White Mountains Insurance Group, Ltd. — Q3 2015 Form 10-Q
Reporting period: Three and nine months ended September 30, 2015. Figures are in U.S. dollars; financial amounts are in millions unless noted. White Mountains operates through OneBeacon, HG Global/BAM and Other Operations. Sirius Group is classified as discontinued operations following a July 2015 sale agreement, so prior periods were reclassified.
Key financial results
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Total revenue from continuing operations | $334.7 | $323.2 | $1,130.1 | $1,048.5 |
| Pre-tax income (loss), continuing operations | $(94.6) | $(35.5) | $(103.2) | $36.7 |
| Net income (loss) attributable to common shareholders, continuing operations | $(73.1) | $(12.6) | $(61.8) | $65.8 |
| Net income (loss) attributable to common shareholders, consolidated | $(58.9) | $51.3 | $29.7 | $242.3 |
| Consolidated diluted EPS | $(10.01) | $8.42 | $4.97 | $39.44 |
| Net realized and unrealized investment gains (losses), continuing operations | $(43.9) | $(27.5) | $(33.9) | $64.4 |
- Earned premiums were $284.9 million in Q3 and $896.0 million year to date. Net investment income was $16.8 million and $42.6 million, respectively.
- OneBeacon’s GAAP combined ratio was 99% in Q3 and 96% for the first nine months, versus 95% and 94% a year earlier. Sirius Group, reported in discontinued operations, posted combined ratios of 95% and 84%, versus 79% and 78%.
- Operating cash flow was $87.3 million for the first nine months, including $80.6 million from continuing operations, compared with $123.3 million total in 2014. Ending cash in the cash-flow presentation was $183.2 million, excluding restricted cash and discontinued-operations cash.
- At September 30, total assets were $10.35 billion and total equity was $4.21 billion. These balances include $4.53 billion of assets and $3.03 billion of liabilities held for sale.
- Continuing-operations debt was $383.3 million, up from $343.1 million at year-end; total debt including discontinued operations was $786.8 million. Total debt to total adjusted capital was 15%, versus 14% at year-end.
- Adjusted book value per share was $654.58, down 2% for Q3 and 1% for the first nine months, including dividends. Management’s pro forma adjusted book value per share, incorporating the proposed Sirius and Symetra transactions, was $779.62.
Material changes and management commentary
- Revenue rose 4% in Q3 and 8% year to date, largely reflecting Tranzact, acquired in October 2014, and growth at MediaAlpha. Year-to-date revenue also included a $20 million gain on the sale of Hamer. Investment results weakened substantially versus 2014.
- Expenses increased 20% in Q3 and 22% year to date. General and administrative expenses included $36 million of additional incentive compensation related to the Sirius and Symetra sale agreements, as well as expenses from Tranzact and MediaAlpha.
- Net written premiums fell 14% in Q3 and 4% year to date. OneBeacon’s net written premiums declined 15% and 5%; management cited the crop-business exit, other portfolio exits and business mix. Excluding specified exits and a terminated reinsurance treaty, OneBeacon premiums grew 3% year to date.
- OneBeacon exited its crop business on July 31 and transferred its remaining 2015 net exposure to an AmTrust affiliate. Management said the transaction left no material net crop exposure. OneBeacon also reported no material net prior-year reserve development in 2015, versus unfavorable development in 2014.
Transactions, outlook and risks
- White Mountains agreed to sell Sirius Group for cash equal to 127.3% of its closing tangible common shareholder equity, plus $10 million. Closing was expected in Q1 2016, subject to regulatory approval and customary conditions. The agreement includes an option for White Mountains to replenish Sirius tangible equity to its December 31, 2014 level if it is lower at closing. The company purchased industry loss warranty coverage to limit event exposure before closing.
- Sumitomo Life agreed to acquire Symetra for $32 per share in cash; White Mountains received a $0.50-per-share special dividend in Q3. Closing was expected in Q1 2016, subject to approvals and customary conditions.
- Management said cash, operating cash flows, investment maturities and the undrawn $425 million holding-company revolving facility were adequate for expected foreseeable requirements. A new $65 million OneBeacon facility was also undrawn. The company reported compliance with debt covenants.
- Important risks include regulatory or other delays to the Sirius and Symetra transactions, catastrophe losses, reinsurance collectability and pricing, reserve-estimate uncertainty, investment-market and foreign-currency volatility, and access to financing. The filing identifies no material change in previously disclosed risk factors.
- Contingencies include ordinary-course claims and litigation. Management did not expect disclosed litigation to materially adversely affect the company; it characterized the challenge to the OneBeacon runoff sale approvals as remote in potential adverse impact. An IRS examination was ongoing, but management did not expect a material adverse effect.
Investor verification priorities
- Verify progress, final terms, required approvals and closing adjustments for the Sirius and Symetra transactions, including the estimates underlying pro forma book value.
- Assess recurring earnings apart from discontinued operations, investment mark-to-market results, the Hamer sale gain and transaction-related incentive compensation.
- Review OneBeacon premium trends, expense ratios, reinsurance costs and loss-reserve development, alongside Sirius’s elevated 2015 loss experience before its sale closes.
- Check liquidity available at the parent versus regulated subsidiaries, debt and covenant terms, and the potential capital support obligation under the WM Life Re keep-well agreement.
- Evaluate investment valuation and liquidity, including Level 3 assets, restricted fund redemptions, and sensitivity to equity, credit-spread and foreign-exchange movements.