White Mountains Insurance Group sells off subsidiary

Chinese investment firm could pay up to $2.2 billion for Sirius International Investment Group

White Mountains Insurance Group has agreed to sell off one of its major subsidiaries – Sirius International Insurance Group – to a Chinese investment company, which could pay up to $2.2 billion, the Hanover-based insurance conglomerate announced Monday.

China Minsheng Investment Corp, a Shanghai-based company, was only founded in May of 2014 but has more than $6 billion in equity. The buyer agreed to pay 127.3 percent of the tangible common shareholders equity at closing – expected to take place before May 2016 – plus $10 million. The exact price won’t be known until the transaction is completed, but if the transaction took place at the end of last year, it would have been for $2.235 billion.

The deal is further complicated by the fact that Sirius owns portions of other subsidiaries of White Mountains that aren’t being sold. When all is said and done, White Mountains said it would increase its adjusted book value by approximately $65 a share. The announcement alone increased the company’s stock price, which jumped up from $675 to $710 a share on Monday and has since traded around for about $700.

The deal would also boost White Mountains’ undeployed capital, between $1.4 billion and $2 billion, the company stated.  And what would it do with all that cash? 

“The board will carefully review the additional capital management options available to the company when proceeds have been received,” said White Mountains’ Chairman and CEO Raymond Barrette.

“This is a win-win-win transaction,” he added. “Sirius is a high quality reinsurer with a strong franchise and a great track record. The acquisition by CMI recognizes this value and opens doors for Sirius to new opportunities in Asia, especially China.”

Although this is a “definitive” agreement, with a $200 million letter of credit downpayment (and does not require the approval of White Mountains shareholders), it’s not a done deal. Either could back out if the closing doesn’t take place by May 31, 2016. The deal could also be nixed if there were a catastrophic event that resulted in $350 million of losses to Sirius before closing, though there would be $120 million penalty involved.

The announcement of the agreement coincided with the company’s second quarter earnings report, which was not exactly positive. The company’s net income attributable to common shareholders was $4.3 million for the second quarter (72 cents a share) and $95 million ($15.51 a share) for the half, down from $88.6 million and $191 million for the second quarter and half of 2014 respectively. Adjusted book value per share – the company’s preferred yardstick – was at $671, only a 1.1 percent increase for both the second quarter and first half of 2015, including dividends. 

One Beacon, the company’s other major subsidiary, suffered nearly twice as much in catastrophic losses, thanks to severe spring weather in the Midwest and South as well as the East Coast winter storms in the first quarter. Sirius’ losses were about half of what they were in the previous year. Still the company’s pre tax income was $6.8 million for the second quarter, compared to $76.7 million in 2014, bringing that income up to $93.7 million for the half, compared to $150.7 million for the first half of last year.