WHITE MOUNTAINS INSURANCE GROUP LTD quarterly report, Q1 FY2023

Vollständiges Dokument

White Mountains Insurance Group, Ltd. — Q1 2023 Form 10-Q

Reporting period: Three months ended March 31, 2023; balance-sheet comparisons are with December 31, 2022. White Mountains operates through HG Global/BAM (municipal bond insurance), Ark/WM Outrigger (P&C insurance and reinsurance), Kudu (asset management investments), and Other Operations. Amounts below are in millions of dollars unless stated otherwise.

Financial results and key metrics

  • Revenue: $531.9, up from $260.4 in Q1 2022. The increase principally reflects stronger investment results, including a $85.2 unrealized gain on MediaAlpha; Q1 2022 included substantial fixed-income losses.
  • Profit: Continuing-operations pretax income was $199.1, versus a $14.8 loss. Net income attributable to White Mountains common shareholders was $179.5, versus $33.4; diluted EPS was $69.83 versus $9.90. The effective tax rate was 6.0%.
  • Book value: GAAP book value per share was $1,521.73 and adjusted book value per share was $1,566.73 at March 31. Both increased 5% during the quarter, including dividends, according to management.
  • Cash flow: Operating cash flow was $85.6, compared with a $45.9 use in Q1 2022. Investing activities used $96.6 and financing activities used $41.3. Cash balances, including restricted cash, were $202.7 at quarter-end.
  • Debt and capital: Debt was $556.3, down from $575.2 at year-end; total debt to adjusted capital was 11.4%, versus 12.1%. The company reported compliance in all material respects with debt covenants.
  • Liquidity: Management said cash, operating cash flows, and routine investment sales and maturities should meet expected requirements for the foreseeable future. At the holding-company and intermediate-holding-company level, reported unrestricted cash, short-term investments and fixed maturities totaled $554, alongside $254 of MediaAlpha shares and other investments. Some subsidiary assets are pledged, held in trusts, or otherwise restricted.
  • Investments: The consolidated portfolio returned 4.5% in Q1, or 3.0% excluding MediaAlpha. MediaAlpha’s carrying value rose to $253.8 from $168.6 at year-end; management noted a $1 change in its share price would change White Mountains’ book value per share by approximately $6.60.

Segments and changes versus prior year

  • HG Global/BAM: Segment pretax income was $8.2 versus a $50.6 loss, largely reflecting a reversal from fixed-income investment losses to gains. BAM insured $2.9 billion of municipal bonds versus $3.5 billion; gross premiums plus municipal service contract collections were $21.0 versus $21.7. Total pricing increased to 73 basis points from 63. BAM claims-paying resources were $1.433 billion.
  • Ark/WM Outrigger: Segment pretax income was $42.1 versus a $23.1 loss. Gross written premiums rose 28% to $809.4; net written premiums were $614.2 and net earned premiums $255.1. The combined ratio was 92.2%. Ark’s combined ratio improved to 93.6% from 99.8%, with negligible catastrophe losses versus 17 points of catastrophe losses in Q1 2022. Q1 2023 included unfavorable prior-year reserve development, primarily related to Winter Storm Elliot; Q1 2022 had favorable development. Ark’s risk-adjusted rate change was approximately 14% year over year. WM Outrigger Re, newly included in the segment in 2023, reported a 21.2% combined ratio.
  • Kudu: Pretax income was $35.3 versus $29.3, including $29.6 of investment gains versus $22.3. Adjusted EBITDA, a non-GAAP measure, was $10.9 versus $10.0. Kudu distributed $56 during the quarter and repaid $16.9 on its credit facility.
  • Other Operations: Pretax income was $113.5 versus $29.6, including $85.2 of MediaAlpha gains and $41.8 of other investment gains. Results also included an unspecified transaction gain from a sale; higher incentive compensation contributed to increased expenses.

Outlook, risks and unusual items

  • The filing provides no specific earnings or operating guidance. Management’s liquidity outlook is its stated expectation that available resources will cover foreseeable cash needs; actual cash flows, claim payments and investment proceeds remain uncertain.
  • MediaAlpha’s share-price exposure is material: management reported that its April 2023 month-end price was $7.40, versus $14.98 at March 31, reducing the investment’s fair value to $125 and implying an approximately $50 decline in book value per share and adjusted book value per share from the March 31 level.
  • Other principal risks include catastrophe losses, reserve inadequacy, reinsurance counterparty performance, market and interest-rate movements, access to financing, competition, and regulatory or rating-agency actions. Ark remains responsible to policyholders if reinsurers fail to pay.
  • Floating-rate borrowing costs increased: effective rates at March 31 included 11.0% on HG Global Senior Notes, 10.3% on Ark subordinated notes, and 8.7% on Kudu’s facility. HG Global’s interest-rate cap limits exposure above 3.5% SOFR through July 2025, but does not remove all rate risk.
  • No material non-claims-related litigation was identified; the filing reports no material change to previously disclosed risk factors. No material changes in internal control over financial reporting were reported.
  • The 2022 NSM sale generated $1.4 billion of net proceeds and an $875.7 gain, but it is not Q1 2023 income. Q1 2023 Other Operations also recorded a sale-related transaction gain, for which the excerpt does not provide a clear value.

Important facts for investors to verify

  • How much Q1 earnings and book-value growth depended on fair-value gains, especially MediaAlpha, and how subsequent share-price movements affect reported value.
  • Whether Ark’s premium growth and underwriting performance persist, and how catastrophe experience and reserve development evolve.
  • The adequacy of Ark’s loss reserves and the collectability and concentration of reinsurance recoverables.
  • The liquidity available at the holding-company level after accounting for pledged assets, subsidiary restrictions, and investment redemption limits.
  • The assumptions underlying Kudu and other Level 3 investment valuations, including discount rates and exit multiples.