White Mountains Insurance Group, Ltd. — 2020 Q2 Form 10-Q
Reporting period: Three and six months ended June 30, 2020. Amounts are in millions of dollars except per-share data. White Mountains operates through HG Global/BAM (municipal bond insurance), NSM (specialty insurance distribution), Kudu (asset management investments) and Other Operations.
Financial results and position
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Total revenue | $259.6 | $129.0 | $200.4 | $562.6 |
| Pre-tax income (loss), continuing operations | $132.7 | $15.8 | ($33.3) | $297.5 |
| Net income (loss) attributable to common shareholders | $115.4 | $20.5 | ($13.4) | $304.9 |
| Basic and diluted EPS, consolidated operations | $37.14 | $6.44 | ($4.28) | $95.93 |
- Q2 revenue and earnings benefited from a rebound in investment markets: consolidated pre-tax portfolio return was 6.5% for the quarter. Investment gains included $122.0 in Other Operations, $16.5 in Kudu and $14.4 in HG Global/BAM.
- For the first half, portfolio return was 1.7%, versus 12.4% in 2019 (7.9% excluding the prior-year MediaAlpha transaction gain). First-half results included net investment losses of $3.8 and a $33.3 continuing-operations pre-tax loss.
- Net cash used for operating activities was $38.9 in the first half, versus $1.8 provided in 2019. Investing activities provided $89.0; financing activities provided $1.3. Ending cash, including restricted cash, was $211.3, of which $96.3 was restricted.
- At June 30, total assets were $4,000.3, total liabilities $937.0, and total equity $3,063.3. Common shareholders’ equity was $3,166.0. GAAP book value per share was $1,020.71; adjusted book value per share was $1,021.91. Adjusted book value per share rose about 4% in Q2 but was up about 0.4% in the first half, including dividends.
- Total debt was $349.8, up from $283.5 at year-end 2019, primarily reflecting acquisition financing. Debt to total adjusted capital was 9.9%, versus 8.0%. Management reported compliance with all debt covenants.
- At the holding-company and intermediate-holding-company level, White Mountains reported $466 of net unrestricted cash, short-term investments and fixed-maturity investments, plus $567 of common equities and $158 of private-equity and ILS funds. Management said cash, operating cash flows and routine investment sales and maturities should meet expected requirements for the foreseeable future.
Material changes and segment performance
- HG Global/BAM: Q2 gross written premiums and member surplus contributions were $43, versus $25; insured municipal bond par was $4.1 billion, versus $2.9 billion. Q2 total pricing increased to 105 basis points from 84. Six-month premiums and contributions were $63, versus $40. BAM’s claims-paying resources were $957 at June 30, compared with $938 at year-end 2019.
- NSM: Q2 commission and other revenues grew to $76.1 from $66.1; adjusted EBITDA rose to $18.0 from $16.4, while GAAP pre-tax results shifted to a $3.7 loss from $0.7 income. The loss included a $6.2 impairment of U.K. intangible assets. Six-month revenues were $141.1 and adjusted EBITDA $28.5; pre-tax loss was $5.1.
- Kudu: Q2 pre-tax income was $17.7, including a $16.5 unrealized investment gain, compared with $2.2 a year earlier. First-half pre-tax loss was $3.7, including an $8.3 unrealized investment loss. Kudu deployed $57.4 in new participation contracts during the half.
- Other Operations: Q2 pre-tax income was $107.4, compared with $5.1, largely reflecting investment gains. First-half pre-tax loss was $36.9, compared with $288.2 income in 2019, which included $182.2 of gains from the MediaAlpha transaction.
- White Mountains acquired Kingsbridge in April 2020 for approximately $132 upfront, funded in part with an $80.3 contribution to NSM and approximately $52.4 of NSM borrowing. The acquisition added $125.1 of provisional goodwill and intangible assets; final allocation was not complete at quarter-end.
- White Mountains repurchased 34,684 shares for $30.6 in Q2 at an average $886.70 per share. First-half repurchases totaled 99,087 shares for $85.1. A $1.00 per-share dividend was paid during the first half.
Outlook, risks and unusual items
- Management said the ultimate effects of the ongoing COVID-19 pandemic on markets, the economy and White Mountains’ businesses could not yet be determined. NSM’s Q2 results were not materially affected overall, but management noted possible future softening, premium refunds or payment relief, and exposure to weaker U.K. travel, auto, workers’ compensation and staffing activity. Pet volumes benefited from increased demand.
- BAM reported no insured bonds on its credit watchlist and said payments due through August 1 had been made. Management identified consumption-tax, transportation and higher-education credits as more exposed to pandemic-related stress; together these represented about 14% of BAM’s outstanding insured par.
- PassportCard/DavidShield’s travel-insurance premiums and commissions fell sharply as travel slowed. White Mountains invested an additional $15 in May to support operations and expansion. MediaAlpha’s insurance verticals continued to grow, while its smaller travel vertical declined.
- Significant non-cash and valuation-sensitive items affected results: Q2 investment gains and Kudu’s fair-value recovery; first-quarter investment-market losses; the $6.2 NSM intangible impairment tied to lower U.K. premium volumes, including COVID-19 effects, and reorganization; and fair-value gains on MediaAlpha of $45 in the first half.
- Of the $898.1 in other long-term investments, $740.1 was Level 3, using significant unobservable inputs; fair values are sensitive to assumptions. The filing provides no specific earnings or revenue guidance.
- Other disclosed exposures include floating-rate, secured debt at NSM and Kudu; foreign-currency net assets of $246.6; and a $16.5 liability for the Sirius Group Swedish tax contingency, which remained under appeal. Management reported no current litigation expected to materially affect financial condition, results or cash flows.
Key facts for investors to verify
- Whether the Q2 investment rebound and reported earnings are sustained, given the first-half investment loss and substantial quarter-to-quarter market sensitivity.
- NSM’s performance excluding Kingsbridge and acquisition effects, the trajectory of U.K. programs, and the impact of the $6.2 impairment and elevated operating costs.
- The assumptions and sensitivity underlying Level 3 valuations, particularly Kudu participation contracts, MediaAlpha and PassportCard/DavidShield.
- Acquisition integration, Kingsbridge’s final purchase-price allocation and contingent earnout, and NSM’s leverage and floating-rate borrowing costs.
- COVID-19 effects on municipal credit quality, specialty insurance volumes and commissions, and travel-related businesses; also monitor BAM’s claims-paying resources and ratings.
- Liquidity availability by subsidiary, including restrictions on cash and BAM surplus-note payments requiring regulatory approval, and developments in the Swedish tax appeal.