White Mountains Insurance Group, Ltd. — 2019 Form 10-K
Business context and period. This annual report covers the fiscal year ended December 31, 2019. White Mountains is a Bermuda-based investment and operating company focused on opportunistic acquisitions and dispositions in insurance and related businesses. Its 2019 reporting segments were HG Global/BAM (municipal bond insurance), NSM (specialty insurance distribution), Kudu (capital solutions for asset managers) and Other Operations. Results are affected materially by investment valuation changes and acquisition or disposition activity.
Key financial metrics
| Metric | 2019 | 2018 |
|---|---|---|
| Revenue | $893.4 million | $369.1 million |
| Expenses | $488.3 million | $547.3 million |
| Pre-tax income (loss) from continuing operations | $405.1 million | $(178.2) million |
| Income tax expense (benefit) | $29.3 million expense | $4.0 million benefit |
| Net income (loss) attributable to common shareholders | $414.5 million | $(141.2) million |
| Basic and diluted EPS | $130.27 | $(41.76) |
| Cash flows used for continuing operations | $120.5 million | $31.1 million |
| Total assets | $3.98 billion | $3.36 billion |
| Common shareholders’ equity | $3.26 billion | $2.84 billion |
| Total debt | $283.5 million | $192.7 million |
| Book value per share | $1,023.91 | $896.00 |
| Adjusted book value per share (non-GAAP) | $1,018.41 | $887.85 |
Revenue and earnings include substantial investment gains and transaction-related items; they should not be read as a recurring operating margin. The company reported a 20.4% pre-tax total return on invested assets, or 15.5% excluding the MediaAlpha transaction. Continuing-operations EPS was $130.02 in 2019 versus a loss of $36.67 in 2018. Cash at year-end was $161.0 million, including $56.3 million of restricted cash. At the holding company and intermediate-holding-company level, White Mountains reported $602.6 million of net unrestricted cash, short-term investments and fixed-maturity investments.
Material changes and business performance
- MediaAlpha: The February 2019 transaction reduced White Mountains’ ownership to 48.3% and ended consolidation. It generated $182.2 million of realized and unrealized gains and $89.3 million of net cash proceeds. The retained stake was valued at $180 million at year-end.
- Investment results: Net realized and unrealized investment gains were $433.2 million in 2019, compared with losses of $108.3 million in 2018. The company cited the equity-market recovery and gains in long-term investments; the 2018 comparison was affected by the fourth-quarter equity-market decline.
- NSM: Commission and other revenue was $233.1 million, compared with $101.6 million for the partial ownership period in 2018. NSM reported a $2.1 million pre-tax loss and $48.0 million of adjusted EBITDA (non-GAAP). Results included the Embrace pet-insurance acquisition and collector-car renewal rights purchase; NSM does not assume insurance risk.
- Kudu: White Mountains increased its ownership to 99.1% in April 2019 and began consolidating Kudu. From acquisition through year-end, Kudu reported $21.2 million revenue and $10.8 million pre-tax income. It had deployed $266 million across nine asset managers, with an average inception cash yield of 10.6%.
- HG Global/BAM: Segment pre-tax income was $10.0 million versus a $29.4 million loss in 2018. BAM’s insured municipal-bond portfolio grew to $62.25 billion from $52.20 billion; claims-paying resources rose to $937.6 million from $871.4 million. Gross premiums and member surplus contributions collected were about $106.7 million in both years, while total pricing declined to 83 basis points from 93 basis points.
- Capital and book value: Book value per share increased 14.4% and adjusted book value per share increased 14.8%, including dividends, as reported. On a comparison that treats the MediaAlpha transaction gain as if recognized at year-end 2018, adjusted book value per share growth was 8.1%.
Liquidity, debt and cash flow
Debt increased to $283.5 million, principally reflecting NSM borrowings and Kudu’s new facility. NSM’s term loans had a $221.3 million balance and a 7.5% effective rate at year-end; its reported leverage covenant ratio was 3.6x against a 5.5x maximum. Kudu drew $57 million under a secured facility with up to $125 million of capacity. White Mountains stated it was in compliance with all debt covenants and that cash, operating cash flows and routine investment sales and maturities were adequate for foreseeable requirements. Continuing-operations cash use was $120.5 million, driven in part by Kudu investment deployments. The company also disclosed $183.4 million of unfunded commitments to other long-term investments.
Outlook, risks and unusual items
- The filing provides no quantified earnings or revenue guidance. Management’s forward-looking statements depend on investment performance, acquisition opportunities, financing availability, competition, regulation and general economic conditions.
- In January 2020, HG Global and BAM extended the variable-rate period on the BAM Surplus Notes to 2024 and the initial term of the first-loss reinsurance treaty to the end of 2022, and entered into an excess-of-loss treaty with an aggregate limit of up to $75 million. BAM also paid $65 million of principal and interest in January 2020. Payments on the notes remain subject to NYDFS approval.
- Management said COVID-19-related travel restrictions were negatively affecting PassportCard/DavidShield revenue in the first quarter of 2020, with effects expected to persist until travel volumes normalize. The filing warns more broadly of market, credit, interest-rate, currency and catastrophe risks.
- Valuation and concentration risks include $654 million of Level 3 investments with limited observable pricing and $655 million of goodwill and other intangible assets, mostly associated with NSM. NSM placed approximately 17% of its 2019 business with its largest carrier and 56% with its five largest carriers.
- Other notable items include a $20 million increase in the time-value discount applied in adjusted book value for expected BAM Surplus Note payments, impairment charges of $10.4 million across goodwill and intangible assets, and a $16.5 million liability for the Swedish tax contingency related to the prior Sirius Group sale.
Important facts for investors to verify
- How much of 2019 earnings and book-value growth is repeatable without the MediaAlpha transaction gain and favorable investment-market returns.
- Whether BAM can maintain its AA rating, grow pricing and business profitably, and obtain regulatory approval for future Surplus Note payments.
- NSM’s underlying adjusted EBITDA, acquisition integration and carrier-partner concentration, alongside its debt service capacity.
- The assumptions and sensitivity behind material Level 3 valuations, especially Kudu participation contracts, MediaAlpha and PassportCard/DavidShield.
- Cash availability after debt service, acquisition spending and the $183.4 million of unfunded investment commitments; confirm restricted cash is excluded from available liquidity.