Business context and reporting period
White Mountains Insurance Group, Ltd. is an acquisition-oriented insurance and financial-services holding company. This Form 10-K covers the fiscal year ended December 31, 2017; the company’s main continuing segments were municipal bond insurance (HG Global/BAM), marketing technology (MediaAlpha) and Other Operations. Although metadata refers to 2017 Q4, the filing is an annual report; selected fourth-quarter results are noted below. Amounts are in U.S. dollars unless stated otherwise.
Financial performance and condition
| Metric | 2017 | 2016 |
|---|---|---|
| Revenue | $373.8 million | $157.7 million |
| Pre-tax income (loss) from continuing operations | $7.8 million | $(147.3) million |
| Net income attributable to common shareholders | $627.2 million | $401.8 million |
| Basic earnings per share | $146.06 | $80.11 |
| Operating cash flow, continuing operations | $(62.4) million | $(172.9) million |
| Total assets | $3.659 billion | $6.520 billion |
| Common shareholders’ equity | $3.493 billion | $3.583 billion |
| Debt in continuing operations | $23.8 million | $12.7 million |
| Book value per share | $931.30 | $785.01 |
| Adjusted book value per share (non-GAAP) | $914.75 | $789.08 |
Reported earnings were heavily influenced by discontinued operations, particularly the OneBeacon sale: 2017 included $577.5 million of income from discontinued operations, including a $554.5 million after-tax sale gain. Continuing-operations net income attributable to common shareholders was $49.7 million. Fourth-quarter 2017 revenue was $114.0 million, pre-tax continuing-operations income was $5.2 million and net income attributable to common shareholders was $22.5 million.
- Liquidity and capital: At year-end, the company and intermediate holding companies reported $1.683 billion of net unrestricted cash, short-term investments and fixed-maturity investments, plus $866 million of common equity securities and $62 million of other long-term investments. The $425 million parent revolving facility was undrawn and matures August 14, 2018. Total adjusted capital was $3.470 billion and debt-to-adjusted-capital was 0.7%.
- Cash flows: Consolidated operating cash flow was $94.6 million, including $157.0 million from discontinued operations. Investing activities provided $718.5 million, including sale proceeds; financing activities used $699.0 million, primarily reflecting share repurchases.
- Investments and returns: Total investments were $3.381 billion. The pre-tax total portfolio return was 5.6%, versus 2.7% in 2016. Fixed-income returns were 3.5%; common equities returned 20.1%, below the S&P 500’s 21.8%; other long-term investments returned negative 5.8%.
- Margins and segments: MediaAlpha generated $163.2 million of revenue, a $0.4 million pre-tax loss and $11.3 million of EBITDA (non-GAAP). Its reported gross profit was $27.3 million. HG Global/BAM reported a $24.0 million GAAP pre-tax loss; Other Operations reported $32.2 million of pre-tax income.
Material changes versus the prior comparable period
- White Mountains completed the sale of OneBeacon on September 28, 2017, receiving approximately $1.3 billion and recording a $554.6 million net gain before tax presentation details. The disposal substantially reduced consolidated assets and liabilities and shifted earnings toward sale-related gains.
- Shareholders’ equity declined despite higher book value per share, reflecting substantial buybacks: the company repurchased 832,725 shares for $723.9 million, at an average $869.29 per share. It returned approximately $728 million through repurchases and dividends.
- MediaAlpha revenue increased to $163.2 million from $116.5 million, while its pre-tax loss narrowed to $0.4 million from $4.1 million. Growth was led by Health, Life and Medicare and supported by the October acquisition of Healthplans.com assets for $28 million.
- BAM’s gross par insured increased to $42.1 billion from $33.1 billion, while 2017 bond issuance fell to $10.4 billion from $11.3 billion. Higher pricing lifted premiums and member surplus contributions to $100.6 million from $76.6 million; pricing rose to 99 basis points from 68.
- Investment gains were $133.3 million versus losses of $27.4 million in 2016. Common equity securities increased to $866.1 million from $285.6 million, while the fixed-maturity portfolio declined to $2.130 billion from $4.257 billion.
Outlook, commentary, risks and unusual items
- The filing provides no specific consolidated earnings or revenue guidance. Management said cash, operating cash flows and routine investment sales and maturities should meet expected requirements for the foreseeable future.
- BAM’s Standard & Poor’s rating was affirmed at AA/stable in June 2017 after a negative-credit-watch review. BAM temporarily withdrew from the market and wrote no policies while under review. Management noted that maintaining an AA rating is important to BAM’s business and surplus-note repayment capacity.
- BAM had $708.4 million of claims-paying resources against $42.1 billion of insured par. Its watchlist included one category 3 credit, the City of Hartford, with $103 million gross par outstanding; no category 4 credits were reported. BAM’s top ten exposures represented 5.5% of total gross par.
- White Mountains held $499 million face value of BAM surplus notes and $126 million accrued interest. Payments require NYDFS approval; BAM paid $5 million in principal and interest in 2017. The notes mature in 2042, and management’s repayment projections depend on uncertain future issuance, pricing, market share and regulatory approvals.
- In October 2017, the company discovered that Wobi’s former CEO had overstated commission revenue and receivables. White Mountains revised prior-period statements, wrote Wobi goodwill and intangible assets down to zero, and said the revisions were not material to individual prior periods, though the aggregate could be material to 2017 results. Management concluded disclosure controls and internal control over financial reporting were effective; the auditor issued unqualified opinions.
- Other notable items include $28 million of cash payments related to former executives’ departures, a $15 million write-down of the Captricity investment, and the Tax Cuts and Jobs Act, which reduced the U.S. corporate tax rate to 21%. The filing identifies market, interest-rate, credit, foreign-exchange, illiquidity, cyber, rating, regulatory and tax risks. A potential indemnity related to a Swedish tax dispute at sold Sirius Group was approximately $19 million; management reported no current litigation expected to materially affect financial condition, results or cash flows.
- MediaAlpha had customer concentration: approximately 27% of 2017 advertising revenue was associated with one customer. Its bank facility had $23.8 million outstanding at year-end, was secured by subsidiary stock and intellectual property, and matures in October 2020.
Important facts for investors to verify
- Reconcile 2017 earnings and cash generation excluding the OneBeacon sale gain and other discontinued-operation items; assess the sustainability of continuing-operations earnings.
- Review the Wobi financial-statement revisions, revenue and receivable controls, impairment, and any continuing investigation or remediation disclosures.
- Assess BAM’s claims-paying resources, Hartford exposure, rating outlook, premium growth and the assumptions and regulatory conditions behind surplus-note recovery.
- Track MediaAlpha’s customer concentration, acquisition contribution, profitability after amortization and debt covenant headroom.
- Evaluate the investment portfolio’s increased equity exposure, private-investment valuation and liquidity, foreign-currency positions, and sensitivity to market declines and higher interest rates.
- Confirm post-year-end capital commitments and transactions, including up to $50 million for CrossHarbor, up to $125 million for Kudu, and the approximately $28 million DavidShield investment.