White Mountains Insurance Group, Ltd. — Q2 2021 Form 10-Q
Reporting period: Three and six months ended June 30, 2021. Amounts are in millions of U.S. dollars except per-share data. White Mountains operates through HG Global/BAM, Ark, NSM, Kudu and Other Operations. Ark was acquired and consolidated beginning January 1, 2021, making year-to-date comparisons with 2020 less comparable.
Financial results and key metrics
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Total revenue | $426.7 | $259.6 | $604.9 | $200.4 |
| Pre-tax income (loss) | $162.3 | $132.7 | $23.6 | $(33.3) |
| Net income (loss) attributable to common shareholders | $138.5 | $115.4 | $63.2 | $(13.4) |
| Basic and diluted earnings per share | $44.56 | $37.14 | $20.35 | $(4.28) |
| Operating cash flow | Not separately presented for the quarter | $13.9 | $(38.9) |
- Q2 results included $113.0 of realized and unrealized gains on MediaAlpha; six-month gains were $71.3. MediaAlpha’s share-price movements materially affect results and book value.
- GAAP book value per share was $1,279.49 and adjusted book value per share was $1,292.03 at June 30. Both increased 4% in Q2 and 2% year to date, including dividends.
- Ark’s Q2 GAAP combined ratio was 90% (adjusted 84%); its six-month ratios were 99% (adjusted 96%). Six-month results included $25.3 of Ark transaction expenses. Ark recorded $9.0 of favorable prior-year loss development in Q2 and $8.5 for the first half.
- NSM reported Q2 pre-tax income of $1.1 and adjusted EBITDA of $19.0, versus a $3.7 pre-tax loss and $18.0 adjusted EBITDA in Q2 2020. First-half pre-tax loss of $32.2 included a $28.7 loss on the sale of Fresh Insurance’s motor business; adjusted EBITDA was $33.4.
- Kudu recorded Q2 pre-tax income of $31.4 and first-half pre-tax income of $47.1, substantially reflecting unrealized gains on participation contracts of $27.8 and $43.6, respectively.
Balance sheet, debt and liquidity
- Total assets were $7,279.9 at June 30, 2021, versus $4,831.4 at December 31, 2020; total liabilities were $3,171.9 and equity was $4,108.0. The increase largely reflects the Ark acquisition and consolidation.
- Total debt was $428.8, compared with $376.4 at year-end 2020. Total debt to adjusted capital was 9.2%, versus 8.7%. The company reported compliance in all material respects with debt covenants.
- Cash at period-end, including restricted cash, was $326.7. Holding company and intermediate holding companies had $594 of net unrestricted cash, short-term investments and fixed maturity investments, plus $713 of MediaAlpha shares and $159 of private equity and insurance-linked securities funds. These investments are not all cash-equivalent or immediately available.
- Cash provided by investing activities was $90.3 and financing activities provided $11.7 in the first half. Operating cash flow turned positive from an outflow in the prior-year period.
Material changes and unusual items
- White Mountains completed the Ark transaction on January 1, contributing $605.4 of equity and purchasing $40.9 of shares. It owned 72.0% of Ark’s basic shares at June 30 and had agreed to provide up to a further $200.0 of capital; the call deadline was extended to September 15, 2021.
- White Mountains sold 3.6 million MediaAlpha shares in a March secondary offering for net proceeds of $160.3. Its remaining 16.9 million shares were valued at $713.2 at June 30; the filing reports a July month-end value of $565.8, reflecting a $33.40 share price.
- A $17.6 gain from reversal of the Sirius Group tax-indemnity liability, plus $1.1 of foreign currency translation gain, contributed to first-half discontinued-operations income of $18.7. The reversal followed a favorable Swedish court ruling.
- The U.K. corporate tax rate was enacted to rise from 19% to 25% after April 1, 2023. Revaluation of U.K. deferred taxes contributed to a high 86% effective tax rate for the first half.
Outlook, commentary and risks
The filing provides no specific consolidated earnings or revenue guidance. Management said it believes cash balances, operating cash flows and routine investment sales and maturities are adequate for expected needs. Ark’s premiums grew strongly versus the comparable pre-acquisition period, with risk-adjusted rate increases of approximately 7% in Q2 and 9% year to date. NSM cited continuing constraints in insurance-carrier capacity for its coastal condominium program, expected to affect results through the rest of the year. Management noted that COVID-19 effects vary among businesses and could continue to affect results.
Key exposures include catastrophe losses and uncertainty in Ark’s loss reserves, reinsurance recoverability, MediaAlpha share-price volatility, Level 3 investment valuation assumptions and potential investment illiquidity. The filing highlights sensitivity of Kudu and other private investments to discount rates and exit assumptions. BAM reported no insured bonds on its credit watchlist and said all insured bond payments due through August 1, 2021 had been made; pandemic-related financial pressure on municipalities remains a risk. The company reported no current litigation expected to materially affect its financial condition, results or cash flows, and no material changes to previously disclosed risk factors.
Investor verification priorities
- Reconcile earnings and book-value sensitivity to MediaAlpha’s share price, including the post-quarter decline disclosed in the filing.
- Track Ark’s remaining capital raise, potential additional $200.0 contribution, underwriting growth, catastrophe exposure and reserve development.
- Assess NSM’s continuing coastal-property capacity limits and the effect of the Fresh Insurance sale on reported comparisons.
- Review the assumptions supporting Kudu and other Level 3 valuations, along with restricted or redemption-limited investments and available liquidity.
- Separate recurring operating performance from investment gains, the Sirius tax-indemnity reversal, Ark transaction costs, the Fresh Insurance disposal loss and U.K. deferred-tax revaluation.