White Mountains Insurance Group, Ltd. — Q3 2021 Form 10-Q
Reporting period: Three and nine months ended September 30, 2021. White Mountains is a Bermuda-domiciled insurance and investment holding company with five segments: HG Global/BAM, Ark, NSM, Kudu and Other Operations. Ark was acquired and began consolidation on January 1, 2021, limiting comparability with 2020.
Key financial results
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Total revenue | $(10.1) million | $459.5 million | $594.8 million | $659.9 million |
| Pre-tax income (loss) | $(362.3) million | $321.2 million | $(338.7) million | $287.9 million |
| Net income (loss) attributable to common shareholders | $(371.4) million | $232.9 million | $(308.2) million | $219.5 million |
| Diluted earnings (loss) per share | $(120.18) | $75.09 | $(99.45) | $70.14 |
| Operating cash flow | Not separately provided for quarter | $46.0 million | $12.2 million |
Revenue and earnings were dominated by investment marks, particularly MediaAlpha: its share-price decline generated losses of $396.8 million in Q3 and $325.5 million for the first nine months. Consolidated investment returns were -8.0% for Q3 and -3.7% year to date; excluding MediaAlpha, returns were 1.4% and 4.6%, respectively.
At September 30, 2021, total assets were $7.11 billion, total liabilities $3.46 billion, and total equity $3.65 billion. Common shareholders’ equity was $3.52 billion. GAAP book value per share was $1,162.44 and adjusted book value per share, a non-GAAP measure, was $1,175.86. Both declined 9% in Q3; year-to-date declines were 8% and 7%, respectively, including dividends.
Total debt was $710.4 million, up from $376.4 million at year-end 2020; debt to adjusted capital was 15.7%, versus 8.7%. Consolidated cash, including restricted cash, was $310.7 million. The company and intermediate holding companies reported $507 million of net unrestricted cash, short-term investments and fixed maturities, plus $316 million of MediaAlpha shares and $160 million of private equity and insurance-linked securities funds. Management said cash, operating flows and routine investment sales and maturities were adequate for foreseeable needs. All material debt covenants were reported in compliance.
Segments and changes versus prior period
- Ark: Reported Q3 pre-tax income of $10.9 million and year-to-date pre-tax loss of $3.8 million, including $25 million of acquisition transaction expenses. Q3/year-to-date GAAP combined ratios were 92%/95%; adjusted ratios were 89%/93%. Catastrophe losses and favorable prior-year reserve development affected both periods. Gross written premiums increased 79% in Q3 and 90% year to date versus 2020, with risk-adjusted rate increases of about 7% and 9%.
- NSM: Q3 adjusted EBITDA (non-GAAP) was $19.1 million, compared with $15.4 million; year-to-date adjusted EBITDA was $52.5 million, compared with $43.9 million. Reported pre-tax losses included a $28.7 million first-quarter loss on the Fresh Insurance motor business sale. J.C. Taylor was acquired in August.
- Kudu: Q3/year-to-date pre-tax income was $23.3 million/$70.4 million. Results included unrealized gains of $18.9 million/$62.5 million on participation contracts; year-to-date adjusted EBITDA was $18.6 million, compared with $13.7 million.
- HG Global/BAM: Year-to-date gross written premiums and member surplus contributions were $83.8 million, down from $92.5 million. BAM claims-paying resources rose to $1.18 billion from $987 million at year-end 2020, including a $150 million increase from a new Fidus Re agreement.
Outlook, risks and unusual items
- The filing provides no quantified consolidated earnings or revenue guidance. Management said operating businesses performed solidly excluding MediaAlpha investment losses; this is commentary, not formal guidance.
- MediaAlpha’s market value is a major source of book-value volatility. At September 30, White Mountains held 16.9 million shares worth $316.4 million; management estimated each $1 share-price move changes book value per share by about $5.60.
- Ark faces catastrophe exposure, and its loss reserves depend on uncertain actuarial estimates. Q3 catastrophe losses included Hurricane Ida and European floods; year-to-date losses also included Winter Storm Uri. Actual catastrophe losses and reserve development may differ materially from estimates.
- COVID-19 may affect municipal credit quality, insurance programs and investment values. BAM identified certain transportation, consumption-tax and higher-education credits as more exposed, although it reported no insured bonds on its credit watchlist and all payments due through November 1, 2021 had been made.
- Other notable items included a $17.6 million gain from reversal of the Sirius Group tax indemnity liability after a favorable Swedish court outcome, and the UK corporate tax rate increase to 25% after April 1, 2023, which increased White Mountains’ UK deferred tax liability.
- Management cited risks including investment-market declines, catastrophe losses, reserve inadequacy, COVID-19 effects, ratings actions, financing availability, competition and regulatory changes. The filing reported no material changes to previously disclosed risk factors and no current litigation expected to materially harm financial condition, results or cash flows.
Most important facts for investors to verify
- MediaAlpha share price, remaining ownership and sensitivity of book value to further price changes.
- Ark underwriting performance, catastrophe exposure, reserve development and reinsurance recoverability.
- Debt growth, floating-rate exposure, subsidiary covenant headroom and cash availability at the holding-company level.
- Whether Kudu’s Level 3 participation-contract valuations and other private investment marks are supported by underlying performance and realizable transaction values.
- Comparability of 2021 results with 2020, including Ark’s consolidation, acquisitions, disposals and non-GAAP adjustments.