WHITE MOUNTAINS INSURANCE GROUP LTD quarterly report, Q3 FY2023

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White Mountains Insurance Group, Ltd. — Q3 2023 Form 10-Q

Reporting period: Three and nine months ended September 30, 2023. Amounts are in U.S. dollars; financial statement figures are generally in millions unless noted. White Mountains operates through HG Global/BAM, Ark/WM Outrigger, Kudu and Other Operations.

Financial performance and position

  • Revenue: $519.6 million in Q3 2023, up from $383.2 million; $1.430 billion for the first nine months, versus $720.3 million. The changes reflect insurance growth and investment results, among other factors.
  • Profit: Continuing-operations net income was $13.8 million in Q3, compared with a $23.6 million loss, and $218.2 million for nine months, compared with a $252.3 million loss. Income attributable to common shareholders was $23.6 million and $222.7 million, respectively. Continuing-operations diluted EPS was $9.19 for Q3 and $86.82 for nine months.
  • Prior-year comparability: 2022 common-shareholder net income included an $886.8 million after-tax gain on the NSM sale. Consequently, total net income and EPS comparisons with 2022 are not indicative of underlying continuing-operations trends.
  • Insurance performance: Ark/WM Outrigger’s combined ratio was 77% in Q3 and 83% for nine months. Net earned premiums were $498.9 million and $1.047 billion, respectively. Ark’s standalone combined ratios were 81% and 87%. The nine-month figure included two points of unfavorable prior-year development.
  • Cash flow: Continuing-operations operating cash flow was $379.6 million for nine months, versus $118.2 million. Investing activities used $455.0 million and financing activities used $16.8 million. Ending cash, including restricted cash, was $162.8 million, compared with $255.0 million at the start of the year.
  • Balance sheet and debt: September 30 assets were $8.143 billion, total equity $4.164 billion, and common shareholders’ equity $3.949 billion. Debt was $564.7 million, down from $575.2 million at year-end 2022; debt to adjusted capital was 11.3%, versus 12.1%. The company reported compliance in all material respects with debt covenants.
  • Liquidity: The company and intermediate holding companies held $512 million of net unrestricted cash, short-term investments and fixed maturities. Management said cash balances, operating cash flows and routine investment sales and maturities should meet expected requirements for the foreseeable future.

Material changes and segment developments

  • Ark/WM Outrigger: Nine-month gross written premiums rose to $1.667 billion from $1.253 billion; segment pre-tax income was $192.7 million versus a $20.4 million loss. Ark cited stronger premium volume and pricing. Catastrophe losses were lower than the prior-year period, but prior-year reserve development turned unfavorable, driven mainly by Winter Storm Elliot and large property and marine & energy claims.
  • HG Global/BAM: Gross written premiums plus member surplus contributions collected were $36 million in Q3 and $84 million for nine months, below $46 million and $109 million in 2022. BAM insured $10.5 billion of municipal bonds for nine months, versus $13.5 billion. Claims-paying resources increased to $1.474 billion from $1.423 billion at year-end 2022.
  • Kudu: Nine-month revenue was $89.4 million and pre-tax income $61.6 million, compared with $87.0 million and $66.3 million. Adjusted EBITDA, a non-GAAP measure, was $34.4 million versus $32.5 million. Q3 pre-tax income fell to $16.3 million from $47.2 million, largely reflecting smaller investment gains.
  • Investments and book value: Book value per share was $1,542 and adjusted book value per share was $1,588 at September 30. Both increased 1% in Q3 and 6% in the first nine months, including dividends. Nine-month total portfolio return was 5.3%, or 6.3% excluding MediaAlpha. MediaAlpha’s Q3 share-price decline generated a $46.8 million investment loss; its value was $188.8 million at quarter-end.

Outlook, risks and unusual items

  • No formal earnings or financial guidance is provided in the filing. Management reported roughly $400 million of undeployed capital as of September 30, including the planned Bamboo investment.
  • On October 19, 2023, White Mountains agreed to acquire approximately 70% of Bamboo, a California residential-property insurance distribution platform, for approximately $285 million in cash. Closing was expected in Q1 2024, subject to regulatory approvals and customary conditions; the transaction had no financing condition.
  • White Mountains announced plans to deploy $500 million of equity capital over time through White Mountains Partners, targeting non-insurance sectors. Kudu also had a $150 million incremental equity commitment for future deployments.
  • Principal risks include catastrophe losses, reserve estimate uncertainty, investment-market movements—especially MediaAlpha—reinsurance collectability, interest rates, liquidity and access to financing, and geopolitical events. Ark has exposure to the Israel-Gaza conflict; management did not expect a material impact at the time of filing but noted losses could rise with the conflict’s scope and duration. Management likewise did not expect the conflict’s effect on PassportCard/DavidShield to be material.
  • Unusual comparability items include the 2022 NSM disposal gain and 2023 Ark contingent-consideration fair-value expense of $16.8 million for nine months. Some investments are illiquid or valued using unobservable inputs; 2023 unrealized investment results materially affected reported earnings.
  • The company reported no material changes to previously disclosed risk factors, no material non-claims-related litigation, and no material changes to internal control over financial reporting during Q3.

Important facts for investors to verify

  • How much of continuing-operations earnings and book-value growth came from recurring underwriting and investment income versus fair-value marks and other non-recurring items.
  • Ark reserve development, catastrophe claims and reinsurance recoverables, including the potential effect of future loss emergence and the transition away from third-party capital for newer years of account.
  • BAM’s premium and insured-volume trends, claims-paying resources, and regulatory limits on payments of principal and interest on its surplus notes.
  • MediaAlpha valuation sensitivity: management estimated that a $1 per-share change in its stock price would change White Mountains’ book value per share by approximately $9.
  • Bamboo’s final ownership percentage, investment amount, regulatory approvals and closing; and the timing and returns of planned capital deployment, including White Mountains Partners and Kudu.