White Mountains Insurance Group, Ltd. — Q2 2023 Form 10-Q
Business context and period: Unaudited results for the three and six months ended June 30, 2023, compared with the same 2022 periods. Operations comprise municipal bond insurance (HG Global/BAM), property and casualty insurance and reinsurance (Ark/WM Outrigger), asset management (Kudu), and Other Operations. Amounts are in millions of dollars unless noted.
Financial results and key metrics
| Metric | Q2 2023 | Q2 2022 | H1 2023 | H1 2022 |
|---|---|---|---|---|
| Total revenue | $378.4 | $76.7 | $910.3 | $337.1 |
| Pre-tax continuing income (loss) | $17.4 | $(232.6) | $216.5 | $(247.4) |
| Net income (loss) attributable to common shareholders | $19.6 | $(169.2) | $199.1 | $(135.8) |
| GAAP book value per share | $1,531.84 at June 30 | Up 5% in H1, including dividends | ||
| Adjusted book value per share (non-GAAP) | $1,576.46 at June 30 | Up 6% in H1, including dividends |
- Insurance underwriting: Ark/WM Outrigger’s combined ratio was 87% for Q2 and 89% for H1. Ark’s own ratios were 89% and 91%, respectively. Ark/WM Outrigger H1 gross written premiums were $1,415.5, net written premiums $1,075.4, and net earned premiums $548.4.
- Cash flow: H1 operating cash flow was $156.7, versus $3.2 in 2022. Investing activities used $222.8 and financing activities used $34.4. Period-end cash, including restricted cash, was $154.5.
- Balance sheet and capital: Total assets were $8,376.3 and total equity $4,125.9 at June 30. Debt carrying value was $566.1, down from $575.2 at year-end 2022. Debt to adjusted capital was 11.5%, compared with 12.1% at year-end.
- Liquidity: The company and intermediate holding companies reported $546 of net unrestricted cash, short-term investments and fixed maturities, plus $236 of MediaAlpha shares and other investment assets. Management said cash, operating cash flows and routine investment sales and maturities should meet expected needs for the foreseeable future.
- Investments: Portfolio return was 0.9% in Q2 and 5.5% in H1; excluding MediaAlpha, returns were 3.0% and 6.1%. Net investment income was $82.0 in H1, up from $45.7. MediaAlpha’s Q2 mark-to-market loss was $77.3; its carrying value was $235.7 at June 30.
Material changes versus prior periods
- Results swung to profit from substantial 2022 losses, chiefly reflecting improved investment results and stronger P&C operating results. H1 2023 included $209.5 of realized and unrealized investment gains, compared with losses of $207.2 in H1 2022.
- Ark/WM Outrigger premium growth reflected added capacity from WM Outrigger Re and higher property, marine and energy activity. Ark’s H1 combined ratio improved from 93% to 91%, despite $19.6 of unfavorable prior-year reserve development in 2023 versus $26.4 of favorable development in 2022.
- MediaAlpha’s Q2 share-price decline partly offset gains elsewhere. White Mountains bought 5.9 million additional shares in a tender offer at $10 per share; ownership reached 35.7% basic (33.0% fully diluted).
- Comparability is affected by the August 2022 NSM sale; NSM is presented as discontinued operations in 2022, and its sale generated $1.4 billion net cash proceeds and a reported $875.7 transaction gain in 2022. Ark’s 2022 comparisons also reflect third-party capital participation in prior underwriting years.
Outlook, commentary, risks and unusual items
- The filing gives no specific consolidated earnings or revenue guidance. Management reported approximately $680 of undeployed capital and described liquidity as adequate for expected requirements.
- BAM’s claims-paying resources were $1,451 at June 30; S&P affirmed BAM’s AA rating with a stable outlook in July 2023. BAM’s municipal bond premium and insured volume were below 2022 levels, while pricing increased.
- Key risks include catastrophe losses, reserve adequacy, reinsurance recoverability, investment-market volatility (particularly MediaAlpha), interest rates, access to financing, and changes in economic conditions, regulation or ratings. Ark remains liable to policyholders if reinsurers fail to pay; $285.5 of recoverables were net of collateral at June 30.
- Some investments are less liquid or valued using unobservable inputs: Level 3 investments were $1,018.4, and private equity, hedge fund and ILS investments may have redemption limits or lockups. H1 insurance premiums receivable and unearned premiums rose materially alongside business growth.
- Ark recorded $19.6 of unfavorable H1 prior-year reserve development, principally associated with Winter Storm Elliott and three large property and marine/energy claims. The filing reports no current non-claims litigation expected to materially affect the company and no material changes to previously disclosed risk factors.
- All material debt covenants were reported in compliance. Kudu’s credit facility was amended effective July 1, 2023 to use SOFR plus a credit adjustment spread and margin.
Important facts for investors to verify
- How much of reported earnings and book-value movement reflects recurring underwriting and investment income versus fair-value marks, especially MediaAlpha and Level 3 assets.
- Whether Ark’s premium growth can be maintained while controlling catastrophe exposure and reserve development; review reserve emergence and reinsurance recoverables.
- Liquidity available at the holding-company level versus cash and assets restricted or pledged for insurance, collateral and debt purposes.
- Valuation assumptions and liquidity terms for Kudu participation contracts, private funds and other Level 3 investments.
- Impact of variable-rate debt and the timing or regulatory constraints on BAM Surplus Note payments and subsidiary distributions.