White Mountains Insurance Group, Ltd. — Q3 2020 Form 10-Q
Reporting period: Three and nine months ended September 30, 2020. White Mountains operates through financial guarantee (HG Global/BAM), specialty insurance distribution (NSM), asset management (Kudu) and Other Operations. Amounts below are in millions of dollars, except per-share data.
Financial performance and position
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Total revenue | $459.5 | $155.5 | $659.9 | $718.1 |
| Pre-tax income from continuing operations | $321.2 | $51.1 | $287.9 | $348.6 |
| Net income attributable to common shareholders | $232.9 | $48.7 | $219.5 | $353.6 |
| Basic and diluted EPS, total operations | $75.09 | $15.29 | $70.14 | $111.17 |
- Investment-driven results: Q3 included $250 million of unrealized gains and $55 million of net investment income from MediaAlpha. MediaAlpha-related gains and income totaled $355 million in the first nine months. Excluding MediaAlpha, pre-tax portfolio returns were 2.8% for both Q3 and the nine-month period.
- Margins/operating performance: NSM reported Q3 pre-tax loss of $1 million and adjusted EBITDA of $15 million, versus pre-tax income of $5 million and adjusted EBITDA of $13 million a year earlier. For nine months, NSM had a $6 million pre-tax loss and $44 million adjusted EBITDA, versus $4 million pre-tax income and $39 million adjusted EBITDA. Adjusted EBITDA is a non-GAAP measure.
- Cash flow: Nine-month operating cash flow was positive $12.2 million, compared with negative $72.5 million in 2019. Investing activities provided $28.0 million and financing activities provided $13.8 million. Period-end cash, including restricted cash, was $214.8 million versus $149.2 million at September 30, 2019.
- Equity and book value: Common shareholders’ equity was $3.408 billion, versus $3.262 billion at year-end 2019. Book value per share was $1,099 and adjusted book value per share was $1,101; both increased 8% in Q3. Nine-month adjusted book value per share rose 8%, including dividends.
- Debt and liquidity: Total debt was $359.4 million, up from $283.5 million at year-end 2019; debt to total adjusted capital was 9.5%, versus 8.0%. Management said available cash, operating cash flows and routine investment sales and maturities were adequate for foreseeable needs. The company reported compliance with material debt covenants.
Material changes and unusual items
- MediaAlpha’s Q3 fair value increased by $250 million to $475 million, contributing substantially to reported earnings. White Mountains changed its valuation method to a probability-weighted expected return method; the investment was Level 3 and sensitive to assumptions.
- MediaAlpha completed its IPO on October 30, 2020, after quarter-end. White Mountains sold 3.61 million shares for $63.8 million and retained 20.53 million shares, or 32.3% on a fully diluted basis. The remaining stake was valued at $390.1 million at the IPO price and $694.6 million at the October month-end share price.
- White Mountains acquired Kingsbridge in April 2020 for approximately $132 million, funded partly by an $80.3 million contribution and approximately $52.4 million of NSM borrowing. NSM’s debt and expenses increased; it also recognized $6.2 million of intangible-asset impairments tied to lower U.K. premium volumes, COVID-19 effects and reorganization initiatives.
- During the first nine months, the company repurchased 99,087 shares for $85 million. It sold $507 million of common equity securities in Q3 and redeployed proceeds into short-term investments ahead of the planned Ark transaction.
Outlook, commentary and risks
- No specific consolidated earnings or revenue guidance is provided. Management cautioned that interim results may not indicate full-year results.
- On October 1, 2020, White Mountains agreed to invest $605.4 million in Ark Insurance and purchase $40.9 million of shares, with a further commitment of up to $200 million in 2021. Closing was expected in January 2021 and remained subject to regulatory and other conditions.
- Management said the ultimate effects of COVID-19 on markets, the economy and the company were uncertain. NSM businesses experienced mixed effects; premium refunds or grace periods by insurance partners could affect commissions or cash flow. BAM noted municipal credit exposure to sectors affected by the pandemic, although it reported no insured bonds on its credit watchlist and that payments due through November 1 had been made.
- MediaAlpha’s post-IPO market price may create greater volatility in book value and results. Other disclosed risks include investment valuation uncertainty, economic and market deterioration, ratings changes, competition, regulatory changes and availability of financing.
- A $17.2 million liability remained for a tax indemnity related to the former Sirius Group; the underlying Swedish tax appeal was ongoing. The filing states there was no current litigation expected to have a material adverse effect.
Important facts for investors to verify
- How much reported earnings and book-value growth depend on MediaAlpha’s valuation and post-IPO share price; review the Level 3 assumptions and subsequent market value.
- Ark transaction closing conditions, final funding requirements, ownership dilution and the effect on holding-company liquidity.
- NSM’s post-Kingsbridge leverage, covenant headroom, organic growth and any continued COVID-related weakness or impairment risk in the U.K. business.
- Quality and liquidity of Level 3 and NAV-valued investments, including Kudu participation contracts, private funds and PassportCard/DavidShield.
- COVID-19-related municipal credit developments, BAM claims-paying resources and the status and potential cost of the Sirius Group tax contingency.