WHITE MOUNTAINS INSURANCE GROUP LTD annual report, FY2020

Business context and reporting period

White Mountains Insurance Group, Ltd. filed this Form 10-K for the fiscal year ended December 31, 2020. The Bermuda-based holding company pursues opportunistic acquisitions and investments. Its reported segments were HG Global/BAM (municipal bond insurance and reinsurance), NSM (specialty insurance distribution), Kudu (capital solutions for asset managers) and Other Operations. BAM is consolidated for GAAP purposes, with its results attributed to non-controlling interests.

Key financial metrics

Metric	2020	2019
Revenue	$1,180.7 million	$893.4 million
Pre-tax income from continuing operations	$645.2 million	$405.1 million
Net income attributable to common shareholders	$708.7 million	$414.5 million
Continuing-operations diluted EPS	$227.72	$130.02
Comprehensive income attributable to common shareholders	$715.5 million	$413.1 million
Common shareholders’ equity	$3,906.0 million	$3,261.5 million
Book value per share	$1,259.18	$1,023.91
Adjusted book value per share (non-GAAP)	$1,263.64	$1,018.41
Total debt	$376.4 million	$283.5 million
Net cash used for operations	$60.6 million	$120.5 million

Net income attributable to common shareholders includes a $2.3 million loss from discontinued operations in 2020; it was $0.8 million of income in 2019. The 2020 income-tax benefit was $20.5 million, including a $130.5 million benefit from releasing a deferred tax liability following an internal reorganization related to the MediaAlpha IPO. A consolidated profit margin is not especially informative here because reported revenue includes substantial investment gains and fair-value changes.

Liquidity, investments and debt

• At year-end, total assets were $4.83 billion and total liabilities were $1.01 billion. Cash, including restricted cash, was $211.2 million. At the holding-company and intermediate-holding-company level, White Mountains reported $464.2 million of net unrestricted cash, short-term investments and fixed-maturity investments, plus $802.2 million of MediaAlpha shares and $172.7 million of private-equity and ILS fund investments.
• Debt rose to $376.4 million from $283.5 million, principally reflecting NSM borrowings for its Kingsbridge acquisition and increased Kudu borrowings. Debt was 8.7% of total adjusted capital, a non-GAAP measure. The company reported covenant compliance at year-end.
• Operating cash outflow improved from $120.5 million to $60.6 million, partly due to $55 million of investment income received from a MediaAlpha dividend recapitalization. Investing activities provided $64.6 million, while $646.3 million was prefunded or placed in escrow for Ark.
• White Mountains reported $297.8 million of unfunded commitments to other long-term investments, with no fixed funding dates. Total contractual obligations and commitments in the filing’s table were $646.9 million; that table excludes the unfunded investment commitments.

Material changes versus 2019

• Revenue rose about 32% and pre-tax income about 59%. The principal driver was a $686.0 million realized and unrealized gain from MediaAlpha, compared with $180.0 million in 2019; the 2019 result also included a $67.5 million gain from the MediaAlpha deconsolidation transaction.
• MediaAlpha completed its IPO in October 2020. White Mountains sold 3.61 million shares for $63.8 million, received $55 million from a dividend recapitalization, and retained a 35.0% basic ownership interest valued at $802.2 million at year-end. The publicly traded share price now drives the investment’s fair value.
• Book value per share increased 23.1% and adjusted book value per share increased 24.2% during 2020, including dividends, according to management.
• NSM revenue increased to $285.1 million from $233.1 million; adjusted EBITDA (non-GAAP) rose to $58.9 million from $48.0 million, while GAAP pre-tax loss widened to $12.6 million from $2.1 million. Results included Kingsbridge, acquired in April 2020, and growth in pet, real estate and specialty transportation, partly offset by weakness in parts of the U.K. business.
• Kudu reported $27.6 million of pre-tax income and $45.7 million of revenue, versus $10.8 million and $21.2 million for its partial 2019 consolidation period. It deployed $121 million during 2020 and had deployed $386 million across 13 asset managers by year-end.
• BAM insured $17.3 billion of municipal bonds, up from $12.8 billion. Gross written premiums and member surplus contributions collected totaled $131.3 million versus $106.9 million, while total pricing declined to 76 basis points from 83. Claims-paying resources increased to $987 million from $938 million.
• White Mountains repurchased 99,087 shares for $85.1 million and paid a $1.00 per-share dividend. It liquidated its common-equity portfolio during the second half of the year to help fund Ark.

Outlook, commentary and risks

• No numeric consolidated earnings or revenue guidance is provided. Management said operating cash, operating cash flows and routine investment sales and maturities were adequate for expected cash requirements for the foreseeable future, but noted the company’s capital base was, for the time being, more or less fully deployed after approximately $1.0 billion of 2020 deployments and commitments.
• Ark acquisition: White Mountains closed the acquisition on January 1, 2021, after year-end prefunding. The agreed investment comprised $605.4 million of equity capital and $40.9 million of share purchases, with up to a further $200 million of equity capital contemplated in 2021. White Mountains owned 72.0% of basic shares at closing (63.0% fully diluted, fully converted); Ark is to be reported as a segment in later periods.
• COVID-19 affected businesses unevenly: travel-related premiums and commissions at PassportCard fell sharply, while pet demand benefited NSM. Management expected travel-related trends to persist until global travel resumes and NSM’s results could remain exposed to pandemic effects. Municipal finances may also weaken; BAM identified consumption-tax, transportation and higher-education exposures as more susceptible, together about 15% of insured par. BAM reported no bonds on its credit watchlist and no insured payments missed through February 15, 2021.
• Key risks include MediaAlpha share-price volatility; subjective Level 3 valuations (including $614.2 million of other long-term investments); possible impairment of $782.4 million of goodwill and other intangible assets; BAM surplus-note repayment and regulatory approval risk; NSM reliance on a concentrated group of carrier partners (five largest represented about 64% of premiums placed); and catastrophe, reinsurance, competition, market, interest-rate, cyber, tax and regulatory risks.
• Other unusual items: NSM recorded $6.2 million of intangible-asset impairment related to its U.K. vertical. A $18.7 million liability remained for a Swedish tax matter associated with the prior Sirius Group sale, which is under appeal. The filing reports no current litigation expected to have a material adverse effect.

Most important facts for investors to verify

• How much of 2020 earnings and book-value growth came from the MediaAlpha mark-to-market gain and the one-time tax benefit, versus recurring operating performance.
• MediaAlpha’s current share price, lock-up and sale-coordination restrictions, and sensitivity: management estimated each $1 change in its share price affects White Mountains’ book value per share by approximately $7.
• Ark’s post-close capital needs, underwriting performance, catastrophe exposure, and whether the contemplated additional $200 million investment is made.
• NSM’s ability to improve GAAP profitability while managing higher debt costs, U.K. business pressure and carrier concentration.
• Recoverability and timing of BAM surplus-note principal and interest payments, which require NYDFS approval, and the assumptions supporting management’s repayment model.
• Liquidity available after Ark funding, debt maturities and interest costs, and the timing of approximately $297.8 million of unfunded investment commitments.