White Mountains Insurance Group, Ltd. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020. Amounts are in U.S. dollars; financial statement amounts are in millions unless otherwise noted.
Business context and reporting period
White Mountains operates across municipal bond financial guarantee insurance (HG Global/BAM), specialty insurance distribution (NSM), asset management (Kudu) and Other Operations, including its investment portfolio and unconsolidated interests. Comparisons are affected by portfolio changes: MediaAlpha was deconsolidated in February 2019, while Kudu began being consolidated in Q2 2019. NSM’s Q1 2020 results include Embrace, acquired in April 2019.
Financial results and position
| Metric | Q1 2020 / March 31, 2020 | Comparable period / prior year-end |
|---|---|---|
| Total revenues | $(59.2) | $433.6 in Q1 2019 |
| Pre-tax income (loss) from continuing operations | $(166.0) | $281.7 in Q1 2019 |
| Net income (loss) attributable to common shareholders | $(128.8); diluted EPS $(40.54) | $284.4; diluted EPS $89.64 in Q1 2019 |
| Operating cash flow | $(59.8) | $(41.1) in Q1 2019 |
| Cash flow from investing / financing | $80.5 / $(44.2) | $(42.8) / $105.5 in Q1 2019 |
| Total cash, including restricted cash | $136.4 | $161.0 at December 31, 2019; includes $64.9 restricted |
| Total debt | $294.7 | $283.5 at December 31, 2019 |
| Common shareholders’ equity | $3,076.7 | $3,261.5 at December 31, 2019 |
| Book value / adjusted book value per share | $981.39 / $979.74 | $1,023.91 / $1,018.41 at December 31, 2019 |
The consolidated loss was principally investment-driven: net realized and unrealized investment losses were $156.7, including $140.8 of losses on common equity securities. Total pre-tax investment return was negative 4.6%, versus positive 10.1% in Q1 2019; the prior-year return included a $115 unrealized gain associated with the MediaAlpha transaction. The company declared and paid a $1.00 per-share dividend.
Segment highlights: NSM reported $65.0 of commission and other revenue and $10.5 of adjusted EBITDA, compared with $49.3 and $9.8, respectively, in Q1 2019; its pre-tax loss was $1.4. HG Global/BAM reported $1.1 of pre-tax income. Kudu reported a $21.4 pre-tax loss, including $24.8 of unrealized investment losses, and $5.5 of adjusted EBITDA.
Material changes versus the prior comparable period
- Consolidated results shifted from profit to loss, reflecting the Q1 2020 market decline and investment losses, compared with Q1 2019’s investment gains and MediaAlpha transaction gain.
- NSM revenue grew, with higher activity in specialty transportation, real estate and pet insurance; U.K. commission and other revenue declined.
- BAM insured municipal bonds with $3.0 billion par value, up from $1.9 billion. Gross written premiums and member surplus contributions collected were $19.7, versus $15.8; total pricing declined to 66 basis points from 83 basis points.
- Common share repurchases totaled 64,403 shares for approximately $54, or an average $844 per share. The board authorization had 577,201 shares remaining at quarter-end.
Liquidity, debt and capital
Management said cash balances, operating cash flows and routine investment sales and maturities were adequate for expected requirements for the foreseeable future. The holding company and intermediate holding companies reported $536 of net unrestricted cash, short-term investments and fixed maturities, in addition to $524 of common equity securities and $145 of private equity, hedge fund and ILS investments. These investment balances are not equivalent to cash and may have liquidity constraints.
Debt was $294.7, primarily NSM’s bank facility and Kudu’s bank facility. Total debt to total adjusted capital was 8.7%, up from 8.0% at year-end. The company reported compliance with all debt covenants. NSM’s actual leverage ratio was 3.8x against a 5.5x maximum covenant.
Outlook, risks and unusual items
- COVID-19: Management said the full effect on markets, the economy and the company could not yet be determined. Q1 investment returns were hurt by falling equity markets. BAM reported that insured bond payments had been made through May 1 and no bonds were on its insured credit watchlist, while noting municipal stress risks, particularly in consumption-tax, transportation and higher-education credits.
- Operating exposures: NSM saw mixed early April effects, including higher pet-health volumes and lower activity in certain auto, leisure and other lines; premium refunds or payment grace periods by insurance partners could affect commissions or cash flow. Kudu estimated same-store AUM down 7% and modeled annualized revenue down 12% in Q1. PassportCard/DavidShield travel insurance revenue fell sharply; White Mountains invested $15 in the business in May.
- Subsequent acquisition: On April 7, 2020, NSM acquired Kingsbridge for approximately £120 million, funded with approximately £103 million upfront cash, an approximately £17 million target earnout and £42.5 million of NSM borrowing; White Mountains contributed $79.9.
- Capital and contingencies: In January, BAM made a $65 special payment on its surplus notes and amended their variable-rate period through 2024, subject to regulatory approval for payments. White Mountains recorded a $15.5 liability for a Swedish tax dispute related to the previously sold Sirius Group; the appeal was pending. The filing also describes contingent obligations relating to the prior Esurance sale, without a clear quantified exposure. Management reported no current litigation expected to have a material adverse effect.
- Guidance: The filing provides no quantified earnings or revenue guidance. Management cautioned that actual results may differ materially from forward-looking statements.
Important facts for investors to verify
- How COVID-19 and market movements affect investment valuations, especially Level 3 and other long-term investments, which include $661 of Level 3 assets; valuation models rely on significant judgment.
- Whether BAM’s municipal exposures and claims-paying resources remain resilient as municipal finances respond to the pandemic; claims-paying resources were $930 at March 31.
- NSM’s post-acquisition performance, leverage and exposure to premium refunds, alongside the financing and earnout terms for Kingsbridge.
- Kudu’s underlying AUM, fee levels and Participation Contract valuations, given its Q1 valuation loss and sensitivity to assumptions.
- Liquidity and access to funds held in restricted, trust, or less liquid investments, and the eventual outcome of the Sirius tax appeal and other contingent obligations.