WHITE MOUNTAINS INSURANCE GROUP LTD quarterly report, Q2 FY2019

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White Mountains Insurance Group, Ltd. — Q2 2019 Form 10-Q

Reporting period: Three and six months ended June 30, 2019. Amounts are in U.S. dollars; financial statement figures are in millions unless noted. The group operates across municipal bond insurance, specialty insurance distribution, asset and wealth management, and investments. Comparisons are affected by acquisitions and the MediaAlpha transaction.

Financial results and position

MetricQ2 2019Q2 2018Six months 2019Six months 2018
Total revenue$129.0$122.3$562.6$164.4
Pre-tax income (loss), continuing operations$15.8$(12.4)$297.5$(78.4)
Net income (loss) attributable to common shareholders$20.5$3.5$304.9$(44.5)
Basic and diluted EPS$6.44$1.02$95.93$(12.41)

The six-month results include $182.2 million of realized and unrealized gains from the MediaAlpha transaction. They also reflect $280.8 million of net realized and unrealized investment gains, compared with losses of $43.2 million in the first half of 2018; the MediaAlpha-related gains are presented separately in the income statement. Q2 net investment income was $21.0 million, versus $11.8 million; first-half net investment income was $37.0 million, versus $31.5 million.

  • Book value: GAAP book value per share was $987.12 at June 30, up from $896.00 at December 31, 2018. Adjusted book value per share, a non-GAAP measure, was $986.39, up from $887.85. Management attributed first-half growth mainly to the MediaAlpha gain and strong investment returns; excluding the estimated MediaAlpha gain, management reported first-half growth of 4% in book value per share and 5% in adjusted book value per share, including dividends.
  • Cash flow: First-half operating cash flow was $1.8 million, compared with cash used of $25.4 million in 2018. Investing activities used $112.6 million and financing activities provided $151.0 million. Period-end cash was $150.3 million, including $88.8 million of restricted cash.
  • Balance sheet and debt: Total assets were $3.75 billion and total liabilities $744.3 million at June 30. Total debt was $230.5 million, versus $192.7 million at year-end. Common shareholders’ equity was $3.14 billion. Debt to total adjusted capital was 6.8%, versus 6.3% at year-end.
  • Liquidity: Management said cash balances, operating cash flows, and routine investment sales and maturities were adequate for expected requirements for the foreseeable future. The company and intermediate holding companies reported $585 million of net unrestricted cash, short-term investments, and fixed maturities, plus $709 million of common equities and $206 million of private equity, hedge fund, and ILS investments.
  • Margins: A consolidated operating margin is not presented and is not a directly comparable measure for this investment-oriented, multi-business group. NSM reported Q2 pre-tax income of $0.7 million and adjusted EBITDA of $16.4 million; for the first half it reported a pre-tax loss of $0.8 million and adjusted EBITDA of $26.2 million. Adjusted EBITDA is non-GAAP.

Material changes versus the prior period

  • White Mountains completed the MediaAlpha recapitalization on February 26, received $89.3 million net cash proceeds, recognized $67.5 million of realized gain and $114.7 million of unrealized gain, and reduced its ownership to 48.3%. It deconsolidated MediaAlpha and elected fair value accounting for its remaining stake.
  • On April 4, the company acquired additional Kudu interests, raising basic ownership to 99.1% and beginning consolidation. It paid $81.4 million and assumed additional commitments, bringing its total Kudu commitment to $250 million, of which $105 million remained unfunded.
  • NSM acquired Embrace Pet Insurance for approximately $71.5 million net of cash acquired and acquired U.S. collector-car renewal rights for $82.5 million. NSM debt increased, and its acquisition-related goodwill and intangible assets expanded. Its results are not directly comparable with 2018 because White Mountains acquired NSM in May 2018 and made further acquisitions.
  • White Mountains bought a 30% interest in Elementum for $55.1 million and committed a further $50 million to Elementum-managed funds; $40 million had been invested in those funds by June 30.
  • First-half total consolidated portfolio return was 12.4%; excluding the MediaAlpha transaction, it was 7.9%. Q2 portfolio return was 2.0%. Equity and fixed-income portfolios both underperformed their respective benchmarks in Q2 and the first half of 2019.

Outlook, commentary, risks, and unusual items

  • Guidance: The filing provides no specific earnings or revenue guidance. Management’s liquidity outlook is that resources are adequate for expected needs for the foreseeable future, but it cautions that financing may not be available on satisfactory terms if needed.
  • BAM: Q2 gross written premiums and member surplus contributions were $25 million, versus $29 million; first-half amounts were $40 million in both years. Pricing declined year over year, which management attributed mainly to lower interest rates and tighter credit spreads. BAM’s claims-paying resources were $894.6 million at June 30, and S&P affirmed its AA/stable rating in June.
  • NSM: Q2 and first-half results include acquisition activity and $6.3 million and $7.6 million, respectively, of expense from increases in contingent-consideration earnout liabilities. NSM’s floating-rate term debt had a 7.30% effective rate before debt issuance costs; a swap hedged $151 million of variable-rate loans. NSM was in compliance with its covenants, with a 3.9x leverage ratio against a 5.5x maximum.
  • Investment and valuation risks: Approximately 75% of the investment portfolio was priced using quoted market prices or other observable inputs. Other investments include Level 3 valuations and fund NAV estimates; private equity and ILS holdings have lockups or redemption limits. The company reported a $15 million write-down of Compare.com in Q2.
  • Contingencies and tax: White Mountains retained a $16.6 million liability related to a Swedish tax dispute involving previously sold Sirius Group; an appeal was pending. The company said it had no current litigation deemed probable of materially affecting its financial condition, results, or cash flows. It warned that proposed U.S. Treasury regulations could cause it to be treated as a PFIC for a shareholder’s 2020 tax year if finalized as proposed and circumstances remain unchanged; the company said it did not then believe it was a PFIC.
  • Other notable items: The company recorded a tax benefit associated with releasing a full valuation allowance on Guilford’s U.S. deferred tax assets. It concluded NSM goodwill and intangible assets were not impaired at June 30. All debt covenants were met.

Most important facts for investors to verify

  • How much of first-half earnings and book-value growth depends on the non-recurring MediaAlpha transaction gains, and how the remaining investment is valued.
  • Whether NSM’s acquisitions deliver the expected growth and cash generation, and how earnout liabilities, goodwill, and debt evolve.
  • The liquidity and realizability of investments subject to Level 3 valuation, NAV estimates, lockups, or redemption restrictions.
  • Developments in the Sirius-related Swedish tax appeal and the potential PFIC treatment under proposed regulations.
  • BAM’s premium volume and pricing trends, regulatory constraints on surplus-note payments, and continued claims-paying capacity.