White Mountains Insurance Group, Ltd. — Q3 2018 Form 10-Q
Reporting period: Three and nine months ended September 30, 2018. Amounts are in U.S. dollars; financial amounts are in millions unless stated otherwise. White Mountains operates across municipal bond insurance, specialty insurance distribution, marketing technology and investment activities.
Financial performance and position
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Total revenue | $198.7 | $87.5 | $363.1 | $259.8 |
| Pre-tax income (loss), continuing operations | $44.3 | $8.4 | $(34.1) | $2.6 |
| Net income (loss) attributable to common shareholders | $40.8 | $562.1 | $(3.7) | $604.7 |
| Continuing-operations diluted EPS | $18.27 | $5.36 | $3.90 | $7.03 |
| Cash from continuing operations | Not stated by quarter | $(30.5) | $(64.4) |
- The large year-over-year net income comparison reflects the $554.6 gain on the 2017 OneBeacon sale, recorded in discontinued operations. In 2018, a $17.3 loss related to a Sirius Group tax indemnity reduced discontinued-operations results.
- At September 30, 2018, total assets were $3,422.8, total liabilities $583.2 and White Mountains common shareholders’ equity $2,984.0. Book value per share was $938.19; adjusted book value per share, a non-GAAP measure, was $926.14. Both measures rose 2% in Q3 and 1% in the first nine months, including dividends.
- Total debt was $164.3, versus $23.8 at year-end 2017; debt to total adjusted capital was 5.2%, versus 0.7%. The company reported compliance with debt covenants. NSM’s leverage ratio was 3.9x against a 5.5x maximum covenant.
- Consolidated cash balances were $112.2, including $41.2 of NSM restricted cash. The company and intermediate holding companies reported $636 of net unrestricted cash, short-term investments and fixed maturities in Other Operations. Management said cash, operating cash flows and routine investment sales and maturities should meet expected requirements for the foreseeable future.
- Pre-tax total investment return was 3.1% in Q3 and 2.8% year to date, compared with 1.4% and 4.3%, respectively, in 2017. Other Operations recorded $70.2 of investment gains in Q3, but only $37.3 for the first nine months.
Material changes and segment performance
- White Mountains acquired 95% of NSM on May 11 for $274.2 cash consideration; NSM’s results are included from the acquisition date. NSM acquired Fresh Insurance for about $49.6 in May. Q3 NSM revenue was $39.7, pre-tax loss $5.2 and adjusted EBITDA $6.2; from acquisition through September 30, revenue was $63.2, pre-tax loss $2.0 and adjusted EBITDA $11.4.
- MediaAlpha Q3 revenue rose to $74.5 from $37.9, with pre-tax income of $4.7 versus a $0.5 loss and adjusted EBITDA of $7.7 versus $1.9. Nine-month revenue increased to $218.0 from $101.2; adjusted EBITDA was $24.8 versus $4.6. Management attributed growth mainly to P&C demand and Health, Medicare and Life activity, including the Healthplans.com assets acquired in 2017.
- HG Global/BAM had a Q3 pre-tax loss of $8.4 and a nine-month loss of $32.1, chiefly reflecting BAM losses and lower investment returns. Gross written premiums and member surplus contributions were $16 in Q3 and $56 year to date, down from $19 and $68. BAM’s insured municipal bond par was $2.2 billion in Q3 and $6.6 billion year to date. Total pricing declined to 75 basis points in Q3 and 91 basis points year to date.
- BAM claims-paying resources increased to $834.6 from $708.4 at year-end 2017, including $100 of collateralized reinsurance protection from Fidus Re. The agreement is accounted for using deposit accounting, not reinsurance accounting.
- White Mountains repurchased 585,033 shares for $513.1 during the first nine months, including a May tender offer for 575,068 shares at $875 each. No shares were repurchased in Q3; 643,130 shares remained authorized for repurchase. The company reported $1.4 billion of undeployed capital.
Outlook, risks and unusual items
- The filing provides no specific earnings or revenue guidance. Management described its acquisition-and-investment approach as opportunistic and value-oriented; actual outcomes remain subject to market conditions, available opportunities and financing access.
- In late October, a Swedish court ruled against Sirius Group on disputed interest deductions. White Mountains recorded a $17.3 loss under its sale indemnity; Sirius Group intends to appeal.
- White Mountains guaranteed NSM’s obligation to purchase certain U.S. collector-car renewal rights for $82.5 if a sale is not arranged by December 31, 2019. Management said estimated fair value exceeds that amount and recorded no liability.
- MediaAlpha had customer concentration: one customer accounted for approximately 30% of Q3 advertising revenue and 31% for the first nine months. Its revenue-share cost structure and customer demand are relevant operating sensitivities.
- Investment results are exposed to equity-market, interest-rate, credit and foreign-currency movements. Approximately $276 of net assets had foreign-currency exposure. Management noted that rising rates weighed on BAM’s fixed-income marks, while short duration helped the broader fixed-income portfolio.
- Other disclosed risks include contingent earnout valuations at NSM, BAM’s regulatory restrictions on surplus-note payments, and the possibility of reduced ratings or less favorable access to financing. The filing reported no material change to previously disclosed risk factors and no litigation expected to have a material adverse effect.
Important facts for investors to verify
- Separate recurring operating performance from investment gains and the prior-year OneBeacon sale gain when comparing earnings.
- Track NSM’s post-acquisition results, debt repayment, 3.9x covenant leverage, earnout liabilities and the $82.5 collector-car renewal-rights contingency.
- Assess whether MediaAlpha’s growth persists, including dependence on major customers and variable partner revenue-share costs.
- Monitor BAM’s premium volume and pricing, investment performance, claims-paying resources, Fidus Re agreement and regulatory limits on surplus-note payments.
- Reconcile share repurchases and capital deployment with changes in book value per share, liquidity and investment-portfolio risk.