White Mountains Insurance Group, Ltd. — Q1 2021 Form 10-Q
Reporting period: Three months ended March 31, 2021. Amounts are in U.S. dollars; financial statement amounts are in millions unless noted otherwise.
Business context
White Mountains operates in financial guarantee insurance (HG Global/BAM), property and casualty insurance and reinsurance (Ark), specialty insurance distribution (NSM), asset management (Kudu), and Other Operations. Results include Ark for the first time following its acquisition and consolidation on January 1, 2021; therefore, the comparison with Q1 2020 is not fully like-for-like.
Financial results and key metrics
| Metric | Q1 2021 | Q1 2020 / prior date |
|---|---|---|
| Total revenue | $178.2 | $(59.2) |
| Total expenses | $316.9 | $106.8 |
| Pre-tax loss | $(138.7) | $(166.0) |
| Net loss from continuing operations | $(129.2) | $(140.5) |
| Net loss attributable to common shareholders | $(75.3); $(24.30) per share | $(128.8); $(40.54) per share |
| Operating cash flow | $(92.8) | $(59.8) |
| Investing cash flow | $363.9 | $80.5 |
| Financing cash flow | $6.5 | $(44.2) |
| Total debt at March 31 | $429.7 | $376.4 at December 31, 2020 |
| Common shareholders’ equity at March 31 | $3,825.9 | $3,906.0 at December 31, 2020 |
Cash balances, including restricted cash, were $488.5 at quarter-end, up from $211.2 at year-end. The increase included release of $646.3 previously prefunded or escrowed for the Ark transaction. At the holding-company level, White Mountains reported $600 of net unrestricted cash, short-term investments and fixed maturities, in addition to $600 of MediaAlpha shares and $166 of private equity and ILS funds. Management said available cash, operating cash flows, and routine investment sales and maturities were adequate for expected requirements for the foreseeable future.
Book value per share was $1,231 and adjusted book value per share was $1,242 at March 31; both declined 2% during the quarter, including dividends. The reported total portfolio return was -0.3%, or 0.7% excluding MediaAlpha. Total debt to adjusted capital was 9.5%, versus 8.7% at year-end. The company paid a $1.00 per-share dividend.
Material changes and segment performance
- Ark: The acquisition added a new consolidated insurance and reinsurance segment. Q1 gross written premiums were $404.5, net written premiums $342.4, and net earned premiums $104.6. Ark reported a $32.5 pre-tax loss, including $25.3 of transaction costs. Its GAAP combined ratio was 109%; adjusted combined ratio was 108%, including 17 catastrophe-loss points, 14 of them from Winter Storm Uri. Gross written premiums rose 207% versus Q1 2020, before White Mountains owned Ark, and blended renewal pricing increased over 10%.
- MediaAlpha: White Mountains sold 3.6 million shares in a March secondary offering for $160.3 net proceeds, reducing its basic ownership to 28.5%. Its remaining stake was valued at $600.2 at quarter-end, after the share price fell from $39.07 at year-end to $35.43. The company recorded $41.7 of MediaAlpha investment losses. Management estimated that each $1 change in MediaAlpha’s share price would change White Mountains’ book value per share by about $5.50.
- NSM: Commission and other revenue increased to $74.8 from $65.0; adjusted EBITDA rose to $14.4 from $10.5. NSM recorded a $28.7 loss on Fresh Insurance’s motor business, which it sold on April 12, 2021. Pre-tax loss was $33.3, compared with $1.4 in Q1 2020. Pet and social services grew; real estate revenue weakened amid reduced carrier capacity.
- Kudu: Pre-tax income was $15.7, compared with a $21.4 loss a year earlier, largely reflecting $15.8 of unrealized investment gains versus $24.8 of unrealized losses in Q1 2020. Adjusted EBITDA was $5.9, versus $5.5. Kudu refinanced its facility and had $95.9 of debt outstanding at quarter-end.
- HG Global/BAM: The segment recorded a $25.0 pre-tax loss versus $1.1 income, mainly because of weaker investment returns. Gross written premiums and member surplus contributions collected totaled $26.3, up from $19.7. BAM’s claims-paying resources were $1,144, compared with $987 at year-end, including $150 of additional collateralized Fidus Re protection.
- Other Operations: Pre-tax loss narrowed to $63.6 from $144.3, primarily reflecting less severe investment losses than in Q1 2020, partly offset by MediaAlpha losses and higher general and administrative costs.
Investment income was $20.6, compared with $22.9. Net realized and unrealized investment losses were $40.6, compared with $156.7 of losses in Q1 2020. Investment marks remained a significant source of earnings volatility.
Outlook, risks, contingencies, and unusual items
- The filing provides no specific consolidated earnings or revenue guidance. Management’s liquidity assessment is qualified by the uncertainty of claims timing, investment returns, and operating cash flows.
- Key stated risks include catastrophe losses, potential inadequacy of loss reserves, MediaAlpha share-price volatility, COVID-19 effects, economic and market deterioration, competition, regulatory changes, rating actions, and access to financing. Ark’s reserve estimates and catastrophe models involve significant uncertainty; management cautioned actual catastrophe losses could exceed modeled estimates.
- COVID-19 may continue to affect insurance demand and claims. BAM noted municipal financial stress risks, though it reported no insured bonds on its credit watchlist and said payments due through May 1 had been made. NSM cited pandemic-related weakness in some U.K. markets; Kudu’s results remain sensitive to asset-manager performance and financial markets.
- The $18.7 gain from discontinued operations principally reflected reversal of a Sirius Group tax-indemnity liability after a favorable Swedish tax-law development. NSM’s $28.7 Fresh Insurance held-for-sale loss was recorded in Q1; the sale closed after quarter-end.
- White Mountains reported no material litigation expected to adversely affect its financial condition, results, or cash flows; no material changes to previously disclosed risk factors; and compliance in all material respects with debt covenants. Disclosure controls were assessed as effective.
Important facts for investors to verify
- How Ark’s underwriting results develop after acquisition, including catastrophe exposure, reserve adequacy, and the effect of transaction costs; also track the possible additional $200 capital contribution and resulting ownership changes.
- MediaAlpha’s share-price sensitivity and the value of White Mountains’ remaining stake, which drove a material portion of Q1 investment losses.
- NSM’s post-sale performance and whether reduced carrier capacity in its real estate program and pandemic-related market weakness persist.
- The liquidity and valuation of Level 3 and NAV-based investments, including Kudu participation contracts; $656 of investments were Level 3 and $376 were valued using NAV practical expedients.
- Debt, financing terms, and subsidiary dividend constraints, including regulatory approval requirements affecting BAM surplus-note payments and collateral supporting insurance obligations.