WHITE MOUNTAINS INSURANCE GROUP LTD annual report, FY2022

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White Mountains Insurance Group, Ltd. — FY2022 Form 10-K

Business context and period. This annual report covers the year ended December 31, 2022. White Mountains is an opportunistic insurance and financial-services holding company. Its reportable segments are municipal bond insurance and reinsurance (HG Global/BAM), specialty property and casualty insurance and reinsurance (Ark), and capital solutions for asset and wealth managers (Kudu); remaining businesses and investments are reported in Other Operations. BAM is consolidated for GAAP purposes, with its results attributed to non-controlling interests.

Financial performance and position

  • Shareholder results: Net income attributable to common shareholders was $792.8 million, versus a $275.4 million loss in 2021; comprehensive income attributable to common shareholders was $787.6 million, versus a $273.3 million loss. GAAP book value per share ended at $1,456.74 and adjusted book value per share at $1,495.28. Both increased during 2022, including dividends, by 24% and 26%, respectively.
  • Revenue and continuing operations: Consolidated revenue was $1.158 billion, up from $614.4 million. Continuing-operations pre-tax loss was $149.4 million and net loss was $190.8 million. Net income included an $886.8 million after-tax gain from the NSM sale; without that sale, the bottom-line comparison would look materially different.
  • Cash flow and liquidity: Net cash provided by continuing operations was $326.3 million, compared with $3.7 million used in 2021. The NSM sale generated $1.373 billion in net cash proceeds in investing activities. At year-end, the Company and intermediate holding companies had $706 million of net unrestricted cash, short-term investments and fixed-maturity investments. Consolidated cash, including restricted cash, was $255 million.
  • Debt and capital: Debt from continuing operations was $575.2 million at carrying value, up from $420.9 million; total debt to adjusted capital was 12.1%, down from 15.2%. Total assets were $7.389 billion and common shareholders’ equity was $3.747 billion. Management reported covenant compliance and said cash balances, operating cash flows and routine investment maturities should cover foreseeable needs.
  • Investments and returns: Total investments were $5.170 billion. The consolidated portfolio return was negative 1.6%, compared with negative 3.4% in 2021; excluding MediaAlpha, returns were 0.3% and 6.4%, respectively. MediaAlpha produced a $93 million investment loss in 2022; its year-end value was $168.6 million, down from $261.6 million.
  • Ark: Gross written premiums grew 37% to $1.452 billion; net earned premiums were $1.043 billion. Pre-tax income rose to $95.1 million from $52.9 million. The GAAP combined ratio improved to 81.8% from 87.4% (reported rounded as 82% and 87%); the adjusted ratio was 80.8% versus 84.9%. 2022 catastrophe losses included $45 million related to Ukraine and $44 million from Hurricane Ian, net of reinstatement premiums.
  • HG Global/BAM: BAM’s insured portfolio grew to $100.0 billion of gross par outstanding from $89.2 billion. Segment gross written premiums and member surplus contributions collected totaled $146.5 million, versus $117.8 million; total pricing rose to 91 basis points from 67. BAM’s claims-paying resources were $1.423 billion, up from $1.192 billion. The segment recorded a $135 million pre-tax loss, mainly reflecting unrealized fixed-income losses as interest rates rose.
  • Kudu: Revenue was $118.5 million and pre-tax income was $88.8 million, both down from 2021; adjusted EBITDA increased to $41.8 million from $32.8 million. Results included investment gains, while Kudu deployed $101 million in five firms during 2022.

Material changes versus 2021

  • The August 2022 NSM sale generated $1.4 billion in net proceeds and drove the year’s reported earnings through the $886.8 million after-tax sale gain. NSM is presented as discontinued operations.
  • White Mountains repurchased and retired 461,256 shares for $615.8 million, including a self-tender for 327,795 shares at $1,400 each. Year-end undeployed capital was approximately $0.9 billion.
  • Ark expanded substantially: gross written premiums rose from $1.059 billion to $1.452 billion, and pre-tax income increased despite investment losses and higher catastrophe claims.
  • Rising interest rates contributed to fixed-income losses and increased HG Global/BAM’s reported pre-tax losses. The overall portfolio return improved versus 2021 chiefly because MediaAlpha’s loss was smaller.
  • White Mountains invested $205 million in WM Outrigger Re, a collateralized reinsurance vehicle intended to support Ark’s 2023 catastrophe portfolio. HG Global also issued $150 million of senior notes.

Outlook, risks and unusual items

  • No company-wide earnings or financial guidance is provided in the supplied filing text. Management cited favorable underwriting conditions across many Ark classes; Ark wrote more than $575 million of gross premiums in the January 2023 renewal season, with a 15% risk-adjusted rate change. Management also noted uncertainty about whether favorable BAM market pricing and activity would persist.
  • Ark’s catastrophe exposure includes natural disasters, war and cyber events. Models and loss estimates depend on uncertain assumptions; after its planned 2023 reinsurance placements, expected net exposure to each of its two largest 1-in-250-year catastrophe zones was 25–35% of Ark tangible capital. Reinsurance reduces but does not eliminate exposure, and recoveries depend on reinsurer performance and collateral.
  • Ark reported $1.297 billion of gross loss and LAE reserves, including $505 million of reinsurance recoverables. Management’s recorded net reserves of $791.5 million were within its estimated range of $675.7 million to $851.6 million, but reserve outcomes remain uncertain. The filing highlights the limited history for newer Bermuda business and says a 10% error in initial loss-ratio estimates on GAIL’s 2022 premiums could mean about $62 million of reserve variance.
  • White Mountains held $912 million of Level 3 investments, whose valuations rely on judgment and unobservable assumptions. MediaAlpha’s public share price also creates earnings and book-value volatility; the filing estimates each $1 share-price change affects book value per share by approximately $6.60.
  • BAM’s $340 million of surplus notes and $158 million of accrued interest are subject to NYDFS approval for payment. BAM paid $36 million of principal and interest in December 2022; future payments are not assured. Its AA/stable rating is important to its business and the modeled repayment of the notes.
  • Other disclosed risks include insurance-market cyclicality, inflation and social inflation, regulatory and tax changes, investment-market volatility, liquidity restrictions on private investments, and potential impairment of goodwill and intangible assets. No material non-claims litigation was reported; management and the auditor concluded internal control over financial reporting was effective.

Key facts investors should verify

  1. How much of 2022 earnings and book-value growth came from the NSM sale, and how continuing operations performed without it.
  2. Whether Ark can sustain premium growth and underwriting profitability after catastrophe losses, and whether reserve development and newer-business assumptions remain sound.
  3. The liquidity, collateral and counterparty protection available under Ark’s reinsurance arrangements, including WM Outrigger Re.
  4. The support for valuations of Level 3 assets, particularly Kudu participation contracts and PassportCard/DavidShield, and the sensitivity of those valuations to assumptions.
  5. BAM’s claims-paying resources, rating outlook, regulatory capacity to pay surplus notes, and the durability of its higher 2022 pricing.
  6. Debt maturities, floating-rate exposure, restricted cash and investments, and the amount of capital remaining available after share repurchases and new commitments.