Business context and reporting period
White Mountains Insurance Group, Ltd. filed this unaudited Form 10-Q for the quarter and nine months ended September 30, 2022. Its reportable businesses are municipal bond insurance (HG Global/BAM), specialty P&C insurance and reinsurance (Ark), asset management (Kudu), and Other Operations. NSM is reported as discontinued operations following its August 1, 2022 sale.
Key financial results
Unless otherwise noted, amounts are in millions of dollars. Comparisons are with the corresponding 2021 period.
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Total revenue | $383.2 | $(92.4) | $720.3 | $353.4 |
| Pre-tax loss from continuing operations | $(31.0) | $(360.6) | $(278.4) | $(304.6) |
| Net income (loss) from continuing operations | $(23.6) | $(389.2) | $(252.3) | $(356.8) |
| Net income attributable to common shareholders | $888.2 | $(371.4) | $752.4 | $(308.2) |
| Operating cash flow, continuing operations | Not presented separately | Not presented separately | $118.2 | $5.7 |
Reported common-shareholder earnings include the NSM sale gain: discontinued operations contributed $893.1 in Q3 and $903.2 year to date, including an $886.8 after-tax gain on sale. The continuing-operations losses therefore better reflect results of the businesses retained.
- Ark: Net earned premiums were $346.1 in Q3 and $757.8 year to date, up from $213.4 and $435.8. GAAP combined ratios improved to 87% and 90%, respectively, from 92% and 95%. Ark recorded $51 of net Hurricane Ian losses and favorable prior-year reserve development of $9.2 in Q3 and $35.6 year to date.
- Kudu: Pre-tax income was $47.2 in Q3 and $66.3 year to date. Results included investment gains on participation contracts of $41.1 and $45.8; adjusted EBITDA, a non-GAAP measure, was $11.5 and $32.5.
- Investments: Consolidated portfolio returns were 0.4% in Q3 and negative 3.6% year to date. MediaAlpha generated losses of $18.6 in Q3 and $113.3 year to date. Fixed-maturity investments had $203.7 of net unrealized losses year to date, primarily reflecting higher interest rates.
Financial position, liquidity and capital
- Total assets were $7,545.0 at September 30, 2022, versus $7,000.7 at December 31, 2021; total equity was $3,866.3 versus $3,704.7.
- Book value per share was $1,439.31 and adjusted book value per share was $1,470.84, both up 28% in Q3. The filing attributes the increase chiefly to the NSM sale gain, partly offset by investment losses. Adjusted book value per share is non-GAAP.
- Cash at period end was $245.7, including restricted cash. The Company and intermediate holding companies reported $1,076 of net unrestricted cash, short-term investments and fixed-maturity investments; management said liquidity was adequate for expected needs for the foreseeable future.
- Total debt was $615.5, up from $420.9 at year-end. Total debt to adjusted capital was 13.1%, versus 15.2%. White Mountains reported material compliance with debt covenants.
- Net cash proceeds from NSM were $1.4 billion. During the first nine months, the Company repurchased 457,180 shares for $610.5; 366,645 shares were repurchased in Q3. Undeployed capital was approximately $1.1 billion at quarter-end.
Material changes, outlook and risks
- The NSM sale materially changed reported earnings and liquidity: the sale gain drove positive consolidated net income despite continuing-operations losses. NSM’s results are classified as discontinued operations.
- Ark premiums grew amid favorable market conditions, inflationary concerns, reduced catastrophe-market capacity and positive rate momentum. Its underwriting results also faced catastrophe and Ukraine-related losses; management identifies a 1-in-250-year U.S. earthquake scenario as a significant exposure, estimated at roughly 25% of Ark’s tangible capital after specified recoveries and other adjustments.
- Rising interest rates contributed to unrealized fixed-income losses and losses in HG Global/BAM. MediaAlpha’s share price remains a material source of book-value volatility: at 16.9 million shares held, each $1 share-price movement was estimated to change book value per share by about $6.60.
- No formal earnings or revenue guidance is provided. Management cites the potential effects of catastrophes, reserve adequacy, investment markets and MediaAlpha, economic conditions, competition, regulation, ratings actions, and access to capital. The filing reports no material change to previously disclosed risk factors and no current non-claims litigation expected to materially affect the Company.
Important facts for investors to verify
- Separate recurring continuing-business performance from the one-time NSM disposal gain and confirm how the sale proceeds are being deployed.
- Track Ark’s combined ratio, catastrophe losses, prior-year reserve development, reinsurance recoverables and exposure to major events.
- Review the valuation sensitivity of MediaAlpha and the effects of interest rates, foreign currency and less-liquid Level 3 investments on book value.
- Monitor debt balances, floating-rate borrowing costs, subsidiary dividend capacity and restrictions on assets held in trusts or pledged as collateral.
- Reconcile GAAP book value with adjusted book value and other non-GAAP measures using the filing’s definitions and reconciliations.