White Mountains Insurance Group, Ltd. — Q3 2019 Form 10-Q
Reporting period: Three and nine months ended September 30, 2019. White Mountains is a Bermuda-based insurance and investment holding company. Its principal segments were HG Global/BAM, specialty insurance distributor NSM, newly consolidated asset manager Kudu, and Other Operations. MediaAlpha was deconsolidated on February 26, 2019; results include it only through that date.
Financial performance and position
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Total revenue | $155.5 million | $198.7 million | $718.1 million | $363.1 million |
| Pre-tax income (loss), continuing operations | $51.1 million | $44.3 million | $348.6 million | $(34.1) million |
| Net income (loss) attributable to common shareholders | $48.7 million | $40.8 million | $353.6 million | $(3.7) million |
| Basic and diluted EPS, total operations | $15.29 | $12.83 | $111.17 | $(1.08) |
- Quarterly drivers: Q3 revenue was lower year over year, principally reflecting MediaAlpha’s deconsolidation and lower investment gains in Other Operations. Common-shareholder income increased, despite lower total revenue. Q3 investment gains were $67.0 million, versus $66.1 million a year earlier.
- Nine-month results: The improvement included $182.2 million of combined realized and unrealized gain from the MediaAlpha transaction and stronger investment returns. Excluding that transaction, the portfolio’s reported pre-tax return was 11.3%, compared with 2.8% in 2018. Reported 2019 results are not fully comparable because of acquisitions and changes in consolidation.
- Book value: At September 30, GAAP book value per share was $1,002.53 and adjusted book value per share was $1,004.76. Both increased 2% in Q3; adjusted book value per share increased 13% in the first nine months, including dividends, with the MediaAlpha transaction a significant contributor.
- Business metrics: NSM reported Q3 pre-tax income of $4.5 million and adjusted EBITDA of $12.8 million, versus a $5.2 million pre-tax loss and $7.1 million adjusted EBITDA in Q3 2018. Q3 commission and other revenue was $59.9 million. BAM gross written premiums and member surplus contributions collected were $43.8 million in Q3 and $84.1 million for nine months. BAM’s claims-paying resources were $929.8 million at quarter-end.
- Cash flow and liquidity: Nine-month operating cash flow was negative $72.5 million, versus negative $30.5 million in 2018; management cited Kudu investment deployments as a principal factor. Ending cash, including restricted cash, was $149.2 million. Management stated that cash, operating cash flows, and routine investment sales and maturities should meet expected requirements for the foreseeable future.
- Debt and capital: Total debt was $230.2 million, up from $192.7 million at year-end 2018; total debt to adjusted capital was 6.7%, versus 6.3%. NSM’s bank facility had $221.8 million of term loans outstanding, a 7.17% effective rate before debt issuance costs, and an undrawn revolving facility. The company reported compliance with all debt covenants.
- Margins and earnings quality: Consolidated revenue and pre-tax income include substantial fair-value investment gains, so reported margins do not represent only operating performance. The filing does not present one consolidated operating-margin measure.
Material changes, outlook, and risks
- White Mountains acquired control of Kudu in April 2019 and began consolidating it; Kudu reported $11.9 million of revenue and $5.0 million of pre-tax income from acquisition through September 30. Kudu had deployed $221.9 million across eight asset-management firms and had $28.1 million of unfunded commitments against a $250 million total commitment.
- NSM acquired Embrace Pet Insurance and collector-car renewal rights in 2019, and acquired KBK in December 2018. These acquisitions contributed to NSM growth and increased debt, goodwill, intangibles, and contingent earnout liabilities. The NSM earnout liability was $28.7 million at quarter-end.
- White Mountains received $89.3 million net cash proceeds from the MediaAlpha recapitalization and retained a 48.3% basic ownership interest, carried at fair value. Its $150 million quarter-end carrying value relies on Level 3 discounted-cash-flow assumptions; management cautioned that relatively small input changes can materially affect fair value.
- Management provided no specific earnings or revenue guidance. It cited growth across certain NSM specialty lines and ongoing investment activity, while noting that future results depend on markets, investment returns, competition, financing availability, ratings actions, and regulatory or legal developments.
- Investment and liquidity risks include valuation uncertainty in Level 3 and fund-NAV assets, lockups and redemption restrictions on private equity, hedge, and insurance-linked securities funds, and $175.4 million of net foreign-currency exposure. Common-equity returns underperformed the S&P 500 in Q3 and year to date.
- BAM’s surplus-note principal and interest payments require New York regulatory approval; no such payments were made in the first nine months. White Mountains also had a $15.7 million liability for a Swedish tax matter relating to discontinued Sirius Group, which it had indemnified; the appeal remained pending. The filing reported no current litigation considered likely to have a material adverse effect.
- The company reported effective disclosure controls and no material change in internal control over financial reporting during the quarter. It stated that previously disclosed risk factors had not materially changed.
Important facts for investors to verify
- How much of reported earnings and book-value growth is repeatable operating performance versus realized and unrealized investment gains, especially the MediaAlpha transaction and subsequent fair-value marks.
- NSM’s acquisition-driven growth, adjusted EBITDA reconciliation, earnout exposure, variable-rate debt costs, and headroom under its leverage covenant.
- The assumptions and sensitivity behind Level 3 valuations, particularly MediaAlpha and PassportCard/DavidShield, and the liquidity terms and valuations of fund investments.
- BAM’s capital adequacy, claims-paying resources, regulatory constraints on surplus-note payments, and the sustainability of pricing and premium growth.
- The outcome and potential cash impact of the Sirius-related Swedish tax appeal, plus funding needs for remaining Kudu and other investment commitments.