White Mountains Insurance Group Ltd. — Q1 2019 Form 10-Q
Business context and reporting period
Quarter ended March 31, 2019. White Mountains operates across municipal bond financial guarantee (HG Global/BAM), specialty insurance distribution (NSM), marketing technology (MediaAlpha, through February 26, 2019) and Other Operations, which includes its investment portfolio. Figures below are in millions of dollars except per-share data.
Financial results and key metrics
- Revenue: $433.6, versus $42.1 in Q1 2018. The increase chiefly reflects $182.2 of realized and unrealized gains tied to the MediaAlpha transaction and $119.1 of investment gains in Other Operations; the comparison also reflects the addition of NSM and partial-period MediaAlpha results.
- Profit: Pretax income from continuing operations was $281.7, compared with a $66.0 loss. Net income attributable to common shareholders was $284.4, versus a $48.0 loss. Diluted EPS was $89.64, versus a loss of $12.82.
- Investment performance: Total portfolio return was 10.1%; excluding the $115 pre-tax unrealized MediaAlpha revaluation gain, it was 5.7%, compared with negative 1.0% a year earlier. Common equities returned 13.0%; fixed income returned 2.3%.
- Cash flow: Continuing-operations operating cash flow was negative $41.1, versus negative $44.8. Investing activities used $42.8; financing activities provided $105.5. Cash, including restricted cash, ended at $132.2, versus $110.3 at year-end.
- Margins and segments: NSM reported $49.3 revenue and a $1.5 pretax loss, with adjusted EBITDA of $9.8 (non-GAAP). MediaAlpha reported $48.8 revenue and a $6.1 pretax loss for its January 1–February 26 ownership period. HG Global/BAM had $21.9 revenue and $6.2 pretax income; Other Operations had $313.6 revenue and $283.1 pretax income, largely reflecting transaction and investment gains.
- Balance sheet and liquidity: Total assets were $3,629.7 and total liabilities $651.4; common shareholders’ equity was $3,122.0. Total debt was $195.4, and debt to total adjusted capital was 5.9% (non-GAAP). Management said cash balances, operating cash flows and routine investment sales and maturities should meet expected needs for the foreseeable future.
- Book value: GAAP book value per share was $981.39 and adjusted book value per share $978.51, up 10% for the quarter including dividends. Management estimated that excluding the timing effect of the MediaAlpha transaction, adjusted book value per share growth would have been 4%.
Material changes versus the prior comparable period
- MediaAlpha completed a recapitalization and sale of a significant minority stake on February 26. White Mountains received $88.0 in net proceeds, recognized $67.5 realized gain and $114.7 unrealized gain on its retained investment, and reduced its ownership to 48.3% of basic units. It deconsolidated MediaAlpha and now carries the retained stake at fair value.
- NSM, acquired in May 2018, contributed its first full quarter in the comparison presented. NSM controlled premiums increased to $196.6 from $129.0; commission and other revenues rose to $49.3 from $31.8, reflecting acquisitions including KBK and Fresh Insurance.
- Investment results reversed from losses to gains: net realized and unrealized investment gains were $245.6, versus losses of $53.7. Net investment income declined to $16.0 from $19.7.
- Q1 2019 included $6.8 of MediaAlpha transaction-related costs and $1.3 of expense from increased fair value of NSM contingent earnout liabilities.
Outlook, commentary, risks and contingencies
- No specific earnings or revenue guidance was provided. Management cautioned that interim results may not indicate full-year results and that actual outcomes may differ materially from forward-looking expectations.
- BAM insured $1.9 billion of municipal bonds, versus $1.3 billion in Q1 2018, while total pricing declined to 83 basis points from 96; primary-market pricing fell to 41 basis points from 72, driven mainly by lower interest rates and tighter credit spreads. Claims-paying resources were $878 million.
- NSM’s bank facility carries floating-rate debt; an interest-rate swap hedges $151.0 of variable-rate term loans. NSM’s actual leverage covenant ratio was 4.0x against a 5.5x maximum. The company reported compliance with all debt covenants.
- NSM could be required to buy AIG’s U.S. collector-car renewal rights for $82.5 if they are not sold by December 31, 2019; White Mountains guarantees NSM’s obligation. Management considered the rights’ estimated fair value at least equal to the price and recorded no liability.
- White Mountains recorded a $16.6 liability for a tax indemnity related to Sirius Group, sold in 2016, following an adverse Swedish tax ruling; the appeal was pending. The filing reported no current litigation considered likely to have a material adverse effect.
- Subsequent events: NSM acquired Embrace Pet Insurance for $73.0 on April 1. On April 4, White Mountains bought Oaktree’s Kudu interests for $81.4, raising ownership to 99.1% of basic units and unfunded Kudu commitments to $104.7.
- Management identified general economic and market conditions, competition, regulatory changes, rating-agency actions and access to capital as factors that could affect results. The filing reported no material changes to previously disclosed risk factors.
Important facts for investors to verify
- How much of the quarter’s reported profit and book-value increase is attributable to the MediaAlpha transaction and market-driven investment gains, rather than recurring operating performance.
- MediaAlpha’s retained-investment valuation, subsequent results and the consequences of no longer consolidating its revenue, assets and liabilities.
- NSM’s earnings conversion, acquisition integration, earnout liabilities, floating-rate debt exposure and covenant headroom.
- BAM’s pricing trends, claims-paying resources, and the regulatory restrictions on payments of principal and interest on its surplus notes.
- Cash-flow generation and the capital required for the Embrace and Kudu transactions and Kudu’s remaining commitments.