White Mountains Insurance Group, Ltd. — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018; balance-sheet comparisons are against December 31, 2017. Unless stated otherwise, dollar amounts are in millions.
Business context and financial results
White Mountains makes opportunistic acquisitions in insurance, financial services and related sectors. Its reportable segments are HG Global/BAM (municipal bond insurance), MediaAlpha (marketing technology) and Other Operations (investments and corporate activities). Results include substantial investment-market effects; OneBeacon, Tranzact and Sirius Group are presented as discontinued operations.
- Revenue: Consolidated revenue was $42.1, down from $88.8 in Q1 2017. Results included $53.7 of net realized and unrealized investment losses, versus $36.3 of gains a year earlier.
- Profit and EPS: Pre-tax loss from continuing operations was $66.0, compared with $3.6. Net loss from continuing operations was $66.7 versus $3.3; net loss attributable to White Mountains common shareholders was $48.0 versus income of $29.0. Continuing-operations loss per share was $12.85, compared with $0.52; consolidated loss per share was $12.82, compared with earnings of $6.34. The prior-year comparison included $32.3 of discontinued-operations income.
- Investment performance: Pre-tax total portfolio return was -1.0%, versus +1.5%. Management attributed Q1 2018 performance primarily to rising interest rates and equity-market declines. Net investment income increased to $19.7 from $12.8.
- Cash flow: Continuing-operations cash used in operations was $44.8, compared with $54.8; total cash used for operations was $44.7 versus $56.1. Investing activities provided $77.4 and financing activities used $9.6. Ending cash, excluding discontinued operations, was $120.2 versus $45.4 at the end of Q1 2017.
- Balance sheet and capital: Total assets were $3,587.0 and total liabilities $291.2; common shareholders’ equity was $3,439.0. GAAP book value per share was $916.24 and adjusted book value per share was $903.22. Management said both measures declined for the quarter, including dividends, by 2% and 1%, respectively.
- Debt and liquidity: Debt was $21.5, all at MediaAlpha, versus $23.8 at year-end. White Mountains’ $425 million revolving facility was undrawn and scheduled to mature August 14, 2018. The company reported $1.47 billion of net unrestricted cash, short-term investments and fixed maturities at the parent/intermediate holding-company level, plus $946 million of common equities and $64 million of other long-term investments. Management said available cash, operating cash flows and routine investment sales and maturities were adequate for expected needs for the foreseeable future.
Material changes versus Q1 2017
- Investment losses drove the consolidated decline. Other Operations moved from $3.0 of pre-tax income to a $51.5 loss, principally reflecting investment results; its realized and unrealized investment result swung from a $35.0 gain to a $45.8 loss. The 2018 result included losses associated with closing a currency hedge as the sterling bond portfolio was liquidated.
- MediaAlpha expanded substantially. Revenue rose to $71.7 from $32.5, while its GAAP pre-tax loss narrowed to $0.2 from $1.0. Adjusted EBITDA increased to $9.5 from $1.6. Growth reflected P&C activity and Health, Medicare and Life business, including the Healthplans.com asset acquisition. Q1 2018 included $6.4 of non-cash equity-based compensation expense.
- HG Global/BAM production fell. Gross written premiums plus member surplus contributions were $11.3 versus $28.3, and insured municipal par was $1.3 billion versus $2.4 billion. Management cited lower new-issue volume after issuers pulled planned 2018 issuance into 2017 amid tax-reform uncertainty. Total pricing was 96 basis points versus 119; primary-market pricing increased to 72 basis points from 59.
- Investment portfolio repositioning: Fixed-income duration, including short-term investments, declined to 2.8 years from 3.4 at year-end, primarily following liquidation of the medium-duration sterling bond mandate. No foreign-currency forward contracts remained open at March 31.
Outlook, risks, contingencies and unusual items
- Outlook: The filing provides no formal earnings or revenue guidance. Management’s liquidity assessment is qualified by risks including economic and market conditions, investment returns, competition, regulation, financing availability and ratings-agency actions.
- Acquisition after quarter-end: White Mountains agreed to acquire 95% of NSM Insurance Group for approximately $368.3, subject to adjustments. NSM expected to borrow about $100 million, reducing White Mountains’ net investment to approximately $273.3. Closing was expected by the end of Q2 2018, subject to approvals and customary conditions.
- Other subsequent events: BAM added $100 million of claims-paying resources through a collateralized reinsurance agreement with Fidus Re in April. White Mountains commenced a modified Dutch tender offer for up to 500,000 shares, set to expire May 7, 2018.
- BAM: Claims-paying resources were approximately $709 at March 31, versus $708 at year-end. Payments of principal or interest on BAM’s $499 million surplus notes require New York insurance-regulator approval. BAM had no surplus-note repayments in Q1.
- Contingency: White Mountains may be required to indemnify former subsidiary Sirius Group for approximately $18.5 of tax if a Swedish tax dispute is decided adversely; Sirius believes it is more likely than not to prevail. The company reported no current litigation expected to have a material adverse effect and no material change to previously disclosed risk factors.
- Financial statement revisions: White Mountains revised prior-period statements after discovering overstated Wobi commission revenue and receivables, and wrote Wobi goodwill and intangible assets down to zero. The company said the errors were not material to individual previously reported periods, but their aggregate amount could be material to FY 2017 results.
- Controls: Management concluded disclosure controls were effective and reported no significant change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether investment losses and market sensitivity persist, and how portfolio allocation and currency exposures evolve.
- MediaAlpha’s revenue growth, customer concentration (one customer represented approximately 31% of Q1 advertising revenue), and the distinction between GAAP results and adjusted EBITDA.
- BAM’s premium production, claims-paying resources, regulatory constraints on surplus-note payments and the effect of the Fidus Re agreement.
- Completion, financing and integration of the NSM acquisition, and the outcome and funding of the share tender offer.
- The status and potential financial exposure of the Sirius tax indemnity matter and any further consequences of the Wobi reporting issue.
- Liquidity and refinancing plans for the undrawn parent revolving facility approaching its August 2018 maturity.