White Mountains Insurance(US:WTM)2021-05-10 13:01PART I. FINANCIAL INFORMATION This section presents the company's unaudited financial statements, management's analysis of financial condition and operations, market risk disclosures, and internal controls Item 1. Financial Statements (Unaudited) The unaudited consolidated financial statements for Q1 2021 reflect increased assets due to the Ark acquisition and a reduced net loss, impacted by investment losses and transaction costs Consolidated Balance Sheet Summary (in millions) | Balance Sheet Item | March 31, 2021 | December 31, 2020 | | :--- | :--- | :--- | | Total Assets | $6,900.7 | $4,831.4 | | Total P&C Insurance and Reinsurance (Ark) assets | $2,840.2 | $— | | Total Liabilities | $2,964.8 | $1,013.5 | | Total P&C Insurance and Reinsurance (Ark) liabilities | $2,006.8 | $— | | Total Equity | $3,935.9 | $3,817.9 | | White Mountains's common shareholders' equity | $3,825.9 | $3,906.0 | Consolidated Statement of Operations Summary (in millions) | Income Statement Item | Three Months Ended March 31, 2021 | Three Months Ended March 31, 2020 | | :--- | :--- | :--- | | Total Revenues | $178.2 | $(59.2) | | P&C Insurance and Reinsurance (Ark) revenues | $109.1 | $— | | Net realized/unrealized investment (losses) gains from MediaAlpha | $(41.7) | $30.0 | | Total Expenses | $316.9 | $106.8 | | P&C Insurance and Reinsurance (Ark) expenses | $141.6 | $— | | Net Loss Attributable to White Mountains's Common Shareholders | $(75.3) | $(128.8) | Earnings Per Share (EPS) Summary | EPS Item | Three Months Ended March 31, 2021 | Three Months Ended March 31, 2020 | | :--- | :--- | :--- | | Basic (loss) per share - Continuing operations | $(30.33) | $(40.82) | | Basic earnings per share - Discontinued operations | $6.03 | $0.28 | | Total consolidated basic (loss) per share | $(24.30) | $(40.54) | Notes to Consolidated Financial Statements These notes detail significant accounting policies and transactions, including the Ark acquisition, MediaAlpha share offering, and new accounting standard adoptions, highlighting their financial impact - On January 1, 2021, White Mountains completed its acquisition of Ark, contributing $605.4 million in equity capital and purchasing $40.9 million in shares, resulting in the recognition of $2.5 billion in assets and $1.7 billion in liabilities, including $292.5 million in goodwill and other intangibles585960 - In a secondary offering on March 23, 2021, White Mountains sold 3.6 million MediaAlpha shares for net proceeds of $160.3 million, reducing its ownership to 28.5%, with the fair value of the remaining stake at $600.2 million at quarter-end57 - NSM sold its Fresh Insurance motor business on April 12, 2021, with assets classified as held for sale as of March 31, 2021, resulting in a recognized loss of $28.7 million in Q1 202168 - As of March 31, 2021, the company's reportable segments are HG Global/BAM, Ark, NSM, Kudu, and Other Operations, with Ark being a new segment following the acquisition30 Management's Discussion and Analysis of Financial Condition and Results of Operations Management attributes a 2% decrease in adjusted book value per share to MediaAlpha's stock decline, Ark acquisition costs, and an NSM asset sale loss, while detailing segment performance and liquidity - Book value per share and adjusted book value per share decreased by 2% in Q1 2021, primarily driven by a decrease in the market price of the company's investment in MediaAlpha, a loss on assets held for sale for NSM's Fresh Insurance motor business, and transaction expenses at Ark229 Adjusted Book Value Per Share | Metric | March 31, 2021 | December 31, 2020 | | :--- | :--- | :--- | | GAAP book value per share | $1,231.27 | $1,259.18 | | Adjusted book value per share (Non-GAAP) | $1,241.71 | $1,263.64 | - The total investment portfolio returned -0.3% in Q1 2021, but excluding the investment in MediaAlpha, the portfolio returned 0.7%, driven by favorable results in other long-term investments, partially offset by the impact of rising interest rates on the fixed income portfolio235 Results of Operations Consolidated pre-tax loss improved to $138.7 million, with Ark contributing a $32.5 million loss, NSM's loss widening to $33.3 million, and Kudu achieving $15.7 million in pre-tax income Pre-tax (Loss) Income by Segment (in millions) | Segment | Q1 2021 | Q1 2020 | | :--- | :--- | :--- | | HG Global/BAM | $(25.0) | $1.1 | | P&C Insurance and Reinsurance (Ark) | $(32.5) | — | | Specialty Insurance Distribution (NSM) | $(33.3) | $(1.4) | | Asset Management (Kudu) | $15.7 | $(21.4) | | Other Operations | $(63.6) | $(144.3) | | Total Pre-tax Loss | $(138.7) | $(166.0) | - Ark reported a GAAP combined ratio of 109% and an adjusted combined ratio of 108%, including 17 points of catastrophe losses, with 14 points related to Winter Storm Uri232264 - NSM's adjusted EBITDA grew to $14.4 million from $10.5 million year-over-year, driven by the acquisition of Kingsbridge and organic growth in the pet and social services verticals233273274 - Kudu's pre-tax income of $16 million was driven by $16 million in unrealized gains on its Participation Contracts, and Kudu deployed an additional $11 million in an existing portfolio company during the quarter234284 Liquidity and Capital Resources The company maintains strong liquidity with $600 million in unrestricted cash and investments, a 9.5% debt-to-adjusted-capital ratio, and key financing activities including Kudu's new $300 million credit facility - At the holding company level, White Mountains had $600 million of net unrestricted cash, short-term investments, and fixed maturity investments, in addition to its $600 million stake in MediaAlpha and other private equity funds324344 Capital Structure (in millions) | Component | March 31, 2021 | December 31, 2020 | | :--- | :--- | :--- | | Total debt | $429.7 | $376.4 | | Total White Mountains's common shareholders' equity | $3,825.9 | $3,906.0 | | Total adjusted capital (Non-GAAP) | $4,501.9 | $4,312.7 | | Total debt to total adjusted capital | 9.5% | 8.7% | - Kudu replaced its existing bank facility with a new secured revolving credit facility with a maximum capacity of $300 million, maturing in 2036, with an initial draw of $102 million336 - During Q1 2021, White Mountains repurchased 7,161 common shares for $7 million, primarily to satisfy employee tax withholding obligations342 Non-GAAP Financial Measures The company uses non-GAAP measures like adjusted book value per share, adjusted EBITDA for NSM and Kudu, and adjusted combined ratio for Ark to provide deeper insights into financial performance - Adjusted book value per share is used to analyze the intrinsic value of HG Global, including the value of BAM Surplus Notes and in-force business at HG Re354357 - Ark's adjusted combined ratio adds back amounts ceded to TPC Providers to evaluate results on a fully aligned basis, as these arrangements relate to periods before the White Mountains transaction360 - NSM's and Kudu's adjusted EBITDA measures exclude items like changes in fair value of contingent consideration, non-cash compensation, acquisition costs, and restructuring expenses to better reflect core operating performance361364 Critical Accounting Estimates Critical accounting estimates primarily involve fair value measurements for Level 3 assets, which constitute 27% of the investment portfolio and rely on significant management judgment and valuation models - Approximately 73% of the investment portfolio was priced using Level 1 or Level 2 inputs (quoted market prices or other observable data)372 - Level 3 investments, valued using unobservable inputs, include Kudu's Participation Contracts and the investment in PassportCard/DavidShield, with their valuation relying on discounted cash flow models and significant management judgment on inputs like discount rates and growth projections380381382 Valuation Sensitivity for Kudu's Participation Contracts (in millions) | Scenario | Estimated Fair Value | | :--- | :--- | | Base Case (18%-23% discount rate, 7x-12x exit multiple) | $427 | | +2% discount rate | $385 | | -2% discount rate | $476 | | +2x exit multiple | $456 | | -2x exit multiple | $400 | Forward-Looking Statements This section cautions that forward-looking statements on business strategy and financial targets are subject to risks including catastrophic events, loss reserves, MediaAlpha's value, and COVID-19 impacts - The company identifies forward-looking statements related to its business strategy, financial targets, loss reserves, and growth projections394 - Key risks that could cause actual results to differ from projections include catastrophic events, inadequate loss reserves, the market value of its MediaAlpha investment, COVID-19 uncertainties, and rating agency actions397 Quantitative and Qualitative Disclosures About Market Risk This section refers to the 2020 Annual Report on Form 10-K for market risk disclosures, indicating no material changes - The report references the 2020 Annual Report on Form 10-K for quantitative and qualitative disclosures about market risk, implying no material updates for the current quarter397 Controls and Procedures Management concluded that disclosure controls and procedures were effective as of March 31, 2021, with no significant changes to internal control over financial reporting - Management concluded that the company's disclosure controls and procedures are effective as of March 31, 2021398 - There were no significant changes in internal control over financial reporting during the first quarter of 2021399 PART II. OTHER INFORMATION This section covers other information including legal proceedings, risk factors, defaults, equity security repurchases, and exhibits Other Information Items The company reported no new material legal proceedings or risk factor changes, detailed the repurchase of 7,161 shares for $7.2 million, and listed filed exhibits - The company reported no new material legal proceedings or material changes to its risk factors since the 2020 Annual Report on Form 10-K400401 Issuer Purchases of Equity Securities (Q1 2021) | Month | Total Shares Purchased | Average Price Paid per Share | | :--- | :--- | :--- | | January 2021 | 5,418 | $1,000.66 | | February 2021 | 181 | $1,096.81 | | March 2021 | 1,562 | $1,165.12 | | Total | 7,161 | $1,038.96 | - As of March 31, 2021, the company has authorization to repurchase an additional 542,517 common shares402