White Mountains Insurance(US:WTM)2021-11-08 13:33PART I. FINANCIAL INFORMATION Financial Statements White Mountains reported a $361.9 million net loss for the nine months ended September 30, 2021, primarily due to unrealized investment losses from MediaAlpha Consolidated Balance Sheet Summary (in millions) | Balance Sheet Item | September 30, 2021 | December 31, 2020 | | :--- | :--- | :--- | | Total Investments | $4,203.9 | $2,939.1 | | Total Assets | $7,113.6 | $4,831.4 | | Total Liabilities | $3,459.3 | $1,013.5 | | Total Equity | $3,654.3 | $3,817.9 | Consolidated Statement of Operations Summary (in millions) | Income Statement Item | Nine Months Ended Sep 30, 2021 | Nine Months Ended Sep 30, 2020 | | :--- | :--- | :--- | | Total Revenues | $594.8 | $659.9 | | Total Expenses | $933.5 | $372.0 | | Pre-tax (Loss) Income | $(338.7) | $287.9 | | Net (Loss) Income | $(361.9) | $190.0 | | Net (Loss) Income Attributable to White Mountains | $(308.2) | $219.5 | Consolidated Earnings Per Share (Loss) | EPS Metric | Nine Months Ended Sep 30, 2021 | Nine Months Ended Sep 30, 2020 | | :--- | :--- | :--- | | Basic (Loss) Earnings Per Share | $(99.45) | $70.14 | | Diluted (Loss) Earnings Per Share | $(99.45) | $70.14 | Consolidated Cash Flow Summary (in millions) | Cash Flow Item | Nine Months Ended Sep 30, 2021 | Nine Months Ended Sep 30, 2020 | | :--- | :--- | :--- | | Net Cash from Operations | $46.0 | $12.2 | | Net Cash (Used to) Provided from Investing | $(169.4) | $28.0 | | Net Cash from Financing | $222.3 | $13.8 | | Net Change in Cash | $99.5 | $53.8 | Management's Discussion and Analysis of Financial Condition and Results of Operations Book value per share decreased 9% in Q3 2021 and 8% year-to-date, primarily due to a $397 million unrealized loss from MediaAlpha - Book value per share was $1,162 as of September 30, 2021, a decrease of 9% in the third quarter and 8% year-to-date, driven by net realized and unrealized investment losses of $326 million from MediaAlpha, whose share price fell from $39.07 at year-end 2020 to $18.68 at the end of Q3 2021248249 - Excluding MediaAlpha, operating segments showed solid performance: Ark reported a Q3 adjusted combined ratio of 89%, NSM's adjusted EBITDA grew 24% year-over-year to $19 million, and Kudu deployed $131 million in new investments250253254255 Book Value Per Share Reconciliation | Metric | September 30, 2021 | December 31, 2020 | | :--- | :--- | :--- | | GAAP Book Value Per Share | $1,162.44 | $1,259.18 | | Adjusted Book Value Per Share | $1,175.86 | $1,263.64 | Results of Operations Consolidated pre-tax loss for Q3 2021 was $362.3 million, a reversal from Q3 2020 income, primarily due to a $396.8 million unrealized loss on the MediaAlpha investment in Other Operations Pre-tax Income (Loss) by Segment (in millions) | Segment | Q3 2021 | Q3 2020 | YTD 2021 | YTD 2020 | | :--- | :--- | :--- | :--- | :--- | | Financial Guarantee (HG Global/BAM) | $(8.0) | $(1.1) | $(31.1) | $11.3 | | P&C Insurance (Ark) | $10.9 | — | $(3.8) | — | | Specialty Insurance Distribution (NSM) | $(1.6) | $(1.2) | $(33.8) | $(6.3) | | Asset Management (Kudu) | $23.3 | $12.6 | $70.4 | $8.9 | | Other Operations | $(386.9) | $310.9 | $(340.4) | $274.0 | | Total Pre-tax (Loss) Income | $(362.3) | $321.2 | $(338.7) | $287.9 | - The Ark segment, acquired in January 2021, reported a Q3 GAAP combined ratio of 92% and an adjusted combined ratio of 89%, including 21 points of catastrophe losses offset by 6 points of favorable prior year reserve development290291292 - The NSM segment's Q3 adjusted EBITDA increased to $19.1 million from $15.4 million in Q3 2020, driven by growth in Pet and Social Services verticals, with a YTD pre-tax loss of $33.8 million including a $28.7 million loss on the Fresh Insurance motor business sale306307308 - The Kudu segment's Q3 pre-tax income grew to $23.3 million from $12.6 million year-over-year, largely due to $18.9 million in unrealized investment gains on participation contracts and increased investment income from new deployments324325 Liquidity and Capital Resources The company maintains adequate liquidity with $507 million in net unrestricted cash and liquid investments, while total debt increased to $710.4 million, raising the debt-to-adjusted capital ratio to 15.7% - Management believes cash balances and operating cash flows are adequate to meet expected cash requirements for the foreseeable future at both holding company and subsidiary levels364 Capital Structure (in millions) | Component | September 30, 2021 | December 31, 2020 | | :--- | :--- | :--- | | Total Debt | $710.4 | $376.4 | | Total White Mountains's common shareholders' equity | $3,521.7 | $3,906.0 | | Total Adjusted Capital | $4,510.7 | $4,312.7 | | Total Debt to Total Adjusted Capital | 15.7% | 8.7% | - In Q3 2021, the company repurchased 79,294 common shares for $87 million at an average price of $1,099 per share, with 86,512 shares repurchased for $95 million year-to-date382 Non-GAAP Financial Measures The company uses non-GAAP measures like adjusted book value per share, adjusted combined ratio, and adjusted EBITDA to provide a clearer view of intrinsic value and underlying segment performance - Adjusted book value per share is calculated by adjusting GAAP book value for the time value of money on BAM Surplus Notes and the unearned premium reserve at HG Global397398 - Ark's adjusted combined ratio adds back amounts ceded to third-party capital providers to evaluate results on a fully aligned basis403 - NSM's and Kudu's adjusted EBITDA measures exclude items such as changes in contingent consideration, non-cash compensation, acquisition expenses, and unrealized investment gains to better reflect core operational profitability405407 Critical Accounting Estimates Critical accounting estimates focus on fair value measurements for investments and liabilities, with a substantial portion relying on unobservable inputs (Level 3) requiring significant management judgment - As of September 30, 2021, 69% of the investment portfolio was priced using observable inputs (Level 1 or 2), with the remainder relying on unobservable inputs (Level 3) or Net Asset Value as a practical expedient414 - The fair value of Kudu's Participation Contracts ($605 million) is determined using discounted cash flow models with key unobservable inputs including pre-tax discount rates (18%-23%) and terminal cash flow exit multiples (7x-13x)424425 - The fair value of the investment in PassportCard/DavidShield ($105 million) is determined via a discounted cash flow model, using an after-tax discount rate of 23% and a terminal revenue growth rate of 4%427429 Quantitative and Qualitative Disclosures About Market Risk The company refers to its 2020 Annual Report on Form 10-K for market risk disclosures, indicating no material changes during the quarter - The report refers to the company's 2020 Form 10-K for quantitative and qualitative disclosures about market risk, implying no material updates for the current reporting period437 Controls and Procedures Disclosure controls and procedures were effective as of the reporting period, with no significant changes to internal control over financial reporting during the quarter - The PEO and PFO have evaluated and concluded that the company's disclosure controls and procedures are effective as of September 30, 2021438 - No significant changes were made to the company's internal control over financial reporting during the third quarter of 2021439 PART II. OTHER INFORMATION Legal Proceedings The company reported no new legal proceedings for the period - There are no legal proceedings to report for the quarter440 Risk Factors No material changes to the risk factors previously disclosed in the company's 2020 Annual Report on Form 10-K were reported - No material changes to risk factors from the 2020 Form 10-K were reported441 Issuer Purchases of Equity Securities During Q3 2021, the company repurchased 79,351 common shares for $1,098.82 average price per share, with 463,223 shares remaining authorized for repurchase Share Repurchases for Q3 2021 | Month | Total Shares Purchased | Average Price Paid per Share | | :--- | :--- | :--- | | July 2021 | 2,841 | $1,122.87 | | August 2021 | 16,878 | $1,123.41 | | September 2021 | 59,632 | $1,090.72 | | Total | 79,351 | $1,098.82 | - As of the end of the quarter, the company has authorization to repurchase an additional 463,223 common shares442