White Mountains Reports 2017 Q3 Results

White Mountains Insurance Group reported book value per share of $925 and adjusted book value per share of $906 as of September 30, 2017.  Book value per share increased 17% and 18% for the third quarter and first nine months of 2017, including dividends, and adjusted book value per share increased 17% and 15% for the third quarter and first nine months of 2017, including dividends.

On September 28, 2017, Intact Financial Corporation completed its previously announced acquisition of OneBeacon in an all-cash transaction for $18.10 per share (the “OneBeacon Transaction”).  As of June 30, 2017, including the then estimated net gain from the OneBeacon Transaction, book value per share would have been approximately $908 and adjusted book value per share would have been approximately $890.

Manning Rountree, CEO, commented, “With the successful closing of the OneBeacon Transaction, we ended the quarter with adjusted book value per share of $906.  Our underlying growth in ABVPS was 1.8%⁽¹⁾, driven by solid investment results, with our portfolio up 1.4% in the quarter.  BAM’s par insured dipped in the quarter, while its pricing levels improved meaningfully.  During the quarter, we repurchased roughly 822,000 White Mountains common shares for $715 million, leaving us with $2.3 billion in undeployed capital.  In October, we announced bolt-on acquisitions at both MediaAlpha and PassportCard, where we see exciting potential.  On the other hand, we made small but nevertheless disappointing downward revisions to our prior period financials relating to Wobi, one of our overseas portfolio companies, as discussed further below.”

Comprehensive income attributable to common shareholders was $565 million and $608 million in the third quarter and first nine months of 2017, compared to $91 million and $586 million in the third quarter and first nine months of 2016.  Net income attributable to common shareholders was $562 million and $605 million in the third quarter and first nine months of 2017, compared to $91 million and $441 million in the third quarter and first nine months of 2016.

OneBeacon

On September 28, 2017, White Mountains received $1.3 billion in cash proceeds from the OneBeacon Transaction and recorded a gain of $555 million, net of transaction costs.  As a result of the OneBeacon Transaction, OneBeacon’s results have been reported as discontinued operations within White Mountains’s GAAP financial statements.  Because the OneBeacon Transaction was a fixed price deal, OneBeacon’s results were economically transferred to the buyer at signing.

White Mountains reported a net loss from OneBeacon of $15 million in discontinued operations in the third quarter of 2017, driven primarily by underwriting losses.  OneBeacon’s combined ratio for the third quarter of 2017 was 113%, driven by 9 points of net unfavorable loss reserve development, primarily in the Program, Healthcare and Government Risk businesses, and 9 points of catastrophe losses, primarily due to losses from Hurricane Harvey.

White Mountains reported net income from OneBeacon of $21 million in discontinued operations in the first nine months of 2017.  OneBeacon’s combined ratio for the first nine months of 2017 was 105%, driven by 4 points of net unfavorable loss reserve development, primarily in the Program, Healthcare and Government Risk businesses, and 4 points of catastrophe losses, primarily due to losses from Hurricane Harvey.

HG Global/BAM

BAM insured municipal bonds with par value of $2.0 billion and $7.1 billion in the third quarter and first nine months of 2017, compared to $3.0 billion and $8.5 billion in the third quarter and first nine months of 2016.  Gross written premiums and member surplus contributions totaled $19 million and $68 million in the third quarter and first nine months of 2017, compared to $21 million and $53 million in the third quarter and first nine months of 2016.  Total pricing, which is premiums plus member surplus contributions weighted by the par value of bonds insured, was 103 and 99 basis points in the third quarter and first nine months of 2017, compared to 69 and 63 basis points in the third quarter and first nine months of 2016.  BAM’s total claims paying resources increased $43 million to $687 million in the first nine months of 2017, compared to an increase of $28 million to $629 million in the first nine months of 2016.

Bob Cochran, Chairman of BAM, said, “The affirmation of BAM’s AA/Stable rating by S&P Global at the end of June was a vote of confidence for both BAM and the municipal bond insurance industry as a whole.  Par insured dipped in the quarter, primarily as a result of a 22% year-over-year decline in muni bond new issuance volume.  On the other hand, both total pricing and risk-adjusted pricing increased meaningfully year-over-year and quarter-over-quarter.”

HG Global reported pre-tax income of $7 million and $20 million in the third quarter and first nine months of 2017, compared to pre-tax income of $5 million and $18 million in the third quarter and the first nine months of 2016.  White Mountains reported GAAP pre-tax loss related to BAM of $12 million and $36 million of in the third quarter and first nine months of 2017, compared to GAAP pre-tax loss of $14 million and $30 million in the third quarter and first nine months of 2016.  The decrease in the pre-tax loss during the third quarter of 2017, compared to the third quarter of 2016, was primarily driven by higher realized and unrealized investment gains on BAM’s fixed income portfolio.  The increase in the pre-tax loss during the first nine months of 2017, compared to the first nine months of 2016, was primarily driven by lower realized and unrealized investment gains on BAM’s fixed income portfolio and higher operating expenses.

As a mutual insurance company that is owned by its members, BAM’s results do not affect White Mountains’s book value per share or adjusted book value per share.  However, White Mountains consolidates BAM’s results in its GAAP financial statements, and its results are attributed to non-controlling interests.

During the second quarter of 2017, White Mountains changed its calculation of adjusted book value per share (i) to include a discount for the time value of money arising from the expected timing of cash payments of principal and interest on the BAM surplus notes and (ii) to add back the unearned premium reserve, net of deferred acquisition costs, at HG Global.  These changes decreased adjusted book value per share by $23 at June 30, 2017.

MediaAlpha

MediaAlpha reported revenues of $38 million and $101 million in the third quarter and first nine months of 2017, compared to $28 million and $88 million in the third quarter and first nine months of 2016.  The increases in revenues were primarily driven by growth in both MediaAlpha’s core P&C vertical and new, non-P&C verticals.

Cost of sales was $32 million and $86 million in the third quarter and first nine months of 2017, compared to $23 million and $74 million in the third quarter and first nine months of 2016.  The increases in cost of sales were primarily driven by revenue growth, as MediaAlpha’s cost of sales is comprised primarily of revenue share based payments to partners.

Pre-tax loss was $1 million and $3 million in the third quarter and first nine months of 2017, compared to $1 millionand $3 million in the third quarter and first nine months of 2016.  MediaAlpha’s earnings before interest, taxes, depreciation and amortization (“EBITDA”) was $2 million and $5 million in the third quarter and first nine months of 2017, compared to $1 million and $6 million in the third quarter and first nine months of 2016.  For the third quarter of 2017, the increase in EBITDA was primarily driven by increased gross profit contributions from the P&C and Health/Life verticals of $1 million.  For the first nine months of 2017, the decrease in EBITDA was primarily driven by increased operating expenses of $2 million, partially offset by an increase in gross profit of $1 million.

On October 5, 2017, MediaAlpha acquired certain assets associated with the Health, Medicare, and Life insurance business of Healthplans.com.  The acquired assets include domain names, advertiser and publisher relationships, traffic acquisition accounts, and owned and operated websites.

Other Operations

White Mountains’s Other Operations segment reported pre-tax income of $14 million and $21 million in the third quarter and first nine months of 2017, compared to pre-tax loss of $4 million and $58 million in the third quarter and first nine months of 2016.  The improved results were driven primarily by strong equity returns in the 2017 periods.  Net realized and unrealized gains were $32 million and $99 million in the third quarter and first nine months of 2017, compared to $13 million and $18 million in the third quarter and first nine months of 2016.  Net investment income was $9 million and $31 million in the third quarter and first nine months of 2017, compared to $7 million and $12 million in both the third quarter and first nine months of 2016.

On October 3, 2017, White Mountains entered into an agreement to acquire a 50% equity stake in DavidShield, its joint venture partner in PassportCard, and a leading provider of expatriate medical and other accident and health insurance coverages.  Following closing of the transaction, White Mountains and Alon Ketzef, the founder of both DavidShield and PassportCard, will be 50/50 partners in both businesses.

Share Repurchases

During the third quarter of 2017, White Mountains repurchased and retired 821,842 of its common shares for $715 million at an average price per share of $870, or approximately 96% of White Mountains’s September 30, 2017adjusted book value per share.

For the first nine months of 2017, White Mountains repurchased and retired 832,725 of its common shares for $724 million at an average share price of $869, or approximately 96% of White Mountains’s September 30, 2017 adjusted book value per share.  White Mountains had 3.750 million shares outstanding at September 30, 2017.

Investment Activities

The GAAP total return on invested assets was 1.4% for the third quarter of 2017 and 4.3% for the first nine months of 2017.  This compared to a return of 0.9% for the third quarter of 2016 and 3.3% for the first nine months of 2016.

David Linker, President and Chief Investment Officer of White Mountains Advisors, said, “The total portfolio returned 1.4% for the quarter, a good result that benefited from the continued equity market rally.  The fixed income portfolio returned 0.9% for the quarter, just ahead of the longer-duration Bloomberg Barclays Intermediate Aggregate Index.  Fixed income duration dropped to approximately 2.7 years with the receipt of the OneBeacon sales proceeds at quarter end; it has since returned to 3.1 years, as we have reinvested the sales proceeds.  The risk asset portfolio returned 2.4% for the quarter, lagging the S&P 500 Index return of 4.5%.  Within the risk asset portfolio, common stocks and ETFs returned 4.3%, high yield returned 1.7%, and other long-term investments returned -2.3%, driven primarily by losses on currency hedges (as the dollar weakened).  Risk asset exposure finished the quarter at 37% of the portfolio, up five points for the quarter and 17 points for the year.”

Financial Statement Revisions

In October 2017, White Mountains discovered that the former CEO of Wobi, one of its overseas portfolio companies, had been reporting overstated commission revenues and related receivables to White Mountains.  As a result, White Mountains has revised certain of its previously issued financial statements.  Previously reported amounts appearing in this press release reflect these revisions.

The revisions resulted in a decrease of approximately $6 to White Mountains’s adjusted book value per share as of June 30, 2017.  As of June 30, 2017, the impact of the revisions resulted in reductions of commission receivable (which is a component of other assets) of $19.0 million, other assets of $0.7 million, goodwill and intangible assets of $9.2 million, White Mountains’s common shareholders’ equity of $28.3 million, non-controlling interest of $0.9 million, and an increase to other liabilities of $0.3 million.  The revisions also resulted in reductions of advertising and commission revenue of $6.6 million and net income of $6.8 million for the six months ended June 30, 2017.

As of December 31, 2016, the impact of the revisions resulted in reductions of commission receivable of $14.8 million, other assets of $0.2 million, goodwill and intangible assets of $9.5 million, other liabilities of $3.3 million, White Mountains’s common shareholders’ equity of $20.6 million, and non-controlling interest of $0.6 million.  The revisions also resulted in reductions of advertising and commission revenue of $1.2 million and $2.8 million for the three and nine months ended September 30, 2016, and reductions of net income of $0.9 million and $5.1 million for the three and nine months ended September 30, 2016.