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WHITE MOUNTAINS INSURANCE GROUP LTD – 10-Q – Management's Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion contains "forward-looking statements".White Mountains intends statements that are not historical in nature, which are hereby identified as forward-looking statements, to be covered by the safe harbor provisions of the Private Securities Litigation Reform Act of 1995.White Mountains cannot promise that its expectations in such forward-looking statements will turn out to be correct.White Mountains's actual results could be materially different from and worse than its expectations. See "FORWARD-LOOKING STATEMENTS" on page 75 for specific important factors that could cause actual results to differ materially from those contained in forward-looking statements. The following discussion also includes twelve non-GAAP financial measures: (i) adjusted book value per share, (ii) BAM's gross written premiums and member surplus contributions ("MSC") from new business, (iii) Ark's adjusted loss and LAE ratio, (iv) Ark's adjusted insurance acquisition expense ratio, (v) Ark's adjusted other underwriting expense ratio, (vi) Ark's adjusted combined ratio (vii) NSM's earnings before interest, taxes, depreciation and amortization ("EBITDA"), (viii) NSM's adjusted EBITDA, (ix) Kudu's EBITDA, (x) Kudu's adjusted EBITDA, (xi) total consolidated portfolio returns excludingMediaAlpha and (xii) adjusted capital, that have been reconciled from their most comparable GAAP financial measures on page 72.White Mountains believes these measures to be useful in evaluatingWhite Mountains's financial performance and condition.
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED
Overview
White Mountains reported book value per share of$1,183 and adjusted book value per share of$1,204 as ofMarch 31, 2022 . Book value per share and adjusted book value per share both increased 1% in the first quarter of 2022, including dividends. Results in the first quarter of 2022 were driven primarily by positive results fromWhite Mountains's operating companies as well as positive returns from other long-term investments andWhite Mountains's investment inMediaAlpha , partially offset by losses in the fixed income portfolio due to rising interest rates.White Mountains reported book value per share of$1,231 and adjusted book value per share of$1,242 as ofMarch 31, 2021 . Book value per share and adjusted book value per share both decreased 2% in the first quarter of 2021, including dividends. Results in the first quarter of 2021 were driven by net realized and unrealized investment losses fromWhite Mountains's investment inMediaAlpha and a loss related to NSM's sale of itsFresh Insurance motor business. In the HG Global/BAM segment, gross written premiums and MSC collected totaled$22 million in the first quarter of 2022 compared to$26 million in the first quarter of 2021. Total pricing was 63 basis points in the first quarter of 2022 compared to 74 basis points in the first quarter of 2021. BAM insured municipal bonds with par value of$3.5 billion in the first quarter of 2022 compared to$3.5 billion in the first quarter of 2021, which included$806 million from an assumed reinsurance transaction. BAM's total claims paying resources were$1,201 million as ofMarch 31, 2022 compared to$1,192 million as ofDecember 31, 2021 and$1,144 million as ofMarch 31, 2021 . OnApril 29, 2022 , HG Global received the proceeds of a new$150 million , 10-year term loan credit facility. In turn, onMay 2, 2022 , HG Global paid a$120 million cash dividend to shareholders, of which$116 million was paid toWhite Mountains . Ark reported a GAAP combined ratio of 100% in the first quarter of 2022 compared to 109% in the first quarter of 2021. Ark's adjusted combined ratio, which adds back amounts attributable to TPC providers, was 101% in the first quarter of 2022 compared to 108% in the first quarter of 2021. The adjusted combined ratio in the first quarter of 2022 included 16 points of catastrophe losses, of which 11 points related to an estimate for incurred losses emanating from the conflict inUkraine . The adjusted combined ratio in the first quarter of 2021 included 17 points of catastrophe losses, of which 14 points related to Winter Storm Uri. In the first quarter of 2022, Ark reported gross written premiums of$633 million , net written premiums of$544 million and net earned premiums of$194 million . In the first quarter of 2021, Ark reported gross written premiums of$405 million , net written premiums of$342 million and net earned premiums of$105 million . Ark's gross written premiums in the first quarter of 2022 were up 57% from the first quarter of 2021, with risk-adjusted rate change up approximately 9% year over year. Ark reported pre-tax loss of$23 million in the first quarter of 2022 compared to$33 million in the first quarter of 2021. Ark's pre-tax loss for the first quarter of 2022 included$18 million of net unrealized investment losses, driven primarily by losses on fixed income securities. Results in the first quarter of 2021 included$25 million of transaction expenses related toWhite Mountains's transaction with Ark. NSM reported commission and other revenues of$89 million , pre-tax income of$3 million and adjusted EBITDA of$18 million in the first quarter of 2022 compared to commission and other revenues of$75 million , pre-tax loss of$33 million and adjusted EBITDA of$14 million in the first quarter of 2021. Results in the first quarter of 2022 include the results ofJ.C. Taylor , an MGA offering classic and antique collector car insurance, which was acquired onAugust 6, 2021 . Results in the first quarter of 2021 include a loss of$29 million related to the sale ofNSM's Fresh Insurance motor business, which was sold onApril 12, 2021 . 48 -------------------------------------------------------------------------------- Kudu reported total revenue of$35 million , pre-tax income of$29 million and adjusted EBITDA of$10 million in the first quarter of 2022 compared to total revenue of$24 million , pre-tax income of$16 million and adjusted EBITDA of$6 million in the first quarter of 2021. Total revenues and pre-tax income in the first quarter of 2022 included$22 million of net unrealized investment gains on Kudu's participation contracts compared to$16 million of net unrealized investment gains on Kudu's participation contracts in the first quarter of 2021. As ofMarch 31, 2022 , the market value ofWhite Mountains's investment inMediaAlpha was$280 million , which was up from$262 million as ofDecember 31, 2021 . As ofMarch 31, 2022 , the closing price was$16.55 per share, which increased from$15.44 atDecember 31, 2021 . Based onWhite Mountains's ownership of 16.9 million shares ofMediaAlpha as ofMarch 31, 2022 , each$1.00 per share increase or decrease in the stock price ofMediaAlpha will result in an approximate$5.65 per share increase or decrease inWhite Mountains's book value per share and adjusted book value per share.White Mountains's pre-tax total consolidated portfolio return on invested assets was 0.8% in the first quarter of 2022. This return included$19 million of unrealized investment gains fromWhite Mountains's investment inMediaAlpha . ExcludingMediaAlpha , the total consolidated portfolio return on invested assets was 0.3% in the first quarter of 2022. ExcludingMediaAlpha , investment returns in the first quarter of 2022 were driven primarily by net unrealized investments gains in the other long-term investments portfolio, which more than offset net unrealized investment losses in the fixed income portfolio due to rising interest rates.White Mountains's pre-tax total consolidated portfolio return on invested assets was -0.3% in the first quarter of 2021. This return included$42 million of net realized and unrealized investment losses fromWhite Mountains's investment inMediaAlpha . ExcludingMediaAlpha , the total consolidated portfolio return on invested assets was 0.7% in the first quarter of 2021. ExcludingMediaAlpha , investment returns in the first quarter of 2021 were driven primarily by net unrealized investments gains in the other long-term investments portfolio, which more than offset net unrealized investment losses in the fixed income portfolio due to rising interest rates.
Adjusted Book Value Per Share
The following table presents
reconciles it to adjusted book value per share, a non-GAAP measure. See NON-GAAP
FINANCIAL MEASURES on page 72.
March 31, 2022 December 31, 2021 March 31, 2021
Book value per share numerators (in millions):
White Mountains's common shareholders' equity -
GAAP book value per share numerator $ 3,542.1 $ 3,548.1 $ 3,825.9
Time value of money discount on expected future
payments on the BAM Surplus Notes (1) (120.9) (125.9) (137.7) HG Global's unearned premium reserve (1) 215.8 214.6 195.3 HG Global's net deferred acquisition costs (1) (60.6) (60.8) (54.2) Adjusted book value per share numerator$ 3,576.4 $ 3,576.0$ 3,829.3
Book value per share denominators
(in thousands of shares): Common shares outstanding - GAAP book value per share denominator 2,994.2 3,017.8 3,107.3 Unearned restricted common shares (24.2) (13.7) (23.4) Adjusted book value per share denominator 2,970.0 3,004.1 3,083.9 GAAP book value per share$ 1,183.00 $ 1,175.73$ 1,231.27 Adjusted book value per share$ 1,204.17 $ 1,190.39$ 1,241.71 Year-to-date dividends paid per share $ 1.00 $ 1.00 $ 1.00
(1) Amount reflects
96.9%.
49 --------------------------------------------------------------------------------
The following table presents a summary of goodwill and other intangible assets
that are included in
December 31,
Millions March 31, 2022 2021 March 31, 2021
Goodwill :
Ark $ 116.8 $ 116.8 $ 116.8
NSM 499.1 503.2 477.7
Kudu 7.6 7.6 7.6
Other Operations 17.9 17.9 11.3
Total goodwill 641.4 645.5 613.4
Other intangible assets:
Ark 175.7 175.7 175.7
NSM 212.9 222.2 222.0
Kudu 1.3 1.3 1.5
Other Operations 20.2 21.2 24.4
Total other intangible assets 410.1 420.4 423.6
Total goodwill and other intangible assets
(1) 1,051.5 1,065.9 1,037.0
Goodwill and other intangible assets
attributed to
non-controlling interests (117.1) (117.6) (108.4)
Goodwill and other intangible assets
included in
White Mountains's common shareholders'
equity $ 934.4
(1) See Note 4 - "
and other intangible assets.
50 --------------------------------------------------------------------------------
Summary of Consolidated Results
The following table presents
for the three months ended
Three Months Ended
March 31,
Millions 2022 2021
Revenues
Financial Guarantee revenues $ (31.3) $ (6.7)
P&C Insurance and Reinsurance revenues 175.7 109.1
Specialty Insurance Distribution revenues 88.5 74.8
Asset Management revenues 34.9 24.1
Other Operations revenues 81.1 (23.1)
Total revenues 348.9 178.2
Expenses
Financial Guarantee expenses 19.3 18.3
P&C Insurance and Reinsurance expenses 198.8 141.6
Specialty Insurance Distribution expenses 85.9 108.1
Asset Management expenses 5.6 8.4
Other Operations expenses 51.5 40.5
Total expenses 361.1 316.9
Pre-tax income (loss)
Financial Guarantee pre-tax income (loss) (50.6) (25.0)
P&C Insurance and Reinsurance pre-tax income (loss) (23.1) (32.5)
Specialty Insurance Distribution pre-tax income (loss) 2.6 (33.3)
Asset Management pre-tax income (loss) 29.3 15.7
Other Operations pre-tax income (loss) 29.6 (63.6)
Total pre-tax income (loss) (12.2) (138.7)
Income tax (expense) benefit 3.8 9.5
Net income (loss) from continuing operations (8.4) (129.2)
Gain (loss) on sale of discontinued operations, net
of tax - 18.7 Net income (loss) (8.4) (110.5) Net (income) loss attributable to non-controlling interests 41.8 35.2
Net income (loss) attributable to
common shareholders 33.4 (75.3) Other comprehensive income (loss), net of tax (2.3) 1.8 Comprehensive income (loss) 31.1 (73.5) Other comprehensive (income) loss attributable to non-controlling interests .2 (.1)
Comprehensive income (loss) attributable to White
Mountains's common shareholders$ 31.3 $ (73.6) 51
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I. Summary of Operations By Segment
As ofMarch 31, 2022 ,White Mountains conducted its operations through five segments: (1) HG Global/BAM, (2) Ark, (3) NSM, (4) Kudu and (5) Other Operations. A discussion ofWhite Mountains's consolidated investment operations is included after the discussion of operations by segment.White Mountains's segment information is presented in Note 15 - "Segment Information" to the Consolidated Financial Statements.
HG Global/BAM
HG Global/BAM consists of the consolidated results of HG Global, HG Re and BAM. BAM is the first and only mutual municipal bond insurance company inthe United States . By insuring the timely payment of principal and interest, BAM provides market access to, and lowers interest expense for, issuers of municipal bonds used to finance essential public purpose projects, such as schools, utilities and transportation facilities. BAM is owned by and operated for the benefit of its members, the municipalities that purchase BAM's insurance for their debt issuances. HG Global was established to fund the startup of BAM and, through HG Re, to provide up to 15%-of-par, first loss reinsurance protection for policies underwritten by BAM. The following tables present the components of pre-tax income (loss) included inWhite Mountains's HG Global/BAM segment related to the consolidation of HG Global, which includes HG Re and its other wholly-owned subsidiaries, and BAM for the three months endedMarch 31, 2022 and 2021: Three Months Ended March 31, 2022 Millions HG Global BAM Eliminations Total Direct written premiums $ -$ 9.4 $ -$ 9.4 Assumed written premiums 8.1 - (8.1) - Gross written premiums 8.1 9.4 (8.1) 9.4 Ceded written premiums - (8.1) 8.1 - Net written premiums$ 8.1 $ 1.3 $ -$ 9.4 Earned insurance premiums$ 6.9 $ 1.5 $ -$ 8.4 Net investment income 2.1 2.5 - 4.6 Net investment income - BAM Surplus Notes 2.9 - (2.9) - Net realized and unrealized investment gains (losses) (23.5) (21.6) - (45.1) Other revenues .1 .7 - .8 Total revenues (11.5) (16.9) (2.9) (31.3) Insurance acquisition expenses 2.6 .4 - 3.0 General and administrative expenses .7 15.6 - 16.3 Interest expense - BAM Surplus Notes - 2.9 (2.9) - Total expenses 3.3 18.9 (2.9) 19.3 Pre-tax income (loss)$ (14.8) $ (35.8) $ -$ (50.6) Supplemental information: MSC collected (1) $ - 12.3 $ -$ 12.3
(1) MSC collected are recorded directly to BAM's equity, which is recorded as
non-controlling interest on
52 --------------------------------------------------------------------------------
Three Months Ended March 31, 2021
Millions HG Global BAM Eliminations Total
Direct written premiums $ - $ 8.0 $ - $ 8.0
Assumed written premiums 10.7 4.5 (10.7) 4.5
Gross written premiums 10.7 12.5 (10.7) 12.5
Ceded written premiums - (10.7) 10.7 -
Net written premiums $ 10.7 $ 1.8 $ - $ 12.5
Earned insurance premiums $ 5.3 $ 1.1 $ - $ 6.4
Net investment income 1.8 2.7 - 4.5
Net investment income - BAM Surplus Notes 3.0 - (3.0) -
Net realized and unrealized investment
gains (losses) (9.9) (8.0) - (17.9)
Other revenues .1 .2 - .3
Total revenues 0.3 (4.0) (3.0) (6.7)
Insurance acquisition expenses 1.5 .4 - 1.9
General and administrative expenses .6 15.8 - 16.4
Interest expense - BAM Surplus Notes - 3.0 (3.0) -
Total expenses 2.1 19.2 (3.0) 18.3
Pre-tax loss $ (1.8) $ (23.2) $ - $ (25.0)
Supplemental information:
MSC collected (1) $ - $ 13.8 $ - $ 13.8
(1) MSC collected are recorded directly to BAM's equity, which is recorded as
non-controlling interest on
HG Global/BAM Results-Three Months EndedMarch 31, 2022 versus Three Months EndedMarch 31, 2021 BAM is required to prepare its financial statements on a statutory accounting basis for the NYDFS and does not report stand-alone GAAP financial results. BAM charges an insurance premium on each municipal bond insurance policy it writes. A portion of the premium is MSC and the remainder is a risk premium. In the event of a municipal bond refunding, a portion of the MSC from original issuance can be reutilized, in effect serving as a credit against the total insurance premium on the refunding of the municipal bond. Gross written premiums and MSC collected in the HG Global/BAM segment totaled$22 million in the first quarter of 2022 compared to$26 million in the first quarter of 2021. BAM insured$3.5 billion of municipal bonds,$2.8 billion of which were in the primary market, in the first quarter of 2022 compared to$3.5 billion of municipal bonds,$2.5 billion of which were in the primary market, in the first quarter of 2021. In the first quarter of 2021, BAM completed an assumed reinsurance transaction to insure municipal bonds with a par value of$806 million . Demand remained strong for insured bonds in the primary market, as insured penetration in the primary market was 8.1% in the first quarter of 2022 compared to 7.5% in the first quarter of 2021. Total pricing, which reflects both gross written premiums and MSC from new business, decreased to 63 basis points in the first quarter of 2022 compared to 74 basis points in the first quarter of 2021. See "NON-GAAP FINANCIAL MEASURES" on page 72. The decrease in total pricing was driven primarily by a decrease in pricing in the primary market, partially offset by an increase in pricing for the combined secondary and assumed reinsurance markets in the first quarter of 2022 compared to the first quarter of 2021. Pricing in the primary market decreased to 45 basis points in the first quarter of 2022 compared to 58 basis points in the first quarter of 2021. Pricing in the combined secondary and assumed reinsurance markets increased to 134 basis points in the first quarter of 2022 compared to 117 basis points in the first quarter of 2021. 53 -------------------------------------------------------------------------------- The following table presents the gross par value of primary and secondary market policies issued, the gross par value of assumed reinsurance, the gross written premiums and MSC collected and total pricing for the three months endedMarch 31, 2022 and 2021: Three Months Ended March 31, $ in Millions 2022 2021 Gross par value of primary market policies issued 2,755.1$ 2,542.0 Gross par value of secondary market policies issued 699.1 177.1 Gross par value of assumed reinsurance - 805.5 Total gross par value of market policies issued$ 3,454.2 $ 3,524.6 Gross written premiums 9.4$ 12.5 MSC collected 12.3 13.8 Total gross written premiums and MSC collected $ 21.7$ 26.3 Present value of future installment MSC collections - -
Gross written premium adjustments on existing installment
policies
- - Gross written premiums and MSC from new business (1) $ 21.7$ 26.3 Total pricing 63 bps 74 bps
(1) See "NON-GAAP FINANCIAL MEASURES" on page 72.
HG Global reported pre-tax loss of$15 million in the first quarter of 2022 compared to$2 million in the first quarter of 2021. The change in pre-tax loss was driven primarily by lower investment returns on the HG Global fixed income portfolio, as interest rates increased in the first quarter of 2022 resulting in net unrealized losses. Results in the first quarter of 2022 and 2021 both included$3 million of interest income on the BAM Surplus Notes. OnApril 29, 2022 , HG Global received the proceeds of a new$150 million , 10-year term loan credit facility. In turn, onMay 2, 2022 , HG Global paid a$120 million cash dividend to shareholders, of which$116 million was paid toWhite Mountains . BAM is a mutual insurance company that is owned by its members. BAM's results are consolidated intoWhite Mountains's GAAP financial statements and attributed to non-controlling interests.White Mountains reported$36 million of GAAP pre-tax loss from BAM in the first quarter of 2022 compared to$23 million in the first quarter of 2021. The change in pre-tax loss was driven primarily by lower investment returns on the BAM fixed income portfolio, as interest rates increased in the first quarter of 2022 resulting in net unrealized losses. Results in the first quarter of 2022 and 2021 both included$3 million of interest expense on the BAM Surplus Notes and$16 million of general and administrative expenses. 54 --------------------------------------------------------------------------------
Through the COVID-19 pandemic, BAM's portfolio has performed well. All
BAM-insured bond payments due
through
BAM's watchlist.
Claims Paying Resources BAM's claims paying resources represent the capital and other financial resources BAM has available to pay claims and, as such, is a key indication of BAM's financial strength. BAM's claims paying resources were$1,201 million as ofMarch 31, 2022 compared to$1,192 million as ofDecember 31, 2021 and$1,144 million as ofMarch 31, 2021 . The increase in claims paying resources as ofMarch 31, 2022 compared toDecember 31, 2021 was driven primarily by increases in the statutory value of the collateral trusts resulting from deposits of ceded premiums. In the first quarter of 2021, BAM completed a reinsurance agreement with Fidus Re that increased BAM's claims paying resources by$150 million . The reinsurance agreement with Fidus Re is accounted for using deposit accounting and any related financing expenses are recorded in general and administrative expenses, as the agreement does not meet the risk transfer requirements necessary to be accounted for as reinsurance. The following table presents BAM's total claims paying resources as ofMarch 31, 2022 ,December 31, 2021 andMarch 31, 2021 : Millions March 31, 2022 December 31, 2021 March 31, 2021 Policyholders' surplus $ 294.7 $ 298.1 $ 321.3 Contingency reserve 105.7 101.8 92.2 Qualified statutory capital 400.4 399.9 413.5 Net unearned premiums 49.8 49.5 46.2 Present value of future installment premiums and MSC 13.8 13.8 13.9 HG Re Collateral trusts at statutory value 486.7 478.9 420.7 Fidus Re Collateral trust at statutory value 250.0 250.0 250.0 Claims paying resources$ 1,200.7 $ 1,192.1 $ 1,144.3 55
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ASSURED GUARANTY LTD – 10-Q – MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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