White Mountains marks-up valuation of Elementum Advisors stake

White Mountains has marked-up the valuation of its stake in insurance-linked securities (ILS) investment fund manager and collateralised reinsurance underwriter Elementum Advisors, LLC, even though the proportion of the ILS manager that it owns had been reduced.

It’s a signal that White Mountains is valuing Elementum Advisors at a higher level now.

This could be in response to the improved opportunity that investing into ILS instruments such as catastrophe bonds and other reinsurance-linked investments now presents, with much higher returns available to investors, as well as rising assets at the ILS manager.

As we reported around the middle of this year, Elementum Advisors, LLC, had raised additional capital in advance of the renewals, with its overall assets under management reaching the $4 billion mark again at June 30th.

It suggested over $450 million had been raised by Elementum Advisors through the first-half of the year, according to our ILS fund manager directory, and White Mountains CEO had said the ILS manager won three new investor mandates in the first quarter alone.

$150 million at least had been raised for a higher-risk ILS fund strategy that Elementum manages.

While, demonstrating its commitment to the manager and its desire to capitalise on the higher insurance-linked returns that are available, White Mountains had itself injected a further $100 million into Elementum’s ILS funds this year.

After that fresh investment into the Elementum Advisors ILS funds, White Mountains now carries the fair value of its ILS fund investments at $159.5 million at September 30th 2023, up from $49.3 million at the end of 2022 (which had been from investments made in the ILS funds in 2019 and 2020).

But, it is the valuation of the ownership stake in Elementum Advisors that is more telling of the health of the ILS manager and the greatly opportunity it is now faced with.

Recall, that White Mountains originally acquired its stake in ILS fund manager Elementum Advisors back in May 2019, paying $55 million for a 30% stake in Elementum, which valued the ILS fund management company at roughly $183 million.

Initially, White Mountains has recorded the carrying value of its investment stake in Elementum Advisors at $55.1 million, back at the end of 2019, the year of its acquisition.

But, the valuation of that investment stake fell, first to $45 million at the end of 2021 and then to just $30 million at the end of 2022.

At the end of 2022, White Mountains reported its stake in Elementum Advisors as representing a 29.7% ownership interest, meaning that, at its most basic calculation, this implied the enterprise value was being recorded at just over $101 million at the time.

Now, it’s clear White Mountains is valuing Elementum more highly again.

At September 30th 2023, White Mountains reports the carrying value of its limited partnership investment into Elementum Advisors at $35 million, so up by $5 million since the end of 2022.

But, more telling is the fact that the ownership percentage now reported has fallen to 26.6%, suggesting Elementum as a whole is now valued much higher.

On which basis, it implies an increased enterprise value for Elementum Advisors, of around $132 million.

It’s important to also note the discount rate applied to how White Mountains accounts for its Elementum ownership stake, which has changed. It was set at 21% at the end of 2022, but higher at 24% at the end of September 2023.

But, White Mountains itself notes that an increase to the discount rate it applies would normally, on its own, drive a lower fair valuation of an asset of this kind.

So, as the fair value has actually increased, that also supports a conclusion of a higher overall valuation for the Elementum Advisors business at this time.

White Mountains does not disclose sufficient information to understand whether any other investor has come into support Elementum at the LP level, or whether its management team now hold a larger stake themselves, which could also explain some of the adjustments in the latest reporting.

But, either way, it’s clear White Mountains values Elementum Advisors more highly now, likely reflecting the increased assets under management, the opportunity that can drive, as well as the greatly improved prospects Elementum now has in front of it, thanks to much better market conditions for ILS investment management businesses.