The Company maintains two professional offices in Hamilton, Bermuda, which serve as its headquarters and its registered office. The Company’s principal executive office is in Hanover, New Hampshire. In addition, White Mountains maintains a professional office in Guilford, Connecticut, which houses its corporate finance and investment functions, and in Boston, Massachusetts, which houses its corporate accounting, reporting and internal audit functions.
The following table presents selected consolidated income statement data and ending balance sheet data for each of the five years ended through December 31, 2019:
MediaAlpha recognized cost of sales of $41 in 2019, prior to the date of the MediaAlpha Transaction, compared to $245 and $136 in 2018 and 2017. NSM recognized expenses of $235 in 2019, compared to $107 in 2018 for the period owned by White Mountains.
White Mountains’s total assets increased in 2019, compared to 2018, as a result of NSM’s acquisitions of Embrace and the Renewal Rights from AIG and the Kudu Transaction in 2019. White Mountains’s total assets decreased as a result of share repurchases in 2018, 2017, 2016 and 2015, and the sales of OneBeacon in 2017 and Sirius Group in 2016.
Adjusted book value per share is a non-GAAP measure. See “NON-GAAP FINANCIAL MEASURES” on page 58.
During 2019, 2018, 2017, 2016, and 2015, White Mountains repurchased 5,679, 592,458, 832,725, 1,106,145, and 387,495 respectively, of its common shares through a combination of tender offers, open market transactions and other transactions. See “LIQUIDITY AND CAPITAL RESOURCES” on page 51.
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 67 for specific important factors that could cause actual results to differ materially from those contained in forward-looking statements.
The following discussion also includes nine non-GAAP financial measures (i) adjusted book value per share, (ii) underlying growth in adjusted book value per share, (iii) gross written premiums and MSC from new business, (iv) adjusted capital, (v) NSM’s earnings before interest, taxes, depreciation and amortization (“EBITDA”), (vi) NSM’s adjusted EBITDA, (vii) total consolidated portfolio returns excluding the MediaAlpha Transaction, (viii) common equity securities and other long-term investments returns excluding the MediaAlpha Transaction and (ix) other long-term investments return excluding the MediaAlpha Transaction, that have been reconciled from their most comparable GAAP financial measures on page 58. White Mountains believes these measures to be useful in evaluating White Mountains’s financial performance and condition.
White Mountains ended 2019 with book value per share of $1,024 and adjusted book value per share of $1,018, an increase of 14.4% and 14.8% for the year, including dividends. Comprehensive income attributable to common shareholders was $413 million in 2019 compared to comprehensive loss attributable to common shareholders of $146 million in 2018. The results for 2019 were driven primarily by investment results and the $182 million gain from the MediaAlpha Transaction. The results for 2018 were driven primarily by investment results, which were adversely impacted by the sharp decline in equity markets in the fourth quarter of 2018.
On February 26, 2019, MediaAlpha completed the MediaAlpha Transaction. The transaction resulted in a gain of $55 to each of White Mountains’s book value per share and adjusted book value per share. See “MediaAlpha” on page 43.
2018, book value per share would have been $951 and adjusted book value per share would have been $943 as of December 31, 2018. Had the MediaAlpha Transaction closed on December 31, 2018, White Mountains’s book value per share would have increased 7.8% and adjusted book value per share would have increased 8.1% in 2019, including dividends.
During the fourth quarter of 2019, White Mountains updated its debt service model for the BAM Surplus Notes to reflect (i) the cash payments of principal and interest on the BAM Surplus Notes made in December 2019 and January 2020, (ii) the amendments made to the terms of the BAM Surplus Notes in January 2020, including an extension of the variable interest rate period, and (iii) in light of the current interest rate environment, a more conservative forecast of future operating results for BAM. This has resulted in slower modeled future payments on the BAM Surplus Notes and, in turn, a $20 million increase to the time value of money discount on the BAM Surplus Notes as reflected in adjusted book value per share as of December 31, 2019.
White Mountains’s pre-tax total return on invested assets was 20.4% for 2019, which included a $115 million pre-tax unrealized investment gain from the MediaAlpha Transaction. Excluding the MediaAlpha Transaction, White Mountains’s pre-tax total return on invested assets was 15.5% for 2019, compared to -1.7% for 2018. Investment returns for 2019 benefited from the decision to increase White Mountains’s equity exposure during the equity rout at the end of 2018, the strong rally in equity markets over the course of the year, and strong other long-term investments results. The strong other long-term investment results were driven primarily by a $65 million increase in the fair value of White Mountains’s investment in MediaAlpha resulting from increases in profitability metrics since the MediaAlpha Transaction. Investment returns for 2018 were adversely impacted by the sharp decline in equity markets in the fourth quarter.
White Mountains ended 2018 with book value per share of $896 and adjusted book value per share of $888, a decrease of 3.7% and 2.8% for the year, including dividends. Comprehensive loss attributable to common shareholders was $146 million in 2018 compared to comprehensive income attributable to common shareholders of $631 million in 2017. The results for 2018 were driven primarily by investment results, which were adversely impacted by the sharp decline in equity markets in the fourth quarter of 2018. The results for 2017 were driven primarily by the $557 million gain from the OneBeacon Transaction.
Including the estimated gain of $55 per share for the MediaAlpha Transaction, December 31, 2018 book value per share would have been $951 and adjusted book value per share would have been $943. Had the MediaAlpha Transaction closed on December 31, 2018, White Mountains’s book value per share would have increased 2.2% and adjusted book value per share would have increased 3.2% in 2018, including dividends.
During 2018, White Mountains repurchased and retired 592,458 of its common shares for $519 million at an average share price of $877. The average share price paid was approximately 98% and 99%, respectively, of White Mountains’s December 31, 2018 book value per share and adjusted book value per share. The average share price paid was approximately 92% and 93%, respectively, of White Mountains’s December 31, 2018 book value per share including the estimated gain of $55 per share from the MediaAlpha Transaction and adjusted book value per share including the estimated gain from the MediaAlpha Transaction. During 2018, White Mountains deployed roughly $300 million in new business opportunities, ending the year with approximately $1.2 billion of undeployed capital.
On May 11, 2018, White Mountains acquired a 95.0% ownership interest in NSM (83.6% on a fully diluted, fully converted basis), a full-service MGU and program administrator for specialty property & casualty insurance. NSM reported pre-tax loss of $5 million from May 11, 2018, the date of acquisition, through December 31, 2018. NSM reported adjusted EBITDA of $16 million and revenues of $102 million from May 11, 2018 through December 31, 2018.
MediaAlpha reported pre-tax income of $9 million in 2018, compared to break-even pre-tax income in 2017. MediaAlpha’s adjusted EBITDA was $32 million in 2018, compared to $11 million in 2017. MediaAlpha reported advertising and commission revenues of $296 million in 2018, compared to $163 million in 2017. The increases in pre-tax income, adjusted EBITDA and revenues were driven primarily by growth in the P&C vertical and the HLM vertical, which includes business generated from assets acquired from Healthplans.com in the fourth quarter of 2017.
White Mountains’s fixed income portfolio returned 1.2% for 2018, compared to 3.5% for 2017.
The following table presents White Mountains’s consolidated financial results by industry for the years ended December 31, 2019, 2018 and 2017:
As a result of the MediaAlpha Transaction, White Mountains no longer consolidated MediaAlpha, and consequently it was no longer a reportable segment. White Mountains’s segment disclosures for the year ended December 31, 2019 include MediaAlpha’s results of operations for the period from January 1, 2019 to February 26, 2019, the date of the MediaAlpha Transaction. See Note 2 - “Significant Transactions” on page.
(1) MSC collected are recorded directly to BAM’s equity, which is recorded as non-controlling interest on White Mountains’s balance sheet.
Gross written premiums and MSC collected in the HG Global/BAM segment totaled $107 million in both 2019 and 2018. BAM insured $12.8 billion of municipal bonds, $10.4 billion of which were in the primary market in 2019, compared to $12 billion of municipal bonds, $8.8 billion of which were in the primary market, in 2018. During 2019 and 2018, BAM completed assumed reinsurance transactions to insure municipal bonds with a par value of $1.1 billion and $2.2 billion, respectively.
the policy endorsements for the year ended December 31, 2019 was a decrease to BAM’s gross written premiums of $13.4 and an increase to MSC collected of $13.4.
During the fourth quarter of 2019, White Mountains updated its debt service model for the BAM Surplus Notes to reflect (i) the cash payments of principal and interest on the BAM Surplus Notes made in December 2019 and January 2020, (ii) the amendments made to the terms of the BAM Surplus Notes in January 2020, including the extension of the variable interest rate period and (iii) in light of the current interest rate environment, a more conservative forecast of future operating results for BAM. This has resulted in slower modeled future payments on the BAM Surplus Notes and, in turn, a $20 million increase to the time value of money discount on the BAM Surplus Notes as reflected in adjusted book value per share as of December 31, 2019.
HG Global/BAM Results-Year Ended December 31, 2018 versus Year Ended December 31, 2017
Gross written premiums and MSC collected in the HG Global/BAM segment totaled $107 million in 2018, compared to $101 million in 2017. BAM insured $12.0 billion of municipal bonds, $8.8 billion of which were in the primary market in 2018, compared to $10.4 billion, $9.6 billion of which were in the primary market, in 2017. During 2018, BAM completed an assumed reinsurance transaction to insure municipal bonds with a par value of $2.2 billion.
Total pricing, which reflects both gross written premiums and MSC from new business, decreased to 93 basis points in 2018, compared to 99 basis points in 2017. See “NON-GAAP FINANCIAL MEASURES” on page 58. Pricing in the primary market decreased to 71 basis points in 2018, compared to 74 basis points in 2017. Pricing in the assumed reinsurance and secondary markets decreased to 150 basis points in 2018, compared to 410 basis points in 2017.
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 twelve months ended December 31, 2018 and 2017:
During 2018, BAM made a $23 million cash payment of principal and interest on the BAM Surplus Notes held by HG Global. Of this payment, $18 million was a repayment of principal held in the Supplemental Trust, $1 million was a payment of accrued interest held in the Supplemental Trust and $4 million was a payment of accrued interest held outside the Supplemental Trust. During 2017, BAM made a $5 million cash payment of principal and interest on the BAM Surplus Notes. Of this payment, $4 million was a repayment of principal held in the Supplemental Trust and $1 million was a payment of accrued interest held outside the Supplemental Trust.
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.
The following table presents BAM’s total claims paying resources as of December 31, 2019, 2018 and 2017:
BAM’s claims paying resources increased to $871 million as of December 31, 2018 from $708 million as of December 31, 2017. The increase was driven primarily by the $100 million reinsurance agreement with Fidus Re, $54 million of MSC collected and a $52 million increase in the invested assets of the HG Re Collateral Trusts, partially offset by BAM’s 2018 statutory net loss of $35 million.
The following table presents amounts from HG Global, which includes HG Re and its other wholly-owned subsidiaries, and BAM that are contained within White Mountains’s consolidated balance sheet as of December 31, 2019 and 2018:
The following table presents the components of GAAP net loss and adjusted EBITDA included in White Mountains’s NSM segment for the year ended December 31, 2019 and the for the period of May 11, 2018 to December 31, 2018:
NSM Results-Year ended December 31, 2019 versus the Period from May 11, 2018 to December 31, 2018
For the year ended December 31, 2019, NSM reported GAAP pre-tax loss of $2 million, adjusted EBITDA of $48 million, and commission and other revenues of $233 million. For the period from May 11, 2018, the date White Mountains acquired NSM, to December 31, 2018, NSM reported pre-tax loss of $5 million, adjusted EBITDA of $18 million, and commission and other revenues of $102 million. NSM’s pre-tax loss included interest expense of $17 million and amortization of other intangible assets of $19 million in 2019, compared to $8 million and $8 million, respectively, for the period from May 11, 2018 to December 31, 2018.
Real Estate: NSM’s real estate controlled premium increased 16% in 2019, compared to 2018, driven primarily by organic growth in both rate and units. The organic growth was driven by rate increases in the CHAMP program, which offers insurance coverage for wind-exposed coastal condominium associations, combined with significant unit growth in NSM’s excess and surplus habitational program. NSM’s real estate commission and other revenues increased 15% in 2019, compared to 2018, driven primarily by the increase in controlled premium, increases in rate and an increase in associated fee revenues.
Other: NSM’s other controlled premium increased 4% in 2019, compared to 2018, driven primarily by improvements in units and retention. Commissions and other revenues decreased 4% in 2019 from 2018 due to lower average commission rates resulting from a change in carrier in 2019.
Real Estate: NSM’s real estate controlled premium and commission and other revenue growth in 2018 was primarily due to the CHAMP program, which increased penetration in the southeast U.S. market and benefited from customer goodwill arising from exceptional claims handling in the wake of the 2017 hurricanes.
Social Services: NSM’s social services controlled premium and commission and other revenue experienced a decline in 2018 primarily due to the continued pull back of a key carrier partner. NSM established relationships with two new carrier partners in the Social Services vertical in 2019.
On April 4, 2019, White Mountains completed the Kudu Transaction. For the twelve months ended December 31, 2019, Kudu deployed $203 million, including transaction costs, in seven asset management firms and has now deployed a total of $266 million, including transaction costs, in nine asset management firms with combined assets under management of over $33 billion, spanning a range of asset classes, including real estate, real assets, wealth management, hedge funds and alternative credit strategies. The average cash yield to Kudu at inception for the $266 million of deployed capital was 10.6%.
The following table presents a summary of White Mountains’s financial results from its Kudu segment for the period of April 4, 2019 to December 31, 2019:
The following table presents the components of GAAP pre-tax (loss) income included in White Mountains’s MediaAlpha segment for the period of January 1, 2019 to February 26, 2019, and for the years ended December 31, 2018 and 2017:
MediaAlpha reported GAAP pre-tax loss of $6 million and revenues of $49 million from January 1, 2019 to February 26, 2019, the date of the MediaAlpha Transaction. During the period from January 1, 2019 to February 26, 2019, revenues were driven primarily by the P&C and Health, Medicare and Life verticals, which had revenues of $26 million and $17 million. During the period from January 1, 2019 to February 26, 2019, MediaAlpha recognized $7 million of costs related to the MediaAlpha Transaction in general and administrative expenses.
The following table presents White Mountains’s financial results from its Other Operations segment for the years ended December 31, 2019, 2018 and 2017:
Other Operations Results-Year Ended December 31, 2018 versus Year Ended December 31, 2017
The following table presents the pre-tax investment return for White Mountains’s consolidated portfolio for the years ended December 31, 2019, 2018 and 2017:
(1) For 2019 and 2018, investment returns are calculated using a daily weighted average of investments held. For 2017, investment returns are calculated using a quarterly weighted average of investments held.
White Mountains’s portfolio of ETFs seeks to provide investment results that generally correspond to the performance of the S&P 500 Index. White Mountains’s portfolio of ETFs was $536 million and $675 million as of December 31, 2019 and 2018. In 2019 and 2018, the ETF portfolio essentially earned the effective index return, before expenses, over the period in which White Mountains was invested in these funds.
White Mountains maintains a portfolio of other long-term investments that primarily consists of unconsolidated entities, Kudu’s Participation Contracts, private equity funds, hedge funds, ILS funds and private debt instruments. White Mountains’s portfolio of other long-term investments was $856 million and $326 million as of December 31, 2019 and 2018.
White Mountains’s other long-term investments portfolio returned 52.4% for 2019, which included the $115 million pre-tax unrealized investment gain from the MediaAlpha Transaction. Excluding the MediaAlpha Transaction, White Mountains’s other long-term investments portfolio returned 15.2% for 2019, compared to 10.0% for 2018. Investment returns for 2019 were driven primarily by a $65 million increase in the fair value of White Mountains’s investment in MediaAlpha resulting from increases in profitability metrics since the MediaAlpha Transaction. In addition, the investment returns were also driven by net investment income from Kudu’s Participation Contracts and a $15 million increase in the fair value of White Mountains’s investment in PassportCard/DavidShield resulting from increases in profitability metrics in its core businesses, partially offset by losses from certain unconsolidated entities. Investment results for 2018 were driven primarily by a $26 million increase in the fair value of White Mountains’s investment in PassportCard/DavidShield resulting from increases in profitability metrics in its core businesses, as well as strong private equity fund returns.
In the second quarter of 2019, White Mountains made an investment in three multi-investor ILS funds managed by Elementum, a third-party registered investment adviser specializing in natural catastrophe ILS. Elementum manages separate accounts and pooled investment vehicles across various ILS sectors, including catastrophe bonds, collateralized reinsurance investments and industry loss warranties, on behalf of third-party clients. As of December 31, 2019, White Mountains had approximately $41 million invested in these three ILS funds and has committed an additional $10 million to a fourth fund.
White Mountains’s fixed income portfolio returned 6.1% for 2019, underperforming the Bloomberg Barclays U.S. Intermediate Aggregate Index returns of 6.7%. The short duration and high liquidity positioning of White Mountains’s fixed income portfolio contributed to the underperformance relative to the benchmark as interest rates declined significantly during the period. White Mountains’s fixed income portfolio returned 1.2% for 2018, outperforming the Bloomberg Barclays U.S. Intermediate Aggregate Index returns of 0.9%. The short duration and high liquidity positioning of White Mountains’s fixed income portfolio contributed to the outperformance relative to the benchmark as interest rates rose during the period.
White Mountains’s portfolio of common equity securities and other long-term investments was $1.3 billion and $1.1 billion as of December 31, 2018 and 2017. See Note 3 - “Investment Securities”. White Mountains’s portfolio of common equity securities and other long-term investments represented approximately 49% and 32% of total invested assets as of December 31, 2018 and 2017. White Mountains’s portfolio of common equity securities and other long-term investments returned -3.6% for 2018 compared to 12.7% for 2017.
White Mountains’s portfolio of ETFs was $675 million and $570 million as of December 31, 2018 and 2017. In 2018 and 2017, White Mountains’s portfolio of ETFs essentially earned the effective S&P 500 index return, before expenses, over the period in which White Mountains was invested in these funds. As of December 31, 2018 and 2017, White Mountains had approximately $250 million and $296 million of common equity securities invested with third-party registered investment advisers. White Mountains’s actively managed common equity portfolios returned -15.6% for 2018, underperforming the S&P 500 Index return of -4.4%, driven primarily by relative underperformance in the international common equity portfolios managed by Highclere and Silchester. White Mountains’s actively managed common equity portfolios returned 25.2% for 2017, outperforming the S&P 500 Index return of 21.8%. The outperformance was driven primarily by strong returns from the common equity portfolios managed by Silchester and Lateef.
White Mountains’s other long-term investments portfolio returned 10.0% for 2018. The results were driven primarily by a $26 million increase in the fair value of White Mountains’s investment in PassportCard/DavidShield resulting from increases in profitability metrics in its core businesses, as well as strong private equity fund returns. White Mountains’s other long-term investments portfolio returned -5.8% for 2017. The results were driven primarily by losses from foreign currency forward contracts and White Mountains’s unconsolidated entities, partially offset by strong performance from private equity funds and favorable fair value adjustments to surplus notes issued to OneBeacon in connection with the sale of its runoff business.
White Mountains’s fixed income portfolio returned 1.2% for 2018, outperforming the Bloomberg Barclays U.S. Intermediate Aggregate Index return of 0.9%. The short duration and high liquidity positioning of White Mountains’s fixed income portfolio contributed to the outperformance relative to the benchmark as interest rates rose during the period. White Mountains’s fixed income portfolio returned 3.5% for 2017, outperforming the Bloomberg Barclays U.S. Intermediate Aggregate Index return of 2.3% as short-term yields rose during the period.
The following table presents the breakdown of White Mountains’s fixed maturity investments as of December 31, 2019 by credit class, based upon issuer credit ratings provided by Standard & Poor’s, or if unrated by Standard & Poor’s, long-term obligation ratings provided by Moody’s:
As of December 31, 2019, White Mountains had foreign currency exposure on $191 million of net assets primarily related to common equity securities managed by Silchester and Highclere, NSM’s U.K. operations and certain foreign consolidated and unconsolidated entities.
From time to time, White Mountains may enter into foreign currency forward contracts in order to mitigate its foreign currency exposure on certain invested assets. As of December 31, 2019, White Mountains does not have any open foreign currency forward contracts.
The following table presents the fair value of White Mountains’s foreign denominated net assets as of December 31, 2019:
The Company and its Bermuda domiciled subsidiaries are not subject to Bermuda income tax under current Bermuda law. In the event there is a change in the current law and taxes are imposed, the Company and its Bermuda domiciled subsidiaries would be exempt from such tax until March 31, 2035 pursuant to the Bermuda Exempted Undertakings Tax Protection Act of 1966. The Company has subsidiaries and branches that operate in various other jurisdictions around the world and are subject to tax in the jurisdictions in which they operate.
White Mountains has entered into a number of sale transactions that have been accounted for as discontinued operations within its consolidated financial statements. See Note 20 - “Held for Sale and Discontinued Operations” on page for detailed financial information on each business sold.
As of December 31, 2019, HG Global had $619 million face value of preferred shares outstanding, of which White Mountains owned 96.9%. Holders of the HG Global preferred shares receive cumulative dividends at a fixed annual rate of 6.0% on a quarterly basis, when and if declared by HG Global. HG Global declared and paid preferred dividends of $2 million in 2019. As of December 31, 2019, HG Global had accrued $342 million of dividends payable to holders of its preferred shares, $330 million of which is payable to White Mountains and eliminated in consolidation. As of December 31, 2019, HG Global and its subsidiaries had $3 million of cash outside of HG Re.
HG Re is a Special Purpose Insurer subject to regulation and supervision by the BMA but does not require regulatory approval to pay dividends. However, HG Re’s dividend capacity is limited to amounts held outside of the Collateral Trusts pursuant to the FLRT with BAM. As of December 31, 2019, HG Re had $745 million of statutory capital and surplus and $787 million of assets held in the Collateral Trusts pursuant to the FLRT with BAM.
Effective January 1, 2014, HG Global and BAM agreed to change the interest rate on the BAM Surplus Notes for the five years ending December 31, 2018 from a fixed rate of 8.0% to a variable rate equal to the one-year U.S. Treasury rate plus 300 basis points, set annually. In 2018, BAM exercised its option to extend the variable rate period for an additional three years and, during 2020, the interest rate will be 4.6%. In January 2020, HG Global and BAM agreed to amend the BAM Surplus Notes to extend the end of the variable interest rate period until December 31, 2024. At the end of the variable rate period, the interest rate will be fixed at the higher of the then current variable rate or 8.0%. BAM is required to seek regulatory approval to pay interest and principal on the BAM Surplus Notes only to the extent that its remaining qualified statutory capital and other capital resources continue to support its outstanding obligations, its business plan and its “AA/stable” rating from Standard & Poor’s. No payment of principal or interest on the BAM Surplus Notes may be made without the approval of the NYDFS.
In December 2019, BAM made a $32 million cash payment of principal and interest on the BAM Surplus Notes held by HG Global. Of this payment, $24 million was a repayment of principal held in the Supplemental Trust and $8 million was a payment of accrued interest held outside the Supplemental Trust. In January 2020, BAM made an additional $65 million special cash payment of principal and interest on the BAM Surplus Notes. Of this payment, $48 million was a repayment of principal held in the Supplemental Trust, $1 million was a payment accrued interest held in the Supplemental Trust and $16 million was a payment of accrued interest held outside the Supplemental Trust.
It is possible that, in the future, one or more of the rating agencies may lower White Mountains’s existing ratings. If one or more of its ratings were lowered, White Mountains could incur higher borrowing costs on future borrowings and its ability to access the capital markets could be impacted.
On May 11, 2018, NSM entered into a secured credit facility (the “NSM Bank Facility”) with Ares Capital Corporation in order to refinance NSM’s existing debt and to fund the acquisitions of subsidiaries. The NSM Bank Facility has a total commitment of $234 million, which is comprised of term loans of $224 million and a revolving credit loan of $10 million. The term loans under the NSM Bank Facility mature on May 11, 2024, and the revolving loan under the NSM Bank Facility matures on May 11, 2023. During 2019, NSM borrowed $43 million of incremental term loans, which included $20 million and $23 million for the funding of the acquisitions of Embrace and the Renewal Rights from AIG, respectively, and repaid $2 million of the term loans. Additionally, during 2019, NSM borrowed and repaid $7 million of revolving credit loans under the NSM Bank Facility. As of December 31, 2019, the term loans had an outstanding balance of $221 million and the revolving credit loans were undrawn.
On June 15, 2018, NSM entered into an interest rate swap agreement to hedge its exposure to interest rate risk on $151 million of its variable rate term loans. Under the terms of the swap agreement, NSM pays a fixed rate of 2.97% and receives a variable rate, which is reset monthly, based on then-current LIBOR. As of December 31, 2019, the variable rate received by NSM under the swap agreement was 1.71%. As of December 31, 2019, the interest rate, including the effect of the swap, for the outstanding term loans of $149 million that are hedged by the swap was 7.47%. The effective interest on the outstanding term loans of $73 million that are unhedged was 6.21%. The effective interest rate on the total outstanding term loans under the NSM Bank Facility of $221 million was 7.06%, excluding the effect of debt issuance costs.
NSM also has a secured term loan related to its U.K.-based operations. As of December 31, 2019, the secured term loan had an outstanding balance of $2 million and a maturity date of May 11, 2024.
Interest on the Kudu Bank Facility accrues at a floating interest rate equal to the one-month LIBOR plus 1% or the Prime Rate plus, in each case, an applicable margin. The margin over LIBOR may vary between 5.50% and 6.25% and the margin over the Prime Rate may vary between 4.50% and 5.25%, depending on the consolidated total leverage ratio of the borrower.
As of December 31, 2019, debt in White Mountains’s Other Operations segment consisted of a secured credit facility that had a term loan of $11 million, a delayed-draw term loan of $3 million and a revolving credit loan commitment of $2 million, all with a maturity date of March 12, 2024.
The consolidated total leverage ratio in the NSM Bank Facility is determined by dividing NSM’s debt by its EBITDA, both as defined in the NSM Bank Facility.
Debt is defined to include indebtedness for borrowed money, due and payable earnouts on permitted acquisitions and various other adjustments specified in the NSM Bank Facility, less unrestricted cash and cash equivalents (“Bank Debt”). NSM’s Bank Debt was $190 million as of December 31, 2019.
The maximum consolidated total leverage ratio covenant was 5.5x. NSM’s actual consolidated total leverage ratio as of December 31, 2019 was 3.6x.
(2) Amounts include BAM’s operating lease amounts of $2.1, $3.6, $3.6 and $2.4 that are due in less than one year, one to three years, three to five years, and due after five years, which are attributed to non-controlling interests.
The estimated payments reflected in the table are based on current accrual factors (including performance relative to targets and common share price) and assume that all outstanding balances were 100% vested as of December 31, 2019.
White Mountains’s board of directors has authorized the Company to repurchase its common shares from time to time, subject to market conditions. The repurchase authorizations do not have a stated expiration date. As of December 31, 2019, White Mountains may repurchase an additional 635,705 shares under these board authorizations. In addition, from time to time White Mountains has also repurchased its common shares through tender offers that were separately approved by its board of directors. On May 11, 2018, White Mountains completed a “modified Dutch auction” tender offer, through which it repurchased 575,068 of its common shares at a purchase price of $875 per share for a total cost of approximately $505 million, including expenses. Shares repurchased under this tender offer did not impact the remaining number of shares authorized for repurchase.
The following table presents common shares repurchased by the Company as well as the average price per share as a percent of adjusted book value per share. For 2018, the table also presents the average price per share as a percent of adjusted book value per share, including the estimated gain from the MediaAlpha Transaction of $55 per share.
Detailed information concerning White Mountains’s cash flows during 2019, 2018 and 2017 follows:
During 2019, Kudu borrowed $57 million in term loans under the Kudu Bank Facility and distributed $54 million to unitholders, of which $53 million was paid to White Mountains. As of December 31, 2019, Kudu has not made any payment on the Kudu Bank Facility.
On April 4, 2019, White Mountains completed the Kudu Transaction for $81 million. In addition, White Mountains assumed all of Oaktree’s unfunded capital commitments to Kudu, increasing White Mountains’s total capital commitment to $250 million. During the fourth quarter of 2019, White Mountains increased its total capital commitment to Kudu by an additional $100 million to $350 million, of which $129 million is undrawn as of December 31, 2019. Also during the fourth quarter of 2019, Kudu obtained a committed $125 million credit facility, of which $68 million was undrawn as of December 31, 2019. During 2019, Kudu deployed $203 million, including transaction costs, in seven asset management firms and has now deployed a total of $266 million, including transaction costs, in nine asset management firms.
On May 31, 2019, White Mountains completed the Elementum Transaction for $55 million. As part of the Elementum Transaction, White Mountains also committed to invest $50 million in ILS funds managed by Elementum. As of December 31, 2019, White Mountains had invested $40 million into Elementum-managed ILS funds.
On June 28, 2019, White Mountains acquired additional newly-issued units of NSM for $59 million in connection with NSM’s acquisition of the Renewal Rights from AIG.
On June 28, 2019, NSM acquired the Renewal Rights from AIG for $83 million.
During 2018, MediaAlpha distributed $16 million to unitholders, of which $10 million was paid to White Mountains.
On January 24, 2018, White Mountains paid $42 million in connection with the DavidShield transaction.
On May 11, 2018, White Mountains closed its acquisition of 95.0% of NSM (83.6% on a fully diluted, fully converted basis) for a purchase price of $274 million. White Mountains paid a purchase price adjustment of $2 million in the fourth quarter of 2018.
During 2017, the Company borrowed and repaid $350 million under the WTM Bank Facility.
During 2017, BAM repaid $4 million of principal and paid $1 million of accrued interest on the BAM Surplus Notes.
On October 5, 2017, MediaAlpha acquired certain assets associated with the Health, Life and Medicare insurance business of Healthplans.com for an aggregate purchase price of $28 million.
The GAAP book value per share numerator is adjusted (i) to include a discount for the time value of money arising from the modeled 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.
The denominator used in the calculation of adjusted book value per share equals the number of common shares outstanding adjusted to exclude unearned restricted common shares, the compensation cost of which, at the date of calculation, has yet to be amortized. Restricted common shares are earned on a straight-line basis over their vesting periods. The reconciliation of GAAP book value per share to adjusted book value per share is included on page 30.
The underlying growth in adjusted book value per share on page 30 reflects the estimated gain from the MediaAlpha Transaction as if it had closed as of December 31, 2018. A reconciliation from GAAP to the reported percentage is as follows:
Gross written premiums and MSC from new business is a non-GAAP financial measure, which is derived by adjusting gross written premiums and MSC collected (i) to include the present value of future installment MSC not yet collected and (ii) to exclude the impact of gross written premium adjustments related to policies closed in prior periods. White Mountains believes these adjustments are useful to management and investors in evaluating the volume and pricing of new business closed during the period. The reconciliation from GAAP gross written premiums to gross written premiums and MSC from new business is included on page 35.
Change in fair value of contingent consideration earnout liabilities - Earnout liabilities are amounts payable to the sellers of businesses purchased by NSM that are contingent on the earnings of such businesses in periods subsequent to their acquisition. Under GAAP, earnout liabilities are not capitalized as part of the purchase price. Earnout liabilities are recorded at fair value, with the periodic change in the fair value of these liabilities recorded as income or an expense.
Fair value purchase accounting adjustment for deferred revenue - Represents the amount of deferred revenue that had already been collected but subsequently written down in connection with establishing the fair value of deferred revenue as part of NSM’s purchase accounting for Embrace.
Investments made in the development of new business lines - Represents the net loss related to the start-up of newly established lines of business, which NSM views as investments. For the periods presented, this adjustment relates primarily to NSM’s investment expenditures, net of revenues generated, in the organic development of (i) its pet insurance line and (ii) its MGA in the United Kingdom. NSM recently decided to cease investment in the organic development of its pet insurance line and, instead, to acquire Embrace, which closed in April 2019.
Assets and liabilities carried at fair value include substantially all of the investment portfolio, and derivative instruments, both exchange traded and over the counter instruments. Valuation of assets and liabilities measured at fair value require management to make estimates and apply judgment to matters that may carry a significant degree of uncertainty. In determining its estimates of fair value, White Mountains uses a variety of valuation approaches and inputs. Whenever possible, White Mountains estimates fair value using valuation methods that maximize the use of quoted market prices or other observable inputs. Where appropriate, assets and liabilities measured at fair value have been adjusted for the effect of counterparty credit risk.
White Mountains uses outside pricing services and brokers to assist in determining fair values. The outside pricing services White Mountains uses have indicated that they will only provide prices where observable inputs are available. As of December 31, 2019, approximately 71% of the investment portfolio recorded at fair value was priced based upon quoted market prices or other observable inputs.
Investments valued using Level 2 inputs include fixed maturity investments which have been disaggregated into classes, including debt securities issued by corporations, municipal obligations and mortgage and asset-backed securities. Investments valued using Level 2 inputs also include certain passive ETFs that track U.S. stock indices such as the S&P 500 Index, but are traded on foreign exchanges, which White Mountains values using the fund manager’s published net asset value per share (“NAV”) to account for the difference in market close times.
Fair value estimates for investments that trade infrequently and have few or no quoted market prices or other observable inputs are classified as Level 3 measurements. Investments valued using Level 3 fair value estimates are based upon unobservable inputs and include investments in certain fixed maturity investments, common equity securities and other long-term investments where quoted market prices or other observable inputs are unavailable or are not considered reliable or reasonable.
As of December 31, 2019, White Mountains owned a portfolio of other long-term investments valued at $856 million, including unconsolidated entities, Kudu’s Participation Contracts, private equity funds, hedge funds, ILS funds and private debt instruments. As of December 31, 2019, $654 million of White Mountains’s other long-term investments, including unconsolidated entities, Kudu’s Participation Contracts and private debt instruments were classified as Level 3 investments in the GAAP fair value hierarchy, were not actively traded in public markets and did not have readily observable market prices. The determination of the fair value of these securities involves significant management judgment, and the use of valuation models and assumptions that are inherently subjective and uncertain. See Item 1A. Risk Factors, “Our investment portfolio includes securities that do not have readily observable market prices. We use valuation methodologies that are inherently subjective and uncertain to value these securities. The values of securities established using these methodologies may never be realized, which could materially adversely affect our results of operations and financial condition.” on page 17. As of December 31, 2019, $202 million of White Mountains’s other long-term investments, including private equity funds, hedge funds and ILS funds, were valued at fair value using NAV as a practical expedient. Investments for which fair value is measured at NAV using the practical expedient are not classified within the fair value hierarchy.
As of December 31, 2019, the combined fair value of Kudu’s Participation Contracts was $267 million. The inputs to each discounted cash flow analysis vary depending on the nature of each client. As of December 31, 2019, White Mountains concluded that discount rates in the range of 15% to 22%, and terminal cash flow exit multiples in the range of 6 to 12 times were appropriate for the valuations of Kudu’s Participation Contracts.
MediaAlpha. White Mountains concluded that a discount rate of 15% and a terminal revenue growth rate of 4% was appropriate for the valuation of its investment in MediaAlpha as of December 31, 2019. Utilizing these assumptions, White Mountains determined that the fair value of its investment in MediaAlpha was $180 million as of December 31, 2019.
With a discounted cash flow analysis, small changes to inputs in a valuation model may result in significant changes to fair value. The following table presents the estimated effect on the fair value of White Mountains’s investment in MediaAlpha as of December 31, 2019 resulting from changes in the discount rate and terminal revenue growth rate, two key inputs to the discounted cash flow analysis:
PassportCard/DavidShield. White Mountains concluded that a discount rate of 22% and a terminal revenue growth rate of 4% was appropriate for the valuation of its investment in PassportCard/DavidShield as of December 31, 2019. Utilizing these assumptions, White Mountains determined that the fair value of its investment in PassportCard/DavidShield was $90 million as of December 31, 2019.
With a discounted cash flow analysis, small changes to inputs in a valuation model may result in significant changes to fair value. The following table presents the estimated effect on the fair value of White Mountains’s investment in PassportCard/DavidShield as of December 31, 2019, resulting from changes in key inputs to the discounted cash flow analysis, including the discount rate and terminal revenue growth rate:
The underlying investments of White Mountains’s private equity funds and hedge funds are typically publicly-traded and private securities and, as such, are subject to market risks that are similar to White Mountains’s common equity securities. The following table presents the estimated effect on fair values as of December 31, 2019 resulting from a 10% change and a 30% change in the market value of private equity fund and hedge fund investments:
The underlying investments of White Mountains’s multi-investor ILS funds consist primarily of catastrophe bonds, collateralized reinsurance investments and industry loss warranties. In addition to catastrophe event risk, the underlying investments are also subject to a variety of other risks including modeling, liquidity, market, collateral credit quality, counterparty financial strength, interest rate and currency risks.
See Note 3 - “Investment Securities” on page for tables that summarize the changes in White Mountains’s fair value measurements by level for the years ended December 31, 2019 and 2018 and for amount of total gains (losses) included in earnings attributable to net unrealized investment gains (losses) for Level 3 investments for years ended December 31, 2019, 2018 and 2017.
As of December 31, 2019, White Mountains owned $458 million of BAM Surplus Notes and has accrued $163 million in interest due thereon. In December 2019, BAM made a $32 million cash payment of principal and interest on the BAM Surplus Notes held by HG Global. In January 2020, BAM made an additional $65 million special cash payment of principal and interest on the BAM Surplus Notes. During 2018, BAM made a $23 million cash payment of note principal and interest on the BAM Surplus Notes.
Any write-down of the carried amount of the BAM Surplus Notes and/or the accrued interest thereon could adversely impact White Mountains’s results of operations and financial condition. See Item 1A., Risk Factors, “If BAM does not pay some or all of the principal and interest due on the BAM Surplus Notes, it could materially adversely affect our results of operations and financial condition.” on page 18.
As of December 31, 2019, goodwill and other intangible assets recognized in connection with business and asset acquisitions totaled $655 million, of which $631 million was attributable to White Mountains’s common shareholders. Goodwill and other intangible assets are recorded at their acquisition date fair values. The determination of the acquisition date fair values of goodwill and other intangible assets involves significant management judgment, the use of valuation models and assumptions that are inherently subjective. Goodwill and indefinite-lived intangible assets are not amortized but rather reviewed for potential impairment on an annual basis, or whenever indications of potential impairment exist. In the absence of any indications of potential impairment, the evaluation of goodwill and indefinite-lived intangible assets is performed no later than the interim period in which the anniversary of the acquisition date falls. Finite-lived intangible assets, which are amortized over their estimated economic lives, are reviewed for impairment only when events occur or there are changes in circumstances indicating that their carrying value may exceed fair value. Impairment exists when the carrying value of goodwill or other intangible assets exceeds fair value.
deterioration of general economic, market or business conditions, including due to outbreaks of contagious disease (including COVID-19);
an economic downturn or other economic conditions adversely affecting its financial condition; and