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 professional offices in Guilford, Connecticut, which house its investment and corporate finance functions and Boston, Massachusetts, which house its corporate accounting, reporting and internal audit functions.
The Company’s headquarters, registered office, principal executive office, and corporate accounting, reporting and internal audit offices are leased. White Mountains owns its investment and corporate finance office in Guilford, Connecticut. HG Global’s, BAM’s, MediaAlpha’s, Wobi’s and Buzzmove’s offices are leased. Management considers its office facilities suitable and adequate for its current level of operations.
The following table presents selected consolidated income statement data and ending balance sheet data for each of the five years ended through December 31, 2017:
As a result of the sale of OneBeacon, Sirius Group, Tranzact and Esurance Holdings, Inc. and its subsidiaries and Answer Financial Inc. and its subsidiaries (collectively, “Esurance”), White Mountains has reclassified the results from these businesses for the past five years in the table above to discontinued operations, net of tax. In 2017, discontinued operations, net of tax, includes a gain from sale of OneBeacon of $554 and income of $21 and a (loss) gain from sale of Sirius and Tranzact of $(1) and $3. In 2016, discontinued operations, net of tax, includes a gain from sale of Sirius and Tranzact of $363 and $52 and net income of $108 primarily related to the operations of OneBeacon. In 2015, discontinued operations, net of tax, includes a gain from sale of Esurance of $18 and net income of $117. In 2014, discontinued operations, net of tax, includes a loss on sale of other discontinued operations of $19, mostly offset by a gain from sale of Fireman’s Fund Insurance Company (“FFIC”) of $14, and net income of $261, primarily related to the operations of Sirius Group. See Note 19 - “Held for Sale and Discontinued Operations” on page.
As of December 31, 2015, White Mountains had $50 outstanding under its credit facility, which was repaid in April 2016.
During 2017, 2016, 2015, 2014 and 2013, White Mountains repurchased 832,725, 1,106,145, 387,495, 217,879 and 141,535 respectively, of its common shares through a combination of tender offers, open market transactions and other transactions.
For the year ended December 31, 2017, White Mountains repurchased and retired 832,725 of its common shares for $724 million at an average share price of $869.29, or approximately 95% of White Mountains’s December 31, 2017 adjusted book value per share. For the year ended December 31, 2017, White Mountains returned a total of $728 million of capital to shareholders through share repurchases and dividends.
White Mountains ended 2016 with book value per share of $785 and adjusted book value per share of $789, an increase of 13.2% and 13.3% for the year, including dividends. Comprehensive income attributable to common shareholders increased to $547 million in 2016 compared to $187 million in 2015. The increases in 2016 were driven by larger transaction related gains. In 2016, White Mountains recorded gains of $477 million and $82 million from the sale of Sirius Group and Tranzact. In 2015, White Mountains recognized $241 million of comprehensive income which was the result of a change in accounting for the investment in Symetra from the equity method to fair value, caused by White Mountains’s relinquishment of its representation on Symetra’s board of directors subsequent to Symetra entering into a merger agreement with Sumitomo Life. See Note 2 - “Significant Transactions” on page for a description of each transaction.
Written premiums and MSC in the HG Global/BAM segment were $77 million in 2016, compared to $55 million in 2015, from both higher pricing and higher issuance volume. BAM insured municipal bonds with par value of $11.3 billion in 2016, compared to $10.6 billion in 2015. Total pricing, which is premiums plus MSC weighted by the par value of municipal bonds insured, was 68 basis points, up from 52 basis points in 2015. As of December 31, 2016, BAM’s total claims paying resources were $644 million on total par insured of $33 billion. Total claims paying resources increased $43 million from December 31, 2015.
The pre-tax total return on invested assets was 2.7% for 2016, compared to 3.6% for 2015. White Mountains’s fixed income portfolio returned 2.4% for 2016, outperforming the longer duration Bloomberg Barclays U.S. Intermediate Aggregate Index return of 2.0%. White Mountains’s fixed income portfolio returned 0.2% for 2015, underperforming the longer duration Bloomberg Barclays U.S. Intermediate Aggregate Index return of 1.2%. White Mountains’s portfolio of common equity securities returned 6.2% for 2016, underperforming the S&P 500 Index return of 12.0%. White Mountains’s portfolio of common equity securities returned 33.2% for 2015. Excluding the results from the Symetra transaction, White Mountains’s portfolio of common equity securities returned 2.9% for 2015, outperforming the S&P 500 Index return of 1.4%. White Mountains’s other long-term investments portfolio returned 0.8% for 2016. The results were primarily attributable to favorable mark-to-market adjustments to the OneBeacon Surplus Notes, mostly offset by losses from private equity funds and private capital investments. White Mountains’s other long-term investment portfolio returned -10.1% in 2015, primarily attributable to unfavorable mark-to-market adjustments to the OneBeacon Surplus Notes and unfavorable results from energy exposed private equity funds and a distressed debt hedge fund.
The following tables presents goodwill and other intangible assets that are included in White Mountains’s adjusted book value as of December 31, 2017, 2016 and 2015:
(1) See Note 4 - “Goodwill and Other Intangible Assets” on page for details of other intangible assets.
The following table presents White Mountains’s consolidated financial results by industry for the years ended December 31, 2017, 2016 and 2015:
White Mountains conducts its operations through three segments: (1) HG Global/BAM, (2) MediaAlpha and (3) Other Operations. A discussion of White Mountains’s consolidated investment operations is included after the discussion of operations by segment. White Mountains’s segment information is presented in Note 13 - “Segment Information” on page to the Consolidated Financial Statements.
The following tables present the components of pre-tax income included in White 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 years ended December 31, 2017, 2016 and 2015:
HG Global/BAM Results-Year Ended December 31, 2017 versus Year Ended December 31, 2016
The following table presents the gross par value of primary and secondary market policies issued, the gross written premiums plus MSC and total pricing for the twelve months ended December 31, 2017 and 2016:
HG Global reported GAAP pre-tax income of $26 million and $22 million in 2017 and 2016, which was driven by $19 million and $18 million of interest income on the BAM Surplus Notes, respectively.
BAM is a mutual insurance company that is owned by its members. BAM’s results are consolidated into White
BAM’s claims paying resources increased 10% to $708 million at December 31, 2017. The increase was primarily driven by $37 million of MSC and a $44 million increase in the invested assets of the HG Re collateral trusts, partially offset by BAM’s 2017 statutory net loss of $25 million.
Beginning in 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. See “NON-GAAP FINANCIAL MEASURES” on page 51.
The following table presents the gross par value of primary and secondary market policies issued, the gross written premiums plus MSC and total pricing for the twelve months ended December 31, 2016 and 2015:
White Mountains reported $49 million of GAAP pre-tax losses on BAM in 2016, driven by $18 million of interest expense on the BAM Surplus Notes and $38 million of operating expenses, compared to $47 million of pre-tax losses in 2015, driven by $16 million of interest expense on the BAM Surplus Notes and $35 million of operating expenses.
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, 2017 and 2016:
Less: Gross par value of policies closed that were priced in a previous period
The following table presents the components of GAAP net loss and EBITDA included in White Mountains’s MediaAlpha segment for the years ended 2017, 2016 and 2015:
MediaAlpha’s cost of sales is comprised primarily of revenue share based payments to partners. Cost of sales were $136 million in 2017, compared to $98 million in 2016. The 39% increase in cost of sales was driven by the increase in revenues.
MediaAlpha Results-Year Ended December 31, 2016 versus Year Ended December 31, 2015
The Other Operations segment reported general and administrative expenses of $149 million in 2017, compared to $124 million in 2016. The increase in general and administrative expenses was driven by additional compensation expenses related to the severance of former company executives and higher incentive compensation costs resulting from the OneBeacon Transaction.
Share repurchases. For the year ended December 31, 2017, White Mountains repurchased and retired 832,725 of its common shares for $724 million at an average share price of $869.29, or approximately 95% of White Mountains’s December 31, 2017 adjusted book value per share.
White Mountains’s Other Operations segment reported pre-tax loss of $117 million in 2016 compared to pre-tax income of $161 million in 2015. The decrease is primarily due to the recognition of a $259 million unrealized investment gain on White Mountains’s investment in Symetra in the fourth quarter of 2015. This gain was the result of a change in accounting for the investment in Symetra from the equity method to fair value, caused by White Mountains’s relinquishment of its representation on Symetra’s board of directors subsequent to Symetra entering into a merger agreement with Sumitomo Life.
Share repurchases. White Mountains repurchased and retired 1,106,145 of its common shares for $887 million in 2016 at an average price per share of $802.08, or approximately 101% of White Mountains’s December 31, 2016 adjusted book value per share.
For purposes of discussing rates of return, all percentages are presented gross of management fees and trading expenses in order to produce a better comparison to benchmark returns, while all dollar amounts are presented net of management fees and trading expenses.
White Mountains’s pre-tax total return on invested assets was 5.6% for 2017 compared to 2.7% for 2016. The strong investment returns for 2017 benefited from the relatively short-duration of the fixed income portfolio and continued rally in equity markets, while returns for 2016 were driven by strong common equity returns and decent fixed income returns despite rising rates.
White Mountains maintains a high quality, short-duration fixed income portfolio. As of December 31, 2017, the fixed income portfolio duration, including short-term investments, was 3.4 years compared to 2.8 years as of December 31, 2016.
The increase in the duration of the fixed income portfolio over this period was primarily a result of adding modestly longer securities to the portfolio as prospective total returns became more attractive at higher interest rate levels.
In the third quarter of 2016, White Mountains established a relatively concentrated portfolio of high-yield fixed maturity investments managed by Principal. The portfolio is invested in issuers of U.S. dollar denominated publicly traded and 144A debt securities issued by corporations with generally at least one rating between “B-” and “BB+” inclusive by Standard and Poor’s or similar ratings from other rating agencies. As of December 31, 2017, the fair value of the high-yield fixed maturity investments was $203 million and the duration of the Principal high-yield portfolio was approximately 4.6 years.
Investment Returns-Year Ended December 31, 2016 versus Year Ended December 31, 2015
At the inception of the LGIM mandate, White Mountains entered into a foreign currency forward contract, which is recorded in other long-term investments, to manage its GBP foreign currency exposure related to this mandate. As of December 31, 2016, the contract had a total gross notional value of approximately $185 million (GBP 150 million) and a carrying value of $(1) million.
The following table presents the breakdown of White Mountains’s fixed maturity investments as of December 31, 2017 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:
White Mountains entered into foreign currency forward contracts to mitigate its foreign currency exposure for the invested assets managed by LGIM and a portion of the invested assets managed by Silchester and Highclere. In the fourth quarter of 2017, White Mountains closed the foreign currency forward contracts associated with the investment assets managed by Silchester and Highclere.
During the third quarter of 2015, Symetra announced that it entered into a merger agreement with Sumitomo Life pursuant to which Sumitomo Life would acquire all of the outstanding shares of Symetra. Following the announcement and Symetra shareholders’ November 5, 2015 meeting to approve the transaction, White Mountains relinquished its representation on Symetra’s board of directors. As a result, White Mountains changed its accounting for Symetra common shares from the equity method to fair value and recognized a $259 million pre-tax unrealized investment gain in the fourth quarter of 2015. The carrying value per Symetra share used in the calculation of White Mountains’s adjusted book value per share was $31.77 at December 31, 2015. On February 1, 2016, Symetra closed its merger agreement with Sumitomo Life and White Mountains received proceeds of $658 million, or $32 per common share. White Mountains recognized $5 million in pre-tax net investment gains associated with Symetra during 2016.
Symetra’s total revenues and net income through September 30, 2015 were $1.6 billion and $90 million. As of September 30, 2015, Symetra had total assets of $35.0 billion and shareholders’ equity of $3.1 billion. Since inception, White Mountains received a total of $149 million in cash dividends recorded as a reduction of White Mountains investment in Symetra under the equity method. White Mountains received a cash dividend of $2 million in the fourth quarter of 2015 recorded within net investment income.
White Mountains reported income tax expense of $13 million in 2015 on pre-tax income of $129 million. White Mountains’s effective tax rate for 2015 was different than the U.S. statutory rate of 35% due primarily to a full valuation allowance on all U.S. operations, a tax benefit recorded at BAM related to its MSC and income generated in jurisdictions with lower tax rates than the United States. For 2015, BAM had amounts recorded in shareholders’ equity related to its MSC that were available to partially offset its loss from continuing operations. As a result, BAM recorded a tax benefit of $9 million in net income from continuing operations, with an offsetting amount recorded in shareholders’ equity.
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.
For the 2017 period, White Mountains reported net income from OneBeacon of $21 million in discontinued operations. OneBeacon’s combined ratio for the 2017 period 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.
OneBeacon Results-Year Ended December 31, 2016 versus Year Ended December 31, 2015
For the year ended December 31, 2016, White Mountains reported net income from OneBeacon of $109 million, compared to $38 million for the year ended December 31, 2015. Solid underwriting results and investment returns drove the increase OneBeacon’s GAAP combined ratio increased to 97% for 2016 from 96% for 2015, primarily due to a higher expense ratio driven by a lower premium volume and changing business mix.
For the 2016 period, White Mountains reported Sirius Group’s comprehensive income of $27 million and a combined ratio of 102%, which was driven by $17 million of recorded losses from the Ecuador earthquake that occurred on April 16, 2016.
During 2015, White Mountains recognized $18 million of net income from discontinued operations related to the final settlement with Allstate for favorable development on loss reserves transferred in the sale of Esurance. Since the closing of the transaction through September 30, 2015, White Mountains received a net amount of $28 million from Allstate, primarily related to the favorable development on loss reserves.
Management believes that White Mountains’s cash balances, cash flows from operations and routine sales and maturities of investments are adequate to meet expected cash requirements for the foreseeable future on both a holding company and subsidiary level.
As of December 31, 2017, 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 did not declare or pay any preferred dividends in 2017. As of December 31, 2017, HG Global has accrued $236 million of dividends payable to holders of its preferred shares, $228 million of which is payable to White Mountains and eliminated in consolidation.
During 2017, MediaAlpha paid $5 million of dividends, $3 million of which was paid to White Mountains. As of December 31, 2017, MediaAlpha had $9 million of net unrestricted cash.
During 2017, White Mountains paid a $5 million common share dividend. As of December 31, 2017, the Company and its intermediate holding companies had $1,683 million of net unrestricted cash, short-term investments and fixed maturity investments, $866 million of common equity securities and $62 million of other long-term investments included in its Other Operations segment.
The WTM Bank Facility contains various affirmative, negative and financial covenants that White Mountains considers to be customary for such borrowings, including certain minimum net worth and maximum debt to capitalization standards. These covenants can restrict White Mountains in several ways, including its ability to incur additional indebtedness. An uncured breach of these covenants could result in an event of default under the WTM Bank Facility, which would allow lenders to declare any amounts owed under the WTM Bank Facility to be immediately due and payable. In addition, a default under the WTM Bank Facility could occur if certain of White Mountains’s subsidiaries fail to pay principal and interest on a credit facility, mortgage or similar debt agreement (collectively, “covered debt”), or fail to otherwise comply with obligations in such covered debt agreements where such a default gives the holder of the covered debt the right to accelerate at least $75 million of principal amount of covered debt.
On May 12, 2017, MediaAlpha entered into a secured credit facility (the “MediaAlpha Bank Facility”) with Western Alliance Bank, which had a total commitment of $20 million and a maturity date of May 12, 2020. On October 5, 2017, MediaAlpha refinanced the MediaAlpha Bank Facility in order to fund the acquisition of certain assets associated with the Health, Life and Medicare insurance business of Healthplans.com. The total commitment of the MediaAlpha Bank Facility was increased to $28 million and the maturity date was extended to October 6, 2020. The MediaAlpha Bank Facility consists of an $18 million term loan facility, which has an outstanding balance of $18 million as of December 31, 2017, and a revolving loan facility for $10 million, which has an outstanding balance of $6 million as of December 31, 2017.
The MediaAlpha Bank Facility replaced MediaAlpha’s previous credit facility (the “Previous MediaAlpha Bank Facility”) with Opus Bank, which had a total commitment of $20 million.
At December 31, 2017, White Mountains was in compliance with all of the covenants under all of its debt instruments and expects to remain in compliance for the foreseeable future.
(1) Amounts include BAM’s operating lease amounts of $1.8, $3.6 and $7.8 that are due in less than one year, one to three years and three to five years, are attributed to non-controlling interests.
The balances included in the table above regarding White Mountains’s long-term incentive compensation plans include amounts payable for performance shares and units. Exact amounts to be paid for performance shares cannot be predicted with certainty, as the ultimate amounts of these liabilities are based on the future performance of White Mountains and the market price of the Company’s common shares at the time the payments are made.
There are no provisions within White Mountains’s operating leasing agreements that would trigger acceleration of future lease payments.
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, 2017, White Mountains may repurchase an additional 643,130 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. During the third quarter of 2017, White Mountains completed a “modified Dutch auction” tender offer, through which it repurchased 586,732 of its common shares at a purchase price of $875 per share for a total cost of approximately $515 million, including expenses.
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 2015, the table also presents the average price per share as a percent of adjusted book value per share, including the estimated gain from the Sirius Group sale of $84 per share as of December 31, 2015 that was reported in the Company’s 2015 Form 10-K.
Detailed information concerning White Mountains’s cash flows during 2017, 2016 and 2015 follows:
Cash flows from continuing operations for the years ended 2017, 2016 and 2015
Net cash flows used for continuing operations was $62 million, $173 million and $66 million for the years ended 2017, 2016 and 2015. Cash used for continuing operations was lower in 2017 compared to 2016, primarily due to a $166 million use of cash in 2016 from the settlement of certain liabilities and transaction costs in connection with the Sirius Group and Tranzact sales. This decrease in cash used from operations was partially offset by an increase in incentive compensation and employee retirement payments in 2017 relative to 2016. White Mountains made long-term incentive payments totaling $22 million, $41 million and $31 million during 2017, 2016 and 2015. During 2017, White Mountains also paid $28 million in cash related to the departures of the Company’s former Chairman and CEO and former CFO. White Mountains does not believe that these trends will have a meaningful impact on its future liquidity or its ability to meet its future cash requirements as it has $1,683 million of net unrestricted cash, short-term investments and fixed maturity investments, $866 million of common equity securities and $62 million of other long-term investments as of December 31, 2017.
During 2017, Wobi borrowed ILS 68 million (approximately $19 million) from White Mountains under an internal credit facility.
On August 1, 2017, White Mountains purchased 37,409 newly-issued preferred shares of Buzzmove for GBP 4 million (approximately $5 million based upon the foreign exchange spot rate at the date of acquisition) and 5,808 common shares from the company founders for GBP 0.5 million (approximately $0.7 million based upon the foreign exchange spot rate at the date of acquisition).
On September 28, 2017, OneBeacon closed its definitive merger agreement with Intact and White Mountains received proceeds of $1,299 million, or $18.10 per OneBeacon common share.
On October 5, 2017, White Mountains purchased 131,579 newly-issued Class A common units of MediaAlpha for $13 million.
During 2016, the Company repurchased and retired 1,106,145 of its common shares for $887 million, which included 8,022 common shares repurchased under employee benefit plans.
During 2016, BAM received $38 million in MSC from its members.
On January 7, 2016, Wobi settled its acquisition of the remaining share capital of Cashboard for NIS 16 million (approximately $4 million based upon the foreign exchange spot rate at the date of acquisition).
On April 18, 2016, White Mountains completed the sale of Sirius Group to CMI for approximately $2.6 billion. $162 million of this amount was used to purchase certain assets to be retained by White Mountains out of Sirius Group, including shares of OneBeacon.
During 2016, White Mountains made gross investments into funds managed by Enlightenment Capital totaling $11 million and received a total of $14 million of distributions from these funds.
On August 4, 2016, White Mountains purchased 110,461 common shares of Buzzmove for GBP 4 million (approximately $5 million) and 54,172 shares of newly issued convertible preferred shares of Buzzmove for GBP 2 million (approximately $3 million), representing a 70.9% ownership share of Buzzmove on a fully converted basis.
During 2015, MediaAlpha borrowed $15 million under the term loan portion of the previous MediaAlpha bank facility and used the proceeds to make a $15 million return of capital payment to its unit holders, of which White Mountains received $9 million.
During 2015, White Mountains contributed $8 million to White Mountains Life Reinsurance (Bermuda) Ltd. and its U.S.-based service provider, White Mountains Financial Services LLC (collectively, “WM Life Re”).
During 2015, White Mountains increased its ownership interest in Wobi through (i) the purchase of common and convertible preferred shares from a non-controlling interest shareholder for NIS 35 million (approximately $9 million) and (ii) the purchase of newly-issued convertible preferred shares for NIS 56 million (approximately $15 million).
On May 27, 2015, White Mountains sold its interest in Hamer LLC and received cash proceeds of $24 million.
During 2015, White Mountains provided approximately $13 million of additional growth capital to Compare.com.
During 2015, White Mountains made gross investments into funds managed by Enlightenment Capital totaling $4 million and received a total of $5 million of distributions from these funds.
During 2015, White Mountains made gross investments into funds managed by Tuckerman Capital totaling $5 million and received a total of $2 million of distributions from these funds.
Total capital at White Mountains is comprised of White Mountains’s common shareholders’ equity, debt and non-controlling interests other than non-controlling interests attributable to mutuals and reciprocals. Total adjusted capital is a non-GAAP financial measure, which is derived by adjusting total capital (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. The reconciliation of total capital to total adjusted capital is included on page 46.
For 2015, total consolidated portfolio returns excluding Symetra and total common equity securities and other long-term investments returns excluding Symetra are non-GAAP financial measures that remove the $259 million pre-tax unrealized investment gain recognized in the fourth quarter of 2015 that was the result of the change in accounting for Symetra common shares from the equity method to fair value. White Mountains believes these measures make the returns in 2016 more comparable to 2015.
Assets and liabilities carried at fair value include substantially all of the investment portfolio, exchange traded and over the counter derivative instruments, and reinsurance assumed liabilities associated with variable annuity benefit guarantees. 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 observable prices and other inputs. Where appropriate, assets and liabilities measured at fair value have been adjusted for the effect of counterparty credit risk.
The valuation process described above is generally applicable to all of White Mountains’s fixed maturity investments. The techniques and inputs specific to asset classes within White Mountains’s fixed maturity investments for Level 2 securities that use observable inputs are as follows:
Mortgage and Asset-Backed Securities: The fair value of mortgage and asset-backed securities is determined from a pricing evaluation technique that uses information from market sources and leveraging similar securities. Key inputs include benchmark yields, reported trades, underlying tranche cash flow data, collateral performance, plus new issue data, as well as broker-dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers, and reference data including issuer, vintage, loan type, collateral attributes, prepayment speeds, default rates, recovery rates, cash flow stress testing, credit quality ratings and market research publications.
The following table presents White Mountains’s fair value measurements and the percentage of Level 3 investments as of December 31, 2017. The major security types were based on the legal form of the securities. White Mountains has disaggregated its fixed maturity investments based on the issuing entity type, which impacts credit quality, with debt securities issued by U.S. government entities carrying minimal credit risk, while the credit and other risks associated with other issuers, such as debt securities issued by corporations, foreign governments, municipalities or entities issuing mortgage and asset-backed securities vary depending on the nature of the issuing entity type.
(2) Excludes carrying value of $125.3 associated with hedge funds and private equity funds for which fair value is measured at NAV using the practical expedient.
White Mountains employs a number of procedures to assess the reasonableness of the fair value measurements for its other long-term investments, including obtaining and reviewing periodic and audited annual financial statements of hedge funds and private equity funds as well as discussing each fund’s pricing with the fund manager throughout the year. However, since the fund managers do not provide sufficient information to evaluate the pricing methods and inputs for each underlying investment, White Mountains considers the inputs to be unobservable. The fair value of White Mountains’s hedge fund and private equity fund investments has generally been determined using the fund manager’s net asset value (“NAV”). In the event that White Mountains believes the fair value of a hedge fund or private equity fund differs from the NAV reported by the fund manager due to illiquidity or other factors, White Mountains will adjust the reported NAV to more appropriately represent the fair value of its investment in the hedge fund or private equity fund. As of December 31, 2017 and 2016, White Mountains did not adjust the reported NAV of its investments in hedge funds and private equity funds.
White Mountains maintains a portfolio of other long-term investments that consists primarily of one hedge fund, ten private equity funds, non-controlling interests in private capital investments and foreign currency forward contracts. The underlying investments of the hedge fund and private equity funds are typically publicly traded and private common equity 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, 2017 resulting from a 10% change and a 30% change in the market value of other long-term investments:
(1) Includes non-controlling interests in common equity securities, limited liability companies and private convertible preferred securities.
As of December 31, 2017, White Mountains owned $499 million of BAM Surplus Notes and has accrued $126 million in interest due thereon. During 2017, with approval of the NYDFS, BAM paid $5 million to White Mountains for amounts owed under the BAM Surplus Notes. Because BAM is consolidated in White Mountains’s financial statements, the BAM Surplus Notes and accrued interest are classified as intercompany notes, carried at face value and eliminated in consolidation. However, the BAM Surplus Notes and accrued interest are carried as assets at HG Global, of which White Mountains owns 97% of the preferred equity, while the BAM Surplus Notes are carried as liabilities at BAM, which White Mountains has no ownership interest in and is completely attributed to non-controlling interests.
In the updates of this model that were performed as of December 31, 2017, White Mountains has (1) reflected the impact of the changes to the terms of the BAM Surplus Notes on expected future payments and (2) made more conservative assumptions about BAM’s future operating results, specifically forecasted increases in annual par insured volume and total premiums received, which are each expected to increase over the next six years and flatten thereafter. As a result, White Mountains now projects that the BAM Surplus Notes will be fully repaid approximately nine years prior to final maturity, which is six years later than projected under the previous forecast as of December 31, 2016.
The model assumptions are based on historical trends, current conditions and expected future developments. Whether actual results will follow forecast is subject to a number of risks and uncertainties.
No payment of interest or principal on the BAM Surplus Notes may be made without the approval of the NYDFS. BAM has stated its intention to seek regulatory approval to pay interest and principal on its surplus notes only to the extent that its remaining qualified statutory capital and other capital resources continue to support its outstanding obligations, business plan and AA stable rating from S&P.
projections of revenues, income (or loss), earnings (or loss) per share, dividends, market share or other financial forecasts;
These statements are based on certain assumptions and analyses made by White Mountains in light of its experience and perception of historical trends, current conditions and expected future developments, as well as other factors believed to be appropriate in the circumstances. However, whether actual results and developments will conform to its expectations and predictions is subject to a number of risks and uncertainties that could cause actual results to differ materially from expectations, including: