HG Global’s headquarters are located in Hamilton, Bermuda. BAM’s and Kudu’s headquarters are located in New York, New York. NSM’s headquarters are located in Conshohocken, Pennsylvania.
$ in Millions, Except Share and Per Share Amounts 2020 2019 2018 2017 2016
Basic - continuing operations $ 227.72 $ 130.02 $ (36.67) $ 11.56 $ (24.26)
Total basic income (loss) per share $ 226.97 $ 130.27 $ (41.76) $ 146.06 $ 80.11
Book value per share $ 1,259.18 $ 1,023.91 $ 896.00 $ 931.30 $ 785.01
(c)The income tax benefit in 2020 includes $131 million from the release of a deferred tax liability as a result of an internal reorganization in connection with the MediaAlpha IPO.
(d)White Mountains reported $45, $34, $52, $40 and $38 of non-controlling interest loss related to BAM in 2020, 2019, 2018, 2017 and 2016. Amount for 2017 also includes non-controlling interests in OneBeacon prior to its sale in 2017.
(f)White Mountains’s total assets increased in 2020, compared to 2019, driven primarily by the increase in the fair value of White Mountains investment in MediaAlpha and NSM’s acquisition of Kingsbridge. 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. White Mountains’s total assets decreased as a result of share repurchases in 2018, 2017 and 2016, and the sales of OneBeacon in 2017 and Sirius Group in 2016.
(h)White Mountains’s non-controlling interests includes the policyholders’ surplus of BAM. White Mountains’s non-controlling interests in 2016 also included amounts related to OneBeacon prior to its sale. Note 12 - “Common Shareholders’ Equity and Non-controlling Interests” on page for a detailed breakdown of non-controlling interests by consolidated entity.
(j)During 2020, 2019, 2018, 2017 and 2016 White Mountains repurchased 99,087, 5,679, 592,458, 832,725 and 1,106,145 respectively, of its common shares through a combination of tender offers, open market transactions and other transactions. See “LIQUIDITY AND CAPITAL RESOURCES” on page 55.
RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2020, 2019 AND 2018
On October 1, 2020, White Mountains entered into the Ark SPA and the Ark Acquisition Agreement. Under the terms of the Ark Acquisition Agreement, White Mountains agreed to contribute $605 million of equity capital to Ark, at a pre-money valuation of $300 million, and to purchase $41 million of shares from the Ark Sellers. White Mountains also agreed to contribute up to an additional $200 million of equity capital to Ark in 2021. In accordance with the Ark SPA, in the fourth quarter of 2020 White Mountains pre-funded/placed in escrow a total of $646 million in preparation for closing the transaction, which is reflected on the balance sheet within the Other Operations segment as of December 31, 2020.
On January 1, 2021, White Mountains closed the transaction in accordance with the terms of the Ark SPA. At closing, White Mountains owned 72% of Ark on a basic shares outstanding basis (63% on a fully-diluted, fully-converted basis, taking account of management’s equity incentives). If the additional $200 million is contributed in full, White Mountains will own 77% of Ark on a basic shares outstanding basis (68% on a fully-diluted, fully-converted basis). Management’s equity incentives are subject to an 8% rate of return threshold with no catch-up. The remaining shares are owned by employees. In the future, management rollover shareholders could earn additional shares in the company if and to the extent that White Mountains achieves certain multiple of invested capital return thresholds. These additional shares are generally eligible to vest in three equal tranches at multiple on invested capital (“MOIC”) thresholds of 2.0x, 2.5x and 3.0x. If fully earned, these additional shares would represent 13% of the shares outstanding at closing.
During 2020, White Mountains deployed approximately $1.0 billion in new business opportunities, including commitments related to the Ark Transaction, which closed on January 1, 2021. Also during 2020, White Mountains repurchased and retired 99,087 of its common shares for $85 million. As a result, White Mountains’s capital base is, for the time being, more or less fully deployed.
Gross written premiums and MSC collected in the HG Global/BAM segment totaled $131 million in 2020, compared to $107 million in 2019. Total pricing was 76 basis points in 2020, compared to 83 basis points in 2019. BAM insured municipal bonds with par value of $17.3 billion in 2020, compared to $12.8 billion in 2019. During 2020, BAM completed an assumed reinsurance transaction to insure municipal bonds with a par value of $37 million and, during 2019, BAM completed an assumed reinsurance transaction to insure municipal bonds with a par value of $1.1 billion.
In December 2020, BAM made a $30 million cash payment of principal and interest on the BAM Surplus Notes held by HG Global. In January 2020, BAM made a one-time $65 million cash payment of principal and interest on the BAM Surplus Notes held by HG Global. BAM’s total claims paying resources were $987 million as of December 31, 2020, compared to $938 million as of December 31, 2019.
NSM reported pre-tax loss of $13 million, adjusted EBITDA of $59 million, and commission and other revenues of $285 million in 2020, compared to pre-tax loss of $2 million, adjusted EBITDA of $48 million, and commission and other revenues of $233 million in 2019. Results for the year ended December 31, 2020 include the results, from the date of acquisition, of Kingsbridge, a leading provider of commercial lines insurance and consulting services for the professional contractor and freelancer markets in the United Kingdom, which was acquired on April 7, 2020, and Embrace, a nationwide provider of pet health insurance for dogs and cats, which NSM acquired on April 1, 2019.
Investment returns in 2020 were impacted by White Mountains’s decision to sell its portfolio of common equity securities during the third and fourth quarter of 2020 in preparation of funding the Ark Transaction as equity markets were up strongly in the fourth quarter. Investment returns in 2019 benefited from White Mountains’s decision to increase equity exposure after markets declined sharply at the end of 2018 ahead of the strong rally in equity markets during 2019.
Overview-Year Ended December 31, 2019 versus Year Ended December 31, 2018
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 White Mountains’s investment in MediaAlpha. 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.
Gross written premiums and MSC collected in the HG Global/BAM segment totaled $107 million in both 2019 and 2018. BAM insured municipal bonds with par value of $12.8 billion in 2019, compared to $12.0 billion in 2018. Total pricing was 83 basis points in 2019, compared to 93 basis points in 2018. During 2019, BAM completed assumed reinsurance transactions to insure municipal bonds with a par value of $1.1 billion and, during 2018, BAM completed assumed reinsurance transactions to insure municipal bonds with a par value of $2.2 billion.
In December 2019, BAM made a $32 million cash payment (which included a one-time $10 million cash payment) of principal and interest on the BAM Surplus Notes held by HG Global. BAM’s total claims paying resources were $938 million as of December 31, 2019, compared to $871 million as of December 31, 2018.
The following table presents White Mountains’s adjusted book value per share, a non-GAAP financial measure, as of December 31, 2020, 2019 and 2018 and reconciles this non-GAAP measure to book value per share, the most comparable GAAP measure. See “NON-GAAP FINANCIAL MEASURES” on page 63.
White Mountains’s common shareholders’ equity $ 3,906.0 $ 3,261.5 $ 2,843.1
Adjusted book value per share numerator $ 3,901.1 $ 3,225.1 $ 2,804.2
(Loss) gain on sale of discontinued operations, net of tax (2.3) .8 (17.2)
Net income (loss) attributable to White Mountains’s common shareholders 708.7 414.5 (141.2)
As of December 31, 2020, White Mountains conducted its operations through four segments: (1) HG Global/BAM, (2) NSM, (3) Kudu and (4) Other Operations. In addition, MediaAlpha was consolidated as a reportable segment until the date of the 2019 MediaAlpha Transaction. 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 14 - “Segment Information” on page.
As a result of the 2019 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 2019 MediaAlpha Transaction. See Note 2 - “Significant Transactions” on page.
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, 2020, 2019 and 2018:
Earned insurance and reinsurance premiums $ 18.7 $ 4.1 $ - $ 22.8
Net written premiums $ 33.6 $ 5.1 $ - $ 38.7
Earned insurance and reinsurance premiums $ 13.1 $ 3.2 $ - $ 16.3
Pre-tax income (loss) $ 54.1 $ (44.1) $ - $ 10.0
(2) During 2019, BAM issued policy endorsements for certain policies issued in periods prior to the second quarter of 2018. The impact of 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.
Net investment income - BAM Surplus Notes 22.9 - (22.9) -
HG Global/BAM Results-Year Ended December 31, 2020 versus Year Ended December 31, 2019
Total gross par value of market policies issued $ 17,339.4 $ 12,847.6
HG Global reported GAAP pre-tax income of $50 million in 2020, compared to $54 million in 2019. The decrease in pre-tax income was driven primarily by a decrease in interest income on the BAM Surplus Notes partially offset by an increase in income from insurance operations. HG Global’s results in 2020 included $19 million of interest income on the BAM Surplus Notes, compared to $27 million in 2019.
BAM is a mutual insurance company that is owned by its members. BAM’s results are consolidated into White Mountains’s GAAP financial statements and attributed to non-controlling interests. White Mountains reported GAAP pre-tax losses from BAM of $45 million in 2020, compared to $44 million in 2019. The increase in the pre-tax loss was driven primarily by a lower investment results and higher general and administrative expenses partially offset by a decrease in interest expense on the BAM surplus notes. BAM’s results included $19 million of interest expense on the BAM Surplus Notes and $54 million of general and administrative expenses in 2020, compared to $27 million of interest expense on the BAM Surplus Notes and $49 million of general and administrative expenses in 2019.
In December 2020, BAM made a $30 million cash payment of principal and interest on the BAM Surplus Notes held by HG Global. Of this payment, $22 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 December 2019, BAM made a $32 million cash payment (which included a one-time $10 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.
Total pricing, which reflects both gross written premiums and MSC from new business, decreased to 83 basis points in 2019, compared to 93 basis points in 2018. See “NON-GAAP FINANCIAL MEASURES” on page 63. The decrease in total pricing was driven primarily by a decrease in pricing in the primary market. Pricing in the primary market decreased to 51 basis points in 2019, compared to 71 basis points in 2018, driven primarily by lower interest rates and tighter credit spreads. Pricing in the assumed reinsurance and secondary markets, which is more transaction-specific than pricing in the primary market, increased to 219 basis points in 2019, compared to 150 basis points in 2018, partially offsetting the decline in pricing in the primary market.
Total gross written premiums and MSC collected $ 106.7 $ 106.7
In January 2020, 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. The changes to the debt service model 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.
The following table presents BAM’s total claims paying resources as of December 31, 2020, 2019 and 2018:
Accrued interest receivable on BAM Surplus Notes 162.7 - (162.7) -
(2) Under GAAP, interest accrues daily on the BAM Surplus Notes. Under U.S. Statutory accounting, interest is not accrued on the BAM Surplus Notes until it has been approved for payment by insurance regulators.
NSM is a full-service MGU and program administrator for specialty property and casualty insurance. The company places insurance in niche sectors such as specialty transportation, real estate, social services and pet. On behalf of its insurance carrier partners, NSM typically manages all aspects of the placement process, including product development, marketing, underwriting, policy issuance and claims. NSM earns commissions based on the volume and profitability of the insurance that it places. NSM does not take insurance risk. On May 11, 2018, White Mountains acquired NSM.
NSM reported GAAP pre-tax loss of $13 million, adjusted EBITDA of $59 million, and commission and other revenues of $285 million in 2020. NSM reported pre-tax loss of $2 million, adjusted EBITDA of $48 million, and commission and other revenues of $233 million in 2019. NSM’s pre-tax loss included interest expense of $22 million and amortization of other intangible assets of $27 million in 2020, compared to $17 million and $19 million, respectively, in 2019. Results for the year ended December 31, 2020 include the results, from the date of acquisition, of Kingsbridge, a leading provider of commercial lines insurance and consulting services for the professional contractor and freelancer markets in the United Kingdom, which was acquired on April 7, 2020, and Embrace, a nationwide provider of pet health insurance for dogs and cats, which NSM acquired on April 1, 2019. In addition to the acquisitions of Kingsbridge and Embrace, GAAP pre-tax loss, adjusted EBITDA and commission and other revenues in 2020 benefited from growth in the pet, real estate and specialty transportation verticals, partially offset by declines in the U.K. vertical excluding Kingsbridge.
NSM’s business consists of over 16 active programs that are broadly categorized into six market verticals. Kingsbridge was added to the U.K. vertical in the second quarter of 2020.
Specialty Transportation $ 310.2 $ 85.5 $ 290.2 $ 77.6 $ 136.8 $ 43.0
Total $ 1,060.7 $ 285.1 $ 897.7 $ 233.1 $ 594.7 $ 151.8
Year Ended December 31, 2020 versus Year Ended December 31, 2019
Pet: NSM’s pet controlled premium and commission and other revenues increased 95% and 83% in 2020, compared to 2019, driven primarily by the acquisition of Embrace in April 2019 and strong demand in 2020 as pet adoption increased substantially as a result of the COVID-19 pandemic. The increase in commission and other revenues was less than the increase in premium due to business mix, as affinity business grew faster than direct market business.
Other: NSM’s other controlled premium and commission and other revenues increased 8% and 13% in 2020, compared to 2019. The increase in controlled premium was driven primarily by rate increases. Commission and other revenues increased as the professional liability business, which has higher commission rates than retail, grew while the retail business declined.
Year Ended December 31, 2019 versus Year Ended December 31, 2018
Specialty Transportation: NSM’s specialty transportation controlled premium and commission and other revenues increased significantly in 2019, compared to 2018, driven primarily by the acquisition of KBK in November 2018 and an increase in contingent commissions and fees in 2019. KBK contributed $160 million of controlled premium and $32 million of commission and other revenues in 2019.
United Kingdom: NSM’s United Kingdom controlled premium and commission and other revenues increased 43% and 32% in 2019, compared to 2018, driven primarily by the acquisition of Fresh Insurance in May 2018 and the establishment of First Underwriting in the fourth quarter of 2018. Fresh Insurance’s controlled premium and commission and other revenues contributed $62 million and $18 million in 2019, respectively, compared to $46 million and $16 million, respectively, from the date of acquisition, May 11, 2018, to the end of 2018. First Underwriting contributed $38 million of controlled premium and $3 million of commission and other revenues in 2019.
As of December 31, 2020, Kudu has deployed a total of $386 million in 13 asset management firms, with an average cash yield to Kudu at inception of 10.3%. The firms have combined assets under management of approximately $45 billion, spanning a range of asset classes, including real estate, real assets, wealth management, hedge funds, private equity and alternative credit strategies.
The following table presents the components of GAAP net income, EBITDA and adjusted EBITDA included in White Mountains’s Kudu segment for the year ended December 31, 2020 and the period from April 4, 2019, the date of the Kudu Transaction, to December 31, 2019:
Kudu reported pre-tax income of $28 million and total revenues of $46 million for the year ended December 31, 2020, compared to pre-tax income of $11 million and total revenues of $21 million for the period from April 4, 2019, the date of the Kudu Transaction, to December 31, 2019. Kudu reported adjusted EBITDA of $22 million for the year ended December 31, 2020 compared to $9 million for the period from April 4, 2019, the date of the Kudu Transaction, to December 31, 2019. The increases in Kudu’s pre-tax income, total revenues and adjusted EBITDA were driven primarily by net investment income earned from the $121 million (including approximately $3 million of transaction costs) in new deployments that Kudu made in 2020 and 2019. Pre-tax income and total revenues included $16 million of unrealized gains on Kudu’s Participation Contracts in 2020, compared to $6 million of unrealized gains on Kudu’s Participation Contracts in the period from April 4, 2019, the date of the Kudu Transaction, to December 31, 2019.
Over time, Kudu’s revenues will fluctuate with increases and decreases in assets under management and fee levels at Kudu’s underlying asset management business, which are impacted by increases and decreases in financial markets, such as those experienced during 2020 during the COVID-19 pandemic. Kudu’s portfolio diversification, in particular its emphasis on private capital and its de-emphasis on long-only, should continue to provide some downside protection to financial market declines.
On February 26, 2019, MediaAlpha completed the 2019 MediaAlpha Transaction. White Mountains deconsolidated MediaAlpha as a result of the 2019 MediaAlpha Transaction and stopped reporting it as a segment. Prior to the MediaAlpha IPO, White Mountains’s non-controlling equity interest in MediaAlpha was accounted for at fair value within other long-term investments. Subsequent to the MediaAlpha IPO, White Mountains’s non-controlling equity interest in MediaAlpha is accounted for at fair value based on the publicly traded share price of MediaAlpha’s common stock. As of December 31, 2020 and 2019, the fair value of White Mountains’s investment in MediaAlpha was $802 million and $180 million. See Summary of Investment Results on page 49.
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 year ended December 31, 2018:
MediaAlpha Results-For the Period from January 1, 2019 to February 26, 2019
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 2019 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 2019 MediaAlpha Transaction in general and administrative expenses.
Other Operations Results-Year Ended December 31, 2020 versus Year Ended December 31, 2019
White Mountains’s Other Operations segment reported pre-tax income of $393 million in 2019, compared to pre-tax loss of $153 million in 2018. The change was driven primarily by higher investment returns and White Mountains’s investment in MediaAlpha. In 2019, White Mountains’s Other Operations segment reported net realized and unrealized investment gains from White Mountains’s investment in MediaAlpha of $180 million and $68 million of realized gain from the 2019 MediaAlpha Transaction. White Mountains’s Other Operations segment reported net realized and unrealized investment gains of $220 million in 2019, compared to net realized and unrealized investment losses of $101 million in 2018. See “Summary of Investment Results” on page 49. The Other Operations segment reported general and administrative expenses of $123 million in 2019, compared to $94 million in 2018. The increase was driven primarily by higher incentive compensation costs, driven primarily by an increase in both White Mountains’s share price and the assumed harvest percentage on outstanding performance shares.
White Mountains’s total investment results include results from all segments. 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.
The following table presents the pre-tax investment return for White Mountains’s consolidated portfolio for the years ended December 31, 2020, 2019 and 2018:
Prior to the MediaAlpha IPO, White Mountains’s investment in MediaAlpha was presented within other long-term investments. Subsequent to the MediaAlpha IPO, White Mountains presents its investment in MediaAlpha in a separate line item on the balance sheet. Amounts for periods prior to the MediaAlpha IPO have been reclassified to be comparable to the current period.
White Mountains’s returns for the years ended December 31, 2020, 2019 and 2018 are as follows:
Investment returns in 2020 were impacted by White Mountains’s decision to sell its portfolio of common equity securities during the third and fourth quarter of 2020 in preparation for funding the Ark Transaction as equity markets were up strongly in the fourth quarter. Investment returns in 2019 benefited from White Mountains’s decision to increase equity exposure after markets declined sharply at the end of 2018 ahead of the strong rally in equity markets during 2019.
Investment in MediaAlpha, Common Equity Securities and Other Long-Term Investments Results
White Mountains’s portfolio of common equity securities and other long-term investments returned 4.9% in 2020. White Mountains’s portfolio of its investment in MediaAlpha, common equity securities and other long-term investments returned 80.0% in 2020, which included $746 million of net investment income and net realized and unrealized investment gains from MediaAlpha.
White Mountains’s portfolio of common equity securities returned 3.6% in 2020, underperforming the S&P 500 Index return of 18.4%. The results for 2020 were driven primarily by White Mountains’s lack of common equity exposure during the fourth quarter equity market rally and the relative underperformance from White Mountains’s international common equity portfolios prior to the liquidation of these positions. White Mountains’s portfolio of common equity securities returned 29.1% in 2019, underperforming the S&P 500 Index return of 31.5%. The results for 2019 were driven primarily by relative underperformance in White Mountains’s international common equity portfolios.
White Mountains’s portfolio of ETFs is designed to provide investment results that generally correspond to the performance of the S&P 500 Index. White Mountains’s portfolio of ETFs was fully liquidated as of December 31, 2020 and amounted to $536 million as of December 31, 2019. In 2020 and 2019, White Mountains’s portfolio of ETFs essentially earned the effective index return, before expenses, over the periods in which White Mountains was invested in these funds.
During the third quarter of 2020, White Mountains submitted redemption requests to Silchester and Highclere to liquidate White Mountains’s full investments in the unit trusts. At the beginning of the fourth quarter of 2020, White Mountains received $107 million in total proceeds relating to the Silchester and Highclere redemptions. White Mountains’s actively managed common equity portfolio was $147 million as of December 31, 2019. White Mountains’s actively managed common equity portfolio returned -11.0% in 2020 and 24.2% in 2019, underperforming the S&P 500 Index return of 18.4% and 31.5%, respectively. The results were driven primarily by the lack of exposure to actively managed common equities in the fourth quarter of 2020 and relative underperformance in international stocks versus the S&P 500 Index over these periods.
White Mountains maintains a portfolio of other long-term investments that consists primarily of unconsolidated entities, including Kudu’s Participation Contracts, private equity funds, hedge funds, the ILS Funds and private debt instruments. White Mountains’s portfolio of other long-term investments was $787 million and $676 million as of December 31, 2020 and 2019. The change in other long-term investments was primarily driven by additional investments in Kudu’s Participation Contracts.
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, 2020, White Mountains had approximately $51 million invested in these four ILS Funds. As of December 31, 2019, White Mountains had approximately $41 million invested in three ILS Funds.
White Mountains’s fixed income portfolio, including short-term investments, was $1.4 billion as of December 31, 2020 and 2019. The duration of White Mountains’s fixed income portfolio, including short-term investments, was 3.2 years and 2.8 years as of December 31, 2020 and 2019. White Mountains’s fixed income portfolio included fixed maturity investments and short-term investments in the Collateral Trusts of $432 million and $320 million as of December 31, 2020 and 2019.
White Mountains’s fixed income portfolio returned 4.9% in 2020, underperforming the Bloomberg Barclays U.S. Intermediate Aggregate Index return of 5.6%. White Mountains’s fixed income portfolio returned 6.1% in 2019, underperforming the Bloomberg Barclays U.S. Intermediate Aggregate Index return of 6.7%. The results for both periods were driven primarily by the short duration positioning of White Mountains’s fixed income portfolio as interest rates declined significantly.
Investment returns in 2019 benefited from White Mountains’s decision to increase equity exposure after markets declined sharply at the end of 2018 ahead of the strong rally in equity markets during 2019. Investment returns in 2018 were adversely impacted by the sharp decline in equity markets in the fourth quarter.
White Mountains’s portfolio of common equity securities and other long-term investments returned 20.8% in 2019, compared to -3.6% in 2018. White Mountains’s portfolio of its investment in MediaAlpha, common equity securities and other long-term investments returned 36.9% in 2019, which included $188 million of net investment income and net unrealized investment gains from MediaAlpha.
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.
As of December 31, 2019 and 2018, White Mountains’s had approximately $147 million and $250 million of common equity securities invested with third-party registered investment advisers. In the third quarter of 2019, White Mountains redeemed $82 million from its Highclere and Silchester accounts in order to reduce its international exposure in the context of the size of its overall portfolio of common equity securities. White Mountains’s actively managed common equity portfolio returned 24.2% in 2019, underperforming the S&P 500 Index return of 31.5%. White Mountains’s actively managed common equity portfolio returned -15.6% for 2018, underperforming the S&P 500 Index return of -4.4%. The results in both periods were driven primarily by relative underperformance in the international common equity portfolios managed by Highclere and Silchester.
In the second quarter of 2019, White Mountains made an investment in three multi-investor ILS funds managed by Elementum. As of December 31, 2019, White Mountains had approximately $41 million invested in these three ILS funds and a commitment to invest an additional $10 million in a fourth ILS fund.
White Mountains’s fixed income portfolio returned 6.1% in 2019, underperforming the Bloomberg Barclays U.S. Intermediate Aggregate Index return of 6.7%. The short duration 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% in 2018, outperforming the Bloomberg Barclays U.S. Intermediate Aggregate Index return of 0.9%. The short duration positioning of White Mountains’s fixed income portfolio contributed to the outperformance relative to the benchmark as interest rates rose during the period.
The following table presents the composition of White Mountains’s total operations investment portfolio as of December 31, 2020 and 2019:
(1)Includes mortgage-backed securities, which carry the full faith and credit guaranty of the U.S. government (i.e., GNMA) or are guaranteed by a government sponsored entity (i.e., FNMA, FHLMC).
The cost or amortized cost and carrying value of White Mountains’s fixed maturity investments as of December 31, 2020 is presented below by contractual maturity. Actual maturities could differ from contractual maturities because certain borrowers may call or prepay their obligations with or without call or prepayment penalties.
The following table presents the composition of White Mountains’s other long-term investments portfolio as of December 31, 2020 and 2019:
Kudu Participation Contracts $ 400.6 50.9 % $ 266.5 39.4 %
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, 2020, 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, 2020:
White Mountains reported income tax benefit of $21 million in 2020 on pre-tax income from continuing operations of $645 million. The difference between White Mountains’s effective tax rate and the current U.S. federal statutory rate of 21% was driven primarily by a $131 million release of a deferred tax liability as a result of an internal reorganization in connection with the MediaAlpha IPO and income generated in jurisdictions with lower tax rates than the United States. Also in 2020, $43 million of tax expense was recorded for state income taxes, withholding taxes and the establishment of a partial valuation allowance on deferred tax assets of various companies, entities and investments that are included in the Other Operations segment.
White Mountains reported income tax benefit of $4 million in 2018 on pre-tax loss from continuing operations of $178 million. White Mountains’s effective tax rate was different from the current U.S. federal statutory rate of 21% primarily due to a full valuation allowance on the net deferred tax assets of Guilford, income generated in jurisdictions with lower tax rates than the United States, withholding taxes and a tax benefit recorded at BAM related to its MSC collected. In 2018, BAM recorded a tax benefit of $9 million associated with the valuation allowance on taxes related to MSC collected that is included in the effective tax rate.
On April 18, 2016, White Mountains completed the sale of Sirius Group to CM International Pte. Ltd. and CM Bermuda Limited (collectively “CMI”). In connection with the sale, White Mountains indemnified Sirius Group against the loss of certain interest deductions. In late October 2018, the Swedish Administrative Court ruled against Sirius Group on its appeal of the Swedish Tax Agency’s denial of these interest deductions, which related to periods prior to the sale of Sirius Group to CMI. As a result, in 2018 White Mountains recorded a loss of $17 million within net (loss) gain on sale of discontinued operations reflecting the value of these interest deductions.
For the years ended December 31, 2020 and 2019, White Mountains recognized a net foreign currency translation (loss) gain of $(2) million and $1 million that is included within net gain from sale of Sirius Group in discontinued operations. Sirius Group has appealed the decision to the Swedish Administrative Court of Appeal. See Note 19 - “Held for Sale and Discontinued Operations” on page.
The primary sources of cash for White Mountains’s operating subsidiaries are expected to be commissions, fees and premium collections, net investment income, proceeds from sales, repayments and maturities of investments, contributions from holding companies and capital raising activities. The primary uses of cash are expected to be general and administrative expenses, broker commission expenses, cost of sales, insurance acquisition expenses, loss payments, purchases of investments, payments to tax authorities, payments on and repurchases/retirements of its debt obligations, distributions made to holding companies, distributions to non-controlling interest holders and, from time to time, purchases of operating subsidiaries.
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 operating subsidiary level.
As of December 31, 2020, 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. During 2020, HG Global declared and paid a $23 million preferred dividend, of which $22 million was paid to White Mountains. As of December 31, 2020, HG Global had accrued $377 million of dividends payable to holders of its preferred shares, of which $364 million was payable to White Mountains and eliminated in consolidation. As of December 31, 2020, 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, 2020, HG Re had $768 million of statutory capital and surplus and $827 million of assets held in the Collateral Trusts pursuant to the FLRT with BAM.
On a monthly basis, BAM deposits cash equal to ceded premiums, net of ceding commissions, due to HG Re under the FLRT directly into the Regulation 114 Trust. The Regulation 114 Trust target balance is equal to gross ceded unearned premiums and unpaid ceded loss and LAE expenses, if any. If, at the end of any quarter, the Regulation 114 Trust balance is below the target balance, funds will be withdrawn from the Supplemental Trust and deposited into the Regulation 114 Trust in an amount equal to the shortfall. If, at the end of any quarter, the Regulation 114 Trust balance is above 102% of the target balance, funds will be withdrawn from the Regulation 114 Trust and deposited into the Supplemental Trust.
Through 2024, the interest rate on the BAM Surplus Notes is a variable rate equal to the one-year U.S. Treasury rate plus 300 basis points, set annually. During 2021, the interest rate on the BAM Surplus Notes will be 3.1%. Beginning in 2025, 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.
During 2020, NSM did not make any distributions to unitholders. As of December 31, 2020, NSM had $48 million of net unrestricted cash.
During 2020, Kudu distributed $4 million to unitholders, substantially all of which was paid to White Mountains. As of December 31, 2020, Kudu had $8 million of net unrestricted cash and short-term investments.
The following table summarizes White Mountains’s capital structure as of December 31, 2020 and 2019:
On April 7, 2020, NSM amended its secured credit facility (the “NSM Bank Facility”) with Ares Capital Corporation in connection with the acquisition of Kingsbridge. Under the amendment, the total commitment increased from $234 million, comprised of term loans of $224 million and a revolving credit loan of $10 million, to $291 million, comprised of term loans of $276 million, including £43 million (approximately $52 million based upon the foreign exchange spot rate as of the date of the transaction) in a GBP term loan, and a revolving credit loan commitment of $15 million. The term loans under the NSM Bank Facility mature on May 11, 2026, and the revolving loan matures on November 11, 2025.
Interest on the NSM Bank Facility accrues at a floating interest rate equal to the three-month LIBOR plus an applicable margin. In connection with the amendment, the reference rates for USD denominated borrowings increased. The USD-LIBOR rate floor increased to 1.25% and the margin over USD-LIBOR increased from a range of 4.25% to 4.75% to a range of 5.50% to 6.00%. For GBP denominated borrowings, the GBP-LIBOR rate floor is 1.25% and the margin over GBP-LIBOR ranges from 6.00% to 6.50%. The margins over the reference interest rates vary within the range depending on the consolidated total leverage ratio of NSM.
(1) Borrowings for the year ended December 31, 2020 included $52 for the funding of the acquisition of Kingsbridge. Borrowings for the year ended December 31, 2019, included $20 and $23 for the funding of the acquisitions of Embrace and the Renewal Rights.
As of December 31, 2020, $148 million of the outstanding term loans were hedged by the swap and $130 million of the outstanding term loans were unhedged. For the twelve months ended December 31, 2020, the weighted average effective interest rate on the outstanding term loans that were hedged, including the effect of the amortization of debt issuance costs and the effect of the interest rate swap, was 9.0%, and the weighted average effective interest rate on the outstanding term loans that were unhedged, including the effect of the amortization of debt issuance costs, was 7.6%. For the twelve months ended December 31, 2020, the weighted average interest rate on the total NSM Bank Facility, including the effect of the amortization of debt issuance costs and the effect of the interest rate swap, was 8.4%.
On December 23, 2019, Kudu entered into a secured credit facility (the “Kudu Bank Facility”) with Monroe Capital Management Advisors, LLC to provide funding for distributions to unitholders and fund new investments and related transaction expenses. As of December 31, 2020, the Kudu Bank Facility has a maximum borrowing capacity of $124 million, which is comprised of a revolving credit loan commitment of $5 million, an initial term loan of $57 million and a delayed-draw term loan of $62 million. The term loans and revolving credit loans, under the Kudu Bank Facility, mature in 2025. During 2020, Kudu borrowed $32 million in term loans under the Kudu Bank Facility and made no repayments of principal. As of December 31, 2020, the term loans had an outstanding balance of $89 million and the revolving credit loan, with a $5 million capacity, was undrawn.
As of December 31, 2020, debt in White Mountains’s Other Operations segment consisted of two secured credit facilities. The first credit facility has a maximum borrowing capacity of $16 million, which is comprised of 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. During 2020, White Mountains’s Other Operations segment made no borrowings and made repayments of $2 million on the term loans under the first credit facility. As of December 31, 2020, the term loans had an outstanding balance of $9 million and the revolving credit loan, with a $2 million capacity, was undrawn. The second credit facility has a maximum borrowing capacity of $15 million, which is comprised of a term loan of $9 million, a delayed-draw term loan of $4 million and a revolving credit loan commitment of $2 million, all with a maturity date of July 2, 2025. As of December 31, 2020, the term loans had an outstanding balance of $9 million and the revolving credit loan, with a $2 million capacity, was undrawn.
Millions Due in Less Than One Year Due in One to Three Years Due in Three to Five Years Due After
(2) Amounts include BAM’s operating lease amounts of $2.2, $4.4, $3.6 and $0.6 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 following table presents common shares repurchased by the Company as well as the average price per share as a percent of December 31, 2020 adjusted book value per share and market value per share.
Detailed information concerning White Mountains’s cash flows during 2020, 2019 and 2018 follows:
During 2019, Kudu deployed $203 million in six asset management firms, of which $121 million (including approximately $3 million of transaction costs) was funded subsequent to the date of the Kudu Transaction. During 2019, prior to the date of the Kudu Transaction, Kudu deployed $82 million, of which $41 million was from White Mountains and is included in cash flows from investing activities.
During 2020, BAM repaid $70 million of principal and paid $25 million of accrued interest on the BAM Surplus Notes.
During 2020, White Mountains’s Other Operations segment made no borrowings and repaid $2 million in term loans under its credit facilities.
On April 7, 2020, NSM acquired 100% of Kingsbridge for £107 million (approximately $132 million based upon the foreign exchange spot rate at the date of acquisition).
On October 30, 2020, MediaAlpha completed its initial public offering. In the offering, White Mountains sold 3,609,894 shares and received total proceeds of $64 million. White Mountains also received $55 million of net proceeds related to a dividend recapitalization at MediaAlpha, which was recorded as net investment income.
In the fourth quarter of 2020, White Mountains pre-funded/placed in escrow a total of $646 million in preparation for closing the Ark Transaction.
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 had not made any payment
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. Also during the fourth quarter of 2019, Kudu obtained a committed $124 million credit facility.
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 the ILS Funds.
During 2018, the Company declared and paid a $4 million cash dividend to its common shareholders.
During 2018, NSM borrowed $81 million of term loans under the NSM Bank Facility, which included $51 million to fund the acquisition of Fresh Insurance and $30 million to fund the acquisition of KBK. Additionally, during 2018, NSM repaid $1 million on the term loans and $2 million on the revolving credit loan under the NSM Bank Facility.
On May 18, 2018, NSM acquired 100% of Fresh Insurance for a purchase price of £37 million (approximately $50 million based upon the foreign exchange spot rate at the date of acquisition).
White Mountains does not have any related party transactions to report as of December 31, 2020.
Under GAAP, White Mountains is required to carry the BAM Surplus Notes, including accrued interest, at nominal value with no consideration for time value of money. Based on a debt service model that forecasts operating results for BAM through maturity of the BAM Surplus Notes, the present value of the BAM Surplus Notes, including accrued interest and using an 8.0% discount rate, was estimated to be $147 million, $157 million and $146 million less than the nominal GAAP carrying values as of December 31, 2020, 2019 and 2018, respectively.
The value of HG Global’s unearned premium reserve, net of deferred acquisition costs, was $142 million, $119 million and $106 million as of December 31, 2020, 2019 and 2018, respectively.
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 33.
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 38.
NSM’s EBITDA and adjusted EBITDA are non-GAAP financial measures. EBITDA is a non-GAAP financial measure that excludes interest expense on debt, income tax benefit (expense), depreciation and amortization of other intangible assets from GAAP net income (loss). Adjusted EBITDA is a non-GAAP financial measure that excludes certain other items in GAAP net income (loss) in addition to those excluded from EBITDA. The adjustments relate to (i) change in fair value of contingent consideration earnout liabilities, (ii) non-cash equity-based compensation expense, (iii) impairments of intangible assets, (iv) acquisition-related transaction expenses, (v) fair value purchase accounting adjustment for deferred revenue, (vi) investments made in the development of new business lines and (vii) restructuring expenses. A description of each follows:
•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 initially recorded at fair value as part of purchase accounting, with the periodic change in the fair value of these liabilities recorded as income or an expense.
•Non-cash equity-based compensation expense - Represents non-cash expenses related to NSM’s management compensation emanating from the grants of equity units.
•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.
White Mountains believes that these non-GAAP financial measures are useful to management and investors in evaluating NSM’s performance. See page 43 for the reconciliation of NSM’s GAAP net income (loss) to EBITDA and adjusted EBITDA.
Kudu's EBITDA and adjusted EBITDA are non-GAAP financial measures. EBITDA is a non-GAAP financial measure that excludes interest expense on debt, income tax expense (benefit), depreciation and amortization of other intangible assets from GAAP net income (loss). Adjusted EBITDA is a non-GAAP financial measure that excludes certain other items in GAAP net income (loss) in addition to those excluded from EBITDA. The adjustments relate to (i) net unrealized investment (gains) losses on Kudu's Participation Contracts, (ii) non-cash equity-based compensation expense and (iii) acquisition-related transaction expenses. A description of each adjustment follows:
•Non-cash equity-based compensation expense - Represents non-cash expenses related to Kudu's management compensation that are settled with equity units in Kudu.
•Acquisition-related transaction expenses - Represents costs directly related to Kudu's transactions to acquire Participation Contracts, such as external lawyer, banker, consulting and placement agent fees, which are not capitalized and are expensed under GAAP.
For the Twelve Months Ended December 31, 2020 For the Twelve Months Ended December 31, 2019
GAAP Returns Remove MediaAlpha Returns - Excluding MediaAlpha GAAP Returns Remove MediaAlpha Returns - Excluding MediaAlpha
Management’s Discussion and Analysis of Financial Condition and Results of Operations discuss the Company’s consolidated financial statements, which have been prepared in accordance with GAAP. The financial statements presented herein include all adjustments considered necessary by management to fairly present the financial condition, results of operations and cash flows of White Mountains.
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, 2020, approximately 73% of the investment portfolio recorded at fair value was priced based upon quoted market prices or other observable inputs.
Investments valued using Level 1 inputs include White Mountains’s investment in MediaAlpha subsequent to the MediaAlpha IPO, common equity securities and fixed maturity investments, primarily investments in U.S. Treasuries and short-term investments, which include U.S. Treasury Bills. For investments in active markets, White Mountains uses the quoted market prices provided by outside pricing services to determine fair value.
In circumstances where quoted market prices are unavailable or are not considered reasonable, White Mountains estimates the fair value using industry standard pricing methodologies and observable inputs such as benchmark yields, reported trades, broker-dealer quotes, issuer spreads, benchmark securities, bids, offers, credit ratings, prepayment speeds, reference data including research publications and other relevant inputs. Given that many fixed maturity investments do not trade on a daily basis, the outside pricing services evaluate a wide range of fixed maturity investments by regularly drawing parallels from recent trades and quotes of comparable securities with similar features. The characteristics used to identify comparable fixed maturity investments vary by asset type and take into account market convention.
As of December 31, 2020, White Mountains owned a portfolio of other long-term investments valued at $787 million, that consisted primarily of unconsolidated entities, including Kudu’s Participation Contracts, private equity funds, the ILS Funds and private debt instruments. As of December 31, 2020, $614 million of White Mountains’s other long-term investments, that consisted primarily of unconsolidated entities, including 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 19. As of December 31, 2020, $173 million of White Mountains’s other long-term investments, consisting of private equity funds and the 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, 2020, White Mountains’s most significant other long-term investments that are valued using Level 3 measurements include Kudu’s Participation Contracts and PassportCard/DavidShield.
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 Kudu’s Participation Contracts as of December 31, 2020, resulting from increases and decreases to the discount rates and terminal cash flow exit multiples used in the discounted cash flow analysis:
On a quarterly basis, White Mountains values its investment in PassportCard/DavidShield using a discounted cash flow model. The discounted cash flow valuation model includes key inputs such as projections of future revenues and earnings, a discount rate and a terminal revenue growth rate. The expected future cash flows are based on management judgment, considering current performance, budgets and projected future results. The discount rate reflects the weighted average cost of capital, considering comparable public company data, adjusted for risks specific to the business and industry. The terminal revenue growth rate is based on company, industry and macroeconomic expectations of perpetual revenue growth subsequent to the end of the discrete period in the discounted cash flow analysis.
When making its fair value selection, which is within a range of reasonable values derived from the discounted cash flow model, White Mountains considers all available information, including any relevant market multiples and multiples implied by recent transactions, facts and circumstances specific to PassportCard/DavidShield’s businesses and industries, and any infrequent or unusual results for the period.
Premiums and commission revenues from leisure travel insurance placed by PassportCard declined dramatically in the twelve months ended December 31, 2020 due to the COVID-19 pandemic. This decline was modestly offset by increased revenues from international private medical insurance placed by DavidShield. PassportCard/DavidShield expects these trends to continue until global travel resumes. During the third quarter of 2020, PassportCard/DavidShield curtailed its global expansion efforts in response to the impact of the COVID-19 pandemic.
4.5% $ 109 $ 102 $ 95 $ 90 $ 84
3.5% $ 107 $ 100 $ 94 $ 88 $ 83
Sensitivity Analysis of Likely Returns on Other Long-term Investments - NAV
The underlying investments of White Mountains’s private equity 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, 2020 resulting from a 10% change and a 30% change in the market value of private equity funds:
Millions December 31, 2020 10% Decline 10% Increase 30% Decline 30% Increase
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.
As of December 31, 2020, White Mountains owned $388 million of BAM Surplus Notes and has accrued $156 million in interest due thereon. In December 2020, BAM made a $30 million cash payment of principal and interest on the BAM Surplus Notes held by HG Global. In January 2020, BAM made a one-time $65 million cash payment of principal and interest on the BAM Surplus Notes held by HG Global. During 2019, BAM made a $32 million cash payment (which included a one-time $10 million cash payment) of principal and interest on the BAM Surplus Notes.
As of December 31, 2020, White Mountains debt service model indicated that the BAM Surplus Notes would be fully repaid between six and seven years prior to final maturity, which is generally consistent with the results of the update of the debt service model as of December 31, 2019. The debt service model assumes both par insured and total pricing gradually increase from 2021 to 2024, and flatten thereafter. Assumptions regarding future trends for these factors are a matter of significant judgment, and whether actual results will follow the model is subject to a number of risks and uncertainties.
As of December 31, 2020, goodwill and other intangible assets recognized in connection with business and asset acquisitions totaled $782 million, of which $754 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.
•claims arising from catastrophic events, such as hurricanes, earthquakes, floods, fires, terrorist attacks or severe winter weather;
•the trends and uncertainties from the COVID-19 pandemic, including judicial interpretations on the extent of insurance coverage provided by insurers for COVID-19 pandemic related claims;
•deterioration of general economic, market or business conditions, including due to outbreaks of contagious disease (including the COVID-19 pandemic) and corresponding mitigation efforts;
•changes in domestic or foreign laws or regulations, or their interpretation, applicable to White Mountains, its competitors or its customers; and
The financial statements and supplementary data have been filed as a part of this Annual Report on Form 10-K as indicated in the Index to Consolidated Financial Statements and Financial Statement Schedules appearing on page 80 of this report.