MediaAlpha recognized cost of sales of $245 in 2018, compared to $136 in 2017, and NSM recognized general and administrative expenses of $62 and broker commission expenses of $29 in the 2018 ownership period.
White Mountains reported $52 of non-controlling interest loss related to BAM in 2018, compared to $40 in 2017. Amounts also include non-controlling interests in OneBeacon, Sirius Group and Tranzact prior to their sales.
White Mountains’s total assets decreased as a result of share repurchases, and the sales of OneBeacon in 2017 and Sirius Group in 2016.
White Mountains’s total debt increased as a result of the acquisition of NSM in 2018. As of December 31, 2015, White Mountains had $50 outstanding under its credit facility, which was repaid in April 2016. See Note 5 - “Debt” on page.
White Mountains’s non-controlling interests decreased as a result of the sale of OneBeacon in 2017 and Sirius Group in 2016. See Note 11 - “Common Shareholders’ Equity and Non-controlling Interests” on page for a detailed breakdown of non-controlling interests by consolidated entity.
During 2018, 2017, 2016, 2015, and 2014, White Mountains repurchased 592,458, 832,725, 1,106,145, 387,495, and 217,879 respectively, of its common shares through a combination of tender offers, open market transactions and other transactions.
White Mountains ended 2018 with book value per share of $896 and adjusted book value per share of $888, a decrease of 3.7% and 2.8% for the year, including dividends. Comprehensive loss attributable to common shareholders was $146 million in 2018 compared to comprehensive income attributable to common shareholders of $631 million in 2017. The decrease in book value per share and adjusted book value per share and the comprehensive loss attributable to common shareholders in 2018 was driven primarily by investment results, which were adversely impacted by the sharp decline in equity markets in the fourth quarter of 2018, while comprehensive income attributable to common shareholders in 2017 was driven primarily by the $557 million gain from the OneBeacon Transaction.
During 2018, White Mountains repurchased and retired 592,458 of its common shares for $519 million at an average share price of $877. The average share price paid was approximately 98% and 99%, respectively, of White Mountains’s December 31, 2018 book value per share and adjusted book value per share. The average share price paid was approximately 92% and 93%, respectively, of White Mountains’s December 31, 2018 book value per share including the estimated gain from the MediaAlpha transaction and adjusted book value per share including the estimated gain from the MediaAlpha transaction. During 2018, White Mountains also allocated roughly $300 million to new business opportunities, ending the year with approximately $1.2 billion of undeployed capital.
Gross written premiums and MSC collected in the HG Global/BAM segment totaled $107 million in 2018, compared to $101 million in 2017. BAM insured municipal bonds with par value of $12.0 billion in 2018, compared to $10.4 billion in 2017. Total pricing was 93 basis points in 2018, compared to 99 basis points in 2017. BAM’s total claims paying resources were $871 million as of December 31, 2018, compared to $708 million as of December 31, 2017. The increase in claims paying resources was driven by positive cash flow from operations as well as the $100 million reinsurance agreement that BAM entered into with Fidus Re in the second quarter of 2018. During 2018, BAM paid $23 million of principal and interest on the BAM Surplus Notes held by HG Global.
White Mountains’s pre-tax total return on invested assets was -1.7% for 2018, compared to 5.6% for 2017.
White Mountains’s portfolio of common equity securities and other long-term investments returned -3.6% for 2018, outperforming the S&P 500 Index return of -4.4%, driven primarily by a favorable fair value adjustment to White Mountains’s investment in PassportCard/DavidShield and strong private equity fund returns, partially offset by weak returns from the non-U.S. actively managed common equity portfolios. White Mountains’s portfolio of common equity securities and other long-term investments returned 12.7% for 2017, underperforming the S&P 500 Index returns of 21.8%, driven primarily by losses from foreign currency forward contracts and unconsolidated entities.
White Mountains’s fixed income portfolio returned 1.2% for 2018, outperforming the Bloomberg Barclays U.S. Intermediate Aggregate Index return of 0.9%. White Mountains’s fixed income portfolio returned 3.5% for 2017, outperforming the Bloomberg Barclays U.S. Intermediate Aggregate Index return of 2.3%.
Overview-Year Ended December 31, 2017 versus Year Ended December 31, 2016
White Mountains ended 2017 with book value per share of $931 and adjusted book value per share of $915, an increase of 18.8% and 16.1% for the year, including dividends. The increases were driven primarily by the gain from the OneBeacon Transaction. Comprehensive income attributable to common shareholders increased to $631 million in 2017, compared to $547 million in 2016. Comprehensive income attributable to common shareholders in both 2017 and 2016 was driven primarily by large transaction gains. In 2017, OneBeacon was acquired by Intact Financial Corporation in an all-cash transaction for $18.10 per share, from which White Mountains received $1.3 billion in proceeds and recorded a net gain of $557 million. In 2016, White Mountains recorded net gains of $477 million and $82 million from the sales of Sirius Group and Tranzact. See Note 2 - “Significant Transactions” on page for a description of each transaction.
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. The average share price paid was approximately 93% and 95%, respectively, of White Mountains’s December 31, 2017 book value per share and 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.
MediaAlpha reported break-even pre-tax income in 2017, compared to pre-tax loss of $4 million in 2016. MediaAlpha’s adjusted EBITDA was $11 million in 2017, compared to $7 million in 2016. The increases in pre-tax income and adjusted EBITDA were driven primarily by growth in the HLM vertical and the P&C vertical. In October 2017, MediaAlpha acquired certain assets associated with the Health, Life and Medicare insurance business of Healthplans.com. The acquired assets included domain names, advertiser and publisher relationships, traffic acquisition accounts, and owned and operated websites. During the fourth quarter of 2017, which includes the annual open enrollment period for health and Medicare coverages, business from the acquired assets contributed $2 million of both pre-tax income and adjusted EBITDA.
The following table presents White Mountains’s consolidated financial results by industry for the years ended December 31, 2018, 2017 and 2016:
White Mountains conducts its operations through four segments: (1) HG Global/BAM, (2) NSM (3) MediaAlpha and (4) 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, 2018, 2017 and 2016:
BAM charges an insurance premium on each municipal bond insurance policy it writes. A portion of the premium is an MSC and the remainder is a risk premium. In the event of a municipal bond refunding, the MSC from the original issuance can be reutilized, in effect serving as a credit against the total insurance premium on the refunding of the municipal bond. Issuers of debt insured by BAM are members of BAM so long as any of their BAM-insured debt is outstanding, and as members they have certain interests in BAM, including the right to vote for BAM’s directors and to receive dividends, if declared.
Gross written premiums and MSC collected in the HG Global/BAM segment totaled $107 million in 2018, compared to $101 million in 2017. In 2018, BAM insured $12.0 billion of municipal bonds, $11.0 billion of which were in the primary market, up 15% from 2017. During the fourth quarter of 2018, BAM completed an assumed reinsurance transaction to insure municipal bonds with a par value of $2.2 billion for gross written premiums and MSC collected of $20 million.
The following table presents the gross par value of primary and secondary market policies issued and a reconciliation of GAAP gross written premiums to gross written premiums and MSC from new business for the twelve months ended December 31, 2018 and 2017:
Total pricing was 99 basis points in 2017, up from 68 basis points in 2016. Total pricing in the primary market increased to 74 basis points in 2017, compared to 58 basis points in 2016.
The following table presents the gross par value of primary and secondary market policies issued and a reconciliation of GAAP gross written premiums to gross written premiums and MSC from new business 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 primarily by $19 million and $18 million of interest income on the BAM Surplus Notes, respectively.
White Mountains reported $50 million of GAAP pre-tax losses on BAM in 2017, driven primarily by $19 million of interest expense on the BAM Surplus Notes and $42 million of operating expenses, compared to $49 million of pre-tax losses in 2016, driven primarily by $18 million of interest expense on the BAM Surplus Notes and $38 million of operating expenses.
During 2017, BAM paid $5 million of principal and interest on the BAM Surplus Notes held by HG Global.
On May 18, 2018, NSM acquired 100% of Fresh Insurance, an insurance broker that focuses on non-standard personal lines products in the United Kingdom. NSM paid $50 million of upfront cash consideration for its equity interest in Fresh Insurance. The purchase price is subject to additional adjustments based upon growth in EBITDA during two earnout periods ending in February 2020 and February 2022. In connection with the acquisition, NSM recorded a contingent consideration earnout liability of $8 million.
On December 3, 2018, NSM acquired all of the net assets of KBK, a specialty MGU focused on the towing and transportation space. NSM paid $60 million of upfront cash consideration for the net assets of KBK. NSM recognized $59 million of goodwill and other intangible assets, reflecting estimated acquisition date fair values. The relative fair values of goodwill and other intangible assets recognized in connection with the acquisitions of KBK had not yet been determined as of December 31, 2018. The purchase price is subject to additional adjustments based upon growth in EBITDA during three earnout periods ending in December 2019, December 2020 and December 2021. In connection with the acquisition, NSM expects to record a contingent consideration earnout liability in the first quarter of 2019.
The contingent consideration earnout liabilities related to these acquisitions are subject to adjustment based upon reported EBITDA, projected EBITDA, and present value factors for the acquired entities. During the 2018 ownership period, NSM recognized pre-tax expense of $3 million for the change in the fair value of its contingent consideration earnout liabilities for Fresh Insurance and its other U.K.-based operations. Any future adjustments to contingent consideration earnout liabilities under the agreements will also be recognized through pre-tax income. As of December 31, 2018, NSM recorded contingent consideration earnout liabilities of $20 million.
(1) NSM’s results are from May 11, 2018, the date of acquisition, through December 31, 2018 (“the 2018 ownership period”).
During the 2018 ownership period, NSM reported pre-tax loss of $5 million, commission revenues of $95 million, and adjusted EBITDA of $16 million. NSM’s pre-tax loss also included interest expense of $8 million and amortization of other intangible assets of $8 million.
Broker commission expenses and general and administrative expenses were $29 million and $62 million in the 2018 ownership period.
(1) Controlled premium are total premiums placed by NSM during the period.
Year Ended December 31, 2018 versus Year Ended December 31, 2017
Specialty Transportation: NSM’s specialty transportation controlled premium and commission and fee revenue growth in 2018 was due in part to organic growth in the ACI program. In addition, profit commissions in this vertical were higher in 2018 compared to 2017, as there were no major catastrophes in 2018, while profit commissions were significantly reduced in 2017 due to hurricanes Harvey and Irma.
Real Estate: NSM’s real estate controlled premium and commission and fee revenue grew in 2018 primarily due to the CHAMP program, which places coverages for coastal condominium associations and high-end hotels. CHAMP grew with greater penetration in the southeast U.S. market and coverages with existing policyholders. CHAMP also benefited from customer goodwill produced by exceptional claims handling in the wake of the hurricanes in 2017.
Social Services: NSM’s social services controlled premium and commission and fee revenue experienced a decline in 2018 primarily due to the continued pull back of a key carrier partner and in response to elevated loss ratios. NSM has established relationships with two new carrier partners in the Social Services vertical for 2019.
United Kingdom: NSM’s United Kingdom controlled premium and commission and fee revenue grew significantly in 2018 due to the acquisition of Fresh Insurance.
Other: NSM’s other controlled premium and commission and fee revenue increased due to growth in the retail brokerage program, partially offset by a reduction in the worker’s compensation program.
Specialty Transportation: The decrease in NSM’s specialty transportation commission and fee revenue in 2017 compared to 2016 was driven primarily by decreased profit commissions from the impact of hurricanes Harvey and Irma in 2017.
United Kingdom: NSM acquired Vantage Holdings in the fourth quarter of 2016, which generated nearly all of the controlled premium and commission and fee revenues in the United Kingdom vertical for 2017.
Other: NSM’s other controlled premium and commission and fee revenue experienced modest growth in 2017 over 2016 with the growth in the retail brokerage and architect programs offset by the shutdown of the dental program.
MediaAlpha reported GAAP pre-tax income of $9 million and adjusted EBITDA of $32 million in 2018, compared to break-even pre-tax income and adjusted EBITDA of $11 million in 2017. MediaAlpha reported advertising and commission revenues of $296 million in 2018, compared to $163 million in 2017. The increase in GAAP pre-tax income, adjusted EBITDA and revenues were driven primarily by growth in MediaAlpha’s P&C vertical, driven by increased demand from advertisers, and growth in the HLM vertical, driven by strong revenues generated from assets acquired from Healthplans.com in the fourth quarter of 2017. Revenues from MediaAlpha’s P&C vertical were $162 million in 2018, compared to $88 million in 2017, while revenues from the HLM vertical were $100 million in 2018 compared to $56 million in 2017.
MediaAlpha’s cost of sales is comprised primarily of revenue share based payments to partners, which are correlated to and vary with revenue volume. Cost of sales were $245 million in 2018, compared to $136 million in 2017. The increase in cost of sales was driven primarily by the increase in revenues. MediaAlpha’s general and administrative expenses were $32 million in 2018, compared to $16 million in 2017. The increase in general and administrative expenses in 2018 compared to 2017 was driven primarily by the recognition of non-cash equity-based compensation expense of $12 million that relates to MediaAlpha’s Class B units held by certain employees. The units entitle the award recipient to participate in distributions from MediaAlpha once a cumulative distribution threshold has been met. Compensation expense is recognized when it is deemed probable that the distribution threshold will be met in the future.
On October 5, 2017, MediaAlpha acquired certain assets associated with the Health, Life and Medicare insurance business of Healthplans.com for a purchase price of $28 million. The acquired assets include domain names, advertiser and publisher relationships, traffic acquisition accounts, and owned and operated websites. During the fourth quarter of 2017, which includes the annual open enrollment period for health and Medicare coverages, business from the acquired assets contributed $15 million of revenues and $2 million of both pre-tax income and adjusted EBITDA.
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 increase in cost of sales was driven primarily by the increase in revenues.
The Other Operations segment reported general and administrative expenses of $94 million in 2018, compared to $149 million in 2017. General and administrative expenses in 2017 included additional compensation expenses related to the severance of former company executives and higher incentive compensation costs resulting from the OneBeacon Transaction.
White Mountains’s Other Operations segment reported pre-tax income of $32 million in 2017 compared to pre-tax loss of $117 million in 2016. The results were driven primarily by strong equity returns in 2017. Net realized and unrealized investment gains were $133 million in 2017, compared to net realized and unrealized investment losses of $28 million in 2016. Net investment income increased to $44 million in 2017 from $23 million in 2016. The increase was driven by a higher invested asset base driven primarily from the proceeds received from the OneBeacon Transaction. See “Summary of Investment Results” on page 43. Other revenues were $6 million in 2017, compared to $20 million in 2016, driven primarily by lower third-party investment management fee income at WM Advisors.
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 primarily by additional compensation expenses related to the severance of former company executives and higher incentive compensation costs resulting from the OneBeacon Transaction.
The following table presents the pre-tax investment returns for White Mountains’s consolidated portfolio, including the returns from discontinued operations, for the years ended December 31, 2018, 2017 and 2016:
(1) For 2018, investment returns are calculated using a daily weighted average of investments held. For periods prior to 2018, investment returns are calculated using a quarterly weighted average of investments held.
White Mountains’s pre-tax total return on invested assets was -1.7% for 2018, compared to 5.6% for 2017. Investment returns for 2018 were adversely impacted by the sharp decline in equity markets in the fourth quarter. Investment returns for 2017 benefited from the relatively short-duration of the fixed income portfolio and strong equity markets.
White Mountains’s portfolio of common equity securities and other long-term investments returned -3.6% for 2018 compared to 12.7% for 2017. White Mountains’s portfolio of common equity securities and other long-term investments represented approximately 49% and 32% of total invested assets as of December 31, 2018 and 2017. The increase in this percentage was driven primarily by additions to the common equity security portfolio and a decline in the investment asset base principally due to share repurchase activity during the year.
As of December 31, 2018, White Mountains’s relationships with third-party registered investment advisers (the “actively managed common equity portfolios”) were with Highclere International Investors (“Highclere”), who invests in small to mid-cap equity securities listed in markets outside of the United States and Canada through a unit trust, Silchester International Investors (“Silchester”), who invests in value-oriented non-U.S. equity securities through a unit trust and Lateef Investment Management (“Lateef”), a growth at a reasonable price adviser managing a highly concentrated separate account portfolio of U.S. mid-cap and large-cap growth companies. As of December 31, 2018 and 2017, White Mountains had approximately $250 million and $296 million of common equity securities invested with third-party registered investment advisers. White Mountains’s actively managed common equity portfolios returned -15.6% for 2018, underperforming the S&P 500 Index return of -4.4%. The underperformance was driven primarily by weak returns from the non-U.S. common equity portfolios managed by Highclere and Silchester. White Mountains’s actively managed common equity portfolios returned 25.2% for 2017, outperforming the S&P 500 Index return of 21.8%. The outperformance was driven primarily by strong returns from the common equity portfolios managed by Silchester and Lateef.
White Mountains maintains a portfolio of other long-term investments that primarily consists of unconsolidated entities, private equity funds and hedge funds. White Mountains’s other long-term investments portfolio returned 10.0% for 2018. The results were driven primarily by a $26 million fair value adjustment to White Mountains’s investment in PassportCard/DavidShield, which was driven by strong profitable growth in its core businesses, and strong private equity fund returns. White Mountains’s other long-term investments portfolio returned -5.8% for 2017. The results were driven primarily by losses from foreign currency forward contracts and unconsolidated entities. These losses were partially offset by strong performance from private equity funds and favorable fair value adjustments to surplus notes issued to OneBeacon in connection with the sale of its runoff business (the “OneBeacon Surplus Notes”).
As of both December 31, 2018 and 2017, the fixed income portfolio duration, including short-term investments, was 3.4 years.
White Mountains’s fixed income portfolio returned 1.2% for 2018, outperforming the Bloomberg Barclays U.S. Intermediate Aggregate Index return of 0.9%. These results were driven primarily by strong performance from White Mountains’s overweight exposure to municipal obligations versus the benchmark. In addition, White Mountains’s short duration positioning of the fixed income portfolio also contributed to the outperformance relative to the benchmark as rates rose during the period. However, White Mountains’s overweight exposure to debt securities issued by corporations lessened the positive relative impact of having a short duration portfolio when credit spreads widened significantly in the fourth quarter. White Mountains’s fixed income portfolio returned 3.5% for 2017, outperforming the Bloomberg Barclays U.S. Intermediate Aggregate Index return of 2.3% as short-term yields rose during the period.
White Mountains’s pre-tax total return on invested assets was 5.6% for 2017, compared to 2.7% for 2016. Investment returns for 2017 benefited from the relatively short-duration of the fixed income portfolio and strong equity markets. Investment returns for 2016 were driven primarily by strong equity markets and decent fixed income returns despite rising interest rates
White Mountains’s portfolio of common equity securities and other long-term investments returned 12.7% for 2017, compared to 4.3% for 2016. White Mountains’s portfolio of common equity securities and other long-term investments represented approximately 32% and 15% of total invested assets as of December 31, 2017 and 2016. The increase in this percentage was driven primarily by additions to the common equity security portfolio and a decline in the investment asset base due to the OneBeacon Transaction and share repurchase activity during the year.
White Mountains’s portfolio of common equity securities returned 20.1% for 2017, underperforming the S&P 500 Index return of 21.8%. White Mountains’s portfolio of common equity securities returned 6.2% for 2016, underperforming the S&P 500 Index return of 12.0%. As of December 31, 2017 and 2016, White Mountains had approximately $570 million and $322 million invested in ETFs. In 2017 and 2016, the portfolio of ETFs essentially earned the effective index return, before expenses, over the period in which White Mountains was invested in these funds. As of December 31, 2017 and 2016, White Mountains had approximately $296 million and $152 million of common equity securities invested with third-party registered investment advisers. White Mountains’s actively managed common equity portfolios returned 25.2% in 2017, outperforming the S&P 500 Index return of 21.8%. The outperformance was driven primarily by strong returns from the common equity portfolios managed by Silchester and Lateef. White Mountains’s actively managed common equity portfolios returned 4.0% in 2016, underperforming the S&P 500 Index return of 12.0%, driven primarily by weak returns from the common equity portfolio managed by Lateef.
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.
White Mountains’s fixed income portfolio returned 3.5% for 2017, outperforming the Bloomberg Barclays U.S. Intermediate Aggregate Index return of 2.3% as short-term yields rose during the period. White Mountains’s fixed income portfolio returned 2.4% for 2016, outperforming the Bloomberg Barclays U.S. Intermediate Aggregate Index return of 2.0%, as interest rates rose in the period.
The following table presents the composition of White Mountains’s total operations investment portfolio as of December 31, 2018 and 2017:
The following table presents the breakdown of White Mountains’s fixed maturity investments as of December 31, 2018 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:
The cost or amortized cost and carrying value of White Mountains’s fixed maturity investments as of December 31, 2018 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.
As of December 31, 2018, White Mountains had foreign currency exposure on $244 million of net assets primarily relating to common equity securities managed by Silchester and Highclere, NSM’s U.K. operations, Buzz, Wobi and certain unconsolidated entities.
The following table presents the fair value of White Mountains’s foreign denominated net assets as of December 31, 2018:
(1) Includes net assets of NSM’s U.K. operations, Wobi and Buzz.
The Company and its Bermuda-domiciled subsidiaries are not subject to Bermuda income tax under current Bermuda law. In the event there is a change in the current law such that taxes are imposed, the Company and its Bermuda-domiciled subsidiaries would be exempt from such tax until March 31, 2035, pursuant to the Bermuda Exempted Undertakings Tax Protection Act of 1966. The Company has subsidiaries and branches that operate in various other jurisdictions around the world that are subject to tax in the jurisdictions in which they operate.
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 most of the net deferred tax assets at U.S. operations, 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. For BAM, MSC collected and the related taxes thereon are recorded directly to non-controlling interest equity, while the valuation allowance on such taxes is recorded through the income statement. As a result, 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. See Note 6 - “Income Taxes” on page.
White Mountains reported income tax benefit of $8 million in 2017 on pre-tax income from continuing operations of $8 million. White Mountains’s effective tax rate was different from the 2017 U.S. federal statutory rate of 35% primarily due to a full valuation allowance on most of the net deferred tax assets at U.S. operations net of the impact of tax rate changes, income generated in jurisdictions with lower tax rates than the United States, a tax benefit recorded at BAM related to its MSC collected and consolidated pre-tax income being near break-even. For BAM, MSC collected and the related taxes thereon are recorded directly to non-controlling interest equity, while the valuation allowance on such taxes is recorded through the income statement. As a result, BAM recorded a tax benefit of $10 million associated with the valuation allowance on taxes related to MSC collected that is included in the effective tax rate.
White Mountains reported income tax benefit of $33 million in 2016 on pre-tax loss from continuing operations of $147 million. White Mountains’s effective tax rate was different from the 2016 U.S. federal statutory rate of 35% primarily due to a full valuation allowance on all of the net deferred tax assets at U.S. operations including a $21 million tax benefit generated by the sale of Tranzact recognized in continuing operations related to the reversal of a valuation allowance that resulted from income that was recognized within discontinued operations, income generated in jurisdictions with lower tax rates than the United States and a tax benefit recorded at BAM related to its MSC collected. For BAM, MSC collected and the related taxes thereon are recorded directly to non-controlling interest equity, while the valuation allowance on such taxes is recorded through the income statement. As a result, BAM recorded a tax benefit of $11 million associated with the valuation allowance on taxes related to MSC collected that is included in the effective tax rate.
White Mountains has entered into a number of sale transactions that have been accounted for as discontinued operations within its consolidated financial statements. See Note 19 - “Held for Sale and Discontinued Operations” on page for detailed financial information on each business sold.
On September 28, 2017, Intact Financial Corporation completed its acquisition of OneBeacon Insurance Group, Ltd. in an all-cash transaction for $18.10 per share.
For the year ended December 31, 2016, White Mountains reported net income from OneBeacon of $109 million in discontinued operations, driven primarily by investment results. 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.
In October 2018, the Swedish Administrative Court ruled against Sirius Group on its appeal of the Swedish Tax Agency’s denial of certain interest deductions relating to periods prior to the sale of Sirius Group to CMI. In connection with the sale, White Mountains indemnified Sirius Group against the loss of certain tax attributes, including those related to these interest deductions. As a result, in the third quarter of 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. Sirius Group has appealed the decision to the Swedish Administrative Court of Appeal.
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, 2018, HG Re had statutory capital and surplus of $699 million, $757 million of assets held in the Collateral Trusts pursuant to the FLRT with BAM and $3 million of cash and investments outside the Collateral Trusts.
Effective January 1, 2014, HG Global and BAM agreed to change the interest rate on the BAM Surplus Notes for the five years ending December 31, 2018 from a fixed rate of 8.0% to a variable rate equal to the one-year U.S. treasury rate plus 300 basis points, set annually. In 2018, BAM exercised its option to extend the variable rate period for an additional three years and during 2019, the interest rate will be 5.70%. At the end of the variable rate period, the interest rate will be fixed at the higher of the then current variable rate or 8.0%. BAM is required to seek regulatory approval to pay interest and principal on the BAM Surplus Notes only to the extent that its capital resources continue to support its outstanding obligations, business plan and rating. No payment of interest or principal on the BAM Surplus Notes may be made without the approval of the New York State Department of Financial Services (“NYDFS”).
BAM has stated its intention to seek regulatory approval to pay interest and principal on its surplus notes 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. BAM repaid $18 million of the BAM Surplus Notes and $5 million of accrued interest during 2018. BAM repaid $4 million of the BAM Surplus Notes and $1 million of accrued interest during 2017.
During the period from White Mountains’s acquisition of NSM through December 31, 2018, NSM did not pay any dividends to its shareholders. As of December 31, 2018, NSM had $16 million of net unrestricted cash.
During 2018, MediaAlpha paid $16 million of dividends, $10 million of which was paid to White Mountains. As of December 31, 2018, MediaAlpha had $6 million of net unrestricted cash.
The following table summarizes White Mountains’s capital structure as of December 31, 2018 and 2017:
On May 11, 2018, NSM entered into a secured credit facility (the “NSM Bank Facility”) with Ares Capital Corporation in order to refinance NSM’s existing debt and to fund the acquisition of Fresh Insurance. The NSM Bank Facility is comprised of a term loan of $100 million, delayed-draw term loans of $51 million to fund the Fresh Insurance acquisition and $30 million to fund incremental term loans to fund the KBK acquisition and a revolving credit loan commitment of $10 million, under which NSM initially borrowed $2 million. The term loans under the NSM Bank Facility mature on May 11, 2024, and the revolving credit loan under the NSM Bank Facility matures on May 11, 2023. During the period from May 11, 2018 through December 31, 2018, NSM repaid $1 million on the term loans and $2 million on the revolving credit loan under the NSM Banking Facility. As of December 31, 2018, no revolving credit loans were outstanding under the NSM Bank Facility.
On June 15, 2018, NSM entered into an interest rate swap agreement to hedge its exposure to interest rate risk on $151 million of its variable rate term loans. Under the terms of the swap agreement, NSM pays a fixed rate of 2.97% and receives a variable rate, which is reset monthly, based on the then-current LIBOR. As of December 31, 2018, the variable rate received by NSM under the swap agreement was 2.52%. As of December 31, 2018, the effective interest rate for the outstanding term loans of $150 million that are hedged by the swap was 7.47%. The effective interest rate on the outstanding term loans of $30 million that are unhedged was 6.85%. The effective interest rate on the total outstanding term loans under the NSM Bank Facility of $180 million was 7.42%. See Note 7 - “Derivatives - NSM Interest Rate Swap” on page.
The NSM Bank Facility is secured by all property of NSM and contains various affirmative, negative and financial covenants that White Mountains considers to be customary for such borrowings, including a maximum consolidated total leverage ratio covenant.
MediaAlpha has a secured credit facility (the “MediaAlpha Bank Facility”) with Western Alliance Bank, which has a total commitment of $28 million and a maturity date of October 6, 2020. The MediaAlpha Bank Facility consists of an $18 million term loan facility, which has an outstanding balance of $14 million as of December 31, 2018, and a revolving loan facility for $10 million, which was undrawn as of December 31, 2018. During 2018, MediaAlpha repaid $4 million on the term loan and borrowed $3 million and repaid $9 million on the revolving loan under the MediaAlpha Bank Facility.
Debt is defined to include indebtedness for borrowed money, due and payable earnouts on permitted acquisitions and various other adjustments specified in the NSM Bank Facility, less unrestricted cash and cash equivalents (“Bank Debt”). NSM’s Bank Debt was $166 million as of December 31, 2018.
EBITDA is defined to include adjusted EBITDA (see NON-GAAP FINANCIAL MEASURES on page 55) plus additional adjustments to (i) exclude certain expenses, including program start up and shutdown expenses, mergers and acquisition expenses, terminations and various other adjustments specified in NSM’s Bank Facility and (ii) include/exclude historical earnings of acquired/disposed companies (“Bank EBITDA”). NSM’s Bank EBITDA was $42 million for the trailing twelve months ended December 31, 2018.
The maximum consolidated total leverage ratio covenant as of December 31, 2018 was 5.5x. NSM’s actual consolidated total leverage ratio was 4.0x.
(1) The contingent consideration earnout liabilities are related to NSM’s previous acquisitions of Fresh Insurance and its other U.K.-based operations. Any future adjustments due after one year, which are based upon EBITDA, EBITDA projections, and present value factors for acquired entities, are not included in the table. See Note 2 - “Significant Transactions” on page.
(2) Amounts include BAM’s operating lease amounts of $2.2, $3.9, $3.6 and $4.2 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.
Detailed information concerning White Mountains’s cash flows during 2018, 2017 and 2016 follows:
Cash flows from continuing operations for the years ended 2018, 2017 and 2016
During 2018, the Company repurchased and retired 592,458 of its common shares for $519 million, which included 9,965 for $8 million under employee benefit plans for statutory withholding tax payments.
During 2018, MediaAlpha paid $16 million of dividends to its shareholders, of which $10 million was paid to White Mountains.
During 2018, Wobi borrowed 20 million Israeli New Shekels (“ILS”) (approximately $6 million) from White Mountains under an internal credit facility.
During 2018, Buzz borrowed GBP 3 million (approximately $4 million) from White Mountains under a convertible loan note.
On May 11, 2018, White Mountains closed its acquisition of 95% of NSM for a purchase price of $274 million. White Mountains paid a purchase price adjustment of $2 million in the fourth quarter of 2018.
During 2018, White Mountains made gross investments into the Enlightenment Capital Funds totaling $3 million and received a total of $1 million of distributions from these funds.
During 2017, the Company declared and paid a $5 million cash dividend to its common shareholders.
During 2017, MediaAlpha paid $5 million of dividends, of which $3 million was paid to White Mountains.
During 2017, White Mountains received $45 million of dividends from OneBeacon, which is reported as discontinued operations.
On August 1, 2017, White Mountains purchased 37,409 newly-issued preferred shares of Buzz for GBP 4 million (approximately $5 million) and 5,808 common shares from the company founders for GBP 0.5 million (approximately $0.7 million).
During 2017, White Mountains made gross investments into the Tuckerman Capital Funds totaling $17 million and received a total of $2 million of distributions from these funds.
During 2016, the Company borrowed a total of $350 million and repaid a total of $400 million under the WTM Bank Facility.
During 2016, White Mountains Life Reinsurance (Bermuda) Ltd. returned $73 million of capital to White Mountains.
On January 7, 2016, Wobi settled its acquisition of the remaining share capital of Cashboard for NIS 16 million (approximately $4 million).
On April 18, 2016, White Mountains completed the sale of Sirius Group to CMI for approximately $2.6 billion. Of this amount, $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 the Enlightenment Capital Funds totaling $11 million and received a total of $14 million of distributions from these funds.
See Note 17 - “Transactions with Related Persons” on page in the accompanying Consolidated Financial Statements.
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 to (i) include the present value of future installment MSC not yet collected and (ii) exclude gross written premium adjustments on existing installment policies closed in prior periods. White Mountains believes these adjustments are useful to investors in evaluating the pricing of new business closed during the period. The reconciliation of GAAP gross written premiums to gross written premiums and MSC from new business is included on page 35.
White Mountains uses brokers and outside pricing services 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, 2018, approximately 87% of the investment portfolio was recorded at fair value as Level 1 or Level 2 measurements.
Investments valued using Level 1 inputs include fixed maturity investments, primarily investments in U.S. Treasuries and short-term investments, which include U.S. Treasury Bills and common equity securities. For investments in active markets, White Mountains uses the quoted market prices provided by outside pricing services to determine fair value.
Investments valued using Level 2 inputs include fixed maturity investments, which have been disaggregated into classes, including debt securities issued by corporations, mortgage and asset-backed securities, municipal obligations, and foreign government, agency and provincial obligations. Investments valued using Level 2 inputs also include certain passive ETFs that track U.S. stock indices such as the S&P 500 but are traded on foreign exchanges, which management values using the fund manager’s published NAV to account for the difference in market close times.
The fair value of debt securities issued by corporations is determined from a pricing evaluation technique that uses information from market sources and integrates relative credit information, observed market movements, and sector news. Key inputs include benchmark yields, reported trades, broker-dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers, and reference data including sector, coupon, credit quality ratings, duration, credit enhancements, early redemption features and market research publications.
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 fair value of municipal obligations is determined from a pricing evaluation technique that uses information from market makers, brokers-dealers, buy-side firms, and analysts along with general market information. Key inputs include benchmark yields, reported trades, issuer financial statements, material event notices and new issue data, as well as broker-dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers, and reference data including type, coupon, credit quality ratings, duration, credit enhancements, geographic location and market research publications.
The fair value of foreign government, agency and provincial obligations is determined from a pricing evaluation technique that uses feeds from data sources in each respective country, including active market makers and inter-dealer brokers. Key inputs include benchmark yields, reported trades, broker-dealer quotes, two-sided markets, benchmark securities, bids, offers, local exchange prices, foreign exchange rates and reference data including coupon, credit quality ratings, duration and market research publications.
Fair value estimates for investments that trade infrequently and have few or no observable market prices are classified as Level 3 measurements. Investments valued using Level 3 fair value estimates are based upon unobservable inputs and include investments in certain fixed maturity investments, equity securities and other long-term investments where quoted market prices are unavailable or are not considered reasonable.
Level 3 valuations are generated from techniques that use assumptions not observable in the market. These unobservable assumptions reflect White Mountains’s assumptions that market participants would use in valuing the investment. Generally, certain securities may start out as Level 3 when they are originally issued but as observable inputs become available in the market, they may be reclassified to Level 2. Transfers between levels are based on investments held as of the beginning of the period.
The following table presents White Mountains’s fair value measurements and the percentage of Level 3 investments as of December 31, 2018. 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.
White Mountains maintains a portfolio of other long-term investments that primarily consists of unconsolidated entities, private equity funds and hedge funds. White Mountains’s portfolio of other long-term investments are generally valued at fair value, using level 3 measurements or net asset value “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.
On an ongoing basis, White Mountains considers qualitative changes in facts and circumstances which may impact the valuation of unconsolidated entities, including economic changes of relevant industries and changes to the investee capital structure, business strategy and significant changes in key personnel. On an annual basis, or when facts and circumstances suggest a quantitative valuation analysis is necessary, White Mountains, with the assistance of a third-party valuation firm, completes a valuation analysis of significant unconsolidated entities. White Mountains considers the following fair value approaches:
White Mountains’s portfolio of other long-term investments includes investments in private equity funds and hedge funds. White Mountains employs a number of procedures to assess the reasonableness of the fair value measurements for its private equity funds and hedge funds, including obtaining and reviewing periodic and audited annual financial statements 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 private equity fund and hedge fund investments has generally been determined using the fund manager’s NAV. In the event that White Mountains believes the fair value of a private equity fund or hedge 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 private equity fund or hedge fund. As of December 31, 2018 and 2017, White Mountains did not adjust the reported NAV of its investments in private equity funds and hedge funds.
The underlying investments of private equity funds and hedge funds are typically publicly-traded and private securities and, as such, are subject to market risks that are similar to White Mountains’s common equity securities. The following table presents the estimated effect on fair values as of December 31, 2018 resulting from a 10% change and a 30% change in the market value of other long-term investments:
See Note 3 - “Investment Securities” on page for tables that summarize the changes in White Mountains’s fair value measurements by level for the years ended December 31, 2018 and 2017 and for amount of total gains (losses) included in earnings attributable to net unrealized investment gains (losses) for Level 3 investments for years ended December 31, 2018, 2017 and 2016.
As of December 31, 2018, White Mountains owned $481 million of BAM Surplus Notes and has accrued $144 million in interest due thereon. During the year ended December 31, 2018, with approval of the NYDFS, BAM paid $23 million to White Mountains for amounts owed under the BAM Surplus Notes. During the year ended December 31, 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.
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 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.
Interest payments on the BAM Surplus Notes are due quarterly but are subject to deferral, without penalty or default and without compounding, for payment in the future. Payments made to the BAM Surplus Notes are applied pro rata between outstanding principal and interest. Deferred interest is due on the stated maturity date in 2042.
White Mountains’s annual review for potential impairment first assesses whether qualitative factors indicate that the carrying value of goodwill or other intangible assets may be greater than fair value. If White Mountains determines based on this qualitative review that it is more likely than not that an impairment may exist, then White Mountains performs a quantitative analysis to compare the fair value of a reporting unit with its carrying value. If the carrying value exceeds the estimated fair value, then an impairment charge is recognized through current period pre-tax income. Both the annual qualitative assessment of potential impairment as well as the quantitative comparison of carrying value to estimated fair value involve management judgment, the use of discounted cash flow projections and other valuation techniques and assumptions that are inherently subjective.
A significant portion of the goodwill and other identifiable intangible assets on White Mountains’s balance sheet arose from White Mountains’s acquisition of NSM in May 2018 and NSM’s subsequent acquisitions of Fresh Insurance and KBK. White Mountains believes that all of the goodwill and intangible assets recorded in respect of these acquisitions is fully recoverable. Because of the timing of these acquisitions, all of which are still within the one-year measurement period following the acquisition date, these amounts have not yet been subject to White Mountains’s annual review for potential impairment. See Item 1A., Risk Factors, “If we are required to write down goodwill and other intangible assets, it could materially adversely affect our results of operations and financial condition.” on page 20.
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 69 of this report.