The Company’s headquarters, registered office, principal executive office, and corporate accounting, reporting and internal audit offices are leased. The various offices and facilities of the consolidated Other Operating Businesses are owned or leased. Management considers its office facilities suitable and adequate for its current level of operations.
In 2019, White Mountains recognized a total of $182 of realized and unrealized gains from the MediaAlpha Transaction. MediaAlpha recognized revenues of $49 in 2019, prior to the date of the MediaAlpha Transaction, compared to $297 and $163 in 2018 and 2017, and NSM, which was acquired during 2018, recognized revenues of $233 in 2019, compared to $102 in 2018. Kudu, which was consolidated in 2019, recognized revenues of $21 in 2019. Other Operations recognized net realized and unrealized investment gains (losses) of $285, $(101), $133 and $(28) in 2019, 2018, 2017 and 2016, respectively, which contributed to the increase and decrease in revenues. In 2015, White Mountains changed the accounting for its investment in Symetra Financial Corporation from the equity method to fair value and recognized $259 of unrealized investment gains.
White Mountains reported $34 of non-controlling interest loss related to BAM in 2019, compared to $52 and $40 in 2018 and 2017. Amounts also include non-controlling interests in OneBeacon, Sirius Group and Tranzact prior to their sales.
As a result of the sales of OneBeacon, Sirius Group, Tranzact and Esurance Holdings, Inc. and its subsidiaries and Answer Financial Inc. and its subsidiaries (collectively, “Esurance”), White Mountains has reclassified the results from these businesses for the past five years in the table above to discontinued operations, net of tax. In 2019, discontinued operations, net of tax, includes a gain from sale of Sirius Group $1 related to foreign currency on a contingent liability. In 2018, discontinued operations, net of tax, includes a loss from sale of Sirius Group of $17 for the recognition of a contingent liability related to the sale. In 2017, discontinued operations, net of tax, includes a gain from sale of OneBeacon of $555 and income of $21 and a (loss) gain from sale of Sirius Group and Tranzact of $(1) and $3. In 2016, discontinued operations, net of tax, includes a gain from sale of Sirius Group and Tranzact of $363 and $52 and net income of $108 primarily related to the operations of OneBeacon. In 2015, discontinued operations, net of tax, includes net income of $117 and a gain from sale of Esurance of $18. See Note 20 - “Held for Sale and Discontinued Operations” on page.
White Mountains’s total debt increased as a result of borrowings under the NSM Bank Facility and the Kudu Bank Facility. See Note 5 - “Debt” on page. As of December 31, 2015, White Mountains had $50 outstanding under its credit facility, which was repaid in April 2016.
White Mountains’s non-controlling interests includes the policyholders’ surplus of BAM. White Mountains’s non-controlling interests decreased as a result of the deconsolidation of MediaAlpha in 2019 and the sale of OneBeacon in 2017 and Sirius Group in 2016. See Note 12 - “Common Shareholders’ Equity and Non-controlling Interests” on page for a detailed breakdown of non-controlling interests by consolidated entity.
Including the $55 per share net gain from the MediaAlpha Transaction as if it had closed on December 31,
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. 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. Total pricing was 83 basis points in 2019, compared to 93 basis points in 2018.
In December 2019, BAM made a $32 million cash payment of principal and interest on the BAM Surplus Notes held by HG Global. In January 2020, BAM made an additional $65 million special cash payment of principal and interest on the BAM Surplus Notes. During 2018, BAM made a $23 million cash payment of principal and interest on the BAM Surplus Notes. BAM’s total claims paying resources were $938 million as of December 31, 2019, compared to $871 million as of December 31, 2018. The increase in claims paying resources was driven by positive cash flow from operations.
On April 4, 2019, White Mountains completed the Kudu Transaction. For the twelve months ended December 31, 2019, Kudu deployed $203 million, including transaction costs, in seven asset management firms and has now deployed a total of $266 million, including transaction costs, in nine asset management firms with combined assets under management of over $33 billion, spanning a range of asset classes, including real estate, real assets, wealth management, hedge funds and alternative credit strategies. For the period from April 4, 2019, the date of the Kudu Transaction, through December 31, 2019, Kudu reported total revenues of $21 million and pretax income of $11 million.
White Mountains’s portfolio of common equity securities and other long-term investments returned 36.9% for 2019, which included the $115 million pre-tax unrealized investment gain from the MediaAlpha Transaction. Excluding the MediaAlpha Transaction, White Mountains’s portfolio of common equity securities and other long-term investments returned 25.7% for 2019, compared to -3.6% for 2018.
White Mountains’s fixed income portfolio returned 6.1% for 2019, compared to 1.2% for 2018.
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. During 2018, BAM completed assumed reinsurance transactions to insure municipal bonds with a par value of $2.2 billion. Total pricing was 93 basis points in 2018, compared to 99 basis points in 2017. During 2018, BAM made a $23 million cash payment of principal and interest on the BAM Surplus Notes held by HG Global. During 2017, BAM made a $5 million cash payment of principal and interest on the BAM Surplus Notes. 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.
White Mountains’s portfolio of common equity securities and other long-term investments returned -3.6% for 2018, compared to 12.7% for 2017.
The following tables presents goodwill and other intangible assets that are included in White Mountains’s adjusted book value as of December 31, 2019, 2018 and 2017:
(1) The relative fair values of goodwill and other intangible assets recognized in connection with the acquisition of KBK had not yet been finalized at December 31, 2018.
As of December 31, 2019, 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 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 OneBeacon Transaction, the results of operations for OneBeacon for the year ended December 31, 2017 have been classified as discontinued operations, and are now presented separately, net of related income taxes, in the statement of comprehensive income. See Note 20 - “Held for Sale and Discontinued Operations” 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, 2019, 2018 and 2017:
BAM charges an insurance premium on each municipal bond insurance policy it writes. A portion of the premium is MSC and the remainder is a risk premium. In the event of a municipal bond refunding, a portion of the MSC from 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.
(2) During 2019, BAM issued policy endorsements for certain policies issued in periods prior to the second quarter of 2018. The impact of
Mountains’s GAAP financial statements and attributed to non-controlling interests. White Mountains reported GAAP pre-tax losses from BAM of $44 million in 2019, compared to $61 million in 2018. The decrease in the pre-tax loss was driven primarily by higher returns in BAM’s investment portfolio. BAM’s results included $27 million of interest expense on the BAM Surplus Notes and $49 million of general and administrative expenses in 2019, compared to $23 million of interest expense on the BAM Surplus Notes and $47 million of general and administrative expenses in 2018.
In December 2019, BAM made a $32 million cash payment of principal and interest on the BAM Surplus Notes held by HG Global. Of this payment, $24 million was a repayment of principal held in the Supplemental Trust and $8 million was a payment of accrued interest held outside the Supplemental Trust. In January 2020, BAM made an additional $65 million special cash payment of principal and interest on the BAM Surplus Notes. Of this payment, $48 million was a repayment of principal held in the Supplemental Trust, $1 million was a payment of accrued interest held in the Supplemental Trust and $16 million was a payment of accrued interest held outside the Supplemental Trust. During 2018, BAM made a $23 million cash payment of principal and interest on the BAM Surplus Notes. Of this payment, $18 million was a repayment of principal held in the Supplemental Trust, $1 million was a payment of accrued interest held in the Supplemental Trust and $4 million was a payment of accrued interest held outside the Supplemental Trust.
HG Global reported GAAP pre-tax income of $32 million in 2018, compared to $26 million in 2017. HG Global’s results in 2018 included $23 million of interest income on the BAM Surplus Notes, compared to $19 million in 2017.
White Mountains reported GAAP pre-tax losses from BAM of $61 million 2018, compared to $50 million in 2017. BAM’s results included $23 million of interest expense on the BAM Surplus Notes and $47 million of general and administrative expenses in 2018, compared to $19 million of interest expense on the BAM Surplus Notes and $42 million of general and administrative expenses in 2017. The increase in general and administrative expenses was primarily due to financing expense from the reinsurance agreement with Fidus Re, which is accounted for using the deposit method under GAAP.
BAM’s claims paying resources increased to $938 million as of December 31, 2019 from $871 million as of December 31, 2018. The increase was driven primarily by $68 million of MSC collected and a $56 million increase in the invested assets of the HG Re Collateral Trusts, partially offset by BAM’s 2019 statutory net loss of $38 million.
Broker commission expenses and general and administrative expenses were $65 million and $132 million for 2019, compared to $28 million and $59 million, respectively, for the period from May 11, 2018 to December 31, 2018. NSM’s general and administrative expenses for 2019 included a $2 million impairment of intangible assets related to Fresh Insurance.
NSM’s business consists of a number of active programs that are broadly categorized into six market verticals. The following table presents the controlled premium and commission and other revenues by vertical for the years ended December 31, 2019, 2018 and 2017:
(2) Controlled premium and commission and other revenue includes results prior to White Mountains’s ownership of NSM.
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 the fourth quarter of 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.
Social Services: NSM’s social services controlled premium and commission and other revenues both increased 9% in 2019, compared to 2018. The increase is primarily due to increases in rate and retention.
Pet: The pet program was added during the second quarter of 2019 with the acquisition of Embrace.
United Kingdom: NSM’s United Kingdom controlled premium and commission and other revenues increased 43% and 32% in 2019, respectively, 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.
Specialty Transportation: NSM’s specialty transportation controlled premium and commission and other revenue growth in 2018 was due to organic growth in the collector car programs, and higher profit commissions 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.
United Kingdom: NSM’s United Kingdom controlled premium and commission and fee revenue grew significantly in 2018 due to the acquisition of Fresh Insurance. Fresh Insurance’s controlled premium and commission and other revenues contributed $46 million and $16 million, respectively, from the date of acquisition, May 11, 2018, to the end of 2018.
As a result of the MediaAlpha Transaction, White Mountains’s reduced its ownership interest in MediaAlpha to 48.3% (42.0% on a fully diluted, fully converted basis). White Mountains’s remaining ownership interest in MediaAlpha no longer meets the criteria for a controlling ownership interest and, accordingly, White Mountains deconsolidated MediaAlpha as of February 26, 2019. Subsequent to the MediaAlpha Transaction, White Mountains accounts for its investment in MediaAlpha at fair value within other long-term investments. See Summary of Investment Results on page 45.
MediaAlpha reported GAAP pre-tax income of $9 million, compared to GAAP break-even pre-tax income 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 and revenues were driven primarily by growth in MediaAlpha’s P&C vertical, driven by increased demand from advertisers, and growth in the Health, Medicare and Life vertical and including 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 Health, Medicare and Life 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.
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 $182 million of total gains from the MediaAlpha Transaction. White Mountains’s Other Operations segment reported net realized and unrealized investment gains, excluding the MediaAlpha Transaction, of $285 million in 2019, compared to net realized and unrealized investment losses of $101 million in 2018. See “Summary of Investment Results” on page 45. 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.
For the year ended December 31, 2019, White Mountains repurchased and retired 5,679 of its common shares for $5 million.
White Mountains’s Other Operations segment reported pre-tax loss of $153 million in 2018, compared to pre-tax income of $32 million in 2017. The results were driven primarily by lower investment returns in 2018. Net realized and unrealized investment losses were $101 million in 2018, compared to net realized and unrealized investment gains of $133 million in 2017. See “Summary of Investment Results” on page 45. Other revenues were $1 million in 2018, compared to $6 million in 2017. In 2017, other revenues included $4 million of third-party investment management fee income at WM Advisors. 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
For the year ended December 31, 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 $55 per share estimated gain from the MediaAlpha Transaction and adjusted book value per share including the estimated gain from the MediaAlpha Transaction.
White Mountains’s pre-tax total return on invested assets was 20.4% for 2019, which included a $115 million pre-tax unrealized investment gain from the MediaAlpha Transaction. Excluding the MediaAlpha Transaction, White Mountains’s pre-tax total return on invested assets was 15.5% for of 2019, compared to -1.7% for 2018.
Investment returns for 2019 benefited from the decision to increase White Mountains’s equity exposure during the equity rout at the end of 2018, the strong rally in equity markets over the course of the year, and strong other long-term investments results. The strong other long-term investment results were driven primarily by a $65 million increase in the fair value of White Mountains’s investment in MediaAlpha resulting from increases in profitability metrics since the MediaAlpha Transaction. Investment returns for 2018 were adversely impacted by the sharp decline in equity markets in the fourth quarter.
White Mountains’s portfolio of common equity securities and other long-term investments was $1.5 billion and $1.3 billion as of December 31, 2019 and 2018. See Note 3 - “Investment Securities”. White Mountains’s portfolio of common equity securities and other long-term investments represented approximately 52% and 49% of total invested assets as of December 31, 2019 and 2018.
White Mountains’s portfolio of common equity securities primarily consists of passive ETFs and publicly-traded common equity securities that are actively managed by third-party registered investment advisers. White Mountains’s portfolio of common equity securities was $684 million and $926 million as of December 31, 2019 and 2018. White Mountains’s portfolio of common equity securities returned 29.1% for 2019, underperforming the S&P 500 Index return of 31.5%. White Mountains’s portfolio of common equity securities returned -7.7% for 2018, underperforming the S&P 500 Index return of -4.4%. The results in both periods were driven primarily by relative underperformance in White Mountains’s international common equity portfolios.
White Mountains has maintained long-standing relationships with a small number of third-party registered investment advisers (the “actively managed common equity portfolio”), including Highclere International Investors (“Highclere”), who invests in small- and mid-cap equity securities listed in markets outside of the United States and Canada through a unit trust, and Silchester International Investors (“Silchester”), who invests in value-oriented non-U.S. equity securities through a unit trust. 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 was $147 million and $250 million as of December 31, 2019 and 2018. White Mountains’s actively managed common equity portfolio returned 24.2% for 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.
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. Investment returns for 2017 include discontinued operations returns through the close of the OneBeacon Transaction.
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, 2019 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.
White Mountains reported income tax expense of $29 million in 2019 on pre-tax income from continuing operations of $405 million. White Mountains’s effective tax rate was different from the current U.S. federal statutory rate of 21% primarily due to income generated in jurisdictions with lower tax rates than the United States, state income taxes and a tax benefit recorded at BAM related to its MSC collected. Also, the effective tax rate for 2019 was different from the current U.S. federal statutory rate of 21% due to the release of a valuation allowance on the net deferred tax assets of the U.S. consolidated group Guilford Holdings, Inc. and subsidiaries (“Guilford”), which includes Kudu, White Mountains’s investment in MediaAlpha, WM Capital, WM Advisors and certain other entities and investments that are included in the Other Operations segment. 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. See Note 6 - “Income Taxes” on page.
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. 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.
For the 2017 period, White Mountains reported net income from OneBeacon of $21 million in discontinued operations. OneBeacon’s combined ratio for the 2017 period was 105%, driven by four points of net unfavorable loss reserve development, primarily in the Program, Healthcare and Government Risk businesses, and four points of catastrophe losses, primarily due to losses from Hurricane Harvey.
On April 18, 2016, White Mountains completed the sale of Sirius Group to CMI. Sirius Group’s results inured to White Mountains until the closing date of the transaction.
In late 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 2016. In connection with the sale, White Mountains indemnified Sirius Group against the loss of 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. For the year ended December 31, 2019, White Mountains recognized a net foreign currency translation gain of $1 million that is included within net gain from sale of Sirius Group in discontinued operations.
The primary sources of cash for the Company and certain of its intermediate holding companies are expected to be distributions from its operating subsidiaries, net investment income, proceeds from sales, repayments and maturities of investments, capital raising activities and, from time to time, proceeds from sales of operating subsidiaries. The primary uses of cash are expected to be general and administrative expenses, purchases of investments, payments to tax authorities, payments on and repurchases/retirements of its debt obligations, dividend payments to holders of the Company’s common shares, distributions to non-controlling interest holders of consolidated subsidiaries, contributions to operating subsidiaries and, from time to time, purchases of operating subsidiaries and repurchases of the Company’s common shares.
The Supplemental Trust Target Balance is $603 million, less the amount of cash and securities in the Regulation 114 Trust in excess of its target balance. If, at the end of any quarter, the Supplemental Trust balance exceeds the Supplemental Trust Target Balance, such excess may be distributed to HG Re. The distribution will be made first as an assignment of accrued interest on the BAM Surplus Notes and second in cash and/or fixed income securities. As the BAM Surplus Notes are repaid over time, the BAM Surplus Notes will be replaced in the Supplemental Trust by cash and fixed income securities.
As of December 31, 2019, HG Re had $6 million of cash and investments and $111 million of accrued interest on the BAM Surplus Notes held outside the Collateral Trusts.
During 2019, NSM did not make any distributions to unitholders. As of December 31, 2019, NSM had $33 million of net unrestricted cash.
In December 2019, Kudu entered into a secured credit facility to provide funding for distributions to unitholders and fund new investments and related transaction expenses. At closing, Kudu drew an initial term loan of $57 million to pay transaction expenses and to distribute $54 million to unitholders, of which $53 million was paid to White Mountains. As of December 31, 2019, Kudu had $6 million of net unrestricted cash and short-term investments.
The following table summarizes White Mountains’s capital structure as of December 31, 2019 and 2018:
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. The Kudu Bank Facility has a maximum borrowing capacity of $125 million, which is comprised of an initial term loan of $57 million, a delayed-draw term loan of $63 million and a revolving credit loan of $5 million. The term loans and the revolving credit loans under the Kudu Bank Facility mature in 2025. During 2019, Kudu borrowed $57 million in term loans under the Kudu Bank Facility and had no repayments. As of December 31, 2019, the term loans had an outstanding balance of $57 million and the revolving loan was undrawn.
As of December 31, 2019, White Mountains was in compliance with all of the covenants under all of its debt instruments.
EBITDA is defined to include adjusted EBITDA (see NON-GAAP FINANCIAL MEASURES on page 58) plus additional adjustments (i) to exclude certain expenses not already excluded from adjusted EBITDA as specified in NSM’s Bank Facility and (ii) to include/exclude historical earnings of acquired/disposed companies (“Bank EBITDA”). NSM’s Bank EBITDA was $53 million for the trailing twelve months ended December 31, 2019.
The following table presents White Mountains’s material contractual obligations and commitments as of December 31, 2019:
Cash flows from continuing operations for the years ended 2019, 2018 and 2017
Net cash flows used for continuing operations was $121 million, $31 million and $62 million for the years ended 2019, 2018 and 2017. Cash used from continuing operations was higher in 2019 compared to 2018, driven primarily by Kudu’s deployments in asset management firms. Cash used from continuing operations was lower in 2018 compared to 2017, primarily due to $28 million of payments made in 2017 related to the departures of the Company’s former Chairman and CEO and former CFO. White Mountains does not believe that these trends will have a meaningful impact on its future liquidity or its ability to meet its future cash requirements. The Company and its intermediate holding companies had $603 million of net unrestricted cash, short-term investments and fixed maturity investments, $684 million of common equity securities and $202 million of private equity funds, hedge funds and ILS funds as of December 31, 2019.
During 2019, BAM repaid $24 million of principal and paid $8 million of accrued interest on the BAM Surplus Notes.
During 2019, NSM borrowed $43 million of term loans under the NSM Bank Facility, which included $20 million and $23 million for the funding of the acquisitions of Embrace and the Renewal Rights from AIG, and $7 million of revolving credit loans. Additionally, during 2019 NSM repaid $2 million of term loans and $7 million of revolving credit loans under the NSM Bank Facility.
On February 26, 2019, White Mountains received net cash proceeds of $89 million from the MediaAlpha Transaction.
On April 1, 2019, White Mountains acquired additional newly-issued units of NSM for $58 million in connection with NSM’s acquisition of Embrace.
During 2018, BAM repaid $18 million of principal and paid $5 million of accrued interest on the BAM Surplus Notes.
During 2018, NSM borrowed $51 million of term loans under the NSM Bank Facility to fund the Fresh Insurance acquisition and $30 million of term loans to fund the KBK acquisition. Additionally, during 2018, NSM repaid $1 million on the term loans and $2 million on the revolving credit loan under the NSM Bank Facility.
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.
On December 3, 2018, White Mountains acquired additional newly-issued units of NSM for $29 million in connection with NSM’s acquisition of KBK.
On December 3, 2018, NSM acquired all of the net assets of KBK for a purchase price of $60 million.
Cash flows from investing and financing activities for the year ended December 31, 2017
During 2017, the Company repurchased and retired 832,725 of its common shares for $724 million, which included 10,993 of common shares for $9 million under employee benefit plans for statutory withholding tax payments.
During 2017, MediaAlpha distributed $5 million to unitholders, of which $3 million was paid to White Mountains.
On October 5, 2017, White Mountains purchased additional newly-issued units of MediaAlpha for $13 million.
See Note 18 - “Transactions with Related Persons” on page in the accompanying Consolidated Financial Statements.
This report includes nine non-GAAP financial measures that have been reconciled with their most comparable GAAP financial measures.
The value of HG Global’s unearned premium reserve, net of deferred acquisition costs, was $119 million, $106 million and $82 million as of December 31, 2019, 2018 and 2017, respectively.
(1) Growth includes $1.00 per share dividend paid during the first quarter of 2019.
(1) Growth includes $1.00 per share dividend paid during the first quarter of 2018.
Total capital at White Mountains is comprised of White Mountains’s common shareholders’ equity, debt and non-controlling interests other than non-controlling interests attributable to BAM. Total adjusted capital is a non-GAAP financial measure, which is derived by adjusting total capital (i) to include a discount for the time value of money arising from the expected timing of cash payments of principal and interest on the BAM Surplus Notes and (ii) to add back the unearned premium reserve, net of deferred acquisition costs, at HG Global. The reconciliation of total capital to total adjusted capital is included on page 53.
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 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) acquisition-related transaction expenses, (iii) fair value purchase accounting adjustment for deferred revenue, (iv) investments made in the development of new business lines and (v) restructuring expenses. A description of each follows:
Acquisition-related transaction expenses - Represents costs directly related to NSM’s transactions to acquire businesses, such as transaction-related compensation, impairments of intangible assets, banking, accounting and external lawyer fees, which are not capitalized and are expensed under GAAP.
Restructuring expenses - Represents expenses associated with eliminating redundant work force and facilities that often arise as a result of NSM’s post-acquisition integration strategies.
White Mountains believes that these non-GAAP financial measures are useful to management and investors in evaluating NSM’s performance. See page 40 for the reconciliation of NSM’s GAAP net income (loss) to EBITDA and adjusted EBITDA.
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.
Level 3 valuations are generated from techniques that use assumptions not observable in the market. These unobservable inputs reflect White Mountains’s assumptions of what market participants would use in valuing the investment. In certain circumstances, investment 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 of securities between levels are based on investments held as of the beginning of the period.
White Mountains may use a variety of valuation techniques to determine fair value depending on the nature of the investment, including a discounted cash flow analysis, market multiple approach, cost approach and/or liquidation analysis. On an ongoing basis, White Mountains also considers qualitative changes in facts and circumstances, which may impact the valuation of unconsolidated entities, including economic and market changes in relevant industries, changes to the entity’s capital structure, business strategy and key personnel, and any recent transactions relating to the unconsolidated entity. On a quarterly basis, White Mountains evaluates the most recent qualitative and quantitative information of the business and completes a fair valuation analysis for all Level 3 other long-term investments. Periodically, and at least on an annual basis, White Mountains uses a third-party valuation firm to complete an independent valuation analysis of significant unconsolidated entities.
As of December 31, 2019, White Mountains’s most significant other long-term investments that are valued using Level 3 measurements include Kudu’s Participation Contracts, MediaAlpha and PassportCard/DavidShield.
On a quarterly basis, White Mountains values its investments in MediaAlpha and PassportCard/DavidShield using discounted cash flow models. The discounted cash flow valuation models include 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 rates reflect 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, White Mountains considers all available information, including market multiples and multiples implied by recent transactions, facts and circumstances specific to MediaAlpha’s and PassportCard/DavidShield’s businesses and industries, and any infrequent or unusual results for the period.
White Mountains’s portfolio of other long-term investments includes investments in private equity funds, hedge funds and ILS funds. White Mountains employs a number of procedures to assess the reasonableness of the fair value measurements for its private equity funds, hedge funds and ILS 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, hedge fund and ILS fund investments are generally determined using the fund manager’s NAV. In the event that White Mountains believes the fair value of a private equity fund, hedge fund or ILS 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, hedge fund or ILS fund.
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.
During the fourth quarter of 2019, White Mountains updated its debt service model to reflect (i) the cash payments of principal and interest on the BAM Surplus Notes made in December 2019 and January 2020, (ii) the amendments made to the terms of the BAM Surplus Notes in January 2020, including an extension of the variable interest rate period, and (iii) in light of the current interest rate environment, a more conservative forecast of future operating results for BAM. The debt service model assumes both par insured and total pricing gradually increase over the next five years, and flatten thereafter. White Mountains models that the BAM Surplus Notes will be fully repaid approximately seven years prior to final maturity, which is two years later than previously modeled as of December 31, 2018. The changes to the debt service model resulted in a $20 million increase to the time value of money discount on the BAM Surplus Notes as reflected in adjusted book value per share at December 31, 2019. 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.
Most of White Mountains’s total goodwill and other intangible assets of $655 million relates to the acquisition of NSM and NSM’s subsequent acquisitions of Fresh Insurance, KBK, Embrace and the Renewal Rights from AIG. As of December 31, 2019, goodwill and other intangible assets related to NSM were $623 million. During the second quarter of 2019, White Mountains performed its periodic reviews for potential impairment, including a quantitative review of the goodwill associated with NSM. White Mountains concluded that there was no impairment of the goodwill associated with NSM. White Mountains recognized an impairment of other intangible assets of $2 million related to Fresh Insurance and impairments of goodwill and other intangible assets of $8 million and $1 million, respectively, related to its Other Operations. There were no impairments to goodwill and other intangible assets during 2018 or 2017.
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 19.
changes in domestic or foreign laws or regulations, or their interpretation, applicable to White Mountains, its competitors or its customers;