The Company maintains two professional offices in Hamilton, Bermuda, which serve as its headquarters and its registered office. The Company’s principal executive office is in Hanover, New Hampshire. In addition, White Mountains maintains a professional office in Guilford, Connecticut, which houses its corporate finance and investment functions, and in Boston, Massachusetts, which houses its corporate accounting, reporting and internal audit functions. All of the Company’s professional 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.
The following table presents selected consolidated income statement data and ending balance sheet data for each of the five years ended through December 31, 2020:
Net income (loss) attributable to White Mountains’s common shareholders $ 709 $ 415 $ (141) $ 627 $ 402
Diluted - continuing operations $ 227.72 $ 130.02 $ (36.67) $ 11.56 $ (24.26)
Total diluted income (loss) per share $ 226.97 $ 130.27 $ (41.76) $ 146.06 $ 80.06
Cash dividends paid per common share $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
(a)In 2020, White Mountains recognized $746 of net investment income and realized and unrealized investment gains from its investment in MediaAlpha. In 2019, White Mountains recognized $256 of net investment income, realized gains and unrealized investment gains from its investment in MediaAlpha. MediaAlpha, which was consolidated prior to the 2019 MediaAlpha Transaction, recognized revenues of $49, $297 and $163 in 2019, 2018 and 2017. NSM, which was acquired in 2018, recognized revenues of $285, $233 and $102 in 2020, 2019 and 2018. Kudu, which was consolidated subsequent to the Kudu Transaction in 2019, recognized revenues of $46 in 2020, compared to $21 in 2019. Other Operations recognized net realized and unrealized investment (losses) gains, excluding MediaAlpha, of $(9), $220, $(101), $133 and $(28) in 2020, 2019, 2018, 2017 and 2016, respectively, which contributed to the changes in revenues.
(b)NSM recognized expenses of $298, $235 and $107 in 2020, 2019 and 2018 for the period owned by White Mountains. MediaAlpha recognized cost of sales of $41, $245 and $136 in 2019, 2018 and 2017. Kudu recognized expense of $18 and $10 in 2020 and 2019 for the period consolidated by White Mountains. White Mountains’s Other Operations segment recognized general and administrative expenses of $142, $123, $94, $149 and $124 in 2020, 2019, 2018, 2017 and 2016.
(e)As a result of the sales of OneBeacon Insurance Group, Ltd. (“OneBeacon”), Sirius International Insurance Group, Ltd. (“Sirius Group”) and Tranzact Holdings, LLC (“Tranzact”), 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 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. In 2016, discontinued operations, net of tax, includes a gain from sale of Sirius Group and Tranzact of $363 and $52, respectively, and net income of $108 primarily related to the operations of OneBeacon. See Note 19 - “Held for Sale and Discontinued Operations” on page.
(g)White Mountains’s total debt increased in 2020, compared to 2019, driven primarily by borrowings under the NSM Bank Facility for the acquisition of Kingsbridge. White Mountains’s total debt increased in 2019, compared to 2018, as a result of borrowings under the NSM Bank Facility and the Kudu Bank Facility. See Note 5 - “Debt” on page.
(i)Adjusted book value per share is a non-GAAP measure. See “NON-GAAP FINANCIAL MEASURES” on page 63.
The following discussion contains “forward-looking statements”. White Mountains intends statements that are not historical in nature, which are hereby identified as forward-looking statements, to be covered by the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. White Mountains cannot promise that its expectations in such forward-looking statements will turn out to be correct. White Mountains’s actual results could be materially different from and worse than its expectations. See “FORWARD-LOOKING STATEMENTS” on page 72 for specific important factors that could cause actual results to differ materially from those contained in forward-looking statements.
The following discussion also includes eight non-GAAP financial measures (i) adjusted book value per share, (ii) gross written premiums and MSC from new business, (iii) adjusted capital, (iv) NSM’s earnings before interest, taxes, depreciation and amortization (“EBITDA”), (v) NSM’s adjusted EBITDA, (vi) Kudu’s EBITDA, (vii) Kudu’s adjusted EBITDA and (viii) total consolidated portfolio returns excluding MediaAlpha, that have been reconciled from their most comparable GAAP financial measures on page 63. White Mountains believes these measures to be useful in evaluating White Mountains’s financial performance and condition.
Overview-Year Ended December 31, 2020 versus Year Ended December 31, 2019
White Mountains ended 2020 with book value per share of $1,259 and adjusted book value per share of $1,264, an increase of 23.1% and 24.2% for the year, including dividends. Comprehensive income attributable to common shareholders was $716 million in 2020 compared to $413 million in 2019. The results in 2020 included $746 million of net investment income and net realized and unrealized investment gains from White Mountains’s investment in MediaAlpha. The results in 2020 also included $131 million from the release of a deferred tax liability as a result of an internal reorganization in connection with the MediaAlpha IPO. The results in 2019 included $256 million of net investment income, realized gains and net unrealized investment gains from White Mountains’s investment in MediaAlpha, $182 million of which was from the 2019 MediaAlpha Transaction.
On October 30, 2020, MediaAlpha completed the MediaAlpha IPO. In the offering, White Mountains sold 3,609,894 shares and received total proceeds of $64 million. Following the completion of the MediaAlpha IPO, White Mountains owns 20,532,202 MediaAlpha shares, representing a 35.0% ownership interest (32.3% on a fully-diluted, fully converted basis). At the December 31, 2020 MediaAlpha closing price of $39.07 per share, the value of White Mountains’s remaining investment in MediaAlpha was $802 million. Based on White Mountains’s ownership of 20,532,202 shares of MediaAlpha as of December 31, 2020, each $1.00 per share increase or decrease in the stock price of MediaAlpha subsequent to the MediaAlpha IPO will result in an approximate $7 per share increase or decrease in White Mountains’s book value per share and adjusted book value per share.
In the January 2021 renewal season, Ark wrote gross written premiums in excess of $270 million.
Kudu reported pre-tax income of $28 million and total revenues of $46 million in 2020, compared to pre-tax income of $11 million and total revenues of $21 million for the period from April 4, 2019, the date of the Kudu Transaction, through December 31, 2019. For the twelve months ended December 31, 2020, Kudu deployed $121 million, including transaction costs, in five asset management firms and has now deployed a total of $386 million, including transaction costs, in 13 asset management firms with combined assets under management of approximately $45 billion, spanning a range of asset classes, including real estate, real assets, wealth management, hedge funds, private equity and alternative credit strategies.
White Mountains’s pre-tax total return on invested assets was 31.9% in 2020. This return included $746 million of net investment income and net realized and unrealized investment gains from MediaAlpha. Excluding MediaAlpha, the total return on invested assets was 4.6% in 2020. White Mountains’s pre-tax total return on invested assets was 20.4% in 2019. This return included $188 million of net investment income and net unrealized investment gains from MediaAlpha. Excluding MediaAlpha, the total return on invested assets was 13.0% in 2019.
White Mountains’s fixed income portfolio returned 4.9% in 2020, compared to 6.1% in 2019.
On February 26, 2019, MediaAlpha completed the 2019 MediaAlpha Transaction. The transaction resulted in a gain of $55 to each of White Mountains’s book value per share and adjusted book value per share. See “MediaAlpha” on page 47. Including the $55 per share net gain from the 2019 MediaAlpha Transaction as if it had closed on December 31, 2018, book value per share would have been $951 and adjusted book value per share would have been $943 as of December 31, 2018. Had the 2019 MediaAlpha Transaction closed on December 31, 2018, White Mountains’s book value per share would have increased 7.8% and adjusted book value per share would have increased 8.1% in 2019, including dividends.
In January 2020, White Mountains updated its debt service model for the BAM Surplus Notes to reflect (i) the cash payments of principal and interest on the BAM Surplus Notes made in December 2019 and January 2020, (ii) the amendments made to the terms of the BAM Surplus Notes in January 2020, including 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 changes in the debt service model resulted in slower modeled future payments on the BAM Surplus Notes and, in turn, a $20 million increase to the time value of money discount on the BAM Surplus Notes as reflected in adjusted book value per share as of December 31, 2019.
NSM reported pre-tax loss of $2 million, adjusted EBITDA of $48 million, and commission and other revenues of $233 million in the year ended December 31, 2019. For the period from May 11, 2018, the date White Mountains acquired NSM, to December 31, 2018, NSM reported pre-tax loss of $5 million, adjusted EBITDA of $18 million, and commission and other revenues of $102 million. Results for the year ended December 31, 2019 include the results, from the date of acquisition, of Embrace, a nationwide provider of pet health insurance for dogs and cats, which NSM acquired on April 1, 2019, and KBK, a specialized MGU focused on the towing and transportation space, which NSM acquired on December 3, 2018.
On April 4, 2019, White Mountains completed the Kudu Transaction. 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. For the twelve months ended December 31, 2019, Kudu deployed $203 million, including transaction costs, in seven asset management firms.
White Mountains’s portfolio of common equity securities and other long-term investments returned 20.8% in 2019, compared to -3.6% in 2018. White Mountains’s portfolio of its investment in MediaAlpha, common equity securities and other long-term investments returned 36.9% for 2019.
GAAP book value per share $ 1,259.18 $ 1,023.91 $ 896.00
(1) Amounts reflects White Mountains’s preferred share ownership in HG Global of 96.9%.
The following tables presents goodwill and other intangible assets that are included in White Mountains’s adjusted book value as of December 31, 2020, 2019 and 2018:
(1) The relative fair values of goodwill and other intangible assets recognized in connection with the acquisition of KBK had not yet been finalized as of December 31, 2018.
(2) See Note 4 - “Goodwill and Other Intangible Assets” on page for details of other intangible assets.
The following table presents White Mountains’s consolidated financial results by industry for the years ended December 31, 2020, 2019 and 2018:
As a result of the Kudu Transaction, White Mountains began consolidating Kudu in its financial statements in the second quarter of 2019. White Mountains’s segment disclosures for the year ended December 31, 2019 include Kudu’s results of operations for the period from April 4, 2019, the date of the Kudu Transaction, to December 31, 2019. See Note 2 - “Significant Transactions” on page.
Direct written premiums $ - $ 61.5 $ - $ 61.5
Net written premiums $ 53.0 $ 8.7 $ - $ 61.7
Pre-tax income (loss) $ 50.1 $ (45.4) $ - $ 4.7
Net investment income - BAM Surplus Notes 27.4 - (27.4) -
Direct written premiums $ - $ 44.8 $ - $ 44.8
Net written premiums $ 45.0 $ 7.9 $ - $ 52.9
Earned insurance and reinsurance premiums $ 11.0 $ 2.9 $ - $ 13.9
Pre-tax income (loss) $ 31.7 $ (61.1) $ - $ (29.4)
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. 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 $131 million and $107 million in 2020 and 2019. BAM insured $17.3 billion of municipal bonds, $15.3 billion of which were in the primary market, in 2020, compared to $12.8 billion of municipal bonds, $10.4 billion of which were in the primary market, in 2019. During 2020 and 2019, BAM completed assumed reinsurance transactions to insure municipal bonds with a par value of $37 million and $1.1 billion, respectively.
Gross par value of primary market policies issued $ 15,279.6 $ 10,405.1
Total gross written premiums and MSC collected $ 130.6 $ 106.7
In January 2020, HG Global and BAM agreed to amend the BAM Surplus Notes to extend the end of the variable interest rate period from 2021 to 2024, to extend the initial 10-year term of the FLRT to the end of 2022 and to enter into the XOLT. See “HG Global/BAM - Reinsurance Treaties” on page. In connection with these actions, and reflecting changes in Standard & Poor’s insurance rating methodology, in January 2020, BAM made a one-time $65 million cash payment of principal and interest on the BAM Surplus Notes held by HG Global. 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.
BAM expects that investor concerns about the impact of the COVID-19 pandemic should continue to result in both increased insured penetration in the primary market and opportunities in the secondary market. The COVID-19 pandemic is negatively impacting the finances of municipalities to varying degrees, and, over time, financial stress could emerge. BAM’s existing credit portfolio is of high quality and structured to be resilient during economic slowdowns. BAM views consumption-based tax-backed credits (sales, hotel, excise), transportation-related credits (airports, mass transportation, ports and toll roads) and higher education-related credits as those most likely to be affected by pandemic-related impacts on the economy. Combined, these sectors total approximately 15% of BAM’s outstanding insured par. All BAM-insured bond payments due through February 15, 2021 have been made by insureds. BAM currently has no insured bonds on its insured credit watchlist.
The following table presents the gross par value of primary and secondary market policies issued, the gross par value of assumed reinsurance, the gross written premiums and MSC collected and total pricing for the twelve months ended December 31, 2019 and 2018:
Gross par value of primary market policies issued $ 10,405.1 $ 8,779.9
Total gross par value of market policies issued $ 12,847.6 $ 11,975.3
HG Global reported GAAP pre-tax income of $54 million in 2019, compared to $32 million in 2018. The increase in pre- tax income was driven primarily by higher returns in HG Global’s investment portfolio. HG Global’s results in 2019 included $27 million of interest income on the BAM Surplus Notes, compared to $23 million in 2018.
BAM is a mutual insurance company that is owned by its members. BAM’s results are consolidated into White Mountains’s GAAP financial statements and attributed to non-controlling interests. White Mountains reported GAAP pre-tax losses from BAM of $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 2018, BAM made a $23 million cash payment of principal and interest on the BAM Surplus Notes held by HG Global. Of this payment, $18 million was a repayment of principal held in the Supplemental Trust, $1 million was a payment of accrued interest held in the Supplemental Trust and $4 million was a payment of accrued interest held outside the Supplemental Trust.
BAM’s claims paying resources were $987 million as of December 31, 2020, compared to $938 million as of December 31, 2019 and $871 million as of December 31, 2018. The increase in claims paying resources was driven primarily by increases in the statutory value of the collateral trusts resulting from positive cash flow from operations, partially offset by the portion of cash payments on the BAM surplus notes related to accrued interest held outside the Supplemental Trust.
Present value of future installment premiums and MSC 14.0 13.7 12.9
The following table presents amounts from HG Global, which includes HG Re and its other wholly-owned subsidiaries, and BAM that are contained within White Mountains’s consolidated balance sheet as of December 31, 2020 and 2019:
Fixed maturity investments $ 415.9 $ 443.6 $ - $ 859.5
(1) Under GAAP, the BAM Surplus Notes are classified as debt by the issuer. Under U.S. Statutory accounting, they are classified as policyholders’ surplus.
(3) HG Global preferred dividends payable to White Mountains’s subsidiaries is eliminated in White Mountains’s consolidated financial statements. For segment reporting, the HG Global preferred dividends payable to White Mountains’s subsidiaries included within the HG Global/BAM segment are eliminated against the offsetting receivable included within the Other Operations segment, and therefore are added back to White Mountains’s common shareholders’ equity within the HG Global/BAM segment.
Fixed maturity investments $ 304.2 $ 495.1 $ - $ 799.3
Total liabilities and equity $ 998.7 $ 592.8 $ (667.5) $ 924.0
The following table presents the components of GAAP net loss, EBITDA and adjusted EBITDA included in White Mountains’s NSM segment for the years ended December 31, 2020, 2019 and the period from May 11, 2018, the date White Mountains acquired NSM, to December 31, 2018:
NSM Results-Year ended December 31, 2020 versus Year ended December 31, 2019
Broker commission expenses and general and administrative expenses were $75 million and $177 million in 2020, compared to $65 million and $132 million, respectively, in 2019. NSM’s general and administrative expenses for 2020 and 2019 included a $6 million and $2 million impairment of intangible assets related to its U.K. vertical.
NSM reported GAAP pre-tax loss of $2 million, adjusted EBITDA of $48 million, and commission and other revenues of $233 million in 2019. NSM reported pre-tax loss of $5 million, adjusted EBITDA of $18 million, and commission and other revenues of $102 million for the period from May 11, 2018, the date White Mountains acquired NSM, to December 31, 2018. NSM’s pre-tax loss included interest expense of $17 million and amortization of other intangible assets of $19 million in 2019, compared to $8 million and $8 million, respectively, for the period from May 11, 2018 to December 31, 2018. Results for the year ended December 31, 2019 include the results, from the date of acquisition, of Embrace.
Broker commission expenses and general and administrative expenses were $65 million and $132 million in 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 its U.K. vertical.
The following table presents the controlled premium and commission and other revenues by vertical for the years ended December 31, 2020, 2019 and 2018:
Real Estate: NSM’s real estate controlled premium and commission and other revenues increased 20% and 29% in 2020, compared to 2019, driven primarily by rate increases and strong retention rates in coverages for coastal condominium associations combined with rate increases and unit growth in the excess and surplus habitational program.
Social Services: NSM’s social services controlled premium and commission and other revenues both increased 12% in 2020, compared to 2019, driven primarily by rate increases and unit growth.
The COVID-19 pandemic negatively impacted certain programs (e.g., lower volumes in the non-standard auto and outdoor leisure businesses in the United Kingdom) while others have been positively impacted (e.g., higher volumes in pet). Results at NSM could still be negatively impacted in the coming quarters, but White Mountains does not currently anticipate dramatic impacts over the fullness of time.
Twelve Months Ended December 31, 2020 April 4, 2019 to December 31, 2019
Kudu Results-Year ended December 31, 2020 versus Year ended December 31, 2019
On October 30, 2020, MediaAlpha completed the MediaAlpha IPO. In the offering, White Mountains sold 3,609,894 shares and received total proceeds of $64 million. Following the completion of the MediaAlpha IPO, White Mountains owns 20,532,202 MediaAlpha shares, representing a 35.0% ownership interest (32.3% on a fully-diluted, fully converted basis). At the December 31, 2020 closing price of $39.07 per share, the value of White Mountains’s remaining investment in MediaAlpha was $802 million. Based on White Mountains’s ownership of 20,532,202 shares of MediaAlpha, each $1.00 per share increase or decrease in the stock price of MediaAlpha subsequent to the MediaAlpha IPO will result in an approximate $7 per share increase or decrease in White Mountains’s book value per share and adjusted book value per share.
Millions January 1, 2019 to February 26, 2019 Year Ended December 31, 2018
The following table presents White Mountains’s financial results from its Other Operations segment for the years ended December 31, 2020, 2019 and 2018:
Net realized and unrealized investment gains from MediaAlpha 686.0 180.0 -
White Mountains’s Other Operations segment reported pre-tax income of $626 million in 2020, compared to pre-tax income of $393 million in 2019. The increase in pre-tax income was driven primarily by the increase in the fair value of White Mountains’s investment in MediaAlpha. White Mountains’s Other Operations segment reported net investment income of $82 million in 2020, which was driven primarily by $55 million of net proceeds received in the third quarter of 2020 from a dividend recapitalization at MediaAlpha, compared to net investment income of $43 million in 2019. White Mountains’s Other Operations segment reported net realized and unrealized investment gains from its investment in MediaAlpha of $686 million in 2020, compared to $180 million in 2019. White Mountains’s Other Operations segment reported net realized and unrealized investment losses of $9 million in 2020, compared to net realized and unrealized investment gains of $220 million in 2019. See “Summary of Investment Results” on page 49. The Other Operations segment reported general and administrative expenses of $142 million in 2020, compared to $123 million in 2019. The increase was driven primarily by higher incentive compensation costs, driven primarily by an increase in the assumed harvest percentage on outstanding performance shares. Pre-tax income for the year ended December 31, 2019 also included $68 million of realized gain from the 2019 MediaAlpha Transaction.
Other Operations Results-Year Ended December 31, 2019 versus Year Ended December 31, 2018
Investment in MediaAlpha, common equity securities and other long-term investments 80.0 % 36.9 % (3.6) %
S&P 500 Index (total return) 18.4 % 31.5 % (4.4) %
Bloomberg Barclays U.S. Intermediate Aggregate Index 5.6 % 6.7 % 0.9 %
Total consolidated portfolio - excluding MediaAlpha 4.6 % 13.0 % (1.7) %
Investment Returns-Year Ended December 31, 2020 versus Year Ended December 31, 2019
White Mountains’s portfolio of its investment in MediaAlpha, common equity securities and other long-term investments was $1.6 billion and $1.5 billion as of December 31, 2020 and 2019, which represented 54% and 52% of total invested assets. See Note 3 - “Investment Securities”. The change was primarily driven by an increase in the fair value of White Mountains’s investment in MediaAlpha and an increase in other long-term investments, partially offset by the sale of common equity securities during the third and fourth quarters of 2020 in preparation for funding the Ark Transaction.
White Mountains’s portfolio of common equity securities and other long-term investments returned 20.8% in 2019. White Mountains’s portfolio of its investment in MediaAlpha, common equity securities and other long-term investments returned 36.9% in 2019, which included $188 million of net investment income and net unrealized investment gains from MediaAlpha.
During the third and fourth quarters of 2020, White Mountains sold its remaining portfolio of common equity securities, including its portfolio of ETFs and international common equity portfolios, in anticipation of funding the Ark Transaction.
As of December 31, 2019, White Mountains’s portfolio of common equity securities consisted of passive ETFs and publicly-traded common equity securities actively managed by select third-party registered investment advisers. White Mountains’s portfolio of common equity securities was $684 million as of December 31, 2019.
White Mountains other long-term investments portfolio returned 2.5% in 2020. Investment returns for 2020 were driven primarily by net investment income and net unrealized gains from Kudu’s Participation Contracts, partially offset by a $10 million decrease in the fair value of White Mountains’s investment in PassportCard/DavidShield, where the global slowdown in travel activity in reaction to the COVID-19 pandemic caused a significant decline in premiums and revenues.
White Mountains other long-term investments portfolio returned 6.1% in 2019. Investment returns for 2019 were driven primarily by net investment income from Kudu’s Participation Contracts and a $15 million increase in the fair value of White Mountains’s investment in PassportCard/DavidShield resulting from increases in profitability metrics in its core businesses, partially offset by losses from certain unconsolidated entities.
Investment Returns-Year Ended December 31, 2019 versus Year Ended December 31, 2018
White Mountains’s pre-tax total return on invested assets was 20.4% in 2019. This return included $188 million of net investment income and net unrealized investment gains from MediaAlpha. Excluding MediaAlpha, the total return on invested assets was 13.0% in 2019, compared to -1.7% in 2018.
White Mountains’s portfolio of its investment in MediaAlpha, common equity securities and other long-term investments was $1.5 billion and $1.3 billion as of December 31, 2019 and 2018, which represented approximately 52% and 49% of total invested assets as of December 31, 2019 and 2018. See Note 3 - “Investment Securities”.
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% in 2019, underperforming the S&P 500 Index return of 31.5%. White Mountains’s portfolio of common equity securities returned -7.7% in 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’s fixed income portfolio, including short-term investments, was $1.4 billion and $1.3 billion as of December 31, 2019 and 2018. The duration of White Mountains’s fixed income portfolio, including short-term investments, was 2.8 years and 3.4 years as of December 31, 2019 and 2018. White Mountains’s fixed income portfolio includes fixed maturity investments and short-term investments in the Collateral Trusts of $320 million and $254 million as of December 31, 2019 and 2018.
Fixed maturity investments $ 1,207.2 41.1 % $ 1,205.8 40.9 %
The following table presents the breakdown of White Mountains’s fixed maturity investments as of December 31, 2020 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:
Total fixed maturity investments $ 1,151.7 100.0 % $ 1,207.2 100.0 %
$ in Millions Carrying Value % of Total Carrying Value % of Total
As of December 31, 2020, White Mountains had foreign currency exposure on $188 million of net assets primarily related to NSM’s U.K.-based operations, foreign Kudu Participation Contracts and certain other foreign consolidated and unconsolidated entities.
In the first quarter of 2020, White Mountains adopted ASU 2019-12, Simplifying the Accounting for Income Taxes (ASC740) (“ASU 2019-12”). For periods subsequent to the adoption of ASU 2019-12, White Mountains records both the tax expense related to BAM’s MSC and the related valuation allowance on such taxes directly through non-controlling interest equity. Prior to the adoption of ASU 2019-12, White Mountains recorded the tax expense related to BAM’s MSC directly to non-controlling interest equity, while the valuation allowance on such taxes was recorded through the income statement.
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, which included 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. In 2019, BAM recorded a tax benefit of $10 million associated with the valuation allowance on taxes related to MSC collected that was included in the effective tax rate.
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, including sales of MediaAlpha common shares, 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.
Following is a description of the dividend capacity of White Mountains’s reinsurance and other operating subsidiaries:
As of December 31, 2020, the Collateral Trusts held assets of $827 million, which included $435 million of cash and investments, $388 million of BAM Surplus Notes and $4 million of interest receivable on the BAM Surplus Notes.
As of December 31, 2020, HG Re had $20 million of cash and investments and $114 million of accrued interest on the BAM Surplus Notes held outside the Collateral Trusts.
In January 2020, BAM made a one-time $65 million cash payment of principal and interest on the BAM Surplus Notes held by HG Global. Of this payment, $48 million was a repayment of principal held in the Supplemental Trust, $1 million was a payment accrued interest held in the Supplemental Trust and $16 million was a payment of accrued interest held outside the Supplemental Trust.
During 2020, White Mountains paid a $3 million common share dividend. As of December 31, 2020, the Company and its intermediate holding companies had $464 million of net unrestricted cash, short-term investments and fixed maturity investments, $802 million of MediaAlpha common stock, and $173 million of private equity funds and the ILS Funds. White Mountains entered into a 180-day lock-up agreement in connection with the MediaAlpha IPO. After the expiration of the lock-up on April 25, 2021 and until the one-year anniversary of the MediaAlpha IPO, any sale of MediaAlpha shares by White Mountains must be coordinated with all principal stockholders of MediaAlpha, who may elect to participate in such sale on a pro rata basis.
NSM Bank Facility, net of unamortized issuance costs $ 271.3 $ 217.4
(1)Amount reflects White Mountains's preferred share ownership in HG Global of 96.9%.
Management believes that White Mountains has the flexibility and capacity to obtain funds externally through debt or equity financing on both a short-term and long-term basis. However, White Mountains can provide no assurance that, if needed, it would be able to obtain additional debt or equity financing on satisfactory terms, if at all.
As of December 31, 2020, the term loans had an outstanding balance of $277 million, including £43 million (approximately $58 million based upon the foreign exchange spot rate as of December 31, 2020) in a GBP term loan, and the revolving credit loan was undrawn. For the twelve months ended December 31, 2020, the effective interest rate on the outstanding term loans under the NSM Bank Facility was 7.02%, excluding the effect of debt issuance costs.
The NSM Bank Facility is secured by all property of the loan parties 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.
NSM also has a secured term loan related to its U.K.-based operations. As of December 31, 2020, the secured term loan had an outstanding balance of $1 million and a maturity date of December 31, 2022.
Interest on the Kudu Bank Facility accrues at a floating interest rate equal to the greater of the one-month USD-LIBOR and 1.0% or the Prime Rate plus 1.0%, plus in each case, an applicable margin. The margin over USD-LIBOR may vary between 5.50% and 6.25% and the margin over the base rate may vary between 4.50% and 5.25%, depending on the consolidated total leverage ratio of the borrower.
The Kudu Bank Facility is secured by all property of the loan parties 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.
As of December 31, 2020, White Mountains was in compliance in all material respects with all of the covenants under all of its debt instruments.
The following table presents White Mountains’s material contractual obligations and commitments as of December 31, 2020:
Debt $ 4.5 $ 12.2 $ 106.0 $ 263.3 $ 386.0
Total contractual obligations and commitments $ 83.3 $ 125.2 $ 156.1 $ 282.3 $ 646.9
(1) The contingent consideration earnout liabilities are related to NSM’s previous acquisitions of Fresh Insurance, KBK 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.
The long-term incentive compensation balances included in the table above include amounts payable for performance shares. Exact amounts to be paid for performance shares cannot be predicted with certainty, as the ultimate amounts of these liabilities are based on the future performance of White Mountains and the market price of the Company’s common shares at the time the payments are made.
The estimated payments reflected in the table are based on current accrual factors (including performance relative to targets and common share price) and assume that all outstanding balances were 100% vested as of December 31, 2020.
White Mountains does not finance its operations through the securitization of its trade receivables, through special purpose entities or through synthetic leases. Further, White Mountains has not entered into any material arrangements requiring it to guarantee payment of third-party debt or lease payments or to fund losses of an unconsolidated special purpose entity.
White Mountains’s board of directors has authorized the Company to repurchase its common shares from time to time, subject to market conditions. The repurchase authorizations do not have a stated expiration date. As of December 31, 2020, White Mountains may repurchase an additional 542,517 shares under these board authorizations. In addition, from time to time White Mountains has also repurchased its common shares through tender offers that were separately approved by its board of directors. On May 11, 2018, White Mountains completed a “modified Dutch auction” tender offer, through which it repurchased 575,068 of its common shares at a purchase price of $875 per share for a total cost of approximately $505 million, including expenses. Shares repurchased under this tender offer did not impact the remaining number of shares authorized for repurchase.
Year Ended Repurchased (Millions) Per Share Value Per Share Per Share
Cash flows from operations for the years ended 2020, 2019 and 2018
Net cash flows used for operations was $61 million, $121 million and $31 million for the years ended 2020, 2019 and 2018. Cash used for operations was lower in 2020 compared to 2019, which was driven primarily by $55 million of net investment income received in 2020 from a dividend recapitalization at MediaAlpha. Cash used for operations was higher in 2019 compared to 2018, driven primarily by Kudu’s deployments in asset management firms. White Mountains does not believe these trends will have a meaningful impact on its future liquidity or its ability to meet its future cash requirements. As of December 31, 2020, the Company and its intermediate holding companies had $464 million of net unrestricted cash, short-term investments and fixed maturity investments, $802 million of MediaAlpha common stock, and $173 million of private equity funds and the ILS Funds.
During 2020, Kudu deployed $121 million (including approximately $3 million of transaction costs) in four asset management firms and has now deployed a total of $386 million in 13 asset management firms.
Cash flows from investing and financing activities for the year ended December 31, 2020
During 2020, the Company declared and paid a $3 million cash dividend to its common shareholders.
During 2020, White Mountains repurchased and retired 99,087 of its common shares for $85 million, 5,899 of which were repurchased under employee benefit plans for statutory withholding tax payments.
During 2020, NSM borrowed £43 million (approximately $52 million based upon the foreign exchange spot rate at the date of acquisition) of term loans under the NSM Bank Facility to fund the acquisition of Kingsbridge. Additionally, during 2020 NSM repaid $2 million of term loans under the NSM Bank Facility.
During 2020, Kudu repurchased 41,091 of its units for $1 million from its non-controlling unitholders.
On May 7, 2020, White Mountains made an additional $15 million investment in PassportCard/DavidShield.
During 2019, the Company declared and paid a $3 million cash dividend to its common shareholders.
During 2019, White Mountains repurchased and retired 5,679 of its common shares for $5 million, all of which were repurchased under employee benefit plans for statutory withholding tax payments.
On February 26, 2019, White Mountains received net cash proceeds of $89 million from the 2019 MediaAlpha Transaction.
On April 1, 2019, NSM acquired 100% of Embrace for $72 million, net of cash acquired.
During 2018, the Company repurchased and retired 592,458 of its common shares for $519 million, which included 9,965 of common shares for $8 million under employee benefit plans for statutory withholding tax payments.
This report includes eight non-GAAP financial measures that have been reconciled with their most comparable GAAP financial measures.
Adjusted book value per share is a non-GAAP financial measure which is derived by adjusting (i) the GAAP book value per share numerator and (ii) the common shares outstanding denominator, as described below.
White Mountains believes these adjustments are useful to management and investors in analyzing the intrinsic value of HG Global, including the value of the BAM Surplus Notes and the value of the in-force business at HG Re, HG Global’s reinsurance subsidiary.
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 57.
NSM’s earnings before interest, taxes, depreciation and amortization (“EBITDA”) and NSM’s adjusted EBITDA
•Impairments of intangible assets - Represents expense related to NSM’s write-off of intangible assets. For the periods presented, the impairments related primarily to NSM’s write-off of intangible assets in its U.K. vertical. The impairments related to lower premium volumes, including due to the impact of the COVID-19 pandemic, and certain reorganization initiatives in the U.K. vertical.
•Acquisition-related transaction expenses - Represents costs directly related to NSM’s transactions to acquire businesses, such as transaction-related compensation, banking, accounting and external lawyer fees, which are not capitalized and are expensed under GAAP.
•Fair value purchase accounting adjustment for deferred revenue - Represents the amount of deferred revenue that had already been collected but subsequently written down in connection with establishing the fair value of deferred revenue as part of NSM’s purchase accounting for Embrace.
•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. For the periods presented, this adjustment relates primarily to NSM’s expenses incurred in certain reorganization initiatives in the U.K. vertical.
•Net unrealized investment (gains) losses - Represents net unrealized investment gains and losses on Kudu's Participation Contracts, which are recorded at fair value under GAAP.
White Mountains believes that these non-GAAP financial measures are useful to management and investors in evaluating Kudu’s performance. The reconciliation of Kudu’s GAAP net income (loss) to EBITDA and adjusted EBITDA is included on page 46.
returns 31.9 % (27.3) % 4.6 % 20.4 % (7.4) % 13.0 %
White Mountains records certain assets and liabilities at fair value in its consolidated financial statements, with changes therein recognized in current period earnings. In addition, White Mountains discloses estimated fair value for certain liabilities measured at historical or amortized cost. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants (an exit price) at a particular measurement date. Fair value measurements are categorized into a hierarchy that distinguishes between inputs based on market data from independent sources (“observable inputs”) and a reporting entity’s internal assumptions based upon the best information available when external market data is limited or unavailable (“unobservable inputs”). Quoted prices in active markets for identical assets have the highest priority (“Level 1”), followed by observable inputs other than quoted prices including prices for similar but not identical assets or liabilities (“Level 2”), and unobservable inputs, including the reporting entity’s estimates of the assumptions that market participants would use, having the lowest priority (“Level 3”).
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 its 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.
Kudu’s Participation Contracts comprise non-controlling equity interests in the form of revenue and earnings participation contracts. On a quarterly basis, White Mountains values each of Kudu’s Participation Contracts using discounted cash flow models. The valuation models include key inputs such as projections of future revenues and earnings of Kudu’s clients, a discount rate and a terminal cash flow exit multiple. 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 exit multiple is generally based on expectations of annual cash flow to Kudu from each of its clients in the terminal year of the cash flow model. In determining fair value, White Mountains considers factors such as performance of underlying products and vehicles, expected client growth rates, new fund launches, fee rates by products, capacity constraints, operating cash flow of underlying manager and other qualitative factors, including the assessment of key personnel.
As of December 31, 2020, the combined fair value of Kudu’s Participation Contracts was $401 million. The inputs to each discounted cash flow analysis vary depending on the nature of each client. As of December 31, 2020, White Mountains concluded that pre-tax discount rates in the range of 18% to 23%, and terminal cash flow exit multiples in the range of 7 to 12 times were appropriate for the valuations of Kudu’s Participation Contracts.
+2 $ 478 $ 451 $ 427 $ 404 $ 383
+1 $ 462 $ 437 $ 414 $ 391 $ 371
7x to 12x $ 446 $ 422 $ 401 $ 379 $ 360
-1 $ 431 $ 408 $ 387 $ 367 $ 349
-2 $ 415 $ 394 $ 375 $ 357 $ 340
White Mountains concluded that an after-tax discount rate of 23% and a terminal revenue growth rate of 4% was appropriate for the valuation of its investment in PassportCard/DavidShield as of December 31, 2020. Utilizing these assumptions, White Mountains determined that the fair value of its investment in PassportCard/DavidShield was $95 million as of December 31, 2020, which included the additional $15 million investment in PassportCard/DavidShield made during the second quarter of 2020.
With a discounted cash flow analysis, small changes to inputs in a valuation model may result in significant changes to fair value. The following table presents the estimated effect on the fair value of White Mountains’s investment in PassportCard/DavidShield as of December 31, 2020, resulting from changes in key inputs to the discounted cash flow analysis, including the discount rate and terminal revenue growth rate:
4.0% $ 108 $ 101 $ 95 $ 89 $ 84
White Mountains’s portfolio of other long-term investments includes investments in private equity funds, hedge funds and the 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 the 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 valuation 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.
Private equity funds - NAV $ 121.2 $ (12.1) $ 12.1 $ (36.3) $ 36.3
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, 2020 and 2019 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, 2020, 2019 and 2018.
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 96.9% 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.
Any write-down of the carried amount of the BAM Surplus Notes and/or the accrued interest thereon could adversely impact White Mountains’s results of operations and financial condition. See Item 1A., Risk Factors, “If BAM does not pay some or all of the principal and interest due on the BAM Surplus Notes, it could materially adversely affect our results of operations and financial condition.” on page 19.
In January 2020, 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 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 as of December 31, 2019.
BAM is required to seek regulatory approval to pay interest and principal on the BAM 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. No payment of principal or interest on the BAM Surplus Notes may be made without the approval of the NYDFS.
White Mountains’s annual review first assesses whether qualitative factors indicate that the carrying value of goodwill or other intangible assets may be impaired. 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 models, market comparisons and other valuation techniques and assumptions, including customer retention rates and revenue growth rates, that are inherently subjective.
Most of White Mountains’s total goodwill and other intangible assets of $782 million relates to the acquisition of NSM and NSM’s subsequent acquisitions of Fresh Insurance, KBK, Embrace, the Renewal Rights from AIG and Kingsbridge. As of December 31, 2020, goodwill and other intangible assets related to NSM were $737 million. During 2020, White Mountains recognized impairments of other intangible assets of $6 million related to Fresh Insurance. The impairments related to lower premium volumes, including due to the impact of the COVID-19 pandemic, and certain reorganization initiatives at Fresh Insurance. During 2020, White Mountains did not recognize any goodwill impairments. During 2020, White Mountains performed its periodic reviews for potential impairment, including a quantitative review of the goodwill associated with NSM. During 2019, 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. During 2020 and 2019, White Mountains concluded that there was no impairment of the goodwill associated with NSM.
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 18.
This report may contain “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. All statements, other than statements of historical facts, included or referenced in this report which address activities, events or developments which White Mountains expects or anticipates will or may occur in the future are forward-looking statements. The words “could”, “will”, “believe”, “intend”, “expect”, “anticipate”, “project”, “estimate”, “predict” and similar expressions are also intended to identify forward-looking statements. These forward-looking statements include, among others, statements with respect to White Mountains’s:
•projections of revenues, income (or loss), earnings (or loss) per share, EBITDA, adjusted EBITDA, dividends, market share or other financial forecasts of White Mountains or its businesses;
•actions taken by ratings agencies, such as financial strength or credit ratings downgrades or placing ratings on negative watch;