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 56 for specific important factors that could cause actual results to differ materially from those contained in forward-looking statements.
The following discussion also includes five non-GAAP financial measures, adjusted book value per share, MediaAlpha’s earnings before interest, taxes, depreciation and amortization (“EBITDA”), adjusted total capital and consolidated portfolio returns excluding Symetra, and common equity securities and other long-term investment returns excluding Symetra, that have been reconciled to their most comparable GAAP financial measures on page 51. White Mountains believes these measures to be useful in evaluating White Mountains’s financial performance and condition.
HG Global reported GAAP pre-tax income of $22 million and $18 million in 2016 and 2015, which was driven by $18 million and $16 million of interest income on the BAM Surplus Notes, respectively.
On October 5, 2017, MediaAlpha acquired certain assets associated with the Health, Life and Medicare insurance business of Healthplans.com for a purchase price of $28 million. The acquired assets include domain names, advertiser and publisher relationships, traffic acquisition accounts, and owned and operated websites. During the fourth quarter of 2017, which includes the annual open enrollment period for Health and Medicare coverages, business from the acquired assets contributed $15 million of revenues and $2 million of both pre-tax income and EBITDA.
Advertising and commission revenues were $163 million in 2017, compared to $117 million in 2016. The increase in revenues was primarily driven by growth generated from the newly acquired assets in the Health, Life and Medicare vertical and the growth in the P&C vertical. The Health, Life and Medicare vertical revenues increased $27 million, to $56 million for the year ended December 31, 2017. The P&C vertical revenues increased $11 million, to $88 million for the year ended December 31, 2017.
MediaAlpha reported pre-tax losses of $4 million and $2 million in 2016 and 2015. EBITDA was $7 million in 2016 and 2015. The increase in the pre-tax loss in 2016 was primarily driven by the additional amortization expense of $2 million from amortization related to the 2016 acquisition of certain travel-related assets from Oversee.net. Additionally in 2016, gross profit from the Health, Life and Medicare vertical increased $2 million which was offset by the decline in gross profit from the P&C vertical of $2 million and increased operating expenses.
White Mountains maintains a portfolio of common equity securities and other long-term investments. White Mountains’s management believes that prudent levels of investments in common equity securities and other long-term investments are likely to enhance long-term after-tax total returns.
White Mountains’s actively managed common equity portfolios returned 25.2% in 2017, outperforming the S&P 500 Index return of 21.8% for the comparable period. White Mountains’s actively managed common equity portfolios returned 4.0% in 2016, underperforming the S&P 500 Index return of 12.0% in 2016.
White Mountains’s other long-term investments portfolio returned -5.8% for 2017. The results were primarily attributable to losses from foreign currency forward contracts and unfavorable results from private capital investments, including a $15 million write-down to White Mountains’s investment in Captricity. These losses were partially offset by strong private equity fund performance and favorable mark-to-market adjustments to the OneBeacon Surplus Notes. White Mountains’s other long-term investments portfolio returned 0.8% for 2016. The results were primarily attributable to favorable mark-to-market adjustments to the OneBeacon Surplus Notes, mostly offset by losses from private equity funds and private capital investments.
HG Re is a Special Purpose Insurer subject to regulation and supervision by the BMA, but does not require regulatory approval to pay dividends. However, HG Re’s dividend capacity is limited to amounts held outside of the collateral trusts pursuant to the FLRT with BAM. As of December 31, 2017, HG Re had statutory capital and surplus of $677 million, $715 million of assets held in the collateral trusts pursuant to the FLRT with BAM and less than $1 million of cash and investments outside the collateral trusts.
In order to further support BAM’s long-term capital position and business prospects, on August 14, 2017, HG Global contributed the $203 million of Series A Notes into the Supplemental Trust at HG Re, HG Global’s wholly owned reinsurance subsidiary. The Supplemental Trust already held the $300 million of Series B Surplus Notes. Assets held in the Supplemental Trust serve to collateralize HG Re’s obligations to BAM under the FLRT. HG Global and BAM also changed the payment terms of the Series B Notes, so that payments will reduce principal and accrued interest on a pro rata basis, consistent with the payment terms on the Series A Notes. The terms of the Series B Notes had previously stipulated that payments would first reduce interest owed, then reduce principal owed once all accrued interest had been paid. The Supplemental Trust target balance is equal to approximately $603 million. 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. The collateral trust balances must be at target levels before capital can be distributed out of the Supplemental Trust. In connection with the contribution, Series A Notes were merged with the Series B Notes. During 2017, BAM repaid $4 million of principal and $1 million of accrued interest on the BAM Surplus Notes.
HG Global and BAM also made certain changes to the ceding commission arrangements under the reinsurance treaty between HG Re and BAM. These changes will serve to accelerate growth in BAM’s statutory capital but do not impact the net risk premium ceded from BAM to HG Re.
The following table summarizes White Mountains’s capital structure as of December 31, 2017 and 2016:
During 2017, BAM repaid $4 million of principal and $1 million of accrued interest on the BAM Surplus Notes.
During 2016, MediaAlpha paid $3 million of dividends, of which $2 million was paid to White Mountains. During 2016, MediaAlpha repaid $2 million of the term loan portion and borrowed $3 million and repaid $3 million under the revolving loan portion of the previous MediaAlpha bank facility.
(1) Excludes carrying value of $(3.7) related to foreign currency forward contracts.