NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
Note 1. Summary of Significant Accounting Policies
Basis of Presentation
These interim consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States (“GAAP”) and include the accounts of White Mountains Insurance Group, Ltd. (the “Company” or the “Registrant”), its subsidiaries (collectively, with the Company, “White Mountains”) and other entities required to be consolidated under GAAP. The Company is an exempted Bermuda limited liability company whose principal businesses are conducted through its insurance subsidiaries and other affiliates. The Company’s headquarters is located at 26 Reid Street, Hamilton, Bermuda HM 11, its principal executive office is located at 80 South Main Street, Hanover, New Hampshire 03755-2053 and its registered office is located at Clarendon House, 2 Church Street, Hamilton, Bermuda HM 11. White Mountains’s reportable segments are HG Global/BAM, MediaAlpha and Other Operations.
The HG Global/BAM segment consists of HG Global Ltd. and its wholly-owned subsidiaries (“HG Global”) and the consolidated results of Build America Mutual Assurance Company (“BAM”). BAM is the first and only mutual bond insurance company in the United States. By insuring the timely payment of principal and interest, BAM provides market access to, and lowers interest expense for, issuers of municipal bonds used to finance essential public purposes such as schools, utilities and transportation facilities. BAM is owned by and operated for the benefit of its members, the municipalities that purchase BAM’s insurance for their debt issuances. HG Global was established to fund the startup of BAM and, through its wholly-owned subsidiary, HG Re Ltd. (“HG Re”), to provide
15%
-of-par, first loss reinsurance protection for policies underwritten by BAM. HG Global, together with its subsidiaries, provided the initial capitalization of BAM through the purchase of
$503.0 million
of surplus notes issued by BAM (the “BAM Surplus Notes”). As of
September 30, 2017
and
December 31, 2016
, White Mountains owned
96.9%
of HG Global’s preferred equity and
88.4%
of its common equity. White Mountains does not have an ownership interest in BAM. However, GAAP requires White Mountains to consolidate BAM’s results in its financial statements. BAM’s results are attributed to non-controlling interests.
The MediaAlpha segment consists of QL Holdings LLC and its wholly-owned subsidiary QuoteLab, LLC (collectively “MediaAlpha”). MediaAlpha is an advertising technology company that develops transparent and efficient platforms for the buying and selling of insurance and other vertical-specific performance media (i.e., clicks, calls and leads). MediaAlpha’s exchange technology, machine learning and analytical tools facilitate transparent, real-time transactions between advertisers (buyers of advertising inventory) and publishers (sellers of advertising inventory). MediaAlpha works with
330
advertisers and
280
publishers across a number of insurance (auto, motorcycle, home, renter, health and life) and non-insurance (travel, education, personal finance and home services) verticals.
White Mountains’s Other Operations segment consists of the Company and its intermediate holding companies, its wholly-owned investment management subsidiary, White Mountains Advisors LLC (“WM Advisors”) and certain consolidated and unconsolidated private capital investments. The consolidated private capital investments consist of Wobi Insurance Agency Ltd. (“Wobi”) and Removal Stars Ltd. (“Buzzmove”). During the third quarter of 2017, White Mountains revised certain of its previously issued financial statements for amounts relating to Wobi. See
Note 16 — “Financial Statement Revisions”
. White Mountains’s Other Operations segment also includes its variable annuity reinsurance business, White Mountains Life Reinsurance (Bermuda) Ltd. (“Life Re Bermuda”), which completed its runoff with all of its contracts fully matured on June 30, 2016 and which was liquidated in the third quarter of 2017, and its U.S.-based service provider, White Mountains Financial Services LLC, which was liquidated in the second quarter of 2017 (collectively, “WM Life Re”).
On September 28, 2017, Intact Financial Corporation completed its previously announced acquisition of OneBeacon in an all-cash transaction for
$18.10
per share (the “OneBeacon Transaction”). OneBeacon Ltd., an exempted Bermuda limited liability company that owns a family of property and casualty insurance companies (collectively, “OneBeacon”), offers a wide range of insurance products in the United States through independent agencies, regional and national brokers, wholesalers and managing general agencies. On July 21, 2016, White Mountains completed its sale of Tranzact Holdings, LLC (“Tranzact”) to an affiliate of Clayton, Dubilier & Rice, LLC. On April 18, 2016, White Mountains completed its sale of Sirius International Insurance Group, Ltd., and its subsidiaries (collectively, “Sirius Group”) to CM International Holding PTE Ltd. (“CMI”), the Singapore-based investment arm of China Minsheng Investment Corp., Ltd. White Mountains has presented the results of OneBeacon, Tranzact and Sirius Group as discontinued operations in the statement of operations and comprehensive income for all periods prior to each transaction’s completion date. White Mountains has presented OneBeacon’s assets and liabilities as held for sale as of
December 31, 2016
. On March 7, 2017, White Mountains completed the sale of Star & Shield Services LLC, Star & Shield Risk Management LLC, and Star & Shield Claims Services LLC (collectively “Star & Shield”) and its investment in Star & Shield Insurance Exchange (“SSIE”) surplus notes to K2 Insurance Services, LLC. Star & Shield provides management services for a fee to SSIE, a reciprocal that is owned by its members, who are policyholders. White Mountains was required to consolidate SSIE in its GAAP financial statements until White Mountains completed the sale. White Mountains has presented Star & Shield’s and SSIE’s assets and liabilities as held for sale as of December 31, 2016. See
Note 15 — “Held for Sale and Discontinued Operations”
.
All significant intercompany transactions have been eliminated in consolidation. Certain amounts in the prior period financial statements have been reclassified to conform to the current presentation. These interim financial statements include all adjustments considered necessary by management to fairly state the financial position, results of operations and cash flows of White Mountains. These interim financial statements may not be indicative of financial results for the full year and should be read in conjunction with the Company’s
2016
Annual Report on Form 10-K.
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Refer to the Company’s
2016
Annual Report on Form 10-K for a complete discussion regarding White Mountains’s significant accounting policies.
Recently Adopted Changes in Accounting Principles
Stock Compensation
Effective January 1, 2017, White Mountains adopted ASU 2016-09,
Improvements to Employee Share-Based Payment Accounting (ASC 718)
which simplifies certain aspects of the accounting for share-based compensation. The new guidance provides an accounting policy election to account for forfeitures by either applying an assumption, as required under existing guidance, or by recognizing forfeitures when they actually occur. At adoption, White Mountains did not change its accounting policy for forfeitures, which is to apply an assumed forfeiture rate. The new guidance has also changed the threshold for partial cash settlement to settle statutory withholding requirements for equity classified awards, increasing the threshold up to the maximum statutory tax rate. As a result of adoption, White Mountains reported
$9.3 million
and
$5.8 million
of statutory withholding tax payments made in connection with the settlement of restricted shares as financing cash flows for the nine-month periods ended
September 30, 2017 and 2016
. Such payments were classified as operating cash flows prior to adoption.
In addition, the new guidance changed the treatment for excess tax benefits which arise from the difference between the deduction for tax purposes and the compensation costs recognized for financial reporting. Under the new guidance, a reporting entity will recognize excess tax benefits or expense in current period earnings, regardless of whether it is in a taxes payable position.
Business Combinations - Measurement Period Adjustments
Effective January 1, 2016, White Mountains adopted ASU 2015-16,
Simplifying the Accounting for Measurement-Period Adjustments,
which requires adjustments to provisional amounts recorded in connection with a business combination that are identified during the measurement period to be recorded in the reporting period in which the adjustment amounts are determined, rather than as retroactive adjustments to prior periods. White Mountains has not recognized any adjustments to estimated purchase accounting amounts for the year to date period ended
September 30, 2017
and accordingly, there was no effect to White Mountains’s financial statements upon adoption.
Amendments to Consolidation Analysis
On January 1, 2016, White Mountains adopted ASU 2015-02,
Amendments to the Consolidation Analysis
(ASC 810) which amends the guidance for determining whether an entity is a variable interest entity (“VIE”). ASU 2015-02 eliminates the separate consolidation guidance for limited partnerships and, with it, the presumption that a general partner should consolidate a limited partnership. In addition, ASU 2015-02 changes the guidance for determining if fee arrangements qualify as variable interests and the effect fee arrangements have on the determination of the primary beneficiary. Adoption of ASU 2015-02 did not affect the consolidation analysis for any of White Mountains’s investments.
Share-Based Compensation Awards
On January 1, 2016, White Mountains adopted ASU 2014-12,
Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period
(ASC 718)
.
The new guidance requires that a performance target that affects vesting and that can be achieved after the requisite service period be treated as a performance condition. Compensation cost is to be recognized in the period when it becomes probable the performance target will be achieved in an amount equal to the compensation cost attributable to the periods for which service has been rendered. Adoption did not have any effect on White Mountains’s financial position, results of operations, cash flows, presentation or disclosures.
Debt Issuance Costs
On January 1, 2016, White Mountains adopted ASU 2015-03,
Imputation of Interest
(ASC 835), which requires debt issuance costs to be presented as a deduction from the carrying amount of the related debt, consistent with the treatment required for debt discounts. The new guidance requires amortization of debt issuance costs to be classified within interest expense and also requires disclosure to the debt’s effective interest rate. As of
September 30, 2017
, there was an insignificant amount of unamortized debt issuance costs included in debt.
Recently Issued Accounting Pronouncements
Stock Compensation
In May 2017, the FASB issued ASU 2017-09,
Stock Compensation: Scope of Modification Accounting
(ASC 718), which narrows the scope of transactions subject to modification accounting to changes in terms of an award that result in a change in the award’s fair value, vesting conditions or classification. The new guidance becomes effective for fiscal years beginning after December 15, 2017. White Mountains does not expect a material impact from implementation of this guidance.
Cash Flow Statement
In August 2016, the FASB issued ASU 2016-15,
Statement of Cash Flows: Classification of Certain Cash Receipts and Cash Payments
(ASC 230), which addresses the classification and presentation of certain items, including debt prepayment and extinguishment costs, contingent consideration payments made after a business combination and distributions received from equity method investees, for which there was diversity in practice.
In November 2016, the FASB issued ASU 2016-18,
Statement of Cash Flows: Restricted Cash
(ASC 230)
.
Under current guidance, restricted amounts of cash or cash equivalents are excluded from the cash flow statement. The new guidance requires restricted cash and restricted cash equivalents to be included in the reconciliation of beginning and end-of-period amounts presented on the statement of cash flows. In addition, the new guidance requires a description of the nature of the changes in restricted cash and cash equivalents during the periods presented.
The updated guidance in ASU 2016-15 and ASU 2016-18 are both effective for interim and annual reporting periods beginning after December 15, 2017, with early adoption permitted. White Mountains does not expect a material impact from implementation of this guidance.
Credit Losses
In June 2016, the FASB issued ASU 2016-13,
Measurement of Credit Losses on Financial Instruments
(ASC 326), which establishes new guidance for the recognition of credit losses for financial assets measured at amortized cost. The new ASU requires reporting entities to estimate the credit losses expected over the life of a credit exposure using historical information, current information and reasonable and supportable forecasts that affect the collectability of the financial asset. This differs from current U.S. GAAP, which delays recognition until it is probable a loss has been incurred. The new guidance is expected to accelerate recognition of credit losses. The types of assets within the scope of the new guidance include premium receivables, reinsurance recoverables and loans. ASU 2016-13 is effective for annual periods beginning after January 1, 2020, including interim periods. White Mountains is evaluating the expected impact of this guidance.
Leases
In February 2016, the FASB issued ASU 2016-02,
Leases
(ASC 842). The new guidance requires lessees to recognize lease assets and liabilities on the balance sheet for both operating and financing leases, with the exception of leases with an original term of 12 months or less. Under existing guidance recognition of lease assets and liabilities is not required for operating leases. The lease assets and liabilities to be recognized are both measured initially based on the present value of the lease payments. Under the new guidance, a sale-leaseback transaction must meet the recognition criteria under ASC 606,
Revenues,
in order to be accounted for as sale. The new guidance is effective for White Mountains for years beginning after December 15, 2018, including interim periods therein. White Mountains is evaluating the expected impact of this guidance and available adoption methods.
Financial Instruments - Recognition and Measurement
In January 2016, the FASB issued ASU 2016-01,
Recognition and Measurement of Financial Assets and Financial Liabilities
(ASC 825-10). The new ASU modifies the guidance for financial instruments, including investments in equity securities. Under the new guidance, all equity securities with readily determinable fair values are required to be measured at fair value with changes therein recognized through current period earnings. In addition, the new ASU requires a qualitative assessment for equity securities without readily determinable fair values to identify impairment, and for impaired equity securities to be measured at fair value. ASU 2016-01 is effective for fiscal years beginning after December 15, 2017, with early adoption permitted. White Mountains measures its portfolio of investment securities at fair value with changes therein recognized through current period earnings and accordingly, does not expect the adoption of ASU 2016-01 to have a significant impact on its financial statements.
Revenue Recognition
In May 2014, the FASB issued ASU 2014-09,
Revenue from Contracts with Customers
(ASC 606)
,
which modifies the guidance for revenue recognition. Under ASU 2014-09, revenue is to be recognized at an amount that reflects the consideration to which an entity expects to be entitled in exchange for goods or services transferred to customers. The new guidance sets forth the steps to be followed to recognize revenue: (i) identify the contract(s) with a customer, (ii) identify the performance obligations in the contract, (iii) determine the transaction price, (iv) allocate the transaction price to the performance obligations in the contract and (v) recognize revenue when (or as) the entity satisfies a performance obligation. Subsequently, the FASB issued additional ASUs clarifying the guidance in and providing implementation guidance for ASU 2014-09.
In August 2015, the FASB issued ASU 2015-14,
Revenue from Contracts with Customers
, which delays the effective date of ASU 2014-09 and all related ASUs to annual and interim reporting periods beginning after December 15, 2017. Revenue from insurance contracts, investment income and investments gains and losses are excluded from the scope of 2014-09. The new guidance is applicable to some of White Mountains’s revenue streams, including certain fee arrangements as well as commissions and other non-insurance revenues. White Mountains does not expect ASU 2014-09 to have a significant effect on recognition of White Mountains’s revenues from customers.
Note 2. Significant Transactions
OneBeacon Transaction
On September 28, 2017, White Mountains received
$1.3 billion
in cash proceeds from the OneBeacon Transaction and recorded a gain of
$554.6 million
, net of transaction costs. As a result of the OneBeacon Transaction, OneBeacon’s results have been reported as discontinued operations within White Mountains’s GAAP financial statements. See
Note 15 — “Held for Sale and Discontinued Operations”
.
Sale of Star & Shield
On March 7, 2017, White Mountains completed its sale of Star & Shield and its investment in SSIE surplus notes to K2 Insurances LLC. White Mountains did not recognize any gain or loss on the sale. Through December 31, 2016, Star & Shield’s assets and liabilities are reported as held for sale within White Mountains’s GAAP financial statements. See
Note 15 — “Held for Sale and Discontinued Operations”
.
Acquisition of Buzzmove
On August 4, 2016, White Mountains acquired a
70.9%
ownership share in Buzzmove for a purchase price of GBP
6.1 million
(approximately
$8.1 million
based upon the foreign exchange spot rate at the date of acquisition). White Mountains recognized total assets acquired related to Buzzmove of
$11.5 million
, including
$7.6 million
of goodwill and
$1.1 million
of intangible assets, and total liabilities assumed of
$0.1 million
, reflecting acquisition date fair values.
On August 1, 2017, White Mountains purchased
37,409
newly-issued preferred shares of Buzzmove for GBP
4.0 million
(approximately
$5.0 million
based upon the foreign exchange spot rate at the date of acquisition) and
5,808
common shares from the company founders for GBP
$0.5 million
(approximately
$0.7 million
based upon the spot rate at the date of acquisition). White Mountains ownership share in Buzzmove as of September 30, 2017 was
77.1%
.
Sale of Tranzact
On July 21, 2016, White Mountains completed the sale of Tranzact to Clayton, Dubilier & Rice, LLC and received net proceeds of
$221.3 million
. In connection with the sale of Tranzact, the purchaser directly repaid
$56.3 million
for the portion of Tranzact’s debt attributable to White Mountains’s common shareholders. On October 5, 2016, White Mountains received additional proceeds of
$1.2 million
following the release of the post-closing purchase price adjustment escrow.
White Mountains recorded a
$51.9 million
gain from the sale of Tranzact in discontinued operations, which included a
$30.2 million
tax expense for the reversal of a tax valuation allowance that is offset by a tax benefit recorded in continuing operations. See
Note 6 — “Income Taxes”
. The increase to White Mountains’s book value from the sale of Tranzact was
$82.1 million
. A reconciliation of the gain reported in discontinued operations to the impact to White Mountains’s book value is as follows:
|
|
|
|
|
|
Gain from sale of Tranzact reported in discontinued operations
|
|
$
|
51.9
|
|
Add back reclassification from continuing operations for the release of a tax valuation allowance
|
|
30.2
|
|
Increase to White Mountains’s book value from sale of Tranzact
|
|
$
|
82.1
|
|
In the first quarter of 2017, White Mountains recorded a
$1.0 million
reduction to the gain from sale of Tranzact in discontinued operations as a result of state tax expense.
Through July 21, 2016, Tranzact’s results of operations are reported as discontinued operations and assets and liabilities held for sale within White Mountains’s GAAP financial statements. See
Note 15 — “Held for Sale and Discontinued Operations”
.
Sale of Sirius Group
On April 18, 2016, White Mountains completed the sale of Sirius Group to CMI for approximately
$2.6 billion
. $
161.8 million
of this amount was used to purchase certain assets to be retained by White Mountains out of Sirius Group, including shares of OneBeacon. The amount paid at closing was based on an estimate of Sirius Group’s closing date tangible common shareholder’s equity. During the third quarter of 2016, there was a final true-up to Sirius Group’s tangible common shareholder’s equity that resulted in a
$4.0 million
reduction to the gain. During 2016, White Mountains recorded
$363.2 million
of gain from sale of Sirius Group in discontinued operations and
$113.3 million
in other comprehensive income from discontinued operations from Sirius Group.
During the third quarter of 2017, White Mountains recorded a
$0.8 million
reduction to the gain from sale of Sirius Group as a result of a change to the valuation of the accrued incentive compensation payable to Sirius Group employees.
Through April 18, 2016, Sirius Group’s results are reported as discontinued operations and assets and liabilities held for sale within White Mountains’s GAAP financial statements.
The transactions to purchase the investments in OneBeacon and the other investments held by Sirius Group prior to the closing are presented in the statement of cash flows as net settlement of investment cash flows within discontinued operations. See
Note 15 — “Held for Sale and Discontinued Operations”
.
Sale of Symetra
On February 1, 2016, Symetra Financial Corporation (“Symetra”) closed its merger agreement with Sumitomo Life Insurance Company (“Sumitomo Life”) and White Mountains received proceeds of
$658.0 million
, or
$32.00
per common share. White Mountains also received a special dividend of
$0.50
per share as part of the transaction that was paid in the third quarter of 2015. See
Note 12 — “Investment in Symetra”.
Note 3. Investments Securities
White Mountains’s portfolio of investment securities held for general investment purposes consists of fixed maturity investments, short-term investments, common equity securities and other-long term investments, which are all classified as trading securities. Trading securities are reported at fair value as of the balance sheet date. Net realized and unrealized investment gains (losses) on trading securities are reported in pre-tax revenues.
White Mountains’s fixed maturity investments are generally valued using industry standard pricing methodologies. Key inputs include benchmark yields, benchmark securities, reported trades, issuer spreads, bids, offers, credit ratings and prepayment speeds. Income on mortgage and asset-backed securities is recognized using an effective yield based on anticipated prepayments and the estimated economic life of the securities. When actual prepayments differ significantly from anticipated prepayments, the estimated economic life is recalculated and the remaining unamortized premium or discount is amortized prospectively over the remaining economic life.
Realized investment gains (losses) resulting from sales of investment securities are accounted for using the specific identification method. Premiums and discounts on all fixed maturity investments are amortized or accreted to income over the anticipated life of the investment. Short-term investments consist of interest-bearing money market funds, certificates of deposit and other securities which, at the time of purchase, mature or become available for use within one year. Short-term investments are carried at amortized or accreted cost, which approximated fair value as of
September 30, 2017
and
December 31, 2016
.
Other long-term investments consist primarily of hedge funds, private equity funds, unconsolidated private capital investments and foreign currency forward contracts.
Net Investment Income
White Mountains’s net investment income is comprised primarily of interest income associated with White Mountains’s fixed maturity investments and short-term investments and dividend income from its common equity securities and other long- term investments.
Pre-tax net investment income for the
three and nine months ended
September 30, 2017
and
2016
consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
|
September 30,
|
|
September 30,
|
Millions
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Investment income:
|
|
|
|
|
|
|
|
|
Fixed maturity investments
|
|
$
|
9.8
|
|
|
$
|
9.3
|
|
|
$
|
32.9
|
|
|
$
|
17.4
|
|
Short-term investments
|
|
.3
|
|
|
.2
|
|
|
.6
|
|
|
.7
|
|
Common equity securities
|
|
2.7
|
|
|
.5
|
|
|
7.7
|
|
|
1.0
|
|
Other long-term investments
|
|
.1
|
|
|
—
|
|
|
.5
|
|
|
.4
|
|
Total investment income
|
|
12.9
|
|
|
10.0
|
|
|
41.7
|
|
|
19.5
|
|
Third-party investment expenses
|
|
(.7
|
)
|
|
(.4
|
)
|
|
(2.0
|
)
|
|
(1.3
|
)
|
Net investment income, pre-tax
|
|
$
|
12.2
|
|
|
$
|
9.6
|
|
|
$
|
39.7
|
|
|
$
|
18.2
|
|
Net Realized and Unrealized Investment Gains (Losses)
Net realized and unrealized investment gains (losses) for the
three and nine months ended
September 30, 2017
and
2016
consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
|
September 30,
|
|
September 30,
|
Millions
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Net realized investment gains, pre-tax
|
|
$
|
6.8
|
|
|
$
|
.7
|
|
|
$
|
20.8
|
|
|
$
|
265.0
|
|
Net unrealized investment gains (losses), pre-tax
|
|
25.7
|
|
|
10.2
|
|
|
81.7
|
|
|
(237.8
|
)
|
Net realized and unrealized investment gains, pre-tax
|
|
32.5
|
|
|
10.9
|
|
|
102.5
|
|
|
27.2
|
|
Income tax expense attributable to net realized and
unrealized investment gains
|
|
(3.9
|
)
|
|
—
|
|
|
(9.5
|
)
|
|
(4.0
|
)
|
Net realized and unrealized investment gains, after tax
|
|
$
|
28.6
|
|
|
$
|
10.9
|
|
|
$
|
93.0
|
|
|
$
|
23.2
|
|
Net Realized Investment Gains (Losses)
Net realized investment gains (losses) for the
three and nine months ended
September 30, 2017
and
2016
consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Three Months Ended
|
|
|
September 30, 2017
|
|
September 30, 2016
|
Millions
|
|
Net
realized gains (losses)
|
|
Net
foreign
currency gains (losses)
|
|
Total net realized
gains (losses)
reflected in
earnings
|
|
Net
realized gains
|
|
Net
foreign
currency gains (losses)
|
|
Total net realized
gains
reflected in
earnings
|
Fixed maturity investments
|
|
$
|
.6
|
|
|
$
|
1.2
|
|
|
$
|
1.8
|
|
|
$
|
.3
|
|
|
$
|
—
|
|
|
$
|
.3
|
|
Short-term investments
|
|
(.1
|
)
|
|
—
|
|
|
(.1
|
)
|
|
.2
|
|
|
—
|
|
|
.2
|
|
Common equity securities
|
|
4.9
|
|
|
5.4
|
|
|
10.3
|
|
|
.2
|
|
|
—
|
|
|
.2
|
|
Other long-term investments
|
|
2.0
|
|
|
(7.2
|
)
|
|
(5.2
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
Net realized investment gains (losses),
pre-tax
|
|
7.4
|
|
|
(.6
|
)
|
|
6.8
|
|
|
.7
|
|
|
—
|
|
|
.7
|
|
Income tax expense attributable to
net realized investment gains
|
|
(.6
|
)
|
|
—
|
|
|
(.6
|
)
|
|
(.1
|
)
|
|
—
|
|
|
(.1
|
)
|
Net realized investment
gains (losses), after tax
|
|
$
|
6.8
|
|
|
$
|
(.6
|
)
|
|
$
|
6.2
|
|
|
$
|
.6
|
|
|
$
|
—
|
|
|
$
|
.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
Nine Months Ended
|
|
|
September 30, 2017
|
|
September 30, 2016
|
Millions
|
|
Net
realized (losses)
gains
|
|
Net
foreign
currency gains (losses)
|
|
Total net realized
gains (losses)
reflected in
earnings
|
|
Net
realized gains
|
|
Net
foreign
currency gains (losses)
|
|
Total net realized
gains
reflected in
earnings
|
Fixed maturity investments
|
|
$
|
(.4
|
)
|
|
$
|
2.7
|
|
|
$
|
2.3
|
|
|
$
|
2.0
|
|
|
$
|
—
|
|
|
$
|
2.0
|
|
Short-term investments
|
|
(.1
|
)
|
|
—
|
|
|
(.1
|
)
|
|
.4
|
|
|
—
|
|
|
.4
|
|
Common equity securities
|
|
18.5
|
|
|
6.0
|
|
|
24.5
|
|
|
262.6
|
|
|
—
|
|
|
262.6
|
|
Other long-term investments
|
|
3.0
|
|
|
(8.9
|
)
|
|
(5.9
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
Net realized investment gains (losses), pre-tax
|
|
21.0
|
|
|
(.2
|
)
|
|
20.8
|
|
|
265.0
|
|
|
—
|
|
|
265.0
|
|
Income tax expense attributable to
net realized investment gains
|
|
(3.6
|
)
|
|
—
|
|
|
(3.6
|
)
|
|
(45.1
|
)
|
|
—
|
|
|
(45.1
|
)
|
Net realized investment
gains (losses), after tax
|
|
$
|
17.4
|
|
|
$
|
(.2
|
)
|
|
$
|
17.2
|
|
|
$
|
219.9
|
|
|
$
|
—
|
|
|
$
|
219.9
|
|
Net Unrealized Investment Gains (Losses)
Net unrealized investment gains (losses) and changes in the carrying value of investments measured at fair value for the
three and nine months ended
September 30, 2017
and
2016
consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Three Months Ended
|
|
|
September 30, 2017
|
|
September 30, 2016
|
Millions
|
|
Net
unrealized
gains (losses)
|
|
Net
foreign
currency
gains (losses)
|
|
Total net unrealized gains (losses)
reflected in
earnings
|
|
Net
unrealized (losses) gains
|
|
Net
foreign
currency gains
|
|
Total net unrealized (losses) gains
reflected in
earnings
|
Fixed maturity investments
|
|
$
|
2.0
|
|
|
$
|
5.1
|
|
|
$
|
7.1
|
|
|
$
|
(2.0
|
)
|
|
$
|
—
|
|
|
$
|
(2.0
|
)
|
Common equity securities
|
|
26.6
|
|
|
(3.1
|
)
|
|
23.5
|
|
|
8.5
|
|
|
.2
|
|
|
8.7
|
|
Other long-term investments
|
|
(2.5
|
)
|
|
(2.4
|
)
|
|
(4.9
|
)
|
|
3.4
|
|
|
.1
|
|
|
3.5
|
|
Net unrealized investment gains (losses), pre-tax
|
|
26.1
|
|
|
(.4
|
)
|
|
25.7
|
|
|
9.9
|
|
|
.3
|
|
|
10.2
|
|
Income tax (expense) benefit
attributable to net unrealized
investment gains (losses)
|
|
(3.3
|
)
|
|
—
|
|
|
(3.3
|
)
|
|
.1
|
|
|
—
|
|
|
.1
|
|
Net unrealized investment
gains (losses), after tax
|
|
$
|
22.8
|
|
|
$
|
(.4
|
)
|
|
$
|
22.4
|
|
|
$
|
10.0
|
|
|
$
|
.3
|
|
|
$
|
10.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
Nine Months Ended
|
|
|
September 30, 2017
|
|
September 30, 2016
|
Millions
|
|
Net
unrealized
gains
|
|
Net
foreign
currency
gains (losses)
|
|
Total net unrealized gains (losses)
reflected in
earnings
|
|
Net
unrealized gains (losses)
|
|
Net
foreign
currency gains
|
|
Total net unrealized
gains (losses)
reflected in
earnings
|
Fixed maturity investments
|
|
$
|
19.4
|
|
|
$
|
12.6
|
|
|
$
|
32.0
|
|
|
$
|
13.3
|
|
|
$
|
—
|
|
|
$
|
13.3
|
|
Common equity securities
|
|
53.5
|
|
|
—
|
|
|
53.5
|
|
|
(256.1
|
)
|
|
2.6
|
|
|
(253.5
|
)
|
Other long-term investments
|
|
9.2
|
|
|
(13.0
|
)
|
|
(3.8
|
)
|
|
2.1
|
|
|
.3
|
|
|
2.4
|
|
Net unrealized investment gains (losses), pre-tax
|
|
82.1
|
|
|
(.4
|
)
|
|
81.7
|
|
|
(240.7
|
)
|
|
2.9
|
|
|
(237.8
|
)
|
Income tax (expense) benefit
attributable to net unrealized
investment gains (losses)
|
|
(5.9
|
)
|
|
—
|
|
|
(5.9
|
)
|
|
41.1
|
|
|
—
|
|
|
41.1
|
|
Net unrealized investment
gains (losses), after tax
|
|
$
|
76.2
|
|
|
$
|
(.4
|
)
|
|
$
|
75.8
|
|
|
$
|
(199.6
|
)
|
|
$
|
2.9
|
|
|
$
|
(196.7
|
)
|
Total gains (losses) included in earnings attributable to unrealized investment gains (losses) for Level 3 investments for the
three and nine months ended
September 30, 2017
and
2016
consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
|
September 30,
|
|
September 30,
|
Millions
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Fixed maturity investments
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
.1
|
|
Other long-term investments
|
|
(.7
|
)
|
|
(.9
|
)
|
|
(2.2
|
)
|
|
.7
|
|
Total unrealized investment (losses) gains, pre-tax - Level 3 investments
|
|
$
|
(.7
|
)
|
|
$
|
(.9
|
)
|
|
$
|
(2.2
|
)
|
|
$
|
.8
|
|
Investment Holdings
The cost or amortized cost, gross unrealized investment gains (losses), net foreign currency gains (losses), and carrying values of White Mountains’s fixed maturity investments as of
September 30, 2017
and
December 31, 2016
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2017
|
Millions
|
|
Cost or
amortized
cost
|
|
Gross
unrealized
gains
|
|
Gross
unrealized
losses
|
|
Net foreign
currency
gains
|
|
Carrying
value
|
U.S. Government and agency obligations
|
|
$
|
218.1
|
|
|
$
|
.1
|
|
|
$
|
(.4
|
)
|
|
$
|
—
|
|
|
$
|
217.8
|
|
Debt securities issued by corporations
|
|
608.3
|
|
|
3.2
|
|
|
(1.0
|
)
|
|
14.5
|
|
|
625.0
|
|
Mortgage and asset-backed securities
|
|
389.1
|
|
|
1.2
|
|
|
(2.4
|
)
|
|
—
|
|
|
387.9
|
|
Municipal obligations
|
|
252.1
|
|
|
3.1
|
|
|
(.5
|
)
|
|
—
|
|
|
254.7
|
|
Foreign government, agency and provincial obligations
|
|
4.5
|
|
|
—
|
|
|
(.1
|
)
|
|
.2
|
|
|
4.6
|
|
Total fixed maturity investments
|
|
$
|
1,472.1
|
|
|
$
|
7.6
|
|
|
$
|
(4.4
|
)
|
|
$
|
14.7
|
|
|
$
|
1,490.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
Millions
|
|
Cost or
amortized
cost
|
|
Gross
unrealized
gains
|
|
Gross
unrealized
losses
|
|
Net foreign
currency
gains
|
|
Carrying
value
|
U.S. Government and agency obligations
|
|
$
|
112.1
|
|
|
$
|
—
|
|
|
$
|
(1.1
|
)
|
|
$
|
—
|
|
|
$
|
111.0
|
|
Debt securities issued by corporations
|
|
752.0
|
|
|
2.3
|
|
|
(10.1
|
)
|
|
2.1
|
|
|
746.3
|
|
Mortgage and asset-backed securities
|
|
986.9
|
|
|
.8
|
|
|
(7.9
|
)
|
|
—
|
|
|
979.8
|
|
Municipal obligations
|
|
238.7
|
|
|
1.1
|
|
|
(1.3
|
)
|
|
—
|
|
|
238.5
|
|
Foreign government, agency and provincial obligations
|
|
12.0
|
|
|
.1
|
|
|
—
|
|
|
—
|
|
|
12.1
|
|
Total fixed maturity investments
|
|
$
|
2,101.7
|
|
|
$
|
4.3
|
|
|
$
|
(20.4
|
)
|
|
$
|
2.1
|
|
|
$
|
2,087.7
|
|
Less: fixed maturity investments reclassified to assets
held for sale related to SSIE
|
|
|
|
|
|
|
|
|
|
(6.6
|
)
|
Total fixed maturity investments
|
|
|
|
|
|
|
|
|
|
$
|
2,081.1
|
|
The cost or amortized cost, gross unrealized investment gains (losses), net foreign currency gains (losses), and carrying values of White Mountains’s common equity securities and other long-term investments as of
September 30, 2017
and
December 31, 2016
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2017
|
Millions
|
|
Cost or
amortized
cost
|
|
Gross
unrealized
gains
|
|
Gross
unrealized
losses
|
|
Net foreign
currency
losses
|
|
Carrying
value
|
Common equity securities
|
|
$
|
693.8
|
|
|
$
|
82.6
|
|
|
$
|
(2.0
|
)
|
|
$
|
—
|
|
|
$
|
774.4
|
|
Other long-term investments
|
|
$
|
254.5
|
|
|
$
|
13.1
|
|
|
$
|
(21.2
|
)
|
|
$
|
(16.8
|
)
|
|
$
|
229.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
Millions
|
|
Cost or
amortized
cost
|
|
Gross
unrealized
gains
|
|
Gross
unrealized
losses
|
|
Net foreign
currency
losses
|
|
Carrying
value
|
Common equity securities
|
|
$
|
258.6
|
|
|
$
|
29.0
|
|
|
$
|
(2.0
|
)
|
|
$
|
—
|
|
|
$
|
285.6
|
|
Other long-term investments
|
|
$
|
194.0
|
|
|
$
|
7.9
|
|
|
$
|
(25.2
|
)
|
|
$
|
(3.9
|
)
|
|
$
|
172.8
|
|
Other Long-term Investments
Other long-term investments as of
September 30, 2017
and
December 31, 2016
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
Carrying Value at
|
Millions
|
|
September 30, 2017
|
|
December 31, 2016
|
Hedge funds and private equity funds, at fair value
|
|
$
|
154.9
|
|
|
$
|
82.6
|
|
Private equity securities and limited liability companies, at fair value
(1)(2)
|
|
59.1
|
|
|
57.6
|
|
Private convertible preferred securities, at fair value
(1)
|
|
27.2
|
|
|
30.6
|
|
Forward Contracts
|
|
(15.4
|
)
|
|
(1.2
|
)
|
Other
|
|
3.8
|
|
|
3.2
|
|
Total other-long term investments
|
|
$
|
229.6
|
|
|
$
|
172.8
|
|
(1)
See
Fair Value Measurements by Level
table.
(2)
White Mountains holds a
20%
ownership interest in OneTitle Holdings LLC (“OTH”) and has provided a $
10.0
million surplus note facility under which OTH’s wholly-owned insurance subsidiary, OneTitle National Guaranty Company, Inc. may, under certain circumstances, draw funds. At
September 30, 2017
, no funds had been drawn on the surplus note facility.
Hedge Funds and Private Equity Funds
White Mountains holds investments in hedge funds and private equity funds, which are included in other long-term investments. The fair value of these investments is generally estimated using the net asset value (“NAV”) of the funds. As of
September 30, 2017
, White Mountains held investments in
two
hedge funds and
ten
private equity funds. The largest investment in a single fund was
$54.7 million
as of
September 30, 2017
and
$21.5 million
as of
December 31, 2016
. The following table summarizes investments in hedge funds and private equity funds by investment objective and sector as of
September 30, 2017
and
December 31, 2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2017
|
|
December 31, 2016
|
Millions
|
|
Fair Value
|
|
Unfunded
Commitments
|
|
Fair Value
|
|
Unfunded
Commitments
|
Hedge funds
|
|
|
|
|
|
|
|
|
|
|
|
|
Long/short banks and financials
|
|
$
|
54.7
|
|
|
$
|
—
|
|
|
$
|
21.5
|
|
|
$
|
—
|
|
Long/short equity REIT
|
|
19.1
|
|
|
—
|
|
|
19.9
|
|
|
—
|
|
Total hedge funds
|
|
73.8
|
|
|
—
|
|
|
41.4
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Private equity funds
|
|
|
|
|
|
|
|
|
|
|
|
|
Manufacturing/Industrial
|
|
42.7
|
|
|
12.1
|
|
|
19.4
|
|
|
22.9
|
|
Aerospace/Defense/Government
|
|
28.7
|
|
|
15.6
|
|
|
19.4
|
|
|
25.9
|
|
Direct lending
|
|
6.7
|
|
|
23.3
|
|
|
1.4
|
|
|
28.6
|
|
Financial Services
|
|
3.0
|
|
|
13.0
|
|
|
1.0
|
|
|
5.0
|
|
Insurance
|
|
—
|
|
|
41.2
|
|
|
—
|
|
|
41.2
|
|
Total private equity funds
|
|
81.1
|
|
|
105.2
|
|
|
41.2
|
|
|
123.6
|
|
Total hedge funds and private equity funds
included in other long-term investments
|
|
$
|
154.9
|
|
|
$
|
105.2
|
|
|
$
|
82.6
|
|
|
$
|
123.6
|
|
Redemption of investments in certain hedge funds is subject to restrictions including lock-up periods where no redemptions or withdrawals are allowed, restrictions on redemption frequency and advance notice periods for redemptions. Amounts requested for redemptions remain subject to market fluctuations until the redemption effective date, which generally falls at the end of the defined redemption period. As of
September 30, 2017
,
one
hedge fund with a fair value of
$54.7 million
was subject to a lock-up period that expires on September 1, 2018.
The following table summarizes the fair value of hedge funds subject to restrictions on redemption frequency and advance notice period requirements for investments in active hedge funds as of
September 30, 2017
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notice Period
|
Millions
Redemption frequency
|
|
30-59 days
notice
|
|
60-89 days
notice
|
|
Total
|
Semi-annual
|
|
$
|
54.7
|
|
|
$
|
19.1
|
|
|
$
|
73.8
|
|
White Mountains has submitted a redemption request for its investment in a long/short equity REIT hedge fund. As of September 30, 2017, the redemption of
$19.1 million
is outstanding and is subject to market fluctuation. The bulk of the redemption proceeds are expected to be received in the first quarter of 2018 with the balance expected in the second quarter of 2018.
Investments in private equity funds are generally subject to a lock-up period during which investors may not request a redemption. Distributions prior to the expected termination date of the fund may be limited to dividends or proceeds arising from the liquidation of the fund’s underlying investments. In addition, certain private equity funds provide an option to extend the lock-up period at either, the sole discretion of the fund manager or upon agreement between the fund and the investors.
The following table summarizes investments in private equity funds that were subject to lock-up periods as of
September 30, 2017
:
|
|
|
|
|
|
|
|
|
|
|
|
Millions
|
|
1-3 years
|
|
3 – 5 years
|
|
5 – 10 years
|
|
>10 years
|
|
Total
|
Private Equity Funds — expected lock-up period remaining
|
|
$4.0
|
|
$18.2
|
|
$33.5
|
|
$25.4
|
|
$81.1
|
Fair Value Measurements as of
September 30, 2017
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 or liabilities 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”). As of
September 30, 2017
and December 31, 2016, White Mountains used quoted market prices or other observable inputs to determine fair value for approximately
93%
and
94%
of its investment portfolio. Investments valued using Level 1 inputs include fixed maturity investments, primarily investments in U.S. Treasuries, short-term investments, which include U.S. Treasury Bills and common equity securities. Investments valued using Level 2 inputs include fixed maturity investments, which have been disaggregated into classes, including debt securities issued by corporations, mortgage and asset-backed securities, municipal obligations, and foreign government, agency and provincial obligations. Investments valued using Level 2 inputs also include certain passive exchange traded funds (“ETFs”) that track U.S. stock indices such as the S&P 500 but are traded on foreign exchanges, which management values using the fund manager’s published NAV to account for the difference in market close times. Fair value estimates for investments that trade infrequently and have few or no observable market prices are classified as Level 3 measurements. Investments valued using Level 3 fair value estimates are based upon unobservable inputs and include investments in certain fixed maturity investments, equity securities and other long-term investments where quoted market prices are unavailable or are not considered reasonable. Transfers between levels are based on investments held as of the beginning of the period.
White Mountains uses brokers and outside pricing services to assist in determining fair values. For investments in active markets, White Mountains uses the quoted market prices provided by outside pricing services to determine fair value. The outside pricing services White Mountains uses have indicated that they will only provide prices where observable inputs are available. In circumstances where quoted market prices are unavailable or are not considered reasonable, White Mountains estimates the fair value using industry standard pricing methodologies and observable inputs such as benchmark yields, reported trades, broker-dealer quotes, issuer spreads, benchmark securities, bids, offers, credit ratings, prepayment speeds, reference data including research publications and other relevant inputs. Given that many fixed maturity investments do not trade on a daily basis, the outside pricing services evaluate a wide range of fixed maturity investments by regularly drawing parallels from recent trades and quotes of comparable securities with similar features. The characteristics used to identify comparable fixed maturity investments vary by asset type and take into account market convention.
White Mountains’s process to assess the reasonableness of the market prices obtained from the outside pricing sources
covers substantially all of its fixed maturity investments and includes, but is not limited to, the evaluation of pricing methodologies and a review of the pricing services’ quality control procedures on at least an annual basis, a comparison of its invested asset prices obtained from alternate independent pricing vendors on at least a semi-annual basis, monthly analytical reviews of certain prices and a review of the underlying assumptions utilized by the pricing services for select measurements on an ad hoc basis throughout the year. White Mountains also performs back-testing of selected sales activity to determine whether there are any significant differences between the market price used to value the security prior to sale and the actual sale price on an ad-hoc basis throughout the year. Prices provided by the pricing services that vary by more than
5%
and
$1.0 million
from the expected price based on these assessment procedures are considered outliers. Also considered outliers are prices that have not changed from period to period and prices that have trended unusually compared to market conditions. In circumstances where the results of White Mountains’s review process does not appear to support the market price provided by the pricing services, White Mountains challenges the vendor provided price. If White Mountains cannot gain satisfactory evidence to support the challenged price, it relies upon its own pricing methodologies to estimate the fair value of the security in question.
The valuation process described above is generally applicable to all of White Mountains’s fixed maturity investments. The techniques and inputs specific to asset classes within White Mountains’s fixed maturity investments for Level 2 securities that use observable inputs are as follows:
Debt securities issued by corporations:
The fair value of debt securities issued by corporations is determined from a pricing evaluation technique that uses information from market sources and integrates relative credit information, observed market movements, and sector news. Key inputs include benchmark yields, reported trades, broker-dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers, and reference data including sector, coupon, credit quality ratings, duration, credit enhancements, early redemption features and market research publications.
Mortgage and asset-backed securities:
The fair value of mortgage and asset-backed securities is determined from a pricing evaluation technique that uses information from market sources and leveraging similar securities. Key inputs include benchmark yields, reported trades, underlying tranche cash flow data, collateral performance, plus new issue data, as well as broker-dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers, and reference data including issuer, vintage, loan type, collateral attributes, prepayment speeds, default rates, recovery rates, cash flow stress testing, credit quality ratings and market research publications.
Municipal obligations:
The fair value of municipal obligations is determined from a pricing evaluation technique that uses information from market makers, brokers-dealers, buy-side firms, and analysts along with general market information. Key inputs include benchmark yields, reported trades, issuer financial statements, material event notices and new issue data, as well as broker-dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers, and reference data including type, coupon, credit quality ratings, duration, credit enhancements, geographic location and market research publications.
Foreign government, agency and provincial obligations:
The fair value of foreign government, agency and provincial obligations is determined from a pricing evaluation technique that uses feeds from data sources in each respective country, including active market makers and inter-dealer brokers. Key inputs include benchmark yields, reported trades, broker-dealer quotes, two-sided markets, benchmark securities, bids, offers, local exchange prices, foreign exchange rates and reference data including coupon, credit quality ratings, duration and market research publications.
Level 3 valuations are generated from techniques that use assumptions not observable in the market. These unobservable assumptions reflect White Mountains’s assumptions that market participants would use in valuing the investment. Generally, certain securities may start out as Level 3 when they are originally issued but as observable inputs become available in the market, they may be reclassified to Level 2.
White Mountains employs a number of procedures to assess the reasonableness of the fair value measurements for its other long-term investments, including obtaining and reviewing periodic and audited annual financial statements of hedge funds and private equity funds and 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 inputs and methods for each underlying investment, the inputs are considered to be unobservable. The fair value of White Mountains’s investments in hedge funds and private equity funds has generally been determined using the fund manager’s NAV. In the event White Mountains believes that its estimate of NAV of a hedge fund or private equity fund differs from that 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 hedge fund or private equity fund. As of
September 30, 2017
and December 31, 2016, White Mountains did not have any adjustments to the reported NAV of its investments in hedge funds and private equity funds.
Fair Value Measurements by Level
The following tables summarize White Mountains’s fair value measurements for investments as of
September 30, 2017
and
December 31, 2016
by level. The major security types were based on the legal form of the securities. White Mountains has disaggregated its fixed maturity investments based on the issuing entity type, which impacts credit quality, with debt securities issued by U.S. government entities carrying minimal credit risk, while the credit and other risks associated with other issuers, such as corporations, foreign governments, municipalities or entities issuing mortgage and asset-backed securities vary depending on the nature of the issuing entity type. White Mountains further disaggregates debt securities issued by corporations and common equity securities by industry sector because investors often reference commonly used benchmarks and their subsectors to monitor risk and performance. Accordingly, White Mountains has further disaggregated these asset classes into subclasses based on the similar sectors and industry classifications it uses to evaluate investment risk and performance against commonly used benchmarks, such as the Bloomberg Barclays U.S. Intermediate Aggregate and S&P 500 indices. The fair value measurements for derivative assets associated with White Mountains’s variable annuity business are presented in
Note 7
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2017
|
Millions
|
|
Fair Value
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
Fixed maturity investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government and agency obligations
|
|
$
|
217.8
|
|
|
$
|
217.8
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
Debt securities issued by corporations:
|
|
|
|
|
|
|
|
|
|
Consumer
|
|
121.9
|
|
|
—
|
|
|
121.9
|
|
|
—
|
|
Utilities
|
|
109.3
|
|
|
—
|
|
|
109.3
|
|
|
—
|
|
Health Care
|
|
85.6
|
|
|
—
|
|
|
85.6
|
|
|
—
|
|
Communications
|
|
81.7
|
|
|
—
|
|
|
81.7
|
|
|
—
|
|
Materials
|
|
68.6
|
|
|
—
|
|
|
68.6
|
|
|
—
|
|
Financials
|
|
55.6
|
|
|
—
|
|
|
50.0
|
|
|
5.6
|
|
Technology
|
|
52.0
|
|
|
—
|
|
|
52.0
|
|
|
—
|
|
Industrial
|
|
38.3
|
|
|
—
|
|
|
38.3
|
|
|
—
|
|
Energy
|
|
12.0
|
|
|
—
|
|
|
12.0
|
|
|
—
|
|
Total debt securities issued by corporations
|
|
625.0
|
|
|
—
|
|
|
619.4
|
|
|
5.6
|
|
|
|
|
|
|
|
|
|
|
Mortgage and asset-backed securities
|
|
387.9
|
|
|
—
|
|
|
387.9
|
|
|
—
|
|
Municipal obligations
|
|
254.7
|
|
|
—
|
|
|
254.7
|
|
|
—
|
|
Foreign government, agency and provincial obligations
|
|
4.6
|
|
|
—
|
|
|
4.6
|
|
|
—
|
|
Total fixed maturity investments
|
|
1,490.0
|
|
|
217.8
|
|
|
1,266.6
|
|
|
5.6
|
|
|
|
|
|
|
|
|
|
|
Short-term investments
(1)
|
|
786.5
|
|
|
764.5
|
|
|
22.0
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Common equity securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Exchange traded funds
(2)
|
|
492.5
|
|
|
434.6
|
|
|
57.9
|
|
|
—
|
|
Health Care
|
|
17.1
|
|
|
17.1
|
|
|
—
|
|
|
—
|
|
Financials
|
|
14.9
|
|
|
14.9
|
|
|
—
|
|
|
—
|
|
Consumer
|
|
13.0
|
|
|
13.0
|
|
|
—
|
|
|
—
|
|
Technology
|
|
11.7
|
|
|
11.7
|
|
|
—
|
|
|
—
|
|
Communications
|
|
10.3
|
|
|
10.3
|
|
|
—
|
|
|
—
|
|
Industrial
|
|
10.2
|
|
|
10.2
|
|
|
—
|
|
|
—
|
|
Energy
|
|
4.0
|
|
|
4.0
|
|
|
—
|
|
|
—
|
|
Other
(3)
|
|
200.7
|
|
|
—
|
|
|
200.7
|
|
|
—
|
|
Total common equity securities
|
|
774.4
|
|
|
515.8
|
|
|
258.6
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Other long-term investments
(4)(5)
|
|
90.1
|
|
|
—
|
|
|
—
|
|
|
90.1
|
|
Total investments
|
|
$
|
3,141.0
|
|
|
$
|
1,498.1
|
|
|
$
|
1,547.2
|
|
|
$
|
95.7
|
|
(1)
Short-term investments are measured at amortized cost, which approximates fair value.
(2)
ETFs traded on foreign exchanges are priced using the fund's published NAV to account for the difference in market close times and are therefore designated a level 2 measurement.
(3)
Consists of
two
investments in unit trusts that primarily invest in international equities.
(4)
Excludes carrying value of
$(15.4)
related to foreign currency forward contracts.
(5)
Excludes carrying value of
$154.9
associated with hedge funds and private equity funds for which fair value is measured at NAV using the practical expedient.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
Millions
|
|
Fair Value
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
Fixed maturity investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government and agency obligations
|
|
$
|
111.0
|
|
|
$
|
101.5
|
|
|
$
|
9.5
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
Debt securities issued by corporations:
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer
|
|
190.8
|
|
|
—
|
|
|
190.8
|
|
|
—
|
|
Utilities
|
|
140.8
|
|
|
—
|
|
|
140.8
|
|
|
—
|
|
Health Care
|
|
114.9
|
|
|
—
|
|
|
114.9
|
|
|
—
|
|
Financials
|
|
79.7
|
|
|
—
|
|
|
79.7
|
|
|
—
|
|
Communications
|
|
72.0
|
|
|
—
|
|
|
72.0
|
|
|
—
|
|
Materials
|
|
65.0
|
|
|
—
|
|
|
65.0
|
|
|
—
|
|
Technology
|
|
48.8
|
|
|
—
|
|
|
48.8
|
|
|
—
|
|
Industrial
|
|
28.2
|
|
|
—
|
|
|
28.2
|
|
|
—
|
|
Energy
|
|
6.1
|
|
|
—
|
|
|
6.1
|
|
|
—
|
|
Total debt securities issued by corporations
|
|
746.3
|
|
|
—
|
|
|
746.3
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Mortgage and asset-backed securities
|
|
979.8
|
|
|
—
|
|
|
979.8
|
|
|
—
|
|
Municipal obligations
|
|
238.5
|
|
|
—
|
|
|
238.5
|
|
|
—
|
|
Foreign government, agency and provincial obligations
|
|
12.1
|
|
|
—
|
|
|
12.1
|
|
|
—
|
|
Total fixed maturity investments
(1)
|
|
2,087.7
|
|
|
101.5
|
|
|
1,986.2
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Short-term investments
(1)(2)
|
|
175.0
|
|
|
162.3
|
|
|
12.7
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Common equity securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Exchange traded funds
(3)
|
|
157.2
|
|
|
129.4
|
|
|
27.8
|
|
|
—
|
|
Health Care
|
|
13.9
|
|
|
13.9
|
|
|
—
|
|
|
—
|
|
Consumer
|
|
8.6
|
|
|
8.6
|
|
|
—
|
|
|
—
|
|
Financials
|
|
7.7
|
|
|
7.7
|
|
|
—
|
|
|
—
|
|
Technology
|
|
7.3
|
|
|
7.3
|
|
|
—
|
|
|
—
|
|
Communications
|
|
7.0
|
|
|
7.0
|
|
|
—
|
|
|
—
|
|
Energy
|
|
2.5
|
|
|
2.5
|
|
|
—
|
|
|
—
|
|
Industrial
|
|
1.5
|
|
|
1.5
|
|
|
—
|
|
|
—
|
|
Other
(4)
|
|
79.9
|
|
|
—
|
|
|
79.9
|
|
|
—
|
|
Total common equity securities
|
|
285.6
|
|
|
177.9
|
|
|
107.7
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Other long-term investments
(5)(6)
|
|
91.4
|
|
|
—
|
|
|
—
|
|
|
91.4
|
|
Total investments
(1)
|
|
$
|
2,639.7
|
|
|
$
|
441.7
|
|
|
$
|
2,106.6
|
|
|
$
|
91.4
|
|
(1)
Includes carrying value of
$6.6
in fixed maturity investments and
$0.1
in short-term investments that are classified as assets held for sale related to SSIE.
(2)
Short-term investments are measured at amortized cost, which approximates fair value.
(3)
ETFs traded on foreign exchanges are priced using the fund’s published NAV to account for the difference in market close times and are therefore designated a level 2 measurement.
(3)
Consists of
one
investment in a unit trust that primarily invests in international equities.
(5)
Excludes carrying value of
$(1.2)
related to foreign currency forward contracts.
(6)
Excludes carrying value of
$82.6
associated with hedge funds and private equity funds for which fair value is measured at NAV using the practical expedient.
Debt Securities Issued by Corporations
The following table summarizes the ratings of debt securities issued by corporations held in White Mountains’s investment portfolio as of
September 30, 2017
and
December 31, 2016
:
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value at
|
Millions
|
|
September 30, 2017
|
|
December 31, 2016
|
AA
|
|
$
|
26.7
|
|
|
$
|
37.3
|
|
A
|
|
119.4
|
|
|
212.8
|
|
BBB
|
|
291.9
|
|
|
335.6
|
|
BB
|
|
165.4
|
|
|
143.2
|
|
B
|
|
21.6
|
|
|
17.4
|
|
Debt securities issued by corporations
(1)(2)
|
|
$
|
625.0
|
|
|
$
|
746.3
|
|
(1)
Credit ratings are assigned based on the following hierarchy: (1) Standard & Poor’s Financial Services LLC ("Standard & Poor's") and (2) Moody's Investor Service, Inc. ("Moody’s").
|
|
(2)
|
Includes carrying value of
$4.2
of fixed maturity investments at
December 31, 2016
that is classified as assets held for sale related to SSIE.
|
Mortgage and Asset-backed Securities
White Mountains purchases commercial mortgage-backed securities (“CMBS”) and residential mortgage-backed securities (“RMBS”) with the goal of maximizing risk adjusted returns in the context of a diversified portfolio. White Mountains considers sub-prime mortgage-backed securities as those that have underlying loan pools that exhibit weak credit characteristics, or those that are issued from dedicated sub-prime shelves or dedicated second-lien shelf registrations (i.e., White Mountains considers investments backed primarily by second-liens to be sub-prime risks regardless of credit scores or other metrics). White Mountains did not hold any RMBS categorized as sub-prime as of
September 30, 2017
.
White Mountains categorizes mortgage-backed securities as “non-prime” (also called “Alt A” or “A-”) if they are backed by collateral that has overall credit quality between prime and sub-prime based on White Mountains’s review of the characteristics of their underlying mortgage loan pools, such as credit scores and financial ratios. As of
September 30, 2017
, White Mountains did not hold any RMBS classified as non-prime. White Mountains’s non-agency RMBS portfolio is generally moderate-term and structurally senior. White Mountains does not own any collateralized loan obligations or any collateralized debt obligations.
The following table summarizes the carrying value of White Mountains’s mortgage and asset-backed securities as of
September 30, 2017
and
December 31, 2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2017
|
|
December 31, 2016
|
Millions
|
|
Fair Value
|
|
Level 2
|
|
Level 3
|
|
Fair Value
|
|
Level 2
|
|
Level 3
|
Mortgage-backed securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agency:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GNMA
|
|
$
|
51.0
|
|
|
$
|
51.0
|
|
|
$
|
—
|
|
|
$
|
70.3
|
|
|
$
|
70.3
|
|
|
$
|
—
|
|
FNMA
|
|
88.9
|
|
|
88.9
|
|
|
—
|
|
|
235.5
|
|
|
235.5
|
|
|
—
|
|
FHLMC
|
|
59.7
|
|
|
59.7
|
|
|
—
|
|
|
59.5
|
|
|
59.5
|
|
|
—
|
|
Total Agency
(1)
|
|
199.6
|
|
|
199.6
|
|
|
—
|
|
|
365.3
|
|
|
365.3
|
|
|
—
|
|
Non-agency:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential
|
|
70.1
|
|
|
70.1
|
|
|
—
|
|
|
70.3
|
|
|
70.3
|
|
|
—
|
|
Commercial
|
|
39.0
|
|
|
39.0
|
|
|
—
|
|
|
3.9
|
|
|
3.9
|
|
|
—
|
|
Total Non-agency
|
|
109.1
|
|
|
109.1
|
|
|
—
|
|
|
74.2
|
|
|
74.2
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total mortgage-backed securities
|
|
308.7
|
|
|
308.7
|
|
|
—
|
|
|
439.5
|
|
|
439.5
|
|
|
—
|
|
Other asset-backed securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit card receivables
|
|
40.5
|
|
|
40.5
|
|
|
—
|
|
|
214.2
|
|
|
214.2
|
|
|
—
|
|
Vehicle receivables
|
|
22.7
|
|
|
22.7
|
|
|
—
|
|
|
205.9
|
|
|
205.9
|
|
|
—
|
|
Other
|
|
16.0
|
|
|
16.0
|
|
|
—
|
|
|
120.2
|
|
|
120.2
|
|
|
—
|
|
Total other asset-backed securities
|
|
79.2
|
|
|
79.2
|
|
|
—
|
|
|
540.3
|
|
|
540.3
|
|
|
—
|
|
Total mortgage and asset-backed securities
|
|
$
|
387.9
|
|
|
$
|
387.9
|
|
|
$
|
—
|
|
|
$
|
979.8
|
|
|
$
|
979.8
|
|
|
$
|
—
|
|
(1)
Represents publicly traded 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).
Non-agency Mortgage-backed Securities
The following table summarizes the security issuance years of White Mountains’s investments in non-agency RMBS and non-agency CMBS securities as of
September 30, 2017
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Security Issuance Year
|
|
|
|
|
|
|
Millions
|
|
Fair Value
|
|
2004
|
|
|
2013
|
|
2014
|
|
2015
|
|
2016
|
|
2017
|
Non-agency RMBS
|
|
$
|
70.1
|
|
|
$
|
.3
|
|
|
|
$
|
1.3
|
|
|
$
|
20.6
|
|
|
$
|
47.9
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Non-agency CMBS
|
|
39.0
|
|
|
—
|
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
3.7
|
|
|
35.3
|
|
Total
|
|
$
|
109.1
|
|
|
$
|
.3
|
|
|
|
$
|
1.3
|
|
|
$
|
20.6
|
|
|
$
|
47.9
|
|
|
$
|
3.7
|
|
|
$
|
35.3
|
|
Non-agency Residential Mortgage-backed Securities
The following table summarizes the classification of the underlying collateral quality and the tranche levels of White Mountains’s non-agency RMBS securities as of
September 30, 2017
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Millions
|
|
Fair Value
|
|
Super Senior
(1)
|
|
Senior
(2)
|
|
Subordinate
(3)
|
Prime
|
|
$
|
70.1
|
|
|
$
|
58.4
|
|
|
$
|
11.7
|
|
|
$
|
—
|
|
Non-prime
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Sub-prime
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Total
|
|
$
|
70.1
|
|
|
$
|
58.4
|
|
|
$
|
11.7
|
|
|
$
|
—
|
|
(1)
At issuance, Super Senior, or in the case of resecuritization, the underlying securities, were rated “AAA” by Standard & Poor’s, “Aaa” by Moody’s or “AAA” by Fitch Ratings, Inc. (“Fitch”) and were senior to other “AAA” or “Aaa” bonds.
(2)
At issuance, Senior, or in the case of resecuritization, the underlying securities, were rated “AAA” by Standard & Poor’s, “Aaa” by Moody’s or “AAA” by Fitch and were senior to non-“AAA” or non-“Aaa” bonds.
(3)
At issuance, Subordinate were not rated “AAA” by Standard & Poor’s, “Aaa” by Moody’s or “AAA” by Fitch and were junior to “AAA” or “Aaa” bonds.
Non-agency Commercial Mortgage-backed Securities
White Mountains’s non-agency CMBS portfolio is generally moderate-term and structurally senior, with more than
30
points of subordination on average for both fixed rate and floating rate as of
September 30, 2017
. In general, subordination represents the percentage principal loss on the underlying collateral that would have to be absorbed by other securities lower in the capital structure before the more senior security incurs a loss. As of
September 30, 2017
, none of the underlying loans of the non-agency CMBS held by White Mountains were reported as non-performing.
The following table summarizes the amount of fixed and floating rate securities and their tranche levels of White Mountains’s non-agency CMBS securities as of
September 30, 2017
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Millions
|
|
Fair Value
|
|
Super Senior
(1)
|
|
Senior
(2)
|
|
Subordinate
(3)
|
Fixed rate CMBS
|
|
$
|
17.8
|
|
|
$
|
—
|
|
|
$
|
16.2
|
|
|
$
|
1.6
|
|
Floating rate CMBS
|
|
21.2
|
|
|
—
|
|
|
—
|
|
|
21.2
|
|
Total
|
|
$
|
39.0
|
|
|
$
|
—
|
|
|
$
|
16.2
|
|
|
$
|
22.8
|
|
(1)
At issuance, Super Senior, or in the case of resecuritization, the underlying securities, were rated “AAA” by Standard & Poor’s, “Aaa” by Moody’s or “AAA” by Fitch and were senior to other “AAA” or “Aaa” bonds.
(2)
At issuance, Senior, or in the case of resecuritization, the underlying securities, were rated “AAA” by Standard & Poor’s, “Aaa” by Moody’s or “AAA” by Fitch and were senior to non-“AAA” or non-“Aaa” bonds.
(3)
At issuance, Subordinate were not rated “AAA” by Standard & Poor’s, “Aaa” by Moody’s or “AAA” by Fitch and were junior to “AAA” or “Aaa” bonds.
Rollforward of Fair Value Measurements by Level
White Mountains uses quoted market prices where available as the inputs to estimate fair value for its investments in active markets. Such measurements are considered to be either Level 1 or Level 2 measurements, depending on whether the quoted market price inputs are for identical securities (Level 1) or similar securities (Level 2). Level 3 measurements for fixed maturity investments, common equity securities, and other long-term investments as of
September 30, 2017
and
2016
consist of securities for which the estimated fair value has not been determined based upon quoted market price inputs for identical or similar securities.
The following tables summarize the changes in White Mountains’s fair value measurements by level for the
nine months ended
September 30, 2017
and
2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 3 Investments
|
|
Millions
|
Level 1 investments
|
Level 2
investments
|
Fixed
maturity investments
|
Other long-term
investments
|
Hedge Funds and Private Equity Funds measured at NAV
(3)
|
|
Total
|
|
Balance at January 1, 2017
|
$
|
279.5
|
|
$
|
2,093.8
|
|
$
|
—
|
|
$
|
91.4
|
|
$
|
82.6
|
|
|
$
|
2,547.3
|
|
(1)(2)(4)
|
Net realized and unrealized gains (losses)
|
52.4
|
|
59.8
|
|
—
|
|
(2.2
|
)
|
15.6
|
|
|
125.6
|
|
|
Amortization/Accretion
|
—
|
|
(6.6
|
)
|
—
|
|
—
|
|
—
|
|
|
(6.6
|
)
|
|
Purchases
|
940.7
|
|
1,038.5
|
|
31.2
|
|
2.9
|
|
64.9
|
|
|
2,078.2
|
|
|
Sales
|
(539.0
|
)
|
(1,668.2
|
)
|
(12.5
|
)
|
(2.0
|
)
|
(8.2
|
)
|
|
(2,229.9
|
)
|
|
Deconsolidation of SSIE
|
—
|
|
(5.2
|
)
|
—
|
|
—
|
|
—
|
|
|
(5.2
|
)
|
|
Transfers in
|
—
|
|
13.1
|
|
—
|
|
—
|
|
—
|
|
|
13.1
|
|
|
Transfers out
|
—
|
|
—
|
|
(13.1
|
)
|
—
|
|
—
|
|
|
(13.1
|
)
|
|
Balance at September 30, 2017
|
$
|
733.6
|
|
$
|
1,525.2
|
|
$
|
5.6
|
|
$
|
90.1
|
|
$
|
154.9
|
|
|
$
|
2,509.4
|
|
(1)(2)
|
(1)
Excludes carrying value of
$(1.2)
and
$(15.4)
as of
January 1, 2017
and
September 30, 2017
associated with foreign currency forward contracts.
(2)
Excludes carrying value of $
175.0
and $
786.5
at
January 1, 2017
and
September 30, 2017
associated with short-term investments, of which
$0.1
is classified as held for sale at
January 1, 2017
.
(3)
Investments for which fair value is measured at NAV using the practical expedient are no longer classified within the fair value hierarchy. See
Note 1 — “Summary of Significant Accounting Policies”
.
(4)
Includes carrying value of
$6.6
of fixed maturity investments at
January 1, 2017
that is classified as assets held for sale related to SSIE.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 3 Investments
|
|
|
|
Millions
|
Level 1 investments
|
Level 2
investments
|
Fixed
maturity investments
|
Other long-term
investments
|
Hedge Funds and Private Equity Funds measured at NAV
(2)
|
Total
|
|
Balance at January 1, 2016
|
$
|
789.0
|
|
$
|
585.6
|
|
$
|
—
|
|
$
|
103.6
|
|
$
|
65.3
|
|
$
|
1,543.5
|
|
(1)(3)
|
Net realized and unrealized gains
|
7.2
|
|
17.4
|
|
.1
|
|
.8
|
|
1.7
|
|
27.2
|
|
|
Amortization/Accretion
|
.1
|
|
(3.8
|
)
|
—
|
|
—
|
|
—
|
|
(3.7
|
)
|
|
Purchases
|
1,387.8
|
|
2,228.5
|
|
70.0
|
|
2.2
|
|
38.4
|
|
3,726.9
|
|
|
Sales
|
(1,992.7
|
)
|
(884.1
|
)
|
—
|
|
(.1
|
)
|
(10.1
|
)
|
(2,887.0
|
)
|
|
Transfers in
|
—
|
|
68.0
|
|
—
|
|
—
|
|
—
|
|
68.0
|
|
|
Transfers out
|
—
|
|
—
|
|
(68.0
|
)
|
—
|
|
—
|
|
(68.0
|
)
|
|
Balance at September 30, 2016
|
$
|
191.4
|
|
$
|
2,011.6
|
|
$
|
2.1
|
|
$
|
106.5
|
|
$
|
95.3
|
|
$
|
2,406.9
|
|
(1)(3)
|
(1)
Excludes carrying value of $
142.0
and $
230.0
at
January 1, 2016
and
September 30, 2016
associated with short-term investments of which
$0.1
and
$0.1
is classified as held for sale at
January 1, 2016
and
September 30, 2016
.
(2)
Investments for which fair value is measured at NAV using the practical expedient are no longer classified within the fair value hierarchy. See
Note 1 — “Summary of Significant Accounting Policies”
.
(3)
Includes carrying value of
$9.5
and
$8.3
of fixed maturity investments at
January 1, 2016
and
September 30, 2016
that is classified as assets held for sale related to SSIE.
Fair Value Measurements — Transfers Between Levels - Nine-month Period ended
September 30, 2017
and
2016
Transfers between levels are recorded using the fair value measurement as of the end of the quarterly period in which the event or change in circumstance giving rise to the transfer occurred.
During the first nine months of 2017,
two
fixed maturity investments classified as Level 3 measurement in the prior period were transferred to Level 2 measurement because quoted market prices for similar securities that were considered reliable and could be validated against an alternative source were available at September 30, 2017. These measurements comprise “Transfers out” of Level 3 and “Transfers in” to Level 2 of
$13.1 million
for the period ended
September 30, 2017
.
During the first
nine months
of 2016, there were
two
fixed maturity investments classified as Level 3 measurements in the prior period that were transferred to Level 2 measurements. These investments comprise the “Transfers out” of Level 3 and “Transfers in” to Level 2 of
$68.0 million
for the period ended September 30, 2016.
Significant Unobservable Inputs
The following table summarizes significant unobservable inputs used in estimating the fair value of investment securities, other than hedge funds and private equity funds, classified within Level 3 as of
September 30, 2017
and
December 31, 2016
. The fair value of investments in hedge funds and private equity funds are generally estimated using the NAV of the funds.
|
|
|
|
|
|
|
|
|
|
|
|
Description
|
|
September 30, 2017
|
$ in millions, except share price
|
|
Rating
(2)
|
|
Valuation Technique(s)
|
|
Fair
Value
(3)
|
|
Unobservable Input
|
Debt securities issued
by corporations
(1)
|
|
BBB
|
|
Broker pricing
|
|
$5.6
|
|
Broker quote
|
-
|
133.792
|
Private equity security
|
|
NR
|
|
Share price of most recent transaction
|
|
$21.0
|
|
Share price
|
-
|
$1.00
|
Private equity security
|
|
NR
|
|
Discounted cash flow
|
|
$22.1
|
|
Discount rate
|
-
|
25.0%
|
Private equity security
|
|
NR
|
|
Share price of most recent transaction
|
|
$3.6
|
|
Share price
|
-
|
$2.52
|
Private convertible preferred security
|
|
NR
|
|
Multiple of EBITDA
|
|
$0.2
|
|
EBITDA multiple
|
-
|
6.00
|
Private convertible preferred security
|
|
NR
|
|
Share price of most recent transaction
|
|
$27.0
|
|
Share price
|
-
|
$3.83
|
Private equity security
|
|
NR
|
|
Discounted cash flow/
Option pricing method
|
|
$10.4
|
|
Discount rate
|
-
|
21.0%
|
|
|
|
|
|
|
|
|
Time until expiration
|
-
|
4 years
|
|
|
|
|
|
|
Volatility/Standard deviation
|
-
|
50.0%
|
|
|
|
|
|
|
Risk free rate
|
-
|
1.00%
|
(1)
As of September 30, 2017, asset type consists of one security.
(2)
Credit ratings are assigned based on the following hierarchy: 1) Standard and Poor's and 2) Moody’s.
(3)
Includes the net unrealized investment gains (losses) associated with foreign currency; foreign currency effects based on observable inputs.
|
|
|
|
|
|
|
|
|
|
Description
|
|
December 31, 2016
|
$ in millions, except share price
|
|
Valuation Technique(s)
|
|
Fair Value
(1)
|
|
Unobservable Input
|
Private equity security
|
|
Share price of most recent transaction
|
|
$21.0
|
|
Share price
|
-
|
$1.00
|
Private equity security
|
|
Discounted cash flow
|
|
$22.1
|
|
Discount rate
|
-
|
25.0%
|
Private equity security
|
|
Share price of most recent transaction
|
|
$3.2
|
|
Share price
|
-
|
$2.52
|
Private convertible preferred security
|
|
Multiple of EBITDA
|
|
$3.6
|
|
EBITDA multiple
|
-
|
6.00
|
Private convertible preferred security
|
|
Share price of most recent transaction
|
|
$27.0
|
|
Share price
|
-
|
$3.83
|
Private equity security
|
|
Discounted cash flow/
Option pricing method
|
|
$9.3
|
|
Discount rate
|
-
|
21.0%
|
|
|
|
|
|
|
Time until expiration
|
-
|
4 years
|
|
|
|
|
Volatility/Standard deviation
|
-
|
50.0%
|
|
|
|
|
Risk free rate
|
-
|
1.00%
|
(1)
Includes the net unrealized investment gains (losses) associated with foreign currency; foreign currency effects based on observable inputs.
Note 4. Goodwill and Other Intangible Assets
White Mountains has recognized goodwill and other intangible assets at the acquisition date fair values in connection with its purchases of subsidiaries.
On January 15, 2016, MediaAlpha acquired certain assets from Oversee.net for a purchase price of
$3.9 million
. The majority of assets acquired, which are included in other intangible assets, consists of customer relationships, a customer contract, a non-compete agreement from the seller, domain names and technology.
On August 4, 2016, White Mountains acquired a
70.9%
ownership share in Buzzmove for a purchase price of GBP
6.1 million
(approximately
$8.1 million
based upon the foreign exchange spot rate at the date of acquisition). White Mountains recognized total assets acquired related to Buzzmove of
$11.5 million
, including
$7.6 million
of goodwill and
$1.1 million
of intangible assets, and total liabilities assumed of
$0.1 million
, reflecting acquisition date fair values.
The following table shows the change in goodwill and other intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
|
2017
|
|
2016
|
Millions
|
|
Goodwill
|
|
Other intangible assets
|
|
Total
|
|
Goodwill
|
|
Other intangible assets
|
|
Total
|
Beginning balance
|
|
$
|
25.9
|
|
|
$
|
14.4
|
|
|
$
|
40.3
|
|
|
$
|
18.3
|
|
|
$
|
23.3
|
|
|
$
|
41.6
|
|
Acquisition of businesses
|
|
—
|
|
|
—
|
|
|
—
|
|
|
7.6
|
|
|
1.1
|
|
|
8.7
|
|
Amortization, including foreign currency translation
|
|
—
|
|
|
(2.5
|
)
|
|
(2.5
|
)
|
|
—
|
|
|
(2.6
|
)
|
|
(2.6
|
)
|
Ending balance
|
|
$
|
25.9
|
|
|
$
|
11.9
|
|
|
$
|
37.8
|
|
|
$
|
25.9
|
|
|
$
|
21.8
|
|
|
$
|
47.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30,
|
|
|
2017
|
|
2016
|
Millions
|
|
Goodwill
|
|
Other intangible assets
|
|
Total
|
|
Goodwill
|
|
Other intangible assets
|
|
Total
|
Beginning balance
|
|
$
|
25.9
|
|
|
$
|
19.3
|
|
|
$
|
45.2
|
|
|
$
|
18.6
|
|
|
$
|
26.9
|
|
|
$
|
45.5
|
|
Add: Amounts held for sale at
beginning of the period
(1)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
.4
|
|
|
.4
|
|
Acquisition of businesses
|
|
|
|
|
|
—
|
|
|
7.6
|
|
|
5.0
|
|
|
12.6
|
|
Wobi write off
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(.3
|
)
|
|
(2.5
|
)
|
|
(2.8
|
)
|
Amortization, including foreign currency translation
|
|
—
|
|
|
(7.4
|
)
|
|
(7.4
|
)
|
|
—
|
|
|
(8.0
|
)
|
|
(8.0
|
)
|
Ending balance
|
|
$
|
25.9
|
|
|
$
|
11.9
|
|
|
$
|
37.8
|
|
|
$
|
25.9
|
|
|
$
|
21.8
|
|
|
$
|
47.7
|
|
(1)
See
Note 15 — “Held for Sale and Discontinued Operations”
.
The following table is a summary of goodwill and other intangible assets as of
September 30, 2017
,
December 31, 2016
, and
September 30, 2016
:
|
|
|
|
|
|
|
|
|
|
Millions
|
|
September 30, 2017
|
|
December 31, 2016
|
Goodwill
|
|
|
|
|
MediaAlpha
|
|
$
|
18.3
|
|
|
$
|
18.3
|
|
Buzzmove
|
|
7.6
|
|
|
7.6
|
|
Total goodwill
|
|
25.9
|
|
|
25.9
|
|
Other intangible assets
|
|
|
|
|
MediaAlpha
|
|
11.0
|
|
|
18.3
|
|
Buzzmove
|
|
.9
|
|
|
1.0
|
|
Total other intangible assets
|
|
11.9
|
|
|
19.3
|
|
Total goodwill and other intangible assets
|
|
37.8
|
|
|
45.2
|
|
Goodwill and other intangible assets held for sale
|
|
—
|
|
|
1.2
|
|
Goodwill and other intangible assets attributed to non-controlling interests
|
|
(13.7
|
)
|
|
(17.1
|
)
|
Goodwill and other intangible assets included in White Mountains's
common shareholders' equity
|
|
$
|
24.1
|
|
|
$
|
29.3
|
|
Note 5. Debt
White Mountains’s debt outstanding as of
September 30, 2017
and
December 31, 2016
consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Millions
|
|
September 30,
2017
|
|
Effective
Rate
(1)
|
|
December 31,
2016
|
|
Effective
Rate
(1)
|
WTM Bank Facility
|
|
$
|
—
|
|
|
N/A
|
|
$
|
—
|
|
|
N/A
|
Unamortized issue costs
|
|
—
|
|
|
|
|
—
|
|
|
|
WTM Bank Facility, carrying value
|
|
—
|
|
|
|
|
—
|
|
|
|
MediaAlpha Bank Facility
|
|
9.4
|
|
|
5.5%
|
|
—
|
|
|
N/A
|
Unamortized issuance cost
|
|
—
|
|
|
|
|
—
|
|
|
|
MediaAlpha Bank Facility, carrying value
|
|
9.4
|
|
|
|
|
—
|
|
|
|
Previous MediaAlpha Bank Facility
|
|
—
|
|
|
N/A
|
|
12.9
|
|
|
5.7%
|
Unamortized issuance cost
|
|
—
|
|
|
|
|
(.2
|
)
|
|
|
Previous MediaAlpha Bank Facility, carrying value
|
|
—
|
|
|
|
|
12.7
|
|
|
|
Total debt
|
|
$
|
9.4
|
|
|
|
|
$
|
12.7
|
|
|
|
(1)
Effective rate considers the effect of the debt issuance costs.
WTM Bank Facility
On August 14, 2013, White Mountains entered into a revolving credit facility with a syndicate of lenders administered by Wells Fargo Bank, N.A., which has a total commitment of
$425.0 million
and has a maturity date of August 14, 2018 (the “WTM Bank Facility”). During the third quarter of 2017, White Mountains borrowed
$350.0 million
under the WTM Bank Facility to partially fund a tender offer and subsequently repaid the
$350 million
after receiving the proceeds from the OneBeacon Transaction. As of
September 30, 2017
, the WTM Bank Facility was undrawn.
The WTM Bank Facility contains various affirmative, negative and financial covenants which White Mountains considers to be customary for such borrowings, including certain minimum net worth and maximum debt to capitalization standards.
MediaAlpha Bank Facility
On May 12, 2017, MediaAlpha entered into a secured credit facility (the “MediaAlpha Bank Facility”) with Western Alliance Bank, which has a total commitment of
$20.0 million
and has a maturity date of May 12, 2020. The MediaAlpha Bank Facility replaced MediaAlpha’s previous credit facility (the “Previous MediaAlpha Bank Facility”), which had a total commitment of
$20.0 million
. The MediaAlpha Bank Facility carries a variable interest rate that is based on the Prime Rate, as published by the Wall Street Journal, plus a spread of
1.5%
on the term loan facility and
0.25%
on the revolving credit facility as of
September 30, 2017
.
The MediaAlpha Bank Facility consists of a
$5.0 million
term loan facility, which has an outstanding balance of
$3.4 million
as of
September 30, 2017
, and a revolving loan facility for
$15.0 million
, which has an outstanding balance of
$6.0 million
as of
September 30, 2017
. During the nine months ended
September 30, 2017
, MediaAlpha borrowed
$5.0 million
on the term loan and
$6.0 million
on the revolving loan under the MediaAlpha Bank Facility. During the nine months ended September 30, 2017, MediaAlpha repaid
$12.9 million
under the Previous MediaAlpha Bank Facility and $1.6 million on the term loan under the MediaAlpha Bank Facility.
The MediaAlpha Bank Facility is secured by intellectual property and the common stock of MediaAlpha’s subsidiaries, and contains various affirmative, negative and financial covenants that White Mountains considers to be customary for such borrowings, including a fixed charge coverage ratio and an asset coverage ratio.
Compliance
At
September 30, 2017
, White Mountains was in compliance with the covenants under all of its debt instruments.
Note 6. Income Taxes
The Company and its Bermuda domiciled subsidiaries are not subject to Bermuda income tax under current Bermuda law. In the event there is a change in the current law such that taxes are imposed, the Company and its Bermuda domiciled subsidiaries would be exempt from such tax until March 31, 2035, pursuant to the Bermuda Exempted Undertakings Tax Protection Act of 1966. The Company has subsidiaries and branches that operate in various other jurisdictions around the world that are subject to tax in the jurisdictions in which they operate. The jurisdictions in which the Company’s subsidiaries and branches are subject to tax are Barbados, Gibraltar, Israel, Luxembourg, the Netherlands, the United Kingdom and the United States.
White Mountains’s income tax benefit related to pre-tax income from continuing operations for the three and nine months ended September 30, 2017 represented effective tax rates of
(47.6)%
and
(203.9)%
. The effective tax rates were different from the U.S. statutory rate of
35%
, primarily due to a full valuation allowance on all U.S. operations, a tax benefit recorded at BAM and consolidated pre-tax income being near break-even. For the three and nine months ended September 30, 2017, BAM had amounts recorded in shareholders’ equity related to member surplus contributions that were available to partially offset its loss from continuing operations. As a result, for the three and nine months ended September 30, 2017, BAM recorded a tax benefit of
$2.1 million
and
$6.9 million
in net income from continuing operations, with an offsetting amount recorded in shareholders’ equity.
White Mountains’s income tax benefit related to pre-tax loss from continuing operations for the three and nine months ended September 30, 2016 represented effective tax rates of
(123.9)%
and
(31.2)%
. The effective tax rates were different from the U.S. statutory rate of
35%
, primarily due to a tax benefit recorded at BAM and a
$14.0 million
tax benefit recognized in continuing operations related to the reversal of a valuation allowance that resulted from income that was recognized within discontinued operations. ASC 740 includes an exception to the general principle of intra-period tax allocations that requires a company with a current period loss from continuing operations to consider income recorded in other categories, including discontinued operations, in determining the tax benefit that is allocated to continuing operations. The valuation allowance reversal relates to a consolidated tax group within White Mountains that has a current period loss within continuing operations. Accordingly, the tax benefit resulting from the valuation allowance reversal was recorded in continuing operations with an offsetting tax expense for the same amount in discontinued operations. For the three and nine months ended September 30, 2016, BAM had amounts recorded in shareholders’ equity related to member surplus contributions that were available to partially offset its loss from continuing operations. As a result, for the three and nine months ended September 30, 2016, BAM recorded a tax benefit of
$3.3 million
and
$8.2 million
in net income from continuing operations, with an offsetting amount recorded in shareholders’ equity.
In arriving at the effective tax rate for the
three and nine months ended
September 30, 2017
and 2016, White Mountains forecasted all income and expense items including the change in unrealized investment gains (losses) and realized investment gains (losses) for the years ending December 31, 2017 and 2016.
White Mountains records a valuation allowance against deferred tax assets if it becomes more likely than not that all or a portion of a deferred tax asset will not be realized. Changes in valuation allowances from period to period are included in income tax expense in the period of change. In determining whether or not a valuation allowance, or change therein, is warranted, White Mountains considers factors such as prior earnings history, expected future earnings, carryback and carryforward periods and strategies that if executed would result in the realization of a deferred tax asset.
In the second quarter of 2016, White Mountains recorded an increase in deferred tax assets of
$0.6 million
and a corresponding increase in valuation allowance of
$0.6 million
related to the settlement of the IRS audit of Guilford Holdings, Inc. and subsidiaries for tax year 2012.
With few exceptions, White Mountains is no longer subject to U.S. federal, state, or non-U.S. income tax examinations by tax authorities for years before 2013.
Note 7. Derivatives
Variable Annuity Reinsurance
White Mountains entered into agreements to reinsure death and living benefit guarantees associated with certain variable annuities in Japan. During the third quarter of 2015, the variable annuity contracts reinsured by WM Life Re began to mature and were fully runoff by
September 30, 2016
. The reinsurance agreement was commuted in December 2016. WM Life Re was liquidated in the third quarter of 2017.
The following table summarizes the pre-tax operating results of WM Life Re for the
three and nine months ended
September 30, 2016
.
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
Millions
|
|
September 30, 2016
|
|
September 30, 2016
|
Fees, included in other revenue
|
|
$
|
—
|
|
|
$
|
1.2
|
|
Change in fair value of variable annuity liability, included in other revenue
|
|
—
|
|
|
(.3
|
)
|
Change in fair value of derivatives, included in other revenue
|
|
—
|
|
|
(2.0
|
)
|
Foreign exchange, included in other revenue
|
|
—
|
|
|
1.4
|
|
Total revenue
|
|
—
|
|
|
.3
|
|
Death benefit claims paid, included in general and administrative expenses
|
|
—
|
|
|
(.3
|
)
|
General and administrative expenses
|
|
(.5
|
)
|
|
(2.4
|
)
|
Pre-tax loss
|
|
$
|
(.5
|
)
|
|
$
|
(2.4
|
)
|
The following summarizes realized and unrealized derivative gains (losses) recognized in other revenue for the
three and nine months ended
September 30, 2016
and the carrying values, included in other assets, as of
December 31, 2016
by type of instrument:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gains (losses)
|
|
Carrying Value
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
As of
|
Millions
|
|
September 30, 2016
|
|
September 30, 2016
|
|
December 31, 2016
|
Fixed income/interest rate
|
|
$
|
—
|
|
|
$
|
1.8
|
|
|
$
|
—
|
|
Foreign exchange
|
|
—
|
|
|
(4.8
|
)
|
|
—
|
|
Equity
|
|
—
|
|
|
1.0
|
|
|
—
|
|
Total
|
|
$
|
—
|
|
|
$
|
(2.0
|
)
|
|
$
|
—
|
|
The following tables summarize the changes in White Mountains’s variable annuity reinsurance liabilities and derivative instruments for the nine months ended
September 30, 2016
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2016
|
|
|
Variable Annuity
Liabilities
|
|
Derivative Instruments
|
Millions
|
|
Level 3
|
|
Level 3
(1)
|
|
Level 2
(1)(2)
|
|
Level 1
(3)
|
|
Total
|
Beginning of period
|
|
$
|
.3
|
|
|
$
|
2.7
|
|
|
$
|
16.5
|
|
|
$
|
.9
|
|
|
$
|
20.1
|
|
Purchases
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Realized and unrealized (losses) gains
|
|
(.3
|
)
|
|
2.9
|
|
|
(.7
|
)
|
|
(4.2
|
)
|
|
(2.0
|
)
|
Transfers in
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Sales/settlements
|
|
—
|
|
|
(5.6
|
)
|
|
(15.8
|
)
|
|
3.3
|
|
|
(18.1
|
)
|
End of period
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
(1)
Consists of over-the-counter instruments.
(2)
Consists of interest rate swaps, total return swaps, foreign currency forward contracts, and bond forwards. Fair value measurement based upon bid/ask pricing quotes for similar instruments that are actively traded, where available. Swaps for which an active market does not exist have been priced using observable inputs including the swap curve and the underlying bond index.
(3)
Consists of exchange traded equity index, foreign currency and interest rate futures. Fair value measurements based upon quoted prices for identical instruments that are actively traded.
All of White Mountains’s variable annuity reinsurance liabilities were classified as Level 3 measurements. The fair value of White Mountains’s variable annuity reinsurance liabilities were estimated using actuarial and capital market assumptions related to the projected discounted cash flows over the term of the reinsurance agreement. Actuarial assumptions regarding future policyholder behavior, including surrender and lapse rates, were generally unobservable inputs and significantly impacted the fair value estimates. Generally, the liabilities associated with these guarantees increased with declines in the equity markets, interest rates and currencies against the Japanese yen, as well as with increases in market volatilities. White Mountains used derivative instruments to mitigate the risks associated with changes in the fair value of the reinsured variable annuity guarantees. The types of inputs used to estimate the fair value of these derivative instruments, with the exception of actuarial assumptions regarding policyholder behavior and risk margins, were generally the same as those used to estimate the fair value of variable annuity liabilities.
Forward Contracts
White Mountains’s investment portfolio includes certain investment grade fixed maturity investments denominated in British Pound Sterling (GBP) and common equity securities denominated in Japanese Yen (JPY), Euro (EUR), GBP and other foreign currencies. White Mountains has entered into foreign currency forward contracts to manage its foreign currency exposure related to these investments. The contracts do not meet the criteria to be accounted for as a hedge. White Mountains actively manages its net foreign currency exposure and adjusts its foreign currency positions within ranges established by senior management. Mismatches between currency driven movements in foreign denominated investments and foreign currency forward contracts may result in net foreign currency positions being outside pre-defined ranges and/or may result in net foreign currency gains/(losses). At
September 30, 2017
, White Mountains held
$261.8 million
(GBP
160.7 million
, EUR
18.9 million
and JPY
2,646.4 million
) gross notional value of foreign currency forward contracts.
White Mountains’s foreign currency forward contracts are traded over-the-counter. The fair value of the contracts has been estimated using OTC quotes for similar instruments and accordingly, the measurements have been classified as Level 2 measurements as of
September 30, 2017
.
The net realized derivative loss recognized in net realized and unrealized investment gains (losses) for the
three and nine months ended
September 30, 2017
was
$7.2 million
and
$8.9 million
. The net unrealized derivative loss recognized in net realized and unrealized investment gains (losses) for the
three and nine months ended
September 30, 2017
was
$2.8 million
and
$14.2 million
. White Mountains’s forward contracts are subject to master netting agreements. As of
September 30, 2017
and December 31, 2016, there were no offsets to the gross liability amount under the master netting agreement and the resulting net amount recognized in other long-term investments was
$15.4 million
and
$1.2 million
.
White Mountains does not hold or provide any collateral under its forward contracts. The following table summarizes the gross notional amount associated with the forward currency contracts as of
September 30, 2017
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2017
|
Millions
|
|
Notional Amount
|
|
Carrying Value
|
|
Standard & Poor's Rating
(1)
|
Barclays Bank PLC
|
|
$
|
201.3
|
|
|
$
|
(14.1
|
)
|
|
A-
|
JP Morgan Chase Bank N.A.
|
|
60.5
|
|
|
(1.3
|
)
|
|
A+
|
Total
|
|
$
|
261.8
|
|
|
$
|
(15.4
|
)
|
|
|
(1)
Standard & Poor’s ratings as detailed above are: “A+” (Strong, which is the fifth highest of twenty-three creditworthiness ratings) and “A-” (Strong, which is the seventh highest of twenty-three creditworthiness ratings).
Note 8. Municipal Bond Guarantee Insurance
In 2012, HG Global was capitalized with
$594.5 million
from White Mountains and
$14.5 million
from non-controlling interests to fund BAM, a newly formed mutual municipal bond insurer. As of
September 30, 2017
, White Mountains owned
96.9%
of HG Global’s preferred equity and
88.4%
of its common equity. HG Global, together with its subsidiaries, provided the initial capitalization of BAM through the purchase of
$503.0 million
of BAM Surplus Notes. Through HG Re, HG Global provides first loss reinsurance protection for policies underwritten by BAM of up to
15%
of par outstanding, on a per policy basis. HG Re’s obligations to BAM are collateralized in trusts, and there is an aggregate loss limit that is equal to the total assets in the collateral trusts at any point in time.
For the
three and nine months ended
September 30, 2017
, HG Global had pre-tax income of
$7.0 million
and
$20.3 million
, which included
$4.8 million
and
$14.3 million
of interest income on the BAM Surplus Notes. For the
three and nine months ended
September 30, 2016
, HG Global had pre-tax income of
$5.2 million
and
$18.4 million
, which included
$4.5 million
and
$13.4 million
of interest income on the BAM Surplus Notes.
For the three and nine months ended
September 30, 2017
, White Mountains reported pre-tax losses of
$11.9 million
and
$35.6 million
on BAM that were recorded in net loss attributable to non-controlling interests, which included
$4.8 million
and
$14.3 million
of interest expense on the BAM Surplus Notes. For the three and nine months ended
September 30, 2016
, White Mountains reported pre-tax losses of
$13.7 million
and
$30.3 million
on BAM that were recorded in net loss attributable to non-controlling interests, which included
$4.5 million
and
$13.4 million
of interest expense on the BAM Surplus Notes.
Effective January 1, 2014, HG Global and BAM agreed to change the interest rate on the BAM Surplus Notes for the
five
years ending December 31, 2018 from a fixed rate of
8.0%
to a variable rate equal to the
one
-year U.S. treasury rate plus
300
basis points, set annually, which is
3.54%
and
3.78%
for 2016 and 2017. Prior to the end of 2018, BAM has the option to extend the variable rate period for an additional
three
years. At the end of the variable rate period, the interest rate will be fixed at the higher of the then current variable rate or
8.0%
. No payment of interest or principal on the BAM Surplus Notes may be made without the approval of the New York State Department of Financial Services. BAM has stated its intention to seek regulatory approval to pay interest and principal on its surplus notes only to the extent that (1) its remaining qualified statutory capital (“QSC”) exceeds
$500 million
and (2) its remaining QSC and other capital resources continue to support its outstanding obligations, business plan and its AA stable rating from S&P.
During the second quarter of 2017, in order to further support BAM’s long-term capital position and business prospects, HG Global agreed to contribute the
$203.0 million
Series A BAM Surplus Notes (“Series A Notes”) into the supplemental collateral trust (the “Supplemental Trust”) at HG Re, HG Global’s wholly owned reinsurance subsidiary. The Supplemental Trust already holds the
$300.0 million
Series B BAM Surplus Notes (“Series B Notes” and, collectively with the Series A Notes, the “BAM Surplus Notes”). Assets held in the Supplemental Trust serve to collateralize HG Re’s obligations to BAM under the first loss reinsurance treaty between BAM and HG Re. HG Global and BAM also agreed to change 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 New York Department of Financial Services approved the change during the third quarter of 2017.
During the second quarter of 2017, 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 accelerate growth in BAM’s statutory capital but will not impact the net risk premium ceded from BAM to HG Re.
Under GAAP, if the terms of a debt instrument are amended, unless there is a greater than
10%
change in the expected discounted future cash flows of such instrument, a change in the instrument’s carrying value is not permitted. White Mountains has determined that the impact of the changes made in the second quarter of 2017 to the terms of the BAM Surplus Notes on the expected discounted future cash flows is not greater than
10%
.
All of the contracts issued by BAM are accounted for as insurance contracts under ASC 944-605,
Financial Guarantee Insurance Contracts.
Premiums are received upfront and an unearned premium revenue liability, equal to the amount of the cash received, is established at contract inception. Premium revenues are recognized in revenue over the period of the contracts in proportion to the amount of insurance protection provided using a constant rate. The constant rate is calculated based on the relationship between the par outstanding in a given reporting period compared with the sum of each of the par amounts outstanding for all periods.
The following table provides a schedule of BAM’s insured obligations:
|
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|
|
|
|
|
|
|
|
|
|
September 30, 2017
|
|
December 31, 2016
|
Contracts outstanding
|
|
5,907
|
|
|
4,807
|
|
Remaining weighted average contract period outstanding (in years)
|
|
10.9
|
|
|
10.8
|
|
Contractual debt service outstanding (in millions):
|
|
|
|
|
Principal
|
|
$
|
39,207.5
|
|
|
$
|
33,057.3
|
|
Interest
|
|
19,681.0
|
|
|
16,396.6
|
|
Total debt service outstanding
|
|
$
|
58,888.5
|
|
|
$
|
49,453.9
|
|
|
|
|
|
|
Gross unearned insurance premiums
|
|
$
|
118.5
|
|
|
$
|
82.9
|
|
The following table is a schedule of BAM’s future premium revenues as of
September 30, 2017
:
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|
|
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Millions
|
|
September 30, 2017
|
October 1, 2017 - December 31, 2017
|
|
$
|
2.5
|
|
|
|
|
January 1, 2018 - March 31, 2018
|
|
2.5
|
|
April 1, 2018 - June 30, 2018
|
|
2.5
|
|
July 1, 2018 - September 30, 2018
|
|
2.5
|
|
October 1, 2018 - December 31, 2018
|
|
2.4
|
|
|
|
9.9
|
|
|
|
|
2019
|
|
9.5
|
|
2020
|
|
9.2
|
|
2021
|
|
8.7
|
|
2022 and thereafter
|
|
78.7
|
|
Total gross unearned insurance premiums
|
|
$
|
118.5
|
|
Note 9. Earnings Per Share
White Mountains calculates earnings per share using the two-class method, which allocates earnings between common shares and unvested restricted common shares. Both classes of shares participate equally in earnings on a per share basis. Basic earnings per share amounts are based on the weighted average number of common shares outstanding adjusted for unvested restricted common shares. Diluted earnings per share amounts are also impacted by the net effect of potentially dilutive common shares outstanding. The following table outlines the Company’s computation of earnings per share from continuing operations for the three and nine months ended
September 30, 2017
and
2016
. See
Note 15 — “Held for Sale and Discontinued Operations”
.
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|
|
|
|
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Three Months Ended
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Nine Months Ended
|
|
|
September 30,
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|
September 30,
|
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Basic and diluted earnings per share numerators (in millions):
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|
|
|
|
|
|
|
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Net income attributable to White Mountains’s common shareholders
|
|
$
|
562.1
|
|
|
$
|
90.8
|
|
|
$
|
604.7
|
|
|
$
|
440.7
|
|
Less: total income from discontinued operations, net of tax
|
|
(539.1
|
)
|
|
(84.4
|
)
|
|
(573.2
|
)
|
|
(515.4
|
)
|
Net income (loss) from continuing operations attributable to
White Mountains’s common shareholders
|
|
$
|
23.0
|
|
|
$
|
6.4
|
|
|
$
|
31.5
|
|
|
$
|
(74.7
|
)
|
Allocation of earnings to participating restricted common shares
(1)
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|
(.3
|
)
|
|
(.1
|
)
|
|
(.4
|
)
|
|
.8
|
|
Basic and diluted earnings per share numerators
|
|
$
|
22.7
|
|
|
$
|
6.3
|
|
|
$
|
31.1
|
|
|
$
|
(73.9
|
)
|
Basic earnings per share denominators (in thousands):
|
|
|
|
|
|
|
|
|
Total average common shares outstanding during the period
|
|
4,297.2
|
|
|
4,867.4
|
|
|
4,477.0
|
|
|
5,166.6
|
|
Average unvested restricted common shares
(2)
|
|
(53.7
|
)
|
|
(68.1
|
)
|
|
(54.5
|
)
|
|
(62.9
|
)
|
Basic earnings per share denominator
|
|
4,243.5
|
|
|
4,799.3
|
|
|
4,422.5
|
|
|
5,103.7
|
|
Diluted earnings per share denominator (in thousands):
|
|
|
|
|
|
|
|
|
Total average common shares outstanding during the period
(3)
|
|
4,297.2
|
|
|
4,879.4
|
|
|
4,477.0
|
|
|
5,174.8
|
|
Average unvested restricted common shares
(2)
|
|
(53.7
|
)
|
|
(68.1
|
)
|
|
(54.5
|
)
|
|
(62.9
|
)
|
Diluted earnings per share denominator
(3)
|
|
4,243.5
|
|
|
4,811.3
|
|
|
4,422.5
|
|
|
5,111.9
|
|
Basic earnings per share (in dollars) - continuing operations:
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to White Mountains’s common shareholders
|
|
$
|
5.36
|
|
|
$
|
1.31
|
|
|
$
|
7.03
|
|
|
$
|
(14.47
|
)
|
Dividends declared and paid
|
|
—
|
|
|
—
|
|
|
(1.00
|
)
|
|
(1.00
|
)
|
Undistributed earnings (loss)
|
|
$
|
5.36
|
|
|
$
|
1.31
|
|
|
$
|
6.03
|
|
|
$
|
(15.47
|
)
|
Diluted earnings per share (in dollars) - continuing operations:
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to White Mountains’s common shareholders
|
|
$
|
5.36
|
|
|
$
|
1.31
|
|
|
$
|
7.03
|
|
|
$
|
(14.47
|
)
|
Dividends declared and paid
|
|
—
|
|
|
—
|
|
|
(1.00
|
)
|
|
(1.00
|
)
|
Undistributed earnings (loss)
|
|
$
|
5.36
|
|
|
$
|
1.31
|
|
|
$
|
6.03
|
|
|
$
|
(15.47
|
)
|
(1)
Restricted shares issued by White Mountains receive dividends, and therefore, are considered participating securities.
(2)
Restricted shares outstanding vest either in equal annual installments or upon a stated date. See
Note 13 — “Employee Share-Based Compensation Plans”
.
(3)
The diluted earnings per share denominator for the
three and nine months ended
September 30, 2016
includes the impact of
120,000
common shares issuable upon exercise of the non-qualified options outstanding, which resulted in
11,943
and
8,208
incremental shares outstanding over the period.
The following table summarizes the undistributed net earnings (loss) from continuing operations for the three and nine months ended
September 30, 2017
and
2016
. See
Note 15 — “Held for Sale and Discontinued Operations”
.
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|
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|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
|
September 30,
|
|
September 30,
|
Millions
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Undistributed net earnings - continuing operations:
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to White Mountains’s common shareholders,
net of restricted common share amounts
|
|
$
|
22.7
|
|
|
$
|
6.3
|
|
|
$
|
31.1
|
|
|
$
|
(73.9
|
)
|
Dividends declared net of restricted common share amounts
(1)
|
|
—
|
|
|
—
|
|
|
(4.5
|
)
|
|
(5.9
|
)
|
Total undistributed net earnings (loss), net of restricted common
share amounts
|
|
$
|
22.7
|
|
|
$
|
6.3
|
|
|
$
|
26.6
|
|
|
$
|
(79.8
|
)
|
(1)
Restricted shares issued by White Mountains receive dividends, and therefore, are considered participating securities.