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 OneBeacon, HG Global/BAM and Other Operations.
As discussed further in the Company’s consolidated financial statements in
Note 2 — “Significant Transactions”
, 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. Also, on July 21, 2016, White Mountains completed its sale of Tranzact Holdings, LLC (“Tranzact”) to an affiliate of Clayton, Dubilier & Rice, LLC. For the three months ended March 31, 2016, Sirius Group and Tranzact have been presented as discontinued operations in the statement of operations and comprehensive income. See
Note 17 — “Held for Sale and Discontinued Operations”
.
The OneBeacon segment consists of OneBeacon Insurance Group, Ltd. (“OneBeacon Ltd.”), an exempted Bermuda limited liability company that owns a family of property and casualty insurance companies (collectively, “OneBeacon”). OneBeacon is a specialty property and casualty insurance writer that offers a wide range of insurance products in the United States through independent agencies, regional and national brokers, wholesalers and managing general agencies. As of
March 31, 2017
and
December 31, 2016
, White Mountains owned
75.7%
and
76.1%
of OneBeacon Ltd.’s outstanding common shares.
The HG Global/BAM segment consists of HG Global Ltd. (“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
March 31, 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.
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 QL Holdings LLC (“MediaAlpha”), Wobi Insurance Agency Ltd. (“Wobi”) and Removal Stars Ltd. (“Buzzmove”). 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 maturing by June 30, 2016, and its U.S.-based service provider, White Mountains Financial Services LLC (collectively, “WM Life Re”) and Star & Shield Services LLC, Star & Shield Risk Management LLC, and Star & Shield Claims Services LLC (collectively “Star & Shield”). Star & Shield provides management services for a fee to Star & Shield Insurance Exchange (“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 of Star & Shield and its investment in SSIE Surplus Notes to K2 Insurance Services, LLC on March 7, 2017. White Mountains has presented Star & Shield’s and SSIE’s assets and liabilities as held for sale as of December 31, 2016. See
Note 17 — “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 $6.5 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 three-month periods ended March 31, 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.
Short-Duration Contracts
Effective December 31, 2016, White Mountains adopted ASU 2015-09,
Disclosures about Short Duration Contracts
(ASC 944), which requires expanded footnote disclosures about loss and loss adjustment expense (“LAE”) reserves. Upon adoption, White Mountains modified its footnote disclosures to include loss development tables on a disaggregated basis by accident year and a reconciliation of loss development data to the loss and LAE reserves reflected on the balance sheet. The footnotes disclosures have also been expanded to include information about claim frequency data, including a description of how the claims frequency data is measured. Prior year disclosures have been modified to conform to the new disclosures. See
Note 3 — “Reserves for Unpaid Losses and Loss Adjustment Expenses”
.
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 March 31, 2016 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 a significant 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. White Mountains has applied the guidance retrospectively and as a result has reclassified
$1.9 million
of unamortized debt issuance costs from other assets to debt as of December 31, 2015, reflecting these amounts as a reduction from the related debt, and has modified its disclosures to include the required effective interest rate on its debt. As of
March 31, 2017
, the unamortized debt issuance costs included in debt is
$1.8 million
.
Recently Issued Accounting Pronouncements
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 is evaluating the expected impact of this new 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, which applies to financial assets that have the contractual right to receive cash 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. The types of assets included in the scope of the new guidance includes 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 new 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 new 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 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. Most of White Mountains’s revenue from customers relates to insurance contracts, which are excluded from the scope of ASU 2014-09, as are investment income and investments gains and losses. However, 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 is evaluating the new guidance, but does not expect ASU 2014-09 to have a significant effect on recognition of White Mountains’s non-insurance revenues from customers.
Note 2. Significant Transactions
Sale of Star and 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 17 — “Held for Sale and Discontinued Operations”
.
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.
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 8 — “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 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 2016 tax payments.
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 17 — “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.
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 17 — “Held for Sale and Discontinued Operations”
.
Symetra
On February 1, 2016, 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 14 — “Investments in Unconsolidated Affiliates”
OneBeacon Crop Business
On July 31, 2015, OneBeacon exited its multiple peril crop insurance (“MPCI”) and its related crop-hail business (collectively, “Crop Business”) as its exclusive managing general agency, Climate Crop Insurance Agency (“CCIA”), exited the business through a sale of the agency to an affiliate of AmTrust. As a result of the transaction, OneBeacon and CCIA agreed to an early termination of the existing five-year agreement. In connection with the termination of the agreement, OneBeacon received a payment of
$3.0 million
. Also related to the transaction, OneBeacon withdrew its 2016 Plan of Operations, which previously authorized it to write MPCI for the 2016 Reinsurance Year, and affiliates of AmTrust agreed to reinsure the Company’s remaining net Crop Business exposure for the 2015 Reinsurance Year under a related
100%
quota share reinsurance agreement which, coupled with other transfer and assignment agreements as well as communications with policyholders and agents, had the effect of assumption reinsurance. As a result of this transaction, the Company has no material net exposure related to the Crop Business.
MediaAlpha
On March 14, 2014, White Mountains acquired
60.0%
of the outstanding Class A common units of MediaAlpha. White Mountains paid an initial purchase price of
$28.1 million
. The purchase price was subject to adjustment equal to
62.5%
of the 2015 gross profit in excess of the 2013 gross profit. On February 26, 2016, White Mountains paid
$7.8 million
in
settlement of the final purchase adjustment. After adjustment for the estimated contingent purchase price adjustment, White Mountains recognized total assets acquired related to MediaAlpha of
$70.1 million
, including
$18.3 million
of goodwill and
$38.5 million
of other intangible assets, and total liabilities assumed of
$10.0 million
, reflecting acquisition date fair values.
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.
Wobi
On February 19, 2014, White Mountains acquired
54%
of the outstanding common shares of Wobi for NIS
14.4 million
(approximately
$4.1 million
based upon the foreign exchange spot rate at the date of acquisition). During 2014, in addition to the common shares, White Mountains also purchased NIS
31.5 million
(approximately
$9.0 million
based upon the foreign exchange spot rate at the dates of acquisition) of convertible preferred shares of Wobi. As of the acquisition date, White Mountains recognized total assets acquired related to Wobi of
$13.4 million
, including
$5.5 million
of goodwill and
$2.9 million
of other intangible assets; and total liabilities assumed of
$0.7 million
at their estimated acquisition date fair values.
During 2015, White Mountains purchased NIS
79.6 million
(approximately
$20.7 million
based upon the foreign exchange spot rate at the dates of acquisition) of convertible preferred shares of Wobi. In addition, during 2015 White Mountains also purchased NIS
11.8 million
(approximately
$3.1 million
based upon the foreign exchange spot rate at the date of acquisition) of common shares of Wobi.
On February 23, 2015, Wobi acquired
56.2%
of the outstanding share capital of Tnuva Finansit Ltd. (“Cashboard”) for NIS
9.5 million
(approximately
$2.4 million
). The acquisition of Cashboard accelerated Wobi’s development of its pension products comparison service. As of the acquisition date, Wobi recognized total assets acquired of
$5.5 million
, including
$0.3 million
of goodwill and
$2.8 million
of other intangible assets; and total liabilities assumed of
$1.2 million
at their estimated acquisition date fair values. During 2015, Wobi purchased the remaining share capital of Cashboard for NIS
26.4 million
(approximately
$6.5 million
).
During 2016, White Mountains purchased NIS
35.9 million
(approximately
$9.6 million
based upon the foreign exchange spot rates at the dates of acquisitions) of convertible preferred shares of Wobi. As of both
March 31, 2017
and
December 31, 2016
, White Mountains’s ownership share was
95.0%
.
Note 3. Loss and Loss Adjustment Expense Reserves
The following table summarizes the loss and loss adjustment expense (“LAE”) reserve activities of White Mountains’s insurance and reinsurance subsidiaries for the
three months ended
March 31, 2017
and
2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
Millions
|
|
2017
|
|
2016
|
|
Gross beginning balance
|
|
$
|
1,365.6
|
|
|
$
|
1,389.8
|
|
|
Less beginning reinsurance recoverable on unpaid losses
|
|
(172.9
|
)
|
|
(186.0
|
)
|
|
Net loss and LAE reserves
|
|
1,192.7
|
|
|
1,203.8
|
|
|
|
|
|
|
|
|
Add: SSIE reserves held for sale at beginning of the period
(1)
|
|
4.7
|
|
|
5.5
|
|
|
|
|
|
|
|
|
Loss and LAE incurred relating to:
|
|
|
|
|
|
Current year losses
|
|
151.7
|
|
|
161.2
|
|
|
Prior year losses
|
|
—
|
|
|
(.1
|
)
|
|
Total incurred losses and LAE
|
|
151.7
|
|
|
161.1
|
|
|
|
|
|
|
|
|
Loss and LAE paid relating to:
|
|
|
|
|
|
Current year losses
|
|
(21.5
|
)
|
|
(23.1
|
)
|
|
Prior year losses
|
|
(129.1
|
)
|
|
(148.6
|
)
|
|
Total loss and LAE payments
|
|
(150.6
|
)
|
|
(171.7
|
)
|
|
|
|
|
|
|
|
Less: Deconsolidation of SSIE
(1)
|
|
4.4
|
|
|
—
|
|
|
|
|
|
|
|
|
Less: SSIE reserves held for sale at end of the period
(1)
|
|
—
|
|
|
5.3
|
|
|
|
|
|
|
|
|
Net ending balance
|
|
1,194.1
|
|
|
1,193.4
|
|
|
Plus ending reinsurance recoverable on unpaid losses
|
|
174.7
|
|
|
150.4
|
|
|
Gross ending balance
|
|
$
|
1,368.8
|
|
|
$
|
1,343.8
|
|
(1)
Resulting from the sale of Star & Shield in the first quarter of 2017, SSIE is no longer consolidated.
See
Note 17 — “Held for Sale and Discontinued Operations”
.
Loss and LAE incurred relating to prior year losses for the three months ended
March 31, 2017
For the
three months ended
March 31, 2017
, White Mountains did not experience any net loss reserve development on prior accident year reserves, as unfavorable reserve development at OneBeacon, primarily in Healthcare due to an adverse settlement on a single claim was offset by favorable reserve development driven by Technology, Accident & Health and
Entertainment
resulting from favorable loss experience.
Loss and LAE incurred relating to prior year losses for the three months ended
March 31, 2016
For the
three months ended
March 31, 2016
, White Mountains experienced net favorable loss reserve development of
$0.1 million
. For the
three months ended
March 31, 2016
, OneBeacon did not experience any net loss reserve development on prior accident year reserves, as favorable development from several businesses, including Technology and Accident, was offset by unfavorable development primarily in Healthcare. For the
three months ended
March 31, 2016
, SSIE had net favorable loss reserve development of $
0.1
million.
Note 4. Third Party Reinsurance
In the normal course of business, White Mountains’s insurance subsidiaries may seek to limit losses that may arise from catastrophes or other events by reinsuring with third party reinsurers. White Mountains remains liable for risks reinsured in the event that the reinsurer does not honor its obligations under reinsurance contracts.
OneBeacon
At
March 31, 2017
, OneBeacon had
$3.4 million
and
$174.7 million
of reinsurance recoverables on paid and unpaid losses. At
December 31, 2016
, OneBeacon had
$6.6 million
and
$172.9 million
of reinsurance recoverables on paid and unpaid losses. Reinsurance contracts do not relieve OneBeacon of its obligation to its policyholders. OneBeacon is selective with its reinsurers, placing reinsurance with only those reinsurers having a strong financial condition. OneBeacon monitors the financial strength and ratings of its reinsurers on an ongoing basis. Uncollectible amounts related to the ongoing specialty business historically have not been significant.
Effective May 1, 2017, OneBeacon renewed its property catastrophe reinsurance program through April 30, 2018. The program provides coverage for OneBeacon's property business as well as certain acts of terrorism. Under the program, the first $
20.0 million
of losses resulting from any single catastrophe are retained, with
100.0%
of the next $
110.0 million
of losses resulting from the catastrophe being reinsured. Any part of a catastrophe loss in excess of $
130.0 million
would be retained in full. In the event of a catastrophe, OneBeacon's property catastrophe reinsurance program is reinstated for the remainder of the original contract term by paying a reinstatement premium that is based on the percentage of coverage reinstated and the original property catastrophe coverage premium.
Note 5. Investments Securities
White Mountains’s invested assets consist of investment securities and other long-term investments held for general investment purposes. The portfolio of investment securities includes 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
March 31, 2017
and
December 31, 2016
.
Other long-term investments consist primarily of hedge funds, private equity funds, unconsolidated private capital investments and the OneBeacon Surplus Notes.
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 months ended
March 31, 2017
and
2016
consisted of the following:
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
Millions
|
|
2017
|
|
2016
|
|
Investment income:
|
|
|
|
|
|
Fixed maturity investments
|
|
$
|
24.5
|
|
|
$
|
14.5
|
|
|
Short-term investments
|
|
.3
|
|
|
.2
|
|
|
Common equity securities
|
|
2.1
|
|
|
1.2
|
|
|
Other long-term investments
|
|
(.1
|
)
|
|
2.8
|
|
|
Total investment income
|
|
26.8
|
|
|
18.7
|
|
|
Third-party investment expenses
|
|
(.7
|
)
|
|
(.8
|
)
|
|
Net investment income, pre-tax
|
|
$
|
26.1
|
|
|
$
|
17.9
|
|
Net Realized and Unrealized Investment Gains (Losses)
Net realized and unrealized investment gains (losses) consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
Millions
|
|
2017
|
|
2016
|
|
Net realized investment gains, pre-tax
|
|
$
|
1.1
|
|
|
$
|
256.8
|
|
|
Net unrealized investment gains (losses), pre-tax
|
|
50.2
|
|
|
(227.3
|
)
|
|
Net realized and unrealized investment gains, pre-tax
|
|
51.3
|
|
|
29.5
|
|
|
Income tax expense attributable to net realized and
unrealized investment gains
|
|
(7.2
|
)
|
|
(8.5
|
)
|
|
Net realized and unrealized investment gains, after tax
|
|
$
|
44.1
|
|
|
$
|
21.0
|
|
Net realized investment gains (losses)
Net realized investment gains (losses) for the
three months ended
March 31, 2017
and
2016
consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Three Months Ended
|
|
|
|
March 31, 2017
|
|
March 31, 2016
|
|
Millions
|
|
Net
realized (losses)
gains
|
|
Net
foreign
currency gains
|
|
Total net realized
(losses) gains
reflected in
earnings
|
|
Net
realized (losses)
gains
|
|
Net
foreign
currency gains (losses)
|
|
Total net realized
(losses) gains
reflected in
earnings
|
|
Fixed maturity investments
|
|
$
|
(2.2
|
)
|
|
$
|
.1
|
|
|
$
|
(2.1
|
)
|
|
$
|
(1.1
|
)
|
|
$
|
—
|
|
|
$
|
(1.1
|
)
|
|
Common equity securities
|
|
1.2
|
|
|
.1
|
|
|
1.3
|
|
|
257.6
|
|
|
—
|
|
|
257.6
|
|
|
Other long-term investments
|
|
1.9
|
|
|
—
|
|
|
1.9
|
|
|
.3
|
|
|
—
|
|
|
.3
|
|
|
Net realized investment gains,
pre-tax
|
|
.9
|
|
|
.2
|
|
|
1.1
|
|
|
256.8
|
|
|
—
|
|
|
256.8
|
|
|
Income tax expense
attributable to net realized
investment gains
|
|
(.7
|
)
|
|
—
|
|
|
(.7
|
)
|
|
(42.9
|
)
|
|
—
|
|
|
(42.9
|
)
|
|
Net realized investment
gains, after tax
|
|
$
|
.2
|
|
|
$
|
.2
|
|
|
$
|
.4
|
|
|
$
|
213.9
|
|
|
$
|
—
|
|
|
$
|
213.9
|
|
Net unrealized investment gains (losses)
The following table summarizes net unrealized investment gains (losses) and changes in the carrying value of investments measured at fair value:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Three Months Ended
|
|
|
|
March 31, 2017
|
|
March 31, 2016
|
|
Millions
|
|
Net
unrealized
gains
|
|
Net
foreign
currency
gains (losses)
|
|
Total net unrealized gains
reflected in
earnings
|
|
Net
unrealized gains (losses)
|
|
Net
foreign
currency gains
|
|
Total net unrealized
gains (losses)
reflected in
earnings
|
|
Fixed maturity investments
|
|
$
|
17.5
|
|
|
$
|
1.7
|
|
|
$
|
19.2
|
|
|
$
|
21.7
|
|
|
$
|
—
|
|
|
$
|
21.7
|
|
|
Common equity securities
|
|
29.1
|
|
|
.5
|
|
|
29.6
|
|
|
(249.8
|
)
|
|
2.4
|
|
|
(247.4
|
)
|
|
Other long-term investments
|
|
4.2
|
|
|
.2
|
|
|
4.4
|
|
|
(2.0
|
)
|
|
.4
|
|
|
(1.6
|
)
|
|
Forward contracts
|
|
—
|
|
|
(3.0
|
)
|
|
(3.0
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Net unrealized investment gains (losses), pre-tax
|
|
50.8
|
|
|
(.6
|
)
|
|
50.2
|
|
|
(230.1
|
)
|
|
2.8
|
|
|
(227.3
|
)
|
|
Income tax (expense) benefit
attributable to net unrealized
investment gains (losses)
|
|
(6.5
|
)
|
|
—
|
|
|
(6.5
|
)
|
|
34.4
|
|
|
—
|
|
|
34.4
|
|
|
Net unrealized investment
gains (losses), after tax
|
|
$
|
44.3
|
|
|
$
|
(.6
|
)
|
|
$
|
43.7
|
|
|
$
|
(195.7
|
)
|
|
$
|
2.8
|
|
|
$
|
(192.9
|
)
|
The following table summarizes the amount of total gains (losses) included in earnings attributable to unrealized investment gains (losses) for Level 3 investments for the
three months ended
March 31, 2017
and
2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
Millions
|
|
2017
|
|
2016
|
|
Fixed maturity investments
|
|
$
|
.2
|
|
|
$
|
.5
|
|
|
Other long-term investments
|
|
(1.9
|
)
|
|
1.1
|
|
|
Total unrealized investment (losses) gains, pre-tax - Level 3 investments
|
|
$
|
(1.7
|
)
|
|
$
|
1.6
|
|
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
March 31, 2017
and
December 31, 2016
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2017
|
|
Millions
|
|
Cost or
amortized
cost
|
|
Gross
unrealized
gains
|
|
Gross
unrealized
losses
|
|
Net foreign
currency
gains
|
|
Carrying
value
|
|
U.S. Government and agency obligations
|
|
$
|
110.7
|
|
|
$
|
—
|
|
|
$
|
(.4
|
)
|
|
$
|
—
|
|
|
$
|
110.3
|
|
|
Debt securities issued by corporations
|
|
1,680.2
|
|
|
10.5
|
|
|
(7.6
|
)
|
|
3.7
|
|
|
1,686.8
|
|
|
Municipal obligations
|
|
328.9
|
|
|
2.8
|
|
|
(1.4
|
)
|
|
—
|
|
|
330.3
|
|
|
Mortgage and asset-backed securities
|
|
2,020.0
|
|
|
5.1
|
|
|
(8.7
|
)
|
|
—
|
|
|
2,016.4
|
|
|
Foreign government, agency and provincial obligations
|
|
17.3
|
|
|
.4
|
|
|
—
|
|
|
.2
|
|
|
17.9
|
|
|
Preferred stocks
|
|
8.3
|
|
|
5.4
|
|
|
—
|
|
|
—
|
|
|
13.7
|
|
|
Total fixed maturity investments
|
|
$
|
4,165.4
|
|
|
$
|
24.2
|
|
|
$
|
(18.1
|
)
|
|
$
|
3.9
|
|
|
$
|
4,175.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
$
|
281.7
|
|
|
$
|
.1
|
|
|
$
|
(3.5
|
)
|
|
$
|
—
|
|
|
$
|
278.3
|
|
|
Debt securities issued by corporations
|
|
1,512.6
|
|
|
8.4
|
|
|
(13.7
|
)
|
|
2.1
|
|
|
1,509.4
|
|
|
Municipal obligations
|
|
308.8
|
|
|
1.9
|
|
|
(1.7
|
)
|
|
—
|
|
|
309.0
|
|
|
Mortgage and asset-backed securities
|
|
2,141.7
|
|
|
2.6
|
|
|
(11.4
|
)
|
|
—
|
|
|
2,132.9
|
|
|
Foreign government, agency and provincial obligations
|
|
12.9
|
|
|
.3
|
|
|
—
|
|
|
—
|
|
|
13.2
|
|
|
Preferred stocks
|
|
8.3
|
|
|
5.7
|
|
|
—
|
|
|
—
|
|
|
14.0
|
|
|
Total fixed maturity investments
|
|
$
|
4,266.0
|
|
|
$
|
19.0
|
|
|
$
|
(30.3
|
)
|
|
$
|
2.1
|
|
|
$
|
4,256.8
|
|
|
Less: fixed maturity investments reclassified to assets
held for sale related to SSIE
|
|
|
|
|
|
|
|
|
|
(6.6
|
)
|
|
Total fixed maturity investments
|
|
|
|
|
|
|
|
|
|
$
|
4,250.2
|
|
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
March 31, 2017
and
December 31, 2016
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2017
|
|
Millions
|
|
Cost or
amortized
cost
|
|
Gross
unrealized
gains
|
|
Gross
unrealized
losses
|
|
Net foreign
currency
gains (losses)
|
|
Carrying
value
|
|
Common equity securities
|
|
$
|
537.9
|
|
|
$
|
65.0
|
|
|
$
|
(2.4
|
)
|
|
$
|
.5
|
|
|
$
|
601.0
|
|
|
Other long-term investments
|
|
$
|
321.9
|
|
|
$
|
39.7
|
|
|
$
|
(23.3
|
)
|
|
$
|
(6.6
|
)
|
|
$
|
331.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
Millions
|
|
Cost or
amortized
cost
|
|
Gross
unrealized
gains
|
|
Gross
unrealized
losses
|
|
Net foreign
currency
(losses)
|
|
Carrying
value
|
|
Common equity securities
|
|
$
|
440.8
|
|
|
$
|
35.9
|
|
|
$
|
(2.4
|
)
|
|
$
|
—
|
|
|
$
|
474.3
|
|
|
Other long-term investments
|
|
$
|
314.9
|
|
|
$
|
40.3
|
|
|
$
|
(28.0
|
)
|
|
$
|
(3.9
|
)
|
|
$
|
323.3
|
|
Other Long-term Investments
Other long-term investments consist of the following as of
March 31, 2017
and
December 31, 2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Carrying Value at
|
|
Millions
|
|
March 31, 2017
|
|
December 31, 2016
|
|
Hedge funds and private equity funds, at fair value
|
|
$
|
147.2
|
|
|
$
|
131.0
|
|
|
Private equity securities and limited liability companies, at fair value
(1)(2)
|
|
72.4
|
|
|
72.0
|
|
|
OneBeacon Surplus Notes, at fair value
(1)
|
|
69.6
|
|
|
71.9
|
|
|
Private convertible preferred securities, at fair value
(1)
|
|
30.7
|
|
|
30.6
|
|
|
Tax advantaged federal affordable housing development fund
(3)
|
|
11.7
|
|
|
12.3
|
|
|
Partnership investments accounted for under the equity method
|
|
3.0
|
|
|
3.5
|
|
|
Forward Contracts
|
|
(4.2
|
)
|
|
(1.2
|
)
|
|
Other
|
|
1.3
|
|
|
3.2
|
|
|
Total other-long term investments
|
|
$
|
331.7
|
|
|
$
|
323.3
|
|
(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
March 31, 2017
, no funds had been drawn on the surplus note facility.
(3)
Fund accounted for using the proportional amortization method.
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 are generally estimated using the net asset value (
“
NAV
”
) of the funds. As of
March 31, 2017
, White Mountains held investments in
5
hedge funds and
20
private equity funds. The largest investment in a single fund was
$54.2 million
as of
March 31, 2017
and
$36.5 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
March 31, 2017
and
December 31, 2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2017
|
|
December 31, 2016
|
|
Millions
|
|
Fair Value
|
|
Unfunded
Commitments
|
|
Fair Value
|
|
Unfunded
Commitments
|
|
Hedge funds
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long/short banks and financials
|
|
$
|
54.2
|
|
|
$
|
—
|
|
|
$
|
36.5
|
|
|
$
|
—
|
|
|
Long/short equity REIT
|
|
19.7
|
|
|
—
|
|
|
19.9
|
|
|
—
|
|
|
Other
|
|
2.2
|
|
|
—
|
|
|
3.4
|
|
|
—
|
|
|
Total hedge funds
|
|
76.1
|
|
|
—
|
|
|
59.8
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
Private equity funds
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aerospace/Defense/Government
|
|
24.4
|
|
|
23.6
|
|
|
19.4
|
|
|
25.9
|
|
|
Manufacturing/Industrial
|
|
18.8
|
|
|
22.2
|
|
|
15.9
|
|
|
22.4
|
|
|
Multi-sector
|
|
11.0
|
|
|
2.0
|
|
|
11.4
|
|
|
2.0
|
|
|
Direct lending/Mezzanine debt
|
|
5.5
|
|
|
32.0
|
|
|
1.8
|
|
|
35.7
|
|
|
Healthcare
|
|
3.4
|
|
|
.4
|
|
|
3.5
|
|
|
.4
|
|
|
Energy infrastructure & services
|
|
2.8
|
|
|
3.0
|
|
|
14.1
|
|
|
3.2
|
|
|
Private equity secondaries
|
|
2.5
|
|
|
2.1
|
|
|
3.0
|
|
|
2.1
|
|
|
Financial Services
|
|
1.5
|
|
|
4.5
|
|
|
1.0
|
|
|
5.0
|
|
|
Insurance
|
|
.9
|
|
|
41.3
|
|
|
.8
|
|
|
41.3
|
|
|
Real estate
|
|
.3
|
|
|
.1
|
|
|
.3
|
|
|
.1
|
|
|
Total private equity funds
|
|
71.1
|
|
|
131.2
|
|
|
71.2
|
|
|
138.1
|
|
|
Total hedge funds and private equity funds
included in other long-term investments
|
|
$
|
147.2
|
|
|
$
|
131.2
|
|
|
$
|
131.0
|
|
|
$
|
138.1
|
|
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 March 31, 2017,
one
hedge fund with a fair value of
$38.3 million
was subject to a lock-up period that expires on September 1, 2018.
The following summarizes the
March 31, 2017
fair value of hedge funds subject to restrictions on redemption frequency and advance notice period requirements for investments in active hedge funds:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notice Period
|
|
Millions
Redemption frequency
|
|
30-59 days
notice
|
|
60-89 days
notice
|
|
90-119 days
notice
|
|
Total
|
|
Monthly
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Quarterly
|
|
15.9
|
|
|
—
|
|
|
—
|
|
|
15.9
|
|
|
Semi-annual
|
|
38.3
|
|
|
19.7
|
|
|
—
|
|
|
58.0
|
|
|
Annual
|
|
—
|
|
|
—
|
|
|
2.2
|
|
|
2.2
|
|
|
Total
|
|
$
|
54.2
|
|
|
$
|
19.7
|
|
|
$
|
2.2
|
|
|
$
|
76.1
|
|
Certain of White Mountains’s investments in hedge funds are no longer active and are in the process of disposing of their underlying investments. Distributions from such funds are remitted to investors as the fund’s underlying investments are liquidated. As of
March 31, 2017
, the hedge funds in liquidation had no value. The actual amount of any final distribution remittances remain subject to market fluctuations. The date at which such remittances, if any, will be received is not determinable as of
March 31, 2017
.
White Mountains has also submitted redemption requests for certain of its investments in active hedge funds. As of
March 31, 2017
, redemptions of
$2.2 million
are outstanding that would be subject to market fluctuations. The date at which such redemptions will be received is not determinable as of
March 31, 2017
. Redemptions are recorded as receivables when the investment is no longer subject to market fluctuations.
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.
As of
March 31, 2017
, investments in private equity funds were subject to lock-up periods as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Millions
|
|
1-3 years
|
|
3 – 5 years
|
|
5 – 10 years
|
|
>10 years
|
|
Total
|
|
Private Equity Funds — expected lock-up period remaining
|
|
$18.4
|
|
$23.3
|
|
$22.2
|
|
$7.2
|
|
$71.1
|
OneBeacon Surplus Notes
In the fourth quarter of 2014, in conjunction with OneBeacon's sale of its runoff business to an affiliate of Armour Group Holdings Limited (the “OneBeacon Runoff Transaction”), OneBeacon provided financing in the form of the OneBeacon Surplus Notes with a par value of
$101.0 million
, which had a fair value of
$69.6 million
and $
71.9 million
as of
March 31, 2017
and
December 31, 2016
. Subsequent to closing, the OneBeacon Surplus Notes are included in OneBeacon’s investment portfolio, classified within other long-term investments.
The internal valuation model used to estimate the fair value of the OneBeacon Surplus Notes is based on discounted expected cash flows using information as of the measurement date. The estimated fair value of the surplus notes is sensitive to changes in public debt credit spreads, as well as changes in estimates with respect to other variables including a discount to reflect the private nature of the notes (and the related lack of liquidity), the credit quality of the notes, based on the financial performance of the Issuer relative to expectations, and the timing, amount, and likelihood of interest and principal payments on the notes, which are subject to regulatory approval and therefore may vary from the contractual terms. For the purposes of estimating fair value, OneBeacon has assumed that all accrued but unpaid interest on the seller priority note since the date of issuance is paid in 2020, with regular annual interest payments on both the seller priority note and the pari passu note beginning in 2021, all accrued but unpaid interest on the pari passu note since the date of issuance is paid in 2025 and principal repayments begin on a graduated basis in 2030 for the seller priority note and 2035 for the pari passu note. Although these variables involve considerable judgment, OneBeacon does not currently expect any resulting changes in the estimated value of the surplus notes to be material to its financial position. An interest payment of
$2.4 million
was received in the
three months ended
March 31, 2016.
Below is a table illustrating the valuation adjustments taken to arrive at estimated fair value of the OneBeacon Surplus Notes as of
March 31, 2017
and
December 31, 2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Type of Surplus Note
|
|
Total as of March 31, 2017
|
|
Total as of December 31, 2016
|
|
Millions
|
|
Seller Priority
|
|
Pari Passu
|
|
|
Par Value
|
|
$
|
57.9
|
|
|
$
|
43.1
|
|
|
$
|
101.0
|
|
|
$
|
101.0
|
|
|
Fair value adjustments to reflect:
|
|
|
|
|
|
|
|
|
|
Current market rates on public debt and contract-based repayments
(1)
|
|
7.2
|
|
|
1.8
|
|
|
9.0
|
|
|
5.1
|
|
|
Regulatory approval
(2)
|
|
2.9
|
|
|
(13.2
|
)
|
|
(10.3
|
)
|
|
(15.6
|
)
|
|
Liquidity adjustment
(3)
|
|
(19.9
|
)
|
|
(10.2
|
)
|
|
(30.1
|
)
|
|
(18.6
|
)
|
|
Total adjustments
|
|
(9.8
|
)
|
|
(21.6
|
)
|
|
(31.4
|
)
|
|
(29.1
|
)
|
|
Fair value
(4)
|
|
$
|
48.1
|
|
|
$
|
21.5
|
|
|
$
|
69.6
|
|
|
$
|
71.9
|
|
|
|
|
|
(1)
|
Represents the value of the surplus notes, at current market yields on comparable publicly traded debt, and assuming issuer is allowed to make principal and interest payments when its financial capacity is available, as measured by statutory capital in excess of a 250% RBC score under the National Association of Insurance Commissioners’ risk-based capital standards for property and casualty companies. The favorable year-to-date change in impact is due principally to the narrowing of non-investment grade credit spreads as well as the time value of money benefit from moving three months closer to modeled cash receipts.
|
|
|
|
|
(2)
|
Represents anticipated delay in securing regulatory approvals of interest and principal payments to reflect graduated changes in Issuer's statutory surplus. The monetary impact of the anticipated delay is measured based on credit spreads of public securities with roughly equivalent percentages of discounted payments missed. The favorable year-to-date change in impact is driven primarily by the narrowing of non-investment grade credit spreads, which causes negative valuation impact from the anticipated delay in securing regulatory approval to be lower.
|
(3)
Represents impact of liquidity spread to account for OneBeacon's sole ownership of the notes, lack of a trading market, and unique nature of the ongoing regulatory approval process. The unfavorable year-to-date change in impact is due largely to an increase in the assumed liquidity spread to 400 basis points at March 31, 2017 from 250 basis points at December 31, 2016.
(4)
The decrease in the fair value of the surplus notes during the
three months ended
March 31, 2017
was driven primarily by an increase in the assumed liquidity spread, partially offset by the narrowing of non-investment grade credit spreads as well as the time value of money benefit generated by moving three months closer to modeled cash receipts.
Fair value measurements as of
March 31, 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 March 31, 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 are primarily comprised of fixed maturity investments, which have been disaggregated into classes, including debt securities issued by corporations, municipal obligations, mortgage and asset-backed securities, foreign government, agency and provincial obligations and preferred stocks. 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 and that 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. Level 3 fair value estimates based upon unobservable inputs include White Mountains’s investments in the OneBeacon Surplus Notes, as well as certain investments in fixed maturity investments, common 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 processes and 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.
Preferred stocks:
The fair value of preferred stocks is determined from a pricing evaluation technique that calculates the appropriate spread over a comparable security for each issue. Key inputs include exchange prices (underlying and common stock of same issuer), 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.
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 interest in the hedge fund or private equity fund investment. As of March 31, 2017 and December 31, 2016, White Mountains recorded negative adjustments of $
1.0 million
and $
5.0 million
to the reported NAV of certain 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
March 31, 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 9
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2017
|
|
Millions
|
|
Fair Value
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Fixed maturity investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government and agency obligations
|
|
$
|
110.3
|
|
|
$
|
100.8
|
|
|
$
|
9.5
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt securities issued by corporations:
|
|
|
|
|
|
|
|
|
|
|
Consumer
|
|
362.9
|
|
|
—
|
|
|
362.9
|
|
|
—
|
|
|
Financials
|
|
263.3
|
|
|
—
|
|
|
263.3
|
|
|
—
|
|
|
Health Care
|
|
248.4
|
|
|
—
|
|
|
248.4
|
|
|
—
|
|
|
Utilities
|
|
229.3
|
|
|
—
|
|
|
229.3
|
|
|
—
|
|
|
Industrial
|
|
174.5
|
|
|
—
|
|
|
174.5
|
|
|
—
|
|
|
Communications
|
|
135.9
|
|
|
—
|
|
|
135.9
|
|
|
—
|
|
|
Technology
|
|
118.1
|
|
|
—
|
|
|
118.1
|
|
|
—
|
|
|
Materials
|
|
101.9
|
|
|
—
|
|
|
101.9
|
|
|
—
|
|
|
Energy
|
|
52.5
|
|
|
—
|
|
|
52.5
|
|
|
—
|
|
|
Total debt securities issued by corporations
|
|
1,686.8
|
|
|
—
|
|
|
1,686.8
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage and asset-backed securities
|
|
2,016.4
|
|
|
—
|
|
|
1,958.1
|
|
|
58.3
|
|
|
Municipal obligations
|
|
330.3
|
|
|
—
|
|
|
330.3
|
|
|
—
|
|
|
Foreign government, agency and provincial obligations
|
|
17.9
|
|
|
.6
|
|
|
17.3
|
|
|
—
|
|
|
Preferred stocks
|
|
13.7
|
|
|
—
|
|
|
13.7
|
|
|
—
|
|
|
Total fixed maturity investments
|
|
4,175.4
|
|
|
101.4
|
|
|
4,015.7
|
|
|
58.3
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term investments
(4)
|
|
230.9
|
|
|
227.9
|
|
|
3.0
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
Common equity securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exchange traded funds
(1)
|
|
384.8
|
|
|
330.6
|
|
|
54.2
|
|
|
—
|
|
|
Consumer
|
|
32.2
|
|
|
32.2
|
|
|
—
|
|
|
—
|
|
|
Health Care
|
|
27.1
|
|
|
27.1
|
|
|
—
|
|
|
—
|
|
|
Financials
|
|
18.2
|
|
|
18.2
|
|
|
—
|
|
|
—
|
|
|
Technology
|
|
16.1
|
|
|
16.1
|
|
|
—
|
|
|
—
|
|
|
Communications
|
|
13.9
|
|
|
13.9
|
|
|
—
|
|
|
—
|
|
|
Industrial
|
|
9.0
|
|
|
9.0
|
|
|
—
|
|
|
—
|
|
|
Energy
|
|
7.7
|
|
|
7.7
|
|
|
—
|
|
|
—
|
|
|
Materials
|
|
5.1
|
|
|
5.1
|
|
|
—
|
|
|
—
|
|
|
Utilities
|
|
1.0
|
|
|
1.0
|
|
|
—
|
|
|
—
|
|
|
Other
|
|
85.9
|
|
|
—
|
|
|
85.9
|
|
|
—
|
|
|
Total common equity securities
|
|
601.0
|
|
|
460.9
|
|
|
140.1
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
Other long-term investments
(2)(3)
|
|
174.0
|
|
|
—
|
|
|
—
|
|
|
174.0
|
|
|
Total investments
|
|
$
|
5,181.3
|
|
|
$
|
790.2
|
|
|
$
|
4,158.8
|
|
|
$
|
232.3
|
|
(1)
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.
(2)
Excludes carrying value of
$3.0
associated with other long-term investment limited partnerships accounted for using the equity method and
$(4.2)
related to foreign currency forward contracts. Excludes carrying value of
$11.7
associated with a tax advantaged federal affordable housing development fund accounted for using the proportional amortization method.
(3)
Excludes carrying value of
$147.2
associated with hedge funds and private equity funds for which fair value is measured at NAV using the practical expedient.
(4)
Short-term investments are measured at amortized cost, which approximates fair value.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
Millions
|
|
Fair Value
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Fixed maturity investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government and agency obligations
|
|
$
|
278.3
|
|
|
$
|
268.8
|
|
|
$
|
9.5
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt securities issued by corporations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer
|
|
385.6
|
|
|
—
|
|
|
385.6
|
|
|
—
|
|
|
Health Care
|
|
244.2
|
|
|
—
|
|
|
244.2
|
|
|
—
|
|
|
Utilities
|
|
180.3
|
|
|
—
|
|
|
180.3
|
|
|
—
|
|
|
Financials
|
|
176.0
|
|
|
—
|
|
|
176.0
|
|
|
—
|
|
|
Industrial
|
|
146.4
|
|
|
—
|
|
|
146.4
|
|
|
—
|
|
|
Communications
|
|
131.4
|
|
|
—
|
|
|
131.4
|
|
|
—
|
|
|
Materials
|
|
102.6
|
|
|
—
|
|
|
102.6
|
|
|
—
|
|
|
Technology
|
|
89.4
|
|
|
—
|
|
|
89.4
|
|
|
—
|
|
|
Energy
|
|
53.5
|
|
|
—
|
|
|
53.5
|
|
|
—
|
|
|
Total debt securities issued by corporations
|
|
1,509.4
|
|
|
—
|
|
|
1,509.4
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage and asset-backed securities
|
|
2,132.9
|
|
|
—
|
|
|
2,132.9
|
|
|
—
|
|
|
Municipal obligations
|
|
309.0
|
|
|
—
|
|
|
309.0
|
|
|
—
|
|
|
Foreign government, agency and provincial obligations
|
|
13.2
|
|
|
.6
|
|
|
12.6
|
|
|
—
|
|
|
Preferred stocks
|
|
14.0
|
|
|
—
|
|
|
14.0
|
|
|
—
|
|
|
Total fixed maturity investments
(4)
|
|
4,256.8
|
|
|
269.4
|
|
|
3,987.4
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term investments
(4)(5)
|
|
287.1
|
|
|
274.4
|
|
|
12.7
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
Common equity securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exchange traded funds
(1)
|
|
321.6
|
|
|
270.4
|
|
|
51.2
|
|
|
—
|
|
|
Health Care
|
|
20.9
|
|
|
20.9
|
|
|
—
|
|
|
—
|
|
|
Consumer
|
|
12.9
|
|
|
12.9
|
|
|
—
|
|
|
—
|
|
|
Financials
|
|
11.6
|
|
|
11.6
|
|
|
—
|
|
|
—
|
|
|
Technology
|
|
11.0
|
|
|
11.0
|
|
|
—
|
|
|
—
|
|
|
Communications
|
|
10.5
|
|
|
10.5
|
|
|
—
|
|
|
—
|
|
|
Energy
|
|
3.7
|
|
|
3.7
|
|
|
—
|
|
|
—
|
|
|
Industrial
|
|
2.2
|
|
|
2.2
|
|
|
—
|
|
|
—
|
|
|
Other
|
|
79.9
|
|
|
—
|
|
|
79.9
|
|
|
—
|
|
|
Total common equity securities
|
|
474.3
|
|
|
343.2
|
|
|
131.1
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
Other long-term investments
(2)(3)
|
|
177.7
|
|
|
—
|
|
|
—
|
|
|
177.7
|
|
|
Total investments
(4)
|
|
$
|
5,195.9
|
|
|
$
|
887.0
|
|
|
$
|
4,131.2
|
|
|
$
|
177.7
|
|
(1)
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.
(2)
Excludes carrying value of
$3.5
associated with other long-term investment limited partnerships accounted for using the equity method and
$(1.2)
related to foreign currency forward contracts. Excludes carrying value of
$12.3
associated with a tax advantaged federal affordable housing development fund accounted for using the proportional amortization method.
(3)
Excludes carrying value of
$131.0
associated with hedge funds and private equity funds for which fair value is measured at NAV using the practical expedient.
(4)
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.
(5)
Short-term investments are measured at amortized cost, which approximates fair value.
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
March 31, 2017
and
December 31, 2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value at
|
|
Millions
|
|
March 31, 2017
|
|
December 31, 2016
|
|
AA
|
|
93.1
|
|
|
100.9
|
|
|
A
|
|
484.7
|
|
|
381.9
|
|
|
BBB
|
|
846.5
|
|
|
786.5
|
|
|
BB
|
|
240.2
|
|
|
214.0
|
|
|
B
|
|
22.3
|
|
|
26.1
|
|
|
Debt securities issued by corporations
(1)
|
|
$
|
1,686.8
|
|
|
$
|
1,509.4
|
|
(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 Services ("Moody’s").
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 March 31, 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 March 31, 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. White Mountains does not own any collateralized debt obligations, with the exception of
$33.9 million
of non-agency RMBS resecuritization tranches, each a senior tranche in its own right and each collateralized by a single earlier vintage Super Senior or Senior non-agency RMBS.
The following table summarizes the carrying value of White Mountains’s mortgage and asset-backed securities as of
March 31, 2017
and
December 31, 2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2017
|
|
December 31, 2016
|
|
Millions
|
|
Fair Value
|
|
Level 2
|
|
Level 3
|
|
Fair Value
|
|
Level 2
|
|
Level 3
|
|
Mortgage-backed securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agency:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GNMA
|
|
$
|
249.0
|
|
|
$
|
249.0
|
|
|
$
|
—
|
|
|
$
|
283.9
|
|
|
$
|
283.9
|
|
|
$
|
—
|
|
|
FNMA
|
|
270.1
|
|
|
270.1
|
|
|
—
|
|
|
278.3
|
|
|
278.3
|
|
|
—
|
|
|
FHLMC
|
|
86.1
|
|
|
86.1
|
|
|
—
|
|
|
89.8
|
|
|
89.8
|
|
|
—
|
|
|
Total Agency
(1)
|
|
605.2
|
|
|
605.2
|
|
|
—
|
|
|
652.0
|
|
|
652.0
|
|
|
—
|
|
|
Non-agency:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential
|
|
309.9
|
|
|
251.6
|
|
|
58.3
|
|
|
205.3
|
|
|
205.3
|
|
|
—
|
|
|
Commercial
|
|
126.9
|
|
|
126.9
|
|
|
—
|
|
|
127.5
|
|
|
127.5
|
|
|
—
|
|
|
Total Non-agency
|
|
436.8
|
|
|
378.5
|
|
|
58.3
|
|
|
332.8
|
|
|
332.8
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total mortgage-backed securities
|
|
1,042.0
|
|
|
983.7
|
|
|
58.3
|
|
|
984.8
|
|
|
984.8
|
|
|
—
|
|
|
Other asset-backed securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit card receivables
|
|
383.0
|
|
|
383.0
|
|
|
—
|
|
|
438.3
|
|
|
438.3
|
|
|
—
|
|
|
Vehicle receivables
|
|
353.0
|
|
|
353.0
|
|
|
—
|
|
|
479.5
|
|
|
479.5
|
|
|
—
|
|
|
Other
|
|
238.4
|
|
|
238.4
|
|
|
—
|
|
|
230.3
|
|
|
230.3
|
|
|
—
|
|
|
Total other asset-backed securities
|
|
974.4
|
|
|
974.4
|
|
|
—
|
|
|
1,148.1
|
|
|
1,148.1
|
|
|
—
|
|
|
Total mortgage and asset-backed securities
|
|
$
|
2,016.4
|
|
|
$
|
1,958.1
|
|
|
$
|
58.3
|
|
|
$
|
2,132.9
|
|
|
$
|
2,132.9
|
|
|
$
|
—
|
|
(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 security issuance years of White Mountains’s investments in non-agency RMBS and non-agency CMBS securities as of
March 31, 2017
are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Security Issuance Year
|
|
|
|
|
|
|
|
Millions
|
|
Fair Value
|
|
2004
|
|
2005
|
|
2006
|
|
2008
|
|
2010
|
|
2011
|
|
2012
|
|
2013
|
|
2014
|
|
2015
|
|
2016
|
|
2017
|
|
Non-agency
RMBS
|
|
$
|
309.9
|
|
|
$
|
18.1
|
|
|
$
|
5.3
|
|
|
$
|
2.8
|
|
|
$
|
2.4
|
|
|
$
|
6.0
|
|
|
$
|
8.4
|
|
|
$
|
4.2
|
|
|
$
|
19.8
|
|
|
$
|
49.4
|
|
|
$
|
104.2
|
|
|
$
|
34.5
|
|
|
$
|
54.8
|
|
|
Non-agency
CMBS
|
|
126.9
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
4.1
|
|
|
—
|
|
|
18.1
|
|
|
11.5
|
|
|
23.4
|
|
|
44.2
|
|
|
25.6
|
|
|
—
|
|
|
Total
|
|
$
|
436.8
|
|
|
$
|
18.1
|
|
|
$
|
5.3
|
|
|
$
|
2.8
|
|
|
$
|
2.4
|
|
|
$
|
10.1
|
|
|
$
|
8.4
|
|
|
$
|
22.3
|
|
|
$
|
31.3
|
|
|
$
|
72.8
|
|
|
$
|
148.4
|
|
|
$
|
60.1
|
|
|
$
|
54.8
|
|
Non-agency Residential Mortgage-backed Securities
The classification of the underlying collateral quality and the tranche levels of White Mountains’s non-agency RMBS securities are as follows as of
March 31, 2017
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Millions
|
|
Fair Value
|
|
Super Senior
(1)
|
|
Senior
(2)
|
|
Subordinate
(3)
|
|
Prime
|
|
$
|
309.9
|
|
|
$
|
104.9
|
|
|
$
|
205.0
|
|
|
$
|
—
|
|
|
Non-prime
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Sub-prime
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Total
|
|
$
|
309.9
|
|
|
$
|
104.9
|
|
|
$
|
205.0
|
|
|
$
|
—
|
|
(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.
Non-agency Commercial Mortgage-backed Securities
White Mountains’s non-agency CMBS portfolio is generally short-term and structurally senior, with more than
25
points of subordination on average for both fixed rate and floating rate as of
March 31, 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
March 31, 2017
, none of the underlying loans of the non-agency CMBS held by White Mountains were reported as non-performing.
The amount of fixed and floating rate securities and their tranche levels of White Mountains’s non-agency CMBS securities are as follows as of
March 31, 2017
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Millions
|
|
Fair Value
|
|
Super Senior
(1)
|
|
Senior
(2)
|
|
Subordinate
(3)
|
|
Fixed rate CMBS
|
|
$
|
115.2
|
|
|
$
|
1.6
|
|
|
$
|
70.1
|
|
|
$
|
43.5
|
|
|
Floating rate CMBS
|
|
11.7
|
|
|
—
|
|
|
—
|
|
|
11.7
|
|
|
Total
|
|
$
|
126.9
|
|
|
$
|
1.6
|
|
|
$
|
70.1
|
|
|
$
|
55.2
|
|
(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 (“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
March 31, 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 three months ended
March 31, 2017
and
2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 3 Investments
|
|
|
Millions
|
Level 1 investments
|
Level 2
investments
|
Fixed
maturity investments
|
Common
equity
securities
|
Other long-term
investments
|
Hedge Funds and Private Equity Funds measured at NAV
(3)
|
|
Total
|
|
|
Balance at January 1, 2017
|
$
|
612.5
|
|
$
|
4,118.5
|
|
$
|
—
|
|
$
|
—
|
|
$
|
177.7
|
|
$
|
131.0
|
|
|
$
|
5,039.7
|
|
(1)(2)(4)
|
|
Total realized and
unrealized gains (losses)
|
22.4
|
|
25.5
|
|
.2
|
|
—
|
|
(1.9
|
)
|
8.2
|
|
|
54.4
|
|
|
|
Amortization/Accretion
|
—
|
|
(6.5
|
)
|
—
|
|
—
|
|
—
|
|
—
|
|
|
(6.5
|
)
|
|
|
Purchases
|
124.5
|
|
890.4
|
|
58.1
|
|
—
|
|
.2
|
|
22.1
|
|
|
1,095.3
|
|
|
|
Sales
|
(197.1
|
)
|
(866.9
|
)
|
|
|
—
|
|
(2.0
|
)
|
(14.1
|
)
|
|
(1,080.1
|
)
|
|
|
Deconsolidation of SSIE
|
—
|
|
(5.2
|
)
|
—
|
|
—
|
|
—
|
|
|
|
(5.2
|
)
|
|
|
Transfers in
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
|
—
|
|
|
|
Transfers out
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
|
—
|
|
|
|
Balance at
March 31, 2017
|
$
|
562.3
|
|
$
|
4,155.8
|
|
$
|
58.3
|
|
$
|
—
|
|
$
|
174.0
|
|
$
|
147.2
|
|
|
$
|
5,097.6
|
|
(1)(2)
|
(1)
Excludes carrying value of
$3.5
and
$3.0
at
January 1, 2017
and
March 31, 2017
associated with other long-term investments accounted for using the equity method and
$(1.2)
and
$(4.2)
related to foreign currency forward contracts. Excludes carrying value of
$12.3
and
$11.7
at
January 1, 2017
and
March 31, 2017
associated with a tax advantaged federal affordable housing development fund accounted for using the proportional amortization method.
(2)
Excludes carrying value of $
287.1
and $
230.9
at
January 1, 2017
and
March 31, 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
|
Common
equity
securities
|
Other long-term
investments
|
Hedge Funds and Private Equity Funds measured at NAV
(3)
|
Total
|
|
|
Balance at January 1, 2016
|
$
|
1,152.2
|
|
$
|
2,531.4
|
|
$
|
70.0
|
|
$
|
—
|
|
$
|
169.5
|
|
$
|
127.8
|
|
$
|
4,050.9
|
|
(1)(2)(4)
|
|
Total realized and
unrealized gains (losses)
|
11.3
|
|
19.1
|
|
.5
|
|
—
|
|
1.1
|
|
(2.4
|
)
|
29.6
|
|
|
|
Amortization/Accretion
|
—
|
|
(4.2
|
)
|
—
|
|
—
|
|
—
|
|
—
|
|
(4.2
|
)
|
|
|
Purchases
|
109.0
|
|
292.4
|
|
—
|
|
—
|
|
2.1
|
|
8.9
|
|
412.4
|
|
|
|
Sales
|
(852.9
|
)
|
(272.6
|
)
|
—
|
|
—
|
|
—
|
|
(3.0
|
)
|
(1,128.5
|
)
|
|
|
Transfers in
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
|
|
Transfers out
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
|
|
Balance at
March 31, 2016
|
$
|
419.6
|
|
$
|
2,566.1
|
|
$
|
70.5
|
|
$
|
—
|
|
$
|
172.7
|
|
$
|
131.3
|
|
$
|
3,360.2
|
|
(1)(2)(4)
|
(1)
Excludes carrying value of $
3.8
and
$3.7
at
January 1, 2016
and
March 31, 2016
associated with other long-term investment limited partnerships accounted for using the equity method. Excludes carrying value of
$14.7
and
$14.1
at
January 1, 2016
and
March 31, 2016
associated with a tax advantaged federal affordable housing development fund accounted for using the proportional amortization method.
(2)
Excludes carrying value of $
211.3 million
and $
261.7 million
at
January 1, 2016
and
March 31, 2016
associated with short-term investments of which
$0.1
and
$0.3
is classified as held for sale at
January 1, 2016
and
March 31, 2016
.
(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
$9.5
and
$9.4
of fixed maturity investments at
January 1, 2016
and
March 31, 2016
that is classified as assets held for sale related to SSIE.
Fair Value Measurements — transfers between levels -
Three-month period ended
March 31, 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 three months of
2017
and the first three months of 2016, there were no fixed maturity investments classified as Level 3 measurements in the prior period that were transferred to Level 2 measurements.
Significant Unobservable Inputs
The following 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
March 31, 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
|
|
March 31, 2017
|
|
$ in millions, except share price
|
|
Rating
(6)
|
|
Valuation Technique(s)
|
|
Fair
Value
(1)
|
|
Unobservable Input
|
|
Non-agency residential mortgage-backed securities
|
|
AAA
|
|
Broker pricing
|
|
$58.3
|
|
Broker quote
|
|
102.56
|
|
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
|
|
$3.4
|
|
Share price
|
-
|
$2.52
|
|
Private convertible preferred security
|
|
NR
|
|
Multiple of EBITDA
|
|
$3.7
|
|
EBITDA multiple
|
-
|
6.00
|
|
Private convertible preferred security
|
|
NR
|
|
Share price of most recent transaction
|
|
$27.0
|
|
Share price
|
-
|
$3.83
|
|
Community development tax incentive investment
|
|
NR
|
|
Member share of GAAP net equity
|
|
$14.5
|
|
GAAP net equity
|
|
$14.5
|
|
Private equity security
|
|
NR
|
|
Discounted cash flow/ Option pricing method
|
|
$9.4
|
|
Discount rate
|
-
|
21.0%
|
|
|
|
|
|
|
|
|
|
Time until expiration
|
-
|
4 years
|
|
|
|
|
|
|
|
Volatility/Standard deviation
|
-
|
50.0%
|
|
|
|
|
|
|
|
Risk free rate
|
-
|
1.00%
|
|
OneBeacon Surplus Notes:
|
|
NR
|
|
|
|
|
|
|
|
- Seller priority
|
|
|
|
Discounted cash flow
|
|
$48.1
|
|
Discount rate
(2)
|
-
|
10.6%
|
|
|
|
|
|
|
|
Timing of interest payments
(4)
|
-
|
2020
|
|
|
|
|
|
|
|
Timing of principal payments
(4)
|
-
|
2030
|
|
- Pari passu
|
|
|
|
Discounted cash flow
|
|
$21.5
|
|
Discount rate
(3)
|
-
|
15.0%
|
|
|
|
|
|
|
|
Timing of interest payments
(5)
|
-
|
2021
|
|
|
|
|
|
|
|
Timing of principal payments
(5)
|
-
|
2035
|
(1)
Includes the net unrealized investment gains (losses) associated with foreign currency; foreign currency effects based on observable inputs.
(2)
Stochastic modeling supporting the fair value estimation indicates that the average percentage of discounted payments missed on the seller priority note is roughly equivalent to that of a conventional debt security with a credit rating of ‘B’. The corresponding credit spread, increased to 400 bps as of March 31, 2017 from 250 bps as of December 31, 2016 to reflect an increase in the assumed liquidity spread for the seller priority note.
(3)
Stochastic modeling supporting the fair value estimation indicates that the average percentage of discounted payments missed on the pari passu note is roughly equivalent to that of a conventional debt security with a credit rating of ‘CCC’. The corresponding credit spread, increased to 400 bps as of March 31, 2017 from 250 bps as of December 31, 2016 to reflect an increase in the assumed liquidity spread for the pari passu note.
(4)
As of March 31, 2017, OneBeacon has assumed for the purpose of estimating fair value that all accrued but unpaid interest on the seller priority note since the date of issuance is paid in 2020, with regular annual interest payments beginning thereafter. Principal repayments are assumed to begin on a graduated basis in 2030.
(5)
As of March 31, 2017, OneBeacon has assumed for the purpose of estimating fair value that regular annual interest payments on the pari passu note begin in 2021. All accrued but unpaid interest since the date of issuance is assumed to be paid in 2025. Principal repayments are assumed to begin on a graduated basis in 2035.
(6)
Credit ratings are assigned based on the following hierarchy: 1) Standard and Poor's and 2) Moody’s.
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
Community development tax incentive investment
|
|
Member share of GAAP net equity
|
|
$14.3
|
|
GAAP net equity
|
|
$14.3
|
|
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%
|
|
OneBeacon Surplus Notes:
|
|
|
|
|
|
|
|
- Seller priority
|
|
Discounted cash flow
|
|
$51.1
|
|
Discount rate
(2)
|
-
|
9.6%
|
|
|
|
|
|
Timing of interest payments
(4)
|
-
|
2020
|
|
|
|
|
|
Timing of principal payments
(4)
|
-
|
2030
|
|
- Pari passu
|
|
Discounted cash flow
|
|
$20.8
|
|
Discount rate
(3)
|
-
|
15.0%
|
|
|
|
|
|
Timing of interest payments
(5)
|
-
|
2021
|
|
|
|
|
|
Timing of principal payments
(5)
|
-
|
2035
|
(1)
Includes the net unrealized investment gains (losses) associated with foreign currency; foreign currency effects based on observable inputs.
(2)
Stochastic modeling supporting the fair value estimation indicates that the average percentage of discounted payments missed on the seller priority note is roughly equivalent to that of a conventional debt security with a credit rating of ‘B’. The corresponding credit spread increased by an additional 250 basis points to reflect both a liquidity discount for a private debt instrument and regulatory payment approval uncertainty, was added to the treasury rate to determine the discount rate for the seller priority note.
(3)
Stochastic modeling supporting the fair value estimation indicates that the average percentage of discounted payments missed on the pari passu note is roughly equivalent to that of a conventional debt security with a credit rating of ‘CCC’. The corresponding credit spread increased by an additional 250 basis points to reflect both a liquidity discount for a private debt instrument and regulatory payment approval uncertainty, was added to the treasury rate to determine the discount rate for the pari passu note.
(4)
As of December 31, 2016, OneBeacon has assumed for the purpose of estimating fair value that all accrued but unpaid interest on the seller priority note since the date of issuance is paid in 2020, with regular annual interest payments beginning thereafter. Principal repayments are assumed to begin on a graduated basis in 2030.
(5)
As of December 31, 2016, OneBeacon has assumed for the purpose of estimating fair value that regular annual interest payments on the pari passu note begin in 2021. All accrued but unpaid interest since the date of issuance is assumed to be paid in 2025. Principal repayments are assumed to begin on a graduated basis in 2035.
Note 6. 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.
The following table shows the change in goodwill and other intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
Millions
|
|
2017
|
|
2016
|
|
|
|
Goodwill
|
|
Other intangible assets
|
|
Total
|
|
Goodwill
|
|
Other intangible assets
|
|
Total
|
|
Beginning balance
|
|
$
|
31.7
|
|
|
$
|
24.2
|
|
|
$
|
55.9
|
|
|
$
|
24.1
|
|
|
$
|
31.3
|
|
|
$
|
55.4
|
|
|
Add: Amounts held for sale at
beginning of the period
(1)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
.4
|
|
|
.4
|
|
|
Acquisition of businesses
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
3.9
|
|
|
3.9
|
|
|
Amortization, including foreign
currency translation
|
|
—
|
|
|
(2.9
|
)
|
|
(2.9
|
)
|
|
—
|
|
|
(3.1
|
)
|
|
(3.1
|
)
|
|
Less: Amounts held for sale at end
of the period
(1)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
.3
|
|
|
.3
|
|
|
Ending balance
|
|
$
|
31.7
|
|
|
$
|
21.3
|
|
|
$
|
53.0
|
|
|
$
|
24.1
|
|
|
$
|
32.2
|
|
|
$
|
56.3
|
|
(1)
See
Note 17 — “Held for Sale and Discontinued Operations”
.
Note 7. Debt
White Mountains’s debt outstanding as of
March 31, 2017
and
December 31, 2016
consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Millions
|
|
March 31,
2017
|
|
Effective
Rate
(1)
|
|
December 31,
2016
|
|
Effective
Rate
(1)
|
|
WTM Bank Facility
|
|
$
|
—
|
|
|
N/A
|
|
$
|
—
|
|
|
N/A
|
|
OBH Senior Notes, at face value
|
|
275.0
|
|
|
4.7%
|
|
275.0
|
|
|
4.7%
|
|
Unamortized original issue discount and debt issuance costs
|
|
(1.8
|
)
|
|
|
|
(1.8
|
)
|
|
|
|
OBH Senior Notes, carrying value
|
|
273.2
|
|
|
|
|
273.2
|
|
|
|
|
OneBeacon Bank Facility
|
|
—
|
|
|
N/A
|
|
—
|
|
|
N/A
|
|
MediaAlpha Bank Facility
|
|
11.7
|
|
|
6.1%
|
|
12.9
|
|
|
5.7%
|
|
Unamortized issuance cost
|
|
(.2
|
)
|
|
|
|
(.2
|
)
|
|
|
|
MediaAlpha Bank Facility, carrying value
|
|
11.5
|
|
|
|
|
12.7
|
|
|
|
|
Total debt
|
|
$
|
284.7
|
|
|
|
|
$
|
285.9
|
|
|
|
(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”). As of
March 31, 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.
OBH Senior Notes
In November 2012, OneBeacon U.S. Holdings, Inc. (“OBH”) issued
$275.0 million
face value of senior unsecured notes (“OBH Senior Notes”) through a public offering, at an issue price of
99.9%
and received
$272.9 million
of proceeds. The OBH Senior Notes bear an annual interest rate of
4.6%
payable semi-annually in arrears on May 9 and November 9, until maturity on November 9, 2022, and are fully and unconditionally guaranteed as to the payment of principal and interest by OneBeacon Ltd. Taking into effect the amortization of the original issue discount and all underwriting and issuance expenses, the OBH Senior Notes have an effective yield to maturity of approximately
4.7%
per annum.
The OBH Senior Notes were issued under indentures that contain restrictive covenants which, among other things, limit the ability of OneBeacon Ltd., OBH, and their respective subsidiaries to create liens and enter into sale and leaseback transactions and limits the ability of OneBeacon Ltd. and OBH to consolidate, merge or transfer its properties and assets. The indentures do not contain any financial ratios or specified levels of net worth or liquidity to which the OneBeacon Ltd. or OBH must adhere. In addition, a failure by OneBeacon Ltd. or OBH or their respective subsidiaries to pay principal and interest on covered debt, where such failure results in the acceleration of at least
$75.0 million
of the principal amount of covered debt, could trigger the acceleration of the OBH Senior Notes.
OneBeacon Bank Facility
On September 29, 2015, OneBeacon Ltd. and OneBeacon U.S. Holdings, Inc. (“OBH”), as co-borrowers and co-guarantors, entered into a revolving credit facility administered by U.S. Bank N.A. and also including BMO Harris Bank N.A., which has a total commitment of
$65.0 million
and has a maturity date of September 29, 2019 (the “OneBeacon Bank Facility”). As of
March 31, 2017
, the OneBeacon Bank Facility was undrawn.
The OneBeacon 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 July 23, 2015, MediaAlpha entered into a secured credit facility with Opus Bank, which has a total commitment of
$20.0 million
and has a maturity date of July 23, 2019 (the “MediaAlpha Bank Facility”). The MediaAlpha Bank Facility consists of a
$15.0 million
term loan facility, which has an outstanding balance of
$11.7 million
as of March 31, 2017, and a revolving loan facility for
$5.0 million
, which is undrawn as of March 31, 2017. During the three months ended
March 31, 2017
, MediaAlpha repaid
$1.2 million
under the term loan facility. 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%
as of
March 31, 2017
.
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 maximum leverage ratio.
Compliance
At
March 31, 2017
, White Mountains was in compliance with the covenants under all of its debt instruments.
Note 8. 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, Ireland, Israel, Luxembourg, the Netherlands, the United Kingdom and the United States.
White Mountains’ income tax expense related to pre-tax income from continuing operations for the three months ended March 31, 2017, represented a net effective tax rate of
10.3%
. The effective tax rate for the three months ended March 31, 2017 was lower than the U.S. statutory rate of
35%
due to income generated in jurisdictions other than the United States.
White Mountains’s income tax benefit related to pre-tax income from continuing operations for the three months ended March 31, 2016, represented a net effective tax rate of
(114.1)%
. As noted below, the effective tax rate for the three months ended March 31, 2016 was impacted by a
$12.8 million
tax benefit on the settlement of the 2007-2009 IRS exam. Without the tax benefit on the settlement of the 2007-2009 IRS exam there would have been tax expense, which would have resulted in a net effective tax rate that is approximately the same as the U.S. statutory rate of
35%
.
In arriving at the effective tax rate for the three months ended March 31, 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. It is possible that certain planning strategies or projected earnings in certain subsidiaries may not be feasible to utilize the entire deferred tax asset, which could result in material changes to White Mountains’s deferred tax assets and tax expense.
In the first and second quarters of 2016 White Mountains recorded tax benefits of
$12.8 million
and
$3.5 million
respectively related to the settlement of IRS audits of certain subsidiaries of OneBeacon for tax years 2007-2009 and 2010-2012.
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 9. 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 June 30, 2016. The reinsurance agreement was commuted in December 2016.
The following table summarizes the pre-tax operating results of WM Life Re for the
three months ended
March 31,
2016
.
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
March 31,
|
|
Millions
|
|
2016
|
|
Fees, included in other revenue
|
|
$
|
1.0
|
|
|
Change in fair value of variable annuity liability,
included in other revenue
|
|
(.4
|
)
|
|
Change in fair value of derivatives, included in other revenue
|
|
(1.7
|
)
|
|
Foreign exchange, included in other revenue
|
|
.9
|
|
|
Other investment income and losses
|
|
—
|
|
|
Total revenue
|
|
(.2
|
)
|
|
Death benefit claims paid, included in general and administrative expenses
|
|
(.1
|
)
|
|
General and administrative expenses
|
|
(.8
|
)
|
|
Pre-tax loss
|
|
$
|
(1.1
|
)
|
The following summarizes realized and unrealized derivative gains (losses) recognized in other revenue for the
three months ended
March 31,
2016
and the carrying values, included in other assets, as of
December 31, 2016
by type of instrument:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gains (losses)
|
|
|
|
|
Three Months Ended
|
|
Carrying Value
|
|
|
|
March 31,
|
|
As of
|
|
Millions
|
|
2016
|
|
December 31, 2016
|
|
Fixed income/interest rate
|
|
$
|
1.8
|
|
|
$
|
—
|
|
|
Foreign exchange
|
|
(4.2
|
)
|
|
—
|
|
|
Equity
|
|
.7
|
|
|
—
|
|
|
Total
|
|
$
|
(1.7
|
)
|
|
$
|
—
|
|
The following tables summarize the changes in White Mountains’s variable annuity reinsurance liabilities and derivative instruments for the three months ended March 31, 2016.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 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
|
|
(.4
|
)
|
|
1.2
|
|
|
1.1
|
|
|
(4.0
|
)
|
|
(1.7
|
)
|
|
Transfers in
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Sales/settlements
|
|
—
|
|
|
(1.3
|
)
|
|
(7.3
|
)
|
|
3.3
|
|
|
(5.3
|
)
|
|
End of period
|
|
$
|
(.1
|
)
|
|
$
|
2.6
|
|
|
$
|
10.3
|
|
|
$
|
.2
|
|
|
$
|
13.1
|
|
(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.
WM Life Re entered into both over-the-counter (“OTC”) and exchange traded derivative instruments to economically hedge the liability from the variable annuity benefit guarantee. In the case of OTC derivatives, WM Life Re had exposure to credit risk for amounts that were uncollateralized by counterparties. WM Life Re’s internal risk management guidelines established net counterparty exposure thresholds that took into account OTC counterparties’ credit ratings. The OTC derivative contracts were subject to restrictions on liquidation of the instruments and distribution of proceeds under collateral agreements.
In the case of exchange traded instruments, WM Life Re had exposure to credit risk for amounts uncollateralized by margin balances. WM Life Re had master netting agreements with certain of its counterparties whereby the collateral provided (held) was calculated on a net basis. The following summarizes amounts offset under master netting agreements:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2016
|
|
Millions
|
|
Gross asset amounts before offsets
(1)
|
|
Gross liability amounts offset under master netting arrangements
|
|
Net amounts recognized in Other Assets
|
|
Interest rate contracts
|
|
|
|
|
|
|
|
OTC
|
|
$
|
2.2
|
|
|
$
|
(2.5
|
)
|
|
$
|
(.3
|
)
|
|
Foreign exchange contracts
|
|
|
|
|
|
|
|
OTC
|
|
12.7
|
|
|
—
|
|
|
12.7
|
|
|
Exchange traded
|
|
—
|
|
|
(.1
|
)
|
|
(.1
|
)
|
|
Equity contracts
|
|
|
|
|
|
|
|
OTC
|
|
1.5
|
|
|
(.9
|
)
|
|
.6
|
|
|
Exchange traded
|
|
.3
|
|
|
(.1
|
)
|
|
.2
|
|
|
Total
(2)
|
|
$
|
16.7
|
|
|
$
|
(3.6
|
)
|
|
$
|
13.1
|
|
(1)
Amount equal to fair value of instrument as recognized in other assets
(2)
All derivative instruments held by WM Life Re were subject to master netting arrangements.
There were no open derivatives instruments and no exposure to credit losses on OTC and exchanged traded derivatives subsequent to June 30, 2016.
The following summarizes the value, collateral held or provided by WM Life Re and net exposure to credit losses on OTC and exchange traded derivative instruments by counterparty recorded within other assets as of
March 31, 2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2016
|
|
|
Millions
|
|
Net amount of assets reflected in Balance Sheet
|
|
Collateral provided to counter-party - Cash
|
|
Collateral provided to counter-party - Financial Instruments
|
|
Net amount of exposure after effect of collateral provided
|
|
Excess collateral provided to counter-party- Cash
|
|
Excess collateral provided - Financial Instruments
|
|
Counter-party collateral held by WM Life Re- Cash
|
|
Net amount of exposure to counter-party
|
|
Standard
& Poor's
Rating
(1)
|
|
JP Morgan
|
|
$
|
6.5
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
6.5
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
5.4
|
|
|
$
|
1.1
|
|
|
A
|
+
|
|
Bank of America
|
|
1.4
|
|
|
—
|
|
|
—
|
|
|
1.4
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1.4
|
|
|
A
|
|
|
Citigroup - OTC
|
|
5.0
|
|
|
—
|
|
|
—
|
|
|
5.0
|
|
|
—
|
|
|
—
|
|
|
.5
|
|
|
4.5
|
|
|
A
|
|
|
Citigroup -
Exchange Traded
|
|
.2
|
|
|
—
|
|
|
—
|
|
|
.2
|
|
|
7.9
|
|
|
—
|
|
|
—
|
|
|
8.1
|
|
|
A
|
|
|
Total
|
|
$
|
13.1
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
13.1
|
|
|
$
|
7.9
|
|
|
$
|
—
|
|
|
$
|
5.9
|
|
|
$
|
15.1
|
|
|
|
|
(1)
Standard & Poor’s ratings as detailed above are: “A+” (Strong, which is the fifth highest of
twenty-three
creditworthiness ratings), “A” (Strong, which is the sixth highest of
twenty-three
creditworthiness ratings), “A-” (Strong, which is the seventh highest of
twenty-three
creditworthiness ratings) and
“BBB+” (Adequate, which is the eighth highest of
twenty-three
creditworthiness ratings).
Forward Contracts
White Mountains investment portfolio contains investment grade fixed maturity investments denominated in British Pound Sterling (GBP) and common equity securities denominated in Euro (EUR). White Mountains entered into foreign currency forward contracts to manage its GBP and EUR foreign currency exposure. The contracts do not meet the criteria to be accounted for as a hedge. White Mountains monitors its exposure to foreign currency and adjusts its foreign currency positions within the risk guidelines and ranges established by senior management. While White Mountains actively manages its foreign currency positions, mismatches between movements in foreign currency rates and its foreign currency forward contract may result in foreign currency positions being outside pre-defined ranges and/or foreign currency losses. At
March 31, 2017
, White Mountains held
$299.9 million
(GBP
200.0 million
and EUR
50.0 million
) total 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 have been estimated using OTC quotes for similar instruments and accordingly, the measurements have been classified as Level 2 measurements at
March 31, 2017
.
The net realized and unrealized derivative loss recognized in net realized and unrealized investment gains (losses) for the period ended
March 31, 2017
was
$3.0 million
. White Mountains’s forward contracts are subject to master netting agreements. As of
March 31, 2017
and December 31, 2016, the gross liability amount offset under the master netting agreement and the net amount recognized in other long-term investments was
$(4.2) million
and
$(1.2) million
.
White Mountains does not hold or provide any collateral under its forward contracts. The following table summarizes the notional amount and the uncollateralized balance associated with the forward currency contracts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2017
|
|
Millions
|
|
Notional Amount
|
|
Carrying Value
|
|
Standard & Poor's
Rating
(1)
|
|
Barclays Bank PLC
|
|
$
|
247.2
|
|
|
$
|
(3.2
|
)
|
|
A-
|
|
JP Morgan
|
|
52.7
|
|
|
(1.0
|
)
|
|
A-
|
|
Total
|
|
$
|
299.9
|
|
|
$
|
(4.2
|
)
|
|
|
(1)
Standard & Poor’s ratings “A-” (Strong, which is the ninth highest of twenty-one creditworthiness ratings).
Note 10. 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
March 31, 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, which had statutory capital and surplus of
$467.4 million
at December 31, 2016, 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 months ended
March 31, 2017
, HG Global had pre-tax income of
$6.6 million
, which included
$4.8 million
of interest income on the BAM Surplus Notes. For the three months ended
March 31, 2016
, HG Global had pre-tax income of
$7.3 million
, which included
$4.5 million
of interest income on the BAM Surplus Notes.
For the three months ended
March 31, 2017
, White Mountains reported pre-tax losses of
$12.2 million
on BAM that were recorded in net loss attributable to non-controlling interests, which included
$4.8 million
of interest expense on the BAM Surplus Notes. For the three months ended
March 31, 2016
, White Mountains reported pre-tax losses of
$7.6 million
on BAM that were recorded in net loss attributable to non-controlling interests, which included
$4.5 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%
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%
. BAM is required to seek regulatory approval to pay interest and principal on its surplus notes only when adequate capital resources have accumulated beyond BAM’s initial capitalization and a level that continues to support its outstanding obligations, business plan and ratings.
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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2017
|
|
December 31, 2016
|
|
Contracts outstanding
|
|
5,191
|
|
|
4,807
|
|
|
Remaining weighted average contract period outstanding (in years)
|
|
10.8
|
|
|
10.8
|
|
|
Contractual debt service outstanding (in millions):
|
|
|
|
|
|
Principal
|
|
$
|
35,222.1
|
|
|
$
|
33,057.3
|
|
|
Interest
|
|
17,589.9
|
|
|
16,396.6
|
|
|
Total debt service outstanding
|
|
$
|
52,812.0
|
|
|
$
|
49,453.9
|
|
|
|
|
|
|
|
|
Gross unearned insurance premiums
|
|
$
|
99.8
|
|
|
$
|
83.0
|
|
The following table is a schedule of BAM’s future premium revenues as of
March 31, 2017
:
|
|
|
|
|
|
|
|
|
Millions
|
|
March 31, 2017
|
|
April 1, 2017 - December 31, 2017
|
|
$
|
6.3
|
|
|
|
|
|
|
January 1, 2018 - March 31, 2018
|
|
2.1
|
|
|
April 1, 2018 - June 30, 2018
|
|
2.0
|
|
|
July 1, 2018 - September 30, 2018
|
|
2.0
|
|
|
October 1, 2018 - December 31, 2018
|
|
2.0
|
|
|
|
|
8.1
|
|
|
|
|
|
|
2019
|
|
7.8
|
|
|
2020
|
|
7.4
|
|
|
2021
|
|
7.0
|
|
|
2022 and thereafter
|
|
63.2
|
|
|
Total gross unearned insurance premiums
|
|
$
|
99.8
|
|
Note 11. Earnings Per Share
Basic earnings per share amounts are based on the weighted average number of common shares outstanding including unvested restricted shares that are considered participating securities. Diluted earnings per share amounts are based on the weighted average number of common shares including unvested restricted shares and 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 months ended
March 31, 2017
and
2016
. See
Note 17 — “Held for Sale and Discontinued Operations”
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
|
2017
|
|
2016
|
|
Basic and diluted earnings per share numerators (in millions):
|
|
|
|
|
|
Net income (loss) from continuing operations attributable to
White Mountains’s common shareholders
|
|
$
|
35.3
|
|
|
$
|
11.9
|
|
|
Allocation of income for unvested restricted common shares
|
|
(.4
|
)
|
|
(.1
|
)
|
|
Dividends declared on participating restricted common shares
(1)
|
|
(.1
|
)
|
|
(.1
|
)
|
|
Total allocation to restricted common shares
|
|
(.5
|
)
|
|
(.2
|
)
|
|
Net income (loss) attributable to White Mountains’s common shareholders,
net of restricted common share amounts
|
|
$
|
34.8
|
|
|
$
|
11.7
|
|
|
Undistributed net earnings (in millions):
|
|
|
|
|
|
Net income (loss) attributable to White Mountains’s common shareholders,
net of restricted common share amounts
|
|
$
|
34.8
|
|
|
$
|
11.7
|
|
|
Dividends declared net of restricted common share amounts
(1)
|
|
(4.5
|
)
|
|
(5.9
|
)
|
|
Total undistributed net earnings, net of restricted common share amounts
|
|
$
|
30.3
|
|
|
$
|
5.8
|
|
|
Basic earnings per share denominators (in thousands):
|
|
|
|
|
|
Total average common shares outstanding during the period
|
|
4,564.6
|
|
|
5,539.6
|
|
|
Average unvested restricted shares
(2)
|
|
(52.5
|
)
|
|
(54.0
|
)
|
|
Basic earnings per share denominator
|
|
4,512.1
|
|
|
5,485.6
|
|
|
Diluted earnings per share denominator (in thousands):
|
|
|
|
|
|
Total average common shares outstanding during the period
(3)
|
|
4,564.6
|
|
|
5,540.5
|
|
|
Average unvested restricted common shares
(2)
|
|
(52.5
|
)
|
|
(54.0
|
)
|
|
Diluted earnings per share denominator
(3)
|
|
4,512.1
|
|
|
5,486.5
|
|
|
Basic earnings per share (in dollars):
|
|
|
|
|
|
Net income (loss) attributable to White Mountains’s common shareholders
|
|
$
|
7.72
|
|
|
$
|
2.14
|
|
|
Dividends declared and paid
|
|
(1.00
|
)
|
|
(1.00
|
)
|
|
Undistributed earnings
|
|
$
|
6.72
|
|
|
$
|
1.14
|
|
|
Diluted earnings per share (in dollars):
|
|
|
|
|
|
Net income (loss) attributable to White Mountains’s common shareholders
|
|
$
|
7.72
|
|
|
$
|
2.14
|
|
|
Dividends declared and paid
|
|
(1.00
|
)
|
|
(1.00
|
)
|
|
Undistributed earnings
|
|
$
|
6.72
|
|
|
$
|
1.14
|
|
(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 15 — “Employee Share-Based Compensation Plans”
.
(3)
The diluted earnings per share denominator for the three months ended March 31, 2016 includes the impact of
125,000
common shares issuable upon exercise of the non-qualified options outstanding, which resulted in
882
incremental shares outstanding over the period. The incremental shares had an effect on diluted earning per share of less than
$0.01
.