NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Basis of Presentation and Significant Accounting Policies
Basis of Presentation
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 23 South Main Street, Suite 3B, Hanover, New Hampshire 03755-2053 and its registered office is located at Clarendon House, 2 Church Street, Hamilton, Bermuda HM 11.
The accompanying 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.
Consolidation Principles
Under GAAP, the Company is required to consolidate any entity in which it holds a controlling financial interest. A controlling financial interest is usually in the form of an investment representing the majority of the subsidiary’s voting interests. However, a controlling financial interest may also arise from a financial interest in a variable interest entity (“VIE”) through arrangements that do not involve ownership of voting interests. The Company consolidates a VIE if it determines that it is the primary beneficiary. The primary beneficiary is defined as the entity who holds a variable interest that gives it both the power to direct the VIE’s activities that most significantly impact its economic performance and the obligation to absorb losses of, or the right to receive returns from, the VIE that could potentially be significant to the VIE. See Note 16 — “Variable Interest Entities”.
Intercompany transactions have been eliminated in consolidation. Certain amounts in the prior period financial statements have been reclassified to conform to the current presentation.
Use of Estimates
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.
Reportable Segments
White Mountains has determined its reportable segments based on the nature of the underlying businesses, the manner in which the Company’s subsidiaries and affiliates are organized and managed and the organization of the financial information provided to the chief operating decision maker to assess performance and make decisions regarding allocation of resources. As of December 31, 2020, White Mountains’s reportable segments were HG Global/BAM, NSM, Kudu and Other Operations. On February 26, 2019, MediaAlpha completed the sale of a significant minority stake to Insignia Capital Group in connection with a recapitalization and cash distribution to existing equityholders (the “2019 MediaAlpha Transaction”). MediaAlpha also repurchased a portion of the holdings of existing equityholders. White Mountains deconsolidated MediaAlpha as a result of the 2019 MediaAlpha Transaction, and consequently it was no longer a reportable segment. White Mountains’s consolidated statement of comprehensive income and its segment disclosures include MediaAlpha’s results of operations through the date of the 2019 MediaAlpha Transaction. See Note 2 — “Significant Transactions” and Note 14 — “Segment Information”.
The HG Global/BAM segment consists of HG Global Ltd. and its wholly-owned subsidiaries (“HG Global”) and the consolidated results of Build America Mutual Assurance Company (“BAM”) (collectively, “HG Global/BAM”). BAM is the first and only mutual municipal 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 purpose projects, 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 reinsurance subsidiary HG Re Ltd. (“HG Re”), to provide up to 15%-of-par, first loss reinsurance protection for policies underwritten by BAM. For capital appreciation bonds, par is adjusted to the estimated equivalent par value for current interest paying bonds. HG Global, together with its subsidiaries, funded the initial capitalization of BAM through the purchase of $503.0 million of surplus notes issued by BAM, (the “BAM Surplus Notes”). As of December 31, 2020 and 2019, 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, White Mountains is required to consolidate BAM’s results in its financial statements because BAM is a VIE for which White Mountains is the primary beneficiary. BAM’s results are attributed to non-controlling interests.
The NSM segment consists of NSM Insurance HoldCo, LLC and its subsidiaries (collectively, “NSM”). NSM is a full-service managing general underwriting agency (“MGU”) and program administrator for specialty property and casualty insurance. The company places insurance in niche sectors such as specialty transportation, real estate, social services and pet. On behalf of its insurance carrier partners, NSM typically manages all aspects of the placement process, including product development, marketing, underwriting, policy issuance and claims. NSM earns commissions based on the volume and profitability of the insurance that it places. NSM does not take insurance risk. As of December 31, 2020 and 2019, White Mountains owned 96.6% and 96.4% of the basic units outstanding of NSM (89.6% and 88.4% on a fully diluted, fully converted basis). NSM was acquired by White Mountains in 2018. See Note 2 — “Significant Transactions".
The Kudu segment consists of Kudu Investment Management, LLC and its subsidiaries (collectively “Kudu”), a capital solutions provider for asset management firms. Kudu provides capital solutions for boutique asset managers for a variety of purposes including generational ownership transfers, management buyouts, acquisition and growth finance and legacy partner liquidity. Kudu also provides strategic assistance to investees from time to time. Kudu’s capital solutions typically are structured as minority preferred equity stakes with distribution rights, typically tied to gross revenues and designed to generate immediate strong, stable cash yields. On April 4, 2019, White Mountains acquired the ownership interests in Kudu held by certain funds managed by Oaktree Capital Management, L.P. (“Oaktree”) for cash consideration of $81.4 million. In addition, White Mountains assumed all of Oaktree’s unfunded capital commitments to Kudu, increasing White Mountains’s total capital commitment to $250.0 million (the “Kudu Transaction”). As a result of the Kudu Transaction, White Mountains’s basic unit ownership of Kudu increased from 49.5% to 99.1% (42.7% to 85.4% on a fully diluted, fully converted basis), and White Mountains began consolidating Kudu in its financial statements during the second quarter of 2019. See Note 2 — “Significant Transactions".
The Other Operations segment consists of the Company and its wholly-owned subsidiary, White Mountains Capital, LLC, (“WM Capital”) its other intermediate holding companies, its wholly-owned investment management subsidiary, White Mountains Advisors LLC (“WM Advisors”), investment assets managed by WM Advisors, its interests in MediaAlpha (for periods after the 2019 MediaAlpha Transaction), PassportCard Limited (“PassportCard”) and DavidShield Life Insurance Agency (2000) Ltd. (“DavidShield”) (collectively, “PassportCard/ DavidShield”), Elementum Holdings LP (“Elementum”), Kudu (for periods prior to the Kudu Transaction), certain other consolidated and unconsolidated entities and certain other assets.
The MediaAlpha segment consisted of QL Holdings LLC and its wholly-owned subsidiary QuoteLab, LLC (collectively
“MediaAlpha”). MediaAlpha is a marketing technology company. It operates a transparent and efficient customer acquisition technology platform that facilitates real-time transactions between buyers and sellers of consumer referrals (i.e., clicks, calls and leads), primarily in the property & casualty, health and life insurance verticals. MediaAlpha generates revenue by earning a fee for each consumer referral sold on its platform. A transaction becomes payable only on a qualifying consumer action, and is not contingent on the sale of a product to the consumer. MediaAlpha’s core verticals are property & casualty insurance, health insurance and life insurance.
White Mountains deconsolidated MediaAlpha as a result of the 2019 MediaAlpha Transaction and stopped reporting it as a segment. Subsequent to the 2019 MediaAlpha Transaction, White Mountains’s non-controlling equity interest in MediaAlpha was accounted for at fair value within other long-term investments.
On October 30, 2020, MediaAlpha completed an initial public offering (the “MediaAlpha IPO”). In the offering, White Mountains sold 3,609,894 shares and received total proceeds of $63.8 million. Following the completion of the MediaAlpha IPO, White Mountains owns 20,532,202 MediaAlpha shares, representing a 35.0% ownership interest (32.3% on a fully-diluted, fully converted basis). Subsequent to the MediaAlpha IPO, White Mountains’s non-controlling equity interest in MediaAlpha is accounted for at fair value based on the publicly traded share price of MediaAlpha’s common stock. As of December 31, 2020, White Mountains presents its investment in MediaAlpha as a separate line item on the balance sheet within the Other Operations segment. For comparability purposes, the amounts related to MediaAlpha in 2019 subsequent to the 2019 MediaAlpha Transaction have been reclassified from other long-term investments to investment in MediaAlpha.
Discontinued Operations and Assets and Liabilities Held for Sale
White Mountains has classified its Guilford, Connecticut property, which consists of an office building that was sold in August of 2020, and adjacent land as held for sale as of December 31, 2020 and 2019. The property has been measured at its estimated fair value, net of disposal costs. As of December 31, 2020, assets held for sale also includes a corporate aircraft. The aircraft has been measured at its carrying value of $1.7 million, which is lower than its estimated fair value. See Note 19 — “Held for Sale and Discontinued Operations”.
Significant Accounting Policies
Cash and Restricted Cash
Cash includes amounts on hand and demand deposits with banks and other financial institutions. Amounts presented in the statement of cash flows are shown net of balances acquired and sold in the purchase or sale of the Company’s consolidated subsidiaries.
Cash balances that are not immediately available for general corporate purposes, including fiduciary accounts held by NSM on behalf of insurance carriers, are classified as restricted.
Short-Term Investments
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 December 31, 2020 and 2019.
Investment Securities
As of December 31, 2020 and 2019, White Mountains’s invested assets consisted of securities and other investments held for general investment purposes. White Mountains’s portfolio of fixed maturity investments, investment in MediaAlpha, common equity securities and other long-term investments held for general investment purposes are generally classified as trading securities and are reported at fair value as of the balance sheet date. Changes in net unrealized investment gains (losses) are reported pre-tax in revenues. Realized investment gains (losses) are accounted for using the specific identification method and are reported pre-tax in revenues. Premiums and discounts on all fixed maturity investments are amortized and accreted to income over the anticipated life of the investment.
White Mountains’s invested assets that are measured at fair value include fixed maturity investments, its investment in MediaAlpha, common equity securities and other long-term investments, that consists primarily of unconsolidated entities, including non-controlling equity interests in the form of revenue and earnings participation contracts (“Kudu’s Participation Contracts”), private equity funds, hedge funds, insurance-linked securities (“ILS”) funds and private debt instruments. Whenever possible, White Mountains estimates fair value using valuation methods that maximize the use of quoted prices and other observable inputs.
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants (an exit price) at a particular measurement date. Fair value measurements are categorized into a hierarchy that distinguishes between inputs based on market data from independent sources (“observable inputs”) and a reporting entity’s internal assumptions based upon the best information available when external market data is limited or unavailable (“unobservable inputs”). Quoted prices in active markets for identical assets have the highest priority (“Level 1”), followed by observable inputs other than quoted prices including prices for similar but not identical assets or liabilities (“Level 2”), and unobservable inputs, including the reporting entity’s estimates of the assumptions that market participants would use, having the lowest priority (“Level 3”).
Assets and liabilities carried at fair value include substantially all of White Mountains’s investment portfolio, and derivative instruments, both exchange-traded and over the counter instruments. Valuation of assets and liabilities measured at fair value require management to make estimates and apply judgment to matters that may carry a significant degree of uncertainty. In determining fair value estimates, White Mountains uses a variety of valuation approaches and inputs. Whenever possible, White Mountains estimates fair value using valuation methods that maximize the use of quoted market prices or other observable inputs. Where appropriate, assets and liabilities measured at fair value have been adjusted for the effect of counterparty credit risk.
White Mountains uses outside pricing services and brokers to assist in determining fair values. The outside pricing services White Mountains uses have indicated that they will only provide prices where observable inputs are available. As of December 31, 2020, approximately 73% of the investment portfolio recorded at fair value was priced based upon quoted market prices or other observable inputs.
Level 1 Measurements
Investments valued using Level 1 inputs include White Mountains’s investment in MediaAlpha subsequent to the MediaAlpha IPO, common equity securities and fixed maturity investments, primarily investments in U.S. Treasuries and short-term investments, which include U.S. Treasury Bills. For investments in active markets, White Mountains uses the quoted market prices provided by outside pricing services to determine fair value.
Level 2 Measurements
Investments valued using Level 2 inputs include fixed maturity investments which have been disaggregated into classes, including debt securities issued by corporations, municipal obligations and mortgage and asset-backed securities. 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 Index, but are traded on foreign exchanges, which White Mountains values using the fund manager’s published net asset value per share (“NAV”) to account for the difference in market close times.
In circumstances where quoted market prices are unavailable or are not considered reasonable, White Mountains estimates the fair value using industry standard pricing methodologies and observable inputs such as benchmark yields, reported trades, broker-dealer quotes, issuer spreads, benchmark securities, bids, offers, credit ratings, prepayment speeds, reference data including research publications and other relevant inputs. Given that many fixed maturity investments do not trade on a daily basis, the outside pricing services evaluate a wide range of fixed maturity investments by regularly drawing parallels from recent trades and quotes of comparable securities with similar features. The characteristics used to identify comparable fixed maturity investments vary by asset type and take into account market convention.
White Mountains’s process to assess the reasonableness of the market prices obtained from the outside pricing sources covers substantially all of its fixed maturity investments and includes, but is not limited to, the evaluation of pricing methodologies and a review of the pricing services’ quality control procedures on at least an annual basis, a comparison of its invested asset prices obtained from alternate independent pricing vendors on at least a semi-annual basis, monthly analytical reviews of certain prices and a review of the underlying assumptions utilized by the pricing services for select measurements on an ad hoc basis throughout the year. White Mountains also performs back-testing of selected investment 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 of the security on an ad-hoc basis throughout the year. Prices provided by the pricing services that vary by more than $0.5 million and 5% from the expected price based on these assessment procedures are considered outliers, as 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, White Mountains will rely upon its own internal 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.
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.
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.
Level 3 Measurements
Fair value estimates for investments that trade infrequently and have few or no quoted market prices or other observable inputs are classified as Level 3 measurements. Investments valued using Level 3 fair value estimates are based upon unobservable inputs and include investments in certain fixed maturity investments, common equity securities and other long-term investments where quoted market prices or other observable inputs are unavailable or are not considered reliable or reasonable.
Level 3 valuations are generated from techniques that use assumptions not observable in the market. These unobservable inputs reflect White Mountains’s assumptions of what market participants would use in valuing the investment. In certain circumstances, investment securities may start out as Level 3 when they are originally issued, but as observable inputs become available in the market, they may be reclassified to Level 2. Transfers of securities between levels are based on investments held as of the beginning of the period.
Other Long-Term Investments
As of December 31, 2020, White Mountains owned a portfolio of other long-term investments valued at $786.8 million, that consisted primarily of unconsolidated entities, including Kudu’s Participation Contracts, private equity funds, the Elementum managed ILS funds (the “ILS Funds”) and private debt instruments. As of December 31, 2020, $614.2 million of White Mountains’s other long-term investments, that consisted primarily of unconsolidated entities, including Kudu’s Participation Contracts and private debt instruments were classified as Level 3 investments in the GAAP fair value hierarchy, were not actively traded in public markets and did not have readily observable market prices. The determination of the fair value of these securities involves significant management judgment, and the use of valuation models and assumptions that are inherently subjective and uncertain. As of December 31, 2020, $172.6 million of White Mountains’s other long-term investments, consisting of private equity funds and the ILS Funds, were valued at fair value using NAV as a practical expedient. Investments for which fair value is measured at NAV using the practical expedient are not classified within the fair value hierarchy.
White Mountains may use a variety of valuation techniques to determine fair value depending on the nature of the investment, including a discounted cash flow analysis, market multiple approach, cost approach and/or liquidation analysis. On an ongoing basis, White Mountains also considers qualitative changes in facts and circumstances, which may impact the valuation of unconsolidated entities, including economic and market changes in relevant industries, changes to the entity’s capital structure, business strategy and key personnel, and any recent transactions relating to the unconsolidated entity. On a quarterly basis, White Mountains evaluates the most recent qualitative and quantitative information of the business and completes a fair valuation analysis for all Level 3 other long-term investments. Periodically, and at least on an annual basis, White Mountains uses a third-party valuation firm to complete an independent valuation analysis of significant unconsolidated entities.
Other Long-term Investments - NAV
White Mountains’s portfolio of other long-term investments includes investments in private equity funds, hedge funds and the ILS Funds. White Mountains employs a number of procedures to assess the reasonableness of the fair value measurements for its private equity funds, hedge funds and the ILS Funds, including obtaining and reviewing periodic and audited annual financial statements as well as discussing each fund’s pricing with the fund manager throughout the year. However, since the fund managers do not provide sufficient information to evaluate the pricing methods and inputs for each underlying investment, White Mountains considers the inputs to be unobservable. The fair value of White Mountains’s private equity fund, hedge fund and ILS fund investments are generally determined using the fund manager’s NAV. In the event that White Mountains believes the fair value of a private equity fund, hedge fund or ILS fund differs from the NAV reported by the fund manager due to illiquidity or other factors, White Mountains will adjust the reported NAV to more appropriately represent the fair value of its investment in the private equity fund, hedge fund or ILS fund.
Derivatives
From time to time, White Mountains holds derivative financial instruments for risk management purposes. White Mountains recognizes all derivatives as either assets or liabilities, measured at fair value, on its consolidated balance sheet. Changes in the fair value of derivative instruments that meet the criteria for hedge accounting are recognized in other comprehensive income and reclassified into current period pre-tax income when the hedged items are recognized therein. Changes in the fair value of derivative instruments that do not meet the criteria for hedge accounting are recognized in current period pre-tax income.
As of December 31, 2020, White Mountains holds interest rate cap derivative instruments that do not meet the criteria for hedge accounting. As of December 31, 2020 and 2019, White Mountains holds an interest rate swap derivative instrument that meets the criteria for hedge accounting. See Note 7 — “Derivatives”.
Receivables
BAM’s receivables consist primarily of premiums receivable from customers for municipal bond insurance policies. NSM’s receivables consist of insurance premiums receivable from customers and commissions receivable from insurance carriers, net of a provision for amounts estimated to be uncollectible.
Incentive Compensation
White Mountains’s Long-Term Incentive Plan (the “WTM Incentive Plan”) provides for grants of various types of share-based and non-share-based incentive awards to key employees of White Mountains. Non-share-based awards are recognized over the related service periods based on management’s best estimate of the amounts at which the awards are expected to be paid. Share-based compensation which is typically settled in cash, such as performance shares, is classified as a liability-type award. The compensation cost for liability-classified awards is measured initially at the grant date fair value and remeasured each reporting period until settlement. The compensation cost for equity-classified awards expected to be settled in shares, such as options and restricted shares, is measured at the original grant date fair value of the award. The compensation cost for all awards is recognized for the vested portion of the awards over the related service periods. See Note 10 — “Employee Share-Based Incentive Compensation Plans”.
Goodwill and Other Intangible Assets
Goodwill represents the excess of the amount paid to acquire subsidiaries over the fair value of identifiable net assets at the date of acquisition. Other intangible assets consist primarily of trade names, URL and online names, customer relationships and contracts, information technology platforms and insurance licenses.
Goodwill and other intangible assets with indefinite lives are not amortized, but rather are evaluated for impairment on an annual basis, or whenever indications of potential impairment exist. In the absence of any indications of potential impairment, the evaluation of goodwill and indefinite-lived intangible assets is performed no later than the interim period in which the anniversary of the acquisition date falls. White Mountains initially evaluates goodwill using a qualitative approach (step zero) to determine whether it is more likely than not that the implied fair value of goodwill is greater than its carrying value. If the results of the qualitative evaluation indicate that it is more likely than not that the carrying value of goodwill exceeds its implied fair value, White Mountains performs the two-step quantitative test for impairment.
Other intangible assets with finite lives are measured at their acquisition date fair values, are amortized over their economic lives and presented net of accumulated amortization on the balance sheet. Other intangible assets with finite lives are reviewed for impairment when events occur or there are changes in circumstances indicating that their carrying value may exceed fair value. Impairment exists when the carrying value of other intangible assets exceeds fair value.
Municipal Bond Guarantee Insurance
All of the contracts issued by BAM are accounted for as insurance contracts under ASC 944-605, Financial Guarantee Insurance Contracts. Premiums are generally received upfront and an unearned premium revenue liability, equal to the amount of the premium received, is established at contract inception. Installment premiums are measured at the present value of contractual premiums, discounted at the risk-free rate, which is set at the inception of the insurance contract.
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.
Deferred acquisition costs represent commissions, premium taxes, excise taxes and other costs which are directly attributable to and vary with the production of business. These costs are deferred and amortized to the extent they relate to successful contract acquisitions over the applicable premium recognition period as acquisition expenses. Deferred acquisition costs are limited to the amount expected to be recovered from future earned premiums and anticipated investment income.
BAM’s obligation for outstanding contracts consists of the unearned premium reserve and any loss reserves. Loss reserves are recorded only to the extent that the present value of the expected amount of any losses to be paid, net of any expected recoveries, exceeds the associated unearned premium reserve. As of December 31, 2020 and 2019, BAM did not have any loss or loss adjustment expense reserves.
Revenue Recognition
NSM’s revenues consist primarily of commissions and broker revenues for placement of insurance policies and administrative fees for claims and other services provided to insurance carriers. Commission and broker revenues and service fees are measured based on the contractual rates with insurance carriers, net of any amounts expected to be uncollectible and any amounts associated with expected policy cancellations, adjustments, and are recognized when contractual performance obligations have been fulfilled. NSM’s primary contractual performance obligations are generally satisfied upon the issuance of an insurance policy by the carrier. Where NSM has significant performance obligations beyond the policy issuance date, NSM estimates the relative standalone selling price for the post-issuance services in order to allocate the transaction price using the price charged for the service when sold separately in similar circumstances to similar customers. Deferred revenues associated with unsatisfied performance obligations are recognized within other liabilities.
Contingent commissions are based upon the overall profit and/or volume of the business placed with the insurance carrier during a calendar year and are determined after the contractual period has ended. NSM recognizes revenue on contingent commissions when management has determined that it is probable that the contingent commission requirements have been met.
Kudu’s revenues are primarily generated from non-controlling equity interests in revenue and earnings participation contracts with asset management firms. The participation contracts are measured at fair value with the change therein recognized within unrealized investment gains and losses. Distributions from Kudu’s clients are recognized through investment income when Kudu’s right to receive payment has been established and can be reliably measured, which generally occurs on a quarterly basis in accordance with the terms of the underlying participation contracts.
During the period in which MediaAlpha was consolidated by White Mountains, MediaAlpha recognized advertising and publishing fee revenues based on the contractual amount of the fees, adjusted for any amounts expected to be refunded or uncollectible, when it had satisfied its contractual performance obligations, which was generally at the time each transaction was executed. For transactions where MediaAlpha acted as the principal, such as the Open exchange, revenue amounts were reported gross. For transactions where MediaAlpha acted as an agent facilitating transactions between third parties, revenue amounts were reported at the net fee billed.
Cost of Sales and Broker Commission Expense
NSM’s broker commission expense consists of commissions paid to sub-agents and brokers. Broker commission expense is measured in accordance with contractual terms and recognized when incurred, which is generally at the policy issuance date.
MediaAlpha’s cost of sales consisted primarily of revenue sharing payments to publisher partners and traffic acquisition costs to top tier search engines. Cost of sales were measured based on contract terms and recognized when the related revenue transactions are executed.
Other Operations’s cost of sales consists of salaries and related expenses, professional services and marketing and advertising expenses directly related to sales generation. These expenses are recognized as incurred.
Income Taxes
White Mountains has subsidiaries and branches that operate in various jurisdictions around the world and are subject to tax in the jurisdictions in which they operate. As of December 31, 2020, the jurisdictions in which White Mountains’s subsidiaries and branches were subject to tax were Barbados, Ireland, Israel, Luxembourg, the United Kingdom and the United States. Income earned or losses generated by companies outside the United States are generally subject to an overall effective tax rate lower than that imposed by the United States.
Deferred tax assets and liabilities are recorded when a difference between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts for tax purposes exists, and for other temporary differences. The deferred tax asset or liability is recorded based on tax rates expected to be in effect when the difference reverses. Deferred tax assets represent amounts available to reduce income taxes payable in future periods. 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.
Foreign Currency Exchange
The functional currency for White Mountains’s non-U.S. based subsidiaries are measured, in most instances, using functional currencies other than the U.S. dollar. Net foreign exchange gains and losses arising from the translation of functional currencies are generally reported in shareholders’ equity, in accumulated other comprehensive income or loss.
White Mountains also invests in securities denominated in foreign currencies. Assets and liabilities recorded in these foreign currencies are translated into U.S. dollars at exchange rates in effect at the balance sheet date, and revenues and expenses are converted using the weighted average exchange rates for the period.
As of December 31, 2020 and 2019, White Mountains had unrealized foreign currency translation gains (losses) of $5.6 million and $(2.4) million recorded in accumulated other comprehensive income (loss) on its consolidated balance sheet.
Leases
Leases consist primarily of operating leases for office space and equipment. Lease assets and liabilities are recognized at the lease commencement date based on the present value of future minimum lease payments over the lease term. Lease assets and liabilities are not recorded for leases with a term at inception of one year or less. Lease expense is included in operating expenses.
Non-controlling Interests
Non-controlling interests consist of the ownership interests of non-controlling shareholders in consolidated subsidiaries, and are presented separately on the balance sheet. The portion of comprehensive income attributable to non-controlling interests is presented net of related income taxes in the statement of operations and comprehensive income. See Note 12 — “Common Shareholders’ Equity and Non-controlling Interests”.
Recently Adopted Changes in Accounting Principles
Income Taxes
On January 1, 2020, White Mountains adopted ASU 2019-12, Simplifying the Accounting for Income Taxes (ASC 740), which removes exceptions to standard guidance. Under the new guidance non-income-based taxes, such as franchise taxes, are reported within pre-tax income rather than being included in income taxes. In addition, the new guidance eliminated the exception to the incremental approach for inter-period tax allocation, which previously allowed consideration of the tax effect of items such as discontinued operations and items recognized through other comprehensive income.
For periods subsequent to the adoption of ASU 2019-12, White Mountains has recorded both the tax expense related to BAM’s member surplus contributions (“MSC”) and the related valuation allowance on such taxes through the non-controlling interest equity. Prior to the adoption of ASU 2019-12, White Mountains recorded the tax expense related to BAM’s MSC directly to non-controlling interest equity, while the valuation allowance on such taxes was recorded through the income statement.
Goodwill
On January 1, 2020, White Mountains adopted ASU 2017-04, Simplifying the Test for Goodwill Impairment (ASC 350), which changed the guidance on goodwill impairment testing. Under the new guidance, the qualitative assessment of the recoverability of goodwill remains the same, but the second step of the two-step qualitative test, which required calculation of the implied fair value of goodwill, has been eliminated. Instead, an impairment charge is recognized when the carrying value of a reporting unit exceeds its fair value. Any excess of carrying value over fair value is written down as an impairment. White Mountains did not identify any impairment indicators associated with its reporting units and therefore did not recognize an impairment of goodwill during the year ended December 31, 2020, and accordingly, adoption of ASU 2017-04 did not have any impact on White Mountains’s financial statements.
Credit Losses
On January 1, 2020, White Mountains adopted ASU 2016-13, Measurement of Credit Losses on Financial Instruments (ASC 326), which establishes new guidance for the recognition of credit losses for financial assets measured at amortized cost. The new ASU requires reporting entities to estimate the credit losses expected over the life of a credit exposure using historical information, current information and reasonable and supportable forecasts that affect the collectability of the financial asset. White Mountains measures its portfolio of investment securities at fair value with changes therein recognized through current period earnings and, accordingly, adoption of ASU 2016-13 did not have any impact on White Mountains’s financial statements.
Premium Amortization on Callable Debt Securities
On January 1, 2019, White Mountains adopted ASU 2017-08, Premium Amortization on Purchased Callable Debt Securities (ASC 310-20), which changes the amortization period for certain purchased callable debt securities. Under the new guidance, for investments in callable debt securities held at a premium, the premium is amortized over the period to the earliest call date. The new guidance does not change the amortization period for callable debt securities held at a discount. Adoption of ASU 2017-08 did not have any impact on White Mountains’s financial statements.
Note 2. Significant Transactions
MediaAlpha
On February 26, 2019, MediaAlpha completed the 2019 MediaAlpha Transaction. White Mountains received net cash proceeds of $89.3 million from the transaction.
White Mountains recognized a realized gain of $67.5 million and reduced its ownership interest to 48.3% of the basic units outstanding of MediaAlpha (42.0% on a fully diluted, fully converted basis) as a result of the 2019 MediaAlpha Transaction. White Mountains’s remaining ownership interest in MediaAlpha no longer met the criteria for a controlling ownership interest and, accordingly, White Mountains deconsolidated MediaAlpha on February 26, 2019. White Mountains’s consolidated statement of operations and comprehensive income and its segment disclosures include MediaAlpha’s results of operations for the period from January 1, 2019 through February 26, 2019. Upon deconsolidation, White Mountains’s investment in MediaAlpha met the criteria to be accounted for under the equity method or under the fair value option. See Note 15 — “Equity-Method Eligible Investments”. White Mountains elected the fair value option and the investment in MediaAlpha was initially measured at its estimated fair value of $114.7 million as of the transaction date, with the change in fair value of $114.7 million recognized as an unrealized investment gain. White Mountains recognized a total of $182.2 million of realized gain and unrealized investment gain on the 2019 MediaAlpha Transaction.
On October 30, 2020, MediaAlpha completed the MediaAlpha IPO. In the offering, White Mountains sold 3,609,894 shares and received total proceeds of $63.8 million. White Mountains also received $55.0 million of net proceeds related to a dividend recapitalization at MediaAlpha. Following the MediaAlpha IPO, White Mountains owns 20,532,202 MediaAlpha shares, representing a 35.0% ownership interest (32.3% on a fully-diluted, fully converted basis). At the December 31, 2020 closing price of $39.07 per share, the value of White Mountains’s remaining investment in MediaAlpha was $802.2 million. See Note 15 — “Equity-Method Eligible Investments”
Ark
On October 1, 2020, White Mountains entered into a subscription and purchase agreement (the “Ark SPA”) with Ark Insurance Holdings Limited (“Ark”) and certain selling shareholders (collectively with Ark, the “Ark Sellers”). Certain Ark Sellers also entered into a related management warranty deed (together with the Ark SPA, the “Ark Acquisition Agreement”) pursuant to which they made certain warranties about the Ark business (collectively the “Ark Transaction”). Under the terms of the Ark Acquisition Agreement, White Mountains agreed to contribute $605.4 million of equity capital to Ark, at a pre-money valuation of $300.0 million, and to purchase $40.9 million of shares from the Ark Sellers. White Mountains also agreed to contribute up to an additional $200.0 million of equity capital to Ark in 2021. In accordance with the Ark SPA, in the fourth quarter of 2020 White Mountains pre-funded/placed in escrow a total of $646.3 million in preparation for closing the transaction, including $280.0 million funded directly to Lloyd’s on behalf of Ark under the terms of a credit facility agreement and $366.3 million placed in escrow, which is reflected on the balance sheet within the Other Operations segment as of December 31, 2020.
On January 1, 2021, White Mountains closed the transaction in accordance with the terms of the Ark SPA. At closing, White Mountains owned 72.0% of Ark on a basic shares outstanding basis (63.0% on a fully-diluted, fully-converted basis, taking account of management’s equity incentives). If the additional $200.0 million is contributed in full, White Mountains will own 77.1% of Ark on a basic shares outstanding basis (67.5% on a fully-diluted, fully-converted basis). Management’s equity incentives are subject to an 8.0% rate of return threshold with no catch-up. The remaining shares are owned by employees. In the future, management rollover shareholders could earn additional shares in the company if and to the extent that White Mountains achieves certain multiple of invested capital return thresholds. These additional shares are generally eligible to vest in three equal tranches at multiple on invested capital (“MOIC”) thresholds of 2.0x, 2.5x and 3.0x. If fully earned, these additional shares would represent 12.5% of the shares outstanding at closing.
Ark writes a diversified and balanced portfolio of reinsurance and insurance, including property, accident & health, energy, marine and political risks, through Lloyd’s Syndicates 4020 and 3902. Beginning in January 2021, Ark began writing certain classes of its business through Group Ark Insurance Limited, Ark’s wholly-owned Bermuda-based insurance and reinsurance company. See Note 20 — “Subsequent Events”.
Elementum
On May 31, 2019, White Mountains acquired a 30.0% limited partnership interest in Elementum, a third-party registered investment adviser specializing in natural catastrophe ILS, for $55.1 million (the “Elementum Transaction”). Elementum manages separate accounts and pooled investment vehicles across various ILS sectors, including catastrophe bonds, collateralized reinsurance investments and industry loss warranties, on behalf of third-party clients. As part of the Elementum Transaction, White Mountains also invested $50.0 million in the ILS Funds.
White Mountains has elected the fair value option for its investment in Elementum and the ILS Funds. Both the investment in Elementum and the investments in the ILS Funds are included within other long-term investments.
NSM
On May 11, 2018, White Mountains acquired a 95.0% basic unit ownership interest in NSM (83.6% on a fully diluted, fully converted basis). White Mountains funded the acquisition through a combination of cash on hand and new borrowings by NSM. White Mountains paid $274.2 million of cash consideration for its equity interest in NSM, and NSM borrowed $100.0 million in new debt as part of the transaction. During the third quarter of 2018, White Mountains recorded a purchase price adjustment of an additional $2.1 million of consideration, which was paid in the fourth quarter of 2018. White Mountains recognized total assets acquired related to NSM of $495.2 million, including $383.0 million of goodwill and other intangible assets, total liabilities assumed of $204.6 million, including contingent consideration earnout liabilities related to NSM’s previous acquisitions of its U.K.-based operations, of $10.2 million, and non-controlling interest of $14.4 million reflecting acquisition date fair values. In connection with the acquisition, White Mountains incurred transaction costs of $6.3 million in the Other Operations segment, which were expensed in 2018.
On May 18, 2018, NSM acquired 100% of Fresh Insurance Services Group Limited (“Fresh Insurance”). Fresh Insurance is an insurance broker that offers non-standard personal lines products in the United Kingdom. NSM paid $49.6 million of upfront cash consideration for Fresh Insurance. During 2020, Fresh Insurance was rebranded as part of Kingfisher UK Holdings Ltd. NSM borrowed $51.0 million to fund the transaction. During the twelve months ended December 31, 2019, NSM paid a purchase price adjustment of an additional $0.7 million of consideration. The purchase price is subject to additional adjustments based upon growth in EBITDA during two earnout periods, ending in February 2020 and February 2022. No purchase price adjustment was made related to the earnout period that ended in February 2020. NSM recognized total assets acquired related to Fresh Insurance of $72.6 million, including $54.6 million of goodwill and other intangible assets, and total liabilities assumed of $22.3 million, reflecting acquisition date fair values. In connection with the acquisition, NSM recorded a contingent consideration earnout liability of $7.5 million.
On December 3, 2018, NSM acquired all the net assets of KBK Insurance Group, Inc. (“KBK”), a specialized MGU focused on the towing and transportation space. NSM paid $60.0 million of upfront cash consideration for KBK. White Mountains contributed $29.0 million and NSM borrowed $30.1 million to fund the transaction. White Mountains recognized $59.4 million of goodwill and other intangible assets, reflecting acquisition date fair values, for which the relative fair values of goodwill and other intangible assets had not yet been finalized as of December 31, 2018. During 2019, NSM determined that the relative values of goodwill and other intangible assets recorded in connection with the KBK transaction were $32.6 million and $32.7 million, reflecting acquisition date fair values. The purchase price is subject to additional adjustments based upon growth in EBITDA during three earn out periods ending in December 2019, December 2020 and December 2021. During 2019, NSM recorded a purchase price adjustment of $5.9 million relating to the fair value of the contingent consideration earnout liability in connection with the acquisition. During 2020, NSM paid $6.4 million related to the first KBK earnout period.
On April 1, 2019, NSM acquired 100% of Embrace Pet Insurance (“Embrace”), a nationwide provider of pet health insurance for dogs and cats. NSM paid $71.5 million of cash consideration, net of cash acquired, for Embrace. White Mountains contributed $58.2 million to NSM and NSM borrowed $20.4 million to fund the transaction. White Mountains recognized $52.2 million of goodwill and $15.4 million of other intangible assets, reflecting acquisition date fair values.
On June 28, 2019, NSM acquired the renewal rights on its U.S. collector car business (the “Renewal Rights”) from American International Group, Inc. (“AIG”) for $82.5 million. The acquisition satisfied NSM’s obligation to acquire the Renewal Rights from AIG. See Note 18 — “Commitments and Contingencies”. White Mountains contributed $59.1 million to NSM and NSM borrowed $22.5 million to fund the transaction. White Mountains recognized $82.5 million of other intangible assets, reflecting the acquisition date fair value. See Note 4 — “Goodwill and Other Intangible Assets”.
On April 7, 2020, NSM acquired 100% of Kingsbridge Group Limited (“Kingsbridge”), a leading provider of commercial lines insurance and consulting services for the professional contractor and freelancer markets in the United Kingdom. NSM paid £107.2 million (approximately $132.2 million based upon the foreign exchange spot rate at the date of acquisition) of upfront cash consideration for Kingsbridge. White Mountains contributed $80.3 million to NSM and NSM borrowed £42.5 million (approximately $52.4 million based upon the foreign exchange spot rate at the date of acquisition) to fund the transaction. During 2020, NSM determined that the relative values of goodwill and other intangible assets recorded in connection with the Kingsbridge transaction were $111.5 million and $20.2 million, reflecting acquisition date fair values. The purchase price is subject to adjustment based upon growth in EBITDA during an earnout period ending in January 2022. During 2020, NSM initially recorded a liability relating to the fair value of the Kingsbridge contingent consideration earnout of $4.1 million. During 2020, NSM recognized pre-tax income of $4.1 million for the change in fair value of the Kingsbridge contingent consideration earnout liability and a foreign currency translation unrealized gain of $0.3 million. As of December 31, 2020, the Kingsbridge contingent consideration earnout liability was $0.3 million.
The contingent consideration earnout liabilities related to the Fresh Insurance, KBK and Kingsbridge acquisitions are subject to adjustments based upon EBITDA, EBITDA projections, and present value factors for acquired entities. For the year ended December 31, 2020 and 2019, NSM recognized pre-tax (revenue) expense of $(3.3) million and $2.1 million for the change in the fair value of its contingent consideration earnout liabilities. Any future adjustments to contingent consideration earnout liabilities under the agreements will be recognized through pre-tax income. As of December 31, 2020 and 2019, NSM recognized total contingent consideration earnout liabilities of $14.6 million and $20.6 million. During 2020, NSM
paid $7.0 million of contingent consideration earnout liabilities related to KBK and the U.K. vertical. During 2019, NSM paid $7.6 million of contingent consideration earnout liabilities related to the U.K. vertical.
PassportCard/DavidShield
On January 24, 2018, White Mountains acquired a 50% ownership interest in DavidShield, its joint venture partner in PassportCard. DavidShield is a managing general agency that is the leading provider of expatriate medical insurance in Israel and uses the same card-based delivery system as PassportCard. As part of the transaction, White Mountains reorganized its equity stake in PassportCard so that White Mountains and its partner in DavidShield would each own 50% of both businesses. To facilitate the transaction, White Mountains provided financing to its partner in the form of a non-interest bearing loan that is secured by the partner’s equity in PassportCard and DavidShield. The gross purchase price for the 50% interest in DavidShield was $41.8 million, or $28.3 million net of the financing provided for the restructuring.
On May 7, 2020, White Mountains made an additional $15.0 million investment in PassportCard/DavidShield to support operations through the ongoing COVID-19 pandemic. The transaction increased White Mountains’s ownership interest from 50.0% to 53.8%, but had no impact on the governance structure of the companies, including White Mountains’s board representation or other investor rights. The governance structures for both PassportCard and DavidShield were designed to give White Mountains and its co-investor equal power to make the decisions that most significantly impact the operations of PassportCard and DavidShield.
As a result of the transaction, White Mountains’s re-evaluated its accounting treatment for PassportCard and DavidShield. Because White Mountains does not have the unilateral power to direct the operations of PassportCard or DavidShield, White Mountains does not hold a controlling financial interest in either PassportCard or DavidShield and does not consolidate either entity. White Mountains’s ownership interest gives White Mountains the opportunity to exert significant influence over the significant financial and operating activities of PassportCard and DavidShield. Accordingly, PassportCard and DavidShield meet the criteria to be accounted for under the equity method. White Mountains has taken the fair value option for its investment in PassportCard and DavidShield. Changes in the fair value of PassportCard and DavidShield are recorded in realized and unrealized investment gains. White Mountains’s maximum loss in PassportCard and DavidShield is limited to the amount invested
Kudu
On February 5, 2018, White Mountains entered into an agreement to fund up to $125.0 million in Kudu in exchange for a 49.5% basic unit ownership interest in Kudu (42.7% on a fully diluted, fully converted basis). On April 4, 2019, White Mountains acquired the ownership interests in Kudu held by certain funds managed by Oaktree for cash consideration of $81.4 million. In addition, White Mountains assumed all of Oaktree’s unfunded capital commitments to Kudu, increasing White Mountains’s total capital commitment to $250.0 million. White Mountains recognized total assets acquired of $155.5 million, including $7.6 million of goodwill and $2.2 million of other intangible assets, total liabilities assumed of $0.8 million and non-controlling interest of $1.5 million.
As a result of the Kudu Transaction, White Mountains’s basic unit ownership of Kudu increased from 49.5% to 99.1% (42.7% to 85.4% on a fully diluted, fully converted basis), and White Mountains began consolidating Kudu as a reportable segment in its financial statements during the second quarter of 2019. White Mountains’s consolidated financial statements and its segment disclosures include Kudu’s results for the period from April 4, 2019 to December 31, 2019. For periods prior to the Kudu Transaction, White Mountains determined that Kudu was a VIE, but White Mountains was not the primary beneficiary. In those periods, White Mountains elected to use the fair value option.
During the fourth quarter of 2019, White Mountains increased its total capital commitment to Kudu by $100.0 million to $350.0 million of which $47.5 million and $129.0 million is undrawn as of December 31, 2020 and 2019. Also during the fourth quarter of 2019, Kudu obtained a committed $124.0 million credit facility, of which $34.8 million and $68.0 million was undrawn as of December 31, 2020 and 2019. See Note 5 — “Debt”.
Note 3. Investment Securities
White Mountains’s portfolio of investment securities held for general investment purposes consists of fixed maturity investments, short-term investments, its investment in MediaAlpha, common equity securities and other long-term investments, which are 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 December 31, 2020 and 2019.
Other long-term investments consist primarily of unconsolidated entities, including Kudu’s Participation Contracts, private equity funds, hedge funds, the ILS Funds and private debt instruments.
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, distributions from its investment in MediaAlpha, dividend income from common equity securities and distributions from other long-term investments.
The following table presents pre-tax net investment income for the years ended December 31, 2020, 2019 and 2018:
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|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
Millions
|
|
2020
|
|
2019
|
|
2018
|
Fixed maturity investments
|
|
$
|
29.0
|
|
|
$
|
32.4
|
|
|
$
|
35.1
|
|
Short-term investments
|
|
1.1
|
|
|
5.0
|
|
|
8.0
|
|
Investment in MediaAlpha (1)
|
|
59.9
|
|
|
8.0
|
|
|
—
|
|
Common equity securities
|
|
6.6
|
|
|
13.5
|
|
|
15.1
|
|
|
|
|
|
|
|
|
Other long-term investments
|
|
35.6
|
|
|
22.1
|
|
|
3.8
|
|
|
|
|
|
|
|
|
Total investment income
|
|
132.2
|
|
|
81.0
|
|
|
62.0
|
|
Third-party investment expenses
|
|
(1.2)
|
|
|
(1.3)
|
|
|
(3.0)
|
|
Net investment income
|
|
$
|
131.0
|
|
|
$
|
79.7
|
|
|
$
|
59.0
|
|
(1) For 2018, MediaAlpha was a majority-owned consolidated subsidiary of White Mountains. See Note 2 — “Significant Transactions”
Net Realized and Unrealized Investment Gains (Losses)
The following table presents net realized and unrealized investment gains (losses) for the years ended December 31, 2020, 2019 and 2018:
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|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
Millions
|
|
2020
|
|
2019
|
|
2018
|
Fixed maturity investments
|
|
$
|
38.5
|
|
|
$
|
43.5
|
|
|
$
|
(34.7)
|
|
Short-term investments
|
|
.4
|
|
|
.2
|
|
|
(.8)
|
|
Investment in MediaAlpha (1)
|
|
686.0
|
|
|
180.0
|
|
|
—
|
|
Common equity securities
|
|
6.5
|
|
|
195.7
|
|
|
(98.9)
|
|
Other long-term investments (2)
|
|
(14.6)
|
|
|
13.8
|
|
|
26.1
|
|
Net realized and unrealized investment gains (losses)
|
|
716.8
|
|
|
433.2
|
|
|
(108.3)
|
|
Less: net gains (losses) on investment securities sold
during the period
|
|
20.2
|
|
|
24.6
|
|
|
(33.0)
|
|
Net realized and unrealized investment gains (losses) on investment securities held at the end of the period
|
|
$
|
696.6
|
|
|
$
|
408.6
|
|
|
$
|
(75.3)
|
|
(1) For 2018, MediaAlpha was a majority-owned consolidated subsidiary of White Mountains. See Note 2 — “Significant Transactions”
(2) For 2020, 2019 and 2018, includes $4.0, $(0.3) and $(0.8) of realized and unrealized investment gains (losses) related to foreign currency exchange.
For the years ended December 31, 2020, 2019 and 2018, all of White Mountains’s net realized and unrealized investment gains (losses) were recorded in the consolidated statements of operations. There were no investment gains (losses) recorded in other comprehensive income.
White Mountains recognized gross realized investment gains of $214.4 million, $104.0 million and $49.4 million and gross realized investment losses of $27.3 million, $7.4 million and $62.3 million on sales of investment securities for the years ending December 31, 2020, 2019 and 2018.
The following table presents total gains included in earnings attributable to net unrealized investment gains for Level 3 investments for the years ended December 31, 2020, 2019 and 2018 for investments still held at the end of the period:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
Millions
|
|
2020
|
|
2019
|
|
2018
|
Other long-term investments (1)
|
|
$
|
276.0
|
|
|
$
|
181.9
|
|
|
$
|
22.6
|
|
Total net unrealized investment gains, pre-tax - Level 3 investments
|
|
$
|
276.0
|
|
|
$
|
181.9
|
|
|
$
|
22.6
|
|
(1) For 2020 and 2019, includes $278.7 and $180.0 of unrealized investment gains from White Mountains’s investment in MediaAlpha.
Proceeds from the sales and maturities of investments, excluding short-term investments, totaled $1.4 billion, $1.0 billion and $2.2 billion for the years ended December 31, 2020, 2019 and 2018.
Investment Holdings
The following tables present the cost or amortized cost, gross unrealized investment gains (losses) and carrying values of White Mountains’s fixed maturity investments as of December 31, 2020 and 2019.
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2020
|
Millions
|
|
Cost or
Amortized
Cost
|
|
Gross
Unrealized
Gains
|
|
Gross
Unrealized
Losses
|
|
|
|
Carrying
Value
|
U.S. Government and agency obligations
|
|
$
|
173.2
|
|
|
$
|
3.1
|
|
|
$
|
—
|
|
|
|
|
$
|
176.3
|
|
Debt securities issued by corporations
|
|
522.8
|
|
|
24.7
|
|
|
(.1)
|
|
|
|
|
547.4
|
|
Municipal obligations
|
|
244.0
|
|
|
21.0
|
|
|
—
|
|
|
|
|
265.0
|
|
Mortgage and asset-backed securities
|
|
211.7
|
|
|
6.8
|
|
|
—
|
|
|
|
|
218.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed maturity investments
|
|
$
|
1,151.7
|
|
|
$
|
55.6
|
|
|
$
|
(.1)
|
|
|
|
|
$
|
1,207.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
Millions
|
|
Cost or
Amortized
Cost
|
|
Gross
Unrealized
Gains
|
|
Gross
Unrealized
Losses
|
|
|
|
Carrying
Value
|
U.S. Government and agency obligations
|
|
$
|
231.7
|
|
|
$
|
1.0
|
|
|
$
|
(.2)
|
|
|
|
|
$
|
232.5
|
|
Debt securities issued by corporations
|
|
454.9
|
|
|
12.5
|
|
|
(.2)
|
|
|
|
|
467.2
|
|
Municipal obligations
|
|
284.7
|
|
|
12.5
|
|
|
(.1)
|
|
|
|
|
297.1
|
|
Mortgage and asset-backed securities
|
|
206.6
|
|
|
2.7
|
|
|
(.3)
|
|
|
|
|
209.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed maturity investments
|
|
$
|
1,177.9
|
|
|
$
|
28.7
|
|
|
$
|
(.8)
|
|
|
|
|
$
|
1,205.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The weighted average duration of White Mountains’s fixed income portfolio was approximately 3.2 years, including short-term investments, and approximately 3.6 years, excluding short-term investments, as of December 31, 2020.
The following table presents the cost or amortized cost and carrying value of White Mountains’s fixed maturity investments by contractual maturity as of December 31, 2020. Actual maturities could differ from contractual maturities because borrowers may have the right to call or prepay certain obligations with or without call or prepayment penalties.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2020
|
Millions
|
|
Cost or Amortized Cost
|
|
Carrying Value
|
Due in one year or less
|
|
$
|
126.0
|
|
|
$
|
127.0
|
|
Due after one year through five years
|
|
417.5
|
|
|
433.6
|
|
Due after five years through ten years
|
|
283.2
|
|
|
303.2
|
|
Due after ten years
|
|
113.3
|
|
|
124.9
|
|
Mortgage and asset-backed securities
|
|
211.7
|
|
|
218.5
|
|
|
|
|
|
|
Total
|
|
$
|
1,151.7
|
|
|
$
|
1,207.2
|
|
The following tables present the cost or amortized cost, gross unrealized investment gains (losses), net foreign currency losses, and carrying values of White Mountains’s investment in MediaAlpha, common equity securities and other long-term investments as of December 31, 2020 and 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2020
|
Millions
|
|
Cost or
Amortized Cost
|
|
Gross Unrealized
Gains
|
|
Gross Unrealized
Losses
|
|
Net Foreign
Currency Gains
|
|
Carrying
Value
|
|
|
|
|
|
|
|
|
|
|
|
Investment in MediaAlpha
|
|
$
|
—
|
|
|
$
|
802.2
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
802.2
|
|
Common equity securities
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other long-term investments
|
|
$
|
767.4
|
|
|
$
|
95.8
|
|
|
$
|
(78.1)
|
|
|
$
|
1.7
|
|
|
$
|
786.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
Millions
|
|
Cost or
Amortized Cost
|
|
Gross Unrealized
Gains
|
|
Gross Unrealized
Losses
|
|
Net Foreign
Currency Losses
|
|
Carrying
Value
|
Investment in MediaAlpha
|
|
$
|
—
|
|
|
$
|
180.0
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
180.0
|
|
Common equity securities
|
|
$
|
553.3
|
|
|
$
|
130.6
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
683.9
|
|
|
|
|
|
|
|
|
|
|
|
|
Other long-term investments
|
|
$
|
667.4
|
|
|
$
|
75.2
|
|
|
$
|
(64.1)
|
|
|
$
|
(2.2)
|
|
|
$
|
676.3
|
|
Fair Value Measurements as of December 31, 2020
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 December 31, 2020 and 2019, White Mountains used quoted market prices or other observable inputs to determine fair value for approximately 73% and 71% of the investment portfolio. See Note 1 — “Basis of Presentation and Significant Accounting Policies”.
Fair Value Measurements by Level
The following tables present White Mountains’s fair value measurements for investments as of December 31, 2020 and 2019 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, 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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2020
|
Millions
|
|
Fair Value
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
Fixed maturity investments:
|
|
|
|
|
|
|
|
|
U.S. Government and agency obligations
|
|
$
|
176.3
|
|
|
$
|
176.3
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Debt securities issued by corporations:
|
|
|
|
|
|
|
|
|
Financials
|
|
133.9
|
|
|
—
|
|
|
133.9
|
|
|
—
|
|
Consumer
|
|
81.9
|
|
|
—
|
|
|
81.9
|
|
|
—
|
|
Industrial
|
|
66.9
|
|
|
—
|
|
|
66.9
|
|
|
—
|
|
Technology
|
|
66.7
|
|
|
—
|
|
|
66.7
|
|
|
—
|
|
Healthcare
|
|
51.5
|
|
|
—
|
|
|
51.5
|
|
|
—
|
|
Communications
|
|
44.5
|
|
|
—
|
|
|
44.5
|
|
|
—
|
|
Energy
|
|
35.8
|
|
|
—
|
|
|
35.8
|
|
|
—
|
|
Materials
|
|
33.9
|
|
|
—
|
|
|
33.9
|
|
|
—
|
|
Utilities
|
|
32.3
|
|
|
—
|
|
|
32.3
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Total debt securities issued by corporations
|
|
547.4
|
|
|
—
|
|
|
547.4
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Municipal obligations
|
|
265.0
|
|
|
—
|
|
|
265.0
|
|
|
—
|
|
Mortgage and asset-backed securities
|
|
218.5
|
|
|
—
|
|
|
218.5
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed maturity investments
|
|
1,207.2
|
|
|
176.3
|
|
|
1,030.9
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Short-term investments (1)
|
|
142.9
|
|
|
142.9
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Investment in MediaAlpha
|
|
802.2
|
|
|
802.2
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other long-term investments
|
|
614.2
|
|
|
—
|
|
|
—
|
|
|
614.2
|
|
Other long-term investments — NAV(2)
|
|
172.6
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Total other long-term investments
|
|
786.8
|
|
|
—
|
|
|
—
|
|
|
614.2
|
|
Total investments
|
|
$
|
2,939.1
|
|
|
$
|
1,121.4
|
|
|
$
|
1,030.9
|
|
|
$
|
614.2
|
|
(1) Short-term investments are measured at amortized cost, which approximates fair value.
(2) Consists of private equity funds and the ILS Funds for which fair value is measured at NAV using the practical expedient. Investments for which fair value is measured at NAV are not classified within the fair value hierarchy.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
Millions
|
|
Fair Value
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
Fixed maturity investments:
|
|
|
|
|
|
|
|
|
U.S. Government and agency obligations
|
|
$
|
232.5
|
|
|
$
|
232.5
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
Debt securities issued by corporations:
|
|
|
|
|
|
|
|
|
Financials
|
|
144.8
|
|
|
—
|
|
|
144.8
|
|
|
—
|
|
Industrial
|
|
59.0
|
|
|
—
|
|
|
59.0
|
|
|
—
|
|
Healthcare
|
|
52.6
|
|
|
—
|
|
|
52.6
|
|
|
—
|
|
Consumer
|
|
50.9
|
|
|
—
|
|
|
50.9
|
|
|
—
|
|
Energy
|
|
44.9
|
|
|
—
|
|
|
44.9
|
|
|
—
|
|
Technology
|
|
41.2
|
|
|
—
|
|
|
41.2
|
|
|
—
|
|
Communications
|
|
31.3
|
|
|
—
|
|
|
31.3
|
|
|
—
|
|
Utilities
|
|
25.0
|
|
|
—
|
|
|
25.0
|
|
|
—
|
|
Materials
|
|
17.5
|
|
|
—
|
|
|
17.5
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Total debt securities issued by corporations
|
|
467.2
|
|
|
—
|
|
|
467.2
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Municipal obligations
|
|
297.1
|
|
|
—
|
|
|
297.1
|
|
|
—
|
|
Mortgage and asset-backed securities
|
|
209.0
|
|
|
—
|
|
|
209.0
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed maturity investments
|
|
1,205.8
|
|
|
232.5
|
|
|
973.3
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Short-term investments (1)
|
|
201.2
|
|
|
189.4
|
|
|
11.8
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Investment in MediaAlpha
|
|
180.0
|
|
|
—
|
|
|
—
|
|
|
180.0
|
|
|
|
|
|
|
|
|
|
|
Common equity securities:
|
|
|
|
|
|
|
|
|
Exchange traded funds (2)
|
|
536.4
|
|
|
521.6
|
|
|
14.8
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other (3)
|
|
147.5
|
|
|
25.9
|
|
|
121.5
|
|
|
.1
|
|
Total common equity securities
|
|
683.9
|
|
|
547.5
|
|
|
136.3
|
|
|
.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other long-term investments
|
|
474.0
|
|
|
—
|
|
|
—
|
|
|
474.0
|
|
Other long-term investments — NAV (4)
|
|
202.3
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Total other long-term investments
|
|
676.3
|
|
|
—
|
|
|
—
|
|
|
474.0
|
|
Total investments
|
|
$
|
2,947.2
|
|
|
$
|
969.4
|
|
|
$
|
1,121.4
|
|
|
$
|
654.1
|
|
(1) Short-term investments are measured at amortized cost, which approximates fair value.
(2) ETFs traded on foreign exchanges are priced using the fund’s published NAV to account for the difference in market close times and are therefore designated a Level 2 measurement.
(3) Primarily consists of two investments in unit trusts that predominantly invest in international equities and an open-end mutual fund that invests in domestic
large-cap companies.
(4) Consists of private equity funds, one hedge fund and the ILS Funds for which fair value is measured at NAV using the practical expedient. Investments for which fair value is measured at NAV are not classified within the fair value hierarchy.
Investments Held on Deposit or as Collateral
As of December 31, 2020 and 2019, investments of $432.4 million and $319.9 million, were held in trusts required to be maintained in relation to HG Global’s reinsurance agreements with BAM. White Mountains’s insurance subsidiaries are required to maintain deposits with certain insurance regulatory agencies in order to maintain their insurance licenses. The fair value of such deposits, which represent state deposits and are included within the investment portfolio, totaled $11.9 million and $9.9 million as of December 31, 2020 and 2019.
Debt Securities Issued by Corporations
The following table presents the credit ratings of debt securities issued by corporations held in White Mountains’s investment portfolio as of December 31, 2020 and 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value at December 31,
|
Millions
|
|
2020
|
|
2019
|
AAA
|
|
$
|
10.6
|
|
|
$
|
9.5
|
|
AA
|
|
57.9
|
|
|
73.9
|
|
A
|
|
318.3
|
|
|
288.5
|
|
BBB
|
|
159.6
|
|
|
95.3
|
|
|
|
|
|
|
BB
|
|
1.0
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
Debt securities issued by corporations (1)
|
|
$
|
547.4
|
|
|
$
|
467.2
|
|
(1) Credit ratings are based upon issuer credit ratings provided by Standard & Poor’s Financial Services LLC (“Standard & Poor’s”), or if unrated by Standard & Poor’s, long-term obligation ratings provided by Moody’s Investor Service, Inc.
Mortgage and Asset-backed Securities
The following table presents the fair value of White Mountains’s mortgage and asset-backed securities as of December 31, 2020 and 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2020
|
|
December 31, 2019
|
Millions
|
|
Fair Value
|
|
Level 2
|
|
Level 3
|
|
Fair Value
|
|
Level 2
|
|
Level 3
|
Mortgage-backed securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Agency:
|
|
|
|
|
|
|
|
|
|
|
|
|
FNMA
|
|
$
|
88.7
|
|
|
$
|
88.7
|
|
|
$
|
—
|
|
|
$
|
88.6
|
|
|
$
|
88.6
|
|
|
$
|
—
|
|
FHLMC
|
|
70.1
|
|
|
70.1
|
|
|
—
|
|
|
60.5
|
|
|
60.5
|
|
|
—
|
|
GNMA
|
|
40.6
|
|
|
40.6
|
|
|
—
|
|
|
30.8
|
|
|
30.8
|
|
|
—
|
|
Total agency (1)
|
|
199.4
|
|
|
199.4
|
|
|
—
|
|
|
179.9
|
|
|
179.9
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total mortgage-backed securities
|
|
199.4
|
|
|
199.4
|
|
|
—
|
|
|
179.9
|
|
|
179.9
|
|
|
—
|
|
Other asset-backed securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit card receivables
|
|
11.3
|
|
|
11.3
|
|
|
—
|
|
|
14.0
|
|
|
14.0
|
|
|
—
|
|
Vehicle receivables
|
|
7.8
|
|
|
7.8
|
|
|
—
|
|
|
15.1
|
|
|
15.1
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other asset-backed securities
|
|
19.1
|
|
|
19.1
|
|
|
—
|
|
|
29.1
|
|
|
29.1
|
|
|
—
|
|
Total mortgage and asset-backed securities
|
|
$
|
218.5
|
|
|
$
|
218.5
|
|
|
$
|
—
|
|
|
$
|
209.0
|
|
|
$
|
209.0
|
|
|
$
|
—
|
|
(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).
Investment in MediaAlpha
On February 26, 2019, in connection with the 2019 MediaAlpha Transaction, MediaAlpha was deconsolidated and was subsequently accounted for at fair value within other long-term investments.
On October 30, 2020, MediaAlpha completed the MediaAlpha IPO. In the offering, White Mountains sold 3,609,894 shares and received total proceeds of $63.8 million. Following the MediaAlpha IPO, White Mountains owns 20,532,202 MediaAlpha shares, representing a 35.0% ownership interest (32.3% on a fully-diluted, fully converted basis). At the December 31, 2020 closing price of $39.07 per share, the value of White Mountains’s remaining investment in MediaAlpha was $802.2 million. Subsequent to the MediaAlpha IPO, White Mountains’s investment in MediaAlpha is accounted for at fair value based on the publicly traded share price of MediaAlpha’s common stock and White Mountains presents its investment in MediaAlpha as a separate line item on the balance sheet. For comparability purposes, the amounts related to MediaAlpha in 2019 subsequent to the 2019 MediaAlpha Transaction have been reclassified from other long-term investments to the investment in MediaAlpha.
Other Long-Term Investments
The following table presents the carrying values of White Mountains’s other long-term investments as of December 31, 2020 and 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Carrying Value at
|
Millions
|
|
December 31, 2020
|
|
December 31, 2019
|
Kudu’s Participation Contracts
|
|
$
|
400.6
|
|
|
$
|
266.5
|
|
PassportCard/DavidShield
|
|
95.0
|
|
|
90.0
|
|
Elementum Holdings L.P.
|
|
55.1
|
|
|
55.1
|
|
Other unconsolidated entities (1)
|
|
42.4
|
|
|
33.7
|
|
Total unconsolidated entities (2)
|
|
593.1
|
|
|
445.3
|
|
Private equity funds and hedge funds
|
|
121.2
|
|
|
161.1
|
|
Insurance-linked securities funds
|
|
51.4
|
|
|
41.2
|
|
Private debt investments (2) (3)
|
|
21.1
|
|
|
28.7
|
|
Total other long-term investments
|
|
$
|
786.8
|
|
|
$
|
676.3
|
|
(1) Includes White Mountains’s non-controlling equity interests in certain private common equity securities, limited liability companies and convertible preferred securities and Simple Agreement for Future Equity (“SAFE”) investments.
(2) See Fair Value Measurements by Level table.
(3) Includes $5.8 and $5.0 in private debt investments carried at fair value as of December 31. 2020 and amortized cost as of December 31, 2019.
Private Equity Funds and Hedge Funds
White Mountains invests in private equity funds and hedge funds, which are included in other long-term investments. The fair value of these investments is generally estimated using the net asset value (“NAV”) of the funds. As of December 31, 2020, White Mountains held investments in fourteen private equity funds. The largest investment in a single private equity
fund or hedge fund was $29.1 million as of December 31, 2020 and $54.6 million as of December 31, 2019. In the first quarter of 2020, White Mountains redeemed its sole hedge fund having a fair value of $45.6 million. The bulk of the redemption proceeds, subject to customary audit holdbacks, were received in April 2020 and the remaining balance is expected to be received in April 2021.
The following table presents investments and unfunded commitments in private equity funds and hedge funds by investment objective and sector as of December 31, 2020 and 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2020
|
|
December 31, 2019
|
Millions
|
|
Fair Value
|
|
Unfunded
Commitments
|
|
Fair Value
|
|
Unfunded
Commitments
|
|
|
|
|
|
|
|
|
|
Private equity funds
|
|
|
|
|
|
|
|
|
Aerospace/Defense/Government
|
|
$
|
69.1
|
|
|
$
|
15.3
|
|
|
$
|
33.8
|
|
|
$
|
23.3
|
|
Manufacturing/Industrial
|
|
28.6
|
|
|
—
|
|
|
57.7
|
|
|
4.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial services
|
|
23.5
|
|
|
30.4
|
|
|
15.0
|
|
|
22.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total private equity funds
|
|
121.2
|
|
|
45.7
|
|
|
106.5
|
|
|
50.2
|
|
|
|
|
|
|
|
|
|
|
Hedge funds
|
|
|
|
|
|
|
|
|
Long/short banks and financial
|
|
—
|
|
|
—
|
|
|
54.6
|
|
|
—
|
|
Total hedge funds
|
|
—
|
|
|
—
|
|
|
54.6
|
|
|
—
|
|
Total private equity funds and hedge funds
included in other long-term investments
|
|
$
|
121.2
|
|
|
$
|
45.7
|
|
|
$
|
161.1
|
|
|
$
|
50.2
|
|
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 have the option to extend the lock-up period.
The following table presents investments in private equity funds that were subject to lock-up periods as of December 31, 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Millions
|
|
1 – 3 years
|
|
3 – 5 years
|
|
5 – 10 years
|
|
>10 years
|
|
Total
|
Private equity funds — expected lock-up period remaining
|
|
$
|
8.0
|
|
|
$
|
40.7
|
|
|
$
|
64.7
|
|
|
$
|
7.8
|
|
|
$
|
121.2
|
|
Investors in private equity funds are generally subject to indemnification obligations outside of the capital commitment period and prior to the winding up of the fund. As of December 31, 2020 and 2019, White Mountains is not aware of any indemnification claims relating to its investments in private equity funds.
Redemption of investments in most 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.
Insurance-Linked Securities Funds
White Mountains’s other long-term investments include the ILS Funds. The fair value of these investments is generally estimated using the NAV of the funds. As of December 31, 2020, White Mountains held investments in four ILS Funds with a fair value of $51.4 million.
Investments in the ILS Funds are generally subject to restrictions, including lock-up periods where no redemptions or withdrawals are allowed, non-renewal clauses, restrictions on redemption frequency and advance notice periods for redemptions. From time to time, natural catastrophe, liquidity, market or other events will occur that make the determination of fair value for underlying investments in ILS Funds less certain due to the potential for loss development. In such circumstances, the impacted investments may be subject to additional lock-up provisions.
The ILS Funds are typically subject to monthly and annual restrictions on redemptions and advance redemption notice period requirements that range between 30 and 90 days. Amounts requested for redemption remain subject to market fluctuations until the redemption effective date, which generally falls at the end of the defined redemption period.
One of the ILS Funds requires shareholders to provide advance redemption notice on or before September 15 of each calendar year. Amounts requested for redemption in this fund remain subject to market fluctuation until the underlying investment has fully matured or been commuted, which may be up to a period of three years from the start of each calendar year.
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 December 31, 2020 and 2019 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 present the changes in White Mountains’s fair value measurements by level for the years ended December 31, 2020 and 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 3 Investments
|
|
Other Long-term Investments Measured at NAV (1)
|
|
|
|
Millions
|
|
Level 1
Investments
|
|
Level 2
Investments
|
|
|
|
Common
Equity
Securities
|
|
|
|
Other Long-term
Investments and Investment in MediaAlpha pre-IPO
|
|
|
Total
|
Balance at December 31, 2019
|
|
$
|
780.0
|
|
|
$
|
1,109.6
|
|
|
|
|
$
|
.1
|
|
|
|
|
$
|
654.0
|
|
|
$
|
202.3
|
|
|
$
|
2,746.0
|
|
(2)
|
Net realized and unrealized gains
|
|
436.4
|
|
|
15.9
|
|
|
|
|
—
|
|
|
|
|
275.6
|
|
|
(11.5)
|
|
|
716.4
|
|
(3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization/accretion
|
|
(.1)
|
|
|
(4.4)
|
|
|
|
|
—
|
|
|
|
|
—
|
|
|
—
|
|
|
(4.5)
|
|
|
Purchases
|
|
133.9
|
|
|
437.6
|
|
|
|
|
—
|
|
|
|
|
151.5
|
|
|
43.6
|
|
|
766.6
|
|
|
Sales
|
|
(830.4)
|
|
|
(527.8)
|
|
|
|
|
(.1)
|
|
|
|
|
(8.2)
|
|
|
(61.8)
|
|
|
(1,428.3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of MediaAlpha IPO (4)
|
|
458.7
|
|
|
—
|
|
|
|
|
—
|
|
|
|
|
(458.7)
|
|
|
—
|
|
|
—
|
|
|
Transfers in
|
|
—
|
|
|
—
|
|
|
|
|
—
|
|
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Transfers out
|
|
—
|
|
|
—
|
|
|
|
|
—
|
|
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Balance at December 31, 2020
|
|
$
|
978.5
|
|
|
$
|
1,030.9
|
|
|
|
|
$
|
—
|
|
|
|
|
$
|
614.2
|
|
|
$
|
172.6
|
|
|
$
|
2,796.2
|
|
(2)
|
(1) Includes private equity funds, hedge funds and the ILS Funds for which fair value is measured at NAV using the practical expedient are no longer classified within the fair value hierarchy. See Note 1 — “Basis of Presentation and Significant Accounting Policies”.
(2) Excludes carrying value of $142.9 and $201.2 as of December 31, 2020 and 2019 classified as short-term investments.
(3) Excludes realized and unrealized losses associated with short-term investments of $0.4 for the year ended December 31, 2020.
(4) Represents the reclassification of White Mountains’s investment in MediaAlpha from a level 3 measurement to a level 1 measurement in connection with the MediaAlpha IPO. See Note 2 - “Significant Transactions”.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 3 Investments
|
|
Other Long-term Investments Measured at NAV (1)
|
|
|
|
|
Millions
|
|
Level 1
Investments
|
|
Level 2
Investments
|
|
|
|
Common
Equity
Securities
|
|
|
|
Other Long- term
Investments and Investment in MediaAlpha
|
|
|
|
Total
|
Balance at December 31, 2018
|
|
$
|
842.6
|
|
|
$
|
1,160.5
|
|
|
|
|
$
|
—
|
|
|
|
|
$
|
138.7
|
|
|
$
|
186.9
|
|
|
|
$
|
2,328.7
|
|
(2)
|
Net realized and unrealized gains
|
|
163.0
|
|
|
76.1
|
|
|
|
|
—
|
|
|
|
|
181.2
|
|
|
12.7
|
|
|
|
433.0
|
|
(3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization/accretion
|
|
.2
|
|
|
(1.8)
|
|
|
|
|
—
|
|
|
|
|
—
|
|
|
—
|
|
|
|
(1.6)
|
|
|
Purchases
|
|
165.3
|
|
|
404.5
|
|
|
|
|
.1
|
|
|
|
|
185.4
|
|
|
110.8
|
|
|
|
866.1
|
|
|
Sales
|
|
(391.1)
|
|
|
(529.7)
|
|
|
|
|
—
|
|
|
|
|
—
|
|
|
(29.5)
|
|
|
|
(950.3)
|
|
|
Effect of Kudu Transaction
|
|
—
|
|
|
—
|
|
|
|
|
—
|
|
|
|
|
141.8
|
|
|
(71.7)
|
|
|
|
70.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transfers in
|
|
—
|
|
|
—
|
|
|
|
|
—
|
|
|
|
|
10.9
|
|
|
4.0
|
|
|
|
14.9
|
|
|
Transfers out
|
|
—
|
|
|
—
|
|
|
|
|
—
|
|
|
|
|
(4.0)
|
|
|
(10.9)
|
|
|
|
(14.9)
|
|
|
Balance at December 31, 2019
|
|
$
|
780.0
|
|
|
$
|
1,109.6
|
|
|
|
|
$
|
.1
|
|
|
|
|
$
|
654.0
|
|
|
$
|
202.3
|
|
|
|
$
|
2,746.0
|
|
(2)
|
(1) Includes private equity funds, hedge funds and the ILS Funds for which fair value is measured at NAV using the practical expedient are no longer classified within the fair value hierarchy. See Note 1 — “Basis of Presentation and Significant Accounting Policies”.
(2) Excludes carrying value of $201.2 and $214.2 as of December 31, 2019 and 2018 classified as short-term investments.
(3) Includes $114.7 unrealized investment gain associated with the 2019 MediaAlpha Transaction. See Note 2 — “Significant Transactions”.
(4) Excludes realized and unrealized losses associated with short-term investments of $0.2 for the year ended December 31, 2019.
Fair Value Measurements — Transfers Between Levels - For Years Ended December 31, 2020 and 2019
Transfers between levels are generally 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 2020 and 2019, there were no fixed maturity investments or other long-term investments classified as Level 3 measurements in the prior period that were transferred to Level 2 measurements.
During 2020 and 2019, there were no fixed maturity investments or other long-term investments classified as Level 2 measurements in the prior period that were transferred to Level 3 measurements.
During 2020, in connection with the MediaAlpha IPO, White Mountains’s investment in MediaAlpha was reclassified from a Level 3 measurement to a Level 1 measurement.
Significant Unobservable Inputs
The following tables present significant unobservable inputs used in estimating the fair value of White Mountains’s investment in MediaAlpha and other long-term investments, other than private equity funds, hedge funds and the ILS Funds, classified within Level 3 as of December 31, 2020 and 2019. The fair value of investments in private equity funds, hedge funds and the ILS Funds are generally estimated using the NAV of the funds.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ in Millions
|
|
December 31, 2020
|
Description
|
|
Valuation Technique(s) (1)
|
|
Fair Value (2)
|
|
Unobservable Inputs
|
|
|
|
|
|
|
Discount Rate (3)(4)
|
|
Terminal Cash Flow Exit Multiple (x) or Terminal Revenue Growth Rate (%) (4)
|
Kudu’s Participation Contracts (5)
|
|
Discounted cash flow
|
|
$400.6
|
|
18% - 23%
|
|
7x - 12x
|
PassportCard/DavidShield (6)
|
|
Discounted cash flow
|
|
$95.0
|
|
23%
|
|
4%
|
Elementum Holdings, L.P.
|
|
Discounted cash flow
|
|
$55.1
|
|
17%
|
|
4%
|
Private debt instruments
|
|
Discounted cash flow
|
|
$17.1
|
|
4% - 8%
|
|
N/A
|
All other
|
|
Discounted cash flow
|
|
$18.8
|
|
20% - 24%
|
|
4%
|
New Market Solutions, LLC
|
|
Recent transaction
|
|
$9.9
|
|
Transaction price:
|
|
$9.9
|
Noblr, Inc.
|
|
Recent transaction
|
|
$8.7
|
|
Transaction price:
|
|
$8.7
|
Zillion Insurance Services, Inc. (7)
|
|
Recent transaction
|
|
$5.0
|
|
Transaction price:
|
|
$5.0
|
(1) Key inputs to the discounted cash flow analysis generally include projections of future revenue and earnings, discount rates and terminal exit multiples or growth rates.
(2) Includes the net unrealized investment gains (losses) associated with foreign currency; foreign currency effects based on observable inputs.
(3) Since Kudu’s Participation Contracts are not subject to corporate taxes within Kudu Investment Management, LLC, pre-tax discount rates are applied to pre-tax cash flows in determining fair values.
(4) Increases (decreases) to the discount rates in isolation would result in lower (higher) fair value measurements, while increases (decreases) to the terminal cash flow exit multiples or terminal revenue growth rates in isolation would result in higher (lower) fair value measurements.
(5) In 2020, Kudu deployed a total of $118.2 in new Kudu Participation Contracts, including Creation Investments Capital, Sequoia Financial Group, Channel Capital and Ranger Investment Management.
(6) In 2020, White Mountains made an additional $15.0 investment in PassportCard/DavidShield. See Note 2 - “Significant Transactions”.
(7) In 2020, White Mountains made an additional $2.5 investment in Zillion Insurance Services, Inc.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ in Millions
|
|
|
December 31, 2019
|
Description
|
|
|
Valuation Technique(s) (1)
|
|
Fair Value (2)
|
|
Unobservable Inputs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount Rate (3)
|
|
Terminal Cash Flow Exit
Multiple (x) or Terminal
Revenue Growth Rate (%)(3)
|
Kudu’s Participation Contracts (4)
|
|
|
Discounted cash flow
|
|
$266.5
|
|
15% - 22%
|
|
6x - 12x
|
Investment in MediaAlpha
|
|
|
Discounted cash flow
|
|
$180.0
|
|
15%
|
|
4%
|
PassportCard/DavidShield
|
|
|
Discounted cash flow
|
|
$90.0
|
|
22%
|
|
4%
|
Elementum Holdings, L.P. (5)
|
|
|
Discounted cash flow
|
|
$55.1
|
|
20%
|
|
4%
|
Private debt instruments
|
|
|
Discounted cash flow
|
|
$23.7
|
|
4% - 9%
|
|
N/A
|
All other
|
|
|
Discounted cash flow
|
|
$23.7
|
|
25% - 32%
|
|
4%
|
Noblr, Inc.
|
|
|
Recent transaction
|
|
$5.0
|
|
Transaction price:
|
|
$5.0
|
Zillion Insurance Services, Inc. (6)
|
|
|
Recent transaction
|
|
$2.5
|
|
Transaction price:
|
|
$2.5
|
Compare.com
|
|
|
Estimated net realizable value
|
|
$2.5
|
|
Net realizable value:
|
|
$2.5
|
(1) Key inputs to the discounted cash flow analysis generally include projections of future revenue and earnings, discount rates and terminal exit multiples or growth rates.
(2) Includes the net unrealized investment gains (losses) associated with foreign currency; foreign currency effects based on observable inputs.
(3) Increases (decreases) to the discount rates in isolation would result in lower (higher) fair value measurements, while increases (decreases) to the terminal
cash flow exit multiples or terminal revenue growth rates in isolation would result in higher (lower) fair value measurements.
(4) In 2019, Kudu deployed a total of $198.0 in new Kudu Participation Contracts, including Fair Oaks Capital, Versus Capital Advisors, First Long Island Investors, EJF Capital, Warwick Capital Partners and Pennybacker Capital Management.
(5) In 2019, White Mountains made a $55.1 investment in Elementum Holdings, L.P. See Note 2 - “Significant Transactions”.
(6) In 2019, White Mountains made a $2.5 investment in Zillion Insurance Services, Inc.
Note 4. Goodwill and Other Intangible Assets
White Mountains accounts for business combinations using the acquisition method. Under the acquisition method, White Mountains recognizes and measures the assets acquired, liabilities assumed and any non-controlling interest in the acquired entities at their acquisition date fair values. The estimated acquisition date fair values, generally consisting of intangible assets and liabilities for contingent consideration, may be recorded at provisional amounts in circumstances where the information necessary to complete the acquisition accounting is not available at the reporting date. Any such provisional amounts are finalized as measurement period adjustments within one year of the acquisition date.
The following table presents the economic lives, acquisition date fair values, accumulated amortization and net carrying values for other intangible assets and goodwill, by company as of December 31, 2020 and 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ in Millions
|
|
Weighted Average Economic
Life
(in years)
|
|
December 31, 2020
|
|
December 31, 2019
|
|
Acquisition Date Fair Value
|
|
Accumulated Amortization
|
|
Impairments
|
|
Net Carrying Value
|
|
Acquisition Date Fair Value
|
|
Accumulated Amortization
|
|
Impairments
|
|
Net Carrying Value
|
Goodwill:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NSM (1)(2)
|
|
N/A
|
|
$
|
506.4
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
506.4
|
|
|
$
|
381.6
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
381.6
|
|
Kudu
|
|
N/A
|
|
7.6
|
|
|
—
|
|
|
—
|
|
|
7.6
|
|
|
7.6
|
|
|
—
|
|
|
—
|
|
|
7.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Operations
|
|
N/A
|
|
11.5
|
|
|
—
|
|
|
—
|
|
|
11.5
|
|
|
13.1
|
|
|
—
|
|
|
7.6
|
|
|
5.5
|
|
Total goodwill
|
|
|
|
525.5
|
|
|
—
|
|
|
—
|
|
|
525.5
|
|
|
402.3
|
|
|
—
|
|
|
7.6
|
|
|
394.7
|
|
Other intangible
assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NSM (1)(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer
relationships
|
|
8.9
|
|
136.2
|
|
|
36.7
|
|
|
3.5
|
|
|
96.0
|
|
|
121.7
|
|
|
19.8
|
|
|
1.4
|
|
|
100.5
|
|
Trade names
|
|
16
|
|
65.4
|
|
|
8.3
|
|
|
1.0
|
|
|
56.1
|
|
|
61.9
|
|
|
5.3
|
|
|
.4
|
|
|
56.2
|
|
Information
technology
platform
|
|
0
|
|
3.1
|
|
|
1.4
|
|
|
1.7
|
|
|
—
|
|
|
3.9
|
|
|
1.4
|
|
|
.6
|
|
|
1.9
|
|
Renewal rights
|
|
12
|
|
82.5
|
|
|
4.9
|
|
|
—
|
|
|
77.6
|
|
|
82.5
|
|
|
.7
|
|
|
—
|
|
|
81.8
|
|
Other
|
|
3.4
|
|
1.7
|
|
|
1.0
|
|
|
—
|
|
|
.7
|
|
|
1.7
|
|
|
.7
|
|
|
—
|
|
|
1.0
|
|
Subtotal
|
|
|
|
288.9
|
|
|
52.3
|
|
|
6.2
|
|
|
230.4
|
|
|
271.7
|
|
|
27.9
|
|
|
2.4
|
|
|
241.4
|
|
Kudu
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trade names
|
|
7
|
|
2.2
|
|
|
.6
|
|
|
—
|
|
|
1.6
|
|
|
2.2
|
|
|
.2
|
|
|
—
|
|
|
2.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trade names
|
|
9.6
|
|
3.6
|
|
|
.3
|
|
|
—
|
|
|
3.3
|
|
|
1.7
|
|
|
.5
|
|
|
.2
|
|
|
1.0
|
|
Customer
relationships
|
|
10.7
|
|
14.2
|
|
|
1.4
|
|
|
—
|
|
|
12.8
|
|
|
7.2
|
|
|
.4
|
|
|
—
|
|
|
6.8
|
|
Information
technology
platform
|
|
5
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
.5
|
|
|
.3
|
|
|
.2
|
|
|
—
|
|
Insurance
licenses
|
|
N/A
|
|
8.6
|
|
|
—
|
|
|
—
|
|
|
8.6
|
|
|
8.6
|
|
|
—
|
|
|
—
|
|
|
8.6
|
|
Other
|
|
5.4
|
|
.3
|
|
|
.1
|
|
|
—
|
|
|
.2
|
|
|
.2
|
|
|
—
|
|
|
—
|
|
|
.2
|
|
Subtotal
|
26.7
|
|
|
1.8
|
|
|
|
|
24.9
|
|
|
18.2
|
|
|
1.2
|
|
|
.4
|
|
|
16.6
|
|
Total other intangible assets
|
317.8
|
|
|
54.7
|
|
|
6.2
|
|
|
256.9
|
|
|
292.1
|
|
|
29.3
|
|
|
2.8
|
|
|
260.0
|
|
Total goodwill and other
intangible assets
|
$
|
843.3
|
|
|
$
|
54.7
|
|
|
$
|
6.2
|
|
|
782.4
|
|
|
$
|
694.4
|
|
|
$
|
29.3
|
|
|
$
|
10.4
|
|
|
656.7
|
|
Goodwill and other intangible assets attributed to non-controlling interests
|
(28.1)
|
|
|
|
|
|
|
|
|
(23.4)
|
|
Goodwill and other intangible assets included in White Mountains’s common
shareholders’ equity
|
|
$
|
754.3
|
|
|
|
|
|
|
|
|
$
|
631.3
|
|
(1) During 2020, NSM’s goodwill and intangible assets includes $13.4 and $1.6 of the effect of foreign currency translation. During 2019, NSM’s goodwill and intangible assets includes $1.8 and $0.7 of the effect of foreign currency translation.
(2) The attribution of acquisition date fair value estimates between goodwill and other intangible assets for Kingsbridge was completed during 2020.The attribution of acquisition date fair value estimates between goodwill and other intangible assets for KBK was completed during 2019.
The goodwill recognized for the entities shown above is attributed to expected future cash flows. The acquisition date fair values of other intangible assets with finite lives are estimated using income approach techniques, which use future expected cash flows to develop a discounted present value amount.
The multi-period-excess-earnings method estimates fair value using the present value of the incremental after-tax cash flows attributable solely to the other intangible asset over its remaining life. This approach was used to estimate the fair value of other intangible assets associated with trade names, customer relationships and contracts and information technology.
The relief-from-royalty method was used to estimate fair value for other intangible assets that relate to rights that could be obtained via a license from a third-party owner. Under this method, the fair value is estimated using the present value of license fees avoided by owning rather than leasing the asset. This technique was used to estimate the fair value of domain names, certain trademarks and brand names.
The with-or-without method estimates the fair value of an other intangible asset that provides an incremental benefit. Under this method, the fair value of the other intangible asset is calculated by comparing the value of the entity with and without the other intangible asset. This approach was used to estimate the fair value of favorable lease terms.
The following table presents a summary of the acquisition date fair values of goodwill and other intangible assets for acquisitions completed during 2020 and 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ in Millions
|
|
|
|
|
Acquisition of Subsidiary/ Asset
|
|
Goodwill and
Other Intangible Assets (1)
|
|
Acquisition Date
|
Embrace(2)
|
|
$
|
67.6
|
|
|
April 1, 2019
|
Renewal Rights (3)
|
|
82.5
|
|
|
June 28, 2019
|
Kingsbridge
|
|
131.7
|
|
|
April 7, 2020
|
Total NSM segment
|
|
$
|
281.8
|
|
|
|
Kudu Transaction
|
|
$
|
9.8
|
|
|
April 4, 2019
|
Other Operations
|
|
$
|
38.1
|
|
|
Various
|
(1) Acquisition date fair values include the effect of adjustments during the measurement period and excludes the effect of foreign currency translation subsequent to the acquisition date.
(2) Excludes $3.4 of software classified within other assets.
(3) NSM’s purchase of the Renewal Rights from AIG was an asset acquisition.
On at least an annual basis beginning no later than the interim period included in the one-year anniversary of an acquisition, White Mountains evaluates goodwill for potential impairment.
During 2020, White Mountains recognized impairments of other intangible assets of $6.2 million related to Fresh Insurance. The impairments related to lower premium volumes, including due to the impact of the COVID-19 pandemic, and certain reorganization initiatives at Fresh Insurance. During 2020, White Mountains performed its periodic reviews for potential impairment, including a quantitative review of the goodwill associated with NSM. During 2019, White Mountains recognized an impairment of other intangible assets of $2.4 million related to Fresh Insurance and impairments of goodwill and other intangible assets of $7.6 million and $0.4 million, respectively, related to Other Operations. During 2020 and 2019, White Mountains concluded that there was no impairment of the goodwill associated with NSM. During 2018, there were no impairments of goodwill and other intangible assets. Impairment charges are presented within general and administrative expenses for the segments affected on the statement of operations.
The following table presents the change in goodwill and other intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
2020
|
|
2019
|
Millions
|
|
Goodwill
|
|
Other Intangible Assets
|
|
Total Goodwill and Other Intangible Assets
|
|
Goodwill
|
|
Other Intangible Assets
|
|
Total Goodwill and Other Intangible Assets
|
Beginning balance
|
|
$
|
394.7
|
|
|
$
|
260.0
|
|
|
$
|
654.7
|
|
|
$
|
379.9
|
|
|
$
|
157.6
|
|
|
$
|
537.5
|
|
Acquisitions of businesses (1)
|
|
140.0
|
|
|
—
|
|
|
140.0
|
|
|
64.8
|
|
|
34.6
|
|
|
99.4
|
|
Acquisition of collector car renewal rights
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
82.5
|
|
|
82.5
|
|
Dispositions of businesses (2)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(18.3)
|
|
|
(23.5)
|
|
|
(41.8)
|
|
Attribution of acquisition date fair value
estimates between goodwill and other
intangible assets (3)
|
|
(23.2)
|
|
|
23.2
|
|
|
—
|
|
|
(26.8)
|
|
|
26.8
|
|
|
—
|
|
Impairments (4)
|
|
—
|
|
|
(6.2)
|
|
|
(6.2)
|
|
|
(7.6)
|
|
|
(2.8)
|
|
|
(10.4)
|
|
Measurement period adjustments(5)
|
|
.6
|
|
|
6.6
|
|
|
7.2
|
|
|
.9
|
|
|
5.9
|
|
|
6.8
|
|
Foreign currency translation
|
|
13.4
|
|
|
1.6
|
|
|
15.0
|
|
|
1.8
|
|
|
.7
|
|
|
2.5
|
|
Amortization
|
|
—
|
|
|
(28.3)
|
|
|
(28.3)
|
|
|
—
|
|
|
(21.8)
|
|
|
(21.8)
|
|
Ending balance
|
|
$
|
525.5
|
|
|
$
|
256.9
|
|
|
$
|
782.4
|
|
|
$
|
394.7
|
|
|
$
|
260.0
|
|
|
$
|
654.7
|
|
(1) During 2020, amounts include acquisitions of Kingsbridge and Other Operations. During 2019, amounts include acquisitions related to Kudu, Other Operations and Embrace.
(2) Dispositions relate to the 2019 MediaAlpha Transaction. See Note 2 — “Significant Transactions”.
(3) The determination of the relative fair values of goodwill and other intangible assets recognized in connection with the acquisition of Kingsbridge and Other Operations were completed in 2020. The determination of the relative fair values of goodwill and other intangible assets recognized in connection with the acquisition of KBK was completed in 2019.
(4) In 2020, impairments relate to NSM’s UK vertical. In 2019, impairments of $7.6 and $0.4 of goodwill and other intangible assets relate to Other Operations and $2.4 of impairments to other intangible assets relate to NSM’s UK vertical.
(5) Measurement period adjustments relate to updated information about acquisition date fair values of assets acquired and liabilities assumed. During 2020, adjustments primarily relate to contingent considerations of $4.1 in connection with the acquisition of Kingsbridge. During 2019, $5.9 in connection with the acquisition of KBK.
Amortization expense was $28.3 million, $21.8 million and $18.8 million for the years ended December 31, 2020, 2019 and 2018.
White Mountains expects to recognize amortization expense in each of the next five years as the following table presents:
|
|
|
|
|
|
|
|
|
Millions
|
|
Amortization Expense
|
2021
|
|
$
|
36.3
|
|
2022
|
|
35.2
|
|
2023
|
|
34.1
|
|
2024
|
|
28.6
|
|
2025 and years after
|
|
114.1
|
|
Total (1)
|
|
$
|
248.3
|
|
(1) Excludes indefinite-lived intangible assets of $8.6.
Note 5. Debt
The following table presents White Mountains’s debt outstanding as of December 31, 2020 and 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
Effective
|
|
December 31,
|
|
Effective
|
|
$ in Millions
|
|
2020
|
|
Rate
|
|
2019
|
|
Rate (1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NSM Bank Facility
|
|
$
|
277.4
|
|
|
7.5%
|
(1)
|
$
|
221.3
|
|
|
7.5%
|
(1)
|
Unamortized issuance cost
|
|
(6.1)
|
|
|
|
|
(3.9)
|
|
|
|
|
NSM Bank Facility, carrying value
|
|
271.3
|
|
|
|
|
217.4
|
|
|
|
|
Other NSM debt
|
|
1.3
|
|
|
2.5%
|
|
1.8
|
|
|
3.0%
|
|
Kudu Bank Facility
|
|
89.2
|
|
|
8.3%
|
|
57.0
|
|
|
8.3%
|
|
Unamortized issuance cost
|
|
(2.9)
|
|
|
|
|
(3.4)
|
|
|
|
|
Kudu Bank Facility, carrying value
|
|
86.3
|
|
|
|
|
53.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Operations debt
|
|
18.0
|
|
|
7.4%
|
|
11.1
|
|
|
8.3
|
%
|
|
Unamortized issuance cost
|
|
(.5)
|
|
|
|
|
(.4)
|
|
|
|
|
Other Operations debt, carrying value
|
|
17.5
|
|
|
|
|
10.7
|
|
|
|
|
Total debt
|
|
$
|
376.4
|
|
|
|
|
$
|
283.5
|
|
|
|
|
(1) Effective rate includes the effect of the amortization of debt issuance costs and excludes the effect of the interest rate swap on the hedged portion of the debt. The weighted average interest rate for the years ended December 31, 2020 and 2019, excluding the effect of the amortization of debt issuance costs, was 7.0% and 7.0%. The weighted average interest rate for the years ended December 31, 2020 and 2019 on the total NSM Bank Facility including both the effect of the amortization of debt issuance costs and the effect of the interest rate swap was 8.4% and 8.1%.
The following table presents a schedule of contractual repayments of White Mountains’s debt as of December 31, 2020:
|
|
|
|
|
|
|
|
|
Millions
|
|
December 31, 2020
|
Due in one year or less
|
|
$
|
4.5
|
|
Due in two to three years
|
|
12.2
|
|
Due in four to five years
|
|
106.0
|
|
Due after five years
|
|
263.3
|
|
Total
|
|
$
|
386.0
|
|
NSM Bank Facility
On April 7, 2020, NSM amended its secured credit facility (the “NSM Bank Facility”) with Ares Capital Corporation in connection with the acquisition of Kingsbridge. Under the amendment, the total commitment increased from $234.0 million, comprised of term loans of $224.0 million and a revolving credit loan of $10.0 million, to $291.4 million, comprised of term loans of $276.4 million, including £42.5 million (approximately $52.4 million based upon the foreign exchange spot rate as of the date of the transaction) in a GBP term loan, and a revolving credit loan commitment of $15.0 million. The term loans under the NSM Bank Facility mature on May 11, 2026, and the revolving loan matures on November 11, 2025.
Under GAAP, if the terms of a debt instrument are amended, unless there is greater than 10% change in the expected discounted future cash flows of such instrument, the instrument’s carrying value does not change. White Mountains has determined that the impact of the changes to the terms of the NSM Bank Facility on the expected discounted future cash flows was less than 10%.
Interest on the NSM Bank Facility accrues at a floating interest rate equal to the three-month LIBOR plus an applicable margin. In connection with the amendment, the reference rates for USD denominated borrowings increased. The USD-LIBOR rate floor increased to 1.25% and the margin over USD-LIBOR increased from a range of 4.25% to 4.75% to a range of 5.50% to 6.00%. For GBP denominated borrowings, the GBP-LIBOR rate floor is 1.25% and the margin over GBP-LIBOR ranges from 6.00% to 6.50%. The margins over the reference interest rates vary within the range depending on the consolidated total leverage ratio of NSM.
The following table presents the change in debt under the NSM Bank Facility for the years ended December 31, 2020 and 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Millions
|
|
Year Ended December 31,
|
|
|
NSM Bank Facility
|
|
2020
|
|
2019
|
|
|
|
|
Beginning balance
|
|
$
|
221.3
|
|
|
$
|
180.4
|
|
|
|
|
|
Term loans
|
|
|
|
|
|
|
|
|
Borrowings (1)
|
|
52.4
|
|
|
42.9
|
|
|
|
|
|
Repayments
|
|
(2.0)
|
|
|
(2.0)
|
|
|
|
|
|
Foreign currency translation
|
|
5.7
|
|
—
|
|
|
|
|
|
Revolving credit loan
|
|
|
|
|
|
|
|
|
Borrowings
|
|
—
|
|
|
6.5
|
|
|
|
|
|
Repayments
|
|
—
|
|
|
(6.5)
|
|
|
|
|
|
Ending balance
|
|
$
|
277.4
|
|
|
$
|
221.3
|
|
|
|
|
|
(1) Borrowings for the year ended December 31, 2020 included $52.4 for the funding of the acquisition of Kingsbridge. Borrowings for the year ended December 31, 2019 included $20.4 and $22.5 for the funding of the acquisitions of Embrace and the Renewal Rights.
As of December 31, 2020, the term loans had an outstanding balance of $277.4 million, including £42.5 million (approximately $58.1 million based upon the foreign exchange spot rate as of December 31, 2020) in a GBP term loan, and the revolving credit loan was undrawn.
On June 15, 2018, NSM entered into an interest rate swap agreement to hedge its exposure to interest rate risk on $151.0 million of its USD denominated variable rate term loans.
As of December 31, 2020, $147.6 million of the outstanding term loans were hedged by the swap and $129.8 million of the outstanding term loans were unhedged. For the twelve months ended December 31, 2020, the weighted average effective interest rate on the outstanding term loans that were hedged, including the effect of the amortization of debt issuance costs and the effect of the interest rate swap, was 9.0%, and the weighted average effective interest rate on the outstanding term loans that were unhedged, including the effect of the amortization of debt issuance costs, was 7.6%. For the twelve months ended December 31, 2020, the weighted average interest rate on the total NSM Bank Facility, including the effect of the amortization of debt issuance costs and the effect of the interest rate swap, was 8.4%.
The NSM Bank Facility is secured by all property of the loan parties and contains various affirmative, negative and financial covenants that White Mountains considers to be customary for such borrowings, including a maximum consolidated total leverage ratio covenant.
Other NSM Debt
NSM also has a secured term loan related to its U.K. vertical. As of December 31, 2020, the secured term loan had an outstanding balance of $1.3 million and a maturity date of December 31, 2022.
Kudu Bank Facility
On December 23, 2019, Kudu entered into a secured credit facility (the “Kudu Bank Facility”) with Monroe Capital Management Advisors, LLC to provide funding for distributions to unitholders and fund new investments and related transaction expenses. As of December 31, 2020, the Kudu Bank Facility has a maximum borrowing capacity of $124.0 million, which is comprised of a revolving credit loan commitment of $5.0 million, an initial term loan of $57.0 million and a delayed-draw term loan of $62.0 million. The term loans and revolving credit loans, under the Kudu Bank Facility, mature in 2025. During 2020, Kudu borrowed $32.2 million in term loans under the Kudu Bank Facility and made no repayments. During 2019, Kudu borrowed $57.0 million in term loans under the Kudu Bank Facility and made no repayments. As of December 31, 2020, the term loans had an outstanding balance of $89.2 million and the revolving credit loan was undrawn.
Interest on the Kudu Bank Facility accrues at a floating interest rate equal to the greater of the one-month USD-LIBOR and 1.0% or the Prime Rate plus 1.0%, plus in each case, an applicable margin. The margin over USD-LIBOR may vary between 5.50% and 6.25% and the margin over the base rate may vary between 4.50% and 5.25%, depending on the consolidated total leverage ratio of the borrower.
The Kudu Bank Facility is secured by all property of the loan parties and contains various affirmative, negative and financial covenants that White Mountains considers to be customary for such borrowings, including a maximum consolidated total leverage ratio covenant.
Other Operations Debt
As of December 31, 2020, debt in White Mountains’s Other Operations segment consisted of two secured credit facilities. The first credit facility has a maximum borrowing capacity of $16.3 million, which is comprised of a term loan of $11.3 million, a delayed-draw term loan of $3.0 million and a revolving credit loan commitment of $2.0 million, all with a maturity date of March 12, 2024. During 2020, White Mountains’s Other Operations segment made no borrowings and made repayments of $2.0 million on the term loans under the first credit facility. During 2019, the first credit facility had no borrowings and made repayments of $0.2 million on the term loans. As of December 31, 2020, the term loans had an outstanding balance of $9.1 million and the revolving credit loan was undrawn. The second credit facility has a maximum borrowing capacity of $15.0 million, which is comprised of a term loan of $9.0 million, a delayed-draw term loan of $4.0 million and a revolving credit loan commitment of $2.0 million, all with a maturity date of July 2, 2025. During 2020, White Mountains’s Other Operations segment had no borrowings and made repayments of $0.1 million on the term loans under the second credit facility. As of December 31, 2020, the term loans had an outstanding balance of $8.9 million and the revolving credit loan was undrawn.
Compliance
As of December 31, 2020, White Mountains was in compliance in all material respects with all of the covenants under all of its debt facilities.
Interest
Total interest expense incurred by White Mountains for its indebtedness was $29.5 million, $17.6 million and $9.5 million for the periods ended December 31, 2020, 2019 and 2018. Total interest paid by White Mountains for its indebtedness was $27.0 million, $16.3 million, and $8.8 million for the twelve months ended December 31, 2020, 2019 and 2018.
Note 6. Income Taxes
The Company and its Bermuda-domiciled subsidiaries are not subject to Bermuda income tax under current Bermuda law. In the event there is a change in the current law such that taxes are imposed, the Company and its Bermuda-domiciled subsidiaries would be exempt from such tax until March 31, 2035, pursuant to the Bermuda Exempted Undertakings Tax Protection Act of 1966. The Company has subsidiaries and branches that operate in various other jurisdictions around the world and are subject to tax in the jurisdictions in which they operate. As of December 31, 2020, the jurisdictions in which the Company’s subsidiaries and branches were subject to tax were Barbados, Ireland, Israel, Luxembourg, the United Kingdom and the United States.
The following table presents the total income tax (expense) benefit for the years ended December 31, 2020, 2019 and 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
Millions
|
|
2020
|
|
2019
|
|
2018
|
Current income tax (expense):
|
|
|
|
|
|
|
U.S. federal
|
|
$
|
(10.4)
|
|
|
$
|
.9
|
|
|
$
|
(.1)
|
|
State
|
|
(4.2)
|
|
|
(3.7)
|
|
|
(1.4)
|
|
Non-U.S.
|
|
(1.1)
|
|
|
(1.7)
|
|
|
(2.9)
|
|
Total current income tax (expense)
|
|
(15.7)
|
|
|
(4.5)
|
|
|
(4.4)
|
|
Deferred income tax benefit (expense):
|
|
|
|
|
|
|
U.S. federal
|
|
23.2
|
|
|
(14.9)
|
|
|
8.3
|
|
State
|
|
10.3
|
|
|
(10.4)
|
|
|
—
|
|
Non-U.S.
|
|
2.7
|
|
|
.5
|
|
|
.1
|
|
Total deferred income tax benefit (expense)
|
|
36.2
|
|
|
(24.8)
|
|
|
8.4
|
|
Total income tax benefit (expense)
|
|
$
|
20.5
|
|
|
$
|
(29.3)
|
|
|
$
|
4.0
|
|
Effective Rate Reconciliation
The following table presents a reconciliation of taxes calculated for 2020, 2019 and 2018 using the 21% U.S. federal statutory rate U.S. federal statutory rate (the tax rate at which the majority of White Mountains’s worldwide operations are taxed) to the income tax (expense) benefit on pre-tax income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
Millions
|
|
2020
|
|
2019
|
|
2018
|
Tax (expense) benefit at the U.S. statutory rate
|
|
$
|
(135.5)
|
|
|
$
|
(85.1)
|
|
|
$
|
37.4
|
|
Differences in taxes resulting from:
|
|
|
|
|
|
|
Reorganization
|
|
130.5
|
|
|
—
|
|
|
—
|
|
Non-U.S. earnings, net of foreign taxes
|
|
78.4
|
|
|
27.1
|
|
|
(2.9)
|
|
Change in valuation allowance
|
|
(29.2)
|
|
|
63.6
|
|
|
(31.0)
|
|
State taxes
|
|
(8.5)
|
|
|
(17.5)
|
|
|
4.0
|
|
Withholding tax
|
|
(5.0)
|
|
|
(1.6)
|
|
|
(2.7)
|
|
Member’s surplus contributions
|
|
(4.8)
|
|
|
(3.6)
|
|
|
(2.6)
|
|
Tax rate changes
|
|
2.7
|
|
|
(5.7)
|
|
|
1.7
|
|
Tax reserve adjustments
|
|
1.9
|
|
|
(.7)
|
|
|
(.8)
|
|
Officer compensation
|
|
(1.1)
|
|
|
—
|
|
|
—
|
|
Tax exempt interest and dividends
|
|
.8
|
|
|
1.1
|
|
|
.6
|
|
Other, net
|
|
(9.7)
|
|
|
(6.9)
|
|
|
.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total income tax benefit (expense) on pre-tax income (loss)
|
|
$
|
20.5
|
|
|
$
|
(29.3)
|
|
|
$
|
4.0
|
|
The non-U.S. component of pre-tax income (loss) was $327.8 million, $100.4 million and $(30.1) million for the years ended December 31, 2020, 2019 and 2018. The reorganization benefit resulted from the release of a deferred tax liability following an internal reorganization completed in connection with the MediaAlpha IPO.
Tax Payments and Receipts
Net income tax payments (primarily to the United States) totaled $16.2 million, $3.7 million, and $3.5 million for the years ended December 31, 2020, 2019 and 2018.
Deferred Tax Assets and Liabilities
Deferred taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts for tax purposes.
The following table presents an outline of the significant components of White Mountains’s U.S. federal, state and non-U.S. deferred tax assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
Millions
|
|
2020
|
|
2019
|
Deferred tax assets related to:
|
|
|
|
|
U.S. federal and state net operating and capital
loss carryforwards
|
|
$
|
79.6
|
|
|
$
|
92.3
|
|
Non-U.S. net operating loss carryforwards
|
|
50.5
|
|
|
41.7
|
|
Incentive compensation
|
|
17.5
|
|
|
15.0
|
|
|
|
|
|
|
|
|
|
|
|
Accrued interest
|
|
7.9
|
|
|
5.1
|
|
Deferred acquisition costs
|
|
5.5
|
|
|
4.3
|
|
Tax credit carryforwards
|
|
5.5
|
|
|
4.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other items
|
|
1.3
|
|
|
3.4
|
|
Total gross deferred tax assets
|
|
167.8
|
|
|
166.0
|
|
Less: valuation allowances
|
|
97.4
|
|
|
77.9
|
|
Total net deferred tax assets
|
|
70.4
|
|
|
88.1
|
|
Deferred tax liabilities related to:
|
|
|
|
|
|
|
|
|
|
Member’s surplus contributions
|
|
52.9
|
|
|
43.2
|
|
Investment basis difference
|
|
11.8
|
|
|
6.6
|
|
Purchase accounting
|
|
5.1
|
|
|
3.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net unrealized investment gains
|
|
.3
|
|
|
66.3
|
|
Other items
|
|
2.8
|
|
|
1.5
|
|
Total deferred tax liabilities
|
|
72.9
|
|
|
120.7
|
|
Net deferred tax (liability)
|
|
$
|
(2.5)
|
|
|
$
|
(32.6)
|
|
White Mountains’s deferred tax (liabilities) assets are net of U.S. federal, state and non-U.S. valuation allowances and, to the extent they relate to non-U.S. jurisdictions, they are shown at year-end exchange rates.
Valuation Allowance
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 sufficient to utilize the entire deferred tax asset, which could result in material changes to White Mountains’s deferred tax assets and tax expense.
Of the $97.4 million valuation allowance as of December 31, 2020, $46.5 million related to deferred tax assets on net operating losses in U.S. subsidiaries and other federal and state deferred tax benefits, $26.8 million related to deferred tax assets on net operating losses and net investment unrealized gains and losses in Luxembourg subsidiaries, $20.0 million related to net operating losses and other deferred tax benefits in Israeli subsidiaries and $4.1 million related to net operating losses and other deferred tax benefits in U.K. subsidiaries. Of the $77.9 million valuation allowance as of December 31, 2019, $34.9 million related to deferred tax assets on net operating losses in U.S. subsidiaries and other federal and state deferred tax benefits, $22.6 million related to deferred tax assets on net operating losses and net investment unrealized gains and losses in Luxembourg subsidiaries, $17.3 million related to net operating losses in Israeli subsidiaries and $3.1 million related to net operating losses and other deferred tax benefits in U.K. subsidiaries.
United States
In 2020, White Mountains recorded income tax expense of $14.9 million to establish a full valuation allowance on the deferred tax assets of WM Lincoln, Inc. and subsidiaries (“WM Lincoln”) as White Mountains management is unsure they will generate sufficient taxable income to utilize the deferred tax assets. WM Lincoln includes WM Lafayette Holdings, Inc., WM Capital, WM Advisors and certain other entities and investments that are included in the Other Operations segment.
During 2019, White Mountains recorded income tax benefit of $63.2 million to release a valuation allowance against deferred tax assets of Guilford Holdings, Inc. and subsidiaries (“Guilford”), which included Kudu, White Mountains’s investment in MediaAlpha, WM Capital, WM Advisors and certain other entities and investments that are included in the Other Operations segment. Guilford recorded the tax benefit in 2019 due to a release of the full valuation allowance from 2018.
During 2020 and 2019, White Mountains recorded income tax expense (benefit) of $4.5 million and $(4.5) million to reflect the increase and decrease of the valuation allowance on net deferred tax assets of BAM. In the first quarter of 2020, White Mountains adopted ASU 2019-12, simplifying the Accounting for Income Taxes (ASC 740) (“ASU 2019-12”). For periods subsequent to the adoption of ASU 2019-12, White Mountains records both the tax expense related to BAM’s MSC and the related changes in valuation allowance on such taxes directly through non-controlling interest equity. Prior to the adoption of ASU 2019-12, White Mountains recorded the tax expense related to BAM’s MSC to non-controlling interest equity, while the change in valuation allowance on such taxes was recorded through the income statement. During 2020 and 2019, BAM had income included in equity due to MSC that was available to offset its loss from continuing operations. In 2019, BAM recorded an income tax benefit related to MSC of $10.5 million in continuing operations, with an offsetting tax expense in paid-in surplus. In 2020, based on the adoption of ASU 2019-12, BAM recorded both the income tax benefit on MSC of $9.7 million and the offsetting expense in paid-in surplus. During 2020 and 2019, BAM continued to have a full valuation allowance recorded against its net deferred tax assets, as White Mountains management is unsure it will generate sufficient taxable income to utilize the deferred tax assets.
During 2020 and 2019, White Mountains recorded income tax expense of $1.9 million and $0.1 million to establish a valuation allowance against a deferred tax asset related to foreign tax credits at White Mountains Catskill Holdings, Inc., as White Mountains management is unsure it will generate sufficient taxable income to utilize the deferred tax asset.
Non-U.S. Jurisdictions
During 2020 and 2019, White Mountains recorded income tax expense of $4.2 million and $1.1 million to establish a valuation allowance against most of the deferred tax assets which primarily relate to losses on the write-down of foreign subsidiaries and the unrealized losses on investments held in Luxembourg-domiciled subsidiaries.
During 2020 and 2019, White Mountains recorded income tax expense of $2.7 million and $1.6 million to establish a full valuation allowance against deferred tax assets at certain Israel-domiciled subsidiaries, as White Mountains management does not currently anticipate sufficient taxable income to utilize the deferred tax assets.
During 2020 and 2019, White Mountains recorded income tax expense of $1.0 million and $1.3 million to establish a full valuation allowance against deferred tax assets at certain U.K. subsidiaries, as White Mountains management does not currently anticipate sufficient taxable income to utilize the deferred tax assets.
Net Operating Loss and Capital Loss Carryforwards
The following table presents net operating loss and capital loss carryforwards as of December 31, 2020, the expiration dates and the deferred tax assets thereon:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2020
|
Millions
|
|
United States
|
|
Luxembourg
|
|
|
|
|
|
United Kingdom
|
|
Israel
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020-2024
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
2025-2029
|
|
—
|
|
|
—
|
|
|
|
|
|
|
—
|
|
|
—
|
|
|
—
|
|
2030-2039
|
|
250.7
|
|
|
73.2
|
|
|
|
|
|
|
—
|
|
|
—
|
|
|
323.9
|
|
No expiration date
|
|
118.4
|
|
|
31.0
|
|
|
|
|
|
|
25.9
|
|
|
85.2
|
|
|
260.5
|
|
Total
|
|
$
|
369.1
|
|
|
$
|
104.2
|
|
|
|
|
|
|
$
|
25.9
|
|
|
$
|
85.2
|
|
|
$
|
584.4
|
|
Gross deferred tax asset
|
|
$
|
77.5
|
|
|
$
|
26.0
|
|
|
|
|
|
|
$
|
4.9
|
|
|
$
|
19.6
|
|
|
$
|
128.0
|
|
Valuation allowance
|
|
(66.8)
|
|
|
(25.9)
|
|
|
|
|
|
|
(3.3)
|
|
|
(19.6)
|
|
|
(115.6)
|
|
Net deferred tax asset
|
|
$
|
10.7
|
|
|
$
|
.1
|
|
|
|
|
|
|
$
|
1.6
|
|
|
$
|
—
|
|
|
$
|
12.4
|
|
As of December 31, 2020, there are U.S. foreign tax credit carryforwards available of $5.5 million, which begin to expire in 2028.
Uncertain Tax Positions
Recognition of the benefit of a given tax position is based upon whether a company determines that it is more likely than not that a tax position will be sustained upon examination based upon the technical merits of the position. In evaluating the more-likely-than-not recognition threshold, White Mountains must presume that the tax position will be subject to examination by a taxing authority with full knowledge of all relevant information. If the recognition threshold is met, then the tax position is measured at the largest amount of benefit that is more than 50% likely of being realized upon ultimate settlement.
The following table presents a reconciliation of the beginning and ending amount of unrecognized tax benefits from 2018 to 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Millions
|
|
Permanent
Differences (1)
|
|
Temporary
Differences (2)
|
|
Interest and
Penalties (3)
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2017
|
|
$
|
.3
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
.3
|
|
Changes in prior year tax positions
|
|
.8
|
|
|
—
|
|
|
—
|
|
|
.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2018
|
|
1.1
|
|
|
—
|
|
|
—
|
|
|
1.1
|
|
Changes in prior year tax positions
|
|
1.3
|
|
|
—
|
|
|
—
|
|
|
1.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2019
|
|
2.4
|
|
|
—
|
|
|
—
|
|
|
2.4
|
|
|
|
|
|
|
|
|
|
|
Changes in prior year tax positions
|
|
.1
|
|
|
—
|
|
|
—
|
|
|
.1
|
|
Tax positions taken during the current year
|
|
.1
|
|
|
—
|
|
|
—
|
|
|
.1
|
|
Reorganization
|
|
(2.6)
|
|
|
—
|
|
|
—
|
|
|
(2.6)
|
|
Balance at December 31, 2020
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
(1)Represents the amount of unrecognized tax benefits that, if recognized, would impact the effective tax rate.
(2)Represents the amount of unrecognized tax benefits that, if recognized, would create a temporary difference between the reported amount of an item in White Mountains’s Consolidated Balance Sheet and its tax basis.
(3)Net of tax benefit.
White Mountains classifies all interest and penalties on unrecognized tax benefits as part of income tax expense. During the years ended December 31, 2020, 2019 and 2018, White Mountains did not recognize any net interest (income) expense. There was no accrued interest as of December 31, 2020 and 2019.
Tax Examinations
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 2015.
Note 7. Derivatives
NSM Interest Rate Swap
On June 15, 2018, NSM entered into an interest rate swap agreement to hedge its exposure to interest rate risk on $151.0 million of its USD denominated variable rate term loans under the NSM Bank Facility. Under the terms of the swap agreement, NSM pays a fixed-rate of 2.97% and receives a variable rate, which is reset monthly, based on the then-current USD-LIBOR. As of December 31, 2020, the variable rate received by NSM under the swap agreement was 1.00%. Over the term of the swap, the notional amount decreases in accordance with the principal repayments NSM expects to make on its term loans.
As of December 31, 2020, $147.6 million of the outstanding term loans were hedged by the swap. For the twelve months ended December 31, 2020, the weighted average effective interest rate on the outstanding term loans that were hedged, including the effect of the amortization of debt issuance costs and the effect of the interest rate swap, was 9.0%.
NSM’s obligations under the swap are secured by the same collateral securing the NSM Bank Facility on a pari passu basis. NSM does not currently hold any collateral deposits from or provide any collateral deposits to the swap counterparty.
NSM evaluated the effectiveness of the swap to hedge its interest rate risk associated with its variable rate debt and concluded at the swap inception date that the swap was highly effective in hedging that risk. NSM evaluates the effectiveness of the hedging relationship on an ongoing basis.
For the twelve months ended December 31, 2020 and 2019, White Mountains recognized net interest expense of $2.5 million and $1.1 million for the periodic net settlement payments on the swap. As of December 31, 2020 and December 31, 2019, the estimated fair value of the swap and the accrual of the periodic net settlement payments recorded in other liabilities was $8.2 million and $6.6 million. There was no ineffectiveness in the hedge for the years ended December 31, 2020 and December 31, 2019. For the twelve months ended December 31, 2020 and 2019, the $(1.6) million and $(3.9) million change in the fair value of the swap is included within White Mountains’s accumulated other comprehensive income (loss).
NSM Interest Rate Cap
On June 4, 2020, NSM entered into an interest rate cap agreement to limit its exposure to the risk of interest rate increases on the GBP denominated term loan under the NSM Bank Facility. The notional amount of the interest rate cap is £42.5 million (approximately $52.4 million based upon the foreign exchange spot rate as of the date of the transaction) and the termination date is June 4, 2022. On August 18, 2020, NSM entered into a separate interest rate cap agreement to extend the term of the original interest rate cap agreement by one year. The second interest rate cap agreement has an effective date of June 15, 2022 and a termination date of June 15, 2023.
NSM paid total initial premiums of approximately $0.1 million for the interest rate caps. Under the terms of the interest rate cap agreements, if the current GBP-LIBOR at the measurement date exceeds 1.25%, NSM will receive payments from the counterparty equal to the then-current GBP-LIBOR rate, less the 1.25% cap rate. As of December 31, 2020, the GBP-LIBOR rate was 0.03%.
NSM accounts for the interest rate caps as derivatives at fair value, with changes in fair value recognized in current period earnings within interest expense. For the twelve months ended December 31, 2020, White Mountains recognized a change in fair value of $(0.1) million on the interest rate caps within interest expense. As of December 31, 2020, the estimated fair value of the caps recorded in other assets was less than $0.1 million.
Note 8. Municipal Bond Guarantee Insurance
HG Global was established to fund the startup of BAM, a newly formed mutual municipal bond insurer, and, through HG Re, to provide up to 15%-of-par, first loss reinsurance protection for policies underwritten by BAM. At inception in 2012, HG Global was capitalized with $594.5 million from White Mountains and $14.5 million from non-controlling interests. HG Global, together with its subsidiaries, provided the initial capitalization of BAM through the purchase of $503.0 million of BAM Surplus Notes. As of December 31, 2020, White Mountains owned 96.9% of HG Global’s preferred equity and 88.4% of its common equity.
Reinsurance Treaties
FLRT
BAM is a party to a first loss reinsurance treaty (“FLRT”) with HG Re under which HG Re provides first loss protection up to 15%-of-par outstanding on each municipal bond insured by BAM. For capital appreciation bonds, par is adjusted to the estimated equivalent par value for current interest paying bonds. In return, BAM cedes up to 60% of the risk premium charged for insuring the municipal bond, which is net of a ceding commission. The FLRT is a perpetual agreement, with an initial term through the end of 2022.
Fidus Re
In addition to the FLRT, BAM is party to a collateralized financial guarantee excess of loss reinsurance agreement that serves to increase BAM’s claims paying resources and is provided by Fidus Re, Ltd. (“Fidus Re”), a Bermuda based special purpose insurer created in 2018 solely to provide reinsurance protection to BAM. Fidus Re was capitalized by the issuance of $100.0 million of insurance linked securities. The proceeds from issuance were placed in a collateral trust supporting Fidus Re’s obligations to BAM. The insurance linked securities were issued by Fidus Re with an initial term of 12 years and are callable five years after the date of issuance. Fidus Re reinsures 90% of aggregate losses exceeding $165.0 million on a portion of BAM’s financial guarantee portfolio (the “Covered Portfolio”) up to a total reimbursement of $100.0 million. The Fidus Re agreement does not provide coverage for losses in excess of $276.1 million. The Covered Portfolio consists of approximately 42% of BAM’s portfolio of financial guaranty policies issued through December 31, 2020. The agreement is accounted for using deposit accounting and any related financing expenses are recorded in general and administrative expenses as the agreement does not meet the risk transfer requirements necessary to be accounted for as reinsurance.
XOLT
In January 2020, BAM entered into an excess of loss reinsurance agreement (the “XOLT”) with HG Re. Under the XOLT, HG Re provides last dollar protection for exposures on municipal bonds insured by BAM in excess of NYDFS single issuer limits. The XOLT is subject to an aggregate limit equal to the lesser of $75.0 million or the assets held in the Supplemental Trust at any point in time. The agreement is accounted for using deposit accounting and any related financing expenses are recorded in general and administrative expenses as the agreement does not meet the risk transfer requirements necessary to be accounted for as reinsurance.
Collateral Trusts
HG Re’s obligations under the FLRT are limited to the assets in two collateral trusts: a Regulation 114 Trust and a supplemental collateral trust (the “Supplemental Trust” and together with the Regulation 114 Trust, the “Collateral Trusts”). Losses required to be reimbursed under the FLRT are subject to an aggregate limit equal to the assets held in the Collateral Trusts at any point in time.
At inception, the Supplemental Trust contained the original $300.0 million of Series B Notes and $100.0 million of cash and fixed income securities. During 2017, in order to further support BAM’s long-term capital position and business prospects, HG Global agreed to contribute the original $203.0 million of Series A Notes into the Supplemental Trust. In connection with the contribution, the Series A Notes were merged into the Series B Notes.
On a monthly basis, BAM deposits cash equal to ceded premiums, net of ceding commissions, due to HG Re under the FLRT directly into the Regulation 114 Trust. The Regulation 114 Trust target balance is equal to gross ceded unearned premiums and unpaid ceded loss and LAE expenses, if any. If, at the end of any quarter, the Regulation 114 Trust balance is below the target balance, funds will be withdrawn from the Supplemental Trust and deposited into the Regulation 114 Trust in an amount equal to the shortfall. If, at the end of any quarter, the Regulation 114 Trust balance is above 102% of the target balance, funds will be withdrawn from the Regulation 114 Trust and deposited into the Supplemental Trust. The Regulation 114 Trust balance as of December 31, 2020 and 2019 was $222.8 million and $190.3 million.
The Supplemental Trust target balance is $603.0 million, less the amount of cash and securities in the Regulation 114 Trust in excess of its target balance (the “Supplemental Trust Target Balance”). If, at the end of any quarter, the Supplemental Trust balance exceeds the Supplemental Trust Target Balance, such excess may be distributed to HG Re. The distribution will be made first as an assignment of accrued interest on the BAM Surplus Notes and second in cash and/or fixed income securities. As the BAM Surplus Notes are repaid over time, the BAM Surplus Notes will be replaced in the Supplemental Trust by cash and fixed income securities. The Supplemental Trust balance as of December 31, 2020 and 2019 was $604.3 million and $596.4 million.
As of December 31, 2020 and 2019, the Collateral Trusts held assets of $827.1 million and $786.7 million, which included $434.5 million and $321.6 million of cash and investments, $388.2 million and $457.6 million of BAM Surplus Notes and $4.4 million and $7.5 million of interest receivable on the BAM Surplus Notes.
BAM Surplus Notes
Through 2024, the interest rate on the BAM Surplus Notes is a variable rate equal to the one-year U.S. Treasury rate plus 300 basis points, set annually. During 2021, the interest rate on the BAM Surplus Notes will be 3.1%. Beginning in 2025, the interest rate will be fixed at the higher of the then current variable rate or 8.0%. BAM is required to seek regulatory approval to pay interest and principal on the BAM Surplus Notes only to the extent that its remaining qualified statutory capital and other capital resources continue to support its outstanding obligations, its business plan and its “AA/stable” rating from Standard & Poor’s. No payment of principal or interest on the BAM Surplus Notes may be made without the approval of the NYDFS.
Under GAAP, if the terms of a debt instrument are amended, unless there is greater than a 10% change in the expected discounted future cash flows of such instrument, the instrument’s carrying value does not change. White Mountains has determined that the impact of the changes to the terms of the BAM Surplus Notes on the expected discounted future cash flows was less than 10%.
In December 2020, BAM made a $30.1 million cash payment of principal and interest on the BAM Surplus Notes held by HG Global. Of this payment, $21.5 million was a repayment of principal held in the Supplemental Trust, $0.2 million was a payment of accrued interest held inside the Supplemental Trust and $8.4 million was a payment of accrued interest held outside the Supplemental Trust.
In January 2020, BAM made a one-time $65 million cash payment of principal and interest on the BAM Surplus Notes held by HG Global. Of this payment, $47.9 million was a repayment of principal held in the Supplemental Trust, $0.9 million was a payment of accrued interest held inside the Supplemental Trust and $16.2 million was a payment of accrued interest held outside the Supplemental Trust.
In December 2019, BAM made a $32.0 million cash payment (which included a one-time $10.0 million cash payment) of principal and interest on the BAM Surplus Notes held by HG Global. Of this payment, $23.7 million was a repayment of principal held in the Supplemental Trust, $0.3 million was a payment of accrued interest held in the Supplemental Trust and $8.0 million was a payment of accrued interest held outside the Supplemental Trust.
As of December 31, 2020 and 2019, total interest receivable on the BAM Surplus Notes was $155.7 million and $162.7 million.
Insured Obligations and Premiums
The following table presents a schedule of BAM’s insured obligations as of December 31, 2020 and 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2020
|
|
December 31, 2019
|
Contracts outstanding
|
|
10,997
|
|
8,987
|
Remaining weighted average contract period (in years)
|
|
10.7
|
|
10.7
|
Contractual debt service outstanding (in millions):
|
|
|
|
|
Principal
|
|
$
|
75,287.7
|
|
|
$
|
62,250.5
|
|
Interest and capital appreciation
|
|
36,448.8
|
|
|
31,799.7
|
|
Total debt service outstanding
|
|
$
|
111,736.5
|
|
|
$
|
94,050.2
|
|
|
|
|
|
|
Gross unearned insurance premiums
|
|
$
|
237.5
|
|
|
$
|
198.4
|
|
The following table presents a schedule of BAM’s future premium revenues as of December 31, 2020:
|
|
|
|
|
|
|
|
|
Millions
|
|
December 31, 2020
|
January 1, 2021 - March 31, 2021
|
|
$
|
5.6
|
|
April 1, 2021 - June 30, 2021
|
|
5.5
|
|
July 1, 2021 - September 30, 2021
|
|
5.5
|
|
October 1, 2021 - December 31, 2021
|
|
5.4
|
|
|
|
22.0
|
|
2022
|
|
20.9
|
|
2023
|
|
19.8
|
|
2024
|
|
18.3
|
|
2025
|
|
17.0
|
|
2026 and thereafter
|
|
139.5
|
|
Total gross unearned insurance premiums
|
|
$
|
237.5
|
|
The following table presents a schedule of written premiums and earned premiums included in White Mountains’s HG Global/BAM segment for the years ended December 31, 2020, 2019 and 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Millions
|
|
December 31, 2020
|
|
December 31, 2019
|
|
December 31, 2018
|
Written premiums:
|
|
|
|
|
|
|
Direct
|
|
$
|
61.5
|
|
|
$
|
28.1
|
|
|
$
|
44.8
|
|
Assumed
|
|
.2
|
|
|
10.6
|
|
|
8.1
|
|
Gross written premiums
|
|
$
|
61.7
|
|
|
$
|
38.7
|
|
|
$
|
52.9
|
|
Earned premiums:
|
|
|
|
|
|
|
Direct
|
|
$
|
19.4
|
|
|
$
|
13.6
|
|
|
$
|
13.6
|
|
Assumed
|
|
3.4
|
|
|
2.7
|
|
|
.3
|
|
Gross earned premiums
|
|
$
|
22.8
|
|
|
$
|
16.3
|
|
|
$
|
13.9
|
|
In September 2019, BAM entered into facultative quota share reinsurance agreements under which it assumed a portfolio of municipal bond guarantee contracts with a par value of $1.1 billion. In the second quarter of 2020, BAM assumed an additional municipal bond guarantee contract with a par value of $36.9 million through an endorsement to the facultative quota share reinsurance agreement.
In November 2018, BAM entered into a 100% quota share facultative reinsurance agreement under which it assumed a portfolio of municipal bond guarantee contracts with a par value of $2.2 billion.
None of the contracts assumed under these reinsurance agreements were non-performing and no loss reserves have been established for any of the contracts, either as of the transaction dates or as of December 31, 2020. The agreements, which cover future claims exposure only, meets the risk transfer criteria under ASC 944-20, Insurance Activities and accordingly has been accounted for as reinsurance.
Note 9. Earnings Per Share
White Mountains calculates earnings per share using the two-class method, which allocates earnings between common shares and unvested restricted common shares. Both classes of shares participate equally in dividends and earnings on a per share basis. Basic earnings per share amounts are based on the weighted average number of common shares outstanding adjusted for unvested restricted common shares.
The following table presents the Company’s computation of earnings per share from continuing operations for the years ended December 31, 2020, 2019 and 2018. See Note 19 — “Held for Sale and Discontinued Operations”.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2020
|
|
2019
|
|
2018
|
Basic and diluted earnings per share numerators (in millions):
|
|
|
|
|
|
|
Net income (loss) attributable to White Mountains’s
common shareholders
|
|
$
|
708.7
|
|
|
$
|
414.5
|
|
|
$
|
(141.2)
|
|
Less: total (loss) income from discontinued operations, net of tax
|
|
(2.3)
|
|
|
.8
|
|
|
(17.2)
|
|
Net income (loss) from continuing operations attributable to
White Mountains’s common shareholders
|
|
711.0
|
|
|
413.7
|
|
|
(124.0)
|
|
Allocation of (earnings) losses to participating restricted common shares(1)
|
|
(9.3)
|
|
|
(5.3)
|
|
|
1.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted earnings (losses) per share numerators
|
|
$
|
701.7
|
|
|
$
|
408.4
|
|
|
$
|
(122.6)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share denominators (in thousands):
|
|
|
|
|
|
|
Total average common shares outstanding during the period
|
|
3,122.2
|
|
|
3,181.6
|
|
|
3,382.5
|
|
Average unvested restricted common shares(2)
|
|
(40.8)
|
|
|
(40.5)
|
|
|
(40.1)
|
|
Basic earnings (losses) per share denominator
|
|
3,081.4
|
|
|
3,141.1
|
|
|
3,342.4
|
|
Diluted earnings per share denominator (in thousands):
|
|
|
|
|
|
|
Total average common shares outstanding during the period
|
|
3,122.2
|
|
|
3,181.6
|
|
|
3,382.5
|
|
Average unvested restricted common shares(2)
|
|
(40.8)
|
|
|
(40.5)
|
|
|
(40.1)
|
|
|
|
|
|
|
|
|
Diluted earnings (losses) per share denominator
|
|
3,081.4
|
|
|
3,141.1
|
|
|
3,342.4
|
|
Basic and diluted earnings per share (in dollars) - continuing operations:
|
|
|
|
|
|
|
Distributed earnings - dividends declared and paid
|
|
$
|
1.00
|
|
|
$
|
1.00
|
|
|
$
|
1.00
|
|
Undistributed earnings (losses)
|
|
226.72
|
|
|
129.02
|
|
|
(37.67)
|
|
Basic and diluted earnings (losses) per share
|
|
$
|
227.72
|
|
|
$
|
130.02
|
|
|
$
|
(36.67)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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 10 — “Employee Share-Based Incentive Compensation Plans”.
The following table presents the undistributed net earnings (losses) from continuing operations for the years ended December 31, 2020, 2019 and 2018. See Note 19 — “Held for Sale and Discontinued Operations”.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
Millions
|
|
|
2020
|
|
2019
|
|
2018
|
Undistributed net earnings - continuing operations:
|
|
|
|
|
|
|
|
Net income (loss) attributable to White Mountains’s common shareholders,
net of restricted common share amounts
|
|
|
$
|
701.7
|
|
|
$
|
408.4
|
|
|
$
|
(122.6)
|
|
Dividends declared, net of restricted common share amounts (1)
|
|
|
(3.1)
|
|
|
(3.2)
|
|
|
(3.7)
|
|
Total undistributed net earnings (losses), net of restricted common share amounts
|
|
|
$
|
698.6
|
|
|
$
|
405.2
|
|
|
$
|
(126.3)
|
|
(1) Restricted shares issued by White Mountains receive dividends, and are therefore considered participating securities.
Note 10. Employee Share-Based Incentive Compensation Plans
White Mountains’s share-based incentive compensation plans are designed to incentivize key employees to maximize shareholder value over long periods of time. White Mountains believes that this is best pursued by utilizing a pay-for-performance program that closely aligns the financial interests of management with those of its shareholders. White Mountains accomplishes this by emphasizing highly variable long-term compensation that is contingent on performance over a number of years rather than entitlements. White Mountains expenses all its share-based compensation. As a result, White Mountains’s calculation of its owners’ returns includes the expense of all outstanding share-based compensation awards.
Incentive Compensation Plans
White Mountains’s Long-Term Incentive Plan (the “WTM Incentive Plan”) provides for grants of various types of share-based and non-share-based incentive awards to key employees and directors of White Mountains. The WTM Incentive Plan was adopted by the Board, was approved by the Company’s sole shareholder in 1985 and was subsequently amended by its shareholders in 1995, 2001, 2003, 2005, 2010, 2013 and 2019. Share-based incentive awards that may be granted under the plan include performance shares, restricted shares, incentive stock options and non-qualified stock options (“Non-Qualified Options”).
Performance Shares
Performance shares are designed to reward employees for meeting company-wide performance targets. Performance shares are conditional grants of a specified maximum number of common shares or an equivalent amount of cash. Awards generally vest at the end of a three-year service period, are subject to the attainment of pre-specified performance goals, and are valued based on the market value of common shares at the time awards are paid. Performance shares earned under the WTM Incentive Plan are typically paid in cash but may be paid in common shares. Compensation expense is recognized for the vested portion of the awards over the related service periods. The level of payout ranges from zero to two times the number of shares initially granted, depending on White Mountains’s financial performance. Performance shares become payable at the conclusion of a performance cycle (typically three years) if pre-defined financial targets are met. The performance measures used for determining performance share payouts are growth in White Mountains’s adjusted book value per share and intrinsic value per share. Intrinsic value per share is generally calculated by adjusting adjusted book value per share for differences between the adjusted book value of certain assets and liabilities and White Mountains’s estimate of their underlying intrinsic values.
The following table presents performance share activity for the years ended December 31, 2020, 2019 and 2018 for performance shares granted under the WTM Incentive Plan:
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Year Ended December 31,
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2020
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2019
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2018
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$ in Millions
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Target
Performance
Shares
Outstanding
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Accrued
Expense
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Target
Performance
Shares
Outstanding
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Accrued
Expense
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Target
Performance
Shares
Outstanding
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Accrued
Expense
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Beginning of period
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42,473
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$
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43.7
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40,616
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$
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31.7
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50,515
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$
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45.8
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Shares paid or expired (1)
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(14,070)
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(27.7)
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(13,715)
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(18.1)
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(23,186)
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(28.4)
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New grants
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14,055
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—
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15,600
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—
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14,105
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—
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Forfeitures (2)
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—
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(.4)
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(28)
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(.1)
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(818)
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.1
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Expense recognized
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—
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40.7
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—
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30.2
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—
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14.2
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End of period
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42,458
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$
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56.3
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42,473
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$
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43.7
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40,616
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$
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31.7
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(1)WTM performance share payments in 2020 for the 2017-2019 performance cycle, which were paid in March 2020, ranged from 174% to 180% of target. WTM performance share payments in 2019 for the 2016-2018 performance cycle, which were paid in March 2019, ranged from 139% to 166% of target. WTM performance share payments in 2018 for the 2015-2017 performance cycle, which were paid in March 2018, ranged from 145% to 147% of target.
(2)Amounts include changes in assumed forfeitures, as required under GAAP.
During 2020, White Mountains granted 14,055 performance shares for the 2020-2022 performance cycle. During 2019, White Mountains granted 15,600 performance shares for the 2019-2021 performance cycle. During 2018, White Mountains granted 13,450 performance shares for the 2018-2020 performance cycle, 290 performance shares for the 2017-2019 performance cycle and 365 performance shares for the 2016-2018 performance cycle.
For the 2017-2019, 2016-2018 and 2015-2017 performance cycles, all performance shares earned were settled in cash. If the outstanding performance shares had vested on December 31, 2020, the total additional compensation cost to be recognized would have been $28.8 million, based on accrual factors as of December 31, 2020 (common share price and payout assumptions).
The following table presents performance shares outstanding and accrued expense for performance shares awarded under the WTM Incentive Plan as of December 31, 2020 for each performance cycle:
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$ in Millions
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Target
Performance Shares
Outstanding
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Accrued Expense
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Performance cycle:
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2020 – 2022
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14,055
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$
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9.5
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2019 – 2021
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15,600
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20.7
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2018 – 2020
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13,450
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27.1
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Sub-total
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43,105
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57.3
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Assumed forfeitures
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(647)
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(1.0)
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Total
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42,458
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$
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56.3
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For the 2020-2022 performance cycle, the targeted performance goal for full payment of outstanding performance shares granted under the WTM Incentive Plan to non-investment personnel is 7% average growth in adjusted book value per share and intrinsic value per share. Average growth of 2% or less would result in no payout and average growth of 12% or more would result in a payout of 200%.
For the 2019-2021 performance cycle, the targeted performance goal for full payment of outstanding performance shares granted under the WTM Incentive Plan is 7% average growth in adjusted book value per share and intrinsic value per share. Average growth of 2% or less would result in no payout and average growth of 12% or more would result in a payout of 200%.
For the 2018-2020 performance cycle, the targeted performance goal for full payment of outstanding performance shares granted under the WTM Incentive Plan is 6% average growth in adjusted book value per share and intrinsic value per share. Average growth of 2% or less would result in no payout and average growth of 10% or more would result in a payout of 200%.
Restricted Shares
Restricted shares are grants of a specified number of common shares that generally vest at the end of a three-year service period. The following table presents the unrecognized compensation cost associated with the outstanding restricted share awards under the WTM Incentive Plan for the years ended December 31, 2020, 2019 and 2018:
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Year Ended December 31,
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2020
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2019
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2018
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$ in Millions
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Restricted
Shares
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Unamortized
Issue Date Fair
Value
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Restricted
Shares
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Unamortized
Issue Date Fair
Value
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Restricted
Shares
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Unamortized
Issue Date Fair
Value
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Non-vested,
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Beginning of period
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43,395
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$
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16.7
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41,510
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$
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12.5
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53,755
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$
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14.3
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Issued
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14,055
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15.1
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15,600
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14.5
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14,105
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11.4
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Vested
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(14,345)
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—
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(13,715)
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—
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(25,381)
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—
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Forfeited
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—
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—
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—
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—
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(969)
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(.2)
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Expense recognized
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—
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(16.6)
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—
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(10.3)
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—
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(13.0)
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End of period
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43,105
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$
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15.2
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43,395
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$
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16.7
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41,510
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$
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12.5
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During 2020, White Mountains issued 14,055 restricted shares that vest on January 1, 2023. During 2019, White Mountains issued 15,600 restricted shares that vest on January 1, 2022. During 2018, White Mountains issued 13,450 restricted shares that vest on January 1, 2021, 290 restricted shares that vest on January 1, 2020 and 365 restricted shares that vest on January 1, 2019. The unrecognized compensation cost as of December 31, 2020 is expected to be recognized ratably over the remaining vesting periods.
Note 11. Leases
White Mountains has entered into lease agreements, primarily for office space. These leases are classified as operating leases, with lease expense recognized on a straight-line basis over the term of the lease. Lease incentives, such as free rent or landlord reimbursements for leasehold improvements, are recognized at lease inception and amortized on a straight-line basis over the term of the lease. Lease expense and the amortization of leasehold improvements are recognized within general and administrative expenses. Lease payments related to options to extend or renew the lease term are excluded from the calculation of lease liabilities unless White Mountains is reasonably certain of exercising those options.
On January 1, 2019, White Mountains adopted ASU 2016-02, Leases (ASC 842). See Note 1 — “Basis of Presentation and Significant Accounting Policies” — Basis of Presentation and Significant Accounting Policies. Prior to adoption of ASU 2016-02, White Mountains recognized lease expense for operating leases on a straight-line basis, but did not recognize lease assets or liabilities on its consolidated balance sheet. Upon adoption on January 1, 2019, White Mountains recognized lease ROU assets of $23.2 million and lease liabilities of $23.2 million. As of December 31, 2020, the ROU asset was $37.6 million and lease liabilities were $38.3 million.
The following table summarizes net lease expense recognized in White Mountains’s consolidated statement of operations for the years ended December 31, 2020 and 2019:
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Millions
Lease Cost
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December 31, 2020
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December 31, 2019
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Lease cost
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$
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7.7
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$
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7.2
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Less: sublease income
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.4
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.4
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Net lease cost
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$
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7.3
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$
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6.8
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The following table presents the contractual maturities of the lease liabilities associated with White Mountains’s operating lease agreements as of December 31, 2020:
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Millions
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December 31, 2020
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2021
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$
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7.7
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2022
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7.3
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2023
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7.1
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2024
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5.8
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2025
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5.1
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Thereafter
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12.2
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Total undiscounted lease payments
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45.2
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Less: present value adjustment
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(6.9)
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Operating lease liability
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$
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38.3
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The following table presents lease related assets and liabilities by reportable segment as of December 31, 2020 and 2019:
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As of December 31, 2020
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$ in Millions
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HG/BAM
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NSM
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Kudu
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Other Operations
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Total
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Weighted Average Incremental Borrowing Rate (1)
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ROU lease asset
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$
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10.1
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$
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17.1
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$
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2.0
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$
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8.4
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$
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37.6
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4.6%
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Lease liability
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$
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10.1
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$
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17.1
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$
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2.0
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$
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9.1
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$
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38.3
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(1) The present value of the remaining lease payments was determined by discounting the lease payments using the incremental borrowing rate.
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December 31, 2019
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$ in Millions
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HG/BAM
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NSM
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Kudu
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Other Operations
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Total
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Weighted Average Incremental Borrowing Rate (1)
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ROU lease asset
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$
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10.4
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$
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4.8
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$
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2.3
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$
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5.1
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$
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22.6
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4.6%
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Lease liability
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$
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10.4
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$
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4.8
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$
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2.3
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$
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5.3
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$
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22.8
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(1) The present value of the remaining lease payments was determined by discounting the lease payments using the incremental borrowing rate.
Note 12. Common Shareholders’ Equity and Non-controlling Interests
Common Shares Repurchased and Retired
During the past several years, White Mountains’s board of directors authorized the Company to repurchase its common shares, from time to time, subject to market conditions. Shares may be repurchased on the open market or through privately negotiated transactions. The repurchase authorizations do not have a stated expiration date. As of December 31, 2020, White Mountains may repurchase an additional 542,517 shares under these board authorizations. In addition, from time to time White Mountains has also repurchased its common shares through tender offers that were separately authorized by its board of directors.
During 2020, the Company repurchased 99,087 common shares for $85.1 million at an average share price of $859, which were comprised of 93,188 common shares repurchased under the board authorizations for $78.5 million at an average share price of $843 and 5,899 common shares repurchased pursuant to employee benefit plans.
During 2019, the Company repurchased 5,679 common shares for $4.9 million at an average share price of $858 pursuant to employee benefit plans.
During 2018, the Company repurchased 592,458 common shares for $519.1 million at an average share price of $877, which were comprised of 582,493 common shares repurchased under the board authorizations for $511.0 million at an average share price of $877 and 9,965 common shares repurchased pursuant to employee benefit plans.
Common Shares Issued
During 2020, the Company issued a total of 15,745 common shares, which consisted of 14,055 restricted shares issued to key personnel, 1,440 shares issued to directors of the Company and 250 shares issued to MediaAlpha’s management.
During 2019, the Company issued a total of 17,917 common shares, which consisted of 15,600 restricted shares issued to key personnel and 2,317 shares issued to directors of the Company.
During 2018, the Company issued a total of 16,377 common shares, which consisted of 14,105 restricted shares issued to key personnel, 2,272 shares issued to directors of the Company.
Dividends on Common Shares
For the years ended December 31, 2020, 2019 and 2018, the Company declared and paid cash dividends totaling $3.2 million, $3.2 million and $3.8 million (or $1.00 per common share).