NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
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 80 South Main Street, Hanover, New Hampshire 03755-2053 and its registered office is located at Clarendon House, 2 Church Street, Hamilton, Bermuda HM 11. The Company’s website is located at www.whitemountains.com. The information contained on White Mountains’s website is not incorporated by reference into, and is not a part of, this report.
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.
Intercompany transactions have been eliminated in consolidation. These interim financial statements include all adjustments considered necessary by management to fairly state the financial position, results of operations and cash flows of White Mountains. These interim financial statements may not be indicative of financial results for the full year and should be read in conjunction with the Company’s 2018 Annual Report on Form 10-K.
Business Combinations
White Mountains accounts for purchases of businesses using the acquisition method, which requires the measurement of assets acquired, including goodwill and other intangible assets, and liabilities assumed, including contingent liabilities, at their estimated fair values as of the acquisition date. The acquisition date fair values represent management’s best estimates and are based upon established valuation techniques, reasonable assumptions and, where appropriate, valuations performed by independent third parties. In circumstances where additional information is required in order to determine the acquisition date fair value of balance sheet amounts, provisional amounts may be recorded as of the acquisition date and may be subject to subsequent adjustment throughout the measurement period, which is up to one year from the acquisition date. Measurement period adjustments are recognized in the period in which they are determined. The results of operations and cash flows of businesses acquired are included in the consolidated financial statements from the date of acquisition. White Mountains accounts for purchases of other intangible assets that do not meet the definition of a business as asset acquisitions. Asset acquisitions are recognized at the amount of consideration paid, which is deemed to equal fair value.
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. White Mountains’s reportable segments are HG Global/BAM, NSM, Kudu, MediaAlpha (through February 26, 2019) and Other Operations. See 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 purposes such as schools, utilities and transportation facilities. BAM is owned by and operated for the benefit of its members, the municipalities that purchase BAM’s insurance for their debt issuances. HG Global was established to fund the startup of BAM and, through its wholly-owned subsidiary, HG Re Ltd. (“HG Re”), to provide up to 15%-of-par, first loss reinsurance protection for policies underwritten by BAM. HG Global, together with its subsidiaries, provided the initial capitalization of BAM through the purchase of $503.0 million of surplus notes issued by BAM (the “BAM Surplus Notes”).
As of September 30, 2019, $481.3 million of the surplus notes remain outstanding. As of September 30, 2019 and December 31, 2018, 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 wholly-owned 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 health insurance. On behalf of its insurance carrier partners, NSM 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 September 30, 2019 and December 31, 2018, White Mountains owned 96.4% and 95.5% of the basic units outstanding of NSM (88.4% and 85.0% on a fully diluted, fully converted basis). See Note 2 — “Significant Transactions”.
The Kudu segment consists of Kudu Investment Management, LLC (“Kudu”), a capital provider to global asset management and wealth management firms. Kudu specializes in providing capital solutions to asset managers and registered investment advisers for 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 long-term or permanent revenue shares that generate cash yields and have additional upside equity participation. On April 4, 2019, White Mountains completed its acquisition of the ownership interests in Kudu (the “Kudu Transaction”) held by certain funds managed by Oaktree Capital Management, L.P. (“Oaktree”). In addition, White Mountains assumed all of Oaktree’s unfunded capital commitments to Kudu, increasing White Mountains’s total capital commitment to $250 million, of which $28.1 million is unfunded as of September 30, 2019. 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.
The MediaAlpha segment consisted of QL Holdings LLC and its wholly-owned subsidiary QuoteLab, LLC (collectively “MediaAlpha”). MediaAlpha is a marketing technology company that enables the programmatic buying and selling of vertical-specific, performance-based media between advertisers (buyers of advertising inventory) and publishers (sellers of advertising inventory). MediaAlpha operates in insurance and non-insurance verticals and uses cost-per-click, cost-per-call and cost-per-lead pricing models. MediaAlpha’s media buying platform enables advertisers to create and automate data-driven bidding strategies designed to improve the efficiency and enhance overall performance of their marketing campaigns that target high-intent consumers at the time and place they are ready to purchase. MediaAlpha’s publisher platform is used by publishers to sell their media to advertisers through transparent, programmatic, auction-based marketplaces. 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 “MediaAlpha Transaction”). White Mountains deconsolidated MediaAlpha as a result of the MediaAlpha Transaction. White Mountains’s consolidated statement of comprehensive income and its segment disclosures include MediaAlpha’s results of operations through the date of the MediaAlpha Transaction. See Note 2 — “Significant Transactions”.
The Other Operations segment consists of the Company and its wholly-owned subsidiary, White Mountains Capital, Inc. (“WM Capital”), its intermediate holding companies, its wholly-owned investment management subsidiary, White Mountains Advisors LLC (“WM Advisors”), investment assets managed by WM Advisors, its interests in PassportCard Limited (“PassportCard”) and DavidShield Life Insurance Agency (2000) Ltd. (“DavidShield”) (collectively, “PassportCard/ DavidShield”), Kudu (for periods prior to the Kudu Transaction), MediaAlpha (for periods after the MediaAlpha Transaction), and Elementum Holdings LP (“Elementum”) and certain other consolidated and unconsolidated entities and certain other strategic investments.
Discontinued Operations and Assets Held for Sale
On April 18, 2016, White Mountains completed its sale of Sirius International Insurance Group, Ltd. (“Sirius Group”) to CM International Pte. Ltd. and CM Bermuda Limited (collectively “CMI”), the Singapore-based investment arm of China Minsheng Investment Corp., Ltd. Adjustments to the gain on sale subsequent to the transaction have also been classified within discontinued operations.
White Mountains has classified its Guilford, Connecticut property, which consists of an office building and adjacent land, as held for sale as of September 30, 2019 and December 31, 2018. See Note 17 — “Held for Sale and Discontinued Operations”.
Derivatives
White Mountains holds from time to time derivative financial instruments for risk management purposes. White Mountains recognizes all derivatives as either assets or liabilities on the balance sheet measured at fair value. During the quarter ended June 30, 2018, White Mountains entered into an interest rate swap to hedge its exposure to the interest rate risk associated with the interest payments on NSM’s variable rate debt. In order to qualify for hedge accounting, a derivative instrument must be both highly effective in offsetting the exposure to the hedged risk and designated as a hedge at inception. The NSM interest rate swap meets both of these requirements and is being accounted for as a hedge. Changes in the fair value of the swap are recognized in other comprehensive income. White Mountains formally evaluates the relationship between derivatives used as hedges and the related hedged cash flows, including its risk-management objective and strategy for undertaking a hedging transaction. White Mountains assesses the effectiveness of the hedging transaction at both inception and on an ongoing basis. White Mountains may also hold foreign currency forward contracts for risk management purposes that are not designated as hedges. In these circumstances, these contracts are measured at fair value with the changes therein recognized through current period pre-tax income. See Note 7 — “Derivatives”.
Reinsurance Contracts Accounted for as Deposits
Reinsurance contracts that do not meet the risk transfer requirements necessary to be accounted for as reinsurance are accounted for using the deposit method under GAAP. BAM entered into a reinsurance contract agreement with Fidus Reinsurance Ltd. (“Fidus Re”) during the quarter ended June 30, 2018, which is accounted for using the deposit method. See Note 8 — “Municipal Bond Guarantee Insurance”. The nonrefundable consideration paid by BAM to Fidus Re is charged to financing expense within general and administrative expenses.
Restricted Cash
Cash includes amounts on hand and demand deposits with banks and other financial institutions. Cash balances that are not immediately available for general corporate purposes, including fiduciary accounts, are classified as restricted. Restricted amounts included within cash are disclosed parenthetically on the balance sheet. Amounts presented in the statement of cash flows are shown net of balances acquired and sold in the purchase or sale of White Mountains’s consolidated subsidiaries. Changes in restricted cash balances are presented as a separate caption within the operations, investing and financing activities sections of the statement of cash flows.
Significant Accounting Policies
Refer to the Notes to Consolidated Financial Statements in the Company’s 2018 Annual Report on Form 10-K for a complete discussion regarding White Mountains’s significant accounting policies.
Recently Adopted Changes in Accounting Principles
Leases
On January 1, 2019, White Mountains adopted ASU 2016-02, Leases (ASC 842), which requires lessees to recognize lease assets and liabilities on the balance sheet for both operating and financing leases, with the exception of leases with an original term of 12 months or less. White Mountains elected the optional transition method that permits prospective adoption with recognition of a cumulative effect adjustment to the opening balance of retained earnings. As a result, White Mountains has presented comparative periods prior to adoption in accordance with previous lease accounting guidance. White Mountains also elected all available practical expedients permitted under ASC 842, which allowed White Mountains to carryforward its historical lease classification and not reassess leases for the definition of a lease under the new guidance. As of January 1, 2019, White Mountains recognized $23.2 million for both the lease right-of-use assets and lease liabilities. As of September 30, 2019, White Mountains recognized $23.0 million and $23.3 million of lease right-of-use assets and lease liabilities. Adoption of ASU 2016-02 did not result in an adjustment to opening retained earnings.
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.
Revenue Recognition
On January 1, 2018, White Mountains adopted ASU 2014-09, Revenue from Contracts with Customers (ASC 606), which modifies the guidance for revenue recognition. Under ASU 2014-09, revenue is recognized at an amount that reflects the consideration to which an entity expects to be entitled once it fulfills its performance obligations under the terms of its contract with the customer. The scope of the new guidance includes agent commissions and other non-insurance revenues. Adoption of ASU 2014-09 did not have any impact on White Mountains’s financial statements.
Share-Based Compensation
On January 1, 2018, White Mountains adopted ASU 2017-09, Stock Compensation: Scope of Modification Accounting (ASC 718), which narrows the scope of transactions subject to modification accounting to changes in terms of an award that result in a change in the award’s fair value, vesting conditions or classification. Adoption of ASU 2017-09 did not have any impact on White Mountains’s financial statements.
Business Combinations
On January 1, 2018, White Mountains adopted ASU 2017-01, Business Combinations: Clarifying the Definition of a Business (ASC 805), which clarifies the definition of a business and affects the determination of whether acquisitions or disposals are accounted for as assets or as a business. Under the new guidance, when substantially all of the fair value of the assets is concentrated in a single identifiable asset or group of similar assets, it is not a business. Adoption of ASU 2017-01 did not have any impact on White Mountains’s financial statements.
Cash Flow Statement
On January 1, 2018, White Mountains adopted ASU 2016-15, Statement of Cash Flows: Classification of Certain Cash Receipts and Cash Payments (ASC 230), which addresses the classification and presentation of certain items, including debt prepayment and extinguishment costs, contingent consideration payments made after a business combination and distributions received from equity method investees, for which there was diversity in practice prior to the issuance of ASU 2016-15. Also on January 1, 2018, White Mountains adopted ASU 2016-18, Statement of Cash Flows: Restricted Cash (ASC 230), which modifies the guidance for the treatment of restricted cash amounts in the cash flow statement. The new guidance requires restricted cash to be included in the reconciliation of beginning and end-of-period amounts presented on the statement of cash flows and requires a description of the nature of the changes in restricted cash during the periods presented. Adoption of ASU 2016-15 and ASU 2016-18 did not have any impact on White Mountains’s statement of cash flows.
Financial Instruments - Recognition and Measurement
On January 1, 2018, White Mountains adopted ASU 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities (ASC 825-10), which modifies the guidance for financial instruments, including investments in equity securities. Under the new guidance, all equity securities with readily determinable fair values are required to be measured at fair value with changes therein recognized through current period earnings. In addition, the new ASU requires a qualitative assessment for equity securities without readily determinable fair values to identify impairment, and for impaired equity securities to be measured at fair value. White Mountains measures its portfolio of investment securities at fair value with changes therein recognized through current period earnings and, accordingly, adoption of ASU 2016-01 did not have any impact on White Mountains’s financial statements.
Recently Issued Accounting Pronouncements
Goodwill
In January 2017, the FASB issued ASU 2017-04, Simplifying the Test for Goodwill Impairment (ASC 350), which changes the guidance on goodwill impairment testing. Under the new guidance, the qualitative assessment of the recoverability of goodwill remains the same. However, the second step required under the existing guidance has been eliminated. Goodwill is considered impaired if the carrying value exceeds the estimated fair value. The new guidance is effective for fiscal years beginning after December 15, 2019.
Credit Losses
In June 2016, the FASB issued ASU 2016-13, Measurement of Credit Losses on Financial Instruments (ASC 326), which establishes new guidance for the recognition of credit losses for financial assets measured at amortized cost. The new ASU requires reporting entities to estimate the credit losses expected over the life of a credit exposure using historical information, current information and reasonable and supportable forecasts that affect the collectability of the financial asset. This differs from current GAAP, which delays recognition until it is probable a loss has been incurred. The new guidance is expected to accelerate recognition of credit losses. The types of assets within the scope of the new guidance include premium receivables, reinsurance recoverables and loans. ASU 2016-13 is effective for annual periods beginning after January 1, 2020, including interim periods. White Mountains measures its portfolio of investment securities at fair value with changes therein recognized through current period earnings and, accordingly, does not expect adoption to have any effect on its financial statements.
Note 2. Significant Transactions
Acquisitions
Elementum
On May 31, 2019, White Mountains acquired a 30.0% limited partnership interest in Elementum for $55.1 million (the “Elementum Transaction”). Elementum manages portfolios across a range of liquidity and risk/return profiles, including catastrophe bonds and collateralized reinsurance investments. As part of the Elementum Transaction, White Mountains also committed to invest $50.0 million in insurance-linked securities funds managed by Elementum. As of September 30, 2019, White Mountains has invested $40.0 million into three Elementun-managed funds.
White Mountains has elected to use the fair value option for its investment in Elementum. Both the investment in Elementum and the investments in insurance-linked securities funds managed by Elementum are included within other long-term investments.
NSM
On May 11, 2018, White Mountains acquired 95.0% of the basic units outstanding of NSM. 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 three months ended September 30, 2018, White Mountains recorded a purchase price adjustment of an additional $2.1 million. 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 the three months ended June 30, 2018.
On May 18, 2018, NSM acquired 100% of Fresh Insurance Services Group Limited (“Fresh Insurance”), an insurance broker that specializes in non-standard personal lines products, motor trade, and van insurance in the United Kingdom, for upfront cash consideration of $49.6 million. NSM borrowed $51.0 million as part of the transaction. During the three months ended March 31, 2019, NSM paid a purchase price adjustment of $0.7 million. The purchase price is subject to additional adjustments based upon growth in EBITDA during two earnout periods, ending in February 2020 and February 2022. 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 (“KBK”), a specialized MGU focused on the towing and transportation space, for upfront cash consideration of $60.0 million. White Mountains contributed $29.0 million and NSM borrowed $30.1 million as part of 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 the three months ended March 31, 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, which was not previously determined. During the three months ended March 31, 2019, White Mountains 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 value. The purchase price is subject to additional adjustments based upon growth in EBITDA during three earnout periods ending in December 2019, December 2020 and December 2021.
On April 1, 2019, NSM acquired 100% of Embrace Pet Insurance (“Embrace”), a nationwide provider of pet health insurance for dogs and cats, for upfront cash consideration of $71.5 million, net of cash acquired. White Mountains contributed $58.2 million to NSM and NSM borrowed $20.4 million as part of the transaction. White Mountains recognized $70.6 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 September 30, 2019.
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 16 — “Commitments and Contingencies”. White Mountains contributed $59.1 million to NSM and NSM borrowed $22.5 million as part of the transaction. White Mountains recognized $82.5 million of other intangible assets, reflecting acquisition date fair values. See Note 4 — “Goodwill and Other Intangible Assets”.
The contingent consideration earnout liabilities related to the NSM, Fresh Insurance and KBK acquisitions are subject to adjustments based upon EBITDA, EBITDA projections, and present value factors for acquired entities.
For the three and nine months ended September 30, 2019, NSM recognized pre-tax (income) expense of $(2.0) million and $5.6 million for the change in the fair value of its contingent consideration earnout liabilities. For the three months ended September 30, 2019, the change was driven by a reduction in the earnout liability related to Fresh Insurance and NSM’s other U.K.-based operations. For the nine months ended September 30, 2019, the change was driven by an increase in the earnout liability related to KBK, partially offset by a reduction in the earnout liability related to Fresh Insurance and its other U.K.-based operations.
For both the three months ended September 30, 2018 and the period from May 11, 2018 through September 30, 2018, NSM recognized pre-tax expense of $2.6 million for the change in the fair value of its contingent consideration earnout liabilities. The change was driven by an increase on the earnout liability related to Fresh Insurance and NSM’s other U.K.-based operations.
Any future adjustments to contingent consideration earnout liabilities under the agreements will also be recognized through pre-tax income.
As of September 30, 2019 and December 31, 2018, NSM recorded total contingent consideration earnout liabilities of $28.7 million and $20.2 million.
For the nine months ended September 30, 2019, NSM paid $2.6 million related to its U.K.-based operations’ contingent consideration earnout liabilities.
DavidShield
On January 24, 2018, White Mountains acquired 50% of the basic shares outstanding of 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 restructured 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% of DavidShield was $41.8 million, or $28.3 million net of the financing provided for the restructuring.
Kudu
On February 5, 2018, White Mountains entered into an agreement to fund up to $125.0 million in Kudu. As of March 31, 2019 and December 31, 2018, White Mountains owned 49.5% of the basic units outstanding of Kudu (42.7% on a fully diluted, fully converted basis).
On April 4, 2019, White Mountains completed the Kudu Transaction 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, of which $28.1 million was unfunded as of September 30, 2019. 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. White Mountains’s consolidated financial statements and its segment disclosures include Kudu’s results for the period from April 4, 2019 to September 30, 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.
Kudu closed three transactions in 2018 deploying $63.0 million, including transaction costs, of which $31.5 million was funded by White Mountains. As of September 30, 2019, Kudu has deployed a total of $221.9 million, including transaction costs, in eight investment management firms with combined assets under management of over $30 billion.
Dispositions
MediaAlpha
On February 26, 2019, MediaAlpha completed the MediaAlpha Transaction. White Mountains received net cash proceeds of $89.3 million from the MediaAlpha 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 MediaAlpha Transaction. White Mountains’s remaining ownership interest in MediaAlpha no longer meets 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. 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 March 31, 2019, 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 MediaAlpha Transaction.
Note 3. Investment Securities
White Mountains’s portfolio of investment securities held for general investment purposes consists of fixed maturity investments, short-term investments, common equity securities and other long-term investments, which are substantially all classified as trading securities. Trading securities are reported at fair value as of the balance sheet date. Net realized and unrealized investment gains (losses) on trading securities are reported in pre-tax revenues.
White Mountains’s fixed maturity investments are generally valued using industry standard pricing methodologies. Key inputs include benchmark yields, benchmark securities, reported trades, issuer spreads, bids, offers, credit ratings and prepayment speeds. Income on mortgage and asset-backed securities is recognized using an effective yield based on anticipated prepayments and the estimated economic life of the securities. When actual prepayments differ significantly from anticipated prepayments, the estimated economic life is recalculated and the remaining unamortized premium or discount is amortized prospectively over the remaining economic life.
Realized investment gains (losses) resulting from sales of investment securities are accounted for using the specific identification method. Premiums and discounts on all fixed maturity investments are amortized or accreted to income over the anticipated life of the investment. Short-term investments consist of interest-bearing money market funds, certificates of deposit and other securities, which at the time of purchase, mature or become available for use within one year. Short-term investments are carried at amortized or accreted cost, which approximated fair value as of September 30, 2019 and December 31, 2018.
Other long-term investments consist primarily of unconsolidated entities, Kudu’s investments (non-controlling equity interests in the form of revenue and earnings participations), insurance-linked securities (“ILS”) funds, private equity funds and hedge funds.
Net Investment Income
White Mountains’s net investment income is comprised primarily of interest income associated with White Mountains’s fixed maturity investments and short-term investments and dividend income from its common equity securities and other long-term investments.
The following table presents pre-tax net investment income for the three and nine months ended September 30, 2019 and 2018:
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|
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|
|
|
|
|
|
|
Three Months Ended
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Nine Months Ended
|
|
|
September 30,
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September 30,
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Millions
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|
2019
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2018
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|
2019
|
|
2018
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Fixed maturity investments
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|
$
|
8.0
|
|
|
$
|
7.5
|
|
|
$
|
24.4
|
|
|
$
|
27.3
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|
Short-term investments
|
|
1.3
|
|
|
1.8
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|
|
3.9
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|
|
6.5
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|
Common equity securities
|
|
2.5
|
|
|
3.4
|
|
|
10.8
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|
|
11.2
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|
Other long-term investments
|
|
7.0
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|
|
1.2
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|
|
17.4
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|
|
1.7
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|
Total investment income
|
|
18.8
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|
|
13.9
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|
|
56.5
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|
|
46.7
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Third-party investment expenses
|
|
(.4
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)
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|
(.5
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)
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|
(1.1
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)
|
|
(1.8
|
)
|
Net investment income, pre-tax
|
|
$
|
18.4
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|
|
$
|
13.4
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|
|
$
|
55.4
|
|
|
$
|
44.9
|
|
Net Realized and Unrealized Investment Gains (Losses)
The following table presents net realized and unrealized investment gains (losses) for the three and nine months ended September 30, 2019 and 2018:
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|
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|
|
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Three Months Ended
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|
Nine Months Ended
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|
|
September 30,
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|
September 30,
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Millions
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|
2019
|
|
2018
|
|
2019
|
|
2018
|
Net realized investment gains (losses), pre-tax (1)
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|
$
|
19.6
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|
|
$
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(10.2
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)
|
|
$
|
90.8
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|
|
$
|
(13.9
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)
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Net unrealized investment gains, pre-tax (2)
|
|
47.4
|
|
|
76.3
|
|
|
257.0
|
|
|
36.8
|
|
Net realized and unrealized investment gains, pre-tax
|
|
67.0
|
|
|
66.1
|
|
|
347.8
|
|
|
22.9
|
|
Income tax expense attributable to net realized
and unrealized investment gains
|
|
(13.2
|
)
|
|
(9.7
|
)
|
|
(69.5
|
)
|
|
(5.9
|
)
|
Net realized and unrealized investment gains, after-tax
|
|
$
|
53.8
|
|
|
$
|
56.4
|
|
|
$
|
278.3
|
|
|
$
|
17.0
|
|
(1) Excludes $67.5 realized gain associated with the MediaAlpha Transaction, which is recorded in a separate line item in the statement of operations titled realized gain and unrealized investment gain from the MediaAlpha Transaction. See Note 2 — “Significant Transactions.”
(2) Includes $114.7 unrealized investment gain associated with the MediaAlpha Transaction, which is recorded in a separate line item in the statement of operations titled realized gain and unrealized investment gain from the MediaAlpha Transaction. See Note 2 — “Significant Transactions.”
For the three and nine months ended September 30, 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.
Net Realized Investment Gains (Losses)
The following tables present net realized investment gains (losses) for the three and nine months ended September 30, 2019 and 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Three Months Ended
|
|
|
September 30, 2019
|
|
September 30, 2018
|
Millions
|
|
Net
Realized Gains
|
|
Net
Foreign
Exchange Gains (Losses)
|
|
Total Net Realized
Gains
Reflected in
Earnings
|
|
Net
Realized Losses
|
|
Net
Foreign
Exchange Gains (Losses)
|
|
Total Net Realized
Losses
Reflected in
Earnings
|
Fixed maturity investments
|
|
$
|
1.4
|
|
|
$
|
—
|
|
|
$
|
1.4
|
|
|
$
|
(5.1
|
)
|
|
$
|
—
|
|
|
$
|
(5.1
|
)
|
Common equity securities
|
|
14.0
|
|
|
—
|
|
|
14.0
|
|
|
(1.5
|
)
|
|
—
|
|
|
(1.5
|
)
|
Other long-term investments
|
|
4.2
|
|
|
—
|
|
|
4.2
|
|
|
(3.6
|
)
|
|
—
|
|
|
(3.6
|
)
|
Net realized investment gains (losses),
pre-tax
|
|
19.6
|
|
|
—
|
|
|
19.6
|
|
|
(10.2
|
)
|
|
—
|
|
|
(10.2
|
)
|
Income tax (expense) benefit attributable
to net realized investment gains (losses)
|
|
(.2
|
)
|
|
—
|
|
|
(.2
|
)
|
|
2.3
|
|
|
—
|
|
|
2.3
|
|
Net realized investment gains (losses),
after-tax
|
|
$
|
19.4
|
|
|
$
|
—
|
|
|
$
|
19.4
|
|
|
$
|
(7.9
|
)
|
|
$
|
—
|
|
|
$
|
(7.9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
Nine Months Ended
|
|
|
September 30, 2019
|
|
September 30, 2018
|
Millions
|
|
Net
Realized Gains
|
|
Net
Foreign
Exchange Gains (Losses)
|
|
Total Net Realized
Gains
Reflected in
Earnings
|
|
Net
Realized (Losses) Gains
|
|
Net
Foreign
Exchange Gains (Losses)
|
|
Total Net Realized
(Losses) Gains
Reflected in
Earnings
|
Fixed maturity investments
|
|
$
|
3.5
|
|
|
$
|
—
|
|
|
$
|
3.5
|
|
|
$
|
(27.6
|
)
|
|
$
|
18.2
|
|
|
$
|
(9.4
|
)
|
Short-term investments
|
|
.1
|
|
|
—
|
|
|
.1
|
|
|
(.8
|
)
|
|
—
|
|
|
(.8
|
)
|
Common equity securities
|
|
81.4
|
|
|
—
|
|
|
81.4
|
|
|
10.5
|
|
|
—
|
|
|
10.5
|
|
Other long-term investments (1)
|
|
5.8
|
|
|
—
|
|
|
5.8
|
|
|
(7.0
|
)
|
|
(7.2
|
)
|
|
(14.2
|
)
|
Net realized investment gains (losses),
pre-tax
|
|
90.8
|
|
|
—
|
|
|
90.8
|
|
|
(24.9
|
)
|
|
11.0
|
|
|
(13.9
|
)
|
Income tax (expense) benefit attributable
to net realized investment gains (losses)
|
|
(9.0
|
)
|
|
—
|
|
|
(9.0
|
)
|
|
11.2
|
|
|
—
|
|
|
11.2
|
|
Net realized investment gains (losses),
after-tax
|
|
$
|
81.8
|
|
|
$
|
—
|
|
|
$
|
81.8
|
|
|
$
|
(13.7
|
)
|
|
$
|
11.0
|
|
|
$
|
(2.7
|
)
|
(1) Excludes $67.5 realized gain associated with the MediaAlpha Transaction, which is recorded in a separate line item in the statement of operations titled realized gain and unrealized investment gain from the MediaAlpha Transaction. See Note 2 — “Significant Transactions.”
Net Unrealized Investment Gains (Losses)
The following tables present net unrealized investment gains (losses) and changes in the carrying value of investments measured at fair value for the three and nine months ended September 30, 2019 and 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Three Months Ended
|
|
|
September 30, 2019
|
|
September 30, 2018
|
Millions
|
|
Net
Unrealized Gains (Losses)
|
|
Net
Foreign
Exchange (Losses)
|
|
Total Net Unrealized Gains (Losses)
Reflected in
Earnings
|
|
Net
Unrealized Gains (Losses)
|
|
Net
Foreign
Exchange (Losses)
|
|
Total Net Unrealized
Gains (Losses)
Reflected in
Earnings
|
Fixed maturity investments
|
|
$
|
7.5
|
|
|
$
|
—
|
|
|
$
|
7.5
|
|
|
$
|
1.5
|
|
|
$
|
—
|
|
|
$
|
1.5
|
|
Short-term investments
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(.1
|
)
|
|
—
|
|
|
(.1
|
)
|
Common equity securities
|
|
(11.6
|
)
|
|
—
|
|
|
(11.6
|
)
|
|
54.9
|
|
|
—
|
|
|
54.9
|
|
Other long-term investments
|
|
52.3
|
|
|
(.8
|
)
|
|
51.5
|
|
|
20.1
|
|
|
(.1
|
)
|
|
20.0
|
|
Net unrealized investment gains
(losses), pre-tax
|
|
48.2
|
|
|
(.8
|
)
|
|
47.4
|
|
|
76.4
|
|
|
(.1
|
)
|
|
76.3
|
|
Income tax expense
attributable to net unrealized
investment gains
|
|
(13.0
|
)
|
|
—
|
|
|
(13.0
|
)
|
|
(12.0
|
)
|
|
—
|
|
|
(12.0
|
)
|
Net unrealized investment gains
(losses), after-tax
|
|
$
|
35.2
|
|
|
$
|
(.8
|
)
|
|
$
|
34.4
|
|
|
$
|
64.4
|
|
|
$
|
(.1
|
)
|
|
$
|
64.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
Nine Months Ended
|
|
|
September 30, 2019
|
|
September 30, 2018
|
Millions
|
|
Net
Unrealized Gains
|
|
Net
Foreign
Exchange (Losses)
|
|
Total Net Unrealized Gains
Reflected in
Earnings
|
|
Net
Unrealized (Losses) Gains
|
|
Net
Foreign
Exchange (Losses)
Gains
|
|
Total Net Unrealized (Losses)
Gains
Reflected in
Earnings
|
Fixed maturity investments
|
|
$
|
43.4
|
|
|
$
|
—
|
|
|
$
|
43.4
|
|
|
$
|
(15.7
|
)
|
|
$
|
(14.8
|
)
|
|
$
|
(30.5
|
)
|
Short-term investments
|
|
.2
|
|
|
—
|
|
|
.2
|
|
|
(.1
|
)
|
|
—
|
|
|
(.1
|
)
|
Common equity securities
|
|
60.1
|
|
|
—
|
|
|
60.1
|
|
|
43.7
|
|
|
—
|
|
|
43.7
|
|
Other long-term investments(1)
|
|
154.1
|
|
|
(.8
|
)
|
|
153.3
|
|
|
20.5
|
|
|
3.2
|
|
|
23.7
|
|
Net unrealized investment gains
(losses), pre-tax
|
|
257.8
|
|
|
(.8
|
)
|
|
257.0
|
|
|
48.4
|
|
|
(11.6
|
)
|
|
36.8
|
|
Income tax expense
attributable to net unrealized
investment gains
|
|
(60.5
|
)
|
|
—
|
|
|
(60.5
|
)
|
|
(17.1
|
)
|
|
—
|
|
|
(17.1
|
)
|
Net unrealized investment gains
(losses), after-tax
|
|
$
|
197.3
|
|
|
$
|
(.8
|
)
|
|
$
|
196.5
|
|
|
$
|
31.3
|
|
|
$
|
(11.6
|
)
|
|
$
|
19.7
|
|
(1) Includes $114.7 unrealized investment gain associated with the MediaAlpha Transaction, which is recorded in a separate line item in the statement of operations titled realized gain and unrealized investment gain from the MediaAlpha Transaction. See Note 2 — “Significant Transactions.”
The following table presents total gains (losses) included in earnings attributable to net unrealized investment gains (losses) for Level 3 investments for the three and nine months ended September 30, 2019 and 2018 for investments held at September 30, 2019 and 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
Nine Months Ended
|
|
|
September 30,
|
September 30,
|
Millions
|
|
2019
|
|
2018
|
2019
|
|
2018
|
Other long-term investments
|
|
$
|
54.4
|
|
|
$
|
4.0
|
|
$
|
154.4
|
|
|
$
|
2.1
|
|
Total net unrealized investment gains, pre-tax - Level 3 investments
|
|
$
|
54.4
|
|
|
$
|
4.0
|
|
$
|
154.4
|
|
|
$
|
2.1
|
|
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 September 30, 2019 and December 31, 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2019
|
Millions
|
|
Cost or
Amortized
Cost
|
|
Gross
Unrealized
Gains
|
|
Gross
Unrealized
Losses
|
|
Carrying
Value
|
U.S. Government and agency obligations
|
|
$
|
196.3
|
|
|
$
|
1.3
|
|
|
$
|
—
|
|
|
$
|
197.6
|
|
Debt securities issued by corporations
|
|
449.5
|
|
|
13.8
|
|
|
(.1
|
)
|
|
463.2
|
|
Municipal obligations
|
|
292.4
|
|
|
15.7
|
|
|
(.1
|
)
|
|
308.0
|
|
Mortgage and asset-backed securities
|
|
195.0
|
|
|
2.5
|
|
|
(.3
|
)
|
|
197.2
|
|
Total fixed maturity investments
|
|
$
|
1,133.2
|
|
|
$
|
33.3
|
|
|
$
|
(.5
|
)
|
|
$
|
1,166.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2018
|
Millions
|
|
Cost or
Amortized
Cost
|
|
Gross
Unrealized
Gains
|
|
Gross
Unrealized
Losses
|
|
Carrying
Value
|
U.S. Government and agency obligations
|
|
$
|
154.0
|
|
|
$
|
.1
|
|
|
$
|
(.9
|
)
|
|
$
|
153.2
|
|
Debt securities issued by corporations
|
|
519.0
|
|
|
1.0
|
|
|
(9.5
|
)
|
|
510.5
|
|
Municipal obligations
|
|
279.0
|
|
|
2.4
|
|
|
(1.1
|
)
|
|
280.3
|
|
Mortgage and asset-backed securities
|
|
136.1
|
|
|
.1
|
|
|
(2.7
|
)
|
|
133.5
|
|
Total fixed maturity investments
|
|
$
|
1,088.1
|
|
|
$
|
3.6
|
|
|
$
|
(14.2
|
)
|
|
$
|
1,077.5
|
|
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 common equity securities and other long-term investments as of September 30, 2019 and December 31, 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2019
|
Millions
|
|
Cost or
Amortized
Cost
|
|
Gross
Unrealized
Gains
|
|
Gross
Unrealized
Losses
|
|
Net Foreign
Currency
Losses
|
|
Carrying
Value
|
Common equity securities
|
|
$
|
548.8
|
|
|
$
|
80.9
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
629.7
|
|
Other long-term investments
|
|
$
|
619.5
|
|
|
$
|
222.8
|
|
|
$
|
(65.9
|
)
|
|
$
|
(2.7
|
)
|
|
$
|
773.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2018
|
Millions
|
|
Cost or
Amortized
Cost
|
|
Gross
Unrealized
Gains
|
|
Gross
Unrealized
Losses
|
|
Net Foreign
Currency
Losses
|
|
Carrying
Value
|
Common equity securities
|
|
$
|
904.7
|
|
|
$
|
51.0
|
|
|
$
|
(30.1
|
)
|
|
$
|
—
|
|
|
$
|
925.6
|
|
Other long-term investments
|
|
$
|
330.3
|
|
|
$
|
52.2
|
|
|
$
|
(54.9
|
)
|
|
$
|
(2.0
|
)
|
|
$
|
325.6
|
|
Other Long-Term Investments
The following table presents the carrying values of White Mountains’s other long-term investments as of September 30, 2019 and December 31, 2018:
|
|
|
|
|
|
|
|
|
|
|
|
Carrying Value at
|
Millions
|
|
September 30, 2019
|
|
December 31, 2018
|
Kudu investments (1)(2)
|
|
$
|
219.3
|
|
|
$
|
—
|
|
MediaAlpha (1)(3)
|
|
150.0
|
|
|
—
|
|
PassportCard/DavidShield (1)
|
|
90.0
|
|
|
75.0
|
|
Elementum (1)
|
|
55.1
|
|
|
—
|
|
Other unconsolidated entities (1)(4)
|
|
39.5
|
|
|
60.0
|
|
Kudu (5)
|
|
—
|
|
|
30.7
|
|
Total unconsolidated entities (1)
|
|
553.9
|
|
|
165.7
|
|
Private equity funds and hedge funds
|
|
145.5
|
|
|
146.1
|
|
Insurance-linked securities funds
|
|
41.4
|
|
|
—
|
|
Other
|
|
32.9
|
|
|
13.8
|
|
Total other long-term investments
|
|
$
|
773.7
|
|
|
$
|
325.6
|
|
(1) See Fair Value Measurements by Level table.
(2) Includes Kudu’s non-controlling equity interests in the form of revenue and earnings participations. As of September 30, 2019 White Mountains consolidates Kudu. See Note 2 — “Significant Transactions”.
(3) The MediaAlpha Transaction was completed on February 26, 2019. See Note 2 — “Significant Transactions”.
(4) Includes White Mountains’s non-controlling interests in certain private common equity securities, limited liability companies and convertible preferred securities.
(5) Includes White Mountains non-controlling interest in Kudu prior to consolidation. See Note 2 — “Significant Transactions”.
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 September 30, 2019, White Mountains held investments in twelve private equity funds and one hedge fund. The largest investment in a single fund was $54.9 million as of September 30, 2019 and $54.3 million as of December 31, 2018.
The following table presents investments and unfunded commitments in private equity funds and hedge funds by investment objective and sector as of September 30, 2019 and December 31, 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2019
|
|
December 31, 2018
|
Millions
|
|
Fair Value
|
|
Unfunded
Commitments
|
|
Fair Value
|
|
Unfunded
Commitments
|
Private equity funds
|
|
|
|
|
|
|
|
|
|
|
|
|
Manufacturing/Industrial
|
|
$
|
45.3
|
|
|
$
|
4.1
|
|
|
$
|
42.9
|
|
|
$
|
10.5
|
|
Aerospace/Defense/Government
|
|
32.9
|
|
|
24.5
|
|
|
27.6
|
|
|
34.9
|
|
Financial services
|
|
12.4
|
|
|
26.2
|
|
|
8.3
|
|
|
13.6
|
|
Direct lending
|
|
—
|
|
|
—
|
|
|
13.0
|
|
|
17.7
|
|
Total private equity funds
|
|
90.6
|
|
|
54.8
|
|
|
91.8
|
|
|
76.7
|
|
Hedge funds
|
|
|
|
|
|
|
|
|
|
|
|
|
Long/short banks and financials
|
|
54.9
|
|
|
—
|
|
|
54.3
|
|
|
—
|
|
Total hedge funds
|
|
54.9
|
|
|
—
|
|
|
54.3
|
|
|
—
|
|
Total private equity funds and hedge funds
included in other long-term investments
|
|
$
|
145.5
|
|
|
$
|
54.8
|
|
|
$
|
146.1
|
|
|
$
|
76.7
|
|
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 September 30, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
Millions
|
|
1 – 3 years
|
|
3 – 5 years
|
|
5 – 10 years
|
|
>10 years
|
|
Total
|
Private equity funds — expected lock-up period remaining
|
|
$5.4
|
|
$16.5
|
|
$56.3
|
|
$12.4
|
|
$90.6
|
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 September 30, 2019 and December 31, 2018, 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. As of September 30, 2019, White Mountains held one active hedge fund with a fair value of $54.9 million. The hedge fund is subject to a semi-annual restriction on redemptions and an advance notice period requirement of 45 days.
Insurance-Linked Securities Funds
White Mountains’s other long-term investments include insurance-linked securities (“ILS”) funds. The fair value of these investments are generally estimated using the NAV of the funds. As of September 30, 2019, White Mountains held investments in three ILS funds with a fair value of $41.4 million. Investments in ILS funds are generally subject to restrictions, including lock-up periods where no redemption or withdrawal are allowed, 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 an ILS fund less certain due to the potential for loss development. In such circumstances, the impacted investments may be subject to additional lock-up provisions.
As of September 30, 2019, White Mountains holds one ILS fund subject to a lock-up period that expires on June 1, 2020. White Mountains’s ILS funds are subject to monthly and annual restrictions on redemptions and advance redemption notice period requirements that range between 30 and 90 days. 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.
Fair Value Measurements as of September 30, 2019
Fair value measurements are categorized into a hierarchy that distinguishes between inputs based on market data from independent sources (“observable inputs”) and a reporting entity’s internal assumptions based upon the best information available when external market data is limited or unavailable (“unobservable inputs”). Quoted prices in active markets for identical assets or liabilities have the highest priority (“Level 1”), followed by observable inputs other than quoted prices, including prices for similar but not identical assets or liabilities (“Level 2”) and unobservable inputs, including the reporting entity’s estimates of the assumptions that market participants would use, having the lowest priority (“Level 3”). As of September 30, 2019 and December 31, 2018, White Mountains used quoted market prices or other observable inputs to determine fair value for approximately 73% and 87% of the investment portfolio.
Fair Value Measurements by Level
The following tables present White Mountains’s fair value measurements for investments as of September 30, 2019 and December 31, 2018 by level. The major security types were based on the legal form of the securities. White Mountains has disaggregated its fixed maturity investments based on the issuing entity type, which impacts credit quality, with debt securities issued by U.S. government entities carrying minimal credit risk, while the credit and other risks associated with other issuers, such as corporations, foreign governments, municipalities or entities issuing mortgage and asset-backed securities vary depending on the nature of the issuing entity type. White Mountains further disaggregates debt securities issued by corporations and common equity securities by industry sector because investors often reference commonly used benchmarks and their subsectors to monitor risk and performance. Accordingly, White Mountains has further disaggregated these asset classes into subclasses based on the similar sectors and industry classifications it uses to evaluate investment risk and performance against commonly used benchmarks, such as the Bloomberg Barclays U.S. Intermediate Aggregate and S&P 500 indices.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2019
|
Millions
|
|
Fair Value
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
Fixed maturity investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government and agency obligations
|
|
$
|
197.6
|
|
|
$
|
197.6
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
Debt securities issued by corporations:
|
|
|
|
|
|
|
|
|
|
Financials
|
|
143.3
|
|
|
—
|
|
|
143.3
|
|
|
—
|
|
Industrial
|
|
60.5
|
|
|
—
|
|
|
60.5
|
|
|
—
|
|
Healthcare
|
|
55.0
|
|
|
—
|
|
|
55.0
|
|
|
—
|
|
Consumer
|
|
49.3
|
|
|
—
|
|
|
49.3
|
|
|
—
|
|
Energy
|
|
45.0
|
|
|
—
|
|
|
45.0
|
|
|
—
|
|
Technology
|
|
44.5
|
|
|
—
|
|
|
44.5
|
|
|
—
|
|
Communications
|
|
27.1
|
|
|
—
|
|
|
27.1
|
|
|
—
|
|
Utilities
|
|
22.3
|
|
|
—
|
|
|
22.3
|
|
|
—
|
|
Materials
|
|
16.2
|
|
|
—
|
|
|
16.2
|
|
|
—
|
|
Total debt securities issued by corporations
|
|
463.2
|
|
|
—
|
|
|
463.2
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Mortgage and asset-backed securities
|
|
197.2
|
|
|
—
|
|
|
197.2
|
|
|
—
|
|
Municipal obligations
|
|
308.0
|
|
|
—
|
|
|
308.0
|
|
|
—
|
|
Total fixed maturity investments
|
|
1,166.0
|
|
|
197.6
|
|
|
968.4
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Short-term investments (1)
|
|
272.5
|
|
|
261.0
|
|
|
11.5
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Common equity securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Exchange traded funds (2)
|
|
519.7
|
|
|
506.1
|
|
|
13.6
|
|
|
—
|
|
Other (3)
|
|
110.0
|
|
|
—
|
|
|
110.0
|
|
|
—
|
|
Total common equity securities
|
|
629.7
|
|
|
506.1
|
|
|
123.6
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Other long-term investments
|
|
586.8
|
|
|
—
|
|
|
—
|
|
|
586.8
|
|
Other long-term investments — NAV (4)
|
|
186.9
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Total investments
|
|
$
|
2,841.9
|
|
|
$
|
964.7
|
|
|
$
|
1,103.5
|
|
|
$
|
586.8
|
|
(1) Short-term investments are measured at amortized cost, which approximates fair value.
(2) ETFs traded on foreign exchanges are priced using the fund’s published NAV to account for the difference in market close times and are therefore designated a level 2 measurement.
(3) Consists of two investments in unit trusts that primarily invest in international equities.
(4) Consists of private equity funds, one hedge fund and 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, 2018
|
Millions
|
|
Fair Value
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
Fixed maturity investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government and agency obligations
|
|
$
|
153.2
|
|
|
$
|
153.2
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
Debt securities issued by corporations:
|
|
|
|
|
|
|
|
|
|
|
|
|
Financials
|
|
143.4
|
|
|
—
|
|
|
143.4
|
|
|
—
|
|
Consumer
|
|
68.5
|
|
|
—
|
|
|
68.5
|
|
|
—
|
|
Technology
|
|
60.5
|
|
|
—
|
|
|
60.5
|
|
|
—
|
|
Energy
|
|
57.6
|
|
|
—
|
|
|
57.6
|
|
|
—
|
|
Healthcare
|
|
55.0
|
|
|
—
|
|
|
55.0
|
|
|
—
|
|
Industrial
|
|
47.6
|
|
|
—
|
|
|
47.6
|
|
|
—
|
|
Communications
|
|
31.8
|
|
|
—
|
|
|
31.8
|
|
|
—
|
|
Materials
|
|
26.3
|
|
|
—
|
|
|
26.3
|
|
|
—
|
|
Utilities
|
|
19.8
|
|
|
—
|
|
|
19.8
|
|
|
—
|
|
Total debt securities issued by corporations
|
|
510.5
|
|
|
—
|
|
|
510.5
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Mortgage and asset-backed securities
|
|
133.5
|
|
|
—
|
|
|
133.5
|
|
|
—
|
|
Municipal obligations
|
|
280.3
|
|
|
—
|
|
|
280.3
|
|
|
—
|
|
Total fixed maturity investments
|
|
1,077.5
|
|
|
153.2
|
|
|
924.3
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Short-term investments (1)
|
|
214.2
|
|
|
204.4
|
|
|
9.8
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Common equity securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Exchange traded funds (2)
|
|
675.3
|
|
|
617.0
|
|
|
58.3
|
|
|
—
|
|
Healthcare
|
|
14.0
|
|
|
14.0
|
|
|
—
|
|
|
—
|
|
Financials
|
|
13.5
|
|
|
13.5
|
|
|
—
|
|
|
—
|
|
Communications
|
|
12.7
|
|
|
12.7
|
|
|
—
|
|
|
—
|
|
Industrial
|
|
11.4
|
|
|
11.4
|
|
|
—
|
|
|
—
|
|
Technology
|
|
7.4
|
|
|
7.4
|
|
|
—
|
|
|
—
|
|
Consumer
|
|
6.2
|
|
|
6.2
|
|
|
—
|
|
|
—
|
|
Energy
|
|
4.1
|
|
|
4.1
|
|
|
—
|
|
|
—
|
|
Materials
|
|
3.1
|
|
|
3.1
|
|
|
—
|
|
|
—
|
|
Other (3)
|
|
177.9
|
|
|
—
|
|
|
177.9
|
|
|
—
|
|
Total common equity securities
|
|
925.6
|
|
|
689.4
|
|
|
236.2
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Other long-term investments
|
|
138.7
|
|
|
—
|
|
|
—
|
|
|
138.7
|
|
Other long-term investments — NAV (4)
|
|
186.9
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Total investments
|
|
$
|
2,542.9
|
|
|
$
|
1,047.0
|
|
|
$
|
1,170.3
|
|
|
$
|
138.7
|
|
(1) Short-term investments are measured at amortized cost, which approximates fair value.
(2) ETFs traded on foreign exchanges are priced using the fund’s published NAV to account for the difference in market close times and are therefore designated a level 2 measurement.
(3) Consists of two investments in unit trusts that primarily invest in international equities.
(4) Consists of unconsolidated entities, private equity funds and one hedge fund 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.
Debt Securities Issued by Corporations
The following table presents the ratings of debt securities issued by corporations held in White Mountains’s investment portfolio as of September 30, 2019 and December 31, 2018:
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value at
|
Millions
|
|
September 30, 2019
|
|
December 31, 2018
|
AAA
|
|
$
|
9.9
|
|
|
$
|
8.9
|
|
AA
|
|
79.9
|
|
|
88.7
|
|
A
|
|
286.7
|
|
|
270.5
|
|
BBB
|
|
86.7
|
|
|
142.4
|
|
Debt securities issued by corporations (1)
|
|
$
|
463.2
|
|
|
$
|
510.5
|
|
|
|
(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 September 30, 2019 and December 31, 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2019
|
|
December 31, 2018
|
Millions
|
|
Fair Value
|
|
Level 2
|
|
Level 3
|
|
Fair Value
|
|
Level 2
|
|
Level 3
|
Mortgage-backed securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agency:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FNMA
|
|
$
|
79.8
|
|
|
$
|
79.8
|
|
|
$
|
—
|
|
|
$
|
53.6
|
|
|
$
|
53.6
|
|
|
$
|
—
|
|
FHLMC
|
|
53.5
|
|
|
53.5
|
|
|
—
|
|
|
38.1
|
|
|
38.1
|
|
|
$
|
—
|
|
GNMA
|
|
33.5
|
|
|
33.5
|
|
|
—
|
|
|
23.7
|
|
|
23.7
|
|
|
$
|
—
|
|
Total agency (1)
|
|
166.8
|
|
|
166.8
|
|
|
—
|
|
|
115.4
|
|
|
115.4
|
|
|
—
|
|
Total mortgage-backed securities
|
|
166.8
|
|
|
166.8
|
|
|
—
|
|
|
115.4
|
|
|
115.4
|
|
|
—
|
|
Other asset-backed securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vehicle receivables
|
|
16.5
|
|
|
16.5
|
|
|
—
|
|
|
9.2
|
|
|
9.2
|
|
|
—
|
|
Credit card receivables
|
|
13.9
|
|
|
13.9
|
|
|
—
|
|
|
8.9
|
|
|
8.9
|
|
|
—
|
|
Total other asset-backed securities
|
|
30.4
|
|
|
30.4
|
|
|
—
|
|
|
18.1
|
|
|
18.1
|
|
|
—
|
|
Total mortgage and asset-backed securities
|
|
$
|
197.2
|
|
|
$
|
197.2
|
|
|
$
|
—
|
|
|
$
|
133.5
|
|
|
$
|
133.5
|
|
|
$
|
—
|
|
|
|
(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).
|
Rollforward of Fair Value Measurements by Level
White Mountains uses quoted market prices where available as the inputs to estimate fair value for its investments in active markets. Such measurements are considered to be either Level 1 or Level 2 measurements, depending on whether the quoted market price inputs are for identical securities (Level 1) or similar securities (Level 2). Level 3 measurements for fixed maturity investments, common equity securities and other long-term investments as of September 30, 2019 and 2018 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 three months ended September 30, 2019 and 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 3
Investments
|
Unconsolidated Entities, Private Equity Funds, Hedge Funds and ILS Funds Measured at NAV (3)(5)
|
|
|
|
Millions
|
Level 1 Investments
|
Level 2
Investments
|
Other Long-term
Investments(2)(5)(6)
|
|
Total
|
|
Balance at December 31, 2018
|
$
|
842.6
|
|
$
|
1,160.5
|
|
$
|
138.7
|
|
$
|
186.9
|
|
|
$
|
2,328.7
|
|
(1)
|
Net realized and unrealized gains
|
121.8
|
|
66.6
|
|
154.2
|
|
4.9
|
|
|
347.5
|
|
(2,4)
|
Amortization/Accretion
|
.2
|
|
(1.2
|
)
|
—
|
|
—
|
|
|
(1.0
|
)
|
|
Purchases
|
101.4
|
|
331.3
|
|
211.3
|
|
106.4
|
|
|
750.4
|
|
(6)
|
Sales
|
(362.3
|
)
|
(465.2
|
)
|
—
|
|
(28.7
|
)
|
|
(856.2
|
)
|
|
Transfers in
|
—
|
|
—
|
|
82.6
|
|
—
|
|
|
82.6
|
|
|
Transfers out
|
—
|
|
—
|
|
—
|
|
(82.6
|
)
|
|
(82.6
|
)
|
|
Balance at September 30, 2019
|
$
|
703.7
|
|
$
|
1,092.0
|
|
$
|
586.8
|
|
$
|
186.9
|
|
|
$
|
2,569.4
|
|
(1)
|
(1) Excludes carrying value of $272.5 million and $214.2 as of September 30, 2019 and December 31, 2018 classified as short-term investments.
(2) Includes $114.7 unrealized investment gain associated with the MediaAlpha Transaction, which is recorded in a separate line item in the statement of operations titled realized gain and unrealized investment gain from the MediaAlpha Transaction. See Note 2 — “Significant Transactions”.
(3) Investments for which fair value is measured at NAV using the practical expedient are no longer classified within the fair value hierarchy. See Note 1 — “Basis of Presentation and Significant Accounting Policies”.
(4) Excludes realized and unrealized losses associated with short-term investments of $0.3 for the nine months ended September 30, 2019.
(5) Transfers include $71.7 associated with the Kudu Transaction. See Note 2 — “Significant Transactions”.
(6) Purchases include $70.1 associated with the Kudu Transaction. See Note 2 — “Significant Transactions”.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 3
Investments
|
Unconsolidated Entities, Private Equity Funds, and Hedge Funds, Measured at NAV (3)
|
|
|
Millions
|
Level 1 Investments
|
Level 2
Investments
|
Other Long-term
Investments
|
Total
|
|
Balance at December 31, 2017
|
$
|
890.4
|
|
$
|
2,105.4
|
|
$
|
77.2
|
|
$
|
135.3
|
|
$
|
3,208.3
|
|
(1)(2)
|
Net realized and unrealized gains (losses)
|
51.9
|
|
(33.6
|
)
|
(5.3
|
)
|
18.3
|
|
31.3
|
|
(4)
|
Amortization/Accretion
|
.1
|
|
(2.3
|
)
|
—
|
|
—
|
|
(2.2
|
)
|
|
Purchases
|
412.6
|
|
673.5
|
|
55.1
|
|
10.7
|
|
1,151.9
|
|
|
Sales
|
(457.6
|
)
|
(1,565.0
|
)
|
—
|
|
(1.6
|
)
|
(2,024.2
|
)
|
|
Transfers in
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
|
Transfers out
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
|
Balance at September 30, 2018
|
$
|
897.4
|
|
$
|
1,178.0
|
|
$
|
127.0
|
|
$
|
162.7
|
|
$
|
2,365.1
|
|
(1)
|
(1) Excludes carrying value of $313.7 and $176.1 as of September 30, 2018 and December 31, 2017 classified as short-term investments.
(2) Excludes carrying value of $(3.7) as of December 31, 2017 associated with foreign currency forward contracts.
(3) Investments for which fair value is measured at NAV using the practical expedient are no longer classified within the fair value hierarchy. See Note 1 — “Basis of Presentation and Significant Accounting Policies”.
(4) Excludes realized and unrealized losses associated with foreign currency forward contracts, foreign currency on cash and open trades and short-term investments of $3.5, $4.2 and $0.7 for the nine months ended September 30, 2018.
Fair Value Measurements — Transfers Between Levels - Nine-months ended September 30, 2019 and 2018
Transfers between levels are recorded using the fair value measurement as of the end of the quarterly period in which the event or change in circumstance giving rise to the transfer occurred.
During the first nine months of 2019 and 2018, 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 the first nine months of 2019 and 2018, 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.
Significant Unobservable Inputs
The following tables present significant unobservable inputs used in estimating the fair value of other long-term investments, other than private equity funds, hedge funds and ILS funds, classified within Level 3 as of September 30, 2019 and December 31, 2018. The fair value of investments in private equity funds, hedge funds and ILS funds are generally estimated using the NAV of the funds.
|
|
|
|
|
|
|
|
|
|
$ in Millions
|
|
September 30, 2019
|
Description
|
|
Valuation Technique(s)
|
|
Fair Value (1)
|
|
Unobservable Inputs
|
|
|
|
|
|
|
Discount Rate
|
|
Terminal revenue exit multiple (x) or terminal revenue growth rate (%)
|
Kudu investments
|
|
Discounted cash flow
|
|
$219.3
|
|
15% - 20%
|
|
6x - 12x
|
MediaAlpha
|
|
Discounted cash flow
|
|
$150.0
|
|
17%
|
|
4%
|
PassportCard/DavidShield
|
|
Discounted cash flow
|
|
$90.0
|
|
18%
|
|
1x
|
Private debt instruments
|
|
Discounted cash flow
|
|
$22.7
|
|
6% - 9%
|
|
N/A
|
All other
|
|
Discounted cash flow
|
|
$29.3
|
|
23%
|
|
2x - 4x
|
|
|
|
|
|
|
|
|
|
Elementum Holdings, L.P.
|
|
Price of recent transaction (2)
|
|
$55.1
|
|
Transaction price:
|
|
$55.1
|
|
|
|
|
|
|
|
|
|
Compare.com
|
|
Estimated net realizable value
|
|
$2.5
|
|
Net asset value:
|
|
$2.5
|
|
|
|
|
|
|
|
|
|
Galvanic Applied Sciences
|
|
Multiple of EBITDA
|
|
$2.7
|
|
EBITDA multiple:
|
|
6
|
(1) Includes the net unrealized investment gains (losses) associated with foreign currency; foreign currency effects based on observable inputs.
(2) The Elementum Transaction was completed on May 31, 2019. See Note 2 — “Significant Transactions”.
|
|
|
|
|
|
|
|
|
|
$ in Millions
|
|
December 31, 2018
|
Description
|
|
Valuation Technique(s)
|
|
Fair Value (1)
|
|
Unobservable Inputs
|
|
|
|
|
|
|
Discount Rate
|
|
Terminal revenue exit multiple (x)
|
PassportCard/DavidShield
|
|
Discounted cash flow
|
|
$75.0
|
|
18%
|
|
1x
|
Compare.com
|
|
Discounted cash flow
|
|
$16.9
|
|
22%
|
|
3x
|
Private debt instrument
|
|
Discounted cash flow
|
|
$10.0
|
|
9%
|
|
N/A
|
All other
|
|
Discounted cash flow
|
|
$30.0
|
|
23%
|
|
2x - 4x
|
|
|
|
|
|
|
|
|
|
Galvanic Applied Sciences
|
|
Multiple of EBITDA
|
|
$3.1
|
|
EBITDA multiple:
|
|
6
|
(1) Includes the net unrealized investment gains (losses) associated with foreign currency; foreign currency effects based on observable inputs.
Note 4. Goodwill and Other Intangible Assets
White Mountains accounts for business combinations using the acquisition method. Under the acquisition method, White Mountains recognizes and measures the assets acquired, liabilities assumed and any noncontrolling 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 a summary of the acquisition date fair values of goodwill and other intangible assets for acquisitions during the nine months ended September 30, 2019 and 2018:
|
|
|
|
|
|
|
|
$ in Millions
|
|
|
|
|
Acquisition of subsidiary/ asset
|
|
Goodwill and
Other intangible asset
|
|
Acquisition Date
|
NSM
|
|
$
|
383.0
|
|
|
May 11, 2018
|
Fresh Insurance
|
|
54.6
|
|
|
May 18, 2018
|
KBK
|
|
59.4
|
|
|
December 3, 2018
|
Embrace
|
|
70.6
|
|
(1)
|
April 1, 2019
|
Renewal Rights (2)
|
|
82.5
|
|
|
June 28, 2019
|
Total NSM segment
|
|
$
|
650.1
|
|
|
|
Kudu Transaction
|
|
$
|
9.8
|
|
|
April 4, 2019
|
Other Operations
|
|
$
|
13.1
|
|
(1)
|
March 12, 2019
|
(1) The relative fair values of goodwill and of other intangible assets recognized in connection with the acquisition of Embrace and the acquisition in Other Operations had not yet been finalized at September 30, 2019.
(2) NSM’s acquisition of the Renewal Rights was an asset purchase.
The following tables presents the change in goodwill and other intangible assets for the three and nine months ended September 30, 2019 and 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
|
2019
|
|
2018
|
Millions
|
|
Goodwill
|
|
Other Intangible Assets
|
|
Total Goodwill and Other Intangible Assets
|
|
Goodwill
|
|
Other Intangible Assets
|
|
Total Goodwill and Other Intangible Assets
|
Beginning balance
|
|
$
|
428.6
|
|
|
$
|
239.0
|
|
|
$
|
667.6
|
|
|
$
|
25.9
|
|
|
$
|
30.7
|
|
|
$
|
56.6
|
|
Attribution of acquisition date fair value estimates
between goodwill and other intangible assets
|
|
(2.2
|
)
|
|
2.2
|
|
|
—
|
|
|
295.3
|
|
|
140.9
|
|
|
436.2
|
|
Foreign currency translation
|
|
(1.6
|
)
|
|
(.5
|
)
|
|
(2.1
|
)
|
|
(1.2
|
)
|
|
(.4
|
)
|
—
|
|
(1.6
|
)
|
Adjustments to reflect acquisition date fair value
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1.4
|
|
|
—
|
|
—
|
|
1.4
|
|
Amortization
|
|
—
|
|
|
(4.6
|
)
|
|
(4.6
|
)
|
|
—
|
|
|
(7.4
|
)
|
|
(7.4
|
)
|
Ending balance
|
|
$
|
424.8
|
|
|
$
|
236.1
|
|
|
$
|
660.9
|
|
|
$
|
321.4
|
|
|
$
|
163.8
|
|
|
$
|
485.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30,
|
|
|
2019
|
|
2018
|
Millions
|
|
Goodwill
|
|
Other Intangible Assets
|
|
Total Goodwill and Other Intangible Assets
|
|
Goodwill
|
|
Other Intangible Assets
|
|
Total Goodwill and Other Intangible Assets
|
Beginning balance
|
|
$
|
379.9
|
|
|
$
|
157.6
|
|
|
$
|
537.5
|
|
|
$
|
25.9
|
|
|
$
|
36.2
|
|
|
$
|
62.1
|
|
Deconsolidation of MediaAlpha
|
|
(18.3
|
)
|
|
(23.5
|
)
|
|
(41.8
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
Attribution of acquisition date fair value estimates
between goodwill and other intangible assets
|
|
(29.0
|
)
|
|
29.0
|
|
|
—
|
|
|
295.3
|
|
|
140.9
|
|
|
436.2
|
|
Acquisitions of businesses
|
|
93.8
|
|
(1)
|
—
|
|
|
93.8
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Acquisition of collector car renewal rights
|
|
—
|
|
|
82.5
|
|
|
82.5
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Foreign currency translation
|
|
(1.6
|
)
|
|
—
|
|
|
(1.6
|
)
|
|
(1.2
|
)
|
|
(.4
|
)
|
—
|
|
(1.6
|
)
|
Adjustments to reflect acquisition date fair value
|
|
—
|
|
|
5.9
|
|
|
5.9
|
|
|
1.4
|
|
|
—
|
|
—
|
|
1.4
|
|
Amortization
|
|
—
|
|
|
(15.4
|
)
|
|
(15.4
|
)
|
|
—
|
|
|
(12.9
|
)
|
|
(12.9
|
)
|
Ending balance
|
|
$
|
424.8
|
|
|
$
|
236.1
|
|
|
$
|
660.9
|
|
|
$
|
321.4
|
|
|
$
|
163.8
|
|
|
$
|
485.2
|
|
(1) The relative fair values of goodwill and other intangible assets recognized in connection with the acquisition of Embrace and the acquisition in Other Operations had not yet been finalized at September 30, 2019.
White Mountains evaluates goodwill for potential impairment at least annually, generally in the interim period prior to the one-year anniversary of the acquisition date. An impairment of goodwill or other intangible assets occurs when the carrying value of the asset exceeds its fair value. Between annual evaluations, White Mountains considers changes in circumstances or events subsequent to the most recent evaluation that may indicate that an impairment may exist and, if necessary will perform an interim review for potential impairment. During the second quarter of 2019, White Mountains performed a periodic review of NSM’s goodwill and other intangible assets and concluded that goodwill and other intangible assets were not impaired. There have been no changes in circumstances or events for the quarterly period ended September 30, 2019 that would indicate the existence of an impairment of goodwill or other intangible assets for any acquired entity.
The following table presents the acquisition date fair values, accumulated amortization and net carrying values for other intangible assets and goodwill, by company as of September 30, 2019 and December 31, 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ in Millions
|
|
Weighted Average Economic
life
(in years)
|
|
September 30, 2019
|
|
December 31, 2018
|
|
Acquisition Date Fair Value
|
|
Accumulated Amortization
|
|
Net Carrying Value
|
|
Acquisition Date Fair Value
|
|
Accumulated Amortization
|
|
Net Carrying Value
|
Goodwill:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NSM (1)
|
|
N/A
|
|
$
|
397.0
|
|
|
$
|
—
|
|
|
$
|
397.0
|
|
|
$
|
354.3
|
|
|
$
|
—
|
|
|
$
|
354.3
|
|
Kudu
|
|
N/A
|
|
7.6
|
|
|
—
|
|
|
7.6
|
|
|
—
|
|
|
—
|
|
|
—
|
|
MediaAlpha
|
|
N/A
|
|
—
|
|
|
—
|
|
|
—
|
|
|
18.3
|
|
|
—
|
|
|
18.3
|
|
Other Operations (2)
|
|
N/A
|
|
20.2
|
|
|
—
|
|
|
20.2
|
|
|
7.3
|
|
|
—
|
|
|
7.3
|
|
Total goodwill
|
|
|
|
424.8
|
|
|
—
|
|
|
424.8
|
|
|
379.9
|
|
|
—
|
|
|
379.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NSM (1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer relationships
|
|
9
|
|
110.5
|
|
|
15.5
|
|
|
95.0
|
|
|
85.3
|
|
|
6.0
|
|
|
79.3
|
|
Trade names
|
|
19
|
|
57.1
|
|
|
4.2
|
|
|
52.9
|
|
|
51.2
|
|
|
1.8
|
|
|
49.4
|
|
Information technology
|
|
5
|
|
3.6
|
|
|
1.1
|
|
|
2.5
|
|
|
3.7
|
|
|
.5
|
|
|
3.2
|
|
Renewal rights
|
|
12
|
|
82.5
|
|
|
.3
|
|
|
82.2
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Other
|
|
3
|
|
1.7
|
|
|
.7
|
|
|
1.0
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Subtotal
|
|
|
|
255.4
|
|
|
21.8
|
|
|
233.6
|
|
|
140.2
|
|
|
8.3
|
|
|
131.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Kudu
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trade names
|
|
7
|
|
2.2
|
|
|
.2
|
|
|
2.0
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
MediaAlpha
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer relationships
|
|
9
|
|
—
|
|
|
—
|
|
|
—
|
|
|
26.8
|
|
|
4.9
|
|
|
21.9
|
|
Information technology
|
|
5
|
|
—
|
|
|
—
|
|
|
—
|
|
|
33.3
|
|
|
30.9
|
|
|
2.4
|
|
Other
|
|
3
|
|
—
|
|
|
—
|
|
|
—
|
|
|
9.8
|
|
|
9.0
|
|
|
.8
|
|
Subtotal
|
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
69.9
|
|
|
44.8
|
|
|
25.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trade names
|
|
7
|
|
.6
|
|
|
.2
|
|
|
.4
|
|
|
.6
|
|
|
.2
|
|
|
.4
|
|
Information technology
|
|
5
|
|
.4
|
|
|
.3
|
|
|
.1
|
|
|
.5
|
|
|
.3
|
|
|
.2
|
|
Subtotal
|
|
|
|
1.0
|
|
|
.5
|
|
|
.5
|
|
|
1.1
|
|
|
.5
|
|
|
.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other intangible assets
|
|
258.6
|
|
|
22.5
|
|
|
236.1
|
|
|
211.2
|
|
|
53.6
|
|
|
157.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total goodwill and other
intangible assets
|
|
$
|
683.4
|
|
|
$
|
22.5
|
|
|
660.9
|
|
|
$
|
591.1
|
|
|
$
|
53.6
|
|
|
537.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill and other intangible assets
attributed to non-controlling interests
|
|
|
|
|
|
(25.0
|
)
|
|
|
|
|
|
(40.6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill and other intangible assets
included in White Mountains’s
common shareholders’ equity
|
|
|
|
|
|
$
|
635.9
|
|
|
|
|
|
|
$
|
496.9
|
|
(1) As of September 30, 2019, NSM’s goodwill included $(1.5) and $(2.2) of the effect of foreign currency translation. As of December 31, 2018, NSM’s intangible assets include $(0.7) of the effect of foreign currency translation.
(2) As of September 30, 2019 and December 31, 2018, Other Operations’ goodwill included $(0.1) and $(0.3) of the effect of foreign currency translation.
Note 5. Debt
The following table presents White Mountains’s debt outstanding as of September 30, 2019 and December 31, 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Millions
|
|
September 30,
2019
|
|
Effective
Rate (1)
|
|
December 31,
2018
|
|
Effective
Rate (1)
|
NSM Bank Facility
|
|
$
|
221.8
|
|
|
7.7%
|
|
$
|
180.4
|
|
|
7.4%
|
Unamortized issuance cost
|
|
(4.1
|
)
|
|
|
|
(3.8
|
)
|
|
|
NSM Bank Facility, carrying value
|
|
217.7
|
|
|
|
|
176.6
|
|
|
|
Other NSM debt
|
|
1.7
|
|
|
2.5%
|
|
1.9
|
|
|
2.2%
|
MediaAlpha Bank Facility
|
|
—
|
|
|
|
|
14.3
|
|
|
7.1%
|
Unamortized issuance cost
|
|
—
|
|
|
|
|
(.1
|
)
|
|
|
MediaAlpha Bank Facility, carrying value
|
|
—
|
|
|
|
|
14.2
|
|
|
|
Other Operations debt
|
|
11.2
|
|
|
9.6%
|
|
—
|
|
|
|
Unamortized issuance cost
|
|
(.4
|
)
|
|
|
|
—
|
|
|
|
Other Operations, carrying value
|
|
10.8
|
|
|
|
|
—
|
|
|
|
Total debt
|
|
$
|
230.2
|
|
|
|
|
$
|
192.7
|
|
|
|
(1) Effective rate considers the effect of the debt issuance costs.
NSM Bank Facility
On May 11, 2018, NSM entered into a secured credit facility (the “NSM Bank Facility”) with Ares Capital Corporation in order to refinance NSM’s existing debt and to fund the acquisitions of subsidiaries. The NSM Bank Facility is comprised of term loans totaling $224.0 million and a revolving credit loan commitment of $10.0 million, under which NSM initially borrowed $2.0 million. The term loans under the NSM Bank Facility mature on May 11, 2024, and the revolving loan under the NSM Bank Facility matures on May 11, 2023. During the three and nine months ended September 30, 2019, NSM repaid $0.5 million and $1.4 million on the term loans. During the three months ended September 30, 2019, NSM did not make any borrowings on the term loans or revolving credit loans. During the nine months ended September 30, 2019, NSM repaid $6.5 million on the revolving credit loan. During the nine months ended September 30, 2019, NSM borrowed $42.9 million on the term loans, which included $20.4 million and $22.5 million for the funding of the acquisitions of Embrace and the Renewal Rights. During the nine months ended September 30, 2019, NSM borrowed $6.5 million on the revolving credit loan. As of September 30, 2019, the term loans had an outstanding balance of $221.8 million and the revolving credit loans were undrawn.
Interest on the NSM Bank Facility accrues at a floating interest rate equal to the three month LIBOR or the Prime Rate, as published by the Wall Street Journal plus, in each case, an applicable margin. The margin over LIBOR may vary between 4.25% and 4.75%, and the margin over the Prime Rate may vary between 3.25% and 3.75%, in each case, depending on the consolidated total leverage ratio of the borrower.
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 variable rate term loans. 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 then-current LIBOR. As of September 30, 2019, the variable rate received by NSM under the swap agreement was 2.11%. As of September 30, 2019, the interest rate, including the effect of the swap, for the outstanding term loans of $149.1 million that are hedged by the swap was 7.47%. The effective interest on the outstanding term loans of $72.7 million that are unhedged was 7.12%. The effective interest rate on the total outstanding term loans under the NSM Bank Facility of $221.8 million was 7.17%, excluding the effect of debt issuance costs.
The NSM Bank Facility is secured by all property of the loan parties and contains various affirmative, negative and financial covenants that White Mountains considers to be customary for such borrowings, including a maximum consolidated total leverage ratio covenant.
Compliance
At September 30, 2019, White Mountains was in compliance with the covenants under all of its debt instruments.
Note 6. Income Taxes
The Company and its Bermuda domiciled subsidiaries are not subject to Bermuda income tax under current Bermuda law. In the event there is a change in the current law and taxes are imposed, the Company and its Bermuda domiciled subsidiaries would be exempt from such tax until March 31, 2035, pursuant to the Bermuda Exempted Undertakings Tax Protection Act of 1966. The Company has subsidiaries and branches that operate in various other jurisdictions around the world that are subject to tax in the jurisdictions in which they operate. The jurisdictions in which the Company’s subsidiaries and branches are subject to tax are Barbados, Ireland, Israel, Luxembourg, the United Kingdom and the United States.
White Mountains’s income tax benefit (expense) related to pre-tax income (loss) from continuing operations for the three and nine months ended September 30, 2019 represented an effective tax rate of 17.2% and 5.4%. The effective tax rate for the three and nine months ended September 30, 2019 was different from the current U.S. statutory rate of 21.0%, due to income generated in jurisdictions with lower tax rates than the United States, state income taxes and a tax benefit recorded at BAM. Also, the effective tax rate for the nine months ended September 30, 2019 was different from the current U.S. statutory rate of 21.0%, due to the release of a full valuation allowance on the net deferred tax assets of the U.S. consolidated group Guilford Holdings, Inc. and subsidiaries (“Guilford”). Guilford includes Kudu, White Mountains’s investment in MediaAlpha, various service companies and certain other entities and investments that are included in the Other Operations segment. For BAM, member surplus contributions (“MSC”) and the related taxes thereon are recorded directly to non-controlling interest equity, while the valuation allowance on such taxes is recorded through the income statement. For the three and nine months ended September 30, 2019, BAM recorded a tax benefit of $3.6 million and $6.6 million associated with the valuation allowance on taxes related to MSC that is included in the effective tax rate.
White Mountains’s income tax expense related to pre-tax loss from continuing operations for the three and nine months
ended September 30, 2018 represented an effective tax rate of (8.1)% and (1.2)%. The effective tax rate was different from the U.S. statutory rate of 21.0%, due to a full valuation allowance on net deferred tax assets at U.S operations, consisting of Guilford and BAM, withholding taxes, state income taxes and a tax benefit recorded at BAM. For BAM, MSC and the related taxes thereon are recorded directly to non-controlling interest equity, while the valuation allowance on such taxes is recorded through the income statement. For the three and nine months ended September 30, 2018, BAM recorded a tax benefit of $1.8 million and $4.0 million associated with the valuation allowance on taxes related to MSC that is included in the effective tax rate.
In arriving at the effective tax rate for the three and nine months ended September 30, 2019 and 2018, White Mountains forecasted all income and expense items including the change in unrealized investment gains (losses) and realized investment gains (losses) for the years ending December 31, 2019 and 2018.
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.
With few exceptions, White Mountains is no longer subject to U.S. federal, state, or non-U.S. income tax examinations by tax authorities for years before 2013.
Note 7. Derivatives
NSM Interest Rate Swap
On May 11, 2018, NSM entered into the NSM Bank Facility. Interest on the NSM Bank Facility accrues at a floating interest rate equal to the three month LIBOR or the Prime Rate, as published by the Wall Street Journal plus, in each case, an applicable margin. The margin over LIBOR may vary between 4.25% and 4.75%, and the margin over the Prime Rate may vary between 3.25% and 3.75%, in each case, depending on the consolidated total leverage ratio of the borrower.
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 variable rate term loans. 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 LIBOR. As of September 30, 2019, the variable rate received by NSM under the swap agreement was 2.11%. 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 September 30, 2019, the interest rate, including the effect of the swap, for the outstanding term loans of $149.1 million that are hedged by the swap was 7.47%, excluding the effect of debt issuance costs. 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 will evaluate the effectiveness of the hedging relationship on an ongoing basis.
For the three and nine months ended September 30, 2019, White Mountains recognized net interest expense of $0.3 million and $0.6 million for the periodic net settlement payments on the swap. For the three months and nine months ended September 30, 2018, White Mountains recognized net interest expense of $0.3 million and $0.4 million for the periodic net settlement payments on the swap. As of September 30, 2019 and December 31, 2018, the estimated fair value of the swap and the accrual of the periodic net settlement payments recorded in other liabilities was $7.8 million and $2.7 million. There was no ineffectiveness in the hedge for the three and nine months ended September 30, 2019 or the three and nine months ended September 30, 2018. For the three and nine months ended September 30, 2019, the $(0.8) million and $(5.1) million change in the fair value of the swap is included within accumulated other comprehensive income (loss). For the three months and nine months ended September 30, 2018, the $1.0 million and $(0.1) million change in the fair value of the swap is included within White Mountains’s accumulated other comprehensive income (loss).
Foreign Currency Forward Contracts
White Mountains’s investment portfolio includes investments denominated in GBP, Japanese Yen, Euros and other foreign currencies. White Mountains previously entered into foreign currency forward contracts to manage its foreign currency exposure related to certain of these investments. In the first quarter of 2018, White Mountains closed an outstanding foreign currency forward contract in conjunction with the termination of its GBP investment grade corporate bond mandate. As of September 30, 2019 and December 31, 2018, White Mountains no longer had any open foreign currency forward contracts.
The derivative losses recognized in net realized and unrealized investment gains (losses) for the nine months ended September 30, 2018 were $(3.5) million.
Note 8. Municipal Bond Guarantee Insurance
In 2012, HG Global was capitalized with $594.5 million from White Mountains and $14.5 million from non-controlling interests to fund the initial capitalization of BAM, a then newly formed mutual municipal bond insurer. As of September 30, 2019, White Mountains owned 96.9% of HG Global’s preferred equity and 88.4% of its common equity. HG Global, together with its subsidiaries, provided the initial capitalization of BAM through the purchase of $503.0 million of BAM Surplus Notes. At inception, BAM and HG Re also entered into a first loss reinsurance treaty (“FLRT”). HG Re provides first loss reinsurance 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 60% of the risk premium charged for insuring the municipal bond, net of a ceding commission.
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.
Effective January 1, 2014, HG Global and BAM agreed to change the interest rate on the BAM Surplus Notes for the five years ending December 31, 2018 from a fixed rate of 8.0% to a variable rate equal to the one-year U.S. treasury rate plus 300 basis points, set annually. In 2018, BAM exercised its option to extend the variable rate period for an additional three years. At the end of the variable rate period, the interest rate will be fixed at the higher of the then current variable rate or 8.0%. The variable rate was set at 5.70% for 2019 and 4.60% for 2018.
No payment of interest or principal on the BAM Surplus Notes may be made without the approval of the New York State Department of Financial Services (“NYDFS”). BAM has stated its intention to seek regulatory approval to pay interest and principal on its surplus notes to the extent that its remaining qualified statutory capital and other capital resources continue to support its outstanding obligations, its business plan and its “AA/stable” rating from Standard & Poor’s. BAM repaid $17.7 million of the BAM Surplus Notes and $5.3 million of accrued interest during the year ended December 31, 2018.
In order to further support BAM’s long-term capital position and business prospects, in 2017 HG Global agreed to contribute the $203.0 million of Series A BAM Surplus Notes (“Series A Notes”) into the Supplemental Trust at HG Re. The Supplemental Trust already held the $300.0 million of Series B BAM Surplus Notes (“Series B Notes”). At the same time HG Global and BAM also changed the payment terms of the Series B Notes, so that payments will reduce principal and accrued interest on a pro rata basis, consistent with the payment terms on the Series A Notes. The terms of the Series B Notes had previously stipulated that payments would first reduce interest owed, then reduce principal owed once all accrued interest had been paid. The NYDFS approved the change during 2017.
In connection with the contribution and change in payment terms of the Series B Notes, the Series A Notes were merged into the Series B Notes. The BAM Surplus Notes are currently held in an HG Re sponsored vehicle within the Supplemental Trust.
The Regulation 114 Trust target balance is equal to gross ceded unearned premiums and unpaid ceded loss and LAE expenses, if any. The Supplemental Trust target balance is equal to $603.0 million. As the BAM Surplus Notes are repaid over time, the BAM Surplus Notes will be replaced in the Supplemental Trust by cash and fixed income securities. The Collateral Trust balances must be at target levels before excess funds can be distributed out of the Supplemental Trust.
Under GAAP, if the terms of a debt instrument are amended, unless there is a greater than 10% change in the expected discounted future cash flows of such instrument, a change in the instrument’s carrying value is not permitted. White Mountains determined that the impact of the changes made during 2017 to the terms of the BAM Surplus Notes on the expected discounted future cash flows was not greater than 10%.
As of September 30, 2019 and December 31, 2018, the collateral trusts held assets of $787.4 million and $757.4 million, which both included $481.3 million of BAM Surplus Notes. As of September 30, 2019 and December 31, 2018, HG Global has accrued $164.2 million and $143.7 million of interest receivable on the BAM Surplus Notes.
The following table presents a schedule of BAM’s insured obligations as of September 30, 2019 and December 31, 2018:
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2019
|
|
December 31, 2018
|
Contracts outstanding
|
|
8,508
|
|
|
7,525
|
|
Remaining weighted average contract period outstanding (in years)
|
|
10.7
|
|
|
10.7
|
|
Contractual debt service outstanding (in millions):
|
|
|
|
|
Principal
|
|
$
|
59,190.9
|
|
|
$
|
52,201.6
|
|
Interest
|
|
30,701.7
|
|
|
26,560.3
|
|
Total debt service outstanding
|
|
$
|
89,892.6
|
|
|
$
|
78,761.9
|
|
|
|
|
|
|
Gross unearned insurance premiums (in millions)
|
|
$
|
203.5
|
|
|
$
|
176.0
|
|
The following table presents a schedule of BAM’s future premium revenues as of September 30, 2019:
|
|
|
|
|
|
Millions
|
|
September 30, 2019
|
October 1, 2019 - December 31, 2019
|
|
$
|
4.9
|
|
|
|
|
January 1, 2020 - March 31, 2020
|
|
4.8
|
|
April 1, 2020 - June 30, 2020
|
|
4.8
|
|
July 1, 2020 - September 30, 2020
|
|
4.6
|
|
October 1, 2020 - December 31, 2020
|
|
4.5
|
|
Total 2020
|
|
18.7
|
|
|
|
|
2021
|
|
17.4
|
|
2022
|
|
16.3
|
|
2023
|
|
15.3
|
|
2024
|
|
14.3
|
|
2025 and thereafter
|
|
116.6
|
|
Total gross unearned insurance premiums
|
|
$
|
203.5
|
|
The following table presents a schedule of net written premiums included in White Mountains’s HG Global/BAM segment for the three and nine months ended September 30, 2019 and 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
Millions
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
Written premiums:
|
|
|
|
|
|
|
|
|
Direct
|
|
$
|
10.2
|
|
|
$
|
3.9
|
|
|
$
|
30.6
|
|
|
$
|
28.9
|
|
Assumed
|
|
10.6
|
|
|
—
|
|
|
10.6
|
|
|
—
|
|
Gross written premiums
|
|
$
|
20.8
|
|
|
$
|
3.9
|
|
|
$
|
41.2
|
|
|
$
|
28.9
|
|
Earned premiums:
|
|
|
|
|
|
|
|
|
Direct
|
|
$
|
4.4
|
|
|
$
|
3.3
|
|
|
$
|
11.9
|
|
|
$
|
9.7
|
|
Assumed
|
|
.8
|
|
|
—
|
|
|
1.8
|
|
|
—
|
|
Gross earned premiums
|
|
$
|
5.2
|
|
|
$
|
3.3
|
|
|
$
|
13.7
|
|
|
$
|
9.7
|
|
In April 2018, BAM entered into a collateralized financial guarantee excess of loss reinsurance agreement with Fidus Re, Ltd. (“Fidus Re”), a Bermuda based special purpose insurer created 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 twelve years and are callable five years after the date of issuance. Under the agreement, BAM retains the first $165.0 million of aggregate losses, before giving effect to HG’s reinsurance coverage, on the ceded business. Fidus Re reinsures 90% of aggregate losses exceeding $165.0 million on a portion of BAM’s financial guarantee portfolio up to a total reimbursement of $100.0 million. The aggregate loss limit under the agreement is $276.1 million. The agreement is accounted for using deposit accounting, and any related financing expenses are recorded in general and administrative expenses, because the agreement does not meet the risk transfer requirements necessary to be accounted for as reinsurance.
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. 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. None of the contracts assumed were non-performing and no loss reserves have been established for any of the contracts, either as of the transaction date or as of September 30, 2019. The agreement, which covers 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. Equity-Method Eligible Investments
White Mountains’s equity method eligible investments include certain investments in unconsolidated entities, revenue and earnings participations, private equity funds and hedge funds in which White Mountains has the ability to exert significant influence over the investee’s operating and financial policies.
The following table presents the carrying values of White Mountains’s equity method eligible investments recorded within other long-term investments as of September 30, 2019 and December 31, 2018:
|
|
|
|
|
|
|
|
|
|
Millions
|
|
September 30, 2019
|
|
December 31, 2018
|
Equity method eligible investments, at fair value
|
|
$
|
673.2
|
|
|
$
|
269.7
|
|
Other (1)
|
|
100.5
|
|
|
55.9
|
|
Total other long-term investments
|
|
$
|
773.7
|
|
|
$
|
325.6
|
|
(1) Consists of other long-term investments that are not equity method eligible.
The following table presents White Mountains’s significant equity method eligible investments as of September 30, 2019 and December 31, 2018:
|
|
|
|
|
|
|
|
|
|
Basic Ownership Interest
|
|
|
Investee
|
|
September 30, 2019
|
|
December 31, 2018
|
|
Instrument Held
|
PassportCard/DavidShield
|
|
50.0%
|
|
50.0%
|
|
Common shares
|
MediaAlpha (1)
|
|
48.3%
|
|
n/a
|
|
Units
|
durchblicker
|
|
45.0%
|
|
45.0%
|
|
Common shares
|
Elementum Holdings, L.P.
|
|
30.0%
|
|
n/a
|
|
Limited partnership interest
|
Tuckerman Capital Funds (2)
|
|
18.8 - 62.4%
|
|
18.5 - 62.3%
|
|
Limited and general partnership interests
|
Compare.com
|
|
18.4%
|
|
18.4%
|
|
Common shares
|
JAM Partners L.P.
|
|
11.1%
|
|
12.3%
|
|
Limited partnership interest
|
Enlightenment Capital Funds
|
|
10.0 - 36.5%
|
|
10.3 - 36.5%
|
|
Limited and general partnership interests
|
Kudu investments (3)
|
|
3.2 - 30.0%
|
|
n/a
|
|
Revenue and earnings participations
|
Kudu (3)
|
|
n/a
|
|
49.5%
|
|
Units
|
(1) As of December 31, 2018, MediaAlpha was a majority-owned consolidated subsidiary of White Mountains. See Note 2 — “Significant Transactions”
(2) Includes White Mountains’s direct investment in Galvanic Applied Sciences.
(3) As of September 30, 2019 White Mountains consolidates Kudu. See Note 2 — “Significant Transactions”.
As a result of the MediaAlpha Transaction, White Mountains reduced its ownership interest in MediaAlpha to 48.3% of the basic units outstanding (42.0% on a fully diluted, fully converted basis). White Mountains’s remaining ownership interest in MediaAlpha no longer meets the criteria for a controlling ownership interest and, accordingly, White Mountains deconsolidated MediaAlpha as of 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. 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 March 31, 2019, with the change in fair value of $114.7 million recognized as an unrealized investment gain. For the three and nine months ended September 30, 2019, White Mountains recognized $35.3 million and $150.0 million in unrealized investment gains associated with its investment in MediaAlpha. White Mountains’s consolidated statement of comprehensive income and its segment disclosures include MediaAlpha’s results of operations for the period from January 1, 2019 through February 26, 2019. See Note 2 — “Significant Transactions”.
For the three months ended September 30, 2019, MediaAlpha’s total revenues, total expenses, gross profit and pre-tax income were $110.5 million, $102.1 million, $18.4 million and $8.4 million. For the period from February 26, 2019 to September 30, 2019, MediaAlpha’s total revenues, total expenses, gross profit and pre-tax income were $233.2 million, $217.9 million, $38.8 million and $15.3 million. As of September 30, 2019, MediaAlpha’s total assets and total liabilities were $103.4 million and $145.8 million.
Note 10. Employee Share-Based 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 of White Mountains. As of September 30, 2019, White Mountains’s share-based compensation incentive awards consist of performance shares and restricted shares.
Performance Shares
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 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 approved for payment.
The following table presents the performance share activity for the three and nine months ended September 30, 2019 and 2018 for performance shares granted under the WTM Incentive Plan:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
Millions, except share amounts
|
|
Target Performance
Shares Outstanding
|
|
Accrued
Expense
|
|
Target Performance
Shares Outstanding
|
|
Accrued
Expense
|
|
Target Performance
Shares Outstanding
|
|
Accrued
Expense
|
|
Target Performance
Shares Outstanding
|
|
Accrued
Expense
|
Beginning of period
|
|
42,473
|
|
|
$
|
30.8
|
|
|
40,616
|
|
|
$
|
27.2
|
|
|
40,616
|
|
|
$
|
31.7
|
|
|
50,515
|
|
|
$
|
45.8
|
|
Shares paid (1)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(13,715
|
)
|
|
(18.1
|
)
|
|
(23,186
|
)
|
|
(28.4
|
)
|
New grants
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
15,600
|
|
|
—
|
|
|
14,105
|
|
|
—
|
|
Forfeitures and cancellations(2)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(.1
|
)
|
|
(28
|
)
|
|
—
|
|
|
(818
|
)
|
|
.1
|
|
Expense recognized
|
|
—
|
|
|
5.6
|
|
|
—
|
|
|
7.8
|
|
|
—
|
|
|
22.8
|
|
|
—
|
|
|
17.4
|
|
End of period
|
|
42,473
|
|
|
$
|
36.4
|
|
|
40,616
|
|
|
$
|
34.9
|
|
|
42,473
|
|
|
$
|
36.4
|
|
|
40,616
|
|
|
$
|
34.9
|
|
(1) WTM performance share payments in 2019 for the 2016-2018 performance cycle, which were paid in cash 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 cash in March 2018, ranged from 145% to 147% of target.
(2) Amounts include changes in assumed forfeitures, as required under GAAP.
For performance shares earned in the 2016-2018 and 2015-2017 performance cycles, all performance shares earned were settled in cash. If all the outstanding WTM performance shares had vested on September 30, 2019, the total additional compensation cost to be recognized would have been $21.1 million, based on accrual factors (common share price and payout assumptions) as of September 30, 2019.
The following table presents performance shares outstanding and accrued expense for performance shares awarded under the WTM Incentive Plan as of September 30, 2019 for each performance cycle:
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2019
|
Millions, except share amounts
|
|
Target Performance
Shares Outstanding
|
|
Accrued
Expense
|
Performance cycle:
|
|
|
|
|
|
|
2017 – 2019
|
|
14,070
|
|
|
$
|
24.4
|
|
2018 – 2020
|
|
13,450
|
|
|
8.5
|
|
2019 – 2021
|
|
15,600
|
|
|
4.0
|
|
Sub-total
|
|
43,120
|
|
|
36.9
|
|
Assumed forfeitures
|
|
(647
|
)
|
|
(.5
|
)
|
September 30, 2019
|
|
42,473
|
|
|
$
|
36.4
|
|
Restricted Shares
The following table presents the unrecognized compensation cost associated with the outstanding restricted share awards for the three and nine months ended September 30, 2019 and 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
Millions,
except share amounts
|
|
Restricted
Shares
|
|
Unamortized
Issue Date Fair Value
|
|
Restricted
Shares
|
|
Unamortized
Issue Date Fair Value
|
|
Restricted
Shares
|
|
Unamortized Issue Date
Fair Value
|
|
Restricted
Shares
|
|
Unamortized Issue Date
Fair Value
|
Non-vested,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning of period
|
|
43,395
|
|
|
$
|
21.9
|
|
|
41,510
|
|
|
$
|
19.0
|
|
|
41,510
|
|
|
$
|
12.5
|
|
|
53,755
|
|
|
$
|
14.3
|
|
Issued
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
15,600
|
|
|
14.5
|
|
|
14,105
|
|
|
11.4
|
|
Vested
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(13,715
|
)
|
|
—
|
|
|
(25,381
|
)
|
|
—
|
|
Forfeited
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(969
|
)
|
|
(.2
|
)
|
Expense recognized
|
|
—
|
|
|
(2.6
|
)
|
|
—
|
|
|
(3.2
|
)
|
|
—
|
|
|
(7.7
|
)
|
|
—
|
|
|
(9.7
|
)
|
End of period
|
|
43,395
|
|
|
$
|
19.3
|
|
|
41,510
|
|
|
$
|
15.8
|
|
|
43,395
|
|
|
$
|
19.3
|
|
|
41,510
|
|
|
$
|
15.8
|
|
During the nine months ended September 30, 2019, White Mountains issued 15,600 restricted shares that vest on January 1, 2022. During the nine months ended September 30, 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 vested on January 1, 2019. The unamortized issue date fair value as of September 30, 2019 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 right-of-use (“ROU”) assets of $23.2 million and lease liabilities of $23.2 million. As of September 30, 2019, the ROU asset was $23.0 million and lease liabilities were $23.3 million.
The following table summarizes net lease expense recognized in White Mountains’s consolidated statement of operations for the three and nine months ended September 30, 2019:
|
|
|
|
|
|
|
|
|
|
Millions
Lease Cost
|
|
Three Months Ended September 30, 2019
|
|
Nine Months Ended September 30, 2019
|
Lease cost
|
|
$
|
1.9
|
|
|
$
|
5.4
|
|
Less: sublease income
|
|
.1
|
|
|
.3
|
|
Net lease cost
|
|
$
|
1.8
|
|
|
$
|
5.1
|
|
The following table presents the contractual maturities of the lease liabilities associated with White Mountains’s operating lease agreements as of September 30, 2019:
|
|
|
|
|
|
Millions
|
|
As of September 30, 2019
|
Remainder of 2019
|
|
$
|
1.7
|
|
2020
|
|
5.7
|
|
2021
|
|
4.7
|
|
2022
|
|
4.2
|
|
2023
|
|
3.6
|
|
Thereafter
|
|
6.3
|
|
Total undiscounted lease payments
|
|
26.2
|
|
Less: present value adjustment
|
|
2.9
|
|
Operating lease liability
|
|
$
|
23.3
|
|
The following table presents lease related assets and liabilities by reportable segment as of September 30, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2019
|
Millions
|
|
HG/BAM
|
|
NSM
|
|
Kudu
|
|
Other Operations
|
|
Total
|
|
Weighted Average Incremental Borrowing Rate (1)
|
ROU lease asset
|
|
$
|
10.8
|
|
|
$
|
4.4
|
|
|
$
|
2.3
|
|
|
$
|
5.5
|
|
|
$
|
23.0
|
|
|
4.5%
|
Lease liability
|
|
$
|
10.8
|
|
|
$
|
4.4
|
|
|
$
|
2.3
|
|
|
$
|
5.8
|
|
|
$
|
23.3
|
|
|
(1) The present value of the remaining lease payments were determined by discounting the lease payments using the incremental borrowing rate.
Note 12. 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 three and nine months ended September 30, 2019 and 2018. See Note 17 — “Held for Sale and Discontinued Operations”.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
|
September 30,
|
|
September 30,
|
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
Basic and diluted earnings per share numerators (in millions):
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to White Mountains’s
common shareholders
|
|
$
|
48.7
|
|
|
$
|
40.8
|
|
|
$
|
353.6
|
|
|
$
|
(3.7
|
)
|
Less: total income (loss) from discontinued operations, net of tax
|
|
.9
|
|
|
(17.3
|
)
|
|
1.6
|
|
|
(17.2
|
)
|
Net income from continuing operations attributable to
White Mountains’s common shareholders
|
|
$
|
47.8
|
|
|
$
|
58.1
|
|
|
$
|
352.0
|
|
|
$
|
13.5
|
|
Allocation of earnings to participating restricted common shares(1)
|
|
(.7
|
)
|
|
(.8
|
)
|
|
(4.4
|
)
|
|
(.2
|
)
|
Basic and diluted earnings per share numerators
|
|
$
|
47.1
|
|
|
$
|
57.3
|
|
|
$
|
347.6
|
|
|
$
|
13.3
|
|
Basic earnings per share denominators (in thousands):
|
|
|
|
|
|
|
|
|
Total average common shares outstanding during the period
|
|
3,185.4
|
|
|
3,180.4
|
|
|
3,180.4
|
|
|
3,450.8
|
|
Average unvested restricted common shares(2)
|
|
(43.4
|
)
|
|
(41.5
|
)
|
|
(39.6
|
)
|
|
(39.7
|
)
|
Basic earnings per share denominator
|
|
3,142.0
|
|
|
3,138.9
|
|
|
3,140.8
|
|
|
3,411.1
|
|
Diluted earnings per share denominator (in thousands):
|
|
|
|
|
|
|
|
|
Total average common shares outstanding during the period
|
|
3,185.4
|
|
|
3,180.4
|
|
|
3,180.4
|
|
|
3,450.8
|
|
Average unvested restricted common shares(2)
|
|
(43.4
|
)
|
|
(41.5
|
)
|
|
(39.6
|
)
|
|
(39.7
|
)
|
Diluted earnings per share denominator
|
|
3,142.0
|
|
|
3,138.9
|
|
|
3,140.8
|
|
|
3,411.1
|
|
Basic and diluted earnings per share (in dollars) - continuing operations:
|
|
|
|
|
|
|
|
|
Distributed earnings - dividends declared and paid
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1.00
|
|
|
$
|
1.00
|
|
Undistributed earnings
|
|
15.01
|
|
|
18.27
|
|
|
109.67
|
|
|
2.90
|
|
Basic and diluted earnings per share
|
|
$
|
15.01
|
|
|
$
|
18.27
|
|
|
$
|
110.67
|
|
|
$
|
3.90
|
|
(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 three and nine months ended September 30, 2019 and 2018. See Note 17 — “Held for Sale and Discontinued Operations”.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
|
September 30,
|
|
September 30,
|
Millions
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
Undistributed net earnings - continuing operations:
|
|
|
|
|
|
|
|
|
Net income attributable to White Mountains’s common shareholders,
net of restricted common share amounts
|
|
$
|
47.1
|
|
|
$
|
57.3
|
|
|
$
|
347.6
|
|
|
$
|
13.3
|
|
Dividends declared, net of restricted common share amounts (1)
|
|
—
|
|
|
—
|
|
|
(3.2
|
)
|
|
(3.7
|
)
|
Total undistributed net earnings, net of restricted common share amounts
|
|
$
|
47.1
|
|
|
$
|
57.3
|
|
|
$
|
344.4
|
|
|
$
|
9.6
|
|
(1) Restricted shares issued by White Mountains receive dividends, and therefore, are considered participating securities.