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 subsidiaries and other affiliates. The Company’s headquarters is located at 26 Reid Street, Hamilton, Bermuda HM 11, its principal executive office is located at 23 South Main Street, 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 2019 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. As of March 31, 2020, White Mountains’s reportable segments were HG Global/BAM, NSM, Kudu and Other Operations. As a result of the MediaAlpha Transaction, White Mountains no longer consolidated MediaAlpha, and consequently it was no longer a reportable segment. See Note 13 — “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, funded the initial capitalization of BAM through the purchase of $503.0 million of surplus notes issued by BAM, consisting of $203.0 million of Series A Notes and $300.0 million of Series B Notes (the “BAM Surplus Notes”).
As of March 31, 2020 and December 31, 2019, White Mountains owned 96.9% of HG Global’s preferred equity and 88.4% of its common equity. White Mountains does not have an ownership interest in BAM. However, White Mountains is required to consolidate BAM’s results in its financial statements because BAM is a VIE for which White Mountains is the primary beneficiary. BAM’s results are attributed to non-controlling interests.
The NSM segment consists of NSM Insurance HoldCo, LLC and its subsidiaries (collectively, “NSM”). NSM is a full-service managing general underwriting agency (“MGU”) and program administrator for specialty property and casualty insurance. The company places insurance in niche sectors such as specialty transportation, real estate, social services and pet 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 March 31, 2020 and December 31, 2019, White Mountains owned 96.4% of the basic units outstanding of NSM (88.4% on a fully diluted, fully converted basis). See Note 2 — “Significant Transactions”.
The Kudu segment consists of Kudu Investment Management, LLC and its subsidiaries (collectively “Kudu”), a capital solutions provider for asset management firms. Kudu provides capital solutions for boutique asset managers for a variety of purposes including generational ownership transfers, management buyouts, acquisition and growth finance and legacy partner liquidity. Kudu also provides strategic assistance to investees from time to time. Kudu’s capital solutions typically are structured as minority preferred equity stakes with distribution rights, typically tied to gross revenues and designed to generate immediate strong, stable cash yields. On April 4, 2019, White Mountains acquired the ownership interests in Kudu held by certain funds managed by Oaktree Capital Management, L.P. (“Oaktree”) for cash consideration of $81.4 million. In addition, White Mountains assumed all of Oaktree’s unfunded capital commitments to Kudu, increasing White Mountains’s total capital commitment to $250.0 million (the “Kudu Transaction”). As a result of the Kudu Transaction, White Mountains’s basic unit ownership of Kudu increased from 49.5% to 99.1% (42.7% to 85.4% on a fully diluted, fully converted basis), and White Mountains began consolidating Kudu in its financial statements during the second quarter of 2019. During the fourth quarter of 2019, White Mountains increased its total capital commitment to Kudu by an additional $100.0 million to $350.0 million and, Kudu obtained a committed $125.0 million credit facility. See Note 2 — “Significant Transactions”.
The Other Operations segment consists of the Company and its wholly-owned subsidiary, White Mountains Capital, Inc., its other intermediate holding companies, its wholly-owned investment management subsidiary, White Mountains Advisors LLC (“WM Advisors”), investment assets managed by WM Advisors, its interests in MediaAlpha (for periods after the MediaAlpha Transaction), PassportCard Limited (“PassportCard”) and DavidShield Life Insurance Agency (2000) Ltd. (“DavidShield”) (collectively, “PassportCard/ DavidShield”), Elementum Holdings LP (“Elementum”) and Kudu (for periods prior to the Kudu Transaction), and certain other consolidated and unconsolidated entities and certain other strategic investments.
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). 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 and no longer reports it as a segment. 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”.
Discontinued Operations and Assets Held for Sale
White Mountains has classified its Guilford, Connecticut property, which consists of an office building and adjacent land, as held for sale as of March 31, 2020 and December 31, 2019. The property has been measured at its estimated fair value, net of disposal costs. See Note 17 — “Held for Sale and Discontinued Operations”.
Derivatives
From time to time, White Mountains holds derivative financial instruments for risk management purposes. White Mountains recognizes all derivatives as either assets or liabilities, measured at fair value, on the consolidated balance sheet. Changes in the fair value of derivative instruments that meet the criteria for hedge accounting are recognized in other comprehensive income and reclassified into current period pre-tax income when the hedged items are recognized therein. Changes in the fair value of derivative instruments that do not meet the criteria for hedge accounting are recognized in current period pre-tax income.
As of March 31, 2020 and December 31, 2019, NSM holds an interest rate swap derivative instrument that meets the criteria for hedge accounting. 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 2019 Annual Report on Form 10-K for a complete discussion regarding White Mountains’s significant accounting policies.
Recently Adopted Changes in Accounting Principles
Income Taxes
On January 1, 2020, White Mountains adopted ASU 2019-12, Simplifying the Accounting for Income Taxes (ASC 740), which removes exceptions to standard guidance. Under the new guidance non-income-based taxes, such as franchise taxes, will be reported within pre-tax income rather than being included in income taxes. In addition, the new guidance eliminates the exception to the incremental approach for interperiod tax allocation, which previously allowed consideration of the tax effects of items such as discontinued operations and items recognized through other comprehensive income.
For periods subsequent to the adoption of ASU 2019-12, White Mountains records both the tax expense related to BAM’s members surplus contributions (“MSC”) and the related valuation allowance on such taxes through the non-controlling interest equity. Prior to the adoption of ASU 2019-12, White Mountains recorded the tax expense related to BAM’s MSC directly to non-controlling interest equity, while the valuation allowance on such taxes was recorded through the income statement.
Goodwill
On January 1, 2020, White Mountains adopted ASU 2017-04, Simplifying the Test for Goodwill Impairment (ASC 350), which 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 that requires a quantitative review of the estimated fair value of the individual assets and liabilities compared to the carrying value of the goodwill is no longer required if the qualitative assessment is sufficient to indicate that there is no impairment. White Mountains did not recognize an impairment in goodwill during the quarter ended March 31, 2020 and accordingly, adoption of ASU 2017-04 had no impact on White Mountains’s financial statements.
Credit Losses
On January 1, 2020, White Mountains adopted ASU 2016-13, Measurement of Credit Losses on Financial Instruments (ASC 326), which establishes new guidance for the recognition of credit losses for financial assets measured at amortized cost. The new ASU requires reporting entities to estimate the credit losses expected over the life of a credit exposure using historical information, current information and reasonable and supportable forecasts that affect the collectability of the financial asset. White Mountains measures its portfolio of investment securities at fair value with changes therein recognized through current period earnings and, accordingly, adoption of ASU 2016-13 had no impact on White Mountains’s financial statements
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 March 31, 2020, White Mountains recognized $22.9 million and $23.2 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 had no impact on White Mountains’s financial statements.
Note 2. Significant Transactions
Acquisitions
Elementum
On May 31, 2019, White Mountains acquired a 30.0% limited partnership interest in Elementum, a third-party registered investment adviser specializing in natural catastrophe insurance-linked securities (“ILS”), for $55.1 million (the “Elementum Transaction”). Elementum manages separate accounts and pooled investment vehicles across various ILS sectors, including catastrophe bonds, collateralized reinsurance investments and industry loss warranties, on behalf of third-party clients. As part of the Elementum Transaction, White Mountains also committed to invest $50.0 million in ILS funds managed by Elementum. As of March 31, 2020, White Mountains had $46.2 million invested into four Elementum-managed funds.
White Mountains has elected to use the fair value option for its investments in Elementum and the ILS funds managed by Elementum. Both the investment in Elementum and the investments in ILS funds managed by Elementum are included within other long-term investments.
NSM
On May 11, 2018, White Mountains acquired a 95.0% basic units ownership interest in NSM (83.6% on a fully diluted, fully converted basis). 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.
On May 18, 2018, NSM acquired 100% of Fresh Insurance Services Group Limited (“Fresh Insurance”). Fresh Insurance is an insurance broker that offers non-standard personal lines products in the United Kingdom. NSM paid $49.6 million of upfront cash consideration for Fresh Insurance. NSM borrowed $51.0 million to fund the transaction. During the three months ended March 31, 2019, NSM paid a purchase price adjustment of an additional $0.7 million of consideration. The purchase price is subject to additional adjustments based upon growth in EBITDA during two earnout periods, one which ended in February 2020 and one ending in February 2022.
On December 3, 2018, NSM acquired all the net assets of KBK Insurance Group, Inc. (“KBK”), a specialized MGU focused on the towing and transportation space. NSM paid $60.0 million of upfront cash consideration for KBK. White Mountains contributed $29.0 million to NSM and NSM borrowed $30.1 million to fund the transaction. As of December 31, 2018, White Mountains had recognized $59.4 million of goodwill and other intangible assets, reflecting acquisition date fair values. 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. As of 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 earn out periods, one which ended in December 2019, one ending in December 2020 and one ending in 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. NSM paid $71.5 million, of cash consideration, net of cash acquired, for Embrace. White Mountains contributed $58.2 million to NSM and NSM borrowed $20.4 million to fund the transaction. White Mountains recognized $52.2 million of goodwill and $15.4 million of other intangible assets, reflecting acquisition date fair values.
On June 28, 2019, NSM acquired the renewal rights on its U.S. collector car business (the “Renewal Rights”) from American International Group, Inc. (“AIG”) for $82.5 million. The acquisition satisfied NSM’s contingent obligation to acquire the Renewal Rights from AIG. White Mountains contributed $59.1 million to NSM and NSM borrowed $22.5 million to fund the transaction. White Mountains recognized $82.5 million of other intangible assets, reflecting acquisition date fair values. See Note 4 — “Goodwill and Other Intangible Assets”.
As of March 31, 2020 and December 31, 2019, NSM recorded total contingent consideration earnout liabilities of $13.4 million and $20.6 million. The contingent consideration earnout liabilities primarily related to the Fresh Insurance and KBK acquisitions are subject to adjustments based upon EBITDA, EBITDA projections, and present value factors for acquired entities. For the three months ended March 31, 2020 and 2019, NSM recognized pre-tax (income) expense of $(0.6) million and $1.3 million for the change in the fair value of its contingent consideration earnout liabilities. Any future adjustments to contingent consideration earnout liabilities under the agreements will also be recognized through pre-tax income. For the three months ended March 31, 2020, NSM paid $6.4 million related to KBK’s contingent consideration earnout liabilities. There were no payments for the three months ended March 31, 2019.
Kudu
On February 5, 2018, White Mountains entered into an agreement to fund up to $125.0 million in Kudu in exchange for a 49.5% basic units ownership interest in Kudu (42.7% on a fully diluted, fully converted basis). On April 4, 2019, White Mountains acquired the ownership interests in Kudu held by certain funds managed by Oaktree for cash consideration of $81.4 million. In addition, White Mountains assumed all of Oaktree’s unfunded capital commitments to Kudu, increasing White Mountains’s total capital commitment to $250.0 million. White Mountains recognized total assets acquired of $155.5 million, including $7.6 million of goodwill and $2.2 million of other intangible assets, total liabilities assumed of $0.8 million and non-controlling interest of $1.5 million.
As a result of the Kudu Transaction, White Mountains’s basic unit ownership of Kudu increased from 49.5% to 99.1% (42.7% to 85.4% on a fully diluted, fully converted basis), and White Mountains began consolidating Kudu as a reportable segment in its financial statements during the second quarter of 2019. White Mountains’s consolidated financial statements and its segment disclosures include Kudu’s results from April 4, 2019, the date of the Kudu Transaction. For periods prior to the Kudu Transaction, White Mountains determined that Kudu was a VIE, but White Mountains was not the primary beneficiary. In those periods, White Mountains elected to use the fair value option.
During the fourth quarter of 2019, White Mountains increased its total capital commitment to Kudu by $100.0 million to $350.0 million, of which $122.5 million and $129.0 million was undrawn as of March 31, 2020 and December 31, 2019. During the fourth quarter of 2019, Kudu obtained a committed $125.0 million credit facility, of which $56.0 million and $68.0 million was undrawn as of March 31, 2020 and December 31, 2019. See Note 5 — “Debt”.
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. See Note 14 — “Equity-Method Eligible Investments”. White Mountains elected the fair value option and the investment in MediaAlpha was initially measured at its estimated fair value of $114.7 million as of the transaction date, with the change in fair value of $114.7 million recognized as an unrealized investment gain. White Mountains recognized a total of $182.2 million of realized gain and unrealized investment gain on the 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 classified as trading securities. Trading securities are reported at fair value as of the balance sheet date. Net realized and unrealized investment gains (losses) on trading securities are reported in pre-tax revenues.
White Mountains’s fixed maturity investments are generally valued using industry standard pricing methodologies. Key inputs include benchmark yields, benchmark securities, reported trades, issuer spreads, bids, offers, credit ratings and prepayment speeds. Income on mortgage and asset-backed securities is recognized using an effective yield based on anticipated prepayments and the estimated economic life of the securities. When actual prepayments differ significantly from anticipated prepayments, the estimated economic life is recalculated and the remaining unamortized premium or discount is amortized prospectively over the remaining economic life.
Realized investment gains (losses) resulting from sales of investment securities are accounted for using the specific identification method. Premiums and discounts on all fixed maturity investments are amortized or accreted to income over the anticipated life of the investment. Short-term investments consist of interest-bearing money market funds, certificates of deposit and other securities, which at the time of purchase, mature or become available for use within one year. Short-term investments are carried at amortized or accreted cost, which approximated fair value as of March 31, 2020 and December 31, 2019.
Other long-term investments consist primarily of unconsolidated entities, including Kudu’s non-controlling equity interests in the form of revenue and earnings participation contracts (“Participation Contracts”), private equity funds, hedge funds, ILS funds and private debt instruments.
Net Investment Income
White Mountains’s net investment income is comprised primarily of interest income associated with White Mountains’s fixed maturity investments and short-term investments 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 months ended March 31, 2020 and 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
Millions
|
|
2020
|
|
2019
|
|
Fixed maturity investments
|
|
$
|
8.1
|
|
|
$
|
8.1
|
|
|
Short-term investments
|
|
.8
|
|
|
1.3
|
|
|
Common equity securities
|
|
3.8
|
|
|
5.4
|
|
|
Other long-term investments
|
|
10.5
|
|
|
1.6
|
|
|
Total investment income
|
|
23.2
|
|
|
16.4
|
|
|
Third-party investment expenses
|
|
(.3
|
)
|
|
(.4
|
)
|
|
Net investment income, pre-tax
|
|
$
|
22.9
|
|
|
$
|
16.0
|
|
Net Realized and Unrealized Investment Gains (Losses)
The following table presents net realized and unrealized investment gains (losses) for the three months ended March 31, 2020 and 2019:
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|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
Three Months Ended
|
|
|
March 31, 2020
|
March 31, 2019
|
|
Millions
|
|
Total Net Realized and
Unrealized Gains (Losses) Reflected in Earnings
|
|
Total Net Realized and
Unrealized Gains Reflected in Earnings
|
|
Fixed maturity investments
|
|
$
|
2.2
|
|
|
$
|
21.1
|
|
|
Short-term investments
|
|
.4
|
|
|
—
|
|
|
Common equity securities
|
|
(140.8
|
)
|
|
111.3
|
|
|
Other long-term investments (1) (2)
|
|
(18.5
|
)
|
|
113.2
|
|
|
Net realized and unrealized investment (losses) gains, pre-tax
|
|
(156.7
|
)
|
|
245.6
|
|
|
Income tax benefit (expense) attributable
to net realized and unrealized investment (losses) gains
|
|
25.5
|
|
|
(52.2
|
)
|
|
Net realized and unrealized investment (losses) gains, after-tax
|
|
$
|
(131.2
|
)
|
|
$
|
193.4
|
|
(1) For the three months ended March 31, 2019, excludes $67.5 of realized gain and includes $114.7 of unrealized investment gain associated with the MediaAlpha Transaction, which are both 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) For the three months ended March 31, 2020 and March 31, 2019, includes $0.4 and $0.3 of realized and unrealized investment losses related to foreign currency exchange.
The following table presents total gains (losses) included in earnings attributable to net unrealized investment gains (losses) for Level 3 investments for the three months ended March 31, 2020 and 2019:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
Millions
|
|
2020
|
|
2019
|
|
Other long-term investments
|
|
$
|
(9.4
|
)
|
|
$
|
114.0
|
|
|
Total net unrealized investment (losses) gains, pre-tax - Level 3 investments
|
|
$
|
(9.4
|
)
|
|
$
|
114.0
|
|
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 March 31, 2020 and December 31, 2019:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2020
|
|
Millions
|
|
Cost or
Amortized
Cost
|
|
Gross
Unrealized
Gains
|
|
Gross
Unrealized
Losses
|
|
Carrying
Value
|
|
U.S. Government and agency obligations
|
|
$
|
217.5
|
|
|
$
|
6.4
|
|
|
$
|
—
|
|
|
$
|
223.9
|
|
|
Debt securities issued by corporations
|
|
486.2
|
|
|
9.2
|
|
|
(8.7
|
)
|
|
486.7
|
|
|
Municipal obligations
|
|
255.2
|
|
|
14.8
|
|
|
—
|
|
|
270.0
|
|
|
Mortgage and asset-backed securities
|
|
225.7
|
|
|
6.2
|
|
|
(.2
|
)
|
|
231.7
|
|
|
Total fixed maturity investments
|
|
$
|
1,184.6
|
|
|
$
|
36.6
|
|
|
$
|
(8.9
|
)
|
|
$
|
1,212.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
|
Millions
|
|
Cost or
Amortized
Cost
|
|
Gross
Unrealized
Gains
|
|
Gross
Unrealized
Losses
|
|
Carrying
Value
|
|
U.S. Government and agency obligations
|
|
$
|
231.7
|
|
|
$
|
1.0
|
|
|
$
|
(.2
|
)
|
|
$
|
232.5
|
|
|
Debt securities issued by corporations
|
|
454.9
|
|
|
12.5
|
|
|
(.2
|
)
|
|
467.2
|
|
|
Municipal obligations
|
|
284.7
|
|
|
12.5
|
|
|
(.1
|
)
|
|
297.1
|
|
|
Mortgage and asset-backed securities
|
|
206.6
|
|
|
2.7
|
|
|
(.3
|
)
|
|
209.0
|
|
|
Total fixed maturity investments
|
|
$
|
1,177.9
|
|
|
$
|
28.7
|
|
|
$
|
(.8
|
)
|
|
$
|
1,205.8
|
|
The 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 March 31, 2020 and December 31, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2020
|
|
Millions
|
|
Cost or
Amortized
Cost
|
|
Gross
Unrealized
Gains
|
|
Gross
Unrealized
Losses
|
|
Net Foreign
Currency
Losses
|
|
Carrying
Value
|
|
Common equity securities
|
|
$
|
544.8
|
|
|
$
|
11.3
|
|
|
$
|
(32.4
|
)
|
|
$
|
—
|
|
|
$
|
523.7
|
|
|
Other long-term investments
|
|
$
|
610.1
|
|
|
$
|
265.7
|
|
|
$
|
(67.6
|
)
|
|
$
|
(2.6
|
)
|
|
$
|
805.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
|
Millions
|
|
Cost or
Amortized
Cost
|
|
Gross
Unrealized
Gains
|
|
Gross
Unrealized
Losses
|
|
Net Foreign
Currency
Losses
|
|
Carrying
Value
|
|
Common equity securities
|
|
$
|
553.3
|
|
|
$
|
130.6
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
683.9
|
|
|
Other long-term investments
|
|
$
|
667.4
|
|
|
$
|
255.2
|
|
|
$
|
(64.1
|
)
|
|
$
|
(2.2
|
)
|
|
$
|
856.3
|
|
Other Long-Term Investments
The following table presents the carrying values of White Mountains’s other long-term investments as of March 31, 2020 and December 31, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Carrying Value at
|
|
Millions
|
|
March 31, 2020
|
|
December 31, 2019
|
|
Kudu’s Participation Contracts (1)
|
|
$
|
262.7
|
|
|
$
|
266.5
|
|
|
MediaAlpha (1)
|
|
210.0
|
|
|
180.0
|
|
|
PassportCard/DavidShield (1)
|
|
80.0
|
|
|
90.0
|
|
|
Elementum (1)
|
|
55.1
|
|
|
55.1
|
|
|
Other unconsolidated entities (1)(2)
|
|
24.8
|
|
|
31.2
|
|
|
Total unconsolidated entities (1)
|
|
632.6
|
|
|
622.8
|
|
|
Private equity funds and hedge funds
|
|
98.5
|
|
|
161.1
|
|
|
Insurance-linked securities funds
|
|
46.2
|
|
|
41.2
|
|
|
Private debt investments
|
|
25.8
|
|
|
28.7
|
|
|
Other
|
|
2.5
|
|
|
2.5
|
|
|
Total other long-term investments
|
|
$
|
805.6
|
|
|
$
|
856.3
|
|
(1) See Fair Value Measurements by Level table.
(2) Includes White Mountains’s non-controlling equity interests in certain private common equity securities, limited liability companies and convertible preferred securities.
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 March 31, 2020, White Mountains held investments in thirteen private equity funds. The largest investment in a single private equity fund or hedge fund was $21.1 million as of March 31, 2020 and $54.6 million as of December 31, 2019.
In the first quarter of 2020, White Mountains submitted a notice to redeem its sole hedge fund having a fair value of $45.6 million, which was recorded in accounts receivable on unsettled investment sales as of March 31, 2020. The bulk of the redemption proceeds, subject to customary audit holdbacks, were received in April 2020 and the remaining balance is expected to be received in April 2021.
The following table presents investments and unfunded commitments in private equity funds and hedge funds by investment objective and sector as of March 31, 2020 and December 31, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2020
|
|
December 31, 2019
|
|
Millions
|
|
Fair Value
|
|
Unfunded
Commitments
|
|
Fair Value
|
|
Unfunded
Commitments
|
|
Private equity funds
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Manufacturing/Industrial
|
|
$
|
44.5
|
|
|
$
|
4.0
|
|
|
$
|
57.7
|
|
|
$
|
4.1
|
|
|
Aerospace/Defense/Government
|
|
37.5
|
|
|
23.3
|
|
|
33.8
|
|
|
23.3
|
|
|
Financial services
|
|
16.5
|
|
|
25.9
|
|
|
15.0
|
|
|
22.8
|
|
|
Total private equity funds
|
|
98.5
|
|
|
53.2
|
|
|
106.5
|
|
|
50.2
|
|
|
Hedge funds
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long/short banks and financials
|
|
—
|
|
|
—
|
|
|
54.6
|
|
|
—
|
|
|
Total hedge funds
|
|
—
|
|
|
—
|
|
|
54.6
|
|
|
—
|
|
|
Total private equity funds and hedge funds
included in other long-term investments
|
|
$
|
98.5
|
|
|
$
|
53.2
|
|
|
$
|
161.1
|
|
|
$
|
50.2
|
|
Investments in private equity funds are generally subject to a lock-up period during which investors may not request a redemption. Distributions prior to the expected termination date of the fund may be limited to dividends or proceeds arising from the liquidation of the fund’s underlying investments. In addition, certain private equity funds have the option to extend the lock-up period.
The following table presents investments in private equity funds that were subject to lock-up periods as of March 31, 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Millions
|
|
1 – 3 years
|
|
3 – 5 years
|
|
5 – 10 years
|
|
>10 years
|
|
Total
|
|
Private equity funds — expected lock-up period remaining
|
|
$4.7
|
|
$39.3
|
|
$43.3
|
|
$11.2
|
|
$98.5
|
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 March 31, 2020 and December 31, 2019, White Mountains is not aware of any indemnification claims relating to its investments in private equity funds.
Redemption of investments in most hedge funds is subject to restrictions, including lock-up periods where no redemptions or withdrawals are allowed, restrictions on redemption frequency and advance notice periods for redemptions. Amounts requested for redemptions remain subject to market fluctuations until the redemption effective date, which generally falls at the end of the defined redemption period.
Insurance-Linked Securities Funds
White Mountains’s other long-term investments include ILS funds. The fair value of these investments is generally estimated using the NAV of the funds. As of March 31, 2020, White Mountains held investments in four ILS funds with a fair value of $46.2 million and $5.2 million of unfunded commitments.
Investments in ILS funds are generally subject to restrictions, including lock-up periods where no redemptions or withdrawals are allowed, non-renewal clauses, restrictions on redemption frequency and advance notice periods for redemptions. From time to time, natural catastrophe, liquidity, market or other events will occur that make the determination of fair value for underlying investments in 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 March 31, 2020, 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.
In the first quarter of 2020, White Mountains invested in an ILS fund that requires shareholders to make additional capital commitments annually equal to their existing capital commitment, unless a non-renewal notice is provided on or before September 15 of each calendar year. The notice of non-renewal constitutes a redemption request. Fund proceeds become available on the last calendar day of month when the last underlying fund investment has fully matured or been commuted, which is typically three years from the initial investment in the fund.
Fair Value Measurements as of March 31, 2020
Fair value measurements are categorized into a hierarchy that distinguishes between inputs based on market data from independent sources (“observable inputs”) and a reporting entity’s internal assumptions based upon the best information available when external market data is limited or unavailable (“unobservable inputs”). Quoted prices in active markets for identical assets or liabilities have the highest priority (“Level 1”), followed by observable inputs other than quoted prices, including prices for similar but not identical assets or liabilities (“Level 2”) and unobservable inputs, including the reporting entity’s estimates of the assumptions that market participants would use, having the lowest priority (“Level 3”). As of March 31, 2020 and December 31, 2019, White Mountains used quoted market prices or other observable inputs to determine fair value for approximately 70% and 71% of the investment portfolio.
Fair Value Measurements by Level
The following tables present White Mountains’s fair value measurements for investments as of March 31, 2020 and December 31, 2019 by level. The major security types were based on the legal form of the securities. White Mountains has disaggregated its fixed maturity investments based on the issuing entity type, which impacts credit quality, with debt securities issued by U.S. government entities carrying minimal credit risk, while the credit and other risks associated with other issuers, such as corporations, 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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2020
|
|
Millions
|
|
Fair Value
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Fixed maturity investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government and agency obligations
|
|
$
|
223.9
|
|
|
$
|
223.9
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt securities issued by corporations:
|
|
|
|
|
|
|
|
|
|
|
Financials
|
|
151.3
|
|
|
—
|
|
|
151.3
|
|
|
—
|
|
|
Industrial
|
|
63.4
|
|
|
—
|
|
|
63.4
|
|
|
—
|
|
|
Healthcare
|
|
52.8
|
|
|
—
|
|
|
52.8
|
|
|
—
|
|
|
Technology
|
|
52.7
|
|
|
—
|
|
|
52.7
|
|
|
—
|
|
|
Consumer
|
|
47.5
|
|
|
—
|
|
|
47.5
|
|
|
—
|
|
|
Energy
|
|
38.2
|
|
|
—
|
|
|
38.2
|
|
|
—
|
|
|
Utilities
|
|
30.4
|
|
|
—
|
|
|
30.4
|
|
|
—
|
|
|
Communications
|
|
29.1
|
|
|
—
|
|
|
29.1
|
|
|
—
|
|
|
Materials
|
|
21.3
|
|
|
—
|
|
|
21.3
|
|
|
—
|
|
|
Total debt securities issued by corporations
|
|
486.7
|
|
|
—
|
|
|
486.7
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
Municipal obligations
|
|
270.0
|
|
|
—
|
|
|
270.0
|
|
|
—
|
|
|
Mortgage and asset-backed securities
|
|
231.7
|
|
|
—
|
|
|
231.7
|
|
|
—
|
|
|
Total fixed maturity investments
|
|
1,212.3
|
|
|
223.9
|
|
|
988.4
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term investments (1)
|
|
137.6
|
|
|
130.9
|
|
|
6.7
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
Common equity securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exchange traded funds (2)
|
|
415.6
|
|
|
403.7
|
|
|
11.9
|
|
|
—
|
|
|
Other (3)
|
|
108.1
|
|
|
18.0
|
|
|
90.0
|
|
|
.1
|
|
|
Total common equity securities
|
|
523.7
|
|
|
421.7
|
|
|
101.9
|
|
|
.1
|
|
|
|
|
|
|
|
|
|
|
|
|
Other long-term investments
|
|
660.9
|
|
|
—
|
|
|
—
|
|
|
660.9
|
|
|
Other long-term investments — NAV (4)
|
|
144.7
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Total investments
|
|
$
|
2,679.2
|
|
|
$
|
776.5
|
|
|
$
|
1,097.0
|
|
|
$
|
661.0
|
|
(1) Short-term investments are measured at amortized cost, which approximates fair value.
(2) ETFs traded on foreign exchanges are priced using the fund’s published NAV to account for the difference in market close times and are therefore designated a Level 2 measurement.
(3) Primarily consists of two investments in unit trusts that predominantly invest in international equities and an open-end mutual fund that invests in domestic large-cap companies.
(4) Consists of private equity funds 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, 2019
|
|
Millions
|
|
Fair Value
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Fixed maturity investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government and agency obligations
|
|
$
|
232.5
|
|
|
$
|
232.5
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt securities issued by corporations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financials
|
|
144.8
|
|
|
—
|
|
|
144.8
|
|
|
—
|
|
|
Industrial
|
|
59.0
|
|
|
—
|
|
|
59.0
|
|
|
—
|
|
|
Healthcare
|
|
52.6
|
|
|
—
|
|
|
52.6
|
|
|
—
|
|
|
Consumer
|
|
50.9
|
|
|
—
|
|
|
50.9
|
|
|
—
|
|
|
Energy
|
|
44.9
|
|
|
—
|
|
|
44.9
|
|
|
—
|
|
|
Technology
|
|
41.2
|
|
|
—
|
|
|
41.2
|
|
|
—
|
|
|
Communications
|
|
31.3
|
|
|
—
|
|
|
31.3
|
|
|
—
|
|
|
Utilities
|
|
25.0
|
|
|
—
|
|
|
25.0
|
|
|
—
|
|
|
Materials
|
|
17.5
|
|
|
—
|
|
|
17.5
|
|
|
—
|
|
|
Total debt securities issued by corporations
|
|
467.2
|
|
|
—
|
|
|
467.2
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
Municipal obligations
|
|
297.1
|
|
|
—
|
|
|
297.1
|
|
|
—
|
|
|
Mortgage and asset-backed securities
|
|
209.0
|
|
|
—
|
|
|
209.0
|
|
|
—
|
|
|
Total fixed maturity investments
|
|
1,205.8
|
|
|
232.5
|
|
|
973.3
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term investments (1)
|
|
201.2
|
|
|
189.4
|
|
|
11.8
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
Common equity securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exchange traded funds (2)
|
|
536.4
|
|
|
521.6
|
|
|
14.8
|
|
|
—
|
|
|
Other (3)
|
|
147.5
|
|
|
25.9
|
|
|
121.5
|
|
|
.1
|
|
|
Total common equity securities
|
|
683.9
|
|
|
547.5
|
|
|
136.3
|
|
|
.1
|
|
|
|
|
|
|
|
|
|
|
|
|
Other long-term investments
|
|
654.0
|
|
|
—
|
|
|
—
|
|
|
654.0
|
|
|
Other long-term investments — NAV (4)
|
|
202.3
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Total investments
|
|
$
|
2,947.2
|
|
|
$
|
969.4
|
|
|
$
|
1,121.4
|
|
|
$
|
654.1
|
|
(1) Short-term investments are measured at amortized cost, which approximates fair value.
(2) ETFs traded on foreign exchanges are priced using the fund’s published NAV to account for the difference in market close times and are therefore designated a Level 2 measurement.
(3) Primarily consists of two investments in unit trusts that predominantly invest in international equities and an open-end mutual fund that invests in domestic large-cap companies.
(4) Consists of private equity funds, one hedge fund and 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.
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 March 31, 2020 and December 31, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value at
|
|
Millions
|
|
March 31, 2020
|
|
December 31, 2019
|
|
AAA
|
|
$
|
11.3
|
|
|
$
|
9.5
|
|
|
AA
|
|
63.6
|
|
|
73.9
|
|
|
A
|
|
304.7
|
|
|
288.5
|
|
|
BBB
|
|
106.1
|
|
|
95.3
|
|
|
BB
|
|
1.0
|
|
|
—
|
|
|
Debt securities issued by corporations (1)
|
|
$
|
486.7
|
|
|
$
|
467.2
|
|
|
|
|
|
(1)
|
Credit ratings are based upon issuer credit ratings provided by Standard & Poor’s Financial Services LLC (“Standard & Poor’s”), or if unrated by Standard & Poor’s, long-term obligation ratings provided by Moody’s Investor Service, Inc.
|
Mortgage and Asset-backed Securities
The following table presents the fair value of White Mountains’s mortgage and asset-backed securities as of March 31, 2020 and December 31, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2020
|
|
December 31, 2019
|
|
Millions
|
|
Fair Value
|
|
Level 2
|
|
Level 3
|
|
Fair Value
|
|
Level 2
|
|
Level 3
|
|
Mortgage-backed securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agency:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FNMA
|
|
$
|
90.6
|
|
|
$
|
90.6
|
|
|
$
|
—
|
|
|
$
|
88.6
|
|
|
$
|
88.6
|
|
|
$
|
—
|
|
|
FHLMC
|
|
72.1
|
|
|
72.1
|
|
|
—
|
|
|
60.5
|
|
|
60.5
|
|
|
—
|
|
|
GNMA
|
|
45.7
|
|
|
45.7
|
|
|
—
|
|
|
30.8
|
|
|
30.8
|
|
|
—
|
|
|
Total agency (1)
|
|
208.4
|
|
|
208.4
|
|
|
—
|
|
|
179.9
|
|
|
179.9
|
|
|
—
|
|
|
Total mortgage-backed securities
|
|
208.4
|
|
|
208.4
|
|
|
—
|
|
|
179.9
|
|
|
179.9
|
|
|
—
|
|
|
Other asset-backed securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vehicle receivables
|
|
12.2
|
|
|
12.2
|
|
|
—
|
|
|
15.1
|
|
|
15.1
|
|
|
—
|
|
|
Credit card receivables
|
|
11.1
|
|
|
11.1
|
|
|
—
|
|
|
14.0
|
|
|
14.0
|
|
|
—
|
|
|
Total other asset-backed securities
|
|
23.3
|
|
|
23.3
|
|
|
—
|
|
|
29.1
|
|
|
29.1
|
|
|
—
|
|
|
Total mortgage and asset-backed securities
|
|
$
|
231.7
|
|
|
$
|
231.7
|
|
|
$
|
—
|
|
|
$
|
209.0
|
|
|
$
|
209.0
|
|
|
$
|
—
|
|
|
|
|
|
(1)
|
Represents publicly traded mortgage-backed securities which carry the full faith and credit guaranty of the U.S. Government (i.e., GNMA) or are guaranteed by a government sponsored entity (i.e., FNMA, FHLMC).
|
Rollforward of Fair Value Measurements by Level
White Mountains uses quoted market prices where available as the inputs to estimate fair value for its investments in active markets. Such measurements are considered to be either Level 1 or Level 2 measurements, depending on whether the quoted market price inputs are for identical securities (Level 1) or similar securities (Level 2). Level 3 measurements for fixed maturity investments, common equity securities and other long-term investments as of March 31, 2020 and 2019 consist of securities for which the estimated fair value has not been determined based upon quoted market price inputs for identical or similar securities.
The following tables present the changes in White Mountains’s fair value measurements by level for the three months ended March 31, 2020 and 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 3
Investments
|
Other Long-term Investments Measured at NAV (2)
|
|
|
|
|
Millions
|
Level 1 Investments
|
Level 2
Investments
|
Common
Equity
Securities
|
Other Long-term
Investments
|
|
Total
|
|
|
Balance at December 31, 2019
|
$
|
780.0
|
|
$
|
1,109.6
|
|
$
|
.1
|
|
$
|
654.0
|
|
$
|
202.3
|
|
|
$
|
2,746.0
|
|
(1)
|
|
Net realized and unrealized (losses)
|
(98.7
|
)
|
(39.9
|
)
|
—
|
|
(9.7
|
)
|
(8.8
|
)
|
|
(157.1
|
)
|
(3)
|
|
Amortization/Accretion
|
—
|
|
(.8
|
)
|
—
|
|
—
|
|
—
|
|
|
(.8
|
)
|
|
|
Purchases
|
74.2
|
|
126.8
|
|
—
|
|
24.7
|
|
7.2
|
|
|
232.9
|
|
|
|
Sales
|
(109.9
|
)
|
(105.4
|
)
|
—
|
|
(8.1
|
)
|
(56.0
|
)
|
|
(279.4
|
)
|
|
|
Transfers in
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
|
—
|
|
|
|
Transfers out
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
|
—
|
|
|
|
Balance at March 31, 2020
|
$
|
645.6
|
|
$
|
1,090.3
|
|
$
|
.1
|
|
$
|
660.9
|
|
$
|
144.7
|
|
|
$
|
2,541.6
|
|
(1)
|
(1) Excludes carrying value of $137.6 million and $201.2 as of March 31, 2020 and December 31, 2019 classified as short-term investments.
(2) Includes private equity funds, hedge funds, ILS funds and unconsolidated entities 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”.
(3) Excludes realized and unrealized gains associated with short-term investments of $0.4 for the three months ended March 31, 2020.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 3
Investments
|
Other Long-term Investments Measured at NAV (3)
|
|
|
|
Millions
|
Level 1 Investments
|
Level 2
Investments
|
Other Long-term
Investments
|
Total
|
|
|
Balance at December 31, 2018
|
$
|
842.6
|
|
$
|
1,160.5
|
|
$
|
138.7
|
|
$
|
186.9
|
|
$
|
2,328.7
|
|
(1)
|
|
Net realized and unrealized gains (losses)
|
91.7
|
|
40.7
|
|
114.0
|
|
(.8
|
)
|
245.6
|
|
(2)
|
|
Amortization/Accretion
|
.1
|
|
(.4
|
)
|
—
|
|
—
|
|
(.3
|
)
|
|
|
Purchases
|
14.6
|
|
142.3
|
|
11.5
|
|
49.2
|
|
217.6
|
|
|
|
Sales
|
(149.7
|
)
|
(105.4
|
)
|
—
|
|
(1.9
|
)
|
(257.0
|
)
|
|
|
Transfers in
|
—
|
|
—
|
|
10.9
|
|
—
|
|
10.9
|
|
|
|
Transfers out
|
—
|
|
—
|
|
—
|
|
(10.9
|
)
|
(10.9
|
)
|
|
|
Balance at March 31, 2019
|
$
|
799.3
|
|
$
|
1,237.7
|
|
$
|
275.1
|
|
$
|
222.5
|
|
$
|
2,534.6
|
|
(1)
|
(1) Excludes carrying value of $269.8 and $214.2 as of March 31, 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) Includes private equity funds, hedge funds and unconsolidated entities 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”.
Fair Value Measurements — Transfers Between Levels - Three-months ended March 31, 2020 and 2019
Transfers between levels are recorded using the fair value measurement as of the end of the quarterly period in which the event or change in circumstance giving rise to the transfer occurred.
During the first three months of 2020 and 2019, there were no fixed maturity investments or other long-term investments classified as Level 3 measurements in the prior period that were transferred to Level 2 measurements.
During the first three months of 2020 and 2019, there were no fixed maturity investments or other long-term investments classified as Level 2 measurements in the prior period that were transferred to Level 3 measurements.
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 March 31, 2020 and December 31, 2019. 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
|
|
March 31, 2020
|
|
Description
|
|
Valuation Technique(s)
|
|
Fair Value (2)
|
|
Unobservable Inputs
|
|
|
|
|
|
|
|
Discount Rate (2)
|
|
Terminal Cash Flow Exit Multiple (x) or Terminal Revenue Growth Rate (%) (3)
|
|
Kudu’s Participation Contracts (1)
|
|
Discounted cash flow
|
|
$262.7
|
|
18% - 24%
|
|
6x - 12x
|
|
MediaAlpha
|
|
Discounted cash flow
|
|
$210.0
|
|
15%
|
|
4%
|
|
PassportCard/DavidShield
|
|
Discounted cash flow
|
|
$80.0
|
|
25%
|
|
4%
|
|
Elementum Holdings, L.P.
|
|
Discounted cash flow
|
|
$55.1
|
|
20%
|
|
4%
|
|
Private debt instruments
|
|
Discounted cash flow
|
|
$25.8
|
|
7% - 15%
|
|
N/A
|
|
All other
|
|
Discounted cash flow
|
|
$13.6
|
|
25%
|
|
4%
|
|
|
|
|
|
|
|
|
|
|
|
Noblr, Inc.
|
|
Share price of recent transaction
|
|
$8.7
|
|
Share price:
|
|
$2.17
|
|
Zillion Insurance Services, Inc.
|
|
Recent transaction
|
|
$2.5
|
|
Transaction price:
|
|
$2.5
|
|
Compare.com
|
|
Estimated net realizable value
|
|
$2.5
|
|
Net realizable value:
|
|
$2.5
|
(1) In the first quarter of 2020, Kudu deployed $21.0 million in Creation Investments Capital Management.
(2) Includes the net unrealized investment gains (losses) associated with foreign currency; foreign currency effects based on observable inputs.
(3) Increases (decreases) to the discount rates in isolation would result in lower (higher) fair value measurements, while increases (decreases) to the terminal cash flow exit multiples or terminal revenue growth rates in isolation would result in higher (lower) fair value measurements.
|
|
|
|
|
|
|
|
|
|
|
|
|
$ in Millions
|
|
December 31, 2019
|
|
Description
|
|
Valuation Technique(s)
|
|
Fair Value (1)
|
|
Unobservable Inputs
|
|
|
|
|
|
|
|
Discount Rate (2)
|
|
Terminal Cash Flow Exit Multiple (x) or Terminal Revenue Growth Rate (%) (2)
|
|
Kudu’s Participation Contracts
|
|
Discounted cash flow
|
|
$266.5
|
|
15% - 22%
|
|
6x - 12x
|
|
MediaAlpha
|
|
Discounted cash flow
|
|
$180.0
|
|
15%
|
|
4%
|
|
PassportCard/DavidShield
|
|
Discounted cash flow
|
|
$90.0
|
|
22%
|
|
4%
|
|
Elementum Holdings, L.P.
|
|
Discounted cash flow
|
|
$55.1
|
|
20%
|
|
4%
|
|
Private debt instruments
|
|
Discounted cash flow
|
|
$23.7
|
|
4% - 9%
|
|
N/A
|
|
All other
|
|
Discounted cash flow
|
|
$23.7
|
|
25% - 32%
|
|
4%
|
|
|
|
|
|
|
|
|
|
|
|
Noblr, Inc.
|
|
Share price of recent transaction
|
|
$5.0
|
|
Share price:
|
|
$2.17
|
|
Zillion Insurance Services, Inc.
|
|
Recent transaction
|
|
$2.5
|
|
Transaction price:
|
|
$2.5
|
|
Compare.com
|
|
Estimated net realizable value
|
|
$2.5
|
|
Net realizable value:
|
|
$2.5
|
(1) Includes the net unrealized investment gains (losses) associated with foreign currency; foreign currency effects based on observable inputs.
(2) Increases (decreases) to the discount rates in isolation would result in lower (higher) fair value measurements, while increases (decreases) to the terminal cash flow exit multiples or terminal revenue growth rates in isolation would result in higher (lower) fair value measurements.
Note 4. Goodwill and Other Intangible Assets
White Mountains accounts for purchases of businesses 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 the acquisition date fair values, accumulated amortization and net carrying values for other intangible assets and goodwill, by company as of March 31, 2020 and December 31, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ in Millions
|
|
Weighted Average Economic
Life
(in years)
|
|
March 31, 2020
|
|
December 31, 2019
|
|
|
Acquisition Date Fair Value
|
|
Accumulated Amortization
|
|
Net Carrying Value
|
|
Acquisition Date Fair Value
|
|
Accumulated Amortization
|
|
Impairments
|
|
Net Carrying Value
|
|
Goodwill:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NSM (1)
|
|
N/A
|
|
$
|
379.1
|
|
|
$
|
—
|
|
|
$
|
379.1
|
|
|
$
|
381.6
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
381.6
|
|
|
Kudu
|
|
N/A
|
|
7.6
|
|
|
—
|
|
|
7.6
|
|
|
7.6
|
|
|
—
|
|
|
—
|
|
|
7.6
|
|
|
Other Operations
|
|
N/A
|
|
5.7
|
|
|
—
|
|
|
5.7
|
|
|
13.1
|
|
|
—
|
|
|
7.6
|
|
|
5.5
|
|
|
Total goodwill
|
|
|
|
392.4
|
|
|
—
|
|
|
392.4
|
|
|
402.3
|
|
|
—
|
|
|
7.6
|
|
|
394.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NSM (1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer relationships
|
|
9
|
|
120.1
|
|
|
23.5
|
|
|
96.6
|
|
|
121.7
|
|
|
19.8
|
|
|
1.4
|
|
|
100.5
|
|
|
Trade names
|
|
19
|
|
61.2
|
|
|
5.8
|
|
|
55.4
|
|
|
61.9
|
|
|
5.3
|
|
|
.4
|
|
|
56.2
|
|
|
Information
technology platform
|
|
5
|
|
3.1
|
|
|
1.3
|
|
|
1.8
|
|
|
3.9
|
|
|
1.4
|
|
|
.6
|
|
|
1.9
|
|
|
Renewal rights
|
|
12
|
|
82.5
|
|
|
1.0
|
|
|
81.5
|
|
|
82.5
|
|
|
.7
|
|
|
—
|
|
|
81.8
|
|
|
Other
|
|
3
|
|
1.7
|
|
|
.9
|
|
|
.8
|
|
|
1.7
|
|
|
.7
|
|
|
—
|
|
|
1.0
|
|
|
Subtotal
|
|
|
|
268.6
|
|
|
32.5
|
|
|
236.1
|
|
|
271.7
|
|
|
27.9
|
|
|
2.4
|
|
|
241.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Kudu
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trade names
|
|
7
|
|
2.2
|
|
|
.3
|
|
|
1.9
|
|
|
2.2
|
|
|
.2
|
|
|
—
|
|
|
2.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trade names
|
|
10
|
|
1.0
|
|
|
.1
|
|
|
.9
|
|
|
1.7
|
|
|
.5
|
|
|
.2
|
|
|
1.0
|
|
|
Customer relationships
|
|
11
|
|
7.2
|
|
|
.5
|
|
|
6.7
|
|
|
7.2
|
|
|
.4
|
|
|
—
|
|
|
6.8
|
|
|
Information
technology platform
|
|
5
|
|
—
|
|
|
—
|
|
|
—
|
|
|
.5
|
|
|
.3
|
|
|
.2
|
|
|
—
|
|
|
Insurance Licenses
|
|
N/A
|
|
8.6
|
|
|
—
|
|
|
8.6
|
|
|
8.6
|
|
|
—
|
|
|
—
|
|
|
8.6
|
|
|
Other
|
|
5
|
|
.2
|
|
|
—
|
|
|
.2
|
|
|
.2
|
|
|
—
|
|
|
—
|
|
|
.2
|
|
|
Subtotal
|
|
|
|
17.0
|
|
|
.6
|
|
|
16.4
|
|
|
18.2
|
|
|
1.2
|
|
|
.4
|
|
|
16.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other intangible assets
|
|
287.8
|
|
|
33.4
|
|
|
254.4
|
|
|
292.1
|
|
|
29.3
|
|
|
2.8
|
|
|
260.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total goodwill and other
intangible assets
|
|
$
|
680.2
|
|
|
$
|
33.4
|
|
|
646.8
|
|
|
$
|
694.4
|
|
|
$
|
29.3
|
|
|
10.4
|
|
|
654.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill and other intangible assets attributed to
non-controlling interests
|
|
(23.5
|
)
|
|
|
|
|
|
|
|
(23.4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill and other intangible assets included in
White Mountains’s common shareholders’ equity
|
|
$
|
623.3
|
|
|
|
|
|
|
|
|
$
|
631.3
|
|
(1) As of March 31, 2020, NSM’s goodwill and intangible assets included $(2.5) and $(0.5) of the effect of foreign currency translation. As of December 31, 2019, NSM’s goodwill and intangible assets included $1.4 and $0.7 of the effect of foreign currency translation.
The goodwill recognized for the entities shown above is attributed to expected future cash flows. The acquisition date fair values of other intangible assets with finite lives are estimated using income approach techniques, which use future expected cash flows to develop a discounted present value amount.
The multi-period-excess-earnings method estimates fair value using the present value of the incremental after-tax cash flows attributable solely to the other intangible asset over its remaining life. This approach was used to estimate the fair value of other intangible assets associated with trade names, customer relationships and contracts and information technology.
The relief-from-royalty method was used to estimate fair value for other intangible assets that relate to rights that could be obtained via a license from a third-party owner. Under this method, the fair value is estimated using the present value of license fees avoided by owning rather than leasing the asset. This technique was used to estimate the fair value of domain names, certain trademarks and brand names.
The with-or-without method estimates the fair value of an other intangible asset that provides an incremental benefit. Under this method, the fair value of the other intangible asset is calculated by comparing the value of the entity with and without the other intangible asset. This approach was used to estimate the fair value of favorable lease terms.
The following table presents a summary of the acquisition date fair values of goodwill and other intangible assets for
acquisitions completed from January 1, 2019 through March 31, 2020:
|
|
|
|
|
|
|
|
|
|
|
$ in Millions
|
|
|
|
|
|
Acquisition of subsidiary/ asset
|
|
Goodwill and
Other intangible asset (1)
|
|
Acquisition Date
|
|
Embrace (2)
|
|
$
|
67.6
|
|
|
April 1, 2019
|
|
Renewal Rights (3)
|
|
82.5
|
|
|
June 28, 2019
|
|
Total NSM segment
|
|
$
|
150.1
|
|
|
|
|
Kudu Transaction
|
|
$
|
9.8
|
|
|
April 4, 2019
|
|
Other Operations
|
|
$
|
22.6
|
|
|
Various
|
(1) Acquisition date fair values include the effect of adjustments during the measurement period and excludes the effect of foreign currency translation subsequent to the acquisition date.
(2) Exclude $3.4 of software classified within other assets.
(3) NSM’s purchase of the Renewal Rights from AIG was an asset acquisition.
On an annual basis beginning no later than the interim period included in the one-year anniversary of an acquisition, White Mountains evaluates goodwill for potential impairment. 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. There were no impairments recognized during the three month periods ended March 31, 2020 and 2019 and no events or changes in circumstances that would indicate the existence of an impairment of goodwill or other intangible asset for any acquired entity.
The following tables presents the change in goodwill and other intangible assets for the three months ended March 31, 2020 and 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
|
2020
|
|
2019
|
|
Millions
|
|
Goodwill
|
|
Other Intangible Assets
|
|
Total Goodwill and Other Intangible Assets
|
|
Goodwill
|
|
Other Intangible Assets
|
|
Total Goodwill and Other Intangible Assets
|
|
Beginning balance
|
|
$
|
394.7
|
|
|
$
|
260.0
|
|
|
654.7
|
|
|
$
|
379.9
|
|
|
$
|
157.6
|
|
|
$
|
537.5
|
|
|
Deconsolidation of MediaAlpha
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(18.3
|
)
|
|
(23.5
|
)
|
|
(41.8
|
)
|
|
Attribution of acquisition date fair value estimates
between goodwill and other intangible assets
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(26.8
|
)
|
|
26.8
|
|
|
—
|
|
|
Acquisitions of businesses
|
|
—
|
|
|
—
|
|
|
—
|
|
|
13.4
|
|
|
—
|
|
|
13.4
|
|
|
Foreign currency translation
|
|
(2.5
|
)
|
|
(.5
|
)
|
|
(3.0
|
)
|
|
1.2
|
|
|
.3
|
|
|
1.5
|
|
|
Adjustments to reflect acquisition date fair value
|
|
.2
|
|
|
—
|
|
|
.2
|
|
|
.3
|
|
|
5.9
|
|
|
6.2
|
|
|
Amortization
|
|
—
|
|
|
(5.1
|
)
|
|
(5.1
|
)
|
|
—
|
|
|
(6.6
|
)
|
|
(6.6
|
)
|
|
Ending balance
|
|
$
|
392.4
|
|
|
$
|
254.4
|
|
|
$
|
646.8
|
|
|
$
|
349.7
|
|
|
$
|
160.5
|
|
|
$
|
510.2
|
|
Note 5. Debt
The following table presents White Mountains’s debt outstanding as of March 31, 2020 and December 31, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Millions
|
|
March 31,
2020
|
|
Effective
Rate (1)
|
|
December 31,
2019
|
|
Effective
Rate (1)
|
|
NSM Bank Facility
|
|
$
|
220.7
|
|
|
6.8%
|
|
$
|
221.3
|
|
|
7.5%
|
|
Unamortized issuance cost
|
|
(3.6
|
)
|
|
|
|
(3.9
|
)
|
|
|
|
NSM Bank Facility, carrying value
|
|
217.1
|
|
|
|
|
217.4
|
|
|
|
|
Other NSM debt
|
|
1.3
|
|
|
2.2%
|
|
1.8
|
|
|
3.0%
|
|
Kudu Bank Facility
|
|
69.0
|
|
|
9.1%
|
|
57.0
|
|
|
8.3%
|
|
Unamortized issuance cost
|
|
(3.3
|
)
|
|
|
|
(3.4
|
)
|
|
|
|
Kudu Bank Facility, carrying value
|
|
65.7
|
|
|
|
|
53.6
|
|
|
|
|
Other Operations debt
|
|
11.0
|
|
|
8.2%
|
|
11.1
|
|
|
8.3%
|
|
Unamortized issuance cost
|
|
(.4
|
)
|
|
|
|
(.4
|
)
|
|
|
|
Other Operations, carrying value
|
|
10.6
|
|
|
|
|
10.7
|
|
|
|
|
Total debt
|
|
$
|
294.7
|
|
|
|
|
$
|
283.5
|
|
|
|
(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 months ended March 31, 2020 and 2019, NSM repaid $0.6 million and $0.5 million on the term loans and had no repayments on the revolving credit loan. During the three months ended March 31, 2020, NSM did not make any borrowings on the term loans or revolving credit loans. During the three months ended March 31, 2019, NSM borrowed $6.5 million on the revolving credit loan. As of March 31, 2020, the term loans had an outstanding balance of $220.7 million and the revolving credit loan was 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 March 31, 2020, the variable rate received by NSM under the swap agreement was 1.58%. As of March 31, 2020, the interest rate, including the effect of the swap, for the outstanding term loans of $148.4 million that are hedged by the swap was 7.47%. The effective interest on the outstanding term loans of $72.3 million that are unhedged was 6.25%. The effective interest rate on the total outstanding term loans under the NSM Bank Facility of $220.7 million was 6.34%, excluding the effect of debt issuance costs. See Note 7 — “Derivatives”.
The NSM Bank Facility is secured by all property of the loan parties and contains various affirmative, negative and financial covenants that White Mountains considers to be customary for such borrowings, including a maximum consolidated total leverage ratio covenant.
Other NSM Debt
NSM also has a secured term loan related to its U.K.-based operations. As of March 31, 2020, the secured term loan had an outstanding balance of $1.6 million and a maturity date of May 11, 2026.
Kudu Bank Facility
On December 23, 2019, Kudu entered into a secured credit facility (the “Kudu Bank Facility”) with Monroe Capital Management Advisors, LLC to provide funding for distributions to unitholders and fund new investments and related transaction expenses. The Kudu Bank Facility has a maximum borrowing capacity of $125.0 million, which is comprised of a revolving credit loan commitment of $5.0 million, an initial term loan of $57.0 million and a delayed-draw term loan of $63.0 million. The term loans and revolving credit loans, under the Kudu Bank Facility, mature in 2025. During the three months ended March 31, 2020, Kudu borrowed $12.0 million in term loans under the Kudu Bank Facility and made no repayments. As of March 31, 2020, the term loans had an outstanding balance of $69.0 million and the revolving credit loan was undrawn.
Interest on the Kudu Bank Facility accrues at a floating interest rate equal to the greater of the one-month LIBOR and 1.0% or the Prime Rate plus 1%, plus in each case, an applicable margin. The margin over LIBOR may vary between 5.50% and 6.25% and the margin over the Base Rate may vary between 4.50% and 5.25%, depending on the consolidated total leverage ratio of the borrower.
The Kudu Bank Facility is secured by all property of the loan parties and contains various affirmative, negative and financial covenants that White Mountains considers to be customary for such borrowings, including a maximum consolidated total leverage ratio covenant.
Other Operations Debt
As of March 31, 2020, debt in White Mountains’s Other Operations segment consisted of a secured credit facility that had a maximum borrowing capacity of $16.3 million, which is comprised of a term loan of $11.3 million, a delayed-draw term loan of $3.0 million and a revolving credit loan commitment of $2.0 million, all with a maturity date of March 12, 2024. As of March 31, 2020, the term loans had an outstanding balance of $11.0 million and the revolving credit loan was undrawn.
Compliance
At March 31, 2020, 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.
In the first quarter of 2020, White Mountains adopted ASU 2019-12, Simplifying the Accounting for Income Taxes (ASC 740) (“ASU 2019-12”). For periods subsequent to the adoption of ASU 2019-12, White Mountains records both the tax expense related to BAM’s MSC and the related valuation allowance on such taxes through the non-controlling interest equity. Prior to the adoption of ASU 2019-12, White Mountains recorded the tax expense related to BAM’s MSC directly to non-controlling interest equity, while the valuation allowance on such taxes was recorded through the income statement.
White Mountains’s income tax benefit related to pre-tax loss from continuing operations for the three months ended March 31, 2020 represented an effective tax rate of 15.4%. The effective tax rate was different from the U.S. statutory rate of 21.0%, due to income generated in jurisdictions with lower tax rates than the United States and state income taxes.
White Mountains’s income tax expense related to pre-tax income from continuing operations for the three months ended March 31, 2019 represented an effective tax rate of 3.6%. The effective tax rate was different from the U.S. statutory rate of 21.0%, primarily due to a release of a full valuation allowance on net deferred tax assets at 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. The effective rate was also different due to withholding taxes and a tax benefit recorded at BAM. For BAM, MSC and the related taxes thereon were recorded directly to non-controlling interest equity, while the valuation allowance on such taxes was recorded through the income statement. For the three months ended March 31, 2019, BAM recorded a tax benefit of $1.1 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 months ended March 31, 2020 and 2019, 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, 2020 and 2019.
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 March 31, 2020, the variable rate received by NSM under the swap agreement was 1.58%. 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 March 31, 2020, the interest rate, including the effect of the swap, for the outstanding term loans of $148.4 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 evaluates the effectiveness of the hedging relationship on an ongoing basis.
For the three months ended March 31, 2020 and 2019, White Mountains recognized net interest expense of $0.5 million and $0.2 million for the periodic net settlement payments on the swap. As of March 31, 2020 and December 31, 2019, the estimated fair value of the swap and the accrual of the periodic net settlement payments recorded in other liabilities was $9.8 million and $6.6 million. There was no ineffectiveness in the hedge for the three month periods ended March 31, 2020 or March 31, 2019. For the three months ended March 31, 2020 and 2019, the $(3.2) million and $(1.9) million change in the fair value of the swap is included within White Mountains’s accumulated other comprehensive income (loss).
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 newly formed mutual municipal bond insurer. As of March 31, 2020, 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.
At inception, the Supplemental Trust contained the original $300.0 million of Series B Notes and $100.0 million of cash and fixed income securities. During 2017, in order to further support BAM’s long-term capital position and business prospects, HG Global agreed to contribute the original $203.0 million of Series A Notes into the Supplemental Trust. At the same time HG Global and BAM also changed the payment terms of the Series B Notes, so that payments reduce principal and accrued interest on a pro rata basis, consistent with the payment terms on the Series A Notes. The terms of the Series B Notes had previously stipulated that payments would first reduce interest owed, then reduce principal owed once all accrued interest had been paid. The New York State Department of Financial Services (“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.
On a monthly basis, BAM deposits cash equal to ceded premiums, net of ceding commissions, due to HG Re under the FLRT directly into the Regulation 114 Trust. The Regulation 114 Trust target balance is equal to gross ceded unearned premiums and unpaid ceded loss and LAE expenses, if any. If, at the end of any quarter, the Regulation 114 Trust balance is below the target balance, funds will be withdrawn from the Supplemental Trust and deposited into the Regulation 114 Trust in an amount equal to the shortfall. If, at the end of any quarter, the Regulation 114 Trust balance is above 102% of the target balance, funds will be withdrawn from the Regulation 114 Trust and deposited into the Supplemental Trust.
The Supplemental Trust target balance is $603.0 million, less the amount of cash and securities in the Regulation 114 Trust in excess of its target balance (the “Supplemental Trust Target Balance”). If, at the end of any quarter, the Supplemental Trust balance exceeds the Supplemental Trust Target Balance, such excess may be distributed to HG Re. The distribution will be made first as an assignment of accrued interest on the BAM Surplus Notes and second in cash and/or fixed income securities. As the BAM Surplus Notes are repaid over time, the BAM Surplus Notes will be replaced in the Supplemental Trust by cash and fixed income securities.
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. The variable rate was 5.7% for 2019 and is 4.6% for 2020. In January 2020, HG Global and BAM agreed to amend the BAM Surplus Notes to extend the end of the variable interest rate period until December 31, 2024. 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%. BAM is required to seek regulatory approval to pay interest and principal on the BAM Surplus Notes only to the extent that its remaining qualified statutory capital and other capital resources continue to support its outstanding obligations, its business plan and its “AA/stable” rating from Standard & Poor’s. No payment of principal or interest on the BAM Surplus Notes may be made without the approval of the NYDFS.
Under GAAP, if the terms of a debt instrument are amended, unless there is a greater than 10% change in the expected discounted future cash flows of such instrument, a change in the instrument’s carrying value is not permitted. White Mountains has determined that the impact of the changes to the terms of the BAM Surplus Notes on the expected discounted future cash flows was not greater than 10%.
Also in January 2020, HG Global and BAM agreed to extend the initial 10-year term of the FLRT to the end of 2022 and to enter into an excess of loss reinsurance agreement (the “XOLT”). Under the XOLT, HG Re provides last dollar protection for exposures on municipal bonds insured by BAM in excess of NYDFS single issuer limits. The XOLT is subject to an aggregate limit equal to the lesser of $75.0 million or the assets held in the Supplemental Trust at any point in time. At inception, BAM ceded exposure on one covered risk to HG Re under the XOLT. Additional cessions under the XOLT are subject to approval by HG Re.
In connection with the actions described in the preceding paragraphs, in January 2020, BAM made a $65.0 million special cash payment of principal and interest on the BAM Surplus Notes. Of this payment, $47.9 million was a repayment of principal held in the Supplemental Trust, $0.9 million was a payment of accrued interest held inside the Supplemental Trust and $16.2 million was a payment of accrued interest held outside the Supplemental Trust.
As of March 31, 2020 and December 31, 2019, the collateral trusts held assets of $792.7 million and $786.7 million, which included $409.7 million and $457.6 million of BAM Surplus Notes. As of March 31, 2020 and December 31, 2019, HG Global has accrued $150.4 million and $162.7 million of interest receivable on the BAM Surplus Notes.
The following table presents a schedule of BAM’s insured obligations as of March 31, 2020 and December 31, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2020
|
|
December 31, 2019
|
|
Contracts outstanding
|
|
9,312
|
|
|
8,987
|
|
|
Remaining weighted average contract period outstanding (in years)
|
|
10.6
|
|
|
10.7
|
|
|
Contractual debt service outstanding (in millions):
|
|
|
|
|
|
Principal
|
|
$
|
64,481.2
|
|
|
$
|
62,250.5
|
|
|
Interest
|
|
32,449.1
|
|
|
31,799.7
|
|
|
Total debt service outstanding
|
|
$
|
96,930.3
|
|
|
$
|
94,050.2
|
|
|
|
|
|
|
|
|
Gross unearned insurance premiums (in millions)
|
|
$
|
202.7
|
|
|
$
|
198.4
|
|
The following table presents a schedule of BAM’s future premium revenues as of March 31, 2020:
|
|
|
|
|
|
|
|
|
Millions
|
|
March 31, 2020
|
|
April 1, 2020 - December 31, 2020
|
|
$
|
14.3
|
|
|
|
|
|
|
January 1, 2021 - March 31, 2021
|
|
4.6
|
|
|
April 1, 2021 - June 30, 2021
|
|
4.5
|
|
|
July 1, 2021 - September 30, 2021
|
|
4.5
|
|
|
October 1, 2021 - December 31, 2021
|
|
4.4
|
|
|
Total 2021
|
|
18.0
|
|
|
|
|
|
|
2022
|
|
16.9
|
|
|
2023
|
|
15.9
|
|
|
2024
|
|
14.8
|
|
|
2025
|
|
13.8
|
|
|
2026 and thereafter
|
|
109.0
|
|
|
Total gross unearned insurance premiums
|
|
$
|
202.7
|
|
The following table presents a schedule of net written premiums and net earned premiums included in White Mountains’s HG Global/BAM segment for the three months ended March 31, 2020 and 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
Millions
|
|
2020
|
|
2019
|
|
Written premiums:
|
|
|
|
|
|
Direct
|
|
$
|
9.7
|
|
|
$
|
7.9
|
|
|
Assumed
|
|
—
|
|
|
—
|
|
|
Gross written premiums
|
|
$
|
9.7
|
|
|
$
|
7.9
|
|
|
Earned premiums:
|
|
|
|
|
|
Direct
|
|
$
|
4.5
|
|
|
$
|
3.7
|
|
|
Assumed
|
|
.9
|
|
|
.5
|
|
|
Gross earned premiums
|
|
$
|
5.4
|
|
|
$
|
4.2
|
|
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.
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 as the agreement does not meet the risk transfer requirements necessary to be accounted for as reinsurance.
In September 2019, BAM entered into facultative quota share reinsurance agreements under which it assumed a portfolio of municipal bond guarantee contracts with a par value of $1.1 billion. In November 2018, BAM entered into a 100% quota share facultative quota share reinsurance agreement under which it assumed a portfolio of municipal bond guarantee contracts with a par value of $2.2 billion. None of the contracts assumed were non-performing and no loss reserves have been established for any of the contracts, either as of the transaction dates or as of March 31, 2020. 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. 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 months ended March 31, 2020 and 2019. See Note 17 — “Held for Sale and Discontinued Operations”.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
|
2020
|
|
2019
|
|
Basic and diluted earnings per share numerators (in millions):
|
|
|
|
|
|
|
Net (loss) income attributable to White Mountains’s
common shareholders
|
|
$
|
(128.8
|
)
|
|
$
|
284.4
|
|
|
Less: total income from discontinued operations, net of tax
|
|
.9
|
|
|
.7
|
|
|
Net (loss) income from continuing operations attributable to
White Mountains’s common shareholders
|
|
$
|
(129.7
|
)
|
|
$
|
283.7
|
|
|
Allocation of losses (earnings) to participating restricted common shares(1)
|
|
1.3
|
|
|
(2.9
|
)
|
|
Basic and diluted (losses) earnings per share numerators
|
|
$
|
(128.4
|
)
|
|
$
|
280.8
|
|
|
Basic earnings per share denominators (in thousands):
|
|
|
|
|
|
Total average common shares outstanding during the period
|
|
3,178.0
|
|
|
3,172.2
|
|
|
Average unvested restricted common shares(2)
|
|
(33.8
|
)
|
|
(32.5
|
)
|
|
Basic (losses) earnings per share denominator
|
|
3,144.2
|
|
|
3,139.7
|
|
|
Diluted earnings per share denominator (in thousands):
|
|
|
|
|
|
Total average common shares outstanding during the period
|
|
3,178.0
|
|
|
3,172.2
|
|
|
Average unvested restricted common shares(2)
|
|
(33.8
|
)
|
|
(32.5
|
)
|
|
Diluted (losses) earnings per share denominator
|
|
3,144.2
|
|
|
3,139.7
|
|
|
Basic and diluted earnings per share (in dollars) - continuing operations:
|
|
|
|
|
|
Distributed earnings - dividends declared and paid
|
|
$
|
1.00
|
|
|
$
|
1.00
|
|
|
Undistributed (losses) earnings
|
|
(41.82
|
)
|
|
88.42
|
|
|
Basic and diluted (losses) earnings per share
|
|
$
|
(40.82
|
)
|
|
$
|
89.42
|
|
(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 months ended March 31, 2020 and 2019. See Note 17 — “Held for Sale and Discontinued Operations”.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
March 31,
|
|
Millions
|
|
|
2020
|
|
2019
|
|
Undistributed net earnings - continuing operations:
|
|
|
|
|
|
|
Net (loss) income attributable to White Mountains’s common shareholders,
net of restricted common share amounts
|
|
|
$
|
(128.4
|
)
|
|
$
|
280.8
|
|
|
Dividends declared, net of restricted common share amounts (1)
|
|
|
(3.1
|
)
|
|
(3.2
|
)
|
|
Total undistributed net (losses) earnings, net of restricted common share amounts
|
|
|
$
|
(131.5
|
)
|
|
$
|
277.6
|
|
(1) Restricted shares issued by White Mountains receive dividends, and therefore, are considered participating securities.
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 March 31, 2020, White Mountains’s share-based compensation incentive awards consist of performance shares and restricted shares.
Performance Shares
Performance shares are designed to reward employees for meeting company-wide performance targets. Performance shares are conditional grants of a specified maximum number of common shares or an equivalent amount of cash. Awards generally vest at the end of a three-year service period, are subject to the attainment of pre-specified performance goals, and are valued based on the market value of common shares at the time awards are paid. Performance shares earned under the WTM Incentive Plan are typically paid in cash but may be paid in common shares. Compensation expense is recognized for the vested portion of the awards over the related service periods. The level of payout ranges from zero to two times the number of shares initially granted, depending on White Mountains’s financial performance. Performance shares become payable at the conclusion of a performance cycle (typically 3 years) if pre-defined financial targets are met. The performance measures used for determining performance share payouts are growth in White Mountains’s adjusted book value per share and intrinsic value per share. Intrinsic value per share is generally calculated by adjusting adjusted book value per share for differences between the adjusted book value of certain assets and liabilities and White Mountains’s estimate of their underlying intrinsic values.
The following table presents the performance share activity for the three months ended March 31, 2020 and 2019 for performance shares granted under the WTM Incentive Plan:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
|
2020
|
|
2019
|
|
Millions, except share amounts
|
|
Target Performance
Shares Outstanding
|
|
Accrued
Expense
|
|
Target Performance
Shares Outstanding
|
|
Accrued
Expense
|
|
Beginning of period
|
|
42,473
|
|
|
$
|
43.7
|
|
|
40,616
|
|
|
$
|
31.7
|
|
|
Shares paid (1)
|
|
(14,070
|
)
|
|
(27.7
|
)
|
|
(13,715
|
)
|
|
(18.1
|
)
|
|
New grants
|
|
14,055
|
|
|
—
|
|
|
13,700
|
|
|
—
|
|
|
Forfeitures and cancellations(2)
|
|
—
|
|
|
.4
|
|
|
1
|
|
|
.2
|
|
|
Expense recognized
|
|
—
|
|
|
(6.6
|
)
|
|
—
|
|
|
9.3
|
|
|
End of period
|
|
42,458
|
|
|
$
|
9.8
|
|
|
40,602
|
|
|
$
|
23.1
|
|
(1) WTM performance share payments in 2020 for the 2017-2019 performance cycle, which were paid in cash in March 2020, ranged from 174% to 180% of target. WTM performance share payments in 2019 for the 2016-2018 performance cycle, which were paid in cash in March 2019, ranged from 139% to 166% of target.
(2) Amounts include changes in assumed forfeitures, as required under GAAP.
During the three months ended March 31, 2020, White Mountains granted 14,055 performance shares for the 2020-2022 performance cycle. During the three months ended March 31, 2019, White Mountains granted 13,700 performance shares for the 2019-2021 performance cycle.
For performance shares earned in the 2017-2019 and 2016-2018 performance cycles, all performance shares earned were settled in cash. If all the outstanding WTM performance shares had vested on March 31, 2020, the total additional compensation cost to be recognized would have been $18.5 million, based on accrual factors (common share price and payout assumptions) as of March 31, 2020.
The following table presents performance shares outstanding and accrued expense for performance shares awarded under the WTM Incentive Plan as of March 31, 2020 for each performance cycle:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2020
|
|
Millions, except share amounts
|
|
Target Performance
Shares Outstanding
|
|
Accrued
Expense
|
|
Performance cycle:
|
|
|
|
|
|
|
|
2018 – 2020
|
|
13,450
|
|
|
$
|
5.1
|
|
|
2019 – 2021
|
|
15,600
|
|
|
3.8
|
|
|
2020 – 2022
|
|
14,055
|
|
|
1.1
|
|
|
Sub-total
|
|
43,105
|
|
|
10.0
|
|
|
Assumed forfeitures
|
|
(647
|
)
|
|
(.2
|
)
|
|
March 31, 2020
|
|
42,458
|
|
|
$
|
9.8
|
|
Restricted Shares
Restricted shares are grants of a specified number of common shares that generally vest at the end of a three-year service period. The following table presents the unrecognized compensation cost associated with the outstanding restricted share awards for the three months ended March 31, 2020 and 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
|
2020
|
|
2019
|
|
Millions,
except share amounts
|
|
Restricted
Shares
|
|
Unamortized
Issue Date
Fair Value
|
|
Restricted
Shares
|
|
Unamortized
Issue Date
Fair Value
|
|
Non-vested,
|
|
|
|
|
|
|
|
|
|
Beginning of period
|
|
43,395
|
|
|
$
|
16.7
|
|
|
41,510
|
|
|
$
|
12.5
|
|
|
Issued
|
|
14,055
|
|
|
15.1
|
|
|
13,700
|
|
|
12.8
|
|
|
Vested
|
|
(14,345
|
)
|
|
—
|
|
|
(13,715
|
)
|
|
—
|
|
|
Forfeited
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Expense recognized
|
|
—
|
|
|
(5.2
|
)
|
|
—
|
|
|
(2.5
|
)
|
|
End of period
|
|
43,105
|
|
|
$
|
26.6
|
|
|
41,495
|
|
|
$
|
22.8
|
|
During the three months ended March 31, 2020, White Mountains issued 14,055 restricted shares that vest on January 1, 2023. During the three months ended March 31, 2019, White Mountains issued 13,700 restricted shares that vest on January 1, 2022. The unamortized issue date fair value as of March 31, 2020 is expected to be recognized ratably over the remaining vesting periods.
Note 11. Leases
White Mountains has entered into lease agreements, primarily for office space. These leases are classified as operating leases, with lease expense recognized on a straight-line basis over the term of the lease. Lease incentives, such as free rent or landlord reimbursements for leasehold improvements, are recognized at lease inception and amortized on a straight-line basis over the term of the lease. Lease expense and the amortization of leasehold improvements are recognized within general and administrative expenses. Lease payments related to options to extend or renew the lease term are excluded from the calculation of lease liabilities unless White Mountains is reasonably certain of exercising those options.
On January 1, 2019, White Mountains adopted ASU 2016-02, Leases (ASC 842). See Note 1 — “Basis of Presentation and Significant Accounting Policies” — Basis of Presentation and Significant Accounting Policies. Prior to adoption of ASU 2016-02, White Mountains recognized lease expense for operating leases on a straight-line basis, but did not recognize lease assets or liabilities on its consolidated balance sheet. Upon adoption on January 1, 2019, White Mountains recognized lease right-of-use (“ROU”) assets of $23.2 million and lease liabilities of $23.2 million. As of March 31, 2020 and December 31, 2019, the ROU asset was $22.9 million and $22.6 million and lease liabilities were $23.2 million and $22.8 million.
The following table summarizes net lease expense recognized in White Mountains’s consolidated statement of operations for the three months ended March 31, 2020 and 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
Millions
Lease Cost
|
|
Three Months Ended March 31, 2020
|
|
Three Months Ended March 31, 2019
|
|
Lease cost
|
|
$
|
2.0
|
|
|
$
|
1.7
|
|
|
Less: sublease income
|
|
.1
|
|
|
.1
|
|
|
Net lease cost
|
|
$
|
1.9
|
|
|
$
|
1.6
|
|
The following table presents the contractual maturities of the lease liabilities associated with White Mountains’s operating lease agreements as of March 31, 2020:
|
|
|
|
|
|
|
|
|
Millions
|
|
As of March 31, 2020
|
|
Remainder of 2020
|
|
$
|
4.6
|
|
|
2021
|
|
5.4
|
|
|
2022
|
|
5.0
|
|
|
2023
|
|
4.2
|
|
|
2024
|
|
3.1
|
|
|
Thereafter
|
|
3.4
|
|
|
Total undiscounted lease payments
|
|
25.7
|
|
|
Less: present value adjustment
|
|
2.5
|
|
|
Operating lease liability
|
|
$
|
23.2
|
|
The following tables present lease related assets and liabilities by reportable segment as of March 31, 2020 and December 31, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of March 31, 2020
|
|
Millions
|
|
HG/BAM
|
|
NSM
|
|
Kudu
|
|
Other Operations
|
|
Total
|
|
Weighted Average Incremental Borrowing Rate (1)
|
|
ROU lease asset
|
|
$
|
10.0
|
|
|
$
|
6.2
|
|
|
$
|
2.2
|
|
|
$
|
4.5
|
|
|
$
|
22.9
|
|
|
4.7%
|
|
Lease liability
|
|
$
|
10.0
|
|
|
$
|
6.2
|
|
|
$
|
2.2
|
|
|
$
|
4.8
|
|
|
$
|
23.2
|
|
|
(1) The present value of the remaining lease payments was determined by discounting the lease payments using the incremental borrowing rate.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2019
|
|
Millions
|
|
HG/BAM
|
|
NSM
|
|
Kudu
|
|
Other Operations
|
|
Total
|
|
Weighted Average Incremental Borrowing Rate (1)
|
|
ROU lease asset
|
|
$
|
10.4
|
|
|
$
|
4.8
|
|
|
$
|
2.3
|
|
|
$
|
5.1
|
|
|
$
|
22.6
|
|
|
4.6%
|
|
Lease liability
|
|
$
|
10.4
|
|
|
$
|
4.8
|
|
|
$
|
2.3
|
|
|
$
|
5.3
|
|
|
$
|
22.8
|
|
|
(1) The present value of the remaining lease payments was determined by discounting the lease payments using the incremental borrowing rate.