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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2020
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 1-8993
WHITE MOUNTAINS INSURANCE GROUP, LTD.
(Exact name of Registrant as specified in its charter)
Bermuda
(State or other jurisdiction of incorporation or organization)
23 South Main Street, Suite 3B
Hanover,
New Hampshire
(Address of principal executive offices)
94-2708455
(I.R.S. Employer Identification No.)
03755-2053
(Zip Code)
Registrant’s telephone number, including area code: (603) 640-2200
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Common Shares, par value $1.00
per share
Trading Symbol(s)
WTM
Name of each exchange on which registered
New York Stock Exchange
Bermuda Stock Exchange
Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☒ No o
Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No ☒
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No o
Indicate by check mark whether the Registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit such files). Yes ☒ No o
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See
definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ☒
Accelerated filer o
Non-accelerated filer
o
Smaller reporting company ☐
Emerging growth company
☐
If an emerging growth company, indicate by check mark if the Registrant has elected not to use the extended transition period for complying with any new or revised financial accounting
standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under
Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☒
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☒
The aggregate market value of voting shares (based on the closing price of those shares listed on the New York Stock Exchange and the consideration received for those shares not listed on
a national or regional exchange) held by non-affiliates of the Registrant as of June 30, 2020, was $2,685,847,299.
As of February 24, 2021, 3,095,829 common shares, par value of $1.00 per share, were outstanding (which includes 28,405 restricted common shares that were not vested at such date).
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant’s Definitive Proxy Statement to be filed with the Securities and Exchange Commission (“SEC”) pursuant to Regulation 14A under the Securities Exchange Act of
1934, as amended (the “Exchange Act”), relating to the Registrant’s Annual General Meeting of Members scheduled to be held May 27, 2021 are incorporated by reference into Part III of this
Form 10-K. With the exception of the portions of the Proxy Statement specifically incorporated herein by reference, the Proxy Statement is not deemed to be filed as part of this Form 10-K.
TABLE OF CONTENTS
PART I
ITEM 1.
Business
General
HG Global/BAM
NSM
Kudu
Other Operations
Investments
Regulation
Ratings
Human Capital
ITEM 1A.
ITEM 1B.
ITEM 2.
ITEM 3.
ITEM 4.
Risk Factors
Unresolved Staff Comments
Properties
Legal Proceedings
Mine Safety Disclosures
Available Information
Information About Our Executive Officers
ITEM 5.
ITEM 6.
ITEM 7.
Market for the Company’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity
Securities
Selected Financial Data
Management’s Discussion and Analysis of Financial Condition and Results of Operations
PART II
Results of Operations
Liquidity and Capital Resources
Non-GAAP Financial Measures
Critical Accounting Estimates
Forward Looking Statements
ITEM 7A.
ITEM 8.
ITEM 9.
ITEM 9A.
ITEM 9B.
ITEM 10.
ITEM 11.
ITEM 12.
ITEM 13.
ITEM 14.
ITEM 15.
ITEM 16.
Quantitative and Qualitative Disclosures About Market Risk
Financial Statements and Supplementary Data
Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
Controls and Procedures
Other Information
PART III
Directors, Executive Officers and Corporate Governance
Executive Compensation
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Certain Relationships and Related Transactions, and Director Independence
Principal Accountant Fees and Services
PART IV
Exhibits and Financial Statement Schedules
Form 10-K Summary
CERTIFICATIONS
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9
10
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27
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30
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C-1
PART I
Item 1. Business
GENERAL
White Mountains Insurance Group, Ltd. (the “Company” or the “Registrant”) is an exempted Bermuda limited liability company whose principal
businesses are conducted through its subsidiaries and affiliates. Within this report, the term “White Mountains” is used to refer to one or more entities
within the consolidated organization, as the context requires. The Company’s headquarters is located at 26 Reid Street, Hamilton, Bermuda HM 11, its
principal executive office is located at 23 South Main Street, Suite 3B, Hanover, New Hampshire 03755-2053 and its registered office is located at
Clarendon House, 2 Church Street, Hamilton, Bermuda HM 11. The 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.
White Mountains is engaged in the business of making opportunistic and value-oriented acquisitions of businesses and assets in the insurance, financial
services and related sectors, operating these businesses and assets through its subsidiaries and, if and when attractive exit valuations become available,
disposing of these businesses and assets.
As of December 31, 2020, White Mountains conducted its business primarily in four areas: municipal bond insurance, specialty insurance distribution,
capital solutions for asset management firms and other operations. White Mountains’s municipal bond insurance business is conducted through its
subsidiary HG Global Ltd. and its reinsurance subsidiary HG Re Ltd. (“HG Re”), (collectively, “HG Global”). HG Global was established to fund the
startup of and provide reinsurance, through HG Re, to Build America Mutual Assurance Company (“BAM”), a mutual municipal bond insurance company.
White Mountains’s specialty insurance distribution business is conducted through its subsidiary NSM Insurance HoldCo, LLC and its subsidiaries
(collectively, “NSM”). White Mountains provides capital solutions for asset management firms through its subsidiary Kudu Investment Management, LLC
and its subsidiaries (collectively, “Kudu”). White Mountains’s other operations consist of the Company and its wholly-owned subsidiary, White Mountains
Capital, LLC (“WM Capital”), its other intermediate holding companies, its wholly-owned investment management subsidiary, White Mountains Advisors
LLC (“WM Advisors”), investment assets managed by WM Advisors, its interests in MediaAlpha, Inc. (“MediaAlpha”), certain other consolidated and
unconsolidated entities and certain other assets. As of December 31, 2020, White Mountains’s reportable segments were HG Global/BAM, NSM, Kudu
and Other Operations.
In January 2021, White Mountains acquired a controlling interest in Ark Insurance Holdings Limited (“Ark”). Ark writes a diversified and balanced
portfolio of insurance and reinsurance, including property, accident & health, energy, marine and political risks, through Lloyd’s Syndicates 4020 and 3902.
Beginning in January 2021, Ark began writing certain classes of its business through Group Ark Insurance Limited (“GAIL”), Ark’s wholly-owned
Bermuda-based insurance and reinsurance company. Ark will be consolidated and reported as its own segment for periods after December 31, 2020. See
description of Ark Transaction on page 12.
HG GLOBAL/BAM
Overview
The HG Global/BAM segment consists of the consolidated results of HG Global, HG Re and 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 on municipal bonds, BAM provides market access to, and
lowers interest expense for, issuers of municipal bonds used to finance essential public purpose projects. BAM is domiciled in New York and is owned by
and operated for the benefit of its policyholders, the municipalities that purchase BAM’s insurance for their debt issuances. Generally accepted accounting
principles in the United States (“GAAP”) require White Mountains to consolidate BAM’s results in its financial statements, which are attributed to non-
controlling interests. BAM reports on a statutory accounting basis to the New York State Department of Financial Services (“NYDFS”) and does not report
stand-alone GAAP financial results.
HG Global was established to fund the startup of BAM and, through HG Re, to provide up to 15%-of-par, first loss reinsurance protection for policies
underwritten by BAM. HG Global and HG Re are domiciled in Bermuda. At inception in 2012, HG Global was capitalized with $609 million. HG Global,
together with its subsidiaries, funded the initial capitalization of BAM through the purchase of $503 million of surplus notes issued by BAM, consisting of
$203 million of Series A Notes and $300 million of Series B Notes (the “BAM Surplus Notes”). See “CRITICAL ACCOUNTING ESTIMATES —
Surplus Notes Valuation — BAM Surplus Notes” on page 70 for a discussion on the accounting and risks associated with the BAM Surplus Notes. BAM
launched in July 2012 after securing its “AA/stable” rating from Standard & Poor’s Financial Services LLC (“Standard & Poor’s”). In June 2020, Standard
& Poor’s affirmed BAM’s “AA/stable” rating. “AA” is the third highest of 23 financial strength ratings assigned by Standard & Poor’s.
1
BAM charges an insurance premium on each municipal bond insurance policy it writes. A portion of the premium is a member’s surplus contribution
(“MSC”) and the remainder is a risk premium. In the event of a municipal bond refunding, a portion of the MSC from original issuance can be reutilized, in
effect serving as a credit against the total insurance premium on the refunding of the municipal bond. Issuers of debt insured by BAM are members of
BAM so long as any of their BAM-insured debt is outstanding. As members, they have certain interests in BAM, including the right to vote for BAM’s
directors and to receive dividends, if declared.
BAM focuses on municipal bonds issued to finance essential public purpose projects, such as schools, utilities and transportation facilities. BAM
focuses on small-to-medium sized investment grade municipal bonds, primarily in the AA, A and BBB categories. BAM seeks to build a relatively low risk
insurance portfolio with prudent single risk limits. White Mountains believes that municipal bonds insured by BAM have strong appeal to retail investors,
who buy smaller, less liquid issues, have less portfolio diversification and have fewer credit differentiation skills and analytical resources than institutional
investors.
As of December 31, 2020 and 2019, White Mountains reported $1,061 million and $999 million of total assets and $486 million and $494 million of
total equity related to HG Global. As of December 31, 2020 and 2019, White Mountains owned 96.9% of HG Global’s preferred equity and 88.4% of its
common equity. As of December 31, 2020 and 2019, White Mountains reported $14 million of non-controlling interests related to HG Global.
As of December 31, 2020 and 2019, White Mountains reported $560 million and $593 million of total assets and $(123) million and $(147) million of
non-controlling interests related to BAM.
Reinsurance Treaties
FLRT
BAM is a party to a first loss reinsurance treaty (“FLRT”) with HG Re under which HG Re provides first loss protection up to 15%-of-par outstanding
on each municipal bond insured by BAM. For capital appreciation bonds, par is adjusted to the estimated equivalent par value for current interest paying
bonds. In return, BAM cedes up to 60% of the risk premium charged for insuring the municipal bond, which is net of a ceding commission.
The FLRT is a perpetual agreement, with an initial term through the end of 2022. The FLRT can be amended after the initial term and after each
subsequent five-year period on a prospective basis. If the parties are unable to mutually agree to amended terms, the dispute is resolved through arbitration,
according to certain principles agreed to by the parties. Amended contract terms must be approved by the NYDFS. Should BAM consider the amended
terms unacceptable, it has the option to purchase HG Re or cause another reinsurer to purchase HG Re, at fair value.
Pursuant to the FLRT, BAM’s underwriting guidelines may only be amended with the consent of HG Re. In addition, HG Holdings Ltd, a subsidiary of
HG Global, has the right to designate two directors for election to BAM’s board of directors.
Fidus Re
In addition to the FLRT, BAM is party to a collateralized excess of loss reinsurance agreement that serves to increase BAM’s claims paying resources
and is provided by Fidus Re, Ltd. (“Fidus Re”), a Bermuda based special purpose insurer created in 2018 solely to provide reinsurance protection to BAM.
Fidus Re was capitalized by the issuance of $100 million of insurance linked securities. The proceeds from issuance were placed in a collateral trust
supporting Fidus Re’s obligations to BAM. The insurance-linked securities were issued by Fidus Re with an initial term of 12 years and are callable five
years after the date of issuance. Fidus Re reinsures 90% of aggregate losses exceeding $165 million on a portion of BAM’s financial guarantee portfolio
(the “Covered Portfolio”) up to a total reimbursement of $100 million. The Fidus Re agreement does not provide coverage for losses in excess of $276
million. The Covered Portfolio consists of approximately 42% of BAM’s portfolio of financial guaranty policies issued through December 31, 2020.
XOLT
In January 2020, BAM entered into an excess of loss reinsurance agreement (the “XOLT”) with HG Re. Under the XOLT, HG Re provides last dollar
protection for exposures on municipal bonds insured by BAM in excess of NYDFS single issuer limits. The XOLT is subject to an aggregate limit equal to
the lesser of $75 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. As of December 31, 2020, BAM had ceded no exposure to HG Re
under the XOLT.
Collateral Trusts
HG Re’s obligations under the FLRT are limited to the assets in two collateral trusts: a Regulation 114 Trust and a supplemental collateral trust (the
“Supplemental Trust” and, together with the Regulation 114 Trust, the “Collateral Trusts”). Losses required to be reimbursed under the FLRT are subject to
an aggregate limit equal to the assets held in the Collateral Trusts at any point in time.
2
At inception, the Supplemental Trust contained the original $300 million of Series B Notes and $100 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 million of Series A Notes into the Supplemental Trust. In connection with the contribution, the Series A Notes were merged into the Series B Notes.
On a monthly basis, BAM deposits cash equal to ceded premiums, net of ceding commissions, due to HG Re under the FLRT directly into the
Regulation 114 Trust. The Regulation 114 Trust target balance is equal to gross ceded unearned premiums and unpaid ceded loss and LAE expenses, if any.
If, at the end of any quarter, the Regulation 114 Trust balance is below the target balance, funds will be withdrawn from the Supplemental Trust and
deposited into the Regulation 114 Trust in an amount equal to the shortfall. If, at the end of any quarter, the Regulation 114 Trust balance is above 102% of
the target balance, funds will be withdrawn from the Regulation 114 Trust and deposited into the Supplemental Trust. The Regulation 114 Trust balance as
of December 31, 2020 and 2019 was $223 million and $190 million.
The Supplemental Trust target balance is $603 million, less the amount of cash and securities in the Regulation 114 Trust in excess of its target balance
(the “Supplemental Trust Target Balance”). If, at the end of any quarter, the Supplemental Trust balance exceeds the Supplemental Trust Target Balance,
such excess may be distributed to HG Re. The distribution will be made first as an assignment of accrued interest on the BAM Surplus Notes and second in
cash and/or fixed income securities. As the BAM Surplus Notes are repaid over time, the BAM Surplus Notes will be replaced in the Supplemental Trust
by cash and fixed income securities. The Supplemental Trust balance as of December 31, 2020 and 2019 was $604 million and $596 million.
If, at any point in time, the sum of the Regulation 114 Trust balance and the Supplemental Trust balance equals zero, BAM may choose to terminate
the FLRT on a runoff basis. However, HG Re can elect to continue the FLRT by depositing into the Regulation 114 Trust assets with a fair market value not
less than the greater of (i) $100 million or (ii) 10% of the then Regulation 114 Trust target balance.
As of December 31, 2020 and 2019, the Collateral Trusts held assets of $827 million and $787 million, which included $435 million and $322 million
of cash and investments, $388 million and $458 million of BAM Surplus Notes and $4 million and $8 million of interest receivable on the BAM Surplus
Notes. As of December 31, 2020 and 2019, total interest receivable on the BAM Surplus Notes was $156 million and $163 million.
Competition/Pricing
The municipal bond insurance industry is highly competitive. BAM’s primary competitor is Assured Guaranty Ltd. (“Assured”).
BAM and Assured each seeks to differentiate itself through financial strength ratings, claims paying resources and underwriting strategies. BAM
believes it has a number of distinct competitive advantages. BAM’s insured portfolio consists only of essential public purpose U.S. municipal bonds, and it
has no exposure to mortgage and asset-backed securities, derivatives, non-U.S. structured or sovereign credits or territorial credits, such as Puerto Rico.
BAM believes that, over time, its mutual structure will deliver a cost of capital advantage relative to its stock company competitors.
BAM seeks to provide transparency with respect to its insured portfolio and each insured issuer. In order to allow issuers and investors in BAM-
insured municipal bonds to monitor financial strength first-hand, BAM publishes Credit Profiles on every insured issuer. Credit Profiles are accessible by
CUSIP, obligor, state or sector on BAM’s website.
Pricing (i.e., premium level) is affected by a number of factors, including interest rate levels, credits spreads, trading value, and capture rate (i.e., the
percentage of total interest savings captured in the form of insurance premium). All other things being equal, pricing is higher when interest rates are
higher, credit spreads are wider and BAM’s trading value is higher relative to competitors and the capture rate is higher.
3
Insured Portfolio
The following table presents BAM’s insured portfolio by asset class as of December 31, 2020 and 2019:
Millions
December 31, 2020
December 31, 2019
Sector
General Obligation
Utility
Dedicated Tax
General Fund
Public Higher Education
Transportation
Other Public Finance
Total gross par outstanding
Gross Par
Outstanding
$
$
42,800.6
9,223.5
8,614.7
6,375.3
5,282.1
2,656.3
335.2
75,287.7
Average
Standard & Poor’s
Credit Rating
(1)
A
A
A
A
A
A
BBB-
A
Gross Par
Outstanding
$
$
36,173.8
7,344.0
7,024.4
5,550.2
3,788.3
1,935.0
434.8
62,250.5
Average
Standard & Poor’s
Credit Rating
(1)
A
A
A
A
A-
A
BBB+
A
(1)
The average credit ratings are based on Standard & Poor’s credit ratings, or if unrated by Standard & Poor’s, the Standard & Poor’s equivalent of credit ratings provided by
Moody’s Investor Service (“Moody’s”).
The following tables present BAM’s ten largest direct exposures based upon gross par outstanding as of December 31, 2020 and 2019:
(2)
$ in Millions
City of Chicago, IL (Cook County), Sales Tax - Local
State of Illinois
New Jersey Transportation Trust Fund Authority, System &
Program Bonds, NJ, Gas Tax
Metropolitan Transit Authority (MTA), NY, Mass Transit - Farebox
Pennsylvania Turnpike Commission, PA, Toll Roads
Oregon State University, OR, Public Higher Education - Gross Revenue
Municipal Authority of Westmoreland County, PA, Water
Pennsylvania, Commonwealth of
City of Bridgeport, CT (Fairfield County)
Clark Country SD, NV (Clark County)
(2)
Total of top ten exposures
Gross Par
Outstanding
(2)
December 31, 2020
Percent of Total Gross
Par Outstanding
(2)
$
$
376.8
376.1
358.9
346.9
331.0
320.7
319.1
306.6
306.5
295.4
3,338.0
0.5 %
0.5
0.5
0.5
0.5
0.4
0.4
0.4
0.4
0.4
4.5 %
(1)
Standard & Poor’s
Credit Rating
AA-
BBB-
BBB
BBB+
A
BBB+
A+
BBB-
A
A+
(1)
(2)
“A+” is the fifth highest, “A” is the sixth highest, “A-“ is the seventh highest, “BBB+” is the eighth highest and “BBB-” is the tenth highest of 23 credit ratings assigned by Standard & Poor’s.
For capital appreciation bonds, the amounts shown equal the estimated equivalent par value had the bonds been current interest paying bonds.
4
(2)
$ in Millions
State of Illinois
New Jersey Transportation Trust Fund Authority, System &
Program Bonds, NJ, Gas Tax
Municipal Authority of Westmoreland County, PA, Water
Metropolitan Transit Authority (MTA), NY, Mass Transit - Farebox
City of Philadelphia, PA (Philadelphia County)
Compton USD, CA (Los Angeles County)
Suffolk County, NY
City of Bridgeport, CT (Fairfield County)
City of Yonkers, NY (Westchester County)
City of Chicago, IL (Cook County)
(2)
(2)
(2)
Gross Par
Outstanding
(2)
$
385.3
December 31, 2019
Percent of Total Gross
Par Outstanding
(2)
0.6 %
0.6
0.5
0.5
0.5
0.5
0.5
0.5
0.4
0.4
5.0 %
Standard & Poor’s
Credit Rating
BBB-
(1)
BBB+
A+
A
A
A
A-
A
A
BBB+
356.1
329.1
323.7
307.0
302.6
287.1
282.5
272.5
265.5
3,111.4
Total of top ten exposures
$
(1)
“A+” is the fifth highest, “A” is the sixth highest, “A-“ is the seventh highest, “BBB+” is the eighth highest and “BBB-” is the tenth highest of 23 credit ratings assigned by Standard & Poor’s.
(2)
For capital appreciation bonds, the amounts shown equal the estimated equivalent par value had the bonds been current interest paying bonds.
The following table presents the geographic distribution of BAM’s insured portfolio as of December 31, 2020 and 2019:
$ in Millions
California
Texas
Pennsylvania
Illinois
New York
New Jersey
Alabama
Ohio
Florida
Michigan
Arizona
Louisiana
Other States
Total insured portfolio
December 31, 2020
December 31, 2019
Number of Risks
Gross Par
Outstanding
Percent of Total Gross
Par Outstanding
Number of Risks
Gross Par
Outstanding
Percent of Total Gross
Par Outstanding
729 $
839
489
409
346
169
167
159
70
139
69
77
921
4,583 $
16,155.8
9,790.5
9,281.8
7,014.5
4,150.2
3,553.5
2,311.7
2,137.5
1,805.4
1,600.4
1,522.5
1,500.5
14,463.4
75,287.7
21.5 %
13.0
12.3
9.3
5.5
4.7
3.1
2.8
2.4
2.1
2.0
2.0
19.3
100.0 %
5
683 $
740
440
337
324
135
125
139
64
123
65
65
788
4,028 $
14,354.7
8,656.2
7,800.5
4,939.9
3,718.5
2,886.7
1,523.0
1,597.5
1,355.4
1,361.2
1,343.1
1,400.3
11,313.5
62,250.5
23.1 %
13.9
12.5
7.9
6.0
4.6
2.4
2.6
2.2
2.2
2.2
2.2
18.2
100.0 %
The following table presents BAM’s insured portfolio by issue size of exposure as of December 31, 2020 and 2019:
$ in Millions
December 31, 2020
December 31, 2019
(1)
Original Par Amount Per Issue
Less than $10 million
$10 to $50 million
$50 to $100 million
$100 to $200 million
$200 to $300 million
$300 to $400 million
Total insured portfolio
Number of Risks
Gross Par
Outstanding
Percent of Total Gross
Par Outstanding
Number of Risks
Gross Par
Outstanding
Percent of Total Gross
Par Outstanding
2,647 $
1,592
230
73
31
10
4,583 $
10,510.1
31,160.4
14,072.6
9,306.1
6,999.8
3,238.7
75,287.7
14.0 %
41.3
18.7
12.4
9.3
4.3
100.0 %
2,388 $
1,370
187
56
22
5
4,028 $
9,594.1
27,125.7
11,695.3
7,224.9
4,996.4
1,614.1
62,250.5
15.4 %
43.6
18.8
11.6
8.0
2.6
100.0 %
(1)
The original par amount per issue does not include refunded and re-issued deals.
Insured Credit Watchlist
BAM management maintains a surveillance committee that evaluates the credit profile of each insured municipal bond on a periodic basis. The
surveillance committee places each insured municipal bond into one of four surveillance categories, the last two of which represent insured municipal
bonds that are on BAM’s insured credit watchlist. All BAM-insured bond payments due through February 15, 2021 have been made by BAM’s insured
members. BAM currently has no insured bonds on its insured credit watchlist (surveillance category 3 or surveillance category 4).
Insured municipal bonds on the watchlist are monitored closely and are subject to BAM’s distressed credit management procedures, including a
remediation plan developed in consultation with BAM’s legal counsel and consultants. The objectives of any remediation plan are to address the problems
the issuer is facing, to address any external factors impacting the credit, to ensure that creditors’ rights are enforced and to cure any breaches that may have
occurred with respect to any credit triggers or covenants. BAM may work with other insurers, municipal bondholders and/or interested parties on
remediation efforts, as applicable.
Surveillance category 3 represents insured municipal bonds whose issuers are experiencing financial, legal or administrative issues causing overall
credit quality deterioration, but whose probability of generating an insured loss is considered remote. Surveillance category 4 represents insured municipal
bonds where a loss is expected or losses have been paid and have not been recovered or are not recoverable.
6
NSM
Overview
NSM is a full-service managing general underwriting agency (“MGU”) and program administrator for specialty property and casualty insurance. The
company places insurance in niche sectors such as specialty transportation, real estate, social services and pet. On behalf of its insurance carrier partners,
NSM typically manages all aspects of the placement process, including product development, marketing, underwriting, policy issuance and claims. NSM
earns commissions based on the volume and profitability of the insurance that it places. NSM does not take insurance risk.
NSM distributes through a variety of channels. Commercial products are sold through a network of roughly 6,000 independent brokers. NSM also
transacts business on a “direct to consumer” basis in certain segments (e.g., collector car and pet).
As of December 31, 2020, NSM had approximately 150 insurance carrier partners. NSM expands its programs when market conditions are attractive
and shrinks and/or shuts down its programs when market conditions are challenging. This practice has led to longstanding insurance carrier partner
relationships, in some cases over 20 years. As of December 31, 2020, the five largest carrier partners accounted for approximately 64% of total premiums
placed by NSM, with the largest carrier partner accounting for approximately 19%.
NSM’s primary competitors are typically specialty insurance carriers and their agents. Competitors are differentiated based on price, conditions of
coverage, loss ratio performance, quality of service, technology and other factors.
Historically, NSM has grown both organically and inorganically through acquisitions. Since its inception in 1990, NSM has completed over 20
acquisitions, including five sizable acquisitions under White Mountains’s ownership.
On May 11, 2018, White Mountains acquired a 95.0% ownership interest in NSM (83.6% on a fully diluted, fully converted basis) for cash
consideration of $276 million.
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. During 2020, Fresh Insurance was rebranded as part of Kingfisher UK Holdings Ltd
(“Kingfisher”).
On December 3, 2018, NSM acquired all of the net assets of KBK Insurance Group, Inc. (“KBK”). KBK is a specialty MGU focused on the towing
and transportation space.
On April 1, 2019, NSM acquired 100% of Embrace Pet Insurance (“Embrace”). Embrace is a U.S. nationwide provider of pet health insurance for dogs
and cats.
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”).
On April 7, 2020, NSM acquired 100% of Kingsbridge Group Limited (“Kingsbridge”). Kingsbridge is a leading provider of commercial lines
insurance and consulting services for the professional contractor and freelancer markets in the United Kingdom.
As of December 31, 2020 and 2019, White Mountains reported $1,000 million and $825 million of total assets and $508 million and $424 million of
total equity related to NSM. As of December 31, 2020 and 2019, White Mountains owned 96.6% and 96.4% of NSM (89.6% and 88.4% on a fully diluted,
fully converted basis) and reported $17 million and $15 million of non-controlling interests related to NSM.
7
Verticals
NSM’s business consists of a number of active programs that are broadly categorized into six market verticals. The following table presents the
controlled premium and commission and other revenues by vertical for the years ended December 31, 2020, 2019 and 2018:
2020
2019
2018
(2)
Year Ended December 31,
Controlled
(1)
Premium
Commission and
Other Revenue
Controlled
(1)
Premium
Commission and
Other Revenue
Controlled
(1)
Premium
Commission and
Other Revenue
$
310.2
$
189.1
115.5
131.9
179.5
85.5
44.9
28.9
55.0
49.4
$
290.2
$
$
136.8
$
157.2
102.7
67.6
155.5
124.5
897.7
77.6
34.7
25.9
30.0
45.9
135.7
94.0
—
108.8
119.4
594.7
$
43.0
30.3
23.8
—
34.9
19.8
151.8
134.5
1,060.7
$
$
21.4
285.1
$
19.0
233.1
$
$
Millions
Specialty
Transportation
Real Estate
Social Services
Pet
United Kingdom
Other
Total
(1)
(2)
Controlled premium are total premiums placed by NSM during the period.
Includes results prior to White Mountains’s ownership of NSM.
A description of the key programs within each market vertical follows:
Specialty Transportation
The specialty transportation vertical consists of NSM’s U.S. collector car programs as well as all other transportation-related programs in the United
States. NSM operates its U.S. collector car business through three brands: (i) American Collectors Insurance, (ii) Condon Skelly and (iii) Heacock Classic.
Each brand has an exclusive underwriting contract with an insurance carrier partner to provide insurance coverage for antique and classic cars, vintage
motorcycles and related automotive collectibles.
The other large program in the specialty transportation vertical is KBK, which is an MGU offering insurance coverages for towing businesses (e.g.,
tow truck operators, dealers, repair shops). NSM also offers specialty insurance coverage for motor carriers and owner operators through its True Transport
and Transport Specialties programs.
Real Estate
The real estate vertical consists of NSM’s specialty real estate programs. The largest program is CHAMP, which offers insurance coverage (e.g.,
property, general liability and umbrella) for wind-exposed coastal condominium associations. NSM also offers specialty insurance coverages for non-
coastal apartment complexes, condominiums and hotels and motels through its HabPro program.
Social Services
The social services segment consists of three key programs: (i) Care Providers Insurance Services, which offers insurance coverages to non-profit social
services organizations such as private/charter schools, charitable institutions and adult & youth centers, (ii) Addiction Treatment Providers Insurance,
which offers insurance coverages to addiction treatment providers and mental healthcare facilities, and (iii) Sports & Wellness Insurance, which offers
insurance coverages to a broad range of sports and wellness organizations such as fitness centers, yoga studios and university sponsored recreational
programs and groups.
Pet
The pet segment consists of Embrace, which offers comprehensive accident and illness insurance plans for dogs and cats in the United States. Embrace
also offers Wellness Rewards, an optional preventative care product that reimburses routine veterinary visits, grooming, vaccinations, training, and other
services.
8
United Kingdom
The United Kingdom vertical consists of all of NSM’s U.K.-based programs. The U.K. business primarily consists of Kingfisher, First Underwriting
Limited (“First Underwriting”) and Kingsbridge. Kingfisher offers a variety of specialty insurance coverages in the U.K. market, including coverages for
mid-market and high-end collector cars and the outdoor leisure industry (e.g., motor homes and trailers) and non-standard auto insurance and buildings and
content insurance for non-standard properties (which had previously been offered by Fresh Insurance). First Underwriting is a specialty MGA offering
motor, household and surety coverages in the U.K. market. Kingsbridge is a leading provider of commercial lines insurance and consulting services for the
professional contractor and freelancer markets in the United Kingdom.
Other
The other vertical consists of approximately five other programs, offering a wide variety of tailored insurance coverages to niche sectors including (i)
professional liability insurance for architects and engineers, (ii) packaged insurance solutions for outplacement & staffing agencies, and (iii) workers
compensation insurance coverages primarily for artisan contractors and restaurants and hotels.
KUDU
Overview
Kudu provides capital solutions for boutique asset and wealth 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 generally 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 February 5, 2018, White Mountains entered into an agreement to provide up to $125 million to Kudu in exchange for a 49.5% 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 Capital Management, L.P. (“Oaktree”) for cash consideration of $81 million. In addition, White Mountains assumed all of Oaktree’s
unfunded capital commitments to Kudu, increasing White Mountains’s total capital commitment to $250 million (the “Kudu Transaction”). As a result of
the Kudu Transaction, White Mountains’s 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 in the second quarter of 2019. During the fourth quarter
of 2019, White Mountains increased its total capital commitment to Kudu by an additional $100 million to $350 million, of which $48 million and $129
million was undrawn as of December 31, 2020 and 2019. Also during the fourth quarter of 2019, Kudu obtained a committed $124 million credit facility, of
which $35 million and $68 million was undrawn as of December 31, 2020 and 2019.
As of December 31, 2020 and 2019, White Mountains reported $430 million and $291 million of total assets, $334 million and $234 million of total
equity related to Kudu. As of December 31, 2020 and 2019, White Mountains owned 99.3% and 99.1% of Kudu (85.4% and 85.4% on a fully diluted, fully
converted basis) and reported $2 million of non-controlling interests related to Kudu.
Portfolio
As of December 31, 2020, Kudu has deployed $386 million in 13 asset management firms with combined assets under management of more than $45
billion, spanning a range of asset classes, including real estate, real assets, wealth management, hedge funds and alternative credit strategies. The average
cash yield to Kudu at inception for the $386 million of deployed capital was 10.3%.
Kudu’s philosophy is to partner with asset management firms that exhibit strong cash flow generation and growth. Kudu seeks to provide its solutions
across a diverse mix of investment strategies and asset classes in the middle market.
Kudu’s average capital solution to date has been $30 million, with a range from $17 million to $62 million. Apportioned by manager type, Kudu’s
portfolio is deployed 36% in liquid alternatives segments, 31% in private capital, 27% in wealth management and 5% in traditional asset management.
Kudu seeks diversity across asset classes. Kudu also prioritizes the private capital segment as the underlying clients of these firms tend to be locked-up for
an extended period, which can provide stability of revenues in a potential market downturn.
Kudu expects that no single manager will represent more than 25% of total firm revenues. As more capital is deployed, the reliance on any one
manager is expected to decrease. Additionally, Kudu seeks to diversify geographically. Its portfolio currently includes 10 firms headquartered in eight
different states in the United States, two firms headquartered in the United Kingdom, and one in Australia.
9
OTHER OPERATIONS
White Mountains’s Other Operations segment consists of the Company and its wholly-owned subsidiary WM Capital, its other intermediate holding
companies, its wholly-owned investment management subsidiary WM Advisors, investment assets managed by WM Advisors, its interests in MediaAlpha,
PassportCard Limited (“PassportCard”) and DavidShield Life Insurance Agency (2000) Ltd. (“DavidShield”) (collectively, “PassportCard/DavidShield”),
Elementum Holdings LP (“Elementum”), certain other consolidated and unconsolidated entities (“Other Operating Businesses”) and certain other assets.
MediaAlpha
MediaAlpha is a marketing technology company. It operates a transparent and efficient customer acquisition technology platform that facilitates real-
time transactions between buyers and sellers of consumer referrals (i.e., clicks, calls and leads), primarily in the property & casualty, health and life
insurance verticals. MediaAlpha generates revenue by earning a fee for each consumer referral sold on its platform. A transaction becomes payable only on
a qualifying consumer action, and is not contingent on the sale of a product to the consumer. MediaAlpha’s core verticals of property & casualty insurance,
health insurance and life insurance supported over $1 billion in transaction value across its platform over the last two years.
In March 2014, White Mountains acquired a controlling ownership interest in MediaAlpha. On February 26, 2019, MediaAlpha completed the sale of
a significant minority stake to Insignia Capital Group in connection with a recapitalization and cash distribution to existing equityholders (the “2019
MediaAlpha Transaction”). MediaAlpha also repurchased a portion of the holdings of existing equityholders. White Mountains reduced its ownership
interest to 48.3% of MediaAlpha (42.0% on a fully diluted, fully converted basis) as a result of the 2019 MediaAlpha Transaction.
On October 30, 2020, MediaAlpha completed an initial public offering (the “MediaAlpha IPO”). In the offering, White Mountains sold 3,609,894
shares and received total proceeds of $64 million. Following the completion of the MediaAlpha IPO, White Mountains owns 20,532,202 MediaAlpha
shares, representing a 35.0% ownership interest (32.3% on a fully-diluted, fully converted basis).
White Mountains deconsolidated MediaAlpha as a result of the 2019 MediaAlpha Transaction and stopped reporting it as a segment. Prior to the
MediaAlpha IPO, White Mountains’s non-controlling equity interest in MediaAlpha was accounted for at fair value within other long-term investments.
Subsequent to the MediaAlpha IPO, White Mountains’s non-controlling equity interest in MediaAlpha is accounted for at fair value based on the publicly
traded share price of MediaAlpha’s common stock. As of December 31, 2020 and 2019, the fair value of White Mountains’s investment in MediaAlpha
was $802 million and $180 million.
PassportCard/DavidShield
PassportCard is a U.K.-based global managing general agency (“MGA”) offering the travel industry’s first real-time, paperless insurance solution,
which facilitates claim payouts in minutes wherever and whenever the customer needs it. PassportCard receives commissions for placing policies with its
insurance carrier partners and licensing fees for use of its card-based technology. PassportCard distributes its products through the broker channel and on a
direct-to-consumer basis, and also franchises its solutions in certain markets to major travel insurance and medical assistance companies.
DavidShield is an MGA that is the leading provider of expatriate medical insurance in Israel and uses the same card-based delivery system as
PassportCard. Since 2000, DavidShield has delivered industry-leading medical insurance solutions to diplomats, non-governmental organizations and
thousands of multinational corporations and individuals in over 95 countries. DavidShield receives structured commissions for placing policies with its
insurance carrier partners and licensing fees for use of its card-based technology.
There are a number of distinct advantages to the PassportCard/DavidShield insurance solutions that differentiate them in the marketplace. Through the
real-time claims handling process, PassportCard/DavidShield are generally able to control claims, loss costs and fraud upfront, driving lower than industry
average loss ratios for their reinsurance partners. Further, the card-based, paperless delivery model enables a superior customer experience, commanding
industry-leading customer retention rates and strong brand loyalty. PassportCard/DavidShield originally launched in, and remain principally focused on, the
Israeli marketplace.
In April 2015, White Mountains acquired a 50.0% ownership interest in PassportCard for $21 million. On January 24, 2018, White Mountains
acquired a 50.0% ownership interest in DavidShield for a net purchase price of $28 million. As a result of the January 2018 transaction, White Mountains
and its joint venture partner each held a 50.0% stake in PassportCard/DavidShield. In May 2020, White Mountains made an additional $15 million
investment in PassportCard/DavidShield to support the business through the ongoing COVID-19 pandemic. The transaction increased White Mountains’s
ownership interest from 50.0% to 53.8%. In January 2020, PassportCard/DavidShield received regulatory approval for its wholly-owned insurance carrier.
The carrier writes both the leisure travel and expatriate medical business and cedes 100% of the underwriting risk to its reinsurance partner.
10
Premiums and commission revenues from leisure travel insurance placed by PassportCard declined dramatically in the twelve months ended December
31, 2020 due to the COVID-19 pandemic. This decline was modestly offset by increased revenues from international private medical insurance placed by
DavidShield. PassportCard/DavidShield expects these trends to continue until global travel resumes. During the third quarter of 2020,
PassportCard/DavidShield curtailed global expansion efforts in response to the impact of the COVID-19 pandemic.
White Mountains’s non-controlling equity interests in PassportCard/DavidShield is accounted for at fair value within other long-term investments. As
of December 31, 2020 and 2019, the fair value of White Mountains’s interests in PassportCard/DavidShield was $95 million and $90 million.
Elementum
Elementum is a third-party registered investment adviser specializing in natural catastrophe insurance-linked securities (“ILS”). On May 31, 2019,
White Mountains acquired a 30.0% limited partnership interest in Elementum for $55 million (the “Elementum Transaction”). White Mountains’s non-
controlling equity interest in Elementum is accounted for at fair value within other long-term investments. As of December 31, 2020 and 2019, the fair
value of White Mountains’s interest in Elementum totaled $55 million. As of December 31, 2020, White Mountains had a 28.9% limited partnership
interest in Elementum.
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 million in ILS funds managed by Elementum (the “ILS Funds”). As of December 31, 2020 and 2019, White Mountains had $51
million and $41 million invested in the ILS Funds.
Other Operating Businesses
White Mountains has controlling equity interests in various other operating businesses, which are consolidated. As of December 31, 2020 and 2019,
White Mountains reported $67 million and $47 million of total assets related to these businesses. As of December 31, 2020 and 2019, White Mountains
reported $39 million and $31 million of total equity (net of intercompany eliminations), and non-controlling interests of $2 million and $(2) million, related
to these businesses.
White Mountains also has non-controlling equity interests in various other operating businesses and private debt instruments with various other
operating businesses, which are generally accounted for at fair value within other long-term investments. As of December 31, 2020 and 2019, the fair value
of these interests totaled $52 million and $40 million.
WM Advisors
As of December 31, 2020, WM Advisors managed substantially all of White Mountains’s fixed maturity investments, short-term investments, common
equity securities and other long-term investments, with the exception of non-controlling equity interests in the form of revenue and earnings participation
contracts (“Kudu’s Participation Contracts”), which are managed by Kudu, and BAM’s investment portfolio, which is managed by an outside third-party
investment manager.
11
Ark Transaction
On October 1, 2020, White Mountains entered into a subscription and purchase agreement (the “Ark SPA”) with Ark and certain selling shareholders
(collectively with Ark, the “Ark Sellers”). Certain Ark Sellers also entered into a related management warranty deed (together with the Ark SPA, the “Ark
Acquisition Agreement”) pursuant to which they made certain warranties about the Ark business (collectively the “Ark Transaction”). Under the terms of
the Ark Acquisition Agreement, White Mountains agreed to contribute $605 million of equity capital to Ark, at a pre-money valuation of $300 million, and
to purchase $41 million of shares from the Ark Sellers. White Mountains also agreed to contribute up to an additional $200 million of equity capital to Ark
in 2021. In accordance with the Ark SPA, in the fourth quarter of 2020, White Mountains pre-funded/placed in escrow a total of $646 million in preparation
for closing the transaction, including $280 million funded directly to Lloyd’s on behalf of Ark under the terms of a credit facility agreement and $366
million placed in escrow, which is reflected on the balance sheet within the Other Operations segment as of December 31, 2020.
On January 1, 2021, White Mountains closed the transaction in accordance with the terms of the Ark SPA. At closing, White Mountains owned 72.0%
of Ark on a basic shares outstanding basis (63.0% on a fully-diluted, fully-converted basis, taking account of management’s equity incentives). If the
additional $200 million is contributed in full, White Mountains will own 77.1% of Ark on a basic shares outstanding basis (67.5% on a fully-diluted, fully-
converted basis). Management’s equity incentives are subject to an 8.0% rate of return threshold with no catch-up. The remaining shares are owned by
employees. In the future, management rollover shareholders could earn additional shares in the company if and to the extent that White Mountains achieves
certain multiple of invested capital return thresholds. These additional shares are generally eligible to vest in three equal tranches at multiple on invested
capital (“MOIC”) thresholds of 2.0x, 2.5x and 3.0x. If fully earned, these additional shares would represent 12.5% of the shares outstanding at closing.
Ark writes a diversified and balanced portfolio of insurance and reinsurance, including property, accident & health, energy, marine and political risks,
through Lloyd’s Syndicates 4020 and 3902. Beginning in January 2021, Ark began writing certain classes of its business through GAIL, Ark’s wholly-
owned Bermuda-based insurance and reinsurance company.
INVESTMENTS
White Mountains’s investment philosophy is to maximize long-term after-tax total returns while taking prudent levels of risk and maintaining a
diversified portfolio, subject to White Mountains’s investment guidelines and various regulatory restrictions. Under White Mountains’s investment
philosophy, each dollar of after-tax investment income or investment gains (realized or unrealized) is valued equally.
White Mountains maintains an equity portfolio that consists of its investment in MediaAlpha, common equity securities and other long-term
investments. During the third and fourth quarter of 2020 White Mountains liquidated its portfolio of common equity securities in anticipation of funding
the Ark Transaction. As of December 31, 2019, White Mountains’s portfolio of common equity securities consisted of passive exchange traded funds
(“ETFs”) and publicly-traded common equity securities actively managed by select third-party registered investment advisers, whom White Mountains
believes have a differentiated investment strategy and approach. White Mountains’s other long-term investments consists primarily of unconsolidated
entities, including Kudu’s Participation Contracts, private equity funds, hedge funds, the ILS Funds and private debt instruments.
White Mountains’s maintains a fixed income portfolio that consists primarily of high-quality, short-duration, fixed maturity investments and short-term
investments. White Mountains invests in fixed maturity investments that are attractively priced in relation to their investment risks and actively manages
the average duration of the fixed income portfolio. As of December 31, 2020, the fixed income portfolio duration, including short-term investments, was
3.2 years. White Mountains has established relationships with select third-party registered investment advisers to manage a portion of its fixed income
portfolio. See “Portfolio Composition” on page 52.
12
REGULATION
United States
Insurance Regulation
BAM is subject to regulation and supervision in New York and each of the states where it is licensed to conduct business. Generally, state regulatory
authorities have broad supervisory and administrative powers over such matters as licenses, standards of solvency, premium rates, policy forms,
investments, statutory deposits, methods of accounting, form and content of financial statements, claims reserves and LAE liabilities, reinsurance,
minimum capital and surplus requirements, dividends and other distributions to shareholders, annual and other report filings and other market conduct. In
general, such regulation is for the protection of policyholders rather than shareholders. White Mountains believes that BAM is in compliance with all
applicable laws and regulations pertaining to its business that would have a material effect on its financial condition and results of operations in the event of
non-compliance.
NSM, through its subsidiaries is licensed in all 50 states and the District of Columbia. White Mountains believes NSM is in compliance with all
applicable laws and regulations pertaining to its business that would have a material effect on its financial condition and results of operations in the event of
non-compliance.
State Accreditation and Monitoring
State insurance laws and regulations include numerous provisions governing marketplace activities of insurers, including provisions governing
marketing and sales practices, policyholder services, claims management and complaint handling. State regulatory authorities generally test and enforce
these provisions through periodic market conduct examinations.
New York Insurance Law establishes single and aggregate risk limits for financial guaranty insurers. Single risk limits for financial guaranty insurers
are applicable to all obligations issued by a single entity and backed by a single revenue source. Insurance on municipal obligations is also subject to a limit
where the insured average annual debt service for a single risk, net of qualifying reinsurance and collateral, may not exceed 10% of policyholders' surplus
and contingency reserves. In addition, the insured principal of municipal obligations attributable to any single risk, net of qualifying reinsurance and
collateral, is limited to 75% of policyholders' surplus and contingency reserves.
The New York Insurance Law also establishes aggregate risk limits on the basis of total outstanding principal and interest of guaranteed obligations
insured net of qualifying reinsurance and collateral (the “Aggregate Net Liability”), compared to the sum of the insurer’s policyholders’ surplus and
contingency reserves. Under these limits, policyholders' surplus and contingency reserves for municipal obligations must not be less than 0.33% of the
Aggregate Net Liability. If a financial guaranty insurer fails to comply with single or aggregate risk limits, the NYDFS has broad discretion to order the
insurer to cease new business originations. As of December 31, 2020, BAM was in compliance with the single and aggregate risk limits.
No payment of principal or interest on the BAM Surplus Notes may be made without the approval of the NYDFS.
Under the New York Insurance Law, BAM must establish a contingency reserve to protect policyholders against the effect of adverse economic
developments or cycles or other unforeseen circumstances. BAM determines its contingency reserves by applying the calculations required by each state in
which it is licensed and recording a contingency reserve equal to the calculation that results in the highest contingency reserve.
The NYDFS, the regulatory authority of BAM’s state of domicile, conducts periodic examinations of insurance companies domiciled in New York,
usually at five-year intervals. In 2019, the NYDFS commenced and in early 2020 completed its examination of BAM and issued a Report on Examination
of BAM for the period ending December 31, 2018. The reports did not note any significant regulatory issues concerning BAM.
13
Cyber Regulations
NYDFS’s cybersecurity regulation (“Part 500”) requires financial services institutions, including BAM and NSM, to establish and maintain a
cybersecurity program designed to protect consumers’ private data and the confidentiality, integrity and availability of the institution’s information systems.
In 2018, California enacted the California Consumer Privacy Act (the “CCPA”), which broadly regulates the sale of California residents’ personal
information and grants California residents certain rights to, among other things, access and delete data about them in certain circumstances. In November
2020, California augmented the CCPA by enacting the California Privacy Rights Act (the “CPRA”). Among other things, the CPRA grants consumers the
right to correct inaccurate data about them and creates a new enforcement agency. Compliance with the CCPA and the CPRA, or similar laws in other
jurisdictions, may increase the cost of providing services, including those provided by NSM.
In 2018, the EU General Data Privacy Regulation (the “GDPR”) became effective. The GDPR requires companies to satisfy requirements regarding
the notification of data breaches and the handling of personal and sensitive data, including its use, protection and the ability of persons whose data is stored
to correct or delete such data about themselves. The GDPR permits regulators to impose fines of up to €20,000,000 or 4% of global annual revenue,
whichever is higher, and establishes a private right of action.
The GDPR was transposed into U.K. domestic law in January 2021 following the United Kingdom's exit from the EU (“U.K. GDPR”) and
supplements the United Kingdom's Data Protection Act of 2018. The UK GDPR mirrors the compliance requirements and fine structure of the GDPR.
Investments
BAM is subject to state laws and regulations that require investment portfolio diversification and that dictate the quality, quantity and general types of
investments it may hold. Non-compliance may cause non-conforming investments to be non-admitted when measuring statutory surplus and, in some
instances, may require divestiture.
Holding Company Structure
Regulations under certain state insurance holding company acts contain reporting requirements relating to the capital structure, ownership, financial
condition and general business operations of insurance entities. These regulations also contain special reporting and prior approval requirements with
respect to certain transactions among affiliates. The domiciliary states of insurance entities impose regulatory application and approval requirements on
acquisitions that may be deemed to confer control, as that concept is defined under the applicable state laws. In some states as little as 5% may be deemed
to confer control, and the application process for approval can be extensive and time consuming. Although BAM has no ownership relationship with HG
Re or HG Global, BAM agreed with the NYDFS to submit any agreements, or amendments thereto, among BAM and HG Re, HG Global and their
affiliated entities or controlling persons to the NYDFS as if they were subject to Article 15 of the New York Insurance Law, which relates to transactions
with holding companies.
Legislation
Although the federal government does not directly regulate the insurance business, federal legislation and administrative policies impact the industry.
In addition, legislation has been introduced in recent years that, if enacted, could result in the federal government assuming a more direct role in the
regulation of the insurance industry. Notably, the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) created the
Federal Insurance Office (“FIO”) within the Treasury Department, which is responsible for gathering information and monitoring the insurance industry to
identify gaps in the regulation of insurers that could contribute to a systemic crisis in the insurance industry or U.S. financial system.
In addition to emerging federal regulation, many states are adopting laws that attempt to strengthen the ability of regulators to understand and regulate
the risk management practices of insurers and insurance groups. For example, many states have adopted measures related to the NAIC’s Solvency
Modernization Initiative (“SMI”), which have included model regulations that require insurers to summarize their key risks and risk management strategies
to regulators. The SMI resulted in a 2010 amendment to the NAIC’s Model Insurance Holding Company System Regulatory Act (the “Model Holding
Company Act”), which requires the ultimate controlling person in an insurer’s holding company structure to identify and report material enterprise risks to
the state insurance regulator.
The SMI also produced the NAIC Risk Management and Own Risk Solvency Model Act (“ORSA”), which requires insurers meeting premium
thresholds to maintain a risk management framework, and annually submit a comprehensive report designed to assess the adequacy of an insurer’s risk
management practices, including risks related to the insurer’s future solvency position.
14
Premium Accounts Held in Trust
NSM maintains approximately 45 trust accounts in order to comply with fiduciary requirements under U.S. state and U.K. Financial Conduct
Authority (the “FCA”) insurance laws and regulations relating to premium trust accounts. Under such laws, insurance agencies that do not make immediate
remittances to counterparties (such as insurance companies, clients or other producers to which premium, commissions or other amounts are due from time
to time) must segregate funds owed to such counterparties and these funds must be held in trust for the insurance company, client or other relevant third-
party payee. NSM’s use of trust accounts is routinely subject to audits by carrier partners and other external auditors. As of December 31, 2020, NSM
believes that it is in compliance with all applicable laws and regulations pertaining to premium trust accounts that would have a material effect on its
financial condition and results of operations in the event of non-compliance.
Bermuda
Insurance Regulation
The Insurance Act 1978 of Bermuda and related regulations, as amended (the “Insurance Act”), regulates the insurance business of HG Re, and
provides that no person may carry on any insurance business in or from within Bermuda unless registered as an insurer under the Insurance Act by the
Bermuda Monetary Authority (“BMA”). The BMA, in deciding whether to grant registration, has broad discretion to act as it thinks fit in the public
interest. The BMA is required by the Insurance Act to determine whether the applicant is a fit and proper body to be engaged in the insurance business and,
in particular, whether it has, or has available to it, adequate knowledge and expertise to operate an insurance business. In addition, the BMA is required by
the Insurance Act to determine whether a person who proposes to control 10 percent, 20 percent, 33 percent or 50 percent (as applicable) of the voting
powers of a Bermuda registered insurer or its parent company is a fit and proper person to exercise such degree of control.
The continued registration of an applicant as an insurer is subject to the applicant complying with the terms of its registration and such other conditions
as the BMA may impose from time to time. The Insurance Act also grants to the BMA powers to supervise, investigate and intervene in the affairs of
Bermuda insurance companies.
The Insurance Act imposes solvency and liquidity standards on Bermuda insurance companies, as well as auditing and reporting requirements. White
Mountains believes that it is in compliance with all applicable laws and regulations pertaining to its business that would have a material effect on its
financial condition and results of operations in the event of non-compliance.
Certain Other Bermuda Law Considerations
The Company is an exempted company incorporated and organized under the Companies Act 1981 of Bermuda, as amended (the “Companies Act”).
As a result, the Company is required to comply with the provisions of the Companies Act regulating the payment of dividends and making of distributions
from contributed surplus. A company is prohibited from declaring or paying a dividend, or making a distribution out of contributed surplus, if there are
reasonable grounds for believing that:
(1) the company is, or would after the payment be, unable to pay its liabilities as they become due; or
(2) the realizable value of the company’s assets would thereby be less than its liabilities.
Under the Company’s bye-laws, each common share is entitled to dividends if, and when, dividends are declared by its board of directors, subject to
any preferred dividend rights of the holders of any preference shares. In addition, the Companies Act regulates return of capital, reduction of capital and
any purchase or redemption of shares by the Company.
Although the Company is incorporated in Bermuda, it has been designated as a non-resident of Bermuda for exchange control purposes by the BMA.
Pursuant to its non-resident status, the Company may hold any currency other than Bermuda dollars and convert that currency into any other currency,
other than Bermuda dollars, without restriction.
Shares may be offered or sold in Bermuda only in compliance with the provisions of the Investment Business Act 2003 and the Exchange Control Act
1972, and related regulations of Bermuda which regulate the sale of securities in Bermuda. In addition, specific permission is required from the BMA
pursuant to the provisions of the Exchange Control Act 1972 and related regulations, for all issuances and transfers of securities of Bermuda companies,
other than in cases where the BMA has granted a general permission. The BMA in its policy dated June 1, 2005 provides that where any equity securities,
including the Company’s common shares, of a Bermuda company are listed on an appointed stock exchange, general permission is given for the issue and
subsequent transfer of any securities of a company from and/or to a non-resident, for as long as any equity securities of such company remain so listed. The
New York Stock Exchange is deemed to be an appointed stock exchange under Bermuda law. Notwithstanding the above general permission, the BMA has
granted the Company permission to, subject to its common shares being listed on an appointed stock exchange, (a) issue and transfer its shares, up to the
amount of its authorized capital from time to time, to persons resident and non-resident of Bermuda for exchange control purposes; (b) issue and transfer
options, warrants, depository receipts, rights, and other securities; and (c) issue and transfer loan notes and other debt instruments and options, warrants,
receipts, rights over loan notes and other debt instruments to persons resident and non-resident of Bermuda for exchange control purposes.
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The Economic Substance Act 2018, as amended (“ESA”) came into effect in Bermuda in December 2018 and impacts every Bermuda registered entity
engaged in a “relevant activity”, requiring impacted entities to maintain a substantial economic presence in Bermuda and to satisfy economic substance
requirements. Under the ESA, insurance or holding entity activities (both as defined in the ESA and the Economic Substance Regulations 2018, as
amended) are relevant activities. To the extent that the ESA applies to any of our Bermuda entities, we are required to demonstrate compliance with
economic substance requirements by filing an annual economic substance declaration with the Bermuda Registrar of Companies. Any entity that must
satisfy economic substance requirements but fails to do so could face automatic disclosure to competent authorities in the EU of the information filed by
the entity with the Bermuda Registrar of Companies in connection with the economic substance requirements. Additionally, a company may also face
penalties, restriction or regulation of its business activities and may be struck off as a registered entity in Bermuda for failure to satisfy economic substance
requirements. The Company believes it is in compliance with all of the applicable laws and regulations pertaining to economic substance that would have a
material effect on its financial condition and results of operations in the event of non-compliance.
Under Bermuda law, exempted companies are companies formed for the purpose of conducting business outside Bermuda from a principal place in
Bermuda. As an exempted company, the Company may not, without the express authorization of the Bermuda legislature or under a license granted by the
Bermuda Minister of Finance (the “Minister”), participate in various specified business transactions, including
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the acquisition or holding of land in Bermuda, except land held by way of lease or tenancy agreement which is required for the Company’s
business and held for a term not exceeding 50 years, or which is used to provide accommodation or recreational facilities for the Company’s
officers and employees and held with the consent of the Minister, for a term not exceeding 21 years;
the taking of mortgages on land in Bermuda in excess of $50,000;
the acquisition of any bonds or debentures secured by any land in Bermuda, other than certain types of Bermuda government or public
authority securities; or
subject to some exceptions, the carrying on of business of any kind in Bermuda for which the Company is not licensed in Bermuda.
Under Bermuda law, non-Bermudians (other than spouses of Bermudians, holders of permanent resident certificates and holders of working resident
certificates) may not engage in any gainful occupation in Bermuda without an appropriate governmental work permit. Work permits may be granted or
extended by the Bermuda government upon showing that, after proper public advertisement in most cases, no Bermudian (or spouse of a Bermudian or a
holder of a permanent resident’s certificate or holder of a working resident’s certificate) is available who meets the minimum standard requirements for the
advertised position. A waiver from advertising is automatically granted in respect of any chief executive officer position and other chief officer positions.
The employer can also make a request for a waiver from the requirement to advertise in certain other cases, as expressed in the Bermuda government's
work permit policies. Currently, all of the Company's Bermuda-based professional employees who require work permits have been granted work permits
by the Bermuda government.
United Kingdom
NSM is regulated in the United Kingdom principally by the FCA. The FCA has a wide range of rule-making, investigatory and enforcement powers,
and monitors compliance with regulatory requirements. The FCA aims (i) to secure an appropriate degree of protection for consumers, (ii) to protect and
enhance the integrity of the U.K.’s financial system and (iii) to promote effective competition in the interests of consumers.
Our U.K.-based operations are subject to the U.K. General Data Protection Regulation and the Data Protection Act 2018.
RATINGS
Insurance companies are evaluated by various rating agencies in order to measure each company’s financial strength. Higher ratings generally indicate
financial stability and a stronger ability to pay claims. White Mountains believes that strong ratings are important factors in the marketing and sale of
insurance products and services to agents, consumers and ceding companies.
As of February 25, 2021, BAM was rated “AA/stable” by Standard & Poor’s. “AA” is the third highest of 23 financial strength ratings assigned by
Standard & Poor’s.
As of February 25, 2021, GAIL was rated “A/stable” by A.M. Best. “A” is the third highest of 16 financial strength ratings assigned by A.M. Best.
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HUMAN CAPITAL
As of December 31, 2020, White Mountains employed 1,366 people (consisting of 65 people at the Company, WM Capital, its other intermediate
holding companies, WM Advisors and HG Global, 84 people at BAM, 976 people at NSM, 11 people at Kudu, and 230 people at the consolidated Other
Operating Businesses).
One of White Mountains’s key strengths lies in its people and it proactively supports each employee’s well-being and development. White Mountains’s
Board of Directors receives periodic reporting on employee satisfaction and concerns and interacts with employees across the organization. White
Mountains has an inclusive, team-oriented culture in which all employees are treated with respect. Under the guidelines of its Code of Business Conduct,
White Mountains is firmly committed to providing equal employment opportunities. White Mountains is committed to the long-term development of our
workforce and the cultivation of our next generation of leaders.
Throughout the unique challenges of 2020, White Mountains commitment to the health and safety of its employees and their families has been a
guiding priority. To support its employees during this time, White Mountains expanded and encouraged remote work, introduced protocols and practices
that emphasized employee well-being, regularly solicited feedback from its employees and significantly increased senior leadership communication.
Item 1A. Risk Factors
The information contained in this report may contain “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933
and Section 21E of the Securities Exchange Act of 1934. See “FORWARD-LOOKING STATEMENTS” on page 72 for specific important factors that
could cause actual results to differ materially from those contained in forward-looking statements. The Company’s actual future results and trends may
differ materially depending on a variety of factors including, but not limited to, the risks and uncertainties discussed below.
Risks Related to White Mountains Generally
We may be subject to greater volatility from our investment in MediaAlpha, which could materially adversely affect our results of operations and
financial condition.
On October 30, 2020, MediaAlpha completed the MediaAlpha IPO. For periods subsequent to the MediaAlpha IPO, White Mountains’s investment in
MediaAlpha is valued based on the publicly-traded share price of MediaAlpha’s common stock, which at the December 31, 2020 closing price of $39.07
per share was $802 million. As a result, White Mountains’s reported book value per share and adjusted book value per share may be subject to greater
volatility in the future, as the valuation of its investment in MediaAlpha based on the publicly-traded share price of MediaAlpha’s common stock could be
more volatile than the valuation of its investment in MediaAlpha based on the private discounted cash flow model used in White Mountains’s financial
statements in periods prior to the MediaAlpha IPO. Should there be a significant decrease in the publicly-traded share price of MediaAlpha’s common
stock, it could materially adversely affect our results of operations and financial condition.
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If we are required to write down goodwill and other intangible assets, it could materially adversely affect our results of operations and financial
condition.
As of December 31, 2020, we had total goodwill and other intangible assets of $782 million on our consolidated balance sheet, most of which relate to
our acquisition of NSM and NSM’s subsequent acquisitions of Fresh Insurance, KBK, Embrace, the Renewal Rights from AIG and Kingsbridge. As of
December 31, 2020, goodwill and other intangible assets related to NSM were $737 million.
We periodically review goodwill and other intangible assets to determine whether an impairment has occurred. An impairment of goodwill or other
intangible assets occurs when the carrying value of the asset exceeds its fair value. The evaluation of goodwill or other intangible assets for impairment
requires the use of significant judgment in determining fair value, including assumptions about the future performance of the associated business. We may
experience unexpected circumstances that cause future results to differ significantly from those assumptions used in our estimation of the fair value of our
goodwill and other intangible assets that could cause us to conclude that goodwill and other intangible assets are impaired. Such an impairment would
result in a non-cash charge to income that could materially adversely affect our results of operations and financial condition.
Our investment portfolio may suffer reduced returns or losses, which could materially adversely affect our results of operations and financial
condition. Adverse changes in equity markets, interest rates, debt markets or foreign currency exchange rates could result in significant losses to the
value of our investment portfolio.
Our investment portfolio primarily consists of fixed maturity investments, short-term investments, our investment in MediaAlpha, common equity
securities and other long-term investments. We invest to maximize long-term after-tax total returns while taking prudent levels of risk and maintaining a
diversified portfolio subject to our investment guidelines and various regulatory restrictions. However, investing entails substantial risks. We may not
achieve our investment objectives, and our investment performance may vary substantially over time. Losses or volatility in the equity or fixed income
markets could materially adversely affect our results of operations and financial condition.
The fair market value of our investment portfolio is affected by general economic and market conditions that are outside of our control, including (i)
fluctuations in equity market levels, interest rates, debt market levels and foreign currency exchange rates, (ii) public health crises, natural disasters,
terrorist attacks and other outside events, and (iii) credit losses sustained by issuers. A significant decline in the equity markets such as that experienced
from September 2008 to March 2009 could materially adversely affect our results of operations and financial condition. In addition to causing declines in
the value of securities that we own in our investment portfolio, public health crises, natural disasters, terrorist attacks and other outside events can adversely
affect general commercial activity and the economies of many countries, which could materially adversely affect the business, financial condition and
results of operations of the entities in which we have invested. For example, reductions of travel, including due to travel restrictions and bans imposed by
governments, due to the COVID-19 pandemic are negatively impacting revenues at PassportCard/DavidShield through the first quarter of 2021 and are
expected to do so until travel volumes return to normal levels. We are also exposed to changes in debt markets. Interest rates are highly sensitive to many
factors, including governmental monetary policies, economic and political conditions and other factors beyond our control. In particular, a significant
increase in interest rates could result in significant losses in the value of our investment portfolio and, consequently, could materially adversely affect our
results of operations and financial condition. We also hold investments, such as unconsolidated entities, including Kudu’s Participation Contracts, private
equity funds, hedge funds, the ILS Funds and private debt instruments that are not regularly traded in active investment markets and may be illiquid. These
investments can experience volatility in their returns or valuation, which could materially adversely affect our results of operations and financial condition.
We have successfully created shareholder value through acquisitions and dispositions. We may not be able to continue to create shareholder value
through such transactions in the future, which could materially adversely affect our results of operations and financial condition.
In past years, we have completed numerous acquisitions and dispositions, many of which have contributed significantly to creating shareholder value.
Failure to identify and complete future acquisitions and dispositions could limit our ability to create shareholder value. Even if we were to identify and
complete future acquisitions and dispositions, there is no assurance that such transactions will ultimately achieve their anticipated benefits, and such
transactions could materially adversely affect our results of operation and financial condition.
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Our investment portfolio includes securities that do not have readily observable market prices. We use valuation methodologies that are inherently
subjective and uncertain to value these securities. The values of securities established using these methodologies may never be realized, which could
materially adversely affect our results of operations and financial condition.
As of December 31, 2020, White Mountains owned $614 million in securities, including our investments in Kudu’s Participation Contracts and
PassportCard/DavidShield, that are not actively traded in public markets, do not have readily observable market prices, and are classified as Level 3
investments in the GAAP fair value hierarchy. On a quarterly basis, we make a good faith determination of the fair value of our Level 3 investments in our
GAAP financial statements using valuation techniques that are inherently subjective and uncertain.
In determining the GAAP fair value of these securities, we use judgment in selecting the fair value methodology and the significant inputs that are
employed by that methodology for each such investment. See “Level 3 Measurements” under CRITICAL ACCOUNTING ESTIMATES on pages 67 -
69 for a description of the methodologies we use to determine GAAP fair value of our investments without a readily observable market price. Given the
inherent subjectivity and uncertainty in the methodologies we use to determine the fair value of our investments without a readily observable market price,
the values of such investments established using these methodologies may never be realized, which could materially adversely affect our results of
operations and financial condition.
Risks Related to HG Global/BAM’s Business and Industry
BAM may not maintain a favorable financial strength rating, which could materially adversely affect its ability to conduct business and,
consequently, could materially adversely affect our results of operations and financial condition.
Third-party rating agencies assess and rate the financial strength of insurers, including claims-paying ability. These ratings are based upon criteria
established by the rating agencies and are subject to revision at any time at the sole discretion of the rating agencies. Some of the criteria relate to general
economic conditions and other circumstances outside the rated insurer’s control. The financial strength rating of Standard & Poor’s is used by outside
parties to assess the suitability of BAM as a business counterparty and is an important factor in establishing BAM’s competitive position.
Standard & Poor’s periodically evaluates BAM to confirm that it continues to meet the criteria of the rating previously assigned to it. On June 6, 2017,
Standard & Poor’s placed BAM on credit watch negative and initiated a detailed review of BAM’s financial strength rating. On June 26, 2017, Standard &
Poor’s concluded its review and affirmed BAM’s “AA/stable” financial strength rating. During the time that BAM’s financial strength rating was placed on
credit watch negative by Standard & Poor’s, it voluntarily withdrew from the marketplace and did not write any municipal bond insurance policies.
The maintenance of an “AA” or better financial strength rating from Standard & Poor’s is particularly important to BAM’s ability to write municipal
bond insurance policies and meet its debt service obligations under the BAM Surplus Notes. On June 29, 2020, Standard & Poor’s concluded its most
recent review and affirmed BAM’s “AA/stable” financial strength rating. A downgrade, withdrawal or negative watch/outlook of BAM’s financial strength
rating could severely limit or prevent BAM’s ability to write municipal bond insurance policies, which could materially adversely affect our results of
operations and financial condition.
If BAM does not pay some or all of the principal and interest due on the BAM Surplus Notes, it could materially adversely affect our results of
operations and financial condition.
As of December 31, 2020, White Mountains owned $388 million in BAM Surplus Notes and had accrued $156 million of interest thereon. No payment
of principal or interest on the BAM Surplus Notes may be made without the approval of the NYDFS. Under its agreements with HG Global, BAM is
required to seek regulatory approval to pay principal and interest on the BAM Surplus Notes only to the extent that its capital resources continue to support
its outstanding obligations, business plan and rating. It is unlikely that BAM would pay principal and interest on the BAM Surplus Notes if such payments
could lead to a rating downgrade. In December 2020, the NYDFS approved a $30 million cash payment of principal and interest on the BAM Surplus
Notes, while in January 2020, the NYDFS approved a one-time $65 million cash payment of principal and interest on the BAM Surplus Notes. We cannot
guarantee that the NYDFS will approve payments on the BAM Surplus Notes in the future.
If BAM does not repay some or all of the principal and interest on the BAM Surplus Notes, it could materially adversely affect our results of
operations and financial condition. BAM’s ability to repay principal and interest on the BAM Surplus Notes is dependent on a number of factors, many of
which are beyond BAM’s control, including primary municipal bond issuance levels, insured penetration rates, interest rate levels, credit spreads, trading
value, capture rate and market share. BAM also could incur significant losses from the municipal bonds it insures. In addition, the municipal bond
insurance industry is highly competitive. BAM’s primary competitor is Assured and, if BAM is unable to compete effectively against Assured, it could
result in fewer policies issued, lower premium levels and less favorable policy terms and conditions.
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We are exposed to losses from municipal bond insurance written by BAM through our reinsurance arrangements between BAM and HG Re, which
could materially adversely affect our results of operations and financial condition.
Our reinsurance subsidiary, HG Re, reinsures (i) losses up to the first 15%-of-par outstanding on each municipal bond insured by BAM and (ii) certain
municipal bonds insured by BAM on an excess of loss basis. Should the policies underwritten by BAM experience insured losses for any reason, it could
materially adversely affect our results of operations and financial condition. The COVID-19 pandemic is negatively impacting the finances of
municipalities to varying degrees, and, over time, financial stress could emerge. BAM’s existing credit portfolio is of high quality and structured to be
resilient during economic slowdowns. BAM views consumption-based tax-backed credits (sales, hotel, excise), transportation-related credits (airports,
mass transportation, ports and toll roads) and higher education-related credits as those most likely to be affected by pandemic-related impacts on the
economy. Combined, these sectors total approximately 15% of BAM’s outstanding insured par.
Risks Related to Ark’s Business and Industry
Unpredictable catastrophic events could materially adversely affect our results of operations and financial condition.
We are exposed to potentially significant losses from unpredictable catastrophic events subsequent to our acquisition of Ark. Ark writes insurance and
reinsurance policies that cover unpredictable catastrophic events. Covered unpredictable catastrophic events include natural and other disasters, such as
hurricanes, windstorms, earthquakes, floods, wildfires and severe winter weather. Catastrophes can also include public health crises, terrorist attacks,
explosions, infrastructure failures and cyber attacks.
The extent of catastrophe losses is a function of both the severity of the event and total amount of insured exposure affected by the event. Increases in
the value and concentration of insured property or insured employees, the effects of inflation, changes in weather patterns and increased terrorism could
increase the future frequency and/or severity of claims from catastrophic events. There is a growing consensus today that climate change increases the
frequency and severity of extreme weather events, and, in recent years, the frequency of major natural catastrophes appears to have increased and may
continue to increase in the future. There is also a growing threat of cyber catastrophes due to the increasing interconnectivity of global systems. Claims
from catastrophic events could materially adversely affect our results of operations and financial condition. Ark’s ability to write new insurance and
reinsurance policies could also be impacted as a result of corresponding reductions in our capital levels.
Ark seeks to manage our exposure to catastrophic losses by limiting the aggregate insured value of policies in geographic areas with exposure to
catastrophic events by estimating potential losses for many different catastrophe scenarios and by buying reinsurance. To manage and analyze aggregate
insured values and potential losses, Ark uses a variety of tools, including external and internal catastrophe modeling software packages. Ark’s estimates of
potential losses are dependent on many variables, including assumptions about the demand surge and storm surge, loss adjustment expenses, insurance-to-
value and storm intensity in the aftermath of weather- related catastrophes utilized to model the event, the relationship of the actual event to the modeled
event and the quality of data provided by ceding companies (in the case of our reinsurance operations). Accordingly, if the assumptions about the variables
are incorrect, the losses Ark might incur from an actual catastrophe could be materially higher than the expectation of losses generated from modeled
catastrophe scenarios, which could materially adversely affect our results of operations and financial condition.
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Ark and its subsidiaries benefit from favorable financial strength ratings from A.M. Best and Standard & Poor’s, the deterioration of which could
materially adversely affect its ability to conduct business and, consequently, could materially adversely affect our results of operations and financial
condition.
Third-party rating agencies assess and rate the financial strength, including claims-paying ability, of insurers, reinsurers and the Lloyd’s marketplace.
These ratings are based upon criteria established by the rating agencies and are subject to revision at any time at the sole discretion of the agencies. Some of
the criteria relate to general economic conditions and other circumstances outside the rated company’s control. These financial strength ratings are used by
policyholders, agents and brokers to assess the suitability of insurers and reinsurers as business counterparties and are an important factor in establishing
the competitive position of insurance and reinsurance companies. Rating agencies periodically evaluate us to confirm that we continue to meet the criteria
of the ratings previously assigned to us.
The maintenance of “A-” or better financial strength ratings is particularly important to Ark’s ability to write new or renewal property and casualty
insurance and reinsurance business in most markets. Ark writes insurance and reinsurance through Lloyd’s Syndicates 4020 and 3902, each of which
benefits from the financial strength rating of “A/stable” (Excellent, the third highest of 16 A.M. Best financial strength ratings) and “A+/stable” (Strong,
the fifth highest of 23 financial strength ratings assigned by Standard & Poor’s) assigned to the Lloyd’s marketplace by A.M. Best and Standard & Poor’s,
respectively. Beginning in January 2021, Ark began writing certain classes of its business through GAIL, Ark’s wholly-owned Bermuda-based insurance
and reinsurance company. A.M. Best has also assigned an “A/stable” financial strength rating directly to GAIL. A downgrade, withdrawal or negative
watch/outlook of these financial strength ratings could severely limit or prevent Ark from writing new policies or renewing existing policies, which could
materially adversely affect our results of operations and financial condition.
Ark may not successfully alleviate risk through reinsurance and retrocessional arrangements, which could materially adversely affect our results
of operations and financial condition.
Ark attempts to limit its risk of loss through reinsurance and retrocessional arrangements. Retrocessional arrangements refer to reinsurance purchased
by a reinsurer to cover its own risks assumed from ceding companies. The availability and cost of reinsurance and retrocessional protection is subject to
market conditions, which are outside of our control. In addition, the coverage provided by Ark’s reinsurance and retrocessional arrangements may be
inadequate to cover its future liabilities. As a result, Ark may not be able to successfully alleviate risk through these arrangements, which could materially
adversely affect our results of operations and financial condition.
Purchasing reinsurance does not relieve Ark of its underlying obligations to policyholders or ceding companies, so any inability to collect amounts due
from reinsurers could materially adversely affect our results of operations and financial condition. Inability to collect amounts due from reinsurers can
result from a number of scenarios, including: (1) reinsurers choosing to withhold payment due to a dispute or other factors beyond our control; and (2)
reinsurers becoming unable to pay amounts owed to us as a result of a deterioration in their financial condition. While we currently believe the condition of
Ark’s reinsurers is strong, it is possible that one or more of Ark’s reinsurers will be adversely affected by future significant losses or economic events,
causing them to be unable or unwilling to pay amounts owed.
In addition, due to factors such as the price or availability of reinsurance or retrocessional coverage, we sometimes decide to increase the amount of
risk we retain by purchasing less reinsurance. Such determinations have the effect of increasing our financial exposure to losses associated with such risks
and, in the event of significant losses associated with a given risk could materially adversely affect our results of operations and financial condition.
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The property and casualty insurance and reinsurance industries are highly competitive and cyclical and we may not be able to compete effectively
in the future, which could materially adversely affect our results of operations and financial condition.
The property and casualty insurance and reinsurance industries are highly competitive and have historically been cyclical, experiencing periods of
severe price competition and less selective underwriting standards (“soft markets”) followed by periods of relatively high prices and more selective
underwriting standards (“hard markets”). In general terms, Ark competes with numerous insurance and reinsurance companies throughout the world and
with other Lloyd’s syndicates and London Market Companies. Many of these competitors have greater resources than Ark does, have established long-term
and continuing business relationships throughout the insurance and reinsurance industries and may have higher financial strength ratings, which can be a
significant competitive advantage for them.
Soft primary insurance market conditions could lead to a significant reduction in reinsurance premium rates, less favorable contract terms and fewer
submissions for Ark’s reinsurance underwriting capacity. The supply of reinsurance is also related to the level of reinsured losses and the level of industry
capital which, in turn, may fluctuate in response to changes in rates of return earned in the reinsurance industry. As a result, the reinsurance business
historically has been a cyclical industry characterized by periods of intense price competition due to excess underwriting capacity as well as periods when
shortages of capacity permitted improvements in reinsurance rate levels and terms and conditions. In addition, in recent years the persistent low interest rate
environment and ease of entry into the reinsurance sector has led to increased competition from third party capital in the property catastrophe excess
reinsurance line. This alternative capital provides collateralized property catastrophe protection in the form of catastrophe bonds, industry loss warranties,
sidecars and other vehicles that facilitate the ability for non-reinsurance entities, such as hedge funds and pension funds, to compete for property
catastrophe excess reinsurance business outside of the traditional treaty market.
We expect to continue to experience the effects of the insurance and reinsurance industries’ cyclicality. If Ark is unable to maintain its competitive
position throughout soft and hard market cycles, its business may be adversely affected and we may not be able to compete effectively in the future, which
could materially adversely affect our results of operations and financial condition.
Risks Related to NSM’s Business and Industry
Our commission revenues are dependent on many factors, some of which are beyond our control, including the pricing and profitability of certain
segments of the property and casualty insurance industry, which is highly competitive and cyclical.
NSM generates most of its revenues from commissions that are a portion of premiums charged by insurance companies to their insureds. NSM also
generates profit commissions from certain of its businesses that are paid by insurance companies based on the profitability of policies placed with them.
NSM is an MGU, and as such, its carrier partners bear the insurance risk on the programs designed and underwritten by NSM. Should NSM fail to meet the
profitability expectations of the carriers that write the business it places, those carriers could choose to stop writing the business, which could materially
adversely affect NSM’s commission revenues and, consequently, could materially adversely affect our results of operations and financial condition.
The property and casualty insurance industry is highly competitive and has historically been cyclical, experiencing periods of severe price competition
and less selective underwriting standards (“soft markets”) followed by periods of relatively high prices and more selective underwriting standards (“hard
markets”). The cyclicality of the property and casualty markets is beyond our control and could materially adversely affect our results of operations and
financial condition by reducing the commissions we receive for property and casualty insurance we place during soft markets. We expect to continue to
experience the effects of cyclicality and may not be able to successfully manage the associated risks.
Our future commission revenues could also be materially adversely affected by other factors beyond our control, including (i) the increasing availability
of capital markets-based products designed to replace traditional insurance and reinsurance products; (ii) growth in the direct-to-consumer sales channel at
the expense of insurance intermediaries including agents; and (iii) the percentage of premium insurance carriers will pay for placement services.
A substantial portion of NSM’s business is placed with one insurance carrier, and most of NSM’s business is placed with a small number of carriers.
NSM placed approximately 19% of its business with its single largest carrier during the year ended December 31, 2020. NSM placed approximately 64%
of its business with its five largest carriers during the year ended December 31, 2020. Should any of these carriers reduce the volume of business accepted
from NSM or adversely change the terms and conditions of placement, we cannot guarantee that NSM would be able to find other carriers to assume the
business, which could materially adversely affect our results of operations and financial condition.
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Risks Related to Kudu’s Business and Industry
Kudu’s financial performance is dependent upon its clients’ asset and performance-based fees, which are subject to a variety of economic, market
and other risks.
Through our subsidiary Kudu, we provide capital solutions for asset management firms through non-controlling equity interests in the form of revenue
and earnings participation contracts. Kudu’s clients generate their revenues and earnings by charging asset based fees, which are typically a percentage of
the value of the assets they manage for their clients, and/or performance based fees, which are typically a portion of actual returns achieved for their clients
above a target return. The revenue that Kudu generates from its clients is subject to the same general economic and market risks that may affect our
investment portfolio. See “Our investment portfolio may suffer reduced returns or losses, which could materially adversely affect our results of
operations and financial condition. Adverse changes in equity markets, interest rates, debt markets or foreign currency exchange rates could result in
significant losses to the value of our investment portfolio.” on page 18.
Additionally, Kudu’s clients participate in a highly competitive, highly regulated industry that subjects their operations to a number of other risks that are
out of our control and could materially adversely affect our results of operations and financial condition, including (i) changes in investor preference from
the actively-managed investments offered by Kudu’s clients to passively-managed investments; (ii) the ability of Kudu’s clients to successfully attract new
clients and retain existing ones; (iii) the ability of Kudu’s clients to avoid fee compression; (iv) the reliance of Kudu’s clients on a small number of key
personnel; and (v) future changes to regulations that make Kudu’s clients’ businesses more cumbersome and expensive to operate.
Risks Related to Taxation
We may be treated as a PFIC, in which case a U.S. holder of our common shares could be subject to disadvantageous rules under U.S. federal
income tax laws.
Significant potential adverse U.S. federal income tax consequences apply to any U.S. person who owns shares in a passive foreign investment
company (“PFIC”). In general, a non-U.S. corporation is classified as a PFIC for a taxable year in which, after taking into account the income and assets of
the corporation and certain subsidiaries pursuant to certain “look-through” rules, either (i) 75% or more of its gross income is passive income or (ii) 50% or
more of the average quarterly value of its gross assets is attributable to assets that produce passive income or are held for the production of passive income.
If a corporation is treated as a PFIC for a taxable year, it is generally treated as a PFIC for all later taxable years. Passive income for PFIC purposes
generally includes interest, dividends and other investment income, subject to certain exceptions.
On January 15, 2021 new final and proposed PFIC regulations issued by the U.S. Department of the Treasury were published in the Federal Register.
The final regulations are generally effective for tax years of shareholders beginning on or after their date of publication. The proposed regulations may be
selectively adopted by shareholders prior to their finalization. We are carefully studying the final and proposed regulations, including their effective dates
and their application to White Mountains to determine their effects on our PFIC status in the future.
While we believe that White Mountains should not currently be treated as a PFIC based upon the income and assets of White Mountains and the
income and assets of its subsidiaries (taking into account certain applicable subsidiary “look-through” rules), there is no assurance that White Mountains
will not become a PFIC in the future as a result of changes in law or regulations (or their application to White Mountains) or changes in our assets, income
or business operations. Nor is there assurance that the Internal Revenue Service will not successfully argue that White Mountains is now, or in the future
may become, a PFIC.
If we are determined to be a PFIC, a U.S. person may be subject to less advantageous tax consequences upon the sale, exchange or receipt of dividends
with respect to our common shares and may be required to pay U.S. federal income tax at ordinary income rates for gains and dividends, as well as an
interest charge on certain “excess distributions.” Certain elections designed to mitigate the adverse consequences of owning shares in a PFIC, including a
“Protective QEF Election,” may be available. If you are a U.S. person, we encourage you to consult your own tax advisor concerning the potential tax
consequences to you under the PFIC rules.
23
The Company and certain of our non-U.S. subsidiaries may become subject to U.S. tax, which could materially adversely affect our results of
operations and financial condition.
The Company and our non-U.S. subsidiaries without U.S. branches operate in a manner such that none of these companies should be subject to U.S.
tax (other than U.S. excise tax on insurance and reinsurance premium income attributable to insuring or reinsuring U.S. risks and U.S. withholding tax on
some types of U.S. source investment income) because none of these companies should be treated as engaged in a trade or business within the United
States. However, because there is considerable uncertainty as to the activities that constitute being engaged in a trade or business within the United States,
we cannot be certain that the Internal Revenue Service will not contend successfully that the Company or its non-U.S. subsidiaries without U.S. branches
are engaged in a trade or business in the United States. If the Company or any of its non-U.S. subsidiaries without U.S. branches were considered to be
engaged in a trade or business in the United States, such entity could be subject to U.S. corporate income and branch profits taxes on the portion of its
earnings effectively connected to such U.S. business, which could materially adversely affect our results of operations and financial condition.
Changes in tax laws or tax treaties could materially adversely affect our results of operations and financial condition.
The income of our U.S. subsidiaries is subject to U.S. federal, state and local income tax and other taxes. The income of our non-U.S. subsidiaries is
generally subject to a lower tax rate than that imposed by the United States. Certain of our non-U.S. subsidiaries are eligible for the benefits of tax treaties
between the United States and other countries. We believe our non-U.S. subsidiaries will continue to be eligible for treaty benefits. However, it is possible
that factual changes or changes to U.S. tax laws or changes to tax treaties that presently apply to our non-U.S. subsidiaries could increase income subject to
tax, or the tax rate on income, in the United States. Similarly, changes to the applicable tax laws, treaties or regulations of other countries could subject the
income of members of our group to higher rates of tax outside the United States. Additionally, the base erosion and profit shifting project currently being
undertaken by the Organization for Economic Cooperation and Development and the European Commission’s investigation into illegal state aid may result
in changes to long standing tax principles, which could materially adversely affect our results of operations and financial condition.
Our non-U.S. subsidiaries are treated as CFCs and may subject a U.S. 10% shareholder of our common shares to disadvantageous rules under
U.S. federal income tax laws.
The Tax Cuts and Jobs Act of 2017 (“TCJA”) modified certain U.S. tax rules that apply to controlled foreign corporations (“CFCs”). As a result of
these changes, each of our non-U.S. subsidiaries is treated as a CFC. If any of our shareholders is a “U.S. 10% shareholder” (as described below) that
directly or indirectly owns stock in White Mountains, that shareholder must include in its taxable income each year its pro rata share of our CFC
subsidiaries’ “subpart F income” for that year, even if no distributions are received by the U.S. 10% shareholder.
Due to changes made by the TCJA, a shareholder is treated as a U.S. 10% shareholder if the shareholder is a U.S. person who owns directly, indirectly
or through constructive ownership rules 10% or more of either the voting power or the total value of our shares. As a result, a U.S. person that owns
(directly, indirectly or through constructive ownership rules) 10% or more of our shares will generally be treated as a U.S. 10% shareholder of our CFC
subsidiaries, notwithstanding the voting power restrictions of our shares. However, a person that is a U.S. 10% shareholder solely as a result of constructive
ownership rules (i.e., such person does not directly or indirectly own stock of White Mountains) should not have a subpart F income inclusion with respect
to our CFC subsidiaries.
If you are a U.S. person who might be a U.S. 10% shareholder, we encourage you to consult your own tax advisor concerning the CFC rules.
Risks Related to Laws and Regulation
Regulation may restrict our ability to operate.
Changes in laws and regulations may restrict our ability to operate and/or have an adverse effect upon the profitability of our business. For example, as
a result of various state, federal and international regulatory efforts to modernize and harmonize insurer solvency regulations, the states could further
restrict allowable investments or increase our capital requirements, both of which could materially adversely affect our results of operations and financial
condition. Likewise, data privacy regulations have recently been enacted in various jurisdictions in the United States and throughout the world. These
regulations address numerous aspects related to the security of personal information that is stored in our information systems, networks and facilities.
Failure to comply with these regulations could result in reputational damage and significant penalties, which could materially adversely affect our results of
operations and financial condition.
24
Bermuda law differs from the laws in effect in the United States and may afford less protection to shareholders.
We are organized under the laws of Bermuda, and a portion of our assets are located outside the United States. As a result, it may not be possible for
our shareholders to enforce court judgments obtained in the United States against us based on the civil liability provisions of the federal or state securities
laws of the United States, either in Bermuda or in countries other than the United States where we will have assets. In addition, there is some doubt as to
whether the courts of Bermuda and other countries would recognize or enforce judgments of U.S. courts obtained against us or our directors or officers
based on the civil liabilities provisions of the federal or state securities laws of the United States or would hear actions against us or those persons based on
those laws.
Our corporate affairs are governed by the Bermuda Companies Act. The Companies Act differs in some material respects from laws generally
applicable to U.S. corporations and shareholders, including the provisions relating to interested directors, amalgamations, mergers and acquisitions,
takeovers, shareholder lawsuits and indemnification of directors. Generally, the duties of directors and officers of a Bermuda company are owed to the
company only. Shareholders of Bermuda companies generally do not have rights to take action against directors or officers of the company and may only
do so in limited circumstances. Class actions and derivative actions are generally not available to shareholders under Bermuda law. The Bermuda courts,
however, would ordinarily be expected to permit a shareholder to commence an action in the name of a company to remedy a wrong to the company where
the act complained of is alleged to be beyond the corporate power of the company or illegal, or would result in the violation of the company’s
memorandum of association or bye-laws. Furthermore, a Bermuda court would ordinarily be expected to permit a shareholder to commence an action that
alleges a fraud against non-controlling shareholders or, for instance, where an act requires the approval of a greater percentage of the company’s
shareholders than that which actually approved it.
When the affairs of a company are being conducted in a manner that is oppressive or prejudicial to the interests of some part of the shareholders, one
or more shareholders may apply to the Supreme Court of Bermuda, which may make such order as it sees fit, including an order regulating the conduct of
the company’s affairs in the future or ordering the purchase of the shares of any shareholders by other shareholders or by the company. Additionally, under
our bye-laws and as permitted by Bermuda law, each shareholder has waived any claim or right of action against our directors or officers for any action
taken by directors or officers in the performance of their duties, except for actions involving fraud or dishonesty. In addition, the rights of our shareholders
and the fiduciary responsibilities of our directors under Bermuda law are not as clearly established as under statutes or judicial precedent in existence in
jurisdictions in the United States, particularly the State of Delaware. Therefore, our shareholders may have more difficulty protecting their interests than
would shareholders of a corporation incorporated in a jurisdiction within the United States.
We could be materially adversely affected if our controls designed to ensure compliance with guidelines, policies, and legal and regulatory
standards are not effective.
Our business is highly dependent on our ability to successfully execute a large number of transactions, many of which are complex. These processes
are often subject to internal guidelines and policies, and government regulation. A control system, no matter how well designed and operated, can provide
only reasonable assurance that the control system’s objectives will be met. If controls are not effective, it could lead to unanticipated risk exposure, or
damage to our reputation and, consequently, could materially adversely affect our results of operations and financial condition.
25
Other Risks Related to Our Businesses
We may be unable to adequately maintain our systems and safeguard the security of our data, which could adversely impact our ability to operate
our business and cause reputational harm and, consequently, could materially adversely affect our results of operations and financial condition.
Because our business and operations rely on secure and efficient information technology systems, we depend on our ability, and the ability of certain
third parties, including vendors and business partners, to access our computer systems to perform necessary functions such as providing quotes and product
pricing, billing and processing transactions, administering claims, and reporting our financial results. The functioning of these systems may be impacted by
any number of events, including power outages, natural and manmade catastrophes, and cyber-attacks. In the event we are unable to access any of our
systems, or any third-party system that we rely upon, our ability to operate our business effectively may be significantly impaired.
Our business also depends upon our ability to securely process, store, transmit and safeguard confidential and proprietary information that is in our
possession. This information includes confidential information relating to our business, and personally identifiable information (“PII”) and protected health
information (“PHI”) belonging to our employees, customers, claimants and business partners. Because our systems may be vulnerable to a variety of forms
of unauthorized access that could result in a data breach, including hackers, computer viruses, and other cyber-attacks, as well as breaches that result from
dishonest employees, errors by employees or lost or stolen computer devices, we may not be able to protect the confidentiality of such information.
Third parties present an additional risk of cyber-related events. We outsource certain technological and business process functions to third-party
providers. We rely on these third parties to maintain and store PII and PHI and other confidential information on their systems. We also routinely transmit
such information by e-mail and other electronic means. Although we attempt to establish sufficient controls and secure capabilities to transmit such
information and to prevent unauthorized disclosure, these controls may not be sufficient. Furthermore, third-party providers may not have appropriate
controls in place to protect such information.
Our computer systems have been and will continue to be the target of cyber-attacks, although we are not aware that we have experienced a material
cybersecurity breach. We are also not aware of any third-party vendor having experienced a material cybersecurity breach that impacted our data. The risk
of a cyber-attack may increase, and we may experience more significant attacks in the future.
The risks identified above could expose us to data breaches, disruptions of service, financial losses and significant increases in compliance costs and
reputational harm. In addition, a data breach could subject us to legal liability or regulatory action under data protection and privacy laws and regulations
enacted by federal, state and foreign governments, or other regulatory bodies. As a result, our ability to conduct our business and our results of operations
and financial condition could be materially adversely affected.
We may suffer losses from unfavorable outcomes from litigation and other legal proceedings, which could materially adversely affect our results of
operations and financial condition.
From time to time we are subject to legal proceedings. In the event of an unfavorable outcome in one or more legal matters, our ultimate liability may
be in excess of amounts we have reserved and such additional amounts could materially adversely affect our results of operations and financial condition.
Furthermore, it is possible that these legal proceedings could result in equitable remedies or other unexpected outcomes that could materially adversely
affect our results of operations and financial condition.
We depend on our key personnel to manage our business effectively and they may be difficult to replace, which could materially adversely affect our
results of operations and financial condition.
Much of our competitive advantage is based on the expertise, experience and know-how of our key personnel. We do not have fixed term employment
agreements with any of our key personnel or key man life insurance and the loss of one or more of these key personnel could materially adversely affect
our results of operations and financial condition. Our success also depends on the ability to hire and retain additional personnel. Difficulty in hiring or
retaining personnel could materially adversely affect our results of operations and financial condition.
26
Item 1B. Unresolved Staff Comments
As of the date of this report, the Company had no unresolved comments from the Commission staff regarding its periodic or current reports under the
Exchange Act.
Item 2. Properties
The Company maintains two professional offices in Hamilton, Bermuda, which serve as its headquarters and its registered office. The Company’s
principal executive office is in Hanover, New Hampshire. In addition, White Mountains maintains a professional office in Guilford, Connecticut, which
houses its corporate finance and investment functions, and in Boston, Massachusetts, which houses its corporate accounting, reporting and internal audit
functions. All of the Company’s professional offices are leased.
HG Global’s headquarters are located in Hamilton, Bermuda. BAM’s and Kudu’s headquarters are located in New York, New York. NSM’s
headquarters are located in Conshohocken, Pennsylvania.
The various offices and facilities of the consolidated Other Operating Businesses are owned or leased. Management considers its office facilities
suitable and adequate for its current level of operations.
Item 3. Legal Proceedings
None.
Item 4. Mine Safety Disclosures
None.
AVAILABLE INFORMATION
The Company is subject to the informational reporting requirements of the Exchange Act. In accordance therewith, the Company files reports, proxy
statements and other information with the SEC. These documents are available at www.sec.gov and www.whitemountains.com shortly after such material is
electronically filed with or furnished to the SEC. In addition, the Company’s code of business conduct and ethics as well as the various charters governing
the actions of certain of the Company’s Committees of its Board of Directors, including its Audit Committee, Compensation Committee and Nominating
and Governance Committee, are available at www.whitemountains.com.
The Company will provide to any shareholder, upon request and without charge, copies of these documents (excluding any applicable exhibits unless
specifically requested). Written or telephone requests should be directed to the Corporate Secretary, White Mountains Insurance Group, Ltd., 26 Reid
Street, Hamilton, HM 11 Bermuda, telephone number (441) 278-3160. Additionally, all such documents are physically available at the Company’s
registered office at Clarendon House, 2 Church Street, Hamilton, HM 11 Bermuda.
27
Information About Our Executive Officers (As of February 26, 2021)
Name
G. Manning Rountree
Reid T. Campbell
Frank R. Bazos
J. Brian Palmer
Robert L. Seelig
Position
Chief Executive Officer
Executive Vice President and Chief Financial Officer
Executive Vice President and Head of M&A at WM Capital
Managing Director and Chief Accounting Officer
Executive Vice President and General Counsel
Age
48
53
53
48
52
Executive Officer
Since
2009
2007
2019
2001
2002
All executive officers of the Company and its subsidiaries are elected by the Board for a term of one year or until their successors have been elected
and have duly qualified. Information with respect to the principal occupation and relevant business experience of the Executive Officers follows:
Mr. Rountree was appointed as a director and Chief Executive Officer of the Company in March 2017. Prior to that, he served as an Executive Vice
President of the Company and President of WM Capital. He joined White Mountains in 2004 and served as President of WM Advisors from March 2009
until December 2014. Prior to joining White Mountains, Mr. Rountree was a Senior Vice President at Putnam Investments for two years. Prior to joining
Putnam Investments, Mr. Rountree spent three years with McKinsey & Company. Mr. Rountree is a director and member of the Group Risk Committee of
Admiral Group plc, a large car insurance provider based in the United Kingdom. Mr. Rountree also serves as a director of BAM.
Mr. Campbell was appointed Executive Vice President and Chief Financial Officer of the Company in May 2017. Prior to that, he served as a
Managing Director of WM Capital and as President of WM Advisors. He joined White Mountains in 1994 and has served in a variety of financial
management positions with the Company and its subsidiaries. Prior to joining White Mountains, Mr. Campbell spent three years with KPMG. Mr.
Campbell serves as a director of BAM.
Mr. Bazos is Executive Vice President and Head of M&A at WM Capital. Prior to joining WM Capital in 2019, Mr. Bazos was with the private equity
firm Century Equity Partners and previous work experience includes TA Associates and North Atlantic Capital. Effective March 1, 2021, Mr. Bazos will
resign from his current role and become an advisor to management.
Mr. Palmer is a Managing Director and the Chief Accounting Officer of the Company. Prior to joining White Mountains in 1999, Mr. Palmer was
with PricewaterhouseCoopers. Effective May 14, 2021, Mr. Palmer will retire from his current role and become an advisor to management.
Mr. Seelig is Executive Vice President and General Counsel of the Company. Prior to joining White Mountains in 2002, Mr. Seelig was with the law
firm of Cravath, Swaine & Moore.
28
PART II
Item 5. Market for the Company’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities
White Mountains’s common shares are listed on the New York Stock Exchange (symbol “WTM”) and the Bermuda Stock Exchange (symbol “WTM-
BH”). As of February 24, 2021, there were 232 registered holders of White Mountains common shares, par value $1.00 per share. For information on
securities authorized for issuance under the Company’s equity compensation plans, see “Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters” on page 76.
The following graph presents the five-year cumulative total return for a shareholder who invested $100 in common shares as of December 31, 2015,
assuming re-investment of dividends. Cumulative returns for the five-year period ended December 31, 2020 are also shown for the Standard & Poor’s 500
Stocks (Property & Casualty) Capitalization Weighted Index (“S&P P&C”) and the Standard & Poor’s 500 Stocks Capitalization Weighted Index
(“S&P 500”) for comparison.
Purchases of Equity Securities by the Company
No common shares were repurchased by the Company during the fourth quarter of 2020.
29
Item 6. Selected Financial Data
The following table presents selected consolidated income statement data and ending balance sheet data for each of the five years ended through
December 31, 2020:
$ in Millions, Except Share and Per Share Amounts
Income Statement Data:
Revenues
(a)
Expenses
(b)
Pre-tax income (loss)
Income tax benefit (expense)
(c)
Net loss (income) attributable to non-controlling interests
(d)
Discontinued operations, net of tax
(e)
Net income (loss) attributable to White Mountains’s common shareholders
Income (loss) attributable to White Mountains’s common shareholders per
share:
Basic — continuing operations
Basic — discontinued operations
Total basic income (loss) per share
Diluted — continuing operations
Diluted — discontinued operations
Total diluted income (loss) per share
Balance Sheet Data:
(f)
Total assets
(g)
Debt
Non-controlling interests
(h)
White Mountains’s common shareholders’ equity
Book value per share
Adjusted book value per share
(i)
Share Data:
Cash dividends paid per common share
Ending common shares (000’s)
(j)
Year Ended December 31,
2020
2019
2018
2017
2016
$
1,181
$
536
645
21
45
(2)
709
227.72
(.75)
226.97
227.72
(.75)
226.97
4,831
376
(88)
3,906
1,259.18
1,263.64
1.00
3,102
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
893
488
405
(29)
38
1
415
130.02
.25
130.27
130.02
.25
130.27
3,983
284
(117)
3,262
1,023.91
1,018.41
1.00
3,185
$
$
$
$
$
$
$
$
$
$
369
547
(178)
4
50
(17)
(141)
(36.67)
(5.09)
(41.76)
(36.67)
(5.09)
(41.76)
3,363
193
(125)
2,843
896.00
887.85
1.00
3,173
$
$
$
$
$
$
$
$
$
$
374
366
8
8
34
577
627
11.56
134.50
146.06
11.56
134.50
146.06
3,659
24
(132)
3,493
931.30
914.75
1.00
3,750
$
$
$
$
$
$
$
$
$
$
158
305
(147)
33
(7)
523
402
(24.26)
104.37
80.11
(24.26)
104.32
80.06
6,520
13
133
3,583
785.01
789.08
1.00
4,564
(a)
(b)
(c)
(d)
(e)
(f)
(g)
(h)
(i)
(j)
In 2020, White Mountains recognized $746 of net investment income and realized and unrealized investment gains from its investment in MediaAlpha. In 2019, White Mountains recognized
$256 of net investment income, realized gains and unrealized investment gains from its investment in MediaAlpha. MediaAlpha, which was consolidated prior to the 2019 MediaAlpha
Transaction, recognized revenues of $49, $297 and $163 in 2019, 2018 and 2017. NSM, which was acquired in 2018, recognized revenues of $285, $233 and $102 in 2020, 2019 and 2018.
Kudu, which was consolidated subsequent to the Kudu Transaction in 2019, recognized revenues of $46 in 2020, compared to $21 in 2019. Other Operations recognized net realized and
unrealized investment (losses) gains, excluding MediaAlpha, of $(9), $220, $(101), $133 and $(28) in 2020, 2019, 2018, 2017 and 2016, respectively, which contributed to the changes in
revenues.
NSM recognized expenses of $298, $235 and $107 in 2020, 2019 and 2018 for the period owned by White Mountains. MediaAlpha recognized cost of sales of $41, $245 and $136 in 2019,
2018 and 2017. Kudu recognized expense of $18 and $10 in 2020 and 2019 for the period consolidated by White Mountains. White Mountains’s Other Operations segment recognized general
and administrative expenses of $142, $123, $94, $149 and $124 in 2020, 2019, 2018, 2017 and 2016.
The income tax benefit in 2020 includes $131 million from the release of a deferred tax liability as a result of an internal reorganization in connection with the MediaAlpha IPO.
White Mountains reported $45, $34, $52, $40 and $38 of non-controlling interest loss related to BAM in 2020, 2019, 2018, 2017 and 2016. Amount for 2017 also includes non-controlling
interests in OneBeacon prior to its sale in 2017.
As a result of the sales of OneBeacon Insurance Group, Ltd. (“OneBeacon”), Sirius International Insurance Group, Ltd. (“Sirius Group”) and Tranzact Holdings, LLC (“Tranzact”), White
Mountains has reclassified the results from these businesses for the past five years in the table above to discontinued operations, net of tax. In 2018, discontinued operations, net of tax,
includes a loss from sale of Sirius Group of $17 for the recognition of a contingent liability related to the sale. In 2017, discontinued operations, net of tax, includes a gain from sale of
OneBeacon of $555 and income of $21 and a (loss) gain from sale of Sirius Group. In 2016, discontinued operations, net of tax, includes a gain from sale of Sirius Group and Tranzact of $363
and $52, respectively, and net income of $108 primarily related to the operations of OneBeacon. See Note 19 — “Held for Sale and Discontinued Operations” on page F-62.
White Mountains’s total assets increased in 2020, compared to 2019, driven primarily by the increase in the fair value of White Mountains investment in MediaAlpha and NSM’s acquisition of
Kingsbridge. White Mountains’s total assets increased in 2019, compared to 2018, as a result of NSM’s acquisitions of Embrace and the Renewal Rights from AIG and the Kudu Transaction.
White Mountains’s total assets decreased as a result of share repurchases in 2018, 2017 and 2016, and the sales of OneBeacon in 2017 and Sirius Group in 2016.
White Mountains’s total debt increased in 2020, compared to 2019, driven primarily by borrowings under the NSM Bank Facility for the acquisition of Kingsbridge. White Mountains’s total
debt increased in 2019, compared to 2018, as a result of borrowings under the NSM Bank Facility and the Kudu Bank Facility. See Note 5 — “Debt” on page F-34.
White Mountains’s non-controlling interests includes the policyholders’ surplus of BAM. White Mountains’s non-controlling interests in 2016 also included amounts related to OneBeacon
prior to its sale. Note 12 — “Common Shareholders’ Equity and Non-controlling Interests” on page F-49 for a detailed breakdown of non-controlling interests by consolidated entity.
Adjusted book value per share is a non-GAAP measure. See “NON-GAAP FINANCIAL MEASURES” on page 63.
During 2020, 2019, 2018, 2017 and 2016 White Mountains repurchased 99,087, 5,679, 592,458, 832,725 and 1,106,145 respectively, of its common shares through a combination of tender
offers, open market transactions and other transactions. See “LIQUIDITY AND CAPITAL RESOURCES” on page 55.
30
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion contains “forward-looking statements”. White Mountains intends statements that are not historical in nature, which are
hereby identified as forward-looking statements, to be covered by the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. White
Mountains cannot promise that its expectations in such forward-looking statements will turn out to be correct. White Mountains’s actual results could be
materially different from and worse than its expectations. See “FORWARD-LOOKING STATEMENTS” on page 72 for specific important factors that
could cause actual results to differ materially from those contained in forward-looking statements.
The following discussion also includes eight non-GAAP financial measures (i) adjusted book value per share, (ii) gross written premiums and MSC
from new business, (iii) adjusted capital, (iv) NSM’s earnings before interest, taxes, depreciation and amortization (“EBITDA”), (v) NSM’s adjusted
EBITDA, (vi) Kudu’s EBITDA, (vii) Kudu’s adjusted EBITDA and (viii) total consolidated portfolio returns excluding MediaAlpha, that have been
reconciled from their most comparable GAAP financial measures on page 63. White Mountains believes these measures to be useful in evaluating White
Mountains’s financial performance and condition.
RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2020, 2019 AND 2018
Overview—Year Ended December 31, 2020 versus Year Ended December 31, 2019
White Mountains ended 2020 with book value per share of $1,259 and adjusted book value per share of $1,264, an increase of 23.1% and 24.2% for
the year, including dividends. Comprehensive income attributable to common shareholders was $716 million in 2020 compared to $413 million in 2019.
The results in 2020 included $746 million of net investment income and net realized and unrealized investment gains from White Mountains’s investment
in MediaAlpha. The results in 2020 also included $131 million from the release of a deferred tax liability as a result of an internal reorganization in
connection with the MediaAlpha IPO. The results in 2019 included $256 million of net investment income, realized gains and net unrealized investment
gains from White Mountains’s investment in MediaAlpha, $182 million of which was from the 2019 MediaAlpha Transaction.
On October 30, 2020, MediaAlpha completed the MediaAlpha IPO. In the offering, White Mountains sold 3,609,894 shares and received total
proceeds of $64 million. Following the completion of the MediaAlpha IPO, White Mountains owns 20,532,202 MediaAlpha shares, representing a 35.0%
ownership interest (32.3% on a fully-diluted, fully converted basis). At the December 31, 2020 MediaAlpha closing price of $39.07 per share, the value of
White Mountains’s remaining investment in MediaAlpha was $802 million. Based on White Mountains’s ownership of 20,532,202 shares of MediaAlpha
as of December 31, 2020, each $1.00 per share increase or decrease in the stock price of MediaAlpha subsequent to the MediaAlpha IPO will result in an
approximate $7 per share increase or decrease in White Mountains’s book value per share and adjusted book value per share.
On October 1, 2020, White Mountains entered into the Ark SPA and the Ark Acquisition Agreement. Under the terms of the Ark Acquisition
Agreement, White Mountains agreed to contribute $605 million of equity capital to Ark, at a pre-money valuation of $300 million, and to purchase $41
million of shares from the Ark Sellers. White Mountains also agreed to contribute up to an additional $200 million of equity capital to Ark in 2021. In
accordance with the Ark SPA, in the fourth quarter of 2020 White Mountains pre-funded/placed in escrow a total of $646 million in preparation for closing
the transaction, which is reflected on the balance sheet within the Other Operations segment as of December 31, 2020.
On January 1, 2021, White Mountains closed the transaction in accordance with the terms of the Ark SPA. At closing, White Mountains owned 72% of
Ark on a basic shares outstanding basis (63% on a fully-diluted, fully-converted basis, taking account of management’s equity incentives). If the additional
$200 million is contributed in full, White Mountains will own 77% of Ark on a basic shares outstanding basis (68% on a fully-diluted, fully-converted
basis). Management’s equity incentives are subject to an 8% rate of return threshold with no catch-up. The remaining shares are owned by employees. In
the future, management rollover shareholders could earn additional shares in the company if and to the extent that White Mountains achieves certain
multiple of invested capital return thresholds. These additional shares are generally eligible to vest in three equal tranches at multiple on invested capital
(“MOIC”) thresholds of 2.0x, 2.5x and 3.0x. If fully earned, these additional shares would represent 13% of the shares outstanding at closing.
In the January 2021 renewal season, Ark wrote gross written premiums in excess of $270 million.
During 2020, White Mountains deployed approximately $1.0 billion in new business opportunities, including commitments related to the Ark
Transaction, which closed on January 1, 2021. Also during 2020, White Mountains repurchased and retired 99,087 of its common shares for $85 million.
As a result, White Mountains’s capital base is, for the time being, more or less fully deployed.
31
Gross written premiums and MSC collected in the HG Global/BAM segment totaled $131 million in 2020, compared to $107 million in 2019. Total
pricing was 76 basis points in 2020, compared to 83 basis points in 2019. BAM insured municipal bonds with par value of $17.3 billion in 2020, compared
to $12.8 billion in 2019. During 2020, BAM completed an assumed reinsurance transaction to insure municipal bonds with a par value of $37 million and,
during 2019, BAM completed an assumed reinsurance transaction to insure municipal bonds with a par value of $1.1 billion.
In December 2020, BAM made a $30 million cash payment of principal and interest on the BAM Surplus Notes held by HG Global. In January 2020,
BAM made a one-time $65 million cash payment of principal and interest on the BAM Surplus Notes held by HG Global. BAM’s total claims paying
resources were $987 million as of December 31, 2020, compared to $938 million as of December 31, 2019.
NSM reported pre-tax loss of $13 million, adjusted EBITDA of $59 million, and commission and other revenues of $285 million in 2020, compared to
pre-tax loss of $2 million, adjusted EBITDA of $48 million, and commission and other revenues of $233 million in 2019. Results for the year ended
December 31, 2020 include the results, from the date of acquisition, of Kingsbridge, a leading provider of commercial lines insurance and consulting
services for the professional contractor and freelancer markets in the United Kingdom, which was acquired on April 7, 2020, and Embrace, a nationwide
provider of pet health insurance for dogs and cats, which NSM acquired on April 1, 2019.
Kudu reported pre-tax income of $28 million and total revenues of $46 million in 2020, compared to pre-tax income of $11 million and total revenues
of $21 million for the period from April 4, 2019, the date of the Kudu Transaction, through December 31, 2019. For the twelve months ended
December 31, 2020, Kudu deployed $121 million, including transaction costs, in five asset management firms and has now deployed a total of $386
million, including transaction costs, in 13 asset management firms with combined assets under management of approximately $45 billion, spanning a range
of asset classes, including real estate, real assets, wealth management, hedge funds, private equity and alternative credit strategies.
White Mountains’s pre-tax total return on invested assets was 31.9% in 2020. This return included $746 million of net investment income and net
realized and unrealized investment gains from MediaAlpha. Excluding MediaAlpha, the total return on invested assets was 4.6% in 2020. White
Mountains’s pre-tax total return on invested assets was 20.4% in 2019. This return included $188 million of net investment income and net unrealized
investment gains from MediaAlpha. Excluding MediaAlpha, the total return on invested assets was 13.0% in 2019.
Investment returns in 2020 were impacted by White Mountains’s decision to sell its portfolio of common equity securities during the third and fourth
quarter of 2020 in preparation of funding the Ark Transaction as equity markets were up strongly in the fourth quarter. Investment returns in 2019 benefited
from White Mountains’s decision to increase equity exposure after markets declined sharply at the end of 2018 ahead of the strong rally in equity markets
during 2019.
White Mountains’s portfolio of common equity securities and other long-term investments returned 4.9% in 2020. White Mountains’s portfolio of its
investment in MediaAlpha, common equity securities and other long-term investments returned 80.0% in 2020. White Mountains’s portfolio of common
equity securities and other long-term investments returned 20.8% in 2019. White Mountains’s portfolio of its investment in MediaAlpha, common equity
securities and other long-term investments returned 36.9% in 2019.
White Mountains’s fixed income portfolio returned 4.9% in 2020, compared to 6.1% in 2019.
Overview—Year Ended December 31, 2019 versus Year Ended December 31, 2018
White Mountains ended 2019 with book value per share of $1,024 and adjusted book value per share of $1,018, an increase of 14.4% and 14.8% for
the year, including dividends. Comprehensive income attributable to common shareholders was $413 million in 2019 compared to comprehensive loss
attributable to common shareholders of $146 million in 2018. The results for 2019 were driven primarily by investment results and White Mountains’s
investment in MediaAlpha. The results for 2018 were driven primarily by investment results, which were adversely impacted by the sharp decline in equity
markets in the fourth quarter of 2018.
On February 26, 2019, MediaAlpha completed the 2019 MediaAlpha Transaction. The transaction resulted in a gain of $55 to each of White
Mountains’s book value per share and adjusted book value per share. See “MediaAlpha” on page 47. Including the $55 per share net gain from the 2019
MediaAlpha Transaction as if it had closed on December 31, 2018, book value per share would have been $951 and adjusted book value per share would
have been $943 as of December 31, 2018. Had the 2019 MediaAlpha Transaction closed on December 31, 2018, White Mountains’s book value per share
would have increased 7.8% and adjusted book value per share would have increased 8.1% in 2019, including dividends.
During 2019, White Mountains deployed approximately $435 million in new business opportunities. Also during 2019, White Mountains repurchased
and retired $5 million of its common shares and ended the year with approximately $1.0 billion of undeployed capital.
Gross written premiums and MSC collected in the HG Global/BAM segment totaled $107 million in both 2019 and 2018. BAM insured municipal
bonds with par value of $12.8 billion in 2019, compared to $12.0 billion in 2018. Total pricing was 83 basis points in 2019, compared to 93 basis points in
2018. During 2019, BAM completed assumed reinsurance transactions to insure municipal bonds with a par value of $1.1 billion and, during 2018, BAM
completed assumed reinsurance transactions to insure municipal bonds with a par value of $2.2 billion.
32
In December 2019, BAM made a $32 million cash payment (which included a one-time $10 million cash payment) of principal and interest on the
BAM Surplus Notes held by HG Global. BAM’s total claims paying resources were $938 million as of December 31, 2019, compared to $871 million as of
December 31, 2018.
In January 2020, White Mountains updated its debt service model for the BAM Surplus Notes to reflect (i) the cash payments of principal and interest
on the BAM Surplus Notes made in December 2019 and January 2020, (ii) the amendments made to the terms of the BAM Surplus Notes in January 2020,
including an extension of the variable interest rate period, and (iii) in light of the current interest rate environment, a more conservative forecast of future
operating results for BAM. The changes in the debt service model resulted in slower modeled future payments on the BAM Surplus Notes and, in turn, a
$20 million increase to the time value of money discount on the BAM Surplus Notes as reflected in adjusted book value per share as of December 31,
2019.
NSM reported pre-tax loss of $2 million, adjusted EBITDA of $48 million, and commission and other revenues of $233 million in the year ended
December 31, 2019. For the period from May 11, 2018, the date White Mountains acquired NSM, to December 31, 2018, NSM reported pre-tax loss of $5
million, adjusted EBITDA of $18 million, and commission and other revenues of $102 million. Results for the year ended December 31, 2019 include the
results, from the date of acquisition, of Embrace, a nationwide provider of pet health insurance for dogs and cats, which NSM acquired on April 1, 2019,
and KBK, a specialized MGU focused on the towing and transportation space, which NSM acquired on December 3, 2018.
On April 4, 2019, White Mountains completed the Kudu Transaction. For the period from April 4, 2019, the date of the Kudu Transaction, through
December 31, 2019, Kudu reported total revenues of $21 million and pretax income of $11 million. For the twelve months ended December 31, 2019,
Kudu deployed $203 million, including transaction costs, in seven asset management firms.
White Mountains’s pre-tax total return on invested assets was 20.4% in 2019. This return included $188 million of net investment income and net
unrealized investment gains from MediaAlpha. Excluding MediaAlpha, the total return on invested assets was 13.0% in 2019, compared to -1.7% in 2018.
White Mountains’s portfolio of common equity securities and other long-term investments returned 20.8% in 2019, compared to -3.6% in 2018. White
Mountains’s portfolio of its investment in MediaAlpha, common equity securities and other long-term investments returned 36.9% for 2019.
White Mountains’s fixed income portfolio returned 6.1% for 2019, compared to 1.2% for 2018.
Adjusted Book Value Per Share
The following table presents White Mountains’s adjusted book value per share, a non-GAAP financial measure, as of December 31, 2020, 2019 and
2018 and reconciles this non-GAAP measure to book value per share, the most comparable GAAP measure. See “NON-GAAP FINANCIAL
MEASURES” on page 63.
Book value per share numerators (in millions):
White Mountains’s common shareholders’ equity
Time-value of money discount on expected future payments
(1)
on the BAM Surplus Notes
HG Global’s unearned premium reserve
HG Global’s net deferred acquisition costs
Adjusted book value per share numerator
(1)
(1)
Book value per share denominators (in thousands of shares):
Common shares outstanding
Unearned restricted shares
Adjusted book value per share denominator
GAAP book value per share
Adjusted book value per share
Dividends paid per share
(1)
Amounts reflects White Mountains’s preferred share ownership in HG Global of 96.9%.
33
2020
December 31,
2019
2018
$
3,906.0
$
3,261.5
$
2,843.1
(142.5)
190.0
(52.4)
3,901.1
3,102.0
(14.8)
3,087.2
1,259.18
1,263.64
1.00
(151.6)
156.7
(41.5)
3,225.1
3,185.4
(18.5)
3,166.9
1,023.91
1,018.41
1.00
$
$
$
$
$
$
$
$
$
$
$
$
(141.2)
136.9
(34.6)
2,804.2
3,173.1
(14.6)
3,158.5
896.00
887.85
1.00
The following tables presents goodwill and other intangible assets that are included in White Mountains’s adjusted book value as of December 31,
2020, 2019 and 2018:
Millions
Goodwill:
(1)
NSM
Kudu
MediaAlpha
Other Operations
Total goodwill
Other intangible assets:
NSM
(1)
Kudu
MediaAlpha
Other Operations
Total other intangible assets
Total goodwill and other intangible assets
Total goodwill and other intangible assets attributed to non-controlling
interests
Total goodwill and other intangible assets included in White Mountains’s
common shareholders’ equity
(2)
December 31,
2020
2019
2018
$
506.4
$
381.6
$
354.3
7.6
—
11.5
525.5
230.4
1.6
—
24.9
256.9
782.4
(28.1)
7.6
—
5.5
394.7
.
.
241.4
2.0
—
16.6
260.0
654.7
(23.4)
—
18.3
7.3
379.9
131.9
—
25.1
.6
157.6
537.5
(40.6)
$
754.3
$
631.3
$
496.9
(1)
(2)
The relative fair values of goodwill and other intangible assets recognized in connection with the acquisition of KBK had not yet been finalized as of December 31, 2018.
See Note 4 — “Goodwill and Other Intangible Assets” on page F-31 for details of other intangible assets.
34
Summary of Consolidated Results
The following table presents White Mountains’s consolidated financial results by industry for the years ended December 31, 2020, 2019 and 2018:
Year Ended December 31,
2020
2019
2018
$
$
68.5
285.1
45.7
—
781.4
1,180.7
63.8
297.7
18.1
—
155.9
535.5
4.7
(12.6)
27.6
—
625.5
645.2
20.5
665.7
(2.3)
663.4
45.3
708.7
7.3
716.0
(.5)
$
66.6
233.1
21.2
48.8
523.7
893.4
56.6
235.2
10.4
54.9
131.2
488.3
10.0
(2.1)
10.8
(6.1)
392.5
405.1
(29.3)
375.8
.8
376.6
37.9
414.5
(1.4)
413.1
—
24.3
101.6
—
297.1
(53.9)
369.1
53.7
106.8
—
288.2
98.6
547.3
(29.4)
(5.2)
—
8.9
(152.5)
(178.2)
4.0
(174.2)
(17.2)
(191.4)
50.2
(141.2)
(4.8)
(146.0)
.3
$
715.5
$
413.1
$
(145.7)
Millions
Revenues
Financial Guarantee revenues
Specialty Insurance Distribution revenues
Asset Management revenues
Marketing Technology revenues
Other Operations revenues
Total revenues
Expenses
Financial Guarantee expenses
Specialty Insurance Distribution expenses
Asset Management expenses
Marketing Technology expenses
Other Operations expenses
Total expenses
Pre-tax income (loss)
Financial Guarantee pre-tax income (loss)
Specialty Insurance Distribution pre-tax loss
Asset Management, pre-tax income
Marketing Technology pre-tax (loss) income
Other Operations pre-tax income (loss)
Total pre-tax income (loss)
Income tax benefit (expense)
Net income (loss) from continuing operations
(Loss) gain on sale of discontinued operations, net of tax
Net income (loss)
Net loss attributable to non-controlling interests
Net income (loss) attributable to White Mountains’s common shareholders
Other comprehensive income (loss), net of tax
Comprehensive income (loss)
Comprehensive (income) loss attributable to non-controlling interests
Comprehensive income (loss) attributable to White Mountains’s
common shareholders
35
I. Summary of Operations By Segment
As of December 31, 2020, White Mountains conducted its operations through four segments: (1) HG Global/BAM, (2) NSM, (3) Kudu and (4) Other
Operations. In addition, MediaAlpha was consolidated as a reportable segment until the date of the 2019 MediaAlpha Transaction. A discussion of White
Mountains’s consolidated investment operations is included after the discussion of operations by segment. White Mountains’s segment information is
presented in Note 14 — “Segment Information” on page F-52.
As a result of the Kudu Transaction, White Mountains began consolidating Kudu in its financial statements in the second quarter of 2019. White
Mountains’s segment disclosures for the year ended December 31, 2019 include Kudu’s results of operations for the period from April 4, 2019, the date of
the Kudu Transaction, to December 31, 2019. See Note 2 — “Significant Transactions” on page F-16.
As a result of the 2019 MediaAlpha Transaction, White Mountains no longer consolidated MediaAlpha, and consequently it was no longer a reportable
segment. White Mountains’s segment disclosures for the year ended December 31, 2019 include MediaAlpha’s results of operations for the period from
January 1, 2019 to February 26, 2019, the date of the 2019 MediaAlpha Transaction. See Note 2 — “Significant Transactions” on page F-16.
HG Global/BAM
The following tables present the components of pre-tax income included in White Mountains’s HG Global/BAM segment related to the consolidation
of HG Global, which includes HG Re and its other wholly-owned subsidiaries, and BAM for the years ended December 31, 2020, 2019 and 2018:
Millions
Direct written premiums
Assumed written premiums
Gross written premiums
Ceded written premiums
Net written premiums
Earned insurance and reinsurance premiums
Net investment income
Net investment income - BAM Surplus Notes
Net realized and unrealized investment gains
Other revenues
Total revenues
Insurance and reinsurance acquisition expenses
Other underwriting expenses
General and administrative expenses
Interest expense - BAM Surplus Notes
Total expenses
Pre-tax income (loss)
Supplemental information:
MSC collected
(1)
HG Global
BAM
Eliminations
Total
December 31, 2020
$
$
$
$
$
— $
53.0
53.0
—
53.0 $
18.7 $
7.8
18.8
11.8
.3
57.4
4.7
—
2.6
—
7.3
50.1 $
61.5 $
.2
61.7
(53.0)
8.7 $
4.1 $
11.7
—
11.9
2.2
29.9
2.3
.4
53.8
18.8
75.3
(45.4) $
—
(53.0)
(53.0)
53.0
—
—
—
(18.8)
—
—
(18.8)
—
—
—
(18.8)
(18.8)
—
— $
68.9 $
—
$
$
$
$
$
61.5
0.2
61.7
—
61.7
22.8
19.5
—
23.7
2.5
68.5
7.0
.4
56.4
—
63.8
4.7
68.9
(1)
MSC collected are recorded directly to BAM’s equity, which is recorded as non-controlling interest on White Mountains’s balance sheet.
36
Millions
Direct written premiums
Assumed written premiums
Gross written premiums
Ceded written premiums
Net written premiums
Earned insurance and reinsurance premiums
Net investment income
Net investment income - BAM Surplus Notes
Net realized and unrealized investment losses
Other revenues
Total revenues
Insurance and reinsurance acquisition expenses
Other underwriting expenses
General and administrative expenses
Interest expense - BAM Surplus Notes
Total expenses
Pre-tax income (loss)
Supplemental information:
MSC collected
(1) (2)
HG Global
BAM
Eliminations
Total
December 31, 2019
$
$
$
$
$
— $
33.6
33.6
—
33.6 $
13.1 $
7.5
27.4
11.0
—
59.0
3.3
—
1.6
—
4.9
54.1 $
28.1
10.6
38.7
(33.6)
5.1
3.2
14.1
—
16.1
1.6
35.0
2.4
.4
48.9
27.4
79.1
(44.1)
— $
68.0
(2)
$
(2)
$
$
$
$
—
(33.6)
(33.6)
33.6
—
—
—
(27.4)
—
—
(27.4)
—
—
—
(27.4)
(27.4)
—
—
$
$
$
$
$
28.1
10.6
38.7
—
38.7
16.3
21.6
—
27.1
1.6
66.6
5.7
.4
50.5
—
56.6
10.0
68.0
(1)
(2)
MSC collected are recorded directly to BAM’s equity, which is recorded as non-controlling interest on White Mountains’s balance sheet.
During 2019, BAM issued policy endorsements for certain policies issued in periods prior to the second quarter of 2018. The impact of the policy endorsements for the year
ended December 31, 2019 was a decrease to BAM’s gross written premiums of $13.4 and an increase to MSC collected of $13.4.
Millions
Direct written premiums
Assumed written premiums
Gross written premiums
Ceded written premiums
Net written premiums
Earned insurance and reinsurance premiums
Net investment income
Net investment income - BAM Surplus Notes
Net realized and unrealized investment losses
Other revenues
Total revenues
Insurance and reinsurance acquisition expenses
Other underwriting expenses
General and administrative expenses
Interest expense - BAM Surplus Notes
Total expenses
Pre-tax income (loss)
Supplemental information:
MSC collected
(1)
HG Global
BAM
Eliminations
Total
December 31, 2018
$
$
$
$
$
— $
45.0
45.0
—
45.0 $
11.0 $
5.7
22.9
(4.1)
—
35.5
2.7
—
1.1
—
3.8
31.7 $
44.8 $
8.1
52.9
(45.0)
7.9 $
2.9 $
11.0
—
(3.4)
1.2
11.7
2.6
.4
46.9
22.9
72.8
(61.1) $
—
(45.0)
(45.0)
45.0
—
—
—
(22.9)
—
—
(22.9)
—
—
—
(22.9)
(22.9)
—
— $
53.8 $
—
$
$
$
$
$
44.8
8.1
52.9
—
52.9
13.9
16.7
—
(7.5)
1.2
24.3
5.3
.4
48.0
—
53.7
(29.4)
53.8
(1)
MSC collected are recorded directly to BAM’s equity, which is recorded as non-controlling interest on White Mountains’s balance sheet.
37
HG Global/BAM Results—Year Ended December 31, 2020 versus Year Ended December 31, 2019
BAM charges an insurance premium on each municipal bond insurance policy it writes. A portion of the premium is MSC and the remainder is a risk
premium. In the event of a municipal bond refunding, a portion of the MSC from original issuance can be reutilized, in effect serving as a credit against the
total insurance premium on the refunding of the municipal bond. Issuers of debt insured by BAM are members of BAM so long as any of their BAM-
insured debt is outstanding. As members, they have certain interests in BAM, including the right to vote for BAM’s directors and to receive dividends, if
declared.
Gross written premiums and MSC collected in the HG Global/BAM segment totaled $131 million and $107 million in 2020 and 2019. BAM insured
$17.3 billion of municipal bonds, $15.3 billion of which were in the primary market, in 2020, compared to $12.8 billion of municipal bonds, $10.4 billion
of which were in the primary market, in 2019. During 2020 and 2019, BAM completed assumed reinsurance transactions to insure municipal bonds with a
par value of $37 million and $1.1 billion, respectively.
Total pricing, which reflects both gross written premiums and MSC from new business, decreased to 76 basis points in 2020, compared to 83 basis
points in 2019. See “NON-GAAP FINANCIAL MEASURES” on page 63. The mix of business impacted 2020 total pricing as BAM wrote
proportionally more lower-priced primary business and less higher-priced secondary market and assumed reinsurance business. Additionally, during 2020
BAM wrote more higher credit quality business, which can pressure absolute pricing but, at the same time, improve risk-adjusted pricing. Pricing in the
primary market increased to 59 basis points in 2020, compared to 51 basis points in 2019, driven primarily by increased demand for insurance and wider
credit spreads as a result of the COVID-19 pandemic. Pricing in the secondary and assumed reinsurance markets, which is more transaction-specific than
pricing in the primary market, decreased to 197 basis points in 2020, compared to 219 basis points in 2019.
The following table presents the gross par value of primary and secondary market policies issued, the gross par value of assumed reinsurance, the gross
written premiums and MSC collected and total pricing for the twelve months ended December 31, 2020 and 2019:
$ in Millions
Gross par value of primary market policies issued
Gross par value of secondary market policies issued
Gross par value of assumed reinsurance
Total gross par value of market policies issued
Gross written premiums
MSC collected
Total gross written premiums and MSC collected
Present value of future installment MSC collections
Gross written premium adjustments on existing installment policies
Gross written premiums and MSC from new business
(1)
Total pricing
Year Ended December 31,
2020
2019
15,279.6 $
2,022.9
36.9
17,339.4 $
61.7 $
68.9
130.6 $
.3
.4
131.3 $
76 bps
10,405.1
1,311.8
1,130.7
12,847.6
(2)
(2)
38.7
68.0
106.7
.3
(.1)
106.9
83 bps
$
$
$
$
$
(1)
(2)
See “NON-GAAP FINANCIAL MEASURES” on page 63.
During 2019, BAM issued policy endorsements for certain policies issued in periods prior to the second quarter of 2018. The impact of the policy endorsements for the
year ended December 31, 2019 was a decrease to BAM’s gross written premiums of $13.4 and an increase to MSC collected of $13.4.
HG Global reported GAAP pre-tax income of $50 million in 2020, compared to $54 million in 2019. The decrease in pre-tax income was driven
primarily by a decrease in interest income on the BAM Surplus Notes partially offset by an increase in income from insurance operations. HG Global’s
results in 2020 included $19 million of interest income on the BAM Surplus Notes, compared to $27 million in 2019.
BAM is a mutual insurance company that is owned by its members. BAM’s results are consolidated into White Mountains’s GAAP financial
statements and attributed to non-controlling interests. White Mountains reported GAAP pre-tax losses from BAM of $45 million in 2020, compared to $44
million in 2019. The increase in the pre-tax loss was driven primarily by a lower investment results and higher general and administrative expenses
partially offset by a decrease in interest expense on the BAM surplus notes. BAM’s results included $19 million of interest expense on the BAM Surplus
Notes and $54 million of general and administrative expenses in 2020, compared to $27 million of interest expense on the BAM Surplus Notes and $49
million of general and administrative expenses in 2019.
38
In December 2020, BAM made a $30 million cash payment of principal and interest on the BAM Surplus Notes held by HG Global. Of this payment,
$22 million was a repayment of principal held in the Supplemental Trust and $8 million was a payment of accrued interest held outside the Supplemental
Trust.
In January 2020, HG Global and BAM agreed to amend the BAM Surplus Notes to extend the end of the variable interest rate period from 2021 to
2024, to extend the initial 10-year term of the FLRT to the end of 2022 and to enter into the XOLT. See “HG Global/BAM - Reinsurance Treaties” on
page F-42. In connection with these actions, and reflecting changes in Standard & Poor’s insurance rating methodology, in January 2020, BAM made a
one-time $65 million cash payment of principal and interest on the BAM Surplus Notes held by HG Global. Of this payment, $48 million was a repayment
of principal held in the Supplemental Trust, $1 million was a payment of accrued interest held in the Supplemental Trust and $16 million was a payment of
accrued interest held outside the Supplemental Trust.
In December 2019, BAM made a $32 million cash payment (which included a one-time $10 million cash payment) of principal and interest on the BAM
Surplus Notes held by HG Global. Of this payment, $24 million was a repayment of principal held in the Supplemental Trust and $8 million was a payment
of accrued interest held outside the Supplemental Trust.
As of December 31, 2020, White Mountains’s debt service model indicated that the BAM Surplus Notes would be fully repaid between six and seven
years prior to final maturity, which is generally consistent with the results of the update of the debt service model as of December 31, 2019. The debt
service model assumes both par insured and total pricing gradually increase from 2021 to 2024, and flatten thereafter.
COVID-19
BAM expects that investor concerns about the impact of the COVID-19 pandemic should continue to result in both increased insured penetration in the
primary market and opportunities in the secondary market. The COVID-19 pandemic is negatively impacting the finances of municipalities to varying
degrees, and, over time, financial stress could emerge. BAM’s existing credit portfolio is of high quality and structured to be resilient during economic
slowdowns. BAM views consumption-based tax-backed credits (sales, hotel, excise), transportation-related credits (airports, mass transportation, ports and
toll roads) and higher education-related credits as those most likely to be affected by pandemic-related impacts on the economy. Combined, these sectors
total approximately 15% of BAM’s outstanding insured par. All BAM-insured bond payments due through February 15, 2021 have been made by insureds.
BAM currently has no insured bonds on its insured credit watchlist.
HG Global/BAM Results—Year Ended December 31, 2019 versus Year Ended December 31, 2018
Gross written premiums and MSC collected in the HG Global/BAM segment totaled $107 million in both 2019 and 2018. BAM insured $12.8 billion
of municipal bonds, $10.4 billion of which were in the primary market, in 2019, compared to $12 billion of municipal bonds, $8.8 billion of which were in
the primary market, in 2018. During 2019 and 2018, BAM completed assumed reinsurance transactions to insure municipal bonds with a par value of $1.1
billion and $2.2 billion, respectively.
Total pricing, which reflects both gross written premiums and MSC from new business, decreased to 83 basis points in 2019, compared to 93 basis
points in 2018. See “NON-GAAP FINANCIAL MEASURES” on page 63. The decrease in total pricing was driven primarily by a decrease in pricing in
the primary market. Pricing in the primary market decreased to 51 basis points in 2019, compared to 71 basis points in 2018, driven primarily by lower
interest rates and tighter credit spreads. Pricing in the assumed reinsurance and secondary markets, which is more transaction-specific than pricing in the
primary market, increased to 219 basis points in 2019, compared to 150 basis points in 2018, partially offsetting the decline in pricing in the primary
market.
39
The following table presents the gross par value of primary and secondary market policies issued, the gross par value of assumed reinsurance, the gross
written premiums and MSC collected and total pricing for the twelve months ended December 31, 2019 and 2018:
$ in Millions
Gross par value of primary market policies issued
Gross par value of secondary market policies issued
Gross par value of assumed reinsurance
Total gross par value of market policies issued
Gross written premiums
MSC collected
Total gross written premiums and MSC collected
Present value of future installment MSC collections
Gross written premium adjustments on existing installment policies
Gross written premiums and MSC from new business
(1)
Total pricing
(1)
See “NON-GAAP FINANCIAL MEASURES” on page 63.
$
$
$
$
$
Year Ended December 31,
2019
2018
10,405.1
1,311.8
1,130.7
12,847.6
(2)
(2)
38.7
68.0
106.7
.3
(.1)
106.9
83 bps
$
$
$
$
$
8,779.9
959.6
2,235.8
11,975.3
52.9
53.8
106.7
3.1
1.1
110.9
93 bps
(2)
During 2019, BAM issued policy endorsements for certain policies issued in periods prior to the second quarter of 2018. The impact of the policy endorsements for the
year ended December 31, 2019 was a decrease to BAM’s gross written premiums of $13.4 and an increase to MSC collected of $13.4.
HG Global reported GAAP pre-tax income of $54 million in 2019, compared to $32 million in 2018. The increase in pre- tax income was driven
primarily by higher returns in HG Global’s investment portfolio. HG Global’s results in 2019 included $27 million of interest income on the BAM Surplus
Notes, compared to $23 million in 2018.
BAM is a mutual insurance company that is owned by its members. BAM’s results are consolidated into White Mountains’s GAAP financial
statements and attributed to non-controlling interests. White Mountains reported GAAP pre-tax losses from BAM of $44 million in 2019, compared to $61
million in 2018. The decrease in the pre-tax loss was driven primarily by higher returns in BAM’s investment portfolio. BAM’s results included $27
million of interest expense on the BAM Surplus Notes and $49 million of general and administrative expenses in 2019, compared to $23 million of interest
expense on the BAM Surplus Notes and $47 million of general and administrative expenses in 2018.
In December 2019, BAM made a $32 million cash payment (which included a one-time $10 million cash payment) of principal and interest on the
BAM Surplus Notes held by HG Global. Of this payment, $24 million was a repayment of principal held in the Supplemental Trust and $8 million was a
payment of accrued interest held outside the Supplemental Trust.
In December 2018, BAM made a $23 million cash payment of principal and interest on the BAM Surplus Notes held by HG Global. Of this payment,
$18 million was a repayment of principal held in the Supplemental Trust, $1 million was a payment of accrued interest held in the Supplemental Trust and
$4 million was a payment of accrued interest held outside the Supplemental Trust.
In January 2020, White Mountains updated its debt service model for the BAM Surplus Notes to reflect (i) the cash payments of principal and interest
on the BAM Surplus Notes made in December 2019 and January 2020, (ii) the amendments made to the terms of the BAM Surplus Notes in January 2020,
including the extension of the variable interest rate period and (iii) in light of the current interest rate environment, a more conservative forecast of future
operating results for BAM. The changes to the debt service model resulted in slower modeled future payments on the BAM Surplus Notes and, in turn, a
$20 million increase to the time value of money discount on the BAM Surplus Notes as reflected in adjusted book value per share as of December 31,
2019.
Claims Paying Resources
BAM’s claims paying resources represent the capital and other financial resources BAM has available to pay claims and, as such, is a key indication of
BAM’s financial strength.
BAM’s claims paying resources were $987 million as of December 31, 2020, compared to $938 million as of December 31, 2019 and $871 million as
of December 31, 2018. The increase in claims paying resources was driven primarily by increases in the statutory value of the collateral trusts resulting
from positive cash flow from operations, partially offset by the portion of cash payments on the BAM surplus notes related to accrued interest held outside
the Supplemental Trust.
40
The following table presents BAM’s total claims paying resources as of December 31, 2020, 2019 and 2018:
Millions
Policyholders’ surplus
Contingency reserve
Qualified statutory capital
Net unearned premiums
Present value of future installment premiums and MSC
HG Re Collateral Trusts at statutory value
Fidus Re collateral trust at statutory value
Claims paying resources
$
December 31, 2020
December 31, 2019
December 31, 2018
$
324.7
$
402.4
$
86.4
411.1
45.2
14.0
417.0
100.0
987.3
$
68.2
470.6
39.3
13.7
314.0
100.0
937.6
$
413.7
50.3
464.0
36.2
12.9
258.3
100.0
871.4
HG Global/BAM Balance Sheets
The following table presents amounts from HG Global, which includes HG Re and its other wholly-owned subsidiaries, and BAM that are contained
within White Mountains’s consolidated balance sheet as of December 31, 2020 and 2019:
Millions
Assets
Fixed maturity investments
Short-term investments
Total investments
Cash
BAM Surplus Notes
Accrued interest receivable on BAM Surplus Notes
Deferred acquisition costs
Insurance premiums receivable
Accrued investment income
Other assets
Total assets
Liabilities
(1)
BAM Surplus Notes
Accrued interest payable on BAM Surplus Notes
Preferred dividends payable to White Mountains's
subsidiaries
Preferred dividends payable to non-controlling interests
Unearned insurance premiums
Other liabilities
(2)
(3)
Total liabilities
Equity
White Mountains’s common shareholders’ equity
Non-controlling interests
(3)
Total equity
Total liabilities and equity
December 31, 2020
HG Global
BAM
Eliminations and
Segment
Adjustment
Total Segment
$
$
$
$
$
$
$
415.9
16.5
432.4
23.8
388.2
155.7
54.1
4.4
2.0
—
1,060.6
—
—
363.9
12.7
196.1
2.2
574.9
$
$
$
443.6
43.9
487.5
19.0
—
—
27.8
6.9
3.0
15.8
560.0
388.2
155.7
—
—
41.4
98.0
683.3
472.2
13.5
485.7
1,060.6
$
—
(123.3)
(123.3)
560.0
$
—
—
—
—
(388.2)
(155.7)
(54.1)
(4.4)
—
(.4)
(602.8)
(388.2)
(155.7)
—
—
—
(58.9)
(602.8)
—
—
—
(602.8)
$
$
$
$
859.5
60.4
919.9
42.8
—
—
27.8
6.9
5.0
15.4
1,017.8
—
—
363.9
12.7
237.5
41.3
655.4
472.2
(109.8)
362.4
1,017.8
(1)
(2)
(3)
Under GAAP, the BAM Surplus Notes are classified as debt by the issuer. Under U.S. Statutory accounting, they are classified as policyholders’ surplus.
Under GAAP, interest accrues daily on the BAM Surplus Notes. Under U.S. Statutory accounting, interest is not accrued on the BAM Surplus Notes until it has been approved for payment by
insurance regulators.
HG Global preferred dividends payable to White Mountains’s subsidiaries is eliminated in White Mountains’s consolidated financial statements. For segment reporting, the HG Global
preferred dividends payable to White Mountains’s subsidiaries included within the HG Global/BAM segment are eliminated against the offsetting receivable included within the Other
Operations segment, and therefore are added back to White Mountains’s common shareholders’ equity within the HG Global/BAM segment.
41
Millions
Assets
Fixed maturity investments
Short-term investments
Total investments
Cash
BAM Surplus Notes
Accrued interest receivable on BAM Surplus Notes
Deferred acquisition costs
Insurance premiums receivable
Accrued investment income
Other assets
Total assets
Liabilities
(1)
BAM Surplus Notes
Accrued interest payable on BAM Surplus Notes
Preferred dividends payable to White Mountains's subsidiaries
Preferred dividends payable to non-controlling interests
Unearned insurance premiums
Other liabilities
(2)
(3)
Total liabilities
Equity
White Mountains’s common shareholders’ equity
Non-controlling interests
(3)
Total equity
Total liabilities and equity
December 31, 2019
HG Global
BAM
Eliminations and
Segment
Adjustment
Total Segment
$
$
$
$
304.2 $
15.7
319.9
9.8
457.6
162.7
42.8
4.2
1.7
—
998.7 $
— $
—
330.3
11.4
161.7
1.7
505.1
479.2
14.4
493.6
998.7 $
495.1 $
30.6
525.7
14.4
—
—
22.1
6.7
3.7
20.2
592.8 $
457.6 $
162.7
—
—
36.7
82.5
739.5
—
(146.7)
(146.7)
592.8 $
— $
—
—
—
(457.6)
(162.7)
(42.8)
(4.2)
—
(.2)
(667.5) $
(457.6) $
(162.7)
—
—
—
(47.2)
(667.5)
—
—
—
(667.5) $
799.3
46.3
845.6
24.2
—
—
22.1
6.7
5.4
20.0
924.0
—
—
330.3
11.4
198.4
37.0
577.1
479.2
(132.3)
346.9
924.0
(1)
(2)
(3)
Under GAAP, the BAM Surplus Notes are classified as debt by the issuer. Under U.S. Statutory accounting, they are classified as policyholders’ surplus.
Under GAAP, interest accrues daily on the BAM Surplus Notes. Under U.S. Statutory accounting, interest is not accrued on the BAM Surplus Notes until it has been approved for payment by
insurance regulators.
HG Global preferred dividends payable to White Mountains’s subsidiaries is eliminated in White Mountains’s consolidated financial statements. For segment reporting, the HG Global
preferred dividends payable to White Mountains’s subsidiaries included within the HG Global/BAM segment are eliminated against the offsetting receivable included within the Other
Operations segment, and therefore are added back to White Mountains’s common shareholders’ equity within the HG Global/BAM segment.
42
NSM
NSM is a full-service MGU and program administrator for specialty property and casualty insurance. The company places insurance in niche sectors
such as specialty transportation, real estate, social services and pet. On behalf of its insurance carrier partners, NSM typically manages all aspects of the
placement process, including product development, marketing, underwriting, policy issuance and claims. NSM earns commissions based on the volume
and profitability of the insurance that it places. NSM does not take insurance risk. On May 11, 2018, White Mountains acquired NSM.
The following table presents the components of GAAP net loss, EBITDA and adjusted EBITDA included in White Mountains’s NSM segment for the
years ended December 31, 2020, 2019 and the period from May 11, 2018, the date White Mountains acquired NSM, to December 31, 2018:
Millions
Commission revenues
Broker commission expense
Gross profit
Other revenues
General and administrative expenses
Change in fair value of contingent consideration
earnout liabilities
Amortization of other intangible assets
Interest expense
GAAP pre-tax loss
Income tax benefit
GAAP net loss
Add back:
Interest expense
Income tax benefit
General and administrative expenses — depreciation
Amortization of other intangible assets
EBITDA
(1)
Add back:
Change in fair value of contingent consideration
earnout liabilities
Non-cash equity-based compensation expense
Impairments of intangible assets
Acquisition-related transaction expenses
Fair value purchase accounting adjustment for
deferred revenue
Investments made in the development of
new business lines
Restructuring expenses
Adjusted EBITDA
(1)
(1)
See “NON-GAAP FINANCIAL MEASURES” on page 63.
Year Ended
December 31, 2020
Year Ended
December 31, 2019
May 11, 2018 to
December 31, 2018
89.6
28.4
61.2
12.0
59.4
2.7
8.3
8.0
(5.2)
—
(5.2)
8.0
—
1.7
8.3
12.8
2.7
—
—
1.0
—
1.8
.1
18.4
$
232.5 $
75.3
157.2
52.6
176.9
193.4 $
64.8
128.6
39.7
132.2
(3.3)
26.7
22.1
(12.6)
(5.7)
(6.9)
22.1
(5.7)
4.5
26.7
40.7
(3.3)
2.4
6.2
7.2
—
2.1
19.4
16.7
(2.1)
(.6)
(1.5)
16.7
(.6)
2.8
19.4
36.8
2.1
—
2.4
3.2
.9
.9
4.8
58.9 $
.3
2.3
48.0 $
$
43
NSM Results—Year ended December 31, 2020 versus Year ended December 31, 2019
NSM reported GAAP pre-tax loss of $13 million, adjusted EBITDA of $59 million, and commission and other revenues of $285 million in 2020. NSM
reported pre-tax loss of $2 million, adjusted EBITDA of $48 million, and commission and other revenues of $233 million in 2019. NSM’s pre-tax loss
included interest expense of $22 million and amortization of other intangible assets of $27 million in 2020, compared to $17 million and $19 million,
respectively, in 2019. Results for the year ended December 31, 2020 include the results, from the date of acquisition, of Kingsbridge, a leading provider of
commercial lines insurance and consulting services for the professional contractor and freelancer markets in the United Kingdom, which was acquired on
April 7, 2020, and Embrace, a nationwide provider of pet health insurance for dogs and cats, which NSM acquired on April 1, 2019. In addition to the
acquisitions of Kingsbridge and Embrace, GAAP pre-tax loss, adjusted EBITDA and commission and other revenues in 2020 benefited from growth in the
pet, real estate and specialty transportation verticals, partially offset by declines in the U.K. vertical excluding Kingsbridge.
Broker commission expenses and general and administrative expenses were $75 million and $177 million in 2020, compared to $65 million and $132
million, respectively, in 2019. NSM’s general and administrative expenses for 2020 and 2019 included a $6 million and $2 million impairment of intangible
assets related to its U.K. vertical.
NSM Results—Year ended December 31, 2019 versus the Period from May 11, 2018 to December 31, 2018
NSM reported GAAP pre-tax loss of $2 million, adjusted EBITDA of $48 million, and commission and other revenues of $233 million in 2019. NSM
reported pre-tax loss of $5 million, adjusted EBITDA of $18 million, and commission and other revenues of $102 million for the period from May 11,
2018, the date White Mountains acquired NSM, to December 31, 2018. NSM’s pre-tax loss included interest expense of $17 million and amortization of
other intangible assets of $19 million in 2019, compared to $8 million and $8 million, respectively, for the period from May 11, 2018 to December 31,
2018. Results for the year ended December 31, 2019 include the results, from the date of acquisition, of Embrace.
Broker commission expenses and general and administrative expenses were $65 million and $132 million in 2019, compared to $28 million and $59
million, respectively, for the period from May 11, 2018 to December 31, 2018. NSM’s general and administrative expenses for 2019 included a $2 million
impairment of intangible assets related to its U.K. vertical.
NSM Business Trends
NSM’s business consists of over 16 active programs that are broadly categorized into six market verticals. Kingsbridge was added to the U.K. vertical
in the second quarter of 2020.
The following table presents the controlled premium and commission and other revenues by vertical for the years ended December 31, 2020, 2019 and
2018:
2020
2019
2018
(2)
Year Ended December 31,
Controlled
(1)
Premium
Commission
and Other
Revenue
Controlled
(1)
Premium
Commission
and Other
Revenue
Controlled
(1)
Premium
Commission
and Other
Revenue
$
310.2
$
189.1
115.5
131.9
179.5
85.5
44.9
28.9
55.0
49.4
$
290.2
$
$
136.8
$
157.2
102.7
67.6
155.5
124.5
897.7
77.6
34.7
25.9
30.0
45.9
135.7
94.0
—
108.8
119.4
594.7
$
43.0
30.3
23.8
—
34.9
19.8
151.8
134.5
1,060.7
$
$
21.4
285.1
$
19.0
233.1
$
$
$ in Millions
Specialty
Transportation
Real Estate
Social Services
Pet
United Kingdom
Other
Total
(1)
(2)
Controlled premium are total premiums placed by NSM during the period.
Controlled premium and commission and other revenue includes results prior to White Mountains’s ownership of NSM.
44
Year Ended December 31, 2020 versus Year Ended December 31, 2019
Specialty Transportation: NSM’s specialty transportation controlled premium and commission and other revenues increased 7% and 10% in 2020,
compared to 2019, driven primarily by rate increases and new business unit growth in the collector car and tow truck markets.
Real Estate: NSM’s real estate controlled premium and commission and other revenues increased 20% and 29% in 2020, compared to 2019, driven
primarily by rate increases and strong retention rates in coverages for coastal condominium associations combined with rate increases and unit growth in
the excess and surplus habitational program.
Social Services: NSM’s social services controlled premium and commission and other revenues both increased 12% in 2020, compared to 2019, driven
primarily by rate increases and unit growth.
Pet: NSM’s pet controlled premium and commission and other revenues increased 95% and 83% in 2020, compared to 2019, driven primarily by the
acquisition of Embrace in April 2019 and strong demand in 2020 as pet adoption increased substantially as a result of the COVID-19 pandemic. The
increase in commission and other revenues was less than the increase in premium due to business mix, as affinity business grew faster than direct market
business.
United Kingdom: NSM’s United Kingdom controlled premium and commission and other revenues increased 15% and 8% in 2020, compared to 2019,
driven primarily by the acquisition of Kingsbridge. Kingsbridge contributed $26 million of controlled premium and $12 million of commission and other
revenues in 2020. Excluding Kingsbridge, United Kingdom controlled premium decreased 1% in 2020, compared to 2019, as growth in the MGA business
was offset by declines in the brokerage business caused by disruption to the travel and non-standard auto markets in the United Kingdom resulting from the
COVID-19 pandemic. Excluding Kingsbridge, United Kingdom commission and other revenues declined 19% due to COVID-related challenges and
changes in product mix, as the brokerage business, which has higher commission rates than the MGA business, declined while the MGA business grew.
Other: NSM’s other controlled premium and commission and other revenues increased 8% and 13% in 2020, compared to 2019. The increase in
controlled premium was driven primarily by rate increases. Commission and other revenues increased as the professional liability business, which has
higher commission rates than retail, grew while the retail business declined.
COVID-19
The COVID-19 pandemic negatively impacted certain programs (e.g., lower volumes in the non-standard auto and outdoor leisure businesses in the
United Kingdom) while others have been positively impacted (e.g., higher volumes in pet). Results at NSM could still be negatively impacted in the
coming quarters, but White Mountains does not currently anticipate dramatic impacts over the fullness of time.
Year Ended December 31, 2019 versus Year Ended December 31, 2018
Specialty Transportation: NSM’s specialty transportation controlled premium and commission and other revenues increased significantly in 2019,
compared to 2018, driven primarily by the acquisition of KBK in November 2018 and an increase in contingent commissions and fees in 2019. KBK
contributed $160 million of controlled premium and $32 million of commission and other revenues in 2019.
Real Estate: NSM’s real estate controlled premium and commission and other revenues increased 16% and 15% in 2019, compared to 2018, driven
primarily by rate increases in coverages for coastal condominium associations, combined with significant unit growth in the excess and surplus habitational
program.
Social Services: NSM’s social services controlled premium and commission and other revenues both increased 9% in 2019, compared to 2018, driven
primarily by rate increases and higher retention.
Pet: The pet program was added during the second quarter of 2019 with the acquisition of Embrace.
United Kingdom: NSM’s United Kingdom controlled premium and commission and other revenues increased 43% and 32% in 2019, compared to
2018, driven primarily by the acquisition of Fresh Insurance in May 2018 and the establishment of First Underwriting in the fourth quarter of 2018. Fresh
Insurance’s controlled premium and commission and other revenues contributed $62 million and $18 million in 2019, respectively, compared to $46
million and $16 million, respectively, from the date of acquisition, May 11, 2018, to the end of 2018. First Underwriting contributed $38 million of
controlled premium and $3 million of commission and other revenues in 2019.
Other: NSM’s other controlled premium increased 4% in 2019, compared to 2018, driven primarily by improvements in units and retention.
Commissions and other revenues decreased 4% in 2019 from 2018 due to lower average commission rates resulting from a change in carrier in 2019.
45
Kudu
As of December 31, 2020, Kudu has deployed a total of $386 million in 13 asset management firms, with an average cash yield to Kudu at inception of
10.3%. The firms have combined assets under management of approximately $45 billion, spanning a range of asset classes, including real estate, real
assets, wealth management, hedge funds, private equity and alternative credit strategies.
The following table presents the components of GAAP net income, EBITDA and adjusted EBITDA included in White Mountains’s Kudu segment for
the year ended December 31, 2020 and the period from April 4, 2019, the date of the Kudu Transaction, to December 31, 2019:
Millions
Net investment income
Net realized and unrealized investment gains
Other revenues
Total revenues
General and administrative expenses
Amortization of other intangible assets
Interest expense
Total expenses
Pre-tax income
Income tax expense
GAAP net income
Add back:
Interest expense
Income tax expense
General and administrative expenses – depreciation
Amortization of other intangible assets
EBITDA
(1)
Add back:
Net unrealized investment gains
Non-cash equity-based compensation expense
Acquisition-related transaction expenses
Adjusted EBITDA
(1)
$
$
$
Twelve Months Ended
December 31, 2020
April 4, 2019 to December 31,
2019
29.5
15.9
.3
45.7
11.8
.3
6.0
18.1
27.6
7.0
20.6
6.0
7.0
—
.3
33.9
(15.9)
.4
3.7
22.1
$
$
$
14.7
6.3
.2
21.2
10.1
.2
.1
10.4
10.8
2.8
8.0
.1
2.8
—
.2
11.1
(6.3)
1.3
2.9
9.0
(1)
See “NON-GAAP FINANCIAL MEASURES” on page 63.
Kudu Results—Year ended December 31, 2020 versus Year ended December 31, 2019
Kudu reported pre-tax income of $28 million and total revenues of $46 million for the year ended December 31, 2020, compared to pre-tax income of
$11 million and total revenues of $21 million for the period from April 4, 2019, the date of the Kudu Transaction, to December 31, 2019. Kudu reported
adjusted EBITDA of $22 million for the year ended December 31, 2020 compared to $9 million for the period from April 4, 2019, the date of the Kudu
Transaction, to December 31, 2019. The increases in Kudu’s pre-tax income, total revenues and adjusted EBITDA were driven primarily by net investment
income earned from the $121 million (including approximately $3 million of transaction costs) in new deployments that Kudu made in 2020 and 2019. Pre-
tax income and total revenues included $16 million of unrealized gains on Kudu’s Participation Contracts in 2020, compared to $6 million of unrealized
gains on Kudu’s Participation Contracts in the period from April 4, 2019, the date of the Kudu Transaction, to December 31, 2019.
COVID-19
Over time, Kudu’s revenues will fluctuate with increases and decreases in assets under management and fee levels at Kudu’s underlying asset
management business, which are impacted by increases and decreases in financial markets, such as those experienced during 2020 during the COVID-19
pandemic. Kudu’s portfolio diversification, in particular its emphasis on private capital and its de-emphasis on long-only, should continue to provide some
downside protection to financial market declines.
46
MediaAlpha
On October 30, 2020, MediaAlpha completed the MediaAlpha IPO. In the offering, White Mountains sold 3,609,894 shares and received total
proceeds of $64 million. Following the completion of the MediaAlpha IPO, White Mountains owns 20,532,202 MediaAlpha shares, representing a 35.0%
ownership interest (32.3% on a fully-diluted, fully converted basis). At the December 31, 2020 closing price of $39.07 per share, the value of White
Mountains’s remaining investment in MediaAlpha was $802 million. Based on White Mountains’s ownership of 20,532,202 shares of MediaAlpha, each
$1.00 per share increase or decrease in the stock price of MediaAlpha subsequent to the MediaAlpha IPO will result in an approximate $7 per share
increase or decrease in White Mountains’s book value per share and adjusted book value per share.
On February 26, 2019, MediaAlpha completed the 2019 MediaAlpha Transaction. White Mountains deconsolidated MediaAlpha as a result of the
2019 MediaAlpha Transaction and stopped reporting it as a segment. Prior to the MediaAlpha IPO, White Mountains’s non-controlling equity interest in
MediaAlpha was accounted for at fair value within other long-term investments. Subsequent to the MediaAlpha IPO, White Mountains’s non-controlling
equity interest in MediaAlpha is accounted for at fair value based on the publicly traded share price of MediaAlpha’s common stock. As of December 31,
2020 and 2019, the fair value of White Mountains’s investment in MediaAlpha was $802 million and $180 million. See Summary of Investment Results
on page 49.
The following table presents the components of GAAP pre-tax (loss) income included in White Mountains’s MediaAlpha segment for the period of
January 1, 2019 to February 26, 2019, and for the year ended December 31, 2018:
Millions
Advertising and commission revenues
Cost of sales
Gross profit
Other revenue
General and administrative expenses
General and administrative expenses -
the 2019 MediaAlpha Transaction related costs
Amortization of other intangible assets
Interest expense
GAAP pre-tax (loss) income
January 1, 2019 to
February 26, 2019
Year Ended December 31,
2018
$
$
48.8 $
40.6
8.2
—
5.7
6.8
1.6
.2
(6.1) $
295.5
245.0
50.5
1.6
31.7
—
10.3
1.2
8.9
MediaAlpha Results—For the Period from January 1, 2019 to February 26, 2019
MediaAlpha reported GAAP pre-tax loss of $6 million and revenues of $49 million from January 1, 2019 to February 26, 2019, the date of the 2019
MediaAlpha Transaction. During the period from January 1, 2019 to February 26, 2019, revenues were driven primarily by the P&C and Health, Medicare
and Life verticals, which had revenues of $26 million and $17 million. During the period from January 1, 2019 to February 26, 2019, MediaAlpha
recognized $7 million of costs related to the 2019 MediaAlpha Transaction in general and administrative expenses.
47
Other Operations
The following table presents White Mountains’s financial results from its Other Operations segment for the years ended December 31, 2020, 2019 and
2018:
Millions
Net investment income
Net realized and unrealized investment (losses) gains
Net realized and unrealized investment gains from MediaAlpha
Realized gain from the 2019 MediaAlpha Transaction
Advertising and commission revenues
Other revenues
Total revenues
Cost of sales
General and administrative expenses
Amortization of other intangible assets
Interest expense
Total expenses
Pre-tax income (loss)
Year Ended December 31,
2020
2019
2018
$
82.0
$
43.4
$
(8.8)
686.0
—
8.3
13.9
781.4
11.3
141.9
1.3
1.4
219.8
180.0
67.5
6.9
6.1
523.7
7.5
122.5
.6
.6
155.9
625.5
$
131.2
392.5
$
$
42.3
(100.8)
—
—
4.1
.5
(53.9)
3.7
94.4
.2
.3
98.6
(152.5)
Other Operations Results—Year Ended December 31, 2020 versus Year Ended December 31, 2019
White Mountains’s Other Operations segment reported pre-tax income of $626 million in 2020, compared to pre-tax income of $393 million in 2019.
The increase in pre-tax income was driven primarily by the increase in the fair value of White Mountains’s investment in MediaAlpha. White Mountains’s
Other Operations segment reported net investment income of $82 million in 2020, which was driven primarily by $55 million of net proceeds received in
the third quarter of 2020 from a dividend recapitalization at MediaAlpha, compared to net investment income of $43 million in 2019. White Mountains’s
Other Operations segment reported net realized and unrealized investment gains from its investment in MediaAlpha of $686 million in 2020, compared to
$180 million in 2019. White Mountains’s Other Operations segment reported net realized and unrealized investment losses of $9 million in 2020, compared
to net realized and unrealized investment gains of $220 million in 2019. See “Summary of Investment Results” on page 49. The Other Operations
segment reported general and administrative expenses of $142 million in 2020, compared to $123 million in 2019. The increase was driven primarily by
higher incentive compensation costs, driven primarily by an increase in the assumed harvest percentage on outstanding performance shares. Pre-tax income
for the year ended December 31, 2019 also included $68 million of realized gain from the 2019 MediaAlpha Transaction.
Share repurchases
For the year ended December 31, 2020, White Mountains repurchased and retired 99,087 of its common shares for $85 million.
Other Operations Results—Year Ended December 31, 2019 versus Year Ended December 31, 2018
White Mountains’s Other Operations segment reported pre-tax income of $393 million in 2019, compared to pre-tax loss of $153 million in 2018. The
change was driven primarily by higher investment returns and White Mountains’s investment in MediaAlpha. In 2019, White Mountains’s Other
Operations segment reported net realized and unrealized investment gains from White Mountains’s investment in MediaAlpha of $180 million and $68
million of realized gain from the 2019 MediaAlpha Transaction. White Mountains’s Other Operations segment reported net realized and unrealized
investment gains of $220 million in 2019, compared to net realized and unrealized investment losses of $101 million in 2018. See “Summary of
Investment Results” on page 49. The Other Operations segment reported general and administrative expenses of $123 million in 2019, compared to $94
million in 2018. The increase was driven primarily by higher incentive compensation costs, driven primarily by an increase in both White Mountains’s
share price and the assumed harvest percentage on outstanding performance shares.
Share repurchases
For the year ended December 31, 2019, White Mountains repurchased and retired 5,679 of its common shares for $5 million.
48
II. Summary of Investment Results
White Mountains’s total investment results include results from all segments. For purposes of discussing rates of return, all percentages are presented
gross of management fees and trading expenses in order to produce a better comparison to benchmark returns.
The following table presents the pre-tax investment return for White Mountains’s consolidated portfolio for the years ended December 31, 2020, 2019
and 2018:
Gross Investment Returns and Benchmark Returns
Prior to the MediaAlpha IPO, White Mountains’s investment in MediaAlpha was presented within other long-term investments. Subsequent to the
MediaAlpha IPO, White Mountains presents its investment in MediaAlpha in a separate line item on the balance sheet. Amounts for periods prior to the
MediaAlpha IPO have been reclassified to be comparable to the current period.
White Mountains’s returns for the years ended December 31, 2020, 2019 and 2018 are as follows:
Common equity securities
Other long-term investments
Common equity securities and other long-term investments
Investment in MediaAlpha, common equity securities and other long-term
investments
S&P 500 Index (total return)
Fixed income investments
Bloomberg Barclays U.S. Intermediate Aggregate Index
Total consolidated portfolio
Total consolidated portfolio - excluding MediaAlpha
Year Ended December 31,
2019
2020
2018
3.6 %
2.5 %
4.9 %
80.0 %
18.4 %
4.9 %
5.6 %
31.9 %
4.6 %
29.1 %
6.1 %
20.8 %
36.9 %
31.5 %
6.1 %
6.7 %
20.4 %
13.0 %
(7.7)%
10.0 %
(3.6)%
(3.6)%
(4.4)%
1.2 %
0.9 %
(1.7)%
(1.7)%
Investment Returns—Year Ended December 31, 2020 versus Year Ended December 31, 2019
White Mountains’s pre-tax total return on invested assets was 31.9% in 2020. This return included $746 million of net investment income and net
realized and unrealized investment gains from MediaAlpha. Excluding MediaAlpha, the total return on invested assets was 4.6% in 2020. White
Mountains’s pre-tax total return on invested assets was 20.4% in 2019. This return included $188 million of net investment income and net unrealized
investment gains from MediaAlpha. Excluding MediaAlpha, the total return on invested assets was 13.0% in 2019.
Investment returns in 2020 were impacted by White Mountains’s decision to sell its portfolio of common equity securities during the third and fourth
quarter of 2020 in preparation for funding the Ark Transaction as equity markets were up strongly in the fourth quarter. Investment returns in 2019
benefited from White Mountains’s decision to increase equity exposure after markets declined sharply at the end of 2018 ahead of the strong rally in equity
markets during 2019.
Investment in MediaAlpha, Common Equity Securities and Other Long-Term Investments Results
White Mountains’s portfolio of its investment in MediaAlpha, common equity securities and other long-term investments was $1.6 billion and $1.5
billion as of December 31, 2020 and 2019, which represented 54% and 52% of total invested assets. See Note 3 — “Investment Securities”. The change
was primarily driven by an increase in the fair value of White Mountains’s investment in MediaAlpha and an increase in other long-term investments,
partially offset by the sale of common equity securities during the third and fourth quarters of 2020 in preparation for funding the Ark Transaction.
White Mountains’s portfolio of common equity securities and other long-term investments returned 4.9% in 2020. White Mountains’s portfolio of its
investment in MediaAlpha, common equity securities and other long-term investments returned 80.0% in 2020, which included $746 million of net
investment income and net realized and unrealized investment gains from MediaAlpha.
White Mountains’s portfolio of common equity securities and other long-term investments returned 20.8% in 2019. White Mountains’s portfolio of its
investment in MediaAlpha, common equity securities and other long-term investments returned 36.9% in 2019, which included $188 million of net
investment income and net unrealized investment gains from MediaAlpha.
49
During the third and fourth quarters of 2020, White Mountains sold its remaining portfolio of common equity securities, including its portfolio of ETFs
and international common equity portfolios, in anticipation of funding the Ark Transaction.
As of December 31, 2019, White Mountains’s portfolio of common equity securities consisted of passive ETFs and publicly-traded common equity
securities actively managed by select third-party registered investment advisers. White Mountains’s portfolio of common equity securities was $684 million
as of December 31, 2019.
White Mountains’s portfolio of common equity securities returned 3.6% in 2020, underperforming the S&P 500 Index return of 18.4%. The results for
2020 were driven primarily by White Mountains’s lack of common equity exposure during the fourth quarter equity market rally and the relative
underperformance from White Mountains’s international common equity portfolios prior to the liquidation of these positions. White Mountains’s portfolio
of common equity securities returned 29.1% in 2019, underperforming the S&P 500 Index return of 31.5%. The results for 2019 were driven primarily by
relative underperformance in White Mountains’s international common equity portfolios.
White Mountains’s portfolio of ETFs is designed to provide investment results that generally correspond to the performance of the S&P 500 Index.
White Mountains’s portfolio of ETFs was fully liquidated as of December 31, 2020 and amounted to $536 million as of December 31, 2019. In 2020 and
2019, White Mountains’s portfolio of ETFs essentially earned the effective index return, before expenses, over the periods in which White Mountains was
invested in these funds.
Previously, White Mountains maintained relationships with a small number of third-party registered investment advisers (the “actively managed
common equity portfolio”), including Highclere International Investors (“Highclere”), who invests in small- and mid-cap equity securities listed in markets
outside of the United States and Canada through a unit trust, and Silchester International Investors (“Silchester”), who invests in value-oriented non-U.S.
equity securities through a unit trust.
During the third quarter of 2020, White Mountains submitted redemption requests to Silchester and Highclere to liquidate White Mountains’s full
investments in the unit trusts. At the beginning of the fourth quarter of 2020, White Mountains received $107 million in total proceeds relating to the
Silchester and Highclere redemptions. White Mountains’s actively managed common equity portfolio was $147 million as of December 31, 2019. White
Mountains’s actively managed common equity portfolio returned -11.0% in 2020 and 24.2% in 2019, underperforming the S&P 500 Index return of 18.4%
and 31.5%, respectively. The results were driven primarily by the lack of exposure to actively managed common equities in the fourth quarter of 2020 and
relative underperformance in international stocks versus the S&P 500 Index over these periods.
White Mountains maintains a portfolio of other long-term investments that consists primarily of unconsolidated entities, including Kudu’s Participation
Contracts, private equity funds, hedge funds, the ILS Funds and private debt instruments. White Mountains’s portfolio of other long-term investments was
$787 million and $676 million as of December 31, 2020 and 2019. The change in other long-term investments was primarily driven by additional
investments in Kudu’s Participation Contracts.
White Mountains other long-term investments portfolio returned 2.5% in 2020. Investment returns for 2020 were driven primarily by net investment
income and net unrealized gains from Kudu’s Participation Contracts, partially offset by a $10 million decrease in the fair value of White Mountains’s
investment in PassportCard/DavidShield, where the global slowdown in travel activity in reaction to the COVID-19 pandemic caused a significant decline
in premiums and revenues.
White Mountains other long-term investments portfolio returned 6.1% in 2019. Investment returns for 2019 were driven primarily by net investment
income from Kudu’s Participation Contracts and a $15 million increase in the fair value of White Mountains’s investment in PassportCard/DavidShield
resulting from increases in profitability metrics in its core businesses, partially offset by losses from certain unconsolidated entities.
In the second quarter of 2019, White Mountains made an investment in three multi-investor ILS Funds managed by Elementum, a third-party
registered investment adviser specializing in natural catastrophe ILS. 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 of
December 31, 2020, White Mountains had approximately $51 million invested in these four ILS Funds. As of December 31, 2019, White Mountains had
approximately $41 million invested in three ILS Funds.
Fixed Income Results
White Mountains’s fixed income portfolio, including short-term investments, was $1.4 billion as of December 31, 2020 and 2019. The duration of
White Mountains’s fixed income portfolio, including short-term investments, was 3.2 years and 2.8 years as of December 31, 2020 and 2019. White
Mountains’s fixed income portfolio included fixed maturity investments and short-term investments in the Collateral Trusts of $432 million and $320
million as of December 31, 2020 and 2019.
White Mountains’s fixed income portfolio returned 4.9% in 2020, underperforming the Bloomberg Barclays U.S. Intermediate Aggregate Index return
of 5.6%. White Mountains’s fixed income portfolio returned 6.1% in 2019, underperforming the Bloomberg Barclays U.S. Intermediate Aggregate Index
return of 6.7%. The results for both periods were driven primarily by the short duration positioning of White Mountains’s fixed income portfolio as interest
rates declined significantly.
50
Investment Returns—Year Ended December 31, 2019 versus Year Ended December 31, 2018
Prior to the 2019 MediaAlpha Transaction, MediaAlpha was a majority-owned consolidated subsidiary of White Mountains. Subsequent to the 2019
MediaAlpha Transaction, MediaAlpha was deconsolidated and accounted for at fair value.
White Mountains’s pre-tax total return on invested assets was 20.4% in 2019. This return included $188 million of net investment income and net
unrealized investment gains from MediaAlpha. Excluding MediaAlpha, the total return on invested assets was 13.0% in 2019, compared to -1.7% in 2018.
Investment returns in 2019 benefited from White Mountains’s decision to increase equity exposure after markets declined sharply at the end of 2018
ahead of the strong rally in equity markets during 2019. Investment returns in 2018 were adversely impacted by the sharp decline in equity markets in the
fourth quarter.
Investment in MediaAlpha, Common Equity Securities and Other Long-Term Investments Results
White Mountains’s portfolio of its investment in MediaAlpha, common equity securities and other long-term investments was $1.5 billion and $1.3
billion as of December 31, 2019 and 2018, which represented approximately 52% and 49% of total invested assets as of December 31, 2019 and 2018. See
Note 3 — “Investment Securities”.
White Mountains’s portfolio of common equity securities and other long-term investments returned 20.8% in 2019, compared to -3.6% in 2018. White
Mountains’s portfolio of its investment in MediaAlpha, common equity securities and other long-term investments returned 36.9% in 2019, which included
$188 million of net investment income and net unrealized investment gains from MediaAlpha.
White Mountains’s portfolio of common equity securities was $684 million and $926 million as of December 31, 2019 and 2018. White Mountains’s
portfolio of common equity securities returned 29.1% in 2019, underperforming the S&P 500 Index return of 31.5%. White Mountains’s portfolio of
common equity securities returned -7.7% in 2018, underperforming the S&P 500 Index return of -4.4%. The results in both periods were driven primarily
by relative underperformance in White Mountains’s international common equity portfolios.
White Mountains’s portfolio of ETFs was $536 million and $675 million as of December 31, 2019 and 2018. In 2019 and 2018, the ETF portfolio
essentially earned the effective index return, before expenses, over the period in which White Mountains was invested in these funds.
As of December 31, 2019 and 2018, White Mountains’s had approximately $147 million and $250 million of common equity securities invested with
third-party registered investment advisers. In the third quarter of 2019, White Mountains redeemed $82 million from its Highclere and Silchester accounts
in order to reduce its international exposure in the context of the size of its overall portfolio of common equity securities. White Mountains’s actively
managed common equity portfolio returned 24.2% in 2019, underperforming the S&P 500 Index return of 31.5%. White Mountains’s actively managed
common equity portfolio returned -15.6% for 2018, underperforming the S&P 500 Index return of -4.4%. The results in both periods were driven primarily
by relative underperformance in the international common equity portfolios managed by Highclere and Silchester.
White Mountains’s portfolio of other long-term investments was $676 million and $326 million as of December 31, 2019 and 2018. White Mountains
other long-term investments portfolio returned 6.1% in 2019. Investment returns for 2019 were driven primarily by net investment income from Kudu’s
Participation Contracts and a $15 million increase in the fair value of White Mountains’s investment in PassportCard/DavidShield resulting from increases
in profitability metrics in its core businesses, partially offset by losses from certain unconsolidated entities. White Mountains’s other long-term investments
portfolio returned 10.0% in 2018. Investment results for 2018 were driven primarily by a $26 million increase in the fair value of White Mountains’s
investment in PassportCard/DavidShield resulting from increases in profitability metrics in its core businesses, as well as strong private equity fund returns.
In the second quarter of 2019, White Mountains made an investment in three multi-investor ILS funds managed by Elementum. As of December 31,
2019, White Mountains had approximately $41 million invested in these three ILS funds and a commitment to invest an additional $10 million in a fourth
ILS fund.
51
Fixed Income Results
White Mountains’s fixed income portfolio, including short-term investments, was $1.4 billion and $1.3 billion as of December 31, 2019 and 2018. The
duration of White Mountains’s fixed income portfolio, including short-term investments, was 2.8 years and 3.4 years as of December 31, 2019 and 2018.
White Mountains’s fixed income portfolio includes fixed maturity investments and short-term investments in the Collateral Trusts of $320 million and $254
million as of December 31, 2019 and 2018.
White Mountains’s fixed income portfolio returned 6.1% in 2019, underperforming the Bloomberg Barclays U.S. Intermediate Aggregate Index return
of 6.7%. The short duration positioning of White Mountains’s fixed income portfolio contributed to the underperformance relative to the benchmark as
interest rates declined significantly during the period. White Mountains’s fixed income portfolio returned 1.2% in 2018, outperforming the Bloomberg
Barclays U.S. Intermediate Aggregate Index return of 0.9%. The short duration positioning of White Mountains’s fixed income portfolio contributed to the
outperformance relative to the benchmark as interest rates rose during the period.
Portfolio Composition
The following table presents the composition of White Mountains’s total operations investment portfolio as of December 31, 2020 and 2019:
December 31, 2020
December 31, 2019
$ in Millions
Carrying Value
% of Total
Carrying Value
% of Total
Fixed maturity investments
Short-term investments
Investment in MediaAlpha
Common equity securities
Other long-term investments
Total investments
$
$
1,207.2
142.9
802.2
—
786.8
2,939.1
41.1 % $
4.9
27.3
—
26.7
100.0 % $
1,205.8
201.2
180.0
683.9
676.3
2,947.2
40.9 %
6.8
6.1
23.2
23.0
100.0 %
The following table presents the breakdown of White Mountains’s fixed maturity investments as of December 31, 2020 by credit class, based upon
issuer credit ratings provided by Standard & Poor’s, or if unrated by Standard & Poor’s, long-term obligation ratings provided by Moody’s:
$ in Millions
U.S. government and government-sponsored entities
AAA/Aaa
AA/Aa
A/A
BBB/Baa
BB
Other/not rated
(1)
Total fixed maturity investments
December 31, 2020
Amortized
Cost
366.1
48.7
220.3
357.2
156.3
1.1
2.0
1,151.7
$
$
% of Total
31.8 % $
4.2
19.1
31.0
13.6
0.1
0.2
100.0 % $
Carrying
Value
% of Total
375.7
51.6
238.6
373.3
165.0
1.0
2.0
1,207.2
31.1 %
4.3
19.7
30.9
13.7
0.1
0.2
100.0 %
(1)
Includes 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).
52
The cost or amortized cost and carrying value of White Mountains’s fixed maturity investments as of December 31, 2020 is presented below by
contractual maturity. Actual maturities could differ from contractual maturities because certain borrowers may call or prepay their obligations with or
without call or prepayment penalties.
Millions
Due in one year or less
Due after one year through five years
Due after five years through ten years
Due after ten years
Mortgage and asset-backed securities
Total fixed maturity investments
December 31, 2020
Amortized
Cost
Carrying
Value
126.0
417.5
283.2
113.3
211.7
1,151.7
$
$
127.0
433.6
303.2
124.9
218.5
1,207.2
$
$
The following table presents the composition of White Mountains’s other long-term investments portfolio as of December 31, 2020 and 2019:
$ in Millions
Kudu Participation
Contracts
$
PassportCard/DavidShield
Elementum
ILS Funds
Private Equity Funds and
Hedge Funds
Other
Total other long-term
investments
December 31, 2020
December 31, 2019
Carrying
Value
400.6
95.0
55.1
51.4
121.2
63.5
% of Total
50.9 %
12.1
7.0
6.5
15.4
8.1
Carrying
Value
% of Total
$
266.5
90.0
55.1
41.2
161.1
62.4
%
39.4
13.3
8.1
6.1
23.8
9.3
$
786.8
100.0 %
$
676.3
100.0
%
Foreign Currency Exposure
As of December 31, 2020, White Mountains had foreign currency exposure on $188 million of net assets primarily related to NSM’s U.K.-based
operations, foreign Kudu Participation Contracts and certain other foreign consolidated and unconsolidated entities.
From time to time, White Mountains may enter into foreign currency forward contracts in order to mitigate its foreign currency exposure on certain
invested assets. As of December 31, 2020, White Mountains does not have any open foreign currency forward contracts.
The following table presents the fair value of White Mountains’s foreign denominated net assets as of December 31, 2020:
$ in Millions
Currency
GBP
AUD
EUR
All other
Total
$
$
Fair Value
% of Common
Shareholders’ Equity
3.2 %
1.1
.5
—
4.8 %
125.6
43.2
19.0
.6
188.4
53
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 and are subject to tax in the jurisdictions in which they operate.
In the first quarter of 2020, White Mountains adopted ASU 2019-12, Simplifying the Accounting for Income Taxes (ASC740) (“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 directly through non-controlling interest equity. Prior to the adoption of ASU 2019-12, White Mountains recorded the tax expense
related to BAM’s MSC directly to non-controlling interest equity, while the valuation allowance on such taxes was recorded through the income statement.
White Mountains reported income tax benefit of $21 million in 2020 on pre-tax income from continuing operations of $645 million. The difference
between White Mountains’s effective tax rate and the current U.S. federal statutory rate of 21% was driven primarily by a $131 million release of a
deferred tax liability as a result of an internal reorganization in connection with the MediaAlpha IPO and income generated in jurisdictions with lower tax
rates than the United States. Also in 2020, $43 million of tax expense was recorded for state income taxes, withholding taxes and the establishment of a
partial valuation allowance on deferred tax assets of various companies, entities and investments that are included in the Other Operations segment.
White Mountains reported income tax expense of $29 million in 2019 on pre-tax income from continuing operations of $405 million. White
Mountains’s effective tax rate was different from the current U.S. federal statutory rate of 21% primarily due to income generated in jurisdictions with
lower tax rates than the United States, state income taxes and a tax benefit recorded at BAM related to its MSC collected. Also, the effective tax rate for
2019 was different from the current U.S. federal statutory rate of 21% due to the release of a valuation allowance on the net deferred tax assets of the U.S.
consolidated group Guilford Holdings, Inc. and subsidiaries, which included Kudu, White Mountains’s investment in MediaAlpha, WM Capital, WM
Advisors and certain other entities and investments that are included in the Other Operations segment. In 2019, BAM recorded a tax benefit of $10 million
associated with the valuation allowance on taxes related to MSC collected that was included in the effective tax rate.
White Mountains reported income tax benefit of $4 million in 2018 on pre-tax loss from continuing operations of $178 million. White Mountains’s
effective tax rate was different from the current U.S. federal statutory rate of 21% primarily due to a full valuation allowance on the net deferred tax assets
of Guilford, income generated in jurisdictions with lower tax rates than the United States, withholding taxes and a tax benefit recorded at BAM related to
its MSC collected. In 2018, BAM recorded a tax benefit of $9 million associated with the valuation allowance on taxes related to MSC collected that is
included in the effective tax rate.
Discontinued Operations
Sirius Group Tax Contingency
On April 18, 2016, White Mountains completed the sale of Sirius Group to CM International Pte. Ltd. and CM Bermuda Limited (collectively “CMI”).
In connection with the sale, White Mountains indemnified Sirius Group against the loss of certain interest deductions. In late October 2018, the Swedish
Administrative Court ruled against Sirius Group on its appeal of the Swedish Tax Agency’s denial of these interest deductions, which related to periods
prior to the sale of Sirius Group to CMI. As a result, in 2018 White Mountains recorded a loss of $17 million within net (loss) gain on sale of discontinued
operations reflecting the value of these interest deductions.
For the years ended December 31, 2020 and 2019, White Mountains recognized a net foreign currency translation (loss) gain of $(2) million and $1
million that is included within net gain from sale of Sirius Group in discontinued operations. Sirius Group has appealed the decision to the Swedish
Administrative Court of Appeal. See Note 19 — “Held for Sale and Discontinued Operations” on page F-62.
54
LIQUIDITY AND CAPITAL RESOURCES
Operating Cash and Short-term Investments
Holding Company Level
The primary sources of cash for the Company and certain of its intermediate holding companies are expected to be distributions from its operating
subsidiaries, net investment income, proceeds from sales, repayments and maturities of investments, including sales of MediaAlpha common shares, capital
raising activities and, from time to time, proceeds from sales of operating subsidiaries. The primary uses of cash are expected to be general and
administrative expenses, purchases of investments, payments to tax authorities, payments on and repurchases/retirements of its debt obligations, dividend
payments to holders of the Company’s common shares, distributions to non-controlling interest holders of consolidated subsidiaries, contributions to
operating subsidiaries and, from time to time, purchases of operating subsidiaries and repurchases of the Company’s common shares.
Operating Subsidiary Level
The primary sources of cash for White Mountains’s operating subsidiaries are expected to be commissions, fees and premium collections, net
investment income, proceeds from sales, repayments and maturities of investments, contributions from holding companies and capital raising activities.
The primary uses of cash are expected to be general and administrative expenses, broker commission expenses, cost of sales, insurance acquisition
expenses, loss payments, purchases of investments, payments to tax authorities, payments on and repurchases/retirements of its debt obligations,
distributions made to holding companies, distributions to non-controlling interest holders and, from time to time, purchases of operating subsidiaries.
Both internal and external forces influence White Mountains’s financial condition, results of operations and cash flows. Premium and fee levels, loss
payments, cost of sales and investment returns may be impacted by changing rates of inflation and other economic conditions. Some time may lapse
between the occurrence of an insured loss, the reporting of the loss to White Mountains’s operating subsidiaries and the settlement of the liability for that
loss. The exact timing of the payment of losses and benefits cannot be predicted with certainty.
Management believes that White Mountains’s cash balances, cash flows from operations and routine sales and maturities of investments are adequate
to meet expected cash requirements for the foreseeable future on both a holding company and operating subsidiary level.
Dividend Capacity
Following is a description of the dividend capacity of White Mountains’s reinsurance and other operating subsidiaries:
HG Global/BAM
As of December 31, 2020, HG Global had $619 million face value of preferred shares outstanding, of which White Mountains owned 96.9%. Holders
of the HG Global preferred shares receive cumulative dividends at a fixed annual rate of 6.0% on a quarterly basis, when and if declared by HG Global.
During 2020, HG Global declared and paid a $23 million preferred dividend, of which $22 million was paid to White Mountains. As of December 31,
2020, HG Global had accrued $377 million of dividends payable to holders of its preferred shares, of which $364 million was payable to White Mountains
and eliminated in consolidation. As of December 31, 2020, HG Global and its subsidiaries had $3 million of cash outside of HG Re.
HG Re is a Special Purpose Insurer subject to regulation and supervision by the BMA but does not require regulatory approval to pay dividends.
However, HG Re’s dividend capacity is limited to amounts held outside of the Collateral Trusts pursuant to the FLRT with BAM. As of December 31,
2020, HG Re had $768 million of statutory capital and surplus and $827 million of assets held in the Collateral Trusts pursuant to the FLRT with BAM.
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 million, less the amount of cash and securities in the Regulation 114 Trust in excess of its 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.
55
As of December 31, 2020, the Collateral Trusts held assets of $827 million, which included $435 million of cash and investments, $388 million of
BAM Surplus Notes and $4 million of interest receivable on the BAM Surplus Notes.
As of December 31, 2020, HG Re had $20 million of cash and investments and $114 million of accrued interest on the BAM Surplus Notes held
outside the Collateral Trusts.
Through 2024, the interest rate on the BAM Surplus Notes is a variable rate equal to the one-year U.S. Treasury rate plus 300 basis points, set
annually. During 2021, the interest rate on the BAM Surplus Notes will be 3.1%. Beginning in 2025, the interest rate will be fixed at the higher of the then
current variable rate or 8.0%. BAM is required to seek regulatory approval to pay interest and principal on the BAM Surplus Notes only to the extent that
its remaining qualified statutory capital and other capital resources continue to support its outstanding obligations, its business plan and its “AA/stable”
rating from Standard & Poor’s. No payment of principal or interest on the BAM Surplus Notes may be made without the approval of the NYDFS.
In December 2020, BAM made a $30 million cash payment of principal and interest on the BAM Surplus Notes held by HG Global. Of this payment,
$22 million was a repayment of principal held in the Supplemental Trust and $8 million was a payment of accrued interest held outside the Supplemental
Trust.
In January 2020, BAM made a one-time $65 million cash payment of principal and interest on the BAM Surplus Notes held by HG Global. Of this
payment, $48 million was a repayment of principal held in the Supplemental Trust, $1 million was a payment accrued interest held in the Supplemental
Trust and $16 million was a payment of accrued interest held outside the Supplemental Trust.
NSM
During 2020, NSM did not make any distributions to unitholders. As of December 31, 2020, NSM had $48 million of net unrestricted cash.
Kudu
During 2020, Kudu distributed $4 million to unitholders, substantially all of which was paid to White Mountains. As of December 31, 2020, Kudu had
$8 million of net unrestricted cash and short-term investments.
Other Operations
During 2020, White Mountains paid a $3 million common share dividend. As of December 31, 2020, the Company and its intermediate holding
companies had $464 million of net unrestricted cash, short-term investments and fixed maturity investments, $802 million of MediaAlpha common stock,
and $173 million of private equity funds and the ILS Funds. White Mountains entered into a 180-day lock-up agreement in connection with the
MediaAlpha IPO. After the expiration of the lock-up on April 25, 2021 and until the one-year anniversary of the MediaAlpha IPO, any sale of MediaAlpha
shares by White Mountains must be coordinated with all principal stockholders of MediaAlpha, who may elect to participate in such sale on a pro rata
basis.
56
Financing
The following table summarizes White Mountains’s capital structure as of December 31, 2020 and 2019:
$ in Millions
NSM Bank Facility, net of unamortized issuance costs
Other NSM debt, net of unamortized issuance costs
Kudu Bank Facility, net of unamortized issuance costs
Other Operations debt, net of unamortized issuance costs
Total debt
Non-controlling interests — excluding BAM
Total White Mountains’s common shareholders’ equity
Total capital
(1)
Time-value discount on expected future payments on the BAM Surplus
Notes
HG Global’s unearned premium reserve
HG Global’s net deferred acquisition costs
(1)
(1)
Total adjusted capital
Total debt to total adjusted capital
(1)
Amount reflects White Mountains's preferred share ownership in HG Global of 96.9%.
$
$
December 31,
2020
271.3
1.3
86.3
17.5
376.4
35.2
3,906.0
4,317.6
(142.5)
190.0
(52.4)
4,312.7
$
$
2019
217.4
1.8
53.6
10.7
283.5
29.9
3,261.5
3,574.9
(151.6)
156.7
(41.5)
3,538.5
8.7 %
8.0 %
Management believes that White Mountains has the flexibility and capacity to obtain funds externally through debt or equity financing on both a
short-term and long-term basis. However, White Mountains can provide no assurance that, if needed, it would be able to obtain additional debt or
equity financing on satisfactory terms, if at all.
It is possible that, in the future, one or more of the rating agencies may lower White Mountains’s existing ratings. If one or more of its ratings were
lowered, White Mountains could incur higher borrowing costs on future borrowings and its ability to access the capital markets could be impacted.
NSM Bank Facility
On April 7, 2020, NSM amended its secured credit facility (the “NSM Bank Facility”) with Ares Capital Corporation in connection with the
acquisition of Kingsbridge. Under the amendment, the total commitment increased from $234 million, comprised of term loans of $224 million and a
revolving credit loan of $10 million, to $291 million, comprised of term loans of $276 million, including £43 million (approximately $52 million based
upon the foreign exchange spot rate as of the date of the transaction) in a GBP term loan, and a revolving credit loan commitment of $15 million. The term
loans under the NSM Bank Facility mature on May 11, 2026, and the revolving loan matures on November 11, 2025.
Interest on the NSM Bank Facility accrues at a floating interest rate equal to the three-month LIBOR plus an applicable margin. In connection with the
amendment, the reference rates for USD denominated borrowings increased. The USD-LIBOR rate floor increased to 1.25% and the margin over USD-
LIBOR increased from a range of 4.25% to 4.75% to a range of 5.50% to 6.00%. For GBP denominated borrowings, the GBP-LIBOR rate floor is 1.25%
and the margin over GBP-LIBOR ranges from 6.00% to 6.50%. The margins over the reference interest rates vary within the range depending on the
consolidated total leverage ratio of NSM.
57
The following table presents the change in debt under the NSM Bank Facility for the years ended December 31, 2020 and 2019:
Millions
NSM Bank Facility
Beginning balance
Term loans:
(1)
Borrowings
Repayments
Foreign currency translation
Revolving credit loan:
Borrowings
Repayments
Ending balance
Year Ended December 31,
2020
2019
$
$
221.3 $
52.4
(2.0)
5.7
—
—
277.4 $
180.4
42.9
(2.0)
—
6.5
(6.5)
221.3
(1)
Borrowings for the year ended December 31, 2020 included $52 for the funding of the acquisition of Kingsbridge. Borrowings for the year
ended December 31, 2019, included $20 and $23 for the funding of the acquisitions of Embrace and the Renewal Rights.
As of December 31, 2020, the term loans had an outstanding balance of $277 million, including £43 million (approximately $58 million based upon
the foreign exchange spot rate as of December 31, 2020) in a GBP term loan, and the revolving credit loan was undrawn. For the twelve months ended
December 31, 2020, the effective interest rate on the outstanding term loans under the NSM Bank Facility was 7.02%, excluding the effect of debt issuance
costs.
On June 15, 2018, NSM entered into an interest rate swap agreement to hedge its exposure to interest rate risk on $151 million of its USD denominated
variable rate term loans.
As of December 31, 2020, $148 million of the outstanding term loans were hedged by the swap and $130 million of the outstanding term loans were
unhedged. For the twelve months ended December 31, 2020, the weighted average effective interest rate on the outstanding term loans that were hedged,
including the effect of the amortization of debt issuance costs and the effect of the interest rate swap, was 9.0%, and the weighted average effective interest
rate on the outstanding term loans that were unhedged, including the effect of the amortization of debt issuance costs, was 7.6%. For the twelve months
ended December 31, 2020, the weighted average interest rate on the total NSM Bank Facility, including the effect of the amortization of debt issuance costs
and the effect of the interest rate swap, was 8.4%.
The NSM Bank Facility is secured by all property of the loan parties and contains various affirmative, negative and financial covenants that White
Mountains considers to be customary for such borrowings, including a maximum consolidated total leverage ratio covenant.
Other NSM Debt
NSM also has a secured term loan related to its U.K.-based operations. As of December 31, 2020, the secured term loan had an outstanding balance of
$1 million and a maturity date of December 31, 2022.
Kudu Bank Facility
On December 23, 2019, Kudu entered into a secured credit facility (the “Kudu Bank Facility”) with Monroe Capital Management Advisors, LLC to
provide funding for distributions to unitholders and fund new investments and related transaction expenses. As of December 31, 2020, the Kudu Bank
Facility has a maximum borrowing capacity of $124 million, which is comprised of a revolving credit loan commitment of $5 million, an initial term loan
of $57 million and a delayed-draw term loan of $62 million. The term loans and revolving credit loans, under the Kudu Bank Facility, mature in 2025.
During 2020, Kudu borrowed $32 million in term loans under the Kudu Bank Facility and made no repayments of principal. As of December 31, 2020, the
term loans had an outstanding balance of $89 million and the revolving credit loan, with a $5 million capacity, was undrawn.
Interest on the Kudu Bank Facility accrues at a floating interest rate equal to the greater of the one-month USD-LIBOR and 1.0% or the Prime Rate
plus 1.0%, plus in each case, an applicable margin. The margin over USD-LIBOR may vary between 5.50% and 6.25% and the margin over the base rate
may vary between 4.50% and 5.25%, depending on the consolidated total leverage ratio of the borrower.
The Kudu Bank Facility is secured by all property of the loan parties and contains various affirmative, negative and financial covenants that White
Mountains considers to be customary for such borrowings, including a maximum consolidated total leverage ratio covenant.
58
Other Operations Debt
As of December 31, 2020, debt in White Mountains’s Other Operations segment consisted of two secured credit facilities. The first credit facility has a
maximum borrowing capacity of $16 million, which is comprised of a term loan of $11 million, a delayed-draw term loan of $3 million and a revolving
credit loan commitment of $2 million, all with a maturity date of March 12, 2024. During 2020, White Mountains’s Other Operations segment made no
borrowings and made repayments of $2 million on the term loans under the first credit facility. As of December 31, 2020, the term loans had an outstanding
balance of $9 million and the revolving credit loan, with a $2 million capacity, was undrawn. The second credit facility has a maximum borrowing capacity
of $15 million, which is comprised of a term loan of $9 million, a delayed-draw term loan of $4 million and a revolving credit loan commitment of
$2 million, all with a maturity date of July 2, 2025. As of December 31, 2020, the term loans had an outstanding balance of $9 million and the revolving
credit loan, with a $2 million capacity, was undrawn.
Covenant Compliance
As of December 31, 2020, White Mountains was in compliance in all material respects with all of the covenants under all of its debt instruments.
Contractual Obligations and Commitments
The following table presents White Mountains’s material contractual obligations and commitments as of December 31, 2020:
Millions
Debt
Interest on debt
Long-term incentive compensation
Contingent consideration earnout liabilities
Operating leases
(2)
(1)
Total contractual obligations and commitments
Due in Less Than
One Year
Due in One to Three
Years
Due in Three
to Five Years
Due After
Five Years
Total
$
$
4.5 $
27.6
28.9
14.6
7.7
83.3 $
12.2 $
66.4
32.2
—
14.4
125.2 $
106.0 $
39.2
—
—
10.9
156.1 $
263.3 $
6.8
—
—
12.2
282.3 $
386.0
140.0
61.1
14.6
45.2
646.9
(1)
(2)
The contingent consideration earnout liabilities are related to NSM’s previous acquisitions of Fresh Insurance, KBK and its other U.K.-based operations. Any future adjustments due after one
year, which are based upon EBITDA, EBITDA projections, and present value factors for acquired entities, are not included in the table. See Note 2 — “Significant Transactions” on page F-
16.
Amounts include BAM’s operating lease amounts of $2.2, $4.4, $3.6 and $0.6 that are due in less than one year, one to three years, three to five years, and due after five years, which are
attributed to non-controlling interests.
The long-term incentive compensation balances included in the table above include amounts payable for performance shares. Exact amounts to be paid
for performance shares cannot be predicted with certainty, as the ultimate amounts of these liabilities are based on the future performance of White
Mountains and the market price of the Company’s common shares at the time the payments are made.
The estimated payments reflected in the table are based on current accrual factors (including performance relative to targets and common share price)
and assume that all outstanding balances were 100% vested as of December 31, 2020.
There are no provisions within White Mountains’s operating leasing agreements that would trigger acceleration of future lease payments.
White Mountains does not finance its operations through the securitization of its trade receivables, through special purpose entities or through synthetic
leases. Further, White Mountains has not entered into any material arrangements requiring it to guarantee payment of third-party debt or lease payments or
to fund losses of an unconsolidated special purpose entity.
White Mountains also has future binding commitments to fund certain other long-term investments. These commitments, which totaled approximately
$298 million as of December 31, 2020, do not have fixed funding dates and, are therefore, excluded from the table above.
59
Share Repurchase Programs
White Mountains’s board of directors has authorized the Company to repurchase its common shares from time to time, subject to market conditions.
The repurchase authorizations do not have a stated expiration date. As of December 31, 2020, White Mountains may repurchase an additional 542,517
shares under these board authorizations. In addition, from time to time White Mountains has also repurchased its common shares through tender offers that
were separately approved by its board of directors. On May 11, 2018, White Mountains completed a “modified Dutch auction” tender offer, through which
it repurchased 575,068 of its common shares at a purchase price of $875 per share for a total cost of approximately $505 million, including expenses.
Shares repurchased under this tender offer did not impact the remaining number of shares authorized for repurchase.
The following table presents common shares repurchased by the Company as well as the average price per share as a percent of December 31, 2020
adjusted book value per share and market value per share.
Shares
Cost
Average
Price
Year Ended
Repurchased
(Millions)
Per Share
Average
Price Per
Share as %
of
December
31, 2020
Adjusted
Book
Value Per
Share
Average
Price Per
Share as %
of
December
31, 2020
Market
Value
Per Share
December
31, 2020
December
31, 2019
December
31, 2018
99,087
5,679
592,458
$
$
$
85.1
4.9
519.4
$
$
$
858.81
68%
857.69
876.69
68%
69%
86%
86%
88%
Cash Flows
Detailed information concerning White Mountains’s cash flows during 2020, 2019 and 2018 follows:
Cash flows from operations for the years ended 2020, 2019 and 2018
Net cash flows used for operations was $61 million, $121 million and $31 million for the years ended 2020, 2019 and 2018. Cash used for operations
was lower in 2020 compared to 2019, which was driven primarily by $55 million of net investment income received in 2020 from a dividend
recapitalization at MediaAlpha. Cash used for operations was higher in 2019 compared to 2018, driven primarily by Kudu’s deployments in asset
management firms. White Mountains does not believe these trends will have a meaningful impact on its future liquidity or its ability to meet its future cash
requirements. As of December 31, 2020, the Company and its intermediate holding companies had $464 million of net unrestricted cash, short-term
investments and fixed maturity investments, $802 million of MediaAlpha common stock, and $173 million of private equity funds and the ILS Funds.
Acquisitions and Dispositions
During 2020, Kudu deployed $121 million (including approximately $3 million of transaction costs) in four asset management firms and has now
deployed a total of $386 million in 13 asset management firms.
During 2019, Kudu deployed $203 million in six asset management firms, of which $121 million (including approximately $3 million of transaction
costs) was funded subsequent to the date of the Kudu Transaction. During 2019, prior to the date of the Kudu Transaction, Kudu deployed $82 million, of
which $41 million was from White Mountains and is included in cash flows from investing activities.
60
Cash flows from investing and financing activities for the year ended December 31, 2020
Financing and Other Capital Activities
During 2020, the Company declared and paid a $3 million cash dividend to its common shareholders.
During 2020, White Mountains repurchased and retired 99,087 of its common shares for $85 million, 5,899 of which were repurchased under
employee benefit plans for statutory withholding tax payments.
During 2020, BAM received $69 million in MSC.
During 2020, BAM repaid $70 million of principal and paid $25 million of accrued interest on the BAM Surplus Notes.
During 2020, HG Global declared and paid $23 million of preferred dividends, of which $22 million was paid to White Mountains.
During 2020, NSM borrowed £43 million (approximately $52 million based upon the foreign exchange spot rate at the date of acquisition) of term
loans under the NSM Bank Facility to fund the acquisition of Kingsbridge. Additionally, during 2020 NSM repaid $2 million of term loans under the NSM
Bank Facility.
During 2020, Kudu borrowed $32 million in term loans under the Kudu Bank Facility.
During 2020, Kudu repurchased 41,091 of its units for $1 million from its non-controlling unitholders.
During 2020, White Mountains’s Other Operations segment made no borrowings and repaid $2 million in term loans under its credit facilities.
Acquisitions and Dispositions
On April 7, 2020, NSM acquired 100% of Kingsbridge for £107 million (approximately $132 million based upon the foreign exchange spot rate at the
date of acquisition).
On May 7, 2020, White Mountains made an additional $15 million investment in PassportCard/DavidShield.
On October 30, 2020, MediaAlpha completed its initial public offering. In the offering, White Mountains sold 3,609,894 shares and received total
proceeds of $64 million. White Mountains also received $55 million of net proceeds related to a dividend recapitalization at MediaAlpha, which was
recorded as net investment income.
In the fourth quarter of 2020, White Mountains pre-funded/placed in escrow a total of $646 million in preparation for closing the Ark Transaction.
Cash flows from investing and financing activities for the year ended December 31, 2019
Financing and Other Capital Activities
During 2019, the Company declared and paid a $3 million cash dividend to its common shareholders.
During 2019, White Mountains repurchased and retired 5,679 of its common shares for $5 million, all of which were repurchased under employee
benefit plans for statutory withholding tax payments.
During 2019, BAM received $55 million in MSC.
During 2019, BAM repaid $24 million of principal and paid $8 million of accrued interest on the BAM Surplus Notes.
During 2019, NSM borrowed $43 million of term loans under the NSM Bank Facility, which included $20 million and $23 million to fund the
acquisitions of Embrace and the Renewal Rights from AIG, and $7 million of revolving credit loans. Additionally, during 2019 NSM repaid $2 million of
term loans and $7 million of revolving credit loans under the NSM Bank Facility.
During 2019, Kudu borrowed $57 million in term loans under the Kudu Bank Facility and distributed $54 million to unitholders, of which $53 million
was paid to White Mountains. As of December 31, 2019, Kudu had not made any payment
of principal on the Kudu Bank Facility.
Acquisitions and Dispositions
On February 26, 2019, White Mountains received net cash proceeds of $89 million from the 2019 MediaAlpha Transaction.
On April 1, 2019, NSM acquired 100% of Embrace for $72 million, net of cash acquired.
On April 4, 2019, White Mountains completed the Kudu Transaction for $81 million. In addition, White Mountains assumed all of Oaktree’s unfunded
capital commitments to Kudu, increasing White Mountains’s total capital commitment to $250 million. During the fourth quarter of 2019, White Mountains
increased its total capital commitment to Kudu by an additional $100 million to $350 million. Also during the fourth quarter of 2019, Kudu obtained a
committed $124 million credit facility.
On May 31, 2019, White Mountains completed the Elementum Transaction for $55 million. As part of the Elementum Transaction, White Mountains
also committed to invest $50 million in the ILS Funds.
On June 28, 2019, NSM acquired the Renewal Rights from AIG for $83 million.
61
Cash flows from investing and financing activities for the year ended December 31, 2018
Financing and Other Capital Activities
During 2018, the Company declared and paid a $4 million cash dividend to its common shareholders.
During 2018, the Company repurchased and retired 592,458 of its common shares for $519 million, which included 9,965 of common shares for $8
million under employee benefit plans for statutory withholding tax payments.
During 2018, BAM received $54 million in MSC.
During 2018, BAM repaid $18 million of principal and paid $5 million of accrued interest on the BAM Surplus Notes.
During 2018, NSM borrowed $81 million of term loans under the NSM Bank Facility, which included $51 million to fund the acquisition of Fresh
Insurance and $30 million to fund the acquisition of KBK. Additionally, during 2018, NSM repaid $1 million on the term loans and $2 million on the
revolving credit loan under the NSM Bank Facility.
During 2018, MediaAlpha distributed $16 million to unitholders, of which $10 million was paid to White Mountains.
During 2018, MediaAlpha repaid $4 million on the term loan and borrowed $3 million and repaid $9 million on the revolving loan under the
MediaAlpha Bank Facility.
Acquisitions and Dispositions
On January 24, 2018, White Mountains paid $42 million in connection with the DavidShield transaction.
On May 11, 2018, White Mountains closed its acquisition of 95.0% of NSM (83.6% on a fully diluted, fully converted basis) for a purchase price of
$274 million. White Mountains paid a purchase price adjustment of $2 million in the fourth quarter of 2018.
On May 18, 2018, NSM acquired 100% of Fresh Insurance for a purchase price of £37 million (approximately $50 million based upon the foreign
exchange spot rate at the date of acquisition).
On December 3, 2018, NSM acquired all of the net assets of KBK for a purchase price of $60 million.
TRANSACTIONS WITH RELATED PERSONS
White Mountains does not have any related party transactions to report as of December 31, 2020.
62
NON-GAAP FINANCIAL MEASURES
This report includes eight non-GAAP financial measures that have been reconciled with their most comparable GAAP financial measures.
Adjusted book value per share
Adjusted book value per share is a non-GAAP financial measure which is derived by adjusting (i) the GAAP book value per share numerator and (ii)
the common shares outstanding denominator, as described below.
The GAAP book value per share numerator is adjusted (i) to include a discount for the time value of money arising from the modeled timing of cash
payments of principal and interest on the BAM Surplus Notes and (ii) to add back the unearned premium reserve, net of deferred acquisition costs, at HG
Global.
Under GAAP, White Mountains is required to carry the BAM Surplus Notes, including accrued interest, at nominal value with no consideration for
time value of money. Based on a debt service model that forecasts operating results for BAM through maturity of the BAM Surplus Notes, the present
value of the BAM Surplus Notes, including accrued interest and using an 8.0% discount rate, was estimated to be $147 million, $157 million and $146
million less than the nominal GAAP carrying values as of December 31, 2020, 2019 and 2018, respectively.
The value of HG Global’s unearned premium reserve, net of deferred acquisition costs, was $142 million, $119 million and $106 million as of
December 31, 2020, 2019 and 2018, respectively.
White Mountains believes these adjustments are useful to management and investors in analyzing the intrinsic value of HG Global, including the value
of the BAM Surplus Notes and the value of the in-force business at HG Re, HG Global’s reinsurance subsidiary.
The denominator used in the calculation of adjusted book value per share equals the number of common shares outstanding adjusted to exclude
unearned restricted common shares, the compensation cost of which, at the date of calculation, has yet to be amortized. Restricted common shares are
earned on a straight-line basis over their vesting periods. The reconciliation of GAAP book value per share to adjusted book value per share is included on
page 33.
Gross written premiums and MSC from new business
Gross written premiums and MSC from new business is a non-GAAP financial measure, which is derived by adjusting gross written premiums and
MSC collected (i) to include the present value of future installment MSC not yet collected and (ii) to exclude the impact of gross written premium
adjustments related to policies closed in prior periods. White Mountains believes these adjustments are useful to management and investors in evaluating
the volume and pricing of new business closed during the period. The reconciliation from GAAP gross written premiums to gross written premiums and
MSC from new business is included on page 38.
Adjusted capital
Total capital at White Mountains is comprised of White Mountains’s common shareholders’ equity, debt and non-controlling interests other than non-
controlling interests attributable to BAM. Total adjusted capital is a non-GAAP financial measure, which is derived by adjusting total capital (i) to include
a discount for the time value of money arising from the expected timing of cash payments of principal and interest on the BAM Surplus Notes and (ii) to
add back the unearned premium reserve, net of deferred acquisition costs, at HG Global. The reconciliation of total capital to total adjusted capital is
included on page 57.
NSM’s earnings before interest, taxes, depreciation and amortization (“EBITDA”) and NSM’s adjusted EBITDA
NSM’s EBITDA and adjusted EBITDA are non-GAAP financial measures. EBITDA is a non-GAAP financial measure that excludes interest expense
on debt, income tax benefit (expense), depreciation and amortization of other intangible assets from GAAP net income (loss). Adjusted EBITDA is a non-
GAAP financial measure that excludes certain other items in GAAP net income (loss) in addition to those excluded from EBITDA. The adjustments relate
to (i) change in fair value of contingent consideration earnout liabilities, (ii) non-cash equity-based compensation expense, (iii) impairments of intangible
assets, (iv) acquisition-related transaction expenses, (v) fair value purchase accounting adjustment for deferred revenue, (vi) investments made in the
development of new business lines and (vii) restructuring expenses. A description of each follows:
•
•
Change in fair value of contingent consideration earnout liabilities - Earnout liabilities are amounts payable to the sellers of businesses
purchased by NSM that are contingent on the earnings of such businesses in periods subsequent to their acquisition. Under GAAP, earnout
liabilities are initially recorded at fair value as part of purchase accounting, with the periodic change in the fair value of these liabilities recorded
as income or an expense.
Non-cash equity-based compensation expense - Represents non-cash expenses related to NSM’s management compensation emanating from the
grants of equity units.
63
•
•
•
•
•
Impairments of intangible assets - Represents expense related to NSM’s write-off of intangible assets. For the periods presented, the impairments
related primarily to NSM’s write-off of intangible assets in its U.K. vertical. The impairments related to lower premium volumes, including due
to the impact of the COVID-19 pandemic, and certain reorganization initiatives in the U.K. vertical.
Acquisition-related transaction expenses - Represents costs directly related to NSM’s transactions to acquire businesses, such as transaction-
related compensation, banking, accounting and external lawyer fees, which are not capitalized and are expensed under GAAP.
Fair value purchase accounting adjustment for deferred revenue - Represents the amount of deferred revenue that had already been collected but
subsequently written down in connection with establishing the fair value of deferred revenue as part of NSM’s purchase accounting for Embrace.
Investments made in the development of new business lines - Represents the net loss related to the start-up of newly established lines of business,
which NSM views as investments.
Restructuring expenses - Represents expenses associated with eliminating redundant work force and facilities that often arise as a result of
NSM’s post-acquisition integration strategies. For the periods presented, this adjustment relates primarily to NSM’s expenses incurred in certain
reorganization initiatives in the U.K. vertical.
White Mountains believes that these non-GAAP financial measures are useful to management and investors in evaluating NSM’s performance. See
page 43 for the reconciliation of NSM’s GAAP net income (loss) to EBITDA and adjusted EBITDA.
Kudu’s EBITDA and Kudu’s adjusted EBITDA
Kudu's EBITDA and adjusted EBITDA are non-GAAP financial measures. EBITDA is a non-GAAP financial measure that excludes interest expense
on debt, income tax expense (benefit), depreciation and amortization of other intangible assets from GAAP net income (loss). Adjusted EBITDA is a non-
GAAP financial measure that excludes certain other items in GAAP net income (loss) in addition to those excluded from EBITDA. The adjustments relate
to (i) net unrealized investment (gains) losses on Kudu's Participation Contracts, (ii) non-cash equity-based compensation expense and (iii) acquisition-
related transaction expenses. A description of each adjustment follows:
•
•
•
Net unrealized investment (gains) losses - Represents net unrealized investment gains and losses on Kudu's Participation Contracts, which are
recorded at fair value under GAAP.
Non-cash equity-based compensation expense - Represents non-cash expenses related to Kudu's management compensation that are settled with
equity units in Kudu.
Acquisition-related transaction expenses - Represents costs directly related to Kudu's transactions to acquire Participation Contracts, such as
external lawyer, banker, consulting and placement agent fees, which are not capitalized and are expensed under GAAP.
White Mountains believes that these non-GAAP financial measures are useful to management and investors in evaluating Kudu’s performance. The
reconciliation of Kudu’s GAAP net income (loss) to EBITDA and adjusted EBITDA is included on page 46.
Total consolidated portfolio returns excluding MediaAlpha
Total consolidated portfolio returns excluding MediaAlpha are non-GAAP financial measures that remove net investment income and net realized and
unrealized investment gains from White Mountains’s investment in MediaAlpha during the twelve months ended December 31, 2020 and 2019. Subsequent
to the 2019 MediaAlpha Transaction, White Mountains no longer consolidated MediaAlpha and accounted for its remaining investment in MediaAlpha at
fair value. White Mountains believes these measures to be useful to management and investors by making the returns in the current period comparable to
the prior periods. A reconciliation from GAAP to the reported percentages is as follows:
For the Twelve Months Ended December 31, 2020
For the Twelve Months Ended December 31, 2019
GAAP Returns
Remove
MediaAlpha
Returns - Excluding
MediaAlpha
GAAP Returns
Remove
MediaAlpha
Returns - Excluding
MediaAlpha
Total consolidated portfolio
returns
31.9 %
(27.3)%
4.6 %
20.4 %
(7.4)%
13.0 %
64
CRITICAL ACCOUNTING ESTIMATES
Management’s Discussion and Analysis of Financial Condition and Results of Operations discuss the Company’s consolidated financial statements,
which have been prepared in accordance with GAAP. The financial statements presented herein include all adjustments considered necessary by
management to fairly present the financial condition, results of operations and cash flows of White Mountains.
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 as of the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.
Certain of these estimates are considered critical in that they involve a higher degree of judgment and are subject to a significant degree of variability. On
an ongoing basis, management evaluates its estimates and bases its estimates on historical experience and on various other factors that are believed to be
reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not
readily apparent from other sources.
1. Fair Value Measurements
General
White Mountains records certain assets and liabilities at fair value in its consolidated financial statements, with changes therein recognized in current
period earnings. In addition, White Mountains discloses estimated fair value for certain liabilities measured at historical or amortized cost. Fair value is
defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants (an exit price)
at a particular measurement date. Fair value measurements are categorized into a hierarchy that distinguishes between inputs based on market data from
independent sources (“observable inputs”) and a reporting entity’s internal assumptions based upon the best information available when external market
data is limited or unavailable (“unobservable inputs”). Quoted prices in active markets for identical assets have the highest priority (“Level 1”), followed by
observable inputs other than quoted prices including prices for similar but not identical assets or liabilities (“Level 2”), and unobservable inputs, including
the reporting entity’s estimates of the assumptions that market participants would use, having the lowest priority (“Level 3”).
Assets and liabilities carried at fair value include substantially all of the investment portfolio, and derivative instruments, both exchange-traded and
over the counter instruments. Valuation of assets and liabilities measured at fair value require management to make estimates and apply judgment to
matters that may carry a significant degree of uncertainty. In determining its estimates of fair value, White Mountains uses a variety of valuation
approaches and inputs. Whenever possible, White Mountains estimates fair value using valuation methods that maximize the use of quoted market prices or
other observable inputs. Where appropriate, assets and liabilities measured at fair value have been adjusted for the effect of counterparty credit risk.
Invested Assets
White Mountains uses outside pricing services and brokers to assist in determining fair values. The outside pricing services White Mountains uses
have indicated that they will only provide prices where observable inputs are available. As of December 31, 2020, approximately 73% of the investment
portfolio recorded at fair value was priced based upon quoted market prices or other observable inputs.
Level 1 Measurements
Investments valued using Level 1 inputs include White Mountains’s investment in MediaAlpha subsequent to the MediaAlpha IPO, common equity
securities and fixed maturity investments, primarily investments in U.S. Treasuries and short-term investments, which include U.S. Treasury Bills. For
investments in active markets, White Mountains uses the quoted market prices provided by outside pricing services to determine fair value.
65
Level 2 Measurements
Investments valued using Level 2 inputs include fixed maturity investments which have been disaggregated into classes, including debt securities
issued by corporations, municipal obligations and mortgage and asset-backed securities. Investments valued using Level 2 inputs also include certain
passive ETFs that track U.S. stock indices such as the S&P 500 Index, but are traded on foreign exchanges, which White Mountains values using the fund
manager’s published net asset value per share (“NAV”) to account for the difference in market close times.
In circumstances where quoted market prices are unavailable or are not considered reasonable, White Mountains estimates the fair value using industry
standard pricing methodologies and observable inputs such as benchmark yields, reported trades, broker-dealer quotes, issuer spreads, benchmark
securities, bids, offers, credit ratings, prepayment speeds, reference data including research publications and other relevant inputs. Given that many fixed
maturity investments do not trade on a daily basis, the outside pricing services evaluate a wide range of fixed maturity investments by regularly drawing
parallels from recent trades and quotes of comparable securities with similar features. The characteristics used to identify comparable fixed maturity
investments vary by asset type and take into account market convention.
White Mountains’s process to assess the reasonableness of the market prices obtained from the outside pricing sources covers substantially all of its
fixed maturity investments and includes, but is not limited to, the evaluation of pricing methodologies and a review of the pricing services’ quality control
procedures on at least an annual basis, a comparison of its invested asset prices obtained from alternate independent pricing vendors on at least a semi-
annual basis, monthly analytical reviews of certain prices and a review of the underlying assumptions utilized by the pricing services for select
measurements on an ad hoc basis throughout the year. White Mountains also performs back-testing of selected investment sales activity to determine
whether there are any significant differences between the market price used to value the security prior to sale and the actual sale price of the security on an
ad-hoc basis throughout the year. Prices provided by the pricing services that vary by more than $0.5 million and 5% from the expected price based on
these assessment procedures are considered outliers, as are prices that have not changed from period to period and prices that have trended unusually
compared to market conditions. In circumstances where the results of White Mountains’s review process does not appear to support the market price
provided by the pricing services, White Mountains challenges the vendor provided price. If White Mountains cannot gain satisfactory evidence to support
the challenged price, White Mountains will rely upon its own internal pricing methodologies to estimate the fair value of the security in question.
The valuation process described above is generally applicable to all of White Mountains’s fixed maturity investments. The techniques and inputs
specific to asset classes within White Mountains’s fixed maturity investments for Level 2 securities that use observable inputs are as follows:
Debt Securities Issued by Corporations:
The fair value of debt securities issued by corporations is determined from a pricing evaluation technique that uses information from market sources
and integrates relative credit information, observed market movements, and sector news. Key inputs include benchmark yields, reported trades, broker-
dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers, and reference data including sector, coupon, credit quality ratings,
duration, credit enhancements, early redemption features and market research publications.
Municipal Obligations:
The fair value of municipal obligations is determined from a pricing evaluation technique that uses information from market makers, brokers-dealers,
buy-side firms, and analysts along with general market information. Key inputs include benchmark yields, reported trades, issuer financial statements,
material event notices and new issue data, as well as broker-dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers, and
reference data including type, coupon, credit quality ratings, duration, credit enhancements, geographic location and market research publications.
Mortgage and Asset-Backed Securities:
The fair value of mortgage and asset-backed securities is determined from a pricing evaluation technique that uses information from market sources
and leveraging similar securities. Key inputs include benchmark yields, reported trades, underlying tranche cash flow data, collateral performance, plus
new issue data, as well as broker-dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers, and reference data including issuer,
vintage, loan type, collateral attributes, prepayment speeds, default rates, recovery rates, cash flow stress testing, credit quality ratings and market research
publications.
66
Level 3 Measurements
Fair value estimates for investments that trade infrequently and have few or no quoted market prices or other observable inputs are classified as Level
3 measurements. Investments valued using Level 3 fair value estimates are based upon unobservable inputs and include investments in certain fixed
maturity investments, common equity securities and other long-term investments where quoted market prices or other observable inputs are unavailable or
are not considered reliable or reasonable.
Level 3 valuations are generated from techniques that use assumptions not observable in the market. These unobservable inputs reflect White
Mountains’s assumptions of what market participants would use in valuing the investment. In certain circumstances, investment securities may start out as
Level 3 when they are originally issued, but as observable inputs become available in the market, they may be reclassified to Level 2. Transfers of
securities between levels are based on investments held as of the beginning of the period.
Other Long-Term Investments
As of December 31, 2020, White Mountains owned a portfolio of other long-term investments valued at $787 million, that consisted primarily of
unconsolidated entities, including Kudu’s Participation Contracts, private equity funds, the ILS Funds and private debt instruments. As of December 31,
2020, $614 million of White Mountains’s other long-term investments, that consisted primarily of unconsolidated entities, including Kudu’s Participation
Contracts and private debt instruments were classified as Level 3 investments in the GAAP fair value hierarchy, were not actively traded in public markets
and did not have readily observable market prices. The determination of the fair value of these securities involves significant management judgment, and
the use of valuation models and assumptions that are inherently subjective and uncertain. See Item 1A. Risk Factors, “Our investment portfolio includes
securities that do not have readily observable market prices. We use valuation methodologies that are inherently subjective and uncertain to value these
securities. The values of securities established using these methodologies may never be realized, which could materially adversely affect our results of
operations and financial condition.” on page 19. As of December 31, 2020, $173 million of White Mountains’s other long-term investments, consisting of
private equity funds and the ILS Funds, were valued at fair value using NAV as a practical expedient. Investments for which fair value is measured at NAV
using the practical expedient are not classified within the fair value hierarchy.
White Mountains may use a variety of valuation techniques to determine fair value depending on the nature of the investment, including a discounted
cash flow analysis, market multiple approach, cost approach and/or liquidation analysis. On an ongoing basis, White Mountains also considers qualitative
changes in facts and circumstances, which may impact the valuation of its unconsolidated entities, including economic and market changes in relevant
industries, changes to the entity’s capital structure, business strategy and key personnel, and any recent transactions relating to the unconsolidated entity.
On a quarterly basis, White Mountains evaluates the most recent qualitative and quantitative information of the business and completes a fair valuation
analysis for all Level 3 other long-term investments. Periodically, and at least on an annual basis, White Mountains uses a third-party valuation firm to
complete an independent valuation analysis of significant unconsolidated entities.
As of December 31, 2020, White Mountains’s most significant other long-term investments that are valued using Level 3 measurements include
Kudu’s Participation Contracts and PassportCard/DavidShield.
Valuation of Kudu’s Participation Contracts
Kudu’s Participation Contracts comprise non-controlling equity interests in the form of revenue and earnings participation contracts. On a quarterly
basis, White Mountains values each of Kudu’s Participation Contracts using discounted cash flow models. The valuation models include key inputs such as
projections of future revenues and earnings of Kudu’s clients, a discount rate and a terminal cash flow exit multiple. The expected future cash flows are
based on management judgment, considering current performance, budgets and projected future results. The discount rates reflect the weighted average
cost of capital, considering comparable public company data, adjusted for risks specific to the business and industry. The terminal exit multiple is generally
based on expectations of annual cash flow to Kudu from each of its clients in the terminal year of the cash flow model. In determining fair value, White
Mountains considers factors such as performance of underlying products and vehicles, expected client growth rates, new fund launches, fee rates by
products, capacity constraints, operating cash flow of underlying manager and other qualitative factors, including the assessment of key personnel.
As of December 31, 2020, the combined fair value of Kudu’s Participation Contracts was $401 million. The inputs to each discounted cash flow
analysis vary depending on the nature of each client. As of December 31, 2020, White Mountains concluded that pre-tax discount rates in the range of 18%
to 23%, and terminal cash flow exit multiples in the range of 7 to 12 times were appropriate for the valuations of Kudu’s Participation Contracts.
67
With a discounted cash flow analysis, small changes to inputs in a valuation model may result in significant changes to fair value. The following table
presents the estimated effect on the fair value of Kudu’s Participation Contracts as of December 31, 2020, resulting from increases and decreases to the
discount rates and terminal cash flow exit multiples used in the discounted cash flow analysis:
$ in
Millions
Terminal
Exit Multiple
+2
+1
7x to 12x
-1
-2
Pre-tax Discount Rate
-2%
-1%
$
$
$
$
$
478
462
446
431
415
$
$
$
$
$
451
437
422
408
394
18% - 23%
427
$
414
$
401
$
387
$
375
$
+1%
+2%
$
$
$
$
$
404
391
379
367
357
$
$
$
$
$
383
371
360
349
340
Valuation of PassportCard/DavidShield
On a quarterly basis, White Mountains values its investment in PassportCard/DavidShield using a discounted cash flow model. The discounted cash
flow valuation model includes key inputs such as projections of future revenues and earnings, a discount rate and a terminal revenue growth rate. The
expected future cash flows are based on management judgment, considering current performance, budgets and projected future results. The discount rate
reflects the weighted average cost of capital, considering comparable public company data, adjusted for risks specific to the business and industry. The
terminal revenue growth rate is based on company, industry and macroeconomic expectations of perpetual revenue growth subsequent to the end of the
discrete period in the discounted cash flow analysis.
When making its fair value selection, which is within a range of reasonable values derived from the discounted cash flow model, White Mountains
considers all available information, including any relevant market multiples and multiples implied by recent transactions, facts and circumstances specific
to PassportCard/DavidShield’s businesses and industries, and any infrequent or unusual results for the period.
White Mountains concluded that an after-tax discount rate of 23% and a terminal revenue growth rate of 4% was appropriate for the valuation of its
investment in PassportCard/DavidShield as of December 31, 2020. Utilizing these assumptions, White Mountains determined that the fair value of its
investment in PassportCard/DavidShield was $95 million as of December 31, 2020, which included the additional $15 million investment in
PassportCard/DavidShield made during the second quarter of 2020.
Premiums and commission revenues from leisure travel insurance placed by PassportCard declined dramatically in the twelve months ended December
31, 2020 due to the COVID-19 pandemic. This decline was modestly offset by increased revenues from international private medical insurance placed by
DavidShield. PassportCard/DavidShield expects these trends to continue until global travel resumes. During the third quarter of 2020,
PassportCard/DavidShield curtailed its global expansion efforts in response to the impact of the COVID-19 pandemic.
With a discounted cash flow analysis, small changes to inputs in a valuation model may result in significant changes to fair value. The following table
presents the estimated effect on the fair value of White Mountains’s investment in PassportCard/DavidShield as of December 31, 2020, resulting from
changes in key inputs to the discounted cash flow analysis, including the discount rate and terminal revenue growth rate:
$ in
Millions
Terminal
Revenue
Growth Rate
After-tax Discount Rate
21%
22%
23%
24%
25%
4.5%
4.0%
3.5%
$
$
$
109
108
107
$
$
$
102
101
100
$
$
$
95
95
94
$
$
$
90
89
88
$
$
$
84
84
83
68
Other Long-term Investments - NAV
White Mountains’s portfolio of other long-term investments includes investments in private equity funds, hedge funds and the ILS Funds. White
Mountains employs a number of procedures to assess the reasonableness of the fair value measurements for its private equity funds, hedge funds and the
ILS Funds, including obtaining and reviewing periodic and audited annual financial statements as well as discussing each fund’s pricing with the fund
manager throughout the year. However, since the fund managers do not provide sufficient information to evaluate the pricing methods and inputs for each
underlying investment, White Mountains considers the valuation inputs to be unobservable. The fair value of White Mountains’s private equity fund, hedge
fund and ILS fund investments are generally determined using the fund manager’s NAV. In the event that White Mountains believes the fair value of a
private equity fund, hedge fund or ILS fund differs from the NAV reported by the fund manager due to illiquidity or other factors, White Mountains will
adjust the reported NAV to more appropriately represent the fair value of its investment in the private equity fund, hedge fund or ILS fund.
Sensitivity Analysis of Likely Returns on Other Long-term Investments - NAV
The underlying investments of White Mountains’s private equity funds are typically publicly-traded and private securities and, as such, are subject to
market risks that are similar to White Mountains’s common equity securities. The following table presents the estimated effect on fair values as of
December 31, 2020 resulting from a 10% change and a 30% change in the market value of private equity funds:
Millions
December 31, 2020
10% Decline
10% Increase
30% Decline
30% Increase
Private equity funds — NAV
$
121.2
$
(12.1)
$
12.1
$
(36.3)
$
36.3
Carrying Value at
Change in Fair Value at
December 31, 2020
The underlying investments of White Mountains’s multi-investor ILS Funds consist primarily of catastrophe bonds, collateralized reinsurance
investments and industry loss warranties. In addition to catastrophe event risk, the underlying investments are also subject to a variety of other risks
including modeling, liquidity, market, collateral credit quality, counterparty financial strength, interest rate and currency risks.
See Note 3 — “Investment Securities” on page F-19 for tables that summarize the changes in White Mountains’s fair value measurements by level
for the years ended December 31, 2020 and 2019 and for amount of total gains (losses) included in earnings attributable to net unrealized investment gains
(losses) for Level 3 investments for years ended December 31, 2020, 2019 and 2018.
69
2. Surplus Note Valuation
BAM Surplus Notes
As of December 31, 2020, White Mountains owned $388 million of BAM Surplus Notes and has accrued $156 million in interest due thereon. In
December 2020, BAM made a $30 million cash payment of principal and interest on the BAM Surplus Notes held by HG Global. In January 2020, BAM
made a one-time $65 million cash payment of principal and interest on the BAM Surplus Notes held by HG Global. During 2019, BAM made a $32
million cash payment (which included a one-time $10 million cash payment) of principal and interest on the BAM Surplus Notes.
Because BAM is consolidated in White Mountains’s financial statements, the BAM Surplus Notes and accrued interest are classified as intercompany
notes, carried at face value and eliminated in consolidation. However, the BAM Surplus Notes and accrued interest are carried as assets at HG Global, of
which White Mountains owns 96.9% of the preferred equity, while the BAM Surplus Notes are carried as liabilities at BAM, which White Mountains has
no ownership interest in and is completely attributed to non-controlling interests.
Any write-down of the carried amount of the BAM Surplus Notes and/or the accrued interest thereon could adversely impact White Mountains’s
results of operations and financial condition. See Item 1A., Risk Factors, “If BAM does not pay some or all of the principal and interest due on the BAM
Surplus Notes, it could materially adversely affect our results of operations and financial condition.” on page 19.
Periodically, White Mountains’s management reviews the recoverability of amounts recorded from the BAM Surplus Notes. As of December 31, 2020,
White Mountains believes such notes and interest thereon to be fully recoverable. White Mountains’s review is based on a debt service model that forecasts
operating results for BAM, and related payments on the BAM Surplus Notes, through maturity of the BAM Surplus Notes in 2042. The model depends on
assumptions regarding future trends for the issuance of municipal bonds, interest rates, credit spreads, insured market penetration, competitive activity in
the market for municipal bond insurance and other factors affecting the demand for and price of BAM’s municipal bond insurance.
In January 2020, White Mountains updated its debt service model to reflect (i) the cash payments of principal and interest on the BAM Surplus Notes
made in December 2019 and January 2020, (ii) the amendments made to the terms of the BAM Surplus Notes in January 2020, including an extension of
the variable interest rate period, and (iii) in light of the current interest rate environment, a more conservative forecast of future operating results for BAM.
The changes to the debt service model resulted in a $20 million increase to the time value of money discount on the BAM Surplus Notes as reflected in
adjusted book value per share as of December 31, 2019.
As of December 31, 2020, White Mountains debt service model indicated that the BAM Surplus Notes would be fully repaid between six and seven
years prior to final maturity, which is generally consistent with the results of the update of the debt service model as of December 31, 2019. The debt
service model assumes both par insured and total pricing gradually increase from 2021 to 2024, and flatten thereafter. Assumptions regarding future trends
for these factors are a matter of significant judgment, and whether actual results will follow the model is subject to a number of risks and uncertainties.
BAM is required to seek regulatory approval to pay interest and principal on the BAM Surplus Notes to the extent that its remaining qualified statutory
capital and other capital resources continue to support its outstanding obligations, its business plan and its “AA/stable” rating from Standard & Poor’s. No
payment of principal or interest on the BAM Surplus Notes may be made without the approval of the NYDFS.
Interest payments on the BAM Surplus Notes are due quarterly but are subject to deferral, without penalty or default and without compounding, for
payment in the future. Payments made to the BAM Surplus Notes are applied pro rata between outstanding principal and interest. Deferred interest is due
on the stated maturity date in 2042.
70
3. Goodwill and Other Intangible Assets
As of December 31, 2020, goodwill and other intangible assets recognized in connection with business and asset acquisitions totaled $782 million, of
which $754 million was attributable to White Mountains’s common shareholders. Goodwill and other intangible assets are recorded at their acquisition date
fair values. The determination of the acquisition date fair values of goodwill and other intangible assets involves significant management judgment, the use
of valuation models and assumptions that are inherently subjective. Goodwill and indefinite-lived intangible assets are not amortized but rather reviewed
for potential impairment on an annual basis, or whenever indications of potential impairment exist. In the absence of any indications of potential
impairment, the evaluation of goodwill and indefinite-lived intangible assets is performed no later than the interim period in which the anniversary of the
acquisition date falls. Finite-lived intangible assets, which are amortized over their estimated economic lives, are reviewed for impairment only when
events occur or there are changes in circumstances indicating that their carrying value may exceed fair value. Impairment exists when the carrying value of
goodwill or other intangible assets exceeds fair value.
White Mountains’s annual review first assesses whether qualitative factors indicate that the carrying value of goodwill or other intangible assets may
be impaired. If White Mountains determines based on this qualitative review that it is more likely than not that an impairment may exist, then White
Mountains performs a quantitative analysis to compare the fair value of a reporting unit with its carrying value. If the carrying value exceeds the estimated
fair value, then an impairment charge is recognized through current period pre-tax income. Both the annual qualitative assessment of potential impairment
as well as the quantitative comparison of carrying value to estimated fair value involve management judgment, the use of discounted cash flow models,
market comparisons and other valuation techniques and assumptions, including customer retention rates and revenue growth rates, that are inherently
subjective.
Most of White Mountains’s total goodwill and other intangible assets of $782 million relates to the acquisition of NSM and NSM’s subsequent
acquisitions of Fresh Insurance, KBK, Embrace, the Renewal Rights from AIG and Kingsbridge. As of December 31, 2020, goodwill and other intangible
assets related to NSM were $737 million. During 2020, White Mountains recognized impairments of other intangible assets of $6 million related to Fresh
Insurance. The impairments related to lower premium volumes, including due to the impact of the COVID-19 pandemic, and certain reorganization
initiatives at Fresh Insurance. During 2020, White Mountains did not recognize any goodwill impairments. During 2020, White Mountains performed its
periodic reviews for potential impairment, including a quantitative review of the goodwill associated with NSM. During 2019, White Mountains
recognized an impairment of other intangible assets of $2 million related to Fresh Insurance and impairments of goodwill and other intangible assets of $8
million and $1 million, respectively, related to its Other Operations. During 2020 and 2019, White Mountains concluded that there was no impairment of
the goodwill associated with NSM.
See Item 1A., Risk Factors, “If we are required to write down goodwill and other intangible assets, it could materially adversely affect our results of
operations and financial condition.” on page 18.
71
FORWARD-LOOKING STATEMENTS
This report may contain “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934. All statements, other than statements of historical facts, included or referenced in this report which address activities,
events or developments which White Mountains expects or anticipates will or may occur in the future are forward-looking statements. The words “could”,
“will”, “believe”, “intend”, “expect”, “anticipate”, “project”, “estimate”, “predict” and similar expressions are also intended to identify forward-looking
statements. These forward-looking statements include, among others, statements with respect to White Mountains’s:
• change in book value or adjusted book value per share or return on equity;
• business strategy;
• financial and operating targets or plans;
• projections of revenues, income (or loss), earnings (or loss) per share, EBITDA, adjusted EBITDA, dividends, market share or other financial
forecasts of White Mountains or its businesses;
• expansion and growth of its business and operations; and
• future capital expenditures.
These statements are based on certain assumptions and analyses made by White Mountains in light of its experience and perception of historical trends,
current conditions and expected future developments, as well as other factors believed to be appropriate in the circumstances. However, whether actual
results and developments will conform to its expectations and predictions is subject to risks and uncertainties that could cause actual results to differ
materially from expectations, including:
• the risks associated with Item 1A of this Report on Form 10-K;
• claims arising from catastrophic events, such as hurricanes, earthquakes, floods, fires, terrorist attacks or severe winter weather;
• the market value of White Mountains investment in MediaAlpha;
• the trends and uncertainties from the COVID-19 pandemic, including judicial interpretations on the extent of insurance coverage provided by
insurers for COVID-19 pandemic related claims;
• business opportunities (or lack thereof) that may be presented to it and pursued;
• actions taken by ratings agencies, such as financial strength or credit ratings downgrades or placing ratings on negative watch;
• the continued availability of capital and financing;
• deterioration of general economic, market or business conditions, including due to outbreaks of contagious disease (including the COVID-19
pandemic) and corresponding mitigation efforts;
• competitive forces, including the conduct of other insurers;
• changes in domestic or foreign laws or regulations, or their interpretation, applicable to White Mountains, its competitors or its customers; and
• other factors, most of which are beyond White Mountains’s control.
Consequently, all of the forward-looking statements made in this report are qualified by these cautionary statements, and there can be no assurance that
the actual results or developments anticipated by White Mountains will be realized or, even if substantially realized, that they will have the expected
consequences to, or effects on, White Mountains or its business or operations. White Mountains assumes no obligation to publicly update any such
forward-looking statements, whether as a result of new information, future events or otherwise.
72
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
White Mountains’s consolidated balance sheet includes a substantial amount of assets and liabilities whose fair values are subject to market risk. The
term market risk refers to the risk of loss arising from adverse changes in interest rates, credit spreads, equity markets prices and other relevant market rates
and prices. Due to the size of White Mountains’s investment portfolio, market risk could have a significant effect on White Mountains’s consolidated
financial condition, results of operations and cash flows.
Interest Rate and Credit Spread Risk
White Mountains invests in interest rate sensitive securities. White Mountains generally manages the interest rate risk associated with its portfolio of
fixed maturity investments by monitoring the average duration of the portfolio. As of December 31, 2020, White Mountains’s fixed maturity investments
are comprised primarily of debt securities issued by corporations, U.S. government and agency obligations, municipal obligations and mortgage and asset-
backed securities.
Increases and decreases in prevailing interest rates generally translate into decreases and increases in fair values of fixed maturity investments,
respectively. Additionally, fair values of interest rate sensitive instruments may be affected by the creditworthiness of the issuer, prepayment options,
relative values of alternative investments, the liquidity of the instrument and various other market factors.
The following table presents the estimated effects of hypothetical increases and decreases in market interest rates on White Mountains’s fixed maturity
investments:
$ in Millions
Fixed maturity
investments
Fair Value at
December 31, 2020
Assumed Change in
Relevant Interest Rate
Estimated Fair Value
After Change in
Interest Rate
Pre-Tax Increase
(Decrease) in Fair Value
$
1,207.2
100 bps decrease $
50 bps decrease
50 bps increase
100 bps increase
$
1,223.4
1,222.5
1,185.0
1,162.2
16.2
15.3
(22.2)
(45.0)
The magnitude of the fair value decrease in rising interest rate scenarios may be more significant than the fair value increase in comparable falling
interest rate scenarios. This can occur because (i) the analysis floors interest rates at a de minimis level in falling interest rate scenarios, muting price
increases, (ii) portions of the fixed maturity investment portfolio may be callable, muting price increases in falling interest rate scenarios and/or (iii)
portions of the fixed maturity investment portfolio may experience cash flow extension in higher interest rate environments, which generally results in
lower prices.
White Mountains’s overall strategy for fixed maturity investments is to purchase securities that are attractively priced in relation to their investment
risks. Widening and tightening of credit spreads translate into decreases and increases in fair values of fixed maturity investments, respectively.
The following table presents the estimated pre-tax effects of hypothetical widening and tightening of credit spreads on White Mountains’s fixed
maturity investments by asset class:
$ in Millions
Fair Value
Tighten 50
Tighten 25
Widen 25
Widen 50
U.S. government and agency obligations
$
176.3
$
—
$
—
$
—
$
—
December 31, 2020
Agency mortgage-backed securities
Other asset-backed securities
Debt securities issued by corporations
Municipal obligations
199.4
19.1
547.4
265.0
Tighten 100
Tighten 50
Widen 50
Widen 100
2.3
.1
2.0
—
(3.7)
(.1)
(7.3)
(.3)
Tighten 200
Tighten 100
Widen 100
Widen 200
12.2
16.7
11.6
13.2
(21.7)
(15.0)
(43.4)
(30.1)
The magnitude of the fair value decrease in wider credit spread scenarios may be more significant than the fair value increase in comparable tighter
credit spread scenarios. This can occur because the analysis limits the credit spread tightening in order to floor yields of non-government bonds above
yields of short government bonds, thereby muting price increases.
73
Investment in MediaAlpha, Common Equity Securities and Other Long-Term Investments Price Risk
The carrying values of White Mountains’s investment in MediaAlpha, common equity securities and other long-term investments are based on quoted
market prices or management’s estimates of fair value as of the balance sheet date. Market prices of common equity securities, in general, are subject to
fluctuations, which could cause the amount realized upon sale or exercise of these instruments to differ significantly from the current reported value. The
fluctuations may result from perceived changes in the underlying economic characteristics of the investment, the relative price of alternative investments,
supply and demand imbalances for a particular security or various other market factors. Assuming a hypothetical 10% and 30% increase or decrease in the
value of White Mountains’s investment in MediaAlpha, common equity securities and other long-term investments as of December 31, 2020, the carrying
value of White Mountains’s investment in MediaAlpha, common equity securities and other long-term investments would have increased or decreased by
approximately $159 million and $477 million pre-tax, respectively.
Long-Term Obligations
White Mountains records its financial instruments at fair value with the exception of debt obligations which are recorded as debt at face value less
unamortized original issue discount.
The following tables presents the fair value and carrying value of these financial instruments as of December 31, 2020 and December 31, 2019:
Millions
NSM Bank Facility
Other NSM debt
Kudu Bank Facility
(1)
Other Operations debt
December 31, 2020
December 31, 2019
Fair
Value
Carrying
Value
Fair
Value
Carrying
Value
$
$
$
$
279.3
1.3
89.3
18.8
$
$
$
$
271.3
1.3
86.3
17.5
$
$
$
$
221.2
1.7
53.6
11.3
$
$
$
$
217.4
1.8
53.6
10.7
(1)
As of December 31, 2019, White Mountains measured the fair value of the Kudu Bank Facility debt at the carrying value as a result of the debt being issued on
December 23, 2019. See Note 5 — “Debt”.
The fair value estimates for the NSM Bank Facility, the Other NSM debt, the Kudu Bank Facility and Other Operations debt have been determined
based on a discounted cash flow approach and are considered to be Level 3 measurements.
Foreign Currency Exposure
As of December 31, 2020, White Mountains had foreign currency exposure on $188 million of net assets primarily related to NSM’s U.K.-based
operations, foreign Kudu Participation Contracts and certain other foreign consolidated and unconsolidated entities.
From time to time, White Mountains may enter into foreign currency forward contracts in order to mitigate its foreign currency exposure on certain
invested assets. As of December 31, 2020, White Mountains does not have any open foreign currency forward contracts.
The following table presents the fair value of White Mountains’s foreign denominated net assets as of December 31, 2020:
$ in Millions
Currency
GBP
AUD
EUR
All other
Total
$
$
Fair Value
% of Common
Shareholders’ Equity
3.2 %
1.1
.5
—
4.8 %
125.6
43.2
19.0
.6
188.4
74
Item 8. Financial Statements and Supplementary Data
The financial statements and supplementary data have been filed as a part of this Annual Report on Form 10-K as indicated in the Index to
Consolidated Financial Statements and Financial Statement Schedules appearing on page 80 of this report.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A. Controls and Procedures
The Principal Executive Officer (“PEO”) and the Principal Financial Officer (“PFO”) of White Mountains have evaluated the effectiveness of its
disclosure controls and procedures (as defined in Rule 13a-15(e) of the Exchange Act) as of December 31, 2020. Based on that evaluation, the PEO and
PFO have concluded that White Mountains’s disclosure controls and procedures are adequate and effective.
The PEO and the PFO of White Mountains have evaluated the effectiveness of its internal control over financial reporting as of December 31, 2020.
Based on that evaluation, the PEO and PFO have concluded that White Mountains’s internal control over financial reporting is effective. Management’s
annual report on internal control over financial reporting is included on page F-65 of this report. The attestation report on the effectiveness of our internal
control over financial reporting by PricewaterhouseCoopers LLP is included on page F-66 of this report.
There has been no change in White Mountains’s internal controls over financial reporting that occurred during the fourth quarter of 2020 that has
materially affected, or is reasonably likely to materially affect White Mountains’s internal control over financial reporting.
Item 9B. Other Information
None.
75
PART III
Item 10. Directors, Executive Officers and Corporate Governance
Reported under the captions “The Board of Directors”, “Section 16(a) Beneficial Ownership Reporting Compliance” and “Corporate Governance—
Committees of the Board—Audit Committee” in the Company’s 2021 Proxy Statement, herein incorporated by reference, and under the caption “Executive
Officers of the Registrant” of this Annual Report on Form 10-K.
The Company’s Code of Business Conduct, which applies to all directors, officers and employees in carrying out their responsibilities to and on behalf
of the Company, is available at www.whitemountains.com and is also included as Exhibit 14 on the Form 10-K. The Company’s Code of Business Conduct
is also available in print free of charge to any shareholder upon request.
There have been no material changes to the procedures by which shareholders may recommend nominees to the Company’s Board of Directors. The
procedures for shareholders to nominate directors are reported under the caption “Corporate Governance—Committees of the Board—Nominating and
Governance Committee” in the Company’s 2021 Proxy Statement, herein incorporated by reference.
Item 11. Executive Compensation
Reported under the captions “Executive Compensation” and “Corporate Governance—Compensation Committee Interlocks and Insider Participation”
in the Company’s 2021 Proxy Statement, herein incorporated by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Reported under the captions “Voting Securities and Principal Holders Thereof” and “Equity Compensation Plan Information” in the Company’s 2021
Proxy Statement, herein incorporated by reference.
Item 13. Certain Relationships, Related Transactions and Director Independence
Reported under the caption “Transactions with Related Persons, Promoters and Certain Control Persons” and “Corporate Governance—Director
Independence” in the Company’s 2021 Proxy Statement, herein incorporated by reference.
Item 14. Principal Accountant Fees and Services
Reported under the caption “Principal Accountant Fees and Services” in the Company’s 2021 Proxy Statement, herein incorporated by reference.
76
PART IV
Item 15. Exhibits and Financial Statement Schedules
a. Documents Filed as Part of the Report
The financial statements and financial statement schedules and reports of independent auditors have been filed as part of this Annual Report on Form
10-K as indicated in the Index to Consolidated Financial Statements and Financial Statement Schedules appearing on page 80 of this report. A listing of
exhibits filed as part of the report appear below and on page 78 of this report.
b. Exhibits
Exhibit
Number
2.1
2.2
2.3
2.4
3.1
3.2
4
10.1
10.2
10.3
10.4
10.5
10.6
10.7
10.8
Name
Plan of Reorganization (incorporated by reference herein to the Company’s Registration Statement on S-4 (No. 333-87649) dated
September 23, 1999)
Subscription and Purchase Agreement dated October 1, 2020 by and among Ark Insurance
Holdings Limited, Bridge Holdings (Bermuda) Ltd., White Mountains Insurance Group, Ltd.
and the selling shareholders party thereto (incorporated by reference herein to Exhibit 2.1 of
the Company’s Current Report on Form 8-K dated October 1, 2020)
Management Warranty Deed dated October 1, 2020 by and among Ian Beaton, Nicholas
Bonnar, Neil Smith and Bridge Holdings (Bermuda) Ltd. (incorporated by reference herein to
Exhibit 2.2 of the Company’s Current Report on Form 8-K dated October 1, 2020)
Subscription and Purchase Agreement amended and restated on December 14, 2020 by and among Ark Insurance Holdings Limited,
Bridge Holdings (Bermuda) Ltd., White Mountains Insurance Group, Ltd. and the selling shareholders party thereto (incorporated by
reference herein to Exhibit 2.1 of the Company’s Current Report on Form 8-K dated December 15, 2020)
Memorandum of Continuance of the Company (incorporated by reference herein to Exhibit (3)(i) of the Company’s Current Report on
Form 8-K dated November 1, 1999)
Amended and Restated Bye-Laws of the Company (incorporated by reference herein to Exhibit 3 of the Company’s Report on Form 10-Q
dated May 2, 2017)
Description of White Mountains Common Shares(*)
White Mountains Long-Term Incentive Plan, as amended (incorporated by reference to Appendix A of the Company’s Notice of 2013
Annual General Meeting of Members and Proxy Statement dated April 10, 2013)
White Mountains Long-Term Incentive Plan, as amended (incorporated by reference herein to Appendix A of the Company’s Notice of
2019 Annual General Meeting of Members and Proxy Statement dated April 8, 2019)
Regulation 114 Trust Agreement by and among Build America Mutual Assurance Company, HG Re Ltd. and The Bank of New York
Mellon, dated as of July 20, 2012 (incorporated by reference herein to Exhibit 10.2 of the Company’s Report on 10-Q dated October 30,
2012)
Second Amended and Restated Surplus Note Purchase Agreement between Build America Mutual Assurance Company, as Issuer and HG
Holdings Ltd. and HG Re Ltd. as Purchasers, dated August 14, 2017 (incorporated by reference herein and filed as Exhibit 99.(d)(7) of the
Company’s Schedule TO dated April 10, 2018)
Unit Purchase Agreement, dated as of March 31, 2018, by and among NSM Acquisition Holdings, LLC, AIG Property Casualty U.S., Inc,
each management seller, NSM Insurance HoldCo, LLC, White Mountains Catskill Holdings, Inc., the Company, and ABRY Partners VIII,
L.P. (incorporated by reference herein to Exhibit 10 of the Company’s Report on Form 10-Q dated May 2, 2018)
Credit Agreement Dated as of May 11, 2018 among NSM Insurance Group, LLC, as the Borrower, NSM Insurance Holdco, LLC, as
Holdings, Ares Capital Corporation, as Administrative Agent, and the Lenders and L/C Issuers Party Hereto from Time to Time
(incorporated by reference herein to Exhibit 10 of the Company’s Report on Form10-Q dated August 7, 2018)
Second Amended and Restated Supplemental Trust Agreement by and among Build America Mutual Assurance Company, HG Re Ltd.
and The Bank of New York Mellon, dated December 4, 2018 (incorporated by reference herein to Exhibit 10.7 of the Company’s 2018
Annual Report on Form 10-K)
White Mountains Bonus Plan (incorporated by reference herein to Exhibit 10.1 of the Company’s Report on Form 10-Q dated May 6,
2019)
77
Exhibit
Number
10.9
10.10
10.11
10.12
10.13
10.14
14
21
23
24
31.1
31.2
32.1
32.2
101
Name
FIRST AMENDMENT dated as of December 3, 2018, among NSM INSURANCE GROUP, LLC, a Delaware limited liability company,
NSM INSURANCE HOLDCO, LLC, a Delaware limited liability company, the other LOAN PARTIES party hereto, ARES CAPITAL
CORPORATION, a Maryland corporation, as administrative agent, and the LENDERS party hereto (incorporated by reference herein to
Exhibit 10.2 of the Company’s Report on Form 10-Q dated May 6, 2019)
SECOND AMENDMENT dated as of April 1, 2019, among NSM INSURANCE GROUP, LLC, a Delaware limited liability company,
NSM INSURANCE HOLDCO, LLC, a Delaware limited liability company, the other LOAN PARTIES party hereto, ARES CAPITAL
CORPORATION, a Maryland corporation, as administrative agent, and the LENDERS party hereto (incorporated by reference herein to
Exhibit 10.3 of the Company’s Report on Form 10-Q dated May 6, 2019)
THIRD AMENDMENT dated as of June 28, 2019, among NSM INSURANCE GROUP, LLC, a Delaware limited liability company,
NSM INSURANCE HOLDCO, LLC, a Delaware limited liability company, the other LOAN PARTIES party hereto, ARES CAPITAL
CORPORATION, a Maryland corporation, as administrative agent, and the LENDERS party hereto (incorporated by reference herein to
Exhibit 10 of the Company’s Report on Form 10-Q dated August 6, 2019)
FOURTH AMENDMENT dated as of April 7, 2020, among NSM INSURANCE GROUP,
LLC, NSM INSURANCE HOLDCO, LLC, NSM UK HOLDINGS LTD, the other LOAN
PARTIES party thereto, ARES CAPITAL CORPORATION, as administrative agent, and the
LENDERS party thereto (incorporated by reference herein to Exhibit 10 of the Company’s Report on Form 10-Q dated May 8, 2020)
Employment Agreement and Release between White Mountains Capital LLC and J. Brian Palmer dated February 25, 2021.(*)
Employment Agreement between White Mountains Capital LLC and Frank R. Bazos dated December 16, 2020.(*)
The Company’s Code of Business Conduct, which applies to all directors, officers and employees in carrying out their responsibilities to
and on behalf of the Company (incorporated by reference herein to Exhibit 14 of the Company’s 2015 Annual Report on Form 10-K)
Subsidiaries of the Registrant (*)
Consent of PricewaterhouseCoopers LLP (*)
Powers of Attorney (*)
Principal Executive Officer Certification Pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934 (*)
Principal Financial Officer Certification Pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934 (*)
Principal Executive Officer Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002 (*)
Principal Financial Officer Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002 (*)
XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded
within the Inline XBRL document.
(*) Included herein.
c. Financial Statement Schedules and Separate Financial Statements of Subsidiaries Not Consolidated and Fifty Percent or Less Owned
Persons
The financial statement schedules and report of independent registered public accounting firm have been filed as part of this Annual Report on Form
10-K as indicated in the Index to Consolidated Financial Statements and Financial Statement Schedules appearing on page 80 of this report.
White Mountains is required to file the financial statements and the related footnotes of MediaAlpha in accordance with SEC Rule 3-09 of Regulation
S-X. White Mountains expects to file those financial statements by amendment to its Annual Report on Form 10-K/A on or before March 31, 2021.
Item 16. Form 10-K Summary.
None.
78
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Date:
February 26, 2021
WHITE MOUNTAINS INSURANCE GROUP, LTD.
By:
/s/ J. BRIAN PALMER
J. Brian Palmer
Managing Director and Chief Accounting Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the
Company and in the capacities and on the dates indicated.
Signature
/s/ REID T. CAMPBELL
Reid T. Campbell
PETER M. CARLSON*
Peter M. Carlson
MARY C. CHOKSI*
Mary C. Choksi
MORGAN W. DAVIS*
Morgan W. Davis
PHILIP A. GELSTON*
Philip A. Gelston
EDITH E. HOLIDAY*
Edith E. Holiday
/s/ J. BRIAN PALMER
J. Brian Palmer
/s/ G. MANNING ROUNTREE
G. Manning Rountree
DAVID A. TANNER*
David A. Tanner
Executive Vice President and Chief Financial Officer
(Principal Financial Officer)
Title
Director
Director
Chairman
Director
Director
Managing Director and Chief Accounting Officer
(Principal Accounting Officer)
Chief Executive Officer (Principal Executive Officer)
Director
* By:
/s/ G. MANNING ROUNTREE
G. Manning Rountree, Attorney-in-Fact
79
Date
February 26, 2021
February 26, 2021
February 26, 2021
February 26, 2021
February 26, 2021
February 26, 2021
February 26, 2021
February 26, 2021
February 26, 2021
WHITE MOUNTAINS INSURANCE GROUP, LTD.
Index to Consolidated Financial Statements and Financial Statement Schedules
Consolidated financial statements:
Consolidated balance sheets at December 31, 2020 and 2019
Consolidated statements of operations for each of the years ended
December 31, 2020, 2019 and 2018
Consolidated statements of comprehensive income for each of the years ended
December 31, 2020, 2019 and 2018
Consolidated statements of shareholders’ equity for each of the years ended
December 31, 2020, 2019 and 2018
Consolidated statements of cash flows for each of the years ended December 31, 2020, 2019 and 2018
Notes to consolidated financial statements
Other financial information:
Management’s annual report on internal control over financial reporting
Report of independent registered public accounting firm
Selected quarterly financial data (unaudited)
Financial statement schedules:
I.
Summary of investments—other than investments in related parties as of December 31, 2020
Condensed financial information of the Registrant as of December 31, 2020 and 2019 and for each
of the years ended December 31, 2020, 2019 and 2018
Supplementary insurance information as of December 31, 2020 and 2019 and for each of the years
ended December 31, 2020, 2019 and 2018
II.
III.
IV.
Reinsurance for each of the years ended December 31, 2020, 2019 and 2018
Form 10-K
Page(s)
F - 1
F - 3
F - 5
F - 6
F - 7
F - 8
F - 65
F - 66
F - 69
FS-1
FS-2
FS-5
FS-6
80
Millions, Except Share and Per Share Amounts
Assets
Financial Guarantee (HG Global/BAM)
Fixed maturity investments, at fair value
Short-term investments, at fair value
Total investments
Cash
Insurance premiums receivable
Deferred acquisition costs
Accrued investment income
Accounts receivable on unsettled investment sales
Other assets
Total Financial Guarantee assets
Specialty Insurance Distribution (NSM)
Cash (restricted $78.4, $56.3)
Premium and commission receivable
Goodwill and other intangible assets
Other assets
Total Specialty Insurance Distribution assets
Asset Management (Kudu)
Short-term investments, at fair value
Other long-term investments
Total investments
Cash
Accrued investment income
Goodwill and other intangible assets
Other assets
Total Asset Management assets
Other Operations
Fixed maturity investments, at fair value
Short-term investments, at fair value
Investment in MediaAlpha, at fair value
Common equity securities, at fair value
Other long-term investments
Total investments
Cash
Cash pre-funded/placed in escrow for Ark Transaction
Accrued investment income
Accounts receivable on unsettled investment sales
Goodwill and other intangible assets
Other assets
Assets held for sale
Total Other Operations assets
Total assets
See Notes to Consolidated Financial Statements.
CONSOLIDATED BALANCE SHEETS
December 31,
2020
2019
$
$
859.5
60.4
919.9
42.8
6.9
27.8
5.0
—
15.4
1,017.8
126.5
76.7
736.8
59.6
999.6
.1
400.6
400.7
7.8
9.8
9.2
2.7
430.2
347.7
82.4
802.2
—
386.2
1,618.5
34.1
646.3
2.4
3.4
36.4
40.4
2.3
2,383.8
4,831.4
$
$
799.3
46.3
845.6
24.2
6.7
22.1
5.4
3.9
16.1
924.0
89.7
70.8
623.0
41.7
825.2
.1
266.5
266.6
5.8
5.8
9.6
2.7
290.5
406.5
154.8
180.0
683.9
409.8
1,835.0
41.3
—
5.7
5.1
22.1
31.3
3.0
1,943.5
3,983.2
F - 1
CONSOLIDATED BALANCE SHEETS (CONTINUED)
Millions, Except Share and Per Share Amounts
Liabilities
Financial Guarantee (HG Global/BAM)
Unearned insurance premiums
Accrued incentive compensation
Other liabilities
Total Financial Guarantee liabilities
Specialty Insurance Distribution (NSM)
Debt
Premiums payable
Contingent consideration earnout liabilities
Other liabilities
Total Specialty Insurance Distribution liabilities
Asset Management (Kudu)
Debt
Other liabilities
Total Asset Management liabilities
Other Operations
Debt
Accrued incentive compensation
Other liabilities
Total Other Operations liabilities
Total liabilities
Equity
White Mountains’s common shareholders’ equity
White Mountains’s common shares at $1 par value per share—authorized 50,000,000 shares;
issued and outstanding 3,102,011 and 3,185,353 shares
Paid-in surplus
Retained earnings
Accumulated other comprehensive loss, after-tax:
Net unrealized losses from foreign currency translation and interest rate swap
Total White Mountains’s common shareholders’ equity
Non-controlling interests
Total equity
Total liabilities and equity
December 31,
2020
2019
$
$
237.5
25.7
28.3
291.5
272.6
113.4
14.6
91.2
491.8
86.3
10.0
96.3
17.5
70.1
46.3
133.9
1,013.5
3.1
592.1
3,311.2
(.4)
3,906.0
(88.1)
3,817.9
4,831.4
$
$
198.4
21.7
26.7
246.8
219.2
102.3
20.6
59.0
401.1
53.6
3.4
57.0
10.7
55.1
67.8
133.6
838.5
3.2
593.1
2,672.4
(7.2)
3,261.5
(116.8)
3,144.7
3,983.2
See Notes to Consolidated Financial Statements including Note 12 Common Shareholders’ Equity and Non-controlling Interests and Note 18 for Commitments and Contingencies.
F - 2
CONSOLIDATED STATEMENTS OF OPERATIONS
Millions
Revenues:
Financial Guarantee (HG Global/BAM)
Earned insurance premiums
Net investment income
Net realized and unrealized investment gains (losses)
Other revenues
Total Financial Guarantee revenues
Specialty Insurance Distribution (NSM)
Commission revenues
Other revenues
Total Specialty Insurance Distribution revenues
Asset Management (Kudu)
Net investment income
Net realized and unrealized investment gains
Other revenues
Total Asset Management revenues
Marketing Technology (MediaAlpha)
Advertising and commission revenues
Other revenues
Total Marketing Technology revenues
Other Operations
Net investment income
Net realized and unrealized investment (losses) gains
Net realized and unrealized investment gains from MediaAlpha
Realized gain from the 2019 MediaAlpha Transaction
Advertising and commission revenues
Other revenues
Total Other Operations revenues
Total revenues
See Notes to Consolidated Financial Statements.
F - 3
2020
Year Ended December 31,
2019
2018
$
$
22.8 $
19.5
23.7
2.5
68.5
16.3 $
21.6
27.1
1.6
66.6
232.5
52.6
285.1
29.5
15.9
.3
45.7
—
—
—
82.0
(8.8)
686.0
—
8.3
13.9
781.4
1,180.7 $
193.4
39.7
233.1
14.7
6.3
.2
21.2
48.8
—
48.8
43.4
219.8
180.0
67.5
6.9
6.1
523.7
893.4 $
13.9
16.7
(7.5)
1.2
24.3
89.6
12.0
101.6
—
—
—
—
295.5
1.6
297.1
42.3
(100.8)
—
—
4.1
.5
(53.9)
369.1
CONSOLIDATED STATEMENTS OF OPERATIONS (CONTINUED)
Millions
Expenses:
Financial Guarantee (HG Global/BAM)
Insurance acquisition expenses
Other underwriting expenses
General and administrative expenses
Total Financial Guarantee expenses
Specialty Insurance Distribution (NSM)
General and administrative expenses
Broker commission expense
Change in fair value of contingent consideration earnout liabilities
Amortization of other intangible assets
Interest expense
Total Specialty Insurance Distribution expenses
Asset Management (Kudu)
General and administrative expenses
Amortization of other intangible assets
Interest expense
Total Asset Management expenses
Marketing Technology (MediaAlpha)
Cost of sales
General and administrative expenses
Amortization of other intangible assets
Interest expense
Total Marketing Technology expenses
Other Operations
Cost of sales
General and administrative expenses
Amortization of other intangible assets
Interest expense
Total Other Operations expenses
Total expenses
Pre-tax income (loss) from continuing operations
Income tax benefit (expense)
Net income (loss) from continuing operations
(Loss) gain from sale of Sirius Group, net of tax
Net income (loss)
Net loss attributable to non-controlling interests
Net income (loss) attributable to White Mountains’s common shareholders
$
See Notes to Consolidated Financial Statements.
F - 4
2020
Year Ended December 31,
2019
2018
$
7.0 $
.4
56.4
63.8
5.7 $
.4
50.5
56.6
5.3
.4
48.0
53.7
59.4
28.4
2.7
8.3
8.0
106.8
—
—
—
—
245.0
31.7
10.3
1.2
288.2
3.7
94.4
.2
.3
98.6
547.3
(178.2)
4.0
(174.2)
(17.2)
(191.4)
50.2
(141.2)
176.9
75.3
(3.3)
26.7
22.1
297.7
11.8
.3
6.0
18.1
—
—
—
—
—
11.3
141.9
1.3
1.4
155.9
535.5
645.2
20.5
665.7
(2.3)
663.4
45.3
708.7 $
132.2
64.8
2.1
19.4
16.7
235.2
10.1
.2
.1
10.4
40.6
12.5
1.6
.2
54.9
7.5
122.5
.6
.6
131.2
488.3
405.1
(29.3)
375.8
.8
376.6
37.9
414.5 $
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Millions, except for per share amounts
Net income (loss) attributable to White Mountains’s common shareholders
Other comprehensive income (loss), net of tax
Comprehensive income (loss)
Comprehensive (income) loss attributable to non-controlling interests
Comprehensive income (loss) attributable to White Mountains’s common shareholders
Earnings (loss) per share attributable to White Mountains’s common
shareholders:
Basic earnings (loss) per share
Continuing operations
Discontinued operations
Total consolidated operations
Diluted earnings (loss) per share
Continuing operations
Discontinued operations
Total consolidated operations
Dividends declared and paid per White Mountains’s common share
See Notes to Consolidated Financial Statements.
F - 5
2020
Year Ended December 31,
2019
2018
$
$
$
$
$
$
$
708.7 $
7.3
716.0
(.5)
715.5 $
414.5 $
(1.4)
413.1
—
413.1 $
227.72 $
(.75)
226.97 $
227.72 $
(.75)
226.97 $
1.00 $
130.02 $
.25
130.27 $
130.02 $
.25
130.27 $
1.00 $
(141.2)
(4.8)
(146.0)
.3
(145.7)
(36.67)
(5.09)
(41.76)
(36.67)
(5.09)
(41.76)
1.00
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
White Mountains’s Common Shareholders’ Equity
Retained
Earnings
AOCL,
After-tax
Total
Non-controlling
Interests
Total Equity
Millions
Balances at December 31, 2017
$
Net loss
Net change in foreign currency translation and interest rate swap
Comprehensive loss
Dividends declared on common shares
Dividends to non-controlling interests
Issuances of common shares
Repurchases and retirements of common shares
Capital contributions from BAM members, net of tax
Amortization of restricted share awards
Recognition of compensation costs for equity-based
units of subsidiary
Dilution from equity units of subsidiary
Acquisition of non-controlling interests
Acquisition of subsidiary
Balances at December 31, 2018
Net income (loss)
Net change in foreign currency translation and interest rate swap
Comprehensive income (loss)
Dividends declared on common shares
Dividends to non-controlling interests
Issuances of common shares
Repurchases and retirements of common shares
Capital contributions from BAM members, net of tax
Amortization of restricted share awards
Recognition of compensation costs for equity-based
units of subsidiary
Net contributions from other
non-controlling interests
Acquisition of non-controlling interests
Deconsolidation of non-controlling interests
associated with the 2019 MediaAlpha Transaction
Balances at December 31, 2019
Net income (loss)
Net change in foreign currency translation and interest rate swap
Comprehensive income (loss)
Dividends declared on common shares
Dividends to non-controlling interests
Issuances of common shares
Repurchases and retirements of common shares
Capital contributions from BAM members, net of tax
Amortization of restricted share awards
Recognition of compensation costs for equity-based
units of subsidiary
Net contributions from other
non-controlling interests
Acquisition of non-controlling interests
Balances at December 31, 2020
$
See Notes to Consolidated Financial Statements.
Common
Shares and
Paid-in
Surplus
$
670.6
—
—
—
—
—
2.0
(105.8)
—
13.0
$
2,823.2
(141.2)
—
(141.2)
(3.8)
—
—
(413.3)
—
—
—
—
—
—
2,264.9
414.5
—
414.5
(3.2)
—
—
(3.8)
—
—
—
—
—
—
2,672.4
708.7
—
708.7
(3.2)
—
—
(66.7)
—
—
—
—
—
3,311.2
$
$
F - 6
7.4
(1.5)
—
(1.7)
584.0
—
—
—
—
—
2.2
(1.1)
—
10.6
1.5
(.9)
—
—
596.3
—
—
—
—
—
1.5
(18.5)
—
16.6
2.3
(3.0)
—
595.2
(1.3)
—
(4.5)
(4.5)
—
—
—
—
—
—
—
—
—
—
(5.8)
—
(1.4)
(1.4)
—
—
—
—
—
—
—
—
—
—
(7.2)
—
6.8
6.8
—
—
—
—
—
—
—
—
—
(.4)
$
$
3,492.5
(141.2)
(4.5)
(145.7)
(3.8)
—
2.0
(519.1)
—
13.0
7.4
(1.5)
—
(1.7)
2,843.1
414.5
(1.4)
413.1
(3.2)
—
2.2
(4.9)
—
10.6
1.5
(.9)
—
—
3,261.5
708.7
6.8
715.5
(3.2)
—
1.5
(85.2)
—
16.6
2.3
(3.0)
—
3,906.0
$
$
(131.7)
(50.2)
(.3)
(50.5)
—
(8.0)
—
—
45.0
—
4.3
1.5
14.5
—
(124.9)
(37.9)
—
(37.9)
—
(2.0)
—
—
57.6
—
—
2.4
1.8
(13.8)
(116.8)
(45.3)
.5
(44.8)
—
(2.1)
—
—
68.9
—
.1
5.3
1.3
(88.1)
$
$
3,360.8
(191.4)
(4.8)
(196.2)
(3.8)
(8.0)
2.0
(519.1)
45.0
13.0
11.7
—
14.5
(1.7)
2,718.2
376.6
(1.4)
375.2
(3.2)
(2.0)
2.2
(4.9)
57.6
10.6
1.5
1.5
1.8
(13.8)
3,144.7
663.4
7.3
670.7
(3.2)
(2.1)
1.5
(85.2)
68.9
16.6
2.4
2.3
1.3
3,817.9
CONSOLIDATED STATEMENTS OF CASH FLOWS
Millions
Cash flows from operations:
Net income (loss)
Adjustments to reconcile net income to net cash used for operations:
Net realized and unrealized investment (gains) losses
Net realized and unrealized investment gains from MediaAlpha
Realized gain from the 2019 MediaAlpha Transaction
Amortization of restricted share awards
Amortization and depreciation
Deferred income tax (benefit) expense
Net loss (gain) from sale of discontinued operations, net of tax
Other operating items:
Net change in premiums and commissions receivable
Net change in premiums payable
Net change in unearned insurance premiums
Net change in deferred acquisition costs
Net change in restricted cash
Investments in asset management firms - Kudu
Net change in other assets and liabilities, net
Net cash used for operations
Cash flows from investing activities:
Net change in short-term investments
Sales of fixed maturity investments
Maturities, calls and paydowns of fixed maturity investments
Sales of common equity securities
Distributions and redemptions of other long-term investments and settlements of forward contracts
Purchases of other long-term investments
Purchases of common equity securities
Purchases of fixed maturity and convertible investments
Purchases of consolidated subsidiaries, net of cash acquired of $13.4, $12.8, and $90.9 and including restricted cash of $8.4,
$0.0, $53.4
Cash pre-funded/placed in escrow for Ark Transaction
Other investing activities, net
Net cash provided from (used for) investing activities
Cash flows from financing activities:
Draw down of debt and revolving lines of credit
Repayment of debt and revolving lines of credit
Cash dividends paid to the Company’s common shareholders
Acquisitions of additional shares from non-controlling interest
Common shares repurchased
Repurchase of shares from non-controlling interest shareholders
Proceeds from issuance of shares to non-controlling interest shareholders
Capital contributions from non-controlling interest shareholders
Distributions to non-controlling interest shareholders
Payments to contingent considerations related to purchases of consolidated subsidiaries
Capital contributions from BAM members
Fidus Re premium payments
Other financing activities, net
Net cash provided from (used for) financing activities
Effect of exchange rate changes on cash
Net change in cash during the period - continuing operations, including the effect of exchange rate changes
Cash balance at beginning of year (includes restricted cash balances of $56.3, $50.0, $0.0)
Cash balance at end of year (includes restricted cash balances of $78.4, $56.3, $50.0)
$
See Notes to Consolidated Financial Statements.
F - 7
Year Ended December 31,
2019
2020
2018
$
663.4 $
376.6 $
(191.4)
(30.8)
(686.0)
—
16.6
43.4
(36.2)
2.3
(3.1)
1.8
39.1
(5.8)
22.1
(118.3)
30.9
(60.6)
58.7
390.0
180.4
787.9
69.9
(76.8)
(33.8)
(537.7)
(127.3)
(646.3)
(.4)
64.6
84.6
(4.5)
(3.2)
—
(78.5)
(.5)
—
2.4
(.7)
(7.0)
68.9
(3.0)
(9.5)
49.0
(2.8)
50.2
161.0
211.2 $
(253.2)
(180.0)
(67.5)
10.5
29.8
24.8
(.8)
(26.8)
25.1
35.8
(3.1)
6.3
(118.4)
20.4
(120.5)
21.9
334.3
119.3
467.2
29.4
(177.7)
(29.8)
(539.2)
(258.0)
—
(27.3)
(59.9)
206.4
(22.9)
(3.2)
—
—
(21.1)
62.7
1.9
(28.1)
(7.6)
54.6
(3.0)
(9.2)
230.5
.6
50.7
110.3
161.0 $
108.3
—
—
13.0
25.7
(8.4)
17.2
(9.6)
21.3
39.2
(4.2)
(3.4)
—
(38.8)
(31.1)
(39.0)
1,848.5
141.0
169.9
5.0
(95.9)
(328.3)
(970.2)
(295.2)
—
23.4
459.2
84.1
(15.4)
(3.8)
(1.7)
(511.9)
—
—
1.3
(6.0)
(2.6)
53.8
(3.7)
(8.4)
(414.3)
(.6)
13.2
97.1
110.3
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Basis of Presentation and Significant Accounting Policies
Basis of Presentation
The Company is an exempted Bermuda limited liability company whose principal businesses are conducted through its insurance subsidiaries and
other affiliates. The Company’s headquarters is located at 26 Reid Street, Hamilton, Bermuda HM 11, its principal executive office is located at 23 South
Main Street, Suite 3B, Hanover, New Hampshire 03755-2053 and its registered office is located at Clarendon House, 2 Church Street, Hamilton, Bermuda
HM 11.
The accompanying consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United
States (“GAAP”) and include the accounts of White Mountains Insurance Group, Ltd. (the “Company” or the “Registrant”), its subsidiaries (collectively
with the Company, “White Mountains”) and other entities required to be consolidated under GAAP.
Consolidation Principles
Under GAAP, the Company is required to consolidate any entity in which it holds a controlling financial interest. A controlling financial interest is
usually in the form of an investment representing the majority of the subsidiary’s voting interests. However, a controlling financial interest may also arise
from a financial interest in a variable interest entity (“VIE”) through arrangements that do not involve ownership of voting interests. The Company
consolidates a VIE if it determines that it is the primary beneficiary. The primary beneficiary is defined as the entity who holds a variable interest that gives
it both the power to direct the VIE’s activities that most significantly impact its economic performance and the obligation to absorb losses of, or the right to
receive returns from, the VIE that could potentially be significant to the VIE. See Note 16 — “Variable Interest Entities”.
Intercompany transactions have been eliminated in consolidation. Certain amounts in the prior period financial statements have been reclassified to
conform to the current presentation.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ from those estimates.
Reportable Segments
White Mountains has determined its reportable segments based on the nature of the underlying businesses, the manner in which the Company’s
subsidiaries and affiliates are organized and managed and the organization of the financial information provided to the chief operating decision maker to
assess performance and make decisions regarding allocation of resources. As of December 31, 2020, White Mountains’s reportable segments were HG
Global/BAM, NSM, Kudu and Other Operations. On February 26, 2019, MediaAlpha completed the sale of a significant minority stake to Insignia Capital
Group in connection with a recapitalization and cash distribution to existing equityholders (the “2019 MediaAlpha Transaction”). MediaAlpha also
repurchased a portion of the holdings of existing equityholders. White Mountains deconsolidated MediaAlpha as a result of the 2019 MediaAlpha
Transaction, and consequently it was no longer a reportable segment. White Mountains’s consolidated statement of comprehensive income and its segment
disclosures include MediaAlpha’s results of operations through the date of the 2019 MediaAlpha Transaction. See Note 2 — “Significant Transactions”
and Note 14 — “Segment Information”.
F - 8
The HG Global/BAM segment consists of HG Global Ltd. and its wholly-owned subsidiaries (“HG Global”) and the consolidated results of Build
America Mutual Assurance Company (“BAM”) (collectively, “HG Global/BAM”). BAM is the first and only mutual municipal bond insurance company in
the United States. By insuring the timely payment of principal and interest, BAM provides market access to, and lowers interest expense for, issuers of
municipal bonds used to finance essential public purpose projects, such as schools, utilities and transportation facilities. BAM is owned by and operated for
the benefit of its members, the municipalities that purchase BAM’s insurance for their debt issuances. HG Global was established to fund the startup of
BAM and, through its reinsurance subsidiary HG Re Ltd. (“HG Re”), to provide up to 15%-of-par, first loss reinsurance protection for policies
underwritten by BAM. For capital appreciation bonds, par is adjusted to the estimated equivalent par value for current interest paying bonds. HG Global,
together with its subsidiaries, funded the initial capitalization of BAM through the purchase of $503.0 million of surplus notes issued by BAM, (the “BAM
Surplus Notes”). As of December 31, 2020 and 2019, White Mountains owned 96.9% of HG Global's preferred equity and 88.4% of its common equity.
White Mountains does not have an ownership interest in BAM. However, White Mountains is required to consolidate BAM’s results in its financial
statements because BAM is a VIE for which White Mountains is the primary beneficiary. BAM’s results are attributed to non-controlling interests.
The NSM segment consists of NSM Insurance HoldCo, LLC and its subsidiaries (collectively, “NSM”). NSM is a full-service managing general
underwriting agency (“MGU”) and program administrator for specialty property and casualty insurance. The company places insurance in niche sectors
such as specialty transportation, real estate, social services and pet. On behalf of its insurance carrier partners, NSM typically manages all aspects of the
placement process, including product development, marketing, underwriting, policy issuance and claims. NSM earns commissions based on the volume
and profitability of the insurance that it places. NSM does not take insurance risk. As of December 31, 2020 and 2019, White Mountains owned 96.6% and
96.4% of the basic units outstanding of NSM (89.6% and 88.4% on a fully diluted, fully converted basis). NSM was acquired by White Mountains in 2018.
See Note 2 — “Significant Transactions".
The Kudu segment consists of Kudu Investment Management, LLC and its subsidiaries (collectively “Kudu”), a capital solutions provider for asset
management firms. Kudu provides capital solutions for boutique asset managers for a variety of purposes including generational ownership transfers,
management buyouts, acquisition and growth finance and legacy partner liquidity. Kudu also provides strategic assistance to investees from time to time.
Kudu’s capital solutions typically are structured as minority preferred equity stakes with distribution rights, typically tied to gross revenues and designed to
generate immediate strong, stable cash yields. On April 4, 2019, White Mountains acquired the ownership interests in Kudu held by certain funds managed
by Oaktree Capital Management, L.P. (“Oaktree”) for cash consideration of $81.4 million. In addition, White Mountains assumed all of Oaktree’s
unfunded capital commitments to Kudu, increasing White Mountains’s total capital commitment to $250.0 million (the “Kudu Transaction”). As a result of
the Kudu Transaction, White Mountains’s basic unit ownership of Kudu increased from 49.5% to 99.1% (42.7% to 85.4% on a fully diluted, fully
converted basis), and White Mountains began consolidating Kudu in its financial statements during the second quarter of 2019. See Note 2 — “Significant
Transactions".
The Other Operations segment consists of the Company and its wholly-owned subsidiary, White Mountains Capital, LLC, (“WM Capital”) its other
intermediate holding companies, its wholly-owned investment management subsidiary, White Mountains Advisors LLC (“WM Advisors”), investment
assets managed by WM Advisors, its interests in MediaAlpha (for periods after the 2019 MediaAlpha Transaction), PassportCard Limited (“PassportCard”)
and DavidShield Life Insurance Agency (2000) Ltd. (“DavidShield”) (collectively, “PassportCard/ DavidShield”), Elementum Holdings LP
(“Elementum”), Kudu (for periods prior to the Kudu Transaction), certain other consolidated and unconsolidated entities and certain other assets.
The MediaAlpha segment consisted of QL Holdings LLC and its wholly-owned subsidiary QuoteLab, LLC (collectively
“MediaAlpha”). MediaAlpha is a marketing technology company. It operates a transparent and efficient customer acquisition technology platform that
facilitates real-time transactions between buyers and sellers of consumer referrals (i.e., clicks, calls and leads), primarily in the property & casualty, health
and life insurance verticals. MediaAlpha generates revenue by earning a fee for each consumer referral sold on its platform. A transaction becomes payable
only on a qualifying consumer action, and is not contingent on the sale of a product to the consumer. MediaAlpha’s core verticals are property & casualty
insurance, health insurance and life insurance.
F - 9
White Mountains deconsolidated MediaAlpha as a result of the 2019 MediaAlpha Transaction and stopped reporting it as a segment. Subsequent to
the 2019 MediaAlpha Transaction, White Mountains’s non-controlling equity interest in MediaAlpha was accounted for at fair value within other long-term
investments.
On October 30, 2020, MediaAlpha completed an initial public offering (the “MediaAlpha IPO”). In the offering, White Mountains sold 3,609,894
shares and received total proceeds of $63.8 million. Following the completion of the MediaAlpha IPO, White Mountains owns 20,532,202 MediaAlpha
shares, representing a 35.0% ownership interest (32.3% on a fully-diluted, fully converted basis). Subsequent to the MediaAlpha IPO, White Mountains’s
non-controlling equity interest in MediaAlpha is accounted for at fair value based on the publicly traded share price of MediaAlpha’s common stock. As of
December 31, 2020, White Mountains presents its investment in MediaAlpha as a separate line item on the balance sheet within the Other Operations
segment. For comparability purposes, the amounts related to MediaAlpha in 2019 subsequent to the 2019 MediaAlpha Transaction have been reclassified
from other long-term investments to investment in MediaAlpha.
Discontinued Operations and Assets and Liabilities Held for Sale
White Mountains has classified its Guilford, Connecticut property, which consists of an office building that was sold in August of 2020, and adjacent
land as held for sale as of December 31, 2020 and 2019. The property has been measured at its estimated fair value, net of disposal costs. As of December
31, 2020, assets held for sale also includes a corporate aircraft. The aircraft has been measured at its carrying value of $1.7 million, which is lower than its
estimated fair value. See Note 19 — “Held for Sale and Discontinued Operations”.
Significant Accounting Policies
Cash and Restricted Cash
Cash includes amounts on hand and demand deposits with banks and other financial institutions. Amounts presented in the statement of cash flows are
shown net of balances acquired and sold in the purchase or sale of the Company’s consolidated subsidiaries.
Cash balances that are not immediately available for general corporate purposes, including fiduciary accounts held by NSM on behalf of insurance
carriers, are classified as restricted.
Short-Term Investments
Short-term investments consist of interest-bearing money market funds, certificates of deposit and other securities, which at the time of purchase,
mature or become available for use within one year. Short-term investments are carried at amortized or accreted cost, which approximated fair value as of
December 31, 2020 and 2019.
Investment Securities
As of December 31, 2020 and 2019, White Mountains’s invested assets consisted of securities and other investments held for general investment
purposes. White Mountains’s portfolio of fixed maturity investments, investment in MediaAlpha, common equity securities and other long-term
investments held for general investment purposes are generally classified as trading securities and are reported at fair value as of the balance sheet date.
Changes in net unrealized investment gains (losses) are reported pre-tax in revenues. Realized investment gains (losses) are accounted for using the specific
identification method and are reported pre-tax in revenues. Premiums and discounts on all fixed maturity investments are amortized and accreted to income
over the anticipated life of the investment.
White Mountains’s invested assets that are measured at fair value include fixed maturity investments, its investment in MediaAlpha, common equity
securities and other long-term investments, that consists primarily of unconsolidated entities, including non-controlling equity interests in the form of
revenue and earnings participation contracts (“Kudu’s Participation Contracts”), private equity funds, hedge funds, insurance-linked securities (“ILS”)
funds and private debt instruments. Whenever possible, White Mountains estimates fair value using valuation methods that maximize the use of quoted
prices and other observable inputs.
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market
participants (an exit price) at a particular measurement date. Fair value measurements are categorized into a hierarchy that distinguishes between inputs
based on market data from independent sources (“observable inputs”) and a reporting entity’s internal assumptions based upon the best information
available when external market data is limited or unavailable (“unobservable inputs”). Quoted prices in active markets for identical assets have the highest
priority (“Level 1”), followed by observable inputs other than quoted prices including prices for similar but not identical assets or liabilities (“Level 2”),
and unobservable inputs, including the reporting entity’s estimates of the assumptions that market participants would use, having the lowest priority
(“Level 3”).
F - 10
Assets and liabilities carried at fair value include substantially all of White Mountains’s investment portfolio, and derivative instruments, both
exchange-traded and over the counter instruments. Valuation of assets and liabilities measured at fair value require management to make estimates and
apply judgment to matters that may carry a significant degree of uncertainty. In determining fair value estimates, White Mountains uses a variety of
valuation approaches and inputs. Whenever possible, White Mountains estimates fair value using valuation methods that maximize the use of quoted
market prices or other observable inputs. Where appropriate, assets and liabilities measured at fair value have been adjusted for the effect of counterparty
credit risk.
White Mountains uses outside pricing services and brokers to assist in determining fair values. The outside pricing services White Mountains uses
have indicated that they will only provide prices where observable inputs are available. As of December 31, 2020, approximately 73% of the investment
portfolio recorded at fair value was priced based upon quoted market prices or other observable inputs.
Level 1 Measurements
Investments valued using Level 1 inputs include White Mountains’s investment in MediaAlpha subsequent to the MediaAlpha IPO, common equity
securities and fixed maturity investments, primarily investments in U.S. Treasuries and short-term investments, which include U.S. Treasury Bills. For
investments in active markets, White Mountains uses the quoted market prices provided by outside pricing services to determine fair value.
Level 2 Measurements
Investments valued using Level 2 inputs include fixed maturity investments which have been disaggregated into classes, including debt securities
issued by corporations, municipal obligations and mortgage and asset-backed securities. Investments valued using Level 2 inputs also include certain
passive exchange traded funds (“ETFs”) that track U.S. stock indices such as the S&P 500 Index, but are traded on foreign exchanges, which White
Mountains values using the fund manager’s published net asset value per share (“NAV”) to account for the difference in market close times.
In circumstances where quoted market prices are unavailable or are not considered reasonable, White Mountains estimates the fair value using industry
standard pricing methodologies and observable inputs such as benchmark yields, reported trades, broker-dealer quotes, issuer spreads, benchmark
securities, bids, offers, credit ratings, prepayment speeds, reference data including research publications and other relevant inputs. Given that many fixed
maturity investments do not trade on a daily basis, the outside pricing services evaluate a wide range of fixed maturity investments by regularly drawing
parallels from recent trades and quotes of comparable securities with similar features. The characteristics used to identify comparable fixed maturity
investments vary by asset type and take into account market convention.
White Mountains’s process to assess the reasonableness of the market prices obtained from the outside pricing sources covers substantially all of its
fixed maturity investments and includes, but is not limited to, the evaluation of pricing methodologies and a review of the pricing services’ quality control
procedures on at least an annual basis, a comparison of its invested asset prices obtained from alternate independent pricing vendors on at least a semi-
annual basis, monthly analytical reviews of certain prices and a review of the underlying assumptions utilized by the pricing services for select
measurements on an ad hoc basis throughout the year. White Mountains also performs back-testing of selected investment sales activity to determine
whether there are any significant differences between the market price used to value the security prior to sale and the actual sale price of the security on an
ad-hoc basis throughout the year. Prices provided by the pricing services that vary by more than $0.5 million and 5% from the expected price based on
these assessment procedures are considered outliers, as are prices that have not changed from period to period and prices that have trended unusually
compared to market conditions. In circumstances where the results of White Mountains’s review process does not appear to support the market price
provided by the pricing services, White Mountains challenges the vendor provided price. If White Mountains cannot gain satisfactory evidence to support
the challenged price, White Mountains will rely upon its own internal pricing methodologies to estimate the fair value of the security in question.
The valuation process described above is generally applicable to all of White Mountains’s fixed maturity investments. The techniques and inputs
specific to asset classes within White Mountains’s fixed maturity investments for Level 2 securities that use observable inputs are as follows:
Debt Securities Issued by Corporations:
The fair value of debt securities issued by corporations is determined from a pricing evaluation technique that uses information from market sources
and integrates relative credit information, observed market movements, and sector news. Key inputs include benchmark yields, reported trades, broker-
dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers, and reference data including sector, coupon, credit quality ratings,
duration, credit enhancements, early redemption features and market research publications.
F - 11
Municipal Obligations:
The fair value of municipal obligations is determined from a pricing evaluation technique that uses information from market makers, brokers-dealers,
buy-side firms, and analysts along with general market information. Key inputs include benchmark yields, reported trades, issuer financial statements,
material event notices and new issue data, as well as broker-dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers, and
reference data including type, coupon, credit quality ratings, duration, credit enhancements, geographic location and market research publications.
Mortgage and Asset-Backed Securities:
The fair value of mortgage and asset-backed securities is determined from a pricing evaluation technique that uses information from market sources
and leveraging similar securities. Key inputs include benchmark yields, reported trades, underlying tranche cash flow data, collateral performance, plus
new issue data, as well as broker-dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers, and reference data including issuer,
vintage, loan type, collateral attributes, prepayment speeds, default rates, recovery rates, cash flow stress testing, credit quality ratings and market research
publications.
Level 3 Measurements
Fair value estimates for investments that trade infrequently and have few or no quoted market prices or other observable inputs are classified as Level
3 measurements. Investments valued using Level 3 fair value estimates are based upon unobservable inputs and include investments in certain fixed
maturity investments, common equity securities and other long-term investments where quoted market prices or other observable inputs are unavailable or
are not considered reliable or reasonable.
Level 3 valuations are generated from techniques that use assumptions not observable in the market. These unobservable inputs reflect White
Mountains’s assumptions of what market participants would use in valuing the investment. In certain circumstances, investment securities may start out as
Level 3 when they are originally issued, but as observable inputs become available in the market, they may be reclassified to Level 2. Transfers of
securities between levels are based on investments held as of the beginning of the period.
Other Long-Term Investments
As of December 31, 2020, White Mountains owned a portfolio of other long-term investments valued at $786.8 million, that consisted primarily of
unconsolidated entities, including Kudu’s Participation Contracts, private equity funds, the Elementum managed ILS funds (the “ILS Funds”) and private
debt instruments. As of December 31, 2020, $614.2 million of White Mountains’s other long-term investments, that consisted primarily of unconsolidated
entities, including Kudu’s Participation Contracts and private debt instruments were classified as Level 3 investments in the GAAP fair value hierarchy,
were not actively traded in public markets and did not have readily observable market prices. The determination of the fair value of these securities
involves significant management judgment, and the use of valuation models and assumptions that are inherently subjective and uncertain. As of
December 31, 2020, $172.6 million of White Mountains’s other long-term investments, consisting of private equity funds and the ILS Funds, were valued
at fair value using NAV as a practical expedient. Investments for which fair value is measured at NAV using the practical expedient are not classified within
the fair value hierarchy.
White Mountains may use a variety of valuation techniques to determine fair value depending on the nature of the investment, including a discounted
cash flow analysis, market multiple approach, cost approach and/or liquidation analysis. On an ongoing basis, White Mountains also considers qualitative
changes in facts and circumstances, which may impact the valuation of unconsolidated entities, including economic and market changes in relevant
industries, changes to the entity’s capital structure, business strategy and key personnel, and any recent transactions relating to the unconsolidated entity.
On a quarterly basis, White Mountains evaluates the most recent qualitative and quantitative information of the business and completes a fair valuation
analysis for all Level 3 other long-term investments. Periodically, and at least on an annual basis, White Mountains uses a third-party valuation firm to
complete an independent valuation analysis of significant unconsolidated entities.
F - 12
Other Long-term Investments - NAV
White Mountains’s portfolio of other long-term investments includes investments in private equity funds, hedge funds and the ILS Funds. White
Mountains employs a number of procedures to assess the reasonableness of the fair value measurements for its private equity funds, hedge funds and the
ILS Funds, including obtaining and reviewing periodic and audited annual financial statements as well as discussing each fund’s pricing with the fund
manager throughout the year. However, since the fund managers do not provide sufficient information to evaluate the pricing methods and inputs for each
underlying investment, White Mountains considers the inputs to be unobservable. The fair value of White Mountains’s private equity fund, hedge fund and
ILS fund investments are generally determined using the fund manager’s NAV. In the event that White Mountains believes the fair value of a private equity
fund, hedge fund or ILS fund differs from the NAV reported by the fund manager due to illiquidity or other factors, White Mountains will adjust the
reported NAV to more appropriately represent the fair value of its investment in the private equity fund, hedge fund or ILS fund.
Derivatives
From time to time, White Mountains holds derivative financial instruments for risk management purposes. White Mountains recognizes all derivatives
as either assets or liabilities, measured at fair value, on its consolidated balance sheet. Changes in the fair value of derivative instruments that meet the
criteria for hedge accounting are recognized in other comprehensive income and reclassified into current period pre-tax income when the hedged items are
recognized therein. Changes in the fair value of derivative instruments that do not meet the criteria for hedge accounting are recognized in current period
pre-tax income.
As of December 31, 2020, White Mountains holds interest rate cap derivative instruments that do not meet the criteria for hedge accounting. As of
December 31, 2020 and 2019, White Mountains holds an interest rate swap derivative instrument that meets the criteria for hedge accounting. See Note 7
— “Derivatives”.
Receivables
BAM’s receivables consist primarily of premiums receivable from customers for municipal bond insurance policies. NSM’s receivables consist of
insurance premiums receivable from customers and commissions receivable from insurance carriers, net of a provision for amounts estimated to be
uncollectible.
Incentive Compensation
White Mountains’s Long-Term Incentive Plan (the “WTM Incentive Plan”) provides for grants of various types of share-based and non-share-based
incentive awards to key employees of White Mountains. Non-share-based awards are recognized over the related service periods based on management’s
best estimate of the amounts at which the awards are expected to be paid. Share-based compensation which is typically settled in cash, such as performance
shares, is classified as a liability-type award. The compensation cost for liability-classified awards is measured initially at the grant date fair value and
remeasured each reporting period until settlement. The compensation cost for equity-classified awards expected to be settled in shares, such as options and
restricted shares, is measured at the original grant date fair value of the award. The compensation cost for all awards is recognized for the vested portion of
the awards over the related service periods. See Note 10 — “Employee Share-Based Incentive Compensation Plans”.
Goodwill and Other Intangible Assets
Goodwill represents the excess of the amount paid to acquire subsidiaries over the fair value of identifiable net assets at the date of acquisition. Other
intangible assets consist primarily of trade names, URL and online names, customer relationships and contracts, information technology platforms and
insurance licenses.
Goodwill and other intangible assets with indefinite lives are not amortized, but rather are evaluated for impairment on an annual basis, or whenever
indications of potential impairment exist. In the absence of any indications of potential impairment, the evaluation of goodwill and indefinite-lived
intangible assets is performed no later than the interim period in which the anniversary of the acquisition date falls. White Mountains initially evaluates
goodwill using a qualitative approach (step zero) to determine whether it is more likely than not that the implied fair value of goodwill is greater than its
carrying value. If the results of the qualitative evaluation indicate that it is more likely than not that the carrying value of goodwill exceeds its implied fair
value, White Mountains performs the two-step quantitative test for impairment.
Other intangible assets with finite lives are measured at their acquisition date fair values, are amortized over their economic lives and presented net of
accumulated amortization on the balance sheet. Other intangible assets with finite lives are reviewed for impairment when events occur or there are
changes in circumstances indicating that their carrying value may exceed fair value. Impairment exists when the carrying value of other intangible assets
exceeds fair value.
F - 13
Municipal Bond Guarantee Insurance
All of the contracts issued by BAM are accounted for as insurance contracts under ASC 944-605, Financial Guarantee Insurance Contracts.
Premiums are generally received upfront and an unearned premium revenue liability, equal to the amount of the premium received, is established at
contract inception. Installment premiums are measured at the present value of contractual premiums, discounted at the risk-free rate, which is set at the
inception of the insurance contract.
Premium revenues are recognized in revenue over the period of the contracts in proportion to the amount of insurance protection provided using a
constant rate. The constant rate is calculated based on the relationship between the par outstanding in a given reporting period compared with the sum of
each of the par amounts outstanding for all periods.
Deferred acquisition costs represent commissions, premium taxes, excise taxes and other costs which are directly attributable to and vary with the
production of business. These costs are deferred and amortized to the extent they relate to successful contract acquisitions over the applicable premium
recognition period as acquisition expenses. Deferred acquisition costs are limited to the amount expected to be recovered from future earned premiums and
anticipated investment income.
BAM’s obligation for outstanding contracts consists of the unearned premium reserve and any loss reserves. Loss reserves are recorded only to the
extent that the present value of the expected amount of any losses to be paid, net of any expected recoveries, exceeds the associated unearned premium
reserve. As of December 31, 2020 and 2019, BAM did not have any loss or loss adjustment expense reserves.
Revenue Recognition
NSM’s revenues consist primarily of commissions and broker revenues for placement of insurance policies and administrative fees for claims and
other services provided to insurance carriers. Commission and broker revenues and service fees are measured based on the contractual rates with insurance
carriers, net of any amounts expected to be uncollectible and any amounts associated with expected policy cancellations, adjustments, and are recognized
when contractual performance obligations have been fulfilled. NSM’s primary contractual performance obligations are generally satisfied upon the issuance
of an insurance policy by the carrier. Where NSM has significant performance obligations beyond the policy issuance date, NSM estimates the relative
standalone selling price for the post-issuance services in order to allocate the transaction price using the price charged for the service when sold separately
in similar circumstances to similar customers. Deferred revenues associated with unsatisfied performance obligations are recognized within other liabilities.
Contingent commissions are based upon the overall profit and/or volume of the business placed with the insurance carrier during a calendar year and
are determined after the contractual period has ended. NSM recognizes revenue on contingent commissions when management has determined that it is
probable that the contingent commission requirements have been met.
Kudu’s revenues are primarily generated from non-controlling equity interests in revenue and earnings participation contracts with asset management
firms. The participation contracts are measured at fair value with the change therein recognized within unrealized investment gains and losses. Distributions
from Kudu’s clients are recognized through investment income when Kudu’s right to receive payment has been established and can be reliably measured,
which generally occurs on a quarterly basis in accordance with the terms of the underlying participation contracts.
During the period in which MediaAlpha was consolidated by White Mountains, MediaAlpha recognized advertising and publishing fee revenues based
on the contractual amount of the fees, adjusted for any amounts expected to be refunded or uncollectible, when it had satisfied its contractual performance
obligations, which was generally at the time each transaction was executed. For transactions where MediaAlpha acted as the principal, such as the Open
exchange, revenue amounts were reported gross. For transactions where MediaAlpha acted as an agent facilitating transactions between third parties,
revenue amounts were reported at the net fee billed.
Cost of Sales and Broker Commission Expense
NSM’s broker commission expense consists of commissions paid to sub-agents and brokers. Broker commission expense is measured in accordance
with contractual terms and recognized when incurred, which is generally at the policy issuance date.
MediaAlpha’s cost of sales consisted primarily of revenue sharing payments to publisher partners and traffic acquisition costs to top tier search
engines. Cost of sales were measured based on contract terms and recognized when the related revenue transactions are executed.
Other Operations’s cost of sales consists of salaries and related expenses, professional services and marketing and advertising expenses directly related
to sales generation. These expenses are recognized as incurred.
F - 14
Income Taxes
White Mountains has subsidiaries and branches that operate in various jurisdictions around the world and are subject to tax in the jurisdictions in which
they operate. As of December 31, 2020, the jurisdictions in which White Mountains’s subsidiaries and branches were subject to tax were Barbados,
Ireland, Israel, Luxembourg, the United Kingdom and the United States. Income earned or losses generated by companies outside the United States are
generally subject to an overall effective tax rate lower than that imposed by the United States.
Deferred tax assets and liabilities are recorded when a difference between the carrying amounts of assets and liabilities for financial reporting purposes
and the amounts for tax purposes exists, and for other temporary differences. The deferred tax asset or liability is recorded based on tax rates expected to be
in effect when the difference reverses. Deferred tax assets represent amounts available to reduce income taxes payable in future periods. White Mountains
records a valuation allowance against deferred tax assets if it becomes more likely than not that all or a portion of a deferred tax asset will not be realized.
Changes in valuation allowances from period to period are included in income tax expense in the period of change.
Foreign Currency Exchange
The functional currency for White Mountains’s non-U.S. based subsidiaries are measured, in most instances, using functional currencies other than the
U.S. dollar. Net foreign exchange gains and losses arising from the translation of functional currencies are generally reported in shareholders’ equity, in
accumulated other comprehensive income or loss.
White Mountains also invests in securities denominated in foreign currencies. Assets and liabilities recorded in these foreign currencies are translated
into U.S. dollars at exchange rates in effect at the balance sheet date, and revenues and expenses are converted using the weighted average exchange rates
for the period.
As of December 31, 2020 and 2019, White Mountains had unrealized foreign currency translation gains (losses) of $5.6 million and $(2.4) million
recorded in accumulated other comprehensive income (loss) on its consolidated balance sheet.
Leases
Leases consist primarily of operating leases for office space and equipment. Lease assets and liabilities are recognized at the lease commencement date
based on the present value of future minimum lease payments over the lease term. Lease assets and liabilities are not recorded for leases with a term at
inception of one year or less. Lease expense is included in operating expenses.
Non-controlling Interests
Non-controlling interests consist of the ownership interests of non-controlling shareholders in consolidated subsidiaries, and are presented separately
on the balance sheet. The portion of comprehensive income attributable to non-controlling interests is presented net of related income taxes in the statement
of operations and comprehensive income. See Note 12 — “Common Shareholders’ Equity and Non-controlling Interests”.
Recently Adopted Changes in Accounting Principles
Income Taxes
On January 1, 2020, White Mountains adopted ASU 2019-12, Simplifying the Accounting for Income Taxes (ASC 740), which removes exceptions to
standard guidance. Under the new guidance non-income-based taxes, such as franchise taxes, are reported within pre-tax income rather than being included
in income taxes. In addition, the new guidance eliminated the exception to the incremental approach for inter-period tax allocation, which previously
allowed consideration of the tax effect of items such as discontinued operations and items recognized through other comprehensive income.
For periods subsequent to the adoption of ASU 2019-12, White Mountains has recorded both the tax expense related to BAM’s member surplus
contributions (“MSC”) and the related valuation allowance on such taxes through the non-controlling interest equity. Prior to the adoption of ASU 2019-12,
White Mountains recorded the tax expense related to BAM’s MSC directly to non-controlling interest equity, while the valuation allowance on such taxes
was recorded through the income statement.
F - 15
Goodwill
On January 1, 2020, White Mountains adopted ASU 2017-04, Simplifying the Test for Goodwill Impairment (ASC 350), which changed the guidance
on goodwill impairment testing. Under the new guidance, the qualitative assessment of the recoverability of goodwill remains the same, but the second step
of the two-step qualitative test, which required calculation of the implied fair value of goodwill, has been eliminated. Instead, an impairment charge is
recognized when the carrying value of a reporting unit exceeds its fair value. Any excess of carrying value over fair value is written down as an
impairment. White Mountains did not identify any impairment indicators associated with its reporting units and therefore did not recognize an impairment
of goodwill during the year ended December 31, 2020, and accordingly, adoption of ASU 2017-04 did not have any impact on White Mountains’s financial
statements.
Credit Losses
On January 1, 2020, White Mountains adopted ASU 2016-13, Measurement of Credit Losses on Financial Instruments (ASC 326), which establishes
new guidance for the recognition of credit losses for financial assets measured at amortized cost. The new ASU requires reporting entities to estimate the
credit losses expected over the life of a credit exposure using historical information, current information and reasonable and supportable forecasts that
affect the collectability of the financial asset. White Mountains measures its portfolio of investment securities at fair value with changes therein recognized
through current period earnings and, accordingly, adoption of ASU 2016-13 did not have any impact on White Mountains’s financial statements.
Premium Amortization on Callable Debt Securities
On January 1, 2019, White Mountains adopted ASU 2017-08, Premium Amortization on Purchased Callable Debt Securities (ASC 310-20), which
changes the amortization period for certain purchased callable debt securities. Under the new guidance, for investments in callable debt securities held at a
premium, the premium is amortized over the period to the earliest call date. The new guidance does not change the amortization period for callable debt
securities held at a discount. Adoption of ASU 2017-08 did not have any impact on White Mountains’s financial statements.
Note 2. Significant Transactions
MediaAlpha
On February 26, 2019, MediaAlpha completed the 2019 MediaAlpha Transaction. White Mountains received net cash proceeds of $89.3 million from
the transaction.
White Mountains recognized a realized gain of $67.5 million and reduced its ownership interest to 48.3% of the basic units outstanding of MediaAlpha
(42.0% on a fully diluted, fully converted basis) as a result of the 2019 MediaAlpha Transaction. White Mountains’s remaining ownership interest in
MediaAlpha no longer met the criteria for a controlling ownership interest and, accordingly, White Mountains deconsolidated MediaAlpha on February 26,
2019. White Mountains’s consolidated statement of operations and comprehensive income and its segment disclosures include MediaAlpha’s results of
operations for the period from January 1, 2019 through February 26, 2019. Upon deconsolidation, White Mountains’s investment in MediaAlpha met the
criteria to be accounted for under the equity method or under the fair value option. See Note 15 — “Equity-Method Eligible Investments”. White
Mountains elected the fair value option and the investment in MediaAlpha was initially measured at its estimated fair value of $114.7 million as of the
transaction date, with the change in fair value of $114.7 million recognized as an unrealized investment gain. White Mountains recognized a total of $182.2
million of realized gain and unrealized investment gain on the 2019 MediaAlpha Transaction.
On October 30, 2020, MediaAlpha completed the MediaAlpha IPO. In the offering, White Mountains sold 3,609,894 shares and received total
proceeds of $63.8 million. White Mountains also received $55.0 million of net proceeds related to a dividend recapitalization at MediaAlpha. Following the
MediaAlpha IPO, White Mountains owns 20,532,202 MediaAlpha shares, representing a 35.0% ownership interest (32.3% on a fully-diluted, fully
converted basis). At the December 31, 2020 closing price of $39.07 per share, the value of White Mountains’s remaining investment in MediaAlpha was
$802.2 million. See Note 15 — “Equity-Method Eligible Investments”
F - 16
Ark
On October 1, 2020, White Mountains entered into a subscription and purchase agreement (the “Ark SPA”) with Ark Insurance Holdings Limited
(“Ark”) and certain selling shareholders (collectively with Ark, the “Ark Sellers”). Certain Ark Sellers also entered into a related management warranty
deed (together with the Ark SPA, the “Ark Acquisition Agreement”) pursuant to which they made certain warranties about the Ark business (collectively
the “Ark Transaction”). Under the terms of the Ark Acquisition Agreement, White Mountains agreed to contribute $605.4 million of equity capital to Ark,
at a pre-money valuation of $300.0 million, and to purchase $40.9 million of shares from the Ark Sellers. White Mountains also agreed to contribute up to
an additional $200.0 million of equity capital to Ark in 2021. In accordance with the Ark SPA, in the fourth quarter of 2020 White Mountains pre-
funded/placed in escrow a total of $646.3 million in preparation for closing the transaction, including $280.0 million funded directly to Lloyd’s on behalf of
Ark under the terms of a credit facility agreement and $366.3 million placed in escrow, which is reflected on the balance sheet within the Other Operations
segment as of December 31, 2020.
On January 1, 2021, White Mountains closed the transaction in accordance with the terms of the Ark SPA. At closing, White Mountains owned 72.0%
of Ark on a basic shares outstanding basis (63.0% on a fully-diluted, fully-converted basis, taking account of management’s equity incentives). If the
additional $200.0 million is contributed in full, White Mountains will own 77.1% of Ark on a basic shares outstanding basis (67.5% on a fully-diluted,
fully-converted basis). Management’s equity incentives are subject to an 8.0% rate of return threshold with no catch-up. The remaining shares are owned
by employees. In the future, management rollover shareholders could earn additional shares in the company if and to the extent that White Mountains
achieves certain multiple of invested capital return thresholds. These additional shares are generally eligible to vest in three equal tranches at multiple on
invested capital (“MOIC”) thresholds of 2.0x, 2.5x and 3.0x. If fully earned, these additional shares would represent 12.5% of the shares outstanding at
closing.
Ark writes a diversified and balanced portfolio of reinsurance and insurance, including property, accident & health, energy, marine and political risks,
through Lloyd’s Syndicates 4020 and 3902. Beginning in January 2021, Ark began writing certain classes of its business through Group Ark Insurance
Limited, Ark’s wholly-owned Bermuda-based insurance and reinsurance company. See Note 20 — “Subsequent Events”.
Elementum
On May 31, 2019, White Mountains acquired a 30.0% limited partnership interest in Elementum, a third-party registered investment adviser
specializing in natural catastrophe ILS, for $55.1 million (the “Elementum Transaction”). Elementum manages separate accounts and pooled investment
vehicles across various ILS sectors, including catastrophe bonds, collateralized reinsurance investments and industry loss warranties, on behalf of third-
party clients. As part of the Elementum Transaction, White Mountains also invested $50.0 million in the ILS Funds.
White Mountains has elected the fair value option for its investment in Elementum and the ILS Funds. Both the investment in Elementum and the
investments in the ILS Funds are included within other long-term investments.
NSM
On May 11, 2018, White Mountains acquired a 95.0% basic unit ownership interest in NSM (83.6% on a fully diluted, fully converted basis). White
Mountains funded the acquisition through a combination of cash on hand and new borrowings by NSM. White Mountains paid $274.2 million of cash
consideration for its equity interest in NSM, and NSM borrowed $100.0 million in new debt as part of the transaction. During the third quarter of 2018,
White Mountains recorded a purchase price adjustment of an additional $2.1 million of consideration, which was paid in the fourth quarter of 2018. White
Mountains recognized total assets acquired related to NSM of $495.2 million, including $383.0 million of goodwill and other intangible assets, total
liabilities assumed of $204.6 million, including contingent consideration earnout liabilities related to NSM’s previous acquisitions of its U.K.-based
operations, of $10.2 million, and non-controlling interest of $14.4 million reflecting acquisition date fair values. In connection with the acquisition, White
Mountains incurred transaction costs of $6.3 million in the Other Operations segment, which were expensed in 2018.
On May 18, 2018, NSM acquired 100% of Fresh Insurance Services Group Limited (“Fresh Insurance”). Fresh Insurance is an insurance broker that
offers non-standard personal lines products in the United Kingdom. NSM paid $49.6 million of upfront cash consideration for Fresh Insurance. During
2020, Fresh Insurance was rebranded as part of Kingfisher UK Holdings Ltd. NSM borrowed $51.0 million to fund the transaction. During the twelve
months ended December 31, 2019, NSM paid a purchase price adjustment of an additional $0.7 million of consideration. The purchase price is subject to
additional adjustments based upon growth in EBITDA during two earnout periods, ending in February 2020 and February 2022. No purchase price
adjustment was made related to the earnout period that ended in February 2020. NSM recognized total assets acquired related to Fresh Insurance of $72.6
million, including $54.6 million of goodwill and other intangible assets, and total liabilities assumed of $22.3 million, reflecting acquisition date fair
values. In connection with the acquisition, NSM recorded a contingent consideration earnout liability of $7.5 million.
F - 17
On December 3, 2018, NSM acquired all the net assets of KBK Insurance Group, Inc. (“KBK”), a specialized MGU focused on the towing and
transportation space. NSM paid $60.0 million of upfront cash consideration for KBK. White Mountains contributed $29.0 million and NSM borrowed
$30.1 million to fund the transaction. White Mountains recognized $59.4 million of goodwill and other intangible assets, reflecting acquisition date fair
values, for which the relative fair values of goodwill and other intangible assets had not yet been finalized as of December 31, 2018. During 2019, NSM
determined that the relative values of goodwill and other intangible assets recorded in connection with the KBK transaction were $32.6 million and $32.7
million, reflecting acquisition date fair values. The purchase price is subject to additional adjustments based upon growth in EBITDA during three earn out
periods ending in December 2019, December 2020 and December 2021. During 2019, NSM recorded a purchase price adjustment of $5.9 million relating
to the fair value of the contingent consideration earnout liability in connection with the acquisition. During 2020, NSM paid $6.4 million related to the first
KBK earnout period.
On April 1, 2019, NSM acquired 100% of Embrace Pet Insurance (“Embrace”), a nationwide provider of pet health insurance for dogs and cats. NSM
paid $71.5 million of cash consideration, net of cash acquired, for Embrace. White Mountains contributed $58.2 million to NSM and NSM borrowed $20.4
million to fund the transaction. White Mountains recognized $52.2 million of goodwill and $15.4 million of other intangible assets, reflecting acquisition
date fair values.
On June 28, 2019, NSM acquired the renewal rights on its U.S. collector car business (the “Renewal Rights”) from American International Group, Inc.
(“AIG”) for $82.5 million. The acquisition satisfied NSM’s obligation to acquire the Renewal Rights from AIG. See Note 18 — “Commitments and
Contingencies”. White Mountains contributed $59.1 million to NSM and NSM borrowed $22.5 million to fund the transaction. White Mountains
recognized $82.5 million of other intangible assets, reflecting the acquisition date fair value. See Note 4 — “Goodwill and Other Intangible Assets”.
On April 7, 2020, NSM acquired 100% of Kingsbridge Group Limited (“Kingsbridge”), a leading provider of commercial lines insurance and
consulting services for the professional contractor and freelancer markets in the United Kingdom. NSM paid £107.2 million (approximately $132.2 million
based upon the foreign exchange spot rate at the date of acquisition) of upfront cash consideration for Kingsbridge. White Mountains contributed
$80.3 million to NSM and NSM borrowed £42.5 million (approximately $52.4 million based upon the foreign exchange spot rate at the date of acquisition)
to fund the transaction. During 2020, NSM determined that the relative values of goodwill and other intangible assets recorded in connection with the
Kingsbridge transaction were $111.5 million and $20.2 million, reflecting acquisition date fair values. The purchase price is subject to adjustment based
upon growth in EBITDA during an earnout period ending in January 2022. During 2020, NSM initially recorded a liability relating to the fair value of the
Kingsbridge contingent consideration earnout of $4.1 million. During 2020, NSM recognized pre-tax income of $4.1 million for the change in fair value of
the Kingsbridge contingent consideration earnout liability and a foreign currency translation unrealized gain of $0.3 million. As of December 31, 2020, the
Kingsbridge contingent consideration earnout liability was $0.3 million.
The contingent consideration earnout liabilities related to the Fresh Insurance, KBK and Kingsbridge acquisitions are subject to adjustments based
upon EBITDA, EBITDA projections, and present value factors for acquired entities. For the year ended December 31, 2020 and 2019, NSM recognized
pre-tax (revenue) expense of $(3.3) million and $2.1 million for the change in the fair value of its contingent consideration earnout liabilities. Any future
adjustments to contingent consideration earnout liabilities under the agreements will be recognized through pre-tax income. As of December 31, 2020 and
2019, NSM recognized total contingent consideration earnout liabilities of $14.6 million and $20.6 million. During 2020, NSM
paid $7.0 million of contingent consideration earnout liabilities related to KBK and the U.K. vertical. During 2019, NSM paid $7.6 million of contingent
consideration earnout liabilities related to the U.K. vertical.
PassportCard/DavidShield
On January 24, 2018, White Mountains acquired a 50% ownership interest in DavidShield, its joint venture partner in PassportCard. DavidShield is a
managing general agency that is the leading provider of expatriate medical insurance in Israel and uses the same card-based delivery system as
PassportCard. As part of the transaction, White Mountains reorganized its equity stake in PassportCard so that White Mountains and its partner in
DavidShield would each own 50% of both businesses. To facilitate the transaction, White Mountains provided financing to its partner in the form of a non-
interest bearing loan that is secured by the partner’s equity in PassportCard and DavidShield. The gross purchase price for the 50% interest in DavidShield
was $41.8 million, or $28.3 million net of the financing provided for the restructuring.
On May 7, 2020, White Mountains made an additional $15.0 million investment in PassportCard/DavidShield to support operations through the
ongoing COVID-19 pandemic. The transaction increased White Mountains’s ownership interest from 50.0% to 53.8%, but had no impact on the
governance structure of the companies, including White Mountains’s board representation or other investor rights. The governance structures for both
PassportCard and DavidShield were designed to give White Mountains and its co-investor equal power to make the decisions that most significantly impact
the operations of PassportCard and DavidShield.
F - 18
As a result of the transaction, White Mountains’s re-evaluated its accounting treatment for PassportCard and DavidShield. Because White Mountains
does not have the unilateral power to direct the operations of PassportCard or DavidShield, White Mountains does not hold a controlling financial interest
in either PassportCard or DavidShield and does not consolidate either entity. White Mountains’s ownership interest gives White Mountains the opportunity
to exert significant influence over the significant financial and operating activities of PassportCard and DavidShield. Accordingly, PassportCard and
DavidShield meet the criteria to be accounted for under the equity method. White Mountains has taken the fair value option for its investment in
PassportCard and DavidShield. Changes in the fair value of PassportCard and DavidShield are recorded in realized and unrealized investment gains. White
Mountains’s maximum loss in PassportCard and DavidShield is limited to the amount invested
Kudu
On February 5, 2018, White Mountains entered into an agreement to fund up to $125.0 million in Kudu in exchange for a 49.5% basic unit ownership
interest in Kudu (42.7% on a fully diluted, fully converted basis). On April 4, 2019, White Mountains acquired the ownership interests in Kudu held by
certain funds managed by Oaktree for cash consideration of $81.4 million. In addition, White Mountains assumed all of Oaktree’s unfunded capital
commitments to Kudu, increasing White Mountains’s total capital commitment to $250.0 million. White Mountains recognized total assets acquired of
$155.5 million, including $7.6 million of goodwill and $2.2 million of other intangible assets, total liabilities assumed of $0.8 million and non-controlling
interest of $1.5 million.
As a result of the Kudu Transaction, White Mountains’s basic unit ownership of Kudu increased from 49.5% to 99.1% (42.7% to 85.4% on a fully
diluted, fully converted basis), and White Mountains began consolidating Kudu as a reportable segment in its financial statements during the second quarter
of 2019. White Mountains’s consolidated financial statements and its segment disclosures include Kudu’s results for the period from April 4, 2019 to
December 31, 2019. For periods prior to the Kudu Transaction, White Mountains determined that Kudu was a VIE, but White Mountains was not the
primary beneficiary. In those periods, White Mountains elected to use the fair value option.
During the fourth quarter of 2019, White Mountains increased its total capital commitment to Kudu by $100.0 million to $350.0 million of which
$47.5 million and $129.0 million is undrawn as of December 31, 2020 and 2019. Also during the fourth quarter of 2019, Kudu obtained a committed
$124.0 million credit facility, of which $34.8 million and $68.0 million was undrawn as of December 31, 2020 and 2019. See Note 5 — “Debt”.
Note 3. Investment Securities
White Mountains’s portfolio of investment securities held for general investment purposes consists of fixed maturity investments, short-term
investments, its investment in MediaAlpha, common equity securities and other long-term investments, which are classified as trading securities. Trading
securities are reported at fair value as of the balance sheet date. Net realized and unrealized investment gains (losses) on trading securities are reported in
pre-tax revenues.
White Mountains’s fixed maturity investments are generally valued using industry standard pricing methodologies. Key inputs include benchmark yields,
benchmark securities, reported trades, issuer spreads, bids, offers, credit ratings and prepayment speeds. Income on mortgage and asset-backed securities is
recognized using an effective yield based on anticipated prepayments and the estimated economic life of the securities. When actual prepayments differ
significantly from anticipated prepayments, the estimated economic life is recalculated and the remaining unamortized premium or discount is amortized
prospectively over the remaining economic life.
Realized investment gains (losses) resulting from sales of investment securities are accounted for using the specific identification method. Premiums and
discounts on all fixed maturity investments are amortized or accreted to income over the anticipated life of the investment. Short-term investments consist
of interest-bearing money market funds, certificates of deposit and other securities, which at the time of purchase, mature or become available for use
within one year. Short-term investments are carried at amortized or accreted cost, which approximated fair value as of December 31, 2020 and 2019.
Other long-term investments consist primarily of unconsolidated entities, including Kudu’s Participation Contracts, private equity funds, hedge funds,
the ILS Funds and private debt instruments.
F - 19
Net Investment Income
White Mountains’s net investment income is comprised primarily of interest income associated with White Mountains’s fixed maturity investments
and short-term investments, distributions from its investment in MediaAlpha, dividend income from common equity securities and distributions from other
long-term investments.
The following table presents pre-tax net investment income for the years ended December 31, 2020, 2019 and 2018:
Millions
(1)
Fixed maturity investments
Short-term investments
Investment in MediaAlpha
Common equity securities
Other long-term investments
Total investment income
Third-party investment expenses
Net investment income
Year Ended December 31,
2020
2019
2018
$
$
29.0
1.1
59.9
6.6
35.6
132.2
(1.2)
131.0
$
$
32.4
5.0
8.0
13.5
22.1
81.0
(1.3)
79.7
$
$
35.1
8.0
—
15.1
3.8
62.0
(3.0)
59.0
(1)
For 2018, MediaAlpha was a majority-owned consolidated subsidiary of White Mountains. See Note 2 — “Significant Transactions”
Net Realized and Unrealized Investment Gains (Losses)
The following table presents net realized and unrealized investment gains (losses) for the years ended December 31, 2020, 2019 and 2018:
Millions
Fixed maturity investments
Short-term investments
Investment in MediaAlpha
Common equity securities
Other long-term investments
(1)
(2)
Net realized and unrealized investment gains (losses)
Less: net gains (losses) on investment securities sold
during the period
Net realized and unrealized investment gains (losses)
on investment securities held at the end of the period
2020
Year Ended December 31,
2019
2018
$
$
38.5
.4
686.0
6.5
(14.6)
716.8
20.2
$
43.5
.2
180.0
195.7
13.8
433.2
24.6
$
696.6
$
408.6
$
(34.7)
(.8)
—
(98.9)
26.1
(108.3)
(33.0)
(75.3)
(1)
(2)
For 2018, MediaAlpha was a majority-owned consolidated subsidiary of White Mountains. See Note 2 — “Significant Transactions”
For 2020, 2019 and 2018, includes $4.0, $(0.3) and $(0.8) of realized and unrealized investment gains (losses) related to foreign currency exchange.
For the years ended December 31, 2020, 2019 and 2018, all of White Mountains’s net realized and unrealized investment gains (losses) were recorded
in the consolidated statements of operations. There were no investment gains (losses) recorded in other comprehensive income.
White Mountains recognized gross realized investment gains of $214.4 million, $104.0 million and $49.4 million and gross realized investment losses
of $27.3 million, $7.4 million and $62.3 million on sales of investment securities for the years ending December 31, 2020, 2019 and 2018.
The following table presents total gains included in earnings attributable to net unrealized investment gains for Level 3 investments for the years ended
December 31, 2020, 2019 and 2018 for investments still held at the end of the period:
Millions
Other long-term investments
Total net unrealized investment gains, pre-tax - Level 3 investments
(1)
2020
2019
2018
$
$
276.0
276.0
$
$
181.9
181.9
$
$
22.6
22.6
Year Ended December 31,
(1)
For 2020 and 2019, includes $278.7 and $180.0 of unrealized investment gains from White Mountains’s investment in MediaAlpha.
F - 20
Proceeds from the sales and maturities of investments, excluding short-term investments, totaled $1.4 billion, $1.0 billion and $2.2 billion for the years
ended December 31, 2020, 2019 and 2018.
Investment Holdings
The following tables present the cost or amortized cost, gross unrealized investment gains (losses) and carrying values of White Mountains’s fixed
maturity investments as of December 31, 2020 and 2019.
Millions
U.S. Government and agency obligations
Debt securities issued by corporations
Municipal obligations
Mortgage and asset-backed securities
Total fixed maturity investments
Millions
U.S. Government and agency obligations
Debt securities issued by corporations
Municipal obligations
Mortgage and asset-backed securities
Total fixed maturity investments
December 31, 2020
Cost or
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Carrying
Value
$
$
$
$
173.2
522.8
244.0
211.7
1,151.7
Cost or
Amortized
Cost
231.7
454.9
284.7
206.6
1,177.9
$
$
$
$
3.1
24.7
21.0
6.8
55.6
$
$
—
(.1)
—
—
(.1)
December 31, 2019
Gross
Unrealized
Gains
Gross
Unrealized
Losses
1.0
12.5
12.5
2.7
28.7
$
$
(.2)
(.2)
(.1)
(.3)
(.8)
$
$
$
$
176.3
547.4
265.0
218.5
1,207.2
Carrying
Value
232.5
467.2
297.1
209.0
1,205.8
The weighted average duration of White Mountains’s fixed income portfolio was approximately 3.2 years, including short-term investments, and
approximately 3.6 years, excluding short-term investments, as of December 31, 2020.
The following table presents the cost or amortized cost and carrying value of White Mountains’s fixed maturity investments by contractual maturity as
of December 31, 2020. Actual maturities could differ from contractual maturities because borrowers may have the right to call or prepay certain obligations
with or without call or prepayment penalties.
Millions
Due in one year or less
Due after one year through five years
Due after five years through ten years
Due after ten years
Mortgage and asset-backed securities
Total
December 31, 2020
Cost or Amortized Cost
126.0
417.5
283.2
113.3
211.7
1,151.7
$
$
$
$
Carrying Value
127.0
433.6
303.2
124.9
218.5
1,207.2
F - 21
The following tables present the cost or amortized cost, gross unrealized investment gains (losses), net foreign currency losses, and carrying values of
White Mountains’s investment in MediaAlpha, common equity securities and other long-term investments as of December 31, 2020 and 2019:
Millions
Investment in MediaAlpha
Common equity securities
Other long-term investments
Cost or
Amortized Cost
—
$
—
$
767.4
$
Gross Unrealized
Gains
Gross Unrealized
Losses
$
$
$
802.2
—
95.8
$
$
$
—
—
(78.1)
Net Foreign
Currency Gains
—
—
1.7
$
$
$
December 31, 2020
Millions
Investment in MediaAlpha
Common equity securities
Other long-term investments
Cost or
Amortized Cost
—
$
553.3
$
667.4
$
$
$
$
December 31, 2019
Gross Unrealized
Gains
Gross Unrealized
Losses
180.0
130.6
75.2
$
$
$
—
—
(64.1)
Net Foreign
Currency Losses
—
—
(2.2)
$
$
$
Carrying
Value
802.2
—
786.8
Carrying
Value
180.0
683.9
676.3
$
$
$
$
$
$
Fair Value Measurements as of December 31, 2020
Fair value measurements are categorized into a hierarchy that distinguishes between inputs based on market data from independent sources
(“observable inputs”) and a reporting entity’s internal assumptions based upon the best information available when external market data is limited or
unavailable (“unobservable inputs”). Quoted prices in active markets for identical assets or liabilities have the highest priority (“Level 1”), followed by
observable inputs other than quoted prices, including prices for similar but not identical assets or liabilities (“Level 2”) and unobservable inputs, including
the reporting entity’s estimates of the assumptions that market participants would use, having the lowest priority (“Level 3”). As of December 31, 2020 and
2019, White Mountains used quoted market prices or other observable inputs to determine fair value for approximately 73% and 71% of the investment
portfolio. See Note 1 — “Basis of Presentation and Significant Accounting Policies”.
F - 22
Fair Value Measurements by Level
The following tables present White Mountains’s fair value measurements for investments as of December 31, 2020 and 2019 by level. The major
security types were based on the legal form of the securities. White Mountains has disaggregated its fixed maturity investments based on the issuing entity
type, which impacts credit quality, with debt securities issued by U.S. government entities carrying minimal credit risk, while the credit and other risks
associated with other issuers, such as corporations, municipalities or entities issuing mortgage and asset-backed securities vary depending on the nature of
the issuing entity type. White Mountains further disaggregates debt securities issued by corporations and common equity securities by industry sector
because investors often reference commonly used benchmarks and their subsectors to monitor risk and performance. Accordingly, White Mountains has
further disaggregated these asset classes into subclasses based on the similar sectors and industry classifications it uses to evaluate investment risk and
performance against commonly used benchmarks, such as the Bloomberg Barclays U.S. Intermediate Aggregate and S&P 500 indices.
Millions
Fixed maturity investments:
U.S. Government and agency obligations
Debt securities issued by corporations:
Fair Value
Level 1
Level 2
Level 3
December 31, 2020
$
176.3
$
176.3
$
—
$
Financials
Consumer
Industrial
Technology
Healthcare
Communications
Energy
Materials
Utilities
Total debt securities issued by corporations
Municipal obligations
Mortgage and asset-backed securities
Total fixed maturity investments
Short-term investments
(1)
Investment in MediaAlpha
Other long-term investments
Other long-term investments — NAV
(2)
Total other long-term investments
Total investments
133.9
81.9
66.9
66.7
51.5
44.5
35.8
33.9
32.3
547.4
265.0
218.5
1,207.2
142.9
802.2
614.2
172.6
786.8
2,939.1
$
—
—
—
—
—
—
—
—
—
—
—
—
176.3
142.9
802.2
—
—
—
1,121.4
$
$
133.9
81.9
66.9
66.7
51.5
44.5
35.8
33.9
32.3
547.4
265.0
218.5
1,030.9
—
—
—
—
—
1,030.9
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
614.2
—
614.2
614.2
$
(1)
(2)
Short-term investments are measured at amortized cost, which approximates fair value.
Consists of private equity funds and the ILS Funds for which fair value is measured at NAV using the practical expedient. Investments for which fair value is measured at NAV are not
classified within the fair value hierarchy.
F - 23
Millions
Fixed maturity investments:
Fair Value
Level 1
Level 2
Level 3
December 31, 2019
U.S. Government and agency obligations
$
232.5
$
232.5
$
—
$
Debt securities issued by corporations:
Financials
Industrial
Healthcare
Consumer
Energy
Technology
Communications
Utilities
Materials
Total debt securities issued by corporations
Municipal obligations
Mortgage and asset-backed securities
Total fixed maturity investments
Short-term investments
(1)
Investment in MediaAlpha
Common equity securities:
Exchange traded funds
(2)
Other
(3)
Total common equity securities
Other long-term investments
Other long-term investments — NAV
(4)
Total other long-term investments
Total investments
144.8
59.0
52.6
50.9
44.9
41.2
31.3
25.0
17.5
467.2
297.1
209.0
1,205.8
201.2
180.0
536.4
147.5
683.9
474.0
202.3
676.3
2,947.2
$
$
—
—
—
—
—
—
—
—
—
—
—
—
232.5
189.4
—
521.6
25.9
547.5
—
—
—
969.4
144.8
59.0
52.6
50.9
44.9
41.2
31.3
25.0
17.5
467.2
297.1
209.0
973.3
11.8
—
14.8
121.5
136.3
—
—
—
1,121.4
$
$
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
180.0
—
.1
.1
474.0
—
474.0
654.1
(1)
(2)
(3)
(4)
Short-term investments are measured at amortized cost, which approximates fair value.
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.
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.
Consists of private equity funds, one hedge fund and the ILS Funds for which fair value is measured at NAV using the practical expedient. Investments for which fair value is measured at NAV
are not classified within the fair value hierarchy.
Investments Held on Deposit or as Collateral
As of December 31, 2020 and 2019, investments of $432.4 million and $319.9 million, were held in trusts required to be maintained in relation to HG
Global’s reinsurance agreements with BAM. White Mountains’s insurance subsidiaries are required to maintain deposits with certain insurance regulatory
agencies in order to maintain their insurance licenses. The fair value of such deposits, which represent state deposits and are included within the investment
portfolio, totaled $11.9 million and $9.9 million as of December 31, 2020 and 2019.
F - 24
Debt Securities Issued by Corporations
The following table presents the credit ratings of debt securities issued by corporations held in White Mountains’s investment portfolio as of
December 31, 2020 and 2019:
Millions
AAA
AA
A
BBB
BB
Debt securities issued by corporations
(1)
Fair Value at December 31,
2020
2019
10.6
57.9
318.3
159.6
1.0
547.4
$
$
9.5
73.9
288.5
95.3
—
467.2
$
$
(1)
Credit ratings are based upon issuer credit ratings provided by Standard & Poor’s Financial Services LLC (“Standard & Poor’s”), or if unrated by
Standard & Poor’s, long-term obligation ratings provided by Moody’s Investor Service, Inc.
Mortgage and Asset-backed Securities
The following table presents the fair value of White Mountains’s mortgage and asset-backed securities as of December 31, 2020 and 2019:
Millions
Mortgage-backed securities:
Agency:
FNMA
FHLMC
GNMA
Total agency
(1)
Total mortgage-backed securities
Other asset-backed securities:
Credit card receivables
Vehicle receivables
Total other asset-backed securities
Total mortgage and asset-backed
securities
Fair Value
December 31, 2020
Level 2
Level 3
Fair Value
December 31, 2019
Level 2
Level 3
$
$
88.7
70.1
40.6
199.4
199.4
11.3
7.8
19.1
$
88.7
70.1
40.6
199.4
199.4
11.3
7.8
19.1
$
—
—
—
—
—
—
—
—
$
$
88.6
60.5
30.8
179.9
179.9
14.0
15.1
29.1
88.6
60.5
30.8
179.9
179.9
14.0
15.1
29.1
$
218.5
$
218.5
$
—
$
209.0
$
209.0
$
—
—
—
—
—
—
—
—
—
(1)
Represents publicly traded mortgage-backed securities which carry the full faith and credit guaranty of the U.S. Government (i.e., GNMA) or are guaranteed
by a government sponsored entity (i.e., FNMA, FHLMC).
Investment in MediaAlpha
On February 26, 2019, in connection with the 2019 MediaAlpha Transaction, MediaAlpha was deconsolidated and was subsequently accounted for at
fair value within other long-term investments.
On October 30, 2020, MediaAlpha completed the MediaAlpha IPO. In the offering, White Mountains sold 3,609,894 shares and received total
proceeds of $63.8 million. Following the MediaAlpha IPO, White Mountains owns 20,532,202 MediaAlpha shares, representing a 35.0% ownership
interest (32.3% on a fully-diluted, fully converted basis). At the December 31, 2020 closing price of $39.07 per share, the value of White Mountains’s
remaining investment in MediaAlpha was $802.2 million. Subsequent to the MediaAlpha IPO, White Mountains’s investment in MediaAlpha is accounted
for at fair value based on the publicly traded share price of MediaAlpha’s common stock and White Mountains presents its investment in MediaAlpha as a
separate line item on the balance sheet. For comparability purposes, the amounts related to MediaAlpha in 2019 subsequent to the 2019 MediaAlpha
Transaction have been reclassified from other long-term investments to the investment in MediaAlpha.
F - 25
Other Long-Term Investments
The following table presents the carrying values of White Mountains’s other long-term investments as of December 31, 2020 and 2019:
Millions
Kudu’s Participation Contracts
PassportCard/DavidShield
Elementum Holdings L.P.
Other unconsolidated entities
Total unconsolidated entities
(1)
(2)
Private equity funds and hedge funds
Insurance-linked securities funds
Private debt investments
(2) (3)
Total other long-term investments
Carrying Value at
December 31, 2020
December 31, 2019
400.6
95.0
55.1
42.4
593.1
121.2
51.4
21.1
786.8
$
$
266.5
90.0
55.1
33.7
445.3
161.1
41.2
28.7
676.3
$
$
(1)
(2)
(3)
Includes White Mountains’s non-controlling equity interests in certain private common equity securities, limited liability companies and convertible preferred securities and Simple
Agreement for Future Equity (“SAFE”) investments.
See Fair Value Measurements by Level table.
Includes $5.8 and $5.0 in private debt investments carried at fair value as of December 31. 2020 and amortized cost as of December 31, 2019.
Private Equity Funds and Hedge Funds
White Mountains invests in private equity funds and hedge funds, which are included in other long-term investments. The fair value of these
investments is generally estimated using the net asset value (“NAV”) of the funds. As of December 31, 2020, White Mountains held investments in
fourteen private equity funds. The largest investment in a single private equity
fund or hedge fund was $29.1 million as of December 31, 2020 and $54.6 million as of December 31, 2019. In the first quarter of 2020, White Mountains
redeemed its sole hedge fund having a fair value of $45.6 million. The bulk of the redemption proceeds, subject to customary audit holdbacks, were
received in April 2020 and the remaining balance is expected to be received in April 2021.
The following table presents investments and unfunded commitments in private equity funds and hedge funds by investment objective and sector as of
December 31, 2020 and 2019:
Millions
Private equity funds
Aerospace/Defense/Government
Manufacturing/Industrial
Financial services
Total private equity funds
Hedge funds
Long/short banks and financial
Total hedge funds
December 31, 2020
December 31, 2019
Fair Value
Unfunded
Commitments
Fair Value
Unfunded
Commitments
$
$
69.1
28.6
23.5
121.2
—
—
$
15.3
—
30.4
45.7
—
—
$
33.8
57.7
15.0
106.5
54.6
54.6
23.3
4.1
22.8
50.2
—
—
50.2
Total private equity funds and hedge funds
included in other long-term investments
$
121.2
$
45.7
$
161.1
$
F - 26
Investments in private equity funds are generally subject to a lock-up period during which investors may not request a redemption. Distributions prior
to the expected termination date of the fund may be limited to dividends or proceeds arising from the liquidation of the fund’s underlying investments. In
addition, certain private equity funds have the option to extend the lock-up period.
The following table presents investments in private equity funds that were subject to lock-up periods as of December 31, 2020:
Millions
Private equity funds —
expected lock-up period
remaining
1 – 3 years
3 – 5 years
5 – 10 years
>10 years
Total
$
8.0
$
40.7
$
64.7
$
7.8
$
121.2
Investors in private equity funds are generally subject to indemnification obligations outside of the capital commitment period and prior to the winding
up of the fund. As of December 31, 2020 and 2019, White Mountains is not aware of any indemnification claims relating to its investments in private
equity funds.
Redemption of investments in most hedge funds is subject to restrictions, including lock-up periods where no redemptions or withdrawals are allowed,
restrictions on redemption frequency and advance notice periods for redemptions. Amounts requested for redemptions remain subject to market
fluctuations until the redemption effective date, which generally falls at the end of the defined redemption period.
Insurance-Linked Securities Funds
White Mountains’s other long-term investments include the ILS Funds. The fair value of these investments is generally estimated using the NAV of the
funds. As of December 31, 2020, White Mountains held investments in four ILS Funds with a fair value of $51.4 million.
Investments in the ILS Funds are generally subject to restrictions, including lock-up periods where no redemptions or withdrawals are allowed, non-
renewal clauses, restrictions on redemption frequency and advance notice periods for redemptions. From time to time, natural catastrophe, liquidity, market
or other events will occur that make the determination of fair value for underlying investments in ILS Funds less certain due to the potential for loss
development. In such circumstances, the impacted investments may be subject to additional lock-up provisions.
The ILS Funds are typically subject to monthly and annual restrictions on redemptions and advance redemption notice period requirements that range
between 30 and 90 days. Amounts requested for redemption remain subject to market fluctuations until the redemption effective date, which generally falls
at the end of the defined redemption period.
One of the ILS Funds requires shareholders to provide advance redemption notice on or before September 15 of each calendar year. Amounts
requested for redemption in this fund remain subject to market fluctuation until the underlying investment has fully matured or been commuted, which may
be up to a period of three years from the start of each calendar year.
F - 27
Rollforward of Fair Value Measurements by Level
White Mountains uses quoted market prices where available as the inputs to estimate fair value for its investments in active markets. Such
measurements are considered to be either Level 1 or Level 2 measurements, depending on whether the quoted market price inputs are for identical
securities (Level 1) or similar securities (Level 2). Level 3 measurements for fixed maturity investments, common equity securities and other long-term
investments as of December 31, 2020 and 2019 consist of securities for which the estimated fair value has not been determined based upon quoted market
price inputs for identical or similar securities.
The following tables present the changes in White Mountains’s fair value measurements by level for the years ended December 31, 2020 and 2019:
Millions
Balance at December 31, 2019
Net realized and unrealized gains
Amortization/accretion
Purchases
Sales
Effect of MediaAlpha IPO
Transfers in
Transfers out
Balance at December 31, 2020
(4)
Level 3 Investments
Level 1
Investments
Level 2
Investments
Common
Equity
Securities
Other Long-term
Investments and
Investment in MediaAlpha
pre-IPO
Other Long-term
Investments
Measured at NAV
(1)
$
$
780.0 $
436.4
(.1)
133.9
(830.4)
458.7
—
—
978.5 $
1,109.6 $
15.9
(4.4)
437.6
(527.8)
—
—
—
1,030.9 $
.1 $
—
—
—
(.1)
—
—
—
— $
654.0 $
275.6
—
151.5
(8.2)
(458.7)
—
—
614.2 $
202.3 $
(11.5)
—
43.6
(61.8)
—
—
—
172.6 $
Total
2,746.0
716.4
(4.5)
766.6
(1,428.3)
—
—
—
2,796.2
(2)
(3)
(2)
(1)
Includes private equity funds, hedge funds and the ILS Funds for which fair value is measured at NAV using the practical expedient are no longer classified within the fair value hierarchy. See
Note 1 — “Basis of Presentation and Significant Accounting Policies”.
Excludes carrying value of $142.9 and $201.2 as of December 31, 2020 and 2019 classified as short-term investments.
(2)
(3)
(4)
Excludes realized and unrealized losses associated with short-term investments of $0.4 for the year ended December 31, 2020.
Represents the reclassification of White Mountains’s investment in MediaAlpha from a level 3 measurement to a level 1 measurement in connection with the MediaAlpha IPO. See Note 2 -
“Significant Transactions”.
Level 3 Investments
Millions
Balance at December 31, 2018
Net realized and unrealized gains
Amortization/accretion
Purchases
Sales
Effect of Kudu Transaction
Transfers in
Transfers out
Balance at December 31, 2019
Level 1
Investments
Level 2
Investments
Common
Equity
Securities
Other Long- term
Investments and
Investment in MediaAlpha
Other Long-term
Investments
Measured at NAV
(1)
$
$
842.6 $
163.0
.2
165.3
(391.1)
—
—
—
780.0 $
1,160.5 $
76.1
(1.8)
404.5
(529.7)
—
—
—
1,109.6 $
— $
—
—
.1
—
—
—
—
.1 $
138.7 $
181.2
—
185.4
—
141.8
10.9
(4.0)
654.0 $
186.9 $
12.7
—
110.8
(29.5)
(71.7)
4.0
(10.9)
202.3 $
Total
2,328.7
433.0
(1.6)
866.1
(950.3)
70.1
14.9
(14.9)
2,746.0
(2)
(3)
(2)
(1)
(2)
(3)
(4)
Includes private equity funds, hedge funds and the ILS Funds for which fair value is measured at NAV using the practical expedient are no longer classified within the fair value hierarchy. See
Note 1 — “Basis of Presentation and Significant Accounting Policies”.
Excludes carrying value of $201.2 and $214.2 as of December 31, 2019 and 2018 classified as short-term investments.
Includes $114.7 unrealized investment gain associated with the 2019 MediaAlpha Transaction. See Note 2 — “Significant Transactions”.
Excludes realized and unrealized losses associated with short-term investments of $0.2 for the year ended December 31, 2019.
F - 28
Fair Value Measurements — Transfers Between Levels - For Years Ended December 31, 2020 and 2019
Transfers between levels are generally recorded using the fair value measurement as of the end of the quarterly period in which the event or change in
circumstance giving rise to the transfer occurred.
During 2020 and 2019, there were no fixed maturity investments or other long-term investments classified as Level 3 measurements in the prior period
that were transferred to Level 2 measurements.
During 2020 and 2019, there were no fixed maturity investments or other long-term investments classified as Level 2 measurements in the prior period
that were transferred to Level 3 measurements.
During 2020, in connection with the MediaAlpha IPO, White Mountains’s investment in MediaAlpha was reclassified from a Level 3 measurement to
a Level 1 measurement.
Significant Unobservable Inputs
The following tables present significant unobservable inputs used in estimating the fair value of White Mountains’s investment in MediaAlpha and
other long-term investments, other than private equity funds, hedge funds and the ILS Funds, classified within Level 3 as of December 31, 2020 and 2019.
The fair value of investments in private equity funds, hedge funds and the ILS Funds are generally estimated using the NAV of the funds.
$ in Millions
Description
Valuation Technique(s)
(1)
Fair Value
(2)
Unobservable Inputs
December 31, 2020
Discount Rate
(4)
(3)
Terminal Cash Flow
Exit Multiple (x) or Terminal
(4)
Revenue Growth Rate (%)
Kudu’s Participation Contracts
(5)
Discounted cash flow
$400.6
18% - 23%
7x - 12x
PassportCard/DavidShield
(6)
Elementum Holdings, L.P.
Private debt instruments
All other
New Market Solutions, LLC
Noblr, Inc.
Discounted cash flow
Discounted cash flow
Discounted cash flow
Discounted cash flow
Recent transaction
Recent transaction
Zillion Insurance Services, Inc.
(7)
Recent transaction
$95.0
$55.1
$17.1
$18.8
$9.9
$8.7
$5.0
23%
17%
4% - 8%
20% - 24%
Transaction
price:
Transaction
price:
Transaction
price:
4%
4%
N/A
4%
$9.9
$8.7
$5.0
(1)
(2)
(3)
(4)
(5)
(6)
(7)
Key inputs to the discounted cash flow analysis generally include projections of future revenue and earnings, discount rates and terminal exit multiples or growth rates.
Includes the net unrealized investment gains (losses) associated with foreign currency; foreign currency effects based on observable inputs.
Since Kudu’s Participation Contracts are not subject to corporate taxes within Kudu Investment Management, LLC, pre-tax discount rates are applied to pre-tax cash flows in determining fair
values.
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 2020, Kudu deployed a total of $118.2 in new Kudu Participation Contracts, including Creation Investments Capital, Sequoia Financial Group, Channel Capital and Ranger Investment
Management.
In 2020, White Mountains made an additional $15.0 investment in PassportCard/DavidShield. See Note 2 - “Significant Transactions”.
In 2020, White Mountains made an additional $2.5 investment in Zillion Insurance Services, Inc.
F - 29
$ in Millions
Description
Valuation Technique(s)
(1)
Fair Value
(2)
Unobservable Inputs
December 31, 2019
Kudu’s Participation Contracts
(4)
Discounted cash flow
Investment in MediaAlpha
PassportCard/DavidShield
Elementum Holdings, L.P.
(5)
Private debt instruments
All other
Noblr, Inc.
Zillion Insurance Services, Inc.
(6)
Compare.com
Discounted cash flow
Discounted cash flow
Discounted cash flow
Discounted cash flow
Discounted cash flow
Recent transaction
Recent transaction
Estimated net realizable value
$266.5
$180.0
$90.0
$55.1
$23.7
$23.7
$5.0
$2.5
$2.5
Discount Rate
15% - 22%
(3)
Terminal Cash Flow Exit
Multiple (x) or Terminal
Revenue Growth Rate (%)
6x - 12x
(3)
15%
22%
20%
4% - 9%
25% - 32%
Transaction price:
Transaction price:
Net realizable value:
4%
4%
4%
N/A
4%
$5.0
$2.5
$2.5
(1)
(2)
(3)
(4)
(5)
(6)
Key inputs to the discounted cash flow analysis generally include projections of future revenue and earnings, discount rates and terminal exit multiples or growth rates.
Includes the net unrealized investment gains (losses) associated with foreign currency; foreign currency effects based on observable inputs.
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 2019, Kudu deployed a total of $198.0 in new Kudu Participation Contracts, including Fair Oaks Capital, Versus Capital Advisors, First Long Island Investors, EJF Capital, Warwick Capital
Partners and Pennybacker Capital Management.
In 2019, White Mountains made a $55.1 investment in Elementum Holdings, L.P. See Note 2 - “Significant Transactions”.
In 2019, White Mountains made a $2.5 investment in Zillion Insurance Services, Inc.
F - 30
$ in Millions
Goodwill:
(1)(2)
NSM
Kudu
Other Operations
Total goodwill
Other intangible
assets:
NSM
Customer
relationships
Trade names
Information
technology
platform
(1)(2)
Renewal rights
Other
Subtotal
Kudu
Trade names
Other Operations
Trade names
Customer
relationships
Information
technology
platform
Insurance
licenses
Other
N/A
N/A
N/A
8.9
16
0
12
3.4
7
9.6
10.7
5
N/A
5.4
Note 4. Goodwill and Other Intangible Assets
White Mountains accounts for business combinations using the acquisition method. Under the acquisition method, White Mountains recognizes and
measures the assets acquired, liabilities assumed and any non-controlling interest in the acquired entities at their acquisition date fair values. The estimated
acquisition date fair values, generally consisting of intangible assets and liabilities for contingent consideration, may be recorded at provisional amounts in
circumstances where the information necessary to complete the acquisition accounting is not available at the reporting date. Any such provisional amounts
are finalized as measurement period adjustments within one year of the acquisition date.
The following table presents the economic lives, acquisition date fair values, accumulated amortization and net carrying values for other intangible
assets and goodwill, by company as of December 31, 2020 and 2019:
Weighted
Average
Economic
Life
(in years)
December 31, 2020
December 31, 2019
Acquisition
Date Fair
Value
Accumulated
Amortization
Impairments
Net
Carrying
Value
Acquisition
Date Fair
Value
Accumulated
Amortization
Impairments
Net
Carrying
Value
$
$
506.4
7.6
11.5
525.5
$
—
—
—
—
$
—
—
—
—
$
506.4
7.6
11.5
525.5
$
381.6
7.6
13.1
402.3
$
—
—
—
—
— $
—
7.6
7.6
381.6
7.6
5.5
394.7
136.2
65.4
3.1
82.5
1.7
288.9
2.2
3.6
14.2
—
8.6
.3
26.7
317.8
36.7
8.3
1.4
4.9
1.0
52.3
.6
.3
1.4
—
—
.1
1.8
54.7
$
843.3
$
54.7
$
3.5
1.0
1.7
—
—
6.2
—
—
—
—
—
—
6.2
6.2
96.0
56.1
—
77.6
.7
230.4
1.6
3.3
12.8
—
8.6
.2
24.9
256.9
782.4
(28.1)
121.7
61.9
3.9
82.5
1.7
271.7
2.2
1.7
7.2
.5
8.6
.2
18.2
292.1
19.8
5.3
1.4
.7
.7
27.9
.2
.5
.4
.3
—
—
1.2
29.3
1.4
.4
.6
—
—
2.4
—
.2
—
.2
—
—
.4
2.8
$
694.4
$
29.3
$
10.4
100.5
56.2
1.9
81.8
1.0
241.4
2.0
1.0
6.8
—
8.6
.2
16.6
260.0
656.7
(23.4)
$
754.3
$
631.3
Subtotal
Total other intangible assets
Total goodwill and other
intangible assets
Goodwill and other intangible assets attributed to non-controlling interests
Goodwill and other intangible assets included in White Mountains’s common
shareholders’ equity
(1)
(2)
During 2020, NSM’s goodwill and intangible assets includes $13.4 and $1.6 of the effect of foreign currency translation. During 2019, NSM’s goodwill and intangible assets includes $1.8 and
$0.7 of the effect of foreign currency translation.
The attribution of acquisition date fair value estimates between goodwill and other intangible assets for Kingsbridge was completed during 2020.The attribution of acquisition date fair value
estimates between goodwill and other intangible assets for KBK was completed during 2019.
The goodwill recognized for the entities shown above is attributed to expected future cash flows. The acquisition date fair values of other intangible
assets with finite lives are estimated using income approach techniques, which use future expected cash flows to develop a discounted present value
amount.
F - 31
The multi-period-excess-earnings method estimates fair value using the present value of the incremental after-tax cash flows attributable solely to the
other intangible asset over its remaining life. This approach was used to estimate the fair value of other intangible assets associated with trade names,
customer relationships and contracts and information technology.
The relief-from-royalty method was used to estimate fair value for other intangible assets that relate to rights that could be obtained via a license from
a third-party owner. Under this method, the fair value is estimated using the present value of license fees avoided by owning rather than leasing the asset.
This technique was used to estimate the fair value of domain names, certain trademarks and brand names.
The with-or-without method estimates the fair value of an other intangible asset that provides an incremental benefit. Under this method, the fair value
of the other intangible asset is calculated by comparing the value of the entity with and without the other intangible asset. This approach was used to
estimate the fair value of favorable lease terms.
The following table presents a summary of the acquisition date fair values of goodwill and other intangible assets for acquisitions completed during
2020 and 2019:
$ in Millions
(2)
Acquisition of Subsidiary/ Asset
Embrace
Renewal Rights
Kingsbridge
(3)
Total NSM segment
Kudu Transaction
Other Operations
Goodwill and
Other Intangible Assets
(1)
67.6
82.5
131.7
281.8
9.8
38.1
$
$
$
$
Acquisition Date
April 1, 2019
June 28, 2019
April 7, 2020
April 4, 2019
Various
(1)
(2)
(3)
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.
Excludes $3.4 of software classified within other assets.
NSM’s purchase of the Renewal Rights from AIG was an asset acquisition.
On at least an annual basis beginning no later than the interim period included in the one-year anniversary of an acquisition, White Mountains
evaluates goodwill for potential impairment.
During 2020, White Mountains recognized impairments of other intangible assets of $6.2 million related to Fresh Insurance. The impairments related
to lower premium volumes, including due to the impact of the COVID-19 pandemic, and certain reorganization initiatives at Fresh Insurance. During 2020,
White Mountains performed its periodic reviews for potential impairment, including a quantitative review of the goodwill associated with NSM. During
2019, White Mountains recognized an impairment of other intangible assets of $2.4 million related to Fresh Insurance and impairments of goodwill and
other intangible assets of $7.6 million and $0.4 million, respectively, related to Other Operations. During 2020 and 2019, White Mountains concluded that
there was no impairment of the goodwill associated with NSM. During 2018, there were no impairments of goodwill and other intangible assets.
Impairment charges are presented within general and administrative expenses for the segments affected on the statement of operations.
F - 32
The following table presents the change in goodwill and other intangible assets:
Millions
Beginning balance
Acquisitions of businesses
Acquisition of collector car renewal
rights
Dispositions of businesses
(1)
(2)
Attribution of acquisition date fair value
estimates between goodwill and other
intangible assets
(3)
Impairments
Measurement period adjustments
Foreign currency translation
Amortization
(5)
(4)
Ending balance
$
2020
Other
Intangible
Assets
Goodwill
$
394.7 $
140.0
260.0
—
December 31,
2019
Total Goodwill
and Other
Intangible Assets
654.7
$
140.0
Other
Intangible
Assets
Total Goodwill
and Other
Intangible
Assets
Goodwill
$
$
379.9
64.8
$
157.6
34.6
—
—
(23.2)
—
.6
13.4
—
525.5 $
—
—
23.2
(6.2)
6.6
1.6
(28.3)
256.9
$
—
—
—
(6.2)
7.2
15.0
(28.3)
782.4
$
—
(18.3)
(26.8)
(7.6)
.9
1.8
—
394.7
$
82.5
(23.5)
26.8
(2.8)
5.9
.7
(21.8)
260.0
$
537.5
99.4
82.5
(41.8)
—
(10.4)
6.8
2.5
(21.8)
654.7
(1)
(2)
During 2020, amounts include acquisitions of Kingsbridge and Other Operations. During 2019, amounts include acquisitions related to Kudu, Other Operations and Embrace.
Dispositions relate to the 2019 MediaAlpha Transaction. See Note 2 — “Significant Transactions”.
(3)
The determination of the relative fair values of goodwill and other intangible assets recognized in connection with the acquisition of Kingsbridge and Other Operations were completed in
2020. The determination of the relative fair values of goodwill and other intangible assets recognized in connection with the acquisition of KBK was completed in 2019.
In 2020, impairments relate to NSM’s UK vertical. In 2019, impairments of $7.6 and $0.4 of goodwill and other intangible assets relate to Other Operations and $2.4 of impairments to
other intangible assets relate to NSM’s UK vertical.
Measurement period adjustments relate to updated information about acquisition date fair values of assets acquired and liabilities assumed. During 2020, adjustments primarily relate to
contingent considerations of $4.1 in connection with the acquisition of Kingsbridge. During 2019, $5.9 in connection with the acquisition of KBK.
(4)
(5)
Amortization expense was $28.3 million, $21.8 million and $18.8 million for the years ended December 31, 2020, 2019 and 2018.
White Mountains expects to recognize amortization expense in each of the next five years as the following table presents:
Millions
2021
2022
2023
2024
2025 and years
after
Total
(1)
$
$
Amortization Expense
36.3
35.2
34.1
28.6
114.1
248.3
(1)
Excludes indefinite-lived intangible assets of $8.6.
F - 33
Note 5. Debt
The following table presents White Mountains’s debt outstanding as of December 31, 2020 and 2019:
$ in Millions
NSM Bank Facility
Unamortized issuance cost
NSM Bank Facility, carrying value
Other NSM debt
Kudu Bank Facility
Unamortized issuance cost
Kudu Bank Facility, carrying value
Other Operations debt
Unamortized issuance cost
Other Operations debt, carrying value
Total debt
December 31,
Effective
December 31,
2020
277.4
(6.1)
271.3
1.3
89.2
(2.9)
86.3
18.0
(.5)
17.5
376.4
$
$
Rate
7.5%
(1)
$
2.5%
8.3%
7.4%
$
2019
221.3
(3.9)
217.4
1.8
57.0
(3.4)
53.6
11.1
(.4)
10.7
283.5
Effective
(1)
Rate
7.5%
(1)
3.0%
8.3%
8.3 %
(1)
Effective rate includes the effect of the amortization of debt issuance costs and excludes the effect of the interest rate swap on the hedged portion of the debt. The weighted average interest
rate for the years ended December 31, 2020 and 2019, excluding the effect of the amortization of debt issuance costs, was 7.0% and 7.0%. The weighted average interest rate for the years
ended December 31, 2020 and 2019 on the total NSM Bank Facility including both the effect of the amortization of debt issuance costs and the effect of the interest rate swap was 8.4%
and 8.1%.
The following table presents a schedule of contractual repayments of White Mountains’s debt as of December 31, 2020:
Millions
Due in one year or less
Due in two to three years
Due in four to five years
Due after five years
Total
December 31, 2020
4.5
12.2
106.0
263.3
386.0
$
$
NSM Bank Facility
On April 7, 2020, NSM amended its secured credit facility (the “NSM Bank Facility”) with Ares Capital Corporation in connection with the
acquisition of Kingsbridge. Under the amendment, the total commitment increased from $234.0 million, comprised of term loans of $224.0 million and a
revolving credit loan of $10.0 million, to $291.4 million, comprised of term loans of $276.4 million, including £42.5 million (approximately $52.4 million
based upon the foreign exchange spot rate as of the date of the transaction) in a GBP term loan, and a revolving credit loan commitment of $15.0 million.
The term loans under the NSM Bank Facility mature on May 11, 2026, and the revolving loan matures on November 11, 2025.
Under GAAP, if the terms of a debt instrument are amended, unless there is greater than 10% change in the expected discounted future cash flows of
such instrument, the instrument’s carrying value does not change. White Mountains has determined that the impact of the changes to the terms of the NSM
Bank Facility on the expected discounted future cash flows was less than 10%.
F - 34
Interest on the NSM Bank Facility accrues at a floating interest rate equal to the three-month LIBOR plus an applicable margin. In connection with the
amendment, the reference rates for USD denominated borrowings increased. The USD-LIBOR rate floor increased to 1.25% and the margin over USD-
LIBOR increased from a range of 4.25% to 4.75% to a range of 5.50% to 6.00%. For GBP denominated borrowings, the GBP-LIBOR rate floor is 1.25%
and the margin over GBP-LIBOR ranges from 6.00% to 6.50%. The margins over the reference interest rates vary within the range depending on the
consolidated total leverage ratio of NSM.
The following table presents the change in debt under the NSM Bank Facility for the years ended December 31, 2020 and 2019:
Millions
NSM Bank Facility
Beginning balance
Term loans
(1)
Borrowings
Repayments
Foreign currency translation
Revolving credit loan
Borrowings
Repayments
Ending balance
Year Ended December 31,
2020
2019
221.3 $
52.4
(2.0)
5.7
—
—
277.4 $
180.4
42.9
(2.0)
—
6.5
(6.5)
221.3
$
$
(1)
Borrowings for the year ended December 31, 2020 included $52.4 for the funding of the acquisition of Kingsbridge. Borrowings for the year
ended December 31, 2019 included $20.4 and $22.5 for the funding of the acquisitions of Embrace and the Renewal Rights.
As of December 31, 2020, the term loans had an outstanding balance of $277.4 million, including £42.5 million (approximately $58.1 million based
upon the foreign exchange spot rate as of December 31, 2020) in a GBP term loan, and the revolving credit loan was undrawn.
On June 15, 2018, NSM entered into an interest rate swap agreement to hedge its exposure to interest rate risk on $151.0 million of its USD
denominated variable rate term loans.
As of December 31, 2020, $147.6 million of the outstanding term loans were hedged by the swap and $129.8 million of the outstanding term loans
were unhedged. For the twelve months ended December 31, 2020, the weighted average effective interest rate on the outstanding term loans that were
hedged, including the effect of the amortization of debt issuance costs and the effect of the interest rate swap, was 9.0%, and the weighted average effective
interest rate on the outstanding term loans that were unhedged, including the effect of the amortization of debt issuance costs, was 7.6%. For the twelve
months ended December 31, 2020, the weighted average interest rate on the total NSM Bank Facility, including the effect of the amortization of debt
issuance costs and the effect of the interest rate swap, was 8.4%.
The NSM Bank Facility is secured by all property of the loan parties and contains various affirmative, negative and financial covenants that White
Mountains considers to be customary for such borrowings, including a maximum consolidated total leverage ratio covenant.
Other NSM Debt
NSM also has a secured term loan related to its U.K. vertical. As of December 31, 2020, the secured term loan had an outstanding balance of
$1.3 million and a maturity date of December 31, 2022.
F - 35
Kudu Bank Facility
On December 23, 2019, Kudu entered into a secured credit facility (the “Kudu Bank Facility”) with Monroe Capital Management Advisors, LLC to
provide funding for distributions to unitholders and fund new investments and related transaction expenses. As of December 31, 2020, the Kudu Bank
Facility has a maximum borrowing capacity of $124.0 million, which is comprised of a revolving credit loan commitment of $5.0 million, an initial term
loan of $57.0 million and a delayed-draw term loan of $62.0 million. The term loans and revolving credit loans, under the Kudu Bank Facility, mature in
2025. During 2020, Kudu borrowed $32.2 million in term loans under the Kudu Bank Facility and made no repayments. During 2019, Kudu borrowed
$57.0 million in term loans under the Kudu Bank Facility and made no repayments. As of December 31, 2020, the term loans had an outstanding balance of
$89.2 million and the revolving credit loan was undrawn.
Interest on the Kudu Bank Facility accrues at a floating interest rate equal to the greater of the one-month USD-LIBOR and 1.0% or the Prime Rate
plus 1.0%, plus in each case, an applicable margin. The margin over USD-LIBOR may vary between 5.50% and 6.25% and the margin over the base rate
may vary between 4.50% and 5.25%, depending on the consolidated total leverage ratio of the borrower.
The Kudu Bank Facility is secured by all property of the loan parties and contains various affirmative, negative and financial covenants that White
Mountains considers to be customary for such borrowings, including a maximum consolidated total leverage ratio covenant.
Other Operations Debt
As of December 31, 2020, debt in White Mountains’s Other Operations segment consisted of two secured credit facilities. The first credit facility has a
maximum borrowing capacity of $16.3 million, which is comprised of a term loan of $11.3 million, a delayed-draw term loan of $3.0 million and a
revolving credit loan commitment of $2.0 million, all with a maturity date of March 12, 2024. During 2020, White Mountains’s Other Operations segment
made no borrowings and made repayments of $2.0 million on the term loans under the first credit facility. During 2019, the first credit facility had no
borrowings and made repayments of $0.2 million on the term loans. As of December 31, 2020, the term loans had an outstanding balance of $9.1 million
and the revolving credit loan was undrawn. The second credit facility has a maximum borrowing capacity of $15.0 million, which is comprised of a term
loan of $9.0 million, a delayed-draw term loan of $4.0 million and a revolving credit loan commitment of $2.0 million, all with a maturity date of July 2,
2025. During 2020, White Mountains’s Other Operations segment had no borrowings and made repayments of $0.1 million on the term loans under the
second credit facility. As of December 31, 2020, the term loans had an outstanding balance of $8.9 million and the revolving credit loan was undrawn.
Compliance
As of December 31, 2020, White Mountains was in compliance in all material respects with all of the covenants under all of its debt facilities.
Interest
Total interest expense incurred by White Mountains for its indebtedness was $29.5 million, $17.6 million and $9.5 million for the periods ended
December 31, 2020, 2019 and 2018. Total interest paid by White Mountains for its indebtedness was $27.0 million, $16.3 million, and $8.8 million for the
twelve months ended December 31, 2020, 2019 and 2018.
F - 36
Note 6. Income Taxes
The Company and its Bermuda-domiciled subsidiaries are not subject to Bermuda income tax under current Bermuda law. In the event there is a
change in the current law such that taxes are imposed, the Company and its Bermuda-domiciled subsidiaries would be exempt from such tax until
March 31, 2035, pursuant to the Bermuda Exempted Undertakings Tax Protection Act of 1966. The Company has subsidiaries and branches that operate in
various other jurisdictions around the world and are subject to tax in the jurisdictions in which they operate. As of December 31, 2020, the jurisdictions in
which the Company’s subsidiaries and branches were subject to tax were Barbados, Ireland, Israel, Luxembourg, the United Kingdom and the United
States.
The following table presents the total income tax (expense) benefit for the years ended December 31, 2020, 2019 and 2018:
$
Millions
Current income tax (expense):
U.S. federal
State
Non-U.S.
Total current income tax (expense)
Deferred income tax benefit (expense):
U.S. federal
State
Non-U.S.
Total deferred income tax benefit
(expense)
Total income tax benefit (expense)
$
Year Ended December 31,
2019
2020
2018
(10.4)
(4.2)
(1.1)
(15.7)
23.2
10.3
2.7
36.2
20.5
$
$
.9
(3.7)
(1.7)
(4.5)
(14.9)
(10.4)
.5
(24.8)
(29.3)
$
$
(.1)
(1.4)
(2.9)
(4.4)
8.3
—
.1
8.4
4.0
Effective Rate Reconciliation
The following table presents a reconciliation of taxes calculated for 2020, 2019 and 2018 using the 21% U.S. federal statutory rate U.S. federal
statutory rate (the tax rate at which the majority of White Mountains’s worldwide operations are taxed) to the income tax (expense) benefit on pre-tax
income (loss):
Millions
Tax (expense) benefit at the U.S. statutory rate
Differences in taxes resulting from:
Reorganization
Non-U.S. earnings, net of foreign taxes
Change in valuation allowance
State taxes
Withholding tax
Member’s surplus contributions
Tax rate changes
Tax reserve adjustments
Officer compensation
Tax exempt interest and dividends
Other, net
Total income tax benefit (expense) on pre-tax income
(loss)
Year Ended December 31,
2019
2020
2018
$
(135.5)
$
(85.1)
$
37.4
130.5
78.4
(29.2)
(8.5)
(5.0)
(4.8)
2.7
1.9
(1.1)
.8
(9.7)
—
27.1
63.6
(17.5)
(1.6)
(3.6)
(5.7)
(.7)
—
1.1
(6.9)
$
20.5
$
(29.3)
$
—
(2.9)
(31.0)
4.0
(2.7)
(2.6)
1.7
(.8)
—
.6
.3
4.0
The non-U.S. component of pre-tax income (loss) was $327.8 million, $100.4 million and $(30.1) million for the years ended December 31, 2020,
2019 and 2018. The reorganization benefit resulted from the release of a deferred tax liability following an internal reorganization completed in connection
with the MediaAlpha IPO.
Tax Payments and Receipts
Net income tax payments (primarily to the United States) totaled $16.2 million, $3.7 million, and $3.5 million for the years ended December 31, 2020,
2019 and 2018.
F - 37
Deferred Tax Assets and Liabilities
Deferred taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes
and the amounts for tax purposes.
The following table presents an outline of the significant components of White Mountains’s U.S. federal, state and non-U.S. deferred tax assets and
liabilities:
Millions
Deferred tax assets related to:
U.S. federal and state net operating and capital
loss carryforwards
Non-U.S. net operating loss carryforwards
Incentive compensation
Accrued interest
Deferred acquisition costs
Tax credit carryforwards
Other items
Total gross deferred tax assets
Less: valuation allowances
Total net deferred tax assets
Deferred tax liabilities related to:
Member’s surplus contributions
Investment basis difference
Purchase accounting
Net unrealized investment gains
Other items
Total deferred tax liabilities
Net deferred tax (liability)
December 31,
2020
2019
$
$
79.6
50.5
17.5
7.9
5.5
5.5
1.3
167.8
97.4
70.4
52.9
11.8
5.1
.3
2.8
72.9
(2.5)
$
$
92.3
41.7
15.0
5.1
4.3
4.2
3.4
166.0
77.9
88.1
43.2
6.6
3.1
66.3
1.5
120.7
(32.6)
White Mountains’s deferred tax (liabilities) assets are net of U.S. federal, state and non-U.S. valuation allowances and, to the extent they relate to non-
U.S. jurisdictions, they are shown at year-end exchange rates.
Valuation Allowance
White Mountains records a valuation allowance against deferred tax assets if it becomes more likely than not that all or a portion of a deferred tax asset
will not be realized. Changes in valuation allowances from period to period are included in income tax expense in the period of change. In determining
whether or not a valuation allowance, or change therein, is warranted, White Mountains considers factors such as prior earnings history, expected future
earnings, carryback and carryforward periods and strategies that if executed would result in the realization of a deferred tax asset. It is possible that certain
planning strategies or projected earnings in certain subsidiaries may not be sufficient to utilize the entire deferred tax asset, which could result in material
changes to White Mountains’s deferred tax assets and tax expense.
Of the $97.4 million valuation allowance as of December 31, 2020, $46.5 million related to deferred tax assets on net operating losses in U.S.
subsidiaries and other federal and state deferred tax benefits, $26.8 million related to deferred tax assets on net operating losses and net investment
unrealized gains and losses in Luxembourg subsidiaries, $20.0 million related to net operating losses and other deferred tax benefits in Israeli subsidiaries
and $4.1 million related to net operating losses and other deferred tax benefits in U.K. subsidiaries. Of the $77.9 million valuation allowance as of
December 31, 2019, $34.9 million related to deferred tax assets on net operating losses in U.S. subsidiaries and other federal and state deferred tax benefits,
$22.6 million related to deferred tax assets on net operating losses and net investment unrealized gains and losses in Luxembourg subsidiaries, $17.3
million related to net operating losses in Israeli subsidiaries and $3.1 million related to net operating losses and other deferred tax benefits in U.K.
subsidiaries.
F - 38
United States
In 2020, White Mountains recorded income tax expense of $14.9 million to establish a full valuation allowance on the deferred tax assets of WM
Lincoln, Inc. and subsidiaries (“WM Lincoln”) as White Mountains management is unsure they will generate sufficient taxable income to utilize the
deferred tax assets. WM Lincoln includes WM Lafayette Holdings, Inc., WM Capital, WM Advisors and certain other entities and investments that are
included in the Other Operations segment.
During 2019, White Mountains recorded income tax benefit of $63.2 million to release a valuation allowance against deferred tax assets of Guilford
Holdings, Inc. and subsidiaries (“Guilford”), which included Kudu, White Mountains’s investment in MediaAlpha, WM Capital, WM Advisors and certain
other entities and investments that are included in the Other Operations segment. Guilford recorded the tax benefit in 2019 due to a release of the full
valuation allowance from 2018.
During 2020 and 2019, White Mountains recorded income tax expense (benefit) of $4.5 million and $(4.5) million to reflect the increase and decrease
of the valuation allowance on net deferred tax assets of BAM. In the first quarter of 2020, White Mountains adopted ASU 2019-12, simplifying the
Accounting for Income Taxes (ASC 740) (“ASU 2019-12”). For periods subsequent to the adoption of ASU 2019-12, White Mountains records both the
tax expense related to BAM’s MSC and the related changes in valuation allowance on such taxes directly through non-controlling interest equity. Prior to
the adoption of ASU 2019-12, White Mountains recorded the tax expense related to BAM’s MSC to non-controlling interest equity, while the change in
valuation allowance on such taxes was recorded through the income statement. During 2020 and 2019, BAM had income included in equity due to MSC
that was available to offset its loss from continuing operations. In 2019, BAM recorded an income tax benefit related to MSC of $10.5 million in
continuing operations, with an offsetting tax expense in paid-in surplus. In 2020, based on the adoption of ASU 2019-12, BAM recorded both the income
tax benefit on MSC of $9.7 million and the offsetting expense in paid-in surplus. During 2020 and 2019, BAM continued to have a full valuation allowance
recorded against its net deferred tax assets, as White Mountains management is unsure it will generate sufficient taxable income to utilize the deferred tax
assets.
During 2020 and 2019, White Mountains recorded income tax expense of $1.9 million and $0.1 million to establish a valuation allowance against a
deferred tax asset related to foreign tax credits at White Mountains Catskill Holdings, Inc., as White Mountains management is unsure it will generate
sufficient taxable income to utilize the deferred tax asset.
Non-U.S. Jurisdictions
During 2020 and 2019, White Mountains recorded income tax expense of $4.2 million and $1.1 million to establish a valuation allowance against most
of the deferred tax assets which primarily relate to losses on the write-down of foreign subsidiaries and the unrealized losses on investments held in
Luxembourg-domiciled subsidiaries.
During 2020 and 2019, White Mountains recorded income tax expense of $2.7 million and $1.6 million to establish a full valuation allowance against
deferred tax assets at certain Israel-domiciled subsidiaries, as White Mountains management does not currently anticipate sufficient taxable income to
utilize the deferred tax assets.
During 2020 and 2019, White Mountains recorded income tax expense of $1.0 million and $1.3 million to establish a full valuation allowance against
deferred tax assets at certain U.K. subsidiaries, as White Mountains management does not currently anticipate sufficient taxable income to utilize the
deferred tax assets.
Net Operating Loss and Capital Loss Carryforwards
The following table presents net operating loss and capital loss carryforwards as of December 31, 2020, the expiration dates and the deferred tax assets
thereon:
Millions
2020-2024
2025-2029
2030-2039
No expiration date
Total
United States
—
$
—
250.7
118.4
369.1
$
Luxembourg
—
$
—
73.2
31.0
104.2
$
December 31, 2020
United Kingdom
—
$
—
—
25.9
25.9
$
Gross deferred tax
asset
Valuation allowance
Net deferred tax asset
$
$
77.5
(66.8)
10.7
$
$
26.0
(25.9)
.1
$
$
4.9
(3.3)
1.6
Israel
Total
—
—
—
85.2
85.2
19.6
(19.6)
—
$
$
$
$
—
—
323.9
260.5
584.4
128.0
(115.6)
12.4
$
$
$
$
As of December 31, 2020, there are U.S. foreign tax credit carryforwards available of $5.5 million, which begin to expire in 2028.
F - 39
Uncertain Tax Positions
Recognition of the benefit of a given tax position is based upon whether a company determines that it is more likely than not that a tax position will be
sustained upon examination based upon the technical merits of the position. In evaluating the more-likely-than-not recognition threshold, White Mountains
must presume that the tax position will be subject to examination by a taxing authority with full knowledge of all relevant information. If the recognition
threshold is met, then the tax position is measured at the largest amount of benefit that is more than 50% likely of being realized upon ultimate settlement.
The following table presents a reconciliation of the beginning and ending amount of unrecognized tax benefits from 2018 to 2020:
Millions
Balance at December 31, 2017
Changes in prior year tax positions
Balance at December 31, 2018
Changes in prior year tax positions
Balance at December 31, 2019
Changes in prior year tax positions
Tax positions taken during the current year
Reorganization
Balance at December 31, 2020
Permanent
Differences
(1)
Temporary
Differences
(2)
Interest and
(3)
Penalties
Total
$
$
.3 $
.8
1.1
1.3
2.4
.1
.1
(2.6)
— $
— $
—
—
—
—
—
—
—
— $
— $
—
—
—
—
—
—
—
— $
.3
.8
1.1
1.3
2.4
.1
.1
(2.6)
—
(1)
(2)
(3)
Represents the amount of unrecognized tax benefits that, if recognized, would impact the effective tax rate.
Represents the amount of unrecognized tax benefits that, if recognized, would create a temporary difference between the reported amount of an item in White Mountains’s
Consolidated Balance Sheet and its tax basis.
Net of tax benefit.
White Mountains classifies all interest and penalties on unrecognized tax benefits as part of income tax expense. During the years ended December 31,
2020, 2019 and 2018, White Mountains did not recognize any net interest (income) expense. There was no accrued interest as of December 31, 2020 and
2019.
Tax Examinations
With few exceptions, White Mountains is no longer subject to U.S. federal, state, or non-U.S. income tax examinations by tax authorities for years
before 2015.
F - 40
Note 7. Derivatives
NSM Interest Rate Swap
On June 15, 2018, NSM entered into an interest rate swap agreement to hedge its exposure to interest rate risk on $151.0 million of its USD
denominated variable rate term loans under the NSM Bank Facility. Under the terms of the swap agreement, NSM pays a fixed-rate of 2.97% and receives
a variable rate, which is reset monthly, based on the then-current USD-LIBOR. As of December 31, 2020, the variable rate received by NSM under the
swap agreement was 1.00%. Over the term of the swap, the notional amount decreases in accordance with the principal repayments NSM expects to make
on its term loans.
As of December 31, 2020, $147.6 million of the outstanding term loans were hedged by the swap. For the twelve months ended December 31, 2020,
the weighted average effective interest rate on the outstanding term loans that were hedged, including the effect of the amortization of debt issuance costs
and the effect of the interest rate swap, was 9.0%.
NSM’s obligations under the swap are secured by the same collateral securing the NSM Bank Facility on a pari passu basis. NSM does not currently
hold any collateral deposits from or provide any collateral deposits to the swap counterparty.
NSM evaluated the effectiveness of the swap to hedge its interest rate risk associated with its variable rate debt and concluded at the swap inception
date that the swap was highly effective in hedging that risk. NSM evaluates the effectiveness of the hedging relationship on an ongoing basis.
For the twelve months ended December 31, 2020 and 2019, White Mountains recognized net interest expense of $2.5 million and $1.1 million for the
periodic net settlement payments on the swap. As of December 31, 2020 and December 31, 2019, the estimated fair value of the swap and the accrual of the
periodic net settlement payments recorded in other liabilities was $8.2 million and $6.6 million. There was no ineffectiveness in the hedge for the years
ended December 31, 2020 and December 31, 2019. For the twelve months ended December 31, 2020 and 2019, the $(1.6) million and $(3.9) million
change in the fair value of the swap is included within White Mountains’s accumulated other comprehensive income (loss).
NSM Interest Rate Cap
On June 4, 2020, NSM entered into an interest rate cap agreement to limit its exposure to the risk of interest rate increases on the GBP denominated
term loan under the NSM Bank Facility. The notional amount of the interest rate cap is £42.5 million (approximately $52.4 million based upon the foreign
exchange spot rate as of the date of the transaction) and the termination date is June 4, 2022. On August 18, 2020, NSM entered into a separate interest rate
cap agreement to extend the term of the original interest rate cap agreement by one year. The second interest rate cap agreement has an effective date of
June 15, 2022 and a termination date of June 15, 2023.
NSM paid total initial premiums of approximately $0.1 million for the interest rate caps. Under the terms of the interest rate cap agreements, if the
current GBP-LIBOR at the measurement date exceeds 1.25%, NSM will receive payments from the counterparty equal to the then-current GBP-LIBOR
rate, less the 1.25% cap rate. As of December 31, 2020, the GBP-LIBOR rate was 0.03%.
NSM accounts for the interest rate caps as derivatives at fair value, with changes in fair value recognized in current period earnings within interest
expense. For the twelve months ended December 31, 2020, White Mountains recognized a change in fair value of $(0.1) million on the interest rate caps
within interest expense. As of December 31, 2020, the estimated fair value of the caps recorded in other assets was less than $0.1 million.
F - 41
Note 8. Municipal Bond Guarantee Insurance
HG Global was established to fund the startup of BAM, a newly formed mutual municipal bond insurer, and, through HG Re, to provide up to 15%-of-
par, first loss reinsurance protection for policies underwritten by BAM. At inception in 2012, HG Global was capitalized with $594.5 million from White
Mountains and $14.5 million from non-controlling interests. HG Global, together with its subsidiaries, provided the initial capitalization of BAM through
the purchase of $503.0 million of BAM Surplus Notes. As of December 31, 2020, White Mountains owned 96.9% of HG Global’s preferred equity and
88.4% of its common equity.
Reinsurance Treaties
FLRT
BAM is a party to a first loss reinsurance treaty (“FLRT”) with HG Re under which HG Re provides first loss protection up to 15%-of-par outstanding
on each municipal bond insured by BAM. For capital appreciation bonds, par is adjusted to the estimated equivalent par value for current interest paying
bonds. In return, BAM cedes up to 60% of the risk premium charged for insuring the municipal bond, which is net of a ceding commission. The FLRT is a
perpetual agreement, with an initial term through the end of 2022.
Fidus Re
In addition to the FLRT, BAM is party to a collateralized financial guarantee excess of loss reinsurance agreement that serves to increase BAM’s
claims paying resources and is provided by Fidus Re, Ltd. (“Fidus Re”), a Bermuda based special purpose insurer created in 2018 solely to provide
reinsurance protection to BAM. Fidus Re was capitalized by the issuance of $100.0 million of insurance linked securities. The proceeds from issuance were
placed in a collateral trust supporting Fidus Re’s obligations to BAM. The insurance linked securities were issued by Fidus Re with an initial term of 12
years and are callable five years after the date of issuance. Fidus Re reinsures 90% of aggregate losses exceeding $165.0 million on a portion of BAM’s
financial guarantee portfolio (the “Covered Portfolio”) up to a total reimbursement of $100.0 million. The Fidus Re agreement does not provide coverage
for losses in excess of $276.1 million. The Covered Portfolio consists of approximately 42% of BAM’s portfolio of financial guaranty policies issued
through December 31, 2020. The agreement is accounted for using deposit accounting and any related financing expenses are recorded in general and
administrative expenses as the agreement does not meet the risk transfer requirements necessary to be accounted for as reinsurance.
XOLT
In January 2020, BAM entered into an excess of loss reinsurance agreement (the “XOLT”) with HG Re. Under the XOLT, HG Re provides last dollar
protection for exposures on municipal bonds insured by BAM in excess of NYDFS single issuer limits. The XOLT is subject to an aggregate limit equal to
the lesser of $75.0 million or the assets held in the Supplemental Trust at any point in time. The agreement is accounted for using deposit accounting and
any related financing expenses are recorded in general and administrative expenses as the agreement does not meet the risk transfer requirements necessary
to be accounted for as reinsurance.
Collateral Trusts
HG Re’s obligations under the FLRT are limited to the assets in two collateral trusts: a Regulation 114 Trust and a supplemental collateral trust (the
“Supplemental Trust” and together with the Regulation 114 Trust, the “Collateral Trusts”). Losses required to be reimbursed under the FLRT are subject to
an aggregate limit equal to the assets held in the Collateral Trusts at any point in time.
At inception, the Supplemental Trust contained the original $300.0 million of Series B Notes and $100.0 million of cash and fixed income securities.
During 2017, in order to further support BAM’s long-term capital position and business prospects, HG Global agreed to contribute the original $203.0
million of Series A Notes into the Supplemental Trust. In connection with the contribution, the Series A Notes were merged into the Series B Notes.
On a monthly basis, BAM deposits cash equal to ceded premiums, net of ceding commissions, due to HG Re under the FLRT directly into the
Regulation 114 Trust. The Regulation 114 Trust target balance is equal to gross ceded unearned premiums and unpaid ceded loss and LAE expenses, if
any. If, at the end of any quarter, the Regulation 114 Trust balance is below the target balance, funds will be withdrawn from the Supplemental Trust and
deposited into the Regulation 114 Trust in an amount equal to the shortfall. If, at the end of any quarter, the Regulation 114 Trust balance is above 102% of
the target balance, funds will be withdrawn from the Regulation 114 Trust and deposited into the Supplemental Trust. The Regulation 114 Trust balance as
of December 31, 2020 and 2019 was $222.8 million and $190.3 million.
F - 42
The Supplemental Trust target balance is $603.0 million, less the amount of cash and securities in the Regulation 114 Trust in excess of its target
balance (the “Supplemental Trust Target Balance”). If, at the end of any quarter, the Supplemental Trust balance exceeds the Supplemental Trust Target
Balance, such excess may be distributed to HG Re. The distribution will be made first as an assignment of accrued interest on the BAM Surplus Notes and
second in cash and/or fixed income securities. As the BAM Surplus Notes are repaid over time, the BAM Surplus Notes will be replaced in the
Supplemental Trust by cash and fixed income securities. The Supplemental Trust balance as of December 31, 2020 and 2019 was $604.3 million and
$596.4 million.
As of December 31, 2020 and 2019, the Collateral Trusts held assets of $827.1 million and $786.7 million, which included $434.5 million and
$321.6 million of cash and investments, $388.2 million and $457.6 million of BAM Surplus Notes and $4.4 million and $7.5 million of interest receivable
on the BAM Surplus Notes.
BAM Surplus Notes
Through 2024, the interest rate on the BAM Surplus Notes is a variable rate equal to the one-year U.S. Treasury rate plus 300 basis points, set
annually. During 2021, the interest rate on the BAM Surplus Notes will be 3.1%. Beginning in 2025, the interest rate will be fixed at the higher of the then
current variable rate or 8.0%. BAM is required to seek regulatory approval to pay interest and principal on the BAM Surplus Notes only to the extent that
its remaining qualified statutory capital and other capital resources continue to support its outstanding obligations, its business plan and its “AA/stable”
rating from Standard & Poor’s. No payment of principal or interest on the BAM Surplus Notes may be made without the approval of the NYDFS.
Under GAAP, if the terms of a debt instrument are amended, unless there is greater than a 10% change in the expected discounted future cash flows of
such instrument, the instrument’s carrying value does not change. White Mountains has determined that the impact of the changes to the terms of the BAM
Surplus Notes on the expected discounted future cash flows was less than 10%.
In December 2020, BAM made a $30.1 million cash payment of principal and interest on the BAM Surplus Notes held by HG Global. Of this
payment, $21.5 million was a repayment of principal held in the Supplemental Trust, $0.2 million was a payment of accrued interest held inside the
Supplemental Trust and $8.4 million was a payment of accrued interest held outside the Supplemental Trust.
In January 2020, BAM made a one-time $65 million cash payment of principal and interest on the BAM Surplus Notes held by HG Global. Of this
payment, $47.9 million was a repayment of principal held in the Supplemental Trust, $0.9 million was a payment of accrued interest held inside the
Supplemental Trust and $16.2 million was a payment of accrued interest held outside the Supplemental Trust.
In December 2019, BAM made a $32.0 million cash payment (which included a one-time $10.0 million cash payment) of principal and interest on the
BAM Surplus Notes held by HG Global. Of this payment, $23.7 million was a repayment of principal held in the Supplemental Trust, $0.3 million was a
payment of accrued interest held in the Supplemental Trust and $8.0 million was a payment of accrued interest held outside the Supplemental Trust.
As of December 31, 2020 and 2019, total interest receivable on the BAM Surplus Notes was $155.7 million and $162.7 million.
Insured Obligations and Premiums
The following table presents a schedule of BAM’s insured obligations as of December 31, 2020 and 2019:
December 31, 2020
December 31, 2019
Contracts outstanding
Remaining weighted average contract period (in
years)
Contractual debt service outstanding (in millions):
Principal
Interest and capital appreciation
Total debt service outstanding
Gross unearned insurance premiums
$
$
$
10,997
10.7
75,287.7
36,448.8
111,736.5
237.5
$
$
$
8,987
10.7
62,250.5
31,799.7
94,050.2
198.4
F - 43
The following table presents a schedule of BAM’s future premium revenues as of December 31, 2020:
Millions
December 31, 2020
January 1, 2021 - March 31, 2021
April 1, 2021 - June 30, 2021
July 1, 2021 - September 30, 2021
October 1, 2021 - December 31, 2021
$
2022
2023
2024
2025
2026 and thereafter
Total gross unearned insurance premiums
$
5.6
5.5
5.5
5.4
22.0
20.9
19.8
18.3
17.0
139.5
237.5
The following table presents a schedule of written premiums and earned premiums included in White Mountains’s HG Global/BAM segment for the
years ended December 31, 2020, 2019 and 2018:
Millions
Written premiums:
Direct
Assumed
Gross written premiums
Earned premiums:
Direct
Assumed
Gross earned premiums
December 31, 2020
December 31, 2019
December 31, 2018
$
$
$
$
61.5
.2
61.7
19.4
3.4
22.8
$
$
$
$
28.1
10.6
38.7
13.6
2.7
16.3
$
$
$
$
44.8
8.1
52.9
13.6
.3
13.9
In September 2019, BAM entered into facultative quota share reinsurance agreements under which it assumed a portfolio of municipal bond guarantee
contracts with a par value of $1.1 billion. In the second quarter of 2020, BAM assumed an additional municipal bond guarantee contract with a par value of
$36.9 million through an endorsement to the facultative quota share reinsurance agreement.
In November 2018, BAM entered into a 100% quota share facultative reinsurance agreement under which it assumed a portfolio of municipal bond
guarantee contracts with a par value of $2.2 billion.
None of the contracts assumed under these reinsurance agreements were non-performing and no loss reserves have been established for any of the
contracts, either as of the transaction dates or as of December 31, 2020. The agreements, which cover future claims exposure only, meets the risk transfer
criteria under ASC 944-20, Insurance Activities and accordingly has been accounted for as reinsurance.
F - 44
Note 9. Earnings Per Share
White Mountains calculates earnings per share using the two-class method, which allocates earnings between common shares and unvested restricted
common shares. Both classes of shares participate equally in dividends and earnings on a per share basis. Basic earnings per share amounts are based on the
weighted average number of common shares outstanding adjusted for unvested restricted common shares.
The following table presents the Company’s computation of earnings per share from continuing operations for the years ended December 31, 2020,
2019 and 2018. See Note 19 — “Held for Sale and Discontinued Operations”.
Basic and diluted earnings per share numerators (in millions):
Net income (loss) attributable to White Mountains’s
common shareholders
Less: total (loss) income from discontinued operations, net of tax
Net income (loss) from continuing operations attributable to
White Mountains’s common shareholders
Allocation of (earnings) losses to participating restricted common shares
(1)
Basic and diluted earnings (losses) per share numerators
Basic earnings per share denominators (in thousands):
Total average common shares outstanding during the period
Average unvested restricted common shares
(2)
Basic earnings (losses) per share denominator
Diluted earnings per share denominator (in thousands):
Total average common shares outstanding during the period
Average unvested restricted common shares
(2)
Diluted earnings (losses) per share denominator
Basic and diluted earnings per share (in dollars) - continuing
operations:
Distributed earnings - dividends declared and paid
Undistributed earnings (losses)
Basic and diluted earnings (losses) per share
2020
Year Ended December 31,
2019
2018
$
$
$
$
708.7
$
414.5
$
(2.3)
711.0
(9.3)
.8
413.7
(5.3)
(141.2)
(17.2)
(124.0)
1.4
701.7
$
408.4
$
(122.6)
3,122.2
(40.8)
3,081.4
3,122.2
(40.8)
3,081.4
3,181.6
(40.5)
3,141.1
3,181.6
(40.5)
3,141.1
3,382.5
(40.1)
3,342.4
3,382.5
(40.1)
3,342.4
1.00
226.72
227.72
$
$
1.00
129.02
130.02
$
$
1.00
(37.67)
(36.67)
(1)
(2)
Restricted shares issued by White Mountains receive dividends, and therefore, are considered participating securities.
Restricted shares outstanding vest either in equal annual installments or upon a stated date. See Note 10 — “Employee Share-Based Incentive Compensation Plans”.
The following table presents the undistributed net earnings (losses) from continuing operations for the years ended December 31, 2020, 2019 and
2018. See Note 19 — “Held for Sale and Discontinued Operations”.
Millions
Undistributed net earnings - continuing operations:
Net income (loss) attributable to White Mountains’s common shareholders,
net of restricted common share amounts
Dividends declared, net of restricted common share amounts
(1)
Total undistributed net earnings (losses), net of restricted common share
amounts
Year Ended December 31,
2019
2020
2018
$
$
$
701.7
(3.1)
$
408.4
(3.2)
(122.6)
(3.7)
698.6
$
405.2
$
(126.3)
(1)
Restricted shares issued by White Mountains receive dividends, and are therefore considered participating securities.
F - 45
Note 10. Employee Share-Based Incentive Compensation Plans
White Mountains’s share-based incentive compensation plans are designed to incentivize key employees to maximize shareholder value over long
periods of time. White Mountains believes that this is best pursued by utilizing a pay-for-performance program that closely aligns the financial interests of
management with those of its shareholders. White Mountains accomplishes this by emphasizing highly variable long-term compensation that is contingent
on performance over a number of years rather than entitlements. White Mountains expenses all its share-based compensation. As a result, White
Mountains’s calculation of its owners’ returns includes the expense of all outstanding share-based compensation awards.
Incentive Compensation Plans
White Mountains’s Long-Term Incentive Plan (the “WTM Incentive Plan”) provides for grants of various types of share-based and non-share-based
incentive awards to key employees and directors of White Mountains. The WTM Incentive Plan was adopted by the Board, was approved by the
Company’s sole shareholder in 1985 and was subsequently amended by its shareholders in 1995, 2001, 2003, 2005, 2010, 2013 and 2019. Share-based
incentive awards that may be granted under the plan include performance shares, restricted shares, incentive stock options and non-qualified stock options
(“Non-Qualified Options”).
Performance Shares
Performance shares are designed to reward employees for meeting company-wide performance targets. Performance shares are conditional grants of a
specified maximum number of common shares or an equivalent amount of cash. Awards generally vest at the end of a three-year service period, are subject
to the attainment of pre-specified performance goals, and are valued based on the market value of common shares at the time awards are paid. Performance
shares earned under the WTM Incentive Plan are typically paid in cash but may be paid in common shares. Compensation expense is recognized for the
vested portion of the awards over the related service periods. The level of payout ranges from zero to two times the number of shares initially granted,
depending on White Mountains’s financial performance. Performance shares become payable at the conclusion of a performance cycle (typically three
years) if pre-defined financial targets are met. The performance measures used for determining performance share payouts are growth in White
Mountains’s adjusted book value per share and intrinsic value per share. Intrinsic value per share is generally calculated by adjusting adjusted book value
per share for differences between the adjusted book value of certain assets and liabilities and White Mountains’s estimate of their underlying intrinsic
values.
The following table presents performance share activity for the years ended December 31, 2020, 2019 and 2018 for performance shares granted under
the WTM Incentive Plan:
$ in Millions
Beginning of period
Shares paid or expired
New grants
(1)
(2)
Forfeitures
Expense recognized
End of period
2020
2019
2018
Year Ended December 31,
Target
Performance
Shares
Outstanding
42,473
(14,070)
14,055
—
—
42,458
$
$
Accrued
Expense
43.7
(27.7)
—
(.4)
40.7
56.3
Target
Performance
Shares
Outstanding
40,616
(13,715)
15,600
(28)
—
42,473
$
$
Accrued
Expense
31.7
(18.1)
—
(.1)
30.2
43.7
Target
Performance
Shares
Outstanding
50,515
(23,186)
14,105
(818)
—
40,616
$
$
Accrued
Expense
45.8
(28.4)
—
.1
14.2
31.7
(1)
(2)
WTM performance share payments in 2020 for the 2017-2019 performance cycle, which were paid in March 2020, ranged from 174% to 180% of target. WTM performance share payments
in 2019 for the 2016-2018 performance cycle, which were paid in March 2019, ranged from 139% to 166% of target. WTM performance share payments in 2018 for the 2015-2017
performance cycle, which were paid in March 2018, ranged from 145% to 147% of target.
Amounts include changes in assumed forfeitures, as required under GAAP.
F - 46
During 2020, White Mountains granted 14,055 performance shares for the 2020-2022 performance cycle. During 2019, White Mountains granted
15,600 performance shares for the 2019-2021 performance cycle. During 2018, White Mountains granted 13,450 performance shares for the 2018-2020
performance cycle, 290 performance shares for the 2017-2019 performance cycle and 365 performance shares for the 2016-2018 performance cycle.
For the 2017-2019, 2016-2018 and 2015-2017 performance cycles, all performance shares earned were settled in cash. If the outstanding performance
shares had vested on December 31, 2020, the total additional compensation cost to be recognized would have been $28.8 million, based on accrual factors
as of December 31, 2020 (common share price and payout assumptions).
The following table presents performance shares outstanding and accrued expense for performance shares awarded under the WTM Incentive Plan as
of December 31, 2020 for each performance cycle:
$ in Millions
Performance cycle:
2020 – 2022
2019 – 2021
2018 – 2020
Sub-total
Assumed forfeitures
Total
Target
Performance Shares
Outstanding
Accrued Expense
14,055 $
15,600
13,450
43,105
(647)
42,458 $
9.5
20.7
27.1
57.3
(1.0)
56.3
For the 2020-2022 performance cycle, the targeted performance goal for full payment of outstanding performance shares granted under the WTM
Incentive Plan to non-investment personnel is 7% average growth in adjusted book value per share and intrinsic value per share. Average growth of 2% or
less would result in no payout and average growth of 12% or more would result in a payout of 200%.
For the 2019-2021 performance cycle, the targeted performance goal for full payment of outstanding performance shares granted under the WTM
Incentive Plan is 7% average growth in adjusted book value per share and intrinsic value per share. Average growth of 2% or less would result in no payout
and average growth of 12% or more would result in a payout of 200%.
For the 2018-2020 performance cycle, the targeted performance goal for full payment of outstanding performance shares granted under the WTM
Incentive Plan is 6% average growth in adjusted book value per share and intrinsic value per share. Average growth of 2% or less would result in no payout
and average growth of 10% or more would result in a payout of 200%.
Restricted Shares
Restricted shares are grants of a specified number of common shares that generally vest at the end of a three-year service period. The following table
presents the unrecognized compensation cost associated with the outstanding restricted share awards under the WTM Incentive Plan for the years ended
December 31, 2020, 2019 and 2018:
2020
Year Ended December 31,
2019
2018
Restricted
Shares
Unamortized
Issue Date Fair
Value
Restricted
Shares
Unamortized
Issue Date Fair
Value
Restricted
Shares
Unamortized
Issue Date Fair
Value
$ in Millions
Non-vested,
Beginning of period
43,395
$
Issued
Vested
Forfeited
Expense recognized
End of period
14,055
(14,345)
—
—
43,105
$
16.7
15.1
—
—
(16.6)
15.2
41,510
$
15,600
(13,715)
—
—
43,395
$
12.5
14.5
—
—
(10.3)
16.7
53,755
$
14,105
(25,381)
(969)
—
41,510
$
14.3
11.4
—
(.2)
(13.0)
12.5
F - 47
During 2020, White Mountains issued 14,055 restricted shares that vest on January 1, 2023. During 2019, White Mountains issued 15,600 restricted
shares that vest on January 1, 2022. During 2018, White Mountains issued 13,450 restricted shares that vest on January 1, 2021, 290 restricted shares that
vest on January 1, 2020 and 365 restricted shares that vest on January 1, 2019. The unrecognized compensation cost as of December 31, 2020 is expected
to be recognized ratably over the remaining vesting periods.
Note 11. Leases
White Mountains has entered into lease agreements, primarily for office space. These leases are classified as operating leases, with lease expense
recognized on a straight-line basis over the term of the lease. Lease incentives, such as free rent or landlord reimbursements for leasehold improvements,
are recognized at lease inception and amortized on a straight-line basis over the term of the lease. Lease expense and the amortization of leasehold
improvements are recognized within general and administrative expenses. Lease payments related to options to extend or renew the lease term are excluded
from the calculation of lease liabilities unless White Mountains is reasonably certain of exercising those options.
On January 1, 2019, White Mountains adopted ASU 2016-02, Leases (ASC 842). See Note 1 — “Basis of Presentation and Significant Accounting
Policies” — Basis of Presentation and Significant Accounting Policies. Prior to adoption of ASU 2016-02, White Mountains recognized lease expense
for operating leases on a straight-line basis, but did not recognize lease assets or liabilities on its consolidated balance sheet. Upon adoption on January 1,
2019, White Mountains recognized lease ROU assets of $23.2 million and lease liabilities of $23.2 million. As of December 31, 2020, the ROU asset was
$37.6 million and lease liabilities were $38.3 million.
The following table summarizes net lease expense recognized in White Mountains’s consolidated statement of operations for the years ended
December 31, 2020 and 2019:
Millions
Lease Cost
Lease cost
Less: sublease income
Net lease cost
December 31, 2020
December 31, 2019
$
$
7.7 $
.4
7.3 $
7.2
.4
6.8
The following table presents the contractual maturities of the lease liabilities associated with White Mountains’s operating lease agreements as of
December 31, 2020:
Millions
2021
2022
2023
2024
2025
Thereafter
Total undiscounted lease payments
Less: present value adjustment
Operating lease liability
December 31, 2020
7.7
7.3
7.1
5.8
5.1
12.2
45.2
(6.9)
38.3
$
$
F - 48
The following table presents lease related assets and liabilities by reportable segment as of December 31, 2020 and 2019:
$ in Millions
ROU lease asset
Lease liability
HG/BAM
NSM
Kudu
Other Operations
Total
Weighted Average
Incremental Borrowing
Rate
(1)
As of December 31, 2020
$
$
10.1 $
10.1 $
17.1 $
17.1 $
2.0 $
2.0 $
8.4 $
9.1 $
37.6
38.3
4.6%
(1)
The present value of the remaining lease payments was determined by discounting the lease payments using the incremental borrowing rate.
$ in Millions
ROU lease asset
Lease liability
HG/BAM
NSM
Kudu
Other Operations
Total
Weighted Average
Incremental Borrowing
Rate
(1)
December 31, 2019
$
$
10.4 $
10.4 $
4.8 $
4.8 $
2.3 $
2.3 $
5.1 $
5.3 $
22.6
22.8
4.6%
(1)
The present value of the remaining lease payments was determined by discounting the lease payments using the incremental borrowing rate.
Note 12. Common Shareholders’ Equity and Non-controlling Interests
Common Shares Repurchased and Retired
During the past several years, White Mountains’s board of directors authorized the Company to repurchase its common shares, from time to time,
subject to market conditions. Shares may be repurchased on the open market or through privately negotiated transactions. The repurchase authorizations do
not have a stated expiration date. As of December 31, 2020, White Mountains may repurchase an additional 542,517 shares under these board
authorizations. In addition, from time to time White Mountains has also repurchased its common shares through tender offers that were separately
authorized by its board of directors.
During 2020, the Company repurchased 99,087 common shares for $85.1 million at an average share price of $859, which were comprised of 93,188
common shares repurchased under the board authorizations for $78.5 million at an average share price of $843 and 5,899 common shares repurchased
pursuant to employee benefit plans.
During 2019, the Company repurchased 5,679 common shares for $4.9 million at an average share price of $858 pursuant to employee benefit plans.
During 2018, the Company repurchased 592,458 common shares for $519.1 million at an average share price of $877, which were comprised of
582,493 common shares repurchased under the board authorizations for $511.0 million at an average share price of $877 and 9,965 common shares
repurchased pursuant to employee benefit plans.
Common Shares Issued
During 2020, the Company issued a total of 15,745 common shares, which consisted of 14,055 restricted shares issued to key personnel, 1,440 shares
issued to directors of the Company and 250 shares issued to MediaAlpha’s management.
During 2019, the Company issued a total of 17,917 common shares, which consisted of 15,600 restricted shares issued to key personnel and 2,317
shares issued to directors of the Company.
During 2018, the Company issued a total of 16,377 common shares, which consisted of 14,105 restricted shares issued to key personnel, 2,272 shares
issued to directors of the Company.
Dividends on Common Shares
For the years ended December 31, 2020, 2019 and 2018, the Company declared and paid cash dividends totaling $3.2 million, $3.2 million and $3.8
million (or $1.00 per common share).
F - 49
Non-controlling Interests
Non-controlling interests consist of the ownership interests of non-controlling shareholders in consolidated entities and are presented separately on the
balance sheet.
The following table presents the balance of non-controlling interests included in White Mountains’s total equity and the related percentage of each
consolidated entity’s total equity owned by non-controlling shareholders as of December 31, 2020 and 2019:
$ in Millions
Non-controlling interests, excluding BAM
HG Global
NSM
Kudu
Other
Total, excluding BAM
BAM
Total non-controlling interests
December 31, 2020
December 31, 2019
Non-controlling
Percentage
Non-controlling
Equity
Non-controlling
Percentage
Non-controlling
Equity
3.1 % $
3.4 %
.7 %
various
13.5
17.0
2.3
2.4
35.2
3.1 % $
3.6 %
.9 %
various
14.4
14.9
2.2
(1.6)
29.9
100.0 %
(123.3)
(88.1)
$
100.0 %
(146.7)
(116.8)
$
Note 13. Statutory Capital and Surplus
White Mountains’s insurance operations are subject to regulation and supervision in each of the jurisdictions where they are domiciled and licensed to
conduct business. Generally, regulatory authorities have broad supervisory and administrative powers over such matters as licenses, standards of solvency,
premium rates, policy forms, investments, security deposits, methods of accounting, form and content of financial statements, minimum capital and surplus
requirements, dividends and other distributions to shareholders, periodic examinations and annual and other report filings. In general, such regulation is for
the protection of policyholders rather than shareholders.
The Insurance Act 1978 of Bermuda and related regulations, as amended (“Insurance Act”), regulates the insurance business of Bermuda-domiciled
insurers. Under the Insurance Act, insurers are required to maintain available statutory capital and surplus at a level equal to or in excess of its enhanced
capital requirement which is established by reference to either a Bermuda Solvency Capital Requirement (“BSCR”) model or an approved internal capital
model. Generally, the Bermuda Monetary Authority (“BMA”) has broad supervisory and administrative powers over such matters as licenses, standards of
solvency, investments, methods of accounting, form and content of financial statements, minimum capital and surplus requirements, and annual and other
report filings.
HG Global/BAM
HG Re is a Special Purpose Insurer under Bermuda insurance regulations and is subject to regulation and supervision by the BMA. As of
December 31, 2020, HG Re had statutory capital and surplus of $768.1 million. As a Special Purpose Insurer, HG Re has a nominal minimum regulatory
capital requirement of $1.
BAM is domiciled in New York and is subject to regulation by the NYDFS. New York financial guarantee insurance law establishes single risk and
aggregate limits with respect to insured obligations insured by financial guarantee insurers. BAM’s statutory net loss for the years ended December 31,
2020, 2019 and 2018 was $59.3 million, $38.3 million and $34.6 million. BAM’s members’ surplus, as reported to regulatory authorities as of
December 31, 2020, was $324.7 million, which exceeds the minimum members’ surplus necessary for BAM to maintain its New York State financial
guarantee insurance license of $66.0 million.
F - 50
Dividend Capacity
There are no restrictions under Bermuda law or the law of any other jurisdiction on the payment of dividends from retained earnings by White
Mountains, provided that after the payment of any dividend, the Company would continue to be able to pay its liabilities as they become due and the
realizable value of the Company’s assets would remain greater that its liabilities. Following is a description of the dividend capacity of White Mountains’s
reinsurance and other operating subsidiaries:
HG Global/BAM
As of December 31, 2020, HG Global had $619.0 million face value of preferred shares outstanding, of which White Mountains owned 96.9%. Holders
of the HG Global preferred shares receive cumulative dividends at a fixed annual rate of 6.0% on a quarterly basis, when and if declared by HG Global.
During 2020, HG Global declared and paid a $23.0 million preferred dividend, of which $22.3 million was paid to White Mountains. As of December 31,
2020, HG Global had accrued $376.6 million of dividends payable to holders of its preferred shares, of which $363.9 million was payable to White
Mountains and eliminated in consolidation. As of December 31, 2020, HG Global and its subsidiaries had $2.8 million of cash outside of HG Re.
HG Re is a Special Purpose Insurer subject to regulation and supervision by the BMA, but does not require regulatory approval to pay dividends.
However, HG Re’s dividend capacity is limited to amounts held outside of the Collateral Trusts pursuant to the FLRT with BAM. As of December 31,
2020, HG Re had $768.1 million of statutory capital and surplus and $827.1 million of assets held in the Collateral Trusts pursuant to the FLRT with BAM.
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. 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.
As of December 31, 2020, the Collateral Trusts held assets of $827.1 million, which included $434.5 million of cash and investments, $388.2 million
of BAM Surplus Notes and $4.4 million of interest receivable on the BAM Surplus Notes.
As of December 31, 2020, HG Re had $20.1 million of cash and investments and $114.0 million of accrued interest on the BAM Surplus Notes held
outside the Collateral Trusts.
Through 2024, the interest rate on the BAM Surplus Notes is a variable rate equal to the one-year U.S. Treasury rate plus 300 basis points, set
annually. During 2021, the interest rate on the BAM Surplus Notes will be 3.1%. Beginning in 2025, the interest rate will be fixed at the higher of the then
current variable rate or 8.0%. BAM is required to seek regulatory approval to pay interest and principal on the BAM Surplus Notes only to the extent that
its remaining qualified statutory capital and other capital resources continue to support its outstanding obligations, 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.
In December 2020, BAM made a $30.1 million cash payment of principal and interest on the BAM Surplus Notes held by HG Global. Of this
payment, $21.5 million was a repayment of principal held in the Supplemental Trust, $0.2 million was a payment of accrued interest held in the
Supplemental Trust and $8.4 million was a payment of accrued interest held outside the Supplemental Trust.
In January 2020, BAM made a one-time $65.0 million cash payment of principal and interest on the BAM Surplus Notes held by HG Global. Of this
payment, $47.9 million was a repayment of principal held in the Supplemental Trust, $0.9 million was a payment accrued interest held in the Supplemental
Trust and $16.2 million was a payment of accrued interest held outside the Supplemental Trust.
In December 2019, BAM made a $32.0 million cash payment (which included a one-time $10.0 million cash payment) of principal and interest on the
BAM Surplus Notes held by HG Global. Of this payment, $23.7 million was a repayment of principal held in the Supplemental Trust, $0.3 million was a
payment of accrued interest held in the Supplemental Trust and $8.0 million was a payment of accrued interest held outside the Supplemental Trust.
F - 51
NSM
During 2020, NSM did not make any distributions to unitholders. As of December 31, 2020, NSM had $48.1 million of net unrestricted cash.
Kudu
In December 2019, Kudu entered into a secured credit facility to provide funding for distributions to unitholders and fund new investments and related
transaction expenses. At closing, Kudu drew an initial term loan of $57.0 million to pay transaction expenses and to distribute $53.7 million to unitholders,
of which $53.3 million was paid to White Mountains. During 2020, Kudu distributed $4.0 million to unitholders, substantially all of which was paid to
White Mountains. As of December 31, 2020, Kudu had $7.8 million of net unrestricted cash and short-term investments.
Other Operations
During 2020, White Mountains paid a $3.2 million common share dividend. As of December 31, 2020, the Company and its intermediate holding
companies had $464.2 million of net unrestricted cash, short-term investments and fixed maturity investments, $802.2 million of MediaAlpha common
stock and $172.7 million of private equity funds and the ILS Funds.
Note 14. Segment Information
As of December 31, 2020, White Mountains conducted its operations through four segments: (1) HG Global/BAM, (2) NSM, (3) Kudu and (4) Other
Operations. In addition, MediaAlpha was consolidated as a reportable segment until the date of the 2019 MediaAlpha Transaction. A discussion of White
Mountains’s consolidated investment operations is included after the discussion of operations by segment.
As a result of the Kudu Transaction, White Mountains began consolidating Kudu in its financial statements in the second quarter of 2019. White
Mountains’s segment disclosures for the year ended December 31, 2019 include Kudu’s results of operations for the period from April 4, 2019, the date of
the Kudu Transaction, to December 31, 2019. See Note 2 — “Significant Transactions”.
As a result of the 2019 MediaAlpha Transaction, White Mountains no longer consolidated MediaAlpha, and consequently it was no longer a reportable
segment. White Mountains’s segment disclosures for the year ended December 31, 2019 include MediaAlpha’s results of operations for the period from
January 1, 2019 to February 26, 2019, the date of the 2019 MediaAlpha Transaction. See Note 2 — “Significant Transactions”.
White Mountains has made its segment determination based on consideration of the following criteria: (i) the nature of the business activities of each
of the Company’s subsidiaries and affiliates; (ii) the manner in which the Company’s subsidiaries and affiliates are organized; (iii) the existence of primary
managers responsible for specific subsidiaries and affiliates; and (iv) the organization of information provided to the chief operating decision makers and
the Board of Directors. Significant intercompany transactions among White Mountains’s segments have been eliminated herein.
F - 52
The following tables present the financial information for White Mountains’s segments:
Millions
Year Ended December 31, 2020
HG
Global/BAM
(1)
NSM
Kudu
Other
Operations
Total
Earned insurance premiums
$
22.8
$
— $
—
$
— $
Net investment income
Net realized and unrealized investment gains
(losses)
Net realized and unrealized investment gains
from
investment in MediaAlpha
Advertising and commission revenues
(2)
Other revenues
Total revenues
Insurance acquisition expenses
Other underwriting expenses
Cost of sales
General and administrative expenses
Broker commission expense
Change in fair value of contingent
consideration
earnout liabilities
Amortization of other intangible assets
Interest expense
Total expenses
Pre-tax income (loss)
19.5
23.7
—
—
2.5
68.5
7.0
.4
—
56.4
—
—
—
—
—
—
—
232.5
52.6
285.1
—
—
—
176.9
75.3
(3.3)
26.7
22.1
63.8
4.7
$
297.7
(12.6)
$
$
29.5
15.9
—
—
.3
45.7
—
—
—
11.8
—
—
.3
6.0
18.1
27.6
82.0
(8.8)
686.0
8.3
13.9
781.4
—
—
11.3
141.9
—
—
1.3
1.4
155.9
625.5
$
$
22.8
131.0
30.8
686.0
240.8
69.3
1,180.7
7.0
.4
11.3
387.0
75.3
(3.3)
28.3
29.5
535.5
645.2
(1)
(2)
BAM manages its affairs on a statutory accounting basis. BAM’s statutory surplus includes the BAM Surplus Notes and is not reduced by accruals of interest expense on the BAM Surplus
Notes. BAM’s statutory surplus is reduced only after a payment of principal or interest has been approved by the NYDFS.
Approximately 19% of NSM’s commission revenue was associated with one single carrier.
F - 53
Millions
Year Ended December 31, 2019
HG
Global/BAM
(1)
NSM
Kudu
(2)
MediaAlpha
(3)
Other
Operations
Total
Earned insurance premiums
$
16.3
$
Net investment income
Net realized and unrealized
investment gains
Net realized and unrealized
investment gains
from investment in MediaAlpha
Gain from deconsolidation of
MediaAlpha
Advertising and commission revenues
(4)
Other revenues
Total revenues
Insurance acquisition expenses
Other underwriting expenses
Cost of sales
General and administrative expenses
Broker commission expense
Change in fair value of contingent
consideration earnout liabilities
Amortization of other intangible
assets
Interest expense
Total expenses
Pre-tax income (loss)
21.6
27.1
—
—
—
1.6
66.6
5.7
.4
—
50.5
—
—
—
—
56.6
10.0
$
$
—
—
—
—
—
193.4
39.7
233.1
—
—
—
132.2
64.8
2.1
19.4
16.7
235.2
(2.1)
$
— $
14.7
6.3
—
—
.2
21.2
—
—
—
10.1
—
—
.2
.1
10.4
10.8 $
$
—
—
—
—
—
48.8
—
48.8
—
—
40.6
12.5
—
—
1.6
.2
54.9
(6.1)
$
—
$
43.4
16.3
79.7
219.8
253.2
180.0
180.0
67.5
6.9
6.1
523.7
—
—
7.5
122.5
—
—
.6
.6
131.2
392.5
$
$
67.5
249.1
47.6
893.4
5.7
.4
48.1
327.8
64.8
2.1
21.8
17.6
488.3
405.1
(1)
(2)
(3)
(4)
BAM manages its affairs on a statutory accounting basis. BAM’s statutory surplus includes the BAM Surplus Notes and is not reduced by accruals of interest expense on the BAM Surplus
Notes. BAM’s statutory surplus is reduced only after a payment of principal or interest has been approved by the NYDFS.
Kudu’s results are from April 4, 2019, the date of the Kudu Transaction, to December 31, 2019.
MediaAlpha’s results are from January 1, 2019 to February 26, 2019, the date of the 2019 MediaAlpha Transaction.
Approximately 17% of NSM’s commission revenue was associated with one single carrier.
F - 54
Millions
HG Global/BAM
(1)
NSM
MediaAlpha
Other
Operations
Total
Year Ended December 31, 2018
Earned insurance premiums
$
Net investment income
Net realized and unrealized investment losses
Advertising and commission revenues
(2)
Other revenues
Total revenues
Insurance acquisition expenses
Other underwriting expenses
Cost of sales
General and administrative expenses
Broker commission expense
Change in fair value of contingent
consideration earnout liabilities
Amortization of other intangible assets
Interest expense
Total expenses
Pre-tax (loss) income
13.9 $
16.7
(7.5)
—
1.2
24.3
5.3
.4
—
48.0
—
—
—
—
— $
—
—
89.6
12.0
101.6
—
—
—
59.4
28.4
2.7
8.3
8.0
$
53.7
(29.4)$
106.8
(5.2)$
— $
—
—
295.5
1.6
297.1
—
—
245.0
31.7
—
—
10.3
1.2
288.2
8.9 $
— $
42.3
(100.8)
4.1
.5
(53.9)
—
—
3.7
94.4
—
—
.2
.3
98.6
(152.5)$
13.9
59.0
(108.3)
389.2
15.3
369.1
5.3
.4
248.7
233.5
28.4
2.7
18.8
9.5
547.3
(178.2)
(1)
(2)
BAM manages its affairs on a statutory accounting basis. BAM’s statutory surplus includes the BAM Surplus Notes and is not reduced by accruals of interest expense on the BAM Surplus
Notes. BAM’s statutory surplus is reduced only after a payment of principal or interest has been approved by the NYDFS.
Approximately 29% of MediaAlpha’s advertising revenue was associated with one customer and approximately 33% of NSM’s commission revenue was associated with one single carrier.
Millions
Selected Balance Sheet Data
December 31, 2020:
Total investments
Total assets
Total liabilities
Total White Mountains’s common
shareholders’ equity
Non-controlling interest
December 31, 2019:
Total investments
Total assets
Total liabilities
Total White Mountains’s common
shareholders’ equity
Non-controlling interest
HG Global/BAM
NSM
Kudu
Other
Operations
Held for Sale
Total
$
$
$
$
$
$
$
$
$
$
919.9 $
1,017.8 $
(1)
291.5 $
(2)
836.1 $
(2)
(109.8) $
845.6 $
924.0 $
(1)
246.8 $
(2)
809.5 $
(2)
(132.3) $
— $
999.6 $
491.8 $
490.7 $
17.1 $
— $
825.2 $
401.1 $
409.3 $
14.8 $
400.7 $
430.2 $
96.3 $
331.6 $
2.3 $
266.6 $
290.5 $
57.0 $
231.3 $
2.2 $
1,618.5 $
2,381.5 $
(2)
133.9 $
2,245.3 $
(2)
2.3 $
1,835.0 $
1,940.5 $
(2)
133.6 $
1,808.4 $
(2)
(1.5) $
— $
2.3 $
— $
2.3 $
— $
— $
3.0 $
— $
3.0 $
— $
2,939.1
4,831.4
1,013.5
3,906.0
(88.1)
2,947.2
3,983.2
838.5
3,261.5
(116.8)
(1)
As of December 2020 and 2019, total assets in the HG Global/BAM segment reflected the elimination of $388.2 and $457.6 of BAM Surplus Notes issued to HG Global and its subsidiaries,
and $155.7 and $162.7 in accrued interest related to the BAM Surplus Notes.
(2)
HG Global preferred dividends payable to White Mountains’s subsidiaries is eliminated in White Mountains’s consolidated financial statements. For segment reporting, the HG Global
preferred dividends payable to White Mountains’s subsidiaries included within the HG Global/BAM segment are eliminated against the offsetting receivable included within the Other
Operations segment and therefore added back to White Mountains’s common shareholders’ equity within the HG Global/BAM segment. As of December 31, 2020 and 2019, the HG Global
preferred dividends payable to White Mountains’s subsidiaries was $363.9 and $330.3.
F - 55
In compliance with ASC 606, Revenues from Contracts with Customers, the following tables present White Mountains’s total revenues by revenue
source:
Millions
Year Ended December 31, 2020
Commission and Other Revenue
Specialty Transportation
Real Estate
Social Services
Pet
United Kingdom
Other
Total Commission and Other Revenue
Products
Total revenues from contracts with customers
Other revenues
Total revenues
(1)
HG Global/BAM
NSM
Kudu
Other
Operations
Total
$
— $
85.5 $
— $
— $
—
—
—
—
—
—
—
—
68.5
68.5 $
$
44.9
28.9
55.0
49.4
21.4
285.1
—
285.1
—
285.1 $
—
—
—
—
—
—
—
—
—
—
—
—
8.3
8.3
14.5
22.8
85.5
44.9
28.9
55.0
49.4
29.7
293.4
14.5
307.9
45.7
45.7 $
758.6
781.4 $
872.8
1,180.7
(1)
Other revenues consist of premiums, investment income, investment gains and losses and other revenues outside the scope of ASC 606, Revenues from Contracts with Customers.
Millions
Year Ended December 31, 2019
Commission and Other Revenue
HG
Global/BAM
NSM
Kudu
(2)
MediaAlpha
(3)
Other
Operations
Total
Specialty Transportation
$
— $
77.6 $
— $
— $
— $
Real Estate
Social Services
Pet
United Kingdom
Other
Total Commission and Other Revenue
Advertising revenues
Products
Total revenues from contracts with
customers
—
—
—
—
—
—
—
—
—
Other revenues
Total revenues
(1)
66.6
66.6 $
$
34.7
25.9
30.0
45.9
19.0
233.1
—
—
233.1
—
233.1 $
—
—
—
—
—
—
—
—
—
21.2
21.2 $
—
—
—
—
—
—
48.8
—
48.8
—
48.8 $
—
—
—
—
6.9
6.9
—
5.5
12.4
511.3
523.7 $
77.6
34.7
25.9
30.0
45.9
25.9
240.0
48.8
5.5
294.3
599.1
893.4
(1)
(2)
(3)
Other revenues consist of premiums, investment income, investment gains and losses and other revenues outside the scope of ASC 606, Revenues from Contracts with Customers.
Kudu’s results are from April 4, 2019, the date of the Kudu Transaction, to December 31, 2019.
MediaAlpha’s results are from January 1, 2019 to February 26, 2019, the date of the 2019 MediaAlpha Transaction.
F - 56
Millions
HG Global/BAM
NSM
MediaAlpha
Other
Operations
Total
Year Ended December 31, 2018
Commission and Other Revenue
Specialty Transportation
$
— $
28.3 $
— $
— $
Real Estate
Social Services
United Kingdom
Other
Total Commission and Other Revenue
Advertising revenues
Total revenues from contracts with customers
—
—
—
—
—
—
—
Other revenues
Total revenues
(1)
$
24.3
24.3 $
17.8
14.7
28.0
12.8
101.6
—
101.6
—
101.6 $
—
—
—
—
—
295.5
295.5
1.6
297.1 $
—
—
—
4.1
4.1
—
4.1
(58.0)
(53.9) $
28.3
17.8
14.7
28.0
16.9
105.7
295.5
401.2
(32.1)
369.1
(1)
Other revenues consist of premiums, investment income, investment gains and losses and other revenues outside the scope of ASC 606, Revenues from Contracts with Customers.
Note 15. Equity Method Eligible Investments
White Mountains’s equity method eligible investments include White Mountains’s investment in MediaAlpha, certain other unconsolidated entities,
including Kudu’s Participation Contracts, private equity funds and hedge funds in which White Mountains has the ability to exert significant influence over
the investee’s operating and financial policies.
The following table presents the carrying values of White Mountains’s equity method eligible investments as of December 31, 2020 and 2019:
Millions
Investment in MediaAlpha
Other equity method eligible investments, at fair value
December 31,
2020
2019
$
$
802.2
698.1
$
$
180.0
581.7
For the years ended December 31, 2020, 2019 and 2018, White Mountains’s received dividend and income distributions from equity method eligible
investments, including White Mountains’s investment in MediaAlpha, of $95.0 million, $14.8 million and $3.7 million, which were recorded within net
investment income in the consolidated statement of operations.
The following table presents White Mountains’s significant equity method eligible investments as of December 31, 2020 and 2019:
Investee
December 31, 2020
December 31, 2019
Basic Ownership Interest
PassportCard/DavidShield
New Market Solutions, LLC.
(1)
durchblicker
MediaAlpha
Elementum Holdings, L.P.
Compare.com
Tuckerman Capital Funds
JAM Partners L.P.
Enlightenment Capital Funds
Kudu’s Participation Contracts
53.8%
46.7%
45.0%
35.0%
28.9%
18.4%
14.9 - 62.0%
n/a
9.7- 66.7%
3.2 - 35.0%
50.0%
n/a
45.0%
48.3%
30.0%
18.4%
17.5 - 62.4%
11.1%
10.0 - 38.4%
3.2 - 30.0%
Instrument Held
Common shares
Units
Common shares
Common Shares/Units
Limited partnership interest
Common shares
Limited and general partnership interests
(1)
Limited partnership interest
Limited and general partnership interests
Revenue and earnings participation
contracts
(1)
On October 30, 2020, MediaAlpha completed the MediaAlpha IPO. See Note 2 — “Significant Transactions”
F - 57
The following tables present aggregated summarized financial information for White Mountains’s investments in equity method eligible
unconsolidated entities, excluding MediaAlpha:
Millions
(1)
Balance sheet data :
Total assets
Total liabilities
December 31,
2020
2019
$
$
1,328.5
228.7
$
$
1,959.2
653.2
(1)
Financial data for White Mountains’s equity method eligible investees is generally reported on a one-quarter lag.
Millions
(1)
Income statement data :
Total revenues
Total expenses
Net income (loss)
Year Ended December 31,
2019
2020
2018
$
$
$
526.5
325.9
201.7
$
$
$
344.6
88.3
255.1
$
$
$
226.0
141.4
83.6
(1)
Financial data for White Mountains’s equity method eligible investees is generally reported on a one-quarter lag.
As a result of the 2019 MediaAlpha Transaction, White Mountains reduced its ownership interest of the basic units outstanding of MediaAlpha from
61.0% to 48.3% (58.9% to 42.0% on a fully diluted, fully converted basis). White Mountains’s remaining ownership interest in MediaAlpha no longer
meets the criteria for a controlling ownership interest and, accordingly, White Mountains deconsolidated MediaAlpha as of February 26, 2019. Upon
deconsolidation, White Mountains’s investment in MediaAlpha met the criteria to be accounted for under the equity method or under the fair value option.
White Mountains elected the fair value option and the investment in MediaAlpha was initially measured at its estimated fair value of $114.7 million as of
March 31, 2019, with the change in fair value of $114.7 million recognized as an unrealized investment gain. For the twelve months ended December 31,
2019, White Mountains recognized $180.0 million in unrealized investment gains associated with its investment in MediaAlpha including changes in the
fair value of White Mountains’s investment in MediaAlpha subsequent to the 2019 MediaAlpha Transaction.
On October 30, 2020, MediaAlpha completed the MediaAlpha IPO. Following the completion of the MediaAlpha IPO, White Mountains owns
20,532,202 MediaAlpha shares, representing a 35.0% ownership interest (32.3% on a fully-diluted, fully converted basis). At the December 31, 2020
closing price of $39.07 per share, the value of White Mountains’s remaining investment in MediaAlpha was $802.2 million. For the twelve months ended
December 31, 2020, White Mountains recognized $686.0 million in realized and unrealized investment gains associated with its investment in MediaAlpha.
White Mountains’s consolidated statement of comprehensive income and its segment disclosures include MediaAlpha’s results of operations for the
period from January 1, 2019 through February 26, 2019. See Note 2 — “Significant Transactions”. For the period from February 26, 2019 to December
31, 2019, MediaAlpha was considered a significant subsidiary. For the period from February 26, 2019 to December 31, 2019, MediaAlpha’s total revenues,
total expenses, and net income were $359.2 million, $336.3 million, and $22.9 million.
F - 58
For the twelve months ended December 31, 2020, MediaAlpha was considered a significant subsidiary. The following tables present summarized
financial information for MediaAlpha as of December 31, 2020 and 2019 for the twelve months ended December 31, 2020, 2019, and 2018:
Millions
Balance sheet data:
Total assets
Total liabilities
December 31,
2020
2019
(1)
$
$
212.7
315.8
$
$
105.4
144.9
(1)
As of December 31, 2019, MediaAlpha recorded out of period adjustments that (decreased) increased total assets and total liabilities by $(1.5) and $0.3. The
adjustments primarily related to MediaAlpha’s accounting for its other intangible assets and debt. White Mountains has evaluated the impact of the adjustments
and concluded that they are not material, individually and in the aggregate, to current or prior period financial statements.
Millions
Income statement data:
Total revenues
Total expenses
Net income (loss)
Year Ended December 31,
2019
(1)
2020
2018
(1)
$
$
$
584.8
575.4
9.4
$
$
$
408.0
390.2
17.8
$
$
$
296.9
278.8
18.1
(1)
For the twelve months ended December 31, 2019 and 2018, MediaAlpha recorded out of period adjustments that increased (decreased) total revenues by $0.1
and $(0.2), total expenses by $1.2 and $(9.4) and net income by $(1.1) and $9.2. The adjustments primarily related to MediaAlpha’s accounting for its equity-
based compensation and amortization of other intangible assets. White Mountains has evaluated the impact of the adjustments and concluded that they are not
material, individually and in the aggregate, to current or prior period financial statements.
Note 16. Variable Interest Entities
BAM
As a mutual insurance company, BAM is owned by its members. BAM charges an insurance premium on each municipal bond insurance policy it
writes. A portion of the premium is a member surplus contribution (“MSC”) and the remainder is a risk premium. In the event of a municipal bond
refunding, a portion of the MSC from the original issuance can be reutilized, in effect serving as a credit against the total insurance premium on the
refunding of the municipal bond. Issuers of debt insured by BAM are members of BAM so long as any of their BAM-insured debt is outstanding. As
members, they have certain interests in BAM, including the right to vote for BAM’s directors and to receive dividends in the future, if declared.
The equity at risk funded by BAM’s members is not sufficient to fund its operations without the additional financial support provided by the BAM
Surplus Notes and accordingly, BAM is considered to be a VIE.
At inception, BAM and HG Re also entered into the FLRT. HG Re provides first loss protection up to 15%-of-par outstanding on each municipal bond
insured by BAM. For capital appreciation bonds, par is adjusted to the estimated equivalent par value for current interest paying bonds. In return, BAM
cedes up to 60% of the risk premium charged for insuring the municipal bond, net of a ceding commission. HG Re’s obligations under the FLRT are limited
to the assets in the Regulation 114 Trust and the Supplemental Trust. 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. In addition, under the FLRT, HG Holdings Ltd, a subsidiary of HG Global, has the
right to designate two directors for election to BAM’s board of directors.
Since BAM is owned by its members, its equity and results of operations are included in non-controlling interests. 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.
F - 59
Elementum
On May 31, 2019, White Mountains acquired a 30.0% limited partnership interest in Elementum for $55.1 million. White Mountains has determined
that Elementum is a VIE but that White Mountains is not the primary beneficiary. White Mountains’s ownership interest gives White Mountains the
opportunity to exert significant influence over the significant financial and operating activities of Elementum. Accordingly, Elementum meets the criteria to
be accounted for under the equity method. White Mountains has taken the fair value option for its investment in Elementum. Changes in the fair value of
Elementum are recorded in realized and unrealized investment gains. As of December 31, 2020, White Mountains’s maximum exposure to loss on its
investment in Elementum is limited to the carrying value of $55.1 million.
PassportCard/DavidShield
On January 24, 2018, White Mountains acquired a 50% ownership interest in DavidShield, its joint venture partner in PassportCard. As part of the
transaction, White Mountains reorganized its equity stake in PassportCard so that White Mountains and its partner in DavidShield would each own 50% of
both businesses. To facilitate the transaction, White Mountains provided financing to its partner in the form of a non-interest bearing loan that is secured by
the partner’s equity in PassportCard/DavidShield. The gross purchase price for the 50% interest in DavidShield was $41.8 million, or $28.3 million net of
the financing provided for the restructuring.
On May 7, 2020, White Mountains made an additional $15.0 million investment in PassportCard/DavidShield to support
operations through the ongoing COVID-19 pandemic. The transaction increased White Mountains’s ownership interest from
50.0% to 53.8%, but had no impact on the governance structure of the companies, including White Mountains’s board representation or other investor
rights. The governance structures for both PassportCard and DavidShield were designed to give White Mountains and its co-investor equal power to make
the decisions that most significantly impact operations.
As a result of the transaction, White Mountains’s re-evaluated its accounting treatment for its investment in PassportCard/DavidShield. Because White
Mountains does not have the unilateral power to direct the operations of PassportCard or DavidShield, White Mountains does not hold a controlling
financial interest and does not consolidate either entity. White Mountains’s ownership interest gives White Mountains the opportunity to exert significant
influence over the significant financial and operating activities of PassportCard/DavidShield. Accordingly, White Mountains’s investment in
PassportCard/DavidShield meets the criteria to be accounted for under the equity method. White Mountains has taken the fair value option for its
investment in PassportCard/DavidShield. Changes in the fair value of PassportCard/DavidShield are recorded in realized and unrealized investment gains.
As of December 31, 2020, White Mountains’s maximum exposure to loss on its equity investment in PassportCard/DavidShield and the non-interest
bearing loan to its partner is limited to the total carrying value of $104.4 million.
Kudu
On April 4, 2019, White Mountains completed the Kudu Transaction for cash consideration of $81.4 million. White Mountains recognized total assets
acquired of $155.5 million, including $7.6 million of goodwill and $2.2 million other intangible assets, total liabilities assumed of $0.8 million and non-
controlling interest of $1.5 million. As a result of the Kudu Transaction, White Mountains’s basic unit ownership of Kudu increased from 49.5% to 99.1%
(42.7% to 85.4% on a fully diluted, fully converted basis), and White Mountains began consolidating Kudu as a reportable segment in its financial
statements during the second quarter of 2019. White Mountains’s consolidated financial statements and its segment disclosures include Kudu’s results for
the period from April 4, 2019 to December 31, 2019.
For periods prior to the Kudu Transaction, White Mountains determined that Kudu was a VIE but that White Mountains was not the primary
beneficiary. White Mountains’s ownership interest gave White Mountains the opportunity to exert significant influence over the significant financial and
operating activities of Kudu. Accordingly, for the year ended December 31, 2018, Kudu met the criteria to be accounted for under the equity method. White
Mountains took the fair value option for its investment in Kudu, measuring its investment in Kudu at fair value using NAV as a practical expedient with
changes therein recorded in realized and unrealized investment gains for the year ended December 31, 2018.
F - 60
Note 17. Fair Value of Financial Instruments
White Mountains records its financial instruments at fair value with the exception of debt obligations which are recorded as debt at face value less
unamortized original issue discount.
The following tables presents the fair value and carrying value of these financial instruments as of December 31, 2020 and 2019:
Millions
NSM Bank Facility
Other NSM debt
Kudu Bank Facility
(1)
Other Operations debt
December 31, 2020
December 31, 2019
Fair Value
Carrying Value
Fair Value
Carrying Value
$
$
$
$
279.3
1.3
89.3
18.8
$
$
$
$
271.3
1.3
86.3
17.5
$
$
$
$
221.2
1.7
53.6
11.3
$
$
$
$
217.4
1.8
53.6
10.7
(1)
As of December 31, 2019, White Mountains measured the fair value of the Kudu Bank Facility debt at the carrying value as a result of the debt being acquired on December
23, 2019. See Note 5 — “Debt”.
The fair value estimates for the NSM Bank Facility, the Other NSM debt, the Kudu Bank Facility and Other Operations debt have been determined
based on a discounted cash flow approach and are considered to be Level 3 measurements.
Note 18. Commitments and Contingencies
White Mountains leases certain office spaces under non-cancellable operating leases that expire on various dates through 2022. Rental expense for all
of White Mountains’s locations was $7.7 million, $7.2 million and $5.5 million for the years ended December 31, 2020, 2019 and 2018. White Mountains
also has various other lease obligations that are immaterial in the aggregate. White Mountains’s future annual minimum rental payments required under
non-cancellable leases, which are primarily for office space, are $7.7 million, $7.3 million, $7.1 million, and $23.1 million for the years ending December
31, 2021, 2022, 2023 and 2024 and thereafter.
White Mountains also has future binding commitments to fund certain other long-term investments. These commitments, which totaled $297.8 million
as of December 31, 2020, do not have fixed funding dates.
Legal Contingencies
White Mountains is subject to litigation and arbitration in the normal course of business. White Mountains considers the requirements of ASC 450
when evaluating its exposure to litigation and arbitration. ASC 450 requires that accruals be established for litigation and arbitration if it is probable that a
loss has been incurred and it can be reasonably estimated. ASC 450 also requires that litigation and arbitration be disclosed if it is probable that a loss has
been incurred or if there is a reasonable possibility that a loss may have been incurred. White Mountains does not have any current litigation that may have
a material adverse effect on White Mountains’s financial condition, results of operations or cash flows.
The following description presents significant legal contingencies, ongoing non-claims related litigation or arbitration as of December 31, 2020:
Sirius Group Tax Contingency
On April 18, 2016, White Mountains completed the sale of Sirius International Insurance Group, Ltd. (“Sirius Group”) to CM International Pte. Ltd.
and CM Bermuda Limited (collectively “CMI”). In connection with the sale, White Mountains indemnified Sirius Group against the loss of certain interest
deductions. In late October 2018, the Swedish Administrative Court ruled against Sirius Group on its appeal of the Swedish Tax Agency’s denial of these
interest deductions, which related to periods prior to the sale of Sirius Group to CMI. As a result, in 2018 White Mountains recorded a loss of $17.3 million
within net (loss) gain on sale of discontinued operations reflecting the value of these interest deductions.
As of December 31, 2020 and December 31, 2019, White Mountains reported a liability of $18.7 million and $16.5 million, reflecting the value of
these interest deductions. During 2020, the increase in the liability of $2.2 million is related to foreign currency translation and included within net loss on
sale of discontinued operations. Sirius Group has appealed the decision to the Swedish Administrative Court of Appeal.
F - 61
Esurance
On October 7, 2011, the Company completed the sale of its Esurance Holdings, Inc. and its subsidiaries and Answer Financial Inc. and its subsidiaries
(collectively, “Esurance”) to The Allstate Corporation (“Allstate”) pursuant to a Stock Purchase Agreement dated as of May 17, 2011. Subject to specified
thresholds and limits, the Company remains contingently liable to Allstate for specified matters related to the pre-closing period, including (a) losses of
Esurance arising from extra-contractual claims and claims in excess of policy limits, (b) certain corporate reorganizations effected to remove entities from
Esurance that were not being sold in the transaction, and (c) certain tax matters, including certain net operating losses being less than stated levels.
Note 19. Held for Sale and Discontinued Operations
Sirius Group
On April 18, 2016, White Mountains completed the sale of Sirius Group to CMI. In connection with the sale, White Mountains indemnified Sirius
Group against the loss of certain interest deductions. In late October 2018, the Swedish Administrative Court ruled against Sirius Group on its appeal of the
Swedish Tax Agency’s denial of these interest deductions, which related to periods prior to the sale of Sirius Group to CMI. As a result, in 2018 White
Mountains recorded a loss of $17.3 million within net (loss) gain on sale of discontinued operations reflecting the value of these interest deductions.
As of December 31, 2020 and 2019, White Mountains reported a liability of $18.7 million and $16.5 million. During 2020, the increase in the liability
of $2.2 million is related to foreign currency translation and included within net loss on sale of discontinued operations. Sirius Group has appealed the
decision to the Swedish Administrative Court of Appeal. See Note 18 — “Commitments and Contingencies”.
Other
As of December 31, 2017, White Mountains has classified its Guilford, Connecticut property, which consists of an office building and adjacent land, as
held for sale. On August 20, 2020, the office building was sold for $2.3 million. For the twelve months ended December 31, 2020, White Mountains
recognized $0.1 million of realized loss on the sale of the office building. As of December 31, 2020, the adjacent land has been measured at its estimated
fair value, net of costs of disposal, of $0.7 million. As of December 31, 2019, the property was measured at its estimated fair value, net of costs of disposal,
of $3.0 million.
As of December 31, 2020, assets held for sale also includes a corporate aircraft. The aircraft has been measured at its carrying value of $1.7 million,
which is lower than its estimated fair value.
F - 62
Earnings Per Share from Discontinued Operations
White Mountains calculates earnings per share using the two-class method, which allocates earnings between common and unvested restricted
common shares. Both classes of shares participate equally in earnings on a per share basis. Basic earnings per share amounts are based on the weighted
average number of common shares outstanding adjusted for unvested restricted common shares. Diluted earnings per share amounts are also impacted by
the net effect of potentially dilutive common shares outstanding. The following table presents the Company’s computation of earnings per share for
discontinued operations for the years ended December 31, 2020, 2019 and 2018:
Year Ended December 31,
2020
2019
2018
Basic and diluted earnings per share numerators (in millions):
Net income (loss) attributable to White Mountains’s common shareholders
$
708.7
$
414.5
$
Less: total income (loss) from continuing operations, net of tax
Net (loss) income from discontinued operations attributable to
White Mountains’s common shareholders
Allocation of (earnings) losses to participating restricted common shares
(1)
(2.3)
—
711.0
413.7
Basic and diluted (loss) earnings per share numerators
$
(2.3)
$
Basic earnings per share denominators (in thousands):
Total average common shares outstanding during the period
Average unvested restricted common shares
(3)
Basic earnings (loss) per share denominator
Diluted earnings per share denominator (in thousands):
Total average common shares outstanding during the period
Average unvested restricted common shares
(3)
Diluted earnings (loss) per share denominator
3,122.2
(40.8)
3,081.4
3,122.2
(40.8)
3,081.4
.8
—
.8
$
3,181.6
(40.5)
3,141.1
3,181.6
(40.5)
3,141.1
(141.2)
(124.0)
(17.2)
.2
(17.0)
3,382.5
(40.1)
3,342.4
3,382.5
(40.1)
3,342.4
(5.09)
(5.09)
Basic (loss) earnings per share (in dollars) - discontinued operations:
Diluted (loss) earnings per share (in dollars) - discontinued operations:
$
$
(.75)
(.75)
$
$
.25
.25
$
$
(1)
(2)
(3)
Restricted shares issued by White Mountains contain dividend participation features, and therefore, are considered participating securities.
Net earnings attributable to White Mountains’s common shareholders, net of restricted share amounts, is equal to undistributed earnings for the years ended December 31, 2020, 2019 and
2018.
Restricted common shares outstanding vest either in equal annual installments or upon a stated date. See Note 10 — “Employee Share-Based Compensation Plans”.
F - 63
Note 20. Subsequent Event
Ark
On October 1, 2020, White Mountains entered into the Ark SPA with the Ark Sellers. Certain Ark Sellers also entered into the Ark Acquisition
Agreement pursuant to which they made certain warranties about the Ark business. Under the terms of the Ark Acquisition Agreement, White Mountains
agreed to contribute $605.4 million of equity capital to Ark, at a pre-money valuation of $300.0 million, and to purchase $40.9 million of shares from the
Ark Sellers. White Mountains also agreed to contribute up to an additional $200.0 million of equity capital to Ark in 2021. In accordance with the Ark
SPA, in the fourth quarter of 2020 White Mountains pre-funded/placed in escrow a total of $646.3 million in preparation for closing the transaction,
including $280.0 million funded directly to Lloyd’s on behalf of Ark under the terms of a credit facility agreement and $366.3 million placed in escrow,
which is reflected on the balance sheet within the Other Operations segment as of December 31, 2020.
On January 1, 2021, White Mountains closed the transaction in accordance with the terms of the Ark SPA. At closing, White Mountains owned 72.0%
of Ark on a basic shares outstanding basis (63.0% on a fully-diluted, fully-converted basis, taking account of management’s equity incentives). If the
additional $200.0 million is contributed in full, White Mountains will own 77.1% of Ark on a basic shares outstanding basis (67.5% on a fully-diluted,
fully-converted basis). Management’s equity incentives are subject to an 8.0% rate of return threshold with no catch-up. The remaining shares are owned
by employees. In the future, management rollover shareholders could earn additional shares in the company if and to the extent that White Mountains
achieves certain multiple of invested capital return thresholds. These additional shares are generally eligible to vest in three equal tranches at MOIC
thresholds of 2.0x, 2.5x and 3.0x. If fully earned, these additional shares would represent 12.5% of the shares outstanding at closing.
Ark writes a diversified and balanced portfolio of reinsurance and insurance, including property, accident & health, energy, marine and political risks,
through Lloyd’s Syndicates 4020 and 3902. Beginning in January 2021, Ark began writing certain classes of its business through Group Ark Insurance
Limited, Ark’s wholly-owned Bermuda-based insurance and reinsurance company.
F - 64
MANAGEMENT’S RESPONSIBILITY FOR FINANCIAL STATEMENTS
Management is responsible for the preparation and fair presentation of the financial statements included in this report. The financial statements have
been prepared in conformity with GAAP in the United States. 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 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.
The Audit Committee of the Board, which is comprised entirely of independent, qualified directors, is responsible for the oversight of our accounting
policies, financial reporting and internal control including the appointment and compensation of our independent registered public accounting firm. The
Audit Committee meets periodically with management, our independent registered public accounting firm and our internal auditors to ensure they are
carrying out their responsibilities. The Audit Committee is also responsible for performing an oversight role by reviewing our financial reports. Our
independent registered public accounting firm and internal auditors have full and unlimited access to the Audit Committee, with or without management
present, to discuss the adequacy of internal control over financial reporting and any other matters which they believe should be brought to their attention.
MANAGEMENT’S ANNUAL REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-
15(f) under the Securities Exchange Act of 1934. There are inherent limitations in the effectiveness of any internal control over financial reporting,
including the possibility of human error and the circumvention or overriding of internal control. Accordingly, even effective internal control over financial
reporting can provide only reasonable assurance with respect to financial statement preparation. Further, an effective internal control environment as of a
point in time may become inadequate in the future because of changes in conditions, or deterioration in the degree of compliance with the policies and
procedures.
We assessed the effectiveness of White Mountains’s internal control over financial reporting as of December 31, 2020. Our assessment did not include
an assessment of the internal control over financial reporting for Kingsbridge Group Limited, which was acquired on April 7, 2020. This acquisition
represents less than 1% of White Mountains’s total assets as of December 31, 2020 and 1.1% of White Mountains’s total revenue for the year ended
December 31, 2020. In making our assessment, we used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission
(COSO) in Internal Control-Integrated Framework (2013). Based on this assessment, we have concluded that White Mountains maintained effective
internal control over financial reporting as of December 31, 2020.
PricewaterhouseCoopers LLP, the Company’s independent registered public accounting firm, has audited the effectiveness of White Mountains’s
internal control over financial reporting as of December 31, 2020 as stated in their report which appears on page F-66.
February 26, 2021
/s/ G. MANNING ROUNTREE
Chief Executive Officer
(Principal Executive Officer)
/s/ REID T. CAMPBELL
Executive Vice President and Chief Financial Officer
(Principal Financial Officer)
F - 65
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of White Mountains Insurance Group, Ltd.
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated balance sheets of White Mountains Insurance Group, Ltd. and its subsidiaries (the “Company”) as of
December 31, 2020 and 2019, and the related consolidated statements of operations, of comprehensive income, of shareholders' equity and of cash flows
for each of the three years in the period ended December 31, 2020, including the related notes and financial statement schedules listed in the index
appearing after the signature page (collectively referred to as the “consolidated financial statements”). We also have audited the Company's internal control
over financial reporting as of December 31, 2020, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee
of Sponsoring Organizations of the Treadway Commission (COSO).
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of
December 31, 2020 and 2019, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2020 in
conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material
respects, effective internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control - Integrated
Framework (2013) issued by the COSO.
Basis for Opinions
The Company's management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting,
and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Annual Report on
Internal Control over Financial Reporting. Our responsibility is to express opinions on the Company’s consolidated financial statements and on the
Company's internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting
Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities
laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable
assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective
internal control over financial reporting was maintained in all material respects.
Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial
statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis,
evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used
and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal
control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness
exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing
such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
As described in Management's Annual Report on Internal Control over Financial Reporting, management has excluded Kingsbridge Group Limited from
its assessment of internal control over financial reporting as of December 31, 2020 because it was acquired by the Company in a purchase business
combination during 2020. We have also excluded Kingsbridge Group Limited from our audit of internal control over financial reporting. Kingsbridge
Group Limited is a majority-owned subsidiary whose total assets and total revenues excluded from management’s assessment and our audit of internal
control over financial reporting represent less than 1% and 1.1%, respectively, of the related consolidated financial statement amounts as of and for the year
ended December 31, 2020.
F - 66
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control
over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding
prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial
statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were
communicated or required to be communicated to the audit committee and that (i) relate to accounts or disclosures that are material to the consolidated
financial statements and (ii) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not
alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below,
providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
Goodwill Impairment Assessment - NSM Reporting Unit
As described in Notes 1, 2 and 4 to the consolidated financial statements, the Company acquired NSM Insurance HoldCo, LLC and its subsidiaries
(collectively, “NSM”) in 2018 and NSM subsequently acquired Fresh Insurance Services Group Limited (“Fresh Insurance”) and the net assets of KBK
Insurance Group, Inc. (“KBK”) in 2018 and Embrace Pet Insurance (“Embrace”) in 2019. As of December 31, 2020, a significant portion of the $506.4
million NSM reporting unit goodwill is associated with these acquisitions. As disclosed by management, goodwill is reviewed for potential impairment on
an annual basis, or whenever indications of potential impairment exist. The annual review first assesses whether qualitative factors indicate that the
carrying value of goodwill may be impaired, and if it is more likely than not that an impairment may exist, then a quantitative analysis is performed to
compare the fair value of a reporting unit with its carrying value. Both the annual qualitative assessment of potential impairment as well as the quantitative
comparison of carrying value to estimated fair value involve management judgment. The use of discounted cash flow models, market comparisons and
other valuation techniques, as well as assumptions, including revenue growth rates, are inherently subjective. If the carrying value had exceeded the
estimated fair value, then an impairment charge would have been recognized through current period pre-tax income.
The principal considerations for our determination that performing procedures relating to the goodwill impairment assessment for the NSM reporting unit
is a critical audit matter are (i) the significant judgment by management to determine the fair value of the reporting unit, which in turn led to a high degree
of auditor judgment and subjectivity in applying procedures relating to the goodwill impairment assessment; (ii) the significant audit effort in evaluating
the audit evidence relating to management’s discounted cash flow model and market comparisons valuation techniques and significant assumptions related
to the revenue growth rates for the aforementioned entities within the NSM reporting unit; and (iii) the audit effort involved the use of professionals with
specialized skill and knowledge.
F - 67
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated
financial statements. These procedures included testing the effectiveness of controls relating to management’s goodwill impairment assessment, including
controls over the valuation of the NSM reporting unit, the discounted cash flow model and market comparisons valuation techniques, and development of
significant assumptions related to the revenue growth rates. These procedures also included, among others (i) testing management’s process for developing
the fair value of the reporting unit; (ii) evaluating the appropriateness of the discounted cash flow model and market comparisons valuation techniques; and
for the aforementioned entities within the NSM reporting unit, (iii) testing the completeness and accuracy of the underlying data used in the discounted
cash flow model; and (iv) evaluating the reasonableness of the significant assumptions related to the revenue growth rates. Evaluating the revenue growth
rates involved evaluating whether the assumptions used by management were reasonable considering (i) the current and past performance of the reporting
unit, (ii) the consistency with external market and industry data; and (iii) whether the assumptions were consistent with evidence obtained in other areas of
the audit. Professionals with specialized skill and knowledge were used to assist in the evaluation of the appropriateness of the Company’s discounted cash
flow model and market comparisons valuation techniques.
Valuation of Certain Other Long-Term Investments
As described in Notes 1 and 3 to the consolidated financial statements, the Company maintains various other non-controlling equity interests in operating
businesses accounted for at fair value within other long-term investments. The fair values of the most significant of these investments, classified within
other long-term investments as of December 31, 2020, consist of PassportCard Limited and DavidShield Life Insurance Agency (2000) Ltd. (collectively,
“PassportCard/DavidShield”) for $95.0 million; Elementum Holdings L.P. (“Elementum”) for $55.1 million; and certain participation contracts of Kudu
Investment Management, LLC and its subsidiaries (collectively, “Kudu”) representing a portion of the total Kudu participation contracts of $400.6 million.
As disclosed by management, they applied significant judgment in determining the fair value of these other long-term investments using discounted cash
flow models, which involved the use of key inputs with respect to (i) for PassportCard/DavidShield and Elementum, projections of future revenues and
earnings, discount rates, and terminal revenue growth rates, and (ii) for certain participation contracts of Kudu, projections of future revenues and earnings
of Kudu’s clients, discount rates, and terminal cash flow exit multiples.
The principal considerations for our determination that performing procedures relating to the valuation of certain other long-term investments is a critical
audit matter are (i) the significant judgment by management to determine the fair value of these other long-term investments, which in turn led to a high
degree of auditor judgment and subjectivity in performing procedures relating to the fair value measurement; (ii) the significant audit effort in evaluating
the audit evidence relating to the discounted cash flow models and the key inputs related to (a) projections of future revenues and earnings for
PassportCard/DavidShield and Elementum, and (b) projections of future revenues and earnings of Kudu’s clients for certain participation contracts of
Kudu; and (iii) the audit effort involved the use of professionals with specialized skill and knowledge.
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated
financial statements. These procedures included testing the effectiveness of controls relating to the valuation of certain other long-term investments,
including controls over the Company’s discounted cash flow models and determination of key inputs. These procedures also included, among others, the
involvement of professionals with specialized skill and knowledge to assist in developing an independent fair value range of each of the aforementioned
investments and comparing management’s estimate to the independently developed range. Developing the independent estimate involved (i) testing the
completeness and accuracy of data provided by management and (ii) evaluating management’s key inputs related to (a) projections of future revenues and
earnings for PassportCard/DavidShield and Elementum, and (b) projections of future revenues and earnings of Kudu’s clients for certain participation
contracts of Kudu.
/s/ PricewaterhouseCoopers LLP
Boston, Massachusetts
February 26, 2021
We have served as the Company’s auditor since 1999.
F - 68
SELECTED QUARTERLY FINANCIAL DATA
(Unaudited)
The following table presents selected quarterly financial data for 2020 and 2019. The quarterly financial data includes, in the opinion of management,
all recurring adjustments necessary for a fair presentation of the results of operations for the interim periods.
Prior year amounts have been reclassified to conform to the current period’s presentation. Prior year amounts have also been adjusted for the impact of
White Mountains’s financial statement revisions.
Millions, Except Per Share Amounts
Revenues
Expenses
Pre-tax income (loss)
Tax (expense) benefit
Income (loss) from continuing operations
(1)
Net (loss) gain from discontinued operations, net
of tax
Non-controlling interest in consolidated
subsidiaries
Income (loss) attributable to White
Mountains’s common shareholders
Income (loss) attributable to White Mountains’s
common shareholders per share:
Basic
Continuing operations
Discontinued operations
Total consolidated operations
Diluted
Continuing operations
Discontinued operations
Total consolidated operations
2020 Three Months Ended
2019 Three Months Ended
Dec. 31
Sept. 30
June 30
Mar. 31
Dec. 31
Sept. 30
June 30
Mar. 31
$
520.8
$
459.5
$
259.6
$
163.5
357.3
117.6
474.9
(1.5)
15.8
138.3
321.2
(98.5)
222.7
(.7)
10.9
126.9
132.7
(24.1)
108.6
(1.0)
7.8
(59.2)
106.8
(166.0)
25.5
(140.5)
.9
10.8
$
175.3
$
155.5
$
129.0
$
118.8
56.5
(10.4)
46.1
(.8)
15.6
104.4
51.1
(8.8)
42.3
.9
5.5
113.2
15.8
.1
15.9
—
4.6
433.6
151.9
281.7
(10.2)
271.5
.7
12.2
$
489.2
$
232.9
$
115.4
$ (128.8)
$
60.9
$
48.7
$
20.5
$
284.4
$ 158.19
(.49)
$ 157.70
$ 158.19
(.49)
$ 157.70
$
$
$
$
75.32
(.23)
75.09
75.32
(.23)
75.09
$
$
$
$
37.46
$ (40.82)
(.32)
.28
37.14
$ (40.54)
37.46
(.32)
37.14
$ (40.82)
.28
$ (40.54)
$
$
$
$
19.37
(.25)
19.12
19.37
(.25)
19.12
$
$
$
$
15.01
.28
15.29
15.01
.28
15.29
$
$
$
$
6.44
—
6.44
6.44
—
6.44
$
$
$
$
89.42
.22
89.64
89.42
.22
89.64
(1)
During 2020 and 2019, net (loss) gain from discontinued operations arose from the tax contingency on the sale of Sirius Group. See Note 18 — “Commitments and Contingencies”.
F - 69
SCHEDULE I
WHITE MOUNTAINS INSURANCE GROUP, LTD.
SUMMARY OF INVESTMENTS—OTHER THAN
INVESTMENTS IN RELATED PARTIES
At December 31, 2020
Millions
Fixed maturity investments:
U.S. Government and agency obligations
Debt securities issued by corporations
Municipal obligations
Mortgage and asset-backed securities
Total fixed maturity investments
Short-term investments
Investment in MediaAlpha
Other long-term investments
Total investments
Cost
Carrying
Value
Fair
Value
$
173.2
$
176.3
$
522.8
244.0
211.7
1,151.7
142.9
—
547.4
265.0
218.5
1,207.2
142.9
802.2
767.4
2,062.0
$
786.8
2,939.1
$
$
176.3
547.4
265.0
218.5
1,207.2
142.9
802.2
786.8
2,939.1
Schedules of the Registrant should be read in conjunction with the Consolidated Financial Statements and Notes.
FS 1
FS-1
SCHEDULE II
CONDENSED FINANCIAL INFORMATION OF THE REGISTRANT
CONDENSED BALANCE SHEETS
(1)
Millions
Assets:
Cash
Fixed maturity investments, at fair value
Common equity securities, at fair value
Short-term investments, at amortized cost
Other assets
Investments in consolidated subsidiaries
Total assets
Liabilities:
Payable to subsidiary
Other liabilities
Total liabilities
(2)
White Mountains’s common shareholders’ equity
Non-controlling interests
Total liabilities and equity
December 31,
2020
2019
.7
$
10.1
—
24.3
2.5
3,726.0
3,763.6
(195.6)
39.7
(155.9)
3,906.0
13.5
3,763.6
$
$
$
.7
10.0
193.5
66.2
1.9
2,969.0
3,241.3
(69.3)
34.7
(34.6)
3,261.5
14.4
3,241.3
$
$
$
$
(1)
(2)
These condensed unconsolidated financial statements reflect the results of operations, financial condition and cash flows for the Company. Investments in which White Mountains holds a
controlling financial interest are accounted for using the equity method. Under the equity method, investments in subsidiaries are recorded on the condensed balance sheets at the amount of the
Company’s ownership percentage of the subsidiary’s GAAP book value. The income from subsidiaries is reported on a net of tax basis as equity in earnings from consolidated and
unconsolidated subsidiaries on the condensed statements of operations and comprehensive income. Capital contributions to and distributions from consolidated subsidiaries are presented
within investing activities on the condensed statements of cash flows.
As of December 31, 2020 and 2019, White Mountains’s other liabilities includes $18.7 and $16.5 related to the Sirius Group tax contingency. See Note 18 — “Commitments and
Contingencies”.
Schedules of the Registrant should be read in conjunction with the Consolidated Financial Statements and Notes.
FS-2
SCHEDULE II (continued)
CONDENSED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
(1)
Millions
Revenues (loss) (including realized and unrealized gains and losses)
Expenses
Pre-tax income (loss)
Income tax expense
Net income (loss)
Net gain (loss) from discontinued operations, net of tax
(2)
Equity in earnings from consolidated and unconsolidated
subsidiaries,
net of tax
Net income attributable to non-controlling interests
Net income (loss) attributable to White Mountains’s
common shareholders
Other comprehensive (loss) income items, net of tax
Year Ended December 31,
2019
2018
2020
$
(8.7)
$
61.0
(69.7)
(.3)
(70.0)
(2.3)
782.0
(1.0)
708.7
6.8
$
65.0
47.1
17.9
(.9)
17.0
.8
398.5
(1.8)
414.5
(1.4)
(47.7)
45.9
(93.6)
(2.5)
(96.1)
(17.2)
(27.4)
(0.5)
(141.2)
(4.5)
Comprehensive income (loss) attributable to White Mountains’s
common shareholders
$
715.5
$
413.1
$
(145.7)
(1)
(2)
These condensed unconsolidated financial statements reflect the results of operations, financial condition and cash flows for the Company. Investments in which White Mountains holds a
controlling financial interest are accounted for using the equity method. Under the equity method, investments in subsidiaries are recorded on the condensed balance sheets at the amount of
the Company’s ownership percentage of the subsidiary’s GAAP book value. The income from subsidiaries is reported on a net of tax basis as equity in earnings of subsidiaries on the
condensed statements of operations and comprehensive income. Capital contributions to and distributions from subsidiaries are presented within investing activities on the condensed
statements of cash flows.
During 2020, 2019 and 2018, net gain (loss) from discontinued operations includes $(2.3), $0.8 and $(17.3) arising from the tax contingency on the sale of Sirius Group. See Note 18 —
“Commitments and Contingencies”.
Schedules of the Registrant should be read in conjunction with the Consolidated Financial Statements and Notes.
FS-3
SCHEDULE II (continued)
CONDENSED STATEMENTS OF CASH FLOWS
(1)
Millions
Net income (loss) attributable to White Mountains’s common shareholders
Charges (credits) to reconcile net income to net cash from operations:
Net realized and unrealized investment (gains) losses on sales of investments
Undistributed earnings from subsidiaries
Net (gain) loss from sale of discontinued operations, net of tax
Other non-cash reconciling items, primarily amortization of restricted share and option awards
(2)
(3)
Net change in other assets and liabilities
Net cash (used for) provided from operations
(4)
Cash flows from investing activities:
(5)
Net change in short-term investments
(6)
Purchases of investment securities
Sales and maturities of investment securities
Issuance of debt (to) from subsidiaries
Repayment of debt to (from) subsidiaries
Net distributions from (contributions to) subsidiaries
(7)
(8)
(9)
(10)(11)
Net cash provided from (used for) investing activities
Cash flows from financing activities:
Repurchases and retirement of common shares
Dividends paid on common shares
Payments of restricted shares withholding taxes
(8)
Net cash used for financing activities
Net decrease in cash during the year
Cash balance at beginning of year
Cash balance at end of year
Year Ended December 31,
2019
2020
2018
$
708.7 $
414.5 $
(141.2)
10.1
(782.0)
2.3
19.0
(2.6)
(44.5)
(127.4)
(6.7)
189.7
(44.5)
92.6
29.1
132.8
(78.5)
(3.2)
(6.6)
(88.3)
—
.7
.7 $
(61.0)
(398.5)
(.8)
20.0
3.0
(22.8)
(37.6)
(14.8)
207.9
(83.5)
5.0
(46.1)
30.9
—
(3.2)
(4.9)
(8.1)
—
.7
.7 $
57.8
27.4
17.2
34.6
16.7
12.5
134.0
(321.2)
967.6
(55.2)
31.0
(258.2)
498.0
(510.9)
(3.8)
(10.0)
(524.7)
(14.2)
14.9
.7
$
(1)
These condensed unconsolidated financial statements reflect the results of operations, financial condition and cash flows for the Company. Investments in which White Mountains holds a
controlling financial interest are accounted for using the equity method. Under the equity method, investments in consolidated subsidiaries are recorded on the condensed balance sheets at the
amount of the Company’s ownership percentage of the subsidiary’s GAAP book value. The income from consolidated subsidiaries is reported on a net of tax basis as equity in earnings of
subsidiaries on the condensed statements of operations and comprehensive income. Capital contributions to and distributions from consolidated subsidiaries are presented within investing
activities on the condensed statements of cash flows.
(2)
During 2020, 2019 and 2018, net gain (loss) from sale of discontinued operations includes $(2.3), $0.8 and $(17.3) arising from the tax contingency on the sale of Sirius Group. See Note 18
— “Commitments and Contingencies”.
(3)
(4)
(5)
For the years ended December 31, 2020, 2019 and 2018, amortization of restricted share awards was $16.6, $10.5 and $13.0.
For 2020, 2019 and 2018, net change in other assets and liabilities also included a $(4.8), $(6.6), and $4.0 net change in (receivables) payables to the Company’s subsidiaries.
During 2020, the Company had non-cash purchases of short-term investments of $169.6. During 2018, the Company had non-cash purchases of short-term investments of $284.6 and non-
cash sales of short-term investments of $179.2.
(6)
During 2018, the Company had non-cash purchases of investment securities of $603.9, which included $170.5 of fixed maturity securities, $148.8 of common equity securities and $22.7 of
other long term investments.
(7)
During 2018, the Company had non-cash sales of investment securities of $1,065.4, which included $373.4 of fixed maturity securities, $490.1 of common equity securities and $22.7 of
other long-term investments.
(8)
During 2020, the Company had non-cash issuance of debt of $169.6 to its wholly-owned subsidiary, Bridge Holdings (“Bridge”). Proceeds of the debt, which were short-term investments,
were transferred to Bridge. During 2018, the Company had non-cash issuance of debt of $349.5 to its wholly-owned subsidiary, Guilford Holding, Inc. (“Guilford”). Proceeds of the debt,
which included $170.4 of fixed maturity securities and $179.2 of short-term investments, were transferred to Guilford.
(9)
(10)
During 2018, the Company received non-cash repayments of $22.7 from its wholly-owned subsidiary, Bridge in the form of other long term investments.
During 2019, the Company made cash contributions of $70.5 and $2.0 to Bridge and its wholly-owned subsidiary, White Mountains Investment Bermuda, Ltd (“WMIB”). During 2018, the
Company made non-cash contributions of $350.0 by transferring intercompany debt receivable from Guilford to Bridge. Also during 2018, the Company made a non-cash contribution of
$1.0 by transferring intercompany debt receivable from White Mountains Investments (Luxembourg) S.a’r.l. (“White Mountains Investments”), a wholly-owned subsidiary of Bridge, to
Bridge. During 2018, the Company made cash contributions of $255.3 and $2.9 to Bridge and WMIB.
(11)
During 2020, the Company received cash distributions of $6.8 and $22.3 from its wholly-owned subsidiary, PSC Holdings, Ltd. and the Company’s subsidiary, HG Global Ltd. During 2019,
the Company received cash distributions of $24.4 and $1.9 from WMIB and the Company’s subsidiary, HG Global Ltd.
Schedules of the Registrant should be read in conjunction with the Consolidated Financial Statements and Notes.
FS-4
SCHEDULE III
WHITE MOUNTAINS INSURANCE GROUP, LTD.
SUPPLEMENTARY INSURANCE INFORMATION
Column
A
Millions
Segment
Years ended:
December 31,
2020
HG Global/
BAM
December 31,
2019
HG Global/
BAM
December 31,
2018
HG Global/
BAM
Column
B
Column C
Column
D
Column
E
Column
F
Column
G
Column
H
Column
I
Column
J
Column
K
Future
Policy
Benefits,
Losses,
Claims
and Loss
Expenses
Deferred
Acqui-
sition
Costs
Other
Policy
Claims
and
Benefits
Payable
Unearned
Premiums
Premiums
Earned
Net
Investment
Income
Benefits,
Claims,
Losses and
Settlement
Expenses
Amortization
of Deferred
Policy
Acquisition
Costs
Other
Operating
Expenses
Premiums
Written
$
27.8
$
—
$
237.5
$
—
$
22.8
$
19.5
$
—
$
7.0
$
.4
$
61.7
22.1
—
198.4
—
16.3
21.6
19.0
—
176.0
—
13.9
16.7
—
—
5.7
5.3
.4
.4
38.7
52.9
Schedules of the Registrant should be read in conjunction with the Consolidated Financial Statements and Notes.
FS-5
SCHEDULE IV
Column A
$ in Millions
Premiums Earned
Year ended:
December 31, 2020
HG Global/BAM
December 31, 2019
HG Global/BAM
December 31, 2018
HG Global/BAM
WHITE MOUNTAINS INSURANCE GROUP, LTD.
REINSURANCE
Column B
Column C
Column D
Column E
Column F
Gross Amount
Ceded to Other
Companies
Assumed from
Other Companies
Net Amount
Percentage of
Amount Assumed
to Net
$
19.4
$
—
$
3.4
$
22.8
14.9 %
13.6
13.6
—
—
2.7
.3
16.3
13.9
16.6
2.2
Schedules of the Registrant should be read in conjunction with the Consolidated Financial Statements and Notes.
FS-6
Exhibit 4
The summary of the terms of White Mountains’s common shares set forth below does not purport to be complete and is qualified in its
entirety by reference to our memorandum of continuance and bye-laws.
DESCRIPTION OF COMMON SHARES
Authorized Share Capital
White Mountains's memorandum of continuance and the bye-laws provide that its authorized share capital is limited to 50,000,000
common shares, par value U.S. $1.00 per share. As of February 24, 2021, 3,095,829 common shares were issued and outstanding.
Voting
The holders of common shares are entitled to one vote per share except as restricted by the voting limitation described below (subject to
the rights of the holders of any other class of shares that may be issued). All actions submitted to a vote of shareholders shall be voted on by
the holders of common shares, voting together as a single class, except as provided by law.
With respect to the election of directors, each holder of common shares entitled to vote at the election has the right to vote, in person or
by proxy, the number of shares held by him or her for as many persons as there are directors to be elected and for whose election that holder
has a right to vote. The directors are divided into three classes with staggered terms, with only one class standing for election each year. Each
nominee receiving the majority of the votes cast at a meeting duly called and constituted shall be elected a director of the company; provided,
however, that (i) in a contested director election in which the number of nominees exceeds the number of directors to be elected, the
nominees receiving the highest number of votes, up to the number of directors to be elected, shall be elected (a “Plurality Vote”); and (ii) in
an uncontested election, any director who receives less than a majority of the votes cast with respect to that director’s election shall tender his
or her resignation, but if such resignation is declined by the board of directors of White Mountains in accordance with the bye-laws, such
director shall be elected by a Plurality Vote.
The bye-laws contain a provision limiting the voting rights of any person who beneficially holds (directly, indirectly or constructively
under the Internal Revenue Code) 10% or more of the votes conferred by the issued shares of White Mountains to 9.9% of the votes
conferred by the issued shares of White Mountains. This 9.9% voting limitation provision will not be applicable to any foundation or trust
established by John J. Byrne, Patrick M. Byrne (his son) and/or any affiliate or associate of any of them or any group of which any of them is
a part (each of them, a "Byrne Entity") with respect to any matter submitted to shareholders other than with respect to the election of
directors.
In addition, the bye-laws contain a provision limiting the voting rights of any group (defined as two or more persons acting as a
partnership, syndicate or other group for the purpose of acquiring, holding or disposition of the relevant securities) which beneficially holds
10% or more of the votes conferred by the issued shares of White Mountains to 9.9% of the votes conferred by the issued shares of White
Mountains, except that this provision will not restrict (a) any Byrne Entity or (b) any person or group that the board of directors, by the
affirmative vote of at least 75% of the entire board of directors, may exempt from this provision.
The bye-laws also contain a provision limiting the voting rights of any person to a reduced percentage who, at his or her election, notifies
the board of directors to the percentage designated by such person (subject to acceptance of such cut-back by the board in its sole discretion)
so that (and to the extent) such person may meet any applicable insurance or other regulatory requirement or voting threshold or limitation
that may be applicable to such person or to evidence that such person's voting power is no greater than such threshold.
Dividends
Holders of common shares are entitled to participate, on a share-for-share basis, with the holders of any other common shares
outstanding, with respect to any dividends declared by the board of directors of White Mountains. Dividends will generally be payable in
U.S. dollars.
Liquidation
On a liquidation of White Mountains, holders of common shares are entitled to receive any assets remaining after the payment of our
debts and the expenses of the liquidation, subject to such special rights as may be attached to any other class of shares.
Redemption
White Mountains is entitled to redeem common shares from a shareholder at fair market value if its board of directors determines that
common share ownership by that shareholder may result in adverse tax, regulatory or legal consequences to White Mountains, any of its
subsidiaries or any of the holders of common shares.
Variation of Rights
Under the bye-laws, if at any time White Mountains's share capital is divided into different classes of shares, the rights attached to any
class (unless otherwise provided by the terms of the issue of the shares of that class) may be varied with the consent in writing of the holders
of a majority of the issued shares of that class or with the sanction of a resolution passed at a separate general meeting of the holders of the
shares of that class.
Change of Control
Bermuda law permits an amalgamation or a merger between two or more Bermuda companies subject, unless the bye-laws otherwise
provide, to obtaining a majority vote of three-fourths of the shareholders of each of the companies, and of each class of shares entitled to vote
separately as a class at such a meeting, present and voting in person or by proxy at a meeting called for that purpose. Unless the bye-laws
otherwise provide, Bermuda law also requires that the quorum at the meetings be at least two persons holding or representing by proxy one-
third of the issued shares of the company or the class, as the case may be. Each share of an amalgamating or merging company carries the
right to vote in respect of an amalgamation or merger, whether or not it otherwise carries the right to vote.
Except as set forth in the next paragraph, the bye-laws provide that any amalgamation or merger approved by two-thirds of White
Mountains's board of directors shall only require approval by a majority of the voting power held by the shareholders present at a meeting of
the shareholders where a quorum is present.
White Mountains's bye-laws generally prohibit us from engaging in a "business combination" with an "interested shareholder" for a
period of three years after the time of the transaction in which the person became an interested shareholder, unless:
(1) prior to that time, the board of directors approves the transaction or the business combination;
(2) upon consummation of the transaction which resulted in the shareholder becoming an interested shareholder, the interested
shareholder owned at least 85% of the outstanding voting shares, excluding for purposes of determining the number of shares
outstanding, shares owned by directors who are also officers and by certain employee plans; or
(3) on or after that time the board of directors and the shareholders by an affirmative vote of at least 66 /3% of the outstanding voting
2
shares, which are not owned by the interested shareholder, approve the transaction.
The definition of "business combinations" includes mergers, asset sales and other transactions resulting in a financial benefit to the
interested shareholder. An "interested shareholder" is a person who, together with affiliates and associates, owns or, within three years, did
own 15% or more of White Mountains's voting stock. However, the bye-laws provide that each Byrne Entity is excepted from being an
"interested shareholder".
Bermuda law also provides that where an offer is made for shares in a company by another company and, within four months of the offer,
the holders of at least 90% in value of the shares which are the subject of the offer (other than shares already held by or on behalf of the
offeror) accept, the offeror may by notice, given within two months after such approval is obtained, require any non-tendering shareholder to
transfer their shares on the terms of the offer. Dissenting shareholders may apply to a court within one month of notice objecting to the
transfer and the court may make any order it thinks fit. The burden is on the dissenting shareholders to show that the court should exercise its
discretion to enjoin the required transfer, which the court will be unlikely to do unless there is evidence of fraud or bad faith or collusion
between the offeror and the holders of the shares who have accepted the offer as a means of unfairly forcing out minority shareholders.
EMPLOYMENT AGREEMENT AND RELEASE
Exhibit 10.13
THIS EMPLOYMENT AGREEMENT AND RELEASE (this “Agreement”) is between WHITE MOUNTAINS CAPITAL
LLC (the “Company”), and J. BRIAN PALMER (the “Executive”) and shall become effective on the eighth day following its
execution by Executive (the “Effective Date”), provided Executive has not revoked this Agreement during the Revocation
Period (as defined in Section 8(b)).
WHEREAS, the Executive has communicated his intention to retire; and
WHEREAS, the Company desires for Executive to: (i) remain employed in a modified capacity by the
Company following the Effective Date; and (ii) for Executive to give a general release to the Company in respect of
Executive’s employment with the Company up to and including the Effective Date; and
WHEREAS, Executive desires to remain employed in a modified capacity by the Company and to give a
general release to the Company in exchange for the considerations described in this Agreement, including, without limitation,
a salary, participation in Company benefit plans, and continued vesting of outstanding awards under the White Mountains
Long-Term Incentive Plan (the “LTIP”).
NOW THEREFORE, in consideration of the mutual covenants and agreements set forth herein, intending to be
legally bound, Executive and the Company hereby agree as follows:
1.
Duties; Responsibilities.
(a)
As of May 15, 2021 (the “Transition Date”), the Company hereby employs Executive to perform, and
Executive hereby agrees to be employed and to perform, advisory services for the Company and its affiliates (the “Services”).
The Services may include, but not be limited to, provision of general support to the financial reporting function, including but
not limited to: (i) assistance and input on quarterly/annual releases and filings (including earnings releases and 10-Q/K
filings), (ii) assistance and input on assessing current and new accounting/reporting-related matters, (iii) assisting the
management team’s preparation for Board and management meetings, and (iv) other such duties that support the financial
reporting and finance functions of the Company and its affiliates as reasonably determined by management.
(b) As of the Transition Date, Executive shall retire from the position of Managing Director and Chief
Accounting Officer of White Mountains Insurance Group, Ltd. Executive’s retirement described in this Section 1(a) shall be
automatic and without any further action on Executive’s part or on the part of the Company and its subsidiaries. Executive
hereby agrees to execute and deliver any additional notices or other documents reasonably necessary to implement such
retirement.
1
2.
Timing/Location. The Executive shall make himself generally available to perform the Services
hereunder as requested by the Company. Notwithstanding the above, it is anticipated that the Executive will provide Services
not less than an average of one (1) day per week. The Executive agrees to be available to meet with Company management
upon request and at such locations as Executive and the Company may agree from time to time. Notwithstanding the above, it
is anticipated that Executive will work primarily from home.
3.
Employment Period. Executive’s employment pursuant to this Agreement shall begin on the Transition
Date and shall continue, unless earlier terminated by either the Company or Executive, until January 1, 2023 (Executive’s
period of employment hereunder, the “Employment Period”).
4.
Compensation.
(a) During the Employment Period, the Company shall pay Executive a salary in accordance with its regular
payroll practices at an annual rate of $200,000 (the “Salary”). During the Employment Period, Executive shall not accrue
vacation, sick time or other paid time off.
(b)
In addition to the Salary, the Company shall reimburse Executive for all reasonable and necessary
expenses (including, without limitation, travel and meal expenses) incurred or paid by Executive during the Employment
Period, in connection with, or related to, the performance of the Services reasonably promptly after receipt of an itemization
and documentation of such expenses.
(c)
The Company shall pay Executive the Salary through the date of any termination of this Agreement.
Following any termination, Executive will have thirty (30) days to submit any final expenses for reimbursement.
(d) During the Employment Period, Executive shall continue to participate in the Company’s employee
benefit plans, subject to the terms and conditions thereunder; provided that no such continued participation shall result in a
duplication of benefits received by Executive under any severance plan or arrangement of the Company as result of
Executive’s modification of the terms of her employment pursuant to this Agreement.
(e) No equity incentives will be granted to Executive by the Company for the 2021-2023 performance cycle
or during the Employment Period. For calendar year 2021, Executive shall be entitled to an annual bonus of $125,000, to be
paid at the same time as the bonus payment date applied to other Company executives.
5.
Continuation of LTIP Awards. Executive currently holds (x) the awards under the LTIP set forth on
Exhibit A. The LTIP Awards shall not terminate as a result of entering into this Agreement or modification of Executive’s
responsibilities and, instead, the Executive’s employment under this Agreement shall be treated as continued employment with
the Company under the LTIP. Subject to Executive’s compliance with this Agreement, the LTIP Awards will continue to vest
based on Executive's continued employment under this Agreement pursuant to the existing vesting terms of such LTIP Awards,
except in each case as provided in the following Sections 5(a)-(d):
2
(a)
(b)
(c)
In the event the Executive remains employed hereunder through the normal vesting date of any LTIP
Award (as set forth on Exhibit A), Executive shall vest in such award pursuant to the existing terms of
such award, and shall receive payment thereon in the same manner and at the same time as equivalent
awards held by other Company executives (including, in the case of Performance Share Awards, levels
of achieved performance applied to other Company executives).
If, prior to the normal vesting date of any LTIP Award, (x) the Company terminates Executive’s
employment for “Cause” or (y) Executive voluntarily resigns, any such LTIP Award shall terminate
without any payment therefor. “Cause” shall have the meaning provided in the LTIP, as applicable, and
shall also mean a termination for any violation by Executive of Sections 6 or 7 of this Agreement.
If the Company terminates Executive’s employment without Cause, the Company shall (i) if such
termination occurs in 2021, (v) immediately accelerate the vesting of the 2019 Restricted Share
Agreement (“RSA”) and the 2020 RSA, (w) settle the 2019 Performance Share Award (“PSA”) at the
same time and in the same amounts as if Executive had continued employment until the normal vesting
date thereof (assuming the same level of performance achievement applied to other Company
executives), (x) settle the 2020 PSAs prior to March 15, 2022 based on performance achieved through
the end of the Company’s 2021 fiscal year, and (ii) if such termination occurs during 2022, (x)
immediately accelerate the vesting of the 2020 RSA, and (y) settle the 2020 PSAs at the same time and
in the same amounts as if Executive had continued employment until the normal vesting date thereof
(assuming the same level of performance achievement applied to other Company executives).
(d)
If Executive’s employment terminates due to the Executive’s death, to the extent not already paid or
vested, the Company shall (i) pay, or cause to be paid, the 2019 PSA and 2020 PSA and (ii) vest or
cause to be vested the 2019 RSA and 2020 RSA, in each case, in accordance with the LTIP.
6.
Information; Access; Technology. During the Employment Period, Executive shall have access to
Company information and personnel as is reasonably necessary or desirable to perform the Services. The Company agrees to
provide a laptop computer and printer/scanner to be used in Executive’s home office and a mobile phone. Upon the
termination of the Employment Period, Executive will return to the Company all property and proprietary information of the
Company in Executive’s possession or under Executive’s control (other than any such property or information which
Executive has reason to retain in connection with other services Executive may be providing to the Company at such time).
Except as required to perform the Services hereunder, Executive agrees to not use or divulge to any third-party any such
Company property or proprietary information (including
3
confidential or proprietary information or intellectual property of any third-party with which Executive has been entrusted or
which Executive has otherwise acquired by virtue of Executive’s employment with the Company).
7.
Electronic Devices. Notwithstanding Section 6, Executive shall be permitted to retain Executive’s
Company-issued cellular phone and the telephone number associated therewith; provided that the Executive meets with a
designated member of the Company’s information technology department in advance of the termination of the Employment
Period to delete all proprietary Company software and records therefrom.
8.
Agreement to Not Compete.
(a)
Executive acknowledges that in the course of Executive’s employment with the Company and its
affiliates (hereinafter collectively referred to as the “Company Group”), Executive has and will become familiar with trade
secrets and other confidential and proprietary information of the Company Group and that Executive’s services are and shall
be of special, unique and extraordinary value to the Company.
(b)
Executive agrees that, during the Employment Period, Executive will refrain from, directly or indirectly,
owning any interest in, managing, controlling, financing, participating in, consulting with, or rendering services for, any
activity or business transaction for Executive or any other person or entity, or affiliate, whether or not for remuneration, direct
or indirect, contingent or otherwise, which (i) may result in a conflict of interest or otherwise adversely affect the proper
discharge of Executive’s duties with, and responsibilities to, the Company hereunder, or (ii) in any way competes with, or
interferes with, any operation of the Company Group; provided that this provision shall not prohibit Executive from (x) being
a passive owner of not more than one percent of the outstanding stock of any company which is publicly traded, so long as
Executive has no active participation in the business of such company or (y) engaging in activities with the prior written
consent of the Company.
(c)
Executive further agrees that, during the Employment Period and for a period of one year thereafter
(together, the “Restriction Period”), Executive shall refrain from, directly or indirectly: (i) inducing or attempting to induce
any employee of the Company Group to leave the employ of the Company Group; (ii) hiring any person who was an
employee of the Company Group at any time during the twelve-month period preceding such hiring; and (iii) inducing or
attempting to induce any existing or prospective customer, supplier, licensee, lender, licensor or other business relation of the
Company Group to cease doing business with the Company Group, or to reduce the level of business conducted with the
Company Group.
(d)
Executive further agrees that, during the Restriction Period, Executive shall not make, either directly or
indirectly, any oral or written negative, disparaging or adverse statements or representations of or concerning the Company
Group, any of their clients, customers or businesses, or any of their current or former officers, directors, employees or
shareholders; provided, however, that nothing in this Agreement shall prohibit (i) critical communications between
Executive and the Company in connection with Executive’s employment, (ii) Executive from disclosing truthful information
if legally required (whether by oral questions, interrogatories, requests for information or documents,
4
subpoena, civil investigative demand or similar process) or (iii) Executive from acting in good faith to enforce Executive’s
rights under this Agreement.
(e)
The parties each acknowledge that the business of the Company Group is global in scope and intend for
the covenants contained in this Section 8 to apply in each country in the world in which the Company Group conducts
business on the date hereof or in which the Company Group has a reasonable expectation of conducting business in the future.
If, at the time of enforcement of this Section 8, a court holds that the restrictions stated herein are unreasonable under
circumstances then existing, the parties hereto agree that the maximum period, scope or geographical area reasonable under
such circumstances shall be substituted for the stated period, scope or area.
(f)
Executive agrees that any violation of this Section 8 shall constitute a material breach of this
Agreement and that the Company’s discontinuance of any payments to Executive hereunder as a result of such breach shall
in no way preclude the Company from seeking relief to enforce the provisions of this Section 8.
9.
Release.
(a)
Release of Claims. As a condition of receiving the payments and benefits provided under Section 5,
Executive will be required to execute, deliver and not revoke, within sixty (60) calendar days following the Transition Date, the
mutual release attached hereto as Exhibit B (the "Release"), such Release to be delivered by Executive and become irrevocable
no later than sixty (60) calendar days following the Transition Date (the "Release Requirement" and, the date such Release
becomes effective and irrevocable in accordance with its terms, the "Release Date"). If the Release has not been executed,
delivered and become irrevocable by Executive prior to the 60th day following the Transition Date (other than as a result of
Executive's death or incapacity), all benefits provided under Section 5 shall be forfeited.
(b)
Pursuant to the requirements of the Older Workers Benefit Protection Act, Sec. 201, 29 U.S.C. Sec. 626,
et seq., Executive will have a period of twenty-one (21) days to consider this Agreement after Executive’s receipt of the same
(but may execute this Agreement at any time). If Executive elects not to take the full twenty-one (21) days, Executive agrees
that Executive has done so knowingly, voluntarily, and with full understanding that Executive is waiving a statutory right to
consider this Agreement for twenty-one (21) days. Executive may revoke this Agreement within the seven (7) day period
following Executive’s execution of the same (the “Revocation Period”). This Agreement shall not become effective or
enforceable until the Revocation Period expires. In order to revoke this Agreement, Executive must notify the Company of
Executive’s decision to revoke in writing c/o White Mountains Capital LLC, 23 South Main Street, Suite 3B, Hanover, NH
03755 before the end of the Revocation Period.
(c)
Executive represents and agrees that: (i) Executive has thoroughly reviewed all aspects of this
Agreement; (ii) Executive was given a period of twenty-one (21) days within which to consider this Agreement; (iii) the
Company advised Executive in writing to consult with an attorney before executing this Agreement; (iv) Executive has had an
adequate opportunity to review the Agreement with an attorney; (v) Executive fully
5
understands its terms; (vi) Executive was not coerced into signing it, (vii) Executive is knowingly and voluntarily entering into
this Agreement; and (viii) Executive has not filed any complaints or charges against any member of the Company Group.
(d)
This Agreement shall not be construed as an admission of any wrongdoing by any member of the
Company Group, or any of their affiliates, officers, or employees, or that any of them violated any legal or other obligation to
Executive.
10. Acknowledgements; Equitable Relief. Executive acknowledges and agrees that Executive’s covenants
contained in this Agreement are expressly intended to protect and preserve the legitimate business interests and goodwill of the
Company Group. Executive further acknowledges and agrees that Executive’s breach of any such covenant will cause the
Company Group irreparable injury and damage that cannot be adequately compensated by money damages. Executive
therefore expressly agrees that the Company Group shall be entitled to injunctive or other equitable relief in order to prevent a
breach of this Agreement by Executive in addition to such other remedies as are legally available to the Company Group.
11.
Indemnification. The Company shall indemnify Executive and hold Executive harmless from any claims,
demands, liabilities, actions, suits or proceedings (“Claims”) asserted or claimed by third-parties arising out of the
performance of Executive’s duties hereunder, or as an officer or director of the Company or any of its affiliates before and
during the Employment Period to the fullest extent provided in the Company’s governance documents, and permitted under
applicable law, except to the extent such Claims arise from Executive’s willful misconduct or fraud. Without diminution of the
Executive’s rights under this Section 11, the Company shall indemnify the Executive during and after the Employment Term
at least to the same extent that the Company indemnifies its then active senior executive officers.
12.
Section 409A of the Internal Revenue Code.
(a)
It is the intent of the parties that the arrangements set forth herein not violate the requirements of Section
409A of the Internal Revenue Code of 1986, as amended and the regulations promulgated thereunder (“Section 409A”), and
that all provisions of this Agreement shall be construed and interpreted in a manner consistent with the requirements for
avoiding taxes or penalties under Section 409A. If the Executive believes that a separation from service has occurred prior to
the end of the Employment Period, the Company will take reasonable instruction from the Executive in regard to the delay of
payments required to be made subsequently hereunder in order that the requirements of Section 409A, or an exemption
thereto, be satisfied in respect of such payments. In no event shall the Company (a) be required to accelerate any payments
hereunder, or (b) have any liability to the Executive as a result of the arrangements set forth herein failing to satisfy the
requirements of Section 409A.
(b)
Except as specifically permitted by Section 409A or as otherwise specifically set forth in this Agreement,
the benefits and reimbursements provided to the Executive under this Agreement or under any other plan, policy, arrangement
or agreement of or with the Company or any of its subsidiaries (this Agreement and such other plans, policies, arrangements
and agreements, the “Company Plans”) during any calendar year shall not affect
6
the benefits and reimbursements to be provided to the Executive under the relevant section of this Agreement or any Company
Plan in any other calendar year, and the right to such benefits and reimbursements cannot be liquidated or exchanged for any
other benefit and shall be provided in accordance with Treas. Reg. Section 1.409A-3(i)(1)(iv) or any successor thereto.
Further, in the case of reimbursement payments, reimbursement payments shall be made to the Executive as soon as
practicable following the date that the applicable expense is incurred, but in no event later than the last day of the calendar
year following the calendar year in which the underlying expense is incurred.
13.
Entire Agreement. This Agreement constitutes the entire agreement between the parties and supersedes
all prior agreements and understandings, whether written or oral, relating to the subject matter hereof and thereof. If there is
any conflict between the provisions of this Agreement and the provisions of the plans, policies, and programs referred to in
this Agreement, the provisions of this Agreement will control.
14.
Survival. The provisions of Sections 4(c), 5, 6, 7, 8, 9, 10, 11, 12, 13, 14, 15, 16 and 17 will survive the
expiration or termination of this Agreement.
15. Modifications. This Agreement may be amended or modified only by a written instrument executed
by both the Company and Executive.
16. Governing Law; Jurisdiction. This Agreement will be construed and enforced in accordance with the
laws of the State of New York applicable to contracts made in and to be performed in New York. THE PARTIES HERETO
AGREE THAT JURISDICTION AND VENUE IN ANY ACTION BROUGHT BY ANY PARTY PURSUANT TO THIS
AGREEMENT SHALL PROPERLY (AND EXCLUSIVELY) LIE IN ANY FEDERAL OR STATE COURT LOCATED IN
THE COUNTY OF NEW YORK IN THE STATE OF NEW YORK. BY EXECUTION AND DELIVERY OF THIS
AGREEMENT, EACH PARTY IRREVOCABLY SUBMITS TO THE EXCLUSIVE JURISDICTION OF SUCH COURTS
FOR ITSELF AND IN RESPECT OF ITS PROPERTY WITH RESPECT TO SUCH ACTION. THE PARTIES
IRREVOCABLY AGREE THAT VENUE WOULD BE PROPER IN SUCH COURT, AND HEREBY WAIVE ANY
OBJECTION THAT SUCH COURT IS AN IMPROPER OR INCONVENIENT FORUM FOR THE RESOLUTION OF
SUCH ACTION. ANY PARTY MAY MAKE SERVICE ON ANY OTHER PARTY BY SENDING OR DELIVERING A
COPY OF THE PROCESS TO THE PARTY TO BE SERVED. NOTHING IN THIS SECTION 16, HOWEVER, SHALL
AFFECT THE RIGHT OF ANY PARTY TO SERVE LEGAL PROCESS IN ANY OTHER MANNER PERMITTED BY
LAW OR AT EQUITY.
17.
Successors and Assigns. This Agreement shall be binding upon, and inure to the benefit of the parties
and their respective successors and assigns, including any entity with which, or into which, the Company may be merged or
which may succeed to its assets or business; provided, however, that the obligations of Executive are personal and shall not be
assigned by Executive.
18. Notice. Any notice or other communication hereunder to either party shall be in writing and shall be
deemed to have been duly given when delivered personally or
7
mailed by registered mail, return receipt requested, postage prepaid, addressed to the party as its respective address as it
appears below:
Notices to Executive:
To the most recent address on file with the Company Notices to the Company:
White Mountains Capital LLC
23 South Main Street, Suite 3B
Hanover, New Hampshire 03755
Attention: Deputy General Counsel
19. Counterparts. This Agreement may be executed in counterparts, each of which will be deemed to be an
original, but each of which together will constitute one and the same agreement.
* * *
{Signature Page to Follow}
8
WHITE MOUNTAINS CAPITAL LLC
By: /s/ Jason R. Lichtenstein
Name: Jason R. Lichtenstein
Title: Managing Director, Deputy General Counsel & Secretary
Date: February 25, 2021
Agreed and Accepted:
J. BRIAN PALMER
/s/ J. Brian
Palmer
Date: February 25, 2021
9
In reference to Section 5 of the Employment Agreement, to which this Exhibit is annexed and deemed a part thereof,
the Performance Share Awards and Restricted Share Awards are as follows:
EXHIBIT A
A.
Performance Share Awards
Performance Cycle Grant Date Normal Vesting Target Number of
Date Shares
2019-2021 2/28/19 12/31/21 500
2020-2022 2/27/20 12/31/22 450
B. Restricted Share Awards
Grant Date Normal Vesting Date Number of Shares
02/28/19 1/1/22 500
02/27/20 1/1/23 450
10
EXHIBIT B
Mutual Release of Claims
WHEREAS, J. Brian Palmer ("Executive") retired from his position as Chief Accounting Officer of White Mountains
Insurance Group, Ltd. (the "White Mountains") as of May 15, 2021; and
WHEREAS, Executive and White Mountains entered into that certain letter agreement, dated as of [Month X, 2021]
(the "Employment Agreement").
NOW, THEREFORE, for good and valuable consideration, the sufficiency and receipt of which are hereby
acknowledged, and intending to be legally bound, Executive and White Mountains agree as follows:
This mutual release of claims (this "Release") is effective as of the date hereof and shall continue in effect as provided
herein.
a.
(a) In consideration of the mutual covenants and agreements contained in the Employment Agreement,
Executive, for himself and his dependents, successors, assigns, heirs, executors and administrators (and his and their legal
representatives of every kind), hereby releases, dismisses, remises and forever discharges White Mountains and its respective
predecessors, parents, subsidiaries, divisions, related or affiliated companies, officers, directors, stockholders, members,
employees, heirs, successors, assigns, representatives, agents and counsel (collectively, the "Company") from any and all
arbitrations, claims, including claims for attorney's fees, demands, damages, suits, proceedings, actions and/or causes of action
of any kind and every description, whether known or unknown, which Executive now has arising out of or relating to
Executive's employment by, or service with, the Company and resignation from such employment or service ("claims")
including but not limited to:
i.
any and all claims of discrimination, including but not limited to claims of discrimination on the basis of
sex, race, age, national origin, marital status, religion or handicap, including, specifically, but without limiting the
generality of the foregoing, any claims under the Age Discrimination in Employment Act, as amended, Title VII of the
Civil Rights Act of 1964, as amended, the Americans with Disabilities Act or any other applicable federal, state or local
law provisions, whether domestic or foreign; and
ii.
implied.
any and all claims of wrongful or unjust discharge or breach of any contract or promise, express or
(b)
Executive understands and acknowledges that the Company does not admit any violation of law, liability or
invasion of any of his rights and that any such violation, liability or invasion is expressly denied. The consideration provided for
this Release is made for the purpose of settling and extinguishing all claims and rights (and every other similar or dissimilar
11
matter) that Executive ever had or now may have against the Company to the extent provided in this Release. Executive further
agrees and acknowledges that no representations, promises or inducements have been made by the Company other than as
appear in the Employment agreement.
(c)
Executive further agrees and acknowledges that:
(i)
(ii)
The release provided for herein releases claims up to and including the date of this Release;
Executive has been advised by the Company to consult with legal counsel prior to executing this Release,
has had an opportunity to consult with and to be advised by legal counsel of his choice, fully understands the terms of
this Release, and enters into this Release freely, voluntarily and intending to be bound;
(iii)
Executive has been given a period of 45 calendar days to review and consider the terms of this Release
prior to its execution and that he may use as much of the 45-day period as he desires; and
(iv)
Executive may, within seven calendar days after execution, revoke this Release. Revocation shall be made
by delivering a written notice of revocation to the Company. For such revocation to be effective, such written notice
must be actually received by the Company no later than the close of business on the seventh day after Executive executes
this Release. If Executive exercises his right to revoke this Release, all of the terms and conditions of this Release shall
be of no force and effect (including, for the avoidance of doubt, the release of claims by the Company described in
Section 2 of this Release).
(d)
Executive agrees that he shall never file a lawsuit or other complaint asserting any claim that he releases in this
Release or the validity or enforceability of this Release.
(e)
Executive does not by this Release relinquish (i) any right to any vested, deferred benefit in any benefit plan, (ii)
any right to indemnification or insurance under any applicable directors and officers liability insurance policy, applicable state
and federal law, and the Company's Memorandum of Continuance and Bye-Laws, (iii) any right that is not waivable under
applicable law, (iv) any right with respect to any event, act or omission taking place after the date hereof, (v) any right with
respect to the Company's breach of any terms or conditions of the Employment Agreement or (vi) any right Executive may have
to obtain contribution as permitted by applicable law in the event of any judgment against Executive as a result of any act or
failure to act for which the Company or its affiliates and Executive are jointly liable.
b.
(a) In consideration of the mutual covenants and agreements contained in the Employment Agreement, the
Company hereby releases, dismisses, remises and forever discharges Executive and his dependents, successors, assigns, heirs,
executors and administrators (and his and their legal representatives of every kind) from any and all claims of any kind and
every description, whether known or unknown, arising out of or relating to
12
Executive's employment by or service with the Company and resignation from such employment or service.
(b)
The Company understands and acknowledges that Executive does not admit any violation of law, liability or
invasion of any of its rights and that any such violation, liability or invasion is expressly denied. The consideration provided for
this Release is made for the purpose of settling and extinguishing all claims and rights (and every other similar or dissimilar
matter) that the Company ever had or now may have against Executive to the extent provided in this Release. The Company
further agrees and acknowledges that no representations, promises or inducements have been made by Executive other than as
appear in the Employment Agreement.
(c)
The Company further agrees and acknowledges that:
(i)
(ii)
The release provided for herein releases claims up to and including the date of this Release.
The Company agrees that it shall never file a lawsuit or other complaint asserting any claim that it
releases in this Release or the validity or enforceability of this Release.
(d)
The Company does not by this Release relinquish (i) any claims the Company may have against Executive for
illegal conduct, (ii) any right that is not waivable under applicable law, (iii) any right with respect to any event, act or omission
taking place after the date hereof, (iv) any rights with respect to Executive's breach of any terms or conditions of the
Employment Agreement or (v) any right the Company may have to obtain contribution as permitted by applicable law in the
event of any judgment against the Company or its affiliates as a result of any act or failure to act for which Executive and the
Company or its affiliates are jointly liable and with respect to which the Company is not otherwise obligated to indemnify
Executive.
c.
The Company and Executive agree that the terms of this Release are and shall be deemed to be strictly
confidential, and each agrees not to disclose such terms to any person or entity other than their legal, financial and tax advisors
(or, in the case of Executive, his immediate family) or as required by applicable law or applicable regulatory rules, without the
prior written consent of the other party. Notwithstanding the foregoing, this Release is not intended to, and shall be interpreted
in a manner that does not, limit or restrict Executive from exercising any legally protected whistleblower rights (including
pursuant to Rule 21F under the Securities Exchange Act of 1934). The Company and Executive each agree that they shall
remain obligated to the other party under the Employment Agreement from and after the date of this Release to the extent
provided thereunder. The provisions of this Release are severable and if any part of it is found to be unenforceable, the other
paragraphs shall remain full, valid and enforceable.
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IN WITNESS WHEREOF, the Executive and the Company have executed and delivered this Release on the dates set
forth below.
______________________________
J. Brian Palmer
White Mountains Insurance Group, Ltd.
By: ______________________________
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Exhibit 10.14
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (this “Agreement”) between WHITE MOUNTAINS CAPITAL LLC (the
“Company”), and FRANK R. BAZOS (the “Executive”) is made and entered into as of December 16, 2020.
WHEREAS, effective as of March 1, 2021 (the “Effective Date”), Executive will resign as Executive Vice
President and Head of Mergers & Acquisitions and, except as contemplated in this Agreement, from all other positions within
the Company and its affiliates;
WHEREAS, the Company desires for Executive to: (i) remain employed by the Company following the
Effective Date in a modified capacity as a Senior Advisor; and (ii) for Executive to give a general release to the Company in
respect of Executive’s employment with the Company up to and including the Effective Date; and
WHEREAS, Executive desires to remain employed as a Senior Advisor to the Company and to give a general
release to the Company in exchange for the considerations described in this Agreement, including, without limitation, a salary,
participation in Company benefit plans, and vesting or settlement of outstanding awards under the White Mountains Long-
Term Incentive Plan (the “LTIP”).
NOW THEREFORE, in consideration of the mutual covenants and agreements set forth herein, intending to
be legally bound, Executive and the Company hereby agree as follows:
1.
Duties; Responsibilities.
(a) As of the Effective Date, Executive shall resign as Executive Vice President and Head of Mergers &
Acquisitions of the Company, and except as described below in Section 1(b), from all other employment positions with the
Company and its affiliates. With the exception of board services described below in Section 1(b), Executive shall also resign
as a member of the board of directors of any affiliate of the Company effective as of the Effective Date. Executive’s
resignations described in this Section 1(a) shall be automatic and without any further action on Executive’s part or on the part
of the Company and its affiliates. Executive hereby agrees to execute and deliver any additional notices or other documents
reasonably necessary to implement such resignations.
(b) The Company hereby employs Executive, as a Senior Advisor, to perform, and Executive hereby agrees
to be employed and to perform, advisory services for the Company and its affiliates (the “Services”). The Services may
include, but not be limited to: (i) advising the senior executives of the Company and its affiliates on existing business
initiatives, (ii) continuation of service as a member of the board of directors of Ark Insurance Holdings, (iii) service on
additional portfolio company boards, (iv) participation in external calls and/or meetings for the purpose of business
development, and (v) any other such duties and responsibilities that support the Company and its affiliates that may be
reasonably requested by the Company from time to time.
1
2.
Timing/Location. The Executive shall make himself generally available to perform the Services
hereunder as requested by the Company. Notwithstanding the above, it is anticipated that the Executive will provide Services
not less than an average of one (1) day per week. The Executive agrees to be available to meet with Company management
upon request and at such locations as Executive and the Company may agree from time to time. Notwithstanding the above, it
is anticipated that Executive will work primarily from home.
3.
Employment Period. Executive’s employment pursuant to this Agreement shall begin on the Effective Date
and shall continue, unless earlier terminated by either the Company or Executive, until March 1, 2023 (the “End Date” and,
Executive’s period of employment hereunder, the “Employment Period”). Executive’s termination of employment on the End
Date shall be automatic and without any further action on the part of Executive or on the part of the Company and its
subsidiaries. Executive expressly acknowledges and agrees that Executive shall not be entitled to any severance pay or
separation benefits in connection with the expiration of the Employment Period.
4.
Compensation.
(a) During the Employment Period, the Company shall pay Executive a salary in accordance with its regular
payroll practices at an annual rate of $250,000 (the “Salary”). During the Employment Period, Executive shall not accrue
vacation, sick time or other paid time off.
(b)
In addition to the Salary, the Company shall reimburse Executive for all reasonable and necessary expenses
(including, without limitation, travel and meal expenses) incurred or paid by Executive during the Employment Period, in
connection with, or related to, the performance of the Services reasonably promptly after receipt of an itemization and
documentation of such expenses.
(c) The Company shall pay Executive the Salary through the date of any termination of this Agreement.
Following any termination, Executive will have thirty (30) days to submit any final expenses for reimbursement.
(d) During the Employment Period, Executive shall continue to participate in the Company’s employee benefit
plans, subject to the terms and conditions thereunder; provided that no such continued participation shall result in a duplication
of benefits received by Executive under any severance plan or arrangement of the Company as result of Executive’s
modification of the terms of her employment pursuant to this Agreement.
(e) No equity incentives will be granted to Executive by the Company for the 2021-2023 performance cycle or
during the Employment Period. In addition, Executive shall not be eligible for any annual bonus for calendar year 2021 or
otherwise during the Employment Period.
5.
2020 Annual Bonus; Offer Letter Payments.
(i)
Executive’s 2020 Annual Bonus (the “FY 2020 Bonus”). The Company shall, before March 15, 2021, pay
to Employee his earned bonus under the Company’s annual
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bonus program for the Company’s 2020 fiscal year (the “2020 Bonus”). The amount of the 2020 Bonus shall be equal to
$375,000 multiplied by the pool percentage determined by the compensation committee of the board of directors of White
Mountains Insurance Group, Ltd. (“WMIG”) to be applicable to the executive officers of WMIG and its subsidiaries generally.
(ii)
Additional Cash Payments. Within 14 days following the Release Date, the Company will pay Executive
$1,375,000, which consists of (x) a payment of $500,000, representing the 3 and final installment of Executive’s signing bonus,
plus (y) a payment of $875,000, representing the agreed termination payment in the event of Executive’s departure prior to
March 15, 2021, as set forth in Executive’s offer of employment.
rd
6.
Outstanding LTIP Awards. Executive currently holds the awards under the LTIP set forth in Exhibit A (the
“LTIP Awards”), consisting of (i) the performance share awards for the 2019-2021 performance cycle and the 2020-2022
performance cycle (collectively, the “PSAs”) and (ii) restricted share awards granted in 2019 and 2020 (collectively, the
“RSAs”). The LTIP Awards shall not terminate as a result of entering into this Agreement or modification of Executive’s
responsibilities and, instead, the Executive’s employment under this Agreement shall be treated as continued employment with
the Company under the LTIP. Subject to the satisfaction of the Release Requirement, the LTIP Awards will be settled as follows:
2019 and 2020 Restricted Shares. The RSAs (consisting of 1,900 restricted shares normally vesting on
January 1, 2022 and 1,700 restricted shares normally vesting on January 1, 2023) will immediately vest on the Release Date.
(a)
(b)
2019 and 2020 Performance Shares. The PSAs (consisting of 1,900 performance shares granted with
respect to the 2019-2021 performance cycle and 1,700 performance shares granted with respect to the 2020-2022 performance
cycle) will continue to vest under this Agreement, and Executive shall receive payment thereon in the same manner, at the same
time, and at the same levels of achieved performance as applicable to equivalent awards held by other Company executives.
7.
Release of Claims. As a condition of receiving the payments and benefits provided under Sections 5(b) and
6, Executive will be required to execute, deliver and not revoke, within sixty (60) calendar days following the Effective Date,
the mutual release attached hereto as Exhibit B (the “Release”), such Release to be delivered by Executive and become
irrevocable no later than sixty (60) calendar days following the Effective Date (the “Release Requirement” and, the date such
Release becomes effective and irrevocable in accordance with its terms, the “Release Date”). If the Release has not been
executed, delivered and become irrevocable by Executive prior to the 60 day following the Effective Date (other than as a
result of Executive’s death or incapacity), all benefits provided under Sections 5(b) and 6 shall be forfeited.
th
8.
Information; Access; Technology. During the Employment Period, Executive shall have access to
Company information and personnel as is reasonably necessary or desirable to perform the Services. The Company agrees to
provide a laptop computer and printer/scanner to be used in Executive’s home office and a mobile phone. Upon the termination
of the Employment Period, Executive will return to the Company all property and proprietary information of the Company in
Executive’s possession or under Executive’s control (other than
3
any such property or information which Executive has reason to retain in connection with other services Executive may be
providing to the Company at such time). Except as required to perform the Services hereunder, Executive agrees to not use or
divulge to any third-party any such Company property or proprietary information (including confidential or proprietary
information or intellectual property of any third-party with which Executive has been entrusted or which Executive has
otherwise acquired by virtue of Executive’s employment with the Company).
9.
Electronic Devices. Notwithstanding Section 8, Executive shall be permitted to retain Executive’s
Company-issued cellular phone and the telephone number associated therewith; provided that the Executive meets with a
designated member of the Company’s information technology department in advance of the termination of the Employment
Period to delete all proprietary Company software and records therefrom. At the end of the Employment Period, the Company
shall provide reasonable assistance to Executive to transfer the telephone number associated with Executive’s Company-issued
cellular phone to a carrier or personal account of Executive’s choosing.
10. Agreement to Not Compete.
(a) Executive acknowledges that in the course of Executive’s employment with the Company and its affiliates
(hereinafter collectively referred to as the “Company Group”), Executive has and will become familiar with trade secrets and
other confidential and proprietary information of the Company Group and that Executive’s services are and shall be of special,
unique and extraordinary value to the Company.
(b) Executive agrees that, during the Employment Period, Executive will refrain from, directly or indirectly,
owning any interest in, managing, controlling, financing, participating in, consulting with, or rendering services for, any activity
or business transaction for Executive or any other person or entity, or affiliate, whether or not for remuneration, direct or
indirect, contingent or otherwise, which (i) may result in a conflict of interest or otherwise adversely affect the proper discharge
of Executive’s duties with, and responsibilities to, the Company hereunder, or (ii) in any way competes with, or interferes with,
any operation of the Company Group; provided that this provision shall not prohibit Executive from (x) being a passive owner
of not more than one percent of the outstanding stock of any company which is publicly traded, so long as Executive has no
active participation in the business of such company or (y) engaging in activities with the prior written consent of the Company.
(c) Executive further agrees that, during the Employment Period and for a period of one year thereafter
(together, the “Restriction Period”), Executive shall refrain from, directly or indirectly: (i) inducing or attempting to induce any
employee of the Company Group to leave the employ of the Company Group; (ii) hiring any person who was an employee of
the Company Group at any time during the twelve-month period preceding such hiring; and (iii) inducing or attempting to
induce any existing or prospective customer, supplier, licensee, lender, licensor or other business relation of the Company Group
to cease doing business with the Company Group, or to reduce the level of business conducted with the Company Group.
(d) Executive further agrees that, during the Restriction Period, Executive shall not make, either directly or
indirectly, any oral or written negative, disparaging or adverse
4
statements or representations of or concerning the Company Group, any of their clients, customers or businesses, or any of their
current or former officers, directors, employees or shareholders; provided, however, that nothing in this Agreement shall
prohibit (i) critical communications between Executive and the Company in connection with Executive’s employment, (ii)
Executive from disclosing truthful information if legally required (whether by oral questions, interrogatories, requests for
information or documents, subpoena, civil investigative demand or similar process) or (iii) Executive from acting in good faith
to enforce Executive’s rights under this Agreement.
(e) The parties each acknowledge that the business of the Company Group is global in scope and intend for the
covenants contained in this Section 8 to apply in each country in the world in which the Company Group conducts business on
the date hereof or in which the Company Group has a reasonable expectation of conducting business in the future. If, at the time
of enforcement of this Section 10, a court holds that the restrictions stated herein are unreasonable under circumstances then
existing, the parties hereto agree that the maximum period, scope or geographical area reasonable under such circumstances
shall be substituted for the stated period, scope or area.
(f)
Executive agrees that any violation of this Section 10 shall constitute a material breach of this Agreement
and that the Company’s discontinuance of any payments to Executive hereunder as a result of such breach shall in no way
preclude the Company from seeking relief to enforce the provisions of this Section 10.
11. Acknowledgements; Equitable Relief. Executive acknowledges and agrees that Executive’s covenants
contained in this Agreement are expressly intended to protect and preserve the legitimate business interests and goodwill of the
Company Group. Executive further acknowledges and agrees that Executive’s breach of any such covenant will cause the
Company Group irreparable injury and damage that cannot be adequately compensated by money damages. Executive therefore
expressly agrees that the Company Group shall be entitled to injunctive or other equitable relief in order to prevent a breach of
this Agreement by Executive in addition to such other remedies as are legally available to the Company Group.
12.
Indemnification. The Company shall indemnify Executive and hold Executive harmless from any claims,
demands, liabilities, actions, suits or proceedings (“Claims”) asserted or claimed by third-parties arising out of the performance
of Executive’s duties hereunder, or as an officer or director of the Company or any of its affiliates before and during the
Employment Period to the fullest extent provided in the Company’s governance documents, and permitted under applicable law,
except to the extent such Claims arise from Executive’s willful misconduct or fraud. Without diminution of the Executive’s
rights under this Section 12, the Company shall indemnify the Executive during and after the Employment Term at least to the
same extent that the Company indemnifies its then active senior executive officers.
13. Section 409A of the Internal Revenue Code.
(a)
It is the intent of the parties that the arrangements set forth herein not violate the requirements of Section
409A of the Internal Revenue Code of 1986, as amended and the regulations promulgated thereunder (“Section 409A”), and that
all provisions of this
5
Agreement shall be construed and interpreted in a manner consistent with the requirements for avoiding taxes or penalties under
Section 409A. If the Executive believes that a separation from service has occurred prior to the end of the Employment Period,
the Company will take reasonable instruction from the Executive in regard to the delay of payments required to be made
subsequently hereunder in order that the requirements of Section 409A, or an exemption thereto, be satisfied in respect of such
payments. In no event shall the Company (a) be required to accelerate any payments hereunder, or (b) have any liability to the
Executive as a result of the arrangements set forth herein failing to satisfy the requirements of Section 409A.
(b)
Except as specifically permitted by Section 409A or as otherwise specifically set forth in this Agreement,
the benefits and reimbursements provided to the Executive under this Agreement or under any other plan, policy, arrangement
or agreement of or with the Company or any of its subsidiaries (this Agreement and such other plans, policies, arrangements and
agreements, the “Company Plans”) during any calendar year shall not affect the benefits and reimbursements to be provided to
the Executive under the relevant section of this Agreement or any Company Plan in any other calendar year, and the right to
such benefits and reimbursements cannot be liquidated or exchanged for any other benefit and shall be provided in accordance
with Treas. Reg. Section 1.409A-3(i)(1)(iv) or any successor thereto. Further, in the case of reimbursement payments,
reimbursement payments shall be made to the Executive as soon as practicable following the date that the applicable expense is
incurred, but in no event later than the last day of the calendar year following the calendar year in which the underlying expense
is incurred.
14. Entire Agreement. This Agreement constitutes the entire agreement between the parties and supersedes all
prior agreements and understandings, whether written or oral, relating to the subject matter hereof and thereof. If there is any
conflict between the provisions of this Agreement and the provisions of the plans, policies, and programs referred to in this
Agreement, the provisions of this Agreement will control.
15. Survival. The provisions of Sections 4(c), 5, 6, 7, 8, 9, 10, 11, 12, 13, 14, 15, 16, 17, 18 and 19 will survive
the expiration or termination of this Agreement.
16. Termination. This Agreement, the Employment Period and Executive's employment hereunder may be
terminated by either the Company or Executive at any time and for any reason; provided that either party shall be required to
give the other party at least 10 days prior written notice of any termination; provided further, that in the case of a termination by
the Company for Cause (as defined in the LTIP), prior notice shall not be required. On termination, Executive shall have no
further rights to any compensation or any other benefits from the Company or any of its affiliates except as follows:
(i)
Executive shall be entitled to receive any unpaid salary through the date of termination of this
Agreement;
(b) The PSAs shall continue to remain outstanding and shall vest on the dates set forth in Exhibit
A, subject to the performance conditions set forth in the PSAs; provided that if Executive is terminated for Cause (as
defined in the LTIP), the PSAs shall be canceled without payment therefor; and
6
(c)
If any termination of this Agreement under this Section 16 is for any reason other than Cause
(as defined in the LTIP) and occurs at any time prior to the payments and vesting described in Sections 5 and 6 (and
without limiting the provisions of Sections 16(a) and (b) above) having been made, Executive shall be entitled to such
payments and vesting described in Sections 5 and 6 in accordance with and subject to their terms.
17. Modifications. This Agreement may be amended or modified only by a written instrument executed by
both the Company and Executive.
18. Governing Law; Jurisdiction. This Agreement will be construed and enforced in accordance with the laws
of the State of New York applicable to contracts made in and to be performed in New York. THE PARTIES HERETO AGREE
THAT JURISDICTION AND VENUE IN ANY ACTION BROUGHT BY ANY PARTY PURSUANT TO THIS
AGREEMENT SHALL PROPERLY (AND EXCLUSIVELY) LIE IN ANY FEDERAL OR STATE COURT LOCATED IN
THE COUNTY OF NEW YORK IN THE STATE OF NEW YORK. BY EXECUTION AND DELIVERY OF THIS
AGREEMENT, EACH PARTY IRREVOCABLY SUBMITS TO THE EXCLUSIVE JURISDICTION OF SUCH COURTS
FOR ITSELF AND IN RESPECT OF ITS PROPERTY WITH RESPECT TO SUCH ACTION. THE PARTIES
IRREVOCABLY AGREE THAT VENUE WOULD BE PROPER IN SUCH COURT, AND HEREBY WAIVE ANY
OBJECTION THAT SUCH COURT IS AN IMPROPER OR INCONVENIENT FORUM FOR THE RESOLUTION OF SUCH
ACTION. ANY PARTY MAY MAKE SERVICE ON ANY OTHER PARTY BY SENDING OR DELIVERING A COPY OF
THE PROCESS TO THE PARTY TO BE SERVED. NOTHING IN THIS SECTION 16, HOWEVER, SHALL AFFECT THE
RIGHT OF ANY PARTY TO SERVE LEGAL PROCESS IN ANY OTHER MANNER PERMITTED BY LAW OR AT
EQUITY.
19. Successors and Assigns. This Agreement shall be binding upon, and inure to the benefit of the parties
and their respective successors and assigns, including any entity with which, or into which, the Company may be merged or
which may succeed to its assets or business; provided, however, that the obligations of Executive are personal and shall not be
assigned by Executive.
20. Notice. Any notice or other communication hereunder to either party shall be in writing and shall be
deemed to have been duly given when delivered personally or mailed by registered mail, return receipt requested, postage
prepaid, addressed to the party as its respective address as it appears below:
Notices to Executive:
To the most recent address on file with the Company
Notices to the Company:
White Mountains Capital LLC
23 South Main Street, Suite 3B
Hanover, New Hampshire 03755
Attention: Office of General Counsel
7
21. Counterparts. This Agreement may be executed in counterparts, each of which will be deemed to be an
original, but each of which together will constitute one and the same agreement.
* * *
{Signature Page to Follow}
8
WHITE MOUNTAINS CAPITAL LLC
By: /s/ Jason R. Lichtenstein
Name: Jason R. Lichtenstein
Title: Managing Director, Deputy General Counsel & Secretary
FRANK R. BAZOS
/s/ Frank R.
Bazos
9
In reference to Section 5 of the Employment Agreement, to which this Exhibit is annexed and deemed a part thereof,
the Performance Share Awards and Restricted Share Awards are as follows:
EXHIBIT A
A.
Performance Share Awards
2019-2021 5/1/19 12/31/21 1,900
2020-2022 2/27/20 12/31/22 1,700
B. Restricted Share Awards
Grant Date Normal Vesting Date Number of Shares
5/1/19 1/1/22 1,900
2/27/20 1/1/23 1,700
10
EXHIBIT B
Mutual Release of Claims
WHEREAS, Frank R. Bazos ("Executive"), resigned from his position as Executive Vice President and Head of
Mergers & Acquisitions of White Mountains Capital LLC ("White Mountains") as of March 1, 2021; and
WHEREAS, Executive and White Mountains entered into that certain Employment Agreement dated as of
December 16, 2020 (the "Employment Agreement").
NOW, THEREFORE, for good and valuable consideration, the sufficiency and receipt of which are hereby
acknowledged, and intending to be legally bound, Executive and White Mountains agree as follows:
This mutual release of claims (this "Release") is effective as of the date hereof and shall continue in effect as provided
herein.
a.
(a) In consideration of the mutual covenants and agreements contained in the Employment Agreement,
Executive, for himself and his dependents, successors, assigns, heirs, executors and administrators (and his and their legal
representatives of every kind), hereby releases, dismisses, remises and forever discharges White Mountains and its respective
predecessors, parents, subsidiaries, divisions, related or affiliated companies, officers, directors, stockholders, members,
employees, heirs, successors, assigns, representatives, agents and counsel (collectively, the "Company") from any and all
arbitrations, claims, including claims for attorney's fees, demands, damages, suits, proceedings, actions and/or causes of action
of any kind and every description, whether known or unknown, which Executive now has arising out of or relating to
Executive's employment by, or service with, the Company and resignation from such employment or service ("claims")
including but not limited to:
i.
any and all claims of discrimination, including but not limited to claims of discrimination on the basis of
sex, race, age, national origin, marital status, religion or handicap, including, specifically, but without limiting the
generality of the foregoing, any claims under the Age Discrimination in Employment Act, as amended, Title VII of the
Civil Rights Act of 1964, as amended, the Americans with Disabilities Act or any other applicable federal, state or local
law provisions, whether domestic or foreign; and
ii.
implied.
any and all claims of wrongful or unjust discharge or breach of any contract or promise, express or
(b) Executive understands and acknowledges that the Company does not admit any violation of law, liability or
invasion of any of his rights and that any such violation, liability or invasion is expressly denied. The consideration provided for
this Release is made for the purpose of settling and extinguishing all claims and rights (and every other similar or dissimilar
matter) that Executive ever had or now may have against the Company to the extent provided in
11
this Release. Executive further agrees and acknowledges that no representations, promises or inducements have been made by
the Company other than as appear in the Employment agreement.
(c) Executive further agrees and acknowledges that:
(i)
(ii)
The release provided for herein releases claims up to and including the date of this Release;
Executive has been advised by the Company to consult with legal counsel prior to executing this Release,
has had an opportunity to consult with and to be advised by legal counsel of his choice, fully understands the terms of
this Release, and enters into this Release freely, voluntarily and intending to be bound;
(iii)
Executive has been given a period of 45 calendar days to review and consider the terms of this Release
prior to its execution and that he may use as much of the 45-day period as he desires; and
(iv)
Executive may, within seven calendar days after execution, revoke this Release. Revocation shall be made
by delivering a written notice of revocation to the Company. For such revocation to be effective, such written notice
must be actually received by the Company no later than the close of business on the seventh day after Executive executes
this Release. If Executive exercises his right to revoke this Release, all of the terms and conditions of this Release shall
be of no force and effect (including, for the avoidance of doubt, the release of claims by the Company described in
Section 2 of this Release).
(d) Executive agrees that he shall never file a lawsuit or other complaint asserting any claim that he releases in this
Release or the validity or enforceability of this Release.
(e) Executive does not by this Release relinquish (i) any right to any vested, deferred benefit in any benefit plan, (ii)
any right to indemnification or insurance under any applicable directors and officers liability insurance policy, applicable state
and federal law, the Company's Operating Agreement or other governing documents, or any agreement between Executive and
the Company, (iii) any right that is not waivable under applicable law, (iv) any right with respect to any event, act or omission
taking place after the date hereof, (v) any right under or with respect to the Company's breach of any terms or conditions of the
Employment Agreement or (vi) any right Executive may have to obtain contribution as permitted by applicable law in the event
of any judgment against Executive as a result of any act or failure to act for which the Company or its affiliates and Executive
are jointly liable.
b.
(a) In consideration of the mutual covenants and agreements contained in the Employment Agreement, the
Company hereby releases, dismisses, remises and forever discharges Executive and his dependents, successors, assigns, heirs,
executors and administrators (and his and their legal representatives of every kind) from any and all claims of any kind and
every description, whether known or unknown, arising out of or relating to Executive's employment by or service with the
Company and resignation from such employment or service.
12
(b) The Company understands and acknowledges that Executive does not admit any violation of law, liability or
invasion of any of its rights and that any such violation, liability or invasion is expressly denied. The consideration provided for
this Release is made for the purpose of settling and extinguishing all claims and rights (and every other similar or dissimilar
matter) that the Company ever had or now may have against Executive to the extent provided in this Release. The Company
further agrees and acknowledges that no representations, promises or inducements have been made by Executive other than as
appear in the Employment Agreement.
(c) The Company further agrees and acknowledges that:
(i)
(ii)
The release provided for herein releases claims up to and including the date of this Release.
The Company agrees that it shall never file a lawsuit or other complaint asserting any claim that it
releases in this Release or the validity or enforceability of this Release.
(d) The Company does not by this Release relinquish (i) any claims the Company may have against Executive for
illegal conduct, (ii) any right that is not waivable under applicable law, (iii) any right with respect to any event, act or omission
taking place after the date hereof, (iv) any rights with respect to Executive's breach of any terms or conditions of the
Employment Agreement or (v) any right the Company may have to obtain contribution as permitted by applicable law in the
event of any judgment against the Company or its affiliates as a result of any act or failure to act for which Executive and the
Company or its affiliates are jointly liable and with respect to which the Company is not otherwise obligated to indemnify
Executive.
c.
The Company and Executive agree that the terms of this Release are and shall be deemed to be strictly
confidential, and each agrees not to disclose such terms to any person or entity other than their legal, financial and tax advisors
(or, in the case of Executive, his immediate family) or as required by applicable law or applicable regulatory rules, without the
prior written consent of the other party. Notwithstanding the foregoing, this Release is not intended to, and shall be interpreted
in a manner that does not, limit or restrict Executive from exercising any legally protected whistleblower rights (including
pursuant to Rule 21F under the Securities Exchange Act of 1934). The Company and Executive each agree that they shall
remain obligated to the other party under the Employment Agreement from and after the date of this Release to the extent
provided thereunder. The provisions of this Release are severable and if any part of it is found to be unenforceable, the other
paragraphs shall remain full, valid and enforceable.
***
{Signature Page to Follow}
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IN WITNESS WHEREOF, the Executive and the Company have executed and delivered this Release on the dates set
forth below.
EMPLOYEE WHITE MOUNTAINS CAPITAL LLC
___________________________ By: ___________________________
Frank R. Bazos
Date: ______________________ Title: ___________________________
Date: ___________________________
14
SUBSIDIARIES OF THE REGISTRANT
AS OF DECEMBER 31, 2020
Exhibit 21
FULL NAME OF SUBSIDIARY
BRIDGE HOLDINGS (BERMUDA) LTD
HG GLOBAL LTD
HG HOLDINGS LTD
HG RE LTD
HG SERVICES LTD
PSC HOLDINGS LTD.
WHITE MOUNTAINS INVESTMENTS (BERMUDA) LTD.
WM HINSON (BERMUDA) LTD
ATTORNEY'S & PROFESSIONAL INSURANCE SERVICES, INC.
NSM ADMINISTRATION, INC
AMERICAN COLLECTOR'S INSURANCE, LLC
COPPER FUNDING, LLC
KUDU INVESTMENT HOLDINGS, LLC
KUDU INVESTMENT MANAGEMENT LLC
KUDU INVESTMENT US, LLC
NSM INSURANCE HOLDING CO, LLC
NSM INSURANCE GROUP, LLC
TK PARTNERS, LLC
WHITE MOUNTAINS ADVISORS LLC
WHITE MOUNTAINS CAPITAL, LLC
WHITE MOUNTAINS CATSKILL HOLDINGS, INC
WM LAFEYETTE HOLDINGS, INC
WM LINCOLN HOLDINGS, LLC
WM PORTFOLIO HOLDINGS, LLC
WHITE MOUNTAINS SERVICES LLC
HGR PORTFOLIO SOLUTIONS ICAV
TNUVA FINANCIT LTD
WOBI INSURANCE AGENCY, LTD
WHITE MOUNTAINS HOLDINGS (LUXEMBOURG) S.A.R.L.
WHITE MOUNTAINS INVESTMENTS (LUXEMBOURG) S.A.R.L
CLEVERLAND HOLDINGS, LLC
EMBRACE PET INSURANCE AGENCY, LLC
EMBRACE PET MANAGEMENT, LLC
PLANS LIABILITY INSURANCE COMPANY
NSM INSURANCE SERVICES LLC
AUTOSAINT LIMITED
BUZZVAULT LIMITED
CLASSIC INSURANCE SERVICES LIMITED
FIRST INSURANCE SERVICES LIMITED
FIRST UNDERWRITING LTD
FIRST SPECIALTY LTD
FRESH INSURANCE SERVICES GROUP LIMITED
KFO HOLDINGS LTD
KWCP HOLDINGS UK LTD
LADYBIRD INSURANCE BROKER LIMITED
MAYBURY JAMES LIMITED
NSM MGA HOLDINGS
PETER D. JAMES LIMITED
REMOVAL STARS LIMITED
STEWART MILLER MCCULLOCH & CO. LIMITED
STEWART MILLER MCCULLOCH (HOLDINGS) LIMITED
VANTAGE HOLDINGS LIMITED
VANTAGE INSURANCE SERVICES LIMITED
WM CAPITAL HOLDINGS LTD
WM INTERNATIONAL HOLDINGS LTD
WM REGENT, LTD
PLACE OF INCORPORATION
BERMUDA
BERMUDA
BERMUDA
BERMUDA
BERMUDA
BERMUDA
BERMUDA
BERMUDA
CALIFORNIA, USA
CALIFORNIA, USA
DELAWARE, USA
DELAWARE, USA
DELAWARE, USA
DELAWARE, USA
DELAWARE, USA
DELAWARE, USA
DELAWARE, USA
DELAWARE, USA
DELAWARE, USA
DELAWARE, USA
DELAWARE, USA
DELAWARE, USA
DELAWARE, USA
DELAWARE, USA
DELAWARE, USA
IRELAND
ISRAEL
ISRAEL
LUXEMBOURG
LUXEMBOURG
OHIO, USA
OHIO, USA
OHIO, USA
OHIO, USA
TEXAS, USA
UNITED KINGDOM
UNITED KINGDOM
UNITED KINGDOM
UNITED KINGDOM
UNITED KINGDOM
UNITED KINGDOM
UNITED KINGDOM
UNITED KINGDOM
UNITED KINGDOM
UNITED KINGDOM
UNITED KINGDOM
UNITED KINGDOM
UNITED KINGDOM
UNITED KINGDOM
UNITED KINGDOM
UNITED KINGDOM
UNITED KINGDOM
UNITED KINGDOM
UNITED KINGDOM
UNITED KINGDOM
UNITED KINGDOM
Certain other subsidiaries of the Company have been omitted since, in the aggregate, they would not constitute a significant subsidiary.
Exhibit 21
Exhibit 23
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We hereby consent to the incorporation by reference in the Registration Statements on Form S-8 (No. 333-220469, 333-83206) of
White Mountains Insurance Group, Ltd. of our report dated February 26, 2021 relating to the financial statements and financial
statement schedules and the effectiveness of internal control over financial reporting, which appears in this Form 10-K.
/s/ PricewaterhouseCoopers LLP
Boston, Massachusetts
February 26, 2021
Exhibit 24
WHITE MOUNTAINS INSURANCE GROUP, LTD.
POWER OF ATTORNEY
KNOW ALL MEN by these presents, that Peter M. Carlson does hereby make, constitute and appoint G. Manning Rountree and himself, and
each of them, as true and lawful attorney-in-fact and agent of the undersigned, with full power of substitution, resubstitution and revocation, for
and in the name, place and stead of the undersigned, to execute and deliver the Annual Report on Form 10-K, and any and all amendments thereto;
such Form 10-K and each such amendment to be in such form and to contain such terms and provisions as said attorney or substitute shall deem
necessary or desirable; giving and granting unto said attorney, or to such person or persons as in any case may be appointed pursuant to the power
of substitution herein given, full power and authority to do and perform any and every act and thing whatsoever requisite, necessary or, in the
opinion of said attorney or substitute, able to be done in and about the premises as fully and to all intents and purposes as the undersigned might or
could do if personally present, hereby ratifying and confirming all that said attorney or such substitute shall lawfully do or cause to be done by
virtue hereof.
IN WITNESS WHEREOF, the undersigned has duly executed these presents this 23rd day of February, 2021.
/s/ Peter M. Carlson
WHITE MOUNTAINS INSURANCE GROUP, LTD.
POWER OF ATTORNEY
KNOW ALL MEN by these presents, that Mary C. Choksi does hereby make, constitute and appoint G. Manning Rountree and Peter M. Carlson,
and each of them, as true and lawful attorney-in-fact and agent of the undersigned, with full power of substitution, resubstitution and revocation,
for and in the name, place and stead of the undersigned, to execute and deliver the Annual Report on Form 10-K, and any and all amendments
thereto; such Form 10-K and each such amendment to be in such form and to contain such terms and provisions as said attorney or substitute shall
deem necessary or desirable; giving and granting unto said attorney, or to such person or persons as in any case may be appointed pursuant to the
power of substitution herein given, full power and authority to do and perform any and every act and thing whatsoever requisite, necessary or, in
the opinion of said attorney or substitute, able to be done in and about the premises as fully and to all intents and purposes as the undersigned
might or could do if personally present, hereby ratifying and confirming all that said attorney or such substitute shall lawfully do or cause to be
done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has duly executed these presents this 22nd day of February, 2021.
/s/ Mary C. Choksi
WHITE MOUNTAINS INSURANCE GROUP, LTD.
POWER OF ATTORNEY
KNOW ALL MEN by these presents, that Morgan W. Davis does hereby make, constitute and appoint G. Manning Rountree and Peter M.
Carlson, and each of them, as true and lawful attorney-in-fact and agent of the undersigned, with full power of substitution, resubstitution and
revocation, for and in the name, place and stead of the undersigned, to execute and deliver the Annual Report on Form 10-K, and any and all
amendments thereto; such Form 10-K and each such amendment to be in such form and to contain such terms and provisions as said attorney or
substitute shall deem necessary or desirable; giving and granting unto said attorney, or to such person or persons as in any case may be appointed
pursuant to the power of substitution herein given, full power and authority to do and perform any and every act and thing whatsoever requisite,
necessary or, in the opinion of said attorney or substitute, able to be done in and about the premises as fully and to all intents and purposes as the
undersigned might or could do if personally present, hereby ratifying and confirming all that said attorney or such substitute shall lawfully do or
cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has duly executed these presents this 23rd day of February, 2021.
/s/ Morgan W. Davis
WHITE MOUNTAINS INSURANCE GROUP, LTD.
POWER OF ATTORNEY
KNOW ALL MEN by these presents, that Philip A. Gelston does hereby make, constitute and appoint G. Manning Rountree and Peter M.
Carlson, and each of them, as true and lawful attorney-in-fact and agent of the undersigned, with full power of substitution, resubstitution and
revocation, for and in the name, place and stead of the undersigned, to execute and deliver the Annual Report on Form 10-K, and any and all
amendments thereto; such Form 10-K and each such amendment to be in such form and to contain such terms and provisions as said attorney or
substitute shall deem necessary or desirable; giving and granting unto said attorney, or to such person or persons as in any case may be appointed
pursuant to the power of substitution herein given, full power and authority to do and perform any and every act and thing whatsoever requisite,
necessary or, in the opinion of said attorney or substitute, able to be done in and about the premises as fully and to all intents and purposes as the
undersigned might or could do if personally present, hereby ratifying and confirming all that said attorney or such substitute shall lawfully do or
cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has duly executed these presents this 22nd day of February, 2021.
/s/ Philip A. Gelston
WHITE MOUNTAINS INSURANCE GROUP, LTD.
POWER OF ATTORNEY
KNOW ALL MEN by these presents, that Edith E. Holiday does hereby make, constitute and appoint G. Manning Rountree and Peter M.
Carlson, and each of them, as true and lawful attorney-in-fact and agent of the undersigned, with full power of substitution, resubstitution and
revocation, for and in the name, place and stead of the undersigned, to execute and deliver the Annual Report on Form 10-K, and any and all
amendments thereto; such Form 10-K and each such amendment to be in such form and to contain such terms and provisions as said attorney or
substitute shall deem necessary or desirable; giving and granting unto said attorney, or to such person or persons as in any case may be appointed
pursuant to the power of substitution herein given, full power and authority to do and perform any and every act and thing whatsoever requisite,
necessary or, in the opinion of said attorney or substitute, able to be done in and about the premises as fully and to all intents and purposes as the
undersigned might or could do if personally present, hereby ratifying and confirming all that said attorney or such substitute shall lawfully do or
cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has duly executed these presents this 22nd day of February, 2021.
/s/ Edith E. Holiday
WHITE MOUNTAINS INSURANCE GROUP, LTD.
POWER OF ATTORNEY
KNOW ALL MEN by these presents, that David A. Tanner does hereby make, constitute and appoint G. Manning Rountree and Peter M.
Carlson, and each of them, as true and lawful attorney-in-fact and agent of the undersigned, with full power of substitution, resubstitution and
revocation, for and in the name, place and stead of the undersigned, to execute and deliver the Annual Report on Form 10-K, and any and all
amendments thereto; such Form 10-K and each such amendment to be in such form and to contain such terms and provisions as said attorney or
substitute shall deem necessary or desirable; giving and granting unto said attorney, or to such person or persons as in any case may be appointed
pursuant to the power of substitution herein given, full power and authority to do and perform any and every act and thing whatsoever requisite,
necessary or, in the opinion of said attorney or substitute, able to be done in and about the premises as fully and to all intents and purposes as the
undersigned might or could do if personally present, hereby ratifying and confirming all that said attorney or such substitute shall lawfully do or
cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has duly executed these presents this 22nd day of February, 2021.
/s/ David A. Tanner
Exhibit 31.1
PRINCIPAL EXECUTIVE OFFICER CERTIFICATION PURSUANT TO RULE 13a-14(a)
OF THE SECURITIES EXCHANGE ACT OF 1934
I, G. Manning Rountree, Chief Executive Officer of White Mountains Insurance Group, Ltd., certify that:
I have reviewed this Annual Report on Form 10-K for the fiscal year ended December 31, 2020 of White Mountains Insurance Group, Ltd.;
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial
condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange
Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the
registrant and have:
(a)
(b)
(c)
(d)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by
others within those entities, particularly during the period in which this report is being prepared;
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our
supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting principles;
Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most
recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely
to materially affect, the registrant's internal control over financial reporting; and
The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the
registrant's auditors and the audit committee of the registrant's board of directors:
(a)
(b)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal
control over financial reporting.
/s/ G. Manning Rountree
Chief Executive Officer
(Principal Executive Officer)
February 26, 2021
C-1
Exhibit 31.2
PRINCIPAL FINANCIAL OFFICER CERTIFICATION PURSUANT TO RULE 13a-14(a)
OF THE SECURITIES EXCHANGE ACT OF 1934
I, Reid T. Campbell, Executive Vice President & Chief Financial Officer of White Mountains Insurance Group, Ltd. certify that:
I have reviewed this Annual Report on Form 10-K for the fiscal year ended December 31, 2020 of White Mountains Insurance Group, Ltd.;
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial
condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange
Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the
registrant and have:
(a)
(b)
(c)
(d)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by
others within those entities, particularly during the period in which this report is being prepared;
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our
supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting principles;
Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most
recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely
to materially affect, the registrant's internal control over financial reporting; and
The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the
registrant's auditors and the audit committee of the registrant's board of directors:
(a)
(b)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal
control over financial reporting.
/s/ Reid T. Campbell
Executive Vice President and Chief Financial Officer
(Principal Financial Officer)
February 26, 2021
C -2
PRINCIPAL EXECUTIVE OFFICER
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Exhibit 32.1
In connection with the Annual Report on Form 10-K of White Mountains Insurance Group, Ltd. (the “Company”), for the period ending December 31,
2020 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, G. Manning Rountree, Chief Executive Officer of the
Company, certify, pursuant to 18 U.S.C. §1350, as adopted pursuant to §906 of the Sarbanes-Oxley Act of 2002, that to my knowledge:
(a) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and,
(b) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the
Company as of and for the periods presented in the Report.
/s/ G. Manning Rountree
Chief Executive Officer
(Principal Executive Officer)
February 26, 2021
C - 3
PRINCIPAL FINANCIAL OFFICER
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Exhibit 32.2
In connection with the Annual Report on Form 10-K of White Mountains Insurance Group, Ltd. (the “Company”), for the period ending December 31,
2020 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Reid T. Campbell, Executive Vice President and Chief
Financial Officer of the Company, certify, pursuant to 18 U.S.C. §1350, as adopted pursuant to §906 of the Sarbanes-Oxley Act of 2002, that to my
knowledge:
(a) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and,
(b) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the
Company as of and for the periods presented in the Report.
/s/ Reid T. Campbell
Executive Vice President and Chief Financial Officer
(Principal Financial Officer)
February 26, 2021
C - 4