White Mountains Insurance(WTM) - 2019 Q4 - Annual Report

PART I Business The company is a holding company focused on opportunistic acquisitions and dispositions in insurance and financial services, operating through four main segments - The company's business model is centered on making opportunistic and value-oriented acquisitions in the insurance and financial services sectors, operating them, and disposing of them when attractive valuations are available[13] - As of December 31, 2019, White Mountains's four reportable segments are HG Global/BAM, NSM, Kudu, and Other Operations[14] HG Global/BAM This segment provides municipal bond insurance through BAM, which grew its insured portfolio to $62.3 billion in 2019 with no watchlist credits - BAM is the first and only mutual municipal bond insurance company in the U.S., owned by its policyholders (the municipalities) White Mountains consolidates BAM's results because it is the primary beneficiary of BAM, a Variable Interest Entity (VIE)[15] - HG Global provides up to 15%-of-par, first-loss reinsurance protection to BAM through its subsidiary HG Re In return, BAM cedes 60% of the risk premium[16][22] BAM Insured Portfolio by Asset Class (Gross Par Outstanding) | Sector | Dec 31, 2019 ($M) | Dec 31, 2018 ($M) | | :--- | :--- | :--- | | General Obligation | $36,173.8 | $30,627.0 | | Utility | $7,344.0 | $6,451.0 | | Dedicated Tax | $7,024.4 | $6,263.8 | | General Fund | $5,550.2 | $4,858.5 | | Public Higher Education | $3,788.3 | $2,406.6 | | Transportation | $1,935.0 | $1,293.6 | | Other Public Finance | $434.8 | $301.1 | | Total | $62,250.5 | $52,201.6 | - As of December 31, 2019, BAM's insured credit watchlist had no credits assigned to surveillance category 3 or category 4 (loss expected or paid)[48] NSM NSM is a specialty P&C MGU that places insurance in niche sectors, growing significantly in 2019 through acquisitions and organic growth - NSM is a full-service MGU that places specialty P&C insurance, earning commissions based on volume and profitability without taking direct insurance risk[50] - NSM has grown through acquisitions under White Mountains's ownership, including Fresh Insurance (UK personal lines), KBK Insurance Group (towing/transportation), and Embrace Pet Insurance[54] NSM Controlled Premium and Revenue by Vertical | Vertical | Controlled Premium 2019 ($M) | Commission & Other Revenue 2019 ($M) | Controlled Premium 2018 ($M) | Commission & Other Revenue 2018 ($M) | | :--- | :--- | :--- | :--- | :--- | | Specialty Transportation | $290.2 | $77.6 | $136.8 | $43.0 | | Real Estate | $157.2 | $34.7 | $135.7 | $30.3 | | Social Services | $102.7 | $25.9 | $94.0 | $23.8 | | Pet | $67.6 | $30.0 | — | — | | United Kingdom | $155.5 | $45.9 | $108.8 | $34.9 | | Other | $124.5 | $19.0 | $119.4 | $19.8 | | Total | $897.7 | $233.1 | $594.7 | $151.8 | Kudu Kudu provides capital solutions to asset managers, with White Mountains increasing its stake to 99.1% and deploying $266 million across nine firms - White Mountains increased its ownership of Kudu to 99.1% in April 2019, leading to its consolidation as a new reportable segment[67] - Kudu's capital solutions are structured as minority preferred equity stakes with distribution rights tied to gross revenues, designed to generate stable cash yields[68] Kudu Portfolio Snapshot (as of Dec 31, 2019) | Metric | Value | | :--- | :--- | | Capital Deployed | $266 million | | Number of Firms | 9 | | Combined AUM | > $33 billion | | Average Inception Cash Yield | 10.6% | | White Mountains Total Capital Commitment | $350 million | Other Operations This segment holds strategic investments in unconsolidated entities like MediaAlpha and PassportCard/DavidShield, with MediaAlpha deconsolidated in 2019 - In February 2019, MediaAlpha completed a recapitalization, reducing White Mountains's ownership to 48.3% This led to the deconsolidation of MediaAlpha and its reclassification as a long-term investment accounted for at fair value[76][78] Fair Value of Key Strategic Investments (as of Dec 31, 2019) | Investment | Fair Value ($M) | | :--- | :--- | | MediaAlpha | $180 | | PassportCard/DavidShield | $90 | | Elementum | $55 | | Tuckerman Capital | $58 | | Enlightenment Capital | $34 | - In May 2019, White Mountains acquired a 30% interest in Elementum, an ILS investment adviser, for $55 million and committed to invest an additional $50 million in its funds[84] Discontinued Operations The company has completed major dispositions of operating businesses, including OneBeacon and Sirius Group, generating significant cash proceeds and gains - The company completed the sale of OneBeacon Insurance Group in 2017, receiving $1.3 billion in cash and recording a $557 million comprehensive gain[96] - The sale of Sirius Group was completed in 2016 for approximately $2.6 billion in cash proceeds, resulting in a $477 million comprehensive gain[100] Risk Factors The company faces significant risks including investment volatility, BAM rating downgrades, NSM/Kudu business concentration, adverse tax implications, and operational challenges - Investment Risk: The investment portfolio is subject to losses from adverse changes in equity markets, interest rates, and credit markets A significant portion of the portfolio ($654 million) consists of Level 3 assets without readily observable market prices, requiring subjective valuation[134][136] - BAM-Related Risks: A downgrade of BAM's "AA" financial strength rating could severely limit its ability to write new business Additionally, there is a risk that BAM may not pay the principal and interest due on the $458 million in BAM Surplus Notes owned by White Mountains, as payments require NYDFS approval and depend on BAM's financial health[139][141][142] - NSM & Kudu Risks: A substantial portion of NSM's business is placed with a small number of insurance carriers (56% with the top five), creating concentration risk Kudu's financial performance is dependent on the asset- and performance-based fees of its clients, which are subject to market volatility and competition[150][152] - Tax Risks: The company may be treated as a Passive Foreign Investment Company (PFIC), which could subject U.S. shareholders to disadvantageous tax rules Its non-U.S. subsidiaries are also treated as Controlled Foreign Corporations (CFCs), which has tax implications for U.S. 10% shareholders[154][163] - Operational & Regulatory Risks: The company is exposed to cybersecurity risks that could compromise data and disrupt operations It also depends on key personnel who may be difficult to replace Changes in insurance regulations could restrict operations or increase capital requirements[170][175][177] Unresolved Staff Comments The company reports no unresolved comments from the SEC staff regarding its periodic or current reports - The Company reports no unresolved comments from the SEC staff[182] Properties The company's main offices are in Bermuda and New Hampshire, with most facilities leased and deemed adequate for operations - The company's principal executive office is in Hanover, New Hampshire, with other key offices in Bermuda, Connecticut, and Massachusetts Most properties are leased[183][185] Legal Proceedings The company reports no material legal proceedings - None[186] Mine Safety Disclosures This item is not applicable to the company - None[187] PART II Market for the Company's Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities White Mountains's common shares are listed on NYSE and BSX, with no repurchases in Q4 2019, and a stock performance graph is included - The company's common shares trade on the NYSE under the symbol "WTM"[194] - No common shares were repurchased by the company during the fourth quarter of 2019[196] Selected Financial Data This section summarizes five-year consolidated financial data, highlighting 2019 revenues of $893 million, net income of $415 million, and increased book value per share Selected Financial Data (2017-2019) | ($ in Millions, Except Per Share) | 2019 | 2018 | 2017 | | :--- | :--- | :--- | :--- | | Revenues | $893 | $369 | $374 | | Pre-tax income (loss) | $405 | $(178) | $8 | | Net income (loss) attributable to common shareholders | $415 | $(141) | $627 | | Total diluted income (loss) per share | $130.27 | $(41.76) | $146.06 | | Total assets | $3,983 | $3,363 | $3,659 | | Debt | $284 | $193 | $24 | | White Mountains's common shareholders' equity | $3,262 | $2,843 | $3,493 | | Book value per share | $1,023.91 | $896.00 | $931.30 | Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses the company's financial condition and results, highlighting 2019's strong investment performance and MediaAlpha gain, which drove a 14.8% adjusted book value per share increase Results of Operations In 2019, adjusted book value per share grew 14.8% to $1,018, driven by strong investment returns and a $182 million MediaAlpha gain, contrasting with 2018's decline Book Value Per Share Performance | Metric | 2019 | 2018 | | :--- | :--- | :--- | | Book Value Per Share | $1,024 | $896 | | Adjusted Book Value Per Share | $1,018 | $888 | | Growth in Adjusted BVPS (incl. dividends) | 14.8% | (2.8)% | - The 2019 results were primarily driven by strong investment results and a $182 million gain from the MediaAlpha Transaction[207][208] - The 2018 results were primarily driven by investment results, which were adversely impacted by the sharp decline in equity markets in the fourth quarter of 2018[207] Liquidity and Capital Resources The company maintains adequate liquidity with $603 million in cash and liquid investments, while total debt increased to $284 million, and share repurchases significantly decreased in 2019 - Primary sources of cash are distributions from subsidiaries, investment income, and proceeds from asset sales Primary uses include operating expenses, investments, debt service, dividends, and share repurchases[335][336] Capital Structure Summary | ($ in Millions) | Dec 31, 2019 | Dec 31, 2018 | | :--- | :--- | :--- | | Total debt | $283.5 | $192.7 | | Total White Mountains's common shareholders' equity | $3,261.5 | $2,843.1 | | Total adjusted capital (Non-GAAP) | $3,538.5 | $3,042.6 | | Total debt to total adjusted capital | 8.0% | 6.3% | - The company has future binding commitments to fund other long-term investments totaling approximately $183 million as of December 31, 2019[371] Share Repurchases | Year Ended | Shares Repurchased | Cost ($M) | | :--- | :--- | :--- | | Dec 31, 2019 | 5,679 | $4.9 | | Dec 31, 2018 | 592,458 | $519.4 | | Dec 31, 2017 | 832,725 | $723.9 | Critical Accounting Estimates Management's critical accounting estimates include fair value measurements for Level 3 investments, valuation of BAM Surplus Notes, and impairment testing for goodwill and other intangible assets - Fair Value Measurements: A significant portion of the investment portfolio ($654 million of other long-term investments) is classified as Level 3, requiring valuation based on unobservable inputs and management judgment Key Level 3 assets include Kudu's Participation Contracts, MediaAlpha, and PassportCard/DavidShield, which are valued using discounted cash flow models[409][422][424] - BAM Surplus Notes Valuation: The company believes the $458 million principal and $163 million accrued interest on the BAM Surplus Notes are fully recoverable This assessment is based on a debt service model that forecasts BAM's operating results through 2042 and is sensitive to assumptions about the municipal bond market[439][442] - Goodwill and Intangible Assets: The company holds $655 million in goodwill and other intangibles, with $623 million related to NSM and its acquisitions These assets are tested for impairment annually, requiring management to estimate the fair value of reporting units, which involves significant judgment[447][449] Quantitative and Qualitative Disclosures About Market Risk The company faces market risks from its investment portfolio, including interest rate, credit spread, and equity price risks, with sensitivity analyses showing potential impacts on fair value Interest Rate Risk Sensitivity on Fixed Maturity Investments | Assumed Change in Interest Rate | Pre-Tax (Decrease) in Fair Value ($M) | | :--- | :--- | | 50 bps increase | $(20.3) | | 100 bps increase | $(41.5) | - A hypothetical 10% increase or decrease in the value of common equity securities and other long-term investments would change their carrying value by approximately $154 million pre-tax[460] - As of December 31, 2019, the company had foreign currency exposure on $191 million of net assets, primarily in GBP, EUR, and JPY[464] Financial Statements and Supplementary Data The company's consolidated financial statements and supplementary data are filed as part of the Annual Report on Form 10-K - The financial statements and supplementary data are filed as part of this report[466] Changes in and Disagreements With Accountants on Accounting and Financial Disclosure The company reports no changes in or disagreements with its accountants on accounting and financial disclosure - None[467] Controls and Procedures Management concluded that the company's disclosure controls and internal control over financial reporting were effective as of December 31, 2019 - Management concluded that both disclosure controls and procedures, and internal control over financial reporting, were effective as of December 31, 2019[468][469] Other Information The company reports no other information for this item - None[471] PART III Directors, Executive Officers and Corporate Governance Information on directors, executive officers, and corporate governance is incorporated by reference from the 2020 Proxy Statement - This section incorporates information by reference from the Company's 2020 Proxy Statement[473] Executive Compensation Information regarding executive compensation is incorporated by reference from the 2020 Proxy Statement - This section incorporates information by reference from the Company's 2020 Proxy Statement[476] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Information regarding security ownership is incorporated by reference from the 2020 Proxy Statement - This section incorporates information by reference from the Company's 2020 Proxy Statement[477] Certain Relationships and Related Transactions, and Director Independence Information regarding related party transactions and director independence is incorporated by reference from the 2020 Proxy Statement - This section incorporates information by reference from the Company's 2020 Proxy Statement[478] Principal Accountant Fees and Services Information regarding principal accountant fees and services is incorporated by reference from the 2020 Proxy Statement - This section incorporates information by reference from the Company's 2020 Proxy Statement[479] PART IV Exhibits and Financial Statement Schedules This section lists all financial statements, schedules, and exhibits filed with the Form 10-K, noting MediaAlpha's statements will be amended - This section lists all exhibits and financial statement schedules filed with the 10-K[481] - The financial statements for MediaAlpha, required under SEC Rule 3-09, will be filed via an amendment to the 10-K[485] Form 10-K Summary The company provides no summary for this item - None[486]