White Mountains Insurance Group Earnings 2018-12-31

WTM 10K Annual Report

Balance Sheet	Income Statement	Cash Flow

10-K 1 wtm10-k2018.htm 10-K Document

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K



ý	ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2018



o	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		94-2708455
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)
80 South Main Street
Hanover, New Hampshire		03755-2053
(Address of principal executive offices)		(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		Name of each exchange on which registered
Common Shares, par value $1.00		New York Stock Exchange
per share		Bermuda Stock Exchange

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ý 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 ý

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 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 ý No o

Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or shorter period that the registrant was required to submit and post such files). Yes ý No o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of the Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ý

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.



Large accelerated filer ý	Accelerated filer o		Non-accelerated filer o
Smaller reporting company o		Emerging growth company o

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 is a shell company (as defined in Rule 12b-2 of the Act). Yes o No ý

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, 2018, was $2,745,786,244.

As of February 25, 2019, 3,167,436 common shares, par value of $1.00 per share, were outstanding (which includes 27,795 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 23, 2019 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	1
	General	1
	HG Global/BAM	2
	NSM	7
	MediaAlpha	9
	Other Operations	12
	Investments	14
	Discontinued Operations	14
	Regulation	15
	Ratings	18
	Employees	18
	Available Information	18
ITEM 1A.	Risk Factors	19
ITEM 1B.	Unresolved Staff Comments	25
ITEM 2.	Properties	25
ITEM 3.	Legal Proceedings	25
ITEM 4.	Mine Safety Disclosures	25
	Executive Officers of the Registrant and its Subsidiaries	26
	PART II
ITEM 5.	Market for the Company’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities	26
ITEM 6.	Selected Financial Data	28
ITEM 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	29
	Results of Operations	29
	Liquidity and Capital Resources	49
	Non-GAAP Financial Measures	55
	Critical Accounting Estimates	56
	Forward Looking Statements	62
ITEM 7A.	Quantitative and Qualitative Disclosures About Market Risk	63
ITEM 8.	Financial Statements and Supplementary Data	64
ITEM 9.	Changes in and Disagreements With Accountants on Accounting and Financial Disclosure	64
ITEM 9A.	Controls and Procedures	65
ITEM 9B.	Other Information	65
	PART III
ITEM 10.	Directors, Executive Officers and Corporate Governance	65
ITEM 11.	Executive Compensation	65
ITEM 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	65
ITEM 13.	Certain Relationships and Related Transactions, and Director Independence	65
ITEM 14.	Principal Accountant Fees and Services	65
	PART IV
ITEM 15.	Exhibits and Financial Statement Schedules	66
ITEM 16.	Form 10-K Summary	67
	CERTIFICATIONS	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 80 South Main Street, Hanover, New Hampshire 03755-2053 and its registered office is located at Clarendon House, 2 Church Street, Hamilton, Bermuda HM 11.

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.

White Mountains conducts its business primarily in four areas: municipal bond insurance, specialty insurance distribution, marketing technology (for insurance and other verticals) 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’s marketing technology business is conducted through its subsidiary QL Holdings LLC and its subsidiary QuoteLab, LLC (collectively “MediaAlpha”). White Mountains’s investing activities are conducted through its investment management subsidiary, White Mountains Advisors LLC (“WM Advisors”). White Mountains’s reportable segments are HG Global/BAM, NSM, MediaAlpha and Other Operations.

White Mountains’s Operating Principles

White Mountains strives to operate within the spirit of four operating principles. These are:

Underwriting Comes First. An insurance enterprise must respect the fundamentals of insurance. There must be a realistic expectation of underwriting profit on all business written and demonstrated fulfillment of that expectation over time, with focused attention to the loss ratio and to all the professional insurance disciplines of pricing, underwriting and claims management.

Maintain a Disciplined Balance Sheet. The first concern here is that insurance liabilities must always be fully recognized. Loss reserves and expense reserves must be solid before any other aspect of the business can be solid. Pricing, marketing and underwriting all depend on informed judgment of ultimate loss costs that can be managed effectively only with a disciplined balance sheet.

Invest for Total Return. Historically, the insurance industry has emphasized investment income (interest and dividends) above capital gains. White Mountains invests to maximize total return over time. White Mountains manages its bond portfolios for after-tax total return and also invests prudently in equities.

Think Like Owners. Thinking like owners has a value all its own. There are stakeholders in a business enterprise, and doing good work requires more than this quarter’s profit. Thinking like an owner embraces all of that and is the touchstone of a capitalist enterprise.

HG GLOBAL/BAM

The HG Global/BAM segment consists of the consolidated results of HG Global 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, BAM provides market access to, and lowers interest expense for, issuers of municipal bonds used to finance essential public purposes. 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.

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, 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, and 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 purposes, 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.

BAM launched in July 2012 after securing an “AA/stable” rating from Standard & Poor’s Financial Services LLC (“Standard & Poor’s”). In June 2018, Standard & Poor’s affirmed BAM’s “AA/stable” rating. “AA” is the third highest of 23 financial strength ratings assigned by Standard & Poor’s.

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 60 for a discussion on the accounting and risks associated with the BAM Surplus Notes.

At inception, BAM and HG Re also entered into a first loss reinsurance treaty (“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 60% of the risk premium charged for insuring the municipal bond, net of a ceding commission.

HG Re’s obligations under the FLRT are limited to the assets in two collateral trusts: a Regulation 114 Trust and a supplemental collateral trust (the “Supplemental Trust” and, together with the Regulation 114 Trust, the “Collateral Trusts”). Losses required to be reimbursed under the FLRT are subject to an aggregate limit equal to the assets held in the Collateral Trusts at any point in time.

At inception, the Supplemental Trust contained the original $300 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. At the same time HG Global and BAM also agreed to change the payment terms of the Series B Notes, so that payments will reduce principal and accrued interest on a pro rata basis, consistent with the payment terms on the Series A Notes. The terms of the Series B Notes had previously stipulated that payments would first reduce interest owed, then reduce principal owed once all accrued interest had been paid. The NYDFS approved the change during 2017. In connection with the contribution and change in payment terms of the Series B Notes, the Series A Notes were merged into the Series B Notes.

The Regulation 114 Trust target balance is equal to gross ceded unearned premiums and unpaid ceded loss and LAE expenses, if any. The Supplemental Trust target balance is equal to $603 million. As the BAM Surplus Notes are repaid over time, the BAM Surplus Notes will be replaced in the Supplemental Trust by cash and fixed income securities. The Collateral Trust balances must be at target levels before excess funds can be distributed out of the Supplemental Trust.

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.

The FLRT is a perpetual agreement, with an initial term of 10 years. The FLRT can be amended after the first 10-year period and after each subsequent 5-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.

In addition to the FLRT, BAM is party to a collateralized excess of loss reinsurance agreement provided by Fidus Re, Ltd. (“Fidus Re”), a Bermuda based special purpose insurer created solely to provide reinsurance protection to BAM. Fidus Re was capitalized by the issuance of $100 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 5 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 Covered Portfolio consists of approximately 73% of BAM’s portfolio of financial guaranty policies issued through December 31, 2018.

As of December 31, 2018 and 2017, White Mountains reported $926 million and $860 million of total assets, and $496 million and $516 million of total equity related to HG Global. As of December 31, 2018 and 2017, White Mountains owned 96.9% of HG Global’s preferred equity and 88.4% of its common equity. As of December 31, 2018 and 2017, White Mountains reported $15 million and $16 million of non-controlling interests related to HG Global.

As of December 31, 2018 and 2017, White Mountains reported $555 million and $541 million of total assets, and $(171) million and $(163) million of non-controlling interest related to BAM.

Competition

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, BAM’s trading value is higher relative to competitors and the capture rate is higher.

Insured Portfolio

The following table presents BAM’s insured portfolio by asset class as of December 31, 2018 and 2017:

Millions

December 31, 2018

December 31, 2017

Sector

Gross Par Outstanding

Average Standard & Poor’s Credit Rating ⁽¹⁾

Gross Par Outstanding

Average Standard & Poor’s Credit Rating ⁽¹⁾

General Obligation

30,627.0

25,147.7

Utility

6,451.0

5,425.8

Dedicated Tax

6,263.8

4,852.6

General Fund

4,858.5

3,638.8

Public Higher Education

2,406.6

A-

1,781.7

A-

Transportation

1,293.6

953.4

Other Public Finance

301.1

A-

290.6

A-

Total gross par outstanding

52,201.6

42,090.6

⁽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, 2018 and 2017:



	December 31, 2018
$ in Millions		Gross Par Outstanding		Percent of Total Gross Par Outstanding		Standard & Poor’s Credit Rating ⁽¹⁾
Municipal Authority of Westmoreland County, PA, Water		$	329.9	0.6	%		A+
State of Illinois		329.8		0.6			BBB-
City of Shreveport, LA (Caddo Parish), Water & Sewer		269.7		0.5			A-
New Jersey Transportation Trust Fund Authority, System & Program Bonds, NJ, Gas Tax ⁽²⁾		264.5		0.5			BBB+
Eastern Michigan University, MI (Lapeer County), Public Higher Education - Gross Revenue		258.1		0.5			A
State of New Jersey		250.6		0.5			BBB+
Suffolk Country, NY		246.7		0.5			A-
New Jersey Economic Development Authority (Motor Vehicle Surcharge)		225.7		0.4			BBB+
State of Louisiana		219.6		0.4			A+
State of Connecticut		211.0		0.4			A
Total of top ten exposures		$	2,605.6	4.9	%

⁽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⁾The bonds issued for the New Jersey Transportation Trust Fund Authority, System & Program Bonds, NJ, Gas Tax include capital appreciation bonds. The estimated equivalent par value for current interest paying bonds is approximately $350.0.



	December 31, 2017
$ in Millions		Gross Par Outstanding		Percent of Total Gross Par Outstanding		Standard & Poor’s Credit Rating ⁽¹⁾
Municipal Authority of Westmoreland County, PA, Water		$	334.0	0.8	%		A+
State of Illinois		284.1		0.7			BBB-
Commonwealth of Pennsylvania		260.8		0.6			A-
Suffolk County, NY		257.4		0.6			A-
Eastern Michigan University, MI (Lapeer County), Public Higher Education - Gross Revenue		252.2		0.6			A
New Jersey Economic Development Authority (Motor Vehicle Surcharge)		213.3		0.5			BBB+
State of New Jersey		197.0		0.5			BBB+
West Travis County Public Utility Agency, TX (Travis County), Water & Sewer		188.6		0.4			A
City of Shreveport, LA (Caddo Parish), Water & Sewer		177.6		0.4			A-
City of New Brunswick, NJ (Middlesex County)		162.5		0.4			A+
Total of top ten exposures		$	2,327.5	5.5	%

The following table presents the geographic distribution of BAM’s insured portfolio as of December 31, 2018 and 2017:



	December 31, 2018					December 31, 2017
$ in Millions	Number of Risks	Gross Par Outstanding		Percent of Total Gross Par Outstanding		Number of Risks	Gross Par Outstanding		Percent of Total Gross Par Outstanding
California	621	$	12,044.6	23.1	%	468	$	9,810.7	23.3	%
Texas	643	7,015.4		13.4		523	6,079.0		14.4
Pennsylvania	417	6,460.1		12.4		334	5,726.1		13.6
Illinois	290	4,342.0		8.3		248	3,201.3		7.6
New York	312	3,234.9		6.2		261	2,931.5		7.0
New Jersey	118	2,429.1		4.7		93	1,839.5		4.4
Ohio	126	1,436.2		2.8		82	1,174.3		2.8
Arizona	62	1,314.2		2.5		52	1,077.4		2.6
Michigan	97	1,236.0		2.4		78	1,092.9		2.6
Louisiana	55	1,208.5		2.3		43	895.4		2.1
Florida	55	1,145.0		2.2		48	1,006.4		2.4
Other States	769	10,335.6		19.7		594	7,256.1		17.2
Total insured portfolio	3,565	$	52,201.6	100.0	%	2,824	$	42,090.6	100.0	%

The following table presents BAM’s insured portfolio by issue size of exposure as of December 31, 2018 and 2017:



$ in Millions	December 31, 2018					December 31, 2017
Original Par Amount Per Issue⁽¹⁾	Number of Risks	Gross Par Outstanding		Percent of Total Gross Par Outstanding		Number of Risks	Gross Par Outstanding		Percent of Total Gross Par Outstanding
Less than $10 million	2,159	$	8,938.3	17.1	%	1,665	$	7,479.3	17.8	%
$10 to $50 million	1,182	23,567.4		45.1		981	20,113.5		47.8
$50 to $100 million	164	10,335.0		19.8		141	8,916.7		21.2
$100 to $200 million	46	5,972.5		11.4		30	3,782.3		9.0
$200 to $300 million	12	2,728.8		5.2		6	1,464.8		3.5
$300 to $400 million	2	659.7		1.4		1	334.0		.7
Total insured portfolio	3,565	$	52,201.7	100.0	%	2,824	$	42,090.6	100	%

⁽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. 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. As of December 31, 2018, BAM did not have any credits assigned to surveillance category 3 or surveillance category 4.

NSM

During 2018, White Mountains acquired a 95.0% equity interest in NSM for cash consideration of $276 million. 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, social services and real estate. On behalf of its insurance carrier partners, NSM manages all aspects of the placement process, including product development, marketing, underwriting, policy issuance and claims. NSM earns commissions based on the volume and profitability of the insurance that it places. NSM does not take insurance risk.

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, non-standard personal lines).

As of December 31, 2018, NSM had approximately 100 insurance carrier partners. NSM has consistently generated strong loss ratios for its insurance carrier partners, expanding its programs when market conditions are attractive and shrinking and/or shutting 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, 2018, the five largest carrier partners account for approximately 58% of total premiums placed by NSM, with the largest carrier partner accounting for approximately 33%.

Historically, NSM has grown both organically and inorganically through acquisitions. Since its inception in 1990, NSM has completed over 20 acquisitions, including two sizable acquisitions under White Mountains’s ownership. On May 18, 2018, NSM acquired 100% of Fresh Insurance Services Group Limited (“Fresh Insurance”). Fresh Insurance is an insurance broker that focuses on non-standard personal lines products in the United Kingdom. On December 3, 2018, NSM acquired all of the net assets of KBK Insurance Group, Inc. and KBK Premium Services, Inc. (collectively, “KBK”). KBK is a specialty MGU focused on the towing and transportation space.

The NSM segment also includes White Mountains Catskill Holdings, Inc., the immediate holding company of NSM. As of December 31, 2018, White Mountains reported $627 million of total assets and $298 million of total equity related to NSM. As of December 31, 2018, White Mountains owned 95.5% of NSM and reported $14 million of non-controlling interest related to NSM.

Competition

NSM operates in a highly competitive property and casualty insurance intermediary industry. Competitors are differentiated based on price, conditions of coverage, loss ratio performance, quality of service, technology and other factors. NSM’s primary competitors are typically specialty insurance carriers and their agents.

Verticals

NSM’s business consists of over 15 active programs that are broadly categorized into five market verticals. The following table presents the controlled premium and commission revenues by vertical for the years ended December 31, 2018, 2017 and 2016:



	Year Ended December 31,
	2018				2017				2016
Millions	Controlled Premium ⁽¹⁾		Commission and Fee Revenue		Controlled Premium ⁽¹⁾		Commission and Fee Revenue		Controlled Premium ⁽¹⁾		Commission and Fee Revenue
Specialty Transportation	$	136.8	$	43.0	$	112.6	$	32.9	$	112.4	$	37.4
Real Estate	135.7		30.3		106.8		22.2		97.6		19.9
Social Services	94.0		23.8		111.6		28.8		122.3		32.3
United Kingdom	108.8		34.9		46.0		16.1		1.2		.7
Other	119.4		19.8		113.4		18.6		112.3		18.3
Total	$	594.7	$	151.8	$	490.4	$	118.6	$	445.8	$	108.6

⁽¹⁾Controlled premium are total premiums placed by NSM during the period.

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 programs: (i) American Collectors Insurance, (ii) Condon Skelly and (iii) Heacock Classic. Each program 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 primarily focused on providing insurance coverages for the towing businesses (e.g., tow truck operators, dealers, and 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 specializes in providing insurance coverage (e.g., property, general liability, 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 provides 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 provides insurance coverages to addiction treatment providers and mental healthcare facilities, and (iii) Sports & Wellness Insurance, which provides insurance coverages to a broad range of sports and wellness organizations such as fitness centers, yoga studios and university sponsored recreational programs and groups.

United Kingdom

The United Kingdom vertical consists of all of NSM’s U.K. based programs. The two largest programs today are Vantage Insurance Services (“Vantage”) and Fresh Insurance. Vantage provides 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 caravans and trailers). Fresh Insurance focuses on non-standard auto insurance and buildings and content insurance for non-standard properties.

Other

The other vertical consists of approximately 10 other programs, providing 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.

MEDIAALPHA

In March 2014, White Mountains acquired a controlling interest in MediaAlpha. On October 5, 2017, White Mountains acquired 131,579 additional newly-issued Class A common units of MediaAlpha for $13 million in connection with MediaAlpha’s acquisition of certain assets associated with the Health, Life and Medicare insurance business of Healthplans.com. Through December 31, 2018, White Mountains has invested approximately $48 million in MediaAlpha ($21 million net of distributions received of $27 million).

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. MediaAlpha also repurchased a portion of the holdings of existing equityholders. White Mountains retained a 42% ownership interest in MediaAlpha on a fully-diluted basis. As a result of the transaction, White Mountains also expects that it will no longer consolidate MediaAlpha in its financial statements and will mark its interest in MediaAlpha to fair value at the transaction closing date and in subsequent periods.

MediaAlpha is a leading marketing technology company that enables the programmatic buying and selling of vertical-specific, performance-based media between advertisers (buyers of advertising inventory) and publishers (sellers of advertising inventory) through cost-per-click, cost-per-call and cost-per-lead pricing models. MediaAlpha’s media buying platform (“MediaAlpha for Advertisers”) enables advertisers to create and automate data-driven bidding strategies designed to improve the efficiency and enhance the overall performance of their marketing campaigns. MediaAlpha has developed distinctive platform solutions for a range of insurance verticals, including auto, motorcycle, home, renter, health and life, and non-insurance verticals, including travel, education and personal finance. MediaAlpha powers over 200 million transactions annually, representing more than $400 million in aggregate media spend.

As of December 31, 2018 and 2017, White Mountains reported $88 million and $97 million of total assets and $42 million and $37 million of total equity related to MediaAlpha. As of December 31, 2018 and 2017, White Mountains owned 61.0% and 64.4% of MediaAlpha. On a fully diluted basis, White Mountains owned 58.9% of MediaAlpha at December 31, 2018 and 2017. As of December 31, 2018 and 2017, White Mountains reported $16 million and $13 million of non-controlling interest related to MediaAlpha.

Business Model

MediaAlpha generates revenue based on the value of the media bought and sold by advertisers and publishers through its exchange platforms. MediaAlpha’s cost of sales is comprised primarily of revenue share-based payments to publishers and traffic acquisition costs paid to top tier search engines. MediaAlpha's primary business model is to facilitate transactions between buyers and sellers and to retain a percentage of the advertising spend as gross profit. MediaAlpha only takes media risk when advertising revenue is generated through its owned and operated websites, with cost of sales consisting primarily of traffic acquisition spend on top tier search engines such as Google.

MediaAlpha offers its partners the flexibility to transact using MediaAlpha’s platforms through the following relationship types:

•

Open Exchange: Under this model, the advertiser pays for media placement on publisher sites, on a source-transparent basis, through an agreement with MediaAlpha. MediaAlpha secures and manages the advertising partnerships, as well as the publisher relationships. MediaAlpha bills the advertiser for the media purchased through the Open Exchange and is responsible for collections from the advertiser and disbursements to publisher partners. Revenue recognized represents the gross dollars transacted through the Open Exchange (“transaction value”) and cost of sales is comprised of the revenue share payments to publisher partners.

•

Buyer Exchange: Under this model, the advertiser uses MediaAlpha’s advertiser platform to manage and optimize media campaigns that place ads on third-party publisher sites or advertising networks that do not use MediaAlpha for Publishers for the sale of their media. MediaAlpha tracks the transaction value of the media purchased through MediaAlpha’s platform from these third-party media partners and bills the advertiser a platform fee based on that total transaction value. Revenue is recognized on a net basis, representing the licensing fee, since MediaAlpha is not responsible for disbursing funds to the advertiser’s various third-party media partners.

•

Seller Exchange: Under this model, the publisher uses MediaAlpha’s publisher platform to manage, track, and optimize the media spend from advertisers with whom the publisher maintains direct contractual relationships. The publisher utilizes the platform as its ad serving, demand management, yield optimization, reporting, and analytics platform to enable the direct, programmatic sale of its performance media to its advertisers. MediaAlpha tracks the total transaction value generated through the publisher platform, but is not responsible for billing or collections from the publisher’s advertisers. MediaAlpha bills the publisher a platform fee based on the transaction value of the media sold by the publisher and recognizes this revenue on a net basis.

The following table presents the transaction value by relationship types for the years ended December 31, 2018, 2017, and 2016:



	Year Ended December 31,
$ in Millions	2018				2017				2016
Open Exchange ⁽¹⁾	$	289.0	73.2	%	$	159.9	73.1	%	$	113.2	64.8	%
Seller Exchange	67.6		17.1		33.9		15.5		38.4		21.9
Buyer Exchange	38.4		9.7		25.0		11.4		23.2		13.3
Total transaction value	$	395.0	100.0	%	$	218.8	100.0	%	$	174.8	100.0	%

⁽¹⁾ Includes transaction value from owned and operated properties.

MediaAlpha operates in several data-rich verticals, including Property & Casualty (“P&C”), Health, Life and Medicare (“HLM”), Travel, and Others (Education and Consumer Finance).

•

P&C consists of advertisers who acquire customers with the intent of selling automobile, home or motorcycle insurance coverage. The advertisers in this vertical are primarily national insurance carriers and advertising agencies commissioned by carriers. The publishers in this vertical are a mix of third-party publishers and national carriers (“Carrier Publishers”) and MediaAlpha’s owned and operated properties.

•

HLM consists of advertisers who acquire customers with the intent of selling them health, life and Medicare insurance coverage. The advertisers in this vertical are primarily national carriers and advertising agencies commissioned by carriers. The publishers in this vertical are primarily third-party publishers and MediaAlpha’s owned and operated properties. On October 5, 2017, MediaAlpha acquired certain assets associated with the Health, Life and Medicare insurance business of Healthplans.com. The acquisition allowed MediaAlpha to supplement its position as the leading marketing technology provider for advertisers and publishers in this market. See Note 4 — “Goodwill and Other Intangibles Assets” on page F-30.

•

Travel consists of advertisers who acquire customers with the intent of selling a leisure travel item (e.g. air fare, hotel, package deal, car rental). The advertisers in this vertical are primarily national brands, online travel agents, travel metasearch sites and advertising agencies commissioned by national brands. The publishers in this vertical are a mix of third-party publishers and MediaAlpha’s owned and operated properties. On January 15, 2016, MediaAlpha acquired certain travel-related assets from Oversee.net, including owned and operated websites, domain names and key customer relationships. The acquisition accelerated MediaAlpha’s entry into the travel vertical, providing MediaAlpha with access to a high quality owned and operated inventory and existing advertiser relationships, consisting primarily of major online travel agents, metasearch sites and national brands. See Note 4 — “Goodwill and Other Intangibles Assets” on page F-30.


•	Other verticals MediaAlpha operates in include the following:


◦	Education consists of advertisers in the for-profit education industry, who seek to acquire customers that will enroll in higher or technical education programs.


◦	Personal Finance consists of multiple sub verticals, ranging from mortgage products (refinance, HELOC, new home) to personal loans.

The following table presents the transaction value by vertical for the years ended December 31, 2018, 2017, and 2016:



	Year Ended December 31,
$ in Millions	2018				2017				2016
P&C	$	225.4	57.1	%	$	121.6	55.5	%	$	126.5	72.4	%
HLM	113.7		28.8		65.4		29.9		32.4		18.5
Travel	29.5		7.5		18.3		8.4		10.1		5.8
Other	26.4		6.6		13.5		6.2		5.8		3.3
Total transaction value	$	395.0	100.0	%	$	218.8	100.0	%	$	174.8	100.0	%

Strategy

MediaAlpha’s goal is to gain adoption of its technology platforms in all data-rich, performance-marketing verticals. MediaAlpha believes that online advertising spend will continue to shift toward measurable, data-driven models and that advertisers will continue to focus on performance and return on investment (“ROI”) on advertising spend. Since inception, MediaAlpha’s approach has been to facilitate this shift by providing partners with unparalleled pricing control and full source transparency down to the domain level, and by continually improving its technology platforms to provide key constituents with more and deeper capabilities.

Competition

The marketing industry is very competitive, highly fragmented and historically dominated by advertising networks. MediaAlpha’s direct competitors include QuinStreet Inc., Intent Media and Clicktripz. MediaAlpha differentiates itself from the competition in the following areas:


•	Technology: MediaAlpha’s proprietary technology provides advertisers with a set of robust tools to help them manage their adverting spend programmatically, on a granular, real time basis.


•	Transparency: The marketplaces powered by MediaAlpha’s technology are fully source transparent, offering full placement-level pricing control to the advertiser.


•	Control: MediaAlpha’s technology gives granular, self-service buying control to advertisers and enables publishers to control and manage all aspects of how their media is made available to advertisers.


•	Quality: MediaAlpha’s publishers include some of the largest and most reputable names in the industry.

OTHER OPERATIONS

White Mountains’s Other Operations segment consists of the Company and its wholly-owned subsidiary, White Mountains Capital, Inc. (“WM Capital”), its other intermediate holding companies, its wholly-owned investment management subsidiary, WM Advisors, investment assets managed by WM Advisors, its interests in PassportCard Limited (“PassportCard”) and DavidShield Life Insurance Agency (2000) Ltd. (“DavidShield”) (collectively “PassportCard/DavidShield”) and Kudu Investment Management, LLC (“Kudu”), certain other consolidated and unconsolidated entities (“Other Operating Businesses”) and certain other strategic investments (“Strategic Investments”).

PassportCard/DavidShield

In April 2015, White Mountains acquired a 50% interest in PassportCard, a UK-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 directly markets its solutions in select markets and also franchises its offerings to major travel insurance and medical assistance companies. PassportCard receives commissions for placing policies with its insurance carrier partners and licensing fees for use of its card-based technology.

On January 24, 2018, White Mountains acquired 50% of DavidShield for a net purchase price of $28 million. As a result of the transaction, White Mountains and its joint venture partner both hold 50% stakes in PassportCard and DavidShield. 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.

There are a number of distinct advantages to the PassportCard and DavidShield insurance solutions that differentiate them in the marketplace. Through the real-time claims handling process, PassportCard and DavidShield are generally able to control claims, loss costs and fraud upfront, driving lower than industry average loss ratios. Further, the card-based, paperless delivery model enables a superior customer experience, commanding industry-leading customer retention rates and strong brand loyalty.

PassportCard and DavidShield launched originally in Israel and are now focused on international expansion. In the second quarter of 2018, PassportCard launched in Australia (under the “TravelCard” brand).

White Mountains’s non-controlling equity interests in PassportCard and DavidShield are accounted for at fair value within other long-term investments. As of December 31, 2018, the fair value of these interests totaled $75 million. As of December 31, 2017, the fair value of White Mountains’s interest in PassportCard was $21 million.

Kudu

On February 5, 2018, White Mountains entered into an agreement to fund up to $125 million in Kudu, a capital provider to asset management and wealth management firms. As of December 31, 2018, White Mountains owned 49.5% of Kudu. Kudu specializes in providing capital solutions to asset managers and registered investment advisers for purposes including generational ownership transfers, management buyouts, acquisition and growth finance and legacy partner liquidity. Kudu also provides strategic assistance to investees from time to time. Kudu’s capital solutions typically are structured as long-term or permanent revenue shares.

As of December 31, 2018, Kudu had completed transactions with two asset management firms and one wealth manager since the inception of White Mountains’s commitment. As of December 31, 2018, White Mountains had funded $31 million of its $125 million commitment, plus an additional $4 million for working capital. White Mountains’s non-controlling equity interest in Kudu is accounted for at fair value within other long-term investments. As of December 31, 2018, the fair value of this interest was $31 million.

On February 14, 2019, White Mountains entered into a definitive agreement to buy all of the interests in Kudu held by certain funds managed by Oaktree Capital Management, L.P. (“Oaktree”) for approximately $50 million. In connection with the transaction, White Mountains will assume all of Oaktree’s unfunded capital commitments to Kudu, increasing White Mountains’s total unfunded Kudu capital commitment to approximately $167 million. If Kudu calls additional capital from Oaktree prior to the closing of the transaction, the purchase price would increase by the amount of the capital called, and White Mountains’s assumed unfunded capital commitment would decrease by an equal amount.

As a result of the transaction, White Mountains’s ownership of Kudu will increase from 49.5% to 99.0%, and it expects to consolidate Kudu in its financial statements after closing.

Other Operating Businesses

Buzz

In August 2016, White Mountains acquired a controlling interest in Removal Stars Ltd. (“Buzz”). As of December 31, 2018 and 2017, White Mountains owned 77.1% of Buzz. Buzz is a portfolio of three related business models that leverage its household inventory technology and the household moving process. Buzzmove is an online price comparison and booking platform for all moving related services in the United Kingdom. Buzzsurvey provides remote surveying technology and services to moving companies. Buzzvault is a digital asset vault that inventories consumers’ belongings and offers insurance policies in respect of those belongings. As of December 31, 2018 and 2017, White Mountains reported $10 million and $12 million of total assets and $9 million and $11 million of shareholders’ equity related to Buzz.

Wobi

In February 2014, White Mountains acquired a controlling interest in Wobi Insurance Agency, Ltd (“Wobi”). As of December 31, 2018 and 2017, White Mountains owned 100.0% and 96.8% of Wobi. Wobi is a financial-sector price comparison business in Israel. Wobi has built a consumer-facing technology platform to enable price comparison and has assembled a panel of large, branded insurance carriers. The company sells primarily auto insurance and earns commissions on all policy sales. As of December 31, 2018 and 2017, White Mountains reported $4 million and $5 million of total assets and $1 million and $2 million of shareholders’ equity related to Wobi.

Other

White Mountains maintains various other non-controlling equity interests in operating businesses accounted for at fair value within other long-term investments. As of December 31, 2018 and 2017, the fair value of these interests totaled $50 million and $52 million, respectively.

Strategic Investments

Enlightenment Capital

In November 2012, in connection with its initial limited partnership investment in Enlightenment Capital Fund I, White Mountains acquired a 15% general partner interest in Enlightenment Capital, a private investment firm that provides flexible capital solutions to middle market businesses in the aerospace, defense and government sectors. White Mountains also holds non-controlling limited partnership interests in Enlightenment Capital Fund I, Enlightenment Capital Fund II and Enlightenment Capital Fund III. As of December 31, 2018 and 2017, the fair value of White Mountains’s investments in Enlightenment Capital and the Enlightenment Capital Funds totaled $28 million and $16 million, respectively.

Tuckerman Capital

White Mountains owns a 25% general partnership interest in Tuckerman Capital, a private investment firm with a focus on manufacturing and industrial service sectors. White Mountains also holds non-controlling limited partnership interests in the Tuckerman Capital III Fund, the Tuckerman Capital IV Fund, the Tuckerman Capital V Fund and the Tuckerman Capital V Co-investment Fund. White Mountains also holds a direct interest in Galvanic Applied Sciences (“Galvanic”), a manufacturer of liquid and gas analyzers, through Tuckerman Capital. As of both December 31, 2018 and 2017, the fair value of White Mountains’s investment in Tuckerman Capital, the Tuckerman Capital Funds and Galvanic totaled $47 million.

Other

White Mountains maintains various other non-controlling equity interests in strategic investments accounted for at fair value within other long-term investments. As of December 31, 2018 and 2017, the fair value of these interests totaled $18 million and $14 million, respectively.

WM Advisors

WM Advisors manages substantially all of White Mountains’s investment portfolio, which primarily consists of fixed maturity investments, short-term investments, common equity securities and other long-term investments.

Previously, WM Advisors was a registered investment adviser that also managed investment portfolios for former White Mountains’s subsidiaries OneBeacon Insurance Group, Ltd. (“OneBeacon”) and Sirius International Insurance Group, Ltd. (“Sirius Group”), and former White Mountains affiliate Symetra Financial Corporation (“Symetra”). WM Advisors managed investment portfolios for each party prior to their sales and for a transition period after each respective transaction. See “Discontinued Operations” on page 48 for a description of the OneBeacon and Sirius Group transactions. As of December 31, 2017, WM Advisors no longer managed any invested assets for OneBeacon, Sirius Group or Symetra. Consequently, WM Advisors de-registered with the SEC on January 29, 2018 and is no longer a registered investment adviser.

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 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 primarily of common equity securities and other long-term investments, including unconsolidated entities, private equity funds and hedge funds. White Mountains’s portfolio of common equity securities primarily consists of passive exchange traded funds (“ETFs”) and publicly-traded common equity securities that are actively managed by select third-party registered investment advisers, whom White Mountains believes have a differentiated investment strategy and approach.

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, 2018, the fixed income portfolio duration, including short-term investments, was 3.4 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 46.

DISCONTINUED OPERATIONS

Over the past three years, White Mountains has disposed of a number of its principal operating businesses and recorded large transaction gains. See Note 2 — “Significant Transactions” on page F-16 and Note 19 — “Held for Sale and Discontinued Operations” on page F- 55 for details regarding these dispositions. A description of the largest of these dispositions follows:

OneBeacon

On September 28, 2017, Intact Financial Corporation completed its acquisition of OneBeacon Insurance Group, Ltd. in an all-cash transaction for $18.10 per share (the “OneBeacon Transaction”). White Mountains received $1.3 billion in cash proceeds and recorded a $557 million comprehensive gain from sale of discontinued operations, net of transaction costs. The comprehensive gain includes $3 million related to the reversal of accumulated other comprehensive income from benefit plan assets and obligations.

While owned by White Mountains, OneBeacon was a provider of a wide range of property and casualty insurance products in the United States primarily through independent agencies, regional and national brokers, wholesalers and MGAs.

Tranzact

On July 21, 2016, White Mountains completed the disposition of Tranzact Holdings, LLC (“Tranzact”) to an affiliate of Clayton, Dubilier & Rice, LLC and received $221 million in cash proceeds. The increase to White Mountains’s book value from the sale of Tranzact was $82 million.

While owned by White Mountains, Tranzact was a provider of comprehensive direct-to-consumer customer acquisition solutions, primarily to insurance companies. Tranzact operated in the health, life and property and casualty insurance verticals (as well as several non-insurance verticals). Tranzact generated revenues through commissions and technology licensing, maintenance, and professional fees.

Sirius Group

On April 18, 2016, White Mountains completed the disposition of Sirius Group to CM International Pte. Ltd. and CM Bermuda Limited (collectively “CMI”). White Mountains received approximately $2.6 billion in cash proceeds and recorded a $477 million comprehensive gain from sale of discontinued operations. The comprehensive gain includes $113 million related to the reversal of accumulated other comprehensive income from foreign currency translation.

While owned by White Mountains, Sirius Group was a provider of reinsurance and insurance products for property, accident and health, aviation and space, trade credit, marine, agriculture and certain other exposures on a worldwide basis through its subsidiary, Sirius International Insurance Corporation. Sirius Global Solutions, formerly known as White Mountains Solutions, specialized in the acquisition and management of runoff liabilities for insurance and reinsurance companies both in the United States and internationally.

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 operation 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, 2018, BAM was in compliance with the single and aggregate risk limits.

No payment of interest or principal 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.

When considering the principal amount guaranteed, New York Insurance Law permits the insurer to take credit for amounts ceded through reinsurance.

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 2014, the NYDFS commenced and completed its examination of BAM and issued a Report on Examination of BAM for the period beginning at BAM’s inception and ending December 31, 2013. The reports did not note any significant regulatory issues concerning BAM.

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 they 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.

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.

Premium Accounts Held in Trust

NSM maintains approximately 40 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. NSM believes that it is in compliance with its fiduciary requirements.

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. See “Dividend Capacity” on page 49 for further discussion.

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 (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. Issued share capital is the aggregate par value of the company’s issued shares, and the share premium account is the aggregate amount paid for issued shares over and above their par value. Share premium accounts may be reduced in certain limited circumstances. 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, depositary 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.

On January 1, 2019 the Economic Substance Act 2018 (the “ESA”) came into effect in Bermuda. Under the provisions of the ESA, every Bermuda registered entity engaged in a “relevant activity” must satisfy economic substance requirements by maintaining a substantial economic presence in Bermuda. Carrying on as a business either in insurance or holding entity activities (both as defined in the ESA and Economic Substance Regulations 2018) are relevant activities under the ESA. To the extent that the ESA applies to any of our entities registered in Bermuda, we will be required to demonstrate compliance with economic substance requirements by filing an annual economic substance declaration with the Registrar of Companies in Bermuda.

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


•	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 by the FCA. The FCA has a wide range of rule-making, investigatory and enforcement powers, and monitors compliance with regulatory requirements.

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 and consumers and ceding companies.

As of February 27, 2019, BAM is rated “AA/stable” by Standard & Poor’s. “AA” is the third highest of 23 financial strength ratings assigned by Standard & Poor’s.

EMPLOYEES

As of December 31, 2018, White Mountains employed 1,058 people (consisting of 58 people at the Company, WM Capital, its other intermediate holding companies, WM Advisors and HG Global, 741 people at NSM, 145 people at Wobi, 65 people at MediaAlpha and 49 people at Buzz). Management believes that White Mountains has satisfactory relations with its employees.

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.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.

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 62 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.

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, common equity securities and other long-term investments, including unconsolidated entities, private equity funds and hedge funds. 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 fluctuations in equity market levels, interest rates, debt market levels, foreign currency exchange rates and 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. 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, private equity funds and hedge funds 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. Additionally, a portion of our investment portfolio is invested in securities denominated in currencies other than the U.S. dollar, predominantly British Pound Sterling (“GBP”), Japanese Yen and the Euro. A significant strengthening of the U.S. dollar against these other currencies 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.

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.

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 was under review 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. As of February 27, 2019, BAM is rated “AA/stable” by Standard & Poor’s. 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, 2018, White Mountains owned $481 million in BAM Surplus Notes and had accrued $144 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 the fourth quarter of 2018, the NYDFS approved a payment on the BAM Surplus Notes of $18 million of principal and $5 million of accrued interest. 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.

We are exposed to losses from municipal bond insurance written by BAM through our reinsurance arrangement between BAM and HG Re, which could materially adversely affect our results of operations and financial condition.

Our reinsurance subsidiary, HG Re, reinsures losses on the first 15%-of-par outstanding on each municipal bond insured by BAM. Should the policies underwritten by BAM experience insured losses for any reason, it could materially adversely affect our results of operations and financial condition.

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, 2018, we had total goodwill and other intangible assets of $538 million on our consolidated balance sheet, most of which relate to our acquisition of NSM and NSM’s subsequent acquisitions of Fresh Insurance and KBK. As of December 31, 2018, goodwill and other intangible assets related to NSM were $486 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 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 33% and 40% of its business with its single largest carrier during the years ended December 31, 2018 and 2017. NSM placed approximately 58% and 68% of its business with its five largest carriers during the years ended December 31, 2018 and 2017. 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.

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. Under a previous special exception for insurance companies, income derived in the active conduct of an insurance business, including investment income derived in such an insurance business, was not treated as passive income for purposes of the PFIC rules. The Tax Cuts and Jobs Act of 2017 (the “TCJA”) modified the insurance exception to apply to a company only if (i) the company would be taxed as an insurance company were it a U.S. corporation and (ii) either (A) loss and loss adjustment expenses and certain reserves constitute more than 25% of the company’s gross assets for the relevant year or (B) loss and loss adjustments expense and certain reserves constitute more than 10% of the company’s gross assets for the relevant year and, based on the applicable facts and circumstances, the company is predominantly engaged in an insurance business and the failure of the company to satisfy the preceding 25% test is due solely to run-off related or rating-related circumstances involving the insurance business.

At the present time White Mountains does not qualify for the insurance exception described above. However, based on the income and assets of White Mountains and, under applicable “look-through” rules, the income and assets of its subsidiaries, we believe that White Mountains should not be treated as a PFIC, and we do not expect that White Mountains will become a PFIC in the future. However, there is no assurance that White Mountains will not become a PFIC at some future time as a result of changes in our assets, income or business operations. In addition, there is no 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.

The Company and 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 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 are engaged in a trade or business in the United States. If the Company or any of its non-U.S. subsidiaries 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 TCJA contains changes that decrease the tax rate applicable to our U.S. subsidiaries, but also could increase their taxable income. We continue to monitor potential impacts from the TCJA.

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 (“BEPS”) project currently being undertaken by the Organization for Economic Cooperation and Development (“OECD”) 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 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, for 2018 and later years 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 for 2018 and later years 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.

We may be deemed to be an investment company under U.S. federal securities law.

The Investment Company Act of 1940, as amended (the “Investment Company Act”), regulates certain companies that are engaged in the business of investing in or trading securities. Although the recent completion of the OneBeacon Transaction and other recent dispositions have resulted in the Company currently having a high level of undeployed capital relative to our historic levels, we do not believe that we are an investment company under the Investment Company Act. White Mountains has been, and will continue to be, 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 our subsidiaries and, if and when attractive exit valuations become available, disposing of these businesses and assets.

However, notwithstanding the foregoing, if the Company is found to be an investment company and becomes obligated to register as such under the Investment Company Act, we would attempt to implement various changes to our operations and capital structure. There can be no assurance that the implementation of these changes would be successful. If the Company were ultimately required to register as an investment company, it would become subject to extensive, restrictive and potentially adverse regulation relating to, among other things, operating methods, management, capital structure, our ability to raise additional debt and equity capital or issue options or warrants (which could impact our ability to compensate key employees), financial leverage, dividends, board of director composition and transactions with affiliates. Accordingly, if we were required to register as an investment company, we may not be able to operate our business as it is currently conducted.

If at any time it were found that we had been operating as an investment company in violation of the registration requirements of the Investment Company Act, there would be a risk, among other material adverse consequences, that we could become subject to monetary penalties or injunctive relief, or both, that we could be unable to enforce contracts with third parties, or that third parties could seek to obtain rescission of transactions with us undertaken during the period in which it was established that we were an unregistered investment company. If, subsequently, we were not permitted or were unable to register as an investment company, it is possible that we would be forced to cease operations.

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 that involves the compromise of PII or PHI 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 depend on our key personnel to manage our business effectively and they may be difficult to replace.

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.

We may suffer losses from unfavorable outcomes from litigation and other legal proceedings.

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 on operations and financial condition.

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 within a given jurisdiction. For example, as a result of various state, federal and international regulatory efforts to modernize and harmonize insurer solvency regulations in the wake of the 2008-2009 financial crisis, 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.

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 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, consideration would be given by a Bermuda court to acts that are alleged to constitute 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.

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 professional offices in Guilford, Connecticut, which house its corporate finance and investment functions and Boston, Massachusetts, which house its corporate accounting, reporting and internal audit functions.

HG Global’s headquarters are located in Hamilton, Bermuda. BAM’s headquarters are located in New York, New York. NSM’s headquarters are located in Conshohocken, Pennsylvania. MediaAlpha’s headquarters are located in Los Angeles, California. Buzz’s headquarters are located in London, United Kingdom. Wobi’s headquarters are located in in Ramat Gan, Israel.

The Company’s headquarters, registered office, principal executive office, and corporate accounting, reporting and internal audit offices are leased. White Mountains owns its corporate finance and investment office in Guilford, Connecticut. HG Global’s, BAM’s, NSM’s, MediaAlpha’s, Buzz’s and Wobi’s offices are 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.

Executive Officers of the Registrant and its Subsidiaries (As of February 27, 2019)



Name	Position	Age	Executive Officer Since
G. Manning Rountree	Chief Executive Officer	46	2009
Reid T. Campbell	Executive Vice President and Chief Financial Officer	51	2007
J. Brian Palmer	Managing Director and Chief Accounting Officer	46	2001
Robert L. Seelig	Executive Vice President and General Counsel	50	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 also serves as a director of BAM.

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.

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.

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 25, 2019, there were 223 registered holders of White Mountains common shares, par value $1.00 per share. The following table presents the quarterly range of the high and low sales price for common shares during 2018 and 2017:



	2018				2017
Quarter Ended:	High		Low		High		Low
December 31	$	942.35	$	832.88	$	903.26	$	841.33
September 30	980.89		895.01		888.00		838.65
June 30	933.70		804.40		900.05		845.41
March 31	858.09		786.23		948.94		834.20

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 65.

The following graph presents the five-year cumulative total return for a shareholder who invested $100 in common shares as of December 31, 2012, assuming re-investment of dividends. Cumulative returns for the five-year period ended December 31, 2018 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

The following table provides information regarding common shares repurchased by the Company during the fourth quarter of 2018:



Months	Total Number of Shares Purchased	Average Price Paid Per Share		Total Number of Shares Purchased as Part of Publicly Announced Plan ⁽¹⁾	Maximum Number of Shares that May Yet Be Purchased Under the Plan ⁽¹⁾
October 1 - 31, 2018	—	$	—	—	643,130
November 1 - 30, 2018	—	$	—	—	643,130
December 1 - 31, 2018	7,425	$	840.82	7,425	635,705
Total	7,425	$	840.82	7,425	635,705


⁽¹⁾	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 authorization does not have a stated expiration.

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, 2018:



	Year Ended December 31,
$ in Millions, Except Share and Per Share Amounts	2018			2017			2016			2015			2014
Income Statement Data:
Revenues ^(a)	$	369		$	374		$	158		$	440		$	137
Expenses ^(b)	547			366			305			311			216
Pre-tax (loss) income	(178		)	8			(147		)	129			(79		)
Income tax benefit (expense)	4			8			33			(13		)	3
Non-controlling interest income (loss)^(c)	50			34			(7		)	19			22
Equity in earnings of unconsolidated affiliates	—			—			—			25			45
Discontinued operations, net of tax ^(d)	(17		)	577			523			135			314
Net (loss) income attributable to White Mountains’s common shareholders	$	(141	)	$	627		$	402		$	295		$	305
(Loss) income attributable to White Mountains’s common shareholders per share:
Basic — continuing operations	$	(36.67	)	$	11.56		$	(24.26	)	$	27.22		$	(1.39	)
Basic — discontinued operations	(5.09		)	134.50			104.37			22.98			51.37
Total basic (loss) income per share	$	(41.76	)	$	146.06		$	80.11		$	50.20		$	49.98
Diluted — continuing operations	$	(36.67	)	$	11.56		$	(24.26	)	$	27.22		$	(1.39	)
Diluted — discontinued operations	(5.09		)	134.50			104.32			22.98			51.37
Total diluted (loss) income per share	$	(41.76	)	$	146.06		$	80.06		$	50.20		$	49.98
Balance Sheet Data:
Total assets^(e)	$	3,363		$	3,659		$	6,520		$	10,271		$	10,448
Debt ^(f)	193			24			13			65			1
Non-controlling interests ^(g)	(125		)	(132		)	133			454			543
White Mountains’s common shareholders’ equity	2,843			3,493			3,583			3,903			3,996
Book value per share	$	896.00		$	931.30		$	785.01		$	694.06		$	667.46
Adjusted book value per share ^(h)	$	887.85		$	914.75		$	789.08		$	697.16		$	664.48
Share Data:
Cash dividends paid per common share	$	1.00		$	1.00		$	1.00		$	1.00		$	1.00
Ending common shares (000’s) ⁽ⁱ⁾	3,173			3,750			4,564			5,624			5,986

^(a)

MediaAlpha recognized advertising and commission revenues of $296 in 2018, compared to $163 in 2017, and NSM, which was acquired during 2018, recognized advertising and commission revenues of $95 from May 11, 2018 through December 31, 2018. Other Operations recognized net realized and unrealized investment (losses) gains of $(101), $133 and $(28), in 2018 and 2017 and 2016, respectively, which contributed to the increase and decrease in revenues. In 2015, White Mountains changed the accounting for its investment in Symetra Financial Corporation from the equity method to fair value and recognized $259 of unrealized investment gains.


^(b)	MediaAlpha recognized cost of sales of $245 in 2018, compared to $136 in 2017, and NSM recognized general and administrative expenses of $62 and broker commission expenses of $29 in the 2018 ownership period.


^(c)	White Mountains reported $52 of non-controlling interest loss related to BAM in 2018, compared to $40 in 2017. Amounts also include non-controlling interests in OneBeacon, Sirius Group and Tranzact prior to their sales.

^(d)

As a result of the sale of OneBeacon, Sirius Group, Tranzact and Esurance Holdings, Inc. and its subsidiaries and Answer Financial Inc. and its subsidiaries (collectively, “Esurance”), 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 of $17 for the recognition of a contingent liability related to the sale of Sirius. 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 and Tranzact of $(1) and $3. In 2016, discontinued operations, net of tax, includes a gain from sale of Sirius and Tranzact of $363 and $52 and net income of $108 primarily related to the operations of OneBeacon. In 2015, discontinued operations, net of tax, includes a gain from sale of Esurance of $18 and net income of $117. In 2014, discontinued operations, net of tax, includes a loss on sale of other discontinued operations of $19, mostly offset by a gain from sale of Fireman’s Fund Insurance Company (“FFIC”) of $14, and net income of $261, primarily related to the operations of Sirius Group. See Note 19 — “Held for Sale and Discontinued Operations” on page F-55.


^(e)	White Mountains’s total assets decreased as a result of share repurchases, and the sales of OneBeacon in 2017 and Sirius Group in 2016.


^(f)	White Mountains’s total debt increased as a result of the acquisition of NSM in 2018. As of December 31, 2015, White Mountains had $50 outstanding under its credit facility, which was repaid in April 2016. See Note 5 — “Debt” on page F-32.


^(g)	White Mountains’s non-controlling interests decreased as a result of the sale of OneBeacon in 2017 and Sirius Group in 2016. See Note 11 — “Common Shareholders’ Equity and Non-controlling Interests” on page F-47 for a detailed breakdown of non-controlling interests by consolidated entity.


^(h)	Adjusted book value per share is a non-GAAP measure. See “NON-GAAP FINANCIAL MEASURES” on page 55.


⁽ⁱ⁾	During 2018, 2017, 2016, 2015, and 2014, White Mountains repurchased 592,458, 832,725, 1,106,145, 387,495, and 217,879 respectively, of its common shares through a combination of tender offers, open market transactions and other transactions.

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 62 for specific important factors that could cause actual results to differ materially from those contained in forward-looking statements.

The following discussion also includes four non-GAAP financial measures (i) adjusted book value per share, (ii) gross written premiums and MSC from new business, (iii) adjusted capital, and (iv) adjusted earnings before interest, taxes, depreciation and amortization (“adjusted EBITDA”), that have been reconciled from their most comparable GAAP financial measures on page 55. 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, 2018, 2017 AND 2016

Overview—Year Ended December 31, 2018 versus Year Ended December 31, 2017

White Mountains ended 2018 with book value per share of $896 and adjusted book value per share of $888, a decrease of 3.7% and 2.8% for the year, including dividends. Comprehensive loss attributable to common shareholders was $146 million in 2018 compared to comprehensive income attributable to common shareholders of $631 million in 2017. The decrease in book value per share and adjusted book value per share and the comprehensive loss attributable to common shareholders in 2018 was driven primarily by investment results, which were adversely impacted by the sharp decline in equity markets in the fourth quarter of 2018, while comprehensive income attributable to common shareholders in 2017 was driven primarily by the $557 million gain from the OneBeacon Transaction.

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. MediaAlpha also repurchased a portion of the holdings of existing equityholders. The transaction valued MediaAlpha at approximately $350 million. The transaction results in an estimated gain of approximately $55 to each of White Mountains’s book value per share and adjusted book value per share. Including the estimated gain of $55 per share for the MediaAlpha transaction, December 31, 2018 book value per share would have been $951 and adjusted book value per share would have been $943. See “MediaAlpha” on page 41.

During 2018, White Mountains repurchased and retired 592,458 of its common shares for $519 million at an average share price of $877. The average share price paid was approximately 98% and 99%, respectively, of White Mountains’s December 31, 2018 book value per share and adjusted book value per share. The average share price paid was approximately 92% and 93%, respectively, of White Mountains’s December 31, 2018 book value per share including the estimated gain from the MediaAlpha transaction and adjusted book value per share including the estimated gain from the MediaAlpha transaction. During 2018, White Mountains also allocated roughly $300 million to new business opportunities, ending the year with approximately $1.2 billion of undeployed capital.

Gross written premiums and MSC collected in the HG Global/BAM segment totaled $107 million in 2018, compared to $101 million in 2017. BAM insured municipal bonds with par value of $12.0 billion in 2018, compared to $10.4 billion in 2017. Total pricing was 93 basis points in 2018, compared to 99 basis points in 2017. BAM’s total claims paying resources were $871 million as of December 31, 2018, compared to $708 million as of December 31, 2017. The increase in claims paying resources was driven by positive cash flow from operations as well as the $100 million reinsurance agreement that BAM entered into with Fidus Re in the second quarter of 2018. During 2018, BAM paid $23 million of principal and interest on the BAM Surplus Notes held by HG Global.

On May 11, 2018, White Mountains acquired a 95.0% equity interest in NSM, a full-service MGU and program administrator for specialty property & casualty insurance. NSM reported pre-tax loss of $5 million from May 11, 2018, the date of acquisition, through December 31, 2018 (“the 2018 ownership period”). NSM reported adjusted EBITDA of $16 million and revenues of $102 million in the 2018 ownership period.

MediaAlpha reported pre-tax income of $9 million in 2018, compared to break-even pre-tax income in 2017. MediaAlpha’s adjusted EBITDA was $32 million in 2018, compared to $11 million in 2017. MediaAlpha reported advertising and commission revenues of $296 million in 2018, compared to $163 million in 2017. The increases in pre-tax income, adjusted EBITDA and revenues were driven primarily by growth in the P&C vertical and the HLM vertical, which includes business generated from assets acquired from Healthplans.com in the fourth quarter of 2017.

White Mountains’s pre-tax total return on invested assets was -1.7% for 2018, compared to 5.6% for 2017.

White Mountains’s portfolio of common equity securities and other long-term investments returned -3.6% for 2018, outperforming the S&P 500 Index return of -4.4%, driven primarily by a favorable fair value adjustment to White Mountains’s investment in PassportCard/DavidShield and strong private equity fund returns, partially offset by weak returns from the non-U.S. actively managed common equity portfolios. White Mountains’s portfolio of common equity securities and other long-term investments returned 12.7% for 2017, underperforming the S&P 500 Index returns of 21.8%, driven primarily by losses from foreign currency forward contracts and unconsolidated entities.

White Mountains’s fixed income portfolio returned 1.2% for 2018, outperforming the Bloomberg Barclays U.S. Intermediate Aggregate Index return of 0.9%. White Mountains’s fixed income portfolio returned 3.5% for 2017, outperforming the Bloomberg Barclays U.S. Intermediate Aggregate Index return of 2.3%.

Overview—Year Ended December 31, 2017 versus Year Ended December 31, 2016

White Mountains ended 2017 with book value per share of $931 and adjusted book value per share of $915, an increase of 18.8% and 16.1% for the year, including dividends. The increases were driven primarily by the gain from the OneBeacon Transaction. Comprehensive income attributable to common shareholders increased to $631 million in 2017, compared to $547 million in 2016. Comprehensive income attributable to common shareholders in both 2017 and 2016 was driven primarily by large transaction gains. In 2017, OneBeacon was acquired by Intact Financial Corporation in an all-cash transaction for $18.10 per share, from which White Mountains received $1.3 billion in proceeds and recorded a net gain of $557 million. In 2016, White Mountains recorded net gains of $477 million and $82 million from the sales of Sirius Group and Tranzact. See Note 2 — “Significant Transactions” on page F-16 for a description of each transaction.

For the year ended December 31, 2017, White Mountains repurchased and retired 832,725 of its common shares for $724 million at an average share price of $869.29. The average share price paid was approximately 93% and 95%, respectively, of White Mountains’s December 31, 2017 book value per share and adjusted book value per share. For the year ended December 31, 2017, White Mountains returned a total of $728 million of capital to shareholders through share repurchases and dividends.

Gross written premiums and MSC collected in the HG Global/BAM segment totaled $101 million in 2017, compared to $77 million in 2016, as higher pricing more than offset a decrease in issuance volume. BAM insured municipal bonds with par value of $10.4 billion in 2017, compared to $11.3 billion in 2016. Total pricing was 99 basis points, up from 68 basis points in 2016. BAM’s total claims paying resources were $708 million as of December 31, 2017, compared to $644 million as of December 31, 2016. The increase in claims paying resources was driven by positive cash flow from operations. During 2017, BAM paid $5 million of principal and interest on the surplus notes held by HG Global.

Beginning in the second quarter of 2017, White Mountains changed its calculation of adjusted book value per share (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. See “NON-GAAP FINANCIAL MEASURES” on page 55.

MediaAlpha reported break-even pre-tax income in 2017, compared to pre-tax loss of $4 million in 2016. MediaAlpha’s adjusted EBITDA was $11 million in 2017, compared to $7 million in 2016. The increases in pre-tax income and adjusted EBITDA were driven primarily by growth in the HLM vertical and the P&C vertical. In October 2017, MediaAlpha acquired certain assets associated with the Health, Life and Medicare insurance business of Healthplans.com. The acquired assets included domain names, advertiser and publisher relationships, traffic acquisition accounts, and owned and operated websites. During the fourth quarter of 2017, which includes the annual open enrollment period for health and Medicare coverages, business from the acquired assets contributed $2 million of both pre-tax income and adjusted EBITDA.

White Mountains’s pre-tax total return on invested assets was 5.6% for 2017, compared to 2.7% for 2016.

White Mountains’s portfolio of common equity securities and other long-term investments returned 12.7% for 2017, underperforming the S&P 500 Index return of 21.8%, driven primarily by losses from foreign currency forward contracts and unconsolidated entities. White Mountains’s portfolio of common equity securities and other long-term investments returned 4.3% for 2016, underperforming the S&P 500 Index return of 12.0%, driven primarily by losses from private equity funds and unconsolidated entities and weak returns from certain actively managed common equity portfolios.

White Mountains’s fixed income portfolio returned 3.5% for 2017, outperforming the Bloomberg Barclays U.S. Intermediate Aggregate Index return of 2.3%. White Mountains’s fixed income portfolio returned 2.4% for 2016, outperforming the Bloomberg Barclays U.S. Intermediate Aggregate Index return of 2.0%.

Adjusted Book Value Per Share

The following table presents White Mountains’s adjusted book value per share, a non-GAAP financial measure, for the years ended December 31, 2018, 2017 and 2016 and reconciles this non-GAAP measure to book value per share, the most comparable GAAP measure. See “NON-GAAP FINANCIAL MEASURES” on page 55.



	December 31,
	2018			2017			2016
Book value per share numerators (in millions):
White Mountains’s common shareholders’ equity	$	2,843.1		$	3,492.5		$	3,582.7
Future proceeds from options ⁽¹⁾	—			—			29.7
Time-value of money discount on expected future payments on the BAM Surplus Notes⁽²⁾	(141.2		)	(157.0		)	N/A
HG Global’s unearned premium reserve ⁽²⁾	136.9			103.9			N/A
HG Global’s net deferred acquisition costs⁽²⁾	(34.6		)	(24.3		)	N/A
Adjusted book value per share numerator	$	2,804.2		$	3,415.1		$	3,612.4
Book value per share denominators (in thousands of shares):
Common shares outstanding	3,173.1			3,750.2			4,563.8
Unearned restricted shares	(14.6		)	(16.8		)	(25.9		)
Options assumed issued ⁽¹⁾	—			—			40.0
Adjusted book value per share denominator	3,158.5			3,733.4			4,577.9
GAAP book value per share	$	896.00		$	931.30		$	785.01
Adjusted book value per share	$	887.85		$	914.75		$	789.08
Dividends paid per share	$	1.00		$	1.00		$	1.00


⁽¹⁾	Adjusted book value per share at December 31, 2016 includes the impact of 40,000 non-qualified stock options exercisable for $742 per common share. All non-qualified options were exercised prior to their expiration date of January 20, 2017.


⁽²⁾	Amounts reflects White Mountains’s preferred share ownership in HG Global of 96.9%.

The following tables presents goodwill and other intangible assets that are included in White Mountains’s adjusted book value as of December 31, 2018, 2017 and 2016:



	December 31,
Millions	2018			2017			2016
Goodwill:
NSM ⁽¹⁾	$	354.3		$	—		$	—
MediaAlpha	18.3			18.3			18.3
Buzz	7.3			7.6			7.6
Total goodwill	379.9			25.9			25.9
	.
Other intangible assets:
NSM	131.9			—			—
MediaAlpha	25.1			35.4			18.3
Buzz	.6			.8			1.0
Total other intangible assets	157.6			36.2			19.3
Total goodwill and other intangible assets ⁽²⁾	537.5			62.1			45.2
Goodwill and other intangible assets held for sale	—			—			1.2
Goodwill and other intangible assets attributed to non-controlling interests	(40.6		)	(21.1		)	(17.1		)
Goodwill and other intangible assets included in White Mountains’s common shareholders’ equity	$	496.9		$	41.0		$	29.3

⁽¹⁾The relative fair values of goodwill and other intangible assets recognized in connection with the acquisition of KBK had not yet been determined at December 31, 2018.

⁽²⁾See Note 4 — “Goodwill and Other Intangible Assets” on page F-30 for details of other intangible assets.

Summary of Consolidated Results

The following table presents White Mountains’s consolidated financial results by industry for the years ended December 31, 2018, 2017 and 2016:



	Year Ended December 31,
Millions	2018			2017			2016
Revenues
Financial Guarantee revenues	$	24.3		$	23.3		$	16.7
Specialty Insurance Distribution revenues	101.6			—			—
Marketing Technology revenues	297.1			163.2			116.5
Other revenues	(53.9		)	187.3			24.5
Total revenues	369.1			373.8			157.7
Expenses
Financial Guarantee expenses	53.7			47.3			43.4
Specialty Insurance Distribution expenses	106.8			—			—
Marketing Technology expenses	288.2			163.6			120.6
Other expenses	98.6			155.1			141.0
Total expenses	547.3			366.0			305.0
Pre-tax (loss) income
Financial Guarantee pre-tax loss	(29.4		)	(24.0		)	(26.7		)
Specialty Insurance Distribution pre-tax loss	(5.2		)	—			—
Marketing Technology pre-tax income (loss)	8.9			(.4		)	(4.1		)
Other pre-tax (loss) income	(152.5		)	32.2			(116.5		)
Total pre-tax (loss) income	(178.2		)	7.8			(147.3		)
Income tax benefit	4.0			7.8			32.9
Net (loss) income from continuing operations	(174.2		)	15.6			(114.4		)
(Loss) gain on sale of discontinued operations, net of tax	(17.2		)	557.0			415.1
Net income from discontinued operations, net of tax	—			20.5			108.3
Net (loss) income	(191.4		)	593.1			409.0
Net loss (income) attributable to non-controlling interests	50.2			34.1			(7.2		)
Net (loss) income attributable to White Mountains’s common shareholders	(141.2		)	627.2			401.8
Other comprehensive (loss) income, net of tax	(4.8		)	.3			(.7		)
Comprehensive income from discontinued operations, net of tax	—			3.2			146.3
Comprehensive (loss) income	(146.0		)	630.7			547.4
Comprehensive income (loss) attributable to non-controlling interests	.3			(.2		)	(.3		)
Comprehensive (loss) income attributable to White Mountains’s common shareholders	$	(145.7	)	$	630.5		$	547.1

I. Summary of Operations By Segment

White Mountains conducts its operations through four segments: (1) HG Global/BAM, (2) NSM (3) MediaAlpha and (4) Other Operations. 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 13 — “Segment Information” on page F-49 to the Consolidated Financial Statements.

As a result of the OneBeacon, Sirius Group and Tranzact transactions, the results of operations for OneBeacon, Sirius Group and Tranzact have been classified as discontinued operations and are now presented separately, net of related income taxes, in the statement of comprehensive income. Prior year amounts have been reclassified to conform to the current period’s presentation. See Note 19 — “Held for Sale and Discontinued Operations” on page F-55.

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, 2018, 2017 and 2016:



	December 31, 2018
Millions	HG Global			BAM			Eliminations			Total
Direct written premiums	$	—		$	44.8		$	—		$	44.8
Assumed (ceded) written premiums	44.9			(36.8		)	—			8.1
Net written premiums	$	44.9		$	8.0		$	—		$	52.9

Earned insurance and reinsurance premiums	$	11.0		$	2.9		$	—		$	13.9
Net investment income	5.7			11.0			—			16.7
Net investment income - BAM Surplus Notes	22.9			—			(22.9		)	—
Net realized and unrealized investment losses	(4.1		)	(3.4		)	—			(7.5		)
Other revenues	—			1.2			—			1.2
Total revenues	35.5			11.7			(22.9		)	24.3
Insurance and reinsurance acquisition expenses	2.7			2.6			—			5.3
Other underwriting expenses	—			.4			—			.4
General and administrative expenses	1.1			46.9			—			48.0
Interest expense - BAM Surplus Notes	—			22.9			(22.9		)	—
Total expenses	3.8			72.8			(22.9		)	53.7
Pre-tax income (loss)	$	31.7		$	(61.1	)	$	—		$	(29.4	)
Supplemental information:
MSC collected ⁽¹⁾	$	—		$	53.8		$	—		$	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.



	December 31, 2017
Millions	HG Global			BAM			Eliminations			Total
Direct written premiums	$	—		$	63.2		$	—		$	63.2
Assumed (ceded) written premiums	53.6			(53.6		)	—			—
Net written premiums	$	53.6		$	9.6		$	—		$	63.2

Earned insurance and reinsurance premiums	$	7.1		$	2.3		$	—		$	9.4
Net investment income	3.3			9.0			—			12.3
Net investment income - BAM Surplus Notes	19.0			—			(19.0		)	—
Net realized and unrealized investment (losses) gains	(1.2		)	1.8			—			.6
Other revenues	—			1.0			—			1.0
Total revenues	28.2			14.1			(19.0		)	23.3
Insurance and reinsurance acquisition expenses	1.5			2.5			—			4.0
Other underwriting expenses	—			.4			—			.4
General and administrative expenses	1.0			41.9			—			42.9
Interest expense - BAM Surplus Notes	—			19.0			(19.0		)	—
Total expenses	2.5			63.8			(19.0		)	47.3
Pre-tax income (loss)	$	25.7		$	(49.7	)	$	—		$	(24.0	)
Supplemental information:
MSC collected ⁽¹⁾	$	—		$	37.4		$	—		$	37.4

⁽¹⁾MSC collected are recorded directly to BAM’s equity, which is recorded as non-controlling interest on White Mountains’s balance sheet.



	December 31, 2016
Millions	HG Global		BAM			Eliminations			Total
Direct written premiums	$	—	$	38.6		$	—		$	38.6
Assumed (ceded) written premiums	27.2		(27.2		)	—			—
Net written premiums	$	27.2	$	11.4		$	—		$	38.6

Earned insurance and reinsurance premiums	$	4.4	$	1.5		$	—		$	5.9
Net investment income	2.2		6.8			—			9.0
Net investment income - BAM Surplus Notes	17.8		—			(17.8		)	—
Net realized and unrealized investment gains	.1		.6			—			.7
Other revenues	—		1.1			—			1.1
Total revenues	24.5		10.0			(17.8		)	16.7
Insurance and reinsurance acquisition expenses	.9		2.5			—			3.4
Other underwriting expenses	—		.4			—			.4
General and administrative expenses	1.4		38.2			—			39.6
Interest expense - BAM Surplus Notes	—		17.8			(17.8		)	—
Total expenses	2.3

Closing Price ($)	Shares Out (MM)	Market Cap ($MM)
$912.32	3	$2,900

10-K	2018-12-31	Annual: 2018-12-31
10-Q	2018-09-30	Quarter: 2018-09-30
10-Q	2018-06-30	Quarter: 2018-06-30
10-Q	2018-03-31	Quarter: 2018-03-31
10-K	2017-12-31	Annual: 2017-12-31
10-Q	2017-09-30	Quarter: 2017-09-30
10-Q	2017-06-30	Quarter: 2017-06-30
10-Q	2017-03-31	Quarter: 2017-03-31
10-K	2016-12-31	Annual: 2016-12-31
10-Q	2016-09-30	Quarter: 2016-09-30
10-Q	2016-06-30	Quarter: 2016-06-30
10-Q	2016-03-31	Quarter: 2016-03-31
10-K	2015-12-31	Annual: 2015-12-31
10-Q	2015-09-30	Quarter: 2015-09-30
10-Q	2015-06-30	Quarter: 2015-06-30
10-Q	2015-03-31	Quarter: 2015-03-31
10-K	2014-12-31	Annual: 2014-12-31
10-Q	2014-09-30	Quarter: 2014-09-30
10-Q	2014-06-30	Quarter: 2014-06-30
10-Q	2014-03-31	Quarter: 2014-03-31
10-K	2013-12-31	Annual: 2013-12-31

8-K	2019-04-04	Other Events
8-K	2019-02-14	Other Events
8-K	2019-02-06	Earnings, Exhibits
8-K	2019-02-04	Other Events, Exhibits
8-K	2019-01-03	Officers, Other Events, Exhibits
8-K	2018-08-23	Officers, Exhibits
8-K	2018-06-08	Regulation FD, Exhibits
8-K	2018-05-24	Officers, Shareholder Vote
8-K	2018-05-11	Other Events
8-K	2018-04-10	Other Events, Exhibits
8-K	2018-03-31	Enter Agreement, Exhibits
8-K	2018-03-01	Officers, Exhibits
8-K	2018-02-07	Earnings, Exhibits

ITW	Illinois Tool Works	51,570
OKE	Oneok	28,990
CGNX	Cognex	9,590
EXPO	Exponent	2,900
OAS	Oasis Petroleum	2,130
CBLK	Carbon Black	918
STRL	Sterling Construction	348
USDP	USD Partners	289
NSPW	Northern States Power	0
PEER	Peerstream	0

EX-10.7	wtm10-k2018ex107.htm
EX-12	wtm10-k2018ex12.htm
EX-21	wtm10-k2018ex21.htm
EX-23	wtm10-k2018ex23.htm
EX-24	wtm10-k2018ex24.htm
EX-31.1	wtm10-k2018ex311.htm
EX-31.2	wtm10-k2018ex312.htm
EX-32.1	wtm10-k2018ex321.htm
EX-32.2	wtm10-k2018ex322.htm