WHITE MOUNTAINS INSURANCE GROUP LTD (WTM) FY 2022 MD&A

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

The following discussion also includes ten non-GAAP financial measures: (i) adjusted book value per share, (ii) growth in adjusted book value per share excluding net realized and unrealized investment losses from White Mountains’s investment in MediaAlpha, (iii) Ark’s adjusted loss and LAE ratio, (iv) Ark’s adjusted insurance acquisition expense ratio, (v) Ark’s adjusted other underwriting expense ratio, (vi) Ark’s adjusted combined ratio (vii) Kudu’s earnings before interest, taxes, depreciation and amortization (“EBITDA”), (viii) Kudu’s adjusted EBITDA, (ix) total consolidated portfolio returns excluding MediaAlpha, and (x) total adjusted capital, that have been reconciled from their most comparable GAAP financial measures on page 69. 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, 2022, 2021 AND 2020

Overview—Year Ended December 31, 2022 versus Year Ended December 31, 2021

White Mountains ended 2022 with book value per share of $1,457 and adjusted book value per share of $1,495. During 2022, book value per share increased 24% and adjusted book value per share increased 26%, including dividends. Comprehensive income (loss) attributable to common shareholders was $788 million in 2022 compared to $(273) million in 2021.

Results in 2022 were driven primarily by the net gain from the NSM Transaction. On August 1, 2022, White Mountains closed the NSM Transaction. White Mountains received $1.4 billion in net cash proceeds at closing and recognized a net gain of $876 million in the third quarter of 2022, which was comprised of $887 million of net gain from sale of discontinued operations and $3 million of comprehensive income related to the recognition of foreign currency translation gains (losses) from the sale, partially offset by $14 million of compensation and other costs related to the transaction recorded in Other Operations. Results in 2021 were driven primarily by $380 million of net realized and unrealized investment losses from White Mountains’s investment in MediaAlpha.

During 2022, White Mountains repurchased and retired 461,256 of its common shares for $616 million at an average share price of $1,335.11, or 92% of White Mountains’s book value per share and 89% of White Mountains’s adjusted book value per share at December 31, 2022. As of December 31, 2022, White Mountains’s undeployed capital was approximately $0.9 billion.

In the HG Global/BAM segment, gross written premiums and MSC collected totaled $147 million in 2022 compared to $118 million in 2021. Total pricing was 91 basis points in 2022 compared to 67 basis points in 2021. BAM insured municipal bonds with par value of $16.0 billion in 2022 compared to $17.5 billion in 2021. During 2022, BAM completed an assumed reinsurance transaction to insure municipal bonds with a par value of $43 million. During 2021, BAM completed an assumed reinsurance transaction to insure municipal bonds with a par value of $806 million. BAM’s total claims paying resources were $1,423 million at December 31, 2022 compared to $1,192 million at December 31, 2021. During 2022 and 2021, BAM completed reinsurance agreements with Fidus Re that increased BAM’s claims paying resources by $150 million in each year. In December 2022, BAM made a $36 million cash payment of principal and interest on the BAM Surplus Notes held by HG Global. In December 2021, BAM made a $34 million cash payment of principal and interest on the BAM Surplus Notes held by HG Global. In June 2022, Standard & Poor’s affirmed BAM’s “AA/stable” rating.

Ark’s GAAP combined ratio was 82% in 2022 compared to 87% in 2021. Ark’s adjusted combined ratio, which adds back amounts ceded to TPC Providers, was 81% in 2022 compared to 85% in 2021. The GAAP combined ratio in 2022 included six points of favorable prior year loss reserve development compared to three points in 2021. The GAAP combined ratio for 2022 included 13 points of catastrophe losses compared to 10 points in 2021. Catastrophe losses in 2022 included $45 million related to events in the Ukraine and $44 million related to Hurricane Ian on a net basis after reinstatement premiums. Ark reported gross written premiums of $1,452 million, net written premiums of $1,195 million and net earned premiums of $1,043 million in 2022 compared to gross written premiums of $1,059 million, net written premiums of $859 million and net earned premiums of $637 million in 2021. Ark reported pre-tax income of $95 million in 2022 compared to $53 million in 2021, which reflected $25 million of transaction expenses related to the Ark Transaction. In December 2022, AM Best affirmed GAIL’s ‘A/stable’ rating. In the January 2023 renewal season, Ark wrote gross written premiums in excess of $575 million, with risk adjusted rate change of 15%.

During the fourth quarter of 2022, White Mountains invested $205 million into Outrigger Re Ltd., a newly-formed Bermuda special purpose insurer that will provide reinsurance protection on a portion of Ark’s Bermuda global property catastrophe portfolio written in calendar year 2023.

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Kudu reported total revenues of $119 million, pre-tax income of $89 million and adjusted EBITDA of $42 million in 2022 compared to total revenues of $134 million, pre-tax income of $108 million and adjusted EBITDA of $33 million in 2021. Total revenues and pre-tax income in 2022 included $54 million of net investment income and $64 million of net realized and unrealized investment gains compared to $44 million and $90 million in 2021. Kudu deployed $101 million, including transaction costs, in five asset management firms in 2022. As of December 31, 2022, Kudu had deployed $713 million in 20 asset and wealth management firms globally, including two that have been exited. As of December 31, 2022, the asset and wealth management firms have combined assets under management of approximately $74 billion, spanning a range of asset classes.

White Mountains’s investment in MediaAlpha was $169 million as of December 31, 2022 at the closing price of $9.95 per share, compared to $262 million as of December 31, 2021 at the closing price of $15.44 per share. Based on White Mountains’s ownership of 16.9 million shares of MediaAlpha as of December 31, 2022, each $1.00 per share increase or decrease in the stock price of MediaAlpha will result in an approximate $6.60 per share increase or decrease in White Mountains’s book value per share and adjusted book value per share. On March 23, 2021, MediaAlpha completed a secondary offering of 8.05 million shares at $46.00 per share ($44.62 per share net of underwriting fees). In the secondary offering, White Mountains sold 3.6 million shares for net proceeds of $160 million.

White Mountains’s total consolidated portfolio return on invested assets was -1.6% in 2022. This return included $93 million of net unrealized investment losses from White Mountains’s investment in MediaAlpha. Excluding MediaAlpha, the total consolidated portfolio return on invested assets was 0.3% in 2022. Excluding MediaAlpha, investment returns in 2022 were driven primarily by favorable other long-term investments results, which more than offset net unrealized investment losses in the fixed income portfolio due to rising interest rates.

White Mountains’s total consolidated portfolio return on invested assets was -3.4% in 2021. This return included $380 million of net realized and unrealized investment losses from White Mountains’s investment in MediaAlpha. Excluding MediaAlpha, the total consolidated portfolio return on invested assets was 6.4% in 2021. Excluding MediaAlpha, investment returns in 2021 were driven primarily by favorable other long-term investment results.

Overview—Year Ended December 31, 2021 versus Year Ended December 31, 2020

White Mountains ended 2021 with book value per share of $1,176 and adjusted book value per share of $1,190, a decrease of 6.5% and 5.7% in the year, including dividends. Comprehensive (loss) income attributable to common shareholders was $(273) million in 2021 compared to $716 million in 2020. The results in 2021 included $380 million of net realized and unrealized investment losses from White Mountains’s investment in MediaAlpha. Excluding net realized and unrealized investment losses from White Mountains’s investment in MediaAlpha, adjusted book value per share increased 4.3% in 2021, including dividends, reflecting strong results within White Mountains’s operating businesses. The results in 2020 included $746 million of net investment income and net realized and unrealized investment gains from White Mountains’s investment in MediaAlpha. The results in 2020 also included $131 million from the release of a deferred tax liability as a result of an internal reorganization in connection with the MediaAlpha IPO.

Substantially all of White Mountains’s capital base was deployed at the end of 2020 with approximately $150 million of undeployed capital. During 2021, White Mountains repurchased and retired 98,511 of its common shares for $108 million. This was more than offset by (i) the $160 million of net proceeds from the MediaAlpha secondary offering and (ii) the termination of White Mountains commitment to provide up to $200 million of additional equity capital to Ark as a result of Ark raising $163 million in new subordinated debt during the third quarter. As a result, White Mountains finished 2021 with approximately $400 million of undeployed capital.

In the HG Global/BAM segment, gross written premiums and MSC collected totaled $118 million in 2021 compared to $131 million in 2020. Total pricing was 67 basis points in 2021 compared to 76 basis points in 2020. BAM insured municipal bonds with par value of $17.5 billion in 2021 compared to $17.3 billion in 2020. During 2021, BAM completed an assumed reinsurance transaction to insure municipal bonds with a par value of $806 million. During 2020, BAM completed an assumed reinsurance transaction to insure municipal bonds with a par value of $37 million.

In December 2021, BAM made a $34 million cash payment of principal and interest on the BAM Surplus Notes held by HG Global. In December 2020, BAM made a $30 million cash payment of principal and interest on the BAM Surplus Notes held by HG Global. In January 2020, BAM made a one-time $65 million cash payment of principal and interest on the BAM Surplus Notes held by HG Global. BAM’s total claims paying resources were $1,192 million as of December 31, 2021 compared to $987 million as of December 31, 2020. During 2021, BAM completed a reinsurance agreement with Fidus Re that increased BAM’s claims paying resources by $150 million.

On January 1, 2021, White Mountains closed the Ark Transaction. Ark’s GAAP combined ratio was 87% in 2021. Ark’s adjusted combined ratio, which adds back amounts ceded to TPC Providers, was 85% in 2021. The adjusted combined ratio in 2021 included 10 points of catastrophe losses and six points of net favorable prior year loss reserve development. Ark reported gross written premiums of $1,059 million, net written premiums of $859 million and net earned premiums of $637 million in 2021. Ark reported pre-tax income of $53 million in 2021, which reflected $25 million of transaction expenses related to the Ark Transaction. In the January 2022 renewal season, Ark wrote gross written premiums in excess of $500 million.

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Kudu reported total revenues of $134 million, pre-tax income of $108 million and adjusted EBITDA of $33 million in 2021 compared to total revenues of $46 million, pre-tax income of $28 million and adjusted EBITDA of $22 million in 2020. Total revenues and pre-tax income included $90 million of net realized and unrealized gains on Kudu’s Participation Contracts in 2021 compared to $16 million of net unrealized gains on Kudu’s Participation Contracts in 2020. Kudu deployed $225 million, including transaction costs, in six asset management firms in 2021. As of December 31, 2021, Kudu had deployed $612 million in 17 asset and wealth management firms globally, including one that has been exited. As of December 31, 2021, the asset and wealth management firms have combined assets under management of approximately $66 billion, spanning a range of asset classes, including real estate, real assets, wealth management, hedge funds, private equity and alternative credit strategies.

White Mountains’s investment in MediaAlpha was $262 million as of December 31, 2021 at the closing price of $15.44 per share, compared to $802 million as of December 31, 2020 at the closing price of $39.07 per share. On March 23, 2021, MediaAlpha completed a secondary offering of 8.05 million shares at $46.00 per share ($44.62 per share net of underwriting fees). In the secondary offering, White Mountains sold 3.6 million shares for net proceeds of $160 million.

White Mountains’s total consolidated portfolio return on invested assets was -3.4% in 2021. This return included $380 million of net realized and unrealized investment losses from White Mountains’s investment in MediaAlpha. Excluding MediaAlpha, the total consolidated portfolio return on invested assets was 6.4% in 2021. Excluding MediaAlpha, investment returns in 2021 were driven primarily by favorable other long-term investments results.

White Mountains’s total consolidated portfolio return on invested assets was 31.9% in 2020. This return included $746 million of net investment income and net realized and unrealized investment gains from White Mountains’s investment in MediaAlpha. Excluding MediaAlpha, the total consolidated portfolio return on invested assets was 4.6% in 2020. Excluding MediaAlpha, investment returns in 2020 were impacted by White Mountains’s decision to liquidate its portfolio of common equity securities in the second half of 2020 in preparation for funding the Ark Transaction as equity markets rallied in the fourth quarter.

Adjusted Book Value Per Share

The following table presents White Mountains’s adjusted book value per share, a non-GAAP financial measure, as of December 31, 2022, 2021 and 2020 and reconciles this non-GAAP measure from book value per share, the most comparable GAAP measure. See “NON-GAAP FINANCIAL MEASURES” on page 69.

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

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Goodwill and Other Intangible Assets

The following table presents goodwill and other intangible assets that are included in White Mountains’s adjusted book value as of December 31, 2022, 2021 and 2020:

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

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Summary of Consolidated Results

The following table presents White Mountains’s consolidated financial results by industry for the years ended December 31, 2022, 2021 and 2020:

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I. Summary of Operations By Segment

As of December 31, 2022, White Mountains conducted its operations through three reportable segments: (1) HG Global/BAM, (2) Ark, and (3) Kudu, with our remaining operating businesses, holding companies and other assets included in Other Operations. White Mountains has made its segment determination based on consideration of the following criteria: (i) the nature of the business activities of each of the Company’s subsidiaries and affiliates; (ii) the manner in which the Company’s subsidiaries and affiliates are organized; (iii) the existence of primary managers responsible for specific subsidiaries and affiliates; and (iv) the organization of information provided to the chief operating decision makers and the Board of Directors. Significant intercompany transactions among White Mountains’s segments have been eliminated herein. White Mountains’s segment information is presented in Note 16 — “Segment Information” on page F-62.

As a result of the NSM Transaction, the results of operations for NSM, previously reported as a segment, have been classified as discontinued operations in the statements of operations and comprehensive income through the closing of the transaction. Prior period amounts have been reclassified to conform to the current period’s presentation. See Note 21 — “Held for Sale and Discontinued Operations” on page F-68.

As a result of the Ark Transaction, White Mountains began consolidating Ark in its financial statements as of January 1, 2021. See Note 2 — “Significant Transactions” on page F-17.

A discussion of White Mountains’s consolidated investment operations is included after the discussion of operations by segment.

HG Global/BAM

The following tables present the components of pre-tax income (loss) 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, 2022, 2021 and 2020:

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

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

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

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HG Global/BAM Results—Year Ended December 31, 2022 versus Year Ended December 31, 2021

BAM is required to prepare its financial statements on a statutory accounting basis for the NYDFS and does not report stand-alone GAAP financial results. BAM is owned by its members, the municipalities that purchase BAM’s insurance for their debt issuances. BAM charges an insurance premium on each municipal bond insurance policy it writes. A portion of the premium is MSC and the remainder is a risk premium. In the event of a municipal bond refunding, a portion of the MSC from original issuance can be reutilized, in effect serving as a credit against the total insurance premium on the refunding of the municipal bond.

Gross written premiums and MSC collected in the HG Global/BAM segment totaled $147 million and $118 million in 2022 and 2021. BAM insured $16.0 billion of municipal bonds, $12.2 billion of which were in the primary market, in 2022 compared to $17.5 billion of municipal bonds, $15.6 billion of which were in the primary market, in 2021. During 2022, BAM completed an assumed reinsurance transaction to insure municipal bonds with a par value of $43 million. During 2021, BAM completed an assumed reinsurance transaction to insure municipal bonds with a par value of $806 million. Demand remained strong for insured bonds in the primary market, as insured penetration in the primary market was 8.0% in 2022 compared to 8.1% in 2021.

Total pricing increased to 91 basis points in 2022 compared to 67 basis points in 2021. The increase in total pricing was driven primarily by increased secondary market activity and higher pricing in the primary market in 2022 compared to 2021. Pricing in the primary market increased to 69 basis points in 2022 compared to 57 basis points in 2021, driven primarily by an increase in transactions insured in specific credit sectors with higher pricing. Pricing in the secondary and assumed reinsurance markets, which is more transaction-specific than pricing in the primary market, increased to 163 basis points in 2022 compared to 155 basis points in 2021.

Increased secondary market activity and higher pricing in the primary market, driven in part by the volatility in interest rates experienced in 2022, contributed to the increase in gross written premiums and MSC collected in 2022 compared to 2021. It is uncertain if these market factors will continue in the near term.

The following table presents the gross par value of primary and secondary market policies issued, the gross par value of assumed reinsurance, the gross written premiums and MSC collected and total pricing for the years ended December 31, 2022 and 2021:

HG Global reported pre-tax income (loss) of $(23) million in 2022 compared to $21 million in 2021. The change in pre-tax income (loss) was driven primarily by higher net unrealized investment losses on the HG Global fixed income portfolio in 2022 compared to 2021 as interest rates increased. HG Global’s results in 2022 and 2021 both included $12 million of interest income on the BAM Surplus Notes.

BAM is a mutual insurance company that is owned by its members. BAM’s results are consolidated into White Mountains’s GAAP financial statements and attributed to non-controlling interests. White Mountains reported pre-tax loss from BAM of $112 million in 2022 compared to $63 million in 2021. The increase in pre-tax loss was driven primarily by higher net unrealized investment losses on the BAM fixed income portfolio in 2022 compared to 2021 as interest rates increased. BAM’s results included $12 million of interest expense on the BAM Surplus Notes and $66 million of general and administrative expenses in 2022 compared to $12 million of interest expense on the BAM Surplus Notes and $55 million of general and administrative expenses in 2021. The increase in general and administrative expenses was driven primarily by higher incentive compensation costs.

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In December 2022, BAM made a $36 million cash payment of principal and interest on the BAM Surplus Notes held by HG Global. Of this payment, $25 million was a repayment of principal held in the Supplemental Trust, $1 million was a payment of accrued interest held in the Supplemental Trust and $10 million was a payment of accrued interest held outside the Supplemental Trust.

In December 2021, BAM made a $34 million cash payment of principal and interest on the BAM Surplus Notes held by HG Global. Of this payment, $24 million was a repayment of principal held in the Supplemental Trust and $10 million was a payment of accrued interest held outside the Supplemental Trust.

As of December 31, 2022, White Mountains’s debt service model indicated that the BAM Surplus Notes would be fully repaid approximately six years prior to final maturity, which is generally consistent with the results of the update of the debt service model as of December 31, 2021.

HG Global/BAM Results—Year Ended December 31, 2021 versus Year Ended December 31, 2020

Gross written premiums and MSC collected in the HG Global/BAM segment totaled $118 million and $131 million in 2021 and 2020. BAM insured $17.5 billion of municipal bonds, $15.6 billion of which were in the primary market, in 2021 compared to $17.3 billion of municipal bonds, $15.3 billion of which were in the primary market, in 2020. During 2021, BAM completed an assumed reinsurance transaction to insure municipal bonds with a par value of $806 million. During 2020, BAM completed an assumed reinsurance transaction to insure municipal bonds with a par value of $37 million. Demand remained strong for insured bonds in the primary market, as insured penetration in the primary market was 8.1% in 2021 compared to 7.6% in 2020.

Total pricing decreased to 67 basis points in 2021 compared to 75 basis points in 2020. The decrease in total pricing was driven primarily by a decrease in pricing and the amount of par insured in the secondary market during 2021, partially offset by the assumed reinsurance transaction in the first quarter of 2021. Additionally, during 2021 BAM wrote more higher credit quality business, which can pressure absolute pricing but, at the same time, improve risk-adjusted pricing. Pricing in the primary market decreased to 57 basis points in 2021 compared to 59 basis points in 2020, driven primarily by a decrease in credit spreads. Pricing in the secondary and assumed reinsurance markets, which is more transaction-specific than pricing in the primary market, decreased to 155 basis points in 2021 compared to 197 basis points in 2020.

The following table presents the gross par value of primary and secondary market policies issued, the gross par value of assumed reinsurance, the gross written premiums and MSC collected and total pricing for the years ended December 31, 2021 and 2020:

HG Global reported pre-tax income of $21 million in 2021 compared to $50 million in 2020. The decrease in pre-tax income was driven primarily by lower investment returns on the HG Global investment portfolio and a decrease in interest income on the BAM Surplus Notes. HG Global’s results in 2021 included $12 million of interest income on the BAM Surplus Notes compared to $19 million in 2020.

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BAM is a mutual insurance company that is owned by its members. BAM’s results are consolidated into White Mountains’s GAAP financial statements and attributed to non-controlling interests. White Mountains reported pre-tax loss from BAM of $63 million in 2021 compared to $45 million in 2020. The increase in the pre-tax loss was driven primarily by lower investment returns on the BAM investment portfolio partially offset by a decrease in interest expense on the BAM surplus notes. BAM’s results included $12 million of interest expense on the BAM Surplus Notes and $55 million of general and administrative expenses in 2021 compared to $19 million of interest expense on the BAM Surplus Notes and $54 million of general and administrative expenses in 2020.

In December 2021, BAM made a $34 million cash payment of principal and interest on the BAM Surplus Notes held by HG Global. Of this payment, $24 million was a repayment of principal held in the Supplemental Trust and $10 million was a payment of accrued interest held outside the Supplemental Trust.

In December 2020, BAM made a $30 million cash payment of principal and interest on the BAM Surplus Notes held by HG Global. Of this payment, $22 million was a repayment of principal held in the Supplemental Trust and $8 million was a payment of accrued interest held outside the Supplemental Trust.

In January 2020, BAM made a one-time $65 million cash payment of principal and interest on the BAM Surplus Notes held by HG Global. Of this payment, $48 million was a repayment of principal held in the Supplemental Trust, $1 million was a payment of accrued interest held in the Supplemental Trust and $16 million was a payment of accrued interest held outside the Supplemental Trust.

Claims Paying Resources

BAM’s claims paying resources represent the capital and other financial resources BAM has available to pay claims and, as such, is a key indication of BAM’s financial strength.

BAM’s claims paying resources were $1,423 million as of December 31, 2022 compared to $1,192 million as of December 31, 2021 and $987 million as of December 31, 2020. The increase in claims paying resources was driven primarily by the Fidus Re 2022 and 2021 Agreements and increases in the statutory value of the collateral trusts resulting from positive cash flow from operations, partially offset by the portion of cash payments on the BAM surplus notes related to accrued interest held outside the Supplemental Trust.

The following table presents BAM’s total claims paying resources on a statutory basis as of December 31, 2022, 2021 and 2020:

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HG Global/BAM Balance Sheets

The following table presents amounts from HG Global, which includes HG Re and its other wholly-owned subsidiaries, and BAM that are contained within White Mountains’s consolidated balance sheet as of December 31, 2022 and 2021:

(1)    Under GAAP, the BAM Surplus Notes are classified as debt by the issuer. Under U.S. Statutory accounting, they are classified as policyholders’ surplus.

(2)    Under GAAP, interest accrues daily on the BAM Surplus Notes. Under U.S. Statutory accounting, interest is not accrued on the BAM Surplus Notes until it has been approved for payment by insurance regulators.

(3)    HG Global preferred dividends payable to White Mountains’s subsidiaries is eliminated in White Mountains’s consolidated financial statements. For segment reporting, the HG Global preferred dividends payable to White Mountains’s subsidiaries included within the HG Global/BAM segment are eliminated against the offsetting receivable included within Other Operations, and therefore are added back to White Mountains’s common shareholders’ equity within the HG Global/BAM segment.

(4)    HG Global’s intercompany debt is eliminated in White Mountains’s consolidated financial statements.

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(1)    Under GAAP, the BAM Surplus Notes are classified as debt by the issuer. Under U.S. Statutory accounting, they are classified as policyholders’ surplus.

(2)    Under GAAP, interest accrues daily on the BAM Surplus Notes. Under U.S. Statutory accounting, interest is not accrued on the BAM Surplus Notes until it has been approved for payment by insurance regulators.

(3)    HG Global preferred dividends payable to White Mountains’s subsidiaries is eliminated in White Mountains’s consolidated financial statements. For segment reporting, the HG Global preferred dividends payable to White Mountains’s subsidiaries included within the HG Global/BAM segment are eliminated against the offsetting receivable included within Other Operations, and therefore are added back to White Mountains’s common shareholders’ equity within the HG Global/BAM segment.

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Ark

On January 1, 2021, White Mountains completed the Ark Transaction. See Note 2 — “Significant Transactions”. Ark is a specialty property and casualty insurance and reinsurance company that offers a wide range of niche insurance and reinsurance products, including property, specialty, marine & energy, casualty and accident & health. Ark underwrites select coverages through its two major subsidiaries in the United Kingdom and Bermuda.

In the third quarter of 2021, Ark issued $163 million of floating rate unsecured subordinated notes (the “Ark 2021 Subordinated Notes”) in three separate transactions. See Note 7 — “Debt”. In connection with the issuance of the Ark 2021 Subordinated Notes, White Mountains and Ark terminated White Mountains’s commitment to provide up to $200 million of additional equity capital to Ark.

The following table presents the components of pre-tax income (loss) included in White Mountains’s Ark segment for the year-ended December 31, 2022 and 2021:

For the years of account prior to the Ark Transaction, a significant proportion of the Syndicates’ underwriting capital was provided by TPC Providers using whole account reinsurance contracts with Ark’s corporate member. The TPC Providers’ participation in the Syndicates for the 2020 open year of account is 43% of the total net result of the Syndicates. For the years of account subsequent to the Ark Transaction, Ark is no longer using TPC Providers to provide underwriting capital for the Syndicates. Captions within Ark’s results of operations are shown net of amounts relating to the TPC Providers’ share of the Syndicates’ results, including investment results.

Ark Results—Year Ended December 31, 2022 versus Year Ended December 31, 2021

Ark reported gross written premiums of $1,452 million, net written premiums of $1,195 million and net earned premiums of $1,043 million in 2022 compared to gross written premiums of $1,059 million, net written premiums of $859 million and net earned premiums of $637 million in 2021. Premium growth at Ark has been supported by favorable market conditions across most classes with general inflationary concerns and market capacity constraints, along with the ongoing conflict in Ukraine driving positive rate momentum.

Ark reported pre-tax income of $95 million in 2022 compared to $53 million in 2021. Ark’s pre-tax income for 2022 included $(55) million of net realized and unrealized investment losses, driven primarily by net unrealized losses on fixed income securities and the impact of foreign currency on its investment portfolio, compared to $17 million of net realized and unrealized investment gains in 2021.

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Ark’s GAAP combined ratio was 82% in 2022 compared to 87% in 2021. The GAAP combined ratio for 2022 included 13 points of catastrophe losses, driven primarily by the events in Ukraine and Hurricane Ian, compared to 10 points of catastrophe losses in 2021, driven primarily by Hurricane Ida, Winter Storm Uri and European floods. Catastrophe losses for 2022 included $45 million related to events in the Ukraine and $44 million related to Hurricane Ian on a net basis after reinstatement premiums. The GAAP combined ratio for 2022 included five points of favorable prior year loss reserve development, driven primarily by the property and accident & health, specialty and marine & energy reserving lines of business, predominantly from business underwritten in London. This compared to three points of favorable prior year loss reserve development in 2021, driven primarily by the property and accident & health reserving line of business.

Ark’s adjusted combined ratio, which adds back amounts attributable to TPC Providers, was 81% in 2022 compared to 85% in 2021. The adjusted combined ratio for 2022 included 13 points of catastrophe losses compared to 10 points of catastrophe losses in 2021. The adjusted combined ratio for 2022 included seven points of favorable prior year loss reserve development compared to six points of favorable prior year loss reserve development in 2021. The underlying drivers of year-over-year changes were the same as those impacting the GAAP combined ratio.

The following tables present Ark’s loss and loss adjustment expense, insurance acquisition expense, other underwriting expense and combined ratios on both a GAAP basis and an adjusted basis, which adds back amounts ceded to TPC Providers, for the year ended December 31, 2022 and 2021:

(1) See “NON-GAAP FINANCIAL MEASURES” on page 69.

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(1) See “NON-GAAP FINANCIAL MEASURES” on page 69.

Gross Written Premiums

The following table presents Ark’s gross written premiums by line of business for the years ended December 31, 2022, 2021 and 2020, which includes the period prior to White Mountains’s ownership of Ark. White Mountains believes this information is useful in understanding the underwriting growth in the business. Gross written premiums increased 37% to $1,452 million in 2022 compared to 2021, with risk adjusted rate change of 9%. In 2022 and 2021, in response to an improved underwriting environment, Ark substantially increased its gross written premiums, principally in the property, specialty and marine & energy lines of business.

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Kudu

Kudu provides capital solutions for boutique asset and wealth managers for a variety of purposes including generational ownership transfers, management buyouts, acquisition and growth finance and legacy partner liquidity. Kudu also provides strategic assistance to investees from time to time.

As of December 31, 2022, Kudu has deployed a total of $713 million, including transaction costs, in 20 asset and wealth management firms globally, including two that have been exited. As of December 31, 2022, the asset and wealth management firms have combined assets under management of approximately $74 billion, spanning a range of asset classes, including real estate, wealth management, hedge funds, private equity and alternative credit strategies. Kudu’s capital was deployed at an average gross cash yield at inception of 9.9%.

As a result of the Kudu Transaction, White Mountains’s basic ownership of Kudu decreased from 99.1% to 89.3%. See Note 2 — “Significant Transactions.”

The following table presents the components of GAAP net income, EBITDA and adjusted EBITDA included in White Mountains’s Kudu segment for the years ended December 31, 2022, 2021 and 2020:

(1) See “NON-GAAP FINANCIAL MEASURES” on page 69.

The following table presents the changes in Kudu’s Participation Contracts:

(1) Includes realized and unrealized investment gains (losses) recognized from participation contracts beginning in the quarter a contract is classified as pending sale.

(2) Includes unrealized investment gains (losses) recognized from (i) ongoing participation contracts and (ii) participation contracts prior to classification as pending sale.

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Kudu Results — Year Ended December 31, 2022 versus Year Ended December 31, 2021

Kudu reported total revenues of $119 million, pre-tax income of $89 million and adjusted EBITDA of $42 million for the year ended December 31, 2022 compared to total revenues of $134 million, pre-tax income of $108 million and adjusted EBITDA of $33 million for the year ended December 31, 2021. Total revenues and pre-tax income included $67 million of realized investment gains, partially offset by $3 million of net unrealized investment losses, on Kudu’s Participation Contracts in 2022 compared to $22 million of realized investment gains and $68 million of net unrealized investment gains on Kudu’s Participation Contracts in 2021. Realized investment gains on Kudu’s Participation Contracts were driven by two sales transactions in 2022 and one sales transaction in 2021. The net unrealized investment losses on Kudu’s Participation Contracts for the year ended December 31, 2022 were driven primarily by declines in assets under management at several managers with public equity exposure, an increase in discount rates as a result of the rising interest rate environment and foreign exchange losses, partially offset by an increase in the fair value of two Participation Contracts with pending sales transactions. Total revenues, pre-tax income, and adjusted EBITDA for the year ended 2022 also included $54 million of net investment income compared to $44 million for the year ended 2021. The increase in net investment income was driven primarily by amounts earned from $310 million (including $2.9 million of transaction costs) in new deployments that Kudu made during 2022 and 2021. The two sales transactions in 2022 will negatively impact net investment income in the near-term until proceeds are redeployed.

Kudu Results—Year Ended December 31, 2021 versus Year ended December 31, 2020

Kudu reported total revenues of $134 million, pre-tax income of $108 million and adjusted EBITDA of $33 million in 2021 compared to total revenues of $46 million, pre-tax income of $28 million and adjusted EBITDA of $22 million in 2020. Total revenues and pre-tax income included $22 million of realized investment gains and $68 million of net unrealized investment gains on Kudu’s Participation Contracts in 2021 compared to $16 million of net unrealized investment gains on Kudu’s Participation Contracts in 2020. Realized investment gains on Kudu’s Participation Contracts were driven by one sales transaction in 2021. The increase in net unrealized investment gains on Kudu’s Participation Contracts was driven primarily by asset growth and the performance of Kudu’s underlying asset management businesses. Total revenues, pre-tax income and adjusted EBITDA in 2021 also included $44 million of net investment income compared to $30 million in 2020. The increase in net investment income was driven primarily by amounts earned from the $347 million (including $5 million of transaction costs) in new deployments that Kudu made during 2021 and 2020.

Other Operations

The following table presents White Mountains’s financial results from Other Operations for the years ended December 31, 2022, 2021 and 2020:

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Other Operations Results—Year Ended December 31, 2022 versus Year Ended December 31, 2021

White Mountains’s Other Operations reported pre-tax loss of $198 million in 2022 compared to $392 million in 2021. White Mountains’s Other Operations reported net realized and unrealized investment losses from its investment in MediaAlpha of $93 million in 2022 compared to $380 million in 2021. White Mountains’s Other Operations reported net realized and unrealized investment gains (losses) of $(2) million in 2022 compared to $51 million in 2021. White Mountains’s Other Operations reported net investment income of $32 million in 2022 compared to $18 million in 2021. See “Summary of Investment Results” on page 57. The increase in net investment income in 2022 was driven primarily by the increase in the invested assets resulting from the NSM Transaction.

White Mountains’s Other Operations reported $127 million of other revenues in 2022 compared to $91 million in 2021. White Mountains’s Other Operations reported $99 million of cost of sales in 2022 compared to $69 million in 2021. The increases in other revenues and cost of sales were driven primarily by a business acquired within Other Operations in 2021.

White Mountains’s Other Operations reported general and administrative expenses of $169 million in 2022 compared to $105 million in 2021. The increase in general and administrative expenses was driven primarily by higher incentive compensation costs and advisory fees, primarily in connection with the NSM Transaction

Share repurchases

In the year ended December 31, 2022, White Mountains repurchased and retired 461,256 of its common shares for $616 million at an average price of $1,335.11. The majority of these shares were repurchased through a self-tender offer that White Mountains completed on September 26, 2022, through which it repurchased 327,795 of its common shares at a purchase price of $1,400 per share for a total cost of approximately $461 million, including expenses.

Other Operations Results—Year Ended December 31, 2021 versus Year Ended December 31, 2020

White Mountains’s Other Operations reported pre-tax income (loss) of $(392) million in 2021 compared to $628 million in 2020. White Mountains’s Other Operations reported net realized and unrealized investment gains (losses) from its investment in MediaAlpha of $(380) million in 2021 compared to $686 million in 2020. White Mountains’s Other Operations reported net realized and unrealized investment gains (losses) of $51 million in 2021 compared to $(9) million in 2020. White Mountains’s Other Operations reported net investment income of $18 million in 2021 compared to $82 million in 2020. Net investment income in the year ended December 31, 2020 included $55 million of net proceeds received from a dividend recapitalization at MediaAlpha. See “Summary of Investment Results” on page 57.

White Mountains’s Other Operations reported $91 million of other revenues in 2021 compared to $14 million in 2020. White Mountains’s Other Operations reported $69 million of cost of sales in 2021 compared to $11 million in 2020. The increases in other revenues and cost of sales were driven primarily by a business acquired within Other Operations in 2021.

White Mountains’s Other Operations reported general and administrative expenses of $105 million in 2021 compared to $139 million in 2020. The decrease in general and administrative expenses was driven primarily by lower incentive compensation costs, driven primarily by a decrease in the assumed harvest percentage on outstanding performance shares.

Share repurchases

For the year ended December 31, 2021, White Mountains repurchased and retired 98,511 of its common shares for $108 million at an average share price of $1,091.29.

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II. Summary of Investment Results

White Mountains’s total investment results include results from all segments. For purposes of discussing rates of return all percentages are presented on a pre-tax basis, gross of management fees and trading expenses, and before any adjustments for TPC Providers, in order to produce a better comparison to benchmark returns.

Gross Investment Returns and Benchmark Returns

Prior to the MediaAlpha IPO, White Mountains’s investment in MediaAlpha was presented within other long-term investments. Following the MediaAlpha IPO, White Mountains presents its investment in MediaAlpha in a separate line item on the balance sheet. Amounts for periods prior to the MediaAlpha IPO have been reclassified to be comparable to the current period.

The following table presents the investment returns for White Mountains’s consolidated portfolio for the years ended December 31, 2022, 2021 and 2020:

Investment Returns—Year Ended December 31, 2022 versus Year Ended December 31, 2021

White Mountains’s total consolidated portfolio return on invested assets was -1.6% in 2022. This return included $93 million of net unrealized investment losses from White Mountains’s investment in MediaAlpha. Excluding MediaAlpha, the total consolidated portfolio return on invested assets was 0.3% in 2022. Excluding MediaAlpha, investment returns in 2022 were driven primarily by favorable other long-term investments results, which more than offset net unrealized investment losses in the fixed income portfolio due to rising interest rates.

White Mountains’s total consolidated portfolio return on invested assets was -3.4% in 2021. This return included $380 million of net realized and unrealized investment losses from White Mountains’s investment in MediaAlpha. Excluding MediaAlpha, the total consolidated portfolio return on invested assets was 6.4% in 2021. Excluding MediaAlpha, investment returns in 2021 were driven primarily by favorable other long-term investment results.

Fixed Income Results

White Mountains’s fixed income portfolio, including short-term investments, was $2.8 billion and $2.4 billion as of December 31, 2022 and 2021, which represented 55% and 56% of total invested assets. See Note 3 — “Investment Securities”. The increase was driven primarily by the receipt of cash proceeds from the NSM Transaction, partially offset by outflows relating to White Mountains’s self-tender offer in the third quarter of 2022. The duration of White Mountains’s fixed income portfolio, including short-term investments, was 2.3 years and 2.6 years as of December 31, 2022 and 2021. White Mountains’s fixed income portfolio includes fixed maturity and short-term investments held on deposit or as collateral. See Note 3 — “Investment Securities”.

White Mountains’s fixed income portfolio returned -4.8% in 2022 compared to -0.4% in 2021, outperforming the Bloomberg Barclays U.S. Intermediate Aggregate Index returns of -9.5% and -1.3% for the comparable periods. The results in both 2022 and 2021 were driven primarily by the short duration positioning of White Mountains’s fixed income portfolio as interest rates increased in each period.

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Common Equity Securities, Investment in MediaAlpha and Other Long-Term Investments Results

White Mountains’s portfolio of common equity securities, its investment in MediaAlpha and other long-term investments was $2.3 billion and $1.9 billion as of December 31, 2022 and 2021, which represented 45% and 44% of total invested assets. See Note 3 — “Investment Securities”. The increase was driven primarily by an increase in White Mountains’s common equity exposure, as a portion of the cash proceeds from the NSM Transaction was invested in ETFs, additional investments in international listed common equity funds at Ark, and an increase in the fair value of Kudu’s Participation Contracts, partially offset by a decline in the fair value of White Mountains’s investment in MediaAlpha.

White Mountains’s portfolio of common equity securities, its investment in MediaAlpha and other long-term investments returned 2.3% in 2022, which included $93 million of net unrealized investment losses from MediaAlpha. White Mountains’s portfolio of common equity securities and other long-term investments returned 8.1% in 2022. White Mountains’s portfolio of common equity securities, its investment in MediaAlpha and other long-term investments returned -7.1% in 2021, which included $380 million of net realized and unrealized investment losses from MediaAlpha. White Mountains’s portfolio of common equity securities and other long-term investments returned 19.3% in 2021.

White Mountains’s portfolio of common equity securities consists of passive ETFs that seek to provide investment results

that generally correspond to the performance of the S&P 500 Index and international listed common equity funds. White Mountains’s portfolio of common equity securities was $668 million and $251 million as of December 31, 2022 and 2021.

White Mountains’s portfolio of common equity securities returned -1.0% in 2022 compared to 11.0% in 2021, outperforming and underperforming the S&P 500 Index returns of -18.1% and 28.7% for the comparable periods. The results for 2022 and 2021 were driven primarily by relative outperformance and underperformance in White Mountains’s international listed common equity funds versus the S&P 500 Index.

White Mountains maintains a portfolio of other long-term investments that consists primarily of unconsolidated entities, including Kudu’s Participation Contracts, private equity funds and hedge funds, a bank loan fund, Lloyd’s trust deposits, ILS funds and private debt instruments. White Mountains’s portfolio of other long-term investments was $1.5 billion and $1.4 billion as of December 31, 2022 and 2021.

White Mountains’s other long-term investments portfolio returned 10.5% in 2022 compared to 20.7% in 2021. Investment returns for 2022 were driven primarily by net investment income and net realized and unrealized investment gains from Kudu’s Participation Contracts, net investment income and net realized and unrealized investment gains from private equity funds, and an increase in the fair value of White Mountains’s investment in PassportCard/DavidShield, partially offset by unrealized losses from foreign currency. Investment returns for 2021 were driven primarily by net investment income and net realized and unrealized investment gains from Kudu’s Participation Contracts, net investment income and net realized and unrealized investment gains from private equity funds, and an increase in the fair value of White Mountains’s investment in PassportCard/DavidShield.

Investment Returns—Year Ended December 31, 2021 versus Year Ended December 31, 2020

White Mountains’s total consolidated portfolio return on invested assets was -3.4% in 2021. This return included $380 million of net realized and unrealized investment losses from White Mountains’s investment in MediaAlpha. Excluding MediaAlpha, the total consolidated portfolio return on invested assets was 6.4% in 2021. Excluding MediaAlpha, investment returns in 2021 were driven primarily by favorable other long-term investments results. White Mountains’s total consolidated portfolio return on invested assets was 31.9% in 2020. This return included $746 million of net investment income and net realized and unrealized investment gains from White Mountains’s investment in MediaAlpha. Excluding MediaAlpha, the total consolidated portfolio return on invested assets was 4.6% in 2020. Excluding MediaAlpha, investment returns in 2020 were impacted by White Mountains’s decision to liquidate its portfolio of common equity securities in the second half of 2020 in preparation for funding the Ark Transaction as equity markets rallied in the fourth quarter.

Fixed Income Results

White Mountains’s fixed income portfolio, including short-term investments, was $2.4 billion and $1.4 billion as of December 31, 2021 and 2020, which represented 56% and 46% of total invested assets. See Note 3 — “Investment Securities”. The increase was driven primarily by the inclusion of Ark’s invested assets as a result of the Ark Transaction. The duration of White Mountains’s fixed income portfolio, including short-term investments, was 2.6 years and 3.2 years as of December 31, 2021 and 2020. White Mountains’s fixed income portfolio includes fixed maturity and short-term investments held on deposit or as collateral. See Note 3 — “Investment Securities”.

White Mountains’s fixed income portfolio returned -0.4% in 2021 compared to 4.9% in 2020, outperforming and underperforming the Bloomberg Barclays U.S. Intermediate Aggregate Index returns of -1.3% and 5.6% for the comparable periods. The results in 2021 were driven primarily by the short duration positioning of White Mountains’s fixed income portfolio as interest rates increased during the period, partially offset by currency losses. The results in 2020 were driven primarily by the short duration positioning of White Mountains’s fixed income portfolio as interest rates declined significantly during the period.

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Common Equity Securities, Investment in MediaAlpha and Other Long-Term Investments Results

White Mountains’s portfolio of common equity securities, its investment in MediaAlpha and other long-term investments was $1.9 billion and $1.6 billion as of December 31, 2021 and 2020, which represented 44% and 54% of total invested assets. See Note 3 — “Investment Securities”. The increase was driven primarily by the inclusion of Ark’s invested assets as a result of the Ark Transaction, an increase in the fair value of Kudu’s Participation Contracts, and the addition of international listed common equity funds and a bank loan fund at Ark, partially offset by a decline in the fair value of White Mountains’s investment in MediaAlpha.

White Mountains’s portfolio of common equity securities, its investment in MediaAlpha and other long-term investments returned -7.1% in 2021, which included $380 million of net realized and unrealized investment losses from MediaAlpha. White Mountains’s portfolio of common equity securities and other long-term investments returned 19.3% in 2021. White Mountains’s portfolio of common equity securities, its investment in MediaAlpha and other long-term investments returned 80.0% in 2020, which included $746 million of net investment income and net realized and unrealized investment gains from MediaAlpha. White Mountains’s portfolio of common equity securities and other long-term investments returned 4.9% in 2020.

In the second half of 2020, White Mountains liquidated its portfolio of common equity securities, including its portfolio of ETFs and international common equity securities, in preparation for funding the Ark Transaction. Following the Ark Transaction, White Mountains’s portfolio of common equity securities consisted of international listed common equity funds held in the Ark portfolio. As of December 31, 2021, the fair value of White Mountains’s international listed common equity funds was $251 million.

White Mountains’s portfolio of common equity securities returned 11.0% in 2021 compared to 3.6% in 2020, underperforming the S&P 500 Index returns of 28.7% and 18.4% for the comparable periods. The results for 2021 were driven primarily by relative underperformance in White Mountains’s international listed common equity funds versus the S&P 500 Index. The results for 2020 were driven primarily by White Mountains’s lack of common equity exposure during the fourth quarter equity market rally and the relative underperformance from White Mountains’s international common equity portfolio versus the S&P 500 Index prior to the liquidation of these positions.

In 2020, White Mountains’s portfolio of ETFs essentially earned the effective index return, before expenses, over the period in which White Mountains was invested in these funds. White Mountains’s portfolio of ETFs was fully liquidated in the fourth quarter of 2020. White Mountains also maintained relationships with a small number of third-party registered investment advisers (the “actively managed common equity portfolio”), who primarily invested in non-U.S. equity securities through unit trusts. At the end of the third quarter of 2020, White Mountains fully redeemed its actively managed common equity portfolio. White Mountains’s actively managed common equity portfolio returned -11.0% in 2020, underperforming the S&P 500 Index return of 18.4%. The results were driven primarily by the lack of exposure to actively managed common equities in the fourth quarter of 2020 and relative underperformance in international stocks versus the S&P 500 Index.

White Mountains’s portfolio of other long-term investments was $1.4 billion and $787 million as of December 31, 2021 and 2020. The change in other long-term investments was driven primarily by an increase in the fair value of Kudu’s Participation Contracts, the inclusion of invested assets relating to the Ark Transaction and the addition of a bank loan fund at Ark.

White Mountains’s other long-term investments portfolio returned 20.7% in 2021 compared to 2.5% in 2020. Investment returns for 2021 were driven primarily by net investment income and net realized and unrealized investment gains from Kudu’s Participation Contracts, net investment income and net realized and unrealized investment gains from private equity funds, and an increase in the fair value of White Mountains’s investment in PassportCard/DavidShield. Investment returns for 2020 were driven primarily by net investment income and net unrealized gains from Kudu’s Participation Contracts, partially offset by a decrease in the fair value of White Mountains’s investment in PassportCard/DavidShield, and net unrealized investment losses from hedge funds and private debt instruments.

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Portfolio Composition

The following table presents the composition of White Mountains’s total investment portfolio as of December 31, 2022 and 2021:

The following table presents the breakdown of White Mountains’s fixed maturity investments as of December 31, 2022 by credit class, based upon issuer credit ratings provided by Standard & Poor’s, or if unrated by Standard & Poor’s, long-term obligation ratings provided by Moody’s:

(1)Includes mortgage-backed securities, which carry the full faith and credit guaranty of the U.S. government (i.e., GNMA) or are guaranteed by a government sponsored entity (i.e., FNMA, FHLMC).

The following table presents the cost or amortized cost and carrying value of White Mountains’s fixed maturity investments by contractual maturity as of December 31, 2022. Actual maturities could differ from contractual maturities because borrowers may have the right to call or prepay certain obligations with or without call or prepayment penalties.

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The following table presents the composition of White Mountains’s other long-term investments portfolio as of December 31, 2022 and 2021:

Foreign Currency Exposure

As of December 31, 2022, White Mountains had foreign currency exposure on $202 million of net assets primarily related to Ark’s non-U.S. business, Kudu’s non-U.S. Participation Contracts, and certain other foreign consolidated and unconsolidated entities.

The following table presents the fair value of White Mountains’s foreign denominated net assets (liabilities) by segment as of December 31, 2022:

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III. Income Taxes

The Company and its Bermuda domiciled subsidiaries are not subject to Bermuda income tax under current Bermuda law. In the event there is a change in the current law and taxes are imposed, the Bermuda Exempted Undertakings Tax Protection Act of 1966 states that the Company and its Bermuda domiciled subsidiaries would be exempt from such tax until March 31, 2035. The Company has subsidiaries and branches that operate in various other jurisdictions around the world that are subject to tax in the jurisdictions in which they operate. As of December 31, 2022, the primary jurisdictions in which the Company’s subsidiaries and branches were subject to tax are Ireland, Israel, Luxembourg, the United Kingdom and the United States.

The OECD has proposed a global minimum tax of 15% of reported profits (“Pillar 2”) that has been agreed upon by over 140 countries including the United States. On December 15, 2022, European Union Member States voted to adopt the European Union Minimum Tax Directive (the “Directive”) in conformity with Pillar 2. The Directive requires European Union Member States to enact conforming rules into domestic law by December 31, 2023. The main rule of the Directive, the Income Inclusion Rule, will become effective on or after December 31, 2023 with the backstop rule, the Undertaxed Profits Rule, becoming effective on or after December 31, 2024. Other countries, including the United Kingdom, have also stated their intention to enact Pillar 2 legislation in 2023. The timing and impact of these rules on the Company remain uncertain.

On August 16, 2022, the U.S. enacted the Inflation Reduction Act (the “IRA”). White Mountains has evaluated the tax provisions of the IRA, the most significant of which relate to the corporate alternative minimum tax and the tax on share repurchases, and does not expect the legislation to have a material impact on its results of operations.

White Mountains reported income tax expense of $41 million in 2022 on pre-tax loss from continuing operations of $149 million. The difference between White Mountains’s effective tax rate and the current U.S. statutory rate of 21% was driven primarily by losses generated in jurisdictions with lower tax rates than the United States, a full valuation allowance on net deferred tax assets in certain U.S. operations (consisting of Other Operations and BAM), withholding taxes and state income taxes.

White Mountains reported income tax expense of $44 million in 2021 on pre-tax loss from continuing operations of $274 million. The difference between White Mountains’s effective tax rate and the current U.S. statutory rate of 21% was driven primarily by losses generated in jurisdictions with lower tax rates than the United States, a full valuation allowance on net deferred tax assets in certain U.S. operations (consisting of Other Operations and BAM), and state income taxes. The effective rate was also different from the U.S. statutory rate of 21% due to additional tax expense related to the revaluation of U.K. deferred tax assets and liabilities. On June 10, 2021, the U.K. enacted an increase in its corporate tax rate from 19% to 25% for periods after April 1, 2023. During 2021, White Mountains increased its net U.K. deferred tax liability to reflect the higher tax rate.

White Mountains reported income tax benefit of $15 million in 2020 on pre-tax income from continuing operations of $660 million. The difference between White Mountains’s effective tax rate and the current U.S. federal statutory rate of 21% was driven primarily by a $131 million release of a deferred tax liability as a result of an internal reorganization in connection with the MediaAlpha IPO and income generated in jurisdictions with lower tax rates than the United States. Also in 2020, $40 million of tax expense was recorded for state income taxes, withholding taxes and the establishment of a partial valuation allowance on deferred tax assets of various companies, entities and investments that are included in Other Operations.

IV. Discontinued Operations

NSM

On August 1, 2022, White Mountains closed the NSM Transaction. White Mountains received $1.4 billion in net cash proceeds at closing and recognized a net gain of $876 million in the third quarter of 2022, which was comprised of $887 million of net gain from sale of discontinued operations and $3 million of comprehensive income related to the recognition of foreign currency translation gain (loss) from the sale, partially offset by $14 million of compensation and other costs related to the transaction recorded in Other Operations. See Note 2 — “Significant Transactions” on page F-17.

White Mountains reported net income from discontinued operations, net of tax, for NSM Group of $16 million for the period from January 1, 2022 to August 1, 2022. White Mountains reported net loss from discontinued operations, net of tax, for NSM Group of $23 million and $10 million for the years ended December 31, 2021 and 2020. The net loss from discontinued operations, net of tax, for NSM Group for the year ended December 31, 2021 included a loss of $29 million related to the sale of a subsidiary. See Note 21 — “Held for Sale and Discontinued Operations” on page F-68.

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Sirius Group

On April 18, 2016, White Mountains completed the sale of Sirius International Insurance Group, Ltd. (“Sirius Group”) to CM International Pte. Ltd. and CM Bermuda Limited (collectively “CMI”). In connection with the sale, White Mountains indemnified Sirius Group against the loss of certain interest deductions claimed by Sirius Group related to periods prior to the sale of Sirius Group to CMI that had been disputed by the Swedish Tax Agency (STA). In late October 2018, the Swedish Administrative Court ruled against Sirius Group on its appeal of the STA’s denial of these interest deductions. As a result, in 2018 White Mountains recorded a loss of $17 million in discontinued operations reflecting the value of these interest deductions.

In April 2021, the STA informed the Swedish Administrative Court of Appeal that Sirius Group should prevail in its appeal and that the interest deductions should not be disallowed. In June 2021, the Swedish Administrative Court of Appeal ruled in Sirius Group’s favor. As a result, in 2021 White Mountains recorded a gain of $19 million in discontinued operations to reverse the accrued liability, including foreign currency translation. See Note 21 — “Held for Sale and Discontinued Operations” on page F-68.

LIQUIDITY AND CAPITAL RESOURCES

Operating Cash and Short-term Investments

Holding Company Level

The primary sources of cash for the Company and certain of its intermediate holding companies are expected to be distributions from its insurance, reinsurance and other operating subsidiaries, net investment income, proceeds from sales, repayments and maturities of investments, capital raising activities and, from time to time, proceeds from sales of operating subsidiaries. The primary uses of cash are expected to be general and administrative expenses, purchases of investments, payments to tax authorities, payments on and repurchases/retirements of debt obligations, dividend payments to holders of the Company’s common shares, distributions to non-controlling interest holders of consolidated subsidiaries, contributions to operating subsidiaries and, from time to time, purchases of operating subsidiaries and repurchases of the Company’s common shares.

Operating Subsidiary Level

The primary sources of cash for White Mountains’s insurance, reinsurance and other operating subsidiaries are expected to be premium and fee collections, commissions, net investment income, proceeds from sales, repayments and maturities of investments, contributions from holding companies and capital raising activities. The primary uses of cash are expected to be claim payments, policy acquisition costs, general and administrative expenses, broker commission expenses, cost of sales, purchases of investments, payments to tax authorities, payments on and repurchases/retirements of debt obligations, distributions to holding companies, distributions to non-controlling interest holders and, from time to time, purchases of operating subsidiaries.

Both internal and external forces influence White Mountains’s financial condition, results of operations and cash flows. Premium and fee collections, investment returns, claim payments and cost of sales may be impacted by changing rates of inflation and other economic conditions. Some time may lapse between the occurrence of an insured loss, the reporting of the loss to White Mountains’s insurance and reinsurance operating subsidiaries and the settlement of the liability for that loss. The exact timing of the payment of losses and benefits cannot be predicted with certainty. White Mountains’s insurance and reinsurance operating subsidiaries maintain portfolios of invested assets with varying maturities and a substantial amount of cash and short-term investments to provide adequate liquidity for the payment of claims.

Management believes that White Mountains’s cash balances, cash flows from operations and routine sales and maturities of investments are adequate to meet expected cash requirements for the foreseeable future at both a holding company and insurance, reinsurance and other operating subsidiary level.

Dividend Capacity

Following is a description of the dividend capacity of White Mountains’s insurance and reinsurance and other operating subsidiaries:

HG Global/BAM

As of December 31, 2022, HG Global had $619 million face value of preferred shares outstanding, of which White Mountains owned 96.9%. Holders of the HG Global preferred shares receive cumulative dividends at a fixed annual rate of 6.0% on a quarterly basis, when and if declared by HG Global. As of December 31, 2022, HG Global had accrued $354 million of dividends payable to holders of its preferred shares, $341 million of which is payable to White Mountains and eliminated in consolidation.

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On April 29, 2022, HG Global received the proceeds of its new $150 million, 10-year term loan credit facility. In turn, on May 2, 2022, HG Global paid a $120 million cash dividend to shareholders, of which $116 million was paid to White Mountains.

As of December 31, 2022, HG Global and its subsidiaries had $3 million of net unrestricted cash outside of HG Re.

HG Re is a special purpose insurer subject to regulation and supervision by the BMA but does not require regulatory approval to pay dividends. However, HG Re’s dividend capacity is limited to amounts held outside of the Collateral Trusts pursuant to the FLRT with BAM. As of December 31, 2022, HG Re had $9 million of net unrestricted cash and investments and $112 million of accrued interest on the BAM Surplus Notes held outside the Collateral Trusts. As of December 31, 2022, HG Re had $731 million of statutory capital and surplus and $857 million of assets held in the Collateral Trusts.

On a monthly basis, BAM deposits cash equal to ceded premiums, net of ceding commissions, due to HG Re under the FLRT into the Regulation 114 Trust. The Regulation 114 Trust target balance is equal to HG Re’s unearned premiums and unpaid loss and LAE reserves, if any.  If, at the end of any quarter, the Regulation 114 Trust balance is below the target balance, funds will be withdrawn from the Supplemental Trust and deposited into the Regulation 114 Trust in an amount equal to the shortfall.  If, at the end of any quarter, the Regulation 114 Trust balance is above 102% of the target balance, funds will be withdrawn from the Regulation 114 Trust and deposited into the Supplemental Trust.

The Supplemental Trust Target Balance is $603 million, less the amount of cash and securities in the Regulation 114 Trust in excess of its target balance. If, at the end of any quarter, the Supplemental Trust balance exceeds the Supplemental Trust Target Balance, such excess may be distributed to HG Re.  The distribution will be made first as an assignment of accrued interest on the BAM Surplus Notes and second in cash and/or fixed income securities.  As the BAM Surplus Notes are repaid over time, the BAM Surplus Notes will be replaced in the Supplemental Trust by cash and fixed income securities. The Supplemental Trust balance as of December 31, 2022 and 2021 was $568 million and $602 million.

As of December 31, 2022, the Collateral Trusts held assets of $857 million, which included $503 million of cash and investments, $340 million of BAM Surplus Notes and $14 million of interest receivable on the BAM Surplus Notes.

Through 2024, the interest rate on the BAM Surplus Notes is a variable rate equal to the one-year U.S. Treasury rate plus 300 basis points, set annually. During 2023, the interest rate on the BAM Surplus Notes will be 7.7%. Beginning in 2025, the interest rate will be fixed at the higher of the then current variable rate or 8.0%. 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 remaining qualified statutory capital and other capital resources continue to support its outstanding obligations, its business plan and its “AA/stable” rating from Standard & Poor’s. No payment of principal or interest on the BAM Surplus Notes may be made without the approval of the NYDFS.

In December 2022, BAM made a $36 million cash payment of principal and interest on the BAM Surplus Notes held by HG Global. Of this payment, $25 million was a repayment of principal held in the Supplemental Trust, $1 million was a payment of accrued interest held in the Supplemental Trust and $10 million was a payment of accrued interest held outside the Supplemental Trust.

Ark

During any 12-month period, GAIL, a class 4 licensed Bermuda insurer, has the ability to (i) make capital distributions of up to 15% of its total statutory capital per the previous year’s statutory financial statements, or (ii) make dividend payments of up to 25% of its total statutory capital and surplus per the previous year’s statutory financial statements, without prior approval of Bermuda regulatory authorities. Accordingly, GAIL will have the ability to make capital distributions of up to $113 million during 2023, which is equal to 15% of its December 31, 2022 statutory capital of $755 million, subject to meeting all appropriate liquidity and solvency requirements and the filing of its December 31, 2022 statutory financial statements. During 2022, GAIL did not pay a dividend to its immediate parent.

During 2022, Ark paid $21 million of dividends to shareholders, $15 million of which was paid to White Mountains. As of December 31, 2022, Ark and its intermediate holding companies had $11 million of net unrestricted cash, short-term investments and fixed maturity investments outside of its regulated and unregulated insurance and reinsurance operating subsidiaries.

Kudu

During 2022, Kudu distributed $110 million to unitholders, $100 million of which was paid to White Mountains. As of December 31, 2022, Kudu had $89 million of net unrestricted cash.

Other Operations

During 2022, White Mountains paid a $3 million common share dividend.

As of December 31, 2022, the Company and its intermediate holding companies had $706 million of net unrestricted cash, short-term investments and fixed maturity investments, $169 million of MediaAlpha common stock, $334 million of common equity securities and $244 million of private equity and hedge funds, ILS funds and unconsolidated entities.

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Financing

The following table summarizes White Mountains’s capital structure as of December 31, 2022 and 2021:

(1)See Note 7 — “Debt” for details of debt arrangements.

(2) Net of unamortized issuance costs.

(3) The NSM bank facility with Ares Capital Corporation and the other NSM debt was settled in conjunction with the closing of the NSM Transaction and was classified as held for sale as of December 31, 2021.

(4) Amount reflects White Mountains's preferred share ownership in HG Global of 96.9%.

Management believes that White Mountains has the flexibility and capacity to obtain funds externally through debt or equity financing on both a short-term and long-term basis. However, White Mountains can provide no assurance that, if needed, it would be able to obtain additional debt or equity financing on satisfactory terms, if at all.

It is possible that, in the future, one or more of the rating agencies may lower White Mountains’s and its subsidiaries’ existing ratings. If one or more of its ratings were lowered, White Mountains could incur higher borrowing costs on future borrowings and its ability to access the capital markets could be impacted.

Covenant Compliance

As of December 31, 2022, White Mountains was in compliance, in all material respects, with all of the covenants under its debt instruments.

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Contractual Obligations and Commitments

The following table presents White Mountains’s material contractual obligations and commitments as of December 31, 2022:

(1) Represents expected future cash outflows resulting from loss and LAE payments. The amounts presented are gross of reinsurance recoverables on unpaid losses of $505.0 as of December 31, 2022.

(2) The contingent consideration liabilities are primarily related to White Mountains’s acquisition of Ark. See Note 2 — “Significant Transactions” on page F-17.

(3) Includes amounts related to BAM’s operating leases of $2.2, $3.6 and $0.6 that are due in less than one year, two to three years, and four to five years, which are attributed to non-controlling interests.

The long-term incentive compensation balances included in the table above include amounts payable for performance shares. Exact amounts to be paid for performance shares cannot be predicted with certainty, as the ultimate amounts of these liabilities are based on the future performance of White Mountains and the market price of the Company’s common shares at the time the payments are made.

The estimated payments reflected in the table are based on current accrual factors (including performance relative to targets and common share price) and assume that all outstanding balances were 100% vested as of December 31, 2022.

There are no provisions within White Mountains’s operating lease agreements that would trigger acceleration of future lease payments.

White Mountains does not finance its operations through the securitization of its trade receivables, through special purpose entities or through synthetic leases. Further, White Mountains has not entered into any material arrangements requiring it to guarantee payment of third-party debt or lease payments or to fund losses of an unconsolidated special purpose entity.

White Mountains also has future binding commitments to fund certain other long-term investments. These commitments, which totaled approximately $102 million as of December 31, 2022, do not have fixed funding dates and, are therefore, excluded from the table above.

Share Repurchase Programs

White Mountains’s board of directors has authorized the Company to repurchase its common shares from time to time, subject to market conditions. The repurchase authorizations do not have a stated expiration date. As of December 31, 2022, White Mountains may repurchase an additional 320,550 shares under these board authorizations. In addition, from time to time White Mountains has also repurchased its common shares through tender offers that were separately approved by its board of directors.

The following table presents common shares repurchased by the Company as well as the average price per share as a percent of December 31, 2022 GAAP book value per share, adjusted book value per share and market value per share.

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Cash Flows

Detailed information concerning White Mountains’s cash flows from continuing operations during 2022, 2021 and 2020 follows:

Cash flows from operations for the years ended 2022, 2021 and 2020

Net cash flows provided from (used for) operations was $326 million, $(4) million and $(96) million for the years ended December 31, 2022, 2021 and 2020. Cash provided from (used for) operations was higher in 2022 compared to 2021, driven primarily by the cash inflow from Ark’s operations and the proceeds from Kudu’s Participation Contracts sold. Cash used for operations was lower in 2021 compared to 2020, driven primarily by the cash inflow from Ark’s operations, partially offset by the contributions to Kudu’s Participation Contracts and Ark’s transaction expenses. White Mountains does not believe these trends will have a meaningful impact on its future liquidity or its ability to meet its future cash requirements. As of December 31, 2022, the Company and its intermediate holding companies had $706 million of net unrestricted cash, short-term investments and fixed maturity investments, $169 million of MediaAlpha common stock, $334 million of common equity securities and $244 million of private equity funds and hedge funds, ILS funds and unconsolidated entities.

Cash flows from investing and financing activities for the year ended December 31, 2022

Financing and Other Capital Activities

During 2022, the Company declared and paid a $3 million cash dividend to its common shareholders.

During 2022, White Mountains repurchased and retired 461,256 of its common shares for $616 million. The majority of these shares were repurchased through a self-tender offer that White Mountains completed on September 26, 2022, through which it repurchased 327,795 of its common shares at a purchase price of $1,400 per share for a total cost of approximately $461 million, including expenses. Of the shares White Mountains repurchased in 2022, 4,011 were to satisfy employee income tax withholding pursuant to employee benefit plans.

During 2022, HG Global received net proceeds of $147 million from the issuance of the HG Global Senior Notes.

During 2022, BAM received $81 million in MSC.

During 2022, BAM repaid $25 million of principal and paid $11 million of accrued interest on the BAM Surplus Notes.

During 2022, Kudu borrowed $35 million and repaid $45 million in term loans under the Kudu Credit Facility.

Acquisitions and Dispositions

On May 26, 2022, Kudu raised $115 million of equity capital from the Kudu Transaction. Mass Mutual, White Mountains and Kudu management contributed $64 million, $50 million and $1 million in the Kudu Transaction, respectively.

On August 1, 2022, White Mountains closed the previously announced NSM Transaction. White Mountains received $1.4 billion in net cash proceeds at closing.

On December 20, 2022, Outrigger Re Ltd. issued non-voting redeemable preference shares on behalf of four segregated accounts to White Mountains and other unrelated third party investors. White Mountains purchased 100% of the preference shares issued by its segregated account, WM Outrigger Re, for $205 million.

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Cash flows from investing and financing activities for the year ended December 31, 2021

Financing and Other Capital Activities

During 2021, the Company declared and paid a $3 million cash dividend to its common shareholders.

During 2021, White Mountains repurchased and retired 98,511 of its common shares for $108 million, 7,218 of which were repurchased under employee benefit plans for statutory withholding tax payments.

During 2021, BAM received $62 million in MSC.

During 2021, BAM repaid $24 million of principal and paid $10 million of accrued interest on the BAM Surplus Notes.

During 2021, Ark issued $163 million face value floating rate unsecured subordinated notes at par in three transactions for proceeds of $158 million, net of debt issuance costs, and repaid €12 million ($14 million based upon the foreign exchange spot rate at the date of repayment) of the outstanding principal balance on the subordinated note to Dekania Europe CDO II plc (“Ark 2007 Notes Tranche 2”).

During 2021, Kudu borrowed $3 million in term loans under the Kudu Bank Facility.

On March 23, 2021, Kudu entered into the Kudu Credit Facility with an initial draw of $102 million, of which $92 million was used to repay the outstanding principal balance on its term loans under the Kudu Bank Facility. During 2021, Kudu borrowed an additional $130 million and repaid $7 million in term loans under the Kudu Credit Facility.

During 2021, White Mountains’s Other Operations borrowed $3 million and repaid $8 million under its three secured credit facilities.

Acquisitions and Dispositions

On January 1, 2021 White Mountains completed the Ark Transaction, which included contributing $605 million of equity capital to Ark, at a pre-money valuation of $300 million, and purchasing $41 million of shares from certain selling shareholders. In the fourth quarter of 2020, White Mountains prefunded/placed in escrow a total of $646 million in preparation for closing the Ark Transaction.

On March 23, 2021, MediaAlpha completed a secondary offering of 8.05 million shares. In the secondary offering, White Mountains sold 3.6 million shares at $46.00 per share ($44.62 per share net of underwriting fees) for net proceeds of $160 million.

Cash flows from investing and financing activities for the year ended December 31, 2020

Financing and Other Capital Activities

During 2020, the Company declared and paid a $3 million cash dividend to its common shareholders.

During 2020, White Mountains repurchased and retired 99,087 of its common shares for $85 million, 5,899 of which were repurchased under employee benefit plans for statutory withholding tax payments.

During 2020, BAM received $69 million in MSC.

During 2020, BAM repaid $70 million of principal and paid $25 million of accrued interest on the BAM Surplus Notes.

During 2020, HG Global declared and paid $23 million of preferred dividends, of which $22 million was paid to White Mountains.

During 2020, Kudu borrowed $32 million in term loans under the Kudu Bank Facility.

During 2020, White Mountains’s Other Operations made no borrowings and repaid $2 million in term loans under its credit facilities.

Acquisitions and Dispositions

On May 7, 2020, White Mountains made an additional $15 million investment in PassportCard/DavidShield.

On October 30, 2020, MediaAlpha completed its initial public offering. In the offering, White Mountains sold 3,609,894 shares and received total proceeds of $64 million. White Mountains also received $55 million of net proceeds related to a dividend recapitalization at MediaAlpha, which was recorded as net investment income.

In the fourth quarter of 2020, White Mountains pre-funded/placed in escrow a total of $646 million in preparation for closing the Ark Transaction.

TRANSACTIONS WITH RELATED PERSONS

White Mountains does not have any related party transactions to report as of December 31, 2022.

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NON-GAAP FINANCIAL MEASURES

This report includes ten non-GAAP financial measures that have been reconciled with their most comparable GAAP financial measures.

Adjusted book value per share

Adjusted book value per share is a non-GAAP financial measure which is derived by adjusting (i) the GAAP book value per share numerator and (ii) the common shares outstanding denominator, as described below.

The GAAP book value per share numerator is adjusted (i) to include a discount for the time value of money arising from the modeled timing of cash payments of principal and interest on the BAM Surplus Notes and (ii) to add back the unearned premium reserve, net of deferred acquisition costs, at HG Global.

Under GAAP, White Mountains is required to carry the BAM Surplus Notes, including accrued interest, at nominal value with no consideration for time value of money. Based on a debt service model that forecasts operating results for BAM through maturity of the BAM Surplus Notes, the present value of the BAM Surplus Notes, including accrued interest and using an 8.0% discount rate, was estimated to be $98 million, $130 million and $147 million less than the nominal GAAP carrying values as of December 31, 2022, 2021 and 2020, respectively.

The value of HG Global’s unearned premium reserve, net of deferred acquisition costs, was $179 million, $159 million and $142 million as of December 31, 2022, 2021 and 2020, respectively.

White Mountains believes these adjustments are useful to management and investors in analyzing the intrinsic value of HG Global, including the value of the BAM Surplus Notes and the value of the in-force business at HG Re, HG Global’s reinsurance subsidiary.

The denominator used in the calculation of adjusted book value per share equals the number of common shares outstanding adjusted to exclude unearned restricted common shares, the compensation cost of which, at the date of calculation, has yet to be amortized. Restricted common shares are earned on a straight-line basis over their vesting periods. The reconciliation of GAAP book value per share to adjusted book value per share is included on page 41.

Growth in adjusted book value per share excluding MediaAlpha

The growth in adjusted book value per share excluding net realized and unrealized investment losses from White Mountains’s investment in MediaAlpha on page 41 is a non-GAAP financial measure. White Mountains believes this measure to be useful to management and investors by showing the underlying performance of White Mountains in 2021 without regard to the impact of changes in MediaAlpha’s share price. A reconciliation from GAAP to the reported percentages is as follows:

Ark’s adjusted loss and loss adjustment expense ratio, adjusted insurance acquisition expense ratio, adjusted other underwriting expense ratio and adjusted combined ratio

Ark’s adjusted loss and loss adjustment expense ratio, adjusted insurance acquisition expense ratio, adjusted other underwriting expense ratio and adjusted combined ratio are non-GAAP financial measures, which are derived by adjusting the GAAP ratios to add back the impact of whole-account quota-share reinsurance arrangements related to TPC Providers for the Syndicates. The impact of these reinsurance arrangements relates to years of account prior to the Ark Transaction. White Mountains believes these adjustments are useful to management and investors in evaluating Ark’s results on a fully aligned basis (i.e., 100% of the Syndicates’ results). The reconciliation from the GAAP ratios to the adjusted ratios is included on page 52.

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Kudu’s EBITDA and Kudu’s adjusted EBITDA

Kudu's EBITDA and adjusted EBITDA are non-GAAP financial measures. EBITDA is a non-GAAP financial measure that excludes interest expense on debt, income tax (expense) benefit, depreciation and amortization of other intangible assets from GAAP net income (loss). Adjusted EBITDA is a non-GAAP financial measure that excludes certain other items in GAAP net income (loss) in addition to those excluded from EBITDA. The adjustments relate to (i) net realized and unrealized investment gains (losses) on Kudu's Participation Contracts, (ii) non-cash equity-based compensation expense and (iii) transaction expenses. A description of each adjustment follows:

•Net realized and unrealized investment gains (losses) - Represents net unrealized investment gains and losses on Kudu’s Participation Contracts, which are recorded at fair value under GAAP, and net realized investment gains and losses on Kudu’s Participation Contracts sold during the period.

•Non-cash equity-based compensation expense - Represents non-cash expenses related to Kudu’s management compensation that are settled with equity units in Kudu.

•Transaction expenses - Represents costs directly related to Kudu’s mergers and acquisitions activity, such as external lawyer, banker, consulting and placement agent fees, which are not capitalized and are expensed under GAAP.

White Mountains believes that these non-GAAP financial measures are useful to management and investors in evaluating Kudu’s performance. The reconciliation of Kudu’s GAAP net income (loss) to EBITDA and adjusted EBITDA is included on page 54.

Total consolidated portfolio return excluding MediaAlpha

Total consolidated portfolio return excluding MediaAlpha is a non-GAAP financial measure that removes the net investment income and net realized and unrealized investment gains (losses) from White Mountains’s investment in MediaAlpha. White Mountains believes this measure to be useful to management and investors by showing the underlying performance of White Mountains’s investment portfolio without regard to MediaAlpha.

The following table presents return reconciliations from GAAP to the reported percentages:

Total adjusted capital

Total capital at White Mountains is comprised of White Mountains’s common shareholders’ equity, debt and non-controlling interests other than non-controlling interests attributable to BAM. Total adjusted capital is a non-GAAP financial measure, which is derived by adjusting total capital (i) to include a discount for the time value of money arising from the expected timing of cash payments of principal and interest on the BAM Surplus Notes and (ii) to add back the unearned premium reserve, net of deferred acquisition costs, at HG Global. The reconciliation of total capital to total adjusted capital is included on page 65.

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CRITICAL ACCOUNTING ESTIMATES

Management’s Discussion and Analysis of Financial Condition and Results of Operations discuss the Company’s consolidated financial statements, which have been prepared in accordance with GAAP. The financial statements presented herein include all adjustments considered necessary by management to fairly present the financial condition, results of operations and cash flows of White Mountains.

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Certain of these estimates are considered critical in that they involve a higher degree of judgment and are subject to a significant degree of variability. On an ongoing basis, management evaluates its estimates and bases its estimates on historical experience and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources.

1. Fair Value Measurements

General

White Mountains records certain assets and liabilities at fair value in its consolidated financial statements, with changes therein recognized in current period earnings. In addition, White Mountains discloses estimated fair value for certain liabilities measured at historical or amortized cost. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants (an exit price) at a particular measurement date. Fair value measurements are categorized into a hierarchy that distinguishes between inputs based on market data from independent sources (observable inputs) and a reporting entity’s internal assumptions based upon the best information available when external market data is limited or unavailable (unobservable inputs). Quoted prices in active markets for identical assets have the highest priority (“Level 1”), followed by observable inputs other than quoted prices including prices for similar but not identical assets or liabilities (“Level 2”), and unobservable inputs, including the reporting entity’s estimates of the assumptions that market participants would use, having the lowest priority (“Level 3”).

Assets and liabilities carried at fair value include all of White Mountains’s investment portfolio and derivative instruments. Valuation of assets and liabilities measured at fair value require management to make estimates and apply judgment to matters that may carry a significant degree of uncertainty. In determining its estimates of fair value, White Mountains uses a variety of valuation approaches and inputs. Whenever possible, White Mountains estimates fair value using valuation methods that maximize the use of quoted market prices or other observable inputs. Where appropriate, assets and liabilities measured at fair value have been adjusted for the effect of counterparty credit risk.

Invested Assets

White Mountains uses outside pricing services and brokers to assist in determining fair values. The outside pricing services White Mountains uses have indicated that they will only provide prices where observable inputs are available. As of December 31, 2022, approximately 72% of the investment portfolio recorded at fair value was priced based upon quoted market prices or other observable inputs.

Level 1 Measurements

Investments valued using Level 1 inputs include White Mountains’s fixed maturity investments, primarily investments in U.S. Treasuries and short-term investments, which include U.S. Treasury Bills, common equity securities, and its investment in MediaAlpha following the MediaAlpha IPO. For investments in active markets, White Mountains uses the quoted market prices provided by outside pricing services to determine fair value.

Level 2 Measurements

Investments valued using Level 2 inputs include fixed maturity investments which have been disaggregated into classes, including debt securities issued by corporations, municipal obligations, mortgage and asset-backed securities and collateralized loan obligations. Investments valued using Level 2 inputs also include certain international listed common equity funds, which White Mountains values using the fund manager’s published net asset value (“NAV”) to account for the difference in market close times.

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In circumstances where quoted market prices are unavailable or are not considered reasonable, White Mountains estimates the fair value using industry standard pricing methodologies and observable inputs such as benchmark yields, reported trades, broker-dealer quotes, issuer spreads, benchmark securities, bids, offers, credit ratings, prepayment speeds, reference data including research publications and other relevant inputs. Given that many fixed maturity investments do not trade on a daily basis, the outside pricing services evaluate a wide range of fixed maturity investments by regularly drawing parallels from recent trades and quotes of comparable securities with similar features. The characteristics used to identify comparable fixed maturity investments vary by asset type and take into account market convention.

White Mountains’s process to assess the reasonableness of the market prices obtained from the outside pricing sources covers substantially all of its fixed maturity investments and includes, but is not limited to, the evaluation of pricing methodologies and a review of the pricing services’ quality control procedures on at least an annual basis, a comparison of its invested asset prices obtained from alternate independent pricing vendors on at least a semi-annual basis, monthly analytical reviews of certain prices and a review of the underlying assumptions utilized by the pricing services for select measurements on an ad hoc basis throughout the year. White Mountains also performs back-testing of selected investment sales activity to determine whether there are any significant differences between the market price used to value the security prior to sale and the actual sale price of the security on an ad hoc basis throughout the year. Prices provided by the pricing services that vary by more than $0.5 million and 5% from the expected price based on these assessment procedures are considered outliers, as are prices that have not changed from period to period and prices that have trended unusually compared to market conditions. In circumstances where the results of White Mountains’s review process does not appear to support the market price provided by the pricing services, White Mountains challenges the vendor provided price. If White Mountains cannot gain satisfactory evidence to support the challenged price, White Mountains will rely upon its own internal pricing methodologies to estimate the fair value of the security in question.

The valuation process described above is generally applicable to all of White Mountains’s fixed maturity investments. The techniques and inputs specific to asset classes within White Mountains’s fixed maturity investments for Level 2 securities that use observable inputs are as follows:

Debt Securities Issued by Corporations:

The fair value of debt securities issued by corporations is determined from a pricing evaluation technique that uses information from market sources and integrates relative credit information, observed market movements, and sector news. Key inputs include benchmark yields, reported trades, broker-dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers, and reference data including sector, coupon, credit quality ratings, duration, credit enhancements, early redemption features and market research publications.

Municipal Obligations:

The fair value of municipal obligations is determined from a pricing evaluation technique that uses information from market makers, brokers-dealers, buy-side firms, and analysts along with general market information. Key inputs include benchmark yields, reported trades, issuer financial statements, material event notices and new issue data, as well as broker-dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers, and reference data including type, coupon, credit quality ratings, duration, credit enhancements, geographic location and market research publications.

Mortgage and Asset-Backed Securities and Collateralized Loan Obligations:

The fair value of mortgage and asset-backed securities and collateralized loan obligations is determined from a pricing evaluation technique that uses information from market sources and leveraging similar securities. Key inputs include benchmark yields, reported trades, underlying tranche cash flow data, collateral performance, plus new issue data, as well as broker-dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers, and reference data including issuer, vintage, loan type, collateral attributes, prepayment speeds, default rates, recovery rates, cash flow stress testing, credit quality ratings and market research publications.

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Level 3 Measurements

Fair value estimates for investments that trade infrequently and have few or no quoted market prices or other observable inputs are classified as Level 3 measurements. Investments valued using Level 3 fair value estimates are based upon unobservable inputs and include investments in certain fixed maturity investments, common equity securities and other long-term investments where quoted market prices or other observable inputs are unavailable or are not considered reliable or reasonable.

Level 3 valuations are generated from techniques that use assumptions not observable in the market. These unobservable inputs reflect White Mountains’s assumptions of what market participants would use in valuing the investment. In certain circumstances, investment securities may start out as Level 3 when they are originally issued, but as observable inputs become available in the market, they may be reclassified to Level 2. Transfers of securities between levels are based on investments held as of the beginning of the period.

Other Long-Term Investments

As of December 31, 2022, $912 million of White Mountains’s other long-term investments, which consisted primarily of unconsolidated entities including Kudu’s Participation Contracts and PassportCard/DavidShield, were classified as Level 3 investments in the GAAP fair value hierarchy. The determination of the fair value of these securities involves significant management judgment, and the use of valuation models and assumptions that are inherently subjective and uncertain. See Item 1A. Risk Factors, “Our investment portfolio includes securities that do not have readily observable market prices. We use valuation methodologies that are inherently subjective and uncertain to value these securities. The values of securities established using these methodologies may never be realized, which could materially adversely affect our results of operations and financial condition.” on page 32.

White Mountains may use a variety of valuation techniques to determine fair value depending on the nature of the investment, including a discounted cash flow analysis, market multiple approach, cost approach and/or liquidation analysis. On an ongoing basis, White Mountains also considers qualitative changes in facts and circumstances, which may impact the valuation of its unconsolidated entities, including economic and market changes in relevant industries, changes to the entity’s capital structure, business strategy and key personnel, and any recent transactions relating to the unconsolidated entity. On a quarterly basis, White Mountains evaluates the most recent qualitative and quantitative information of the business and completes a fair valuation analysis for all other long-term investments classified as Level 3 investments. Periodically, and at least on an annual basis, White Mountains uses a third-party valuation firm to complete an independent valuation analysis of significant unconsolidated entities.

As of December 31, 2022, White Mountains’s most significant other long-term investments that are valued using Level 3 measurements include Kudu’s Participation Contracts and PassportCard/DavidShield.

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Valuation of Kudu’s Participation Contracts

Kudu’s Participation Contracts comprise non-controlling equity interests in the form of revenue and earnings participation contracts. As of December 31, 2022, the combined fair value of Kudu’s Participation Contracts was $696 million. On a quarterly basis, White Mountains values each of Kudu’s Participation Contracts, typically using discounted cash flow models. As of December 31, 2022, two of Kudu’s Participation Contracts with a total fair value of $189 million were valued using a probability weighted expected return method, which takes into account factors such as a discounted cash flow analysis, the expected value to be received in a pending sales transaction and the likelihood that a sales transaction will take place.

The discounted cash flow valuation models include key inputs such as projections of future revenues and earnings of Kudu’s clients, a discount rate and a terminal cash flow exit multiple. The expected future cash flows are based on management judgment, considering current performance, budgets and projected future results. The discount rates reflect the weighted average cost of capital, considering comparable public company data, adjusted for risks specific to the business and industry. The terminal exit multiple is generally based on expectations of annual cash flow to Kudu from each of its clients in the terminal year of the cash flow model. In determining fair value, White Mountains considers factors such as performance of underlying products and vehicles, expected client growth rates, new fund launches, fee rates by products, capacity constraints, operating cash flow of underlying manager and other qualitative factors, including the assessment of key personnel. The inputs to each discounted cash flow analysis vary depending on the nature of each client. As of December 31, 2022, White Mountains concluded that pre-tax discount rates in the range of 18% to 25%, and terminal cash flow exit multiples in the range of 7 to 16 times were appropriate for the valuations of Kudu’s Participation Contracts.

With a discounted cash flow analysis, small changes to inputs in a valuation model may result in significant changes to fair value. The following table presents the estimated effect on the fair value of Kudu’s Participation Contracts as of December 31, 2022, resulting from changes in key inputs to the discounted cash flow analysis, including the discount rates and terminal cash flow exit multiples:

(1) Since Kudu’s Participation Contracts are not subject to corporate taxes within Kudu Investment Management, LLC, pre-tax discount rates are applied to pre-tax cash flows in determining fair values.

Valuation of PassportCard/DavidShield

On a quarterly basis, White Mountains values its investment in PassportCard/DavidShield using a discounted cash flow model. The discounted cash flow valuation model includes key inputs such as projections of future revenues and earnings, a discount rate and a terminal revenue growth rate. The expected future cash flows are based on management judgment, considering current performance, budgets and projected future results. The discount rate reflects the weighted average cost of capital, considering comparable public company data, adjusted for risks specific to the business and industry. The terminal revenue growth rate is based on company, industry and macroeconomic expectations of perpetual revenue growth subsequent to the end of the discrete period in the discounted cash flow analysis.

When making its fair value selection, which is within a range of reasonable values derived from the discounted cash flow model, White Mountains considers all available information, including any relevant market multiples and multiples implied by recent transactions, facts and circumstances specific to PassportCard/DavidShield’s businesses and industries, and any infrequent or unusual results for the period.

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White Mountains concluded that an after-tax discount rate of 24% and a terminal revenue growth rate of 4% was appropriate for the valuation of its investment in PassportCard/DavidShield as of December 31, 2022. Utilizing these assumptions, White Mountains determined that the fair value of its investment in PassportCard/DavidShield was $135 million as of December 31, 2022.

Premiums and commission revenues from international private medical insurance placed by DavidShield grew in 2021 and have remained strong through 2022. In 2022, PassportCard’s written premiums exceeded pre-pandemic premium levels.

With a discounted cash flow analysis, small changes to inputs in a valuation model may result in significant changes to fair value. The following table presents the estimated effect on the fair value of White Mountains’s investment in PassportCard/DavidShield as of December 31, 2022, resulting from changes in key inputs to the discounted cash flow analysis, including the discount rate and terminal revenue growth rate:

Other Long-term Investments - NAV

As of December 31, 2022, $562 million of White Mountains’s other long-term investments, which consisted of a private equity funds and hedge funds, a bank loan fund, Lloyd’s trust deposits and ILS funds, were valued at fair value using NAV as a practical expedient. Investments for which fair value is measured using NAV as a practical expedient are not classified within the fair value hierarchy.

White Mountains employs a number of procedures to assess the reasonableness of the fair value measurements for other long-term investments measured at NAV, including obtaining and reviewing interim unaudited and annual audited financial statements as well as periodically discussing each fund’s pricing with the fund manager. However, since the fund managers do not provide sufficient information to evaluate the pricing methods and inputs for each underlying investment, White Mountains considers the valuation inputs to be unobservable. The fair value of White Mountains’s other long-term investments measured at NAV are generally determined using the fund manager’s NAV. In the event that White Mountains believes the fair value differs from the NAV reported by the fund manager due to illiquidity or other factors, White Mountains will adjust the reported NAV to more appropriately represent the fair value of its investment.

Sensitivity Analysis on Other Long-term Investments - NAV

The underlying investments of White Mountains’s private equity funds and hedge funds typically consist of publicly-traded and private securities whose exit strategies often depend on equity market conditions. These investments are based on quoted market prices or management’s estimates of fair value, which could cause the amount realized upon sale to differ from current reported fair values. The fluctuations in fair value may result from a variety of risks, such as changes in the economic characteristics, the relative price of alternative investments, supply and demand, and other equity market factors.

The underlying investments of White Mountains’s bank loan fund consist primarily of U.S. dollar-denominated, non-investment grade, floating-rate senior secured loans and may consist of other financial instruments, such as secured and unsecured corporate debt, credit default swaps, reverse repurchase agreements, and synthetic indices. These investments are subject to credit spread risk and interest rate risk, and may be affected by the creditworthiness of the issuer, prepayment options, relative values of alternative investments, the liquidity of the instrument and various other market factors.

The underlying investments of White Mountains’s multi-investor ILS funds consist primarily of catastrophe bonds, collateralized reinsurance investments and industry loss warranties. In addition to catastrophe event risk, the underlying investments are also subject to a variety of other risks including modeling, liquidity, market, collateral credit quality, counterparty financial strength, interest rate and currency risks.

See Note 3 — “Investment Securities” on page F-19 for tables that summarize the changes in White Mountains’s fair value measurements by level as of December 31, 2022 and 2021 and, for investments held at the end of the period, the total net unrealized gains (losses) attributable to Level 3 investments for the years ended December 31, 2022, 2021 and 2020.

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2. Surplus Note Valuation

BAM Surplus Notes

As of December 31, 2022, White Mountains owned $340 million of BAM Surplus Notes and has accrued $158 million in interest due thereon. In December 2022, BAM made a $36 million cash payment of principal and interest on the BAM Surplus Notes held by HG Global. In December 2021, BAM made a $34 million cash payment of principal and interest on the BAM Surplus Notes held by HG Global. In December 2020, BAM made a $30 million cash payment of principal and interest on the BAM Surplus Notes held by HG Global. In January 2020, BAM made a one-time $65 million cash payment of principal and interest on the BAM Surplus Notes held by HG Global.

Because BAM is consolidated in White Mountains’s financial statements, the BAM Surplus Notes and accrued interest are classified as intercompany notes, carried at face value and eliminated in consolidation. However, the BAM Surplus Notes and accrued interest are carried as assets at HG Global, of which White Mountains owns 96.9% of the preferred equity and 88.4% of the common equity, while the BAM Surplus Notes are carried as liabilities at BAM, which White Mountains has no ownership interest in and is completely attributed to non-controlling interests.

Any write-down of the carried amount of the BAM Surplus Notes and/or the accrued interest thereon could adversely impact White Mountains’s results of operations and financial condition. See Item 1A., Risk Factors, “If BAM does not pay some or all of the principal and interest due on the BAM Surplus Notes, it could materially adversely affect our results of operations and financial condition.” on page 27.

Periodically, White Mountains’s management reviews the recoverability of amounts recorded from the BAM Surplus Notes. As of December 31, 2022, White Mountains believes such notes and interest thereon to be fully recoverable. White Mountains’s review is based on a debt service model that forecasts operating results for BAM and related payments on the BAM Surplus Notes through maturity of the BAM Surplus Notes in 2042. The model depends on assumptions regarding future trends for the issuance of municipal bonds, interest rates, credit spreads, insured market penetration, competitive activity in the market for municipal bond insurance and other factors affecting the demand for and price of BAM’s municipal bond insurance.

As of December 31, 2022, White Mountains debt service model indicated that the BAM Surplus Notes would be fully repaid approximately six years prior to final maturity, which is generally consistent with the results of the update of the debt service model as of December 31, 2021. The debt service model assumes both par insured and total pricing gradually increase from 2023 to 2026, and flatten thereafter. Assumptions regarding future trends for these factors are a matter of significant judgment, and whether actual results will follow the model is subject to a number of risks and uncertainties.

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 remaining qualified statutory capital and other capital resources continue to support its outstanding obligations, its business plan and its “AA/stable” rating from Standard & Poor’s. No payment of principal or interest on the BAM Surplus Notes may be made without the approval of the NYDFS.

Interest payments on the BAM Surplus Notes are due quarterly but are subject to deferral, without penalty or default and without compounding, for payment in the future. Payments made to the BAM Surplus Notes are applied pro rata between outstanding principal and interest. Deferred interest is due on the stated maturity date in 2042.

3. Loss and LAE Reserves

General

Ark establishes loss and LAE reserves that are estimates of amounts needed to pay claims and related expenses in the future for insured events that have already occurred. The process of estimating loss and LAE reserves involves a considerable degree of judgment by management and, as of any given date, is inherently uncertain. See Note 5 — “Losses and Loss Adjustment Expense Reserves” on page F-32 for a description of Ark’s loss and LAE reserves and actuarial methods.

Ark performs an actuarial review of its recorded loss and LAE reserves each quarter, using several generally accepted actuarial methods to evaluate its loss reserves, each of which has its own strengths and weaknesses. Management bases its level of reliance on a particular method based on the facts and circumstances at the time the reserve estimates are made.

As part of Ark’s quarterly actuarial review, Ark compares the previous quarter’s projections of incurred, paid and case reserve activity, including amounts incurred but not reported, to actual amounts experienced in the quarter. Differences between previous estimates and actual experience are evaluated to determine whether a given actuarial method for estimating loss and LAE reserves should be relied upon to a greater or lesser extent than it had been in the past. While some variance is expected each quarter due to the inherent uncertainty in estimating loss and LAE reserves, persistent or large variances would indicate that prior assumptions and/or reliance on certain actuarial methods may need to be revised going forward.

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Upon completion of each quarterly review, Ark selects indicated loss and LAE reserve levels based on the results of the relevant actuarial methods, which are the primary consideration in determining management’s best estimate of required loss and LAE reserves. However, in making its best estimate, management also considers other qualitative factors that may lead to a difference between held reserves and actuarially indicated reserve levels. Typically, these qualitative factors are considered when management and Ark’s actuaries conclude that there is insufficient historical incurred and paid loss information or that there is particular uncertainty about whether trends included in the historical incurred and paid loss information are likely to repeat in the future. Such qualitative factors include, among others, recent entry into new markets or new products, improvements in the claims department that are expected to lessen future ultimate loss costs, legal and regulatory developments, inflation, climate change, or other uncertainties that may arise.

The process of establishing loss and LAE reserves, including amounts incurred but not reported, is complex and imprecise as it must consider many variables that are subject to the outcome of future events. As a result, informed subjective estimates and judgments as to Ark’s ultimate exposure to losses are an integral component of the loss and LAE reserving process. Ark categorizes and tracks insurance and reinsurance reserves by “reserving class of business” for each underwriting office, London and Bermuda, and then aggregates the reserving classes by line of business, which are summarized herein as property and accident & health, specialty, marine & energy, casualty - active and casualty - runoff.

Ark regularly reviews the appropriateness of its loss and LAE reserves at the reserving class of business level, considering a variety of trends that impact the ultimate settlement of claims for the subsets of claims in each particular reserving class. Losses and LAE are categorized by the year in which the policy is underwritten (the year of account, or underwriting year) for purposes of Ark’s claims management and estimation of the ultimate loss and LAE reserves. For purposes of Ark’s reporting under GAAP, losses and LAE are categorized by the accident year.

Impact of Third-Party Capital

For the years of account prior to the Ark Transaction, a significant proportion of the Syndicates’ underwriting capital was provided by TPC Providers using whole account reinsurance contracts with Ark’s corporate member. The TPC Providers’ participation in the Syndicates for the 2020 open year of account is 42.8% of the total net result of the Syndicates. For the years of account subsequent to the Ark Transaction, Ark is no longer using TPC Providers to provide underwriting capital for the Syndicates.

A Reinsurance to Close (“RITC”) agreement is generally put in place after the third year of operations for a year of account such that the outstanding loss and LAE reserves, including future development thereon, are reinsured into the next year of account. As a result, and in combination with the changing participation provided by TPC Providers, Ark’s participation on outstanding loss and LAE reserves reinsured into the next year of account may change, perhaps significantly. For example, during 2022, an RITC was executed such that the outstanding loss and LAE reserves for claims arising out of the 2019 year of account, for which the TPC Providers’ participation in the total net results of the Syndicates was 58.3%, were reinsured into the 2020 year of account, for which the TPC Providers’ participation in the total net results of the Syndicates is 42.8%.

Loss and LAE Reserves by Line of Business

The following table summarizes Ark’s loss and LAE reserves, net of reinsurance recoverables on unpaid losses, as of December 31, 2022:

(1) The loss and LAE reserves, net of reinsurance, are net of amounts attributable to TPC Providers of $145.4, including $73.8 of case reserves and $71.6 of IBNR reserves.

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For loss and LAE reserves as of December 31, 2022, Ark considers that the impact of the various reserving factors, as described in Note 5 — “Losses and Loss Adjustment Expense Reserves” on page F-32, on future paid losses would be similar to the impact of those factors on historical paid losses.

The major causes of material uncertainty (i.e., reserving factors) generally will vary for each line of business, as well as for each separately analyzed reserving class of business within the line of business. Also, reserving factors can have offsetting or compounding effects on estimated loss and LAE reserves. In most cases, it is not possible to measure the effect of a single reserving factor and construct a meaningful sensitivity expectation. Actual results will likely vary from expectations for each of these assumptions, resulting in an ultimate claim liability that is different from that being estimated currently.

Additional causes of material uncertainty exist in most product lines and may impact the types of claims that could occur within a particular line of business or reserving class of business. Examples where reserving factors, within a line of business or reserving class of business, are subject to change include changing types of insured (e.g., size of account, industry insured, jurisdiction), changing underwriting standards, or changing policy provisions (e.g., deductibles, policy limits, endorsements).

Ark Loss and LAE Development

See Note 5 — “Losses and Loss Adjustment Expense Reserves” on page F-32 for prior year loss and LAE development discussions for the year ended December 31, 2022.

Range of Reserves

The following table shows the recorded loss and LAE reserves and the high and low ends of Ark’s range of reasonable loss and LAE reserve estimates, net of reinsurance recoverables on unpaid losses, as of December 31, 2022. See Note 5 — “Losses and Loss Adjustment Expense Reserves” on page F-32 for a description of Ark’s loss and LAE reserves and actuarial methods.

(1) The recorded loss and LAE reserves and the high and low ends of the range of loss and LAE reserve estimates, net of reinsurance recoverables on unpaid losses, are net of amounts attributable to TPC Providers of $145.4.

The recorded reserves represent management's best estimate of unpaid loss and LAE reserves. Management’s best estimate of reserves is in the upper portion of the actuarial range of estimates in response to potential volatility in the actuarial indications and estimates for large claims. Ark uses the results of several different standard actuarial methods to develop its best estimate of ultimate loss and LAE reserves. While it has not determined the statistical probability of actual ultimate paid losses falling within the range, Ark believes that it is reasonably likely that actual ultimate paid losses will fall within the ranges noted above.

On an annual basis, Ark uses an independent external actuary to provide actuarial opinions on the reasonableness of loss and LAE reserves for its operating subsidiaries. Ark uses the independent actuarial review solely to corroborate Ark’s recorded loss and LAE reserves. The result of the independent actuarial review indicated that Ark’s net recorded loss and LAE reserves fall within the ranges noted above.

Although Ark believes its loss and LAE reserves are reasonably stated, ultimate losses may deviate, perhaps materially, from the recorded reserve amounts and could be above the high end of the range of actuarial projections. This is because ranges are developed based on known events as of the valuation date, whereas the ultimate disposition of losses is subject to the outcome of events and circumstances that may be unknown as of the valuation date.

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Sensitivity Analysis

Below is a discussion of possible variations from current estimates of loss and LAE reserves due to changes in certain key assumptions. Each of the impacts described below is estimated individually, without consideration for any correlation among key assumptions. Further, there is uncertainty around other assumptions not explicitly quantified in the discussion below. Therefore, it would be inappropriate to take each of the amounts described below and add them together in an attempt to estimate volatility for Ark’s reserves in total. It is important to note that the volatilities and variations discussed below are not meant to be worst-case scenarios or an all-inclusive list, and therefore it is possible that future volatilities and variations may be more than amounts discussed below.

•Sustained elevated levels of inflation: Elevated levels of inflation have been observed during 2022, and recent economic forecasts suggest this trend will continue at least in the short term. This has been particularly observed in the casualty lines of business with key social inflation drivers being court awards, changes in technology, and the legal environment. For example, a hypothetical increase in inflation rates by 4% per annum would increase the recorded loss and LAE reserves, net of reinsurance recoverables on unpaid losses, for the casualty lines of business by approximately $7 million, or approximately 5% of the recorded casualty loss and LAE reserves of $132 million. The property line of business has also been impacted by elevated levels of inflation in relation to many elements of construction costs. While the impact on construction costs could be viewed as a short-term measure, there is uncertainty over how long it will take for the current elevated level of costs to reduce back to historic norms given COVID-19 disruption and worldwide supply chain issues.

•Catastrophe losses: The years 2017 through 2022 have been active for major loss events, including natural catastrophes. As time has passed, the emerging claims information for major loss events has been better than expected. As of December 31, 2022, Ark has recorded $131 million of loss and LAE reserves, net of reinsurance recoverables on unpaid losses, for major loss events, of which $67 million is held as IBNR reserves. Some, but perhaps not all, of the IBNR reserves may be needed to handle adverse reporting from clients.

•Ark new business: In January 2021, in response to an improved underwriting environment, Ark converted GAIL into a Class 4 Bermuda-based insurance and reinsurance company and began to underwrite third-party business. GAIL now underwrites a range of third-party business including property, specialty, marine & energy and casualty lines from Bermuda. GAIL’s initial expected loss ratios selected for reserving purposes were based on market benchmarks, supplemented based on discussions with underwriters, policy details, views at time of pricing the risk and emerging experience during 2021 and 2022. As actual losses develop, Ark will revise its initial expectations with its actual experience. However, it could be a few years before Ark has sufficient internal data to rely on and possibly longer for the longer-tailed lines of business, such as casualty. In 2022, GAIL reported gross written premiums of $619 million. A 10% error in Ark’s initial loss ratio estimates could result in approximately $62 million of adverse variance in loss and LAE reserves.

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Loss and LAE Reserve Summary

The following table summarizes the loss and LAE reserve activity of Ark’s insurance and reinsurance subsidiaries for the year ended December 31, 2022:

(1) The beginning reinsurance recoverable on unpaid losses includes amounts attributable to TPC Providers of $276.8 as of December 31, 2021.

(2) Amount represents the impact to net loss and LAE reserves due to a change in the TPC Providers’ participation related to the annual RITC process.

(3) The ending reinsurance recoverable on unpaid losses includes amounts attributable to TPC Providers of $145.4 as of December 31, 2022.

During the year ended December 31, 2022, Ark experienced $52 million of net favorable prior year loss reserve development. Ark’s net favorable prior year loss reserve development was driven primarily by the property and accident & health ($21 million), marine & energy ($19 million) and specialty ($13 million) reserving lines of business. The favorable prior year loss reserve development in the property and accident & health, marine & energy and specialty reserving lines of business was driven primarily by positive claims experience within the 2021 accident year.

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The following table summarizes the unpaid loss and LAE reserves, net of reinsurance recoverables on unpaid losses, for each of Ark’s major reserving lines of business as of December 31, 2022:

(1) The reinsurance recoverables on unpaid losses include amounts attributable to TPC Providers of $145.4 as of December 31, 2022.

The following ten tables include two tables each for the property and accident & health, specialty, marine & energy, casualty-active and casualty-runoff reserving lines of business. The first table for each reserving line of business is presented net of reinsurance, which includes the impact of whole-account quota-share reinsurance arrangements related to TPC Providers. Through the annual RITC process and in combination with the changing participation provided by TPC Providers, Ark’s participation on outstanding loss and LAE reserves on prior years of account can fluctuate. Depending on the change in the TPC Providers’ participation from one year of account to the next, the impact could be significant and is reflected in the tables on a retrospective basis by accident year. That is, for the RITC executed in the current year that changes Ark’s participation for claims relating to prior accident years, the prior year columns are adjusted to include the impact of the RITC. The second table for each reserving line of business excludes the impact of amounts attributable to TPC Providers. White Mountains believes this information is useful to management and investors in evaluating Ark’s loss and LAE reserves on a fully aligned basis (i.e., 100% of the Syndicates’ results), by excluding the impact of changing levels of TPC Providers’ participation from one year of account to the next. The following table summarizes the participation of Ark’s TPC Providers by year of account:

Each of the ten tables includes three sections.

The top section of the table presents, for each of the previous 10 accident years (1) cumulative total undiscounted incurred loss and LAE as of each of the previous 10 year-end evaluations, (2) total IBNR plus expected development on reported claims as of December 31, 2022, and (3) the cumulative number of reported claims as of December 31, 2022.

The middle section of the table presents cumulative paid loss and LAE for each of the previous 10 accident years as of each of the previous 10 year-end evaluations. Also included in this section is a calculation of the loss and LAE reserves as of December 31, 2022 which is then included in the reconciliation to the consolidated balance sheet presented above. The total unpaid loss and LAE reserves as of December 31, 2022 is calculated as the cumulative incurred loss and LAE from the top section less the cumulative paid loss and LAE from the middle section, plus any outstanding liabilities from accident years prior to 2013.

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The bottom section of the table is supplementary information about the average historical claims duration as of December 31, 2022. It shows the weighted average annual percentage payout of incurred loss and LAE by accident year as of each age. For example, the first column is calculated as the incremental paid loss and LAE in the first calendar year for each given accident year (e.g. calendar year 2020 for accident year 2020, calendar year 2021 for accident year 2021) divided by the cumulative incurred loss and LAE as of December 31, 2022 for that accident year. The resulting ratios are weighted together using cumulative incurred loss and LAE as of December 31, 2022.