WHITE MOUNTAINS INSURANCE GROUP LTD

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.

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 White Mountains’s investment in MediaAlpha. 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 exchange close times.

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

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

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

Debt Securities Issued by Corporations:

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

Municipal Obligations:

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

Mortgage and Asset-Backed Securities 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.

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.

As of December 31, 2023, $1,138 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 analyses 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 34.

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. 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, 2023, White Mountains’s most significant other long-term investments that are fair valued using Level 3 measurements include Kudu’s Participation Contracts and its investment in PassportCard/DavidShield.

Valuation of Kudu’s Participation Contracts

Kudu’s Participation Contracts comprise noncontrolling equity interests in the form of revenue and earnings participation contracts. As of December 31, 2023, the combined fair value of Kudu’s Participation Contracts was $891 million. On a quarterly basis, White Mountains fair values each of Kudu’s Participation Contracts, typically using a discounted cash flow analysis. As of December 31, 2023, one of Kudu’s Participation Contracts, with a fair value of $69 million, was 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 analyses used to fair value Kudu’s Participation Contracts include key inputs, such as projections of future revenues and earnings of Kudu’s underlying managers, 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 and adjusted for risks specific to the business and industry. The terminal cash flow exit multiple is generally based on expectations of annual cash flow to Kudu from each of its underlying managers in the terminal year of the discounted cash flow analysis. In determining fair value, White Mountains considers factors for each underlying manager, such as performance of products and vehicles, expected client growth rates, new fund launches, fee rates by products, capacity constraints, operating cash flows 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 underlying manager. As of December 31, 2023, 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 22 times were appropriate inputs for the discounted cash flow analyses used to fair value Kudu’s Participation Contracts.

With a discounted cash flow analysis, small changes to key inputs 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, 2023, resulting from changes in key inputs to the discounted cash flow analysis, including 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 analysis. The discounted cash flow analysis used to fair value PassportCard/DavidShield 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 and 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 analysis, 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.

As of December 31, 2023, White Mountains concluded that an after-tax discount rate of 24% and a terminal revenue growth rate of 4% were appropriate for the valuation of its investment in PassportCard/DavidShield. Utilizing these assumptions and all available information, White Mountains determined that the fair value of its investment in PassportCard/DavidShield was $150 million as of December 31, 2023.

Revenues from leisure travel insurance placed by PassportCard grew through the first nine months of 2023 but declined significantly in the fourth quarter due to the events of October 7, 2023 and the resulting war in Gaza. PassportCard expects leisure travel in Israel to remain depressed until the war abates and international carriers resume flights in and out of Tel Aviv. Revenues from international private medical insurance (“IPMI”) placed by DavidShield were less impacted and grew slightly year over year. Revenues from international operations, including European IPMI and Australian leisure travel, also grew year over year. White Mountains does not expect the war to have a material impact on White Mountains’s results of operations or financial condition.

With a discounted cash flow analysis, small changes to key inputs 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, 2023, 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, 2023, $834 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 the valuations and methodologies used to value the underlying investments of each fund with fund managers. However, since 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 of the fund differs from the NAV reported by the fund manager due to illiquidity or other factors, White Mountains will make an adjustment to the reported NAV to more appropriately represent the fair value of its other long-term 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 fund managers’ 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 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 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-20 for tables that summarize the changes in White Mountains’s fair value measurements by level as of December 31, 2023 and 2022, 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, 2023, 2022 and 2021.

2. Surplus Note Valuation

BAM Surplus Notes

As of December 31, 2023, White Mountains owned $322 million of BAM Surplus Notes and had accrued $175 million in interest due thereon. BAM made cash payments of principal and interest on the BAM Surplus Notes of $27 million, $36 million and $34 million in 2023, 2022 and 2021, respectively.

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 noncontrolling interests.

Any write-down of the carrying value 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 28.

Periodically, White Mountains’s management reviews the recoverability of amounts recorded from the BAM Surplus Notes. As of December 31, 2023, 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 pricing of BAM’s municipal bond insurance.

As of December 31, 2023, White Mountains debt service model indicated that the BAM Surplus Notes would be fully repaid approximately five years prior to final maturity, which is generally consistent with the results of the update of the debt service model as of December 31, 2022. The debt service model assumes both par insured and total pricing gradually increase from 2024 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 on 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. Ark’s 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 — “Loss and Loss Adjustment Expense Reserves”on page F-33 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.

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. 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 changes. For example, during 2023, an RITC was executed such that the outstanding loss and LAE reserves for claims arising out of the 2020 year of account, for which the TPC Providers’ participation in the total net results of the Syndicates was 42.8%, were reinsured into the 2021 year of account, for which the TPC Providers’ participation in the total net results of the Syndicates is 0.0%. After 2023, Ark is no longer subject to changes in TPC Providers’ participation.

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, 2023:

For loss and LAE reserves as of December 31, 2023, Ark considers that the impact of the various reserving factors, as described in Note 5 — “Loss and Loss Adjustment Expense Reserves” on page F-33, 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 insureds (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 — “Loss and Loss Adjustment Expense Reserves” on page F-33 for prior year loss and LAE development discussions for the year ended December 31, 2023.

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, 2023. See Note 5 — “Loss and Loss Adjustment Expense Reserves”on page F-33 for a description of Ark’s loss and LAE reserves and actuarial methods.

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 range 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 range 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.

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 2023, 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 $10 million, or approximately 5% of the recorded casualty loss and LAE reserves of $218 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 2023 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, 2023, Ark has recorded $75 million of loss and LAE reserves, net of reinsurance recoverables on unpaid losses, for major loss events, of which $48 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 since 2021. 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-tail lines of business, such as casualty. In 2023, GAIL reported gross written premiums of $871 million. A 10% error in Ark’s initial loss ratio estimates could result in approximately $87 million of adverse variance in loss and LAE reserves.

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, 2023:

(1) The beginning reinsurance recoverable on unpaid losses includes amounts attributable to TPC Providers of $145.4.

(2) Amount includes $15.6 ceded by Ark to WM Outrigger Re, which eliminates in White Mountains’s consolidated financial statements.

(3) 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.

During the year ended December 31, 2023, Ark experienced $20 million of net unfavorable prior year loss reserve development. The net unfavorable prior year loss reserve development was driven primarily by the property and accident & health ($42 million) reserving line of business, partially offset by net favorable prior year loss reserve development within the specialty ($12 million) and casualty–runoff ($6 million) reserving lines of business. The net unfavorable prior year loss reserve development in the property and accident & health reserving line of business was driven primarily by Hurricane Ian, Winter Storm Elliott and a power outage claim. The net favorable prior year loss reserve development in the specialty and casualty-runoff reserving lines of business was driven primarily by positive claims experience within the 2021 and 2020 accident years.

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, 2023:

The following ten tables include two tables each for Ark’s 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. After 2023, Ark is no longer subject to changes in TPC Providers’ participation. 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, 2023 and (3) the cumulative number of reported claims as of December 31, 2023.

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, 2023, 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, 2023 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.

The bottom section of the table is supplementary information about the average historical claims duration as of December 31, 2023. 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 2023 for accident year 2023, calendar year 2022 for accident year 2022) divided by the cumulative incurred loss and LAE as of December 31, 2023 for that accident year. The resulting ratios are weighted using cumulative incurred loss and LAE as of December 31, 2023.

The following tables provide a reconciliation from the first table grouping above, presented net of reinsurance, and the second table grouping above, presented gross of amounts attributable to TPC Providers:

4. Goodwill and Other Intangible Assets

As of December 31, 2023, goodwill and other intangible assets recognized in connection with business and asset acquisitions totaled $371 million, of which $276 million was attributable to White Mountains’s common shareholders. See Note 4 — “Goodwill and Other Intangible Assets.”Goodwill represents the excess of the amount paid to acquire subsidiaries over the fair value of identifiable net assets at the date of acquisition. Other intangible assets are recorded at their acquisition date fair values, which involves significant management judgment, the use of valuation models and assumptions that are inherently subjective. Goodwill and indefinite-lived intangible assets are not amortized but rather reviewed for potential impairment on an annual basis, or whenever indications of potential impairment exist. In the absence of any indications of potential impairment, the evaluation of goodwill and indefinite-lived intangible assets is performed no later than the interim period in which the anniversary of the acquisition date falls. Finite-lived intangible assets, which are amortized over their estimated economic lives, are reviewed for impairment only when events occur or there are changes in circumstances indicating that their carrying value may exceed fair value. An impairment exists when the carrying value of goodwill or other intangible assets exceeds fair value.

White Mountains’s annual review first assesses whether qualitative factors indicate that the carrying value of goodwill or other intangible assets may be impaired. If White Mountains determines, based on this qualitative review, that it is more likely than not that an impairment may exist, then White Mountains performs a quantitative analysis to compare the fair value of a reporting unit with its carrying value. If the carrying value exceeds the estimated fair value, then an impairment charge is recognized through current period pre-tax income (loss). Both the annual qualitative assessment of potential impairment as well as the quantitative comparison of carrying value to estimated fair value involve management judgment, the use of discounted cash flow models, market comparisons and other valuation techniques and assumptions, including customer retention rates and revenue growth rates, that are inherently subjective.

As of December 31, 2023, White Mountains had total goodwill and other intangible assets of $371 million, of which $293 million related to the acquisition of Ark. During 2023 and 2022, White Mountains performed its periodic reviews for potential impairment and did not recognize any impairments of goodwill and other intangible assets.

See Item 1A. Risk Factors, “If we are required to write down goodwill and other intangible assets, it could materially adversely affect our results of operations and financial condition.”on page 27.