WHITE MOUNTAINS INSURANCE GROUP LTD

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 noncontrolling 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 noncontrolling 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 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:

As of December 31, 2023, 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 are entitled to 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, 2023, HG Global had accrued $415 million of dividends payable to holders of its preferred shares, $400 million of which is payable to White Mountains and eliminated in consolidation. As of December 31, 2023, HG Global and its subsidiaries had less than $1 million of net unrestricted cash outside of HG Re.

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 preferred shareholders, of which $116 million was paid to White Mountains.

HG Re is a special purpose insurer subject to regulation and supervision by the BMA. HG Re does not require regulatory approval to pay dividends; however, its dividend capacity is limited to amounts held outside of the Collateral Trusts pursuant to the FLRT with BAM. As of December 31, 2023, HG Re had $3 million of net unrestricted cash. As of December 31, 2023, HG Re had $106 million of accrued interest on the BAM Surplus Notes held outside the Collateral Trusts. As of December 31, 2023, HG Re had $784 million of statutory capital and surplus and $949 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 directly 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 Regulation 114 Trust balance as of December 31, 2023 and 2022 was $342 million and $289 million.

The Supplemental Trust Target Balance is $603 million, less the amount of cash and securities in the Regulation 114 Trust in excess of its target balance. 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, 2023 and 2022 was $607 million and $568 million, which included $247 million and $214 million of cash, investments and accrued investment income, $322 million and $340 million of BAM Surplus Notes and $38 million and $14 million of interest receivable on the BAM Surplus Notes.

As of December 31, 2023, the Collateral Trusts held assets of $949 million, which included $589 million of cash, investments and accrued investment income, $322 million of BAM Surplus Notes and $38 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. Beginning in 2025, the rate will be fixed through maturity at the higher of the 2024 variable rate or 8.0%. Accordingly, beginning in 2024 and through maturity, the interest rate on the BAM Surplus Notes will be 8.2%. 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 2023, BAM made a $27 million cash payment of principal and interest on the BAM Surplus Notes held by HG Global. Of this payment, $18 million was a repayment of principal held in the Supplemental Trust, $2 million was a payment of accrued interest held in the Supplemental Trust and $7 million was a payment of accrued interest held outside the Supplemental Trust.

See Note 10 — “Municipal Bond Guarantee Insurance.”

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 pay a dividend of up to $272 million during 2024, which is equal to 25% of its December 31, 2023 statutory capital and surplus of $1,088 million, subject to meeting all appropriate liquidity and solvency requirements and the filing of its December 31, 2023 statutory financial statements. During 2023, GAIL paid a $15 million dividend to its immediate parent.

During 2023, Ark paid $24 million of dividends to shareholders, $17 million of which was paid to White Mountains. As of December 31, 2023, Ark and its intermediate holding companies had $1 million of net unrestricted cash, short-term investments and fixed maturity investments outside of its regulated and unregulated insurance and reinsurance operating subsidiaries.

WM Outrigger Re is a special purpose insurer subject to regulation and supervision by the BMA. WM Outrigger Re does not require regulatory approval to pay dividends; however, its dividend capacity is limited to amounts held outside of the collateral trust pursuant to the reinsurance agreement with GAIL. As of December 31, 2023, WM Outrigger Re had less than $1 million of net unrestricted cash and investments held outside the collateral trust. As of December 31, 2023, WM Outrigger Re had $273 million of statutory capital and surplus and $265 million of assets held in the collateral trusts pursuant to the reinsurance agreement with GAIL.

Kudu

During 2023, Kudu distributed $83 million to unitholders, $78 million of which was paid to White Mountains. As of December 31, 2023, Kudu had $16 million of net unrestricted cash and short-term investments.

Other Operations

During 2023, White Mountains paid a $3 million common share dividend.

As of December 31, 2023, the Company and its intermediate holding companies had $673 million of net unrestricted cash, short-term investments and fixed maturity investments, $255 million of MediaAlpha common stock, $138 million of common equity securities and $426 million of private equity and hedge funds, ILS funds and unconsolidated entities.

Financing

The following table presents White Mountains’s capital structure as of December 31, 2023 and 2022:

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

(2)Net of unamortized issuance costs.

(3) 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, 2023, White Mountains was in compliance, in all material respects, with all of the covenants under its debt instruments.

Contractual Obligations and Commitments

The following table presents White Mountains’s material contractual obligations and commitments as of December 31, 2023:

(1) Represents expected future cash outflows resulting from loss and LAE payments. The amounts presented are gross of reinsurance recoverables on unpaid losses of $340.8 as of December 31, 2023.

(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 $2.1, $3.0 and $0.5 that are due in less than one year, two to three years and four to five years, which are attributed to noncontrolling interests. Includes amounts related to Ark’s new operating lease, which will not commence until 2024, of $4.2 and $17.5 that are due in four to five years and after five years.

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, 2023.

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 $61 million as of December 31, 2023, 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, 2023, White Mountains may repurchase an additional 301,014 shares under these Board authorizations. In addition, from time to time White Mountains has also repurchased its common shares through self-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, 2023 GAAP book value per share, adjusted book value per share and market value per share.

Cash Flows

Detailed information concerning White Mountains’s cash flows from continuing operations during 2023, 2022 and 2021 follows:

Cash flows from operations for the years ended 2023, 2022 and 2021

Net cash flows provided from (used for) operations was $404 million, $326 million and $(4) million for the years ended December 31, 2023, 2022 and 2021. Cash provided from (used for) operations was higher in 2023 compared to 2022, driven primarily by the cash inflow from Ark/WM Outrigger Re’s operations. 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. 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, 2023, the Company and its intermediate holding companies had $673 million of net unrestricted cash, short-term investments and fixed maturity investments, $255 million of MediaAlpha common stock, $138 million of common equity securities and $426 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, 2023

During 2023, the Company declared and paid a $3 million cash dividend to its common shareholders.

During 2023, White Mountains repurchased and retired 24,165 of its common shares

for $33 million. Of the shares White Mountains repurchased in 2023, 4,629 were to satisfy employee income tax withholding pursuant to employee benefit plans.

During 2023, BAM received $73 million in MSC.

During 2023, BAM repaid $18 million of principal and paid $9 million of accrued interest on the BAM Surplus Notes.

During 2023, Kudu borrowed $12 million in term loans under the Kudu Credit Facility.

During 2023, Kudu repaid $17 million in term loans under the Kudu Credit Facility.

On June 28, 2023, White Mountains completed a tender offer to purchase 5.9 million additional shares of MediaAlpha at a purchase price of $10.00 per share for a total cost of $59 million.

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

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.

On May 26, 2022, Kudu raised $115 million of equity capital (the “Kudu Transaction”) from Massachusetts Mutual Life Insurance Company (“Mass Mutual”), White Mountains and Kudu management. 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.

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

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.

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.