White Mountains Insurance Group, Ltd. (WTM) Earnings Call Transcript & Summary

Good morning, everyone, and welcome. I'm Morgan Davis, your Chairman of the Board at White Mountains. I would like to introduce my other directors to you. We have Pete Carlson. Pete joined the Board in February 2019. He has extensive accounting and auditing experience. He's the Chief Financial Officer at MiMedx, a biopharmaceutical company. He was previously COO of Brighthouse Financial and Chief Accounting Officer at MetLife. Our next director is Mary Choski. She's been a director since 2017. She has extensive executive and board level service and investment management expertise. She's a founding partner of Strategic Investment Group and Founder of Emerging Markets Management. Our next Director is a new director, Margaret Dillon, better known as Margie, and I'm very pleased to welcome her. She was just elected by the shareholders at our Annual General Meeting last week. She has extensive leadership in insurance and financial expertise. She's previously was the Chief Customer Officer for Liberty Mutual and CFO for Liberty's Personal Lines business. Our next director is Phil Gelston. He's been a director since 2018. He has deep legal and management expertise. He was previously partner at Cravath. He focused on M&A, joint ventures or and general corporate. He has extensive institutional knowledge since he represented us for many years. So we're delighted to have Phil also. Our next Director is David Tanner. He's been a director since 2018. He has extensive executive and board level service and private equity financial services expertise. He's a Managing Director at Three Mile Capital, previously Managing Director at Arlon Group, Executive Vice President of Continental Grain and a founding and manager principle of Quadrangle Group. Manning Rountree is last but not least. He's your Chief Executive since 2017. He's been involved with leadership at White Mountain since 2004. He was the Executive Vice President and President of White Mountains Capital, President of White Mountains Advisors, and at this point, I'll hand it over to Manning for the investor presentation. I hope that you'll find it interesting and encourage you to ask any questions that you would like more knowledge about. So Manning the floor is yours.

All right. Thank you, Morgan, and welcome fellow shareholders. Thank you for joining us today. I'm going to continue with the introductions for just a moment and introduce the senior team of White Mountains. Reid Campbell, CFO; Todd Pozefsky, Deputy CFO and Investor Relations. Most of you will have known Todd along the way; Rob Seelig, General Counsel; Jason Lichtenstein, Deputy General Counsel; Dave Staples, Head of Tax, Michaela Hildreth, Chief Accounting Officer; Caroline Fedorowich, General Auditor; Mark Plourde, Head of Investments; Jonathan Cramer, Senior Portfolio Manager; Chris Delehanty, Head of Corporate Development and M&A; and Jen Moyer, Chief Administrative Officer and Corporate Secretary. Let me just note that every member of that team is a White Mountain shareholder. And in most cases, hold shares worth multiples of his or her salary. And I can assure you that every member of this team thinks like an owner every day, and during the pandemic worked tirelessly with a focus on shareholder value. It's really my privilege to work with them every day, and I can't commend them highly enough to you. I'm going to introduce the senior teams of our operating companies as the presentation proceeds. So we'll get to that in due course. Before we get started, let me just say that, just like all of you, we're all zoomed out at White Mountains. I have a voice that makes me want to push the mute button. And Reid has a face that makes him want to push the stop camera button. We find this format, every bit is imperfect as you find this format, and we can't wait to see you guys in-person again next year in New York as is our custom. For today, the approach we're going to take is to move briskly through the formal presentation, get to Q&A as quickly as possible. That means Reid and I are going to present the slides, but our CEOs of the operating businesses will be available in Q&A or follow-up after the meeting or however you'd like to handle it. And the Q&A session will go on for as long as you like, and we'll answer any questions you have. All right. With that in mind, let's get started. Just to recap on performance. Our key metric, as I'm sure you know, is growth in adjusted book value per share or ABVPS. We fundamentally believe if we grow that over time, the share price will follow. In 2020, adjusted book value per share was up 24%. That was our strongest per share result in a decade. And something we're proud of. On the other hand, the share price traded off a bit in 2020. Sure enough, and somewhat predictably in the first quarter of this year, those trends have reversed, and the metrics have converged again with the share price up nicely and ABVPS down a bit in first quarter. This slide puts those returns into context. Book value return was quite strong relative to the insurance sector composite. And you can see it's a weaker share price performance. But relative to financial indices, it's not out of line. So there was an eventful year in 2020, and it was really bookended by 2 significant transactions, both of which happened in October. First, on October 1, we signed and announced our scale-up transaction with Ark. And this transaction deploys at least $650 million for White Mountains. Puts us back in the P&C underwriting business, which is our historic bread and butter. It does that during a hardening market in most lines of business. And the deal partners us with a top-tier management team with a proven track record and clear alignment around our core operating principles. So what's not to like. We'll talk a bit more about Ark later on in the presentation. The second deal happened right around Halloween, and that was the successful IPO of MediaAlpha. And then subsequently, in March of this year, we did a secondary transaction in MediaAlpha stock. Over the summer, the public markets had really demonstrated a strong bid for 2 things: first, technology companies with a growth story; and second, businesses that have proven themselves to be COVID resilient. And MediaAlpha had both of those elements covered in spades. So we had a long conversation with our founders and the management team and decided to hit the public bid and take the company public. The IPO is a remarkable milestone for MediaAlpha and the returns to White Mountains on this investment, which you see on the slide speak for themselves. It's easily one of the best investments in our history. All I can say is, thank you to Steve and Eugene and Ambrose and Tigran and the entire team at MediaAlpha. Now one of the implications of the 2020 activity, in particular, the Ark transaction is that, at least for a moment in time, it completes the capital agenda that we set out after the sale of OneBeacon in May of 2017, 4 years ago. And I'll just give you the tale of the tape on that activity. We deployed $2 billion into new businesses, and we returned $1.4 billion to shareholders. All in the form of share repurchases. Those repurchases retired 1.5 million shares outstanding, more than 1/3 of the float at an average price of $8.72, which is about 70% of current book value per share. All right. Slide 8. This will give you a visual on the distribution and deployment activity that I just described. And we take some satisfaction and a job well done. It's been busy 4 years. But we also recognize that the situation is not static. It's never static. And it will evolve again as it always does, and you can see this. You can see UDC declining from $3 billion or more in 2017 to modest levels today, but you can also see with the completion of the secondary offering at MediaAlpha in the first quarter UDC is back up above $300 million. And I expect that number is going to move above $500 million this year and higher again in 2022. And the implication is that there's really just no breather here. Our emphasis on intelligent deployment and distribution of capital is unchanged, and our search for good deployment opportunities is unflagged. All right. Moving into our operating businesses. This slide gives you a visual of how our book value per share is allocated across the various operating businesses. You can see now that we've got a handful of good, sizable businesses, representing the bulk of the capital. That's a relatively new phenomenon. In years past, the UDC bucket would have dominated this page. NSM, Kudu and Ark are all new to us over the past 3 years. This gives you a bit more detail. I'm not going to drag you through it. I do want to note in the Ark line the 2 numbers that are slashed in the right-hand columns. There's $200 million of capital that may or may not be called by Ark. And this represents that delta, whether it's called or not. I'll talk about that a bit more in a moment. I do think there's some themes that emerge from this slide. One, all of our operating businesses now are in the insurance or related financial services sectors. There are no exceptions to that. Two, we tend to prefer control positions. You could see that in 5 of these 7 businesses we control, and until fairly recently, we also controlled MediaAlpha. So Elementum is the one exception to that. But otherwise, these are control positions for White Mountains in sizable insurance and related businesses. Third, the management teams of our operating companies are significant owners in their businesses, and there are no exceptions to that. And we view that as relatively fundamental to what we're trying to do here. All right, moving to BAM, Build America Mutual and HG Re. Let me first introduce Sean McCarthy, CEO and Co-Founder of Build America Mutual. Welcome, Sean. BAM, just as a reminder, is a financial guarantor of essential public purpose municipal bonds. This means bonds that are issued by state and local governments to finance things like the construction of new utilities or new school districts. BAM is a primary insurer, and it faces the market, and it's a mutual company that's owned by its member municipalities, the same municipalities that use its insurance. And HG Re is a single purpose first loss reinsurance company. It's a private stock company, it's owned by White Mountains. White mountains provided BAM's formation capital through HG Re, including $500 million of surplus notes. So it's a complicated structure, but when you boil it down, our economics come from 2 sources: interest on the surplus notes and reinsurance profits at HG Re. BAM had a record year in 2020. The volatility in the credit markets over the spring and the summer had 2 positive impacts on BAM's businesses. First, risk perception increased and insured penetration for municipal bonds jumped to levels we haven't seen since 2008 before the Great Recession. And so far, those higher levels of insured penetration have held up even as markets have calmed down. Second, credit spreads widened. And all things being equal, this translates into higher premiums and pricing for BAM. Of course, all things are not equal. And during the course of 2020, BAM focused on guaranteeing higher-rated credits. So as a result, absolute pricing, which is not credit weighted, moved down a little bit, but risk-adjusted pricing moved up substantially, and that's a good outcome. In 2020, BAM made $30 million of cash payments of surplus note P&I. That was up 36% year-over-year and marks the fourth consecutive year of increasing payments. First quarter results were also strong, best first quarter on record and driven again by insured penetration in the primary market. I want to remark that the current economic and political environment is positive for BAM's business almost across the board. Higher interest rates, wider credit spreads, credit market volatility, the promise of infrastructure spending, all of these factors are net-net positives. The one caveat is the concern that lingering financial stress from the COVID episode could create stress in BAM's existing portfolio. And in that regard, it's important to understand that municipal finance is a lagging indicator. Most municipalities came into 2020 in good shape. Most debt issuances have built in reserves that provide some downside cushion. And current conditions look good to improving, but it's not out of the question that we could get stress in the portfolio. BAM has been extremely proactive in surveilling its portfolio and with working with municipalities where issues could conceivably emerge. There have been no miss payments in the portfolio to date, there are no credits on the watch list. All right. This slide gives you some basic facts on the market environment. I would note the significant increase in insured penetration, especially in BAM's target market, which tends to be for smaller issuances in the A range. Also note the wider credit spreads here. We've given you as an indicator, the spread between AA and A, which is a pretty good proxy for a typical credit enhancement provided by a BAM route. This slide provides some financial highlights. And there are a few things I want to note here. First of all, you see the big jump in par insured in 2020, again, driven primarily by insured penetration in the primary markets. You can see the S&P RAP figure here, that's risk-adjusted pricing, increasing in 2020 and again in 2021, even as the absolute pricing levels were down a bit. This is a function of credit quality in new underwriting. You can see a substantial contribution from secondary market activity. We often get asked what is that. Its secondary market activity is providing insurance on uninsured bonds that are already issued and held by institutional investors in the marketplace. It's a huge market. It's many multiples of the size of the primary issuance market and institutional investors might seek insurance for any number of reasons, including just risk management needs in their own portfolios. These secondary market transactions tend to generate better pricing for BAM, while still delivering significant benefits for their investors. BAM intends to grow this business substantially, and the prospects are really only constrained by the number and quality of the ideas that BAM can generate. You can also see on this slide, strong growth in claims paying resources, both organically and inorganically. We've crossed the $1 billion threshold for CPR, which is a meaningful number. In 2019 and again in 2021, BAM executed what we call Fidus Re transactions. Those raised capital from third-party investors in the form of collateralized excess of loss in bonds. These transactions provide a lot of room for BAM to continue to grow. Finally, I would note the continued growth in HG Global's UPR, the bottom line on the page. This figure represents the embedded reinsurance profit in the existing portfolio. And assuming no credit losses, and that's a big assumption, but assuming no credit losses, this will turn into profit over time as those bonds mature. All right. Let's turn now to our newest operating business, Ark. Please allow me to introduce Nick Bonnar, Chief Underwriting Officer and Co-Founder of Ark. Welcome, Nick. Unfortunately, Ian Beaton, who's the CEO and the Co-founder of Ark was unable to join today, but I look forward to introducing Ian to you in person this time next year. Ark is a property and casual underwriting business. Ian and Nick founded the business with PE backing in 2017 and then did a management buyout a few years later. Their willingness to confer a control stake to White Mountains in the transaction we struck last year, speaks volumes, I think, about their view of the market opportunity in front of us. Ark's roots are at Lloyd's, and it remains Lloyd-centric. It has consistently produced top quartile underwriting results with high volatility and high profitability and low volatility. Ark also has a Bermuda platform, and we expect that will grow in importance over time. Let me talk a little bit about the transaction. 2020 saw the first broad-based hard market in P&C insurance in a decade. There were many pre-existing conditions to that. Soft prices for many years, heavy cat years in '17 and '18 and a low interest rate environment. And then the tipping point, oddly enough, turned out to be what we call the COVID cat, which looks to be about a $50 billion loss event for the industry. And that ultimately catalyzed a turn in rates in most lines. We had known Ian for a number of years, and we thought very highly of him. His and Nick's approach to the business is 100% foursquare with white mountains operating principles. As Phil Gelston has observed listening to Ian and Nick, it's like listening to Jack Burns but with an English accent. And that's a complement, Nick. At least as far as the underwriting goes. Not quite so sure about the accents yet. Anyway, Ian and Nick saw the same turn in the market that we saw. So we rekindled our conversations, and we moved pretty quickly from there. In fact, this was a pretty unusual transaction to work on. We submitted our first letter of intent on August 10. We signed and announced the deal on October 1, and we closed that deal on January 1. And during that time, because of the COVID restrictions, neither in the principles nor the lawyers ever met in-person. And I think it's just a remarkable achievement. It's a testimony to hard work but also clarity of purpose and a shared vision and intelligent execution all the way around. So in the transaction, White Mountains acquired a controlling stake in Ark. We cashed out some shares that were held by the founders, but Ian and Nick rolled over the vast majority of their shareholdings, and they are very well aligned with us going forward. On a post-money basis, our blended purchase price multiple was about 1.3x book value. So it's a bit more than the 1.1 or so that you would pay for a pure start-up. But it's quite a bit less than you would pay in a takeout transaction of a high performing, scaled underwriting business, which feels to us like a pretty good and fair entry point. Our capital commitment at closing was roughly $650 million. Ark also has the option to call another $200 million of equity capital from White Mountains during the course of 2021. And this structure was intentional. And the reason we did it this way was in order to leg into Ark's growth plan and its projected higher capital commitments over time. And in order to provide some optionality about how market conditions would play out in 2021. At this point, the business conditions are such that we expect Ark to call from our capital. But we expect to fulfill most, if not all, of that call via third-party hybrid debt capital as opposed to additional White Mountains equity capital. So we do think more capital will be going in the business. We don't think much of that's going to come from White Mountains, and all of this should be sorted out over the course of the summer. The goal at Ark is to triple premiums over the next 3 to 4 years, while maintaining underwriting discipline and producing 15% to 20% ROEs. This means taking premiums from $500 million or $600 million at the close of last year to north of $1.5 billion. And I would characterize the plan as 2/3 scale-up, 1/3 start-up. And what do I mean by that? About 2/3 of the growth in the plan comes from doing more of the same. First, by aligning the existing capacity at Lloyd's in order to capture 100% of the existing business, and that's been done. And then writing more business in the property and specialty lines that Ark knows intimately well, in essence, just growing into the hard market. The final 1/3 of the growth has more of a start-up element to it, and it will come from new underwriting teams and new lines of business. Now we always point out that at White Mountains, we don't ever plan more than 1 year at a time, and that's still true. So you've got to take a 3- or 4-year plan with -- from us in particular, with a grain of salt. Insurance market conditions are cyclical, they're unpredictable. I would observe that the current hard market was not driven by aggregate capital deficiency or industry distress, but really just by a collective refocusing on underwriting profitability by the industry, which raises the question, how long will that focus be sustained? And I'd also note that there have been a number of entrants in the class of 2020, they total up to about $10 billion or $15 billion of fresh capital on a capital base in our industry of $500 billion to $600 billion. And that raises the question, how big of an impact will new entrants have on marginal pricing dynamics. And the truth is that the intensity and the duration of the hard market are unknowns. And I feel quite confident in Ark's growth trajectory for 2021 and into 2022. But beyond that involves an element of speculation. If the full business plan or even more than the full business plan comes to pass, that would be wonderful, and that's what we're shooting for. If it doesn't, and the cycle turns again, we and our partners will capital manage around a new reality, as we've done many times in the past, again, with a focus on core operating principles and underwriting discipline. Ark is off to a good start. First of all, a good finish to 2020, producing a 98% combined ratio, which was a strong relative result at Lloyd's again. Second, excellent execution on the forward plan. Ark achieved a flat A rating from best, which was the highest rating in the class of 2020. And we had all of the underwriting platforms up and running as expected for Jan 1 renewals. And that might sound simple, but let me assure you that behind the scenes, it was a triple lindy on a tight timeline. Our first quarter writings were more or less in line with plan. Premiums were up more than 2x year-over-year and blended pricing on renewals was up more than 10%. Pricing was at the low end of the plan for the pure property lines, but quite a bit above plan for specialty lines. When you roll it all up, it would be roughly on plan. The first quarter combined ratio was above target, driven by the winter storm, eerie losses, but that's the nature of this business and not something that concerns us. I want to make one quick note here on GAAP accounting, which I'm sure most of you know, and that is to remember that Ark's earned premium and GAAP earnings results will lag. It's gross -- it's written premium numbers as it's moving through this growth phase. All right. Turning to NSM. Please allow me to introduce Geof McKernan, CEO and Founder of NSM. Billy McKernan, President; Marc Castellucci, Chief Operating Officer; and Jonathan Costello, Chief Financial Officer. Welcome to all the guys from Philly. All right. Just a reminder on what NSM is. It's a full-service specialty MGU. MGU stands for Managing General Underwriter. We often get asked, what does that mean? It means that NSM focuses on specialized or niche lines of insurance such as collector car or coastal condominium or social services. Niches with unique underwriting characteristics. And that it also means that for any one of its lines of business, NSM handles all activities from customer acquisition all the way through to claims servicing, with one exception, which is that NSM does not retain underwriting risk, which instead it places with its highly rated carrier partners. NSM's business model is commission based, primarily fixed commission. And it's important to remember, NSM is a platform business. It has a long track record of successful acquisitions, and that's part of the nature of our involvement with NSM. Since acquiring a controlling stake in 2018, NSM has closed 5 sizable transactions, which have deployed roughly $250 million of incremental capital. And the businesses include Fresh, which is a U.K. nonstandard personal lines business. KBK in specialty transportation. Embrace in pet insurance. Kingsbridge an U.K. independent contractor liability and collector car renewal rights. If you take this as a whole, this portfolio of acquisitions has added considerable value to the NSM enterprise, and we're very happy to play a part in that. The specialty roll up strategy that we have been pursuing for NSM is intact, and it very much remains to playbook. NSM had really good results in 2020. The controlled premiums crossed the $1 billion threshold. Organic premium growth was 12% year-over-year. EBITDA was $62 million. Its organic growth was 5%. And NSM has now more than doubled EBITDA since we acquired an interest in 2018. So very strong progress over the last 3 years. There were some puts and takes underneath the 2020 results. The U.S. businesses really blew the doors off and had record results in basically every line. On the other hand, the U.K. business had a tough year, partly driven by underperformance in one line of business. That's the Fresh motor business and partly driven by the impact of the COVID shutdown on other U.K. lines of business, which we see is temporary. We made the decision to exit the Fresh motor business in April of 2021. This is the one NSM platform investment that has proven to be a miss. And that miss is on me. I overestimated how niche the business really was, and I underestimated a number of competitive operational and management challenges. And over time, Fresh lost market share to more traditional competitors, face cutbacks and underwriting capacity and then ultimately saw its target market shrink a lot with the COVID cutback in miles driven. So Geof and Marc and team took a hard decision to exit and turn the page, and I applaud their decisiveness and the speed of execution. If you exclude Fresh, the rest of the U.K. business is in good shape. We have leading businesses in the U.K. market in collector car, and camping And Caravan, and an independent contractor liability. These businesses are all rebounding nicely as the U.K. opens and returns to work. And meanwhile, the U.S. businesses are performing very well. We expect continued growth from the U.S. business as a whole in 2021, with particularly strong growth in collector car, pet and social services, offset by some shrink in real estate. Here, you can just see a visual on the growth of NSM since second quarter of 2018 when we closed the acquisition. You can see controlled premiums up almost 2x and EBITDA up more than 2x. It's been achieved through a mix of organic growth and intelligent roll up M&A activity. And you now also see a nice diversified book of business with a handful of sizable lines driving the results. We're really pleased with this progress, and we look forward to continued momentum. All right. Let's turn now to Kudu. Please allow me to introduce Rob Jakacki, CEO; and Charlie Ruffel, Managing Partner. Welcome, guys. As a reminder, Kudu provides capital solutions and advisory services to boutique asset and wealth managers. It targets the so-called middle market, firms with AUM between, say, $2 billion and $10 billion. The capital is used for a range of purposes, which you see -- some of which you see listed here. Kudu receives back what we call in our financial statements, a participation contract, which is kind of a mouthful. But it's typically a revenue share interest plus equity participation rights should the portfolio company have a subsequent event. Kudu has grown nicely since we first invested in 2018. It now has a portfolio of 13 investee companies that span a range of investment formats, strategies and geographies. It's a balanced portfolio with some emphasis on private capital and wealth management. We would expect the portfolio to have a beta of considerably less than 1 relative to, say, a broad market index like the S&P 500. And indeed, that's how it played out in 2020, where we saw far less volatility in Kudu's portfolio than in the equity market as a whole. White Mountains now has $350 million of equity capital allocated to Kudu. And in March, Kudu closed on a $300 million rated debt facility was placed with mass mutual. And I think this placement is an important milestone. It demonstrates how far Kudu's come and also provides plenty of dry powder going forward. Slide 23. Good results in -- for Kudu in 2020. Deployed $120 million in 5 deals. The new deals were broadly diversified. The fair value of the existing portfolio grew in 2020. The cash yield is running at target levels at 10%. And now you could really see the operating leverage in the business kicking in. The business is producing strong EBITDA and cash flow stream. EBITDA is now approaching $30 million, which implies a running return on equity in the high single digits and growing. Here you see a visual of the build-out of the business since the first quarter of '19 and you can just sort of see steady growth across all dimensions. Kudu's market is surprisingly large. It's amazing just how many boutique asset managers that are out there who, at some point in their life cycle could use a capital solution like the ones that Kudu provides. I will say that we've seen more competition into the marketplace over the last 3 years and that valuations are moving up on in Kudu's target market, which is a classic good news, bad news situation. The good news is, there's no doubt that the private market value of Kudu's existing portfolio is increasing. But on the other hand, there's more pricing pressure on new deals, and there's no doubt about that. Kudu was an early entrant and has carved out a pretty strong position for itself. It does have some differentiating characteristics. It's capital by virtue of its relationship with White Mountains is indefinite. And that is a big differentiator versus competitors who are offering time dated capital out of a fund vehicle. And Kudu's focus on the middle market is also a differentiator, and it has developed a strong reputation in that market as a good partner. It continues to have a robust deal pipeline, and I'm confident that there's plenty of room for us to continue to grow this business, while maintaining discipline around pricing and terms. Okay. Let's turn now to MediaAlpha. Let me introduce, please, Steve Yi, CEO and Co-Founder; and Eugene Nonko, CEO and Co-Founder. Welcome to the guys from the West Coast and what a year for MediaAlpha. Thank you, Steve and Eugene. So as a reminder, MediaAlpha is a customer acquisition technology platform. It operates in multiple verticals, but has particular expertise in insurance, P&C, health and life. In simple terms, MediaAlpha enables an insurance carrier to acquire potential customer traffic in the form of clicks and calls and leads efficiently and transparently. In general, MediaAlpha's business model is simply to collect a percentage of all the transaction volume it facilitates. We invested in MediaAlpha in 2014 when the team were working out of a garage in Santa Monica, literally. We've come to know MediaAlpha through experiences at Esurance, who was MediaAlpha's first and really cornerstone career partner. In those early days of Esurance, it was critically important for us to optimize marketing spend, especially online spend because of the intensity of competition for customer acquisition in the personal auto market. Esurance came to believe that MediaAlpha had the best mousetrap out there that helped it do that. And their commercial relationship blossomed. A few years later, the MediaAlpha team went to market to sell a stake in their business and to bring in a partner and Morgan and Davis and I jumped at it and the rest is history. It's been a great investment and a lot of fun to watch. Even sometimes to help or even just not to screw it up as the team built something substantial and impactful. MediaAlpha hit a big milestone in 2020, executing a successful IPO on the New York Stock Exchange. We sold shares, and we sold again in March in secondary. But we continue to own almost 17 million shares, which, as of yesterday, had a value of about $700 million. So let's put the stock market aside for a second on this slide and focus on the fundamentals and the underlying business performance. On this basis, MediaAlpha had an outstanding year in 2020, posting record results on against all key financial metrics, transaction volume revenue and EBITDA. And the results were particularly strong in P&C insurance and health insurance. Why? Well, first, in personal auto, the dynamics were interesting. The COVID lockdown caused a dramatic drop in miles driven, which created found underwriting profits for carriers. Some of those found profits will return to customers in the form of rebates or lower prices, some of the found profits were plowed back into customer acquisition, driving volumes and prices for customer acquisition higher. And where they were plowed back into customer acquisition that was mostly done in digital channels since everybody is locked up at home. Separately, across all the verticals, not just P&C but everywhere, the COVID lockdown accelerated the ongoing shift to digital channels. People stuck at home, shopping online like never before for all kinds of goods and services, and that includes insurance. And I would emphasize that this trend still has a long way to go, especially in the insurance sector. We expect the shift to digital channels for insurance advertising to continue COVID or no COVID and MediaAlpha is perfectly positioned to benefit from that trend. Finally, here's a visual on the incredible growth at MediaAlpha since our investment in early 2014. In particular, note the strong growth in 2020. This has been an exciting journey, and we look forward to what comes next. As I often remind Steve and Eugene, we aren't going anywhere just yet. And on the contrary, we still have 700 million reasons to pay close attention to what they're up to. Let's turn now to PassportCard/DavidShield. Let me introduce Alon KetZef, who's joining us from Tel Aviv. Welcome, Alon. PassportCard is an MGA for travel and expat medical insurance. We see those 2 coverages on the continuum. And we deliver them off of the same operational and technological chassis. PassportCard/DavidShield delivered services more or less anywhere in the world. And it provides coverage and settles claims in real-time with no paper via a debit card solution. And this is a better mousetrap. It drives very high levels of customer satisfaction, premium pricing levels and high reactivation rates. Travelers and expats who use this product once are very likely to use it again, which is somewhat unusual, especially in travel insurance, which is typically a one-off purchase. The business was launched in Israel, and it remains Israeli-centric, which means that most of our customers emanate from Israel. Our goal is to add new customer markets around the world, and we plan to do this selectively. We target markets that are large, that are accessible and that have customers that value the specific characteristics of the PassportCard/DavidShield solution, chiefly quality efficient international medical insurance coverage. PassportCard/DavidShield does not retain underwriting risk, which exceeds to its global reinsurance partner, Allianz. As you might imagine, PassportCard/DavidShield is the White Mountains business most directly impacted by the COVID pandemic and the shutdown in leisure travel globally took travel insurance volumes essentially to 0 for most of 2020. And you can see that in the numbers here. Travel premiums dropped from $88 million in 2019 to $12 million in 2020. And that was the main event for the year. The silver lining was that Expat Medical premiums grew from $42 million to $49 million as the pandemic raised risk perception and drove higher insurance penetration rates among the expat population. The Expat business, DavidShield has always been a steady eddy with a leading position in the Israeli market. But 2020 brought a new and welcome leg of growth business, which is good to see. When you put it together, total premiums dropped by about half year-over-year from about $150 million in 2019 to about $75 million in 2020. However, the core business remained modestly profitable, which is, thanks to an incredible job by Alon and team on the ground. They were really the canary in the coal mine for me on COVID and what it could potentially mean. They were early to see the emergence to anticipate what it could mean on the -- for the travel insurance business. They acted swiftly and aggressively, cutting expenses and triaging all over the place. While also managing to retain 100% of their key senior execs and carrying on with business as usual. It's a remarkable management job on the ground. In the first quarter of 2020, we took a decision to inject $15 million of equity capital, just to provide cushion and flexibility for what we thought would be an unpredictable year. As it turned out, Alon and the team really didn't need to draw on that funding to support basic operations, and they were able to manage through without it. So the capital is there in the business to support growth initiatives going forward, which is good to see. We have reprioritized those growth initiatives coming out of the pandemic. On the one hand, we've hibernated the travel insurance business in Australia. And that decision is really all down to the uncertainty of timing of full reopening for international travel in and out of Australia. We believe we have the makings of a successful business in Australia, and we'd like to have another go. But for now, we're still on hold. On the other hand, we continue to press forward with building out an Expat medical business on the ground in Germany. The Tel Aviv opened -- airport reopened for good, we hope, in March, and we're seeing strong volumes in the travel business since then. We expect continuing and accelerating recovery in 2021. And more broadly, we expect -- global travel to recover to pre pandemic levels over the next couple of years. As that happens, we think we're going to see deeper insurance penetration rates for travel insurance. And we expect higher premium rates for our coverages. We think we're pretty well positioned to benefit from the recovery. All right. Last but not least, let's turn to Elementum. Please allow me to introduce Tony Rettino, Senior Portfolio Manager and founding partner; John DeCaro, Senior Portfolio Manager and Founding Partner; and Mike France, Chief Financial Officer. Welcome to the guys from Chicago. Elementum is an asset management business. It manages assets for institutional investors in separate account in fund formats. It invests in insurance league securities, which include cat bonds, collateralized reinsurance and, in some cases, primary insurance. It's a typical fee-based business and it earns management fees and performance fees. White Mountains bought 30% stake in the business, just about 2 years ago now in May of 2019. Separately, we've invested $50 million from our parent company investment portfolio in 4 of the Elementum funds. We think those investments have an attractive risk return profile and are a nice diversifier. We think of them as a noncorrelated high-yield bond substitute in the fixed income portfolio. Elementum had okay results in 2020. The key metrics for the business are AUM, net revenues and EBITDA. All of these metrics were more or less flat year-over-year. The business is producing a nice distributable stream of cash flow, and we had a 7% yield on our equity in 2020. Our investments in the funds produced a positive return but fell short of expectations, driven by a whole range of factors. 2021 is off to a good start. Conditions are favorable for ILS investing, the best we've seen in decade. And Elementum seems pretty well positioned. We expect measured growth in the business over the course of 2021. And Tony and John can give more color in Q&A, if you would like. I'm going to stop there, and I'll hand over to Reid. To cover financial position and investment portfolio.

Okay. Thank you, Manning. So on the next slide, our current financial position. As we sit today, we have a total capital base of $4.5 billion. The vast majority of this amount or $3.8 billion, represents common shareholders' equity, with the balance consisting of noncontrolling interests and debt at our operating subsidiaries. We have just over $300 million of undeployed capital. This is down from a peak of $3.1 billion in 2017 and reflects the impact of $1.4 billion of distributions over the past 4 years as well as $2 billion of new capital deployments as previously discussed by Manning. Again, if Ark does not call the full $200 million of our remaining commitment, undeployed capital would increase to upwards of $500 million. We currently have no debt at the White Mountains holding company level. Consistent with past practices, we do employ prudent amounts of financial leverage at the operating subsidiary level. This now totals $430 million or about 10% of total capital and principally reflects financial leverage at NSM, Kudu and Ark. We will continue to utilize financial leverage in conjunction with new capital deployments when appropriate, with the amounts dictated by the cash flow and credit profiles of the underlying businesses we invest in. Okay. Investments. White Mountains has maintained a consistent approach to investments for many years. Our objective is to maximize long-term total returns after tax while taking prudent levels of risk and maintaining a diversified portfolio. We accomplished this in practice by managing 2 distinct classes of assets, the first is policyholder funds, which we generally invest in high-quality fixed income instruments. And the next is shareholder funds where we generally take a more aggressive posture, typically including a significant component of equities. Over the long term, relative to our peers, our fixed income duration has generally been shorter, while our exposure to equities has generally been higher as we basically prefer to take our investment risk in the equity portfolio. Driven by the sales of Sirius Group and OneBeacon, since 2017, the vast majority of our investments represented shareholder funds with minimal policyholder funds in the portfolio. However, with the Ark transaction and with continued growth at HG Re, we now again have significant policyholder funds. It's important to note that we do not make investment decisions in a vacuum. Our overall capital position and broader corporate needs as well as our overall level of comfort with the risk profile of our businesses and balance sheet are all factored into constructing and managing our portfolio. And you can see this in practice with our current portfolio as we have historically low equity exposure due to limited undeployed capital of the parent and limited capacity for equities at Ark and HG Re. In order to understand our current positioning, it's helpful to first highlight that we now have 3 distinct and separate mandates within the consolidated portfolio, each with its own objectives. The first mandate is the parent portfolio. The objective here is to safeguard our known capital commitments and invest the balance, including undeployed capital for total return. And here, we are currently invested in fixed income with a small amount of long-term strategic investments and alternative assets. The second mandate is the HG Re portfolio. The objective here is to preserve claims paying resources and liquidity in support of our reinsurance arrangements with BAM. And here, we are strictly invested in fixed income and cannot invest in equities. The third mandate is the Ark portfolio. The objective here is to preserve capital and provide sufficient liquidity to meet insurance obligations while managing for total return. And here, we are invested primarily in fixed income with a modest amount of equities. On the next slide is a snapshot of our positioning as of March 31. This is on a management basis, which excludes BAM, Kudu's participation contracts and unconsolidated entities such as MediaAlpha. And here, you can see how the objectives for each mandate are impacting our current positioning. In the parent portfolio, given our limited undeployed capital, we have no equities outside of our strategic investments. As we continue to build our undeployed capital position, we will consider adding equities to the parent portfolio depending on market conditions at the time. In the HG Re portfolio, we have only high grade, short to medium duration fixed income instruments. In the Ark portfolio, we have a large high-grade, short duration fixed income portfolio. We are still in the early stages of putting the new capital at Ark to work and expect duration to edge up from here as we complete this process. There are only a modest amount of equities in the Ark portfolio as Ark prefers to use the bulk of its risk budget and its insurance business. When adding it all up on a consolidated basis, we have $2.2 billion of overall high grade, short duration, fixed income instruments, generally consistent with our historical positioning and just $254 million of equities at the parent Ark. When looking at equity exposure, even when including Kudu's participation contracts, which have mark-to-market risk, but a lower beta than the broader equity markets and our MediaAlpha shares, which also obviously have mark-to-market risk. Our consolidated equity exposure is just 23% or 32% of adjusted shareholders' equity. Again, on the low side of our historical positioning, but appropriate for current circumstances. Performance. These are our management basis returns for the past 2-plus years. 2019 was a strong year on both an absolute and relative basis. And was driven primarily by our healthy allocation to equities after the market decline in the fourth quarter of 2018. 2020 was an okay year on an absolute basis, but a disappointing year on a relative basis, part of this was driven by active investment decisions, including the decision to maintain our international common stock portfolios, which significantly underperformed the market in the first half of the year. But the bulk of this underperformance was driven by broader corporate needs affecting the portfolio, particularly the need to liquidate the entire common stock portfolio in the second half of the year in preparation for funding the Ark transaction. And this caused us to miss out entirely on the fourth quarter equity market rally. I'd say we're off to a sneaky good start in 2021. Our short duration positioning in the fixed income portfolio muted losses as interest rates spiked during the quarter, and this was particularly the case at Ark, where the team has been very patient in putting the new capital to work. At the same time, our smaller equity portfolio produced a solid absolute and relative return. So I'd say we're generally happy with our recent performance and continue to focus on maximizing long-term risk-adjusted returns as we move forward. So with that, I'll hand it back to Manning.

Okay. Thank you, Reid. What to expect from us? More of the same. We're focused on growing our per share values over a long periods of time. We're not focused on near-term GAAP results. We will continue to adhere to our core operating principles, which are even more in focus with the Ark investment. We will continue to deploy and distribute capital intelligently. There's a pause at the moment, but it won't last long. And above all else, we will think and act like owners. Wise words here from, Benjamin Graham, that applied directly to the mission of White Mountains. We're focused on growing adjusted book value per share with the expectation that over the fullness of time, the share price will [ crack ]. And finally, this is a slide that shows our history of per share value since the IPO in 1985. And 2 things to note. First of all, this is 35 years of evidence between the correlation of adjusted book value per share and market price. They diverge at times. But over the fullness of time, they tend to move together and to converge. I think it's living proof of Ben Graham's famous maxim. Second, note that if you invested in the IPO at $25.75 per share, your multiple of invested capital is approaching 50x, and we are determined to cross that 50x threshold and to take it well beyond. So I'll stop there, and we will open for Q&A.

The first question is from Fred Burtner. Regarding MediaAlpha. What prevents others from emulating your approach and bringing demand and supply partners together you using data science and also being financially successful.

Good question. I think I'll call on Steve Yi to answer that question, please. Steve? Do we have any of the MediaAlpha guys? Anyone who want to take that one? So I think we're having some technical issues with Steve and Eugene. I'm happy to answer it, but I think you'll get a better answer from Steve or Eugene. So why don't we hold that question and circle back to it, Todd?

There is no other answers in the queue.

No other questions in the queue. So I'll take a stab at it. I think the short answer is, nothing. There -- it is possible to stand up platforms to connect buyers and sellers of online traffic. I think MediaAlpha has focused on specific verticals and understood how to do that very well. Understanding the use needs of its customers. And if you think about how we got to introduce to the company, it was through working with Esurance, who tried all of the platforms available and settle on MediaAlpha as the best solution for its needs. It's a large market. It continues to grow. I think MediaAlpha is reasonably deeply integrated, especially on the buy side with the folks who are looking to acquire traffic. But there is no absolute moat around this business in terms of entry or technological innovation, and that's a fact.

Okay. There's another question from Michael Rodarte. What drives the higher return and lower volatility in Ark versus peers? What is their view on rising frequency and severity of global catastrophes and how will they manage across the underwriting cycle?

Good questions. Let's see if we can call on Nick to answer those questions.

Thank you. Thank you for that question. I think answering it in reverse order if I can. And I apologize if I can't get all 3 comments together, but I'll start on the first one in reverse. About managing the underwriting cycle. We are very aligned with our shareholders. And before we have White Mountains on board, we were very aligned with our third-party capital providers. We're as all members of staff, big owners of the business. And that alignment means that we focus on profit and managing our volatility appropriately. So that means that it's not about growing the top line in, particularly in softening markets, but aggressively growing the top line in improving markets where we see that the margin is sufficient in the business. And by way of example in that, in the height of the bottom market during 2017, 2018, we didn't think that we were getting an appropriate level of return. Therefore, we didn't grow our top lines. But we now see that the market rating environment across most sectors is very solid. And therefore, we are growing our top line, and we hope, therefore, our profits. So I think our track record has proven that we can do that, but it's all about alignment of interest and having the feelers out there for where we are in an absolute term in the marketplace. It's not just about the momentum of movement. It's about where we are in absolute terms. I think on the second point about managing volatility, again, because we are significant owners and very aligned with White Mountains and always have been. Volatility is something that's right in the heart of what we do. And that's, therefore, a combination of having what we call a multimetric approach to downside risk. So of course, insurance risk is the biggest component part of that and it's having not one view on downside risk but looking at a broad range of different potential outcomes and managing our business around that. And that managing the business is, therefore, about the reinsurance you buy, the inwards portfolio, you buy, the amount of debt, the amount of leverage you want to put on as well. And so I think it's, for us, about managing the cycle smartly and then managing our balance sheet smartly as well with that inherent volatility. The first question, I think, was Ark relative to White Mountains or relative to peers? If I believe, if I've got that correctly, I would say, again, since our 14-year track record in the Lloyd's market. We've sort of performed in the top quartile. And we're proud of that performance. We haven't liked some of the years. But again, similar to the White Mountain's approach, it's about a long-term view of things as well that we feel that being in the top quartile is the appropriate place for us to go and be. So I hope that answered those questions.

Okay. The next question is from Thomas Sliney regarding BAM. Could you talk about BAM's actual performance versus your original expectations? Results seem a little so-so.

Right. Sean, do you want to take that question?

Sure. Absolutely. Well, since -- in the last couple of years, our performance has built to a much stronger result. Since we formed the company, though, interest rates went down pretty much over the next 7 years, which tightened credit spreads and prohibited us from maximizing our initial hopes for value. But that, over the last several years, including last year, has really turned around the contribution of secondary market. And the -- really the deeper market penetration with institutional investors has something that's built and is creating stronger results.

I'd add to that, Todd, that the way I would characterize the early years at BAM, we've been in this now for going on 9 years. And the early years were marked by outstanding execution, but incredibly challenging fundamental conditions in the marketplace. So BAM entered the market. Achieved a AA rating and held it, took 50% market share and held it, built a portfolio of business that's had 0 losses since inception. And stuck to exactly what it said it would do from a credit underwriting perspective. So there are many aspects of what BAM did in the early years in terms of execution that were outstanding. On the other hand, the fundamental conditions in the marketplace, especially for pricing were just not there. Interest rate levels dropped, credit spreads got incredibly tight and there was only so much pricing that was achievable. I think BAM has done a nice job of figuring out ways to grow its business that are -- that help it get around some of those constraints. Secondary market is a good example of that. And I think now, as you see a little more credit market volatility, a little wider spread, and so on, you're seeing the benefits of what was accomplished in the early years come to pass with more favorable fundamental conditions. Net-net, do we wish it was a stronger result in 2012, '13, '14? Sure. But we are who we are. And I think performance last year was good, and the future looks pretty good for BAM.

Okay. The next question is also BAM related from Brian Barrett. Could you elaborate further on the point of financial stress and impact on BAM insured bonds, perhaps providing some detail how you think the range of outcomes and possible losses could be?

Yes. Sean, that's one for you.

Sure. So throughout COVID, we have had no defaults of any kind, as Manning had mentioned. We have no credits on the watch list as well. That's primarily due to the fact that we have really a step to our knitting in terms of guaranteeing essential public purpose, state and local government transactions. And so when we look at the portfolio pretty closely, we don't see any risks right now that look like they're going to be a problem. That being said, we work very actively with our members to make sure that their financial positions are in a strong position. What we would call COVID-sensitive transactions, which would have been transactions that would have been affected by utilization of -- or an effect on the revenue stream due to the fact that people weren't in the market. Hotel, occupancy tax, for example, would be an example of that, but have all performed to date? Fairly, well. So we don't see any significant risk of defaults. There might be payment interruptions, which Manning had alluded to. But to this date, we don't anticipate any of those occurring in the portfolio as it is right now.

Okay. The next question is from Fred Burtner on MediaAlpha. Once MediaAlpha becomes deeply integrated with its demand partners, are those partners unlikely to ever leave?

We have Steve and Eugene. It would be great if they could take this. Steve, it's your chance to correct all the falsehoods I've spread about your business today.