Back to GetFilings.com
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____ to _____
Commission file number 1-8993
WHITE MOUNTAINS INSURANCE GROUP, LTD.
(Exact name of Registrant as specified in its charter)
BERMUDA 94-2708455
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
80 SOUTH MAIN STREET, HANOVER, NEW HAMPSHIRE 03755-2053
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (603) 643-1567
Securities registered pursuant to Section 12(b) of the Act:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
Common Stock, par value $1.00 New York Stock Exchange
per share
Securities registered pursuant to section 12(g) of the Act:
None
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes /X/ No
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of voting shares (based on the closing price of
those shares listed on the New York Stock Exchange and the consideration
received for those shares not listed on a national or regional exchange) held by
non-affiliates of the Registrant as of March 24, 2000, was $796,743,057.
As of March 24, 2000, 5,904,534 shares of Common Stock, par value of $1.00
per share, were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Notice of 2000 Annual Meeting of Shareholders and
Proxy Statement dated March 24, 2000 (Part III)
WHITE MOUNTAINS INSURANCE GROUP, LTD.
TABLE OF CONTENTS
PART I
ITEM 1. Business....................................................................................... 1
a. General................................................................................... 1
b. Reinsurance and Insurance Operations...................................................... 1
c. Discontinued Mortgage Banking Operations.................................................. 10
d. Investing Operations...................................................................... 11
e. Regulation................................................................................ 11
f. Employees................................................................................. 11
g. Forward-Looking Statements................................................................ 11
ITEM 2. Properties..................................................................................... 12
ITEM 3. Legal Proceedings.............................................................................. 12
ITEM 4. Submission of Matters to a Vote of Security Holders............................................ 12
PART II
ITEM 5. Market for the Company's Common Equity and Related Stockholder Matters........................ 13
ITEM 6. Selected Financial Data........................................................................ 14
ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.......... 15
ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk..................................... 27
ITEM 8. Financial Statements and Supplementary Data.................................................... 27
ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure........... 28
PART III
ITEM 10. Directors and Executive Officers............................................................... 28
ITEM 11. Executive Compensation......................................................................... 29
ITEM 12. Security Ownership of Certain Beneficial Owners and Management................................. 29
ITEM 13. Certain Relationships and Related Transactions................................................. 29
PART IV
ITEM 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K............................... 29
PART I
ITEM 1. BUSINESS
GENERAL
White Mountains Insurance Group, Ltd. (the "Company") was originally formed
as a Delaware corporation in 1980 and became a Bermuda corporation during 1999.
Within this report, the consolidated organization is referred to as "White
Mountains". White Mountains' principal operations are conducted through its
subsidiaries and affiliates in the businesses of property and casualty
insurance, property and casualty reinsurance and financial guaranty insurance.
The Company's headquarters is located at Crawford House, 23 Church Street,
Hamilton, Bermuda and its principal executive office is located at 80 South Main
Street, Hanover, New Hampshire, 03755-2053.
In June 1999 the Company changed its name from "Fund American Enterprises
Holdings, Inc." to "White Mountains Insurance Group, Inc."
On October 25, 1999, the Company completed a corporate reorganization
whereby it changed its domicile from Delaware to Bermuda (the
"Redomestication"). The Redomestication was primarily undertaken to improve the
Company's ability to compete in international markets by creating a corporate
structure which is more favorable for the formation and growth of
internationally-based insurance and reinsurance operations and which has an
enhanced ability to pursue business combinations with non-United States
entities. In connection with the Redomestication, the Company's name was further
changed to "White Mountains Insurance Group, Ltd." to comply with Bermuda law.
REINSURANCE AND INSURANCE OPERATIONS
REINSURANCE OPERATIONS
FOLKSAMERICA HOLDING COMPANY, INC. ("FOLKSAMERICA")
Folksamerica, through its wholly-owned subsidiary, Folksamerica Reinsurance
Company (a New York-domiciled reinsurance company), is a multi-line
broker-market reinsurer which provides reinsurance to insurers of property and
casualty risks in the United States, Canada, Latin America and the Carribean.
Folksamerica is rated "A" (Excellent) by A.M. Best Company. During 1999, 1998
and 1997, Folksamerica had net written premiums of $201.7 million, $212.6
million and $232.4 million, respectively. At December 31, 1999 and 1998,
Folksamerica had total assets of $1.3 billion and $1.2 billion, respectively,
and shareholder's equity of $249.4 million and $302.0 million, respectively.
In June 1996 White Mountains purchased a 50.0% economic interest in
Folksamerica for $79.9 million from a group of European mutual insurance
companies (the "European Mutuals") who continued to own the remaining 50.0%
interest. White Mountains' initial investment in Folksamerica consisted of
6,920,000 shares of ten-year 6.5% voting preferred stock having a liquidation
preference of $79.4 million ("Folksamerica Preferred Stock") and ten-year
warrants
1
("Folksamerica Warrants") to purchase up to 6,920,000 shares of the common stock
of Folksamerica ("Folksamerica Common Stock") for $11.47 per share. In November
1997 White Mountains and the European Mutuals each purchased an additional
1,563,907 shares of Folksamerica Common Stock for $20.8 million which maintained
White Mountains 50.0% economic ownership position.
On August 18, 1998, White Mountains acquired all of the remaining
outstanding shares of the Folksamerica Common Stock from the European Mutuals
for $169.1 million which resulted in Folksamerica becoming a wholly-owned
consolidated subsidiary of White Mountains as of that date. Following the August
18, 1998 transaction, Folksamerica retired the Folksamerica Preferred Stock and
issued White Mountains an equivalent amount of Folksamerica Common Stock. As of
December 31, 1999 and 1998, White Mountains owned all of the outstanding shares
of Folksamerica Common Stock.
REINSURANCE OVERVIEW
Reinsurance is an arrangement in which a reinsurance company (the
"reinsurer") agrees to indemnify an insurance company (the "ceding company") for
all or a portion of the insurance risks underwritten by the ceding company under
one or more insurance policies. Reinsurance can benefit a ceding company in a
number of ways, including reducing net liability exposure on individual risks,
providing catastrophe protections from large or multiple losses, stabilizing
financial results and assisting in maintaining acceptable operating leverage
ratios. Reinsurance also provides a ceding company with additional underwriting
capacity by permitting it to accept larger risks and underwrite a greater number
of risks without a corresponding increase in its capital or surplus. Reinsurers
may also purchase reinsurance, known as retrocessional reinsurance, to cover
their own risks assumed from primary ceding companies. Reinsurance companies
enter into retrocessional agreements for many of the same reasons that ceding
companies enter into reinsurance agreements.
Folksamerica writes both treaty and facultative reinsurance. Treaty
reinsurance is an agreement whereby the ceding company is obligated to cede, and
the reinsurer is obligated to assume, a specified portion or category of risk
under all qualifying policies issued by the ceding company during the term of a
treaty. In the underwriting of treaty reinsurance, the reinsurer does not
evaluate each individual risk assumed and generally accepts the original
underwriting decisions made by the ceding insurer. Facultative reinsurance is
underwritten on a risk-by-risk basis whereby Folksamerica applies its own
pricing to an individual exposure. Facultative reinsurance is normally purchased
by insurance companies for individual risks not covered under reinsurance
treaties or for amounts in excess of limits on risks covered under reinsurance
treaties. The majority of Folksamerica's premiums are derived from treaty
reinsurance contracts both on an excess of loss and quota share basis, which in
1999 amounted to 28.5% and 63.9% of its total earned premiums, respectively.
Folksamerica derives its business from a spectrum of ceding insurers including
national, regional, specialty and excess and surplus lines writers. Folksamerica
selects transactions based solely on anticipated underwriting results of the
transaction which are evaluated on a variety of factors including the quality of
the reinsured, the attractiveness of the reinsured's insurance rates, policy
conditions and the adequacy of the proposed reinsurance terms.
A significant period of time normally elapses between the receipt of
reinsurance premiums and the disbursement of reinsurance claims ("float"). The
claims process generally begins upon the occurrence of an event causing an
insured loss followed by: (i) the reporting of the
2
loss to the ceding company; (ii) the reporting of the loss by the ceding company
to Folksamerica; (iii) the ceding company's adjustment and payment of the loss;
and (iv) the payment to the ceding company by Folksamerica. During this time,
Folksamerica earns investment income on the float. Therefore, Folksamerica's
combined ratio can generally be higher than that of White Mountains'
consolidated property and casualty insurance operations and yet may still earn
an equivalent or superior return on equity.
LINES OF BUSINESS AND GEOGRAPHIC LOCATION
The following tables set forth information regarding Folksamerica's net
written premiums by lines of business and geographic location:
- -------------------------------------------------------------------------------------------------------------------
Year Ended December 31,
------------------------------------------------------
Millions 1999 1998 1997 1996 1995
- -------------------------------------------------------------------------------------------------------------------
Liability ......................................... $122.6 $122.0 $123.6 $ 79.6 $ 71.9
Property .......................................... 68.9 87.2 104.9 85.9 87.9
Marine ............................................ 3.1 3.4 3.9 6.4 --
Other ............................................. 7.1 -- -- -- --
--------------------------------------------------------
Total ................................................ $201.7 $212.6 $232.4 $171.9 $159.8
========================================================
3
- -------------------------------------------------------------------------------------------------------------------
Year Ended December 31,
------------------------------------------------------
Millions 1999 1998 1997 1996 1995
- -------------------------------------------------------------------------------------------------------------------
United States ..................................... $172.2 $190.9 $208.6 $155.2 $159.8
Canada ............................................ 21.0 13.9 10.1 4.2 --
Latin America ..................................... 8.5 7.8 13.7 12.5 --
-------------------------------------------------------
Total ................................................ $201.7 $212.6 $232.4 $171.9 $159.8
=======================================================
UNDERWRITING
Folksamerica's primary underwriting objective is to carefully assess
reinsurance opportunities to determine the probability of a particular
transaction providing an underwriting profit. Those risks that do not provide a
reasonable likelihood of delivering an underwriting profit are rejected.
Underwriting opportunities presented to Folksamerica are evaluated based on a
number of factors including historical analysis of results, estimates of future
loss costs, a review of other programs displaying similar exposure
characteristics, the primary insurers underwriting and claims experience and the
primary insurer's financial condition. Folksamerica regularly conducts
underwriting and claims audits of ceding companies to assist it in evaluating
the information submitted by the ceding companies.
Folksamerica's most senior underwriters and executives are responsible for
its underwriting policy and quality standards and informing Folksamerica's board
of directors of current and anticipated market conditions and underwriting
results.
MARKETING
Folksamerica generally obtains all its reinsurance business through brokers
and reinsurance intermediaries which represent the ceding company in
negotiations for the purchase of reinsurance. The process of effecting a
brokered reinsurance placement typically begins when a ceding company enlists
the aid of a reinsurance broker in structuring a reinsurance program. Often the
ceding company and the broker will consult with one or more lead reinsurers as
to the pricing and contract terms for the reinsurance protection being sought.
Once the ceding company has approved the terms quoted by the lead reinsurer, the
broker will offer participations to qualified reinsurers until the program is
fully subscribed by reinsurers at terms agreed to by all parties.
Folksamerica pays its reinsurance brokers commissions representing
negotiated percentages of the premium it writes. These commissions, which
generally average 5% of premium, constitute a significant portion of
Folksamerica's total acquisition costs and are included in its underwriting
expenses. During the year ended December 31, 1999, Folksamerica received
approximately 67% of its gross reinsurance premiums written from three major
reinsurance brokers as follows: (i) Guy Carpenter and affiliates - 26%; (ii)
E.W. Blanch - 21%; and (iii) AON Re, Inc. - 20%. During the year ended
December 31, 1999, Folksamerica received no more than 10% of its gross
reinsurance premiums from any individual ceding company.
4
LOSS AND LOSS ADJUSTMENT EXPENSE RESERVES
Insurers and reinsurers establish loss and loss adjustment expense reserves
representing estimates of future amounts needed to pay claims and related
expenses with respect to insured events that have occurred. Loss and loss
adjustment expense reserves have two components: case reserves, which are
reserves for reported losses, and incurred but not reported ("IBNR") reserves,
which are reserves for losses not yet reported. Reserve estimates reflect the
judgement of both the ceding company and the reinsurer, based on the experience
and knowledge of its claims personnel, regarding the nature and value of the
claim. The ceding company may periodically adjust the amount of the case
reserves as additional information becomes known or partial payments are made.
Upon notification of a loss from a ceding company, Folksamerica establishes
case reserves, including loss adjustment expense reserves, based upon
Folksamerica's share of the amount of reserves established by the ceding company
and Folksamerica's independent evaluation of the loss. Where appropriate,
Folksamerica establishes case reserves in excess of its share of the reserves
established by the ceding company.
Folksamerica uses a combination of actuarial methods to determine its IBNR
reserves. These methods fall into two general categories: (1) methods by which
ultimate claims are estimated based upon historical patterns of reported claim
development experienced by Folksamerica, as supplemented by reported industry
data, and (2) methods in which the level of Folksamerica's IBNR claim reserves
are established based upon the IBNR claim reserves relative to earned premium
applied by accident year, line of business and type of reinsurance written by
Folksamerica. Due to the inherent uncertainties of estimating claim reserves,
actual losses and loss adjustment expenses may deviate, perhaps substantially,
from estimates of Folksamerica's reserves reflected in its consolidated
financial statements. During the claims settlement period, which may extend over
a long period of time, additional facts regarding claims and trends may become
known which may cause Folksamerica to adjust its estimates of the ultimate
liability. The revised estimates of ultimate liability may prove to be less than
or greater than the actual settlement or award amount for which the claim is
finally discharged.
REINSURANCE INDUSTRY AND COMPETITION
Folksamerica commenced writing business in 1980 as one of a host of newly
formed, foreign-owned reinsurers capitalized with minimum surplus. In 1991,
recognizing that surplus size and critical mass would become an increasingly
important business issue, Folksamerica launched an aggressive strategy to
increase its resources and capacity through the acquisition of select
broker-market reinsurance and property and casualty insurance companies. Since
1991, Folksamerica has acquired several other reinsurers which has served to
raise Folksamerica's surplus and contributed a number of important business
relationships.
In general, competition among primary companies has caused primary insurers
to reduce their own premium writings or restructure their reinsurance programs,
thereby reducing the
5
amount of reinsurance they purchase. As a result of consolidation within the
industry, many ceding companies are now larger and financially stronger, thereby
enabling them to retain more risk. In addition, increasingly intense competition
in the reinsurance markets has driven reinsurance prices on a number of accounts
below pricing levels which Folksamerica will accept. Folksamerica's management
believes that the reinsurance industry, including the intermediary market, will
continue to undergo further consolidation. Management further believes that,
although size and financial strength will continue to be factors in selecting
reinsurance partners, product pricing has become the most telling competitive
factor.
CONSOLIDATED INSURANCE OPERATIONS
Over the past several years White Mountains has been acquiring and
developing various property and casualty insurance operating interests. These
interests are described below:
VALLEY GROUP, INC. ("VGI")
In 1995 White Mountains acquired VGI of Albany, Oregon and Charter Group,
Inc. ("CGI") of Richardson, Texas for $41.7 million in cash less $3.0 million of
purchase price adjustments. In September 1995, White Mountains formed White
Mountains Insurance Company ("WMIC") which is a New Hampshire-domiciled mid-size
commercial property and casualty company. CGI and WMIC were subsequently
contributed to VGI thereby making them wholly-owned subsidiaries of VGI.
On June 17, 1999, White Mountains completed the sale of VGI to Unitrin (the
"Valley Group Sale") and received net proceeds of $139.0 million in cash after
receiving a special dividend prior to the closing of $76.6 million (net of
related tax liabilities) consisting of cash, investment securities and the
common stock of Valley National Insurance Company (subsequently renamed to
"Waterford Insurance Company"). In connection with the Valley Group Sale, the
Company recorded a pretax gain of $88.1 million, $53.8 million after tax. As
part of the Valley Group Sale, White Mountains has provided Unitrin, Inc. with
certain adverse loss development protections for approximately four years. These
protections are not expected to result in a material subsequent purchase price
adjustment.
6
CONSOLIDATED INTERNATIONAL GROUP, INC. ("CIG")
On October 15, 1999, White Mountains completed its acquisition of CIG, a
Delaware-based insurance holding company for $86.7 million in cash. As a result
of the acquisition, the Company has recorded a $62.0 million deferred credit
(negative goodwill) which will be amortized over the estimated period of benefit
of three years. CIG's principal operating subsidiaries are outlined below:
PENINSULA INSURANCE COMPANY ("PIC"). PIC, which was established in 1960, is
a Maryland-domiciled property and casualty insurer which writes both personal
and commercial lines, primarily private passenger auto, homeowners, commercial
auto and commercial multiple peril. Most of PIC's insurance products are sold in
Maryland, Delaware and Virginia. PIC is rated "A" or "excellent" by A.M. Best
Company.
In the United States, property and casualty insurance can be obtained
through national and regional companies that use an agency distribution system,
direct writers, brokers or through self-insurance including the use by
corporations of subsidiary captive insurers. PIC markets insurance products
principally through independent agents. PIC's primary business focus is to
establish strong long-term relationships with its agents and insured customers
by focusing on providing quality insurance products to families and small
private businesses. PIC pays their independent agents commissions representing
negotiated percentages of the premium they write. These commissions, which
currently range from 5.0% to 20.0% of premium, depending on the line of
business, constitute a significant portion of total acquisition costs and are
included in underwriting expenses.
The long-term relationships cultivated by PIC with its agents and insured
customers have produced a relatively high level of renewal persistency,
particularly in PIC's standard private passenger auto and commercial auto books
of business. Renewal persistency can be a significant indicator of an insurance
company's long-term prospects for successful underwriting. An insurance company
typically incurs more marketing and underwriting costs to write new business
(e.g., policies written for new customers) than it does to write "seasoned"
business (e.g., policy renewals). Additionally, losses and loss adjustment
expenses are typically higher and less predictable for new business than for
seasoned business.
The principal competitive factors that affect PIC are: (i) pricing; (ii)
underwriting; (iii) quality of claims and policyholder services; (iv) appointing
and retaining high quality independent agents; (v) operating efficiencies; (vi)
product differentiation and availability; and (vii) increased competition from
national direct writers. No single company or group of affiliated companies
dominates the insurance industry. The highly competitive environment in the
property and casualty insurance market during the past several years has
intensified due to increased capacity resulting from growing capital supporting
the industry and robust investment returns achieved in recent years. PIC
maintains a disciplined approach to pricing and underwriting of insurance risks.
Application of this disciplined approach in a highly competitive environment
results in a lower volume of insurance premiums than would result from a less
disciplined approach, but should produce better overall financial returns from
the business over long periods of time.
7
Selected financial information for PIC is as follows:
- ---------------------------------------------------------------------------------------------------------------------
Year Ended December 31,
---------------------------
Statutory Basis (a), in Millions 1999 1998 1997
- ---------------------------------------------------------------------------------------------------------------------
Gross written premiums, by line of business:
Private passenger auto ..................................................... $17.3 $20.9 $ 20.4
Homeowners ................................................................. 2.5 2.5 2.2
Commercial auto ............................................................ 2.8 2.5 2.4
Commercial multiple peril .................................................. 1.9 2.1 2.3
Other ...................................................................... 1.4 1.9 2.2
--------------------------
Total gross written premiums .................................................... $25.9 $29.9 $ 29.5
==========================
Ending total admitted assets .................................................... $62.5 $63.4 $ 57.8
Ending policyholders' surplus ................................................... 33.6 30.4 29.3
==========================
(a) The term "statutory" as contained herein refers to a basis of accounting
other than generally accepted accounting principles that is prescribed by
the individual states that an insurance company transacts business in.
AMERICAN CENTENNIAL INSURANCE COMPANY ("ACIC"). ACIC is a
Delaware-domiciled property and casualty insurance company in run-off. ACIC was
incorporated in 1970 for the purpose of underwriting primary and excess
liability insurance for many large national and international chemical,
manufacturing and pharmaceutical companies, as well as for the purpose of
underwriting facultative and treaty reinsurance for the same types of risks. In
1983, in response to the poor profitability of these books of business and
substantial difficulties in the collection of its reinsurance recoverables due
principally to financial problems of its reinsurers, ACIC stopped actively
writing insurance and reinsurance and is currently in run-off. Since 1983, ACIC
has concentrated its run-off efforts on commuting its loss exposures with its
insureds and on settling the ultimate amount of its reinsurance recoverables
with its reinsurers. In 1997, ACIC entered into a retrospective excess of loss
reinsurance treaty with a highly rated reinsurer whereby substantially all of
its remaining loss exposure has been reinsured. At December 31, 1999 and 1998,
ACIC had $51.4 million and $51.0 million of total admitted assets, respectively,
and $43.2 million and $43.0 million of policyholders' surplus, respectively.
BRITISH INSURANCE COMPANY OF CAYMAN ("BICC"). BICC is a Cayman
Island-domiciled property and casualty insurance company in run-off. BICC was
established in 1997 as a means to improve CIG's ability to recover reinsurance
recoverables from insolvent or near insolvent international reinsurers. BICC
consists principally of certain reinsurance recoverables and loss reserves
assumed from ACIC and invested assets. At December 31, 1999 and 1998, BICC had
$36.1 million and $26.0 million of total assets, respectively.
WATERFORD INSURANCE COMPANY ("WATERFORD").
Waterford is a Kansas-domiciled property and casualty insurance company.
Waterford was purchased in 1996 (at which time it was an inactive insurance
company) and is licensed to write property and casualty insurance in 48 states.
Waterford had $11.0 million and $11.1 million in gross written premiums ($1.4
million and $1.4 million of net written premiums) during 1999 and 1998,
respectively. As of December 31, 1999, Waterford has ceased writing new
business. At December 31, 1999 and 1998, Waterford had $13.3 million and $13.2
million of total admitted assets, respectively, and $12.2 million and $11.9
million of policyholders' surplus, respectively.
INVESTMENTS IN UNCONSOLIDATED INSURANCE AFFILIATES
White Mountains' investments in unconsolidated insurance affiliates
represent strategic operating investments in other insurers in which White
Mountains has a significant voting and
8
economic interest but does not own more than 50.0% of the entity. Since 1994,
White Mountains has been active in accumulating various investments in
unconsolidated affiliates which are further described below:
FINANCIAL SECURITY ASSURANCE HOLDINGS LTD. ("FSA"). FSA, through its
wholly-owned subsidiary, Financial Security Assurance Inc., guarantees scheduled
payments of principal and interest on municipal bonds and asset-backed
securities, including residential mortgage-backed securities. FSA's guaranty on
investment-grade securities helps issuers lower their funding costs and provides
bondholders with the highest-quality investments. FSA's claims-paying ability is
rated Triple-A by Fitch IBCA, Inc., Moody's Investors Service, Inc., Standard &
Poor's Rating Services and Nippon Investors Service Inc. For 1999, 1998 and
1997, FSA's gross premiums written totalled $362.7 million, $319.3 million and
$236.4 million, respectively, and its net income was $125.4 million, $115.4
million and $94.7 million, respectively. As of December 31, 1999 and 1998, FSA's
total assets were $2.9 billion and $2.4 billion, respectively, and its
shareholders' equity was $1.3 billion and $1.1 billion, respectively.
In 1994 White Mountains purchased 2,000,000 shares of the common stock of
FSA ("FSA Common Stock") from MediaOne Capital Corp. ("MediaOne", formerly U S
WEST Capital Corp.), a wholly-owned subsidiary of MediaOne Group, Inc. (formerly
U S WEST, Inc.). The purchase was part of an initial public offering of
8,082,385 shares of FSA Common Stock at the offering price of $20.00 per share.
White Mountains also acquired various fixed price options ("FSA Options")
and shares of convertible preferred stock ("FSA Preferred Stock") during 1994
which, in total, gave White Mountains the right to acquire up to 4,560,607
additional shares of FSA Common Stock for aggregate consideration of $125.7
million.
White Mountains purchased an additional 460,200 shares of FSA Common Stock
on the open market for $8.8 million during 1995 and an additional 1,000,000
shares of FSA Common Stock in a private transaction for $26.5 million during
1996.
In May 1999, White Mountains exercised FSA Options pursuant to which it
acquired 666,667 shares of FSA Common Stock at a strike price of $23.50 per
share. In September 1999, White Mountains exercised FSA Options pursuant to
which it acquired 1,893,940 shares of FSA Common Stock at a strike price of
$26.40 per share.
In December 1999, White Mountains purchased an additional 922,509 shares of
FSA Common Stock at a price of $54.20 per share. The transaction was part of a
private offering by FSA pursuant to which it sold a total of approximately
$135.0 million of its common stock to White Mountains, XL Capital Ltd, The Tokio
Marine and Fire Insurance Co., Ltd and an FSA management group.
All shares of and rights to acquire FSA Common Stock owned by White
Mountains are either formally registered with the Securities and Exchange
Commission ("SEC") or are subject to demand registration rights. Notwithstanding
SEC registration or the existence of registration rights, White Mountains is
currently subject to the "affiliate" provisions of Rule 144 of the Securities
Act of 1933 which limits public sales of FSA Common Shares by White Mountains.
As of December 31, 1999, 1998 and 1997 White Mountains' economic interest in FSA
was approximately 25.8%, 25.1% and 26.2%, respectively, and White Mountains'
voting interest in FSA was approximately 25.8%, 23.1% and 24.0%, respectively.
Mr. K. Thomas Kemp (Deputy Chairman the Company) and Mr. Terry L. Baxter (a
director of the Company) are directors of FSA. In addition to being FSA
directors, Mr. Kemp is Chairman of FSA's Human Resources Committee and Mr.
Baxter is a member of FSA's Underwriting Committee.
9
White Mountains' investment in FSA Common Stock is accounted for using
the equity method. FSA Common Stock is publicly traded on the New York Stock
Exchange ("NYSE"). The market value of the FSA Common Stock as of December
31, 1999 and 1998, as quoted on the NYSE, exceeded White Mountains' carrying
value of the FSA Common Stock under the equity method. White Mountains'
investment in FSA Preferred Stock is accounted for under the provisions of
Statement of Financial Accounting Standards ("SFAS") No. 115 whereby the
investment is reported at fair value as of the balance sheet date, with
related unrealized investment gains and losses, after tax, reported as a net
amount in a separate component of shareholders' equity and reported on the
income statement as a component of other comprehensive net income.
MAIN STREET AMERICA HOLDINGS, INC. ("MSA"). MSA is a subsidiary of National
Grange Mutual Insurance ("NGM"), a New Hampshire-domiciled property and casualty
insurance company, which insures risks located primarily in New York,
Massachusetts, Connecticut, Pennsylvania, New Hampshire, Virginia and Florida.
NGM's principal lines of business and approximate percentage of total direct
written premiums are personal automobile (43.1%), commercial multi-peril
(17.5%), homeowners (15.7%), commercial automobile (12.9%) and all other
(10.8%). MSA participates in NGM's property and casualty business through a
reinsurance agreement. MSA's net written premiums totalled $242.7 million,
$258.5 million and $156.6 million in 1999, 1998 and 1997, respectively, and its
net income was $25.8 million, $13.4 million and $11.9 million, respectively.
MSA's total assets as of December 31, 1999 and 1998 were $582.3 million and
$581.6 million, respectively, and its shareholders' equity was $233.4 million
and $232.5 million, respectively.
In 1994, White Mountains acquired 90,606 shares of the common stock of MSA
("MSA Common Stock") for $25.0 million in cash plus $1.2 million in subsequent
purchase price adjustments which represented approximately 33.1% of the MSA
Common Stock outstanding at that time. From 1994 to 1997 MSA participated in 40%
NGM's property and casualty business through a reinsurance agreement.
In 1998 White Mountains acquired an additional 131,487 shares of MSA Common
Stock for $70.3 million (subject to certain purchase price adjustments which are
not expected to exceed $3.5 million) which raised White Mountains ownership of
MSA to 50.0%. As a result of White Mountains' additional investment in MSA
during 1998, MSA's reinsurance pooling agreement was increased from 40.0% to
60.0% and NGM contributed certain of its insurance, reinsurance and financial
services subsidiaries to MSA. White Mountains' investment in MSA Common Stock is
accounted for using the equity method.
Messrs. Kemp, Baxter and John J. Byrne (Chairman and Chief Executive
Officer of the Company) are directors of MSA.
DISCONTINUED MORTGAGE BANKING OPERATIONS
On May 1, 1999, White Mountains concluded its sale (the "Mortgage Banking
Sale") of substantially all the mortgage banking assets of its subsidiary White
Mountains Services Corporation ("WMSC" - formerly Source One Mortgage Services
Corporation) to Citibank Mortgage, Inc. ("Citibank") and received net proceeds
totalling $180.6 million (which is net of WMSC's public indebtedness assumed by
Citibank and WMSC's credit agreement borrowings which were required to be repaid
at closing). Mortgage banking assets and liabilities that were not part of the
Citibank sale were substantially liquidated during 1999. White Mountains
recorded an estimated $11.6 million after tax gain on the sale of its mortgage
banking net assets (which is net of anticipated future liabilities) during 1999.
As a result of the Company's decision to dispose of its net mortgage banking
assets, these activities are shown as discontinued operations herein.
10
INVESTING OPERATIONS
White Mountains' philosophy is to invest all assets to maximize their
after tax total return over extended periods of time. Under this approach,
each dollar of after tax investment income, realized capital gains and
unrealized appreciation is valued equally. Management further believes that
the investment assets of the insurance companies should be invested in a
"balanced portfolio" consisting of a mixture of fixed income investments,
equity securities and occasionally other investments in order to maximize
returns over extended periods of time. The Company's Investment Committee,
headed by director John D. Gillespie (a former T. Rowe Price fund manager)
and comprised of certain other directors, key management and investment
professionals, oversee the Company's investment activities which are more
extensive than in the recent past. The Investment Committee regularly
monitors the overall investment results of White Mountains, reviews the
results of each of White Mountains' various investment managers, reviews
compliance with established investment guidelines, approves all purchases and
sales of investment securities and ultimately reports the overall investment
results to the Company's Board of Directors (the "Board").
As previously stated, the investment portfolios of White Mountains'
insurance operations consist, in part, of common equity securities and related
investments. At December 31, 1999, Folksamerica's investment portfolio contained
$126.4 million of common equity securities and other investments which
represented approximately 14% of its total portfolio (excluding short-term
investments). At December 31, 1999, the portfolios of PIC, ACIC, BICC and
Waterford contained $3.5 million of common equity securities and other
investments which represented approximately 3% of the aggregate PIC, ACIC, BICC
and Waterford portfolios (excluding short-term investments). Management believes
that modest investments of common equity securities within the investment
portfolios of its insurance operations will enhance their after tax returns
without significantly increasing the risk profile of the portfolio when
considered over long periods of time.
REGULATION
White Mountains' insurance and reinsurance operations are subject to
regulation and supervision of their operations in each of the jurisdictions
where they are domiciled and licensed to conduct business. Generally, regulatory
authorities have broad supervisory and administrative powers over such matters
as licenses, standards of solvency, premium rates, policy forms, investments,
security deposits, methods of accounting, form and content of financial
statements, reserves for unpaid losses and loss adjustment expenses,
reinsurance, minimum capital and surplus requirements, dividends and other
distributions to shareholders, periodic examinations and annual and other report
filings. Over the last several years most states have, and continue to
implement, laws which establish standards for current, as well as continued,
state accreditation. In addition, the National Association of Insurance
Commissioners has adopted risk-based capital ("RBC") standards for property and
casualty companies as a means of monitoring certain aspects affecting the
overall financial condition of insurance companies. The RBC ratios for
Folksamerica, PIC, ACIC and Waterford at December 31, 1999 and 1998, were above
the levels which would require regulatory action.
White Mountains is not aware of any current recommendations by regulatory
authorities that would be expected to have a material effect on its results of
operations or liquidity or any other matters that would require disclosure
herein.
EMPLOYEES
As of December 31, 1999, White Mountains employed 235 persons (including 11
persons at the Company, 125 persons at Folksamerica, 75 persons at PIC, 20
persons at ACIC and BICC and 4 persons at subsidiary holding companies).
Management believes that White Mountains' employee relations are good.
FORWARD-LOOKING STATEMENTS
White Mountains relies upon the safe harbor for forward looking statements
provided by the Private Securities Litigation Reform Act of 1995. This safe
harbor requires that White Mountains specify important factors that could cause
actual results to differ materially from those contained
11
in forward-looking statements made by or on behalf of White Mountains.
Accordingly, forward-looking statements by the Company and its affiliates are
qualified by reference to the following cautionary statements.
In its filings with the SEC, reports to shareholders, press releases and
other written and oral communications, White Mountains from time to time makes
forward-looking statements. Such forward-looking statements include, but are not
limited to, (i) projections of revenues, income (or loss), earnings (or loss)
per share, dividends, market share or other financial forecasts, (ii) statements
of plans, objectives or goals of White Mountains or its management, including
those related to growth in book value and deferred credit per share or return on
equity and (iii) expected losses on, and adequacy of loss reserves for,
insurance in force. Words such as "believes", "anticipates", "expects",
"intends" and "plans" and similar expressions are intended to identify
forward-looking statements but are not the exclusive means of identifying such
statements.
White Mountains cautions that a number of important factors could cause
actual results to differ materially from the plans, objectives, expectations,
estimates and intentions expressed in forward-looking statements made by White
Mountains. These factors include: (i) competitive forces, including the conduct
of other property and casualty insurers and reinsurers; (ii) changes in domestic
or foreign laws or regulations applicable to White Mountains, its competitors or
its clients; (iii) an economic downturn or other economic conditions (such as a
rising interest rate environment) adversely affecting White Mountains'
investment portfolio; and (iv) inadequacy of loss reserves established by White
Mountains. White Mountains cautions that the foregoing list of important factors
is not exhaustive. In any event, such forward-looking statements made by White
Mountains speak only as of the date on which they are made, and White Mountains
does not undertake any obligation to update or revise such statements as a
result of new information, future events or otherwise.
ITEM 2. PROPERTIES
The Company maintains two small professional offices in Hamilton, Bermuda
which serve as its headquarters and registered office. In addition, the Company
and certain of its subsidiaries lease 8,600 square feet of office space at 80
South Main Street, Hanover, New Hampshire, under a lease expiring in 2006, which
serves as its principal executive office. Folksamerica leases 40,000 square feet
of office space in New York, New York, under a lease expiring 2004, which serves
as its principal office. PIC owns its principal offices in Salisbury, Maryland.
ACIC and BICC lease 15,200 square feet of office space in Wilmington, Delaware,
under a lease which expires in December 2000, which serves as their principal
office. White Mountains leases several other office facilities and operating
equipment under cancelable and noncancelable agreements.
ITEM 3. LEGAL PROCEEDINGS
Various claims have been made against White Mountains in the normal course
of its business. Based on all information available at the date of this report,
management believes that the outcome of such claims will not, in the aggregate,
have a material effect on White Mountains' financial position or results of
operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Pursuant to a Proxy Statement filed with the SEC on September 23, 1999
calling for a Special Meeting of Shareholders (the "Special Meeting") on
October 22, 1999, shareholders approved the Redomestication, including the
Company's bye-laws and authorization for the Board to exercise its powers set
out in the bye-laws and to take all actions deemed necessary or advisable to
give effect to the Redomestication. As of September 24, 1999, the record date
for the Special Meeting, a total of 5,982,291 shares were eligible to vote.
At the Special Meeting, 3,839,754 votes were cast in favor of the
Redomestication, 692,714 votes were cast against and 16,743 votes abstained.
12
PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
As of March 24, 2000, there were 440 registered holders of shares of the
Company's Common Stock, par value $1.00 per share ("Shares").
During 1999 and 1998 the Company declared and paid total cash dividends of
$1.60 per Share. Dividends are typically declared and paid on a quarterly basis.
The Board currently intends to reconsider from time to time the declaration of
regular periodic dividends on Shares with due consideration given to the
financial characteristics of White Mountains' invested assets and operations and
the amount and regularity of its cash flows at the time. The Company's Common
Stock (symbol WTM) is listed on the NYSE. The quarterly range of the daily
closing price for Shares during 1999 and 1998 is presented below:
- --------------------------------------------------------------------------------------------------------------------
1999 1998
------------------------- -----------------------
HIGH LOW High Low
- --------------------------------------------------------------------------------------------------------------------
Quarter ended:
December 31 ....................................... $134 1/2 $116 $144 $117
September 30 ...................................... 143 130 1/16 153 1/8 119 1/8
June 30 ........................................... 149 131 3/8 149 1/8 135 15/16
March 31 .......................................... 150 120 1/2 137 5/16 120 9/16
=======================================================
13
ITEM 6. SELECTED FINANCIAL DATA
Selected consolidated income statement data and ending balance sheet data
for each of the five years ended December 31, 1999, follows:
- -----------------------------------------------------------------------------------------------------------------------------------
Year Ended December 31,
------------------------------------------------------------------
Millions, except per share amounts 1999 1998(a) 1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------------------------
INCOME STATEMENT DATA:
Revenues ..................................................... $ 565 $ 390 $ 293 $ 186 $ 85
Expenses ..................................................... 404 311 192 164 85
------------------------------------------------------------------
Pretax earnings .............................................. 161 79 101 22 --
Income tax provision ...................................... (53) (28) (36) (9) (1)
------------------------------------------------------------------
Net income (loss) from continuing operations ................. $ 108 $ 51 $ 65 $ 13 $ (1)
==================================================================
Net income (loss) from continuing operations per Share:
Basic ..................................................... $ 19.25 $ 8.71 $ 9.88 $ 1.74 $ (.12)
Diluted ................................................... $ 17.66 $ 7.75 $ 8.93 $ 1.59 $ (.11)
------------------------------------------------------------------
ENDING BALANCE SHEET DATA:
Total assets ................................................. $ 2,049 $ 2,164 $ 1,156(b) $ 1,120 $ 1,015
Short-term debt .............................................. 4 52 2 2 21
Long-term debt ............................................... 203 186 132 133 115
Deferred credit .............................................. 101(c) 37(d) -- -- --
Shareholders' equity ......................................... 614(e) 703 659(e) 687(e) 700(e)
Book value per Share (f) ..................................... $103.32 $109.68 $100.08 $ 90.81 $ 83.28
Book value plus deferred credit per Share (f) ................ $120.23 $115.11 $100.08 $ 90.81 $ 83.28
------------------------------------------------------------------
SHARE DATA:
Cash dividends paid per Share ................................ $ 1.60 $ 1.60 $ .80 $ .80 $ .20
Ending common and equivalent Shares (000's) .................. 5,946 6,831 6,983 7,908 8,687
==================================================================
(a) Includes the interim period income statement and ending balance sheet of
Folksamerica which was acquired during 1998.
(b) Restated as a result of White Mountains' acquisition of Folksamerica
during 1998. See Note 3.
(c) Deferred credits added during 1999 resulted from the purchase of CIG and
exercises of FSA Options. See Note 1.
(d) Deferred credits added during 1998 resulted from the acquisition of
Folksamerica. See Note 1.
(e) Reflects reductions in shareholders' equity resulting from repurchases of
Shares.
(f) As adjusted for the dilutive effects of outstanding options and warrants
to acquire Shares ("Warrants").
14
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
CONSOLIDATED RESULTS
White Mountains reported net income of $121.0 million for the year ended
December 31, 1999, which compares to net income of $78.5 million and $39.3
million for 1998 and 1997, respectively. Net income for 1999, 1998 and 1997
includes after tax gains from sales of investment securities of $45.2 million,
$46.1 million and $63.4 million, respectively. Net income for 1999 includes
after tax gains of $53.8 million from the Valley Group Sale and $11.6 million
from the Mortgage Banking Sale.
Comprehensive net income, which includes other comprehensive income items
(primarily changes in net unrealized investment gains and losses for investments
held during the period), for 1999 was $3.0 million versus $69.6 million and
$81.0 million for 1998 and 1997, respectively. Comprehensive net income for 1999
was adversely affected by $28.8 million of after tax unrealized bond losses at
Folksamerica and a $43.9 million after tax accounting write-down of White
Mountains' investment in FSA. Comprehensive net income for 1997 was favorably
impacted by $105.1 million of after tax unrealized holding gains primarily
associated with White Mountains' investment in FSA.
Book value plus deferred credit per Share was $120.23 at December 31, 1999,
which compares to $115.11 at December 31, 1998. At December 31, 1999 and 1998,
White Mountains had $100.6 million and $37.1 million of after tax unamortized
deferred credit, respectively, which will be amortized to income over the next
four years. During 1998 White Mountains recorded a deferred credit of $39.8
million resulting from its acquisition of Folksamerica. During 1999 White
Mountains added a $62.0 million deferred credit resulting from its acquisition
of the CIG companies and a $14.2 million deferred credit resulting from a
write-down of its investment in FSA.
INSURANCE OPERATIONS
REINSURANCE OPERATIONS
Folksamerica contributed $44.9 million to net income during 1999 versus
$10.0 million and $5.2 million during 1998 and 1997, respectively.
Folksamerica's contribution for 1998 included $5.6 million of pretax earnings
($4.5 million after tax) recorded as earnings from unconsolidated insurance
affiliates. Folksamerica's entire contribution for 1997 was recorded as earnings
from unconsolidated insurance affiliates.
Folksamerica's results for the three years ended December 31, 1999, 1998
and 1997 included $211.0 million, $238.1 million and $238.0 million of earned
reinsurance premiums, respectively, and $182.2 million, $170.3 million and
$165.6 million of losses and loss adjustment expenses, respectively. For 1999
Folksamerica's combined ratio was 122.5% versus a combined ratio of 108.0% and
102.9% for the comparable 1998 and 1997 periods.
A summary of Folksamerica's 1999, 1998 and 1997 underwriting results
follows:
- ---------------------------------------------------------------------------------------------------------------------
Year Ended December 31,
-------------------------------------
Dollars in millions 1999 1998 1997
- ---------------------------------------------------------------------------------------------------------------------
Net written premiums ...................................................... $ 201.7 $ 212.6 $ 232.4
Earned premiums ........................................................... 211.0 238.1 238.0
Losses and loss adjustment expenses ....................................... 182.2 170.3 165.6
Underwriting expenses ..................................................... 81.4 92.6 81.6
--------------------------------------
Underwriting loss ...................................................... $ (52.6) $ (24.8) $ (9.2)
======================================
Statutory combined ratios:
Loss and loss adjustment expense ....................................... 86.5% 71.5% 69.6%
Underwriting expense ................................................... 36.0 36.5 33.3
--------------------------------------
Combined ........................................................ 122.5% 108.0% 102.9%
======================================
15
During 1999 Folksamerica acquired USF Re Insurance Co. ("USF Re") from The
Centris Group Inc. for total consideration of $92.5 million. The purchase
consideration included the issuance of a $20.8 million, five-year note by
Folksamerica (which can be reduced by adverse loss development at USF Re post
acquisition).
Folksamerica's 1999 combined ratio of 122.5% included approximately $20.1
million in pretax losses associated with USF Re's loss reserves, $4.0 million of
pretax property catastrophe losses and higher than anticipated asbestos and
environmental losses. These significant 1999 adverse loss developments resulted
primarily from business acquired through Folksamerica's prior acquisitions
(mainly USF Re). However, Folksamerica's 1999 combined ratio does not reflect
the offsetting bargain purchase benefits of such acquisitions which are recorded
at its parent. For 1999, Folksamerica's holding company recorded $20.3 million
of after tax income resulting from the favorable purchase structures of such
acquisitions which were designed to mitigate Folksamerica's adverse loss
development. These benefits for 1999 included a $14.0 million after tax
reduction in the USF Re seller note and $6.3 million of after tax deferred
credit amortization. The effects of such favorable purchase structures, which
are not included in Folksamerica's combined ratio, would serve to reduce the
1999 combined ratio by approximately 13 points to 110%.
Folksamerica's 1998 combined ratio of 108.0% was higher than that of 1997
due primarily to two property events experienced during the year (Canadian ice
storms and Hurricane Georges) and higher than anticipated asbestos and
environmental losses.
In addition to incurred losses, Folksamerica's combined ratios for 1999 and
1998 were higher than anticipated due to lower premium volume resulting from
lower than expected production on a number of domestic treaties, the effects of
non-renewals in its property portfolio, slower than anticipated growth in its
Latin America business and a less favorable pricing environment. During 1999,
Folksamerica's written premium volume decreased 5% versus 1998 despite its
acquisition of USF Re during mid 1999. During 1998, Folksamerica's written
premium volume decreased approximately 9% versus 1997 premium levels. These
premium volume decreases primarily reflect increased non-renewed business due to
deteriorating terms and conditions.
As previously mentioned, Folksamerica underwrites each reinsurance contract
anticipating an element of underwriting profit. The anticipated degree of
underwriting profit varies by contract and is based on a variety of factors
which can include some degree of float. Despite this expectation on an
individual contract basis, Folksamerica's reported results for the years ended
December 31, 1999, 1998 and 1997 included overall underwriting losses due to the
following: (i) actual results on some accounts or classes have produced higher
than anticipated loss costs (considering the highly competitive market
conditions, there has been insufficient margin in profitable accounts to absorb
higher loss costs produced by other accounts); (ii) higher than anticipated
property catastrophe losses, particularly during 1999 and 1998; and (iii)
continued strengthening of reserve portfolios relating to acquired companies.
However, as previously mentioned, Folksamerica has various protections into its
prior acquisition structures at its holding company which are designed to
mitigate such losses.
Since Folksamerica's claims settlement period generally extends over a long
period of time, Folksamerica earns significant amounts of investment income on
the float generated by its reinsurance operations. When considering investment
income and certain other items at the Folksamerica holding company level
(primarily interest expense and income taxes), Folksamerica reported net income
of $63.7 million, $27.3 million and $35.9 million for the three years ended
December 31, 1999, 1998 and 1997, respectively, and reported comprehensive net
16
income of $13.4 million, $54.3 million and $50.9 million during those periods,
respectively. This resulted in Folksamerica attaining an after tax return on its
beginning equity of 5.7%, 20.9% and 29.9% for 1999, 1998 and 1997, respectively.
The following table presents the subsequent development of the year-end
reinsurance losses for the ten-year period from 1989 to 1999. Section I of the
table shows the estimated liabilities that were recorded at the end of each of
the indicated years for all current and prior year unpaid losses and loss
adjustment expenses ("lae"). Section II shows the re-estimate of the liabilities
made in each succeeding year. Section III shows the cumulative liabilities paid
of such previously recorded liabilities. Section IV shows the cumulative
deficiency representing the aggregate change in the liability from the original
balance sheet dates:
17
- --------------------------------------------------------------------------------------------------------------------------
Reinsurance Losses and Loss Adjustment Expenses (a)
Year Ended December 31,
- --------------------------------------------------------------------------------------------------------------------------
Dollars in Millions 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999
- --------------------------------------------------------------------------------------------------------------------------
I. Liability for
unpaid losses and lae .. $341.4 $391.1 $461.6 $698.4 $728.3 $776.9 $836.1 $830.5 $848.1 $869.1 $782.1
- --------------------------------------------------------------------------------------------------------------------------
II. Liability
re-estimated
as of:
1 year later ... 351.2 425.5 493.7 748.2 762.6 847.4 861.5 863.3 890.4 912.8 --
2 years later .. 385.5 448.8 498.5 771.2 825.0 867.9 886.6 881.4 907.5
3 years later .. 408.7 449.8 513.3 813.3 837.3 887.7 907.8 898.6
4 years later .. 409.3 458.4 531.7 819.8 856.6 904.6 923.0
5 years later .. 421.7 471.2 531.8 843.7 872.1 919.0
6 years later .. 430.6 472.6 541.5 856.6 882.8
7 years later .. 432.9 480.6 547.8 864.8
8 years later .. 438.8 486.9 554.2
9 years later .. 444.1 494.7
10 years later .. 452.2
- ---------------------------------------------------------------------------------------------------------------------------
III. Cumulative
amount of
liability paid
through:
1 year later ... 98.7 110.5 133.8 243.3 229.9 238.7 253.6 226.3 241.6 288.5 --
2 years later .. 156.5 175.1 199.6 366.5 363.4 387.1 393.3 364.2 401.3
3 years later .. 195.5 216.2 256.7 452.3 466.2 485.8 484.3 475.0
4 years later .. 221.2 252.7 304.4 525.6 534.4 550.5 570.7
5 years later .. 248.2 285.6 340.0 575.2 576.7 617.1
6 years later .. 271.1 312.6 367.6 604.8 630.5
7 years later .. 293.0 332.8 382.3 651.6
8 years later .. 306.1 342.9 409.4
9 years later .. 314.1 367.5
10 years later .. 336.0
- -------------------------------------------------------------------------------------------------------------------------
IV. Cumulative
deficiency $110.8 $103.6 $92.6 $166.4 $154.5 $142.1 $86.9 $68.1 $59.4 $43.7 --
Percent 32% 26% 20% 24% 21% 18% 10% 8% 7% 5% --
deficient
- -------------------------------------------------------------------------------------------------------------------------
(a) For the years 1989 through 1991 liabilities are shown net of reinsurance
recoverable. For the years 1992 through 1999 liabilities are shown without
regard to reinsurance recoverable in accordance with SFAS No. 113. The
table excludes the insurance operations of VGI and CIG whose liability for
unpaid losses and lae totalled $68.9 million, $88.5 million, $71.9 million
and $65.4 million as of December 31, 1999, 1998, 1997 and 1996,
respectively.
18
The table above has been prepared in accordance with prescribed
instructions, however, management believes that this information is not
indicative of Folksamerica's actual loss development history for the following
reasons: (i) with respect to 1992 through 1999, the information is presented
prior to considering the benefit of significant amounts of ceded reinsurance
recovered (and recoverable) from Folksamerica's reinsurers; (ii) the information
includes the complete loss development history for companies acquired by
Folksamerica for all periods presented, including periods prior to
Folksamerica's acquisition of such companies; and (iii) the structure of each of
Folksamerica's acquisitions has provided effective economic protections to
offset potential post-acquisition loss development. The form of these
protections has included deferred and adjustable purchase consideration and
favorable purchase prices. In consideration of such factors, the table presented
below is management's attempt to adjust the deficiencies presented above for the
most recent five years:
- ----------------------------------------------------------------------------------------------------------------------
Year Ended December 31,
---------------------------------------------------------
Percent of deficit to carried reserves: 1995 1996 1997 1998 1999
- ----------------------------------------------------------------------------------------------------------------------
Deficiency as reported ............................. 10% 8% 7% 5% -- %
Deficiency as adjusted for the effects described above... 3% 3% 2% 2% -- %
=========================================================
INSURANCE OPERATIONS
On October 15, 1999, the Company concluded its acquisition of the CIG
companies (PIC, ACIC and BICC) for $86.7 million in cash. Because the cost of
these companies was less than the fair value of their net identifiable assets at
October 15, 1999, the Company recorded a $62.0 million deferred credit ($57.7
million as of December 31, 1999) that will be amortized to income over three
years. For the period from October 15, 1999 to December 31, 1999, the inclusion
of PIC, ACIC and BICC did not have a significant impact on the Company's 1999
operating results.
On June 17, 1999, the Company completed the Valley Group Sale and recorded
a pretax gain of $88.1 million, $53.8 million after tax on the transaction. The
Company recorded net income from Valley Group for the 1999 period through the
date of sale of $3.6 million which primarily represented realized investment
gains. For the years ended December 31,1998 and 1997, VGI contributed $5.0
million and $7.2 million, respectively, to net income.
19
INVESTMENTS IN UNCONSOLIDATED INSURANCE AFFILIATES
FSA and MSA represented White Mountains' investments in unconsolidated
insurance affiliates at December 31, 1999 and 1998.
FSA and White Mountains' related investment in MediaOne preferred stock
(which was redeemed on September 2, 1999) contributed $15.7 million to net
income during the year ended December 31, 1999 versus $9.3 million for 1998 and
$7.8 million for 1997. The significant increase in FSA-related net income during
1999 resulted from the additional purchase of $50.0 million of FSA Common Stock
and the exercise of FSA Options, each occurring during 1999.
MSA contributed $9.8 million to net income during the year ended December
31, 1999 versus $3.2 million for 1998 and $2.5 million for 1997. The significant
increase in MSA-related net income during 1999 resulted principally from
significant realized gains on sales of investments recorded by MSA during the
year.
INVESTMENT OPERATIONS
Net realized gains on investments and the total net investment return from
White Mountains' investment activities (excluding net unrealized investment
holding gains and losses from White Mountains' investments in unconsolidated
insurance affiliates) are shown below:
- ---------------------------------------------------------------------------------------------------------------------
Year Ended December 31,
---------------------------------------
Millions 1999 1998 1997
- ---------------------------------------------------------------------------------------------------------------------
Net realized investment gains, before tax ................................. $ 69.6(a) $ 71.0 $ 97.4
========================================
Net investment income ..................................................... $ 61.9 $ 36.8 $ 21.6
Net unrealized investment gains (losses) for investments held during the
period .................................................................... (20.2) 24.8 87.7
----------------------------------------
Total net investment return, before tax ................................... $ 41.7 $ 61.6 $ 109.3
========================================
(a) Excludes a $15.8 million realized gain on sale of the USF Re shell company
Net realized investment gains of $69.6 million for the year ended
December 31, 1999 included $23.9 million of pretax gains from sales of San
Juan Basin Royalty Trust ("SJT") units and $28.0 million of pretax gains from
sales of various common stocks and other investments in Folksamerica's
operating portfolio. In addition, $9.4 million of pretax gains on sales of
common stocks and fixed maturity investments were recorded in anticipation of
or in connection with the Valley Group Sale. Net realized investment gains of
$71.0 million for the year ended December 31, 1998 resulted principally from
the sale of White Mountains' investment in White River Corporation ("White
River"). Net realized investment gains of $97.4 million recorded during 1997
included $37.2 million of pretax gains from sales of Travelers Property
Casualty Corp. common stock, $24.3 million of pretax gains from sales of SJT
units, $10.3 million of pretax gains from sales of Mid Ocean Limited common
stock and $15.5 million of pretax gains from sales of Veritas DGC Inc. common
stock.
White Mountains' net investment income is comprised primarily of interest
income associated with the fixed maturity investments of its consolidated
insurance and reinsurance operations and dividend income from its equity
investments. The significant increase in net investment income
20
from 1997 to 1999 is mainly attributable to White Mountains' growing portfolio
of fixed maturity investments resulting from the consolidation of Folksamerica
in August 1998 and the 1999 acquisitions of USF Re and CIG.
Net unrealized investment losses for investments held during 1999 of $20.2
million pretax resulted from a $48.3 million pretax loss on fixed maturities
held in White Mountains' insurance operating portfolios partially offset by
unrealized gains from common stocks and other investments. Net unrealized gains
for investments held during 1998 of $24.8 million pretax resulted from
unrealized gains on fixed maturities and common stocks. Net unrealized gains for
investments held during 1997 of $87.7 million resulted from gains on common
stocks, particularly White River.
EXPENSES
Insurance losses and loss adjustment expenses totalled $228.3 million for
1999 versus $174.8 million for 1998 and $97.1 million for 1997. Insurance and
reinsurance acquisition expenses totalled $73.4 million for 1999 versus $54.8
million for 1998 and $23.2 million for 1997. The increase in these insurance
expenses from 1997 to 1999 is primarily attributable to the inclusion of
Folksamerica in the Company's consolidated results during 1998 and the
acquisitions of USF Re and CIG during 1999. During 1999 and 1998, losses and
loss adjustment expenses relating to prior years developed unfavorably by $15.3
million (which is net of USF Re purchase price offsets) and $7.8 million,
respectively. During 1997, losses and loss adjustment expenses relating to prior
years developed favorably by $2.5 million pretax.
Compensation and benefits totalled $67.8 million for 1999 versus $51.5
million for 1998 and $45.5 million for 1997. The increase in compensation and
benefits from 1998 to 1999 is due to both the inclusion of Folksamerica in the
Company's consolidated results for the entire 1999 period and expenses incurred
in connection with the Redomestication. See "Liquidity and Capital Resources".
The increase in compensation and benefits from 1997 to 1998 is primarily due to
the initial inclusion of $7.1 million of Folksamerica's compensation and
benefits during 1998.
General expenses totalled $19.5 million for 1999 versus $15.9 million for
1998 and $15.7 million for 1997. The increase in general expenses during the
1999 period are primarily attributable to both the inclusion of Folksamerica in
the Company's consolidated results for the entire 1999 period and expenses
incurred in connection with the Redomestication.
Interest expense totalled $14.7 million during 1999 versus $13.7 million
for 1998 and $10.6 million for 1997. The increase in interest expense from 1998
to 1999 primarily reflects higher average indebtedness levels due to
indebtedness outstanding at Folksamerica for the entire 1999 period. The
increase in interest expense from 1997 to 1998 primarily reflects the inclusion
of $1.4 million of Folksamerica's interest expense for 1998 and an increase in
average indebtedness under White Mountains' credit facility associated with its
1998 acquisition of Folksamerica and its 1998 increase in its investment in MSA.
INCOME TAXES
In connection with the Redomestication, the Company and certain of its
subsidiaries changed their domicile to either Bermuda or Barbados (the "Offshore
Companies") while certain other subsidiaries remained domiciled in the United
States (the "Onshore Companies"). As a result, income earned by the Offshore
Companies will generally be subject to an effective overall tax rate lower than
that imposed by the United States, however, no tax benefits will be attained
21
in the event of net losses incurred by such companies. Additionally, prior to
the Redomestication, the Company filed a consolidated United States income tax
return with its subsidiaries. The Onshore Companies must continue to file United
States tax returns but may no longer do so on a group-wide consolidated basis.
As a result, the aggregate United States income tax liability of the Onshore
Companies may be higher than it otherwise would have been if part of a
consolidated tax return. These factors may serve to increase or decrease White
Mountains' effective tax rate for 1999 and beyond, depending on the events and
circumstances occurring during such periods.
The income tax provision related to pretax earnings for 1999, 1998 and 1997
represents an effective tax rate of 32.9%, 35.8% and 35.9%, respectively. The
reduction in the effective rate for 1999 resulted from the Redomestication.
White Mountains recorded a deferred tax asset of $52.5 million (relating
primarily to various operating items) and a deferred tax liability of $37.5
million (relating primarily to net unrealized investment holding gains) on its
balance sheet as of December 31, 1999. White Mountains recorded a net deferred
tax liability of $13.4 million on its balance sheet as of December 31, 1998. The
1998 net deferred tax liability consisted of $103.3 million of deferred tax
assets (relating primarily to various operating items) and $116.7 million of
deferred tax liabilities (relating primarily to net unrealized investment
holding gains).
In 1991, the Company sold Fireman's Fund Insurance Company ("Fireman's
Fund") to Allianz of America, Inc. The $1.3 billion gain from the sale as
reported in 1991 included a $75.0 million tax benefit related to the Company's
estimated tax loss from the sale. Since 1991 the Company has carried an
estimated reserve related to tax matters affecting the amount of the deductible
tax loss from the sale and other tax matters. The amount of tax benefit from the
sale of Fireman's Fund ultimately realized by the Company may be significantly
more or less than the Company's current estimate due to possible changes in or
new interpretations of tax rules, possible amendments to White Mountains' 1991
or prior years' income tax returns, the results of further IRS audits and other
matters affecting the amount of the deductible tax loss from the sale.
LIQUIDITY AND CAPITAL RESOURCES
THE COMPANY, INSURANCE OPERATIONS AND OTHER
The primary sources of cash inflows for the Company are investment income,
sales of investment securities and dividends received from its operating
subsidiaries. Under the insurance laws of the states under which the Company's
insurance subsidiaries are licensed to write business, an insurer is restricted
with respect to the amount of dividends it may pay without prior approval by
state regulatory authorities. Accordingly, there is no assurance that dividends
may be paid by such subsidiaries in the future.
During 1993 the Company issued $150.0 million in principal amount of
medium-term notes for net cash proceeds of $148.0 million after related costs.
The Company has repurchased its medium-term notes from time to time and during
1999 repurchased $15.9 million in principal amount of the notes due in February
2003. At December 31, 1999 the $96.0 million of medium-term notes outstanding
had an average maturity of 3.6 years and an average yield to maturity of 7.83%.
The Company has a revolving credit agreement whereby it may borrow up to
$35.0 million
22
(which was increased to $50.0 million during 1999) at short-term market interest
rates. The credit agreement contains certain customary covenants and conditions.
At December 31, 1999 and 1998 the Company was in compliance with all covenants
under the facility and had no borrowings outstanding under the agreement.
During 1999 and 1998 the Company repurchased 1,020,150 Shares for $139.5
million and 151,916 Shares for $19.8 million, respectively. All Shares
repurchased during 1999 and 1998 have been retired. During 1999 and 1998 the
Company declared and paid quarterly cash dividends of $.40 per Share. Shares
repurchased and dividends paid during 1999 and 1998 represented returns of
excess capital to shareholders.
During 1999 the Company issued a total of 1,137,495 common shares to its
Chairman and its key employees in satisfaction of the Chairman's warrant
exercise and various employee benefit plan obligations. In order to entice the
Chairman to exercise his Warrants early, the Company paid Mr. Byrne $6.0 million
to compensate him for the estimated interest cost of borrowing the strike price
and the amounts required to prematurely pay his income taxes.
During 1999 White Mountains exercised FSA Options pursuant to which it
acquired 666,667 shares of FSA Common Stock at a strike price of $23.50 per
share. Also during 1999, White Mountains exercised FSA Options pursuant to which
it acquired 1,893,940 shares of FSA Common Stock at a strike price of $26.40 per
share in accordance with the redemption of the MediaOne preferred stock.
During 1999 White Mountains purchased an additional 922,509 shares of the
common stock of FSA at a price of $54.20 per share. The transaction was part of
a private offering by FSA pursuant to which it sold a total of $140.0 million of
its common stock to White Mountains, XL Capital, Ltd, The Tokio Marine and Fire
Insurance Co., Ltd and an FSA management group.
During 1999 the Company concluded the Mortgage Banking Sale and recorded an
$11.6 million after gain on the sale. The Company has retained the WMSC legal
entity which currently owns the majority of White Mountains' investments in FSA
and certain other mortgage-related and other assets and liabilities.
During 1999 the Company concluded the Valley Group Sale and recorded a
$53.8 million after tax gain on the sale. In connection with the Valley Group
Sale, White Mountains repaid $15.0 million of VGI's long-term indebtedness
during 1999.
During 1999 the Company concluded its previously announced acquisition of
the CIG companies for $86.7 million in cash.
In connection with the Redomestication, White Mountains paid $104.1 million
in certain compensation benefits to its current and former employees and
directors on October 22, 1999 at an incremental after tax cost of $14.9 million.
In connection with the compensation payments, White Mountains paid cash of $89.8
million (primarily to its former employees) and issued $14.3 million in Shares
(primarily to its current employees, directors and advisors). A significant
portion of the compensation paid on October 22, 1999 represented the
acceleration of expenses that would have ordinarily been incurred in future
periods which resulted in increased tax deductible expenses in 1999.
In connection with the Redomestication, the Company was treated as if it
sold all of its directly owned assets in a fully taxable transaction in which
gains, but not losses, were recognized. The Company incurred a United States
income tax liability upon the Redomestication of approximately $2.5 million.
On March 14, 2000, White Mountains entered into a definitive agreement to
sell its indirect,
23
wholly-owned subsidiary, White Mountains Holdings, Inc. (which controls a
substantial amount of its holdings of FSA Common Stock and the FSA Preferred
Stock) as well as all its other holdings of FSA Common Stock, to Dexia S.A.
("Dexia") for total cash proceeds of $620.4 million. The transaction will occur
only in connection with Dexia's pending merger with FSA in which all holders of
FSA Common Stock will receive $76.00 cash per share. The merger agreement
between FSA and Dexia is subject to, among other matters, regulatory approvals
and the satisfaction of the conditions contained in Dexia's merger agreement
with FSA, including the approval of FSA shareholders. The transaction, if
approved, is expected to close mid-year 2000.
REINSURANCE OPERATIONS
Under the insurance laws of New York an insurer is restricted with respect
to the amount of dividends it may pay without prior approval by state regulatory
authorities. Accordingly, there is no assurance that dividends may be paid by
Folksamerica in the future.
As part of the Folksamerica acquisition in 1998, White Mountains agreed to
repay or refinance Folksamerica's $55.6 million of outstanding long-term
indebtedness during February 1999. On February 24, 1999, White Mountains repayed
and replaced its former facility with a revolving credit agreement whereby it
may borrow up to $100.0 million (which was subsequently increased to $120.0
million during 1999) at market interest rates. The new credit agreement contains
certain customary covenants and conditions. At December 31, 1999, Folksamerica
was in compliance with all covenants under the facility and had $100.0 million
of borrowings outstanding under the agreement.
During 1999 Folksamerica acquired USF Re for total consideration of $92.5
million. The purchase consideration included the issuance of a $20.8 million,
five-year note by Folksamerica (which has been reduced to $6.8 million at
year-end 1999 due to adverse loss development at USF Re post acquisition) with
the balance paid in cash. Folksamerica did not record a significant amount of
goodwill in connection with its acquisition of USF Re.
On December 30, 1999, Folksamerica announced that it had signed a
definitive agreement to purchase PCA Property & Casualty Insurance Company
("PCA"), a Florida-domiciled insurance company specializing in workers'
compensation, from Humana Inc. The transaction, for $125.0 million in cash, is
subject to regulatory approvals.
On January 10, 2000, Folksamerica announced that it had signed a definitive
agreement to acquire substantially all the reinsurance operations of Risk
Capital Reinsurance Company ("RCRe"), a wholly-owned subsidiary of Risk Capital
Holdings, Inc., for consideration of $20.3 million. The transaction is subject
to regulatory approvals.
MARKET RISK
White Mountains' consolidated balance sheet includes a substantial amount
of assets and liabilities whose fair values are subject to market risk. The term
market risk refers to the risk of loss arising from adverse changes in: interest
rates, foreign currency exchange rates and other relevant market rates and
prices such as prices for common equity securities. Due to White Mountains'
sizable investments in fixed maturity investments and common equity securities
and its use of medium- and long-term debt financing, market risk can have a
significant effect on White Mountains' consolidated financial position.
24
INTEREST RATE RISK
FIXED MATURITY PORTFOLIO. In connection with the Company's consolidated
insurance and reinsurance subsidiaries, White Mountains invests in interest rate
sensitive securities, primarily debt securities. White Mountains' strategy is to
purchase fixed maturity investments that are attractively priced in relation to
perceived credit risks. White Mountains' investments in fixed maturity
investments are held as available for sale and, accordingly, White Mountains
accepts that realized and unrealized losses on these instruments may occur.
White Mountains does not use derivative securities to manage its interest rate
risk associated with its fixed maturity investments, rather it manages the
average duration of the fixed maturity portfolio in the anticipation of
achieving an adequate yield without subjecting the portfolio to an unreasonable
level of interest rate risk.
Increases and decreases in prevailing interest rates generally translate
into decreases and increases in fair values of fixed maturity investments,
respectively. Additionally, fair values of interest rate sensitive instruments
may be affected by the credit worthiness of the issuer, prepayment options,
relative values of alternative investments, the liquidity of the instrument and
other general market conditions. These investments are carried at fair value on
the balance sheet with unrealized gains reported net of tax in a separate
component of shareholders equity.
INDEBTEDNESS. White Mountains utilizes debt financing at many levels of its
businesses. Increases and decreases in prevailing interest rates generally
translate into decreases and increases in fair values of fixed rate
indebtedness, respectively, particularly long-term debt. Additionally, fair
values of interest rate sensitive instruments may be affected by the credit
worthiness of the issuer, prepayment options, relative values of alternative
investments, the liquidity of the instrument and other general market
conditions.
The table below summarizes the estimated effects of hypothetical increases
and decreases in market interest rates on White Mountains' fixed maturity
portfolio and long-term fixed rate indebtedness outstanding. Significant
variations in market interest rates could produce changes in the timing of
repayments due to prepayment options available to the issuer or the holder which
are not reflected herein. It is assumed that the changes occur immediately and
uniformly to each category of instrument containing interest rate risk.
25
- ---------------------------------------------------------------------------------------------------------------------
Estimated Fair Percentage Increase
Fair Value at Assumed Change Value after Change (Decrease) to
Dollars in Millions December 31, 1999 in Interest Rate in Interest Rate Shareholders' Equity
- ---------------------------------------------------------------------------------------------------------------------
Fixed maturity investments $924.5 50 bp decrease $ 940.8 1.7%
50 bp increase 908.5 (1.7)
100 bp increase 892.9 (3.3)
200 bp increase 862.8 (6.5)
-----------------------------------------------------------------------------------
Fixed rate indebtedness (a) $100.3 50 bp decrease $ 101.8 (.2)%
50 bp increase 98.8 .2
100 bp increase 97.4 .5
200 bp increase 94.7 .9
===================================================================================
(a) Represents medium-term notes with a carrying value at December 31, 1999 of
$96.4 million. Excludes short-term indebtedness, variable rate obligations
and the USF Re seller note whose principal (and interest payable thereon)
amortizes in response to adverse loss development experienced at
Folksamerica resulting from its acquisition of USF Re.
FOREIGN CURRENCY EXCHANGE RATES
Folksamerica operates a branch office in Toronto, Canada to service its
Canadian customers and a portion of BICC's premiums are denominated in a foreign
currencies. Net unrealized foreign currency translation gains and losses
associated with Folksamerica and BICC are reported, after tax, as a net amount
in a separate component of shareholders' equity. Changes in the values of these
operations due to currency fluctuations, after tax, are reported on the income
statement as a component of other comprehensive net income. At December 31, 1999
and 1998, Folksamerica's and BICC's net assets denominated in foreign currency
represented approximately one percent of the Company's shareholders' equity,
therefore, any significant change in foreign currency rates would not have a
material impact on White Mountains' financial position.
EQUITY PRICE RISK
The carrying values of White Mountains' common equity securities, a
significant portion of its other investments (primarily partnership interests
invested in common equity securities) and its investment in FSA Preferred Stock
are based on quoted market prices or management's estimates of fair value (which
is based, in part, on quoted market prices) as of the balance sheet date. Market
prices of common equity securities are subject to fluctuations which could cause
the amount to be realized upon sale of the investment to differ significantly
from the current reported value. The fluctuations may result from perceived
changes in the underlying economic characteristics of the investee, the relative
price of alternative investments, general market conditions and supply and
demand imbalances for a particular security.
The table below summarizes White Mountains' equity price risks as of
December 31, 1999 and shows the effects of a hypothetical 20% increase and a 20%
decrease in market prices as of that date.
26
- ---------------------------------------------------------------------------------------------------------------------
Assumed Estimated Fair Percentage Increase
Fair Value at Price Value after Assumed (Decrease) to
Dollars in Millions December 31, 1999 Change Price Change Shareholders' Equity
- --------------------------------------------------------------------------------------------------------------------
Common equity securities ............. $108.4 20% increase $130.1 2.6%
20% decrease $ 86.7 (2.6)%
Other investments (a) ................ $ 67.7 20% increase $ 81.2 1.6%
20% decrease $ 54.1 (1.6)%
FSA Preferred Stock .................. $ 41.1 20% increase $ 61.3 2.1%
20% decrease $ 20.9 (2.1)%
=====================================================================================================================
(a) Excludes $.6 million of other investments which would not be directly
affected by the assumed changes in equity prices.
OTHER MATTERS
ACCOUNTING FOR FSA OPTIONS AND FSA PREFERRED STOCK
White Mountains accounts for its investment in FSA Common Stock on the
equity method of accounting and accounts for its unexercised stock options and
convertible securities to acquire FSA Common Stock at fair value. Upon the
exercises of FSA Options during 1999, the Company was required to write its
investments in the FSA Options exercised to their original cost in order to
transition the investment from fair value accounting to equity accounting. In
connection with this accounting transition, the Company reduced its after tax
net unrealized gains at the time of exercise by $39.3 million and recorded a
deferred credit of $14.2 million that will be amortized to income over a
five-year period. The difference between fair value and equity value ($25.1
million at the time of exercise) may not be recognized by White Mountains until
such time as equity accounting is no longer appropriate for its investment in
FSA Common Stock.
RETIREMENT OF COMMON STOCK HELD IN TREASURY
In conformance with Bermuda law, the Company retired all Shares held in its
treasury during 1999. The retirement of treasury shares resulted in a
significant reclassification of several of the Company's various shareholders'
equity accounts but did not affect total shareholders' equity.
YEAR 2000 UPDATE
Neither White Mountains nor any of its unconsolidated insurance affiliates
experienced any significant Year 2000 disruptions to its business operations.
White Mountains' total pretax cost of Year 2000 remediation, excluding its
unconsolidated insurance affiliates, was approximately $3.0 million. This figure
does not include the cost of hardware and software replacements and upgrades
made in the normal course of business.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
See "Market Risk Disclosures" contained in Item 7. Management's Discussion
and Analysis of Financial Condition and Results of Operations.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and supplementary data have been filed as a part
of this Annual Report on Form 10-K as indicated in the Index to Financial
Statements and Financial Statement Schedules appearing on page 34 of this
report.
27
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
On March 10, 1999, the Audit Committee of the Board appointed
PricewaterhouseCoopers LLP ("PwC") as its independent auditors for the fiscal
year ending December 31, 1999, to succeed KPMG LLP ("KPMG") effective upon the
date of their reports on such consolidated financial statements for the year
ended December 31, 1998.
PwC has served as Folksamerica's independent auditors since 1981 and has
served as FSA's independent auditors since 1989. The Audit Committee has
recommended that PwC succeed KPMG as the Company's independent auditors for 1999
due to the growing significance of Folksamerica and FSA to the Company's 1999
financial position and results of operations.
In connection with the audits of the years ended December 31, 1998 and
1997, there were no disagreements with KPMG on any matter of accounting
principles or practices, financial statement disclosure, or auditing scope and
procedures which, if not resolved to their satisfaction, would have caused them
to make reference in connection with their opinion to the subject matter of the
disagreement.
The Company has requested KPMG to furnish a letter addressed to the SEC
stating whether it agrees with the above statements. A copy of this letter,
dated March 25, 1999, is contained herein as Exhibit 16.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS
A. DIRECTORS (AS OF MARCH 24, 2000)
Reported under the caption "Election of Directors" on pages 3 through 6 of
the Company's 2000 Proxy Statement, herein incorporated by reference.
B. EXECUTIVE OFFICERS (AS OF MARCH 24, 2000)
- ---------------------------------------------------------------------------------------------------------------
Executive
officer
Name Position Age since
- ---------------------------------------------------------------------------------------------------------------
Raymond Barrette ...... President 49 1997
John J. Byrne ......... Chief Executive Officer 67 1985
Reid T. Campbell ...... Vice President and Director of Finance 32 1996
Michael S. Paquette ... Senior Vice President and Controller 36 1993
David G. Staples ...... Vice President 39 1997
==============================================================================================================
All executive officers are elected by the Board for a term of one year
or until their successors have been elected and have duly qualified.
28
MR. BARRETTE was appointed President of the Company in January 1999 and
became a Director in February 2000. He joined White Mountains in 1997 as the
Company's Executive Vice President and Chief Financial Officer. He was
formerly a consultant with Tillinghast-Towers Perrin from 1994 to 1996 and
was with Fireman's Fund from 1973 to 1993. Mr. Barrette is also a director of
Folksamerica, PIC, ACIC, BICC and Waterford.
MR. BYRNE was appointed Chief Executive Officer of the Company in January
2000. He has served as Chairman of the Board of the Company since 1985 and
formerly served as President and Chief Executive Officer from 1990 to 1997, and
as Chief Executive Officer from 1985 to 1990. Mr. Byrne is also a director of
MSA.
MR. CAMPBELL was elected Vice President and Director of Finance in 1998 and
previously served as Assistant Controller from 1996 to 1998 and Director of
Accounting from 1995 to 1996. Mr. Campbell has been with White Mountains since
1994. Prior to joining White Mountains, Mr. Campbell was with KPMG Peat Marwick
from 1990 to 1994. Mr. Campbell is a director of PIC and Waterford.
MR. PAQUETTE was appointed Senior Vice President and Controller in 1997.
Mr. Paquette previously served as Vice President and Controller since 1995 and
as Vice President and Chief Accounting Officer from 1993 to 1995. Mr. Paquette
has been a member of the White Mountains organization since 1989. Mr. Paquette
is also a director of Waterford.
MR. STAPLES was elected Vice President in 1997 and has been with White
Mountains since 1996. Prior to joining White Mountains, Mr. Staples served as
Vice President and Director of Taxation for Crum & Forster Holdings, Inc. from
1993 to 1996, and was with KPMG Peat Marwick from 1983 to 1993.
ITEM 11. EXECUTIVE COMPENSATION
Reported under the captions "Compensation of Executive Officers" on pages
11 through 13, "Reports of the Compensation Committees on Executive
Compensation" on pages 13 though 15, "Shareholder Return Graph" on page 16, and
"Compensation Plans" on page 17 of the Company's 2000 Proxy Statement, herein
incorporated by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Reported under the caption "Voting Securities and Principal Holders
Thereof" on pages 7 through 9 of the Company's 2000 Proxy Statement, herein
incorporated by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Reported under the captions "Certain Relationships and Related
Transactions" on page 13 and "Compensation Committee Interlocks and Insider
Participation in Compensation Decisions" on page 18 of the Company's 2000 Proxy
Statement, herein incorporated by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
a. DOCUMENTS FILED AS PART OF THE REPORT
The financial statements and financial statement schedules and reports
of independent auditors have been filed as part of this Annual Report on Form
10-K as indicated in the Index to Financial Statements and Financial Statement
Schedules appearing on page 34 of this report. A listing of exhibits filed as
part of the report appear on pages 30 through 32 of this report.
29
b. REPORTS ON FORM 8-K
During the fourth quarter of 1999 the Company filed two Current Reports
on Form 8-K. The first, dated November 1, 1999, announced that the Company had
completed the Redomestication on October 25, 1999. The second, dated December
30, 1999, announced that Folksamerica had signed a definitive agreement to
purchase PCA.
c. EXHIBITS
- ----------------------------------------------------------------------------------------------------------------------
EXHIBIT NUMBER NAME
- ----------------------------------------------------------------------------------------------------------------------
2 Plan of Reorganization (incorporated by reference herein to the Company's Registration Statement on S-4
(No. 333-87649) dated September 23, 1999)
3(a) Memorandum of Continuance of the Company (incorporated by reference herein to the Company's Registration
Statement on S-4 (No. 333-87649) dated September 23, 1999)
3(b) Bye-Laws of the Company (incorporated by reference herein to the Company's Registration Statement on S-4
(No. 333-87649) dated September 23, 1999)
4 Indenture dated January 1, 1993, with The First National Bank of Chicago, as trustee, pursuant to the
Company's offering of $150 million of medium-term notes (incorporated by reference herein to the Company's
Registration Statement on S-3 (No. 33-54006) dated October 30, 1992)
9 Voting Trust Agreement dated September 2, 1994 between the Company, U S WEST Capital Corporation and The
First National Bank of Chicago (incorporated by reference herein to Exhibit 10(a) of the Company's Report
on Form 8-K dated April 10, 1994)
10 (a) Second Amended and Restated Credit Agreement dated February 24, 1999 among the Company, the Lenders (as
named therein) and The First National Bank of Chicago (*)
10 (b) Amendment No. 1 dated March 23, 1999 to the Second Amended and Restated Credit Agreement dated February
24, 1999 among the Company, the Lenders (as named therein) and The First National Bank of Chicago (*)
10 (c) Amendment No. 2 dated July 30, 1999 to the Second Amended and Restated Credit Agreement dated February 24,
1999 among the Company, the Lenders (as named therein) and The First National Bank of Chicago (*)
10 (d) Amendment No. 3 dated October 29, 1999 to the Second Amended and Restated Credit Agreement dated February
24, 1999 among the Company, the Lenders (as named therein) and The First National Bank of Chicago (*)
10 (e) Credit Agreement dated February 24, 1999 among Folksamerica Holding Company, Inc., the Lenders (as named
therein) and The First National Bank of Chicago (*)
10 (f) Amendment No.1 dated June 29, 1999 to the Credit Agreement dated February 24, 1999 among Folksamerica
Holding Company, Inc., the Lenders (as named therein) and The First National Bank of Chicago (*)
10 (g) Amendment No. 2 dated October 29, 1999 to the Credit Agreement dated February 24, 1999 among Folksamerica
Holding Company, Inc., the Lenders (as named therein) and The First National Bank of Chicago (*)
30
- ----------------------------------------------------------------------------------------------------------------------
EXHIBIT NUMBER NAME
- ----------------------------------------------------------------------------------------------------------------------
10 (h) Folksamerica Stock Purchase Agreement dated as of July 1, 1998 by and among the Company, White Mountains,
Folksam Mutual General Insurance Company, Folksam International Insurance Co. Ltd, Weiner Staedtische
Allgemeine Versicherung AG, P&V Assurances S.C. and Samvirke Skadeforsikring AS (incorporated by reference
herein to Exhibit 10(a) of the Company's Report on Form 8-K dated August 18, 1998)
10 (i) Assignment and Assumption Agreement dated as of August 18, 1998 by and among Folksam Omsesidig
Sakforsakring, Samvirke Skadeforsikring AS and the Company (incorporated by reference herein to Exhibit
10(b) of the Company's Report on Form 8-K dated August 18, 1998)
10 (j) Subscription Agreement dated November 6, 1997 between Folksamerica, the Company, White Mountains, Folksam
Mutual General Insurance Company, Folksam International Insurance Co. Ltd, Weiner Staedtische Allgemeine
Versicherung AG, P&V Assurances S.C. and Samvirke Skadeforsikring AS (incorporated by reference herein to
Exhibit 10(l) of the Company's 1997 Annual Report on Form 10-K)
10 (k) Securities Purchase Agreement dated March 6, 1996 between the Company and Folksamerica (incorporated by
reference herein to Exhibit 10(a) of the Company's Report on Form 8-K dated June 19, 1996)
10 (l) Folksamerica Stock Purchase Agreement dated August 8, 1995 between the Company, Skandia U.S. Holding
Corporation, and Skandia America Corporation (incorporated by reference herein to Exhibit 10(e) of the
Company's 1995 Annual Report on Form 10-K)
10 (m) Guaranty, dated February 28, 1997, by the Company to and for the benefit of Chemical Mortgage Company
(incorporated by reference herein to Exhibit 10(y) of the Company's 1996 Annual Report on Form 10-K)
10 (n) VGI Stock Acquisition Agreement dated February 10, 1999 between Unitrin, Inc. and the Company (incorporated
by reference herein to Exhibit 10(n) of the Company's 1998 Annual Report on Form 10-K)
10 (o) Transition Services Agreement dated March 25, 1999 between Source One and Citicorp Mortgage, Inc.
(incorporated by reference herein to Exhibit 10(o) of the Company's 1998 Annual Report on Form 10-K)
10 (p) Source One Asset Purchase Agreement dated March 25, 1999 between the Company, Source One and Citicorp
Mortgage Inc. (incorporated by reference herein to Exhibit 10(p) of the Company's 1998 Annual Report on Form
10-K)
10 (q) Common Stock Warrant Agreement with respect to shares of the Company's Common stock between the Company and
John J. Byrne (incorporated by reference herein to Exhibit 10(v) of the Company's Registration Statement on
Form S-1 (No. 33-0199)) (**)
10 (r) The Company's Retirement Plan for Non-Employee Directors (incorporated by reference herein to Exhibit 10(aa)
of the Company's 1992 Annual Report on Form 10-K) (**)
10 (s) The Company's Voluntary Deferred Compensation Plan, as amended on November 15, 1996 (incorporated by
reference herein to Exhibit 10(o) of the Company's 1996 Annual Report on Form 10-K) (**)
10 (t) The Company's Deferred Benefit Plan, as amended on November 15, 1996 (incorporated by reference herein to
Exhibit 10(p) of the Company's 1996 Annual Report on Form 10-K) (**)
31
- ----------------------------------------------------------------------------------------------------------------------
EXHIBIT NUMBER NAME
- ----------------------------------------------------------------------------------------------------------------------
10 (u) The Company's Long-Term Incentive Plan, as amended February 15, 1995 (incorporated by reference to Appendix
I of the Company's Notice of 1995 Annual Meeting of Shareholders and Proxy Statement) (**)
10 (v) Stock Purchase Agreement by and among White Mountains Insurance Group, Inc., Consolidated International
Group, Inc. and The Sellers Named Therein (incorporated by reference herein to Exhibit 10(a) of the
Company's Report on Form 8-K dated June 1, 1999)
10 (w) Stock Purchase Agreement as of December 30, 1999, by and among Humana Inc., Physician Corporation of America
and Folksamerica Holding Company, Inc. (incorporated by reference herein to Exhibit 10(a) of the Company's
Report on Form 8-K dated December 30, 1999)
10 (x) Amended and Restated Management Contract by and between PCA and Humana Workers Compensation Services, Inc.
(incorporated by reference herein to Exhibit 10(a) of the Company's Report on Form 8-K dated December 30,
1999)
10 (y) Stock Purchase Agreement dated March 31, 1999, by and Between the Centris Group, Inc. and Folksamerica
Holding Company, Inc. (incorporated by reference herein to Exhibit 10(a) of the Company's Report on Form 8-K
dated June 29, 1999)
10 (z) Stock Purchase and Indemnity Agreement by and among White Mountains and Dexia for all of the outstanding
capital stock of White Mountains Holdings, Inc. and indirectly for certain of the outstanding capital stock
of FSA (incorporated by reference herein to Exhibit 99.1 of the Company's Report on Form 8-K dated March 17,
2000)
11 Statement Re Computation of Per Share Earnings (***)
16 Letter of KPMG LLP dated March 25, 1999, (incorporated by reference herein to Exhibit 16 of the Company's
1998 Annual Report on Form 10-K)
21 Subsidiaries of the Registrant (*)
22 Notice of Special Meeting of Stockholders and Proxy Statement (incorporated by reference herein to the
Company's Registration Statement on S-4 (No. 333-87649) dated September 23, 1999)
23 (a) Consent of PricewaterhouseCoopers dated March 27, 2000 (*)
23 (b) Consent of KPMG LLP dated March 27, 2000 (*)
23 (c) Consent of PricewaterhouseCoopers LLP dated March 27, 2000 relating to Folksamerica and FSA (*)
24 Powers of Attorney (*)
27 1999 Financial Data Schedule (*)
99 (a) Report of PricewaterhouseCoopers LLP dated February 2, 1999 relating to Folksamerica (incorporated by
reference herein to Exhibit 99(a) of the Company's 1998 Annual Report on Form 10-K)
99 (b) The Consolidated Financial Statements of FSA and the related Report of Independent Accountants as of
December 31, 1999 and 1998 and for each of the three years in the period ended December 31, 1999 (*)
- ---------------------------------
(*) Included herein.
(**) Management contracts or compensation plans/arrangements required to be
filed as an exhibit pursuant to Item 14(a)3 of Form 10-K.
(***) Not included herein as the information is contained elsewhere within
report. See Note 1 of the Notes to Consolidated Financial Statements.
D. FINANCIAL STATEMENT SCHEDULES
The financial statement schedules and report of independent auditors have
been filed as part of this Annual Report on Form 10-K as indicated in the
Index to Financial Statements and Financial Statement Schedules appearing
on page 34 of this report.
32
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Company has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
WHITE MOUNTAINS INSURANCE GROUP, LTD.
Date: March 27, 2000 By: /s/ MICHAEL S. PAQUETTE
Senior Vice President and Controller
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the Company
and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
RAYMOND BARRETTE President and Director March 27, 2000
- ------------------------------------------
Raymond Barrette
TERRY L. BAXTER* Director March 27, 2000
- ------------------------------------------
Terry L. Baxter
JOHN J. BYRNE Chairman and Chief Executive Officer March 27, 2000
- -------------------------------------------
John J. Byrne
PATRICK M. BYRNE* Director March 27, 2000
- -------------------------------------------
Patrick M. Byrne
HOWARD L. CLARK, JR.* Director March 27, 2000
- -------------------------------------------
Howard L. Clark, Jr.
ROBERT P. COCHRAN* Director March 27, 2000
- -------------------------------------------
Robert P. Cochran
STEVEN E. FASS* Director March 27, 2000
- -------------------------------------------
Steven E. Fass
GEORGE J. GILLESPIE, III* Director March 27, 2000
- -------------------------------------------
George J. Gillespie, III
JOHN D. GILLESPIE* Director March 27, 2000
- -------------------------------------------
John D. Gillespie
K. THOMAS KEMP* Director March 27, 2000
- -------------------------------------------
K. Thomas Kemp
GORDON S. MACKLIN* Director March 27, 2000
- -------------------------------------------
Gordon S. Macklin
FRANK A. OLSON* Director March 27, 2000
- -------------------------------------------
Frank A. Olson
MICHAEL S. PAQUETTE Senior Vice President and Controller March 27, 2000
- -------------------------------------------
Michael S. Paquette
*By: /s/ RAYMOND BARRETTE
- --------------------------------------------
Raymond Barrette, Attorney-in-Fact
33
WHITE MOUNTAINS INSURANCE GROUP, LTD.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
- -----------------------------------------------------------------------------------------------------------------
Form
10-K
page(s)
- -----------------------------------------------------------------------------------------------------------------
CONSOLIDATED FINANCIAL STATEMENTS:
Consolidated balance sheets as of December 31, 1999 and 1998......................................... 35
Consolidated statements of income and comprehensive income for each of the years ended
December 31, 1999, 1998 and 1997................................................................ 36
Consolidated statements of shareholders' equity for each of the years ended
December 31, 1999, 1998 and 1997................................................................ 37
Consolidated statements of cash flows for each of the years ended
December 31, 1999, 1998 and 1997................................................................ 38
Notes to consolidated financial statements........................................................... 39
OTHER FINANCIAL INFORMATION:
Report on management's responsibilities.............................................................. 68
Reports of independent accountants................................................................... 69
Selected quarterly financial data (unaudited)........................................................ 71
FINANCIAL STATEMENT SCHEDULES:
I. Summary of investments other than investments in related parties........................... 72
II. Condensed financial information of the Registrant.......................................... 73
III. Supplementary insurance information........................................................ 75
IV. Reinsurance................................................................................ 76
V. Valuation and qualifying accounts.......................................................... 77
VI. Supplemental information concerning property and casualty insurance underwriters........... 78
34
CONSOLIDATED BALANCE SHEETS
- ----------------------------------------------------------------------------------------------------------------------
December 31,
-----------------------------
Dollars in millions 1999 1998
- ----------------------------------------------------------------------------------------------------------------------
ASSETS
Fixed maturity investments, at fair value (cost $957.9 and $916.1) .................. $ 924.5 $ 929.6
Common equity securities, at fair value (cost $100.4 and $195.4) .................... 108.4 241.7
Other investments (cost $57.5 and $69.1) ............................................ 68.3 77.5
Short-term investments, at amortized cost (which approximated fair value) ........... 117.5 79.0
-----------------------------
Total investments .............................................................. 1,218.7 1,327.8
Cash ................................................................................ 3.9 22.4
Investments in unconsolidated insurance affiliates .................................. 422.6 354.3
Reinsurance recoverable on paid and unpaid losses ................................... 193.7 137.3
Insurance and reinsurance balances receivable ....................................... 49.8 124.7
Deferred acquisition costs .......................................................... 22.2 35.4
Investment income accrued ........................................................... 15.0 16.2
Other assets ........................................................................ 106.9 35.2
Net assets of discontinued mortgage banking operations .............................. 16.3 110.4
-----------------------------
Total assets ................................................................... $ 2,049.1 $ 2,163.7
=============================
LIABILITIES
Loss and loss adjustment expense reserves ........................................... $ 851.0 $ 811.7
Unearned insurance and reinsurance premiums ......................................... 92.1 153.1
Short-term debt ..................................................................... 4.0 51.5
Long-term debt ...................................................................... 202.8 186.3
Deferred credit ..................................................................... 100.6 37.1
Accounts payable and other liabilities .............................................. 184.3 221.5
----------------------------
Total liabilities .............................................................. 1,434.8 1,461.2
----------------------------
SHAREHOLDERS' EQUITY
Common stock - authorized 15,000,000 and 125,000,000 Shares,
issued 5,945,953 and 30,863,547 Shares ............................................ 5.9 30.9
Paid-in surplus ..................................................................... 67.0 354.2
Retained earnings ................................................................... 534.2 1,063.2
Common stock in treasury, at cost, 0 and 25,034,939 Shares .......................... - (871.0)
Accumulated other comprehensive net income, after tax ............................... 7.2 125.2
----------------------------
Total shareholders' equity ..................................................... 614.3 702.5
-----------------------------
Total liabilities and shareholders' equity ..................................... $ 2,049.1 $ 2,163.7
=============================
See Notes to Consolidated Financial Statements including Note 16 for Commitments
and Contingencies.
35
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
- ----------------------------------------------------------------------------------------------------------------------
Year Ended December 31,
-------------------------------------------
Millions, except per Share amounts 1999 1998 1997
- ----------------------------------------------------------------------------------------------------------------------
REVENUES:
Earned insurance and reinsurance premiums ............................... $ 283.2 $ 246.0 $ 145.3
Gain on sale of Valley Group ............................................ 88.1 - -
Net realized gains on investments and other assets ...................... 85.4 71.0 97.4
Net investment income ................................................... 61.9 36.8 21.6
Earnings from unconsolidated insurance affiliates ....................... 31.1 24.3 21.3
Amortization of deferred credit ......................................... 11.8 2.7 -
Other insurance operations revenue ...................................... 3.7 9.5 7.8
----------------------------------------
Total revenues ..................................................... 565.2 390.3 293.4
----------------------------------------
EXPENSES:
Losses and loss adjustment expenses ..................................... 228.3 174.8 97.1
Insurance and reinsurance acquisition expenses .......................... 73.4 54.8 23.2
Compensation and benefits ............................................... 67.8 51.5 45.5
General expenses ........................................................ 19.5 15.9 15.7
Interest expense ........................................................ 14.7 13.7 10.6
----------------------------------------
Total expenses ..................................................... 403.7 310.7 192.1
----------------------------------------
PRETAX EARNINGS ........................................................... 161.5 79.6 101.3
Income tax provision .................................................... (53.1) (28.5) (36.4)
----------------------------------------
NET INCOME FROM CONTINUING OPERATIONS ..................................... 108.4 51.1 64.9
Gain from sale of discontinued mortgage banking operations .............. 11.6 - -
Net income (loss) from discontinued mortgage banking operations ......... 1.0 27.4 (25.6)
----------------------------------------
NET INCOME ................................................................ 121.0 78.5 39.3
========================================
OTHER COMPREHENSIVE NET INCOME (LOSS) ITEMS, AFTER TAX:
Net unrealized gains (losses) for investments held during the period .... (73.7) 38.1 105.1
Net unrealized gains (losses) on foreign currency translation ........... .9 (.9) -
Recognition of unrealized gains for investments sold during the period .. (45.2) (46.1) (63.4)
----------------------------------------
COMPREHENSIVE NET INCOME .................................................. $ 3.0 $ 69.6 $ 81.0
========================================
BASIC EARNINGS PER SHARE:
Net income ........................................................... $ 21.50 $ 13.38 $ 5.98
Comprehensive net income ............................................. .54 11.87 12.33
DILUTED EARNINGS PER SHARE:
Net income ........................................................... $ 19.73 $ 11.94 $ 5.40
Comprehensive net income ............................................. .39 10.58 11.15
========================================
See Notes to Consolidated Financial Statements.
36
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
- ------------------------------------------------------------------------------------------------------------------------
Common Net Foreign
stock and Common unrealized currency
paid-in Retained stock in investment translation
Millions Total surplus earnings treasury gains adjustment
- ------------------------------------------------------------------------------------------------------------------------
Balances at January 1, 1997 ................ $ 686.9 $ 398.4 $1,067.1 $(871.0) $ 92.4 $ -
-------------------------------------------------------------------------
Net income ................................. 39.3 - 39.3 - - -
Dividends to shareholders .................. (5.3) - (5.3) - - -
Shares repurchased and retired ............. (103.7) (11.5) (92.2) - - -
Change in net unrealized investment
gains and losses, after tax .............. 41.7 - - - 41.7 -
-------------------------------------------------------------------------
Balances at December 31, 1997 .............. 658.9 386.9 1,008.9 (871.0) 134.1 -
-------------------------------------------------------------------------
Net income ................................. 78.5 - 78.5 - - -
Dividends to shareholders .................. (9.4) - (9.4) - - -
Shares repurchased and retired ............. (19.8) (1.8) (18.0) - - -
Change in net unrealized investment
gains and losses and other, after tax .... (8.9) - - - (8.0) (.9)
Other ...................................... 3.2 - 3.2 - - -
-------------------------------------------------------------------------
Balances at December 31, 1998 .............. 702.5 385.1 1,063.2 (871.0) 126.1 (.9)
-------------------------------------------------------------------------
Net income ................................. 121.0 - 121.0 - - -
Dividends to shareholders .................. (8.8) - (8.8) - - -
Issuances of Shares from treasury .......... 57.1 - (58.8) 115.9 - -
Shares repurchased and retired ............. (139.5) (312.2) (582.4) 755.1 - -
Change in net unrealized investment
gains and losses and other, after tax .... (118.0) - - - (118.9) .9
--------------------------------------------------------------------------
BALANCES AT DECEMBER 31, 1999 .............. $ 614.3 $ 72.9 $534.2 $ - $ 7.2 $ -
=========================================================================
See Notes to Consolidated Financial Statements.
37
CONSOLIDATED STATEMENTS OF CASH FLOWS
- ----------------------------------------------------------------------------------------------------------------------
Year Ended December 31,
----------------------------------------
Millions 1999 1998 1997
- ----------------------------------------------------------------------------------------------------------------------
Net income ...................................................................$ 121.0 $ 78.5 $ 39.3
Reconciliation of net income to cash flows from operating activities:
Gain from sale of discontinued mortgage banking operations, after tax ... (11.6) - -
Net (income) loss from discontinued operations .......................... (1.0) (27.4) 25.6
Gain on sale of Valley Group ............................................ (88.1) - -
Undistributed earnings from unconsolidated insurance affiliates ......... (29.0) (19.1) (14.7)
Net realized gains on investments and other assets ...................... (85.4) (71.0) (97.4)
Amortization of deferred credit ......................................... (11.8) (2.7) -
Decrease (increase) in reinsurance recoverable .......................... 5.7 (2.7) 33.2
Decrease (increase) in insurance and reinsurance premiums receivable .... 15.5 (2.4) (3.8)
(Decrease) increase in insurance loss and loss adjustment expense
reserves ............................................................. (83.2) 13.7 6.6
Net change in current and deferred income taxes receivable and payable .. 55.6 (7.1) 19.8
(Decrease) increase in other liabilities ................................ (97.9) 16.5 2.3
Decrease (increase) in other assets ..................................... 7.4 25.1 (14.5)
Other, net .............................................................. (5.5) (5.3) 12.3
--------------------------------------
Net cash (used for) provided from operating activities ....................... (208.3) (3.9) 8.7
--------------------------------------
Cash flows from investing activities:
Net (increase) decrease in short-term investments ....................... (41.3) 38.8 (19.0)
Sales of common equity securities and other investments ................. 256.4 137.5 197.4
Sales and maturities of fixed maturity investments ...................... 273.7 132.8 92.4
Purchases of common equity securities and other investments ............. (71.1) (56.1) (.8)
Purchases of fixed maturity investments ................................. (89.4) (122.7) (102.6)
Investments in unconsolidated insurance affiliates ...................... (115.7) (70.3) (44.4)
Purchase of consolidated affiliates ..................................... (118.6) (167.5) -
Proceeds from sales of consolidated affiliates .......................... 144.5 - -
Net purchases of fixed assets ........................................... (1.0) (1.1) (3.8)
--------------------------------------
Net cash provided from (used for) investing activities ....................... 237.5 (108.6) 119.2
--------------------------------------
Cash flows from financing activities:
Net (decrease) increase of short-term debt .............................. (51.6) (.4) .3
Issuances of long-term debt ............................................. 100.0 50.0 -
Repayments of long-term debt ............................................ (86.4) (1.1) (1.1)
Shares repurchased and retired .......................................... (139.4) (19.5) (103.8)
Proceeds from exercises of Warrants and stock options ................... 21.7 - -
Cash dividends paid to common shareholders .............................. (8.8) (9.4) (5.3)
--------------------------------------
Net cash (used for) provided from financing activities ....................... (164.5) 19.6 (109.9)
--------------------------------------
Net cash provided from (used for) discontinued operations .................... 116.8 108.3 (15.8)
--------------------------------------
Net (decrease) increase in cash during year .................................. (18.5) 15.4 2.2
--------------------------------------
Cash balance at beginning of year ............................................ 22.4 7.0 4.8
--------------------------------------
Cash balance at end of year ..................................................$ 3.9 $ 22.4 $ 7.0
======================================
See Notes to Consolidated Financial Statements.
38
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying consolidated financial statements include the accounts
of the Company and its subsidiaries and have been prepared in accordance with
accounting principles generally accepted in the United States ("GAAP"). The
Company's consolidated operating subsidiaries at December 31, 1999
principally consisted of Folksamerica, PIC, ACIC, BICC and Waterford. The
Company's principal unconsolidated affiliates at December 31, 1999 consisted
of FSA and MSA. All significant intercompany transactions have been
eliminated in consolidation. The financial statements include all adjustments
considered necessary by management to fairly present the financial position,
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. Actual results
could differ from those estimates. Certain amounts in the prior period
financial statements have been reclassified to conform with the current
presentation, including the segregation of mortgage banking net assets and
mortgage banking net income as discontinued operations which relates to a
decision made by the Company during 1999 to exit from the mortgage banking
business. See Note 2.
White Mountains has completed numerous significant transactions that
have affected the comparability of the financial statement information
presented herein.
INVESTMENT SECURITIES
White Mountains' portfolio of fixed maturity investments, common equity
securities and other investments are classified as available for sale and are
reported at fair value as of the balance sheet date. Net unrealized investment
gains and losses, after tax, associated with such investments are reported as a
net amount as a separate component of shareholders' equity. Changes in net
unrealized investment gains and losses, after tax, are reported as a component
of other comprehensive net income.
Premiums and discounts on fixed maturity investments are accreted to income
over the anticipated life of the investment.
Other investments principally include investments in limited partnership
interests which are recorded using the equity method of accounting.
Realized gains and losses resulting from sales of investment securities are
accounted for using the specific identification method.
Short-term investments consist of money market funds, certificates of
deposit and other securities which mature or become available for use within one
year. Short-term investments are carried at amortized cost, which approximated
fair value as of December 31, 1999 and 1998.
White Mountains' consolidated insurance and reinsurance operations are
required to maintain deposits with certain insurance regulatory agencies in
order to maintain their insurance licenses. The fair value of such deposits
totalled $59.5 million and $57.7 million as of December 31, 1999 and 1998,
respectively.
CASH
Cash includes amounts on hand and demand deposits with banks and other
financial institutions. Amounts presented in the statement of cash flows are
shown net of balances acquired and sold in the purchase or sale of the Company's
consolidated subsidiaries.
INSURANCE AND REINSURANCE OPERATIONS
Premiums written are recognized as revenues and are earned ratably over the
terms of the related policies or reinsurance treaties. Unearned premiums
represent the portion of premiums collected that are applicable to future
insurance or reinsurance coverage provided by policies or treaties in force.
39
Deferred acquisition costs represent commissions, premium taxes, brokerage
expenses and other costs which are directly attributable to and vary with the
production of new business. These costs are deferred and amortized over the
applicable premium recognition period. Deferred acquisition costs are limited to
the amount expected to be recovered from future earned premiums and anticipated
investment income.
Losses and loss adjustment expenses are charged against income as incurred.
Unpaid insurance losses and loss adjustment expenses are based on estimates
(generally determined by claims adjusters, legal counsel and actuarial staff) of
the ultimate costs of settling claims, including the effects of inflation and
other societal and economic factors. Unpaid reinsurance losses and loss
adjustment expenses are based on reports received from ceding companies. Unpaid
loss and loss adjustment expense reserves represent management's best estimate
of ultimate losses and loss adjustment expenses, net of estimated salvage and
subrogation recoveries, if applicable. Such estimates are regularly reviewed and
updated and any adjustments resulting therefrom are reflected in current
operations. The process of estimating loss and loss adjustment expenses involves
a considerable degree of judgement by management and the ultimate amount of
expense to be incurred could be considerably greater than or less than the
amounts currently reflected in the financial statements.
Due to the nature of the policies written by White Mountains' insurance
subsidiaries, the Company's exposure to environmental and asbestos liabilities
is limited. However, as case law expands, White Mountains may be subject to
environmental and asbestos loss and loss adjustment expense liabilities beyond
that intended by policy coverage. White Mountains' insurance subsidiaries have
estimated environmental and asbestos loss and loss adjustment expense
liabilities based upon several factors including facts surrounding reported
cases (such as policy limits and deductibles), current law, past and projected
claim activity and past settlement values for similar claims. The Company
believes that recorded reserves related to environmental and asbestos loss and
loss adjustment expenses are adequate. Furthermore, in the event that current
case law is expanded to include claims not contemplated in the establishment of
White Mountains' recorded environmental and asbestos loss and loss adjustment
expense reserves, the Company believes that it is unlikely that these claims
will have a material adverse effect on its financial condition or liquidity.
Nonetheless, due to the inherent uncertainty present in the establishment of
environmental and asbestos loss and loss adjustment expense liabilities, the
possibility exists that the reserves for environmental and asbestos liabilities
could be revised in the near term.
Amounts recoverable from reinsurers are estimated in a manner consistent
with the claim liability associated with the reinsured policy. Reinsurance
premiums, commissions, expense reimbursements and reserves related to reinsured
business are accounted for on a basis consistent with those used in accounting
for the original policies issued and the terms of the reinsurance contracts.
Premiums ceded to other companies are reported as a reduction of premiums
written. Amounts applicable to reinsurance ceded for unearned premium reserves
(e.g., prepaid reinsurance premiums) have been included as a component of other
assets. Expense allowances received in connection with reinsurance ceded have
been accounted for as a reduction of the related policy acquisition costs and
are deferred and amortized accordingly.
DEFERRED CREDIT
As of December 31, 1999 and 1998, White Mountains had deferred credit
balances of $100.6 million and $37.1 million, respectively. These deferred
credits resulted from the transactions outlined below.
During 1999 White Mountains completed its acquisition of CIG for $86.7
million in cash. Because the cost acquiring CIG was less than the value of its
net identifiable assets, the Company recorded a $62.0 million deferred credit
(negative goodwill) which is being amortized ratably over the estimated period
of benefit of three years.
During 1999 White Mountains exercised its FSA Options and acquired
2,560,607 shares of FSA Common Stock. In accordance with GAAP, White Mountains
accounted for its FSA Options
40
at fair value and accounts for its investment in FSA Common Stock on the equity
method of accounting. Upon the exercises of the FSA Options, White Mountains was
required to write down its investments in the FSA Options to their original
cost. Because the cost of White Mountains' investment in FSA Common Stock
(resulting from the exercise of the FSA Options) was less than the incremental
portion of FSA's net identifiable assets it acquired at the date of exercise,
White Mountains recorded a $14.2 million deferred credit that is being amortized
to income ratably over the estimated period of benefit of five years.
During 1998 White Mountains acquired all outstanding shares of
Folksamerica Common Stock for $169.1 million thereby causing Folksamerica to
become a consolidated subsidiary of the Company as of that date. Prior to
1998, White Mountains owned a 50.0% non-consolidated interest in Folksamerica
through its investments in Folksamerica Preferred Stock and Folksamerica
Common Stock. In accordance with GAAP, White Mountains accounted for its
investment in Folksamerica Preferred Stock at fair value and accounts for its
investment in Folksamerica Common Stock on the equity method of accounting.
Upon the acquisition of Folksamerica, White Mountains was required to write
down its investment in Folksamerica Preferred Stock to its original cost.
Because the cost of White Mountains' investment in Folksamerica Preferred
Stock was less than the value of Folksamerica's net identifiable assets at
the date of acquisition, White Mountains recorded a $39.8 million deferred
credit that is being amortized to income ratably over the estimated period of
benefit of 5 years.
INCOME AND WITHHOLDING TAXES
Deferred tax assets and liabilities are recorded when a difference between
an asset or liability's financial statement value and its tax reporting value
exists, and for other temporary differences as defined by SFAS No. 109,
"Accounting for Income Taxes". The deferred tax asset or liability is recorded
based on tax rates expected to be in effect when the difference reverses.
As a result of the Redomestication, income earned by the Offshore Companies
will generally be subject to an effective overall tax rate lower than that
imposed by the United States, however, no tax benefits will be attained in the
event of net losses incurred by such companies. Onshore Companies continue to be
subject to United States income taxes.
The Company is no longer subject to United States income taxes on its
direct earnings. The Company's Barbados subsidiaries are generally subject to
a 5% United States withholding tax and a 1% Barbados income tax on dividends
received from its subsidiaries. Therefore, it is White Mountains' policy to
accrue a 1% foreign income tax and a 5% United States withholding tax on the
equity in earnings of each of its Onshore Companies. In addition, the Company
may be subject to an 8% state tax on dividends it receives from certain of
its subsidiaries. Therefore, it is the Company's policy to accrue an 8% state
income tax on dividends it is expected to receive in any given period from
such subsidiaries. These taxes are recorded in addition to United States
income taxes accrued by its Onshore Companies.
FOREIGN CURRENCY TRANSLATION
Folksamerica operates a branch office in Toronto, Canada to service its
Canadian customers and a portion of BICC's premiums are denominated in a foreign
currencies. Net unrealized foreign currency translation gains and losses
associated with Folksamerica and BICC are reported, after tax, as a net amount
in a separate component of shareholders' equity. Changes in the values of these
operations due to currency fluctuations, after tax, are reported on the income
statement as a component of other comprehensive net income.
ACCOUNTING STANDARDS RECENTLY ADOPTED AND ISSUED
In October 1998, the American Institute of Certified Public Accountants
(the "AICPA") issued Statement of Position ("SOP") 98-7 entitled "Deposit
Accounting: Accounting for Insurance and Reinsurance Contracts That Do Not
Transfer Risk". SOP 98-7 provides guidance on how to account for all insurance
and reinsurance contracts that do not transfer insurance risk. SOP 98-7 is
effective for periods beginning January 1, 2000, with early adoption permitted.
White Mountains is currently evaluating the impact of the adoption of SOP 98-7
and the potential effects on its financial position and results of operations.
41
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities" which requires
companies to record all derivatives on the balance sheet as either assets or
liabilities and measure those instruments at fair value. The manner in which
companies are to record gains and losses resulting from changes in the values of
those derivatives depends on the use of the derivative and whether it qualifies
for hedge accounting. The Company is not currently invested in traditional
derivative financial instruments for hedging or for any other purpose. However,
under SFAS 133 derivatives may be deemed to be embedded in other financial
instruments. If the embedded derivatives meet certain criteria, they must be
bifurcated from the original contract and separately accounted for in a manner
that is consistent with other derivative financial instruments. SFAS No. 133 is
effective beginning after June 15, 2000, with initial application as of the
beginning of the first quarter of the applicable fiscal year. White Mountains is
currently evaluating the impact of the adoption of SFAS 133 and the potential
effects on its financial position and results of operations.
In March 1998, the AICPA issued SOP 98-1 entitled "Accounting For the Cost
of Computer Software Developed or Obtained for Internal Use" which requires the
capitalization of certain prospective costs in connection with developing or
obtaining software for current use. The adoption of SOP 98-1 did not have a
material impact on White Mountains' financial position or results of operations.
In December 1997, the AICPA issued SOP 97-3 entitled "Accounting by
Insurance and Other Enterprises for Insurance-Related Assessments". SOP No. 97-3
provides guidance on when a liability should be recognized for guaranty fund and
other assessments and how to measure the liability. This statement is effective
for fiscal years beginning after December 15, 1998. SOP No. 97-3 did not have a
material effect on the results of operations or financial position.
EARNINGS PER SHARE
Basic earnings per Share amounts are based on the weighted average number
of Shares outstanding. Diluted earnings per Share amounts are based on the
average number of Shares and potential dilutive Shares outstanding. Potential
dilutive Shares include outstanding stock options and Warrants. In the diluted
earnings per Share calculation, the Company's net income is reduced by an amount
deemed to be reflective of the dilution to FSA's reported net income caused by
its investment in FSA Preferred Stock. The following table outlines the
Company's computation of earnings per Share for the years ended December 31,
1999, 1998 and 1997:
- ----------------------------------------------------------------------------------------------------------------------
Year Ended December 31,
----------------------------------------
1999 1998 1997
- ----------------------------------------------------------------------------------------------------------------------
BASIC EARNINGS PER SHARE NUMERATORS (IN MILLIONS):
Net income ................................................................ $121.0 $ 78.5 $ 39.3
=========================================
Net income from continuing operations ..................................... $108.4 $ 51.1 $ 64.9
========================================
Comprehensive net income .................................................. $ 3.0 $ 69.6 $ 81.0
========================================
DILUTED EARNINGS PER SHARE NUMERATORS (IN MILLIONS):
Net income ................................................................ $121.0 $ 78.5 $ 39.3
Dilution to earnings from unconsolidated insurance affiliates .......... (.6) (.4) (.2)
-----------------------------------------
Diluted net income ........................................................ $120.4 $ 78.1 $ 39.1
=========================================
Diluted net income from continuing operations ............................. $107.8 $ 50.7 $ 64.7
=========================================
Diluted comprehensive net income .......................................... $ 2.4 $ 69.2 $ 80.8
=========================================
42
EARNINGS PER SHARE DENOMINATORS (IN THOUSANDS):
Basic earnings per Share denominator (average Shares outstanding) ......... 5,630 5,866 6,570
Average outstanding dilutive stock options and Warrants (a) ............ 472 669 674
----------------------------------------
Diluted earnings per Share denominator .................................... 6,102 6,535 7,244
========================================
BASIC EARNINGS PER SHARE (IN DOLLARS):
Net income ................................................................ $21.50 $ 13.38 $ 5.98
========================================
Net income from continuing operations ..................................... $19.25 $ 8.71 $ 9.88
========================================
Comprehensive net income .................................................. $ .54 $ 11.87 $ 12.33
========================================
DILUTED EARNINGS PER SHARE (IN DOLLARS):
Net income ................................................................ $19.73 $ 11.94 $ 5.40
========================================
Net income from continuing operations ..................................... $17.66 $ 7.75 $ 8.93
========================================
Comprehensive net income .................................................. $ .39 $ 10.58 $ 11.15
========================================
(a) See Note 10 for detailed information concerning outstanding dilutive stock
options and Warrants.
43
NOTE 2. DISCONTINUED MORTGAGE BANKING OPERATIONS
On May 1, 1999, White Mountains concluded the Mortgage Banking Sale which
encompassed substantially all the mortgage banking assets of WMSC and received
net proceeds totalling $180.6 million (which was net of WMSC's public
indebtedness assumed by Citibank and WMSC's credit agreement borrowings which
were required to be repaid at closing). Mortgage banking assets and liabilities
that were not part of the Citibank sale principally included WMSC's investments
in financial instruments, pool loan purchases and preferred stock, each of which
were substantially liquidated during 1999. White Mountains recorded an estimated
$11.6 million after tax gain on the sale of its mortgage banking net assets
(which is net of anticipated future liabilities) during 1999. As a result of the
Company's decision to dispose of its net mortgage banking assets, these
activities are shown as discontinued operations herein.
Summary condensed financial results of discontinued mortgage banking
operations follow:
CONDENSED STATEMENTS OF NET ASSETS
- --------------------------------------------------------------------------------------------------------
December 31,
--------------------------
Millions 1999 1998
- --------------------------------------------------------------------------------------------------------
ASSETS:
Cash and investments ................................................. $ 13.8 $ 19.4
Capitalized mortgage servicing rights ................................ - 169.7
Mortgage loans held for sale ......................................... - 676.3
Pool loan purchases .................................................. 26.9 165.0
Other mortgage origination and servicing assets ...................... 2.1 106.9
Other assets ......................................................... 15.7 90.1
--------------------------
Total assets ..................................................... $ 58.5 $ 1,227.4
--------------------------
LIABILITIES AND PREFERRED STOCK:
Short-term debt ...................................................... $ - $ 697.0
Long-term debt ....................................................... - 173.4
Accounts payable and other liabilities ............................... 42.2 202.6
Preferred stock ...................................................... - 44.0
--------------------------
Total liabilities and preferred stock ............................ 42.2 1,117.0
--------------------------
Net assets of discontinued mortgage banking operations ............... $ 16.3 $ 110.4
==========================
44
CONDENSED STATEMENTS OF INCOME
- ----------------------------------------------------------------------------------------------------------------------
Year Ended December 31,
----------------------------------------
Millions 1999 1998 1997
- ----------------------------------------------------------------------------------------------------------------------
REVENUES:
Net investment income ............................................... $ 27.8 $ 81.6 $ 43.5
Net gain on sales of mortgages ...................................... 25.4 86.8 21.5
Net mortgage servicing revenue ...................................... 10.4 43.3 38.2
Other mortgage operations revenue ................................... 12.0 47.1 14.3
----------------------------------------
Total revenues .................................................. 76.2 258.8 117.5
----------------------------------------
EXPENSES:
Compensation and benefits ........................................... 28.5 78.7 56.3
Interest expense .................................................... 24.5 70.2 35.4
General expenses .................................................... 19.3 59.5 57.9
----------------------------------------
Total expenses .................................................. 72.3 208.4 149.6
----------------------------------------
Pretax earnings (loss) .............................................. 3.9 50.4 (32.1)
Income tax benefit (provision) ................................... (1.7) (19.3) 10.2
----------------------------------------
Net income (loss) before preferred stock dividends .................. 2.2 31.1 (21.9)
Preferred stock dividends ....................................... (1.2) (3.7) (3.7)
----------------------------------------
Net income (loss) from discontinued mortgage banking operations ..... $ 1.0 $ 27.4 $(25.6)
========================================
NOTE 3. REINSURANCE OPERATIONS
On August 18, 1998, White Mountains acquired all of the remaining
outstanding shares of Folksamerica Common Stock for $169.1 million thereby
causing Folksamerica to become a consolidated subsidiary of White Mountains as
of that date. Prior to that date, White Mountains owned a 50% non-consolidated
interest in Folksamerica, primarily through the Folksamerica Preferred Stock.
Supplemental condensed unaudited pro forma financial information for the
year ended December 31, 1998, which assumes that White Mountains' acquisition of
all the outstanding Folksamerica Common Stock had occurred as of January 1,
1998, follows:
- ----------------------------------------------------------------------------------
(Unaudited)
Pro Forma
Year Ended
Millions, except per Share amounts December 31, 1998
- ----------------------------------------------------------------------------------
Total revenues ........................................ $ 576.3
Net income ............................................ $ 95.0
Comprehensive net income .............................. $ 95.8
BASIC EARNINGS PER SHARE:
Net income .......................................... $ 16.19
Comprehensive net income ............................ $ 16.33
DILUTED EARNINGS PER SHARE:
Net income .......................................... $ 14.46
Comprehensive net income ............................ $ 14.59
------------------
The unaudited pro forma information presented does not purport to represent
what White Mountains' results of operations actually would have been had White
Mountains acquired all the outstanding common stock of Folksamerica as of
January 1, 1998, or to project White Mountains' results of operations for any
future date or period.
45
LOSS AND LOSS ADJUSTMENT EXPENSE RESERVE ACTIVITY
The following table summarizes White Mountains' loss and loss adjustment
expense reserve activity relating to Folksamerica for the year ended December
31, 1999 and the interim period from August 18, 1998 to December 31, 1998:
- ----------------------------------------------------------------------------------------------------------------------
YEAR ENDED Period Ended
Millions DECEMBER 31, 1999 December 31, 1998
- ----------------------------------------------------------------------------------------------------------------------
Beginning balance ........................................................ $ 723.2 $ 726.1
Less beginning reinsurance recoverable ............................... (129.0) (124.1)
-----------------------------------------
Net loss and loss adjustment expense reserves ............................ 594.2 602.0
Loss and loss adjustment expense reserves acquired - USF Re .............. 106.5 -
Losses and loss adjustment expenses incurred relating to:
Current year losses .................................................. 152.9 58.6
Prior year losses .................................................... 29.3 1.1
------------------------------------------
Total incurred losses and loss adjustment expenses ....................... 182.2(a) 59.7
Loss and loss adjustment expenses paid relating to:
Current year losses .................................................. (55.4) (13.0)
Prior year losses .................................................... (181.6) (54.5)
------------------------------------------
Total loss and loss adjustment expense payments .......................... (237.0) (67.5)
Net ending balance ....................................................... 645.9 594.2
Plus ending reinsurance recoverable .................................. 136.2 129.0
-----------------------------------------
Gross ending balance ..................................................... $ 782.1 $ 723.2
==========================================
(a) Includes adverse loss development on USF Re acquired reserves. This adverse
development resulted in a $14.0 million reduction in Folksamerica's USF Re
seller note payable. See Note 7.
During 1999 Folksamerica acquired USF Re for total consideration of $92.5
million. The purchase consideration included the issuance of a $20.8 million,
five-year note by Folksamerica (which can be reduced by adverse loss development
at USF Re post acquisition). Incurred losses for the year ended December 31,
1999 related to prior accident years are primarily attributable to reserve
additions related to: (i) adverse loss development on USF Re acquired reserves
of $20.1 million pretax (which resulted in a reduction of the USF Re seller note
of $14.0 million) and (ii) reserve additions relating to asbestos and
environmental liability exposures.
As of December 31, 1999 and 1998, Folksamerica carried reported case
reserves for environmental exposures of $9.9 million and $14.9 million, ($8.4
million and $10.9 million, net of reinsurance) respectively. As of December 31,
1999 and 1998, Folksamerica carried reported case reserves for asbestos
exposures of $34.5 million and $29.5 million ($22.3 million and $17.9 million
net of reinsurance), respectively. Folksamerica carried IBNR reserves for these
exposures as of December 31, 1999 and 1998 of $25.2 million ($19.2 million net
of reinsurance).
ADDITIONAL REINSURANCE OPERATIONS INFORMATION
For the period from August 18, 1998 to December 31, 1998, White Mountains
recorded $73.7 million of premiums written, $85.4 million of premiums earned,
$29.1 million of reinsurance acquisition costs and $59.7 million of loss and
loss adjustment expenses relating to
46
Folksamerica. These amounts are shown net of reinsurance ceded by Folksamerica
of $9.4 million of premiums written, $8.8 million of premiums earned, $.9
million of reinsurance acquisition costs and $19.0 million of loss and loss
adjustment expenses.
Folksamerica's policyholders' surplus, as reported to various regulatory
authorities as of December 31, 1999 and 1998, was $338.5 million and $328.5
million, respectively. Folksamerica's statutory net income for the year ended
December 31, 1999 and for the period from August 18, 1998 to December 31, 1998
was $48.6 million and $9.0 million, respectively. The principal differences
between Folksamerica's statutory amounts and the amounts reported in accordance
with GAAP (Folksamerica's stand-alone shareholder's equity was $249.4 million
and $302.0 million at December 31, 1999 and 1998, respectively, and its net
income was $63.7 million and $5.5 million for the year ended December 31, 1999
and for the period from August 18, 1998 to December 31, 1998, respectively)
include deferred taxes, deferred acquisition costs and market value adjustments
for debt securities. Folksamerica's statutory policyholders' surplus at December
31, 1999 was in excess of the minimum requirements of relevant state insurance
regulations.
Under the insurance laws of the state of New York, Folksamerica is
restricted with respect to the amount of dividends it may pay without prior
approval by state regulatory authorities. Accordingly, there is no assurance
that dividends may be paid by Folksamerica in the future. At December 31, 1999,
Folksamerica had the ability to pay a dividend to its shareholder of $33.9
million without prior approval of regulatory authorities.
On December 30, 1999, Folksamerica announced that it had signed a
definitive agreement to purchase PCA, a Florida-domiciled workers' compensation
insurance company, from Humana Inc. The transaction, for $125.0 million in cash,
is subject to regulatory approvals.
On January 10, 2000, Folksamerica announced that it had signed a definitive
agreement to acquire substantially all the reinsurance operations of RCRe, a
wholly-owned subsidiary of Risk Capital Holdings, Inc., for consideration of
$20.3 million. The transaction is subject to regulatory approvals.
During the year ended December 31, 1999, Folksamerica received
approximately 67% of its gross reinsurance premiums written from three major
reinsurance brokers as follows: (i) Guy Carpenter and affiliates - 26%; (ii)
E.W. Blanch - 21%; and (iii) AON Re, Inc. - 20%. During the year ended December
31, 1999, Folksamerica received no more than 10% of its gross reinsurance
premiums from any individual ceding company.
NOTE 4. CONSOLIDATED INSURANCE OPERATIONS
On October 15, 1999, White Mountains completed its acquisition of CIG for
$86.7 million in cash. CIG's principal operating subsidiaries are PIC, a
commercial and personal lines writer, and ACIC and BICC, both of which are in
run-off.
On June 17, 1999, White Mountains completed the Valley Group Sale and
received net proceeds of $139.0 million in cash after receiving a special
dividend prior to the closing of $76.6 million (net of related tax liabilities)
consisting of cash, investment securities and the common stock of Waterford. In
connection with the Valley Group Sale, White Mountains recorded a pretax gain of
$88.1 million, $53.8 million after tax. As part of the Valley Group Sale, White
Mountains has provided Unitrin, Inc. with certain adverse loss development
protections for approximately four years. These protections are not expected to
result in a material subsequent purchase price adjustment.
47
For the years ended December 31,1998 and 1997, VGI contributed $5.0 million
and $7.2 million, respectively, to net income. For the year ended December 31,
1999, VGI's contribution to net income was not material.
LOSS AND LOSS ADJUSTMENT EXPENSE RESERVE ACTIVITY
The following table summarizes loss and loss adjustment expense reserve
activity for White Mountains' consolidated property and casualty insurance
operations for the years ended December 31, 1999, 1998 and 1997:
- ----------------------------------------------------------------------------------------------------------------------
Year Ended December 31,
------------------------------------------
Millions 1999 1998 1997
- ----------------------------------------------------------------------------------------------------------------------
Beginning balance .................................................... $ 88.5 $ 71.9 $ 65.4
Less beginning reinsurance recoverable ........................... (8.9) (8.7) (9.2)
------------------------------------------
Net loss and loss adjustment expense reserves ........................ 79.6 63.2 56.2
Loss and loss adjustment expense reserves sold - VGI ................. (87.8) - -
Loss and loss adjustment expense reserves acquired - CIG ............. 22.5 - -
Losses and loss adjustment expenses incurred relating to:
Current year losses .............................................. 57.5 108.4 99.6
Prior year losses ................................................ 2.6 6.7 (2.5)
------------------------------------------
Total incurred losses and loss adjustment expenses ................... 60.1 115.1 97.1
Loss and loss adjustment expense payments ............................ (38.3) (98.7) (90.1)
Net ending balance ................................................... 36.1 79.6 63.2
Plus ending reinsurance recoverable .............................. 32.8 8.9 8.7
------------------------------------------
Gross ending balance ................................................. $ 68.9 $ 88.5 $ 71.9
==========================================
Total policyholders' surplus of PIC and ACIC at December 31, 1999, as
reported to regulatory authorities, was $76.8 million. Statutory net loss for
the period from October 16, 1999 to December 31, 1999 for PIC and ACIC totalled
$3.9 million. The principal differences between PIC and ACIC's statutory amounts
and the amounts reported in accordance with GAAP (PIC and ACIC's total
shareholder's equity was $73.0 million at December 31, 1999 and its net loss was
$3.3 million for the period from October 16, 1999 to December 31, 1999) include
deferred taxes, deferred acquisition costs and market value adjustments for debt
securities. PIC and ACIC's statutory policyholders' surplus at December 31, 1999
was in excess of the minimum requirements of relevant state insurance
regulations.
Under the insurance laws of the various states under which PIC and ACIC are
domiciled, an insurer is restricted with respect to the amount of dividends it
may pay without prior approval by state regulatory authorities. Accordingly,
there is no assurance that dividends may be paid by PIC and ACIC in the future.
At December 31, 1999, $11.0 million of PIC and ACIC's total statutory surplus
was available for the payment of dividends to its shareholders without prior
approval of regulatory authorities.
48
NOTE 5. INVESTMENT SECURITIES
White Mountains' net investment income is comprised primarily of interest
income associated with the fixed maturity investments of its consolidated
insurance and reinsurance operations and dividend income from its equity
investments. Net investment income for 1999, 1998 and 1997 consisted of the
following:
- ----------------------------------------------------------------------------------------------------------------------
Year Ended December 31,
----------------------------------------
Millions 1999 1998 1997
- ----------------------------------------------------------------------------------------------------------------------
Investment income:
Fixed maturity investments ........................................ $ 53.6 $ 28.4 $ 11.3
Common equity securities .......................................... 3.2 3.6 7.3
Short-term investments ............................................ 6.1 3.4 3.5
Other ............................................................. .3 2.2 -
----------------------------------------
Total investment income .............................................. 63.2 37.6 22.1
Less investment expenses and other charges ........................ (1.3) (.8) (.5)
----------------------------------------
Net investment income, before tax .................................... $ 61.9 $ 36.8 $ 21.6
========================================
Total net investment gains and losses (excluding net unrealized gains and
losses from investments in unconsolidated insurance affiliates), before tax,
associated with White Mountains' investment portfolio consisted of the
following:
- ----------------------------------------------------------------------------------------------------------------------
Year Ended December 31,
----------------------------------------
Millions 1999 1998 1997
- ----------------------------------------------------------------------------------------------------------------------
Gross realized investment gains ............................................. $ 90.4 $ 74.0 $ 98.3
Gross realized investment losses ............................................ (20.8) (3.0) (.9)
----------------------------------------
Net realized investment gains ............................................... 69.6(a) 71.0 97.4
Change in net unrealized investment gains ................................... (89.8) (46.2) (9.7)
----------------------------------------
Total net investment gains (losses) for investments held during the period,
before tax ............................................................... $(20.2) $ 24.8 $ 87.7
========================================
(a) Excludes a $15.8 million realized gain on sale of the USF Re shell company
49
The composition of pretax realized gains consisted of the following:
- --------------------------------------------------------------------------------------------
Year Ended December 31,
----------------------------------------
Millions 1999 1998 1997
- --------------------------------------------------------------------------------------------
Fixed maturity investments ...................... $ .7 $ 1.6 $ .6
Common equity securities ........................ 61.3 22.6 59.5
Other investments ............................... 7.6 46.8 37.3
----------------------------------------
Net realized investment gains ................... $ 69.6(a) $ 71.0 $ 97.4
========================================
(a) Excludes a $15.8 million realized gain on sale of the USF Re shell company
The components of White Mountains' ending net unrealized investment gains
and losses on its investment portfolio and its investments in unconsolidated
insurance affiliates were as follows:
- --------------------------------------------------------------------------------------------------------------------
December 31,
--------------------------------------
Millions 1999 1998
- --------------------------------------------------------------------------------------------------------------------
Investment securities:
Gross unrealized investment gains ...................................... $ 21.6 $ 68.4
Gross unrealized investment losses ..................................... (37.8) (2.5)
--------------------------------------
Net unrealized gains (losses) from investment securities ................... (16.2) 65.9
Net unrealized gains from investments in unconsolidated insurance affiliates 30.0 128.1
--------------------------------------
Total net unrealized investment gains, before tax .......................... $ 13.8 $194.0
======================================
50
The cost or amortized cost, gross unrealized investment gains and losses,
and carrying values of White Mountains' fixed maturity investments as of
December 31, 1999 and 1998, were as follows:
- ----------------------------------------------------------------------------------------------------------------------
DECEMBER 31, 1999
--------------------------------------------------------
Cost or Gross Gross
amortized unrealized unrealized Carrying
Millions cost gains losses value
- ----------------------------------------------------------------------------------------------------------------------
U. S. Government and agency obligations ................... $351.5 $.6 $(14.5) $337.6
Debt securities issued by industrial corporations ......... 330.8 .4 (11.8) 319.4
Municipal obligations ..................................... 132.0 .7 (4.0) 128.7
Mortgage-backed securities ................................ 93.1 .1 (3.9) 89.3
Foreign government obligations ............................ 50.5 .1 (1.1) 49.5
--------------------------------------------------------
Total fixed maturity investments ..................... $957.9 $1.9 $(35.3) $924.5
========================================================
- ----------------------------------------------------------------------------------------------------------------------
December 31, 1998
----------------------------------------------------------
Cost or Gross Gross
amortized unrealized unrealized Carrying
Millions cost gains losses value
- ----------------------------------------------------------------------------------------------------------------------
Debt securities issued by industrial corporations ........... $351.9 $ 7.0 $(1.0) $357.9
U. S. Government and agency obligations ..................... 217.6 4.7 (.3) 222.0
Municipal obligations ....................................... 189.1 2.8 (.1) 191.8
Mortgage-backed securities .................................. 79.0 .9 (.7) 79.2
MediaOne redeemable preferred stock ......................... 49.8 - - 49.8
Foreign government obligations .............................. 26.7 .3 (.1) 26.9
Other fixed maturity investments ............................ 2.0 - - 2.0
------------------------------------------------------
Total fixed maturity investments ....................... $916.1 $15.7 $(2.2) $929.6
======================================================
The cost or amortized cost and carrying value of White Mountains' fixed
maturity investments at December 31, 1999 is presented below by contractual
maturity. Actual maturities could differ from contractual maturities because
borrowers may have the right to call or prepay certain obligations with or
without call or prepayment penalties.
- ---------------------------------------------------------------------------------------------
DECEMBER 31, 1999
----------------------------------
Cost or
amortized Carrying
Millions cost value
- ---------------------------------------------------------------------------------------------
Due in one year or less .............................. $81.0 $80.3
Due after one year through five years ................ 455.8 443.4
Due after five years through ten years ............... 300.0 285.4
Due after ten years .................................. 28.0 26.1
Mortgage-backed securities ........................... 93.1 89.3
---------------------------
Total ........................................... $957.9 $924.5
===========================
51
The cost or amortized cost, gross unrealized investment gains and losses,
and carrying values of White Mountains' common equity securities and other
investments as of December 31, 1999 and 1998, were as follows:
- ---------------------------------------------------------------------------------------------------
DECEMBER 31, 1999
------------------------------------------------------
Cost or Gross Gross
amortized unrealized unrealized Carrying
Millions cost gains losses value
- ---------------------------------------------------------------------------------------------------
Common equity securities ................ $100.4 $14.8 $(6.8) $108.4
=====================================================
Other investments ....................... $ 57.5 $11.4 $(.6) $68.3
=====================================================
- ----------------------------------------------------------------------------------------------------------------------
December 31, 1998
-------------------------------------------------------
Cost or Gross Gross
amortized unrealized unrealized Carrying
Millions cost gains losses value
- -----------------------------------------------------------------------------------------------------------------------
Common equity securities .................................. $195.4 $51.4 $(5.1) $241.7
========================================================
Other investments ......................................... $ 69.1 $ 8.6 $(.2) $77.5
=======================================================
Sales and maturities of investments, excluding short-term investments,
totalled $530.1 million, $270.3 million and $158.0 million for the years ended
December 31, 1999, 1998 and 1997, respectively. There were no non-cash exchanges
or involuntary sales of investment securities during 1999, 1998 and 1997.
52
The components of the White Mountains' change in net unrealized investment
gains, after tax, from 1997 to 1999 are as follows:
- --------------------------------------------------------------------------------------------------------------------
Year Ended December 31,
--------------------------------------
Millions 1999 1998 1997
- --------------------------------------------------------------------------------------------------------------------
Net realized investment gains .............................................. $ 69.6(a) $ 71.0 $ 97.4
Income tax expense applicable to net realized investment gains ........... (24.4) (24.9) (34.0)
----------------------------------------
Net realized investment gains, after tax ................................... $ 45.2 $ 46.1 $ 63.4
========================================
Net unrealized investment holding gains (losses) arising during the year ... $ (118.4) $ 58.6 $ 162.0
Income taxes applicable to net unrealized investment holding gains ....... 44.7 (20.5) (56.9)
----------------------------------------
Net unrealized investment holding gains arising during the year, after tax .. (73.7) 38.1 105.1
Recognition of unrealized gains for investments sold, after tax .......... (45.2) (46.1) (63.4)
----------------------------------------
Change in net unrealized investment gains, after tax ....................... $ (118.9) $ (8.0) $ 41.7
========================================
(a) Excludes a $15.8 million realized gain on sale of the USF Re shell company
NOTE 6. THIRD PARTY REINSURANCE
In the normal course of business, White Mountains' insurance subsidiaries
seek to limit losses that may arise from catastrophes or other events that may
cause unfavorable underwriting results by reinsuring certain levels of risk in
various areas of exposure with other insurance enterprises or reinsurers. White
Mountains remains liable for risks reinsured with third parties to the extent
that the reinsurer is unable to honor its obligations under reinsurance
contracts at the time of loss. White Mountains' insurance subsidiaries evaluate
the financial condition of their reinsurers and monitor concentrations of credit
risk arising from similar activities or economic characteristics of the
reinsurers to minimize the Company's exposure to significant losses from
reinsurer insolvencies.
REINSURANCE OPERATIONS
At December 31, 1999, Folksamerica has reinsurance recoverables with a
carrying value of $46.7 million associated with London Life and Casualty
Reinsurance Corporation. At December 31, 1999, Folksamerica holds a letter of
credit and funds withheld as collateral for amounts due from London Life and
Casualty in excess of the recoverable balance.
INSURANCE OPERATIONS
ACIC is a party to an aggregate excess of loss contract with Gerling Global
International Reinsurance Company, Ltd. ("Gerling") to reinsure direct excess
liability policies written prior to December 31, 1985. At December 31, 1999,
ACIC had reinsurance recoverables with a carrying value of $23.3 million with
Gerling under the contract. ACIC holds a letter of credit and assets held in
trust as collateral for amounts due under the Gerling contract.
53
The effects of reinsurance on White Mountains' written and earned premiums
and on loss and loss adjustment expenses was as follows:
- -----------------------------------------------------------------------------------------------------------------------------------
Consolidated Property and Casualty
Insurance Operations
------------------------------------
Reinsurance ACIC, PIC and
Millions Operations (a) BICC (b) VGI (c) Waterford Total
- -----------------------------------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, 1999
Gross written premiums:
Direct .................................................. $ 2.2 $ 4.9 $ 48.2 $ 9.5 $ 64.8
Assumed ................................................. 236.2 2.3 30.1 1.5 270.1
Ceded ................................................... (36.7) (3.0) (10.9) (9.6) (60.2)
-------------------------------------------------------------------
Net written premiums ....................................... $ 201.7 $ 4.2 $ 67.4 $ 1.4 $ 274.7
-------------------------------------------------------------------
Gross earned premiums:
Direct .................................................. $ 2.4 $ 5.9 $ 44.1 $ 11.4 $ 63.8
Assumed ................................................. 241.0 2.7 35.1 1.8 280.6
Ceded ................................................... (32.4) (4.1) (13.2) (11.5) (61.2)
-------------------------------------------------------------------
Net earned premiums ........................................ $ 211.0 $ 4.5 $ 66.0 $ 1.7 $ 283.2
-------------------------------------------------------------------
Losses and loss adjustment expenses:
Direct .................................................. $ (6.2) $ 4.8 $ 44.5 $ (1.8) $ 41.3
Assumed ................................................. 205.4 1.6 14.6 12.9 234.5
Ceded ................................................... (31.0) (.2) (6.6) (9.7) (47.5)
-------------------------------------------------------------------
Net losses and loss adjustment expenses .................... $ 168.2 $ 6.2 $ 52.5 $ 1.4 $ 228.3
===================================================================
Year ended December 31, 1998
Gross written premiums:
Direct .................................................. $ 1.9 $ - $ 96.3 $ 9.6 $ 107.8
Assumed ................................................. 81.2 - 69.9 1.5 152.6
Ceded ................................................... (9.4) - (2.7) (9.7) (21.8)
-------------------------------------------------------------------
Net written premiums ....................................... $ 73.7 $ - $ 163.5 $ 1.4 $ 238.6
-------------------------------------------------------------------
Gross earned premiums:
Direct .................................................. $ 2.0 $ - $ 98.0 $ 6.4 $ 106.4
Assumed ................................................. 92.2 - 68.3 1.0 161.5
Ceded ................................................... (8.8) - (6.6) (6.5) (21.9)
-------------------------------------------------------------------
Net earned premiums ........................................ $ 85.4 $ - $ 159.7 $ .9 $ 246.0
-------------------------------------------------------------------
Losses and loss adjustment expenses:
Direct .................................................. $ 4.4 $ - $ 79.5 $ 3.6 $ 87.5
Assumed ................................................. 74.3 - 37.9 .7 112.9
Ceded ................................................... (19.0) - (2.8) (3.8) (25.6)
-------------------------------------------------------------------
Net losses and loss adjustment expenses .................... $ 59.7 $ - $ 114.6 $ .5 $ 174.8
===================================================================
54
- -----------------------------------------------------------------------------------------------------------------------------------
Consolidated Property and Casualty
Insurance Operations
--------------------------------------
Reinsurance ACIC, PIC and
Millions Operations (a) BICC (b) VGI (c) Waterford Total
- -----------------------------------------------------------------------------------------------------------------------------------
Year ended December 31, 1997
- -----------------------------------------------------------------------------------------------------------------------------------
Gross written premiums:
Direct ......................................... $ - $ - $ 92.3 $ 2.4 $ 94.7
Assumed ........................................ - - 64.2 1.0 65.2
Ceded .......................................... - - (6.0) (3.1) (9.1)
------------------------------------------------------------------------
Net written premiums .............................. $ - $ 8 $ 150.5 $ .3 $ 150.8
------------------------------------------------------------------------
Gross earned premiums:
Direct ......................................... $ - $ - $ 89.2 $ .5 $ 89.7
Assumed ........................................ - - 61.8 1.2 63.0
Ceded .......................................... - - (5.8) (1.6) (7.4)
------------------------------------------------------------------------
Net earned premiums ............................... $ - $ - $ 145.2 $ .1 $ 145.3
------------------------------------------------------------------------
Losses and loss adjustment expenses:
Direct ......................................... $ - $ - $ 64.3 $ - $ 64.3
Assumed ........................................ - - 33.5 5.1 38.6
Ceded .......................................... - - (.8) (5.0) (5.8)
------------------------------------------------------------------------
Net losses and loss adjustment expenses ........... $ - $ - $ 97.0 $ .1 $ 97.1
========================================================================
(a) Excludes premiums and loss and loss adjustment expenses from January 1,
1997 to August 17, 1998 during which time Folksamerica was not a
consolidated subsidiary of the Company. See Note 3.
(b) Excludes premiums and loss and loss adjustment expenses from January 1,
1997 to October 14, 1999 during which time ACIC, PIC and BICC were not
consolidated subsidiaries of the Company. See Note 4.
(c) Excludes premiums and loss and loss adjustment expenses from Waterford for
all periods presented, as Waterford was not part of the Valley Group Sale.
See Note 4.
NOTE 7. DEBT
SHORT-TERM DEBT
At December 31, 1999 the Company had short-term debt outstanding of $4.0
million representing medium-term notes due February 2000 with a stated interest
rate of 7.39%. At December 31, 1998 White Mountains had $51.5 million of
short-term debt outstanding which consisted of a $50.0 million credit facility
at a subsidiary holding company with an average interest rate of 6.20% and a
$1.5 million note payable at CGI with a stated interest rate of 6.50%. During
1999, White Mountains repaid the $50.0 million credit facility and extinguished
the CGI obligation in connection with the Valley Group Sale.
In addition, the Company has a revolving credit agreement whereby it may
borrow up to $35.0 million (which was increased to $50.0 million during 1999) at
short-term market interest rates. The credit agreement contains customary
facility fees plus an interest rate equal to the London Interbank Offered Rate
plus .625% on borrowings thereunder. The credit agreement contains certain
customary covenants and conditions. At December 31, 1999 the Company was in
compliance with all covenants under the facility and had no borrowings
outstanding under the agreement. At December 31, 1998 the Company had no
outstanding borrowings under its previous credit agreement.
55
LONG-TERM DEBT
Long-term debt outstanding consisted of the following:
- ------------------------------------------------------------------------------------------------------------------
December 31,
------------------------------------
Millions 1999 1998
- ------------------------------------------------------------------------------------------------------------------
The Company:
Medium-term notes ....................................................... $ 96.4 $ 116.3
Less net discounts ...................................................... (.4) (.6)
--------------------------------
Total ................................................................ 96.0 115.7
--------------------------------
Folksamerica:
Revolving credit agreement .............................................. 100.0 -
USF Re seller note ...................................................... 6.8 -
Medium-term notes ....................................................... - 55.6
--------------------------------
Total ................................................................ 106.8 55.6
--------------------------------
VGI: Medium-term notes .................................................... - 15.0
--------------------------------
Total long-term debt ....................................................... $ 202.8 $ 186.3
=================================
At December 31, 1999 the Company had $96.0 million of outstanding
medium-term notes with an average maturity of 3.6 years and a yield to maturity
of 7.83%. During 1999 the Company repurchased $15.9 million in principal amount
of its medium-term notes due in February 2003.
As part of the Folksamerica acquisition in 1998, White Mountains agreed to
repay or refinance Folksamerica's $55.6 million of outstanding long-term
indebtedness during February 1999. In February 1999 White Mountains repayed and
replaced Folksamerica's former facility with a six-year revolving credit
agreement whereby it may borrow up to $100.0 million (which was subsequently
increased to $120.0 million during 1999) at market interest rates. The new
credit agreement contains certain customary covenants and conditions. At
December 31, 1999 Folksamerica was in compliance with all covenants under the
facility and had $100.0 million of borrowings outstanding under the agreement.
As part of its 1999 acquisition of USF Re, Folksamerica issued a $20.8
million, five-year note which may be reduced by adverse loss development at USF
Re post acquisition. During 1999 Folksamerica reduced the principal amount of
the USF Re note to $6.8 million in response to post acquisition adverse loss
development experienced on loss reserves assumed in connection with
56
the USF Re acquisition. The reduction of the principal amount of the USF Re note
of $14.0 million has been recorded as a reduction of incurred loss and loss
adjustment expenses for the period ended December 31, 1999.
At December 31, 1998 Valley had $15.0 million outstanding under a five year
credit facility whereby it could borrow up to $15.0 million at market interest
rates. During 1999 this obligation was repaid in connection with the Valley
Group Sale.
Total interest paid by White Mountains for its short-term and long-term
indebtedness was $15.6 million, $13.3 million and $14.3 million in 1999, 1998
and 1997, respectively.
White Mountains' debt maturities for 2000, 2003, 2004 and beyond are $4.0
million, $86.4 million, $6.8 million and $110.0 million, respectively.
NOTE 8. INCOME TAXES
In connection with the Redomestication, the Company and certain of its
subsidiaries changed their domicile to either Bermuda or Barbados while certain
other subsidiaries remained domiciled in the United States. As a result, income
earned by the Offshore Companies will generally be subject to an effective
overall tax rate lower than that imposed by the United States, however, no tax
benefits will be attained in the event of net losses incurred by such companies
Additionally, prior to the Redomestication, the Company filed a consolidated
United States income tax return with its subsidiaries. The Onshore Companies
must continue to file United States tax returns but may no longer do so on a
group-wide consolidated basis. As a result, the aggregate United States income
tax liability of the Onshore Companies may be higher than it otherwise would
have been if part of a consolidated tax return. These factors may serve to
increase or decrease White Mountains' effective tax rate for 1999 and beyond,
depending on the events and circumstances occurring during such periods.
In connection with the Redomestication, the Company was treated as if it
sold all of its directly owned assets in a fully taxable transaction in which
gains, but not losses, were recognized. The Company incurred a tax liability
upon the Redomestication of approximately $2.5 million.
The total income tax provision consisted of the following:
- -----------------------------------------------------------------------------------------------------------------------------
Year Ended December 31,
--------------------------------
Millions 1999 1998 1997
- -----------------------------------------------------------------------------------------------------------------------------
United States income tax provision ..................................................... $ 47.0 $ 26.9 $ 35.1
State and local income tax provision ................................................... 6.0 1.6 1.3
United States withholding tax and foreign income tax provision ......................... .1 - -
---------------------------------
Total income tax provision .......................................................... $ 53.1 $ 28.5 $ 36.4
=================================
Net income tax payments ................................................................ $ 14.1 $ 35.7 $ 24.9
=================================
Tax provision recorded directly to shareholders' equity related to:
Changes in net unrealized investment gains and losses .............................. $ (69.1) $ (4.4) $ 22.9
Changes in net foreign currency translation gains and losses ....................... $ .5 $ (.5) $ -
=================================
57
The components of the income tax provision (benefit) on pretax earnings
follow:
- -------------------------------------------------------------------------------------------------------------
Year Ended December 31,
-------------------------------------------
Millions 1999 1998 1997
- -------------------------------------------------------------------------------------------------------------
Current ................................................... $ 14.3 $30.3 $ 36.9
Deferred .................................................. 38.8 (1.8) (.5)
--------------------------------------------
Total income tax provision on pretax earnings ........ $ 53.1 $28.5 $ 36.4
============================================
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts received for tax purposes. White Mountains recorded a
net deferred income tax asset of $52.5 million in other assets and a net
deferred tax liability of $37.5 million in accounts payable and other
liabilities on its balance sheet as of December 31, 1999. White Mountains
recorded a net deferred income tax liability of $13.4 million in accounts
payable and other liabilities on its balance sheet at December 31, 1998. An
outline of the significant components of White Mountains' deferred tax assets
and liabilities follows:
- --------------------------------------------------------------------------------
December 31,
----------------------
Millions 1999 1998
- --------------------------------------------------------------------------------
Deferred tax assets related to:
Discounting of loss reserves ..................... $ 45.3 $ 40.1
Unearned insurance and reinsurance premiums ...... 5.7 10.5
Compensation and benefit accruals ................ 4.4 49.9
Other items ...................................... .7 2.8
---------------------
Total deferred tax assets ................... $ 56.1 $ 103.3
=====================
- ----------------------------------------------------------------------------------------------
December 31,
------------------------
Millions 1999 1998
- ----------------------------------------------------------------------------------------------
Deferred tax liabilities related to:
Earnings from unconsolidated insurance affiliates ............ $ 18.1 $ 17.5
Net unrealized investment gains .............................. 13.9 83.0
Deferred acquisition costs ................................... 7.8 12.4
Other items .................................................. 1.3 3.8
-----------------------
Total deferred tax liabilities .......................... $ 41.1 $ 116.7
=======================
The Company believes that it is more likely than not that results of future
operations will generate sufficient taxable income to realize the deferred tax
asset balances carried as of December 31, 1999 and 1998.
58
A reconciliation of taxes calculated using the 35% United States statutory
rate (the tax rate at which the majority of the Company's worldwide operations
are subject to) to the income tax provision on pretax earnings follows:
- --------------------------------------------------------------------------------------------------------------------------
Year Ended December 31,
------------------------------------
Millions 1999 1998 1997
- --------------------------------------------------------------------------------------------------------------------------
Tax provision at the United States statutory rate .................................. $ 56.5 $ 27.9 $ 35.5
Differences in taxes resulting from:
Deferred credit amortization and purchase price adjustments ..................... (7.9) (.9) -
Tax reserve adjustments ......................................................... 6.1 5.4 5.1
State income taxes, net ......................................................... 3.9 1.0 .9
Non-United States net earnings .................................................. (3.6) - -
United States income tax incurred upon the Redomestication ...................... 2.5 - -
Tax exempt interest ............................................................. (2.2) (1.2) -
Dividends received deduction .................................................... (1.4) (2.6) (3.1)
Other, net ...................................................................... (.8) (1.1) (2.0)
---------------------------------
Total income tax provision on pretax earnings ...................................... $ 53.1 $ 28.5 $ 36.4
=================================
The non-United States component of net earnings was $9.0 million for the
year ended December 31, 1999.
In 1991, the Company sold Fireman's Fund to Allianz of America, Inc. The
$1.3 billion gain from the sale as reported in 1991 included a $75.0 million tax
benefit related to the Company's estimated tax loss from the sale. Since 1991
the Company has carried an estimated reserve related to tax matters affecting
the amount of the deductible tax loss from the sale and other tax matters. The
amount of tax benefit from the sale of Fireman's Fund ultimately realized by the
Company may be significantly more or less than the Company's current estimate
due to possible changes in or new interpretations of tax rules, possible
amendments to White Mountains' 1991 or prior years' Federal income tax returns,
the results of further Internal Revenue Service audits and other matters
affecting the amount of the deductible tax loss from the sale.
NOTE 9. RETIREMENT AND POSTRETIREMENT PLANS
The Company formerly had an unfunded, nonqualified defined contribution
plan for a select group of management employees for the purpose of providing
retirement benefits (the "DBP"). The amount of annual contribution to the DBP
was determined using actuarial assumptions. At December 31, 1998, White
Mountains' liability to participants pursuant to the DBP was $4.8 million.
The Company formerly had an unfunded, nonqualified plan for a select group
of management employees for the purpose of deferring current compensation for
retirement savings (the "DCP"). Pursuant to the DCP, participants could
voluntarily defer all or a portion of qualifying remuneration payable by White
Mountains. At December 31, 1998 White Mountains' liability to participants
pursuant to the DCP was $65.1 million.
Prior to the Redomestication, White Mountains terminated the DBP and the
DCP and paid participants a total of $88.6 million in full satisfaction of White
Mountains' long-term DBP and DCP obligations. This payment resulted in an
incremental pretax cost to the Company of $15.2 million, however, this action
provided the Company with increased tax deductible expenses during 1999 and
served to reduce future compensation and benefit expenses.
During 1999 the Board mandated deferrals of a portion of compensation
earned by certain of its executive officers totalling $3.1 million for a period
of no less than one year. These 1999 deferrals are eligible for inclusion in
any successor plan to the DCP.
59
White Mountains has various defined contribution employee savings plans for
the benefit of substantially all its employees. The costs of these plans are not
material to White Mountains' financial statements.
Folksamerica has a defined benefit pension plan for the benefit of its
employees. Benefits under this plan are based on years of service and each
employee's highest average eligible compensation over the last five consecutive
years of employment. The cost of this plan is not material to White Mountains'
financial statements.
White Mountains' does not have any significant ongoing postretirement
benefit plan obligations.
NOTE 10. EMPLOYEE STOCK-BASED COMPENSATION PLANS
White Mountains' Long-Term Incentive Plan (the "Incentive Plan") provides
for granting to participants of the Company (and certain of its subsidiaries)
various types of stock-based incentive awards including stock options and
performance shares. At December 31, 1999, 323,400 Shares remained available for
grants under the Incentive Plan.
Performance shares are conditional grants of a specified maximum number of
Shares or an equivalent amount of cash. The grants are generally payable
(subject to the attainment of a specified after tax return on equity) at the end
of a three year period or as otherwise determined by the Compensation Committee
of the Board. The Compensation Committee consists solely of disinterested,
non-management directors.
During 1999, 1998 and 1997 the Company granted a total of 29,300, 47,800
and 50,000 performance shares, respectively, to its employees. During 1999, 1998
and 1997 the Company paid a total of 141,650, 47,129 and 22,944 performance
shares, respectively, to its participants in cash and Shares. Performance shares
paid during 1999 included 58,100 performance shares relating to the period from
1996 to 1998, 40,300 performance shares relating to the period from 1997 to 1999
and 43,250 performance shares relating to the period from 1998 to 2000. At
December 31, 1999 and 1998, 29,300 and 147,350 performance shares remained
outstanding, respectively. The financial goal for full payment of the
performance shares is the achievement of a 13% annual after tax return on equity
(as specifically defined by the Compensation Committee) as measured over the
applicable performance periods. All performance shares that remain unpaid at the
end of any performance period are cancelled. White Mountains expenses
performance shares outstanding ratably over the performance period assuming full
vesting at current market values. During 1999, 1998 and 1997, White Mountains
recorded $6.1 million, $7.2 million and $8.8 million, of pretax performance
share expense, respectively.
As of December 31, 1998 and 1997 there were 2,000 stock options outstanding
which had an exercise price of $27.13 per Share. These options were exercised
during 1999.
As of December 31, 1998 and 1997 the Company's Chairman had Warrants
outstanding entitling him to buy 1,000,000 Shares for $21.66 per Share through
January 2, 2002. During 1999 the Chairman exercised the Warrants early in
exchange for a one-time payment of $6.0 million. This one-time payment
compensated the Chairman for the estimated interest cost of borrowing the strike
price and the amounts required to prematurely pay his income taxes. The 1999
exercise of Warrants provided the Company with increased tax deductible
expenses.
60
Folksamerica's defined contribution plan (the "Folksamerica 401(k) Plan")
offers its participants the ability to invest their balances in several
different investment options including Shares. As of December 31, 1999 and 1998
the Folksamerica 401(k) Plan owned less than 1% of the total Shares outstanding.
SFAS No. 123, "Accounting for Stock Based Compensation," requires
disclosure regarding all employee compensation involving Shares and Share
equivalents and encourages companies to recognize compensation expense for
stock-based awards based on the fair value of such awards on the date of grant.
White Mountains has not adopted the recognition and measurement criteria of SFAS
No. 123 and alternatively has chosen to disclose the pro forma effects of SFAS
No. 123 as it relates to outstanding Warrants and stock options during 1998 and
1997, as follows:
- ---------------------------------------------------------------------------------------
Year Ended December 31,
----------------------------
Millions, except per Share amounts 1998 1997
- ---------------------------------------------------------------------------------------
Net income:
As reported ............................... $ 78.5 $ 39.3
Pro forma ................................. 77.4 39.4
------------------------
Basic net income per Share:
As reported ............................... $ 13.38 $ 5.98
Pro forma ................................. 12.56 5.99
-------------------------
Diluted net income per Share:
As reported ............................... $ 11.94 $ 5.40
Pro forma ................................. 11.20 5.41
========================
SFAS No. 123 provides for the expense of Warrants and stock options over
the life of the award using the Black Scholes option pricing model. Significant
assumptions used include a 5.0% risk-free interest rate, an expected Share
volatility of .167 and an expected life of five years for the Warrants. In
determining the pro forma effects of SFAS No. 123, the Company recognizes the
pro forma expense of the Warrants and stock options over time. The pro forma net
income figures disclosed above may not be representative of the effects on net
income to be reported in future years.
As previously mentioned, during 1999 all Warrants and stock options were
exercised. Therefore, no pro forma disclosures in accordance with SFAS No. 123
are provided for the year ended December 31, 1999.
NOTE 11. SHAREHOLDERS' EQUITY
SHARE REPURCHASES AND RETIREMENT
During 1999 and 1998 the Company repurchased 1,020,150 Shares for $139.5
million and 151,916 Shares for $19.8 million, respectively. All Shares
repurchased during 1999 and 1998 were retired.
RETIREMENT OF SHARES HELD IN TREASURY
In conformance with Bermuda law, the Company retired all Shares held in its
treasury during 1999. The retirement of treasury shares resulted in a
significant reclassification of several of the Company's various shareholders'
equity accounts but did not affect total shareholders' equity.
61
COMMON STOCK DIVIDENDS
During 1999 and 1998 the Company declared and paid quarterly cash dividends
of $.40 per Share.
NOTE 12. SEGMENT INFORMATION
White Mountains has determined that its reportable segments include
Reinsurance, Property and Casualty Insurance, Investments in Unconsolidated
Insurance Affiliates (which includes White Mountains' investment in MediaOne
preferred stock where applicable) and Holding Company (primarily the operations
of the Company and certain of its intermediate subsidiary holding companies).
Investment results are included within the segment to which the investments
relate. The Company has made this determination based on consideration of the
following criteria: (i) the nature of the business activities of each of the
Company's subsidiaries and affiliates; (ii) the manner in which the Company's
subsidiaries and affiliates are organized; (iii) the existence of primary
managers responsible for specific subsidiaries and affiliates; and (iv) the
organization of information provided to the Board. Management and the Board does
not currently review its operating results on a geographic basis. There are no
significant intercompany transactions among White Mountains' segments other than
occasional intercompany sales and transfers of investment securities (gains and
losses resulting from such transfers have been eliminated herein).
Certain amounts in the prior periods have been reclassified to conform with
the current presentation which involved the segregation of the mortgage banking
net assets, revenues and pretax earnings as discontinued operations.
Selected financial information for White Mountains' segments follows:
- -----------------------------------------------------------------------------------------------------------------------------------
Property
and Investments in
Casualty Unconsolidated Holding
Millions Reinsurance Insurance Affiliates Company Total
- -----------------------------------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, 1999
- -----------------------------------------------------------------------------------------------------------------------------------
Revenues from external customers ..................... $ 211.0 $ 75.6 $ - $ - $ 286.6
Gain from the Valley Group Sale ...................... - - - 88.1 88.1
Net realized gains on investments and other assets ... 43.8 10.0 - 31.6 85.4
Net investment income ................................ 49.1 4.9 2.6 5.3 61.9
Equity in earnings of unconsolidated affiliates ...... - - 31.1 - 31.1
Amortization of deferred credit ...................... 6.3 - 1.2 4.3 11.8
Other revenue ........................................ - - - .3 .3
-----------------------------------------------------------------------
Total revenues ....................................... $ 310.2 $ 90.5 $ 34.9(a) $ 129.6 $ 565.2
=======================================================================
Pretax earnings before interest expense .............. $ 60.6 $ .2 $ 34.9 $ 80.5 $ 176.2
Interest expense ..................................... (5.9) (.4) - (8.4) (14.7)
Income tax provision ................................. (9.8) - (1.1) (42.2) (53.1)
-----------------------------------------------------------------------
$ 44.9 $ (.2) $ 33.8 $ 29.9 $ 108.4
====================================================================================================================================
Year ended December 31, 1998
- -----------------------------------------------------------------------------------------------------------------------------------
Revenues from external customers ..................... $ 85.4 $ 170.0 $ - $ - $ 255.4
Net realized gains (losses) on investments ........... (.8) 5.4 - 66.4 71.0
Net investment income ................................ 18.1 8.2 3.8 6.7 36.8
Equity in earnings of unconsolidated affiliates ...... - - 24.3 - 24.3
Amortization of deferred credit ...................... 2.7 - - - 2.7
Other revenue ........................................ - - - .1 .1
-----------------------------------------------------------------------
Total revenues ....................................... $ 105.4 $ 183.6 $ 28.1(a) $ 73.2 $ 390.3
=======================================================================
Pretax earnings before interest expense .............. $ 8.1 $ 7.7 $ 28.1 $ 49.4 $ 93.3
Interest expense ..................................... (1.4) (1.1) - (11.2) (13.7)
Income tax provision ................................. (1.2) (1.8) (7.6) (17.9) (28.5)
-----------------------------------------------------------------------
Net income from continuing operations ................ $ 5.5 $ 4.8 $ 20.5 $ 20.3 $ 51.1
=======================================================================
62
Property Investments
and in
casualty unconsolidated Holding
Millions Reinsurance insurance affiliates company Total
- ----------------------------------------------------------------------------------------------------
Year ended December 31, 1997
- ----------------------------------------------------------------------------------------------------
Revenues from external customers .............. $ - $ 153.1 $ - $ - $ 153.1
Net realized gains (losses) on investments .... - 4.1 - 93.3 97.4
Net investment income ......................... - 8.9 3.8 8.9 21.6
Equity in earnings of unconsolidated affiliates - -- 21.3 - 21.3
--------------------------------------------------
Total revenues ................................ $ - $ 166.1 $ 25.1(a) $ 102.2 $ 293.4
==================================================
Pretax earnings before interest expense ....... $ - $ 12.6 $ 25.1 $ 74.2 $ 111.9
Interest expense ............................. - (1.2) - (9.4) (10.6)
Income tax provision .......................... - (4.3) (6.1) (26.0) (36.4)
--------------------------------------------------
Net income from continuing operations ......... $ - $ 7.1 $ 19.0 $ 38.8 $ 64.9
==================================================
(a) Includes interest income on White Mountains' investment in MediaOne
preferred stock (considered to be related to White Mountains' investment in
FSA) of $2.6 million, $3.8 million and $3.8 million for 1999, 1998 and
1997, respectively.
- ----------------------------------------------------------------------------------------------------------------------
Property Investments Net assets
and in of
Millions casualty unconsolidated Holding discontinued
Ending assets: Reinsurance insurance affiliates company operations Total
- ----------------------------------------------------------------------------------------------------------------------
December 31, 1999 ........................ $ 1,294.3 198.6 422.6 117.3 16.3 $ 2,049.1
December 31, 1998 ........................ 1,220.5 311.5 404.1 117.2 110.4 2,163.7
======================================================================================================================
NOTE 13. INVESTMENTS IN UNCONSOLIDATED AFFILIATES
INVESTMENT IN FSA
White Mountains owned 6,943,316, 3,460,200 and 3,460,200 shares of FSA
Common Stock at December 31, 1999, 1998 and 1997, respectively. This represented
approximately 21.2%, 11.6% and 12.1%, respectively, of the total shares of FSA
Common Stock outstanding at those times. At December 31, 1999, 1998 and 1997,
White Mountains also owned FSA Preferred Stock which gives White Mountains the
right to acquire 2,000,000 additional shares of FSA Common Stock for net
consideration of $59.3 million. At December 31, 1998 and 1997, White Mountains
also owned FSA Options which, in total, gave White Mountains the right to
acquire 2,560,607 additional shares of FSA Common Stock for aggregate
consideration of $115.7 million which includes the MediaOne Preferred Stock. As
of December 31, 1999, 1998 and 1997, White Mountains' total interest in FSA was
25.8%, 25.1% and 26.2%, respectively, which includes the economic effects of the
FSA Preferred Stock and the FSA Options.
White Mountains' investment in FSA Common Stock is accounted for using the
equity method. FSA Common Stock is publicly traded on the NYSE. The market value
of the FSA Common Stock as of December 31, 1999 and 1998, as quoted on the NYSE,
exceeded White Mountains' carrying value of the FSA Common Stock on the equity
method. White Mountains' investment in FSA Preferred Stock and FSA Options are
accounted for under the provisions of SFAS No. 115, "Accounting for Certain
Investments in Debt and Equity Securities", whereby the investments are reported
at fair value as of the balance sheet date, with related unrealized investment
gains and losses, after tax, reported as a net amount in a separate component of
shareholders' equity and reported on the income statement as a component of
comprehensive net income.
63
The following table summarizes financial information for FSA:
- ----------------------------------------------------------------------------------------------------------------------
Millions 1999 1998 1997
- ----------------------------------------------------------------------------------------------------------------------
FSA BALANCE SHEET DATA:
Total investments ........................................................ $2,140.0 $1,874.8 $1,431.6
Total assets ............................................................. 2,905.6 2,444.2 1,931.2
Deferred premium revenue ................................................. 844.1 721.7 595.2
Loss and loss adjustment expense reserve ................................. 87.3 63.9 75.4
Preferred shareholder's equity ........................................... .7 .7 .7
Common shareholders' equity .............................................. 1,252.0 1,065.4 875.3
FSA INCOME STATEMENT DATA:
Net premiums written ..................................................... $ 230.4 $ 219.9 $ 172.9
Net premiums earned ...................................................... 175.0 137.9 109.5
Net investment income .................................................... 94.7 78.8 72.1
Net income ............................................................... 125.4 115.4 94.7
Comprehensive net income ................................................. 39.9 127.8 110.8
------------------------------------
AMOUNTS RECORDED BY WHITE MOUNTAINS:
Investment in FSA Common Stock ........................................... $ 262.2 $ 119.7 $ 104.3
Investment in FSA Options and Preferred Stock ............................ 41.1 114.4 87.8
------------------------------------
Total investment in FSA ................................................. $ 303.3 $ 234.1 $ 192.1
====================================
Equity in earnings from FSA Common Stock (a) ............................. $ 19.5 $ 13.8 $ 11.4
Dividends received from FSA Common Stock ................................. 2.1 1.5 1.4
Equity in net unrealized investment gains (losses) from FSA's
investment portfolio, before tax (b) ..................................... (14.0) 3.1 2.1
Unrealized investment gains (losses) on FSA Options and
Preferred Stock, before tax (b) ......................................... (4.1) 26.6 68.0
Write-down from fair value to equity value upon exercise of
FSA Options, before tax .................................................. (45.8) - -
====================================
(a) Recorded net of related amortization of goodwill.
(b) Recorded directly to shareholders' equity (after tax) with related changes
in net unrealized investment gains and losses (after tax) reported as a
component of comprehensive net income.
At December 31, 1999 and 1998, White Mountains' consolidated retained
earnings included $53.3 million and $35.9 million, respectively, of accumulated
undistributed earnings of FSA (net of related amortization of goodwill).
64
INVESTMENT IN MSA
At December 31, 1999, 1998 and 1997, White Mountains owned 222,093, 222,093
and 90,606 shares of MSA Common Stock. This represented approximately 50.0%,
50.0% and 33.1% of the total shares of MSA Common Stock outstanding at those
times. White Mountains' investment in MSA is accounted for using the equity
method. The following tables summarize financial information for MSA:
- --------------------------------------------------------------------------------------------------------------------
Millions 1999 1998 1997
- --------------------------------------------------------------------------------------------------------------------
MSA BALANCE SHEET DATA:
Total investments ............................................................. $ 466.3 $465.9 $280.1
Total assets .................................................................. 582.3 581.6 337.2
Unearned premium reserve ...................................................... 118.3 113.0 71.8
Loss and loss adjustment expense reserves ..................................... 198.4 212.2 123.7
Shareholders' equity .......................................................... 233.4 232.5 120.6
MSA INCOME STATEMENT DATA:
Net premiums written .......................................................... $ 242.7 $258.5 $156.6
Net premiums earned ........................................................... 237.4 226.3 148.7
Net investment income ......................................................... 24.9 22.1 15.4
Net income .................................................................... 25.8 13.4 11.9
Comprehensive net income ...................................................... .9 21.2 18.7
--------------------------------
AMOUNTS RECORDED BY WHITE MOUNTAINS:
Investment in MSA Common Stock ................................................ $ 119.3 $120.2 $ 40.9
Equity in earnings from MSA Common Stock (a) .................................. 11.6 4.9 3.8
Equity in net unrealized investment gains (losses) from MSA's
investment portfolio, before tax (b) ....................................... (12.5) 4.1 2.4
=================================
(a) Recorded net of related amortization of goodwill.
(b) Recorded directly to shareholders' equity (after tax) with related changes
in net unrealized investment gains and losses (after tax) reported as a
component of comprehensive net income.
At December 31, 1999 and 1998, White Mountains' consolidated retained
earnings included $25.7 million and $14.1 million, respectively, of accumulated
undistributed earnings of MSA (net of related amortization of goodwill).
INVESTMENT IN FOLKSAMERICA
On August 18, 1998, White Mountains acquired all of the remaining
outstanding shares of the common stock of Folksamerica for $169.1 million which
resulted in Folksamerica becoming a consolidated subsidiary of White Mountains
as of that date. Prior to August 18, 1998, Folksamerica was an unconsolidated
insurance affiliate of White Mountains whereby its investment in Folksamerica
Common Stock was accounted for using the equity method and its investment in
Folksamerica Preferred Stock and Folksamerica Warrants were accounted for under
the provisions of SFAS No. 115. For the years ended December 31, 1998 and 1997,
White Mountains recorded $5.6 million and $6.1 million of pretax earnings from
unconsolidated insurance affiliates, respectively, from its unconsolidated
investment in Folksamerica. For the year ended December 31, 1997, White
Mountains' recorded $1.8 million of equity in net unrealized gains from
Folksamerica's investment portfolio, before tax.
65
NOTE 14. FAIR VALUE OF FINANCIAL INSTRUMENTS
White Mountains carries all its financial instruments on its balance
sheet at fair value with the exception of long-term indebtedness. At December
31, 1999 and 1998, the market value of White Mountains' long-term
indebtedness was $206.7 million and $198.1 million, respectively, which
compared to a carrying value of $202.8 million and $186.3 million,
respectively. The fair value of long-term indebtedness is estimated by
discounting future cash flows using incremental borrowing rates for similar
types of borrowing arrangements or quoted market prices. Considerable
judgement is required to develop such estimates of fair value. Therefore, the
estimates provided herein are not necessarily indicative of the amounts that
could be realized in a current market exchange.
NOTE 15. RELATED PARTY TRANSACTIONS
For corporate travel purposes White Mountains Holdings, Inc., an indirect
wholly-owned subsidiary of the Company, jointly owns two short-range aircraft
with Haverford Utah, LLC ("Haverford"). Messrs. Byrne, Patrick M. Byrne (a
director of the Company) and Kemp are principals of Haverford. Both aircraft
were acquired from unaffiliated third parties during 1996. In exchange for
Haverford's 20% ownership interest in the aircraft, Haverford contributed
capital equal to 20% of the total initial cost of the aircraft and pays a pro
rata share of all fixed costs plus the direct operating costs when onboard the
aircraft pursuant to a Joint Ownership Agreement.
During 1998 White Mountains sold its 25% joint ownership interest in a
private jet operated by a third party to Haverford for cash proceeds of
$500,000. The purchase price received from Haverford represented a payment of
$437,500 for White Mountains' joint ownership interest (which resulted in White
Mountains recognizing a pretax gain on sale of approximately $75,000) and
$62,500 for reimbursement of prepaid aircraft expenses which were required to be
paid to the operator prior to the sale to Haverford.
Mr. Howard Clark, Jr., a director of the Company, is Vice Chairman of
Lehman Brothers Inc. Lehman Brothers Inc. has, from time to time, provided
various services to White Mountains including investment banking services,
brokerage services, underwriting of debt and equity securities and financial
consulting services.
Mr. George J. Gillespie, III, a director of the Company, is a Partner in
the firm Cravath, Swaine & Moore, which has been retained by White Mountains
from time to time to perform legal services.
White Mountains owns a limited partnership investment interest which is
managed by John D. Gillespie, a director of the Company.
White Mountains owns a limited partnership investment interest which is
managed by Arthur Zankel, a director of the Company.
White Mountains believes that all the above transactions were on terms that
were reasonable and competitive. Additional transactions of this nature may be
expected to take place in the ordinary course of business in the future.
66
NOTE 16. COMMITMENTS AND CONTINGENCIES
Folksamerica leases its principal office space under noncancellable leases
expiring at various dates through July 2008. Rental expense for all of
Folksamerica's locations was approximately $1.6 million, $1.6 million and $1.7
million for the years ended December 31, 1999, 1998 and 1997, respectively.
Folksamerica's future annual minimum rental payments required under
noncancellable leases for office space are $2.5 million for each of the years
2000, 2001, and 2002, $2.6 million for both 2003 and 2004 and $11.3 million for
years thereafter.
Various claims have been made against White Mountains in the normal course
of its business. Based on all information available at the date of this report,
management believes that the outcome of such claims will not, in the aggregate,
have a material effect on White Mountains' financial position or results of
operations.
NOTE 17. SUBSEQUENT EVENT
On March 14, 2000, White Mountains entered into a definitive agreement to
sell its indirect, wholly-owned subsidiary, White Mountains Holdings, Inc.
(which controls a substantial amount of its holdings of FSA Common Stock and the
FSA Preferred Stock) as well as all its other holdings of FSA Common Stock, to
Dexia for total cash proceeds of $620.4 million. The transaction will occur only
in connection with Dexia's pending merger with FSA in which all holders of FSA
Common Stock will receive $76.00 cash per share. The merger agreement between
FSA and Dexia is subject to, among other matters, regulatory approvals and the
satisfaction of the conditions contained in Dexia's merger agreement with FSA,
including the approval of FSA shareholders. The transaction, if approved, is
expected to close mid-year 2000.
White Mountains expects that the transaction will serve to increase its
comprehensive net income by $283.3 million, after tax, based on the December 31,
1999 carrying value of its investments in FSA.
67
REPORT ON MANAGEMENT'S RESPONSIBILITIES
The financial information included in this report, including the audited
consolidated financial statements, has been prepared by the management of White
Mountains. The consolidated financial statements have been prepared in
accordance with GAAP and, where necessary, include amounts based on informed
estimates and judgments. In those instances where there is no single specified
accounting principle or standard, management makes a choice from reasonable,
accepted alternatives which are believed to be most appropriate under the
circumstances. Financial information presented elsewhere in this report is
consistent with that shown in the financial statements.
White Mountains maintains internal financial and accounting controls
designed to provide reasonable and cost effective assurance that assets are
safeguarded from loss or unauthorized use, that transactions are recorded in
accordance with management's policies and that financial records are reliable
for preparing financial statements. The internal controls structure is
documented by written policies and procedures which are communicated to all
appropriate personnel and is updated as necessary. White Mountains' business
ethics policies require adherence to the highest ethical standards in the
conduct of its business. Compliance with these controls, policies and procedures
is continuously maintained and monitored by management.
PricewaterhouseCoopers has audited the consolidated financial statements of
White Mountains as of December 31, 1999 and for the year then ended and KPMG LLP
has audited the consolidated financial statements of White Mountains as of
December 31, 1998 and for each of the two years in the period ended December 31,
1998. These firms have issued their unqualified reports thereon, which appear on
pages 69 and 70.
In connection with their audits, the independent auditors provide an
objective, independent review and evaluation of the structure of internal
controls to the extent they consider necessary. Management reviews all
recommendations of the independent auditors concerning the structure of internal
controls and responds to such recommendations with corrective actions, as
appropriate.
The Audit Committee of the Board, which is comprised solely of
non-management directors, has general responsibility for the oversight and
surveillance of the accounting, reporting and financial control practices of
White Mountains. The Audit Committee, which reports to the full Board, annually
reviews the effectiveness of the independent auditors and management with
respect to the financial reporting process and the adequacy of internal
controls. The internal auditors have free access to the Audit Committee, without
members of management present, to discuss the results of their audits, the
adequacy of internal controls and any other matter that they believe should be
brought to the attention of the Audit Committee.
John J. Byrne Raymond Barrette Michael S. Paquette
Chairman and President Senior Vice President
Chief Executive Officer and Controller
68
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders
of White Mountains Insurance Group, Ltd.:
In our opinion, the 1999 consolidated financial statements listed in the
index referenced under Item 14(a) present fairly, in all material respects,
the financial position of White Mountains Insurance Group, Ltd. and
subsidiaries at December 31, 1999, and the results of their operations and
their cash flows for the period ended December 31, 1999 in conformity with
accounting principles generally accepted in the United States. In addition,
in our opinion, the 1999 financial statement schedules listed in the index
referenced under Item 14(a) present fairly, in all material respects, the
information set forth therein when read in conjunction with the related 1999
consolidated financial statements. These financial statements and financial
statement schedules are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements and
financial statement schedules based on our audit. We conducted our audit of
these statements in accordance with auditing standards generally accepted in
the United States, which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We believe that
our audit provides a reasonable basis for the opinion expressed above.
/s/ PricewaterhouseCoopers
Hamilton, Bermuda
February 15, 2000, except for Note 17,
which is as of March 14, 2000
69
INDEPENDENT AUDITORS' REPORT
Board of Directors and Shareholders
White Mountains Insurance Group, Ltd.
We have audited the accompanying consolidated balance sheets of White Mountains
Insurance Group, Ltd. and Subsidiaries (the "Company") as of December 31, 1998,
and the related consolidated statements of income and comprehensive income,
statements of shareholders' equity, and cash flows for the two year period then
ended (collectively, the "consolidated financial statements"). In connection
with our audits of the consolidated financial statements, we also have audited
the 1998 and 1997 financial information in Schedule II Condensed financial
information of the registrant, Schedule III Supplementary insurance information,
Schedule IV Reinsurance, Schedule V Valuation and qualifying accounts, and
Schedule VI Supplementary information for property and casualty insurance
underwriters (collectively, the "financial statement schedules"). These
consolidated financial statements and financial statement schedules are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements and financial statement
schedules based on our audits. We did not audit the consolidated financial
statements of Folksamerica Holding Company, Inc. ("Folksamerica"), a
wholly-owned subsidiary and Financial Security Assurance Holdings, Ltd. ("FSA"),
an 11.6 percent owned equity investee company. The financial statements of
Folksamerica reflect total assets constituting 56.4 percent and total revenues
of 27.0 percent in 1998 of the related consolidated totals. The Company's equity
investment in FSA at December 31, 1998 was $119.7 million and its equity in
earnings of FSA were $13.8 million and $11.4 million for the years 1998 and
1997, respectively. The financial statements of Folksamerica and FSA were
audited by other auditors, PricewaterhouseCoopers LLP, whose reports were
furnished to us, and our opinion, insofar as it relates to the amounts included
for Folksamerica and FSA, is based solely on the reports of other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits and the reports other auditors provide a reasonable
basis for our opinion.
In our opinion, based on our audits and the reports of the other auditors, the
consolidated financial statements referred to above present fairly, in all
material respects, the financial position of White Mountains Insurance Group,
Ltd. and Subsidiaries as of December 31, 1998, and the results of their
operations and their cash flows for the two year period then ended in conformity
with generally accepted accounting principles. Also in our opinion, based on our
audits and the reports of other auditors, the 1998 and 1997 information in the
related financial statement schedules, when considered in relation to the basic
financial statements taken as a whole, presents fairly, in all material
respects, the information set forth therein.
February 12, 1999 /s/ KPMG LLP
Providence, Rhode Island
70
SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
Selected quarterly financial data for 1999 and 1998 is shown in the
following table. The quarterly financial data includes, in the opinion of
management, all recurring adjustments necessary for a fair presentation of the
results of operations for the interim periods.
- ----------------------------------------------------------------------------------------------------------------------
1999 Three Months Ended (a) 1998 Three Months Ended (b)
----------------------------------------------------------------------
Millions, except per share amounts Dec. 31 Sept. 30 June 30 Mar. 31 Dec. 31 Sept. 30 June 30 Mar. 31
- ----------------------------------------------------------------------------------------------------------------------
Revenues $132.3 $106.5 $ 199.5 $ 126.9 $130.5 $151.3 $ 55.5 $ 53.0
Expenses 115.3 83.4 94.7 110.3 127.4 76.6 54.7 52.0
----------------------------------------------------------------------
Pretax earnings 17.0 23.1 104.8 16.6 3.1 74.7 .8 1.0
Income tax benefit (provision) 2.7 (9.0) (41.0) (5.8) (.4) (26.1) (.6) (1.4)
----------------------------------------------------------------------
Net income (loss) from continuing operations 19.7 14.1 63.8 10.8 2.7 48.6 .2 (.4)
Net income (loss) from discontinued operations - - (2.0) 3.0 6.1 5.6 6.4 9.3
Net gain (loss) from sale of discontinued (3.3) - 14.9 - - - - -
operations
----------------------------------------------------------------------
Net income $ 16.4 $ 14.1 $ 76.7 $ 13.8 $ 8.8 $ 54.2 $ 6.6 $ 8.9
======================================================================
Earnings per Share:
Basic $ 2.73 $ 2.72 $ 13.94 $ 2.36 $1.51 $ 9.28 $ 1.13 $ 1.50
Diluted 2.69 2.43 12.41 2.10 1.33 8.31 1.00 1.33
======================================================================
(a) The quarterly amounts for the three month period ended June 30, 1999
reflect the Valley Group Sale and the Mortgage Banking Sale. The Mortgage
Banking Sale represented a decision by the Company to exit the mortgage
banking business. As a result, all mortgage banking activities are
presented herein as discontinued operations.
(b) The quarterly amounts for the three month periods ended September 30, 1998
and December 31, 1998 reflect the consolidation of Folksamerica which
became a wholly-owned subsidiary on August 18, 1998. The quarterly amounts
for the three month period ended September 30, 1998 include $61.6 million
of pretax realized investment gains which served to increase third quarter
1998 net income by $40.0 million.
71
SCHEDULE I
WHITE MOUNTAINS INSURANCE GROUP, LTD.
SUMMARY OF INVESTMENTS -- OTHER THAN
INVESTMENTS IN RELATED PARTIES
AT DECEMBER 31, 1999
- -------------------------------------------------------------------------------------------------------
FAIR
Millions Cost VALUE
- -------------------------------------------------------------------------------------------------------
Fixed maturities:
Bonds:
United States Government and government agencies and authorities ... $ 444.6 $ 426.9
Corporate bonds .................................................... 330.8 319.4
States, municipalities and political subdivisions .................. 132.0 128.7
Foreign governments ................................................ 50.5 49.5
-------------------------
Total fixed maturities ................................................ 957.9 924.5
-------------------------
Common equity securities:
Banks, trust and insurance companies ............................... 45.0 43.6
Industrial, miscellaneous and other ................................ 55.4 64.8
-------------------------
Total common equity securities ........................................ 100.4 108.4
Other investments ........................................................ 57.5 68.3
Short-term investments ................................................... 117.5 117.5
-------------------------
Total investments ................................................... $ 1,233.3 $ 1,218.7
=========================
NOTE - fair value was equal to carrying value at December 31, 1999.
72
SCHEDULE II
WHITE MOUNTAINS INSURANCE GROUP, LTD.
(REGISTRANT ONLY)
CONDENSED BALANCE SHEETS
- --------------------------------------------------------------------------------------
December 31,
----------------------------
Millions 1999 1998
- --------------------------------------------------------------------------------------
Assets:
Fixed maturities ..................................... $ 39.6 $ -
Common equity securities and other investments ....... 26.3 -
Short-term investments, at amortized cost ............ 5.7 10.8
Other assets ......................................... 1.2 37.8
Investments in consolidated affiliates ............... 770.9 972.2
------------------------
Total assets ....................................... $ 843.7 $1,020.8
========================
Liabilities:
Short-term debt ..................................... $ 4.0 $ -
Long-term debt ...................................... 96.0 115.7
Intercompany borrowings ............................. - 53.0
Deferred credit ..................................... 57.8 -
Accounts payable and other liabilities .............. 71.6 149.6
------------------------
Total liabilities .................................. 229.4 318.3
Shareholders' equity .................................... 614.3 702.5
-------------------------
Total liabilities and shareholders' equity ......... $ 843.7 $1,020.8
========================
CONDENSED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
- ---------------------------------------------------------------------------------------------------
Year Ended December 31,
-----------------------------------
Millions 1999 1998 1997
- ---------------------------------------------------------------------------------------------------
Revenues ............................................. $ 29.1 $ 28.9 $ 52.7
Expenses ............................................. 46.6 23.2 21.2
------------------------------------
Pretax earnings (loss) ............................... (17.5) 5.7 31.5
Income tax provision ................................. (6.0) (8.3) (16.3)
------------------------------------
Net income (loss) .................................... (23.5) (2.6) 15.2
Earnings from consolidated affiliates ................ 144.5 81.1 24.1
------------------------------------
Consolidated net income .............................. 121.0 78.5 39.3
Other comprehensive net income (loss) items, after tax (118.0) (8.9) 41.7
------------------------------------
Consolidated comprehensive net income ................ $ 3.0 $ 69.6 $ 81.0
====================================
73
SCHEDULE II
(CONTINUED)
WHITE MOUNTAINS INSURANCE GROUP, LTD.
(REGISTRANT ONLY)
CONDENSED STATEMENTS OF CASH FLOWS
- ---------------------------------------------------------------------------------------------------------------------------------
Year Ended December 31,
------------------------------------
Millions 1999 1998 1997
- ---------------------------------------------------------------------------------------------------------------------------------
Net income ................................................................................ $ 121.0 $ 78.5 $ 39.3
Reconciliation of net income to net cash from operating activities:
Net realized investment gains ......................................................... (21.7) (26.7) (44.2)
Distributions from consolidated subsidiaries in excess of current earnings ............ 213.0 - -
Undistributed current earnings from consolidated subsidiaries ......................... - (78.0) (24.1)
Undistributed current earnings from unconsolidated insurance affiliates ............... - - (.4)
Changes in current income taxes receivable and payable ................................ (4.3) 8.5 5.1
Deferred income tax provision (benefit) ............................................... 39.7 .1 (3.7)
(Decrease) increase in accounts payable and other liabilities ......................... (103.2) 8.7 7.0
Other, net ............................................................................ (2.5) (3.3) (4.6)
------------------------------------
Net cash (used for) provided from operating activities .................................... 242.0 (12.2) (25.6)
------------------------------------
Cash flows from investing activities:
Net decrease (increase) in short-term investments, net of balances acquired ........... 18.3 (8.5) (2.0)
Sales of investment securities ........................................................ 5.4 - 119.4
Purchases of investment securities .................................................... - - -
Investments in consolidated affiliates, net of balances acquired ...................... (73.5) - (12.7)
Investments in unconsolidated affiliates .............................................. (50.0) - -
Sale of securities carried in other assets ............................................ - 26.8 -
-----------------------------------
Net cash (used for) provided from investing activities .................................... (99.8) 18.3 104.7
-----------------------------------
Cash flows from financing activities:
Purchases of common stock retired ..................................................... (139.4) (19.5) (103.8)
Proceeds from exercises of Warrants and stock options ................................. 21.7 - -
Repayment of long-term debt ........................................................... (15.9) - -
Intercompany borrowings from subsidiaries ............................................. - 23.0 30.0
Cash dividends paid to common shareholders ............................................ (8.8) (9.4) (5.3)
-----------------------------------
Net cash used for financing activities .................................................... (142.4) (5.9) (79.1)
-----------------------------------
Net (decrease) increase in cash during year ............................................... (.2) .2 -
Cash balance at beginning of year ......................................................... .2 - -
-----------------------------------
Cash balance at end of year ............................................................... $ - $ .2 $ -
===================================
74
SCHEDULE III
WHITE MOUNTAINS INSURANCE GROUP, LTD.
SUPPLEMENTARY INSURANCE INFORMATION
(MILLIONS)
- -----------------------------------------------------------------------------------------------------------------------------------
Column A Column B Column C Column D Column E Column F Column G
- -----------------------------------------------------------------------------------------------------------------------------------
Future
policy Other
benefits, policy
Deferred losses, claims and Net
acquisition claims and Unearned benefits Premiums investment
Segment costs loss expenses premiums payable earned income (b)
- ----------------------------------------------------------------------------------------------------------------------------------
Years ended:
December 31, 1999:
Reinsurance ........................... $ 21.3 $ 782.1 $ 79.0 $ - $ 211.0 $ 49.1
Property casualty insurance ........... .9 68.9 13.1 - 72.2 4.9
December 31, 1998:
Reinsurance (a) ....................... 20.7 723.2 71.2 - 85.4 18.1
Property casualty insurance ........... 14.7 88.5 81.9 - 160.6 8.3
December 31, 1997:
Property and casualty
insurance ........................... 14.3 71.9 78.0 - 145.3 9.0
(SCHEDULE III TABLE CONTINUED)
- -----------------------------------------------------------------------------------------------------------------------------------
Column H Column I Column J Column K
- -----------------------------------------------------------------------------------------------------------------------------------
Benefits, Amortization
claims, of deferred Other
losses, and policy operating
Segment settlement acquisition expenses Premiums
expenses costs payable written
- -----------------------------------------------------------------------------------------------------------------------------------
Years ended:
December 31, 1999:
Reinsurance ........................... $ 168.2 $ 64.3 $ - $ 201.7
Property casualty insurance ........... 60.1 9.1 - 73.0
December 31, 1998:
Reinsurance (a) ....................... 59.7 29.1 - 73.7
Property casualty insurance ........... 115.1 25.7 - 164.9
December 31, 1997:
Property and casualty
insurance ........................... 97.1 23.2 - 150.8
- -----------------------------------------------------------------------------------------------------------------------------------
(a) The amounts shown for Reinsurance in columns F through K represent
activity for Folksamerica from August 18, 1998 through December 31, 1998.
(b) The amounts shown exclude net investment income relating to
non-insurance operations of $7.9 million, $10.4 million and $12.6 million
for the twelve months ended December 31, 1999, 1998 and 1997, respectively.
75
SCHEDULE IV
WHITE MOUNTAINS INSURANCE GROUP, LTD.
REINSURANCE
- -------------------------------------------------------------------------------------------------------------------------
Column A Column B Column C Column D Column E Column F
- -------------------------------------------------------------------------------------------------------------------------
Ceded to Assumed Percentage
Gross other from other Net of amount
Premiums earned amount companies companies amount assumed to
(Dollars in millions) net
- -------------------------------------------------------------------------------------------------------------------------
Years ended:
December 31, 1999:
Property and casualty insurance .................... $ 61.4 $(28.8) $39.6 $72.2 54.8%
Reinsurance ........................................ 2.4 (32.4) 241.0 211.0 114.2%
December 31, 1998:
Property and casualty insurance .................... 104.4 (13.1) 69.3 160.6 43.2%
Reinsurance (a) .................................... 2.0 (8.8) 92.2 85.4 108.0%
December 31, 1997:
Property and casualty insurance .................... 89.7 (7.4) 63.0 145.3 43.4%
- -------------------------------------------------------------------------------------------------------------------------
(a) Amounts shown in columns B through F represent activity for Folksamerica
from August 18, 1998 through December 31, 1998.
76
SCHEDULE V
WHITE MOUNTAINS INSURANCE GROUP, LTD.
VALUATION AND QUALIFYING ACCOUNTS
- ----------------------------------------------------------------------------------------------------------------------
Column A Column B Column C Column D Column E
- ----------------------------------------------------------------------------------------------------------------------
Additions
-----------------------
Balance at Charged to Charged Balance
beginning costs and to other Deductions at end
Millions of period expenses accounts described (a) of period
- ------------------------------------------------------------------------------------------------------------------------
Years ended:
December 31,1999:
Reinsurance recoverable:
Allowance for reinsurance balances .......... $1.2 $ - $ - $ - $1.2
Property and casualty insurance:
Allowance for uncollectible accounts ........ 1.1 - - - 1.1
December 31,1998:
Reinsurance recoverable:
Allowance for reinsurance balances (b) ...... $1.2 $ - $ - $ - $1.2
Property and casualty insurance:
Allowance for uncollectible accounts ........ .3 1.9 - (1.8) .4
December 31,1997:
Property and casualty insurance:
Allowance for uncollectible accounts ........ .4 1.1 - (1.2) .3
- ----------------------------------------------------------------------------------------------------------------------
(a) Represents charge-offs of balances receivable
(b) Represents allowances acquired from Folksamerica on August 18, 1998
77
SCHEDULE VI
WHITE MOUNTAINS INSURANCE GROUP, LTD.
SUPPLEMENTAL INFORMATION FOR PROPERTY AND CASUALTY INSURANCE UNDERWRITERS
(MILLIONS)
- ----------------------------------------------------------------------------------------------------------------------------------
Column A Column B Column C Column D Column E Column F Column G
- ----------------------------------------------------------------------------------------------------------------------------------
Reserves for
unpaid claims Discount,
Deferred and claims if any, Net
acquisition adjustment deducted Unearned Earned investment
costs expenses in Column C premiums premiums income
- ----------------------------------------------------------------------------------------------------------------------------------
Consolidated
reinsurance
operations:
1999 $ 21.3 $ 782.1 - $ 79.0 $ 211.0 $ 49.1
1998(a) 20.7 723.2 - 71.2 85.4 18.1
1997 - - - - - -
Consolidated property and
casualty insurance
operations:
1999 .9 68.9 - 13.1 72.2 4.9
1998 14.7 88.5 - 81.9 160.6 8.3
1997 14.3 71.9 - 78.0 145.3 9.0
50%-or-less owned property
and casualty investees (b):
1999 17.5 99.2 - 59.2 118.7 12.5
1998 16.0 106.1 - 56.5 103.6 10.1
1997 6.5 40.9 - 23.8 49.2 5.1
- ----------------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------
Column A Column H Column I Column J Column K
- -------------------------------------------------------------------------------------------------
Claims and claims
adjustment expenses Amortization
incurred related to of deferred Paid claims
(1) (2) policy and claims
Current Prior acquisition adjustment Premiums
year year Costs expenses written
- -------------------------------------------------------------------------------------------------
Consolidated
reinsurance
operations:
1999 $ 138.9 $ 29.3 $ 64.3 $ 237.0 $ 201.7
1998(a) 58.6 1.1 29.1 67.5 73.7
1997 - - - - -
Consolidated property and
casualty insurance
operations:
1999 57.5 2.6 9.1 38.3 73.0
1998 108.4 6.7 25.7 98.7 164.9
1997 99.6 (2.5) 23.2 90.1 150.8
50%-or-less owned property
and casualty investees (b):
1999 89.3 (7.0) 34.4 84.3 121.3
1998 82.5 (5.1) 24.2 48.1 118.3
1997 35.9 (1.2) 12.7 34.1 51.8
- ------------------------------------------------------------------------------------------------
(a) The amounts shown for Reinsurance in columns F through K represent
activity for Folksamerica from August 18, 1998 through December 31, 1998.
(b) The amounts shown represent White Mountains' share of its property and
casualty affiliate, MSA, which was 50.0% owned during the years ended December
31, 1999 and 1998 and 33.1% owned during the year ended December 31, 1997.
78