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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, 2000
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 Shares, 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. [X]
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 23, 2001, was $1,825,187,696.
As of March 23, 2001, 5,880,115 Common Shares, par value of $1.00 per share,
were outstanding (excludes 21,000 restricted Common Shares which were not
vested as of such date).
DOCUMENTS INCORPORATED BY REFERENCE
None
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 Operations................................................................... 8
d. Investing Operations...................................................................... 8
e. Regulation................................................................................ 8
f. Employees................................................................................. 9
g. Forward-Looking Statements................................................................ 9
ITEM 2. Properties..................................................................................... 9
ITEM 3. Legal Proceedings.............................................................................. 10
ITEM 4. Submission of Matters to a Vote of Security Holders............................................ 10
PART II
ITEM 5. Market for the Company's Common Equity and Related Stockholder Matters........................ 10
ITEM 6. Selected Financial Data........................................................................ 11
ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.......... 12
ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk..................................... 22
ITEM 8. Financial Statements and Supplementary Data.................................................... 22
ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure........... 22
PART III
ITEM 10. Directors and Executive Officers............................................................... 22
ITEM 11. Executive Compensation......................................................................... 25
ITEM 12. Security Ownership of Certain Beneficial Owners and Management................................. 28
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
and reinsurance, each of which is described in detail herein. The Company's
headquarters is located at Crawford House, 23 Church Street, Hamilton, Bermuda
HM11, its principal executive office is located at 80 South Main Street,
Hanover, New Hampshire, 03755-2053 and its registered office is located at
Clarendon House, 2 Church Street, Hamilton, Bermuda HMDX.
In June 1999 the Company changed its name from "Fund American Enterprises
Holdings, Inc." to "White Mountains Insurance Group, Inc."
In October 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.
In September 2000 White Mountains entered into a definitive agreement with
London-based CGNU plc ("CGNU") to purchase its U.S. property and casualty
insurance operations ("CGU"). CGU, headquartered in Boston, is a large U.S.
property & casualty insurer which operates in all 50 states. Completion of the
CGU acquisition is subject to, among other matters, the receipt of regulatory
approvals, the completion of financing and the satisfaction of other customary
conditions. Further details concerning this pending acquisition are contained
herein.
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 and accident and health risks in the United States, Canada, Latin
America and the Carribean. Folksamerica is rated "A" (Excellent) by A.M. Best
Company. During 2000, 1999 and 1998, Folksamerica had net written premiums of
$332.6 million, $201.7 million and $212.6 million, respectively. At December 31,
2000 and 1999, Folksamerica had total assets of $2.8 billion and $1.3 billion,
respectively, and shareholder's equity of $339.7 million and $249.4 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. In November 1997 White Mountains and the European Mutuals each
purchased equal interests in Folksamerica for $20.8 million which maintained
White Mountains' 50.0% economic ownership position. In August 1998 White
Mountains acquired all of the remaining capital stock of Folksamerica from the
European Mutuals for $169.1 million which resulted in Folksamerica becoming a
wholly-owned consolidated subsidiary of White Mountains at that time.
In June 1999 Folksamerica acquired USF Re Insurance Co. ("USF Re") from the
Centris Group. Significant assets and liabilities acquired through USF Re
included $204.1 million of cash and investments and $106.5 million of net loss
and loss adjustment expense reserves.
1
On March 31, 2000, Folksamerica acquired PCA Property & Casualty Insurance
Company ("PCA") from Humana Inc. Significant assets and liabilities acquired
through PCA included $339.8 million of cash and investments and $253.8 million
of net loss and loss adjustment expense reserves.
On May 5, 2000, Folksamerica acquired substantially all the reinsurance
operations of Risk Capital Reinsurance Company ("Risk Capital"), a wholly-owned
subsidiary of Risk Capital Holdings, Inc. Significant assets and liabilities
acquired through the Risk Capital transaction included $249.9 million of cash
and investments, $108.6 million of premiums receivable, $312.6 million of net
loss and loss adjustment expense reserves and $82.0 million of net unearned
reinsurance premiums.
On October 10, 2000, Folksamerica acquired an 80% interest in Esurance Inc.
("Esurance") for $9.0 million in cash. Esurance is an internet-based insurance
provider which sells personal auto insurance in 26 states.
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
2000 amounted to 23.2% and 67.1% 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 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.
2
LINES OF BUSINESS AND GEOGRAPHIC LOCATION
Folksamerica's net written premiums by line of business follow:
- ------------------------------------------------------------------------------------------------------------------
Year Ended December 31,
-------------------------------------------------------
Millions 2000 1999 1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------
Liability $208.4 $122.6 $122.0 $123.6 $ 79.6
Property 91.6 68.9 87.2 104.9 85.9
Accident and Health 26.4 - - - -
Other 6.2 10.2 3.4 3.9 6.4
-------------------------------------------------------
Total $332.6 $201.7 $212.6 $232.4 $171.9
==================================================================================================================
Folksamerica's net written premiums by geographic location follow:
- ------------------------------------------------------------------------------------------------------------------
Year Ended December 31,
-------------------------------------------------------
Millions 2000 1999 1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------
United States $296.7 $172.2 $190.9 $208.6 $155.2
Canada 21.6 21.0 13.9 10.1 4.2
Latin America and the Carribean 14.3 8.5 7.8 13.7 12.5
-------------------------------------------------------
Total $332.6 $201.7 $212.6 $232.4 $171.9
==================================================================================================================
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 insurer's 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 based on 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, 2000, Folksamerica received approximately 56.4% of its gross
reinsurance premiums written from three major reinsurance brokers as follows:
(i) E.W. Blanch - 21.6%; (ii) Guy Carpenter and affiliates - 17.6%; and (iii)
AON Re, Inc. - 17.2%. During the year ended December 31, 2000, Folksamerica
received no more than 10% of its gross reinsurance premiums from any individual
ceding company.
3
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 paid and
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 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 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 historically
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 companies. These
companies are described below:
INTERNATIONAL AMERICAN GROUP ("IAG")
In October 1999 White Mountains completed its acquisition of IAG, a
collection of insurance companies for $86.7 million in cash. White Mountains
acquired the following subsidiaries through its acquisition of IAG:
4
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" (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.
Selected financial information for PIC is as follows:
- --------------------------------------------------------------------------------------------------------------------
Year Ended December 31,
---------------------------
Statutory Basis (a) in Millions 2000 1999 1998
- --------------------------------------------------------------------------------------------------------------------
Net written premiums, by line of business:
Private passenger auto $16.2 $16.9 $ 20.2
Commercial auto 3.5 2.7 2.2
Commercial multiple peril 1.0 .9 1.0
Homeowners .9 1.0 1.0
Other 1.1 1.0 1.3
---------------------------
Total net written premiums $22.7 $22.5 $ 25.7
===========================
Ending total admitted assets $48.1 $56.4 $ 57.3
Ending policyholders' surplus $20.0 $27.5 $ 24.2
====================================================================================================================
(a) The term "statutory" as contained herein refers to a basis of accounting
other than generally accepted accounting principles that is prescribed or
permitted by the individual states that an insurance company is domiciled
in.
5
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, 2000 and 1999, ACIC had $47.1 million and $51.4
million of total statutory admitted assets, respectively, and $40.5 million and
$43.2 million of statutory 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 IAG'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, 2000 and 1999, BICC had
$22.1 million and $36.1 million of total assets and $4.5 million and $17.2
million of shareholder's equity, 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.
As of December 31, 1999, Waterford ceased writing new business. At December 31,
2000 and 1999, Waterford had $11.6 million and $13.3 million of total statutory
admitted assets, respectively, and $11.3 million and $12.2 million of statutory
policyholders' surplus, respectively. Waterford was sold to a third party on
January 5, 2001 for cash proceeds of $23.8 million.
VALLEY GROUP, INC. ("VGI")
In 1995 White Mountains acquired the Valley Insurance Companies ("Valley")
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"), a New
Hampshire- domiciled mid-size commercial property and casualty company. Valley,
CGI and WMIC are collectively referred to herein as "VGI".
In June 1999 White Mountains completed the sale of VGI to Unitrin (the "VGI
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.
INVESTMENTS IN UNCONSOLIDATED INSURANCE AFFILIATES
White Mountains' investments in unconsolidated insurance affiliates
represent operating investments in other insurers in which White Mountains has a
significant voting and economic interest but does not own more than 50.0% of the
entity.
MAIN STREET AMERICA HOLDINGS, INC. ("MSA")
MSA is a subsidiary of National Grange Mutual Insurance Company ("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
(41.5%), commercial multi-peril (18.0%), homeowners (14.4%) and commercial
automobile (13.9%). MSA, through its subsidiaries, participates in NGM's
property and casualty business through a reinsurance agreement. MSA's net
written premiums totalled $265.4
6
million, $242.7 million and $258.5 million in 2000, 1999 and 1998, respectively,
and its net income was $3.8 million, $25.8 million and $13.4 million,
respectively. MSA's total assets as of December 31, 2000 and 1999 were $608.7
million and $582.3 million, respectively, and its shareholders' equity was
$253.8 million and $233.4 million, respectively.
From 1994 to 1997 White Mountains owned 33.1% of the common stock of MSA
("MSA Common Stock"). During that period 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 $74.4 million (which includes a purchase price adjustment of $4.1
million paid to MSA during 2000) which raised White Mountains ownership of MSA
to 50.0%. As a result of White Mountains' additional investment in MSA, 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.
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.
On July 5, 2000 White Mountains concluded the sale of its indirect,
wholly-owned subsidiary, White Mountains Holdings, Inc. (which controlled a
substantial amount of its holdings of FSA) and all its other holdings of the
common stock of FSA ("FSA Common Stock") to Dexia S.A. ("Dexia") for proceeds of
$620.4 million (the "Dexia Sale") which resulted in a pretax gain of $391.2
million.
In 1994 White Mountains purchased 2,000,000 shares of 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 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 to acquire 666,667
shares of FSA Common Stock for $15.7 million in cash. In September 1999, White
Mountains exercised FSA Options to acquire 1,893,940 shares of FSA Common Stock
in exchange for White Mountains' $50.0 million investment in MediaOne preferred
stock.
In December 1999, White Mountains purchased an additional 922,509 shares of
FSA Common Stock at a price of $54.20 per share in a private transaction with
FSA.
Prior to the Dexia Sale, White Mountains' accounted for its investment in
FSA Common Stock using the equity method. White Mountains' accounted for its
investment in FSA Preferred Stock and FSA Options under the provisions of
Statement of Financial Accounting Standards ("SFAS") No. 115 whereby the
investment was 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.
7
DISCONTINUED OPERATIONS
In 1991 White Mountains sold Fireman's Fund Insurance Company ("Fireman's
Fund"), a large property and casualty insurance company, to Allianz of America,
Inc. Since 1991 the Company has carried a reserve related to various outstanding
tax issues involving the sale. In September 2000, the Company was informed that
the Internal Revenue Service agreed with the position taken by White Mountains
in its 1991 tax return and, on October 19, 2000, the Company received the
Technical Advice Memorandum from the Internal Revenue Service's National Office
confirming this conclusion. As a result, the Company released a $95.0 million
reserve during 2000 to income which is presented as a gain from discontinued
insurance operations.
In May 1999 White Mountains concluded the sale of substantially all the
mortgage banking assets (the "Mortgage Banking Sale") of White Mountains
Services Corporation ("WMSC" formerly Source One Mortgage Services Corporation)
and received net proceeds totalling $180.6 million. Mortgage banking assets and
liabilities that were not part of the Citibank sale principally included WMSC's
investments in derivative instruments (which were fully liquidated in 1999),
various residual mortgage assets and preferred stock, each of which were
substantially liquidated during 1999. White Mountains recorded a $17.9 million
pretax ($11.6 million after tax) gain on the sale of its mortgage banking net
assets (which is net of anticipated future liabilities) during 1999. During 2000
WMSC was liquidated and all remaining mortgage banking assets were transferred
to White Mountains Services L.L.C., a wholly- owned subsidiary of White
Mountains. As a result of White Mountains' decision to dispose of its net
mortgage banking assets, these activities are shown as discontinued operations
herein.
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 gains and unrealized gains is valued
equally. Management further believes that the investment assets of its
reinsurance and insurance operations 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 John D.
Gillespie and comprised of certain other members of the Company's Board of
Directors (the "Board"), 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 Board.
As previously stated, the investment portfolios of White Mountains'
reinsurance and insurance operations consist, in part, of common equity
securities and other investments. At December 31, 2000, the investment
portfolios of White Mountains' reinsurance and insurance operations contained
$181.5 million of common equity securities and other investments which
represented approximately 14% of their total portfolio, excluding short-term
investments. Management believes that modest investments of common equity
securities within its investment portfolio will enhance 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 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 ("NAIC") 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 Reinsurance
8
Company, PIC, ACIC and Waterford at December 31, 2000 and 1999, 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, 2000, White Mountains employed approximately 255 persons
(consisting of 10 persons at the Company, 150 persons at Folksamerica, 70
persons at PIC, 15 persons at ACIC and BICC and 10 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 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 Securities and Exchange Commission (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' financial
position, and (iv) loss reserves established by White Mountains subsequently
proving to have been inadequate and (v) the failure of pending transactions to
be consummated. 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 60,000 square feet
of office space in New York, New York, under a lease expiring 2009, which serves
as its principal office. Folksamerica also leases 12,000 square feet of office
space in Greenwich, Connecticut, under a lease expiring in 2010, which serves as
its satellite office. PIC owns a 20,000 square foot office building in
Salisbury, Maryland which serves as its principal office. ACIC and BICC lease
8,000 square feet of office space in Wilmington, Delaware, under a lease which
expires in 2004, which serves as their principal office. White Mountains leases
several other office facilities and operating equipment under cancellable and
noncancellable agreements.
9
ITEM 3. LEGAL PROCEEDINGS
White Mountains, in common with the insurance and reinsurance industry in
general, is subject to litigation and arbitration in the normal course of its
business. As of December 31, 2000, White Mountains was not a party to any
material litigation or arbitration other than as routinely encountered in claims
activity, none of which is expected by management to have a material adverse
effect on the Company's financial condition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of White Mountains' shareholders
during the fourth quarter of 2000.
PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
As of March 26, 2001, there were 407 registered holders of common shares of
the Company, par value $1.00 per share ("Shares").
During 2000 and 1999 the Company declared and paid cash dividends totalling
$1.20 and $1.60 per Share, respectively. Through the third quarter of 2000,
dividends were declared and paid on a quarterly basis. In August 2000 the Board
announced that, beginning in the 2000 fourth quarter, it would no longer pay
quarterly dividends and expected to reduce future dividends to $1.00 per Share,
payable annually in the first quarter of each year, dependent on the Company's
financial position and the regularity of its cash flows.
The Company's Shares (symbol WTM) are listed on the New York Stock Exchange
(the "NYSE"). The quarterly range of the daily closing price for Shares during
2000 and 1999 is presented below:
2000 1999
------------------------ ------------------------
HIGH LOW High Low
- --------------------------------------------------------------------------------------------------------------------
Quarter ended:
December 31 $319 $239 $134 1/2 $116
September 30 272 7/8 155 143 130 1/16
June 30 162 126 149 131 3/8
March 31 135 13/16 102 150 120 1/2
====================================================================================================================
10
ITEM 6. SELECTED FINANCIAL DATA
Selected consolidated income statement data and ending balance sheet data
for each of the five years ended December 31, 2000, follows:
- -------------------------------------------------------------------------------------------------------------------
Year Ended December 31,
------------------------------------------------------------
Millions, except per Share amounts 2000(a) 1999(b) 1998(c) 1997 1996
- -------------------------------------------------------------------------------------------------------------------
INCOME STATEMENT DATA:
Revenues $ 848 $ 579 $ 390 $ 293 $ 186
Expenses 493 418 311 192 164
------------------------------------------------------------
Pretax earnings 355 161 79 101 22
Income tax provision (42) (53) (28) (36) (9)
------------------------------------------------------------
Net income from continuing operations $ 313 $ 108 $ 51 $ 65 $ 13
============================================================
Net income from continuing operations per Share:
Basic $ 53.08 $ 19.25 $ 8.71 $ 9.88 $ 1.74
Diluted $ 52.84 $ 17.66 $ 7.75 $ 8.93 $ 1.59
- -------------------------------------------------------------------------------------------------------------------
BALANCE SHEET DATA:
Total assets $ 3,545 $2,049 $2,164 $ 1,156 $ 1,120
Short-term debt - 4 52 2 2
Long-term debt 96(d) 203 186 132 133
Deferred credits 92 101(e) 37(f) - -
Shareholders' equity (g) 1,046 614 703 659 687
Book value per Share (h) $ 177.07 $103.32 $109.68 $100.08 $ 90.81
Tangible Book value per Share (h) (i) $ 187.65 $120.23 $115.11 $100.08 $ 90.81
- -------------------------------------------------------------------------------------------------------------------
SHARE DATA:
Cash dividends paid per Share $ 1.20 $ 1.60 $ 1.60 $ .80 $ .80
Ending common and equivalent Shares (000's) 5,880 5,946 6,831 6,983 7,908
===================================================================================================================
(a) Includes the acquisitions of PCA and Risk Capital as well as the gain on
the Dexia Sale.
(b) Includes gains resulting from the VGI Sale and the Mortgage Banking Sale.
(c) Includes the interim period income statement and ending balance sheet of
Folksamerica which was consolidated during 1998.
(d) Reflects a significant repayment of long-term debt by Folksamerica during
2000. See Note 7.
(e) Deferred credits added during 1999 resulted from the purchase of IAG and
exercises of FSA Options. See Note 1.
(f) Deferred credits added during 1998 resulted from the consolidation of
Folksamerica. See Note 1.
(g) Reflects reductions in shareholders' equity resulting from significant
repurchases of Shares from 1996 to 1999.
(h) As adjusted for the dilutive effects of outstanding options and warrants to
acquire Shares.
(i) Book value per Share plus unamortized deferred credits less goodwill per
Share.
11
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
CONSOLIDATED RESULTS
White Mountains reported net income from continuing operations of $312.9
million for the year ended December 31, 2000, which compares to $108.4 million
for 1999 and $51.1 million for 1998. Net income from continuing operations for
2000 and 1999 includes $385.8 million and $103.9 million, respectively, in
pretax gains from sales of subsidiaries and insurance assets.
Net income was $407.9 million for the year ended December 31, 2000, which
compares to $121.0 million for 1999 and $78.5 million for 1998. Net income for
2000, 1999 and 1998 includes income from discontinued operations of $95.0
million, $12.6 million and $27.4 million, respectively.
Comprehensive net income was $447.6 million for 2000, which compares to
$3.0 million for 1999 and $69.6 million for 1998. Comprehensive net income for
2000 benefitted by unrealized gains in the fixed maturity investments of the
Company's insurance and reinsurance operations. Comprehensive net income for
1999 was adversely affected by unrealized fixed maturity investment losses and
an accounting write-down resulting from exercises of FSA Options. Comprehensive
net income for 1998 benefitted by modest unrealized gains from both fixed
maturity investments and common stocks.
Book value per Share was $177.07 at December 31, 2000, which compares to
$103.32 at December 31, 1999. Tangible book value per Share (which includes
unamortized deferred credits less goodwill per Share) was $187.65 at December
31, 2000, which compares to $120.23 at December 31, 1999. White Mountains'
unamortized deferred credits and goodwill represent the remaining difference
between the cost of companies acquired by White Mountains during the periods
presented and the fair value of the net identifiable assets acquired.
INSURANCE OPERATIONS
REINSURANCE OPERATIONS
Folksamerica provided a net loss of $10.5 million during 2000 versus $44.9
million of net income during 1999 and $10.0 million of net income for 1998.
Folksamerica's contribution for 1998 included $4.5 million of net income as an
unconsolidated insurance affiliate.
Folksamerica's results for the three years ended December 31, 2000, 1999
and 1998 included $312.5 million, $211.0 million and $238.1 million of earned
reinsurance premiums, respectively, and $275.9 million, $182.2 million and
$170.3 million of losses and loss adjustment expenses, respectively. For 2000
Folksamerica's statutory combined ratio was 126.3% versus a statutory combined
ratio of 122.5% and 108.0% for the comparable 1999 and 1998 periods.
A summary of Folksamerica's 2000, 1999 and 1998 underwriting results
follows. Folksamerica's underwriting results presented for 1998 reflects
activity for the full calendar year which includes activity prior to
Folksamerica becoming a consolidated subsidiary of White Mountains.
- --------------------------------------------------------------------------------------------------------------------
Year Ended December 31,
Dollars in millions 2000 1999 1998
- --------------------------------------------------------------------------------------------------------------------
Net written premiums $ 332.6 $ 201.7 $ 212.6
------------------------------------
Earned premiums 312.5 211.0 238.1
Losses and loss adjustment expenses 270.8 182.2 170.3
Underwriting expenses 120.9 81.4 92.6
------------------------------------
Underwriting loss $(79.2) $(52.6) $(24.8)
====================================
Statutory combined ratios:
Loss and loss adjustment expense 88.3% 86.5% 71.5%
Underwriting expense 38.0 36.0 36.5
------------------------------------
Combined 126.3% 122.5% 108.0%
====================================================================================================================
12
During 2000 Folksamerica acquired Risk Capital which served to
significantly increase its written and earned premiums in that year. During
1999, Folksamerica's written premium volume decreased 5% versus 1998 despite its
acquisition of USF Re during mid-1999. The premium volume decrease in 1999
excluding USF Re primarily reflects increased non-renewed business due to
deteriorating terms and conditions.
Folksamerica's 2000 statutory combined ratio of 126.3% reflects the effects
of $111.1 million in premiums ceded in the 2000 fourth quarter to a third party
insurer coupled with prior year reserve strengthening and increased loss
estimates for the current underwriting year. Prior year reserve strengthening of
$22.9 million affected most of Folksamerica's segments including the portfolios
acquired with USF Re and Risk Capital. In the fourth quarter of 2000
Folksamerica purchased reinsurance coverage from Imagine Re which was designed
to reduce its statutory operating leverage and provide adverse development
protection on the run-off of loss and unearned premium reserves acquired in the
Risk Capital transaction and any additional premium reported for the 2000
underwriting year, as well as the reserves remaining from the USF Re acquisition
and remaining environmental and asbestos exposures. Folksamerica holds a letter
of credit and funds held as collateral for amounts due from Imagine Re.
Folksamerica's 1999 statutory 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).
The structure of Folksamerica's acquisitions often provides effective
economic protections to offset potential post-acquisition loss development.
Folksamerica's statutory combined ratios do not reflect such protections which
are recorded at the holding company level. For 2000 and 1999, Folksamerica
recorded $27.8 million and $20.3 million of net after tax benefits,
respectively, resulting from favorable purchase structures which mitigate the
impact of future adverse loss development from such acquisitions. These benefits
for 2000 consisted of a $6.8 million after tax reduction in the USF Re seller
note, $10.0 million of various purchase price adjustments and $11.0 million of
net after tax deferred credit amortization. These benefits for 1999 consisted of
a $14.0 million after tax reduction in the USF Re seller note and $6.3 million
of net after tax deferred credit amortization.
Folksamerica's 1998 statutory combined ratio of 108.0% included two
property events experienced during the year (Canadian ice storms and Hurricane
Georges) and higher than anticipated asbestos and environmental losses.
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, 2000, 1999 and 1998 yielded 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 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 but are not
recorded in a manner that offsets Folksamerica's underwriting results.
Since reinsurance claims settlement periods generally extend over long
periods of time, Folksamerica earns significant amounts of investment income on
the float generated by its reinsurance operations. When considering investment
income and other comprehensive income items at the Folksamerica holding company
level, the Company's reinsurance operations reported comprehensive net income of
$24.2 million, $13.4 million and $54.3 million during those periods,
respectively. This resulted in an after tax return on Folksamerica's equity of
9.7%, 5.7% and 20.9% for 2000, 1999 and 1998, respectively.
The following table presents the subsequent development of the year-end
reinsurance losses for the ten-year period from 1990 to 2000. 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:
13
- ------------------------------------------------------------------------------------------------------------------------------------
Reinsurance Losses and Loss Adjustment Expenses (a)
Year Ended December 31,
Dollars in Millions 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000
- ------------------------------------------------------------------------------------------------------------------------------------
I. Liability for unpaid
losses and LAE $ 431.8 $ 506.3 $ 758.3 $ 798.4 $ 856.2 $ 981.5 $1,578.7 $1,461.3 $1,437.6 $1,210.7 $1,500.7
- ------------------------------------------------------------------------------------------------------------------------------------
II. Liability re-estimated
as of:
1 year later 466.3 543.4 804.6 850.4 928.4 1,044.3 1,599.7 1,560.9 1,435.8 1,289.8 -
2 years later 494.3 542.9 843.0 910.3 979.3 1,074.4 1,675.5 1,532.3 1,451.0
3 years later 489.2 567.6 882.9 951.5 1,002.4 1,090.7 1,652.6 1,526.1
4 years later 508.0 589.2 915.6 975.5 1,015.3 1,104.3 1,646.3
5 years later 522.9 610.2 943.0 989.7 1,029.1 1,091.1
6 years later 539.1 623.0 956.3 1,001.2 1,020.9
7 years later 551.3 630.6 964.6 995.9
8 years later 559.3 637.1 962.1
9 years later 567.1 635.7
10 years later 566.7
- ------------------------------------------------------------------------------------------------------------------------------------
III. Cumulative amount of
liability paid through:
1 year later 113.0 136.7 244.7 263.1 253.1 273.4 396.5 343.5 382.8 128.9 -
2 years later 179.8 202.6 400.3 406.7 411.7 435.7 632.0 597.6 511.5
3 years later 219.8 290.9 494.2 515.4 522.5 548.1 833.9 733.3
4 years later 286.3 343.4 572.1 593.2 600.0 655.2 971.2
5 years later 322.5 382.1 629.4 646.5 674.2 719.4
6 years later 352.3 415.8 668.7 706.9 713.3
7 years later 377.4 439.1 718.7 734.1
8 years later 394.4 468.7 738.5
9 years later 421.1 488.4
10 years later 439.1
- ------------------------------------------------------------------------------------------------------------------------------------
IV.Cumulative deficiency $134.9 $ 129.4 $ 203.8 $ 197.5 $ 164.7 $ 109.6 $ 67.6 $ 64.8 $ 13.4 $ 79.1 $ -
Percent deficient 31% 26% 27% 25% 19% 11% 4% 4% 1% 7% -
- ------------------------------------------------------------------------------------------------------------------------------------
(a) For the years 1990 and 1991 liabilities are shown net of reinsurance
recoverable. For the years 1992 through 2000 liabilities are shown without
regard to reinsurance recoverable in accordance with SFAS No. 113. The
table excludes the insurance operations of VGI and IAG whose liability for
unpaid losses and LAE totalled $55.6 million, $68.9 million, $88.5 million,
$71.9 million and $65.4 million as of December 31, 2000, 1999, 1998, 1997
and 1996, respectively.
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 2000, 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 (whether favorable or
unfavorable) for companies acquired by Folksamerica for all periods presented,
including periods prior to Folksamerica's acquisition of such companies; and
(iii) as previously described, the structure of Folksamerica's acquisitions
often provides effective economic protections to offset potential
post-acquisition loss development. In consideration of each of these factors,
the table presented below is management's attempt to adjust the cumulative
deficiencies presented above for the most recent five years:
- -------------------------------------------------------------------------------------------------------------------
Year Ended December 31,
---------------------------------------------------------------
Percent of deficit to carried reserves: 1996 1997 1998 1999 2000
- -------------------------------------------------------------------------------------------------------------------
Deficiency as reported 4% 4% 1% 7% - %
Deficiency as adjusted for the effects described above 2% 1% 2% 2% - %
===================================================================================================================
14
INSURANCE OPERATIONS
On October 15, 1999, the Company concluded its acquisition of the IAG
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 ($37.0
million and $57.7 million as of December 31, 2000 and 1999, respectively) that
will be amortized to income over the estimated period of benefit of three years.
For the year ended December 31, 2000, PIC, ACIC and BICC provided $5.8
million of net income which resulted principally from favorable recoveries on
prior years' reinsurance at BICC. For the period from October 15, 1999 to
December 31, 1999, PIC, ACIC and BICC provided a $3.6 million net loss which was
due primarily to strengthening of prior year reserves at ACIC.
On June 17, 1999, the Company completed the VGI Sale and recorded a pretax
gain of $88.1 million ($53.8 million after tax) on the transaction. As part of
the VGI Sale, White Mountains has provided Unitrin, Inc. with certain adverse
loss development protections that will be settled as of December 31, 2002.
During 2000 White Mountains provided $5.4 million in reserves for such adverse
loss development protections.
During 2000, Waterford provided a $1.2 million net loss which principally
reflects goodwill amortization related to its purchase in 1996. For the 1999
period through the date of VGI Sale, the operations of VGI (which included
Waterford) provided $3.6 million of net income which primarily represented
realized investment gains during the period. For the year ended December 31,
1998 the operations of VGI (which included Waterford) contributed $5.0 million
to net income.
INVESTMENT IN UNCONSOLIDATED INSURANCE AFFILIATE(S)
MSA contributed $1.0 million to net income during the year ended December
31, 2000 versus $9.8 million for 1999 and $3.2 million for 1998. MSA's net
income for 2000 was adversely impacted by significant realized losses on its
investment portfolio whereas MSA's net income for 1999 benefitted by significant
realized investment gains.
During 2000 FSA provided a $3.6 million net loss for the interim period
though July 5, 2000 which resulted from realized investment losses in FSA's
investment portfolio and increased expenses for employee equity-based
compensation programs, which rose significantly after FSA's announcement of its
acquisition by Dexia. FSA contributed $15.7 million to net income during the
year ended December 31, 1999 versus $9.3 million during 1998. The significant
increase in FSA-related net income during 1999 resulted from increased equity in
earnings resulting from the additional purchase of $50.0 million of FSA Common
Stock and the exercise of FSA Options, each occurring during 1999.
INVESTMENT OPERATIONS
Net realized gains on investments and the total net investment return from
White Mountains' investment activities (excluding net unrealized investment
holding gains from White Mountains' investments in unconsolidated insurance
affiliates) are shown below:
- --------------------------------------------------------------------------------------------------------------------
Year Ended December 31,
Millions 2000 1999 1998
- --------------------------------------------------------------------------------------------------------------------
Net realized investment gains (losses), before tax $(8.8) $ 69.6 $ 71.0
- --------------------------------------------------------------------------------------------------------------------
Net investment income $ 85.9 $ 61.9 $ 36.8
Net change in unrealized investment gains (losses) for investments held 65.1 (11.7) 25.0
---------------------------------------
Total net investment return, before tax $151.0 $ 50.2 $ 61.8
====================================================================================================================
15
Net realized investment losses for the year ended December 31, 2000
resulted principally from sales of fixed maturities in preparation for
Folksamerica's acquisitions of PCA and Risk Capital during the first quarter of
2000. Net realized investment gains of $69.6 million for 1999 included $23.9
million of pretax gains from sales of San Juan Basin Royalty Trust units and
$28.0 million of pretax gains from sales of various other 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 VGI Sale. Net
realized investment gains of $71.0 million for 1998 resulted principally from
the sale of White Mountains' investment in White River Corporation.
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 from 1998 to 2000
is mainly attributable to White Mountains' growing portfolio of fixed maturity
investments resulting from the consolidation of Folksamerica in August 1998, the
1999 acquisition of USF Re and the 2000 acquisitions of PCA and Risk Capital.
Net unrealized gains for investments held during 2000 of $65.1 million
resulted principally from unrealized gains on fixed maturity investments whereby
net unrealized investment losses for investments held during 1999 of $11.7
million resulted principally from losses on fixed maturity investments. The
fluctuations in net investment gains from fixed maturity investments from 1999
to 2000 principally resulted from the effects of changes in market interest
rates on Folksamerica's sizable fixed income portfolio. Net unrealized gains for
investments held during 1998 of $25.0 million resulted from unrealized gains on
both fixed maturity investments and common stocks.
EXPENSES
Insurance losses and loss adjustment expenses totalled $287.7 million for
2000 versus $242.3 million for 1999 and $174.8 million for 1998. During 2000,
1999 and 1998, losses and loss adjustment expenses relating to prior years
developed unfavorably by $23.6 million, $31.9 million and $7.8 million,
respectively. Insurance and reinsurance acquisition expenses totalled $101.1
million for 2000 versus $73.4 million for 1999 and $54.8 million for 1998. The
increase in these insurance expenses from 1999 to 2000 is primarily attributable
to the acquisitions of PCA and Risk Capital during 2000. The increase in these
insurance expenses from 1998 to 1999 is primarily attributable to the
acquisitions of USF Re and IAG during 1999.
Compensation and benefits totalled $59.5 million for 2000 versus $67.8
million for 1999 and $51.5 million for 1998. Compensation and benefits expenses
for 2000 include increased Share-based contingent compensation accruals
resulting from the attainment of above-plan results as well as a significant
increase in the market value of Shares during the year. The increase in
compensation and benefits from 1998 to 1999 is due both to 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".
General expenses totalled $28.4 million for 2000 versus $19.5 million for
1999 and $15.9 million for 1998. The increase in general expenses during 2000 is
primarily attributable to the acquisitions of PCA and Risk Capital as well as
various contingencies and expenditures associated with certain of the Company's
acquisition and disposition activities during the period. 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 $16.1 million for 2000 versus $14.7 million for
1999 and $13.7 million for 1998. The increase in interest expense from 1999 to
2000 reflects higher average levels of indebtedness at Folksamerica for the
period. The increase in interest expense from 1998 to 1999 reflects higher
average levels of indebtedness at Folksamerica for the period, partially offset
by the repayment of $15.0 million of indebtedness in May 1999 in connection with
the VGI Sale.
16
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 in
the event of net losses incurred by such companies. Prior to the
Redomestication, the Company filed a consolidated United States income tax
return with its subsidiaries. The Onshore Companies 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 Federal 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 2000, 1999 and 1998
represents an effective tax rate of 12.0%, 32.9% and 35.8%, respectively. The
reduction in the effective rate for 1999 and 2000 resulted from an increase in
White Mountains' non-United States net earnings to $395.9 million in 2000 versus
$9.0 million in 1999.
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
deferred tax asset of $105.1 million (relating primarily to discounting of
insurance loss reserves and net operating loss carryforwards) and a deferred tax
liability of $2.8 million on its balance sheet as of December 31, 2000. White
Mountains recorded a deferred tax asset of $52.5 million (relating primarily to
discounting of insurance loss reserves) and a deferred tax liability of $37.5
million (relating primarily to unrealized investment gains) on its balance sheet
as of December 31, 1999. Deferred income tax assets and liabilities are shown
net in circumstances where a consolidated income tax return is filed.
In 1991, White Mountains sold Fireman's Fund to Allianz of America, Inc.
Since 1991 the Company had carried a reserve related to various outstanding tax
issues involving the sale. In September 2000, the Company was informed that the
Internal Revenue Service agreed with the position taken by White Mountains in
its 1991 tax return. On October 19, 2000, the Company received the Technical
Advice Memorandum from the Internal Revenue Service's National Office confirming
this conclusion. As a result, the Company released a $95.0 million reserve
during 2000 which represents a gain from discontinued insurance operations.
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 and countries under which
the Company's insurance subsidiaries are domiciled, an insurer is restricted
with respect to the amount of dividends it may pay without prior approval by
regulatory authorities. Accordingly, there is no assurance regarding the amount
of such dividends that may be paid by such subsidiaries in the future.
During 1993 the Company issued $150.0 million in principal amount of
medium-term notes. The Company has repurchased certain of its medium-term notes
from time to time and during 2000 and 1999 repurchased $.1 million and $15.9
million in principal amount of the notes due in February 2003, respectively. At
December 31, 2000 the Company had $96.3 million in principal amount of
medium-term notes outstanding which had an average maturity of 2.6 years and an
average yield to maturity of 7.87%.
The Company has historically secured revolving credit agreements whereby it
could borrow funds at short-term market interest rates. As of December 31, 1999
the Company could borrow up to $50.0 million under a short-term debt facility
which the Company let expire in 2000. There were no borrowings outstanding under
this facility at December 31, 1999.
17
During 2000, 1999 and 1998 the Company repurchased 65,838 Shares for $8.3
million, 1,020,150 Shares for $139.5 million and 151,916 Shares for $19.8
million, respectively. In conformance with Bermuda law, the Company retires all
Shares repurchased. During 2000 the Company declared and paid cash dividends
totalling $1.20 per Share. During 1999 and 1998 the Company declared and paid
cash dividends totalling $1.60 per Share. Shares repurchased and dividends paid
from 1998 to 2000 represented returns of excess capital to shareholders. White
Mountains had typically paid its dividends quarterly but in August 2000
announced that it would pay future dividends annually at an expected rate of
$1.00 per Share.
On July 5, 2000 White Mountains concluded the sale of its indirect,
wholly-owned subsidiary, White Mountains Holdings, Inc. (which controlled a
substantial amount of its holdings of FSA) and all its other holdings of FSA
Common Stock to Dexia for proceeds of $620.4 million.
In May 1999, White Mountains exercised FSA Options to acquire 666,667
shares of FSA Common Stock for $15.7 million in cash. In September 1999, White
Mountains exercised FSA Options to acquire 1,893,940 shares of FSA Common Stock
in exchange for White Mountains' $50.0 million investment in 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 White Mountains concluded the Mortgage Banking Sale and
recorded an $11.6 million after tax gain on the sale.
During 1999 White Mountains concluded the VGI Sale and received net
proceeds of $139.0 million in cash after receiving a special dividend of assets
and cash prior to the closing of $76.6 million. In connection with the VGI Sale,
White Mountains repaid $15.0 million of indebtedness at VGI during 1999.
During 1999 the Company acquired IAG for $86.7 million in cash.
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 to acquire Shares early, the Company paid the
Chairman $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.
In connection with the Redomestication, White Mountains paid $104.1 million
in certain compensation benefits to its current and former employees and
Directors in October 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 such compensation paid 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 $13.5 million.
In September 2000 White Mountains entered into a definitive agreement with
CGNU to purchase its U.S. property and casualty insurance operations, CGU. The
CGU purchase agreement, which was amended on October 15, 2000 and February 20,
2001, calls for a purchase price of $2.17 billion, subject to certain
adjustments, of which $260.0 million will consist of a note payable (which must
be paid in eighteen months in cash or Shares valued at $245.00 per Share, at the
Company's sole option). In addition, CGU will repay approximately $.5 billion of
debt outstanding to its parent at closing.
In connection with the CGU transaction, White Mountains has entered into an
$875.0 million Credit Agreement (the "Credit Agreement") with Lehman Brothers
Inc. ("Lehman") as well as arranging for up to $741.0 million of new equity
commitments from a small group of outside investors. In connection with
financing the transaction, White Mountains will contribute Folksamerica, PIC and
MSA to CGU.
18
Completion of the CGU acquisition is subject to, among other matters, the
receipt of regulatory approvals, the completion of financing and the
satisfaction of other customary conditions. The stock purchase agreement dated
September 25, 2000 and subsequent amendments thereto, terms of the note payable
to CGNU (as amended on February 20, 2001), terms of the various equity
commitments and the Credit Agreement are contained herein as Exhibits 10(a)
through 10(f), and are incorporated by reference in their entirety.
On March 15, 2001 White Mountains commenced a cash tender offer (the "Note
Offer") for its $96.3 million aggregate principal amount of outstanding
medium-term notes. In conjunction with the Note Offer, noteholder consents are
being solicited to effect an amendment to the indenture governing these notes,
which will facilitate White Mountains' pending acquisition of CGU. The Note
Offer is scheduled to expire at 5:00 p.m., New York City time on April 16, 2001,
unless extended or terminated.
The total consideration to be paid for each validly tendered and consented
note due in 2003 will be based upon a fixed spread of 95 basis points over the
yield to maturity on the applicable reference U.S. Treasury Note, and includes a
consent payment of $30.00 per $1,000 principal amount of such notes. The total
consideration to be paid for each validly tendered and consented note due 2008
will be based upon a fixed spread of 125 basis points over the yield to maturity
on the applicable reference U.S. Treasury Note, and includes a consent payment
of $30.00 per $1,000 principal amount of such notes. The Note Offer pricing date
is expected to be April 11, 2001. Accrued and unpaid interest up to, but not
including, the payment date will be paid for notes validly tendered and accepted
for purchase.
The Note Offer is conditioned upon, among other things, (i) there being
validly tendered and not withdrawn not less than a majority in aggregate
principal amount of outstanding notes, (ii) the execution of the supplemental
indenture governing the notes and (iii) the consummation of White Mountains'
acquisition of CGU.
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 regarding the amount of such
dividends that may be paid by Folksamerica Reinsurance Company in the future.
During the 2000 fourth quarter White Mountains provided $259.6 million of
capital to Folksamerica through the contribution of ACIC and BICC and through
the issuance of a $195.0 million inter-company note. Folksamerica subsequently
contributed ACIC and $80.0 million of such cash to Folksamerica Reinsurance
Company in order to provide the statutory capital needed to support its recent
acquisitions of PCA and Risk Capital. The remaining $115.0 million was used by
Folksamerica to repay its outstanding bank indebtedness. White Mountains intends
to forgive the inter-company note at the closing of the CGU acquisition.
As part of the Folksamerica acquisition in 1998, White Mountains agreed to
repay or refinance Folksamerica's existing long-term indebtedness by utilizing a
six-year revolving credit agreement whereby Folksamerica could borrow up to
$120.0 million at market interest rates. This facility was repaid and terminated
by Folksamerica during 2000 as described above.
In March 2000 Folksamerica acquired PCA for $122.3 million in cash.
In May 2000 Folksamerica acquired Risk Capital for $20.3 million in cash
plus related expenses.
In 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 zero at year-end 2000
due to adverse loss development at USF Re post acquisition) with the balance
paid in cash.
19
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-term and long-term debt financing, market risk can have a
significant effect on White Mountains' consolidated financial position.
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.
The Company's fixed maturity portfolio is comprised of primarily
investment grade corporate securities, U.S. government and agency securities,
municipal obligations and mortgage-backed securities. Based on ratings by the
NAIC, 100% of the Company's total fixed maturity portfolio at December 31,
2000 is considered to be investment grade (i.e., received a rating from the
NAIC of 1 or 2).
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.
- --------------------------------------------------------------------------------------------------------------------
Estimated Fair Percentage Increase
Fair Value at Assumed Change Value after Change (Decrease) to
Dollars in Millions December 31, 2000 in Interest Rate in Interest Rate Shareholders' Equity
- --------------------------------------------------------------------------------------------------------------------
Fixed maturity investments $1,078.6 50 bp decrease $ 1,104.2 1.6 %
50 bp increase 1,053.9 (1.5)
100 bp increase 1,029.8 (3.0)
200 bp increase 983.6 (5.9)
- --------------------------------------------------------------------------------------------------------------------
Fixed rate indebtedness $97.2 50 bp decrease $ 98.3 (.1) %
50 bp increase 96.2 .1
100 bp increase 95.1 .2
200 bp increase 93.0 .4
====================================================================================================================
20
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, 2000
and 1999, Folksamerica's and BICC's net assets denominated in foreign currency
represented less than 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 and a
significant portion of its other investments (primarily partnership interests
invested in common equity securities) 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, 2000 and shows the effects of a hypothetical 20% increase and a 20%
decrease in market prices as of that date.
- --------------------------------------------------------------------------------------------------------------------
Assumed Estimated Fair Percentage Increase
Fair Value at Price Value after Assumed (Decrease) to
Dollars in Millions December 31, 2000 Change Price Change Shareholders' Equity
- --------------------------------------------------------------------------------------------------------------------
Common equity securities $144.8 20% increase $ 173.8 2.0%
20% decrease $ 115.9 (2.0)%
Other investments $142.9 20% increase $ 171.5 2.3%
20% decrease $ 114.3 (2.3)%
====================================================================================================================
OTHER MATTERS
ACCOUNTING FOR FSA OPTIONS AND FSA PREFERRED STOCK
White Mountains accounted for its investment in FSA Common Stock on the
equity method of accounting and accounted 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 was to be amortized to income over a
five-year period. In July 2000 White Mountains sold its investments in FSA as
part of the Dexia Sale which resulted in the immediate recognition of the
related unamortized deferred credit balance.
RETIREMENT OF COMMON SHARES HELD IN TREASURY
In conformance with Bermuda law, the Company retired all Shares held in its
treasury at October 1999 and has retired all Shares repurchased thereafter. The
retirement of treasury shares in 1999 resulted in a significant reclassification
of several of the Company's various shareholders' equity accounts but did not
affect total shareholders' equity.
21
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 its Year 2000 remediation, excluding its
unconsolidated insurance affiliates, was approximately $3.0 million.
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.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Effective with the 1999 audit, the Audit Committee of the Board appointed
PricewaterhouseCoopers LLP ("PwC") as its independent auditors to succeed KPMG
LLP ("KPMG"). PwC served as Folksamerica's independent auditors since 1981 and
served as FSA's independent auditors since 1989. The Audit Committee recommended
that PwC succeed KPMG as the Company's independent auditors in 1999 due to the
significance of Folksamerica and FSA to the Company's financial position and
results of operations. In connection with the 1998 audit, 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 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
DIRECTORS (AS OF MARCH 26, 2001)
- --------------------------------------------------------------------------------------------------------------------------
Name Class Term Ending Age Director Since
- ------------------------ ----------------------- ----------------------- ----------------------- -----------------------
Raymond Barrette III 2003 50 2000
John J. "Jack" Byrne II 2002 68 1985
Patrick M. Byrne I 2001 38 1997
Howard L. Clark, Jr. III 2003 57 1986
Robert P. Cochran III 2003 51 1994
Steven E. Fass I 2001 55 2000
George J. Gillespie, III II 2002 70 1986
John D. Gillespie II 2002 42 1999
K. Thomas Kemp I 2001 60 1994
Gordon S. Macklin I 2001 72 1987
Frank A. Olson II 2002 68 1996
Arthur Zankel III 2003 69 1992
======================== ======================= ======================= ======================= =======================
22
An outline of the principal occupation, business experience, recent
business activities involving White Mountains and other affiliations of the
Directors follows:
MR. BARRETTE was appointed President of the Company in January 2000 and
became a Director in February 2000. He joined the Company in 1997 as its
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 and BICC.
MR. JACK BYRNE was re-appointed Chief Executive Officer of the Company in
January 2000 after a brief retirement. 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 Markel Corporation and Folksamerica.
MR. PATRICK BYRNE has been a director of the Company since 1997. Mr. Byrne
serves as President and CEO of Overstock.com, an internet shopping service. Mr.
Byrne formerly served as President and CEO of Fecheimer Bros. Co. (a
wholly-owned subsidiary of Berkshire Hathaway Inc.), a manufacturer of uniforms
and accessories, from 1997 to 1999 and President and CEO of Centricut, LLC, a
manufacturer of industrial torch consumable parts, from 1994 to 1999. In
addition, since 1991, Mr. Byrne has been the managing general partner of a
number of limited partnerships investing in real estate, gaming, insurance and
international trade. Mr. Byrne is the son of Mr. Jack Byrne.
MR. CLARK has been a director or advisor to the board since 1986. He is
currently Vice Chairman of Lehman and was Chairman and CEO of Shearson Lehman
Brothers Inc. from 1990 to 1993. Prior to joining Shearson Lehman Brothers Inc.,
Mr. Clark was Executive Vice President and Chief Financial Officer of American
Express. He is also a director of Lehman, Maytag Corporation, H Power Corp. and
Walter Industries, Inc. Lehman provided services to White Mountains during 2000.
See "Item 13. Certain Relationships and Related Transactions".
MR. COCHRAN has been a director of the Company since 1994. Mr. Cochran was
a founding principal of FSA and has served FSA in various capacities since 1985.
He has been President and CEO and a director of FSA since 1990 and became
Chairman in 1997. He is also Chairman of Financial Security Assurance Inc. and
Financial Security Assurance (U.K.) Ltd.
MR. FASS was appointed to the Board in 2000. Mr. Fass has served as a
Director, President and Chief Executive Officer of Folksamerica and its
subsidiaries including Folksamerica Reinsurance Company since 1984. He joined
Folksamerica as its Vice President, Treasurer and Chief Financial Officer in
1980. Mr. Fass is also a director of Esurance.
MR. GEORGE GILLESPIE has been a director of the Company since 1986. Mr.
Gillespie has been a Partner in the law firm of Cravath, Swaine & Moore
("Cravath") since 1963. He is also a director of The Washington Post Company.
Cravath provided legal services to White Mountains during 2000. See "Item 13.
Certain Relationships and Related Transactions". Mr. Gillespie's son, Mr. John
Gillespie, is also a director of the Company.
MR. JOHN GILLESPIE was appointed to the board in August 1999. He is the
founder and Managing Partner of his own investment firm, Prospector Partners,
LLC, in Hartford, Connecticut. Prior to forming Prospector Partners, Mr.
Gillespie was President of the T. Rowe Price Growth Stock Fund and the New Age
Media Fund, Inc. White Mountains owns limited partnership investment interests
which were managed by Mr. Gillespie during 2000. See "Item 13. Certain
Relationships and Related Transactions". Mr. Gillespie's father, Mr. George
Gillespie, is also a director of the Company.
MR. KEMP has served as Deputy Chairman of the Company since 2000 and has
been a director since 1994. Mr. Kemp served as the Company's President and CEO
from 1997 to 2000 and served as Executive Vice President from 1993 to 1997, Vice
President, Treasurer and Secretary from 1991 to 1993 and was formerly a Vice
President of Fireman's Fund. Mr. Kemp is also a director of MSA, Eldorado
Bancshares, Inc. and Amlin plc.
23
MR. MACKLIN has been a director of the Company since 1987. Mr. Macklin is
currently a corporate financial advisor. Mr. Macklin formerly served as Chairman
of White River Corporation, an information services company, from 1993 to 1998,
as Chairman of Hambrecht and Quist Group, a venture capital and investment
banking company, from 1987 until 1992, and as President of the National
Association of Securities Dealers, Inc. from 1970 until 1987. He is a director
of MCI Worldcom, Inc., Martek Biosciences Corporation, MedImmune Inc.,
Overstock.com and Spacehab, Inc., and is a trustee, director or managing general
partner (as the case may be) of 47 of the investment companies in the Franklin
Templeton Group of Funds.
MR. OLSON has been a director of the Company since 1996. He serves as
Chairman of The Hertz Corporation ("Hertz"). Mr. Olson served as the CEO of
Hertz from 1977 to 1999 and has been with that company since 1964. He is also
a director of Becton Dickinson and Company, Amerada Hess Corporation and
Warnaco Group, Inc. and was formerly Chairman and CEO of Allegis Corporation
and United Airlines.
MR. ZANKEL has been a director or advisor to the board since 1992. He
served as a General Partner of First Manhattan Co. from 1965 to 1999 and was
Co-Managing Partner of First Manhattan from 1979 to 1997. Mr. Zankel is
currently Managing Member of Zankel Capital Advisors, LLC which provided
investment services to the Company during 2000. See "Item 13. Certain
Relationships and Related Transactions". Mr. Zankel is also a director of
Citigroup, Inc., Travelers Property Casualty Corp. and VICORP Restaurants, Inc.
EXECUTIVE OFFICERS (AS OF MARCH 26, 2001)
- ------------------------------------------------------------------------------------------------------------------------
Name Position Age Executive Officer Since
- ------------------------- ---------------------------------------------- -------------------- ------------------------
Raymond Barrette President 50 1997
John J. Byrne Chairman and Chief Executive Officer 68 1985
Reid T. Campbell Vice President and Director of Finance 33 1996
K. Thomas Kemp Deputy Chairman 60 1991
Michael S. Paquette Senior Vice President and Controller 37 1993
James J. Ritchie Chief Financial Officer of TACK Acquisition Corp. 46 2001
David G. Staples Vice President 40 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. Information
relating to Messrs. Barrette, Byrne and Kemp has been previously provided (see
"Directors" above). An outline of the principal occupation and relevant business
experiences of the other Executive Officers follows:
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. Mr. Campbell is a director of PIC.
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 with White Mountains since 1989.
MR. RITCHIE was appointed Chief Financial Officer of TACK Acquisition Corp.
(the intended acquisition company for the CGU transaction) on March 1, 2001.
Prior to joining White Mountains in 2001, Mr. Ritchie served as Senior Vice
President and Chief Financial Officer of CIGNA Corporation's International
Division. Mr. Ritchie was with CIGNA since 1986.
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 for Crum & Forster Holdings, Inc. from 1993 to 1996.
FILINGS UNDER SECTION 16
Pursuant to SEC rules relating to the reporting of changes in beneficial
ownership of Shares, the Company's Executive Officers, Directors and greater
than 10% shareholders are believed to have filed all reports required under
Section 16 on a timely basis during 2000.
24
ITEM 11. EXECUTIVE COMPENSATION
COMPENSATION OF EXECUTIVE OFFICERS
The following tables set forth certain information regarding the salary,
incentive compensation and benefits paid by White Mountains to its Chairman and
CEO, its four most highly compensated Executive Officers and one former
Executive Officer (collectively, the "Named Executive Officers").
- -----------------------------------------------------------------------------------------------------------------------
Long-Term Compensation
----------------------------------- ----------------------------------
Annual Compensation Awards Payouts
----------------------------------- -------------------- ----------
Other
Annual Restricted Securities All Other
Name and Compen- Stock Underlying LTIP Compen-
Principal Position Year Salary($) Bonus ($) sation ($) Awards ($) Options (#) Payouts ($) sation ($)(a)
- ------------------------------------------------------------------------------------------------------------------------
JACK BYRNE 2000 $ 282,692 $ 350,000 $ 0 $ 0 0 $ 0 $ 9,100
Chairman and CEO (b)
RAYMOND BARRETTE 2000 333,654 350,000 0 0 9,000 0 15,627
President 1999 262,692 1,278,776 0 0 0 1,105,000 462,291
1998 250,000 217,000 0 0 0 0 294,175
DAVID G. STAPLES 2000 147,308 150,000 0 0 9,000 0 5,169
Vice President 1999 135,077 1,081,313 0 0 0 520,000 19,489
1998 128,769 106,000 0 0 0 399,000 15,330
REID T. CAMPBELL 2000 108,077 150,000 0 0 9,000 0 6,177
Vice President and 1999 99,077 129,918 0 0 0 520,000 14,816
Director of Finance 1998 91,769 84,000 0 0 0 399,000 12,326
K. THOMAS KEMP 2000 182,000 75,000 0 0 0 0 129,900
Deputy Chairman 1999 400,000 1,308,809 0 0 0 2,600,000 269,490
(former CEO) 1998 386,923 304,000 0 0 0 1,995,000 275,185
TERRY L. BAXTER 2000 156,039 80,000 0 0 0 0 66,862
Former Executive Officer (b) 1999 262,692 738,853 0 0 0 1,625,000 475,451
1998 247,692 180,000 0 0 0 931,000 758,588
====================================================================================================================
(a) Amounts include, when applicable, 401(k) Savings Plan matching
contributions (which did not exceed $10,200 per individual), principal
credited to a former non-qualified deferred compensation plan, director
fees and retainers paid by companies for which White Mountains is entitled
to board representation and certain other compensation. The amounts for
2000, 1999 and 1998, respectively, relating to director fees and retainers
of affiliates include: $9,100, $0, and $0 for Mr. Byrne; $9,685; $22,450
and $15,475 for Mr. Barrette; $119,700, $71,650 and $75,100 for Mr. Kemp
and $57,500, $41,342 and $21,700 for Mr. Baxter. The 1999 and 1998 amounts
for Mr. Barrette also include $42,545 and $249,646, respectively, in
reimbursements principally associated with a Company-sponsored relocation.
The 1999 amounts for Messrs. Barrette and Baxter also include $351,917 in
phantom stock awards resulting from the sale of WMSC. The 1998 amount for
Mr. Baxter also includes $665,000 in incentive compensation as interim
Chairman of WMSC.
(b) In January 2000 Mr. Byrne replaced Mr. Kemp as CEO of the Company and Mr.
Baxter retired from full-time service. The table above reflects Messrs.
Byrne and Baxter's total compensation for 2000.
25
OPTION GRANTS IN LAST FISCAL YEAR
The following table summarizes, for the Named Executive Officers,
options to acquire Shares ("Options") granted during 2000.
% of Total Potential Realizable Value at
Options Assumed Annual Rates of Stock
Number of Securities Granted to Exercise Price Price Appreciation for Option Term
Underlying Options Employees in of Base Price
Name Granted (#) Fiscal Year ($/Sh) Expiration Date 5% ($) 10% ($)
- --------------------------------------------------------------------------------------------------------------------------------
John J. Byrne 0 0% $ - - $ 0 $ 0
Raymond Barrette 9,000 11.1% 106.19(a) December 2009 0 704,567
David G. Staples 9,000 11.1% 106.19(a) December 2009 0 704,567
Reid T. Campbell 9,000 11.1% 106.19(a) December 2009 0 704,567
K. Thomas Kemp 0 0% - - 0 0
Terry L. Baxter 0 0% - - 0 0
================================================================================================================================
(a) Represents the closing market value of Shares on the grant date of February
28, 2000. The exercise price of the Options increases by 6% annually on a pro
rata basis. Options vest 10% per year through 2009. The Options are considered
to be Incentive Stock Options for income tax purposes.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION
VALUES
The following table summarizes, for the Named Executive Officers,
Options exercised during the Company's latest fiscal year, and the number and
in-the-money value of Options outstanding as of December 31, 2000.
As of December 31, 2000
--------------------------------------------------------------
Number of Securities Underlying Value of Unexercised In-the-
Unexercised Options at Fiscal Money Options at
Year-End (#) Fiscal Year-End ($)
------------------------------ ------------------------------- -----------------------------
Shares Acquired Value
on Exercise (#) Realized Exercisable Unexercisable Exercisable Unexercisable
- -------------------------------------------------------------------------------------------------------------------------
John J. Byrne 0 $ 0 0 0 $ 0 $ 0
Raymond Barrette 0 0 900 8,100 186,737 1,680,634
David G. Staples 0 0 900 8,100 186,737 1,680,634
Reid T. Campbell 0 0 900 8,100 186,737 1,680,634
K. Thomas Kemp 0 0 0 0 0 0
Terry L. Baxter 0 0 0 0 0 0
=========================================================================================================================
26
LONG-TERM INCENTIVE PLANS - AWARDS IN LAST FISCAL YEAR
The following table summarizes the Incentive Plan awards made to the Named
Executive Officers during 2000. Such awards consisted of performance shares.
Number of Performance Estimated Future Payouts (a)
Performance Period for ------------------------------------
Name Shares (#) Payout Threshold (#) Target (#) Maximum (#)
- --------------------------------------------------------------------------------------------------------------------
John J. Byrne 10,000 3 yrs. 0 10,000 20,000
Raymond Barrette 10,000 3 yrs. 0 10,000 20,000
David G. Staples 2,000 3 yrs. 0 2,000 4,000
Reid T. Campbell 2,000 3 yrs. 0 2,000 4,000
K. Thomas Kemp 2,000 3 yrs. 0 2,000 4,000
Terry L. Baxter 2,000 3 yrs. 0 2,000 4,000
====================================================================================================================
(a) Such performance shares are payable upon completion of pre-defined business
goals and are payable in cash based on the market value of Shares at the
time of payment or Shares. The "Target" performance for the 2000
performance share award is the attainment of a corporate annualized return
on equity ("ROE") of 13% after tax. The determination of ROE is generally
based on the economic value of Shares with dividends reinvested. At an ROE
of 6% or less ("Threshold") the percentage of performance shares payable
will be 0% and at an ROE of 25% or more ("Maximum") the percentage of
performance shares payable will become 200% of Target.
OTHER COMPENSATION ARRANGEMENTS
Pursuant to the Incentive Plan, under some circumstances such as a "Change
in Control" followed by a termination without cause, constructive termination or
an "Adverse Change" in the Incentive Plan, stock options will generally become
fully exercisable and performance shares will become partially or fully payable.
Such circumstances are more fully described in the Incentive Plan.
The Company does not provide pension benefits to its Executive Officers
under a defined benefit or actuarial plan. The Company has previously provided
non-qualified pension benefits to its Executive Officers under a deferred
benefit plan but did not provide such benefits during 2000.
COMPENSATION OF DIRECTORS
Messrs. Patrick Byrne, Clark, Cochran, George Gillespie, John Gillespie,
Kemp, Macklin, Olson and Zankel each received a retainer of $50,000 during 2000
and fees of $1,000 for each Board meeting and Committee meeting attended. The
annual retainer relates to the twelve month period from May 2000 to May 2001.
Messrs. Clark, John Gillespie and Macklin also received additional retainers of
$3,000, $100,000 and $6,000 during 2000 for their roles as Chairman of the Audit
Committee, Chairman of the Investment Committee and Chairman of the Compensation
and Human Resources Committees, respectively. Mr. Fass was granted 9,000 Options
and 2,000 performance shares during 2000 on the same terms as Options and
performance shares granted to other Executive Officers. Messrs. Jack Byrne and
Barrette did not receive compensation for their role as a Director during 2000.
27
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
PRINCIPAL HOLDERS OF SHARES
To the knowledge of the Company, there was no person or entity beneficially
owning more than 5% of Shares outstanding as of March 26, 2001, except as shown
below:
Number of Shares
Name and address of beneficial owner beneficially owned Percent of Class (a)
- ------------------------------------------------------------------------- -------------------- -----------------------
Jack Byrne 80 South Main Street, Hanover, NH 03755 (b) 1,182,959 20.1%
Franklin Mutual Advisers LLC 51 JFK Parkway, Short Hills, NJ 07078 (c) 750,271 12.8%
Alliance Asset Accumulation Plan 777 San Marin Drive, Novato, CA 94998 (d) 367,014 6.2%
========================================================================= ==================== =======================
(a) Represents beneficial ownership of Shares as opposed to voting power.
(b) Does not include 65,913 Shares donated to charitable foundations for which
Mr. Byrne disclaims beneficial ownership, but for which his spouse retains
voting power.
(c) According to filings by such holders with the SEC, the Shares beneficially
owned by Franklin Mutual Advisers LLC were acquired solely for investment
purposes on behalf of client investment advisory accounts of such holders.
(d) Represents Shares beneficially owned by employees of Fireman's Fund
pursuant to an employee incentive savings plan. The trustee for such plan
generally votes the Shares held by the plan in accordance with directions
given by the participating Fireman's Fund employees to whose accounts
Shares have been allocated.
BENEFICIAL STOCK OWNERSHIP OF DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth, as of March 26, 2001, beneficial ownership
of Shares by each director of the Company, by each of the current Executive
Officers, and by all Directors and Executive Officers as a group.
Number of Shares owned
-----------------------------------------------
Directors and Executive Officers Beneficially (a)(b) Economically (c)
- ------------------------------------------------------------------------------------------------------------------------
Raymond Barrette 29,433 79,867
Jack Byrne (d) 1,182,959 1,207,959
Patrick M. Byrne 236,008 236,008
Reid T. Campbell 4,902 20,502
Howard L. Clark, Jr. 1,000 1,000
Robert P. Cochran 0 0
Steven E. Fass 4,415 16,515
George J. Gillespie, III 1,000 1,000
John D. Gillespie 1,676 1,676
K. Thomas Kemp 81,690 107,779
Gordon S. Macklin 15,000 15,000
Frank A. Olson 3,000 3,000
David G. Staples 5,183 21,283
Arthur Zankel 11,600 11,600
All Directors and Executive Officers as a group (16 persons) (d) 1,591,189 1,759,612
========================================================================================================================
(a) The Shares beneficially owned by Messrs Jack Byrne, Patrick Byrne, Kemp and
all Directors and Executive Officers as a group represent 20.1%, 4.0%, 1.4%
and 27.0% of the total Shares outstanding at March 26, 2001, respectively.
All other Directors and Executive Officers beneficially owned less than 1%
of the total Shares outstanding at that date. Represents beneficial
ownership of Shares as opposed to voting power.
(b) Includes vested Options to acquire 900 Shares for each of Messrs. Barrette,
Fass, Campbell and Staples.
(c) Incremental Shares shown as economically owned by Directors and Executive
Officers represent unvested performance share awards, unvested Option
awards, unvested restricted stock awards and earned phantom shares on
compensation deferred.
(d) Does not include 65,913 Shares donated to charitable foundations for which
Mr. Byrne disclaims beneficial ownership, but for which his spouse retains
voting power.
28
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Mr. Clark is Vice Chairman of Lehman. Lehman has, for a number of years,
provided investment banking services to White Mountains. Lehman is the arranger,
the administrative agent and a lender under the Credit Facility.
Mr. George Gillespie is a Partner in Cravath. Cravath has, for many years,
provided legal services to White Mountains.
White Mountains owns a limited partnership investment interest which was
managed by Mr. John Gillespie during 2000.
White Mountains owns a limited partnership interest and an investment
portfolio which was managed by Mr. Zankel during 2000.
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.
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.
b. REPORTS ON FORM 8-K
During the fourth quarter of 2000 the Company filed two Reports on Form
8-K. The first, dated October 19, 2000, announced that the Company amended its
Stock Purchase Agreement with CGNU to purchase CGU. The second, dated October
20, 2000, announced that the Company had received a favorable tax ruling from
the Internal Revenue Service regarding issues related to its 1991 sale of
Fireman's Fund.
29
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)
10 (a) Stock Purchase Agreement among CGU International Holdings Luxembourg S.A., CGU Holdings LLC, CGNU
PLC, the Company, Tack Holding Corp. and Tack Acquisition Corp. dated as of September 24, 2000
(incorporated by reference herein to Exhibit 99(a) of the Company's Report on Form 8-K dated September 24,
2000)
10 (b) Amendment No. 1 dated October 15, 2000 to the Stock Purchase Agreement among CGU International
Holdings Luxembourg S.A., CGU Holdings LLC, CGNU PLC, the Company, Tack Holding Corp. and Tack
Acquisition Corp. dated as of September 24, 2000 (incorporated by reference herein to Exhibit 99(c) of the
Company's Report on Form 8-K dated October 19, 2000)
10 (c) Amendment No. 2 dated February 20, 2001 to the Stock Purchase Agreement among CGU International
Holdings Luxembourg S.A., CGU Holdings LLC, CGNU PLC, the Company, Tack Holding Corp. and Tack
Acquisition Corp. dated as of September 24, 2000 (incorporated by reference herein to Exhibit 99(i) of the
Company's Report on Form 8-K dated February 20, 2001)
10 (d) Convertible Preferred Stock Term Sheet relating to the Company's acquisition of CGU (incorporated by reference
herein to Exhibit 99(e) of the Company's Report on Form 8-K dated October 19, 2000)
10 (e) Berkshire Hathaway Preferred Stock and Warrants Term Sheet relating to the Company's acquisition of CGU
(incorporated by reference herein to Exhibit 99(f) of the Company's Report on Form 8-K dated October 19, 2000)
10 (f) $875 million Credit Agreement among TACK Holding Corp., TACK Acquisition Corp. and the Company (as
borrowers), Lehman (as arranger) and the several lenders as parties thereto relating to the Company's
acquisition of CGU dated March 16, 2001 (*)
10 (g) Stock Purchase and Indemnity Agreement by and among the Company and Dexia S.A. 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 10, 2000)
10 (h) Asset Purchase Agreement, as of January 10, 2000, by and between Risk Capital Holdings, Inc., Risk Capital
Reinsurance Company, Folksamerica Holding Company, Inc. and Folksamerica Reinsurance Company
(incorporated by reference herein to Exhibit 10(a) of the Company's Report on Form 8-K dated January 10,
2000)
10 (i) 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 (j) 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 (k) Stock Purchase Agreement by and among the Company, 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)
30
- -------------------------------------------------------------------------------------------------------------------
EXHIBIT NUMBER NAME
- -------------------------------------------------------------------------------------------------------------------
10 (l) 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 (m) 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 (n) 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 (o) 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 (p) 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 (incorporated by reference herein to Exhibit 10(a) of the Company's
1999 Annual Report on Form 10-K)
10 (q) 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 (incorporated by reference
herein to Exhibit 10(b) of the Company's 1999 Annual Report on Form 10-K)
10 (r) 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 (incorporated by reference
herein to Exhibit 10(c) of the Company's 1999 Annual Report on Form 10-K)
10 (s) 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 (incorporated by reference
herein to Exhibit 10(d) of the Company's 1999 Annual Report on Form 10-K)
10 (t) Credit Agreement dated February 24, 1999 among Folksamerica Holding Company, Inc., the Lenders (as
named therein) and The First National Bank of Chicago (incorporated by reference herein to Exhibit 10(e) of
the Company's 1999 Annual Report on Form 10-K)
10 (u) 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 (incorporated by reference
herein to Exhibit 10(f) of the Company's 1999 Annual Report on Form 10-K)
10 (v) 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 (incorporated by reference
herein to Exhibit 10(g) of the Company's 1999 Annual Report on Form 10-K)
10 (w) 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 (x) The Company's Long-Term Incentive Plan, as amended, (incorporated by reference to Appendix I of the Company's Notice
of 1995 Annual Meeting of Shareholders and Proxy Statement) (**)
11 Statement Re Computation of Per Share Earnings (***)
31
- -------------------------------------------------------------------------------------------------------------------------
EXHIBIT NUMBER NAME
- -------------------------------------------------------------------------------------------------------------------------
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 (*)
23 (a) Consent of PricewaterhouseCoopers dated March 26, 2001 (*)
23 (b) Consent of KPMG LLP dated March 26, 2001 (*)
23 (c) Consent of PricewaterhouseCoopers LLP dated March 26, 2001 relating to Folksamerica and FSA (*)
24 Powers of Attorney (*)
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 (incorporated by
reference herein to Exhibit 99(b) of the Company's 1999 Annual Report on Form 10-K)
- -------------------------------------------------------------------------------------------------------------------
(*) 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 26, 2001 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
/s/ RAYMOND BARRETTE President and Director March 26, 2001
- ------------------------------------------------ (Principal Financial Officer)
Raymond Barrette
/s/ JOHN J. BYRNE Chairman and Chief Executive Officer March 26, 2001
- ------------------------------------------------ (Principal Executive Officer)
John J. Byrne
PATRICK M. BYRNE* Director March 26, 2001
- ------------------------------------------------
Patrick M. Byrne
HOWARD L. CLARK, JR.* Director March 26, 2001
- ------------------------------------------------
Howard L. Clark, Jr.
ROBERT P. COCHRAN* Director March 26, 2001
- ------------------------------------------------
Robert P. Cochran
STEVEN E. FASS* Director March 26, 2001
- ------------------------------------------------
Steven E. Fass
GEORGE J. GILLESPIE, III* Director March 26, 2001
- ------------------------------------------------
George J. Gillespie, III
JOHN D. GILLESPIE* Director March 26, 2001
- ------------------------------------------------
John D. Gillespie
/s/ K. THOMAS KEMP Director March 26, 2001
- ------------------------------------------------
K. Thomas Kemp
GORDON S. MACKLIN* Director March 26, 2001
- ------------------------------------------------
Gordon S. Macklin
FRANK A. OLSON* Director March 26, 2001
- ------------------------------------------------
Frank A. Olson
/s/ MICHAEL S. PAQUETTE Senior Vice President and Controller March 26, 2001
- ------------------------------------------------ (Principal Accounting Officer)
Michael S. Paquette
ARTHUR ZANKEL* Director March 26, 2001
- ------------------------------------------------
Arthur Zankel
*By: /s/ K. THOMAS KEMP
- -----------------------------------------------------
K. Thomas Kemp, 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, 2000 and 1999......................................... F-1
Consolidated statements of income and comprehensive income for each of the years ended
December 31, 2000, 1999 and 1998................................................................ F-2
Consolidated statements of shareholders' equity for each of the years ended
December 31, 2000, 1999 and 1998................................................................ F-3
Consolidated statements of cash flows for each of the years ended
December 31, 2000, 1999 and 1998................................................................ F-4
Notes to consolidated financial statements........................................................... F-5
OTHER FINANCIAL INFORMATION:
Report on management's responsibilities.............................................................. F-30
Reports of independent accountants................................................................... F-31
Selected quarterly financial data (unaudited)........................................................ F-33
FINANCIAL STATEMENT SCHEDULES:
I. Summary of investments other than investments in related parties............................. FS-1
II. Condensed financial information of the Registrant............................................. FS-2
III. Supplementary insurance information........................................................... FS-4
IV. Reinsurance.................................................................................... FS-5
V. Valuation and qualifying accounts.............................................................. FS-6
VI. Supplemental information concerning property and casualty insurance underwriters............... FS-7
- -------------------------------------------------------------------------------------------------------------------
34
CONSOLIDATED BALANCE SHEETS
- ---------------------------------------------------------------------------------------------------------------------
December 31,
-----------------------------
Dollars in millions 2000 1999
- ---------------------------------------------------------------------------------------------------------------------
ASSETS
Fixed maturity investments, at fair value (cost $1,063.0 and $957.9) $ 1,078.6 $ 924.5
Common equity securities, at fair value (cost $127.5 and $100.4) 144.8 108.4
Short-term investments, at amortized cost (which approximated fair value) 735.9 117.5
Other investments (cost $117.3 and $59.1) 142.9 68.3
-----------------------------
Total investments 2,102.2 1,218.7
Cash 4.4 3.9
Reinsurance recoverable on paid and unpaid losses 777.2 193.7
Investment in unconsolidated insurance affiliate(s) 130.6 422.6
Insurance and reinsurance balances receivable 105.7 49.8
Deferred tax asset 105.1 52.5
Deferred acquisition costs 27.2 22.2
Goodwill 25.4 3.6
Investment income accrued 20.1 15.0
Other assets 231.1 50.8
Net assets of discontinued mortgage banking operations 16.2 16.3
-----------------------------
Total assets $ 3,545.2 $ 2,049.1
=====================================================================================================================
LIABILITIES
Loss and loss adjustment expense reserves $ 1,556.3 $ 851.0
Funds held under reinsurance treaties 420.0 31.4
Unearned insurance and reinsurance premiums 182.0 92.1
Short-term debt - 4.0
Long-term debt 96.0 202.8
Deferred credits 92.2 100.6
Accounts payable and other liabilities 152.2 152.9
-----------------------------
Total liabilities 2,498.7 1,434.8
- ---------------------------------------------------------------------------------------------------------------------
SHAREHOLDERS' EQUITY
Common Shares at $1 par per Share- authorized 50,000,000 Shares,
issued and outstanding 5,880,115 and 5,945,953 Shares 5.9 5.9
Paid-in surplus 66.2 67.0
Retained earnings 927.5 534.2
Accumulated other comprehensive income, after tax 46.9 7.2
-----------------------------
Total shareholders' equity 1,046.5 614.3
- ---------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 3,545.2 $ 2,049.1
=====================================================================================================================
See Notes to Consolidated Financial Statements including Note 16 for Commitments
and Contingencies.
F-1
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
Year Ended December 31,
--------------------------------------
Millions, except per Share amounts 2000 1999 1998
- ---------------------------------------------------------------------------------------------------------------------
REVENUES:
Gains on sales of subsidiaries and insurance assets $ 385.8 $ 103.9 $ -
Earned insurance and reinsurance premiums 334.4 283.2 246.0
Net investment income 85.9 61.9 36.8
Amortization of deferred credits and other benefits 41.4 25.8 2.7
Earnings (losses) from unconsolidated insurance affiliates (2.6) 31.1 24.3
Net realized gains (losses) on sales of investments and other assets (8.4) 69.6 71.0
Other revenue 11.7 3.7 9.5
--------------------------------------
Total revenues 848.2 579.2 390.3
- ---------------------------------------------------------------------------------------------------------------------
EXPENSES:
Losses and loss adjustment expenses 287.7 242.3 174.8
Insurance and reinsurance acquisition expenses 101.1 73.4 54.8
Compensation and benefits 59.5 67.8 51.5
General expenses 28.4 19.5 15.9
Interest expense 16.1 14.7 13.7
--------------------------------------
Total expenses 492.8 417.7 310.7
- ---------------------------------------------------------------------------------------------------------------------
PRETAX EARNINGS 355.4 161.5 79.6
Tax provision (42.5) (53.1) (28.5)
--------------------------------------
NET INCOME FROM CONTINUING OPERATIONS 312.9 108.4 51.1
DISCONTINUED OPERATIONS, AFTER TAX:
Gains from discontinued operations 95.0 11.6 -
Net income from discontinued operations - 1.0 27.4
--------------------------------------
NET INCOME 407.9 121.0 78.5
======================================
OTHER COMPREHENSIVE INCOME (LOSS) ITEMS ARISING DURING THE YEAR, AFTER TAX:
Net change in unrealized gains for investments held 56.3 (73.7) 38.1
Net change in foreign currency translation (.7) .9 (.9)
Recognition of net unrealized gains for investments sold (15.9) (45.2) (46.1)
--------------------------------------
COMPREHENSIVE NET INCOME $ 447.6 $ 3.0 $ 69.6
- -------------------------------------------------------------------------------======================================
BASIC EARNINGS PER SHARE:
Net income from continuing operations $ 53.08 $ 19.25 $ 8.71
Net income 69.19 21.50 13.38
Comprehensive net income 75.93 .54 11.87
DILUTED EARNINGS PER SHARE:
Net income from continuing operations $ 52.84 $ 17.66 $ 7.75
Net income 68.89 19.73 11.94
Comprehensive net income 75.60 .39 10.58
=====================================================================================================================
See Notes to Consolidated Financial Statements.
F-2
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Common Net Foreign
Shares and Common unrealized currency
paid-in Retained Shares in investment translation
Millions Total surplus earnings treasury gains adjustment
- ---------------------------------------------------------------------------------------------------------------------
Balances at January 1, 1998 $ 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 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 -
- ---------------------------------------------------------------------------------------------------------------------
Net income 407.9 - 407.9 - - -
Dividends to shareholders (7.1) - (7.1) - - -
Shares repurchased and retired (8.3) (.8) (7.5) - - -
Change in net unrealized investment
gains and losses and other, after tax 39.7 - - - 40.4 (.7)
- ---------------------------------------------------------------------------------------------------------------------
BALANCES AT DECEMBER 31, 2000 $1,046.5 $ 72.1 $ 927.5 $ - $ 47.6 $(.7)
=====================================================================================================================
See Notes to Consolidated Financial Statements.
F-3
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31,
---------------------------------------
Millions 2000 1999 1998
- ---------------------------------------------------------------------------------------------------------------------
Net income from continuing operations $ 312.9 $ 108.4 $ 51.1
Reconciliation of net income to cash flows from operating activities:
Gains on sales of subsidiaries and other insurance assets (385.8) (88.1) -
Undistributed loss (earnings) from unconsolidated insurance affiliates 2.6 (29.0) (19.1)
Net realized losses (gains) on sales of investments and other assets 8.4 (85.4) (71.0)
Amortization of deferred credits and other benefits (41.4) (25.8) (2.7)
Decrease (increase) in reinsurance recoverable (367.2) 5.7 (2.7)
Net increase in funds held and insurance and reinsurance premiums receivable 432.8 28.9 2.3
(Decrease) increase in insurance loss and loss adjustment expense reserves (72.4) (69.2) 13.7
Net change in current and deferred income taxes receivable and payable (12.6) 55.6 (7.1)
Net change in other liabilities 31.6 (111.3) 11.8
Net change in other assets (33.0) 7.4 25.1
Other, net 10.1 (5.5) (5.3)
---------------------------------------
Net cash used for operating activities (114.0) (208.3) (3.9)
- ---------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Net (increase) decrease in short-term investments (614.6) 75.5 147.1
Sales of common equity securities and other investments 204.0 256.4 137.5
Sales of fixed maturity investments 315.1 237.7 116.7
Maturities of fixed maturity investments 63.0 36.0 16.1
Purchases of common equity securities and other investments (205.6) (71.1) (56.1)
Purchases of fixed maturity investments (159.0) (89.4) (122.7)
Purchases of consolidated and unconsolidated affiliates 60.1 (234.3) (237.8)
Proceeds from sales of consolidated and unconsolidated affiliates 570.4 144.5 -
Net sales (purchases) of fixed assets 1.0 (1.0) (1.1)
---------------------------------------
Net cash provided from (used for) investing activities 234.4 354.3 (.3)
- ---------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Net (decrease) increase of short-term debt (4.0) (51.6) (.4)
Issuances of long-term debt 15.0 100.0 50.0
Repayments of long-term debt (115.0) (86.4) (1.1)
Shares repurchased and retired (8.8) (139.4) (19.5)
Proceeds from exercises of warrants and options to acquire Shares - 21.7 -
Cash dividends paid to common shareholders (7.1) (8.8) (9.4)
--------------------------------------
Net cash (used for) provided from financing activities (119.9) (164.5) 19.6
- ---------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash during year .5 (18.5) 15.4
Cash balance at beginning of year 3.9 22.4 7.0
---------------------------------------
Cash balance at end of year $ 4.4 $ 3.9 $ 22.4
=====================================================================================================================
See Notes to Consolidated Financial Statements.
F-4
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, 2000 principally
consisted of Folksamerica, PIC, ACIC, BICC and Waterford. The Company's
unconsolidated affiliate at December 31, 2000 consisted of 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 during the
periods presented herein 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, 2000 and 1999.
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.
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.
F-5
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 primarily 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 and
reinsurance subsidiaries and the existence of reinsurance, the Company's
exposure to liabilities related to damage or injury from environmental pollution
or from asbestos injury claims arising out of product or general liability
coverage is limited. White Mountains' insurance and reinsurance 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's
reserves for environmental and asbestos losses at December 31, 2000 represent
management's best estimate of the Company's ultimate liability based on
information currently available. 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. 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 expansion of coverage and liability allowed
under case law in the past and the possibilities of similar interpretations in
the future, additional increases in environmental and asbestos loss reserves may
emerge which would adversely affect the Company's financial position. Loss
reserve additions arising from such future unfavorable case law interpretations
cannot be reasonably estimated at the present time.
White Mountains' insurance and reinsurance subsidiaries enter into
reinsurance contracts from time to time to protect their businesses from losses
due to poor risk diversification, to manage their operating leverage ratios and
to limit ultimate losses arising from catastrophic events. The majority of such
reinsurance contracts are executed through excess of loss treaties and
catastrophe contracts under which the reinsurer indemnifies for a specified part
or all of certain types of losses over stipulated amounts arising from any one
occurrence or event. To a lesser extent, White Mountains has entered into quota
share treaties with reinsurers under which all risks meeting prescribed criteria
are covered on a pro-rata basis. The amount of each risk retained by White
Mountains is subject to maximum limits which vary by line of business and type
of coverage. Retention limits are continually reviewed and are revised
periodically as the capacity to underwrite risks changes. Amounts related to
reinsurance contracts are recorded in accordance with SFAS No. 113, "Accounting
and Reporting for Reinsurance of Short-Duration and Long-Duration Contracts".
Amounts recoverable from reinsurers are estimated in a manner consistent
with the claim liability associated with the reinsured policies. The
collectibility of reinsurance recoverables is subject to the solvency of the
reinsurers. The Company is selective in regard to its reinsurers, placing
reinsurance with only those reinsurers with a strong financial condition,
industry ratings and underwriting ability. Management monitors the financial
condition and ratings of its reinsurers on an ongoing basis.
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.
Fund held under reinsurance treaties represent contractual payments due to the
reinsurer that White Mountains has retained to secure obligations of the
reinsurer. Such amounts are recorded as liabilities in the consolidated
financial statements.
F-6
DEFERRED CREDITS AND GOODWILL
As of December 31, 2000 and 1999, White Mountains had deferred credits of
$92.2 million and $100.6 million, respectively and goodwill of $25.4 million and
$3.6 million, respectively. The deferred credits and goodwill resulted
principally from the acquisition activities outlined below.
In May 2000 White Mountains completed its acquisition of the reinsurance
operations of Risk Capital for $20.3 million in cash plus related expenses.
Because the cost of Risk Capital was more than the fair value of its net
identifiable assets at that date, White Mountains recorded $24.9 million in
goodwill at acquisition ($23.3 million at December 31, 2000) which is being
amortized to income over the estimated period of benefit of ten years.
In March 2000 White Mountains acquired PCA for $122.3 million in cash.
Because the cost of PCA was less than the fair value of its net identifiable
assets acquired at that date, White Mountains recorded a $37.9 million deferred
credit at acquisition ($33.0 million at December 31, 2000) which is being
amortized to income over the estimated period of benefit of six years.
In October 1999 White Mountains acquired IAG (which consisted primarily of
PIC, ACIC and BICC) for $86.7 million in cash. Because the cost of acquiring
PIC, ACIC and BICC was less than the value of their net identifiable assets, the
Company recorded a $62.0 million deferred credit at acquisition ($37.0 million
and $57.7 million at December 31, 2000 and 1999, respectively) which is being
amortized to income 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. 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 upon exercise ($13.0 million at December 31, 1999) that was
being amortized to income ratably over the estimated period of benefit of five
years. In July 2000 White Mountains sold its investments in FSA as part of the
Dexia Sale which resulted in the immediate recognition of the related
unamortized deferred credit balance.
In August 1998 White Mountains acquired all the outstanding common stock of
Folksamerica thereby causing Folksamerica to become a consolidated subsidiary as
of that date. Because the cost of White Mountains' investment in Folksamerica
was less than the value of Folksamerica's net identifiable assets at that date,
White Mountains recorded a $39.8 million deferred credit ($22.2 million and
$29.9 million at December 31, 2000 and 1999, respectively) which is being
amortized to income ratably over the estimated period of benefit of five years.
FEDERAL AND FOREIGN INCOME AND WITHHOLDING TAXES
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. Prior to the Redomestication, the Company
filed a consolidated United States Federal income tax return with its
subsidiaries. The Onshore Companies 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.
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 on dividends received from its subsidiaries as
well as a 1% Barbados income tax on taxable earnings (which include dividends
received from its subsidiaries). These taxes are recorded in addition to United
States income taxes accrued by its Onshore Companies.
With regard to the Onshore Companies, 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.
F-7
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 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
Effective January 1, 2001, Folksamerica Reinsurance Company, PIC and ACIC
are required to adopt new regulations implementing a codification of statutory
accounting principles for insurers. The purpose of the codification is to
enhance the consistency of the accounting treatment of assets, liabilities,
reserves, income and expenses of insurers, by setting forth the accounting
practices and procedures to be followed in completing annual and quarterly
financial statements required by state law.
Codification will not serve to materially change the aggregate
policyholders' surplus of the Company's reinsurance and insurance operations as
of December 31, 2000. However, New York (Folksamerica Reinsurance Company's
state of domicile), has not yet adopted certain codification standards adopted
by other states that conflict with New York law, particularly those standards
relating to deferred taxes and goodwill. If New York were to adopt all proposed
codification provisions, codification would serve to increase the aggregate
policyholders' surplus of the Company's reinsurance and insurance operations as
of December 31, 2000.
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.
The adoption of SOP 98-7 did not have a material impact on White Mountains'
financial position or results of operations.
In June 1998, the Financial Accounting Standards Board (the "FASB") 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 for fiscal years beginning after June 15, 2000. White
Mountains has recently completed its evaluation of the impact of the adoption of
SFAS 133 and has determined that SFAS No. 133 will not have a material impact on
White Mountains' financial position or 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.
ACCOUNTING STANDARD RECENTLY PROPOSED
In February 2001 the FASB issued an exposure draft entitled "Business
Combinations and Intangible Assets - Accounting for Goodwill". This exposure
draft proposes, among other things, the prospective elimination of the pooling
method of accounting for business combinations and sets forth new standards
concerning accounting for deferred credits, goodwill and other intangible assets
arising from such activities.
With respect to deferred credits, the proposal calls for the immediate
recognition of all existing and prospective deferred credits through the income
statement as an extraordinary gain. With respect to goodwill, the proposed
exposure draft would require companies to amortize its existing and prospective
goodwill when the asset is deemed to have been impaired rather than
systematically over a perceived period of benefit.
F-8
The exposure draft, in its current form, would be effective for interim and
annual periods beginning after a final accounting standard is issued. As of
December 31, 2000 and 1999, White Mountains had deferred credits of $92.2
million and $100.6 million, respectively and goodwill of $25.4 million and $3.6
million, respectively.
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
weighted average number of Shares and the net effect of potential dilutive
Shares outstanding. In 1999 and 1998 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, 2000, 1999
and 1998:
Year Ended December 31,
-------------------------------------
2000 1999 1998
- ---------------------------------------------------------------------------------------------------------------------
BASIC EARNINGS PER SHARE NUMERATORS (IN MILLIONS):
Net income $407.9 $ 121.0 $ 78.5
=====================================
Net income from continuing operations $312.9 $ 108.4 $ 51.1
=====================================
Comprehensive net income $447.6 $ 3.0 $ 69.6
- --------------------------------------------------------------------------------=====================================
DILUTED EARNINGS PER SHARE NUMERATORS (IN MILLIONS):
Net income $407.9 $ 121.0 $ 78.5
Dilution to earnings resulting from FSA Preferred Stock - (.6) (.4)
-------------------------------------
Diluted net income $407.9 $ 120.4 $ 78.1
=====================================
Diluted net income from continuing operations $312.9 $ 107.8 $ 50.7
=====================================
Diluted comprehensive net income $447.6 $ 2.4 $ 69.2
- --------------------------------------------------------------------------------=====================================
EARNINGS PER SHARE DENOMINATORS (IN THOUSANDS):
Basic earnings per Share denominator (average Shares outstanding) 5,895 5,630 5,866
Average outstanding dilutive options and warrants to acquire Shares (a) 26 472 669
-------------------------------------
Diluted earnings per Share denominator 5,921 6,102 6,535
- --------------------------------------------------------------------------------=====================================
BASIC EARNINGS PER SHARE (IN DOLLARS):
Net income $69.19 $ 21.50 $ 13.38
=====================================
Net income from continuing operations $53.08 $ 19.25 $ 8.71
=====================================
Comprehensive net income $75.93 $ .54 $ 11.87
- --------------------------------------------------------------------------------=====================================
DILUTED EARNINGS PER SHARE (IN DOLLARS):
Net income $68.89 $ 19.73 $ 11.94
=====================================
Net income from continuing operations $52.84 $ 17.66 $ 7.75
=====================================
Comprehensive net income $75.60 $ .39 $ 10.58
=====================================================================================================================
(a) See Note 10 for detailed information concerning outstanding dilutive options
and warrants to acquire Shares.
F-9
NOTE 2. DISCONTINUED OPERATIONS
FORMER INSURANCE OPERATIONS.
In 1991, White Mountains sold Fireman's Fund to Allianz of America, Inc.
Since 1991 the Company had carried a reserve related to various outstanding tax
issues involving the sale. In September 2000, the Company was informed that the
Internal Revenue Service agreed with the position taken by White Mountains in
its 1991 tax return and, on October 19, 2000, the Company received the Technical
Advice Memorandum from the Internal Revenue Service's National Office confirming
this conclusion. As a result, the Company released a $95.0 million reserve
during 2000 to income which is presented as a gain from discontinued insurance
operations.
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. Mortgage banking assets and liabilities
that were not part of the Citibank sale principally included WMSC's investments
in derivative instruments (which were fully liquidated in 1999), various
residual mortgage assets and preferred stock, each of which were substantially
liquidated during 1999. White Mountains recorded a $17.9 million pretax ($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 White
Mountains' decision to dispose of its net mortgage banking assets, these
activities are shown as discontinued operations herein.
Net cash provided from (used for) discontinued mortgage banking operations
totalled $(.1) million, $(16.4) million and $13.3 million for the years ended
December 31, 2000, 1999 and 1998, respectively.
Summary condensed financial results of discontinued mortgage banking
operations follow:
CONDENSED STATEMENTS OF NET ASSETS
December 31,
Millions 2000 1999
- ---------------------------------------------------------------------------------------------------------------------
ASSETS:
- ------
Cash and investments $ 17.7 $ 13.8
Residual mortgage assets, net 7.6 26.9
Other assets 10.4 17.8
------------------------
Total assets $ 35.7 $ 58.5
------------------------
LIABILITIES:
- -----------
Accounts payable and other liabilities $ 19.5 $ 42.2
------------------------
Net assets of discontinued mortgage banking operations $ 16.2 $ 16.3
=====================================================================================================================
F-10
CONDENSED STATEMENTS OF INCOME
Year Ended December 31,
Millions 2000 1999 1998
- ---------------------------------------------------------------------------------------------------------------------
REVENUES:
Net investment income and investment gains $ 4.2 $ 27.9 $ 81.6
Net gain on sales of mortgages - 25.4 86.8
Net mortgage servicing revenue - 10.9 43.3
Other mortgage operations revenue - 12.0 47.1
--------------------------------------
Total revenues 4.2 76.2 258.8
--------------------------------------
EXPENSES:
Compensation and benefits - 28.5 78.7
Interest expense - 24.5 70.2
General expenses 4.2 19.3 59.5
--------------------------------------
Total expenses 4.2 72.3 208.4
--------------------------------------
Pretax earnings - 3.9 50.4
Income tax provision - (1.7) (19.3)
--------------------------------------
Net income before preferred stock dividends - 2.2 31.1
Preferred stock dividends - (1.2) (3.7)
--------------------------------------
Net income from discontinued mortgage banking operations $ - $ 1.0 $ 27.4
=====================================================================================================================
NOTE 3. REINSURANCE OPERATIONS
On August 18, 1998, White Mountains acquired all of the outstanding
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 economic interest in
Folksamerica.
Supplemental condensed unaudited pro forma financial information for the
year ended December 31, 1998, which assumes that White Mountains' acquisition of
Folksamerica 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 from continuing operations $ 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 capital stock of Folksamerica as of
January 1, 1998, or to project White Mountains' results of operations for any
future date or period.
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 years ended December
31, 2000 and 1999 and the interim period from August 18, 1998 to December 31,
1998:
F-11
- ---------------------------------------------------------------------------------------------------------------------
Millions Period Ended December 31,
- ---------------------------------------------------------------------------------------------------------------------
2000 1999 1998
-----------------------------------------
Gross beginning balance $ 782.1 $ 723.2 $ 726.1
Less beginning reinsurance recoverable on unpaid losses (136.2) (129.0) (124.1)
-----------------------------------------
Net loss and loss adjustment expense reserves 645.9 594.2 602.0
Loss and loss adjustment expense reserves acquired - USF Re (1) - 106.5 -
Loss and loss adjustment expense reserves acquired - PCA (1) 253.8 - -
Loss and loss adjustment expense reserves acquired - Risk Capital (1) 312.6 - -
Loss and loss adjustment expense reserves transferred and assumed (2) (270.2) - -
Losses and loss adjustment expenses incurred relating to:
Current year losses 247.9 152.9 58.6
Prior year losses 22.9 29.3 1.1
-----------------------------------------
Total incurred losses and loss adjustment expenses 270.8 182.2 59.7
Loss and loss adjustment expenses paid relating to:
Current year losses (16.0) (55.4) (13.0)
Prior year losses (399.0) (181.6) (54.5)
-----------------------------------------
Total loss and loss adjustment expense payments (415.0) (237.0) (67.5)
Net ending balance 797.9 645.9 594.2
Plus ending reinsurance recoverable on unpaid losses 702.8 136.2 129.0
-----------------------------------------
Gross ending balance $1,500.7 $ 782.1 $ 723.2
=====================================================================================================================
(1) Reinsurance recoverables on unpaid losses acquired in the Risk Capital, PCA
and USF Re acquisitions were $59.1 million, $153.3 million and $21.8
million, respectively.
(2) Includes $270.6 million of loss reserves ceded to Imagine Re during 2000.
See Note 6.
Prior year reserve strengthening of $22.9 million affected most of
Folksamerica's segments including the portfolios acquired with USF Re and Risk
Capital.
During 1999 Folksamerica acquired USF Re. Significant assets and
liabilities acquired through USF Re included $204.1 million of cash and
investments and $106.5 million of net loss and loss adjustment expense reserves.
The purchase consideration included the issuance of a $20.8 million, five-year
note by Folksamerica (which could be reduced by adverse loss development at USF
Re post acquisition). Incurred losses for the years ended December 31, 2000 and
1999 related to prior accident years include adverse loss development on USF Re
acquired reserves which resulted in a reduction of the USF Re seller note of
$6.8 million and $14.0 million during those periods, respectively.
On March 31, 2000, Folksamerica acquired PCA. Significant assets and
liabilities acquired through PCA included $339.8 million of cash and investments
and $253.8 million of net loss and loss adjustment expense reserves.
On May 5, 2000, Folksamerica acquired the reinsurance operations of Risk
Capital. Significant assets and liabilities acquired through the Risk Capital
transaction included $249.9 million of cash and investments, $108.6 million of
premiums receivable, $312.6 million of net loss and loss adjustment expense
reserves and $82.0 million of net unearned reinsurance premiums. In addition,
the Risk Capital acquisition provided White Mountains with two specialty
underwriting units (Accident & Health and Marine) and several significant new
treaty clients.
F-12
ASBESTOS AND ENVIRONMENTAL LOSS AND LOSS ADJUSTMENT EXPENSE RESERVE ACTIVITY
The following table summarizes Folksamerica's reported environmental and
asbestos loss and loss adjustment expense reserve activities gross and net of
reinsurance for the years ended December 31, 2000, 1999 and 1998:
- ---------------------------------------------------------------------------------------------------------------------
Millions Period Ended December 31,
- ---------------------------------------------------------------------------------------------------------------------
2000 1999 1998
------------------------------------------------------------------
Gross Net Gross Net Gross Net
------------------------------------------------------------------
Asbestos:
Beginning balance $ 34.5 $ 22.3 $ 29.5 $ 17.9 $ 18.7 $ 14.5
Incurred losses and loss adjustment expenses 3.8 2.7 13.0 9.3 14.7 6.6
Paid losses and loss adjustment expenses (4.7) (4.0) (8.0) (4.9) (3.9) (3.2)
------------------------------------------------------------------
Ending balance 33.6 21.0 34.5 22.3 29.5 17.9
==================================================================
Environmental:
Beginning balance 9.8 8.4 14.9 10.9 13.4 10.3
Incurred losses and loss adjustment expenses 1.4 .8 .5 (.2) 3.3 2.3
Paid losses and loss adjustment expenses (2.3) (1.3) (5.6) (2.3) (1.8) (1.7)
------------------------------------------------------------------
Ending balance 8.9 7.9 9.8 8.4 14.9 10.9
==================================================================
Total asbestos and environmental:
Beginning balance 44.3 30.7 44.4 28.8 32.1 24.8
Incurred losses and loss adjustment expenses 5.2 3.5 13.5 9.1 18.0 8.9
Paid losses and loss adjustment expenses (7.0) (5.3) (13.6) (7.2) (5.7) (4.9)
------------------------------------------------------------------
Ending balance $ 42.5 $ 28.9 $ 44.3 $ 30.7 $ 44.4 $ 28.8
=====================================================================================================================
ADDITIONAL REINSURANCE OPERATIONS INFORMATION
Folksamerica's policyholders' surplus, as reported to various regulatory
authorities as of December 31, 2000 and 1999, was $443.9 million and $338.5
million, respectively. The large increase in surplus from 1999 to 2000 resulted
principally from the contribution of ACIC and $80.0 million in cash to
Folksamerica Reinsurance Company during the 2000 fourth quarter. Folksamerica's
statutory net income (loss) for the years ended December 31, 2000 and 1999 and
for the period from August 18, 1998 to December 31, 1998 was $(20.0) million,
$48.6 million and $9.0 million, respectively. The principal differences between
Folksamerica's statutory amounts and the amounts reported in accordance with
GAAP include deferred taxes, deferred acquisition costs, gains recognized under
retroactive reinsurance contracts and market value adjustments for debt
securities. Folksamerica's statutory policyholders' surplus at December 31, 2000
was in excess of the minimum requirements of relevant state insurance
regulations.
Under the insurance laws of the state of New York, Folksamerica may pay
dividends only from earned surplus as determined on a statutory basis.
Generally, the maximum amount of cash dividends that a New York-domiciled
company may pay out of its statutory earned surplus without prior regulatory
approval in any twelve month period is the lesser of the company's statutory net
investment income or 10% of statutory surplus. Accordingly, there is no
assurance that dividends may be paid by Folksamerica in the future. At December
31, 2000, Folksamerica had the ability to pay a dividend to its shareholder of
$44.4 million without prior approval of regulatory authorities.
During the year ended December 31, 2000, Folksamerica received
approximately 56.4% of its gross reinsurance premiums written from three major
reinsurance brokers as follows: (i) E.W. Blanch - 21.6%; (ii) Guy Carpenter and
affiliates - 17.6%; and (iii) AON Re, Inc. - 17.2%. During the year ended
December 31, 2000, Folksamerica received no more than 10% of its gross
reinsurance premiums from any individual ceding company.
F-13
NOTE 4. CONSOLIDATED INSURANCE OPERATIONS
On October 15, 1999, White Mountains completed its acquisition of IAG for
$86.7 million in cash. IAG'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 VGI 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. The VGI Sale
resulted in a pretax gain of $88.1 million ($53.8 million after tax). As part of
the VGI Sale, White Mountains has provided Unitrin, Inc. with certain adverse
loss development protections that will be settled as of December 31, 2002.
During 2000 White Mountains provided $5.4 million in reserves for such adverse
loss development protections. Waterford was sold to a third party on January 5,
2001 for cash proceeds of $23.8 million.
For the years ended December 31,1999 and 1998 VGI's contribution to the
Company's consolidated 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, 2000, 1999 and 1998:
- ---------------------------------------------------------------------------------------------------------------------
Millions Year Ended December 31,
- ---------------------------------------------------------------------------------------------------------------------
2000 1999 1998
-----------------------------------------
Gross beginning balance $ 68.9 $ 88.5 $ 71.9
Less beginning reinsurance recoverable on unpaid losses (32.8) (8.9) (8.7)
-----------------------------------------
Net loss and loss adjustment expense reserves 36.1 79.6 63.2
Loss and loss adjustment expense reserves sold - VGI - (87.8) -
Loss and loss adjustment expense reserves acquired - IAG - 22.5 -
Losses and loss adjustment expenses incurred relating to:
Current year losses 16.2 57.5 108.4
Prior year losses .7 2.6 6.7
-----------------------------------------
Total incurred losses and loss adjustment expenses 16.9 60.1 115.1
Loss and loss adjustment expense payments (21.1) (38.3) (98.7)
Net ending balance 31.9 36.1 79.6
Plus ending reinsurance recoverable on unpaid losses 23.7 32.8 8.9
-----------------------------------------
Gross ending balance $ 55.6 $ 68.9 $ 88.5
=====================================================================================================================
Gross ending loss and loss adjustment expense balances for 2000 and 1999
include approximately $27.2 million and $29.3 million of environmental and
asbestos reserves, respectively, relating to the run-off activities of ACIC and
BICC. Until 1983, ACIC wrote (and subsequently ceded a portion to BICC) primary
and excess liability insurance for many large national and international
chemical, manufacturing and pharmaceutical companies, as well as facultative and
treaty reinsurance for the same types of risks. Since 1983, management has
concentrated its run-off efforts on commuting its loss exposures with its
insureds. Due to the limited number of remaining policies under which a claim
could be filed and the length of time since the policies were written,
management expects any future development related to these reserves to be
immaterial.
The aggregate policyholders' surplus of PIC and ACIC at December 31, 2000
and 1999, as reported to regulatory authorities, was $60.5 million and $70.6
million, respectively. Statutory net loss for the year ended December 31, 2000
and the period from October 16, 1999 to December 31, 1999 for PIC and ACIC
totalled $1.7 million and $3.9 million, respectively. The principal differences
between PIC and ACIC's statutory amounts and the amounts reported in accordance
with GAAP (PIC and ACIC's aggregate shareholder's equity was $67.6 million and
$73.0 million at December 31, 2000 and 1999, respectively, and its net income
(loss) was $1.0 million and $(3.3) million for the year ended December 31, 2000
and the period from October 16, 1999 to December 31, 1999, respectively) include
deferred
F-14
taxes, deferred acquisition costs and market value adjustments for debt
securities. PIC and ACIC's statutory policyholders' surplus at December 31, 2000
was in excess of the minimum requirements of relevant state insurance
regulations.
Under the insurance laws of the states under which PIC and ACIC are
domiciled, PIC and ACIC may pay dividends only from earned surplus as determined
on a statutory basis. Generally, the maximum amount of cash dividends that PIC
and ACIC may pay out of their statutory earned surplus without prior regulatory
approval in any twelve month period is the greater of the company's statutory
net income or 10% of statutory surplus. Accordingly, there is no assurance that
dividends may be paid by PIC and ACIC in the future. At December 31, 2000, $4.1
million of PIC and ACIC's total statutory surplus was available for the payment
of dividends to its shareholder without prior approval of regulatory
authorities.
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, dividend income from its equity
investments and interest income from its short-term investments. Net investment
income for 2000, 1999 and 1998 consisted of the following:
- ---------------------------------------------------------------------------------------------------------------------
Year Ended December 31,
Millions 2000 1999 1998
- ---------------------------------------------------------------------------------------------------------------------
Investment income:
Fixed maturity investments $ 63.1 $ 53.6 $ 28.4
Common equity securities 2.8 3.2 3.6
Short-term investments 19.9 6.1 3.4
Other .7 .3 2.2
--------------------------------------
Total investment income 86.5 63.2 37.6
Less investment expenses and other charges (.6) (1.3) (.8)
--------------------------------------
Net investment income, before tax $ 85.9 $ 61.9 $ 36.8
=====================================================================================================================
The composition of pretax realized investment gains (losses) for
investments sold consisted of the following:
- ---------------------------------------------------------------------------------------------------------------------
Year Ended December 31,
Millions 2000 1999 1998
- ---------------------------------------------------------------------------------------------------------------------
Fixed maturity investments $(9.2) $ .7 $ 1.6
Common equity securities (4.7) 61.3 22.6
Other investments 5.1 7.6 46.8
------------------------------------
Net realized investment gains (losses) $(8.8) $ 69.6 $ 71.0
=====================================================================================================================
The components of White Mountains' change in unrealized investment gains,
after tax, as recorded on the statements of income and comprehensive income were
as follows:
F-15
- ---------------------------------------------------------------------------------------------------------------------
Year Ended December 31,
Millions 2000 1999 1998
- ---------------------------------------------------------------------------------------------------------------------
Gross realized gains from investment securities $ 22.3 $ 90.4 $ 74.0
Gross realized losses from investment securities (31.1) (20.8) (3.0)
------------------------------------
Net realized gains (losses) from investment securities sold (8.8) 69.6 71.0
Recognition of unrealized gains from investment in unconsolidated affiliate sold 32.5 - -
------------------------------------
Recognition of net unrealized gains for investments sold, before tax 23.7 69.6 71.0
Income taxes attributable to investments sold (7.8) (24.4) (24.9)
------------------------------------
Recognition of net unrealized gains for investments sold, after tax $ 15.9 $ 45.2 $ 46.1
====================================
Net change in unrealized gains for investments securities held $ 65.1 $ (11.7) $ 25.0
Net change in unrealized gains from investments in unconsolidated affiliates held 6.2 (98.9) 33.7
------------------------------------
Net change in unrealized investment gains for investments held, before tax 71.3 (110.6) 58.7
Income taxes attributable to investments held (15.0) 36.9 (20.6)
------------------------------------
Net change in unrealized gains for investments held, after tax 56.3 (73.7) 38.1
Recognition of net unrealized gains for investments sold, after tax (15.9) (45.2) (46.1)
------------------------------------
Change in net unrealized investment gains, after tax $ 40.4 $(118.9) $ (8.0)
=====================================================================================================================
The components of White Mountains' ending net unrealized investment gains
and losses on its investment portfolio and its investments in unconsolidated
insurance affiliate(s) were as follows:
- ---------------------------------------------------------------------------------------------------------------------
December 31,
Millions 2000 1999
- -------------------------------------------------------------------------------------------------------------------
Investment securities:
Gross unrealized investment gains $ 70.5 $ 26.5
Gross unrealized investment losses (12.0) (42.7)
----------------------
Net unrealized gains (losses) from investment securities 58.5 (16.2)
Net unrealized gains from investments in unconsolidated insurance affiliates 2.9 30.0
----------------------
Total net unrealized investment gains, before tax 61.4 13.8
Income taxes attributable to such gains (13.8) (6.6)
----------------------
Total net unrealized investment gains, after tax $ 47.6 $ 7.2
===================================================================================================================
The cost or amortized cost, gross unrealized investment gains and losses,
and carrying values of White Mountains' fixed maturity investments as of
December 31, 2000 and 1999, were as follows:
- ---------------------------------------------------------------------------------------------------------------------
DECEMBER 31, 2000
---------------------------------------------------------
Cost or Gross Gross
amortized unrealized unrealized Carrying
Millions cost gains losses value
- --------------------------------------------------------------------------------------------------------------------
U. S. Government and agency obligations $ 309.4 $ 9.5 $ (.7) $ 318.2
Debt securities issued by industrial corporations 310.6 3.9 (1.6) 312.9
Municipal obligations 265.7 3.0 (.2) 268.5
Mortgage-backed securities 102.4 1.3 (.4) 103.3
Foreign government obligations 52.2 .3 (.1) 52.4
Preferred stocks 22.7 .6 - 23.3
---------------------------------------------------------
Total fixed maturity investments $1,063.0 $18.6 $(3.0) $1,078.6
=====================================================================================================================
F-16
- ---------------------------------------------------------------------------------------------------------------------
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
=====================================================================================================================
The cost or amortized cost and carrying value of White Mountains' fixed
maturity investments at December 31, 2000 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, 2000
------------------------------
Cost or Carrying
Millions amortized cost value
- ---------------------------------------------------------------------------------------------------------------------
Due in one year or less $ 70.7 $ 70.9
Due after one year through five years 470.4 478.1
Due after five years through ten years 287.2 295.8
Due after ten years 109.6 107.2
Mortgage-backed securities 102.4 103.3
Preferred stocks 22.7 23.3
------------------------------
Total $1,063.0 $1,078.6
=====================================================================================================================
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, 2000 and 1999, were as follows:
- ---------------------------------------------------------------------------------------------------------------------
DECEMBER 31, 2000
------------------------------------------------------
Cost or Gross Gross
amortized unrealized unrealized Carrying
Millions cost gains losses value
- ---------------------------------------------------------------------------------------------------------------------
Common equity securities $127.5 $21.1 $(3.8) $144.8
======================================================
Other investments $117.3 $30.8 $(5.2) $142.9
=====================================================================================================================
- ---------------------------------------------------------------------------------------------------------------------
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 $ 59.1 $ 9.8 $ (.6) $ 68.3
=====================================================================================================================
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 $69.1 million and $59.5 million as of December 31, 2000 and 1999,
respectively.
F-17
Sales and maturities of investments, excluding short-term investments,
totalled $582.1 million, $530.1 million and $270.3 million for the years ended
December 31, 2000, 1999 and 1998, respectively. There were no non-cash exchanges
or involuntary sales of investment securities during 2000, 1999 and 1998.
NOTE 6. THIRD PARTY REINSURANCE
In the normal course of business, White Mountains' insurance and
reinsurance 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.
REINSURANCE OPERATIONS
Folksamerica has exposure to losses caused by hurricanes, earthquakes,
winter storms, windstorms and other catastrophic events. Folksamerica
continually assesses its concentration of underwriting exposures in catastrophe
prone areas and develops strategies to manage this exposure, primarily through
the purchase of catastrophe reinsurance. Folksamerica's current catastrophe
reinsurance program provides coverage for losses incurred as a result of
individual catastrophic events between $7.5 million and $17.5 million.
In the fourth quarter of 2000 Folksamerica purchased reinsurance coverage
from Imagine Re which was designed to reduce its statutory operating leverage
and to provide the following protections: (i) adverse development protection of
up to $65.0 million on the run-off of loss and unearned premium reserves
acquired in the Risk Capital transaction and any additional premium reported for
the 2000 underwriting year; and (ii) $50.0 million of adverse development
protection from the reserves remaining from the USF Re acquisition and remaining
environmental and asbestos exposures. Amounts related to reserves transferred to
Imagine Re for liabilities incurred as a result of past insurable events have
been accounted for as retroactive reinsurance in accordance with SFAS No. 113.
Reinsurance recoverables of $321.7 million were recorded at December 31, 2000,
to reflect the loss reserves transferred ($250.0 million), fourth quarter
incurred losses attached to the premium run-off ($51.1 million) and adverse
development on loss reserves transferred ($20.6 million). At December 31, 2000,
Folksamerica has recorded a $20.6 million deferred gain related to the adverse
development on loss reserves transferred which will be recognized in income over
the expected settlement period of the underlying claims. Contractual premiums
due to Imagine Re of $315.0 million have been recorded as funds withheld under
reinsurance treaties at December 31, 2000. Folksamerica holds a letter of credit
and funds held as collateral for amounts due from Imagine Re.
At December 31, 2000 and 1999, Folksamerica had reinsurance recoverables
with a carrying value of $116.7 million and $46.7 million, respectively,
associated with London Life and Casualty Reinsurance Corporation. Folksamerica
holds a letter of credit and funds held as collateral for amounts due from
London Life and Casualty.
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, 2000 and
1999, ACIC had reinsurance recoverables with a carrying value of $17.0 million
and $23.3 million, respectively, 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.
The effects of reinsurance on White Mountains' written and earned premiums
and on loss and loss adjustment expenses were as follows:
F-18
Insurance Operations
------------------------------
Reinsurance ACIC, PIC and
Millions Operations BICC (b) Waterford Total
- ---------------------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, 2000
- ---------------------------------------------------------------------------------------------------------------------
Gross written premiums:
Direct $ 6.3 $ 26.4 $ (.5) $ 32.2
Assumed 484.7 .1 (.1) 484.7
Ceded (158.4) (3.8) .5 (161.7)
--------------------------------------------------------------
Net written premiums $ 332.6 $ 22.7 $ (.1) $ 355.2
- ---------------------------------------------------------------------------------------------------------------------
Gross earned premiums:
Direct $ 4.1 $ 26.1 $ 2.3 $ 32.5
Assumed 476.1 .1 .3 476.5
Ceded (167.7) (4.6) (2.3) (174.6)
--------------------------------------------------------------
Net earned premiums $ 312.5 $ 21.6 $ .3 $ 334.4
- ---------------------------------------------------------------------------------------------------------------------
Losses and loss adjustment expenses:
Direct $ (.6) $ 18.3 $ 2.3 $ 20.0
Assumed 468.5 - .3 468.8
Ceded (197.1) (1.7) (2.3) (201.1)
--------------------------------------------------------------
Net losses and loss adjustment expenses $ 270.8 $ 16.6 $ .3 $ 287.7
=====================================================================================================================
Insurance Operations
---------------------------------------
Reinsurance ACIC, PIC and
Millions Operations BICC (b) VGI 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 $ 7.8 $ 4.8 $ 44.5 $ (1.8) $ 55.3
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 $ 182.2 $ 6.2 $ 52.5 $ 1.4 $ 242.3
=====================================================================================================================
F-19
================================================================
Insurance Operations
----------------------------------
Reinsurance ACIC, PIC and
Millions Operations (a) BICC (b) VGI Waterford Total
- ---------------------------------------------------------------------------------------------------------------------
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
=====================================================================================================================
(a) Excludes premiums and loss and loss adjustment expenses from January 1,
1998 to August 17, 1998 during which time Folksamerica was not a
consolidated subsidiary of White Mountains. See Note 3.
(b) Excludes premiums and loss and loss adjustment expenses from January 1,
1998 to October 14, 1999 during which time ACIC, PIC and BICC were not
consolidated subsidiaries of White Mountains. See Note 4.
NOTE 7. DEBT
SHORT-TERM DEBT
At December 31, 2000 the Company had no short-term debt outstanding. At
December 31, 1999 the Company had short-term debt outstanding of $4.0 million
consisting of 7.39% medium-term notes which were repaid on their maturity date
in February 2000.
In addition, the Company has from time-to-time entered into revolving
credit agreements whereby it may borrow funds at short-term market interest
rates. As of December 31, 1999 the Company could borrow up to $50.0 million
under a short-term debt facility which the Company let expire in 2000. There
were no borrowings outstanding under this facility at December 31, 1999.
LONG-TERM DEBT
Long-term debt outstanding as of December 31, 2000 and 1999 consisted of
the following:
December 31,
Millions 2000 1999
- ---------------------------------------------------------------------------------------------------------------------
The Company:
Medium-term notes $ 96.3 $ 96.4
Less net discounts (.3) (.4)
----------------------------
Total 96.0 96.0
----------------------------
Folksamerica:
Revolving credit agreement - 100.0
USF Re seller note - 6.8
Total - 106.8
----------------------------
Total long-term debt $ 96.0 $202.8
=====================================================================================================================
F-20
At December 31, 2000 the Company had $96.3 million in principal amount of
outstanding medium-term notes with an average maturity of 2.6 years and a yield
to maturity of 7.87%. During 2000 and 1999 the Company repurchased $.1 million
and $15.9 million, respectively, 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 existing long-term indebtedness by utilizing a
six-year revolving credit agreement whereby Folksamerica could borrow up to
$120.0 million at market interest rates. Outstanding borrowings of $115.0
million were repaid in December 2000 and the facility was terminated.
As part of its 1999 acquisition of USF Re, Folksamerica issued a $20.8
million, five-year note which could be reduced by adverse loss development at
USF Re post acquisition. During 2000 and 1999, Folksamerica reduced the
principal amount of the USF Re note by $6.8 million and $14.0 million,
respectively, in response to post acquisition adverse loss development
experienced on its loss reserves assumed from USF Re.
Total interest paid by White Mountains for its short-term and long-term
indebtedness was $16.1 million, $15.6 million and $13.3 million in 2000, 1999
and 1998, respectively.
Of the $96.3 million in medium-term notes outstanding at December 31, 2000,
$86.3 million of such notes mature in 2003 with the balance of the notes
maturing in 2008.
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.
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 $13.5 million.
The total income tax provision consisted of the following:
Year Ended December 31,
--------------------------------------------
Millions 2000 1999 1998
- ---------------------------------------------------------------------------------------------------------------------
United States income tax provision $ 38.0 $ 47.0 $ 26.9
State and local income tax provision 1.7 6.0 1.6
United States withholding tax and foreign income tax provision 2.8 .1 -
--------------------------------------------
Total income tax provision $ 42.5 $ 53.1 $ 28.5
- -------------------------------------------------------------------------============================================
Net income tax payments $ 54.5 $ 14.1 $ 35.7
- -------------------------------------------------------------------------============================================
Income taxes recorded directly to shareholders' equity related to:
Changes in net unrealized investment gains and losses $ 7.2 $(61.3) $(4.3)
Changes in net foreign currency translation gains and losses $ (.4) $ .5 $ (.5)
=====================================================================================================================
The components of the income tax provision (benefit) on pretax earnings
follow:
Year Ended December 31,
---------------------------------------------
Millions 2000 1999 1998
- ---------------------------------------------------------------------------------------------------------------------
Current $ 58.2 $14.3 $ 30.3
Deferred (15.7) 38.8 (1.8)
---------------------------------------------
Total income tax provision on pretax earnings $ 42.5 $53.1 $ 28.5
=====================================================================================================================
F-21
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. Deferred income tax assets
and liabilities are shown net in circumstances where a consolidated income tax
return is filed. An outline of the significant components of White Mountains'
deferred tax assets and liabilities follows:
December 31,
------------------------
Millions 2000 1999
- ---------------------------------------------------------------------------------------------------------------------
Deferred income tax assets related to:
Discounting of loss reserves $ 60.3 $ 45.3
Net operating loss carryforwards (which principally expire in 2010) 29.3 .9
Unearned insurance and reinsurance premiums 7.2 5.7
Deferred gain on reinsurance contract 7.1 -
Compensation and benefit accruals 4.1 4.4
Other items (2.9) (3.8)
------------------------
Total deferred income tax assets $ 105.1 $ 52.5
=====================================================================================================================
December 31,
------------------------
Millions 2000 1999
- ---------------------------------------------------------------------------------------------------------------------
Deferred income tax liabilities related to:
Earnings from unconsolidated insurance affiliates $ - $ 18.1
Net unrealized investment gains .2 13.9
Other items 2.6 5.5
-----------------------
Total deferred income tax liabilities (recorded in accounts payable and other liabilities) $ 2.8 $ 37.5
=====================================================================================================================
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, 2000 and 1999.
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 2000 1999 1998
- ---------------------------------------------------------------------------------------------------------------------
Tax provision at the United States statutory rate $ 124.4 $56.5 $27.9
Differences in taxes resulting from:
Deferred credit amortization and purchase price adjustments (6.3) (7.9) (.9)
Tax reserve adjustments 5.5 6.1 5.4
State income taxes, net 1.2 3.9 1.0
Non-United States net earnings (88.6) (3.6) -
United States income tax incurred upon the Redomestication 11.0 2.5 -
Tax exempt interest and dividends (3.9) (3.6) (3.8)
Foreign and withholding taxes 2.8 .1 -
Other, net (3.6) (.9) (1.1)
---------------------------------------
Total income tax provision on pretax earnings $ 42.5 $53.1 $28.5
=====================================================================================================================
The non-United States component of pretax earnings was $395.9 million and
$9.0 million for the year ended December 31, 2000 and 1999, respectively.
During 2000, the Company released a $95.0 million tax reserve relating to
its 1991 sale of Fireman's Fund. See Note 2.
F-22
NOTE 9. RETIREMENT AND POSTRETIREMENT PLANS
Prior to the Redomestication, White Mountains terminated two non-qualified
compensation plans and paid participants a total of $88.6 million in full
satisfaction of White Mountains' long-term 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 compensation earned by certain
of its executive officers that was payable in connection with the
Redomestication. Deferred balances are invested in phantom shares which are
valued based on the market value of Shares. As of December 31, 2000 and 1999,
these balances totalled $7.7 million and $2.9 million, respectively.
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 and for former employees of the Company's discontinued mortgage
banking operations. 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 fair value of the assets in Folksamerica's
defined benefit plan exceed its current and future employee obligations under
the plan, therefore, 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 SHARE-BASED COMPENSATION PLANS
White Mountains' Incentive Plan provides for granting to participants of
the Company (and certain of its subsidiaries) various types of share-based
incentive awards including performance shares and options to acquire Shares. At
December 31, 2000, 206,400 Shares remained available for grant 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 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. Performance share payments can double if returns
significantly exceed 13%. The Compensation Committee consists solely of
disinterested, non-management Directors.
For the three year performance periods beginning 2000, 1999 and 1998 the
Company granted a total of 34,000, 31,300 and 47,800 performance shares,
respectively, to its employees. No performance shares were paid in 2000. During
1999 and 1998 the Company paid a total of 141,650 and 47,129 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 paid early relating to the period from 1997
to 1999 and 43,250 performance shares paid early relating to the period from
1998 to 2000.
White Mountains expenses performance shares ratably over the performance
period assuming full vesting at the current market values of Shares. During
2000, 1999 and 1998, White Mountains recorded $25.8 million, $6.1 million and
$7.2 million, of pretax performance share expense, respectively. The Company's
performance share expense for 2000 was significantly higher than that of prior
years as a result of: (i) a significant increase in the market value of Shares
during the year; and (ii) the recording of $12.0 million of additional
performance share expense undertaken to provide for potential future vesting of
performance shares at an amount greater than 100% in light of the achievement of
above plan results for 2000.
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, 2000 and 1999
the Folksamerica 401(k) Plan owned less than 1% of the total Shares outstanding.
As of December 31, 2000 there were 81,000 options to acquire Shares
outstanding which had an effective exercise price of $111.59 per Share at that
date. Of the 81,000 options granted during 2000, 8,100 options were vested and
exercisable at December 31, 2000. There were no options to acquire Shares
outstanding at December 31, 1999.
F-23
The Company's Chairman formerly held warrants to acquire Shares 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.
SFAS No. 123, "Accounting for Stock Based Compensation," requires
disclosure regarding significant employee compensation involving the issuance of
Shares and encourages companies to recognize compensation expense 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 follows:
- -------------------------------------------------------------------------------------------------------------------
Year Ended December 31,
Millions, except per Share amounts 1998
- -------------------------------------------------------------------------------------------------------------------
Net income:
As reported $ 78.5
Pro forma 77.4
- -------------------------------------------------------------------------------------------------------------------
Basic net income per Share:
As reported $ 13.38
Pro forma 12.56
- -------------------------------------------------------------------------------------------------------------------
Diluted net income per Share:
As reported $ 11.94
Pro forma 11.20
===================================================================================================================
The SFAS No. 123 disclosure above presents the expense of warrants to
acquire Shares over the life of the award using the Black Scholes option pricing
model. Significant assumptions used in the presentation include a 5.0% risk-
free interest rate, an expected Share volatility of .167 and an expected life of
five years. The pro forma net income figures disclosed above may not be
representative of the effects on net income to be reported in future years.
SFAS No. 123 disclosures are not presented for the years ended December 31,
2000 and 1999 as the pro forma effect of vested options to acquire Shares at
December 31, 2000 would have been $.3 million or $.06 per diluted Share (and
would therefore not be material to the above presentation) and there were no
options to acquire Shares outstanding at December 31, 1999.
NOTE 11. SHAREHOLDERS' EQUITY
SHARE REPURCHASES AND RETIREMENT
During 2000, 1999 and 1998 the Company repurchased 65,838 Shares for $8.3
million, 1,020,150 Shares for $139.5 million and 151,916 Shares for $19.8
million, respectively. In conformance with Bermuda law, the Company retires all
Shares it repurchases.
SHARES ISSUED
During 1999 the Company issued a total of 1,137,495 Shares to its employees
and Directors in satisfaction of the Chairman's warrant exercise, option
exercises and various employee benefit plan obligations. No Shares were issued
during 2000.
DIVIDENDS ON SHARES
During 2000, 1999 and 1998 the Company declared and paid cash dividends
totalling $1.20, $1.60 and $1.60 per Share, respectively.
F-24
NOTE 12. SEGMENT INFORMATION
White Mountains has determined that its reportable segments include
Reinsurance, Property and Casualty Insurance, Investments in Unconsolidated
Insurance Affiliates 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 Affiliate(s) Company Total
- --------------------------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, 2000
- --------------------------------------------------------------------------------------------------------------------------
Revenues from external customers $ 313.4 $ 32.7 $ - $ - $ 346.1
Gains on sales of subsidiaries and insurance assets - - - 385.8 385.8
Net realized losses on sales of investments and other assets (11.8) (.6) - 4.0 (8.4)
Net investment income 57.5 8.3 - 20.1 85.9
Losses from unconsolidated affiliate(s) - - (2.6) - (2.6)
Amortization of deferred credits and other benefits 19.3 - 1.4 20.7 41.4
--------------------------------------------------------------
Total revenues 378.4 40.4 (1.2) 430.6 848.2
--------------------------------------------------------------
Pretax earnings before interest expense (19.1) 5.2 (1.2) 386.6 371.5
Interest expense (8.2) - - (7.9) (16.1)
Income tax provision 16.8 (.6) - (58.7) (42.5)
--------------------------------------------------------------
Net income (loss) from continuing operations $ (10.5) $ 4.6 $ (1.2) $ 320.0 $ 312.9
==========================================================================================================================
Year ended December 31, 1999
- --------------------------------------------------------------------------------------------------------------------------
Revenues from external customers $ 211.0 $ 75.6 $ - $ .3 $ 286.9
Gains on sales of subsidiaries and insurance assets - - - 88.1 88.1
Net realized gains on sales of 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
Earnings from unconsolidated affiliates - - 31.1 - 31.1
Amortization of deferred credits and other benefits 20.3 - 1.2 4.3 25.8
--------------------------------------------------------------
Total revenues 324.2 90.5 34.9(a) 129.6 579.2
--------------------------------------------------------------
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)
--------------------------------------------------------------
Net income (loss) from continuing operations $ 44.9 $ (.2) $ 33.8 $ 29.9 $ 108.4
==========================================================================================================================
F-25
- ---------------------------------------------------------------------------------------------------------------------------
Year ended December 31, 1998
- ---------------------------------------------------------------------------------------------------------------------------
Revenues from external customers $ 85.4 $ 170.0 $ - $ .1 $ 255.5
Net realized gains on sales of investments and other assets (.8) 5.4 - 66.4 71.0
Net investment income 18.1 8.2 3.8 6.7 36.8
Earnings from unconsolidated affiliates - - 24.3 - 24.3
Amortization of deferred credits and other benefits 2.7 - - - 2.7
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 (loss) from continuing operations $ 5.5 $ 4.8 $ 20.5 $ 20.3 $ 51.1
===========================================================================================================================
(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 and $3.8 million for 1999 and 1998, respectively.
Ending assets Property and Investments in Net assets of
Casualty Unconsolidated Holding Discontinued
Millions Reinsurance Insurance Affiliates Company Operations Total
- ---------------------------------------------------------------------------------------------------------------------------
December 31, 2000 $2,681.4 156.6 130.6 560.4 16.2 $3,545.2
December 31, 1999 $1,294.3 198.6 422.6 117.3 16.3 $2,049.1
- ---------------------------------------------------------------------------------------------------------------------------
NOTE 13. INVESTMENTS IN UNCONSOLIDATED AFFILIATES
INVESTMENT IN FSA
On July 5, 2000 White Mountains concluded the sale of its indirect,
wholly-owned subsidiary, White Mountains Holdings, Inc. (which controlled a
substantial amount of its holdings of FSA) and all its other holdings of FSA
common stock to Dexia for proceeds of $620.4 million which represented a gain of
$391.2 million.
White Mountains owned 6,943,316 and 3,460,200 shares of FSA Common Stock at
December 31, 1999 and 1998, respectively. This represented approximately 21.2%
and 11.6%, respectively, of the total shares of FSA Common Stock outstanding at
those times. At December 31, 1999 and 1998, White Mountains also owned FSA
Preferred Stock which provided 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, 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 net aggregate consideration of $115.7 million.
Prior to the Dexia Sale, White Mountains' accounted for its investment in
FSA Common Stock using the equity method. White Mountains' accounted for its
investment in FSA Preferred Stock and FSA Options under the provisions SFAS No.
115 whereby the investment was 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.
F-26
The following table summarizes the amounts recorded by White Mountains
relating to its investments in FSA:
- ---------------------------------------------------------------------------------------------------------------------
Millions 2000 1999 1998
- ---------------------------------------------------------------------------------------------------------------------
AMOUNTS RECORDED BY WHITE MOUNTAINS:
Investment in FSA Common Stock $ - $ 262.2 $ 119.7
Investment in FSA Options and Preferred Stock - 41.1 114.4
-----------------------------------
Total investment in FSA $ - $ 303.3 $ 234.1
===================================
Equity in earnings (loss) from FSA Common Stock (a) $ (3.6) $ 19.5 $ 13.8
Dividends received from FSA Common Stock 1.4 2.1 1.5
Equity in net unrealized investment gains (losses) from FSA's investment portfolio (b) - (14.0) 3.1
Unrealized investment gains (losses) on FSA Options and Preferred Stock (b) - (4.1) 26.6
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) as a component of
other 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).
INVESTMENT IN MSA
At December 31, 2000, 1999 and 1998, White Mountains owned 222,093 shares
of MSA Common Stock. This represented 50.0% 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 provides summary
financial information for MSA as wells as amounts recorded by White Mountains
relating to its investment in MSA:
Millions 2000 1999 1998
- ---------------------------------------------------------------------------------------------------------------------
MSA BALANCE SHEET DATA:
Total investments $ 449.0 $ 466.3 $ 465.9
Total assets 608.7 582.3 581.6
Unearned premium reserve 129.6 118.3 113.0
Loss and loss adjustment expense reserves 202.1 198.4 212.2
Shareholders' equity 253.8 233.4 232.5
MSA INCOME STATEMENT DATA:
Net premiums written $ 265.4 $ 242.7 $ 258.5
Net premiums earned 254.1 237.4 226.3
Net investment income 23.5 24.9 22.1
Net income 3.8 25.8 13.4
Comprehensive net income 16.4 .9 21.2
- ---------------------------------------------------------------------------------------------------------------------
AMOUNTS RECORDED BY WHITE MOUNTAINS:
Investment in MSA Common Stock (a) $ 130.6 $ 119.3 $ 120.2
Equity in earnings from MSA Common Stock (b) 1.0 11.6 4.9
Equity in net unrealized investment gains (losses) from MSA's
investment portfolio (c) 6.2 (12.5) 4.1
=====================================================================================================================
(a) Includes related goodwill of $3.7 million, $2.6 million and $4.0 million at
December 31, 2000, 1999 and 1998, respectively.
(b) Recorded net of related amortization of goodwill.
(c) Recorded directly to shareholders' equity (after tax) as a component of
other comprehensive net income.
At December 31, 2000 and 1999, White Mountains' consolidated retained
earnings included $26.7 million and $25.7 million, respectively, of accumulated
undistributed earnings of MSA (net of related amortization of goodwill).
F-27
INVESTMENT IN FOLKSAMERICA
In August 1998 White Mountains acquired all of the remaining outstanding
shares of the common stock of Folksamerica which resulted in Folksamerica
becoming a consolidated subsidiary of White Mountains at that time. Prior to
August 1998, Folksamerica was an unconsolidated insurance affiliate of White
Mountains whereby White Mountains' investment in Folksamerica consisted of
investments in Folksamerica common stock and Folksamerica preferred stock and
warrants. White Mountains investment in the common stock of Folksamerica was
accounted for using the equity method and its investment in the preferred stock
and warrants of Folksamerica was accounted for under the provisions of SFAS No.
115. For the year ended December 31, 1998, White Mountains recorded $5.6 million
of pretax earnings from its unconsolidated investment in Folksamerica.
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,
2000 and 1999, the market value of White Mountains' long-term indebtedness was
$97.2 million and $206.7 million, respectively, which compared to a carrying
value of $96.0 million and $202.8 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
White Mountains formerly owned two short-range aircraft jointly with
Haverford Utah, LLC ("Haverford"). Messrs. Jack Byrne, Patrick Byrne and Kemp
(each Directors of the Company) were 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 paid its pro
rata share of all fixed costs plus the direct operating costs for its use
pursuant to a Joint Ownership Agreement. The aircraft were sold to a third party
during 2000 which resulted in Haverford receiving 20% of the cash proceeds.
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. Clark, a Director of the Company, is Vice Chairman of Lehman. Lehman
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. Lehman is the arranger, the
administrative agent and a lender under the Credit Facility. See Note 17.
Mr. George Gillespie, a Director of the Company, is a Partner in Cravath,
which has been retained by White Mountains from time to time to perform legal
services.
White Mountains owns a limited partnership investment interest which was
managed by Mr. John Gillespie, a Director of the Company.
White Mountains owns a limited partnership interest and an investment
portfolio which was managed by Mr. 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.
F-28
NOTE 16. COMMITMENTS AND CONTINGENCIES
Folksamerica leases its office space under noncancellable leases expiring
at various dates through 2010. Rental expense for all of Folksamerica's
locations was approximately $2.1 million, $1.6 million and $1.6 million for the
years ended December 31, 2000, 1999 and 1998, respectively. Folksamerica's
future annual minimum rental payments required under noncancellable leases for
office space are $2.9 million for 2001, $2.8 million for both 2002 and 2003,
$3.0 million for 2004, and $16.0 million for years thereafter. White Mountains
also has various other lease obligations which are immaterial in the aggregate.
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 EVENTS
PENDING ACQUISITION OF CGU
In September 2000 White Mountains entered into a definitive agreement with
CGNU to purchase its U.S. property and casualty insurance operations, CGU. The
CGU purchase agreement, which was amended on October 15, 2000 and February 20,
2001, calls for a purchase price of $2.17 billion, subject to certain
adjustments, of which $260.0 million will consist of a note payable (which must
be paid in eighteen months in cash or Shares valued at $245.00 per Share, at the
Company's sole option). In addition, CGU will repay approximately $.5 billion of
debt outstanding to its parent at closing.
In connection with the CGU transaction, White Mountains has arranged for up
to $741.0 million of new equity commitments from a small group of outside
investors and, on March 16, 2001, finalized its $875.0 million Credit Agreement
with Lehman. In connection with financing the transaction, White Mountains will
contribute Folksamerica, PIC and MSA to CGU.
Completion of the CGU acquisition is subject to, among other matters, the
receipt of regulatory approvals, the completion of financing and the
satisfaction of other customary conditions.
CASH TENDER OFFER AND CONSENT SOLICITATION FOR OUTSTANDING MEDIUM-TERM NOTES
On March 15, 2001 White Mountains commenced the Note Offer providing for
the repurchase of its $96.3 million aggregate principal amount of outstanding
medium-term notes. In conjunction with the Note Offer, noteholder consents are
being solicited to effect an amendment to the indenture governing these notes,
which will facilitate White Mountains' pending acquisition of CGU. The Note
Offer is scheduled to expire at 5:00 p.m., New York City time on April 16, 2001,
unless extended or terminated.
The total consideration to be paid for each validly tendered and consented
note due in 2003 will be based upon a fixed spread of 95 basis points over the
yield to maturity on the applicable reference U.S. Treasury Note, and includes a
consent payment of $30.00 per $1,000 principal amount of such notes. The total
consideration to be paid for each validly tendered and consented note due 2008
will be based upon a fixed spread of 125 basis points over the yield to maturity
on the applicable reference U.S. Treasury Note, and includes a consent payment
of $30.00 per $1,000 principal amount of such notes. The Note Offer pricing date
is expected to be April 11, 2001. Accrued and unpaid interest up to, but not
including, the payment date will be paid for notes validly tendered and accepted
for purchase.
The Note Offer is conditioned upon, among other things, (i) there being
validly tendered and not withdrawn a majority in aggregate principal amount of
outstanding notes, (ii) the execution of the supplemental indenture governing
the notes and (iii) the consummation of White Mountains' acquisition of CGU.
F-29
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 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, 2000 and 1999 and for each of the two years
then ended and KPMG LLP has audited the consolidated financial statements of
White Mountains for the year ended December 31, 1998. These firms have issued
their unqualified reports thereon, which appear on pages F-31 and F-32.
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 independent,
qualified directors, has general responsibility for the oversight and
surveillance of the accounting, reporting and financial control practices of
White Mountains as well as establishing and maintaining the Company's Audit
Committee Charter. The Audit Committee, which reports to the full Board,
annually reviews the overall quality and effectiveness of the independent
auditors and management with respect to the financial reporting process and the
adequacy of internal controls. The independent 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.
/s/ John J. Byrne /s/ Raymond Barrette /s/ Michael S. Paquette
Chairman and President Senior Vice President
Chief Executive Officer and Controller
F-30
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders
of White Mountains Insurance Group, Ltd.:
In our opinion, the 2000 and 1999 consolidated financial statements listed in
the index referenced under Item 14(a) on page 34 present fairly, in all material
respects, the financial position of White Mountains Insurance Group, Ltd. and
subsidiaries at December 31, 2000 and 1999, and the results of their operations
and their cash flows for each of the two years in the period ended December 31,
2000 in conformity with accounting principles generally accepted in the United
States. In addition, in our opinion, the 2000 and 1999 financial statement
schedules listed in the index referenced under Item 14(a) on page 34 present
fairly, in all material respects, the information set forth therein when read in
conjunction with the related 2000 and 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 audits. We conducted our audits 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 audits provide a reasonable basis
for the opinion expressed above.
/s/ PricewaterhouseCoopers
Hamilton, Bermuda
February 9, 2001, except for Note 17,
which is as of March 16, 2001
F-31
INDEPENDENT AUDITORS' REPORT
Board of Directors and Shareholders
White Mountains Insurance Group, Ltd.
We have audited the accompanying consolidated statements of income and
comprehensive income, shareholders' equity, and cash flows of White Mountains
Insurance Group, Ltd. and Subsidiaries (the "Company") for the year ended
December 31, 1998 (collectively, the "consolidated financial statements"). In
connection with our audit of the consolidated financial statements, we also have
audited the 1998 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 Supplemental information for property-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 audit. 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 revenues of 27.0 percent in 1998 of the related
consolidated totals. The Company's equity in earnings of FSA was $13.8 million
for the year ended December 31, 1998. 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 audit in accordance with auditing standards generally accepted
in the United States of America. 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 audit and the reports
other auditors provide a reasonable basis for our opinion.
In our opinion, based on our audit and the reports of the other auditors, the
consolidated financial statements referred to above present fairly, in all
material respects, the results of operations and cash flows of White Mountains
Insurance Group, Ltd. and Subsidiaries for the year ended December 31, 1998 in
conformity with accounting principles generally accepted in the United States of
America. Also in our opinion, based on our audit and the reports of other
auditors, the 1998 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.
/s/ KPMG LLP
February 12, 1999
Providence, Rhode Island
F-32
SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
Selected quarterly financial data for 2000 and 1999 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.
2000 Three Months Ended (a) 1999 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 $ 55.1 $546.1 $ 163.9 $ 83.1 $146.3 $106.5 $199.5 $ 126.9
Expenses 79.3 161.9 161.0 90.6 129.3 83.4 94.7 110.3
---------------------------------------------------------------------
Pretax earnings (loss) (24.2) 384.2 2.9 (7.5) 17.0 23.1 104.8 16.6
Income tax benefit (provision) 8.4 (49.7) (3.1) 1.9 2.7 (9.0) (41.0) (5.8)
---------------------------------------------------------------------
Net income (loss) from continuing operations (15.8) 334.5 (.2) (5.6) 19.7 14.1 63.8 10.8
Net income (loss) from discontinued operations - 95.0 - - (3.3) - 12.9 3.0
---------------------------------------------------------------------
Net income (loss) $(15.8) $429.5 $ (.2) $ (5.6) $ 16.4 $ 14.1 $ 76.7 $ 13.8
=====================================================================
Net income (loss) from continuing operations per Share:
Basic $(2.68) $56.86 $ (.03) $ (.94) $ 2.73 $ 2.72 $11.58 $ 1.84
Diluted (2.68) 56.59 (.03) (.94) 2.69 2.43 11.56 1.64
=====================================================================
Net income (loss) per Share:
Basic $(2.68) $73.02 $ (.03) $ (.94) $ 2.73 $ 2.72 $13.94 $ 2.36
Diluted (2.68) 72.67 (.03) (.94) 2.69 2.43 12.41 2.10
=====================================================================================================================
(a) The quarterly amounts subsequent to March 31, 2000 reflect the acquisitions
of PCA and Risk Capital. The quarterly amounts for the three month period
ended September 30, 2000 reflect the Dexia Sale and a $95.0 million reserve
release relating to Fireman's Fund. The quarterly amounts for the three
month period ended December 31, 2000 have been impacted by a significant
reinsurance contract with a third party.
(b) The quarterly amounts for the three month period ended June 30, 1999
reflect the VGI 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.
F-33
SCHEDULE I
WHITE MOUNTAINS INSURANCE GROUP, LTD.
SUMMARY OF INVESTMENTS -- OTHER THAN
INVESTMENTS IN RELATED PARTIES
AT DECEMBER 31, 2000
- ---------------------------------------------------------------------------------------------------------------------
FAIR
Millions Cost VALUE
- ---------------------------------------------------------------------------------------------------------------------
Fixed maturities:
Bonds:
United States Government and government agencies and authorities $ 411.8 $ 421.5
Corporate bonds 310.6 312.9
States, municipalities and political subdivisions 265.7 268.5
Foreign governments 52.2 52.4
Redeemable preferred stocks 22.7 23.3
-----------------------------
Total fixed maturities 1,063.0 1,078.6
-----------------------------
Common equity securities:
Banks, trust and insurance companies 47.1 63.0
Industrial, miscellaneous and other 80.4 81.8
-----------------------------
Total common equity securities 127.5 144.8
Other investments 117.3 142.9
Short-term investments 735.9 735.9
- ---------------------------------------------------------------------------------------------------------------------
Total investments $ 2,043.7 $ 2,102.2
=====================================================================================================================
NOTE - fair value was equal to carrying value at December 31, 2000.
FS-1
SCHEDULE II
WHITE MOUNTAINS INSURANCE GROUP, LTD.
(REGISTRANT ONLY)
CONDENSED BALANCE SHEETS
December 31,
----------------------------
Millions 2000 1999
- ---------------------------------------------------------------------------------------------------------------------
Assets:
Fixed maturities $ - $ 39.6
Common equity securities and other investments 30.5 26.3
Short-term investments, at amortized cost 96.4 5.7
Other assets 56.8 1.2
Investments in consolidated affiliates 1,040.3 770.9
----------------------------
Total assets $ 1,224.0 $ 843.7
- ---------------------------------------------------------------------------------------------------------------------
Liabilities:
Short-term debt $ - $ 4.0
Long-term debt 96.0 96.0
Deferred credits 37.0 57.8
Accounts payable and other liabilities 44.5 71.6
----------------------------
Total liabilities 177.5 229.4
Shareholders' equity 1,046.5 614.3
----------------------------
Total liabilities and shareholders' equity $ 1,224.0 $ 843.7
=====================================================================================================================
CONDENSED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
Year Ended December 31,
-----------------------------------------
Millions 2000 1999 1998
- ---------------------------------------------------------------------------------------------------------------------
Revenues $ 26.8 $ 29.1 $28.9
Expenses 43.5 46.6 23.2
-----------------------------------------
Pretax earnings (loss) (16.7) (17.5) 5.7
Income tax provision (26.6) (6.0) (8.3)
-----------------------------------------
Net loss (43.3) (23.5) (2.6)
Earnings from consolidated affiliates 356.2 131.9 53.7
Earnings from discontinued operations, after tax 95.0 12.6 27.4
-----------------------------------------
Consolidated net income 407.9 121.0 78.5
Other comprehensive net income (loss) items, after tax 39.7 (118.0) (8.9)
-----------------------------------------
Consolidated comprehensive net income $ 447.6 $ 3.0 $69.6
=====================================================================================================================
FS-2
SCHEDULE II
(CONTINUED)
WHITE MOUNTAINS INSURANCE GROUP, LTD.
(REGISTRANT ONLY)
CONDENSED STATEMENTS OF CASH FLOWS
Year Ended December 31,
------------------------------------
Millions 2000 1999 1998
- ---------------------------------------------------------------------------------------------------------------------
Net income $ 407.9 $ 121.0 $ 78.5
Reconciliation of net income to net cash from operating activities:
Net realized gains on sales of investments and insurance assets (2.7) (21.7) (26.7)
Distributions from consolidated subsidiaries in excess of current earnings - 213.0 -
Undistributed current earnings from consolidated subsidiaries (250.1) - (78.0)
Amortization of deferred credits (20.8) - -
Deferred income tax provision - 39.7 .1
Release of tax reserve on sale of former insurance subsidiary (95.0) - -
(Increase) decrease in other assets (24.3) 2.5 (4.2)
Increase (decrease) in accounts payable and other liabilities 37.3 (112.5) 18.1
------------------------------------
Net cash provided from (used for) operating activities 52.3 242.0 (12.2)
- ---------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Net (increase) decrease in short-term investments, net of balances acquired (84.8) 18.3 (8.5)
Sales of investment securities 53.8 5.4 -
Purchases of investment securities (1.4) - -
Investments in consolidated affiliates, net of balances acquired - (73.5) -
Investments in unconsolidated affiliates - (50.0) -
Sale of securities carried in other assets - - 26.8
------------------------------------
Net cash (used for) provided from investing activities (32.4) (99.8) 18.3
- ---------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Purchases of common shares retired (8.8) (139.4) (19.5)
Proceeds from exercises of warrants and options to acquire Shares - 21.7 -
Repayment of long-term debt (4.0) (15.9) -
Intercompany borrowings from subsidiaries - - 23.0
Cash dividends paid to common shareholders (7.1) (8.8) (9.4)
------------------------------------
Net cash used for financing activities (19.9) (142.4) (5.9)
- ---------------------------------------------------------------------------------------------------------------------
Net (decrease) increase in cash during year - (.2) .2
Cash balance at beginning of year - .2 -
- ---------------------------------------------------------------------------------------------------------------------
Cash balance at end of year $ - $ - $ .2
=====================================================================================================================
FS-3
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 Column H
- -----------------------------------------------------------------------------------------------------------------------------------
Future policy Benefits,
benefits, Other policy claims,
Deferred losses, claims claims and Net losses, and
acquisition and loss Unearned benefits Premiums investment settlement
Segment costs expenses premiums payable earned income (b) expenses
- -----------------------------------------------------------------------------------------------------------------------------------
Years ended:
December 31, 2000:
Reinsurance $ 26.2 $1,500.7 $171.9 $ - $ 312.5 $ 57.4 $ 270.8
Property casualty insurance 1.0 55.6 10.1 - 21.9 8.3 16.9
December 31, 1999:
Reinsurance $ 21.3 $ 782.1 $ 79.0 $ - $ 211.0 $ 49.1 $ 182.2
Property casualty insurance .9 68.9 13.1 - 72.2 4.9 60.1
December 31, 1998:
Reinsurance (a) $ 20.7 $ 723.2 $ 71.2 $ - $ 85.4 $ 18.1 $ 59.7
Property casualty insurance 14.7 88.5 81.9 - 160.6 8.3 115.1
- -----------------------------------------------------------------------------------------------------------------------------------
Column A Column I Column J Column K
- -------------------------------------------------------------------------
Amortization
of deferred
policy Other
acquisition operating Premiums
Segment costs expenses written
- -------------------------------------------------------------------------
Years ended:
December 31, 2000:
Reinsurance $ 98.0 $ - $ 332.6
Property casualty insurance 3.1 - 22.6
December 31, 1999:
Reinsurance $ 64.3 $ - $ 201.7
Property casualty insurance 9.1 - 73.0
December 31, 1998:
Reinsurance (a) $ 29.1 $ - $ 73.7
Property casualty insurance 25.7 - 164.9
- -------------------------------------------------------------------------
(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 $20.2 million, $7.9 million and $10.4 million for the twelve
months ended December 31, 2000, 1999 and 1998, respectively.
FS-4
SCHEDULE IV
WHITE MOUNTAINS INSURANCE GROUP, LTD.
REINSURANCE
- ------------------------------------------------------------------------------------------------------------------------
Column A Column B Column C Column D Column E Column F
- ------------------------------------------------------------------------------------------------------------------------
Ceded to Assumed Percentage
Premiums earned Gross other from other Net of amount
(Dollars in millions) amount companies companies amount assumed to net
- ------------------------------------------------------------------------------------------------------------------------
Years ended:
December 31, 2000:
Property and casualty insurance $ 28.4 $ (6.9) $ .4 $ 21.9 1.8%
Reinsurance 4.1 (167.7) 476.1 312.5 152.4%
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%
- ------------------------------------------------------------------------------------------------------------------------
(a) Amounts shown in columns B through F represent activity for Folksamerica
from August 18, 1998 through December 31, 1998.
FS-5
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 of period
- ---------------------------------------------------------------------------------------------------------------------
Years ended:
December 31, 2000:
Reinsurance recoverable:
Allowance for reinsurance balances $ 1.2 $ - $ - $ - $ 1.2
Property and casualty insurance:
Allowance for uncollectible accounts 1.1 - - - 1.1
December 31, 1999:
Reinsurance recoverable:
Allowance for reinsurance balances $ 1.2 $ - $ - $ - $ 1.2
Property and casualty insurance:
Allowance for uncollectible accounts .4 - - .7(a) 1.1
December 31, 1998:
Reinsurance recoverable:
Allowance for reinsurance balances (b) $ - $ - $ - $ 1.2(a) $ 1.2
Property and casualty insurance:
Allowance for uncollectible accounts .3 1.9 - (1.8)(b) .4
- ---------------------------------------------------------------------------------------------------------------------
(a) Represents allowances acquired from insurance and reinsurance operations
purchased
(b) Represents charge-offs of balances receivable
FS-6
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, if
Deferred and Claims any, Net
acquisition Adjustment deducted in Unearned Earned investment
Affiliation with registrant costs Expenses Column C Premiums Premiums income
- -------------------------------------------------------------------------------------------------------------------
Consolidated reinsurance
operations:
2000 $ 26.2 $ 1,500.7 $ - $ 171.9 $ 312.5 $ 57.4
1999 21.3 782.1 - 79.0 211.0 49.1
1998(a) 20.7 723.2 - 71.2 85.4 18.1
Consolidated property and
casualty insurance operations:
2000 $ 1.0 $ 55.6 $ - $ 10.1 $ 21.9 $ 8.3
1999 .9 68.9 - 13.1 72.2 4.9
1998 14.7 88.5 - 81.9 160.6 8.3
50%-or-less owned property
and casualty investees (b):
2000 $ 18.8 $ 101.1 $ - $ 64.8 $ 127.1 $ 11.8
1999 17.5 99.2 - 59.2 118.7 12.5
1998 16.0 106.1 - 56.5 103.6 10.1
- -------------------------------------------------------------------------------------------------------------------
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
Affiliation with registrant Year Year costs Expenses written
- -------------------------------------------------------------------------------------------------
Consolidated reinsurance
operations:
2000 $ 247.9 $ 22.9 $ 98.0 $ 415.0 $ 332.6
1999 152.9 29.3 64.3 237.0 201.7
1998(a) 58.6 1.1 29.1 67.5 73.7
Consolidated property and
casualty insurance operations:
2000 $ 16.2 $ .7 $ 3.1 $ 21.1 $ 22.6
1999 57.5 2.6 9.1 38.3 73.0
1998 108.4 6.7 25.7 98.7 164.9
50%-or-less owned property
and casualty investees (b):
2000 $ 91.9 $(3.3) $ 37.2 $ 89.0 $ 132.7
1999 89.3 (7.0) 34.4 84.3 121.3
1998 82.5 (5.1) 24.2 48.1 118.3
- -------------------------------------------------------------------------------------------------
(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 three year period
ended December 31, 2000.
FS-7