UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------
FORM 8-K/A
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
JUNE 1, 2001
Date of Report (Date of earliest event reported)
WHITE MOUNTAINS INSURANCE GROUP, LTD.
(Exact name of registrant as specified in its charter)
BERMUDA 1-8993 94-2708455
(State or other jurisdiction of (Commission (I.R.S. Employer
incorporation or organization) file number) Identification No.)
28 GATES STREET WHITE RIVER JUNCTION, VERMONT 05001
(Address of principal executive offices)
(802) 295-4500
(Registrant's telephone number, including area code)
ITEM 2. ACQUISITION OF ASSETS
White Mountains Insurance Group, Ltd. (the "Registrant") announced on June 1,
2001 that it completed its acquisition of the U.S. property and casualty
operations ("CGU") of London-based CGNU plc.
The Stock Purchase Agreement and the press release dated September 25, 2000 were
previously filed as Exhibits 99 (a) and 99 (b), respectively, to the Form 8-K
dated September 25, 2000. Amendment No.1 to the Stock Purchase Agreement, the
Registrant's press release dated October 19, 2000, the Convertible Preferred
Stock Term Sheet, the Berkshire Hathaway Preferred Stock and Warrants Term
Sheet, the Senior Secured Credit Facilities Commitment and the Amendment to the
Senior Secured Credit Facilities Commitment were previously filed as Exhibits
99(c), 99(d), 99(e), 99(f), 99(g) and 99(h), respectively, to the Form 8-K dated
October 19, 2000. Amendment No. 2 to the Stock Purchase Agreement, the summary
of the terms and conditions of the modified Lehman financing commitment and the
Registrant's press release dated February 20, 2001 were previously filed as
Exhibits 99(i), 99(j) and 99(k), respectively, to the Form 8-K dated February
20, 2001. The reinsurance contracts with National Indemnity Company and General
Re Corporation (and related agreements) and the Registrant's press release dated
June 1, 2001 were previously filed as Exhibits 99(m), 99(n), 99(o), 99(p), 99(q)
and 99(r), respectively, to the Form 8-K dated June 1, 2001. The Registrant's
Warrant Agreement and Subscription Agreement with Berkshire Hathaway Inc., each
dated May 30, 2001, as well as the Registrant's Subordinated Note Due 2002 and
Note Purchase Option Agreement with CGU International Holdings Luxembourg S.A.
and CGU Holdings LLC, each dated as of June 1, 2001, were previously filed as
Exhibits 99(s), 99(t), 99(u) and 99(v), respectively, to the Form 8-K dated June
8, 2001. Exhibit 99(1) has been intentionally omitted.
Included as Exhibits 99(w), 99(x) and 99(y) to this Current Report on Form 8-K
are the audited consolidated financial statements of CGU Corporation for the
years ended December 31, 2000, 1999 and 1998, the unaudited consolidated
financial statements of CGU Corporation for the three month periods ended March
31, 2001 and March 31, 2000 and the unaudited pro forma condensed combined
balance sheet of the Registrant as of March 31, 2001 and the unaudited pro forma
condensed combined income statements of the Registrant for the year ended
December 31, 2000 and the three month period ended March 31, 2001, respectively,
which are incorporated by reference herein in their entirety.
This Current Report on Form 8-K amends the Form 8-K dated June 1, 2001 and filed
on June 25, 2001. The amendment serves (i) to remove the financial impact of
certain material non-recurring transactions which were entered into
contemporaneously with the acquisition of CGU from the pro forma condensed
income statement for the year ended December 31, 2000, and (ii) to amend the
pro forma condensed income statement for the three month period ended March 31,
2001 to reflect the acquisition of CGU as if it had occurred as of January 1,
2000.
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS.
(a) FINANCIAL STATEMENTS OF BUSINESSES ACQUIRED.
The audited consolidated financial statements of CGU Corporation
for the years ended December 31, 2000, 1999 and 1998 are
enclosed as Exhibit 99(w).
The unaudited consolidated financial statements of CGU
Corporation for the three month periods ended March 31, 2001 and
March 31, 2000 are enclosed herein as Exhibit 99(x).
(b) PRO FORMA FINANCIAL INFORMATION.
The unaudited pro forma condensed combined balance sheet of the
Registrant as of March 31, 2001 and the amended unaudited pro
forma condensed combined income statements of the Registrant
for the year ended December 31, 2000 and the three month period
ended March 31, 2001 are enclosed herein as Exhibit 99(y).
(c) Exhibits. The following exhibits are filed herewith:
EXHIBIT NO. DESCRIPTION
99 (w) The audited consolidated financial statements of CGU
Corporation for the years ended December 31, 2000, 1999 and
1998.
99 (x) The unaudited consolidated financial statements of CGU
Corporation for the three month periods ended March 31, 2001
and March 31, 2000.
99 (y) The unaudited pro forma condensed combined balance sheet
of the Registrant as of March 31, 2001 and the amended
unaudited pro forma condensed combined income statements of
the Registrant for the year ended December 31, 2000 and the
three month period ended March 31, 2001.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
WHITE MOUNTAINS INSURANCE GROUP, LTD.
Dated: July 15, 2002 By: /s/ J. Brian Palmer
------------------------------------
J. Brian Palmer
Chief Accounting Officer
EXHIBIT 99(w)
CGU CORPORATION
(A WHOLLY-OWNED SUBSIDIARY OF CGNU PLC)
CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31,
2000, 1999 AND 1998
CGU CORPORATION
(A WHOLLY-OWNED SUBSIDIARY OF CGNU PLC)
CONSOLIDATED FINANCIAL STATEMENTS
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
PAGE(S)
Report of Independent Accountants 1
Consolidated Financial Statements:
Consolidated Balance Sheets at December 31, 2000 and 1999 2
Consolidated Statements of Income and Comprehensive Income
for the years ended December 31, 2000, 1999 and 1998 3
Consolidated Statements of Shareholders' Equity
for the years ended December 31, 2000, 1999 and 1998 4
Consolidated Statements of Cash Flows for the
years ended December 31, 2000, 1999 and 1998 5
Notes to Consolidated Financial Statements 6-26
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of
CGU Corporation
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of income and comprehensive income, shareholders'
equity, and cash flows present fairly, in all material respects, the financial
position of CGU Corporation and its subsidiaries (the "Company") at December 31,
2000 and 1999, and the results of their operations and their cash flows for each
of the three years in the period ended December 31, 2000 in conformity with
accounting principles generally accepted in the United States of America. These
financial statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States of America, 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 our opinion.
As discussed in Note 1, effective January 1, 1999, the Company changed its
method of accounting for insurance-related assessments.
/s/ PricewaterhouseCoopers LLP
- ----------------------------------
May 8, 2001
CGU CORPORATION
(A WHOLLY-OWNED SUBSIDIARY OF CGNU PLC)
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2000 AND 1999
(DOLLARS IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNT)
- --------------------------------------------------------------------------------
2000 1999
---- ----
ASSETS
Fixed maturity investments, at fair value (amortized cost
$7,995,352 and $6,574,647) $ 8,154,276 $ 6,680,941
Common equity securities, at fair value (cost $474,528
and $1,600,630) 765,162 2,433,643
Preferred equity securities, at fair value (cost $116,513
and $119,547) 146,919 154,828
Short-term investments, at amortized cost (which approximates
fair value) 321,173 280,621
Other investments 98,752 73,846
----------- -----------
Total investments 9,486,282 9,623,879
Cash 45,826 50,800
Insurance balances receivable 1,419,538 1,283,065
Reinsurance recoverable on paid and unpaid losses 1,558,184 1,516,361
Deferred policy acquisition costs 420,810 451,632
Investment income accrued 103,584 122,574
Net deferred federal income taxes 107,332 --
Other assets 564,762 446,324
Net assets of discontinued operations 503,800 505,602
----------- -----------
Total assets $14,210,118 $14,000,237
=========== ===========
LIABILITIES
Loss and loss adjustment expense reserves $ 6,982,728 $ 6,368,828
Unearned insurance premiums 2,042,468 2,023,396
Long-term debt 1,113,900 1,130,750
Net deferred federal income taxes -- 102,627
Accounts payable and other liabilities 872,316 603,138
----------- -----------
Total liabilities 11,011,412 10,228,739
----------- -----------
Commitments and contingencies (Notes 11, 12 and 16)
SHAREHOLDERS' EQUITY
Common stock, $1.00 par value;
authorized 100,000 shares, 16,022 shares outstanding 16 16
Additional paid-in capital 753,200 753,200
Retained earnings 2,135,727 2,400,619
Accumulated other comprehensive income 309,763 617,663
----------- -----------
Total shareholders' equity 3,198,706 3,771,498
----------- -----------
Total liabilities and shareholders' equity $14,210,118 $14,000,237
=========== ===========
The accompanying notes are an integral part of the consolidated financial
statements.
2
CGU CORPORATION
(A WHOLLY-OWNED SUBSIDIARY OF CGNU PLC)
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
(DOLLARS IN THOUSANDS)
- --------------------------------------------------------------------------------
2000 1999 1998
---- ---- ----
Revenues:
Earned insurance premiums $ 4,275,059 $ 4,259,995 $ 4,041,878
Net investment income 504,884 502,125 480,276
Net realized gains from investment securities
and other investments 732,769 381,948 400,335
----------- ----------- -----------
Total revenues 5,512,712 5,144,068 4,922,489
----------- ----------- -----------
Expenses:
Losses and loss adjustment expenses 4,301,997 3,252,406 3,946,847
Underwriting and other operating expenses 1,497,698 1,516,614 1,462,800
----------- ----------- -----------
Total expenses 5,799,695 4,769,020 5,409,647
----------- ----------- -----------
Pretax earnings (loss) (286,983) 375,048 (487,158)
Federal income tax benefit (provision) 83,318 (104,474) 186,150
----------- ----------- -----------
Net income (loss) from continuing operations before
cumulative effect of change in accounting principle (203,665) 270,574 (301,008)
Cumulative effect of change in accounting principle,
net of tax -- (9,405) --
----------- ----------- -----------
Net income (loss) from continuing operations (203,665) 261,169 (301,008)
Income from discontinued operations 40,817 54,146 46,691
Loss on disposal of discontinued operations (102,044) -- --
----------- ----------- -----------
Net income (loss) from discontinued operations (61,227) 54,146 46,691
----------- ----------- -----------
Net income (loss) (264,892) 315,315 (254,317)
Other comprehensive income, net of tax:
Increase (decrease) in net unrealized appreciation
of investments (304,218) (552,945) 281,836
Gain (loss) on foreign currency exchange (3,682) 29,276 (16,283)
----------- ----------- -----------
Comprehensive net income (loss) $ (572,792) $ (208,354) $ 11,236
=========== =========== ===========
The accompanying notes are an integral part of the consolidated financial
statements.
3
CGU CORPORATION
(A WHOLLY-OWNED SUBSIDIARY OF CGNU PLC)
CONSOLIDATED STATEMENTS SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
(DOLLARS IN THOUSANDS)
- --------------------------------------------------------------------------------
2000 1999 1998
---- ---- ----
Common stock:
Balance, beginning of year $ 16 $ 16 $ 18
Common stock issued to parent -- -- 9
Retirement of shares due to merger -- -- (11)
----------- ----------- -----------
Balance, end of year 16 16 16
----------- ----------- -----------
Additional paid-in capital:
Balance, beginning of year 753,200 753,200 1,378,199
Common stock issued to parent -- -- 474,999
Return of capital distribution -- -- (1,099,998)
----------- ----------- -----------
Balance, end of year 753,200 753,200 753,200
----------- ----------- -----------
Accumulated other comprehensive income:
Balance, beginning of year 617,663 1,141,332 875,779
Increase (decrease) in net unrealized appreciation
of investments (net of deferred federal income tax) (304,218) (552,945) 281,836
Gain (loss) on foreign currency exchange (net of
federal income tax) (3,682) 29,276 (16,283)
----------- ----------- -----------
Balance, end of year 309,763 617,663 1,141,332
----------- ----------- -----------
Retained earnings:
Balance, beginning of year 2,400,619 2,085,304 2,339,867
Net income (loss) (264,892) 315,315 (254,317)
Dividend to shareholder -- -- (246)
----------- ----------- -----------
Balance, end of year 2,135,727 2,400,619 2,085,304
----------- ----------- -----------
Total shareholders' equity $ 3,198,706 $ 3,771,498 $ 3,979,852
=========== =========== ===========
The accompanying notes are an integral part of the consolidated financial
statements.
4
CGU CORPORATION
(A WHOLLY-OWNED SUBSIDIARY OF CGNU PLC)
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
(DOLLARS IN THOUSANDS)
- --------------------------------------------------------------------------------
2000 1999 1998
---- ---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (264,892) $ 315,315 $ (254,317)
Adjustments to reconcile net income to net
cash provided by operating activities:
Loss on disposal of discontinued operations 102,044 -- --
Net income from discontinued operations (40,817) (54,146) (46,691)
Amortization of bond premium and discount (32,143) (6,724) 4,517
Net realized gains from investment securities
and other assets (732,769) (381,948) (400,335)
Depreciation and amortization 30,201 47,610 42,186
Deferred federal income taxes (80,443) 107,243 (179,749)
Change in operating assets and liabilities:
Reinsurance recoverable on paid and unpaid losses (41,823) 386,806 (641,304)
Deferred policy acquisition costs 30,822 835 (23,995)
Loss and loss adjustment expense reserves 613,901 (575,197) 1,235,903
Unearned insurance premiums 19,071 (29,010) 109,613
Insurance balances receivable (136,473) (101,814) (58,814)
Net change in other assets and liabilities 180,200 125,227 96,481
----------- ----------- -----------
Net cash used by operating activities (353,121) (165,803) (116,505)
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of investments:
Fixed maturity investments (6,182,395) (3,206,018) (1,567,358)
Common equity securities (642,410) (1,220,016) (1,516,461)
Preferred equity securities (539) (250) --
Net increase (decrease) in short-term investments (40,552) 28,106 (107,727)
Net increase (decrease) in other invested assets (31,958) (3,897) (54,200)
Proceeds from the sales of investments:
Fixed maturity investments 4,785,894 2,985,482 1,198,776
Common equity securities 2,316,433 1,372,141 1,548,504
Preferred equity securities 4,146 22,733 --
Maturities of fixed maturity investments 207,511 253,628 265,348
Proceeds from the sale of real estate 4,883 8,203 --
Purchase of National Farmers Union Insurance
Company (Note 3) -- -- (116,400)
Purchases of equipment, net (14,233) (18,809) (31,063)
Development of computer software (41,783) -- --
----------- ----------- -----------
Net cash provided (used) by investing activities 364,997 221,303 (380,581)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Capital contribution -- -- 425,295
Return of capital distribution -- -- (1,099,998)
Dividends paid -- -- (246)
Long-term debt (16,850) (4,700) 1,100,000
----------- ----------- -----------
Net cash provided (used) by financing activities (16,850) (4,700) 425,051
----------- ----------- -----------
Net increase (decrease) in cash (4,974) 50,800 (72,035)
Cash, beginning of year 50,800 -- 72,035
----------- ----------- -----------
Cash, end of year $ 45,826 $ 50,800 $ --
=========== =========== ==========
The accompanying notes are an integral part of the consolidated financial
statements.
5
CGU CORPORATION
(A WHOLLY-OWNED SUBSIDIARY OF CGNU PLC)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
- --------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a. NATURE OF BUSINESS AND BASIS OF PRESENTATION
Effective June 2, 1998, Commercial Union plc and General Accident
plc, both UK corporations, were merged in a pooling of interests to
form CGU plc. The U.S. operations of both companies were formally
merged on December 31, 1998 when General Accident Corporation of
America (GACA) was merged into Commercial Union Corporation (CUC)
and the name was changed to CGU Corporation (the "Company"), which
is a wholly-owned subsidiary of CGNU plc, its ultimate parent. CGNU
plc is a United Kingdom Company listed on the London Stock Exchange,
and was formed on May 30, 2000, when CGU plc merged with Norwich
Union plc to form CGNU plc. The Company, through certain of its
subsidiaries, is primarily engaged in underwriting and risk
placement of property and casualty insurance business. The Company
is also engaged, through certain other subsidiaries, in underwriting
of life insurance and annuities.
The Company's primary subsidiaries are CGU Insurance Company and
subsidiaries (Pennsylvania domiciled), Commercial Union Insurance
Company and subsidiaries (Massachusetts domiciled), General Accident
Insurance Company and subsidiaries (Pennsylvania domiciled), CGU
Life Insurance Company of America and subsidiary (Delaware
domiciled), National Farmers Union Property and Casualty Company and
subsidiary (Colorado domiciled), Houston General Insurance Company
and subsidiaries (Texas domiciled), and Pilot Insurance Company (a
Canadian Subsidiary).
Subsidiaries acquired during 1998 and accounted for as purchases
under Accounting Principles Board (APB) Opinion No. 16, "Business
Combinations" (APB No. 16), are included in the consolidated
financial statements from the date of acquisition. The merger of the
U.S. operations of GACA and CUC was accounted for as a pooling of
interests. Accordingly, the 1998 consolidated financial statements
have been restated as though the companies had been merged
throughout the accounting periods presented. All significant
intercompany transactions have been eliminated in consolidation.
b. PENDING TRANSACTION
On September 25, 2000, CGNU plc announced it had entered into a
definitive agreement to sell its U.S. property and casualty
operations to White Mountains Insurance Group, Ltd (White
Mountains). The agreed-upon purchase price is approximately
$2,170,000, subject to purchase price adjustments and certain
pre-closing reinsurance transactions, payable in cash and a Sellers
Note amounting to $260,000. Concurrent with the sale:
- The Company will enter into certain retroactive reinsurance
arrangements which will include the cession of all asbestos,
environmental and certain other latent exposures, as well as an
excess of loss reinsurance agreement covering adverse
development.
- The Company will sell its life insurance and Canadian property
and casualty operations to CGNU plc for $503,800, subject to
purchase price adjustments and certain reinsurance
transactions. As more fully described in Note 2, the sale of
the Company's life operations and Canadian property and
casualty operations to CGNU plc has been reported as
discontinued operations in accordance with APB Opinion No. 30,
"Reporting the Results of Operations - Reporting the Effects of
a Disposal of a Segment of a Business, and Extraordinary,
Unusual and Infrequently Occurring Events and Transactions"
(APB No. 30).
6
CGU CORPORATION
(A WHOLLY-OWNED SUBSIDIARY OF CGNU PLC)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
- --------------------------------------------------------------------------------
- Long-term debt owed to CGNU plc amounting to $1,100,000 at
December 31, 2000 and included in the accompanying balance
sheet will be paid with proceeds from the anticipated sale of
the Company's discontinued operations and with proceeds from
sales of investment securities.
Subject to regulatory approvals, the sale is expected to be
consummated in the second quarter of 2001.
c. USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS
The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure
of contingent assets and liabilities at 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.
d. INVESTMENTS
Fixed maturity investments (all of which are classified as
"Available for Sale") and common and preferred equity securities are
stated at fair value based on quoted market prices and in accordance
with Statement of Financial Accounting Standards No. 115,
"Accounting for Certain Investment in Debt and Equity Securities."
Certain other invested assets are stated at cost, which approximates
fair value.
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.
Unrealized gains and losses from changes in the fair value of common
and preferred equity securities and fixed maturity investments, net
of applicable deferred federal income taxes, are a separate
component of other comprehensive income and, accordingly, do not
affect net income. Realized gains and losses on the sale of
investments are determined on the basis of specific cost and are
included as a component of total revenues. When other than temporary
impairment of the value of a specific investment or group of
investments is determined, a realized investment loss is recorded.
e. 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 and sale of the Company's consolidated subsidiaries.
f. PREMIUMS AND UNEARNED INSURANCE PREMIUMS
Property and casualty premium revenues are earned on a daily pro
rata basis over the term of the respective policies. Unearned
insurance premiums represent the portion of premiums written
applicable to the unexpired term of each policy.
7
CGU CORPORATION
(A WHOLLY-OWNED SUBSIDIARY OF CGNU PLC)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
- --------------------------------------------------------------------------------
g. DEFERRED POLICY ACQUISITION COSTS
Deferred policy acquisition costs primarily represent commissions,
premium taxes 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 policy acquisition costs are limited to the amount expected
to be recovered from future earned premiums and anticipated
investment income. Deferred policy acquisition costs not expected to
be recoverable at any given time are immediately expensed. Total
acquisition costs expensed in 2000, 1999 and 1998 were $1,030,576,
$985,115, and $909,629, respectively. Expenses incurred in 2000
include the recognition of $23,620 of deferred policy acquisition
costs that were considered to be unrecoverable in future periods.
h. PROPERTY AND EQUIPMENT
Property and equipment, included in other assets, are carried at
cost less accumulated depreciation. Depreciation is charged to
income principally on the straight-line method over the estimated
useful lives of the assets. The Company estimates that computer
equipment and furniture and fixtures have useful lives of between
five and ten years. Leasehold improvements are amortized over the
lesser of their estimated useful life or the lease term. Internal
use software costs are capitalized for significant projects and upon
completion are amortized over their estimated useful lives.
The cost of property sold or otherwise disposed of and the
accumulated depreciation thereon are eliminated from the accounts
and any resulting gain or loss is credited or charged to income.
i. LOSSES AND LOSS ADJUSTMENT EXPENSES
Liabilities for unpaid losses and loss adjustment expenses are
comprised of case basis estimates for claims and claim expenses
reported prior to year-end, estimates of incurred but not reported
losses and loss expenses, reported reserves from underwriting pools
and associations in which the Company participates, and other
estimates, net of estimated salvage and subrogation recoverable.
These estimates are continually reviewed and updated and any
resulting adjustments are reflected in current operating results.
Certain claim settlements are funded by annuities (structured
settlements) purchased from various life insurers. The aggregate
present value of expected future payment amounts as of December 31,
2000 and 1999, for which the Company is contingently liable in the
event of default by the life insurer, was $182,283 and $359,169,
respectively. Included in these amounts are annuities from CGU Life
Insurance Company, an affiliated company, of $106,100 and $275,686
as of December 31, 2000 and 1999, respectively.
Certain liabilities for unpaid losses related to long-term workers'
compensation coverage are discounted to present value at 7.0% in
2000 and 1999. The undiscounted liabilities were $482,889 at
December 31, 2000 and $447,389 at December 31, 1999. The effect of
discounting these claims is to reduce liabilities for unpaid losses
by $230,691 and $227,306 at December 31, 2000 and 1999,
respectively.
All policy liabilities and accruals are based on the various
estimates discussed above. Although the adequacy of these amounts
cannot be assured, the Company believes that it is more likely than
not that policy liabilities and accruals will be sufficient to meet
future obligations of policies in force. The amount of liabilities
and accruals, however, could be revised in the near term if the
estimates discussed above are revised.
8
CGU CORPORATION
(A WHOLLY-OWNED SUBSIDIARY OF CGNU PLC)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
- --------------------------------------------------------------------------------
j. POLICYHOLDER DIVIDENDS
Dividends payable to participating property and casualty insurance
policyholders are accrued for in the period in which the related
premium was earned. Policyholder dividends of $17,754, $24,861 and
$23,117 were included in underwriting expenses in 2000, 1999 and
1998, respectively.
k. FEDERAL INCOME TAXES
The Company files a consolidated federal income tax return with its
eligible subsidiary companies, primarily comprised of its property
and casualty and life insurance subsidiaries.
In accordance with Statement of Financial Accounting Standards No.
109, "Accounting for Income Taxes," the Company uses an asset and
liability approach that recognizes deferred tax assets and
liabilities for the expected future tax consequences of events that
have been recognized in the Company's financial statements or tax
returns. In estimating future tax consequences, the Company
generally considers all expected future events other than changes in
the tax law or rates, unless enacted. Valuation allowances are
established when necessary to reduce deferred tax assets to the
amount expected to be realized.
l. FOREIGN CURRENCY TRANSLATION
The operations of Pilot Insurance Company ("Pilot"), a discontinued
operation located in Canada, are denominated in Canadian dollars.
Net unrealized foreign currency translation gains and losses
associated with Pilot are reported, after tax, as a net amount in a
separate component of accumulated other comprehensive income.
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 income.
m. GOODWILL
The excess of the cost to acquire purchased companies over the net
assets acquired is recorded as goodwill. The Company amortizes
goodwill on straight-line basis over 20 years. At December 31, 2000
and 1999, respectively, other assets included $41,947 and $47,747 of
goodwill.
n. CHANGES IN ACCOUNTING PRINCIPLES
Effective January 1, 1999, the Company changed its accounting policy
for guarantee fund assessments and adopted the provisions of
American Institute of Certified Public Accountants Statement of
Position 97-3, "Accounting by Insurance and other Enterprises for
Insurance-Related Assessments" (SOP 97-3). The cumulative effect of
this change was to reduce net income by $9,405, representing an
increase in unpaid loss and loss adjustment expense reserves of
$14,470 less a related deferred federal income tax benefit of $5,065
for the year ended December 31, 1999.
Effective January 1, 1999, the Company changed its accounting policy
for internally developed software and adopted the provisions of
American Institute of Certified Public Accountants Statement of
Position 98-1, "Accounting for the Cost of Computer Software
Developed or Obtained for Internal Use" (SOP 98-1). SOP 98-1
requires that certain costs incurred in developing the internal-use
computer software be capitalized and provides guidance for
determining whether computer software is to be considered for
internal use. During 2000, the Company capitalized $41,783 of
eligible computer software costs.
9
CGU CORPORATION
(A WHOLLY-OWNED SUBSIDIARY OF CGNU PLC)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
- --------------------------------------------------------------------------------
o. NEW AND PENDING ACCOUNTING PRONOUNCEMENTS
On January 1, 2001, Statement of Financial Accounting Standards No.
133, "Accounting for Derivative Instruments and Hedging Activities"
(FAS 133), which establishes accounting and reporting standards for
derivative instruments, became effective. FAS 133 did not have a
significant impact on the results of operations or financial
position of the Company.
In September 2000, the Financial Accounting Standards Board (FASB)
issued an exposure draft (ED), "Business Combinations and Intangible
Assets." This ED proposes to eliminate the pooling-of-interests
method of accounting, which would require that purchase accounting,
with its recognition of intangible assets and goodwill, be applied
to all business combinations.
As the ED stands, the issuance of this statement could have a
significant effect on the Company's intangible assets and
amortization charge, as the Company's goodwill and intangible assets
would no longer be amortized. Management is currently evaluating the
impact of this ED on the Company.
p. CODIFICATION OF STATUTORY ACCOUNTING PRINCIPLES (UNAUDITED)
Effective January 1, 2001, the Company's insurance subsidiaries 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 serve to increase the aggregate statutory
policyholders' surplus of the Company's insurance operations by
approximately $120,000 (unaudited) as of January 1, 2001 primarily
as a result of permitting the recording of deferred tax assets.
q. FINANCIAL INSTRUMENTS
In the normal course of business, the Company enters into
transactions involving various types of financial instruments,
including debt and investments such as fixed maturities and equity
securities. These instruments involve credit risk and also may be
subject to risk of loss due to interest rate fluctuation. The
Company evaluates and monitors each financial instrument
individually and, when appropriate, obtains collateral or other
security to minimize losses. At December 31, 2000 and 1999, unless
otherwise noted in the financial instruments, the carrying amount of
the Company's financial instruments approximates their fair value.
2. DISCONTINUED OPERATIONS
On September 25, 2000, in connection with CGNU plc's decision to sell the
Company to White Mountains, the Company agreed to sell, commensurate with
the sale, four of its subsidiaries to its parent, CGNU plc. Included in
the sale are CGU Life Insurance Company of America and subsidiary (CGU
Life), Pilot, CGU Annuity Services Corporation (CGUAS), and CGU
Investment Management Canada Limited (CGUIMC).
Accordingly, the operating results of the discontinued segments have been
reported in the consolidated statements of income and comprehensive
income as discontinued operations in accordance with APB No. 30.
Subsequent to the September 25, 2000 measurement date through December
31, 2000, operations from the discontinued business generated income of
approximately $30,589. Discontinued operations are anticipated to
generate income of approximately $13,500 from December 31, 2000 through
the anticipated disposal date.
10
CGU CORPORATION
(A WHOLLY-OWNED SUBSIDIARY OF CGNU PLC)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
- --------------------------------------------------------------------------------
At December 31, 2000, the discontinued segments had assets of
approximately $3,700,000, consisting primarily of invested assets,
premiums and fees receivable, and deferred acquisition costs, and
liabilities of approximately $3,100,000 consisting primarily of policy
liabilities. Revenues for the discontinued operations were approximately
$649,000, $611,000 and $660,000 for the years ended December 31, 2000,
1999, and 1998, respectively.
The sale is expected to be completed during the second quarter of 2001.
The Company anticipates receiving proceeds of $503,800 in connection with
the sale of the discontinued operations. As a result of the sale, the
Company recorded a $73,122 pretax adjustment related to the write-down of
the net assets of the discontinued operations to their net realizable
value, which is included in the loss on disposal indicated below.
The consolidated statements of operations for all periods presented
include the results of CGU Life, Pilot, CGUAS, and CGUIMC in Net Income
from Discontinued Operations.
The following table summarizes the Company's discontinued operations for
the three-year period ended December 31, 2000:
YEAR ENDED DECEMBER 31 2000 1999 1998
---------------------- ---- ---- ----
Operating income, before income taxes $ 70,930 $ 78,605 $ 74,227
Income taxes (30,113) (24,459) (27,536)
--------- --------- ---------
Net income $ 40,817 $ 54,146 $ 46,691
========= ========= =========
Loss on disposal, before income taxes $ (42,533) $ -- $ --
Income taxes (59,511)
--------- --------- ---------
Loss on disposal $(102,044) $ -- $ --
========= ========= =========
3. ACQUISITIONS AND SUBSIDIARIES CONTRIBUTED BY PARENT
On July 16, 1998, CUC acquired Farmers Union Insurance Acquisition
Corporation and its two property and casualty insurance subsidiaries,
known collectively as National Farmers Union Insurance Companies (NFU),
at a cost of $116,400. The acquisition was accounted for as a purchase
and, accordingly, NFU's operating results from that date are included in
CGU's net income. NFU is engaged in underwriting and risk placement of
property and casualty insurance business, primarily in the Midwestern
region of the U.S. Goodwill of $42,100 related to the acquisition is
being amortized over a 20-year period.
Effective January 1, 1998, Commercial Union plc acquired 100% of the
capital stock of Houston General Insurance Company (HG), an underwriter
of property and casualty insurance business, from Tokio Marine and Fire
Company, Ltd. (TMF), and contributed the HG stock, valued at $50,000, to
the capital of the Company. In exchange, the Company issued 205 shares of
its common stock to its parent. Effective from the same date, under the
terms of a reinsurance agreement between HG and an affiliate of TMF, all
premiums, losses, and underwriting expenses associated with HG policies
written prior to the effective date and with any renewals or new policies
required by statute or contract to be issued on or after the effective
date will be 100% ceded to and assumed by the affiliate of TMF. In
addition, TMF has indemnified the Company and HG from any decline in the
value of the acquired assets, other than invested assets, subsequent to
January 1, 1998. The operating results of Houston General are included in
the consolidated results.
11
CGU CORPORATION
(A WHOLLY-OWNED SUBSIDIARY OF CGNU PLC)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
- --------------------------------------------------------------------------------
4. INVESTMENTS
NET INVESTMENT INCOME
An analysis of net investment income for the years ended December 31,
2000, 1999 and 1998 is as follows:
2000 1999 1998
---- ---- ----
Interest from fixed maturity and short-term investments $ 472,510 $ 466,257 $ 443,377
Dividends from common and preferred equity securities 31,811 34,793 40,933
Other investment income 9,649 8,707 3,732
--------- --------- ---------
Total investment income 513,970 509,757 488,042
Investment expenses (9,086) (7,632) (7,766)
--------- --------- ---------
Total net investment income $ 504,884 $ 502,125 $ 480,276
========= ========= =========
FIXED MATURITY INVESTMENTS
The amortized cost and fair value of fixed maturity investments available
for sale at December 31, 2000 and 1999 are summarized as follows:
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------- ---------- ---------- -----
2000
U.S. Government and agency
obligations $3,119,428 $ 42,605 $ (12,811) $3,149,222
Debt securities issued by industrial
corporations 2,980,490 61,623 (35,619) 3,006,494
Municipal obligations 891,626 90,750 (6,759) 975,617
Mortgage-backed securities 965,878 19,067 (899) 984,046
Foreign government obligations 37,930 1,149 (182) 38,897
---------- ---------- ---------- ----------
Totals $7,995,352 $ 215,194 $ (56,270) $8,154,276
========== ========== ========== ==========
1999
U.S. Government and agency
obligations $1,352,748 $ 92,469 $ (19,843) $1,425,374
Debt securities issued by industrial
corporations 2,999,442 51,234 (70,337) 2,980,339
Municipal obligations 1,493,444 102,266 (37,278) 1,558,432
Mortgage-backed securities 729,013 1,799 (14,016) 716,796
Foreign government obligations -- -- -- --
---------- ---------- ---------- ----------
Totals $6,574,647 $ 247,768 $ (141,474) $6,680,941
========== ========== ========== ==========
The amortized cost and fair values of fixed maturity investments by
contractual maturity, at December 31, 2000, are shown below. Expected
maturities will differ from contractual maturities because borrowers may
have the right to call or prepay obligations with or without call or
prepayment penalties.
12
CGU CORPORATION
(A WHOLLY-OWNED SUBSIDIARY OF CGNU PLC)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
- --------------------------------------------------------------------------------
AMORTIZED FAIR
COST VALUE
--------- -----
Due in one year or less $2,522,392 $2,523,164
Due after one year through five years 1,307,990 1,341,077
Due after five years through ten years 1,929,250 1,957,410
Due after ten years 1,269,842 1,348,579
Mortgage-backed securities 965,878 984,046
---------- ----------
Total $7,995,352 $8,154,276
========== ==========
At December 31, 2000 and 1999, respectively, fixed maturity investments
included $458,295 and $478,450 which were on deposit, with respect to
certain of the Company's insurance subsidiaries, with various states
and other regulatory agencies.
On a gross basis, gains of $253,801 and losses of $58,023 were realized
on 2000 sales of fixed maturity investments available for sale, while
gains of $45,588 and $43,181 and losses of $61,767 and $1,654 were
realized on 1999 and 1998 sales, respectively.
COMMON EQUITY SECURITIES
Cost and fair value of common equity securities as of December 31, 2000
and 1999 are summarized as follows:
UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
---- ---------- ---------- -----
As of December 31, 2000 $ 474,528 $ 312,507 $ (21,873) $ 765,162
As of December 31, 1999 1,600,630 936,968 (103,955) 2,433,643
On a gross basis, gains of $764,631 and losses of $210,720 were realized
on 2000 sales of common equity securities, while gains of $479,954 and
$423,140 and losses of $81,769 and $76,651 were realized on 1999 and 1998
sales, respectively.
PREFERRED EQUITY SECURITIES
Cost and fair value of preferred equity securities as of December 31,
2000 and 1999 are summarized as follows:
UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
---- ---------- ---------- -----
As of December 31, 2000 $116,513 $ 31,361 $ (955) $146,919
As of December 31, 1999 119,547 37,466 (2,185) 154,828
On a gross basis, gains of $638 and losses of $65 were realized on 2000
sales of preferred equity securities, while gains of $8,583 and $12,294
and losses of $68 and $47 were realized on 1999 and 1998 sales,
respectively.
CURRENCY SWAP
In order to protect against fluctuations in the exchange value and return
on Sterling denominated U.K. Government debt securities ("Gilts"), the
Company had previously entered into a currency swap agreement with an
affiliate of its parent. In 1999, the Gilts were sold and the swap
agreement was terminated.
13
CGU CORPORATION
(A WHOLLY-OWNED SUBSIDIARY OF CGNU PLC)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
- --------------------------------------------------------------------------------
SECURITIES LENDING
The Company has entered into a Securities Lending Authorization Agreement
with a third party under which the Company has designated all fixed
maturity investments not on deposit with various states or reinsurance
pools as available for lending to brokers approved by the Company. The
agreement specifies that all securities loaned shall be collateralized by
the borrower at approximately 102% of market value, such collateral to be
held by the third party. All securities loaned can be redeemed on short
notice. The total market value of securities on loan at December 31, 2000
and 1999 was $1,378,701 and $325,041, respectively, with corresponding
collateral valued at $1,403,737 and $331,808, respectively.
OTHER INVESTMENTS
Included in other investments is the Company's 20% interest in United
Fire and Casualty Insurance Company (UFC) at December 31, 2000, 1999 and
1998. The Company's investment in UFC is accounted for using the equity
method. In addition to UFC, other investments are primarily comprised of
unconsolidated ownership interests in various investment partnerships,
investments in leveraged leases and trust financing and are valued at
cost, or equity, as appropriate.
5. INSURANCE BALANCES RECEIVABLE
The allowance for uncollectible premiums and other receivables was
$40,923 and $36,419 at December 31, 2000 and 1999, respectively. The
Company estimates the allowance for uncollectible premiums based on
analysis of past due recoverables, accounts in legal collection, and
historical charges for uncollectible accounts.
6. PROPERTY AND EQUIPMENT
Details of property and equipment, net of accumulated depreciation and
amortization, included in other assets in the accompanying financial
statements at December 31, are as follows:
2000 1999
---- ----
Real estate, net of impairment adjustments $145,070 $164,568
Furniture, fixtures and computer equipment 199,470 232,818
Internally developed software 41,783 --
Leasehold improvements 30,521 31,761
-------- --------
416,844 429,147
Less accumulated depreciation and amortization 235,185 260,387
-------- --------
Property and equipment, net $181,659 $168,760
======== ========
During 2000, the Company sold two real estate holdings, realizing a loss
of $2,494 on proceeds of $4,883. Correspondingly, the Company paid down
certain long-term bonds relating to the property sold, in the aggregate
amount of $16,850 (See Note 8).
14
CGU CORPORATION
(A WHOLLY-OWNED SUBSIDIARY OF CGNU PLC)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
- --------------------------------------------------------------------------------
During 1999, the Company sold two real estate holdings, realizing a gain
of $1,436 on proceeds of $8,203. Correspondingly, the Company paid down
certain long-term bonds relating to the property sold, in the aggregate
amount of $4,700 (See Note 8).
The Company contracts with a third party to conduct annual appraisals of
its real estate holdings. As a result of these annual valuations, the
Company realized a loss of $11,000 in 2000 and $10,000 in 1999 for other
than temporary impairments in the valuation of certain real estate
holdings.
7. UNPAID LOSS AND LOSS ADJUSTMENT EXPENSE RESERVES
Activity in the liability for unpaid losses and loss adjustment expenses
is summarized as follows:
FOR THE YEARS ENDED
DECEMBER 31,
-------------------
2000 1999
---- ----
Balance at January 1 $6,368,828 $6,944,024
Less reinsurance recoverable on unpaid losses 1,285,637 1,651,963
---------- ----------
Net balance at January 1 5,083,191 5,292,061
---------- ----------
Incurred related to:
Current year 3,483,967 3,194,913
Prior years 818,030 57,493
---------- ----------
Total incurred losses 4,301,997 3,252,406
---------- ----------
Cumulative effect of change in accounting principle -- 14,470
---------- ----------
Paid related to:
Current year 1,706,573 1,611,718
Prior years 1,972,243 1,864,028
---------- ----------
Total paid 3,678,816 3,475,746
---------- ----------
Net balance at December 31 5,706,372 5,083,191
Plus reinsurance recoverable on unpaid losses 1,276,356 1,285,637
---------- ----------
Balance at December 31 $6,982,728 $6,368,828
========== ==========
During 2000 and 1999, the Company strengthened loss reserves on prior
accident years by approximately $818,000 and $57,000, respectively.
Incurred losses related to prior years primarily represents adverse loss
development on the Company's auto liability coverages as well as certain
commercial lines (workers' compensation, general liability and special
multiple peril). This longer tail casualty business written during the
mid-1990's originated primarily from the former General Accident book of
business. The adverse development recorded in 2000 was primarily driven
by increases in paid and case loss trends which were more indicative of
true loss reserve development than changes in case reserving or payment
philosophy resulting from the merger of CUC and GACA.
15
CGU CORPORATION
(A WHOLLY-OWNED SUBSIDIARY OF CGNU PLC)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
- --------------------------------------------------------------------------------
The Company believes it has made a reasonable provision for its
environmental and asbestos exposures as set forth below on a gross and
net of reinsurance basis. However, due to significant unresolved legal
and coverage issues such as whether coverage exists, definition of an
occurrence, determination of ultimate damages and allocation of such
damages to financially responsible parties, an indeterminate amount of
additional liability may develop over time.
Included in liability for unpaid losses and loss adjustment expense are
reserves for environmental and asbestos exposures at December 31, 2000
and 1999. These reserves, which include IBNR provisions for reported and
unreported claims and loss adjustment expenses (LAE) including coverage
dispute costs, aggregated:
2000 1999
---- ----
Gross of reinsurance $1,039,605 $1,353,110
Net of reinsurance $ 786,469 $ 956,001
As more fully described in Note 1, environmental and asbestos liabilities
will be ceded to a third party in connection with the acquisition of the
Company by White Mountains.
8. LONG-TERM DEBT
Long-term debt at December 31, 2000 and 1999 consisted of the following:
2000 1999
---- ----
Term note payable to parent $1,100,000 $1,100,000
Bonds payable 13,900 30,750
---------- ----------
Total long-term debt $1,113,900 $1,130,750
========== ==========
The term note payable to CGU Holdings LLC, a wholly-owned subsidiary of
the Company's ultimate parent and the direct owner of 45.86% of the
Company's common stock, was issued on December 31, 1998. Interest at the
rate of 6.5% is payable annually on March 31 of each year. The entire
principal is due on December 31, 2013. The term note payable agreement
contains restrictive covenants regarding financial reporting. Interest
paid on the note was $71,500, $17,875, and $0 in 2000, 1999 and 1998,
respectively. The fair value of the term note payable to parent was
approximately $1,009,000 at December 31, 2000.
The bonds payable mature from 2014 to 2015 and no principal payments are
required until maturity. Semi-annual payments of interest are required at
rates which will vary based upon an index which is a compilation of
certain short-term, tax-free bond issues. The average interest rates were
3.84%, 3.34% and 3.55% for 2000, 1999 and 1998, respectively. Although
the terms of the bonds restricted the use of the borrowings to the
construction of specific office buildings, the buildings themselves do
not constitute collateral for the bonds. Interest paid on the bonds was
$1,101, $1,143 and $1,318 for 2000, 1999 and 1998, respectively. During
2000 and 1999, notes with principal of $16,850 and $4,700 were paid
subsequent to the sale of the related property.
16
CGU CORPORATION
(A WHOLLY-OWNED SUBSIDIARY OF CGNU PLC)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
- --------------------------------------------------------------------------------
As more fully described in Note 1, the term note payable to parent will
be paid with proceeds from the anticipated sale of the Company's
discontinued operations and with proceeds from sales of investment
securities upon acquisition of the Company by White Mountains.
9. INCOME TAXES
The federal income tax provision for the years ended December 31, 2000,
1999 and 1998, consists of the following:
2000 1999 1998
---- ---- ----
Current taxes $ 3,230 $ 2,609 $ (9,132)
Deferred taxes (86,548) (107,083) (177,018)
--------- --------- ---------
Federal income taxes charged (credited) to
continuing operations $ (83,318) $ 104,474 $(186,150)
========= ========= =========
Deferred taxes arise from temporary differences in the bases of assets
and liabilities for tax and financial statement purposes. Components of
deferred tax assets and liabilities for the property and casualty
operations are as follows:
DECEMBER 31,
------------------
2000 1999
---- ----
Deferred tax assets:
Discounting of loss reserves $ 213,284 $ 187,457
Unearned premium reserve adjustment 130,199 125,332
Net operating loss and tax credit carryforward 99,125 71,149
Reinsurance fee payable to foreign affiliate 59,500 --
Reserve for post-retirement benefits 26,151 19,043
Deferred compensation reserve 14,189 1,543
Accrued interest on term note payable to parent 18,769 18,769
Allowance for doubtful receivables 14,048 30,072
Other 40,955 31,514
--------- ---------
Total deferred tax assets $ 616,220 $ 484,879
========= =========
Deferred tax liabilities:
Net unrealized capital gains and losses (167,851) (340,400)
Deferred acquisition costs (147,284) (158,071)
Disposal of discontinued operations (48,813) --
Accumulated bond discount (31,414) (60,589)
Prepaid pension cost (18,571) (20,474)
Deferred software costs (14,624) --
Other (7,381) (7,972)
--------- ---------
Total deferred tax liabilities (435,938) (587,506)
--------- ---------
Net deferred tax asset (liability) before valuation allowance 180,282 (102,627)
Valuation allowance (72,950) --
--------- ---------
Net deferred tax asset (liability) $ 107,332 $(102,627)
========= =========
17
CGU CORPORATION
(A WHOLLY-OWNED SUBSIDIARY OF CGNU PLC)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
- --------------------------------------------------------------------------------
A reconciliation between the statutory federal tax rate and Company's
effective tax rate in 2000, 1999 and 1998 is as follows:
DECEMBER 31,
----------------------
2000 1999 1998
---- ---- ----
Statutory federal tax rate: 35.0% 35.0% 35.0%
Tax exempt interest 7.3 (6.0) 4.7
Dividends received deduction 2.7 (2.2) 2.0
Nondeductible charges (1.1) 1.4 (1.3)
Prior year true ups 2.4 4.3 --
Valuation allowance (25.4) (0.2) --
Other 8.1 (4.4) (2.2)
---- ---- ----
Effective tax rate 29.0% 27.9% 38.2%
==== ==== ====
At December 31, 2000, the Company had net operating loss carryforwards
available for utilization of approximately $87,848 of which approximately
$40,476 are subject to certain limitations that restrict the utilization
of these losses to the Company or group of companies that generated them.
At December 31, 2000, the Company had foreign tax credits of
approximately $44,950 which begin to expire in 2001 and Alternative
Minimum Tax (AMT) credits of approximately $23,428 which do not expire.
Income taxes paid were $14,000, $24,800 and $85,330 for 2000, 1999 and
1998, respectively. Income tax refunds of $24,022, $70,244 and $0 were
received in 2000, 1999 and 1998, respectively.
10. PENSIONS AND OTHER POSTRETIREMENT BENEFITS
The Company offers various postretirement benefits to its employees.
Under the terms of these plans, the Company reserves the right to change,
modify or discontinue the plans.
PENSIONS
The parent Company and certain subsidiaries have noncontributory defined
benefit plans covering substantially all employees. The benefits for
these plans are based primarily on years of service and employees' pay
near retirement. The Company's funding policy is consistent with the
funding requirements of federal law and regulations.
18
CGU CORPORATION
(A WHOLLY-OWNED SUBSIDIARY OF CGNU PLC)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
- --------------------------------------------------------------------------------
OTHER POSTRETIREMENT BENEFITS
The parent Company and certain subsidiaries provide medical and life
insurance benefits to pensioners and survivors. The associated plans pay
approved claims from existing assets and from company funds.
PENSION BENEFITS OTHER BENEFITS
---------------- -----------------
2000 1999 2000 1999
---- ---- ---- ----
CHANGE IN BENEFIT OBLIGATION
Benefit obligation at beginning of year $ 477,731 $ 534,971 $ 110,836 $ 114,181
Service cost 17,629 21,374 2,840 3,172
Interest cost 36,683 34,075 9,193 7,963
Amendments -- -- 2,372 (3)
Assumption changes -- -- 20,697 --
Actuarial (gain)/loss 40,022 (51,694) 2,920 (6,339)
Benefits and expenses (net of participant
contributions) (59,678) (60,995) (9,846) (8,138)
--------- --------- --------- ---------
Benefit obligation at end of year $ 512,387 $ 477,731 $ 139,012 $ 110,836
========= ========= ========= =========
CHANGE IN PLAN ASSETS
Fair value of plan assets at beginning of year $ 594,987 $ 611,655 $ -- $ --
Actual return on plan assets 14,369 37,283 -- --
Employer contribution 3,343 7,045 9,846 8,138
Benefit (net of participant contributions) (58,841) (60,995) (9,846) (8,138)
Expenses paid (837) -- -- --
--------- --------- --------- ---------
Fair value of plan assets at end of year $ 553,021 $ 594,988 $ -- $ --
========= ========= ========= =========
Funded status $ 40,634 $ 117,257 $(139,012) $(110,836)
Unrecognized actuarial (gain)/loss (22,967) (86,978) 19,916 (7,139)
Unrecognized transition obligation/(asset) (4,577) (8,551) 39,060 42,353
Unrecognized prior service cost 6,792 8,467 5,958 3,979
--------- --------- --------- ---------
Net prepaid (accrued) benefit cost $ 19,882 $ 30,195 $ (74,078) $ (71,643)
========= ========= ========= =========
19
CGU CORPORATION
(A WHOLLY-OWNED SUBSIDIARY OF CGNU PLC)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
- --------------------------------------------------------------------------------
The amount recognized in the accompanying financial statements consists
of:
PENSION BENEFITS OTHER BENEFITS
---------------- -------------------
2000 1999 2000 1999
---- ---- ---- ----
Prepaid benefit cost $ 53,559 $ 46,000 $ -- $ --
Accrued benefit liability (33,677) (17,369) (74,078) (71,643)
Intangible asset -- 1,564 -- --
---------- -------- ---------- ----------
Net prepaid (accrued) benefit cost $ 19,882 $ 30,195 $ (74,078) $ (71,643)
========== ======== ========== ==========
Weighted average assumptions
as of December 31:
Discount rate 7.50% 7.96% 7.50% 8.00%
Expected return on plan assets 9.50% 9.84% -- --
Rate of compensation increase 5.00% 4.13% -- --
Initial medical trend rate -- -- 9.50% 7.00%
Ultimate medical trend rate -- -- 5.50% 5.00%
PENSION BENEFITS OTHER BENEFITS
----------------------------- ----------------------------
2000 1999 1998 2000 1999 1998
---- ---- ---- ---- ---- ----
Components of net periodic
benefit cost:
Service cost $ 17,629 $ 21,374 $ 22,167 $ 2,840 $ 3,172 $ 3,370
Interest cost 36,683 34,075 32,337 9,193 7,963 8,068
Expected return on plan assets (51,182) (49,647) (42,631) -- (125) (139)
Amortization of prior
service cost 1,716 1,720 982 393 211 36
Amortization of transition
obligation/(asset) (4,179) (4,372) (2,618) 3,301 3,301 3,900
Amortization of unrecognized
(gain)/loss 5,817 169 71 (26) (9) 336
Special termination benefits -- -- 18,763 -- -- 781
Curtailment/settlement (gain)/
loss -- -- (11,699) -- -- 6,825
-------- -------- -------- -------- -------- --------
Net periodic benefit cost $ 6,484 $ 3,319 $ 17,372 $ 15,701 $ 14,513 $ 23,177
======== ======== ======== ======== ======== ========
Assumed health care cost trend rates have a significant effect on the
amounts reported for the health care plans. A one-percentage-point change
in assumed health care rates would have the following effects:
1-PERCENTAGE- 1-PERCENTAGE-
POINT POINT
INCREASE DECREASE
------------- -------------
Effect on total of service and interest cost components $ 1,209 $ 1,083
Effect on postretirement benefit obligation 15,475 13,930
20
CGU CORPORATION
(A WHOLLY-OWNED SUBSIDIARY OF CGNU PLC)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
- --------------------------------------------------------------------------------
11. OPERATING LEASES
Net rental expense for 2000, 1999 and 1998 aggregated $51,032, $47,686
and $52,303, respectively, net of sublease rental income of $1,716, $432
and $20, respectively. The Company leases office facilities, computer and
transportation equipment with remaining lease terms ranging from one to
ten years. Minimum lease commitments for each of the next five years, and
thereafter, are as follows:
RENTAL SUBLEASE
EXPENSE INCOME
------- --------
2001 $ 48,203 $2,261
2002 39,044 1,743
2003 32,255 1,743
2004 21,558 787
2005 16,259 695
Thereafter 31,889 232
-------- ------
$189,208 $7,461
======== ======
Under the existing leases, there are no material contingent rental
agreements, escalation clauses or restrictions imposed on the Company.
12. REINSURANCE
In the ordinary course of business, the Company reinsures certain risks
with other insurance enterprises. Reinsurance limits the Company's
maximum loss on catastrophes, large risks and unusually hazardous risks.
The Company is contingently liable in the event of default by a
reinsurer.
Included in reinsurance recoverable at December 31, 2000 and 1999 are
recoverables on paid losses of $281,828 and $288,447, respectively, for
the property and casualty operations, which were recorded net of a
valuation allowance for uncollectible reinsurance of $20,000 at December
31, 2000 and 1999.
Reinsurance recoverable on paid and unpaid losses with a carrying value
of $169,584 and $170,503 and prepaid reinsurance premiums of $12,226 and
$8,812 at December 31, 2000 and 1999, respectively, for the property and
casualty operations, are due from the National Council on Compensation
Insurance, an involuntary pool.
21
CGU CORPORATION
(A WHOLLY-OWNED SUBSIDIARY OF CGNU PLC)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
- --------------------------------------------------------------------------------
The effect of reinsurance on premiums and losses for the property and
casualty operations is as follows:
DECEMBER 31, 2000
----------------------------------------
LOSSES AND
LOSS
ADJUSTMENT
PREMIUM PREMIUM EXPENSES
WRITTEN EARNED INCURRED
------- ------- ----------
Direct $ 4,654,603 $ 4,630,377 $ 4,767,171
Assumed 73,591 70,495 110,904
Ceded (434,063) (425,813) (576,078)
----------- ----------- -----------
Net $ 4,294,131 $ 4,275,059 $ 4,301,997
=========== =========== ===========
DECEMBER 31, 1999
----------------------------------------
LOSSES AND
LOSS
ADJUSTMENT
PREMIUM PREMIUM EXPENSES
WRITTEN EARNED INCURRED
------- ------- ----------
Direct $ 4,485,534 $ 4,518,278 $ 3,503,024
Assumed 65,249 70,158 64,711
Ceded (302,037) (328,441) (315,329)
----------- ----------- -----------
Net $ 4,248,746 $ 4,259,995 $ 3,252,406
=========== =========== ===========
DECEMBER 31, 1998
----------------------------------------
LOSSES AND
LOSS
ADJUSTMENT
PREMIUM PREMIUM EXPENSES
WRITTEN EARNED INCURRED
------- ------- ----------
Direct $ 4,389,663 $ 4,366,704 $ 4,675,460
Assumed 77,826 80,906 234,874
Ceded (354,090) (405,732) (963,487)
----------- ----------- -----------
Net $ 4,113,399 $ 4,041,878 $ 3,946,847
=========== =========== ===========
22
CGU CORPORATION
(A WHOLLY-OWNED SUBSIDIARY OF CGNU PLC)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
- --------------------------------------------------------------------------------
During 2000 the Company purchased a reinsurance contract from an
affiliated reinsurer. The contract is a $170,000 stop loss reinsurance
agreement covering accident year 2000 losses (the "primary coverage").
This contract was amended in December 2000 to include a $200,000
retroactive reinsurance agreement dated December 31, 2000, covering
potential adverse loss development on reserves carried by the Company as
of December 31, 2000, excluding all exposures for all policy years prior
to 1988, asbestos exposures for all policy years prior to 1993, and all
lead-related exposures for all policy years prior to 1993 (the "secondary
coverage"). This secondary coverage was not triggered as of December 31,
2000. The Company incurred adverse development up to the limits of the
primary coverage and accordingly recorded reinsurance recoverable from
the affiliated reinsurer of $170,000 at December 31, 2000.
In addition, a portion of the coverage under certain of the Company's
reinsurance contracts in 2000, 1999 and 1998 has been provided by the
affiliated reinsurer. Earned insurance premiums ceded to the affiliated
reinsurer in 2000, 1999 and 1998 were $15,800, $28,420 and $33,190,
respectively.
Total amounts recoverable on paid and unpaid losses ceded to the
affiliated reinsurer were $20,961 and $7,114 as of December 31, 2000 and
1999, respectively.
13. OTHER COMPREHENSIVE INCOME
Other comprehensive income was comprised of the following:
2000
--------------------------------------
BEFORE TAX NET OF
TAX (EXPENSE) TAX
AMOUNT OR BENEFIT AMOUNT
------ ---------- ------
Gain (loss) on foreign currency exchange:
Balance, beginning of year $ (39,614) $ 13,865 $ (25,749)
Change during year (5,664) 1,982 (3,682)
----------- ----------- -----------
Balance, end of year (45,278) 15,847 (29,431)
----------- ----------- -----------
Net unrealized appreciation of investments:
Balance, beginning of year 1,005,015 (361,603) 643,412
Change during year (467,529) 163,311 (304,218)
----------- ----------- -----------
Balance, end of year 537,486 (198,292) 339,194
----------- ----------- -----------
Total other comprehensive income:
Balance, beginning of year 965,401 (347,738) 617,663
Change during year (473,193) 165,293 (307,900)
----------- ----------- -----------
Balance, end of year $ 492,208 $ (182,445) $ 309,763
=========== =========== ===========
23
CGU CORPORATION
(A WHOLLY-OWNED SUBSIDIARY OF CGNU PLC)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
- --------------------------------------------------------------------------------
1999
--------------------------------------
BEFORE TAX NET OF
TAX (EXPENSE) TAX
AMOUNT OR BENEFIT AMOUNT
------ ---------- ------
Gain (loss) on foreign currency exchange:
Balance, beginning of year $ (55,025) $ -- $ (55,025)
Change during year 15,411 13,865 29,276
----------- ----------- -----------
Balance, end of year (39,614) 13,865 (25,749)
----------- ----------- -----------
Net unrealized appreciation of investments:
Balance, beginning of year 1,840,549 (644,192) 1,196,357
Change during year (835,534) 282,589 (552,945)
----------- ----------- -----------
Balance, end of year 1,005,015 (361,603) 643,412
----------- ----------- -----------
Total other comprehensive income:
Balance, beginning of year 1,785,524 (644,192) 1,141,332
Change during year (820,123) 296,454 (523,669)
----------- ----------- -----------
Balance, end of year $ 965,401 $ (347,738) $ 617,663
=========== =========== ===========
1998
--------------------------------------
BEFORE TAX NET OF
TAX (EXPENSE) TAX
AMOUNT OR BENEFIT AMOUNT
------ ---------- ------
Gain (loss) on foreign currency exchange:
Balance, beginning of year $ (38,742) $ -- $ (38,742)
Change during year (16,283) -- (16,283)
----------- ----------- -----------
Balance, end of year (55,025) -- (55,025)
----------- ----------- -----------
Net unrealized appreciation of investments:
Balance, beginning of year 1,406,955 (492,434) 914,521
Change during year 433,594 (151,758) 281,836
----------- ----------- -----------
Balance, end of year 1,840,549 (644,192) 1,196,357
----------- ----------- -----------
Total other comprehensive income:
Balance, beginning of year 1,368,213 (492,434) 875,779
Change during year 417,311 (151,758) 265,553
----------- ----------- -----------
Balance, end of year $ 1,785,524 $ (644,192) $ 1,141,332
=========== =========== ===========
24
CGU CORPORATION
(A WHOLLY-OWNED SUBSIDIARY OF CGNU PLC)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
- --------------------------------------------------------------------------------
14. STATUTORY BASIS INFORMATION
The Company is required to file an annual statement with state insurance
regulatory authorities for each of its insurance subsidiaries prepared on
an accounting basis prescribed or permitted by such authorities
(statutory basis). Prescribed statutory accounting practices, which
differ from accounting principles generally accepted in the United States
of America in certain respects, include a variety of publications of the
National Association of Insurance Commissioners (NAIC), as well as state
laws, regulations, and general administrative rules. Permitted statutory
accounting practices encompass all accounting practices not so
prescribed.
Statutory basis information for 2000, 1999 and 1998 is as follows:
2000 1999 1998
---- ---- ----
Net income (loss) for the year $ 8,234 $ 526,311 $ (428,990)
Policyholders' surplus at December 31 $2,782,986 $3,804,229 $3,580,188
15. DIVIDEND RESTRICTIONS
The Company's ability to pay dividends to its shareholder is dependent on
receipt of dividends from its insurance subsidiaries whose shareholder
dividends are restricted by state insurance regulatory authorities.
The insurance subsidiaries are subject to state regulations which limit
by reference to each companies statutory investment income and
policyholders' surplus the dividends that can be paid to their parent
company without prior regulatory approval. Dividend restrictions vary
between the companies as determined by the laws of the domiciliary
states.
Massachusetts's statute limits the dividends an insurer may pay in any
twelve-month period, without the prior permission of The Commonwealth of
Massachusetts Insurance Commissioner, to the greater of (i) 10% of its
statutory policyholder surplus as of the preceding December 31 or (ii)
the individual company's statutory net gain from operations for the
preceding calendar year (if such insurer is a life company), or its net
income for the preceding calendar year (if such insurer is not a life
company). In addition, under Massachusetts law, no domestic insurer shall
pay a dividend or make any distribution to its shareholders from other
than unassigned funds unless the Commissioner shall have approved such
dividend or distribution.
Pursuant to Pennsylvania's statute, the maximum amount of dividends and
other distributions that an insurer may pay in any twelve-month period,
without the prior approval of the Pennsylvania Commissioner of Insurance,
is limited to the greater of (i) 10% of it's policyholders' surplus as of
the preceding December 31 or (ii) the individual company's statutory net
gain from operations for the preceding calendar year (if such insurer is
a life company) or its net income for the preceding calendar year (if
such insurer is not a life company). Any dividends to be paid by an
insurer, whether or not in excess of the aforementioned threshold, from a
source other than statutory unassigned surplus would also require the
prior approval of the Pennsylvania Commissioner of Insurance.
Under the applicable state restrictions, such subsidiaries paid dividends
of $342,288, $180,092 and $302,799 in 2000, 1999 and 1998, respectively.
25
CGU CORPORATION
(A WHOLLY-OWNED SUBSIDIARY OF CGNU PLC)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
- --------------------------------------------------------------------------------
16. CONTINGENCIES
REGULATORY AND INDUSTRY DEVELOPMENTS
Unfavorable economic conditions may contribute to an increase in the
number of insurance companies that are under regulatory supervision. This
may result in an increase in mandatory assessments by state guaranty
funds, or voluntary payments by solvent insurance companies to cover
losses to policyholders of insolvent or rehabilitated companies.
Mandatory assessments, which are subject to statutory limits, can be
partially recovered through a reduction in future premium taxes in some
states. The Company is not able to reasonably estimate the potential
effect on it of any such future assessments or voluntary payments.
LITIGATION
The Company has been named a defendant in various legal proceedings
arising in the normal course of business. In the Company's opinion, based
on the advice of legal counsel, the ultimate resolution of these
proceedings will not have a material effect on the Company's consolidated
financial statements. However, liabilities related to these proceedings
could be established in the near term if estimates of the ultimate
resolution of these proceedings are revised.
RESIDUAL MARKETS
The Company is required to participate in residual markets in various
states. The results of the residual markets are not subject to the
predictability associated with the Company's own managed business, and
are significant to the workers' compensation line of business and both
the private passenger and commercial automobile lines of business.
17. SUBSEQUENT EVENTS
During January 2001, the Company sold substantially all of its
investments in common equity securities and recognized net realized gains
of approximately $246,000.
26
EXHIBIT 99(x)
CGU CORPORATION
(A Wholly-Owned Subsidiary of CGNU plc)
Consolidated Balance Sheet
March 31, 2001
(Dollars in Thousands, except for per share amount)
- ------------------------------------------------------------------------------
2001
ASSETS
Fixed maturity investments at fair value (amortized cost $8,942,827) $ 9,047,350
Common equity securities at fair value (cost $8,218) 14,558
Preferred equity securities at fair value (cost $116,414) 144,500
Short-term investments, at amortized cost (which approximates fair value) 159,726
Other Investments 47,326
-------------------
Total investments 9,413,460
Cash 52,138
Insurance balances receivable 1,294,501
Reinsurance recoverable on paid and unpaid losses 1,587,291
Deferred policy acquisition costs 341,638
Investment income accrued 90,536
Net deferred federal income taxes 261,895
Other assets 559,001
Net assets of discontinued operations 508,000
-------------------
Total assets $ 14,108,460
-------------------
LIABILITIES
Loss and loss adjustment expense reserves $ 6,925,527
Unearned insurance premiums 1,926,041
Long-term debt 1,103,150
Net deferred federal income taxes -
Accounts payable and other liabilities 985,654
-------------------
Total liabilities 10,940,372
-------------------
SHAREHOLDERS' EQUITY
Common Stock, $1.00 par value; authorized 100,000 shares, 16,022 shares outstanding 16
Additional paid-in capital 753,200
Retained earnings 2,308,836
Accumulated other comprehensive income 106,036
-------------------
Total shareholders' equity 3,168,088
-------------------
Total liabilities and shareholders' equity $ 14,108,460
-------------------
CGU CORPORATION
(A Wholly-Owned Subsidiary of CGNU plc)
Consolidated Statements of Income and Comprehensive Income
For the Three Months Ended March 31, 2001 and 2000
(Dollars in Thousands)
- ------------------------------------------------------------------------------
2001 2000
REVENUES:
Earned insurance premiums $ 1,043,088 $ 1,065,421
Net investment income 123,947 122,644
Net realized gains from investment securities and other investments 402,171 21,147
-------------------- -------------------
Total revenues 1,569,206 1,209,212
-------------------- -------------------
EXPENSES:
Losses and loss adjustment expenses 814,322 765,771
Underwriting and other operating expenses 435,863 339,225
-------------------- -------------------
Total expenses 1,250,185 1,104,996
-------------------- -------------------
Pretax Earnings 319,022 104,216
Federal income tax provision (129,872) (24,062)
-------------------- -------------------
Net income from continuing operations 189,149 80,154
Income from discontinued operations - 7,234
Loss on disposal of discontinued operations (16,040) -
-------------------- -------------------
NET INCOME 173,109 87,388
Other comprehensive income, net of tax;
Increase (decrease) in net unrealized appreciation of investments (196,155) 91,110
Loss on foreign currency exchange (7,572) (1,763)
-------------------- -------------------
COMPREHENSIVE NET INCOME (LOSS) $ (30,618) $ 176,735
-------------------- -------------------
CGU CORPORATION
(A Wholly-Owned Subsidiary of CGNU plc)
Consolidated Statements of Cash Flows
For the Three Months Ended March 31, 2001 and 2000
(Dollars in Thousands)
- -------------------------------------------------------------------------------
2001 2000
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 173,109 $ 87,388
Adjustments to reconcile net income to net
cash provided by operating activities:
Loss on disposal of discontinued operations 16,040 -
Net income from discontinued operations - (7,234)
Amortization of bond premium and discount (26,502) (377)
Net realized gains from investment securities
and other assets (402,171) (21,147)
Depreciation and amortization 6,703 6,752
Deferred federal income taxes (34,174) (4,423)
Change in operating assets and liabilities:
Reinsurance recoverable on paid and unpaid losses 263,683 56,675
Deferred policy acquisition costs 79,172 (4,487)
Loss and loss adjustment expense reserves (57,201) (198,402)
Unearned insurance premiums (116,427) 13,658
Insurance balances receivable (167,753) (109,588)
Net change in other assets and liabilities 128,382 (31,964)
-------------- --------------
Net cash used by operating activities (137,139) (213,149)
-------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of investments:
Fixed maturity investments (3,467,644) (1,246,646)
Common equity securities (24,677) (259,414)
Preferred equity securities - -
Net increase in short-term investments 161,447 180,944
Net increase in other invested assets 51,426 1,912
Proceeds from the sales of investments:
Fixed maturity investments 2,619,859 1,296,459
Common equity securities 733,438 282,030
Preferred equity securities 100 1,535
Maturities of fixed maturity investments 90,190 73,085
Purchases of equipment, net (2,195) (2,639)
Development of computer software (7,743) (8,118)
-------------- --------------
Net cash provided by investing activities 154,201 319,148
-------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Long-term debt (10,750) -
-------------- --------------
Net cash used by financing activities (10,750) -
-------------- --------------
Net increase in cash 6,312 105,999
Cash and cash equivalents, beginning of period 45,826 50,800
-------------- --------------
Cash and cash equivalents, end of period $ 52,138 $ 156,799
-------------- --------------
EXHIBIT 99(y)
WHITE MOUNTAINS INSURANCE GROUP, LTD.
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION
INTRODUCTION
On June 1, 2001, White Mountains Insurance Group, Ltd. (the "Company",
collectively with its subsidiaries "White Mountains") acquired the U.S.
property and casualty operations (known as "CGU") of London-based CGNU plc.
("CGNU") for $2.1 billion, of which $260.0 million consisted of a convertible
note payable (the "Seller Note") with the balance paid in cash.
The pro forma adjustments presented herein have been segregated as being made
either in connection with the financing of the acquisition of CGU (the
"Financing") or in connection with the acquisition of CGU (the "Acquisition").
THE FINANCING
DEBT TENDER AND DEBT ESCROW TRANSACTIONS
In connection with the Acquisition, the Company completed a tender offer and
consent solicitation for $96.3 million in outstanding medium-term notes (the
"Debt Tender") which facilitated the Acquisition by amending the indenture
governing the notes. Pursuant to the Debt Tender, the Company repurchased and
retired $90.9 million of its medium-term notes and subsequently prepaid, in
the form of a fully-funded irrevocable escrow arrangement (the "Debt
Escrow"), the balance of the outstanding medium-term notes.
EQUITY FINANCING
On June 1, 2001, a small group of private investors purchased $437.6 million
of a newly-issued class of non-voting convertible preference shares of the
Company (the "Convertible Preference Shares"). The Convertible Preference
Shares bear a dividend of 1% per year and will be automatically converted (at
a conversion price of approximately $200.00 per share) into 2,184,583 common
shares upon approval of the conversion by the Company's shareholders. If
shareholder approval has not been obtained prior to March 31, 2003, each
holder of Convertible Preference Shares will thereafter have the right to
require the Company to repurchase the Convertible Preference Shares on an "as
converted" basis at the then-current price of a common share. Since the
market value of the Company's common shares at June 1, 2001 ($346.00 per
common share) exceeded the private investors' cost of the Convertible
Preference Shares (approximately $200.00 per common share), this instrument
is deemed to have a beneficial conversion feature. This determination
requires that the Convertible Preference Shares be marked-to-market, by an
adjustment to retained earnings until the date the Convertible Preference
Shares are converted to permanent common equity (which will occur upon
shareholder approval, if and when such approval is obtained).
On June 1, 2001, Berkshire Hathaway, Inc. ("Berkshire") purchased from the
Company, for $75.0 million in cash, warrants (the "Warrants") to acquire
1,714,285 common shares at an exercise price of $175.00 per share. Of the
total Warrants purchased by Berkshire, Warrants to purchase 1,170,000 common
shares (the "Series A Warrants") were immediately exercisable and Warrants to
purchase approximately 544,285 common shares (the "Series B Warrants") will
become exercisable upon approval by shareholders. Shareholder approval will
be sought at the same time as approval of the conversion of Convertible
Preference Shares is sought. If shareholder approval has not been obtained by
March 31, 2003, Berkshire will thereafter have the right to require the
Company to repurchase the Series B Warrants at a price per Series B Warrant
equal to the then-current market price per common share less $175.00. The
Warrants have a term of seven years from the date of issuance although the
Company has the right to call the Warrants for $60.0 million in cash
commencing on the fourth anniversary of their issuance. Since the Series B
Warrants do not yet represent common equity to the Company, they constitute a
contingent put liability (similar in nature to a stock appreciation right)
which will be carried at fair value through a periodic charge or credit to
the income statement. The Series B Warrants will become permanent common
equity upon shareholder approval, if and when such approval is obtained.
On June 1, 2001, Berkshire also purchased for $225.0 million, $300.0 million
in face value of cumulative non-voting preferred stock (the "Berkshire
Preferred Stock") of a subsidiary of the Company. The Berkshire Preferred
Stock is entitled to a 2.35475% dividend per quarter and is mandatorily
redeemable after seven years. The Berkshire Preferred Stock represents
subsidiary preferred stock which is considered to be minority interest in the
Company's consolidated financial statements.
On June 1, 2001, Zenith Insurance Company purchased $20.0 million in
cumulative non-voting preferred stock (the "Zenith Preferred Stock") of a
subsidiary of the Company. The Zenith Preferred Stock is entitled to a 2.5%
dividend per quarter through June 30, 2007 and a 3.5% dividend thereafter and
is mandatorily redeemable after ten years. The Zenith Preferred Stock
represents subsidiary preferred stock which is considered to be minority
interest in the Company's consolidated financial statements.
BANK FINANCING
On June 1, 2001, a subsidiary of the Company borrowed $700.0 million in term
loans and $125.0 million in revolving loans (of a $175.0 million revolving
loan facility) from a banking syndicate arranged by Lehman Brothers Inc.
(collectively the "Lehman Facility"). The term loans are repayable in
quarterly installments with a final maturity on the sixth anniversary of the
closing date. The revolving loan facility is available on a revolving basis
from the closing date until the fifth anniversary of the closing. The loans
are variable rate instruments which are currently tied to a rate based on the
three-month eurodollar rate.
THE ACQUISITION
SIGNIFICANT REINSURANCE CONTRACTS
Immediately prior to the Acquisition, CGU entered into reinsurance agreements
with National Indemnity Company (the "NICO Cover") and General Re Corporation
(the "GRC Cover") which provide CGU with significant reinsurance protections
against unanticipated increases in recorded reserves for insurance losses and
loss adjustment expenses. The NICO Cover provides up to $2.5 billion of
protection against CGU's asbestos, environmental and certain other latent
exposures. The GRC Cover provides for up to $400.0 million in excess of loss
reinsurance protection against adverse development on accident year 2000 and
prior losses.
SELLER NOTE
On June 1, 2001, White Mountains issued the Seller Note to CGNU. The Seller
Note has an 18 month term and bears interest at a rate equal to 50 basis
points over the rate on White Mountains' revolving loan facility described
above. The Seller Note may be settled in cash, or at White Mountains' option,
with common shares valued at $245.00 per share. White Mountains has
classified this obligation as debt since management believes it has the
ability to settle this obligation in a form other than pursuant to the Note
Purchase Option Agreement which governs the Seller Note.
PRECLOSING TRANSACTIONS WITH CGNU
On June 1, 2001, CGU repaid $1.1 billion in intercompany debt to CGNU with
proceeds from the sale of CGU's life insurance and Canadian operations to
CGNU, the sale of certain other assets to CGNU and available cash. In
addition, CGNU made a $200.0 million cash contribution to CGU immediately
prior to the Acquisition.
UNAUDITED PRO FORMA FINANCIAL INFORMATION
The following unaudited pro forma condensed combined income statements of
White Mountains for the year ended December 31, 2000 and the three-months
ended March 31, 2001 present results for White Mountains as if the
acquisition of CGU and certain recurring transactions and adjustments related
to the acquisition had occurred as of January 1, 2000. The accompanying
unaudited pro forma condensed combined balance sheet of White Mountains as of
March 31, 2001 presents White Mountains' financial position as if the
acquisition of CGU had occurred on March 31, 2001.
The Acquisition will be accounted for by the purchase method of accounting
and, therefore, the assets and liabilities of CGU will be recorded at their
fair values at June 1, 2001. The unaudited pro forma financial information is
provided for informational purposes only. The unaudited pro forma financial
information does not purport to represent what White Mountains' financial
position or results of operations actually would have been had the
Acquisition in fact occurred as of the dates indicated, or to project White
Mountains' financial position or results of operations for any future date or
period. The pro forma adjustments are based on available information and
assumptions that the Company currently believes are reasonable under the
circumstances and that are considered to be material to the overall pro forma
presentation. The unaudited pro forma financial information should be read in
conjunction with White Mountains' Annual Report on Form 10-K for the year
ended December 31, 2000, White Mountains' Quarterly Report on Form 10-Q for
the period ended March 31, 2001, CGU's audited consolidated financial
statements for the years ended December 31, 2000, 1999 and 1998 which are
enclosed herein as Exhibit 99(w) and CGU's unaudited consolidated balance
sheet as of March 31, 2001 and CGU's unaudited income statements and
statements of cash flows for the three-month periods ended March 31, 2001 and
2000, which are enclosed herein as Exhibit 99(x).
WHITE MOUNTAINS INSURANCE GROUP, LTD.
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
MARCH 31, 2001
(in millions of dollars)
Pro Forma
White Adjustments for
Mountains CGU the Financing Notes
----------------- ------------------ ----------------- ------
ASSETS
Total investments and cash $ 2,076.1 $ 9,466.6 $ (103.3) A
300.0 B
825.0 C
20.0 D
437.6 E
Reinsurance recoverable on paid and unpaid losses 806.2 1,587.3
Federal income tax assets 118.4 261.9
Insurance and reinsurance balances receivable 103.0 1,294.5
Deferred acquisition costs 29.4 341.6
Net assets of discontinued operations - 508.0
Other assets 455.8 648.6 5.9 A
----------------- ------------------ -----------------
TOTAL ASSETS $ 3,588.9 $ 14,108.5 $ 1,485.2
================= ================== =================
LIABILITIES
Loss and loss adjustment expense reserves $ 1,549.2 $ 6,822.9
Funds held under insurance and reinsurance treaties 450.1 102.8
Unearned insurance and reinsurance premiums 192.9 1,926.0
Debt 96.0 1,103.1 $ (90.9) A
825.0 C
Deferred credits 83.5 -
Other liabilities 176.2 985.6 (1.7) A
111.7 B
----------------- ------------------ -----------------
TOTAL LIABILITIES 2,547.9 10,940.4 844.1
----------------- ------------------ -----------------
CONVERTIBLE PREFERENCE SHARES - - 755.8 E
MINORITY INTEREST - SUBSIDIARY PREFERRED STOCK - - 145.2 B
20.0 D
SHAREHOLDERS' EQUITY 1,041.0 3,168.1 (4.8) A
105.7 B
(62.6) B
(318.2) E
----------------- ------------------ -----------------
TOTAL SHAREHOLDERS' EQUITY 1,041.0 3,168.1 (279.9)
TOTAL LIABILITIES, CONVERTIBLE PREFERENCE SHARES,
MINORITY INTEREST AND SHAREHOLDERS' EQUITY $ 3,588.9 $ 14,108.5 $ 1,485.2
================= ================== =================
Book value per common and common equivalent share (Note M)
See the accompanying notes to the unaudited pro forma condensed combined
financial statements.
Pro Forma
Adjustments for Pro Forma
the Acquisition Notes Combined
----------------- ------- -----------------
ASSETS
Total investments and cash $ (463.5) G
(1,114.8) H
(275.0) I
(1,843.3) J
$ 9,325.4
Reinsurance recoverable on paid and unpaid losses 747.6 H
105.0 I
(352.1) J 2,894.0
Federal income tax assets 128.5 H
36.7 I
(65.5) J 480.0
Insurance and reinsurance balances receivable (42.0) J 1,355.5
Deferred acquisition costs 371.0
Net assets of discontinued operations (508.0) G -
Other assets (246.7) J
(9.6) J
(29.9) J 824.1
----------------- -----------------
TOTAL ASSETS $ (3,932.6) $ 15,250.0
================= =================
LIABILITIES
Loss and loss adjustment expense reserves $ (652.1) J
105.0 I $ 7,825.0
Funds held under insurance and reinsurance treaties 552.9
Unearned insurance and reinsurance premiums 2,118.9
Debt (1,100.0) G
260.0 J 1,093.2
Deferred credits 755.3 J 838.8
Other liabilities (71.5) G
(170.0) I
108.8 J 1,139.1
----------------- -----------------
TOTAL LIABILITIES (764.5) 13,567.9
----------------- -----------------
CONVERTIBLE PREFERENCE SHARES 755.8
MINORITY INTEREST - SUBSIDIARY PREFERRED STOCK
165.2
SHAREHOLDERS' EQUITY 200.0 G
(238.7) H
(68.3) I
(3,061.1) J 761.1
----------------- -----------------
TOTAL SHAREHOLDERS' EQUITY (3,168.1) 761.1
TOTAL LIABILITIES, CONVERTIBLE PREFERENCE SHARES,
MINORITY INTERESTY AND SHAREHOLDERS' EQUITY $ (3,932.6) $ 15,250.0
================= =================
Book value per common and common equivalent share (Note M)
See the accompanying notes to the unaudited pro forma condensed combined
financial statements.
WHITE MOUNTAINS INSURANCE GROUP, LTD.
UNAUDITED PRO FORMA CONDENSED COMBINED INCOME STATEMENT
FOR THE THREE MONTHS ENDED MARCH 31, 2001
(IN MILLIONS OF DOLLARS, EXCEPT SHARE AND PER SHARE DATA)
Pro Forma Pro Forma
Adjustments Adjustments
White the for the for
REVENUES Mountains CGU Financing Notes Acquisition Notes
---------- ---------- ----------- ----- ----------- -----
Earned insurance and reinsurance premiums $ 97.7 $ 1,043.1
Net realized gains on investment securities 21.4 402.2
Net investment income 24.0 123.9 $ (4.5) F $ (17.9) G
(18.5) H
(4.5) I
Other revenues 11.2 - 27.0 J
---------- ---------- ----------- -----------
TOTAL REVENUES 154.3 1,569.2 (4.5) (13.9)
EXPENSES
Losses and loss adjustment expenses 90.2 814.3
Insurance and reinsurance acquisition expenses 23.0 263.9
General and administrative expenses 23.2 154.0 3.2 K
Accretion of discounted loss reserves - - 22.5 J
Interest expense 1.9 17.9 (1.8) A (17.9) G
16.8 C 5.7 J
---------- ---------- ----------- -----------
TOTAL EXPENSES 138.3 1,250.1 15.0 13.5
---------- ---------- ----------- -----------
PRETAX EARNINGS 16.0 319.1 (19.5) (27.4)
Income tax benefit (provision) 1.1 (129.9) 5.9 C 6.5 H
1.6 I
7.9 J
1.1 K
Minority interest:
Accretion of subsidiary preferred stock to face value - - (2.4) B
Dividends on subsidiary preferred stock - - (7.1) B
(0.5) D
---------- ---------- ----------- -----------
NET INCOME FROM CONTINUING OPERATIONS 17.1 189.2 (23.6) (10.3)
Dividends on preference shares - - (1.1) E -
---------- ---------- ----------- -----------
NET INCOME FROM CONTINUING OPERATIONS
AVAILABLE TO COMMON SHAREHOLDERS $ 17.1 $ 189.2 $ (24.7) $ (10.3)
========== ========== =========== ===========
Earnings per Common Share (Note L):
Average shares used in computing basic earnings per share 5,880,115
Basic earnings per common share:
Net income from continuing operations $ 2.91
Average shares used in computing diluted earnings per share 5,931,337
Diluted earnings per common share:
Net income from continuing operations $ 2.88
Pro Forma
REVENUES Combined
-----------
Earned insurance and reinsurance premiums $ 1,140.8
Net realized gains on investment securities 423.6
Net investment income
102.5
Other revenues 38.2
-----------
TOTAL REVENUES 1,705.1
EXPENSES
Losses and loss adjustment expenses 904.5
Insurance and reinsurance acquisition expenses 286.9
General and administrative expenses 180.4
Accretion of discounted loss reserves 22.5
Interest expense
22.6
-----------
TOTAL EXPENSES 1,416.9
-----------
PRETAX EARNINGS 288.2
Income tax benefit (provision)
(105.8)
Minority interest:
Accretion of subsidiary preferred stock to face value (2.4)
Dividends on subsidiary preferred stock
(7.6)
-----------
NET INCOME FROM CONTINUING OPERATIONS 172.4
Dividends on preference shares (1.1)
-----------
NET INCOME FROM CONTINUING OPERATIONS
AVAILABLE TO COMMON SHAREHOLDERS $ 171.3
===========
Earnings per Common Share (Note L):
Average shares used in computing basic earnings per share 5,880,115
Basic earnings per common share:
Net income from continuing operations $ 29.13
Average shares used in computing diluted earnings per share 8,967,901
Diluted earnings per common share:
Net income from continuing operations $ 19.22
See the accompanying notes to the unaudited pro forma
condensed combined financial statements.
5
WHITE MOUNTAINS INSURANCE GROUP, LTD.
UNAUDITED PRO FORMA CONDENSED COMBINED INCOME STATEMENT
FOR THE YEAR ENDED DECEMBER 31, 2000
(IN MILLIONS OF DOLLARS, EXCEPT SHARE AND PER SHARE DATA)
Pro Forma Pro Forma
Adjustments Adjustments
White for the for the
REVENUES Mountains CGU Financing Notes Acquisition Notes
---------- ----------- ----------- -------- ------------ -----
Earned insurance and reinsurance premiums $ 334.4 $ 4,275.0
Net realized gains (losses) on investment securities (8.4) 732.8
Net investment income 85.9 504.9 $ (20.0) F (71.5) G
(76.0) H
(17.9) I
Gains on sales of subsidiaries and other assets 385.8 -
Other revenues 50.5 - 107.9 J
---------- ----------- ---------- -----------
TOTAL REVENUES $ 848.2 $ 5,512.7 $ (20.0) $ (57.5)
EXPENSES
Losses and loss adjustment expenses $ 287.7 $ 4,302.0
Insurance and reinsurance acquisition expenses 101.1 1,030.5
General and administrative expenses 87.9 395.7 12.7 K
Accretion of discounted loss reserves - - 90.0 J
Interest expense 16.1 71.5 (7.2) A (71.5) G
73.8 C 24.7 J
Share appreciation expense - contingent warrants - - 62.6 B
---------- ----------- ---------- -----------
TOTAL EXPENSES 492.8 5,799.7 129.2 55.9
---------- ----------- ---------- -----------
PRETAX EARNINGS (LOSS) 355.4 (287.0) (149.2) (113.4)
Income tax benefit (provision) (42.5) 83.3 25.8 C 26.6 H
6.3 I
31.5 J
4.4 K
Minority interest:
Accretion of subsidiary preferred stock to face value - - (10.7) B -
Dividends on subsidiary preferred stock - - (28.3) B
(2.0) D
---------- ----------- ---------- -----------
NET INCOME (LOSS) FROM CONTINUING OPERATIONS 312.9 (203.7) (164.4) (44.6)
-
Redemption adjustment - Convertible Preference Shares - - (318.2) E -
Dividends on preference shares - - (4.4) E -
---------- ----------- ---------- -----------
NET INCOME (LOSS) FROM CONTINUING OPERATIONS
AVAILABLE TO COMMON SHAREHOLDERS $ 312.9 $ (203.7) $ (487.0) $ (44.6)
========== =========== ========== ===========
Earnings per Common Share (Note L):
Average shares used in computing basic earnings per share 5,894,875
Basic earnings (loss) per common share:
Net income (loss) from continuing operations $ 53.08
Average shares used in computing diluted earnings per share 5,920,625
Diluted earnings (loss) per common share:
Net income (loss) from continuing operations $ 52.84
Pro Forma
REVENUES Combined
------------
Earned insurance and reinsurance premiums $ 4,609.4
Net realized gains (losses) on investment securities 724.4
Net investment income
405.4
Gains on sales of subsidiaries and other assets 385.8
Other revenues 158.4
-------------
TOTAL REVENUES $ 6,283.4
EXPENSES
Losses and loss adjustment expenses $ 4,589.7
Insurance and reinsurance acquisition expenses 1,131.6
General and administrative expenses 496.3
Accretion of discounted loss reserves 90.0
Interest expense
107.4
Share appreciation expense - contingent warrants 62.6
-------------
TOTAL EXPENSES 6,477.6
-------------
PRETAX EARNINGS (LOSS) (194.2)
Income tax benefit (provision)
135.4
Minority interest:
Accretion of subsidiary preferred stock to face value (10.7)
Dividends on subsidiary preferred stock
(30.3)
-------------
NET INCOME (LOSS) FROM CONTINUING OPERATIONS (99.8)
Dividends on preference shares (318.2)
Dividends on preference shares (4.4)
-------------
NET INCOME (LOSS) FROM CONTINUING OPERATIONS
AVAILABLE TO COMMON SHAREHOLDERS $ (422.4)
=============
Earnings per Common Share (Note L):
Average shares used in computing basic earnings per share 5,894,875
Basic earnings (loss) per common share:
Net income (loss) from continuing operations $ (71.66)
Average shares used in computing diluted earnings per share 5,894,875
Diluted earnings (loss) per common share:
Net income (loss) from continuing operations $ (71.66)
See the accompanying notes to the unaudited pro forma
condensed combined financial statements.
6
WHITE MOUNTAINS INSURANCE GROUP, LTD.
NOTES TO UNAUDITED PRO FORMA CONDENSED
COMBINED FINANCIAL STATEMENTS
ADJUSTMENTS RELATING TO THE FINANCING
The pro forma Financing adjustments, as they relate to the unaudited pro
forma condensed combined balance sheet and statements of income, are
described below.
(A) Pursuant to the Debt Tender, the Company repurchased and retired the
majority of its medium-term notes and subsequently prepaid, through the Debt
Escrow, the balance of its outstanding medium-term notes. Total cash paid
pursuant to the Debt Tender and the Debt Escrow was $103.3 MILLION, which is
comprised of a payment of $95.4 million to retire $90.9 MILLION in net
principal amount of medium-term notes acquired under the Debt Tender, $5.9
MILLION in principal and interest prepaid under the Debt Escrow, $1.7 MILLION
in accrued interest, and $.3 million in expenses.
A $4.8 MILLION loss on early extinguishment of debt resulted from the Debt
Tender, which represented a $4.5 million premium paid pursuant to the Debt
Tender plus expenses of $.3 million. The $1.8 MILLION and $7.2 MILLION
reductions in interest expense presented on the pro forma income statements
for the periods ended March 31, 2001 and December 31, 2000, respectively,
represent interest expense on medium-term notes retired under the Debt Tender.
The medium-term notes are an obligation of the Company which is domiciled in
Bermuda. As a result, no Federal income tax benefit or provision was recorded
for these transactions.
(B) On June 1, 2001, White Mountains received a total of $300.0 MILLION in
cash from Berkshire in full payment for the Berkshire Preferred Stock and the
Warrants. The total proceeds received were allocated to each instrument based
on their relative estimated fair values at the date of acquisition. As a
result, $145.2 MILLION of such proceeds were allocated to the Berkshire
Preferred Stock and $154.8 million of such proceeds were allocated to the
Warrants. Of the amount initially allocated to the Warrants, a further
allocation was made among the Series A Warrants and the Series B Warrants of
$49.1 million and $105.7 MILLION, respectively, based on the relative number
of Warrants in each series. Since the Series B Warrants do not yet represent
equity to the Company, they have been classified as a liability recorded at
their estimated fair value which was determined to be $111.7 MILLION. The
estimated fair values attributed to the Warrants were determined using the
Black Scholes option pricing model.
Share appreciation expense relating to the Series B Warrants of $62.6 MILLION
recorded on the December 31, 2000 pro forma income statement represents the
excess of the estimated fair value of the Series B Warrants of $111.7 million
over the purchase price allocation to the Series B Warrants of $49.1 million.
This treatment assumes that shareholder approval did not occur during this
period. Upon shareholder approval, the estimated fair value of the Series B
Warrants recorded as a liability will be reclassed to shareholders' equity
($111.7 million as of the date of the Acquisition).
The Warrants are an obligation of the Company which is domiciled in Bermuda.
As a result, no Federal income tax benefit or provision was recorded for the
Warrants.
Berkshire Preferred Stock dividends of $7.1 MILLION and $28.3 MILLION
recorded for the periods ended March 31, 2001 and December 31, 2000,
respectively, represent regular dividends on the Berkshire Preferred Stock.
Accretion of subsidiary preferred stock to face value of $2.4 MILLION and
$10.7 MILLION recorded for the periods ended March 31, 2001 and December 31,
2000, respectively, represent accretion on the Berkshire Preferred Stock
which is required to transition the Berkshire Preferred Stock's recorded
value (initially $145.2 million) to its face value of $300.0 million over the
instrument's seven-year term. The accretion was determined using the interest
method of amortization.
(C) On June 1, 2001, a subsidiary of the Company borrowed $825.0 MILLION
pursuant to the Lehman Facility. For the periods ended March 31, 2001 and
December 31, 2000, interest expense on the Lehman Facility was $16.8 MILLION and
$73.8 MILLION, respectively. The Lehman Facility is an obligation of a
subsidiary of the Company which is domiciled in the United States. As a result,
a Federal income tax benefit of $5.9 MILLION and $25.8 MILLION, for the periods
ended March 31, 2001 and December 31, 2000, respectively, were recorded for
these transactions.
(D) On June 1, 2001, a subsidiary of the Company received a total of $20.0
MILLION in cash from Zenith Insurance Company in full payment for the Zenith
Preferred Stock. Zenith Preferred Stock dividends of $.5 MILLION and $2.0
MILLION, recorded for the periods ended March 31, 2001 and December 31, 2000,
respectively, represent regular dividends on the Zenith Preferred Stock.
(E) On June 1, 2001, the Company received a total of $437.6 MILLION in cash from
a small group of private investors in full payment for the Convertible
Preference Shares. Due to the beneficial conversion feature inherent in the
Convertible Preference Shares that existed on the date of purchase, the $318.2
MILLION difference between the $755.8 MILLION market value of the underlying
common shares at the date of purchase and the $437.6 million purchase price
represents a charge to retained earnings which is included in the Company's
determination of net income or loss available to common shareholders and
earnings or loss per share.
Convertible Preference Share dividends of $1.1 MILLION and $4.4 MILLION
recorded for the periods ended March 31, 2001 and December 31, 2000,
respectively, represent regular dividends on Convertible Preference Shares
which assumes that shareholder approval did not occur during such periods.
Upon shareholder approval, the estimated fair value of the Convertible
Preference Shares will be reclassed from "mezzanine" equity to shareholders'
equity ($755.8 million as of the date of the Acquisition).
(F) The Company utilized $364.0 million of its cash on hand to fund the
Acquisition, the Debt Tender, the Debt Escrow and related expenses. The
Company estimates that it earned $4.5 MILLION and $20.0 MILLION, for the
periods ended March 31, 2001 and December 31, 2000, respectively, on such
balances which were held in the form of short-term investments.
Cash on hand used to fund the Acquisition was previously held at a subsidiary
of the Company which is domiciled in Barbados. As a result, no Federal income
tax benefit or provision was recorded for this transaction.
ADJUSTMENTS RELATING TO THE ACQUISITION
The pro forma Acquisition adjustments, as they relate to the unaudited pro
forma condensed combined balance sheet and statements of income, are
described below.
(G) CGU paid $463.5 MILLION of net cash to CGNU immediately prior to the
Acquisition which consisted of: (1) the repayment of $1,100.0 MILLION of
intercompany indebtedness plus $71.5 million of accrued interest thereon; (2)
the receipt of a $200.0 MILLION capital contribution; and (3) the receipt of
$508.0 MILLION in proceeds from the sale of its discontinued life insurance
and Canadian property and casualty operations.
The $17.9 MILLION and $71.5 MILLION reductions in net investment income and
interest expense recorded on the pro forma income statements for the periods
ended March 31, 2001 and December 31, 2000, respectively, resulted from the
repayment of the CGNU intercompany note. The yield of 6.5% on the CGNU
intercompany note approximated CGU's historical pre-tax yield on its fixed
maturity portfolio during the periods.
(H) Effective June 1, 2001, in accordance with a provision in the CGU
purchase and sale agreement, CGNU caused CGU to purchase the NICO Cover for
total consideration of $1,322.3 million. This was comprised of $1,114.8
MILLION in cash and an assignment of $207.5 million in reinsurance
recoverables related to covered claims. The NICO Cover, which was contingent
on, and occurred contemporaneously with the Acquisition, qualifies for
prospective reinsurance accounting treatment under the Emerging Issues Task
Force Technical Matter Document No. D-54 ("EITF Topic D-54") which
characterizes the protection as an indemnification by the seller for
increases in the liabilities for losses and loss adjustment expenses that
existed at the acquisition date. Pursuant to the NICO Cover, a $747.6 MILLION
reinsurance recoverable was recorded which is represented by ceded loss and
loss adjustment expense reserves of $955.1 million less $207.5 million of
reinsurance recoverables assigned.
A $367.2 million pretax loss ($238.7 MILLION after tax) from the NICO Cover
resulted from recording ceded premiums of $1,322.3 million, less ceded loss
and loss adjustment expenses of $955.1 million. A Federal income tax benefit
of $128.5 MILLION is reflected as a deferred tax asset on the March 31, 2001
pro forma balance sheet. The net loss recorded on the NICO Cover of $238.7
million reflected on the March 31, 2001 pro forma balance sheet represents
the after tax excess of premiums paid to NICO over net ceded reserves.
The NICO Cover had an inception date of January 1, 2000 but was not consummated
until June 1, 2001. During the intervening period, the base transaction premium
was adjusted for losses and loss adjustment expenses paid, reinsurance
recoverable claims received, salvage and subrogation recoveries and an interest
charge due to NICO, which was based on the average adjusted base transaction
premium. Ceded premiums of $1,318.2 million and ceded losses and loss adjustment
expenses of $985.9 million recognized under the NICO Cover resulted in a pretax
loss of $332.3 million ($216.0 million after tax) on OneBeacon's income
statement immediately prior to the Acquisition. This material non-recurring
charge has been excluded from the pro forma income statements presented. CGU
estimates that it earned $18.5 MILLION and $76.0 MILLION for the periods ended
March 31, 2001 and December 31, 2000, respectively, on the cash used to pay NICO
based on CGU's historical pre-tax yield on its fixed maturity portfolio of
approximately 6.5%. These amounts constitute recurring charges that have been
included in the pro forma income statements presented. As a result, a Federal
income tax benefit of $6.5 MILLION and $26.6 MILLION, for the periods ended
March 31, 2001 and December 31, 2000, respectively, was recorded for these
transactions.
(I) Effective June 1, 2001, in accordance with a provision in the CGU
purchase and sale agreement, CGNU caused CGU to purchase the GRC Cover for
total consideration of $275.0 MILLION in cash. The GRC Cover, which was
contingent on, and occurred contemporaneously with the Acquisition, qualifies
for prospective reinsurance accounting treatment under the EITF Topic D-54
which characterizes the protection as an indemnification by the seller for
increases in the liabilities for losses and loss adjustment expenses that
existed at the acquisition date. In connection with the execution of the GRC
Cover, CGU commuted an existing reinsurance contract with an affiliated
reinsurer (the "Commutation"). Under the terms of the Commutation,
reinsurance recoverables of approximately $170.0 million were settled through
the reduction of an existing $170.0 MILLION intercompany payable to the
affiliate. Pursuant to the GRC Cover, CGU obtained $400.0 million of adverse
development coverage and ceded $170.0 million of loss reserves. Management
has estimated that approximately $105.0 MILLION of adverse loss reserves
development subject to the GRC Cover has occurred. Accordingly, this amount
has been recorded as an increase in loss and loss adjustment expense reserves
which is offset by a corresponding increase in reinsurance recoverable from
GRC.
A $105.0 million pretax loss ($68.3 MILLION after tax) from the GRC Cover
reflected on the March 31, 2001 pro forma balance sheet represents after tax
adverse loss development. A Federal income tax benefit of $36.7 MILLION is
reflected as a deferred tax asset on the March 31, 2001 pro forma balance
sheet.
Ceded premiums of $187.7 million and ceded losses and loss adjustment expenses
of $82.7 million recognized under the GRC Cover resulted in a pretax loss of
$105.0 million ($68.3 million after tax) on OneBeacon's income statement
immediately prior to the Acquisition. This material non-recurring charge has
been excluded from the pro forma income statements presented. CGU estimates that
it earned $4.5 MILLION and $17.9 MILLION for the periods ended March 31, 2001
and December 31, 2000, respectively, on the cash used to pay GRC which was held
in the form of fixed income investments. These amounts constitute recurring
charges and have been included in the pro forma income statements presented. As
a result, a Federal income tax benefit of $1.6 MILLION and $6.3 MILLION, for the
periods ended March 31, 2001 and December 31, 2000 respectively, was recorded
for these transactions.
(J) The Acquisition will be accounted for by the purchase method of
accounting in accordance with the treatment of a purchase business
combination under Accounting Principles Board Opinion ("APB") 16, "Business
Combinations." and, therefore, the assets and liabilities of CGU will be
recorded at their estimated fair values at June 1, 2001. The preliminary
adjustments to record the assets and liabilities of CGU to their estimated
fair values and to allocate the excess of such estimated fair values of the
net assets acquired over the purchase price follow. Such values were
determined using management's best estimate.
DETERMINATION OF PURCHASE PRICE (in millions)
Total purchase price paid in cash $ 1,811.9
Acquisition expenses incurred and paid from April 1, 2001 through closing 31.4
-----------------
Total cash paid 1,843.3
Seller Note issued to CGNU 260.0
Acquisition expenses incurred and paid through March 31, 2001 9.6
-----------------
Total purchase price $ $2,112.9
=================
ALLOCATION OF PURCHASE PRICE
Net book value of CGU at March 31, 2001 $ 3,168.1 1
Total purchase price (2,112.9)
Adjustments to net book value described in notes (G), (H) and (I) (107.0) 1
ADJUSTMENTS TO REFLECT THE ESTIMATED FAIR VALUE OF ASSETS AND LIABILITIES ASSUMED:
Loss and loss adjustment expense reserves 652.1
Reinsurance recoverable (352.1)
Insurance balances receivable (42.0)
Amounts recorded in other assets:
Employee benefit plans (29.9)
Miscellaneous other (.2) 2
Amounts recorded in other liabilities:
Recognition of liabilities in connection with the Acquisition (185.3) 3
Employee benefit plans (55.3) 3
Reclassification of current tax payable to deferred taxes 145.3 3
Miscellaneous other (13.5) 3
ADJUSTMENTS TO REDUCE THE CARRYING VALUE OF NON-CURRENT, NON-FINANCIAL ASSETS:
Amounts recorded in other assets:
Property, plant and equipment (187.0) 2
Miscellaneous other (14.8) 2
Goodwill and intangible assets (44.7) 2
Net Federal deferred and current taxes relating to purchase accounting adjustments (65.5)
-----------------
RESULTING DEFERRED CREDIT $ 755.3
===================
1 The sum of these items equals the $3,061.1 MILLION elimination of CGU's
shareholders' equity on the unaudited pro forma condensed combined balance
sheet.
2 The sum of these items equals the $246.7 MILLION adjustment to other assets
on the unaudited pro forma condensed combined balance sheet.
3 The sum of these items equals the $108.8 MILLION adjustment to other
liabilities on the unaudited pro forma condensed combined balance sheet.
DETERMINATION OF PURCHASE PRICE
SELLER NOTE. On June 1, 2001, the Company issued the $260.0 MILLION Seller
Note to CGNU. For the pro forma periods ended March 31, 2001 and December 31,
2000, interest expense on the Seller Note was $5.7 MILLION and $24.7 MILLION,
respectively.
ALLOCATION OF PURCHASE PRICE
ADJUSTMENTS TO REFLECT THE ESTIMATED FAIR VALUE OF ASSETS AND LIABILITIES
ASSUMED:
The following pro forma purchase accounting adjustments were undertaken to
reflect CGU's assets and liabilities purchased by the Company at their
estimated fair values.
LOSS AND LOSS ADJUSTMENT EXPENSE RESERVES AND REINSURANCE RECOVERABLES. The
estimated fair values of CGU's loss and loss adjustment expense reserves and
related reinsurance recoverables were based on the present value of their
expected cash flows with consideration for the uncertainty inherent in the
both the timing of, and the ultimate amount of, future payments for losses
and receipts of amounts recoverable from reinsurers. In estimating the fair
value of such items, management adjusted CGU's nominal loss reserves (net of
the effects of reinsurance obtained from NICO and GRC in connection with the
Acquisition) and discounted them to their present value assuming a 4.7%
risk-free discount rate. The series of future cash flows related to such loss
payments and reinsurance recoveries were actuarially developed using CGU's
historical loss data. The "price" for bearing the uncertainty inherent in
CGU's net loss reserves was assumed to be approximately 11% of the present
value of the expected underlying cash flows of the loss reserves and
reinsurance recoverables, which is believed to be reflective of the cost CGU
would likely incur if it had attempted to obtain reinsurance for the full
amount of its net loss and loss adjustment expense reserves with a third
party reinsurer. As a result, loss and loss adjustment expense reserves and
the related reinsurance recoverables on those amounts have been reduced by
$652.1 MILLION and $352.1 MILLION, respectively, in the March 31, 2001 pro
forma balance sheet. This reduction to net loss and loss adjustment expense
reserves of $300.0 million will be accreted through an income statement
charge over the period that the claims are expected to be settled.
Accretion of loss and loss adjustment expense reserves of $22.5 MILLION and
$90.0 MILLION recorded on the pro forma income statements for the periods
ended March 31, 2001 and December 31, 2000, respectively, represent the
amortization of net loss and loss adjustment expense reserves (which were
reduced to their estimated fair value in purchase accounting) to their
nominal value over the respective reporting period. The accretion expenses
recorded during these periods assumes that 30% of the loss and loss
adjustment expense reserves acquired by White Mountains pursuant to the
Acquisition are recognized during the first year on an annualized basis. As a
result, a Federal income tax benefit of $7.9 MILLION and $31.5 MILLION, for
the periods ended March 31, 2001 and December 31, 2000, respectively, were
recorded for this transaction.
INSURANCE BALANCES RECEIVABLE. In determining the estimated fair value of
premiums receivable as of the acquisition date, White Mountains has estimated
that an additional allowance for doubtful accounts was warranted in light of its
decision to exit certain of CGU's business activities. Accordingly, an
adjustment of $42.0 MILLION has been recorded in the March 31, 2001 pro forma
balance sheet.
RECOGNITION OF LIABILITIES IN CONNECTION WITH THE ACQUISITION. The $185.3
million pro forma adjustment to increase other liabilities represents White
Mountains' best estimate of the expected costs to exit certain business
activities of CGU and the estimated fair value of obligations related to the
required participation by CGU in certain assigned risk pools. Costs
associated with the exit of certain of CGU's business activities have been
estimated in accordance with EITF No. 95-3, "Recognition of Liabilities in
Connection with a Purchase Business Combination".
EMPLOYEE BENEFITS PLANS. In accordance with Financial Accounting Standards Board
("FASB") No. 87, "Employers' Accounting for Pensions", CGU's pension plan was
required to recognize all previously unrecognized transition items as of the
date of the Acquisition which increased the prepaid pension asset by $2.6
million. In addition, White Mountains revised the weighted average discount rate
used to determine CGU's pension obligations from 7.5% to 7.0% in light of
current market conditions which reduced the pension asset by $32.5 million. The
net impact of the pension adjustments served to decrease other assets by $29.9
MILLION pretax.
In accordance with FASB No. 106, "Employers' Accounting for Postretirement
Benefits Other Than Pensions", CGU's postretirement plan was required to
recognize all previously unrecognized transition items as of the date of the
Acquisition which increased other liabilities by $47.5 million. In addition,
White Mountains revised the weighted average discount rate used to determine
CGU's postretirement obligations from 7.5% to 7.0% in light of current market
conditions which increased other liabilities by $7.8 million. The total
impact of the postretirement adjustments served to increase other liabilities
by $55.3 million pretax.
ADJUSTMENTS TO REDUCE THE CARRYING VALUE OF NON-CURRENT, NON-FINANCIAL ASSETS:
After recording all assets and liabilities purchased at their estimated fair
values, the excess of acquired net assets over the purchase price has been
used to reduce the estimated fair values of all non-current, non-financial
assets acquired, in accordance with APB 16.
AMORTIZATION OF DEFERRED CREDIT. The excess of the estimated fair value of net
assets (after the reduction of the carrying amounts of non-current,
non-financial assets acquired) over the purchase price has been recorded as a
deferred credit in accordance with APB 16. The deferred credit will be amortized
systematically to income over the estimated period of benefit of seven years. As
a result, deferred credit amortization of $27.0 MILLION and $107.9 MILLION has
been recorded on the pro forma income statements for the periods ended March 31,
2001 and December 31, 2000, respectively.
In June 2001 the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 141 entitled "Business
Combinations". SFAS No. 141 requires all business combinations initiated after
June 30, 2001 to be accounted for using the purchase method and calls for the
recognition of all existing deferred credits arising from business combinations
prior to July 1, 2001 through the income statement on the first day of the
fiscal year beginning after December 15, 2001. In accordance with SFAS No. 141,
White Mountains will recognize its remaining unamortized deferred credit balance
on January 1, 2002 as a cumulative effect of a change in accounting principle.
(K) On June 1, 2001, White Mountains awarded 73,500 restricted shares to its
key employees pursuant to the Acquisition which will vest in June 2003.
Compensation expenses of $3.2 MILLION and $12.7 MILLION recorded on the pro
forma income statements for the periods ended March 31, 2001 and December 31,
2000, respectively, represent restricted share awards deemed to have been
earned by recipients over the periods. As a result, a Federal income tax
benefit of $1.1 MILLION and $4.4 MILLION, for the periods ended March 31,
2001 and December 31, 2000, respectively, were recorded for this transaction.
(L) Basic earnings per common share is determined using the weighted average
number of common shares outstanding during the period. Diluted earnings per
common share is determined using the weighted average number of common shares
and dilutive common share equivalents outstanding during the period.
In determining the pro forma basic and diluted loss per share for the period
ended December 31, 2000, the net loss from continuing operations was increased
by a $318.2 MILLION redemption value adjustment associated with the Convertible
Preference Shares (see Note E) and $4.4 MILLION in Convertible Preference Share
dividends. The pro forma income statement for the period ended December 31,
2000 presented a net loss from continuing operations. Accordingly, no additional
common share equivalents resulting from the Acquisition have been included in
that pro forma diluted earnings per share computation as the inclusion of such
potential shares would be anti-dilutive.
In determining the pro forma basic net income per share for the period ended
March 31, 2001, net income from continuing operations was reduced by $1.1
MILLION in Convertible Preference Share dividends. In determining pro forma
diluted net income per share for the period ended March 31, 2001, the 73,500
restricted shares issued in connection with the Acquisition are assumed to have
been issued, the Convertible Preference Shares are assumed to have been
converted into 2,184,583 common shares and the Warrants are assumed to have been
exercised into 778,481 incremental common shares (in accordance with the
treasury method), each as of the beginning of the period presented. In
computing the dilutive effect of the assumed conversion of the Convertible
Preference Shares, the March 31, 2002 diluted earnings per common share
numerator is adjusted to add-back Convertible Preference Share dividends of
$1.1 million.
(M) In determining book value per common and common equivalent share, common
shareholders' equity is increased for the benefits deemed to have been
received by the Company upon the assumed issuances of common share
equivalents (cash proceeds from assumed exercises of options and warrants to
acquire common shares and, when applicable, income tax benefits derived
therefrom) and is decreased by the difference between the carrying value of
the Berkshire Preferred Stock and its face value (see Note B). Tangible book
value per common share is determined in the same manner but includes
unamortized deferred credits less goodwill per common share.
At March 31, 2001, the Company's book value per common and common equivalent
share was $176.14 and its tangible book value per share was $185.44. This
computation is based on dilutive common and common equivalent shares
outstanding of 5,962,070 shares at that date.
On a pro forma basis, at March 31, 2001 the Company's book value per common
and common equivalent share was $121.89 and its tangible book value per share
was $234.40. This pro forma computation of book value per common and common
equivalent share at March 31, 2001 assumes the issuance of 1,170,000 common
shares upon the exercise of the Series A Warrants at a price per common share
of $175.00.
At the Company's 2001 Annual General Meeting, holders of common shares will
be asked to approve the issuance of additional common shares upon conversion
of the Convertible Preference Shares and the exercise of the Series B
Warrants. Assuming that shareholder approval is obtained, $755.8 million of
"mezzanine" equity recorded upon the issuance of Convertible Preference
Shares (see Note E) and $111.7 million of other liabilities recorded upon the
issuance of the Series B Warrants (see Note B) would become permanent equity
of the Company thereby increasing its shareholders' equity from $761.1
million on a pro forma basis at March 31, 2001 to $1,628.6 million. As a
result, the Company's pro forma book value per common and common equivalent
share would increase to $180.37 and its tangible book value per share would
increase to $261.98. This pro forma computation of book value per common and
common equivalent share assumes the issuance of 2,184,583 common shares upon
conversion of the Convertible Preference Shares and the issuance of 1,714,285
common shares upon the exercise of the Series A and Series B Warrants at a
price per common share of $175.00.
