UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the period ended March 31, 1996
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____ to ____
Commission file number 1-8993
FUND AMERICAN ENTERPRISES HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
Delaware 94-2708455
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
80 South Main Street, Hanover, New Hampshire 03755-2053
(Address of principal executive offices including zip code)
(603) 643-1567
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
----- -----
As of May 13, 1996, 7,653,069 shares of Common Stock with a par value of $1.00
per share were outstanding.
FUND AMERICAN ENTERPRISES HOLDINGS, INC.
Table of Contents
PART I. FINANCIAL INFORMATION Page No.
--------
Item 1. Financial Statements
Condensed Consolidated Balance Sheets,
March 31, 1996 (Unaudited), and December 31, 1995 3
Condensed Consolidated Income Statements (Unaudited),
Three Months Ended March 31, 1996 and 1995 4
Condensed Consolidated Statements of Cash Flows
(Unaudited), Three Months Ended March 31, 1996 and 1995 5
Notes to Condensed Consolidated Financial Statements
(Unaudited) 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 6-10
PART II. OTHER INFORMATION
Items 1 through 6 11
SIGNATURES 12
-2-
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
FUND AMERICAN ENTERPRISES HOLDINGS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(dollars in millions, except per share amounts)
March 31, December 31,
1996 1995
---------- -------------
(Unaudited)
Assets
Common equity securities, at fair value (cost: $71.0 and $232.1) $ 89.0 $ 274.5
Fixed maturity investments, at fair value (cost: $143.1 and $109.8) 143.0 110.7
Other investments (cost: $89.2 and $86.7) 98.7 95.9
Short-term investments, at amortized cost (which approximated market value) 230.5 103.6
---------- -----------
Total investments 561.2 584.7
Cash - 2.7
Capitalized mortgage servicing, net of accumulated amortization 423.2 397.1
Mortgage loans held for sale 537.1 381.0
Other mortgage origination and servicing assets 171.7 164.4
Insurance premiums receivable 47.9 45.3
Investments in unconsolidated insurance affiliates 94.7 96.2
Other assets 200.2 200.5
---------- -----------
Total Assets $ 2,036.0 $ 1,871.9
========== ===========
Liabilities
Short-term debt $ 577.3 $ 445.4
Long-term debt 406.6 407.3
Loss and loss adjustment expense reserves 44.0 44.1
Unearned insurance premiums 52.0 35.0
Accounts payable and other liabilities 203.4 196.4
---------- -----------
Total liabilities 1,283.3 1,128.2
---------- -----------
Minority Interest - preferred stock of subsidiary 44.0 44.0
---------- -----------
Shareholders' Equity
Common stock at $1 par value per share - authorized 125,000,000 shares;
issued 32,707,297 and 32,719,279 shares 32.7 32.7
Common paid-in surplus 375.4 375.5
Retained earnings 1,150.6 1,124.6
Common stock in treasury, at cost - 25,034,939 shares (871.0) (871.0)
Net unrealized gains on investment securities 21.0 37.9
---------- -----------
Total shareholders' equity 708.7 699.7
---------- -----------
Total Liabilities, Minority Interest and Shareholders' Equity $ 2,036.0 $ 1,871.9
========== ===========
See Notes to Condensed Consolidated Financial Statements.
-3-
CONDENSED CONSOLIDATED INCOME STATEMENTS
Unaudited
(millions, except per share amounts)
Three Months Ended
March 31,
----------------------
1996 1995
---------- ---------
Revenues:
Mortgage servicing revenue $ 34.6 $ 41.2
Amortization of capitalized servicing and investment contract losses 3.2 14.0
---------- ---------
Net servicing revenue 31.4 27.2
Gain on sale of mortgage servicing - 28.2
Net gain on sales of mortgages 13.1 3.4
Other mortgage operations revenue 4.9 3.5
Insurance premiums earned 19.5 -
Equity in earnings of unconsolidated insurance affiliates 1.3 1.6
Investment income and other revenue 17.5 12.9
---------- ---------
Total revenues 87.7 76.8
---------- ---------
Expenses:
Compensation and benefits 22.4 17.8
General expenses 19.9 13.6
Interest expense 14.1 12.0
Insurance losses and loss adjustment expenses 13.2 -
---------- ---------
Total expenses 69.6 43.4
---------- ---------
Pretax operating earnings 18.1 33.4
Net realized investment gains 28.4 17.0
---------- ---------
Pretax earnings 46.5 50.4
Income tax provision 17.7 18.4
---------- ---------
After tax earnings 28.8 32.0
Loss on early extinguishment of debt, after tax - (0.2)
---------- ---------
Net income 28.8 31.8
Less dividends on preferred stock - 1.6
---------- ---------
Net income applicable to common stock $ 28.8 $ 30.2
========== =========
Primary earnings per share:
After tax earnings $ 3.45 $ 3.43
Net income 3.45 3.41
Fully diluted earnings per share:
After tax earnings $ 3.45 $ 3.23
Net income 3.45 3.22
See Notes to Condensed Consolidated Financial Statements
-4-
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Unaudited
(millions)
Three Months Ended
March 31,
-------------------------------------
1996 1995
---------- ----------
Cash flows from operations:
Net income $ 28.8 $ 31.8
Charges (credits) to reconcile net income to cash flows from operations:
Loss on early extinguishment of debt, after tax - 0.2
Equity in earnings of unconsolidated affiliates (1.3) (1.6)
Net realized investment gains (28.4) (17.0)
(Increase) decrease in mortgage loans held for sale (156.1) 22.1
Gain on sale of mortgage servicing - (28.2)
Increase in unearned insurance premiums 17.0 -
Increase in insurance premiums receivable (2.6) -
Increase in deferred insurance policy acquisition costs (2.8) -
Depreciation and amortization 5.3 15.4
Capitalized excess mortgage servicing income (3.4) (1.1)
Changes in current income taxes receivable and payable (2.6) 16.0
Deferred income tax expense 20.2 2.4
Other, net 9.2 6.8
---------- ----------
Net cash flows (used for) provided from operating activities (116.7) 46.8
---------- ----------
Cash flows from investing activities:
Net increase in short-term investments (126.9) (66.8)
Sales of common equity securities and other investments 191.7 97.6
Sales and maturities of fixed maturity investments 6.9 97.6
Purchases of common equity securities and other investments (4.0) (40.7)
Purchases of fixed maturity investments (35.2) (40.7)
Acquisition of consolidated affiliate (13.2) -
Investments in unconsolidated affiliates (1.0) (33.8)
Collections on mortgage origination and servicing assets 34.2 42.5
Additions to purchased mortgage servicing rights (43.4) (24.6)
Originated mortgage servicing rights (14.0) (4.7)
Proceeds from sale of mortgage servicing - 170.7
Additions to other mortgage origination and servicing assets (8.3) (42.1)
Purchases (sales) of fixed assets, net (1.3) 0.5
---------- ----------
Net cash flows (used for) provided from investing activities (14.5) 155.5
---------- ----------
Cash flows from financing activities:
Net increase (decrease) in short-term debt 131.8 (2.5)
Repayments of long-term debt - (79.6)
Purchases of common stock retired (0.9) (56.4)
Dividends paid to shareholders (1.5) (1.6)
Other (0.9) 0.3
---------- ----------
Net cash provided from (used for) financing activities 128.5 (139.8)
---------- ----------
Net (decrease) increase in cash during period (2.7) 62.5
Cash balance at beginning of period 2.7 1.5
---------- ----------
Cash balance at end of period $ - $ 64.0
========== ==========
Supplemental cash flows information:
Interest paid
Net income tax payments $ (6.8) $ (7.3)
$ (0.1) $ (0.2)
See Notes to Condensed Consolidated Financial Statements.
-5-
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Unaudited
Note 1. Basis of Presentation
- ------------------------------
The accompanying condensed consolidated financial statements include the
accounts of Fund American Enterprises Holdings, Inc. (the "Company") and its
subsidiaries (collectively, "Fund American"). Fund American's principal
businesses are conducted through White Mountains Holdings, Inc. and its
operating subsidiaries ("White Mountains") and Source One Mortgage Services
Corporation and its subsidiaries ("Source One"). White Mountains is an
insurance holding company principally engaged through its affiliates in the
business of property and casualty insurance. Source One is one of the nation's
largest independent mortgage banking companies.
The financial statements have been prepared in accordance with generally
accepted accounting principles and include all adjustments (consisting of normal
recurring adjustments) considered necessary by management to fairly present the
financial position, results of operations and cash flows of Fund American.
These interim financial statements may not be indicative of financial results
for the full year and should be read in conjunction with the Company's 1995
Annual Report to Shareholders.
Note 2. Earnings Per Share
- ---------------------------
Primary earnings per share amounts are based on the weighted average number of
common and dilutive common equivalent shares outstanding of 8,364,724 and
8,849,625 for the three-month periods ended March 31, 1996 and 1995,
respectively. Fully diluted earnings per share amounts are based on the
weighted average number of common shares outstanding, assuming full dilution, of
8,364,730 and 9,889,470 for the three-month periods ended March 31, 1996 and
1995, respectively.
Item 2. Management's Discussion and Analysis
- --------------------------------------------
Results of Operations -- Three-Month Periods Ended March 31, 1996 and 1995
Net income was $28.8 million, or $3.45 per share on a fully diluted basis, for
the quarter ended March 31, 1996. These amounts compare to net income of $31.8
million, or $3.22 per share, for the quarter ended March 31, 1995. The 1996
first quarter includes a $20.0 pretax, $13.0 after tax, recovery of valuation
allowances related to Source One's mortgage servicing rights. The 1995 first
quarter includes a $28.2 million pretax, $18.3 million after tax, gain on the
sale of $9.9 billion of servicing rights by Source One.
Book value per common and equivalent share increased $1.24 to $84.52 at March
31, 1996, from $83.28 at December 31, 1995. The increase from year end 1995 is
primarily attributable to solid first quarter operating results at Source One.
Insurance Operations. Insurance operating results for the quarter ended March
31, 1996 included $19.5 million of net earned premiums and $13.2 million of
losses and loss adjustment expenses. Net written premiums for the first quarter
of 1996 totalled $36.5 million. Earned premiums will continue to lag net
written premiums until the first quarter of 1997 since Charter Indemnity Company
("Charter"), which writes about $60 million of non-standard automobile insurance
in Texas annually, began for the first time in 1996 to retain virtually all its
written premium. The operations of Valley Insurance Company ("Valley"), a
Northwest-based, regional property-casualty company which writes personal and
commercial lines, represented $16.5 million of the total earned premium and had
net written premiums of $16.3 million during the period. Valley and Charter
were acquired by White Mountains on December 1, 1995. A summary of White
Mountains' consolidated insurance operating results follows:
-6-
- --------------------------------------------------------------------------------
Three Months Ended
Dollars in millions March 31, 1996
- --------------------------------------------------------------------------------
Gross written premium $ 38.1
Net written premium $ 38.5
Ending statutory policyholders' surplus $ 83.0
Statutory ratios:
- ----------------
Loss and loss adjustment 67.8%
Expense 30.8%
----
Combined 98.6%
================================================================================
Mortgage Origination and Servicing. A summary of Source One's mortgage loan
production and mortgage servicing portfolio activities follows:
- --------------------------------------------------------------------------------
Three Months
Ended March 31,
---------------------
Millions 1996 1995
- --------------------------------------------------------------------------------
Mortgage loan production:
Retail originations $ 595 $ 193
Wholesale originations 610 136
------------------------
Total $ 1,205 $ 329
- --------------------------------------------------------------------------------
Mortgage loan servicing portfolio (a):
Beginning balance $ 31,831 $ 39,568
Mortgage loan production 1,205 329
Regular payoffs (919) (384)
Sale of servicing (9,893)
Other (512) (650)
------------------------
Ending balance $ 31,605 $ 28,970
================================================================================
The increase in mortgage loan production and payoffs for the 1996 first quarter
versus the comparable prior year period reflects lower market interest rates and
a corresponding increase in refinancing activity during the 1996 first quarter
versus the comparable 1995 period. Additional information regarding Source
One's mortgage loan servicing portfolio is shown below:
- --------------------------------------------------------------------------------
March 31, Dec. 31,
1996 1995
- --------------------------------------------------------------------------------
Mortgage loan servicing portfolio (a):
Number of loans 488,380 494,051
Weighted average interest rate 8.28% 8.33%
Percent delinquent(b) 5.15% 6.08%
================================================================================
(a) Includes loans subserviced for others. Loans and $4,252 million as
subserviced for others had a principal balance March 31, 1996, December of
$3,968 million, $4,039 million 31, 1995 and March 31, 1995, respectively.
(b) Includes loans in process of foreclosure.
-7-
Net mortgage servicing revenue increased to $31.4 million for the first quarter
of 1996 from $27.2 million for the 1995 first quarter. Gross mortgage servicing
revenue, however, decreased $6.6 million primarily due to the $9.9 billion
servicing sale in the first quarter of 1995, partially offset by the effects of
a $4.7 billion servicing rights acquisition in the fourth quarter of 1995. The
decrease in revenue was more than offset by a $10.8 million decrease in
amortization of the capitalized servicing asset. The lower amortization was due
to a $20.0 million recovery of the valuation allowance for the impairment of
mortgage servicing rights, reflecting an increase in interest rates and the
corresponding increase in the fair value of Source One's mortgage servicing
rights since year end 1995. This recovery was partially offset by higher
amortization of the capitalized mortgage servicing asset reflecting a lower
interest rate environment during the first quarter of 1996 versus the comparable
period of 1995 and a $3.0 million unrealized servicing portfolio loss on its
investment in interest rate contracts. Source One enters into interest rate
contracts to reduce the sensitivity of its earnings to changes in market
interest rates. The contracts derive their value from the ten-year constant
maturity treasury yield index or the ten-year swap index, as applicable. Source
One's total losses on its existing contracts cannot exceed Source One's initial
investment of $3.5 million.
Net gain on sales of mortgages increased to $13.1 million from $3.4 million for
the first quarter of 1996 compared to 1995. The increase is primarily due to an
increase in capitalized originated mortgage servicing rights resulting from the
adoption of a new accounting standard in 1995, and the increase in production
and the related mortgage loan sales volume during the first quarter of 1996
compared to 1995.
Investment Operations. Fund American's investment income is comprised primarily
of interest income earned on mortgage loans originated by Source One and by the
fixed maturity investments of its insurance operations. Investment income and
other revenue increased to $17.5 million for the 1996 first quarter from $12.9
million for the comparable prior year quarter. The increase is primarily due to
an increase in the average size of Source One's inventory of mortgage loans held
for sale, and an increase in fixed maturity investments due to the Valley and
Charter acquisitions.
Total net investment gains and losses, before tax, were as follows:
- --------------------------------------------------------------------------------
Three Months
Ended March 31,
-------------------
Millions 1996 1995
- --------------------------------------------------------------------------------
Net realized gains $ 28.4 $ 17.0
Net unrealized gains (losses) (26.8) 9.8
-------------------
Total net investment gains, before tax $ 1.6 $ 26.8
================================================================================
During the first quarter of 1996, Fund American sold all of its holdings
(2,042,572 shares) of the common stock of Zurich Reinsurance Centre Holdings,
Inc. ("ZRC") back to ZRC in a private transaction for net proceeds of $61.8
million. Fund American also sold all of its holdings (2,928,100 shares) of the
common stock of The Louisiana Land and Exploration Company ("LLX") in a series
of open market transactions for net proceeds of $125.1. The sales of ZRC and LLX
represented the majority of the $28.4 million of realized net investment gains
reported for the first quarter of 1996.
Expenses. Compensation and benefits expense increased to $22.4 million for the
1996 first quarter from $17.8 million for the comparable prior year quarter. The
increase is primarily a result of higher mortgage loan production volumes
experienced by Source One during the 1996 first quarter and the inclusion of
Valley and Charter's personnel costs in the 1996 consolidated financial
statements.
-8-
General expenses increased $6.3 million to $19.9 million for the 1996 first
quarter versus $13.6 million for the comparable prior year quarter. The increase
is primarily due to the inclusion of Valley and Charter's operations in the 1996
consolidated financial statements.
Source One finances its inventory of mortgage loans held for sale primarily with
short-term debt. Accordingly, the increase in mortgage loans held for sale noted
above also resulted in a increase in interest expense for the 1996 first quarter
as compared to the 1995 period.
Liquidity and Capital Resources
Parent Company. On April 2, 1996 Fund American purchased 3,142,906 shares of
Common Stock of Travelers-Aetna Property Casualty Corp. ("TAPC") for $50.8
million, including related expenses. John J. Byrne, Fund American's Chairman and
Chief Executive Officer, recently became a director of TAPC.
Prospectively, the primary sources of cash inflows for the Parent Company will
be distributions received from its operating subsidiaries, sales of investment
securities and investment income.
White Mountains and subsidiaries. Fund American has entered into a definitive
agreement to purchase, for $79.4 million, a 50% interest in Folksamerica Holding
Company, Inc. ("Folksamerica"), parent company of Folksamerica Reinsurance
Company. The proceeds from Fund American's investment will be used by
Folksamerica to complete its previously announced acquisition of Christiania
General Insurance Corporation ("Christiania") of New York for $88.0 million.
Consummation of both transactions is pending state insurance regulatory
approvals. Fund American believes that it will receive the requisite approvals
to proceed with the Folksamerica transaction, however, there is no assurance
that such approvals will be obtained.
Folksamerica is a multi-line broker-market reinsurance company which in 1995 had
net written premiums of $159.7 million. At March 31, 1996, Folksamerica had
$76.3 million of shareholders' equity and total capitalization of $151.8
million. Christiania had net written premiums in 1995 of $123.2 million and
shareholders' equity of $128.4 million at March 31, 1996. Folksamerica's
consolidated financial statements, pro forma for the completion of Fund
American's investment and the acquisition of Christiania, include total assets
of $1,025.3 million as of March 31, 1996 and total revenues of $69.5 million for
the quarter then ended.
Fund American's investment in Folksamerica will include (i) 6,920,000 shares of
ten-year 6.5% voting preferred stock having a liquidation preference of $79.4
million and (ii) ten-year warrants to purchase up to 6,920,000 shares of
Folksamerica Common Stock for $11.47 per share. Folksamerica's book value per
share at March 31, 1996 was $11.03.
Fund American expects to assign the purchase of the Folksamerica investment to
White Mountains. White Mountains intends to fund the Folksamerica investment
using proceeds from sales of investment securities and an additional $25.0
million capital contribution from the Company.
On January 19, 1996, Valley purchased an inactive insurance company from Lincoln
National Corporation for $13.2 million, net of cash balances acquired. The newly
acquired insurance company is licensed to write property and casualty insurance
in 49 states and is expected to be renamed Valley National Insurance Company
("Valley National"). Assets acquired pursuant to the Valley National acquisition
included an investment portfolio, consisting principally of fixed maturity
investments, totalling $6.7 million.
-9-
Source One. Source One's investments, mortgage loans held for sale and mortgage
loan servicing portfolio provide a liquidity reserve since they may be sold to
meet cash needs.
Source One's working capital requirements have historically been funded through
its revolving credit and commercial paper programs. These borrowings are used to
fund mortgage loan production until the sale of such mortgage loans in the
secondary market. Increases in mortgage loan production have resulted in a
higher balance of mortgage loans held for sale during 1996, resulting in a
increase in Source One's short-term borrowings.
At March 31, 1996 Source One had $38.1 million of short-term borrowings
outstanding under committed bank credit agreements and $421.2 million of
outstanding commercial paper.
After four months of fruitless negotiations with Mellon Mortgage Company
("Mellon") concerning a potential sale of Source One, Fund American has
terminated discussions with Mellon.
-10-
Part II. OTHER INFORMATION
Item 1. Legal Proceedings
None.
Item 2. Changes in Securities
None.
Item 3. Defaults upon Senior Securities
None.
Item 4. Submission of Matters to a Vote by Security Holders
None.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
11 - Statement Re Computation of Per Share Earnings*
(b) Reports on Form 8-K
None.
*Filed herewith.
-11-
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.
FUND AMERICAN ENTERPRISES HOLDINGS, INC.
----------------------------------------
(Registrant)
Date: May 14, 1996 By: /s/
--------------------------------
Michael S. Paquette
Vice President and Controller
-12-
FUND AMERICAN ENTERPRISES HOLDINGS, INC.,
STATEMENT RE COMPUTATION OF PER SHARE EARNINGS
(in thousands, except per share earnings)
Unaudited
Three Months Ended
March 31,
---------------------------------
1996 1995
----------- ------------
Primary earnings per share
Earnings per share numerator:
After tax earnings $ 28,834 $ 31,971
Preferred stock dividends - (1,641)
----------- -----------
After tax earnings for per share computation 28,834 30,330
Loss on early extinguishment of debt, after tax - (172)
----------- -----------
Net income for per share computation $ 28,834 $ 30,158
=========== ===========
Earnings per share denominator:
Average common shares outstanding 7,681 8,369
Dilution for options, warrants and performance shares 684 481
----------- -----------
Shares for per share computation 8,365 8,850
=========== ===========
Per share earnings:
After tax earnings $ 3.45 $ 3.43
Net income 3.45 3.41
Fully diluted earnings per share
Earnings per share numerator:
After tax earnings $ 28,834 $ 31,971
Preferred stock dividends, if applicable - -
----------- -----------
After tax earnings for per share computation 28,834 31,971
Loss on early extinguishment of debt, after tax - (172)
----------- -----------
Net income for per share computation $ 28,834 $ 31,799
=========== ===========
Earnings per share denominator:
Average common shares outstanding 7,681 8,369
Dilution for options, warrants and performance shares 684 481
Dilution for preferred stock - 1,040
----------- -----------
Shares for per share computation 8,365 9,890
=========== ===========
Per share earnings:
After tax earnings $ 3.45 $ 3.23
Net income 3.45 3.22
NOTE: The Voting Preferred Stock Series D is not a common stock equivalent.
5
1,000,000
3-MOS
DEC-31-1996
JAN-01-1996
MAR-31-1996
0
561
91
(13)
0
0
0
0
2,036
577
407
0
0
709
0
2,036
0
88
0
55
(28)
0
14
47
18
0
0
0
0
29
3.45
3.45
