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, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 1-8993
WHITE MOUNTAINS INSURANCE GROUP, LTD.
(Exact name of registrant as specified in its charter)
BERMUDA 94-2708455
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
80 SOUTH MAIN STREET, HANOVER, NEW HAMPSHIRE
03755-2053 (Address of principal executive offices
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 14, 2001, 5,896,115 Common Shares with a par value of $1.00 per
share were outstanding (which includes 21,000 restricted Common Shares which
were not vested at such date).
WHITE MOUNTAINS INSURANCE GROUP, LTD.
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION PAGE NO.
--------
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheets,
March 31, 2001 (Unaudited), and December 31, 2000 3
Consolidated Statements of Income and Comprehensive Income
(Unaudited), Three Months Ended March 31, 2001 and 2000 4
Consolidated Statements of Cash Flows (Unaudited),
Three Months Ended March 31, 2001 and 2000 5
Condensed Notes to Consolidated Financial
Statements (Unaudited) 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 12
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 17
PART II. OTHER INFORMATION
ITEMS 1 THROUGH 6 18
SIGNATURES 19
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
WHITE MOUNTAINS INSURANCE GROUP, LTD.
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
March 31, December 31,
2001 2000
-------------- ------------
(UNAUDITED)
ASSETS
Fixed maturity investments, at fair value (cost: $1,023.0 and $1,063.0) $ 1,049.2 $ 1,078.6
Short-term investments, at amortized cost (which approximated market value) 750.8 735.9
Common equity securities, at fair value (cost: $175.5 and $127.5) 179.7 144.8
Other investments (cost: $79.5 and $117.3) 90.0 142.9
-------------- -------------
Total investments 2,069.7 2,102.2
Cash 6.4 4.4
Reinsurance recoverable on paid and unpaid losses 806.2 777.2
Investment in Main Street America Holdings, Inc. 127.7 130.6
Deferred tax asset 118.4 105.1
Insurance and reinsurance balances receivable 103.0 105.7
Deferred acquisition costs 29.4 27.2
Goodwill 24.6 25.4
Other assets 303.5 267.4
-------------- -------------
TOTAL ASSETS $ 3,588.9 $ 3,545.2
============== =============
LIABILITIES
Loss and loss adjustment expense reserves $ 1,549.2 $ 1,556.3
Funds held under reinsurance treaties 450.1 420.0
Unearned insurance and reinsurance premiums 192.9 182.0
Debt 96.0 96.0
Deferred credits 83.5 92.2
Accounts payable and other liabilities 176.2 152.2
-------------- -------------
Total liabilities 2,547.9 2,498.7
-------------- -------------
SHAREHOLDERS' EQUITY
Common Shares at $1 par value per share - authorized 50,000,000 shares;
issued and outstanding 5,901,115 and 5,880,115 shares 5.9 5.9
Paid-in surplus 72.7 66.2
Retained earnings 938.7 927.5
Accumulated other comprehensive income, after tax 29.9 46.9
Unearned compensation - restricted stock awards (6.2) -
-------------- -------------
Total shareholders' equity 1,041.0 1,046.5
-------------- -------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 3,588.9 $ 3,545.2
============== =============
See Notes to Condensed Consolidated Financial Statements.
3
WHITE MOUNTAINS INSURANCE GROUP, LTD.
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
UNAUDITED
(MILLIONS, EXCEPT PER SHARE AMOUNTS)
Three Months Ended
March 31,
-----------------------
2001 2000
---------- ----------
REVENUES:
Earned insurance and reinsurance premiums $ 97.7 $ 70.4
Net investment income 24.0 14.5
Net gain (loss) from sales of investments and other assets 21.4 (6.0)
Amortization of deferred credits 8.7 7.8
Earnings (losses) from unconsolidated insurance affiliates .3 (3.8)
Other revenue 2.2 .2
---------- ----------
Total revenues 154.3 83.1
---------- ----------
EXPENSES:
Losses and loss adjustment expenses 90.2 53.0
Insurance and reinsurance acquisition expenses 23.0 17.9
Compensation and benefits 13.6 6.7
General expenses 9.6 8.9
Interest expense 1.9 4.1
---------- ----------
Total expenses 138.3 90.6
---------- ----------
PRETAX EARNINGS (LOSS) 16.0 (7.5)
Tax benefit (1.1) (1.9)
---------- ----------
NET INCOME (LOSS) 17.1 (5.6)
========== ==========
OTHER COMPREHENSIVE INCOME ITEMS ARISING DURING THE PERIOD, AFTER TAX:
Net change in unrealized gains and losses for investments held (8.1) 33.3
Net change in foreign currency translation (.6) (.1)
Recognition of net unrealized (gains) losses for investments sold (8.3) 4.6
---------- ----------
COMPREHENSIVE NET INCOME $ .1 $ 32.2
========== ==========
BASIC EARNINGS PER SHARE:
Net income (loss) $ 2.91 $ (.94)
Comprehensive net income .01 5.45
DILUTED EARNINGS PER SHARE:
Net income (loss) $ 2.88 $ (.94)
Comprehensive net income .01 5.45
DIVIDENDS DECLARED PER COMMON SHARE $ 1.00 $ .40
See Notes to Condensed Consolidated Financial Statements.
4
WHITE MOUNTAINS INSURANCE GROUP, LTD.
CONSOLIDATED STATEMENTS OF CASH FLOWS
UNAUDITED
(MILLIONS)
Three Months Ended
March 31,
---------------------------------
2001 2000
--------------- --------------
CASH FLOWS FROM OPERATIONS:
Net income (loss) $ 17.1 $ (5.6)
Charges (credits) to reconcile net income to cash flows from operations:
Undistributed (earnings) loss from unconsolidated insurance affiliates (.3) 4.6
Net (gain) loss from sales of investments and other assets (21.4) 6.0
Amortization of deferred credits (8.7) (7.8)
Increase in reinsurance recoverable (29.1) (6.0)
Net change in funds held and insurance and reinsurance balances receivable 29.5 (2.2)
Increase in unearned insurance premiums 10.9 .1
Decrease in insurance loss and loss adjustment expense reserves (7.1) (15.5)
Net change in current and deferred income taxes receivable and payable (1.0) (40.6)
Net change in other assets (11.6) (1.6)
Net change in other liabilities (6.0) 10.7
Other items, net 4.1 7.6
--------------- --------------
NET CASH FLOWS USED FOR OPERATIONS (23.6) (50.3)
--------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net increase in short-term investments (18.8) (37.8)
Sales of common equity securities and other investments 38.1 58.4
Sales of fixed maturity investments 37.5 183.3
Maturities of fixed maturity investments 24.2 1.0
Purchases of common equity securities and other investments (41.7) (70.7)
Purchases of fixed maturity investments (28.6) (18.8)
Purchase of consolidated affiliate - (57.2)
Sale of consolidated affiliate 23.6 -
Net purchases of fixed assets (2.8) (.1)
--------------- --------------
NET CASH FLOWS PROVIDED FROM INVESTING ACTIVITIES 31.5 58.1
--------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES
Cash dividends paid to shareholders (5.9) (2.4)
Repayment of debt - (4.0)
Purchases of shares retired - (5.3)
--------------- --------------
NET CASH USED FOR FINANCING ACTIVITIES (5.9) (11.7)
--------------- --------------
NET INCREASE (DECREASE) IN CASH DURING PERIOD 2.0 (3.9)
CASH BALANCES AT BEGINNING OF PERIOD 4.4 3.9
--------------- --------------
CASH BALANCE AT END OF PERIOD $ 6.4 $ -
============== ==============
SUPPLEMENTAL CASH FLOWS INFORMATION:
Interest paid $ (3.3) $ (5.3)
Net taxes received (paid) .3 (38.5)
See Notes to Condensed Consolidated Financial Statements.
5
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
UNAUDITED
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
These condensed consolidated financial statements include the accounts of the
White Mountains Insurance Group, Ltd. (the "Company") and its subsidiaries
(collectively, "White Mountains") and have been prepared in accordance with
accounting principles generally accepted in the United States of America
("GAAP"). The Company is a Bermuda corporation with its headquarters located at
Crawford House, 23 Church Street, Hamilton, Bermuda HM11. The Company's
principal executive office is located at 80 South Main Street, Hanover, New
Hampshire, 03755-2053 and its registered office is located at Clarendon House, 2
Church Street, Hamilton, Bermuda HMDX.
White Mountains' consolidated property and casualty reinsurance operations are
conducted through Folksamerica Holding Company, Inc. ("Folksamerica").
Folksamerica also owns American Centennial Insurance Company ("ACIC") and
British Insurance Company of Cayman ("BICC"), both of which are in run-off.
White Mountains' consolidated property and casualty insurance operations are
conducted through Peninsula Insurance Company ("PIC"). White Mountains'
investment in Main Street America Holdings, Inc. ("MSA") at March 31, 2001
consisted of a 50% interest in MSA, a stock subsidiary of National Grange Mutual
("NGM"). MSA shares 60% of NGM's pool of east coast "main street" commercial and
personal lines business. White Mountains' investment in unconsolidated
affiliates at March 31, 2000 consisted of a 26% interest in Financial Security
Assurance Holdings Ltd. ("FSA"), which writes municipal and commercial bond
credit enhancement insurance, as well as its investment in MSA.
All significant intercompany transactions have been eliminated in consolidation.
The financial statements include all adjustments considered necessary by
management to fairly present the financial position, results of operations and
cash flows of White Mountains. 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 2000 Annual Report on Form 10-K. The preparation
of financial statements in conformity with GAAP requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities as of the date of the financial statements and the reported amounts
of revenues and expenses during the reporting period. Actual results could
differ from those estimates. Certain amounts in the prior period financial
statements have been reclassified to conform with the current presentation.
Amounts presented in the statement of cash flows are shown net of balances
acquired and sold in the purchase or sale of the Company's consolidated
affiliates.
DEFERRED CREDITS AND GOODWILL
As of March 31, 2001 and December 31, 2000, White Mountains had deferred credit
balances of $83.5 million and $92.2 million, respectively, and goodwill of $24.6
million and $25.4 million, respectively. The deferred credits and goodwill
resulted principally from the acquisition activities outlined below.
In May 2000 White Mountains completed its acquisition of the reinsurance
operations of Risk Capital Reinsurance Company ("the Risk Capital Operations")
for $20.3 million in cash plus related expenses. Because the cost of the Risk
Capital Operations was more than the fair value of its net identifiable assets
at that date, White Mountains recorded $24.9 million in goodwill at acquisition
($22.7 million and $23.3 million at March 31, 2001 and December 31, 2000,
respectively) which is being amortized to income over the estimated period of
benefit of ten years.
6
In March 2000 White Mountains acquired PCA for $122.3 million in cash. Because
the cost of PCA was less than the fair value of its net identifiable assets
acquired at that date, White Mountains recorded a $37.9 million deferred credit
at acquisition ($31.6 million and $33.0 million at March 31, 2001 and December
31, 2000, respectively) which is being amortized to income over the estimated
period of benefit of six years.
In October 1999 White Mountains acquired the International American Group
("IAG", which consisted primarily of PIC, ACIC and BICC) for $86.7 million in
cash. Because the cost of acquiring IAG was less than the value of their net
identifiable assets, the Company recorded a $62.0 million deferred credit at
acquisition ($31.8 million and $37.0 million at March 31, 2001 and December 31,
2000, respectively) which is being amortized to income over the estimated period
of benefit of three years.
In August 1998 White Mountains acquired all the outstanding common stock of
Folksamerica thereby causing Folksamerica to become a consolidated subsidiary as
of that date. Because the cost of White Mountains' investment in Folksamerica
was less than the value of Folksamerica's net identifiable assets at that date,
White Mountains recorded a $39.8 million deferred credit ($20.1 million and
$22.2 million at March 31, 2001 and December 31, 2000, respectively) which is
being amortized to income ratably over the estimated period of benefit of five
years.
SALE OF WATERFORD INSURANCE COMPANY ("WIC")
On January 5, 2001, the Company completed the sale of its wholly-owned insurance
subsidiary, WIC, to a third party for $23.6 million of cash proceeds net of
transaction expenses. The Company recognized an after tax gain on the sale of
WIC of $11.4 million. WIC ceased actively writing insurance during 1999. WIC's
operating results were immaterial to the Company's financial position for the
period ended March 31, 2000.
FOREIGN CURRENCY TRANSLATION
Folksamerica operates a branch office in Toronto, Canada to service its Canadian
customers and a portion of BICC's premiums are denominated in foreign
currencies. Net after tax losses from foreign currency translation of $1.3
million $.7 million at March 31, 2001 and December 31, 2000, respectively, were
recorded in shareholders' equity as a component of accumulated other
comprehensive income. Changes in the values of Folkamerica's and BICC's
operations denominated in foreign currency, after tax, are reported on the
income and comprehensive income statement as a component of other comprehensive
net income.
7
NOTE 2. REINSURANCE AND INSURANCE LOSS AND LOSS ADJUSTMENT EXPENSE RESERVES
The following table summarizes the loss and loss adjustment expense reserve
activities of White Mountains' consolidated insurance and reinsurance operations
for the three months ended March 31, 2001 and 2000:
- -----------------------------------------------------------------------------------------------------------------------
Three Months
Ended March 31,
-----------------------
Millions 2001 2000
- -----------------------------------------------------------------------------------------------------------------------
Gross beginning balance $ 1,556.3 $ 851.0
Less beginning reinsurance recoverable on unpaid losses (726.5) (167.7)
-----------------------
Net loss and loss adjustment expense reserves 829.8 683.3
Net loss and loss adjustment expense reserves acquired - PCA(1) - 252.3
Losses and loss adjustment expenses incurred relating to:
Current year losses 79.0 51.4
Prior year losses 11.2 1.6
-----------------------
Total incurred losses and loss adjustment expenses 90.2 53.0
Loss and loss adjustment expenses paid relating to:
Current year losses (3.0) (2.8)
Prior year losses (121.1) (69.1)
-----------------------
Total loss and loss adjustment expense payments (124.1) (71.9)
Net ending balance 795.9 916.7
Plus ending reinsurance recoverable on unpaid losses 753.3 324.3
-----------------------
Gross ending balance $ 1,549.2 $1,241.0
=======================================================================================================================
(1) Reinsurance recoverables on unpaid losses acquired in the PCA acquisition
totalled $153.3 million.
Incurred losses and loss adjustment expenses totaling $11.2 million for the
three months ended March 31, 2001 related to prior accident years are primarily
from higher than expected reported losses in Folksamerica's property excess
line. Incurred losses and loss adjustment expenses totalling $1.6 million for
the three months ended March 31, 2000, related to prior accident years are
primarily attributable to Folksamerica's reserve additions resulting from
asbestos, environmental liability and breast implant exposures.
NOTE 3. EARNINGS PER SHARE
Basic earnings per share amounts are based on the weighted average number of the
Company's common shares ("Shares") outstanding excluding unearned restricted
Shares. Diluted earnings per share amounts are based on the weighted average
number of Shares and the net effect of dilutive equivalent Shares outstanding.
The following table outlines the Company's computation of earnings per Share for
the three months ended March 31, 2001 and 2000:
8
- -------------------------------------------------------------------------------------------------------------------
Three Months
Ended March 31,
--------------------
2001 2000
- --------------------------------------------------------------------------------------------------------------------
EARNINGS PER SHARE NUMERATORS (IN MILLIONS):
Net income (loss) $ 17.1 $ (5.6)
=====================
Comprehensive net income $ .1 $ 32.2
--------------------
- --------------------------------------------------------------------------------------------------------------------
EARNINGS PER SHARE DENOMINATORS (IN THOUSANDS):
Basic earnings per Share denominator (average Shares outstanding) 5,880 5,926
Dilutive options to acquire Shares (1) 51 -
--------------------
Diluted earnings per Share denominator 5,931 5,926
--------------------
- --------------------------------------------------------------------------------------------------------------------
BASIC EARNINGS PER SHARE (IN DOLLARS):
Net income (loss) $ 2.91 $ (.94)
=====================
Comprehensive net income $ .01 $ 5.45
--------------------
- --------------------------------------------------------------------------------------------------------------------
DILUTED EARNINGS PER SHARE (IN DOLLARS):
Net income (loss) $ 2.88 $ (.94)
====================
Comprehensive net income $ .01 $ 5.45
====================================================================================================================
(1) The 2001 period includes the net dilutive effects of options to acquire
81,000 Shares at an average price of $112.32 per Share. The 2000 period
excludes the effects of such options as they were anti-dilutive during that
period.
NOTE 4. ACCOUNTING STANDARDS RECENTLY ADOPTED AND ISSUED
ACCOUNTING STANDARDS RECENTLY ADOPTED AND ISSUED
Effective January 1, 2001, Folksamerica Reinsurance Company, PIC and ACIC were
required to adopt new regulations implementing a codification of statutory
accounting principles for insurers ("Codification"). The purpose of 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 did not serve to materially change the aggregate policyholders'
surplus of the Company's reinsurance and insurance operations as of March 31,
2001. However, the New York State Legislature established a regulation whereby
codification standards which specifically conflict with existing New York law,
including those standards relating to deferred taxes and goodwill, cannot be
adopted by companies domiciled in New York. If New York had allowed the adoption
of all proposed provisions, Codification would have served to increase the
aggregate policyholders' surplus of Folksamerica as of March 31, 2001.
In October 1998, the American Institute of Certified Public Accountants (the
"AICPA") issued Statement of Position ("SOP") 98-7 entitled "Deposit Accounting:
Accounting for Insurance and Reinsurance Contracts That Do Not Transfer Risk".
SOP 98-7 provides guidance on how to account for all insurance and reinsurance
contracts that do not transfer insurance risk. SOP 98-7 is effective for periods
beginning January 1, 2000, with early adoption permitted. The adoption of SOP
98-7 did not have a material impact on White Mountains' financial position or
results of operations.
9
In June 1998, the Financial Accounting Standards Board (the "FASB") issued SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities" which
requires companies to record all derivatives on the balance sheet as either
assets or liabilities and measure those instruments at fair value. The manner in
which companies are to record gains and losses resulting from changes in the
values of those derivatives depends on the use of the derivative and whether it
qualifies for hedge accounting. The Company is not currently invested in
traditional derivative financial instruments for hedging or for any other
purpose. However, under SFAS 133 derivatives may be deemed to be embedded in
other financial instruments. If the embedded derivatives meet certain criteria,
they must be bifurcated from the original contract and separately accounted for
in a manner that is consistent with other derivative financial instruments. SFAS
No. 133 is effective for fiscal years beginning after June 15, 2000. The
adoption of SFAS No. 133 did not have a material impact on White Mountains'
financial position or results of operations.
ACCOUNTING STANDARD RECENTLY PROPOSED
In February 2001 the FASB issued an exposure draft entitled "Business
Combinations and Intangible Assets - Accounting for Goodwill". This exposure
draft proposes, among other things, the prospective elimination of the pooling
method of accounting for business combinations and sets forth new standards
concerning accounting for deferred credits, goodwill and other intangible assets
arising from such activities.
With respect to deferred credits, the proposal calls for the immediate
recognition of all existing and prospective deferred credits through the income
statement as an extraordinary gain. With respect to goodwill, the proposed
exposure draft would require companies to amortize its existing and prospective
goodwill when the asset is deemed to have been impaired rather than
systematically over a perceived period of benefit.
The exposure draft, in its current form, would be effective for interim and
annual periods beginning after a final accounting standard is issued. As of
March 31, 2001 and December 31, 2000, White Mountains had deferred credit
balances of $83.5 million and $92.2 million, respectively, and goodwill of $24.6
million and $25.4 million, respectively.
NOTE 5. SEGMENT INFORMATION
White Mountains has determined that its reportable segments include Reinsurance,
Property and Casualty Insurance, Investment in Unconsolidated Insurance
Affiliate(s) and Holding Company (primarily the operations of the Company and
certain of its onshore and offshore subsidiary holding companies). Investment
results are included within the segment to which the investments relate. The
Company has made its determination of segments based on consideration of the
following criteria: (i) the nature of the business activities of each of the
Company's subsidiaries and affiliates; (ii) the manner in which the Company's
subsidiaries and affiliates are organized; (iii) the existence of primary
managers responsible for specific subsidiaries and affiliates; and (iv) the
organization of information provided to the Company's Board of Directors. There
are no significant intercompany transactions among White Mountains' segments
other than occasional intercompany sales and transfers of investment securities
and intercompany management fees (all of which have been eliminated herein).
During the 2000 fourth quarter, ACIC and BICC were contributed to Folksamerica
and are reported under the Reinsurance segment for 2001. This change in segment
reporting was not material, therefore, the Company has not restated prior
periods. Financial information presented by segment is shown below:
10
- ---------------------------------------------------------------------------------------------------------------------------------
Property and Investments in
Casualty Unconsolidated Holding
Millions Reinsurance Insurance Affiliates Company Total
- ----------------------------------------------------------------------------------------------------------------------------------
THREE MONTHS ENDED MARCH 31, 2001
- ----------------------------------------------------------------------------------------------------------------------------------
Revenues from external customers $ 93.1 $ 5.9 $ - $ - $ 99.0
Net investment income 17.2 .7 - 6.1 24.0
Net gain from sales of investments and other assets 5.6 - - 15.8 21.4
Amortization of deferred credits 3.5 - - 5.2 8.7
Earnings from unconsolidated insurance affiliate - - .3 - .3
Other revenue - .1 - .8 .9
--------------------------------------------------------------------
Total revenues $ 119.4 $ 6.7 $ .3 $ 27.9 $ 154.3
====================================================================
Pretax earnings (loss) $ (3.3) $ - $ .3 $ 19.0 $16.0
==================================================================================================================================
Three Months Ended March 31, 2000
- ----------------------------------------------------------------------------------------------------------------------------------
Revenues from external customers $ 64.8 $ 5.6 $ - $ - $ 70.4
Net investment income 11.7 2.1 - .7 14.5
Net gain (loss) from sales of investments and other assets (6.7) - - .7 (6.0)
Amortization of deferred credits 1.9 - .1 5.8 7.8
Loss from unconsolidated insurance affiliates - - (3.8) - (3.8)
Other revenue - .2 - - .2
--------------------------------------------------------------------
Total revenues $ 71.7 $ 7.9 $ (3.7) $ 7.2 $ 83.1
====================================================================
Pretax earnings (loss) $ (1.7) $ 2.0 $ (3.7) $ (4.1) $ (7.5)
==================================================================================================================================
- ----------------------------------------------------------------------------------------------------------------------------------
Millions Property and
Casualty Investment Holding
Ending assets Reinsurance Insurance in MSA Company Total
- ----------------------------------------------------------------------------------------------------------------------------------
MARCH 31, 2001 $2,787.7 $ 53.3 $127.7 $620.2 $3,588.9
December 31, 2000 2,681.4 156.6 130.6 576.6 3,545.2
===================================================================================================================================
NOTE 6. PENDING ACQUISITION OF CGU
In September 2000 White Mountains entered into a definitive agreement with CGNU
plc ("CGNU") to purchase its U.S. property and casualty insurance operations
("CGU"). The CGU purchase agreement, which was amended on October 15, 2000 and
February 20, 2001, calls for a purchase price of $2.17 billion, subject to
certain adjustments, of which $260.0 million will consist of a note payable
(which must be paid in eighteen months in cash or Shares valued at $245.00 per
Share, at the Company's sole option). In connection with the CGU transaction,
White Mountains has arranged for up to $741.0 million of new equity commitments
from a small group of outside investors and, on March 16, 2001, finalized its
$875.0 million Credit Agreement with Lehman Brothers, Inc. ("Lehman").
11
NOTE 7. SUBSEQUENT EVENT
CASH TENDER OFFER AND CONSENT SOLICITATION FOR OUTSTANDING MEDIUM-TERM NOTES
On April 17, 2001 the Company repurchased $91.2 million of its $96.3 million of
outstanding medium-term notes pursuant to a tender offer and consent
solicitation dated March 15, 2001. As a result, the Company will record a $4.8
million loss on extinguishment of debt during the 2001 second quarter. The
tender offer and consent solicitation permitted the Company to effect an
amendment to the indenture governing the notes which will facilitate its
acquisition of CGU.
Completion of the CGU acquisition is subject to, among other matters, the
receipt of regulatory approvals, the completion of financing and the
satisfaction of other customary conditions.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
RESULTS OF OPERATIONS -- THREE MONTHS ENDED MARCH 31, 2001 AND 2000
White Mountains reported net income of $17.1 million or $2.88 per diluted Share
for the three months ended March 31, 2001, compared to a net loss of $5.6
million or $.94 per Share for the comparable 2000 period. Comprehensive net
income, which includes other comprehensive income items (primarily changes in
net unrealized investment gains and foreign currency translation for the
period), was $.1 million or $.01 per Share for the three months ended March 31,
2001, compared to comprehensive net income of $32.2 million or $5.45 per Share
for the comparable 2000 period.
White Mountains ended the first quarter of 2001 with a tangible book value per
Share (which includes unamortized deferred credits less goodwill per Share) of
$185.44, a decrease of $2.21 from the December 31, 2000 tangible book value per
Share of $187.65.
INSURANCE AND REINSURANCE OPERATIONS
CONSOLIDATED REINSURANCE OPERATIONS. Folksamerica reported a $11.0 million
comprehensive net loss during the first quarter of 2001 versus $2.3 million of
comprehensive net income for the comparable 2000 period. Folksamerica's
comprehensive net loss for the first quarter of 2001 is primarily due to net
unrealized losses from common stocks and other investments which exceeded net
unrealized gains from fixed maturities, higher than expected reported losses
from its property excess lines and approximately $3.5 million in catastrophe
losses during the quarter related to the El Salvador earthquake and the
Petrobras oil rig explosion in Brazil. Folksamerica's comprehensive net income
for the first quarter of 2000 resulted primarily from net unrealized gains in
its bond portfolio exceeding net unrealized losses in its portfolio of common
stocks and other investments. A summary of selected data relating to
Folksamerica is as follows:
- --------------------------------------------------------------------------------------------------------------------
Three Months
REINSURANCE OPERATIONS: Ended March 31,
----------------------
Dollars in millions 2001 2000
- --------------------------------------------------------------------------------------------------------------------
Net written premiums $ 98.3 $ 67.4
Earned premiums $ 91.8 $ 64.8
GAAP Ratios:
Loss and loss adjustment expense 93.8% 77.8%
Underwriting expense 27.1% 29.9%
----------------------
Combined 120.9% 107.7%
====================================================================================================================
12
Folksamerica's significant increases in written and earned premiums during the
2001 period is primarily attributable to its 2000 acquisition of the Risk
Capital Operations. Folksamerica's first quarter 2001 GAAP combined ratio does
not take into account the favorable impact of Folksamerica's retroactive
reinsurance coverage with Imagine Re (the "Imagine Cover") which was entered
into during the 2000 fourth quarter. Adverse development on reserves covered
under the Imagine Cover are recorded currently and are therefore included in
Folksamerica's first quarter 2001 combined ratio. However, the reinsurance
benefit obtained from the Imagine Cover is deferred and recognized into
underwriting income over the expected settlement period of the underlying claims
in accordance with GAAP. When adjusted for the full effects of reinsurance,
Folksamerica's first quarter 2001 combined ratio is 116.5%.
CONSOLIDATED INSURANCE OPERATIONS. As of March 31, 2001, White Mountains
consolidated insurance operations consisted principally of PIC. A summary of
selected data relating to PIC is as follows:
- -------------------------------------------------------------------------------------------------------------------
Three Months
INSURANCE OPERATIONS: Ended March 31,
-----------------------
Dollars in millions 2001 2000(a)
- --------------------------------------------------------------------------------------------------------------------
Net written premiums $ 7.2 $ 5.7
Earned premiums $ 5.9 $ 5.3
GAAP Ratios:
Loss and loss adjustment expense 80.1% 74.9%
Underwriting expense 28.5% 30.0%
-----------------------
Combined 108.6% 104.9%
====================================================================================================================
(a) Amounts related to WIC have been excluded as they are immaterial to the
presentation.
The increase in PIC's written premiums from the first quarter of 2000 to the
first quarter of 2001 is primarily due to increases in both rates and policies
in force in its commercial and non-standard auto lines. The increase in PIC's
GAAP combined ratio is due to higher losses from Northeast winter storms in the
first quarter of 2001 versus the comparable 2000 period.
SALE OF WIC. On January 5, 2001, the Company completed the sale of its
wholly-owned insurance subsidiary, WIC, to a third party for $23.6 million of
cash proceeds net of transaction expenses. The Company recognized an after tax
gain on the sale of WIC of $11.4 million. WIC ceased actively writing insurance
during 1999.
UNCONSOLIDATED INSURANCE OPERATIONS. White Mountains recorded a comprehensive
net loss on its investment in MSA of $2.9 million during the first quarter of
2001 versus comprehensive net income of $1.5 million for the comparable 2000
period. The amounts recorded by White Mountains included income of $.3 million
from MSA 's 2001 operations versus a loss of $.7 million for the comparable 2000
period. The net change in MSA's unrealized investment gains provided $3.2
million of its comprehensive net loss for the 2001 period compared to $2.2
million of comprehensive net income during the comparable 2000 period. The
significant fluctuations in MSA's net investment gains from the 2000 first
quarter to the 2001 first quarter principally resulted from a decrease in the
value of its portfolio of common equity securities. MSA's combined ratio was
107% for the first quarter of 2001 versus a combined ratio of 109% for the
comparable 2000 period.
White Mountains recorded comprehensive net income from its investment in FSA of
$31.8 million during the 2000 first quarter. The amounts recorded by White
Mountains included a loss of $3.1 million ($1.7 million after tax) on FSA's
first quarter 2000 operations offset by $33.5 million in after tax unrealized
gains recorded from the Company's investment in FSA. FSA's net loss for the 2000
period resulted principally from increased expenses for employee equity-based
compensation programs, which rose significantly along with the market value of
FSA common stock after Dexia S.A. announced during the period that it would
acquire FSA during 2000.
13
INVESTMENT OPERATIONS
Net investment income totalled $24.0 million for the 2001 first quarter compared
to $14.5 million for the comparable 2000 period. White Mountains' investment
income is comprised primarily of interest income associated with its fixed
maturity investments and dividend income from its equity investments. The
increase in net investment income from the 2000 to 2001 periods is primarily
attributable to the acquisitions of PCA and the Risk Capital Operations which
resulted in a significant increase in average invested assets during the 2001
period.
White Mountains records net unrealized investment gains and losses as a result
of changes in the value of its available for sale investment portfolio holdings,
changes in the value of its convertible securities to acquire the common stock
of FSA, when applicable, and changes in its equity in the net unrealized
investment gains and losses of its unconsolidated insurance affiliates. The
components of White Mountains' ending net unrealized investment gains and losses
on its investment portfolio and its investments in unconsolidated insurance
affiliate(s) were as follows:
- --------------------------------------------------------------------------------------------------------------------
March 31,
-----------------------
Millions 2001 2000
- --------------------------------------------------------------------------------------------------------------------
Net unrealized gains (losses) from investment securities $ 38.8 $ (18.2)
Net unrealized gains (losses) from investment in unconsolidated affiliate(s) (.3) 82.2
-----------------------
Total ending net unrealized investment gains, before tax 38.5 64.0
Deferred income taxes attributable to such gains (7.3) (18.9)
-----------------------
Total ending net unrealized investment gains, after tax $ 31.2 $ 45.1
====================================================================================================================
The components of White Mountains' change in net unrealized investment gains,
after tax, as recorded on its statements of income and comprehensive income were
as follows:
- --------------------------------------------------------------------------------------------------------------------
March 31,
-----------------------
Millions 2001 2000
- --------------------------------------------------------------------------------------------------------------------
Recognition of net unrealized gains (losses) for investments sold $ 10.2 $ (6.0)
Income taxes applicable to such gains and losses (1.9) 1.4
-----------------------
Recognition of net unrealized gains (losses) for investments sold, after tax $ 8.3 $ (4.6)
=======================
Net decrease in unrealized gains and losses for investments held $ (9.5) $ (8.8)
Net increase (decrease) in unrealized gains from investments in unconsolidated affiliates (3.2) 53.0
----------------------
Net increase (decrease) in unrealized gains and losses for investments held (12.7) 44.2
Deferred income taxes attributable to such gains and losses 4.6 (10.9)
----------------------
Net increase (decrease) in unrealized gains and losses for investments held, after tax (8.1) 33.3
Recognition of net unrealized (gains) losses for investments sold, after tax (8.3) 4.6
----------------------
Net increase (decrease) in unrealized investment gains, after tax $ (16.4) $ 37.9
====================================================================================================================
The $8.1 million decrease in after tax net unrealized gains for investments held
during the 2001 first quarter primarily reflects after tax decreases in the
values of the common equity portfolios of both White Mountains and MSA. The
$33.3 million increase in after tax net unrealized gains for investments held
during the comparable 2000 period primarily reflects unrealized losses in the
value of Folksamerica's fixed maturity portfolio due to an increase in market
interest rates during the period as well as an increase in the fair value of
White Mountains' investment in FSA convertible securities.
14
EXPENSES AND TAXES
Losses and loss adjustment expenses totalled $90.2 million for the 2001 first
quarter versus $53.0 million for the comparable 2000 period. Insurance and
reinsurance acquisition expenses totalled $23.0 million for the 2001 first
quarter versus $17.9 million for the comparable 2000 period. The increases in
these insurance expenses from the 2000 to 2001 period is primarily attributable
to the acquisitions of PCA and the Risk Capital Operations.
Compensation and benefits expenses totalled $13.6 million for the 2001 first
quarter versus $6.7 million for the comparable 2000 period. The increase in
compensation and benefits expenses for the 2001 period resulted primarily from
an increase in Share-based contingent compensation accruals which resulted from
anticipation of above-plan results for certain performance share cycles as well
as an increase in the market value of Shares during the 2001 first quarter.
General expenses totalled $9.6 million for the 2001 first quarter versus $8.9
million during the comparable 2000 period. The increase in general expenses
during the 2001 period is primarily attributable to an increase in general
expenses resulting from goodwill amortization related to the Risk Capital
Operations.
Interest expense totalled $1.9 million for the 2001 first quarter versus $4.1
million during the comparable 2000 period. The decrease in interest expense for
the 2001 period resulted from Folksamerica's repayment of all its outstanding
bank indebtedness during the 2000 fourth quarter.
As a result of the Company's redomestication to Bermuda, income earned by its
offshore subsidiaries in subsequent periods is generally subject to an effective
overall tax rate lower than that imposed by the United States, however, no tax
benefits will be attained in the event of losses incurred by such companies.
Income earned by the Company's onshore subsidiaries continues to be subject to
United States income taxes. During the 2001 first quarter, White Mountains
recorded a $1.1 million tax benefit which consisted of a Federal and state
income tax benefit of $.5 million and a foreign and United States withholding
tax benefit of $.6 million related to prior year accruals. During the 2000 first
quarter, White Mountains recorded a $1.9 million tax benefit which consisted of
a Federal and state income tax benefit of $2.1 million and a foreign and United
States withholding tax provision of $.2 million.
LIQUIDITY AND CAPITAL RESOURCES
White Mountains made significant acquisitions of run-off insurance portfolios
during the 1999 and 2000 period. These transactions involved the assumption of
sizable portfolios of invested assets on favorable terms, as well as the
assumption of insurance liabilities. Run-off liabilities paid are shown on the
Company's statement of cash flows as uses of operating cash whereby sales of the
related assets acquired are shown as sources of cash from investing activities.
On January 5, 2001, White Mountains completed the sale of WIC to a third party
for consideration of $23.6 million in cash net of transaction related expenses.
During March of 2001, the Company declared and paid $5.9 million in dividends to
shareholders.
During the 2001 first quarter, the Company issued 21,000 restricted Shares to
its employees which will vest in December 2002.
15
In September 2000 White Mountains entered into a definitive agreement with CGNU
to purchase its U.S. property and casualty insurance operations, CGU. The CGU
purchase agreement, which was amended on October 15, 2000 and February 20, 2001,
calls for a purchase price of $2.17 billion, subject to certain adjustments, of
which $260.0 million will consist of a note payable (which must be paid in
eighteen months in cash or Shares valued at $245.00 per Share, at the Company's
sole option).
In connection with the CGU transaction, White Mountains has arranged for up to
$741.0 million of new equity commitments from a small group of outside investors
and, on March 16, 2001, finalized its $875.0 million Credit Agreement with
Lehman.
On April 17, 2001 the Company repurchased $91.2 million of its $96.3 million of
outstanding medium-term notes pursuant to a tender offer and consent
solicitation dated March 15, 2001. As a result, the Company will record a $4.8
million loss on extinguishment of debt during the 2001 second quarter. The
tender offer and consent solicitation permitted the Company to effect an
amendment to the indenture governing the notes which will facilitate its
acquisition of CGU.
Completion of the CGU acquisition is subject to, among other matters, the
receipt of regulatory approvals, the completion of financing and the
satisfaction of other customary conditions.
FORWARD LOOKING STATEMENTS
White Mountains relies upon the safe harbor for forward looking statements
provided by the Private Securities Litigation Reform Act of 1995. This safe
harbor requires that White Mountains specify important factors that could cause
actual results to differ materially from those contained in forward-looking
statements made by or on behalf of White Mountains. Accordingly, forward-looking
statements by the Company and its affiliates are qualified by reference to the
following cautionary statements.
In its filings with the Securities and Exchange Commission, reports to
shareholders, press releases and other written and oral communications, White
Mountains from time to time makes forward-looking statements. Such
forward-looking statements include, but are not limited to, (i) projections of
revenues, income (or loss), earnings (or loss) per share, dividends, market
share or other financial forecasts, (ii) statements of plans, objectives or
goals of White Mountains or its management, including those related to growth in
book value and deferred credit per share or return on equity and (iii) expected
losses on, and adequacy of loss reserves for, insurance in force. Words such as
"believes", "anticipates", "expects", "intends" and "plans" and similar
expressions are intended to identify forward-looking statements but are not the
exclusive means of identifying such statements.
White Mountains cautions that a number of important factors could cause actual
results to differ materially from the plans, objectives, expectations, estimates
and intentions expressed in forward-looking statements made by White Mountains.
These factors include: (i) competitive forces, including the conduct of other
property and casualty insurers and reinsurers, (ii) changes in domestic or
foreign laws or regulations applicable to White Mountains, its competitors or
its clients, (iii) an economic downturn or other economic conditions (such as a
rising interest rate environment) adversely affecting White Mountains' financial
position, and (iv) loss reserves established by White Mountains subsequently
proving to have been inadequate and (v) the failure of pending transactions to
be consummated. White Mountains cautions that the foregoing list of important
factors is not exhaustive. In any event, such forward-looking statements made by
White Mountains speak only as of the date on which they are made, and White
Mountains does not undertake any obligation to update or revise such statements
as a result of new information, future events or otherwise.
16
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
White Mountains' consolidated balance sheet includes a substantial amount of
assets and liabilities whose fair values are subject to market risk. The term
market risk refers to the risk of loss arising from adverse changes in: interest
rates, foreign currency exchange rates, commodity prices, and other relevant
market rates and prices such as prices for common equity securities. Due to
White Mountains' sizable investments in fixed maturity investments and common
equity securities at its insurance and reinsurance subsidiaries and its use of
medium and long-term debt financing at the Company and certain of its operating
companies, market risk can have a significant affect on White Mountains
consolidated financial position.
17
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
On February 20, 2001, the Registrant filed a Form 8-K (Item 5)
which announced that it had amended its definitive agreement
to acquire CGU and that the Company had revised the terms of
its debt financing commitment with Lehman.
* Not included as an exhibit as the information is contained
elsewhere within report. See Note 3 of the Notes to Condensed
Consolidated Financial Statements.
18
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.
(Registrant)
Date: May 14, 2001 By: /s/
---------------------------------
Michael S. Paquette
Senior Vice President and Controller
19
