AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 10, 2001
REGISTRATION NO. 333-73012
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------------------------
AMENDMENT NO. 1 TO
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
-------------------------------
WHITE MOUNTAINS INSURANCE GROUP, LTD. FUND AMERICAN COMPANIES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
BERMUDA DELAWARE
(STATE OR OTHER JURISDICTION OF INCORPORATION OR ORGANIZATION) (STATE OR OTHER JURISDICTION OF INCORPORATION OR ORGANIZATION)
94-2708455 52-2272489
(I.R.S. EMPLOYER IDENTIFICATION NUMBER) (I.R.S. EMPLOYER IDENTIFICATION NUMBER)
28 GATES STREET ONE BEACON STREET
WHITE RIVER JUNCTION, VERMONT 05001-7066 BOSTON, MASSACHUSETTS 02108-3100
(802) 295-4500 (617) 725-6000
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING (ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING
AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICE) AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICE)
FUND AMERICAN TRUST I
FUND AMERICAN TRUST II
FUND AMERICAN TRUST III
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE
(STATE OR JURISDICTION OF INCORPORATION OR ORGANIZATION)
04-6954892
04-6954893
04-6954894
(I.R.S. EMPLOYER IDENTIFICATION NUMBER)
ONE BEACON STREET
BOSTON, MASSACHUSETTS 02108-3100
(617) 725-6000
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING
AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICE)
-------------------------------
J. BRIAN PALMER
WHITE MOUNTAINS INSURANCE GROUP, LTD.
28 GATES STREET
WHITE RIVER JUNCTION, VERMONT 05001-7066
(802) 295-4500
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF AGENT FOR SERVICE)
-------------------------------
COPIES TO:
WILLIAM J. WHELAN, III, ESQ.
CRAVATH, SWAINE & MOORE
825 EIGHTH AVENUE
NEW YORK, NEW YORK 10019-7475
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO PUBLIC: From time
to time after the effective date of this registration statement, as determined
by market conditions and other factors.
If the only securities being registered on this Form are being offered pursuant
to dividend or interest reinvestment plans, please check the following box. / /
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box. /X/
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, please check the following box and list
the Securities Act registration statement number of the earlier effective
registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. /X/
--------------------------------------------
CALCULATION OF REGISTRATION FEE
==============================================================================================================
TITLE OF EACH CLASS OF AMOUNT TO BE AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED(1)(2)(3) REGISTRATION FEE(*)
- ---------------------------------------------------------------------------------------------------------------
Debt Securities of White Mountains
Insurance Group, Ltd................................
Preference Shares of White Mountains...................
Insurance Group, Ltd................................
Debt Securities and Junior Subordinated
Debt Securities of Fund American
Companies, Inc......................................
Preferred Securities of Fund American
Trust I, Fund American Trust II and
Fund American Trust III (collectively,
the "Fund American Trusts").........................
Guarantees of Debt Securities and Junior
Subordinated Debt Securities of Fund American
Companies, Inc. by White Mountains
Insurance Group, Ltd(4).............................
Guarantees of Preferred Securities of the
Fund American Trusts by White Mountains
Insurance Group, Ltd(4).............................
TOTAL.................................................. $1,000,000,000.00 $250,000.00
==============================================================================================================
(*) Previously paid on November 8, 2001.
(1) Includes such indeterminate principal amount of debt securities as may
from time to time be issued at indeterminate prices.
(2) Represents the aggregate initial offering price of all securities sold.
Amounts represent United States Dollars or the equivalent in one or
more other currencies or currency units.
(3) Estimated solely for purposes of calculating the registration fee in
accordance with Rule 457(o) under the Securities Act of 1933 and
exclusive of accrued interest and dividends, if any.
(4) No additional registration fee is payable in respect of the
registration of Guarantees.
--------------------------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE
OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
================================================================================
[begin red herring]
The information in this prospectus is not complete and may be changed. We may
not sell these securities until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus is not an offer
to sell these securities and it is not soliciting an offer to buy these
securities in any state where the offer or sale is not permitted.
[end red herring]
PROSPECTUS SUBJECT TO COMPLETION
PRELIMINARY PROSPECTUS
DATED DECEMBER 10, 2001
$1,000,000,000
WHITE MOUNTAINS INSURANCE GROUP, LTD.
PREFERENCE SHARES AND DEBT SECURITIES
FUND AMERICAN COMPANIES, INC.
DEBT SECURITIES AND JUNIOR SUBORDINATED DEBT SECURITIES
(IRREVOCABLY AND UNCONDITIONALLY GUARANTEED BY
WHITE MOUNTAINS INSURANCE GROUP, LTD.)
FUND AMERICAN TRUST I
FUND AMERICAN TRUST II
FUND AMERICAN TRUST III
PREFERRED SECURITIES
(FULLY AND UNCONDITIONALLY
GUARANTEED TO THE EXTENT PROVIDED IN THIS PROSPECTUS
BY WHITE MOUNTAINS INSURANCE GROUP, LTD.)
We may offer these securities in one or more offerings having an
aggregate initial public offering price of up to $1,000,000,000. When we decide
to sell a particular series of securities, we will prepare a prospectus
supplement describing those securities and our plan of distribution. You should
read this prospectus and any prospectus supplement carefully.
White Mountains Insurance Group, Ltd.'s common shares are listed on the
New York Stock Exchange under the symbol "WTM".
SEE "RISK FACTORS" BEGINNING ON PAGE 3 TO READ ABOUT FACTORS YOU SHOULD
CONSIDER BEFORE INVESTING IN THE SECURITIES.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED WHETHER
THIS PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
-------------------------------
THE DATE OF THIS PROSPECTUS IS , 2001
TABLE OF CONTENTS
PAGE
----
About This Prospectus............................................................................................ii
Where You Can Find More Information.............................................................................iii
Enforcement of Judgments and Other Matters.......................................................................iv
Prospectus Summary................................................................................................1
Risk Factors......................................................................................................3
Special Note Regarding Forward-Looking Statements.................................................................8
Ratio of Earnings to Fixed Charges and Ratio of Earnings to Combined Fixed Charges
and Preferred Stock Dividends............................................................................9
Use of Proceeds...................................................................................................9
Business.........................................................................................................10
Description of Other Obligations.................................................................................31
General Description of Securities................................................................................36
Description of Preference Shares.................................................................................36
Description of Debt Securities...................................................................................38
Description of Junior Subordinated Debt Securities...............................................................50
Description of Trust Preferred Securities........................................................................62
Description of Trust Preferred Securities Guarantees.............................................................65
Plan of Distribution.............................................................................................68
Legal Matters....................................................................................................70
Experts..........................................................................................................70
i
ABOUT THIS PROSPECTUS
This prospectus is part of a registration statement that White
Mountains Insurance Group, Ltd. ("White Mountains"), Fund American Companies,
Inc. ("Fund American") and Fund American Trusts I, II and III (each a "Fund
American Trust") filed with the Securities and Exchange Commission (the "SEC")
utilizing a "shelf" registration process. Each of White Mountains, Fund American
and each Fund American Trust is an issuer under the shelf. Under this shelf
process, White Mountains, Fund American and each Fund American Trust may, from
time to time over approximately the next two years, sell any combination of the
securities described in this prospectus in one or more offerings up to a total
dollar amount of $1,000,000,000 or the equivalent of this amount in foreign
currencies or foreign currency units.
This prospectus provides you with a general description of the
securities White Mountains, Fund American and each Fund American Trust may
offer. Each time White Mountains, Fund American or a Fund American Trust sell
securities registered under the registration statement to which this prospectus
is part, the issuer will provide a prospectus supplement that will contain
specific information about the terms of that offering. The issuer will file each
prospectus supplement with the SEC. The prospectus supplement may also add,
update or change information contained in this prospectus. You should read both
this prospectus and any prospectus supplement together with additional
information described under the heading "Where You Can Find More Information"
below.
This prospectus does not contain separate financial statements for the
Fund American Trusts. We do not believe these financial statements would be
useful since each trust is an indirect wholly-owned subsidiary of White
Mountains, and we file consolidated financial information under the Exchange
Act. The Fund American Trusts will not have any independent function other than
to issue common and trust preferred securities and to purchase junior
subordinated debt securities of Fund American. White Mountains will provide a
full, unconditional guarantee of each trust's obligations under their respective
common and trust preferred securities.
You should rely only on the information provided in this prospectus and
in any prospectus supplement, including the information incorporated by
reference. White Mountains, Fund American and the Fund American Trusts have not
authorized anyone to provide you with different information. White Mountains,
Fund American and the Fund American Trusts are not offering the securities in
any state where the offer is not permitted. You should not assume that the
information in this prospectus, or any supplement to this prospectus, is
accurate at any date other than the date indicated on the cover page of these
documents.
ii
WHERE YOU CAN FIND MORE INFORMATION
White Mountains files annual, quarterly and special reports, proxy
statements and other information with the SEC. You may read and copy any
document we file with the SEC at the SEC's public reference rooms at the
following locations:
Public Reference Room New York Regional Office Chicago Regional Office
450 Fifth Street, N.W. 233 Broadway Citicorp Center
Room 1024 New York, NY 10279 500 West Madison Street
Washington, D.C. 20549 Suite 1400
Chicago, Illinois 60661-2511
Please call the SEC at 1-800-SEC-0330 for further information on the
operations of the public reference rooms. Our SEC filings are also available to
the public at the SEC's web site at HTTP://WWW.SEC.GOV and at the public
reference room of the New York Stock Exchange, 20 Broad Street, New York, New
York. You may also obtain more information by visiting our web site at
HTTP://WWW.WHITEMOUNTAINS.COM. The information on our web site is not part of
this prospectus.
Some documents filed or to be filed by us with the SEC are incorporated
by reference into this prospectus. The information contained in those documents
is considered to be part of this prospectus, except that the information
contained in later-dated documents will supplement, modify or supersede, as
applicable, the information contained in earlier-dated documents.
The information in the following documents that we have filed or will
file with the SEC is incorporated by reference into this prospectus:
o Our Annual Report on Form 10-K for the year ended
December 31, 2000;
o Our Quarterly Reports on Forms 10-Q for the quarters
ended March 31, 2001, June 30, 2001 and September 30,
2001;
o Our Current Reports on Forms 8-K dated February 20,
2001 (filed February 20, 2001); June 1, 2001 (filed
June 1, 2001); June 8, 2001 (filed June 8, 2001);
July 25, 2001 (filed July 25, 2001); August 23, 2001
(filed August 23, 2001); September 5, 2001 (filed
September 7, 2001); September 14, 2001 (filed
September 17, 2001); October 31, 2001 (filed November
1, 2001) and November 2, 2001 (filed November 2,
2001); and Form 8-K/A dated June 1, 2001 (filed June
8, 2001); June 1, 2001 (filed June 25, 2001);
September 5, 2001 (filed October 31, 2001); November
1, 2001 (filed November 5, 2001) and June 1, 2001
(filed November 7, 2001).
o Our Proxy Statement for our 2001 Annual Meeting on
Schedule 14A filed July 6, 2001;
o The description of our common shares in Form 8-A
filed December 16, 1999; and
o All documents filed by us with the SEC under
Sections 13(a), 13(c), 14 or 15(d) of the Securities
Exchange Act of 1934 after the date of this
prospectus and prior to the termination of all
offerings hereunder.
The statements contained in this prospectus regarding the provisions of
any other document are not necessarily complete. Accordingly, each of these
statements is qualified in its entirety by reference to the copy of that
document filed with the SEC.
iii
You may obtain without charge a copy of any of the documents
incorporated by reference into this prospectus, except for any exhibits to those
documents that are not expressly incorporated by reference, from us. Any request
for those documents should be directed to our Corporate Secretary at one of the
following addresses or telephone numbers:
28 Gates Street Suite 224
White River Junction, Vermont 05001-7066 12 Church Street
(802) 295-4500 Hamilton HM 11, Bermuda
(Bermuda mailing address)
Crawford House
23 Church Street
Hamilton HM 11, Bermuda
(Bermuda street address)
(441) 296-6011
ENFORCEMENT OF JUDGMENTS AND OTHER MATTERS
White Mountains is organized under the laws of Bermuda. In addition,
some of our directors and officers, as well as some of the experts named in this
prospectus, reside outside of the United States. A substantial portion of our
and their assets are located outside of the United States. It may be difficult
for you to effect service of process within the United States on White
Mountains' directors, officers and experts who reside outside the United States
or to enforce in the United States judgments of U.S. courts obtained in actions
against White Mountains or its directors and officers, as well as the experts
named in this prospectus who reside outside the United States.
We have been advised by our Bermuda counsel, Conyers Dill & Pearman,
that there is doubt as to whether:
o an investor would be able to enforce, in the courts of
Bermuda, judgments of United States courts against persons who
reside in Bermuda based upon the civil liability provisions of
United States federal securities laws;
o an investor would be able to enforce, in the courts of
Bermuda, judgments of United States courts based upon the
civil liability provisions of the United States federal
securities laws;
o an investor would be able to bring an original action in the
Bermuda courts to enforce liabilities against us or our
directors and officers, as well as the experts named in this
prospectus, who reside outside the United States based solely
upon United States federal securities laws.
We also have been advised by Conyers Dill & Pearman that there is no
treaty in effect between the United States and Bermuda providing for such
enforcement, and there are grounds upon which Bermuda courts may not enforce
judgments of United States courts. Certain remedies available under the laws of
United States jurisdictions, including certain remedies available under the
United States federal securities law, may not be allowed in Bermuda courts as
contrary to Bermuda's public policy.
iv
PROSPECTUS SUMMARY
THIS SUMMARY HIGHLIGHTS WHAT WE BELIEVE TO BE THE MOST IMPORTANT
INFORMATION ABOUT THE COMPANY AND THE OFFERING. BECAUSE THIS IS A SUMMARY, IT
DOES NOT CONTAIN ALL THE INFORMATION THAT MAY BE IMPORTANT TO YOU. TO UNDERSTAND
OUR BUSINESS AND THIS OFFERING FULLY, YOU SHOULD READ THE ENTIRE PROSPECTUS
CAREFULLY, INCLUDING THE RISK FACTORS SECTION BEGINNING ON PAGE 3, THE DOCUMENTS
INCORPORATED BY REFERENCE INTO THIS PROSPECTUS AND THE PROSPECTUS SUPPLEMENT
RELATING TO THE SECURITIES THAT YOU PROPOSE TO BUY, ESPECIALLY ANY DESCRIPTION
OF INVESTMENT RISKS THAT WE MAY INCLUDE IN THE PROSPECTUS SUPPLEMENT. UNLESS
OTHERWISE INDICATED OR THE CONTEXT OTHERWISE REQUIRES, REFERENCES IN THIS
PROSPECTUS TO "WE", "OUR", "US" OR THE "COMPANY" REFER TO WHITE MOUNTAINS
INSURANCE GROUP, LTD. AND ITS DIRECT AND INDIRECT SUBSIDIARIES.
WHITE MOUNTAINS INSURANCE GROUP, LTD.
White Mountains was originally formed as a Delaware corporation in
1980 and became a Bermuda limited liability company during 1999. The
company's headquarters are located at Crawford House, 23 Church Street,
Hamilton, Bermuda HM 11, its principal executive office is located at 28
Gates Street, White River Junction, Vermont, 05001-7066 and its registered
office is located at Clarendon House, 2 Church Street, Hamilton, Bermuda HM
DX. The company's telephone numbers are (441) 296-6011 in Bermuda and (802)
295-4500 in Vermont. The company is a holding company for its property and
casualty insurance and reinsurance operations.
FUND AMERICAN COMPANIES, INC.
Fund American is a Delaware corporation with its principal executive
office located at One Beacon Street, Boston, Massachusetts 02108-3100. Fund
American is an intermediate holding company for all of White Mountains' property
and casualty insurance and reinsurance operations. OneBeacon Corporation
("OneBeacon"), a wholly-owned subsidiary of Fund American, owns and controls
several property and casualty insurance and reinsurance companies and
Folksamerica Holding Company, Inc. ("Folksamerica"), a wholly-owned subsidiary
of the OneBeacon, owns and controls several property and casualty insurance and
reinsurance companies.
White Mountains indirectly owns all the outstanding shares of Fund
American common stock.
THE FUND AMERICAN TRUSTS
The Fund American Trusts I, II and III are each Delaware business
trusts that will offer and sell trust preferred securities, from time to time in
one or more offerings. Each Fund American Trust will use all of the proceeds
from the sale of its trust preferred securities to buy junior subordinated debt
securities of Fund American. The Fund American Trusts will receive cash payments
from the junior subordinated debt securities, and each trust will distribute
these payments to the holders of its trust preferred and common securities.
Fund American will own all of the common securities of the Fund
American Trusts.
1
THE OFFERING
We may offer any of the following securities from time to time:
o preference shares
o debt securities
o trust preferred securities
This prospectus describes the general terms that may apply to the
securities; the specific terms of any particular securities that we may offer
will be described in a separate supplement to this prospectus.
RISK FACTORS
Prospective purchasers of the securities should consider carefully all
the information set forth in this prospectus and, in particular, should evaluate
the specific factors under the section "Risk Factors" beginning on page 3 for
considerations relevant to an investment in the offering.
OUR EXECUTIVE OFFICES
Our principal executive offices are located at 28 Gates Street,
White River Junction, Vermont 05001-7066, and our telephone number is (802)
295-4500. Our headquarters are located at Crawford House, 23 Church Street,
Hamilton, Bermuda HM 11 and our registered office is located at Clarendon
House, 2 Church Street, Hamilton, Bermuda HM DX.
2
RISK FACTORS
In addition to the other information in this prospectus, you should
consider the following factors before determining whether to invest in the
securities.
RISKS RELATING TO OUR BUSINESS
UNPREDICTABLE CATASTROPHIC EVENTS, SUCH AS THE SEPTEMBER 11, 2001
TERRORIST ATTACKS, COULD REDUCE OUR NET INCOME.
We write insurance and reinsurance policies that cover catastrophic
events. Our policies cover unpredictable natural and other disasters, such as
hurricanes, windstorms, earthquakes, floods, fires and explosions. Claims from
catastrophic events could reduce our net income, cause substantial volatility
in our financial results for any fiscal quarter or year and adversely affect our
financial condition or results of operations. Our ability to write new business
could also be impacted. We believe that increases in the value and geographic
concentration of insured property and the effects of inflation will increase the
severity of claims from catastrophic events in the future.
On September 11, 2001, terrorists hijacked a number of airplanes and
caused them to crash, resulting in large losses to life and property. We
estimate that our pretax gross losses associated with these terrorist attacks to
be approximately $348.0 million, $85.0 million net of reinsurance and taxes.
Further repercussions from these incidents and the effect they will have on us
and our industry cannot be predicted and are beyond our control. The current
conflict in Afghanistan, the potential commission of further terrorist
incidents, substantial political instability and societal disruption may harm
our business.
WE MAY NOT BE SUCCESSFUL IN ACHIEVING THE INTENDED BENEFITS OF THE
ONEBEACON ACQUISITION.
We recently completed the acquisition of OneBeacon, which significantly
changed the operations of our company. Acquisitions involve numerous risks,
including:
o difficulty with the assimilation of acquired operations and
products;
o failure to achieve targeted returns;
o inability to retain key employees and business relationships
of acquired companies; and
o diversion of the attention and resources of our management
team.
The process of improving acquired operations and achieving targeted
returns may result in unexpected operating difficulties and may require
significant financial and other resources that would otherwise be available for
the ongoing development of existing operations.
If we cannot successfully integrate OneBeacon, the risks associated
with the acquisition may adversely affect our business, financial condition,
results of operations and cash flows.
3
OUR LOSS RESERVES MAY BE INADEQUATE TO COVER OUR ULTIMATE LIABILITY FOR
LOSSES AND AS A RESULT COULD ADVERSELY AFFECT OUR FINANCIAL RESULTS.
We are required to maintain adequate monetary reserves to cover our
estimated ultimate liabilities for loss and loss adjustment expenses. These
reserves are only estimates based on actuarial and statistical projections of
what we believe the settlement and administration of claims will cost based on
facts and circumstances then known to us. Because of the uncertainties that
surround estimating loss reserves, we cannot be certain that our reserves are
adequate and actual claims and claim expenses paid might exceed our reserves. If
our reserves are insufficient to cover our actual loss and loss adjustment
expenses, we would have to augment our reserves and incur charges to our
earnings. These charges could be material.
OUR SUBSTANTIAL DEBT AND OUR DEBT SERVICE OBLIGATIONS COULD ADVERSELY
AFFECT OUR BUSINESS.
We have substantial amounts of outstanding indebtedness. As of
September 30, 2001, we had approximately $1,115.1 million of indebtedness
outstanding, including $850.0 million of indebtedness of Fund American.
Our substantial indebtedness could have significant negative
consequences, including:
o increasing our vulnerability to general adverse economic and
industry conditions;
o limiting our ability to obtain additional financing for
working capital, capital expenditures, acquisitions and other
purposes;
o requiring the dedication of a significant portion of our
expected cash flow from operations to service our
indebtedness, thereby reducing the amount of our expected cash
flow available for working capital, capital expenditures,
acquisitions and other purposes;
o making it more difficult to satisfy our obligations with
respect to the debt securities;
o limiting our flexibility in planning for, or reacting to,
changes in our business and industry;
o placing us at a possible competitive disadvantage relative to
less leveraged competitors;
o increasing the amount of our interest expense, because some of
our borrowings are at variable rates of interest, which, if
interest rates increase, could result in higher interest
expense; and
o limiting, through the financial and other restrictive
covenants in our indebtedness, among other things, our ability
to borrow additional funds, dispose of assets or make
investments.
Our ability to meet our expenses and debt obligations will depend on
our future performance, which will be affected by financial, business, economic
and other factors. We will not be able to control many of these factors, such as
economic conditions and governmental regulation. We cannot be certain that our
earnings will be sufficient to allow us to pay the principal and interest on our
debt and meet our other obligations. If we do not have enough money, we may be
required to refinance all or part of our existing debt, sell assets, borrow more
money or sell equity. We cannot assure you that we will be able to accomplish
any of these alternatives on terms acceptable to us, if at all.
4
DESPITE CURRENTLY EXPECTED LEVELS OF INDEBTEDNESS, OUR SUBSIDIARIES AND
WE WILL BE ABLE TO INCUR SUBSTANTIALLY MORE DEBT.
Our subsidiaries and we will be able to incur substantial additional
indebtedness in the future. Any such borrowings would be effectively senior to
the securities. In addition, the indenture with respect to the debt securities
does not restrict us from incurring additional indebtedness. To the extent new
debt and other obligations are added to our and our subsidiaries' currently
anticipated debt levels, the substantial risks described above would increase.
BECAUSE WHITE MOUNTAINS AND FUND AMERICAN ARE HOLDING COMPANIES, THEY
ARE DEPENDENT ON DIVIDENDS AND PAYMENTS FROM THEIR RESPECTIVE SUBSIDIARIES TO
MAKE PAYMENTS ON THEIR DEBT AND TO PAY DIVIDENDS ON THEIR PREFERRED STOCK.
As holding companies with no direct operations and whose only
significant assets are the capital stock of their respective subsidiaries, each
of White Mountains and Fund American relies on investment income, cash dividends
and other permitted payments from its subsidiaries to make principal and
interest payments on its debt and dividends on its preferred stock. The
respective subsidiaries of White Mountains and Fund American are not obligated
to pay amounts due pursuant to any debt securities of White Mountains and Fund
American or make funds available to White Mountains or Fund American,
respectively, for such payments. The respective subsidiaries of White Mountains
and Fund American may not be able to generate a cash flow sufficient to pay a
dividend or distribute funds to White Mountains or Fund American. In addition,
applicable state law that regulates the payment of dividends by our insurance
subsidiaries and certain contractual restrictions, including restrictions in the
debt instruments of White Mountains' and Fund American's subsidiaries, could
prohibit such dividends or distributions. Under the insurance laws of the states
in which White Mountains' and Fund American's insurance subsidiaries are
domiciled, an insurer is restricted with respect to the timing or the amount of
dividends it may pay without prior approval by regulatory authorities. In a
given calendar year, our insurance subsidiaries can generally dividend without
prior regulatory approval up to the greater of 10% of their statutory surplus at
the beginning of the year or the prior year's statutory net income, subject to
the availability of unassigned funds (the statutory accounting equivalent of
retained earnings). Larger dividends can be paid only upon regulatory approval.
If the respective subsidiaries of White Mountains and Fund American cannot pay
dividends, White Mountains and Fund American may be unable to repay their
indebtedness or to pay dividends on preferred stock.
DECREASES IN RATES FOR PROPERTY AND CASUALTY INSURANCE AND REINSURANCE
COULD REDUCE OUR NET INCOME.
The property and casualty insurance and reinsurance industry
historically has been highly cyclical and competitive. Rates for property and
casualty insurance and reinsurance are influenced primarily by factors that are
outside of our control, including market and competitive conditions and
regulatory issues. Any significant decrease in the rates for property and
casualty insurance or reinsurance could reduce our net income.
THE PROPERTY AND CASUALTY INSURANCE AND REINSURANCE INDUSTRY IS HIGHLY
COMPETITIVE AND WE MAY NOT BE ABLE TO COMPETE EFFECTIVELY IN THE FUTURE.
The property and casualty insurance and reinsurance industry is highly
competitive and has experienced severe price competition over the last several
years. We compete in the United States with numerous international and domestic
insurance and reinsurance companies. Some of these competitors
5
have greater financial resources than we do, have been operating for longer than
we have and have established long-term and continuing business relationships
throughout the industry, which can be a significant competitive advantage. In
addition, we expect to face further competition in the future. If we are unable
to maintain our competitive position, our business may be adversely affected and
we may not be able to compete effectively in the future.
WE MAY NOT BE ABLE TO SUCCESSFULLY ALLEVIATE RISK THROUGH REINSURANCE
AND RETROCESSIONAL ARRANGEMENTS.
We attempt to limit our risk of loss through reinsurance and
retrocessional arrangements. The availability and cost of reinsurance and
retrocessional protection is subject to market conditions, which are outside of
our control. As a result, we may not be able to successfully alleviate risk
through these arrangements. In addition, we are subject to credit risk with
respect to our reinsurance and retrocessions because the ceding of risk to other
insurance enterprises and reinsurers does not relieve us of our liability to our
policy holders or ceding companies. We also may experience difficulties in the
future in recovering material reinsurance receivables under our reinsurance and
retrocessional arrangements if one or more of our reinsurers suffer financial
deterioration.
WE MAY NOT MAINTAIN A FAVORABLE FINANCIAL STRENGTH RATING WHICH COULD
ADVERSELY AFFECT OUR ABILITY TO CONDUCT BUSINESS.
Third party rating agencies assess and rate the claims-paying ability
of insurers and reinsurers. Financial strength ratings are used by insurers and
reinsurers and insurance and reinsurance intermediaries as an important means of
assessing the financial strength and quality of insurers and reinsurers. In
addition, the rating of a company purchasing reinsurance may be adversely
affected by an unfavorable rating or the lack of a rating of its reinsurer.
These ratings are based upon criteria established by the rating agencies. Some
of the criteria relate to general economic conditions and other circumstances
outside the rated company's control. Periodically the rating agencies evaluate
us to confirm that we continue to meet the criteria of the ratings previously
assigned to us. The claims-paying ability ratings assigned by rating agencies to
insurance or reinsurance companies are based upon factors relevant to
policyholders and are not directed toward the protection of investors. Financial
strength ratings by rating agencies are not ratings of securities or
recommendations to buy, hold, or sell any security.
OneBeacon's principal insurance operating subsidiaries presently hold
an "A" (Excellent) financial strength rating from A.M. Best Company.
Folksamerica's principal reinsurance operating subsidiary presently holds an
"A-" (Excellent) financial strength rating from A.M. Best Company. A downgrade
or withdrawal of either of our ratings could severely limit or prevent us from
writing any new insurance or reinsurance policies.
OUR INABILITY TO ACCURATELY ASSESS UNDERWRITING RISK COULD REDUCE OUR
NET INCOME.
Our success is dependent on our ability to accurately assess the risks
associated with the businesses that we insure or reinsure. If we fail to
accurately assess the risks we assume, we may fail to establish appropriate
premium rates and our reserves may be inadequate to cover our losses, which
could adversely impact our financial condition and results of operations.
6
REGULATION MAY RESTRICT OUR ABILITY TO OPERATE AND RESTRICTS OUR
ABILITY TO RECEIVE DIVIDENDS FROM OUR INSURANCE SUBSIDIARIES.
The insurance and reinsurance industries are subject to extensive
regulation under Federal, state and foreign laws. Governmental agencies have
broad administrative power to regulate many aspects of the insurance business,
which may include premium rates, marketing practices, advertising, policy forms
and capital adequacy. These agencies are concerned primarily with the protection
of policyholders rather than shareholders or holders of debt securities.
Insurance laws and regulations limit the amount of dividends that can be paid,
impose restrictions on the amount and type of investments, prescribe solvency
standards that must be met and maintained and require the maintenance of
reserves. In addition, state insurance holding company statutes generally
require prior notice or approval of changes of control of an insurer or its
holding company.
MANDATED MARKET MECHANISMS MAY REQUIRE US TO UNDERWRITE POLICIES WITH A
HIGHER RISK OF LOSS.
White Mountains' insurance and reinsurance operations are often
required to directly or indirectly participate in mandatory shared market
mechanisms, principally in the states of Massachusetts, New Jersey and New York.
These mechanisms typically require insurers to accept applications for insurance
policies by individuals who are unable to obtain insurance in the voluntary
market. Underwriting results related to assigned risk plans are typically
adverse and, as a result, we underwrite some policies with a higher risk of loss
than we would normally accept. This may result in greater liability than
anticipated and could adversely affect our financial condition and results of
operations.
OUR INVESTMENT OBJECTIVES MAY NOT BE REALIZED.
The success of our investment objectives is affected by general
economic conditions that are outside of our control. General economic conditions
can adversely affect the markets for interest-rate- sensitive securities,
including the extent and timing of investor participation in such markets, the
level and volatility of interest rates and, consequently, the value of fixed
income securities. Unexpected volatility or illiquidity in the markets in which
we directly or indirectly hold positions could adversely affect us and we may
not be able to realize our investment objectives, which could reduce our net
income.
WE DEPEND ON OUR KEY PERSONNEL TO MANAGE OUR BUSINESS EFFECTIVELY AND
THEY MAY BE DIFFICULT TO REPLACE.
Our performance substantially depends on the efforts and abilities of
our senior management team and other executive officers and key employees.
Furthermore, much of our competitive advantage is based on the expertise,
experience and know-how of our key personnel. The loss of key employees could
have a negative effect on our business, revenues, results of operations and
financial condition. Our success also depends on the ability to hire and retain
additional personnel. Difficulty in hiring or retaining personnel could
adversely affect future operating performance.
7
SPECIAL NOTE ON FORWARD-LOOKING STATEMENTS
This prospectus includes "forward-looking statements" within the
meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934. All statements, other than statements of
historical facts, included or incorporated by reference in this prospectus which
address activities, events or developments which we expect or anticipate will or
may occur in the future are forward-looking statements. The words "believe",
"intend", "expect", "anticipate", "project", "estimate", "predict" and similar
expressions are also intended to identify forward-looking statements.
These forward-looking statements include, among others, such things as:
o the amount and nature of future capital expenditures;
o our financial and operating targets;
o business strategy;
o expansion and growth of our business and operations;
o projections of revenues, income (or loss), earnings (or loss)
per share, dividends, market share or other financial
forecasts;
o our or our management's statements of plans, objectives or
goals, including those related to growth in book value and
deferred credit per share or return on equity; and
o expected losses on, and adequacy of loss reserves for,
insurance in force.
These statements are based on certain assumptions and analyses made by
us in light of our experience and perception of historical trends, current
conditions and expected future developments, as well as other factors we believe
are appropriate in the circumstances. However, whether actual results and
developments will conform with our expectations and predictions is subject to a
number of risks and uncertainties which could cause actual results to differ
materially from our expectations, including:
o the risk factors discussed in this prospectus and in the
documents we incorporate by reference;
o continued availability of capital and financing;
o general economic, market or business conditions;
o the acquisition and other business opportunities (or lack
thereof) that may be presented to and pursued by us;
o competitive forces, including the conduct of other property
and casualty insurers and reinsurers;
o changes in domestic or foreign laws or regulations applicable
to us, our competitors or our clients;
8
o an economic downturn or other economic conditions (such as a
rising interest rate environment) adversely affecting our
financial position;
o loss reserves established by us subsequently proving to have
been inadequate; and
o other factors, most of which are beyond our control.
Consequently, all of the forward-looking statements made in this
prospectus are qualified by these cautionary statements, and there can be no
assurance that the actual results or developments anticipated by us will be
realized or, even if substantially realized, that they will have the expected
consequences to or effects on us or our business or operations. We assume no
obligation to update publicly any such forward-looking statements, whether as a
result of new information, future events or otherwise.
RATIO OF EARNINGS TO FIXED CHARGES
AND RATIO OF EARNINGS TO COMBINED FIXED CHARGES
AND PREFERRED STOCK DIVIDENDS
The following table sets forth the ratio of earnings to fixed charges
and the ratio of earnings to combined fixed charges and preferred stock
dividends for White Mountains for the periods indicated.
YEAR ENDED DECEMBER 31,
----------------------- NINE MONTHS ENDED
1996 1997 1998 1999 2000 SEPTEMBER 30, 2001
---- ---- ---- ---- ---- -------------
Ratio of earnings to fixed
charges (1)........................ 2.3 8.7 5.4 9.7 21.8 n/a (2)
Ratio of earnings to combined
fixed charges and preferred
stock dividends.................... 2.3 8.7 5.4 9.7 21.8 n/a (2)
(1) For purposes of this computation, earnings are defined as earnings from
continuing operations before income taxes plus fixed charges excluding
capitalized interest. Fixed charges are the sum of interest expense and
interest expense inherent in lease obligations.
(2) Not applicable due to a loss from continuing operations before income
taxes plus fixed charges excluding capitalized interest reported during
the period.
USE OF PROCEEDS
Unless indicated otherwise in a prospectus supplement, we expect to use
the net proceeds from the sale of the securities for general corporate purposes,
including repayment of borrowings, working capital, capital expenditures, share
repurchase programs and acquisitions. Unless otherwise specified in the
accompanying prospectus supplement, the Fund American Trusts will use all
proceeds received from the sale of their trust preferred securities to purchase
junior subordinated debt securities of Fund American.
9
BUSINESS
GENERAL
White Mountains Insurance Group, Ltd. was originally formed as a
Delaware corporation in 1980 and became a Bermuda company during 1999. The
company's headquarters are located at Crawford House, 23 Church Street,
Hamilton, Bermuda HM 11, its principal executive office is located at 28
Gates Street, White River Junction, Vermont 05001-7066 and its registered
office is located at Clarendon House, 2 Church Street, Hamilton, Bermuda HM
DX. The company is the holding company for its property and casualty
insurance and reinsurance operations.
In June 1999, the company changed its name from "Fund American
Enterprises Holdings, Inc." to "White Mountains Insurance Group, Inc."
In October 1999, the company completed a corporate reorganization
whereby it changed its domicile from Delaware to Bermuda (the
"Redomestication"). The Redomestication was primarily undertaken to improve the
company's ability to compete in international markets by creating a corporate
structure which is more favorable for the formation and growth of
internationally-based insurance and reinsurance operations and which has an
enhanced ability to pursue business combinations with non- United States
entities. In connection with the Redomestication, the company's name was further
changed to "White Mountains Insurance Group, Ltd." to comply with Bermuda law.
On June 1, 2001, the company acquired OneBeacon Corporation (formerly
CGU Corporation, "OneBeacon") from 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. OneBeacon owns and controls
several property and casualty insurance companies and Folksamerica Holding
Company, Inc. ("Folksamerica"), a wholly-owned subsidiary of OneBeacon, which
owns and controls several property and casualty insurance and reinsurance
companies.
On October 30, 2001, OneBeacon announced that it had reached a
definitive agreement (the "Renewal Rights Agreement") with Liberty Mutual
Insurance Group ("Liberty Mutual") which, beginning November 1, 2001, gradually
transfers OneBeacon's personal and commercial business, staff and operations in
42 states and the District of Columbia to Liberty Mutual.
PROPERTY AND CASUALTY INSURANCE
OVERVIEW
As a property and casualty insurance company, OneBeacon writes
insurance policies in exchange for premiums paid by its customers (the insured).
An insurance policy is a contract between an insurance company and the insured
whereby the insurance company agrees to pay for losses covered under the
contract. Property insurance covers the financial consequences of accidental
losses to the property of the insured, such as a house and typically the
personal property in it, or a business' building, inventory and equipment.
Casualty insurance (often referred to as liability insurance) generally covers
the financial consequences of a legal liability of an individual or an
organization resulting from negligent acts and omissions causing bodily injury
and/or property damage to a third party. Property and casualty insurance is
available on a wide variety of coverages, including the following:
10
o Automobile insurance covers physical damage to an
insured's vehicle as well as liabilities to third
parties. Auto physical damage insurance covers loss
or damage to vehicles from collision, vandalism,
fire, theft or other causes. Auto liability insurance
covers bodily injury to others, damage to the
property of others resulting from automobile
accidents caused by the insured and the legal costs
of defending the insured against lawsuits.
o Homeowners insurance covers losses to an insured's
home, including its contents, as a result of weather,
fire, theft and other causes.
o Workers' compensation insurance covers an employer's
liability for injuries, disability or death of
employees, without regard to fault, as prescribed by
state workers' compensation law and other statutes.
o Ocean marine insurance covers losses to an insured's
vessel and/or its cargo as a result of a collision,
fire, piracy and other perils.
o Inland marine insurance covers property that may be
in transit, held by a bailee at a fixed location,
movable goods that are often stored at different
locations or property with an unusual antique or
collector's value.
o General liability insurance covers businesses for any
liability resulting from bodily injury and property
damage arising from its general business operations,
accidents on its premises and its products
manufactured or sold.
o Umbrella insurance supplements existing insurance
policies by covering losses from a broad range of
insurance risks that attach at a level above the
primary insurance policy up to a specified limit.
Insurance companies derive a significant amount of their total revenues
from earned premiums, investment income and net gains and losses from sales of
securities. Earned premiums represent premiums paid by insureds, which are
recognized as revenue over the period of time during which insurance coverage is
provided (i.e., ratably over the life of the policy). Investment income,
consisting primarily of interest earned on fixed maturity investments and
dividends earned on equity securities, is derived from investing funds on hand,
including funds supporting unpaid loss and loss adjustment expense reserves and
unearned premium reserves. Net realized investment gains and losses result from
sales of securities from an insurer's investment portfolio. Because the timing
and magnitude of such gains or losses depend on conditions in the securities
markets, it is difficult to accurately forecast realized gains or losses.
Insurance companies incur a significant amount of their total expenses
from policyholder losses, which are commonly referred to as "claims". As part of
the settlement of policyholder losses, insurance companies also incur various
loss adjustment expenses, including insurance adjusters' fees and litigation
expenses. Insurance companies also incur expenses in the form of commissions
payable to agents and expenses related to the underwriting process, such as
salaries for actuarial staff.
An underwriting profit or loss is determined by subtracting losses,
loss adjustment expenses and other underwriting expenses from earned premiums. A
key measure of relative underwriting performance is the combined ratio. An
insurer's combined ratio under generally accepted accounting principles is
11
calculated by adding the ratio of incurred loss and loss adjustment expenses to
premiums earned (the "loss ratio") and the ratio of underwriting expenses to
premiums earned (the "expense ratio"). A combined ratio of 100% or less
indicates an underwriting profit, while a ratio greater than 100% indicates an
underwriting loss. When considering investment income and realized gains or
losses, insurance companies operating at a combined ratio of greater than 100%
can be profitable despite incurring an underwriting loss.
ONEBEACON
OneBeacon is a multi-line property and casualty insurer that writes
policies primarily through independent agents in the United States.
Headquartered in Boston, Massachusetts, OneBeacon is currently licensed and
writing business in all 50 states and the District of Columbia, with a strong
presence in the Northeast region. OneBeacon's principal insurance operating
subsidiaries are currently rated "A" (Excellent) by A.M. Best Company.
Most insurance subsidiaries of OneBeacon participate in an
intercompany pooling agreement whereby 100% of all property and casualty
business written by the participating companies is ceded to the lead company
(OneBeacon Insurance Company), which in turn retrocedes the premiums and
losses associated with the business back to the participating companies based
on a specified percentage of the pool's total written premium. Two other
subsidiaries, National Farmers Union Property and Casualty Company and
subsidiaries ("NFU") and Houston General Insurance Company and subsidiaries
("HG"), operate outside of this pooling arrangement but are nonetheless
included in OneBeacon's consolidated results.
Under the terms of the Renewal Rights Agreement, on November 1, 2001
Liberty Mutual began to assume all new and renewal business subject to the
Renewal Rights Agreement. OneBeacon will retain all of the existing balance
sheet liabilities, including loss and loss adjustment expense reserves and
unearned premium reserves, related to the transferred business. Additionally,
OneBeacon will reinsure 66 2/3% of the net premiums written and the net
liability for loss and loss adjustment expenses of all renewal policies subject
to the Renewal Rights Agreement during the first twelve months after November 1,
2001 and 33 1/3% of such net premiums written and net liability for loss and
loss adjustment expenses during the following twelve months. As a result of the
Renewal Rights Agreement, OneBeacon expects to become a Northeast regional
personal and commercial lines insurance company with some select specialty
markets in other regions. The Renewal Rights Agreement is contained in the
Company's Current Report on Form 8-K dated November 1, 2001.
During the nine months ended September 30, 2001, OneBeacon had net
written premiums of $2.8 billion prior to giving effect to reinsurance
obtained from National Indemnity Company (the "NICO Cover") and from General
Re Corporation (the "GRC Cover"), of which $1.6 billion would not have been
subject to the Renewal Rights Agreement had it been effective at the
beginning of the applicable period. During 2000, 1999 and 1998, OneBeacon had
net written premiums of $4.3 billion, $4.2 billion and $4.1 billion,
respectively, of which $2.3 billion, $2.2 billion and $2.0 billion,
respectively, would not have been subject to the Renewal Rights Agreement had
it been effective at the beginning of each applicable period. OneBeacon had
total assets of $15.5 billion and shareholder's equity of $3.3 billion at
September 30, 2001 and had total assets of $14.2 billion and $14.0 billion
and shareholder's equity of $3.2 billion and $3.8 billion at December 31,
2000 and 1999, respectively.
12
National Indemnity Company and General Re Corporation are wholly-owned
subsidiaries of Berkshire Hathaway Inc. ("Berkshire"). Through the exercise of
fully vested warrants to acquire common shares held by Berkshire, Berkshire has
the right to acquire 1,714,285 common shares of White Mountains at an exercise
price of $175.00 per share. The warrants represented 17% of the total
outstanding common shares of White Mountains at September 30, 2001 on a
fully-converted basis.
LINES OF BUSINESS AND GEOGRAPHIC CONCENTRATION
BUSINESS LINES. OneBeacon writes three main lines of business:
commercial lines, personal lines and specialty products which for the nine
months ended September 30, 2001, prior to giving effect to the NICO Cover and
the GRC Cover, represented 46%, 42% and 12% of its net written premiums,
respectively. OneBeacon's net written premiums by line of business for the
nine months ended September 30, 2001, prior to giving effect to the NICO
Cover and the GRC Cover, and the years ended December 31, 2000, 1999 and 1998
were as follows:
Nine Months
Ended Year Ended December 31,
September 30, ----------------------------------------------
Business line 2001 2000 1999 1998
- -------------------------------------------------------------------------------------------------------------------
($ in millions)
- -------------------------------------------------------------------------------------------------------------------
Commercial $ 1,278.7 $ 2,063.4 $ 2,017.2 $ 1,947.8
Personal 1,154.5 1,695.2 1,741.8 1,814.0
Specialty 321.0 535.5 489.7 351.6
-----------------------------------------------------------
Total $ 2,754.2 $ 4,294.1 $ 4,248.7 $ 4,113.4
- -------------------------------------------------------------------------------------------------------------------
Commercial lines products are issued to business enterprises and
include package (property/liability coverage), commercial auto and workers'
compensation, which for the nine months ended September 30, 2001 represented
43%, 21% and 18% respectively, and for the year ended December 31, 2000
represented 40%, 24%, and 19%, respectively, of commercial lines net written
premiums. Personal lines products are issued to individuals and include auto,
homeowners and Custom-Pac products (home/auto coverage with optional
umbrella, ocean marine and inland marine coverages), which for the nine
months ended September 30, 2001 represented 57%, 20% and 16% respectively,
and for the year ended December 31, 2000 represented 58%, 21% and 14%,
respectively, of personal lines net written premium. Specialty products
principally include national and regional affinity programs, non-crop farm
and ranch business, ocean marine, travel and tuition reimbursement.
OneBeacon's unaudited pro forma net written premiums not subject to
the Renewal Rights Agreement, had it been effective at the beginning of each
applicable period, by line of business for the nine months ended September
30, 2001, prior to giving effect to the NICO Cover and the GRC Cover, and the
years ended December 31, 2000, 1999 and 1998 would have been as follows:
13
Nine Months
Ended Year Ended December 31,
September 30, -------------------------------------------
Business line 2001 2000 1999 1998
- -------------------------------------------------------------------------------------------------------------------
($ in millions)
- -------------------------------------------------------------------------------------------------------------------
Commercial $ 626.0 $ 877.0 $ 856.5 $ 783.4
Personal 658.9 891.2 891.0 914.1
Specialty 321.0 535.5 489.7 351.6
-----------------------------------------------------------
Total $ 1,605.9 $ 2,303.7 $ 2,237.2 $ 2,049.1
- -------------------------------------------------------------------------------------------------------------------
For the nine months ended September 30, 2001, package, commercial
auto and workers' compensation would have represented 39%, 20% and 18%
respectively, and for the year ended December 31, 2000 would have represented
37%, 25%, and 19%, respectively, of commercial lines net written premiums had
the Renewal Rights Agreement been effective at the beginning of each
applicable period. For the nine months ended September 30, 2001, auto,
homeowners and Custom-Pac products would have represented 62%, 16% and 15%
respectively, and for the year ended December 31, 2000 would have represented
62%, 17% and 14%, respectively, of personal lines net written premium had the
Renewal Rights Agreement been effective at the beginning of each applicable
period.
GEOGRAPHIC CONCENTRATION. OneBeacon's gross written premiums are
derived solely from the United States. OneBeacon derived the majority of its
gross written premiums for the periods ended September 30, 2001 and December
31, 2000 from the states of New York (18% and 17%, respectively),
Massachusetts (11% and 10%, respectively), California (6% for both periods),
New Jersey (6% for both periods), Pennsylvania (5% for both periods) and
Texas (5% for both periods). OneBeacon's gross written premiums not subject
to the Renewal Rights Agreement, had it been effective for the periods ended
September 30, 2001 and December 31, 2000, would have been derived from the
states of New York (30% for both periods), Massachusetts (19% and 18%,
respectively), New Jersey (10% and 11%, respectively), Maine (7% and 6%,
respectively) and Connecticut (4% for both periods).
MARKETING
OneBeacon writes insurance exclusively through independent agents.
At September 30, 2001, OneBeacon had a total agency force of approximately
3,970 agents. OneBeacon believes that independent agents will continue to be
a key factor in overall industry premium production and that business written
by independent agents has historically produced lower loss ratios than
business obtained through alternative distribution channels. Prior to
November 1, 2001, OneBeacon operated a "hub and spoke" structure to support
its agency operations consisting of 38 branches serving agents and
policyholders in their local markets and 12 regional hub offices. In
connection with the Renewal Rights Agreement, OneBeacon expects to reduce the
number of its branch and regional hub offices to approximately 13 and 4,
respectively, and expects its total agency force to be reduced to
approximately 1,850 agents.
14
UNDERWRITING AND PRICING
OneBeacon's primary underwriting objective is to carefully assess
opportunities and accept only those risks exhibiting a reasonable likelihood of
providing an underwriting profit. OneBeacon evaluates underwriting opportunities
based on a number of factors including the actuarially determined expected
frequency and severity of losses, the costs of providing the necessary coverage
(including the cost of administering policy benefits, sales and other
administrative costs), information provided by its agents and information
obtained from claims personnel regarding developing claim patterns and issues.
One of the significant competitive factors for most insurance products
offered by OneBeacon is price. Pricing pressures can be caused by many factors
such as: (1) insurance companies selling their products for a period of time at
less than adequate rates, because they either underestimate ultimate claim costs
or overestimate the amount of investment income they will earn on premiums
before the claims are paid, (2) insurance companies utilizing direct-response
marketing methods versus marketing their products through independent agents and
(3) mutual insurance companies and insurance companies who are willing to accept
a lower return on equity on their insurance operations than White Mountains'
management and its shareholders. In addition, pricing levels can also be
influenced by the frequency and severity of insurance claims, state regulation
and legislation, inflation and judicial decisions.
Many of the pricing considerations discussed above have adversely
impacted OneBeacon's historic underwriting results. In response, White Mountains
has caused OneBeacon to cease writing policies on certain historically
unprofitable product lines. Since the acquisition of OneBeacon, White Mountains
has been focused on strengthening OneBeacon's future insurance operations
through such actions as more selective and disciplined underwriting practices,
the implementation of price increases and the elimination of poor and marginal
accounts and agents. Additionally, as a result of the Renewal Rights Agreement,
the Company is seeking to focus its efforts on improving the ongoing operations
of OneBeacon in the Northeast region, where the Company believes that these
actions will have the greatest effect on improving OneBeacon's underwriting
results.
CLAIMS
Claims handling is another significant competitive factor in the
property and casualty insurance marketplace. Effective claims management is a
key ingredient to achieving satisfactory underwriting results. Additionally,
claims servicing is a means by which property and casualty insurance companies
seek to differentiate the products they sell from similar products available in
the marketplace.
Claims handling is managed by OneBeacon's home office and is performed
in various regional and local branch offices. OneBeacon maintains an experienced
staff of appraisers, medical specialists, managers, attorneys and field
adjusters strategically located throughout its operating territories. OneBeacon
also maintains a special investigative unit designed to detect insurance fraud
and abuse.
Since the acquisition of OneBeacon by White Mountains, management has
been seeking to improve its claim function in order to reduce ultimate loss and
loss adjustment expense payments. Improvements include implementing systems
applications designed to improve the availability and scope of claims related
data and increasing staffing levels in certain claims functions. Such actions
are expected to increase the amount of indirect expenses associated with claims
handling but reduce the amount of loss and loss adjustment expenses in total.
15
LOSS AND LOSS ADJUSTMENT EXPENSE RESERVES
OneBeacon establishes loss and loss adjustment expense reserves that
are estimates of future amounts needed to pay claims and related expenses
with respect to insured events that have occurred. Loss and loss adjustment
expense reserves have two components: case reserves, which are reserves for
reported losses, and incurred but not reported ("IBNR") reserves. Case
reserves are estimated based on the experience and knowledge of claims
personnel regarding the nature and value of each claim. OneBeacon
periodically adjusts case reserves as additional information becomes known or
payments are made. OneBeacon determines its IBNR reserves considering
historical patterns of paid and reported claim development experience,
supplemented by reported industry data, and the level of OneBeacon's IBNR
claim reserves relative to earned premium applied by accident year, line of
business and type of insurance written by OneBeacon.
The process of estimating loss and loss adjustment expense reserves
involves a considerable degree of judgment by management. During the claims
settlement period, which may extend over a long period of time, additional facts
regarding claims and trends may become known which may cause OneBeacon to adjust
its estimates of the ultimate liability. As a result, actual loss and loss
adjustment expenses may deviate, perhaps substantially, from estimates reflected
in OneBeacon's consolidated financial statements.
The following table presents the development of OneBeacon's year-end
property and casualty losses for the ten-year period from 1990 to 2000. Section
I of the table shows the gross and net (of reinsurance) estimated liabilities
that were recorded at the end of each of the indicated years for all current and
prior year unpaid loss and loss adjustment expenses ("LAE"). Section II shows
the re- estimate of the net liabilities made in each succeeding year. Section
III shows the cumulative net liabilities paid of such previously recorded
liabilities. Section IV shows the cumulative net deficiency representing the
aggregate change in the liability from the original balance sheet dates.
16
- ------------------------------------------------------------------------------------------------------------------------------------
OneBeacon Loss and Loss Adjustment Expenses (1)
Year Ended December 31,
- ------------------------------------------------------------------------------------------------------------------------------------
Dollars in Millions 1990 (2) 1991 (2) 1992 1993 1994 1995 1996 1997 1998 (3) 1999 2000
- ------------------------------------------------------------------------------------------------------------------------------------
I. Liability for
unpaid losses
and LAE:
Gross balance $ _ $ _ $ 5,652.8 $ 5,562.5 $ 5,535.4 $ 5,844.4 $ 5,804.4 $ 5,655.9 $ 6,944.0 $ 6,368.8 $ 6,982.7
Less: reins.
recoverables on
unpaid losses
and LAE - - (1,392.6) (1,191.6) (1,069.8) (1,307.4) (1,260.4) (1.159.2) (1,651.9) (1,285.6) (1.276.4)
----------------------------------------------------------------------------------------------------------------
Net balance $3,167.0 $3,638.2 $ 4,260.2 $ 4,370.9 $ 4,465.6 $ 4,537.0 $ 4,544.0 $ 4,496.7 $ 5,292.1 $ 5,083.2 $ 5,706.3
- ------------------------------------------------------------------------------------------------------------------------------------
II. Liability re-estimated
as of:
1 year later 3,271.5 3,782.7 4,365.9 4,411.5 4,494.1 4,584.7 4,627.8 5,370.1 5,305.3 5,893.6
2 years later 3,449.9 3,904.4 4,413.4 4,450.3 4,552.1 4,667.1 5,476.0 5,424.7 5,985.4
3 years later 3,582.9 3,992.2 4,510.5 4,501.0 4,642.8 5,460.6 5,549.0 5,965.0
4 years later 3,689.1 4,147.5 4,610.3 4,602.8 5,406.5 5,510.6 5,924.8
5 years later 3,903.5 4,257.6 4,705.8 5,353.2 5,431.8 5,779.5
6 years later 4,004.0 4,356.3 5,446.4 5,353.5 5,632.0
7 years later 4,097.8 5,093.6 5,439.2 5,523.8
8 years later 4,824.2 5,080.7 5,587.1
9 years later 4,812.8 5,217.2
10 years later 4,932.5
- ------------------------------------------------------------------------------------------------------------------------------------
III. Cumulative
amount of
liability
paid through:
1 year later 1,081.8 1,075.7 1,461.0 1,367.3 1,390.1 1,476.6 1,591.9 1,687.3 1,815.2 1,966.5
2 years later 1,619.6 1,928.3 2,254.8 2,152.5 2,240.8 2,372.6 2,621.3 2,735.4 2,954.8
3 years later 2,184.8 2,438.5 2,761.5 2,711.5 2,821.9 3,083.3 3,331.1 3,518.0
4 years later 2,514.0 2,734.0 3,135.8 3,089.5 3,328.3 3,571.3 3,872.2
5 years later 2,691.6 2,994.5 3,394.6 3,464.3 3,672.7 3,961.5
6 years later 2,876.7 3,182.3 3,693.0 3,720.2 3,978.3
7 years later 3,016.5 3,434.1 3,882.1 3,979.3
8 years later 3,229.3 3,591.6 4,122.9
9 years later 3,369.1 3,813.0
10 years later 3,578.5
- ------------------------------------------------------------------------------------------------------------------------------------
IV. Cumulative
deficiency $1,765.5 $1,579.0 $ 1,326.9 $ 1,152.9 $ 1,166.4 $ 1,242.5 $ 1,380.8 $ 1,468.3 $ 693.3 $ 810.4 $ -
Percent
deficient 55.7% 43.4% 31.1% 26.4% 26.1% 27.4% 30.4% 32.7% 13.1% 15.9% %
- ------------------------------------------------------------------------------------------------------------------------------------
(1) In 1998, OneBeacon was formed as a result of a pooling of interests
between Commercial Union and General Accident. All historical balances
have been restated as though the companies had been merged throughout
the periods presented.
(2) For the years 1990 and 1991 liabilities are shown net of reinsurance
recoverables, as was the accounting practice prior to the
implementation of Statement of Financial Accounting Standard No. 113,
"Accounting and Reporting for Reinsurance of Short- Duration and
Long-Duration Contracts" ("SFAS 113").
(3) In 1998, OneBeacon acquired HG and NFU. All liabilities related to
these entities have been shown from the acquisition date forward in
this table.
17
The following table summarizes OneBeacon's loss and loss adjustment
expense reserve activity for the nine months ended September 30, 2001 and the
years ended December 31, 2000, 1999 and 1998:
Nine Months Year Ended December 31,
Ended September 30, -------------------------------------
($ in millions) 2001 2000 1999 1998
- ------------------------------------------------------------------------------------------------------------------
Gross beginning balance $ 6,982.7 $ 6,368.8 $ 6,944.0 $ 5,655.9
Less beginning reinsurance recoverables on unpaid losses
and LAE (1,276.4) (1,285.6) (1,651.9) (1,159.2)
--------- ---------- --------- ----------
Net loss and LAE reserves 5,706.3 5,083.2 5,292.1 4,496.7
Net loss and LAE reserves acquired - HG (1) - - - 6.4
Net loss and LAE reserves acquired - NFU (2) - - - 56.8
Cumulative effect of accounting change - guaranty fund
assessments - - 14.4 -
Loss and LAE incurred relating to:
Current year losses 2,787.1 3,484.0 3,194.9 3,106.3
Prior year losses (1,021.2) 818.0 57.5 840.6
--------- ---------- --------- ----------
Total loss and LAE incurred 1,765.9 4,302.0 3,252.4 3,946.9
Loss and LAE paid relating to:
Current year losses (1,350.4) (1,706.6) (1,611.7) (1,639.9)
Prior year losses (1,303.8) (1,972.3) (1,864.0) (1,574.8)
--------- ---------- --------- ----------
Total loss and LAE paid (2,654.2) (3,678.9) (3,475.7) (3,214.7)
Gross beginning balance $ 4,818.0 $ 5,706.3 $ 5,083.2 $ 5,292.1
Plus ending reinsurance recoverables on unpaid losses
and LAE 2,379.0 1,276.4 1,285.6 1,651.9
--------- ---------- --------- ----------
Gross ending balance $ 7,197.0 $ 6,982.7 $ 6,368.8 $ 6,944.0
- ------------------------------------------------------------------------------------------------------------------
(1) Reinsurance recoverables on unpaid losses and LAE acquired in the HG
acquisition were $286.8 million.
(2) Reinsurance recoverables on unpaid losses and LAE acquired in the NFU
acquisition were $9.0 million.
OneBeacon discounts certain loss and loss adjustment expenses
relating to long-term workers' compensation reserves. These liabilities on an
undiscounted basis were $610.7 million at September 30, 2001 and were $482.9
million, $447.4 million and $375.1 million at December 31, 2000, 1999 and
1998, respectively. Discounting these reserves served to reduce loss and loss
adjustment expense liabilities by $267.3 million at September 30, 2001 and by
$230.7 million, $227.3 million and $167.6 million at December 31, 2000, 1999
and 1998, respectively. The discount rate used to value such reserves was
approximately 7% over the periods presented.
OneBeacon strengthened prior year loss reserves in 1998 by $840.6
million primarily for environmental and asbestos claims ($614.0 million) and for
certain long-tailed business.
18
Subsequent to the execution of the definitive agreement for the
acquisition of OneBeacon by White Mountains, OneBeacon increased prior year loss
reserves by $818.0 million in 2000 primarily for adverse loss development on
auto liability coverage ($204.4 million) and certain commercial workers'
compensation ($149.3 million), general liability ($136.9 million) and special
multi-peril coverage ($256.5 million).
During the first nine months of 2001, prior year loss reserve
reductions and a net increase in reinsurance recoverables of $1,021.2 million
and $1,102.6 million, respectively, were almost entirely related to the NICO
Cover and the GRC Cover. The NICO Cover and the GRC Cover, which were
contingent on, and occurred contemporaneously with the Acquisition, qualify
for prospective reinsurance accounting treatment under the Financial
Accounting Standards Board's Emerging Issues Task Force Topic No. D-54 which
characterizes the protection as an indemnification by the seller for
increases in the liabilities for loss and loss adjustment expenses that
existed at the acquisition date.
ENVIRONMENTAL AND ASBESTOS LIABILITIES
OneBeacon has estimated its environmental and asbestos loss and loss
adjustment expense liabilities based upon several factors, including facts
surrounding reported cases (such as policy limits and deductibles), current law,
past and projected claim activity and past settlement values for similar claims.
Immediately prior to the acquisition of OneBeacon by White Mountains, CGNU
(OneBeacon's former parent) caused OneBeacon to purchase the NICO Cover for
$1,114.8 million in cash. Pursuant to the NICO Cover, OneBeacon obtained $2.5
billion in total coverage against its asbestos, environmental, and certain other
latent exposures, including lead paint, and ceded net nominal loss reserves of
$747.6 million. As a result, OneBeacon believes that its net exposure to
liabilities related to damage or injury from environmental pollution or from
asbestos injury claims arising out of product or general liability coverage is
limited. However, as case law expands, OneBeacon may become subject to
environmental and asbestos loss and loss adjustment expense liabilities beyond
those intended by policy coverage. White Mountains believes that it is unlikely
that any such liabilities would have a material adverse effect on its financial
condition or its cash flows. However, loss reserve additions arising from future
unfavorable expansion of case law cannot be reasonably estimated at the present
time, and future increases in environmental and asbestos loss reserves may
emerge which would adversely affect the Company's financial position.
The following table summarizes loss and loss adjustment expense
reserves for environmental and asbestos exposures, including coverage dispute
costs, at September 30, 2001 and December 31, 2000 and 1999:
December 31,
September 30, ----------------------------
Dollars in Millions 2001 2000 1999
- -----------------------------------------------------------------------------------
Gross of reinsurance $ 920.2 $ 1,039.6 $ 1,353.1
Net of reinsurance $ 26.8 $ 786.5 $ 956.0
===================================================================================
CONSTRUCTION DEFECT AND MOLD CLAIMS
Construction defect claims represent a subset of claims that arise from
coverage provided by general liability insurance. Construction defect claims
arise from alleged defective work performed by contractors and subcontractors in
the construction of large dwellings, such as apartments, condominiums and large
developments of single family dwellings. In addition to damages arising directly
from the
19
alleged defective work, construction defect claims often allege that the
economic value of the structure has been diminished. Mold claims also represent
a subset of claims that arise from coverage provided by general liability
insurance. The existence of certain airborne mold spores, resulting from
moisture trapped in confined areas, has been alleged to cause severe health and
environmental hazards. OneBeacon has sought to limit its potential future
exposure to construction defect and mold claims by including exclusionary
language in its insurance policies or ceasing to write business in jurisdictions
where the exposure to such claims is large. As a result, OneBeacon believes that
its net exposure to these claims is limited and that its reserves for such
liabilities are adequate. However, as case law expands, OneBeacon may be subject
to construction defect and mold loss and loss adjustment expense liabilities
beyond those intended by policy coverage. White Mountains believes that it is
unlikely that any such liabilities would have a material adverse effect on its
financial condition or its cash flows. However, loss reserve additions arising
from future unfavorable expansion of case law cannot be reasonably estimated at
the present time and future increases in construction defect and mold loss
reserves may emerge which would adversely affect the Company's financial
position.
THIRD PARTY REINSURANCE
In the ordinary course of its business, OneBeacon cedes various risks
to high quality, highly rated, third party reinsurers in order to provide
greater diversification of its business and minimize its net loss arising from
large risks or catastrophic events.
Catastrophe losses are unpredictable and the level of catastrophic
losses experienced in any year could potentially be material to OneBeacon's
results of operations and financial position. Examples of catastrophes include
losses caused by earthquakes, wildfires, hurricanes and other types of storms,
tornadoes and terrorist acts. The extent of losses caused by catastrophes is
both a function of the total amount of insured exposure in an area affected by
the event and the severity of the event.
OneBeacon continually assesses and develops strategies to manage its
exposure to catastrophe losses through individual risk selection, by limiting
the concentration of insurance written in catastrophe- prone areas (such as
coastal regions) and through the purchase of catastrophe reinsurance. OneBeacon
has a catastrophe reinsurance program in place for the 2001 calendar year
whereby the first $125.0 million of losses resulting from any one catastrophe
are retained by OneBeacon. Catastrophe losses from a single event in excess of
$125.0 million up to $650.0 million are reinsured with a syndicate of reinsurers
for either 95.0% or 97.5% of the loss, depending upon the aggregate amount of
all losses incurred as a result of the catastrophe.
Reinsurance contracts do not relieve OneBeacon of its primary
obligation to its policyholders. Therefore, the financial position and solvency
of OneBeacon's reinsurers is critical to the collectibility of its reinsurance
coverages. OneBeacon is selective with regard to its reinsurers, placing
reinsurance with only those reinsurers with strong financial strength ratings.
OneBeacon monitors the financial strength of its reinsurers on an ongoing basis.
As a result, uncollectible amounts have not historically been significant.
OneBeacon ceded 53.9% of its gross premiums written during the nine
months ended September 30, 2001. When adjusted for the one-time impact of the
NICO Cover and the GRC Cover, OneBeacon ceded 8.7% of its gross premiums
written during the nine months ended September 30, 2001. OneBeacon ceded
9.3%, 6.7% and 8.1% of its gross premiums written during the years ended
December 31, 2000, 1999 and 1998, respectively.
20
PROPERTY AND CASUALTY REINSURANCE
OVERVIEW
Reinsurance is an arrangement in which a reinsurance company (the
"reinsurer") agrees to indemnify an insurance company (the "ceding company") for
all or a portion of the insurance risks underwritten by the ceding company under
one or more insurance policies. Reinsurance can benefit a ceding company in a
number of ways, including reducing net liability exposure on individual risks,
providing catastrophe protections from large or multiple losses, stabilizing
financial results and assisting in maintaining acceptable operating leverage
ratios. Reinsurance can also provide a ceding company with additional
underwriting capacity by permitting it to accept larger risks and underwrite a
greater number of risks without a corresponding increase in its capital or
surplus. Reinsurers may also purchase reinsurance, known as retrocessional
reinsurance, to cover their own risks assumed from primary ceding companies.
Reinsurance companies often enter into retrocessional agreements for many of the
same reasons that ceding companies enter into reinsurance agreements.
A significant period of time normally elapses between the receipt of
reinsurance premiums and the disbursement of reinsurance claims ("float"). The
claims process generally begins upon the occurrence of an event causing an
insured loss followed by: (1) the reporting of the loss to the ceding company;
(2) the reporting of the loss by the ceding company to reinsurer; (3) the ceding
company's adjustment and payment of the loss; and (4) the payment to the ceding
company by reinsurer. During this time, the reinsurer earns investment income on
the float. Therefore, even if a reinsurer's combined ratio is higher than that
of a property and casualty insurance company it may still earn an equivalent or
superior return on equity.
FOLKSAMERICA
Folksamerica, through its wholly-owned subsidiary, Folksamerica
Reinsurance Company (a New York-domiciled reinsurance company), is a multi-line
broker-market reinsurer which provides reinsurance to insurers of property and
casualty and accident and health risks in the United States, Canada, Latin
America and the Caribbean. Folksamerica Reinsurance Company is currently rated
"A-" (Excellent) by A.M. Best Company. During the 2000 fourth quarter and the
2001 second quarter, certain insurance operating subsidiaries of White Mountains
were contributed to Folksamerica. These operations, which in the aggregate are
not significant to White Mountains, are excluded from the following discussion
of Folksamerica.
During the nine months ended September 30, 2001, Folksamerica had
net written premiums of $324.5 million. During 2000, 1999 and 1998,
Folksamerica had net written premiums of $332.6 million, $201.7 million and
$212.6 million, respectively. At September 30, 2001, Folksamerica had total
assets of $2.7 billion and shareholder's equity of $544.0 million. At
December 31, 2000 and 1999, Folksamerica had total assets of $2.8 billion and
$1.3 billion, respectively, and shareholder's equity of $339.7 million and
$249.4 million, respectively.
Folksamerica writes both treaty and facultative reinsurance. Treaty
reinsurance is an agreement whereby the ceding company is obligated to cede, and
the reinsurer is obligated to assume, a specified portion or category of risk
under all qualifying policies issued by the ceding company during the term of a
treaty. In the underwriting of treaty reinsurance, the reinsurer does not
evaluate each individual risk assumed and generally accepts the original
underwriting decisions made by the ceding insurer.
21
Facultative reinsurance is underwritten on a risk-by-risk basis whereby
Folksamerica applies its own pricing to an individual exposure. Facultative
reinsurance is normally purchased by insurance companies for individual risks
not covered under reinsurance treaties or for amounts in excess of limits on
risks covered under reinsurance treaties. The majority of Folksamerica's
premiums are derived from treaty reinsurance contracts both on an excess of loss
and quota share basis, which in 2000 amounted to 23.2% and 67.1% of its total
earned premiums, respectively. Folksamerica derives its business from a spectrum
of ceding insurers including national, regional, specialty and excess and
surplus lines writers. Folksamerica determines which risks it accepts based on
the anticipated underwriting results of the transaction, which are evaluated on
a variety of factors including the quality of the reinsured, the attractiveness
of the reinsured's insurance rates, policy conditions and the adequacy of the
proposed reinsurance terms.
Folksamerica commenced writing business in 1980 as one of a host of
newly formed, foreign- owned reinsurers capitalized with minimum surplus. In
1991, recognizing that surplus size would become an increasingly important
business issue, Folksamerica launched an aggressive strategy to increase its
resources and capacity through the acquisition of select broker-market
reinsurance and property and casualty insurance companies. Since 1991,
Folksamerica has acquired several other reinsurers which has served to raise
Folksamerica's surplus and contributed a number of important business
relationships. Folksamerica's more recent acquisitions included USF Re Insurance
Co. ("USF Re"), PCA Property & Casualty Insurance Company ("PCA"), substantially
all the reinsurance operations of Risk Capital Reinsurance Company ("Risk
Capital") and C-F Insurance Company. Folksamerica may acquire additional
insurance and reinsurance operations in the future.
LINES OF BUSINESS AND GEOGRAPHIC CONCENTRATION
BUSINESS LINES. Folksamerica writes three main lines of reinsurance:
liability reinsurance, property reinsurance and accident and health
reinsurance, which for the nine months ended September 30, 2001 represented
62%, 23% and 6% of its net written premiums, respectively.
22
Folksamerica's net written premiums by line of business and by
geographic region for the nine months ended September 30, 2001 and the years
ended December 31, 2000, 1999 and 1998 were as follows:
Nine Months Year Ended December 31,
ended September 30, ------------------------------
Business line ($ in millions) 2001 2000 1999 1998 (1)
- ------------------------------------------------------------------------------------------
Liability $ 201.7 $ 208.4 $ 122.6 $ 122.0
Property 76.0 91.6 68.9 87.2
Accident and Health 18.2 26.4 - -
Other 28.6 6.2 10.2 3.4
-------------------------------------------
Total $ 324.5 $ 332.6 $ 201.7 $ 212.6
==========================================================================================
Nine Months Year Ended December 31,
ended September 30, ------------------------------
Geographic region ($ in millions) 2001 2000 1999 1998 (1)
- ------------------------------------------------------------------------------------------
United States $ 287.5 $ 296.7 $ 172.2 $ 190.9
Canada 19.2 21.6 21.0 13.9
Latin America and the Carribean 17.8 14.3 8.5 7.8
-------------------------------------------
Total $ 324.5 $ 332.6 $ 201.7 $ 212.6
==========================================================================================
(1) White Mountains acquired all the outstanding capital stock of
Folksamerica in August 1998. Prior to that date, White Mountains owned
a 50% economic interest in Folksamerica.
MARKETING
Folksamerica obtains most of its reinsurance business through brokers
and reinsurance intermediaries that represent the ceding company in negotiations
for the purchase of reinsurance. The process of effecting a brokered reinsurance
placement typically begins when a ceding company enlists the aid of a
reinsurance broker in structuring a reinsurance program. Often the ceding
company and the broker will consult with one or more lead reinsurers as to the
pricing and contract terms for the reinsurance protection being sought. Once the
ceding company has approved the terms quoted by the lead reinsurer, the broker
will offer participation to qualified reinsurers until the program is fully
subscribed by reinsurers at terms agreed to by all parties.
Folksamerica generally pays ceding companies a ceding commission
under quota share reinsurance treaties. The ceding commission is generally
based on the ceding company's cost of acquiring the business being reinsured
(commissions, premium taxes and certain miscellaneous expenses). During the
nine months ended September 30, 2001 and the year ended December 31, 2000,
Folksamerica received no more than 10% of its gross reinsurance premiums from
any individual ceding company. Additionally, Folksamerica pays reinsurance
brokers' commissions based on negotiated percentages of the premium it
writes. These commissions, which average approximately 5% of premium,
constitute a significant portion of Folksamerica's total acquisition costs
and are included in its underwriting expenses. During the nine month period
ended September 30, 2001 and the year ended December 31, 2000, Folksamerica
received approximately 54.2% and 56.4%, respectively, of its gross
reinsurance premiums written from three major reinsurance brokers as follows:
(1) AON Re, Inc. - 20.9% and 17.2%, respectively; (2) Benfield Blanch - 18.1%
and 21.6%, respectively; and (3) Guy Carpenter - 15.2% and 17.6%,
respectively.
23
UNDERWRITING AND PRICING
Folksamerica's actuaries separately evaluate each underwriting
opportunity presented by Folksamerica's reinsurance brokers in order to
determine price. Folksamerica prices its products by assessing the desired
return on the capital needed to write a given contract and by estimating future
loss and loss adjustment expenses and investment income to be earned on net cash
flow from the contract. Folksamerica will only accept contracts with a high
likelihood of generating acceptable returns on equity. Folksamerica's estimates
are based on a number of underwriting factors including historical analysis of
results, estimates of future loss costs, a review of other programs displaying
similar exposure characteristics, the primary insurer's underwriting and claims
experience and the primary insurer's financial condition.
CLAIMS
Folksamerica maintains a staff of experienced reinsurance claim
specialists that work closely with reinsurance intermediaries to obtain specific
claims information from its customers. Folksamerica's claims staff also
regularly perform onsite claim reviews of Folksamerica's customers to improve
the insured's claim-handling ability, which can, in turn, reduce the total
losses ceded by the insured to Folksamerica. In addition, Folksamerica's claim
specialists often review loss information provided to Folksamerica by the
insured for adequacy and appropriateness. The results of Folksamerica's onsite
claim reviews are shared with its actuaries and underwriters to ensure that they
are making the correct assumptions in pricing its products and that
Folksamerica's loss reserves are appropriately stated.
LOSS AND LOSS ADJUSTMENT EXPENSE RESERVES
Folksamerica establishes loss and loss adjustment expense reserves that
are estimates of future amounts needed to pay claims and related expenses with
respect to insured events that have occurred. Loss and loss adjustment expense
reserves have two components: case reserves and IBNR reserves. Reserve estimates
reflect the judgment of both the ceding company and the reinsurer, based on the
experience and knowledge of their respective claims personnel, regarding the
nature and value of the claim. The ceding company may periodically adjust the
amount of the case reserves as additional information becomes known or partial
payments are made. Upon notification of a loss from a ceding company,
Folksamerica establishes case reserves, including loss adjustment expense
reserves, based upon Folksamerica's share of the amount of reserves established
by the ceding company and Folksamerica's independent evaluation of the loss.
Where appropriate, Folksamerica establishes case reserves in excess of its share
of the reserves established by the ceding company.
Folksamerica uses a combination of actuarial methods to determine its
IBNR reserves. These methods fall into two general categories: (1) methods by
which ultimate claims are estimated based upon historical patterns of paid and
reported claim development experienced by Folksamerica, as supplemented by
reported industry patterns, and (2) methods in which the level of Folksamerica's
IBNR claim reserves are established based upon the application of expected loss
ratios relative to earned premium by accident year, line of business and type of
reinsurance written by Folksamerica.
The process of estimating loss and loss adjustment expense reserves
involves a considerable degree of judgment by management. During the claims
settlement period, which may extend over a long period of time, additional facts
regarding claims and trends may become known which may cause Folksamerica to
adjust its estimates of the ultimate liability. As a result, actual loss and
loss adjustment
24
expenses may deviate, perhaps substantially, from estimates reflected in the
Company's consolidated financial statements.
The following table presents the subsequent development of the year-end
reinsurance losses for the ten-year period from 1990 to 2000. Section I of the
table shows the estimated liabilities that were recorded at the end of each of
the indicated years for all current and prior year unpaid losses and loss
adjustment expenses. Section II shows the re-estimate of the liabilities made in
each succeeding year. Section III shows the cumulative liabilities paid of such
previously recorded liabilities. Section IV shows the cumulative deficiency
representing the aggregate change in the liability from the original balance
sheet dates:
- ---------------------------------------------------------------------------------------------------------------------
Reinsurance Loss and Loss Adjustment Expenses (1), (3)
Year Ended December 31,
- ---------------------------------------------------------------------------------------------------------------------
Dollars in Millions 1990 (2) 1991 (2) 1992 1993 1994 1995 1996 1997 1998 1999 2000
- ---------------------------------------------------------------------------------------------------------------------
I. Liability for
unpaid losses
and LAE:
Gross balance $ - $ - $ 758.3 $ 798.4 $ 856.2 $ 981.5 $1,578.7 $1,461.3 $1,437.6 $1,210.7 $1,500.7
Less: reins.
recoverables on
unpaid losses
and LAE - - (172.0) (154.4) (182.4) (201.0) (390.2) (352.0) (397.9) (324.1) (702.8)
-------------------------------------------------------------------------------------------------
Net balance $ 431.8 $ 506.3 $ 586.3 $ 644.0 $ 673.8 $ 780.5 $1,188.5 $1,109.3 $1,039.7 $ 886.6 $ 797.9
- ---------------------------------------------------------------------------------------------------------------------
II. Liability
re-estimated
as of:
1 year later 466.3 543.4 601.5 672.5 701.8 834.1 1,222.6 1,125.5 1,036.0 914.4
2 years later 494.3 542.9 626.0 706.0 748.6 855.4 1,224.6 1,108.5 1,047.8
3 years later 489.2 567.6 653.2 746.3 763.7 862.7 1,206.4 1,114.5
4 years later 508.0 589.2 680.7 761.3 767.0 874.9 1,214.2
5 years later 522.9 610.2 694.8 764.1 778.8 874.2
6 years later 539.1 623.0 699.6 772.8 779.2
7 years later 551.3 630.6 706.5 774.2
8 years later 559.3 637.1 709.1
9 years later 567.1 635.7
10 years later 566.7
- ---------------------------------------------------------------------------------------------------------------------
III. Cumulative
amount of
liability
paid
through:
1 year later 113.0 136.7 165.1 219.8 201.9 225.5 322.6 277.5 291.4 102.3
2 years later 179.8 202.6 289.8 337.3 323.4 363.6 506.7 472.0 390.6
3 years later 219.8 290.9 366.2 418.2 412.8 457.0 656.6 582.4
4 years later 286.3 343.4 423.9 481.2 474.3 542.8 774.0
5 years later 322.5 382.1 467.9 521.4 530.8 608.2
6 years later 352.3 415.8 495.2 565.8 572.7
7 years later 377.4 439.1 530.6 596.3
8 years later 394.4 480.7 551.0
9 years later 421.1 488.4
10 years later 439.1
- ---------------------------------------------------------------------------------------------------------------------
IV. Cumulative $ 134.9 $ 129.4 $ 122.8 $ 130.2 $ 105.4 $ 93.7 $ 25.7 $ 5.2 $ 8.1 $ 27.8 $ -
deficiency
Percent
deficient 31.2% 25.6% 20.9% 20.2% 15.6% 12.0% 2.2% 0.5% 0.8% 3.1% -%
- ---------------------------------------------------------------------------------------------------------------------
(1) The table excludes certain other insurance operations of White Mountains
whose liability for unpaid losses and LAE totaled $55.6 million, $68.9
million, $88.5 million, $71.9 million and $65.4 million as of December 31,
2000, 1999, 1998, 1997 and 1996, respectively.
(2) For the years 1990 and 1991 liabilities are shown net of reinsurance
recoverables on paid and unpaid losses and LAE, as was the accounting
practice prior to the implementation of SFAS 113.
(3) The above table includes the complete loss development history for all
periods presented for all companies acquired by Folksamerica through an
instrument of Transfer and Assumption approved by the appropriate
insurance regulators. Under the instrument, insurance regulators require
that Folksamerica report reserve development on loss and loss adjustment
expense reserve liabilities as if the companies had been combined from
their inception.
25
The following table summarizes Folksamerica's loss and loss adjustment
expense reserve activity for the nine months ended September 30, 2001 and the
years ended December 31, 2000, 1999 and 1998:
Nine
Months
Ended Year Ended December 31,
September 30, -----------------------------
Millions 2001 2000 1999 1998 (3)
- -------------------------------------------------------------------------------------------------------------------
Gross beginning balance $ 1,500.7 $ 782.1 $ 723.2 $ 739.1
Less beginning reinsurance recoverables on unpaid losses and LAE (702.8) (136.2) (129.0) (122.8)
--------------------------------------------
Net loss and LAE reserves 797.9 645.9 594.2 616.3
Loss and LAE reserves acquired - USF Re (1) - - 106.5 -
Loss and LAE reserves acquired - PCA (1) - 253.8 - -
Loss and LAE reserves acquired - Risk Capital (1) - 312.6 - -
Loss and LAE reserves transferred and assumed (2) 6.4 (270.2) - -
Loss and LAE incurred relating to:
Current year losses 246.6 247.9 152.9 167.1
Prior year losses 12.0 22.9 29.3 3.2
--------------------------------------------
Total incurred loss and LAE 258.6 270.8 182.2 170.3
Loss and LAE paid relating to:
Current year losses (45.8) (16.0) (55.4) (37.1)
Prior year losses (303.4) (399.0) (181.6) (155.3)
--------------------------------------------
Total loss and LAE payments (349.2) (415.0) (237.0) (192.4)
Net ending balance 713.7 797.9 645.9 594.2
Plus ending reinsurance recoverables on unpaid losses and LAE 791.0 702.8 136.2 129.0
--------------------------------------------
Gross ending balance $ 1,504.7 $1,500.7 $ 782.1 $ 723.2
- -------------------------------------------------------------------------------------------------------------------
(1) Reinsurance recoverables on unpaid losses and LAE acquired in the Risk
Capital, PCA and USF Re acquisitions were $59.1 million, $153.3 million
and $21.8 million, respectively.
(2) Includes $270.6 million of loss and LAE reserves ceded to a third party
during 2000.
(3) White Mountains acquired all the outstanding capital stock of Folksamerica
in August 1998. Prior to that date, White Mountains owned a 50% economic
interest in Folksamerica.
Prior year reserve strengthening of $12.0 million for the nine months
ended September 30, 2001 was primarily from higher than expected reported
losses in Folksamerica's property excess line recorded during the 2001 first
quarter.
Prior year reserve strengthening of $22.9 million and $29.3 million in
2000 and 1999, respectively, was primarily from additions to the reserves
acquired with USF Re and Risk Capital and additions resulting from asbestos,
environmental liability and breast implant exposures.
Since 1991, Folksamerica has acquired several other insurers and
reinsurers, which has increased Folksamerica's surplus and contributed a
number of important business relationships. The structure of Folksamerica's
acquisitions often provides effective economic protections to offset
potential post- acquisition loss development. Folksamerica's statutory
combined ratios generally do not reflect such protections which are usually
recorded at the holding company level. For the nine months ended September
30, 2001 and the years ended December 31, 2000 and 1999, Folksamerica
recorded $10.6 million, $27.8 million and $20.3 million of net after tax
benefits, respectively, resulting from favorable purchase structures which
mitigate the impact of future adverse loss development from such
acquisitions. These benefits for the nine month period ended September 30,
2001 consisted entirely of deferred credit amortization. These benefits for
2000 consisted of a $6.8 million after tax reduction in the note issued in
connection with Folksamerica's acquisition of USF Re (the "USF Re Seller
Note"), $10.0 million of various purchase price adjustments and $11.0 million
of net after-tax deferred credit amortization. These benefits
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for 1999 consisted of a $14.0 million after-tax reduction in the USF Re Seller
Note and $6.3 million of net after-tax deferred credit amortization.
COMPETITION
PROPERTY AND CASUALTY INSURANCE
Property and casualty insurance is highly competitive and stringently
regulated by state insurance departments. As a result, it is often difficult for
insurance companies to differentiate their products to consumers. The two most
significant competitive factors for most insurance products offered by OneBeacon
are price and service. As a property and casualty insurer that writes
exclusively through independent agents, OneBeacon believes that most property
and casualty insurance customers value the counsel of a professional independent
agent, and that its exclusive use of independent agents is a competitive
advantage over direct-response writers. OneBeacon is able to offer independent
agents broader product offerings (including both commercial and personal lines)
and greater financial strength than many smaller carriers who are its primary
competitors in the independent agent channel. As a result of the Renewal Rights
Agreement, OneBeacon expects to become a large Northeast regional company. As a
sizable regional company, OneBeacon expects that it can continue to provide
broad product offerings yet believes that its narrower focus will allow
OneBeacon to provide more responsive and comprehensive service to its agents and
customers.
PROPERTY AND CASUALTY REINSURANCE
In general, competition among primary companies has caused insurers to
reduce their own premium writings or restructure their reinsurance programs,
thereby reducing the amount of reinsurance they purchase. As a result of
consolidation within the industry, many ceding companies are now larger and
financially stronger, thereby enabling them to retain more risk. In addition,
increasingly intense competition in the reinsurance markets caused by increased
industry capital has historically driven reinsurance prices on many programs
below levels which Folksamerica will accept. However, modest improvements in
overall reinsurance pricing have emerged at recent renewal dates due to a
reduction in capacity of some reinsurers. The significant insured losses
resulting from the terrorist attacks on September 11, 2001 will likely cause
reinsurance pricing, terms and conditions to improve significantly in the coming
months. Folksamerica's management believes that the reinsurance industry,
including the intermediary market, will continue to undergo further
consolidation. Management further believes that size and financial strength
will become increasingly important factors in selecting reliable reinsurance
partners.
REGULATION
White Mountains' insurance and reinsurance operations are subject to
regulation and supervision in each of the jurisdictions where they are domiciled
and licensed to conduct business. Generally, regulatory authorities have broad
supervisory and administrative powers over such matters as licenses, standards
of solvency, premium rates, policy forms, investments, security deposits,
methods of accounting, form and content of financial statements, reserves for
unpaid loss and loss adjustment expenses, reinsurance, minimum capital and
surplus requirements, dividends and other distributions to shareholders,
periodic examinations and annual and other report filings. In general, such
regulation is for the protection of policyholders rather than shareholders. Over
the last several years most states have implemented laws that establish
standards for current, as well as continued, state accreditation. In
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addition, the National Association of Insurance Commissioners ("NAIC") has
adopted risk-based capital ("RBC") standards for property and casualty companies
as a means of monitoring certain aspects affecting the overall financial
condition of insurance companies. The current RBC ratios of White Mountains'
active insurance and reinsurance subsidiaries are believed to be satisfactory
and such ratios are not expected to result in any adverse regulatory action.
White Mountains is not aware of any current recommendations by regulatory
authorities that would be expected to have a material effect on its results of
operations or liquidity.
As a condition of its license to do business in certain states, White
Mountains' insurance operations are required to participate in mandatory shared
market mechanisms. Each state dictates the types of insurance and the level of
coverage that must be provided. The most common type of shared market mechanism
in which White Mountains is required to participate is an assigned risk plan.
Many states, including New Jersey and New York, operate assigned risk plans.
These plans require insurers licensed within the applicable state to accept the
applications for insurance policies of individuals who are unable to obtain
insurance in the voluntary market. The total amount of such policies an insurer
is required to accept is based on its market share of voluntary business in the
state. Underwriting results related to assigned risk plans are typically
adverse. Reinsurance facilities are another type of shared market mechanism.
Reinsurance facilities require an insurance company to accept all applications
submitted by certain state designated agents. As a result, an insurer could be
underwriting policies with a higher risk of loss than it would normally accept.
The reinsurance facility then allows the insurer to cede some of its business to
the reinsurance facility so that the facility will reimburse the insurer for
claims paid on ceded business. Typically, however, reinsurance facilities
operate at a deficit, which is funded through assessments against the same
insurers.
The insurance laws of many states generally provide that property and
casualty insurers doing business in those states belong to a statutory property
and casualty guaranty association. The purpose of these guaranty associations is
to protect policyholders by requiring that solvent property and casualty
insurers pay certain insurance claims of insolvent insurers. These guaranty
associations generally pay these claims by assessing solvent insurers
proportionately based on the insurer's share of voluntary premiums written in
the state. While most guaranty associations provide for recovery of assessments
through rate increases, surcharges or premium tax credits, there is no assurance
that insurers will ultimately recover these assessments.
Many states have laws and regulations that limit an insurer's ability to
exit a market. For example, certain states limit a private passenger auto
insurer's ability to cancel and non-renew policies. Furthermore, certain states
prohibit an insurer from withdrawing one or more lines of insurance business
from the state, except pursuant to a plan that is approved by the state
insurance regulators who can refuse to approve such plans on the grounds that
they could lead to market disruption. Such laws and regulations may restrict
White Mountains' ability to exit unprofitable markets.
Nearly all states have insurance laws requiring personal property and
casualty insurers to file price schedules, policy or coverage forms, and other
information with the state's regulatory authority. In most cases, such price
schedules and/or policy forms must be approved prior to use. While pricing laws
vary from state to state, their objectives are generally to ensure that prices
are adequate, not excessive and not unfairly discriminatory.
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White Mountains' insurance subsidiaries are subject to state laws and
regulations that require investment portfolio diversification and that limit
the amount of investment in certain categories. Non- compliance may cause
non-conforming investments to be ignored in measuring statutory surplus and,
in some instances, may require divestiture. White Mountains investment
portfolio at September 30, 2001 complied with such laws and regulations in
all material respects.
One of the primary sources of cash inflows for the Company and certain of
its intermediary holding companies is dividends received from its operating
subsidiaries. Under the insurance laws of the states and countries under which
White Mountains' insurance subsidiaries are domiciled, an insurer is restricted
with respect to the timing or the amount of dividends it may pay without prior
approval by regulatory authorities. In a given calendar year, the insurance
subsidiaries can generally dividend without prior regulatory approval up to the
greater of 10% of their statutory surplus at the beginning of the year or the
prior year's statutory net income, subject to the availability of unassigned
funds (the statutory accounting equivalent of retained earnings). Larger
dividends can be paid only upon regulatory approval. Accordingly, there is no
assurance regarding the amount of such dividends that may be paid by such
subsidiaries in the future.
White Mountains is subject to regulation under certain state insurance
holding company acts. These regulations contain reporting requirements relating
to the capital structure, ownership, financial condition and general business
operations of White Mountains' insurance and reinsurance subsidiaries. These
regulations also contain special reporting and prior approval requirements with
respect to certain transactions among affiliates.
While the federal government does not directly regulate the insurance
business, federal legislation and administrative policies affect the insurance
industry. In addition, legislation has been introduced from time to time in
recent years that, if enacted, could result in the federal government assuming a
more direct role in the regulation of the insurance industry. A number of
enacted and pending legislative measures could lead to increased consolidation
and increased competition for business and for capital in the financial services
industry. White Mountains cannot predict whether any state or federal measures
will be adopted to change the nature or scope of the regulation of the insurance
business or what effect such measures may have on its insurance and reinsurance
operations.
Environmental pollution cleanup of polluted waste sites is subject to both
federal and state regulation. The Comprehensive Environmental Response
Compensation and Liability Act of 1980 ("Superfund") and comparable state
statutes ("mini-Superfund") govern the cleanup and restoration of waste sites by
"Potentially Responsible Parties" ("PRPs"). Superfund and the mini-Superfunds
establish a mechanism to pay for cleanup of waste sites if PRPs fail to do so,
and to assign liability to PRPs. The extent of liability allocated to a PRP is
dependent on a variety of factors and the extent of cleanup necessary and the
process of assigning liability remains in dispute. The insurance industry in
general is involved in extensive litigation regarding coverage issues arising
out of the cleanup of waste sites by insured PRPs and as a result has disputed
many such claims. Superfund reform proposals have been introduced in Congress,
but none has yet been enacted. At this time, it remains unclear as to whether
Superfund reform legislation will be enacted or that any such legislation will
provide for a fair, effective and cost-efficient system for settlement of
Superfund related claims. The NICO Cover is designed to protect OneBeacon from
such exposures; however, there can be no assurance that the coverage provided
under the NICO Cover will ultimately prove to be adequate.
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RATINGS
Insurance and reinsurance companies are evaluated by various rating
agencies in order to provide a basis for measuring the financial strength of
individual insurance companies. Higher ratings generally indicate financial
stability and a stronger ability to pay claims. A.M. Best Company, a rating
agency which specializes in the insurance and reinsurance industry, currently
rates OneBeacon's principal operating insurance subsidiaries "A" (Excellent) and
Folksamerica's principal reinsurance operating subsidiary "A-" (Excellent).
White Mountains believes that strong ratings are important factors in the
marketing of insurance products to agents and consumers.
INVESTMENTS
INVESTMENT PHILOSOPHY AND STRATEGY
At September 30, 2001, White Mountains' investment portfolio consisted
of $6,009.9 million (65%) of fixed maturity investments, $2,922.0 million
(32%) of short-term investments and $282.8 million (3%) of common stocks and
other investments. White Mountains' fixed maturity portfolio at September 30,
2001 consisted principally of high grade corporate debt securities (54%),
U.S. government and agency securities (37%) and mortgage-backed securities
(4%).
White Mountains' investment philosophy is to invest all assets with a view
towards maximizing its after-tax total return over extended periods of time.
Under this approach, each dollar of after-tax investment income, realized gains
and losses and unrealized gains and losses is valued equally. White Mountains'
current investment portfolio consists primarily of fixed maturity investments.
White Mountains' overall fixed maturity investment strategy is to purchase
securities that are attractively priced in relation to perceived credit risks.
White Mountains generally manages the interest rate risk associated with holding
fixed maturity investments by actively monitoring and maintaining the average
duration of the portfolio with a view towards achieving an adequate after-tax
total return without subjecting the portfolio to an unreasonable level of
interest rate risk.
Management further believes that the investment assets of its insurance
and reinsurance operations should be invested in a "balanced portfolio"
consisting of a mixture of fixed income investments, equity securities and other
investments (primarily investments in limited partnership interests that invest
in common equity securities) in order to maximize returns over extended periods
of time. White Mountains' Investment Committee, comprised of certain officers
and key managers of OneBeacon and other investment professionals, oversee White
Mountains' investment activities. The Investment Committee regularly monitors
the overall investment results of White Mountains, reviews the results of each
of White Mountains' various investment managers, reviews compliance with
established investment guidelines, approves all purchases and sales of
investment securities and ultimately reports the overall investment results to
the Company's Board of Directors.
As previously stated, the investment portfolios of White Mountains'
insurance and reinsurance operations consist primarily of fixed maturity
investments but also consist, in part, of common equity securities and other
investments. White Mountains' management believes that modest investments of
common equity securities and other investments within its investment portfolio
are likely to enhance after tax total returns without significantly increasing
the risk profile of the portfolio when considered over long periods of time.
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Historically, the fixed maturity portfolios of both White Mountains and
OneBeacon has been comprised primarily of investment grade corporate debt
securities, U.S. government and agency securities and mortgage-backed securities
(i.e., greater than 99% of such securities received a rating from the National
Association of Insurance Commissioners of 1 or 2). Nearly all the fixed income
securities currently held by White Mountains are publicly traded. White
Mountains expects to continue to invest primarily in high-quality fixed maturity
investments.
EMPLOYEES
As of September 30, 2001, White Mountains employed approximately 6,915
persons (consisting of five persons at the Company, approximately 190 persons
at Folksamerica and approximately 6,720 persons at OneBeacon). As a result of
the Renewal Rights Agreement, the Company expects approximately 2,700 of its
employees to be transferred to Liberty Mutual. Management believes that White
Mountains has satisfactory relations with its employees and with its agents.
PROPERTIES
The company maintains two professional offices in Hamilton, Bermuda
which serve as its headquarters and its registered office. In addition, the
company and certain of its subsidiaries maintain a professional office in
White River Junction, Vermont which serves, in part, as its principal
executive office. The home offices of OneBeacon and Folksamerica are located
in Boston, Massachusetts and New York, New York, respectively. In addition,
OneBeacon and Folksamerica maintain branch offices in various cities
throughout the United States. White Mountains' principal executive office,
its home offices and most of its branch offices are leased with the exception
of branch offices located in Florida, Illinois, New Jersey, New York,
Tennessee and Washington, which are owned by OneBeacon. Additionally,
OneBeacon owns office facilities in Illinois, Pennsylvania and Oregon, which
serve as regional headquarter locations. Management considers its office
facilities suitable and adequate for its current level of operations. See
White Mountains' and OneBeacon's consolidated financial statements for the
three years ended December 31, 2000, which are incorporated by reference
herein, for further information concerning commitments and contingencies
concerning its owned and leased properties.
LEGAL PROCEEDINGS
We, in common with the insurance and reinsurance industry in general,
are subject to litigation and arbitration in the normal course of business.
As of September 30, 2001, we were not a party to any material litigation or
arbitration other than as routinely encountered in the insurance and
reinsurance industry, none of which is expected by management to have a
material adverse effect on our financial condition.
DESCRIPTION OF OTHER OBLIGATIONS
THE FOLLOWING SUMMARY OF OUR OTHER OBLIGATIONS DOES NOT PURPORT TO BE
COMPLETE AND IS QUALIFIED BY REFERENCE TO THE DEFINITIVE DOCUMENTATION FOR SUCH
OBLIGATIONS.
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FUND AMERICAN CREDIT FACILITY
GENERAL
In connection with the acquisition of OneBeacon, a credit facility was
provided by a syndicate of banks, financial institutions and other entities,
with Lehman Brothers Inc. as the advisor, lead arranger and book manager, Fleet
National Bank as the syndication agent, Bank of America, N.A., as documentation
agent and Lehman Commercial Paper Inc. as the administrative agent.
The credit facility is comprised of two term loan facilities and a
revolving credit facility. The term loan facilities are comprised of a $300.0
million Tranche A Loan with a five-year maturity and a $400.0 million Tranche B
Loan with a six-year maturity. The revolving credit facility provides for
revolving credit loans of up to $175.0 million, including up to $25.0 million
available for the issuance of letters of credit. The revolving credit facility
matures on June 1, 2006.
INTEREST RATE, FEES
All borrowings under the credit facility bear interest, at Fund American's
election, at a rate per annum equal to either: (a) the base rate (generally, the
higher of (x) the prime lending rate of the British Banking Association and (y)
the Federal funds rate as established by the Federal Reserve Bank of New York
plus 0.50%) plus (i) 0.50% to 1.75%, in the case of the revolving credit
facility and the Tranche A Loan, and (ii) 1.50% to 2.50%, in the case of the
Tranche B Loan, or (b) the eurodollar rate (the rate based on a formula relating
to the rate for dollar deposits in the interbank eurodollar market for a given
interest period) plus (i) 1.50% to 2.75%, in the case of the revolving credit
facility and the Tranche A Loan, and (ii) 2.50% to 3.50%, in the case of the
Tranche B Loan.
A commitment fee calculated at a rate of between 0.25% and 0.375% per
annum is payable on the average daily unused portion of the revolving credit
facility.
INTEREST RATE SWAPS
Since June 2001, Fund American has entered into a series of interest rate
swaps with large financial institutions that were undertaken to achieve a fixed
interest rate on the term loans under the credit facility. The interest rate
swaps consist of a $200.0 million notional contract that was executed in June
2001, which is indexed to a 6.050% ten-year rate, a $200.0 million notional
contract that was executed in September 2001, which is indexed to a 3.955%
three-year rate, and $100.0 million and $200.0 million notional contracts that
were executed in October 2001, which are indexed to a 3.825% three-year rate.
Pursuant to Statement of Financial Accounting Standard ("SFAS") No. 133,
the interest rate swap investments are carried at fair value on our balance
sheet with changes in their fair value reported directly through the income
statement as the swap investments do not satisfy the criteria for hedge
accounting under SFAS No. 133.
REPAYMENT, PREPAYMENTS
The Tranche A Loan and the Tranche B Loan are repaid quarterly in amounts
equal to a specified percentage rate multiplied by the principal amount
borrowed.
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The term loans may be prepaid at any time without premium or penalty with
the exception that any payments on the Tranche B Loan on or prior to December 1,
2002, shall include a prepayment premium ranging from 0.5% to 1.5%.
The credit facilities are subject to mandatory prepayments with (i) 50% of
the net proceeds in excess of $5.0 million from certain equity issuances and
(ii) 100% of the net proceeds in excess of $10.0 million from certain assets
sales.
GUARANTEES, SECURITY
The obligations of Fund American in respect of the credit facility are
unconditionally guaranteed by OneBeacon, each of its subsidiaries (other than
insurance company subsidiaries, certain foreign subsidiaries, and A.W.G. Dewar)
and Fund American Enterprises Holdings, Inc. ("Enterprises").
The obligations of Fund American and each guarantor in respect of the
credit facility are secured by a perfected first priority security interest in
all their assets including the capital stock of their non- insurance company
subsidiaries (other than A.W.G. Dewar) and each of their first-tier insurance
company subsidiaries.
CERTAIN COVENANTS
The credit facility contains affirmative covenants which include:
- reporting requirements;
- conduct of business and compliance with laws;
- requirements to maintain properties and insurance; and
- requirements to maintain interest rate protection.
The credit facility also contains negative covenants that restrict the
ability to:
- incur indebtedness and issue preferred stock;
- incur liens;
- engage in mergers, acquisitions, consolidations and asset sales;
- declare dividends or redeem or repurchase capital stock;
- make investments;
- make payments in respect of, or modify the terms of, subordinated
indebtedness and other debt instruments;
- transact with affiliates; and
- enter into sale and leaseback transactions.
33
In addition, the credit facility requires compliance with various
financial covenants, including minimum interest and fixed charge coverage,
maximum leverage, minimum net worth and statutory surplus and a minimum
risk-based capital ratio.
EVENTS OF DEFAULT
The credit facility contains customary events of default including payment
defaults, breaches of representations and warranties, covenant defaults,
cross-default to certain other indebtedness, bankruptcy and insolvency events,
ERISA violations, material judgments, invalidity of any guarantee or security
document and a change of control.
ENTERPRISES SUBORDINATED SELLER NOTE
In connection with the acquisition of OneBeacon, Enterprises issued to
CGNU plc a $260.0 million aggregate principal amount note. The note matures on
December 1, 2002 and pays interest as described below. The full amount of the
principal and interest is payable at maturity in cash. However, subject to
certain exceptions, White Mountains has the option to purchase the note at a
purchase price equal to the aggregate principal amount thereof plus accrued
interest, such purchase price to be paid in common shares of White Mountains at
a deemed value of $245 per share. In the event the note is paid in common
shares, the recipients of such shares would be entitled to three demand and
unlimited piggyback registration rights. The note contains customary
anti-dilution protection and events of default such as failure to pay,
bankruptcy events and cross-acceleration to other debt.
The note bears interest equal to the six-month LIBOR rate plus the sum of
(i) 0.5% and (ii) the weighted average of the eurodollar margin rate for the (x)
revolving credit facility and the Tranche A Loan and (y) the Tranche B Loan. The
interest rate is reset every six months from issuance until the principal and
interest are paid in full.
FUND AMERICAN PREFERRED STOCK
In connection with the acquisition of OneBeacon, Fund American issued and
sold 300,000 shares of Series A Preferred Stock, par value $1.00 per share
("Fund American Preferred Stock"), to Berkshire. The Fund American Preferred
Stock pays cumulative dividends at a rate of 2.35475% per quarter on March 31,
June 30, September 30 and December 31 of each year. If any dividend is not paid,
Fund American is prohibited from paying any dividends or making any
distributions on any stock junior to the Fund American Preferred Stock until all
such dividends are paid.
If Fund American's dividend payments are no longer eligible for the
dividends received deduction or the dividends are treated as extraordinary, in
each case pursuant to the Internal Revenue Code, Fund American will reimburse
the holder of the Fund American Preferred Stock for the additional taxes,
interest and penalties due to the loss of all or a portion of the deduction or
the treatment of such dividends as extraordinary.
The holders of the Fund American Preferred Stock will not be entitled to
any voting rights other than those provided in Fund American's certificate of
incorporation or as required by law. However, the consent of the holders of
two-thirds of the Fund American Preferred Stock is required to amend, alter or
repeal Fund American's certificate of incorporation or the certificate of
designation relating to the Fund American Preferred Stock. In addition, subject
to certain exceptions, as long as any shares of Fund American Preferred Stock
are outstanding, Fund American shall not declare or pay any dividend or
34
distribution on any stock junior to the Fund American Preferred Stock or
repurchase any junior stock, or make any loan to, or guarantee any indebtedness
of, White Mountains or any subsidiary that is intermediate between White
Mountains and Fund American, without the consent of the holders of a majority of
the Fund American Preferred Stock.
Fund American must redeem the Fund American Preferred Stock on May 31,
2008, at a redemption price of $1,000 per share plus accrued and unpaid
dividends to the date of payment.
In the event of any liquidation, dissolution or winding up of Fund
American, the holders of the Fund American Preferred Stock will be entitled to
receive a liquidation preference amount of $1,000 per share plus accrued and
unpaid dividends to the date of payment.
ENTERPRISES PREFERRED STOCK
On May 31, 2001, Enterprises issued and sold 20,000 shares of Series A
Preferred Stock, par value $1.00 per share ("Enterprises Preferred Stock"), to
Zenith Insurance Company. The Enterprises Preferred Stock pays cumulative
dividends at a rate of (i) on or prior to June 30, 2007, 10% per annum, and (ii)
after June 30, 2007, 14% per annum. Dividends are payable in arrears quarterly
on March 31, June 30, September 30 and December 31 of each year. If Enterprises
fails to pay a dividend when due or if the stock does not meet specific rating
criteria of, and is valued below $950 by, the National Association of Insurance
Commissioners, the dividend rate shall increase by 0.50% per annum each
quarterly period to a maximum of 18%. The dividend rate shall decrease to the
applicable rate once all accrued dividends are paid in full or, in the case that
the stock meets the specific rating criteria and valuation, the dividend rate
will decrease by 0.50% per annum each quarter to a minimum of the applicable
dividend rate.
Subject to specific exceptions, in the event that Enterprises' dividend
payments are no longer eligible for the dividends received deduction, the
deduction percentage is reduced, or the dividends are treated as extraordinary,
in each case pursuant to the Internal Revenue Code, Enterprises will reimburse
the holder of the Enterprises Preferred Stock or adjust the dividend rate for
the additional taxes, interest and penalties due to the loss of all or a portion
of the deduction or the treatment of such dividends as extraordinary, as
applicable. In the event that the deduction percentage is reduced due to an
amendment of the Internal Revenue Code, Enterprises will only adjust the
dividend rate to compensate for reductions in the deduction percentage between
70% and 50%. If the deduction percentage is reduced to below 50%, Enterprises
will only adjust the dividend rate to the level to which the dividend rate would
have been adjusted had the deduction percentage been reduced to 50%.
The holders of the Enterprises Preferred Stock will not be entitled to any
voting rights other than those provided in Enterprises' certificate of
incorporation or as required by law. However, the consent of the holders of
two-thirds of the Enterprises Preferred Stock is required (1) to amend, alter or
repeal Enterprises' certificate of incorporation or the certificate of
designation relating to the Enterprises Preferred Stock, (2) for certain
mergers, consolidations or sale of all or substantially all of Enterprises'
assets, (3) the liquidation or dissolution of Enterprises and (4) any issuance
or authorization of a class of capital stock that ranks senior to the
Enterprises Preferred Stock. Additionally, if Enterprises fails to declare and
pay dividends on the Enterprises Preferred Stock in an amount equal to six
quarterly payments, the holders of a majority of the then outstanding stock will
have the exclusive right to nominate and elect two members to the Board of
Directors of Enterprises.
35
Enterprises must redeem the Enterprises Preferred Stock on May 31, 2011 or
promptly following any time at which its consolidated net worth becomes less
than $200.0 million. At any time on or after June 30, 2007, Enterprises may, at
its sole option, redeem all or a portion of the Enterprises Preferred Stock. In
each case, the redemption price shall be $1,000 per share plus accrued and
unpaid dividends to the redemption date. A change of control of Enterprises
would require the payment of the redemption price.
In the event of any liquidation, dissolution or winding up of Enterprises,
the holders of the Enterprises Preferred Stock will be entitled to receive a
liquidation preference amount of $1,000 per share plus accrued and unpaid
dividends to the date of payment.
GENERAL DESCRIPTION OF SECURITIES
The Issuers may offer preference shares, debt securities, junior
subordinated debt securities, trust preferred securities or any combination of
them either individually or as units consisting of one or more securities under
this prospectus.
THE SECURITIES TO BE OFFERED MAY INVOLVE A HIGH DEGREE OF RISK. YOU SHOULD
CONSIDER THE RISK FACTORS DISCUSSED IN THIS PROSPECTUS BEGINNING ON PAGE 3 AND
THE RISK FACTORS SET FORTH IN ANY PROSPECTUS SUPPLEMENT BEFORE INVESTING IN THE
SECURITIES.
DESCRIPTION OF PREFERENCE SHARES
The following description of White Mountains' preference shares,
together with the additional information included in any prospectus
supplement, summarizes the material terms and provisions of these types of
securities. If we issue preference shares, the certificate of designation for
the preference shares will be filed with the SEC as an exhibit to a Current
Report on Form 8-K and a prospectus supplement will contain a full
description of the terms thereof. We encourage you to read the Memorandum of
Continuance and the Bye-laws of White Mountains, referred to below, which
have been filed with the SEC and which are incorporated herein by reference.
The Memorandum of Continuance and the Bye-Laws of White Mountains
provide that the authorized common share capital of White Mountains is
limited to 50,000,000 common shares, par value U.S. $1.00 per share ("Common
Shares"), and 20,000,000 preference shares having a par value of U.S. $1.00
per share ("Preference Shares"). As of December 5, 2001, 8,165,981 Common
Shares were issued and outstanding. As of December 5, 2001, no Preference
Shares were issued and outstanding.
Under White Mountains' Bye-Laws and pursuant to authority delegated by its
shareholders, the Board of Directors of White Mountains has the full power to
issue any unissued shares of White Mountains on such terms and conditions as it
may, in its absolute discretion, determine. The Board of Directors may authorize
the issue of Preference Shares in one or more series, may establish from time to
time the number of shares to be included in each such series and may fix the
designation, powers, preferences and rights of the shares of each such series
and the qualifications, limitations or restrictions thereof.
The authority of the Board of Directors with respect to each such series
shall include, but not be limited to, determination of the following:
36
o the number of shares constituting that series and the distinctive
designation of that series;
o the dividend rate on the shares of that series, whether dividends shall
be cumulative, and, if so, from which date or dates, and the relative
rights of priority, if any, of payment of dividends on shares of that
series;
o whether that series shall have voting rights, in addition to the voting
rights provided by law, and, if so, the terms of such voting rights;
o whether that series shall have conversion or exchange privileges
(including, without limitation, conversion into Common Shares), and, if
so, the terms and conditions of such conversion or exchange, including
provision for adjustment of the conversion or exchange rate in such
events as the Board of Directors shall determine;
o whether or not the shares of that series shall be redeemable, and, if
so, the terms and conditions of such redemption, including the manner
of selecting shares for redemption if less than all shares are to be
redeemed, the date or dates upon or after which they shall be
redeemable, and the amount per share payable in case of redemption,
which amount may vary under different conditions and at different
redemption dates;
o whether that series shall have a sinking fund for the redemption or
purchase of shares of that series, and, if so, the terms and amount of
such sinking fund;
o the right of the shares of that series to the benefit of conditions and
restrictions upon the creation of indebtedness of White Mountains or
any subsidiary, upon the issue of any additional shares (including
additional shares of such series or any other series) and upon the
payment of dividends or the making of other distributions on, and the
purchase, redemption or other acquisition by White Mountains or any
subsidiary of any outstanding shares of White Mountains;
o the rights of the shares of that series in the event of voluntary or
involuntary liquidation, dissolution or winding up of White Mountains,
and the relative rights of priority, if any, of payment of shares of
that series; and
o any other relative participating, optional or other special rights,
qualifications, limitations or restrictions of that series.
Any Preference Shares of any series which have been redeemed (whether
through the operation of a sinking fund or otherwise) or which, if convertible
or exchangeable, have been converted into or exchanged for shares of any other
class or classes shall have the status of authorized and unissued Preference
Shares of the same series and may be reissued as a part of the series of which
they were originally a part or may be reclassified and reissued as part of a new
series of Preference Shares to be created by resolution or resolutions of the
Board of Directors or as part of any other series of Preference Shares, all
subject to the conditions and the restrictions on issuance set forth in the
resolution or resolutions adopted by the Board of Directors providing for the
issue of any series of Preference Shares.
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DESCRIPTION OF DEBT SECURITIES
White Mountains and Fund American (each, an "Issuer") may offer, from time
to time, unsecured general obligations, which may be senior (the "Senior Debt
Securities") or subordinated (the "Subordinated Debt Securities", and together
with the Senior Debt Securities, the "Debt Securities"). The following
description summarizes the general terms and provisions of the Debt Securities
to which any prospectus supplement may relate. We will describe the specific
terms of the Debt Securities and the extent, if any, to which the general
provisions summarized below may apply to any series of the Debt Securities in
the prospectus supplement relating to the series.
The Issuer may issue Senior Debt Securities from time to time, in one or
more series under a senior indenture (the "Senior Indenture"), between White
Mountains (as issuer or guarantor), Fund American and Bank One, National
Association, as senior trustee, or another senior trustee named in a prospectus
supplement (the "Senior Trustee"). The form of Senior Indenture is filed as an
exhibit to this registration statement. The Issuer may issue the Subordinated
Debt Securities from time to time, in one or more series under a subordinated
indenture (the "Subordinated Indenture"), between White Mountains (as issuer or
guarantor), Fund American and Bank One, National Association, as subordinated
trustee, or another subordinated trustee named in a prospectus supplement (the
"Subordinated Trustee"). The form of Subordinated Indenture is filed as an
exhibit to this registration statement. Together, the Senior Indenture and the
Subordinated Indenture are referred to as the "Indentures", and together the
Senior Trustee and the Subordinated Trustee are referred to as the "Debt
Trustees". None of the Indentures will limit the amount of Debt Securities that
may be issued. The applicable Indenture will provide that Debt Securities may be
issued up to an aggregate principal amount authorized by the Issuer and may be
payable in any currency or currency unit designated by the Issuer or in amounts
determined by reference to an index.
GENERAL
The Senior Debt Securities will be unsecured and will rank equally with
the Issuer's other unsecured and unsubordinated debt, if any, unless the Issuer
is required to secure the Senior Debt Securities as described below under
"--Senior Debt Securities". The Issuer's obligations under any Subordinated Debt
Securities will be subordinate in right of payment to all of its senior
indebtedness and will be described in an accompanying prospectus supplement. The
Issuer will issue Debt Securities from time to time and offer the Debt
Securities on terms determined by market conditions at the time of sale.
The Issuer may issue the Debt Securities in one or more series with the
same or various maturities, at par, at a premium, or at a discount. Any Debt
Securities bearing no interest or interest at a rate which at the time of
issuance is below market rates will be sold at a discount, which may be
substantial, from their stated principal amount. We will describe the Federal
income tax consequences and other special considerations applicable to any
substantially discounted Debt Securities in the related prospectus supplement.
You should refer to the prospectus supplement for the following terms of
the Debt Securities offered hereby:
o the designation, aggregate principal amount and authorized
denominations of the Debt Securities;
o the percentage of the principal amount at which the Issuer will issue
the Debt Securities;
o the date or dates on which the Debt Securities will mature;
38
o the annual interest rate or rates of the Debt Securities, or the method
of determining the rate or rates;
o the date or dates on which any interest will be payable, the date or
dates on which payment of any interest will commence and the regular
record dates for the interest payment dates;
o the terms of any mandatory or optional redemption, including any
provisions for any sinking, purchase or other similar funds, or
repayment options;
o the currency, currencies or currency units for which the Debt
Securities may be purchased and in which the principal, any premium and
any interest may be payable;
o if the currency, currencies or currency units for which the Debt
Securities may be purchased or in which the principal, any premium and
any interest may be payable is at the Issuer's election or the
purchaser's election, the manner in which the election may be made;
o if the amount of payments on the Debt Securities is determined by an
index based on one or more currencies or currency units, or changes in
the price of one or more securities or commodities, the manner in which
the amounts may be determined;
o the extent to which any of the Debt Securities will be issuable in
temporary or permanent global form, and the manner in which any
interest payable on a temporary or permanent global security will be
paid;
o the terms and conditions upon which the Debt Securities may be
convertible into or exchanged for Common Shares, Preference Shares, or
indebtedness or other securities of any kind;
o information with respect to book-entry procedures, if any;
o a discussion of the Federal income tax, accounting and other special
considerations, procedures and limitations with respect to the Debt
Securities; and
o any other specific terms of the Debt Securities not inconsistent with
the applicable Indenture.
If the Issuer sells any of the Debt Securities for one or more foreign
currencies or foreign currency units or if the principal of, premium on, if any,
or interest on any series of Debt Securities will be payable in one or more
foreign currencies or foreign currency units, it will describe the restrictions,
elections, Federal income tax consequences, specific terms and other information
with respect to the issue of Debt Securities and the currencies or currency
units in the related prospectus supplement.
Unless specified otherwise in a prospectus supplement, the principal of,
premium on, and interest on the Debt Securities will be payable, and the Debt
Securities will be transferable, at the corporate trust office of the applicable
Debt Trustee in New York, New York. However, the Issuer may make payment of
interest at its option by check mailed on or before the payment date to the
address of the person entitled to the interest payment as it appears on the
registry books of the Issuer or its agents.
Unless specified otherwise in a prospectus supplement, the Issuer will
issue the Debt Securities only in fully registered form and in denominations of
$1,000 and any integral multiple of $1,000. No service charge will be made for
any transfer or exchange of any Debt Securities, but the Issuer may, except in
39
specific cases not involving any transfer, require payment of a sufficient
amount to cover any tax or other governmental charge payable in connection with
the transfer or exchange. Unless we specify otherwise in the prospectus
supplement, the Issuer will pay interest on outstanding Debt Securities to
holders of record on the date 15 days immediately prior to the date the interest
is to be paid.
The Issuer's rights and the rights of its creditors, including holders of
Debt Securities, to participate in any distribution of assets of any of the
Issuer's subsidiaries upon its liquidation or reorganization or otherwise is
subject to the prior claims of creditors of the subsidiary, except to the extent
that the Issuer's claims as a creditor of the subsidiary may be recognized. The
Issuer's operations are conducted through subsidiaries and, therefore, the
Issuer is dependent upon the earnings and cash flow of its subsidiaries to meet
its obligations, including obligations under the Debt Securities. The Debt
Securities will be effectively subordinated to all indebtedness of the Issuer's
subsidiaries.
WHITE MOUNTAINS GUARANTEE
White Mountains will irrevocably and unconditionally guarantee to each
holder of Debt Securities issued by Fund American the due and punctual payment
of the principal of, and any premium and any interest on, those Debt Securities,
when and as the same becomes due and payable, whether at maturity, upon
acceleration or otherwise. White Mountains has:
o agreed that its obligations under the guarantees, upon the occurrence
and continuance of an event of default with respect to any guaranteed
Debt Securities, will be as if it were principal obligor and not merely
surety, and will be enforceable irrespective of any invalidity,
irregularity or unenforceability of any series of guaranteed Debt
Securities or the applicable Indenture, and
o waived its right to require the Debt Trustee or the holders of
guaranteed Debt Securities to pursue or exhaust their legal or
equitable remedies against Fund American prior to exercising their
rights under the Guarantees.
White Mountains' guarantee of Fund American's obligations under any Debt
Security will be subordinated in right of payment to same extent as Fund
American's obligations under such Debt Security.
GLOBAL SECURITIES
The Issuer may issue Debt Securities of a series in whole or in part in
the form of one or more global securities and will deposit them with or on
behalf of a depositary identified in the prospectus supplement relating to that
series. The Issuer may issue global securities only in fully registered form and
in either temporary or permanent form. Unless and until it is exchanged in whole
or in part for the individual Debt Securities represented thereby, a global
security may not be transferred except as a whole by the depositary for the
global security to a nominee of the depositary or by a nominee of the depositary
to the depositary or another nominee of the depositary or by the depositary or
any nominee of the depositary to a successor or any nominee.
The specific terms of the depositary arrangement relating to a series of
Debt Securities will be described in the prospectus supplement relating to that
series. It is anticipated that the following provisions will generally apply to
depositary arrangements.
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Upon the issuance of a global security, the depositary for the global
security or its nominee will credit on its book entry registration and transfer
system the principal amounts of the individual Debt Securities represented by
the global security to the accounts of persons that have accounts with the
depositary. The accounts will be designated by the dealers, underwriters or
agents with respect to the Debt Securities or by the Issuer if the Debt
Securities are offered and sold directly by it. Ownership of beneficial
interests in a global security will be limited to persons that have accounts
with the applicable depositary participants or persons that hold interests
through participants. Ownership of beneficial interests in the global security
will be shown on, and the transfer of that ownership will be effected only
through, records maintained by:
o the applicable depositary or its nominee, with respect to interests of
participants, and
o the records of participants, with respect to interests of persons other
than participants.
The laws of some states require that purchasers of securities take
physical delivery of the securities in definitive form. These limits and laws
may impair the ability to transfer beneficial interests in a global security.
So long as the depositary for a global security or its nominee is the
registered owner of the global security, the depositary or the nominee will be
considered the sole owner or holder of the Debt Securities represented by the
global security for all purposes under the applicable Indenture. Except as
provided below, owners of beneficial interests in a global security will:
o not be entitled to have any of the individual Debt Securities of the
series represented by the global security registered in their names;
o not receive or be entitled to receive physical delivery of any Debt
Security of that series in definitive form;
o not be considered the owners or holders thereof under the applicable
Indenture governing the Debt Securities.
Payments of principal of, any premium on and any interest on individual
Debt Securities represented by a global security registered in the name of a
depositary or its nominee will be made to the depositary or its nominee as the
registered owner of the global security representing the Debt Securities.
Neither the Issuer, the applicable Debt Trustee for the Debt Securities, any
paying agent, nor the security registrar for the Debt Securities will have any
responsibility or liability for the records relating to or payments made on
account of beneficial ownership interests of the global security for the Debt
Securities or for maintaining, supervising or reviewing any records relating to
the beneficial ownership interests.
The Issuer expects that the depositary for a series of Debt Securities or
its nominee, upon receipt of any payment of principal, premium or interest in
respect of a permanent global security representing any of the Debt Securities,
will immediately credit participants' accounts with payments in amounts
proportionate to their beneficial interests in the principal amount of the
global security for the Debt Securities as shown on the records of the
depositary or its nominee. The Issuer also expects that payments by participants
to owners of beneficial interests in the global security held through the
participants will be governed by standing instructions and customary practices,
as is now the case with securities held for the accounts of customers in bearer
form or registered in "street name". The payments will be the responsibility of
those participants.
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If the depositary for a series of Debt Securities is at any time
unwilling, unable or ineligible to continue as depositary and a successor
depositary is not appointed by the Issuer within 90 days, the Issuer will issue
individual Debt Securities of that series in exchange for the global security
representing that series of Debt Securities. In addition, the Issuer may at any
time and in its sole discretion, subject to any limitations described in the
prospectus supplement relating to the Debt Securities, determine not to have any
Debt Securities of a series represented by one or more global securities. In
that event, the Issuer will issue individual Debt Securities of that series in
exchange for the global security or Securities representing that series of Debt
Securities. Further, if the Issuer so specifies with respect to the Debt
Securities of a series, an owner of a beneficial interest in a global security
representing Debt Securities of that series may, on terms acceptable to the
Issuer, the applicable Debt Trustee and the depositary for such global security,
receive individual Debt Securities of that series in exchange for the beneficial
interests, subject to any limitations described in the prospectus supplement
relating to the Debt Securities. In any such instance, an owner of a beneficial
interest in a global security will be entitled to physical delivery of
individual Debt Securities of the series represented by the global security
equal in principal amount to the beneficial interest and to have the Debt
Securities registered in its name. Individual Debt Securities of the series so
issued will be issued in denominations, unless otherwise specified by the
Issuer, of $1,000 and integral multiples of $1,000.
AMALGAMATION, CONSOLIDATION, MERGER AND SALE OF ASSETS
Each Indenture prohibits, without the consent of the holders of the
applicable Debt Securities, the Issuer's amalgamation, consolidation with or
merger into any other entity or the transfer of the Issuer's properties and
assets substantially as an entirety to any other entity, unless:
o the successor entity is organized and existing under the laws of the
United States, any State thereof, the District of Columbia or Bermuda,
and expressly assumes by a supplemental indenture the punctual payment
of the principal of, premium on and interest on all the outstanding
Debt Securities and the performance of every covenant in the applicable
Indenture to be performed or observed on the Issuer's part;
o immediately after giving effect to the transaction, no event of default
has happened and is continuing; and
o the Issuer has delivered to the applicable Debt Trustee an officers'
certificate stating that the amalgamation, consolidation, merger,
conveyance or transfer and the supplemental indenture comply with the
foregoing provisions relating to the transaction.
In case of any amalgamation, consolidation, merger, conveyance or
transfer, the successor corporation will succeed to and be substituted for the
Issuer as obligor on the Debt Securities, with the same effect as if it had been
named as the Issuer in the applicable Indenture. If the Issuer of Debt
Securities is Fund American, the above restriction on amalgamation,
consolidation, merger, conveyance or transfer will also apply to White
Mountains, as guarantor of the Debt Securities. Unless otherwise specified in a
prospectus supplement, other than the restrictions on liens described below, the
Indentures and the Debt Securities do not contain any covenants or other
provisions designed to protect holders of Debt Securities in the event of a
highly leveraged transaction involving the Issuer or any Subsidiary.
42
EVENTS OF DEFAULT; WAIVER AND NOTICE OF DEFAULT; DEBT SECURITIES IN FOREIGN
CURRENCIES
An event of default when used in an Indenture will mean any of the
following as to any series of Debt Securities:
o default for 30 days in payment of any interest, or, in the case of the
Subordinated Indenture, for a period of 90 days;
o default in payment of principal of or any premium at maturity;
o default in payment of any sinking or purchase fund or similar
obligation;
o default by the Issuer in the performance of any other covenant or
warranty contained in the applicable Indenture for the benefit of that
series which has not been remedied for a period of 90 days after notice
is given; or
o events of the Issuer's bankruptcy, insolvency and reorganization.
A default under the Issuer's other indebtedness will not be a default
under the Indentures and a default under one series of Debt Securities will not
necessarily be a default under another series.
Each Indenture provides that if an event of default described in the first
four bullet points above has occurred and is continuing with respect to any
series, and the event of default under the fourth bullet point is with respect
to less than all series of Debt Securities then outstanding, either the
applicable Debt Trustee or the holders of not less than 25% in aggregate
principal amount of the Debt Securities of the series then outstanding, each
series acting as a separate class, may declare the principal or, in the case of
original issue discount securities, the portion specified in the terms thereof,
of all outstanding Debt Securities of the series and the accrued interest to be
due and payable immediately. Each Indenture further provides that if an event of
default described in the fourth or fifth bullet point above has occurred and is
continuing, and the event of default under the fourth bullet point is with
respect to all series of Debt Securities then outstanding, either the applicable
Debt Trustee or the holders of at least 25% in aggregate principal amount of all
Debt Securities then outstanding, treated as one class, may declare the
principal or, in the case of original issue discount securities, the portion
specified in the terms thereof, of all Debt Securities then outstanding and the
accrued interest to be due and payable immediately. However, upon certain
conditions the declarations may be annulled and past defaults, except for
defaults in the payment of principal of, premium on, or interest on, the Debt
Securities and in compliance with certain covenants, may be waived by the
holders of a majority in aggregate principal amount of the Debt Securities of
the series then outstanding.
Under each Indenture the applicable Debt Trustee must give notice to the
holders of each series of Debt Securities of all uncured defaults known to it
with respect to that series within 90 days after a default occurs. The term
"default" includes the events specified above without notice or grace periods.
However, in the case of any default of the type described in the fourth bullet
point above, no notice may be given until at least 90 days after the occurrence
of the event. The Debt Trustee will be protected in withholding notice if it in
good faith determines that the withholding of notice is in the interests of the
holders of the Debt Securities, except in the case of default in the payment of
principal of, premium on, or interest on any of the Debt Securities, or default
in the payment of any sinking or purchase fund installment or analogous
obligations.
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No holder of any Debt Securities of any series may institute any action
under either Indenture unless:
o the holder has given the Debt Trustee written notice of a continuing
event of default with respect to that series;
o the holders of not less than 25% in aggregate principal amount of the
Debt Securities of the series then outstanding have requested the Debt
Trustee to institute proceedings in respect of the event of default;
o the holder or holders have offered the Debt Trustee reasonable
indemnity as the Debt Trustee may require;
o the Debt Trustee has failed to institute an action for 60 days; and
o no inconsistent direction has been given to the Debt Trustee during the
60-day period by the holders of a majority in aggregate principal
amount of Debt Securities of the series then outstanding.
The holders of a majority in aggregate principal amount of the Debt
Securities of any series affected and then outstanding will have the right,
subject to limitations, to direct the time, method and place of conducting any
proceeding for any remedy available to the applicable Debt Trustee or exercising
any trust or power conferred on the Debt Trustee with respect to a series of
Debt Securities. Each Indenture provides that if an event of default occurs and
is continuing, the Debt Trustee will be required to use the degree of care of a
prudent person in the conduct of that person's own affairs in exercising its
rights and powers under the Indenture. Each Indenture further provides that the
Debt Trustee will not be required to expend or risk its own funds in the
performance of any of its duties under the Indenture unless it has reasonable
grounds for believing that repayment of the funds or adequate indemnity against
the risk or liability is reasonably assured to it.
The Issuer must furnish to the Debt Trustees within 120 days after the end
of each fiscal year a statement signed by one of its officers to the effect that
a review of its activities during the year and of its performance under the
applicable Indenture and the terms of the Debt Securities has been made, and, to
the knowledge of the signatories based on the review, the Issuer has complied
with all conditions and covenants of the Indenture through the year or, if the
Issuer is in default, specifying the default.
To determine whether the holders of the requisite principal amount of Debt
Securities have taken action as described above when the Debt Securities are
denominated in a foreign currency, the principal amount of the Debt Securities
will be deemed to be that amount of United States dollars that could be obtained
for the principal amount based on the applicable spot rate of exchange as of the
date the action is taken as evidenced to the Debt Trustee as provided in the
Indenture.
To determine whether the holders of the requisite principal amount of Debt
Securities have taken action as described above when the Debt Securities are
original issue discount securities, the principal amount of the Debt Securities
will be deemed to be the portion of the principal amount that would be due and
payable at the time the action is taken upon a declaration of acceleration of
maturity.
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MODIFICATION OF THE INDENTURES
The Indentures provide that the Issuer and the applicable Debt Trustee
may, without the consent of any holders of Debt Securities, enter into
supplemental indentures for the purposes, among other things, of:
o adding to the Issuer's covenants;
o adding additional events of default;
o establishing the form or terms of any series of Debt Securities; or
o curing ambiguities or inconsistencies in the Indenture or making other
provisions.
With specific exceptions, the applicable Indenture or the rights of the
holders of the Debt Securities may be modified by the Issuer and the applicable
Debt Trustee with the consent of the holders of a majority in aggregate
principal amount of the Debt Securities of each series affected by the
modification then outstanding, but no modification may be made without the
consent of the holder of each outstanding Debt Security affected which would:
o change the maturity of any payment of principal of, or any premium on,
or any installment of interest on any Debt Security;
o reduce the principal amount of or the interest or any premium on any
Debt Security;
o change the method of computing the amount of principal of or interest
on any date;
o change any place of payment where, or the currency in which, any Debt
Security or any premium or interest is payable;
o impair the right to sue for the enforcement of any payment on or after
the maturity thereof, or, in the case of redemption or repayment, on or
after the redemption date or the repayment date;
o reduce the percentage in principal amount of the outstanding Debt
Securities of any series, the consent of the holders of which is
required for any modification of, or waiver of compliance with
provisions of, the applicable Indenture or specific defaults and their
consequences provided for in the Indenture; or
o modify any of the provisions of specific sections of the applicable
Indenture, including the provisions summarized in this section, except
to increase any required consent percentage or to provide that other
provisions of the Indenture cannot be modified or waived without the
consent of the holder of each outstanding Debt Security affected
thereby.
SATISFACTION AND DISCHARGE OF THE INDENTURES; DEFEASANCE
The Indentures will generally cease to be of any further effect with
respect to a series of Debt Securities if the Issuer delivers all Debt
Securities of that series, with limited exceptions, for cancellation to the
applicable Debt Trustee or all Debt Securities of that series not previously
delivered for cancellation to the applicable Debt Trustee have become due and
payable or will become due and
45
payable or called for redemption within one year, and the Issuer has deposited
with the applicable Debt Trustee as trust funds the entire amount sufficient to
pay at maturity or upon redemption all the Debt Securities, no default with
respect to the Debt Securities has occurred and is continuing on the date of the
deposit, and the deposit does not result in a breach or violation of, or default
under, the applicable Indenture or any other agreement or instrument to which
the Issuer is a party.
The Issuer has a "legal defeasance option" under which it may terminate,
with respect to the Debt Securities of a particular series, all of its
obligations under the Debt Securities and the applicable Indenture. In addition,
the Issuer has a "covenant defeasance option" under which it may terminate, with
respect to the Debt Securities of a particular series, the Issuer's obligations
with respect to the Debt Securities under specified covenants contained in the
applicable Indenture. If the Issuer exercises its legal defeasance option with
respect to a series of Debt Securities, payment of the Debt Securities may not
be accelerated because of an event of default. If the Issuer exercises its
covenant defeasance option with respect to a series of Debt Securities, payment
of the Debt Securities may not be accelerated because of an event of default
related to the specified covenants.
The Issuer may exercise its legal defeasance option or its covenant
defeasance option with respect to the Debt Securities of a series only if:
o the Issuer deposits in trust with the applicable Debt Trustee cash or
debt obligations of the United States of America or its agencies or
instrumentalities for the payment of principal, premium and interest
with respect to the Debt Securities to maturity or redemption;
o the Issuer delivers to the applicable Debt Trustee a certificate from a
nationally recognized firm of independent public accountants expressing
their opinion that the cash or debt obligations described above on
deposit with the applicable Debt Trustee will provide cash sufficient
to pay the principal, premium, and interest when due with respect to
all the Debt Securities of that series to maturity or redemption;
o 91 days pass after the deposit is made and during the 91-day period no
default described in the fifth bullet point under "--Events of Default,
Waiver and Notice Of Default; Debt Securities in Foreign Currencies"
above with respect to the Issuer occurs that is continuing at the end
of the period;
o no default has occurred and is continuing on the date of the deposit;
o the deposit does not constitute a default under any other agreement
binding on the Issuer;
o the Issuer delivers to the applicable Debt Trustee an opinion of
counsel to the effect that the trust resulting from the deposit does
not constitute a regulated investment company under the Investment
Company Act of 1940;
o the Issuer has delivered to the applicable Debt Trustee an opinion of
counsel addressing specific Federal income tax matters relating to the
defeasance; and
o the Issuer delivers to the applicable Debt Trustee an officers'
certificate and an opinion of counsel stating that all conditions to
the defeasance and discharge of the Debt Securities of that series have
been complied with.
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The applicable Debt Trustee will hold in trust cash or debt obligations of
the United States of America or its agencies or instrumentalities deposited with
it as described above and will apply the deposited cash and the proceeds from
deposited debt obligations of the United States of America or its agencies or
instrumentalities to the payment of principal, premium, and interest with
respect to the Debt Securities of the defeased series.
CONCERNING THE DEBT TRUSTEES
The Issuer will identify the Debt Trustee for the Senior Debt Securities
and the Debt Trustee for the Subordinated Debt Securities in the relevant
prospectus supplement. In specific instances, the Issuer or the holders of a
majority of the then outstanding principal amount of the Debt Securities issued
under an Indenture may remove the Debt Trustee and appoint a successor Debt
Trustee. The Debt Trustee may become the owner or pledgee of any of the Debt
Securities with the same rights, subject to conflict of interest restrictions,
it would have if it were not the Debt Trustee. The Debt Trustee and any
successor trustee must be a corporation organized and doing business as a
commercial bank or trust company under the laws of the United States or of any
state thereof, authorized under those laws to exercise corporate trust powers,
having a combined capital and surplus of at least $50,000,000 and subject to
examination by Federal or state authority. Subject to applicable law relating to
conflicts of interest, the Debt Trustee may also serve as trustee under other
indentures relating to debt securities issued by the Issuer or its affiliated
companies and may engage in commercial transactions with the Issuer and its
affiliated companies. The initial Debt Trustee under each Indenture is Bank One,
National Association.
SENIOR DEBT SECURITIES
In addition to the provisions previously described in this prospectus and
applicable to all Debt Securities, the following description of the Senior Debt
Securities summarizes the general terms and provisions of the Senior Debt
Securities to which any prospectus supplement may relate. The Issuer will
describe the specific terms of the Senior Debt Securities offered by any
prospectus supplement and the extent, if any, to which the general provisions
summarized below may apply to any series of its Senior Debt Securities in the
prospectus supplement relating to that series.
RANKING OF SENIOR DEBT SECURITIES
Unless we specify otherwise in a prospectus supplement for a particular
series of Debt Securities, all series of Senior Debt Securities will be the
Issuer's senior indebtedness and will be direct, unsecured obligations of the
Issuer ranking equally with all of the Issuer's other unsecured and
unsubordinated indebtedness. Because the Issuer is a holding company, the Debt
Securities will be effectively subordinated to all existing and future
liabilities, including indebtedness, of the Issuer's subsidiaries.
COVENANTS
The Senior Indenture contains the covenants summarized below, which will
apply to the Issuer and, in the case of issuances of Senior Debt Securities by
Fund American, will also apply to White Mountains as guarantor of Fund
American's obligations under the Senior Debt Securities. The covenants will be
applicable, unless waived or amended, so long as any of the Senior Debt
Securities are outstanding, unless stated otherwise in the prospectus
supplement.
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LIMITATIONS ON LIENS
The Issuer will not, and will not permit any subsidiary to, create, incur,
assume or permit to exist any lien on any stock or indebtedness of a subsidiary
or property of the Issuer or any subsidiary, to secure any debt of any
subsidiary or any other person, or permit any subsidiary so to do, without
securing the Senior Debt Securities equally and ratably with such debt for so
long as such debt shall be so secured, subject to certain exceptions. Exceptions
include:
o existing liens;
o liens on stock or indebtedness of corporations at the time they become
subsidiaries or existing upon stock or indebtedness of a subsidiary at
the time of acquisition of such stock or indebtedness;
o liens upon property of entities existing at the time they become
subsidiaries;
o liens existing on properties when acquired, or incurred to finance the
purchase price or construction thereof;
o liens to extend, renew or replace any liens referred to above;
o certain liens relating to certain permitted sale and leaseback
transactions;
o liens in favor of the Issuer or one or more subsidiaries granted by the
Issuer or a subsidiary to secure any intercompany obligations;
o mechanics', landlords' and similar liens;
o liens arising out of legal proceedings being contested;
o liens for taxes not yet due, or being contested;
o easements and similar liens not impairing the use or value of the
property involved;
o pledges or deposits in connection with workers' compensation,
unemployment insurance and other social security legislation;
o deposits to secure performance of letters of credit, bids, leases,
statutory obligations, surety and appeal bonds, performance bonds and
other obligations of a like nature incurred in the ordinary course of
business;
o any interest or title of a lessor under any lease entered into in the
ordinary course of business;
o liens on assets of any subsidiary which is required to be licensed as
an insurer or reinsurer (or any subsidiary of such subsidiary) securing
indebtedness incurred to provide short-term liquidity to facilitate
claims payments in the event of catastrophes; and
o liens otherwise prohibited by this covenant, securing indebtedness
which, together with the value of certain sale and leaseback
transactions described under "Limitation on Sale and Leasebacks", does
not exceed 15% of shareholders equity.
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LIMITATION ON SALE AND LEASEBACKS
The Issuer will not, and will not permit any subsidiary to, enter into any
arrangement with any person pursuant to which the Issuer or any subsidiary
leases any property that has been or is to be sold or transferred by the Issuer
or the subsidiary to such person (a "sale and leaseback transaction"), except
that a sale and leaseback transaction is permitted if the Issuer or such
subsidiary would be entitled to secure the property to be leased (without
equally and ratably securing the outstanding Senior Debt Securities) in an
amount equal to the present value of the lease payments with respect to the term
of the lease remaining on the date as of which the amount is being determined
under the provisions described in "Limitation on Liens" above.
In addition, permitted sale and leaseback transactions not subject to the
limitation above and the provisions described in "Limitations on Liens" above
include:
o leases for a term, including renewals at the option of the lessee, of
not more than five years;
o leases between the Issuer and a subsidiary or between subsidiaries; and
o leases of property executed by the time of, or within 12 months after
the latest of, the acquisition, the completion of construction or
improvement, or the commencement of commercial operation of the
property.
SUBORDINATED DEBT SECURITIES
In addition to the provisions previously described in this prospectus and
applicable to all Debt Securities, the following description of the Subordinated
Debt Securities summarizes the general terms and provisions of its Subordinated
Debt Securities to which any prospectus supplement may relate. We will describe
the specific terms of the Subordinated Debt Securities offered by any prospectus
supplement and the extent, if any, to which the general provisions summarized
below may apply to any series of Subordinated Debt Securities in the prospectus
supplement relating to that series.
RANKING OF SUBORDINATED DEBT SECURITIES
The Subordinated Debt Securities will be subordinated in right of payment
to the Issuer's other indebtedness to the extent set forth in the applicable
prospectus supplement. If the Issuer of Subordinated Debt Securities is Fund
American, White Mountains' guarantee of Fund American's obligations thereunder
will be subordinated in right of payment to the same extent as Fund American's
obligations thereunder.
The payment of the principal of, premium, if any, and interest on the
Subordinated Debt Securities will be subordinated in right of payment to the
prior payment in full of all of the Issuer's senior indebtedness and equally
with its trade creditors. The Issuer may not make payment of principal of,
premium, if any, or interest on the Subordinated Debt Securities and may not
acquire or make payment on account of any sinking fund for, the Subordinated
Debt Securities unless full payment of amounts then due for principal, premium,
if any, and interest then due on all senior indebtedness by reason of the
maturity thereof has been made or duly provided for in cash or in a manner
satisfactory to the holders of the senior indebtedness. In addition, the
Subordinated Indenture provides that if a default has occurred giving the
holders of the senior indebtedness the right to accelerate the maturity of that
senior indebtedness, or an event has occurred which, with the giving of notice,
or lapse of time, or both, would constitute an event of default, then unless and
until that event has been cured or waived or has ceased to
49
exist, no payment of principal, premium, if any, or interest on the Subordinated
Debt Securities and no acquisition of, or payment on account of a sinking fund
for, the Subordinated Debt Securities may be made. The Issuer will give prompt
written notice to the Subordinated Trustee of any default under any senior
indebtedness or under any agreement pursuant to which senior indebtedness may
have been issued. The Subordinated Indenture provisions described in this
paragraph, however, do not prevent the Issuer from making a sinking fund payment
with Subordinated Debt Securities acquired prior to the maturity of senior
indebtedness or, in the case of default, prior to the default and notice
thereof. Upon any distribution of assets in connection with the Issuer's
dissolution, liquidation or reorganization, all senior indebtedness must be paid
in full before the holders of the Subordinated Debt Securities are entitled to
any payments whatsoever. As a result of these subordination provisions, in the
event of the Issuer's insolvency, holders of the Subordinated Debt Securities
may recover ratably less than the Issuer's senior creditors.
For purposes of the description of the Subordinated Debt Securities, the
term "senior indebtedness" means the principal of and premium, if any, and
interest on the following, whether outstanding on the date of execution of the
Subordinated Indenture or incurred or created after the execution:
o the Issuer's indebtedness for money borrowed by it, including purchase
money obligations with an original maturity in excess of one year, or
evidenced by securities, other than the Subordinated Debt Securities or
Junior Subordinated Debt Securities, notes, bankers' acceptances or
other corporate Debt Securities or similar instruments issued by the
Issuer;
o obligations with respect to letters of credit;
o the Issuer's indebtedness constituting a guarantee of indebtedness of
others of the type referred to in the preceding two bullet points; or
o renewals, extensions or refundings of any of the indebtedness referred
to in the preceding three bullet points unless, in the case of any
particular indebtedness, renewal, extension or refunding, under the
express provisions of the instrument creating or evidencing the same,
or pursuant to which the same is outstanding, the indebtedness or the
renewal, extension or refunding thereof is not superior in right of
payment to the Subordinated Debt Securities.
DESCRIPTION OF JUNIOR SUBORDINATED DEBT SECURITIES
Fund American may offer, from time to time, junior subordinated debt
securities (the "Junior Subordinated Debt Securities"). The following
description summarizes the general terms and provisions of the Junior
Subordinated Debt Securities to which any prospectus supplement may relate. Fund
American will describe the specific terms of the Junior Subordinated Debt
Securities and the extent, if any, to which the general provisions summarized
below may apply to any series of its Junior Subordinated Debt Securities in the
prospectus supplement relating to that series.
Fund American may issue its Junior Subordinated Debt Securities from time
to time in one or more series under a junior subordinated indenture (the "Junior
Subordinated Indenture"), between Fund American, White Mountains (as guarantor)
and Bank One, National Association, as junior subordinated trustee, or another
junior subordinated trustee named in a prospectus supplement (the "Junior
Subordinated Trustee"). The form of Junior Subordinated Indenture is filed as an
exhibit to the registration statement.
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GENERAL
The Junior Subordinated Debt Securities will be unsecured, junior
subordinated obligations of Fund American. The Junior Subordinated Indenture
does not limit the amount of additional indebtedness Fund American or any of its
subsidiaries may incur. Since Fund American is a holding company, Fund
American's rights and the rights of its creditors, including the holders of
Junior Subordinated Debt Securities, to participate in the assets of any
subsidiary upon the latter's liquidation or recapitalization will be subject to
the prior claims of the subsidiary's creditors, except to the extent that Fund
American may itself be a creditor with recognized claims against the subsidiary.
The Junior Subordinated Indenture does not limit the aggregate principal
amount of indebtedness which may be issued thereunder and provides that Junior
Subordinated Debt Securities may be issued thereunder from time to time in one
or more series. The Junior Subordinated Debt Securities are issuable in one or
more series pursuant to a board resolution or an indenture supplemental to the
Junior Subordinated Indenture. Fund American will issue Junior Subordinated Debt
Securities from time to time and offer its Junior Subordinated Debt Securities
on terms determined by market conditions at the time of sale.
In the event Junior Subordinated Debt Securities are issued to any Fund
American Trust or a trustee of the applicable Fund American Trust in connection
with the issuance of preferred securities by the applicable Fund American Trust,
the Junior Subordinated Debt Securities held by the applicable Fund American
Trust subsequently may be distributed pro rata to the holders of the applicable
preferred securities in connection with the dissolution of the applicable Fund
American Trust upon the occurrence of the events described in the applicable
prospectus supplement. Only one series of Junior Subordinated Debt Securities
will be issued to each Fund American Trust or a trustee of such Fund American
Trust in connection with the issuance of preferred securities by such Fund
American Trust.
You should refer to the applicable prospectus supplement for the following
terms of the Junior Subordinated Debt Securities offered hereby:
o the designation, aggregate principal amount and authorized
denominations of the Junior Subordinated Debt Securities;
o the percentage of the principal amount at which Fund American will
issue the Junior Subordinated Debt Securities;
o the date or dates on which the Junior Subordinated Debt Securities will
mature;
o the annual interest rate or rates of the Junior Subordinated Debt
Securities, or the method of determining the rate or rates;
o the date or dates on which any interest will be payable, the date or
dates on which payment of any interest will commence and the regular
record dates for the interest payment dates;
o the terms of any mandatory or optional redemption, including any
provisions for any sinking, purchase or other similar funds or
repayment options;
o the currency, currencies or currency units for which the Junior
Subordinated Debt Securities may be purchased and in which the
principal, any premium and any interest may be payable;
51
o if the currency, currencies or currency units for which the Junior
Subordinated Debt Securities may be purchased or in which the
principal, any premium and any interest may be payable is at Fund
American's election or the purchaser's election, the manner in which
the election may be made;
o if the amount of payments on the Junior Subordinated Debt Securities is
determined by an index based on one or more currencies or currency
units, or changes in the price of one or more securities or
commodities, the manner in which the amounts may be determined;
o the extent to which any of the Junior Subordinated Debt Securities will
be issuable in temporary or permanent global form, or the manner in
which any interest payable on a temporary or permanent global security
will be paid;
o the terms and conditions upon which the Junior Subordinated Debt
Securities may be convertible into or exchanged for Common Shares,
Preference Shares, or indebtedness or other securities of any kind;
o information with respect to book-entry procedures, if any;
o a discussion of the Federal income tax, accounting and other special
considerations, procedures and limitations with respect to the Junior
Subordinated Debt Securities; and
o any other specific terms of the Junior Subordinated Debt Securities not
inconsistent with the Junior Subordinated Indenture.
If Fund American sells any of the Junior Subordinated Debt Securities for
one or more foreign currencies or foreign currency units or if the principal of,
premium, if any, or interest on any series of Junior Subordinated Debt
Securities will be payable in one or more foreign currencies or foreign currency
units, we will describe the restrictions, elections, Federal income tax
consequences, specific terms and other information with respect to the issue of
Junior Subordinated Debt Securities and the currencies or currency units in the
applicable prospectus supplement.
Unless specified otherwise in the prospectus supplement, the principal of,
premium on, and interest on the Junior Subordinated Debt Securities will be
payable, and the Junior Subordinated Debt Securities will be transferable, at
the Corporate Trust Office of the Junior Subordinated Trustee in New York, New
York. However, Fund American may make payment of interest at its option by check
mailed on or before the payment date to the address of the person entitled to
the interest payment as it appears on the registry books of Fund American or its
agents.
Unless specified otherwise in the prospectus supplement, Fund American
will issue the Junior Subordinated Debt Securities only in fully registered form
and in denominations of $1,000 and any integral multiple of $1,000. No service
charge will be made for any transfer or exchange of any Junior Subordinated Debt
Securities, but Fund American may, except in specific cases not involving any
transfer, require payment of a sufficient amount to cover any tax or other
governmental charge payable in connection with the transfer or exchange. Unless
specified otherwise in the prospectus supplement, Fund American will pay
interest on outstanding Junior Subordinated Debt Securities to holders of record
on the date 15 days immediately prior to the date the interest is to be paid.
52
Fund American rights and the rights of its creditors, including holders of
Junior Subordinated Debt Securities, to participate in any distribution of
assets of any of the its subsidiaries upon its liquidation or reorganization or
otherwise is subject to the prior claims of creditors of the subsidiary, except
to the extent that Fund American's claims as a creditor of the subsidiary may be
recognized. Fund American's operations are conducted through subsidiaries and,
therefore, Fund American is dependent upon the earnings and cash flow of its
subsidiaries to meet its obligations, including obligations under the Junior
Subordinated Debt Securities. The Junior Subordinated Debt Securities will be
effectively subordinated to all indebtedness of Fund American's subsidiaries.
WHITE MOUNTAINS GUARANTEE
White Mountains will irrevocably and unconditionally guarantee, on a
subordinated basis, to each holder of Junior Subordinated Debt Securities issued
by Fund American the due and punctual payment of the principal of, and any
premium and any interest on, those Junior Subordinated Debt Securities, when and
as the same becomes due and payable, whether at maturity, upon acceleration or
otherwise. White Mountains has:
o agreed that its obligations under the guarantees, upon the occurrence
and continuance of an event of default with respect to any guaranteed
Junior Subordinated Debt Securities, will be as if it were principal
obligor and not merely surety, and will be enforceable irrespective of
any invalidity, irregularity or unenforceability of any series of
guaranteed Junior Subordinated Debt Securities or the Junior
Subordinated Indenture, and
o waived its right to require the Junior Subordinated Trustee or the
holders of guaranteed Junior Subordinated Debt Securities to pursue or
exhaust their legal or equitable remedies against Fund American prior
to exercising their rights under the Guarantees.
White Mountains' guarantee of Fund American's obligations under any Junior
Subordinated Debt Security will be subordinated in right of payment to same
extent as Fund American's obligations under such Junior Subordinated Debt
Security.
GLOBAL SECURITIES
Fund American may issue Junior Subordinated Debt Securities of a series in
whole or in part in the form of one or more global securities that will be
deposited with or on behalf of a depositary identified in the prospectus
supplement relating to that series. Fund American may issue global securities
only in fully registered form and in either temporary or permanent form. Unless
and until it is exchanged in whole or in part for the individual Junior
Subordinated Debt Securities represented thereby, a global security may not be
transferred except as a whole by the depositary for the global security to a
nominee of the depositary or by a nominee of the depositary to the depositary or
another nominee of the depositary or by the depositary or any nominee of the
depositary to a successor or any nominee.
The specific terms of the depositary arrangement relating to a series of
Junior Subordinated Debt Securities will be described in the prospectus
supplement relating to that series.
53
AMALGAMATION, CONSOLIDATION, MERGER, CONVEYANCE OR TRANSFER
The Junior Subordinated Indenture prohibits Fund American's or White
Mountains' amalgamation or consolidation with or merger into any other entity or
the transfer of its properties and assets substantially as an entirety to any
entity, unless:
o the successor entity is organized and existing under the laws of the
United States, any State thereof, the District of Columbia or Bermuda,
and expressly assumes by a supplemental indenture the punctual payment
of the principal of, premium on and interest on, all the outstanding
Junior Subordinated Debt Securities and the performance of every
covenant in the Junior Subordinated Indenture to be performed or
observed on Fund American's or White Mountains' part, as applicable;
o immediately after giving effect to the transaction, no event of default
has happened and is continuing; and
o Fund American or White Mountains, as applicable, or the successor
entity has delivered to the Junior Subordinated Trustee an officers'
certificate stating that the amalgamation, consolidation, merger,
conveyance or transfer and the supplemental indenture comply with the
foregoing provisions relating to the transaction.
In case of any amalgamation, consolidation, merger, conveyance or
transfer, the successor entity will succeed to and be substituted for Fund
American or White Mountains, as applicable, as obligor or guarantor, as
applicable, on the Junior Subordinated Debt Securities, with the same effect as
if it had been named as the obligor or the guarantor, as applicable, in the
Junior Subordinated Indenture. Unless the prospectus supplement states
otherwise, the Junior Subordinated Indenture and the Junior Subordinated Debt
Securities do not contain any covenants or other provisions designed to protect
holders of Junior Subordinated Debt Securities in the event of a highly
leveraged transaction involving White Mountains, Fund American or any of their
subsidiaries.
EVENTS OF DEFAULT; WAIVER AND NOTICE OF DEFAULT; JUNIOR SUBORDINATED DEBT
SECURITIES IN FOREIGN CURRENCIES
An event of default when used in the Junior Subordinated Indenture will
mean any of the following as to any series of Junior Subordinated Debt
Securities:
o default for 90 days in payment of any interest on the Junior
Subordinated Debt Securities;
o default in payment of principal or any premium at maturity;
o default in payment of any sinking or purchase fund or similar
obligation;
o default by Fund American in the performance of any other covenant or
warranty contained in the Junior Subordinated Indenture for the benefit
of that series which has not been remedied for a period of 90 days
after notice is given; or
o events of Fund American's bankruptcy, insolvency and reorganization.
54
A default under Fund American's other indebtedness will not be a default
under the Junior Subordinated Indenture and a default under one series of Junior
Subordinated Debt Securities will not necessarily be a default under another
series.
The Junior Subordinated Indenture provides that if an event of default
described in the first four bullet points above has occurred and is continuing
with respect to any series, and the event of default under the fourth bullet
point is with respect to less than all series of Junior Subordinated Debt
Securities then outstanding, either the Junior Subordinated Trustee or the
holders of not less than 25% in aggregate principal amount of the Junior
Subordinated Debt Securities of the series then outstanding, each series acting
as a separate class, may declare the principal or, in the case of original issue
discount securities, the portion specified in the terms thereof, of all
outstanding Junior Subordinated Debt Securities of that series and the accrued
interest to be due and payable immediately. The Junior Subordinated Indenture
further provides that if an event of default described in the fourth or fifth
bullet point above has occurred and is continuing, and the event of default
under the fourth bullet point is with respect to all series of Junior
Subordinated Debt Securities then outstanding, either the Junior Subordinated
Debt Trustee or the holders of at least 25% in aggregate principal amount of all
Junior Subordinated Debt Securities then outstanding, treated as one class, may
declare the principal or, in the case of original issue discount securities, the
portion specified in the terms thereof, of all Junior Subordinated Debt
Securities then outstanding and the accrued interest to be due and payable
immediately. However, upon certain conditions the declarations may be annulled
and past defaults, except for defaults in the payment of principal of, premium
on, or interest on, the Junior Subordinated Debt Securities and in compliance
with certain covenants, may be waived by the holders of a majority in aggregate
principal amount of the Junior Subordinated Debt Securities of that series then
outstanding, subject to the consent of the holders of the preferred securities
and the common securities of any Fund American Trust as required by its
declaration of trust in the event that the Junior Subordinated Debt Securities
are held as assets of the applicable Fund American Trust prior to a security
exchange.
When used with respect to the Junior Subordinated Debt Securities that are
held as trust assets of any Fund American Trust pursuant to the declaration of
trust of such Fund American Trust, the term "security exchange" means the
distribution of the Junior Subordinated Debt Securities held by such Fund
American Trust in exchange for the preferred securities and the common
securities of such Fund American Trust in dissolution of such Fund American
Trust pursuant to the declaration of trust of such Fund American Trust.
Under the Junior Subordinated Indenture, the Junior Subordinated Trustee
must give notice to the holders of each series of Junior Subordinated Debt
Securities of all uncured defaults known to it with respect to that series
within 90 days after a default occurs. The term "default" includes the events
specified above without notice or grace periods. However, in the case of any
default of the type described in the fourth bullet point above, no notice may be
given until at least 90 days after the occurrence of the event. The Junior
Subordinated Debt Trustee will be protected in withholding notice if it in good
faith determines that the withholding of notice is in the interests of the
holders of the Junior Subordinated Debt Securities, except in the case of
default in the payment of principal of, premium on, or interest on, any of the
Junior Subordinated Debt Securities, or default in the payment of any sinking or
purchase fund installment or analogous obligations.
No holder of any Junior Subordinated Debt Securities of any series may
institute any action under the indenture unless:
55
o the holder has given the Junior Subordinated Trustee written notice of
a continuing event of default with respect to that series;
o the holders of not less than 25% in aggregate principal amount of the
Junior Subordinated Debt Securities of that series then outstanding
have requested the Junior Subordinated Trustee to institute proceedings
in respect of the event of default;
o the holder or holders have offered the Junior Subordinated Trustee
reasonable indemnity as the Junior Subordinated Trustee may require;
o the Junior Subordinated Trustee has failed to institute an action for
60 days after the notice, request and indemnity have been made as
described above; and
o no inconsistent direction has been given to the Junior Subordinated
Trustee during the 60-day period by the holders of a majority in
aggregate principal amount of Junior Subordinated Debt Securities of
the series then outstanding, subject to the consent of the holders of
the preferred securities and the common securities of any Fund American
Trust as required by its declaration of trust in the event that the
Junior Subordinated Debt Securities are held as assets of the
applicable Fund American Trust prior to a security exchange.
The Junior Subordinated Indenture provides that if an event of default
occurs and is continuing, the Junior Subordinated Trustee will be required to
use the degree of care of a prudent person in the conduct of the person's own
affairs in exercising its rights and powers under the indenture. The Junior
Subordinated Indenture further provides that the Junior Subordinated Trustee
will not be required to expend or risk its own funds in the performance of any
of its duties under the indenture unless it has reasonable grounds for believing
that repayment of the funds or adequate indemnity against the risk or liability
is reasonably assured to it.
Fund American must furnish to the Junior Subordinated Trustee within 120
days after the end of each fiscal year a statement signed by one of its officers
to the effect that a review of its activities during the year and of its
performance under the Junior Subordinated Indenture and the terms of the Junior
Subordinated Debt Securities has been made, and, to the knowledge of the
signatories based on the review, Fund American has complied with all conditions
and covenants of the indenture through the year or, if Fund American is in
default, specifying the default.
If any Junior Subordinated Debt Securities are denominated in a currency
other than that of the United States, then for the purposes of determining
whether the holders of the requisite principal amount of Junior Subordinated
Debt Securities have taken any action as described in this prospectus, the
principal amount of the Junior Subordinated Debt Securities will be deemed to be
that amount of United States dollars that could be obtained for the principal
amount on the basis of the spot rate of exchange into United States dollars for
the currency in which the Junior Subordinated Debt Securities are denominated as
of the date the taking of the action by the holders of the requisite principal
amount is evidenced to the Junior Subordinated Trustee as provided in the Junior
Subordinated Indenture.
If any Junior Subordinated Debt Securities are original issue discount
securities, then for the purposes of determining whether the holders of the
requisite principal amount of Junior Subordinated Debt Securities have taken any
action described in this prospectus, the principal amount of the Junior
Subordinated Debt Securities will be deemed to be the portion of the principal
amount that would be due and payable at the time of the taking of the action
upon a declaration of acceleration of maturity thereof.
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MODIFICATION OF THE JUNIOR SUBORDINATED INDENTURE
The Junior Subordinated Indenture provides that Fund American and the
Junior Subordinated Trustee may, without the consent of any holders of Junior
Subordinated Debt Securities, enter into supplemental indentures for the
purposes, among other things, of adding to Fund American's covenants, adding
additional events of default, establishing the form or terms of any series of
Junior Subordinated Debt Securities or curing ambiguities or inconsistencies in
the indenture or making other provisions.
With specific exceptions, the Junior Subordinated Indenture or the rights
of the holders of the Junior Subordinated Debt Securities may be modified by
Fund American and the Junior Subordinated Trustee with the consent of the
holders of a majority in aggregate principal amount of the Junior Subordinated
Debt Securities of each series affected by the modification then outstanding,
subject to the consent of the holders of the preferred securities and the common
securities of the Fund American Trust as required by its declaration of trust in
the event that the Junior Subordinated Debt Securities are held as assets of the
Fund American Trust prior to a security exchange, but no modification may be
made without the consent of the holder of each outstanding Junior Subordinated
Debt Security affected, subject to the consent of the holders of the preferred
securities and the common securities of any Fund American Trust as required by
its declaration of trust in the event that the Junior Subordinated Debt
Securities are held as assets of the applicable Fund American Trust prior to a
security exchange, which would:
o change the maturity of any payment of principal of, or any premium on,
or any installment of interest on any Junior Subordinated Debt
Security;
o reduce the principal amount of or the interest or any premium on any
Junior Subordinated Debt Security;
o change the method of computing the amount of principal of or interest
on any date;
o change any place of payment where, or the currency in which, any Junior
Subordinated Debt Security or any premium or interest is payable;
o impair the right to sue for the enforcement of any payment on or after
the maturity thereof or, in the case of redemption or repayment, on or
after the redemption date or the repayment date;
o reduce the percentage in principal amount of the outstanding Junior
Subordinated Debt Securities of any series, the consent of the holders
of which is required for any modification of, or waiver of compliance
with the provisions of, the Junior Subordinated Indenture or specific
defaults and their consequences provided for in the indenture; or
o modify any of the provisions of specific sections of the Junior
Subordinated Indenture, including the provisions summarized in this
section, except to increase any required consent percentage or to
provide that other provisions of the indenture cannot be modified or
waived without the consent of the holder of each outstanding Junior
Subordinated Debt Security affected thereby.
57
SATISFACTION AND DISCHARGE OF THE JUNIOR SUBORDINATED INDENTURE; DEFEASANCE
The Junior Subordinated Indenture will generally cease to be of any
further effect with respect to a series of Junior Subordinated Debt Securities
if Fund American delivers all Junior Subordinated Debt Securities of that
series, with limited exceptions, for cancellation to the Junior Subordinated
Trustee or all Junior Subordinated Debt Securities of that series not previously
delivered for cancellation to the Junior Subordinated Trustee have become due
and payable or will become due and payable or called for redemption within one
year, and Fund American has deposited with the Junior Subordinated Trustee as
trust funds the entire amount sufficient to pay at maturity or upon redemption
all the Junior Subordinated Debt Securities, no default with respect to the
Junior Subordinated Debt Securities has occurred and is continuing on the date
of the deposit, and the deposit does not result in a breach or violation of, or
default under, the Junior Subordinated Indenture or any other agreement or
instrument to which Fund American is a party.
Fund American has a "legal defeasance option" under which it may
terminate, with respect to the Junior Subordinated Debt Securities of a
particular series, all of its obligations under the Junior Subordinated Debt
Securities and the Junior Subordinated Indenture. In addition, Fund American has
a "covenant defeasance option" under which it may terminate, with respect to the
Junior Subordinated Debt Securities of a particular series, its obligations with
respect to the Junior Subordinated Debt Securities under specified covenants
contained in the Junior Subordinated Indenture. If Fund American exercises its
legal defeasance option with respect to a series of Junior Subordinated Debt
Securities, payment of the Junior Subordinated Debt Securities may not be
accelerated because of an event of default. If Fund American exercises its
covenant defeasance option with respect to a series of Junior Subordinated Debt
Securities, payment of the Junior Subordinated Debt Securities may not be
accelerated because of an event of default related to the specified covenants.
Fund American may exercise its legal defeasance option or its covenant
defeasance option with respect to the Junior Subordinated Debt Securities of a
series only if:
o Fund American deposits in trust with the Junior Subordinated Trustee
cash or debt obligations of the United States of America or its
agencies or instrumentalities for the payment of principal, premium and
interest with respect to the Junior Subordinated Debt Securities to
maturity or redemption;
o Fund American delivers to the Junior Subordinated Trustee a certificate
from a nationally recognized firm of independent public accountants
expressing their opinion that the cash or debt obligations described
above on deposit with the Junior Subordinated Trustee will provide cash
sufficient to pay the principal, premium, and interest when due with
respect to all the Junior Subordinated Debt Securities of that series
to maturity or redemption;
o 91 days pass after the deposit is made and during the 91-day period no
default described in the fifth bullet point under "--Events of Default,
Waiver and Notice of Default; Junior Subordinated Debt Securities in
Foreign Currencies" above with respect to Fund American occurs that is
continuing at the end of the period;
o no default has occurred and is continuing on the date of the deposit;
o the deposit does not constitute a default under any other agreement
binding on Fund American;
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o Fund American delivers to the Junior Subordinated Trustee an opinion of
counsel to the effect that the trust resulting from the deposit does
not constitute a regulated investment company under the Investment
Company Act of 1940;
o Fund American has delivered to the Junior Subordinated Trustee an
opinion of counsel addressing specific Federal income tax matters
relating to the defeasance; and
o Fund American delivers to the Junior Subordinated Trustee an officers'
certificate and an opinion of counsel stating that all conditions to
the defeasance and discharge of the Junior Subordinated Debt Securities
of that series have been complied with.
The Junior Subordinated Trustee will hold in trust cash or debt
obligations of the United States of America or its agencies or instrumentalities
deposited with it as described above and will apply the deposited cash and the
proceeds from deposited debt obligations of the United States of America or its
agencies or instrumentalities to the payment of principal, premium, and interest
with respect to the Junior Subordinated Debt Securities of the defeased series.
CONCERNING THE JUNIOR SUBORDINATED TRUSTEE
The Junior Subordinated Trustee for the Junior Subordinated Debt
Securities will be identified in the relevant prospectus supplement. In specific
instances, Fund American or the holders of a majority of the then outstanding
principal amount of the Junior Subordinated Debt Securities issued under an
indenture may remove the Junior Subordinated Trustee and appoint a successor
Junior Subordinated Trustee. The Junior Subordinated Trustee may become the
owner or pledgee of any of the Junior Subordinated Debt Securities with the same
rights, subject to conflict of interest restrictions, it would have if it were
not the Junior Subordinated Trustee. The Junior Subordinated Trustee and any
successor trustee must be a corporation organized and doing business as a
commercial bank or trust company under the laws of the United States or of any
state thereof, authorized under those laws to exercise corporate trust powers,
having a combined capital and surplus of at least $50,000,000 and subject to
examination by Federal or state authority. Subject to applicable law relating to
conflicts of interest, the Junior Subordinated Trustee may also serve as trustee
under other indentures relating to Debt Securities or Junior Subordinated Debt
Securities issued by White Mountains or its affiliated companies and may engage
in commercial transactions with White Mountains and its affiliated companies.
The initial Junior Subordinated Trustee under the Junior Subordinated Indenture
is Bank One, National Association.
CERTAIN COVENANTS OF WHITE MOUNTAINS AND FUND AMERICAN APPLICABLE TO THE JUNIOR
SUBORDINATED DEBT SECURITIES
If Junior Subordinated Debt Securities are issued to a Fund American Trust
in connection with the issuance of preferred securities by the Fund American
Trust, each of White Mountains and Fund American covenants in the Junior
Subordinated Indenture that, so long as the preferred securities of the Fund
American Trust remain outstanding, it will not declare or pay any dividends on,
or redeem, purchase, acquire or make a distribution or liquidation payment with
respect to, any shares of its common stock or preferred stock if at the time:
o an event of default with respect to the Junior Subordinated Debt
Securities has occurred;
o White Mountains is in default with respect to its payment of any
obligations under its guarantee of the preferred securities of the Fund
American Trust; or
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o Fund American has given notice of its election to defer payments of
interest on the Junior Subordinated Debt Securities by extending the
interest payment period as provided in the terms of the Junior
Subordinated Debt Securities and the period, or any extension thereof,
is continuing.
However, the foregoing restrictions will not apply to:
o dividends, distributions, redemptions, purchases, acquisitions or
payments made with capital stock;
o any declaration or payment of a dividend in connection with the
implementation of a shareholders' rights plan, or the issuance of stock
under any such plan in the future, or the redemption or repurchase of
any such rights pursuant thereto;
o payments of accrued dividends on preferred stock upon the redemption,
exchange or conversion of any preferred stock as may be outstanding
from time to time;
o the purchase of fractional interests in shares of preferred stock upon
the redemption, exchange or conversion of such preferred stock;
o purchases or acquisitions of shares of common stock in connection with
the satisfaction of obligations under any employee benefit plan or
other contractual obligation; or
o dividends, distributions, redemptions, purchases, acquisitions or
payments as a result of a reclassification of capital stock or the
exchange or conversion of one class or series capital stock for another
class or series of capital stock.
In addition, if Junior Subordinated Debt Securities are issued to a Fund
American Trust in connection with the issuance of preferred securities of the
Fund American Trust, for so long as the preferred securities of the Fund
American Trust remain outstanding, Fund American has agreed:
o to maintain directly, or indirectly through a wholly owned subsidiary,
100% ownership of the common securities of such Fund American Trust,
provided, however, that any permitted successor of Fund American under
the Junior Subordinated Indenture may succeed to Fund American's
ownership of such common securities;
o not to voluntarily terminate, windup or liquidate such Fund American
Trust, except in connection with a distribution of Junior Subordinated
Debt Securities to the holders of the preferred securities in
liquidation of such Fund American Trust or in connection with certain
mergers, consolidations or amalgamations permitted by the declaration
of trust of such Fund American Trust; and
o to use its reasonable best efforts, consistent with the terms and
provisions of the declaration of trust of such Fund American Trust, to
cause such Fund American Trust to remain classified as a grantor trust
and not as an association taxable as a corporation for United States
Federal income tax purposes.
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SUBORDINATION OF THE JUNIOR SUBORDINATED DEBT SECURITIES
The Junior Subordinated Debt Securities will be subordinated and junior in
right of payment to Fund American's other indebtedness to the extent set forth
in the applicable prospectus supplement.
The payment of the principal of, premium, if any, and interest on the
Junior Subordinated Debt Securities will be subordinated in right of payment to
the prior payment in full of all of Fund American's senior indebtedness and will
rank equally with its trade creditors. No payment on account of principal of,
premium, if any, or interest on the Junior Subordinated Debt Securities and no
acquisition of, or payment on account of any sinking fund for, the Junior
Subordinated Debt Securities may be made unless full payment of amounts then due
for principal, premium, if any, and interest then due on all senior indebtedness
by reason of the maturity thereof, by lapse of time, acceleration or otherwise,
has been made or duly provided for in cash or in a manner satisfactory to the
holders of the senior indebtedness. In addition, the Junior Subordinated
Indenture provides that if a default has occurred giving the holders of the
senior indebtedness the right to accelerate the maturity thereof, or an event
has occurred which, with the giving of notice, or lapse of time, or both, would
constitute an event of default, then unless and until that event has been cured
or waived or has ceased to exist, no payment on account of principal, premium,
if any, or interest on the Junior Subordinated Debt Securities and no
acquisition of, or payment on account of a sinking fund for, the Junior
Subordinated Debt Securities may be made. Fund American will give prompt written
notice to the Junior Subordinated Trustee of any default under any senior
indebtedness or under any agreement pursuant to which senior indebtedness may
have been issued. Upon any distribution of Fund American's assets in connection
with its dissolution, liquidation or reorganization, all senior indebtedness
must be paid in full before the holders of the Junior Subordinated Debt
Securities are entitled to any payments whatsoever. As a result of these
subordination provisions, in the event of Fund American's insolvency, holders of
the Junior Subordinated Debt Securities may recover ratably less than Fund
American's senior creditors.
SUBORDINATION OF WHITE MOUNTAINS' GUARANTEE OF THE JUNIOR SUBORDINATED DEBT
SECURITIES
White Mountains' guarantee of the Junior Subordinated Debt Securities will
be subordinated and junior in right of payment to White Mountains' other
indebtedness to the extent set forth in the applicable prospectus supplement.
The payment of the principal of, premium, if any, and interest on the
Junior Subordinated Debt Securities will be subordinated in right of payment to
the prior payment in full of all of White Mountains' senior indebtedness and
will rank equally with its trade creditors. No payment on account of principal
of, premium, if any, or interest on the Junior Subordinated Debt Securities and
no acquisition of, or payment on account of any sinking fund for, the Junior
Subordinated Debt Securities may be made unless full payment of amounts then due
for principal, premium, if any, and interest then due on all senior indebtedness
by reason of the maturity thereof, by lapse of time, acceleration or otherwise,
has been made or duly provided for in cash or in a manner satisfactory to the
holders of the senior indebtedness. In addition, the Junior Subordinated
Indenture provides that if a default has occurred giving the holders of the
senior indebtedness the right to accelerate the maturity thereof, or an event
has occurred which, with the giving of notice, or lapse of time, or both, would
constitute an event of default, then unless and until that event has been cured
or waived or has ceased to exist, no payment on account of principal, premium,
if any, or interest on the Junior Subordinated Debt Securities and no
acquisition of, or payment on account of a sinking fund for, the Junior
Subordinated Debt Securities may be made. White Mountains will give prompt
written notice to the Junior Subordinated Trustee of any default under any
senior indebtedness or under any agreement pursuant to which senior indebtedness
may have been issued.
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Upon any distribution of White Mountains' assets in connection with its
dissolution, liquidation or reorganization, all senior indebtedness must be paid
in full before the holders of the Junior Subordinated Debt Securities are
entitled to any payments whatsoever. As a result of these subordination
provisions, in the event of White Mountains' insolvency, holders of the Junior
Subordinated Debt Securities may recover ratably less than White Mountains'
senior creditors.
For purposes of the description of the Junior Subordinated Debt
Securities, the term senior indebtedness with respect to Fund American or White
Mountains, as applicable, means the principal of and premium, if any, and
interest on the following, whether outstanding on the date of execution of the
Junior Subordinated Indenture or incurred or created after the execution:
o indebtedness for money borrowed including purchase money obligations
with an original maturity in excess of one year, or evidenced by
securities, notes, bankers' acceptances or other corporate Debt
Securities or similar instruments other than the Junior Subordinated
Debt Securities;
o obligations with respect to letters of credit;
o indebtedness constituting a guarantee of indebtedness of others of the
type referred to in the preceding two bullet points; or
o renewals, extensions or refundings of any of the indebtedness referred
to in the preceding three bullet points unless, in the case of any
particular indebtedness, renewal, extension or refunding, under the
express provisions of the instrument creating or evidencing the same,
or pursuant to which the same is outstanding, the indebtedness or the
renewal, extension or refunding thereof is not superior in right of
payment to the Junior Subordinated Debt Securities.
DESCRIPTION OF TRUST PREFERRED SECURITIES
Each Fund American Trust may issue, from time to time, only one series of
preferred securities having terms described in the prospectus supplement
relating thereto. The declaration of trust under which each Fund American Trust
is formed will be replaced by an amended and restated declaration of trust,
which will authorize the regular trustees of the Fund American Trust to issue on
behalf of the Fund American Trust one series of preferred securities. Each
amended and restated declaration of trust will be qualified as an indenture
under the Trust Indenture Act. The preferred securities will have terms,
including distributions, redemption, voting, liquidation rights and other
preferred, deferred or other special rights or restrictions as will be set forth
in the related amended and restated declaration of trust or made part of the
declaration by the Trust Indenture Act. Reference is made to any prospectus
supplement relating to the preferred securities of any Fund American Trust for
specific terms, including:
o the specific designation of the preferred securities;
o the number of preferred securities issued by the Fund American Trust;
o the annual distribution rate, or method of calculation of the rate, for
preferred securities issued by the Fund American Trust, the date or
dates upon which the distributions will be payable and the record date
or dates for the payment of the distributions;
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o whether distributions on preferred securities issued by the Fund
American Trust will be cumulative, and, in the case of preferred
securities having cumulative distribution rights, the date or dates or
method of determining the date or dates from which distributions on
preferred securities issued by the Fund American Trust will be
cumulative;
o the amount or amounts which will be paid out of the assets of the Fund
American Trust to the holders of preferred securities of the Fund
American Trust upon voluntary or involuntary liquidation, dissolution,
winding-up or termination of the Fund American Trust;
o the obligation or right, if any, of the Fund American Trust to purchase
or redeem preferred securities issued by the Fund American Trust and
the price or prices at which, the period or periods within which and
the terms and conditions upon which preferred securities issued by the
Fund American Trust will or may be purchased or redeemed, in whole or
in part, pursuant to an obligation or right;
o the voting rights, if any, of preferred securities issued by the Fund
American Trust in addition to those required by law, including the
number of votes per preferred security and any requirement for the
approval by the holders of preferred securities, or of preferred
securities issued by one or more Fund American Trusts, or of both, as a
condition to specified actions or amendments to the declaration of the
Fund American Trust;
o the terms and conditions upon which the preferred securities may be
convertible into or exchanged for Common Shares, Preference Shares,
Debt Securities, Junior Subordinated Debt Securities, or indebtedness
or other securities of any kind of White Mountains or Fund American;
and
o any other relevant rights, preferences, privileges, limitations or
restrictions of preferred securities issued by the Fund American Trust
consistent with the declaration of the Fund American Trust or with
applicable law.
All preferred securities offered hereby will be guaranteed by White
Mountains as and to the extent set forth below under "Description of Trust
Preferred Securities Guarantees". Federal income tax considerations applicable
to any offering of preferred securities will be described in the applicable
prospectus supplement.
In connection with any issuance of preferred securities, the applicable
Fund American Trust will issue one series of common securities. The amended and
restated declaration of the applicable Fund American Trust will authorize the
regular trustees of the Fund American Trust to issue one series of common
securities having terms including distributions, redemption, voting, liquidation
rights or restrictions as set forth in the amended and restated declaration. The
terms of the common securities issued by the Fund American Trust will be
substantially identical to the terms of the preferred securities issued by the
Fund American Trust. The common securities will rank equally with the preferred
securities and payments on the common securities will be made on a pro rata
basis with the preferred securities. However, if an event of default under the
applicable amended and restated declaration of trust occurs and is continuing,
the rights of the holders of the common securities to payment in respect of
distributions and payments upon liquidation, redemption and maturity will be
subordinated to the rights of the holders of the preferred securities.
Generally, the common securities issued by a Fund American Trust will also carry
the right to vote and to appoint, remove or replace any of the trustees of the
Fund American Trust. All the common securities of a Fund American Trust will be
owned by Fund American or its subsidiary.
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As long as payments of interest and other payments are made when due on
the Junior Subordinated Debt Securities, the payments will be sufficient to
cover distributions and other payments due on the preferred securities primarily
because the aggregate principal amount of Junior Subordinated Debt Securities
held as trust assets will be equal to the sum of the aggregate stated
liquidation amount of the preferred securities, and the interest rate and
interest and other payment dates on the Junior Subordinated Debt Securities will
match the distribution rate and distribution and other payment dates for the
preferred securities.
If an event of default with respect to the amended and restated
declaration of any Fund American Trust occurs and is continuing, then the
holders of preferred securities of the Fund American Trust would rely on the
enforcement by the property trustee (the "Property Trustee") of its rights as a
holder of the Junior Subordinated Debt Securities deposited in the Fund American
Trust against Fund American. In addition, the holders of a majority in
liquidation amount of the preferred securities will have the right to direct the
time, method, and place of conducting any proceeding for any remedy available to
the Property Trustee or to direct the exercise of any power conferred upon the
Property Trustee under the amended and restated declaration of trust, including
the right to direct the Property Trustee to exercise the remedies available to
it as a holder of the Junior Subordinated Debt Securities. If the Property
Trustee fails to enforce its rights under the Junior Subordinated Debt
Securities deposited in the Fund American Trust, any holder of the preferred
securities may, to the extent permitted by applicable law, after a period of 60
days has elapsed from the holder's written request, institute a legal proceeding
against Fund American and White Mountains to enforce the Property Trustee's
rights under the Junior Subordinated Debt Securities without first instituting
any legal proceeding against the Property Trustee or any other person or entity.
If an event of default with respect to the amended and restated declaration of
the Fund American Trust occurs and is continuing and the event is attributable
to the failure of Fund American to pay interest or principal on the Junior
Subordinated Debt Securities on the date the interest or principal is otherwise
payable, or in the case of redemption, on the redemption date, then a holder of
preferred securities of the Fund American Trust may also directly institute a
proceeding for enforcement of payment to the holder of the principal of or
interest on the Junior Subordinated Debt Securities having a principal amount
equal to the aggregate liquidation amount of the preferred securities held by
the holder on or after the respective due date specified in the Junior
Subordinated Debt Securities without first directing the Property Trustee to
enforce the terms of the Junior Subordinated Debt Securities or instituting a
legal proceeding against Fund American and White Mountains to enforce the
Property Trustee's rights under the Junior Subordinated Debt Securities. In
connection with a direct action, the rights of Fund American or White Mountains,
as applicable, will be substituted for the rights of the holder of the preferred
securities under the amended and restated declaration of trust to the extent of
any payment made by Fund American or White Mountains, as applicable, to the
holder of the preferred securities in a direct action. The holders of preferred
securities of the Fund American Trust will not be able to exercise directly any
other remedy available to the holders of the Junior Subordinated Debt Securities
unless the Property Trustee first fails to do so.
Federal income tax considerations applicable to an investment in preferred
securities will be described in the prospectus supplement relating thereto.
The Property Trustee and its affiliates may provide customary commercial
banking services to White Mountains and its subsidiaries and participate in
various financing agreements of White Mountains in the ordinary course of their
business. Initially, the Property Trustee is Bank One, National Association.
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DESCRIPTION OF TRUST PREFERRED SECURITIES GUARANTEES
Set forth below is a summary of information concerning the guarantees (the
"Guarantees") that will be executed and delivered from time to time by White
Mountains for the benefit of the holders of preferred securities of the Fund
American Trust. Each Guarantee will be separately qualified under the Trust
Indenture Act and will be held by Bank One, National Association, acting in its
capacity as guarantee trustee (the "Guarantee Trustee") with respect to the
guarantee, for the benefit of holders of the preferred securities of the
applicable Fund American Trust. The terms of each Guarantee will be set forth in
the Guarantee or made part of the Guarantee by the Trust Indenture Act.
GENERAL
Pursuant to each Guarantee, White Mountains will irrevocably and
unconditionally agree, to the extent set forth in the guarantee, to pay in full,
to the holders of the preferred securities issued by the applicable Fund
American Trust, the guarantee payments, to the extent not paid by the Fund
American Trust, regardless of any defense, right of set-off or counterclaim that
the Fund American Trust may have or assert. The following distributions and
other payments with respect to preferred securities issued by a Fund American
Trust to the extent not made or paid by the Fund American Trust, will be subject
to the Guarantee without duplication:
o any accrued and unpaid distributions on the preferred securities, but
only to the extent that in each case Fund American has made a payment
to the Property Trustee of interest on the Junior Subordinated Debt
Securities;
o the redemption price, including all accrued and unpaid distributions to
the date of redemption, with respect to any preferred securities called
for redemption by the Fund American Trust, but only to the extent that
in each case Fund American has made a payment to the Property Trustee
of interest or principal on the Junior Subordinated Debt Securities
deposited in the Fund American Trust as trust assets; and
o upon a voluntary or involuntary liquidation, dissolution, winding-up or
termination of the Fund American Trust, other than in connection with
the distribution of related Junior Subordinated Debt Securities to the
holders of the preferred securities or the redemption of all the
preferred securities upon the maturity or redemption of the Junior
Subordinated Debt Securities, the lesser of:
(1) the aggregate of the liquidation amount and all accrued and
unpaid distributions on the preferred securities to the date
of payment, to the extent the Fund American Trust has funds
available, and
(2) the amount of assets of the Fund American Trust remaining
available for distribution to holders of the preferred
securities upon liquidation of the Fund American Trust.
White Mountains' obligation to make a guarantee payment may be satisfied
by direct payment of the required amounts by White Mountains to the holders of
the applicable preferred securities or by causing the applicable Fund American
Trust to pay the amounts to the holders.
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The Guarantee is a full and unconditional guarantee from the time of
issuance of the applicable preferred securities, but the Guarantee covers
distributions and other payments on the preferred securities only if and to the
extent that Fund American has made a payment to the Property Trustee of interest
or principal on the Junior Subordinated Debt Securities deposited in the
applicable Fund American Trust as trust assets. If Fund American does not make
interest or principal payments on the Junior Subordinated Debt Securities
deposited in the applicable Fund American Trust as trust assets, the Property
Trustee will not make distributions on the preferred securities of the Fund
American Trust and the Fund American Trust will not have the necessary funds
available to make these payments.
Fund American's obligations under the declaration for each Fund American
Trust, the Guarantee issued with respect to preferred securities issued by the
Fund American Trust, the Junior Subordinated Debt Securities purchased by the
Fund American Trust, the Junior Subordinated Indenture and the Guarantee issued
with respect to the Junior Subordinated Debt Securities in the aggregate will
provide a full, irrevocable and unconditional guarantee on a subordinated basis
by White Mountains of payments due on the preferred securities issued by the
Fund American Trust. No single document standing alone or operating in
conjunction with fewer than all of the other documents constitutes such
guarantee. It is only the combined operation of these documents that has the
effect of providing a full, irrevocable and unconditional guarantee of the
trust's obligations under the preferred securities.
CERTAIN COVENANTS OF WHITE MOUNTAINS
In each Guarantee, White Mountains will covenant that, so long as any
preferred securities issued by the applicable Fund American Trust remain
outstanding, White Mountains will not declare or pay any dividends on, or
redeem, purchase, acquire or make a distribution with respect to, any of its
Common Shares or Preferred Shares, if at the time:
o White Mountains will be in default with respect to its guarantee
payments or other payment obligations under the Guarantee;
o any event of default under the related amended and restated declaration
of trust has occurred; or
o Fund American has given notice of its election to defer payments of
interest on the Junior Subordinated Debt Securities by extending the
interest payment period as provided in the terms of the Junior
Subordinated Debt Securities and the period, or any extension thereof,
is continuing.
However, the foregoing restrictions will not apply to:
o dividends, distributions, redemptions, purchases, acquisitions or
payments made with its capital stock;
o any declaration or payment of a dividend in connection with the
implementation of a shareholders' rights plan, or the issuance of
shares under any such plan in the future, or the redemption or
repurchase of any such rights pursuant thereto;
o payments of accrued dividends on Preference Shares upon the redemption,
exchange or conversion of any Preference Shares as may be outstanding
from time to time;
o the purchase of fractional interests in Preference Shares upon the
redemption, exchange or conversion of such Preference Shares;
66
o purchases or acquisitions of Common Shares in connection with the
satisfaction of obligations under any employee benefit plan or other
contractual obligation; or
o dividends, distributions, redemptions, purchases, acquisitions or
payments as a result of a reclassification of capital stock or the
exchange or conversion of one class or series capital stock for another
class or series of capital stock.
AMENDMENTS AND ASSIGNMENT
Except with respect to any changes that do not adversely affect the rights
of holders of the applicable preferred securities, in which case no consent will
be required, each Guarantee may be amended only with the prior approval of the
holders of not less than 66 2/3% in liquidation amount of the outstanding
preferred securities issued by the applicable Fund American Trust. The manner of
obtaining any such approval of holders of the preferred securities will be set
forth in an accompanying prospectus supplement. All guarantees and agreements
contained in a Guarantee will bind the successors, assignees, receivers,
trustees and representatives of White Mountains and will inure to the benefit of
the holders of the preferred securities of the applicable Fund American Trust
then outstanding. Except in connection with a consolidation, merger, conveyance,
or transfer of assets involving White Mountains that is permitted under the
Junior Subordinated Indenture, White Mountains may not assign its obligations
under any Guarantee.
TERMINATION OF THE GUARANTEES
Each Guarantee will terminate and be of no further force and effect as to
the preferred securities issued by the Fund American Trust upon full payment of
the redemption price of all preferred securities of the Fund American Trust, or
upon distribution of the Junior Subordinated Debt Securities to the holders of
the preferred securities of the Fund American Trust in exchange for all the
preferred securities issued by the Fund American Trust, or upon full payment of
the amounts payable upon liquidation of the Fund American Trust. Nevertheless,
each Guarantee will continue to be effective or will be reinstated, as the case
may be, if at any time any holder of preferred securities issued by the Fund
American Trust must restore payment of any sums paid under the preferred
securities or the Guarantee.
STATUS OF THE GUARANTEES
White Mountains' obligations to make the guarantee payments to the extent
set forth in the applicable Guarantee will constitute an unsecured obligation of
White Mountains and will rank subordinate and junior in right of payment to all
other indebtedness, liabilities and obligations of White Mountains and any
guarantees, endorsements or other contingent obligations of White Mountains,
except those made on an equal basis or subordinate by their terms, and senior to
all capital stock issued by White Mountains and to any guarantee entered into by
White Mountains in respect of any of its capital stock. White Mountains'
obligations under each Guarantee will rank equally with each other Guarantee.
Because White Mountains is a holding company, White Mountains' obligations under
each Guarantee are also effectively subordinated to all existing and future
liabilities, including trade payables, of White Mountains' subsidiaries, except
to the extent that White Mountains is a creditor of the subsidiaries recognized
as such. Each amended and restated declaration of trust will provide that each
holder of preferred securities issued by the applicable Fund American Trust, by
acceptance thereof, agrees to the subordination provisions and other terms of
the related Guarantee.
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The guaranteed party may institute a legal proceeding directly against
White Mountains to enforce its rights under a Guarantee without first
instituting a legal proceeding against any other person or entity. Each
Guarantee will be deposited with the Guarantee Trustee, to be held for the
benefit of the holders of the preferred securities issued by the Fund American
Trust. The Guarantee Trustee will enforce the Guarantee on behalf of the holders
of the preferred securities. The holders of not less than a majority in
aggregate liquidation amount of the preferred securities issued by the Fund
American Trust have the right to direct the time, method and place of conducting
any proceeding for any remedy available in respect of the related Guarantee,
including the giving of directions to the Guarantee Trustee. If the Guarantee
Trustee fails to enforce a Guarantee as above provided, any holder of preferred
securities issued by the Fund American Trust may institute a legal proceeding
directly against White Mountains to enforce its rights under the Guarantee,
without first instituting a legal proceeding against the Fund American Trust, or
any other person or entity. However, if White Mountains has failed to make a
guarantee payment, a holder of preferred securities may directly institute a
proceeding against White Mountains for enforcement of the holder's right to
receive payment under the Guarantee. White Mountains waives any right or remedy
to require that any action be brought first against the Fund American Trust or
any other person or entity before proceeding directly against White Mountains.
MISCELLANEOUS
White Mountains will be required to provide annually to the Guarantee
Trustee a statement as to the performance by White Mountains of its obligations
under each Guarantee and as to any default in the performance. White Mountains
is required to file annually with the Guarantee Trustee an officer's certificate
as to White Mountains' compliance with all conditions to be complied with by it
under each Guarantee.
The Guarantee Trustee, prior to the occurrence of a default, undertakes to
perform only those duties as are specifically set forth in the applicable
Guarantee and, after default with respect to a Guarantee, will exercise the same
degree of care as a prudent individual would exercise under the circumstances in
the conduct of his or her own affairs. Subject to that provision, the Guarantee
Trustee is under no obligation to exercise any of the powers vested in it by a
Guarantee at the request of any holder of preferred securities unless it is
offered reasonable security and indemnity against the costs, expenses and
liabilities that might be incurred thereby.
PLAN OF DISTRIBUTION
Each Issuer may sell the securities being offered hereby in any one or
more of the following ways:
o directly to investors;
o to investors through agents;
o to broker-dealers as principals;
o through underwriting syndicates led by one or more managing
underwriters as such Issuer may select from time to time;
o through one or more underwriters acting alone; or
o through a selling shareholder.
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If an underwriter or underwriters are utilized in the sale, the specific
managing underwriter or underwriters with respect to the offer and sale of the
offered securities are set forth on the cover of the prospectus supplement
relating to such offered securities and the members of the underwriting
syndicate, if any, are named in the prospectus supplement.
Sales of the offered securities by underwriters may be in negotiated
transactions, at a fixed offering price or at various prices determined at the
time of sale. The prospectus supplement describes the method of reoffering by
the underwriters. The prospectus supplement also describes the discounts and
commissions to be allowed or paid to the underwriters, if any, all other items
constituting underwriting compensation, the discounts and commissions to be
allowed or paid to dealers, if any, and the exchanges, if any, on which the
securities offered thereby will be listed.
Each Issuer may authorize underwriters to solicit offers by certain
institutions to purchase securities at the price set forth in the prospectus
supplement pursuant to Delayed Delivery Contracts providing for payment and
delivery at a future date.
If any securities are sold pursuant to an Underwriting Agreement, the
several underwriters will ordinarily agree, subject to the terms and conditions
set forth therein to purchase all the securities offered by the accompanying
prospectus supplement if any of such securities are purchased. In the event of
default by any underwriter, in certain circumstances, the purchase commitments
may be increased or the Underwriting Agreement may be terminated.
Offers to purchase securities may be solicited directly by either of the
Issuers or by agents designated by either Issuer from time to time. Any such
agent, who may be deemed to be an underwriter as the term is defined in the
Securities Act of 1933 (the "Act"), involved in the offer or sale of the offered
securities in respect of which this prospectus is delivered will be named, and
any commissions payable by either of the Issuers to such agent set forth, in a
prospectus supplement. Any such agent will ordinarily be acting on a best
efforts basis.
If a broker-dealer is utilized in the sale of the offered securities in
respect of which this prospectus is delivered, the Issuers will sell such
offered securities to the dealer, as principal. The dealer may then resell such
offered securities to the public at varying prices to be determined by such
dealer at the time of resale.
Agents, broker-dealers or underwriters may be entitled under agreements
which may be entered into with an Issuer to indemnification or contribution by
that Issuer in respect of certain civil liabilities, including liabilities under
the Act, and may be customers of, engage in transactions with or perform
services for that Issuer in the ordinary course of business.
The place and time of delivery for the offered securities in respect of
which this prospectus is delivered are set forth in the accompanying prospectus
supplement.
The offered securities may or may not be listed on a national securities
exchange or a foreign securities exchange. The securities may not have an
established trading market. No assurances can be given that there will be a
market for the offered securities.
69
LEGAL MATTERS
Certain legal matters with respect to United States and New York law
will be passed upon for us by Cravath, Swaine & Moore, New York, New York.
Mr. George J. Gillespie, III, a director of White Mountains who holds 1,000
of our Common Shares, is a partner at Cravath, Swaine & Moore. The validity
of the preferred securities of the Fund American Trusts under Delaware law
will be passed upon for us by Richards, Layton & Finger P.A., Wilmington,
Delaware. Certain legal matters with respect to Bermuda law will be passed
upon for us by Conyers Dill & Pearman. Certain legal matters will be passed
upon for the underwriters or agents, if any, by counsel to be named in the
prospectus supplement.
EXPERTS
The consolidated financial statements and the related financial
statement schedules of White Mountains Insurance Group, Ltd. and consolidated
subsidiaries included in our Annual Report on Form 10-K for the year ended
December 31, 2000, as well as the consolidated financial statements of White
Mountains Insurance Group, Ltd. and consolidated subsidiaries included as an
exhibit to that Form 10-K, have been audited by PricewaterhouseCoopers and
PricewaterhouseCoopers LLP, each independent auditors, as to the two years in
the period ended December 31, 2000 and KPMG LLP and PricewaterhouseCoopers
LLP, each, independent auditors, as to the year ended December 31, 1998, as
set forth in their reports thereon incorporated by reference in this
prospectus. The consolidated financial statements of OneBeacon and its
consolidated subsidiaries included as an exhibit to Form 8-K/A dated June 1,
2001 (filed June 25, 2001), have been audited by PricewaterhouseCoopers LLP,
independent auditors, as to each of the three years ended December 31, 2000,
as set forth in their report thereon incorporated by reference in this
prospectus. The financial statements referred to above are incorporated
herein by reference in reliance upon such reports given upon the authority of
such firms as experts in accounting and auditing.
70
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the estimated expenses in connection with
the issuance and distribution of the securities being registered, other than
underwriting discounts and commissions:
TOTAL(1)
-----
Securities and Exchange Commission Registration Fee.............................................. $250,000
Trustee Fees and Expenses........................................................................ 25,000
Printing......................................................................................... 100,000
Accounting Fees.................................................................................. 150,000
Legal Fees....................................................................................... 450,000
Rating Agency Fees............................................................................... 200,000
Miscellaneous.................................................................................... 100,000
(1) All amounts except the SEC filing fee are estimated. White Mountains will
pay all expenses.
ITEM 15. INDEMNIFICATION OF OFFICERS AND DIRECTORS.
WHITE MOUNTAINS
By-law 33 of the By-laws of White Mountains states:
"(1) The Company shall indemnify its officers and directors to the
fullest extent possible except as prohibited by the Act. Without limiting the
foregoing, the Directors, Secretary and other Officers (such term to include,
for the purposes of this Bye-law, any Alternate Director or any person
appointed to any committee by the Board or any person who is or was serving
at the request of the Company as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust or other enterprise
(including, without limitation, any employee benefit plan)) and every one of
them, and their heirs, executors and administrators, shall be indemnified and
secured harmless out of the assets of the Company from and against all
actions, costs, charges, losses, damages and expenses which they or any of
them, their heirs, executors or administrators, shall or may incur or sustain
by or by reason of any act done, concurred in or omitted (actual or alleged)
in or about the execution of their duty, or supposed duty, or in their
respective offices or trusts, and none of them shall be answerable for the
acts, receipts, neglects or defaults of the others of them or for joining in
any receipts for the sake of conformity, or for any bankers or other persons
with whom any moneys or effects belonging to the Company shall or may be
lodged or deposited for safe custody, or for insufficiency or deficiency of
any security upon which any moneys of or belonging to the Company shall be
placed out on or invested, or for any other loss, misfortune or damage which
may happen in the execution of their respective offices or trusts, or in
relation thereto, provided that this indemnity shall not extend to any matter
in respect of which such person is, or may be, found guilty of fraud or
dishonesty.
(2) The Company may purchase and maintain insurance to protect itself
and any Director, Officer or other person entitled to indemnification
pursuant to this Bye-law to the fullest extent permitted by law.
II-1
(3) All reasonable expenses incurred by or on behalf of any person
entitled to indemnification pursuant to Bye-law 33(1) in connection with any
proceeding shall be advanced to such person by the Company within twenty (20)
business days after the receipt by the Company of a statement or statements
from such person requesting such advance or advances from time to time,
whether prior to or after final disposition of such proceeding. Such
statement or statements shall reasonably evidence the expenses incurred by
such person and, if required by law or requested by the Company at the time
of such advance, shall include or be accompanied by an undertaking by or on
behalf of such person to repay the amounts advanced if it should ultimately
be determined that such person is not entitled to be indemnified against such
expenses pursuant to this Bye-law.
(4) The right of indemnification and advancement of expenses provided
in this Bye-law shall not be exclusive of any other rights to which those
seeking indemnification may otherwise be entitled, and the provisions of this
Bye-law shall inure to the benefit of the heirs and legal representatives of
any person entitled to indemnity under this Bye-law and shall be applicable
to proceedings commenced or continuing after the adoption of this Bye-law,
whether arising from acts or omissions occurring before or after such
adoption. Any repeal or modification of the foregoing provisions of this
section shall not adversely affect any right or protection existing at the
time of such repeal or modification".
Reference is made to Section 98 of the Bermuda Companies Act of 1981 (the
"Act"). The Act provides that a company may, in its bye-laws or in any contract
or arrangement between the company and any officer or person employed as an
auditor, exempt such officer or person from, or indemnify him in respect of, any
loss arising or liability attaching to him by virtue of any rule of law in
respect of any negligence, default, breach of duty or breach of trust of which
the officer or person may be guilty in relation to the company or any subsidiary
thereof.
The Act further provides that any provision, whether contained in the
bye-laws of a company or in any contract or arrangement between the company and
any officer or person employed as an auditor, exempting such officer or person
from or indemnifying him against any liability which by virtue of any rule of
law would otherwise attach to him in respect of any fraud or dishonesty of which
he may be guilty in relation to the company shall be void; provided, however,
that
(a) nothing in Section 98 of the Act shall operate to deprive any
person of any exemption or right to be indemnified in respect
of anything done or omitted to be done while any such
provision was in force; and
(b) notwithstanding anything in Section 98 of the Act, a company
may, in pursuance of any such provision as aforesaid,
indemnify any such officer or auditor against any liability
incurred by him in defending any proceedings, whether civil or
criminal, in which judgment is given in his favor or in which
he is acquitted or when relief is granted to him by the
Supreme Court under Section 281 of the Act.
FUND AMERICAN
Section 145(a) of the Delaware General Corporation Law (the "DGCL")
provides in relevant part that a corporation may indemnify any officer or
director who was or is a party or is threatened to be made a party to any
threatened, pending or completed action, suit or proceeding (other than an
action by or in the right of the corporation) by reason of the fact that such
person is or was a director or officer of the corporation, or is or was
serving at the request of the corporation as a director or officer of another
entity, against expenses (including attorneys' fees), judgments, fines and
amounts paid in settlement actually and reasonably incurred by such person in
connection with such action, suit or proceeding if such person acted in good
faith and in a manner such person reasonably believed to be in or not opposed
to the best interests of the corporation, and, with respect to any criminal
action or proceeding, had no reasonable cause to believe such person's
conduct was unlawful. Under Section 145(b) of the DGCL, such eligibility for
indemnification may be further subject to the adjudication of the Delaware
Court of Chancery.
The articles of incorporation and by-laws of Fund American provides
that Fund American indemnifies its officers and directors to the maximum
extent allowed by Delaware law.
Furthermore, Section 102(b)(7) of the DGCL provides that a corporation
may in its certificate of incorporation eliminate or limit the personal
liability of a director to the corporation or its stockholders for monetary
damages for breach of fiduciary duty as a director except for liability: for
any breach of the director's duty of loyalty to the corporation or its
stockholders; for acts or omissions not in good faith or which involve
intensional misconduct or a knowing violation of law; under Section 174 of
the DGCL (pertaining to certain prohibited acts including unlawful payment of
dividends or unlawful purchase or redemption of the corporation's capital
stock); or for any transaction from which the director derived an improper
personal benefit. Fund American eliminates such personal liability of its
directors under such terms.
INDEMNIFICATION OF TRUSTEES OF THE FUND AMERICAN TRUSTS.
The amended and restated declaration of trust of each Fund American
Trust will provide that no regular trustee, or affiliate of any regular
trustee, or officer, director, shareholder, member, partner, employee,
representative or agent of any regular trustee or of any such affiliate, or
employee or agent of the applicable Fund American Trust or its affiliates,
each an "Indemnified Person", shall be liable, responsible or accountable in
damages or otherwise to such Fund American Trust or any employee or agent of
such Fund American Trust or its affiliates for any loss, damage or claim
incurred by reason or any act or omission performed or omitted by such
Indemnified Person in good faith on behalf of such Fund American Trust and in
a manner such Indemnified Person reasonably believed to be within the scope
of the authority conferred on such Indemnified Person by such declaration of
trust or by law, except that an Indemnified Person shall be liable for any
such loss, damage or claim incurred by reason of such Indemnified Person's
gross negligence or willful misconduct with respect to such act or omission.
Each amended and restated declaration of trust will also provide that to the
fullest extent permitted by applicable law, Fund American shall indemnify and
hold harmless each Indemnified Person from and against any loss, damage or
claim incurred by such Indemnified Person by reason of any act or omission
performed or omitted by such Indemnified Person in good faith on behalf of
the applicable Fund American Trust and in a manner such Indemnified Person
reasonably believe to be within the scope of authority conferred on such
Indemnified Person by such declaration of trust, except that no Indemnified
Person shall be entitled to be indemnified in respect of any loss, damage or
claim incurred by such Indemnified Person by reason of gross negligence or
willful misconduct with respect to such act or omission. Each amended and
restated declaration of trust will further provide that, to the fullest
extent permitted by applicable law, expenses, including legal fees, incurred
by an Indemnified Person in defending any claim, demand, action, suit or
proceeding shall, from time to time, be advanced by Fund American prior to
the final disposition of such claim, demand, action, suit or proceeding upon
receipt of an undertaking by or on behalf of the Indemnified Person to repay
such amount if it shall be determined that the Indemnified Person is not
entitled to be indemnified for the underlying cause of action as authorized
by such declaration of trust.
II-2
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits
1.1 Form of Underwriting Agreement (preference shares).*
1.2 Form of Underwriting Agreement (debt).*
1.3 Form of Underwriting Agreement (preferred securities).**
3.1 Articles of Incorporation of Fund American Companies, Inc., as
amended.*
3.2 By-laws of Fund American Companies, Inc.*
4.1 Form of Senior Indenture.*
4.2 Form of Senior Debt Security (included in Form of Senior Indenture
filed as Exhibit 4.1).
4.3 Form of Subordinated Indenture.*
4.4 Form of Subordinated Debt Security (included in Form of
Subordinated Indenture filed as Exhibit 4.3).
4.5 Form of Junior Subordinated Indenture.*
4.6 Form of Junior Subordinated Debt Security (included in Form of
Junior Subordinated Indenture filed as Exhibit 4.5).
4.7 Certificate of Trust of Fund American Trust I.*
4.8 Certificate of Trust of Fund American Trust II.*
4.9 Certificate of Trust of Fund American Trust III.*
4.10 Declaration of Trust of Fund American Trust I.*
4.11 Declaration of Trust of Fund American Trust II.*
4.12 Declaration of Trust of Fund American Trust III.*
4.13 Form of Amended and Restated Declaration of Trust of Fund American
Trust I.*
4.14 Form of Amended and Restated Declaration of Trust of Fund American
Trust II.*
4.15 Form of Amended and Restated Declaration of Trust of Fund American
Trust III.*
4.16 Form of Preferred Security of Fund American Trust I (included in
Form of Amended and Restated Declaration of Trust of Fund American
Trust I filed as Exhibit 4.13).
4.17 Form of Preferred Security of Fund American Trust II (included in
Form of Amended and Restated Declaration of Trust of Fund American
Trust II filed as Exhibit 4.14).
4.18 Form of Preferred Security of Fund American Trust III (included in
Form of Amended and Restated Declaration of Trust of Fund American
Trust III filed as Exhibit 4.15).
4.19 Form of Guarantee of Preferred Securities of Fund American Trust
I.*
4.20 Form of Guarantee of Preferred Securities of Fund American Trust
II.*
4.21 Form of Guarantee of Preferred Securities of Fund American Trust
III.*
5.1 Opinion of Cravath, Swaine & Moore (filed herewith).
5.2 Opinion of Conyers Dill & Pearman (filed herewith).
5.3 Opinion of Richards, Layton & Finger (filed herewith).
12.1 Computation of Ratio of Earnings to Fixed Charges and Ratio of
Earnings to Combined Fixed Charges and Preferred Stock Dividends.*
23.1 Consent of PricewaterhouseCoopers (filed herewith).
23.2 Consent of PricewaterhouseCoopers LLP (filed herewith).
23.3 Consent of PricewaterhouseCoopers LLP (filed herewith).
23.4 Consent of KPMG LLP (filed herewith).
23.5 Consent of Cravath, Swaine & Moore (contained in Exhibit 5.1).
23.6 Consent of Conyers Dill & Pearman (contained in Exhibit 5.2).
23.7 Consent of Richards, Layton & Finger (contained in Exhibit 5.3).
24.1 Powers of Attorney*
24.2 Power of Attorney from Mark J. Byrne (filed herewith)
25.1 Statement of Eligibility and Qualification on Form T-1 of Bank
One, National Association, as trustee under the Senior Indenture.*
25.2 Statement of Eligibility and Qualification on Form T-1 of Bank
One, National Association, as trustee under the Subordinated
Indenture.*
25.3 Statement of Eligibility and Qualification on Form T-1 of Bank
One, National Association, as trustee under the Junior
Subordinated Indenture.*
II-3
25.4 Statement of Eligibility and Qualification on Form T-1 of Bank
One, National Association, as trustee under the Declaration of
Trust of Fund American Trust I.*
25.5 Statement of Eligibility and Qualification on Form T-1 of Bank
One, National Association, as trustee under the Declaration of
Trust of Fund American Trust II.*
25.6 Statement of Eligibility and Qualification on Form T-1 of Bank
One, National Association, as trustee under the Declaration of
Trust of Fund American Trust III.*
25.7 Statement of Eligibility and Qualification on Form T-1 of Bank
One, National Association, as trustee under the Guarantee of
Preferred Securities of Fund American Trust I.*
25.8 Statement of Eligibility and Qualification on Form T-1 of Bank
One, National Association, as trustee under the Guarantee of
Preferred Securities of Fund American Trust II.*
25.9 Statement of Eligibility and Qualification on Form T-1 of Bank
One, National Association, as trustee under the Guarantee of
Preferred Securities of Fund American Trust III.*
- ----------------
* Previously filed.
** To be filed by subsequent Form 8-K.
ITEM 17. UNDERTAKINGS.
(a) The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are
being made, a post-effective amendment to this
registration statement:
(i) To include any prospectus required by section
10(a)(3) of the Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events
arising after the effective date of the registration
statement (or the most recent post-effective
amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the
information set forth in the registration statement.
Notwithstanding the foregoing, any increase or
decrease in volume of securities offered (if the
total dollar value of securities offered would not
exceed that which was registered) and any deviation
from the low or high end of the estimated maximum
offering range may be reflected in the form of
prospectus filed with the SEC pursuant to Rule 424(b)
if, in the aggregate, the changes in volume and price
represent no more than a 20% change in the maximum
aggregate offering price set forth in the
"Calculation of Registration Fee" table in the
effective registration statement;
(iii) To include any material information with respect to
the plan of distribution not previously disclosed in
the registration statement or any material change to
such information in the registration statement;
PROVIDED, HOWEVER, that paragraphs (a)(1)(i) and (a)(1)(ii) do
not apply if the information required to be included in a
post-effective amendment by those paragraphs is contained in
periodic reports filed with the SEC by the registrant pursuant
to section 13 or section 15(d) of the Securities Exchange Act of
1934 that are incorporated by reference in the registration
statement.
II-4
(2) That, for the purpose of determining any liability under
the Securities Act of 1933, each such post-effective
amendment shall be deemed to be a new registration
statement relating to the securities offered therein, and
the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which
remain unsold at the termination of the offering.
(b) The undersigned registrant hereby undertakes that, for purposes
of determining any liability under the Securities Act of 1933,
each filing of the registrant's annual report pursuant to
Section 13(a) or Section 15(d) of the Securities Exchange Act of
1934 that is incorporated by reference in the registration
statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of
such securities at that time shall be deemed to be the initial
bona fide offering thereof.
(c) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers
and controlling persons of the registrant pursuant to the
foregoing provisions, or otherwise, the registrant has been
advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as
expressed in said Act and is, therefore, unenforceable. In the
event that a claim for indemnification against such liabilities
(other than the payment by the registrant of expenses incurred
or paid by a director, officer or controlling person of the
registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered, the
registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in
the Act and will be governed by the final adjudication of such
issue.
(d) The undersigned registrant hereby undertakes to deliver or cause
to be delivered with the prospectus, to each person to whom the
prospectus is sent or given, the latest annual report to
security holders that is incorporated by reference in the
prospectus and furnished pursuant to and meeting the
requirements of Rule 14a-3 or Rule 14c-3 under the Securities
Exchange Act of 1934; and, where interim financial information
required to be presented by Article 3 of Regulation S-X are not
set forth in the prospectus, to deliver, or cause to be
delivered to each person to whom the prospectus is sent or
given, the latest quarterly report that is specifically
incorporated by reference in the prospectus to provide such
interim financial information.
(e) The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the
Securities Act of 1933, the information omitted from the
form of prospectus filed as part of this registration
statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the registrant pursuant to
Rule 424(b)(1) or (4) or 497(h) under the Securities Act
shall be deemed to be part of this registration statement
as of the time it was declared effective.
II-5
(2) For the purpose of determining any liability under the
Securities Act of 1933, each post-effective amendment that
contains a form of prospectus shall be deemed to be a new
registration statement relating to the securities offered
therein, and the offering of such securities at that time
shall be deemed to be the initial bona fide offering
thereof.
(f) The undersigned registrant hereby undertakes to file an
application for the purpose of determining the eligibility of
the trustee under subsection (a) of Section 310 of the Trust
Indenture Act (the "Act") in accordance with the rules and
regulations prescribed by the Commission under Section 305(b)(2)
of the Act.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets
all of the requirements for filing on Form S-3 and has duly caused this
amendment to the registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the Town of White River Junction,
State of Vermont, on December 10, 2001.
WHITE MOUNTAINS INSURANCE GROUP,
LTD.
By: /s/ J. BRIAN PALMER
----------------------------------------
J. Brian Palmer
Chief Accounting Officer
II-6
Pursuant to the requirements of the Securities Act of 1933, this
amendment to the registration statement has been signed by the following
persons in the capacities and on the dates indicated:
SIGNATURE TITLE DATE
--------- ----- ----
RAYMOND BARRETTE* Director December 10, 2001
- -----------------------------------------
Raymond Barrette
DENNIS P. BEAULIEU* Corporate Secretary and Treasurer December 10, 2001
- ----------------------------------------- (Principal Financial Officer)
Dennis P. Beaulieu
JOHN J. BYRNE* Chairman December 10, 2001
- -----------------------------------------
John J. Byrne
MARK J. BYRNE* Director December 10, 2001
- -----------------------------------------
Mark J. Byrne
PATRICK M. BYRNE* Director December 10, 2001
- -----------------------------------------
Patrick M. Byrne
HOWARD L. CLARK, JR.* Director December 10, 2001
- -----------------------------------------
Howard L. Clark, Jr.
ROBERT P. COCHRAN* Director December 10, 2001
- -----------------------------------------
Robert P. Cochran
STEVEN E. FASS* Director December 10, 2001
- -----------------------------------------
Steven E. Fass
GEORGE J. GILLESPIE, III* Director December 10, 2001
- -----------------------------------------
George J. Gillespie, III
JOHN D. GILLESPIE* Director December 10, 2001
- -----------------------------------------
John D. Gillespie
II-7
SIGNATURE TITLE DATE
--------- ----- ----
/s/ K. THOMAS KEMP Director and President December 10, 2001
- ---------------------------------------- (Principal Executive Officer)
K. Thomas Kemp
GORDON S. MACKLIN* Director and Deputy Chairman December 10, 2001
- -----------------------------------------
Gordon S. Macklin
FRANK A. OLSON* Director December 10, 2001
- -----------------------------------------
Frank A. Olson
/s/ J. BRIAN PALMER Chief Accounting Officer December 10, 2001
- ----------------------------------------- (Principal Accounting Officer)
J. Brian Palmer
JOSEPH S. STEINBERG* Director December 10, 2001
- -----------------------------------------
Joseph S. Steinberg
ARTHUR ZANKEL* Director December 10, 2001
- -----------------------------------------
Arthur Zankel
*By: /s/ K. THOMAS KEMP
- -----------------------------------------
K. Thomas Kemp, Attorney-in-Fact
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets
all of the requirements for filing on Form S-3 and has duly caused this
amendment to the registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Boston, Commonwealth
of Massachusetts, on December 10, 2001.
FUND AMERICAN COMPANIES, INC.
By:/s/ JAMES J. RITCHIE
-------------------------------------
Name: James J. Ritchie
Title: Managing Director and
Chief Financial Officer
II-8
Pursuant to the requirements of the Securities Act of 1933, this
amendment to the registration statement has been signed by the following
persons in the capacities and on the dates indicated:
SIGNATURE TITLE DATE
--------- ----- ----
RAYMOND BARRETTE* Director and President December 10, 2001
- -----------------------------------------
Raymond Barrette
/s/ JOHN J. BYRNE Director and December 10, 2001
- ----------------------------------------- Chief Executive Officer
John J. Byrne
JOHN D. GILLESPIE* Director and Managing Partner December 10, 2001
- -----------------------------------------
John D. Gillespie
*By: /s/ JOHN J. BYRNE
- -----------------------------------------
John J. Byrne, Attorney-in-Fact
II-9
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, each of
Fund American Trust I, Fund American Trust II and Fund American Trust III
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-3 and has duly caused this amendment to the
registration statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of Boston, Commonwealth of
Massachusets, on December 10, 2001.
FUND AMERICAN TRUST I,
a Delaware business trust
By: Fund American Companies, Inc.,
as Depositor
By: /s/ JAMES J. RITCHIE
-----------------------------------
James J. Ritchie
Managing Director and
Chief Financial Officer
FUND AMERICAN TRUST II,
a Delaware business trust
By: Fund American Companies, Inc.,
as Depositor
By: /s/ JAMES J. RITCHIE
-----------------------------------
James J. Ritchie
Managing Director and
Chief Financial Officer
FUND AMERICAN TRUST III,
a Delaware business trust
By: Fund American Companies, Inc.,
as Depositor
By: /s/ JAMES J. RITCHIE
-----------------------------------
James J. Ritchie
Managing Director and
Chief Financial Officer
II-10
EXHIBIT 5.1
[Letterhead of]
CRAVATH, SWAINE & MOORE
[New York Office]
November 30, 2001
WHITE MOUNTAINS INSURANCE GROUP, LTD.
FUND AMERICAN COMPANIES, INC.
FUND AMERICAN TRUST I
FUND AMERICAN TRUST II
FUND AMERICAN TRUST III
REGISTRATION STATEMENT ON FORM S-3
Dear Ladies and Gentlemen:
We have acted as special counsel for White Mountains Insurance Group,
Ltd., a corporation existing under the laws of Bermuda (the "Company"), Fund
American Companies, Inc., a Delaware corporation ("Fund American"), and Fund
American Trust I, Fund American Trust II and Fund American Trust III, each a
Delaware business trust (each a "Trust" and, collectively, the "Trusts"), in
connection with the filing with the Securities and Exchange Commission (the
"Commission") of a Registration Statement on Form S-3 (the "Registration
Statement") relating to (i) preference shares of the Company (the "Preference
Shares"), (ii) unsecured senior debt securities and unsecured subordinated debt
securities of the Company (collectively, the "Company Debt Securities"), (iii)
unsecured senior debt securities, unsecured subordinated debt securities and
unsecured junior subordinated debt securities of Fund American (collectively,
the "Fund American Debt Securities" and, together with the Company Debt
Securities, the "Debt Securities"), (iv) guarantees of the Fund American Debt
Securities by the Company (the "Debt Guarantees"), (v) preferred securities of
the Trusts (the "Trust Preferred Securities") and (vi) guarantees of the Trust
Preferred Securities by the Company (the "Trust Preferred Guarantees"). The
Preference Shares, Debt Securities, Debt Guarantees, Trust Preferred Securities
and Trust Preferred Guarantees will be offered on a continued or delayed basis
pursuant to the provisions of Rule 415 under the Securities Act of 1933 (the
"Securities Act").
In connection with the foregoing, we have examined originals,
or copies certified or otherwise identified to our satisfaction, of such
documents, corporate records and
2
other instruments as we have deemed necessary for the purposes of this opinion,
including without limitation, (i) the Certificate of Incorporation of Fund
American, as amended, (ii) the By-Laws of Fund American, (iii) the form of
Senior Indenture (the "Senior Indenture") to be entered into by the Company (as
issuer or guarantor), Fund American (if Fund American is to issue its unsecured
senior debt securities) and Bank One, National Association (the "Senior
Trustee"), (iv) the form of Subordinated Indenture (the "Subordinated
Indenture") to be entered into by the Company (as issuer or guarantor), Fund
American (if Fund American is to issue its unsecured subordinated debt
securities) and Bank One, National Association (the "Subordinated Trustee"), (v)
the form of Junior Subordinated Indenture (the "Junior Subordinated Indenture"
and, together with the Senior Indenture and the Subordinated Indenture, the
"Indentures") to be entered into by the Company (as guarantor), Fund American
(as issuer) and Bank One, National Association (the "Junior Subordinated
Trustee" and, together with the Senior Trustee and the Subordinated Trustee, the
"Trustees"), (vi) the form of Amended and Restated Declarations of Trust of each
Trust (the "Trust Agreements") and (vii) the forms of Guarantee Agreements (the
"Trust Preferred Guarantee Agreements") to be entered into by the Company and
Bank One, National Association (the "Guarantee Trustee").
Based on the foregoing, we are of the opinion as follows:
1. Based solely on a certificate from the Secretary of State of
Delaware, Fund American is a corporation validly existing and good standing
under the laws of the State of Delaware.
2. The execution and delivery of the Indentures and the issuance and
sale of Debt Securities by Fund American have been duly authorized by all
necessary corporate action of Fund American.
3. The execution and delivery of the Trust Agreements has been duly
authorized by all necessary corporate action of Fund American.
4. When any Indenture shall have been duly authorized, executed and
delivered by each of the Company
3
(as guarantor or issuer), Fund American (if Fund American is to be a party
thereto as issuer of the applicable Debt Securities) and the applicable Trustee,
such Indenture will constitute a legal, valid and binding obligation of the
Company and Fund American (if Fund American is a party thereto), enforceable
against the Company and Fund American (if Fund American is a party thereto) in
accordance with its terms (subject to applicable bankruptcy, insolvency,
reorganization, moratorium, fraudulent transfer or other similar laws affecting
creditors' rights generally from time to time in effect and to general
principles of equity, including concepts of materiality, reasonableness, good
faith and fair dealing, regardless of whether such enforceability is considered
in a proceeding in equity or at law).
5. When (i) the applicable Indenture shall have been duly authorized,
executed and delivered by each of the Company and the applicable Trustee and
(ii) the Company Debt Securities shall have been duly authorized, executed,
authenticated and delivered against payment therefor, the Company Debt
Securities will constitute legal, valid and binding obligations of the Company,
enforceable against the Company in accordance with their terms and entitled to
the benefits of the applicable Indenture (subject to applicable bankruptcy,
insolvency, reorganization, moratorium, fraudulent transfer or other similar
laws affecting creditors' rights generally from time to time in effect and to
general principles of equity, including concepts of materiality, reasonableness,
good faith and fair dealing, regardless of whether such enforceability is
considered in a proceeding in equity or at law).
6. When (i) the applicable Indenture shall have been duly authorized,
executed and delivered by each of the Company (as guarantor), Fund American and
the applicable Trustee and (ii) the Fund American Debt Securities shall have
been duly authorized, executed, authenticated and delivered against payment
therefor, the Fund American Debt Securities will constitute legal, valid and
binding obligations of Fund American, enforceable against Fund American in
accordance with their terms and entitled to the
4
benefits of the applicable Indenture (subject to applicable bankruptcy,
insolvency, reorganization, moratorium, fraudulent transfer or other similar
laws affecting creditors' rights generally from time to time in effect and to
general principles of equity, including concepts of materiality, reasonableness,
good faith and fair dealing, regardless of whether such enforceability is
considered in a proceeding in equity or at law).
7. When (i) the applicable Indenture shall have been duly authorized,
executed and delivered by each of the Company (as guarantor), Fund American (as
issuer) and the Trustee and (ii) the Debt Guarantees to be endorsed on the Fund
American Debt Securities issued under such Indenture shall have been duly
authorized, such Debt Guarantees will constitute legal, valid and binding
obligations of the Company, enforceable against the Company in accordance with
their terms and entitled to the benefits of the applicable Indenture (subject to
applicable bankruptcy, insolvency, reorganization, moratorium, fraudulent
transfer or other similar laws affecting creditors' rights generally from time
to time in effect and to general principles of equity, including concepts of
materiality, reasonableness, good faith and fair dealing, regardless of whether
such enforceability is considered in a proceeding in equity or at law).
8. When (i) the applicable Trust Preferred Guarantee Agreement shall
have been duly authorized, executed and delivered by each of the Company and the
Guarantee Trustee and (ii) the applicable Trust Preferred Guarantee shall have
been duly authorized such Trust Preferred Guarantee will constitute a legal,
valid and binding obligation of the Company, enforceable against the Company in
accordance with its terms and entitled to the benefits of the applicable Trust
Preferred Guarantee Agreement (subject to applicable bankruptcy, insolvency,
reorganization, moratorium, fraudulent transfer or other similar laws affecting
creditors' rights generally from time to time in effect and to general
principles of equity, including concepts of materiality, reasonableness, good
faith and fair dealing, regardless of whether such enforceability is considered
in a proceeding in equity or at law).
5
We are admitted to practice in the State of New York, and we express no
opinion as to matters governed by any laws other than the laws of the State of
New York, the General Corporation Law of the State of Delaware and the Federal
laws of the United States of America. In particular, we do not purport to pass
on any matter governed by the Delaware Business Trust Act or the laws of
Bermuda.
We hereby consent to the filing of this opinion as an exhibit
to the Registration Statement. We also consent to the use of our name under the
caption "Legal Matters" in the prospectus contained in the Registration
Statement. In giving this consent, we do not thereby admit we are included in
the category of persons whose consent is required under Section 7 of the
Securities Act or the rules and regulations of the Commission.
Very truly yours,
/s/ Cravath,Swaine & Moore
White Mountains Insurance Group, Ltd.
80 South Main Street
Hanover, New Hampshire 03755-2053
1922
O
White Mountains Insurance Group, Ltd.
20 November, 2001
Page 1
EXHIBIT 5.2
20 November, 2001
White Mountains Insurance Group, Ltd. Direct Line: 441 2994943
80 South Main Street E-MAIL: ajdickson@cdp.bm
Hanover, New Hampshire 03755-2053 OUR REF: AJD/10080
USA
Dear Sirs
WHITE MOUNTAINS INSURANCE GROUP, LTD. (THE "COMPANY")
We have acted as special legal counsel in Bermuda to the Company in connection
with the filing by the Company with the United States Securities and Exchange
Commission under the Securities Act of 1933, as amended (the "Securities Act")
of a registration statement on Form S-3 (Registration No. 333-73012) to which
this opinion is an exhibit (the "Registration Statement") in relation to the
registration of preference shares (the "Shares") and debt securities of the
Company to be issued from time to time by the Company after the Registration
Statement becomes effective (the "Debt") (the Shares and Debt are referred to
herein as the "Securities") and in relation to certain guarantees to be granted
by the Company in respect of debt securities and junior subordinated debt
securities of Fund American Companies, Inc. and preferred securities of Fund
American Trust I, Fund American Trust II, and Fund American Trust III
(collectively the "Guarantees").
For the purposes of giving this opinion, we have examined an electronic copy of
the Registration Statement, excluding the exhibits and the documents
incorporated by reference therein.
We have also reviewed and have relied upon the memorandum of association and the
bye-laws of the Company (the "Constitutional Documents"), minutes of meetings of
the Company's board of directors (referred to herein as the "Minutes"),
correspondence on behalf of the Company with the Bermuda Monetary Authority (the
"BMA") whereby the BMA has granted certain permissions, inter alia, for the
issue (and subsequent transfer) of the Securities (subject to conditions
expressed in such correspondence), and such other documents and made such
enquiries as to questions of Bermuda law as we have deemed necessary in order to
render the opinions set forth below.
We have assumed (a) the genuineness and authenticity of all signatures and the
conformity to
White Mountains Insurance Group, Ltd.
20 November, 2001
Page 2
the originals of all copies (whether or not certified) examined by us and the
authenticity and completeness of the originals from which such copies were
taken, (b) the accuracy and completeness of all factual representations made in
the Registration Statement and other documents reviewed by us, (c) that the
Company will issue the Securities in furtherance of its objects as set out in
its memorandum of association, (d) that there is no provision of the law of any
jurisdiction, other than Bermuda, which would have any implication in relation
to the opinions expressed herein, (e) the Company will receive money or money's
worth for each Share when issued of not less than the par value thereof, (f) the
Company will have sufficient authorised capital to effect the issue of each
Share when issued, (g) the Company will comply, to the extent applicable, with
the requirements of Part III of the Companies Act 1981, as amended "Prospectuses
and Public Offers", and (h) at the time of issue of any Securities the BMA will
not have revoked or amended its consent to the issue of the Securities.
"Non-assessability" is not a legal concept under Bermuda law, but when we
describe the Shares as being "non-assessable" herein we mean, subject to any
contrary provision in any agreement between the Company and any one of its
members holding any of the Common Shares (but only with respect to such member),
that no further sums are payable with respect to the holding of such Shares and
the member shall not be bound by an alteration in the memorandum of association
or the bye-laws of the Company after the date upon which it became a member if
and so far as the alteration requires such member to take or subscribe for
additional Shares or in any way increases its liability to contribute to the
share capital of, or otherwise pay money to, the Company.
We have made no investigation of and express no opinion in relation to the laws
of any jurisdiction other than Bermuda. This opinion is to be governed by and
construed in accordance with the laws of Bermuda and is limited to and is given
on the basis of the current law and practice in Bermuda. This opinion is issued
solely for your benefit and is not to be relied upon by any other person, firm
or entity or in respect of any matter other than the issue of the Securities, as
described in the Registration Statement.
On the basis of and subject to the foregoing, we are of the opinion that:
1. The Company is duly incorporated and existing under the laws of Bermuda in
good standing (meaning solely that it has not failed to make any filing
with any Bermuda governmental authority or to pay any Bermuda government
fee or tax which would make it liable to be struck off the Register of
Companies and thereby cease to exist under the laws of Bermuda).
2. The Company has taken all corporate action required to authorize the
adoption and filing of the Registration Statement.
3. Upon the issuance and delivery by the Company of any of the Shares as
contemplated by the Registration Statement against payment therefor in
accordance with the terms
White Mountains Insurance Group, Ltd.
20 November, 2001
Page 3
of issuance of such Shares, such Shares will be validly issued and will be
fully paid and non-assessable.
4. The issuance of the Debt and the granting of the Guarantees has been
authorized by the Minutes.
We hereby consent to the use of this opinion as an exhibit to the Registration
Statement and to the references to our Firm under the headings entitled
"Enforcement of Judgments and Other Matters" and "Legal Matters" in the
Registration Statement. In giving such consent, we do not hereby admit that we
are in the category of persons whose consent is required under the Securities
Act.
Yours faithfully
CONYERS DILL & PEARMAN
/S/ CONYERS DILL & PEARMAN
- ---------------------------------
EXHIBIT 5.3
November 29, 2001
Fund American Trusts I-III
c/o Fund American Companies, Inc.
One Beacon Street
Boston, Massachusetts 02108-3100
Re: FUND AMERICAN TRUSTS I, FUND AMERICAN TRUST II AND
FUND AMERICAN TRUST III
Ladies and Gentlemen:
We have acted as special Delaware counsel for Fund American Companies,
Inc., a Delaware corporation (the "Company"), and Fund American Trusts I, Fund
American Trust II and Fund American Trust III, each a Delaware business trust
(each, a "Trust" and collectively, the "Trusts"), in connection with the matters
set forth herein. At your request, this opinion is being furnished to you.
For purposes of giving the opinions hereinafter set forth, our
examination of documents has been limited to the examination of originals or
copies of the following:
(a) The Declaration of Trust of each Trust, each dated as of October
30, 2001, among the Company and the trustees of the Trust named
therein;
(b) A form of Amended and Restated Declaration of Trust for each Trust
(including Exhibits A, B and C thereto) (collectively, the "Trust
Agreements"), to be entered into by and among the Company, as
depositor, the trustees of the Trust named therein, and the
holders, from time to time, of the undivided beneficial interests
in the assets of such Trust;
Fund American Trusts I-III
November 29, 2001
Page 2
(c) The Registration Statement (the "Registration Statement") on Form
S-3, including a preliminary prospectus with respect to each Trust
(the "Prospectus"), filed by the Trusts, the Company and others
with the Securities and Exchange Commission (the "Commission") on
November 8, 2001, relating to the preferred securities of each
Trust, representing undivided beneficial interests in the assets
of each Trust (each, a Preferred Security" and collectively, the
"Preferred Securities");
(d) A certified copy of the Certificate of Trust for each Trust, each
dated October 30, 2001, as filed with the Office of the Secretary
of State of Delaware (the "Secretary of State") on October 30,
2001, each as corrected by the Corrected Certificate of Trust for
each Trust, as filed with the Office of the Secretary of State on
November 2, 2001 (each as so corrected, a "Certificate of Trust;"
and collectively, the "Certificates of Trust"); and
(e) A Certificate of Good Standing for each Trust, each dated November
29, 2001, obtained from the Secretary of State.
Initially capitalized terms used herein and not otherwise defined are
used as defined in the Trust Agreements.
For purposes of this opinion, we have not reviewed any documents other
than the documents listed in paragraphs (a) through (e) above. In particular, we
have not reviewed any document (other than the documents listed in paragraphs
(a) through (e) above) that is referred to in or incorporated by reference into
the documents reviewed by us. We have assumed that there exists no provision in
any document that we have not reviewed that bears upon or is inconsistent with
the opinions stated herein. We have conducted no independent factual
investigation of our own but rather have relied solely upon the foregoing
documents, the statements and information set forth therein and the additional
matters recited or assumed herein, all of which we have assumed to be true,
complete and accurate in all material respects.
With respect to all documents examined by us, we have assumed (i) the
authenticity of all documents submitted to us as authentic originals, (ii) the
conformity with the originals of all documents submitted to us as copies or
forms, and (iii) the genuineness of all signatures.
Fund American Trusts I-III
November 29, 2001
Page 3
For purposes of this opinion, we have assumed (i) that each Trust
Agreement will constitute the entire agreement among the parties thereto with
respect to the subject matter thereof, including with respect to the creation,
operation and termination of each Trust, that the Certificates of Trust are in
full force and effect and have not been further amended and that the Trust
Agreements will be in full force and effect and will be executed in
substantially the forms reviewed by us, (ii) except to the extent provided in
paragraph 1 below, the due creation or due organization or due formation, as the
case may be, and valid existence in good standing of each party to the documents
examined by us under the laws of the jurisdiction governing its creation,
organization or formation, (iii) the legal capacity of natural persons who are
parties to the documents examined by us, (iv) that each of the parties to the
documents examined by us has the power and authority to execute and deliver, and
to perform its obligations under, such documents, (v) the due authorization,
execution and delivery by all parties thereto of all documents examined by us,
(vi) the receipt by each Person to whom Preferred Securities are to be issued by
the Trusts (collectively, the "Preferred Security Holders") of a Preferred
Security Certificate for such Preferred Security and the payment for the
Preferred Security acquired by it, in accordance with the Trust Agreements and
the Registration Statement, (vii) that the Preferred Securities are issued and
sold to the Preferred Security Holders in accordance with the Trust Agreements
and the Registration Statement; and (viii) that Bank One Delaware, Inc.
satisfies the requirements of Section 3807 of the Delaware Business Trust Act.
We have not participated in the preparation of the Registration Statement or
Prospectus and assume no responsibility for their contents.
This opinion is limited to the laws of the State of Delaware (excluding
the securities laws of the State of Delaware), and we have not considered and
express no opinion on the laws of any other jurisdiction, including federal laws
and rules and regulations relating thereto. Our opinions are rendered only with
respect to Delaware laws and rules, regulations and orders thereunder which are
currently in effect.
Based upon the foregoing, and upon our examination of such questions of
law and statutes of the State of Delaware as we have considered necessary or
appropriate, and subject to the assumptions, qualifications, limitations and
exceptions set forth herein, we are of the opinion that:
1. Each Trust has been duly created and is validly existing in good
standing as a business trust under the Delaware Business Trust Act, 12 DEL.
C.ss.3801, ET SEQ.
Fund American Trusts I-III
November 29, 2001
Page 4
2. When each of the Trust Agreements shall have been duly authorized,
executed and delivered by each party thereto, the Preferred Securities of each
Trust will be duly authorized by each Trust Agreement and upon issuance against
payment therefor will be duly and validly issued and, subject to the
qualifications set forth in paragraph 3 below, fully paid and nonassessable
undivided beneficial interests in the assets of their respective Trust.
3. The Preferred Security Holders, as beneficial owners of the Trusts,
will be entitled to the same limitation of personal liability extended to
stockholders of private corporations for profit organized under the General
Corporation Law of the State of Delaware. We note that the Preferred Security
Holders may be obligated to make payments as set forth in the Trust Agreements.
We consent to the filing of this opinion with the Securities and
Exchange Commission as an exhibit to the Registration Statement. In addition, we
hereby consent to the reference to us as local counsel under the headings "Legal
Matters" in the Prospectus. In giving the foregoing consents, we do not thereby
admit that we come within the category of Persons whose consent is required
under Section 7 of the Securities Act of 1933, as amended, or the rules and
Fund American Trusts I-III
November 29, 2001
Page 5
regulations of the Securities and Exchange Commission promulgated thereunder.
Except as stated above, without our prior written consent, this opinion may not
be furnished or quoted to, or relied upon by, any other Person for any purpose.
Very truly yours,
/s/ Richards,
Layton & Finger
P.A.
Exhibit 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statement on Form S-3 of White Mountains Insurance Group, Ltd. and Fund
American Companies, Inc. of our report dated February 9, 2001, except for
Note 17, which is as of March 16, 2001, relating to the 2000 and 1999
financial statements and financial statement schedules of White Mountains
Insurance Group, Ltd. and its subsidiaries. We also consent to the reference
to us under the heading "Experts" in such registration statement.
/s/ PricewaterhouseCoopers
Hamilton, Bermuda
December 10, 2001
Exhibit 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statement on Form S-3 of White Mountains Insurance Group, Ltd. and Fund
American Companies, Inc. of our report dated January 25, 2000, except for
Note 22, as to which the date is March 14, 2000, with respect to the
consolidated financial statements of Financial Security Assurance Holdings,
Ltd. and its subsidiaries as of December 31, 1999 and 1998 and for each of
the three years in the period ended December 31, 1999 and our report dated
February 2, 1999, except for Note 17, as to which the date is February 24,
1999, with respect to the consolidated financial statements of Folksamerica
Holding Company, Inc. and its subsidiaries for the year ended December 31,
1998. We also consent to the reference to us under the heading of "Experts"
in such registration statement.
/s/ PricewaterhouseCoopers LLP
New York, New York
December 10, 2001
Exhibit 23.3
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statement on Form S-3 of White Mountains Insurance Group, Ltd. and Fund
American Companies, Inc. of our report dated May 8, 2001 related to the
financial statements of CGU Corporation and its subsidiaries which appears in
the White Mountains Insurance Group, Ltd. Current Report on Form 8-K/A dated
June 1, 2001 (filed June 25, 2001). We also consent to the reference to us
under the heading of "Experts" in such registration statement.
/s/ PricewaterhouseCoopers LLP
Boston, Massachusetts
December 10, 2001
EXHIBIT 23.4
CONSENT OF INDEPENDENT ACCOUNTANTS
The Board of Directors
White Mountains Insurance Group, Ltd.:
We consent to the incorporation by reference in the Registration Statement on
Form S-3 of White Mountains Insurance Group, Ltd. and Fund American Companies,
Inc. of our report dated February 12, 1999, with respect to the consolidated
statements of income and comprehensive income, shareholders' equity, and cash
flows of White Mountains Insurance Group, Ltd. and subsidiaries, and all related
schedules, for the year ended December 31, 1998 which report appears in the
December 31, 2000, annual report on Form 10-K of White Mountains Insurance
Group, Ltd.
/s/ KPMG LLP
Providence, Rhode Island
December 10, 2001
Exhibit 24.2
POWER OF ATTORNEY
I, Mark Byrne, being a director of White Mountains Insurance Group, Ltd. hereby
appoint and constitute K. Thomas Kemp and Gordon S. Macklin, and each of them
singly, my true and lawful attorneys with full power to them, and each of them
singly, to sign for me and in my name any and all amendments (including
post-effective amendments) to this registration statement (or to any other
registration statement for the same offering that is to be effective upon filing
pursuant to Rule 462(b) under the Securities Act), and generally to do all such
things in my name and in my capacity as a director to enable White Mountains
Insurance Group, Ltd. to comply with the provisions of the Securities Act of
1933 and all requirements of the Securities and Exchange Commission, hereby
ratifying and confirming my signature as it may be signed by my said attorneys,
or any of them, to said registration statement and any and all amendments
thereto.
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by me as a director of White Mountains
Insurance Group, Ltd. on the date indicated:
Dated this 7th Day of December, 2001.
SIGNED /s/ Mark Byrne
----------------------------
Name: Mark Byrne
