UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
NOVEMBER 1, 2001
Date of Report (Date of earliest event reported)
WHITE MOUNTAINS INSURANCE GROUP, LTD.
(Exact name of registrant as specified in its charter)
BERMUDA 1-8993 94-2708455
(State or other jurisdiction of (Commission (I.R.S. Employer
incorporation or organization) file number) Identification No.)
28 GATES STREET, WHITE RIVER JUNCTION, VERMONT 05001
(Address of principal executive offices)
(802) 295-4500
(Registrant's telephone number, including area code)
ITEM 2. DISPOSITION OF ASSETS (OR BUSINESS)
White Mountains' wholly owned subsidiary, OneBeacon Insurance Group
(consisting of OneBeacon Corporation and its subsidiaries, "OneBeacon"),
previously announced that it has executed a definitive agreement with Liberty
Mutual Insurance Group ("Liberty Mutual"). The agreement calls for Liberty
Mutual, beginning November 1, 2001 (the "Effective Date"), to assume new and
renewal commercial and personal lines business produced by OneBeacon agents
in 42 states and the District of Columbia. Additionally, OneBeacon will
reinsure 67% of the renewal premiums written and the net liability for loss
and loss adjustment expense of all renewal policies subject to the agreement
during the first twelve months after the Effective Date of the transaction
and approximately 33% of such net premiums written and net liability for loss
and loss adjustment expenses during the following twelve months.
The press release issued by OneBeacon dated September 5, 2001 and a summary of
significant terms of non- binding agreement in principle between OneBeacon and
Liberty Mutual were previously filed as Exhibits 99 (a) and 99 (b),
respectively, to the Form 8-K dated September 5, 2001 (filed September 7, 2001).
The press release issued by OneBeacon dated October 30, 2001 was previously
filed as Exhibit 99 (c) to the Form 8-K amendment dated September 5, 2001 (filed
October 31, 2001).
Also previously filed as Exhibits 99(d), 99(e), 99(f), 99(g) and 99(h) to Form
8-K dated September 5, 2001 (filed November 6, 2001) were the Master Agreement
by and among the Registrant, OneBeacon and Liberty Mutual, a Glossary of Terms
to the Master Agreement, the Renewal Rights Agreement by and among OneBeacon and
Liberty Mutual, the Peerless Post-Closing Indemnity Reinsurance Agreement by and
between OneBeacon and Peerless Insurance Company and the Rewritten Indemnity
Reinsurance Agreement by and between Peerless Insurance Company and OneBeacon,
respectively.
The unaudited pro forma condensed combined income statements of the Registrant
for the year ended December 31, 2000 and the nine month period ended September
30, 2001 are enclosed herein as Exhibit 99(i), which are incorporated by
reference herein in their entirety.
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS.
(b) PRO FORMA FINANCIAL INFORMATION.
The unaudited pro forma condensed combined income statements of
the Registrant for the year ended December 31, 2000 and the nine
month period ended September 30, 2001, and the notes thereto,
are enclosed herein as Exhibit 99(i).
(c) Exhibits. The following exhibits are filed herewith:
Exhibit No. Description
----------- -----------
99 (i) The unaudited pro forma condensed combined income
statements of the Registrant for the year ended December 31,
2000 and the nine month period ended September 30, 2001,
and the notes thereto.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
WHITE MOUNTAINS INSURANCE GROUP, LTD.
Dated: January 14, 2002 By: /s/ J. Brian Palmer
----------------------
Chief Accounting Officer
Exhibit 99(i)
WHITE MOUNTAINS INSURANCE GROUP, LTD.
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION
INTRODUCTION AND OVERVIEW
On June 1, 2001, White Mountains Insurance Group, Ltd. (the "Company")
acquired OneBeacon Insurance Group ("OneBeacon", formerly CGU) from CGNU plc
("CGNU") for total consideration of $2.1 billion (the "Acquisition"), of
which $260.0 million consisted of a convertible note payable (the "Seller
Note"), with the balance paid in cash. Through October 31, 2001, OneBeacon
wrote property and casualty insurance policies nationwide, primarily through
a network of independent insurance agents.
On September 5, 2001, OneBeacon reached an agreement in principle (the
"Renewal Rights Agreement") with Liberty Mutual Group ("Liberty Mutual")
which calls for Liberty Mutual to assume control of the infrastructure,
employees and future underwriting results for all personal and commercial
lines business written by OneBeacon through agents in 42 states and the
District of Columbia. Pursuant to the Renewal Rights Agreement, beginning
November 1, 2001 (the "Effective Date"), Liberty Mutual assumed
responsibility for the underwriting results of an estimated $1.5 billion of
annual commercial and personal lines premium written in the affected regions.
In the first twelve months, OneBeacon will reinsure (the "Quota Share") from
Liberty Mutual approximately 67% of the underwriting results generated by the
renewal of policies subject to the Renewal Rights Agreement. The Quota Share
will reduce to approximately 33% in the second year of the agreement and
finally to zero in the third year. For purposes of the Renewal Rights
Agreement, renewals constitute historic OneBeacon policies that are renewed
by Liberty for those OneBeacon customers in existence at November 1, 2001.
New business written by Liberty Mutual is excluded from the Quota Share. As a
result of the Renewal Rights Agreement, OneBeacon's remaining operations will
be focused on New England, New Jersey, New York and selected specialty
businesses.
The following unaudited pro forma condensed combined income statements of the
Company for the year ended December 31, 2000 and the nine months ended September
30, 2001 present results for the Company as if each of the activities described
herein had both occurred as of January 1, 2000 and January 1, 2001,
respectively. The Acquisition was fully reflected in the Company's September 30,
2001 balance sheet and the Renewal Rights Agreement did not have a material
effect on the Company's balance sheet on the Effective Date. Therefore, a pro
forma condensed consolidated balance sheet at September 30, 2001 has not been
supplied herein.
The pro forma adjustments presented herein have been segregated as being made
either in connection with the Renewal Rights Agreement, the Quota Share,
Other Adjustments (as described herein) and the Acquisition. The Acquisition
adjustments, which have been reported in various filings with the Securities
and Exchange Commission since the Acquisition occurred, have been included as
the final adjustment to the pro forma income statements in order to more
clearly illustrate the effects of the Renewal Rights Agreement and Quota
Share transactions on OneBeacon's historical operating results for the full
nine months ended September 30, 2001 and the full year ended December 31,
2000. In order to achieve this desired presentation, the September 30, 2001
pro forma condensed combined income statement begins with OneBeacon's results
for the full nine months ended September 30, 2001 despite the fact that the
Company's income statement for the nine months ended September 30, 2001 also
includes OneBeacon's actual results post-acquisition. Therefore, a subsequent
column entitled "Less: OneBeacon for the four months ended September 30,
2001" is necessary to avoid double counting said operations.
1
The consolidated financial statements of OneBeacon for the first five of the
nine months ended September 30, 2001 and the year ended December 31, 2000 were
prepared in their entirety under the direction of the former management of
OneBeacon, and for the benefit of CGNU. The consolidated financial statements
of OneBeacon for the four months ended September 30, 2001 were prepared in their
entirety under the direction of, and for the benefit of, the Company.
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions, which are based on information known as of the date the
financial statements are prepared and issued, that affect the reported amounts
of assets, liabilities, revenues and expenses. Eventual results can differ from
those estimates, particularly with respect to loss and loss adjustment expense
reserves, as further information subsequently unfolds.
An overview of each column presented in the unaudited pro forma condensed
combined income statements for the period ended September 30, 2001 and December
31, 2000 is as follows:
ONEBEACON
The amounts presented in the "OneBeacon" column represent OneBeacon's
historical stand-alone results for each applicable period. As such,
OneBeacon's results for the nine months ended September 30, 2001 exclude the
results of Folksamerica Holding Company, Inc. and its subsidiaries
("Folksamerica"), which became a wholly owned subsidiary of OneBeacon on June
1, 2001. Folksamerica's results for the full nine months ended September 30,
2001 are included in the White Mountains column.
BUSINESS SUBJECT TO THE RENEWAL RIGHTS AGREEMENT
The amounts in the "Business Subject to the Renewal Rights Agreement" column
represent the underwriting results recorded in OneBeacon's historical
financial statements of all business subject to the Renewal Rights Agreement
(i.e., personal and commercial lines underwriting results for all regions of
the United States except for New England, New York and New Jersey and
selected specialty businesses) for each applicable period. No adjustments to
net investment income as a result of float generated by Business Subject to
the Renewal Rights Agreement have been made herein because the Renewal Rights
Agreement does not include the transfer of assets and liabilities to Liberty
Mutual.
ONEBEACON LESS BUSINESS SUBJECT TO THE RENEWAL RIGHTS AGREEMENT
The "OneBeacon less Business Subject to the Renewal Rights Agreement" column is
the sum of the previous two columns. It has the effect of estimating what
OneBeacon's historical underwriting results would have been had OneBeacon not
written any of the business subject to the Renewal Rights Agreement.
ADJUSTMENTS FOR THE QUOTA SHARE
In the first twelve months, OneBeacon will quota share reinsure from Liberty
Mutual approximately 67% of the underwriting results of the business
generated by renewals underwritten by Liberty Mutual. Since these pro forma
financial statements present results for the Company as if the Renewal Rights
Agreement and the Acquisition had both occurred as of January 1, 2000 and
January 1, 2001, the amounts in the "Adjustments for the Quota Share" column
represent approximately 67% of the premiums, losses and loss adjustment
expenses and other underwriting expenses of the business generated by
renewals underwritten by Liberty Mutual.
2
OTHER ADJUSTMENTS
The amounts in the "Other Adjustments" column relate to three adjustments
which are necessary to reflect the results of OneBeacon as if the Renewal
Rights Agreement occurred at the beginning of the periods presented in the
pro forma income statements.
First, because the Renewal Rights Agreement covers all premiums written from
the Effective Date forward, an adjustment is necessary to add back the
results of premiums written prior to the Effective Date that would have been
earned after that date.
Second, since the "Business Subject to the Renewal Rights Agreement" column
represents all applicable income statement activity related to such
underwriting results, it includes losses and loss adjustment expenses which
relate to policies whose premiums were earned in periods prior to those
presented in the accompanying pro forma income statements. Accordingly, an
adjustment has been made to include prior year loss reserve strengthening in
the Company's results as these costs would not have been the responsibility
of Liberty Mutual.
Third, since the "Business Subject to the Renewal Rights Agreement" column
represents all applicable income statement activity related to such underwriting
results, it includes certain corporate overhead expenses which will not be
incurred by Liberty Mutual. Accordingly, an adjustment has been made to include
such corporate overhead expenses in the Company's results.
ONEBEACON AS ADJUSTED
The "OneBeacon As Adjusted" column is the sum of the previous three columns.
WHITE MOUNTAINS
The "White Mountains" column represents the Company's historical results as
reported in its Quarterly Report on Form 10-Q for the period ended September 30,
2001 and in its Annual Report on Form 10-K for the year ended December 31, 2000.
3
ADJUSTMENTS FOR THE ACQUISITION
The amounts in the "Adjustments for the Acquisition" column represent various
closing and related pre-closing transactions undertaken in the acquisition of
OneBeacon by the Company as described below.
DEBT TENDER AND DEBT ESCROW TRANSACTIONS
In connection with the Acquisition, the Company completed a tender offer and
consent solicitation for $96.3 million in outstanding medium-term notes (the
"Debt Tender") which facilitated the Acquisition by amending the indenture
governing the notes. Pursuant to the Debt Tender, the Company repurchased and
retired $90.9 million of its medium-term notes and subsequently prepaid, in the
form of a fully-funded irrevocable escrow arrangement (the "Debt Escrow"), the
balance of the outstanding medium-term notes.
EQUITY FINANCING
On June 1, 2001, a small group of private investors purchased $437.6 million of
a newly-issued class of non-voting convertible preference shares of the Company
(the "Convertible Preference Shares"). The Convertible Preference Shares bore a
dividend of 1% per year and were automatically converted (at a conversion price
of approximately $200.00 per share) into 2,184,583 common shares upon approval
of the conversion by the Company's shareholders which occurred on August 23,
2001.
On June 1, 2001, Berkshire Hathaway, Inc. ("Berkshire") purchased from the
Company, for $75.0 million in cash, warrants (the "Warrants") to acquire
1,714,285 common shares at an exercise price of $175.00 per share. Warrants to
purchase 1,170,000 common shares (the "Series A Warrants") were immediately
exercisable and Warrants to purchase approximately 544,285 common shares (the
"Series B Warrants") became exercisable upon approval by shareholders which
occurred on August 23, 2001. The Warrants have a term of seven years from the
date of issuance, although the Company has the right to call the Warrants for
$60.0 million in cash commencing on the fourth anniversary of their issuance.
Since the Series B Warrants did not represent common equity to the Company until
shareholder approval was obtained on August 23, 2001, they constituted a
contingent put liability (similar in nature to a stock appreciation right) which
were carried at fair value through a periodic charge or credit to the income
statement for the period June 1, 2001 through August 23, 2001.
On June 1, 2001, Berkshire also purchased for $225.0 million, $300.0 million in
face value of cumulative non-voting preferred stock (the "Berkshire Preferred
Stock") of a subsidiary of the Company. The Berkshire Preferred Stock is
entitled to a dividend of no less than 2.35475% per quarter and is mandatorily
redeemable after seven years. The Berkshire Preferred Stock represents
subsidiary preferred stock which is considered to be minority interest in the
Company's consolidated financial statements.
On June 1, 2001, Zenith Insurance Company purchased $20.0 million in cumulative
non-voting preferred stock (the "Zenith Preferred Stock") of a subsidiary of the
Company. The Zenith Preferred Stock is entitled to a dividend of no less than
2.5% per quarter through June 30, 2007 and a dividend of no less than 3.5%
thereafter and is mandatorily redeemable after ten years. The Zenith Preferred
Stock represents subsidiary preferred stock which is considered to be minority
interest in the Company's consolidated financial statements.
4
BANK FINANCING
On June 1, 2001, a subsidiary of the Company borrowed $700.0 million in term
loans and $125.0 million in revolving loans (of a $175.0 million revolving loan
facility) from a banking syndicate arranged by Lehman Brothers Inc.
(collectively the "Lehman Facility"). The term loans are repayable in quarterly
installments with a final maturity on the sixth anniversary of the closing date.
The revolving loan facility is available on a revolving basis from the closing
date until the fifth anniversary of the closing. The loans are variable rate
instruments which are currently tied to a rate based on the three-month
eurodollar rate.
SIGNIFICANT REINSURANCE CONTRACTS
Immediately prior to the Acquisition, OneBeacon entered into reinsurance
agreements with National Indemnity Company (the "NICO Cover") and General Re
Corporation (the "GRC Cover") which provide OneBeacon with significant
reinsurance protections against unanticipated increases in recorded reserves for
insurance losses and loss adjustment expenses. The NICO Cover provides up to
$2.5 billion of protection against OneBeacon's asbestos, environmental and
certain other latent exposures. The GRC Cover provides for up to $400.0 million
in excess of loss reinsurance protection against adverse development on accident
year 2000 and prior losses.
SELLER NOTE
On June 1, 2001, the Company issued the Seller Note to CGNU. The Seller Note
has an 18 month term and bears interest at a rate equal to 50 basis points
over the rate on the Lehman Facility described above. The Seller Note may be
settled in cash, or at the Company's option, with common shares valued at
$245.00 per share. The Company has classified this obligation as debt since
management believes it has the ability to settle this obligation in a form
other than pursuant to the Note Purchase Option Agreement which governs the
Seller Note.
PRECLOSING TRANSACTIONS WITH CGNU
On June 1, 2001, OneBeacon repaid $1.1 billion in intercompany debt to CGNU with
proceeds from the sale of OneBeacon's life insurance and Canadian operations to
CGNU, the sale of certain other assets to CGNU and available cash. In addition,
CGNU made a $200.0 million cash contribution to OneBeacon immediately prior to
Acquisition.
5
UNAUDITED PRO FORMA FINANCIAL INFORMATION
The following unaudited pro forma condensed combined income statements of the
Company for the year ended December 31, 2000 and the nine months ended September
30, 2001 present results for the Company as if the Renewal Rights Agreement, the
Quota Share, the Other Adjustments and the Acquisition had occurred as of
January 1, 2000 and January 1, 2001, respectively.
The unaudited pro forma financial information is provided for informational
purposes only. The unaudited pro forma financial information does not purport to
represent what the Company's results of operations actually would have been had
the Renewal Rights Agreement, the Quota Share, the Other Adjustments and the
Acquisition had, in fact, occurred as of the dates indicated, or to project the
Company's results of operations for any future date or period. The pro forma
adjustments are based on available information and assumptions that the Company
currently believes are reasonable under the circumstances and that are
considered to be material to the overall pro forma presentation. The unaudited
pro forma financial information should be read in conjunction with the Company's
Annual Report on Form 10-K for the year ended December 31, 2000, the Company's
Quarterly Reports on Form 10-Q for the period ended March 31, 2001, June 30,
2001 and September 30, 2001 and the Company's Current Report on Form 8-K dated
June 1, 2001 (filed on June 25, 2001, which contains OneBeacon's audited
consolidated financial statements for the years ended December 31, 2000, 1999
and 1998) and the Company's Current Report on Form 8-K dated November 1, 2001
(which contains the Renewal Rights Agreement and related documents).
6
WHITE MOUNTAINS INSURANCE GROUP, LTD.
UNAUDITED PRO FORMA CONDENSED COMBINED INCOME STATEMENT
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2001
(IN MILLIONS OF DOLLARS, EXCEPT SHARE AND PER SHARE DATA)
OneBeacon less
Business Subject Business Subject to
to the Renewal the Renewal Rights
REVENUES OneBeacon [1] Rights Agreement Agreement
-------------- ------------------- ---------------------
Written insurance and reinsurance premiums $ 1,414.1 $ (1,148.2) A $ 265.9
Earned insurance and reinsurance premiums $ 1,698.8 $ (1,324.1) A $ 374.7
Net realized gains (losses) on investment
securities 492.4 - 492.4
Net investment income 376.0 - 376.0
Other revenues - - -
-------------- ------------------- ---------------------
TOTAL REVENUES 2,567.2 (1,324.1) 1,243.1
EXPENSES
Losses and loss adjustment expenses 1,765.9 (1,131.8) A 634.1
Other underwriting expenses 1,110.9 (502.3) A 608.6
Accretion of discounted loss reserves - - -
Interest expense 33.0 - 33.0
Share appreciation expense -
contingent warrants - - -
-------------- ------------------- ---------------------
TOTAL EXPENSES 2,909.8 (1,634.1) 1,275.7
-------------- ------------------- ---------------------
PRETAX EARNINGS (LOSS) (342.6) 310.0 (32.6)
Income tax benefit (provision) 72.6 (108.5) A (35.9)
Minority interest:
Accretion of subsidiary
preferred stock to face value - - -
Dividends on subsidiary
preferred stock - - -
-------------- ------------------- ---------------------
NET INCOME (LOSS) FROM CONTINUING
OPERATIONS (270.0) 201.5 (68.5)
Net income (loss) from
discontinued operations, after tax (18.3) - (18.3)
-------------- ------------------- ---------------------
NET INCOME (LOSS) BEFORE EXTRAORDINARY ITEM (288.3) 201.5 (86.8)
Excess of fair value of acquired net
assets over cost, C-F Insurance Company - - -
Early extinguishment of debt - - -
-------------- ------------------- ---------------------
NET INCOME (LOSS) $ (288.3) $ 201.5 $ (86.8)
============== =================== =====================
Dividends on preference shares - - -
-------------- ------------------- ---------------------
NET INCOME (LOSS) AVAILABLE TO COMMON SHAREHOLDERS $ (288.3) $ 201.5 $ (86.8)
============== =================== =====================
Average shares used in computing loss per share
Loss per common share:
Net loss from continuing operations
Net loss available to common shareholders
OneBeacon selected combined ratios - (Note T)
See accompanying Notes to the unaudited pro forma condensed combined
financial statements.
Adjustments
for the Other OneBeacon White
REVENUES Quota Share Adjustments as adjusted Mountains
---------------- ---------------- -------------- ---------------
Written insurance and reinsurance premiums $ 687.7 B $ - $ 953.6 $ 1,509.1
Earned insurance and reinsurance premiums $ 266.5 B $ 803.0 C $ 1,444.2 $ 1,616.4
Net realized gains (losses) on investment
securities - - 492.4 148.3
Net investment income - - 376.0 201.5
Other revenues - - - 80.0
---------------- ---------------- -------------- ---------------
TOTAL REVENUES 266.5 803.0 2,312.6 2,046.2
EXPENSES
Losses and loss adjustment expenses 225.5 B 685.9 C
6.2 D 1,551.7 1,515.9
Other underwriting expenses 93.3 B 289.0 C
41.1 D 1,032.0 590.0
Accretion of discounted loss reserves - - - 40.0
Interest expense - - 33.0 27.9
Share appreciation expense -
contingent warrants - - - 58.8
---------------- ---------------- -------------- ---------------
TOTAL EXPENSES 318.8 1,022.2 2,616.7 2,232.6
---------------- ---------------- -------------- ---------------
PRETAX EARNINGS (LOSS) (52.3) (219.2) (304.1) (186.4)
Income tax benefit (provision) 18.3 B 76.7 E 59.1 66.8
Minority interest:
Accretion of subsidiary
preferred stock to face value - - - (2.9)
Dividends on subsidiary
preferred stock - - - (10.0)
---------------- ---------------- -------------- ---------------
NET INCOME (LOSS) FROM CONTINUING
OPERATIONS (34.0) (142.5) (245.0) (132.5)
Net income (loss) from
discontinued operations, after tax - - (18.3) -
---------------- ---------------- -------------- ---------------
NET INCOME (LOSS) BEFORE EXTRAORDINARY ITEM (34.0) (142.5) (263.3) (132.5)
Excess of fair value of acquired net
assets over cost, C-F Insurance Company - - - 13.6
Early extinguishment of debt - - - (4.8)
---------------- ---------------- -------------- ---------------
NET INCOME (LOSS) $ (34.0) $ (142.5) $ (263.3) $ (123.7)
================ ================ ============== ===============
Dividends on preference shares - - - (0.3)
---------------- ---------------- -------------- ---------------
NET INCOME (LOSS) AVAILABLE TO COMMON SHAREHOLDERS $ (34.0) $ (142.5) $ (263.3) $ (124.0)
================ ================ ============== ===============
Average shares used in computing loss per share 6,184,551
Loss per common share:
Net loss from continuing operations $ (21.48)
Net loss available to common shareholders (20.05)
Less: OneBeacon White
for the four Mountains
months ended Adjustments for Pro Forma
REVENUES September 30, 2001 the Acquisition Combined
-------------------- --------------- ---------------
Written insurance and reinsurance premiums $ (1,165.5) $ - $ 1,297.2
Earned insurance and reinsurance premiums $ (1,302.1) $ - $ 1,758.5
Net realized gains (losses) on investment
securities (169.7) - 471.0
Net investment income (146.8) (7.6) K
(36.4) L
(63.4) M
(7.4) N 315.9
Other revenues - 40.6 Q 120.6
-------------------- --------------- ---------------
TOTAL REVENUES (1,618.6) (74.2) 2,666.0
EXPENSES
Losses and loss adjustment expenses
(1,232.7) - 1,834.9
Other underwriting expenses
(439.3) 5.8 R 1,188.5
Accretion of discounted loss reserves - 43.8 P 83.8
Interest expense - (2.1) F
28.8 H
(36.4) L
9.1 O 60.3
Share appreciation expense -
contingent warrants - - 58.8
-------------------- --------------- ---------------
TOTAL EXPENSES (1,672.0) 49.0 3,226.3
-------------------- --------------- ---------------
PRETAX EARNINGS (LOSS) 53.4 (123.2) (560.3)
Income tax benefit (provision) (19.9) 10.1 H
22.2 M
2.6 N
15.3 P
2.0 R 158.2
Minority interest:
Accretion of subsidiary
preferred stock to face value - (3.7) G (6.6)
Dividends on subsidiary
preferred stock - (11.9) G
(0.8) I (22.7)
-------------------- --------------- ---------------
NET INCOME (LOSS) FROM CONTINUING
OPERATIONS 33.5 (87.4) (431.4)
Net income (loss) from
discontinued operations, after tax - - (18.3)
-------------------- --------------- ---------------
NET INCOME (LOSS) BEFORE EXTRAORDINARY ITEM 33.5 (87.4) (449.7)
Excess of fair value of acquired net
assets over cost, C-F Insurance Company - - 13.6
Early extinguishment of debt - - (4.8)
-------------------- --------------- ---------------
NET INCOME (LOSS) $ 33.5 $ (87.4) $ (440.9)
==================== =============== ===============
Dividends on preference shares - (1.8) J (2.1)
-------------------- --------------- ---------------
NET INCOME (LOSS) AVAILABLE TO COMMON SHAREHOLDERS $ 33.5 $ (89.2) $ (443.0)
==================== =============== ===============
Average shares used in computing loss per share 6,184,551
Loss per common share:
Net loss from continuing operations $ (70.10)
Net loss available to common shareholders (71.63)
[1] OneBeacon actual results for the nine months ended September 30,2001
included certain adjustments related to the NICO Cover and the GRC Cover
which served to reduce premiums by $1,510.0 million and losses and loss
adjustment expenses by $1,037.8 million. See Notes M and N.
See the accompanying notes to the unaudited pro forma condensed combined
financial statements.
WHITE MOUNTAINS INSURANCE GROUP, LTD.
UNAUDITED PRO FORMA CONDENSED COMBINED INCOME STATEMENT
FOR THE YEAR ENDED DECEMBER 31, 2000
(IN MILLIONS OF DOLLARS, EXCEPT SHARE AND PER SHARE DATA)
OneBeacon less
Business Subject Business Subject to
to the Renewal the Renewal Rights
REVENUES OneBeacon Rights Agreement Agreement
----------------- ------------------ ---------------------
Written insurance and reinsurance premiums $ 4,294.1 $ (1,990.4) A $ 2,303.7
Earned insurance and reinsurance premiums $ 4,275.0 $ (2,012.0) A $ 2,263.0
Net realized gains (losses) on investment securities 732.8 - 732.8
Net investment income 504.9 - 504.9
Gains on sales of subsidiaries and other assets - - -
Other revenues - - -
----------------- ------------------ ---------------------
TOTAL REVENUES 5,512.7 (2,012.0) 3,500.7
EXPENSES
Losses and loss adjustment expenses 4,302.0 (2,105.2) A 2,196.8
Other underwriting expenses 1,426.2 (673.3) A 752.9
Accretion of discounted loss reserves - - -
Interest expense 71.5 - 71.5
Share appreciation expense - contingent warrants - - -
----------------- ------------------ ---------------------
TOTAL EXPENSES 5,799.7 (2,778.5) 3,021.2
----------------- ------------------ ---------------------
PRETAX EARNINGS (LOSS) (287.0) 766.5 479.5
Income tax benefit (provision) 83.3 (268.3) A (185.0)
Minority interest:
Accretion of subsidiary preferred stock to face value - - -
Dividends on subsidiary preferred stock - - -
----------------- ------------------ ---------------------
NET INCOME (LOSS) FROM CONTINUING OPERATIONS (203.7) 498.2 294.5
Net income (loss) from discontinued operations, after tax (61.2) - (61.2)
----------------- ------------------ ---------------------
NET INCOME (LOSS) BEFORE EXTRAORDINARY ITEM (264.9) 498.2 233.3
Early extinguishment of debt - - -
----------------- ------------------ ---------------------
NET INCOME (LOSS) $ (264.9) $ 498.2 $ 233.3
================= ================== =====================
Dividends on preference shares - - -
----------------- ------------------ ---------------------
NET INCOME (LOSS) AVAILABLE TO COMMON SHAREHOLDERS $ (264.9) $ 498.2 $ 233.3
================= ================== =====================
Earnings per Common Share (Note S):
Average shares used in computing basic earnings per share
Basic earnings (loss) per common share:
Net income (loss) from continuing operations
Net income (loss) available to common shareholders
Average shares used in computing diluted earnings per share
Diluted earnings (loss) per common share:
Net income (loss) from continuing operations
Net income (loss) available to common shareholders
OneBeacon selected combined ratios (See Note T)
Adjustments
for the Other OneBeacon
REVENUES Quota Share Adjustments as adjusted
---------------- ------------------- ---------------
Written insurance and reinsurance premiums $ 1,108.0 B $ - $ 3,411.7
Earned insurance and reinsurance premiums $ 562.4 B $ 975.1 C $ 3,800.5
Net realized gains (losses) on investment securities - - 732.8
Net investment income - - 504.9
Gains on sales of subsidiaries and other assets - - -
Other revenues - - -
---------------- ------------------- ---------------
TOTAL REVENUES 562.4 975.1 5,038.2
EXPENSES
Losses and loss adjustment expenses 477.4 B 1,212.4 C
11.9 D 3,898.5
Other underwriting expenses 180.1 B 305.0 C
44.2 D 1,282.2
Accretion of discounted loss reserves - - -
Interest expense - - 71.5
Share appreciation expense - contingent warrants - - -
---------------- ------------------- ---------------
TOTAL EXPENSES 657.5 1,573.5 5,252.2
---------------- ------------------- ---------------
PRETAX EARNINGS (LOSS) (95.1) (598.4) (214.0)
Income tax benefit (provision) 33.3 B 209.4 E 57.7
Minority interest:
Accretion of subsidiary preferred stock to face value - - -
Dividends on subsidiary preferred stock - - -
---------------- ------------------- ---------------
NET INCOME (LOSS) FROM CONTINUING OPERATIONS (61.8) (389.0) (156.3)
Net income (loss) from discontinued operations, after tax - - (61.2)
---------------- ------------------- ---------------
NET INCOME (LOSS) BEFORE EXTRAORDINARY ITEM (61.8) (389.0) (217.5)
Early extinguishment of debt - - -
---------------- ------------------- ---------------
NET INCOME (LOSS) $ (61.8) $ (389.0) $ (217.5)
================ =================== ===============
Dividends on preference shares - - -
---------------- ------------------- ---------------
NET INCOME (LOSS) AVAILABLE TO COMMON SHAREHOLDERS $ (61.8) $ (389.0) $ (217.5)
================ =================== ===============
Earnings per Common Share (Note S):
Average shares used in computing basic earnings per share
Basic earnings (loss) per common share:
Net income (loss) from continuing operations
Net income (loss) available to common shareholders
Average shares used in computing diluted earnings per share
Diluted earnings (loss) per common share:
Net income (loss) from continuing operations
Net income (loss) available to common shareholders
OneBeacon selected combined ratios (See Note T)
White
Mountains
White Adjustments for Pro Forma
REVENUES Mountains the Acquisition Combined
--------------- --------------- -----------------
Written insurance and reinsurance premiums $ 355.2 $ (1,413.8) M
(187.7) N $ 2,165.4
Earned insurance and reinsurance premiums $ 334.4 $ (1,413.8) M
(187.7) N $ 2,533.4
Net realized gains (losses) on investment securities (8.4) - 724.4
Net investment income 85.9 (20.0) K
(71.5) L
(76.0) M
(17.9) N 405.4
Gains on sales of subsidiaries and other assets 385.8 - 385.8
Other revenues 50.5 97.4 Q 147.9
--------------- --------------- -----------------
TOTAL REVENUES 848.2 (1,689.5) 4,196.9
EXPENSES
Losses and loss adjustment expenses
287.7 (1,156.4) M
(82.7) N 2,947.1
Other underwriting expenses
189.0 12.7 R 1,483.9
Accretion of discounted loss reserves - 105.0 P 105.0
Interest expense 16.1 (7.2) F
73.8 H
(71.5) L
24.7 O 107.4
Share appreciation expense - contingent warrants - 62.6 G 62.6
--------------- --------------- -----------------
TOTAL EXPENSES 492.8 (1,039.0) 4,706.0
--------------- --------------- -----------------
PRETAX EARNINGS (LOSS) 355.4 (650.5) (509.1)
Income tax benefit (provision) (42.5) 25.8 H
116.7 M
43.0 N
36.8 P
4.4 R 241.9
Minority interest:
Accretion of subsidiary preferred stock to face value - (10.7) G (10.7)
Dividends on subsidiary preferred stock - (28.3) G
(2.0) I (30.3)
--------------- --------------- -----------------
NET INCOME (LOSS) FROM CONTINUING OPERATIONS 312.9 (464.8) (308.2)
Net income (loss) from discontinued operations, after tax 95.0 - 33.8
--------------- --------------- -----------------
NET INCOME (LOSS) BEFORE EXTRAORDINARY ITEM 407.9 (464.8) (274.4)
Early extinguishment of debt - (4.8) F (4.8)
--------------- --------------- -----------------
NET INCOME (LOSS) $ 407.9 $ (469.6) $ (279.2)
=============== =============== =================
Dividends on preference shares - (4.4) J (4.4)
--------------- --------------- -----------------
NET INCOME (LOSS) AVAILABLE TO COMMON SHAREHOLDERS $ 407.9 $ (474.0) $ (283.6)
=============== =============== =================
Earnings per Common Share (Note S):
Average shares used in computing basic earnings per share 5,894,875 5,894,875
Basic earnings (loss) per common share:
Net income (loss) from continuing operations $ 53.08 $ (53.03)
Net income (loss) available to common shareholders 69.19 (48.11)
Average shares used in computing diluted earnings per share 5,920,625 5,920,625
Diluted earnings (loss) per common share:
Net income (loss) from continuing operations $ 52.84 $ (52.80)
Net income (loss) available to common shareholders 68.89 (47.90)
See the accompanying notes to the unaudited pro forma condensed combined
financial statements.
WHITE MOUNTAINS INSURANCE GROUP, LTD.
NOTES TO UNAUDITED PRO FORMA CONDENSED
COMBINED FINANCIAL STATEMENTS
ADJUSTMENTS FOR BUSINESS SUBJECT TO THE RENEWAL RIGHTS AGREEMENT
(A) Reductions in written premiums, earned premiums, losses and loss adjustment
expenses and other underwriting expenses of $1,148.2 MILLION, $1,324.1 MILLION,
$1,131.8 MILLION and $502.3 MILLION, respectively, recorded on the pro forma
income statement for the period ended September 30, 2001 and $1,990.4 MILLION,
$2,012.0 MILLION, $2,105.2 MILLION and $673.3 MILLION, respectively, recorded on
the pro forma income statement for the period ended December 31, 2000 represent
the underwriting results of all personal and commercial lines of business in all
regions of the United States excluding New England, New York and New Jersey.
Income tax provision of $108.5 MILLION and $268.3 MILLION recorded on the pro
forma income statements for the periods ended September 30, 2001 and December
31, 2000, respectively, related to the adjustments for the Renewal Rights
Agreement were recorded at the United States statutory rate of 35%.
ADJUSTMENTS FOR THE QUOTA SHARE
(B) OneBeacon will reinsure 67% of all premiums and loss and loss adjustment
expenses from renewal policies underwritten by Liberty Mutual under the Renewal
Rights Agreement during the first twelve months and 33% of all such premiums and
loss and loss adjustment expenses in the following twelve months. Additionally,
OneBeacon will pay Liberty Mutual a ceding commission equal to 67% of certain
underwriting expenses during the first twelve months of the Renewal Rights
Agreement and 33% of such underwriting expenses during the following twelve
months. Per the terms of the Renewal Rights Agreement, the ceding commission
paid by OneBeacon will not exceed 35% of the premiums subject to the Quota Share
in either twelve month period. Since the Renewal Rights Agreement has been
assumed to have been effective as of the first day in each of the pro forma
income statements presented herein, the Quota Share Reinsurance adjustments are
based on the first twelve months of the Quota Share (i.e., 67%).
Written premiums, earned premiums and losses and loss adjustment expenses of
$687.7 MILLION, $266.5 MILLION and $225.5 MILLION, respectively, recorded on the
pro forma income statement for the period ended September 30, 2001 and $1,108.0
MILLION, $562.4 MILLION and $477.4 MILLION, respectively, recorded on the pro
forma income statement for the period ended December 31, 2000 consist of 67% of
all written premiums, earned premiums and loss and loss adjustment expenses from
renewal policies subject to the Renewal Rights Agreement. Such adjustments were
recorded based on an estimate that approximately 39% of all renewal written
premiums for Business Subject to the Renewal Rights Agreement were earned during
the nine months ended September 30, 2001 and 51% of such renewal written
premiums were earned during the year ended December 31, 2000.
Other underwriting expenses of $93.3 MILLION and $180.1 MILLION recorded on the
pro forma income statements for the periods ended September 30, 2001 and
December 31, 2000, respectively, represent 67% of all acquisition expenses
attributable to renewal business subject to the Renewal Rights Agreement and an
estimate of all other expenses attributable to renewal business subject to the
Renewal Rights Agreement as specified in the Renewal Rights Agreement (e.g.,
certain employee salaries and benefit costs, regional office expenses, system
costs and other administrative expenses). The other underwriting expenses
adjustment also includes an estimate of certain indirect corporate overhead
charges incurred by Liberty Mutual related to the Renewal Rights Agreement
business for which Liberty Mutual can be reimbursed pursuant to the terms of the
Renewal Rights Agreement.
1
Income tax benefit of $18.3 MILLION and $33.3 MILLION recorded on the pro
forma income statements for the periods ended September 30, 2001 and December
31, 2000, respectively, related to the adjustments for the Renewal Rights
Agreement were recorded at the United States statutory rate of 35%.
OTHER ADJUSTMENTS
(C) Adjustments to earned premiums, losses and loss adjustment expenses and
other underwriting expenses of $803.0 MILLION, $685.9 MILLION and $289.0
MILLION, respectively, recorded on the pro forma income statement for the
period ended September 30, 2001 and $975.1 MILLION, $1,212.4 MILLION and
$305.0 MILLION, respectively, recorded on the pro forma income statement for
the period ended December 31, 2000 are to reflect the underwriting results
associated with the earning of the unearned premium related to the Business
Subject to the Renewal Rights Agreement on January 1, 2001 and January 1,
2000, respectively. Such adjustments were recorded based on an estimate that
approximately 39% of all written premiums for Business Subject to the Renewal
Rights Agreement were earned during the nine months ended September 30, 2001
and 51% of such written premiums were earned during the year ended December
31, 2000. The adjustments to loss and loss adjustment expenses also include
$7.3 million and $384.0 million of prior year loss reserve strengthening for
the periods ended September 30, 2001 and December 31, 2000, respectively.
(D) Adjustments to losses and loss adjustment expenses and other underwriting
expenses of $6.2 MILLION and $41.1 MILLION, respectively, recorded on the pro
forma income statement for the period ended September 30, 2001 and $11.9
MILLION and $44.2 MILLION, respectively, recorded on the pro forma income
statement for the period ended December 31, 2000 are to reflect certain
corporate overhead charges which have been included in the "Business Subject
to the Renewal Rights Agreement" adjustments but will not be charged to
Liberty Mutual.
(E) Income tax benefit of $76.7 MILLION and $209.4 MILLION recorded on the pro
forma income statements for the periods ended September 30, 2001 and December
31, 2000, respectively, related to the adjustments in Notes C and D were
recorded at the United States statutory rate of 35%.
ADJUSTMENTS FOR THE ACQUISITION
The pro forma Acquisition adjustments, as they relate to the unaudited pro forma
condensed combined statements of income, are described below. Due to the timing
of the Acquisition, the Company's actual results for the nine months ended
September 30, 2001 contained OneBeacon's actual results for the four months
ended September 30, 2001. As a result, the pro forma income statement
adjustments presented for the nine months ended September 30, 2001 related to
the Acquisition represent adjustments only for the period January 1, 2001 to May
31, 2001 unless otherwise noted.
(F) Pursuant to the Debt Tender, the Company repurchased and retired $90.9
million of $96.3 million in medium- term notes and subsequently prepaid, through
the Debt Escrow, the balance of its outstanding medium-term notes. A $4.8
MILLION extraordinary loss on early extinguishment of debt resulting from the
Debt Tender was recorded on the December 31, 2000 pro forma income statement and
on the actual September 30, 2001 income statement. The $2.1 MILLION and $7.2
MILLION reductions in interest expense presented on the pro forma income
statements for the periods ended September 30, 2001 and December 31, 2000,
respectively, represent interest expense on medium-term notes retired under the
Debt Tender.
The medium-term notes are an obligation of the Company, which is domiciled in
Bermuda. Accordingly, no Federal income taxes were recorded for these
adjustments.
2
(G) On June 1, 2001, White Mountains received a total of $300.0 million in cash
from Berkshire in full payment for the Berkshire Preferred Stock and the
Warrants. The total proceeds received were allocated to each instrument based on
their relative estimated fair values at the date of acquisition. As a result,
$145.2 million of such proceeds were allocated to the Berkshire Preferred Stock
and $154.8 million of such proceeds were allocated to the Warrants. Of the
amount initially allocated to the Warrants, a further allocation was made among
the Series A Warrants and the Series B Warrants of $105.7 million and $49.1
million, respectively, based on the relative number of Warrants in each series.
The estimated fair values attributed to the Warrants were determined using the
Black Scholes option pricing model.
Share appreciation expense relating to the Series B Warrants of $62.6 MILLION
recorded on the pro forma income statement for the period ended December 31,
2000 represents the excess of the estimated fair value at June 1, 2001 of the
Series B Warrants liability of $111.7 million over the purchase price allocation
to the Series B Warrants of $49.1 million. Prior to shareholder approval on
August 23, 2001, changes in the fair value of the liability related to the
Series B Warrants were reflected as share appreciation expense in the Company's
income statement. The Company recorded $58.8 million of share appreciation
expense related to the Series B Warrants in its September 30, 2001 income
statement; accordingly, no pro forma adjustment is necessary for the nine months
ended September 30, 2001. Upon shareholder approval, the estimated fair value of
the Series B Warrants liability of $107.9 million was reclassified to
shareholders' equity.
Berkshire Preferred Stock dividends of $11.9 MILLION and $28.3 MILLION recorded
for the periods ended September 30, 2001 and December 31, 2000, respectively,
represent regular dividends on the Berkshire Preferred Stock. Accretion of
subsidiary preferred stock to face value of $3.7 MILLION and $10.7 MILLION
recorded for the periods ended September 30, 2001 and December 31, 2000,
respectively, represent accretion on the Berkshire Preferred Stock which is
required to transition the Berkshire Preferred Stock's recorded value (initially
$145.2 million) to its face value of $300.0 million over the instrument's
seven-year term. The accretion was determined using the interest method of
amortization.
The Warrants are an obligation of the Company which is domiciled in Bermuda.
Accordingly, no Federal income taxes were recorded for the Warrants.
(H) On June 1, 2001, Fund American Companies, Inc., a wholly owned subsidiary
of the Company borrowed $825.0 million pursuant to the Lehman Facility. The
increases in interest expense of $28.8 MILLION and $73.8 MILLION for the
periods ended September 30, 2001 and December 31, 2000, respectively,
represent interest on the Lehman Facility. The Lehman Facility is an
obligation of Fund American which is domiciled in the United States. As a
result, a Federal income tax benefit of $10.1 MILLION and $25.8 MILLION, for
the periods ended September 30, 2001 and December 31, 2000, respectively,
were recorded for these adjustments.
(I) On June 1, 2001, a subsidiary of the Company received a total of $20.0
million in cash from Zenith Insurance Company in full payment for the Zenith
Preferred Stock. Zenith Preferred Stock dividends of $.8 MILLION and $2.0
MILLION, recorded for the periods ended September 30, 2001 and December 31,
2000, respectively, represent regular dividends on the Zenith Preferred Stock.
(J) On June 1, 2001, the Company received a total of $437.6 million in cash
from a small group of private investors in full payment for the Convertible
Preference Shares. Convertible Preference Share dividends of $1.8 MILLION and
$4.4 MILLION, recorded for the periods ended September 30, 2001 and December
31, 2000, respectively, represent regular dividends on Convertible Preference
Shares which assumes that shareholder approval did not occur during such
periods.
3
(K) The Company utilized $364.0 million of its cash on hand to fund the
Acquisition, the Debt Tender, the Debt Escrow and related expenses. The Company
estimates that it earned $7.6 MILLION and $20.0 MILLION, for the periods ended
September 30, 2001 and December 31, 2000, respectively, on such balances which
were held in the form of short-term investments.
Cash on hand used to fund the Acquisition was previously held at a subsidiary of
the Company which is domiciled in Barbados. As a result, no Federal income taxes
were recorded for this adjustment.
(L) The $36.4 MILLION and $71.5 MILLION reductions in net investment income and
interest expense recorded on the pro forma income statements for the periods
ended September 30, 2001 and December 31, 2000, respectively, resulted from the
repayment of the $1.1 billion CGNU intercompany note. The yield of 6.5% on the
CGNU intercompany note approximated OneBeacon's historical pre-tax yield on its
fixed maturity portfolio during the periods.
(M) Effective June 1, 2001, in accordance with a provision in the OneBeacon
purchase and sale agreement, CGNU caused OneBeacon to purchase the NICO Cover
for total consideration of $1,322.3 million. The NICO Cover, which was
contingent on, and occurred contemporaneously with the Acquisition, qualifies
for prospective reinsurance accounting treatment under the Emerging Issues Task
Force Technical Matter Document No. D-54 ("EITF Topic D- 54") which
characterizes the protection as an indemnification by the seller for increases
in the liabilities for losses and loss adjustment expenses that existed at the
acquisition date.
The NICO Cover had an inception date of January 1, 2000 but was not consummated
until June 1, 2001. During the intervening period, the base transaction premium
was adjusted for losses and loss adjustment expenses paid, reinsurance
recoverable claims received, salvage and subrogation recoveries and an interest
charge due to NICO, which was based on the average adjusted base transaction
premium. As a result, ceded premiums of $1,413.8 MILLION and ceded losses and
loss adjustment expenses of $1,156.4 MILLION were recorded in the pro forma
income statement for the period ended December 31, 2000. Ceded premiums of
$1,322.3 million and ceded losses and loss adjustment expenses of $955.1 million
were recorded in the income statement for the period ended September 30, 2001.
OneBeacon estimates that it earned $63.4 MILLION and $76.0 MILLION for the
periods ended September 30, 2001 and December 31, 2000, respectively, on the
cash used to pay NICO based on OneBeacon's historical pre-tax yield on its fixed
maturity portfolio of approximately 6.5%. A Federal income tax benefit of $22.2
MILLION and $116.7 MILLION, for the periods ended September 30, 2001 and
December 31, 2000, respectively, was recorded as a result of these adjustments.
(N) Effective June 1, 2001, in accordance with a provision in the OneBeacon
purchase and sale agreement, CGNU caused OneBeacon to purchase the GRC Cover for
total consideration of $275.0 million in cash. The GRC Cover, which was
contingent on, and occurred contemporaneously with the Acquisition, qualifies
for prospective reinsurance accounting treatment under the EITF Topic D-54 which
characterizes the protection as an indemnification by the seller for increases
in the liabilities for losses and loss adjustment expenses that existed at the
acquisition date.
Ceded premiums of $187.7 MILLION and ceded losses and loss adjustment expenses
of $82.7 MILLION were recorded on the December 31, 2000 pro forma income
statement and the actual September 30, 2001 income statement in connection with
the GRC Cover. OneBeacon estimates that it earned $7.4 MILLION and $17.9 MILLION
for the periods ended September 30, 2001 and December 31, 2000, respectively, on
the cash used to pay GRC which was held in the form of fixed income investments.
As a result, a Federal income tax benefit of $2.6 MILLION and $43.0 MILLION, for
the periods ended September 30, 2001 and December 31, 2000 respectively, was
recorded for these adjustments.
4
(O) On June 1, 2001, the Company issued the $260.0 million Seller Note to CGNU.
For the pro forma periods ended September 30, 2001 and December 31, 2000,
interest expense on the Seller Note was $9.1 MILLION and $24.7 MILLION,
respectively.
(P) In determining the purchase accounting related to the Acquisition, White
Mountains estimated the fair values of OneBeacon's loss and loss adjustment
expense reserves and related reinsurance recoverables based on the present value
of their expected cash flows with consideration for the uncertainty inherent in
the both the timing of, and the ultimate amount of, future payments for losses
and receipts of amounts recoverable from reinsurers. As a result, net loss and
loss adjustment expense reserves were reduced by $300.0 million and are being
accreted through an income statement charge over the period that the claims are
expected to be settled.
Accretion of loss and loss adjustment expense reserves of $43.8 MILLION and
$105.0 MILLION recorded on the pro forma income statements for the periods ended
September 30, 2001 and December 31, 2000, respectively, represent the
amortization of net loss and loss adjustment expense reserves (which were
reduced to their estimated fair value in purchase accounting) to their nominal
value over the respective reporting period. The accretion expenses recorded
during these periods assumes that 35% of the loss and loss adjustment expense
reserves acquired by White Mountains pursuant to the Acquisition are recognized
during the first year on an annualized basis. As a result, a Federal income tax
benefit of $15.3 MILLION and $36.8 MILLION, for the periods ended September 30,
2001 and December 31, 2000, respectively, were recorded for this adjustment.
(Q) The excess of the estimated fair value of net assets (after the reduction of
the carrying amounts of noncurrent, non-financial assets acquired) over the
purchase price related to the Acquisition of $682.0 million has been recorded as
a deferred credit in accordance with APB 16. The deferred credit is being
amortized systematically to income over the estimated period of benefit of seven
years. As a result, deferred credit amortization of $40.6 MILLION and $97.4
MILLION has been recorded on the pro forma income statements for the periods
ended September 30, 2001 and December 31, 2000, respectively.
In June 2001 the FASB issued SFAS No. 142 entitled "Goodwill and Other
Intangible Assets". SFAS No. 142 sets forth new standards concerning accounting
for deferred credits, goodwill and other intangible assets arising from business
combinations. With respect to deferred credits, SFAS No. 142 calls for the
immediate recognition of all existing and prospective deferred credits through
the income statement as an extraordinary gain. With respect to goodwill, SFAS
No. 142 calls for the amortization of existing and prospective goodwill only
when the asset acquired is deemed to have been impaired rather than
systematically over a perceived period of benefit. SFAS No. 142 is effective for
interim and annual periods beginning after December 15, 2001. As a result, White
Mountains will recognize its entire unamortized deferred credit balance on
January 1, 2002 as an extraordinary gain and will no longer ratably amortize its
unamortized goodwill balance at that date.
(R) On June 1, 2001, White Mountains awarded 73,500 restricted shares to its key
employees pursuant to the Acquisition which will vest in June 2003. Compensation
expenses of $5.8 MILLION and $12.7 MILLION recorded on the pro forma income
statements for the periods ended September 30, 2001 and December 31, 2000,
respectively, represent restricted share awards deemed to have been earned by
recipients over the periods. As a result, a Federal income tax benefit of $2.0
MILLION and $4.4 MILLION, for the periods ended September 30, 2001 and December
31, 2000, respectively, were recorded for this adjustment.
EARNINGS PER SHARE
5
(S) In determining earnings (loss) per common share, earnings are reduced by
dividends on convertible preference shares. The basic earnings per common share
computation is determined using the weighted average number of common share
outstanding during the period. The diluted earnings per common share computation
is determined using the weighted average number of common shares and dilutive
common share equivalents outstanding during the period. The pro forma income
statements for the periods ended September 30, 2001 and December 31, 2000 each
present a net loss to common shareholders. Accordingly, no additional common
share equivalents resulting from the Acquisition have been included in the pro
forma earnings per share computations as the inclusion of such potential shares
would be anti-dilutive.
6
(T) OneBeacon's GAAP combined ratios for the pro forma periods ended September
30, 2001 and December 31, 2000 are as follows:
OneBeacon
less
Business Business
Subject to Subject to the
GAAP Combined Ratios the Renewal Renewal
for the period ended Rights Rights OneBeacon as
September 30, 2001: (1) OneBeacon Agreement Agreement Quota Share adjusted
------------- ------------- --------------- -------------- ---------------
Current year loss and LAE
ratio (exc. Sept. 11th) 82.6% 85.0% 81.0% 84.6% 82.4%
Other underwriting
expense ratios 36.6% 37.9% 35.5% 35.0% 37.1%
------------- ------------- --------------- -------------- ---------------
Current year GAAP combined
ratios: 119.2% 122.9% 116.5% 119.6% 119.5%
============= ============= =============== ============== ===============
Prior year losses 0.5% 0.5% 0.5% -- 0.6%
Sept 11th losses 3.5% -- 6.1% -- 3.8%
Total GAAP combined
ratios 123.2% 123.4% 123.1% 119.6% 123.9%
============= ============= =============== ============== ===============
OneBeacon
less
Business Business
Subject to Subject to the
GAAP Combined Ratios the Renewal Renewal
for the period ended Rights Rights OneBeacon as
December 31, 2000: OneBeacon Agreement Agreement Quota Share adjusted
------------- ------------- --------------- -------------- ---------------
Current year loss and LAE 81.5% 85.5% 78.0% 84.9% 81.1%
ratio
Other underwriting
expense ratios 33.4% 33.5% 33.2% 32.0% 33.7%
------------- ------------- --------------- -------------- ---------------
Current year GAAP combined
ratios: 114.9% 119.0% 111.2% 116.9% 114.8%
============= ============= =============== ============== ===============
Prior year losses 19.1% 19.1% 19.1% -- 21.5%
------------- ------------- --------------- -------------- ---------------
Total GAAP combined
ratios 134.0% 138.1% 130.3% 116.9% 136.3%
============= ============= =============== ============== ===============
(1) Combined ratios for the period ended September 30, 2001 exclude the impact
of the NICO Cover and the GenRe Cover as they are non-recurring items
related to the Acquisition.
7
