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 05001-7066
(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 Insurance Group LLC 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 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 the 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 were previously filed as Exhibit 99(i) to Form 8-K
dated November 1, 2001 (filed January 14, 2002).
The unaudited pro forma condensed combined income statement of the Registrant
for the year ended December 31, 2001 is enclosed herein as Exhibit 99(j),
which is incorporated by reference in its entirety.
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS.
(b) PRO FORMA FINANCIAL INFORMATION.
The unaudited pro forma condensed combined income statement of
the Registrant for the year ended December 31, 2001, and the
notes thereto, are enclosed herein as Exhibit 99(j).
(c) Exhibits. The following exhibits are filed herewith:
EXHIBIT NO. DESCRIPTION
99 (j) The unaudited pro forma condensed combined income
statement of the Registrant for the year ended
December 31, 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: May 15, 2002 By: /s/ J. Brian Palmer
--------------------------------------
Chief Accounting Officer
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 November 1, 2001 (the "Effective Date"), OneBeacon transferred its regional
agency business, agents and operations in 42 states and the District of Columbia
to Liberty Mutual Insurance Group ("Liberty Mutual") pursuant to a renewal
rights agreement (the "Renewal Rights Agreement"). This transfer amounted to
approximately $1.5 billion in written premiums, or approximately 45% of
OneBeacon's total business. Over the next two years, the underwriting results
and cash flows of the renewed policies will be shared between OneBeacon and
Liberty Mutual. A reinsurance agreement pro-rates results so that OneBeacon
assumes approximately two-thirds and one-third of the underwriting results
corresponding to renewals in the first and second years, respectively. For
purposes of the Renewal Rights Agreement, renewals constitute historic OneBeacon
policies that are renewed by Liberty Mutual for those OneBeacon customers in
existence at November 1, 2001. New business written by Liberty Mutual is
excluded from the Quota Share. OneBeacon is now focused on becoming a profitable
independent agency property and casualty insurance company in the Northeast and
for select specialty business on a national basis.
The following unaudited pro forma condensed combined income statement of the
Company for the year ended December 31, 2001 present results for the Company
as if each of the activities described herein had both occurred as of January
1, 2001. The Acquisition was fully reflected in the Company's March 31, 2002
balance sheet and first quarter 2002 income statement 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 March 31, 2002 and first quarter 2002 income statement 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
year ended December 31, 2001. In order to achieve this desired presentation,
the December 31, 2001 pro forma condensed combined income statement begins
with OneBeacon's results for the full twelve months ended December 31, 2001
despite the fact that the Company's income statement for the year ended
December 31, 2001 also includes OneBeacon's actual results post-acquisition.
Therefore, a subsequent column entitled "Less: OneBeacon for the seven months
ended December 31, 2001" is necessary to avoid double counting said
operations.
The consolidated financial statements of OneBeacon for the first five of the
twelve months ended December 31, 2001 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
seven months ended December 31, 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 year ended December 31, 2001 is as follows:
ONEBEACON
The amounts presented in the "OneBeacon" column represent OneBeacon's historical
stand-alone results . As such, OneBeacon's results for the year ended December
31, 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 year ended
December 31, 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, New Jersey and selected
specialty business). 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 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 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, 2001, the amounts in the
"Adjustments for the Quota Share" column represent 67% of the premiums, losses
and loss adjustment expenses and other underwriting expenses of the business
generated by renewals underwritten by Liberty Mutual.
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
period presented in the pro forma income statement.
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 Annual Report on Form 10-K for the year ended December 31, 2001.
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.
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.
UNAUDITED PRO FORMA FINANCIAL INFORMATION
The following unaudited pro forma condensed combined income statement of the
Company for the year ended December 31, 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, 2001.
The unaudited pro forma financial information is provided for informational
purposes only. The unaudited pro forma financial information does not purport to
represent what 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, 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).
WHITE MOUNTAINS INSURANCE GROUP, LTD.
UNAUDITED PRO FORMA CONDENSED COMBINED INCOME STATEMENT
FOR THE YEAR ENDED DECEMBER 31, 2001
(IN MILLIONS OF DOLLARS, EXCEPT SHARE AND PER SHARE DATA)
OneBeacon less
Business Subject Business Subject to Adjustments
to the Renewal the Renewal Rights for the
REVENUES OneBeacon [1] Rights Agreement Agreement Quota Share
-------------- ------------------ -------------------- ------------
Written insurance and reinsurance premiums $ 2,126.8 $ (1,370.7) A $ 756.1 $ 868.9 B
Earned insurance and reinsurance premiums $ 2,605.0 $ (1,693.3) A $ 911.7 $ 451.6 B
Net realized gains (losses) on investment
securities 505.8 - 505.8 -
Net investment income 457.6 - 457.6 -
Other revenues - - - -
-------------- ------------------ -------------------- ------------
TOTAL REVENUES 3,568.4 (1,693.3) 1,875.1 451.6
EXPENSES
Losses and loss adjustment expenses 2,606.9 (1,478.2) A 1,128.7 385.9 B
Other underwriting expenses 1,483.4 (661.8) A 821.6 158.1 B
Accretion of discounted loss reserves - - - -
Interest expense 33.0 - 33.0 -
Share appreciation expense - contingent
warrants - - - -
-------------- ------------------ -------------------- ------------
TOTAL EXPENSES 4,123.3 (2,140.0) 1,983.3 544.0
-------------- ------------------ -------------------- ------------
PRETAX EARNINGS (LOSS) (554.9) 446.7 (108.2) (92.4)
Income tax benefit (provision) 165.7 (156.3) A 9.4 32.3 B
Minority interest:
Accretion of subsidiary preferred stock
to face value - - - -
Dividends on subsidiary preferred stock - - - -
-------------- ------------------ -------------------- ------------
NET INCOME (LOSS) FROM CONTINUING OPERATIONS (389.2) 290.4 (98.8) (60.1)
Net income (loss) from discontinued
operations, after tax (18.3) - (18.3) -
-------------- ------------------ -------------------- ------------
NET INCOME (LOSS) BEFORE EXTRAORDINARY ITEM (407.5) 290.4 (117.1) (60.1)
Excess of fair value of acquired net
assets over cost - - - -
Early extinguishment of debt - - - -
-------------- ------------------ -------------------- ------------
NET INCOME (LOSS) $ (407.5) $ 290.4 $ (117.1) $ (60.1)
============== ================== ==================== ============
COMPUTATION OF NET INCOME (LOSS) AVAILABLE TO
COMMON SHAREHOLDERS
Redemption value adjustment - Convertible
Preference Shares - - - -
Dividends on Convertible Preference Shares - - - -
-------------- ------------------ -------------------- ------------
NET INCOME (LOSS) AVAILABLE TO COMMON
SHAREHOLDERS $ (407.5) $ 290.4 $ (117.1) $ (60.1)
============== ================== ==================== ============
Average shares used in computing loss per share
Loss per common share (Note S):
Net loss from continuing operations
Net loss available to common shareholders
Less: OneBeacon
for the seven
Other OneBeacon White months ended
REVENUES Adjustments as adjusted Mountains December 31, 2001
------------- ------------ ---------- ------------------
Written insurance and reinsurance premiums $ - $ 1,625.0 $ 2,365.4 $ (1,878.2)
Earned insurance and reinsurance premiums $ 964.2 C $ 2,327.5 $ 2,656.1 $ (2,208.2)
Net realized gains (losses) on investment
securities - 505.8 173.1 (183.1)
Net investment income - 457.6 284.5 (228.4)
Other revenues - - 119.9 -
------------- ------------ ---------- ------------------
TOTAL REVENUES 964.2 3,290.9 3,233.6 (2,619.7)
EXPENSES
Losses and loss adjustment expenses 850.5 C
7.6 D 2,372.7 2,493.9 (2,073.8)
Other underwriting expenses 364.0 C
51.0 D 1,394.7 1,001.4 (811.7)
Accretion of discounted loss reserves - - 56.0 -
Interest expense - 33.0 45.7
-
Share appreciation expense - contingent
warrants - - 58.8 -
------------- ------------ ---------- ------------------
TOTAL EXPENSES 1,273.1 3,800.4 3,655.8 (2,885.5)
------------- ------------ ---------- ------------------
PRETAX EARNINGS (LOSS) (308.9) (509.5) (422.2) 265.8
Income tax benefit (provision) 108.1 E 149.8 174.3 (113.0)
Minority interest:
Accretion of subsidiary preferred stock
to face value - - (5.1) -
Dividends on subsidiary preferred stock - - (18.1) -
------------- ------------ ---------- ------------------
NET INCOME (LOSS) FROM CONTINUING OPERATIONS (200.8) (359.7) (271.1) 152.8
Net income (loss) from discontinued
operations, after tax - (18.3) - -
------------- ------------ ---------- ------------------
NET INCOME (LOSS) BEFORE EXTRAORDINARY ITEM (200.8) (378.0) (271.1) 152.8
Excess of fair value of acquired net
assets over cost - - 16.6 -
Early extinguishment of debt - - (4.8) -
------------- ------------ ---------- ------------------
NET INCOME (LOSS) $ (200.8) $ (378.0) $ (259.3) $ 152.8
============= ============ ========== ==================
COMPUTATION OF NET INCOME (LOSS) AVAILABLE TO
COMMON SHAREHOLDERS
Redemption value adjustment - Convertible
Preference Shares - - (305.1) -
Dividends on Convertible Preference Shares - - (0.3) -
------------- ------------ ---------- ------------------
NET INCOME (LOSS) AVAILABLE TO COMMON
SHAREHOLDERS $ (200.8) $ (378.0) $ (564.7) $ 152.8
============= ============ ========== ==================
Average shares used in computing loss per share 6,663,038
Loss per common share (Note S):
Net loss from continuing operations $ (86.52)
Net loss available to common shareholders (84.75)
White
Mountains
Adjustments for Pro Forma
REVENUES the Acquisition Combined
---------------- -----------
Written insurance and reinsurance premiums $ - $ 2,112.2
Earned insurance and reinsurance premiums $ - $ 2,775.4
Net realized gains (losses) on investment
securities - 495.8
Net investment income (7.6) K
(36.4) L
(63.4) M
(7.4) N 398.9
Other revenues 40.6 Q 160.5
----------- -----------
TOTAL REVENUES (74.2) 3,830.6
EXPENSES
Losses and loss adjustment expenses - 2,792.8
Other underwriting expenses
5.8 R 1,590.2
Accretion of discounted loss reserves 43.8 P 99.8
Interest expense (2.1) F
28.8 H
(36.4) L
9.1 O 78.1
Share appreciation expense - contingent
warrants - 58.8
----------- -----------
TOTAL EXPENSES 49.0 4,619.7
----------- -----------
PRETAX EARNINGS (LOSS) (123.2) (789.1)
Income tax benefit (provision) 10.1 H
22.2 M
2.6 N
15.3 P
2.0 R 263.3
Minority interest:
Accretion of subsidiary preferred stock
to face value (3.7) G (8.8)
Dividends on subsidiary preferred stock (11.9) G
(0.8) I (30.8)
----------- -----------
NET INCOME (LOSS) FROM CONTINUING OPERATIONS (87.4) (565.4)
Net income (loss) from discontinued
operations, after tax - (18.3)
----------- -----------
NET INCOME (LOSS) BEFORE EXTRAORDINARY ITEM (87.4) (583.7)
Excess of fair value of acquired net
assets over cost - 16.6
Early extinguishment of debt - (4.8)
----------- -----------
NET INCOME (LOSS) $ (87.4) $ (571.9)
=========== ===========
COMPUTATION OF NET INCOME (LOSS) AVAILABLE TO
COMMON SHAREHOLDERS
Redemption value adjustment - Convertible
Preference Shares - (305.1)
Dividends on Convertible Preference Shares (1.8) J (2.1)
----------- -----------
NET INCOME (LOSS) AVAILABLE TO COMMON
SHAREHOLDERS $ (89.2) $ (879.1)
=========== ===========
Average shares used in computing loss per share 6,663,038
Loss per common share (Note S):
Net loss from continuing operations $ (130.96)
Net loss available to common shareholders (131.94)
[1] OneBeacon actual results for the year ended December 31, 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.
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 $1,370.7 MILLION, $1,693.3 MILLION,
$1,478.2 MILLION and $661.8 MILLION, respectively, recorded on the pro forma
income statement for the year ended December 31, 2001 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 taxes of $156.3 MILLION recorded on the pro forma income statement for
the year ended December 31, 2001 relate to the adjustments for the Renewal
Rights Agreement and were recorded at the United States statutory rate of 35%.
ADJUSTMENTS FOR THE QUOTA SHARE
(B) OneBeacon will reinsure 67% of all premiums and losses 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
losses 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
$868.9 MILLION, $451.6 MILLION and $385.9 MILLION, respectively, recorded on the
pro forma income statement for the year ended December 31, 2001 consist of 67%
of all written premiums, earned premiums and losses and loss adjustment expenses
from renewal policies subject to the Renewal Rights Agreement. Such adjustments
were recorded based on an estimate that approximately 52% of all renewal written
premiums for Business Subject to the Renewal Rights Agreement were earned during
the year ended December 31, 2001.
Other underwriting expenses of $158.1 MILLION recorded on the pro forma income
statement for the year ended December 31, 2001 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.
Income taxes of $32.3 MILLION recorded on the pro forma income statement for the
periods ended December 31, 2001 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 $964.2 MILLION, $850.5 MILLION and $364.0
MILLION, respectively, recorded on the pro forma income statement for the year
ended December 31, 2001 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. Such adjustments were recorded
based on an estimate that approximately 52% of all written premiums for Business
Subject to the Renewal Rights Agreement were earned during the year ended
December 31, 2001. The adjustments to loss and loss adjustment expenses also
include $31.7 million of prior year loss reserve strengthening for the year
ended December 31, 2001.
(D) Adjustments to losses and loss adjustment expenses and other underwriting
expenses of $7.6 MILLION and $51.0 MILLION, respectively, recorded on the pro
forma income statement for the year ended December 31, 2001 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 taxes of $108.1 MILLION recorded on the pro forma income statement
for the year ended December 31, 2001 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 year ended December 31,
2001 contained OneBeacon's actual results for the seven months ended December
31, 2001. As a result, the pro forma income statement adjustments presented for
the year ended December 31, 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 actual December 31, 2001 income statement. The
$2.1 MILLION reduction in interest expense presented on the pro forma income
statement for the year ended December 31, 2001 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.
(G) Berkshire Preferred Stock dividends of $11.9 MILLION recorded for the year
ended December 31, 2001 represent regular dividends on the Berkshire Preferred
Stock. Accretion of subsidiary preferred
stock to face value of $3.7 MILLION recorded for the year ended December 31,
2001 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
increase in interest expense of $28.8 MILLION for the year ended represents
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 for the year ended December 31, 2001 was 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 recorded for
the year ended December 31, 2001 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
recorded for the year ended December 31, 2001 represent regular dividends on
Convertible Preference Shares which assumes that shareholder approval did not
occur during such periods.
(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 for the year ended December 31, 2001 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 reduction in net investment income and interest expense
recorded on the pro forma income statement for the year ended December 31, 2001
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
$1,322.3 million and ceded losses and loss adjustment expenses of $955.1
million were recorded in the income statement for the year ended December 31,
2001. OneBeacon estimates that it earned $63.4 MILLION for the year ended
December 31, 2001 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 for the year ended
December 31, 2001 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 actual December 31, 2001 income statement
in connection with the GRC Cover. OneBeacon estimates that it earned $7.4
MILLION for the year ended December 31, 2001 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 for the year ended December 31, 2001 was recorded
for these adjustments.
(O) On June 1, 2001, the Company issued the $260.0 million Seller Note to CGNU.
For the pro forma year ended December 31, 2001, interest expense on the Seller
Note was $9.1 MILLION.
(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 recorded
on the pro forma income statements for the year ended December 31, 2001
represents 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 33% 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 for the year ended December 31, 2001 was
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 has been
recorded on the pro forma income statement for
the year ended December 31, 2001.
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 recognized 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 recorded on the pro forma income statements for the
year ended December 31, 2001 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 for the year ended December 31, 2001 was recorded for
this adjustment.
EARNINGS PER SHARE
(S) In determining earnings (loss) per common share, earnings are reduced by
dividends and the redemption value adjustment on convertible preference shares.
The basic earnings per common share computation is determined using the weighted
average number of common shares 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 year ended December 31, 2001
presents 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.
