WHITE MOUNTAINS INSURANCE GROUP, LTD.
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION
INTRODUCTION
On June 1, 2001, White Mountains Insurance Group, Ltd. (the "Company",
collectively with its subsidiaries "White Mountains") acquired the U.S.
property and casualty operations (known as "CGU") of London-based CGNU plc.
("CGNU") for $2.1 billion, of which $260.0 million consisted of a convertible
note payable (the "Seller Note") with the balance paid in cash.
The pro forma adjustments presented herein have been segregated as being made
either in connection with the financing of the acquisition of CGU (the
"Financing") or in connection with the acquisition of CGU (the "Acquisition").
THE FINANCING
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 bear a dividend of 1% per year and will be 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. If
shareholder approval has not been obtained prior to March 31, 2003, each
holder of Convertible Preference Shares will thereafter have the right to
require the Company to repurchase the Convertible Preference Shares on an "as
converted" basis at the then-current price of a common share. Since the
market value of the Company's common shares at June 1, 2001 ($346.00 per
common share) exceeded the private investors' cost of the Convertible
Preference Shares (approximately $200.00 per common share), this instrument
is deemed to have a beneficial conversion feature. This determination
requires that the Convertible Preference Shares be marked-to-market, by an
adjustment to retained earnings until the date the Convertible Preference
Shares are converted to permanent common equity (which will occur upon
shareholder approval, if and when such approval is obtained).
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. Of the
total Warrants purchased by Berkshire, 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") will
become exercisable upon approval by shareholders. Shareholder approval will
be sought at the same time as approval of the conversion of Convertible
Preference Shares is sought. If shareholder approval has not been obtained by
March 31, 2003, Berkshire will thereafter have the right to require the
Company to repurchase the Series B Warrants at a price per Series B Warrant
equal to the then-current market price per common share less $175.00. 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 do not yet represent common equity to the Company, they constitute a
contingent put liability (similar in nature to a stock appreciation right)
which will be carried at fair value through a periodic charge or credit to
the income statement. The Series B Warrants will become permanent common
equity upon shareholder approval, if and when such approval is obtained.
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 2.35475% dividend 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 2.5%
dividend per quarter through June 30, 2007 and a 3.5% dividend 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.
THE ACQUISITION
SIGNIFICANT REINSURANCE CONTRACTS
Immediately prior to the Acquisition, CGU entered into reinsurance agreements
with National Indemnity Company (the "NICO Cover") and General Re Corporation
(the "GRC Cover") which provide CGU 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 CGU'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, White Mountains 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 White Mountains' revolving loan facility described
above. The Seller Note may be settled in cash, or at White Mountains' option,
with common shares valued at $245.00 per share. White Mountains 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, CGU repaid $1.1 billion in intercompany debt to CGNU with
proceeds from the sale of CGU'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 CGU immediately
prior to the Acquisition.
UNAUDITED PRO FORMA FINANCIAL INFORMATION
The following unaudited pro forma condensed combined income statements of
White Mountains for the year ended December 31, 2000 and the three-months
ended March 31, 2001 present results for White Mountains as if the
acquisition of CGU and certain transactions and adjustments related to the
acquisition had occurred as of January 1, 2000 and January 1, 2001,
respectively. The accompanying unaudited pro forma condensed combined balance
sheet of White Mountains as of March 31, 2001 presents White Mountains'
financial position as if the acquisition of CGU had occurred on March 31,
2001.
The Acquisition will be accounted for by the purchase method of accounting
and, therefore, the assets and liabilities of CGU will be recorded at their
fair values at June 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 White Mountains' financial
position or results of operations actually would have been had the
Acquisition in fact occurred as of the dates indicated, or to project White
Mountains' financial position or 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 White Mountains' Annual Report on Form 10-K for the year
ended December 31, 2000, White Mountains' Quarterly Report on Form 10-Q for
the period ended March 31, 2001, CGU's audited consolidated financial
statements for the years ended December 31, 2000, 1999 and 1998 which are
enclosed herein as Exhibit 99(w) and CGU's unaudited consolidated balance
sheet as of March 31, 2001 and CGU's unaudited income statements and
statements of cash flows for the three-month periods ended March 31, 2001 and
2000, which are enclosed herein as Exhibit 99(x).
WHITE MOUNTAINS INSURANCE GROUP, LTD.
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
MARCH 31, 2001
(in millions of dollars)
Pro Forma
White Adjustments for
Mountains CGU the Financing Notes
----------------- ------------------ ----------------- ------
ASSETS
Total investments and cash $ 2,076.1 $ 9,466.6 $ (103.3) A
300.0 B
825.0 C
20.0 D
437.6 E
Reinsurance recoverable on paid and unpaid losses 806.2 1,587.3
Federal income tax assets 118.4 261.9
Insurance and reinsurance balances receivable 103.0 1,294.5
Deferred acquisition costs 29.4 341.6
Net assets of discontinued operations - 508.0
Other assets 455.8 648.6 5.9 A
----------------- ------------------ -----------------
TOTAL ASSETS $ 3,588.9 $ 14,108.5 $ 1,485.2
================= ================== =================
LIABILITIES
Loss and loss adjustment expense reserves $ 1,549.2 $ 6,822.9
Funds held under insurance and reinsurance treaties 450.1 102.8
Unearned insurance and reinsurance premiums 192.9 1,926.0
Debt 96.0 1,103.1 $ (90.9) A
825.0 C
Deferred credits 83.5 -
Other liabilities 176.2 985.6 (1.7) A
111.7 B
----------------- ------------------ -----------------
TOTAL LIABILITIES 2,547.9 10,940.4 844.1
----------------- ------------------ -----------------
CONVERTIBLE PREFERENCE SHARES - - 755.8 E
MINORITY INTEREST - SUBSIDIARY PREFERRED STOCK - - 145.2 B
20.0 D
SHAREHOLDERS' EQUITY 1,041.0 3,168.1 (4.8) A
105.7 B
(62.6) B
(318.2) E
----------------- ------------------ -----------------
TOTAL SHAREHOLDERS' EQUITY 1,041.0 3,168.1 (279.9)
TOTAL LIABILITIES, CONVERTIBLE PREFERENCE SHARES,
MINORITY INTEREST AND SHAREHOLDERS' EQUITY $ 3,588.9 $ 14,108.5 $ 1,485.2
================= ================== =================
Book value per common and common equivalent share (Note M)
See the accompanying notes to the unaudited pro forma condensed combined
financial statements.
Pro Forma
Adjustments for Pro Forma
the Acquisition Notes Combined
----------------- ------- -----------------
ASSETS
Total investments and cash $ (463.5) G
(1,114.8) H
(275.0) I
(1,843.3) J
$ 9,325.4
Reinsurance recoverable on paid and unpaid losses 747.6 H
105.0 I
(352.1) J 2,894.0
Federal income tax assets 128.5 H
36.7 I
(65.5) J 480.0
Insurance and reinsurance balances receivable (42.0) J 1,355.5
Deferred acquisition costs 371.0
Net assets of discontinued operations (508.0) G -
Other assets (246.7) J
(9.6) J
(29.9) J 824.1
----------------- -----------------
TOTAL ASSETS $ (3,932.6) $ 15,250.0
================= =================
LIABILITIES
Loss and loss adjustment expense reserves $ (652.1) J
105.0 I $ 7,825.0
Funds held under insurance and reinsurance treaties 552.9
Unearned insurance and reinsurance premiums 2,118.9
Debt (1,100.0) G
260.0 J 1,093.2
Deferred credits 755.3 J 838.8
Other liabilities (71.5) G
(170.0) I
108.8 J 1,139.1
----------------- -----------------
TOTAL LIABILITIES (764.5) 13,567.9
----------------- -----------------
CONVERTIBLE PREFERENCE SHARES 755.8
MINORITY INTEREST - SUBSIDIARY PREFERRED STOCK
165.2
SHAREHOLDERS' EQUITY 200.0 G
(238.7) H
(68.3) I
(3,061.1) J 761.1
----------------- -----------------
TOTAL SHAREHOLDERS' EQUITY (3,168.1) 761.1
TOTAL LIABILITIES, CONVERTIBLE PREFERENCE SHARES,
MINORITY INTERESTY AND SHAREHOLDERS' EQUITY $ (3,932.6) $ 15,250.0
================= =================
Book value per common and common equivalent share (Note M)
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 THREE MONTHS ENDED MARCH 31, 2001
(in millions of dollars, except share and per share data)
Pro Forma
White Adjustments for
REVENUES Mountains CGU the Financing Notes
------------ ------------- ------------- --------
Earned insurance and reinsurance premiums $ 97.7 $ 1,043.1
Net realized gains on investment securities 21.4 402.2
Net investment income 24.0 123.9 $ (4.5) F
Other revenues 11.2 -
------------ ------------- -------------
TOTAL REVENUES 154.3 1,569.2 (4.5)
EXPENSES
Losses and loss adjustment expenses 90.2 814.3
Insurance and reinsurance acquisition expenses 23.0 263.9
General and administrative expenses 23.2 154.0
Accretion of discounted loss reserves - -
Interest expense 1.9 17.9 (1.8) A
16.8 C
Share appreciation expense - contingent warrants - - 62.6 B
------------ ------------- -------------
TOTAL EXPENSES 138.3 1,250.1 77.6
------------ ------------- -------------
PRETAX EARNINGS (LOSS) 16.0 319.1 (82.1)
Income tax benefit (provision) 1.1 (129.9) 5.9 C
Minority interest:
Accretion of subsidiary preferred stock to face value - - (2.4) B
Dividends on subsidiary preferred stock - - (7.1) B
(0.5) D
------------ ------------- -------------
NET INCOME (LOSS) FROM CONTINUING OPERATIONS 17.1 189.2 (86.2)
Net loss from discontinued operations, after tax - (16.1) -
------------ ------------- -------------
NET INCOME (LOSS) BEFORE EXTRAORDINARY ITEM 17.1 173.1 (86.2)
Early extinguishment of debt - - (4.8) A
------------ ------------- -------------
NET INCOME (LOSS) $ 17.1 $ 173.1 $ (91.0)
============ ============= =============
Dividends on preference shares - - (1.1) E
------------ ------------- -------------
NET INCOME (LOSS) AVAILABLE TO COMMON SHAREHOLDERS $ 17.1 $ 173.1 $ (92.1)
============ ============= =============
Earnings per common share (Note L)
See the accompanying notes to the unaudited pro forma condensed combined
financial statements.
Earnings per common share (Note L):
Average shares used in computing basic earnings per share 5,880,115
Basic earnings per common share:
Net income (loss) from continuing operations $ 2.91
Net income (loss) available to common shareholders 2.91
Average shares used in computing diluted earnings per share 5,931,337
Diluted earnings per common share:
Net income (loss) from continuing operations $ 2.88
Net income (loss) available to common shareholders 2.88
Pro Forma
Adjustments for Pro Forma
REVENUES the Acquisition Notes Combined
-------------- -------- ---------------
Earned insurance and reinsurance premiums $ (1,318.2) H
(187.7) I $ (365.1)
Net realized gains on investment securities 423.6
Net investment income (17.9) G
(18.5) H
(4.5) I 102.5
Other revenues 27.0 J 38.2
-------------- ---------------
TOTAL REVENUES (1,519.8) 199.2
EXPENSES
Losses and loss adjustment expenses (985.9) H
(82.7) I (164.1)
Insurance and reinsurance acquisition expenses 286.9
General and administrative expenses 3.2 K 180.4
Accretion of discounted loss reserves 22.5 J 22.5
Interest expense (17.9) G
5.7 J 22.6
Share appreciation expense - contingent warrants 62.6
-------------- ---------------
TOTAL EXPENSES (1,055.1) 410.9
-------------- ---------------
PRETAX EARNINGS (LOSS) (464.7) (211.7)
Income tax benefit (provision) 122.8 H
38.3 I
7.9 J
2.0 J
1.1 K 49.2
Minority interest:
Accretion of subsidiary preferred stock to face value (2.4)
Dividends on subsidiary preferred stock
(7.6)
-------------- ---------------
NET INCOME (LOSS) FROM CONTINUING OPERATIONS (292.6) (172.5)
Net loss from discontinued operations, after tax - (16.1)
-------------- ---------------
NET INCOME (LOSS) BEFORE EXTRAORDINARY ITEM (292.6) (188.6)
Early extinguishment of debt (4.8)
-------------- ---------------
NET INCOME (LOSS) $ (292.6) $ (193.4)
============== ===============
Dividends on preference shares - (1.1)
-------------- ---------------
NET INCOME (LOSS) AVAILABLE TO COMMON SHAREHOLDERS $ (292.6) $ (194.5)
============== ===============
See the accompanying notes to the unaudited pro forma condensed combined
financial statements.
Earnings per common share (Note L):
Average shares used in computing basic earnings per share 5,880,115
Basic earnings per common share:
Net income (loss) from continuing operations $ (29.52)
Net income (loss) available to common shareholders (33.08)
Average shares used in computing diluted earnings per share 5,931,337
Diluted earnings per common share:
Net income (loss) from continuing operations $ (29.27)
Net income (loss) available to common shareholders (32.79)
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)
Pro Forma
White Adjustments for
Mountains CGU the Financing Notes
----------------- ----------------- ----------------- --------
REVENUES
Earned insurance and reinsurance premiums $ 334.4 $ 4,275.0
Net realized gains (losses) on investment securities (8.4) 732.8
Net investment income 85.9 504.9 $ (20.0) F
Gains on sales of subsidiaries and other assets 385.8 -
Other revenues 50.5 -
----------------- ----------------- -----------------
TOTAL REVENUES 848.2 5,512.7 (20.0)
EXPENSES
Losses and loss adjustment expenses 287.7 4,302.0
Insurance and reinsurance acquisition expenses 101.1 1,030.5
General and administrative expenses 87.9 395.7
Accretion of discounted loss reserves - -
Interest expense 16.1 71.5 (7.2) A
73.8 C
Share appreciation expense - contingent warrants - - 62.6 B
----------------- ----------------- -----------------
TOTAL EXPENSES 492.8 5,799.7 129.2
----------------- ----------------- -----------------
PRETAX EARNINGS (LOSS) 355.4 (287.0) (149.2)
Income tax benefit (provision) (42.5) 83.3 25.8 C
Minority interest:
Accretion of subsidiary preferred stock to face value - - (10.7) B
Dividends on subsidiary preferred stock - - (28.3) B
(2.0) D
----------------- ----------------- -----------------
NET INCOME (LOSS) FROM CONTINUING OPERATIONS 312.9 (203.7) (164.4)
Net income (loss) from discontinued operations, after tax 95.0 (61.2) -
----------------- ----------------- -----------------
NET INCOME (LOSS) BEFORE EXTRAORDINARY ITEM 407.9 (264.9) (164.4)
Early extinguishment of debt - - (4.8) A
----------------- ----------------- -----------------
NET INCOME (LOSS) $ 407.9 $ (264.9) $ (169.2)
================= ================= =================
Dividends on preference shares - - (4.4) E
----------------- ----------------- -----------------
NET INCOME (LOSS) AVAILABLE TO COMMON SHAREHOLDERS $ 407.9 $ (264.9) $ (173.6)
================= ================= =================
Earnings per common share (Note L)
See the accompanying notes to the unaudited pro forma condensed combined
financial statements.
Average shares used in computing basic earnings per share 5,894,875
Basic earnings (loss) per common share:
Net income (loss) from continuing operations $ 53.08
Net income (loss) available to common shareholders 69.19
Average shares used in computing diluted earnings per share 5,920,625
Diluted earnings (loss) per common share:
Net income (loss) from continuing operations $ 52.84
Net income (loss) available to common shareholders 68.89
Pro Forma
Adjustments for Pro Forma
the Acquisition Notes Combined
----------------- ------- -----------------
REVENUES
Earned insurance and reinsurance premiums $ (1,413.8) H
(187.7) I $ 3,007.9
Net realized gains (losses) on investment securities 724.4
Net investment income (71.5) G
(76.0) H
(17.9) I 405.4
Gains on sales of subsidiaires and other assets 385.8
Other revenues 107.9 J 158.4
----------------- -----------------
TOTAL REVENUES (1,659.0) 4,681.9
EXPENSES
Losses and loss adjustment expenses (1,156.4) H
(82.7) I 3,350.6
Insurance and reinsurance acquisition expenses 1,131.6
General and administrative expenses 12.7 K 496.3
Accretion of discounted loss reserves 90.0 J 90.0
Interest expense (71.5) G
24.7 J 107.4
Share appreciation expense - contingent warrants 62.6
----------------- -----------------
TOTAL EXPENSES (1,183.2) 5,238.5
----------------- -----------------
PRETAX EARNINGS (LOSS) (475.8) (556.6)
Income tax benefit (provision) 116.7 H
43.0 I
31.5 J
8.6 J
4.4 K 270.8
Minority interest:
Accretion of subsidiary preferred stock to face value - (10.7)
Dividends on subsidiary preferred stock
(30.3)
----------------- -----------------
NET INCOME (LOSS) FROM CONTINUING OPERATIONS (271.6) (326.8)
Net income (loss) from discontinued operations, after tax - 33.8
----------------- -----------------
NET INCOME (LOSS) BEFORE EXTRAORDINARY ITEM (271.6) (293.0)
Early extinguishment of debt (4.8)
----------------- -----------------
NET INCOME (LOSS) $ (271.6) $ (297.8)
================= =================
Dividends on preference shares - (4.4)
----------------- -----------------
NET INCOME (LOSS) AVAILABLE TO COMMON SHAREHOLDERS $ (271.6) $ (302.2)
================= =================
See the accompanying notes to the unaudited pro forma condensed combined
financial statements.
Earnings per common share (Note L):
Average shares used in computing basic earnings per share 5,894,875
Basic earnings (loss) per common share:
Net income (loss) from continuing operations $ (56.18)
Net income (loss) available to common shareholders (51.26)
Average shares used in computing diluted earnings per share 5,920,625
Diluted earnings (loss) per common share:
Net income (loss) from continuing operations $ (55.94)
Net income (loss) available to common shareholders (51.04)
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 RELATING TO THE FINANCING
The pro forma Financing adjustments, as they relate to the unaudited pro
forma condensed combined balance sheet and statements of income, are
described below.
(A) Pursuant to the Debt Tender, the Company repurchased and retired the
majority of its medium-term notes and subsequently prepaid, through the Debt
Escrow, the balance of its outstanding medium-term notes. Total cash paid
pursuant to the Debt Tender and the Debt Escrow was $103.3 MILLION, which is
comprised of a payment of $95.4 million to retire $90.9 MILLION in net
principal amount of medium-term notes acquired under the Debt Tender, $5.9
MILLION in principal and interest prepaid under the Debt Escrow, $1.7 MILLION
in accrued interest, and $.3 million in expenses.
A $4.8 MILLION loss on early extinguishment of debt resulted from the Debt
Tender, which represented a $4.5 million premium paid pursuant to the Debt
Tender plus expenses of $.3 million. The $1.8 MILLION and $7.2 MILLION
reductions in interest expense presented on the pro forma income statements
for the periods ended March 31, 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. As a result, no Federal income tax benefit or provision was recorded
for these transactions.
(B) 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
$49.1 million and $105.7 MILLION, respectively, based on the relative number
of Warrants in each series. Since the Series B Warrants do not yet represent
equity to the Company, they have been classified as a liability recorded at
their estimated fair value which was determined to be $111.7 MILLION. 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 statements represents the excess of the
estimated fair value of the Series B Warrants of $111.7 million over the
purchase price allocation to the Series B Warrants of $49.1 million. This
treatment assumes that shareholder approval did not occur during such
periods. Upon shareholder approval, the estimated fair value of the Series B
Warrants recorded as a liability will be reclassed to shareholders' equity
($111.7 million as of the date of the Acquisition).
The Warrants are an obligation of the Company which is domiciled in Bermuda.
As a result, no Federal income tax benefit or provision was recorded for the
Warrants.
Berkshire Preferred Stock dividends of $7.1 MILLION and $28.3 MILLION
recorded for the periods ended March 31, 2001 and December 31, 2000,
respectively, represent regular dividends on the Berkshire Preferred Stock.
Accretion of subsidiary preferred stock to face value of $2.4 MILLION and
$10.7 MILLION recorded for the periods ended March 31, 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.
(C) On June 1, 2001, a subsidiary of the Company borrowed $825.0 MILLION
pursuant to the Lehman Facility. For the periods ended March 31, 2001 and
December 31, 2000, interest expense on the Lehman Facility was $16.8 MILLION and
$73.8 MILLION, respectively. The Lehman Facility is an obligation of a
subsidiary of the Company which is domiciled in the United States. As a result,
a Federal income tax benefit of $5.9 MILLION and $25.8 MILLION, for the periods
ended March 31, 2001 and December 31, 2000, respectively, were recorded for
these transactions.
(D) 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 $.5 MILLION and $2.0
MILLION, recorded for the periods ended March 31, 2001 and December 31, 2000,
respectively, represent regular dividends on the Zenith Preferred Stock.
(E) 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. Due to the beneficial conversion feature inherent in the
Convertible Preference Shares that existed on the date of purchase, the $318.2
MILLION difference between the $755.8 MILLION market value of the underlying
common shares at the date of purchase and the $437.6 million purchase price
represents a charge to retained earnings.
Convertible Preference Share dividends of $1.1 MILLION and $4.4 MILLION
recorded for the periods ended March 31, 2001 and December 31, 2000,
respectively, represent regular dividends on Convertible Preference Shares
which assumes that shareholder approval did not occur during such periods.
Upon shareholder approval, the estimated fair value of the Convertible
Preference Shares will be reclassed from "mezzanine" equity to shareholders'
equity ($755.8 million as of the date of the Acquisition).
(F) 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 $4.5 MILLION and $20.0 MILLION, for the
periods ended March 31, 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
tax benefit or provision was recorded for this transaction.
ADJUSTMENTS RELATING TO THE ACQUISITION
The pro forma Acquisition adjustments, as they relate to the unaudited pro
forma condensed combined balance sheet and statements of income, are
described below.
(G) CGU paid $463.5 MILLION of net cash to CGNU immediately prior to the
Acquisition which consisted of: (1) the repayment of $1,100.0 MILLION of
intercompany indebtedness plus $71.5 million of accrued interest thereon; (2)
the receipt of a $200.0 MILLION capital contribution; and (3) the receipt of
$508.0 MILLION in proceeds from the sale of its discontinued life insurance
and Canadian property and casualty operations.
The $17.9 MILLION and $71.5 MILLION reductions in net investment income and
interest expense recorded on the pro forma income statements for the periods
ended March 31, 2001 and December 31, 2000, respectively, resulted from the
repayment of the CGNU intercompany note. The yield of 6.5% on the CGNU
intercompany note approximated CGU's historical pre-tax yield on its fixed
maturity portfolio during the periods.
(H) Effective June 1, 2001, in accordance with a provision in the CGU
purchase and sale agreement, CGNU caused CGU to purchase the NICO Cover for
total consideration of $1,322.3 million. This was comprised of $1,114.8
MILLION in cash and an assignment of $207.5 million in reinsurance
recoverables related to covered claims. 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. Pursuant to the NICO Cover, a $747.6 MILLION
reinsurance recoverable was recorded which is represented by ceded loss and
loss adjustment expense reserves of $955.1 million less $207.5 million of
reinsurance recoverables assigned.
A $367.2 million pretax loss ($238.7 MILLION after tax) from the NICO Cover
resulted from recording ceded premiums of $1,322.3 million, less ceded loss
and loss adjustment expenses of $955.1 million. A Federal income tax benefit
of $128.5 MILLION is reflected as a deferred tax asset on the March 31, 2001
pro forma balance sheet. The net loss recorded on the NICO Cover of $238.7
million reflected on the March 31, 2001 pro forma balance sheet represents
the after tax excess of premiums paid to NICO over net ceded reserves.
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 $1,318.2
MILLION and $1,413.8 MILLION, and ceded losses and loss adjustment expenses
of $985.9 MILLION and $1,156.4 MILLION were recorded in the pro forma income
statements for the periods ended March 31, 2001 and December 31, 2000,
respectively. CGU estimates that it earned $18.5 MILLION and $76.0 MILLION
for the periods ended March 31, 2001 and December 31, 2000, respectively, on
the cash used to pay NICO based on CGU's historical pre-tax yield on its
fixed maturity portfolio of approximately 6.5%. A Federal income tax benefit
of $122.8 MILLION and $116.7 MILLION, for the periods ended March 31, 2001
and December 31, 2000, respectively, was recorded as a result of these
transactions.
(I) Effective June 1, 2001, in accordance with a provision in the CGU
purchase and sale agreement, CGNU caused CGU 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. In connection with the execution of the GRC
Cover, CGU commuted an existing reinsurance contract with an affiliated
reinsurer (the "Commutation"). Under the terms of the Commutation,
reinsurance recoverables of approximately $170.0 million were settled through
the reduction of an existing $170.0 MILLION intercompany payable to the
affiliate. Pursuant to the GRC Cover, CGU obtained $400.0 million of adverse
development coverage and ceded $170.0 million of loss reserves. Management
has estimated that approximately $105.0 MILLION of adverse loss reserves
development subject to the GRC Cover has occurred. Accordingly, this amount
has been recorded as an increase in loss and loss adjustment expense reserves
which is offset by a corresponding increase in reinsurance recoverable from
GRC.
A $105.0 million pretax loss ($68.3 MILLION after tax) from the GRC Cover
reflected on the March 31, 2001 pro forma balance sheet represents after tax
adverse loss development. A Federal income tax benefit of $36.7 MILLION is
reflected as a deferred tax asset on the March 31, 2001 pro forma balance
sheet.
Ceded premiums of $187.7 MILLION and ceded losses and loss adjustment
expenses of $82.7 MILLION were recorded on the March 31, 2001 and the
December 31, 2000 pro forma income statements in connection with the GRC
Cover. CGU estimates that it earned $4.5 MILLION and $17.9 MILLION for the
periods ended March 31, 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 $38.3 MILLION and $43.0 MILLION, for
the periods ended March 31, 2001 and December 31, 2000 respectively, was
recorded for these transactions.
(J) The Acquisition will be accounted for by the purchase method of
accounting in accordance with the treatment of a purchase business
combination under Accounting Principles Board Opinion ("APB") 16, "Business
Combinations." and, therefore, the assets and liabilities of CGU will be
recorded at their estimated fair values at June 1, 2001. The preliminary
adjustments to record the assets and liabilities of CGU to their estimated
fair values and to allocate the excess of such estimated fair values of the
net assets acquired over the purchase price follow. Such values were
determined using management's best estimate.
DETERMINATION OF PURCHASE PRICE (in millions)
Total purchase price paid in cash $ 1,811.9
Acquisition expenses incurred and paid from April 1, 2001 through closing 31.4
-----------------
Total cash paid 1,843.3
Seller Note issued to CGNU 260.0
Acquisition expenses incurred and paid through March 31, 2001 9.6
-----------------
Total purchase price $ $2,112.9
=================
ALLOCATION OF PURCHASE PRICE
Net book value of CGU at March 31, 2001 $ 3,168.1 1
Total purchase price (2,112.9)
Adjustments to net book value described in notes (G), (H) and (I) (107.0) 1
ADJUSTMENTS TO REFLECT THE ESTIMATED FAIR VALUE OF ASSETS AND LIABILITIES ASSUMED:
Loss and loss adjustment expense reserves 652.1
Reinsurance recoverable (352.1)
Insurance balances receivable (42.0)
Amounts recorded in other assets:
Employee benefit plans (29.9)
Miscellaneous other (.2) 2
Amounts recorded in other liabilities:
Recognition of liabilities in connection with the Acquisition (185.3) 3
Employee benefit plans (55.3) 3
Reclassification of current tax payable to deferred taxes 145.3 3
Miscellaneous other (13.5) 3
ADJUSTMENTS TO REDUCE THE CARRYING VALUE OF NON-CURRENT, NON-FINANCIAL ASSETS:
Amounts recorded in other assets:
Property, plant and equipment (187.0) 2
Miscellaneous other (14.8) 2
Goodwill and intangible assets (44.7) 2
Net Federal deferred and current taxes relating to purchase accounting adjustments (65.5)
-----------------
RESULTING DEFERRED CREDIT $ 755.3
===================
1 The sum of these items equals the $3,061.1 MILLION elimination of CGU's
shareholders' equity on the unaudited pro forma condensed combined balance
sheet.
2 The sum of these items equals the $246.7 MILLION adjustment to other assets
on the unaudited pro forma condensed combined balance sheet.
3 The sum of these items equals the $108.8 MILLION adjustment to other
liabilities on the unaudited pro forma condensed combined balance sheet.
DETERMINATION OF PURCHASE PRICE
SELLER NOTE. On June 1, 2001, the Company issued the $260.0 MILLION Seller
Note to CGNU. For the pro forma periods ended March 31, 2001 and December 31,
2000, interest expense on the Seller Note was $5.7 MILLION and $24.7 MILLION,
respectively. The Seller Note is an obligation of a subsidiary of the Company
which is domiciled in the United States. As a result, a Federal income tax
benefit of $2.0 MILLION and $8.6 MILLION, for the pro forma periods ended
March 31, 2001 and December 31, 2000, respectively, was recorded for this
transaction.
ALLOCATION OF PURCHASE PRICE
ADJUSTMENTS TO REFLECT THE ESTIMATED FAIR VALUE OF ASSETS AND LIABILITIES
ASSUMED:
The following pro forma purchase accounting adjustments were undertaken to
reflect CGU's assets and liabilities purchased by the Company at their
estimated fair values.
LOSS AND LOSS ADJUSTMENT EXPENSE RESERVES AND REINSURANCE RECOVERABLES. The
estimated fair values of CGU's loss and loss adjustment expense reserves and
related reinsurance recoverables were 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. In estimating the fair
value of such items, management adjusted CGU's nominal loss reserves (net of
the effects of reinsurance obtained from NICO and GRC in connection with the
Acquisition) and discounted them to their present value assuming a 4.7%
risk-free discount rate. The series of future cash flows related to such loss
payments and reinsurance recoveries were actuarially developed using CGU's
historical loss data. The "price" for bearing the uncertainty inherent in
CGU's net loss reserves was assumed to be approximately 11% of the present
value of the expected underlying cash flows of the loss reserves and
reinsurance recoverables, which is believed to be reflective of the cost CGU
would likely incur if it had attempted to obtain reinsurance for the full
amount of its net loss and loss adjustment expense reserves with a third
party reinsurer. As a result, loss and loss adjustment expense reserves and
the related reinsurance recoverables on those amounts have been reduced by
$652.1 MILLION and $352.1 MILLION, respectively, in the March 31, 2001 pro
forma balance sheet. This reduction to net loss and loss adjustment expense
reserves of $300.0 million will be 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 $22.5 MILLION and
$90.0 MILLION recorded on the pro forma income statements for the periods
ended March 31, 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 30% 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 $7.9 MILLION and $31.5 MILLION, for
the periods ended March 31, 2001 and December 31, 2000, respectively, were
recorded for this transaction.
INSURANCE BALANCES RECEIVABLE. In determining the estimated fair value of
premiums receivable as of the acquisition date, White Mountains has estimated
that an additional allowance for doubtful accounts was warranted in light of its
decision to exit certain of CGU's business activities. Accordingly, an
adjustment of $42.0 MILLION has been recorded in the March 31, 2001 pro forma
balance sheet.
RECOGNITION OF LIABILITIES IN CONNECTION WITH THE ACQUISITION. The $185.3
million pro forma adjustment to increase other liabilities represents White
Mountains' best estimate of the expected costs to exit certain business
activities of CGU and the estimated fair value of obligations related to the
required participation by CGU in certain assigned risk pools. Costs
associated with the exit of certain of CGU's business activities have been
estimated in accordance with EITF No. 95-3, "Recognition of Liabilities in
Connection with a Purchase Business Combination".
EMPLOYEE BENEFITS PLANS. In accordance with Financial Accounting Standards Board
("FASB") No. 87, "Employers' Accounting for Pensions", CGU's pension plan was
required to recognize all previously unrecognized transition items as of the
date of the Acquisition which increased the prepaid pension asset by $2.6
million. In addition, White Mountains revised the weighted average discount rate
used to determine CGU's pension obligations from 7.5% to 7.0% in light of
current market conditions which reduced the pension asset by $32.5 million. The
net impact of the pension adjustments served to decrease other assets by $29.9
MILLION pretax.
In accordance with FASB No. 106, "Employers' Accounting for Postretirement
Benefits Other Than Pensions", CGU's postretirement plan was required to
recognize all previously unrecognized transition items as of the date of the
Acquisition which increased other liabilities by $47.5 million. In addition,
White Mountains revised the weighted average discount rate used to determine
CGU's postretirement obligations from 7.5% to 7.0% in light of current market
conditions which increased other liabilities by $7.8 million. The total
impact of the postretirement adjustments served to increase other liabilities
by $55.3 million pretax.
ADJUSTMENTS TO REDUCE THE CARRYING VALUE OF NON-CURRENT, NON-FINANCIAL ASSETS:
After recording all assets and liabilities purchased at their estimated fair
values, the excess of acquired net assets over the purchase price has been
used to reduce the estimated fair values of all non-current, non-financial
assets acquired, in accordance with APB 16.
AMORTIZATION OF DEFERRED CREDIT. The excess of the estimated fair value of net
assets (after the reduction of the carrying amounts of non-current,
non-financial assets acquired) over the purchase price has been recorded as a
deferred credit in accordance with APB 16. The deferred credit will be amortized
systematically to income over the estimated period of benefit of seven years. As
a result, deferred credit amortization of $27.0 MILLION and $107.9 MILLION has
been recorded on the pro forma income statements for the periods ended March 31,
2001 and December 31, 2000, respectively.
In February 2001 the Financial Accounting Standards Board issued an exposure
draft entitled "Business Combinations and Intangible Assets - Accounting for
Goodwill." This exposure draft proposes, among other things, new standards
concerning accounting for deferred credits arising from such business
combinations. The exposure draft, in its current form, would be effective for
interim and annual periods beginning after a final accounting standard is
issued, which is currently expected to be January 1, 2002. Adoption of this
standard in its current form would result in the immediate recognition of all
White Mountains' unamortized deferred credits during 2002 as an extraordinary
gain.
(K) 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 $3.2 MILLION and $12.7 MILLION recorded on the pro
forma income statements for the periods ended March 31, 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 $1.1 MILLION and $4.4 MILLION, for the periods ended March 31,
2001 and December 31, 2000, respectively, were recorded for this transaction.
(L) 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 March 31, 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 antidilutive.
(M) In determining book value per common and common equivalent share, common
shareholders' equity is increased for the benefits deemed to have been
received by the Company upon the assumed issuances of common share
equivalents (cash proceeds from assumed exercises of options and warrants to
acquire common shares and, when applicable, income tax benefits derived
therefrom) and is decreased by the difference between the carrying value of
the Berkshire Preferred Stock and its face value (see Note B). Tangible book
value per common share is determined in the same manner but includes
unamortized deferred credits less goodwill per common share.
At March 31, 2001, the Company's book value per common and common equivalent
share was $176.14 and its tangible book value per share was $185.44. This
computation is based on dilutive common and common equivalent shares
outstanding of 5,962,070 shares at that date.
On a pro forma basis, at March 31, 2001 the Company's book value per common
and common equivalent share was $121.89 and its tangible book value per share
was $234.40. This pro forma computation of book value per common and common
equivalent share at March 31, 2001 assumes the issuance of 1,170,000 common
shares upon the exercise of the Series A Warrants at a price per common share
of $175.00.
At the Company's 2001 Annual General Meeting, holders of common shares will
be asked to approve the issuance of additional common shares upon conversion
of the Convertible Preference Shares and the exercise of the Series B
Warrants. Assuming that shareholder approval is obtained, $755.8 million of
"mezzanine" equity recorded upon the issuance of Convertible Preference
Shares (see Note E) and $111.7 million of other liabilities recorded upon the
issuance of the Series B Warrants (see Note B) would become permanent equity
of the Company thereby increasing its shareholders' equity from $761.1
million on a pro forma basis at March 31, 2001 to $1,628.6 million. As a
result, the Company's pro forma book value per common and common equivalent
share would increase to $180.37 and its tangible book value per share would
increase to $261.98. This pro forma computation of book value per common and
common equivalent share assumes the issuance of 2,184,583 common shares upon
conversion of the Convertible Preference Shares and the issuance of 1,714,285
common shares upon the exercise of the Series A and Series B Warrants at a
price per common share of $175.00.