UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1995
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______ to _______
Commission file number 1-8993
FUND AMERICAN ENTERPRISES HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
Delaware 94-2708455
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
80 South Main Street, Hanover, New Hampshire 03755-2053
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (603) 643-1567
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
------------------- -----------------------------------------
Common Stock, par value $1.00 New York Stock Exchange
per share
Securities registered pursuant to section 12(g) of the Act:
None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ X ]
The aggregate market value of voting shares (based on the closing price of
those shares listed on the New York Stock Exchange and the consideration
received for those shares not listed on a national or regional exchange) held by
non-affiliates of the registrant as of March 25, 1996, was $575,521,650.
As of March 25, 1996, 7,673,622 shares of Common Stock, par value of $1.00 per
share, were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's 1995 Annual Report to
Shareholders (Parts II and IV).
Portions of the registrant's Notice of 1996 Annual Meeting of Shareholders
and Proxy Statement dated March 29, 1996 (Part III)
TABLE OF CONTENTS
PART I
Item 1. Business....................................................... 1
a. General..................................................... 1
b. Insurance Operations........................................ 1
c. Mortgage Origination and Servicing Operations............... 1
d. Investment Portfolio Management............................. 6
e. Certain Business Conditions................................. 6
f. Competition................................................. 6
g. Regulation.................................................. 7
h. Employees................................................... 7
Item 2. Properties..................................................... 8
Item 3. Legal Proceedings.............................................. 8
Item 4. Submission of Matters to a Vote of Security Holders............ 8
a. Executive Officers of the Registrant and its Subsidiaries... 9
PART II
Item 5. Market for Registrant's Common Equity and
Related Stockholder Matters................................. 10
Item 6. Selected Financial Data........................................ 10
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations............... 10
Item 8. Financial Statements and Supplementary Data.................... 10
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure......................... 10
PART III
Item 10. Directors and Executive Officers............................... 10
Item 11. Executive Compensation......................................... 10
Item 12. Security Ownership of Certain Beneficial
Owners and Management....................................... 11
Item 13. Certain Relationships and Related Transactions................. 11
PART IV
Item 14. Exhibits, Financial Statement Schedules, and
Reports on Form 8-K......................................... 11
PART I
Item 1. Business
GENERAL
Fund American Enterprises Holdings, Inc., (the "Company"), is a Delaware
corporation which was organized in 1980. Within this report, the consolidated
organization is referred to as "Fund American." Fund American's principal
businesses are conducted through White Mountains Holdings, Inc. and its
operating subsidiaries ("White Mountains") and Source One Mortgage Services
Corporation and its subsidiaries ("Source One"). White Mountains is an
insurance holding company principally engaged through its affiliates in the
businesses of property and casualty insurance and financial guaranty insurance.
Source One is one of the nation's largest mortgage banking companies. Fund
American also owns a passive investment portfolio totaling $415.3 million as of
December 31, 1995. The Company's principal office is located at 80 South Main
Street, Hanover, New Hampshire, 03755, and its telephone number is (603)
643-1567.
INSURANCE OPERATIONS
In 1995 the Company capitalized White Mountains with $250.0 million of assets.
White Mountains was formed to be the holding company for all of Fund American's
insurance operating interests. As of December 31, 1995 White Mountains'
principle holdings included investments in: Financial Security Assurance
Holdings Ltd. ("FSA"), a leading Aaa/AAA writer of financial guaranty insurance;
Main Street America Holdings, Inc. ("MSA"), an affiliate of National Grange
Mutual Insurance Company which is a New Hampshire-based property and casualty
insurer; and the wholly-owned subsidiaries described below.
On December 1, 1995 White Mountains acquired Valley Group, Inc. of Albany,
Oregon, and its subsidiaries (collectively, "Valley") and Charter Group, Inc. of
Dallas, Texas, and its subsidiaries (collectively, "Charter") for $41.7 million
in cash less $3.0 million of purchase price adjustments. Valley's wholly-owned
subsidiary, Valley Insurance Company, is an "A" rated, Northwest-based property
and casualty company which writes personal and commercial lines. In 1995 Valley
Insurance Company wrote $73.1 million of gross premiums in Oregon, Washington
and California. Charter's wholly-owned subsidiary, Charter Indemnity Company,
wrote $64.4 million of gross non-standard automobile insurance premiums in Texas
during 1995.
White Mountains Insurance Company ("WMIC") is a New Hampshire licensed
commercial property and casualty company which commenced its operations in
September 1995 and wrote $250,000 in premiums during the year. WMIC is expected
to expand its operations to other states as additional state approvals are
obtained.
All of White Mountains' insurance subsidiaries market their insurance products
principally through independent agents.
MORTGAGE ORIGINATION AND SERVICING OPERATIONS
General
Source One is one of the largest mortgage banking companies in the United
States. As of December 31, 1995 Source One had a mortgage loan servicing
portfolio totaling $31.8 billion, including $4.0 billion of loans subserviced
for others, which is serviced on behalf of approximately 320 institutional
investors and numerous other security holders. As of December 31, 1995 Source
One had 128 retail branch offices in 25 states and originated $2.9 billion in
mortgage loans for the year then ended.
Source One engages primarily in the business of producing, selling and
servicing residential mortgage loans. Its sources of revenue are net mortgage
servicing revenue, net interest revenue, net gain on sales of mortgages, net
gain on sales of servicing and other revenue (including underwriting and
appraisal fees). Through subsidiaries, Source One also markets credit-related
insurance products (such as life, disability, health, accidental death and
property and casualty insurance).
1
Source One was incorporated in 1972 and is the successor to Citizens Mortgage
Corporation which was organized in 1946. Source One is a wholly-owned
subsidiary of Fund American Enterprises, Inc. ("FAE") which is a wholly-owned
subsidiary of the Company. Source One's principal office is located in
Farmington Hills, Michigan.
Industry Overview
Mortgage banking is the business of serving as a financial intermediary in
the: (i) origination and purchase of mortgage loans; (ii) holding of such loans
while aggregating sufficient loans to form appropriate mortgage-backed security
pools; (iii) subsequent sale of such loans through pools or directly to
investors; and (iv) ongoing management or servicing of such loans during the
repayment period. Mortgage bankers generate revenue in each of the four stages
of the mortgage banking process.
The origination process involves providing competitive mortgage loan rates,
soliciting loan applications, reviewing title and credit matters, and funding
loans at closing. Mortgage loans are often purchased from the originators
thereof, who may receive a premium for releasing the right to service such
purchased mortgage loans. The purchase price and any premium paid for servicing
rights are greatly influenced by existing market conditions.
When interest rates on long-term mortgage loans exceed average interest rates
incurred on total borrowings by Source One, as is generally the case, the
holding of mortgage loans generates net interest income. In periods when
borrowing rates exceed long-term mortgage lending rates, the holding of mortgage
loans can generate net interest expense.
Marketing or selling mortgage loans requires matching the needs of the
production market (consisting of homebuyers and homeowners seeking new
mortgages) with the needs of the secondary market for mortgage loans (consisting
of securities broker-dealers, depository institutions, insurance companies,
pension funds and other investors). Conventional mortgage loans (i.e., those
not guaranteed or insured by agencies of the Federal government) which are
secured by one- to four-family residential properties, and which comply with
applicable requirements, are packaged for direct sale or conversion to a
mortgage-backed security, generally in pools of $1.0 million or more. Such
mortgage-backed securities are guaranteed by the Federal Home Loan Mortgage
Corporation ("FHLMC") or the Federal National Mortgage Association ("FNMA").
Mortgage-backed securities are sold by mortgage banking companies primarily to
securities broker-dealers. Federal Housing Administration ("FHA") insured
mortgage loans and Veterans Administration ("VA") partially guaranteed mortgage
loans are packaged in the form of modified pass-through mortgage-backed
securities guaranteed by the Government National Mortgage Association ("GNMA")
for sale primarily to securities broker-dealers. In addition, private entities
may pool mortgage loans in the form of collateralized mortgage obligations or
pass-through certificates, which may or may not qualify as real estate mortgage
investment conduits ("REMICs") under the Internal Revenue Code of 1986, as
amended, and offer the resulting mortgage-backed securities to the public
through securities broker-dealers. There is also a limited private market for
mortgage loans which have not been pooled or securitized.
Servicing involves: (i) collecting principal, interest and funds to be
escrowed for tax and insurance payments from mortgage loan borrowers; (ii)
remitting principal and interest to mortgage loan investors; (iii) paying
property taxes and insurance premiums on mortgaged property; (iv) in some cases,
advancing uncollected payments to mortgage loan investors; (v) administering
delinquent loans; (vi) supervising foreclosures in the event of unremedied
defaults; and (vii) performing all related accounting and reporting activities.
Servicing generates cash income in the form of fees, which represent a
percentage of the declining outstanding principal amount of the loans serviced
and are collected from each mortgage loan payment received plus any late
charges.
Mortgage Loan Production
Source One produces residential mortgage loans through a system of retail
branch offices, a specialized marketing program, mortgage brokers, and a
correspondent network of banks, thrift institutions and other mortgage lenders.
The existence of these mortgage production sources gives Source One the
flexibility to shift its production between those sources as market conditions
warrant and allows Source One to emphasize the production mode which is most
economically advantageous at the time.
2
Loans produced, whether through origination or purchase, include conventional
residential mortgage loans as well as mortgage loans which are either insured by
the FHA or partially guaranteed by the VA (government loans). In evaluating
loans purchased through its correspondent network and loans originated through
its broker network, Source One applies the same quality standards as those
required for loans originated by Source One itself. Source One's quality
control department reviews a random sample of the loans purchased to determine
compliance with Source One's standards.
It is a policy of Source One to primarily produce fixed rate mortgage loans.
As of December 31, 1995 approximately 6% of Source One's total mortgage loan
servicing portfolio consisted of adjustable rate mortgage loans.
The following table sets forth selected information regarding Source One's
mortgage loan production:
- -----------------------------------------------------------------------------------------------
Year Ended December 31,
---------------------------------------------------
Millions 1995 1994 1993 1992 1991
- -----------------------------------------------------------------------------------------------
Loan production by type of loan:
FHA/VA insured $1,565 $2,065 $ 3,453 $1,927 $1,641
Conventional 1,287 2,521 7,999 5,664 2,386
-------------------------------------------------
Total $2,852 $4,586 $11,452 $7,591 $4,027
- ---------------------------------------------------------------------------------------------
Loan production by origination source:
Retail branch office originations $1,347 $2,005 $ 4,922 $3,326 $1,695
Correspondent network acquisitions 1,157 1,081 2,643 2,578 1,908
Mortgage broker originations 196 696 1,708 1,026 290
Specialized marketing program originations 152 804 2,179 661 134
-------------------------------------------------
Total $2,852 $4,586 $11,452 $7,591 $4,027
=============================================================================================
Retail Branch Offices. As of December 31, 1995 Source One had 128 retail
branch offices in 25 states. Each office has sales representatives who originate
mortgage loans through contacts with real estate brokers, builders, developers
and others, as well as through direct contact with homebuyers.
As of December 31, 1995 Source One's retail branch offices were located in the
following states:
Number of Number of Number of
State offices State offices State offices
- -----------------------------------------------------------------------------
California 29 Florida 5 Kansas 1
Washington 21 Missouri 4 Maryland 1
Texas 11 Ohio 4 Massachusetts 1
Illinois 7 Kentucky 3 Oregon 1
Nevada 7 New Jersey 2 Rhode Island 1
Arizona 6 Pennsylvania 2 Tennessee 1
Michigan 6 Alaska 1 Virginia 1
New York 6 Arkansas 1
Colorado 5 Iowa 1
Mortgage loans originated by Source One are subject to a defined underwriting
process in order to assess each prospective borrower's ability to repay the loan
requested and the adequacy of each property as collateral. In addition, Source
One is subject to the underwriting guidelines of FHA, VA, FHLMC and FNMA, as
well as specific contractual requirements of institutional investors who have
agreed to acquire mortgage loans originated by Source One. Most branch office
originations are referred to regional operating centers for preparation of loan
documentation, evaluation of compliance with Source One's underwriting
conditions and closing of the loans.
3
Correspondent Network. Source One conducts a program through which it agrees
to purchase mortgage loans from a network of banks, thrift institutions and
other mortgage lenders. The funding price for such loans is set by Source One on
a daily basis. In addition, Source One pays a premium for the release of
servicing rights which is negotiated on a case-by-case basis. As of December 31,
1995 there were approximately 200 participants in Source One's correspondent
network, with no single participant or group of affiliated participants
accounting for more than 10% of Source One's total mortgage loan originations.
Mortgage Brokers. Source One conducts a program through which it closes loans
originated by a network of mortgage brokers. The funding price for such loans is
set by Source One on a daily basis. The originating mortgage broker receives
compensation equivalent to the difference between Source One's pricing schedule
and the closing price. Source One maintains an office to service this network in
West Bloomfield, Michigan. As of December 31, 1995 there were approximately 400
active participants in Source One's mortgage broker network, with no single
broker or group of affiliated brokers accounting for more than 10% of Source
One's total mortgage loan originations.
Specialized Marketing Program. Source One also generates mortgage loan
originations through affinity programs and by responding to refinancing requests
from the population of loans currently serviced by Source One.
Sales of Loans
Source One sells loans either through mortgage-backed securities issued
pursuant to programs of GNMA, FNMA and FHLMC, or to institutional investors.
Most loans are aggregated in pools of $1.0 million or more, which are purchased
by institutional investors after having been guaranteed by GNMA, FNMA or FHLMC.
During 1995 approximately 46.3%, 34.3% and 9.3% of the principal amount of
Source One's loans were sold in pools through GNMA, FNMA and FHLMC,
respectively. During 1994 approximately 40.9%, 40.6% and 16.5% of the principal
amount of Source One's loans were sold in pools through GNMA, FNMA and FHLMC,
respectively. During 1993 approximately 29.4%, 44.5% and 25.3% of the principal
amount of Source One's loans were sold in pools through GNMA, FNMA and FHLMC,
respectively. Substantially all GNMA securities are sold without recourse to
Source One for loss of principal in the event of a subsequent default by the
mortgage borrower due to the underlying FHA and VA insurance.
Servicing agreements relating to mortgage-backed securities issued pursuant to
the programs of GNMA, FNMA or FHLMC require Source One to advance funds to make
the required payments to investors in the event of a delinquency by the
borrower. Source One expects that it would recover most funds advanced upon cure
of default by the borrower or at foreclosure. However, in connection with VA
partially guaranteed loans and certain conventional loans (which may be
partially insured by private mortgage insurers), funds advanced may not cover
losses due to potential declines in collateral value. In addition, most of
Source One's servicing agreements for mortgage-backed securities typically
require the payment to investors of a full month's interest on each loan
although the loan may be paid off (by optional prepayment or foreclosure) other
than on a month-end basis. In this instance, Source One is obligated to pay the
investor interest at the note rate from the date of the loan payoff through the
end of that calendar month without reimbursement.
Source One, through private placements and public offerings, has also sold
mortgage loans through the issuance of mortgage pass-through certificates.
Source One issued $521.7 million of REMIC certificates through December 31,
1990. Source One is the primary servicer for these REMIC certificates, which
were sold pursuant to five separate trusts that have no recourse provisions.
Source One has not issued any mortgage-backed securities since 1990; however,
Source One may offer additional mortgage-backed securities in the future if
economic and market conditions warrant.
Historically, Source One's sales of loans have generated net gains. However,
if secondary market interest rates decline after Source One obtains a mandatory
forward commitment for a loan, the loan may not close and Source One may incur a
loss from the cost of covering its obligations under such commitment. If
secondary market interest rates increase after Source One commits to an interest
rate for a loan, and Source One has not obtained a forward commitment, Source
One may incur a loss when the loan is subsequently sold. To minimize this risk,
Source One obtains mandatory forward commitments of up to 120 days to sell
mortgage-backed securities with respect to all loans which have been funded and
a substantial portion of loans in process ("pipeline") which it believes will
close.
4
Source One's risk management function closely monitors the mortgage loan
pipeline to determine appropriate forward commitment coverage on a daily basis.
In addition, the risk management area seeks to reduce counterparty risk by
committing to sell mortgage loans only to approved dealers, with no dealer
having in excess of 20% of current commitments. Source One currently transacts
business with seven approved dealers.
Loan Servicing
Source One currently retains the rights to service the majority of the
mortgage loans it produces. In addition, Source One may acquire the rights to
service or subservice a mortgage loan portfolio without originating or acquiring
the underlying mortgage loans. Source One customarily makes such purchases of
servicing rights from banks, thrift institutions and other mortgage lenders. The
fees paid to acquire such servicing rights are negotiated on a case-by-case
basis. During 1995, Source One purchased the rights to service $4.7 billion of
mortgage loans.
Source One also sells servicing rights when management deems it economically
advantageous. During 1995 Source One sold the rights to service $11.0 billion of
mortgage loans resulting in pretax gains of $40.0 million. During 1994 Source
One sold the rights to service $3.9 billion of mortgage loans and continues to
subservice these loans pursuant to a five-year subservicing agreement.
The following table summarizes the changes in Source One's mortgage loan
servicing portfolio including loans subserviced, interim servicing contracts and
those under contract to acquire, and excluding loans sold but not transferred:
- --------------------------------------------------------------------------------
Year Ended December 31,
---------------------------------------
Billions 1995 1994 1993 1992 1991
- --------------------------------------------------------------------------------
Balance at beginning of year $39.6 $38.4 $37.3 $41.0 $35.6
---------------------------------------
Mortgage loan production 2.9 4.6 11.5 7.6 4.0
Servicing acquisitions 4.7 3.7 6.4 2.3 6.8
---------------------------------------
Total servicing in 7.6 8.3 17.9 9.9 10.8
---------------------------------------
Regular payoffs 2.3 4.7 13.6 11.5 3.9
Sales of servicing 11.0 - - - -
Principal amortization, servicing
released and foreclosures 2.1 2.4 3.2 2.1 1.5
---------------------------------------
Total servicing out 15.4 7.1 16.8 13.6 5.4
---------------------------------------
Balance at end of year $31.8 $39.6 $38.4 $37.3 $41.0
================================================================================
Source One closely monitors the rate of delinquencies and foreclosures
incident to its servicing portfolio. The following table summarizes delinquency
and foreclosure experience with respect to the residential mortgage loans
serviced by Source One:
- --------------------------------------------------------------------------------
December 31,
---------------------------------------
1995 1994 1993 1992 1991
- --------------------------------------------------------------------------------
Percent of total residential loans
serviced:
Past due:
31-59 days 3.99% 3.15% 3.41% 3.26% 3.56%
60-89 days .70 .54 .58 .65 .61
90 days or more .59 .38 .45 .48 .41
---------------------------------------
Total delinquencies 5.28% 4.07% 4.44% 4.39% 4.58%
- -----------------------------------------=======================================
Foreclosures .80% .77% .92% .77% .74%
================================================================================
5
Related Activities
In conjunction with its mortgage origination and servicing activities, Source
One markets certain credit-related insurance products (such as life, disability,
health, accidental death, and property and casualty insurance). Source One acts
as an agent and receives fees based on premium value but does not assume any
insurance risk. Insurance products are sold through (i) solicitation at the time
of mortgage application, (ii) direct mail solicitation by Source One shortly
after mortgage loan closing, (iii) solicitation by direct solicitors and (iv)
resolicitation of Source One's mortgage loan servicing portfolio on an annual
basis. At certain locations, personal solicitation by Source One staff is
permitted by state regulations which determine allowable insurance sales
practices. Total fees recognized under these programs for 1995 were $4.8
million.
INVESTMENT PORTFOLIO MANAGEMENT
The Company's passive investment portfolio is primarily managed by a small
group of employees located in Hanover, New Hampshire. FAE's passive investment
portfolio is primarily managed by a small group of its employees located in
Norwich, Vermont. Beginning January 1, 1996 Fund American engaged First
Manhattan Co. to provide discretionary investment advisory services with respect
to a portfolio of investment securities totalling approximately $21.0 at
December 31, 1995. First Manhattan Co. is a registered investment advisor.
Fund American's philosophy is to invest all assets to maximize their total
return over a three- to five-year time frame. Under this approach, each dollar
of after tax investment income, realized capital gains and unrealized
appreciation is valued equally. Management believes that it should focus its
efforts and the entity's funds on a small number of quality companies selling at
reasonable prices in the marketplace. While such an approach leads to a high
concentration in a few securities, management believes it will provide superior
returns over a three- to five-year horizon. However, management does not believe
that owning a large portfolio of passive investment securities in a taxable
corporation format will maximize shareholder returns over the long-term.
Therefore, Fund American's long-term goal is to reinvest at least a portion of
its investment securities (or proceeds from sales thereof) into operating
businesses in which management has knowledge and experience.
CERTAIN BUSINESS CONDITIONS
Inflation and changes in market interest rates can have significant effects on
White Mountains' insurance operations. Inflation increases the costs of settling
insurance claims over time. Increases in market interest rates, which often
occur during periods of high inflation, reduce the market value of the insurance
operations' fixed-income investments. Conversely, reductions in market interest
rates increase the market value of White Mountains' fixed- income investments.
Changes in the economy or prevailing interest rates can also have significant
effects, including material adverse effects, on the mortgage banking business
and Source One.
Inflation and changes in interest rates can have differing effects on various
aspects of Source One's business, particularly with respect to marketing gains
and losses from the sale of mortgage loans, mortgage loan production, the value
of Source One's servicing portfolio and net interest revenue. Historically,
Source One's loan originations and loan production income have increased in
response to falling interest rates and have decreased during periods of rising
interest rates. Periods of low inflation and falling interest rates tend to
reduce loan servicing income and the value of Source One's mortgage loan
servicing portfolio because prepayments of mortgages increase and the average
life of loan servicing rights is shortened. Conversely, periods of increasing
inflation and rising interest rates tend to increase loan servicing income and
the value of Source One's mortgage loan servicing portfolio because prepayments
of mortgages decline and the average life of loan servicing rights is
lengthened.
COMPETITION
The principal competitive factors that affect White Mountains' insurance
subsidiaries are: (i) pricing; (ii) underwriting; (iii) quality of claims and
policyholder services; (iv) operating efficiencies; and (v) product
differentiation and availability. The highly competitive environment in the
property and casualty insurance market during the past several years has
intensified due to increased capacity resulting from growing capital supporting
the industry.
6
Perception of financial strength, as reflected in the ratings assigned to an
insurance company, especially by A.M. Best, is also a factor in White Mountains'
insurance subsidiaries' competitive position. In the United States, property and
casualty insurance can be obtained through national and regional companies that
use an agency distribution system, direct writers (who may have an employed
agency force) or brokers, or through self-insurance including the use by
corporations of subsidiary captive insurers. No single company or group of
affiliated companies dominates the insurance industry.
Source One competes nationally and locally for loan production with other
mortgage banks, state and national banks, thrift institutions and insurance
companies. National banks and thrift institutions have substantially more
flexibility in their loan origination programs than Source One, which must
originate loans meeting the standards of the secondary market. Mortgage lenders
compete primarily with respect to price and service. Competition may also occur
on mortgage terms and closing costs. Source One competes, in part, by using its
commissioned sales force to maintain close relationships with real estate
brokers, builders and developers and members of its correspondent and broker
network. In the opinion of management of Source One, no single mortgage lender
dominates the industry.
REGULATION
White Mountains' insurance subsidiaries are subject to regulation and
supervision of their operations in each of the jurisdictions where they conduct
business. Regulations vary between jurisdictions but, generally, they provide
regulatory authorities with broad supervisory, regulatory and administrative
powers over such matters as licenses, standards of solvency, premium rates,
policy forms, investments, security deposits, methods of accounting, form and
content of financial statements, reserves for unpaid losses and loss adjustment
expenses, reinsurance, minimum capital and surplus requirements, dividends and
other distributions to shareholders, periodic examinations and annual and other
report filings. Over the last several years most states have, and continue to
implement, laws which establish standards for current, as well as continued,
state accreditation. In addition, the National Association of Insurance
Commissioners ("NAIC") has adopted risk-based capital rules for property and
casualty companies. White Mountains' insurance subsidiaries were adequately
capitalized under the NAIC's rules as of December 31, 1995.
Source One is subject to the rules and regulations of, and examinations by,
FNMA, FHLMC, GNMA, FHA and VA with respect to the origination, processing,
selling and servicing of mortgage loans. These rules and regulations, among
other things, prohibit discrimination, provide for inspections and appraisals of
properties, require credit reports on prospective borrowers and, in some cases,
establish maximum interest rates, fees and loan amounts. Lenders are required to
submit audited financial statements annually. FNMA and GNMA require the
maintenance of specified net worth levels which vary depending on the amount of
FNMA loans serviced and GNMA mortgage-backed securities issued by Source One.
Mortgage loan origination activities are also subject to fair housing laws, the
Equal Credit Opportunity Act, the Federal Truth-in-Lending Act, the Real Estate
Settlement Procedures Act, the Fair Credit Reporting Act, the Home Mortgage
Disclosure Act, and regulations promulgated thereunder which, among other
things, prohibit discrimination in residential lending and require disclosure of
certain information to borrowers.
Certain conventional mortgage loans are also subject to state usury statutes;
FHA and VA loans are exempt from the effects of such statutes. There are various
other state laws and regulations affecting Source One's mortgage banking and
insurance operations. Source One's internal audit and quality control
departments monitor compliance with all these laws and regulations.
EMPLOYEES
As of December 31, 1995 the Company employed 11 persons, FAE employed 1,681
persons (including 1,680 persons at Source One) and White Mountains employed 416
persons (including 231 at Valley and 178 at Charter). None of Fund American's
employees are covered by a collective bargaining agreement. Management believes
that Fund American's employee relations are good.
7
Item 2. Properties
Fund American leases 8,600 square feet of space at 80 South Main Street,
Hanover, New Hampshire, under a lease expiring in 2006. This space is used as
the principal office for the Company, White Mountains and WMIC. Valley owns a
40,000 square foot office building in Albany, Oregon and leases 6,200 square
feet in Sacramento, California. The lease on Valley's California property
expires in 1998. Charter leases 48,400 square feet in Dallas, Texas, which lease
expires in 1997. Source One owns its principal office in Farmington Hills,
Michigan, which houses the majority of its employees. Source One also owns an
office building in West Bloomfield, Michigan. Fund American leases several other
office facilities and operating equipment under cancelable and noncancelable
agreements. Most of such leases contain renewal clauses.
Item 3. Legal Proceedings
Various claims have been made against Fund American in the normal course of
its business. In management's opinion, the outcome of such claims will not, in
the aggregate, have a material effect on Fund American's financial position or
results of operations.
Item 4. Submission of Matters to a Vote of Security Holders
There were no matters submitted to a vote of Fund American's shareholders
during the fourth quarter of 1995.
8
EXECUTIVE OFFICERS OF THE REGISTRANT AND ITS SUBSIDIARIES (as of March 25, 1996)
- ---------------------------------------------------------------------------------------------------------------------
Executive
officer
Name Position Age since
- ---------------------------------------------------------------------------------------------------------------------
Terry L. Baxter President and Secretary of FAE 50 1994
Dennis P. Beaulieu Vice President and Secretary 48 1995
John J. Byrne Chairman, President and Chief Executive Officer 63 1985
James A. Conrad President and Chief Executive Officer of Source One 54 1986
K. Thomas Kemp Executive Vice President 55 1991
Michael S. Paquette Vice President and Controller 32 1993
Robert W. Richards Chairman of Source One 53 1986
Allan L. Waters Senior Vice President and Chief Financial Officer 38 1990
=====================================================================================================================
All executive officers are elected by the Company's Board of Directors for a
term of one year or until their successors have been elected and have duly
qualified.
Mr. Baxter was elected President and Secretary of FAE in 1994. Prior to
joining Fund American in 1994, Mr. Baxter was Managing Director of the National
Transportation Safety Board from 1990. Prior to that, he was the Assistant
Director of OMB in the Reagan Administration. Mr. Baxter is a director of FAE,
MSA, Source One, White Mountains and WMIC.
Mr. Beaulieu was elected Vice President and Secretary in February 1995 and
also serves as Vice President and Secretary of White Mountains and Chief
Financial Officer of WMIC. Prior to joining Fund American in 1995, Mr. Beaulieu
was Senior Vice President and Chief Financial Officer of New Dartmouth Bank. Mr.
Beaulieu is a director of White Mountains and WMIC.
Mr. Byrne has served as Chairman, President and Chief Executive Officer since
1990, as Chairman and Chief Executive Officer from 1985 to 1990 and was Chairman
and Chief Executive Officer of Fireman's Fund Insurance Company ("Fireman's
Fund") from 1989 through January 2, 1991. Mr. Byrne is also Chairman of FSA, FAE
and White Mountains.
Mr. Conrad has served as President and Chief Executive Officer of Source One
since 1990, as Executive Vice President of its Production Division from 1987 to
1989, and as Corporate Vice President of its Wholesale Division from 1985 to
1987. Mr. Conrad is also a director of Source One.
Mr. Kemp has served as Vice President, Treasurer and Secretary since 1991, was
elected Executive Vice President in 1993 and became a director of the Company in
1994. He is also President and Chief Executive Officer of White Mountains and
WMIC. Mr. Kemp was a Vice President of Fireman's Fund from 1990 to January 2,
1991. Prior to joining Fireman's Fund, Mr. Kemp was President of Resolute
Reinsurance Company. Mr. Kemp is Chairman of Valley, Charter and WMIC. Mr. Kemp
is also a director of FSA, FAE, MSA and White Mountains.
Mr. Paquette was elected Vice President and Chief Accounting Officer in 1993
and was appointed Vice President and Controller in February 1995. Mr. Paquette
is also Vice President and Controller of White Mountains and WMIC. He was
formerly Secretary of FAE from 1990 to 1993 and has been a member of the Fund
American organization since 1989. Mr. Paquette is a director of FAE, White
Mountains and WMIC.
Mr. Richards has served as Chairman of Source One since 1989, as its President
from 1987 to 1989, and as its Executive Vice President from 1985 to 1987.
Mr. Waters was elected Senior Vice President and Chief Financial Officer in
1993. Mr. Waters is also Senior Vice President and Chief Financial Officer of
White Mountains. He was formerly Vice President and Controller of FAE from 1991
to 1993; was Vice President, Controller and Assistant Secretary of the Company
from 1990 to 1991, and was Vice President, Finance of the Company from 1988 to
1990. Mr. Waters is a director of FSA, FAE, Source One, White Mountains and
WMIC.
9
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
As of March 25, 1996 there were 606 registered holders of shares of the
Company's Common Stock, par value $1.00 per share ("Shares").
From 1992 to 1994 the Company did not pay regular cash dividends to
holders of Shares. In the fourth quarter of 1995 the Board of Directors
reinstated a regular quarterly dividend on Shares of $.20. However, the Board of
Directors currently intends to reconsider from time to time the declaration of
regular periodic dividends on Shares with due consideration given to the
financial characteristics of Fund American's remaining invested assets and
operations and the amount and regularity of its cash flows at the time.
The remaining information called for by this item is reported as
"Quarterly trading range for Shares of common stock" and "Stock Exchange
Information" appearing on pages 66 and 72, respectively, of the Company's 1995
Annual Report to Shareholders, herein incorporated by reference.
Item 6. Selected Financial Data
Reported on page 18 of the Company's 1995 Annual Report to
Shareholders, herein incorporated by reference.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Reported on pages 19 through 31 of the Company's 1995 Annual Report to
Shareholders, herein incorporated by reference.
Item 8. Financial Statements and Supplementary Data
Reported in the consolidated financial statements of Fund American and
the notes thereto and the report thereon of Ernst & Young LLP, independent
auditors, appearing on pages 32 through 63 and 65 of the Company's 1995 Annual
Report to Shareholders, herein incorporated by reference.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
PART III
Item 10. Directors and Executive Officers
a. Directors (as of March 25, 1996)
Reported under the caption "Election of Directors" on pages 3 through 5
of the Company's 1996 Proxy Statement, herein incorporated by reference.
b. Executive Officers (as of March 25, 1996)
Reported in Part I pursuant to General Instruction G to Form 10-K.
Item 11. Executive Compensation
Reported under the captions "Compensation of Executive Officers" on
pages 8 through 10, "Reports of the Compensation Committees on Executive
Compensation" on pages 10 though 13, "Shareholder Return Graph" on page 14, and
"Compensation Plans" on pages 15 through 16 of the Company's 1996 Proxy
Statement, herein incorporated by reference.
10
Item 12. Security Ownership of Certain Beneficial Owners and Management
Reported under the caption "Voting Securities and Principal Holders
Thereof" on pages 6 through 7 of the Company's 1996 Proxy Statement, herein
incorporated by reference.
Item 13. Certain Relationships and Related Transactions
Reported under the captions "Certain Transactions" on page 10 and
"Compensation Committee Interlocks and Insider Participation in Compensation
Decisions" on page 16 of the Company's 1996 Proxy Statement, herein incorporated
by reference.
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
a. (1) Financial Statements
The financial statements applicable to the Company and its consolidated
affiliates have been incorporated by reference herein from the Company's 1995
Annual Report to Shareholders as they appear in the Index to Financial
Statements and Financial Statement Schedules shown on page 12 of this report.
(2) Financial Statement Schedules
The financial statement schedules and report of independent auditors
have been filed as part of this Annual Report on Form 10-K as indicated in the
Index to Financial Statements and Financial Statement Schedules appearing on
page 12 of this report.
b. Reports on Form 8-K
On December 1, 1995, the registrant filed Form 8-K announcing that it
had completed its acquisition of Valley and Charter.
11
FUND AMERICAN ENTERPRISES HOLDINGS, INC.
Index to Financial Statements and Financial Statement Schedules
- ---------------------------------------------------------------------------------------------------------------------
Annual Form
Report 10-K
page(s)* page(s)
- ---------------------------------------------------------------------------------------------------------------------
Financial statements:
Consolidated balance sheets as of December 31, 1995 and 1994 32
Consolidated income statements for each of the years ended December 31, 1995, 1994 and 1993 33
Consolidated statements of shareholders' equity for each of the years ended
December 31, 1995, 1994 and 1993 34
Consolidated statements of cash flows for each of the years ended
December 31, 1995, 1994 and 1993 35
Notes to consolidated financial statements 36-63
Other financial information:
Report of independent auditors 65
Selected quarterly financial data (unaudited) 66
Financial statement schedules:
III. Condensed financial information of registrant 13-14
=====================================================================================================================
* The Company's 1995 Annual Report to Shareholders.
All other schedules are omitted as they are not applicable or the information
required is included in the financial statements or notes thereto.
12
SCHEDULE III
FUND AMERICAN ENTERPRISES HOLDINGS, INC.
(Parent Company Only)
CONDENSED BALANCE SHEETS
- ----------------------------------------------------------------------------
December 31,
------------------
Millions 1995 1994
- ----------------------------------------------------------------------------
Assets:
Common equity securities and other investments $ 8.0 $ 148.7
Short-term investments, at amortized cost 23.9 58.2
Cash - .1
Other assets 18.9 23.9
Investments in unconsolidated affiliates, at equity 2.5 69.7
Investments in wholly-owned subsidiaries 825.4 679.2
------------------
Total assets $ 878.7 $ 979.8
- ----------------------------------------------------------------------------
Liabilities:
Debt $ 115.3 $ 153.8
Accounts payable and other liabilities 63.7 164.9
------------------
Total liabilities 179.0 318.7
Shareholders' equity 699.7 661.1
------------------
Total liabilities and shareholders' equity $ 878.7 $ 979.8
============================================================================
CONDENSED INCOME STATEMENTS
- --------------------------------------------------------------------------------------------
Year Ended December 31,
------------------------------
Millions 1995 1994 1993
- --------------------------------------------------------------------------------------------
Revenues $ 28.7 $ 14.2 $ 11.1
Expenses 68.9 21.2 29.6
------------------------------
Pretax operating loss (40.2) (7.0) (18.5)
------------------------------
Net realized investment gains 12.6 22.7 68.9
Change in net unrealized investment gains and losses - - (61.3)
------------------------------
Net investment gains 12.6 22.7 7.6
------------------------------
Pretax earnings (loss) (27.6) 15.7 (10.9)
Income tax provision (benefit) (8.7) 7.6 14.3
------------------------------
Parent company only operating income (loss) (18.9) 8.1 (25.2)
Equity in operating income of subsidiaries 37.4 13.0 95.6
Tax benefit from sale of discontinued operations 66.0 - -
Loss on early extinguishment of debt, after tax (.4) - -
Cumulative effect of accounting change - purchased mortgage
servicing, after tax - (44.3) -
------------------------------
Consolidated net income (loss) $ 84.1 $ (23.2) $ 70.4
============================================================================================
13
SCHEDULE III
(continued)
FUND AMERICAN ENTERPRISES HOLDINGS, INC.
(Parent Company Only)
CONDENSED STATEMENTS OF CASH FLOWS
- ---------------------------------------------------------------------------------------------------------------------------------
Year Ended December 31,
---------------------------------
Millions 1995 1994 1993
- ---------------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 84.1 $ (23.2) $ 70.4
Charges (credits) to reconcile net income to net cash from operations:
Tax benefit from sale of discontinued operations (66.0) - -
Loss on early extinguishment of debt, after tax .4 - -
Cumulative effect of accounting change - purchased mortgage servicing, after tax - 44.3 -
Compensation expense resulting from warrant extension 46.2 - -
Net investment gains (12.6) (22.7) (7.6)
Equity in operating income of wholly-owned subsidiaries (37.4) (13.0) (95.6)
Equity in operating income of unconsolidated affiliates (9.0) (2.5)
Dividends and return of capital distributions
received from subsidiaries and unconsolidated affiliates 233.3 121.3 114.6
Changes in current income taxes receivable and payable 2.9 35.1 (10.3)
Deferred income tax (benefit) provision (13.5) 2.8 21.0
Other, net (4.1) 10.0 1.9
---------------------------------
Net cash provided from operations 224.3 152.1 94.4
- ---------------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Net decrease (increase) in short-term investments 34.3 69.6 (28.3)
Sales and maturities of common equity securities and other investments 45.1 73.3 216.7
Purchases of common equity securities and other investments (41.3) (60.3) (314.6)
Purchase of Valley and Charter (77.2) - -
Investments in unconsolidated affiliates (33.8) (44.0) -
Other - - (1.7)
---------------------------------
Net cash (used for) provided from investing activities (72.9) 38.6 (127.9)
- ---------------------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Decrease in short-term debt - - (100.0)
Proceeds from issuances of long-term debt - - 178.0
Repayments of long-term debt (7.9) (23.9) -
Redemption of preferred stock (75.0) (82.0) -
Proceeds from issuances of common stock from treasury 3.3 2.8 2.1
Purchases of common stock retired (65.5) (78.8) (41.8)
Dividends paid to shareholders (6.4) (10.8) (12.2)
---------------------------------
Net cash (used for) provided from financing activities (151.5) (192.7) 26.1
- ---------------------------------------------------------------------------------------------------------------------------------
Net decrease in cash during year (.1) (2.0) (7.4)
Cash balance at beginning of year .1 2.1 9.5
- ---------------------------------------------------------------------------------------------------------------------------------
Cash balance at end of year $ - $ .1 $ 2.1
=================================================================================================================================
14
c. Exhibits
- ----------------------------------------------------------------------------------------------------------------------------------
Exhibit
number Name
- ----------------------------------------------------------------------------------------------------------------------------------
2 -- Distribution Agreement, effective September 24, 1993 among the Company and White River Corporation (incorporated by
reference to Exhibit (2.1) of the Company's Report on Form 8-K dated December 6, 1993)
3(i) -- Amended and Restated Certificate of Incorporation of the Company (incorporated by reference to Exhibit 3(a) of the
Company's 1993 Annual Report on Form 10-K)
(ii) -- Amended and Restated By-Laws of the Company (incorporated by reference to Exhibit 3(b) of the Company's 1993 Annual
Report on Form 10-K)
4 -- Indenture dated January 1, 1993, with The First National Bank of Chicago, as trustee, pursuant to the Company's
offering of $150 million of medium-term notes (incorporated by reference to Exhibit (4) of the Company's Report on
Form 8-K dated January 15, 1993)
9 -- Voting Trust Agreement dated September 2, 1994 between the Company, U S West Capital Corporation and First Chicago
Trust Company of New York (filed pursuant to Exhibit 10(a) herein)
10 -- Material Contracts:
(a) -- Credit Agreement dated June 2, 1994 among the Company, Fund American Enterprises, Inc., FFOG, Inc., the banks named
therein and The Chase Manhattan Bank (incorporated by reference to Exhibit 10(a) of the Company's 1994 Annual Report
on Form 10-K)
(b) -- Amendment No. 1 to the Credit Agreement dated June 1, 1995 among the Company, Fund American Enterprises, Inc., FFOG,
Inc., the banks named therein and The Chase Manhattan Bank(*)
(c) -- Amendment No. 2 to the Credit Agreement dated August 2, 1995 among the Company, Fund American Enterprises, Inc., FFOG,
Inc., the banks named therein and The Chase Manhattan Bank(*)
(d) -- Amendment No. 3 to the Credit Agreement dated August 11, 1995 among the Company, Fund American Enterprises, Inc.,
FFOG, Inc., the banks named therein and The Chase Manhattan Bank(*)
(e) -- Stock Purchase Agreement dated August 8, 1995 between the Company, Skandia U.S. Holding Corporation, and
Skandia America Corporation(*)
(f) -- Securities Purchase Agreement dated April 10, 1994 between the Company, U S West, Inc., U S West Capital Corporation
and Financial Security Assurance Holdings Ltd. (incorporated by reference to Exhibit 10(a) of the Company's Report on
Form 8-K dated April 10, 1994)
(g) -- Employment Agreement dated February 15, 1995, between the Company and John J. Byrne (incorporated by reference to
Appendix II of the Company's Notice of 1995 Annual Meeting of Shareholders and Proxy Statement)(*)
(h) -- Common Stock Warrant Agreement with respect to shares of the Company's Common stock between the Company and John J.
Byrne (incorporated by reference to Exhibit 10(v) of the Company's Registration Statement on Form S-1 (No. 33-
0199))(**)
(i) -- Loan Agreement between the Company and its Chairman, John J. Byrne, dated December 30, 1992 (incorporated by reference
to Exhibit 10(s) of the Company's 1992 Annual Report on Form 10-K)(**)
(j) -- The Company's Retirement Plan for Non-Employee Directors (incorporated by reference to Exhibit 10(aa) of the Company's
1992 Annual Report on Form 10-K)(**)
(k) -- The Company's Voluntary Deferred Compensation Plan, as amended on November 10, 1995(*)(**)
(l) -- The Company's Deferred Benefit Plan, as amended on November 10, 1995(*)(**)
(m) -- The Company's Long-Term Incentive Plan, as amended February 15, 1995 (incorporated by reference to Appendix I of the
Company's Notice of 1995 Annual Meeting of Shareholders and Proxy Statement)(**)
(n) -- Source One Mortgage Services Corporation's Long-Term Incentive Plan (incorporated by reference to Exhibit 10(n) of the
Company's 1994 Annual Report on Form 10-K)(**)
(o) -- Source Once Mortgage Service Corporation's Voluntary Deferred Compensation Plan (incorporated by reference to Exhibit
10(s) of the Company's 1993 Annual Report on Form 10-K)(**)
15
(p) -- Source One Mortgage Service Corporation's Amended and Restated Executive Phantom Stock Plan (incorporated by reference
to Exhibit 10(t) of the Company's 1993 Annual Report on Form 10-K)(**)
(q) -- Source One Mortgage Services Corporation's Stock Appreciation Rights Plan (incorporated by reference to Exhibit 10(u)
of the Company's 1993 Annual Report on Form 10-K)(**)
(r) -- Investment Contract by and between Source One Mortgage Services Corporation and James A. Conrad (incorporated by
reference to Exhibit 10(v) of the Company's 1993 Annual Report on Form 10-K)(**)
(s) -- Investment Contract by and between Source One Mortgage Services Corporation and Robert W. Richards (incorporated by
reference to Exhibit 10(w) of the Company's 1993 Annual Report on Form 10-K)(**)
(t) -- Credit Agreement, dated December 13, 1993, among the Company and White River Corporation (incorporated by reference to
Exhibit 10(x) of the Company's 1993 Annual Report on Form 10-K)(**)
11 -- Statement Re Computation of Per Share Earnings(*)
13 -- Fund American Enterprises Holdings, Inc. 1995 Annual Report to Shareholders. Such report, except portions which are
expressly incorporated by reference in this report on Form 10-K, is furnished only for the information of the
Securities and Exchange Commission and is not being "filed" as part hereof(*)
18 -- Letter from Ernst & Young LLP regarding change in accounting principle (incorporated by reference to Exhibit 18 of the
Company's 1994 Annual Report on Form 10-K)
21 -- Subsidiaries of the Registrant(*)
23 -- Consent of Independent Auditors(*)
24 -- Powers of Attorney(*)
====================================================================================================================================
16
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
FUND AMERICAN ENTERPRISES HOLDINGS, INC.
By: /s/ MICHAEL S. PAQUETTE
---------------------------------------------
Michael S. Paquette
Vice President and Controller
Date: March 25, 1996
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
JOHN J. BYRNE* Chairman, President and March 25, 1996
- -------------------------- Chief Executive Officer
John J. Byrne
HOWARD L. CLARK* Director March 25, 1996
- --------------------------
Howard L. Clark
HOWARD L. CLARK, JR.* Director March 25, 1996
- --------------------------
Howard L. Clark, Jr.
ROBERT P. COCHRAN* Director March 25, 1996
- --------------------------
Robert P. Cochran
GEORGE J. GILLESPIE, III* Director March 25, 1996
- --------------------------
George J. Gillespie, III
/s/ K. THOMAS KEMP Executive Vice President and March 25, 1996
- -------------------------- Director
K. Thomas Kemp
GORDON S. MACKLIN* Director March 25, 1996
- --------------------------
Gordon S. Macklin
MICHAEL S. PAQUETTE* Vice President and Controller March 25, 1996
- --------------------------
Michael S. Paquette
ALLAN L. WATERS* Senior Vice President and March 25, 1996
- -------------------------- Chief Financial Officer
Allan L. Waters
ARTHUR ZANKEL* Director March 25, 1996
- --------------------------
Arthur Zankel
*By: /s/ K. THOMAS KEMP
- -----------------------------------
K. Thomas Kemp, Attorney-in-Fact
17