Exhibit 99(j)
WHITE MOUNTAINS INSURANCE GROUP, LTD.
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION
INTRODUCTION AND OVERVIEW
On June 1, 2001, White Mountains Insurance Group, Ltd. (the "Company") acquired
OneBeacon Insurance Group ("OneBeacon", formerly CGU) from CGNU plc ("CGNU") for
total consideration of $2.1 billion (the "Acquisition"), of which $260.0 million
consisted of a convertible note payable (the "Seller Note") with the balance
paid in cash. Through October 31, 2001, OneBeacon wrote property and casualty
insurance policies nationwide, primarily through a network of independent
insurance agents.
On November 1, 2001 (the "Effective Date"), OneBeacon transferred its
regional agency business, agents and operations in 42 states and the District
of Columbia to Liberty Mutual Insurance Group ("Liberty Mutual") pursuant to
a renewal rights agreement (the "Renewal Rights Agreement"). This transfer
amounted to approximately $1.5 billion in written premiums, or approximately
45% of OneBeacon's total business. Over the two years following the Effective
Date, the operating results and cash flows of the renewed policies will be
shared between OneBeacon and Liberty Mutual. A reinsurance agreement
pro-rates results so that OneBeacon assumes approximately two-thirds and
one-third of the underwriting results corresponding to renewals in the first
and second years, respectively (the "Quota Share"). For purposes of the
Renewal Rights Agreement, renewals constitute historic OneBeacon policies
that are renewed by Liberty Mutual for those OneBeacon customers in existence
at November 1, 2001. New business written by Liberty Mutual is excluded from
the Quota Share. OneBeacon is now focused on becoming a profitable
independent agency property and casualty insurance company in the Northeast
and for select specialty business on a national basis.
The following unaudited pro forma condensed combined income statement of the
Company for the year ended December 31, 2001 presents results for the Company
as if the Acquisition had occurred as of January 1, 2001. The potential
effects of the Renewal Rights Agreement on White Mountains' premiums and loss
and loss adjustment expenses for the year ended December 31, 2001 are
supplementally disclosed herein. The Acquisition was fully reflected in
the Company's March 31, 2002 balance sheet and first quarter 2002 income
statement and the Renewal Rights Agreement did not have a material effect on
the Company's balance sheet on the Effective Date. Therefore, a pro forma
condensed consolidated balance sheet at March 31, 2002 and first quarter 2002
income statement has not been supplied herein.
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions, which are based on information known as of the date the
financial statements are prepared and issued, that affect the reported amounts
of assets, liabilities, revenues and expenses. Eventual results can differ from
those estimates, particularly with respect to loss and loss adjustment expense
reserves, as further information subsequently unfolds.
The amounts in the "Adjustments for the Acquisition" column represent various
closing and related pre-closing transactions undertaken in the acquisition of
OneBeacon by the Company as described below.
DEBT TENDER AND DEBT ESCROW TRANSACTIONS
In connection with the Acquisition, the Company completed a tender offer and
consent solicitation for $96.3 million in outstanding medium-term notes (the
"Debt Tender") which facilitated the Acquisition by amending the indenture
governing the notes. Pursuant to the Debt Tender, the Company repurchased and
retired $90.9 million of its medium-term notes and subsequently prepaid, in the
form of a fully-funded irrevocable escrow arrangement (the "Debt Escrow"), the
balance of the outstanding medium-term notes.
EQUITY FINANCING
On June 1, 2001, a small group of private investors purchased $437.6 million of
a newly-issued class of non-voting convertible preference shares of the Company
(the "Convertible Preference Shares"). The Convertible Preference Shares bore a
dividend of 1% per year and were automatically converted (at a conversion price
of approximately $200.00 per share) into 2,184,583 common shares upon approval
of the conversion by the Company's shareholders which occurred on August 23,
2001.
On June 1, 2001, Berkshire Hathaway, Inc. ("Berkshire") purchased from the
Company, for $75.0 million in cash, warrants (the "Warrants") to acquire
1,714,285 common shares at an exercise price of $175.00 per share. Warrants to
purchase 1,170,000 common shares (the "Series A Warrants") were immediately
exercisable and Warrants to purchase approximately 544,285 common shares (the
"Series B Warrants") became exercisable upon approval by shareholders which
occurred on August 23, 2001. The Warrants have a term of seven years from the
date of issuance, although the Company has the right to call the Warrants for
$60.0 million in cash commencing on the fourth anniversary of their issuance.
Since the Series B Warrants did not represent common equity to the Company until
shareholder approval was obtained on August 23, 2001, they constituted a
contingent put liability (similar in
nature to a stock appreciation right) which were carried at fair value through a
periodic charge or credit to the income statement for the period June 1, 2001
through August 23, 2001.
On June 1, 2001, Berkshire also purchased for $225.0 million, $300.0 million in
face value of cumulative non-voting preferred stock (the "Berkshire Preferred
Stock") of a subsidiary of the Company. The Berkshire Preferred Stock is
entitled to a dividend of no less than 2.35475% per quarter and is mandatorily
redeemable after seven years. The Berkshire Preferred Stock represents
subsidiary preferred stock which is considered to be minority interest in the
Company's consolidated financial statements.
On June 1, 2001, Zenith Insurance Company purchased $20.0 million in cumulative
non-voting preferred stock (the "Zenith Preferred Stock") of a subsidiary of the
Company. The Zenith Preferred Stock is entitled to a dividend of no less than
2.5% per quarter through June 30, 2007 and a dividend of no less than 3.5%
thereafter and is mandatorily redeemable after ten years. The Zenith Preferred
Stock represents subsidiary preferred stock which is considered to be minority
interest in the Company's consolidated financial statements.
BANK FINANCING
On June 1, 2001, a subsidiary of the Company borrowed $700.0 million in term
loans and $125.0 million in revolving loans (of a $175.0 million revolving loan
facility) from a banking syndicate arranged by Lehman Brothers Inc.
(collectively the "Lehman Facility"). The term loans are repayable in quarterly
installments with a final maturity on the sixth anniversary of the closing date.
The revolving loan facility is available on a revolving basis from the closing
date until the fifth anniversary of the closing. The loans are variable rate
instruments which are currently tied to a rate based on the three-month
eurodollar rate.
SIGNIFICANT REINSURANCE CONTRACTS
Immediately prior to the Acquisition, OneBeacon entered into reinsurance
agreements with National Indemnity Company (the "NICO Cover") and General
Reinsurance Corporation (the "GRC Cover") which provide OneBeacon with
significant reinsurance protections against unanticipated increases in
recorded reserves for insurance losses and loss adjustment expenses. The NICO
Cover provides up to $2.5 billion of protection against OneBeacon's asbestos,
environmental and certain other latent exposures. The GRC Cover provides for
up to $400.0 million in excess of loss reinsurance protection against adverse
development on accident year 2000 and prior losses. Because the NICO Cover
and the GRC Cover were material non-recurring transactions undertaken in
connection with the Acquisition, the financial effects of the NICO Cover and
the GRC Cover are excluded from the pro forma statements of operations for
the year ended December 31, 2001. The potential effects of the NICO Cover and
the GRC Cover on White Mountains' premiums and net loss from continuing
operations for the year ended December 31, 2001 are supplementaly disclosed
in the Notes to Unaudited Pro Forma Condensed Combined Financial Statements
herein.
SELLER NOTE
On June 1, 2001, the Company issued the Seller Note to CGNU. The Seller Note has
an 18 month term and bears interest at a rate equal to 50 basis points over the
rate on the Lehman Facility described above. The Seller Note may be settled in
cash, or at the Company's option, with common shares valued at $245.00 per
share. The Company has classified this obligation as debt since management
believes it has the ability to settle this obligation in a form other than
pursuant to the Note Purchase Option Agreement which governs the Seller Note.
PRECLOSING TRANSACTIONS WITH CGNU
On June 1, 2001, OneBeacon repaid $1.1 billion in intercompany debt to CGNU with
proceeds from the sale of OneBeacon's life insurance and Canadian operations to
CGNU, the sale of certain other assets to CGNU and available cash. In addition,
CGNU made a $200.0 million cash contribution to OneBeacon immediately prior to
Acquisition.
UNAUDITED PRO FORMA FINANCIAL INFORMATION
The following unaudited pro forma condensed combined income statement of the
Company for the year ended December 31, 2001 presents results for the Company as
if the Acquisition had occurred as of January 1, 2001.
The unaudited pro forma financial information is provided for informational
purposes only. The unaudited pro forma financial information does not purport to
represent what the Company's results of operations actually would have been had
the Acquisition in fact, occurred as of the date indicated, or to project the
Company's results of operations for any future date or period. The pro forma
adjustments are based on available information and assumptions that the Company
currently believes are reasonable under the circumstances and that are
considered to be material to the overall pro forma presentation. The unaudited
pro forma financial information should be read in conjunction with the Company's
Annual Report on Form 10-K for the year ended December 31, 2001 and the
Company's Current Report on Form 8-K dated June 1, 2001 (as amended and filed on
March 24, 2003, which contains OneBeacon's audited consolidated financial
statements for the years ended December 31, 2000, 1999 and 1998) and the
Company's Current Report on Form 8-K dated November 1, 2001 (which contains the
Renewal Rights Agreement and related documents).
WHITE MOUNTAINS INSURANCE GROUP, LTD.
UNAUDITED PRO FORMA CONDENSED COMBINED INCOME STATEMENT
FOR THE YEAR ENDED DECEMBER 31, 2001
(IN MILLIONS OF DOLLARS, EXCEPT SHARE AND PER SHARE DATA)
Pro Forma
White Adjustments for Pro Forma
Mountains OneBeacon the Acquisition Combined
--------------- ----------- ---------------- --------------
REVENUES
Earned insurance and reinsurance premiums $ 2,656.1 $ 1,906.9 $ - $ 4,563.0
Net realized gains on investment securities 173.1 362.3 - 535.4
Net investment income 284.5 229.2 (7.6) E
(36.4) F 469.7
Other revenues 119.9 - 40.6 I 160.5
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TOTAL REVENUES 3,233.6 2,498.4 (3.4) 5,728.6
EXPENSES
Losses and loss adjustment expenses 2,493.9 1,571.1 - 4,065.0
Other underwriting expenses 1,001.4 783.5 5.8 J 1,790.7
Accretion of discounted loss reserves 56.0 - 40.0 H 96.0
Interest expense 45.7 32.7 (2.1) A
28.8 C
(36.4) F
9.1 G 77.8
Share appreciation expense - contingent warrants 58.8 - - 58.8
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TOTAL EXPENSES 3,655.8 2,387.3 45.2 6,088.3
------------- ------------- ------- -------------
PRETAX EARNINGS (LOSS) (422.2) 111.1 (48.6) (359.7)
Income tax benefit (provision) 174.3 (55.5) 10.1 C
14.0 H
2.0 J 144.9
Minority interest:
Accretion of subsidiary preferred stock to
face value (5.1) - (3.7) B (8.8)
Dividends on subsidiary preferred stock (18.1) - (11.9) B
(0.8) D (30.8)
------------- ------------- ------- -------------
NET INCOME (LOSS) FROM CONTINUING OPERATIONS $ (271.1) $ 55.6 $ (38.9) $ (254.4)
============= ============= ======= =============
Average shares used in computing loss per share 6,663,038 6,663,038
Loss per common share (Note K):
Net loss from continuing operations available
to common shareholders $ (86.52) $ (84.29)
See the accompanying notes to the unaudited pro forma condensed combined
financial statements.
WHITE MOUNTAINS INSURANCE GROUP, LTD.
NOTES TO UNAUDITED PRO FORMA CONDENSED
COMBINED FINANCIAL STATEMENTS
ADJUSTMENTS FOR THE ACQUISITION
The pro forma Acquisition adjustments, as they relate to the unaudited pro forma
condensed combined statements of income, are described below. Due to the timing
of the Acquisition, the Company's actual results for the year ended December 31,
2001 contained OneBeacon's actual results for the seven months ended December
31, 2001. As a result, the pro forma income statement adjustments presented for
the year ended December 31, 2001 related to the Acquisition represent
adjustments only for the period January 1, 2001 to May 31, 2001 unless otherwise
noted.
(A) Pursuant to the Debt Tender, the Company repurchased and retired $90.9
million of $96.3 million in medium-term notes and subsequently prepaid, through
the Debt Escrow, the balance of its outstanding medium-term notes. The $2.1
million reduction in interest expense presented on the pro forma income
statement for the year ended December 31, 2001 represents interest expense on
medium-term notes retired under the Debt Tender.
The medium-term notes are an obligation of the Company, which is domiciled in
Bermuda. Accordingly, no Federal income taxes were recorded for this adjustment.
(B) Berkshire Preferred Stock dividends of $11.9 million recorded for the year
ended December 31, 2001 represent regular dividends on the Berkshire Preferred
Stock. Accretion of subsidiary preferred stock to face value of $3.7 million
recorded for the year ended December 31, 2001 represents accretion on the
Berkshire Preferred Stock which is required to transition the Berkshire
Preferred Stock's recorded value (initially $145.2 million) to its face value of
$300.0 million over the instrument's seven-year term. The accretion was
determined using the interest method of amortization.
The Warrants are an obligation of the Company which is domiciled in Bermuda.
Accordingly, no Federal income taxes were recorded for the Warrants.
(C) On June 1, 2001, Fund American Companies, Inc. ("Fund American"), a
wholly owned subsidiary of the Company, borrowed $825.0 million pursuant to
the Lehman Facility. The increase in interest expense of $28.8 million for
the year ended represents interest on the Lehman Facility. A one-eighth
percentage variance in interest rates would result in decreased or increased
interest expense of $1.0 million. The Lehman Facility is an obligation of
Fund American which is domiciled in the United States. As a result, a Federal
income tax benefit of $10.1 million for the year ended December 31, 2001 was
recorded for this adjustment.
(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 $0.8 million recorded for
the year ended December 31, 2001 represent regular dividends on the Zenith
Preferred Stock.
(E) The Company utilized $364.0 million of its cash on hand to fund the
Acquisition, the Debt Tender, the Debt Escrow and related expenses. The Company
estimates that it earned $7.6 million for the year ended December 31, 2001 on
such balances which were held in the form of short-term investments.
Cash on hand used to fund the Acquisition was previously held at a subsidiary of
the Company which is domiciled in Barbados. As a result, no Federal income taxes
were recorded for this adjustment.
(F) The $36.4 million reduction in net investment income and interest expense
recorded on the pro forma income statement for the year ended December 31, 2001
resulted from the repayment of the $1.1 billion CGNU intercompany note. The
yield of 6.5% on the CGNU intercompany note approximated OneBeacon's historical
pre-tax yield on its fixed maturity portfolio during the period.
(G) On June 1, 2001, the Company issued the $260.0 million Seller Note to CGNU.
For the pro forma year ended December 31, 2001, interest expense on the Seller
Note was $9.1 million.
(H) In determining the purchase accounting related to the Acquisition, White
Mountains estimated the fair values of OneBeacon's loss and loss adjustment
expense reserves and related reinsurance recoverables based on the present value
of their expected cash flows with consideration for the uncertainty inherent in
both the timing of, and the ultimate amount of, future payments for losses and
receipts of amounts recoverable from reinsurers. As a result, net loss and loss
adjustment
expense reserves were reduced by $300.0 million and are being accreted through
an income statement charge over the period that the claims are expected to be
settled.
Accretion of loss and loss adjustment expense reserves of $40.0 million
recorded on the pro forma income statement for the year ended December 31,
2001 represents the amortization of net loss and loss adjustment expense
reserves (which were reduced to their estimated fair value in purchase
accounting) to their nominal value over the respective reporting period. The
accretion expense recorded during this period assumes that 32% 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 $14.0 million for the year ended
December 31, 2001 was recorded for this adjustment.
(I) The excess of the estimated fair value of net assets (after the reduction of
the carrying amounts of noncurrent, non-financial assets acquired) over the
purchase price related to the Acquisition of $682.0 million has been recorded as
a deferred credit in accordance with APB 16. The deferred credit is being
amortized systematically to income over the estimated period of benefit of seven
years. As a result, deferred credit amortization of $40.6 million has been
recorded on the pro forma income statement for the year ended December 31, 2001.
In June 2001 the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 141 entitled "Business
Combinations". SFAS No. 141 requires all business combinations initiated after
June 30, 2001 to be accounted for using the purchase method and calls for the
recognition of all existing deferred credits arising from business combinations
prior to July 1, 2001 through the income statement on the first day of the
fiscal year beginning after December 15, 2001. In accordance with SFAS No. 141,
White Mountains will recognize its remaining unamortized deferred credit balance
on January 1, 2002 as a cumulative effect of a change in accounting principle.
In June 2001 the FASB issued SFAS No. 142 entitled "Goodwill and Other
Intangible Assets". SFAS No. 142 sets forth new standards concerning accounting
for deferred credits, goodwill and other intangible assets arising from business
combinations. With respect to goodwill, SFAS No. 142 calls for the amortization
of existing and prospective goodwill only when the asset acquired is deemed to
have been impaired rather than systematically over a perceived period of
benefit. SFAS No. 142 is effective for interim and annual periods beginning
after December 15, 2001. As a result, White Mountains will no longer ratably
amortize its unamortized goodwill balance.
(J) On June 1, 2001, White Mountains awarded 73,500 restricted shares to its key
employees pursuant to the Acquisition which will vest in June 2003. Compensation
expenses of $5.8 million recorded on the pro forma income statement for the year
ended December 31, 2001 represent restricted share awards deemed to have been
earned by recipients over the period. As a result, a Federal income tax benefit
of $2.0 million for the year ended December 31, 2001 was recorded for this
adjustment.
EARNINGS PER SHARE
(K) In determining earnings (loss) per common share, earnings are reduced by
dividends and the redemption value adjustment on convertible preference shares.
The basic earnings per common share computation is determined using the weighted
average number of common shares outstanding during the period. The diluted
earnings per common share computation is determined using the weighted average
number of common shares and dilutive common share equivalents outstanding during
the period. The pro forma income statement for the year ended December 31, 2001
presents a net loss to common shareholders. Accordingly, no additional common
share equivalents resulting from the Acquisition have been included in the pro
forma earnings per share computations as the inclusion of such potential shares
would be anti-dilutive.
On June 1, 2001, the Company received a total of $437.6 million in cash from
a small group of private investors in full payment for the Convertible
Preference Shares. Convertible Preference Share dividends of $1.8 million
recorded for the year ended December 31, 2001 represent regular dividends on
Convertible Preference Shares which assumes that shareholder approval did not
occur during the period.
NON-RECURRING TRANSACTIONS
SUPPLEMENTAL INFORMATION IN REGARDS TO THE RENEWAL RIGHTS AGREEMENT
BUSINESS SUBJECT TO THE RENEWAL RIGHTS AGREEMENT
Based on historical underwriting results experienced by OneBeacon for the year
ended December 31, 2001 on all personal and commercial lines of business in all
regions of the United States excluding New England, New York and New Jersey, had
the Renewal Rights Agreement been in place as of January 1, 2001, it would have
served to reduce written premiums, earned premiums, losses and loss adjustment
expenses and other underwriting expenses by $1,370.7 million, $1,693.3 million,
$1,470.6 million and $610.8 million, respectively for the year ended December
31, 2001. Such amounts do not take into consideration the underwriting results
associated with the earning of the unearned premium related to the Business
Subject to the Renewal Rights Agreement on January 1, 2001.
EXISTING BUSINESS SUBJECT TO THE RENEWAL RIGHTS AGREEMENT
Had the Renewal Rights Agreement been in place as of January 1, 2001, the
Company would have experienced earned premiums, losses and loss adjustment
expenses and other underwriting expenses of $964.2 million, $850.5 million and
$364.0 million, respectively, for the year ended December 31, 2001 related to
the underwriting results associated with the earning of the unearned premium on
existing policies written in regions subject to the Renewal Rights Agreement
prior to January 1, 2001. Such amounts were based on an estimate that
approximately 52% of all written premiums for Business Subject to the Renewal
Rights Agreement would have been earned during the year ended December 31, 2001.
ADJUSTMENTS FOR THE QUOTA SHARE
OneBeacon will reinsure 67% of all premiums and losses and loss adjustment
expenses from renewal policies underwritten by Liberty Mutual under the Renewal
Rights Agreement during the first twelve months and 33% of all such premiums and
losses and loss adjustment expenses in the following twelve months.
Additionally, OneBeacon will pay Liberty Mutual a ceding commission equal to 67%
of certain underwriting expenses during the first twelve months of the Renewal
Rights Agreement and 33% of such underwriting expenses during the following
twelve months. Per the terms of the Renewal Rights Agreement, the ceding
commission paid by OneBeacon will not exceed 35% of the premiums subject to the
Quota Share in either twelve month period.
Had the Renewal Rights Agreement been in place as of January 1, 2001, the
Company would have experienced written premiums, earned premiums and losses and
loss adjustment expenses for the year ended December 31, 2001 of $868.9 million,
$451.6 million and $385.9 million, respectively, consisting of 67% of all
written premiums, earned premiums and losses and loss adjustment expenses from
renewal policies subject to the Renewal Rights Agreement. Such amounts were
based on an estimate that approximately 52% of all renewal written premiums for
Business Subject to the Renewal Rights Agreement would have been earned during
the year ended December 31, 2001.
Had the Renewal Rights Agreement been in place as of January 1, 2001, the
Company would have experienced other underwriting expenses of $158.1 million for
the year ended December 31, 2001. This amount represents 35% of the premiums
subject to the Quota Share during the twelve month period, which is the maximum
annual ceding commission that OneBeacon would be liable to pay per the terms of
the Renewal Rights Agreement.
SIGNIFICANT REINSURANCE CONTRACTS
Effective June 1, 2001, in accordance with a provision in the OneBeacon purchase
and sale agreement, CGNU caused OneBeacon to purchase the NICO Cover for total
consideration of $1,322.3 million and the GRC Cover for total consideration of
$275.0 million in cash. The NICO Cover and the GRC Cover, which were contingent
on, and occurred contemporaneously with the Acquisition, qualify for prospective
reinsurance accounting treatment under the 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. Because the
NICO Cover and the GRC Cover were material non-recurring transactions undertaken
in connection with the Acquisition, the financial effects of the NICO Cover and
the GRC Cover are excluded from the pro forma statements of operations for the
year ended December 31, 2001. The NICO Cover and the GRC Cover would have
reduced revenues by $1.5 billion and increased the net loss from continuing
operations by $306.9 million during the pro forma period presented.