<Page>
Exhibit 99(w)
CGU CORPORATION
(A WHOLLY-OWNED SUBSIDIARY OF CGNU PLC)
CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31,
2000, 1999 AND 1998
CGU CORPORATION
(A WHOLLY-OWNED SUBSIDIARY OF CGNU PLC)
CONSOLIDATED FINANCIAL STATEMENTS
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
<Table>
<Caption>
PAGE(S)
Report of Independent Accountants 1
Consolidated Financial Statements:
Consolidated Balance Sheets at December 31, 2000 and 1999 2
Consolidated Statements of Income and Comprehensive Income
for the years ended December 31, 2000, 1999 and 1998 3
Consolidated Statements of Shareholders' Equity
for the years ended December 31, 2000, 1999 and 1998 4
Consolidated Statements of Cash Flows for the
years ended December 31, 2000, 1999 and 1998 5
Notes to Consolidated Financial Statements 6-26
</Table>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of
CGU Corporation
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of income and comprehensive income, shareholders'
equity, and cash flows present fairly, in all material respects, the financial
position of CGU Corporation and its subsidiaries (the "Company") at December 31,
2000 and 1999, and the results of their operations and their cash flows for each
of the three years in the period ended December 31, 2000 in conformity with
accounting principles generally accepted in the United States of America. These
financial statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States of America, which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
As discussed in Note 1, effective January 1, 1999, the Company changed its
method of accounting for insurance-related assessments.
/s/ PricewaterhouseCoopers LLP
- ----------------------------------
May 8, 2001
CGU CORPORATION
(A WHOLLY-OWNED SUBSIDIARY OF CGNU PLC)
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2000 AND 1999
(DOLLARS IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNT)
- --------------------------------------------------------------------------------
<Table>
<Caption>
2000 1999
---- ----
ASSETS
Fixed maturity investments, at fair value (amortized cost
$7,995,352 and $6,574,647) $ 8,154,276 $ 6,680,941
Common equity securities, at fair value (cost $474,528
and $1,600,630) 765,162 2,433,643
Preferred equity securities, at fair value (cost $116,513
and $119,547) 146,919 154,828
Short-term investments, at amortized cost (which approximates
fair value) 321,173 280,621
Other investments 98,752 73,846
----------- -----------
Total investments 9,486,282 9,623,879
Cash 45,826 50,800
Insurance balances receivable 1,419,538 1,283,065
Reinsurance recoverable on paid and unpaid losses 1,558,184 1,516,361
Deferred policy acquisition costs 420,810 451,632
Investment income accrued 103,584 122,574
Net deferred federal income taxes 107,332 --
Other assets 564,762 446,324
Net assets of discontinued operations 503,800 505,602
----------- -----------
Total assets $14,210,118 $14,000,237
=========== ===========
LIABILITIES
Loss and loss adjustment expense reserves $ 6,982,728 $ 6,368,828
Unearned insurance premiums 2,042,468 2,023,396
Long-term debt 1,113,900 1,130,750
Net deferred federal income taxes -- 102,627
Accounts payable and other liabilities 872,316 603,138
----------- -----------
Total liabilities 11,011,412 10,228,739
----------- -----------
Commitments and contingencies (Notes 11, 12 and 16)
SHAREHOLDERS' EQUITY
Common stock, $1.00 par value;
authorized 100,000 shares, 16,022 shares outstanding 16 16
Additional paid-in capital 753,200 753,200
Retained earnings 2,135,727 2,400,619
Accumulated other comprehensive income 309,763 617,663
----------- -----------
Total shareholders' equity 3,198,706 3,771,498
----------- -----------
Total liabilities and shareholders' equity $14,210,118 $14,000,237
=========== ===========
</Table>
The accompanying notes are an integral part of the consolidated financial
statements.
2
CGU CORPORATION
(A WHOLLY-OWNED SUBSIDIARY OF CGNU PLC)
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
(DOLLARS IN THOUSANDS)
- --------------------------------------------------------------------------------
<Table>
<Caption>
2000 1999 1998
---- ---- ----
Revenues:
Earned insurance premiums $ 4,275,059 $ 4,259,995 $ 4,041,878
Net investment income 504,884 502,125 480,276
Net realized gains from investment securities
and other investments 732,769 381,948 400,335
----------- ----------- -----------
Total revenues 5,512,712 5,144,068 4,922,489
----------- ----------- -----------
Expenses:
Losses and loss adjustment expenses 4,301,997 3,252,406 3,946,847
Underwriting and other operating expenses 1,497,698 1,516,614 1,462,800
----------- ----------- -----------
Total expenses 5,799,695 4,769,020 5,409,647
----------- ----------- -----------
Pretax earnings (loss) (286,983) 375,048 (487,158)
Federal income tax benefit (provision) 83,318 (104,474) 186,150
----------- ----------- -----------
Net income (loss) from continuing operations before
cumulative effect of change in accounting principle (203,665) 270,574 (301,008)
Cumulative effect of change in accounting principle,
net of tax -- (9,405) --
----------- ----------- -----------
Net income (loss) from continuing operations (203,665) 261,169 (301,008)
Income from discontinued operations 40,817 54,146 46,691
Loss on disposal of discontinued operations (102,044) -- --
----------- ----------- -----------
Net income (loss) from discontinued operations (61,227) 54,146 46,691
----------- ----------- -----------
Net income (loss) (264,892) 315,315 (254,317)
Other comprehensive income, net of tax:
Increase (decrease) in net unrealized appreciation
of investments (304,218) (552,945) 281,836
Gain (loss) on foreign currency exchange (3,682) 29,276 (16,283)
----------- ----------- -----------
Comprehensive net income (loss) $ (572,792) $ (208,354) $ 11,236
=========== =========== ===========
</Table>
The accompanying notes are an integral part of the consolidated financial
statements.
3
CGU CORPORATION
(A WHOLLY-OWNED SUBSIDIARY OF CGNU PLC)
CONSOLIDATED STATEMENTS SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
(DOLLARS IN THOUSANDS)
- --------------------------------------------------------------------------------
<Table>
<Caption>
2000 1999 1998
---- ---- ----
Common stock:
Balance, beginning of year $ 16 $ 16 $ 18
Common stock issued to parent -- -- 9
Retirement of shares due to merger -- -- (11)
----------- ----------- -----------
Balance, end of year 16 16 16
----------- ----------- -----------
Additional paid-in capital:
Balance, beginning of year 753,200 753,200 1,378,199
Common stock issued to parent -- -- 474,999
Return of capital distribution -- -- (1,099,998)
----------- ----------- -----------
Balance, end of year 753,200 753,200 753,200
----------- ----------- -----------
Accumulated other comprehensive income:
Balance, beginning of year 617,663 1,141,332 875,779
Increase (decrease) in net unrealized appreciation
of investments (net of deferred federal income tax) (304,218) (552,945) 281,836
Gain (loss) on foreign currency exchange (net of
federal income tax) (3,682) 29,276 (16,283)
----------- ----------- -----------
Balance, end of year 309,763 617,663 1,141,332
----------- ----------- -----------
Retained earnings:
Balance, beginning of year 2,400,619 2,085,304 2,339,867
Net income (loss) (264,892) 315,315 (254,317)
Dividend to shareholder -- -- (246)
----------- ----------- -----------
Balance, end of year 2,135,727 2,400,619 2,085,304
----------- ----------- -----------
Total shareholders' equity $ 3,198,706 $ 3,771,498 $ 3,979,852
=========== =========== ===========
</Table>
The accompanying notes are an integral part of the consolidated financial
statements.
4
CGU CORPORATION
(A WHOLLY-OWNED SUBSIDIARY OF CGNU PLC)
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
(DOLLARS IN THOUSANDS)
- --------------------------------------------------------------------------------
<Table>
<Caption>
2000 1999 1998
---- ---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (264,892) $ 315,315 $ (254,317)
Adjustments to reconcile net income to net
cash provided by operating activities:
Loss on disposal of discontinued operations 102,044 -- --
Net income from discontinued operations (40,817) (54,146) (46,691)
Amortization of bond premium and discount (32,143) (6,724) 4,517
Net realized gains from investment securities
and other assets (732,769) (381,948) (400,335)
Depreciation and amortization 30,201 47,610 42,186
Deferred federal income taxes (80,443) 107,243 (179,749)
Change in operating assets and liabilities:
Reinsurance recoverable on paid and unpaid losses (41,823) 386,806 (641,304)
Deferred policy acquisition costs 30,822 835 (23,995)
Loss and loss adjustment expense reserves 613,901 (575,197) 1,235,903
Unearned insurance premiums 19,071 (29,010) 109,613
Insurance balances receivable (136,473) (101,814) (58,814)
Net change in other assets and liabilities 180,200 125,227 96,481
----------- ----------- -----------
Net cash used by operating activities (353,121) (165,803) (116,505)
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of investments:
Fixed maturity investments (6,182,395) (3,206,018) (1,567,358)
Common equity securities (642,410) (1,220,016) (1,516,461)
Preferred equity securities (539) (250) --
Net increase (decrease) in short-term investments (40,552) 28,106 (107,727)
Net increase (decrease) in other invested assets (31,958) (3,897) (54,200)
Proceeds from the sales of investments:
Fixed maturity investments 4,785,894 2,985,482 1,198,776
Common equity securities 2,316,433 1,372,141 1,548,504
Preferred equity securities 4,146 22,733 --
Maturities of fixed maturity investments 207,511 253,628 265,348
Proceeds from the sale of real estate 4,883 8,203 --
Purchase of National Farmers Union Insurance
Company (Note 3) -- -- (116,400)
Purchases of equipment, net (14,233) (18,809) (31,063)
Development of computer software (41,783) -- --
----------- ----------- -----------
Net cash provided (used) by investing activities 364,997 221,303 (380,581)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Capital contribution -- -- 425,295
Return of capital distribution -- -- (1,099,998)
Dividends paid -- -- (246)
Long-term debt (16,850) (4,700) 1,100,000
----------- ----------- -----------
Net cash provided (used) by financing activities (16,850) (4,700) 425,051
----------- ----------- -----------
Net increase (decrease) in cash (4,974) 50,800 (72,035)
Cash, beginning of year 50,800 -- 72,035
----------- ----------- -----------
Cash, end of year $ 45,826 $ 50,800 $ --
=========== =========== ==========
</Table>
The accompanying notes are an integral part of the consolidated financial
statements.
5
CGU CORPORATION
(A WHOLLY-OWNED SUBSIDIARY OF CGNU PLC)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
- --------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a. NATURE OF BUSINESS AND BASIS OF PRESENTATION
Effective June 2, 1998, Commercial Union plc (Commercial Union) and
General Accident plc (General Accident), both UK corporations,
were merged in a pooling of interests to CGU plc. The U.S.
operations of both companies were formally merged on December 31,
1998 when General Accident Corporation of America (GACA) was
merged into Commercial Union Corporation (CUC) and the name was
changed to CGU Corporation (the "Company"), which is a
wholly-owned subsidiary of CGNU plc, its ultimate parent. CGNU plc
is a United Kingdom Company listed on the London Stock Exchange,
and was formed on May 30, 2000, when CGU plc merged with Norwich
Union plc to form CGNU plc. The Company, through certain of its
subsidiaries, is primarily engaged in underwriting and risk
placement of property and casualty insurance business. The Company
is also engaged, through certain other subsidiaries, in underwriting
of life insurance and annuities.
The Company's primary subsidiaries are CGU Insurance Company and
subsidiaries (Pennsylvania domiciled), Commercial Union Insurance
Company and subsidiaries (Massachusetts domiciled), General Accident
Insurance Company and subsidiaries (Pennsylvania domiciled), CGU
Life Insurance Company of America and subsidiary (Delaware
domiciled), National Farmers Union Property and Casualty Company and
subsidiary (Colorado domiciled), Houston General Insurance Company
and subsidiaries (Texas domiciled), and Pilot Insurance Company (a
Canadian Subsidiary).
Subsidiaries acquired during 1998 and accounted for as purchases
under Accounting Principles Board (APB) Opinion No. 16, "Business
Combinations" (APB No. 16), are included in the consolidated
financial statements from the date of acquisition. The merger of the
U.S. operations of GACA and CUC was accounted for as a pooling of
interests. Accordingly, the 1998 consolidated financial statements
have been restated as though the companies had been merged
throughout the accounting periods presented. All significant
intercompany transactions have been eliminated in consolidation.
b. PENDING TRANSACTION
On September 25, 2000, CGNU plc announced it had entered into a
definitive agreement to sell its U.S. property and casualty
operations to White Mountains Insurance Group, Ltd (White
Mountains). The agreed-upon purchase price is approximately
$2,170,000, subject to purchase price adjustments and certain
pre-closing reinsurance transactions, payable in cash and a Sellers
Note amounting to $260,000. Concurrent with the sale:
- The Company will enter into certain retroactive reinsurance
arrangements which will include the cession of all asbestos,
environmental and certain other latent exposures, as well as an
excess of loss reinsurance agreement covering adverse
development.
- The Company will sell its life insurance and Canadian property
and casualty operations to CGNU plc for $503,800, subject to
purchase price adjustments and certain reinsurance
transactions. As more fully described in Note 2, the sale of
the Company's life operations and Canadian property and
casualty operations to CGNU plc has been reported as
discontinued operations in accordance with APB Opinion No. 30,
"Reporting the Results of Operations - Reporting the Effects of
a Disposal of a Segment of a Business, and Extraordinary,
Unusual and Infrequently Occurring Events and Transactions"
(APB No. 30).
6
<Page>
CGU CORPORATION
(A WHOLLY-OWNED SUBSIDIARY OF CGNU PLC)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
- --------------------------------------------------------------------------------
- Long-term debt owed to CGNU plc amounting to $1,100,000 at
December 31, 2000 and included in the accompanying balance
sheet will be paid with proceeds from the anticipated sale of
the Company's discontinued operations and with proceeds from
sales of investment securities.
Subject to regulatory approvals, the sale is expected to be
consummated in the second quarter of 2001.
c. USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS
The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure
of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those
estimates.
d. INVESTMENTS
Fixed maturity investments (all of which are classified as
"Available for Sale") and common and preferred equity securities are
stated at fair value based on quoted market prices and in accordance
with Statement of Financial Accounting Standards No. 115,
"Accounting for Certain Investment in Debt and Equity Securities."
Certain other invested assets are stated at cost, which approximates
fair value.
Short-term investments consist of money market funds, certificates
of deposit and other securities which mature or become available for
use within one year. Short-term investments are carried at amortized
cost, which approximated fair value as of December 31, 2000 and
1999.
Unrealized gains and losses from changes in the fair value of common
and preferred equity securities and fixed maturity investments, net
of applicable deferred federal income taxes, are a separate
component of other comprehensive income and, accordingly, do not
affect net income. Realized gains and losses on the sale of
investments are determined on the basis of specific cost and are
included as a component of total revenues. When other than temporary
impairment of the value of a specific investment or group of
investments is determined, a realized investment loss is recorded.
e. CASH
Cash includes amounts on hand and demand deposits with banks and
other financial institutions. Amounts presented in the statement of
cash flows are shown net of balances acquired and sold in the
purchase and sale of the Company's consolidated subsidiaries.
f. PREMIUMS AND UNEARNED INSURANCE PREMIUMS
Property and casualty premium revenues are earned on a daily pro
rata basis over the term of the respective policies. Unearned
insurance premiums represent the portion of premiums written
applicable to the unexpired term of each policy.
7
<Page>
CGU CORPORATION
(A WHOLLY-OWNED SUBSIDIARY OF CGNU PLC)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
- --------------------------------------------------------------------------------
g. DEFERRED POLICY ACQUISITION COSTS
Deferred policy acquisition costs primarily represent commissions,
premium taxes and other costs which are directly attributable to and
vary with the production of new business. These costs are deferred
and amortized over the applicable premium recognition period.
Deferred policy acquisition costs are limited to the amount expected
to be recovered from future earned premiums and anticipated
investment income. Deferred policy acquisition costs not expected to
be recoverable at any given time are immediately expensed. Total
acquisition costs expensed in 2000, 1999 and 1998 were $1,030,576,
$985,115, and $909,629, respectively. Expenses incurred in 2000
include the recognition of $23,620 of deferred policy acquisition
costs that were considered to be unrecoverable in future periods.
h. PROPERTY AND EQUIPMENT
Property and equipment, included in other assets, are carried at
cost less accumulated depreciation. Depreciation is charged to
income principally on the straight-line method over the estimated
useful lives of the assets. The Company estimates that computer
equipment and furniture and fixtures have useful lives of between
five and ten years. Leasehold improvements are amortized over the
lesser of their estimated useful life or the lease term. Internal
use software costs are capitalized for significant projects and upon
completion are amortized over their estimated useful lives.
The cost of property sold or otherwise disposed of and the
accumulated depreciation thereon are eliminated from the accounts
and any resulting gain or loss is credited or charged to income.
i. LOSSES AND LOSS ADJUSTMENT EXPENSES
Liabilities for unpaid losses and loss adjustment expenses are
comprised of case basis estimates for claims and claim expenses
reported prior to year-end, estimates of incurred but not reported
losses and loss expenses, reported reserves from underwriting pools
and associations in which the Company participates, and other
estimates, net of estimated salvage and subrogation recoverable.
These estimates are continually reviewed and updated and any
resulting adjustments are reflected in current operating results.
Certain claim settlements are funded by annuities (structured
settlements) purchased from various life insurers. The aggregate
present value of expected future payment amounts as of December 31,
2000 and 1999, for which the Company is contingently liable in the
event of default by the life insurer, was $182,283 and $359,169,
respectively. Included in these amounts are annuities from CGU Life
Insurance Company, an affiliated company, of $106,100 and $275,686
as of December 31, 2000 and 1999, respectively.
Certain liabilities for unpaid losses related to long-term workers'
compensation coverage are discounted to present value at 7.0% in
2000 and 1999. The undiscounted liabilities were $482,889 at
December 31, 2000 and $447,389 at December 31, 1999. The effect of
discounting these claims is to reduce liabilities for unpaid losses
by $230,691 and $227,306 at December 31, 2000 and 1999,
respectively.
All policy liabilities and accruals are based on the various
estimates discussed above. Although the adequacy of these amounts
cannot be assured, the Company believes that it is more likely than
not that policy liabilities and accruals will be sufficient to meet
future obligations of policies in force. The amount of liabilities
and accruals, however, could be revised in the near term if the
estimates discussed above are revised.
8
CGU CORPORATION
(A WHOLLY-OWNED SUBSIDIARY OF CGNU PLC)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
- --------------------------------------------------------------------------------
j. POLICYHOLDER DIVIDENDS
Dividends payable to participating property and casualty insurance
policyholders are accrued for in the period in which the related
premium was earned. Policyholder dividends of $17,754, $24,861 and
$23,117 were included in underwriting expenses in 2000, 1999 and
1998, respectively.
k. FEDERAL INCOME TAXES
The Company files a consolidated federal income tax return with its
eligible subsidiary companies, primarily comprised of its property
and casualty and life insurance subsidiaries.
In accordance with Statement of Financial Accounting Standards No.
109, "Accounting for Income Taxes," the Company uses an asset and
liability approach that recognizes deferred tax assets and
liabilities for the expected future tax consequences of events that
have been recognized in the Company's financial statements or tax
returns. In estimating future tax consequences, the Company
generally considers all expected future events other than changes in
the tax law or rates, unless enacted. Valuation allowances are
established when necessary to reduce deferred tax assets to the
amount expected to be realized.
l. FOREIGN CURRENCY TRANSLATION
The operations of Pilot Insurance Company ("Pilot"), a discontinued
operation located in Canada, are denominated in Canadian dollars.
Net unrealized foreign currency translation gains and losses
associated with Pilot are reported, after tax, as a net amount in a
separate component of accumulated other comprehensive income.
Changes in the values of these operations due to currency
fluctuations, after tax, are reported on the income statement as a
component of other comprehensive income.
m. GOODWILL
The excess of the cost to acquire purchased companies over the net
assets acquired is recorded as goodwill. The Company amortizes
goodwill on straight-line basis over 20 years. At December 31, 2000
and 1999, respectively, other assets included $41,947 and $47,747 of
goodwill.
n. CHANGES IN ACCOUNTING PRINCIPLES
Effective January 1, 1999, the Company changed its accounting policy
for guarantee fund assessments and adopted the provisions of
American Institute of Certified Public Accountants Statement of
Position 97-3, "Accounting by Insurance and other Enterprises for
Insurance-Related Assessments" (SOP 97-3). The cumulative effect of
this change was to reduce net income by $9,405, representing an
increase in unpaid loss and loss adjustment expense reserves of
$14,470 less a related deferred federal income tax benefit of $5,065
for the year ended December 31, 1999.
Effective January 1, 1999, the Company changed its accounting policy
for internally developed software and adopted the provisions of
American Institute of Certified Public Accountants Statement of
Position 98-1, "Accounting for the Cost of Computer Software
Developed or Obtained for Internal Use" (SOP 98-1). SOP 98-1
requires that certain costs incurred in developing the internal-use
computer software be capitalized and provides guidance for
determining whether computer software is to be considered for
internal use. During 2000, the Company capitalized $41,783 of
eligible computer software costs.
9
CGU CORPORATION
(A WHOLLY-OWNED SUBSIDIARY OF CGNU PLC)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
- --------------------------------------------------------------------------------
o. NEW AND PENDING ACCOUNTING PRONOUNCEMENTS
On January 1, 2001, Statement of Financial Accounting Standards No.
133, "Accounting for Derivative Instruments and Hedging Activities"
(FAS 133), which establishes accounting and reporting standards for
derivative instruments, became effective. FAS 133 did not have a
significant impact on the results of operations or financial
position of the Company.
In September 2000, the Financial Accounting Standards Board (FASB)
issued an exposure draft (ED), "Business Combinations and Intangible
Assets." This ED proposes to eliminate the pooling-of-interests
method of accounting, which would require that purchase accounting,
with its recognition of intangible assets and goodwill, be applied
to all business combinations.
As the ED stands, the issuance of this statement could have a
significant effect on the Company's intangible assets and
amortization charge, as the Company's goodwill and intangible assets
would no longer be amortized. Management is currently evaluating the
impact of this ED on the Company.
p. CODIFICATION OF STATUTORY ACCOUNTING PRINCIPLES (UNAUDITED)
Effective January 1, 2001, the Company's insurance subsidiaries are
required to adopt new regulations implementing a codification of
statutory accounting principles for insurers. The purpose of the
codification is to enhance the consistency of the accounting
treatment of assets, liabilities, reserves, income and expenses of
insurers, by setting forth the accounting practices and procedures
to be followed in completing annual and quarterly financial
statements required by state law.
Codification will serve to increase the aggregate statutory
policyholders' surplus of the Company's insurance operations by
approximately $120,000 (unaudited) as of January 1, 2001 primarily
as a result of permitting the recording of deferred tax assets.
q. FINANCIAL INSTRUMENTS
In the normal course of business, the Company enters into
transactions involving various types of financial instruments,
including debt and investments such as fixed maturities and equity
securities. These instruments involve credit risk and also may be
subject to risk of loss due to interest rate fluctuation. The
Company evaluates and monitors each financial instrument
individually and, when appropriate, obtains collateral or other
security to minimize losses. At December 31, 2000 and 1999, unless
otherwise noted in the financial instruments, the carrying amount of
the Company's financial instruments approximates their fair value.
2. DISCONTINUED OPERATIONS
On September 25, 2000, in connection with CGNU plc's decision to sell the
Company to White Mountains, the Company agreed to sell, commensurate with
the sale, four of its subsidiaries to its parent, CGNU plc. Included in
the sale are CGU Life Insurance Company of America and subsidiary (CGU
Life), Pilot, CGU Annuity Services Corporation (CGUAS), and CGU
Investment Management Canada Limited (CGUIMC).
Accordingly, the operating results of the discontinued segments have been
reported in the consolidated statements of income and comprehensive
income as discontinued operations in accordance with APB No. 30.
Subsequent to the September 25, 2000 measurement date through December
31, 2000, operations from the discontinued business generated income of
approximately $30,589. Discontinued operations are anticipated to
generate income of approximately $13,500 from December 31, 2000 through
the anticipated disposal date.
10
CGU CORPORATION
(A WHOLLY-OWNED SUBSIDIARY OF CGNU PLC)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
- --------------------------------------------------------------------------------
At December 31, 2000, the discontinued segments had assets of
approximately $3,700,000, consisting primarily of invested assets,
premiums and fees receivable, and deferred acquisition costs, and
liabilities of approximately $3,100,000 consisting primarily of policy
liabilities. Revenues for the discontinued operations were approximately
$649,000, $611,000 and $660,000 for the years ended December 31, 2000,
1999, and 1998, respectively.
The sale is expected to be completed during the second quarter of 2001.
The Company anticipates receiving proceeds of $503,800 in connection with
the sale of the discontinued operations. As a result of the sale, the
Company recorded a $73,122 pretax adjustment related to the write-down of
the net assets of the discontinued operations to their net realizable
value, which is included in the loss on disposal indicated below.
The consolidated statements of operations for all periods presented
include the results of CGU Life, Pilot, CGUAS, and CGUIMC in Net Income
from Discontinued Operations.
The following table summarizes the Company's discontinued operations for
the three-year period ended December 31, 2000:
<Table>
<Caption>
YEAR ENDED DECEMBER 31 2000 1999 1998
---------------------- ---- ---- ----
Operating income, before income taxes $ 70,930 $ 78,605 $ 74,227
Income taxes (30,113) (24,459) (27,536)
--------- --------- ---------
Net income $ 40,817 $ 54,146 $ 46,691
========= ========= =========
Loss on disposal, before income taxes $ (42,533) $ -- $ --
Income taxes (59,511)
--------- --------- ---------
Loss on disposal $(102,044) $ -- $ --
========= ========= =========
</Table>
3. ACQUISITIONS AND SUBSIDIARIES CONTRIBUTED BY PARENT
On July 16, 1998, CUC acquired Farmers Union Insurance Acquisition
Corporation and its two property and casualty insurance subsidiaries,
known collectively as National Farmers Union Insurance Companies (NFU),
at a cost of $116,400. The acquisition was accounted for as a purchase
and, accordingly, NFU's operating results from that date are included in
CGU's net income. NFU is engaged in underwriting and risk placement of
property and casualty insurance business, primarily in the Midwestern
region of the U.S. Goodwill of $42,100 related to the acquisition is
being amortized over a 20-year period.
Effective January 1, 1998, Commercial Union plc acquired 100% of the
capital stock of Houston General Insurance Company (HG), an underwriter
of property and casualty insurance business, from Tokio Marine and Fire
Company, Ltd. (TMF), and contributed the HG stock, valued at $50,000, to
the capital of the Company. In exchange, the Company issued 205 shares of
its common stock to its parent. Effective from the same date, under the
terms of a reinsurance agreement between HG and an affiliate of TMF, all
premiums, losses, and underwriting expenses associated with HG policies
written prior to the effective date and with any renewals or new policies
required by statute or contract to be issued on or after the effective
date will be 100% ceded to and assumed by the affiliate of TMF. In
addition, TMF has indemnified the Company and HG from any decline in the
value of the acquired assets, other than invested assets, subsequent to
January 1, 1998. The operating results of Houston General are included in
the consolidated results.
11
CGU CORPORATION
(A WHOLLY-OWNED SUBSIDIARY OF CGNU PLC)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
- --------------------------------------------------------------------------------
4. INVESTMENTS
NET INVESTMENT INCOME
An analysis of net investment income for the years ended December 31,
2000, 1999 and 1998 is as follows:
<Table>
<Caption>
2000 1999 1998
---- ---- ----
Interest from fixed maturity and short-term investments $ 472,510 $ 466,257 $ 443,377
Dividends from common and preferred equity securities 31,811 34,793 40,933
Other investment income 9,649 8,707 3,732
--------- --------- ---------
Total investment income 513,970 509,757 488,042
Investment expenses (9,086) (7,632) (7,766)
--------- --------- ---------
Total net investment income $ 504,884 $ 502,125 $ 480,276
========= ========= =========
</Table>
FIXED MATURITY INVESTMENTS
The amortized cost and fair value of fixed maturity investments available
for sale at December 31, 2000 and 1999 are summarized as follows:
<Table>
<Caption>
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------- ---------- ---------- -----
2000
U.S. Government and agency
obligations $3,119,428 $ 42,605 $ (12,811) $3,149,222
Debt securities issued by industrial
corporations 2,980,490 61,623 (35,619) 3,006,494
Municipal obligations 891,626 90,750 (6,759) 975,617
Mortgage-backed securities 965,878 19,067 (899) 984,046
Foreign government obligations 37,930 1,149 (182) 38,897
---------- ---------- ---------- ----------
Totals $7,995,352 $ 215,194 $ (56,270) $8,154,276
========== ========== ========== ==========
1999
U.S. Government and agency
obligations $1,352,748 $ 92,469 $ (19,843) $1,425,374
Debt securities issued by industrial
corporations 2,999,442 51,234 (70,337) 2,980,339
Municipal obligations 1,493,444 102,266 (37,278) 1,558,432
Mortgage-backed securities 729,013 1,799 (14,016) 716,796
Foreign government obligations -- -- -- --
---------- ---------- ---------- ----------
Totals $6,574,647 $ 247,768 $ (141,474) $6,680,941
========== ========== ========== ==========
</Table>
The amortized cost and fair values of fixed maturity investments by
contractual maturity, at December 31, 2000, are shown below. Expected
maturities will differ from contractual maturities because borrowers may
have the right to call or prepay obligations with or without call or
prepayment penalties.
12
CGU CORPORATION
(A WHOLLY-OWNED SUBSIDIARY OF CGNU PLC)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
- --------------------------------------------------------------------------------
<Table>
<Caption>
AMORTIZED FAIR
COST VALUE
--------- -----
Due in one year or less $2,522,392 $2,523,164
Due after one year through five years 1,307,990 1,341,077
Due after five years through ten years 1,929,250 1,957,410
Due after ten years 1,269,842 1,348,579
Mortgage-backed securities 965,878 984,046
---------- ----------
Total $7,995,352 $8,154,276
========== ==========
</Table>
At December 31, 2000 and 1999, respectively, fixed maturity investments
included $458,295 and $478,450 which were on deposit, with respect to
certain of the Company's insurance subsidiaries, with various states
and other regulatory agencies.
On a gross basis, gains of $253,801 and losses of $58,023 were realized
on 2000 sales of fixed maturity investments available for sale, while
gains of $45,588 and $43,181 and losses of $61,767 and $1,654 were
realized on 1999 and 1998 sales, respectively.
COMMON EQUITY SECURITIES
Cost and fair value of common equity securities as of December 31, 2000
and 1999 are summarized as follows:
<Table>
<Caption>
UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
---- ---------- ---------- -----
As of December 31, 2000 $ 474,528 $ 312,507 $ (21,873) $ 765,162
As of December 31, 1999 1,600,630 936,968 (103,955) 2,433,643
</Table>
On a gross basis, gains of $764,631 and losses of $210,720 were realized
on 2000 sales of common equity securities, while gains of $479,954 and
$423,140 and losses of $81,769 and $76,651 were realized on 1999 and 1998
sales, respectively.
PREFERRED EQUITY SECURITIES
Cost and fair value of preferred equity securities as of December 31,
2000 and 1999 are summarized as follows:
<Table>
<Caption>
UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
---- ---------- ---------- -----
As of December 31, 2000 $116,513 $ 31,361 $ (955) $146,919
As of December 31, 1999 119,547 37,466 (2,185) 154,828
</Table>
On a gross basis, gains of $638 and losses of $65 were realized on 2000
sales of preferred equity securities, while gains of $8,583 and $12,294
and losses of $68 and $47 were realized on 1999 and 1998 sales,
respectively.
CURRENCY SWAP
In order to protect against fluctuations in the exchange value and return
on Sterling denominated U.K. Government debt securities ("Gilts"), the
Company had previously entered into a currency swap agreement with an
affiliate of its parent. In 1999, the Gilts were sold and the swap
agreement was terminated.
13
CGU CORPORATION
(A WHOLLY-OWNED SUBSIDIARY OF CGNU PLC)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
- --------------------------------------------------------------------------------
SECURITIES LENDING
The Company has entered into a Securities Lending Authorization Agreement
with a third party under which the Company has designated all fixed
maturity investments not on deposit with various states or reinsurance
pools as available for lending to brokers approved by the Company. The
agreement specifies that all securities loaned shall be collateralized by
the borrower at approximately 102% of market value, such collateral to be
held by the third party. All securities loaned can be redeemed on short
notice. The total market value of securities on loan at December 31, 2000
and 1999 was $1,378,701 and $325,041, respectively, with corresponding
collateral valued at $1,403,737 and $331,808, respectively.
OTHER INVESTMENTS
Included in other investments is the Company's 20% interest in United
Fire and Casualty Insurance Company (UFC) at December 31, 2000, 1999 and
1998. The Company's investment in UFC is accounted for using the equity
method. In addition to UFC, other investments are primarily comprised of
unconsolidated ownership interests in various investment partnerships,
investments in leveraged leases and trust financing and are valued at
cost, or equity, as appropriate.
5. INSURANCE BALANCES RECEIVABLE
The allowance for uncollectible premiums and other receivables was
$40,923 and $36,419 at December 31, 2000 and 1999, respectively. The
Company estimates the allowance for uncollectible premiums based on
analysis of past due recoverables, accounts in legal collection, and
historical charges for uncollectible accounts.
6. PROPERTY AND EQUIPMENT
Details of property and equipment, net of accumulated depreciation and
amortization, included in other assets in the accompanying financial
statements at December 31, are as follows:
<Table>
<Caption>
2000 1999
---- ----
Real estate, net of impairment adjustments $145,070 $164,568
Furniture, fixtures and computer equipment 199,470 232,818
Internally developed software 41,783 --
Leasehold improvements 30,521 31,761
-------- --------
416,844 429,147
Less accumulated depreciation and amortization 235,185 260,387
-------- --------
Property and equipment, net $181,659 $168,760
======== ========
</Table>
During 2000, the Company sold two real estate holdings, realizing a loss
of $2,494 on proceeds of $4,883. Correspondingly, the Company paid down
certain long-term bonds relating to the property sold, in the aggregate
amount of $16,850 (See Note 8).
14
CGU CORPORATION
(A WHOLLY-OWNED SUBSIDIARY OF CGNU PLC)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
- --------------------------------------------------------------------------------
During 1999, the Company sold two real estate holdings, realizing a gain
of $1,436 on proceeds of $8,203. Correspondingly, the Company paid down
certain long-term bonds relating to the property sold, in the aggregate
amount of $4,700 (See Note 8).
The Company contracts with a third party to conduct annual appraisals of
its real estate holdings. As a result of these annual valuations, the
Company realized a loss of $11,000 in 2000 and $10,000 in 1999 for other
than temporary impairments in the valuation of certain real estate
holdings.
7. UNPAID LOSS AND LOSS ADJUSTMENT EXPENSE RESERVES
As discussed in Note 1, the Company establishes loss and loss
adjustment expense reserves that are estimates of amounts needed to
pay claims and related expenses in the future for insured events that
have already occurred. Reinsurance is an arrangement in which a
reinsurance company (a reinsurer) contractually agrees to indemnify
an insurance company for all or a portion of the insurance risks
underwritten by the insurance company. The Company establishes
estimates of amounts recoverable from its reinsurers in a manner
consistent with the claim liability covered by the reinsurance
contracts, net of an allowance for uncollectible amounts. Net
insurance loss reserves represent loss and loss adjustment expense
reserves reduced by reinsurance recoverable on unpaid losses.
In a broad sense, loss and loss adjustment expense reserves have two
components: case reserves, which are reserves established within the
claims function for claims that have been reported to the Company,
and reserves established by management for claims incurred but not
reported to the Company and for future development on claims that
have been reported (collectively, IBNR). Case reserves are estimated
based on the experience and knowledge of claims staff regarding the
nature and potential cost of each claim. The Company's claims staff
periodically adjusts case reserves as additional information becomes
known or payments are made. Generally accepted actuarial methods are
used to project estimates of IBNR. Actuaries use a variety of
statistical and analytical methods to determine estimates of IBNR,
which are based, in part, on historical claim reporting and payment
patterns. In estimating IBNR, actuaries consider all available
information, including historical experience, changes in business
mix, coverage limits, changes in claims handling practices, pricing,
reinsurance protections, inflation and the effects of legal, social
and legislative trends on future claim payments. Management exercises
judgment based upon its knowledge of its business, review of the
outcome of actuarial studies, historical experience and other factors
to record an estimate it believes reflects its expected ultimate
unpaid loss and loss adjustment expenses and related reinsurance
recoverables.
Regardless of the techniques used, estimation is inherent in the
process of establishing unpaid loss reserves and related reinsurance
recoverables as of any given date. Uncertainties in projecting
ultimate claim amounts are magnified by the time lag between when a
claim actually occurs and when it becomes reported and settled. This
time lag is sometimes referred to as the "claim-tail". The claim-tail
for most property coverages is typically short. The claim-tail for
liability coverages, such as general and product liability, directors
and officers liability, medical malpractice and workers'
compensation, can be especially long as claims are often reported or
settled years after the related occurrences. During the claims
reporting and settlement period, additional facts regarding claims
and trends become known which may cause the Company to adjust its
estimate of its ultimate net loss and loss adjustment expense
liability.
Loss and loss adjustment expense reserve estimates at the Company are
subject to additional uncertainty as a consequence of numerous
factors that occurred subsequent to the 1998 merger of the U.S.
operations of General Accident and Commercial Union, two companies
with different underwriting and claims management philosophies and
practices. Beginning in the mid-1990s, and continuing through the
merger and the subsequent operational integration of General Accident
and Commercial Union, the Company experienced an environment of
significant change, both in its business and operations. Generally
accepted actuarial techniques used to estimate reserves rely in large
degree on projecting historical trends (such as patterns of claim
development (i.e., reported claims and paid losses)) into the future.
Accordingly, estimating reserves becomes more uncertain if business
mix, case reserve adequacy, claims payment rates, coverage limits and
other factors change over time. The breadth and depth of the business
and operational changes that occurred at the Company (1) led to a
wider range in the reserve estimates produced by a variety of
actuarial loss reserving techniques, especially those that rely upon
consistent claim development patterns, and (2) introduced greater
complexity to the judgments required to be made by management in
determining the impact of the business and operational changes on the
development patterns used to estimate reserves.
Activity in the liability for unpaid losses and loss adjustment expenses
is summarized as follows:
<Table>
<Caption>
FOR THE YEARS ENDED
DECEMBER 31,
-------------------
2000 1999
---- ----
Balance at January 1 $6,368,828 $6,944,024
Less reinsurance recoverable on unpaid losses 1,285,637 1,651,963
---------- ----------
Net balance at January 1 5,083,191 5,292,061
---------- ----------
Incurred related to:
Current year 3,483,967 3,194,913
Prior years 818,030 57,493
---------- ----------
Total incurred losses 4,301,997 3,252,406
---------- ----------
Cumulative effect of change in accounting principle -- 14,470
---------- ----------
Paid related to:
Current year 1,706,573 1,611,718
Prior years 1,972,243 1,864,028
---------- ----------
Total paid 3,678,816 3,475,746
---------- ----------
Net balance at December 31 5,706,372 5,083,191
Plus reinsurance recoverable on unpaid losses 1,276,356 1,285,637
---------- ----------
Balance at December 31 $6,982,728 $6,368,828
========== ==========
</Table>
During 2000 and 1999, the Company strengthened loss reserves on prior
accident years by $818,030 and $57,493, respectively. The reserve
increases recorded in 2000 were for long-tail lines of business as
illustrated in the following table. This longer tail casualty business
written during the mid-1990s originated primarily from the former
General Accident book of business. The table below also includes
December 31, 1999 reserve balances (net of reinsurance) which consist
of reserves for accident years 1999 and prior.
RESERVES AS OF RESERVE INCREASES
DECEMBER 31, 1999 RECORDED IN 2000
------------------------ -------------------
Workers compensation $ 846,000 $176,172
General liability 1,081,146 318,197
Multiple peril 1,109,547 151,829
Commercial automobile liability 547,671 110,942
Other lines 1,498,364 60,890
---------------------- ---------------------
Total 5,082,728 $818,030
=====================
Less: asbestos and environmental reserves (956,102)
-----------------------
Non-asbestos and environmental reserves $4,126,626
=======================
15
CGU CORPORATION
(A WHOLLY-OWNED SUBSIDIARY OF CGNU PLC)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
- --------------------------------------------------------------------------------
The Company believes it has made a reasonable provision for its
environmental and asbestos exposures as set forth below on a gross and
net of reinsurance basis. However, due to significant unresolved legal
and coverage issues such as whether coverage exists, definition of an
occurrence, determination of ultimate damages and allocation of such
damages to financially responsible parties, an indeterminate amount of
additional liability may develop over time.
Included in liability for unpaid losses and loss adjustment expense are
reserves for environmental and asbestos exposures at December 31, 2000
and 1999. These reserves, which include IBNR provisions for reported and
unreported claims and loss adjustment expenses (LAE) including coverage
dispute costs, aggregated:
<Table>
<Caption>
2000 1999
---- ----
Gross of reinsurance $1,039,605 $1,353,110
Net of reinsurance $ 786,469 $ 956,001
</Table>
As more fully described in Note 1, environmental and asbestos liabilities
will be ceded to a third party in connection with the acquisition of the
Company by White Mountains.
8. LONG-TERM DEBT
Long-term debt at December 31, 2000 and 1999 consisted of the following:
<Table>
<Caption>
2000 1999
---- ----
Term note payable to parent $1,100,000 $1,100,000
Bonds payable 13,900 30,750
---------- ----------
Total long-term debt $1,113,900 $1,130,750
========== ==========
</Table>
The term note payable to CGU Holdings LLC, a wholly-owned subsidiary of
the Company's ultimate parent and the direct owner of 45.86% of the
Company's common stock, was issued on December 31, 1998. Interest at the
rate of 6.5% is payable annually on March 31 of each year. The entire
principal is due on December 31, 2013. The term note payable agreement
contains restrictive covenants regarding financial reporting. Interest
paid on the note was $71,500, $17,875, and $0 in 2000, 1999 and 1998,
respectively. The fair value of the term note payable to parent was
approximately $1,009,000 at December 31, 2000.
The bonds payable mature from 2014 to 2015 and no principal payments are
required until maturity. Semi-annual payments of interest are required at
rates which will vary based upon an index which is a compilation of
certain short-term, tax-free bond issues. The average interest rates were
3.84%, 3.34% and 3.55% for 2000, 1999 and 1998, respectively. Although
the terms of the bonds restricted the use of the borrowings to the
construction of specific office buildings, the buildings themselves do
not constitute collateral for the bonds. Interest paid on the bonds was
$1,101, $1,143 and $1,318 for 2000, 1999 and 1998, respectively. During
2000 and 1999, notes with principal of $16,850 and $4,700 were paid
subsequent to the sale of the related property.
16
CGU CORPORATION
(A WHOLLY-OWNED SUBSIDIARY OF CGNU PLC)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
- --------------------------------------------------------------------------------
As more fully described in Note 1, the term note payable to parent will
be paid with proceeds from the anticipated sale of the Company's
discontinued operations and with proceeds from sales of investment
securities upon acquisition of the Company by White Mountains.
9. INCOME TAXES
The federal income tax provision for the years ended December 31, 2000,
1999 and 1998, consists of the following:
<Table>
<Caption>
2000 1999 1998
---- ---- ----
Current taxes $ 3,230 $ 2,609 $ (9,132)
Deferred taxes (86,548) (107,083) (177,018)
--------- --------- ---------
Federal income taxes charged (credited) to
continuing operations $ (83,318) $(104,474) $(186,150)
========= ========= =========
</Table>
Deferred taxes arise from temporary differences in the bases of assets
and liabilities for tax and financial statement purposes. Components of
deferred tax assets and liabilities for the property and casualty
operations are as follows:
<Table>
<Caption>
DECEMBER 31,
------------------
2000 1999
---- ----
Deferred tax assets:
Discounting of loss reserves $ 213,284 $ 187,457
Unearned premium reserve adjustment 130,199 125,332
Net operating loss and tax credit carryforward 99,125 71,149
Reinsurance fee payable to foreign affiliate 59,500 --
Reserve for post-retirement benefits 26,151 19,043
Deferred compensation reserve 14,189 1,543
Accrued interest on term note payable to parent 18,769 18,769
Allowance for doubtful receivables 14,048 30,072
Other 40,955 31,514
--------- ---------
Total deferred tax assets $ 616,220 $ 484,879
========= =========
Deferred tax liabilities:
Net unrealized capital gains and losses (167,851) (340,400)
Deferred acquisition costs (147,284) (158,071)
Disposal of discontinued operations (48,813) --
Accumulated bond discount (31,414) (60,589)
Prepaid pension cost (18,571) (20,474)
Deferred software costs (14,624) --
Other (7,381) (7,972)
--------- ---------
Total deferred tax liabilities (435,938) (587,506)
--------- ---------
Net deferred tax asset (liability) before valuation allowance 180,282 (102,627)
Valuation allowance (72,950) --
--------- ---------
Net deferred tax asset (liability) $ 107,332 $(102,627)
========= =========
</Table>
17
CGU CORPORATION
(A WHOLLY-OWNED SUBSIDIARY OF CGNU PLC)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
- --------------------------------------------------------------------------------
A reconciliation between the statutory federal tax rate and Company's
effective tax rate in 2000, 1999 and 1998 is as follows:
<Table>
<Caption>
DECEMBER 31,
----------------------
2000 1999 1998
---- ---- ----
Statutory federal tax rate: 35.0% 35.0% 35.0%
Tax exempt interest 7.3 (6.0) 4.7
Dividends received deduction 2.7 (2.2) 2.0
Nondeductible charges (1.1) 1.4 (1.3)
Prior year true ups 2.4 4.3 --
Valuation allowance (25.4) (0.2) --
Other 8.1 (4.4) (2.2)
---- ---- ----
Effective tax rate 29.0% 27.9% 38.2%
==== ==== ====
</Table>
At December 31, 2000, the Company had net operating loss carryforwards
available for utilization of approximately $87,848 of which approximately
$40,476 are subject to certain limitations that restrict the utilization
of these losses to the Company or group of companies that generated them.
At December 31, 2000, the Company had foreign tax credits of
approximately $44,950 which begin to expire in 2001 and Alternative
Minimum Tax (AMT) credits of approximately $23,428 which do not expire.
Income taxes paid were $14,000, $24,800 and $85,330 for 2000, 1999 and
1998, respectively. Income tax refunds of $24,022, $70,244 and $0 were
received in 2000, 1999 and 1998, respectively.
10. PENSIONS AND OTHER POSTRETIREMENT BENEFITS
The Company offers various postretirement benefits to its employees.
Under the terms of these plans, the Company reserves the right to change,
modify or discontinue the plans.
PENSIONS
The parent Company and certain subsidiaries have noncontributory defined
benefit plans covering substantially all employees. The benefits for
these plans are based primarily on years of service and employees' pay
near retirement. The Company's funding policy is consistent with the
funding requirements of federal law and regulations.
18
CGU CORPORATION
(A WHOLLY-OWNED SUBSIDIARY OF CGNU PLC)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
- --------------------------------------------------------------------------------
OTHER POSTRETIREMENT BENEFITS
The parent Company and certain subsidiaries provide medical and life
insurance benefits to pensioners and survivors. The associated plans pay
approved claims from existing assets and from company funds.
<Table>
<Caption>
PENSION BENEFITS OTHER BENEFITS
---------------- -----------------
2000 1999 2000 1999
---- ---- ---- ----
CHANGE IN BENEFIT OBLIGATION
Benefit obligation at beginning of year $ 477,731 $ 534,971 $ 110,836 $ 114,181
Service cost 17,629 21,374 2,840 3,172
Interest cost 36,683 34,075 9,193 7,963
Amendments -- -- 2,372 (3)
Assumption changes -- -- 20,697 --
Actuarial (gain)/loss 40,022 (51,694) 2,920 (6,339)
Benefits and expenses (net of participant
contributions) (59,678) (60,995) (9,846) (8,138)
--------- --------- --------- ---------
Benefit obligation at end of year $ 512,387 $ 477,731 $ 139,012 $ 110,836
========= ========= ========= =========
CHANGE IN PLAN ASSETS
Fair value of plan assets at beginning of year $ 594,987 $ 611,655 $ -- $ --
Actual return on plan assets 14,369 37,283 -- --
Employer contribution 3,343 7,045 9,846 8,138
Benefit (net of participant contributions) (58,841) (60,995) (9,846) (8,138)
Expenses paid (837) -- -- --
--------- --------- --------- ---------
Fair value of plan assets at end of year $ 553,021 $ 594,988 $ -- $ --
========= ========= ========= =========
Funded status $ 40,634 $ 117,257 $(139,012) $(110,836)
Unrecognized actuarial (gain)/loss (22,967) (86,978) 19,916 (7,139)
Unrecognized transition obligation/(asset) (4,577) (8,551) 39,060 42,353
Unrecognized prior service cost 6,792 8,467 5,958 3,979
--------- --------- --------- ---------
Net prepaid (accrued) benefit cost $ 19,882 $ 30,195 $ (74,078) $ (71,643)
========= ========= ========= =========
</Table>
19
CGU CORPORATION
(A WHOLLY-OWNED SUBSIDIARY OF CGNU PLC)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
- --------------------------------------------------------------------------------
The amount recognized in the accompanying financial statements consists
of:
<Table>
<Caption>
PENSION BENEFITS OTHER BENEFITS
---------------- -------------------
2000 1999 2000 1999
---- ---- ---- ----
Prepaid benefit cost $ 53,559 $ 46,000 $ -- $ --
Accrued benefit liability (33,677) (17,369) (74,078) (71,643)
Intangible asset -- 1,564 -- --
---------- -------- ---------- ----------
Net prepaid (accrued) benefit cost $ 19,882 $ 30,195 $ (74,078) $ (71,643)
========== ======== ========== ==========
Weighted average assumptions
as of December 31:
Discount rate 7.50% 7.96% 7.50% 8.00%
Expected return on plan assets 9.50% 9.84% -- --
Rate of compensation increase 5.00% 4.13% -- --
Initial medical trend rate -- -- 9.50% 7.00%
Ultimate medical trend rate -- -- 5.50% 5.00%
</Table>
<Table>
<Caption>
PENSION BENEFITS OTHER BENEFITS
----------------------------- ----------------------------
2000 1999 1998 2000 1999 1998
---- ---- ---- ---- ---- ----
Components of net periodic
benefit cost:
Service cost $ 17,629 $ 21,374 $ 22,167 $ 2,840 $ 3,172 $ 3,370
Interest cost 36,683 34,075 32,337 9,193 7,963 8,068
Expected return on plan assets (51,182) (49,647) (42,631) -- (125) (139)
Amortization of prior
service cost 1,716 1,720 982 393 211 36
Amortization of transition
obligation/(asset) (4,179) (4,372) (2,618) 3,301 3,301 3,900
Amortization of unrecognized
(gain)/loss 5,817 169 71 (26) (9) 336
Special termination benefits -- -- 18,763 -- -- 781
Curtailment/settlement (gain)/
loss -- -- (11,699) -- -- 6,825
-------- -------- -------- -------- -------- --------
Net periodic benefit cost $ 6,484 $ 3,319 $ 17,372 $ 15,701 $ 14,513 $ 23,177
======== ======== ======== ======== ======== ========
</Table>
Assumed health care cost trend rates have a significant effect on the
amounts reported for the health care plans. A one-percentage-point change
in assumed health care rates would have the following effects:
<Table>
<Caption>
1-PERCENTAGE- 1-PERCENTAGE-
POINT POINT
INCREASE DECREASE
------------- -------------
Effect on total of service and interest cost components $ 1,209 $ 1,083
Effect on postretirement benefit obligation 15,475 13,930
</Table>
20
CGU CORPORATION
(A WHOLLY-OWNED SUBSIDIARY OF CGNU PLC)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
- --------------------------------------------------------------------------------
11. OPERATING LEASES
Net rental expense for 2000, 1999 and 1998 aggregated $51,032, $47,686
and $52,303, respectively, net of sublease rental income of $1,716, $432
and $20, respectively. The Company leases office facilities, computer and
transportation equipment with remaining lease terms ranging from one to
ten years. Minimum lease commitments for each of the next five years, and
thereafter, are as follows:
<Table>
<Caption>
RENTAL SUBLEASE
EXPENSE INCOME
------- --------
2001 $ 48,203 $2,261
2002 39,044 1,743
2003 32,255 1,743
2004 21,558 787
2005 16,259 695
Thereafter 31,889 232
-------- ------
$189,208 $7,461
======== ======
</Table>
Under the existing leases, there are no material contingent rental
agreements, escalation clauses or restrictions imposed on the Company.
12. REINSURANCE
In the ordinary course of business, the Company reinsures certain risks
with other insurance enterprises. Reinsurance limits the Company's
maximum loss on catastrophes, large risks and unusually hazardous risks.
The Company is contingently liable in the event of default by a
reinsurer.
Included in reinsurance recoverable at December 31, 2000 and 1999 are
recoverables on paid losses of $281,828 and $288,447, respectively, for
the property and casualty operations, which were recorded net of a
valuation allowance for uncollectible reinsurance of $20,000 at December
31, 2000 and 1999.
Reinsurance recoverable on paid and unpaid losses with a carrying value
of $169,584 and $170,503 and prepaid reinsurance premiums of $12,226 and
$8,812 at December 31, 2000 and 1999, respectively, for the property and
casualty operations, are due from the National Council on Compensation
Insurance, an involuntary pool.
21
CGU CORPORATION
(A WHOLLY-OWNED SUBSIDIARY OF CGNU PLC)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
- --------------------------------------------------------------------------------
The effect of reinsurance on premiums and losses for the property and
casualty operations is as follows:
<Table>
<Caption>
DECEMBER 31, 2000
----------------------------------------
LOSSES AND
LOSS
ADJUSTMENT
PREMIUM PREMIUM EXPENSES
WRITTEN EARNED INCURRED
------- ------- ----------
Direct $ 4,654,603 $ 4,630,377 $ 4,767,171
Assumed 73,591 70,495 110,904
Ceded (434,063) (425,813) (576,078)
----------- ----------- -----------
Net $ 4,294,131 $ 4,275,059 $ 4,301,997
=========== =========== ===========
</Table>
<Table>
<Caption>
DECEMBER 31, 1999
----------------------------------------
LOSSES AND
LOSS
ADJUSTMENT
PREMIUM PREMIUM EXPENSES
WRITTEN EARNED INCURRED
------- ------- ----------
Direct $ 4,485,534 $ 4,518,278 $ 3,503,024
Assumed 65,249 70,158 64,711
Ceded (302,037) (328,441) (315,329)
----------- ----------- -----------
Net $ 4,248,746 $ 4,259,995 $ 3,252,406
=========== =========== ===========
</Table>
<Table>
<Caption>
DECEMBER 31, 1998
----------------------------------------
LOSSES AND
LOSS
ADJUSTMENT
PREMIUM PREMIUM EXPENSES
WRITTEN EARNED INCURRED
------- ------- ----------
Direct $ 4,389,663 $ 4,366,704 $ 4,675,460
Assumed 77,826 80,906 234,874
Ceded (354,090) (405,732) (963,487)
----------- ----------- -----------
Net $ 4,113,399 $ 4,041,878 $ 3,946,847
=========== =========== ===========
</Table>
22
CGU CORPORATION
(A WHOLLY-OWNED SUBSIDIARY OF CGNU PLC)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
- --------------------------------------------------------------------------------
During 2000 the Company purchased a reinsurance contract from an
affiliated reinsurer. The contract is a $170,000 stop loss reinsurance
agreement covering accident year 2000 losses (the "primary coverage").
This contract was amended in December 2000 to include a $200,000
retroactive reinsurance agreement dated December 31, 2000, covering
potential adverse loss development on reserves carried by the Company as
of December 31, 2000, excluding all exposures for all policy years prior
to 1988, asbestos exposures for all policy years prior to 1993, and all
lead-related exposures for all policy years prior to 1993 (the "secondary
coverage"). This secondary coverage was not triggered as of December 31,
2000. The Company incurred adverse development up to the limits of the
primary coverage and accordingly recorded reinsurance recoverable from
the affiliated reinsurer of $170,000 at December 31, 2000.
In addition, a portion of the coverage under certain of the Company's
reinsurance contracts in 2000, 1999 and 1998 has been provided by the
affiliated reinsurer. Earned insurance premiums ceded to the affiliated
reinsurer in 2000, 1999 and 1998 were $15,800, $28,420 and $33,190,
respectively.
Total amounts recoverable on paid and unpaid losses ceded to the
affiliated reinsurer were $20,961 and $7,114 as of December 31, 2000 and
1999, respectively.
13. OTHER COMPREHENSIVE INCOME
Other comprehensive income was comprised of the following:
<Table>
<Caption>
2000
--------------------------------------
BEFORE TAX NET OF
TAX (EXPENSE) TAX
AMOUNT OR BENEFIT AMOUNT
------ ---------- ------
Gain (loss) on foreign currency exchange:
Balance, beginning of year $ (39,614) $ 13,865 $ (25,749)
Change during year (5,664) 1,982 (3,682)
----------- ----------- -----------
Balance, end of year (45,278) 15,847 (29,431)
----------- ----------- -----------
Net unrealized appreciation of investments:
Balance, beginning of year 1,005,015 (361,603) 643,412
Change during year (467,529) 163,311 (304,218)
----------- ----------- -----------
Balance, end of year 537,486 (198,292) 339,194
----------- ----------- -----------
Total other comprehensive income:
Balance, beginning of year 965,401 (347,738) 617,663
Change during year (473,193) 165,293 (307,900)
----------- ----------- -----------
Balance, end of year $ 492,208 $ (182,445) $ 309,763
=========== =========== ===========
</Table>
23
CGU CORPORATION
(A WHOLLY-OWNED SUBSIDIARY OF CGNU PLC)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
- --------------------------------------------------------------------------------
<Table>
<Caption>
1999
--------------------------------------
BEFORE TAX NET OF
TAX (EXPENSE) TAX
AMOUNT OR BENEFIT AMOUNT
------ ---------- ------
Gain (loss) on foreign currency exchange:
Balance, beginning of year $ (55,025) $ -- $ (55,025)
Change during year 15,411 13,865 29,276
----------- ----------- -----------
Balance, end of year (39,614) 13,865 (25,749)
----------- ----------- -----------
Net unrealized appreciation of investments:
Balance, beginning of year 1,840,549 (644,192) 1,196,357
Change during year (835,534) 282,589 (552,945)
----------- ----------- -----------
Balance, end of year 1,005,015 (361,603) 643,412
----------- ----------- -----------
Total other comprehensive income:
Balance, beginning of year 1,785,524 (644,192) 1,141,332
Change during year (820,123) 296,454 (523,669)
----------- ----------- -----------
Balance, end of year $ 965,401 $ (347,738) $ 617,663
=========== =========== ===========
</Table>
<Table>
<Caption>
1998
--------------------------------------
BEFORE TAX NET OF
TAX (EXPENSE) TAX
AMOUNT OR BENEFIT AMOUNT
------ ---------- ------
Gain (loss) on foreign currency exchange:
Balance, beginning of year $ (38,742) $ -- $ (38,742)
Change during year (16,283) -- (16,283)
----------- ----------- -----------
Balance, end of year (55,025) -- (55,025)
----------- ----------- -----------
Net unrealized appreciation of investments:
Balance, beginning of year 1,406,955 (492,434) 914,521
Change during year 433,594 (151,758) 281,836
----------- ----------- -----------
Balance, end of year 1,840,549 (644,192) 1,196,357
----------- ----------- -----------
Total other comprehensive income:
Balance, beginning of year 1,368,213 (492,434) 875,779
Change during year 417,311 (151,758) 265,553
----------- ----------- -----------
Balance, end of year $ 1,785,524 $ (644,192) $ 1,141,332
=========== =========== ===========
</Table>
24
<Page>
CGU CORPORATION
(A WHOLLY-OWNED SUBSIDIARY OF CGNU PLC)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
- --------------------------------------------------------------------------------
14. STATUTORY BASIS INFORMATION
The Company is required to file an annual statement with state insurance
regulatory authorities for each of its insurance subsidiaries prepared on
an accounting basis prescribed or permitted by such authorities
(statutory basis). Prescribed statutory accounting practices, which
differ from accounting principles generally accepted in the United States
of America in certain respects, include a variety of publications of the
National Association of Insurance Commissioners (NAIC), as well as state
laws, regulations, and general administrative rules. Permitted statutory
accounting practices encompass all accounting practices not so
prescribed.
Statutory basis information for 2000, 1999 and 1998 is as follows:
<Table>
<Caption>
2000 1999 1998
---- ---- ----
Net income (loss) for the year $ 8,234 $ 526,311 $ (428,990)
Policyholders' surplus at December 31 $2,782,986 $3,804,229 $3,580,188
</Table>
15. DIVIDEND RESTRICTIONS
The Company's ability to pay dividends to its shareholder is dependent on
receipt of dividends from its insurance subsidiaries whose shareholder
dividends are restricted by state insurance regulatory authorities.
The insurance subsidiaries are subject to state regulations which limit
by reference to each companies statutory investment income and
policyholders' surplus the dividends that can be paid to their parent
company without prior regulatory approval. Dividend restrictions vary
between the companies as determined by the laws of the domiciliary
states.
Massachusetts's statute limits the dividends an insurer may pay in any
twelve-month period, without the prior permission of The Commonwealth of
Massachusetts Insurance Commissioner, to the greater of (i) 10% of its
statutory policyholder surplus as of the preceding December 31 or (ii)
the individual company's statutory net gain from operations for the
preceding calendar year (if such insurer is a life company), or its net
income for the preceding calendar year (if such insurer is not a life
company). In addition, under Massachusetts law, no domestic insurer shall
pay a dividend or make any distribution to its shareholders from other
than unassigned funds unless the Commissioner shall have approved such
dividend or distribution.
Pursuant to Pennsylvania's statute, the maximum amount of dividends and
other distributions that an insurer may pay in any twelve-month period,
without the prior approval of the Pennsylvania Commissioner of Insurance,
is limited to the greater of (i) 10% of it's policyholders' surplus as of
the preceding December 31 or (ii) the individual company's statutory net
gain from operations for the preceding calendar year (if such insurer is
a life company) or its net income for the preceding calendar year (if
such insurer is not a life company). Any dividends to be paid by an
insurer, whether or not in excess of the aforementioned threshold, from a
source other than statutory unassigned surplus would also require the
prior approval of the Pennsylvania Commissioner of Insurance.
Under the applicable state restrictions, such subsidiaries paid dividends
of $342,288, $180,092 and $302,799 in 2000, 1999 and 1998, respectively.
25
CGU CORPORATION
(A WHOLLY-OWNED SUBSIDIARY OF CGNU PLC)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
- --------------------------------------------------------------------------------
16. CONTINGENCIES
REGULATORY AND INDUSTRY DEVELOPMENTS
Unfavorable economic conditions may contribute to an increase in the
number of insurance companies that are under regulatory supervision. This
may result in an increase in mandatory assessments by state guaranty
funds, or voluntary payments by solvent insurance companies to cover
losses to policyholders of insolvent or rehabilitated companies.
Mandatory assessments, which are subject to statutory limits, can be
partially recovered through a reduction in future premium taxes in some
states. The Company is not able to reasonably estimate the potential
effect on it of any such future assessments or voluntary payments.
LITIGATION
The Company has been named a defendant in various legal proceedings
arising in the normal course of business. In the Company's opinion, based
on the advice of legal counsel, the ultimate resolution of these
proceedings will not have a material effect on the Company's consolidated
financial statements. However, liabilities related to these proceedings
could be established in the near term if estimates of the ultimate
resolution of these proceedings are revised.
RESIDUAL MARKETS
The Company is required to participate in residual markets in various
states. The results of the residual markets are not subject to the
predictability associated with the Company's own managed business, and
are significant to the workers' compensation line of business and both
the private passenger and commercial automobile lines of business.
17. SUBSEQUENT EVENTS
During January 2001, the Company sold substantially all of its
investments in common equity securities and recognized net realized gains
of approximately $246,000.
26