<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the period ended March 31, 1997
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
----- -----
Commission file number 1-8993
FUND AMERICAN ENTERPRISES HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
Delaware 94-2708455
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
80 South Main Street, Hanover, New Hampshire 03755-2053
(Address of principal executive offices including zip code)
(603) 643-1567
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
----- -----
As of May 12, 1996, 6,889,032 shares of Common Stock with a par value of $1.00
per share were outstanding.
<PAGE>
<TABLE>
<CAPTION>
FUND AMERICAN ENTERPRISES HOLDINGS, INC.
Table of Contents
PART I. FINANCIAL INFORMATION Page No.
--------
<S> <C> <C>
Item 1. Financial Statements
Condensed Consolidated Balance Sheets,
March 31, 1997 (Unaudited), and December 31, 1996 3
Condensed Consolidated Income Statements (Unaudited),
Three Months Ended March 31, 1997 and 1996 4
Condensed Consolidated Statements of Cash Flows (Unaudited),
Three Months Ended March 31, 1997 and 1996 5
Notes to Condensed Consolidated Financial
Statements (Unaudited) 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 7-11
PART II. OTHER INFORMATION
Items 1 through 6 12
SIGNATURES 13
</TABLE>
-2-
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
FUND AMERICAN ENTERPRISES HOLDINGS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(dollars in millions, except per share amounts)
<TABLE>
<CAPTION>
March 31, December 31,
1997 1996
------------- -------------
(Unaudited)
Assets
<S> <C> <C>
Common equity securities, at fair value (cost: $90.7 and $101.1) $ 139.7 $ 160.8
Fixed maturity investments, at fair value (cost: $159.9 and $154.5) 158.1 155.4
Other investments (cost: $102.8 and $119.7) 161.9 176.5
Short-term investments, at amortized cost (which approximated market value) 34.3 67.5
------------- -------------
Total investments 494.0 560.2
Cash 4.7 4.8
Capitalized mortgage servicing rights, net of accumulated amortization 157.6 410.9
Mortgage loans held for sale 249.7 314.9
Other mortgage origination and servicing assets 237.4 183.0
Receivable from sale of mortgage servicing 190.3 -
Insurance premiums receivable 53.9 52.2
Reinsurance recoverable on paid and unpaid losses 43.1 40.0
Investments in unconsolidated insurance affiliates 231.6 226.9
Other assets 162.5 187.7
------------- -------------
Total Assets $ 1,824.8 $ 1,980.6
============= =============
Liabilities
Short-term debt $ 260.7 $ 407.9
Long-term debt 422.2 424.2
Loss and loss adjustment expense reserves 68.4 65.4
Unearned insurance premiums 75.8 72.6
Accounts payable and other liabilities 270.7 279.5
------------- -------------
Total liabilities 1,097.8 1,249.6
------------- -------------
Minority Interest - preferred stock of subsidiary 44.0 44.0
------------- -------------
Shareholders' Equity
Common stock at $1 par value per share - authorized 125,000,000 shares;
issued 31,929,630 and 31,940,202 shares 31.9 31.9
Common paid-in surplus 366.4 366.5
Retained earnings 1,069.6 1,067.1
Common stock in treasury, at cost - 25,034,939 shares (871.0) (871.0)
Net unrealized investment gains, after tax 86.1 92.5
------------- -------------
Total shareholders' equity 683.0 687.0
------------- -------------
Total Liabilities, Minority Interest and Shareholders' Equity $ 1,824.8 $ 1,980.6
============= =============
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
-3-
<PAGE>
FUND AMERICAN ENTERPRISES HOLDINGS, INC.
CONDENSED CONSOLIDATED INCOME STATEMENTS
Unaudited
(millions, except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
--------------------------------
1997 1996
-------------- --------------
<S> <C> <C>
Revenues:
Gross mortgage servicing revenue $ 28.7 $ 34.6
Amortization and impairment of capitalized mortgage servicing (7.7) (.2)
Net loss on financial instruments (6.1) (2.9)
-------------- --------------
Net mortgage servicing revenue 14.9 31.5
Net gain on sales of mortgages 7.9 13.1
Loss on sale of mortgage servicing (3.2) -
Other mortgage operations revenue 4.3 4.8
Earned property and casualty insurance premiums 35.5 19.5
Earnings from unconsolidated insurance affiliates 5.2 1.3
Other insurance operations revenue 2.5 3.3
Net investment income 14.6 13.8
-------------- --------------
Total revenues 81.7 87.3
-------------- --------------
Expenses:
Compensation and benefits 25.5 22.4
Insurance losses and loss adjustment expenses 24.2 13.2
General expenses 20.7 19.4
Interest expense 11.6 14.1
-------------- --------------
14.1
Total expenses 82.0 69.1
-------------- --------------
Pretax operating earnings (loss) (.3) 18.2
Net realized investment gains 9.6 28.3
-------------- --------------
Pretax earnings 9.3 46.5
Income tax provision 4.4 17.7
-------------- --------------
Net income $ 4.9 $ 28.8
============== ==============
Net income per share:
Primary $ .65 $ 3.45
Fully diluted .65 3.45
</TABLE>
See Notes to Condensed Consolidated Financial Statements
-4-
<PAGE>
FUND AMERICAN ENTERPRISES HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Unaudited
(millions)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
----------------------------
1997 1996
------------ -------------
<S> <C> <C>
Cash flows from operations:
Net income $ 4.9 $ 28.8
Charges (credits) to reconcile net income to cash flows from operations:
Undistributed earnings from unconsolidated insurance affiliates (3.6) (1.1)
Net realized investment gains (9.6) (28.3)
Decrease (increase) in mortgage loans held for sale 65.2 (156.1)
Loss on sale of mortgage servicing 3.2 -
Increase in unearned insurance premiums 3.2 17.0
Increase in insurance premiums receivable (1.7) (2.6)
Increase in deferred insurance policy acquisition costs (.5) (2.8)
Decrease (increase) in other assets 25.2 (.9)
Depreciation and amortization 10.1 2.4
Net unrealized loss on financial instruments 5.9 3.0
Changes in current income taxes receivable and payable 3.0 (2.6)
Deferred income tax expense 1.4 20.2
Other, net 4.0 6.4
------------ -------------
Net cash flows provided from (used for) operating activities 110.7 (116.6)
------------ -------------
Cash flows from investing activities:
Net decrease (increase) in short-term investments 33.2 (126.9)
Sales of common equity securities and other investments 31.3 191.6
Sales and maturities of fixed maturity investments 16.1 6.9
Purchases of common equity securities and other investments (3.0) (4.0)
Purchases of fixed maturity investments (24.4) (35.2)
Acquisition of consolidated affiliate - (13.2)
Investments in unconsolidated insurance affiliates - (1.0)
Collections on and sales of mortgage origination and servicing assets 130.6 43.7
Additions to other mortgage origination and servicing assets (186.7) (52.9)
Additions to capitalized mortgage servicing rights (35.6) (22.3)
Net proceeds from sale of mortgage servicing 81.2 -
Net purchases of fixed assets (1.5) (1.3)
------------ -------------
Net cash flows provided from (used for) investing activities 41.2 (14.6)
------------ -------------
Cash flows from financing activities:
(Repayments) issuances of short-term debt (149.5) 131.8
Purchases of common stock retired (1.1) (.9)
Dividends paid to common shareholders (1.4) (1.5)
Other - (.9)
------------ -------------
Net cash (used for) provided from financing activities (152.0) 128.5
------------ -------------
Net decrease in cash during period (.1) (2.7)
Cash balance at beginning of period 4.8 2.7
------------ -------------
Cash balance at end of period $ 4.7 $ -
============ =============
Supplemental cash flows information:
Interest paid $ (7.9) $ (6.8)
Net income tax (payments) receipts $ (2.8) $ .1
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
-5-
<PAGE>
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Unaudited
Note 1. Basis of Presentation
- ------------------------------
The accompanying condensed consolidated financial statements include the
accounts of Fund American Enterprises Holdings, Inc. (the "Company") and its
subsidiaries (collectively, "Fund American"). Fund American's principal
businesses are conducted through White Mountains Holdings, Inc. and its
operating subsidiaries ("White Mountains") and Source One Mortgage Services
Corporation and its subsidiaries ("Source One"). White Mountains is an
insurance holding company principally engaged through its affiliates in the
business of property and casualty insurance. Source One is one of the nation's
largest independent mortgage banking companies.
The financial statements have been prepared in accordance with generally
accepted accounting principles and include all adjustments (consisting of normal
recurring adjustments) considered necessary by management to fairly present the
financial position, results of operations and cash flows of Fund American.
These interim financial statements may not be indicative of financial results
for the full year and should be read in conjunction with the Company's 1996
Annual Report to Shareholders. Certain amounts in the prior period financial
statements have been reclassified to conform with the current presentation.
Note 2. Application of New Accounting Standards
- ------------------------------------------------
In June 1996, the Financial Accounting Standards Board (the "FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 125, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishment of Liabilities".
SFAS No. 125 eliminates the distinction between "normal" servicing rights and
excess servicing receivable and changes Fund American's method of measuring the
value of its capitalized excess servicing asset. SFAS No. 125 is effective for
all transfers of financial assets occurring after December 31, 1996.
Retroactive application of SFAS No. 125 is not permitted. The adoption of SFAS
No. 125 did not materially effect Source One's financial results for the three-
month period ended March 31, 1997.
In February 1997, the FASB issued SFAS No. 128, "Earnings Per Share". SFAS No.
128 will serve to simplify the computation of earnings per share and to make the
U.S. standard more compatible with existing international standards. FASB No.
128 will become effective for all periods ending after December 15, 1997.
Earlier application is not permitted. The adoption of SFAS No. 128 is not
expected to change the method by which the Company currently calculates its
earnings per share but will change the Company's presentation of earnings per
share by eliminating the "primary earnings per share" disclosure, which
considers the effects of common equivalent shares, in favor of a more simplistic
"basic earnings per share" disclosure which generally considers only common
shares outstanding.
Note 3. Earnings Per Share
- ---------------------------
Primary earnings per share amounts are based on the weighted average number of
common and dilutive common equivalent shares outstanding of 7,575,150 and
8,364,724 for the three-month periods ended March 31, 1997 and 1996,
respectively. Fully diluted earnings per share amounts are based on the
weighted average number of common shares outstanding, assuming full dilution, of
7,575,154 and 8,364,730 for the three-month periods ended March 31, 1997 and
1996, respectively.
-6-
<PAGE>
Item 2. Management's Discussion and Analysis
- --------------------------------------------
Results of Operations -- Three-Month Periods Ended March 31, 1997 and 1996
Fund American reported net income of $4.9 million, or $.65 per share, for the
three month period ended March 31, 1997, compared to net income of $28.8
million, or $3.45 per share, for the three month period ended March 31, 1996.
Book value per common and equivalent share at March 31, 1997 was $90.72, a
decrease of $.09 from the December 31, 1996 book value per share of $90.81.
Insurance Operations. Valley Insurance Companies ("Valley"), a Northwest region
property-casualty company which writes personal and commercial lines, posted a
combined ratio of 100.7% for the 1997 first quarter. Valley had $19.0 million
of earned premium in the 1997 period. The operations of Charter Insurance
Companies ("Charter"), which writes non-standard automobile insurance in Texas,
posted a combined ratio of 95.6% for the 1997 period. Charter had $15.9 million
of earned premium in the 1997 first quarter. Charter's earned premium increased
$13.0 million from the comparable 1996 amount. Premiums for Charter's
automobile policies written prior to 1996 were fully ceded to a former affiliate
of Charter. White Mountains Insurance Company, a newly formed New England
region property-casualty company which writes commercial lines, had $.6 million
of earned premium in the 1997 first quarter. A summary of White Mountains'
consolidated insurance operating results follows:
<TABLE>
<CAPTION>
Three Months Ended
March 31,
-------------------
Dollars in millions 1997 1996
- -------------------------------------------------------------------------
<S> <C> <C>
Net written premium $ 38.1 $ 36.5
Ending statutory surplus 82.5 83.3
Valley:
- -------
Loss and loss adjustment expense ratio 61.9% 62.0%
Underwriting expense ratio 38.8% 37.6%
----- -----
Combined ratio 100.7% 99.6%
====== =====
Charter:
- --------
Loss and loss adjustment expense ratio 73.8% 72.0%
Underwriting expense ratio 21.8% 22.4%
----- -----
Combined ratio 95.6% 94.4%
===== =====
White Mountains Insurance Company:
- ----------------------------------
Loss and loss adjustment expense ratio 115.8% 86.9%
Underwriting expense ratio 58.7% 55.6%
----- -----
Combined ratio 174.5% 142.5%
=========================================================================
</TABLE>
The Company's unconsolidated insurance affiliates consist of a 25% economic
interest in Financial Security Assurance Holdings Ltd. ("FSA"), a 50% interest
in Folksamerica Holdings Company, Inc. ("Folksamerica") and a 33% interest in
Main Street America Holdings, Inc. ("MSA"), an affiliate of the National Grange
Mutual Insurance Company ("NGM"). Fund American's earnings from these
affiliates increased to $5.2 million for the 1997 first quarter, from $1.3
million for the comparable 1996 period. The increase is primarily due to strong
operating results at FSA and MSA and the inclusion in 1997 of earnings from the
Folksamerica investment (which was acquired in June 1996). The strong operating
results at FSA in the 1997 first quarter were muted by unrealized investment
losses in its bond portfolio. FSA's adjusted book value ended the 1997 period
at $34.68, up $.15 from $34.53 at December 31, 1996. Folksamerica's operations
performed well despite a continuing highly-competitive reinsurance market.
Folksamerica's March 31, 1997 book value per share was $12.13, an increase from
the year-end 1996 amount of only $.01 per share due to unrealized losses in
Folksamerica's fixed income investment portfolio. MSA's underwriting results
for the 1997 first quarter produced a respectable combined ratio of 101.9%.
However, MSA also suffered in the first quarter of 1997 from unrealized losses
in its bond portfolio.
-7-
<PAGE>
Mortgage Origination and Servicing. A summary of Source One's mortgage loan
production and mortgage servicing portfolio activities follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Three Months
Ended March 31,
----------------------
Millions 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C>
Mortgage loan production by source:
Retail originations $ 268 $ 595
Wholesale originations 373 610
----------------------
Total $ 641 $ 1,205
================================================================================
Mortgage loan servicing portfolio (a):
Beginning balance $ 29,201 $ 31,831
Mortgage loan production 641 1,205
Regular payoffs (591) (919)
Other (400) (512)
----------------------
Ending balance $ 28,851 $ 31,605
================================================================================
</TABLE>
(a) Includes loans subserviced for others of $19,585 million and $3,968 million
as of March 31, 1997 and March 31, 1996, respectively.
The decrease in mortgage loan production and payoffs for the 1997 three-month
period versus the comparable prior year period reflects higher market interest
rates and a corresponding decrease in refinancing activity. Additional
information regarding Source One's mortgage loan servicing portfolio is shown
below:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
March 31, Dec. 31,
1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C>
Mortgage loan servicing portfolio:
Number of loans (a) 471,764 478,779
Weighted average net servicing fee .433% .422%
Weighted average interest rate (a) 8.46% 8.48%
Percent delinquent (a) (b) 6.15% 7.17%
================================================================================
</TABLE>
(a) Includes loans subserviced for others of $19,585 million and $2,791 million
as of March 31, 1997 and December 31, 1996, respectively.
(b) Includes loans in process of foreclosure.
Source One's net mortgage servicing revenue decreased to $14.9 million for the
first quarter of 1997 from $31.5 million for the 1996 first quarter. The
decrease in net servicing revenue is primarily due to a $20.0 million pretax
recovery of the valuation allowance related to mortgage servicing rights in the
first quarter of 1996 which was partially offset by a $2.9 million pretax net
loss on financial instruments. During the first quarter of 1997, Source One had
a $6.5 million pretax recovery of the valuation allowance related to mortgage
servicing rights which was offset by a $6.1 million pretax net loss on financial
instruments. Gross mortgage servicing revenue decreased to $28.7 million for the
first quarter of 1997 from $34.6 million for the 1996 first quarter due
primarily to the February 28, 1997 sale of servicing with respect to $17.0
billion of non-recourse mortgage loans for gross proceeds of $271.5 million. The
following table illustrates the recent change in Source One's servicing
portfolio mix as a result of the sale:
-8-
<PAGE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
March 31, December 31,
Millions 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C>
Mortgage loan servicing portfolio owned $ 9,266 $ 26,410
Mortgage loan servicing portfolio 19,585 2,791
subserviced for others
-------------------
Total mortgage loan servicing portfolio $ 28,851 $ 29,201
================================================================================
</TABLE>
In connection with the 1997 servicing sale, Source One recorded a $3.2 million
pretax loss ($2.1 million after tax) in the first quarter. Source One will
continue to subservice the mortgage loans pursuant to a subservicing agreement
for a period of no less than 12 months.
The net gain on sales of mortgages decreased to $7.9 million for the first
quarter of 1997, from $13.1 million for the comparable 1996 period. The decrease
is primarily due to decreased mortgage loan production and a decline in the
related mortgage loan sales volume during the 1997 period as compared to 1996.
In order to offset changes in the value of Source One's portfolio of mortgage
servicing rights and to mitigate the effect on earnings of higher amortization
and impairment of such rights which results from increased prepayment activity,
Source One invests in various financial instruments. As interest rates decline,
prepayment activity increases, thereby reducing the value of the mortgage
servicing rights, while the value of the financial instrument increases.
Conversely, as interest rates increase, the value of the servicing rights
increases while the value of the financial instrument decreases. The financial
instruments utilized by Source One include interest rate floor contracts and
principal-only swap transactions.
The interest rate floor contracts derive their value from differences between
the floor rate specified in the contract and market interest rates. The floor
yields range from 5.47% to 6.24%. To the extent that market interest rates
increase, the value of the floors declines. However, Source One is not exposed
to losses in excess of its initial investment in the floors. The interest rate
floor contracts are carried at fair value with related realized and unrealized
gains and losses included in net loss on financial instruments in the
consolidated income statements. As of March 31, 1997, the carrying value of
Source One's open interest rate floor contracts totalled $1.8 million with a
total notional principal amount of $1.0 billion. The floors have terms ranging
from two to five years.
The value of the principal-only swaps is determined by changes in the value of
referenced principal-only strips. As of March 31, 1997, the carrying value of
Source One's principal-only swap transactions totalled $.3 million, with an
original notional principal amount of $50.0 million. The principal-only swap
transactions are carried at fair value with related realized and unrealized
gains and losses included in net loss on financial instruments in the
consolidated income statements. The principal-only swaps have a remaining term
of approximately four years.
In April 1997 Source One approved and implemented a restructuring plan designed
to reduce its operating costs in order to improve its financial performance. As
part of this plan Source One reduced its workforce by approximately 100
employees at the end of April 1997. Source One has not yet finalized the amount
of employee separation costs, including severance payments and related benefits,
that will be incurred as a result of the restructuring. The restructuring
charge will be recorded by Source One in the second quarter of 1997.
Investment Operations. Fund American's net investment income is comprised
primarily of interest income earned on mortgage loans originated by Source One
and on the fixed maturity investments of its consolidated insurance operations.
Net investment income increased to $14.6 million for the 1997 first quarter,
from $13.8 million for the comparable 1996 period. The increase is primarily due
to additional interest income earned on the insurance operation's growing
portfolio of fixed maturity investments.
-9-
<PAGE>
Total net investment gains and losses, before tax, were as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Three Months
Ended March 31,
---------------------
Millions 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C>
Net realized gains $ 9.6 $ 28.3
Net unrealized losses (9.9) (26.8)
---------------------
Total net investment gains (losses), before tax $ (.3) $ 1.5
================================================================================
</TABLE>
The 1997 first quarter includes $9.6 million of pretax realized gains resulting
principally from the sale of 526,551 shares of the common stock of Veritas DGC
Inc. for net proceeds of $9.8 million. During the first quarter of 1996, Fund
American sold all its holdings (2,042,572 shares) of the common stock of Zurich
Reinsurance Centre Holdings, Inc. ("ZRC") for net proceeds of $61.8 million.
Fund American also sold all its holdings (2,928,100 shares) of the common stock
of The Louisiana Land and Exploration Company ("LLX") for net proceeds of $125.1
million. Gains on the sales of ZRC and LLX represented the majority of the
$28.3 million of realized net investment gains reported during the 1996 first
quarter.
Expenses. Source One finances its inventory of mortgage loans held for sale
primarily with short-term debt. Accordingly, the decrease in mortgage loan
production noted above also resulted in a decrease in interest expense for the
1997 first quarter as compared to the 1996 period.
Compensation and benefits expense increased $3.1 million to $25.5 million during
the 1997 first quarter versus the comparable 1996 period. The increase is
primarily a result of an increase in stock-based compensation accruals
associated with certain of the Company's long-term compensation plans.
Insurance losses and loss adjustment expenses increased from $13.2 million in
the 1996 first quarter to $24.2 million in the 1997 quarter due primarily to the
increase in earned premium at Charter. The loss and loss adjustment expense
ratio for the 1997 first quarter was 68.1% which compares to 67.7% for the 1996
first quarter.
The income tax provision for the first quarter of 1997 and 1996 includes $1.2
million and $1.1 million, respectively, of expense related to tax reserve
adjustments. Excluding these tax reserve adjustments, Fund American's effective
income tax rate for the first quarter of 1997 and 1996 was 34.3% and 35.7%,
respectively.
Liquidity and Capital Resources
Parent Company. In connection with Source One's February 28, 1997 sale of
approximately $17.0 billion of mortgage servicing rights to a third party, the
Company has made certain collection, payment and performance guarantees to the
buyer for a period of no more than ten years. The aggregate amount of the
Company's guaranty is initially limited to $20.0 million and is expected to
amortize down to $15.0 million.
Prospectively, the primary sources of cash inflows for the Company will be
distributions received from its operating subsidiaries, sales of investment
securities and investment income.
-10-
<PAGE>
White Mountains and Subsidiaries. On November 1, 1996, Fund American signed a
definitive agreement (the "MSA Agreement") to increase its ownership of MSA from
33% to 50%. MSA currently shares in 40% of NGM's business through a quota share
reinsurance agreement which is expected to be increased to 60% pursuant to the
MSA Agreement. Also pursuant to the MSA Agreement, NGM will contribute certain
of its insurance, reinsurance and information and financial services
subsidiaries to MSA. The aggregate purchase price to be paid by Fund American
pursuant to the MSA Agreement is approximately $60.2 million, subject to certain
purchase price adjustments. Fund American expects to assign the additional
investment in MSA to White Mountains. The closing is dependent upon the receipt
of state regulatory approvals and is expected to occur in the second quarter of
1997. White Mountains intends to finance the MSA investment by borrowing $50.0
million pursuant to White Mountains' existing credit facility, and through sales
and maturities of investment securities.
On March 17, 1997, the Boards of Directors of the Company, White Mountains,
Source One and Fund American Enterprises, Inc. ("FAE"), a wholly-owned
subsidiary of the Company, approved a reorganization plan whereby Source One
will become a part of Fund American's permanent operating group. As part of the
reorganization, White Mountains will be merged into FAE. The plan also calls
for approximately $139 million of capital infusions into Source One. This step
is intended to improve Source One's debt ratings and reduce Source One's
borrowing costs. Portions of the plan are subject to insurance regulatory
approvals and will require amending various credit facilities of the Company,
White Mountains, Source One, FAE, and Valley. Fund American believes that it
will receive the requisite insurance regulatory and banking approvals to proceed
with the transaction in the second quarter of 1997; however, there is no
assurance that such approvals will be obtained.
Source One. Through March 31, 1997, Source One received $81.2 million of the
estimated $271.5 million total proceeds from its February 1997 sale of mortgage
servicing rights, with the $190.3 million balance reflected as a receivable on
the March 31, 1997 balance sheet. At March 31, 1997, the proceeds received to-
date for the servicing sale had been used by Source One to reduce short-term
debt. Approximately $150.0 million of the balance of the servicing sale
proceeds is expected be received in the second quarter of 1997. Source One is
currently evaluating its options as to how it will utilize the remaining
proceeds from the sale. These options include: (i) purchasing additional
mortgage servicing rights from third parties; (ii) further reducing its
outstanding indebtedness; (iii) reducing its outstanding preferred or common
shareholders' equity; or (iv) any combination of the foregoing.
In connection with the servicing sale, Source One recently implemented a plan to
reduce and restructure its outstanding indebtedness and eliminate certain
covenants which restrict Source One's ability to increase its secured
borrowings. Pursuant to this plan, on May 8, 1997 Source One initiated a tender
offer to repurchase up to 100% of its outstanding 8.875% medium-term notes due
October 15, 2001. Source One estimates the price will be approximately 107.5% of
the face amount of the notes redeemed. As of March 31, 1997, Source One had
$138.4 million of such medium-term notes outstanding. The repurchase of the
notes will be initially funded with additional issuance of short-term debt.
Source One is currently considering further steps to restructure its debt
capital including (i) the issuance of approximately $100.0 million of additional
medium-term notes pursuant to an existing shelf registration and (ii) entering
into interest rate swaps whereby Source One's obligation to pay a fixed rate of
interest on a portion of its outstanding medium-term notes and debentures will
be swapped for an obligation to pay a floating rate of interest. Source One
believes that using floating rate debt to finance a larger portion of its
mortgage servicing assets is prudent, since the value of such assets generally
increases as interest rates increase, and declines as interest rates decrease.
Source One's investments, mortgage loans held for sale and mortgage loan
servicing portfolio provide a liquidity reserve since they may be sold to meet
cash needs.
-11-
<PAGE>
Part II. OTHER INFORMATION
Item 1. Legal Proceedings
None.
Item 2. Changes in Securities
None.
Item 3. Defaults upon Senior Securities
None.
Item 4. Submission of Matters to a Vote by Security Holders
None.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
11 - Statement Re Computation of Per Share Earnings*
27 Financial Data Schedule
(b) Reports on Form 8-K
On January 31, 1997 the registrant filed a Form 8-K,
dated January 24, 1997, which disclosed a change in Fund
American's independent auditors for 1997. This matter is
further described in Item 9 of Fund American's 1996
Annual Report on Form 10-K.
*Filed herewith.
-12-
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FUND AMERICAN ENTERPRISES HOLDINGS, INC.
----------------------------------------
(Registrant)
Date: May 12, 1997 By: /s/
---------------------------------
Michael S. Paquette
Vice President and Controller
-13-
<PAGE>
EXHIBIT 11
FUND AMERICAN ENTERPRISES HOLDINGS, INC.
STATEMENT RE COMPUTATION OF PER SHARE EARNINGS
(in thousands, except per share earnings)
Unaudited
<TABLE>
<CAPTION>
Three Months Ended
March 31,
--------------------------
1997 1996
------------ ------------
<S> <C> <C>
Primary earnings per share
Net income $ 4,916 $ 28,834
============ ============
Earnings per share denominator:
Average common shares outstanding 6,890 7,681
Dilution for options and warrants 675 684
------------ ------------
Shares for per share computation 7,565 8,365
============ ============
Primary earnings per share $ .65 $ 3.45
============ ============
Fully diluted earnings per share
Net income $ 4,916 $ 28,834
============ ============
Earnings per share denominator:
Average common shares outstanding 6,890 7,681
Dilution for options and warrants 675 684
------------ ------------
Shares for per share computation 7,565 8,365
============ ============
Fully diluted earnings per share $ .65 $ 3.45
============ ============
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 0
<SECURITIES> 494
<RECEIVABLES> 287
<ALLOWANCES> (15)
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 1,825
<CURRENT-LIABILITIES> 261
<BONDS> 422
0
0
<COMMON> 683
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 1,825
<SALES> 0
<TOTAL-REVENUES> 82
<CGS> 0
<TOTAL-COSTS> 71
<OTHER-EXPENSES> (10)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 12
<INCOME-PRETAX> 9
<INCOME-TAX> 4
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5
<EPS-PRIMARY> .65
<EPS-DILUTED> .65
</TABLE>
