<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_____________
FORM 8-K/A
(AMENDMENT NO. 1)
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
AUGUST 18, 1998
Date of Report (Date of earliest event reported)
FUND AMERICAN ENTERPRISES HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 1-8993 94-2708455
(State or other jurisdiction of (Commission (I.R.S. Employer)
incorporation or organization) File number) Identification No.)
80 SOUTH MAIN STREET, HANOVER, NEW HAMPSHIRE 03755
(Address of principal executive offices)
(603) 643-1567
(Registrant's telephone number, including area code)
<PAGE>
This Amendment No. 1 amends and supplements the Form 8-K Current Report
originally filed on August 18, 1998, relating to the Company's acquisition of
all the outstanding common stock of Folksamerica Holding Company, Inc.
("Folksamerica") that it did not previously own. Folksamerica is the parent
company of Folksamerica Reinsurance Company.
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS.
Item 7 is hereby amended by adding the following information:
(a) Financial Statements of Businesses Acquired.
Unaudited historical condensed consolidated financial statements of
Folksamerica and its subsidiaries as of December 31, 1997 and June 30,
1998 and for the three and six-month periods ended June 30, 1998 and 1997,
filed as Exhibit 99(a) hereto.
Audited historical consolidated financial statements of Folksamerica and
its subsidiaries as of December 31, 1997 and 1996 and for each of the three
years in the period ended December 31, 1997, including the report of
PricewaterhouseCoopers LLP, filed as Exhibit 99(b) hereto.
(b) Pro Forma Financial Information.
Unaudited pro forma condensed combined financial statements of the
Registrant and its subsidiaries consisting of a pro forma balance sheet as
of June 30, 1998, a pro forma income statement for the six months ended
June 30, 1998 and a pro forma income statement for the twelve months ended
December 31, 1997, together with the notes thereto, filed as Exhibit 99(c)
hereto.
(c) Exhibits. The following exhibits are filed herewith:
<TABLE>
<CAPTION>
Exhibit No. Description
----------- -----------
<S> <C>
10 (a) Stock Purchase Agreement dated as of July 1, 1998, by
and among Fund American Enterprises Holdings, Inc.,
White Mountains Holdings, Inc. and the Sellers (as
defined therein).*
10 (b) Assignment and Assumption Agreement dated as of August
18, 1998, by and among Folksam Omsesidig Sakforsakring,
Samvirke Skadeforsikring AS and Fund American
Enterprises Holdings, Inc.*
23 (a) Consent of PricewaterhouseCoopers LLP
<PAGE>
99 (a) Unaudited historical condensed consolidated financial
statements of Folksamerica and its subsidiaries as of
December 31, 1997 and June 30, 1998 and for the three
and six-month periods ended June 30, 1998 and 1997.
99 (b) Audited historical consolidated financial statements of
Folksamerica and its subsidiaries as of December 31, 1997
and 1996 and for each of the three years in the period ended
December 31, 1997, including the report of
PricewaterhouseCoopers LLP.
99 (c) Unaudited pro forma condensed combined financial statements
of the Registrant and its subsidiaries consisting of a pro
forma balance sheet as of June 30, 1998, a pro forma income
statement for the six months ended June 30, 1998 and a pro
forma income statement for the twelve months ended December
31, 1997, together with the notes thereto.
</TABLE>
* previously filed
<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.
Dated: October 16, 1998 By: /s/
--------------- ---------------
Michael S. Paquette
Senior Vice President and
Controller
<PAGE>
Exhibit Index
-------------
<TABLE>
<CAPTION>
Exhibit No. Description
----------- -----------
<S> <C>
10 (a) Stock Purchase Agreement dated as of July 1, 1998, by
and among Fund American Enterprises Holdings, Inc.,
White Mountains Holdings, Inc. and the Sellers (as
defined therein).*
10 (b) Assignment and Assumption Agreement dated as of August
18, 1998, by and among Folksam Omsesidig Sakforsakring,
Samvirke Skadeforsikring AS and Fund American
Enterprises Holdings, Inc.*
23 (a) Consent of PricewaterhouseCoopers LLP
99 (a) Unaudited historical condensed consolidated financial
statements of Folksamerica and its subsidiaries as of
December 31, 1997 and June 30, 1998 and for the three
and six-month periods ended June 30, 1998 and 1997
99 (b) Audited historical financial statements of Folksamerica
and its subsidiaries as of December 31, 1997 and 1996
and for each of the three years in the period ended
December 31, 1997, including the report of
PricewaterhouseCoopers LLP.
99 (c) Unaudited pro forma condensed combined financial
statements of the Registrant and its subsidiaries
consisting of a pro forma balance sheet as of June 30,
1998, a pro forma income statement for the six months
ended June 30, 1998 and a pro forma income statement
for the twelve months ended December 31, 1997, together
with the notes thereto.
</TABLE>
* previously filed
<PAGE>
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference (from this Form 8-K filed by
Fund American Enterprises Holdings, Inc.) in the Registration Statements, as
amended, pertaining to the Long-Term Incentive Plan (Form S-8, No. 33-5297),
Medium-Term Notes Series A (Form S-3, No. 33-54006), Common Stock Warrants
(Form S-3, No. 33-54749) and the Valley Group Employees' 401(K) Savings Plan
(Form S-8, No. 333-30233) of Fund American Enterprises Holdings, Inc. and to
the Source One Mortgage Services Corporation Employee Stock Ownership and
401(K) Plan (Form S-8, No. 333-13027) of our report dated February 27, 1998,
except for Note 16, as to which the date is August 18, 1998, with respect to
the consolidated financial statements of Folksamerica Holding Company, Inc. and
Subsidiaries as of December 31, 1997 and 1996 and for each of the three years
in the period ended December 31, 1997.
/s/ PricewaterhouseCoopers LLP
New York, New York
October 16, 1998
<PAGE>
FOLKSAMERICA HOLDING COMPANY, INC.
UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
JUNE 30, 1998
<PAGE>
FOLKSAMERICA HOLDING COMPANY, INC.
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Table of Contents
<TABLE>
<CAPTION>
Page No.
--------
<S> <C>
Condensed Consolidated Balance Sheets
June 30, 1998 (unaudited) and December 31, 1997 2
Condensed Consolidated Income Statements (unaudited)
Three month and six month periods ended
June 30, 1998 and 1997 3
Condensed Consolidated Statement of Cash Flows (unaudited)
Six months ended June 30, 1998 and 1997 4
Notes to Condensed Consolidated Financial Statements 5
</TABLE>
<PAGE>
FOLKSAMERICA HOLDING COMPANY, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
----------- ------------
(unaudited)
<S> <C> <C>
ASSETS:
Bonds, at amortized cost $ 93,090 $ 115,722
Bonds, at market value 669,638 656,166
Equity securities, at market value 108,428 80,747
Short term investments 5,670 5,326
Cash and cash equivalents 63,566 68,099
----------- ------------
Total cash and investments 940,392 926,060
Reinsurance recoverable on paid and unpaid losses 128,468 126,909
Reinsurance balances receivable 67,631 74,198
Accrued interest and dividends receivable 12,830 13,185
Deferred acquisition costs 25,115 27,154
Deferred income taxes 19,431 27,888
Funds held by ceding companies 13,680 11,172
Other assets 12,227 7,014
----------- ------------
Total assets $1,219,774 $1,213,580
----------- ------------
----------- ------------
LIABILITIES AND STOCKHOLDERS' EQUITY:
LIABILITIES:
Unpaid losses and loss adjustment expenses $ 729,429 $ 739,072
Loan payable 55,553 55,553
Unearned premiums 86,379 96,514
Funds held under reinsurance treaties 21,822 21,004
Accounts payable and accrued expenses 12,514 9,689
Deferred credit 32,854 36,758
----------- ------------
Total liabilities 938,551 958,590
----------- ------------
STOCKHOLDERS' EQUITY:
Common stock 100 100
Preferred stock Series B 79,372 79,372
Paid-in capital 80,194 80,194
Unrealized appreciation on investments, net of taxes 33,653 20,877
Foreign currency translation adjustment, net of taxes (1,775) (1,507)
Retained earnings 89,679 75,954
----------- ------------
Total stockholders' equity 281,223 254,990
----------- ------------
Total liabilities and stockholders' equity $1,219,774 $1,213,580
----------- ------------
----------- ------------
</TABLE>
See accompanying notes to condensed consolidated
financial statements.
2
<PAGE>
FOLKSAMERICA HOLDING COMPANY, INC.
CONDENSED CONSOLIDATED INCOME STATEMENTS
UNAUDITED
(IN THOUSANDS)
________
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
1998 1997 1998 1997
------- ------- -------- --------
<S> <C> <C> <C> <C>
Revenues:
Net premiums written $55,540 $41,008 $114,082 $ 87,736
Decrease in net unearned premiums 1,724 3,037 9,685 2,080
------- ------- -------- --------
Net premiums earned 57,264 44,045 123,767 89,816
Investment income, net of expenses 12,710 10,490 25,445 20,927
Net realized gains from sale of investments 922 6,305 5,123 6,229
------- ------- -------- --------
Total revenues 70,896 60,840 154,335 116,972
Expenses:
Losses and LAE incurred 41,624 31,852 88,715 64,188
Acquisition and other underwriting expenses 22,023 15,438 44,713 31,610
Interest expense 939 1,302 1,889 2,575
Amortization, net (primarily deferred credit) (1,782) (1,512) (3,704) (3,024)
------- ------- -------- --------
Total expenses 62,804 47,080 131,613 95,349
Income before Federal and foreign income
tax expense 8,092 13,760 22,722 21,623
Federal and foreign income tax expense 1,664 3,792 5,705 5,522
------- ------- -------- --------
Net income 6,428 9,968 17,017 16,101
Net unrealized gains and foreign exchange 5,625 7,269 12,508 2,546
------- ------- -------- --------
Comprehensive income $12,053 $17,237 $ 29,525 $ 18,647
------- ------- -------- --------
------- ------- -------- --------
</TABLE>
See accompanying notes to condensed consolidated
financial statements.
3
<PAGE>
FOLKSAMERICA HOLDING COMPANY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND 1997
UNAUDITED
(IN THOUSANDS)
________
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 17,017 $ 16,101
Adjustments to reconcile net income to cash (used in)
provided by operating activities:
Reinsurance balances and funds held 4,877 13,959
Reinsurance recoverable (1,559) 2,663
Investment income due and accrued 236 409
Deferred acquisition costs 2,039 350
Deferred income taxes 1,659 857
Unpaid losses & LAE (9,642) (16,827)
Unearned premiums (10,135) (2,572)
Depreciation and amortization, net (3,461) (2,871)
Amortization of bond discount/premium, net 741 558
Net realized capital gains on investments (5,123) (6,229)
Other, net 18 (601)
-------- --------
Net cash (used in) provided by operating activities (3,333) 5,797
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Sale of FGIC, net of cash sold 10,612
Sale of CGIC, net of cash sold 12,680
Bonds available for sale
Purchases (74,620) (42,002)
Maturities/calls 36,073 15,928
Sales 20,919 716
Bonds held to maturity
Purchases (700) (100)
Maturities/calls 23,531 31,472
Net short term investment purchases (400) (112)
Purchases of equities (12,854) (12,873)
Sales of equities 1,600
Purchase of furniture, equipment and leasehold improvements,
net (19) (114)
-------- --------
Net cash provided by in investing activities 2,092 7,195
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Common dividends paid (503)
Preferred dividends paid (2,789) (2,580)
-------- --------
Net cash used in financing activities (3,292) (2,580)
-------- --------
(Decrease) increase in cash and cash equivalents (4,533) 10,412
Cash and cash equivalents, beginning of year 68,099 45,508
-------- --------
Cash and cash equivalents, end of period $ 63,566 $ 55,920
-------- --------
-------- --------
</TABLE>
See accompanying notes to condensed consolidated
financial statements.
4
<PAGE>
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
_________________
1. BASIS OF PRESENTATION:
As of June 30, 1998, Folksamerica Holding Company, Inc. (the "Company")
was owned by the following companies ("Stockholders"): White Mountains
Holdings,Inc. ("White Mountains") (Hanover, New Hampshire), a wholly
owned subsidiary of Fund American Enterprises Holdings, Inc. ("Fund
American"), Folksam Mutual General Insurance Co. ("Folksam")
(Stockholm, Sweden), Wiener Staedtische Allgemeine Versicherung
("Wiener") (Vienna, Austria), P&V Assurances S.C. ("P&V")
(Brussels, Belgium) and Forsikringsaktieselskapet Samvirke
("Samvirke") (Oslo, Norway).
The Company owns 100% of Folksamerica Reinsurance Company ("FRC") and
Fester, Fothergill and Hartung, Ltd. ("FF&H"). FRC underwrites property
and liability reinsurance in the U.S., Latin America and Canada and
direct insurance business through managing general agents in the United
States. All assumed reinsurance is obtained through reinsurance
brokers and intermediaries. The Company principally derives its revenue
from underwriting property treaty business, casualty treaty business and
property facultative business for both commercial and personal lines.
FF&H is an underwriting manager for a property catastrophe reinsurance
facility underwritten by FRC.
On March 4, 1998, FRC sold 100% of the outstanding stock of Folksamerica
General Insurance Company ("FGIC") (formerly known as Great Lakes
American Reinsurance Company) for $4,060,000 over its book value on that
date. The gain is included in net realized capital gains on investments
in the June 30, 1998 statement of operations. The sale of FGIC will not
have a material impact on the Company's future results of operations.
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 the Company. 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 1997 audited financial statements.
Certain amounts in the prior period financial statements have been
reclassified to conform with the current presentation.
2. NEW PRONOUNCEMENTS:
In June 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 130, "Reporting Comprehensive
Income" (SFAS No. 130). This statement requires that all items that
are required to be recognized under accounting standards as components
of comprehensive income be explicitly reported in a financial
statement. SFAS No. 130 is effective for fiscal years beginning after
December 15, 1997 and reclassification of earlier periods is required.
There is no impact on the Company's net income or financial position as
a result of adoption of this statement in 1998.
The components of the Company's comprehensive income are net income,
changes in foreign currency translation adjustments and changes in
unrealized appreciation of investments.
3. SUBSEQUENT EVENT
Pursuant to a Stock Purchase Agreement dated July 1, 1998, White
Mountains and Fund American Enterprises, Inc., a wholly owned
subsidiary of Fund American, acquired the remaining 50% of the Company
that they did not previously own for approximately $169.1 million. The
transaction was completed on August 18, 1998 at which time the Company
became a wholly owned subsidiary of Fund American.
5
<PAGE>
FOLKSAMERICA HOLDING COMPANY, INC.
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
____________
To the Board of Directors and Stockholders of
Folksamerica Holding Company, Inc.:
We have audited the accompanying consolidated balance sheets of FOLKSAMERICA
HOLDING COMPANY, INC. and SUBSIDIARIES as of December 31, 1997 and 1996, and the
related consolidated statements of operations, stockholders' equity and cash
flows for each of the three years in the period ended December 31, 1997. 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 in accordance with generally accepted auditing
standards. Those standards 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. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Folksamerica
Holding Company, Inc. and Subsidiaries as of December 31, 1997 and 1996, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1997, in conformity with generally
accepted accounting principles.
PricewaterhouseCoopers LLP
New York, New York
February 27, 1998, except for
Note 16, as to which the date
is August 18, 1998.
1
<PAGE>
FOLKSAMERICA HOLDING COMPANY, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1997 AND 1996
(IN THOUSANDS)
________
<TABLE>
<CAPTION>
1997 1996
---------- --------
<S> <C> <C>
ASSETS:
Bonds, at amortized cost $ 115,722 $155,492
Bonds, at market value 656,166 479,150
Equity securities, at market value 80,747 22,044
Short term investments 5,326 9,226
Cash and cash equivalents 68,099 45,508
---------- --------
Total cash and investments 926,060 711,420
Reinsurance recoverable on paid and unpaid losses 126,909 138,850
Reinsurance balances receivable 74,198 63,033
Accrued interest and dividends receivable 13,185 10,606
Deferred acquisition costs 27,154 17,000
Deferred income taxes 27,888 30,959
Funds held by ceding companies 11,172 17,690
Other assets 7,014 5,274
---------- --------
Total assets $1,213,580 $994,832
---------- --------
---------- --------
LIABILITIES AND STOCKHOLDERS' EQUITY:
LIABILITIES:
Unpaid losses and loss adjustment expenses $ 739,072 $628,894
Loan payable 55,553 70,000
Note payable to Folksam 4,000
Unearned premiums 96,514 61,451
Funds held under reinsurance treaties 21,004 21,257
Accounts payable and accrued expenses 9,689 7,459
Deferred credit 36,758 34,212
---------- --------
Total liabilities 958,590 827,273
---------- --------
STOCKHOLDERS' EQUITY:
Common stock 100 69
Preferred stock Series B 79,372 79,372
Paid-in capital 80,194 38,531
Unrealized appreciation on investments, net of taxes 20,877 5,360
Foreign currency translation adjustment, net of taxes (1,507) (1,014)
Retained earnings 75,954 45,241
---------- --------
Total stockholders' equity 254,990 167,559
---------- --------
Total liabilities and stockholders' equity $1,213,580 $994,832
---------- --------
---------- --------
</TABLE>
See accompanying notes to condensed consolidated
financial statements.
2
<PAGE>
FOLKSAMERICA HOLDING COMPANY, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(IN THOUSANDS)
________
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
REVENUES:
Net premiums written $232,386 $171,901 $159,747
Decrease (increase) in unearned premiums 5,443 9,538 (410)
-------- -------- --------
Net premiums earned 237,829 181,439 159,337
Management fees 166 52
Investment income, net of related expenses of
$1,565 in 1997, $1,186 in 1996 and $1,301 in 1995 46,673 32,430 23,293
Net realized capital gains on investments 7,373 3,432 1,136
-------- -------- --------
Total revenues 291,875 217,467 183,818
-------- -------- --------
EXPENSES:
Losses and loss adjustment expenses 165,946 135,643 116,922
Acquisition and other underwriting expenses 81,082 57,922 51,435
Amortization, net (primarily deferred credit) (6,845) (2,964) 120
Interest expense 5,028 4,924 5,243
-------- -------- --------
Total expenses 245,211 195,525 173,720
-------- -------- --------
Income before Federal and foreign income tax expense 46,664 21,942 10,098
Federal and foreign income tax expense 10,792 4,837 2,269
-------- -------- --------
Net income $ 35,872 $ 17,105 $ 7,829
-------- -------- --------
-------- -------- --------
</TABLE>
See accompanying notes to consolidated
financial statements.
3
<PAGE>
FOLKSAMERICA HOLDING COMPANY, INC.
Consolidated Statements of Stockholders' Equity
December 31, 1997, 1996 and 1995
(in thousands, except for share information)
<TABLE>
<CAPTION>
Common Stock Preferred Stock
--------------- --------------- Additional Foreign Total
Par Par Paid-in Net unrealized Currency Retained Stockholders'
Shares Value Shares Value Capital Equities Bonds Translation Earnings Equity
--------- ----- ------- ------ ---------- -------- ------- ----------- -------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1994 4,500,000 $ 45 484,000 $24,200 $14,355 $ (24) $ (902) $(1,751) $26,914 $62,837
Net income 7,829 7,829
Change in net unrealized 866 4,600 5,466
Change in foreign currency
translation 253 253
Preferred dividends paid (908) (908)
- ----------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1995 4,500,000 $ 45 484,000 $24,200 $14,355 $ 842 $ 3,698 $(1,498) $33,835 $75,477
- ----------------------------------------------------------------------------------------------------------------------------------
Net income 17,105 17,105
Change in net unrealized 2,522 (1,702) 820
Change in foreign currency
translation 484 484
Preferred dividends paid (5,699) (5,699)
Conversion of "A" Preferred 2,420,000 24 (484,000) (24,200) 24,176
Issuance of "B" Preferred 6,920,000 79,372 79,372
- ----------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1996 6,920,00 69 6,920,000 79,372 38,531 3,364 1,996 (1,014) 45,241 167,559
- ----------------------------------------------------------------------------------------------------------------------------------
Net income 35,872 35,872
Change in net unrealized 7,498 8,019 15,517
Change in foreign currency
translation (493) (493)
Issuance of Common Stock 3,127,814 31 41,663 41,694
Preferred dividends paid (5,159) (5,159)
- ----------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1997 10,047,814 $100 6,920,000 $79,372 $80,194 $10,862 $10,015 $(1,507) $75,954 $254,990
- ----------------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated
financial statements.
4
<PAGE>
FOLKSAMERICA HOLDING COMPANY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(IN THOUSANDS)
________
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- --------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 35,872 $ 17,105 $ 7,829
Adjustments to reconcile net income to net
cash provided by operating activities:
Reinsurance balances receivable and funds held 10,106 10,653 (4,909)
Reinsurance recoverable on paid and unpaid losses 12,267 1,528 5,176
Accrued interest and dividends receivable 1,578 235 (207)
Deferred acquisition costs 1,848 1,872 60
Deferred income taxes 2,436 2,152 (1,172)
Unpaid losses and loss adjustment expenses (20,846) (13,073) 23,583
Unearned premiums (6,330) (9,746) 263
Depreciation and amortization, net (6,453) (2,469) 187
Amortization of bond (discount) premium, net 1,431 606 1,148
Net realized capital gains on investments (7,373) (3,432) (1,136)
Other, net (1,224) (2,570) 2,265
--------- --------- --------
Net cash provided by operating activities 23,312 2,861 33,087
--------- --------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of FGIC (net of cash acquired of $20) (107,042)
Sale of CGIC (net of cash sold of $128) 12,685
Purchase of CGIC (net of cash acquired of $62,504) (29,496)
Sale of FNRC (net of cash sold of $3,622) 7,382
Purchase of Surety Re (452)
BONDS AVAILABLE FOR SALE:
Purchases (78,976) (244,278) (97,128)
Maturities/calls 68,506 38,264 22,795
Sales 77,751 74,162 1,000
BONDS HELD TO MATURITY:
Purchases (100) (8,909) (10,416)
Maturities 39,225 35,549 57,385
Purchases of equities (49,310) (10,562) (2,725)
Sales of equities 4,651 556 5,530
Net short term investment sales 14,005 60,032 172
Purchase (sale) of furniture, equipment and
leasehold improvements, net (204) (62) (121)
Other (37)
--------- --------- --------
Net cash used in investing activities (18,809) (77,851) (23,508)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of preferred stock 79,372
Proceeds from issuance of common stock 41,694
Preferred dividends paid (5,159) (5,699) (908)
Principal payments on loans (18,447) (1,500) (1,500)
--------- --------- --------
Net cash provided by (used in) financing activities 18,088 72,173 (2,408)
Increase (decrease) in cash and cash equivalents 22,591 (2,817) 7,171
Cash and cash equivalents, beginning of year 45,508 48,325 41,154
--------- --------- --------
Cash and cash equivalents, end of year $ 68,099 $ 45,508 $ 48,325
--------- --------- --------
--------- --------- --------
</TABLE>
See accompanying notes to consolidated
financial statements
5
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
_________________
1. ORGANIZATION:
Folksamerica Holding Company, Inc. ("Holding Company") is owned by the
following companies ("Stockholders"): White Mountains Holdings, Inc.
("White Mountains") (Hanover, New Hampshire), a wholly owned subsidiary of
Fund American Enterprises Holdings, Inc. ("Fund American"), Folksam Mutual
General Insurance Co. ("Folksam") (Stockholm, Sweden), Wiener Staedtische
Allgemeine Versicherung ("Wiener") (Vienna, Austria), P&V Assurances S.C.
("P&V") (Brussels, Belgium) and Forsikringsaktieselskapet Samvirke
("Samvirke") (Oslo, Norway) (see Note 13). Folksam, Wiener, P&V and
Samvirke are collectively the "Founding Stockholders".
The Holding Company owns 100% of Folksamerica Reinsurance Company ("FRC")
and Fester, Fothergill and Hartung, Ltd. ("FF&H"). FRC owns 100% of the
outstanding stock of Folksamerica General Insurance Company ("FGIC")
(formerly known as "Great Lakes American Reinsurance Company") and 100% of
the outstanding stock of Surety Reinsurance Company ("Surety")
(collectively, the "Company"). FRC and FGIC underwrite property and
liability reinsurance in the U.S., Latin America and Canada. They also
write direct insurance business through managing general agents in the
United States. All assumed reinsurance is obtained through reinsurance
brokers and intermediaries. The Company principally derives its revenue
from underwriting property treaty business, casualty treaty business and
property facultative business for both commercial and personal lines. FF&H
is an underwriting manager for a property catastrophe reinsurance facility
underwritten by FRC.
On May 14, 1997, FRC sold 100% of Christiania General Insurance
Corporation of New York ("CGIC") for $5,200,000 over its book value on
that date. This gain is included in net realized capital gains on
investments in the 1997 statement of operations. The sale of CGIC will
not have a material impact on the Holding Company's future results of
operations.
On July 9, 1996, FRC sold 100% of Folksamerica National Reinsurance
Company ("FNRC") for $2,100,000 over its book value on that date. This
gain is included in net realized capital gains on investments in the 1996
statement of operations. The sale of FNRC will not have a material impact
on the Holding Company's future results of operations.
2. ACQUISITION OF GREAT LAKES AMERICAN REINSURANCE COMPANY:
On July 22, 1997, FRC acquired 100% of Great Lakes American Reinsurance
Company, subsequently renamed Folksamerica General Insurance Company
("FGIC") for $105,912,337 from Munich Re (Munich, Germany). The
transaction was approved by the Insurance Department of the State of New
York ("Insurance Department"). For financial reporting purposes, the
acquisition date was designated as July 1, 1997. The acquisition was
accounted for as a purchase in accordance with Accounting Principles Board
Statement ("APB") No. 16 "Business Combinations". The results of
operations of FGIC have been included in the consolidated financial
statements from July 1, 1997.
The excess of the fair value of the purchased net assets of FGIC as of
July 1, 1997 over the acquisition price, is included in the consolidated
balance sheet as a deferred credit, and is being amortized over 6 years.
Amortization of the deferred credit of $797,000 is included in the 1997
statement of operations. The deferred credit as of July 1, 1997 was
calculated as follows (in thousands):
<TABLE>
<S> <C>
Fair value of net assets acquired $ 116,622
Cash paid for capital stock (105,912)
Acquisition expenses (1,150)
---------
Deferred credit $ 9,560
---------
---------
</TABLE>
Included in the 1997 statement of operations are net premiums earned of
approximately $59,165,000 and losses incurred of approximately $43,059,000
related to FGIC.
Continued
6
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
_________________
3. ACQUISITION OF CHRISTIANIA GENERAL INSURANCE CORPORATION OF NEW YORK:
On June 19, 1996, the Holding Company and FRC acquired 100% of CGIC for
$88,000,000 from Oslo Reinsurance Company AS (Oslo, Norway). The
transaction was approved by the Insurance Department. For financial
reporting purposes, the acquisition date was designated as June 30, 1996.
The acquisition was accounted for as a purchase in accordance with
Accounting Principles Board Statement ("APB") No. 16 "Business
Combinations". The acquisition was primarily financed by the issuance of
Series B Preferred Stock as further described in Note 13 to the
Consolidated Financial Statements. The results of operations of CGIC have
been included in the consolidated financial statements from July 1, 1996.
The excess of the fair value of the purchased net assets of CGIC as of
June 30, 1996 over the acquisition price, is included in the consolidated
balance sheet as a deferred credit, and is being amortized over 6 years.
Amortization of the deferred credit of $6,168,000 and $3,084,000 in 1997
and 1996 statements of operations, respectively. The deferred credit as
of June 30, 1996 was calculated as follows (in thousands):
<TABLE>
<S> <C>
Fair value of net assets acquired $129,490
Cash paid for capital stock (88,000)
Acquisition expenses (4,000)
---------
Deferred credit $ 37,490
---------
---------
</TABLE>
Included in the 1996 statement of operations are net premiums earned of
approximately $38,169,000 and income before income taxes of approximately
$6,711,000 related to CGIC.
CGIC owned 52.5% of Surety on June 30, 1996. As of December 31, 1996, FRC
acquired the remaining 47.5% of Surety. The financial position and results
of operations of Surety are immaterial.
4. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
The Holding Company's consolidated financial statements have been prepared
on the basis of generally accepted accounting principles which differ in
certain respects from statutory accounting practices prescribed or
permitted by the Insurance Department. The following is a description of
the significant accounting policies and practices employed by the Holding
Company:
BASIS OF CONSOLIDATION:
The consolidated financial statements include the accounts of the Holding
Company and its wholly owned subsidiaries. All significant intercompany
transactions have been eliminated. Certain reclassifications have been
made to conform the prior years presentation with 1997.
ESTIMATES:
The preparation of financial statements in conformity with generally
accepted accounting principles 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.
INVESTMENTS:
Bonds that the Company has both the ability and the intent to hold until
maturity are stated at amortized cost. Equity securities and bonds that
may not be held until maturity (i.e. "available for sale") are stated at
market values. Short-term investments are carried at amortized cost, which
approximates market value and comprise securities which mature in less
than one year, but greater than three months from the date of acquisition.
The differences between the cost and market values of equity securities
and available for sale bonds are reflected as unrealized
appreciation/depreciation, net of deferred income taxes, as a separate
component of stockholders' equity. Realized gains or losses from the sale
of investments are determined on the basis of average cost. Investment
income is recognized when earned. Market values for investment securities
are based on quoted market prices.
Continued
7
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
_________________
CASH EQUIVALENTS:
Cash equivalents are stated at cost, which approximates market value, and
consist of certificates of deposit, commercial paper, and United States
Treasury bills acquired with original maturities of three months or less.
GOODWILL:
The Holding Company recognized goodwill related to the acquisition of
FF&H. Goodwill, which is amortized on a straight line basis over 20 years,
was recorded as the excess of the acquisition price over the sum of the
fair values of the purchased net assets. Goodwill of $1,227,000 and
$1,347,000 as of December 31, 1997 and 1996, respectively, is included in
other assets.
PREMIUM REVENUE AND RELATED EXPENSES:
Premiums written, which include the effect of premium adjustments for
deposits and experience-rated contracts, are recognized as revenues
ratably over the terms of the related reinsurance treaties or policies in
force. Unearned premiums are established to cover the unexpired portion of
premiums written and are computed by pro rata methods on the basis of
statistical data or reports received from ceding companies.
Deferred policy acquisition costs represent commissions and brokerage
expenses, which are deferred and amortized over the applicable premium
recognition period, generally one year. These deferred costs have been
limited to the amount expected to be recovered from future earned premiums
and anticipated investment income. Acquisition costs which have been
amortized were approximately $66,784,000, $47,598,000 and $44,142,000 in
1997, 1996 and 1995, respectively. Premiums written and acquisition costs
and the change in unearned premiums are presented after deductions for
reinsurance ceded to other insurance companies (see Note 8).
UNPAID LOSSES AND LOSS ADJUSTMENT EXPENSES:
The estimated liability for unpaid losses and loss adjustment expenses is
based on reports received from ceding companies. A provision, which is
based on historical experience and modified for current trends, is also
included for losses and loss adjustment expenses which have been incurred
but not reported (IBNR). The methods of determining such estimates and
establishing the resulting reserves are continually reviewed and modified
to reflect current conditions. Unpaid losses and loss adjustment expenses
also include a provision for certain types of latent injury or toxic tort
exposures which cannot be estimated with traditional reserving techniques
since such exposures are subject to evolving legal interpretation and
environmental liability reform. Accordingly, the reserves carried for
these exposures represent management's informed estimate based on
currently available information. Such reserves are subject to a higher
degree of potential variability than the reserves established for the
majority of the book of business using traditional reserving techniques
(see Note 6). Any adjustments relating to changes in reserve estimates are
reflected in results of operations currently.
REINSURANCE:
In the normal course of business, the Company seeks to reduce the loss
that may arise from catastrophes or other events that cause unfavorable
underwriting results by reinsuring certain levels of risk in various areas
of exposure with other insurance enterprises or reinsurers. Amounts
recoverable from reinsurers are estimated in a manner consistent with the
claim liability associated with the reinsured policy.
FEDERAL INCOME TAXES:
The Holding Company and its consolidated subsidiaries file a consolidated
federal income tax return. Deferred income taxes have been provided for
expenses and revenues recognized for financial statement purposes in
periods different from those for income tax purposes, net of a valuation
allowance against net deductible temporary differences, if applicable.
The principal differences are deferred acquisition costs, unearned
premiums and the discounting of unpaid losses and loss adjustment expense
reserves for tax purposes.
NEW PRONOUNCEMENTS:
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income"
(SFAS No. 130). This statement requires that all items that are required
to be recognized under accounting standards as components of comprehensive
income be explicitly reported in a financial statement. SFAS No. 130 is
effective for fiscal years beginning after December 15, 1997 and
reclassification of earlier periods is required. There will be no impact
on the Company's net income or financial position upon adoption of this
statement in 1998. Comprehensive income for 1997 is $50,896,000.
Continued
8
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
_____________________
5. INVESTMENTS:
The amortized cost and estimated market value of investments in bonds
and equity securities at December 31, 1997 and 1996 are as follows
(in thousands):
<TABLE>
<CAPTION>
Amortized Unrealized Unrealized Market
Cost* Gains Losses Value
---------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
1997
HELD TO MATURITY
U.S. Government........................................ $ 49,356 $ 639 $ 199 $ 49,796
States, municipalities and political subdivisions...... 3,717 69 3,786
Foreign Governments.................................... 7,299 70 40 7,329
Corporate.............................................. 41,735 563 137 42,161
Mortgage-backed........................................ 5,683 13 39 5,657
Other.................................................. 7,932 19 14 7,937
---------- ---------- ---------- ---------
Subtotal........................................... $115,722 $ 1,373 $ 429 $116,666
---------- ---------- ---------- ---------
AVAILABLE FOR SALE
U.S. Government........................................ $187,027 $ 3,375 $ 105 $190,297
States, municipalities and political subdivisions...... 99,951 3,247 124 103,074
Foreign Governments.................................... 28,140 253 457 27,936
Corporate.............................................. 218,896 7,452 52 226,296
Mortgage-backed........................................ 87,973 1,447 104 89,316
Other.................................................. 18,798 452 3 19,247
---------- ---------- ---------- ---------
Subtotal........................................... $640,785 $16,226 $ 845 $656,166
---------- ---------- ---------- ---------
Total Bonds........................................ $756,507 $17,599 $ 1,274 $772,832
---------- ---------- ---------- ---------
---------- ---------- ---------- ---------
Equity Securities.................................. $ 64,044 $17,922 $ 1,219 $ 80,747
---------- ---------- ---------- ---------
---------- ---------- ---------- ---------
1996
HELD TO MATURITY
U.S. Government....................................... $ 58,746 $ 564 $ 684 $ 58,626
States, municipalities and political subdivisions..... 4,194 104 4,298
Foreign Governments................................... 7,613 101 69 7,645
Corporate............................................. 61,178 416 541 61,053
Mortgage-backed....................................... 9,729 32 68 9,693
Other................................................. 14,032 92 94 14,030
---------- ---------- ---------- ---------
Subtotal.......................................... $155,492 $ 1,309 $ 1,456 $155,345
---------- ---------- ---------- ---------
AVAILABLE FOR SALE
U.S. Government....................................... $166,718 $ 417 $ 1,400 $165,735
States, municipalities and political subdivisions..... 49,888 464 365 49,987
Foreign Governments................................... 30,313 382 11 30,684
Corporate............................................. 182,144 3,720 733 185,131
Mortgage-backed....................................... 25,305 231 41 25,495
Other................................................. 21,696 434 12 22,118
---------- ---------- ---------- ---------
Subtotal.......................................... $476,064 $ 5,648 $ 2,562 $479,150
---------- ---------- ---------- ---------
Total Bonds....................................... $631,556 $ 6,957 $ 4,018 $634,495
---------- ---------- ---------- ---------
---------- ---------- ---------- ---------
Equity securities..................................... $ 16,945 $ 5,224 $ 125 $ 22,044
---------- ---------- ---------- ---------
---------- ---------- ---------- ---------
</TABLE>
*Equity securities are at cost.
Continued
9
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
_____________________
FRC and FGIC have investments in bonds with an amortized cost and market
value of approximately $192,593,000 and $195,983,000, respectively as of
December 31, 1997, which are issued by several different banks and
financial service companies. These securities are rated either "BBB" or
higher by Moody's Investors Service, Inc. or Standard and Poor's
Corporation. Cash and cash equivalents includes approximately
$30,266,000 held with one institution.
The amortized cost and estimated market value of investments in bonds as
of December 31, 1997, by contractual maturity, are shown below (in
thousands). Expected maturities could differ from contractual
maturities because borrowers have the right to call or prepay certain
obligations with or without call or prepayment penalties.
<TABLE>
<CAPTION>
Estimated
Amortized Market
HELD TO MATURITY Cost Value
--------- ---------
<S> <C> <C>
Due in one year or less............................... $ 35,968 $ 35,929
Due after one year through five years................. 40,717 41,217
Due after five years through ten years................ 33,354 33,864
--------- ---------
Subtotal......................................... 110,039 111,010
Mortgage-backed securities............................ 5,683 5,656
--------- ---------
Subtotal......................................... 115,722 116,666
--------- ---------
AVAILABLE FOR SALE
Due in one year or less............................... 54,753 54,942
Due after one year through five years................. 201,922 206,698
Due after five years through ten years................ 260,949 269,142
Due after ten years................................... 35,188 36,068
--------- ---------
Subtotal......................................... 552,812 566,850
Mortgaged-backed securities........................... 87,973 89,316
--------- ---------
Subtotal......................................... 640,785 656,166
--------- ---------
Total bonds........................................... $756,507 $772,832
--------- ---------
--------- ---------
</TABLE>
Gross realized gains and gross realized losses on sales of bonds were
$10,000 and $465,000 during 1997, $1,076,000 and $611,000 during 1996
and none in 1995. Gross realized gains and gross realized losses on
sales of equities were $2,476,000 and $0 during 1997, $15,968 and $1,533
during 1996 and $1,263,503 and $127,898 during 1995. Investments stated
at approximately $48,023,000 and $21,672,000 as of December 31, 1997 and
1996, respectively, were on deposit with state and foreign regulatory
authorities, to comply with insurance laws.
The components of net investment income are presented in the table below:
<TABLE>
<CAPTION>
Years ended December 31,
1997 1996 1995
-------- --------- ---------
<S> <C> <C> <C>
Bonds..................................................... $ 44,197 $ 25,959 $ 20,420
Equity securities......................................... 638 289 193
Short term investments.................................... 1,161 5,836 2,627
Cash & cash equivalents................................... 2,242 1,532 1,354
-------- --------- ---------
Total gross investment income............................. 48,238 33,616 24,594
Investment expenses....................................... 1,565 1,186 1,301
-------- --------- ---------
Total net investment income............................... $ 46,673 $ 32,430 $ 23,293
-------- --------- ---------
-------- --------- ---------
</TABLE>
Continued
10
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
_____________________
6. UNPAID LOSSES AND LOSS ADJUSTMENT EXPENSES:
Activity in the liability for unpaid losses and loss adjustment
expenses is summarized as follows (in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
-------- --------- ---------
<S> <C> <C> <C>
Balance at January 1...................................... $628,894 $358,491 $334,908
less: reinsurance recoverable............................. 131,861 66,134 66,974
-------- --------- ---------
Net balance at January 1................................ 497,033 292,357 267,934
FGIC reserves at July 1, 1997............................. 130,726
CGIC reserves at June 30, 1996............................ 210,919
Incurred losses, related to:
Current accident year................................... 155,382 128,013 108,418
Prior accident years.................................... 10,564 7,630 8,503
-------- --------- ---------
Total incurred losses..................................... 165,946 135,643 116,921
Paid losses, related to:
Current accident year................................... 37,283 45,376 22,718
Prior accident years.................................... 140,151 96,510 69,780
-------- --------- ---------
Total paid losses......................................... 177,434 141,886 92,498
Balance at December 31.................................... 739,072 628,894 358,491
less: reinsurance recoverable............................. 122,801 131,861 66,134
-------- --------- ---------
Net balance at December 31.............................. $616,271 $497,033 $292,357
-------- --------- ---------
-------- --------- ---------
</TABLE>
Incurred losses during 1997, 1996 and 1995 related to prior accident
years, are primarily attributable to reserve additions relating to
asbestos, environmental liability and breast implant exposures.
Asbestos and Environmental Reserves (in millions):
<TABLE>
<CAPTION>
Environmental Asbestos
1997 1996 1995 1997 1996 1995
------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
GROSS OF REINSURANCE:
Beginning reserves................... $11.6 $ 7.9 $7.7 $19.1 $19.0 $15.7
FGIC as of January 1, 1997........... .5 .1
CGIC as of January 1, 1996........... 3.1 7.4
Incurred loss & LAE.................. 3.5 3.7 2.2 4.1 4.0 5.5
Payments............................. 2.2 3.1 2.0 4.5 11.3 2.2
Ending reserves...................... $13.4 $11.6 $7.9 $18.8 $19.1 $19.0
NET OF REINSURANCE:
Beginning reserves................... $ 9.4 $ 7.7 $7.4 $14.1 $13.0 $12.1
FGIC as of January 1, 1997........... .5 .1
CGIC as of January 1, 1996........... 1.8 3.6
Incurred loss & LAE.................. 2.3 2.4 2.3 3.3 1.8 3.1
Payments............................. 1.8 2.5 2.0 2.9 4.3 2.2
Ending reserves...................... $10.4 $ 9.4 $7.7 $14.6 $14.1 $13.0
</TABLE>
FGIC paid and incurred losses are included in the above table for the
full year of 1997. CGIC paid and incurred losses are included in the
above table for the full year of 1996. The Company also holds IBNR for
these exposures of $19.2 million net and $25.1 million gross at December
31, 1997. The IBNR held at December 31, 1996 was $18.6 million net and
$24.5 million gross.
Continued
11
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
_____________________
7. TRANSACTIONS WITH AFFILIATES:
The Company provides investment management services for certain insurance
subsidiaries of Folksam. Fees earned from these services for 1997, 1996
and 1995 were $864,000, $476,000 and $275,000, respectively.
FRC assumed premiums earned through an affiliated entity of approximately
$1,827,000, $2,202,000 and $3,542,000 and losses and loss adjustment
expenses of approximately $315,000, $649,000 and $1,623,000 for the years
ended December 31, 1997, 1996 and 1995, respectively. Funds held related
to this business were approximately $4,000 as of December 31, 1997 and
$5,035,000 as of December 31, 1996, respectively, and were reflected in
funds held by ceding reinsurers.
8. COMMITMENTS AND CONTINGENCIES:
REINSURANCE:
Contingent liabilities exist with respect to reinsurance ceded, which
would become an ultimate liability of FRC in the event that the assuming
companies were unable to meet their obligations under reinsurance
agreements in force. The Company evaluates the financial condition of
its reinsurers and monitors concentrations of credit risk arising from
similar activities or economic characteristics of the reinsurers to
minimize its exposure to significant losses from reinsurer insolvencies.
At December 31, 1997, reinsurance recoverables with a carrying value of
$41.7 million were associated with a single reinsurer. The Company
holds collateral from this reinsurer in the form of a letter of credit
totaling $21.4 million and funds withheld totaling $20.3 million that
can be drawn on for amounts that remain unpaid.
The amounts deducted from revenues and expenses for reinsurance ceded
were as follows (in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
------- -------- -------
<S> <C> <C> <C>
Income and expenses:
Premiums written................... $18,663 $15,306 $12,549
Premiums earned.................... 19,316 15,514 12,696
Acquisition costs.................. 2,465 1,771 (43)
Losses and loss adjustment
expenses incurred............... 14,063 16,272 6,899
</TABLE>
LEASES:
The Holding Company leases office space under noncancelable leases
expiring at various dates through July 2008. Rental expense, for the
years ended December 31, 1997, 1996 and 1995 was approximately
$1,725,000, $1,858,000 and $1,427,000, respectively. The future annual
minimum rental payments required under noncancelable leases for office
space are as follows (in thousands):
<TABLE>
<CAPTION>
YEAR AMOUNT
---- ------
<S> <C>
1998 $ 1,498
1999 1,632
2000 1,595
2001 1,538
2002 1,540
Thereafter 9,761
-------
$17,564
-------
-------
</TABLE>
9. EMPLOYEE BENEFIT PLANS:
HOLDING COMPANY
The Holding Company is the sponsor of a defined-contribution employee
savings plan ("savings plan") which covers participating employees. The
plan allows participating employees to contribute up to 12% of their
annual salary to the plan. The Holding Company matches and contributes
an amount equal to the first 6% of annual salary contributed by the
employee. Contributions are expensed when incurred. The annual amount
contributed by the Holding Company to the plan was approximately
$375,000, $263,000 and $260,000 for the years 1997, 1996 and 1995,
respectively.
Continued
12
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
____________________
Health care and life insurance benefits for active employees are
provided by the Holding Company through insurance companies whose annual
premiums charged to the Holding Company are based on historical
experience of the underlying policies. These costs were not material in
1997, 1996 and 1995.
The Holding Company maintains a qualified, noncontributory,
defined-benefit pension plan ("pension plan") covering all full-time
employees who have fulfilled minimum age and service requirements. The
pension plan provides retirement benefits at age 65, with an early
retirement option. The Holding Company makes annual contributions to
the pension plan equal to the minimum funding required in accordance
with ERISA. The net periodic pension cost includes the following
components (in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Service cost (benefits earned during the year)................. $471 $219 $192
Interest cost on projected benefit obligation.................. 475 234 246
Actual return on assets........................................ (380) (154) (144)
Net amortization and deferred asset gain....................... 22 (2) 24
---- ---- ----
Net periodic pension cost............................... $588 $297 $318
---- ---- ----
---- ---- ----
</TABLE>
The aggregate funded status and aggregate net pension liability are as
follows (in thousands):
<TABLE>
<CAPTION>
1997 1996
--------- -------
<S> <C> <C>
Actuarial present value of accumulated benefit obligation
Vested......................................................... $5,474 $2,676
Nonvested...................................................... 369 121
--------- -------
Accumulated benefit obligation............................. $5,843 $2,797
--------- -------
--------- -------
Projected benefit obligation....................................... $7,455 $3,440
Plan assets at fair value.......................................... 5,356 2,347
--------- -------
Projected benefit obligation in excess of plan assets....... (2,099) (1,093)
Unrecognized transition amount..................................... (69) (43)
Unrecognized net loss.............................................. 1,462 789
Unrecognized prior service cost.................................... 263 (380)
--------- -------
Net pension liability.......................................... $ (443) $ (727)
--------- -------
--------- -------
</TABLE>
The development of the projected benefit obligation as of December 31,
1997 and 1996 was based upon 7.25% and a 7.75% discount rate,
respectively, and a 5.5% average rate of increase in employee
compensation. The expected long-term rate of return on assets was 8% as
of December 31, 1997 and 1996. Plan assets are invested primarily in
bonds, stocks, private placement loans, urban mortgages, short-term
securities and cash equivalents.
The Holding Company provides pension benefits for certain employees
above amounts allowed under the tax qualified plan, through an unfunded
non-qualified non-contributory plan. No contributions to the plan were
made in 1997. Included in the Consolidated Balance Sheet was a pension
liability of $200,000 related to this plan as of December 31, 1997. The
Company previously provided benefits through a funded non-qualified plan
which has been terminated. The amount contributed by the Holding
Company was approximately $298,000 for the year ending December 31, 1997.
During 1997 the Board of Directors adopted a Long Term Incentive Plan
("Incentive Plan"). The Incentive Plan provides for the granting of
performance shares to executive officers and other key employees of the
Company. Such grants are determined by the Human Resources Committee
(the "Committee") of the Company's Board of Directors based upon
recommendations by the Company's Chief Executive Officer. Performance
shares are conditional grants of a specified number of theoretical
shares of Company stock. The grants are payable in cash at the end of
three year performance periods, subject to the attainment of specified
return on equity targets established by the Committee. Payments, based
on the fully diluted book value per share of the Company's common stock,
can range between 0% and 200% of performance shares granted based upon
the level of performance achieved during a three year performance
period. Compensation expense related to this plan for 1997 was $950,000.
Continued
13
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
____________________
CHRISTIANIA GENERAL INSURANCE CORPORATION OF NEW YORK
CGIC is also a sponsor of a defined contribution employee savings plan
("savings plan") which covers participating employees. CGIC's plan
matches 100% of the employee's contribution up to a maximum matching
contribution of 6% of the employee's salary. This plan was merged into
the Holding Company plan as of January 1, 1997.
Through December 31, 1996, CGIC maintained a non-contributory defined
benefit pension plan covering substantially all employees. This plan
was merged into the Holding Company plan as of January 1, 1997. The
benefits were based on years of service and the employee's final
compensation. The cost of this plan was not material in 1996.
10. INCOME TAXES:
Income taxes in the statements of operations give effect to permanent
differences between financial and taxable income. The income tax
expense for 1997, 1996 and 1995 as reflected in the statements of
operations are summarized as follows (in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
------- ------ -------
<S> <C> <C> <C>
Current $ 8,356 $2,685 $ 3,442
Deferred 2,436 2,152 (1,173)
------- ------ -------
Income tax expense $10,792 $4,837 $ 2,269
------- ------ -------
------- ------ -------
</TABLE>
Deferred income taxes reflect the tax impact of the temporary
differences between the value of assets and liabilities for financial
statement purposes and such values as measured by the tax laws and
regulations. The principal items making up the net deferred income tax
asset are as follows:
<TABLE>
<CAPTION>
Years ended December 31,
1997 1996
------- -------
<S> <C> <C>
Deferred tax assets:
Reserve for losses and loss
adjustment expenses $37,140 $29,214
Unearned premium reserve 6,698 4,076
Foreign currency translation 851 524
Pension 1,339 1,129
Other 4,338 7,159
------- -------
Total deferred tax assets 50,366 42,102
------- -------
Deferred tax liabilities:
Deferred acquisition costs 9,504 5,780
Net unrealized appreciation on
investments 11,207 2,825
Other 1,767 2,538
------- -------
Total deferred tax liabilities 22,478 11,143
------- -------
Net deferred tax assets $27,888 $30,959
------- -------
------- -------
</TABLE>
Continued
14
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
____________________
The Holding Company's effective income tax rate for the years ended
December 31, 1997, 1996 and 1995 differs from the statutory rate on
ordinary income as follows (in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
-------------------- -------------------- -------------------
Percent Percent Percent
of of of
Pretax Pretax Pretax
Amount Income Amount Income Amount Income
-------- ------- -------- ------- -------- -------
<S> <C> <C> <C> <C> <C> <C>
Income taxes computed on
pretax income $16,332 35.0 $ 7,475 34.0 $3,434 34.0
Increase (decrease) in
taxes resulting from:
Non-taxable purchase
accounting (3,028) (6.5) (2,553) (11.6) 163 1.6
Prior period deferred tax
benefits recognized
currently (367) (3.6)
Accrual of ceded premium
written (442) (4.4)
Effect of deferred tax rate
change (896) (1.9)
Tax-exempt bond interest (1,138) (2.4) (556) (2.5) (203) (2.0)
Dividend-received deduction (123) (0.3) (55) (.3) (39) (.4)
Other (355) (0.8) 526 2.4 (277) (2.7)
------- ---- ------- ----- ------ ----
Income tax expense $10,792 23.1 $ 4,837 22.0 $2,269 22.5
------- ---- ------- ----- ------ ----
------- ---- ------- ----- ------ ----
</TABLE>
Income taxes recoverable of approximately $1,159,000 and $477,000 as of
December 31, 1997 and 1996 are reflected in other assets. Income tax
payments made by the Holding Company totaled approximately $7,025,000,
$1,300,000 and $2,855,000 for the years ended December 31, 1997, 1996
and 1995, respectively.
11. DIVIDENDS:
The Holding Company is subject to the Insurance Holding Company Act of
the State of New York. The Holding Company's cash flow is dependent
upon the ability of its subsidiaries to transfer funds in the form of
loans, advances, or cash dividends. The insurance holding company laws
require the filing of annual reports by FRC and FGIC and regulate
transactions between the Holding Company and its reinsurance
subsidiaries to ensure the maintenance of the reinsurance subsidiaries
surplus in relation to liabilities and financial needs.
Under New York law, FRC and FGIC may pay dividends only from earned
surplus determined on a statutory basis. Generally, the maximum amount
of cash dividends that a company may pay out of its statutory earned
surplus without prior regulatory approval in any twelve-month period is
the lesser of net investment income, as defined, or 10% of statutory
surplus to policyholders. Accordingly, as of December 31, 1997, FRC had
the ability to pay dividends to the Holding Company of approximately
$27,583,000, during 1998, without prior regulatory approval, however, in
connection with the acquisition of CGIC, the Company consented to the
Insurance Department's standard 2 year dividend moratorium period during
which FRC and CGIC may not pay dividends without prior Insurance
Department approval. The moratorium period ends June 19, 1998. During
1997, 1996 and 1995 FRC paid dividends of $10,000,000, $9,500,000 and
$6,750,000, respectively, to the Holding Company. FRC has received
approval from the Insurance Department for a $3,000,000 dividend to be
paid in the first quarter of 1998. CGIC paid dividends of $2,000,000 to
the Company in 1996.
12. STATUTORY FINANCIAL INFORMATION:
FRC and FGIC file financial statements in accordance with accounting
practices prescribed or permitted by the Insurance Department of the
State of New York. Statutory financial statements do not reflect
deferred acquisition costs, furniture and equipment, deferred income
taxes and certain other items recognized under generally accepted
accounting principles. FRC's statutory net income for the years ended
December 31, 1997, 1996 and 1995 was approximately $34,516,000,
$19,372,000 and $11,251,000, respectively, and the
Continued
15
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
____________________
statutory surplus as of December 31, 1997 and 1996 was approximately
$275,830,000 and $223,178,000, respectively. FGIC's statutory net loss
was approximately $6,306,000 for the year ended December 31, 1997.
FGIC's statutory surplus was approximately $7,316,000 as of December 31,
1997.
13. CAPITAL STOCK:
There are 20,760,000 authorized shares of common stock with a par value
of $.01 per share. On November 20, 1997, 3,127,814 additional shares of
common stock were issued, at $13.33 per share, to the existing
shareholders, including the conversion of the Folksam Loan. A portion
of the proceeds from these additional shares was used to repay principal
on the $70 million loan payable (see Note 14). At December 31, 1997,
there are 10,047,814 shares of common stock issued and outstanding,
owned 15.5% by White Mountains, 35.7% by Folksam, 22.5% by Wiener, 18.7%
by P&V and 7.6% by Samvirke.
On June 19, 1996, the holders of the 484,000 shares of Series A
Convertible Preferred Stock exercised their conversion option and
received 5 shares of common stock for each share of preferred stock.
Additionally, in accordance with the Shareholders' Agreement, executed
in connection with the issuance of the Series B Preferred Stock (see
below), cumulative preferred dividends of $3,176,000 were paid upon
conversion of the Series A Preferred Stock. At December 31, 1996, there
were 6,920,000 shares of common stock issued and outstanding, owned
47.5% by Folksam, 23.2% by Wiener, 20.3% by P&V and 9% by Samvirke.
There are 20,760,000 authorized shares of Series B Preferred Stock. On
June 19, 1996, 6,920,000 shares of Series B Preferred Stock were issued
to White Mountains for $11.47 per share. The Series B Preferred Stock
is ten-year voting stock with an annual dividend of 6 1/2% and carries
warrants to purchase up to 6,920,000 shares of common stock for $11.47.
The Series B Preferred Stock is redeemable in 10 years, and at the
option of the Company, it may be redeemed in cash or common stock. The
exercise price of the warrants is subject to adjustment under certain
circumstances, to reflect changes in the December 31, 1995 combined loss
reserves of the Company and CGIC. On exercise of the warrants, the
Series B Preferred Shares would be converted to Series C Preferred
Shares (non-voting) with the same characteristics as the Series B
Preferred Shares other than voting rights. The proceeds of the issuance
of the Series B Preferred Stock were primarily used to finance the
acquisition of CGIC as further described in Note 3 to the Consolidated
Financial Statements. Preferred dividends of $5,159,900 and $2,523,000
were paid to White Mountains during 1997 and 1996, respectively.
14. LOANS PAYABLE:
At December 31, 1996, the Holding Company had a $70,000,000 note payable
to a foreign bank which was guaranteed by the Founding Stockholders or
their affiliates, with an annual guarantee fee of .45%. On November 21,
1997, the Holding Company made a principal payment of $14,447,000. In
connection with the repayment, certain Founding Stockholders were
released from their proportionate share of the loan guarantee. The
remaining loan balance is $55,553,000 and is guaranteed by Folksam
($51,100,000) and Samvirke ($4,453,000). On June 14, 1996, the Holding
Company refinanced the loan for a term of 10 years. The remaining loan
carries an interest rate of LIBOR plus .55%. The one-year LIBOR rate
was 5.969% as of December 31, 1997. Interest paid by the Holding
Company was $4,473,000, $4,977,000 and $4,614,000 for the years ended
December 31, 1997, 1996 and 1995, respectively. Principal payments
will be due as follows:
<TABLE>
<S> <C>
2001 $ 5,000,000
2002 5,000,000
2003 5,000,000
2004 5,000,000
2005 35,553,000
-----------
$55,553,000
-----------
-----------
</TABLE>
During 1997, the $4 million note payable to Folksam was converted to
common stock for $13.33 per share or 300,075 shares (see Note 13).
The carrying value of loans payable approximates market value.
Continued
16
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
____________________
15. MONY REINSURANCE CORPORATION:
During 1991, the Holding Company acquired 100% of MONY Reinsurance
Corporation (renamed Folksamerica National Reinsurance Company ("FNRC")
after the acquisition) from The Mutual Life Insurance Company of New
York ("MONY"). The Holding Company issued a contingent promissory note,
guaranteed by Folksam, to MONY for $30,000,000 of the purchase price.
Payment of the contingent promissory note, including interest at 11% on
the unamortized balance, is contingent principally upon the adequacy of
FNRC's reserve for unpaid losses and loss adjustment expenses as of
December 31, 1990. In the event unpaid losses and loss adjustment
expense reserves develop adversely, the contingent promissory note will
be reduced dollar for dollar for the first $20,000,000 of adverse
development and by 90% of the next $11,111,111 of adverse development.
As of December 31, 1992, the contingent promissory note was fully
amortized.
The purchase agreement requires that independent actuarial valuations be
performed as of December 31, 1992, 1995, 1998 and 2000 to determine the
value of the contingent promissory note and the amount of related
payments. An independent actuarial review was completed in September of
1993 and resulted in no adjustment to the recorded value of the
contingent promissory note (i.e. "zero"). MONY and the Company mutually
agreed to forego the actuarial valuation as of December 31, 1995, based
on the results of the 1993 independent actuarial valuation.
16. SUBSEQUENT EVENTS:
On March 4, 1998 FRC sold 100% of FGIC for $4,060,000 over its book
value on that date. The sale of FGIC will not have a material impact on
the Holding Company's future results of operations.
Pursuant to a Stock Purchase Agreement dated July 1, 1998, White
Mountains and Fund American Enterprises, Inc., a wholly owned subsidiary
of Fund American, acquired the remaining 50% of the Company that they
did not previously own for approximately $169.1 million. The
transaction was completed on August 18, 1998 at which time the Company
became a wholly owned subsidiary of Fund American.
Continued
17
<PAGE>
FUND AMERICAN ENTERPRISES HOLDINGS, INC.
UNAUDITED PRO FORMA FINANCIAL INFORMATION
The following unaudited pro forma financial information of Fund American
Enterprises Holdings, Inc. and its subsidiaries ("Fund American") is being
presented in connection with Fund American's purchase, on August 18, 1998, of
all the outstanding common stock of Folksamerica Holding Company, Inc. and
its subsidiaries ("Folksamerica") that it did not previously own (the
"Transaction").
The accompanying unaudited pro forma condensed combined income statements of
Fund American for the periods ended June 30, 1998 and December 31, 1997
present results for Fund American as if the Transaction and certain
transactions and adjustments related to the Transaction (the "Related
Events") had occurred as of January 1, 1998 and January 1, 1997,
respectively. The accompanying unaudited pro forma condensed combined
balance sheet of Fund American as of June 30, 1998 presents Fund American's
financial position as if the Transaction and the Related Events had occurred
as of June 30, 1998. The unaudited pro forma financial information does not
purport to represent what Fund American's financial position or results of
operations actually would have been had the Transaction and the Related
Events in fact occurred as of the dates indicated, or to project Fund
American's financial position or results of operations for any future date or
period. The pro forma adjustments are based on available information and
certain assumptions that Fund American currently believes are reasonable
under the circumstances. The unaudited pro forma financial information
should be read in conjunction with: (i) Fund American's Annual Report on
Form 10-K for the year ended December 31, 1997; (ii) Fund American's
Quarterly Report on Form 10-Q for the three and six month periods ended June
30, 1998; (iii) the separate historical financial statements of Folksamerica
as of June 30, 1998 and for the three and six month periods ended June 30,
1998; and (iv) the separate historical financial statements of Folksamerica
as of December 31, 1997 and 1996 and for each of the three years in the
period ended December 31, 1997.
As a result of the Transaction, Fund American will restate its historic
balance sheets to account for the portion of its investment in Folksamerica
that was reported at fair value in accordance with Statement of Financial
Accounting Standards No. 115 entitled "Accounting for Certain Investments in
Debt and Equity Securities" to its original cost in accordance with the
purchase accounting principles of Accounting Principles Board Opinion No. 18
entitled "The Equity Method of Accounting for Investments in Common Stock".
The pro forma adjustments and pro forma combined amounts are provided for
informational purposes only. Fund American's financial statements will
reflect the actual effects of the Transaction and the Related Events only
from the date such events occur. The pro forma adjustments are applied to
the historical financial statements to, among other things, account for the
acquisition as a purchase. Under purchase accounting, the amount by which
the fair value of the net identifiable assets of Folksamerica exceeds the
total purchase price will be first used to reduce the carrying value of
Folksamerica's non-current, non-monetary assets with any residual amount
being allocated to deferred credit. Such allocations have not yet been
formally completed and final allocations will differ. Although the final
allocations will differ, the unaudited pro forma financial information
reflects management's best estimate based on currently available information.
The pro forma financial information included herein excludes the recognition
of a realized investment gain in connection with the pro forma sale of $92.1
million of the common stock of White River Corporation ("White River"). The
sale of White River, which occurred on July 10, 1998, was a principal source
of funds used in the Transaction and was executed at a price not materially
different from Fund American's June 30, 1998 carrying value, thus, the
recognition of pro forma realized gains associated with the sale of these
securities would not have a material impact on Fund American's book value or
comprehensive income as of and for the pro forma periods presented herein.
The pro forma adjustments contained herein assume that the tax rate
is 35%, the maximum Federal statutory rate for corporations.
<PAGE>
FUND AMERICAN ENTERPRISES HOLDINGS, INC.
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
AS OF JUNE 30, 1998
(in millions of dollars)
<TABLE>
<CAPTION>
Pro Forma Adjustments
----------------------
Fund Fund for the
American American Folksamerica for the Related Pro Forma
ASSETS Historical Restated Historical Transaction Events Combined
---------- -------- ------------ ----------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
Equity securities at market $ 153.0 $ 153.0 $ 108.4 $ 261.4
Fixed maturities at amort cost -- -- 93.1 $ 1.3 [A] (94.4)[D] --
Fixed maturities at market 173.9 173.9 669.7 94.4 [D] 938.0
Other investments 109.3 109.3 -- (65.3)[C] 44.0
Short term investments 30.5 30.5 67.5 (169.1)[A] 142.1 [C] 71.0
---------- ---------- ---------- ---------- ------- --------
TOTAL INVESTMENTS 466.7 466.7 938.7 (167.8) 76.8 1,314.4
Cash 4.3 4.3 1.7 6.0
Capitalized mortgage servicing 204.4 204.4 -- 204.4
Mortgage loans held for sale 568.2 568.2 -- 568.2
Other mortgage orig and servicing assets 193.2 193.2 -- 193.2
Reinsurance balances receivable -- -- 67.6 67.6
Reinsurance recoverables 8.1 8.1 128.5 136.6
Insurance premiums receivable 56.7 56.7 -- 56.7
Investments in unconsolidated affiliates 384.2 384.2 -- 384.2
Investment in Folksamerica 139.2 105.8 169.1 [A] --
(274.9)[B]
Goodwill 2.8 2.8 1.0 (1.0)[A] 2.8
Other assets 184.5 184.5 82.3 (26.8)[C]
(19.4)[D] 220.6
---------- ---------- ---------- ---------- ------- --------
TOTAL ASSETS $ 2,212.3 $ 2,178.9 $ 1,219.8 $ (274.6) $ 30.6 $3,154.7
---------- ---------- ---------- ---------- ------- --------
---------- ---------- ---------- ---------- ------- --------
LIABILITIES
Short term debt $ 601.7 $ 601.7 $ - $ 601.7
Long term debt 304.8 304.8 55.6 50.0 [C] 410.4
Unpaid losses and LAE 77.6 77.6 729.4 807.0
Unearned insurance premiums 80.2 80.2 86.4 166.6
Accounts payable and other liabilities 392.5 379.1 34.2 0.5 [A] 394.4
(19.4)[D]
Deferred credit -- -- 32.9 6.4 [B] 39.1
(0.2)[A]
---------- ---------- ---------- ---------- ------- --------
TOTAL LIABILITIES 1,456.8 1,443.4 938.5 6.7 30.6 2,419.2
---------- ---------- ---------- ---------- ------- --------
MINORITY INTEREST 44.0 44.0 -- -- -- 44.0
---------- ---------- ---------- ---------- ------- --------
SHAREHOLDERS' EQUITY
Common stock 30.9 30.9 0.1 (0.1)[B] 30.9
Preferred stock -- -- 79.4 (79.4)[B] --
Paid in surplus 354.4 354.4 80.2 (80.2)[B] 354.4
Retained earnings 1,004.0 1,007.6 89.7 (89.7)[B] 1,007.6
Common stock in treasury (871.0) (871.0) -- (871.0)
Foreign currency translation -- -- (1.8) 1.8 [B] --
Net unrealized investment gains and other,
after tax 193.2 169.6 33.7 (33.7)[B] 169.6
---------- ---------- ---------- ---------- ------- --------
TOTAL SHAREHOLDERS' EQUITY 711.5 691.5 281.3 (281.3) -- 691.5
---------- ---------- ---------- ---------- ------- --------
TOTAL LIABILITIES, MINORITY INTEREST
AND SHAREHOLDERS' EQUITY $ 2,212.3 $ 2,178.9 $ 1,219.8 $ (274.6) $ 30.6 $3,154.7
---------- ---------- ---------- ---------- ------- --------
---------- ---------- ---------- ---------- ------- --------
</TABLE>
<PAGE>
FUND AMERICAN ENTERPRISES HOLDINGS, INC.
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED
BALANCE SHEET
(in millions of dollars)
A. The following pro forma adjustments reflect the payment of $169.1 million
for all of the outstanding common stock Folksamerica that Fund American
did not previously own and certain other adjustments associated with the
determination of the amounts to be recorded as a result of the Transaction:
<TABLE>
<S> <C>
Folksamerica's shareholders' equity at 6/30/98 $ 281.3
Adjustment to mark fixed maturity investments to market 1.3
Income tax provision at 35% (.5)
Elimination of Folksamerica deferred credit existing upon acquisition 32.9
Elimination of Folksamerica goodwill existing upon acquisition (1.0)
-------
Adjusted shareholders' equity at 6/30/98 314.0
-------
Purchase price paid with short-term investment proceeds (169.1)
Basis of previous investments in Folksamerica:
Investment in preferred stock at cost (79.9)
Investment in common stock at equity value (25.9)
-------
Total deferred credit resulting from the Transaction $ 39.1
-------
-------
</TABLE>
B. Adjustments to eliminate Folksamerica shareholders' equity and to reflect
the change in deferred credit resulting from the Transaction.
<PAGE>
C. The following pro forma adjustments reflect certain transactions that
occurred subsequent to June 30, 1998 which served to fund the
Transaction:
<TABLE>
<S> <C>
Third party sales of 718,818 shares of the common stock of
White River Corporation which were classified as other
investments $ 65.3
Third party sales of 295,432 shares of the common stock of
White River Corporation which were classified as other
assets 26.8
Issuance of $50 million of indebtedness pursuant to Fund
American's existing credit facility 50.0
------
Funds raised pursuant to the Transaction $142.1
Sales of short-term investments 27.0
------
Total source of cash used to fund the Transaction $169.1
------
------
</TABLE>
D. Certain reclassifications to conform to the current presentation.
<PAGE>
FUND AMERICAN ENTERPRISES HOLDINGS, INC.
UNAUDITED PRO FORMA CONDENSED COMBINED INCOME STATEMENT
FOR THE SIX MONTHS ENDED JUNE 30, 1998
(in millions of dollars)
<TABLE>
<CAPTION>
Pro Forma Adjustments
----------------------
Fund Fund for the
American American Folksamerica for the Related Pro Forma
REVENUES Historical Restated Historical Transaction Events Combined
---------- --------- ------------ ----------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
Net written premiums $ 81.0 $ 81.0 $ 114.1 $ 195.1
Change in unearned insurance premiums (2.3) (2.3) 9.7 7.4
----------- --------- --------- --------- ------ ---------
Earned insurance premiums 78.7 78.7 123.8 -- -- 202.5
Earnings from unconsolidated ins affiliates 15.2 15.2 -- (4.4)[A] 10.8
Other ins operations revenues 4.2 4.2 4.2
Gross mortgage servicing revenue 41.1 41.1 -- 41.1
Amortization and impairment of servicing (29.4) (29.4) -- (29.4)
Gain on financial instruments 5.5 5.5 -- 5.5
----------- --------- --------- --------- ------ ---------
Net mortgage servicing revenue 17.2 17.2 -- -- -- 17.2
Net gain on sales of mortgages 42.2 42.2 -- 42.2
Gain on sale of mortgage servicing 9.0 9.0 -- 9.0
Other mortgage servicing revenues 13.7 13.7 -- 13.7
Net investment income 47.1 47.1 25.4 (0.7)[B] 71.8
----------- --------- --------- --------- ------ ---------
TOTAL REVENUES $ 227.3 $ 227.3 $ 149.2 $ (5.1) $ -- $ 371.4
----------- --------- --------- --------- ------ ---------
----------- --------- --------- --------- ------ ---------
EXPENSES
Ins losses and loss adj expenses $ 54.6 $ 54.6 $ 88.7 $ 143.3
Compensation and benefits 63.0 63.0 -- 7.0 [E] 70.0
Insurance and reinsurance acquisition expenses -- -- 44.7 4.6 [E] 49.3
Interest expense 41.2 41.2 1.9 1.5 [F] 44.6
General expenses 45.0 45.0 -- (11.6)[E] 33.4
Amortization of intangible assets and liabilities -- -- (3.7) (0.6)[C] (4.3)
----------- --------- --------- --------- ------ ---------
TOTAL EXPENSES 203.8 203.8 131.6 (0.6) 1.5 336.3
---------- ---------- ---------- ---------- ------- ---------
PRETAX OPERATING EARNINGS 23.5 23.5 17.6 (4.5) (1.5) 35.1
---------- ---------- ---------- ---------- ------- ---------
Net realized investment gains 4.2 4.2 5.1 -- -- 9.3
---------- ---------- ---------- ---------- ------- ---------
PRETAX EARNINGS 27.7 27.7 22.7 (4.5) (1.5) 44.4
Income tax provision 12.2 12.2 5.7 (1.0)[D] (0.5)[G] 16.4
---------- ---------- ---------- ---------- ------- ---------
NET INCOME 15.5 15.5 17.0 (3.5) (1.0) 28.0
Other comprehensive income, after tax 44.4 36.9 12.5 49.4
---------- ---------- ---------- ---------- ------- ---------
COMPREHENSIVE NET INCOME $ 59.9 $ 52.4 $ 29.5 $ (3.5) $ (1.0) $ 77.4
---------- ---------- ---------- ---------- ------- ---------
---------- ---------- ---------- ---------- ------- ---------
Basic earnings per share:
Net income $ 2.63 $ 2.63 $ 4.75
Comprehensive net income 10.16 8.89 13.13
Diluted earnings per share:
Net income $ 2.33 $ 2.33 $ 4.24
Comprehensive net income 9.10 7.96 11.76
</TABLE>
<PAGE>
FUND AMERICAN ENTERPRISES HOLDINGS, INC.
UNAUDITED PRO FORMA CONDENSED COMBINED INCOME STATEMENT
FOR THE TWELVE MONTHS ENDED DECEMBER 31, 1997
(in millions of dollars)
<TABLE>
<CAPTION>
Pro Forma Adjustments
---------------------
Fund Fund for the
American American Folksamerica for the Related Pro Forma
REVENUES Historical Restated Historical Transaction Events Combined
---------- -------- ------------ ----------- ------- ---------
<S> <C> <C> <C> <C> <C> <C>
Net written premiums $ 150.8 $ 150.8 $ 232.4 $ 383.2
Change in unearned insurance premiums (5.5) (5.5) 5.4 (0.1)
---------- -------- ------------ ----------- ------- ---------
Earned insurance premiums 145.3 145.3 237.8 - - 383.1
Earnings from unconsolidated ins affiliates 21.3 21.3 - (6.1)[A] 15.2
Other ins operations revenues 7.8 7.8 7.8
Gross mortgage servicing revenue 95.0 95.0 - 95.0
Amortization and impairment of servicing (64.2) (64.2 - (64.2)
Gain on financial instruments 11.3 11.3 - 11.3
---------- -------- ------------ ----------- ------- ----------
Net mortgage servicing revenue 42.1 42.1 - - - 42.1
Net gain on sales of mortgages 21.5 21.5 - 21.5
Loss on sale of mortgage servicing (8.0) (8.0) - (8.0)
Other mortgage servicing revenues 19.1 19.1 - 19.1
Net investment income 65.1 65.1 46.7 (1.5)[B] 110.3
---------- -------- ------------ ----------- ------- ----------
TOTAL REVENUES $ 314.2 $ 314.2 $ 284.5 $ (7.6) $ - $ 591.1
---------- -------- ------------ ----------- ------- ----------
---------- -------- ------------ ----------- ------- ----------
EXPENSES
Ins losses and loss adj expenses $ 97.1 $ 97.1 $ 165.9 $ 263.0
Compensation and benefits 101.8 101.8 - 11.4 [E] 113.2
Insurance and reinsurance acquisition expense - - 81.1 8.9 [E] 90.0
Interest expense 49.7 49.7 5.0 3.1 [F] 57.8
General expenses 87.6 87.6 - (20.3)[E] 67.3
Amortization of intangible assets
and liabilities - - (6.8) (1.2)[C] (8.0)
---------- -------- ------------ ----------- ------- ----------
TOTAL EXPENSES 336.2 336.2 245.2 (1.2) 3.1 583.3
---------- -------- ------------ ----------- ------- ----------
PRETAX OPERATING EARNINGS (LOSS) (22.0) (22.0) 39.3 (6.4) 3.1 7.8
---------- -------- ------------ ----------- ------- ----------
Net realized investment gains 96.7 96.7 7.4 - - 104.1
---------- -------- ------------ ----------- ------- ----------
PRETAX EARNINGS 74.7 74.7 46.7 (6.4) (3.1) 111.9
Income tax provision 29.4 29.4 10.8 (1.2)[D] (1.1)[G] 37.9
---------- -------- ------------ ----------- ------- ----------
AFTER TAX EARNINGS 45.3 45.3 35.9 (5.2) (2.0) 74.0
Loss on early extinguishment of debt, after tax (6.0) (6.0) - (6.0)
---------- -------- ------------ ----------- ------- ----------
NET INCOME 39.3 39.3 35.9 (5.2) (2.0) 68.0
Other comprehensive income, after tax 56.3 40.5 15.0 55.5
---------- -------- ------------ ----------- ------- ----------
COMPREHENSIVE NET INCOME $ 95.6 $ 79.8 $ 50.9 $ (5.2) $ (2.0) $ 123.5
---------- -------- ------------ ----------- ------- ----------
---------- -------- ------------ ----------- ------- ----------
Basic earnings per share:
After tax earnings $ 6.89 $ 6.89 $ 11.26
Net income 5.98 5.98 10.35
Comprehensive net income 14.55 12.15 18.80
Diluted earnings per share:
After tax earnings $ 6.22 $ 6.22 $ 10.18
Net income 5.40 5.40 9.36
Comprehensive net income 13.17 10.98 17.02
</TABLE>
<PAGE>
FUND AMERICAN ENTERPRISES HOLDINGS, INC.
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED
INCOME STATEMENTS
(in millions of dollars)
A. Pro forma adjustment to eliminate Fund American's equity in earnings of
Folksamerica and preferred stock dividends received during the periods.
B. Pro forma adjustment to reflect a reduction in net investment income earned
on the portion of short-term investment balances deemed to have partially
financed the Transaction ($27.0 million). The consolidated pro forma
income information assumes that the annualized yield on short-term
investments used to partially fund the Transaction was 5.50% and 5.60% for
the periods ended June 30, 1998 and December 31, 1997, respectively.
C. Pro forma adjustment to reflect the amortization of the net change in
goodwill and the related incremental deferred credit associated with the
Transaction ($6.2 million). Fund American's amortization period is
expected to be five years.
D. Adjustment to reflect the income tax effects of A and B above.
E. Certain reclassifications to conform to the current presentation.
F. Pro forma adjustment to reflect additional interest expense associated with
the monies borrowed under Fund American's existing debt arrangements
($50.0 million) to partially fund the Transaction. The consolidated pro
forma income information assumes that the annualized applicable interest
rate on such indebtedness was 6.04% and 6.10% for the periods ended
June 30, 1998 and December 31, 1997, respectively.
G. Adjustment to reflect the income tax effect of F above.
H. No adjustments have been made to the December 31, 1997 pro forma income
statement to reflect Folksamerica's acquisition of Great Lakes American
Reinsurance Company on July 22, 1997 because such adjustments are not
considered meaningful.
