<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 June 30, 1999
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
WHITE MOUNTAINS INSURANCE GROUP, 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 August 10, 1999, 4,982,291 shares of Common Stock with a par value of
$1.00 per share were outstanding.
<PAGE>
WHITE MOUNTAINS INSURANCE GROUP, INC.
Table of Contents
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION Page No.
--------
<S> <C>
Item 1. Financial Statements
Condensed Consolidated Balance Sheets,
June 30, 1999 (Unaudited), and December 31, 1998 3
Condensed Consolidated Statements of Income and Comprehensive Income
(Unaudited), Three Months and Six Months Ended June 30, 1999 and 1998 4
Condensed Consolidated Statements of Cash Flows (Unaudited),
Six Months Ended June 30, 1999 and 1998 5
Notes to Condensed Consolidated Financial
Statements (Unaudited) 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 13
Item 3. Quantitative and Qualitative Disclosures About Market Risk 21
PART II. OTHER INFORMATION
Items 1 through 6 22
SIGNATURES 23
</TABLE>
2
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
WHITE MOUNTAINS INSURANCE GROUP, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(dollars in millions, except per share amounts)
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
(Unaudited)
Assets
<S> <C> <C>
Fixed maturity investments, at fair value (cost: $903.3 and $916.1) $ 886.0 $ 929.6
Common equity securities, at fair value (cost: $175.5 and $195.4) 214.5 241.7
Short-term investments, at amortized cost (which approximated market value) 131.0 79.0
Other investments (cost: $50.5 and $69.1) 60.4 77.5
Total investments 1,291.9 1,327.8
Cash 2.4 22.4
Investments in unconsolidated insurance affiliates 347.0 354.3
Reinsurance recoverable on paid and unpaid losses 154.3 137.3
Insurance and reinsurance balances receivable 61.7 124.7
Deferred acquisition costs 22.3 35.4
Investment income accrued 14.1 16.2
Other assets 62.5 35.2
Net assets of discontinued mortgage banking operations 19.4 110.4
Total Assets $1,975.6 $2,163.7
Liabilities
Loss and loss adjustment expense reserves $ 823.0 $ 811.7
Unearned insurance and reinsurance premiums 91.9 153.1
Short-term debt -- 51.5
Long-term debt 136.5 186.3
Deferred credit 38.4 37.1
Accounts payable and other liabilities 259.7 221.5
Total liabilities 1,349.5 1,461.2
Shareholders' Equity
Common stock at $1 par value per share - authorized 15,000,000 and
125,000,000 shares; issued 15,000,000 and 30,863,547 shares 15.0 30.9
Common paid-in capital 174.3 354.2
Retained earnings 790.5 1,063.2
Common stock in treasury at cost - 10,011,277 shares and 25,034,939 shares (434.2) (871.0)
Accumulated other comprehensive income, after tax 80.5 125.2
Total shareholders' equity 626.1 702.5
Total Liabilities and Shareholders' Equity $1,975.6 $2,163.7
</TABLE>
See Notes to Condensed Consolidated Financial Statements
3
<PAGE>
WHITE MOUNTAINS INSURANCE GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
Unaudited
(millions, except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
1999 1998 1999 1998
<S> <C> <C> <C> <C>
Revenues:
Earned insurance and reinsurance premiums $ 72.6 $ 41.2 $ 166.3 $ 78.7
Gain on sale of Valley Group 88.1 -- 88.1 --
Net investment income 13.4 3.1 29.2 8.3
Net realized investment gains 17.8 1.6 26.8 2.1
Earnings from unconsolidated insurance affiliates 4.8 7.7 9.0 15.2
Amortization of deferred credit 1.9 -- 3.7 --
Other insurance operations revenue .9 1.9 3.3 4.2
Total revenues 199.5 55.5 326.4 108.5
Expenses:
Insurance losses and loss adjustment expenses 56.6 28.1 123.0 54.6
Insurance and reinsurance policy acquisition expenses 16.7 6.8 39.5 13.0
Compensation and benefits 12.3 13.8 25.1 26.8
General expenses 5.1 2.8 9.2 6.5
Interest expense 4.0 3.2 8.2 5.8
Total expenses 94.7 54.7 205.0 106.7
Pretax earnings 104.8 .8 121.4 1.8
Income tax provision 41.0 .6 46.8 2.0
Net income (loss) from continuing operations 63.8 .2 74.6 (.2)
Net income from discontinued mortgage banking operations (2.0) 6.4 1.0 15.7
Gain from sale of discontinued mortgage banking operations, after tax 14.9 -- 14.9 --
Net income 76.7 6.6 90.5 15.5
Other comprehensive income, after tax:
Net unrealized gains (losses) for investments held during the period (12.8) 12.3 (28.0) 38.9
Net change in foreign currency translation .8 -- .7 --
Recognition of net unrealized gains for investments sold during the period (11.5) (1.1) (17.4) (1.4)
Other comprehensive income (loss), after tax (23.5) 11.2 (44.7) 37.5
Comprehensive net income $ 53.2 $ 17.8 $ 45.8 $ 53.0
Basic earnings per common share:
Net income $ 13.94 $ 1.13 $ 15.97 $ 2.63
Comprehensive net income 9.66 3.02 8.08 8.98
Diluted earnings per common share:
Net income $ 12.41 $ 1.00 $ 14.25 $ 2.33
Comprehensive net income 8.59 2.70 7.20 8.04
</TABLE>
See Notes to Condensed Consolidated Financial Statements
4
<PAGE>
WHITE MOUNTAINS INSURANCE GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
UNAUDITED
(MILLIONS)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
---------------------------------
1999 1998
--------------- ---------------
<S> <C> <C>
CONTINUING OPERATIONS - OPERATING CASH
FLOWS:
Net income $ 90.5 $ 15.5
Charges (credits) to reconcile net income to cash flows from
operations:
Gain from sale of discontinued mortgage banking operations, after tax (14.9) --
Net income from discontinued operations (1.0) (15.7)
Gain from sale of Valley Group (88.1) --
Undistributed earnings from unconsolidated insurance (8.2) (11.5)
affiliates
Net realized investment gains (26.8) (2.1)
Amortization of deferred credit (3.7) --
Decrease in reinsurance recoverable 5.6 1.6
(Decrease) increase in insurance loss and loss adjustment expense reserves (35.5) 5.7
Net change in current and deferred income taxes receivable and payable 42.7 (5.4)
Other, net 9.2 5.3
NET CASH FLOWS USED FOR OPERATING ACTIVITIES (30.2) (6.6)
CONTINUING OPERATIONS - INVESTING CASH
FLOWS:
Net decrease (increase) in short-term investments, net of balances acquired and (68.8) 32.3
sold
Sales of common equity securities and other investments 85.8 10.9
Sales and maturities of fixed maturity investments 139.7 34.9
Purchases of common equity securities and other investments (20.2) (9.6)
Purchases of fixed maturity investments (32.4) (42.1)
Investments in unconsolidated insurance affiliates (15.7) (70.3)
Proceeds from sale of Valley Group, net of cash balances sold 121.8 --
Purchase of USF Re, net of cash balances acquired (66.4) --
Net purchases of fixed assets (1.2) (1.0)
NET CASH FLOWS PROVIDED FROM (USED FOR) INVESTING 142.6 (44.9)
ACTIVITIES
CONTINUING OPERATIONS - FINANCING CASH
FLOWS:
Net repayments of short-term debt (51.5) (.2)
Issuances of long-term debt -- 50.0
Repayments of long-term debt (70.6) (50.0)
Purchases of common stock retired or placed in treasury (121.6) (17.2)
Cash dividends paid to common shareholders (4.4) (2.8)
NET CASH USED FOR FINANCING ACTIVITIES (248.1) (20.2)
NET CASH PROVIDED FROM DISCONTINUED OPERATIONS 115.7 69.0
NET DECREASE IN CASH DURING PERIOD (20.0) (2.7)
CASH BALANCES AT BEGINNING OF PERIOD 22.4 7.0
CASH BALANCE AT END OF PERIOD $ 2.4 $ 4.3
SUPPLEMENTAL CASH FLOWS INFORMATION:
Interest paid $ (34.9) $ (41.2)
Net income taxes paid $ (4.2) $ (7.6)
Common stock issued to employees for compensation (non-cash) $ (3.4) $ --
</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 White Mountains Insurance Group, Inc. (the "Company") and its
subsidiaries (collectively, "White Mountains"). The Company's consolidated and
unconsolidated insurance operations are conducted through its subsidiaries and
affiliates in the businesses of property and casualty insurance, reinsurance and
financial guaranty insurance. 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 White Mountains. 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 1998 Annual Report on Form 10-K. Certain amounts
in the prior period financial statements have been reclassified to conform with
the current presentation, including the segregation of mortgage banking net
assets and mortgage banking net income as discontinued operations which relates
to a decision made by the Company during the 1999 first quarter to exit from the
mortgage banking business. See Note 2.
Since June 30, 1998, White Mountains has completed several transactions which
affect the comparability of the financial statement information presented
herein. These transactions are further described below:
On August 18, 1998, White Mountains acquired all of the remaining outstanding
shares of the common stock of Folksamerica Holding Company, Inc.
("Folksamerica"), parent company of Folksamerica Reinsurance Company, for $169.1
million (the "Folksamerica Purchase") thereby causing Folksamerica to become a
consolidated subsidiary of White Mountains on that date. Prior to the
Folksamerica Purchase, White Mountains owned a 50% non-consolidated interest in
Folksamerica primarily through a preferred stock investment with fixed price
warrants to acquire common stock. As a result of the Folkamerica Purchase, White
Mountains was required to restate its investment in Folksamerica preferred stock
to its original cost. Because the total cost of White Mountains' investments in
Folksamerica was less than the fair value of Folksamerica's net identifiable
assets at August 18, 1998, White Mountains recorded a $39.8 million deferred
credit (negative goodwill) on August 18, 1998 that will be amortized to income
over 5 years. The remaining unamortized deferred credit balance relating to the
Folksamerica Purchase as of June 30, 1999 and December 31, 1998 was $33.5
million and $37.1 million, respectively.
On June 17, 1999, White Mountains completed its previously announced sale of
Valley Group, Inc. ("Valley Group") to Unitrin Inc. (the "Valley Group Sale").
Valley Group represented the majority of White Mountains' primary property and
casualty insurance operations. The Valley Group Sale did not represent a
decision by the Company to exit the property and casualty insurance business,
thus, the financial results of these companies are not shown as discontinued
operations herein.
Condensed pro forma financial information for the six months ended June 30,
1998, which assumes the Valley Group Sale and the Folksamerica Purchase had
occurred as of January 1, 1998, follows:
6
<PAGE>
<TABLE>
- -------------------------------------------------------------------------------------------------------------------
Six Months Ended June 30, 1998
Millions Actual Pro Forma
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Total revenues $ 108.5 $ 260.4
Net income (loss) from continuing operations $ (.2) $ 62.4
Net income (loss) from continuing operations per share:
Basic $ (.03) $ 10.59
Diluted $ (.06) $ 9.48
===================================================================================================================
</TABLE>
The pro forma information presented does not purport to represent what White
Mountains' results of operations actually would have been had White Mountains
had completed the Valley Group Sale and the Folksamerica Purchase as of January
1, 1998, or to project White Mountains' results of operations for any future
date or period.
On June 30, 1999 Folksamerica completed its acquisition of USF Re Insurance Co.
("USF Re"). The purchase of USF Re did not constitute a "significant business
combination" by White Mountains and therefore prior year pro forma effects
related to the acquisition of USF Re are not presented herein. See "Liquidity
and Capital Resources".
Note 2. Discontinued Mortgage Banking Operations
On May 1, 1999, White Mountains concluded its sale (the "Mortgage Banking Sale")
of substantially all the mortgage banking assets of its subsidiary White
Mountains Services Corporation ("WMSC" - formerly Source One Mortgage Services
Corporation) to Citibank Mortgage, Inc. ("Citibank") and has received net
proceeds totalling $180.6 million (which is net of WMSC's public indebtedness
assumed by Citibank and WMSC's credit agreement borrowings which were required
to be repaid at closing). Mortgage banking assets and liabilities that were not
part of the Citibank sale principally include WMSC's investments in financial
instruments (which were liquidated during the 1999 first quarter), pool loan
purchases (which were substantially liquidated during the 1999 first half) and
$44.0 million of preferred stock outstanding (which was redeemed on June 3,
1999). White Mountains recorded an estimated $14.9 million after tax gain on the
sale of its mortgage banking net assets (which is net of anticipated future
liabilities) during the 1999 second quarter. As a result of the Company's
decision dispose of its net mortgage banking assets, these activities are shown
as discontinued operations herein.
Summary condensed financial results of discontinued mortgage banking operations
follow:
7
<PAGE>
CONDENSED STATEMENTS OF NET ASSETS OF DISCONTINUED MORTGAGE BANKING
OPERATIONS
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------
June 30, December 31,
Millions 1999 1998
- -----------------------------------------------------------------------------------------
<S> <C> <C>
Assets:
Cash and investments $ 45.8 $ 19.4
Capitalized mortgage servicing rights * 169.7
Mortgage loans held for sale * 676.3
Other mortgage origination and servicing assets 36.9 271.9
Other assets 13.0 90.1
--------------------
Total assets of discontinued mortgage banking assets $ 95.7 $1,227.4
--------------------
Liabilities and Minority Interest:
Short-term debt $ * $ 697.0
Long-term debt * 173.4
Accounts payable and other liabilities 76.3 202.6
Minority interest - preferred stock * 44.0
--------------------
Total liabilities and minority interest $ 76.3 $1,117.0
--------------------
Net assets of discontinued mortgage banking operations $ 19.4 $ 110.4
======================================================================================
</TABLE>
8
<PAGE>
CONDENSED STATEMENTS OF INCOME FROM DISCONTINUED MORTGAGE BANKING
OPERATIONS
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
Three Months Six Months
ended June 30, ended June 30,
----------------- ------------------
Millions 1999 1998 1999 1998
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues:
Net investment income $ 6.3 $ 22.0 $ 27.9 $ 38.8
Net gain on sales of mortgages 5.1 25.5 25.4 42.2
Net mortgage servicing revenue 2.7 7.7 10.9 17.2
Other mortgage operations revenue 3.0 8.6 12.0 24.8
----------------- ------------------
Total revenues 17.1 63.8 76.2 123.0
----------------- ------------------
Expenses:
Compensation and benefits 7.5 19.3 28.5 36.2
Interest expense 5.4 18.2 24.5 33.5
General expenses 6.4 14.5 19.3 25.5
----------------- ------------------
Total expenses 19.3 52.0 72.3 95.2
----------------- ------------------
Pretax earnings (loss) (2.2) 11.8 3.9 27.8
Income tax provision (benefit) (.5) 4.4 1.7 10.2
----------------- ------------------
Net income (loss) before minority interest (1.7) 7.4 2.2 17.6
Minority interest - preferred stock dividends (.3) (1.0) (1.2) (1.9)
----------------- ------------------
Net income (loss) from discontinued mortgage banking operations $ (2.0) $ 6.4 $ 1.0 $ 15.7
===================================================================================================================
</TABLE>
Note 3. Reinsurance and Insurance Loss and Loss Adjustment Expense Reserves
The following table summarizes White Mountains' reinsurance loss and loss
adjustment expense reserve activities for the three months and six months ended
June 30, 1999:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------
Three Months Six Months
Ended Ended
Millions June 30, 1999 June 30, 1999
- ------------------------------------------------------------------------------------------------------
<S> <C> <C>
Gross beginning balance $ 706.5 $ 723.2
Less beginning reinsurance recoverable (122.5) (129.0)
--------- --------
Net loss and loss adjustment expenses 584.0 594.2
Loss and loss adjustment expenses acquired - USF Re 106.4 106.4
Losses and loss adjustment expenses incurred relating to:
Current period losses 29.6 65.2
Prior period losses 2.4 5.0
Loss and loss adjustment expenses paid relating to:
Current period losses (5.2) (6.8)
Prior period losses (43.2) (90.0)
--------- --------
Net ending balance 674.0 674.0
Plus ending reinsurance recoverable 144.2 144.2
--------- --------
Gross ending balance $ 818.2 $ 818.2
======================================================================================================
</TABLE>
9
<PAGE>
Incurred losses totalling $2.4 million and $5.0 million for the three months and
six months ended June 30, 1999, respectively, related to prior accident years
are primarily attributable to reserve additions relating to asbestos,
environmental liability and breast implant exposures.
The following table summarizes White Mountains' insurance loss and loss
adjustment expense reserve activities for the three months and six months ended
June 30, 1999 and 1998:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
Millions Three Months Six Months
Ended June 30, Ended June 30,
------------------ ------------------
1999 1998 1999 1998
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Beginning balance $ 88.8 $ 74.5 $ 88.5 $ 71.9
Losses and loss adjustment expenses incurred (net of ceded reinsurance) 24.6 28.1 52.8 54.6
Loss and loss adjustment expenses paid (net of reinsurance) (20.8) (25.0) (48.7) (48.9)
Loss and loss adjustment expenses sold - Valley Group (87.8) * (87.8) *
------------------ ------------------
Ending balance $ 4.8 $ 77.6 $ 4.8 $ 77.6
=====================================================================================================================
</TABLE>
Loss and loss adjustment expenses incurred during the periods presented did not
include significant reserve strengthening for losses and loss adjustment
expenses relating to prior years. Ending loss and loss adjustment reserves of
$4.8 million at June 30, 1999 relate to Waterford Insurance Company
("Waterford", formerly Valley National Insurance Company), a small property and
casualty insurance company retained by White Mountains which is licensed to
write property and casualty insurance in 48 states.
Note 4. Accounting Standards Recently Adopted and Issued
In March 1998, the American Institute of Certified Public Accountants (the
"AICPA") issued Statement of Position ("SOP") 98-1 entitled "Accounting For the
Cost of Computer Software Developed or Obtained for Internal Use" which requires
the capitalization of certain prospective costs in connection with developing or
obtaining software for current use. The adoption of SOP 98-1, which occurred as
of January 1, 1999, did not have a material impact on White Mountains' financial
position or results of operations.
In June 1998 the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities" which requires companies to record all
derivatives on the balance sheet as either assets or liabilities and measure
those instruments at fair value. The manner in which companies are to record
gains and losses resulting from changes in the values of those derivatives
depends on the use of the derivative and whether it qualifies for hedge
accounting. SFAS No. 133 is effective beginning in 2001 with earlier adoption
permitted. The adoption of SFAS No. 133 is not expected to have a material
effect on White Mountains' financial position or results of operations.
In October 1998, the AICPA issued SOP 98-7 entitled "Deposit Accounting:
Accounting for Insurance and Reinsurance Contracts That Do Not Transfer Risk".
SOP 98-7 provides guidance on how to account for all insurance and reinsurance
contracts that do not transfer insurance risk, except for long-duration life and
health insurance contracts. SOP 98-7 is effective for periods beginning January
1, 2000, with early adoption permitted. White Mountains is currently evaluating
the impact of the adoption of SOP 98-7 and the potential effects on its
financial position and results of operations.
10
<PAGE>
Note 5. Earnings Per Share
The following table outlines the Company's computation of earnings per share for
the three and six months ended June 30, 1999 and 1998:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
Three Months Six Months
Ended June 30, Ended June 30,
----------------------- -----------------------
1999 1998 1999 1998
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Basic earnings per common share numerators (in millions):
Net income $ 76.7 $ 6.6 $ 90.5 $ 15.5
======================= =======================
Comprehensive net income $ 53.2 $ 17.8 $ 45.8 $ 53.0
======================= =======================
- -----------------------------------------------------------------------------------------------------------------------------------
Diluted earnings per common share numerators (in millions):
Net income $ 76.7 $ 6.6 $ 90.5 $ 15.5
Dilution to earnings from unconsolidated insurance affiliates (.1) (.1) (.2) (.2)
----------------------- -----------------------
Diluted net income $ 76.6 $ 6.5 $ 90.3 $ 15.3
======================= =======================
Diluted comprehensive net income $ 53.1 $ 17.7 $ 45.6 $ 52.8
======================= =======================
- -----------------------------------------------------------------------------------------------------------------------------------
Earnings per common share denominators (in thousands):
Basic earnings per share numerator (average common shares outstanding) 5,508 5,854 5,669 5,894
Dilutive stock options and warrants to acquire common stock (a) 669 668 669 669
----------------------- -----------------------
Diluted earnings per share denominator 6,177 6,522 6,338 6,563
======================= =======================
- -----------------------------------------------------------------------------------------------------------------------------------
Basic earnings per common share (in dollars):
Net income $ 13.94 $ 1.13 $ 15.97 $ 2.63
======================= =======================
Comprehensive net income $ 9.66 $ 3.02 $ 8.08 $ 8.98
======================= =======================
- -----------------------------------------------------------------------------------------------------------------------------------
Diluted earnings per common share & assumed conversions (in dollars):
Net income $ 12.41 $ 1.00 $ 14.25 $ 2.33
======================= =======================
Comprehensive net income $ 8.59 $ 2.70 $ 7.20 $ 8.04
===================================================================================================================================
</TABLE>
(a) Includes the net dilutive effects for each period presented of warrants to
acquire 1,000,000 Shares at $21.66 per Share and stock options to acquire
2,000 Shares at $24.82 per Share.
Basic earnings per share amounts are based on the weighted average number of the
Company's common stock ("Shares") outstanding. Diluted earnings per share
amounts are based on the weighted average number of Shares and the net effect of
potential dilutive Shares outstanding. Potential dilutive Shares include stock
options and warrants to acquire Shares.
11
<PAGE>
Note 6. Segment Information
White Mountains has determined that its reportable segments include Reinsurance,
Property and Casualty Insurance, Investments in Unconsolidated Insurance
Affiliates (which includes White Mountains' investment in MediaOne preferred
stock) and Holding Company (primarily the operations of the Company and certain
of its intermediate subsidiary holding companies). Investment results are
included within the segment to which the investments relate. The Company has
made this determination based on consideration of the following criteria: (i)
the nature of the business activities of each of the Company's subsidiaries and
affiliates; (ii) the manner in which the Company's subsidiaries and affiliates
are organized; (iii) the existence of primary managers responsible for specific
subsidiaries and affiliates; and (iv) the organization of information provided
to the Board. There are no significant intercompany transactions among White
Mountains' segments other than occasional intercompany sales and transfers of
investment securities (gains and losses resulting from such transfers have been
eliminated herein). Certain amounts in the prior periods have been reclassified
to conform with the current presentation which involved the segregation of the
mortgage banking net assets, revenues and pretax earnings as discontinued
operations. See Note 1. Financial information presented by segment is shown
below:
<TABLE>
<CAPTION>
Property
and Investments in
Casualty Unconsolidated Holding
Millions Reinsurance Insurance Affiliates Company Total
- ---------------------------------------------------------------------------------------------------------------------------------
Six Months Ended June 30, 1999
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenues from external customers $ 99.3 $ 70.0 $ * $ * $169.3
Gain from sale of Valley Group * * * 88.1 88.1
Net investment income 22.8 3.2 1.9 1.3 29.2
Earnings from unconsolidated insurance affiliates * * 9.0 * 9.0
Amortization of deferred credit 3.6 * * .1 3.7
Realized gains 4.3 9.7 * 12.8 26.8
Other * * * .3 .3
-----------------------------------------------------------
Total revenues $130.0 $ 82.9 $ 10.9 $102.6 $326.4
===========================================================
Pretax earnings $ 17.8 $ 5.2 $ 10.9 $ 87.5 $121.4
===========================================================
Net income from continuing operations $ 13.8 $ 3.5 $ 7.8 $ 49.5 $ 74.6
=================================================================================================================================
Six Months Ended June 30, 1998
- ---------------------------------------------------------------------------------------------------------------------------------
Revenues from external customers $ * $ 82.9 $ * $ * $ 82.9
Net investment income * 4.1 1.9 2.3 8.3
Earnings from unconsolidated insurance affiliates * * 15.2 * 15.2
Realized gains (losses) * 2.4 * (.3) 2.1
-----------------------------------------------------------
Total revenues $ * $ 89.4 $ 17.1 $ 2.0 $108.5
===========================================================
Pretax earnings (loss) $ * $ 4.4 $ 17.1 $(19.7) $ 1.8
===========================================================
Net income (loss) from continuing operations $ * $ 2.7 $ 8.3 $(11.2) $ (.2)
=================================================================================================================================
</TABLE>
12
<PAGE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
Property and Investments in
Casualty Unconsolidated Holding
Millions Reinsurance Insurance Affiliates Company Total
- ----------------------------------------------------------------------------------------------------------------------------------
Three Months Ended June 30, 1999
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenues from external customers $ 45.7 $ 27.7 $ * $ * $ 73.4
Gain from sale of Valley Group * * * 88.1 88.1
Net investment income 11.3 1.3 1.0 (.2) 13.4
Earnings from unconsolidated insurance affiliates * * 4.8 * 4.8
Amortization of deferred credit 1.8 * * .1 1.9
Realized gains 4.0 8.9 * 4.9 17.8
Other * * * .1 .1
----------------------------------------------------------------
Total revenues $ 62.8 $ 37.9 $ 5.8 $ 93.0 $199.5
================================================================
Pretax earnings $ 10.1 $ 4.6 $ 5.8 $ 84.3 $104.8
================================================================
Net income from continuing operations $ 7.9 $ 3.0 $ 4.1 $ 48.8 $ 63.8
==================================================================================================================================
Three Months Ended June 30, 1998
- ----------------------------------------------------------------------------------------------------------------------------------
Revenues from external customers $ * $ 43.1 $ * $ * $ 43.1
Net investment income * 1.6 .9 .6 3.1
Earnings from unconsolidated insurance affiliates * * 7.7 * 7.7
Realized gains (losses) * 1.7 * (.1) 1.6
----------------------------------------------------------------
Total revenues $ * $ 46.4 $ 8.6 $ .5 $ 55.5
================================================================
Pretax earnings (loss) $ * $ 2.7 $ 8.6 $(10.5) $ .8
================================================================
Net income (loss) from continuing operations $ * $ 1.6 $ 2.1 $ (3.5) $ .2
==================================================================================================================================
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
Millions Property and Investments in Net Assets of
Casualty Unconsolidated Discontinued Holding
Ending assets Reinsurance Insurance Affiliates Operation Company Total
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
June 30, 1999 $1,356.8 $ 26.7 $396.9 $ 19.4 $175.8 $1,975.6
December 31, 1998 1,220.5 311.5 404.1 110.4 117.2 2,163.7
===================================================================================================================================
</TABLE>
Item 2. Management's Discussion and Analysis
RESULTS OF OPERATIONS -- THREE AND SIX MONTHS ENDED JUNE 30, 1999 AND 1998
White Mountains reported comprehensive net income of $45.8 million or $7.20 per
diluted common share for the six months ended June 30, 1999, compared to
comprehensive net income of $53.0 million or $8.04 per diluted common share for
the comparable 1998 period. Net income, which does not include other
comprehensive income (primarily changes in net unrealized investment gains), was
$90.5 million or $14.25 per diluted common share for the six months ended June
30, 1999, compared to $15.5 million or $2.33 per dilutive common share for the
comparable 1998 period.
Comprehensive net income for the 1999 second quarter was $53.2 million or $8.59
per diluted common share, compared to comprehensive net income of $17.8 million
or $2.70 per diluted common share for the 1998 second quarter. Net income for
the 1999 second quarter was $76.7 million or $12.41 per diluted common share,
compared to $6.6 million or $1.00 per dilutive common share for the 1998 second
quarter.
13
<PAGE>
Comprehensive net income for the 1999 second quarter was $53.2 million or $8.59
per diluted common share, compared to comprehensive net income of $17.8 million
or $2.70 per diluted common share for the 1998 second quarter. Net income for
the 1999 second quarter was $76.7 million or $12.41 per diluted common share,
compared to $6.6 million or $1.00 per dilutive common share for the 1998 second
quarter.
14
<PAGE>
White Mountains ended the 1999 first half with a book value per share of $112.36
($118.76 including $6.40 per share of after tax unamortized deferred credit)
versus a 1998 ending book value per share of $109.68 ($115.11 including $5.43
per share of after tax unamortized deferred credit).
Significant Transactions Affecting Comparability of Financial Information
Since June 30, 1998, White Mountains has completed several significant
transactions that affect the comparability of the financial statement
information contained herein. These transactions include: (i) the Folksamerica
Purchase on August 18, 1998; (ii) the Mortgage Banking Sale on May 1, 1999;
(iii) the Valley Group Sale on June 17, 1999; (iv) the acquisition of USF Re by
Folksamerica on June 29, 1999; (v) the exercise of stock options to acquire an
additional 666,667 shares of the common stock of FSA on May 13, 1999; and (vi)
significant repurchases of shares of the Company's common stock. Each of these
transactions are further described herein.
Insurance and Reinsurance Operations
White Mountains' consolidated reinsurance operations consist of Folksamerica,
which owns Folksamerica Reinsurance Company - a broker market reinsurer.
Unconsolidated insurance operations include a 25% economic interest in FSA,
which writes municipal and commercial bond credit enhancement insurance and a
50% interest in Main Street America Holdings, Inc. ("MSA"), a stock subsidiary
of National Grange Mutual ("NGM") which shares 60% of NGM's pool of east coast
"main street" commercial and personal lines business.
Consolidated Reinsurance Operations. Folksamerica's reinsurance operations
provided $13.8 million to net income for the 1999 first half versus net income
of $3.5 million for the 1998 comparable period during which Folksamerica was an
unconsolidated affiliate. A summary of White Mountains' consolidated reinsurance
operating results follows:
- -------------------------------------------------------------------------------
Three Months Six Months
Ended June 30, Ended June 30,
----------------------------------------
Dollars in millions 1999 1998 1999 1998
- -------------------------------------------------------------------------------
Folksamerica:
Net written premiums $ 46.5 $ 55.6 $ 96.4 $ 114.1
Earned premiums $ 45.6 $ 57.3 $ 99.3 $ 123.8
Loss and loss adjustment expense 70.2% 69.0% 70.9% 69.9%
Underwriting expense 35.7% 36.9% 35.0% 35.0%
----------------------------------------
Combined ratio 105.9% 105.9% 105.9% 104.9%
===============================================================================
Folksamerica's 1999 combined ratio is slightly higher than anticipated due to
lower premium volumes resulting from lower than expected production on a number
of domestic treaties, the effects of non-renewals in its property portfolio,
slower than anticipated growth in its Latin America business and a less
favorable pricing environment.
Folksamerica's 1999 year-to-date net written premiums totalled $96.4 million
versus $114.1 million during 1998. Management believes that Folksamerica's
premiums are not far below expectation given the fiercely competitive market
conditions that exist in today's reinsurance market. Folksamerica's strategy in
such an environment is to grow its business through well executed acquisitions
rather than chasing market share at unattractive prices. Consistent with
15
<PAGE>
this strategy, Folksamerica acquired USF Re on June 29, 1999. See "Liquidity and
Capital Resources".
Sale of Consolidated Insurance Operations. On June 17, 1999, the Company
completed the Valley Group Sale (consisting primarily of Valley Insurance
Company, Charter Indemnity Company and White Mountains Insurance Company) and
received net proceeds of $139.0 million in cash after receiving a special
dividend prior to the closing of $76.6 million (net of related tax liabilities)
consisting of cash, investment securities and the common stock of Waterford. In
connection with the Valley Group Sale, the Company recorded a pretax gain of
$88.1 million, $52.8 million after tax. As part of the Valley Group Sale, White
Mountains has provided Unitrin, Inc. with certain adverse loss development
protections for approximately four years, however, White Mountains believes that
its loss and loss adjustment reserves sold pursuant to the Valley Group Sale
were adequately stated and are not expected to result in a material subsequent
purchase price adjustment. The Valley Group Sale did not represent a decision by
the Company to exit the property and casualty insurance business, thus, the
financial results of these companies are not shown as discontinued operations
herein.
The Company recorded net income from Valley Group for the 1999 period through
the date of sale of $3.6 million which primarily represented realized investment
gains (see "Investment Operations"). For the 1998 first half, Valley Group
contributed $2.8 million to net income.
Unconsolidated Insurance Operations. FSA and White Mountains' related investment
in MediaOne preferred stock contributed $6.2 million to net income during the
1999 first half versus $6.1 million for the comparable 1998 period. FSA produced
$239.1 million of present value premiums during the 1999 period, compared with
$158.0 million in the prior year, an increase of 51.4%. During the 1999 first
half, FSA's adjusted book value per share (FSA's book value plus the after tax
present value of all deferred premium income, less deferred expenses) increased
from $47.62 at year-end 1998 to $50.11 per share at June 30, 1999.
MSA contributed $1.6 million to net income during the 1999 first half versus
$2.2 million for the comparable 1998 period. MSA's 1999 year-to-date combined
ratio of 103.2% for the 1999 first half (versus 101.4% for the comparable 1998
period) is much improved from 106.7% for the 1999 first quarter but short of
management's long-term objective. In response to its disappointing operating
results during recent months, NGM has been implementing rate increases within
certain of its major lines of business. These rate actions are expected to have
a growing favorable impact on MSA's operations as the year progresses.
In addition to recording equity in earnings from its investments in the common
stock of unconsolidated insurance affiliates, White Mountains also records net
unrealized investment gains and losses as a result of changes in the value of
its options and convertible securities to acquire the common stock of FSA and
changes in its equity in the net unrealized investment gains and losses of FSA
and MSA. See "Investment Operations".
Mortgage Banking (Discontinued) Operations
As previously mentioned, on May 1, 1999, the Company concluded the Mortgage
Banking Sale. White Mountains recorded an estimated $14.9 million after tax gain
on the sale of such mortgage banking net assets (which is net of anticipated
future liabilities) during the 1999 second quarter.
Net mortgage banking assets of $19.4 million at June 30, 1999 consisted
primarily of $45.8
16
<PAGE>
million of cash and investments, $38.5 million of remaining mortgage banking
assets partially offset by estimated future liabilities associated with the
run-off of existing mortgage banking assets and other certain other long-term
liabilities.
The Citibank transaction represented a decision by the Company to exit from the
mortgage banking business. As a result, all current and prior mortgage banking
activities are presented as discontinued mortgage banking operations herein.
Through May 1, 1999, WMSC's mortgage banking activities contributed $1.0 million
to net income. During the 1998 first half WMSC's mortgage banking activities
contributed $15.7 million to net income.
Investment Operations
Net investment income totalled $29.2 million for the six months ended June 30,
1999 compared to $8.3 million for the comparable 1998 period. White Mountains'
investment income is comprised primarily of interest income associated with the
fixed maturity investments and dividend income from its equity investments. The
significant increase in net investment income during the 1999 first half is
primarily the result of the addition of Folksamerica's sizable fixed income
portfolio to the Company's consolidated results for 1999.
White Mountains records net unrealized investment gains and losses as a result
of changes in the value of its available for sale investment portfolio holdings,
changes in the value of its options and convertible securities to acquire the
common stock of FSA and changes in its equity in the net unrealized investment
gains and losses of its unconsolidated insurance affiliates. Additional
information concerning White Mountains' net investment gains and losses arising
during the periods, before tax, were as follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------
Three Months Six Months
Ended June 30, Ended June 30,
-----------------------------------------
Millions 1999 1998 1999 1998
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net realized investment gains for investments sold $ 17.8 $ 1.6 $ 26.8 $ 2.1
Net realized gains included in net income from discontinued operations -- .1 -- 2.1
-----------------------------------------
Total net realized gains for investments sold 17.8 1.7 26.8 4.2
Net unrealized gains (losses) from investment securities (23.0) (1.4) (31.0) 9.5
Net unrealized gains (losses) from investments in unconsolidated affiliates (14.6) 18.5 (38.9) 48.1
-----------------------------------------
Total net investment gains (losses) for investments held during the period $ (19.8) $ 18.8 $ 43.2 $ 61.8
==============================================================================================================================
</TABLE>
The components of White Mountains' change in net unrealized investment gains,
after tax, as recorded on the income statement are as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
Three Months Six Months
Ended June 30, Ended June 30,
------------------------------------------------
Millions 1999 1998 1999 1998
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net realized investment gains for investments sold (from table above) $ 17.8 $ 1.7 $ 26.8 $ 4.2
Income tax expense applicable to such gains (6.3) (.6) (9.4) (1.5)
------------------------------------------------
Net realized investment gains for investments sold, after tax $ 11.5 $ 1.1 $ 17.4 $ 2.7
================================================
Net unrealized investment gains (losses) for investments held $(19.7) $ 18.9 $(43.1) $ 59.8
Income tax benefit (expense) applicable to such gains and losses 6.9 (6.6) 15.1 (20.9)
------------------------------------------------
Net unrealized investment gains (losses) for investments held, after tax (12.8) 12.3 (28.0) 38.9
Unrealized gains reclassed for investments sold, after tax (11.5) (1.1) (17.4) (1.4)
------------------------------------------------
Change in net unrealized investment gains, after tax $(24.3) $ 11.2 $(45.4) $ 37.5
================================================================================================================================
</TABLE>
17
<PAGE>
Net realized investment gains of $26.8 million for the 1999 first half resulted
principally from pretax gains from the sales of all or a portion of White
Mountains' investments in San Juan Basin Royalty Trust ($6.0 million), Travelers
Property Casualty Corp. ($4.8 million) and various common equities in
Folksamerica's operating portfolio ($3.5 million). In addition, pretax realized
gains on sales of equity securities and fixed maturity investments of $9.4
million were recorded in anticipation of or in connection with the Valley Group
Sale during the 1999 second quarter. No significant sales of investment
securities occurred during the 1998 first half.
The $28.0 million decrease in after tax net unrealized investment gains for
investments held during the 1999 first half primarily reflects: (i) unrealized
losses of $17.8 million after tax in Folksamerica's sizeable fixed maturity
portfolio due to an increase in market interest rates during the period; (ii) a
$10.4 million after tax reduction in unrealized gains associated with White
Mountains' May 13, 1999 exercise of options to acquire 666,667 shares of the
common stock of FSA (as further described below), partially offset by: (iii) net
after tax gains associated with White Mountains' equity security portfolios. The
$38.9 million increase in after tax net unrealized investment gains for
investments held during the 1998 first half primarily reflects an increase in
the value of its FSA options and convertible securities during that period as
well as an increase in the value of White Mountains' former investments in the
common stock of Travelers Property Casualty Corp. and White River Corporation.
In accordance with Generally Accepted Accounting Principles the Company accounts
for its investments in FSA common stock on the equity method of accounting and
accounts for its stock options and convertible securities to acquire FSA common
stock at fair value. Upon the exercise of FSA options during the 1999 second
quarter, White Mountains was required to write its investment in the FSA options
exercised to its original cost in order to transition the investment from fair
value accounting to equity accounting. In connection with this accounting
transition, White Mountains reduced its after tax net unrealized gains by $10.4
million and recorded a deferred credit of $5.0 million that will be amortized to
income over a five-year period. The difference between fair value and equity
value (currently $5.4 million) may not be recognized by the Company until such
time as equity accounting is no longer appropriate for its investment in FSA
shares.
Expenses
Insurance losses and loss adjustment expenses totalled $123.0 million for the
1999 first half versus $54.6 million for the comparable 1998 period. Insurance
and reinsurance acquisition expenses totalled $39.5 million for the 1999 first
half versus $13.0 million for the comparable 1998 period. The increases in these
insurance expenses during the 1999 period are primarily attributable to the
inclusion of Folksamerica in the Company's consolidated results for 1999.
Compensation and benefits expenses totalled $25.1 million for the 1999 first
half versus $26.8 million for the comparable 1998 period. Compensation and
benefits expenses include stock-based compensation accruals that vary with
changes in the market value of the Company's common stock. For the 1998 first
half, White Mountains recorded stock-based compensation accruals in response to
a 22.3% increase in the market value of the Company's common stock. For the 1999
first half, the Company's market value for its common stock did not increase
significantly.
Increases in interest expense and general expenses from the 1998 first half to
the 1999 comparable period relate primarily to the inclusion of Folksamerica in
the Company's consolidated results for 1999.
18
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
On June 29, 1999 Folksamerica acquired USF Re from The Centris Group Inc. for
total consideration of $92.5 million. The purchase consideration included the
issuance of a $20.8 million, five-year note by Folksamerica (which may be
reduced by adverse loss development at USF Re post acquisition) with the balance
paid in cash. Folksamerica did not record a significant amount of goodwill in
connection its acquisition of USF Re.
In connection with the Valley Group Sale, White Mountains repaid $15.0 million
of Valley's long-term indebtedness on June 17, 1999.
During the 1999 second quarter, White Mountains repaid $85.0 million of its
subsidiary indebtedness with proceeds received from the Mortgage banking Sale
and the Valley Group Sale. White Mountains retains the ability to borrow up to
$100.0 million under this revolving facility.
During the 1999 first half the Company repurchased 865,413 shares of its common
stock from third parties in a series of public and private transactions for a
total of $121.2 million in cash. Also during the 1999 first half the Company
issued from its treasury a total of 25,528 common shares to its key employees in
satisfaction of certain stock-based employee benefit plan obligations.
On June 7, 1999, White Mountains announced that it had signed a definitive
agreement to purchase the Consolidated International Group, Inc., a Delaware
based insurance holding company for $85.3 million in cash. Consolidated's
principal operating subsidiaries are Peninsula Insurance Company, American
Centennial Insurance Company, and British Insurance Company of Cayman. Peninsula
Insurance Company, located in Salisbury, Maryland, writes small commercial and
personal lines through independent agents in the mid-Atlantic. American
Centennial Insurance Company and British Insurance Company of Cayman are in
runoff. The transaction is subject to regulatory approval.
On August 3, 1999 the Company was notified that its investment in
MediaOne preferred stock was being redeemed on September 2, 1999 for $50.0
million plus accrued and unpaid interest. The redemption also requires the
Company to exercise its stock options with MediaOne to acquire 1,893,940 FSA
common shares at $26.40 per share on the redemption date. The $50.0 million
principal amount of the preferred stock will be used to fund the exercise price
to acquire the FSA common shares. The Company expects that it will be required
to account for this FSA stock option exercise in a manner consistent with that
of its exercise of May 13, 1999.
OTHER MATTERS
Year 2000
Status. Since 1996 White Mountains has been identifying, modifying and testing
its internal systems and controls to ensure that these systems can accurately
process transactions involving the Year 2000 and beyond with no material adverse
effects to its customers or disruption to its business operations. As of
December 31, 1998, White Mountains had substantially completed its testing phase
(the final phase of its Year 2000 remediation plan).
19
<PAGE>
White Mountains estimates that its total pretax cost of Year 2000 remediation,
excluding its unconsolidated insurance affiliates, is approximately $3.0 million
(including Valley Group and WMSC) of which the majority of this amount has been
expensed as of September 30, 1999. This estimate does not include the cost of
hardware and software replacements and upgrades made in the normal course of
business and represents less than 20% of White Mountains' total Information
Technology budget.
White Mountains has also been closely monitoring the year 2000 issues of its
third party constituents that it voluntarily interacts with (e.g. customers,
suppliers, reinsurers, creditors, borrowers...). White Mountains' third party
constituents have been requested to provide White Mountains with information
concerning their Year 2000 remediation plans and the status of such plans. For
those constituents who either fail to respond to this inquiry or are deemed to
be unlikely to remedy their own Year 2000 issues in a timely manner, White
Mountains is in the process of either replacing that constituent or establishing
similar relationships with new parties that appear to be Year 2000 compliant.
As of December 31, 1998, FSA and MSA had also substantially completed the
testing phase of their Year remediation plans and are in the process of
determining their third party exposures in a similar manner to that of White
Mountains. White Mountains' nominees to the Boards of Directors of FSA and MSA
have received detailed briefings concerning their respective Year 2000 plans and
have determined that these plans appear to be on schedule for a timely
completion and should reduce the risk of Year 2000 issues. White Mountains'
portion of the total estimated costs of the Year 2000 issue for its
unconsolidated insurance affiliates are not material and the majority of such
expenses have already been incurred.
Risks. The failure to identify or correct significant Year 2000 issues could
result in an interruption in, or a failure of, certain normal business
activities or operations concerning the Company and its consolidated
subsidiaries and its unconsolidated insurance affiliates. Such failures could
adversely affect White Mountains' results of operations, liquidity and financial
condition. Due to the general uncertainty inherent in the Year 2000 problem,
resulting in part from the uncertainty of potential business interruptions
caused by third party constituents in which White Mountains must interact
(including but not limited to suppliers of electrical power, various private and
public markets for equity and debt securities, certain agencies of the Federal
government and the states in which White Mountains conducts business), White
Mountains is unable to determine at this time whether the consequences of any
Year 2000 failures will have a material impact on its results of operation,
liquidity or financial condition. However, White Mountains currently believes
that, with the implementation of its Year 2000 plan (which is in the final
stages of completion), the possibility of significant interruptions of normal
business activities due to the Year 2000 issue should be reduced.
Folksamerica's approach towards underwriting against potential Year 2000
exposures is to seek coverages which contain Year 2000 event exclusions. In
instances where exclusions are not provided, Folksamerica attempts to determine
whether the risk is acceptable based on a variety of factors (a description of
such factors is not provided herein as each situation is unique). Folksamerica
has estimated that less than 9% of its property reinsurance coverage in force
could be subject to Year 2000 exposures. However, these risks generally lie with
large corporations who have been aware of the issue for some time and have
invested significant time and resources towards Year 2000 remediation.
Additionally, Folksamerica does not anticipate significant Year 2000 exposures
from its casualty reinsurance coverage in force due
20
<PAGE>
to the nature of such exposures. Further, Folksamerica generally writes such
exposures on an excess of loss basis which provides Folksamerica with additional
protections against potential losses of this nature.
In connection with the Valley Group Sale and the Mortgage Banking Sale, the
Company has made certain representations as to the Year 2000 "readiness" of such
operations and assets sold. The Company believes that its exposure to Year 2000
issues resulting from such representations is no greater than if such operations
and assets had been retained.
The Company is currently in the process of developing a Year 2000 contingency
plan (the "Y2K Plan") which is designed to mitigate, to the extent possible, any
adverse affects White Mountains may suffer due to any potential business
interruptions caused by third party constituents in which White Mountains must
interact (as further explained above). It is expected that the Y2K Plan will be
finalized during the third quarter of 1999.
Annual Meeting Proposals Enacted
In connection with a proposal approved by shareholders at the Company's 1999
Annual Meeting held on May 27, 1999, the name of the Company was changed on June
1, 1999 to "White Mountains Insurance Group, Inc.".
Also in connection with a proposal approved by shareholders at the 1999 Annual
Meeting, the Company recently retired 15,657,452 shares of its treasury stock
prior to the filing of a charter amendment to reduce its number of common shares
authorized from 125.0 million shares to 15.0 million shares. The retirement of
treasury shares resulted in a significant reclassification of several of the
Company's various shareholders' equity accounts but did not affect total
shareholders' equity.
Forward Looking Statements
From time to time, the Company may publish forward-looking statements relating
to such matters as anticipated financial performance, business prospects, new
products and similar matters. This information is often subject to various risks
and uncertainties. The Private Securities Litigation Reform Act of 1995 provides
a safe harbor for forward-looking statements. In order to comply with the terms
of the safe harbor, the Company notes that numerous factors could cause actual
results and experience to differ materially from anticipated results or other
expectations expressed in its forward- looking statements. The risks and
uncertainties that may affect the operations, performance, development and
results of the Company's business are further described in the Company's 1998
Annual Report on Form 10-K (such as those involving competition, regulation and
certain business conditions).
Item 3. Quantitative and Qualitative Disclosures About Market Risk
White Mountains' consolidated balance sheet includes a substantial amount of
assets and liabilities whose fair values are subject to market risk. The term
market risk refers to the risk of loss arising from adverse changes in: interest
rates, foreign currency exchange rates, commodity prices, and other relevant
market rates and prices such as prices for common equity securities. Due to
White Mountains' sizable investments in fixed maturity investments and common
equity securities at its insurance and reinsurance subsidiaries and its use of
medium and long-term debt financing at the Company and certain of its operating
companies, market risk can have a significant affect on White Mountains
consolidated financial position.
Prior to May 1, 1999, White Mountains also had additional exposure to market
risk associated with derivative securities and mortgage-related assets and
liabilities at WMSC. As a result of the Mortgage Banking Sale, White Mountains
is no longer subject to market risk associated with derivative securities (which
were liquidated during the 1999 first quarter) and has significantly reduced its
exposure to market risk associated with its mortgage-related assets and
liabilities (which were substantially liquidated during the 1999 first half).
21
<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
At the Company's 1999 Annual Meeting of Shareholders, which was held on
May 27, 1999 in Hanover, New Hampshire, shareholders approved proposals
(as further contained in the Company's 1999 Proxy Statement) calling for
the Election of Directors ("Proposal 1"), a Charter Amendment to Change
the Corporate Name ("Proposal 2"), a Charter Amendment to reduce the
Number of Authorized Shares of Capital Stock ("Proposal 3") and the
Appointment of Independent Auditors ("Proposal 4"). As of March 29,
1999, the "Record Date" for the 1999 Annual Meeting, a total of
5,843,731 shares were eligible to vote. With respect to Proposal 1,
4,763,048 votes were cast in favor of the proposal and 73,459 votes were
withheld. With respect to Proposal 2, 4,809,132 votes were cast in favor
of the proposal, 18,042 votes were cast against the proposal and 9,333
votes abstained. With respect to Proposal 3, 4,816,198 votes were cast
in favor of the proposal, 4,414 votes were cast against the proposal and
15,895 votes abstained. With respect to Proposal 4, 4,831,574 votes were
cast in favor of the proposal, 651 votes were cast against the proposal
and 4,282 votes abstained.
In connection with Proposal 1, incumbent directors John J. Byrne, George
J. Gillespie, III and Frank A. Olson were re-elected to the Board of
Directors with terms ending in 2002 and Mr. Arthur Zankel was elected to
the Board of Directors with a term ending in 2000.
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 for the six-month period ended June 30,
1999**
22
<PAGE>
(b) Reports on Form 8-K
During the 1999 second quarter the Company filed the following
Current Reports on Form 8-K:
o Form 8-K dated May 27, 1999 which reported that the Company
changed its name to White Mountains Insurance Group, Inc.,
o Form 8-K dated June 1, 1999 which reported that the Company
entered into a definitive agreement to acquire Consolidated
International Group, Inc.
o Form 8-K dated June 8, 1999 which reported that the Company
repurchased 450,000 shares of its common stock from an
unaffiliated third party,
o Form 8-K dated June 17, 1999 which reported that the Company
completed its sale of Valley Group, Inc. to Unitrin, Inc.
o Form 8-K dated June 29, 1999 which reported that the Company
completed its purchase of USF Re Insurance Co. from The
Centris Group Inc.
* Not included herein as the information is contained elsewhere within
report. See Note 5 of the Notes to Condensed Consolidated Financial
Statements.
** Filed herewith.
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.
WHITE MOUNTAINS INSURANCE GROUP, INC.
-------------------------------------
(Registrant)
Date: August 12, 1999 By: /s/
------------------------------------
Michael S. Paquette
Senior Vice President and Controller
23
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 7
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<DEBT-HELD-FOR-SALE> 0
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 886
<EQUITIES> 275
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 1,292
<CASH> 2
<RECOVER-REINSURE> 154
<DEFERRED-ACQUISITION> 22
<TOTAL-ASSETS> 1,976
<POLICY-LOSSES> 823
<UNEARNED-PREMIUMS> 92
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 137
0
0
<COMMON> 189
<OTHER-SE> 437
<TOTAL-LIABILITY-AND-EQUITY> 1,976
166
<INVESTMENT-INCOME> 29
<INVESTMENT-GAINS> 27
<OTHER-INCOME> 104
<BENEFITS> 123
<UNDERWRITING-AMORTIZATION> 40
<UNDERWRITING-OTHER> 0
<INCOME-PRETAX> 121
<INCOME-TAX> 47
<INCOME-CONTINUING> 74
<DISCONTINUED> 17
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 91
<EPS-BASIC> 15.97
<EPS-DILUTED> 14.25
<RESERVE-OPEN> 812
<PROVISION-CURRENT> 240
<PROVISION-PRIOR> 5
<PAYMENTS-CURRENT> (7)
<PAYMENTS-PRIOR> (227)
<RESERVE-CLOSE> 823
<CUMULATIVE-DEFICIENCY> (17)
</TABLE>
