(c) Deferred credits added during 1999 resulted from the purchase of CIG and exercises of FSA Options. See Note 1.
(d) Deferred credits added during 1998 resulted from the acquisition of Folksamerica. See Note 1.
(f) As adjusted for the dilutive effects of outstanding options and warrants to acquire Shares ("Warrants").
Comprehensive net income, which includes other comprehensive income items (primarily changes in net unrealized investment gains and losses for investments held during the period), for 1999 was $3.0 million versus $69.6 million and $81.0 million for 1998 and 1997, respectively. Comprehensive net income for 1999 was adversely affected by $28.8 million of after tax unrealized bond losses at Folksamerica and a $43.9 million after tax accounting write-down of White Mountains' investment in FSA. Comprehensive net income for 1997 was favorably impacted by $105.1 million of after tax unrealized holding gains primarily associated with White Mountains' investment in FSA.
Folksamerica's results for the three years ended December 31, 1999, 1998 and 1997 included $211.0 million, $238.1 million and $238.0 million of earned reinsurance premiums, respectively, and $182.2 million, $170.3 million and $165.6 million of losses and loss adjustment expenses, respectively. For 1999 Folksamerica's combined ratio was 122.5% versus a combined ratio of 108.0% and 102.9% for the comparable 1998 and 1997 periods.
A summary of Folksamerica's 1999, 1998 and 1997 underwriting results follows:
In addition to incurred losses, Folksamerica's combined ratios for 1999 and 1998 were higher than anticipated due to lower premium volume 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. During 1999, Folksamerica's written premium volume decreased 5% versus 1998 despite its acquisition of USF Re during mid 1999. During 1998, Folksamerica's written premium volume decreased approximately 9% versus 1997 premium levels. These premium volume decreases primarily reflect increased non-renewed business due to deteriorating terms and conditions.
Since Folksamerica's claims settlement period generally extends over a long period of time, Folksamerica earns significant amounts of investment income on the float generated by its reinsurance operations. When considering investment income and certain other items at the Folksamerica holding company level (primarily interest expense and income taxes), Folksamerica reported net income of $63.7 million, $27.3 million and $35.9 million for the three years ended December 31, 1999, 1998 and 1997, respectively, and reported comprehensive net
income of $13.4 million, $54.3 million and $50.9 million during those periods, respectively. This resulted in Folksamerica attaining an after tax return on its beginning equity of 5.7%, 20.9% and 29.9% for 1999, 1998 and 1997, respectively.
FSA and MSA represented White Mountains' investments in unconsolidated insurance affiliates at December 31, 1999 and 1998.
Net realized investment gains of $69.6 million for the year ended December 31, 1999 included $23.9 million of pretax gains from sales of San Juan Basin Royalty Trust ("SJT") units and $28.0 million of pretax gains from sales of various common stocks and other investments in Folksamerica's operating portfolio. In addition, $9.4 million of pretax gains on sales of common stocks and fixed maturity investments were recorded in anticipation of or in connection with the Valley Group Sale. Net realized investment gains of $71.0 million for the year ended December 31, 1998 resulted principally from the sale of White Mountains' investment in White River Corporation ("White River"). Net realized investment gains of $97.4 million recorded during 1997 included $37.2 million of pretax gains from sales of Travelers Property Casualty Corp. common stock, $24.3 million of pretax gains from sales of SJT units, $10.3 million of pretax gains from sales of Mid Ocean Limited common stock and $15.5 million of pretax gains from sales of Veritas DGC Inc. common stock.
White Mountains' net investment income is comprised primarily of interest income associated with the fixed maturity investments of its consolidated insurance and reinsurance operations and dividend income from its equity investments. The significant increase in net investment income
from 1997 to 1999 is mainly attributable to White Mountains' growing portfolio of fixed maturity investments resulting from the consolidation of Folksamerica in August 1998 and the 1999 acquisitions of USF Re and CIG.
Net unrealized investment losses for investments held during 1999 of $20.2 million pretax resulted from a $48.3 million pretax loss on fixed maturities held in White Mountains' insurance operating portfolios partially offset by unrealized gains from common stocks and other investments. Net unrealized gains for investments held during 1998 of $24.8 million pretax resulted from unrealized gains on fixed maturities and common stocks. Net unrealized gains for investments held during 1997 of $87.7 million resulted from gains on common stocks, particularly White River.
Insurance losses and loss adjustment expenses totalled $228.3 million for 1999 versus $174.8 million for 1998 and $97.1 million for 1997. Insurance and reinsurance acquisition expenses totalled $73.4 million for 1999 versus $54.8 million for 1998 and $23.2 million for 1997. The increase in these insurance expenses from 1997 to 1999 is primarily attributable to the inclusion of Folksamerica in the Company's consolidated results during 1998 and the acquisitions of USF Re and CIG during 1999. During 1999 and 1998, losses and loss adjustment expenses relating to prior years developed unfavorably by $15.3 million (which is net of USF Re purchase price offsets) and $7.8 million, respectively. During 1997, losses and loss adjustment expenses relating to prior years developed favorably by $2.5 million pretax.
General expenses totalled $19.5 million for 1999 versus $15.9 million for 1998 and $15.7 million for 1997. The increase in general expenses during the 1999 period are primarily attributable to both the inclusion of Folksamerica in the Company's consolidated results for the entire 1999 period and expenses incurred in connection with the Redomestication.
In connection with the Redomestication, the Company and certain of its subsidiaries changed their domicile to either Bermuda or Barbados (the "Offshore Companies") while certain other subsidiaries remained domiciled in the United States (the "Onshore Companies"). As a result, income earned by the Offshore Companies will generally be subject to an effective overall tax rate lower than that imposed by the United States, however, no tax benefits will be attained
The income tax provision related to pretax earnings for 1999, 1998 and 1997 represents an effective tax rate of 32.9%, 35.8% and 35.9%, respectively. The reduction in the effective rate for 1999 resulted from the Redomestication.
The primary sources of cash inflows for the Company are investment income, sales of investment securities and dividends received from its operating subsidiaries. Under the insurance laws of the states under which the Company's insurance subsidiaries are licensed to write business, an insurer is restricted with respect to the amount of dividends it may pay without prior approval by state regulatory authorities. Accordingly, there is no assurance that dividends may be paid by such subsidiaries in the future.
During 1993 the Company issued $150.0 million in principal amount of medium-term notes for net cash proceeds of $148.0 million after related costs. The Company has repurchased its medium-term notes from time to time and during 1999 repurchased $15.9 million in principal amount of the notes due in February 2003. At December 31, 1999 the $96.0 million of medium-term notes outstanding had an average maturity of 3.6 years and an average yield to maturity of 7.83%.
(which was increased to $50.0 million during 1999) at short-term market interest rates. The credit agreement contains certain customary covenants and conditions. At December 31, 1999 and 1998 the Company was in compliance with all covenants under the facility and had no borrowings outstanding under the agreement.
During 1999 and 1998 the Company repurchased 1,020,150 Shares for $139.5 million and 151,916 Shares for $19.8 million, respectively. All Shares repurchased during 1999 and 1998 have been retired. During 1999 and 1998 the Company declared and paid quarterly cash dividends of $.40 per Share. Shares repurchased and dividends paid during 1999 and 1998 represented returns of excess capital to shareholders.
During 1999 the Company concluded the Mortgage Banking Sale and recorded an $11.6 million after gain on the sale. The Company has retained the WMSC legal entity which currently owns the majority of White Mountains' investments in FSA and certain other mortgage-related and other assets and liabilities.
During 1999 the Company concluded the Valley Group Sale and recorded a $53.8 million after tax gain on the sale. In connection with the Valley Group Sale, White Mountains repaid $15.0 million of VGI's long-term indebtedness during 1999.
During 1999 the Company concluded its previously announced acquisition of the CIG companies for $86.7 million in cash.
In connection with the Redomestication, the Company was treated as if it sold all of its directly owned assets in a fully taxable transaction in which gains, but not losses, were recognized. The Company incurred a United States income tax liability upon the Redomestication of approximately $2.5 million.
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 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 and its use of medium- and long-term debt financing, market risk can have a significant effect on White Mountains' consolidated financial position.
(a) Represents medium-term notes with a carrying value at December 31, 1999 of $96.4 million. Excludes short-term indebtedness, variable rate obligations and the USF Re seller note whose principal (and interest payable thereon) amortizes in response to adverse loss development experienced at Folksamerica resulting from its acquisition of USF Re.
(a) Excludes $.6 million of other investments which would not be directly affected by the assumed changes in equity prices.
White Mountains accounts for its investment in FSA Common Stock on the equity method of accounting and accounts for its unexercised stock options and convertible securities to acquire FSA Common Stock at fair value. Upon the exercises of FSA Options during 1999, the Company was required to write its investments in the FSA Options exercised to their original cost in order to transition the investment from fair value accounting to equity accounting. In connection with this accounting transition, the Company reduced its after tax net unrealized gains at the time of exercise by $39.3 million and recorded a deferred credit of $14.2 million that will be amortized to income over a five-year period. The difference between fair value and equity value ($25.1 million at the time of exercise) may not be recognized by White Mountains until such time as equity accounting is no longer appropriate for its investment in FSA Common Stock.
In conformance with Bermuda law, the Company retired all Shares held in its treasury during 1999. 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.
Neither White Mountains nor any of its unconsolidated insurance affiliates experienced any significant Year 2000 disruptions to its business operations. White Mountains' total pretax cost of Year 2000 remediation, excluding its unconsolidated insurance affiliates, was approximately $3.0 million. This figure does not include the cost of hardware and software replacements and upgrades made in the normal course of business.
The financial statements and supplementary data have been filed as a part of this Annual Report on Form 10-K as indicated in the Index to Financial Statements and Financial Statement Schedules appearing on page 34 of this report.