The Company maintains two small professional offices in Hamilton, Bermuda which serve as its headquarters and registered office. In addition, the Company and certain of its subsidiaries lease 8,600 square feet of office space at 80 South Main Street, Hanover, New Hampshire, under a lease expiring in 2006, which serves as its principal executive office. Folksamerica leases 60,000 square feet of office space in New York, New York, under a lease expiring 2009, which serves as its principal office. Folksamerica also leases 12,000 square feet of office space in Greenwich, Connecticut, under a lease expiring in 2010, which serves as its satellite office. PIC owns a 20,000 square foot office building in Salisbury, Maryland which serves as its principal office. ACIC and BICC lease 8,000 square feet of office space in Wilmington, Delaware, under a lease which expires in 2004, which serves as their principal office. White Mountains leases several other office facilities and operating equipment under cancellable and noncancellable agreements.
Comprehensive net income was $447.6 million for 2000, which compares to $3.0 million for 1999 and $69.6 million for 1998. Comprehensive net income for 2000 benefitted by unrealized gains in the fixed maturity investments of the Company's insurance and reinsurance operations. Comprehensive net income for 1999 was adversely affected by unrealized fixed maturity investment losses and an accounting write-down resulting from exercises of FSA Options. Comprehensive net income for 1998 benefitted by modest unrealized gains from both fixed maturity investments and common stocks.
Book value per Share was $177.07 at December 31, 2000, which compares to $103.32 at December 31, 1999. Tangible book value per Share (which includes unamortized deferred credits less goodwill per Share) was $187.65 at December 31, 2000, which compares to $120.23 at December 31, 1999. White Mountains' unamortized deferred credits and goodwill represent the remaining difference between the cost of companies acquired by White Mountains during the periods presented and the fair value of the net identifiable assets acquired.
Folksamerica provided a net loss of $10.5 million during 2000 versus $44.9 million of net income during 1999 and $10.0 million of net income for 1998. Folksamerica's contribution for 1998 included $4.5 million of net income as an unconsolidated insurance affiliate.
A summary of Folksamerica's 2000, 1999 and 1998 underwriting results follows. Folksamerica's underwriting results presented for 1998 reflects activity for the full calendar year which includes activity prior to Folksamerica becoming a consolidated subsidiary of White Mountains.
During 2000 Folksamerica acquired Risk Capital which served to significantly increase its written and earned premiums in that year. During 1999, Folksamerica's written premium volume decreased 5% versus 1998 despite its acquisition of USF Re during mid-1999. The premium volume decrease in 1999 excluding USF Re primarily reflects increased non-renewed business due to deteriorating terms and conditions.
The structure of Folksamerica's acquisitions often provides effective economic protections to offset potential post-acquisition loss development. Folksamerica's statutory combined ratios do not reflect such protections which are recorded at the holding company level. For 2000 and 1999, Folksamerica recorded $27.8 million and $20.3 million of net after tax benefits, respectively, resulting from favorable purchase structures which mitigate the impact of future adverse loss development from such acquisitions. These benefits for 2000 consisted of a $6.8 million after tax reduction in the USF Re seller note, $10.0 million of various purchase price adjustments and $11.0 million of net after tax deferred credit amortization. These benefits for 1999 consisted of a $14.0 million after tax reduction in the USF Re seller note and $6.3 million of net after tax deferred credit amortization.
Folksamerica's 1998 statutory combined ratio of 108.0% included two property events experienced during the year (Canadian ice storms and Hurricane Georges) and higher than anticipated asbestos and environmental losses.
(a) For the years 1990 and 1991 liabilities are shown net of reinsurance recoverable. For the years 1992 through 2000 liabilities are shown without regard to reinsurance recoverable in accordance with SFAS No. 113. The table excludes the insurance operations of VGI and IAG whose liability for unpaid losses and LAE totalled $55.6 million, $68.9 million, $88.5 million, $71.9 million and $65.4 million as of December 31, 2000, 1999, 1998, 1997 and 1996, respectively.
On October 15, 1999, the Company concluded its acquisition of the IAG companies (PIC, ACIC and BICC) for $86.7 million in cash. Because the cost of these companies was less than the fair value of their net identifiable assets at October 15, 1999, the Company recorded a $62.0 million deferred credit ($37.0 million and $57.7 million as of December 31, 2000 and 1999, respectively) that will be amortized to income over the estimated period of benefit of three years.
On June 17, 1999, the Company completed the VGI Sale and recorded a pretax gain of $88.1 million ($53.8 million after tax) on the transaction. As part of the VGI Sale, White Mountains has provided Unitrin, Inc. with certain adverse loss development protections that will be settled as of December 31, 2002. During 2000 White Mountains provided $5.4 million in reserves for such adverse loss development protections.
MSA contributed $1.0 million to net income during the year ended December 31, 2000 versus $9.8 million for 1999 and $3.2 million for 1998. MSA's net income for 2000 was adversely impacted by significant realized losses on its investment portfolio whereas MSA's net income for 1999 benefitted by significant realized investment gains.
During 2000 FSA provided a $3.6 million net loss for the interim period though July 5, 2000 which resulted from realized investment losses in FSA's investment portfolio and increased expenses for employee equity-based compensation programs, which rose significantly after FSA's announcement of its acquisition by Dexia. FSA contributed $15.7 million to net income during the year ended December 31, 1999 versus $9.3 million during 1998. The significant increase in FSA-related net income during 1999 resulted from increased equity in earnings resulting from the additional purchase of $50.0 million of FSA Common Stock and the exercise of FSA Options, each occurring during 1999.
Net realized gains on investments and the total net investment return from White Mountains' investment activities (excluding net unrealized investment holding gains from White Mountains' investments in unconsolidated insurance affiliates) are shown below:
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 in the event of net losses incurred by such companies. Prior to the Redomestication, the Company filed a consolidated United States income tax return with its subsidiaries. The Onshore Companies continue to file United States tax returns but may no longer do so on a group-wide consolidated basis. As a result, the aggregate United States Federal income tax liability of the Onshore Companies may be higher than it otherwise would have been if part of a consolidated tax return. These factors may serve to increase or decrease White Mountains' effective tax rate for 1999 and beyond, depending on the events and circumstances occurring during such periods.
The Company has historically secured revolving credit agreements whereby it could borrow funds at short-term market interest rates. As of December 31, 1999 the Company could borrow up to $50.0 million under a short-term debt facility which the Company let expire in 2000. There were no borrowings outstanding under this facility at December 31, 1999.
During 2000, 1999 and 1998 the Company repurchased 65,838 Shares for $8.3 million, 1,020,150 Shares for $139.5 million and 151,916 Shares for $19.8 million, respectively. In conformance with Bermuda law, the Company retires all Shares repurchased. During 2000 the Company declared and paid cash dividends totalling $1.20 per Share. During 1999 and 1998 the Company declared and paid cash dividends totalling $1.60 per Share. Shares repurchased and dividends paid from 1998 to 2000 represented returns of excess capital to shareholders. White Mountains had typically paid its dividends quarterly but in August 2000 announced that it would pay future dividends annually at an expected rate of $1.00 per Share.
In connection with the CGU transaction, White Mountains has entered into an $875.0 million Credit Agreement (the "Credit Agreement") with Lehman Brothers Inc. ("Lehman") as well as arranging for up to $741.0 million of new equity commitments from a small group of outside investors. In connection with financing the transaction, White Mountains will contribute Folksamerica, PIC and MSA to CGU.
The total consideration to be paid for each validly tendered and consented note due in 2003 will be based upon a fixed spread of 95 basis points over the yield to maturity on the applicable reference U.S. Treasury Note, and includes a consent payment of $30.00 per $1,000 principal amount of such notes. The total consideration to be paid for each validly tendered and consented note due 2008 will be based upon a fixed spread of 125 basis points over the yield to maturity on the applicable reference U.S. Treasury Note, and includes a consent payment of $30.00 per $1,000 principal amount of such notes. The Note Offer pricing date is expected to be April 11, 2001. Accrued and unpaid interest up to, but not including, the payment date will be paid for notes validly tendered and accepted for purchase.
The Note Offer is conditioned upon, among other things, (i) there being validly tendered and not withdrawn not less than a majority in aggregate principal amount of outstanding notes, (ii) the execution of the supplemental indenture governing the notes and (iii) the consummation of White Mountains' acquisition of CGU.
Under the insurance laws of New York 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 regarding the amount of such dividends that may be paid by Folksamerica Reinsurance Company in the future.
As part of the Folksamerica acquisition in 1998, White Mountains agreed to repay or refinance Folksamerica's existing long-term indebtedness by utilizing a six-year revolving credit agreement whereby Folksamerica could borrow up to $120.0 million at market interest rates. This facility was repaid and terminated by Folksamerica during 2000 as described above.
In March 2000 Folksamerica acquired PCA for $122.3 million in cash.
In May 2000 Folksamerica acquired Risk Capital for $20.3 million in cash plus related expenses.
In 1999 Folksamerica acquired USF Re for total consideration of $92.5 million. The purchase consideration included the issuance of a $20.8 million, five-year note by Folksamerica (which has been reduced to zero at year-end 2000 due to adverse loss development at USF Re post acquisition) with the balance paid in cash.
FIXED MATURITY PORTFOLIO. In connection with the Company's consolidated insurance and reinsurance subsidiaries, White Mountains invests in interest rate sensitive securities, primarily debt securities. White Mountains' strategy is to purchase fixed maturity investments that are attractively priced in relation to perceived credit risks. White Mountains' investments in fixed maturity investments are held as available for sale and, accordingly, White Mountains accepts that realized and unrealized losses on these instruments may occur. White Mountains does not use derivative securities to manage its interest rate risk associated with its fixed maturity investments, rather it manages the average duration of the fixed maturity portfolio in the anticipation of achieving an adequate yield without subjecting the portfolio to an unreasonable level of interest rate risk.
The Company's fixed maturity portfolio is comprised of primarily investment grade corporate securities, U.S. government and agency securities, municipal obligations and mortgage-backed securities. Based on ratings by the NAIC, 100% of the Company's total fixed maturity portfolio at December 31, 2000 is considered to be investment grade (i.e., received a rating from the NAIC of 1 or 2).
The table below summarizes the estimated effects of hypothetical increases and decreases in market interest rates on White Mountains' fixed maturity portfolio and long-term fixed rate indebtedness outstanding. Significant variations in market interest rates could produce changes in the timing of repayments due to prepayment options available to the issuer or the holder which are not reflected herein. It is assumed that the changes occur immediately and uniformly to each category of instrument containing interest rate risk.
The table below summarizes White Mountains' equity price risks as of December 31, 2000 and shows the effects of a hypothetical 20% increase and a 20% decrease in market prices as of that date.