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STATE OF MAINE
DEPARTMENT OF PROFESSIONAL AND FINANCIAL REGULATION
BUREAU OF INSURANCE

IN RE:

FORM A STATEMENT OF WHITE MOUNTAINS INSURANCE GROUP LTD., WHITE MOUNTAINS HOLDINGS (BARBADOS) SRL, WM ASSET MANAGEMENT (BARBADOS) LTD., WM BRIDGETOWN (BARBADOS) LTD., WM ENTERPRISES (BARBADOS) LTD., TACK HOLDING CORP., TACK ACQUISITION CORP. AND MR. JOHN J. BYRNE PERTAINING TO THE ACQUISITION OF CONTROL OF COMMERCIAL UNION YORK INSURANCE COMPANY

Docket No. INS 00-3031

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DECISION AND ORDER

This Decision and Order is issued in the above-captioned proceeding by Eric A. Cioppa, Deputy Superintendent of the Maine Bureau of Insurance. All legal authority for the procedural processing and decision making with respect to this proceeding has been delegated by Superintendent Alessandro A. Iuppa to Deputy Superintendent Eric A. Cioppa pursuant to Order dated November 8, 2000.

  1. THE PROPOSED ACQUISITION

    On October 23, 2000, White Mountains Insurance Group, Ltd. ("White Mountains"), White Mountains Holdings (Barbados) SRL, TACK Holding Corp. and TACK Acquisition Corp. (collectively, the "Applicants")1 submitted to the Maine Bureau of Insurance in the above-captioned proceeding a Form A Statement seeking approval of their proposed acquisition of control of Commercial Union York Insurance Company ("CU York"). The Applicants propose to acquire control of CU York through the purchase of all of the issued and outstanding shares of CU York’s indirect parent company, CGU Corporation ("CGUC") from CGNU plc, a company incorporated under the laws of England and Wales (the "Proposed Acquisition"). As a result of the Proposed Acquisition, the Applicants will acquire CGUC and all of the United States domiciled property and casualty insurance company subsidiaries of CGUC, including CU York.

    1 In addition to these entities, the term "Applicants" also includes WM Asset Management (Barbados) LTD, WM Bridgetown (Barbados) LTD, WM Enterprises (Barbados) LTD, and Mr. John J. Byrne, having been added as acquiring persons by the terms of Amendment No. 1 to the Form A Statement.

    The Proposed Acquisition will be effected pursuant to a Stock Purchase Agreement among CGU International Holdings Luxembourg, S.A., a Luxembourg Corporation ("CGU-Luxembourg"), CGU Holdings LLC, a Delaware limited liability company ("CGU-Delaware"), CGNU plc, White Mountains, TACK Holding Corp. and TACK Acquisition Corp. CGU-Luxembourg and CGU-Delaware are both indirect wholly-owned subsidiaries of CGNU plc. CGU-Luxembourg owns approximately 54.1% of the outstanding stock of CGUC, and CGU-Delaware owns the remaining approximately 45.9% of such stock.

    Prior to the Proposed Acquisition taking effect, CGUC and certain of its subsidiaries propose to enter into several transactions in connection with the Proposed Acquisition. The purpose of these transactions may be summarized as follows: (i) to sell assets to be retained by CGNU plc; (ii) to pay off certain inter-affiliate indebtedness of CGUC (approximately $1.1 billion); and (iii) to strengthen the reserves of the CGUC insurers through reserve strengthening and the purchase of two reinsurance covers. Some of these transactions have already taken place, and others are proposed to take place immediately prior to closing. By letter dated November 21, 2000, a request was filed seeking an exemption from the Form A filing requirements for certain of the pre-closing corporate transactions.

    With respect to the reinsurance, the first reinsurance cover involves a reinsurance agreement with National Indemnity Company, a Nebraska-domiciled insurance company ("NICO"), covering certain discontinued operations liabilities of the CGUC insurers including asbestos and environmental exposures. The second reinsurance cover involves a reinsurance agreement with General Reinsurance Corporation, a Delaware corporation ("GenRe"), covering certain continuing operations liabilities of the CGUC insurers for accident years 2000 and prior. The NICO coverage will provide $2.5 billion in reinsurance protection, and the GenRe coverage will provide $570 million in reinsurance protection.

    As of the submission of the Form A Statement, White Mountains had 5.9 million common shares issued and outstanding. In connection with the Proposed Acquisition, White Mountains and its subsidiary, TACK Acquisition Corp., will issue equity securities and warrants to purchase White Mountains common shares. Specifically, prior to the closing, White Mountains will issue convertible preferred shares to a group of investors for aggregate consideration of $441 million. TACK Holding Corp. will issue to White Mountains or an affiliate of White Mountains, in exchange for $875 million in cash, shares of its common stock. In addition, TACK Acquisition Corp. will issue to Berkshire Hathaway, Inc. ("Berkshire Hathaway") $300 million of non-voting preferred shares for a purchase price of $225 million. For a purchase price of $75 million, White Mountains also will issue to Berkshire Hathaway warrants to purchase 1,714,285 of its common shares at an exercise price of $175 per share. In addition, TACK Acquisition Corp. will borrow approximately $875 million ($700 million in term loans and $175 million in revolving credit) from certain institutional lenders through credit facilities arranged by Lehman Brothers, Inc. White Mountains and TACK Holding Corp. will contribute cash and certain insurance company subsidiaries to TACK Acquisition Corp. TACK Acquisition Corp. will then purchase all of the shares of CGUC for approximately $1.91 billion (+/- the Sales Proceeds Variance).

    On March 12, 2001, Amendment No. 1 to the Form A Statement (the "Amendment") was filed. The Amendment addresses the execution on February 20, 2001 of a second amendment to the Stock Purchase Agreement relating to the purchase by White Mountains of the U.S. property and casualty operations of CGNU plc. The overall structure of the Proposed Acquisition did not change following the Amendment. Specifically, the purchase price, transaction structure (i.e. the method for effecting the proposed acquisition at closing) and the insurance operations being acquired did not change. Some of the principal changes identified by the Applicants include: (i) the contribution of $200 million to CGUC by CGNU plc; (ii) an increase of $50 million in the portion of the purchase price that will be settled by the "TACK Holding Corp. Notes"; (iii) certain changes in the terms of the "TACK Holding Corp. Notes"; (iv) an increase of at least $125 million of White Mountains equity investment in TACK Acquisition Corp.; and (v) the purchase of additional reinsurance coverage against adverse loss development (the aforementioned reinsurance agreement with GenRe). The Amendment also included the following additional Applicants as acquiring persons in this proceeding: WM Asset Management (Barbados) LTD, WM Bridgetown (Barbados) LTD, WM Enterprises (Barbados) LTD, and Mr. John J. Byrne.

  2. PROCEDURAL HISTORY

    A Notice of Pending Proceeding and Prehearing Conference was issued by the Deputy Superintendent on November 8, 2000. The prehearing conference was held as scheduled on November 27, 2000. Identified in the notice for consideration at the prehearing conference was a request of the Applicants, dated October 23, 2000 (the "October 23rd Request"), that the Superintendent:

    1. determine that certain investors will not "control" CU York following the completion of the Proposed Acquisition within the meaning of 24-A M.R.S.A. § 222 (2)(B), or, alternatively;
    2. exempt those investors from any requirement to file a Form A Statement in connection with the Proposed Acquisition pursuant to the Superintendent’s authority under 24-A M.R.S.A. § 222 (4-A).

    The investors subject to the October 23rd Request are:

    1. Franklin Mutual Advisers, LLC ("Franklin"), a United States subsidiary of Franklin Resources, Inc., a California-based investment management organization publicly traded on the New York Stock Exchange,
    2. Berkshire Hathaway, Inc., a Delaware holding company publicly traded on the New York Stock Exchange, and
    3. John J. Byrne, an individual and the Chairman of the Board and Chief Executive Officer of White Mountains ("Mr. Byrne") (collectively, the "Investors").

    Following the consummation of the Proposed Acquisition, each of the Investors will have control or own in excess of ten percent (10%) of White Mountains’ voting stock on a fully diluted basis, assuming conversion of all outstanding convertible preferred shares and the exercise of all outstanding stock warrants.

    On December 11, 2000, the Deputy Superintendent issued two Orders: (a) an Order on Request for Determination of Non-Control or, Alternatively, Exemption from Form A Filing Requirements With Respect to Certain Investors; and (b) an Order on Request for Determination of Non-Control or, Alternatively, Exemption from Form A Filing Requirements With Respect to Certain Pre-Closing Corporate Transactions. Pursuant to the Order with Respect to Certain Investors, the Deputy Superintendent found that Franklin, Berkshire Hathaway and Mr. Byrne would possess "control" over White Mountains as a result of the Proposed Acquisition, but provided Franklin and Berkshire Hathaway an exemption to the Form A hearing and approval requirements of 24-A M.R.S.A. § 222 (4-A) (B) and (C) (declining to grant such an exemption for Mr. Byrne). Pursuant to the Order with Respect to Certain Pre-Closing Corporate Transactions, the Deputy Superintendent found that the transactions would result in an "acquisition of control" by CGU-Pennsylvania of CU York but provided CGU-Pennsylvania an exemption to the Form A hearing and approval requirements of 24-A M.R.S.A. § 222 (4-A) (B) and (C).

    The Applicants submitted a Request for Reconsideration, dated December 20, 2000, of the Deputy Superintendent’s Order with Respect to Certain Investors. Specifically, the Applicants requested reconsideration of the Deputy Superintendent’s determination that Franklin and Berkshire Hathaway are subject to the filing requirements of 24-A M.R.S.A. § 222 (4-A) (A) and that Mr. Byrne is subject to the Form A filing and approval requirements of 24-A M.R.S.A. § 222 (4-A) (A), (B) and (C) including the requirement that he be added as an "acquiring person" in this proceeding.

    Following separate written notices issued by the Deputy Superintendent on December 21, 2000 and April 20, 2001, respectively, two conferences of counsel were conducted for purposes of hearing oral argument on the Applicants’ Request for Reconsideration. The conferences were held as scheduled on December 22, 2000 and April 25, 2001. At the conferences, the Deputy Superintendent heard further argument and posed questions to the parties.

    By Order dated April 27, 2001, the Deputy Superintendent found that Franklin and Berkshire Hathaway would not acquire actual control of White Mountains for purposes of 24-A M.R.S.A. § 222 (4-A) as a result of the pending Form A transaction, but that Mr. John J. Byrne would acquire actual control of CGUC.

    By a Notice of Hearing dated November 28, 2000, a hearing on the Proposed Acquisition was scheduled for January 10, 2001, and an intervention deadline of December 15, 2000 was established. No applications for intervention have been made in this proceeding.

    On January 5, 2001, the Applicants filed a Motion for Continuance of Hearing, which was granted by the Deputy Superintendent on the same day. Following the issuance of a Notice of Continued Hearing on April 27, 2001, the hearing originally scheduled for January 10, 2001 was held on May 11, 2001.

  3. THE RECORD

    At the hearing, the Deputy Superintendent admitted the following materials into the record of this proceeding:

    1. The Applicants’ Form A Statement, as amended and supplemented;
    2. All of the Applicants’ responses to the various information requests in this proceeding, including but not limited to the following:
      1. Written Response to Questions Raised at the November 27, 2000 Prehearing Conference;
      2. Response to First Discovery Request of the Deputy Superintendent, dated December 27, 2000;
      3. Response to Request for Information Concerning Certain Investors, dated December 27, 2000;
      4. Response to Request for Information with Respect to Certain Pre-Closing Corporate Transactions, dated December 27, 2000;
      5. Response to Second Discovery Request of the Deputy Superintendent, dated April 25, 2001;
      6. Response to E-mail Request of Thomas C. Sturtevant, Jr., dated May 2, 2001.
    3. The KPMG Report distributed by the Applicants’ at the April 25, 2001 Prehearing Conference.
    4. The financial and other proprietary information of Mr. John J. Byrne, which information has been designated confidential pursuant to Protective Order issued April 26, 2001.
    5. The official Transcripts from the December 22, 2000 and the April 25, 2001 Prehearing Conferences.
    6. All written orders and rulings issued by the Deputy Superintendent in this proceeding.
    7. The Pre-filed Testimony of the Applicants’ witnesses: James Joseph Ritchie, William H. Jensen, Jr. and Roger M. Singer.

    In addition to the foregoing, the oral testimony presented at the hearing by the Applicants’ witness panel will be included in the record, as contained in the official Transcript of the hearing, as well as the Exhibits offered and admitted at hearing.

  4. STANDARD OF REVIEW

    As identified in both the Notice of Hearing and the Notice of Continued Hearing issued in this proceeding, the legal standard of review for consideration of the pending application include the following legal standards of review under 24-A M.R.S.A. §§ 222(7)(A) and 3476(2):

    1. whether, after the proposed change of control, CU York could satisfy the requirements for the issuance of a certificate of authority according to requirements in force at the time of the issuance, or last renewal or continuation of its certificate of authority to do the insurance business which it intends to transact in the State of Maine;
    2. whether the effect of the proposed acquisition of control may be substantially or materially to lessen competition in insurance or the insurance business in the State of Maine or elsewhere as to the kinds of insurance involved, or would materially tend to create a monopoly as to such business therein, or would violate the laws of the State of Maine or of the United States relating to monopolies or restraints of trade;
    3. whether the financial condition of the Applicants is such as would jeopardize the financial stability of CU York or prejudice the interest of its policyholders;
    4. whether the Applicants’ proposed plans or proposals to make any major change in the business or corporate structure or management of CU York are unfair or prejudicial to policyholders;
    5. whether the competence, experience and integrity of the Applicants indicate that it would not be in the interest of policyholders or the public to permit them to control the operation of CU York; and whether the Applicants are qualified by character, experience and financial responsibility to control and operate CU York, or cause it to be operated, in a lawful and proper manner;
    6. whether the proposed acquisition of control would tend to affect adversely the contractual obligations of CU York or its ability and tendency to render service in the future to its policyholders and the public; and
    7. whether the interests of CU York or its other stockholders would be impaired through the proposed change of control.

    In addition to the legal standards of review under 24-A M.R.S.A. §§ 222(7)(A) and 3476(2) as identified in items (1) through (7) above, the Deputy Superintendent, in his discretion, has the authority to consider such other relevant issues identified by participating parties or otherwise. No other issues were presented for consideration.

  5. FINDINGS OF FACT AND CONCLUSIONS OF LAW

    At the hearing held on May 11, 2001, testimonial evidence was presented in a panel format by the Applicants’ witnesses, comprised of: James Joseph Ritchie, Chief Financial Officer of TACK Acquisition Corp.; William H. Jensen, Jr., Vice President and Controller of CGUC; Roger M. Singer, Senior Vice President and General Counsel of CGUC and CU York, and Reid T. Campbell, Vice President and Director Finance of White Mountains. Mr. Ritchie’s testimony provided an overview of the Proposed Acquisition, the financial impact of the Proposed Acquisition, and the Applicants’ future plans for CU York. Mr. Jensen testified about the financial projections and assumptions underlying the Proposed Acquisition. The testimony of Mr. Singer focused on the impact of the Proposed Acquisition on the policyholders of CU York. Mr. Campbell provided testimony in support of the other witnesses.

    Based on the testimonial and documentary evidence presented at the hearing, and upon a review of the record of this proceeding, the Deputy Superintendent finds that no issues of material concern exist with respect to the Applicants’ abilities to satisfy the legal standards for approval set forth in 24-A M.R.S.A. §§ 222(7)(A) and 3476(2), summarized as follows:

    1. No evidence was presented to the contrary, and the Deputy Superintendent finds, that CU York can satisfy the requirements for the issuance of a certificate of authority according to requirements in force at the time of the issuance, or last renewal or continuation of its certificate of authority to do the insurance business which it intends to transact in the State of Maine.
    2. No evidence was presented that demonstrates, and the Deputy Superintendent does not find, that the Proposed Acquisition will substantially lessen competition in insurance or the insurance business in the State of Maine or elsewhere as to the kinds of insurance involved, or would materially tend to create a monopoly as to such business therein, or would violate the laws of the State of Maine or of the United States relating to monopolies or restraints of trade.
    3. No evidence was presented that demonstrates, and the Deputy Superintendent does not find, that the Proposed Acquisition would jeopardize the financial stability of CU York or prejudice the interest of its policyholders.
    4. No evidence was presented that demonstrates, and the Deputy Superintendent does not find, that the Applicants’ proposed plans or proposals with respect to the business or corporate structure or management of CU York are unfair or prejudicial to policyholders.
    5. No evidence was presented to the contrary, and the Deputy Superintendent finds, that the competence, experience and integrity of the Applicants indicates that it would be in the interest of policyholders or the public to permit them to control the operation of CU York; and that the Applicants are qualified by character, experience and financial responsibility to control and operate CU York, or cause it to be operated, in a lawful and proper manner.
    6. No evidence was presented that demonstrates, and the Deputy Superintendent does not find, that the proposed acquisition of control would tend to affect adversely the contractual obligations of CU York or its ability and tendency to render service in the future to its policyholders and the public.
    7. No evidence was presented that demonstrates, and the Deputy Superintendent does not find, that the interests of CU York or its other stockholders would be impaired through the proposed change of control.

    For all of the foregoing reasons, the Deputy Superintendent concludes that the Applicants’ have met the legal standards for approval set forth in 24-A M.R.S.A. §§ 222(7)(A) and 3476(2).

  6. ORDER

    The application of White Mountains Insurance Group, Ltd., White Mountains Holdings (Barbados) SRL, WM Asset Management (Barbados) Ltd., WM Bridgetown (Barbados) Ltd., WM Enterprises (Barbados) Ltd., TACK Holding Corp., TACK Acquisition Corp., and Mr. John J. Byrne for approval of the acquisition of control of Commercial Union York Insurance Company is APPROVED; provided, however, that it is ORDERED that the Applicants and CU York shall be subject to the following notice requirements:

    1. the Superintendent shall be provided copies of all written decisions or conditions of any regulatory authority that are imposed on, related to or arising out of the Proposed Acquisition;
    2. the Superintendent shall be provided written notice of any material change to the NICO or GenRe reinsurance covers within 30 days of the effective date of such changes; and
    3. the Superintendent shall be provided written notice of any rating actions taken by a rating organization affecting any of the CGUC insurance companies within 10 days of such actions.

    Furthermore, as established by the Order on Request for Reconsideration, the occurrence of any of the following events will be deemed to be a "material change" for purposes of 24-A M.R.S.A. § 222 (8)(D) and, as such, it is ORDERED that, on behalf of the Applicants, CU York shall provide written notice to the Superintendent of any such occurrence in accordance with the requirements of sub-section (8)(D):

    1. Any proposal or action is initiated to amend the White Mountains Bye-Laws, including Bye-law 47, that would alter in any way the 9.9% voting power limitation;
    2. Berkshire Hathaway or Franklin, directly or indirectly, obtain any Board of Director representation in White Mountains or any of its affiliates; or
    3. Berkshire Hathaway or Franklin otherwise acquire the possession, direct or indirect, of the power to direct or cause the direction of the management and policies of White Mountains or any of its affiliates.

    The notice requirements in this Order shall be in addition to, and shall not take the place of, any other required notice or action required of CU York or its affiliates under applicable law.

  7. NOTICE OF APPEAL RIGHTS

    This Decision and Order is a final agency action of the Superintendent of Insurance within the meaning of the Maine Administrative Procedure Act. It may be appealed to the Superior Court in the manner provided by 24-A M.R.S.A. § 236, 5 M.R.S.A. § 11001, et seq. and M.R. Civ. P. 80C. Any party to the proceeding may initiate an appeal within thirty days after receiving this notice. Any aggrieved non-party whose interests are substantially and directly affected by this Decision and Order may initiate an appeal within forty days of the issuance of this decision. There is no automatic stay pending appeal; application for stay may be made in the manner provided in 5 M.R.S.A. § 11004.

PER ORDER OF THE SUPERINTENDENT OF INSURANCE

 

DATED: ____________________ By: _______________________________
    ERIC A. CIOPPA
Deputy Superintendent of Insurance

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Last Updated: July 16, 2008