<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
_______________
FORM 11-K
ANNUAL REPORT
PURSUANT TO SECTION 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
[X] ANNUAL REPORT PURSUANT TO SECTION 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 [NO FEE REQUIRED].
For the fiscal year ended December 31, 1998.
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 [NO FEE REQUIRED].
For the transition period from _____________ to ____________.
Commission file number
A. Full title of the plan and the address of the plan, if different from that
of the issuer named below: Highlands Insurance Group Employees' Retirement and
Savings Plan.
B. Name of issuer of the securities held pursuant to the plan and the address
of its principal executive office: Highlands Insurance Group, Inc., 1000 Lenox
Drive, Lawrenceville, New Jersey 08648.
<PAGE>
HIGHLANDS INSURANCE GROUP
EMPLOYEES' RETIREMENT AND SAVINGS PLAN
ANNUAL REPORT ON FORM 11-K
December 31, 1998
INDEX
PAGE
----
AUDITED FINANCIAL STATEMENTS AND REPORT OF INDEPENDENT AUDITORS............ ii
Exhibits................................................................... iv
i
<PAGE>
HIGHLANDS INSURANCE GROUP
EMPLOYEES' RETIREMENT AND SAVINGS PLAN
Financial Statements
December 31, 1998 and 1997
(With Independent Auditors'
Report Thereon)
ii
<PAGE>
HIGHLANDS INSURANCE GROUP
EMPLOYEES' RETIREMENT AND SAVINGS PLAN
TABLE OF CONTENTS
Page
Independent Auditors' Report 1
FINANCIAL STATEMENTS
Statements of Net Assets Available for Plan Benefits with Fund
Information - December 31, 1998 and 1997 2-3
Statement of Changes in Net Assets Available for Plan Benefits
with Fund Information - Year ended December 31, 1998 4
Notes to Financial Statements 5-9
SUPPLEMENTAL SCHEDULES
1 Item 27(a) Schedule of Assets Held for Investment Purposes -
December 31, 1998 10
2 Item 27(d) Schedule of Reportable Transactions - Year ended
December 31, 1998 11
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Administrative Committee of the
Highlands Insurance Group
Employees' Retirement and Savings Plan:
We have audited the accompanying statements of net assets available for plan
benefits with fund information of Highlands Insurance Group Employees'
Retirement and Savings Plan (the Plan) as of December 31, 1998 and 1997, and the
related statement of changes in net assets available for plan benefits with fund
information for the year ended December 31, 1998. These financial statements
are the responsibility of the Plan's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the net assets available for plan benefits of Highlands
Insurance Group Employees' Retirement and Savings Plan as of December 31, 1998
and 1997, and the changes in net assets available for plan benefits for the year
ended December 31, 1998, in conformity with generally accepted accounting
principles.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The supplemental schedules of assets
held for investment purposes and reportable transactions are presented for the
purpose of additional analysis and are not a required part of the basic
financial statements but are supplementary information required by the
Department of Labor Rules and Regulations for Reporting and Disclosure under the
Employee Retirement Income Security Act of 1974. The fund information in the
statements of net assets available for plan benefits and the statement of
changes in net assets available for plan benefits is presented for purposes of
additional analysis rather than to present the net assets available for plan
benefits and changes in net assets available for plan benefits of each fund.
The supplemental schedules have been subjected to the auditing procedures
applied in the audits of the basic financial statements and, in our opinion, are
fairly stated, in all material respects, in relation to the basic financial
statements taken as a whole.
June 18, 1999
<PAGE>
HIGHLANDS INSURANCE GROUP
EMPLOYEES' RETIREMENT AND SAVINGS PLAN
Statement of Net Assets Available for Plan Benefits with Fund Information
December 31, 1998
<TABLE>
<CAPTION>
Stable Highlands
Bond Life Solutions Value Insurance Matrix Templeton
Fund of Growth Income Group Equity Foreign
America Fund Fund Stock Fund Fund
----------- -------------- ------- --------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
Assets:
Investments at fair value (note 2):
Mutual funds $2,619,376 20,876,706 18,413,090 763,552 14,635,844 875,168
Participants loans - - - - - -
---------- ---------- ---------- ------- ---------- -------
Total investments at fair value 2,619,376 20,876,706 18,413,090 763,552 14,635,844 875,168
---------- ---------- ---------- ------- ---------- -------
Receivable - employer's profit sharing
contribution - - - - - -
Cash - - - - - -
---------- ---------- ---------- ------- ---------- -------
Total assets 2,619,376 20,876,706 18,413,090 763,552 14,635,844 875,168
Accrued liabilities - - - - - -
---------- ---------- ---------- ------- ---------- -------
Net assets available for plan benefits 2,619,376 20,876,706 18,413,090 763,552 14,635,844 875,168
========== ========== ========== ======= ========== =======
</TABLE>
<TABLE>
<CAPTION>
Franklin
Participant Small Cap
loans Fund Other Total
----------- ---------- ------ ----------
<S> <C> <C> <C> <C>
Assets:
Investments at fair value (note 2):
Mutual funds - 1,903,331 - 60,087,067
Participants loans 1,416,666 - - 1,416,666
--------- --------- ------- ----------
Total investments at fair value 1,416,666 1,903,331 - 61,503,733
--------- --------- ------- ----------
Receivable - employer's profit sharing
contribution - - 191,960 191,960
Cash - - 191,202 191,202
--------- --------- ------- ----------
Total assets 1,416,666 1,903,331 383,162 61,886,895
Accrued liabilities - - 114,370 114,370
--------- --------- ------- ----------
Net assets available for plan benefits 1,416,666 1,903,331 268,792 61,772,525
========= ========= ======= ==========
</TABLE>
See accompanying notes to financial statements.
<PAGE>
HIGHLANDS INSURANCE GROUP
EMPLOYEES' RETIREMENT AND SAVINGS PLAN
Statement of Net Assets Available for Plan Benefits with Fund Information
December 31, 1997
<TABLE>
<CAPTION>
Stable
Balanced Life Solutions Value Income and Matrix Active
Growth Growth Income Growth Equity International
Portfolio Fund Fund Portfolio Fund Fund
------------ -------------- ---------- ----------- --------- -------------
<S> <C> <C> <C> <C> <C> <C>
Assets:
Investments at fair value (note 2):
Mutual funds $17,559,388 3,514,451 14,005,111 1,471,948 6,940,869 139,783
Participants loans - - - - - -
----------- --------- ---------- --------- --------- -------
Total investments at fair value 17,559,388 3,514,451 14,005,111 1,471,948 6,940,869 139,783
----------- --------- ---------- --------- --------- -------
Receivable - employer's profit sharing
contribution - - - - - -
Cash - - - - - -
----------- --------- ---------- --------- --------- -------
Total assets 17,559,388 3,514,451 14,005,111 1,471,948 6,940,869 139,783
Accrued liabilities - - - - - -
----------- --------- ---------- --------- --------- -------
Net assets available for plan benefits 17,559,388 3,514,451 14,005,111 1,471,948 6,940,869 139,783
=========== ========= ========== ========= ========= =======
</TABLE>
<TABLE>
<CAPTION>
Participant
loans Other Total
----------- --------- ---------
<S> <C> <C> <C>
Assets:
Investments at fair value (note 2):
Mutual funds - - 43,631,550
Participants loans 964,807 - 964,807
------- ------- ----------
Total investments at fair value 964,807 - 44,596,357
------- ------- ----------
Receivable - employer's profit sharing
contribution - 478,091 478,091
Cash - 206,721 206,721
------- ------- ----------
Total assets 964,807 684,812 45,281,169
Accrued liabilities - 106,613 106,613
------- ------- ----------
Net assets available for plan benefits 964,807 578,199 45,174,556
======= ======= ==========
</TABLE>
See accompanying notes to financial statements.
<PAGE>
HIGHLANDS INSURANCE COMPANY EMPLOYEES
RETIREMENT & SAVINGS PLAN
Statement of Changes in Net Assets Available for Plan Benefits
Year ended December 31, 1998
<TABLE>
<CAPTION>
Life Highlands
Income and Balance Bond Solutions Stable Insurance Matrix
Growth Growth Fund Growth Value Income Group Equity
Accounts Portfolio Portfolio of America Fund Fund Stock Fund
- -------- ----------- ---------- ---------- ----------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Additions to net assets
Contributions:
Employer $ 20,711 91,463 2,564 101,315 349,831 404,106 155,242
Employee 17,657 58,959 98,022 362,937 466,967 11,601 524,144
Rollover 9,603 4,824 17,152 28,301 68,820 146 81,260
----------- ----------- --------- ---------- ---------- ------- -----------
Total contributions 47,971 155,246 117,738 492,553 885,618 415,853 760,646
Investment income - interest and
dividend income - - 95,053 - 911,580 770 -
Net appreciation (depreciation) (170,146) (4,213,215) (48,984) 394,660 (36,516) (45,968) 1,158,619
Realized gains (losses) 299,565 5,871,745 (23,669) (99,320) - (31,471) 440,199
----------- ----------- ---------- ---------- ---------- ------- ---------
Net gain (loss) 129,419 1,658,530 (72,653) 295,340 (36,516) (77,439) 1,598,818
Total investment income 129,419 1,658,530 22,400 295,340 875,064 (76,669) 1,598,818
Transfer in from ARI Plan - - 1,711,745 3,810,371 3,150,345 - 6,011,282
Total additions 177,390 1,813,776 1,851,883 4,598,264 4,911,027 339,184 8,370,746
Deductions from net assets:
Benefits paid on behalf
of participants 315,346 1,068,165 244,264 1,400,930 2,434,856 1,589 1,624,786
Administrative expenses 60 103 597 1,119 2,789 - 1,582
----------- ----------- ---------- ---------- ---------- ------- ----------
Total deductions 315,406 1,068,268 244,861 1,402,049 2,437,645 1,589 1,626,368
Increase (decrease) before transfers (138,016) 745,508 1,607,022 3,196,215 2,473,382 337,595 6,744,378
Transfers between funds (1,333,932) (18,304,896) 1,012,354 14,166,040 1,934,597 425,957 950,597
----------- ----------- ---------- ---------- ---------- ------- ----------
Net increase (decrease) in net
assets available for plan benefits (1,471,948) (17,559,388) 2,619,376 17,362,255 4,407,979 763,552 7,694,975
Net assets available for plan benefits -
beginning of year 1,471,948 17,559,388 - 3,514,451 14,005,111 - 6,940,869
----------- ----------- --------- ---------- ---------- ------- ----------
Net assets available for plan benefits -
end of year $ - - 2,619,376 20,876,706 18,413,090 763,552 14,635,844
=========== =========== ========= ========== ========== ======= ==========
</TABLE>
<TABLE>
<CAPTION>
Active
International Franklin
Fund/Templeton Participant Small
Accounts Foreign Fund Loans Cap Fund Other Total
- -------- ----------- ---------- ---------- ------- --------
<S> <C> <C> <C> <C> <C>
Additions to net assets
Contributions:
Employer 11,805 - 2,856 (367,307) 772,586
Employee 89,836 - 120,090 - 1,750,213
Rollover 16,980 - 7,243 - 234,329
-------- --------- --------- -------- ----------
Total contributions 118,621 - 130,189 (367,307) 2,757,128
Investment income - interest and
dividend income 100,679 94,000 28,247 - 1,230,329
Net appreciation (depreciation) (139,104) - (46,427) - (3,147,081)
Realized gains (losses) (38,289) - (154,226) - 6,264,534
-------- --------- --------- -------- ----------
Net gain (loss) (177,393) - (200,653) - 3,117,453
Total investment income (76,714) 94,000 (172,406) - 4,347,782
Transfer in from ARI Plan 548,107 80,806 1,722,722 - 17,035,378
Total additions 590,014 174,806 1,680,505 (367,307) 24,140,288
Deductions from net assets:
Benefits paid on behalf
of participants 94,047 236,005 92,354 15,519 7,527,861
Administrative expenses 167 - 284 7,757 14,458
-------- --------- ---------- --------- ----------
Total deductions 94,214 236,005 92,638 23,276 7,542,319
Increase (decrease) before transfers 495,800 (61,199) 1,587,867 (390,583) 16,597,969
Transfers between funds 239,585 513,058 315,464 81,176 -
-------- --------- ---------- --------- ----------
Net increase (decrease) in net
assets available for plan benefits 735,385 451,859 1,903,331 (309,407) 16,597,969
Net assets available for plan benefits -
beginning of year 139,783 964,807 - 578,199 45,174,556
-------- --------- ---------- --------- ----------
Net assets available for plan benefits -
end of year 875,168 1,416,666 1,903,331 268,792 61,772,525
======== ========= ========= ======== ==========
</TABLE>
See accompanying notes to financial statements.
4
<PAGE>
HIGHLANDS INSURANCE GROUP
EMPLOYEES' RETIREMENT AND SAVINGS PLAN
Notes to Financial Statements
December 31, 1998 and 1997
(1) SUMMARY OF THE PLAN
The following brief description of the Highlands Insurance Group Employees'
Retirement and Savings Plan (the Plan) is provided for general information
purposes only. Participants should refer to the Plan agreement for more
complete information.
The Plan is a defined contribution plan covering eligible employees of
Highlands Insurance Group, Inc., a Delaware corporation, and its subsidiaries
(the Company). The record keeping and administrative services provided for
the Plan were transferred to State Street Bank and Trust (the Trustee)
effective April 1, 1997. In addition, in connection with this transfer, the
available investment options for participants were changed based on the
options offered by the Trustee.
Effective July 1, 1998, as approved by the Board of Directors, American
Reliance, Inc. Retirement Plan was merged into the Plan, as amended.
PARTICIPATION
An employee is eligible for participation in the Plan on the first day of
employment. Prior to January 1, 1997, an employee was eligible to
participate in the Plan on the first day of the month following the
completion of one year of service with the employer. The administrative
committee of the Plan consists of members appointed by the board of directors
of the Company.
CONTRIBUTIONS
The Plan allows the participant to contribute between 1% and 15% of
compensation up to an annual maximum of $10,000 and $9,500 in 1998 and 1997,
respectively, in a calendar year, which is nontaxable income. The total
nontaxable contribution in any year is subject to certain limitations set
forth in the Internal Revenue Code. The Company's matching contributions are
equal to the percent declared for the year, if any, by the Company's Board of
Directors, up to 6% of the participant's eligible compensation contributed to
the Plan. For 1998, the Company provided a match of 50% on the first 6% of
pay contributed to the Plan. The Company may also make a discretionary
annual profit sharing contribution at the Plan's year end as determined by
the Board of Directors. Such profit sharing contribution totaled $191,960
for the 1998 Plan year.
For 1998, the employer contributions consisted of an annual profit sharing
and a matching contribution. At the authorization of the Board of Directors,
the employer contributed to an eligible participant's account a profit
sharing amount equal to the participant's eligible earnings, as defined by
the Plan, multiplied by 2%.
In order to be eligible for such contribution for the 1998 plan year, the
participant must have completed one year of service and be actively employed
by the employer on December 31 of the Plan year for which the contribution
applies unless the participant meets certain other conditions specified by
the Plan.
(Continued)
5
<PAGE>
HIGHLANDS INSURANCE GROUP
EMPLOYEES' RETIREMENT AND SAVINGS PLAN
Notes to Financial Statements
December 31, 1998 and 1997
Participants may elect to make after-tax contributions to the Plan, in
addition to their pre-tax contribution, not to exceed 15% and 12% in total
for 1998 and 1997, respectively, of their eligible earnings during the Plan
year. After tax contributions are not subject to company match and/or profit
sharing contributions.
INVESTMENT OPTIONS
From January 1, 1997 through March 31, 1997, the following investment options
were available to Plan participants:
. BALANCED GROWTH PORTFOLIO - Amounts invested in this fund are invested
with a view toward providing capital appreciation from stocks, balanced
with stable income from bonds.
. LIFE SOLUTIONS GROWTH FUND - Amounts invested in this fund are invested
with a view toward providing capital growth by investing primarily in
stocks.
. STABLE VALUE INCOME FUND - Amounts invested in this fund are invested with
a view toward preserving principal and provide a rate of return
competitive with other fixed income investments by investing primarily in
investment contracts.
Effective April 1, 1997, the following additional investment options were
made available to Plan participants:
. INCOME AND GROWTH PORTFOLIO - Amounts invested in this fund are invested
primarily with a view toward providing stable income and opportunity for
moderate growth in a highly diversified portfolio of stocks and bonds.
. MATRIX EQUITY FUND - Amounts invested in this fund are invested with a
view toward producing returns that exceed the S&P 500 Index by investing
primarily in common stock.
. ACTIVE INTERNATIONAL FUND - Amounts invested in this fund are invested
with a view toward providing long-term capital appreciation primarily
through investments in international stocks.
Effective July 1, 1998, the Plan was amended to include the following
investment options to participants:
. AMERICAN BOND FUND OF AMERICA - This bond fund seeks a high level of
current income by investing primarily in investment grade corporate bonds,
U.S. government bonds and money market securities.
. FRANKLIN SMALL CAP GROWTH FUND - This aggressive growth stock fund seeks
maximum capital appreciation by investing in domestic small companies with
market capitalizations generally under $1 billion.
(Continued)
6
<PAGE>
HIGHLANDS INSURANCE GROUP
EMPLOYEES' RETIREMENT AND SAVINGS PLAN
Notes to Financial Statements
December 31, 1998 and 1997
. TEMPLETON FOREIGN FUND I - This international stock fund seeks long-term
capital growth by investing primarily in stocks and, to a lesser degree,
debt obligations of companies and governments outside the United States.
. HIGHLANDS INSURANCE GROUP STOCK FUND - This single stock fund seeks growth
over the long-term through appreciation in the value of Highlands
Insurance Group, Inc. common stock. The Fund provides an opportunity to
become an owner in the Company and share directly in its future
performance.
In addition, the following three investment options were no longer available
to plan participants:
. Income and Growth Portfolio
. Balanced Growth Portfolio
. Active International Fund
Net assets invested in the Active International Fund as of July 1, 1998 were
transferred to the Templeton Foreign Fund. All activity in the two funds
during 1998 have been reported on a combined basis in the accompanying
statement of changes in net assets available for plan benefits.
BENEFITS PAID TO PARTICIPANTS
Upon application and approval by the administrative committee, a participant
may withdraw, during active employment, all or part of his/her after-tax
employee contribution account balance and, under certain conditions, such as
hardship withdrawals, the vested portion of his/her employer contribution
account balance. Participants have a vested interest in the employer
contribution account based on years of service as follows:
VESTED
YEARS OF SERVICE PERCENTAGE
---------------- ----------
Less than 3 0%
At least 3 but less than 4 33-1/3
At least 4 but less than 5 66-2/3
5 or more 100
The right to benefits under the Plan is nonforfeitable upon the attainment of
normal retirement age (age 65 effective July 1, 1998), permanent disability
or death. A retired or disabled participant or the beneficiary of a deceased
participant is entitled to receive the total amounts in the participant and
employer contribution accounts as of the date of retirement, permanent
disability, or death, whether his/her interest in such accounts is vested or
not. A participant which has terminated employment is entitled to receive
the total amounts in the participant contribution accounts and his/her vested
interest in the amounts in the employer contribution account.
(Continued)
7
<PAGE>
HIGHLANDS INSURANCE GROUP
EMPLOYEES' RETIREMENT AND SAVINGS PLAN
Notes to Financial Statements
December 31, 1998 and 1997
FORFEITURES
Forfeitures represent the nonvested portion of a terminated participant's
employer contribution account. Forfeitures are allocated at each year end
($81,176 and $447,480 in 1998 and 1997, respectively) to all active
participants eligible for an employer contribution for such year. The
allocation is based on the same method as that of the employer contribution
discussed above. Forfeited employer tax deferred contributions are used to
reduce future company matching contributions.
PARTICIPANT LOANS
Effective April 1, 1997, the Plan agreement was amended to add provisions for
loans to be made to participants subject to ERISA and Company guidelines.
Prior to the Plan's amendment, the Plan agreement did not provide for
participant loans. A participant may request a loan for up to 50% of the
participant's vested interest up to a maximum of $50,000. No more than two
loans may be outstanding at any time with $1,000 as a minimum loan amount.
The term of the loan cannot exceed five years and requires level amortization
with payments not less frequently than quarterly. The loan interest rate for
1998 and 1997 is the prime rate plus 1%. All loans are due and payable from
the participant's account upon termination of employment.
PARTICIPANT ACCOUNTS
Each participant's account is credited with the participant's contribution
and an allocation of the Company's matching contribution, Plan earnings,
forfeitures and administrative expenses.
FEES AND EXPENSES
Administrative expenses, which are related to compliance and operational
activities as defined by the Department of Labor, may be charged against the
Plan assets at the discretion of the Plan administrator and in accordance
with the terms of the Plan. Such expenses were $103,273 and $97,765 in 1998
and 1997, respectively.
PLAN AMENDMENT, MODIFICATION, AND TERMINATION
The Board of Directors of the Company may amend, modify, or terminate the
Plan at any time. No such termination is contemplated, but if it should
occur, the accounts of all participants would be immediately fully vested and
paid in accordance with the terms of the Plan.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
INVESTMENT VALUATION
The Income and Growth Portfolio, Balanced Growth Portfolio, Life Solutions
Growth Fund, Stable Value Income Fund, Matrix Equity Fund, Active
International Fund, Bond Fund of America, Franklin Small Cap Growth Fund and
Templeton Foreign Fund are mutual funds valued at fair value. The fair value
is adjusted periodically to reflect investment results in the securities
underlying the mutual funds. Participant loans are stated at cost which
approximates their fair value.
(Continued)
8
<PAGE>
HIGHLANDS INSURANCE GROUP
EMPLOYEES' RETIREMENT AND SAVINGS PLAN
Notes to Financial Statements
December 31, 1998 and 1997
ACCRUED LIABILITIES
Accrued liabilities represent amounts owed for Plan expenses as of the end
of the year.
(3) INVESTMENTS
Individual investments in excess of 5% of net assets available for plan
benefits are as follows:
1998 1997
---- ----
Balanced Growth Portfolio $ - 17,559,388
Life Solutions Growth Fund 20,876,706 3,514,451
Stable Value Income Fund 18,413,090 14,005,111
Matrix Equity Fund 14,635,844 6,940,869
=========== ==========
(4) FEDERAL INCOME TAX MATTERS
The Plan obtained its latest determination letter on August 14, 1996, in
which the Internal Revenue Service (IRS) stated that the Plan, as then
designed, was in compliance with the applicable requirements of the Internal
Revenue Code (the Code). The Plan has been amended since receiving the
determination letter. However, the Plan Administrator and the Plan's tax
counsel believe that the Plan is designed and is currently being operated in
compliance with the applicable provisions of the Code.
(5) RECONCILIATION OF FINANCIAL STATEMENTS TO FORM 5500
The following is a reconciliation of net assets available for plan benefits
per the financial statements to the Form 5500:
December 31, December 31,
1998 1997
------------ ------------
Net assets available for plan benefits per the $61,722,525 45,174,556
financial statements
Benefit claims payable - (140,628)
----------- -----------
Net assets available for benefits per the
Form 5500 $61,722,525 45,033,928
========== ===========
9
<PAGE>
Schedule 1
HIGHLANDS INSURANCE GROUP
EMPLOYEES' RETIREMENT AND SAVINGS PLAN
Item 27(a) Schedule of Assets Held for Investment Purposes
December 31, 1998
<TABLE>
<CAPTION>
(a) Identity of issue, borrower, Current
lessor, or similar party Description of investment Cost value
- --------------------------------- ------------------------- ----------- ----------
<S> <C>
State Street Bank and Trust Bond Fund of America $ 2,663,296 2,619,376
*State Street Bank and Trust Life Solutions Growth Fund 19,852,806 20,876,706
*State Street Bank and Trust Stable Value Income Fund 18,203,731 18,413,090
State Street Bank and Trust Small Cap Fund 1,945,303 1,903,331
*State Street Bank and Trust Matrix Equity Fund 12,564,764 14,635,844
State Street Bank and Trust Templeton Foreign Fund 1,036,744 875,168
*State Street Bank and Trust Highlands Insurance Group Stock 772,218 763,552
Participant loans (Bearing interest at rates between
9.25% and 9.50% maturing in
years 1999 through 2002) 1,416,666 1,416,666
----------- ----------
$58,455,528 61,503,733
=========== ==========
</TABLE>
* Represents party-in-interest transactions.
See accompanying independent auditors' report.
10
<PAGE>
HIGHLANDS INSURANCE GROUP
EMPLOYEES' RETIREMENT AND SAVINGS PLAN
Item 27(d) Schedule of Reportable Transactions
Year ended December 31, 1998
<TABLE>
<CAPTION>
Number
of Cost
transactions Purchase Selling of
Identity of party Description of asset in series price price asset
- -------------------------- ------------------------------ ------------ ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
*State Street Bank & Trust Stable Value Income Fund 1 - - 3,166,845
102 11,945,844 - -
145 - 19,593,657 19,593,657
*State Street Bank & Trust Life Solutions Balanced Growth 1 - - 15,673,265
17 347,461 - -
72 - 19,636,909 17,941,203
*State Street Bank & Trust Matrix Equity Fund 1 - - 6,032,705
110 12,624,833 - -
101 - 19,121,493 19,122,370
*State Street Bank & Trust Income and Growth Portfolio 1 - - 22,962,931
62 24,791,687 - -
125 - 7,736,633 8,113,317
21 747,449 - -
38 - 3,114,997 2,972,563
State Street Bank & Trust Franklin Small Cap Fund 1 - - 3,646,657
86 2,873,093 3,646,657 -
State Street Bank & Trust Cash Control/Holding Account 113 9,818,543 - -
110 - 19,804,287 19,804,287
State Street Bank & Trust Bond Fund of America 48 3,584,250 - -
49 - 4,481,536 4,505,198
</TABLE>
<TABLE>
<CAPTION>
Current
value
of asset on
transaction Net
Identity of party date gain
- -------------------------- ------------ --------
<S> <C> <C>
*State Street Bank & Trust 3,166,845 -
- -
- -
*State Street Bank & Trust 17,228,347 1,555,082
- -
- 1,695,706
*State Street Bank & Trust 6,032,705 -
- -
- (877)
*State Street Bank & Trust 22,962,931 -
- -
- (376,684)
- -
- 142,434
State Street Bank & Trust 3,646,657 -
- (154,085)
State Street Bank & Trust - -
- -
State Street Bank & Trust - -
- (23,662)
</TABLE>
Note: The above transactions represent "reportable transactions" as defined in
2520-103-6 of ERISA.
* Represents party-in-interest transactions.
See accompanying independent auditors' report.
11
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Plan
administrators have duly caused this annual report to be signed on the Plan's
behalf by the undersigned hereunto duly authorized.
HIGHLANDS INSURANCE GROUP
EMPLOYEES' RETIREMENT AND SAVINGS PLAN
Dated: June 28, 1999 By: /s/ Georgean M. Wardzinski
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Georgean M. Wardzinski, Plan Administrator
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EXHIBIT INDEX
Exhibit
23 Consent of KPMG LLP
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EXHIBIT 23
Consent of Independent Auditors
The Board of Directors
Highlands Insurance Group, Inc.:
We consent to incorporation by reference in the registration statement
(No. 333-55699) on Form S-8 of Highlands Insurance Group, Inc. of our report
dated June 18, 1999, relating to the statements of net assets available for plan
benefits with fund information of Highlands Insurance Group Employees'
Retirement and Savings Plan as of December 31, 1998 and 1997, and the related
statement of changes in net assets available for plan benefits with fund
information for the year ended December 31, 1998, which report appears in the
December 31, 1998 annual report on Form 11-K of Highlands Insurance Group
Employees' Retirement and Savings Plan.
KPMG LLP
Houston, Texas
June 25, 1999
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