<PAGE> 1
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Quarterly Report Pursuant to Section 13 of the
Securities Exchange Act of 1934
For the quarterly period ended March 31, 1996
Commission file number 0-19347
HOME HOLDINGS INC.
(Exact name of registrant as specified in its charter)
Delaware 13-3584978
(State of incorporation) (I.R.S. Employer
Identification No.)
59 Maiden Lane, New York, New York 10038-4548
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (212) 530-6600
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 of the Securities Exchange Act of 1934 during the
preceding 12 months and (2) has been subject to such filing requirements for the
past 90 days.
YES X NO
----- -----
At March 31, 1996, there were 14,114,500 shares of registrant's Series A Common
Stock, par value $.01 per share, outstanding.
<PAGE> 2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
HOME HOLDINGS INC.
Consolidated Statements of Income
Quarter ended March 31,
(Unaudited)
($ millions, except per share information)
<TABLE>
<CAPTION>
1996 1995
----- -----
<S> <C> <C>
REVENUES:
Net earned premiums (note 2) $ 80 $ 352
Insurance net investment income 43 53
Insurance realized capital gains -- 5
Securities broker-dealer operations 117 101
----- -----
Total revenues 240 511
----- -----
OPERATING EXPENSES:
Losses and loss adjustment expenses (note 2) 105 350
Policy acquisition and other insurance expenses 47 106
Securities broker-dealer operations 110 95
Corporate interest expense 12 10
Other expenses -- 12
----- -----
Total expenses 274 573
----- -----
Loss before income taxes (34) (62)
Income tax expense (1) (2)
----- -----
NET LOSS $ (35) $ (64)
===== =====
Net loss per share N.M. $(1.84)
=====
</TABLE>
- - ------------------
N.M. - Not Meaningful.
See notes to consolidated financial statements.
1
<PAGE> 3
HOME HOLDINGS INC.
Consolidated Balance Sheets
($ millions, except per share information)
<TABLE>
<CAPTION>
March 31, December 31,
ASSETS 1996 1995
--------- ------------
(Unaudited)
<S> <C> <C>
Insurance investments at fair value:
Portfolio Swap receivable (note 5) $ 1,870 $ 2,130
Fixed maturities available for sale
(cost $32 and $33) 32 33
Equity securities (cost $21 and $24) 25 24
Short-term investments 2 2
------- -------
Total insurance investments 1,929 2,189
Cash 27 34
Premiums receivable 341 384
Funds held by affiliate 282 265
Reinsurance receivables 2,357 2,383
Prepaid reinsurance premiums 6 24
Securities broker-dealer investments 678 539
Receivable from brokers, dealers and customers 2,096 1,896
Other assets 264 289
------- -------
Total assets $ 7,980 $ 8,003
======= =======
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
Liabilities:
Unpaid losses and loss adjustment expenses $ 5,587 $ 5,814
Unearned premiums 50 141
Payables to brokers, dealers and customers 1,743 1,621
Securities of broker-dealer sold under
agreements to repurchase 150 131
Debt of securities broker-dealer 434 304
Corporate debt (note 4) 526 517
Other liabilities 598 552
------- -------
Total liabilities 9,088 9,080
------- -------
Litigation and contingencies (note 6)
Stockholders' deficiency: (note 3)
Series A preferred stock, $.01 par value; 170
shares authorized, issued and outstanding -- --
Series A common stock, $.01 par value;
40,000,000 shares authorized;
14,114,500 shares outstanding -- --
Series B convertible stock, $.01 par value;
15,000,000 shares authorized;
11,425,177 shares outstanding -- --
Paid-in capital 777 777
Deficit (1,887) (1,852)
Unrealized gains on insurance investments 4 --
Unrealized currency translation adjustments (2) (2)
------- -------
Total stockholders' deficiency (1,108) (1,077)
------- -------
Total liabilities and stockholders' deficiency $ 7,980 $ 8,003
======= =======
</TABLE>
- - ------------------
See notes to consolidated financial statements.
2
<PAGE> 4
HOME HOLDINGS INC.
Consolidated Statements of Cash Flows
Quarter ended March 31,
(Unaudited)
($ millions)
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (35) $ (64)
Adjustments to reconcile net loss to net cash
used for operating activities:
Insurance realized capital gains -- (5)
Unpaid losses and loss adjustment expenses (227) (64)
Premiums and reinsurance receivables 87 50
Funds held by affiliate (17) --
Unearned premiums (91) (91)
Broker-dealer investments and receivables,
net of payables (141) 8
Other 20 12
----- -----
Net cash used for operating
activities (404) (154)
----- -----
CASH FLOWS FROM INVESTING ACTIVITIES:
Portfolio swap receivable 260 --
Sales of fixed maturities -- 128
Redemptions and calls of fixed maturities -- 49
Sales of equity securities 3 26
Purchases of fixed maturities -- (3)
Short-term investments, net -- (47)
Other (5) (8)
----- -----
Net cash provided by investing
activities 258 145
----- -----
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in debt of broker-dealer 130 79
Increase in corporate debt 9 4
Other -- (9)
----- -----
Net cash provided by financing
activities 139 74
----- -----
Net increase (decrease) in cash (7) 65
Cash at beginning of period 34 144
----- -----
CASH AT END OF PERIOD $ 27 $ 209
===== =====
SUPPLEMENTAL DISCLOSURES OF CASH FLOW:
Corporate interest paid $-- $ 18
Broker-dealer interest paid $ 19 $ 17
Income taxes paid $-- $ 2
</TABLE>
- - ------------------
See notes to consolidated financial statements.
3
<PAGE> 5
HOME HOLDINGS INC.
Notes to Consolidated Financial Statements
1. ACCOUNTING POLICIES
Home Holdings Inc. (the "Company") follows the accounting policies
set forth in the 1995 Annual Report on Form 10-K ("Annual Report") filed
with the Securities and Exchange Commission (the "Commission"). Users of
financial information produced for interim periods are encouraged to
refer to the footnotes contained in the Annual Report when reviewing
interim financial results, and to note 1 of such Annual Report for
discussion of the Company's recapitalization and related terms mentioned
herein.
The accompanying interim consolidated financial statements are
unaudited. These financial statements reflect all adjustments, consisting
of normal recurring adjustments, necessary for a fair presentation of
financial position and results of operations. Results of interim periods
are not necessarily indicative of results for the full year.
2. PREMIUMS AND LOSSES
Premium and loss information for the quarter ended March 31, follows:
<TABLE>
<CAPTION>
1996 1995
----- -----
<S> <C> <C>
($ millions)
Written premiums:
Direct $ 6 $ 141
Assumed 17 230
Ceded (15) (109)
----- -----
Net $ 8 $ 262
===== =====
Earned premiums:
Direct $ 28 $ 379
Assumed 86 83
Ceded (34) (110)
----- -----
Net $ 80 $ 352
===== =====
Losses and loss adjustment expenses:
Direct $ 139 $ 361
Assumed 37 60
Ceded (71) (71)
----- -----
Net $ 105 $ 350
===== =====
</TABLE>
4
<PAGE> 6
HOME HOLDINGS INC.
Notes to Consolidated Financial Statements
In connection with the Recapitalization as defined in note 1 of the
1995 Annual Report, on December 24, 1994, Zurich Insurance Company's U.S.
Branch ("Zurich American"), the Company and Trygg-Hansa AB, a corporation
organized under the laws of Sweden ("Trygg-Hansa") entered into the
Facultative Reinsurance Facility Agreement (the "Facility Agreement").
Pursuant to the Facility Agreement, Zurich American agreed to issue
facultative reinsurance certificates and related cut-through endorsements
with respect to policies issued by Home Insurance and its Insurance
Subsidiaries, if requested by Home Insurance and if such risks met Zurich
American's underwriting criteria. On February 9, 1995, the Facility
Agreement was amended to provide that existing or prospective insureds of
The Home Insurance Company and its insurance subsidiaries ("Home
Insurance") that decline a Zurich American reinsurance certificate would
be offered a Zurich American insurance policy with associated premiums
and liabilities being assumed by Home Insurance through a 100% quota
share reinsurance agreement.
On June 12, 1995, the Facility Agreement was further amended to
provide for settlements of balances after June 12, 1995 due between Home
Insurance and Zurich American and to delete a provision for a 1% renewal
premium payable by Zurich American with respect to direct policies issued
by Zurich American under the Facility Agreement. The Facility Agreement
terminated as of June 12, 1995.
The effect of the Facility Agreement for the quarter ended March 31,
1996 and 1995 is as follows:
($ millions)
<TABLE>
<CAPTION>
1996 1995
---- -----
<S> <C> <C>
Written premiums:
Direct** $ (5) $(121)
Assumed 10 191
Ceded (5) (28)
---- -----
Net $-- $ 42
==== =====
Earned premiums
Direct** $ (5) $ (40)
Assumed 10 48
Ceded (5) (6)
---- -----
Net $-- $ 2
==== =====
</TABLE>
** Decrease in direct premiums is due to policies cancelled and
subsequently assumed.
5
<PAGE> 7
HOME HOLDINGS INC.
Notes to Consolidated Financial Statements
Asbestos/Pollution Losses and Loss Adjustment Expenses
The 1996 first quarter incurred loss and loss adjustment expenses
relating to policies which have been alleged to contain
asbestos/pollution exposure ("Asbestos/Pollution Policies") were nil
compared with $15 million in the 1995 period. The 1996 first quarter
incurred loss for Asbestos\Pollution Policies reflected $26 million of
paid losses offset by a $26 million decrease to unpaid losses and loss
adjustment expenses.
The process of estimating reserve requirements is necessarily
imperfect and involves an evaluation of a large number of variables
discussed above. Therefore, there can be no assurance that the ultimate
liability will not exceed amounts reserved. However, on the basis of (i)
current legal interpretations, and political, economic and social
conditions, (ii) Home Insurance's internal procedures, which analyze Home
Insurance's experience with similar cases and historical trends, such as
reserving patterns, loss payments, pending levels of unpaid claims and
product mix, and (iii) management's judgments of the relevant factors
regarding reserve requirements for claims relating to Asbestos/ Pollution
Policies, management believes that adequate provision has been made for
Home Insurance's loss reserves.
Estimation of loss reserves for Asbestos/Pollution Policies is one of
the most difficult aspects of establishing reserves, especially in view
of changes in the legal and tort environment which affect the development
of loss reserves. There is a high degree of uncertainty with respect to
future exposure from these types of claims because significant issues
exist as to the liabilities of the insureds, the extent to which
insurance coverage exists, diverging legal interpretations and judgments
state by state relating to, among other things, when the loss occurred
and what policies provide coverage; what claims are covered; whether
there is an insurer obligation to defend; how policy limits are
determined; how policy exclusions are applied and interpreted; and
whether clean-up costs represent insured property damage, and other
matters. Home Insurance is engaged in litigation over the interpretation
of policy coverage and other liability issues. If the courts expand the
intent of the policies and the scope of coverage, as they sometimes have
in the past, additional liabilities may emerge. Conversely, proposals for
regulatory reform may serve to reduce or limit future liabilities. Among
other complications, there are uncertainties regarding the number and
identity of insureds with potential exposure, lack of historical data and
long reporting delays. Management believes these issues are not likely to
be resolved in the near future. Given these uncertainties, management
believes that it is virtually impossible to determine ultimate losses in
this area and no meaningful range for adequate reserves for such ultimate
losses can be established at this time.
With respect to claims involving exposures to asbestos and certain
other toxic torts, the development of the legal insurance coverage issues
is more advanced and the insurance companies have had a longer history in
defending and settling such claims.
6
<PAGE> 8
HOME HOLDINGS INC.
Notes to Consolidated Financial Statements
As a result, Home Insurance establishes specific case reserves for these
asbestos and toxic tort claims at such time as Home Insurance is able to
estimate the probable ultimate cost to Home Insurance over reasonably
foreseeable future periods of time. Pollution claims, however, continue
to present the range of issues presented above. Policyholders generally
do not make available sufficient information from which the reasonable
costs of clean-up or remediation, even if covered by a Home Insurance
policy, might be estimated. Moreover, successful defense by Home
Insurance on coverage issues might eliminate all coverage for a
particular claim or group of claims. Accordingly, the development of a
factual basis from which a claim can be evaluated with respect to
exposure and coverage can take months to years from receipt of an initial
claim. Thus, reserves with respect to specific pollution cases typically
are set, if at all, only after substantial factual discovery is completed
in the action.
In 1995 the Company established a single Environmental and Mass Tort
Division, which will also include a new team to merge legal, actuarial
and financial expertise in collaborating with policyholders and
reinsurers to find alternative resolutions to claims in the environmental
and mass tort areas. Management believes that these organizational
changes will increase operational efficiency, while assuring that the
Company takes a unified and consistent approach to these claims. This
division is also preparing an inventory of potential exposures for
Asbestos/Pollution Policies, which the Company will utilize to evaluate
its use of industry benchmarks to establish reserves.
Losses for such claims are likely to be reflected in future years
and, due to the uncertainties discussed above, the ultimate losses may
vary materially from current reserves and could have a materially adverse
effect on the Company's financial condition and results of operations.
The process of estimating reserve requirements is necessarily
imperfect and involves an evaluation of a large number of variables
discussed above. Therefore, there can be no assurance that the ultimate
liability will not exceed amounts reserved. However, on the basis of (i)
current legal interpretations, and political, economic and social
conditions, (ii) Home Insurance's internal procedures, which analyze Home
Insurance's experience with similar cases and historical trends, such as
reserving patterns, loss payments, pending levels of unpaid claims and
product mix, and (iii) management's judgments of the relevant factors
regarding reserve requirements for claims relating to Asbestos/Pollution
Policies, management believes that adequate provision has been made for
Home Insurance's loss reserves.
7
<PAGE> 9
HOME HOLDINGS INC.
Notes to Consolidated Financial Statements
3. STOCKHOLDERS' DEFICIENCY
Dividend Restrictions
The Company has been notified by the New Hampshire Insurance
Department (the "New Hampshire Department") that, in light of the
Recapitalization, Home Insurance cannot pay any dividends without prior
approval of the New Hampshire Department. If the New Hampshire Department
rejects future dividends filings, the Company will be forced to raise
cash through capital infusions, the issuance of additional debt, or the
sale of assets in order to meet its current obligations; however there
are no assurances that such sources will be available. Under the terms of
the Recapitalization Agreement, Centre Finance Dublin ("Centre Finance"),
an affiliate of Zurich Insurance Company, agreed to purchase up to $46
million aggregate principal amount of the Company's 7% Series B Senior
Working Capital Notes to fund interest payments occurring until June 1997
on the Public Indebtedness. Such Series B Senior Working Capital Notes
will be purchased by Centre Finance on the applicable interest payment
dates for the Public Indebtedness. As of March 31, 1996 the Company has
issued $23 million of the Series B Senior Working Capital Notes.
Based on the Company's most current cash flow projections, funds on
hand and funds that could be borrowed from the remaining $700,000 of
Series A Senior Working Capital Notes and funds that can be used from the
Series B Senior Working Capital Notes should be sufficient to meet the
Company's cash flow needs through the end of 1996. The preparation of
cash flow projections, however, requires many assumptions and estimates
by management, and the actual outcome and results can vary materially
from such estimates. Additionally, there are no assurances that, without
dividends from Home Insurance, the Company will be able to meet its
cash flow needs beyond 1996.
Statutory Information
The accounting practices of insurance companies are prescribed or
permitted by certain regulatory authorities. Certain of these practices
differ from the generally accepted accounting principles used in
preparing the consolidated financial statements of the Company. Home
Insurance's consolidated policyholders' surplus determined in accordance
with statutory practices was $222 million at March 31, 1996 compared with
$230 million at December 31, 1995.
In connection with the New Hampshire Department's involvement in
approving the Recapitalization, it has appointed a representative to act
as an on-site monitor for the Company's operations, with certain rights
of access and cooperation from the Company and REM. The New Hampshire
Department also has directed a consulting actuarial firm to perform an
accelerated review of Home Insurance's loss reserves, with particular
emphasis on Asbestos/Pollution Policies.
8
<PAGE> 10
HOME HOLDINGS INC.
Notes to Consolidated Financial Statements
4. CORPORATE DEBT
<TABLE>
<CAPTION>
March 31, December 31,
1996 1995
--------- ------------
($ millions)
<S> <C> <C>
7% Senior Notes due in 1998, net of
unamortized discount of $1 in 1996 and 1995 $ 99 $ 99
7 7/8% Senior Notes due in 2003, net of
unamortized discount of $1 in 1996 and $2 in 1995 178 177
7 7/8% Senior Notes due in 2003, net of
unamortized discount of nil in 1995 1 1
12% Senior Subordinated Notes, issued at
original issue discount, $303 million
principal value due in 2004 108 105
8% Junior Subordinated Notes, issued at
original issue discount, $171 million
principal value due in 2004 86 84
12% Senior Subordinated Working Capital
Notes, issued at original issue discount,
$46 million principal value due in 2004 16 16
7% Series A Senior Working Capital Notes 15 12
7% Series B Senior Working Capital Notes 23 23
--- ---
Total corporate debt $526 $517
=== ===
</TABLE>
Interest on the Series A and Series B Senior Working Capital Notes is
payable quarterly, and at March 31, 1996, approximately $1.5 million of
interest was accrued but not paid by the Company and accordingly is
overdue. On any overdue payment of principal or interest, the interest
rate is adjusted upwards to the greater of (i) the rate of interest on
the notes, plus 3% or (ii) the prime rate plus 3%. Non-payment of
interest at the due date additionally constitutes an Event of Default
under the terms of the Series A and Series B Senior Working Capital Notes
which, among other things, would remove Centre Finance's obligation to
fund additional Series A and Series B Senior Working Capital Notes.
Centre Finance and its affiliates have waived their rights and privileges
with respect to a default of an interest payment, except interest rate
adjustments, through December 31, 1996.
Neither Centre Finance nor Zurich Insurance Company have any
obligations pursuant to the Recapitalization or otherwise to provide any
capital or other financial support to the Company or its subsidiaries
other than the limited amounts specifically provided for pursuant to the
Recapitalization and related agreements. Centre Finance and Zurich
Insurance Company have informed the Company that they do not intend to
provide any financial support beyond such limited amounts as may be
required pursuant to the Recapitalization.
9
<PAGE> 11
HOME HOLDINGS INC.
Notes to Consolidated Financial Statements
5. PORTFOLIO SWAP RECEIVABLE AND OTHER INSURANCE INVESTMENTS
The Portfolio Value Swap Agreements (the "Swap") are designed to
transfer control and market risk of the portfolio to Centre Reinsurance
Dublin. The Company has accounted for the Swap as if the investments
covered by the Swap were sold to Centre Reinsurance Dublin. The Company,
however, continues to retain legal ownership. As a result, the Company
has reclassified its investments covered by the Swap to a balance
receivable from Centre Reinsurance Dublin ("Portfolio Swap Receivable"),
valued at the fair value of the portfolio investments on the effective
date (January 1, 1995) less withdrawals made to fund operations plus the
total return of 7.5%. Centre Reinsurance Dublin bears the market risk and
will reimburse the Company or be reimbursed by the Company for any
changes in the fair value of securities underlying the Swap as discussed
below.
As of March 31, 1996 the Company has recorded, as a component of the
Portfolio Swap Receivable, an amount due from Centre Reinsurance Dublin
of $39 million because of a negative difference from the 7.5% target
return. The negative difference since January 1, 1996 resulted from the
net of (i) a $35 million difference in favor of the Company due to a
decrease in the fair value of investments underlying the Swap and (ii) a
$4 million difference in favor of the Company for investment income
representing an upward adjustment to reach the 7.5% target yield. Actual
investment income before such adjustments was $39 million.
Securities and cash totaling $210 million were transferred to Centre
Reinsurance Dublin on January 22, 1996, to settle the 1995 Swap payable.
In the first quarter of 1996, the Company recognized $4 million in
unrealized gains on insurance equity investments not underlying the Swap.
10
<PAGE> 12
HOME HOLDINGS INC.
Notes to Consolidated Financial Statements
The fair value of securities managed by Centre Investment Services
Limited ("CIS") and underlying the Portfolio Swap Receivable from Centre
International is as follows:
<TABLE>
<CAPTION>
Estimated
Fair
Value
($ millions)
<S> <C>
U.S. Government and agency $ 636
Mortgage-backed 499
Corporate 503
Foreign governments 59
Other 3
------
Fixed maturities 1,700
Equity securities 8
Short-term investments 123
------
Total Swap investments 1,831
Receivable from Centre Reinsurance Dublin 39
------
Portfolio Swap Receivable $1,870
======
</TABLE>
6. LITIGATION AND CONTINGENCIES
Home Insurance, in common with the insurance industry, is subject to
litigation, including claims for punitive damages and for
extra-contractual damages, in the normal course of its business. Gruntal
Financial Corporation ("Gruntal"), in the ordinary course of its
business, has been named as a defendant or co-defendant in a number of
lawsuits, including class actions and arbitration proceedings, some of
which involve claims for damages of substantial or unspecified amounts.
In the ordinary course of their business, Home Insurance is involved
in insurance litigation, including claims litigation involving the
defense of policyholders arising from suits brought by third parties,
litigation or arbitration to recover sums due from reinsurers, actions
brought by policyholders alleging the improper failure to settle or
defend suits, and actions to recover premiums due from insureds,
including premiums due under retrospectively-rated insurance policies and
premium balances due from agents or brokers. In addition, Home Insurance
is involved in non-insurance litigation arising out of investments and
employment-related matters.
While the aggregate dollar amounts involved in these legal
proceedings cannot be determined with certainty, if the Company were
required to pay the amounts at issue, such payment or payments could have
a material adverse effect on the Company's financial condition or results
of operations. However, in the opinion of management, the ultimate
aggregate liability in these actions is not expected to exceed the
amounts
11
<PAGE> 13
HOME HOLDINGS INC.
Notes to Consolidated Financial Statements
currently reserved in an amount which would have a material adverse
effect on the Company's financial condition or results of operations.
There are no assurances that the outcome of these matters will not vary
materially from management's estimates.
A petition was filed on December 13, 1993, in the District Court of
Dallas County, Texas, joining Home Insurance as a defendant in a
previously filed action. The action seeks certification of both plaintiff
and defendant classes. The purported plaintiff class consists of all
Texas insureds who were charged premiums above state-approved rates for
casualty coverage through the use of retrospectively-rated policies for a
period beginning prior to May 15, 1987, through April 1, 1992. Plaintiffs
seek to certify a defendant class of all insurers doing business in Texas
who charged the alleged excessive rates, plus certain brokers and the
National Council on Compensation Insurance. The Complaint alleges that
defendants entered into a conspiracy to devise various methods of
charging and collecting the allegedly excessive rates and, in doing so,
breached their contracts with plaintiffs, breached their fiduciary duty
and violated the Texas Insurance Code and the Deceptive Trade Practices
Act. Compensatory and punitive damages are sought in unspecified amounts
plus treble damages.
The Texas Legislature has passed a statute which, under certain
circumstances, may exempt insurers from liability for the alleged
overcharges if they did not charge insureds more than residual market
rates and were not members of a defendant class alleged in an action
filed prior to May, 1993. The action in which the intervention was filed
was commenced prior to May, 1993, however, and Home Insurance is
allegedly a member of the class which that action seeks to certify.
Pursuant to the terms of Home Insurance's premium agreements with its
insureds, a motion was filed to stay the litigation pending arbitration
which was denied by the court. Home Insurance's motion for leave to file
a petition for a writ of mandamus subsequent to this ruling was denied by
the appellate court. Plaintiffs' Motion for Class Certification is
pending along with other motions filed by the defendants. Settlement
negotiations are underway. It is reasonably possible that the outcome of
this action may be adverse; however, it is not possible at this time to
estimate the amount of loss or the effect it might have on the financial
condition or results of operations of the Company.
A complaint and temporary restraining order issued from the New York
State Supreme Court were served upon Home Insurance by Bertholon-Rowland
Corp., a large producer of Home Insurance professional liability business
in New York and Massachusetts. The action arises out of the producer's
decision to terminate its business relationship with Home Insurance on
six months' notice, and Home Insurance's subsequent immediate suspension
of the producer's authority to act on its behalf. The Complaint seeks an
injunction and damages nullifying the suspension of authority and
enforcing the producer's contractual rights to its customer accounts and
commissions. Compensatory and punitive damages are sought. By stipulation
of the parties the restraining order was dissolved and legal proceedings
stayed pending submission of the dispute to an arbitration panel. Home
Insurance obtained a
12
<PAGE> 14
HOME HOLDINGS INC.
Notes to Consolidated Financial Statements
preliminary injunction against Bertholon-Rowland preventing it from
issuing cancellations and non-renewal notices to Home Insurance insureds
pending the arbitration hearing which was conducted in June and July of
1995. The final award of the arbitration panel dated August 7, 1995
ordered, among other things, that Bertholon- Rowland's damages claim
against Home Insurance be denied. Home Insurance's motion to confirm the
arbitration award was submitted to the court on October 12, 1995. On
November 8, 1995, Bertholon-Rowland obtained a court order temporarily
restraining alleged violations of its ownership rights to policy
expirations, and filed a motion for a preliminary injunction against Home
Insurance and Zurich-American Insurance Group and Professional Liability
Underwriting Managers Inc. due to the alleged violations, seeking other
relief as well. Subsequently, Bertholon-Rowland filed a motion to amend
the temporary restraining order based upon alleged continuing violations
of its expiration rights. The motions are pending before the court. The
Company does not believe that the outcome of this action will have a
material adverse effect on its financial condition or results of
operations.
On February 13, 1991, Home Insurance and its subsidiaries were
acquired from AmBase (the "Acquisition") pursuant to a stock purchase
agreement (the "Stock Purchase Agreement"). As part of the Stock Purchase
Agreement, as amended, AmBase provided Home Insurance a tax
indemnification for certain taxes assessed against AmBase and its
consolidated group, which included Home Insurance, for all periods ending
on or before December 31, 1989. The Stock Purchase Agreement, as amended,
also provided for a "hold-back" of a portion of the purchase
consideration by the Company to be used to pay (i) liabilities for
federal or state income taxes, including interest thereon, assessed
against AmBase, Home Insurance or any other member of the AmBase
affiliated group for years ending on or before December 31, 1989, and
(ii) certain other liabilities, and to the extent not used for these
purposes, to be paid to AmBase.
Home Insurance, as a member of the AmBase affiliated group, joined in
filing consolidated federal income tax returns with AmBase during tax
years through February 13, 1991, and is severally liable for any federal
income tax, including interest, ultimately assessed against AmBase for
years during such period. In the event AmBase federal income tax and
interest assessments exceed the amount held back pursuant to the Stock
Purchase Agreement, as amended, and AmBase does not have sufficient
financial resources to pay the excess amount, Home Insurance would be
severally liable for such excess amount.
13
<PAGE> 15
HOME HOLDINGS INC.
Notes to Consolidated Financial Statements
AmBase federal tax years through 1991 have been examined and settled
by the Internal Revenue Service, with the exception of a "Fresh Start"
issue for the 1987 tax year and no additional assessments can be made.
Based upon public disclosures by AmBase and information provided by
AmBase to the Company under the terms of the Stock Purchase Agreement, as
amended, (i) AmBase believes that it has meaningful defenses with respect
to the Fresh Start tax issue that is material to AmBase and (ii) the
Company believes that if AmBase does not have sufficient financial
resources to pay federal income tax and interest assessments for the 1987
tax year for which Home Insurance is severally liable and for the
additional AmBase withholding tax issue still open for which Home
Insurance believes it is not liable, any liability of Home Insurance for
such amounts in excess of the amount held back pursuant to the Stock
Purchase Agreement would not have a material adverse effect on the
Company's or Home Insurance's financial condition or results of
operations. No amounts have been accrued by Home Insurance or the Company
in excess of the amount held back pursuant to the Stock Purchase
Agreement, as amended.
In or about October 1994, Gruntal discovered a defalcation in its
back office operations area. Gruntal notified the New York Stock Exchange
Inc. ("NYSE"), the Commission and the United States Attorney's Office for
the Southern District of New York ("USAO"). Gruntal also undertook an
inquiry into the circumstances and facts of the defalcation and into
related matters. At this time, Gruntal believes that approximately $14
million, consisting in substantial part of funds that should have or
potentially could have been abandoned property under the laws of various
states ("Abandoned Property"), was embezzled or improperly diverted,
including approximately $5 million in such funds that were diverted to
accounts established at Gruntal in the names of fictitious customers and
used in substantial part to benefit Gruntal. Gruntal believes that the
theft is substantially covered by insurance and has submitted claims to
its insurer, Home Insurance, under the applicable insurance policy. To
date, approximately $8.5 million has been advanced to Gruntal by the
carrier. Home Insurance's net retention on the claim was approximately $1
million, with the balance reinsured. Based upon information furnished by
Gruntal, inquiries were undertaken by the NYSE, the Commission and USAO.
In August 1995, two former employees of Gruntal, Charles Meizoso, a
Senior Vice President, and Eugene McCloskey, an Internal Audit Manager,
pled guilty to a criminal information filed against them by the USAO. The
first count of the information alleged a conspiracy involving Meizoso,
McCloskey, Waseam Ahmad, Gruntal's former executive cashier (now
deceased), and others, the principal purpose of which was alleged to be
to embezzle in excess of $5 million, including funds that represented
Abandoned Property. The second count of the information alleged a
conspiracy involving Meizoso, McCloskey, Ahmad and others, the principal
purpose of which was alleged to be to divert for Gruntal's benefit in
excess of $5 million of funds, consisting largely of Abandoned Property,
by falsifying Gruntal's records and fraudulently transferring funds to
fictitious customer accounts, from which some of the funds were
14
<PAGE> 16
HOME HOLDINGS INC.
Notes to Consolidated Financial Statements
thereafter used to pay Gruntal's expenses or to increase its profits. In
April 1996, Edward Bao, a former director and Executive Vice President of
Gruntal, was indicted by a grand jury in the Southern District of New
York. The 17 count indictment alleged that Bao conspired with Meizoso,
McCloskey, Ahmad and others to misappropriate funds, including Abandoned
Property, and divert such funds to Gruntal's benefit. The indictment
further charged Bao with mail fraud and making certain false entries in
Gruntal's book and records. In April 1996, the Commission filed a
separate civil injunction against Bao based on, among other things, Bao's
alleged role in the diversion of funds, including Abandoned Property, for
Gruntal's benefit, the filing of false and misleading reports and a
registration statement by Gruntal with the Commission between 1985 and
1987 and certain sales of common stock of Gruntal by Bao in 1987.
Gruntal continues to discuss the progress of its investigation
relating to Abandoned Property with the governmental and self-regulatory
bodies involved. In connection with these matters, Gruntal has taken and
is taking steps designed to bring the firm into compliance with the
Abandoned Property laws of the various states in question, including the
recrediting of customers and, to the extent it has been unable to
identify customer accounts for recrediting, the escheatment of Abandoned
Property to such states and the adoption of new procedures and controls
relating to Abandoned Property.
In addition, Gruntal advised the NYSE, the Commission, USAO and the
National Association of Securities Dealers, Inc. ("NASD") that it was
conducting a separate review relating to the execution and reporting of
certain Over-the Counter ("OTC") trades, which appears to have involved
delayed executions of customer trades and questionable reporting and
pricing activities.
In April 1996, pursuant to a settlement entered into between Gruntal
and the Commission, and without admitting or denying the allegations
therein, Gruntal consented to the entry of an administrative order in
which the Commission found the Gruntal's practices with respect to
Abandoned Property violated antifraud and broker-dealer reporting and
recordkeeping provisions of the federal securities laws, and aided and
abetted violations of the federal securities laws by the Company. The
Commission order censured Gruntal and required Gruntal to pay $5.5
million in disgorgement and pre-judgment interest (to be disbursed by a
fund administrator pursuant to a plan of distribution approved by a
federal district court) and a monetary fine of $4 million, and reimburse
any customers determined by an independent consultant acceptable to the
Commission to have been financially harmed by Gruntal's OTC execution and
reporting practices. Under the terms of the settlement, the fund
administrator is also required to verify Gruntal's representation to the
Commission that it has repaid, recredited, escheated or segregated and
scheduled for escheatment $6.7 million which Gruntal has identified as
escheatable, or presently believes to be escheatable, or has identified
as belonging to customers, contra-parties, vendors and other third
parties. In addition,
15
<PAGE> 17
HOME HOLDINGS INC.
Notes to Consolidated Financial Statements
the independent consultant will review Gruntal's operating policies and
procedures with respect to the operations and OTC areas and recommend
further changes, if deemed appropriate. In performing these reviews, the
fund administrator and independent consultant are authorized to rely upon
work performed or to be performed by the Quality Assurance Task Force
established by Gruntal's new President and Chief Executive Officer to
conduct a diagnostic review of Gruntal's departments and business
activities, and upon work by other representatives of Gruntal.
Gruntal also entered into a separate settlement with the Commission
in April 1996, pursuant to which Gruntal consented, without admitting or
denying the allegations therein, to the entry of an administrative order
in which the Commission found that Gruntal violated antifraud and
recordkeeping provisions of the federal securities laws in connection
with the execution of certain transactions for investment advisory
clients and the non-disclosure to advisory clients of the receipt of
certain payments for order flow. The Commission's order censured Gruntal
and required Gruntal to pay a monetary fine of $1 million, reimburse any
clients determined by an independent consultant acceptable to the
Commission to have been financially harmed as a result of the violations,
and pay into the United States Treasury the amount of payment that the
independent consultant determines Gruntal received for order flow on
transactions executed for advisory client accounts plus accrued interest
thereon. Under the terms of the settlement, the independent consultant
also will review Gruntal's policies and procedures with respect to the
execution of orders for advisory client accounts and the coding, and
reporting on client confirmations and internal Gruntal records, of
transactions executed by Gruntal and recommend further changes, if deemed
appropriate. In performing this review, the independent consultant is
entitled to rely upon work performed or to be performed by Gruntal's
Quality Assurance Task Force and upon work by other representatives of
Gruntal.
In addition, Gruntal entered into a stipulation with the NYSE staff
in March 1996 to resolve the NYSE's investigation of Abandoned Property
and other issues relating to the supervision of pricing and valuation of
certain collateralized mortgage obligations and certain proprietary
trading accounts, as well as the accuracy of FOCUS reports previously
filed with the NYSE and the late filing of certain other required reports
with the NYSE. Pursuant to the stipulation, which was approved by the
NYSE in April 1996, Gruntal was censured and required to pay a $1 million
fine to the NYSE. In addition, Gruntal agreed to appoint an independent
director acceptable to the NYSE to serve on Gruntal's Board of Directors
for the next five years. Gruntal is also required to retain an
independent consultant, who may be the same person appointed pursuant to
the Commission orders, to review Gruntal's systems and procedures and
make recommendations for additional systems and procedures, if necessary,
reasonably designed to ensure Gruntal's compliance with federal
securities laws and NYSE rules and to prevent the recurrence of the
violations described in the stipulation.
16
<PAGE> 18
HOME HOLDINGS INC.
Notes to Consolidated Financial Statements
In April 1996, pursuant to a consent between Gruntal and the NASD,
and without admitting or denying the allegations therein, Gruntal also
consented, among other things, to findings by the NASD that during 1995
through the date of the consent, Gruntal violated certain provisions of
the NASD Bylaws and Rules of Fair Practice by trading ahead of certain
customer limit orders, failing to report or timely report certain trading
transactions and failing to enforce written supervisory procedures
relating to the execution of limit orders. Pursuant to the terms of the
consent, Gruntal was censured and required to pay a fine of $200,000, up
to $100,000 of which may be waived to the extent of payment by Gruntal to
customers harmed by certain trading practices, as discussed below. In
addition, Gruntal is required to retain an independent consultant to
review and, if appropriate, make recommendations with respect to
Gruntal's practices and written procedures pertaining to Gruntal's
trading, execution and reporting practices in Nasdaq securities. Gruntal
is also required to pay to each customer identified by the consultant as
harmed by practices described above the amount by which each customer was
harmed plus accrued interest.
The disgorgement amounts and fines described above in connection with
the Commission, NYSE and NASD regulatory matters were accrued in the
December 1995 financial statements. The Company has made timely payments
of the disgorgement amounts and fines as required under these
settlements.
As discussed above, the USAO undertook a separate investigation
relating to the Abandoned Property matter. Based upon the information
presently available, Gruntal cannot predict whether the USAO will charge
Gruntal with any criminal violations. Gruntal believes that any decision
by the USAO to prosecute Gruntal would have a materially adverse impact
on Gruntal's financial condition. Gruntal has advised the USAO of its
views and has also communicated a number of factors that in Gruntal's
view would support a decision not to indict Gruntal, including Gruntal's
self-reporting to, and cooperation with, governmental, regulatory and
self-regulatory bodies, remediation of past non-compliance with state
abandoned property laws and recrediting of customer accounts, adoption of
new policies and procedures, management and personnel changes, ongoing
review of its business practices, and willingness to agree to the
appointment of an independent monitor with authority to review Gruntal's
business activities and recommend further changes in policies and
procedures.
Gruntal has also brought the Abandoned Property and other matters
referred to above to the attention of the Commodity Futures Trading
Commission ("CFTC") and the North American Securities Administrators
Association, a national association of state securities regulators. These
matters could result in additional investigations and proceedings by the
CFTC and state securities regulators, in connection with which such
authorities may seek to impose additional sanctions against Gruntal.
Although the ultimate outcome cannot be predicted with certainty,
management presently believes that any such sanctions will not have a
materially adverse effect on the consolidated financial statements of
Gruntal or the Company.
17
<PAGE> 19
HOME HOLDINGS INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
The following should be read in conjunction with the consolidated
financial statements.
CONSOLIDATED
Consolidated revenues were $240 million in the three months ended
March 31, 1996 compared with $511 million in the prior-year. The net loss
was $35 million in the three months ended March 31, 1996, a decrease of
$29 million over the same period in 1995.
HOME INSURANCE
Insurance revenues and pre-tax loss were as follows:
<TABLE>
<CAPTION>
1996 1995
----- -----
($ millions)
<S> <C> <C>
Net earned premiums $ 80 $ 352
Net investment income 43 53
Realized capital gains -- 5
----- -----
Insurance revenues $ 123 $ 410
===== =====
Underwriting loss $ (72) $(104)
Net investment income 43 53
Realized capital gains -- 5
----- -----
Insurance pre-tax loss $ (29) $ (46)
===== =====
</TABLE>
Underwriting Results
In connection with the Recapitalization which closed on June 12,
1995, Home Insurance ceased writing new and renewal business except for
limited risks that Home Insurance is obligated to continue writing for an
interim period. All Home Insurance operations are being run-off
subsequent to June 12, 1995. Prior to the Closing, the Company had
attempted to mitigate the effect of the downgrades by the rating agencies
by entering into a Facility Agreement which allowed Home Insurance's
clients to have access to the security of Zurich American, a Company that
is A+ rated by A.M. Best. The Facility Agreement terminated June 12,
1995.
18
<PAGE> 20
HOME HOLDINGS INC.
Net earned premiums and underwriting results by product were as follows:
Net Earned Premiums
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
($ millions)
Commercial casualty $50 $207
Commercial property 4 14
--- ----
Commercial accounts group 54 221
Professional liability 9 60
Other specialty lines 11 61
--- ----
Specialty lines group 20 121
Run-off operations 6 10
--- ----
Total $80 $352
=== ====
</TABLE>
Underwriting Loss
<TABLE>
<CAPTION>
1996 1995
---- ----
($ millions)
<S> <C> <C>
Commercial casualty $(25) $ (36)
Commercial property (26) (18)
---- -----
Commercial accounts group (51) (54)
Professional liability (10) (15)
Other specialty lines (4) (3)
---- -----
Specialty lines group (14) (18)
---- -----
Run-off operations (7) (32)
---- -----
Total $(72) $(104)
==== =====
</TABLE>
Underwriting losses were $72 million in the three months of 1996,
compared with $104 million in the same period in 1995. The 1996
underwriting loss was primarily due to lower earned premiums and expenses
incurred in managing the run-off of Home Insurance's operations. The 1995
underwriting loss was impacted by unfavorable loss experience.
The commercial accounts group underwriting loss was $51 million in
the three months of 1996, compared with $54 million in the prior year
period. The 1996 underwriting loss included commercial casualty and
commercial property losses of $25 million and $26 million, respectively,
compared to $36 million and $18 million, respectively in the prior year
period. The 1996 commercial accounts group loss was primarily due to
lower earned premiums and expenses incurred in managing the run-off of
its operations. The 1995 result reflected unfavorable loss experience.
19
<PAGE> 21
HOME HOLDINGS INC.
The specialty lines group loss was $14 million in the three months of
1996, compared with $18 million in the prior year period. The 1996
specialty lines group loss was primarily due to lower earned premiums and
expenses incurred in managing the run-off of its operations. The 1995
underwriting loss was primarily attributable to unfavorable loss
experience in professional liability and excess casualty/umbrella.
The run-off operations loss was $7 million in the three months of
1996, compared with $32 million in the prior year period. Underwriting
losses from Pollution/Asbestos Policies was nil in 1996 compared to $15
million in the 1995 period. The 1996 underwriting loss included $4
million from involuntary syndicates while the 1995 loss included $8
million from personal lines and $8 million from voluntary syndicates and
assumed reinsurance.
Investments
As of March 31, 1996 the Company has recorded an increase to the
Portfolio Swap Receivable of $39 million representing a receivable from
Centre Reinsurance Dublin because of a negative difference from the 7.5%
target return. The negative difference since January 1, 1996 resulted
from the net of (i) a $35 million difference in favor of the Company due
to a decrease in the fair value of investments underlying the Swap and
(ii) a $4 million difference in favor of the Company for investment
income representing an upward adjustment to reach the 7.5% target yield.
Actual investment income before such adjustments was $39 million.
In the first quarter of 1996, the Company recorded $4 million in
unrealized gains on insurance equity investments not underlying the Swap.
GRUNTAL
An analysis of broker-dealer results for the first quarter ended
March 31, is set forth in the following table:
<TABLE>
<CAPTION>
1996 1995
---- ----
($ millions)
<S> <C> <C>
Commissions $ 25 $ 19
Principal transactions 45 43
Underwriting and investment banking 9 7
Interest 29 26
Other 9 6
---- ----
Total revenues 117 101
Total expenses 110 95
---- ----
Income before income taxes $ 7 $ 6
==== ====
</TABLE>
20
<PAGE> 22
HOME HOLDINGS INC.
Total broker-dealer revenues increased $16 million for the three
months ended March 31, 1996, to $117 million, when compared to the same
period last year. All categories of revenues increased from the same
period last year.
Commission revenues were $25 million, a 32% increase from the prior
year, primarily due to increased sales of OTC securities. Principal
transactions increased $2 million or 5% over the prior year. This was due
to increased sales of OTC securities and listed equity securities which
were offset by decreased revenues from sales of fixed income securities,
including municipal and corporate bonds, transacted on a principal basis
to clients and other broker/dealers. Underwriting and investment banking
revenues increased 29% to $9 million primarily due to increased mutual
funds and unit trust sales. Interest revenues increased by $3 million or
12% from the prior year mainly due to higher margin interest rates on a
larger base of customer margin debt and higher levels of stock borrowed
activity.
The increase in Gruntal's expenses from $95 million in 1995 to $110
million in 1996 primarily reflects increases in compensation related to
the increase in compensable revenues and an increase in interest expense
from higher levels of bank loans compared to the same period last year.
Income before income taxes was $7 million for the three months ended
March 31, 1996 compared with $6 million in 1995.
OTHER
Corporate interest expense was $12 million in the first quarter of
1996, compared with $10 million in 1995. The increase reflects the
changes to corporate debt in connection with the Recapitalization.
Other expenses were nil in the first quarter of 1996, compared to $12
million in 1995. The 1995 expenses were primarily comprised of
transaction expenses of $9 million, related to the Recapitalization.
Income tax expense was $1 million in the three months of 1996
compared with expense of $2 million in the 1995 period. Taxes in 1996 and
1995 were comprised of state and foreign taxes. The Company was unable to
recognize a federal income tax benefit against its 1996 or 1995 pre-tax
losses.
21
<PAGE> 23
HOME HOLDINGS INC.
FINANCIAL CONDITION
Consolidated
Following the closing of the Recapitalization, Home Insurance has
generally ceased writing new or renewal insurance or reinsurance
business, except for limited risks that Home Insurance is obligated to
continue writing for an interim period. The Company has been notified by
the New Hampshire Department that, in light of the Recapitalization, Home
Insurance cannot pay any dividends without prior approval of the New
Hampshire Department.
If the New Hampshire Department rejects future dividends filings, the
Company will be forced to raise cash through capital infusions, the
issuance of additional debt, or the sale of assets in order to meet its
current obligations; however there are no assurances that such sources
will be available. Under the terms of the Recapitalization Agreement,
Centre Finance agreed to purchase up to $46 million aggregate principal
amount of the Company's 7% Series B Senior Working Capital Notes to fund
interest payments occurring until June 1997 on the Public Indebtedness as
described in note 1 of the 1995 Annual Report. Such Series B Senior
Working Capital Notes will be purchased by Centre Finance on the
applicable interest payment dates for the Public Indebtedness. As of
March 31, 1996 the Company has issued $23 million of the Series B Senior
Working Capital Notes.
To fund additional cash requirements incurred in connection with the
Equity Repurchase Transaction, the Recapitalization and other
extraordinary needs, Centre Finance and Zurich Centre Investments Limited
("ZCI") purchased $15 million principal amount of the Company's 12%
Senior Subordinated Working Capital Notes due and $12 million principal
amount of the Company's 7% Series A Senior Working Capital Notes,
pursuant to the Standby Working Capital Credit Agreement, dated as of
April 26, 1995, by and between the Company and ZHI. The Company, ZHI and
Trygg-Hansa agreed that the Company may issue and ZHI may purchase,
additional Series A Senior Working Capital Notes having an aggregate
principal amount of $4 million, and on February 8, 1996 the Company
issued $3.3 million of these notes.
Interest on the Series A and Series B Senior Working Capital Notes is
payable quarterly, and, at March 31, 1996, approximately $1.5 million of
interest was accrued but not paid by the Company and accordingly is
overdue. On any overdue payment of principal or interest, the interest
rate is adjusted upwards to the greater of (i) the rate of interest on
the notes, plus 3% or (ii) the prime rate plus 3%. Non-payment of
interest at the due date additionally constitutes an Event of Default
under the terms of the Series A and Series B Senior Working Capital Notes
which, among other things, would remove Centre Finance's obligation to
fund additional Series A and Series B Senior Working Capital Notes.
Centre Finance and its affiliates have waived their rights and privileges
with respect to a default of an interest payment, except interest rate
adjustments, through December 31, 1996.
22
<PAGE> 24
HOME HOLDINGS INC.
Neither Centre Finance nor Zurich Insurance Company have any
obligations pursuant to the Recapitalization or otherwise to provide any
capital or other financial support to the Company or its subsidiaries
other than the limited amounts specifically provided for pursuant to the
Recapitalization and related agreements. Centre Finance and Zurich
Insurance Company have informed the Company that they do not intend to
provide any financial support beyond such limited amounts as may be
required pursuant to the Recapitalization.
The sources of funds of the Company consist primarily of dividends
from Home Insurance. Accordingly, the Company's ability to pay its
obligations depends on the receipt of sufficient funds from Home
Insurance. Since Home Insurance is subject to regulatory restrictions on
the amount of dividends that can be paid as described above, its assets
are not necessarily available to the Company on a current basis. The
Company did not receive common stock dividends from Home Insurance in
1996 or 1995.
Based on the Company's most current cash flow projections, funds on
hand and funds that could be borrowed from the remaining $700,000 of
Series Senior A Working Capital Notes and funds that can be used from
the Series B Senior Working Capital Notes should be sufficient to meet
the Company's cash flow needs through the end of 1996. The preparation of
cash flow projections, however, requires many assumptions and estimates
by management, and the actual outcome and results can vary materially
from such estimates. Additionally, there are no assurances that, without
dividends from Home Insurance, the Company will be able to meet its cash
flow needs beyond 1996.
At March 31, 1996 and December 31, 1995, the Company's outstanding
corporate debt was $526 million and $517 million, respectively.
Home Insurance and Centre Reinsurance Dublin entered into the Excess
of Loss Reinsurance Agreement, dated as of June 12, 1995. Home Insurance
is provided with an aggregate limit of $1.3 billion subject to certain
adjustments, attaching at the point that Home Insurance has no remaining
cash or assets readily convertible into cash to pay any of its
obligations. Among such adjustments, in the event that Home Insurance
pays any dividends to the Company prior to the third anniversary of the
Closing to fund interest payments on the Public Indebtedness, the limit
will be increased by the amount of such dividends plus interest thereon
at the rate of 7.5% per annum, compounded, from the date such dividends
were paid to the date the reinsurer commences making payments under the
Excess of Loss Reinsurance Agreement. Also, up to $290 million of
additional coverage provided by the Excess of Loss Reinsurance Agreement
shall be linked to certain factors including dividend payments from Home
Insurance to the Company funding principal payments on the Public
Indebtedness and the New Notes (as defined in note 1 to the 1995 Annual
Report) as such debts become payable.
Based on cash flow forecasts at December 31, 1995, the Company is
projecting that coverage limits of the Excess of Loss Reinsurance
Agreement will be substantially exhausted, and due to these projected
future recoveries, loss reserves with a net present value of $415 million
were recorded in 1995 as a recoverable from the Excess of Loss
23
<PAGE> 25
HOME HOLDINGS INC.
Reinsurance Agreement. The Company has not recorded any changes to the
recoverable in the first quarter of 1996.
Home Insurance
Following the closing of the Recapitalization, Home Insurance has
generally ceased accepting business except as required by regulation or
contractual obligations. As a result, payment of future claims and
operating expenses would be met by earning investment income or through
liquidating the investment portfolio. At March 31, 1996, the Portfolio
Swap Receivable of $1,870 million was available to provide for any
foreseeable immediate cash requirements.
Cash used for insurance operating activities was $404 million in the
three months ended March 31, 1996 compared with $154 million in the same
period in 1995. The increase in 1996 was due primarily to lower premiums
collections resulting from the run-off of operations. Cash used for
operating activities was funded primarily from sales of fixed maturities.
The cash flow of Home Insurance's operations is derived primarily
from investment income and proceeds from sales, redemptions and
maturities of investments. Home Insurance's funds are applied primarily
to claim payments and operating expenses.
Home Insurance's statutory surplus at March 31, 1996 was $222 million
compared with $230 million at December 31, 1995. The New Hampshire
Department also has directed a consulting actuarial firm to perform an
accelerated review of Home Insurance's loss reserves, with particular
emphasis on Asbestos/Pollution Policies.
Securities Broker-Dealer
Certain minimum amounts of capital must be maintained by Gruntal's
broker-dealer subsidiaries to satisfy the requirements of the Uniform Net
Capital Rule (Rule 15c3-1) of the Commission and the capital rules of
other regulatory authorities. At March 31, 1996, Gruntal & Co.'s net
capital as defined by the Commission and other regulatory authorities was
$103 million, which was $82 million in excess of the aggregate minimum
required.
24
<PAGE> 26
HOME HOLDINGS INC.
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
Reports on Form 8-K were filed by the Company on April 4,
1996 and May 3, 1996.
25
<PAGE> 27
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.
HOME HOLDINGS INC.
May 14, 1996 by RICHARD H. HERSHMAN
Treasurer
(Principal Financial and Accounting Officer
through the Services Agreement with
Risk Enterprise Management Limited)
26
<PAGE> 28
EXHIBIT INDEX
Exhibit No. Description
- - ---------- -----------
27 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 7
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> MAR-31-1996
<DEBT-HELD-FOR-SALE> 32
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 25
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 1,929
<CASH> 27
<RECOVER-REINSURE> 2,357
<DEFERRED-ACQUISITION> 0
<TOTAL-ASSETS> 7,980
<POLICY-LOSSES> 5,587
<UNEARNED-PREMIUMS> 50
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 526
0
0
<COMMON> 0
<OTHER-SE> (1,108)
<TOTAL-LIABILITY-AND-EQUITY> 7,980
80
<INVESTMENT-INCOME> 43
<INVESTMENT-GAINS> 0
<OTHER-INCOME> 117
<BENEFITS> 105
<UNDERWRITING-AMORTIZATION> 47
<UNDERWRITING-OTHER> 0
<INCOME-PRETAX> (34)
<INCOME-TAX> 1
<INCOME-CONTINUING> (35)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (35)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
<RESERVE-OPEN> 5,814
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 5,587
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
