UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE YEAR ENDED DECEMBER 31, 1996
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission file no. 0-19347
HOME HOLDINGS INC.
(Exact name of registrant as specified in its charter)
DELAWARE
(State of incorporation)
13-3584978
(I.R.S. Employer Identification No.)
59 Maiden Lane, New York, New York 10038-4548
(Address of principal executive offices)
Registrant's telephone number, including area code (212) 530-6600
Securities registered pursuant to Section 12(b) of the Act:
None N/A
(Title of each class) (Name of each exchange
on which registered)
Securities registered pursuant to Section 12(g) of the Act:
None
At March 28, 1997, there were 14,114,500 shares of registrant's Series A
Common Stock, par value $ .01 per share, outstanding.
The aggregate market value of the shares of all classes of voting stock
of the registrant held by non-affiliates of the registrant on March 1,
1997 was nil.
Indicate by check mark whether 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 (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject
to such filing requirements for the past 90 days. YES X NO
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-K or any amendment to this Form 10-K. [ ]
HOME HOLDINGS INC.
ANNUAL REPORT ON FORM 10-K
YEAR ENDED DECEMBER 31, 1996
TABLE OF CONTENTS
PAGE
PART 1
ITEM 1. BUSINESS...................................................... 1
ITEM 2. PROPERTIES.................................................... 25
ITEM 3. LEGAL PROCEEDINGS............................................. 25
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF
SECURITY TO HOLDERS........................................... 31
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS............................... 31
ITEM 6. SELECTED FINANCIAL DATA....................................... 32
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.................................................... 35
ITEM 8. FINANCIAL STATEMENTS, SCHEDULES AND
EXHIBITS...................................................... 49
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH
ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.......................................... *
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS
OF THE REGISTRANT............................................. 98
ITEM 11. EXECUTIVE COMPENSATION........................................ 99
ITEM 12. SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT..............................100
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED
PARTY TRANSACTIONS............................................101
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT
SCHEDULES AND REPORTS ON FORM 8-K.............................106
* Not applicable.
PART 1
ITEM 1. BUSINESS
THE COMPANY
Home Holdings Inc., a Delaware corporation (the "Company"), is a
holding company for its wholly-owned subsidiary, The Home Insurance
Company, a New Hampshire corporation, and its insurance subsidiaries
("Home Insurance"). Prior to June 12, 1995, Home Insurance concentrated
on larger, more complex commercial and specialty risks. Specialty risks
included lawyers' liability, directors' and officers' liability and other
specialized property and liability coverage for individuals,
professionals and businesses. Home Insurance generally ceased writing new
or renewal insurance on June 12, 1995 in connection with a
recapitalization agreement described below. Additionally, on March 3,
1997, the New Hampshire Insurance Department (the "Department") issued an
Order of Supervision (the "Order") as discussed below.
As of December 31, 1996, the statutory surplus of Home Insurance
was $55 million. The Department gave Home Insurance permission to include
in the 1996 Statutory Annual Statement a non-tabular discount which
results from discounting all loss reserves, and allocated and unallocated
loss adjustment expense reserves at 7%. Home Insurance has sufficient
assets that will earn 7% to meet the expected stream of loss and loss
adjustment expense payments. Home Insurance calculated that the
non-tabular discount is $469 million. The non-tabular discount is not
included in the Company's consolidated financial statements prepared
under generally accepted accounting principles ("GAAP"). See note 4 to
the consolidated financial statements for further discussion. On March 7,
1997, A.M. Best downgraded Home Insurance to E (under state supervision).
A.M. Best ratings represent an independent opinion of an insurance
company's financial strength and ability to meet its obligations to
policyholders.
Home Insurance owns Gruntal Financial Corp. ("Gruntal"), a
securities brokerage business. Gruntal, through its broker-dealer
subsidiaries, Gruntal & Co., Incorporated ("Gruntal & Co.") and The GMS
Group, Inc. ("GMS"), had approximately 2,000 full-time employees as of
December 31, 1996, including approximately 854 account executives located
in its 29 offices throughout the United States. On February 24, 1997,
Gruntal, and The 1880 Group LLC entered into a reorganization agreement
(the "Reorganization Agreement"), under which Gruntal will be
restructured as a limited liability company, Gruntal Financial, LLC
("Gruntal Financial"), and partially transferred to a management group
led by Gruntal officers (the "Reorganization"). See note 15 to the
consolidated financial statements for further discussion.
Home Insurance also owns Sterling Forest Corporation ("Sterling
Forest"), a property development business. Sterling Forest owns the
largest privately-held undeveloped area of land in the greater New York
metropolitan area, consisting of approximately 17,500 acres. On February
18, 1997, an agreement was entered into to sell a substantial part of
Sterling Forest. See note 15 to the consolidated financial statements for
further discussion.
The Company's executive office is located at 59 Maiden Lane, New
York, New York 10038-4548, and its telephone number at such office is
(212) 530-6600.
ORDER OF SUPERVISION
On March 3, 1997, Home Insurance was placed under formal
supervision by the Department. The Department states in the Order that
this action was taken in response to Home Insurance's Risk-Based Capital
("RBC") report filed with the Department which indicates that a mandatory
control level event has occurred within the meaning of New Hampshire
Revised Statutes Annotated 404-F:6 (a "Mandatory Control Level Event").
See "Risk-Based Capital", for further discussion. The Order establishes
that the Department will oversee and supervise Home Insurance for the
purpose of continuing and intensifying an economic, actuarial and
accounting review of the books, records and business affairs of Home
Insurance so as to determine what future actions may be appropriate. The
Order also provides that Home Insurance may not take certain actions
without the prior approval of the Department, including, among other
matters, payment of claims and other obligations within certain dollar
limits, and changes in the terms and conditions of certain existing
contracts and entering into of certain new contracts. See "Insurance
Regulation".
THE RECAPITALIZATION AGREEMENT AND RELATED AGREEMENTS
The Company entered into a recapitalization agreement (as amended,
the "Recapitalization Agreement" or the "Recapitalization") dated as of
February 9, 1995, with Trygg-Hansa AB, a corporation organized under the
laws of Sweden ("Trygg-Hansa"), Zurich Insurance Company, a corporation
organized under the laws of Switzerland ("Zurich"), Zurich Centre
Investments Limited, a corporation organized under the laws of Bermuda
("ZCI"), Insurance Partners Advisors, L.P., a Delaware limited
partnership ("IP") and ZCI Investments Limited (now known as Zurich Home
Investments Limited), a corporation organized under the laws of Bermuda
("ZHI") (Zurich, ZCI, IP and ZHI are collectively referred to herein as
the "Investor Group"). Closing under the Recapitalization Agreement took
place on June 12, 1995 (the "Closing").
Following the Closing, Home Insurance has generally ceased writing
new or renewal insurance or reinsurance business, except for limited
risks that it is obligated to continue writing for an interim period.
Zurich and its affiliates were afforded rights of access and cooperation
assisting them in assessing the existing business of Home Insurance and
the business and assets of the Company and its subsidiaries are being
managed by affiliates of Zurich.
The transactions consummated under the Recapitalization Agreement
have the effect of Trygg-Hansa and the Investor Group owning virtually
the entire equity interest in the Company. The primary transactions
constituting the Recapitalization were as follows:
o The Company issued to Trygg-Hansa (a) $98 million aggregate
principal amount of the Company's 12% Senior Subordinated Notes
due December 31, 2004 (the "Senior Subordinated Notes") and (b)
$80 million aggregate principal amount of the Company's 8% Junior
Subordinated Notes due December 31, 2004 (the "Junior
Subordinated Notes") in exchange for all notes and other
obligations of the Company outstanding under the Credit Agreement,
dated as of November 20, 1991, as amended, between the Company and
Trygg-Hansa (the "Credit Agreement") and in exchange for the
aggregate principal amount of the notes and all other obligations
of the Company outstanding under the Interest Deferral Agreement
(the "Interest Deferral Agreement"), dated as of February 9, 1995,
by and between the Company and Trygg-Hansa, representing interest
deferred on the Credit Agreement Notes from February 9, 1995 to
June 12, 1995. See note 5 to the consolidated financial statements
for further discussion.
o ZHI purchased, at a purchase price equal to the aggregate liqui-
dation preference of $98 million, 170 shares of the Company's
Series A Preferred Stock, par value $.01 per share (the "Preferred
Stock"), to fund the Equity Repurchase Transaction (as defined
below) and to pay non-capitalized expenses associated with the
Recapitalization.
o Trygg-Hansa sold to ZHI (a) 800,000 shares of the Company's Series
A Common Stock and 333,333 shares of the Series B Common Stock for
a purchase price of $7.50 per share, and (b) 8 year warrants, for
an aggregate purchase price of $124,000; Trygg-Hansa sold to
Centre Finance Dublin ("Centre Finance"), an affiliate of Zurich,
$98 million principal amount of Senior Subordinated Notes of the
Company held by Trygg-Hansa and $12 million principal amount of
Junior Subordinated Notes of the Company held by Trygg-Hansa for
$1 million in cash plus the right to receive a contingent payment;
and Trygg-Hansa exchanged with ZHI $35 million principal amount of
Junior Subordinated Notes for 6/17ths (i.e. 60 shares) of the
number of shares of Preferred Stock.
o The Company consummated a repurchase transaction (the "Equity
Repurchase Transaction") pursuant to which participating holders
of the Series A Common Stock (other than Centre Re (Bermuda),
Centre Reinsurance Limited, International Insurance Investors,
L.P. ("III") and Trygg-Hansa) received $10.00 (net) per share of
Series A Common Stock in cash plus a payment of $.20 per share in
settlement of certain litigation related to the Recapitalization.
o To fund additional cash requirements incurred in connection with
the Equity Repurchase Transaction, the Recapitalization and other
extraordinary needs, Centre Finance and ZCI purchased, in 1995,
$15 million principal amount of the Company's 12% Senior
Subordinated Working Capital Notes due December 31, 2004 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. In February 1996, 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 the Company
issued $3.8 million of these additional notes during 1996.
o ZCI issued a commitment to extend a line of credit of up to $30
million to Sterling Forest to fund the commercial and residential
development of land owned by Sterling Forest. Sterling Forest
borrowed $7.5 million as of December 31, 1996, bearing interest at
a rate of 10% per annum.
o As of April 7, 1995, ZHI, ZCI, and certain of the holders of the
Company's 7% Senior Notes due 1998 and 7 7/8% Senior Notes due 2003
(collectively, the "Senior Notes") entered into an agreement
(the "Bondholder Agreement") pursuant to which each such
Bondholder delivered to the trustee under the Indentures governing
the Senior Notes on April 18, 1995, a Waiver, Consent and Release
consenting to waivers and amendments to the Indentures necessary
to consummate the Recapitalization. Also pursuant to the
Bondholder Agreement, on August 25, 1995, the Company completed an
exchange offer in which approximately $179 million principal value
of the 7 7/8% Senior Notes due 2003 were exchanged for the
Company's 7 7/8% Senior Sinking Fund Notes due December 15, 2003
(the "New Notes") which provide for a sinking fund payment (to be
applied to the mandatory retirement of the New Notes) in
installments of approximately $36 million each in years 1999
through 2003. The Senior Notes and the New Notes are collectively
referred to as the public indebtedness (the "Public
Indebtedness"). See note 5 to the consolidated financial
statements.
o As part of a services agreement between the Company, Home
Insurance and Risk Enterprise Management Limited ("REM"), an
indirect subsidiary of Zurich, the assets and liabilities
associated with the Company and insurance policies written by
Home Insurance are maintained by the Company and Home Insurance,
respectively, and managed by REM. REM manages the administrative
operations of Home Insurance, including the claims associated with
all of Home Insurance's policyholders, and will defer all fees, in
excess of actual costs, payable by Home Insurance for the first
five years. During 1995, REM leased substantially all of its
employees from Home Insurance to perform these services and
effective January 1, 1996, Home Insurance employees became REM
employees. The Services Agreement was amended on March 4, 1997, to
accommodate the terms of the Order. This amendment includes, among
other provisions, provisions related to the Department's right of
prior approval with respect to certain transactions involving Home
Insurance. The Company had accrued $17 million of fees payable to
REM as of December 31, 1995. This liability is no longer accrued
and is included as part of a contingent liability as of December
31, 1996. See note 14 to the consolidated financial statements.
o Zurich Investment Management Inc. ("ZIM") a subsidiary of Zurich,
was appointed by Centre Investment Services Limited to manage the
cash and invested assets of the Company and Home Insurance
pursuant to an investment management agreement, which was amended
to add ZIM as an additional party.
o The Company and Home Insurance entered into the Portfolio Value
Swap Agreements (the "Swap") with Centre Reinsurance International
Company which subsequently novated the contracts to Centre
Reinsurance Dublin. Centre Reinsurance Dublin will hereinafter be
referred to as the party to the Swap. See note 6 to the
consolidated financial statements.
o Home Insurance purchased an Aggregate Excess of Loss Reinsurance
Agreement (the "Excess of Loss Reinsurance Agreement") from Centre
Reinsurance International Company, which subsequently novated the
contract to Centre Reinsurance Dublin and commuted or assigned its
right to receive payments under the existing stop loss treaty
dated January 1, 1991 (the "Stop Loss Treaty"). Centre Reinsurance
Dublin will hereinafter be referred to as the party to the Excess
of Loss Reinsurance Agreement. See note 7 to the consolidated
financial statements.
PROPERTY AND CASUALTY INSURANCE
In connection with the transactions contemplated by the
Recapitalization Agreement 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.
Home Insurance's principal insurance operations prior to June 12,
1995, were organized into two business groups. The commercial accounts
group (the "Commercial Accounts Group") underwrote property and casualty
insurance throughout the United States and internationally for two
primary market segments: (i) large industrial and commercial enterprises
that were national in scope and required customized property and casualty
insurance involving the services of a professional risk manager; and (ii)
enterprises operating out of a single state or region. The specialty
lines group (the "Specialty Lines Group"), wrote specialized property and
liability insurance for individuals, professionals and businesses.
Finally, Home Insurance maintained a run-off operations group ("Run-Off
Operations") which administered certain businesses from which Home
Insurance had withdrawn prior to June 12, 1995, principally assumed
reinsurance, personal lines, and excess casualty business written during
the period from 1962 through 1982, and also managed run-off of policies
containing asbestos/pollution exposure ("Asbestos/Pollution Policies").
Subsequent to June 12, 1995, all of Home Insurance's operations
are being managed by REM. The following discussion of Home Insurance's
business operations maintains the presentation of business units existing
prior to June 12, 1995 for comparability with prior years.
BUSINESS GROUPS
The following table contains certain underwriting data for Home
Insurance's business units for each of the years in the five-year period
ended December 31, 1996. The data is presented before benefits
attributable to cessions to the Stop Loss Treaty and Excess of Loss
Reinsurance Agreement. For a further discussion see "Ceded Reinsurance
Operations, Excess of Loss Reinsurance Agreement and Stop Loss Treaty".
The Company's results for 1996 reflect $662 million of loss and loss
adjustment expense reserve bulk additions, including $225 million
relating to Asbestos/Pollution Policies. The Company's results for 1995
reflect $549 million of incurred losses for Asbestos/Pollution Policies
which includes $440 million of reserve additions. The Company's results
for the years ended December 31, 1994, 1993 and 1992 reflect bulk reserve
strengthenings of $75 million, $290 million and $200 million,
respectively.
<TABLE>
<CAPTION>
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
($ millions)
COMMERCIAL ACCOUNTS GROUP
<S> <C> <C> <C> <C> <C>
Gross written premiums $ 12 $ 300 $ 1,230 $ 1,596 $ 1,580
Net written premiums - 161 1,010 1,313 1,280
Net earned premiums 84 526 1,087 1,321 1,299
Underwriting loss (279) (288) (95) (184) (143)
GAAP combined ratio N.M. N.M. 108.7% 113.8% 111.0%
SPECIALTY LINES GROUP
Gross written premiums $ 3 $ 241 $ 742 $ 726 $ 632
Net written premiums - 162 532 478 406
Net earned premiums 22 349 516 445 379
Underwriting loss (250) (127) (135) (122) (16)
GAAP combined ratio N.M. N.M. 126.2% 127.4% 104.2%
RUN-OFF OPERATIONS
Gross written premiums $ 7 $ 41 $ 47 $ 102 $ 212
Net written premiums 1 39 45 84 100
Net earned premiums 10 39 50 116 164
Underwriting loss (435) (690) (138) (234) (266)
GAAP combined ratio N.M. N.M. 376.0% 301.2% 261.5%
HOME INSURANCE BEFORE
STOP LOSS TREATY
Gross written premiums $ 22 $ 582 $ 2,019 $ 2,424 $ 2,424
Net written premiums 1 362 1,587 1,875 1,786
Net earned premiums 116 914 1,653 1,882 1,842
Underwriting loss (964) (1,105) (368) (540) (425)
GAAP combined ratio N.M. N.M. 122.3% 128.7% 123.1%
STOP LOSS TREATY
Net written premiums $ - $ - $ - $ - $ (214)
Net earned premiums - - - - (214)
Underwriting profit (loss) - (189)(a) - - 214
TOTAL HOME INSURANCE
Gross written premiums $ 22 $ 582 $ 2,019 $ 2,424 $ 2,424
Net written premiums 1 362 1,587 1,875 1,572
Net earned premiums 116 914 1,653 1,882 1,628
Underwriting loss (964) (1,294) (368) (540) (211)
GAAP combined ratio N.M. N.M. 122.3% 128.7% 112.9%
</TABLE>
(a) Resulted from the commutations and assignment of the Stop Loss Treaty
(see note 7 to the consolidated financial statements).
N.M. - Not Meaningful.
COMMERCIAL ACCOUNTS GROUP
As discussed previously, the Commercial Accounts Group business is
being run-off subsequent to June 12, 1995. Prior to June 12, 1995, the
Commercial Accounts Group consisted of two business units: (i) Commercial
Casualty and (ii) Commercial Property. Commercial Casualty was comprised of
the former Middle Market Casualty and Major Casualty units. The Commercial
Accounts Group also encompassed New Ventures business and International
Accounts business.
Commercial Casualty
Prior to June 12, 1995, the Commercial Casualty unit underwrote
insurance throughout the United States for large and medium-sized
industrial and other commercial enterprises that were national in scope
and required customized casualty insurance programs and services.
The Commercial Casualty unit principally offered its customers
workers' compensation, general liability and commercial automobile
insurance. Workers' compensation insurance was purchased by employers to
comply with state and federal laws requiring employees injured in the
course of their employment to be provided with medical and wage loss
benefits. General liability insurance included non-automobile liability
coverage for commercial enterprises, while commercial automobile
insurance included automobile coverage for those same entities. These
coverages were written on both manuscripted policy forms and standard
policy forms. The Major Casualty unit used a variety of loss sensitive
programs in which premiums varied depending on loss experience, such as
incurred loss retrospectively-rated plans, where the premium was adjusted
annually based on the level of reported incurred losses, and paid loss
retrospectively-rated plans, where premiums were collected from the
insured over time as losses were paid.
Commercial Property
Prior to June 12, 1995, The Commercial Property unit underwrote
insurance throughout the United States for two types of customers: i)
large industrial and other commercial enterprises, which were national in
scope, required customized property insurance programs and services,
generated annual premiums in excess of $100,000, employed the services of
a professional risk manager and required the underwriting of all of the
customer's property insurance, with policies generally written on a
deductible basis in excess of $100,000 per occurrence, and ii) highly
protected risks, which were generally sprinklered engineered risks and
typically generated annual premiums in excess of $25,000.
The Commercial Property unit offered primarily fire, inland
marine, boiler and machinery and builders risk insurance. Fire insurance
provided coverage for damage to property and personal effects from
physical perils; inland marine coverage afforded protection for property
that does not remain at a fixed location; boiler and machinery insurance
extended sudden and accidental damage protection for equipment; and
builders risk insurance applied coverage to buildings under construc-
tion. The coverages were typically written on manuscripted policy forms.
SPECIALTY LINES GROUP
Prior to June 12, 1995, the Specialty Lines Group wrote
specialized property and liability insurance for individuals,
professionals and businesses. In addition to professional liability
insurance for lawyers, real estate agents, accountants, security guards
and life insurance agents, Specialty Lines Group coverages included
directors' and officers' liability, primary and excess surplus lines
casualty, trucking liability, energy related property coverage, ocean
marine, traditional excess casualty coverage and group accident
insurance. Specialty Lines' customer base covered a wide range of
enterprises, including, for example, Fortune 500 companies for whom group
accident coverage was written, emerging high-technology companies
purchasing directors' and officers' liability coverage for the first
time, and individual lawyers or accountants.
The Specialty Lines Group generally used three types of
distribution systems: (1) regional and national brokers for access to the
admitted markets; (2) surplus lines brokers for access to the
non-admitted markets; and (3) program administrators for monoline mass
marketed policies.
Professional Liability
From 1983 until 1994, Home Insurance and Professional Liability
Underwriting Managers, Inc. ("PLUM") had been parties to a contract
pursuant to which PLUM acted as a program administrator for lawyers'
professional liability. In 1994, over 95% of Home Insurance's lawyers'
professional liability business, which constituted approximately 86% of
Home Insurance's professional liability business, was written by PLUM
pursuant to such contract.
Other Specialty Lines
Aside from professional liability, Specialty Lines was organized
into five product areas which concentrated management and professional
resources. These product areas were: (i) excess casualty umbrella; (ii)
surplus lines; (iii) financial products; (iv) energy and marine; and (v)
healthcare. Specialty Lines business was concentrated in a limited number
of product lines requiring highly specialized risk selection and
underwriting skills and which allowed it to achieve adequate prices and
select quality risks within its market segments. The underwriters
accepted or rejected submissions based on an evaluation of the risk, the
negotiated contract language and price, as well as the policy limits and
attachment points.
RUN-OFF OPERATIONS
Run-Off Operations prior to June 12, 1995 were comprised primarily
of personal lines, assumed reinsurance, Asbestos/Pollution Policies and
other excess casualty business written by Home Insurance between 1962 and
1982.
Personal Lines
Personal lines consisted of personal property, personal automobile
and umbrella coverages. In October 1991, Home Insurance announced its
plans to cease the issuance of new and renewal personal lines policies.
As part of this strategy, Home Insurance ceased to accept new business
after January 31, 1992, where permitted by state law. In order to
facilitate its market withdrawal for existing business, Home Insurance
reached agreements with certain carriers for the purpose of extending
offers of renewal to Home Insurance's policyholders in a number of
states. Prior to June 12, 1995, Home Insurance had otherwise commenced
the nonrenewal of personal lines business in all states other than
Arizona, California, Hawaii, New Jersey, New York and West Virginia,
where regulations restrict Home Insurance's ability to cease renewals of
personal lines business.
Subsequent to June 12, 1995, Home Insurance has commenced the
nonrenewal of all personal lines business in Arizona, California, Hawaii,
New Jersey, New York and West Virginia. This action has been taken based
on various regulatory initiatives agreed upon by Home Insurance and the
insurance departments of these states.
Based on the above actions, the last personal lines policy is
scheduled to expire on May 31, 1997.
Assumed Reinsurance
Prior to September 1990, US International Reinsurance Company
("USI Re"), a subsidiary of Home Insurance, was engaged in the business
of writing treaty and facultative reinsurance. In September 1990, USI Re
ceased accepting new or renewal insurance business, except for operations
conducted by City International Insurance Company Limited ("City
International"), which ceased writing business at December 31, 1991,
except for certain syndicate participations which expired on December 31,
1992. In 1992, USI Re commenced writing a limited amount of business
primarily assumed from Home Insurance which ceased at December 31, 1993.
Asbestos/Pollution Policies
Asbestos/Pollution Policies consist of policies under which
asbestos, pollution and other toxic tort coverages have been alleged
relating to (i) certain types of excess casualty policies written prior
to 1983 which consisted of high level umbrella coverage for major U.S.
corporations, (ii) certain policies primarily written prior to 1985,
which did not include an absolute exclusion for asbestos, pollution and
other toxic tort exposures and (iii) certain assumed reinsurance
policies.
1962-1982 Other Excess Casualty
Excess casualty policies written in the period from approximately
1962 to 1982 consisted of umbrella coverage for major U.S. corporations,
other than Asbestos/Pollution Policies, covering such exposures as
general liability, product liability, workers' compensation, auto
liability and, to a lesser extent, other lines of business. Home
Insurance stopped writing these policies in approximately 1982. See
"Unpaid Losses and Loss Adjustment Expenses" for a discussion of Home
Insurance's exposure to future losses from these policies.
In January 1984, Home Insurance sold its 27.1% interest in
American Foreign Insurance Association ("AFIA"), an underwriting
association engaged primarily in insuring foreign risks. As part of the
sale agreement, Home Insurance, together with the other former members of
the AFIA pool, entered into a quota share agreement covering 90% of the
excess of $335 million to $600 million of losses on business written
prior to July 1983 and indemnifying AFIA for its non-recoverable
reinsurance in excess of certain limits.
CEDED REINSURANCE OPERATIONS
Since Home Insurance ceased writing new business effective June
12, 1995, the only reinsurance placements during 1996 related to the
purchase of catastrophic protection. Specific reinsurance (both treaty
and facultative) on risks written prior to June 12, 1995 cover the
run-off of that liability.
Protection against catastrophic exposures was purchased as follows:
o Third Party Casualty in the amount of $42.5 million in
excess of a $7.5 million retention.
o Property protection for natural catastrophe losses remained in
effect from 1995 amounting to $20 million in excess of a $10
million retention.
o Accident & Health was covered by a six layer excess of loss
program providing coverage of $100 million in excess of
a $300,000 retention.
o Workers' Compensation losses were protected by $50 million
in excess of a retention of $30 million.
Where appropriate, further cover will be purchased in 1997.
The financial strength of reinsurers for these and all other Home
Insurance reinsurers are reviewed as part of a regular monitoring process
based on industry norms and standard Insurance Regulatory Information
System ("IRIS") tests. This same process is utilized to evaluate expected
ultimate recoveries so that reserves for doubtful collection can be
established.
Such reserves are established when the expected ultimate recovery
is determined to be less than the full amount due. Accordingly, Home
Insurance has recorded reserves of $126 million for recoverable
reinsurance doubtful of collection as of December 31, 1996, as compared
to $146 million recorded as of December 31, 1995. At December 31, 1996,
there were no amounts due from any individual reinsurer in excess of 10%
of the Company's stockholders' deficiency, excluding amounts due from
Centre Reinsurance Dublin, General Reinsurance Corporation and Lloyds of
London which were $787 million, $187 million and $261 million,
respectively.
The following table shows 1996 premiums ceded to Home Insurance's
five largest reinsurers and such reinsurers' A.M. Best rating, where
applicable.
Ceded
Written A.M. Best
Name Premiums Rating
Zurich American Insurance Company of Illinois $ 7 A+
Lloyds of London 3 *
General Reinsurance Corporation 1 A++
Haftpflichtverband Der Deutschen Industrial
(Germany) 1 **
American Re-Insurance Company 1 A+
Five largest reinsurers 13
Other reinsurers 8
---------
Total ceded premiums $ 21
=========
- ------------------------
* An A.M. Best rating is not applicable. Lloyds of London ("Lloyds") has
suffered several years of significant underwriting losses. However, the
Company does not believe that Lloyds represents an unacceptable
security risk.
** Rated A by Standard and Poor's Corporation ("S&P") International Ratings
Excess of Loss Reinsurance Agreement and Stop Loss Treaty
Effective January 1, 1991, Home Insurance entered into the Stop
Loss Treaty with a group of reinsurers, including Centre Reinsurance
Limited and Trygg-Hansa Insurance Company Limited ("THI"), a subsidiary
of Trygg-Hansa, which had 50% and 15% participations in the treaty,
respectively. The treaty protected Home Insurance against losses
sustained in all years prior to the year in which the treaty is
cancelled.
Under the Stop Loss Treaty, the reinsurers indemnified Home
Insurance to the extent its ultimate net loss exceeded the sum of (i) the
loss and loss adjustment expense reserves as of December 31, 1990 and
(ii) for 1991 through cancellation, a specified percentage of net earned
premiums. Premiums paid to the reinsurers under the Stop Loss Treaty were
$59 million in 1994 and $9 million in 1993. At December 31, 1994 premiums
and losses and loss adjustment expenses ceded under the Stop Loss Treaty
were $295 million and $590 million, respectively. At December 31, 1994,
the amount recoverable net of premium payable of $100 million under the
Stop Loss Treaty was $490 million.
In 1995, in connection with the Recapitalization, Home Insurance
entered into a Commutation Agreement, dated as of June 12, 1995 (the
"Commutation Agreement") with Centre Reinsurance Limited and Zurich
International (Bermuda) Ltd. (the "Commuting Reinsurers") providing for
the commutation of the Stop Loss Treaty as of June 12, 1995 as to the
Commuting Reinsurers. Home Insurance also entered into the Assignment
Agreement, dated as of June 12, 1995 (the "Assignment Agreement"), with
Centre Reinsurance Dublin, pursuant to which Home Insurance assigned all
of its rights, title and interest in any payments by those reinsurers
under the Stop Loss Treaty that were not Commuting Reinsurers (i.e.,
Kemper Reinsurance Company and THI) due Home Insurance in accordance with
the Stop Loss Treaty. The Company recognized a $189 million loss in 1995
attributable to the Commutation Agreement and the Assignment Agreement.
In 1996, THI commuted its share of the Stop Loss Treaty, leaving Kemper
Reinsurance Company as the only non-commuting reinsurer.
Also, 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 reinsurers commence making
payments under the Excess of Loss Reinsurance Agreement. See "Insurance
Regulation - Dividend Restrictions". Also, up to $290 million of
additional coverage provided by the Excess of Loss Reinsurance Agreement
is linked to certain factors including dividend payments from Home
Insurance to the Company funding principal payments on the Public
Indebtedness (as defined in note 1 to the consolidated financial
statements) as such debts become payable. The Excess of Loss Reinsurance
Agreement became effective on June 12, 1995 upon (i) the payment by Home
Insurance to Centre Reinsurance Dublin of $63 million and (ii) the
transfer by Home Insurance of $166 million to Centre Reinsurance Dublin,
representing the respective amounts received by Home Insurance from
Zurich International (Bermuda) Ltd. and Centre Reinsurance Limited as a
reinsurance commutation (exclusive of refunds of security costs). In 1996
an additional $43 million was transferred to Centre Reinsurance Dublin,
representing the amount received by Home Insurance from THI as a
reinsurance commutation.
Based on cash flow forecasts at December 31, 1996, the Company is
projecting that the coverage limits of the Excess of Loss Reinsurance
Agreement will be exhausted. Due to these projected future recoveries,
loss reserves with a net present value of $787 million were recorded as
of December 31, 1996 as a recoverable from the Excess of Loss Reinsurance
Agreement, including an additional $372 million during 1996. As of
December 31, 1995, the recoverable from the Excess of Loss Reinsurance
Agreement was $415 million. The increase resulted primarily from changes
to cash flow projections which now forecast that the cover will be
exhausted, and changes in the net present value of the receivable based
on current projections of amounts and timing of cash inflows and
outflows.
The Excess of Loss Reinsurance Agreement includes a no-claims
bonus payable to Home Insurance, (the "Bonus") equal to the Loss Transfer
Amount, as defined in note 7 to the consolidated financial statements
plus interest accrued thereon at a rate of 7.5% per annum from Closing
until the date that the Bonus is paid. The Bonus will be paid at such
time as the Company, the Department, and Centre Reinsurance Dublin agree
that there will be no obligations payable under the Excess of Loss
Reinsurance Agreement. However, as discussed previously, the Company,
based on current cash flow forecasts, is projecting a recoverable from
the Excess of Loss Reinsurance Agreement and therefore does not expect
to receive and has not recorded the no-claims bonus as an asset.
UNPAID LOSSES AND LOSS ADJUSTMENT EXPENSES
Home Insurance's loss and loss adjustment expense reserves
represent estimates of the cost of satisfying claims currently pending
and claims incurred but not yet reported. Payments relating to such costs
will occur over a period of years. The methods and assumptions used in
evaluating reserves are consistent with prevailing actuarial practice and
are modified periodically based on changes in circumstances. The
liability for unpaid losses is estimated using case and case development
estimates for reported claims and estimates based on experience and
expected loss development for unreported claims. Unpaid loss adjustment
expenses are estimated based on experience and expected future emergence.
The effect of inflation on the ultimate cost of claims is implicitly
considered as part of the overall evaluation of changes in average claim
severities or average claim costs. In addition to inflation, claim
severity is also affected by the type of coverage underwritten and the
net retention after ceded reinsurance. The reasonableness of estimated
average claim costs is assessed periodically by comparing such estimates
with average paid claims for each line of business. In addition, the
results of actuarial reviews, performed at regular intervals throughout
the year, are incorporated in the data used to monitor the adequacy of
reserves.
Home Insurance is required by state law to participate in various
involuntary pools principally involving workers' compensation and
automobile insurance, including the National Workers' Compensation
Reinsurance Pool (the "Pool") and workers' compensation pools in a number
of states. From time to time, such pools assess charges on their
participants to reflect claims which have been made against such pools.
Home Insurance does not make any independent assessment of the adequacy
of reserves for involuntary pools in which it participates, and records
reserves reported to it and related accruals as part of loss reserves,
assuming the adequacy of such reported amounts.
Home Insurance is currently involved in a dispute with the
National Council on Compensation Insurance ("NCCI"), which administers
the Pool. See note 14 to the consolidated financial statements for
further discussion.
Reserve Strengthening
Home Insurance recorded a $662 million bulk addition to reserves
during the fourth quarter of 1996, including a $100 million increase in
unallocated loss adjustment expense reserves, distributed among all
product lines to reflect Home Insurance's experience in run-off during
1995 and 1996. The Company has compared industrywide payment trends to
its own payments for Asbestos/Pollution Policies, and has considered it
appropriate to review industry ratios of reserves to payments in
establishing its own reserves. The bulk reserve additions included a $225
million increase for Asbestos/Pollution Policies, reflecting higher
aggregate annual payments in the last two years as Home Insurance has
pursued more early settlement opportunities and simultaneously sought to
strengthen its relative reserve position. The 1996 bulk reserve additions
for other product lines were $437 million, including $132 million for
professional liability, $121 million for Commercial Casualty, $68 million
for Other Specialty Lines, $65 million for excess run-off, $35 million
for assumed reinsurance and $16 million for personal lines. The
professional liability increase reflects consolidation of a trend to a
new level of higher claim severities which has persisted over the last
three years compared to prior periods. The Commercial Casualty increases
reflect a higher exposure measured for products liability, compared to
earlier years, with associated increases in loss ratios, claim severities
and tail factors. The increases for excess run-off and assumed
reinsurance are less a reflection of the company's own immediate past
experience than a response to higher tail factors for excess casualty
exposure indicated by recent industry experience.
Home Insurance recorded a $440 million bulk addition to reserves
during the fourth quarter of 1995 for Asbestos/Pollution Policies. Home
Insurance also recorded a $75 million bulk reserve strengthening during
the third quarter of 1994 for professional liability business.
Strengthening for professional liability related to higher than expected
case emergence in 1994 on recent accident years. This emergence related
to an increased frequency of moderately-severe cases affecting the
lawyers' professional liability line of business which, in the judgment
of the Company at that time, represented a new, higher level of average
settlement value for this business.
Asbestos/Pollution Policies
At December 31, 1996, the gross, ceded and net loss and loss
adjustment expense reserves for Asbestos/Pollution Policies amounted to
$1,501 million, $682 million and $819 million, respectively. Net loss
reserves for Asbestos/Pollution Policies increased $140 million from $679
million at December 31, 1995.
As of December 31, 1996, Home Insurance had approximately 2,100
policies for which one or more claims were open relating to asbestos and
pollution matters. Some policies have both asbestos and pollution claims
open against them. As of the end of 1996, the Company has open
approximately 900 asbestos claims and 3,300 pollution claims. The Company
has provided claim count information in an effort to provide additional
insight into the magnitude of the management effort required to deal with
the case load in the areas of Asbestos/Pollution Policies. Claim counts
for these exposures are not, however, subject to the same level of
consistent definition that is common for other insured perils. A claim
count for a pollution policy might involve a single waste site in a
single year for which coverage is being sought under a single policy.
Alternatively, a single claim count might involve a settlement covering
many waste sites over many years and/or several policies in several
layers of coverage per year. As a result, the interpretation of this data
is complicated and the use of average values calculated on the basis of
this data is likely to be misleading. The number of open asbestos claims
has been fairly stable over the last five years. The number of pollution
claims has also been fairly stable over the last four years. In addition,
as of December 31, 1996, Home Insurance was involved in approximately 330
coverage disputes (where an action seeking a declaratory judgment had
been filed, the resolution of which will require a judicial
interpretation or compromise resolution of an insurance policy) related
to claims on Asbestos/Pollution Policies.
About half of these claims involve primary policies issued by Home
Insurance, and half involve Home Insurance excess policies issued during
the late 1960's through early 1980's. The predominance of the expected
dollar exposure relates to the excess policies. Policy limits on those
excess policies range from $100,000 up to as much as $25 million, and may
operate above self insured retentions or underlying insurance which may
range from $25,000 to hundreds of millions of dollars. In addition to the
claim counts and policy counts listed above, which relate to the
Company's direct business, the Company has material exposure relating to
its assumed reinsurance business, for which it has $111 million of net
reserves included in the total above.
While the Company has compared industrywide payment trends to its
own payments for Asbestos/Pollution Policies, and has considered it
appropriate at this time to review industry ratios of reserves to
payments in establishing its own reserves, the Company views such
"survival ratios" as temporary benchmarks of reserving levels which can
be misleading and which over time must inevitably decline in importance,
as legal issues are resolved, experience matures and actuarial models can
be validated. Benchmarks based on premium market share or payments share
necessarily depend on the consistency between companies of many variables
including policy class and limits distribution, policy deductibles and
underlying retentions, coverages and coverage exclusions and geographic
mix. Survival ratios have an additional limitation in that a company
which accelerates the disposal of its claims compared to its peers, and
is thus retiring its ultimate liabilities faster, will appear to require
a higher reserve. Following industry practice which became apparent only
in 1995 with new statutory disclosure requirements, the Company has
established somewhat lower survival ratios on its gross reserves than its
net 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. 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, REM, in its capacity as manager of Home Insurance's
operations, established a single Environmental and Mass Tort Division,
which includes a new team to merge financial, legal and environmental
engineering expertise in negotiation with policyholders and reinsurers to
find alternative resolutions to claims in the environmental and mass tort
areas. Management believes that these organizational changes increase
operational efficiency, while assuring that Home Insurance takes a
unified and consistent approach to these claims. This division has also
prepared an inventory of potential exposures for Asbestos/Pollution
Policies, which Home Insurance has utilized 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.
Changes in 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, as
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.
The table below sets forth the changes in unpaid loss and loss
adjustment expenses for the three years ended December 31, 1996:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
($ millions)
<S> <C> <C> <C>
Unpaid losses and loss adjustment expenses, net
at beginning of year $ 4,023 $ 3,279 $ 3,243
--------- -------- --------
Incurred losses and loss adjustment expenses:
Provision for insured events of current year 196 851 1,349
Provision for insured events of prior years 764 927 223
--------- -------- --------
Total incurred loss and loss adjustment
expenses 960(a) 1,778(b) 1,572
--------- -------- ---------
Payments:
Attributable to insured events of current year (102) (202) (289)
Attributable to insured events of prior years (1,036) (832)(b) (1,247)
--------- --------- ---------
Total payments (1,138) (1,034) (1,536)
--------- --------- ---------
Unpaid losses and loss adjustment expenses, net
at end of year 3,845 4,023 3,279
Ceded unpaid losses and loss adjustment
expenses at end of year 1,842(a) 1,791(b) 2,294
---------- --------- ---------
Gross unpaid losses and loss adjustment
expenses at end of year $ 5,687 $ 5,814 $ 5,573
========== ========= ========
</TABLE>
(a) In 1996, excludes $372 million of incurred losses and $787 million
of ceded unpaid losses relating to the Excess of Loss Reinsurance
Agreement. See note 7 to the consolidated financial statements.
(b) Excludes reduction to ceded paid losses of $401 million and an
increase to ceded unpaid losses of $415 million relating to the
Excess of Loss Reinsurance Agreement.
The table also includes $662 million of bulk reserve additions in
1996, which includes $225 million for Asbestos/Pollution Policies, $121
million for Commercial Casualty business, $132 million for professional
liability, $68 million for Other Specialty Lines business, $16 million
for personal lines business, $65 million for excess run-off and $35
million for assumed reinsurance. The table also includes $440 million of
bulk reserve additions for Asbestos/Pollution Polices in 1995, and a $75
million bulk reserve strengthening for professional liability in 1994.
The incurred losses and loss adjustment expenses for insured events of
prior years included Asbestos/Pollution losses of $233 million, $549
million, and $126 million in 1996, 1995 and 1994, respectively. The 1995
incurred losses and loss adjustment expenses for insured events of prior
years also include $189 million related to the commutation and assignment
of the Stop Loss Treaty as discussed in note 7 to the consolidated
financial statements.
The following table presents the development of the net liability
for unpaid losses and loss adjustment expenses for calendar years 1986
through 1995 at December 31, 1996. Net unpaid losses and loss adjustment
expenses represent the estimated net liabilities as initially recorded at
the end of the year for all outstanding claims, including claims that
have been incurred but not yet reported. The re-estimated net liability
represents subsequent evaluations of the initial net liability at the end
of each succeeding year. The cumulative deficiency represents the excess
of the latest re-estimate over the initial estimate. The re-estimated net
liability and cumulative deficiency as of the end of each calendar year
include the effects of changes in the net liability for all prior
calendar years. For example, the amount of the deficiency related to
losses settled or re-estimated in 1995 but incurred in the earliest year
displayed will be included in the re-estimated net liability and
cumulative deficiency amounts for each subsequent year. The cumulative
deficiencies shown in the aforementioned table have been charged against
income in 1996 and prior years.
<TABLE>
<CAPTION>
December 31,
-----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996
---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
($ millions)
Net unpaid losses and
loss adjustment
expenses(1)(2)(3)(4) $ 2,868 $ 3,112 $ 3,305 $ 3,404 $ 3,171 $ 3,012 $ 2,820 $ 3,243 $ 3,279 $ 4,023 $3,845
-------- ------- ------- ------- ------- ------- ------- ------- ------- ------- ------
Cumulative amounts
paid as of:
One year later $ 945 $ 992 $ 1,123 $ 1,387 $ 1,091 $ 1,188 $ 1,154 $ 1,247 $ 832 $ 1,036
Two years later 1,594 1,734 1,993 2,111 1,921 1,986 2,056 1,761 1,672
Three years later 2,133 2,313 2,476 2,679 2,479 2,627 2,359 2,376
Four years later 2,540 2,628 2,854 3,066 2,943 2,780 2,805
Five years later 2,775 2,908 3,129 3,405 3,009 3,116
Six years later 3,002 3,114 3,395 3,389 3,267
Seven years later 3,178 3,326 3,345 3,596
Eight years later 3,367 3,257 3,522
Nine years later 3,285 3,415
Ten years later 3,427
Re-estimated net
liability as of:
One year later $ 3,010 $ 3,219 $ 3,394 $ 3,510 $ 3,194 $ 3,032 $ 3,258 $ 3,466 $ 4,206 $ 4,787
Two years later 3,143 3,283 3,471 3,536 3,222 3,516 3,436 4,361 4,812
Three years later 3,246 3,395 3,504 3,610 3,662 3,665 4,345 4,931
Four years later 3,384 3,397 3,548 3,991 3,827 4,441 4,957
Five years later 3,385 3,442 3,829 4,146 4,491 5,005
Six years later 3,426 3,684 3,995 4,782 5,032
Seven years later 3,656 3,835 4,636 5,299
Eight years later 3,807 4,471 5,131
Nine years later 4,446 4,951
Ten years later 4,935
Cumulative deficiency
through December
31, 1995 $(2,067) $(1,839) $(1,826) $(1,895) $(1,861) $(1,993) $(2,137) $(1,688) $(1,533) $ (764)
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Gross unpaid losses and loss adjustment expenses, at end of year $ 5,496 $ 5,573 $ 5,814 $ 5,687
Ceded unpaid losses and loss adjustment expenses, at end of year (4) 2,253 2,294 1,791 1,842
-------- ------- ------- -------
Net unpaid losses and loss adjustment expenses, at end of year $ 3,243 $ 3,279 $ 4,023 $ 3,845
-------- -------- ------- -------
Re-estimated gross liability, at end of year $ 7,919 $ 7,694 $ 6,984
Re-estimated ceded liability, at end of year 2,988 2,882 2,197
-------- -------- -------
Re-estimated net liability, at end of year $ 4,931 $ 4,812 $ 4,787
-------- -------- -------
</TABLE>
(1) The table includes data for Commonwealth Insurance Company
("Commonwealth") through August 1990, the date Commonwealth was
sold. The data in the above table represents pre-acquisition
amounts for the years 1986 through 1990.
(2) The decrease in net unpaid losses and loss adjustment expenses
from $3,404 million at December 31, 1989 to $3,171 million at
December 31, 1990 included a loss portfolio transfer by USI Re
which reduced the December 31, 1990 net unpaid losses and loss
adjustment expenses by $244 million.
(3) The increase in net reserves from December 31, 1994 to December
31, 1995 was impacted by the $590 million reduction in ceded unpaid
losses and loss adjustment expenses resulting from the commutation
and assignment of the Stop Loss Treaty.
(4) Excludes ceded unpaid losses of $787 million and $415 million in
1996 and 1995, respectively, relating to the Excess of Loss
Reinsurance Agreement. See note 7 to the consolidated financial
statements.
As shown in the reserve development table, a retrospective
evaluation of prior years' reserve requirements has indicated
deficiencies for each of the years 1986 through 1995. These deficiencies
were attributable primarily to general liability, workers' compensation,
claims on Asbestos/Pollution Policies and assumed reinsurance. All of
these lines have long development periods and are consequently subject to
greater variation in the reserve estimation process. A portion of the
policies written for these lines of business are subject to retrospective
premium adjustments based on loss experience, which tends to reduce the
effect of adverse development. Such premium adjustments are not reflected
in the preceding table. The principal factors that have adversely
affected these lines include (i) the higher legal costs associated with
protracted litigation, (ii) increasingly larger jury awards in tort and
contract litigation involving coverage issued for general liability,
workers' compensation, products liability, professional liability and
other third party general liability claims, and (iii) unfavorable
experience with new products and markets which in retrospect can be seen
to have been underpriced.
Conditions and trends that have affected the development of
liabilities in the past may not necessarily exist in the future. Also,
due to the uncertainties inherent in estimating reserves, projection of
past reserve deficiency experience to future periods is inappropriate.
At December 31, 1996, unpaid losses and loss adjustment expenses
were net of a discount to unpaid losses of $134 million relating to all
workers' compensation pension liabilities which are carried at present
value, discounted at an interest rate of 7.5%. Home Insurance recorded
decreases to the discount of $50 million in 1996 and $19 million in 1995,
and an increase of $52 million in 1994. The 1996 decrease reflects a
reduction in the escalation benefit and associated discount foreseen
for claims in certain states, and also the natural unwinding of the
discount as Home Insurance has ceased writing business. The increase in
1994 related to an increase in the number of workers' compensation
pension cases as well as strengthened case development estimates. The
decreases in the discount increased underwriting losses, while recording
additional discount reduced underwriting losses. See note 4 to the
consolidated financial statements for discussion of discount of loss
reserves for statutory purposes.
INVESTMENTS
ZIM manages the cash and invested assets of the Company and Home
Insurance pursuant to an investment management agreement. Additionally,
upon Closing, the Company and Home Insurance entered into the Swap
effective January 1, 1995 with Centre Reinsurance Dublin whereby Centre
Reinsurance Dublin will pay annually to the Company and Home Insurance
any negative differences between the actual total return on such assets
and a target total return of 7.5% per year (net of asset management fees)
on such assets and, the Company and Home Insurance will pay annually to
Centre Reinsurance Dublin any positive difference between the actual
total return on such assets and the 7.5% target total return (net of
asset management fees) on such assets.
The Swap is 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 underlying 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
underlying 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%. In
1995, the Company also recorded realized capital losses of $208 million,
which were reflected at December 31, 1994 as unrealized capital losses
included in stockholders' equity. Subsequent changes to fair market value
of securities have not and will not be recognized, as Centre Reinsurance
Dublin bears the market risk.
As of December 31, 1996, the Company has recorded, as a component
of the Portfolio Swap Receivable, an amount due from Centre Reinsurance
Dublin of $48 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 $13 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 $133 million.
The Company received $48 million from Centre Reinsurance Dublin on
January 21, 1997, to settle the 1996 Swap Receivable. Securities and cash
totaling $210 million were transferred to Centre Reinsurance Dublin on
January 22, 1996, to settle the 1995 Swap liability.
The estimated fair values of the securities managed by ZIM as of
December 31, 1996 and 1995, and underlying the Portfolio Swap Receivable
from Centre Reinsurance Dublin is as follows:
<TABLE>
<CAPTION>
1996 1995
-------------------------------------------------------------------------
Carrying Carrying
and Percent and Percent
Estimated of Total Estimated of Total
Fair Carrying Fair Carrying
Cost Value Value Cost Value Value
--------------------------------------------------------------------------
($ millions)
<S> <C> <C> <C> <C> <C> <C>
U.S. Government and agency $ 414 $ 412 34% $ 563 $ 573 25%
Mortgage-backed 296 292 24 862 869 37
Corporate 375 377 32 746 760 32
Foreign government 43 45 4 57 58 2
Other 2 2 - 2 3 -
------- ------- ---- ------ ------- ----
Total fixed maturities 1,130 1,128 94 2,230 2,263 96
------- ------- ---- ------ ------- ----
Equity securities - - - 12 11 1
Short-term investments 67 67 6 66 66 3
------- ------- ---- ------ ------- ----
Total Swap investments $ 1,197 1,195 100% $2,308 2,340 100%
------- ==== ====== ----
Receivable from (payable) to
Centre Reinsurance Dublin 48 (210)
------- -------
Portfolio Swap Receivable $ 1,243 $ 2,130
======= =======
</TABLE>
The investments of Home Insurance must comply with the insurance
laws of its domiciliary state. These laws prescribe the type and amount
of investments which may be made by a domestic insurance company. In
general, these laws permit investments, within specified limits and
subject to certain qualifications, in federal, state and municipal
obligations, corporate bonds, preferred stocks, common stocks, real
estate mortgage loans and real estate. Under the terms of the Order, the
Department has the final authority to approve, disapprove or otherwise
control (including the power to direct) the location and material terms
of all banking, investment, trust, deposit and custodial accounts for
assets of Home Insurance, including but not limited to reserves. See
"Insurance Regulation" for further discussion.
The credit quality of the investments underlying the Swap remained
strong as of December 31, 1996. As measured by Moody's Investors
Service, Inc. ("Moody's") ratings, Aaa bonds (highest quality) and Aa
bonds (high quality) represented 77% of the fixed maturities portfolio,
while the overall composite rating of the portfolio was Aa. Moody's bond
ratings are a measure of the quality of the credit of the issues and
range from Aaa to C. All bonds given a rating of Baa or better (i.e., in
descending order, Aaa, Aa, A and Baa) are considered to be investment
grade.
The National Association of Insurance Commissioners ("NAIC") also
has a bond rating system that assigns securities to classes, called "NAIC
designations," that are used by insurers when preparing their annual
statutory financial statements. The NAIC assigns designations to publicly
traded as well as privately placed securities. The designations assigned
by the NAIC range from class 1 to class 6, with a rating in class 1 being
of the highest quality. As of December 31, 1996, 99% of the securities
underlying the Swap, measured on a statutory carrying value basis, was
invested in securities rated in class 1 or class 2 by the NAIC.
The following table sets forth Home Insurance's fixed maturities
underlying the Swap, classified by Moody's ratings as of December 31,
1996:
Percentage
of Total
Carrying Value Carrying Value
($ millions)
Rating:
Aaa $ 819 73%
Aa 45 4
A 98 8
Baa 166 15
--------- ---
Total investment grade 1,128 100
Non-investment grade - -
--------- ---
Total fixed maturities $ 1,128 100%
========= ===
As of December 31, 1996, fixed maturities investments underlying
the Swap included $292 million of mortgage-backed securities as measured
by fair value, which were comprised of $131 million of pass-through
securities and $161 million of collateralized mortgage obligations. The
mortgage-backed securities portfolio was comprised of 73% issued by
United States federal agencies and government-sponsored enterprises, and
27% issued by private entities. At December 31, 1996 the average life
of the mortgage-backed securities portfolio was 5.2 years.
The collateralized mortgage obligation portfolio underlying the
Swap was comprised of 54% planned amortization class securities and 46%
sequential-pay securities. These classes of collateralized mortgage
obligations have relatively low levels of prepayment risk and volatility.
Certain investments at December 31, 1996 were excluded from the
Swap, including fixed maturities carried at $28 million and equity
securities at $21 million. Furthermore, there were no direct real estate
investments included in the portfolio as of December 31, 1996, and the
carrying value of all non-income producing securities excluded from the
Swap was $8 million. In the year ended December 31, 1996, the Company
recognized $9 million in realized capital gains and $6 million in
unrealized gains on insurance equity investments not underlying the Swap.
COMPETITION
Competition prevailed in all lines of insurance written by Home
Insurance, prior to the Closing of the Recapitalization. Subsequent to
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.
GOODWILL
In November 1994, the Company was downgraded by the three primary
insurance rating agencies. These actions had a significant adverse effect
on the premium production of Home Insurance. As a result, the Company
could no longer forecast operating income to demonstrate the
recoverability of goodwill related to its subsidiaries. Therefore, the
Company recorded a charge of $206 million in 1994 for the writeoff of
goodwill, exclusive of the annual amortization.
INSURANCE REGULATION
State and Other Regulation
Home Insurance, in common with other insurers, is subject to
regulation and supervision in the various states and jurisdictions in
which it transacts business. The extent of regulation varies but
generally has its source in statutes which delegate regulatory,
supervisory and administrative authority to a department of insurance.
The regulation, supervision and administration relate, among other
things, to the standards of solvency which must be met and maintained,
the licensing of insurers and their agents, the nature of and limitations
on investments, premium rates, restrictions on the size of risks which
may be insured under a single policy, reserves and provisions for
unearned premiums, losses and other purposes, deposits of securities for
the benefit of policyholders and approval of policy forms.
On March 3, 1997, Home Insurance was placed under formal
supervision by the Department. The Department states in its Order that
this action was taken in response to Home Insurance's RBC report filed
with the Department which indicates that a Mandatory Control Level Event
has occurred. See "Risk-Based Capital." The Order establishes that the
Department will oversee and supervise Home Insurance for the purpose of
continuing and intensifying an economic, actuarial and accounting review
of the books, records and business affairs of Home Insurance so as to
determine what future actions may be appropriate. The Order provides that
Home Insurance may not take certain actions without the prior approval of
the Department, including, but not limited to:
i) Make any single claim payment in excess of $1 million
except under conditions specified therein.
ii) Make any payment to creditors or other persons in excess
of $500,000, except as set forth in clause (i) above.
iii) Make any single payment to cedents or reinsurers (a) in
excess of $250,000 or (b) out of the ordinary course of
business, or any commutation of any amount with
any cedents or reinsurers.
iv) Release any obligation or collateral in excess of $500,000.
v) Materially change the terms of any contracts or enter into
any new contracts in excess of $500,000.
vi) Engage in any transactions with the Company, REM, ZHI,
Zurich or Trygg-Hansa or any subsidiaries, other
affiliates or agents of such entities.
In addition, without limiting the general authority of the
Department as set forth above, the Department shall have the final
authority to approve, disapprove or control (including the power to
direct) the following:
i) The initiation, settlement or withdrawal of any action,
dispute, arbitration, litigation, or proceeding of any
kind involving Home Insurance other than in the ordinary
course of business.
ii) The location and material terms of all banking, investment,
trust, deposit and custodial accounts for assets of Home
Insurance, including but not limited to reserves.
In connection with the Recapitalization in 1995, the Department
restricted the licenses of Home Insurance to prohibit the writing of any
new or renewal business except for limited risks that Home Insurance was
obligated to continue writing for an interim period until Home Insurance
could complete the orderly transition to full run-off of operations.
Also, in connection with the Closing of the Recapitalization, the
Department had 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. In addition to New Hampshire (the
primary domiciliary state of Home Insurance), several states issued
orders restricting, suspending, or revoking Home Insurance's licenses or
authority to write business. These states include: Arizona, California,
Hawaii, Michigan, Montana, New York, North Carolina and West Virginia.
Insurance departments and foreign insurance regulatory authorities
also conduct periodic examinations of the affairs of insurance companies
and require the filing of annual and other reports relating to the
financial condition of companies and other matters. The Department
routinely conducts detailed triennial reviews of insurance companies
domiciled in that state and has completed an examination of Home
Insurance, The Home Indemnity Company and USI Re covering the years 1991
through 1993.
Home Insurance is required to participate in various involuntary
pools, principally involving workers' compensation and automobile
insurance. Home Insurance's involuntary pool participation in most states
is generally in proportion to voluntary writings of related lines of
business in that state. Net earned premiums related to such pools and
assigned risks were $16 million in 1996, $60 million in 1995, $118
million in 1994, $190 million in 1993 and $124 million in 1992. The
related underwriting results are set forth below:
<TABLE>
<CAPTION>
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
($ millions)
UNDERWRITING PROFIT (LOSS):
<S> <C> <C> <C> <C> <C>
Workers' compensation $ 6 $ 14 $ 3 $ (36) $ (44)
Other underwriting losses,
primarily automobile (16) (14) (11) (22) (5)
------ ------ ------- ------- -------
Total underwriting loss $ (10) $ - $ (8) $ (58) $ (49)
====== ====== ======= ======= ======
GAAP combined ratio 162.3% 117.7% 106.7% 130.4% 139.5%
</TABLE>
All states require insurers licensed to do business in their state
to bear a portion of the loss suffered by certain insureds as a result of
insolvency of other insurers. Depending upon state law, insurers can be
assessed to pay the claims of an insolvent insurer. Assessments average
2% of gross written premiums for the relevant lines of insurance written
in the states of assessment each year. Home Insurance recognized income
of $2 million in 1996 and paid total assessments of $2 million and $10
million in 1995 and 1994, respectively, as a result of such insolvencies.
State insurance holding company statutes provide a regulatory
apparatus which is designed to protect the financial condition of
domestic insurers operating within a holding company system. All holding
company statutes require disclosure and, in some instances, prior
approval of significant transactions between the domestic insurer and an
affiliate. The holding company statutes also require, among other things,
prior approval of an acquisition of control of a domestic insurer, as
well as the organization of a subsidiary by a domestic insurer.
Dividend Restrictions
Home Holdings Inc., a holding company whose principal asset is the
capital stock of Home Insurance, relies primarily on dividends from Home
Insurance to meet its obligations for payment of interest and principal
on outstanding debt obligations, dividends to stockholders and corporate
expenses. Home Insurance paid common stock dividends of nil in 1996 and
1995, $77 million in 1994 and preferred stock dividends of nil in 1996
and 1995 and $1 million in 1994. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations-Financial
Condition".
The Company's ability to pay its obligations depends on the
receipt of sufficient funds from Home Insurance. Home Insurance is
subject to regulatory restrictions on the amount of dividends that must
be paid as described below.
The Company was notified in 1995 by the Department that, in light
of the Recapitalization, Home Insurance cannot pay any dividends without
prior approval of the Department. If the 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. Based on the Company's most current
cash flow projections, without dividends from Home Insurance, the Company
is unlikely to be able to meet its cash flow needs in 1997.
Insurance Regulatory Information System
IRIS was developed by a committee of state insurance regulators
primarily to assist state insurance departments in executing their
statutory mandate to oversee the financial condition of insurance
companies. IRIS helps to select those companies that merit highest
priority in the allocation of the regulators' resources on the basis of
eleven financial ratios which are calculated annually. The analytical
phase is a review of annual statements and the financial ratios. The
ratios and trends are valuable in pointing to companies likely to
experience financial difficulties, but are not themselves indicative of
adverse financial condition. The ratios and benchmark comparisons are
mechanically produced and are not intended to replace the state insurance
departments' own in-depth financial analyses or on-site examinations.
An unusual range of ratio results has been established from
studies of the ratios for companies that have become insolvent or have
experienced financial difficulties. In the analytical phase, all
companies that receive four or more financial ratio values outside the
usual range are analyzed in order to identify those companies that appear
to require immediate regulatory attention. Subsequently, a more
comprehensive review of the ratio results and an insurer's annual
statement is performed to confirm that an insurer's situation in fact
calls for increased and closer regulatory attention.
In 1996, Home Insurance was outside the usual values of seven IRIS
test ratios. Two of the failed ratios relate to loss reserves, one to
change in writings, one to the two-year overall operating ratio, one to
the change in surplus and one to the relationship of total liabilities to
liquid assets and one to the relationship of agent's balances to surplus.
Upon Closing of the Recapitalization, Home Insurance ceased underwriting
insurance business, except as required by regulation or contractual
obligation. On March 3, 1997 Home Insurance was placed under formal
supervision by the Department. See "Insurance Regulation" for further
discussion.
Risk-Based Capital
In order to enhance the regulation of insurer solvency, on
December 5, 1993 the NAIC approved a formula and model law to implement
RBC requirements for property and casualty insurance companies, which are
designed to assess capital adequacy and to raise the level of protection
that statutory surplus provides for policyholder obligations. The RBC
formula for property and casualty insurance companies measures three
major areas of risk facing property and casualty insurers: (i)
underwriting, which encompasses the risk of adverse loss development and
inadequate pricing; (ii) declines in asset values arising from credit
risk; and (iii) declines in asset values arising from investment risks.
Pursuant to the model law, insurers having less statutory surplus than
required by the RBC calculation will be subject to varying degrees of
regulatory action, depending on the level of capital inadequacy.
Home Insurance, which had received a waiver from the Department
relating to calculation of RBC in 1995, was required to perform this
calculation in 1996. This calculation indicated that a Mandatory Control
Level Event had occurred since Home Insurance's total adjusted capital
was negative $227 million, which was less than its mandatory control
level RBC of $228 million. The adjusted capital is a calculated amount
per the RBC formula, derived by deducting 60% of non-tabular discount
from statutory surplus (see note 4 to the consolidated financial
statements). The Department has informed Home Insurance that it is
exercising its rights under New Hampshire law to expand its supervision
of Home Insurance's run-off based on this Mandatory Control Level Event.
In this regard the Department issued the Order to increase the
Department's oversight of Home Insurance. See "Insurance Regulation" for
further discussion.
OTHER BUSINESSES
Gruntal
Gruntal, through its broker-dealer subsidiaries, Gruntal & Co. and
GMS, operates a full-service securities brokerage business. Gruntal
employs as of December 31, 1996 approximately 2,000 full-time people, of
whom approximately 854 are account executives. Gruntal & Co. has its main
office in New York City and 23 branch offices in 9 states. GMS
specializes in municipal and other fixed income securities, with
headquarters in Livingston, New Jersey and four branch offices. Gruntal
has approximately 278,000 active clients, which are predominantly retail.
Gruntal's business is divided into two primary areas: retail and
capital markets.
Retail principally includes client brokerage and professional
asset management. These businesses are conducted through 29 offices in
the United States, with a concentration on the northeast corridor,
particularly New York. In addition, Gruntal provides research and client
services in support of these businesses. To facilitate client
transactions, Gruntal maintains an inventory of securities positions
which are generally large in number, small in individual size and turn
over rapidly. The retail business accounted for 55% of Gruntal's total
revenues during 1996, and constitutes the majority of the revenues of
each category, except "principal transactions" and "other", set forth in
the table below. Gruntal's additional activities within the retail area,
included in the retail revenues, are customer margin lending, money
market funds, securities borrowing and lending activities.
Capital market activities primarily involved the trading of high grade
corporate bonds ("bond dealer"), municipal fixed income debt instruments, unit
trusts government issues and proprietary trading, which in aggregate,
excluding bond dealer, accounted for 27% of Gruntal's total revenues during
1996. With respect to corporate bonds, Gruntal maintains active markets and an
extensive inventory of corporate debt instruments, marketing them through its
dealer network of over 300 brokers and institutions. Dealing primarily in
liquid, investment grade securities, a portion of which are hedged, Gruntal
believes that its bond dealer activities are a relatively low risk business
line. Bond dealer activities accounted for 8% of Gruntal's total revenues
during 1996. In addition Gruntal conducts a traditional investment
banking/corporate finance business, which emphasizes initial purchase
offerings and private placements for emerging companies; these aggregate
business lines accounted for 2% of Gruntal's total revenues during 1996.
Gruntal also engages in other business activities, including
correspondent clearance. In correspondent clearance activities, Gruntal
executes and clears securities transactions, and carries customers'
accounts of 10 broker dealers which pay Gruntal a fee for the "back
office" service it provides. Revenues are also derived from related
interest sensitive activities such as margin lending. Correspondent
clearance has become increasingly important, comprising approximately 8%
of Gruntal's total revenues during 1996.
An analysis of revenues for Gruntal for each of the years in the
five-year period ended December 31, 1996 is set forth in the following
table:
<TABLE>
<CAPTION>
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
($ millions)
<S> <C> <C> <C> <C> <C>
Principal transactions $ 152 $ 199 $ 109 $ 174 $ 163
Interest 127 117 89 57 44
Commissions 92 87 68 81 75
Underwriting and investment banking 36 32 34 52 41
Other 35 28 23 24 18
------- ------ ------ ------ ------
Total revenues 442 463 323 388 341
Total expenses 417 430 313 335 306
------- ------ ------ ------ ------
Income before income taxes $ 25 $ 33 $ 10 $ 53 $ 35
======= ====== ====== ====== ======
</TABLE>
Gruntal is a member of the New York Stock Exchange Inc. ("NYSE"),
other principal stock exchanges, the National Association of Securities
Dealers, Inc. ("NASD") and the National Futures Association. Gruntal is
also a member of the Securities Investor Protection Corporation ("SIPC")
and is registered as a futures commission merchant. GMS is also a member
of NASD and SIPC.
Gruntal is subject to extensive regulation under federal and state
laws covering numerous aspects of the securities business, including
sales methods, trade practices, uses and safekeeping of customer funds
and securities, capital structure, payment of dividends, record keeping,
margin lending and the conduct of directors, officers and employees. Much
of the regulation of broker-dealers has been delegated to self-regulatory
organizations, principally the national securities exchanges and the
NASD. Gruntal is also subject to regulation in the states in which it is
registered.
Gruntal's arbitrage, trading, market-making, dealer and
underwriting activities, which involve the purchase, sale or short sale
of securities as principal, are an important part of its business and
require the commitment of substantial capital. These activities involve
risks, including the risk of a change in the market price of such
securities and the risk of a decrease in the liquidity of markets, which
may limit Gruntal's ability to sell securities purchased or to purchase
securities sold in such transactions. In connection with certain risk
arbitrage and bond-dealer activities, Gruntal from time to time takes a
large position in the securities of a single issuer. Such positions
increase Gruntal's exposure to the risks that contemplated transactions
may fail to have the anticipated results and that securities purchased
may significantly decline in value or that securities sold short in
anticipation of such transactions may appreciate in value.
Gruntal's brokerage activities as well as its principal
transactions are subject to risks inherent in extending credit. To the
extent that Gruntal advances funds in a securities transaction, funds
from a customer may not be received in a timely manner. If the securities
decline in value, Gruntal may not recover the amounts advanced. In
addition, in margin accounts, a customer may not respond to a margin call
and, where the securities being held as collateral diminish in value,
there is a risk that Gruntal may not recover the funds that it loaned.
The Company has no obligation, legal or otherwise, to provide Gruntal
with any financial assistance or financial backing.
In order to control and manage its risk exposure, Gruntal employs
a number of techniques. First, Gruntal sets limits for the maximum
position exposure of any trading unit or any individual within a
particular unit with respect to proprietary positions in equities and
fixed income securities. Second, Gruntal limits the maximum position it
holds in a single issuer by setting limits which vary according to
whether the investment is a government, corporate debt or equity
security. Gruntal manages these exposures on a daily basis through the
use of information reports which are reviewed by support and senior
management personnel. In addition, Gruntal's management philosophy limits
its exposure to higher risk products. Gruntal has no material exposure to
commodities, foreign exchange, or real estate.
On February 24, 1997, Gruntal, and The 1880 Group LLC entered into
the Reorganization Agreement, under which Gruntal will be restructured as
a limited liability company, Gruntal Financial, and partially transferred
to a management group led by Gruntal officers. Home Insurance will be the
sole owner of Gruntal after the consummation of the Reorganization. The
Reorganization involves the issuance of several classes of securities to
Gruntal and The 1880 Group, including preferred securities, in an
aggregate nominal amount of approximately $235 million as follows: (i)
Gruntal Financial will issue to Gruntal, the direct wholly-owned
subsidiary of Home Insurance, securities called Preferred A Interests in
a nominal amount of $155.5 million and securities called Preferred B
Interests in a nominal amount of $70 million; and (ii) Gruntal Financial
will issue to The 1880 Group securities called Preferred C Interests in
an approximate nominal amount of $9 million. As a result of the
Reorganization, Gruntal will own 40% of the common interest of Gruntal
Financial and The 1880 Group will own 60% of the common interest of
Gruntal Financial. In connection with the issuance of certain preferred
securities to Gruntal, Home Insurance and Centre Reinsurance Dublin will
enter into a swap agreement intended to ensure that Home Insurance's
investment in Gruntal Financial yields at least $155.5 million plus a
7.5% per annum rate of return thereon, subject to certain modifications
with respect to certain distributions and sales proceeds of the common
and preferred interests of Gruntal Financial. The closing of the
Reorganization occurred on March 28, 1997, and did not result in a gain
or loss to the Company. See note 15 to the consolidated financial
statements for further discussion.
Sterling Forest
Sterling Forest Corporation's principal asset is 17,500 acres of
largely undeveloped land in Orange County, New York, approximately forty
miles from Manhattan.
On May 15, 1996 Governors Pataki of New York and Whitman of New
Jersey, and Speaker of the House Gingrich, announced an agreement in
principle for the purchase and sale of a substantial part of Sterling
Forest lands for public parkland. A letter of intent between Sterling
Forest, as seller, and Trust for Public Land and Open Space Institute, as
purchaser, was signed in June 1996, and a formal contract was signed on
February 18, 1997.
Under the terms of the Purchase and Sale Agreement dated February
18, 1997 between Sterling Forest and Sterling Lake Associates, as seller,
and Trust for Public Land and Open Space Institute, as buyers (the
"Sterling Forest Agreement"), more than 15,000 acres of Sterling Forest
land will be acquired as parkland by the State of New York under the
management of the Palisades Interstate Park Commission, at a total
acquisition cost of $55 million. Under the agreement the buyers have up
to two years to raise the funding. The purchase price for any lands not
yet acquired, however, will increase annually if the purchase has not
been fully consummated by the first anniversary of the agreement. All the
funding for the acquisition does not yet appear to be in place, though a
total of $49 million has been committed, as of March 28,1997, by a
combination of federal and state governments, and one not-for-profit
conservation foundation. Sterling Forest will continue to own
approximately 2,200 acres of land and existing improvements, for future
sale or development.
Sterling Forest's undeveloped lands have been a focus of public
acquisition efforts by public and private entities for the better part of
a decade. Until recently, however, funding for such an acquisition did
not appear to be available. In the absence of likely sources of funds for
an acquisition, Sterling Forest proceeded with the creation and
implementation of a Comprehensive Plan to develop its property,
nevertheless publicly stating its willingness to sell some or all of its
land for a fair price.
The resulting Sterling Forest Comprehensive Plan (the "Plan")
balanced residential and commercial development, clustered in an
ecologically sound way that utilized the economic development potential
of the entire tract. The Plan contemplated the eventual construction of
up to 13,170 residential units and approximately eight million square
feet of commercial and retail development, while maintaining over 75% of
the property, or approximately 13,250 acres, as permanently undeveloped
open space. Sterling Forest made significant progress towards obtaining
the land use approvals necessary to begin implementing the Plan,
including significant progress in New York's State Environmental Quality
Review process, prior to reaching the agreement for a public acquisition.
Under the agreement, development on the 2,200 acres of land to be
retained by Sterling Forest will be "capped" at no more than 3,000 new
residential units, and 2.8 million square feet of new commercial space.
Sterling Forest has withdrawn its applications for land use
approvals that were pending before the towns of Warwick, NY and Monroe,
NY. Sterling Forest's application in the town of Tuxedo, NY, where most
of the retained lands are located, has not been withdrawn, but is likely
to be modified or replaced by a new application, unless the retained
lands also are sold in the near future.
In 1995, Sterling Forest entered into a $30 million loan agreement
with Centre Finance to finance Sterling Forests' ongoing activities.
Sterling Forest borrowed $7.5 million as of December 31, 1996, bearing
interest at a rate of 10% per annum. Amounts advanced to Sterling Forest
under the Loan Agreement are secured by a mortgage on Sterling Forest's
property, and Centre Finance is entitled to receive a portion of the
proceeds of the sale of the property up to the outstanding balance of the
loan.
Employees
As of December 31, 1996, the Company, through Gruntal, had a total
of approximately 2,000 employees. The employees of Home Insurance were
leased to REM during 1995 as part of the Services Agreement, and
effective January 1, 1996 all employees of Home Insurance became REM
employees (see note 1 to the consolidated financial statements). The
Company believes that its employee relations are satisfactory.
ITEM 2. PROPERTIES
Home Insurance rents approximately 583,000 square feet of space
for use as its headquarters office building at 59 Maiden Lane, New York,
New York, under a 15-year lease expiring in 1999. Of such space,
approximately 93,000 square feet is sublet to third parties for periods
approximately the same as the primary lease. The Company is involved in a
dispute with its landlord, Olympia and York Maiden Lane Company (the
"Landlord"), with respect to its lease at 59 Maiden Lane. See note 14 to
the consolidated financial statements for further discussion.
Home Insurance owns an office building comprising approximately
56,000 square feet of space in Maitland, Florida and leases premises in a
number of other locations throughout the United States.
Gruntal leases its headquarters in New York City and other
locations in the United States.
ITEM 3. LEGAL PROCEEDINGS
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,
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 its 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 or its
subsidiaries 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 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.
Pursuant to the Order, the Department has the final authority to
approve, disapprove or otherwise control (including the power to direct)
the initiation, settlement or withdrawal of any action, dispute,
arbitration, litigation or proceeding of any kind involving Home
Insurance other than in the ordinary course of business. In addition,
pursuant to the Order, Home Insurance is prohibited from making certain
payments, as specified in the Order, without the prior approval of the
Department. See "Insurance Regulation" for further discussion of the
Order.
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 sought certification of both
plaintiff and defendant classes. The purported plaintiff class consisted
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 sought to certify a defendant class of all insurers
doing business in Texas who charged the alleged excessive rates, plus
certain brokers and the NCCI. The Complaint alleged 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 were sought in unspecified amounts plus treble
damages.
A settlement between fourteen of the primary defendants, including
Home Insurance, was reached. Home Insurance has contributed approximately
$8 million, which had been accrued as of December 31, 1995, under a trust
agreement pending final court approval. On July 5, 1996 the Texas
District Court gave preliminary approval to the settlement. The
defendants submitted to a verification process of their damage
calculations. Final orders of approval were issued by the court on
November 1, 1996. The settlement is being implemented through refunds to
insureds.
On January 13, 1997 Home Insurance was served with suit papers
issued from the Chancery Court of Davidson County, Tennessee in a
purported class action. The allegations of the complaint are similar to
those in the Texas litigation case that was recently settled.
Plaintiffs allege that from 1987 until the present, the
defendants, individually, and in conspiracy with each other, used rates
of premium and policy forms for workers compensation retro policies other
than those filed with, and approved by, the Tennessee Commissioner of
Insurance. Specifically, the companies are alleged to have illegally
passed through residual market charges to their insureds during the class
period. The NCCI is alleged to be the conduit for sharing of information
and the instrumentality for making the illegal filings.
The principal causes of action are for breach of contract, fraud,
misrepresentation, conspiracy, unjust enrichment, and violation of the
Tennessee Consumer Protection and Trade Practices Acts. Compensatory and
punitive damages are sought in unspecified amounts plus treble damages.
A nearly identical class action complaint naming the same parties
was also recently filed in the Superior Court of Richmond Country,
Georgia. It includes the same common law causes of action that are
asserted in the Tennessee complaint, and others that allege violation of
various provisions of the Georgia statutory code, as well as RICO.
Compensatory, punitive, and treble damages are sought.
With respect to the Tennessee and Georgia actions discussed above,
it is too early to predict the outcome of these actions and whether or
not they will have a material adverse impact on the Company's financial
condition.
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's
professional liability business in New York and Massachusetts. The action
arose 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 sought 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 were sought. By stipulation of the parties the
restraining order was dissolved and legal proceedings stayed pending
submission of the dispute to an arbitration panel. 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 and seeking other relief as well. Subse-
quently, 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 indemnifi-
cation 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.
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, as amended, 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.
Home Insurance is involved in a dispute with its landlord, Olympia
and York Maiden Lane Company (the "Landlord"), with respect to its lease
of its principal offices at 59 Maiden Lane, New York, New York. The
Landlord is in default of certain bond obligations that are secured by
the building and, consequently, the Landlord has made an assignment of
rents to the trustee (the "Trustee") representing the Landlord's
bondholders. On June 24, 1996, the Landlord's bondholders obtained a
judgment of foreclosure and it is anticipated that the Landlord's
bondholders will complete the foreclosure, and gain possession of the
building shortly.
On June 1, 1996, Home Insurance began withholding rent and tax
payments to the Landlord. Subsequently, the Trustee and the Landlord
issued several notices to Home Insurance threatening to terminate its
lease and/or seek possession of the premises. On July 19, 1996, Home
Insurance brought an action against the Landlord and the Trustee in its
capacity as trustee in New York State Supreme Court entitled, The Home
Insurance Company v. Olympia & York Maiden Lane Company, et al., seeking
a preliminary injunction to prohibit the Landlord from terminating the
lease or beginning an independent rent action in Landlord-Tenant court.
In this action, Home Insurance seeks damages from the Landlord for rent
overcharges, refusal to obtain tax relief which would benefit Home
Insurance, failure to maintain the building including certain life safety
systems, and failure to meet its obligations (including statutory and
regulatory obligations) with respect to The Americans with Disabilities
Act and asbestos in the building.
The Court granted a temporary restraining order on July 19, 1996,
in favor of Home Insurance. On August 9, 1996 the Court entered a
decision and interim order, which, as amended through September 12, 1996,
appointed a mediator and provided that Home Insurance deposit in escrow
with a receiver approximately $7.4 million representing the June and July
rent and June tax payment. The order states that the escrow payment
"shall not per se constitute a secured claim under New Hampshire Revised
Statutes Annotated 402-C:3 but may be subject to the provisions of New
Hampshire Insurance Laws, Chapter 402-C in the event of proceedings
thereunder or similar proceedings in this or any other jurisdiction".
Home Insurance made this escrow payment and the mediation proceeded.
As a condition for continuing the preliminary injunction, Home
Insurance increased its deposit in escrow to $10.7 million. The Landlord
moved for summary judgment for past due rent. Home Insurance moved to
amend its complaint (i) to add a cause for constructive eviction from
approximately 23% of its premises, where its environmental expert has
identified "significantly damaged" asbestos containing materials ("ACM");
(ii) to increase the amount of damages sought by Home Insurance for the
Landlord's refusal to obtain tax relief to more than $20 million; (iii)
to join the bondholders as a class action; and (iv) to consolidate the
foreclosure action brought by the Trustee against the Landlord. On
December 30, 1996 the Court granted (i) Home's motion to amend with
respect to items (i) and (ii), but denied Home Insurance's motion with
respect to item (iii) pending mediation, and also with respect to item
(iv) without prejudice to renew before the assigned judge. The Court
granted the Landlord's motion for partial summary judgment on its
counterclaims holding Home Insurance liable for rent due and owing from
June 1, 1996 to November 30, 1996, plus interest from September 1, 1996,
together with costs and disbursements. The remainder of the Landlord's
motion was denied without prejudice. The Court stayed entry and execution
of the Landlord's judgment. In accordance with the Court's order, Home
Insurance filed its amended and supplemental verified complaint. The
Landlord and Trustee counterclaimed, and Home Insurance replied. On March
4, 1997, the Court directed Home Insurance to deposit into escrow,
without prejudice, rent for the period September 1, 1996 through November
30, 1996, which payment is currently due to be made by April 1, 1997. On
March 27, the Landlord moved for summary judgment on additional rent, for
entry of the earlier summary judgment, and for other relief. Concurrent
with the litigation, the Company and the Landlord are currently engaged
in mediation. Management believes that it is too early to predict with
certainty the ultimate outcome of this dispute. However, an unfavorable
outcome could have a material adverse impact on the Company's financial
condition.
On or about January 17, 1997, Marine Midland (the trustee in the
action described above), brought an action entitled Marine Midland Bank
v. Zurich Insurance Company, et al. in New York State Supreme Court
against Zurich and certain affiliates, Home Insurance and REM alleging,
among other things, that the conveyance to Zurich of the right to write
renewal business on policies of Home Insurance constituted a fraudulent
transfer under New York State law because Home Insurance purportedly was
rendered insolvent as a result and did not receive adequate consideration
from Zurich for this right. Plaintiff in its complaint disregards that the
transaction, which permitted the conveyance of this right to Zurich, was
approved by the Department in April 1995. The complaint, which does not
seek any relief against Home Insurance, demands judgment against Zurich
and certain of its affiliates for all past and future rent due under the
lease between Home Insurance and its landlord, not paid by Home
Insurance, plus interest, or alternatively, for the imposition of a
constructive trust upon the proceeds obtained by Zurich from the
conveyance noted above, which according to plaintiff would secure the
repayment of Home Insurance's purported obligations under its lease, as
well as attorneys' fees. The complaint also seeks from REM damages in the
amount of all rents due and owing under the lease plus interest, as well
as, a declaration that REM is obligated to make all future rent payments.
On March 27, 1997, REM and Home Insurance moved to dismiss the complaint.
Home Insurance is involved in a dispute with NCCI. The NCCI is a
licensed rating or advisory organization for the workers' compensation
line of insurance in a majority of states. One function it performs is to
administer the National Workers' Compensation Reinsurance Pool ("the
Pool"). The Pool collects premium and pays losses for various residual
market plans around the country. The premium is supposed to be
distributed to pool members in proportion to their market share and held
in reserve. The NCCI sends a quarterly invoice to each pool member for
its share of the losses as calculated and paid by the Pool in that
quarter.
Home Insurance is a participant in the Pool, and, as of December
31, 1996, Home Insurance is carrying undiscounted loss reserves of
approximately $261 million allocated to the Pool. Home Insurance has had
several discussions with the NCCI over the past year concerning the
extent of its obligation and the possibility of a commutation. Home
Insurance has refused to pay the NCCI's three most recent quarterly
invoices totalling approximately $28 million and requested an audit of
the Pool's calculations and of the NCCI's administration of the Pool. The
NCCI has refused to permit the requested audit. The NCCI has also asked
Home Insurance to put the aforementioned invoiced but unpaid amount in
escrow. Negotiations concerning a possible commutation have begun.
Management believes it is too early to predict with certainty the
ultimate outcome of this matter; however, an unfavorable outcome could
have a material adverse impact on the Company's financial condition.
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. Gruntal presently 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 was used in
substantial part to benefit Gruntal. Gruntal has submitted claims to its
insurer, Home Insurance, under the applicable insurance policy and 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. Gruntal discussed its
investigation relating to Abandoned Property with the governmental and
self-regulatory bodies involved. 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") orders.
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 that 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 prejudgment interest 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. The disgorgement fund
will be administered and disbursed by a fund administrator pursuant to a
report and a plan which will be submitted to the Commission and require
court approval. 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 June 1996,
at the direction of the Commission and as approved by the order of the
United States District Court for the Southern District of New York in SEC
v. Gruntal & Co., Incorporated, et al., 96 Civ. 2514, James R. Doty,
Esq., a partner in the law firm of Baker & Botts, LLP and a former
General Counsel of the Commission, was engaged to serve as Fund
Administrator (hereinafter, the "Fund Administrator").
In June 1996, with the approval of the Commission, the NYSE and
the NASD, Gruntal engaged Irving M. Pollack, Esq., a former Commissioner
of the Commission, to serve as Independent Consultant (hereinafter the
"Independent Consultant"), pursuant to the settlement with the
Commission, and, additionally, pursuant to other settlements with the
Commission, NYSE and NASD, described below. 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
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 the Independent Consultant
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. Gruntal also agreed to retain the
Independent Consultant 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.
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 agreed to retain the 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 Independent 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 would not have a
materially adverse effect on the consolidated financial condition of
Gruntal or the Company.
During the third quarter of 1996, Gruntal discovered that
approximately 2,800 principal transactions involved customers that were
employee benefit plans or individual retirement arrangements under the
Employee Retirement Income Security Act of 1974, as amended ("ERISA") or
parallel provisions of the Internal Revenue Code. In the absence of an
available exemption, these transactions would be "prohibited
transactions" under Section 406 of ERISA and Section 4975 of the Code.
Gruntal is examining the availability of certain exemptions. Management
believes it is too early to predict with certainty the ultimate outcome
of this matter, but management does not believe that such costs will have
a material adverse effect on the financial position of Gruntal or the
Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the fourth quarter of 1996, no matters were submitted to a
vote of security holders.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
There is no established public trading market for the Series A
Common Stock. The shares of Series A Common Stock were delisted from the
NYSE on July 31, 1995. After the consummation of a tender offer made by
the Company for the repurchase of its shares, which closed in June 1995,
the NYSE determined that the shares were no longer suitable for continued
listing and trading on the NYSE. The approximate number of holders of the
Series A Common Stock as of March 1, 1997 is fewer than 2,000.
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
($ millions, except per share information)
INCOME STATEMENT DATA:
INSURANCE OPERATIONS
Net earned premiums before
Stop Loss Treaty $ 116 $ 914 $ 1,653 $ 1,882 $ 1,842
Stop Loss Treaty(1) - - - - (214)
--------- ---------- ---------- -------- ----------
Total net earned premiums $ 116 $ 914 $ 1,653 $ 1,882 $ 1,628
========= ========== ========== ======== ==========
Underwriting loss before Stop Loss(2)
Treaty $ (964) $ (1,105) $ (368) $ (540) $ (425)
Stop Loss Treaty(1) - (189) - - 214
--------- ---------- ----------- --------- ----------
Total underwriting loss (964) (1,294) (368) (540) (211)
Excess of Loss Reinsurance Agreement 372 14 - - -
Net investment income 146 219 225 246 273
Realized capital gains (losses) 9 (225) 16 193 67
--------- ---------- ----------- --------- ----------
Insurance pre-tax operating income
(loss) (437) (1,286) (127) (101) 129
OTHER OPERATIONS
Securities broker-dealer operating
income 25 33 10 53 35
Goodwill writeoff and amortization - - (211) (5) (5)
Corporate interest expense (49) (46) (38) (50) (53)
Other expenses - (24) (8) (26) (10)
--------- ---------- ----------- --------- ----------
Income (loss) before income taxes,
preferred dividends of subsidiary,
extraordinary item and accounting
change (461) (1,323) (374) (129) 96
- -----
Income tax expense (7) (3) (7) (10) (33)
Preferred dividends of subsidiary - - - (19) (19)
--------- ---------- ----------- --------- ----------
Income (loss) before extraordinary
item and accounting change (468) (1,326) (381) (158) 44
Extraordinary item - loss on
extinguishment of debt, net of
applicable income tax benefit
of nil and $4 - - - (7) (7)
Cumulative effect of a change
in accounting principle - - (4) - -
--------- ---------- ----------- --------- ----------
Net income (loss) $ (468) $ (1,326) $ (385) $ (165) $ 37
- --- ========= ========== =========== ========= ==========
INCOME (LOSS) PER SHARE
Income (loss) before extraordinary
item and accounting change N.M. N.M. $ (10.95) $ (14.94) $ 3.42
=== =========== ========= =========
Net income (loss) N.M. N.M. $ (11.06) $ (15.58) $ 2.77
=========== ========== =========
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
($ millions)
BALANCE SHEET DATA (AT PERIOD END):
Insurance investments $ 1,292 $ 2,189 $ 3,377 $ 4,027(5) $ 3,417
Reinsurance receivables 2,765 2,383 2,309 2,247 2,163
Total assets 7,593 8,003 9,276 10,319(5) 8,719
Unpaid losses and loss adjustment
expenses 5,687 5,814 5,573 5,496 5,037
Corporate debt 567 517 447 550 534
Debt of securities broker-dealer 246 304 278 295 186
Total liabilities 9,132 9,080 9,228 9,621 8,299
Stockholders' equity (deficiency) (1,539) (1,077) 48 698(5) 345
OPERATING INFORMATION AND RATIOS:
Gross written premiums $ 22 $ 582 $ 2,019 $ 2,424 $ 2,424
Net written premiums 1 362 1,587 1,875 1,572
Revenues 713 1,371 2,217 2,709 2,309
Consolidated GAAP ratios before
Stop Loss Treaty cessions:(1)(3)
Loss N.M. N.M. 95.1% 101.4% 97.4%
Expense 27.2 27.3 25.7
--------- ---------- ----------
Combined 122.3% 128.7% 123.1%
========= ========== ==========
Consolidated GAAP ratios:(3)
Loss N.M. N.M. 95.1% 101.4% 83.9%
Expense 27.2 27.3 29.0
--------- ---------- ----------
Combined 122.3% 128.7% 112.9%
========= ========== ==========
Consolidated statutory ratios:(3)
Loss N.M. N.M. 97.9 100.7% 86.3%
Expense 28.3 27.4 29.3
--------- ---------- ----------
Combined 126.2% 128.1% 115.6%
========= ========== ==========
Statutory surplus $ 55(7) $ 230 $ 618 $ 901 $ 951
Ratio of net written premiums
to statutory surplus N.M. N.M. 2.6 2.1 1.6
Dividends paid by Home Insurance:
Common stock - - 77 75 53
Preferred stock - - 1 19 19
Statutory industry data:(4)
Combined ratio for the property
and casualty industry 105.9% 107.2% 108.4% 106.9% 115.8%
NUMBER OF EMPLOYEES:
Home Insurance(6) - 1,454 3,100 3,500 4,100
Gruntal 2,000 2,075 1,950 1,900 1,800
</TABLE>
N.M. - Not Meaningful.
(1) Effective January 1, 1991, Home Insurance entered into a Stop Loss
Treaty with a group of reinsurers which protected Home Insurance
against losses in all years prior to the year in which the treaty
is cancelled. Home Insurance did not cede any additional premiums
or losses to the Stop Loss Treaty after December 31, 1992. In
1995, in connection with the Recapitalization, Home Insurance
commuted and assigned the Stop Loss Treaty. See note 7 to the
consolidated financial statements.
(2) The 1996 loss includes $662 million of bulk additions to loss and
loss adjustment expense reserves, including $225 million for
Asbestos/Pollution Policies. The 1995 amount includes incurred
losses of $549 million for Asbestos/Pollution Policies which
includes $440 million of reserve increases. Also amounts include
the effect of the 1994, 1993 and 1992 Reserve Strengthenings of
$75 million, $290 million and $200 million, respectively.
(3) GAAP ratios and statutory loss ratios are expressed as a percentage
of net earned premiums. Statutory expense ratios are expressed as
a percentage of net written premiums. Both GAAP and statutory
expense ratios include dividends to policyholders as a percentage
of net earned premiums. As a result of the run-off of all Home
Insurance operations effective June 12, 1995, disclosure of 1996
and 1995 ratios as a percentage of premiums is not meaningful.
(4) The combined ratios for the property and casualty industry were
provided by A.M. Best Company.
(5) The Company adopted Statement of Financial Accounting Standards
("SFAS") No. 115, "Accounting for Certain Investments in Debt and
Equity Securities", on December 31, 1993 and, accordingly, the
carrying value of fixed maturities available for sale increased by
$87 million, representing the unrealized gains on these
investments and, after the effect of related deferred taxes, total
stockholders' equity increased by $57 million.
(6) In connection with the Services Agreement between the Company
and REM, effective January 1, 1996 all employees of Home Insurance
became employees of REM. There are approximately 850 employees in
REM, at the end of 1996, dedicated to serving the Company and Home
Insurance.
(7) The Department gave Home Insurance permission to include in the
1996 Annual Statement a non-tabular discount which results from
discounting all loss reserves, and allocated and unallocated loss
reserves at 7%. Home Insurance has sufficient assets that will
earn 7% to meet the expected stream of loss and loss adjustment
expense payments. Home Insurance calculated that the non-tabular
discount is $469 million. The 1996 statutory surplus of $55
million reflects the benefit of this discount. See note 4 to the
consolidated financial statements.
ITEM 7. 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 and accompanying notes included elsewhere herein.
Consolidated revenues were $713 million in 1996, compared with
$1,371 million in 1995 and $2,217 million in 1994. The Company reported a
net loss of $468 million in 1996 compared with net losses of $1,326
million and $385 million in 1995 and 1994, respectively.
The net loss of $468 million included $662 million of bulk
additions to loss and loss adjustment expense reserves, partially offset
by an increased recoverable of $372 million under the Excess of Loss
Reinsurance Agreement.
The 1995 net loss reflected incurred losses of $549 million
related to Asbestos/Pollution Policies, which included $440 million of
bulk reserve additions, and one-time losses of $418 million related to
transactions in connection with the Recapitalization. The one-time losses
of $418 million included a loss of $189 million due to the commutation
and assignment of the Stop Loss Treaty and net realized capital losses of
$208 million pertaining to previously recorded unrealized losses. The
recognition of the capital losses results from the classification of its
investments as a trading portfolio in connection with the Swap. The
Company also recorded $21 million of transaction expenses. See notes 6
and 7 to the consolidated financial statements for further discussion of
the Swap and the Stop Loss Treaty, respectively.
INSURANCE REVENUES AND OPERATING INCOME
Insurance revenues and pre-tax operating income follow:
($ millions) 1996 1995 1994
---- ---- ----
Net earned premiums $ 116 $ 914 $ 1,653
Net investment income 146 219 225
Realized capital gains (losses) 9 (225) 16
--------- --------- --------
INSURANCE REVENUES $ 271 $ 908 $ 1,894
========= ========= ========
Underwriting loss $ (964) $ (1,294) $ (368)
Excess of Loss Reinsurance Agreement 372 14 -
Net investment income 146 219 225
Realized capital gains 9 (225) 16
--------- --------- --------
INSURANCE PRE-TAX OPERATING LOSS $ (437) $ (1,286) $ (127)
========= ========= ========
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. The Company was downgraded in November 1994
by three primary insurance rating agencies, and the decline in earned
premiums is attributable to the impact of such downgrades and the ceasing
of business effective June 12, 1995. Prior to the Closing, the Company
had attempted to mitigate the effect of the downgrades 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. See notes 1 and 3 to the consolidated financial statements for
further discussion of the Recapitalization Agreement and the Facility
Agreement, respectively. Net earned premiums were as follows:
($ millions) 1996 1995 1994
---- ---- ----
NET EARNED PREMIUMS
Commercial Accounts Group
Commercial Casualty $ 74 $ 480 $ 1,008
Commercial Property 10 46 79
--------- --------- --------
Total Commercial Accounts Group 84 526 1,087
--------- --------- --------
Specialty Lines Group
Professional Liability 14 169 278
Other Specialty Lines 8 180 238
--------- --------- --------
Total Specialty Lines Group 22 349 516
--------- --------- --------
Run-off Operations 10 39 50
--------- --------- --------
Net earned premiums $ 116 $ 914 $ 1,653
========= ========= ========
Underwriting losses totaled $964 million in 1996 compared with
underwriting losses of $1,105 million in 1995, before the commutation and
assignment of the Stop Loss Treaty and $368 million in 1994. An analysis
of underwriting results follows:
<TABLE>
<CAPTION>
<C> <C> <C> <C>
($ millions) 1996 1995 1994
---- ---- ----
UNDERWRITING LOSS
Commercial Accounts Group
Commercial Casualty $ (227) $ (221) $ (26)
Commercial Property (52) (67) (69)
--------- --------- ----------
Total Commercial Accounts Group (279) (288) (95)
--------- --------- ----------
Specialty Lines Group
Professional Liability (161) (98) (164)
Other Specialty Lines (89) (29) 29
--------- --------- ----------
Total Specialty Lines Group (250) (127) (135)
- --- --------- --------- ----------
Run-off Operations (435) (690) (138)
--------- --------- ----------
Underwriting loss before commutation and
assignment of the Stop Loss Treaty (964) (1,105) (368)
Commutation and assignment of the Stop Loss Treaty - (189) -
--------- --------- ----------
Total underwriting loss $ (964) $ (1,294) $ (368)
========= ========= ==========
GAAP RATIOS(1)
Loss N.M. N.M. 95.1%
Expense 27.2
------
Combined 122.3%
======
</TABLE>
(1) GAAP ratios are expressed as a percentage of net earned premiums
and are presented prior to cessions to the Stop Loss Treaty. As a
result of the run-off of all Home Insurance operations effective
June 12, 1995, disclosure of 1995 ratios as a percentage of earned
premiums is not meaningful.
N.M. - Not Meaningful.
The 1996 underwriting loss was impacted by bulk additions to
reserves of $662 million, including a $100 million increase in
unallocated loss adjustment expense reserves, distributed among all
product lines to reflect Home Insurance's experience in run-off during
1995 and 1996. The bulk reserve additions included a $225 million
increase for Asbestos/Pollution Polices, $132 million for professional
liability, $121 million for Commercial Casualty, $68 million for Other
Specialty Lines, $65 million for excess run-off, $35 million for assumed
reinsurance and $16 million for personal lines. The bulk additions to
reserves were partially offset by an increased recoverable of $372
million under the Excess of Loss Reinsurance Agreement. The underwriting
loss was also impacted by lower earned premiums and expenses incurred in
managing the run-off of its operations.
The 1995 underwriting loss was impacted by the Run-off Operations
loss of $690 million and the $189 million loss on the commutation and
assignment of the Stop Loss Treaty. The Run-off Operations loss included
losses of $549 million related to Asbestos/Pollution Policies, and a $53
million provision for uncollectible reinsurance. In addition, commercial
and specialty results deteriorated due to lower earned premiums,
unfavorable loss experience and providing for higher loss ratios on
current year business.
The 1994 results were adversely impacted by bulk reserve strengthening
of $75 million for professional liability, and additions to loss reserves
for known Asbestos/Pollution Policies of $60 million.
The Company recorded decreases to discount on workers' compensation
pension liabilities of $50 million and $19 million in 1996 and 1995,
respectively, and an increase of $52 million in 1994. The 1996 decrease
reflects a reduction in the escalation benefit and associated discount
foreseen for claims in certain states and also the natural unwinding of the
discount as Home Insurance has ceased writing business. The discount recorded
in 1994 related to an increase in the number of workers' compensation pension
cases as well as strengthened case development estimates. The decrease to the
discount in 1996 and 1995 increased the underwriting loss while recording of
additional discount in 1994 reduced underwriting losses. See note 4 to the
consolidated financial statements for discussion of discount of loss reserves
for statutory purposes.
Excess of Loss Reinsurance Agreement and Stop Loss Treaty
In 1995, in connection with the Recapitalization, Home Insurance
entered into the Commutation Agreement, with the Commuting Reinsurers
providing for the commutation of the Stop Loss Treaty as of June 12, 1995
as to the Commuting Reinsurers. Home Insurance also entered into the
Assignment Agreement with Centre Reinsurance Dublin, pursuant to which
Home Insurance assigned all of its rights, title and interest in any
payments by those reinsurers under the Stop Loss Treaty that were not
Commuting Reinsurers (i.e., Kemper Reinsurance Company and THI) due
Home Insurance in accordance with the Stop Loss Treaty. In 1996, THI
commuted its share of the Stop Loss Treaty, leaving Kemper Reinsurance
Company as the only non Commuting Reinsurers. The Company recognized a
$189 million loss in 1995 attributable to the Commutation Agreement and
the Assignment Agreement.
Also, 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 reinsurers commence making payments under the
Excess of Loss Reinsurance Agreement. See "Insurance Regulation -
Dividend Restrictions". Also, up to $290 million of additional coverage
provided by the Excess of Loss Reinsurance Agreement is linked to certain
factors including dividend payments from Home Insurance to the Company
funding principal payments on the Public Indebtedness (as defined in note
1 to the consolidated financial statements) as such debts become payable.
The Excess of Loss Reinsurance Agreement became effective on June 12,
1995 upon (i) the payment by Home Insurance to Centre Reinsurance Dublin
of $63 million and (ii) the transfer by Home Insurance of $166 million to
Centre Reinsurance Dublin, representing the respective amounts received
by Home Insurance from Zurich International (Bermuda) Ltd. and Centre
Reinsurance Limited as a reinsurance commutation (exclusive of refunds of
security costs).
Based on cash flow forecasts at December 31, 1996 the Company is
projecting that the coverage limits of the Excess of Loss Reinsurance
Agreement will be exhausted, and due to these projected future
recoveries, loss reserves with a net present value of $787 million were
recorded as of December 31, 1996 as a recoverable from the Excess of Loss
Reinsurance Agreement, including an additional $372 million during 1996.
As of December 31, 1995, the recoverable from the Excess of Loss
Reinsurance Aggreement was $415 million. The increase resulted primarily
from changes to cash flow projections which now forecast that the cover
will be exhausted, and changes in the net present value of the receivable
based on current projections of amounts and timing of cash inflows and
outflows.
Loss Reserves and Reserve Strengthening
Home Insurance recorded a $662 million bulk addition to reserves
during the fourth quarter of 1996, including a $100 million increase in
unallocated loss adjustment expense reserves, distributed among all
product lines to reflect Home Insurance's experience in run-off during
1995 and 1996. The Company has compared industrywide payment trends to
its own payments for Asbestos/Pollution Policies, and has considered it
appropriate at this time to review industry ratios of reserves to
payments in establishing its own reserves. The bulk reserve additions
included a $225 million increase for Asbestos/Pollution Policies,
reflecting higher aggregate annual payments in the last two years as Home
Insurance has pursued more early settlement opportunities and
simultaneously sought to strengthen its relative reserve position. The
1996 bulk reserve additions for other product lines was $437 million,
including $132 million for professional liability, $121 million for
Commercial Casualty, $68 million for Other Specialty Lines, $65 million
for excess run-off, $35 million for assumed reinsurance and $16 million
for personal lines. The professional liability increase reflects
consolidation of a trend to a new level of higher claim severities which
has persisted over the last three years compared to prior periods. The
Commercial Casualty increases reflect a higher exposure measured for
products liability, compared to earlier years, with associated increases
in loss ratios, claim severities and tail factors. The increases for
excess run-off and assumed reinsurance are less a reflection of the
company's own immediate past experience than a response to higher tail
factors for excess casualty exposure indicated by recent industry
experience.
Home Insurance recorded a $440 million bulk addition to reserves
during the fourth quarter of 1995 for Asbestos/Pollution Policies. Home
Insurance also recorded a $75 million bulk reserve strengthening during
the third quarter of 1994 for professional liability business.
Strengthening for professional liability related to higher than expected
case emergence in 1994 on recent accident years. This emergence related
to an increased frequency of moderately-severe cases affecting the
lawyers' professional liability line of business which, in the judgment
of the Company at that time, represented a new, higher level of average
settlement value for this business.
At December 31, 1996, the gross, ceded and net loss and loss
adjustment expense reserves for Asbestos/Pollution Policies amounted to
$1,501 million, $682 million and $819 million, respectively. Net reserves
for Asbestos/Pollution Policies claims increased $140 million from $679
million at December 31, 1995.
As of December 31, 1996, Home Insurance had approximately 2,100
policies for which one or more claims were open relating to asbestos and
pollution matters. Some policies have both asbestos and pollution claims
open against them. As of the end of 1996, the Company has open
approximately 900 asbestos claims and 3,300 pollution claims. The Company
has provided claim count information in an effort to provide additional
insight into the magnitude of the management effort required to deal with
the case load in the areas of Asbestos/Pollution Policies. Claim counts
for these exposures are not, however, subject to the same level of
consistent definition that is common for other insured perils. A claim
count for a Pollution Policy might involve a single waste site in a
single year for which coverage is being sought under a single policy.
Alternatively, a single claim count might involve a settlement covering
many waste sites over many years and/or several policies in several
layers of coverage per year. As a result, the interpretation of this data
is complicated and the use of average values calculated on the basis of
this data is likely to be misleading. The number of open asbestos claims
has been fairly stable over the last five years. The number of pollution
claims has also been fairly stable over the last four years. In addition,
as of December 31, 1996, Home Insurance was involved in approximately 330
coverage disputes (where an action seeking a declaratory judgment had
been filed, the resolution of which will require a judicial
interpretation or compromise resolution of an insurance policy) related
to claims on Asbestos/Pollution Policies.
About half of these claims involve primary policies issued by Home
Insurance, and half involve Home Insurance excess policies issued during
the late 1960's through early 1980's. The predominance of the expected
dollar exposure relates to the excess policies. Policy limits on those
excess policies range from $100,000 up to as much as $25 million, and may
operate above self insured retentions or underlying insurance which may
range from $25,000 to hundreds of millions of dollars. In addition to the
claim counts and policy counts listed above, which relate to the
Company's direct business, the Company has material exposure relating to
its assumed reinsurance business, for which it has $111 million of net
reserves included in the total above.
While the Company has compared industrywide payment trends to its
own payments for Asbestos/Pollution Policies, and has considered it
appropriate at this time to review industry ratios of reserves to
payments in establishing its own reserves, the Company views such
"survival ratios" as temporary benchmarks of reserving levels which can
be misleading and which over time must inevitably decline in importance,
as legal issues are resolved, experience matures and actuarial models can
be validated. Benchmarks based on premium market share or payments share
necessarily depend on the consistency between companies of many variables
including policy class and limits distribution, policy deductibles and
underlying retentions, coverages and coverage exclusions and geographic
mix. Survival ratios have an additional limitation in that a company
which accelerates the disposal of its claims compared to its peers, and
is thus retiring its ultimate liabilities faster, will appear to require
a higher reserve. Following industry practice which became apparent only
in 1995 with new statutory disclosure requirements, the Company has
established somewhat lower survival ratios on its gross reserves than its
net 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. 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, REM, in its capacity as manager of Home Insurance's
operations, established a single Environmental and Mass Tort Division,
which includes a new team to merge financial, legal, and environmental
engineering expertise in negotiation with policyholders and reinsurers to
find alternative resolutions to claims in the environmental and mass tort
areas. Management believes that these organizational changes increase
operational efficiency, while assuring that Home Insurance takes a
unified and consistent approach to these claims. This division has also
prepared an inventory of potential exposures for Asbestos/Pollution
Policies, which Home Insurance has utilized 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.
At December 31, 1996, unpaid losses and loss adjustment expenses
were net of a discount to unpaid losses of $134 million relating to all
workers' compensation pension liabilities which are carried at present
value, discounted at an interest rate of 7.5%. Home Insurance recorded
decreases to the discount of $50 million in 1996 and $19 million in 1995,
and an increase of $52 million in 1994. The 1996 decrease reflects a
reduction in the escalation benefit and associated discount foreseen for
claims in certain states, and also the natural unwinding of the discount
as Home Insurance has ceased writing business. The increase in 1994
related to an increase in the number of workers' compensation pension
cases as well as strengthened case development estimates. The decreases
in the discount increased underwriting losses, while recording additional
discount reduced underwriting losses. See note 4 to the consolidated
financial statements for discussion of discount of loss reserves for
statutory purposes.
Pension and Benefit Plans
Subsequent to the Recapitalization, all employees of Home
Insurance were leased to REM and effective January 1, 1996, all personnel
became employees of REM. All benefits under the Company's pension plans
were frozen, and in 1995 a gain of $6 million was recorded due to
settlement and curtailment of the plans.
COMMERCIAL ACCOUNTS GROUP
In 1995, Middle Market Casualty and Major Casualty which had been
segregated in 1994, were combined into Commercial Casualty.
Commercial Casualty
Underwriting losses were $227 million in 1996 compared with $221
million and $26 million in 1995 and 1994, respectively. The 1996 losses
were primarily due to loss and loss adjustment expense reserve bulk
additions of $121 million, and to lower earned premiums and expenses
incurred in managing the run-off of its operations. The 1995 results
were impacted by lower earned premiums, unfavorable loss experience and
providing for higher loss ratios on current year business. The 1994
result benefited by lower involuntary assessments, favorable loss
experience and additional discount on workers' compensation pension
cases.
Commercial Property
Underwriting losses were $52 million, $67 million and $69 million
in 1996, 1995 and 1994, respectively. The 1996 losses were primarily due
to lower earned premiums and expenses incurred in managing the run-off of
its operations. The 1995 loss reflected lower earned premiums and
unfavorable loss experience. The 1994 loss reflected catastrophe losses
of $31 million, including reinstatement premiums of $12 million,
primarily from the Northridge, California earthquake.
SPECIALTY LINES GROUP
Professional Liability
The underwriting loss was $161 million in 1996, compared with
losses of $98 million and $164 million in 1995 and 1994. The 1996 loss
was primarily due to loss and loss adjustment expense reserve bulk
additions of $132 million, and to lower earned premiums and expenses
incurred in managing the run-off of its operations. The 1995 underwriting
loss was impacted by lower earned premiums, unfavorable loss experience
and providing for higher loss ratios on current year business. The loss
in 1994 was primarily due to adverse loss development on recent accident
years accompanied with a bulk reserve strengthening of $75 million
relating to higher than expected case emergence.
Other Specialty Lines
The 1996 underwriting loss was $89 million as compared to a loss
of $29 million in 1995 and an underwriting profit of $29 million in 1994.
The 1996 loss was primarily due to loss and loss adjustment expense
reserve bulk additions of $68 million and to lower earned premiums and
expenses incurred in managing the run-off of its operations. The 1995
underwriting loss was impacted by lower earned premiums, unfavorable loss
experience and providing for higher loss ratios on current year business.
The 1994 result reflected an increase in premium rates, favorable
reinsurance arrangements and improved loss experience.
RUN-OFF OPERATIONS
Underwriting losses were $435 million, $690 million and $138
million in 1996, 1995 and 1994, respectively. The underwriting loss
includes losses from Asbestos/Pollution Policies of $233 million, $549
million and $126 million in 1996, 1995 and 1994, respectively. The 1996
results include loss and loss adjustment expense reserve bulk additions
of $341 million including $225 million relating to Asbestos/Pollution
policies, $65 million for excess run-off, $35 million for assumed
reinsurance and $16 million for personal lines. The 1995 results include
reserve additions of $440 million. In 1994, the Company added $60 million
to loss reserves for known environmental and toxic tort claims.
INVESTMENTS
ZIM manages the cash and invested assets of the Company and Home
Insurance pursuant to an investment management agreement. Additionally,
upon Closing, the Company and Home Insurance entered into the Swap
effective January 1, 1995 with Centre Reinsurance Dublin whereby Centre
Reinsurance Dublin will pay annually to the Company and Home Insurance
any negative differences between the actual total return on such assets
and a target total return of 7.5% per year (net of asset management fees)
on such assets and, the Company and Home Insurance will pay annually to
Centre Reinsurance Dublin any positive difference between the actual
total return on such assets and the 7.5% target total return (net of
asset management fees) on such assets.
The Swap is 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 underlying 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
underlying the Swap to the 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%. In 1995, the Company also recorded realized capital losses of $208
million, which were reflected at December 31, 1994 as unrealized capital
losses included in stockholders' equity. Subsequent changes to fair
market value of securities have not and will not be recognized, as Centre
Reinsurance Dublin bears the market risk.
As of December 31, 1996, the Company has recorded, as a component
of the Portfolio Swap Receivable, an amount due from Centre Reinsurance
Dublin of $48 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 $13 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 $133 million.
The Company received $48 million from Centre Reinsurance Dublin on
January 21, 1997, to settle the 1996 Swap receivable. Securities and cash
totaling $210 million were transferred to Centre Reinsurance Dublin on
January 22, 1996, to settle the 1995 Swap liability.
In the year ended December 31, 1996, the Company recognized $9
million in realized capital gains and $6 million in unrealized capital
gains for insurance equity investments not underlying the Swap.
SECURITIES BROKER-DEALER OPERATIONS
Revenues, expenses and income before income taxes of Gruntal, the
Company's securities broker-dealer, for the years ended December 31,
1996, 1995 and 1994 were as follows:
($ millions) 1996 1995 1994
---- ---- ----
Principal transactions $ 152 $ 199 $ 109
Interest 127 117 89
Commissions 92 87 68
Underwriting and investment banking 36 32 34
Other 35 28 23
------ ------ ------
Total revenues 442 463 323
Total expenses 417 430 313
------ ------ ------
INCOME BEFORE INCOME TAXES $ 25 $ 33 $ 10
- --- ====== ====== ======
Total securities broker-dealer revenues decreased $21 million to
$442 million for the year ended December 31, 1996, when compared to the
prior year. Principal transactions revenues were $152 million for the
year ended December 31, 1996, a decrease of $47 million or 24% for the
year. This was primarily due to the firm discontinuing the proprietary
trading of listed equities, municipal bonds, as well as, closing the
mortgage brokerage operations. Commissions increased $5 million or 6%
from the prior year to $92 million due to increased investor
participation in the equities markets.
The decrease in securities broker-dealer expenses to $417 million
from $430 million in the same period last year primarily reflects
decreases in compensable revenues and decreased legal and audit costs
related to a defalcation in 1994. Income before taxes was $25 million for
the year compared to $33 million for the prior year a decrease of 24%.
See note 15 to the consolidated financial statements for further
discussion of the Reorganization Agreement entered into on February 24,
1997 by Gruntal and The 1880 Group LLC.
CORPORATE INTEREST EXPENSE
Corporate interest expense was $49 million, $46 million and $38
million in 1996, 1995 and 1994, respectively, and was related to debt
incurred in connection with the Recapitalization and the acquisition of
Home Insurance and its consolidated subsidiaries in 1991 by the Company.
Corporate interest expense increased during 1996 and 1995 as compared to
1994 due to the increased debt incurred in connection with the
Recapitalization. As a result of the Company's debt rating being reduced
to BB- by S&P, the interest rate on the 1998 Senior Notes increased from
7% to 7 3/4% and the interest rate on the 2003 Senior Notes increased
from 7 7/8% to 8 5/8% in November 1994. See note 5 to the consolidated
financial statements for additional information on corporate debt.
OTHER EXPENSES
Other expenses were nil, $24 million, and $8 million in 1996, 1995
and 1994, respectively. Other expenses in 1995 were due primarily to
transaction expenses incurred in connection with the Recapitalization.
Other expenses in 1994 were primarily due to corporate expenses.
INCOME TAXES
Income tax expense was $7 million, $3 million and $7 million in
1996, 1995 and 1994, respectively. In 1996, 1995 and 1994, the
Company's federal income tax expense was insignificant due to its pre-
tax losses. No income tax benefit was recognized as a result of such
losses. A reconciliation between income taxes computed at the statutory
federal rate and the provision for income taxes is included in note 8 to
the consolidated financial statements.
GOODWILL
In November 1994, the Company was downgraded by the three primary
insurance rating agencies. These actions had a significant adverse effect
on the premium production of Home Insurance. As a result, the Company
could no longer forecast operating income to demonstrate the
recoverability of goodwill related to its subsidiaries. Therefore, the
Company recorded a charge of $206 million in 1994 for the writeoff of
goodwill, exclusive of the annual amortization.
ACCOUNTING PRONOUNCEMENTS
In November 1992, the Financial Accounting Standards Board
("FASB") issued SFAS No. 112, "Employers' Accounting for Post-employment
Benefits." This statement requires employers to recognize the obligation
to provide benefits, such as health-care, life insurance coverage and
disability related costs to former or inactive employees. The Company
adopted this statement in 1994 and recorded a loss of $4 million as a
cumulative effect of a change in accounting principle.
In March 1995, FASB issued SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of," effective for financial statements with fiscal years beginning after
December 15, 1995. Among other provisions, SFAS No. 121 requires that
long-lived assets and certain identifiable intangibles to be held and
used by an entity be reviewed for impairment whenever events or changes
in circumstances indicate that the carrying amount of an asset may not be
recoverable. In performing the review for recoverability, an entity
should estimate the future cash flows expected to result from the use of
the assets and their eventual disposition. Measurement of an impairment
loss for long-lived assets and identifiable intangibles expected to be
held and used should be based on the fair value of the asset. The Company
has determined that this pronouncement does not have any impact on the
financial condition and results of operations.
FINANCIAL CONDITION
Consolidated
Following the Closing, 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 Department that, in light of
the Recapitalization, Home Insurance cannot pay any dividends without
prior approval of the Department.
On March 3, 1997, Home Insurance was placed under formal
supervision by the Department. The Department states in its Order that
this action was taken in response to Home Insurance's RBC report filed
with the Department which indicates that a Mandatory Control Level Event
has occurred. See "Risk-Based Capital", for further discussion. The
Order establishes that the Department will oversee and supervise Home
Insurance for the purpose of continuing and intensifying an economic,
actuarial and accounting review of the books, records and business
affairs of Home Insurance so as to determine what future actions may be
appropriate. The Order also provides that Home Insurance may not take
certain actions without the prior approval of the Department, including,
among other matters, payment of claims and other obligations within
certain dollar limits, and changes in the terms and conditions of certain
existing contracts and entering into of certain new contracts. See
"Insurance Regulation" for further discussion of the Order.
If the 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. Based on the Company's most current cash flow projections,
without dividends from Home Insurance, the Company is unlikely to be able
to meet its cash flow needs during 1997. Under the terms of the
Recapitalization Agreement, Centre Finance has purchased approximately
$46 million aggregate principal amount of the Company's 7% Series B
Senior Working Capital Notes to fund interest payments occurring through
December 1996 on the Public Indebtedness.
To fund additional cash requirements incurred in connection with
the Equity Repurchase Transaction, the Recapitalization and other
extraordinary needs, Centre Finance and ZCI purchased, in 1995, $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. In February 1996, 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 during 1996 the Company has issued $3.8 million of these
notes.
Effective December 13, 1996, pursuant to Amendment No. 2 to the
Amended and Restated Purchase Agreement, dated as of April 26, 1995,
between the Company and ZHI, the Amended and Restated Note Exchange
Agreement, dated as of April 26, 1995, between the Company and Trygg-
Hansa, the Amended and Restated Securities Purchase Agreement, dated as
of April 26, 1995, between ZHI and Trygg-Hansa, the Amended and Restated
Standby Working Capital Credit Agreement, dated as of April 26, 1995,
between the Company and ZHI, and the notes issued thereunder, such
documents were amended to effectuate the original intent of the parties
thereto to permit the issuance of up to an aggregate principal amount of
$46,550,000 Series B Senior Working Capital Notes, which aggregate
principal amount is equal to the aggregate amount of interest payments
made by the Company with respect to the Public Indebtedness up to
December 31, 1996. The proceeds of the Series B Senior Working Capital
Notes, as so amended, were used by the Company to make required interest
payments on the Public Indebtedness up to December 31, 1996.
In addition, effective December 31, 1996, each of the Series A and
Series B Senior Working Capital Notes, was amended to change the timing
of the payment of interest. Prior to such amendment, interest was payable
quarterly. However, according to the amended terms, interest shall not be
due or payable until seven business days following the receipt by the
Company of written demand from holders of these notes, or when the
principal of the Series A and Series B Senior Working Capital Notes
becomes due and payable. If interest is not paid within seven business
days of such written demand, all interest accrued shall be deemed overdue
and shall immediately become due and payable. If interest becomes
overdue, 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%. As
of December 31, 1996, approximately $4 million of interest has been
accrued but not paid on the Series A and Series B Senior Working Capital
Notes. As a result of the amended terms, the interest is not overdue.
Neither Centre Finance nor Zurich nor Trygg-Hansa has 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, Zurich and
Trygg-Hansa 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. Home Insurance is subject to regulatory restrictions on the
amount of dividends that must be paid as described above. The Company did
not receive any common stock dividends from Home Insurance in 1996 and
1995. Based on the Company's most current cash flow projections, without
dividends from Home Insurance, the Company is unlikely to be able to meet
its cash flow needs during 1997.
At December 31, 1996, the Company's outstanding corporate debt was
$567 million and, at December 31, 1995, was $517 million. As part of the
Recapitalization, Trygg-Hansa refinanced the sum of $178 million of
indebtedness outstanding under the Credit Agreement ($170 million) and
the Interest Deferral Agreement ($8 million). In exchange the Company
issued $98 million of 12% Senior Subordinated Notes, at original issue
discount ($303 million principal value) and $80 million of 8% Junior
Subordinated Notes at original issue discount ($171 million principal
value). See note 1 to the consolidated financial statements for further
discussion. The principal repayments under the Public Indebtedness are
$100 million in 1998 and $180 million in 2003, however the repayment of
the 2003 Senior Notes have changed as a result of an exchange (see
discussion below). The Company would need to fund the required principal
payments for the Public Indebtedness through dividend income from Home
Insurance.
Pursuant to the Bondholder Agreement, in exchange for the consent
by each Bondholder to the waivers and amendments to the indentures
governing the Public Indebtedness necessary to consummate the
Recapitalization, the Company completed an exchange offer on August 25,
1995, in which approximately $179 million principal value of the 2003
Senior Notes were exchanged for the New Notes, which provide for sinking
fund payments (to be applied to the mandatory retirement of the New
Notes) in installments of approximately $36 million each in year 1999
through 2003. All other terms and conditions of the New Notes are
substantially the same as the 2003 Senior Notes. See note 1 to the
consolidated financial statements.
In March, 1997, Moody's lowered its rating of the Company's debt
security to Ca from B3, and Standard and Poor's Corporation ("S&P")
lowered its ratings to CC from B-.
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 reinsurers commenced making payments under the
Excess of Loss Reinsurance Agreement. See "Insurance Regulation - Dividend
Restrictions". 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 consolidated financial statements) as such debts become
payable.
Based on cash flow forecasts at December 31, 1996, the Company is
projecting that the coverage limits of the Excess of Loss Reinsurance
Agreement will be exhausted. Due to these projected future recoveries,
loss reserves with a net present value of $787 million were recorded as
of December 31, 1996 as a recoverable from the Excess of Loss Reinsurance
Agreement, including an additional $372 million during 1996. The increase
resulted primarily from changes to cash flow projections which now
forecast that the cover will be exhausted, and changes in the net present
value of the receivable based on current projections of amounts and
timing of cash inflows and outflows.
Beginning June 1996, Home Insurance is withholding rent and tax
payments to its Landlord. Amounts withheld for rent of approximately $3
million per month, are being accrued pending resolution of litigation.
Home Insurance was required to deposit in escrow with a court appointed
receiver approximately $10.7 million. See note 14 to the consolidated
financial statements for further discussion.
Home Insurance is involved in a dispute with NCCI. Home Insurance
is a participant in the Pool, and, as of December 31, 1996, Home
Insurance is carrying undiscounted loss reserves of approximately $261
million allocated to the Pool. Home Insurance has refused to pay the
NCCI's three most recent quarterly invoices totaling approximately $28
million. See note 14 to the consolidated financial statements for further
discussion.
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 primarily earning investment income,
collection of premiums receivable and reinsurance receivables, collection
of the Portfolio Swap Receivable and sale of assets. At December 31,
1996, the Portfolio Swap Receivable of $1,243 million was available to
provide for any foreseeable immediate cash requirements.
On March 3, 1997, Home Insurance was placed under formal
supervision by the Department. The Department states in its Order that
this action was taken in response to Home Insurance's RBC report filed
with the Department which indicates that a Mandatory Control Level Event
has occurred. See "Risk Based Capital", for further discussion. The Order
establishes that the Department will oversee and supervise Home Insurance
for the purpose of continuing and intensifying an economic, actuarial and
accounting review of the books, records and business affairs of Home
Insurance so as to determine what future actions may be appropriate. The
Order also provides that Home Insurance may not take certain actions
without the prior approval of the Department, including, among other
matters, payment of claims and other obligations within certain dollar
limits, and changes in the terms and conditions of certain existing
contracts and entering into of certain new contracts. See "Insurance
Regulation".
Cash used for insurance operating activities was $1,070 million in
1996 compared with $1,191 million in 1995 and $131 million in 1994. The
net outflows in 1996 and 1995 were primarily due to paid losses and lower
premium collections, resulting from the run-off of operations. The
decrease in 1994 was primarily due to lower premium collections and
increased payments under the Stop Loss Treaty.
The Department gave Home Insurance permission to include in the
1996 Statutory Annual Statement a non-tabular discount which results from
discounting all loss reserves, and allocated and unallocated loss
adjustment expense reserves at 7%. Home Insurance has sufficient assets
that will earn 7% to meet the expected stream of loss and loss adjustment
expense payments. Home Insurance calculated that the non-tabular discount
is $469 million. The non-tabular discount is not included in the
Company's consolidated financial statements prepared under GAAP. Home
Insurance's consolidated policyholders' surplus determined in accordance
with statutory practices, and after reflecting the benefit of non-tabular
discount, was $55 million. Statutory surplus at December 31, 1995 was
$230 million. The decline is attributable primarily to the net loss in
1996. Home Insurance reported a consolidated statutory net loss of $685
million in 1996, $272 million in 1995 and $204 million in 1994. The 1996
net loss reflects loss and loss adjustment expense reserve bulk additions
of $662 million, lower earned premiums and expenses incurred in managing
the run-off of its operations.
The Company's loss reserves are determined through a process of
estimation which is necessarily imperfect, and involves an evaluation of
a large number of variables. 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. See note 3 to the
consolidated financial statements for further discussion.
The Department also continues to direct a consulting actuarial
firm to perform a review of Home Insurance's loss reserves, and has
retained a second actuarial firm to perform a peer review of the
findings. Such reviews are expected to be completed during the second
quarter of 1997. Management cannot predict whether reserve estimates to
be prepared by these consultants will change the Department's view of the
level of regulatory intervention required for Home Insurance.
Risk-Based Capital
In order to enhance the regulation of insurer solvency, on
December 5, 1993 the NAIC approved a formula and model law to implement
RBC requirements for property and casualty insurance companies, which are
designed to assess capital adequacy and to raise the level of protection
that statutory surplus provides for policyholder obligations. The RBC
formula for property and casualty insurance companies measures three
major areas of risk facing property and casualty insurers: (i)
underwriting, which encompasses the risk of adverse loss development
and inadequate pricing; (ii) declines in asset values arising from credit
risk; and (iii) declines in asset values arising from investment risks.
Pursuant to the model law, insurers having less statutory surplus than
required by the RBC calculation will be subject to varying degrees of
regulatory action, depending on the level of capital inadequacy.
Home Insurance, which had received a waiver from the Department
relating to calculation of RBC in 1995, was required to perform this
calculation in 1996. This calculation indicated that a Mandatory Control
Level Event had occurred since Home Insurance's total adjusted capital
was negative $227 million, which was less than its mandatory control
level RBC of $228 million. The adjusted capital is a calculated amount
per the RBC formula, derived by deducting 60% of non-tabular discount
from statutory surplus (see note 4 to the consolidated financial
statements). The Department has informed Home Insurance that it is
exercising its rights under New Hampshire law to expand its supervision
of Home Insurance's run-off based on this Mandatory Control Level Event.
In this regard the Department issued the Order to increase the
Department's oversight of Home Insurance. See "Insurance Regulation" for
further discussion.
Sterling Forest
On May 15, 1996 an agreement in principle was announced for the
sale of a substantial part of Sterling Forest lands for public parkland.
A letter of intent between Sterling Forest, as seller, and Trust for
Public Land and Open Space Institute, as purchaser, was later signed and
a formal contract was signed on February 18, 1997. Under the terms of the
agreement, more than 15,000 acres will be acquired as parkland, at a
total acquisition cost of $55 million, and Sterling Forest will continue
to own approximately 2,200 acres of land and existing improvements, for
future development. There is no accounting recognition of the sale in the
financial statements until the transaction is consummated. However, no
material impact on net income is anticipated upon consummation.
Securities Broker-Dealer
Securities broker-dealer debt of $246 million and $304 million at
December 31, 1996 and 1995, respectively, consists principally of loans
from banks which are payable on demand. See note 10 to the consolidated
financial statements.
Securities broker-dealer liquid assets of $1,677 million and
$1,389 million at December 31, 1996 and 1995, respectively, consisted of
cash, marketable securities, receivables from brokers and dealers and
securities purchased under agreements to resell. Another major component
of assets is receivables from customers, primarily consisting of margin
debt, which are collateralized by customers' securities. Receivables from
customers were $982 million and $979 million at December 31, 1996 and
1995, respectively. At December 31, 1996 and 1995, securities
broker-dealer total assets were $2,831 million and $2,553 million,
respectively, and were financed by equity capital, subordinated
borrowing, term notes, short-term borrowing, customers' interest-bearing
and non-interest-bearing free credit balances and other payables.
Certain minimum amounts of capital must be maintained by
securities 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 December 31, 1996, Gruntal &
Co.'s net capital, as defined by the Commission and other regulatory
authorities, was approximately $125 million, which was $104 million in
excess of the aggregate minimum required.
On February 24, 1997, Gruntal, and The 1880 Group LLC entered into
the Reorganization Agreement, under which Gruntal will be restructured
as a limited liability company, Gruntal Financial, and partially
transferred to a management group led by Gruntal officers. Home Insurance
will be the sole owner of Gruntal after the consummation of the
Reorganization. The Reorganization involves the issuance of several
classes of securities to Gruntal and The 1880 Group, including preferred
securities, in an aggregate nominal amount of approximately $235 million
as follows: (i) Gruntal Financial will issue to Gruntal, the direct
wholly-owned subsidiary of Home Insurance, securities called Preferred A
Interests in a nominal amount of $155.5 million and securities called
Preferred B Interests in a nominal amount of $70 million; and (ii)
Gruntal Financial will issue to The 1880 Group securities called
Preferred C Interests in an approximate nominal amount of $9 million. As
a result of the Reorganization, Gruntal will own 40% of the common
interest of Gruntal Financial and The 1880 Group will own 60% of the
common interest of Gruntal Financial. In connection with the issuance of
certain preferred securities to Gruntal, Home Insurance and Centre
Reinsurance Dublin will enter into a swap agreement intended to ensure
that Home Insurance's investment in Gruntal Financial yields at least
$155.5 million plus a 7.5% per annum rate of return thereon, subject to
certain modifications with respect to certain distributions and sales
proceeds of the common and preferred interests of Gruntal Financial. The
closing of the Reorganization occurred on March 28, 1997, and did not
result in a gain or loss to the Company. See note 15 to the consolidated
financial statements for further discussion.
ITEM 8. FINANCIAL STATEMENTS, SCHEDULES AND EXHIBITS
<TABLE>
1. Index to Financial Statements
<S> <C>
PAGE
Home Holdings Inc. and Subsidiaries
Independent Auditors' Report 50
Consolidated Statements of Income for the years ended
December 31, 1996, 1995 and 1994 52
Consolidated Balance Sheets at December 31, 1996 and 1995 53
Consolidated Statements of Stockholders' Deficiency
for the years ended December 31, 1996, 1995 and 1994 54
Consolidated Statements of Cash Flows
for the years ended December 31, 1996, 1995 and 1994 55
Notes to Consolidated Financial Statements 56
2. Index to Financial Statement Schedules
Schedule I - Summary of Investments of Insurance Companies -
Other than Investments in Related Parties 91
Schedule II - Condensed Financial Information of Registrant 92
Schedule III - Supplementary Insurance Information 94
Schedule IV - Reinsurance 96
Schedule V - Supplemental Information Concerning Consolidated
Property and Casualty Insurance Operations 97
</TABLE>
INDEPENDENT AUDITORS' REPORT
- ----------------------------------------------------------------------------
The Board of Directors and Stockholders
Home Holdings Inc.:
We have audited the consolidated financial statements of Home Holdings
Inc. and subsidiaries as listed in the accompanying index. In connection
with our audits of the consolidated financial statements, we have also
audited the financial statement schedules as listed in the accompanying
index. These consolidated financial statements and financial statement
schedules are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements and financial statement schedules 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 1995 and 1994 consolidated financial statements
referred to above present fairly, in all material respects, the financial
position of Home Holdings Inc. and subsidiaries as of December 31, 1995,
and the results of their operations and their cash flows for each of the
years in the two-year period ended December 31, 1995, in conformity with
generally accepted accounting principles.
The accompanying 1996 consolidated financial statements have been
prepared assuming that the Company will continue as a going concern. As
discussed in Note 4 to the consolidated financial statements, the
Company has suffered recurring losses from operations and has a net
stockholders' deficiency. In addition, based on the Company's most
current cash flow projections, without dividends from The Home Insurance
Company (Home Insurance), the Company is unlikely to meet its cash flow
needs during 1997. Home Insurance cannot pay any dividends without prior
approval of The State of New Hampshire Insurance Department (Department).
At December 31, 1996, these circumstances raise substantial doubt about
the entity's ability to continue as a going concern. The 1996
consolidated financial statements do not include any adjustments that
might result from the outcome of this uncertainty.
On March 3, 1997, the Company's principal subsidiary, Home Insurance, a
New Hampshire-domiciled property and casualty insurer was placed under
formal supervision by the Department. The Department's Order of
Supervision (Order) establishes that the Department will oversee and
supervise Home Insurance for the purpose of continuing and intensifying
an economic, actuarial and accounting review of the books, records and
business affairs of Home Insurance so as to determine what future actions
may be appropriate. The Order also provides that Home Insurance may not
take certain actions without the prior approval of the Department.
As described more fully in Note 4 to the consolidated financial
statements, Home Insurance follows a permitted accounting practice in its
statutory financial statements as filed with the Department which has a
material positive impact on statutory surplus. Non-tabular loss and loss
adjustment expense reserves are reported at their present value
discounted at 7.0% for the time value of money resulting in a reduction
of such reserves in the statutory financial statements and a
corresponding increase in reported statutory surplus of $469 million.
In our opinion, because the amount and timing of ultimate loss payments
are subject to substantial uncertainty, the Company does not meet the
prescribed statutory criteria required to account for its loss reserves
on a discounted basis. However, the Company requested permission to
follow this practice in its 1996 statutory financial statements filed
with the Department and such permission was granted.
The accompanying consolidated financial statements have been prepared in
accordance with generally accepted accounting principles. Amounts
included therein for non-tabular loss and loss adjustment expense
reserves have not been discounted for the time value of money as
described above.
Because of the significance of the uncertainty discussed in the fourth
paragraph, we are unable to express, and we do not express, an opinion on
the accompanying 1996 consolidated financial statements. Also we are
unable to express, and we do not express, an opinion on the related
financial statement schedules.
As discussed in Note 12 to the consolidated financial statements, the
Company adopted the provisions of the Financial Accounting Standards
Board's Statement of Financial Accounting Standards No. 112, "Employers'
Accounting for Postemployment Benefits," effective January 1, 1994.
KPMG Peat Marwick LLP
New York, New York
March 27, 1997
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF INCOME
- ---------------------------------------------------------------------------------------------------
Home Holdings Inc. and Subsidiaries
Year ended December 31,
($ millions, except per share information) 1996 1995 1994
---- ---- ----
REVENUES
<S> <C> <C> <C>
Net earned premiums (note 3) $ 116 $ 914 $ 1,653
Insurance net investment income (note 6) 146 219 225
Insurance realized capital gains (losses) (note 6) 9 (225) 16
Securities broker-dealer operations 442 463 323
--------- --------- --------
Total revenues 713 1,371 2,217
--------- --------- --------
OPERATING EXPENSES
Losses and loss adjustment expenses (notes 3 and 7) 588 1,764 1,572
Policy acquisition and other insurance expenses 120 430 449
Securities broker-dealer operations 417 430 313
Goodwill writeoff and amortization - - 211
Corporate interest expense 49 46 38
Other expenses - 24 8
--------- --------- --------
Total expenses 1,174 2,694 2,591
--------- --------- --------
Loss before income taxes
and accounting change (461) (1,323) (374)
Income tax expense (note 8) (7) (3) (7)
--------- --------- --------
Loss before accounting change (468) (1,326) (381)
Cumulative effect of accounting change (note 12) - - (4)
--------- --------- --------
NET LOSS $ (468) $ (1,326) $ (385)
========= ========= ========
Net loss attributable to common
stockholders N.M. N.M. $ (385)
========
LOSS PER SHARE
Loss before accounting change N.M. N.M. $ (10.95)
Accounting change N.M. N.M. (0.11)
--------
NET LOSS N.M. N.M. $ (11.06)
========
</TABLE>
- --------------------------------
N.M. - Not Meaningful.
See accompanying notes to consolidated financial statements.
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEETS
- -----------------------------------------------------------------------------------------------
Home Holdings Inc. and Subsidiaries
December 31,
($ millions) 1996 1995
---- ----
ASSETS
Insurance investments at fair value (note 6):
<S> <C> <C>
Portfolio Swap receivable $ 1,243 $ 2,130
Fixed maturities available for sale (cost $26 and $33) 28 33
Equity securities (cost $17 and $24) 21 24
Short-term investments - 2
--------- ----------
Total insurance investments 1,292 2,189
Cash 36 34
Premiums receivable 290 384
Funds held by affiliate (note 3) 248 265
Reinsurance receivables (notes 3, 7 and 11) 2,765 2,383
Securities broker-dealer investments 392 539
Receivables from brokers, dealers and customers 2,258 1,896
Other assets 312 313
--------- ----------
Total assets $ 7,593 $ 8,003
========= ==========
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
Liabilities:
Unpaid losses and loss adjustment expenses (note 3) $ 5,687 $ 5,814
Unearned premiums 9 141
Payables to brokers, dealers and customers 2,060 1,621
Securities of broker-dealer sold under agreements to
repurchase - 131
Debt of securities broker-dealer (note 10) 246 304
Corporate debt (note 5) 567 517
Other liabilities 563 552
--------- ----------
Total liabilities 9,132 9,080
--------- ----------
Litigation and contingencies (note 14)
Stockholders' Deficiency (note 4):
Series A preferred stock $.01 par value;
170 shares authorized, issued and outstanding - -
Common stock, Series A, $.01 par value; 40,000,000 shares
authorized; 14,114,500 shares outstanding in 1996 and 1995 - -
Series B convertible stock, $.01 par value; 15,000,000 shares
authorized; 11,425,177 shares outstanding in 1996 and 1995 - -
Paid-in capital 777 777
Deficit (2,320) (1,852)
Unrealized gains on insurance investments 6 -
Unrealized currency translation adjustments (2) (2)
--------- ----------
Total stockholders' deficiency (1,539) (1,077)
--------- ----------
Total liabilities and stockholders' deficiency $ 7,593 $ 8,003
========= ==========
</TABLE>
- ---------------------------
See accompanying notes to consolidated financial statements.
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY)
- ----------------------------------------------------------------------------------------------------------------
Home Holdings Inc. and Subsidiaries
Unrealized
Preferred Gains Unrealized
and (Losses) on Currency
Common Paid-in Retained Insurance Translation
($ millions) Stock Capital Deficit Investments Adjustments Total
------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
December 31, 1993 $ - $ 780 $ (141) $ 60 $ (1) $ 698
Net loss (385) (385)
Purchase of common stock (1) (1)
Change in unrealized
gains/losses (264) (264)
------------------------------------------------------------------------------
December 31, 1994 - 779 (526) (204) (1) 48
------------------------------------------------------------------------------
Net loss (1,326) (1,326)
Issuance of preferred stock 98 98
Purchase of common stock (92) (92)
Transaction expenses (8) (8)
Change in unrealized gains/losses 204 204
Unrealized currency
translation adjustments (1) (1)
------------------------------------------------------------------------------
December 31, 1995 777 (1,852) - (2) (1,077)
------------------------------------------------------------------------------
Net loss (468) (468)
Change in unrealized
gains/losses - - - 6 - 6
------------------------------------------------------------------------------
DECEMBER 31, 1996 $ - $ 777 $ (2,320) $ 6 $ (2) $ (1,539)
==============================================================================
</TABLE>
- -----------------------
See accompanying notes to consolidated financial statements.
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS
- ---------------------------------------------------------------------------------------------------------------
Home Holdings Inc. and Subsidiaries
Year ended December 31,
($ millions) 1996 1995 1994
---- ---- ----
CASH FLOWS FROM OPERATING ACTIVITIES
<S> <C> <C> <C>
Net loss $ (468) $(1,326) $ (385)
Adjustments to reconcile net loss
to net cash used for operating activities:
Cumulative effect of accounting change - - 4
Insurance realized capital (gains) losses (9) 225 (16)
Goodwill writeoff and amortization - - 211
Unpaid losses and loss adjustment expenses (127) 241 77
Premiums and reinsurance receivables (288) 347 32
Funds held by affiliate 17 (265) -
Unearned premiums (132) (663) (131)
Broker-dealer investments and receivables,
net of payables 175 (161) 114
Prepaid reinsurance premiums 23 111 -
Other (86) 139 16
-------- ------- ------
Net cash used for operating activities (895) (1,352) (78)
-------- ------- ------
CASH FLOWS FROM INVESTING ACTIVITIES
Portfolio Swap receivable, representing
change in balance originating from
non-cash deemed sales 887 1,145 -
Sales of fixed maturities 4 6 327
Redemptions and calls of fixed maturities - - 361
Sales of equity securities 21 2 29
Purchases of fixed maturities - - (513)
Purchases of equity securities - - (36)
Short-term investments, net 2 - 93
Other (9) (1) (33)
-------- ------- ------
Net cash provided by investing activities 905 1,152 228
-------- ------- ------
CASH FLOWS FROM FINANCING ACTIVITIES
Preferred stock issuance - 98 -
Stock repurchase - (92) (1)
Increase in corporate debt 50 240 -
Decrease in corporate debt - (170) (103)
Increase (decrease) in debt of securities broker-dealer (58) 26 (17)
Other - (12) 1
-------- ------- ------
Net cash provided by (used for) financing activities (8) 90 (120)
-------- ------- ------
Net increase (decrease) in cash 2 (110) 30
Cash at beginning of year 34 144 114
-------- ------- ------
CASH AT END OF YEAR $ 36 $ 34 $ 144
======== ======= ======
SUPPLEMENTAL DISCLOSURES OF CASH FLOW:
Corporate interest paid $ 23 $ 25 $ 41
Securities broker-dealer interest paid 85 79 58
Income taxes paid 2 10 7
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING ACTIVITIES:
Deemed sales of securities underlying Portfolio Swap $ - $ 3,275 $ -
- -------------------------
See accompanying notes to consolidated financial statements.
</TABLE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------
Home Holdings Inc. and Subsidiaries
1. GENERAL
Home Holdings Inc., a Delaware corporation (the "Company"), is a
holding company for its wholly-owned subsidiaries, The Home Insurance
Company, a New Hampshire corporation, and its insurance subsidiaries
("Home Insurance"). Home Insurance generally ceased writing new or
renewal insurance on June 12, 1995 in connection with a recapitalization
agreement described below. Home Insurance also owns Gruntal Financial
Corp. ("Gruntal"), a securities brokerage business, and Sterling Forest
Corporation ("Sterling Forest"), a property development business. See
note 15 for further discussion.
(a) ORDER OF SUPERVISION
On March 3, 1997, Home Insurance was placed under formal
supervision by the New Hampshire Insurance Department (the "Department").
The Department states in its Order of Supervision (the "Order") that this
action was taken in response to Home Insurance's Risk-Based Capital
("RBC") report filed with the Department which indicates that a mandatory
control level event has occurred within the meaning of New Hampshire
Revised Statutes of Annotated 404-F:6 (a "Mandatory Control Level
Event"). See note 4 for further discussion of RBC. The Order establishes
that the Department will oversee and supervise Home Insurance for the
purpose of continuing and intensifying an economic, actuarial and
accounting review of the books, records and business affairs of Home
Insurance so as to determine what future actions may be appropriate. The
Order provides that Home Insurance may not take certain actions without
the prior approval of the Department, including, but not limited to:
i) Make any single claim payment in excess of $1 million
except under conditions specified therein.
ii) Make any payment to creditors or other persons in excess
of $500,000, except as set forth in clause (i) above.
iii) Make any single payment to cedents or reinsurers (a) in
excess of $250,000 or (b) out of the ordinary course of
business, or any commutation of any amount with
any cedents or reinsurers.
iv) Release any obligation or collateral in excess of $500,000.
v) Materially change the terms of any contracts or enter into
any new contracts in excess of $500,000.
vi) Engage in any transactions with the Company, REM, ZHI,
Zurich or Trygg-Hansa or any subsidiaries, other affiliates
or agents of such entities.
In addition, without limiting the general authority of the
Department as set forth above, the Department shall have the final
authority to approve, disapprove or control (including the power to
direct) the following:
i) The initiation, settlement or withdrawal of any action,
dispute, arbitration, litigation, or proceeding of any
kind involving Home Insurance other than in the ordinary
course of business.
ii) The location and material terms of all banking, investment,
trust, deposit and custodial accounts for assets of Home
Insurance, including but not limited to reserves.
(B) RECAPITALIZATION
The Company entered into a recapitalization agreement, as amended,
(the "Recapitalization Agreement" or the "Recapitalization") dated as of
February 9, 1995, with Trygg-Hansa AB, a corporation organized under the
laws of Sweden ("Trygg-Hansa"), Zurich Insurance Company, a corporation
organized under the laws of Switzerland ("Zurich"), Zurich Centre
Investments Limited, a corporation organized under the laws of Bermuda
("ZCI"), Insurance Partners Advisors, L.P., a Delaware limited
partnership ("IP") and ZCI Investments Limited (now known as Zurich Home
Investments Limited), a corporation organized under the laws of Bermuda
("ZHI") (Zurich, ZCI, IP and ZHI are collectively referred to herein as
the "Investor Group"). The Closing under the Recapitalization Agreement
took place on June 12, 1995 (the "Closing").
Following the Closing, Home Insurance has generally ceased writing
new or renewal insurance or reinsurance business, except for limited
risks that it is obligated to continue writing for an interim period.
Zurich and its affiliates have been afforded rights of access and
cooperation assisting them in assessing the existing business of Home
Insurance and the business and assets of the Company and its subsidiaries
are being managed by affiliates of Zurich.
The transactions consummated under the Recapitalization Agreement
have the effect of Trygg-Hansa and the Investor Group owning virtually
the entire equity interest in the Company. The primary transactions
constituting the Recapitalization were as follows:
o The Company issued to Trygg-Hansa (a) $98 million aggregate
principal amount of the Company's 12% Senior Subordinated Notes
due December 31, 2004 (the "Senior Subordinated Notes") and (b)
$80 million aggregate principal amount of the Company's 8% Junior
Subordinated Notes due December 31, 2004 (the "Junior Subordinated
Notes") in exchange for all notes and other obligations of the
Company outstanding under the Credit Agreement, dated as of
November 20, 1991, as amended, between the Company and Trygg-Hansa
(the "Credit Agreement") and in exchange for the aggregate
principal amount of the notes and all other obligations of the
Company outstanding under the Interest Deferral Agreement (the
"Interest Deferral Agreement"), dated as of February 9, 1995, by
and between the Company and Trygg-Hansa, representing interest
deferred on the Credit Agreement Notes from February 9, 1995 to
June 12, 1995. See note 5 for further discussion.
o ZHI purchased, at a purchase price equal to the aggregate
liquidation preference of $98 million, 170 shares of the Company's
Series A Preferred Stock, par value $.01 per share (the "Preferred
Stock"), to fund the Equity Repurchase Transaction (as defined
below) and to pay non-capitalized expenses associated with the
Recapitalization.
o Trygg-Hansa sold to ZHI (a) 800,000 shares of the Company's
Series A Common Stock and 333,333 shares of the Series B Common
Stock for a purchase price of $7.50 per share, and (b) 8 year
warrants, for an aggregate purchase price of $124,000; Trygg-Hansa
sold to Centre Finance Dublin ("Centre Finance"), an affiliate of
Zurich, $98 million principal amount of Senior Subordinated Notes
of the Company held by Trygg-Hansa and $12 million principal
amount of Junior Subordinated Notes of the Company held by
Trygg-Hansa for $1 million in cash plus the right to receive a
contingent payment; and Trygg-Hansa exchanged with ZHI $35 million
principal amount of Junior Subordinated Notes for 6/17ths (i.e. 60
shares) of the number of shares of Preferred Stock.
o The Company consummated a repurchase transaction (the "Equity
Repurchase Transaction") pursuant to which participating holders
of the Series A Common Stock (other than Centre Re (Bermuda),
Centre Reinsurance Limited, International Insurance Investors,
L.P. ("III") and Trygg-Hansa) received $10.00 (net) per share of
Series A Common Stock in cash plus a payment of $.20 per share in
settlement of certain litigation related to the Recapitalization.
o To fund additional cash requirements incurred in connection with
the Equity Repurchase Transaction, the Recapitalization and
other extraordinary needs, Centre Finance and ZCI purchased, in
1995, $15 million principal amount of the Company's 12% Senior
Subordinated Working Capital Notes due December 31, 2004 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. In February 1996, 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 the Company
issued $3.8 million of these additional notes during 1996.
o ZCI issued a commitment to extend a line of credit of up to
$30 million to Sterling Forest to fund the commercial and
residential development of land owned by Sterling Forest. Sterling
Forest borrowed $7.5 million as of December 31, 1996, bearing
interest at a rate of 10% per annum.
o As of April 7, 1995, ZHI, ZCI, and certain of the holders of
the Company's 7% Senior Notes due 1998 and 77/8% Senior Notes due
2003 (collectively, the "Senior Notes") entered into an agreement
(the "Bondholder Agreement") pursuant to which each such
Bondholder delivered to the trustee under the Indentures governing
the Senior Notes on April 18, 1995, a Waiver, Consent and Release
consenting to waivers and amendments to the Indentures necessary
to consummate the Recapitalization. Also pursuant to the
Bondholder Agreement, on August 25, 1995, the Company completed an
exchange offer in which approximately $179 million principal value
of the 77/8% Senior Notes due 2003 were exchanged for the
Company's 77/8% Senior Sinking Fund Notes due December 15, 2003
(the "New Notes") which provide for a sinking fund payment (to be
applied to the mandatory retirement of the New Notes) in
installments of approximately $36 million each in years 1999
through 2003. The Senior Notes and the New Notes are collectively
referred to as the public indebtedness (the "Public
Indebtedness"). See note 5.
o As part of a services agreement between the Company, Home
Insurance and Risk Enterprise Management Limited ("REM"), an
indirect subsidiary of Zurich, the assets and liabilities
associated with the Company and insurance policies written by Home
Insurance are maintained by the Company and Home Insurance,
respectively, and managed by REM. REM manages the administrative
operations of Home Insurance, including the claims associated with
all of Home Insurance's policyholders, and will defer all fees, in
excess of actual costs, payable by Home Insurance for the first
five years. During 1995, REM leased substantially all of its
employees from Home Insurance to perform these services and
effective January 1, 1996, Home Insurance employees became REM
employees. The Services Agreement was amended on March 4, 1997, to
accommodate the terms of the Order. This amendment includes, among
other provisions, provisions related to the Department's right of
prior approval with respect to certain transactions involving Home
Insurance. The Company had accrued $17 million of fees payable to
REM as of December 31, 1995. This liability is no longer accrued
and is included as part of a contingent liability as of December
31, 1996. See note 14.
o Zurich Investment Management Inc. ("ZIM") a subsidiary of Zurich,
was appointed by Centre Investment Services Limited to manage the
cash and invested assets of the Company and Home Insurance
pursuant to an investment management agreement, which was amended
to add ZIM as an additional party.
o The Company and Home Insurance entered into the Portfolio Value
Swap Agreements (the "Swap") with Centre Reinsurance International
Company which subsequently novated the contracts to Centre
Reinsurance Dublin. Centre Reinsurance Dublin will hereinafter be
referred to as the party to the Swap. See note 6.
o Home Insurance purchased an Aggregate Excess of Loss Reinsurance
Agreement (the "Excess of Loss Reinsurance Agreement") from Centre
Reinsurance International Company, which subsequently novated the
contract to Centre Reinsurance Dublin and commuted or assigned its
right to receive payments under the existing stop loss treaty
dated January 1, 1991 (the "Stop Loss Treaty"). Centre Reinsurance
Dublin will hereinafter be referred to as the party to the Excess
of Loss Reinsurance Agreement. See note 7.
2. SIGNIFICANT ACCOUNTING POLICIES
(a) BASIS OF PRESENTATION
The accompanying consolidated financial statements have been
prepared on the basis of generally accepted accounting principles
("GAAP") which assumes that the Company will continue as a going concern.
The preparation of financial statements in conformity with GAAP requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosures of contingent assets
and liabilities at the date of the financial statements and the reported
revenues and expenses during the reporting period. Actual results could
differ from those estimates. Certain reclassifications have been made to
the 1995 and 1994 financial statements to conform to the 1996
presentation.
(b) PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the
Company and its subsidiaries, principally Home Insurance. All material
intercompany accounts and transactions have been eliminated.
(c) INSURANCE OPERATIONS
Premium revenues
Premiums are generally recognized as earned on a pro rata basis
over the contract period. Revenues include estimates of premiums for
policies with audit or retrospectively-rated features. The liability for
unearned premiums represents the portion of premiums written relating to
the unexpired terms of coverage.
Portfolio Swap Receivable
The Company has reclassified its insurance investments including
fixed maturities, equity securities and short-term investments underlying
the Swap, as a balance receivable from Centre Reinsurance Dublin
("Portfolio Swap Receivable"). See note 6. The Swap is designed to
transfer control and market risk of the portfolio to Centre Reinsurance
Dublin for a fixed return of 7.5%.
Investments
Insurance investments not underlying the Swap include fixed
maturities, which consist primarily of mortgage loans and bonds, and are
designated as available for sale and are carried at fair value.
Investments designated as available for sale are managed based upon
changes in market conditions and therefore will not necessarily be held
to maturity. Short-term investments are carried at cost which
approximates fair value. Equity securities, which consist primarily of
limited partnerships, are carried at fair value. Net unrealized gains or
losses on equity securities and net unrealized gains or losses on invest-
ments available for sale are shown as a separate component of
stockholders' equity, net of related deferred income taxes, if
appropriate, and are included in the determination of net income only
upon sale. Investments determined to have an other than temporary decline
in fair value are written down to net realizable value through charges to
earnings. An identified certificate basis is used to determine the cost
of investments sold.
Fair values are based on quoted market price, if available. If a
quoted market price is not available, fair value is determined by using
quoted market prices on similar securities.
Reinsurance
Reinsurance receivables other than the recoverable from the Excess
of Loss Reinsurance Agreement, represent estimates of the amount that
will be recovered from reinsurers on both paid and unpaid losses and loss
adjustment expenses, determined in a manner consistent with the
liabilities associated with the reinsured policies. The recoverable from
the Excess of Loss Reinsurance Agreement is calculated based on the
present value of the Company's projected future cash flows. (See note 7)
Earned premiums and losses and loss adjustment expenses are net of
ceded reinsurance.
Unpaid losses and loss adjustment expenses
Unpaid losses are determined using case and case development
estimates for reported claims and estimates based on experience and
expected loss development for unreported claims. Unpaid loss adjustment
expenses are estimated based on experience and expected future emergence.
The liability for unpaid losses and loss adjustment expenses excludes
ceded reserves included within reinsurance receivable and is net of
salvage and subrogation recoverable and discounts on workers'
compensation pension liabilities at a rate of 7.5% which represents the
risk free rate. At December 31, 1996 and 1995, unpaid loss and loss
adjustment expenses were net of discount of $134 million and $184
million, respectively, relating to all workers' compensation pension
liabilities. The process of estimating loss reserves is necessarily
imperfect and involves an evaluation of several variables such as claim
frequency and severity as well as social and economic conditions.
Consequently, there can be no assurance that the ultimate liability will
not exceed amounts reserved.
Change in estimates of unpaid losses and loss adjustment expenses
flow through current year operations. Home Insurance records charges
assessed by involuntary pools and related accruals as part of loss
reserves assuming that the amounts reported are adequate.
Deferred policy acquisition costs
Policy acquisition costs, consisting of commissions, premium taxes
and certain underwriting expenses, are deferred and amortized ratably
over the terms of the related policies. The method followed in computing
deferred policy acquisition costs limits the amount of such costs to
their estimated realizable value. In determining estimated realizable
value, the computation gives effect to the premium to be earned, related
investment income, losses, loss adjustment expenses and certain other
costs expected to be incurred as the premium is earned. Amortization of
deferred policy acquisition costs was $32 million in 1996, $118 million
in 1995 and $124 million in 1994.
Interest rate swap agreements
In October 1994, the Financial Accounting Standards Board ("FASB")
issued SFAS No. 119, "Disclosures About Derivative Financial Instruments
and Fair Value of Financial Instruments." SFAS No. 119 is effective for
financial statements issued for fiscal years ending after December 15,
1994. SFAS No. 119 applies to interest rate swap agreements entered into
by the Company. The Company has only limited involvement with derivative
financial instruments and does not use them for trading purposes. The
Company enters into interest rate swap agreements for purposes of
converting variable interest rate exposure to a fixed rate and to match
interest expense with interest income. Interest rate swap agreements
are accounted for as a hedge of the obligation. Interest expense is
recorded using the revised interest rate.
Application of accounting standards
In March 1995, FASB issued SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of," effective for financial statements with fiscal years beginning after
December 15, 1995. Among other provisions, SFAS No. 121 requires that
long-lived assets and certain identifiable intangibles to be held and
used by an entity be reviewed for impairment whenever events or changes
in circumstances indicate that the carrying amount of an asset may not be
recoverable. In performing the review for recoverability, an entity
should estimate the future cash flows expected to result from the use of
the assets and their eventual disposition. Measurement of an impairment
loss for long-lived assets and identifiable intangibles expected to be
held and used should be based on the fair value of the asset. The Company
has determined that this pronouncement does not have any impact on the
financial condition and results of operations.
(d) SECURITIES BROKER-DEALER OPERATIONS
Customer securities transactions of Gruntal are recorded as of the
settlement date, which is generally three business days after the trade
date, while commission revenues and related expenses are recorded as of
the trade date. Principal transactions are recorded as of the trade date.
Receivables from and payables to brokers, dealers and customers represent
balances in connection with normal securities transactions. Receivables
from customers include amounts due on cash and margin transactions.
Securities owned by customers are held as collateral for receivables and
are not reflected in the consolidated financial statements.
Substantially all investments of securities broker-dealer
operations are carried at fair value. Realized and unrealized gains or
losses and investment income on these securities are included in
securities broker-dealer operations revenues.
The securities broker-dealer is engaged in various securities
trading and brokerage activities serving a diverse group of domestic and
foreign corporations, governments, and institutional and individual
investors. A substantial portion of securities broker-dealer operations
transactions are collateralized and are executed with and on behalf of
institutional investors, including other broker-dealers, commercial
banks, insurance companies, pension plans, mutual funds and other
financial institutions. The securities broker-dealer also extends credit
to customers who pay a portion of the purchase price of securities
acquired on margin. Securities broker-dealer operations' exposure to
credit risk associated with the non-performance of these customers and
broker-dealers in fulfilling their contractual obligations, pursuant to
securities and commodities transactions, can be directly affected by
volatile trading markets which may impair the customers' and
broker-dealers' ability to satisfy their obligations to the securities
broker-dealer. The securities broker-dealer proprietary trading
activities are also subject to the risk of counterparty non-performance.
(e) INCOME TAXES
The Company and its domestic subsidiaries file a consolidated
federal income tax return.
Deferred tax assets and liabilities are established for the
temporary differences between the financial reporting basis and tax basis
of the Company's assets and liabilities at enacted tax rates expected to
be in effect when such amounts are recovered or settled. Deferred tax
assets are reduced by a valuation allowance, if it is more likely than
not that some portion or all of the related tax benefits will not be
realized.
(f) FOREIGN CURRENCY TRANSLATION
The accounts of foreign insurance operations are translated into
U.S. dollars based on current exchange rates. Translation adjustments
relating to City International Insurance Company Limited, a U.K.
subsidiary, are reflected as a separate component of stockholders'
equity.
(g) INCOME PER SHARE
On June 12, 1995, the Company repurchased 9,234,701 shares of its
Series A Common Stock. The repurchase had the effect of Trygg-Hansa and
the Investor Group owning virtually the entire equity in the Company. As
a result of the Equity Repurchase Transaction, it is not meaningful to
display 1996 and 1995 per share data.
Prior to 1995, loss per common share was based on the weighted
average number of common shares outstanding. The weighted average number
of shares of common stock outstanding were 34,803,000 for the year ended
December 31, 1994. In 1994, per share amounts reflect an increase of
common shares outstanding as a result of an initial public offering of
shares of Series A Common Stock, par value $.01 per share, which was
completed in December 1993.
3. PREMIUMS AND LOSSES
Premium and loss information for 1996, 1995 and 1994 follow:
($ millions) 1996 1995 1994
---- ---- ----
WRITTEN PREMIUMS (a)
Direct $ 6 $ (4) $ 1,866
Assumed 16 586 153
Ceded (21) (220) (432)
---------- --------- ----------
Net $ 1 $ 362 $ 1,587
========== ========= =========
EARNED PREMIUMS (a)
Direct $ 48 $ 715 $ 1,988
Assumed 113 530 164
Ceded (45) (331) (499)
---------- --------- ---------
Net $ 116 $ 914 $ 1,653
========== ========= =========
LOSSES AND LOSS ADJUSTMENT
EXPENSES
Direct $ 1,202 $ 1,732 $ 2,104
Assumed 186 418 155
Ceded (800) (386)* (687)
---------- --------- ---------
Net $ 588 $ 1,764 $ 1,572
========== ========= =========
* Includes a decrease to ceded losses and loss adjustment expenses of
$189 million, related to the commutation and assignment of the Stop
Loss Treaty. See note 7.
(a) In connection with the Recapitalization, on December 24, 1994,
Zurich Insurance Company U.S. Branch ("Zurich American"), the
Company and Trygg-Hansa entered into the Facultative Reinsurance
Facility Agreement (the "Facility Agreement"). Pursuant to the
Facility Agreement, Zurich American agreed to issue facultative
reinsurance certificates and related cut-through endorsements
with respect to policies issued by Home Insurance, if requested by
Home Insurance and if such risks met Zurich American's
underwriting criteria. On February 9, 1995, the Facility Agreement
was amended to provide that existing or prospective insureds of
Home Insurance that decline a Zurich American reinsurance
certificate will be offered a Zurich American insurance policy
with associated premiums and liabilities being assumed by Home
Insurance through a 100% quota share reinsurance agreement.
On June 12, 1995, the Facility Agreement was further amended to
provide for settlements of balances after June 12, 1995 due
between Home Insurance and Zurich American and to delete a
provision for a 1% renewal premium payable by Zurich American with
respect to direct policies issued by Zurich American under the
Facility Agreement. The Facility Agreement terminated as of June
12, 1995.
The effect of the Facility Agreement for the years ended December 31,
1996 and 1995 are as follows:
($ millions) 1996 1995
---- ----
Written premiums:
Direct** $ (6) $ (181)
Assumed 4 521
Ceded (8) (38)
--------- ---------
Net $ (10) $ 302
========= =========
Earned premiums:
Direct** $ (6) $ (181)
Assumed 88 436
Ceded (11) (34)
--------- ---------
Net $ 71 $ 221
========= =========
** Negative direct premiums is due to policies cancelled and
subsequently assumed.
Funds held by Affiliate
Pursuant to the Facility Agreement, Zurich American is holding
$248 million of funds on behalf of Home Insurance at December 31, 1996.
The funds relate to the premiums assumed by Home Insurance under the
Facility Agreement, and will be used to pay any future losses
attributable to these premiums. Home Insurance has accrued $32 million of
investment income on the funds held, calculated at a rate of 7.5% per
annum. The funds held, including the accrued investment income, is shown
as an asset on the Company's consolidated balance sheet.
UNPAID LOSS AND LOSS ADJUSTMENT EXPENSE RESERVES
Unpaid, incurred and paid loss and loss adjustment expenses were
as follows:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
($ millions)
<S> <C> <C> <C>
Unpaid losses and loss adjustment expenses, net
at beginning of year $ 4,023 $ 3,279 $ 3,243
--------- --------- ---------
Incurred losses and loss adjustment expenses:
Provision for insured events of current year 196 851 1,349
Provision for insured events of prior years 764 927 223
--------- --------- ---------
Total incurred loss and loss adjustment
expenses 960(a) 1,778(b) 1,572
--------- --------- ---------
Payments:
Attributable to insured events of current year (102) (202) (289)
Attributable to insured events of prior years (1,036) (832)(b) (1,247)
--------- --------- ---------
Total payments (1,138) (1,034) (1,536)
--------- --------- ---------
Unpaid losses and loss adjustment expenses,
net at end of year 3,845 4,023 3,279
Ceded unpaid losses and loss adjustment
expenses at end of year 1,842(A) 1,791(b) 2,294
--------- --------- ---------
Gross unpaid losses and loss adjustment
expenses at end of year $ 5,687 $ 5,814 $ 5,573
========= ========= =========
</TABLE>
- ---------------------
(a) In 1996, excludes $372 million of incurred losses and $787 million
of ceded unpaid losses relating to the Excess of Loss Reinsurance
Agreement. See note 7.
(b) Excludes reduction to ceded paid losses of $401 million and an
increase to ceded unpaid losses of $415 million relating to
the Excess of Loss Reinsurance Agreement.
At December 31, 1996, the gross, ceded and net loss and loss
adjustment expense reserves for policies which have been alleged to
contain asbestos/pollution exposure ("Asbestos/Pollution Policies")
amounted to $1,501 million, $682 million and $819 million, respectively.
The table above includes $225 million of loss and loss adjustment expense
reserve bulk additions for Asbestos/Pollution policies in 1996 and $440
million of bulk reserve additions in 1995. Bulk reserve strengthening of
$565 million is included for years prior to 1995, including $75 million
in 1994 for professional liability, and $290 million in the beginning
reserves for 1994 which included $100 million for professional liability,
$40 million for Asbestos/Pollution Policies, and $100 million for
Commercial Casualty and $50 million for various products. The incurred
losses and loss adjustment expenses for insured events of prior years
included asbestos/pollution losses of $ 233 million, $549 million and
$126 million in 1996, 1995 and 1994, respectively. The 1995 incurred
losses and loss adjustment expenses for insured events of prior years
also includes $189 million related to the commutation and assignment of
the Stop Loss Treaty as discussed in note 7.
The following tables set forth Home Insurance's loss and loss
adjustment expense experience for Asbestos/Pollution Policies for each of
the years in the three-year period ended December 31, 1996:
<TABLE>
<CAPTION>
($ millions) 1996 1995 1994
---- ---- ----
ASBESTOS AND TOXIC TORT EXPOSURES
<S> <C> <C> <C>
Unpaid losses and loss adjustment
expenses, net at beginning of year $ 220 $ 97 $ 80
Incurred losses and loss adjustment expenses 87 165 59
Payments (28) (42) (42)
--------- --------- ----------
Unpaid losses and loss adjustment
expenses, net at end of year 279 220 97
Ceded unpaid losses and loss adjustment
expenses at end of year 432 441 231
--------- --------- ----------
Gross unpaid losses and loss adjustment
expenses at end of year $ 711 $ 661 $ 328
========= ========= ==========
POLLUTION
Unpaid losses and loss adjustment
expenses, net at beginning of year $ 459 $ 142 $ 109
Incurred losses and loss adjustment expenses 146 384 67
Payments (65) (67) (34)
--------- --------- ----------
Unpaid losses and loss adjustment
expenses, net at end of year 540 459 142
Ceded unpaid losses and loss adjustment
expenses at end of year 250 181 89
--------- --------- ----------
Gross unpaid losses and loss adjustment
expenses at end of year $ 790 $ 640 $ 231
========= ========= ==========
TOTAL
Unpaid losses and loss adjustment
expenses, net at beginning of year $ 679 $ 239 $ 189
Incurred losses and loss adjustment expenses 233 549 126
Payments (93) (109) (76)
--------- --------- ----------
Unpaid losses and loss adjustment
expenses, net at end of year 819 679 239
Ceded unpaid losses and loss adjustment
expenses at end of year 682 622 320
--------- --------- ----------
Gross unpaid losses and loss adjustment
expenses at end of year $ 1,501 $ 1,301 $ 559
========= ========= ==========
</TABLE>
The Company's loss and loss adjustment expense payments for claims
on Asbestos/Pollution Policies have not been material in relation to the
Company's total losses and loss adjustment expense payments. Losses and
loss adjustment expense payments relating to these claims were $93
million, $109 million and $76 million and total payments for all policy
claims and related loss expenses were $1.1 billion in 1996, $1.0 billion
in 1995 and $1.5 billion in 1994.
As of December 31, 1996, Home Insurance had approximately 2,100
policies for which one or more claims were open relating to asbestos and
pollution matters. Some policies have both asbestos and pollution claims
open against them. As of the end of 1996, the Company has open
approximately 900 asbestos claims and 3,300 pollution claims. The Company
has provided claim count information in an effort to provide additional
insight into the magnitude of the management effort required to deal with
the case load in the areas of Asbestos/Pollution Policies. Claim counts
for these exposures are not, however, subject to the same level of
consistent definition that is common for other insured perils. A claim
count for a Pollution Policy might involve a single waste site in a
single year for which coverage is being sought under a single policy.
Alternatively, a single claim count might involve a settlement covering
many waste sites over many years and/or several policies in several
layers of coverage per year. As a result, the interpretation of this data
is complicated and the use of average values calculated on the basis of
this data is likely to be misleading. The number of open asbestos claims
has been fairly stable over the last five years. The number of pollution
claims has also been fairly stable over the last four years. In addition,
as of December 31, 1996, Home Insurance was involved in approximately 330
coverage disputes (where an action seeking a declaratory judgment had
been filed, the resolution of which will require a judicial
interpretation or compromise resolutions of an insurance policy) related
to claims on Asbestos/Pollution Policies.
About half of these claims involve primary policies issued by Home
Insurance, and half involve Home Insurance excess policies issued during
the late 1960's through early 1980's. The predominance of the expected
dollar exposure relates to the excess policies. Policy limits on those
excess policies range from $100,000 up to as much as $25 million, and may
operate above self insured retentions or underlying insurance which may
range from $25,000 to hundreds of millions of dollars. In addition to the
claim counts and policy counts listed above, which relate to the
Company's direct business, the Company has material exposure relating to
its assumed reinsurance business, for which it has $111 million of net
reserves included in the total above.
While the Company has compared industrywide payment trends to its
own payments for Asbestos/Pollution Policies, and has considered it
appropriate at this time to review industry ratios of reserves to
payments in establishing its own reserves, the Company views such
"survival ratios" as temporary benchmarks of reserving levels which can
be misleading and which over time must inevitably decline in importance,
as legal issues are resolved, experience matures and actuarial models can
be validated. Benchmarks based on premium market share or payments share
necessarily depend on the consistency between companies of many variables
including policy class and limits distribution, policy deductibles and
underlying retentions, coverages and coverage exclusions and geographic
mix. Survival ratios have an additional limitation in that a company
which accelerates the disposal of its claims compared to its peers, and
is thus retiring its ultimate liabilities faster, will appear to require
a higher reserve. Following industry practice which became apparent only
in 1995 with new statutory disclosure requirements, the Company has
established somewhat lower survival ratios on its gross reserves than its
net 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. 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, REM, in its capacity as manager of Home Insurance's
operations, established a single Environmental and Mass Tort Division,
which includes a new team to merge financial, legal and environmental
engineering expertise in negotiation with policyholders and reinsurers to
find alternative resolutions to claims in the environmental and mass tort
areas. Management believes that these organizational changes increase
operational efficiency, while assuring that Home Insurance takes a
unified and consistent approach to these claims. This division has also
prepared an inventory of potential exposures for Asbestos/Pollution
Policies, which Home Insurance has utilized 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.
4. STOCKHOLDERS' DEFICIENCY
($ millions)
Paid-in capital at December 31, 1994 $ 779
Impact of Recapitalization:
Issuance of Preferred Stock 98
Purchase of Series A Common Stock (92)
Transaction costs (8)
---------
Paid-in capital at December 31, 1995 777
---------
-
---------
Paid-in capital at December 31, 1996 $ 777
=========
Number of Series A Common Shares outstanding:
At December 31, 1994 23,349,201
Purchase of Series A Common Stock (9,234,701)
----------
At December 31, 1995 14,114,500
----------
-
At December 31, 1996 14,114,500
==========
Recapitalization and Stock Repurchase
In connection with the Recapitalization, ZHI purchased 170 shares
of the Company's Preferred Stock, having an aggregate liquidation
preference equal to $98 million to fund the Equity Repurchase
Transaction. On June 12, 1995, the Company repurchased 9,234,701 shares
of its Series A Common Stock for $10 in cash plus an additional payment
of $.20 per share in settlement of certain litigation related to the
Recapitalization. The repurchase has the effect of Trygg-Hansa and the
Investor Group owning virtually the entire equity in the Company. As a
result of the Equity Repurchase Transaction, it is not meaningful to
display 1996 and 1995 per share data.
Dividend Restrictions and Liquidity
The Company has not received common stock dividends from Home
Insurance in 1996 and 1995.
The Company was notified in 1995 by the Department that, in light
of the Recapitalization, Home Insurance cannot pay any dividends without
prior approval of the Department. If the 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. Based on the Company's most current
cash flow projections, without dividends from Home Insurance, the Company
is not likely to meet its cash flow needs during 1997. Under the terms of
the Recapitalization Agreement, Centre Finance has purchased
approximately $46 million aggregate principal amount of the Company's 7%
Series B Senior Working Capital Notes to fund interest payments occuring
through December 1996 on the Public Indebtedness.
Statutory Surplus
The accounting practices of insurance companies are prescribed or
permitted by certain regulatory authorities. Certain of these practices
differ from GAAP used in preparing the consolidated financial statements
of the Company. The Department gave Home Insurance permission to include
in the 1996 Statutory Annual Statement a non-tabular discount which
results from discounting all loss reserves, and allocated and unallocated
loss adjustment expense reserves at 7%. Home Insurance has sufficient
assets that will earn 7% to meet the expected stream of loss and loss
adjustment expense payments. Home Insurance calculated that the
non-tabular discount is $469 million. The non-tabular discount is not
included in the Company's consolidated financial statements prepared
under GAAP. Home Insurance's consolidated policyholders' surplus
determined in accordance with statutory practices, and after reflecting
the benefit of non-tabular discount, was $55 million. The decline from
the 1995 year end is attributable primarily to the net loss in 1996. Home
Insurance reported a consolidated statutory net loss of $685 million in
1996, $272 million in 1995 and $204 million in 1994. The 1996 net loss
reflected loss and loss adjustment expense reserve bulk additions of $662
million, lower earned premiums and expenses incurred in managing the
run-off of its operations.
On March 3, 1997, Home Insurance was placed under formal
supervision by the Department. The Department states in its Order that
this action was taken in response to Home Insurance's RBC report filed
with the Department, as discussed below, which indicates that a Mandatory
Control Level Event has occurred. The Order establishes that the
Department will oversee and supervise Home Insurance for the purpose of
continuing and intensifying an economic, actuarial and accounting review
of the books, records and business affairs of Home Insurance so as to
determine what future actions may be appropriate. The Order also
provides that Home Insurance may not take certain actions without the
prior approval of the Department, including, among other matters, payment
of claims and other obligations within certain dollar limits, and changes
in the terms and conditions of certain existing contracts and entering
into of certain new contracts. See note 1.
In connection with the Department's involvement in approving the
Recapitalization, it had appointed in 1995, 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 Company's loss reserves are determined through a process of
estimation which is necessarily imperfect, and ultimate losses may exceed
such estimates. See note 3 for further discussion. As the Company's
statutory surplus levels have continued to decline since December 31,
1994, management can give no assurance that statutory surplus levels will
be sufficient to absorb materially deficient estimates of loss and loss
adjustment expenses reserves, if any. Management continues to believe
that its provision for loss reserves is adequate.
The Department also continues to direct a consulting actuarial
firm to perform a review of Home Insurance's loss reserves, and has
retained a second actuarial firm to perform a peer review of the
findings. Such reviews are expected to be completed during the second
quarter of 1997. Management cannot predict whether reserve estimates to
be prepared by these consultants will change the Department's view of the
level of regulatory intervention required for Home Insurance.
Insurance Regulatory Information System ("IRIS") was developed by
a committee of state insurance regulators primarily to assist state
insurance departments in executing their statutory mandate to oversee the
financial condition of insurance companies. IRIS helps to select those
companies that merit highest priority in the allocation of the
regulators' resources on the basis of eleven financial ratios which are
calculated annually. The analytical phase is a review of annual
statements and the financial ratios. The ratios and trends are valuable
in pointing to companies likely to experience financial difficulties, but
are not themselves indicative of adverse financial condition. The ratios
and benchmark comparisons are mechanically produced and are not intended
to replace the state insurance departments' own in-depth financial
analyses or on-site examinations.
An unusual range of ratio results has been established from
studies of the ratios for companies that have become insolvent or have
experienced financial difficulties. falling outside the usual range. In
the analytical phase, all companies that receive four or more financial
ratio values outside the usual range are analyzed in order to identify
those companies that appear to require immediate regulatory attention.
Subsequently, a more comprehensive review of the ratio results and an
insurer's annual statement is performed to confirm that an insurer's
situation in fact calls for increased and closer regulatory attention.
In 1996, Home Insurance was outside the usual values of seven IRIS
test ratios. Two of the failed ratios relate to loss reserves, one to
change in writings, one to the two-year overall operating ratio, one to
the change in surplus and one to the relationship of total liabilities to
liquid assets and one to the relationship of agent's balances to surplus.
Upon Closing of the Recapitalization, Home Insurance ceased underwriting
insurance business, except as required by regulation or contractual
obligation.
In order to enhance the regulation of insurer solvency, on
December 5, 1993 The National Association of Insurance Commissioners
("NAIC") approved a formula and model law to implement RBC requirements
for property and casualty insurance companies, which are designed to
assess capital adequacy and to raise the level of protection that
statutory surplus provides for policyholder obligations. The RBC formula
for property and casualty insurance companies measures three major areas
of risk facing property and casualty insurers: (i) underwriting, which
encompasses the risk of adverse loss development and inadequate pricing;
(ii) declines in asset values arising from credit risk; and (iii)
declines in asset values arising from investment risks. Pursuant to the
model law, insurers having less statutory surplus than required by the
RBC calculation will be subject to varying degrees of regulatory action,
depending on the level of capital inadequacy.
Home Insurance, which had received a waiver from the Department
relating to calculation of RBC in 1995, was required to perform this
calculation in 1996. This calculation indicated that a Mandatory Control
Level Event had occurred since Home Insurance's total adjusted capital
was negative $227 million, which was less than its mandatory control
level RBC of $228 million. The adjusted capital is a calculated amount
per the RBC formula, derived by deducting 60% of non-tabular discount
from statutory surplus.
<TABLE>
<CAPTION>
5. CORPORATE DEBT
<S> <C> <C>
1996 1995
---- ----
($ millions)
Corporate debt at December 31 consists of the following:
7% Senior Notes due in 1998, net of
unamortized discount of nil in 1996 and $1 in 1995 $ 100 $ 99
7 7/8% Senior Sinking Fund Notes due in 2003, net of
unamortized discount of $2 million in 1996 and 1995 177 177
7 7/8% Senior Notes due in 2003, net of unamortized
discount of nil in 1996 and 1995 1 1
12% Senior Subordinated Notes, issued at
original issue discount, $303 million
principal value due in 2004 118 105
8% Junior Subordinated Notes, issued at
original issue discount, $171 million
principal value due in 2004 91 84
12% Senior Subordinated Working Capital
Notes, issued at original issue discount,
$46 million principal value due in 2004 18 16
7% Series A Senior Working Capital Notes 16 12
7% Series B Senior Working Capital Notes 46 23
------ ------
Total corporate debt $ 567 $ 517
====== ======
</TABLE>
In December 1993, as part of a 1993 recapitalization, the Company
sold the Public Indebtedness subject to an interest rate adjustment of
3/4% depending on debt ratings assigned by Moody's Investors Service,
Inc. or Standard & Poor's Corporation ("S&P"). On November 7, 1994, as a
result of a reduction in the Company's debt rating to BB- by S&P, the
interest rate on the Public Indebtedness increased by 3/4% to 7 3/4% for
the Senior Notes due in 1998 and 85/8% for the Senior Notes due in 2003.
Pursuant to the Bondholder Agreement (as described in note 1), on
August 25, 1995, the Company completed an exchange offer in which
approximately $179 million principal value of the 7 7/8% Senior Notes due
2003 were exchanged for the Company's 7 7/8% New Notes which provide for a
Sinking Fund payment (to be applied to the mandatory retirement of the
New Notes) in installments of approximately $36 million each in years
1999 through 2003.
As part of the Recapitalization, Trygg-Hansa refinanced the sum of
$178 million of indebtedness outstanding under the Credit Agreement ($170
million) and the Interest Deferral Agreement ($8 million). In exchange
the Company issued $98 million of 12% Senior Subordinated notes, issued
at original issue discount ($303 million principal value) and $80 million
of 8% Junior Subordinated Notes issued at original issue discount ($171
million principal value). The carrying value of the Senior Subordinated
Notes reflect amortization of a discount of $20 million and $7 million as
of December 31, 1996 and 1995, respectively. The Junior Subordinated
Notes reflect amortization of discount of $11 million and $4 million as
of December 31, 1996 and 1995, respectively. The Company is not required
to pay any interest or principal on the Senior Subordinated Notes or the
Junior Subordinated Notes until maturity at December 31, 2004. See note 1.
To fund additional cash requirements incurred in connection with
the Equity Repurchase Transaction, the Recapitalization and other
extraordinary needs, Centre Finance and ZCI purchased $15 million
principal amount of the Company's 12% Senior Subordinated Working Capital
Notes due December 31, 2004, issued at original issue discount ($46
million principal value). The Company is not required to pay any interest
or principal on this note until maturity. In addition, the Company issued
to Centre Finance and ZHI $16 million principal amount of the Company's
7% Series A Senior Working Capital Notes. The principal on these notes
are due on successive one year anniversaries of the closing date;
however, the date can be extended for annual periods at the option of
either Centre Finance, ZHI, or the Company until December 15, 2003. The
Company elected in 1996 to extend the due date until June of 1997.
During 1995 and 1996, the Company issued to Centre Finance
approximately $46 million aggregate principal amount on the Company's 7%
Series B Senior Working Capital Notes to fund interest payments occurring
through December 1996 on the Public Indebtedness. The principal on these
notes is due on the successive one year anniversaries of the Closing
date; however, the date can be extended for annual periods at the option
of either Centre Finance or the Company until December 15, 2003. The
Company elected in 1996 to extend the due date until June of 1997.
Effective December 13, 1996, pursuant to Amendment No. 2 to the
Amended and Restated Purchase Agreement, dated as of April 26, 1995,
between the Company and ZHI, the Amended and Restated Note Exchange
Agreement, dated as of April 26, 1995, between the Company and
Trygg-Hansa, the Amended and Restated Securities Purchase Agreement,
dated as of April 26, 1995, between ZHI and Trygg-Hansa, the Amended and
Restated Standby Working Capital Credit Agreement, dated as of April 26,
1995, between the Company and ZHI, and the notes issued thereunder, such
documents were amended to effectuate the original intent of the parties
thereto to permit the issuance of up to an aggregate principal amount of
$46,550,000 Series B Senior Working Capital Notes, which aggregate
principal amount is equal to the aggregate amount of interest payments
made by the Company with respect to the Public Indebtedness up to
December 31, 1996. The proceeds of the Series B Senior Working Capital
Notes, as so amended, were used by the Company to make required interest
payments on the Public Indebtedness up to December 31, 1996.
In addition, effective December 31, 1996, each of the Series A and
Series B Senior Working Capital Notes, was amended to change the timing
of the payment of interest. Prior to such amendment, interest was payable
quarterly. However, according to the amended terms, interest shall not be
due or payable until seven business days following the receipt by the
Company of written demand from holders of these notes, or when the
principal of the Series A and Series B Senior Working Capital Notes
becomes due and payable. If interest is not paid within seven business
days of such written demand, all interest accrued shall be deemed overdue
and shall immediately become due and payable. If interest becomes
overdue, 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%. As
of December 31, 1996, approximately $4 million of interest has been
accrued but not paid on the Series A and Series B Senior Working Capital
Notes. As a result of the amended terms, the interest is not overdue.
At December 31, 1995 the Company had outstanding a series of
forward interest rate swap agreements for an aggregate notional amount of
$120 million to hedge against interest rate volatility in connection with
the Credit Agreement (see note 1). Under the agreements, the Company paid
interest at rates ranging from 7.9% to 8.0% and received interest at
London Interbank Offered Rate ("LIBOR"). The agreements expired in
February, 1996, with a final payment by the Company of $659,000.
6. PORTFOLIO SWAP RECEIVABLE AND OTHER INSURANCE INVESTMENTS
ZIM manages the cash and invested assets of the Company and Home
Insurance pursuant to an investment management agreement. Additionally,
upon Closing, the Company and Home Insurance entered into the Swap
effective January 1, 1995 with Centre Reinsurance Dublin whereby Centre
Reinsurance Dublin will pay annually to the Company and Home Insurance
any negative differences between the actual total return on such assets
and a target total return of 7.5% per year (net of asset management fees)
on such assets, and the Company and Home Insurance will pay annually to
Centre Reinsurance Dublin any positive difference between the actual
total return on such assets and the 7.5% target total return (net of
asset management fees) on such assets.
The Swap is 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 underlying 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
underlying the Swap to a Portfolio Swap Receivable from Centre
Reinsurance Dublin, 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%. In 1995, the Company also
recorded realized capital losses of $208 million, which were reflected at
December 31, 1994 as unrealized capital losses included in stockholders'
equity. Subsequent changes to fair value of securities have not and will
not be recognized, as Centre Reinsurance Dublin bears the market risk.
As of December 31, 1996, the Company has recorded, as a component
of the Portfolio Swap Receivable, an amount due from Centre Reinsurance
Dublin of $48 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 $13 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 $133 million.
The Company received $48 million from Centre Reinsurance Dublin on
January 21, 1997, to settle the 1996 Swap receivable. Securities and cash
totaling $210 million were transferred to Centre Reinsurance Dublin on
January 22, 1996, to settle the 1995 Swap liability.
The cost and estimated fair values of the securities managed by
ZIM and underlying the Portfolio Swap Receivable from Centre Reinsurance
Dublin at December 31, 1996 and 1995 are as follows:
<TABLE>
<CAPTION>
1996 1995
------------------------- -----------------------
Carrying and Carrying and
Estimated Estimated
Fair Fair
($ millions) Cost Value Cost Value
---- ----- ---- -----
<S> <C> <C> <C> <C>
U.S. Government and agency $ 414 $ 412 $ 563 $ 573
Mortgage-backed 296 292 862 869
Corporate 375 377 746 760
Foreign governments 43 45 57 58
Other 2 2 2 3
--------- --------- --------- ---------
Fixed maturities 1,130 1,128 2,230 2,263
--------- --------- --------- ---------
Equity securities - - 12 11
Short-term investments 67 67 66 66
--------- --------- --------- ---------
Total Swap investments $ 1,197 1,195 $ 2,308 2,340
========= ========= ========= =========
Receivable from (Payable) to
Centre Reinsurance Dublin 48 (210)
--------- ---------
PORTFOLIO SWAP RECEIVABLE $ 1,243 $ 2,130
========= =========
</TABLE>
The estimated fair value of fixed maturities underlying the Swap
at December 31, 1996, by contractual maturity, are as follows. Expected
maturities will differ from contractual maturities because borrowers may
have the right to call or prepay obligations with or without call or
prepayment penalties:
Estimated
Fair
($ millions) Value
Due in one year or less $ 21
Due after one year through five years 554
Due after five years through ten years 218
Due after ten years 43
Mortgage-backed 292
---------
TOTAL $ 1,128
=========
The mortgage-backed securities portfolio is primarily comprised of
high-quality collateralized mortgage obligations and agency pass-through
securities with an average life of 5.0 years and an average yield to
market of 7.9%. The portfolio consists of securities for which there is
an actively traded market and, accordingly, the fair value is based on
quoted market prices.
The estimated fair values of mortgage-backed securities underlying
the Swap at December 31, 1996, by issuer, were as follows:
Estimated
Fair
($ millions) Value
Federal National Mortgage Association $ 56
Federal Home Loan Mortgage Corporation 51
Government National Mortgage Association 105
Private issuers 80
---------
TOTAL $ 292
=========
Fixed maturities and equity securities not underlying the Swap at
December 31, 1996 were $28 million and $21 million, respectively. Certain
securities which were non-income producing for twelve months or more were
$8 million and $9 million at December 31, 1996 and 1995, respectively.
Investments valued at $230 million at December 31, 1996 were
carried on deposit with various state insurance departments.
In 1996 and 1995, the Company's insurance investment income was
based on a 7.5% return as discussed above. The sources of insurance net
investment income for 1994 are as follows:
($ millions) 1994
----
NET INVESTMENT INCOME
Fixed maturities $ 214
Equity securities 5
Short-term investments 9
Other 4
---------
Gross investment income 232
Investment expenses (7)
Net investment income $ 225
==========
Insurance realized capital gains and losses and the change in net
unrealized gains (losses) for 1994 are as follows:
($ millions) 1994
----
REALIZED CAPITAL GAINS
Fixed maturities $ 13
Equity securities 13
----------
Total realized capital gains 26
----------
REALIZED CAPITAL LOSSES
Fixed maturities (6)
Equity securities (4)
----------
Total realized capital losses (10)
----------
NET REALIZED CAPITAL GAINS $ 16
==========
DECREASE IN NET UNREALIZED GAINS/LOSSES
Fixed maturities $ (283)
Equity securities (13)
----------
Decrease in net unrealized gains/losses $ (296)
==========
Realized capital losses include foreign currency transaction loss of $2
million in 1994.
7. EXCESS OF LOSS REINSURANCE AGREEMENT AND STOP LOSS TREATY
Effective January 1, 1991, Home Insurance entered into the Stop
Loss Treaty with a group of reinsurers, including Centre Reinsurance
Limited and Trygg-Hansa Insurance Company Limited ("THI"), a subsidiary
of Trygg-Hansa, which had 50% and 15% participations in the treaty,
respectively. The treaty protected Home Insurance against losses
sustained in all years prior to the year in which the treaty is
cancelled.
Under the Stop Loss Treaty, the reinsurers indemnified Home
Insurance to the extent its ultimate net loss exceeded the sum of (i) the
loss and loss adjustment expense reserves as of December 31, 1990 and
(ii) for 1991 through cancellation, a specified percentage of net earned
premiums. Premiums paid to the reinsurers under the Stop Loss Treaty were
$59 million in 1994 and $9 million in 1993. At December 31, 1994,
premiums and losses and loss adjustment expenses ceded under the Stop
Loss Treaty were $295 million and $590 million, respectively. At December
31, 1994, the amount recoverable net of premium payable of $100 million
under the Stop Loss Treaty was $490 million.
In 1995, in connection with the Recapitalization, Home Insurance
entered into a Commutation Agreement, dated as of June 12, 1995 (the
"Commutation Agreement") with Centre Reinsurance Limited and Zurich
International (Bermuda) Ltd. (the "Commuting Reinsurers") providing for
the commutation of the Stop Loss Treaty as of June 12, 1995 as to the
Commuting Reinsurers. Home Insurance also entered into the Assignment
Agreement, dated as of June 12, 1995 (the "Assignment Agreement"), with
Centre Reinsurance Dublin, pursuant to which Home Insurance assigned all
of its rights, title and interest in any payments by those reinsurers
under the Stop Loss Treaty that were not Commuting Reinsurers (i.e.,
Kemper Reinsurance Company and THI) due Home Insurance in accordance with
the Stop Loss Treaty. The Company recognized a $189 million loss in 1995
attributable to the Commutation Agreement and the Assignment Agreement.
In 1996, THI commuted its share of the Stop Loss Treaty, leaving Kemper
Reinsurance Company as the only non Commuting Reinsurer.
Also, 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 reinsurers commence making payments under the
Excess of Loss Reinsurance Agreement. See note 4 for discussion of
dividend restrictions. Also, up to $290 million of additional coverage
provided by the Excess of Loss Reinsurance Agreement is linked to certain
factors including dividend payments from Home Insurance to the Company
funding principal payments on the Public Indebtedness (as defined in note
1) as such debts become payable. The Excess of Loss Reinsurance
Agreement became effective on June 12, 1995 upon (i) the payment by Home
Insurance to Centre Reinsurance Dublin of $63 million and (ii) the
transfer by Home Insurance of $166 million to Centre Reinsurance Dublin,
representing the respective amounts received by Home Insurance from
Zurich International (Bermuda) Ltd. and Centre Reinsurance Limited as a
reinsurance commutation (exclusive of refunds of security costs). The
aggregate of such payments represent the loss transfer amount ("Loss
Transfer Amount") which means the sum of (a) the amount of the Experience
Refund (as defined in the Stop Loss Treaty) received from the Commuting
Reinsurers by Home Insurance under the Commutation Agreement, plus (b)
the difference between (x) $100 million and (y) any reinsurance premiums
paid after December 31, 1994 by Home Insurance under the Stop Loss
Treaty, minus (c) the product of (x) the Uncommuted Percentage and (y)
the Payment Amount (each term as defined in the Excess of Loss
Reinsurance Agreement). In connection with the Excess of Loss Reinsurance
Agreement, the Company and Zurich entered into a guaranty agreement dated
as of June 12, 1995 (the "Guaranty Agreement"), in favor of Home
Insurance pursuant to which Zurich guaranteed to Home Insurance the
complete and timely performance of Centre Reinsurance Dublin's
obligations under the Excess of Loss Reinsurance Agreement to the fullest
extent permitted by law. In 1996 an additional $43 million was
transferred to Centre Reinsurance Dublin, representing the amount
received by Home Insurance from THI as a reinsurance commutation.
Based on cash flow forecasts at December 31, 1996 the Company is
projecting that the coverage limits of the Excess of Loss Reinsurance
Agreement will be exhausted, and due to these projected future
recoveries, loss reserves with a net present value of $787 million were
recorded as of December 31, 1996 as a recoverable from the Excess of Loss
Reinsurance Agreement, including an additional $372 million during 1996.
As of December 31, 1995, the recoverable from the Excess of Loss
Reinsurance Aggreement was $415 million. The increase resulted primarily
from changes to cash flow projections which now forecast that the cover
will be exhausted, and changes in the net present value of the receivable
based on current projections of amounts and timing of cash inflows and
outflows.
The Excess of Loss Reinsurance Agreement includes a no-claims
bonus payable to Home Insurance, (the "Bonus") equal to the Loss Transfer
Amount plus interest accrued thereon at a rate of 7.5% per annum from
Closing until the date that the Bonus is paid. The Bonus will be paid at
such time as the Company, the Department, and Centre Reinsurance Dublin
agree that there will be no obligations payable under the Excess of Loss
Reinsurance Agreement. However, as discussed previously, the Company,
based on current cash flow forecasts, is projecting a recoverable from
the Excess of Loss Reinsurance Agreement and therefore does not expect to
receive and has not recorded the no-claims bonus as an asset. In the
event that the Bonus is paid, concurrently therewith, ZHI and Trygg-Hansa
and any of their permitted transferees who have acquired any debt or
equity securities of the Company (collectively, the "Company Securities")
shall enter into an agreement that provides that any payment or
distribution of any kind with respect to the Company Securities, as
between Trygg-Hansa and ZHI (and their permitted transferees), will be
paid first to ZHI (or its designee) until ZHI recovers an amount equal to
the Bonus plus interest at an annualized rate of 7.5%, and then, to ZHI
and Trygg-Hansa (and their permitted transferees) on the basis of their
relative claims or rights with respect to the Company Securities
beneficially owned by such persons at the time of payment of the Bonus,
notwithstanding the reduction in such claims resulting from payments made
by the Company with respect to the Company Securities.
8. INCOME TAXES
The difference between income taxes computed at the statutory federal
rate and the provision for income tax expense follows:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
($ millions) 1996 1995 1994
---- ---- ----
Loss before income taxes
and accounting change $ (461) $ (1,323) $ (374)
========= ========= ========
Statutory tax rate 35% 35% 35%
Expected federal income tax benefit $ (161) $ (463) $ (131)
Non-recognition of tax benefits 160 464 66
Goodwill writeoff and amortization - - 74
Foreign income tax expense - - 3
State income taxes, net of federal benefit 2 2 -
Non-taxable investment income (1) (3) (4)
Other 7 3 (1)
-------- --------- ---------
TOTAL INCOME TAX EXPENSE $ 7 $ 3 $ 7
======== ========= =========
COMPOSITION OF INCOME TAX EXPENSE
Current:
Federal $ - $ - $ 2
State 2 4 3
Foreign - - 3
-------- --------- ---------
TOTAL CURRENT 2 4 8
-------- --------- ---------
Deferred:
Federal 4 - 1
State 1 (1) (2)
-------- --------- ---------
TOTAL DEFERRED 5 (1) (1)
-------- --------- ---------
TOTAL INCOME TAX EXPENSE $ 7 $ 3 $ 7
======== ========= =========
</TABLE>
At December 31, 1996, 1995 and 1994, the Company has available for
federal income tax purposes regular net operating loss carryforwards of
$1,986 million, $1,267 million and $717 million, respectively. The
Company has available alternative minimum tax loss carryforwards of
$1,882 million, $1,163 million, and $615 million at December 31, 1996,
1995 and 1994, respectively.
The Company's purchase of virtually all outstanding shares of its
Series A Common Stock as part of the Recapitalization (see note 1) may
cause an "ownership change" with respect to the Company within the
meaning of Section 382. If the Company experiences an ownership change,
its ability to offset taxable income generated in taxable periods ending
after the ownership change with net operating loss carryforwards existing
at the time of the ownership change and with certain other items of loss
and deduction ("built-in losses") will be subject to an annual
limitation. The amount of the annual limitation is equal to the product
of the value of the Company's outstanding stock immediately prior to the
Offer (reduced by certain capital contributions made in the two-year
period prior to the ownership change) and the "long-term tax-exempt rate"
(determined monthly and, for ownership changes occurring in March 1995,
6.83%). The Company will be required to pay federal income taxes in any
year in which its taxable income (before deducting built-in losses and
net operating loss carryforwards) exceeds the annual limitation,
notwithstanding the existence of the net operating loss carryforwards and
the recognition of built-in losses.
The tax effects of temporary differences that give rise to
significant portions of the deferred tax assets and deferred tax
liabilities at December 31, 1996 and 1995 are presented as follows:
($ millions) 1996 1995
---- ----
DEFERRED TAX ASSETS
Unpaid losses and loss adjustment expenses $ 309 $ 402
Net operating loss carryforwards 695 454
Unearned premiums - 8
Reinsurance receivables 51 51
Liability for excess rent 22 26
Investments 28 15
Other 50 46
------- ------
Gross deferred tax assets 1,155 1,002
Valuation allowance (1,145) (985)
------- ------
Deferred tax assets, net of valuation allowance 10 17
------- ------
DEFERRED TAX LIABILITIES
Deferred acquisition costs 1 12
Other 9 5
------- ------
Gross deferred tax liabilities 10 17
------- ------
Net deferred tax liability $ - $ -
======= ======
The net increase in the valuation allowance in 1996 of $160
million was due to increases in temporary differences and net operating
losses.
9. GOODWILL
In November 1994, the Company was downgraded by the three primary
insurance rating agencies. These actions had a significant adverse effect
on the premium production of Home Insurance. As a result, the Company
could no longer forecast operating income to demonstrate the
recoverability of goodwill related to its subsidiaries. Therefore, the
Company recorded a charge of $206 million in 1994 for the writeoff of
goodwill, exclusive of the annual amortization of $5 million.
10. DEBT OF SECURITIES BROKER-DEALER
Debt of securities broker-dealer at December 31, consists of the
following:
($ millions) 1996 1995
---- ----
Loans payable to banks generally payable on
demand, weighted average interest
rate of 6.6% and 6.3% at December 31, 1996
and 1995, respectively $ 198 $ 250
Revolving credit agreement due in 1997,
interest rate of 6.5% and 6.6% at
December 31, 1996 and 1995, respectively 7 7
Term notes, average interest rate of 7.4% at
December 31, 1996 and 1995, respectively 3 4
Other payables to banks 38 43
-------- -------
$ 246 $ 304
======== =======
At December 31, 1996, securities broker-dealer loans payable to
banks of $198 million were collateralized by marketable securities,
valued at $305 million.
The securities broker-dealer has a revolving credit agreement with
a maximum amount permitted to be outstanding of $7 million at December
31, 1996 and December 31, 1995. The loan is due in July 1997 and can be
repaid earlier with three days written notice. Interest accrues at a
premium above various short-term rates. In 1996 and 1995, the interest
rates were a premium above the 90-day LIBOR rate and 90-day certificate
of deposit rate, respectively.
The securities broker-dealer has term notes with lending
institutions which are collateralized by furniture and equipment with a
net book value of $1 million and securities owned by the securities
broker-dealer with a fair value of $15 million at December 31, 1996.
The revolving credit agreement and term notes have certain
restrictive covenants that require the securities broker-dealer to
maintain minimum aggregate levels of stockholder's equity, subordinated
borrowings, debt service coverage ratio and net capital.
Securities broker-dealer's interest expense related to the debt
discussed above was $19 million in 1996, $20 million in 1995 and $12
million in 1994. In addition, securities broker-dealer operations
interest expense related to securities loaned and other broker-dealer
activities was $69 million in 1996, $60 million in 1995 and $46 million
in 1994.
The fair value of securities broker-dealer debt approximates its
carrying value.
See note 15 for further discussion of a reorganization agreement
(the "Reorganization Agreement") entered into on February 24, 1997 by
Gruntal and The 1880 Group LLC (the "Reorganization").
11. REINSURANCE
In the ordinary course of its business Home Insurance cedes
premiums and losses, via reinsurance, to other insurers and reinsurers
under various contracts which cover individual risks or entire classes of
business. These reinsurance arrangements allow for greater
diversification of business and stabilize Home Insurance's net losses
arising from large risks or from hazards of an unusual nature. Home
Insurance determines, by product line, an appropriate retention level
based on an assessment of risk and portfolio size. As a general rule, the
per risk retention does not exceed $5 million, and is generally lower.
Although the ceding of insurance does not discharge the original insurer
from its primary liability to its policyholder, the insurer or reinsurer
that assumes the coverage also assumes the related liability.
At December 31, 1996, there were no amounts due from any
individual reinsurer in excess of 10% of the Company's stockholders'
deficiency, excluding amounts due from Centre Reinsurance Dublin, General
Reinsurance Corporation and Lloyds of London which were $787 million,
$187 million and $261 million, respectively.
Reinsurance receivables, excluding recoverables from the Excess of
Loss Reinsurance Agreement, at December 31, 1996 include $1,842 million
for unpaid losses and loss adjustment expenses, and $136 million for paid
losses and loss adjustment expenses. Home Insurance has recorded reserves
for recoverable reinsurance of doubtful collection of $126 million and
$146 million as of December 31, 1996 and 1995, respectively. The effect
of reinsurance on the Company's premiums and losses is shown in note 3.
12. PENSION AND BENEFIT PLANS
The Company has two non-contributory defined benefit pension plans
covering substantially all employees other than the Gruntal employees.
The Company's funding policy is to contribute annually amounts at least
equal to the minimum funding requirements of the Employee Retirement
Income Security Act of 1974. Effective January 1, 1996, all personnel,
other than Gruntal employees, became employees of REM. Prior to January
1, 1996, pension benefits were generally based on years of service and
compensation during the last five years of employment. All benefits under
the Company's plans were frozen at December 31, 1995 and certain
participants of the supplemental plan received lump-sum settlement of
their pensions. The Company used special curtailment and settlement
accounting treatment as required under SFAS No. 88, "Employers'
Accounting for Settlements and Curtailment of Defined Benefit Pension
Plans and Termination of Benefits'" ("Settlement and Curtailment"). This
accounting standard essentially requires recognition of the reduction of
the pension obligation and accelerated recognition of otherwise deferred
amounts as a result of the cession of benefit accruals (curtailment) or
the full satisfaction of the benefit obligation (settlement).
The components of pension expense follow:
($ millions) 1996 1995 1994
---- ---- ----
Service cost of current period $ - $ 8 $ 8
Interest cost of projected benefit
obligation 8 10 8
Return on plan assets (17) (20) 1
Net amortization and deferral 9 14 (7)
-------- -------- -------
Total net periodic pension cost - 12 10
Gain from settlement - (5) -
Gain from curtailment - (1) -
-------- -------- -------
Total expense $ - $ 6 $ 10
======== ======== =======
The following tables summarize the plans' funded status, the
amounts recognized in the consolidated balance sheets at December 31
and the major assumptions used to determine these amounts:
<TABLE>
<CAPTION>
QUALIFIED PLAN
1995
-----------------------------------------
Before After
($ millions) 1996 Curtailment Curtailment Curtailment
---- ----------- ----------- -----------
ACTUARIAL PRESENT VALUE OF BENEFIT OBLIGATIONS
<S> <C> <C> <C> <C>
Vested benefit obligation $ 104 $ 109 $ - $ 109
Nonvested benefits 5 6 - 6
-------- --------- --------- --------
Accumulated benefit obligation 109 115 - 115
Additional amount related to projected future
salary increases - 24 (24) -
-------- --------- --------- --------
Projected benefit obligation for service
rendered to date 109 139 (24) 115
Plan assets at fair value 121 105 - 105
-------- --------- --------- --------
Projected benefit obligation in excess
of plan assets (12) 34 (24) 10
Unrecognized prior service cost - 1 (1) -
Unrecognized net loss from past experience different
from that assumed 18 (23) 23 -
-------- --------- --------- --------
Accrued pension costs $ 6 $ 12 $ (2) $ 10
======== ========= ========= ========
MAJOR ASSUMPTIONS
Discount rate 7.5% 7.0%
Rate of increase in future compensation N/A 5.5
Long-term rate of return on plan assets 8.0 8.0
======== ======
</TABLE>
<TABLE>
<CAPTION>
NON-QUALIFIED SUPPLEMENTAL PLAN
1995
------------------------------------------------
Before After
Settlement Settlement
and and
($ millions) 1996 Curtailment Settlement Curtailment Curtailment
---- ----------- ---------- ----------- -----------
ACTUARIAL PRESENT VALUE OF BENEFIT OBLIGATIONS
<S> <C> <C> <C> <C> <C>
Vested benefit obligation $ 3 $ 12 $ (8) $ (1) $ 3
Nonvested benefits 1 1 - - 1
-------- --------- ------- -------- ---------
Projected benefit obligation for service
rendered to date 4 13 (8) (1) 4
Plan assets at fair value - - - - -
Projected benefit obligation in excess
of plan assets 4 13 (8) (1) 4
Unrecognized prior service cost - (1) - 1 -
Unrecognized net loss from past experience different
from that assumed (1) (5) 3 1 (1)
Adjustment to equity to reflect minimum liability 1 6 (3) (2) 1
-------- --------- ------- -------- ---------
Accrued pension costs $ 4 $ 13 $ (8) $ (1) $ 4
- --- ======== ========= ======= ======== =========
MAJOR ASSUMPTIONS
Discount rate 7.5% 7.0%
Rate of increase in future compensation N/A 5.5
Long-term rate of return on plan assets N/A N/A
N/A - Not Applicable.
</TABLE>
Plan assets are invested in a diversified portfolio that primarily
consists of fixed maturities and equity securities.
At December 31, 1996 and 1995, the Company's liability for
postretirement benefits other than pensions was $10 million and $11
million, respectively. The following table summarizes the plans' funded
status and the amounts recognized in the consolidated balance sheets at
December 31 and the major assumptions used to determine these amounts:
<TABLE>
<CAPTION>
1995
-------------------------------------------
Before After
($ millions) 1996 Curtailment Curtailment Curtailment
---- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Accumulated postretirement
benefit obligation $ 9 $ 20 $ (9) $ 11
Plan assets at fair value - - - -
-------- --------- --------- --------
Fund status 9 20 (9) 11
Unrecognized net (gain) or loss 1 (7) 7 -
-------- --------- --------- --------
Accrued postretirement benefit cost $ 10 $ 13 $ (2) $ 11
======== ========= ========= ========
MAJOR ASSUMPTIONS
Discount rate 7.0% 7.0%
Rate of increase in future compensation N/A 5.5
Long-term rate of return on plan assets N/A N/A
N/A - Not Applicable.
</TABLE>
The Company's liability for SFAS no. 112, "Employers' Accounting
for Post Employment Benefits" at December 31, 1996 and 1995 was $4
million and $7 million respectively, and $3 million of income was
recognized in 1996 and expense of $3 million in 1995.
13. LEASES
Future minimum rental payments, principally for administrative
offices including leases of furniture and equipment, under non-cancelable
operating leases as of December 31, 1996 are $62 million in 1997, $55
million in 1998, $38 million in 1999, $10 million in 2000 and $28 million
thereafter.
Rental expense was $41 million in 1996, $63 million in 1995, $74
million in 1994. Sublease income was $3 million in 1996 and $2 million in
1995 and 1994.
Home Insurance is involved in a dispute with its landlord, Olympia
and York Maiden Lane Company, with respect to its lease of its principle
offices at 59 Maiden Lane, New York, New York. See note 14 for further
discussion.
14. 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,
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 its 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 or its
subsidiaries 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 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.
Pursuant to the Order, the Department has the final authority to
approve, disapprove or otherwise control (including the power to direct)
the initiation, settlement or withdrawal of any action, dispute,
arbitration, litigation or proceeding of any kind involving Home
Insurance other than in the ordinary course of business. In addition,
pursuant to the Order, Home Insurance is prohibited from making certain
payments, as specified in the Order, without the prior approval of the
Department. See note 1 for further discussion of the Order.
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 sought certification of both
plaintiff and defendant classes. The purported plaintiff class consisted
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 sought 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
("NCCI"). The Complaint alleged 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 were sought in unspecified amounts plus treble damages.
A settlement between fourteen of the primary defendants, including
Home Insurance, was reached. Home Insurance has contributed approximately
$8 million, which had been accrued as of December 31, 1995, under a trust
agreement pending final court approval. On July 5, 1996 the Texas
District Court gave preliminary approval to the settlement. The
defendants submitted to a verification process of their damage
calculations. Final orders of approval were issued by the court on
November 1, 1996. The settlement is being implemented through refunds to
insureds.
On January 13, 1997 Home Insurance was served with suit papers
issued from the Chancery Court of Davidson County, Tennessee in a
purported class action. The allegations of the complaint are similar to
those in the Texas litigation case that was recently settled.
Plaintiffs allege that from 1987 until the present, the
defendants, individually, and in conspiracy with each other, used rates
of premium and policy forms for workers compensation retro policies other
than those filed with, and approved by, the Tennessee Commissioner of
Insurance. Specifically, the companies are alleged to have illegally
passed through residual market changes to their insureds during the class
period. The NCCI is alleged to be the conduit for sharing of information
and the instrumentality for making the illegal filings.
The principal causes of action are for breach of contract, fraud,
misrepresentation, conspiracy, unjust enrichment, and violation of the
Tennessee Consumer Protection and Trade Practices Acts. Compensatory and
punitive damages are sought in unspecified amounts plus treble damages.
A nearly identical class action complaint naming the same parties
was also filed in the Superior Court of Richmond Country, Georgia. It
includes the same common law causes of action that are asserted in the
Tennessee complaint, and others that allege violation of various
provisions of the Georgia statutory code, as well as RICO. Compensatory,
punitive, and treble damages are sought.
With respect to the Tennessee and Georgia actions discussed above,
it is too early to predict the outcome of these actons and whether or not
they will have a material adverse impact on the Company's financial
condition.
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's
professional liability business in New York and Massachusetts. The action
arose 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 sought 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 were sought. By stipulation of the parties the
restraining order was dissolved and legal proceedings stayed pending
submission of the dispute to an arbitration panel. 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 and 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.
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, as amended, 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.
Home Insurance is involved in a dispute with its landlord, Olympia
and York Maiden Lane Company (the "Landlord"), with respect to its lease
of its principal offices at 59 Maiden Lane, New York, New York. The
Landlord is in default of certain bond obligations that are secured by
the building and, consequently, the Landlord has made an assignment of
rents to the trustee (the "Trustee") representing the Landlord's
bondholders. On June 24, 1996, the Landlord's bondholders obtained a
judgment of foreclosure and it is anticipated that the Landlord's
bondholders will complete the foreclosure, and gain possession of the
building shortly.
On June 1, 1996, Home Insurance began withholding rent and tax
payments to the Landlord. Subsequently, the Trustee and the Landlord
issued several notices to Home Insurance threatening to terminate its
lease and/or seek possession of the premises. On July 19, 1996, Home
Insurance brought an action against the Landlord and the Trustee in its
capacity as trustee in New York State Supreme Court entitled, The Home
Insurance Company v. Olympia & York Maiden Lane Company, et al., seeking
a preliminary injunction to prohibit the Landlord from terminating the
lease or beginning an independent rent action in Landlord-Tenant court.
In this action, Home Insurance seeks damages from the Landlord for rent
overcharges, refusal to obtain tax relief which would benefit Home
Insurance, failure to maintain the building including certain life safety
systems, and failure to meet its obligations (including statutory and
regulatory obligations) with respect to The Americans with Disabilities
Act and asbestos in the building.
The Court granted a temporary restraining order on July 19, 1996,
in favor of Home Insurance. On August 9, 1996 the Court entered a
decision and interim order, which, as amended through September 12,
1996, appointed a mediator and provided that Home Insurance deposit in
escrow with a receiver approximately $7.4 million representing the June
and July rent and June tax payment. The order states that the escrow
payment "shall not per se constitute a secured claim under New Hampshire
Revised Statutes Annotated 402-C:3 but may be subject to the
provisions of New Hampshire Insurance Laws, Chapter 402-C in the event
of proceedings thereunder or similar proceedings in this or any other
jurisdiction". Home Insurance made this escrow payment and the mediation
proceeded.
As a condition for continuing the preliminary injunction, Home
Insurance increased its deposit in escrow to $10.7 million. The Landlord
moved for summary judgment for past due rent. Home Insurance moved to
amend its complaint (i) to add a cause for constructive eviction from
approximately 23% of its premises, where its environmental expert has
identified "significantly damaged" asbestos containing materials ("ACM");
(ii) to increase the amount of damages sought by Home Insurance for the
Landlord's refusal to obtain tax relief to more than $20 million; (iii)
to join the bondholders as a class action; and (iv) to consolidate the
foreclosure action brought by the Trustee against the Landlord. On
December 30, 1996 the Court granted (i) Home's motion to amend with
respect to items (i) and (ii), but denied Home Insurance's motion with
respect to item (iii) pending mediation, and also with respect to item
(iv) without prejudice to renew before the assigned judge. The Court
granted the Landlord's motion for partial summary judgment on its
counterclaims holding Home Insurance liable for rent due and owing from
June 1, 1996 to November 30, 1996, plus interest from September 1, 1996,
together with costs and disbursements. The remainder of the Landlord's
motion was denied without prejudice. The Court stayed entry and execution
of the Landlord's judgment. In accordance with the Court's order, Home
Insurance filed its amended and supplemental verified complaint. The
Landlord and Trustee counterclaimed, and Home Insurance replied. On March
4, 1997, the Court directed Home Insurance to deposit into escrow,
without prejudice, rent for the period September 1, 1996 through November
30, 1996, which payment is currently due to be made by April 1, 1997. On
March 27, the Landlord moved for summary judgment on additional rent,
for entry of the earlier summary judgement, and for other relief.
Concurrent with the litigation, the Company and the Landlord are
currently engaged in mediation. Management believes that it is too early
to predict with certainty the ultimate outcome of this dispute. However,
an unfavorable outcome could have a material adverse impact on the
Company's financial condition.
On or about January 17, 1997, Marine Midland (the trustee in the
action described above), brought an action entitled Marine Midland Bank
v. Zurich Insurance Company, et al. in New York State Supreme Court
against Zurich and certain affiliates, Home Insurance and REM alleging,
among other things, that the conveyance to Zurich of the right to write
renewal business on policies of Home Insurance constituted a fraudulent
transfer under New York State law because Home Insurance purportedly was
rendered insolvent as a result and did not receive adequate consideration
from Zurich for this right. Plaintiff in its complaint disregards that the
transaction, which permitted the conveyance of this right to Zurich, was
approved by the Department in April 1995. The complaint, which does not
seek any relief against Home Insurance, demands judgment against Zurich
and certain of its affiliates for all past and future rent due under the
lease between Home Insurance and its landlord, not paid by Home
Insurance, plus interest, or alternatively, for the imposition of a
constructive trust upon the proceeds obtained by Zurich from the
conveyance noted above, which according to plaintiff would secure the
repayment of Home Insurance's purported obligations under its lease, as
well as attorneys' fees. The complaint also seeks from REM damages in the
amount of all rents due and owing under the lease plus interest, as well
as, a declaration that REM is obligated to make all future rent payments.
On March 27, 1997, REM and Home Insurance moved to dismiss the complaint.
Home Insurance is involved in a dispute with NCCI. The NCCI is a
licensed rating or advisory organization for the workers' compensation
line of insurance in a majority of states. One function it performs is to
administer the National Workers' Compensation Reinsurance Pool ("the
Pool"). The Pool collects premium and pays losses for various residual
market plans around the country. The premium is supposed to be
distributed to pool members in proportion to their market share and held
in reserve. The NCCI sends a quarterly invoice to each pool member for
its share of the losses as calculated and paid by the Pool in that
quarter.
Home Insurance is a participant in the Pool, and, as of December
31, 1996, Home Insurance is carrying undiscounted loss reserves of
approximately $261 million allocated to the Pool. Home Insurance has had
several discussions with the NCCI over the past year concerning the
extent of its obligation and the possibility of a commutation. Home
Insurance has refused to pay the NCCI's three most recent quarterly
invoices totalling approximately $28 million and requested an audit of
the Pool's calculations and of the NCCI's administration of the Pool. The
NCCI has refused to permit the requested audit. The NCCI has also asked
Home Insurance to put the aforementioned invoiced but unpaid amount in
escrow. Negotiations concerning a possible commutation have begun.
Management believes it is too early to predict with certainty the
ultimate outcome of this matter; however, an unfavorable outcome could
have a material adverse impact on the Company's financial condition.
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. Gruntal presently 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 was used in
substantial part to benefit Gruntal. Gruntal has submitted claims to its
insurer, Home Insurance, under the applicable insurance policy and 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. Gruntal discussed its
investigation relating to Abandoned Property with the governmental and
self-regulatory bodies involved. 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")
orders.
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 that 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 prejudgment interest 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. The disgorgement fund
will be administered and disbursed by a fund administrator pursuant to a
report and a plan which will be submitted to the Commission and require
court approval. 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 June 1996,
at the direction of the Commission and as approved by the order of the
United States District Court for the Southern District of New York in SEC
v. Gruntal & Co., Incorporated, et al., 96 Civ. 2514, James R. Doty,
Esq., a partner in the law firm of Baker & Botts, LLP and a former
General Counsel of the Commission, was engaged to serve as Fund
Administrator (hereinafter, the "Fund Administrator").
In June 1996, with the approval of the Commission, the NYSE and
the NASD, Gruntal engaged Irving M. Pollack, Esq., a former Commissioner
of the Commission, to serve as Independent Consultant (hereinafter the
"Independent Consultant"), pursuant to the settlement with the
Commission, and, additionally, pursuant to other settlements with the
Commission, NYSE and NASD, described below. 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
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 adminis-
trative 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 the Independent Consultant
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. Gruntal also agreed to retain the
Independent Consultant 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.
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 agreed to retain the 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 Independent 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 would not have a
materially adverse effect on the consolidated financial condition of
Gruntal or the Company.
During the third quarter of 1996, Gruntal discovered that
approximately 2,800 principal transactions involved customers that were
employee benefit plans or individual retirement arrangements under the
Employee Retirement Income Security Act of 1974, as amended ("ERISA") or
parallel provisions of the Internal Revenue Code. In the absence of an
available exemption, these transactions would be "prohibited
transactions" under Section 406 of ERISA and Section 4975 of the Code.
Gruntal is examining the availability of certain exemptions. Management
believes it is too early to predict with certainty the ultimate outcome
of this matter, but management does not believe that such costs will have
a material adverse effect on the financial position of Gruntal or the
Company.
REM's service agreement with the Company provides that REM will
receive a contingent fee amounting to 15% in excess of its actual costs,
accumulating with interest, as follows: 100% of the annual amounts for
the years 1995 through 2000 and 33% of the amounts from years 2000 until
2005, payable on and after 2005. The fee is payable by Home Insurance
contingent upon prior approval of the Department. Based on the issuance
of the Order, and based on projections that the Excess of Loss
Reinsurance Agreement will be fully exhausted, the payment of such fees
is considered remote and therefore has not been accrued in the
consolidated financial statements. The contingent liability as of
December 31, 1996 was $38 million. A liability for this fee of $17
million, at December 31, 1995, is no longer accrued and is included as
part of this contingent liability.
15. SUBSEQUENT EVENTS
GRUNTAL
On February 24, 1997, Gruntal, and The 1880 Group LLC entered into
the Reorganization Agreement, under which Gruntal will be restructured
as a limited liability company, Gruntal Financial, and partially
transferred to a management group led by Gruntal officers. Home Insurance
will be the sole owner of Gruntal after the consummation of the
Reorganization. The Reorganization involves the issuance of several
classes of securities to Gruntal and The 1880 Group, including preferred
securities, in an aggregate nominal amount of approximately $235 million
as follows: (i) Gruntal Financial will issue to Gruntal, the direct
wholly-owned subsidiary of Home Insurance, securities called Preferred A
Interests in a nominal amount of $155.5 million and securities called
Preferred B Interests in a nominal amount of $70 million; and (ii)
Gruntal Financial will issue to The 1880 Group securities called
Preferred C Interests in an approximate nominal amount of $9 million. As
a result of the Reorganization, Gruntal will own 40% of the common
interest of Gruntal Financial and The 1880 Group will own 60% of the
common interest of Gruntal Financial. In connection with the issuance of
certain preferred securities to Gruntal, Home Insurance and Centre
Reinsurance Dublin will enter into a swap agreement intended to ensure
that Home Insurance's investment in Gruntal Financial yields at least
$155.5 million plus a 7.5% per annum rate of return thereon, subject to
certain modifications with respect to certain distributions and sales
proceeds of the common and preferred interests of Gruntal Financial. The
closing of the Reorganization occurred on March 28, 1997, and did not
result in a gain or loss to the Company.
In connection with the Reorganization, the management of The 1880
Group LLC will enter into management services agreements with The 1880
Group LLC which, in turn, will provide such services to Gruntal
Financial.
STERLING FOREST
On May 15, 1996 Governors Pataki of New York and Whitman of New
Jersey, and Speaker of the House Gingrich, announced an agreement in
principle for the purchase and sale of a substantial part of Sterling
Forest lands for public parkland. A letter of intent between Sterling
Forest, as seller, and Trust for Public Land and Open Space Institute, as
purchaser, was signed in June 1996, and a formal contract was signed on
February 18, 1997.
Under the terms of the Purchase and Sale Ageement dated February
18, 1997 between Sterling Forest and Sterling Lake Associates, as seller,
and Trust for Public Land and Open Space Institute, as buyers (the
"Sterling Forest Agreement"), more than 15,000 acres of Sterling Forest
land will be acquired as parkland by the State of New York under the
management of the Palisades Interstate Park Commission, at a total
acquisition cost of $55 million. Under the Sterling Forest Agreement the
buyers have up to two years to raise the funding. The purchase price for
any lands not yet acquired, however, will increase annually if the
purchase has not been fully consummated by the first anniversary of the
agreement. All the funding for the acquisition does not yet appear to be
in place, though a total of $49 million has been committed, as of March
28, 1997, by a combination of federal and state governments, and one
not-for-profit conservation foundation. Sterling Forest will continue to
own approximately 2,200 acres of land and existing improvements, for
future sale or development.
16. INDUSTRY SEGMENT INFORMATION
Information pertaining to the Company's business segments follows:
<TABLE>
<CAPTION>
($ millions) 1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
REVENUES
Net Earned Premiums:
Commercial Accounts Group $ 84 $ 526 $ 1,087
Specialty Lines Group 22 349 516
Run-off Operations 10 39 50
--------- --------- ----------
Net earned premiums 116 914 1,653
Net investment income 146 219 225
Realized capital gains (losses) 9 (225) 16
--------- --------- ----------
Insurance revenues 271 908 1,894
Securities broker-dealer operations 442 463 323
--------- --------- ----------
Total revenues $ 713 $ 1,371 $ 2,217
========= ========= ==========
LOSS BEFORE INCOME TAXES
AND ACCOUNTING CHANGE
Underwriting:
Commercial Accounts Group $ (279) $ (288) $ (95)
Specialty Lines Group (250) (127) (135)
Run-off Operations (435) (690) (138)
Commutation and assignment of the Stop Loss Treaty - (189) -
--------- --------- ----------
Underwriting loss (964) (1,294) (368)
Excess of Loss Reinsurance Agreement 372 14 -
Net investment income 146 219 225
Realized capital gains (losses) 9 (225) 16
--------- --------- ----------
Insurance operating loss (437) (1,286) (127)
Goodwill writeoff and amortization - - (211)
Securities broker-dealer operations 25 33 10
Corporate interest expense (49) (46) (38)
Other expenses - (24) (8)
--------- --------- ----------
Loss before income taxes
and accounting change $ (461) $ (1,323) $ (374)
========= ========= ==========
ASSETS AT YEAR-END
Insurance operations $ 4,742 $ 5,429 $ 6,975
Securities broker-dealer operations 2,831 2,553 2,278
Other 20 21 23
--------- --------- ----------
Total assets $ 7,593 $ 8,003 $ 9,276
========= ========= ==========
</TABLE>
17. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
<TABLE>
<CAPTION>
Summarized quarterly financial information follows:
First Second Third Fourth
($ millions, except per share information) Quarter Quarter Quarter Quarter Year
------- ------- ------- ------- ----
1996
<S> <C> <C> <C> <C> <C>
Revenues$ 240 $ 203 $ 138 $ 132 $ 713
Net loss (35) (40) (64) (329)(1) (468)
1995
Revenues $ 511 $ 254 $ 361 $ 245 $ 1,371
Net loss (64) (474)(3) (87) (701)(4) (1,326)
Weighted average number of shares of
common stock outstanding (in thousands) 34,774 N.M. N.M. N.M. N.M.
Series A Common Stock data (per share)(2):
High stock price $ 9.75 $ 10.13 $ 10.13
Low stock price 7.13 8.25 N.M. N.M. 7.13
======= ======== ======== ======== =======
</TABLE>
(1) Net loss in the fourth quarter of 1996, includes loss and loss
adjustment expense reserve bulk additions of $662 million,
partially offset by an increased recoverable of $372 million under
the Excess of Loss Reinsurance Agreement.
(2) In connection with the Equity Repurchase transaction, the Series A
Common Stock was delisted from the New York Stock Exchange June
13, 1995. There is currently no public market for the Series A
Common stock.
(3) Net loss in the second quarter of 1995 includes losses of $409
million related to the Recapitalization.
(4) Net loss in the fourth quarter of 1995 includes incurred losses
of $497 million related to Asbestos/Pollution Policies.
N.M. - Not Meaningful.
<TABLE>
<CAPTION>
FINANCIAL STATEMENT SCHEDULES
HOME HOLDINGS INC. AND SUBSIDIARIES
SCHEDULE I - SUMMARY OF INVESTMENTS OF INSURANCE COMPANIES OTHER
THAN INVESTMENTS IN RELATED PARTIES
DECEMBER 31, 1996
1996 1995
------------------------ ----------------------
Carrying and Carrying and
Estimated Estimated
Fair Fair
($ millions) Cost Value Cost Value
---- ----------- ---- -----------
<S> <C> <C> <C> <C>
TYPE OF INVESTMENT
Portfolio Swap receivable investments:
Fixed maturities:
U. S. Government and agency $ 414 $ 412 $ 563 $ 573
Mortgage-backed 296 292 862 869
Corporate 375 377 746 760
Foreign governments 43 45 57 58
Other 2 2 2 3
--------- -------- -------- ---------
Total Fixed maturities 1,130 1,128 2,230 2,263
--------- -------- -------- ---------
Equity securities - - 12 11
Short-term investments 67 67 66 66
--------- -------- -------- ---------
Total Swap investments $ 1,197 1,195 $ 2,308 2,340
========= ========
Received from (Payable) to Centre Reinsurance Dublin 48 (210)
-------- ---------
Portfolio Swap Receivable $ 1,243 $ 2,130
======== =========
Investments not underlying the Swap:
Fixed maturities $ 26 $ 28 $ 33 $ 33
Equity securities 17 21 24 24
Short-term investments - - 2 2
--------- -------- -------- ---------
Total Non-Swap investments $ 43 49 $ 59 59
========= ======== ======== =========
Total insurance investments $ 1,292 $ 2,189
======== =========
</TABLE>
HOME HOLDINGS INC. (PARENT ONLY)
SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
BALANCE SHEET
DECEMBER 31,
1996 1995
---- ----
($ millions)
ASSETS
Cash $ - $ -
Other assets 3 4
-------- --------
Total assets $ 3 $ 4
======== ========
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
Corporate debt $ 567 $ 517
Equity in deficiency of Home Insurance 947 533
Other liabilities 28 31
Stockholders' Deficiency:
Series A preferred stock, $.01
par value; 170 shares authorized,
issued and outstanding - -
Common stock, Series A, $.01 par value;
40,000,000 shares authorized;
14,114,500 shares outstanding in
1996 and 1995
Series B convertible stock, $.01 par value;
15,000,000 shares authorized; 11,425,177
shares outstanding in 1996 and 1995 - -
Paid-in capital 777 777
Deficit (2,320) (1,852)
Unrealized losses on insurance investments 6 -
Unrealized currency translation adjustments (2) (2)
-------- --------
Total stockholders' deficiency (1,539) (1,077)
-------- --------
Total liabilities and stockholders'
deficiency $ 3 $ 4
======== ========
STATEMENT OF INCOME
YEAR ENDED DECEMBER 31,
($ millions) 1996 1995 1994
---- ---- ----
Equity in loss of Home
Insurance(a) $ (419) $ (1,259) $ (132)
Goodwill writeoff - - (206)
Interest expense (49) (46) (38)
Other expenses - (21) (9)
--------- --------- --------
Net loss $ (468) $ (1,326) $ (385)
========= ========= ========
Loss attributable to
common stockholders $ (468) $ (1,326) $ (385)
========= ========= ========
(a) Equity in loss of Home Insurance includes common dividends of
nil in 1996 and 1995 and $77 million in 1994.
<TABLE>
<CAPTION>
HOME HOLDINGS INC. (PARENT ONLY)
SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF REGISTRANT (CONTINUED)
STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31,
1996 1995 1994
---- ---- ----
($ millions)
CASH FLOWS FROM OPERATING ACTIVITIES
<S> <C> <C> <C>
Net loss $ (468) $ (1,326) $ (385)
Adjustments to reconcile net loss to
net cash used for operating activities:
Equity in loss of Home Insurance 419 1,259 132
Goodwill writeoff - - 206
Other, net (1) (4) (7)
--------- ----------- ---------
Net cash used for operating activities (50) (71) (54)
--------- ----------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Common and preferred dividends received from Home Insurance - - 77
Investments in and advances from Home Insurance, net - 1 1
Other - 1 (6)
--------- ----------- ---------
Net cash provided by investing activities - 2 72
--------- ----------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Preferred stock issuance - 98 -
Repurchase of stock - (92) (1)
Increase in corporate debt 50 240 -
Decrease in corporate debt - (170) (103)
Other - (8) (2)
--------- ----------- ---------
Net cash provided by (used for) financing activities 50 68 (106)
--------- ----------- ---------
Net decrease in cash - (1) (88)
Cash at beginning of year - 1 89
--------- ----------- ---------
CASH AT END OF YEAR $ - $ - $ 1
========= =========== =========
</TABLE>
<TABLE>
<CAPTION>
HOME HOLDINGS INC. AND SUBSIDIARIES
SCHEDULE III - SUPPLEMENTARY INSURANCE INFORMATION
YEAR ENDED DECEMBER 31,
1996 1995 1994
---- ---- ----
($ millions)
<S> <C> <C> <C>
Deferred Policy Acquisition Cost:
Commercial Accounts Group $ - $ 20 $ 74
Specialty Lines Group - 12 44
--------- --------- ---------
$ - $ 32 $ 118
========= ========= =========
Unpaid Losses and Loss Adjustment Expenses:
Commercial Accounts Group $ 1,887 $ 2,630 $ 2,910
Specialty Lines Group 1,575 1,408 1,440
Run-off Operations 2,225 1,776 1,223
--------- --------- ---------
Gross unpaid losses and loss
adjustment expenses 5,687 5,814 5,573
Ceded (1,842)(a) (1,791)(a) (2,294)
--------- --------- ---------
Net $ 3,845 $ 4,023 $ 3,279
========= ========= =========
Unearned Premiums:
Commercial Accounts Group $ 9 $ 84 $ 486
Specialty Lines Group - 49 299
Run-Off Operations - 8 19
--------- --------- ---------
Gross unearned premiums 9 141 804
Ceded (1) (24) (135)
--------- --------- ---------
Net $ 8 $ 117 $ 669
========= ========= =========
Net Earned Premiums:
Commercial Accounts Group $ 84 $ 526 $ 1,087
Specialty Lines Group 22 349 516
Run-off Operations 10 39 50
--------- --------- ---------
$ 116 $ 914 $ 1,653
========= ========= =========
</TABLE>
(a) Excludes ceded unpaid losses of $787 million and $415 million in
1996 and 1995, respectively, relating to the Excess of Loss Rein-
surance Agreement. See note 7 to the consolidated financial statements.
<TABLE>
<CAPTION>
HOME HOLDINGS INC. AND SUBSIDIARIES
SCHEDULE III - SUPPLEMENTARY INSURANCE INFORMATION (CONTINUED)
YEAR ENDED DECEMBER 31,
1996 1995 1994
---- ---- ----
($ millions)
<S> <C> <C> <C>
Losses and Loss Adjustment Expenses:
Commercial Accounts Group $ 282 $ 535 $ 866
Specialty Lines Group 242 389 540
Run-off Operations 436 665 166
Commutation and assignment of the
Stop Loss Treaty - 189 -
Excess of Loss Reinsurance Agreement (372) (14) -
--------- ----------- -----------
$ 588 $ 1,764 $ 1,572
========= =========== ===========
Amortization of Deferred Policy
Acquisition Costs:
Commercial Accounts Group $ 20 $ 74 $ 86
Specialty Lines Group 12 44 33
Run-off Operations - - 5
--------- ----------- -----------
$ 32 $ 118 $ 124
========= =========== ===========
Other Expenses:
Commercial Accounts Group $ 56 $ 245 $ 230
Specialty Lines Group 23 54 78
Run-off Operations 9 13 17
--------- ----------- -----------
$ 88 $ 312 $ 325
========= =========== ===========
Net Written Premiums:
Commercial Accounts Group $ - $ 161 $ 1,010
Specialty Lines Group - 162 532
Run-off Operations 1 39 45
--------- ----------- -----------
$ 1 $ 362 $ 1,587
========= =========== ===========
</TABLE>
<TABLE>
<CAPTION>
HOME HOLDINGS INC. AND SUBSIDIARIES
SCHEDULE IV - REINSURANCE
YEAR ENDED DECEMBER 31,
Assumed Percentage
Ceded from of Amount
Direct to Other Other Net Assumed
Amount Companies Companies Amount to Net
-----------------------------------------------------------------------------
($ millions)
Earned Premiums:
<C> <C> <C> <C> <C> <C>
1996 $ 48 $ 45 $ 113 $ 116 97%
1995 715 331 530 914 58(a)
1994 1,988 499 164 1,653 10
</TABLE>
(a) Increase in percentage of amount assumed to net resulted primarily
from the Company's entering into a Facility Agreement, as discussed
in note 3 to the consolidated financial statements.
<TABLE>
<CAPTION>
HOME HOLDINGS INC. AND SUBSIDIARIES
SCHEDULE V - SUPPLEMENTAL INFORMATION CONCERNING
CONSOLIDATED PROPERTY AND CASUALTY INSURANCE OPERATIONS
AS OF AND FOR THE YEAR ENDED DECEMBER 31,
1996 1995 1994
---- ---- ----
($ millions)
<S> <C> <C> <C>
Deferred policy acquisition costs $ - $ 32 $ 118
Unpaid losses and loss adjustment expenses 5,687 5,814 5,573
Discount deducted from unpaid losses and
loss adjustment expenses 134 184 203
Unearned premiums 9 141 804
Net earned premiums 116 914 1,653
Insurance net investment income 146 219 225
Losses and loss adjustment expenses incurred
related to:
Current year 196 851 1,349
Prior years 764 927 223
Amortization of deferred policy acquisition costs 32 118 124
Paid losses and loss adjustment expenses 1,138 1,034 1,536
Net written premiums 1 362 1,587
Workers' compensation pension liabilities discount rate 7.5% 7.5% 7.5%
</TABLE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
Set forth below is a list showing the names, ages and positions of
all directors and executive officers of the Company, as of March 25,
1997. The Board of the Company is classified into three classes each
class consisting, as nearly as possible, of one-third of the total number
of directors. The term of the Class I directors terminates on the date of
the 1997 annual meeting of the stockholders; the initial term of the
Class II directors terminates on the date of the 1998 annual meeting of
stockholders; and the initial term of the Class III directors terminates
on the date of the 1996 annual meeting of stockholders. At each annual
meeting, successor directors to the class whose term has expired will be
elected for a three-year term. Executive officers of the Company serve at
the pleasure of the Board of Directors.
Name Age Office
Jan E.G. Bruneheim 42 Class II Director
Steven D. Germain 43 Class I Director, President and
Chief Executive Officer
Michael D. Palm 45 Class III Director
Zaid O.B. Pedersen 49 Class II Director
Set forth below is certain information concerning the directors
and executive officers of the Company as of March 25, 1997.
Mr. Pedersen has served as a director of the Company since
January, 1994. Mr. Bruneheim has served as director of the Company since
February 1995 and Messrs. Germain and Palm have served as directors of
the Company since June 1995.
Mr. Bruneheim resigned as President and Chief Executive Officer of
the Company on April 15, 1996. He also has served as Senior Vice
President and General Manager of the Run-off Division of Trygg-Hansa
since 1995. He previously served as Executive Vice President of Securum
AB from 1992 to 1995. Prior thereto he worked for Swedish Match on a
consultancy basis from 1990 to 1991. From 1988 to 1990 he was Vice
President, Corporate Development of Independent Finance.
On April 15, 1996 the Board of Directors of the Company appointed
John C. Vlahoplus to serve as President and Chief Executive Officer of
the Company, replacing Jan Bruneheim of Trygg-Hansa, who resigned April
15, 1996. Mr. Vlahoplus was Vice President of Zurich Centre ReSource
Limited and previously was an attorney with Sullivan & Cromwell. He
resigned as President and Chief Executive Officer on December 10, 1996.
Mr. Germain was appointed President and Chief Executive Officer of
the Company on January 9, 1997. He had been Secretary and General Counsel
of the Company since June, 1995 and resigned from such position on May
20, 1996. He also has served as Managing Director of Zurich Centre
ReSource Limited and General Counsel of Zurich Centre Investments Limited
and its wholly owned subsidiaries since 1994. Since 1988, Mr. Germain has
served as General Counsel of the Centre Reinsurance Group of Companies.
Mr. Germain also serves on the Board of Directors of Superior National
Insurance Company (a California workers' compensation insurer).
Mr. Palm has been Executive Vice President of Centre Reinsurance
Limited since its founding in 1987. He also serves as Executive Vice
President of Zurich Centre Investments Limited since March 1994 and Chief
Executive Officer of Centre Reinsurance Holdings Limited. since September
1995. Mr. Palm also serves on the Board of Directors of Zurich
Reinsurance Centre Holdings, Inc.
Mr. Pedersen has been Executive Vice President and Controller of
Trygg-Hansa since 1993. Prior thereto he served as Senior Vice President
and Controller of Trygg-Hansa from 1980 to 1993.
COMMITTEES OF THE BOARD OF DIRECTORS
The Board of Directors may, from time to time, establish certain
committees to facilitate the management of the Company, but currently
there are no committees.
Compliance with Section 16(a) of the Securities Exchange Act of 1934
Section 16(a) of the Securities Exchange Act of 1934, as amended
(the "Exchange Act") requires the Company's directors and executive
officers and persons who beneficially own more than ten percent of the
Company's Series A Common Stock to report their ownership of and
transactions in the Company's Series A Common Stock to the Securities and
Exchange Commission and to the New York Stock Exchange. Copies of these
reports are also required to be supplied to the Company. Based solely on
a review of the copies of such reports received by the Company and
written representations that no other reports were required, the Company
believes that all such filing requirements were satisfied for the year
ended December 31, 1996.
ITEM 11. EXECUTIVE COMPENSATION
COMPENSATION OF DIRECTORS AND EXECUTIVE OFFICERS
Directors in office from January 1, 1996 to December 31, 1996 did
not receive any fees for service on the Boards of Directors of the
Company or Home Insurance or for service on any committees thereof. It is
not contemplated that any such fees will be paid during 1997.
The following table shows the aggregate cash compensation for
services in all capacities to the Company and its subsidiaries for the
years ended December 31, 1996, 1995 and 1994 for those persons who were,
at December 31, 1996, (i) the chief executive officer and (ii) the other
most highly compensated executive officers of the Company:
<TABLE>
<CAPTION>
Summary Compensation Table
Annual Compensation
--------------------------------------------------
Other
Name and Annual All Other
Principal Position Year(1) Salary Bonus Compensation(2) Compensation(3)
<S> <C> <C> <C> <C> <C>
Jan E.G. Bruneheim(4) 1996 $ 228,000 $ 193,677 $ 12,786
Former President and 1995 $ 199,500 $ 145,033 $ 11,715
Chief Executive Officer
of the Company
</TABLE>
(1) Compensation for Mr. Bruneheim commenced in June 1995.
(2) Mr. Bruneheim's other annual compensation includes $69,258 and
$55,567 in 1996 and 1995, respectively, which represents
reimbursement of housing expenses. There is no other perquisite or
other benefit included which exceeds 25% of the total amount of
other annual compensation in this column.
(3) The amounts in this column represent premiums on executive
supplementary insurance benefits in the amounts of $12,786 and
$11,715 for Mr. Bruneheim for 1996 and 1995, respectively. Amount
paid in 1996 to Mr. Bruneheim's behalf for the pension plan was
$2,138.
(4) Mr.Bruneheim resigned as President and Chief Executive
Officer on April 15, 1996.
Pursuant to REM's services agreement with the Company, REM provides
management services to the Company. The Company pays fees to REM
for these services.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
OWNERSHIP OF CAPITAL STOCK
The following table sets forth (to the extent known to the
Company) certain information regarding the beneficial ownership of the
Company's Series A Common Stock, excluding 9,284,201 shares of Series A
Common Stock held in treasury, as of March 1, 1997: (a) by each person
known by the Company to be the beneficial owner of more than five percent
(5%) of the Company's Series A Common Stock, (b) by each executive
officer of the Company named in the Summary Compensation Table contained
in this report, (c) by each director, and (d) by all directors, and
executive officers of the Company as a group.
<TABLE>
<CAPTION>
Amount and
Name and Address of Nature of Percentage
Beneficial Owner Beneficial Ownership(1) of Class(1)(2)
- -------------------- ----------------------- --------------
<S> <C> <C>
Trygg-Hansa AB (indirectly through
its subsidiary Trygg-Hansa Holding B.V.).... 21,340,832(3) 83.56%
Fleminggatan 18
S-106 26 Stockholm
Sweden
Trygg-Hansa omsesidig livforsakring(4)...... 21,340,832 83.56%
Fleminggatan 18
S-106 26 Stockholm
Sweden
Forsakringsbolaget SPP, omsesidigt(4)....... 21,340,832 83.56%
Regeringatan 107
S-103 73 Stockholm
Sweden
Zurich Home Investments Limited(5).......... 2,514,326(6) 9.85%
Cumberland House
One Victoria Street
P.O. Box HM1788
Hamilton, HM HX Bermuda
Centre Reinsurance (Bermuda) Limited(7)..... 1,531,556 6.0%
Cumberland House
One Victoria Street
P.O. Box HM 1788
Hamilton, HM HX Bermuda
- ----------------
All Directors and Executive Officers........ - -
</TABLE>
(1) Trygg-Hansa and Centre Re might be deemed to be members of a
"group" as that term is used in Section 13(d)(3) of the Exchange
Act. The group members might be deemed to collectively
beneficially own 22,872,388 shares, representing approximately 95%
of the outstanding shares of Series A Common Stock (including
shares deemed outstanding pursuant to Rule 13d-3(d)(1) under the
Exchange Act). The share ownership reflected in this table
includes only shares owned beneficially by each individual group
member, and excludes shares owned by virtue of group membership.
(2) Including (i) 11,091,844 shares which Trygg-Hansa has the right to
acquire, and (ii) 333,333 shares which ZHI has, the right to
acquire upon conversion of the Series B Convertible Stock and
which are deemed outstanding for purposes of Rule 13d-3(d)(1)
under the Exchange Act.
(3) Includes (i) 10,248,988 shares of Series A Common Stock owned
of record and beneficially by Trygg-Hansa, and (ii) 11,091,844
shares which Trygg-Hansa has the right to acquire upon conversion
of the 11,091,844 shares of Series B Convertible Stock owned by
it.
(4) Trygg-Hansa omsesidig livforsakring and Forsakringsbolaget SPP,
omsesidigt may be deemed, because of their shared control over
Trygg-Hansa to own beneficially the aggregate number of Series A
Common Stock beneficially owned by Trygg-Hansa.
(5) ZHI might be deemed to beneficially own 24,005,721 shares of
Series A Common Stock, representing approximately 94% of the
outstanding shares (including shares deemed outstanding pursuant
to Rule 13d-3(d)(1) under the Exchange Act), because of its
ability, pursuant to the Securityholders' Agreement, to restrict
the transfer and voting of shares of Series A Common Stock by
Trygg-Hansa.
(6) Includes (i) 800,000 shares of Series A Common Stock owned of
record and beneficially by ZHI, and (ii) 333,333 shares which ZHI
has the right to acquire upon conversion of the 333,333 shares of
Series B Convertible Stock owned by it.
(7) Zurich might be deemed to beneficially own those shares of
Series A Common Stock beneficially owned by Centre Re, by virtue
of Zurich's indirect ownership of all of the shares of voting
stock of Centre Re and the fact that Centre Re is a party to the
Governance Agreement. Zurich might be deemed to beneficially own
24,253,381 shares of Series A Common Stock, representing
approximately 95% of the outstanding shares (including shares
deemed outstanding pursuant to Rule 13d-3(d)(1) under the Exchange
Act).
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
RECAPITALIZATION AGREEMENT AND RELATED AGREEMENTS
The Company, Trygg-Hansa, Zurich, ZCI, IP and ZHI are parties to
the Recapitalization Agreement, dated as of February 9, 1995, as
subsequently amended. For a summary of the Recapitalization Agreement and
other agreements entered into among the Company and the other parties in
connection with the Recapitalization Agreement, including the Facility
Agreement between the Company, Trygg-Hansa and Zurich and the amendments
thereto, see notes 1 and 3 to the consolidated financial statements.
Additionally, Risk Enterprise Management Limited, which is a subsidiary
of Zurich, is party to a Services Agreement with the Company. See
"Business - Recapitalization Agreement and Related Agreements."
AGGREGATE EXCESS OF LOSS REINSURANCE AGREEMENT AND STOP LOSS TREATY
In connection with the Recapitalization, Home Insurance commuted
or assigned its right to receive payment under the Stop Loss Treaty, with
a group of reinsurers including Centre Reinsurance Limited, Zurich
International (Bermuda) Ltd. and Trygg-Hansa Insurance Company Limited
("THI"), a wholly owned subsidiary of Trygg-Hansa. Also, Home Insurance
purchased an Aggregate Excess of Loss Reinsurance Agreement with Centre
Reinsurance Dublin, an indirect subsidiary of Zurich. Mr. Germain who
serves as President, Chief Executive Officer and director of the Company,
and Mr. Palm, who serves as director of the Company, also have positions
in the Centre Reinsurance Group of Companies, which includes Centre
Reinsurance Dublin. Mr. Germain serves as General Counsel of the Centre
Reinsurance Group of Companies and Mr. Palm serves as Executive Vice
President of Centre Reinsurance Limited, Executive Vice President of ZCI
and Chief Executive Officer of Centre Reinsurance Holdings Limited.
PARTNERSHIP AGREEMENT OF REINSURANCE
Home Insurance and THI entered into a Partnership Agreement of
Reinsurance, dated June 19, 1992 which provided that each company will
issue locally-admitted policies in territories or jurisdictions where the
company is licensed when requested to do so by the other party provided
the risk meets the issuing company's underwriting standards. Home
Insurance also entered into a similar agreement, dated May 13, 1992 with
Industrial Insurance Company, a former stockholder. With the cessation of
underwriting at Home Insurance, the partnership agreements with THI and
Industrial Insurance Company ceased to be active. Although no premiums
were ceded to THI and Industrial Insurance Company in 1996, each Company
continues to service the run-off of policies issued.
REINSURANCE
As part of the restructuring of its catastrophe reinsurance
arrangements, Home Insurance entered into a property catastrophe
reinsurance agreement, effective from August 11, 1995, to March 31, 1996,
with Centre Cat Limited. The premium for this reinsurance was $3 million.
DIRECTORS' AND OFFICERS' INSURANCE
Prior to June 30, 1996, the Company and Trygg-Hansa had together
purchased, from an unaffiliated insurer, directors' and officers'
insurance coverage insuring directors and officers of all their
affiliated companies. The Company recorded an expense, relating to this
coverage, of $2.6 million, $2.9 million, $2.4 million, $3.4 million and
$3.9 million in 1996, 1995, 1994 and 1993, respectively, for its share of
the cost of this coverage. As of July 1, 1996, the Company purchased a
separate policy.
The Company believes that all of the transactions described above
were at prices and on terms which were no less favorable to the Company
than could have been available in similar transactions with unrelated
parties. Future transactions with related parties will be on terms no
less favorable than could be obtained from unrelated parties and material
transactions, if any, will be approved by the Board of Directors of the
Company.
SECURITYHOLDERS' AGREEMENT
Trygg-Hansa, Trygg-Hansa omsesidig livforsakring, Industrial
Insurance Company, Centre Re (Bermuda), and the Bishop Estate are parties
to a Governance Agreement. The Governance Agreement has not been
terminated, however, the parties to the Securityholders' Agreement
described below have agreed that Trygg-Hansa will exercise its voting
rights under the Governance Agreement and will otherwise take, and cause
the Company to take all actions permitted under the Governance Agreement
or the Certificate and the Company's by-laws so that, to the extent
possible, the purpose and intent of the Securityholders' Agreement are
effectuated.
The following description of the Securityholders' Agreement is
qualified in its entirety by the provisions of the Securityholders'
Agreement, a copy of which is filed herewith as an exhibit.
Pursuant to the Recapitalization Agreement, on June 12, 1995, the
closing date of the Recapitalization, the Company, Trygg-Hansa, ZHI, IP
and Centre Re (Bermuda) entered into a Securityholders' Agreement (the
"Securityholders' Agreement") which contains certain corporate governance
provisions relating to the Company. Among such provisions, the
Securityholders' Agreement provides that the Board of Directors of the
Company will consist of at least eight, however the Securityholders'
Agreement is in the process of being amended to provide for a minimum of
four directors. Pursuant to the amendment, ZHI and its permitted
transferees and Trygg-Hansa and its permitted transferees will each have
the right to designate two of such directors. If the number of directors
is increased above four, ZHI and its permitted transferees will have the
right to designate the additional director(s). ZHI and Trygg-Hansa are
also entitled to appropriate representation on any Committee of the Board
of Directors of the Company and on the boards of directors of Home
Insurance. If certain warrants are not exercised on or prior to their
expiration date, Trygg-Hansa thereafter has the right to appoint a
majority of the members of the board of directors (and any committees
thereof) of the Company and Home Insurance.
Trygg-Hansa has further agreed that, at any time after the first
anniversary of the Closing Date and until December 31, 2003, it will vote
its shares of Common Stock in the manner designated by ZHI with respect
to a merger or consolidation of the Company.
The Securityholders' Agreement also provides that the Company will
not take, and ZHI and Trygg-Hansa will cause the Company not to take or
approve, certain actions (other than as expressly provided for in the
Recapitalization Agreement) without the prior written consent of a
majority of the directors designated by each of ZHI and Trygg-Hansa. The
approval rights of ZHI and Trygg-Hansa with respect to certain
transactions terminate at such time as ZHI or Trygg-Hansa and their
respective permitted transferees cease to own and/or have the right to
acquire at least 5% of the outstanding shares on a fully diluted basis.
There are also certain restrictions on the rights of Trygg-Hansa
and ZHI to transfer securities, and Trygg-Hansa and ZHI have certain sale
and purchase options with respect to the shares of Common Stock owned by
Trygg-Hansa.
PROVISIONS OF CHARTER RELATING TO CORPORATE OPPORTUNITIES AND
INTERESTED DIRECTORS
In order to address certain potential conflicts of interest
between the Company and Trygg-Hansa, International Insurance Investors,
and Centre Re (collectively, the "Insurance Company Stockholders"), the
Charter contains provisions regulating and defining the conduct of
certain affairs of the Company as they may involve the Insurance Company
Stockholders and their respective officers and directors, and the powers,
rights, duties and liabilities of the Company and its officers, directors
and stockholders in connection therewith. In general, these provisions
recognize that the Company and the Insurance Company Stockholders may
engage in the same or similar business activities and lines of business
and have an interest in the same corporate opportunities and that the
Company and the Insurance Company Stockholders will continue to have
certain contractual and business relations with each other (including
service of directors and officers of the Insurance Company Stockholders
as directors and officers of the Company).
The Charter provides that the Insurance Company Stockholders shall
have no duty to refrain from (i) engaging in the same or similar business
activities or lines of business as the Company, (ii) doing business with
any client or customer of the Company or (iii) employing or otherwise
engaging any officer or employee of the Company. Accordingly, no
Insurance Company Stockholder nor any officer or director thereof (except
as provided in the following paragraph) will be liable to the Company or
to its stockholders for breach of any fiduciary duty by reason of any
such activities. The Charter also provides that no Insurance Company
Stockholder is under any duty to present any corporate opportunity to the
Company which may be a corporate opportunity for such Insurance Company
Stockholder and the Company, and such Insurance Company Stockholder will
not be liable to the Company or its stockholders for breach of any
fiduciary duty as a stockholder of the Company by reason of the fact that
such Insurance Company Stockholder pursues or acquires such corporate
opportunity for itself, directs such corporate opportunity to another
person or does not present such corporate opportunity to the Company.
Where persons who are directors or officers of both the Company
and an Insurance Company Stockholder acquire knowledge of a potential
transaction or matter which may be a corporate opportunity for both the
Company and such Insurance Company Stockholder, the Charter provides that
such directors or officers of the Company (a) shall have fully satisfied
their fiduciary duties to the Company and its stockholders with respect
to such corporate opportunity, (b) shall not be liable to the Company or
its stockholders for breach of fiduciary duty by reason of such Insurance
Company Stockholder's actions with respect to such corporate opportunity,
(c) shall, for proposes of the Charter, be deemed to have acted in good
faith and in a manner such officers and directors believed to be in and
not opposed to the best interests of the Company and (d) shall, for
purposes of the Charter, be deemed not to have breached their duties of
loyalty to the Company or its stockholders or to have derived an improper
personal benefit therefrom, if such persons act in good faith in a manner
consistent with the following policy. A corporate opportunity offered to
any person who is a director or an officer of the Company and who is also
a director or an officer of an Insurance Company Stockholder shall belong
to the Company only if such opportunity is expressly offered to such
person solely in his capacity as a director or an officer of the Company,
and otherwise shall belong to such Insurance Company Stockholder.
Presently, Messrs. Bruneheim and Pedersen who are officers of
Trygg-Hansa, serve as directors of the Company.
For purposes of the Charter, "corporate opportunities" include
business opportunities which the Company is financially able to
undertake, which are, from their nature, in the Company's line of
business, are of practical advantage to it and are ones in which it has
an interest or a reasonable expectancy, and in which, by embracing the
opportunities, the self-interest of an Insurance Company Stockholder or
its officers or directors will be brought into conflict with that of the
Company.
The Charter also provides that no contract, agreement, arrangement
or transaction between the Company and an Insurance Company Stockholder,
an entity in which a director of the Company has a financial interest (a
"Related Entity") or a director or officer of the Company, an Insurance
Company Stockholder or any Related Entity shall be void or voidable
solely for the reason that an Insurance Company Stockholder, a Related
Entity or any one or more of the officers or directors of the Company,
the Insurance Company Stockholder or any Related Entity are parties
thereto, or solely because any such directors or officers are present at,
participate in or vote with respect to the authorization of the contract,
agreement, arrangement or transaction, and that the Insurance Company
Stockholder, any Related Entity and such directors and officers (a) shall
have fully satisfied and fulfilled their fiduciary duties to the Company
and its stockholders with respect thereto, (b) shall not be liable to the
Company or its stockholders for any breach of fiduciary duty by reason
of the entering into, performance or consummation of any such contract,
agreement, arrangement or transaction, (c) shall, for purposes of the
Charter, be deemed to have acted in good faith and in a manner such
persons reasonably believed to be in and not opposed to the best
interests of the Company and (d) shall, for purposes of the Charter, be
deemed not to have breached their duties of loyalty to the Company and
its stockholders and not to have derived an improper personal benefit
therefrom; if:
(i) the material facts as to the contract, agreement, arrangement
or transaction are disclosed or are known to the Board or the
committee thereof which authorizes the contract, agreement,
arrangement or transaction, and the Board or such committee in
good faith authorizes the contract, agreement, arrangement or
transaction by the affirmative vote of a majority of the
disinterested directors, even though the disinterested directors
be less than a quorum; or
(ii) the material facts as to the contract, agreement, arrangement
or transaction are disclosed or are known to the holders of a
majority of the then outstanding Common Stock of the Company
entitled to vote thereon, and the contract, agreement, arrangement
or transaction is specifically approved in good faith by vote of
the holders of a majority of the then outstanding Common Stock of
the Company not owned by the Insurance Company Stockholder or a
Related Entity, as the case may be.
Any person purchasing or otherwise acquiring any interest in any shares
of capital stock of the Company will be deemed to have notice of and to have
consented to such provisions of the Charter.
Although the Company does not anticipate any material adverse
effect to occur as a result of the foregoing provisions, it is impossible
to predict whether any transaction or event will occur in the future that
may implicate such provisions. Accordingly, there can be no assurance
that the application of the foregoing provisions will not have a material
adverse effect on the Company.
Delaware law permits corporations to enact charter provisions that
define the nature of the relationship among a corporation, its directors
and its stockholders as they wish, so long as such provisions are not
contrary to settled public policy or a statutory enactment. The Company
is not aware of any settled public policy or statutory enactment
prohibiting stockholders from clarifying and/or defining those
opportunities in which a corporation may have an interest. The Company is
aware of one decision of the Delaware Chancery Court which held that a
provision similar in many respects to the Charter provisions described
above could operate to eliminate or limit the liability of a director for
breach of fiduciary duty. However, the Company believes the factors of
that case, which contemplated a scenario in which a director acted in bad
faith, would not be relevant to the Company's Charter provisions, which
only protect a director acting in good faith. Accordingly, the Company
believes that the Charter provisions described in the preceding paragraph
are consistent with Delaware law.
The Charter provisions may have the effect of limiting remedies of
the Company and its stockholders at law or in equity in certain
circumstances; however, because the Delaware courts have not conclusively
determined the validity or enforceability of such provisions, the Company
is unable to determine the extent to which, if any, such provisions
otherwise limit such remedies. These provisions do not limit stockholder
remedies, if any, predicated on claims arising under the federal
securities laws.
Finally, it is the belief of the Company that, if the Charter
provisions described above were ruled invalid or unenforceable, the
Company and its directors and stockholders would be placed in the same
legal position that they would have been in had the Charter provisions
never been adopted.
Prior to the first date that Trygg-Hansa and its permitted
transferees cease to have beneficial ownership of 25% or more of the then
outstanding shares of common stock (the "Trigger Date"), the affirmative
vote of the holders of more than 75% of the outstanding shares of Series
A Common Stock is required to amend or repeal or adopt any provision
inconsistent with the Charter provisions described above. Accordingly,
prior to the Trigger Date, Trygg-Hansa can prevent any such alteration,
adoption, amendment or repeal.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Documents filed as part of this report:
1. Financial Statements
The list of financial statements appears in the
accompanying index on page 49.
2. Financial Statement Schedules
The list of financial statement schedules appears
in the accompanying index on page 49.
All other schedules have been omitted because they are not applicable.
3. Exhibits
2.1 Reorganization Agreement dated February 24,
1997 between Gruntal Financial Corp. ("GFC")
and The 1880 Group LLC ("The 1880 Group")
(incorporated by reference to the Company's
Report on Form 8-K filed on February 25, 1997).
2.2 Order of Supervision dated March 3, 1997 issued
by the State of New Hampshire Insurance
Department (incorporated by reference to the
Company's Report on Form 8-K filed on March 4,
1997).
3.1 Restated Certificate of Incorporation of the
Company (incorporated by reference to the
Company's Registration Statement on Form S-1,
File No. 33-69308).
3.2 Amended By-Laws of the Company (incorporated by
reference to the Company's Registration
Statement on Form S-1, File No. 33-69308).
10.1 Recapitalization Agreement, dated as of
February 9, 1995 by and among the Company,
Trygg-Hansa AB ("Trygg-Hansa"), Zurich
Insurance Company ("Zurich"), Zurich Centre
Investments Limited, Insurance Partners
Advisors, L.P. and ZCI Investments Limited
(incorporated by reference to the Company's
Report on Form 8-K filed on February 13, 1995).
10.2 Amended and Restated Purchase Agreement,
(formerly Note Purchase Agreement) dated as of
April 26, 1995 (incorporated by reference to
Amendment No. 1 to the Company's Schedule
13E-4).
10.3 Interest Deferral Agreement, dated as of
February 9, 1995 by and between the Company and
Trygg-Hansa (included in Exhibit 10.1).
10.4 Amended and Restated Note Exchange Agreement,
dated as of April 26, 1995 (incorporated by
reference to Amendment No. 1 to Schedule
13E-4).
10.5 Amended and Restated Standby Working Capital
Credit Agreement, dated as of April 26, 1995
(incorporated by reference to Amendment No. 1
to Schedule 13E-4).
10.6 Amendment No. 1 to the Recapitalization
Agreement dated as of March 24, 1995
(incorporated by reference to the Company's
Report on Form 8-K filed April 6, 1995).
10.7 Amendment No. 2 to the Recapitalization
Agreement dated as of March 24, 1995
(incorporated by reference to the Company's
Report on Form 8-K filed March 27, 1995).
10.8 Amendment No. 3 to the Recapitalization
Agreement dated as of April 6, 1995.
(incorporated by reference to Exhibit 10.1(g)
of the Company's Form 10-K for the fiscal year
ended December 31, 1994, File No. 0-19347).
10.9 Amendment No. 4 to the Recapitalization
Agreement, dated as of April 24, 1995
(incorporated by reference to the Company's
Schedule 13E-4 dated April 25, 1995).
10.10 Amendment No. 5 to the Recapitalization
Agreement, dated as of May 16, 1995
(incorporated by reference to Amendment No. 1
to the Company's Schedule 13E-4).
10.11 Loan Documentation dated as of March 31, 1995
between the Company and ZCI Investments
Limited. (incorporated by reference to Exhibit
10.1(h) of the Company's Form 10-K for the
fiscal year ended December 31, 1994, File No.
0-19347).
10.12 Agreement dated as of April 7, 1995 among ZCI
Investments Limited, Zurich Centre Investments
Limited, the Company and each of the members of
the Ad Hoc Committee of Senior Note Holders of
the Company who are signatories thereto.
(incorporated by reference to Exhibit 10.1(i)
of the Company's Form 10-K for the fiscal year
ended December 31, 1994, File No. 0-19347).
10.13 Facultative Reinsurance Facility Agreement,
dated December 24, 1994 by and among Zurich,
the Company and Trygg-Hansa. (incorporated by
reference to Exhibit 10.2 of the Company's Form
10-K for the fiscal year ended December 31,
1994, File No. 0-19347).
10.14 Amendment No. 1 to Facultative Reinsurance
Facility Agreement, dated as of February 9,
1995 by and among Zurich, the Company and
Trygg-Hansa. (incorporated by reference to
Exhibit 10.2(a) of the Company's Form 10-K for
the fiscal year ended December 31, 1994, File
No. 0-19347).
10.15 Amendment No. 2 to Facultative Reinsurance
Facility Agreement dated as of June 12, 1995 by
and among Zurich, the Company and Trygg-Hansa
(incorporated by reference to Exhibit 10.15 of
the Company's Form 10-K for the fiscal year
ended December 31, 1995, File No. 0-19347).
10.16 Services Agreement dated as of June 12, 1995 by
and among Risk Enterprise Management Limited,
Zurich Centre Investments Limited, the Company,
The Home Insurance Company and its insurance
subsidiaries (incorporated by reference to
Exhibit 10.16 of the Company's Form 10-K for
the fiscal year ended December 31, 1995, File
No. 0-19347).
10.17 Investment Management Agreement dated as of
June 12, 1995 by and among Centre Investment
Services Limited, Zurich Centre Investments
Limited, the Company, The Home Insurance
Company and its insurance subsidiaries
(incorporated by reference to Exhibit 10.17 of
the Company's Form 10-K for the fiscal year
ended December 31, 1995, File No. 0-19347).
10.18 Commutation Agreement dated as of June 12, 1995
by and among The Home Insurance Company and its
insurance subsidiaries, Centre Reinsurance
Limited and Zurich International Bermuda
Limited (incorporated by reference to Exhibit
10.18 of the Company's Form 10-K for the fiscal
year ended December 31, 1995, File No.
0-19347).
10.19 Aggregate Excess of Loss Reinsurance Agreement
dated as of June 12, 1995 by and between The
Home Insurance Company and Centre Reinsurance
International Company (incorporated by
reference to Exhibit 10.19 of the Company's
Form 10-K for the fiscal year ended December
31, 1995, File No. 0-19347).
10.20 Assignment Agreement dated as of June 12, 1995
among The Home Insurance Company and its
insurance subsidiaries (incorporated by
reference to Exhibit 10.20 of the Company's
Form 10-K for the fiscal year ended December
31, 1995, File No. 0-19347).
10.21 Amendment No. 1 to Aggregate Excess of Loss
Reinsurance Agreement dated December 29, 1995
(incorporated by reference to Exhibit 10.21 of
the Company's Form 10-K for the fiscal year
ended December 31, 1995, File No. 0-19347).
10.22 Letter Agreement dated December 26, 1995 from
Zurich Centre Investments Limited to The Home
Insurance Company (incorporated by reference
to Exhibit 10.22 of the Company's Form 10-K for
the fiscal year ended December 31, 1995, File
No. 0-19347).
10.23 Guaranty Agreement dated as of June 12, 1995 by
Zurich Insurance Company for the benefit of The
Home Insurance Company (incorporated by
reference to Exhibit 10.23 of the Company's
Form 10-K for the fiscal year ended December
31, 1995, File No. 0-19347).
10.24 Amendment No. 1 to Guaranty Agreement dated as
of December 26, 1995 (incorporated by reference
to Exhibit 10.24 of the Company's Form 10-K for
the fiscal year ended December 31, 1995, File
No. 0-19347).
10.25 Renewal Rights Agreement dated as of June 12,
1995 among Zurich Insurance Company, The Home
Insurance Company and its insurance
subsidiaries (incorporated by reference to
Exhibit 10.25 of the Company's Form 10-K for
the fiscal year ended December 31, 1995, File
No. 0-19347).
10.26 Portfolio Value Swap Agreement dated as of June
12, 1995 by and between Centre Reinsurance
International Company, The Home Insurance
Company and its insurance subsidiaries
(incorporated by reference to Exhibit 10.26 of
the Company's Form 10-K for the fiscal year
ended December 31, 1995, File No. 0-19347).
10.27 Amendment No. 1 to Portfolio Value Swap
Agreement with Home operating companies dated
December 26, 1995 (incorporated by reference to
Exhibit 10.27 of the Company's Form 10-K for
the fiscal year ended December 31, 1995, File
No. 0-19347).
10.28 Portfolio Value Swap Agreement by and between
Centre Reinsurance International Company and
the Company (incorporated by reference to
Exhibit 10.28 of the Company's Form 10-K for
the fiscal year ended December 31, 1995, File
No. 0-19347).
10.29 Amendment No. 1 to the Portfolio Value Swap
Agreement with the Company dated December 26,
1995 (incorporated by reference to Exhibit
10.29 of the Company's Form 10-K for the fiscal
year ended December 31, 1995, File No.
0-19347).
10.30 Funding Commitment dated as of December 26,
1995 by Zurich Centre Investments Limited for
The Home Insurance Company (incorporated by
reference to Exhibit 10.30 of the Company's
Form 10-K for the fiscal year ended December
31, 1995, File No. 0-19347).
10.31 Sterling Forest Corporation Line of Credit
Facility (incorporated by reference to
Exhibit 10.31 of the Company's Form 10-K for
the fiscal year ended December 31, 1995, File
No. 0-19347).
10.32 Agreement dated as of February 5, 1996 among
the Company, Zurich Home Investments Limited
and Trygg-Hansa regarding consent to issuance
of additional Series A Senior Working Capital
Notes (incorporated by reference to Exhibit
10.32 of the Company's Form 10-K for the fiscal
year ended December 31, 1995, File No.
0-19347).
10.33 Governance Agreement among Trygg-Hansa SPP
Holding AB (now known as Trygg-Hansa AB),
Trygg-Hansa omsesidig livforsakring, Industrial
Mutual Insurance Company, International
Insurance Investors L.P., Centre Reinsurance
Limited and the Trustees of the Estate of
Bernice Pauahi Bishop (incorporated by
reference to the Company's Registration
Statement on Form S-1, File No. 33-69308).
10.34 Amendment No. 1 to Governance Agreement, dated
as of January 12, 1994 (incorporated by
reference to Exhibit 10.1(a) of the Company's
Form 10-K for the fiscal year ended December
31, 1993, File No. 0-19347).
10.35 Securityholders' Agreement dated as of June 12,
1995 by and among the Company, ZCI Investments
Limited, Centre Reinsurance (Bermuda) Limited,
Insurance Partners Advisors, L.P. and
Trygg-Hansa AB (incorporated by reference to
Exhibit 10.35 of the Company's Form 10-K for
the fiscal year ended December 31, 1995, File
No. 0-19347).
10.36 Stock Purchase Agreement among AmBase
Corporation, The Home Insurance Company and TVH
Acquisition Corporation, dated as of Septem-
ber 28, 1990, as amended as of December 12,
1990, December 21, 1990 and February 4, 1991
(incorporated by reference to Exhibit 10A of
The Home Insurance Company's Form 10-K for the
fiscal year ended December 31, 1990, File No.
1-8963).
10.37 Indemnity Agreement, dated as of February 13,
1991, among AmBase Corporation, The Home
Insurance Company and TVH Acquisition
Corporation (incorporated by reference to
Exhibit 10B of The Home Insurance Company's
Form 10-K for the fiscal year ended December
31, 1990, File No. 1-8963).
10.38 Consulting Agreement dated as of February 13,
1991 among AmBase Corporation, The Home
Insurance Company and TVH Acquisition
Corporation (incorporated by reference to
Exhibit 10C of The Home Insurance Company's
Form 10-K for the fiscal year ended December
31, 1990, File No. 1-8963).
10.39 Consolidated Group Tax Agreement dated as of
February 13, 1991 between TVH Acquisition
Corporation and Home Group Funding Corporation
(incorporated by reference to Exhibit 10A of
Company's Form 10-Q for the fiscal quarter
ended March 31, 1991, File No. 0-19347).
10.40 Consolidated Group Tax Agreement dated as of
February 13, 1991 between TVH Acquisition
Corporation and Gruntal Financial Services,
Inc. (incorporated by reference to Exhibit 10B
of Company's Form 10-Q for the fiscal quarter
ended March 31, 1991, File No. 0-19347).
10.41 Consolidated Group Tax Agreement dated as of
February 13, 1991 between TVH Acquisition
Corporation and Home Group Financial Services
(incorporated by reference to Exhibit 10C of
Company's Form 10-Q for the fiscal quarter
ended March 31, 1991, File No. 0-19347).
10.42 Consolidated Group Tax Agreement dated as of
February 13, 1991 between TVH Acquisition
Corporation and The Home Insurance Company
(incorporated by reference to Exhibit 10D of
Company's Form 10-Q for the fiscal quarter
ended March 31, 1991, File No. 0-19347).
10.43 Consolidated Group Tax Agreement dated as of
February 13, 1991 between TVH Acquisition
Corporation and AmBase Realty Inc.
(incorporated by reference to Exhibit 10E of
Company's Form 10-Q for the fiscal quarter
ended March 31, 1991, File No. 0-19347).
10.44 Office lease dated as of June 29, 1984
between The Home Insurance Company and
Olympia and York Maiden Lane Company
(incorporated by reference to The Home
Insurance Company's Registration Statement
on Form S-1, File No. 2-98576).
10.45 The Home Insurance Company Supplemental
Retirement Plan (incorporated by reference to
Exhibit 10M of Company's Form 10-K for the
fiscal year ended December 31, 1991, File No.
0-19347).
10.46 Partnership Agreement of Reinsurance dated June
19, 1992 between The Home Insurance Company and
Trygg-Hansa Forsakrings AB (incorporated by
reference to the Company's Registration
Statement on Form S-1, File No. 33-693080).
10.47 Partnership Agreement of Reinsurance dated May
13, 1992 between The Home Insurance Company and
Industrial Mutual Insurance Company
(incorporated by reference to Exhibit 10.25 of
the Company's Form 10-K for the fiscal year
ended December 31, 1993, File No. 0-19347).
10.48 Form of Indenture dated as of December 28, 1993
of $100,000,000 7% Senior Notes Due December
15, 1998, between the Company, as Issuer and
The Bank of New York as Trustee (incorporated
by reference to Post-Effective Amendment No. 1
to the Company's Registration Statement on Form
S-1, File No. 33-69470).
10.49 Form of Indenture dated as of December 28, 1993
of $180,000,000 77/8% Senior Notes Due December
15, 2003 between the Company as Issuer and The
Bank of New York as Trustee (incorporated by
reference to Post-Effective Amendment No. 1 to
the Company's Registration Statement on Form
S-1, File No. 33-69470).
10.50 Indenture dated as of August 22, 1995 of
$180,000,000 77/8% Senior Sinking Fund Notes
due December 15, 2003 between the Company as
Issuer and The Bank of New York as Trustee
(incorporated by reference to Exhibit 10.50 of
the Company's Form 10-K for the fiscal year
ended December 31, 1995, File No. 0-19347).
10.51 Interest and Liabilities Agreement and Property
Surplus Share Treaty between The Home Insurance
Company and certain subscribing reinsurers
(incorporated by reference to Amendment No. 1
to the Company's Registration Statement on
Form S-1, File No. 33-69308).
10.52 Property and Casualty Corporate Catastrophe
Program Agreements between The Home Insurance
Company and various reinsurers (incorporated by
reference to Amendment No. 1 to the Company's
Registration Statement on Form S-1, File No.
33-69308).
10.53 First Amendment to the Service Agreement dated
March 4, 1997 among Risk Enterprise Management
Limited, Zurich Centre Investments Limited, the
Company, US International Reinsurance Company
and The Home Insurance Company (incorporated by
reference to the Company's Report on Form 8-K
filed on March 10, 1997).
10.54 Joint Unanimous Written Consent dated December
31, 1996 of Holders, namely, Centre Reinsurance
Holdings Limited, Zurich Home Investments
Limited and Centre Finance Dublin, of Home
Holdings Inc. Series A and Series B Working
Capital Notes issued by the Company pursuant to
the Amended and Restated Standby Working
Capital Credit Agreement dated as of April 26,
1995 (incorporated by reference to the
Company's Report on Form 8-K filed on January
3, 1997).
10.55 Letter Agreement dated March 29, 1996 among
Zurich Centre Investments Limited, Centre
Reinsurance Holdings Limited and Centre Finance
Dublin in connection with The Amended and
Restated Standby Working Capital Credit
Agreement dated as of April 26, 1995
(incorporated by reference to the Company's
Report on Form 8-K filed on April 4, 1996).
*10.56 Amendment No. 1 to Investment Management
Agreement effective as of April 1, 1996 among
Centre Investment Services Limited, Zurich Centre
Investments Limited, the Company, The Home Insurance
Company, US International Reinsurance Company, The
Home Insurance Company of Illinois and The Home
Insurance Company of Wisconsin, both of which
have been merged with and into The Home
Insurance Company, and Zurich Investment Management,
Inc.
*10.57 Amendment No. 2, dated as of December 13, 1996,
to the Amended and Restated Purchase Agreement,
dated as of April 26, 1995, between the Company
and ZCI Investments Limited, the Amended and
Restated Note Exchange Agreement, dated as of
April 26, 1995, between the Company and
Trygg-Hansa AB, the Amended and Restated
Securities Purchase Agreement, dated as of
April 26, 1995, between ZCI Investments Limited
and Trygg-Hansa AB, the Amended and Restated
Standby Working Capital Credit Agreement, dated
as of April 26, 1995, between the Company and
ZCI Investments Limited and the notes issued
thereunder.
*22.1 List of Subsidiaries of the Company.
99.1 Press release issued on March 4, 1997
announcing that the principal subsidiary of the
Company, The Home Insurance Company, was placed
under formal supervision by The State of New
Hampshire Insurance Department (incorporated by
reference to the Company's report on Form 8-K
filed on March 4, 1997).
________________
* Exhibits filed herewith.
99.2 Form of Limited Liability Company Agreement of
Gruntal Financial, LLC, to be dated as of the
date of the consummation of the Reorganization
between GFC and The 1880 Group (attached to the
Reorganization Agreement as Exhibit 3.1C)
(incorporated by reference to the Company's
report on Form 8-K filed on February 25, 1997).
99.3 Form of Amendment No. 2 to the Portfolio Value
Swap Agreement to be dated as of the date of
the consummation of the Reorganization by and
among The Home Insurance Company and Centre
Reinsurance Dublin (attached to the
Reorganization Agreement as Exhibit 3.1E)
(incorporated by reference to the Company's
report on Form 8-K filed on February 25, 1997).
99.4 Press release issued on February 25, 1997
announcing the Reorganization (incorporated by
reference to the Company's report on Form 8-K
filed on February 25, 1997).
99.5 Press release issued on June 20, 1996
announcing that The Home Insurance Company
has stopped paying rent for its headquarters in
New York City located at 59 Maiden Lane
(incorporated by reference to the Company's
report on Form 8-K filed on June 20, 1996).
99.6 Press release issued on April 26, 1996
announcing that The Home Insurance Company
and its primary regulator, The New Hampshire
Insurance Department have opened talks with
representatives of Olympia and York Company and
its bondholders regarding The Home Insurance
Company's recently reported financial results
and its current lease obligations (incorpo-
rated by reference to the Company's report on
Form 8-K filed on May 2, 1996).
99.7 Press release issued on April 6, 1995
announcing the execution of an amendment dated
March 24, 1996 to the Recapitalization
Agreement dated as of February 9, 1995 by and
among the Company, Trygg-Hansa, Zurich, Zurich
Centre Investments Limited, Insurance Partners
Advisors, L.P. and ZCI Investments Limited
(incorporated by reference to the Company's
report on Form 8-K field on April 6, 1995).
Form 8-K
Reports on Form 8-K were filed by the Company on January 3, 1997,
February 25, 1997, March 4, 1997 and March 10, 1997.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, Home Holdings Inc., the Registrant, has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized, in the
City of New York, State of New York, on the 28th day of March 1997.
Home Holdings Inc.
By: /s/ STEVEN D. GERMAIN
Name: Steven D. Germain
Title: President and Chief
Executive Officer
Pursuant to the requirement of the Securities Exchange Act of
1934, this report has been signed below by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
<S> <C> <C>
/s/ STEVEN D. GERMAIN
- --------------------------
Steven D. Germain President, Chief Executive Officer and March 28, 1997
Director
(Principal Executive Officer)
/s/ RICHARD H. HERSHMAN
- --------------------------
Richard H. Hershman Treasurer March 28, 1997
(Principal Financial and Accounting Officer
through the Services Agreement with Risk
Enterprise Management Limited)
/s/ JAN BRUNEHEIM
- --------------------------
Jan Bruneheim Director March 28, 1997
/s/ MICHAEL D. PALM
- --------------------------
Michael D. Palm Director March 28, 1997
/s/ ZAID O.B. PEDERSEN
- --------------------------
Zaid O.B. Pedersen Director March 28, 1997
</TABLE>
EXHIBIT 10.56
AMENDMENT NO. 1 TO INVESTMENT MANAGEMENT AGREEMENT effective
as of April 1, 1996 by and among
CENTRE INVESTMENT SERVICES LIMITED, a company incorporated
under the laws of Bermuda ("CIS");
ZURICH CENTRE INVESTMENTS LIMITED, a company incorporated
under the laws of Bermuda ("ZCI");
HOME HOLDINGS INC., a company incorporated under the laws of
Delaware ("Home Holdings");
THE HOME INSURANCE COMPANY, a stock insurance company
domiciled in New Hampshire ("Home");
U.S. INTERNATIONAL REINSURANCE COMPANY, a stock re-insurance
company domiciled in New Hampshire ("USIre");
THE HOME INSURANCE COMPANY OF ILLINOIS, a stock insurance
company previously domiciled in New Hampshire and subsequently
merged into Home ("Home Illinois");
THE HOME INSURANCE COMPANY OF WISCONSIN, a stock insurance
company previously domiciled in New Hampshire and subsequently
merged into Home ("Home Wisconsin") (Home (which now includes
Home Illinois and Home Wisconsin) and USIre are hereinafter
collectively referred to as the "Insurers"). (Home Holdings and
the Insurers are hereinafter referred to collectively as the
"Companies"); and
ZURICH INVESTMENT MANAGEMENT, INC., a company incorporated
under the laws of Delaware ("ZIM").
WHEREAS, the INVESTMENT MANAGEMENT AGREEMENT, dated as of
June 12, 1995 (the "Agreement") was entered into by and among
CIS, ZCI and the Companies.
WHEREAS, the parties desire to have ZIM be made a party to
the Agreement effective as of April 1, 1996;
WHEREAS, this Amendment No. 1 to the Agreement (the
"Amendment") is made pursuant to Section 22 of the Agreement and
is intended to permit CIS to appoint ZIM as its sub-manager to
carry out certain duties and responsibilities of CIS under the
Agreement as CIS may designate in its discretion;
WHEREAS, the New Hampshire Department of Insurance (the
"Department") has an interest in the full and complete
performance of this Agreement by the parties hereto, and the
Department has consented to this Amendment by affixing the
signature of its representative;
NOW THEREFORE, the parties hereto agree as follows:
Section 1. Definitions. All capitalized terms used herein
and not otherwise defined herein shall have the meanings assigned
to them in the Agreement.
Section 2. Addition of ZIM. Effective as of April 1, 1996,
ZIM shall be added as an additional party to the Agreement and
shall be responsible under the Agreement for all of the duties,
obligations and agreements of CIS to the same extent as CIS,
including without limitation the obligations set forth in
Sections 9 and 11 of the Agreement. In the discretion and at the
direction of CIS, ZIM shall act as a sub-manager of CIS and shall
provide funds management services according to, and in full
compliance with, the terms and provisions contained in the
Agreement. ZIM and CIS shall be jointly and severally liable
with respect to all actions taken by ZIM in its capacity as sub-
manager on behalf of CIS, under the terms and in accordance with
the Agreement. ZCI hereby covenants and agrees with the
Companies to ensure that ZIM will have sufficient resources
adequately to perform its obligations under the Agreement.
Section 3. Authority of Parties; No Change in Fees. Each
of CIS and ZIM has all necessary corporate authority to enter
into this Amendment and the Agreement and each has (and in the
case of ZIM has had at all times since April 1, 1996) all
regulatory power and authority to perform their respective
obligations hereunder and thereunder. The fees payable by the
Companies under the Agreement pursuant to Section 5 thereof shall
remain the same notwithstanding the addition of ZIM as a party to
the Agreement.
Section 4. Third Party Beneficiaries. This Agreement is
not intended to confer on any person other than the parties
hereto any rights or remedies hereunder, except that the
Commissioner of Insurance for the State of New Hampshire or his
designee is granted third party beneficiary rights to enforce the
Companies rights under this Agreement.
Section 5. Notices to ZIM. Notices pursuant to Section 17
of the Agreement shall be sent to ZIM as follows:
To ZIM: Zurich Investment Management, Inc.
222 South Riverside Plaza
Chicago, IL 60606
Attention - President
Telephone: (312) 537-1984
Telecopy No.: (312) 537-5609
Section 6. Status of Agreement. This Amendment is limited
solely for the purposes and to the extent expressly set forth
herein and nothing contained herein or implied shall constitute
an amendment or waiver of any other term, provision or condition
of the Agreement and each of the parties by their execution
hereof ratifies and confirms its rights and obligations under the
Agreement as amended hereby all of which shall remain in full
force and effect.
Section 7. References to the Agreement. References in this
Amendment and the Agreement and words therein of similar import,
shall be deemed references to the Agreement as amended hereby and
further amended from time to time in accordance with the
requirements of the Agreement.
Section 8. Counterparts. This Amendment may be executed in
any number of counterparts, all of which taken together shall
constitute one Amendment, and any of the parties hereto may
execute this Amendment by signing such a counterpart.
Section 9. Effectiveness. This Amendment shall become
effective as of the dates noted herein upon the execution and
delivery by each party hereto of a counterpart hereof.
IN WITNESS WHEREOF, the parties have executed this Amendment
No. 1 to the Investment Management Agreement to be effective as
of the date noted above.
CENTRE INVESTMENT SERVICES LIMITED
By: /s/ Shernelle Outerbridge
Name: Shernelle Outerbridge
Title: Vice President - Manager
of Investment Operations
ZURICH CENTRE INVESTMENTS LIMITED
By: /s/ Roger Thompson
Name: Roger Thompson
Title: Vice President
HOME HOLDINGS, INC.
By: /s/ Richard H. Hershman
Name: Richard H. Hershman
Title:
THE HOME INSURANCE COMPANY FOR
ITSELF AND AS SUCCESSOR BY MERGER
TO THE HOME INSURANCE COMPANY OF
ILLINOIS AND THE HOME INSURANCE
COMPANY OF WISCONSIN
By: /s/ Richard H. Hershman
Name: Richard H. Hershman
Title:
U.S. INTERNATIONAL REINSURANCE
COMPANY
By: /s/ Arthur D. Wilson
Name: Arthur D. Wilson
Title:
ZURICH INVESTMENT MANAGEMENT, INC.
By: /s/ Ronald M. Cacciola
Name: Ronald M. Cacciola
Title: Managing Director
Accepted and Agreed for
the New Hampshire
Department of Insurance:
By: /s/ David Nichols
David Nichols
EXHIBIT 10.57
======================================================================
AMENDMENT NO. 2
TO
AMENDED AND RESTATED PURCHASE AGREEMENT,
dated as of April 26, 1995, between Home Holdings Inc. and ZCI
Investments Limited,
AMENDED AND RESTATED NOTE EXCHANGE AGREEMENT,
dated as of April 26, 1995, between Home Holdings Inc. and Trygg
Hansa AB,
AMENDED AND RESTATED SECURITIES PURCHASE AGREEMENT,
dated as of April 26, 1995, between ZCI Investments Limited and
Trygg-Hansa AB,
AND
AMENDED AND RESTATED STANDBY WORKING CAPITAL CREDIT AGREEMENT,
dated as of April 26, 1995, between Home Holdings Inc. and ZCI
Investments Limited
AND
THE NOTES ISSUED THEREUNDER
======================================================================
AMENDMENT NO. 2, dated as of December 13, 1996, among
Home Holdings Inc., a Delaware corporation ("HOME HOLDINGS"),
Zurich Home Investments Limited, a Bermuda corporation (formerly
known as ZCI Investments Limited and referred to herein as
"ZHI"), and Trygg-Hansa AB, a Swedish corporation ("TH").
WHEREAS, in connection with the recapitalization of
Home Holdings, Home Holdings and ZHI have entered into an Amended
and Restated Purchase Agreement, dated as of April 26, 1995 (as
amended, the "PURCHASE AGREEMENT"), Home Holdings and TH have
entered into an Amended and Restated Note Exchange Agreement,
dated as of April 26, 1995 (as amended, the "NOTE EXCHANGE
AGREEMENT"), ZHI and TH have entered into a Securities Purchase
Agreement, dated as of April 26, 1995 (as amended, the
"SECURITIES PURCHASE AGREEMENT"), and Home Holdings and ZHI have
entered into an Amended and Restated Standby Working Capital
Credit Agreement, dated as of April 26, 1995 (as amended, the
"STANDBY WORKING CAPITAL CREDIT AGREEMENT" and, together with the
Purchase Agreement, the Note Exchange Agreement and the
Securities Purchase Agreement, the "NOTE AGREEMENTS"), pursuant
to which Home Holdings issued, and ZHI or TH purchased or
received in an exchange, as the case may be, Senior Subordinated
Notes, Junior Subordinated Notes, Senior Working Capital Notes
and Senior Subordinated Working Capital Notes (each as defined in
the Note Agreements and collectively referred to herein as the
"NOTES");
WHEREAS, under the Standby Working Capital Credit
Agreement, the Lenders named therein agreed to fund all interest
payments due on the Public Indebtedness (as defined in the
Standby Working Capital Credit Agreement) within two years after
the Closing Date (as defined in the Standby Working Capital
Credit Agreement) through the issuance of Series B Senior Working
Capital Notes;
WHEREAS, the amount of interest due on the Public
Indebtedness during that period equals $46,550,000;
WHEREAS, due to a rounding error, the terms of the Note
Agreements and the Notes limit the maximum aggregate principal
amount of Series B Senior Working Capital Notes issuable by Home
Holdings to $46,000,000;
WHEREAS, the parties desire to correct this mistake and
consent to the issuance of additional Series B Senior Working
Capital Notes having an additional aggregate principal amount of
$550,000 (the "NEW DEBT ISSUANCE"), the proceeds of which to be
used to pay interest payable on the Public Indebtedness (as
defined in the Standby Working Capital Credit Agreement);
WHEREAS, the parties desire to amend the Note
Agreements and the Notes to enable ZHI, upon certain terms and
conditions, to purchase from Home Holdings, and to enable Home
Holdings, upon certain terms and conditions, to sell to ZHI, Home
Holdings's Series B Senior Working Capital Notes having an
additional aggregate principal amount of $550,000;
NOW, THEREFORE, for good and valuable consideration,
the receipt and sufficiency of which are hereby acknowledged, the
parties agree as follows:
1. Definitions. All capitalized terms used herein and
not otherwise defined herein shall have the respective meanings
assigned to them in the Note Agreements or the Notes, as the case
may be.
2. Amendment of Senior Subordinated Notes due December
31, 2004. The form of Senior Subordinated Note due December 31,
2004 (the "SENIOR SUBORDINATED NOTES") of Home Holdings attached
as Exhibit A to the Purchase Agreement, and the terms of each
outstanding Senior Subordinated Note, are hereby amended as
follows:
(a) The definition of "Senior Working Capital Notes"
in Section 1.1 is amended and restated in its entirety as
follows:
"Senior Working Capital Notes" shall mean,
collectively, the Company's 7% Series A Senior Working
Capital Notes, in the maximum original aggregate principal
amount of $16,000,000 (or such greater amount as shall be
agreed upon by the Company, TH and ZCIL), and the Company's
7% Series B Senior Working Capital Notes, in the maximum
original aggregate principal amount of $46,550,000.
3. Amendment of Junior Subordinated Notes due December
31, 2004. The form of Junior Subordinated Notes due December 31,
2004 (the "JUNIOR SUBORDINATED NOTES") of Home Holdings attached
as Exhibit F to the Recapitalization Agreement, and the terms of
each outstanding Junior Subordinated Note, are hereby amended as
follows:
(a) The definition of "Senior Working Capital Notes"
in Section 1.1 is amended and restated in its entirety as
follows:
"Senior Working Capital Notes" shall mean,
collectively, the Company's 7% Series A Senior Working
Capital Notes, in the maximum original aggregate principal
amount of $16,000,000 (or such greater amount as shall be
agreed upon by the Company, TH and Zurich Home Investments
Limited (formerly known as ZCI Investments Limited)), and
the Company's 7% Series B Senior Working Capital Notes, in
the maximum original aggregate principal amount of
$46,550,000.
4. Amendment of Standby Working Capital Credit
Agreement. The Standby Working Capital Credit Agreement is
hereby amended as follows:
(a) The second recital is hereby amended and replaced
in its entirety as follows:
WHEREAS, the Lenders are prepared, upon the terms
and conditions hereinafter provided, to purchase from
the Company its pay-in-kind 13% Senior Subordinated
Working Capital Notes due December 31, 2004 (the
"Senior Subordinated Working Capital Notes") in the
maximum aggregate principal amount of $15,000,000 and
its 7% Series A Senior Working Capital Notes (the
"Series A Senior Working Capital Notes") in the maximum
original aggregate principal amount of $16,000,000 (or
such greater amount as shall be agreed upon by the
Company, TH and ZCIL), if required by the Company for
general corporate purposes or in connection with the
Equity Repurchase Transaction (defined below) as
provided for under the Recapitalization Agreement
described below, and, following the Closing Date (as
defined in the Recapitalization Agreement), its 7%
Series B Senior Working Capital Notes (the "Series B
Senior Working Capital Notes") in the maximum original
aggregate principal amount of $46,550,000, for the
purposes specified herein;
(b) The proviso to the first sentence of Section
2.3(b) is hereby amended and replaced in its entirety to
read as follows:
; provided, however, that the Lenders shall not be
obligated to purchase, nor shall the Company be
obligated to issue, pursuant to this Section 2.3(b), an
aggregate principal amount of Series B Senior Working
Capital Notes in excess of $46,550,000.
5. Amendment of Series A Senior Working Capital Notes
and Series B Senior Working Capital Notes. The form of [Series
A/Series B] Senior Working Capital Notes (the "SENIOR WORKING
CAPITAL NOTES") of Home Holdings attached as Exhibit A to the
Standby Working Capital Agreement, and the terms of each
outstanding Senior Working Capital Note, are hereby amended as
follows:
(a) The definition of "Senior Working Capital Notes"
in Section 1.1 is hereby amended and restated in its
entirety as follows:
"Senior Working Capital Notes" shall mean,
collectively, the Notes and the 7% [Series A/Series B]
Senior Working Capital Notes, in the maximum original
aggregate principal amount of [$16,000,000 (or such
greater amount as shall be agreed upon by the Company,
Trygg-Hansa AB and Zurich Home Investments Limited
(formerly known as ZCI Investments Limited))
/$46,550,000].
6. Amendment of Senior Subordinated Working Capital
Notes due December 31, 2004. The form of Senior Subordinated
Working Capital Notes (the "SENIOR SUBORDINATED WORKING CAPITAL
NOTES") of Home Holdings attached as Exhibit B to the Standby
Working Capital Agreement, and the terms of each outstanding
Senior Subordinated Working Capital Note, are hereby amended as
follows:
(a) The definition of "Senior Working Capital Notes"
in Section 1.1 is hereby amended and restated in its
entirety as follows:
"Senior Working Capital Notes" shall mean,
collectively, the Company's 7% Series A Senior Working
Capital Notes, in the maximum original aggregate
principal amount of $16,000,000 (or such greater amount
as shall be agreed upon by the Company, Trygg-Hansa AB
and Zurich Home Investments Limited (formerly known as
ZCI Investments Limited)), and the Company's 7% Series
B Senior Working Capital Notes, in the maximum original
aggregate principal amount of $46,550,000.
7. Further Assurances. Each of the parties covenants
and agrees to promptly execute, acknowledge and deliver any other
assurances or documents reasonably requested by Home Holdings,
and to take any and all other actions necessary or desirable, to
effectuate the New Debt Issuance.
8. Status of the Note Agreements and Notes. Except as
expressly set forth herein, all other terms of the Note
Agreements and the Notes shall remain unchanged. Nothing
contained or implied in this Amendment shall constitute an
amendment or waiver of any other term, provision or condition of
the Note Agreements and the Notes.
9. Counterparts. This Amendment No. 2 may be executed
in two or more counterparts, each of which shall be deemed to be
an original, but all of which shall constitute one and the same
instrument.
10. Effective Date. This Amendment, upon the
execution and delivery by each party hereto of a counterpart
hereof, shall be deemed effective as of the date first above
written.
11. Governing Law. This Amendment shall be construed
and enforced in accordance with, and the rights of the parties
shall be governed by, the laws of the State of New York, without
reference to its conflicts of laws principles.
IN WITNESS WHEREOF, the parties have executed this
Amendment No. 2 as of the date first above written.
HOME HOLDINGS INC.
By: /s/ Richard H. Hershman
Name: Richard H. Hershman
Title: Treasurer
ZURICH HOME INVESTMENTS
LIMITED (formerly known as ZCI
Investments Limited)
By: /s/ Michael D. Palm
Name: Michael D. Palm
Title: President
TRYGG-HANSA AB
By: /s/ Zaid Pedersen
Name: Zaid Pedersen
Title: Chief Financial
Officer
EXHIBIT 22.1
HOME HOLDINGS INC.
SUBSIDIARIES
Percentage of
Voting Securities
Jurisdiction Owned by
in which immediate
Name organized parent
---- ------------ ----------------
Home Holdings Inc. (registrant) Delaware
Home Group Funding Corporation Delaware 100%
The Home Insurance Company New Hampshire 100
Briarpark Specialty Risks, Inc. Texas 100
Cityvest International Limited Bermuda 100
Cityvest Reinsurance Limited Bermuda 100
Gruntal Financial Corp Delaware 100
Gruntal & Co., Incorporated Delaware 100
The GMS Group, Inc. New York 100
GF Mortgage Corp Delaware 100
Home International Services, Inc. Delaware 100
Glendale Speciality Risks
Insurance Services, Inc. California 100
Settlement Designs, Inc. New Jersey 100
Sterling Forest Corporation Delaware 100
US International Re, Inc. Delaware 100
US International Reinsurance
Company New Hampshire 100
City International Insurance
Company Limited United Kingdom 100
Certain subsidiaries have been omitted in accordance with the
provisions of Regulation S-K item 601.
