================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
---------------
FORM 10-Q
(X) Quarterly Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the Quarterly Period Ended September 30, 1996
OR
( )TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period from to
Commission File Number 1-11856
TIG HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 94-3172455
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
65 EAST 55TH STREET, 28TH FLOOR
NEW YORK, NEW YORK 10022
(Address of principal executive offices)
(212) 446-2700
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) 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
----- -----
Number of shares of Common Stock, $0.01 par value per share,
outstanding as of close of business on September 30, 1996: 55,479,375 excluding
9,083,300 treasury shares.
<PAGE>
TIG HOLDINGS, INC.
INDEX TO FORM 10-Q
PART I. FINANCIAL INFORMATION PAGE
Item 1. Financial Statements
Condensed consolidated balance sheets as of September 30, 1996
(unaudited) and December 31, 1995 ............................... 1
Condensed consolidated statements of income for the three
and nine months ended September 30, 1996 (unaudited) and
September 30, 1995 (unaudited) .................................. 2
Condensed consolidated statement of changes in shareholders'
equity for the nine months ended September 30, 1996 (unaudited) . 3
Condensed consolidated statements of cash flows for the
nine months ended September 30, 1996 (unaudited) and
September 30, 1995 (unaudited) .................................. 4
Notes to condensed consolidated financial statements (unaudited) 5
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations ....................................... 7
2.1 Consolidated Results ............................................ 8
2.2 Reinsurance ..................................................... 10
2.3 Retail .......................................................... 11
2.4 Commercial Specialty ............................................ 13
2.5 Other Lines ..................................................... 15
2.6 Investments ..................................................... 16
2.7 Reserves ........................................................ 19
2.8 Liquidity and Capital Resources ................................. 20
2.9 Glossary ........................................................ 22
PART II. OTHER INFORMATION
Item 1. Legal Proceedings ............................................... 24
Item 6. Exhibits and Reports on Form 8-K ................................ 25
Exhibit 11 - Computation of Earnings Per Share (unaudited) ...... 26
SIGNATURES ................................................................ 27
<PAGE>
<TABLE>
<CAPTION>
TIG HOLDINGS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
September 30, December 31,
(In millions, except share data) 1996 1995
===============================================================================================================
ASSETs (Unaudited)
Investments:
<S> <C> <C>
Fixed maturities at market (cost: $4,154 in 1996 and $4,233 in 1995) $4,171 $4,402
Short-term and other investments, at cost which approximates market 103 148
- - ---------------------------------------------------------------------------------------------------------------
Total investments 4,274 4,550
Cash 12 4
Accrued investment income 62 56
Premium receivable (net of allowance of: $5 in 1996 and $3 in 1995) 427 409
Reinsurance recoverable ( net allowance of $9 in 1996 and 1995) 1,276 1,221
Deferred policy acquisition costs 152 144
Prepaid reinsurance premium 99 111
Income taxes 136 60
Other assets 108 128
- - ---------------------------------------------------------------------------------------------------------------
Total assets $6,546 $6,683
===============================================================================================================
LIABILITIES
Reserves for:
Losses $3,257 $3,288
Loss adjustment expenses 567 598
Unearned premium 722 712
- - ---------------------------------------------------------------------------------------------------------------
Total reserves 4,546 4,598
Funds withheld under reinsurance agreements 226 151
Notes payable 123 120
Other liabilities 461 413
- - ---------------------------------------------------------------------------------------------------------------
Total liabilities 5,356 5,282
- - ---------------------------------------------------------------------------------------------------------------
MANDATORY REDEEMABLE PREFERRED STOCK 25 25
- - ---------------------------------------------------------------------------------------------------------------
SHAREHOLDERS' EQUITY
Common stock - par value $0.01 per share
(authorized: 180,000,000 shares; issued and outstanding:
64,562,675 shares in 1996 and 64,125,050 shares in 1995) 1,196 1,186
Class A convertible common stock - par value $0.01 per share
(authorized: 1,000,000 shares; issued and outstanding;
-0- shares in 1996 and 35,793 shares in 1995) - 1
Retained earnings 198 168
Net unrealized gain on marketable securities, net of taxes 11 110
Net unrealized loss on foreign currency, net of taxes (1) (1)
- - ---------------------------------------------------------------------------------------------------------------
1,404 1,464
Treasury stock (9,083,300 shares in 1996 and 4,041,100 shares in 1995) (239) (88)
- - ---------------------------------------------------------------------------------------------------------------
Total shareholders' equity 1,165 1,376
- - ---------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $6,546 $6,683
===============================================================================================================
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
- 1 -
<PAGE>
<TABLE>
<CAPTION>
TIG HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
Three Months Nine Months
ended September 30, ended September 30,
----------------------- ----------------------
(In millions, except share data) 1996 1995 1996 1995
==========================================================================================================
REVENUES
<S> <C> <C> <C> <C>
Net premium earned $387 $397 $1,162 $1,224
Net investment income 74 69 216 201
Net realized investment loss (1) - (6) (12)
- - ----------------------------------------------------------------------------------------------------------
Total revenues 460 466 1,372 1,413
- - ----------------------------------------------------------------------------------------------------------
LOSSES AND EXPENSES
Net losses and loss adjustment expenses incurred 283 288 870 894
Commissions and premium related expenses 88 90 265 265
Other operating expenses 32 37 107 130
Dividends to policyholders 1 3 4 9
Interest expense 3 2 7 4
Restructuring charges - - 100 -
- - ----------------------------------------------------------------------------------------------------------
Total losses and expenses 407 420 1,353 1,302
- - ----------------------------------------------------------------------------------------------------------
Income before income tax benefit (expense) 53 46 19 111
Income tax benefit (expense) (16) (12) 21 (26)
- - ----------------------------------------------------------------------------------------------------------
NET INCOME $37 $34 $40 $85
==========================================================================================================
NET INCOME PER COMMON SHARE $0.64 $0.54 $0.65 $1.35
==========================================================================================================
DIVIDEND PER COMMON SHARE $0.05 $0.05 $0.15 $0.15
==========================================================================================================
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
- 2 -
<PAGE>
<TABLE>
<CAPTION>
TIG HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENT OF
CHANGES IN SHAREHOLDERS' EQUITY
(unaudited)
Foreign Total
Class A Unrealized Currency Share-
Common Common Retained Investment Translation Treasury holders'
(In millions) Stock Stock Earnings Gain Adjustment Stock Equity
===============================================================================================================
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1995 $1,186 $1 $168 $110 $(1) $(88) $1,376
Net income 40 40
Common stock dividends (9) (9)
Preferred stock dividends (1) (1)
Common stock issued 7 7
Conversion of Class A common 1 (1) -
Amortization of unearned
compensation 2 2
Treasury stock (151) (151)
Change in net unrealized
gain on fixed maturity
investments (99) (99)
- - ---------------------------------------------------------------------------------------------------------------
Balance at September 30, 1996 $1,196 - $198 $11 $(1) $(239) $1,165
===============================================================================================================
See Notes to Condensed Consolidated Financial Statements.
- 3 -
<PAGE>
TIG HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
Nine Months Ended
September 30,
-------------------------
(In millions) 1996 1995
- - -----------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
<S> <C> <C>
Net income $40 $85
Adjustments to reconcile net income to cash provided by
operating activities:
Changes in:
Loss reserves (31) 161
Loss adjustment expenses reserves (31) (12)
Unearned premium reserves 10 73
Reinsurance recoverable (55) (126)
Prepaid reinsurance premium 12 (61)
Premium receivable (18) (67)
Deferred policy acquisition costs (8) (12)
Funds withheld under reinsurance agreements 75 40
Other assets and other liabilities 68 (20)
Accrued investment income (6) 1
Income taxes (23) 25
Investment loss 6 12
Other - (2)
- - -----------------------------------------------------------------------------------------------------
Net cash provided by operating activities 39 97
- - -----------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Purchases of fixed maturity investments (1,448) (1,183)
Sales of fixed maturity investments 1,318 881
Maturities and calls of fixed maturity investments 207 193
Net decrease in short-term and other investments 47 -
Other (4) (32)
- - -----------------------------------------------------------------------------------------------------
Net cash provided by (used in) investing activities 120 (141)
- - -----------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Common stock issued 7 1
Acquisition of treasury stock (151) (50)
Common stock dividends (9) (9)
Preferred stock dividends (1) (2)
Proceeds from notes payable 3 98
- - -----------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities (151) 38
- - -----------------------------------------------------------------------------------------------------
Increase (decrease) in cash 8 (6)
Cash at beginning of period 4 9
- - -----------------------------------------------------------------------------------------------------
Cash at end of period $12 $3
=====================================================================================================
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
- 4 -
<PAGE>
TIG HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the Nine Months Ended September 30, 1996
(unaudited)
================================================================================
NOTE A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
- - --------------------------------------------------------------------------------
BASIS OF PRESENTATION. TIG Holdings, Inc. ("TIG Holdings") is primarily engaged
in the business of property/casualty insurance and reinsurance through its 16
subsidiaries (collectively "TIG" or "the Company"). The accompanying unaudited
condensed consolidated financial statements include the accounts of TIG Holdings
and its subsidiaries and have been prepared in accordance with generally
accepted accounting principles ("GAAP") for interim financial information and
with the instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes required
by GAAP for complete financial statements. Financial statements prepared in
accordance with GAAP require the use of management estimates. In the opinion of
management, all adjustments, including normal recurring accruals, considered
necessary for a fair presentation have been included. Certain reclassifications
of prior year amounts have been made to conform with the 1996 presentation.
Operating results for the nine months ended September 30, 1996 are not
necessarily indicative of the results to be expected for the full year. For
further information, refer to the consolidated financial statements and
footnotes thereto included in TIG's annual report on Form 10-K for the year
ended December 31, 1995.
EARNINGS PER SHARE ("EPS"). EPS is calculated based upon the weighted average
common shares outstanding ("average shares") during the period. In order to
calculate average shares, unallocated ESOP shares and treasury shares are
deducted from the outstanding common shares. Class A common stock and common
stock options are considered common stock equivalents and are included in
average share calculations if dilutive. To obtain net income attributable to
common shareholders for EPS computations, the preferred stock dividend is
deducted from net income. Refer also to Exhibit 11.
INCOME TAXES. Tax-exempt investment income is reported in the accounting period
in which such tax-exempt income is recorded in the financial statements.
Deferred income taxes at September 30, 1996 and December 31, 1995 included a
deferred liability of $6 million and $59 million, respectively, related to net
unrealized investment gains.
LOSS AND LOSS ADJUSTMENT EXPENSE RESERVES. The liability for unpaid losses and
loss adjustment expense ("LAE") is based on an evaluation of reported losses and
on estimates of incurred but unreported losses. The reserve liabilities are
determined using adjusters' individual case estimates and statistical
projections. The liability is reported net of estimated salvage and subrogation
recoverable. Adjustments to the liability resulting from subsequent developments
or revisions to the estimate are reflected in results of operations in the
period in which such adjustments become known. While there can be no assurance
that the reserves at any given date are adequate to meet TIG's obligations, the
amounts reported on the balance sheet are management's best estimate of that
amount.
TREASURY STOCK. The Board of Directors has authorized the repurchase of up to
11.25 million shares of TIG Holdings common stock. As of September 30, 1996, the
Company has repurchased 9.1 million shares for an aggregated cost of $239
million. The Company uses the cost method to record the repurchase of treasury
shares.
- 5 -
<PAGE>
TIG HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the Nine Months Ended September 30, 1996
(unaudited)
================================================================================
NOTE B. RESTRUCTURING CHARGES
- - --------------------------------------------------------------------------------
In February 1996, TIG announced the reorganization of its commercial operations
and plans to exit certain lines of business that failed to meet profitability
standards. As a result of this reorganization, TIG took the following actions:
1) combined its Specialty Commercial and Workers' Compensation divisions to form
a new division called Commercial Specialty, 2) identified field offices for
consolidation and closure, 3) identified lines of business for non-renewal or
cancellation for which 1995 net premium written was approximately $190 million
or 12% of consolidated 1995 net premium written, 4) formed a run-off division
(called "Other Lines") to administer contractually required policy renewals for
run-off lines of business, and 5) notified approximately 600 employees that
their positions would be eliminated. At September 30, 1996, the
consolidation/closure of field offices was approximately 60% completed; net
written premium for Other Lines had declined by 68% for the three months ended
September 30, 1996 as compared to the three months ended September 30, 1995; and
approximately 600 employees' responsibilities had been outsourced to third party
service providers or their employment had been otherwise terminated. At
September 30, 1996, TIG had approximately 1,350 employees as compared to
approximately 2,000 employees at December 31, 1995. Management estimates that
most Other Lines policies will be by late 1997.
TIG recorded a $100 million accrual in first quarter 1996 for estimated
restructuring charges comprised of severance of $17 million; contractual policy
obligations of $37 million; office lease termination of $18 million; furniture,
equipment and capitalized software write-downs of $12 million; and a reserve for
litigation and credit issues related to terminated producers of $16 million. The
remaining reserve at September 30, 1996 is $60 million. Charges against the
restructure accrual of $40.3 million have been recorded during the first nine
months of 1996 and are comprised of $8.3 million in severance, $15.9 million in
contractual policy obligations, $12.6 million in lease termination costs and
$3.5 million in asset write-downs.
The components of the underwriting loss from the Other Lines division, which
includes all run-off operations, are as follows:
<TABLE>
<CAPTION>
Three Months Nine Months
ended September 30, ended September 30,
----------------------- ----------------------
(In millions) 1996 1995 1996 1995
=======================================================================================================
<S> <C> <C> <C> <C>
Net premium written $26 $81 $126 $237
- - -------------------------------------------------------------------------------------------------------
Premium earned $44 $87 $178 $296
Losses and LAE incurred (See Note C) 36 65 167 221
Underwriting expenses 8 29 44 109
- - -------------------------------------------------------------------------------------------------------
Underwriting loss $ - $(7) $(33) $(34)
=======================================================================================================
</TABLE>
================================================================================
NOTE C. LOSS RESERVES
- - --------------------------------------------------------------------------------
In connection with the February 1996 restructuring, TIG completed a
re-evaluation of loss and LAE reserves related to run-off lines using additional
loss development data received during first quarter 1996. This data confirmed
adverse loss development trends observed in the second half of 1995 and was a
consideration in the decision to exit certain lines of business as discussed in
Note B. As a result of this re-evaluation and management's belief that the
restructuring decision will make the claims settlement process less consistent
and more volatile, TIG increased loss and LAE reserves by $31 million in the
first quarter of 1996 for run-off lines, principally for the Transportation and
Large Programs units.
- 6 -
<PAGE>
TIG HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the Nine Months Ended September 30, 1996
(unaudited)
================================================================================
NOTE D. INCOME TAXES
- - --------------------------------------------------------------------------------
In March 1996, TIG entered into settlement agreements with the IRS on several
outstanding audit assessments, which resulted in a redetermination of certain
tax liabilities related to prior tax years. As a result of the redetermination,
a $20 million deferred tax benefit was recognized in first quarter 1996.
Accordingly, the effective tax rate for the nine months ended September 30, 1996
will not necessarily approximate the estimated effective tax rate for the full
year.
================================================================================
NOTE E. CONTINGENCIES
- - --------------------------------------------------------------------------------
TIG's insurance subsidiaries are routinely engaged in litigation in the normal
course of their business. As a liability insurer, the Company defends
third-party claims brought against its insureds. As an insurer, the Company
defends against coverage claims.
On January 11, 1994, a Los Angeles County Superior Court jury returned a
verdict of $28 million for punitive damages against TIG Insurance Company
("TIC") in Talbot Partners v. Cates Construction, Inc. and TIC (the "Talbot
Case"). The award arose out of TIC's handling of a surety bond claim on a
construction project. Management is vigorously pursuing its rights to appeal the
judgment. TIC is presently litigating with the carriers of its error and
omissions insurance policies as to coverage for punitive damages under the
agreed upon language of the policies. On June 27, 1996, a Los Angeles County
Superior Court entered a verdict against TIC in Reliance Insurance Company of
Illinois ("Reliance") v. TIC. The court ruled in this declaratory relief action
that Reliance, which is one of the carriers which insures TIC, was not obligated
to TIC under its errors and omissions insurance policies for punitive damages
under California law. TIC filed a notice of appeal with respect to this
judgment. TIC and the carrier have entered in a settlement agreement, effective
on the occurance of general conditions. Management believes, however, that the
ultimate liability, if any, arising from the Talbot Case will not materially
impact consolidated operating results.
================================================================================
ITEM 2. MANGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
- - --------------------------------------------------------------------------------
TIG Holdings, Inc. ("TIG Holdings") and its subsidiaries (collectively "TIG" or
the "Company") offer property/casualty insurance and reinsurance throughout the
United States through three major operating divisions: Reinsurance, Retail, and
Commercial Specialty. Products that have been de-emphasized or placed into
run-off are included in the Other Lines division. The following analysis
provides an assessment of TIG's financial results for the three and nine months
ended September 30, 1996 as compared to the three and nine months ended
September 30, 1995 and material changes in financial position from December 31,
1995 to September 30, 1996. This discussion updates the "Management's Discussion
and Analysis" in the 1995 Annual Report to Shareholders and should be read in
conjunction therewith. TIG Holdings would like to caution readers regarding
certain forward-looking statements in the following discussion and elsewhere in
this Form 10-Q. While TIG Holdings believes in the veracity of all statements
made herein, forward-looking statements are necessarily based upon a number of
estimates and assumptions that, while considered reasonable by TIG Holdings, are
inherently subject to significant business, economic and competitive
uncertainties and contingencies, including without limitation changes in
interest rates, increased competition (particularly price competition which
would reduce margins), increases in catastrophes, regulatory changes, adverse
loss development for prior years, the adequacy of TIG's loss reserves as well as
general market conditions. Many of these uncertainties and contingencies can
affect TIG Holdings' actual results and could cause its actual results to differ
materially from those expressed in any forward-looking statements made by, or on
behalf of, TIG Holdings. TIG disclaims any obligation to update forward looking
statements.
- 7 -
<PAGE>
TIG HOLDINGS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
================================================================================
2.1 CONSOLIDATED RESULTS
- - --------------------------------------------------------------------------------
Results of operations for the three and nine months ended September 30, 1996 and
1995 are presented below. Certain reclassifications of prior period amounts have
been made to conform with the current period presentation. Key industry terms
are defined at Item 2.9 - Glossary and are italicized the first time used in the
following discussion.
<TABLE>
<CAPTION>
Three Months Nine Months
ended September 30, ended September 30,
------------------- -------------------
(In millions) 1996 1995 1996 1995
==========================================================================================================
<S> <C> <C> <C> <C>
Gross premium written $496 $535 $1,472 $1,578
- - ----------------------------------------------------------------------------------------------------------
Net premium written $396 $416 $1,183 $1,236
- - ----------------------------------------------------------------------------------------------------------
Net premium earned $387 $397 $1,162 $1,223
Less: Net loss and LAE incurred 282 288 870 893
Commission expense 77 76 226 218
Premium related expense 11 14 39 47
Other underwriting expense 22 28 79 104
Policyholder dividends incurred 2 3 4 9
- - ----------------------------------------------------------------------------------------------------------
Underwriting loss (7) (12) (56) (48)
Net investment income 74 69 216 201
Net realized investment loss (1) - (6) (12)
Corporate expenses (10) (9) (28) (26)
Interest expense (3) (2) (7) (4)
Restructuring charges - - (100) -
- - ----------------------------------------------------------------------------------------------------------
Income before tax benefit (expense) 53 46 19 111
Income tax benefit (expense) (16) (12) 21 (26)
- - ----------------------------------------------------------------------------------------------------------
Net income $37 $34 $40 $85
==========================================================================================================
Income excluding investment losses and restructuring charges $38 $34 $109 $92
==========================================================================================================
</TABLE>
OVERVIEW. Net income for third quarter 1996 of $37 million increased by 8.8%
over 1995 as improved underwriting results and net investment income more than
offset increases in non-underwriting expenses and the effective tax rate. The
decline in underwriting loss for third quarter 1996 as compared to 1995 is
principally attributable to a $7 million decline in underwriting loss for Other
Lines (See Item 2.5). The increase in net investment income and increase in
effective tax rate are due to a change in portfolio mix away from tax-exempt
municipal securities toward higher yield corporate securities (See Item 2.6).
Income excluding restructuring charges and investment losses increased by 18.5%
to $109 million for the first nine months of 1996 due to improved underwriting
results in Other Lines (after exclusion of reserve strengthening) and rising
investment yields. In first quarter 1996, reserve strengthening of $31 million
recorded for certain Other Lines programs was offset by a $20 million deferred
tax benefit. Net income for the first nine months of 1996 was $40 million,
reflecting pre-tax restructuring charges of $100 million recorded in first
quarter 1996 in connection with the reorganization of commercial operations and
the decision to exit certain underperforming programs. For additional
information regarding first quarter 1996 restructuring charges, reserve
strengthening and income tax benefit, see Notes B, C and D to the Condensed
Consolidated Financial Statements.
- 8 -
<PAGE>
TIG HOLDINGS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following table shows net premium written by division and the percentage of
consolidated net premium written by division:
<TABLE>
<CAPTION>
Three Months Nine Months
ended September 30, ended September 30,
--------------------------- ----------------------------
1996 1995 1996 1995
----------------------------------------------------------------------------
NPW % NPW % NPW % NPW %
=======================================================================================================
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Reinsurance $139 35.1 $128 30.8 $421 35.6 $388 31.4
Retail 94 23.7 91 21.9 278 23.5 270 21.9
Commercial Specialty 137 34.6 116 27.9 358 30.3 341 27.6
- - -------------------------------------------------------------------------------------------------------
Total Ongoing Lines 370 93.4 335 80.6 1,057 89.4 999 80.9
Other Lines 26 6.6 81 19.4 126 10.6 237 19.1
- - -------------------------------------------------------------------------------------------------------
Total $396 100.0 $416 100.0 $1,183 100.0 $1,236 100.0
=======================================================================================================
</TABLE>
Consolidated net premium written declined by $20 million or 4.8% in third
quarter 1996 compared to 1995 primarily due to a $55 million decline in Other
Lines premium. Historically unprofitable Other Lines business is being
non-renewed at a slightly faster rate than planned by management. Ongoing lines
net premium written for the quarter increased by $35 million, or 10.4%, compared
to 1995. Reinsurance third quarter net premium written increased by 8.6%
compared to 1995 due to growth in auto liability programs, while Commercial
Specialty net premium written increased by 18.1% due to expansion of commercial
auto and excess programs. Retail net premium written increased by $3 million or
3.3% in third quarter 1996 compared to 1995.
The following table represents the components of TIG's consolidated statutory
combined ratio:
<TABLE>
<CAPTION>
Three Months Nine Months
ended September 30, ended September 30,
---------------------- ----------------------
STATUTORY RATIOS: 1996 1995 1996 1995
=================================================================================================
<S> <C> <C> <C> <C>
Loss and LAE 73.0 72.4 74.8 73.5
- - -------------------------------------------------------------------------------------------------
Commission expense 19.9 19.5 19.8 18.5
Premium related expense 3.0 3.4 3.2 3.9
Other underwriting expense 6.3 7.2 6.8 8.5
- - -------------------------------------------------------------------------------------------------
Total underwriting expense 29.2 30.1 29.8 30.9
Policyholder dividends 0.8 1.3 1.0 1.6
- - -------------------------------------------------------------------------------------------------
Combined ratio 103.0 103.8 105.6 106.0
=================================================================================================
</TABLE>
UNDERWRITING RESULTS. The consolidated combined ratio showed modest improvement
for both third quarter and year-to-date 1996 as compared to 1995. The
underwriting expense ratio has decreased due to the run-off of high expense
Other Lines business while the decrease in the policyholder dividend ratio is
attributable to an increase in non-participating workers' compensation policies.
The loss and LAE ratio increased for third quarter 1996 due to catastrophe and
short-tail loss activity while the year-to-date loss and LAE ratio includes 2.7
percentage points for reserve strengthening for Other Lines recorded in first
quarter 1996. The commission expense ratio has increased in 1996 due to an
increase in program business which generally carries a higher commission rate
but requires less operating expense.
- 9 -
<PAGE>
TIG HOLDINGS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
================================================================================
2.2 REINSURANCE
- - --------------------------------------------------------------------------------
TIG's reinsurance operations are conducted through TIG Reinsurance Company ("TIG
Re") which is based in Stamford, Connecticut. TIG Re's strategy generally is to
focus on excess of loss casualty coverages written on a treaty basis, generally
taking large treaty participations. By assuming a significant participation in
each treaty, TIG Re exercises substantial control over the terms and structure
of each treaty. TIG Re typically seeks to write treaties attaching within
working layers, where losses are more predictable and a higher premium is
available. Underwriting results for TIG Re are presented below:
<TABLE>
<CAPTION>
Three Months ended Nine Months ended
September 30, September 30,
---------------------- ----------------------
(In millions) 1996 1995 1996 1995
==========================================================================================
<S> <C> <C> <C> <C>
Gross premium written $151 $147 $446 $448
- - ------------------------------------------------------------------------------------------
Net premium written $139 $128 $421 $388
- - ------------------------------------------------------------------------------------------
Net premium earned $136 $118 $401 $362
Less: Net loss and LAE incurred 98 87 289 270
Commission expense 34 29 100 86
Other underwriting expense 6 6 18 17
- - ------------------------------------------------------------------------------------------
Underwriting loss $(2) $(4) $(6) $(11)
==========================================================================================
</TABLE>
PREMIUM. TIG Re focuses on long-term relationships with clients who meet
its underwriting standards and share its partnership perspective. While
overall market conditions continue to be very weak, TIG Re continues to see
profitable opportunities and has maintained a growth rate comparable to that of
other top tier reinsurance companies that TIG Re considers to be its peers.
Gross premium written decreased by 0.5% and net premium written increased by
8.5% for the first nine months of 1996 compared to the prior year. The decline
in gross premium written is due to a change in structure of one program from
assuming business on a gross basis to a net basis. This program restructuring
has caused the ratio of net written to gross written premium to increase 5
percentage points to 92.1% in third quarter 1996 as compared to the third
quarter of 1995. Approximately 84% of business eligible for renewal in the first
nine months of 1996 and 1995 was retained. Gross premium produced through TIG
Re's London office was $21.5 million for the first nine months of 1996, as
compared to $16.4 million for the same period in 1995. The following table
summarizes TIG Re's net premium written by statutory line of business:
<TABLE>
<CAPTION>
Three Months ended September 30 Nine Months ended September 30,
------------------------------------ --------------------------------------
1996 1995 1996 1995
-----------------------------------------------------------------------------
(In millions) NPW % NPW % NPW % NPW %
=======================================================================================================
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Property $25 18.0 $26 20.3 $86 20.4 $72 18.6
Medical Malpractice 17 12.2 14 10.9 66 15.7 50 12.9
Automobile Liability 27 19.4 12 9.4 66 15.7 32 8.2
Errors & Omissions 22 15.8 33 25.8 73 17.3 93 24.0
General Liability 24 17.3 23 18.0 66 15.7 70 18.0
Other 24 17.3 20 15.6 64 15.2 71 18.3
- - -------------------------------------------------------------------------------------------------------
Total $139 100.0 $128 100.0 $421 100.0 $388 100.0
=======================================================================================================
</TABLE>
- 10 -
<PAGE>
TIG HOLDINGS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
================================================================================
UNDERWRITING RESULTS. The improvement in TIG Re's underwriting results in 1996
over 1995 is consistent with management's expectations and reflects management's
selection of clients and programs meeting strict criteria for adequate returns.
The statutory combined ratio for the nine month period of 1996 improved by
approximately one and one half points from the same period of 1995, primarily as
a result of lower loss and LAE ratio offset by a slight increase in the
underwriting expense ratio. There has been some upward change in commission and
brokerage rates on business renewed in 1996, but most casualty accounts have
been renewed at expiring terms. The following table presents the components of
TIG Re's statutory combined ratio:
<TABLE>
<CAPTION>
Three Months ended Nine Months ended
September 30, September 30,
---------------------- ----------------------
STATUTORY RATIOS: 1996 1995 1996 1995
- - ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Loss and LAE 72.5 73.7 72.0 74.6
- - ------------------------------------------------------------------------------------------------------
Commission expense 25.0 25.6 25.3 24.4
Premium related expense 0.4 0.2 0.3 0.1
Other underwriting expense 4.1 4.2 4.2 4.2
- - ------------------------------------------------------------------------------------------------------
Total underwriting expense 29.5 30.0 29.8 28.7
- - ------------------------------------------------------------------------------------------------------
Combined ratio 102.0 103.7 101.8 103.3
======================================================================================================
</TABLE>
================================================================================
2.3 RETAIL
- - --------------------------------------------------------------------------------
The Retail division, based in Battle Creek, Michigan, principally provides
single-risk, independent agency produced property and liability coverage to
targeted individuals and small business. Coverages include automobile policies
which cover liabilities to third parties for bodily injury and property damage
and which cover physical damage to the insured's own vehicle resulting from
collision or various other causes of loss. Homeowners/commercial property
policies protect against loss of dwellings/buildings and contents arising from a
variety of perils, as well as liability arising from ownership or occupancy. The
following table presents underwriting results for Retail:
<TABLE>
<CAPTION>
Three Months ended Nine Months ended
September 30, September 30,
---------------------- ----------------------
(In millions) 1996 1995 1996 1995
===========================================================================================================
<S> <C> <C> <C> <C>
Gross premium written $105 $103 $313 $304
- - -----------------------------------------------------------------------------------------------------------
Net premium written $94 $91 $278 $270
- - -----------------------------------------------------------------------------------------------------------
Net premium earned $91 $86 $271 $248
Less: Net loss and LAE incurred 67 61 193 177
Commission expense 15 15 45 42
Premium related expense 3 6 12 13
Other underwriting expense 7 6 23 20
- - -----------------------------------------------------------------------------------------------------------
Underwriting loss $ (1) $(2) $(2) $(4)
===========================================================================================================
</TABLE>
- 11 -
<PAGE>
TIG HOLDINGS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
================================================================================
PREMIUM. Gross and net premium written increased by approximately 3.0% for the
first nine months of 1996 compared to 1995. Automobile and non-standard
automobile premium increased by 21.1% as a result of expansion in target markets
(Michigan, California, Connecticut and Hawaii for automobile; California and
Texas for non-standard automobile). This was offset by a decrease in premiums
for property lines, which is in accordance with management plans to decrease
exposure in catastrophe prone areas (primarily California, New York and
Florida). The following table summarizes Retail net premium written by major
product:
<TABLE>
<CAPTION>
Three Months ended September 30, Nine Months ended September 30,
------------------------------------ --------------------------------------
1996 1995 1996 1995
-----------------------------------------------------------------------------
(In millions) NPW % NPW % NPW % NPW %
=======================================================================================================
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Automobile $49 52.1 $44 48.4 $142 51.1 $131 48.5
Property 19 20.2 28 30.8 56 20.1 82 30.4
Non-standard automobile 10 10.6 3 3.3 30 10.8 11 4.1
Upscale property 7 7.5 7 7.7 19 6.8 19 7.0
All other 9 9.6 9 9.8 31 11.2 27 10.0
- - -------------------------------------------------------------------------------------------------------
Total $94 100.0 $91 100.0 $278 100.0 $270 100.0
=======================================================================================================
</TABLE>
UNDERWRITING RESULTS. Retail's underwriting loss has improved slightly in
1996 while the statutory combined ratio has shown mild deterioration due to the
mechanics of the statutory expense ratio calculation when the difference between
written and earned premium changes as it did from 1995 to 1996. The loss and LAE
ratio excluding catastrophes increased in 1996 as compared to 1995 due to
increased frequency and severity of short-tail losses for standard and
non-standard automobile. Catastrophe activity for the quarter arose principally
from August storms in Arizona. Other underwriting expenses increased for third
quarter and year-to-date 1996 as compared to 1995 due to start up costs incurred
for the Small Business and Alternative Distribution programs. The following
table presents the components of Retail's statutory combined ratios:
<TABLE>
<CAPTION>
Three Months ended Nine Months ended
September 30, September 30,
---------------------- ----------------------
STATUTORY RATIOS 1996 1995 1996 1995
=========================================================================================================
<S> <C> <C> <C> <C>
Loss and LAE 73.1 70.6 71.1 71.2
- - ---------------------------------------------------------------------------------------------------------
Commission expense 16.1 16.9 16.6 16.8
Premium related expense 4.1 5.5 4.5 4.8
Other underwriting expense 8.5 7.3 8.7 7.7
- - ---------------------------------------------------------------------------------------------------------
Total underwriting expense 28.7 29.7 29.8 29.3
- - ---------------------------------------------------------------------------------------------------------
Combined ratio 101.8 100.3 100.9 100.5
- - ---------------------------------------------------------------------------------------------------------
Loss and LAE ratio excluding catastrophes 70.4 67.1 68.3 66.6
=========================================================================================================
</TABLE>
- 12 -
<PAGE>
TIG HOLDINGS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
================================================================================
2.4 COMMERCIAL SPECIALTY
- - --------------------------------------------------------------------------------
Commercial Specialty is comprised of the following business units: Workers'
Compensation, Sports & Leisure, Commercial Auto & Related, and Other Commercial.
Workers' Compensation provides benefits to employees as mandated by state laws
for employment-related accidents, injuries or illnesses. Sports & Leisure offers
insurance products for organizers and participants in sporting events,
entertainment and leisure activities. Coverages include liability, property,
automobile, workers' compensation and participant accident and health insurance.
Commercial Auto covers liability to third parties for bodily injury and property
damage, and covers physical damage to the insured's own vehicle. Commercial Auto
policies are generally issued to business and governmental entities,
organizations and associations. Other Commercial includes: Excess Casualty,
Construction, Marine and Excess & Surplus. Underwriting results for Commercial
Specialty are presented below:
<TABLE>
<CAPTION>
Three Months ended Nine Months ended
September 30, September 30,
---------------------- ----------------------
(In millions) 1996 1995 1996 1995
====================================================================================================
<S> <C> <C> <C> <C>
Gross premium written $185 $159 $473 $443
- - ----------------------------------------------------------------------------------------------------
Net premium written $137 $116 $358 $341
- - ----------------------------------------------------------------------------------------------------
Net premium earned $116 $106 $312 $317
Less: Net loss and LAE incurred 81 75 221 225
Commission expense 23 21 60 53
Premium related expense 4 4 14 16
Other underwriting expense 10 3 28 14
Policyholders dividends 2 2 4 8
- - ----------------------------------------------------------------------------------------------------
Underwriting gain (loss) $ (4) $ 1 $ (15) $ 1
====================================================================================================
</TABLE>
PREMIUM. Net premium written increased by 18.1% and 5.0% for third quarter
and year-to-date 1996, respectively, as compared to 1995 due principally to new
program business in Commercial Auto and growth in Excess Casualty and Excess and
Surplus lines. In October 1996, the Company announced plans to enter into a
quota share reinsurance arrangement with another insurer with respect to certain
Excess and Surplus lines of business in conjunction with such insurer's hiring
of certain TIG underwriting personnel. TIG will continue to underwrite Excess
and Surplus lines business through its Commercial Specialty Program Division and
the reinsurance arrangement with its strategic partner. The Company does not
anticipate any significant reduction in Commercial Specialty net premium written
as a result of the quota share arrangement. Workers' Compensation net premium
written stabilized in third quarter 1996 after declining 24% in the first half
of 1996. Workers' Compensation reforms have been enacted by a number of states,
intensifying competitive market conditions nationwide. Due to the changing
environment, TIG's workers' compensation marketing plan will continue to be
cautious, in line with disciplined underwriting, and remain focused on small to
intermediate size customers using a template underwriting approach. The
following table summarizes Commercial Specialty net premium written by business
unit for the first nine months of 1996 and 1995.
- 13 -
<PAGE>
TIG HOLDINGS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
================================================================================
<TABLE>
<CAPTION>
Three Months ended September 30, Nine Months ended September 30,
------------------------------------ --------------------------------------
1996 1995 1996 1995
-----------------------------------------------------------------------------
(In million) NPW % NPW % NPW % NPW %
========================================================================================================
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Workers' Compensation $ 46 33.6 $ 45 38.8 $143 39.9 $172 50.5
Sports & Leisure 54 39.4 55 47.4 133 37.2 130 38.1
Commercial Automobile 11 8.0 8 6.9 32 8.9 15 4.4
All other units 26 19.0 8 6.9 50 14.0 24 7.0
- - --------------------------------------------------------------------------------------------------------
Total $137 100.0 $116 100.0 $358 100.0 $341 100.0
========================================================================================================
</TABLE>
UNDERWRITING RESULTS. The Commercial Specialty Division's combined ratio
increased by 2.2 percentage points during third quarter 1996 and 2.8 percentage
points for year-to-date 1996 compared to 1995. The increase in the combined
ratio is due principally to increased commission expenses and other underwriting
expenses partially offset by a decline in policyholder dividends and premium
related expenses. Increased writings for program business produced through
managing general agents resulted in higher commission expenses in 1996. The
other underwriting expense ratio increased primarily due to start up costs for
new programs in Workers' Compensation and Excess and Surplus lines and decreased
Workers' Compensation servicing carrier fees. The decrease in policyholder
dividend ratio in the third quarter 1996 is due to the shift in business from
participating to non-participating Workers' Compensation policies. The following
table presents the components of Commercial Specialty's statutory combined
ratios:
<TABLE>
<CAPTION>
Three Months ended Nine Months ended
September 30, September 30,
---------------------- ----------------------
Statutory ratio: 1996 1995 1996 1995
========================================================================================================
<S> <C> <C> <C> <C>
Loss and LAE 70.5 69.6 70.8 70.7
- - --------------------------------------------------------------------------------------------------------
Commission expense 19.5 18.9 19.0 16.9
Premium related expense 3.2 3.6 4.0 5.1
Other underwriting expense 7.9 4.8 8.3 4.4
- - --------------------------------------------------------------------------------------------------------
Total underwriting expense 30.6 27.3 31.3 26.4
- - --------------------------------------------------------------------------------------------------------
Policyholder dividend 2.5 4.5 3.5 5.7
- - --------------------------------------------------------------------------------------------------------
Combined ratio 103.6 101.4 105.6 102.8
========================================================================================================
</TABLE>
- 14 -
<PAGE>
TIG HOLDINGS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
================================================================================
2.5 OTHER LINES
- - --------------------------------------------------------------------------------
Other Lines principally includes commercial products which have been placed in
run-off due to failure to meet profitability standards. Approximately 95% of
this business was placed in run-off in March 1996 with the remainder being place
in run-off in June 1995. Most premium written in run-off programs after the
"exit date" represents contractually required renewals. As discussed at Item
2.1, costs to administer such renewals were accrued in first quarter 1996. Net
premium written decreased in the three and nine months ended September 30, 1996
as compared to 1995 by $55 million and $111 million, respectively. Other Lines
premium is being non-renewed at a slightly faster rate than planned by
management and is expected to be completely non-renewed by late 1997.
Underwriting results and statutory combined ratios for Other Lines are presented
below:
<TABLE>
<CAPTION>
Three Months ended Nine Months ended
September 30, September 30,
---------------------- ----------------------
(In millions) 1996 1995 1996 1995
=========================================================================================================
<S> <C> <C> <C> <C>
Gross premium written $57 $126 $241 $383
- - ---------------------------------------------------------------------------------------------------------
Net premium written $26 $81 $126 $237
- - ---------------------------------------------------------------------------------------------------------
Net premium earned $44 $87 $178 $296
Less: Net loss and LAE incurred 36 65 167 221
Commission expense 5 11 21 37
Premium related expense 3 4 12 18
Other underwriting expense - 13 11 53
Policyholder dividends - 1 - 1
- - ---------------------------------------------------------------------------------------------------------
Underwriting loss - $(7) $(33) $(34)
=========================================================================================================
STATUTORY RATIOS:
Loss and LAE 81.1 75.7 94.1 76.9
- - ---------------------------------------------------------------------------------------------------------
Commission expense 8.7 13.9 10.7 12.8
Premium related expense 11.9 5.6 8.0 7.3
Other underwriting expense 2.1 15.2 7.0 22.3
- - ---------------------------------------------------------------------------------------------------------
Total underwriting expense 22.7 34.7 25.7 42.4
Policyholder dividends 0.4 0.3 0.5 0.3
- - ---------------------------------------------------------------------------------------------------------
Combined ratio 104.2 110.7 120.3 119.6
=========================================================================================================
</TABLE>
As discussed at Item 2.1, TIG strengthened loss and LAE reserves for Other Lines
by $31 million during the first quarter 1996. This reserve strengthening
increased the year to date 1996 loss and LAE ratio by approximately 17.3
percentage points. Commissions expense ratio fluctuations with prior periods are
primarily attributable to the changing mix of business as some products are
non-renewed more quickly than others. Underwriting expenses have declined in
1996 due to the elimination of overhead costs and the first quarter 1996 accrual
for contractual policy obligations as discussed in Note B to the Condensed
Consolidated Financial Statements. Management estimates that underwriting
results for Other Lines will be approximately break-even for the remainder of
1996.
- 15 -
<PAGE>
TIG HOLDINGS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
================================================================================
2.6 INVESTMENTS
- - --------------------------------------------------------------------------------
INVESTMENT MIX. Management continues to emphasize a conservative investment
strategy by maintaining a portfolio of predominately high-quality, principally
fixed maturity, investments. In accordance with SFAS 115, TIG's entire fixed
maturity portfolio has been classified as available-for-sale. As a result, all
fixed maturity investments are recorded in TIG's financial statements at market
value. Unrealized gains and losses on fixed maturity investments and related
hedges are recorded net of tax directly in shareholders' equity. Following is a
summary of TIG's investment portfolio by type of investment.
<TABLE>
<CAPTION>
September 30, 1996 December 31, 1995
------------------------- -------------------------
Market % of Market Market % of Market
(In millions) Value Portfolio Value Portfolio
=====================================================================================================
<S> <C> <C> <C> <C>
Municipal bonds $541 12.7 $951 20.9
Mortgage-backed securities 1,269 29.6 1,405 30.9
United States government bonds 1,169 27.4 1,388 30.5
Corporate and other bonds 1,192 27.9 658 14.5
- - -----------------------------------------------------------------------------------------------------
Total fixed maturity investments 4,171 97.6 4,402 96.8
Short-term and other investments 103 2.4 148 3.2
- - -----------------------------------------------------------------------------------------------------
Total invested assets $4,274 100.0 $4,550 100.0
=====================================================================================================
</TABLE>
During the first half of 1996, tax-exempt municipal bonds and certain other
lower yielding securities were disposed of in favor of higher yielding corporate
bonds and mortgage-backed securities. As a result, the book yield of the
portfolio increased to 7.37% at September 30, 1996 from 6.70% at December 31,
1995.
Approximately one-third of TIG's portfolio consists of mortgage-backed
securities ("MBS"). United States federal government and government agency
mortgages now represent approximately 84% of TIG's exposure to MBS offering AAA
credit quality and high yields. A risk inherent to MBS is prepayment risk
related to interest rate volatility. The underlying mortgages may be repaid
earlier or later than originally anticipated, dependent on the repayment and
refinancing activity of the underlying homeowners. Should this occur, TIG would
receive paydowns on principal amounts which may have been purchased at a premium
or discount and TIG's investment income would be affected by any adjustments to
amortization resulting from the prepayments. TIG's consolidated financial
results have not been materially impacted by prepayments of MBS. In addition,
interest rate volatility can affect the market value of MBS. All MBS held in the
portfolio can be actively traded in the public market.
In the normal course of business, TIG may choose to hedge some of its
interest rate risk with derivative financial instruments. Such arrangements are
intended to help TIG to more closely match the cash flow received from its
assets to the payments on its liabilities. TIG's interest rate swap arrangements
generally provide that one party pays interest at a floating rate in relation to
movements in an underlying index and the other party pays interest at a fixed
rate. While TIG is exposed to credit risk in the event of nonperformance by the
other party, non performance is not anticipated due to the credit rating of the
counterparties. At September 30, 1996, all TIG derivative financial instruments
were with financial institutions rated A or better by one or more of the major
credit rating agencies, and there were no open futures contracts. The Company's
total derivative position at September 30, 1996 was approximately $90 million,
representing 1.8% of the total investment asset holdings.
- 16 -
<PAGE>
TIG HOLDINGS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
================================================================================
TIG's objective is to maintain the weighted average life of its investment
portfolio between 8 and 11 years and the weighted average duration between 4
and 7 years. At September 30, 1996, the weighted average life of TIG's
investment portfolio was 9.2 years compared to 8.9 years at December 31,
1995. At September 30, 1996, the weighted average duration of TIG's investment
portfolio was 5.3 years compared to 5.8 years at December 31, 1995.
TIG routinely enters into commitments to purchase securities on a "To Be
Announced" ("TBA") basis for which the interest rate risk remains with TIG until
the date of delivery and payment. Delivery and payment of securities purchased
on a TBA basis can take place a month or more after the date of the transaction.
These securities are subject to market fluctuations during this period and it is
the Company's policy to recognize any gains or losses only when they are
realized. TIG maintains cash and securities with a fair value exceeding the
amount of its TBA purchase commitments. At September 30, 1996, the TBA purchase
commitments amounted to $55.2 million and had a fair value of $54.8 million
compared to TBA commitments of $152.2 million and a fair value of $153.1 million
at December 31, 1995.
UNREALIZED GAINS. Net pre-tax unrealized gains decreased by $152 million
during the first nine months of 1996 as a result of increasing market interest
rates. As of September 30, 1996, the aggregate pre-tax net unrealized gain on
TIG's investment portfolio was $17 million. The following is a summary of net
unrealized gains (losses) by type of security.
<TABLE>
<CAPTION>
September 30, December 31,
(In millions) 1996 1995 Change
=====================================================================================================
<S> <C> <C> <C>
Municipal bonds $31 $60 $(29)
Mortgage-backed securities (25) (4) (21)
United States government bonds 15 91 (76)
Corporate and other bonds (4) 22 (26)
- - -----------------------------------------------------------------------------------------------------
Net unrealized gains $17 $169 $(152)
=====================================================================================================
</TABLE>
INVESTMENT INCOME. The following table displays the components of TIG's
investment income and mean after-tax investment yields. The yields include
interest earned and exclude realized investment gains and losses. These yields
are computed using the average end of the month asset balances during the
period.
<TABLE>
<CAPTION>
Three Months ended Nine Months ended
September 30, September 30,
---------------------- ----------------------
(In millions) 1996 1995 1996 1995
================================================================================================
Fixed maturity investments:
<S> <C> <C> <C> <C>
Taxable $67 $56 $195 $157
Tax-exempt 8 14 27 46
Short-term and other investments 3 2 8 6
- - ------------------------------------------------------------------------------------------------
Total gross investment income 78 72 230 209
Investment expenses, interest and other (4) (3) (14) (8)
- - ------------------------------------------------------------------------------------------------
Total net investment income $74 $69 $216 $201
- - ------------------------------------------------------------------------------------------------
After-tax net investment yield 4.69% 4.52% 4.54% 4.49%
================================================================================================
</TABLE>
- 17 -
<PAGE>
TIG HOLDINGS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
================================================================================
INVESTMENT QUALITY. The table below shows the rating distribution of TIG's
fixed maturity portfolio:
<TABLE>
<CAPTION>
September 30, 1996 December 31, 1995
------------------------ ------------------------
Market % of Market % of
Standard & Poor's/Moody's Value Portfolio Value Portfolio
===============================================================================================
(In millions)
<S> <C> <C> <C> <C>
AAA/Aaa $2,933 70.3 $3,361 76.4
AA/Aa 195 4.7 369 8.4
A/A 335 8.0 257 5.8
BBB/Baa 230 5.5 119 2.7
Below BBB/Baa 478 11.5 296 6.7
- - -----------------------------------------------------------------------------------------------
Total fixed maturity investments $4,171 100.0 $4,402 100.0
===============================================================================================
</TABLE>
TIG minimizes the credit risk of its fixed maturity portfolio by investing
primarily in investment grade securities. To enhance investment yields,
management has authorized the purchase of up to $500 million in high yield, less
than investment grade securities. The information on credit quality in the
preceding table is based upon the higher of the rating assigned to each issue of
fixed income securities by either Standard & Poor's Rating Group or Moody's
Investor Service, Inc. Where neither Standard & Poor's or Moody's has assigned a
rating to a particular fixed maturity issue, classification is based on 1)
ratings available from other recognized rating services; 2) ratings assigned by
the National Association of Insurance Commissioners ("NAIC"); or 3) an internal
assessment of the characteristics of the individuals security, if no other
rating is available.
The NAIC has a bond rating system that assigns security classes. The "NAIC
designations" are used by insurers when preparing their annual statutory
financial statements. The designations assigned by the NAIC range from class 1
to class 6, with a rating in class 1 being the highest quality. As of September
30, 1996, approximately 89% of TIG's portfolio, measured on a statutory carrying
value basis, was invested in securities rated in class 1 or 2, both considered
investment grade by the NAIC compared to 93% at December 31, 1995.
- 18 -
<PAGE>
TIG HOLDINGS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
================================================================================
2.7 RESERVES
- - --------------------------------------------------------------------------------
TIG's reserves for losses and loss adjustment expenses ("LAE") totaled $3.8
billion at September 30, 1996 and $3.9 billion at December 31, 1995. The process
of estimating loss and LAE reserves involves the active participation of an
experienced actuarial staff with input from underwriting, claims, reinsurance,
financial, and legal departments. Management, using the advice of loss reserve
specialists, makes a judgment as to the appropriate amount to record in the
financial statements. This process is a continuous one, involving regular
updates for new information and adjustments of loss reserves based on the
application of management's best evaluation of the revised data. Such
adjustments are reflected in current operations. As discussed at Item 2.1, TIG
increased loss and LAE reserves by $31 million in first quarter 1996 for certain
run-off programs included in Other Lines.
The inherent uncertainty in estimating reserves is increased when significant
changes occur. Examples of such changes include: 1) changes in production
sources for existing lines of business; 2) writings of significant blocks of new
business; 3) changes in economic conditions; and 4) changes in state or federal
laws and regulations, particularly insurance reform measures. TIG has
experienced significant changes in each of these areas during the past several
years. The inherent uncertainties in estimating reserves are greater with
respect to reinsurance than for primary insurance due to the diversity of the
development patterns among different types of reinsurance contracts, the
necessary reliance on ceding companies for information regarding reported claims
and differing reserving practices among ceding companies. The uncertainty is
compounded in the case of TIG Re by its relatively short operating history (TIG
Re was formed in 1987). Internal data must be supplemented with industry data to
provide the basis for reserve analysis. Applying industry data to TIG Re's
business adds an additional element of uncertainty to the reserving process.
TIG's reserves include an estimate of TIG's ultimate liability for
asbestos-related matters, environmental pollution, toxic tort, and other
non-sudden and accidental claims for which ultimate values cannot be estimated
using traditional reserving techniques. Establishing reserves with respect to
environmental liabilities is one of the most difficult aspects of the reserving
process. TIG's environmental claims activity is predominately from hazardous
waste and pollution-related claims rising from commercial insurance policies
written prior to 1985. TIG has not written primary coverage for the major oil or
chemical companies. Most of TIG's pollution claims are from small, regional
operations or local businesses involved with disposing wastes at dump sites or
having pollution on their own property due to hazardous material or leaking
underground storage tanks. In connection with TIG's initial public offering in
April 1993, an affiliate of TIG's former parent, Transamerica Corporation,
agreed to pay 75% of up to $119 million of reserve development and newly
reported claims, up to a maximum reimbursement of $89 million, on policies
written prior to January 1, 1993, with respect to certain environmental claims
involving paid losses and certain LAE in excess of TIG's environmental loss and
LAE reserves at December 31, 1992. At September 30, 1996, the Transamerica
affiliate had incurred no liability under this agreement.
While there can be no assurance that the loss and LAE reserves at any given date
are adequate to meet TIG's obligations, the amounts reported in TIG's balance
sheet are management's best estimate of those amounts.
- 19 -
<PAGE>
TIG HOLDINGS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
================================================================================
2.8 LIQUIDITY AND CAPITAL RESOURCES
- - --------------------------------------------------------------------------------
Liquidity is a measure of an entity's ability to secure enough cash to meet its
contractual obligations and operating needs. TIG requires cash primarily to pay
policyholders' claims, operating expenses, and dividend obligations. Generally,
premium is collected months or years before claims are paid under the policies
purchased by the premium. These funds are used first to pay current claims and
expenses. The balance is invested in high quality securities to augment the
investment income generated by the existing portfolio. Historically, TIG has
had, and expects to continue to have, more than sufficient funds to pay claims,
expenses and policyholder dividends.
CASH FLOW FROM OPERATING ACTIVITIES
- - -----------------------------------
Cash flow from operations for year-to-date 1996, was $39 million compared to $97
million for 1995. Cash flow for 1996 was comprised of $140 million positive cash
flow for Reinsurance and ($101) million negative cash flow for primary
operations (Retail, Commercial Specialty and Other Lines). This compares to $171
million positive cash flow for Reinsurance and $(74) million negative cash flow
for primary operations in 1995. The commutation of one treaty decreased
Reinsurance 1996 cash flow by $11 million. In addition, Reinsurance cash flow
has been negatively impacted in 1996 by increased loss and LAE payments
attributable to a general change in business mix to shorter tail lines.
Excluding the commutation, year-to-date 1996 paid losses have increased over
1995 by 46% for Reinsurance. Primary operations cash flow has declined in 1996
as paid losses are relatively higher in proportion to net written premium due to
the run-off of longer tail Other Lines reserves. The 90% reinsurance of a
primary program as of April 1, 1995 reduced 1995 cash flow by $34 million .
INVESTMENT LIQUIDITY
- - --------------------
At September 30, 1996, TIG had $103 million in short-term and other investments
compared to $148 million at December 31, 1995. In addition, TIG expects to
realize $633, $631, and $909 million in cash flow from principal and interest
payments for the next three years, respectively, from its investment portfolio.
TIG has structured its investment portfolio to manage the impact of market
interest rate fluctuations on liquidity. Investments and cash at TIG Holdings
totaled $47 million as of September 30, 1996 compared to $169 million at
December 31, 1995. The decrease in investments and cash at TIG Holdings is
attributable to treasury stock purchases of $151 million in 1996.
RESTRICTIONS ON DIVIDENDS FROM INSURANCE SUBSIDIARIES
- - -----------------------------------------------------
The maximum amount of shareholder dividends which the insurance
subsidiaries can pay to TIG Holdings is limited to the greater of (i) 10% of
statutory surplus as of the end of the preceding year or (ii) the statutory net
income for the preceding year except that such amount may not exceed earned
surplus. Accordingly, the maximum dividend payout to TIG Holdings from its
subsidiaries that can be made without regulatory approval during 1996 is $157
million. TIG Holdings received $25 million in cash dividends from its insurance
subsidiaries in each of the first, second and third quarters of 1996 and in the
second quarter of 1995.
NOTES PAYABLE
- - -------------
In December 1995, TIG Holdings established an unsecured revolving line of
credit with maximum borrowings of $250 million. At September 30, 1996, TIG had
no outstanding borrowings under this facility. In 1995, TIG Insurance Company
entered into a five year $50 million credit facility of which approximately $25
million has been drawn as of September 30, 1996. The facility is a direct
financing arrangement with a third party related to the sale leaseback of
certain fixed assets. In addition, TIG Holdings had $98 million of 8.125% notes
payable maturing in 2005 outstanding at September 30, 1996 and December 31,
1995.
- 20 -
<PAGE>
TIG HOLDINGS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
================================================================================
SHAREHOLDERS' EQUITY
- - --------------------
Shareholders' equity decreased by $211 million during the first nine months of
1996, primarily due to a $99 million decrease in after-tax unrealized gains and
$151 million of common stock repurchases. Accordingly, book value per share
decreased to $21.18 at September 30, 1996 from $23.09 at December 31, 1995.
Excluding the impact of unrealized investment gains, the book value per share
would have been $20.99 at September 30, 1996 and $21.26 at December 31, 1995.
As of September 30, 1996, the Board of Directors has authorized stock
repurchases of up to 11.25 million shares of TIG Holdings Common Stock (17.4% of
total issued and outstanding including treasury shares at September 30, 1996).
Under the repurchase plan, repurchases may be made from time to time on the open
market at prevailing market prices or in privately negotiated transactions.
Through September 30, 1996, 9.1 million shares have been repurchased (14.1% of
total issued and outstanding including treasury shares at September 30, 1996) at
an average cost per share of $26.31, for an aggregate cost of $239 million.
- 21 -
<PAGE>
TIG HOLDINGS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
================================================================================
2.9 GLOSSARY
- - --------------------------------------------------------------------------------
CATASTROPHE: An event that is designated to be a "catastrophe" by the Property
Claim Service Division of America Services Group, an industry body. It generally
defines events which are estimated to cause more than $5 million in insured
property damage and which affect a significant number of insureds and insurers.
COMBINED RATIO: A combination of the underwriting expense ratio, the loss and
LAE ratio, and the policyholder dividends ratio, determined in accordance with
statutory accounting practice. A combined ratio below 100% generally indicates
profitable underwriting results. A combined ratio over 100% generally indicates
unprofitable underwriting results.
GROSS PREMIUM WRITTEN: Total premium for direct insurance written and
reinsurance assumed during a given period.
INCURRED BUT NOT REPORTED ("IBNR") RESERVES: Reserves for estimated losses and
LAE which have been incurred but not reported to the insurer (including future
developments on losses that are known to the insurer).
INCURRED LOSSES: The total losses sustained by an insurance company under a
policy or policies, whether paid or unpaid. Incurred losses include a provision
for claims that have occurred but have not yet been reported to the insurer.
LOSS ADJUSTMENT EXPENSES ("LAE"): The expenses of settling claims, including
legal and other fees, and the portion of general expenses allocated to claim
settlement costs.
LOSS DEVELOPMENT: The emergence of actual loss data as compared to estimates for
specific accident years and for specific lines of business.
LOSS AND LAE RATIO: The ratio of incurred losses and LAE to earned premium,
determined in accordance with statutory accounting practices.
LOSS AND LAE RESERVES: Liabilities established by insurers and reinsurers to
reflect the estimated cost of claims payments that the insurer will ultimately
be required to pay in respect of insurance or reinsurance it has written.
Reserves are established for losses and for LAE, and consist of case reserves
and IBNR reserves.
NET PREMIUM EARNED: The portion of net premium written in a particular period
that is recognized for accounting purposes as income during that period.
NET PREMIUM WRITTEN: Direct premium written plus premium on assumed reinsurance
less premium on ceded business for a given period.
POLICYHOLDER DIVIDEND RATIO: The ratio of dividends paid to policyholders to
earned premium determined in accordance with statutory accounting practices.
- 22 -
<PAGE>
TIG HOLDINGS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
================================================================================
PROGRAM BUSINESS: Tailored products developed for a particular industry
segment (i.e., sporting events, trucking) or distribution system (i.e., trade
associations, affinity groups). Programs are often developed and controlled by
managing general agents.
REINSURANCE: The practice whereby one party, called the reinsurer, in
consideration of a premium paid to it agrees to indemnify another party, called
the reinsured, for part or all of the liability assumed by the reinsured under a
policy or policies of insurance which it has issued. The reinsured may be
referred to as the original or primary insurer, the direct writing company, or
the ceding company. Reinsurance does not legally discharge the primary insurer
from its liability to the insured.
RETENTION; RETENTION LEVEL: The amount or portion of risk which an insurer
or reinsurer retains for its own account. Losses in excess of the retention
level are paid by the reinsurer or retrocessionaire. In prorata treaties, the
retention may be a percentage of the original policy's limit. In excess of loss
reinsurance, the retention is a dollar amount of loss, a loss ratio, or a
percentage of loss.
SFAS 115: Statement of Financial Accounting Standards No. 115. "Accounting
for Certain Investments in Debt and Equity Securities", requires categorization
of investment portfolios. Categorization of a portfolio as "Available-for-Sale"
(such as TIG's) creates volatility in shareholders' equity as the changes in
unrealized gains or losses are recorded net of tax directly into shareholders'
equity.
TREATY REINSURANCE: The reinsurance of a specified type or category of
risks defined in a reinsurance agreement (a "treaty") between a primary insurer
or other reinsured and a reinsurer. Typically, in treaty reinsurance, the
primary insurer or reinsured is obligated to offer and the reinsurer is
obligated to accept a specified portion of all such type or category of risks
originally underwritten by the primary insurer or reinsured.
UNDERWRITING: The insurer's process of reviewing applications submitted for
insurance coverage, deciding whether to accept all or part of the coverage
requested and determining the applicable premium.
UNDERWRITING EXPENSE RATIO: The ratio of underwriting expenses to net
premium written, determined in accordance with statutory accounting practices.
UNDERWRITING EXPENSES: The aggregate of policy acquisition costs, including
commissions, and the portion of administrative, general, and other expenses
attributable to underwriting operations.
UNDERWRITING RESULTS: The measure of profitability of the insurance
operations of an insurer, calculated as the result of earned premium, less
losses, loss expenses, and underwriting expenses. Underwriting results is an
indicator of a company's underwriting success.
WORKERS' COMPENSATION INSURANCE: Insurance that covers medical care,
rehabilitation, and lost wages of employees who suffer work-related injuries,
and provides death benefits for dependents of employees killed in work-related
accidents.
WORKING LAYERS REINSURANCE: Reinsurance which absorbs the losses
immediately above the reinsured's retention layer. A working layer reinsurer
will pay up to a certain dollar amount of losses over the insured's retention,
at which point a higher layer reinsurer (or the ceding company) will be liable
for additional losses. Working layer reinsurance is also known as low layer
excess of loss reinsurance.
- 23 -
<PAGE>
TIG HOLDINGS, INC.
PART II. OTHER INFORMATION
================================================================================
ITEM 1. LEGAL PROCEEDINGS
TIG's insurance subsidiaries are routinely engaged in litigation in the
normal course of their business. As a liability insurer, the Company defends
third-party claims brought against its insureds. As an insurer, the Company
defends against coverage claims.
On January 11, 1994, a Los Angeles County Superior Court jury returned a
verdict of $28 million for punitive damages against TIG Insurance Company
("TIC") in Talbot Partners v. Cates Construction, Inc. and TIC (the "Talbot
Case"). The award arose out of TIC's handling of a surety bond claim on a
construction project. Management is vigorously pursuing its right to appeal the
judgment. TIC is presently litigating with the carriers of its errors and
omissions insurance policies as to coverage for punitive damages under the
agreed upon language of the policies. On June 27, 1996, a Los Angeles County
Superior Court entered a verdict against TIC in Reliance Insurance Company of
Illinois ("Reliance") v. TIC. The court ruled in this declaratory relief action
that Reliance, which is one the carriers which insurers TIC, was not obligated
to TIC under its errors and omissions insurance policies for punitive damages
under California law. TIC filed a notice of appeal with respect to this
judgment. TIC and the carrier have entered into a settlement agreement,
effective on the orrurance of several conditions. Management believes, however,
that the ultimate liability, if any, arising from the Talbot Case will not
materially impact consolidated operating results.
- 24 -
<PAGE>
TIG HOLDINGS, INC.
PART II. OTHER INFORMATION
================================================================================
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
EXHIBIT 3.1: Amended and Restated Certificate of Incorporation of TIG
Holdings as filed with the Delaware Secretary of State on April 16, 1993
(incorporated by reference to Exhibit 3.1 to TIG Holdings' Quarterly
Report on Form 10-Q for the quarter ended March 31, 1993, Commission File
No. 1-11856).
EXHIBIT 3.2: Amended and Restated Bylaws of TIG Holdings as adopted by
TIG Holdings' Board of Directors on May 18, 1993 (incorporated by reference
to Exhibit 3.2 to TIG Holdings' Registration Statement on Form S-8, File
No. 33-63148).
EXHIBIT 4.1: Certificate of Designation of TIG Holdings relating to the
$7.75 Cumulative Preferred Stock of TIG Holdings as filed with the Delaware
Secretary of State on April 16, 1993 (incorporated by reference to Exhibit
4.1 to TIG Holdings' Quarterly Report on Form 10-Q for the quarter ended
March 31, 1993, Commission File No. 1-11856).
EXHIBIT 4.2: Indenture dated as of April 1, 1995, between TIG Holdings and
the First National Bank of Chicago, as Trustee (incorporated by reference
to Exhibit 4.2 to Registration Statement No. 33-90594, filed
March 24, 1995).
EXHIBIT 11: Computation of Earnings per Share
(b) The Company did not file any reports on Form 8-K during the three months
ended September 30, 1996.
- 25 -
<PAGE>
TIG HOLDINGS, INC.
COMPUTATION OF EARNINGS PER SHARE
EXHIBIT 11
<TABLE>
<CAPTION>
Three Months ended Nine Months ended
September 30, September 30,
------------------- -------------------
(In millions, except per share data) 1996 1995 1996 1995
=============================================================================================================
PRIMARY:
<S> <C> <C> <C> <C>
Weighted average shares outstanding 55.3 60.4 57.1 61.2
Net effect of dilutive stock options - based on the treasury stock
method using average market price 2.5 1.3 2.8 0.4
- - -------------------------------------------------------------------------------------------------------------
Total primary common shares 57.8 61.7 59.9 61.6
- - -------------------------------------------------------------------------------------------------------------
Net income $37.4 $34.1 $40.1 $84.7
Less preferred stock dividends (0.5) (0.5) (1.5) (1.5)
- - -------------------------------------------------------------------------------------------------------------
Net income available to common stock $36.9 $33.6 $38.6 $83.2
- - -------------------------------------------------------------------------------------------------------------
Net income per common share $0.64 $0.54 $0.65 $1.35
=============================================================================================================
FULLY DILUTIVE:
Weighted average shares outstanding 55.3 60.4 57.1 61.2
Net effect of dilutive stock options - based on the treasury stock
method using higher of average or end of period market price 2.9 2.0 2.9 2.0
- - -------------------------------------------------------------------------------------------------------------
Total fully dilutive common shares 58.2 62.4 60.0 63.2
- - -------------------------------------------------------------------------------------------------------------
Net income $37.4 $34.1 $40.1 $84.7
Less preferred stock dividends (0.5) (0.5) (1.5) (1.5)
- - -------------------------------------------------------------------------------------------------------------
Net income available to common stock $36.9 $33.6 $38.6 $83.2
- - -------------------------------------------------------------------------------------------------------------
Net income per common share $0.63 $0.54 $0.64 $1.32
=============================================================================================================
</TABLE>
- 26 -
<PAGE>
TIG HOLDINGS, INC.
SIGNATURES
================================================================================
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated: November 13, 1996 TIG HOLDINGS, INC.
---------------------
By: /s/Steven A. Cook
---------------------------------
Name: Steven A. Cook
Title: Controller
(Principal Accounting Officer)
- 27 -
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 7
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JUL-01-1996
<PERIOD-END> SEP-30-1996
<DEBT-HELD-FOR-SALE> 0
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 4,171
<EQUITIES> 0
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 4,274
<CASH> 12
<RECOVER-REINSURE> 1,276
<DEFERRED-ACQUISITION> 152
<TOTAL-ASSETS> 6,546
<POLICY-LOSSES> 3,824
<UNEARNED-PREMIUMS> 722
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 123
25
0
<COMMON> 1,196
<OTHER-SE> 208
<TOTAL-LIABILITY-AND-EQUITY> 6,546
387
<INVESTMENT-INCOME> 74
<INVESTMENT-GAINS> (1)
<OTHER-INCOME> 0
<BENEFITS> 283
<UNDERWRITING-AMORTIZATION> 0
<UNDERWRITING-OTHER> 124
<INCOME-PRETAX> 53
<INCOME-TAX> 16
<INCOME-CONTINUING> 37
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 37
<EPS-PRIMARY> 0.64
<EPS-DILUTED> 0.63
<RESERVE-OPEN> 3,824
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 3,824
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
