UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
- - --------------------------------------------------------------------------------
For the Fiscal Year Ended Commission File Number
December 31, 1996 1-11856
TIG HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
Delaware 94-3172455
(State of Incorporation) (IRS Employer Identification No.)
65 East 55th Street, 28th Floor, New York, New York 10022
(Address of principal executive offices) (zip code)
Telephone: 212-446-2700
- - --------------------------------------------------------------------------------
Securities registered pursuant to Section 12(b) of the Act:
Common Stock, $0.01 Par Value Registered - New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
- - --------------------------------------------------------------------------------
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 twelve (12) months 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. X
---
The aggregate market value of voting stock held by non-affiliates of the
registrant as of March 3, 1997, was $1,890,504,283.
The number of shares outstanding of the issuer's common stock as of March 3,
1997:
Common Stock, $0.01 Par Value; 53,822,186 shares outstanding, excluding
11,273,100 Treasury Shares.
Documents Incorporated by Reference:
Portions of the definitive proxy statement for the annual meeting scheduled for
May 1, 1997, are incorporated by reference into Part III.
Exhibit Index is on page 70.
<PAGE>
INDEX
- - --------------------------------------------------------------------------------
PART I Page
Item 1. Description of Business ............................................1
1.1 General ............................................................1
1.2 Reinsurance ........................................................2
1.3 Commercial Specialty ...............................................5
1.4 Retail .............................................................7
1.5 Other Lines ........................................................8
1.6 Reserves ...........................................................9
1.7 Regulation ........................................................13
Item 2. Business Properties ...............................................15
Item 3. Legal Proceedings .................................................15
Item 4. Submission of Matters to a Vote of Security Holders 15
PART II
Item 5. Market for Registrant's Common Equity and Related Shareholder
Matters ...........................................................16
Item 6. Selected Financial Data ...........................................17
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations .........................................18
7.1 Consolidated Results ..............................................18
7.2 Reinsurance .......................................................21
7.3 Commercial Specialty ..............................................22
7.4 Retail ............................................................24
7.5 Other Lines .......................................................25
7.6 Exposure Management ...............................................26
7.7 Investments .......................................................28
7.8 Liquidity and Capital Resources ...................................30
7.9 Financial Condition ...............................................32
7.10 Forward-Looking Statements ........................................33
7.11 Glossary ..........................................................34
Item 8. Financial Statements and Supplementary Data .......................37
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure ...............................62
PART III
Item 10. Directors and Executive Officers of the Registrant ................63
Item 11. Executive Compensation ............................................63
Item 12. Security Ownership of Certain Beneficial Owners and Management ....63
Item 13. Certain Relationships and Related Transactions ....................63
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K ..64
<PAGE>
PART I
- - --------------------------------------------------------------------------------
ITEM 1. DESCRIPTION OF BUSINESS
- - --------------------------------------------------------------------------------
1.1 GENERAL
================================================================================
TIG Holdings, Inc. ("TIG Holdings") is primarily engaged in the business of
property/casualty insurance and reinsurance through its 15 domestic insurance
subsidiaries (collectively "TIG" or "the Company"), one or more of which is
licensed to write substantially all lines of property/casualty insurance in all
states of the United States. Reinsurance products are offered through TIG
Reinsurance Company ("TIG Re") which is based in Stamford, Connecticut, and has
a London branch office. Primary property/casualty insurance products are offered
through TIG Insurance Company ("TIG Insurance") and the remaining general
insurance subsidiaries. Primary products are marketed through two divisions,
Commercial Specialty and Retail, which are based in Irving, Texas and Battle
Creek, Michigan, respectively.
As of December 31, 1996, TIG had approximately 1,300 salaried employees
providing sales, underwriting, claims and service support in 46 active offices.
Of direct premium written by TIG in 1996, 26% was written in California, 8% in
Michigan, 6% in New York, and 7% each in Hawaii and Texas. No other geographical
area, including foreign operations, accounted for more than 5% of direct premium
written. Premium produced through Aon Corporation and its subsidiaries, an
unaffiliated company that owns among other businesses numerous insurance
agencies, accounted for 23%, 22% and 21% of consolidated net premium written in
1996, 1995 and 1994, respectively. In early 1997, Aon Corporation acquired
another of the Company's significant producers. If this acquisition had been in
effect for all of 1996, Aon Corporation and its subsidiaries would have
accounted for 33% of 1996 net premium written.
The following table sets forth consolidated net premium written, classified by
statutory line of business:
Years Ended December 31,
-------------------------
(In millions) 1996 1995 1994
============================================================
Reinsurance operations
net premium written $548 $511 $440
- - ------------------------------------------------------------
Workers' compensation 260 285 342
Automobile liability 244 260 242
Automobile physical damage 133 136 136
General liability 110 144 122
Homeowners 80 81 113
Commercial multiple peril 59 81 103
Ocean and inland marine 24 25 24
Fire and allied lines 14 28 55
Other 57 59 44
- - ------------------------------------------------------------
Primary operations
net premium written 981 1,099 1,181
- - ------------------------------------------------------------
Total TIG net premium written $1,529 $1,610 $1,621
============================================================
Financial information about TIG's business segments is set forth in Note O of
the Consolidated Financial Statements at Item 8 of this Form 10-K. A description
of TIG's three operating divisions, Reinsurance, Commercial Specialty and Retail
follows at Items 1.2, 1.3, and 1.4, respectively. Lines of business that have
been de-emphasized are discussed at Item 1.5. Statements contained in the
Description of Business and elsewhere in the document that are not based on
historical information are forward-looking statements and are based on
managements projections, estimates and assumptions. Management would like to
caution readers regarding its forward-looking statements (see Item 7.10 -
Forward-Looking Statements). Key industry terms that appear in the Description
of Business and elsewhere in this document are defined at Item 7.11.
- 1 -
<PAGE>
PART I
- - --------------------------------------------------------------------------------
1.2 REINSURANCE
================================================================================
NATURE OF BUSINESS. Reinsurance is a form of insurance whereby an insurance
company (the "reinsurer") agrees to indemnify another insurance company (the
"ceding company") for all or a portion of the insurance risks underwritten by
the ceding company under an insurance policy or policies. Reinsurance can
benefit a ceding company in a number of ways, including reducing net liability
on individual risks, providing catastrophe protection from large or multiple
losses, stabilizing results and assisting in maintaining acceptable operating
leverage ratios. Reinsurance also provides a ceding company with additional
underwriting capacity by permitting it to accept larger risks and underwrite a
greater number of risks without a corresponding increase in its capital and
surplus.
There are two basic types of reinsurance agreements: treaty contracts and
facultative certificates. A treaty is an agreement under which the ceding
company is required to cede and the reinsurer is required to assume a specified
portion or category of risks under all qualifying policies issued by the ceding
company during the term of the treaty contract. Facultative reinsurance
arrangements are separately negotiated for each insurance policy to be reinsured
and result in a facultative certificate under which the ceding company cedes,
and the reinsurer assumes, all or part of the risk under a specific insurance
policy.
Reinsurance can be written on either a pro rata or excess of loss basis. Under
pro rata reinsurance, the reinsurer receives a predetermined percentage of the
insurance premium charged by the ceding company and indemnifies the ceding
company against a predetermined percentage of the losses and loss adjustment
expenses ("LAE") incurred by the ceding company under the covered primary policy
or policies. Under excess of loss reinsurance, the reinsurer, in return for a
negotiated premium, indemnifies the ceding company against all or a specified
portion of losses and LAE on underlying insurance policies in excess of a
specified dollar amount, known as the ceding company's retention, subject to a
negotiated policy limit. Excess of loss reinsurance is often written in layers,
with one or a group of reinsurers assuming the risk for each layer. The layer or
layers just above the ceding company's retention are termed "working layers".
PRODUCTS. The following table shows TIG Re's net premium written by statutory
line of business:
Years Ended December 31,
--------------------------
(In millions) 1996 1995 1994
=======================================================
Property $116 $96 $58
Errors and omissions 88 118 81
General liability 88 94 99
Medical malpractice 85 72 75
Automobile liability 80 44 43
Workers' compensation 33 15 7
Umbrella 32 37 41
Directors and officers 26 35 36
- - -------------------------------------------------------
Total net premium written $548 $511 $440
- - -------------------------------------------------------
Percentage of consolidated
net premium written 36% 32% 27%
=======================================================
Approximately 52%, 63% and 55% of TIG Re's net premium written in 1996, 1995 and
1994, respectively, was written on an excess of loss basis. TIG Re's primary
strategy is to focus on excess of loss casualty coverages, written on a treaty
basis, generally taking large participations in working layers of a limited
number of programs. By assuming a significant participation in each treaty, TIG
Re exercises significant control over the terms and structure of each treaty.
Management believes that its emphasis on writing excess of loss treaties in
lines of business for which it has specific expertise improves its underwriting
results by allowing it to price reinsurance based on its own underwriting rather
than on the premium charged by the primary insurer. TIG Re generally seeks to
write treaties with working or low layers of attachment, where losses are more
quantifiable and which typically carry higher premium.
Approximately 48%, 37%, and 45% of TIG Re's net premium written in 1996, 1995
and 1994, respectively, was written on a pro rata basis. TIG Re provides
- 2 -
<PAGE>
PART I
- - --------------------------------------------------------------------------------
pro rata coverages when the ceding company's underwriting capabilities are
considered superior and where the relationship with the ceding company provides
an opportunity for long-term profitability. Pro-rata coverage is preferred in
certain segments of the reinsurance market where low limits are sold by the
ceding company. Non-standard auto is the prime example of this type of business.
Certain other highly volatile lines such as directors and officers liability
also merit a pro-rata position as the losses are infrequent but potentially
large. The reinsurer would thus want to capture a pro-rata share of the premium
to cover this volatile exposure.
DISTRIBUTION SYSTEM. TIG Re's predominant source of business is through
reinsurance intermediaries. TIG Re writes through over 60 brokers, the largest
of which accounted for approximately 26%, 30% and 29% of TIG Re's net premium
written in 1996, 1995 and 1994, respectively. The five largest brokers accounted
for 71%, 83% and 87% of TIG Re's net premium written during the same periods.
There was no change in the top four brokers in 1996 from 1995 or 1994. A
subsidiary of Aon Corporation accounted for 19% of net premium written in 1996.
In early 1997, Aon Corporation acquired TIG Re's largest broker. If this
acquisition had been in effect for all of 1996, subsidiaries of Aon Corporation
would have accounted for 45% of 1996 net premium written.
TIG Re has approximately 330 insurance company "clients". TIG Re's top five
insurance company clients represent 36% of TIG Re's 1996 net premium written,
exclusive of business assumed from TIG Insurance's Commercial Specialty
division. TIG Re maintains an audit staff responsible for performing reinsurance
reviews at the clients' office. The auditors primarily test for treaty
compliance, including the accuracy and timeliness of premium and loss cessions.
Approximately $50 million of TIG Re's net premium written in each of 1996, 1995,
and 1994 was assumed from the Commercial Specialty division of TIG Insurance. Of
premium assumed from TIG Insurance, $18 million and $8 million was "reverse
flow" business in 1996 and 1995 respectively. There was no reverse flow business
written in 1994. Reverse flow is an alternative distribution mechanism whereby
general agents submit program business to TIG Re. TIG Re then works with select
reinsurance intermediaries to provide a primary insurer to the transaction who
will issue the primary policy and then cede a significant portion of the risk to
TIG Re. Use of this alternative distribution mechanism allows TIG Re to increase
its reinsurance opportunities and to develop or expand relationships with
insurance clients (including TIG Insurance) as they expand into new products and
territories.
In January 1994, TIG Re established an office in London, England. On December
29, 1995, the United Kingdom ("U. K.") Department of Trade and Industry
authorized the London office to operate as a branch and underwrite stipulated
classes of general insurance business in the U. K. Net premium produced by the
London office was $29 million for 1996 as compared to $23 million and $8 million
for 1995 and 1994, respectively. Approximately 74% of the 1996 London office net
premium written pertained to international risks.
In October 1996, TIG Re established a new operating unit dedicated to the
marketing and underwriting of direct facultative reinsurance on an automatic and
individual risk basis. This initiative is designed to diversify TIG Re's premium
base while allowing it access to a new market segment management believes will
be characterized by higher underwriting margins and long-term profitability. As
of December 31, 1996, the unit had opened nine branch offices throughout the
United States, with headquarters in New York.
During 1996, TIG Re established a fully integrated Lloyd's vehicle through the
formation and capitalization of a wholly owned managing agent that will manage,
and a wholly owned corporate name that will provide sole support for, syndicate
1218. This was the first fully integrated corporate vehicle to have been
approved in the history of Lloyd's of London. The formation of the syndicate
will allow TIG Re to write insurance and reinsurance world-wide. The syndicate
has a stamp capacity of (pound)20 million for the 1997 account to access
international non-marine casualty and property business. Also, during December
1996, TIG Re was approved as a licensed reinsurer in Canada.
- 3 -
<PAGE>
PART I
- - --------------------------------------------------------------------------------
COMPETITION. Reinsurance prices and conditions are not normally subject to the
same state regulation applicable to the primary insurance market because
reinsurers contract solely with other insurance companies. Reinsurers compete
based on many factors, including the financial strength of the reinsurer, the
A.M. Best ("Best") rating of the reinsurer, premium charged, other terms and
conditions of the reinsurance offered, services offered, timeliness of claims
payments, ongoing business relationships, reputation and experience. Based on
net premium written, TIG Re is the ninth largest property/casualty reinsurer in
the United States as of September 30, 1996, according to the Reinsurance
Association of America. TIG Re has a stand-alone rating of "A" (Excellent) by
Best for financial size IX which corresponds to policyholder surplus levels from
$250 million to $500 million. The ratings assigned by Best are based upon
factors of concern to policyholders, agents and intermediaries.
TIG Re competes with independent reinsurance companies, subsidiaries or
affiliates of established domestic or worldwide insurance companies, reinsurance
departments of certain primary insurance companies, and underwriting syndicates.
TIG Re, as a broker market reinsurer, competes with the four major direct
marketers of reinsurance. TIG Re also competes with a number of reinsurers who
write reinsurance through brokers, although in most instances, TIG Re
participates on treaties with one or more of these companies as a co-reinsurer.
- 4 -
<PAGE>
PART I
- - --------------------------------------------------------------------------------
1.3 COMMERCIAL SPECIALTY
================================================================================
NATURE OF BUSINESS. Commercial insurance policies are generally issued to
business and governmental entities, organizations, associations and individual
professionals. Commercial coverages provide protection against property loss,
legal liability for injuries to other persons or damage to their property
arising from the policyholder's business operations. Workers' compensation
products provide benefits to employees as mandated by state laws for
employement-related accidents, injuries or illnesses. The principal benefits
provided by workers' compensation policies are medical and indemnity. Medical
benefits cover physician, hospitalization and rehabilitation expenses incurred
as a result of the work-related injury while indemnity benefits compensate the
employee for lost wages.
PRODUCTS. The table below shows Commercial Specialty net premium written by
statutory line of business:
Years Ended December 31,
--------------------------
(In millions) 1996 1995 1994
======================================================
Workers' compensation $203 $228 $288
Other liability 119 115 96
Automobile liability 31 18 23
Commercial multiple peril 30 22 14
Other accident and health 25 33 19
Automobile physical damage 20 14 21
Other 32 7 1
- - ------------------------------------------------------
Total net premium written $460 $437 $462
- - ------------------------------------------------------
Percentage of consolidated
net premium written 30% 27% 29%
======================================================
Commercial Specialty offers products that are distinctive due to the unique
nature of risks covered or due to the discrete composition of insured groups.
Significant business units include Sports and Leisure, Workers' Compensation,
Primary Casualty and Excess Casualty. The Sports and Leisure unit offers
coverages for professional and amateur sports events and represents 36% of
Commercial Specialty 1996 net premium written. This unit offers spectator
liability and participant legal liability coverages, including property and
liability packages for a variety of activities such as motorsports, fairs,
festivals, ice skating rinks, stadiums, arenas, gaming facilities, ski resorts
and bowling facilities. The maximum retention on any one policy or event is $2
million. During 1995, the unit expanded product offerings into the Canadian
market.
The Workers' Compensation business unit produced approximately 42% of Commercial
Specialty net premium written in 1996. Among the products offered are
non-participating plans, sliding scale and group participating plans, deferral
plans and small deductible plans. During 1995, TIG began targeting workers'
compensation premium growth in smaller businesses using a template underwriting
approach. Approximately 65% and 54% of workers' compensation business was
underwritten using the template approach in 1996 and 1995 respectively. TIG's
business plan also includes development of strategic alliances with providers of
health care coverages to offer a managed care product. The maximum retention
under a workers' compensation policy is $1 million.
TIG is targeting workers' compensation premium growth in approximately 10 states
where management believes that reasonable reform has occurred and a favorable
long-term operating environment exists. Net premium written in California has
declined from $72 million in 1994 to $21 million in 1996. Repeal of California's
minimum rate laws effective January 1, 1995 intensified competitive market
conditions in that state. Due to the changing environment, Workers' Compensation
premium growth plans for the State of California will continue to be cautious.
Net premium written by state for the Workers' Compensation business unit of
Commercial Specialty (excluding incidental workers' compensation premium written
by other units) is shown in the table below:
Years Ended December 31,
--------------------------
(In millions) 1996 1995 1994
======================================================
Illinois $62 $68 $66
California 21 48 72
Colorado 13 15 21
Wisconsin 13 13 14
Hawaii 11 6 6
All Other 71 66 105
- - ------------------------------------------------------
Total net premium written $191 $216 $284
======================================================
- 5 -
<PAGE>
PART I
- - --------------------------------------------------------------------------------
The Primary Casualty unit focuses on commercial auto, professional liability,
construction and marine programs. These programs generally offer a customized
package of coverages designed for a specific "niche" market and are produced
through a limited number of managing general agents. The Excess Casualty unit
principally offers lead umbrella and excess umbrella policies. Lead umbrella
policies provide liability protection for manufacturing, financial, and service
business above the limits of the primary coverage. Excess umbrella policies
provide similar coverage above the lead excess limits. The maximum retention
under a Primary Casualty and/or an Excess Casualty policy is $1 million.
DISTRIBUTION SYSTEM. Commercial Specialty programs are generally marketed
through selected managing general agents ("MGAs") which have a demonstrated
knowledge of the particular specialty class, the coverages offered, the
competition, and the pricing. Management's objective is to develop strategic
long-term relationships with profitable managing general agents by developing
tailored programs for these key producers and providing responsive service.
Management believes that these strategic relationships will enable TIG to
maintain a variable cost structure while developing specialized underwriting
expertise. TIG sometimes has exclusive contracts with managing general agents.
Sports and Leisure business is produced under an exclusive contract with K&K
Insurance Agency, Inc., a wholly-owned subsidiary of Aon Corporation. TIG's
strategic relationship with Aon Corporation, which includes lines of business
other than Sports and Leisure, accounted for approximately 54% of Specialty
Commercial operations' 1996 net premium written, compared to 51% in 1995 and 43%
in 1994.
Workers' compensation and excess casualty policies are marketed principally
through 10 hub locations throughout the United States which work with large
regional independent agents and brokers. In addition, regional offices in San
Francisco, Chicago, New York City and Dallas assist with sales, underwriting and
administrative functions for specialty program business. Additional sales
positions in strategic locations nationwide develop accounts in targeted
segments.
In December 1996, TIG Insurance purchased a majority interest in a Lloyd's
agency which manages three syndicates with an estimated 1997 stamp capacity of
(pound)180 million. In addition, TIG Insurance established a corporate name with
an approximate 20% share of the managed syndicates 1997 stamp capacity. The
syndicates are expected to principally write marine, U.K. property, and aviation
business.
COMPETITION. The commercial insurance market is highly competitive on the bases
of price, service and ratings. TIG competes with other multi-line
property/casualty companies, specialty workers' compensation carriers and other
underwriting organizations, some of which are substantially larger and have
greater financial resources than TIG. The Company also faces competition from
foreign insurance companies, captive insurance companies, as well as from the
use of self insurance. With respect to workers' compensation, management's
strategy has been to distinguish TIG from its competitors in four areas:
dedicated workers' compensation underwriting, state and substate segmentation,
dedicated and local market-focused claims expertise and intensive loss
management. Recent legislative reforms in most states have restored the
price/cost balance in the workers' compensation system. These reforms, affecting
benefits, fraud and managed care policies, significantly increased competition
in the workers' compensation market, especially in California, during 1995 and
1996.
- 6 -
<PAGE>
PART I
- - --------------------------------------------------------------------------------
1.4 RETAIL
================================================================================
NATURE OF BUSINESS. Retail products provide property and liability coverages for
individuals and small businesses. Automobile policies cover liability to third
parties for bodily injury and property damage, and 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.
PRODUCTS. The following table shows Retail net premium written by statutory
line of business.
Years Ended December 31,
--------------------------
(In millions) 1996 1995 1994
======================================================
Automobile liability $130 $116 $98
Homeowners 107 133 81
Automobile physical damage 95 84 73
All other 38 25 62
- - ------------------------------------------------------
Total net premium written $370 $358 $314
- - ------------------------------------------------------
Percentage of consolidated
net premium written 24% 22% 19%
======================================================
Retail provides single-risk property and automobile coverages to targeted
markets, including products such as standard and upscale property, preferred and
standard automobile, non-standard automobile, and small business owners. Other
premium written is comprised primarily of small commercial coverages and surety
bonds. Approximately 22% of TIG's 1996 automobile policies written were for
non-standard risks, most of which carry comprehensive and collision coverage
only. Non-standard auto policies are purchased by insureds who do not have clean
motor vehicle records, who are considered high risk due to certain driver
characteristics or who drive non-standard performance cars. Premium per exposure
amount is generally higher for non-standard auto policies due to the higher risk
involved.
Of the preferred and standard automobile policies written, substantially all
have liability coverage and approximately 70% have comprehensive and collision
coverage. Standard homeowners' premium accounts for approximately 77%, 80% and
82% of total 1996, 1995 and 1994 property premium, while the emerging upscale
programs account for the remainder. Almost all of the upscale policies have home
value limits of $300 thousand or higher. Retail targets risks that lend
themselves to template underwriting. For automobile policies, "template" risks
would include insureds with clean motor vehicle records or which drive standard
performance cars. For property policies, template risks are those that have a
three year loss-free record. Template underwriting is used for risks not
exceeding $500 thousand for automobile liability, $250 thousand for automobile
physical damage and $500 thousand for combined aggregate risks on
homeowners/commercial property policies. Maximum policy limits for Retail
products are $1 million for automobile liability, $250 thousand for automobile
physical damage, and $3 million for homeowners/commercial property as of
December 31, 1996.
DISTRIBUTION SYSTEM. Retail products are distributed principally through
independent agents and a limited number of MGAs. The distribution of Retail net
premium written by state is displayed in the following chart:
Years Ended December 31,
--------------------------
(Dollars in millions) 1996 1995 1994
=========================================================
California $140 $144 $129
Michigan 87 74 67
Hawaii 41 36 29
New York 31 31 24
Other 71 73 65
- - ---------------------------------------------------------
Total $370 $358 $314
=========================================================
During 1996, refinement of TIG's distribution system continued, focusing on
profitable independent agents who have made a commitment to TIG. One of Retail's
key customer service and expense savings initiatives has been to establish
electronic systems interfaces with its agents. The percentage of electronically
interfaced agencies was 93%, 75% and 51% as of December 31, 1996, 1995 and 1994,
respectively.
The percentage of retail net premium written that was generated by independent
agents was 83.7%, 87.0%, and 96.2% for 1996, 1995 and 1994,
- 7 -
<PAGE>
PART I
- - --------------------------------------------------------------------------------
respectively, while MGAs, which principally produce non-standard auto, accounted
for the remainder. The average premium written for Retail independent agents
increased to $461 thousand in 1996, compared to $398 thousand in 1995 and $329
thousand in 1994. Approximately 57% of the total 627 agents in 1996 were located
in California and Michigan compared to 62% of the total 652 agents in 1995 and
64% of the total 752 agents in 1994. The average tenure with TIG for independent
agents was more than 10 years as of December 31, 1996. The number of active MGAs
has declined from approximately 25 at December 31, 1994 to 5 at December 31,
1996. No single production source accounted for more than 5% of Retail net
premium written in 1996. Consistent with TIG's overall marketing plan, Retail is
focusing on expanding its distribution channels through the development of
strategic relationships with MGAs and other key distribution partners. Premium
produced through these initiatives was insignificant in 1996.
COMPETITION. The retail insurance market is highly cyclical and has experienced
lower underwriting profitability and excess underwriting capacity during the
past several years. TIG's Retail operations compete against direct writers,
national (upscale) companies and regional companies, some of which are
substantially larger and have greater financial resources than TIG.
- - --------------------------------------------------------------------------------
1.5 OTHER LINES
================================================================================
NATURE OF BUSINESS. Other Lines principally includes commercial products which
have been placed in run-off due to failure to meet profitability standards along
with inter-divisional reinsurance activity in 1995. Approximately 41% of 1994
premium written was placed in run-off in June 1995 with the remainder being
place in run-off in March 1996. Most premium written in run-off programs after
the "exit date" represents contractually required renewals.
PRODUCTS. The following table shows net premium written by statutory line of
business:
Years Ended December 31,
--------------------------
(In millions) 1996 1995 1994
=======================================================
Automobile liability $61 $103 $106
Automobile physical damage 16 28 52
Commercial multiple peril 11 65 95
Fire and allied lines 5 15 44
Other 58 93 108
- - -------------------------------------------------------
Net premium written $151 $304 $405
- - -------------------------------------------------------
Percentage of consolidated
net premium written 10% 19% 25%
=======================================================
In May 1995, TIG sold an MGA subsidiary, which marketed collateral protection
insurance to more than 200 financial institutions, to a third party. This MGA
may produce business for TIG through March 1999, however, the majority of this
book is expected to be placed with other insurance carriers in 1997. This
business was reinsured 90% by a third party in April 1995. As a result, net
premium written declined to $6.5 million in 1996 and $(4) million in 1995 from
$79 million in 1994.
In June 1995, TIG announced plans to discontinue small individually underwritten
commercial policies. As a result, net premium written from these policies
declined to $4.4 million in 1996 from $95 million and $154 million in 1995 and
1994, respectively. As a result of this action, TIG consolidated field offices
and outsourced approximately 155 claims positions. Additionally, approximately
180 underwriting and other positions were eliminated.
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 (see Item 7.1 - Consolidated Results). Net premium written for 1996,
1995 and 1994 from lines of business placed in run-off as a result of the 1996
restructure was $140 million, $190 million, and $166 million, respectively.
Management estimates that the last renewals for remaining policies in-force at
December 31, 1996 will be processed by late 1997 and that related net written
premium will decline by over 75% in 1997 as compared to 1996.
- 8 -
<PAGE>
PART I
- - --------------------------------------------------------------------------------
1.6 RESERVES
================================================================================
GENERAL. The reserve liabilities for property/casualty losses and loss
adjustment expenses ("LAE") represent estimates of the ultimate net cost of all
unpaid losses and LAE incurred through December 31 of each year. The reserves
are determined using estimates of losses for individual claims ("case basis
reserves") and statistical projections of reserves for incurred but not reported
("IBNR") claims, allocated LAE and unallocated LAE.
Case basis reserves: The claims department of TIG Insurance establishes case
basis reserves for all primary lines policies and is managed centrally from
TIG's offices in Irving, Texas. As of December 31, 1996 TIG Insurance's
dedicated claims staff totaled approximately 580 of which 173 are located in
Battle Creek, Michigan, 280 are located in 22 offices across the United States
and the remainder in Irving, Texas. Case basis reserves for TIG Re are
established based on bordereaux and individual case estimates received from
ceding companies and additional estimates provided by TIG Re's claims
department, consisting of 12 employees located in Stamford, Connecticut.
The adequacy of case basis reserves is evaluated by TIG's actuarial department
which concentrates on those lines of business (third party liability coverages
and workers' compensation) for which claims settle over a long period of time.
The loss projection procedures used in this analysis contain explicit provisions
for quantifying the effect of inflation on loss payments expected to be made in
the future. In those instances where case reserves are determined to be
deficient, a bulk supplemental reserve is added to the total reserve. TIG uses
accident year methodology to calculate IBNR reserves that provide for both case
reserve deficiency and late reported claims emergence.
IBNR reserves: The IBNR reserve is based on the historical relationship of the
emergence of late reported claims to earned premium. The IBNR reserve
calculation contains an adjustment of the earned premium data base to compensate
for changes in relative rate adequacy. The adjustment includes components for
changes in claim cost resulting from trends in claims' frequency and severity.
The effect of inflation on IBNR estimates is thereby incorporated into the
calculations.
Loss adjustment expense reserves: Loss adjustment expenses are comprised of
allocated and unallocated expenses. Allocated LAE reserves are based on
long-term historical relationships of paid loss adjustment expenses to ultimate
incurred losses. By using incurred losses as a base, inflation assumptions
applicable to loss reserves apply equally to allocated expense reserves.
Unallocated LAE reserves are based on historical relationships of paid
unallocated expenses to paid losses. As with allocated LAE, the inflation
assumption applicable to loss reserves are presumed to apply equally to
unallocated expense reserves.
Inherent Uncertainties: The process of estimating reserves involves the active
participation of an experienced actuarial staff with input from the
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.
When significant changes occur, the inherent uncertainty in estimating reserves
is increased. The ultimate impact of these changes may not be known for several
years. Examples of such changes include (1) changes in production sources for
existing lines of business; (2) writings of significant blocks of new business;
(3) non-renewal or cancellation of significant blocks of existing business; (4)
changes in economic conditions; and (5) 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
- 9 -
<PAGE>
PART I
- - --------------------------------------------------------------------------------
contracts, the necessary reliance on ceding companies for information regarding
reported claims and differing reserving practices among ceding companies. This
uncertainty is compounded in the case of TIG Re by its relatively short
operating history (TIG Re was formed in 1987) and rapid growth in net premium
written. 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.
While there can be no assurance that the 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 that amount.
ANALYSIS OF LOSS AND LOSS ADJUSTMENT EXPENSE DEVELOPMENT. The following table
shows the cumulative amount paid against the previously recorded liability at
the end of each succeeding year and the cumulative development of the estimated
liability for the ten years ended December 31, 1996:
<TABLE>
<CAPTION>
December 31,
-----------------------------------------------------------------------------------------
(In millions) 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996
Net estimated ultimate
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
liability for losses and LAE $969 $1,291 $1,501 $1,668 $1,916 $2,085 $2,437 $2,738 $2,721 $2,752 $2,634
- - --------------------------------------------------------------------------------------------------------------------------
Cumulative paid as of:
One year later 430 520 580 646 719 794 787 796 778 882
Two years later 694 837 925 1,035 1,210 1,286 1,316 1,304 1,368
Three years later 875 1,045 1,160 1,338 1,508 1,641 1,650 1,681
Four years later 989 1,171 1,328 1,493 1,727 1,848 1,895
Five years later 1,041 1,261 1,405 1,627 1,856 2,010
Six years later 1,084 1,304 1,484 1,698 1,952
Seven years later 1,110 1,359 1,521 1,748
Eight years later 1,138 1,383 1,553
Nine years later 1,154 1,402
Ten years later 1,165
Net liability re-estimated as of:
One year later 1,092 1,341 1,525 1,712 1,946 2,343 2,582 2,663 2,697 2,768
Two years later 1,083 1,368 1,538 1,752 2,129 2,459 2,598 2,638 2,700
Three years later 1,123 1,367 1,549 1,850 2,209 2,512 2,559 2,608
Four years later 1,123 1,362 1,637 1,871 2,263 2,465 2,525
Five years later 1,128 1,440 1,646 1,929 2,228 2,436
Six years later 1,187 1,443 1,674 1,915 2,212
Seven years later 1,201 1,474 1,660 1,904
Eight years later 1,220 1,468 1,660
Nine years later 1,214 1,471
Ten years later 1,209
- - --------------------------------------------------------------------------------------------------------------------------
Net cumulative redundancy
(deficiency) $(240) $(180) $(159) $(236) $(296) $(351) $(88) $130 $21 $(16)
- - --------------------------------------------------------------------------------------------------------------------------
Gross Liability - End of Year $3,405 $3,845 $3,873 $3,886 $3,760
Reinsurance Recoverable (968) (1,107) (1,152) (1,134) (1,126)
------- ------- ------- ------- -------
Net Liability - End of Year $2,437 $2,738 $2,721 $2,752 $2,634
------- ------- ------- ------- -------
Gross Re-estimated Liability $3,468 $3,604 $3,791 $3,956
Re-estimated Recoverable (943) (996) (1,091) (1,188)
------- ------- ------- -------
Net Re-estimated Liability $2,525 $2,608 $2,700 $2,768
------- ------- ------- -------
Gross Cumulative Redundancy
(Deficiency) $(63) $241 $82 $(70)
==========================================================================================================================
</TABLE>
- 10 -
<PAGE>
PART I
- - --------------------------------------------------------------------------------
Conditions and trends that have affected the development of these reserves and
payments in the past will not necessarily recur in the future. Accordingly, it
would not be appropriate to use this cumulative history to project future
performance. The re-estimated liability portion of the preceeding table shows
the year by year development of the previously estimated liability at the end of
each succeeding year.
The variability in reserve estimates was affected in 1988 and subsequent periods
as a result of TIG's 1987 acquisition of Fairmont Insurance Company, a workers'
compensation insurer. The acquisition resulted in TIG's existing workers'
compensation operation being merged into the Fairmont operation and new
operating procedures and automation support being developed to integrate these
two dissimilar operations. In 1994, TIG restructured its reinsurance ceded
program (See Item 7.6 - Exposure Management) which changed the pattern of net
reserve development for some business units. For the Sports and Leisure business
unit, excess of loss covers will attach at higher amounts, lengthening the
development tail.
The re-estimated liabilities are increased or decreased as additional
information becomes known about the frequency and severity of claims for
individual years. The increases or decreases are reflected in the current year's
operating earnings. Each column shows the reserve held at the indicated calendar
year end and cumulative data on re-estimated liabilities for the year and all
prior years making up that calendar year end liability. The effect on income of
the change during the current period (i.e., the difference between the estimated
liability at December 31 and the liability re-estimated one year later) is shown
in the following table for each of the three most recent years as "Increase
(decrease) in estimated ultimate losses and LAE for prior years' claims".
Rollforward of Net Liability for LOSS and LOSS ADJUSTMENT EXPENSES. The
following table provides a reconciliation of beginning and ending liability
balances, net of reinsurance recoverable, for the years indicated:
Years Ended December 31,
--------------------------
(In millions) 1996 1995 1994
============================================================================
Liability for losses and LAE
at beginning of year, net of
reinsurance recoverable $2,752 $2,721 $2,738
- - ----------------------------------------------------------------------------
Provision for losses and LAE
for current year claims 1,122 1,200 1,240
Increase (decrease) in estimated
ultimate losses and LAE for
prior years' claims 16 (24) (75)
- - ----------------------------------------------------------------------------
Total losses and LAE incurred 1,138 1,176 1,165
- - ----------------------------------------------------------------------------
Loss and LAE payments for claims attributable to:
Current year 374 367 386
Prior years 882 778 796
Total losses and LAE payments 1,256 1,145 1,182
Liability for losses and LAE
at end of year, net of
reinsurance recoverable $2,634 $2,752 $2,721
============================================================================
Liability for losses and LAE at
end of year (statutory basis) (a) $2,649 $2,767 $2,730
============================================================================
(a) Difference from GAAP basis due to inclusion of Loss and LAE reserves related
to discontinued operations.
TIG experienced unfavorable loss and LAE reserve development for prior years in
1996 of $16 million due primarily to adverse development in Other Lines. 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 the first quarter of 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 at
Item 7.1 - Consolidated Results. 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 long haul trucking and large accounts. This reserve
strengthening was partially offset by continuing favorable development of 1993
and prior workers' compensation reserves.
Loss and LAE reserve development during 1995 was favorable by $24 million and
was primarily comprised of $18 million and $16 million of favorable
- 11 -
<PAGE>
PART I
- - --------------------------------------------------------------------------------
development in commercial multi-peril reserves related primarily to Other Lines
policies and Commercial Specialty workers' compensation, respectively. The
commercial multi-peril result is due in part to the favorable loss ratio trend
stemming from corrective underwriting action instituted since 1993. Most of the
favorable development applies to general liability coverages which benefit
greatly from TIG's litigation management effort as well as other operational
initiatives designed to improve the handling of claims for long-tail coverages.
Workers' Compensation reserve development continues to benefit from external
factors driving the industry-wide improvement observed in 1994 and 1993. During
1995, both paid loss development and case reserve development remained well
below the historical patterns underlying TIG's carried reserves. Higher than
expected loss ratio results during 1995 account for offsetting unfavorable
development recorded in Other Lines automobile liability coverages. Much of the
1995 adverse development for Other Lines occurred in long-haul trucking programs
which were discontinued in 1996.
In 1994, TIG experienced favorable development on prior year reserves of $75
million, principally related to workers' compensation reserves for which results
improved nationwide for TIG as well as the rest of the insurance industry. For
TIG, payments for prior period losses were less than previously projected,
causing the favorable loss development. The improvement was quite extensive in
the state of California due to the combined impacts of reform legislation, tough
anti-fraud measures, and an improving economy. The majority of this favorable
development, which primarily related to 1993 reserves, was reallocated to 1994
accident year reserves and policyholder dividend reserves.
ENVIRONMENTAL RESERVES. 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. The legal definition and assignment of responsibility for
environmental damage vary widely by state and are still evolving. Defense costs
on individual claims are often much greater than the claims costs themselves.
Assignment of damages to the time covered by a particular policy can be
difficult to assess and may ultimately be assigned judicially. Claims frequently
emerge long after the policy has expired.
TIG Re was formed in December 1987 and has no pre-1985 liabilities. Prior to
1985, policy forms did not typically limit coverage for latent liabilities such
as pollution, asbestos and other long-tail environmental liabilities. After that
date, policy forms began to limit exposures to certain types of latent
liabilities. As a result, management believes that TIG Re has minimal exposures
to such liabilities.
TIG's environmental claims activity is predominately from hazardous waste and
pollution-related claims arising from commercial insurance policies. 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 business involved
with disposing wastes at dump sites or having pollution on their own property
due to hazardous material use or leaking underground storage tanks. These
insureds include small manufacturing operations, tool makers, automobile
dealerships, contractors, gasoline stations and real estate developers. About
22% of open environmental claims and 39% of environmental case reserves relate
to losses in years 1972 and prior, with the oldest open loss year being 1946.
The following table presents selected data on environmental losses and LAE
incurred and reserves outstanding:
(In millions, except number Years Ended December 31,
--------------------------
of outstanding claims) 1996 1995 1994
==============================================================
Net liability for environmental
losses and LAE at the beginning
of the year $48 $56 $62
Incurred losses and LAE 2 1 2
Loss and LAE payments (11) (9) (8)
- - --------------------------------------------------------------
Net liability for environmental
losses and LAE at end of year 39 48 56
Reinsurance recoverable 24 36 25
- - --------------------------------------------------------------
Gross environmental reserves $63 $84 $81
- - --------------------------------------------------------------
Number of outstanding claims 545 543 576
==============================================================
Gross and net environmental loss and LAE reserves declined by 25% and 19%
respectively in 1996 as
- 12 -
<PAGE>
PART I
- - --------------------------------------------------------------------------------
compared to 1995 due primarily to the settlement of a
mass tort action involving implants. The number of outstanding claims indicates
the number of impacted insured accounts and not individual claimants.
An affiliate of Transamerica Corporation ("Transamerica"), TIG's former parent,
has agreed to pay 75% of up to $119 million of reserve development and newly
incurred 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. Approximately 99% of environmental reserves
at December 31, 1996 related to policies written prior to 1993. At December 31,
1996, the Transamerica affiliate had incurred no liability under this agreement.
Management regularly reassesses the adequacy of environmental reserves as part
of the reserve review process. Based upon information available on the date of
this report and the aforementioned agreement with Transamerica, management
believes that stated environmental reserves are adequate and that the ultimate
resolution of environmental claims incurred as of December 31, 1996 will not
materially impact TIG's consolidated financial position or results of
operations.
- - --------------------------------------------------------------------------------
1.7 REGULATION
================================================================================
GENERAL. TIG's property/casualty insurance companies are subject to regulation
by governmental agencies in the states in which they conduct business. The
nature and extent of this regulation varies among jurisdictions, but typically
involves the following: (1) prior approval of the acquisition of control of an
insurance company or any company controlling an insurance company, (2)
regulation of certain transactions entered into by an insurance company with any
of its affiliates, (3) approval of premium rates for many lines of insurance,
(4) standards of solvency and minimum amounts of capital and surplus which must
be maintained, (5) limitations on types and amounts of investments, (6)
restrictions on the size of risks which may be insured by a single company, (7)
licensing of insurers and their agents, (8) deposits of securities for the
benefit of policyholders, (9) approval of policy forms, methods of accounting,
establishing reserves for losses and LAE, and (10) filing of annual and other
reports with respect to financial condition and other matters. In addition,
state regulatory examiners perform periodic examinations of insurance companies,
primarily for the protection of policyholders.
As a result of the regulatory supervision of TIG's insurance company
subsidiaries under the California Insurance Holding Company System Regulatory
Act, and other similar acts in states where TIG has domestic insurance company
subsidiaries (the "Holding Company Act"), the insurance company subsidiaries are
required to report information on TIG Holdings. Although TIG has relocated the
majority of its personnel to Irving, Texas, TIG plans to retain significant
operations in California and maintain TIG Insurance's and other insurance
company subsidiaries domicile in that state. The Holding Company Act contains
certain reporting requirements including those requiring the insurance companies
to file information relating to TIG's capital structure, ownership, financial
condition and general business operations of its insurance subsidiaries. The
Holding Company Act contains reporting and prior approval requirements with
respect to transactions among affiliates.
RESTRICTIONS ON DIVIDENDS FROM INSURANCE SUBSIDIARIES. TIG's insurance
subsidiaries are subject to various state statutory and regulatory restrictions,
applicable generally to each insurance company in its state of incorporation,
which limit the amount of dividends or distributions by an insurance company to
its shareholders. The restrictions are generally based on certain levels of
surplus, investment income and operating income, as determined under statutory
accounting practices. If insurance regulators determine that payment of a
dividend or any other payment to an affiliate (such as a payment under a tax
allocation agreement) would, because of the financial condition of the paying
insurance companyor otherwise, be detrimental to such insurance company's
policyholders or creditors, the regulators
- 13 -
<PAGE>
PART I
- - --------------------------------------------------------------------------------
may block payment of such dividends or such other payment to the affiliates that
would otherwise be permitted without prior approval.
Subject to the requirements discussed below, the California Insurance Code (the
"California Code") permits the payment of dividends in any year which, together
with other dividends or distributions made within the preceding 12 months, do
not exceed the greater of (1) 10% of statutory surplus as of the end of the
preceding year or (2) the statutory net income for the preceding year, with
larger dividends ("extraordinary dividends") payable only upon prior regulatory
approval. All extraordinary dividends must be reported to the commissioner
thirty days prior to payment. In addition, California law requires that an
insurer report all dividends within five days of declaration and at least ten
days prior to payment. The interim period would allow the California Department
of Insurance (the "Department") time to take regulatory action if it so elected,
with respect to the dividend declared.
The California Code provides that stock property/casualty insurers may declare
dividends only from earned surplus. "Earned surplus" is defined as unassigned
funds, as required to be reported on the insurer's annual statement. The
California Code prohibits dividends from being paid out of earned surplus
derived from unrealized net appreciation of assets or derived from an exchange
of assets, unless either such earned surplus has been realized or the assets are
currently realizable in cash. An exception to the prohibition allows payment of
dividends if, following the dividend, the insurer's surplus as regards
policyholders is, (1) reasonable in relation to its outstanding liabilities and
(2) adequate to the insurer's financial needs, as prescribed in the California
Code, and the insurance commissioner's prior approval has been obtained.
In June 1993, the California Department of Insurance permitted TIG Insurance
Company ("TIC"), TIG's lead insurer, to record a quasi-reorganization of its
statutory capital accounts. The effect of the quasi-reorganization was to
increase the earned surplus of TIC to zero from a negative $285 million and to
decrease contributed surplus by the same amount. This transaction significantly
increased TIC's future dividend paying capability as insurance companies may
only pay dividends from earned surplus.
Certain other extraordinary transactions between an insurance company and its
affiliates, including sales, loans, or investments which in any twelve-month
period aggregate at least 5% of its admitted assets or 25% of its statutory
capital and surplus, also are subject to prior approval by state insurance
regulatory authorities. Service agreements and reinsurance agreements are
included within such requirements.
RISK-BASED CAPITAL RULES. The NAIC adopted a formula to calculate
risk-based-capital ("RBC") for property/casualty insurance companies. The
primary objective of the RBC requirements is to raise the safety net that
statutory surplus provides for policyholder obligations. The formula first
applied to the property/casualty insurance industry beginning in 1994. The RBC
rules do not have a material impact on TIG's business or on its financial
condition. The statutory "risk adjusted" capital for each of TIG's insurance
subsidiaries as of December 31, 1996 exceeded minimum requirements.
GUARANTY ASSOCIATIONS AND INVOLUNTARY MARKETS. Most states require
property/casualty insurers to become members of insolvency funds or associations
which generally protect policyholders against the insolvency of an insurer
writing insurance in the state. Members of the fund or association must
contribute to the payment of certain claims made against insolvent insurers.
Maximum contributions required by law in any one year vary between 1% and 2% of
annual premium written by a member in that state. Assessments from guaranty
funds were $1 million for 1996, 1995 and 1994. Most of these payments are
recoverable through future policy surcharges and premium tax reductions.
Provision of coverage for less desirable risks through participation in
mandatory programs is also required by most states. TIG's participation in
assigned risk pools and similar plans, mandated now or in the future, creates
downward pressure on earnings. Involuntary costs resulted in increases in
underwriting loss of $18 million, $16 million and $22 million in 1996, 1995, and
1994, respectively. Excluding a one time buyout payment of $3.3 million for a
New Jersey auto facility, involuntary costs for 1996 would have declined to $14
million.
- 14 -
<PAGE>
PART I
- - --------------------------------------------------------------------------------
ITEM 2. BUSINESS PROPERTIES
================================================================================
TIG's business properties include 53 leased locations, one owned facility in
Battle Creek, Michigan and two locations where client office space is utilized.
The leased locations represent approximately 0.9 million square feet, and the
owned location occupies approximately 220,000 square feet.
TIG occupies approximately 275,000 square feet of space in Irving, Texas for
which the lease expires in 2009 and may be extended by TIG for two renewal
periods of five years each. All of TIG's other existing leases expire by the end
of 2007.
- - --------------------------------------------------------------------------------
ITEM 3. 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. In the opinion of TIG, based upon information
available on the date of this report, no individual item of litigation, or group
of similar items of litigation (including asbestos-related and environmental
pollution matters and the matter referred to below), taken net of reserves
established therefor and giving effect to insurance and reinsurance, is likely
to result in judgments for amounts material to TIG's consolidated results of
operations.
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.
Management believes that the ultimate liability, if any, arising from the Talbot
Case will not materially impact consolidated operating results.
- - --------------------------------------------------------------------------------
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
================================================================================
There were no matters submitted to a vote of security holders, through
solicitation of proxies or otherwise, during the fourth quarter of 1996.
- 15 -
<PAGE>
PART II
- - --------------------------------------------------------------------------------
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
================================================================================
The principal market in which TIG Holdings' common stock is traded is the New
York Stock Exchange. There were 375 shareholders of record on December 31, 1996,
representing approximately 12,500 beneficial owners. Information concerning
restrictions on the ability of TIG Holdings' subsidiaries to transfer funds to
TIG Holdings in the form of cash dividends is set forth in Item 7.8 - Liquidity
and Capital Resources - Liquidity Restrictions and Note J to the Consolidated
Financial Statements at Item 8. In February 1997, a dividend of $0.15 per share
was paid.
The closing market price and cash dividends paid by calendar quarter for 1996
and 1995 are as follows:
<TABLE>
<CAPTION>
1996 1995
--------------------------------- --------------------------------
Market Price Dividend Market Price Dividend
Quarter High Low per share High Low per share
=====================================================================================================
<S> <C> <C> <C> <C> <C> <C>
1 $33.625 $26.250 $0.05 $22.500 $18.625 $0.05
2 $33.625 $28.500 $0.05 $24.500 $22.125 $0.05
3 $30.125 $27.000 $0.05 $26.875 $22.250 $0.05
4 $34.000 $28.500 $0.05 $28.500 $25.000 $0.05
- - -----------------------------------------------------------------------------------------------------
Year end closing price $33.875 $28.500
=====================================================================================================
</TABLE>
- 16 -
<PAGE>
PART II
- - --------------------------------------------------------------------------------
ITEM 6. SELECTED FINANCIAL DATA
================================================================================
The following information should be read in conjunction with Item 7 -
Management's Discussion and Analysis of Financial Condition and Results of
Operations and with the audited Consolidated Financial Statements and notes
thereto at Item 8 Financial Statements and Supplementary Data.
<TABLE>
<CAPTION>
(In millions except per share data) 1996 1995 1994 1993 1992
======================================================================================================================
CONSOLIDATED RESULTS:
<S> <C> <C> <C> <C> <C>
Net premium earned $1,539 $1,618 $1,549 $1,542 $1,604
Net investment income 290 268 249 241 240
Realized investment gains (losses) (4) (11) (20) 98 165
-------------------------------------------------------------------
Total revenues $1,825 $1,875 $1,778 $1,881 $2,009
-------------------------------------------------------------------
Income (loss) from continuing operations $79 $118 $52 $(128) $(42)
Loss from discontinued operations - - - - (151)
Cumulative effect of change in accounting - - - - (15)
-------------------------------------------------------------------
Net income (loss) $79 $118 $52 $(128) $(208)
- - ----------------------------------------------------------------------------------------------------------------------
PER SHARE RESULTS (a):
Net income (loss) per common share $1.30 $1.89 $0.79 $(2.04) -
Weighted average common shares 59.3 61.6 63.1 63.5 -
Dividends declared per common share $0.20 $0.20 $0.20 $0.05 -
- - ----------------------------------------------------------------------------------------------------------------------
FINANCIAL POSITION:
Investments $4,233 $4,550 $3,919 $4,201 $3,443
Total assets 6,476 6,683 6,116 6,253 5,661
Reserves for losses and LAE 3,760 3,886 3,873 3,845 3,405
Notes payable 123 120 - - 31
Mandatory redeemable preferred stock 25 25 25 25 -
Shareholders' equity 1,207 1,376 1,042 1,203 1,087
Book value per common share $22.41 $23.09 $16.81 $18.86 -
- - ----------------------------------------------------------------------------------------------------------------------
COMMON STOCK (a):
Market high $34.000 $28.500 $23.250 $28.000 -
Market low 26.250 18.625 17.250 20.375 -
Market close 33.875 28.500 18.750 22.625 -
Common shares outstanding net of treasury stock 53.9 59.6 62.0 63.8 -
- - ----------------------------------------------------------------------------------------------------------------------
STATUTORY RESULTS (b):
Combined Surplus $975 $952 $901 $864 $768
-------------------------------------------------------------------
Net income (loss) $184 $136 $13 $(54) $(97)
-------------------------------------------------------------------
Loss and LAE ratio 73.8 72.9 76.4 92.1 98.9
Underwriting expense ratio 30.2 30.7 32.1 31.6 30.5
Policyholder dividends ratio 1.0 1.7 1.9 1.5 1.5
-------------------------------------------------------------------
Combined ratio 105.0 105.3 110.4 125.2 130.9
-------------------------------------------------------------------
Net premium written to surplus ratio 1.6x 1.7x 1.8x 1.8x 2.1x
======================================================================================================================
<FN>
(a)The initial public offering of TIG Holdings common stock was completed in
May 1993, therefore per share results and common stock data are not
applicable for 1992.
(b) Ratios are calculated for continuing operations only.
</FN>
</TABLE>
- 17 -
<PAGE>
PART II
- - --------------------------------------------------------------------------------
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
- - --------------------------------------------------------------------------------
7.1 CONSOLIDATED RESULTS
================================================================================
The following discussion provides management's assessment of financial results
and material changes in financial position for TIG Holdings, Inc. ("TIG
Holdings") and its subsidiaries (collectively "TIG") and presents management's
expectations for the near term future. The analysis focuses on the performance
of TIG's three major operating divisions, Reinsurance, Commercial Specialty and
Retail, and its investment portfolio, which are discussed at Items 7.2, 7.3, 7.4
and 7.7, respectively. Lines of business that have been de-emphasized ("Other
Lines") are discussed at Item 7.5. For a better understanding of this analysis,
reference should be made to Item 1 - Description of Business and to Item 8 -
Financial Statements and Supplementary Data.
Statements contained in the Management's Discussion and Analysis and elsewhere
in this document that are not based on historical information are
forward-looking statements and are based on management's projections, estimates
and assumptions. Management would like to caution readers regarding its
forward-looking statements (see Item 7.10 - Forward-Looking Statements).
Key industry terms that appear in the Management's Discussion and Analysis and
elsewhere in this document are defined at Item 7.11. Certain reclassifications
of prior years' amounts have been made to conform with the 1996 presentation.
OVERVIEW. The following table shows the major components of net income:
Years Ended December 31
-------------------------
(In millions) 1996 1995 1994
==============================================================
Gross premium written $1,924 $2,036 $1,987
- - --------------------------------------------------------------
Net premium written $1,529 $1,610 $1,621
- - --------------------------------------------------------------
Net premium earned $1,539 $1,618 $1,549
Less:
Losses and LAE incurred 1,138 1,176 1,165
Underwriting expenses and
policyholder dividends 466 501 531
- - --------------------------------------------------------------
Underwriting loss (65) (59) (147)
Net investment income 290 268 249
Net investment loss (4) (11) (20)
Interest expense (9) (6) -
Corporate expense (37) (37) (37)
Restructuring charges (100) - -
- - --------------------------------------------------------------
Income before tax benefit (expense) 75 155 45
Income tax benefit (expense) 4 (37) 7
- - --------------------------------------------------------------
Net income $79 $118 $52
Income excluding restructuring
charges and investment loss,
net of tax $147 $125 $65
==============================================================
The $39 million or 33% decrease in 1996 net income as compared to 1995 is
attributable to a $100 million ($65 million after tax) restructuring charge
recorded in the first quarter of 1996 which is discussed below. Income excluding
restructuring charges and investment loss increased by $22 million or 18% in
1996 over 1995 as reserve strengthening of $31 million was more than offset by a
$22 million increase in investment income and a $20 million deferred tax
benefit. As discussed at Item 1.6 - Reserves, TIG strengthened Other Lines loss
and LAE reserves by $31 million in March 1996 in response to adverse development
and the decision to
- 18 -
<PAGE>
PART II
- - --------------------------------------------------------------------------------
exit such business. As discussed at Item 7.7 - Investments, the book yield of
the investment portfolio increased from 6.7% for the year ended December 31,
1995 to 7.5% for the year ended December 31, 1996 due to a shift in portfolio
mix toward high yield bonds. 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.
The $66 million or 127% increase in 1995 net income compared to 1994 arose
principally from improved underwriting results of $88 million, primarily in
Retail and in Other Lines. Retail's underwriting loss declined by $49 million in
1995 as underwriting results for 1994 included $45 million in catastrophe costs
arising from the Northridge, California earthquake. The underwriting loss from
Other Lines declined by $56 million in 1995 due to lower premium volume and a
decline in the statutory combined ratio from 124.6 in 1994 to 114.6 in 1995 as a
result of the 90% reinsurance of financial institutions business and corrective
underwriting actions taken since 1993. In addition, net investment income
increased by $19 million or 7.6% in 1995 compared to 1994 due to an increase in
funds available for investment, partially attributable to the issuance of $100
million in notes in April 1995. Net investment losses declined by $9 million due
to a general decline in interest rates in the second half of 1995.
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, 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 December 31, 1996, the consolidation/closure of field offices
was complete although various lease obligations remain; net written premium for
Other Lines had declined by 50% for the year ended December 31, 1996 as compared
to 1995; and approximately 600 employees' responsibilities had been outsourced
to third party service providers or their employment had been otherwise
terminated. At December 31, 1996, TIG has approximately 1,300 employees as
compared to approximately 2,000 employees at December 31, 1995.
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 December 31, 1996, is $53 million. Charges against the
restructure accrual of $47 million have been recorded during 1996 and are
comprised of $9 million in severance, $23 million in contractual policy
obligations, $10 million in lease termination costs and $5 million in asset
write-downs.
PREMIUM. The following table displays net premium written by division:
Year Ended December 31
------------------------
(In millions) 1996 1995 1994
======================================================
Reinsurance $548 $511 $440
Commercial Specialty 460 437 462
Retail 370 358 314
- - ------------------------------------------------------
Ongoing Lines 1,378 1,306 1,216
Other Lines 151 304 405
- - ------------------------------------------------------
Total $1,529 $1,610 $1,621
======================================================
Growth in ongoing lines net premium written was 5.5% in 1996 and 7.4% in 1995 as
compared to the corresponding prior year. The decline in the premium growth rate
in 1996 is attributable to highly competitive market conditions for both
reinsurance and primary insurance products. Oversupply of capital in the
insurance industry has resulted in
- 19 -
<PAGE>
PART II
- - --------------------------------------------------------------------------------
significant downward pricing pressure, making it increasingly difficult to write
business which meets TIG's profitability standards. TIG's marketing focus for
all operating divisions, particularly Commercial Specialty, is to develop
"program" business. Programs are typically characterized as having a controlled
production source, homogeneous risks and a market niche. Management believes
that programs generally have more predictable loss patterns and a lower,
variable cost structure which produces higher operating margins.
Since mid-1993, TIG has sought to improve profitability by eliminating products
requiring high cost manual processing on an individual policy basis or for which
adequate pricing could not be obtained due to market conditions. Business
targeted for non-renewal has been classified as Other Lines. As expected, the
declines in Other Lines net premium written in 1996 and 1995 has more than
offset premium growth in ongoing lines. Management estimates that the last
renewals for remaining policies in-force at December 31, 1996 will be processed
by late 1997 and that related net premium written will decline by over 75% in
1997 as compared to 1996.
STATUTORY COMBINED RATIO. A key measure of an insurance company's performance is
its statutory combined ratio. The following table shows the combined ratio for
TIG's active operating divisions individually and on a consolidated basis.
Combined Ratio
-----------------------
1996 1995 1994
========================================================
Reinsurance 102.5 103.6 104.4
Commercial Specialty 104.1 103.9 97.4
Retail 101.2 101.6 117.6
- - --------------------------------------------------------
Ongoing lines 102.7 103.2 105.4
Other Lines 118.0 114.6 124.6
- - --------------------------------------------------------
Consolidated 105.0 105.3 110.4
========================================================
The gradual improvement in the combined ratio for ongoing lines from 1994 to
1996 is attributable to loss cost management and expense control programs
implemented by management since 1993. In 1996, the combined ratio for Other
Lines was increased by 14.4 percentage points as a result of reserve
strengthening of $31 million recorded in March 1996 (see Item 1.6 - Reserves).
In 1994, the combined ratio for Retail was increased by 14.3 percentage points
and the consolidated combined ratio was increased by 3.2 percentage points due
to losses of $49 million incurred related to the Northridge, California
earthquake.
- 20 -
<PAGE>
PART II
- - --------------------------------------------------------------------------------
7.2 REINSURANCE
================================================================================
PREMIUM. TIG's reinsurance operations are conducted through TIG Re which is
based in Stamford, Connecticut. TIG Re's marketing strategy and distribution
system are described at Item 1.2 - Reinsurance. The table below shows premium
production for TIG Re:
Years Ended December 31,
------------------------
(In millions) 1996 1995 1994
======================================================
Specialty casualty $362 $428 $398
Reverse flow 65 17 -
Specialty property 63 54 35
International 29 24 8
Other 29 (12) (1)
- - ------------------------------------------------------
Net premium written $548 $511 $440
Gross premium written 576 587 522
- - ------------------------------------------------------
Retention Ratio 95.1% 87.1% 84.3%
======================================================
Growth in net premium written was 7%, 16% and 27% in 1996, 1995 and 1994,
respectively, in comparison to the corresponding prior year. The high growth
rate in 1994 and 1995 was driven by widespread restructuring of corporate
reinsurance programs and uncertainty in the Lloyd's of London reinsurance market
where market opportunities for TIG Re expanded to include international property
as well as U.S. casualty business previously placed in London. Market conditions
softened considerably in 1996 in response to the restructuring of the Lloyd's of
London market and an oversupply of capital in both reinsurance and primary
insurance markets. As a result of competitive primary market conditions, a
number of TIG Re's ceding company clients reduced their reinsurance programs in
1996 to maintain their premium volume.
New business comprised $135 million, $118 million, and $143 million of net
premium written in 1996, 1995 and 1994, respectively. The majority of new
business is attributable to new ceding company relationships, principally in the
property and auto liability areas, developed as a result of TIG Re's efforts to
create additional distribution channels. In January 1994, TIG Re established an
office in London, England which produced $29 million of net premium written in
1996, primarily on international risks, compared to $23 million and $8 million
in 1995, and 1994, respectively. TIG Re has also expanded its distribution
channels since 1994 by identifying insurance market opportunities and presenting
programs directly to TIG Insurance and other ceding company production partners.
Such "reverse flow" business increased by $48 million in 1996 and $17 million in
1995 as compared to the corresponding prior year.
During 1996, TIG Re established a fully integrated Lloyd's vehicle through the
formation and capitalization of a wholly owned managing agent that will manage,
and a wholly owned corporate name that will provide the sole support for,
syndicate 1218. This was the first fully integrated corporate vehicle to have
been approved in the history of Lloyd's. The formation of the syndicate will
allow TIG Re to write insurance and reinsurance world-wide, and is expected to
form an important part of any international expansion undertaken by TIG Re. The
syndicate has a stamp capacity of (pound)20 million for the 1997 account to
access international property and casualty business. Also, during December of
1996, TIG Re was approved as a licensed reinsurer in Canada.
The 8.0 percentage point increase in the retention ratio in 1996 as compared to
1995 is principally attributable to the change in structure of one large program
to assuming premium on a net written basis instead of a gross written basis.
Other net premium written is net of bulk premium cessions not applicable to a
specific line of business and includes for 1995, premium ceded by TIG Re to TIG
Insurance under an aggregate stop loss reinsurance treaty similar to external
reinsurance coverage purchased by TIG Re in 1996 and 1994. Premium ceded by TIG
Re under the 1995 internal reinsurance treaty is reflected in the gross and net
premium of Other Lines.
UNDERWRITING RESULTS. The improvement in TIG Re's underwriting results from 1994
to 1996 reflects management's expectations regarding the selection of
clients/programs that will produce satisfactory returns and the impact of
reduced participation in under-performing treaties. There have been some
- 21 -
<PAGE>
PART II
- - --------------------------------------------------------------------------------
upward changes in commission and brokerage rates on business renewed from 1994
to 1996, but most casualty accounts have been renewed at expiring terms.
Underwriting expenses increased during 1996, principally due to expenses of $2.1
million incurred in connection with TIG Re's formation of a facultative unit as
discussed at Item 1.2 - Reinsurance. As discussed in Item 1.6 - Reserves, the
estimation of TIG Re's loss and LAE reserves and therefore net loss and LAE
incurred is subject to significant uncertainty due to TIG Re's relatively short
operating history and rapid premium growth.
The following tables summarize TIG Re's underwriting results:
Year Ended December 31,
------------------------
(In millions) 1996 1995 1994
======================================================
Net premium earned $534 $483 $394
Less:
Net loss and LAE incurred 386 361 299
Commission expense 137 117 97
Other underwriting expense 25 22 20
- - ------------------------------------------------------
Underwriting loss $(14) $(17) $(22)
- - ------------------------------------------------------
STATUTORY RATIOS:
- - ------------------------------------------------------
Loss and LAE 72.3 74.6 75.9
Commission expense 25.5 24.6 24.3
Other underwriting expense 4.7 4.4 4.2
- - ------------------------------------------------------
Combined ratio 102.5 103.6 104.4
======================================================
- - --------------------------------------------------------------------------------
7.3 COMMERCIAL SPECIALTY
================================================================================
PREMIUM. Commercial Specialty provides specialized insurance products through
four main business units: Sports and Leisure, Workers' Compensation, Primary
Casualty and Excess Casualty. Most support services for Commercial Specialty are
provided by TIG's national support center in Irving, Texas. In addition,
workers' compensation and excess casualty products are distributed through field
offices nationwide. TIG's marketing strategy and distribution systems are
described at Item 1.3 - Commercial Specialty. The table below shows the
distribution of Commercial Specialty net premium written by business unit:
Years Ended December 31,
--------------------------
(In millions) 1996 1995 1994
======================================================
Workers' Compensation $191 $216 $284
Sports and Leisure 163 166 152
Primary Casualty 66 30 13
Excess Casualty 40 25 13
- - ------------------------------------------------------
Net premium written $460 $437 $462
Gross premium written 633 578 588
- - ------------------------------------------------------
Retention ratio 72.7% 75.6% 78.6%
======================================================
Total Commercial Specialty net premium written for 1996 approximated 1994
production levels after dropping 5% in 1995 due to a decline in Workers'
Compensation production. Since 1994, declining Workers' Compensation premium has
offset premium growth in other Commercial Specialty units. A number of states
have enacted workers' compensation reforms which has intensified competitive
market conditions nationwide. Although workers' compensation production for the
second half of 1996 was slightly higher than the second half of 1995, management
believes that increasingly competitive market conditions will make it difficult
to maintain 1996 production levels in 1997. Sports and Leisure premium
production was flat in 1996 as compared to 1995 due to the loss of several large
accounts.
Growth in Primary Casualty and Excess Casualty net premium written since 1994 is
attributable to TIG's marketing focus on the development of program business
through strategic MGA relationships. Growth in 1996 is principally attributable
to expansion of existing commercial auto programs and development of excess and
surplus lines programs. In late 1996, TIG entered into a quota share reinsurance
arrangement with another insurer with respect to certain excess and surplus
lines programs in conjunction with such insurer's hiring of certain TIG
underwriting personnel. Commercial Specialty will continue to underwrite excess
and surplus lines business through its Excess Casualty unit and the
- 22 -
<PAGE>
PART II
- - --------------------------------------------------------------------------------
reinsurance arrangement with such insurer. TIG does not anticipate a significant
reduction in Commercial Specialty net premium written as a result of the quota
share arrangement.
UNDERWRITING RESULTS. The table below presents underwriting results for
Commercial Specialty operations:
Years Ended December 31,
------------------------
(In millions) 1996 1995 1994
======================================================
Net premium earned $429 $419 $413
Less:
Net loss and LAE incurred 298 296 273
Commission expense 84 72 51
Premium related expense 19 20 23
Other underwriting expense 39 21 23
Policyholder dividends 2 14 25
- - ------------------------------------------------------
Total underwriting loss $(13) $(4) $18
- - ------------------------------------------------------
STATUTORY RATIOS:
- - ------------------------------------------------------
Loss and LAE 69.2 70.5 65.7
Commission expense 19.2 17.4 15.3
Premium related expense 4.0 4.8 4.3
Other underwriting expense 8.5 4.9 5.1
Policyholder dividends 3.2 6.3 7.0
- - ------------------------------------------------------
Combined ratio 104.1 103.9 97.4
======================================================
Commercial Specialty's underwriting loss increased by $9 million in 1996 as
compared to 1995 due primarily to an $18 million increase in other underwriting
expense. Approximately $7 million of the increase in other underwriting expense
is attributable to non-recurring start-up costs incurred for one excess and
surplus lines program which was reinsured in late 1996. Advertising costs and
additional staff costs related to the start up of various other Commercial
Specialty programs account for another $5 million of the increase while a
decrease in servicing carrier fees received for administering certain
involuntary pools account for $3 million of the increase.
Commercial Specialty's underwriting results declined by $22 million in 1995 as
compared to 1994 principally due to favorable development recognized in 1994 on
prior year workers' compensation reserves as discussed at Item 1.6 Reserves. A
portion of the decline in 1995 underwriting results is attributable to increased
commission rates as discussed below.
The statutory commission expense ratio increased by 1.8 percentage points in
1996 and 2.1 percentage points in 1995 as compared to the corresponding prior
year. The increase in commission rates reflects the increasing volume of program
business produced through MGAs. Although commissions are generally higher, other
underwriting expenses associated with program business are generally less than
traditional business since many "other underwriting" costs are covered by the
MGAs' commission. The shifting of other underwriting expenses to MGAs creates a
variable cost structure for TIG.
Policyholder dividends incurred and the statutory policyholder's dividend ratio
have declined significantly from 1994 to 1996. The decrease is due to the
combined impact of the repeal of California's minimum rate law in January 1995,
which reduced the emphasis on policyholder dividends, and the reduction in
California workers' compensation business written by TIG. In 1996, premium for
participating business was $62 million as compared to $146 million in 1994. The
decline in policyholder dividends has not significantly impacted net
underwriting results as non-participating policies are generally structured with
lower premium rates.
- 23 -
<PAGE>
PART II
- - --------------------------------------------------------------------------------
7.4 RETAIL
================================================================================
PREMIUM. Retail operations are based in Battle Creek, Michigan. TIG's retail
marketing strategy and distribution system are described at Item 1.4 - Retail.
The table below presents premium production for Retail by major product:
Years Ended December 31,
------------------------
(In millions) 1996 1995 1994
======================================================
Standard automobile $185 $170 $171
Homeowners 107 133 81
Non-standard automobile 40 30 0
Small Business 9 2 0
All Other 29 23 62
- - ------------------------------------------------------
Net written premium $370 $358 $314
Gross written premium 422 404 358
- - ------------------------------------------------------
Retention Ratio 87.7% 88.6% 87.7%
======================================================
Retail net premium written increased by approximately $12 million or 3.4% in
1996 from 1995. Standard automobile premium increased by $15 million or 8.8%
primarily as a result of expansion in target markets (Michigan, California,
Connecticut and Hawaii) and represents 50% of total Retail net premium written.
Non-standard automobile premium has increased to $40 million, or approximately
11% of total Retail premium, since the market was initially targeted in 1995.
Growth in auto lines for 1996 was offset by planned reductions in homeowner's
premium in accordance with management plans to decrease exposure in catastrophe
prone areas (primarily California, New York and Florida).
Retail net premium written increased by approximately $44 million or 14% in 1995
from 1994, principally due to growth of $29 million in automobile lines of which
$30 million related to non-standard automobile. During 1995, Retail targeted the
non-standard automobile market and developed strategic relationships with
several MGAs.
UNDERWRITING RESULTS. The following table summarizes Retails' underwriting
results:
Years Ended December 31,
------------------------
(In millions) 1996 1995 1994
======================================================
Net premium earned $363 $337 $312
Less:
Net loss and LAE incurred 259 244 270
Commission expense 59 56 53
Premium related expense 17 16 16
Other underwriting expense 32 27 28
- - ------------------------------------------------------
Underwriting loss $(4) $(6) $(55)
- - ------------------------------------------------------
Underwriting gain (loss)
excluding catastrophes $4 $13 $(6)
- - ------------------------------------------------------
STATUTORY RATIOS:
- - ------------------------------------------------------
Loss and LAE 71.3 72.5 86.7
Commission expense 16.2 16.9 16.9
Premium related expense 4.7 4.6 5.0
Other underwriting expense 9.0 7.6 9.0
- - ------------------------------------------------------
Combined ratio 101.2 101.6 117.6
======================================================
Combined ratio
excluding catastrophes 98.9 96.1 103.8
======================================================
Retail's underwriting gain excluding catastrophes declined by $9 million to $4
million in 1996 and the combined ratio excluding catastrophes increased by 2.8
percentage points over 1995. The deterioration in the combined ratio excluding
catastrophes is principally due to a 2.0 percentage point rise in the loss and
LAE ratio excluding catastrophes resulting from increased frequency and severity
of reported losses for standard and non-standard automobile lines. In addition,
the underwriting expense ratio increased by 1.4 percentage points due to start
up costs of $3.4 million incurred to develop the Small Business unit and program
business.
Retail's underwriting results excluding catastrophes improved substantially in
1995 in comparison to 1994 due to rate increases effective in 1995 and cost
containment measures implemented in 1994. The
- 24 -
<PAGE>
PART II
- - --------------------------------------------------------------------------------
most significant rate increases were in California and were comprised of 9.9%
for homeowners; 73% for earthquake; and 6.7% for automobile. In 1994, Retail
implemented a number of cost containment measures which included medical cost
control procedures and other vendor programs. These expense controls and
increasing premium volume reduced the other underwriting expense ratio in 1995.
Catastrophe costs decreased to $8.4 million in 1996 compared to $18.6 million in
1995 and $48.7 million in 1994. TIG's 1996 and 1995 catastrophe costs were
mainly attributable to various windstorm, rain and flood losses due to seasonal
storms in western states and to hurricane activity in southeastern states. The
January 1994 Northridge earthquake contributed $44.7 million of the catastrophe
costs for 1994.
- - --------------------------------------------------------------------------------
7.5 OTHER LINES
================================================================================
Other lines principally includes commercial lines that have been placed in
run-off due to failure to meet profitability standards. See Item 1.5 for a
description of business placed in run-off.
Years Ended December 31,
------------------------
(In millions) 1996 1995 1994
======================================================
Gross premium written $294 $466 $520
- - ------------------------------------------------------
Net premium written $151 $304 $405
- - ------------------------------------------------------
Net premium earned $213 $379 $430
Less:
Net loss and LAE incurred 195 275 323
Commission expense 24 49 71
Premium related expense 14 21 23
Other underwriting expense 13 65 99
Dividends to policyholders 1 1 2
- - ------------------------------------------------------
Total underwriting loss $(34) $(32) $(88)
- - ------------------------------------------------------
STATUTORY RATIOS:
- - ------------------------------------------------------
Loss and LAE 91.3 73.5 79.3
Commission expense 10.3 13.0 17.4
Premium related expense 8.3 6.4 6.6
Other underwriting expense 7.4 21.3 21.2
Policyholder dividend ratio 0.7 0.4 0.1
- - ------------------------------------------------------
Combined ratio 118.0 114.6 124.6
======================================================
PREMIUM. Non-renewal of Other Lines business has generally progressed at a
faster rate than originally expected by TIG management. The rapid elimination of
this business is attributable to pro-active efforts by TIG in assisting
producers with placing their business with other insurance carriers. As a
result, TIG has in many cases avoided lengthy cancellation notice periods.
Management estimates that the last renewals for remaining policies in-force at
December 31, 1996 will be processed by late 1997 and that related net premium
written will decline by over 75% in 1997 as compared to 1996.
UNDERWRITING RESULTS. As discussed at Item 1.6, 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 14.4 percentage points. Commission 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
declined in 1996 due to the elimination of overhead costs and the first quarter
1996 accrual for contractual policy obligations as discussed in Note C to the
Consolidated Financial Statements.
- 25 -
<PAGE>
PART II
- - --------------------------------------------------------------------------------
7.6 EXPOSURE MANAGEMENT
================================================================================
GENERAL REINSURANCE PROGRAM. TIG purchases reinsurance to allow it to insure
larger risks while controlling exposure to larger losses and catastrophes. Each
year, TIG's reinsurance program is modified based upon changes in TIG's business
mix, coverage availability and pricing. Reinsurance purchased may include
treaty, pro rata, facultative and aggregate stop loss coverages. TIG's ceding
reinsurance agreements are generally structured on a treaty basis whereby all
risks meeting certain criteria are automatically reinsured. During 1994, TIG
centralized the reinsurance purchasing function for all operating divisions
except TIG Re and increased minimum retentions. Limited authority is still
granted to individual business units regarding treaty and facultative
placements, which adds flexibility to TIG's reinsurance program.
TIG Re purchases reinsurance (retrocessional cover) and aggregate stop loss
coverage separately from TIG Insurance's primary operations. TIG Re purchases
property catastrophe coverage and several retrocessional coverages for specific
treaties or programs. In 1995, TIG Re purchased aggregate stop loss reinsurance
coverage from TIG Insurance, similar to external reinsurance purchased in 1996
and 1994.
The priorities in TIG's reinsurance program are security of reinsurance (ability
of the reinsurer to pay losses now and in the future), coverage and price.
Reinsurers' financial acceptability is monitored and recoverables are pursued.
Contract terms are reviewed annually and renegotiated in the interim if required
to remain in compliance with program needs. Continuity in reinsurance
relationships is a high priority for TIG, with several coverages remaining in
place for 20 or more years with the same reinsurer. Reinsurers are subject to
licensing and regulation in the jurisdictions in which they conduct business.
Countries outside of the United States have varying levels of regulation of
insurance and reinsurance companies. Many states allow financial statement
credit for reinsurance ceded to a reinsurer that is licensed in another state or
foreign jurisdiction, provided such reinsurance meets certain financial
requirements or the insurer is provided with collateral (usually in the form of
a letter of credit) to secure the reinsurer's obligations. To maintain its
ability to receive financial statement credit, TIG typically requires its
reinsurers to be licensed in the ceding insurer's state of domicile or to submit
collateral in a form and in an amount sufficient to secure the reinsurer's
obligations to TIG. Reinsurance does not legally discharge an insurer from its
primary liability for the full amount of the policies it writes. If a reinsurer
fails to meet its obligations under the reinsurance agreement, the ceding
company is required to pay the loss. At December 31, 1996 and 1995, TIG had an
allowance of $9 million for potentially unrecoverable reinsurance. TIG's five
largest non-affiliated reinsurers are as follows:
Reinsurance
Recoverable at Best's
(In millions) December 31, 1996 Rating (1)
===================================================================
American Reinsurance Company $175 A+
Underwriters Reinsurance Company 107 A+
General Reinsurance Corporation 101 A++
Hannover Ruckversicherung 99 A+
Centre Reinsurance Company
of NewYork 88 A
===================================================================
1) The ratings are taken from the Best's Key Rating Guide, 1996 Edition.
------------------------
Ceded written premium equaled approximately 21% of gross premium written in 1996
and 1995 and 18% of gross written premium in 1994. The increase in premium ceded
in 1996 and 1995 as compared to 1994 is principally attributable to the 90%
cession of financial institutions business as discussed at Item 7.5 - Other
Lines.
CATASTROPHE REINSURANCE PROGRAM. TIG is exposed to multiple insured losses
arising out of a single occurrence, such as a natural or man-made catastrophe.
Such an event may generate insured losses in any or all of TIG's operating
divisions. TIG's exposure to catastrophe losses arises principally from
hurricane, windstorm, earthquake, fire and explosion. TIG manages its exposure
to such losses from an underwriting perspective by limiting the accumulation of
known risks in exposed areas, and from a reinsurance perspective, by purchasing
catastrophe reinsurance. Catastrophe reinsurance treaties are
- 26 -
<PAGE>
PART II
- - --------------------------------------------------------------------------------
written to cover one or two loss events per year. If the coverage is exhausted,
additional catastrophe coverage under the treaty may be purchased (a
reinstatement of the original coverage) by paying an additional contractually
defined premium subsequent to a loss. If all contractual reinstatements are
exhausted, reinstatement of coverage may be available by paying an additional
premium at prevailing market rates. TIG's catastrophe reinsurance program
provided for $250 million of gross coverage in 1996 and 1995, and $200 million
in 1994. After consideration of reinsurance reinstatement premium, TIG
effectively retained approximately 95% of the first $50 million of losses and 5%
of losses in excess of $50 million for 1996, 1995 and 1994. In 1995, TIG Re
entered into a separate catastrophe reinsurance agreement providing $25 million
in excess of a $15 million retention for TIG Re's property program. This treaty
will be in effect for three years.
No major catastrophe losses were incurred by TIG in 1996 or 1995. However, as a
result of the 1994 Northridge earthquake, management intensified its efforts to
reduce TIG's exposure to catastrophic loss in any one geographic region and
analyzed loss exposures by zip code for catastrophe prone areas. The majority of
TIG's catastrophe exposure is from the Retail division. Since the Northridge
earthquake, Retail has implemented a new catastrophe management strategy for
reducing PML hurricane and earthquake exposures which includes disciplined
underwriting guidelines for coastal property, termination of unprofitable agents
with high PML's, increased rates and deductibles for earthquake coverage, and
reduced writings for tenant, condominium and mobile home business. As part of
this strategy, TIG developed and received approval in July 1995 from the
California Department of Insurance for a stand alone "no frills" earthquake
policy for writing in that state. This new policy was effective in the third
quarter of 1995, and contains only basic coverage for roofs, walls and limited
amounts for contents. At December 31, 1996, all of Retail's earthquake policies
in force were the new "no frills" policy. In addition, California property
policies in force had decreased by 37% at December 1996 as compared to December
1993. As a result, Retail's estimated PML at December 1996 for an earthquake
equivalent to the Northridge earthquake has been reduced approximately 75% from
the estimated December 1993 PML. Accordingly, TIG's gross catastrophe coverage
was reduced to $170 million for 1997.
Losses from coverages other than property insurance may also occur from an event
giving rise to catastrophic property losses. For example, an earthquake or
explosion could cause workers' compensation losses as well as property losses.
TIG has estimated a PML for such an event and coordinates its underwriting
guidelines and reinsurance covers to limit its probable maximum loss. It is
possible that the PML estimated by TIG may either understate or overstate,
perhaps to a significant degree, the possible losses to TIG which could be
generated by insured loss events.
As with all property/casualty insurers, TIG expects to pay some losses related
to catastrophes and prices its products accordingly. Total gross catastrophe
losses aggregated $15 million, $34 million and $106 million in 1996, 1995 and
1994, respectively. Total net catastrophe costs, including reinsurance
reinstatement premium, aggregated $11 million, $24 million and $54 million in
1996, 1995 and 1994, respectively.
- 27 -
<PAGE>
PART II
- - --------------------------------------------------------------------------------
7.7 INVESTMENTS
================================================================================
INVESTMENT MIX. Management continues to emphasize a conservative investment
strategy by maintaining a portfolio of primarily high-quality, 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 fair value. Unrealized
gains and losses on fixed maturity investments and related hedges are recorded
net of tax directly in shareholders' equity. See Note D to the Consolidated
Financial Statements at Item 8 for further discussion. Following is a summary of
TIG's investment portfolio by type of investment.
December 31,
---------------------------------------------
1996 1995
---------------------------------------------
Market % of Market Market % of Market
(In millions) Value Portfolio Value Portfolio
==============================================================================
Corporate and other bonds $1,242 29.3% $ 658 14.5%
Mortgage-backed securities 1,210 28.6 1,405 30.9
United States government bonds 1,070 25.3 1,388 30.5
Municipal bonds 535 12.6 951 20.9
- - ------------------------------------------------------------------------------
Total fixed maturity investments 4,057 95.8 4,402 96.8
Short-term and other investments 176 4.2 148 3.2
- - ------------------------------------------------------------------------------
Total invested assets $4,233 100.0% $4,550 100.0%
==============================================================================
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 7.5% for the year ended December 31, 1996 from 6.7% for
the year ended December 31, 1995. Invested assets declined by $317 million at
December 31, 1996 as compared to December 31, 1995 due to repurchases of
treasury stock as discussed at Item 7.8 and a decrease in unrealized gains as
discussed below.
Less than one-third of TIG's portfolio consists of mortgage-backed securities
("MBS"). United States federal government and government agency mortgages now
represent approximately 91% 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. Substantially 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 movement
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 non-performance by the other
party, non-performance is not anticipated due to credit rating of the
counterparties.
At December 31, 1996, TIG had one open derivative position for an interest rate
swap with a notional amount of $14 million and such derivative financial
instrument was with a financial institution rated A or better by the major
credit rating agencies. Additionally, there were $85 million of fixed maturity
investments at December 31, 1996 which do not meet the GAAP definition of
"derivative financial instruments", but derive their coupon payments from the
rate of prepayments of certain GNMA mortgage-backed securities. There were no
open future contracts at December 31, 1996 as compared to open futures contracts
of $25 million at December 31, 1995. Net unrealized losses of $4.4 million at
December 31, 1996 related to previous futures contracts are accounted for as a
net increase in the cost basis of the underlying securities and are being
amortized over the life of the hedged securities.
- 28 -
<PAGE>
PART II
- - --------------------------------------------------------------------------------
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 December 31, 1996, the TBA purchase
commitments amounted to $46.3 million, and had a fair value of $45.9 million,
compared to TBA commitments of $152.2 million with a fair value of $153.1
million at December 31, 1995.
TIG's objective is to maintain the weighted average maturity of its investment
portfolio between 8 and 11 years and the weighted-average duration between 4 and
7 years. At December 31, 1996, the weighted average maturity of TIG's investment
portfolio was 10.3 years compared to 8.9 and 10.0 years at December 31, 1995 and
1994. At December 31, 1996, the weighted average duration of TIG's investment
portfolio was 5.6 years compared to 5.8 and 6.3 years at December 31, 1995 and
1994.
UNREALIZED GAINS. The unrealized gain on investments decreased by $88 million on
a pre-tax basis during 1996 as a result of higher market interest rates.
Although an increase in interest rates would decrease shareholders' equity,
management does not believe that interest rate increases would have a
significant adverse impact on TIG's cash flow. The following is a summary of net
unrealized gains/losses by type of security:
December 31,
----------------
(In millions) 1996 1995 Change
==============================================================
Municipal bonds $33 $60 $(27)
Mortgage-backed securities (9) (4) (5)
United States government bonds 32 91 (59)
Corporate and other bonds 25 22 3
- - --------------------------------------------------------------
Net unrealized gains $81 $169 $88
- - --------------------------------------------------------------
Net unrealized gains, net of tax $52 $110 $(58)
==============================================================
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 dividends received and exclude realized investment gains and
losses. These yields are computed using the average of the month-end asset
balances during the period.
Years Ended December 31,
--------------------------
(In millions) 1996 1995 1994
===========================================================
Fixed maturity investments:
Taxable $264 $213 $174
Tax-exempt 34 60 78
Short-term and other investments 6 7 6
- - -----------------------------------------------------------
Total gross investment income 304 280 258
Investment expenses,
interest and other (14) (12) (9)
- - -----------------------------------------------------------
Total net investment income $290 $268 $249
- - -----------------------------------------------------------
After-tax net investment yield 4.61% 4.49% 4.41%
===========================================================
INVESTMENT QUALITY. The table below shows the rating distribution of TIG's fixed
maturity investment portfolio:
December 31,
----------------------------------------------
1996 1995
---------------------- ---------------------
Market % of Market % of
Standard & Poor's/Moody's Value Portfolio Value Portfolio
========================================================================
(In millions)
AAA/Aaa $2,787 68.7% $3,361 76.4%
AA/Aa 194 4.8 369 8.4
A/A 329 8.1 257 5.8
BBB/Baa 232 5.7 119 2.7
Below BBB/Baa 515 12.7 296 6.7
- - ------------------------------------------------------------------------
Total fixed maturity
investments $4,057 100.0% $4,402 100.0%
========================================================================
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 $600 million in high yield,
below investment-grade securities, subject to statutory limitations. 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 Services or Moody's Investor Services, Inc. Where neither
Standard & Poor's nor Moody's has assigned a rating to a particular fixed
maturity issue,
- 29 -
<PAGE>
PART II
- - --------------------------------------------------------------------------------
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 individual security, if no other rating is available.
The NAIC has a bond rating system that assigns security classes. These "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 December
31, 1996 and 1995, approximately 87% and 93% of TIG's investment 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
substantially all of the portfolio as of December 31, 1994.
- - --------------------------------------------------------------------------------
7.8 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 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. The following table summarizes the
significant components of cash flow from operations:
Years Ended December 31,
------------------------
(In millions) 1996 1995 1994
========================================================
Reinsurance operations $161 $209 $180
Primary operations and corporate 36 79 (19)
- - --------------------------------------------------------
Ongoing operations 197 288 161
Run-off (Other Lines) operations (199) (141) (88)
- - --------------------------------------------------------
Total $(2) $147 $73
========================================================
Positive cash flow from Reinsurance operations is attributable to premium growth
and a lengthy loss payout period for most lines. Growth in net premium written
was 7%, 16%, and 27% for 1996, 1995 and 1994, respectively. The reduction in
Reinsurance cash flow from operations in 1996 is attributable to a slowing in
premium growth due to general market conditions and an increase in paid losses
resulting from a shift in business mix to lines with relatively shorter loss
payout patterns. In addition, Reinsurance cash flow for 1996 was reduced by $11
million due to the commutation of one treaty.
Net premium written for ongoing primary operations increased by 4.4% in 1996 and
2.4% in 1995 as compared to the prior year. The decrease in cash flow in 1996
from 1995 is attributable to a general shift in business mix to lines with
relatively shorter loss payout patterns and the timing of premium receivable and
reinsurance recoverable collections. Primary operations cash flow was reduced
$50 million in 1994 for claims and catastrophe reinsurance premium payments
related to the Northridge earthquake.
Net premium written for run-off operations has declined by 50%, 25% and 27% in
1996, 1995 and 1994 as compared to the corresponding prior year. The increase in
negative cash flow for 1996 is due to the decline in premium resulting from the
first quarter 1996 restructure action as discussed at Item 7.1 - Consolidated
Results, restructure charge payments and the continuing payout of prior year
loss and LAE reserves. Run-off operations cash flow was reduced by $42 million
in 1996 for restructure charge payments and $34 million in 1995 as a result of
the 90% reinsurance of financial institutions business as discussed at Item 1.5
- - - Other Lines.
- 30 -
<PAGE>
PART II
- - --------------------------------------------------------------------------------
INVESTMENT LIQUIDITY. At December 31, 1996, TIG had $139 million in short-term
investments compared to $138 million at December 31, 1995. In addition, as of
December 31, 1996, TIG expects to realize $522 million, $857 million, and $554
million in cash flow from principal and interest payments over 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 held at the holding company totaled $40
million as of December 31, 1996.
NOTES PAYABLE. In December 1995, TIG Holdings established an unsecured revolving
line of credit with maximum borrowings of $250 million. At December 31, 1996 and
1995, TIG Holdings had no outstanding borrowings under this facility.
In December 1995, TIG Insurance Company entered into a five-year $50 million
credit facility of which approximately $25 million and $22 million was
outstanding as of December 31, 1996 and 1995, respectively. The facility is a
direct financing arrangement with a third party related to the sale and
leaseback of certain fixed assets.
In addition, TIG Holdings had $98 million of 8.125% notes payable maturing in
2005 outstanding at December 31, 1996 and 1995. Interest of $8 million and $4
million was paid in 1996 and 1995, respectively on these notes.
In January of 1997, TIG Capital Trust I, a statutory business trust created
under Delaware law as a trust subsidiary of TIG Holdings, completed a private
offering of $125 million of 8.597% capital securities. TIG Holdings issued
$128.75 million in 8.597% Junior Subordinated Debentures to TIG Capital Trust I
(including approximately $3.75 million with respect to the capital contributed
to the Trust by TIG Holdings). All of the net proceeds received by TIG Holdings
from the issuance of the debentures will be used for general corporate purposes
which may include repurchases of the Company's common stock (See Part II, Notes
to Consolidated Financial Statements, Note Q - Subsequent Event).
LIQUIDITY RESTRICTIONS. There are certain restrictions on the payment of
dividends by insurance subsidiaries that may limit TIG Holdings' ability to
receive funds from its subsidiaries. Dividends from its insurance subsidiaries
represent the principal long-term source of liquidity to TIG Holdings. During
1996, TIG Holdings received cash dividends of $130 million from its insurance
subsidiaries. As of December 31, 1996, $155 million of dividends is currently
available for payment to TIG Holdings from its insurance subsidiaries during
1997 without restriction (See Item 1.7 - Regulation).
- 31 -
<PAGE>
PART II
- - --------------------------------------------------------------------------------
7.9 FINANCIAL CONDITION
================================================================================
Key balance sheet data is presented below:
December 31,
------------------------
(In millions) 1996 1995 1994
=========================================================
Investments (See Item 7.7) $4,233 $4,550 $3,919
Reinsurance recoverable
(See Item 7.6) 1,264 1,221 1,241
Deferred tax asset
(See Note G at Item 8) 102 60 261
Total assets 6,476 6,683 6,116
Loss and loss expense reserves
(See Item 1.6) 3,760 3,886 3,873
Shareholders' equity 1,207 1,376 1,042
- - ---------------------------------------------------------
Combined statutory surplus $975 $952 $901
Net premium written to statutory
surplus ratio 1.6x 1.7x 1.8x
=========================================================
SHAREHOLDERS' EQUITY. Shareholders' equity decreased by $169 million during
1996, primarily as a result of treasury share repurchases. Unrealized investment
gains as of December 31, 1996 were $52 million (net of tax) compared to $110
million (net of tax) in 1995. Accordingly, book value per share decreased from
$23.09 at December 31, 1995 to $22.41 at December 31, 1996. Approximately
500,000 unallocated Employee Stock Option Plan shares have been excluded from
outstanding common shares for purposes of computing book value per common share
at December 31, 1996 and 1995, respectively.
As of December 31, 1996, the TIG Holdings Board of Directors authorized stock
repurchases of up to 11.25 million shares of TIG Holdings common stock. 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. The
first repurchases of stock were made in April 1994. Through December 31, 1996,
repurchases of 10.3 million shares of stock have been made at an average cost
per share of $26.84, for an aggregate cost of $276 million.
CAPACITY. A key measure of both strength and growth capacity for
property/casualty insurers is the ratio of net premium written to statutory
policyholders' surplus. At December 31, 1996, TIG's net premium-to-surplus ratio
was 1.6, higher than the industry average of 1.1, but within an acceptable
range. Insurance regulators generally accept a ceiling for this ratio of 3.0:1;
therefore, at its current ratio, TIG has the capacity to grow by writing new
business in its targeted markets.
RATINGS. A.M. Best has currently assigned an "A" ("Excellent") rating to both
TIG Insurance (including subsidiaries which cede 100% of net premium written to
TIG Insurance) and TIG Re which are separately rated. Best's ratings are based
on an analysis of the financial condition and operating performance of an
insurance company as they relate to the industry in general. The ratings
represent an independent opinion of a company's financial strength and ability
to meet its obligations to policyholders. An "A" rating is Best's third highest
of 15 rating classifications.
Standard & Poor's Insurance Rating Services ("S&P") has currently assigned a
claims-paying rating of "AA-" to TIG and individual insurance company members of
the TIG group. The assigned rating reflects S&P's opinion of the operating
insurance company's financial capacity to meet the obligations of its insurance
policies in accordance with their terms. The "AA-" rating assigned to TIG is the
fourth highest of ten ratings in the "secure claims-paying ability" category and
represents "excellent financial security".
Moody's Investor Service has currently confirmed a "Baa1" rating for the
Company's notes payable citing its stable rating outlook. Moody's rating is
based on review of the Company's capital structure, cash flows, profitability
and focused business strategy.
- 32 -
<PAGE>
PART II
- - --------------------------------------------------------------------------------
7.10 FORWARD-LOOKING STATEMENTS
================================================================================
TIG Holdings would like to caution readers regarding certain forward-looking
statements in the Management's Discussion and Analysis and elsewhere in this
Form 10-K. Statements that are not based on historical information are forward
looking statements and are based on management's projections, estimate and
assumptions. The words "believe", "expect", "anticipate" and similar expressions
generally identify forward-looking statements. 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:
o changes in interest rates which could impact investment yields, the
market value of invested assets and ultimately product pricing
o changes in the frequency and severity of catastrophes which could impact
net income, reinsurance costs and cash flow
o increased competition (on the basis of price, services, or other factors)
which could generally reduce operating margins
o regulatory changes which could increase the Company's overhead costs,
restrict access to profitable markets or force participation in
unprofitable markets
o changes in loss payment patterns which could impact cash flow and net
investment income
o changes in estimated overall adequacy of loss and LAE reserves which
could impact net income, statutory surplus adequacy and management's
decision to continue certain product lines
o changes in general market or economic conditions which could impact the
demand for the Company's products and loss frequency and severity for
certain lines of business.
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.
- 33 -
<PAGE>
PART II
- - --------------------------------------------------------------------------------
7.11 GLOSSARY
================================================================================
AGENT: An insurer's representative authorized to market a Company's policy
coverages for a commission.
ADMITTED ASSETS: Assets of an insurer permitted by an insurer's domiciliary
state to be taken into account in determining its financial condition for
statutory purposes.
BORDEREAU: A detailed report of reinsurance premiums or reinsurance losses
furnished periodically by the reinsured. A loss borderau contains a detailed
list of claims and claims expenses outstanding and paid by the reinsured during
the reporting period and the amount of reinsurance indemnity applicable
there-to.
BROKER/INTERMEDIARY: One who negotiates contracts of insurance or reinsurance on
behalf of an insured party, receiving a commission from the insurer or reinsurer
for placement and other services rendered.
CAPACITY: The percentage of surplus, or the dollar amount of exposure, that an
insurer or reinsurer is willing to place at risk. Capacity may apply to a single
risk, a program, a line of business or an entire book of business.
CAPTIVE: An insurance company which is generally wholly owned by a non-insurance
organization and whose primary purpose is to insure or reinsure the risks of the
parent organization and its subsidiaries.
CASUALTY INSURANCE: Insurance which is primarily concerned with the losses
caused by injuries to third persons (i.e., not the policyholder) and the legal
liability imposed on the insured resulting therefrom. It includes, but is not
limited to, employers' liability, workers' compensation, public liability,
automobile liability, personal liability and aviation liability insurance. It
excludes certain types of loss that by law or custom are considered as being
exclusively within the scope of other types of insurance, such as fire or
marine.
CATASTROPHE: An event that is designated to be a "catastrophe" by the Property
Claims Service Division of American 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.
CATASTROPHE REINSURANCE: A form of excess of loss property reinsurance which,
subject to a specified limit, indemnifies the ceding company for the aggregate
amount of losses in excess of a specified retention for losses resulting from a
particular catastrophic event. The actual reinsurance document is called a
"catastrophe cover."
CEDED REINSURANCE; CEDING COMPANY: When a company reinsures its risk with
another, it "cedes" business and is referred to as the "ceding company."
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 practices. A combined ratio below 100.0 generally indicates
profitable underwriting results. A combined ratio over 100.0 generally indicates
unprofitable underwriting results.
DIRECT PREMIUM WRITTEN: Premium for insurance written on a company's policy
forms during a given period.
EXCESS OF LOSS: A generic term describing insurance or reinsurance which
indemnifies the policyholder against all or a specified portion of losses on
underlying insurance policies in excess of a specified dollar amount, called a
"layer" or "retention."
FACULTATIVE REINSURANCE: The reinsurance of all or a portion of the insurance
coverage provided by a single policy. Each policy reinsured is separately
negotiated.
GENERALLY ACCEPTED ACCOUNTING PRINCIPLES ("GAAP"): Accounting principles as set
forth in opinions of the Accounting Principles Board of the American Institute
of Certified Public Accountants and/or in statements of the Financial Accounting
- 34 -
<PAGE>
PART II
- - --------------------------------------------------------------------------------
Standards Board and/or their respective successors and which are applicable in
the circumstances as of the date in question.
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 or reinsurer 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 assumed reinsurance less
premium on ceded business for a given period.
PML: (probable maximum loss). The largest loss the underwriter considers
possible based upon the underwriter's experience and judgment.
POLICYHOLDER DIVIDENDS RATIO: The ratio of dividends paid to policyholders to
earned premium, determined in accordance with statutory accounting practices.
PREMIUM-TO-SURPLUS RATIO: The ratio of statutory net premium written to
statutory surplus.
PRIMARY INSURANCE: The insurance coverage provided under the primary policy
issued by the primary insurer to the primary insured (sometimes called
"underlying insurance").
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
MGAs.
PROPERTY INSURANCE: Insurance that provides coverage to a person with an
insurable interest in tangible property for that person's property loss, damage
or loss of use.
REINSTATEMENT PREMIUM: The premium charged for the restoration of the
reinsurance limit of a catastrophe treaty to its full amount after payment by
the reinsurer of losses as a result of an occurrence.
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.
RESERVE STRENGTHENING: The building or enhancement of loss reserves to an
actuarially determined level considered adequate to cover all future claims for
policies in force, generally for a specific accident year or line of business.
- 35 -
<PAGE>
PART II
- - --------------------------------------------------------------------------------
RETENTION: 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 pro rata 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.
RISK-BASED CAPITAL: A regulatory measurement of statutory capital and surplus to
analyze continuation of operations at existing levels, taking into consideration
various inherent risks.
STAMP CAPACITY: The syndicate's premium limit for the relevant underwriting
year.
STATUTORY ACCOUNTING PRACTICES ("SAP"): Rules and procedures prescribed or
permitted by United States state insurance regulatory authorities for recording
transactions and preparing financial statements. Statutory accounting principles
generally reflect a liquidating, rather than a going concern, concept of
accounting.
STATUTORY SURPLUS: The excess of admitted assets over total liabilities
(including loss reserves), determined in accordance with SAP.
TEMPLATE UNDERWRITING: A process by which homogeneous business can be
underwritten using standardized guidelines.
TREATY PARTICIPATION: The portion of risk exposure an insurer or reinsurer
accepts under an insurance contract. The insurer or reinsurer with the largest
participation is the lead insurer and therefore has the ability to influence the
terms of the contract.
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.
UNALLOCATED LOSS ADJUSTMENT EXPENSES ("ULAE"): The expenses incurred in
connection with investigation and adjustment of claims that cannot be directly
allocated to any specific claims.
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.
WORKING LAYER 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.
- 36 -
<PAGE>
PART II
- - --------------------------------------------------------------------------------
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
================================================================================
Page
Report of Independent Auditors ..............................................38
Consolidated Balance Sheets at December 31, 1996 and 1995 ...................39
Consolidated Statements of Income for each of the three years
in the period ended December 31, 1996 .......................................40
Consolidated Statements of Cash Flows for each of the three
years in the period ended December 31, 1996 .................................41
Consolidated Statements of Changes in Shareholders' Equity
for each of the three years in the period ended December 31, 1996 ...........42
Notes to Consolidated Financial Statements ..................................43
- 37 -
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors
TIG Holdings, Inc.
We have audited the accompanying consolidated balance sheets of TIG
Holdings, Inc. and subsidiaries as of December 31, 1996 and 1995, and the
related consolidated statements of income, shareholders' equity, and cash flows
for each of the three years in the period ended December 31, 1996. Our audits
also included the financial statement schedules listed in the Index at Item
14(a). These financial statements and schedules are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements and 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 consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
TIG Holdings, Inc. and subsidiaries at December 31, 1996 and 1995, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1996, in conformity with generally
accepted accounting principles. Also, in our opinion, the related financial
statement schedules, when considered in relation to the basic financial
statements taken as a whole, present fairly in all material respects the
information set forth therein.
ERNST & YOUNG LLP
Dallas, Texas
January 31, 1997
- 38 -
<PAGE>
PART II
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
TIG HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS
December 31,
-----------------------------
(In millions, except share data) 1996 1995
=================================================================================================================
ASSETS
Investments:
<S> <C> <C>
Fixed maturities, at market (cost: $3,976 in 1996 and $4,233 in 1995) $4,057 $4,402
Short-term and other investments, at cost which approximates market 176 148
- - -----------------------------------------------------------------------------------------------------------------
Total investments 4,233 4,550
Cash 19 4
Accrued investment income 57 56
Premium receivable (net of allowance of: $4 in 1996 and $3 in 1995) 420 409
Reinsurance recoverable (net of allowance of: $9 in 1996 and 1995) 1,264 1,221
Deferred policy acquisition costs 144 144
Prepaid reinsurance premium 105 111
Income taxes 102 60
Other assets 132 128
- - -----------------------------------------------------------------------------------------------------------------
Total assets $6,476 $6,683
=================================================================================================================
LIABILITIES
Reserves for:
Losses $3,215 $3,288
Loss adjustment expenses 545 598
Unearned premium 696 712
- - -----------------------------------------------------------------------------------------------------------------
Total reserves 4,456 4,598
Reinsurance premium payable 88 69
Funds held under reinsurance agreements 255 151
Notes payable 123 120
Other liabilities 322 344
- - -----------------------------------------------------------------------------------------------------------------
Total liabilities 5,244 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:
64,610,109 shares in 1996 and 64,125,050 shares in 1995) 1,198 1,186
Class A convertible common stock - par value $0.01 per share
(authorized: 1,000,000 shares; issued and outstanding:
35,793 shares in 1995) - 1
Retained earnings 234 168
Net unrealized gain on fixed maturity investments, net of taxes 52 110
Net unrealized loss on foreign exchange, net of taxes (1) (1)
- - -----------------------------------------------------------------------------------------------------------------
1,483 1,464
Treasury stock (10,306,000 shares in 1996 and 4,041,100 shares in 1995) (276) (88)
- - -----------------------------------------------------------------------------------------------------------------
Total shareholders' equity 1,207 1,376
- - -----------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $6,476 $6,683
=================================================================================================================
<FN>
See Notes to Consolidated Financial Statements.
</FN>
</TABLE>
- 39 -
<PAGE>
PART II
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
TIG HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31
------------------------------------------
(In millions, except share data) 1996 1995 1994
=================================================================================================================
REVENUES
<S> <C> <C> <C>
Net premium earned $1,539 $1,618 $1,549
Net investment income 290 268 249
Net investment loss (4) (11) (20)
- - -----------------------------------------------------------------------------------------------------------------
Total revenues 1,825 1,875 1,778
- - -----------------------------------------------------------------------------------------------------------------
LOSSES AND EXPENSES
Net losses and loss adjustment expenses incurred 1,138 1,176 1,165
Policy acquisition and other underwriting expenses 463 486 504
Dividends to policyholders 3 15 27
Corporate expenses 37 37 37
Interest expense on long-term debt 9 6 -
Restructuring charges 100 - -
- - -----------------------------------------------------------------------------------------------------------------
Total losses and expenses 1,750 1,720 1,733
- - -----------------------------------------------------------------------------------------------------------------
Income before income tax benefit (expense) 75 155 45
Income tax benefit (expense) 4 (37) 7
- - -----------------------------------------------------------------------------------------------------------------
Net income $79 $118 $52
=================================================================================================================
Net income per common share $1.30 $1.89 $0.79
=================================================================================================================
Dividend per common share $0.20 $0.20 $0.20
=================================================================================================================
<FN>
See Notes to Consolidated Financial Statements.
</FN>
</TABLE>
- 40 -
<PAGE>
PART II
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
TIG HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31,
------------------------------------------
(In millions) 1996 1995 1994
=================================================================================================================
OPERATING ACTIVITIES
<S> <C> <C> <C>
Net income $79 $118 $52
Adjustments to reconcile net income to cash provided
by (used in) operating activities:
Changes in:
Accrued investment income (1) (5) 11
Premium receivable (11) (65) (31)
Reinsurance recoverable (43) 20 (47)
Deferred policy acquisition costs - (7) (22)
Prepaid reinsurance premium 6 (45) 49
Income taxes (11) 36 (8)
Loss reserves (73) 73 (52)
Loss adjustment expense reserves (53) (60) 80
Unearned premium reserves (16) 37 22
Reinsurance premium payable 19 15 (28)
Funds held under reinsurance agreements 104 59 25
Other assets and Other liabilities (26) (46) (24)
Investment loss 4 11 20
Other 20 6 26
- - -----------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) operating activities (2) 147 73
=================================================================================================================
INVESTING ACTIVITIES
Purchases of fixed maturity investments (1,920) (2,035) (1,368)
Sales of fixed maturity investments 1,907 1,655 1,071
Maturities and calls of fixed maturity investments 252 281 269
Sale of agency subsidiaries - (8) -
Net increase in short-term and other investments (28) (55) (6)
Other (5) (36) -
- - -----------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) investing activities 206 (198) (34)
=================================================================================================================
FINANCING ACTIVITIES
Common stock issued 9 2 3
Acquisition of treasury stock (188) (62) (26)
Common stock dividends (11) (12) (13)
Preferred stock dividends (2) (2) (3)
Increase in notes payable 3 120 -
- - -----------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities (189) 46 (39)
- - -----------------------------------------------------------------------------------------------------------------
Increase (decrease) in cash 15 (5) -
Cash at beginning of period 4 9 9
- - -----------------------------------------------------------------------------------------------------------------
Cash at end of period $19 $4 $9
=================================================================================================================
<FN>
See Notes to Consolidated Financial Statements.
</FN>
</TABLE>
- 41 -
<PAGE>
PART II
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
TIG HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Years Ended December 31,
=====================================================================================================================
(In millions) 1996 1995 1994
- - ---------------------------------------------------------------------------------------------------------------------
COMMON STOCK
<S> <C> <C> <C>
Balance at beginning of year $1,186 $1,181 $1,173
Common stock issued 9 2 4
Conversion of Class A common stock 1 - -
Amortization of unearned compensation 2 3 4
- - ---------------------------------------------------------------------------------------------------------------------
Balance at end of year 1,198 1,186 1,181
- - ---------------------------------------------------------------------------------------------------------------------
CLASS A COMMON STOCK
Balance at beginning of year 1 1 2
Conversion of Class A common stock (1) - -
Common stock issued - - (1)
- - ---------------------------------------------------------------------------------------------------------------------
Balance at end of year - 1 1
- - ---------------------------------------------------------------------------------------------------------------------
RETAINED EARNINGS
Balance at beginning of year 168 64 28
Net income 79 118 52
Common stock dividends (11) (12) (13)
Preferred stock dividends (2) (2) (3)
- - ---------------------------------------------------------------------------------------------------------------------
Balance at end of year 234 168 64
- - ---------------------------------------------------------------------------------------------------------------------
NET UNREALIZED INVESTMENT GAIN (LOSS)
Balance at beginning of year 110 (177) -
Change in unrealized gain (loss) on fixed maturity investments (58) 287 (277)
Adjustment for change in accounting for fixed maturity investments - - 100
- - ---------------------------------------------------------------------------------------------------------------------
Balance at end of year 52 110 (177)
- - ---------------------------------------------------------------------------------------------------------------------
FOREIGN CURRENCY TRANSLATION ADJUSTMENTS
Balance at beginning of year (1) (1) -
Net unrealized loss on foreign exchange - - (1)
- - ---------------------------------------------------------------------------------------------------------------------
Balance at end of year (1) (1) (1)
- - ---------------------------------------------------------------------------------------------------------------------
TREASURY STOCK
Balance at beginning of year (88) (26) -
Treasury stock purchased (188) (62) (26)
- - ---------------------------------------------------------------------------------------------------------------------
Balance at end of year (276) (88) (26)
- - ---------------------------------------------------------------------------------------------------------------------
TOTAL SHAREHOLDERS' EQUITY AT END OF YEAR $1,207 $1,376 $1,042
=====================================================================================================================
</TABLE>
- 42 -
<PAGE>
PART II
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- - --------------------------------------------------------------------------------
NOTE A. DESCRIPTION OF BUSINESS
================================================================================
TIG Holdings is primarily engaged in the business of property/casualty insurance
and reinsurance through its 16 insurance subsidiaries collectively "TIG" or "the
Company". Of direct premium written by TIG in 1996, 26% was written in
California, 8% in Michigan, 6% in New York and 7% each in Hawaii and Texas. No
other geographical area, including foreign operations, accounted for more than
5% of direct premium written. A description of each operating division's
principal products follows (see also Note O - Business Segments).
REINSURANCE. TIG's reinsurance operations are conducted through TIG Reinsurance
Company ("TIG Re"). Reinsurance is a form of insurance whereby the reinsurer
(i.e. TIG Re) agrees to indemnify another insurance company (the "ceding
company") for all or a portion of the insurance risks underwritten by the ceding
company under an insurance policy or policies. TIG Re focuses on excess of loss
casualty coverages, written on a treaty basis, generally taking large
participations in a limited number of programs. TIG Re's predominant source of
business is through reinsurance intermediaries. Net premium written for the
Reinsurance division comprised 36%, 32%, and 27% of consolidated net premium
written for the years ended December 31, 1996, 1995 and 1994, respectively.
RETAIL. Retail's principal products are standard automobile, non-standard
automobile, homeowners and small business owner's insurance. Automobile policies
cover liability to third parties for bodily injury and property damage and
physical damage to the insured's own vehicle resulting from collision or various
other causes of loss. Homeowners and small 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. Retail's
products are distributed through approximately 630 independent agents. Net
premium written for the Retail division comprised 24%, 22%, and 19% of
consolidated net premium written for the years ended December 31, 1996, 1995 and
1994, respectively.
COMMERCIAL SPECIALTY. Commercial Specialty coverages provide protection against
property loss and legal liability for injuries to other persons or damage to
their property arising from the policyholder's business operations. Commercial
Specialty develops and markets insurance programs where the nature of the risk
does not lend itself to traditional commercial insurance. Significant programs
include Sports and Leisure, with products for professional and amateur sports
events, and Workers' Compensation, which provides liability coverage to
employers for payment of employee benefits associated with employment-related
accidents as mandated by state laws. Commercial Specialty products are
principally marketed through large managing general agents, with which TIG
sometimes has exclusive marketing contracts. Net premium written for the
Commercial Specialty division comprised 30%, 27%, and 29% of consolidated net
premium written for the years ended December 31, 1996, 1995 and 1994,
respectively.
- 43 -
<PAGE>
PART II
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- - --------------------------------------------------------------------------------
NOTE B. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
================================================================================
BASIS OF PRESENTATION. The consolidated financial statements are prepared in
accordance with generally accepted accounting principles ("GAAP") and include
the accounts of TIG Holdings, Inc. and its subsidiaries. Financial statements
prepared in accordance with GAAP require the use of management's estimates.
Intercompany transactions are eliminated in consolidation. Certain
reclassifications of prior years' amounts have been made to conform with the
1996 presentation.
EARNINGS PER SHARE ("EPS"). Primary earnings per share is calculated based upon
the weighted average common shares outstanding during the period. In order to
calculate EPS, unallocated ESOP shares and treasury shares are deducted from the
outstanding common shares. Class A common stock and the common stock options
(See Note K - Incentive Compensation Plans) are considered common stock
equivalents and are included in EPS calculations to the extent that they are
dilutive. To obtain net income attributable to common shareholders for EPS
computations, the annual preferred stock dividend is deducted from net income.
INVESTMENTS. Fixed maturities are classified as available for sale, as TIG has
no positive intent to hold such securities until maturity, and are carried at
market value. Equity securities are also carried at market value while
short-term investments are carried at cost, which approximates market value.
Market value is principally based upon quoted market prices. Quoted market
prices are available for substantially all equity securities. The difference
between the aggregate market value and amortized cost of securities, after
deferred income tax effect, is reported as unrealized gain or loss directly in
shareholders' equity and, accordingly, has no effect on net income.
Interest on fixed maturity investments is recorded as income when earned and is
adjusted for any amortization of purchase premium or accrual of discount.
Realized gains and losses on the sale of investments are generally determined on
a first-in-first-out basis. Realized losses are recorded when an investment's
net realizable value is below cost, and the decline is considered other than
temporary.
ADOPTION OF SFAS 123. TIG adopted Statement of Financial Accounting Standards
No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123") effective
January 1, 1996. SFAS 123 establishes financial accounting and reporting
standards for stock-based employee compensation plans. TIG elected to continue
to account for employee stock-based compensation as prescribed by APB Opinion
No. 25, "Accounting for Stock Issued to Employees" and to provide pro forma
disclosures in the Notes to Financial Statements of the effects of SFAS 123 on
net income and earnings per share. There was no effect on net income as a result
of adopting SFAS 123.
RECOGNITION OF PREMIUM REVENUES. Premium is earned principally on a pro rata
basis over the terms of the policies which are generally not more than one year.
Unearned premium represents the portion of premium written applicable to the
unexpired terms of policies in force.
LOSS AND LOSS ADJUSTMENT EXPENSE RESERVES. The liability for loss and loss
adjustment expenses 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
recoverables of $29 million and $31 million at December 31, 1996 and 1995,
respectively. The liability is considered to be adequate to cover all payments
that will ultimately be made in settling the claims. However, final claim
payments may differ from these reserves. Adjustments to the reserves 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
- 44 -
<PAGE>
PART II
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- - --------------------------------------------------------------------------------
obligations, the amounts reported in the balance sheet are management's best
estimate of that amount. Certain liabilities for unpaid losses related to
long-term workers' compensation coverage are discounted to present value. The
discount on these workers' compensation loss reserves was $39 million at
December 31, 1996 and 1995.
DEFERRED POLICY ACQUISITION COSTS. Acquisition costs that vary with and are
primarily related to the production of new business, consist principally of
commissions, premium taxes, and other expenses incurred at policy issuance and
renewal. The costs are generally deferred and amortized ratably over the terms
of the underlying policies. Anticipated losses, loss expenses, and remaining
costs of servicing the policies are considered in determining the amount of
costs to be deferred. Anticipated investment income is considered in determining
whether a premium deficiency exists. Amortization of deferred policy acquisition
costs totaled $347 million, $335 million, and $299 million for the years ended
December 31, 1996, 1995 and 1994, respectively.
PARTICIPATING INSURANCE BUSINESS. Dividends to policyholders, which relate
primarily to workers' compensation policies, are accrued during the period in
which the related premium is earned. Approximately 4%, 5% and 9% in 1996, 1995
and 1994, respectively, of TIG's total premium was subject to participation in
such dividends.
OTHER ASSETS. Property, leasehold improvements and furniture and equipment of
$41 million and $42 million at December 31, 1996 and 1995, respectively, are
included in other assets. These balances are carried at cost less accumulated
depreciation of $38 million and $28 million at December 31, 1996 and 1995,
respectively. Depreciation is computed under the straight-line method over the
estimated useful lives of the assets. Goodwill and other intangible assets of $2
million and $3 million at December 31, 1996 and 1995, respectively, are also
included in other assets. These balances are amortized on a straight-line basis
over periods ranging from 10 to 40 years. TIG's accounting policy governing the
measurement of goodwill impairment includes an annual analysis of the
recoverability of goodwill as of each balance sheet date.
SALE OF AGENCY SUBSIDIARIES. On May 1, 1995, TIG sold 100% of the outstanding
common stock of certain agency subsidiaries which market force-placed collateral
protection insurance to financial institution ("FI") accounts on behalf of TIG's
insurance subsidiaries. These FI agency subsidiaries had total assets of
approximately $25.6 million at the date of sale. TIG recognized no gain or loss
on the transaction.
In connection with the sale, effective April 1, 1995, TIG reinsured 90% of the
gross premium produced by the FI agency subsidiaries with reinsurers
unaffiliated with either TIG or the purchaser. FI gross premium written for the
years ended December 31, 1996, 1995 and 1994 totaled $77 million, $88 million
and $92 million, respectively. Net earned premium for the same periods was $8
million, $31 million and $90 million, respectively. TIG also reinsured 90% of
the FI unearned premium reserves at April 1, 1995 which resulted in a net
transfer of cash to the reinsurers of $34.3 million, but had no impact on net
income.
- 45 -
<PAGE>
PART II
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- - --------------------------------------------------------------------------------
NOTE C. RESTRUCTURING CHARGES
================================================================================
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
December 31, 1996, the consolidation/closure of field offices was complete
although various lease obligations remain; net written premium for Other Lines
had declined by 50% for the year ended December 31, 1996 as compared to 1995;
and approximately 600 employees' responsibilities had been outsourced to third
party service providers or their employment had been otherwise terminated. At
December 31, 1996, TIG had approximately 1,300 employees as compared to
approximately 2,000 employees at December 31, 1995.
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 December 31, 1996 is $53 million. Charges against the 1996
restructure accrual of $47 million have been recorded during 1996 and are
comprised of $9 million in severance, $23 million in contractual policy
obligations, $10 million in lease termination costs and $5 million in asset
write-downs. Management estimates that the last renewals for remaining policies
in-force at December 31, 1996 will be processed by late 1997 and that related
net written premium will decline by over 75% in 1997 as compared to 1996. The
underwriting loss from Other Lines operations was $34 million, $32 million and
$88 million for 1996, 1995 and 1994, respectively.
- 46 -
<PAGE>
PART II
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- - --------------------------------------------------------------------------------
NOTE D. INVESTMENTS
================================================================================
<TABLE>
<CAPTION>
MARKET VALUES AND AMORTIZED COST OF INVESTED ASSETS.
December 31, 1996
-------------------------------------------------------------------
Market Amortized Unrealized Unrealized % of Market
(In millions) Value Cost Gains Losses Portfolio
===================================================================================================================
<S> <C> <C> <C> <C> <C>
Municipal bonds $535 $502 $34 $(1) 12.6
Mortgage-backed securities 1,210 1,219 4 (13) 28.6
United States government bonds 1,070 1,038 38 (6) 25.3
Corporate and other bonds 1,242 1,217 35 (10) 29.3
- - -------------------------------------------------------------------------------------------------------------------
Total fixed maturity investments 4,057 3,976 111 (30) 95.8
Short-term and other investments 176 176 - - 4.2
- - -------------------------------------------------------------------------------------------------------------------
Total invested assets $4,233 $4,152 $111 $(30) 100.0
===================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
December 31, 1995
-------------------------------------------------------------------
Market Amortized Unrealized Unrealized % of Market
(In millions) Value Cost Gains Losses Portfolio
===================================================================================================================
<S> <C> <C> <C> <C> <C>
Municipal bonds $951 $891 $60 - 20.9
Mortgage-backed securities 1,405 1,409 23 $(27) 30.9
United States government bonds 1,388 1,297 97 (6) 30.5
Corporate and other bonds 658 636 24 (2) 14.5
- - -------------------------------------------------------------------------------------------------------------------
Total fixed maturity investments 4,402 4,233 204 (35) 96.8
Short-term investments 148 148 - - 3.2
- - -------------------------------------------------------------------------------------------------------------------
Total invested assets $4,550 $4,381 $204 $(35) 100.0
===================================================================================================================
</TABLE>
Less than one-third of TIG's portfolio consists of mortgage-backed securities
("MBS"). United States federal government and government agency mortgages now
represent approximately 91% 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 movement
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 non-performance by the other
party, non-performance is not anticipated due to credit rating of the
counterparties. At December 31, 1996, TIG had
- 47 -
<PAGE>
PART II
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- - --------------------------------------------------------------------------------
one open derivative position for an interest rate swap with a notional amount of
$14 million and such derivative financial instrument was with a financial
institution rated A or better by the major credit rating agencies. There were no
open future contracts at December 31, 1996 as compared to open futures contracts
of $25 million at December 31, 1995. Net unrealized losses of $4.4 million at
December 31, 1996 related to previous futures contracts are accounted for as a
net increase in the cost basis of the underlying securities and are being
amortized over the life of the hedged securities.
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 December 31, 1996, the TBA purchase
commitments amounted to $46.3 million, and had a fair value of $45.9 million,
compared to TBA commitments of $152.2 million with a fair value of $153.1
million at December 31, 1995.
TIG has less than $2 million of non-income producing investments and has no
geographic or other concentrations of investment risk which has not been
disclosed. Assets of TIG, carried at $712 million and $649 million at December
31, 1996 and 1995, respectively, were either on deposit with government agencies
as required by law in various states in which TIG insurance subsidiaries conduct
business or were held as collateral for various business transactions.
The estimated market value and amortized cost of the portfolio, by contractual
maturity, at December 31, 1996 are presented below. Expected maturities will
differ from contractual maturities as certain borrowers have the right to call
or prepay obligations.
Market Amortized
(In millions) Value Cost
==============================================================
Due in one year or less $39 $38
Due after one year through five years 753 736
Due after five years through ten years 658 645
Due after ten years 1,397 1,338
Mortgage-backed securities 1,210 1,219
- - --------------------------------------------------------------
Total fixed maturity investments $4,057 $3,976
==============================================================
COMPONENTS OF NET INVESTMENT INCOME.
Years Ended December 31,
------------------------
(In millions) 1996 1995 1994
==========================================================
Fixed maturity investments $298 $273 $252
Short-term and other investments 6 7 6
- - ----------------------------------------------------------
Total gross investment income 304 280 258
Investment expenses,
interest and other (14) (12) (9)
- - ----------------------------------------------------------
Total net investment income $290 $268 $249
==========================================================
NET INVESTMENT GAIN (LOSS).
Years Ended December 31,
------------------------
(In millions) 1996 1995 1994
- - ----------------------------------------------------------
Fixed maturity investments
Gross gains $37 $18 $6
Gross losses (41) (29) (26)
- - ----------------------------------------------------------
Net investment loss before tax (4) (11) (20)
Less related taxes 1 4 7
- - ----------------------------------------------------------
Net investment loss, net of taxes $(3) $(7) $(13)
==========================================================
- 48 -
<PAGE>
PART II
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- - --------------------------------------------------------------------------------
NOTE E. LOSS AND LOSS ADJUSTMENT EXPENSE RESERVES
================================================================================
Activity in the loss and loss adjustment expense reserve account is summarized
as follows:
(In millions) 1996 1995
==============================================================
Balance January 1, net of reinsurance
recoverables of $1,134 and $1,152 $2,752 $2,721
Incurred related to:
Current year 1,122 1,200
Prior years 16 (24)
- - --------------------------------------------------------------
Total losses and LAE incurred 1,138 1,176
- - --------------------------------------------------------------
Loss and LAE payments related to:
Current year 374 367
Prior years 882 778
- - --------------------------------------------------------------
Total losses and LAE payments 1,256 1,145
- - --------------------------------------------------------------
Balance December 31, net of reinsurance
recoverables of $1,126 and $1,134 $2,634 $2,752
==============================================================
TIG experienced unfavorable loss and LAE reserve development in 1996 of $16
million due primarily to adverse development in Other Lines. 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 the first quarter of 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 at Note C. -
Restructuring Charges. 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 long haul
trucking and large accounts. This reserve strengthening was partially offset by
continuing favorable development of 1993 and prior workers' compensation
reserves.
Loss and LAE reserve development during 1995 was favorable by $24 million and
was primarily comprised of $18 million and $16 million of favorable development,
in the commercial multi peril reserves related primarily to Other Lines and in
Commercial Specialty workers' compensation, respectively. The commercial multi
peril result is due in part to the favorable loss ratio trend stemming from
corrective underwriting action instituted during 1993. Most of the favorable
development applies to general liability coverages which benefit greatly from
TIG's litigation management effort as well as other operational initiatives
designed to improve the handling of claims for long-tail coverages. Workers'
compensation reserve development continued to benefit from external factors
driving the industry-wide improvement observed in 1994 and 1993. During 1995,
both paid loss development and case reserve development remained well below the
historical patterns underlying TIG's carried reserves. Higher than expected loss
ratio results during 1995 account for offsetting unfavorable development
recorded in Other Lines automobile liability coverages. Much of the 1995 adverse
development for Other Lines occurred in long haul trucking programs which were
discontinued in 1996.
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. TIG's environmental claims activity is
predominately from hazardous waste and pollution-related claims arising from
commercial insurance policies. Most of TIG's pollution claims are from small
regional operations or local business involved with disposing wastes at dump
sites or having pollution on their own property due to hazardous material use or
leaking underground storage tanks. In connection with the initial public
offering of TIG Holding's common stock ("IPO"), an affiliate of Transamerica
agreed to pay 75% of up to $119 million of reserve development and newly
incurred 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 December 31, 1996, the Transamerica
affiliate had incurred no liability under this agreement.
- 49 -
<PAGE>
PART II
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- - --------------------------------------------------------------------------------
NOTE F. REINSURANCE
================================================================================
Years Ended December 31,
------------------------
(In millions) 1996 1995 1994
======================================================
Written premium:
Direct $1,274 $1,387 $1,401
Assumed 650 649 586
Ceded (395) (426) (366)
- - ------------------------------------------------------
Net $1,529 $1,610 $1,621
- - ------------------------------------------------------
Earned premium:
Direct $1,307 $1,377 $1,422
Assumed 632 629 549
Ceded (400) (388) (422)
- - ------------------------------------------------------
Net $1,539 $1,618 $1,549
- - ------------------------------------------------------
Incurred losses and LAE:
Gross $1,417 $1,443 $1,451
Ceded (279) (267) (286)
- - ------------------------------------------------------
Net $1,138 $1,176 $1,165
======================================================
TIG reinsures portions of its policy risks with other insurance companies or
underwriters and remains liable under these contracts. Reinsurance is used to
transfer some policy risks such that the amount of individual claims can be
limited to a fixed percentage or amount. Reinsurance is also utilized to limit
the amount of claims related to catastrophes. This strategy allows TIG to insure
larger risks while controlling exposure to large losses. Reinsurance agreements
currently in place are structured on both a treaty basis, where all risks
meeting a certain criteria are automatically reinsured, and on a facultative
basis, where each policy reinsured is separately negotiated. Amounts recoverable
from reinsurers are estimated in a manner consistent with the claim liability
associated with the reinsured policy. As a part of its overall business
strategy, TIG also engages in assumed reinsurance transactions, primarily
through TIG Re, a wholly-owned subsidiary.
Reinsurance contracts do not relieve TIG from its obligations to policyholders.
Failure of reinsurers to honor their obligations could result in losses to TIG;
accordingly, allowances are established for amounts estimated to be ultimately
uncollectible. TIG evaluates the financial condition of its reinsurers and
monitors concentrations of credit risk arising from similar geographic regions,
activities, or economic characteristics of the reinsurers to minimize its
exposure to significant losses from reinsurer insolvencies. At December 31,
1996, TIG held collateral related to reinsurance amounts that remain unpaid for
more than 120 days in the form of letters of credit totaling $370 million, trust
funds totaling $252 million, and funds held totaling $136 million.
- - --------------------------------------------------------------------------------
NOTE G. INCOME TAXES
================================================================================
TIG files a consolidated federal income tax return. At December 31, 1996, TIG
had a net operating loss carryover of $101 million, of which $3 million will
expire in 2008 and $98 million will expire in 2009. Additionally, TIG has a $47
million capital loss carryover, of which $18 million will expire in 1999, $18
million will expire in 2000 and $11 million will expire in 2001. For the tax
years ended December 31, 1996 and 1995, TIG made tax payments of $5.2 and $1.0
million, respectively. For the tax year ended December 31, 1994, no federal
income tax payments were made.
The components of the income tax asset balance are as follows:
(In millions) 1996 1995
=======================================================
Current payable $ (9) $ (6)
Net deferred tax asset 111 66
- - -------------------------------------------------------
Total $102 $60
=======================================================
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
- 50 -
<PAGE>
PART II
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- - --------------------------------------------------------------------------------
purposes and the amounts used for income tax purposes. Significant components of
TIG's deferred tax assets and liabilities as of December 31, 1996 and 1995 are
shown in the following table:
December 31,
--------------
(In millions) 1996 1995
===========================================================
DEFERRED TAX ASSETS:
Discounting of loss reserves for losses
and loss adjustment expenses $ 167 $ 172
Discounting of unearned premium reserves 42 43
Net operating loss carryforward 35 46
Restructuring charges 20 4
Capital loss carryforward 17 14
Business in force 14 20
Policyholder dividends 6 10
Postretirement benefits other than pensions 8 8
Other, net 15 12
- - -----------------------------------------------------------
Total deferred tax assets 324 329
- - -----------------------------------------------------------
DEFERRED TAX LIABILITIES:
Deferred policy acquisition costs 52 51
Section 338 - marketable securities 128 124
Unrealized gain - marketable securities 28 59
Section 338 - other 5 29
- - -----------------------------------------------------------
Total deferred tax liabilities 213 263
- - -----------------------------------------------------------
Net deferred tax asset $ 111 $ 66
===========================================================
In accordance with the provisions of Statement of Financial Accounting Standards
No 109, "Accounting for Income Taxes", TIG's management has reviewed its
deferred tax asset balance and concluded that it is more likely than not the
entire deferred tax asset will be realized. Management's conclusion is based on
its expectation that sufficient taxable income will be generated in future
periods within the carryforward period. TIG has reported profits in 1996, 1995
and 1994, and is expected to be profitable in the future. If TIG does not
achieve its anticipated earnings level in future periods but maintains its 1996
earnings level and converts all of its tax-exempt securities into taxable
securities, it anticipates that all of its net operating loss and capital loss
carryforward and 90% of its existing deferred tax asset will be utilized by the
year 2001.
Significant components of the income tax benefit (expense) are as follows:
Years Ended December 31,
------------------------
(In millions) 1996 1995 1994
==========================================================================
Current benefit (expense) $ (9) $ (2) --
Deferred benefit (expense) 13 (35) $ 7
- - --------------------------------------------------------------------------
Total income tax benefit (expense) $ 4 $ (37) $ 7
==========================================================================
The components of benefit (expense) for total deferred income taxes are as
follows:
Years Ended December 31,
------------------------
(In millions) 1996 1995 1994
==========================================================================
Discounting of reserves for losses
and loss adjustment expenses $ (5) $ (7) $ (5)
Discounting of unearned premium
reserves 1 -- 4
Net operating loss carryforward (11) 2 19
Restructuring charges 16 (3) (9)
Capital loss carryforward 3 3 11
Business in force (6) (7) (6)
Policyholder dividends (4) (5) (1)
Tax liability adjustment 20 -- --
Deferred investment income (4) (15) --
Deferred policy acquisition costs (1) (3) (8)
Other 4 -- 2
- - --------------------------------------------------------------------------
Total deferred income tax
benefit (expense) $ 13 $ (35) $ 7
- - --------------------------------------------------------------------------
The reconciliation of income tax computed at the U.S. federal statutory rates to
total income tax benefit (expense) is as follows:
Years Ended December 31,
------------------------
(In millions) 1996 1995 1994
==========================================================================
Federal income tax benefit
(expense) at statutory rates $(26) $ (54) $ (15)
Tax-exempt investment income 9 17 23
Tax liability adjustment 20 -- --
Other 1 -- (1)
- - --------------------------------------------------------------------------
Total income tax benefit (expense) $ 4 $ (37) $ 7
==========================================================================
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. A $20 million deferred tax benefit
was recognized in first quarter of 1996 as a result of the redetermination.
- 51 -
<PAGE>
PART II
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- - --------------------------------------------------------------------------------
NOTE H. FINANCING ARRANGEMENTS
================================================================================
NOTES PAYABLE. In April 1995, TIG Holdings issued $100 million of 8.125% Notes
maturing 2005. Interest is payable on a semi-annual basis, and a lump sum
principal repayment for the non-callable notes is due April 15, 2005. Included
in the restrictive covenants are limitations on the disposition of the stock of
TIG Insurance Company ("TIC"), limitations on liens and limitations on the
merger of the Company. Interest expense was $8 million in 1996 and $6 million in
1995. Interest paid was $8 million and $4 million in 1996 and 1995,
respectively. No interest was expensed or paid in 1994.
SALE - LEASEBACK. In December 1995, TIG entered into a $50 million credit
facility, of which approximately $25 million was outstanding as of December 31,
1996. The facility is a direct financing arrangement with a third party related
to the sale and leaseback of certain fixed assets, excluding data processing
equipment. The initial draw of $22 million against the facility in December 1995
is being amortized over 5 years with interest at 5.9% payable quarterly.
Subsequent draws against the facility are amortized over 5 years and interest,
based on a floating rate, is payable quarterly. Interest rates during 1996
ranged from 6.440% to 6.475%.
LINE OF CREDIT. In December 1995, TIG established an unsecured revolving line of
credit with maximum borrowings of $250 million. The full amount of the five year
credit facility was available for general corporate purposes as of December 31,
1996.
- - --------------------------------------------------------------------------------
NOTE I. MANDATORY REDEEMABLE PREFERRED STOCK
================================================================================
In April 1993, in connection with its IPO, TIG Holdings issued 250,000 shares of
non-voting mandatory redeemable preferred stock with a cumulative annual cash
dividend rate of $7.75 per share and an aggregate liquidation
preference/redemption value of $25 million plus accrued and unpaid dividends.
The preferred stock must be redeemed on April 27, 2000. With each regular
quarterly dividend declared on the preferred shares, each holder also receives
one non-transferable right (a "Right"). Each Right will constitute the right to
receive an additional amount to the extent that the regular cash dividend to
which the related Right was, in whole or in part, not made out of TIG Holdings'
current or accumulated earnings and profits, as calculated for federal income
tax purposes. In such event, the holder of a Right will be entitled to receive
an amount which, when taken together with the regular cash dividend to which the
Right was related, would cause the net after-tax return to such holder to equal
what the net after-tax return on the mandatory redeemable preferred stock would
have been had the regular cash dividend been paid entirely out of the current or
accumulated earnings and profits of TIG Holdings. No additional payments were
required during 1996. During 1995, TIG paid an additional $0.7 million in
respect to these Rights in connection with dividends declared on the mandatory
redeemable preferred stock during 1994. Transamerica agreed to indemnify TIG
Holdings for any amounts paid with regard to any rights issued by TIG Holdings
in connection with dividends declared on the mandatory redeemable preferred
stock during 1993. Accordingly, $0.4 million was paid by Transamerica under this
indemnification in 1994 with respect to dividends declared in 1993.
- 52 -
<PAGE>
PART II
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- - --------------------------------------------------------------------------------
NOTE J. SHAREHOLDERS' EQUITY
================================================================================
AUTHORIZED CAPITAL STOCK. TIG Holdings' authorized capital stock consists of one
million shares of $0.01 par value Class A convertible common stock, 180 million
shares of $0.01 par value common stock, and 15 million shares of $0.01 par value
preferred stock.
CLASS A COMMON STOCK. In April 1993, TIG Holdings issued 224,600 shares of Class
A common stock of which 81,191 had been canceled as of December 31, 1996. The
Class A common stock is convertible into shares of common stock one year after
issuance but not prior to the vesting of such shares in accordance with the
terms of their issuance. Accordingly, as of December 31, 1996, the number of
Class A common shares converted to common stock was 143,409 (see Note K -
Incentive Compensation Plans). As of December 31, 1996, no Class A common stock
is outstanding.
SUBSIDIARY DIVIDEND RESTRICTIONS. Payment of dividends to TIG Holdings by its
insurance subsidiaries is subject to certain restrictions. State insurance laws
limit the amount that may be paid without prior notice or approval by insurance
regulatory authorities. As of December 31, 1996, $155 million of dividends are
currently available for payment to TIG Holdings from its insurance subsidiaries
during 1997 without restriction. Dividends paid by the insurance subsidiaries in
1996 and 1995 were $130 million and $75 million, respectively. Dividends paid in
1996 consisted of cash of $130 million. Dividends paid in 1995 consisted of cash
of $55 million and subsidiary common stock of $20 million. There were no
dividends paid to TIG Holdings in 1994 by its insurance subsidiaries.
- - --------------------------------------------------------------------------------
NOTE K. INCENTIVE COMPENSATION PLANS
================================================================================
As of December 31, 1996, the Company has three stock based compensation plans,
which are described below. The Company adopted SFAS 123 effective January 1,
1996 and has elected to continue to account for employee stock-based
compensation as prescribed by APB Opinion No. 25 (See Note B).
THE 1996 LONG-TERM INCENTIVE PLAN. The 1996 Long-Term Incentive Plan (the "1996
Plan") provides for awards of stock options, stock appreciation rights,
restricted stock grants, restricted stock units and/or performance units. The
maximum number of shares of Common Stock in respect for which awards may be
granted or paid out under the 1996 Plan is 5 million shares plus, effective
January 1, 2000, the Limitation Amount. The "Limitation Amount" is 1.5% of the
total number of issued and outstanding shares of Common Stock as of January 1,
2000, plus, effective each January 1 thereafter through and including January 1,
2006, 1.5% of the total number of issued and outstanding shares of Common Stock
as of such January 1. In addition to the shares available for grant as
previously mentioned, 2 million shares of Common Stock will be available solely
for the grant of awards to employees in connection with acquisitions of other
entities or businesses by the Company and its Related Companies. As of December
31, 1996, there were no stock appreciation rights, restricted stock units or
performance units outstanding. The 1996 Plan will terminate on the date of the
Company's annual meeting of stockholders in 2006. Thereafter, no awards may be
granted. Stock options under the 1996 Plan have a term of ten years from the
date of the grant and vest in equal annual installments over four years.
Restricted stock grants vest in equal annual installments over three years.
THE 1996 NON-EMPLOYEE DIRECTORS COMPENSATION PROGRAM. The 1996 Non-Employee
Directors Compensation Program (the "1996 Program") provides for awards of stock
options and/or restricted
- 53 -
<PAGE>
PART II
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- - --------------------------------------------------------------------------------
shares units. These awards are not to exceed 200,000 shares. As of December 31,
1996, there were 30,636 shares of restricted stock units and 61,272 shares of
stock options outstanding. The 1996 Program will terminate on the close of
business on the date of the Company's annual meeting of stockholders in 1999.
Restricted stock units and stock options granted prior to the date of the annual
meeting of stockholders in 1997 will vest in three substantially equal
installments on the dates of each annual meeting of stockholders in 1997, 1998
and 1999. Restricted share units and stock options granted on or after the date
of the 1997 annual meeting of stockholders but prior to the date of the 1998
annual meeting of stockholders will vest in two equal installments on the dates
of each annual meeting of stockholders in 1998 and 1999. Restricted share units
and stock options granted on or after the date of the 1998 annual meeting of
stockholders but prior to the 1999 annual meeting of stockholders will vest in
one installment on the date of the 1999 annual meeting of stockholders. The
maximum term of any stock option granted will be ten years from the date of
grant.
THE 1993 LONG-TERM INCENTIVE PLAN. The 1993 Long-Term Incentive Plan (the "1993
Plan") provides for awards of stock options, stock appreciation rights,
restricted stock grants and/or performance units (collectively referred to as
"awards"). These awards are not to exceed 15 million shares in the aggregate. As
of December 31, 1996, there were no stock appreciation rights or performance
units outstanding. The 1993 Plan terminated May 2, 1996, except with respect to
outstanding awards, with the approval of the 1996 Plan. Stock options under the
1993 Plan have a term of ten years from the date of grant and vest in equal
annual installments over four years. Restricted stock grants vest in equal
annual installments over three years.
In connection with the IPO, TIG and Transamerica agreed that TIG employees could
surrender their options to purchase Transamerica common stock by May 14, 1993,
and receive options to purchase TIG Holdings common stock, retaining the taxable
spread, vesting schedule and term of the surrendered Transamerica stock options
as of the IPO closing date. Options relating to 820,498 shares of common stock
were issued in connection with this agreement and are included in outstanding
options in the following table.
A summary of the status of the Company's three stock based compensation plans as
of December 31, 1996 and changes during the three years ended December 31, 1996
is presented below:
Restricted Class A
Shares Shares Options
==============================================================================
Oustanding at January 1, 1994 77,047 173,938 9,305,278
Granted 13,800 -- 1,142,670
Exercised/Earned (30,234) (67,816) (42,076)
Forfeited or cancelled (4,599) (29,863) (409,675)
- - ------------------------------------------------------------------------------
Outstanding at December 31, 1994 56,014 76,259 9,996,197
- - ------------------------------------------------------------------------------
Granted 4,600 -- 1,391,100
Exercised/Earned (30,911) (39,800) (100,133)
Forfeited or cancelled (843) (666) (275,982)
- - ------------------------------------------------------------------------------
Outstanding at December 31, 1995 28,860 35,793 11,011,182
- - ------------------------------------------------------------------------------
Granted 110,170 -- 1,456,736
Exercised/Earned (25,436) (35,793) (383,594)
Forfeited or cancelled (14,380) -- (472,089)
- - ------------------------------------------------------------------------------
Outstanding at December 31, 1996 99,214 -- 11,612,235
==============================================================================
The weighted average option exercise price was $22.08 and $22.74 for options
outstanding at December 31, 1995 and 1996, respectively. The weighted average
option exercise price was $27.39 for options granted during 1996, $20.37 for
options exercised in 1996 and $23.67 for options forfeited in 1996.
The weighted average fair value of options granted during 1996 was $8.78 while
the weighted average fair value of restricted stock granted during the year was
$27.46. The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants in 1995 and 1996, respectively: dividend yield of
1.75 percent of all years; expected volatility of .201;
- 54 -
<PAGE>
PART II
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- - --------------------------------------------------------------------------------
risk-free interest rate of 7 percent; and expected life of 7 years. Because the
Company's employee stock options have characteristics significantly different
from those of traded options, and because changes in the subjective input
assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
If the fair value of the stock compensation granted had been accounted for under
SFAS 123, the proforma net income for 1996 would have been $73.4 million or
$1.21 per share and $115.5 million or $1.84 per share for 1995. For purposes of
proforma disclosures, the estimated fair value of the stock compensation is
amortized to expense over the stock compensation's vesting period. The effect on
net income of the stock compensation amortization for the years presented above
is not likely to be representative of the effects on reported net income for
future years.
The following tables summarize information about stock options outstanding and
exercisable at December 31, 1996:
Options Outstanding
------------------------------------------------
Range of Number Weighted-Avg Weighted-Avg
Excercise Outstanding @ Remaining Exercise
Prices 12/31/96 Contractual Life Price
=====================================================================
$13.00 to $18.00 274,272 4.4 yrs $16.40
$18.01 to $24.00 9,857,927 6.7 yrs $22.24
$24.01 to $28.00 1,036,300 8.9 yrs $26.11
$28.01 to $32.00 443,736 9.9 yrs $29.89
- - ---------------------------------------------------------------------
$13.00 to $32.00 11,612,235 6.9 yrs $22.74
=====================================================================
Options Excercisable
-------------------------------------------
Range of Number Weighted-Avg
Exercise Excercisable @ Exercise
Prices 12/31/96 Price
=====================================================================
$13.00 to $18.00 259,522 $16.34
$18.01 to $24.00 8,688,232 $22.53
$24.01 to $28.00 128,350 $25.66
$28.01 to $32.00 - -
- - ---------------------------------------------------------------------
$13.00 to $32.00 9,076,104 $22.39
=====================================================================
- - --------------------------------------------------------------------------------
NOTE L. EMPLOYEE BENEFIT PLANS
================================================================================
TIG Holdings' employee benefit plans (the "Plans") include the Diversified
Savings Plan, the Employee Stock Ownership Plan, and the Profit Sharing Plan.
Effective January 1, 1994, TIG Holdings adopted the ESOP and Profit Sharing
Restoration Plans. TIG Holdings may amend, terminate, or suspend contributions
to the Plans at any time as it may deem advisable. TIG Holdings is the
administrator of the Plans. Any subsidiary of TIG Holdings participating in the
Plans may withdraw at any time with the consent of the Holdings' Board of
Directors. The Board of Directors has fiduciary responsibilities relating to the
interpretation and operation of the Plans. As of January 1, 1997, the
Diversified Savings Plan and Profit Sharing Plan were combined into the TIG
Holdings, Inc. Diversified Savings and Profit Sharing Plan.
DIVERSIFIED SAVINGS PLAN. TIG Holdings, Inc. Diversified Savings Plan (the
"DSP") is qualified under Section 401 (a) of the Internal Revenue Code ("IRC")
and the trust established to hold the assets of the DSP is tax-exempt under
Section 501 (a) of the IRC. The DSP is available to all salaried employees. Most
employees who elect to participate may contribute up to 12% of their pre-tax
salary, plus bonuses, commissions, and overtime pay ("Employee Compensation")
for each calendar year. TIG Holdings administers the DSP and will make matching
contributions to the DSP in an amount equal to 75% of the participant's
contribution up to a maximum of 6% of Employee Compensation. Certain IRC
required limitations may be imposed for participants who are treated as "highly
compensated employees" for purposes of the IRC. Generally, an employee vests in
the matching employer contributions based upon years of service. Prior to
January 1, 1995,
- 55 -
<PAGE>
PART II
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- - --------------------------------------------------------------------------------
an employee vested 25% after three years of service, 50% after four years of
service, and 100% after five years of service. Effective January 1, 1995, an
employee vests 25% after one year of service, 50% after two years of service and
100% after three years of service. Employer matching contributions were $3.3
million, $3.8 million, and $4.0 million for 1996, 1995 and 1994, respectively.
EMPLOYEE STOCK OWNERSHIP PLAN. Prior to the IPO closing, TIG Holdings adopted
the TIG Holdings, Inc. Employees Stock Ownership Plan (the "ESOP"). Most
salaried employees are eligible to participate in the ESOP. Generally, TIG
Holdings will contribute, for each calendar year, an amount equal to one percent
of Employee Compensation, as defined, on behalf of each participant employed on
the last working day of that year or who was employed but died during the year.
No employee contributions are permitted to be made to the ESOP. Prior to January
1, 1995 an employee fully vested at the end of five years. Effective January 1,
1995, an employee vests 25% after one year of service, 50% after two years of
service and 100% after three years of service. In April 1993, the ESOP borrowed
$24.1 million from TIG Holdings to purchase 1,124,754 newly issued shares of
common stock. The loan obligation of the ESOP is considered unearned employee
compensation, and as such, is recorded as a reduction of TIG Holdings'
shareholders' equity. As loan repayments are made by the ESOP, common stock is
released to participant accounts. Unearned compensation is amortized based on
the number of shares committed to be released and compensation expense is
recognized based on the current market price. Compensation expense of
$2.1million, $2.3 million and $1.3 million was recognized in 1996, 1995 and
1994, respectively. At December 31, 1996, 230,928 shares are allocated, 58,601
shares are committed to be released, and 503,766 shares are in suspense. As of
December 31, 1996, the market value of unallocated shares was $17.1 million.
Contributions to the ESOP were $2.0 million, $2.3 million and $1.2 million for
1996, 1995 and 1994, respectively. A participant's ESOP account will be
distributed in full shares of common stock or cash after termination of service.
Employees who were actively employed on April 27, 1993 received an initial
allocation of 100 shares of TIG Holdings common stock in which they were
immediately fully vested. Effective January 1, 1995, all active associates who
did not previously receive the initial allocation of shares in 1993 are eligible
for 100 shares of TIG Holdings, Inc. common stock upon attainment of six months
of service. These shares are allocated to the associates' accounts as of the
last day of the plan year.
ESOP RESTORATION PLAN. The TIG Holdings, Inc. ESOP Restoration Plan is an
unfunded plan for the purpose of providing deferred compensation for a select
group of management or highly compensated employees whose allocations under the
qualified ESOP plan are limited by annual restrictions as determined by the
Internal Revenue Code. Highly compensated employees whose allocations under the
qualified plan are limited by the Internal Revenue Code restrictions will be
eligible for participation immediately upon the date of hire if annual earnings,
including bonus in the year paid, exceed a specified threshold. The threshold
for each year will be the amount of the cap on compensation that may be taken
into account under the qualified plan for that year, or such greater amount as
may be determined by the Committee in its discretion. Effective January 1, 1995,
a Participant vests 25% after one year of service, 50% after two years of
service and 100% after three years of service. Participants' accounts are
credited in dollar amounts for the difference between the cash value of the
stock that would have been allocated to the participant's account under the
qualified ESOP plan and the cash value of the stock that would have been
allocated in the absence of the restrictions noted above. Participants' accounts
are adjusted for gains, losses and earnings as if invested in the same manner as
such associate's account under the qualified ESOP plan. Liabilities due to the
participants were approximately $227 thousand, $118 thousand and $28 thousand as
of December 31, 1996, 1995 and 1994.
PROFIT SHARING PLAN. The TIG Holdings, Inc. Employees' Profit Sharing Plan (the
"Profit Sharing Plan"), benefits eligible employees of TIG Holdings. Eligible
employees are those who either were employed by TIG Holdings on December 31,
each year or were employed during the plan year but who died prior to the plan
year end. Generally, each
- 56 -
<PAGE>
PART II
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- - --------------------------------------------------------------------------------
salaried employee is eligible to participate in the Profit Sharing Plan. Prior
to January 1, 1995 an employee fully vested at the end of five years. Effective
January 1, 1995, an employee vests 25% after one year of service, 50% after two
years of service, and 100% after three years of service. No employee
contributions are permitted to be made to the Profit Sharing Plan. The amount of
any contribution for any calendar year made by TIG Holdings will be determined
at the sole discretion of the TIG Holdings' Board of Directors. For 1996, 1995
and 1994, TIG contributed on behalf of each participant an amount equal to the
sum of (i) two percent of the participant's Employee Compensation, as defined,
for the Plan Year and (ii) four percent of the participant's annual Employee
Compensation in excess of a determined wage base. Contributions were $1.4
million, $2.0 million and $2.1 million for 1996, 1995 and 1994, respectively.
PROFIT SHARING RESTORATION PLAN. The TIG Holdings, Inc. Profit Sharing
Restoration Plan is an unfunded plan for the purpose of providing deferred
compensation for a select group of management or highly compensated employees
whose allocations under the qualified Profit Sharing plan are limited by the
annual restrictions as determined by the Internal Revenue Code. Highly
compensated employees will be eligible for participation immediately upon the
date of hire if annual earnings, including bonus in the year paid, exceed a
specified threshold. The threshold for each year will be the amount of the cap
on compensation that may be taken into account under the qualified plan for that
year, or such greater amount as may be determined by the Committee in its
discretion. Effective January 1, 1995, a Participant vests 25% after one year of
service, 50% after two years of service and 100% after three years of service.
Participants' accounts are credited for the difference between the dollar amount
credited to the participants' account under the qualified Profit Sharing Plan
and the amount that would have been credited in the absence of the restrictions
noted above. Participants' accounts are adjusted for gains, losses and earnings
as if invested in the same manner as such associate's account under the
qualified Profit Sharing Plan. Liabilities due to the participants were
approximately $916 thousand, $447 thousand and $111 thousand as of December 31,
1996, 1995 and 1994.
POSTRETIREMENT BENEFITS OTHER THAN PENSIONS. TIG participated in Transamerica's
defined benefit health care plan that provided postretirement benefits to
eligible retirees of Transamerica and affiliates. TIG assumed all liabilities
with respect to its retirees and active employees at the date of the IPO.
Contributions for these contributory plans are adjusted annually. Considerations
for the adjustments include deductibles and coinsurance. Medical benefits are
based on the employee's length of service and age at retirement from the
Company. Assets held in trust consist of short term investments with a fair
value of approximately $4.5 million and $3.0 million at December 31, 1996 and
1995, respectively.
A summary of the components of net periodic other postretirement benefit cost is
as follows:
Years Ended December 31,
------------------------
(In millions) 1996 1995 1994
==============================================================
Service cost - benefits earned
during the period $0.3 $0.3 $0.3
Interest cost on projected
benefit obligation 1.4 1.4 1.4
Amortization of prior service cost (0.1) (0.1) (0.1)
- - --------------------------------------------------------------
Net periodic other postretirement
benefit cost $1.6 $1.6 $1.6
==============================================================
The following table sets forth the amounts recognized in the balance sheet for
other postretirement benefit plans:
December 31,
----------------
(In millions) 1996 1995
==============================================================
Actuarial present value of other
postretirement obligations:
Retirees $17.2 $17.8
Active participants 3.4 3.5
Unrecognized net gain (loss) - (0.1)
Prior service cost 0.7 0.8
- - --------------------------------------------------------------
Other postretirement benefit obligation $21.3 $22.0
==============================================================
The weighted average annual assumed rate of increase in the health care cost
trend rate is 11.0 percent for 1996 and 10.0 percent for 1997 and is
- 57 -
<PAGE>
PART II
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- - --------------------------------------------------------------------------------
assumed to decrease gradually to 8.0 percent in 1999 and remain at that level
thereafter. The health care cost trend rate assumption has a significant effect
on the amounts reported.
Increasing the trend rate by one percentage point in each year would increase
the actuarial present value obligation for postretirement medical benefits as of
December 31, 1996, 1995 and 1994 by $1.9 million, $2.0 million and $1.9 million,
respectively, and the aggregate of the service and interest cost components of
net periodic postretirement benefit cost by $0.1 million for 1996, 1995 and
1994. The weighted average discount rate used in determining the postretirement
benefit obligation was 7.0% at December 31, 1996 and 1995.
- - --------------------------------------------------------------------------------
NOTE M. COMMITMENTS AND CONTINGENCIES
================================================================================
Leases. Future minimum rental commitments as of December 31, 1996 for all
noncancelable operating leases are as follows:
(In millions)
===========================================
1997 $16
1998 15
1999 14
2000 13
2001 10
Thereafter 46
- - -------------------------------------------
114
Sublease rental income 9
- - -------------------------------------------
Net commitments $105
===========================================
Substantially all of the leases are for rental of office space, the initial
terms of which range from 1 to 20 years. Total rental expense for 1996, 1995 and
1994 was $35.1 million, $29.9 million and $30.0 million, respectively. As a
result of reorganization of TIG's commercial operations in the first quarter of
1996, certain lease termination costs in the amount of $18 million were incurred
and are included in the $100 million restructuring charges recorded in 1996 as
discussed in Note C.
LITIGATION. 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. In the opinion of TIG, based upon information
available on the date of this report, no individual item of litigation, or group
of similar items of litigation (including asbestos-related and environmental
pollution matters and the matter referred to below), taken net of reserves
established therefor and giving effect to insurance and reinsurance, is likely
to result in judgments for amounts material to TIG's consolidated results of
operations.
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.
Management believes that the ultimate liability, if any, arising from the Talbot
Case will not materially impact consolidated operating results.
LONDON MARKET ACTIVITY. Through various indirect subsidiaries, the Company will
become a limited liability participant in the Lloyd's of London ("Lloyd's")
market in 1997. As a prerequisite to admittance to the Lloyd's market,
irrevocable letters of credit totalling (pound)42.5 million and collateralized
by $79.0 million of the Company's investment securities were provided in favor
of the Society and Council of Lloyd's in 1996. The letters of credit effectively
secure the future contingent obligations of the Company should the Lloyd's
underwriting syndicates in which the Company participates incur net losses. The
Company's contingent liability to the Society and Council of Lloyd's is limited
to the amount of the letters of credit.
- 58 -
<PAGE>
PART II
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- - --------------------------------------------------------------------------------
NOTE N. REGULATORY MATTERS
================================================================================
REGULATORY RISK-BASED CAPITAL. The states of domicile of TIG's insurance
subsidiaries impose minimum risk-based capital requirements on insurance
companies which were developed by the National Association of Insurance
Commissioners ("NAIC"). The formulas for determining the amount of risk-based
capital specify various weighting factors that are applied to financial balances
or various levels of activity based on the perceived degree of risk. Regulatory
compliance is determined by a ratio of the enterprise's regulatory total
adjusted capital, as defined by the NAIC, to its authorized control level
risk-based capital, as defined by the NAIC. Enterprises below specific trigger
points or ratios are classified within certain levels, each of which requires
specified corrective action. The levels and ratios are as follows:
Ratio of Total Adjusted Capital to
Authorized Control Level Risk-Based
Regulatory Event Capital (Less Than or Equal to)
- - ---------------------------------------------------------------------
Company action level 2.0 (or 2.5 with negative trends)
Regulatory action level 1.5
Authorized control level 1.0
Mandatory control level 0.7
=====================================================================
At December 31, 1996, the statutory "risk-based" capital for each TIG insurance
subsidiary was such that no action (company or regulatory) would be required.
PERMITTED STATUTORY ACCOUNTING PRACTICES. TIG prepares its statutory financial
statements in accordance with accounting principles and practices prescribed or
permitted by the domiciliary state insurance department. Prescribed statutory
accounting practices include state laws, regulations, and general administrative
rules, as well as a variety of publications of the NAIC. Permitted statutory
accounting practices encompass all accounting practices that are not prescribed;
such practices differ from state to state, may differ from company to company
within a state, and may change in the future. Furthermore, the NAIC has a
project to codify statutory accounting practices, the result of which is
expected to constitute the only source of "prescribed" statutory accounting
practices. Accordingly, that project, which is expected to be completed in 1997
and implemented in 1998 will likely change the definitions of what comprises
prescribed versus permitted statutory accounting practices, and may result in
changes to the accounting policies that insurance enterprises use to prepare
their statutory financial statements.
Statutory amounts for TIG's business segments are as follows (see Note O -
Business Segments):
Years Ended December 31,
------------------------
(In millions) 1996 1995 1994
======================================================
STATUTORY NET INCOME (LOSS):
Primary operations $ 88 $ 67 $(29)
Reinsurance operations 96 69 42
- - ------------------------------------------------------
Total $184 $136 $13
======================================================
December 31,
----------------------
(In millions) 1996 1995 1994
======================================================
STATUTORY SURPLUS:
Primary operations $460 $512 $529
Reinsurance operations 515 440 372
- - ------------------------------------------------------
Total $975 $952 $901
======================================================
In June 1993, the California Department of Insurance permitted TIG Insurance
Company ("TIC"), TIG's lead insurer, to record a quasi-reorganization of its
statutory capital accounts. The effect of the quasi-reorganization was to
increase the earned surplus of TIC to zero from a negative $285 million and to
decrease contributed surplus by the same amount. This transaction significantly
increased TIC's future dividend paying capability as insurance companies may
only pay dividends from earned surplus.
Under the State of California insurance regulations, TIG is required to maintain
minimum capital and surplus of $5,400,000. The Company's surplus and capital
exceeds the NAIC's "risk-based-capital" requirements at the end of 1996.
- 59 -
<PAGE>
PART II
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- - --------------------------------------------------------------------------------
NOTE O. BUSINESS SEGMENTS
================================================================================
TIG's operations are comprised of two business segments. Reinsurance operations
and Primary Insurance operations. Primary Insurance operations are further
broken down into Commercial Specialty, Retail, and Other Lines. Premium produced
through Aon Corporation and its subsidiaries accounted for 23%, 22% and 21% of
consolidated net premium written in 1996, 1995 and 1994, respectively. In
addition, inter-segment premium for 1995 was $43 million. Revenues, pre-tax
operating income and identifiable assets for each segment were as follows:
<TABLE>
<CAPTION>
Segments - 1996
--------------------------------------------------------------
(In millions) Reinsurance Primary Parent Consolidated
===================================================================================================================
Revenues:
<S> <C> <C> <C> <C>
Earned premium $534 $1,005 $ - $1,539
Net investment income 120 163 7 290
Net investment gain (loss) 18 (22) - (4)
- - -------------------------------------------------------------------------------------------------------------------
Total revenues $672 $1,146 $ 7 $1,825
- - -------------------------------------------------------------------------------------------------------------------
Underwriting loss $(14) $(51) $ - $(65)
- - -------------------------------------------------------------------------------------------------------------------
Income (loss) before income taxes $124 $89 $(138) $75
- - -------------------------------------------------------------------------------------------------------------------
Identifiable assets $2,372 $4,046 $58 $6,476
===================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
Segments - 1995
--------------------------------------------------------------
(In millions) Reinsurance Primary Parent Consolidated
===================================================================================================================
Revenues:
<S> <C> <C> <C> <C>
Earned premium $483 $1,135 $ - $1,618
Net investment income 100 158 10 268
Net investment gain (loss) 8 (2) (17) (11)
- - -------------------------------------------------------------------------------------------------------------------
Total revenues $591 $1,291 $(7) $1,875
- - -------------------------------------------------------------------------------------------------------------------
Underwriting loss $(17) $(42) $ - $(59)
- - -------------------------------------------------------------------------------------------------------------------
Income (loss) before income taxes $91 $98 $(34) $ 155
- - -------------------------------------------------------------------------------------------------------------------
Identifiable assets $2,219 $4,282 $182 $6,683
===================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
Segments - 1994
--------------------------------------------------------------
(In millions) Reinsurance Primary Parent Consolidated
===================================================================================================================
Revenues:
<S> <C> <C> <C> <C>
Earned premium $394 $1,155 $ - $1,549
Net investment income 85 155 9 249
Net investment gain (loss) 1 (18) (3) (20)
- - -------------------------------------------------------------------------------------------------------------------
Total revenues $480 $1,292 $6 $1,778
- - -------------------------------------------------------------------------------------------------------------------
Underwriting loss $(22) $(125) $ - $(147)
- - -------------------------------------------------------------------------------------------------------------------
Income (loss) before income taxes $64 $(13) $(6) $45
- - -------------------------------------------------------------------------------------------------------------------
Identifiable assets $1,815 $4,180 $121 $6,116
===================================================================================================================
</TABLE>
- 60 -
<PAGE>
PART II
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- - --------------------------------------------------------------------------------
The following table is a summary of TIG's Primary insurance operations by major
division:
<TABLE>
<CAPTION>
Years Ended December 31,
-----------------------------------------
(In millions) 1996 1995 1994
=================================================================================================================
Primary earned premium:
<S> <C> <C> <C>
Commercial Specialty $429 $419 $413
Retail 363 337 312
Other Lines 213 379 430
- - -----------------------------------------------------------------------------------------------------------------
Total primary earned premium $1,005 $1,135 $1,155
- - -----------------------------------------------------------------------------------------------------------------
Underwriting loss:
Commercial Specialty $(13) $(4) $18
Retail (4) (6) (55)
Other Lines (34) (32) (88)
- - -----------------------------------------------------------------------------------------------------------------
Total underwriting loss $(51) $(42) $(125)
=================================================================================================================
</TABLE>
- - --------------------------------------------------------------------------------
NOTE P. INTERIM FINANCIAL DATA (Unaudited)
================================================================================
<TABLE>
<CAPTION>
Quarter
----------------------------------------------------
(In millions) First Second Third Fourth Total
==================================================================================================================
Summary Quarterly Results:
<S> <C> <C> <C> <C> <C> <C>
Revenues 1996 $455 $457 $460 $453 $1,825
1995 470 476 466 463 1,875
1994 425 468 432 453 1,778
Pre-tax income (loss) from 1996 (82) 49 53 55 75
continuing operations 1995 20 44 47 44 155
1994 (13) 27 8 23 45
Net income (loss) 1996 (31) 34 37 39 79
1995 18 33 34 33 118
1994 (3) 23 10 22 52
- - ------------------------------------------------------------------------------------------------------------------
Earnings per Common Share:
Net income (loss) 1996 $(0.53) $0.55 $0.64 $0.67 $1.30
1995 $0.28 $0.53 $0.54 $0.54 $1.89
1994 $(0.05) $0.36 $0.15 $0.33 $0.79
==================================================================================================================
</TABLE>
The 1994 first and third quarters were impacted by pre-tax catastrophe costs of
$32 and $13 million, respectively, arising from the January 1994 Northridge
earthquake. In the second quarter of 1995, a reserve of $6.3 million was
established for exit costs resulting from management's decision to reduce small
individually underwritten commercial policies, while a normal re-evaluation of
the Company's allowance for reinsurance recoverables in the fourth quarter of
1995 resulted in an increase to pretax income of approximately $11 million for
the quarter. In the first quarter of 1996, an after-tax restructuring change of
$65 million was taken for costs related to management's decision to restructure
operations (see Note C. - Restructuring Charges).
- 61 -
<PAGE>
PART II
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- - --------------------------------------------------------------------------------
NOTE Q. SUBSEQUENT EVENT
================================================================================
In January of 1997, TIG Capital Trust I ("TIG Capital" or the "Trust"), a
statutory business trust created under Delaware law and a trust subsidiary of
TIG Holdings, completed a private offering for $125 million of 8.597% capital
securities. TIG Holdings is the inital holder of 100% of the common securities
of TIG Capital. Holders of the capital securities of the Trust will have a
preference under certain circumstances over the holders of common securities of
the Trust with respect to cash distributions and amounts payable on liquidation,
redemption, or otherwise.
TIG Holdings issued $128.75 million in 8.597% Junior Subordinated Debentures to
TIG Capital Trust I (including approximately $3.75 million with respect to the
capital contributed to the Trust by TIG Holdings). TIG Holdings guaranteed the
payment of distributions and payments on liquidation or redemption of the
capital securities but only in each case to the extent of funds held by the
Trust. The guarantee does not cover payment of distributions when the Trust does
not have sufficient funds to pay such distributions. All of the net proceeds
received by TIG Holdings from the issuance of the debentures will be used for
general corporate purposes which may include repurchases of the Company's common
stock.
- - --------------------------------------------------------------------------------
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
================================================================================
Not applicable.
- 62 -
<PAGE>
PART III
- - --------------------------------------------------------------------------------
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
================================================================================
Information required by this item is incorporated herein by reference from the
sections entitled "Election of Directors", "Stock Ownership and Section 16(a)
Beneficial Ownership Compliance" and "Certain Information Regarding the
Executive Officers" in the Company's definitive proxy statement for its annual
meeting of shareholders to be held May 1, 1997. Notwithstanding the foregoing,
the subsection entitled "Compensation Committee Report on Executive
Compensation" is not incorporated herein by reference.
- - --------------------------------------------------------------------------------
ITEM 11. EXECUTIVE COMPENSATION
================================================================================
Information required by this item is incorporated by reference from the section
entitled "Certain Information Regarding the Executive Officers" in the Company's
definitive proxy statement for its annual meeting of shareholders to be held May
1, 1997. Notwithstanding the foregoing, the subsection entitled "Compensation
Committee Report on Executive Compensation" is not incorporated herein by
reference.
- - --------------------------------------------------------------------------------
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
================================================================================
Information required by this item is incorporated by reference from the sections
entitled "Stock Ownership and Section 16 (a) Beneficial Ownership Compliance"
from the Company's definitive proxy statement for its annual meeting of
shareholders to be held May 1, 1997.
- - --------------------------------------------------------------------------------
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
================================================================================
Not applicable.
- 63 -
<PAGE>
PART IV
- - --------------------------------------------------------------------------------
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
================================================================================
Page
(A) (1) FINANCIAL STATEMENTS
Consolidated Balance Sheets at December 31, 1996 and 1995 ...................39
Consolidated Statements of Income for
each of the three years in the period ended December 31, 1996 ...............40
Consolidated Statements of Cash Flows for
each of the three years in the period ended December 31, 1996 ...............41
Consolidated Statements of Changes in Shareholders' Equity for
each of the three years in the period ended December 31, 1996 ...............42
Notes to Consolidated Financial Statements ..................................43
(A) (2) SCHEDULES SUPPORTING FINANCIAL STATEMENTS
Schedule II. Financial Statements of TIG Holdings, Inc.
(Parent Company Only) .......................................................65
Schedule III. Supplementary Insurance Information ...........................68
Schedule IV. Reinsurance ....................................................69
All other schedules specified by Article 7 of Regulation S-X are not required
pursuant to the related instructions or are inapplicable and, therefore, have
been omitted.
(A) (3) EXHIBITS ............................................................70
Exhibit 11. Computation of Earnings Per Share ...............................73
Exhibit 12. Computation of Ratio of
Consolidated Earnings to Fixed Charges and Preferred Stock Dividends ........74
A copy of exhibits not included with this Form 10-K may be obtained upon request
and payment of the cost of reproduction to the Secretary at the Company's
principal executive office, 65 East 55th Street, 28th Floor, New York, New York
10022.
(B) REPORTS ON FORM 8-K
No reports on Form 8-K were filed during the fourth quarter of 1996.
- 64 -
<PAGE>
PART IV
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
TIG HOLDINGS, INC. SCHEDULE II
BALANCE SHEETS
(Parent Company Only)
December 31,
-------------------------
(In millions) 1996 1995
=================================================================================================================
ASSETS
Investments:
Fixed maturity investments, at market (cost: $-0- in 1996,
<S> <C> <C>
$131 in 1995) $ - $127
Short-term and other investments, at cost which approximates market 40 42
- - -----------------------------------------------------------------------------------------------------------------
Total investments 40 169
- - -----------------------------------------------------------------------------------------------------------------
Investments in subsidiaries 1,318 1,364
Accrued investment income - 1
Income taxes 32 (26)
Other assets 18 12
- - -----------------------------------------------------------------------------------------------------------------
Total assets $1,408 $1,520
=================================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Notes payable $98 $98
Accounts payable and other liabilities 78 21
- - -----------------------------------------------------------------------------------------------------------------
Total liabilities 176 119
- - -----------------------------------------------------------------------------------------------------------------
MANDATORY REDEEMABLE PREFERRED STOCK 25 25
- - -----------------------------------------------------------------------------------------------------------------
SHAREHOLDERS' EQUITY
Common stock - par value $0.01 per share
(authorized: 180,000,000 shares
issued and outstanding: 64,610,109 shares in 1996, and
64,125,050 shares in 1995 ) 1,198 1,186
Class A common stock - par value $0.01 per share
(authorized: 1,000,000 shares; issued and
outstanding: 35,793 shares in 1995) - 1
Retained earnings 234 168
Net unrealized investment gain, net of taxes 52 110
Net unrealized loss on foreign exchange, net of tax (1) (1)
- - -----------------------------------------------------------------------------------------------------------------
1,483 1,464
Treasury stock (10,306,000 shares in 1996 and
4,041,100 shares in 1995) (276) (88)
- - -----------------------------------------------------------------------------------------------------------------
Total shareholders' equity 1,207 1,376
- - -----------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $1,408 $1,520
=================================================================================================================
</TABLE>
These financial statements should be read in conjunction with the Consolidated
Financial Statements and the accompanying notes thereto.
- 65 -
<PAGE>
PART IV
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
TIG HOLDINGS, INC. SCHEDULE II
STATEMENTS OF INCOME
(Parent Company Only)
Years Ended December 31,
-----------------------------------------
(In millions) 1996 1995 1994
=================================================================================================================
REVENUES
<S> <C> <C> <C>
Net investment income $7 $10 $9
Net investment loss - (17) (3)
- - -----------------------------------------------------------------------------------------------------------------
Total revenues 7 (7) 6
- - -----------------------------------------------------------------------------------------------------------------
EXPENSES
Selling and administration expenses 37 21 12
Interest expense 8 6 -
Restructuring charges 100 - -
- - -----------------------------------------------------------------------------------------------------------------
Total expenses 145 27 12
- - -----------------------------------------------------------------------------------------------------------------
Loss before income tax benefit (138) (34) (6)
Income tax benefit 76 42 22
- - -----------------------------------------------------------------------------------------------------------------
Income (loss) before equity in earnings of subsidiaries (62) 8 16
Equity in undistributed earnings of subsidiaries 141 110 36
- - -----------------------------------------------------------------------------------------------------------------
Net income $79 $118 $52
=================================================================================================================
</TABLE>
These financial statements should be read in conjunction with the Consolidated
Financial Statements and the accompanying notes thereto.
- 66 -
<PAGE>
PART IV
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
TIG HOLDINGS, INC. SCHEDULE II
STATEMENTS OF CASH FLOW
(Parent Company Only)
Years Ended December 31,
-----------------------------------------
(In millions) 1996 1995 1994
=================================================================================================================
OPERATING ACTIVITIES
<S> <C> <C> <C>
Net income $79 $118 $52
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
Changes in:
Income taxes (58) (25) 3
Accrued investment income 1 - 1
Equity in undistributed earnings of subsidiaries (141) (110) (36)
Dividends received from subsidiaries 130 75 -
Other 54 6 (42)
- - -----------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) operating activities 65 64 (22)
- - -----------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Purchases of fixed maturity investments (67) (118) (51)
Sales of fixed maturity investment 187 75 99
Maturities and calls of fixed maturities investments 5 9 19
Purchase of common stock investments (2) (8) -
Net change in short-term investments 4 (27) 10
Capital contributions to subsidiaries - (20) (5)
Other 2 1 (11)
- - -----------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) investing activities 129 (88) 61
- - -----------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Net proceeds from issuance of notes payable - 98 -
Net proceeds from issuance of common stock 8 2 3
Acquisition of treasury stock (188) (62) (26)
Common stock dividends (12) (12) (13)
Preferred stock dividends (2) (2) (3)
- - -----------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities (194) 24 (39)
- - -----------------------------------------------------------------------------------------------------------------
Increase (decrease) in cash - - -
Cash at beginning of period - - -
- - -----------------------------------------------------------------------------------------------------------------
Cash at end of period $ - $ - $ -
=================================================================================================================
</TABLE>
These financial statements should be read in conjunction with the Consolidated
Financial Statements and the accompanying notes thereto.
- 67 -
<PAGE>
PART IV
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
TIG HOLDINGS, INC. SCHEDULE III
SUPPLEMENTARY INSURANCE INFORMATION
Future
Policy Other
Benefits, Policy Benefits, Amortization
Deferred Losses, Claims Claims, of Deferred Other
Policy Claims And Net Losses And Policy Operating Net
Acquisition And Loss Unearned Benefits Premium Investment Settlement Acquisition Expenses Premium
(In millions) Costs Expenses Premium Payable Revenue Income (1) Expenses Costs (2) Written
==================================================================================================================================
Year Ended
12/31/96:
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Primary $80 $2,418 $470 - $1,005 $163 $752 $205 $95 $981
Reinsurance 64 1,342 226 - 534 120 386 142 20 548
Parent - - - - - 7 - - 37 -
- - ----------------------------------------------------------------------------------------------------------------------------------
Total $144 $3,760 $696 - $1,539 $290 $1,138 $347 $152 $1,529
- - ----------------------------------------------------------------------------------------------------------------------------------
Year Ended
12/31/95:
Primary $83 $2,600 $495 - $1,135 $158 $815 $216 $132 $1,099
Reinsurance 61 1,286 217 - 483 100 361 119 20 511
Parent - - - - - 10 - - 36 -
- - ----------------------------------------------------------------------------------------------------------------------------------
Total $144 $3,886 $712 - $1,618 $268 $1,176 $335 $188 $1,610
- - ----------------------------------------------------------------------------------------------------------------------------------
Year Ended
12/31/94:
Primary $85 $2,784 $481 - $1,155 $155 $866 $198 $189 $1,181
Reinsurance 52 1,089 194 - 394 85 299 101 16 440
Parent - - - - - 9 - - 37 -
- - ----------------------------------------------------------------------------------------------------------------------------------
Total $137 $3,873 $675 - $1,549 $249 $1,165 $299 $242 $1,621
- - ----------------------------------------------------------------------------------------------------------------------------------
<FN>
(1) Net investment income is based on each segment's investable assets.
(2) Other operating expenses are allocated primarily on the specific
identification basis. Where indirect expenses cannot be directly
related to a segment, these expenses are allocated on a rational basis
depending on the nature of the expense (e.g., premium written, head
count, etc.).
</FN>
</TABLE>
- 68 -
<PAGE>
PART IV
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SCHEDULE IV
TIG HOLDINGS, INC.
REINSURANCE
Assumed
From
Other
Companies Percentage
Ceded To And Of Amount
Gross Other Involuntary Net Assumed
(In millions) Amount Companies Pools Amount To Net
- - ---------------------------------------------------------------------------------------------------------------------
Year Ended December 31, 1996
Property and casualty
<S> <C> <C> <C> <C> <C>
premium $1,307 $400 $632 $1,539 41.07%
- - ---------------------------------------------------------------------------------------------------------------------
Year Ended December 31, 1995
Property and casualty
premium $1,377 $388 $629 $1,618 38.88%
- - ---------------------------------------------------------------------------------------------------------------------
Year Ended December 31, 1994
Property and casualty
premium $1,422 $422 $549 $1,549 35.44%
=====================================================================================================================
</TABLE>
- 69 -
<PAGE>
PART IV
- - --------------------------------------------------------------------------------
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 10.1: Master Leasing Agreement dated December 1, 1995 between BLC
Corporation as Lessor, and TIG Insurance Company, as Lessee (incorporated by
reference to Exhibit 10.1 to TIG Holdings' Annual Report on Form 10-K for the
year ended December 31, 1995, Commission File No. 1-11856).
EXHIBIT 10.2: Trade Name and Service Mark License Agreement dated April 16, 1993
by and between Transamerica and TIG Insurance Group (incorporated by reference
to Exhibit 10.5 to TIG Holdings' Quarterly Report on Form 10-Q for the quarter
ended March 31, 1993, Commission File No. 1-11856).
EXHIBIT 10.3: Employment Agreement dated April 19, 1993 by and between TIG
Holdings and Jon W. Rotenstreich (incorporated by reference to Exhibit 10.10 to
TIG Holdings' Quarterly Report on Form 10-Q for the quarter ended March 31,
1993, Commission File No. 1-11856).
EXHIBIT 10.4: Employment Agreement dated April 19, 1993 by and between TIG
Holdings and Don D. Hutson (incorporated by reference to Exhibit 10.11 to TIG
Holdings' Quarterly Report on Form 10-Q for the quarter ended March 31, 1993,
Commission File No. 1-11856).
EXHIBIT 10.5: Employment Agreement dated March 23, 1993 by and between
Transamerica Reinsurance Company and William G. Clark (incorporated by reference
to Exhibit 10.12 to TIG Holdings' Quarterly Report on Form 10-Q for the quarter
ended March 31, 1993, Commission File No. 1-11856).
EXHIBIT 10.6: Employment Agreement dated March 23, 1993 by and between
Transamerica Reinsurance Company and Edwin M. Millette (incorporated by
reference to Exhibit 10.18 to TIG Holdings' Annual Report on Form 10-K for the
year ended December 31, 1994, Commission File No. 1-11856).
EXHIBIT 10.7: Letter to Edwin M. Millette re: Employment Agreement (incorporated
by reference to Exhibit 10.19 to TIG Holdings' Annual Report on Form 10-K for
the year ended December 31, 1994, Commission File No. 1-11856).
EXHIBIT 10.8: Letter from TIG Holdings to Edwin G. Pickett dated June 15, 1993
and June 22, 1993 concerning certain provisions of Mr. Pickett's employment with
TIG Holdings (incorporated by reference to Exhibit 10.32 to Amendment No. 1 to
TIG Holdings' Annual Report on Form 10-K for the year ended December 31, 1993,
Commission File No. 1-11856).
EXHIBIT 10.9: TIG Holdings, Inc. 1993 Non-Employee Directors Restricted Share
Program (incorporated by reference to Exhibit 10.21 to TIG Holdings' Quarterly
Report on Form 10-Q for the quarter ended March 31, 1993, Commission File No.
1-11856).
- 70 -
<PAGE>
PART IV
- - --------------------------------------------------------------------------------
EXHIBIT 10.10: Amendment to TIG Holdings, Inc. 1993 Non-Employee Directors
Restricted Share Program (incorporated by reference to Exhibit 10.22 to
Amendment No. 1 to TIG Holdings' Annual Report on Form 10-K for the year ended
December 31, 1993, Commission File No. 1-11856).
EXHIBIT 10.11: TIG Holdings, Inc. Common Stock Restricted Share Agreement
(incorporated by reference to Exhibit 4.1 to TIG Holdings' Registration
Statement on Form S-8, File No. 33-66650).
EXHIBIT 10.12: TIG Holdings, Inc. 1993 Long-Term Incentive Plan (incorporated by
reference to Exhibit 10.13 to TIG Holdings' Quarterly Report on Form 10-Q for
the quarter ended March 31, 1993, Commission File No. 1-11856).
EXHIBIT 10.13: TIG Holdings, Inc. Employee Stock Ownership Plan (incorporated by
reference to Exhibit 10.14 to TIG Holdings' Quarterly Report on Form 10-Q for
the quarter ended March 31, 1993, Commission File No. 1-11856).
EXHIBIT 10.14: Employee Stock Ownership Plan Trust Agreement dated April 27,
1993 by and between TIG Holdings and Bank of America National Trust and Savings
Association, as trustee (incorporated by reference to Exhibit 10.15 to TIG
Holdings' Quarterly Report on Form 10-Q for the quarter ended March 31, 1993,
Commission File No. 1-11856).
EXHIBIT 10.15: Loan and Stock Purchase Agreement dated April 27, 1993 by and
between TIG Holdings and Bank of America National Trust and Savings Association,
as trustee of the TIG Holdings, Inc. Employee Stock Ownership Plan (incorporated
by reference to Exhibit 10.16 to TIG Holdings' Quarterly Report on Form 10-Q for
the quarter ended March 31, 1993, Commission File No. 1-11856).
EXHIBIT 10.16: TIG Holdings, Inc. Diversified Savings Plan (incorporated by
reference to Exhibit 10.17 to TIG Holdings' Quarterly Report on Form 10-Q for
the quarter ended March 31, 1993, Commission File No. 1-11856).
EXHIBIT 10.17: Diversified Savings Plan Trust Agreement dated April 27, 1993 by
and between Holdings and Bank of America National Trust and Savings Association,
as trustee (incorporated by reference to Exhibit 10.18 to TIG Holdings'
Quarterly Report on Form 10-Q for the quarter ended March 31, 1993, Commission
File No. 1-11856).
EXHIBIT 10.18: TIG Holdings, Inc. Employee Profit Sharing Plan (incorporated by
reference to Exhibit 10.19 to TIG Holdings' Quarterly Report on Form 10-Q for
the quarter ended March 31, 1993, Commission File No. 1-11856).
EXHIBIT 10.19: Profit Sharing Plan Trust Agreement dated April 27, 1993 by and
between TIG Holdings and Bank of America National Trust and Savings Association,
as trustee (incorporated by reference to Exhibit 10.19 to TIG Holdings'
Quarterly Report on Form 10-Q for the quarter ended March 31, 1993, Commission
File No. 1-11856).
EXHIBIT 10.20: Amendment No. 3 dated February 16, 1995 to each of Employee Stock
Ownership Plan, Employees' Profit Sharing Plan and Diversified Savings Plan
(incorporated by reference to Exhibit 10.34 to TIG Holdings' Annual Report on
Form 10-K for the year ended December 31, 1994, Commission File No. 1-11856).
EXHIBIT 10.21: Credit Agreement, dated as of December 14, 1995, by and among TIG
Holdings, Inc., the lenders party thereto, Chemical Bank, as the Administrative
Agent, and Morgan Guaranty Trust Company of New York, as the Document Agent
(incorporated by reference to Exhibit 10.21 to TIG Holdings' Annual Report on
Form 10-K for the year ended December 31, 1995, Commission File No. 1-11856).
EXHIBIT 10.22: Office Lease dated October 4, 1993 by and between T-Las Colinas
Towers Corp. and TIC (incorporated by reference to Exhibit 10.28 to TIG
Holdings' Registration Statement on Form S-1, File No. 33-71818).
EXHIBIT 10.23: Amendment No. 1 dated November 7, 1994 to each of TIG Holdings,
Inc. Employee Stock Ownership Plan, Employees' Profit Sharing
- 71 -
<PAGE>
PART IV
- - --------------------------------------------------------------------------------
Plan and Diversified Savings Plan (incorporated by reference to Exhibit 10.32 to
TIG Holdings' Annual Report on 10-K for the year ended December 31, 1994,
Commission File No. 1-11856).
EXHIBIT 10.24: Amendment No. 2 dated December 14, 1994 to each of TIG Holdings,
Inc. Employee Stock Ownership Plan, Employees' Profit Sharing Plan and
Diversified Savings Plan (incorporated by reference to Exhibit 10.33 to TIG
Holdings' Annual Report on 10-K for the year ended December 31, 1994, Commission
File No. 1-11856).
EXHIBIT 10.25: Environmental Reimbursement of Loss Agreement dated April 27,
1993 by and between Transamerica Insurance Company and Pyramid Insurance Company
of Bermuda, Ltd. (incorporated by reference to Exhibit 10.2 to TIG Holdings'
Quarterly Report on Form 10-Q for the quarter ended March 31, 1993, Commission
File No. 1-11856.)
EXHIBIT 10.26: TIG Holding, Inc. 1996 Long-Term Incentive Plan (incorporated by
reference to Exhibit 10.1 to TIG Holdings' Quarterly Report on Form 10-Q for the
quarter ended June 30, 1996, Commission File No. 1-11856).
EXHIBIT 10.27: TIG Holdings, Inc. 1996 Non-Employee Directors Program
(incorporated by reference to Exhibit 10.2 to TIG Holdings' Quarterly Report on
Form 10-Q for the quarter ended June 30, 1996, Commission File No. 1-11856).
EXHIBIT 10.28: TIG Holdings, Inc. Annual Incentive Compensation Plan for Certain
Executives (incorporated by reference to Exhibit 10.4 to TIG Holdings Quarterly
Report on Form 10-Q for the quarter ended June 30, 1996, Commission File
No.1-11856).
EXHIBIT 10.29: TIG Holdings Inc. 1993 Long Term Incentive Plan Stock Option
Agreement (incorporated by reference to Exhibit 10.4 to TIG Holdings' Quarterly
Report on Form 10-Q for the quarter ended June 30, 1996, Commission File
1-11856).
EXHIBIT 10.30: TIG Holdings, Inc. 1993 Long Term Incentive Plan Restricted Share
Award Agreement (incorporated by reference to Exhibit 10.5 to TIG Holdings'
Quarterly Report on Form 10-Q for the quarter ended June 30, 1996, Commission
File 1-11856).
EXHIBIT 10.31: TIG Holdings Inc. 1996 Long-Term Incentive Plan Stock Option
Agreement (incorporated by reference to Exhibit 10.6 to TIG Holdings, Inc.
Quarterly Report on Form 10-Q for the quarter ended June 30, 1996, Commission
File 1-11856).
EXHIBIT 10.32: TIG Holdings, Inc. 1996 Long-Term Incentive Plan Executive
Non-Qualified Stock Option Agreement (incorporated by reference to Exhibit 10.7
to TIG Holdings' Quarterly Report on Form 10-Q for the quarter ended June 30,
1996, Commission File 1-11856).
EXHIBIT 10.33: TIG Holdings, Inc. ESOP Restoration Plan.
EXHIBIT 10.34: TIG Holdings, Inc. Profit Sharing Restoration Plan.
EXHIBIT 10.35: Amendment effective January 1, 1997 to the TIG Holdings, Inc.
Diversified Savings Plan.
EXHIBIT 10.36: Amendment effective January 1, 1997 to the TIG Holdings, Inc.
ESOP Restoration Plan.
EXHIBIT 10.37: Amendment effective January 1, 1997 to the TIG Holdings, Inc.
Profit Sharing Plan.
EXHIBIT 11.1: Statement re: Computation of Per Share Earnings.
Exhibit 12.1: Statement re: Computation of Ratio of Consolidated Earnings to
Fixed Charges and Preferred Stock Dividends.
EXHIBIT 21: Subsidiaries of TIG Holdings, Inc.
EXHIBIT 23.1: Consent of Ernst & Young LLP
EXHIBIT 24.1: Powers of Attorney.
- 72 -
<PAGE>
PART IV
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
TIG HOLDINGS, INC. EXHIBIT 11
COMPUTATION OF EARNINGS PER SHARE
(unaudited)
Years Ended December 31,
-----------------------------------------
(In millions, except per share data) 1996 1995 1994
====================================================================================================================
Primary:
<S> <C> <C> <C>
Weighted average shares outstanding 56.4 60.8 63.1
Net effect of dilutive stock options - based on the
treasury stock method using average market price 2.9 0.8 -
- - --------------------------------------------------------------------------------------------------------------------
Total primary common shares 59.3 61.6 63.1
- - --------------------------------------------------------------------------------------------------------------------
Net income $78.9 $118.3 $51.5
Less preferred stock dividend requirements (1.9) (1.9) (1.9)
- - --------------------------------------------------------------------------------------------------------------------
Net income available to common stock $77.0 $116.4 $49.6
- - --------------------------------------------------------------------------------------------------------------------
Net income per common share $1.30 $1.89 $0.79
====================================================================================================================
====================================================================================================================
Fully diluted:
Weighted average shares outstanding 56.4 60.8 63.1
Net effect of dilutive stock options - based on the
treasury stock method using higher of average market price
or end of period market price 3.9 2.5 -
- - --------------------------------------------------------------------------------------------------------------------
Total fully diluted common stock 60.3 63.3 63.1
- - --------------------------------------------------------------------------------------------------------------------
Net income $78.9 $118.3 $51.5
Less preferred stock dividend requirements (1.9) (1.9) (1.9)
- - --------------------------------------------------------------------------------------------------------------------
Net income available to common stock $77.0 $116.4 $49.6
- - --------------------------------------------------------------------------------------------------------------------
Net income per common share $1.28 $1.84 $0.79
====================================================================================================================
</TABLE>
- 73 -
<PAGE>
PART IV
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
EXHIBIT 12
TIG HOLDINGS, INC.
COMPUTATION OF RATIO OF CONSOLIDATED EARNINGS
TO FIXED CHARGES AND PREFERRED STOCK DIVIDENDS
(unaudited)
Years Ended December 31,
---------------------------------------------------------
(In millions) 1996 1995 1994 1993
- - --------------------------------------------------------------------------------------------------------------------
EARNINGS:
<S> <C> <C> <C> <C>
Pretax income from continuing operations $75 $155 $45 $(218)
Fixed charges, excluding preferred
stock dividends 16 15 11 13
- - --------------------------------------------------------------------------------------------------------------------
Earnings $91 $170 $56 $(205)
====================================================================================================================
FIXED CHARGES:
Interest expense $ 9 $ 6 $ - $ 1
Interest portion of operating leases,
net of subleasing income 7 9 11 12
Preferred stock dividends requirements 2 2 2 2
- - --------------------------------------------------------------------------------------------------------------------
Fixed charges $18 $17 $13 $15
====================================================================================================================
RATIO OF EARNINGS TO FIXED CHARGES 5.1 10.0 4.3 -
====================================================================================================================
</TABLE>
- 74 -
<PAGE>
SIGNATURES
- - --------------------------------------------------------------------------------
Pursuant to the requirements of Section 13 or 15(d) 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.
TIG HOLDINGS, INC.
By /s/STEVEN A. COOK
-----------------------
Steven A. Cook
Controller
Date: March 21, 1997
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
By /s/JON W. ROTENSTREICH* By /s/GEORGE B. BEITZEL*
- - ------------------------------------ ------------------------------------
Jon W. Rotenstreich George B. Beitzel
Chairman of the Board and Director
Chief Executive Officer and Director
(Principal Executive Officer)
By /s/WILLIAM G. CLARK*
By /s/DON D. HUTSON* ------------------------------------
- - ------------------------------------ William G. Clark
Don D. Hutson Director
President, Chief Operating Officer
and Director
By /s/JOEL S. EHRENKRANZ*
By /s/EDWIN G. PICKETT* ------------------------------------
- - ------------------------------------ Joel S. Ehrenkranz
Edwin G. Pickett Director
Executive Vice President and
Chief Financial Officer By /s/GEORGE D. GOULD*
(Principal Financial Officer) ------------------------------------
George D. Gould
By /s/STEVEN A. COOK Director
- - ------------------------------------
Steven A. Cook By /s/THE RT. HON. LORD MOORE*
Controller ------------------------------------
(Principal Accounting Officer) The Rt. Hon. Lord Moore
Director
By /s/WILLIAM W. PRIEST, JR.*
------------------------------------
William W. Priest, Jr.
Director
By /s/ANN W. RICHARDS*
------------------------------------
Ann W. Richards
Director
By /s/HAROLD TANNER*
------------------------------------
Harold Tanner
Director
Date: March 21, 1997
*By /s/LOUIS J. PAGLIA
- - ------------------------------------
<PAGE>
INDEX TO 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 10.1: Master Leasing Agreement dated December 1, 1995 between BLC
Corporation as Lessor, and TIG Insurance Company, as Lessee (incorporated by
reference to Exhibit 10.1 to TIG Holdings' Annual Report on Form 10-K for the
year ended December 31, 1995, Commission File No. 1-11856).
EXHIBIT 10.2: Trade Name and Service Mark License Agreement dated April 16, 1993
by and between Transamerica and TIG Insurance Group (incorporated by reference
to Exhibit 10.5 to TIG Holdings' Quarterly Report on Form 10-Q for the quarter
ended March 31, 1993, Commission File No. 1-11856).
EXHIBIT 10.3: Employment Agreement dated April 19, 1993 by and between TIG
Holdings and Jon W. Rotenstreich (incorporated by reference to Exhibit 10.10 to
TIG Holdings' Quarterly Report on Form 10-Q for the quarter ended March 31,
1993, Commission File No. 1-11856).
EXHIBIT 10.4: Employment Agreement dated April 19, 1993 by and between TIG
Holdings and Don D. Hutson (incorporated by reference to Exhibit 10.11 to TIG
Holdings' Quarterly Report on Form 10-Q for the quarter ended March 31, 1993,
Commission File No. 1-11856).
EXHIBIT 10.5: Employment Agreement dated March 23, 1993 by and between
Transamerica Reinsurance Company and William G. Clark (incorporated by reference
to Exhibit 10.12 to TIG Holdings' Quarterly Report on Form 10-Q for the quarter
ended March 31, 1993, Commission File No. 1-11856).
EXHIBIT 10.6: Employment Agreement dated March 23, 1993 by and between
Transamerica Reinsurance Company and Edwin M. Millette (incorporated by
reference to Exhibit 10.18 to TIG Holdings' Annual Report on Form 10-K for the
year ended December 31, 1994, Commission File No. 1-11856).
EXHIBIT 10.7: Letter to Edwin M. Millette re: Employment Agreement (incorporated
by reference to Exhibit 10.19 to TIG Holdings' Annual Report on Form 10-K for
the year ended December 31, 1994, Commission File No. 1-11856).
EXHIBIT 10.8: Letter from TIG Holdings to Edwin G. Pickett dated June 15, 1993
and June 22, 1993 concerning certain provisions of Mr. Pickett's employment with
TIG Holdings (incorporated by reference to Exhibit 10.32 to Amendment No. 1 to
TIG Holdings' Annual Report on Form 10-K for the year ended December 31, 1993,
Commission File No. 1-11856).
EXHIBIT 10.9: TIG Holdings, Inc. 1993 Non-Employee Directors Restricted Share
Program (incorporated by reference to Exhibit 10.21 to TIG Holdings' Quarterly
Report on Form 10-Q for the quarter ended March 31, 1993, Commission File No.
1-11856).
<PAGE>
INDEX TO EXHIBITS
- - -------------------------------------------------------------------------------
EXHIBIT 10.10: Amendment to TIG Holdings, Inc. 1993 Non-Employee Directors
Restricted Share Program (incorporated by reference to Exhibit 10.22 to
Amendment No. 1 to TIG Holdings' Annual Report on Form 10-K for the year ended
December 31, 1993, Commission File No. 1-11856).
EXHIBIT 10.11: TIG Holdings, Inc. Common Stock Restricted Share Agreement
(incorporated by reference to Exhibit 4.1 to TIG Holdings' Registration
Statement on Form S-8, File No. 33-66650).
EXHIBIT 10.12: TIG Holdings, Inc. 1993 Long-Term Incentive Plan (incorporated by
reference to Exhibit 10.13 to TIG Holdings' Quarterly Report on Form 10-Q for
the quarter ended March 31, 1993, Commission File No. 1-11856).
EXHIBIT 10.13: TIG Holdings, Inc. Employee Stock Ownership Plan (incorporated by
reference to Exhibit 10.14 to TIG Holdings' Quarterly Report on Form 10-Q for
the quarter ended March 31, 1993, Commission File No. 1-11856).
EXHIBIT 10.14: Employee Stock Ownership Plan Trust Agreement dated April 27,
1993 by and between TIG Holdings and Bank of America National Trust and Savings
Association, as trustee (incorporated by reference to Exhibit 10.15 to TIG
Holdings' Quarterly Report on Form 10-Q for the quarter ended March 31, 1993,
Commission File No. 1-11856).
EXHIBIT 10.15: Loan and Stock Purchase Agreement dated April 27, 1993 by and
between TIG Holdings and Bank of America National Trust and Savings Association,
as trustee of the TIG Holdings, Inc. Employee Stock Ownership Plan (incorporated
by reference to Exhibit 10.16 to TIG Holdings' Quarterly Report on Form 10-Q for
the quarter ended March 31, 1993, Commission File No. 1-11856).
EXHIBIT 10.16: TIG Holdings, Inc. Diversified Savings Plan (incorporated by
reference to Exhibit 10.17 to TIG Holdings' Quarterly Report on Form 10-Q for
the quarter ended March 31, 1993, Commission File No. 1-11856).
EXHIBIT 10.17: Diversified Savings Plan Trust Agreement dated April 27, 1993 by
and between Holdings and Bank of America National Trust and Savings Association,
as trustee (incorporated by reference to Exhibit 10.18 to TIG Holdings'
Quarterly Report on Form 10-Q for the quarter ended March 31, 1993, Commission
File No. 1-11856).
EXHIBIT 10.18: TIG Holdings, Inc. Employee Profit Sharing Plan (incorporated by
reference to Exhibit 10.19 to TIG Holdings' Quarterly Report on Form 10-Q for
the quarter ended March 31, 1993, Commission File No. 1-11856).
EXHIBIT 10.19: Profit Sharing Plan Trust Agreement dated April 27, 1993 by and
between TIG Holdings and Bank of America National Trust and Savings Association,
as trustee (incorporated by reference to Exhibit 10.19 to TIG Holdings'
Quarterly Report on Form 10-Q for the quarter ended March 31, 1993, Commission
File No. 1-11856).
EXHIBIT 10.20: Amendment No. 3 dated February 16, 1995 to each of Employee Stock
Ownership Plan, Employees' Profit Sharing Plan and Diversified Savings Plan
(incorporated by reference to Exhibit 10.34 to TIG Holdings' Annual Report on
Form 10-K for the year ended December 31, 1994, Commission File No. 1-11856).
EXHIBIT 10.21: Credit Agreement, dated as of December 14, 1995, by and among TIG
Holdings, Inc., the lenders party thereto, Chemical Bank, as the Administrative
Agent, and Morgan Guaranty Trust Company of New York, as the Document Agent
(incorporated by reference to Exhibit 10.21 to TIG Holdings' Annual Report on
Form 10-K for the year ended December 31, 1995, Commission File No. 1-11856).
EXHIBIT 10.22: Office Lease dated October 4, 1993 by and between T-Las Colinas
Towers Corp. and TIC (incorporated by reference to Exhibit 10.28 to TIG
Holdings' Registration Statement on Form S-1, File No. 33-71818).
EXHIBIT 10.23: Amendment No. 1 dated November 7, 1994 to each of TIG Holdings,
Inc. Employee Stock Ownership Plan, Employees' Profit Sharing
<PAGE>
INDEX TO EXHIBITS
- - -------------------------------------------------------------------------------
Plan and Diversified Savings Plan (incorporated by reference to Exhibit 10.32 to
TIG Holdings' Annual Report on 10-K for the year ended December 31, 1994,
Commission File No. 1-11856).
EXHIBIT 10.24: Amendment No. 2 dated December 14, 1994 to each of TIG Holdings,
Inc. Employee Stock Ownership Plan, Employees' Profit Sharing Plan and
Diversified Savings Plan (incorporated by reference to Exhibit 10.33 to TIG
Holdings' Annual Report on 10-K for the year ended December 31, 1994, Commission
File No. 1-11856).
EXHIBIT 10.25: Environmental Reimbursement of Loss Agreement dated April 27,
1993 by and between Transamerica Insurance Company and Pyramid Insurance Company
of Bermuda, Ltd. (incorporated by reference to Exhibit 10.2 to TIG Holdings'
Quarterly Report on Form 10-Q for the quarter ended March 31, 1993, Commission
File No. 1-11856.)
EXHIBIT 10.26: TIG Holding, Inc. 1996 Long-Term Incentive Plan (incorporated by
reference to Exhibit 10.1 to TIG Holdings' Quarterly Report on Form 10-Q for the
quarter ended June 30, 1996, Commission File No. 1-11856).
EXHIBIT 10.27: TIG Holdings, Inc. 1996 Non-Employee Directors Program
(incorporated by reference to Exhibit 10.2 to TIG Holdings' Quarterly Report on
Form 10-Q for the quarter ended June 30, 1996, Commission File No. 1-11856).
EXHIBIT 10.28: TIG Holdings, Inc. Annual Incentive Compensation Plan for Certain
Executives (incorporated by reference to Exhibit 10.4 to TIG Holdings Quarterly
Report on Form 10-Q for the quarter ended June 30, 1996, Commission File
No.1-11856).
EXHIBIT 10.29: TIG Holdings Inc. 1993 Long Term Incentive Plan Stock Option
Agreement (incorporated by reference to Exhibit 10.4 to TIG Holdings' Quarterly
Report on Form 10-Q for the quarter ended June 30, 1996, Commission File
1-11856).
EXHIBIT 10.30: TIG Holdings, Inc. 1993 Long Term Incentive Plan Restricted Share
Award Agreement (incorporated by reference to Exhibit 10.5 to TIG Holdings'
Quarterly Report on Form 10-Q for the quarter ended June 30, 1996, Commission
File 1-11856).
EXHIBIT 10.31: TIG Holdings Inc. 1996 Long-Term Incentive Plan Stock Option
Agreement (incorporated by reference to Exhibit 10.6 to TIG Holdings, Inc.
Quarterly Report on Form 10-Q for the quarter ended June 30, 1996, Commission
File 1-11856).
EXHIBIT 10.32: TIG Holdings, Inc. 1996 Long-Term Incentive Plan Executive
Non-Qualified Stock Option Agreement (incorporated by reference to Exhibit 10.7
to TIG Holdings' Quarterly Report on Form 10-Q for the quarter ended June 30,
1996, Commission File 1-11856).
EXHIBIT 10.33: TIG Holdings, Inc. ESOP Restoration Plan.
EXHIBIT 10.34: TIG Holdings, Inc. Profit Sharing Restoration Plan.
EXHIBIT 10.35: Amendment effective January 1, 1997 to the TIG Holdings, Inc.
Diversified Savings Plan.
EXHIBIT 10.36: Amendment effective January 1, 1997 to the TIG Holdings, Inc.
ESOP Restoration Plan.
EXHIBIT 10.37: Amendment effective January 1, 1997 to the TIG Holdings, Inc.
Profit Sharing Plan.
EXHIBIT 11.1: Statement re: Computation of Per Share Earnings.
Exhibit 12.1: Statement re: Computation of Ratio of Consolidated Earnings to
Fixed Charges and Preferred Stock Dividends.
EXHIBIT 21: Subsidiaries of TIG Holdings, Inc.
EXHIBIT 23.1: Consent of Ernst & Young LLP
EXHIBIT 24.1: Powers of Attorney.
<PAGE>
EXHIBIT 10.33
<PAGE>
TIG HOLDINGS, INC.
ESOP RESTORATION PLAN
Effective
January 1, 1994
<PAGE>
TIG HOLDINGS, INC.
ESOP RESTORATION PLAN
TABLE OF CONTENTS PAGE
- - ----------------- ----
ARTICLE I - PURPOSE AND ESTABLISHMENT..................................... 1
1.1 Purpose................................................. 1
1.2 Establishment........................................... 1
ARTICLE II - DEFINITIONS.................................................. 2
2.1 Beneficiary............................................. 2
2.2 Board................................................... 2
2.3 Committee............................................... 2
2.4 Disability.............................................. 2
2.5 Effective Date.......................................... 2
2.6 Eligible Employee....................................... 2
2.7 Employee Stock Ownership Plan........................... 2
2.8 Employer................................................ 3
2.9 Employer Contributions.................................. 3
2.10 ESOP Restoration Account ............................... 3
2.11 Minimum Eligible Salary ................................ 3
2.12 Participant............................................. 3
2.13 Plan ................................................... 4
2.14 Plan Year............................................... 4
2.15 Profit Sharing Plan..................................... 4
2.16 Profit Sharing Restoration Plan......................... 4
2.17 Vested ................................................. 4
ARTICLE III - ELIGIBILITY AND PARTICIPATION............................... 5
3.1 Eligibility............................................. 5
3.2 Participation........................................... 5
ARTICLE IV - ESTABLISHMENT OF ACCOUNT..................................... 6
4.1 ESOP Restoration Account................................ 6
4.2 Vesting/Forfeiture of Benefits.......................... 8
ARTICLE V - PAYMENT OF BENEFITS........................................... 11
5.1 Lump Sum Distribution................................... 11
5.2 Separateness of Plan ................................... 11
5.3 Inapplicability of Retirement Equity Act of 1984........ 11
ARTICLE VI - UNFUNDED NATURE OF PLAN...................................... 12
<PAGE>
TABLE OF CONTENTS PAGE
- - ----------------- ----
ARTICLE VII - ADMINISTRATION; AMENDMENTS AND TERMINATION;
RIGHTS AGAINST THE EMPLOYER............................. 14
7.1 Administration.......................................... 14
7.2 Liability of Committee; Indemnification................. 14
7.3 Amendment and/or Termination............................ 15
7.4 Rights Against the Employer............................. 16
7.5 Expenses................................................ 16
ARTICLE VIII - GENERAL AND MISCELLANEOUS.................................. 17
8.1 Spendthrift Clause...................................... 17
8.2 Severability............................................ 17
8.3 Construction............................................ 17
8.4 Governing Law........................................... 17
8.5 Payment Due an Incompetent.............................. 18
8.6 Taxes................................................... 18
<PAGE>
TIG HOLDINGS, INC.
ESOP RESTORATION PLAN
---------------------
ARTICLE I
PURPOSE AND ESTABLISHMENT
-------------------------
1.1 Purpose. TIG Holdings, Inc. ("the Employer") desires to establish an "a
-------
plan which is unfunded and is maintained by the employer primarily for the
purpose of providing deferred compensation for a select group of management or
highly compensated employees," within the meaning of Sections 201(2), 301(a)(3)
and 401(a)(1) of the Employee Retirement Income Security Act of 1974, as amended
("ERISA"), solely for the purpose of benefiting participants in the Employee
Stock Ownership Plan (as hereinafter defined) who (i) are precluded from
receiving a full allocation of Employer Contributions under the Employee Stock
Ownership Plan by the limitations of Section 415 of the Internal Revenue Code of
1986 ("the Code") or by the limitation on the compensation taken into account
under such Plan, imposed by Section 401(a)(17) of the Code, as amended by the
Omnibus Budget Reconciliation Act of 1993 ("OBRA 93"), and (ii) are designated
for participation in this Plan, in accordance with the terms hereof.
1.2 Establishment. The Employer hereby establishes the TIG Holdings, Inc.
-------------
ESOP Restoration Plan, effective January 1, 1994.
<PAGE>
ARTICLE II
DEFINITIONS
-----------
2.1 Beneficiary means the person or persons whom the Participant has
-----------
designated or, pursuant to the provisions of Section 7.7 of the Employee Stock
Ownership Plan is deemed to have designated, to receive a distribution from the
Employee Stock Ownership Plan, in the event of the Participant's death.
2.2 Board means the Board of Directors of the Employer.
-----
2.3 Committee means the TIG Benefits Committee established pursuant to
---------
Section 10.2 of the Employee Stock Ownership Plan or any such other committee
designated by the Board, which shall consist of at least three members.
2.4 Disability shall have the meaning set forth in Section 2.12 of the
----------
Employee Stock Ownership Plan and shall be determined pursuant to procedures
established by the Committee.
2.5 Effective Date means January 1, 1994.
--------------
2.6 Eligible Employee means an employee of the Employer who has satisfied
------------------
the requirements of Section 3.1.
2.7 Employee Stock Ownership Plan means the TIG Holdings, Inc. Employee
-------------------------------
Stock Ownership Plan, effective as of April 27, 1993, and as in effect from time
to time.
2.8 Employer means TIG Holdings, Inc. and any Affiliate, within the meaning
--------
of Section 2.3 of the Profit Sharing Plan, that has become a participating
Affiliate in the Profit Sharing Plan in accordance with Section 2.16 of the
Profit Sharing Plan, provided however, that for the purpose of Sections 4.2(b)
and 7.3 the term Employer shall refer only to TIG Holdings, Inc.
<PAGE>
2.9 Employer Contributions means the ESOP Contributions as defined in
-----------------------
Section 2.17 of the Employee Stock Ownership Plan, made in accordance with
Section 4.1 of the Employee Stock Ownership Plan.
2.10 ESOP Restoration Account means the book reserve account established on
------------------------
behalf of a Participant in accordance with Section 4.1.
2.11 Minimum Eligible Salary means, for any Plan Year, a Salary equal to
-------------------------
the greater of (a) the maximum amount of compensation that may be taken into
account under a qualified plan in accordance with Section 4019a)(17) of the
Code, as in effect for such Plan Year, or (b) an amount determined and
designated for such Plan Year by the Committee in its sole discretion. In
exercising the discretion to determine the amount described in item (b) of the
foregoing sentence, the Committee shall not designate an amount that would cause
the Minimum Eligible Salary for any Plan Year to be inconsistent with the status
of the Plan as a plan which is unfunded and is maintained by the Employer
primarily for the purpose of providing deferred compensation for a select group
of management or highly compensated employees, within the meaning of Sections
201(2), 301(a)(3), and 401(a)(1) of ERISA.
2.12 Participant means an employee or former employee of the Employer who
-----------
has satisfied the requirements of Section 3.2 hereof.
2.13 Plan means the TIG Holdings, Inc. ESOP Restoration Plan, as set forth
----
in this document, and as it may be amended from time to time.
2.14 Plan Year means the twelve consecutive month period commencing January
---------
1, 1994 and ending December 31, 1994 and each successive twelve consecutive
month period thereafter, each commencing on January 1st.
<PAGE>
2.15 Profit Sharing Plan means the TIG Holdings, Inc. Employees' Profit
--------------------
Sharing Plan, effective as of April 27, 1993, and as in effect from time to
time.
<PAGE>
2.16 Profit Sharing Restoration Plan means the TIG Holdings, Inc. Profit
---------------------------------
Sharing Restoration Plan, established and maintained by the Employer, as in
effect from time to time.
2.17 "Vested", as used herein, refers only to the restriction provided
---------
hereunder against the reduction of a Participant's Restoration Account.
Notwithstanding the use of the term "vested," no provision of the Plan is
intended to grant to any Participant any right, title, interest or claim to
property, within the meaning of Section 83 of the Code or any other applicable
provision of the Code, except upon the payment of benefits hereunder.
<PAGE>
ARTICLE III
ELIGIBILITY AND PARTICIPATION
-----------------------------
3.1 Eligibility. An employee of the Employer shall be an Eligible Employee
-----------
for any Plan Year hereunder if (i) he is a participant in the Employee Stock
Ownership Plan, (ii) the amount of the ESOP Contributions allocable to his
account under the Employee Stock Ownership Plan for such Plan Year beginning on
or after the Effective Date is less than the amount that would have been
allocable to his account, if the limitations imposed by Sections 401(a)(17) and
415 of the Code had not been in effect, and (iii) his salary exceeds the Minimum
Eligible Salary for such Plan Year.
3.2 Participation. An Eligible Employee shall become a Participant
--------------
hereunder on the date as of which any amount is credited to his ESOP Restoration
Account in accordance with Section 4.1. A Participant shall cease to participate
in the Plan on the date that the balance of his ESOP Restoration Account is
reduced to zero as a result of a distribution pursuant to Section 5.1, a
forfeiture pursuant to Section 4.2(a), or a combination of such distribution and
such forfeiture.
<PAGE>
ARTICLE IV
ESTABLISHMENT OF ACCOUNT
------------------------
4.1 ESOP Restoration Account.
-------------------------
(a) For each Plan Year beginning on or after January 1, 1994,
the Employer shall credit to the ESOP Restoration Account established on behalf
of each Participant who is an Eligible Employee for such Plan Year an amount
equal to the excess, if any, determined by subtracting item (ii) from item (i),
where:
(i) equals the cash value of Employer
Contributions that would have been allocated
to the Participant's account under the
Employee Stock Ownership Plan for such Plan
Year, if (1) the limitation imposed by
Section 401(a)(17) of the Code on the amount
of compensation taken into account under the
Employee Stock Ownership Plan had not been
in effect and (2) the limitation of Section
415 of the Code had not been in effect; and
(ii) equals the cash value of Employer
Contributions allocated to the Participant's
account under the Employee Stock Ownership
Plan for such Plan Year.
(b) For purposes of subsection (a), the term cash value of
Employer Contributions means the fair market value, as determined by the
Committee, of the shares of Holdings Common Stock, within the meaning of Section
2.21 of the Employee Stock Ownership Plan, that are allocated to the
Participant's account under the Employee Stock Ownership Plan, pursuant to
Sections 4.4.2 or 4.4.3(b) of the Employee Stock Ownership Plan (or would be so
allocated, but for the limitations of Sections 401(a)(17) or 415 of the Code).
<PAGE>
(c) The amount determined in accordance with subsection (a)
shall be credited to the Participant's ESOP Restoration Account as of the last
day of each Plan Year during the term of this Plan.
(d) The Employer shall credit each Participant's ESOP
Restoration Account, as of the last day of each Plan Year, with an earnings
credit (or debit) equal to the amount of investment gain (or loss) that would
have been earned on the amount credited to such ESOP Restoration Account as of
the first day of such Plan Year, if such amount had been held in the Employee
Stock Ownership Plan as of such date and invested during such Plan Year in the
same manner as the Participant's account under the Employee Stock Ownership
Plan, in accordance with Sections 4.4.1, 4.4.2, 4.6, 5.6, 5.7, and 6.3 of the
Employee Stock Ownership Plan. In the event that a Participant becomes entitled
to receive a distribution from the Plan in accordance with Section 5.1, the date
of his retirement, death, termination of employment or Disability shall be
treated for purposes of this Section 4.1(d) as the last day of a Plan Year. The
Committee in its sole discretion may determine amounts to be credited under this
subsection without reference to any charges made against accounts under the
Employee Stock Ownership Plan in accordance with Section 6.4.7 of the Employee
Stock Ownership Plan, but in any event such charges shall not be deemed expenses
of the Plan, for purposes of Section 7.5.
(e) The ESOP Restoration Account established hereunder for
each Participant shall be maintained as a book reserve on the books of the
Employer, and amounts credited thereto in accordance with this Section shall be
added to such book reserve.
(f) In addition to amounts credited in accordance with
subsection (a), there shall be credited to a Participant's ESOP Restoration
Account, as of the Effective Date, an amount determined in accordance with
subsection (a), with respect to the Plan Year of the Employee Stock Ownership
Plan that ended on December 31, 1993, if and only if such Participant's Salary,
for such Plan Year of the Employee Stock Ownership Plan exceeded the maximum
amount of compensation permitted to be taken into account under a qualified
plan, in accordance
<PAGE>
4.2 Vesting/Forfeiture of Benefits.
------------------------------
(a) Except as provided in paragraph (b) of this Section 4.2, a
Participant shall become vested in his ESOP Restoration Account in accordance
with the vesting provisions set forth under Sections 8.1 and 8.3 of the Employee
Stock Ownership Plan. If a Participant's employment with the Employer and all of
its affiliates is terminated (whether such termination is initiated by the
Participant, or the Employer or its affiliates, and without regard to the reason
therefor) before a Participant is fully vested in his account under the Employee
Stock Ownership Plan, said Participant or his Beneficiary shall be entitled to
receive, in accordance with Article V of this Plan, that portion of his ESOP
Restoration Account (inclusive of deemed earnings thereunder) determined by
multiplying the value of said ESOP Restoration Account by the Participant's
non-forfeitable percentage determined pursuant to Section 8.1 of the Employee
Stock Ownership Plan and any other applicable provisions of the Employee Stock
Ownership Plan. The nonvested portion of the Participant's ESOP Restoration
Account, if any, shall be forfeited upon such termination date.
(b) Upon a change of control of Employer, each Participant who is then
an employee shall become fully vested in his ESOP Restoration Account.
4.2(b).1 Change of Control. For the purpose of this Section
------------------
4.2(b), "Change of Control" shall mean:
(a) The acquisition, after the Effective Date, by an individual,
entity or group (within the meaning of Section 13(d)(3) or
14(d)(2) of the Securities Exchange Act of 1934, as amended
("the Exchange Act")) of beneficial ownership (within the
meaning of Rule 13d-3 promulgated under the Exchange Act) of
20% or more of either (i) the shares of the issued and
outstanding common stock of the Employer (the "Common
Stock"), or (ii) the combined voting power of the voting
securities of the Employer entitled to
<PAGE>
vote generally in the election of directors (the "Voting
Securities"); provided, however, that the following
--------- --------
acquisitions shall not constitute a Change of Control: (A)
any acquisition by an employee benefit plan (or related
trust) sponsored or maintained by the Employer or any
Affiliate, or (B) any acquisition by any corporation if,
immediately following such acquisition, more than 80% of the
then outstanding shares of common stock of such corporation
and the combined voting power of the then outstanding voting
securities of such corporation (entitled to vote generally
in the election of directors), is beneficially owned,
directly or indirectly, by all or substantially all of the
individuals and entities who, immediately prior to such
acquisition, were the beneficial owners of the Common Stock
and the Voting Securities in substantially the same
proportions, respectively, as their ownership, immediately
prior to such acquisition, of the Common Stock and Voting
Securities; or
(b) Individuals who, as of the Effective Date, constitute the
Board (the "Incumbent Board") cease for any reason to
constitute at least a majority of the Board; provided,
--------
however, that any individual becoming a director subsequent
-------
to the Effective Date whose election, or nomination for
election by the Employer's shareholders, was approved by a
vote of at least a majority of the directors then serving
and comprising the Incumbent Board shall be considered as
though such individual were a member of the Incumbent Board,
but excluding, for this purpose, any such individual whose
initial assumption of office occurs as a result of either an
actual or threatened election contest (as such terms are
used in Rule 14a-11 of Regulation 14A promulgated under the
Exchange Act) or other actual or threatened solicitation of
proxies or consents; or
<PAGE>
(c) Approval by shareholders of the Employer of a
reorganization, merger or consolidation, other than a
reorganization, merger or consolidation with respect to
which all or substantially all of the individuals and
entities who were the beneficial owners, immediately prior
to such reorganization, merger or consolidation, of the
Common Stock and Voting Securities beneficially own,
directly or indirectly, immediately after such
reorganization, merger or consolidation more than 80% of the
then outstanding common stock and voting securities
(entitled to vote generally in the election of directors) of
the corporation resulting from such reorganization, merger
or consolidation in substantially the same proportions as
their respective ownership, immediately prior to such
reorganization, merger or consolidation, of the Common Stock
and the Voting Securities; or
(d) Approval by the shareholders of the Employer of (i) a
complete liquidation or dissolution of the Employer, or (ii)
the sale or other disposition of all or substantially all of
the assets of the Employer, other than to an Affiliate,
wholly-owned, directly or indirectly, by the Employer.
(c) If a Change of Control, within the meaning of Section 4.2(b).1,
occurs and if a Participant's employment is terminated before such Change of
Control and its is reasonably demonstrated by the Participant that such
employment termination (i) was at the request, directly or indirectly, of a
third party who has taken steps reasonably calculated to effect the Change of
Control, or (ii) otherwise arose in connection with or in anticipation of the
Change of Control, then for purposes of Section 4.2(b), the Change of Control
shall be deemed to have occurred immediately prior to such Participant's
employment termination.
<PAGE>
ARTICLE V
PAYMENT OF BENEFITS
-------------------
5.1 Lump Sum Distribution. Payment of the Participant's vested ESOP
-----------------------
Restoration Account hereunder shall be made in the form of a cash lump sum to
the Participant or his Beneficiary as soon as practicable after the
Participant's employment with the Employer and any of its affiliates has been
terminated for any reason. Payment to a Participant's Beneficiary shall be made
only in the event of a Participant's death prior to his receipt of a
distribution of his ESOP Restoration Account.
5.2 Separateness of Plan. Any benefit payable under the Employee Stock
---------------------
Ownership Plan shall be determined solely in accordance with the terms and
provisions thereof. Any benefit payable under the Profit Sharing Plan and Profit
Sharing Restoration Plan shall be determined solely in accordance with the terms
and provisions thereof. Nothing in this Plan shall operate or be construed in
any way to modify, amend or affect the terms and provisions of the Employee
Stock Ownership Plan, the Profit Sharing Plan or the Profit Sharing Restoration
Plan .
5.3 Inapplicability of Retirement Equity Act of 1984. Nothing contained in
------------------------------------------------
this Plan is intended to give or shall give any spouse or former spouse of a
Participant or any other person any right to benefits under the Plan by virtue
of Sections 401(a)(11) and 417 of the Code or Section 205 of ERISA (relating to
qualified pre-retirement survivor annuities and qualified joint and survivor
annuities) or Sections 401(a)(13)(B) and 414(p) of the Code or Section 206(d) of
ERISA (relating to qualified domestic relations orders).
<PAGE>
ARTICLE VI
UNFUNDED NATURE OF PLAN
-----------------------
6.1 The Plan is an "unfunded plan primarily for the purpose of providing
deferred compensation for a select group of management or highly compensated
employees," within the meaning of Section 301(a)(3) of ERISA. The Employer has
established ESOP Restoration Accounts on its books solely as a bookkeeping
convenience, in order to account for the amounts earned by each Participant
hereunder. The Employer shall not be required to segregate any funds
representing the ESOP Restoration Accounts and nothing in this Plan shall be
construed as providing for such segregation. In addition, the Employer shall not
be deemed to be a Trustee for the Participants and their Beneficiaries with
respect to any amounts deferred hereunder. The Participant, his Beneficiary and
any other person or persons having or claiming a right to payments hereunder or
to any interest in this Plan shall rely solely on the unsecured promise of the
Employer to make payments hereunder. Nothing herein shall be construed to give
the Participant, his Beneficiary or any other person or persons any right,
title, interest or claim in or to any specific asset, fund, reserve, account or
property of any kind whatsoever owned by the Employer or in which it may have
any right, title or interest now or in the future; provided, however, that the
Participant or any Beneficiary shall have the right to enforce his claim against
the Employer in the same manner as any unsecured creditor. Nothing herein shall
be construed to give the Participant, his Beneficiary, or any other person any
rights, including, without limitation, voting rights, with respect to any
capital stock of the Employer, nor to cause any person to be deemed an owner or
holder of any capital stock of the Employer.
6.2 Notwithstanding Section 6.1, the Employer may, in its absolute
discretion, establish a trust fund and contribute to such trust fund assets that
shall be held therein, subject to the claims of the Employer's creditors in the
event of the insolvency of the Employer, until paid to Participants or
Beneficiaries in accordance with the terms of the Plan. The Employer shall not
establish any trust fund that would cause the Plan not to be deemed an unfunded
plan for purposes of Title I of ERISA.
<PAGE>
ARTICLE VII
ADMINISTRATION; AMENDMENTS AND
TERMINATION; RIGHTS AGAINST THE EMPLOYER
----------------------------------------
7.1 Administration.
--------------
(a) The Committee shall administer the Plan and shall have the
full and absolute discretionary power and authority to construe and interpret
the provisions of the Plan and to determine a Participant's eligibility for
benefits hereunder.
(b) In exercising the power and authority granted to it by
subsection (a), the Committee shall adhere to the claims and appeal procedure
adopted by it pursuant to Section 10.4(n) of the Employee Stock Ownership Plan.
(c) Any determination made by the Committee pursuant to
the authority granted under subsection (a) and, if applicable, in accordance
with subsection (b), shall be conclusive and binding on all Participants,
Beneficiaries and any other person who at any time have, or claim to have, any
interest whatsoever under this Plan.
(d) Pursuant to Section 401(a)(1) of ERISA, it is intended
that the Plan and the administration thereof shall be exempt from Part 4 of
Title I of ERISA. The Committee and the members thereof shall not be deemed to
be fiduciaries, within the meaning of Section 3(21) of ERISA, and shall not be
subject to the terms of Part 4 of Title 1 of ERISA.
7.2 Liability of Committee; Indemnification. To the extent permitted
-----------------------------------------
by law, no member of the Committee shall be liable to any person for any action
taken or omitted in connection with the interpretation and administration of
this Plan, unless attributable to his own gross negligence or willful
misconduct. The Employer shall indemnify the members of the Committee against
any and all claims, losses, damages, and expenses, including any amounts paid in
settlement with their approval, arising from their action or failure to act to
the maximum extent
<PAGE>
required or permitted under the Delaware General Corporation Law as presently in
effect and as hereafter amended from time to time.
7.3 Amendment and/or Termination. (a) The Employer reserves the right
------------------------------
to alter, amend or terminate the Plan or any part hereof. Any such alteration,
amendment or termination may be effected by resolution of the Board acting in
accordance with the by-laws (or other applicable governing document) of the
Employer, in such manner as the Board may determine and for any reason
whatsoever. Without limiting the power and decision of a majority of the members
of the Committee then in office constituting the final and binding act of the
Committee acting with or without a meeting being called or held, and keeping
minutes of all meetings held and a record of all actions taken by written
consent, may alter or amend the Plan, or any part hereof, in any manner,
provided that the Committee determines, which determination shall be conclusive
and binding on all persons, that any such alteration or amendment is (a)
necessary or appropriate to comply with any applicable law, regulation or
administrative pronouncement or (b) of an administrative nature and has no
material adverse cost effect on the Employer or any Affiliate of the Employer.
Any such amendment or termination shall become effective upon the date stated
herein and shall be binding upon all Participants and Beneficiaries; provided,
however, that no such amendment or termination shall reduce the amount of, or
the vested interest in, the ESOP Restoration Account of a Participant or
Beneficiary hereunder as of the effective date of such amendment or termination.
(b) Unless otherwise, specifically provided in any amendment
to the Employee Stock Ownership Plan made after the Effective Date, the terms of
the Plan shall be subject to the terms of the Employee Stock Ownership Plan, as
amended from time to time.
7.4 Rights Against the Employer. The establishment of this Plan shall
----------------------------
not be construed as giving to any Participant, Beneficiary or any person
whomsoever, any legal, equitable or other rights against the Employer, or its
officers, directors, agents or shareholders, or as giving to any Participant or
Beneficiary any equity or other interest in the assets or business of the
Employer or in shares of Employer stock or giving any employee the right to be
retained in the employment of
<PAGE>
Employer. All Participants shall be subject to discharge to the same extent they
would have been if this Plan had never been adopted.
<PAGE>
7.5 Expenses. The cost of this Plan and the expenses of administering
---------
the Plan shall be borne by the Employer.
<PAGE>
ARTICLE VIII
GENERAL AND MISCELLANEOUS
-------------------------
8.1 Spendthrift Clause. No right, title or interest of any kind in the Plan
-------------------
shall be transferable or assignable by any Participant or Beneficiary or be
subject to alienation, anticipation, encumbrance, garnishment, attachment,
execution or levy of any kind, whether voluntary or involuntary, nor subject to
the debts, contracts, liabilities, engagements, or torts of the Participant or
Beneficiary. Any attempt to alienate, anticipate, encumber, sell, transfer,
assign, pledge, garnish, attach or otherwise subject to legal or equitable
process or dispose of any interest in the Plan shall be void.
8.2 Severability. In the event that any provision of this Plan shall be
------------
declared illegal or invalid for any reason, said illegality or invalidity shall
not affect the remaining provisions of this Plan but shall be fully severable
and this Plan shall be construed and enforced as if said illegal or invalid
provision had never been a part of this Plan.
8.3 Construction. The article and section headings and numbers are included
------------
only for convenience of reference and are not to be taken as limiting or
extending the meaning of any of the terms and provisions of this Plan. Whenever
appropriate, words used in the singular shall include the plural or the plural
may be read as the singular. When used herein, the masculine gender includes the
feminine gender.
8.4 Governing Law. The validity and effect of this Plan and the rights and
--------------
obligations of all persons affected hereby shall be construed and determined in
accordance with the laws of the State of New York, unless superseded by federal
law.
<PAGE>
8.5 Payment Due an Incompetent. If the Committee receives evidence that a
--------------------------
Participant or Beneficiary entitled to receive any payment under the Plan is
physically or mentally incompetent to receive such payment, the Committee may,
in its sole discretion, direct the payment to any other person or trust which
has been legally appointed by a court of competent jurisdiction or, in the event
that no such person has been appointed, to any person whom the Committee, in its
sole discretion, determines to be responsible for the care of the Participant or
Beneficiary. Payment to any person or trust in accordance with this Section will
fully discharge the obligations of the Plan to such Participant or Beneficiary.
8.6 Taxes. All amounts payable hereunder to any Participant or Beneficiary
------
shall be reduced by any and all federal, state and local taxes imposed upon the
Participant or Beneficiary which are required to be paid or withheld by the
Employer.
IN WITNESS WHEREOF, the Employer, as authorized by its Board of Directors,
has caused this Plan to be signed by its duly appointed officers as of the
effective date set forth in Section 1.2 above.
ATTEST: TIG Holdings, Inc.
__________________ By:
Secretary Title:
<PAGE>
EXHIBIT 10.34
<PAGE>
TIG HOLDINGS, INC.
PROFIT SHARING RESTORATION PLAN
Effective
January 1, 1994
<PAGE>
TIG HOLDINGS, INC.
PROFIT SHARING RESTORATION PLAN
TABLE OF CONTENTS PAGE
- - ----------------- ----
ARTICLE I - PURPOSE AND ESTABLISHMENT........................................1
1.1 Purpose....................................................1
1.2 Establishment..............................................1
ARTICLE II - DEFINITIONS.....................................................2
2.1 Beneficiary................................................2
2.2 Board......................................................2
2.3 Committee..................................................2
2.4 Disability.................................................2
2.5 Effective Date.............................................2
2.6 Eligible Employee..........................................2
2.7 Employee Stock Ownership Plan..............................2
2.8 Employer...................................................3
2.9 Employer Contributions.....................................3
2.10 ESOP Restoration Plan .....................................3
2.11 Minimum Eligible Salary ...................................3
2.12 Participant................................................3
2.13 Plan ......................................................3
2.14 Plan Year..................................................4
2.15 Profit Sharing Plan........................................4
2.16 Restoration Account .......................................4
2.17 Salary ....................................................4
2.18 Vested.....................................................4
ARTICLE III - ELIGIBILITY AND PARTICIPATION..................................5
3.1 Eligibility................................................5
3.2 Participation..............................................5
ARTICLE IV - ESTABLISHMENT OF ACCOUNT........................................6
4.1 Restoration Account........................................6
4.2 Vesting/Forfeiture of Benefits.............................8
ARTICLE V - PAYMENT OF BENEFITS.............................................11
5.1 Lump Sum Distribution.....................................11
5.2 Separateness of Plan .....................................11
5.3 Inapplicability of Retirement Equity Act of 1984..........11
ARTICLE VI - UNFUNDED NATURE OF PLAN........................................12
<PAGE>
<PAGE>
TABLE OF CONTENTS PAGE
- - ----------------- ----
ARTICLE VII - ADMINISTRATION; AMENDMENTS AND TERMINATION;
RIGHTS AGAINST THE EMPLOYER...............................13
7.1 Administration............................................13
7.2 Liability of Committee; Indemnification...................13
7.3 Amendment and/or Termination..............................14
7.4 Rights Against the Employer...............................15
7.5 Expenses..................................................15
ARTICLE VIII - GENERAL AND MISCELLANEOUS....................................16
8.1 Spendthrift Clause........................................16
8.2 Severability..............................................16
8.3 Construction..............................................16
8.4 Governing Law.............................................16
8.5 Payment Due an Incompetent................................17
8.6 Taxes.....................................................17
<PAGE>
TIG HOLDINGS, INC.
PROFIT SHARING RESTORATION PLAN
-------------------------------
ARTICLE I
PURPOSE AND ESTABLISHMENT
-------------------------
1.1 Purpose. TIG Holdings, Inc. ("the Employer") desires to establish "a
--------
plan which is unfunded and is maintained by the employer primarily for the
purpose of providing deferred compensation for a select group of management or
highly compensated employees," within the meaning of Sections 201(2), 301(a)(3)
and 401(a)(1) of the Employee Retirement Income Security Act of 1974, as amended
("ERISA"), solely for the purpose of benefiting participants in the Profit
Sharing Plan (as hereinafter defined) who (i) are precluded from receiving a
full allocation of Employer Contributions under the Profit Sharing Plan by the
limitations of Section 415 of the Internal Revenue Code of 1986 ("the Code") or
by the limitation on the compensation taken into account under such Plan,
imposed by Section 401(a)(17) of the Code, as amended by the Omnibus Budget
Reconciliation Act of 1993 ("OBRA 93") and (ii) are designated for participation
in this Plan, in accordance with the terms hereof.
1.2 Establishment. The Employer hereby establishes the TIG Holdings, Inc.
--------------
Profit Sharing Restoration Plan, effective January 1, 1994.
<PAGE>
ARTICLE II
DEFINITIONS
-----------
2.1 Beneficiary means the person or persons whom the Participant has
-----------
designated or, pursuant to the provisions of Section 7.6 of the Profit Sharing
Plan is deemed to have designated, to receive a distribution from the Profit
Sharing Plan, in the event of the Participant's death.
2.2 Board means the Board of Directors of TIG Holdings, Inc.
-----
2.3 Committee means the TIG Benefits Committee established pursuant to
---------
Section 10.2 of the Profit Sharing Plan or any such other committee designated
by the Board, which shall consist of at least three members.
2.4 Disability shall have the meaning set forth in Section 2.12 of the
----------
Profit Sharing Plan and shall be determined pursuant to procedures established
by the Committee.
2.5 Effective Date means January 1, 1994.
--------------
2.6 Eligible Employee means an employee of the Employer who has satisfied
-------------------
the requirements of Section 3.1.
2.7 Employee Stock Ownership Plan means the TIG Holdings, Inc. Employee
-------------------------------
Stock Ownership Plan, effective as of April 27, 1993, and as in effect from time
to time.
2.8 Employer means TIG Holdings, Inc. and any Affiliate, within the meaning
--------
of Section 2.3 of the Profit Sharing Plan, that has become a participating
Affiliate in the Profit Sharing Plan in accordance with Section 2.16 of the
Profit Sharing Plan, provided, however, that for the purpose of Sections 4.2(b)
and 7.3, the term Employer shall refer only to TIG Holdings, Inc.
<PAGE>
2.9 Employer Contributions means Employer Profit Sharing Contributions as
-----------------------
defined in Section 2.17 of the Profit Sharing Plan, made in accordance with
Section 4.1 of the Profit Sharing Plan.
2.10 ESOP Restoration Plan means the TIG Holdings, Inc. ESOP Restoration
-----------------------
Plan, established and maintained by the Employer, as in effect from time to
time.
2.11 Minimum Eligible Salary means, for any Plan Year, a Salary equal to
-------------------------
the greater of (a) the maximum amount of compensation that may be taken into
account under a qualified plan in accordance with Section 401(a)(17) of the
Code, as in effect for such Plan Year, or (b) an amount determined and
designated for such Plan year by the Committee in its sole discretion. In
exercising the discretion to determine the amount described in item (b) of the
foregoing sentence, the Committee shall not designate an amount that would cause
the Minimum Eligible Salary for any Plan Year to be inconsistent with the status
of the Plan as a plan which is unfunded and is maintained by the Employer
primarily for the purpose of providing deferred compensation for a select group
of management or highly compensated employees, within the meaning of Sections
201(2), 301(a)(3), and 401(a)(1) of ERISA.
2.12 Participant means an employee or former employee of the Employer who
-----------
has satisfied the requirements of Section 3.2 hereof.
2.13 Plan means the TIG Holdings, Inc. Profit Sharing Restoration Plan, as
----
set forth in this document, and as it may be amended from time to time.
2.14 Plan Year means the twelve consecutive month period commencing January
---------
1, 1994 and ending December 31, 1994 and each successive twelve consecutive
month period thereafter, each commencing on January 1st.
<PAGE>
2.15 Profit Sharing Plan means the TIG Holdings, Inc. Employees' Profit
--------------------
Sharing Plan, effective as of April 27, 1993, and as in effect from time to
time.
2.16 Restoration Account means the book reserve account established on
--------------------
behalf of a Participant in accordance with Section 4.1.
2.17 Salary shall have the meaning set forth in Section 2.32 of the Profit
------
Sharing Plan, without regard to the second sentence thereof.
2.18 "Vested", as used herein, refers only to the restriction provided
---------
hereunder against the reduction of a Participant's Restoration Account.
Notwithstanding the use of the term "vested," no provision of the Plan is
intended to grant to any Participant any right, title, interest or claim to
property, within the meaning of Section 83 of the Code or any other applicable
provision of the Code, except upon the payment of benefits hereunder.
<PAGE>
ARTICLE III
ELIGIBILITY AND PARTICIPATION
-----------------------------
3.1 Eligibility. An employee of the Employer shall be an Eligible Employee
------------
for any Plan Year hereunder if (i) he is a participant in the Profit Sharing
Plan, (ii) the amount of contributions allocable to his account under the Profit
Sharing Plan for such Plan Year beginning on or after the Effective Date is less
than what would have been allocable to his account, if the limitations imposed
by Sections 401(a)(17) and 415 of the Code had not been in effect, and (iii) his
salary exceeds the Minimum Eligible Salary for such Plan Year.
3.2 Participation. An Eligible Employee shall become a Participant
--------------
hereunder on the date as of which any amount is credited to his Restoration
Account in accordance with Section 4.1. A Participant shall cease to participate
in the Plan on the date that the balance of his Restoration Account is reduced
to zero as a result of a distribution pursuant to Section 5.1, a forfeiture
pursuant to Section 4.2(a), or a combination of such distribution and such
forfeiture.
<PAGE>
ARTICLE IV
ESTABLISHMENT OF ACCOUNT
------------------------
4.1 Restoration Account.
--------------------
(a) For each Plan Year beginning on or after January 1, 1994, the
Employer shall credit to the Restoration Account established on behalf of each
Participant who is an Eligible Employee for such Plan Year an amount equal to
the excess, if any, determined by subtracting item (ii) from item (i), where:
(i) equals the amount of Employer Contributions that would have
been allocated to the Participant's account under the Profit
Sharing Plan for such Plan Year, if (1) the limitation
imposed by Section 401(a)(17) of the Code on the amount of
compensation taken into account under the Profit Sharing
Plan had not been in effect and (2) the limitation of
Section 415 of the Code had not been in effect; and
(ii) equals the amount of Employer Contributions allocated to the
Participant's account under the Profit Sharing Plan for such
Plan Year.
(b) The amount determined in accordance with subsection (a) shall be
credited to the Participant's Restoration Account as of the last day of each
Plan Year during the term of this Plan.
(c) The Employer shall credit each Participant's Restoration Account,
as of the last day of each Plan Year, with an earnings credit (or debit) equal
to the amount of investment gain (or loss) that would have been earned on the
amount credited to such Restoration Account as of the first day of such Plan
Year, if such amount had been held in the Profit Sharing Plan as of such date
<PAGE>
and invested during such Plan Year in the same manner as the Participant's
account under the Profit Sharing Plan, in accordance with Section 5 of the
Profit Sharing Plan. In the event that a Participant becomes entitled to receive
a distribution from the Plan in accordance with Section 5.1, the date of his
retirement, death, termination of employment or Disability shall be treated for
purposes of this Section 4.1(c) as the last day of a Plan Year. The Committee in
its sole discretion may determine amounts to be credited under this subsection
without reference to any charges made against accounts under the Profit Sharing
Plan in accordance with Section 6.3.2 of the Profit Sharing Plan, but in any
event such charges shall not be deemed expenses of this Plan, for purposes of
Section 7.5.
(d) The Restoration Account established hereunder for each Participant
shall be maintained as a book reserve on the books of the Employer, and amounts
credited thereto in accordance with this Section shall be added to such book
reserve.
(e) In addition to amounts credited in accordance with subsection
(a), there shall be credited to a Participant's Restoration Account, as of the
Effective Date, an amount determined in accordance with subsection (a), with
respect to the Plan Year of the Profit Sharing Plan that ended on December 31,
1993, if and only if such Participant's Salary, for such Plan Year of the Profit
Sharing Plan exceeded the maximum amount of compensation permitted to be taken
into account under a qualified plan, in accordance with Section 401(a)(17) of
the Code as in effect during such Plan Year of the Profit Sharing.
4.2 Vesting/Forfeiture of Benefits.
-------------------------------
(a) Except as provided in paragraph (b) of this Section 4.2, a
Participant shall become vested in his Restoration Account in accordance with
the vesting provisions set forth under Sections 8.1, 8.3, 12.3, and 12.4 of the
Profit Sharing Plan. If a Participant's employment with the Employer and all of
its affiliates is terminated (whether such termination is initiated by the
Participant, or the Employer or its affiliates, and without regard to the reason
therefor) before a Participant is fully vested in his account under the Profit
Sharing Plan, said Participant or his Beneficiary shall be entitled to receive,
in accordance with Article V of this Plan, that portion of his
<PAGE>
Restoration Account (inclusive of deemed earnings thereunder) determined by
multiplying the value of said Restoration Account by the Participant's
non-forfeitable percentage determined pursuant to Section 8.1 of the Profit
Sharing Plan and any other applicable provisions of the Profit Sharing Plan. The
nonvested portion of the Participant's Restoration Account, if any, shall be
forfeited upon such termination date.
(b) Upon a Change of Control of the Employer, each Participant who
is then an employee shall become fully vested in his Restoration Account.
4.2(b).1 Change of Control. For the purpose of this Section
4.2(b), "Change of Control" shall mean:
(a) The acquisition, after the Effective Date, by an individual,
entity or group (within the meaning of Section 13(d)(3) or
14(d)(2) of the Securities Exchange Act of 1934, as amended
("the Exchange Act")) of beneficial ownership (within the
meaning of Rule 13d-3 promulgated under the Exchange Act) of
20% or more of either (i) the shares of the issued and
outstanding common stock of the Employer (the "Common
Stock"), or (ii) the combined voting power of the voting
securities of the Employer entitled to vote generally in the
election of directors (the "Voting Securities"); provided,
---------
however, that the following acquisitions shall not
-------
constitute a Change of Control: (A) any acquisition by an
employee benefit plan (or related trust) sponsored or
maintained by the Employer or any Affiliate, or (B) any
acquisition by any corporation if, immediately following
such acquisition, more than 80% of the then outstanding
shares of common stock of such corporation and the combined
voting power of the then outstanding voting securities of
such corporation (entitled to vote generally in the election
of directors), is beneficially owned, directly or
indirectly, by all or substantially all of the individuals
and entities who, immediately prior to such acquisition,
were the beneficial owners of the Common Stock and the
Voting Securities in
<PAGE>
substantially the same proportions, respectively, as their
ownership, immediately prior to such acquisition, of the
Common Stock and Voting Securities; or
(b) Individuals who, as of the Effective Date, constitute the
Board (the "Incumbent Board") cease for any reason to
constitute at least a majority of the Board; provided,
--------
however, that any individual becoming a director subsequent
-------
to the Effective Date whose election, or nomination for
election by the Employer's shareholders, was approved by a
vote of at least a majority of the directors then serving
and comprising the Incumbent Board shall be considered as
though such individual were a member of the Incumbent Board,
but excluding, for this purpose, any such individual whose
initial assumption of office occurs as a result of either an
actual or threatened election contest (as such terms are
used in Rule 14a-11 of Regulation 14A promulgated under the
Exchange Act) or other actual or threatened solicitation of
proxies or consents; or
(c) Approval by shareholders of the Employer of a
reorganization, merger or consolidation, other than a
reorganization, merger or consolidation with respect to
which all or substantially all of the individuals and
entities who were the beneficial owners, immediately prior
to such reorganization, merger or consolidation, of the
Common Stock and Voting Securities beneficially own,
directly or indirectly, immediately after such
reorganization, merger or consolidation more than 80% of the
then outstanding common stock and voting securities
(entitled to vote generally in the election of directors) of
the corporation resulting from such reorganization, merger
or consolidation in substantially the same proportions as
their respective ownership, immediately prior to such
reorganization, merger or consolidation, of the Common Stock
and the Voting Securities; or
<PAGE>
(d) Approval by the shareholders of the Employer of (i) a
complete liquidation or dissolution of the Employer, or (ii)
the sale or other disposition of all or substantially all of
the assets of the Employer, other than to an Affiliate,
wholly-owned, directly or indirectly, by the Employer.
<PAGE>
(c) If a Change of Control, within the meaning of Section 4.2(b).1,
occurs and if a Participant's employment is terminated before such Change of
Control and its is reasonably demonstrated by the Participant that such
employment termination (i) was at the request, directly or indirectly, of a
third party who has taken steps reasonably calculated to effect the Change of
Control, or (ii) otherwise arose in connection with or in anticipation of the
Change of Control, then for purposes of Section 4.2(b), the Change of Control
shall be deemed to have occurred immediately prior to such Participant's
employment termination.
<PAGE>
ARTICLE V
PAYMENT OF BENEFITS
-------------------
5.1 Lump Sum Distribution. Payment of the Participant's vested Restoration
----------------------
Account hereunder shall be made in the form of a lump sum to the Participant or
his Beneficiary as soon as practicable after the Participant's employment with
the Employer and any of its affiliates has been terminated for any reason.
Payment to a Participant's Beneficiary shall be made only in the event of a
Participant's death prior to his receipt of a distribution of his Restoration
Account.
5.2 Separateness of Plan. Any benefit payable under the Profit Sharing
---------------------
Plan shall be determined solely in accordance with the terms and provisions
thereof, any benefit payable under the Employee Stock Ownership and ESOP
Restoration Plan shall be determined solely in accordance with the terms and
provisions thereof. Nothing in this Plan shall operate or be construed in any
way to modify, amend or affect the terms and provisions of the Profit Sharing
Plan, the Employee Stock Ownership Plan or the ESOP Restoration Plan .
5.3 Inapplicability of Retirement Equity Act of 1984. Nothing contained in
------------------------------------------------
this Plan is intended to give or shall give any spouse or former spouse of a
Participant or any other person any right to benefits under the Plan by virtue
of Sections 401(a)(11) and 417 of the Code or Section 205 of ERISA (relating to
qualified pre-retirement survivor annuities and qualified joint and survivor
annuities) or Sections 401(a)(13)(B) and 414(p) of the Code or Section 206(d) of
ERISA (relating to qualified domestic relations orders).
<PAGE>
ARTICLE VI
UNFUNDED NATURE OF PLAN
-----------------------
6.1 The Plan is an "unfunded plan primarily for the purpose of providing
deferred compensation for a select group of management or highly compensated
employees," within the meaning of Section 301(a)(3) of ERISA. The Employer has
established Restoration Accounts on its books solely as a bookkeeping
convenience, in order to account for the amounts earned by each Participant
hereunder. The Employer shall not be required to segregate any funds
representing the Restoration Accounts and nothing in this Plan shall be
construed as providing for such segregation. In addition, the Employer shall not
be deemed to be a Trustee for the Participants and their Beneficiaries with
respect to any amounts deferred hereunder. The Participant, his Beneficiary and
any other person or persons having or claiming a right to payments hereunder or
to any interest in this Plan shall rely solely on the unsecured promise of the
Employer to make payments hereunder. Nothing herein shall be construed to give
the Participant, his Beneficiary or any other person or persons any right,
title, interest or claim in or to any specific asset, fund, reserve, account or
property of any kind whatsoever owned by the Employer or in which it may have
any right, title or interest now or in the future; provided, however, that the
Participant or any Beneficiary shall have the right to enforce his claim against
the Employer in the same manner as any unsecured creditor.
6.2 Notwithstanding Section 6.1, the Employer may, in its absolute
discretion, establish a trust fund and contribute to such trust fund assets that
shall be held therein, subject to the claims of the Employer's creditors in the
event of the insolvency of the Employer, until paid to Participants or
Beneficiaries in accordance with the terms of the Plan. The Employer shall not
establish any trust fund that would cause the Plan not to be deemed an unfunded
plan for purposes of Title I of ERISA.
<PAGE>
ARTICLE VII
ADMINISTRATION; AMENDMENTS AND
TERMINATION; RIGHTS AGAINST THE EMPLOYER
----------------------------------------
7.1 Administration.
--------------
(a) The Committee shall administer the Plan and shall have the full
and absolute discretionary power and authority to construe and interpret the
provisions of the Plan and to determine a Participant's eligibility for benefits
hereunder.
(b) In exercising the power and authority granted to it by subsection
(a), the Committee shall adhere to the claims and appeal procedure adopted by it
pursuant to Section 10.4(o) of the Profit Sharing Plan.
(c) Any determination made by the Committee pursuant to the authority
granted under subsection (a) and, if applicable, in accordance with subsection
(b), shall be conclusive and binding on all Participants, Beneficiaries and any
other person who at any time have, or claim to have, any interest whatsoever
under this Plan.
(d) Pursuant to Section 401(a)(1) of ERISA, it is intended that the
Plan and the administration thereof shall be exempt from Part 4 of Title I of
ERISA. The Committee and the members thereof shall not be deemed to be
fiduciaries, within the meaning of Section 3(21) of ERISA, and shall not be
subject to the terms of Part 4 of Title 1 of ERISA.
7.2 Liability of Committee; Indemnification. To the extent permitted by
------------------------------------------
law, no member of the Committee shall be liable to any person for any action
taken or omitted in connection with the interpretation and administration of
this Plan, unless attributable to his own gross negligence or willful
misconduct. The Employer shall indemnify the members of the Committee against
any and all claims, losses, damages, and expenses, including any amounts paid in
settlement with their approval, arising from their action or failure to act to
the maximum extent
<PAGE>
required or permitted under the Delaware General Corporation Law as presently in
effect and as hereafter amended from time to time.
7.3 Amendment and/or Termination. (a) The Board shall have the right to
-------------------------------
alter, amend or terminate the Plan or any part hereof. Any such alteration,
amendment or termination may be effected by resolution of the Board acting in
accordance with the by-laws (or other applicable governing document) of the
Employer, in such manner as the Board may determine and for any reason
whatsoever. Without limiting the power and authority of the Board, as described
in the previous sentence, the Committee may, by decision of a majority of the
members of the Committee then in office constituting the final and binding act
of the Committee acting with or without a meeting being called or held, and
keeping minutes of all meetings held and a record of all actions taken by
written consent, may alter or amend the Plan, or any part hereof, in any manner,
provided that the Committee determines, which determination shall be conclusive
and binding on all persons, that any such alteration or amendment is (a)
necessary or appropriate to comply with any applicable law, regulation or
administrative pronouncement or (b) of an administrative nature and has no
material adverse cost effect on the Employer or any Affiliate of the herein and
shall be binding upon all Participants and Beneficiaries; provided, however,
that no such amendment or termination shall reduce the amount of, or the vested
interest in, the Restoration Account of a Participant or Beneficiary hereunder
as of the effective date of such amendment or termination.
(b) Unless otherwise specifically provided in any amendment to
the Profit Sharing Plan made after the Effective Date, the terms of the Plan
shall be subject to the terms of the Profit Sharing Plan, as amended from time
to time.
7.4 Rights Against the Employer. The establishment of this Plan shall not
----------------------------
be construed as giving to any Participant, Beneficiary or any person whomsoever,
any legal, equitable or other rights against the Employer, or its officers,
directors, agents or shareholders, or as giving to any Participant or
Beneficiary any equity or other interest in the assets or business of the
Employer or in shares of Employer stock or giving any employee the right to be
retained in the employment of
<PAGE>
Employer. All Participants shall be subject to discharge to the same extent they
would have been if this Plan had never been adopted.
7.5 Expenses. The cost of this Plan and the expenses of administering the
---------
Plan shall be borne by the Employer.
<PAGE>
ARTICLE VIII
GENERAL AND MISCELLANEOUS
-------------------------
8.1 Spendthrift Clause. No right, title or interest of any kind in the Plan
------------------
shall be transferable or assignable by any Participant or Beneficiary or be
subject to alienation, anticipation, encumbrance, garnishment, attachment,
execution or levy of any kind, whether voluntary or involuntary, nor subject to
the debts, contracts, liabilities, engagements, or torts of the Participant or
Beneficiary. Any attempt to alienate, anticipate, encumber, sell, transfer,
assign, pledge, garnish, attach or otherwise subject to legal or equitable
process or dispose of any interest in the Plan shall be void.
8.2 Severability. In the event that any provision of this Plan shall be
-------------
declared illegal or invalid for any reason, said illegality or invalidity shall
not affect the remaining provisions of this Plan but shall be fully severable
and this Plan shall be construed and enforced as if said illegal or invalid
provision had never been a part of this Plan.
8.3 Construction. The article and section headings and numbers are included
-------------
only for convenience of reference and are not to be taken as limiting or
extending the meaning of any of the terms and provisions of this Plan. Whenever
appropriate, words used in the singular shall include the plural or the plural
may be read as the singular. When used herein, the masculine gender includes the
feminine gender.
8.4 Governing Law. The validity and effect of this Plan and the rights and
---------------
obligations of all persons affected hereby shall be construed and determined in
accordance with the laws of the State of the State of New York, unless
superseded by federal law.
<PAGE>
8.5 Payment Due an Incompetent. If the Committee receives evidence that a
---------------------------
Participant or Beneficiary entitled to receive any payment under the Plan is
physically or mentally incompetent to receive such payment, the Committee may,
in its sole discretion, direct the payment to any other person or trust which
has been legally appointed by a court of competent jurisdiction or, in the event
that no such person has been appointed, to any person whom the Committee, in its
sole discretion, determines to be responsible for the care of the Participant or
Beneficiary. Payment to any person or trust in accordance with this Section will
fully discharge the obligations of the Plan to such Participant or Beneficiary.
8.6 Taxes. All amounts payable hereunder to any Participant or Beneficiary
------
shall be reduced by any and all federal, state and local taxes imposed upon the
Participant or Beneficiary which are required to be paid or withheld by the
Employer.
IN WITNESS WHEREOF, the Employer, as authorized by its Board of
Directors, has caused this Plan to be signed by its duly appointed officers
as of the effective date set forth in Section 1.2 above.
ATTEST: TIG Holdings, Inc.
______________ By:
Secretary Title:
<PAGE>
EXHIBIT 10.35
<PAGE>
AMENDMENT OF TIG HOLDINGS, INC. DIVERSIFIED SAVINGS PLAN
1. Section 4.1 is amended to read as follows:
4.1 Pre-Tax Contributions. Pursuant to the elections described
-----------------------
in Section 3.3, a Participant may defer, and have the amount of such deferral
contributed by his or her Employer to the Trust Fund as his or her Pre-Tax
Contributions, a portion of each payment of Salary that would otherwise be made
to the Participant after his or her election becomes effective and while it
remains so pursuant to Section 4.2.1 equal to any whole percentage from 1%
through 12%; provided, however, that the Committee may increase the maximum
percentage from 12% to any other whole percentage by action taken and
communicated to Participants prior to the period with respect to which the
Committee determines that such increased percentage may be elected; and,
provided further, however, that the maximum percentage of deferral permitted
with respect to a Senior Participant (as defined in Section 4.1.2) is 8%.
<PAGE>
EXHIBIT 10.36
<PAGE>
AMENDMENT OF THE TIG HOLDINGS, INC. ESOP RESTORATION PLAN
1. Section 4.2(b) is amended so that the first sentence thereof
reads as follows:
To the extent (but only to the extent) that the general
applicability of this Section 4.2(b) to Participants will not cause
any transaction under the Plan (other than a "discretionary
transaction" as defined by Rule 16b-3(b)(1)) to fail to qualify as an
exempt transaction under Rule 16b-3 of the Securities Exchange Act of
1934, then, upon a Change of Control of the Employer, each Participant
who is then an employee of the Employer or an Affiliate shall become
fully vested in his ESOP Restoration Account.
2. Section 5.1 is amended in its entirety to read as follows:
5.1 Form of Distribution Effective January 1,1997, each new
---------------------
Participant shall elect, upon commencement of participation in the
Plan (which election shall be irrevocable except as otherwise provided
in the Plan), which of the forms of distribution set forth in
subsections (a), (b) and (c) of this Section 5.1 will apply to the
distribution of his benefits (if any) under the Plan. Each Participant
who commenced participation prior to January 1, 1997 shall be required
to make a similar election with respect to the distribution of his
Plan benefits, except that the election shall apply to benefits
accrued prior to January 1, 1997 only if a distribution is not
otherwise required before January 1, 1999; any distribution of such
pre-1997 accrued benefits before January 1, 1999 shall be made as a
Lump Sum Distribution in accordance with Section 5.1(a) hereof.
All Participant elections shall be made in the manner and on the
form selected by the Committee, and shall be final and binding upon
the Participant, except as otherwise provided by the Plan.
(a) Lump Sum Distribution. Payment of the vested portion of the
-----------------------
Participant's ESOP Restoration Account hereunder may be made in the
form of a lump sum to the Participant or his Beneficiary, paid as soon
as practicable after the Participant's employment with the Employer
and any of its Affiliates has terminated for any reason. Payment to
the Participant's Beneficiary shall be made only in the event of the
Participant's death prior to the distribution of the vested portion of
his ESOP Restoration Account.
(b) Ten Year Installment Distribution. Payment of the vested
------------------------------------
portion of the Participant's ESOP Restoration Account hereunder may be
made in the form of a series of ten annual distributions to the
Participant or his Beneficiary, commencing as soon as practicable
after the Participant's employment with the Employer and its
Affiliates has been terminated for any reason. The amount of each
installment shall be equal to the then current value of the vested
portion of the Participant's ESOP Restoration Account multiplied by a
fraction, the numerator of which shall be one and the denominator of
which shall be the
<PAGE>
number of installments remaining to be paid. Payment to a
Participant's Beneficiary shall be made only in the event of the
Participant's death prior to the distribution of the vested portion of
his ESOP Restoration Account. The balance of the Participant's ESOP
Restoration Account during such pay-out period shall be credited with
deemed interest and earnings (or debited with losses and expenses)
using the same measure as used under Section 4.1(d) hereof. In the
event that a Participant no longer has an account under the Employee
Stock Ownership Plan, the deemed earnings credit or debit shall be
determined by the Committee based on the weighted average earnings for
all Participants in the Employee Stock Ownership Plan.
(c) Deferred Lump Sum Distribution Payment of the vested portion
------------------------------
of the Participant's ESOP Restoration Account hereunder may be made in
the form of a deferred lump sum distribution, whereby a lump sum shall
be paid in the first quarter of the calendar year next following the
calendar year in which the Participant's employment with the Employer
and its Affiliates terminated for any reason. Payment to a
Participant's Beneficiary shall be made only in the event of the
Participant's death prior to the distribution of the vested portion of
his ESOP Restoration Account. During the delay period, the
Participant's ESOP Restoration Account shall be credited with deemed
interest and earnings (or debited with losses and expenses) using the
same measure as used under Section 4.1(d) hereof. In the event the
Participant no longer has an account under the Employee Stock
Ownership Plan, the deemed earnings credit or debit shall be
determined by the Committee based on the weighted average earnings for
all Participants in the Employee Stock Ownership Plan.
Participant may elect, at least two years before any distribution
is to be made or would commence pursuant to this Article V, to change
the optional form of distribution that he previously elected, provided
that he elects one of the distribution options specified above, and
provided further that any acceleration of a distribution requires
prior Committee consent. Any election under this Section 5.1 to change
a distribution which is made within two years of a distribution event
shall be null and void.
<PAGE>
TIG HOLDINGS, INC.
------------------
EMPLOYEE STOCK OWNERSHIP RESTORATION PLAN (the "ESORP")
- - -----------------------------------------
RESOLVED, that the ESORP, in such form as authorized and approved by
the Board of Directors as of September 21, 1994 shall be hereby amended to
delete in its entirety Section 4.1(f), such section having been mistakenly
included in the form of the ESORP, the effect of this section being contrary to
the intended purpose of the ESORP, as presented to the Board of Directors for
approval.
<PAGE>
EXHIBIT 10.37
<PAGE>
AMENDMENT OF THE TIG HOLDINGS, INC. PROFIT SHARING RESTORATION PLAN
1. Section 5.1 is amended in its entirety to read as follows:
5.1 Form of Distribution Effective January 1,1997, each new
---------------------
Participant shall elect, upon commencement of participation in the
Plan (which election shall be irrevocable except as otherwise provided
in the Plan), which of the forms of distribution set forth in
subsections (a), (b) and (c) of this Section 5.1 will apply to the
distribution of his benefits (if any) under the Plan. Each Participant
who commenced participation prior to January 1, 1997 shall be required
to make a similar election with respect to the distribution of his
Plan benefits, except that the election shall apply to benefits
accrued prior to January 1, 1997 only if a distribution is not
otherwise required before January 1, 1999; any distribution of such
pre-1997 accrued benefits before January 1, 1999 shall be made as a
Lump Sum Distribution in accordance with Section 5.1(a) hereof.
All Participant elections shall be made in the manner and on the
form selected by the Committee, and shall be final and binding upon
the Participant, except as otherwise provided by the Plan.
(a) Lump Sum Distribution. Payment of the vested portion of the
-----------------------
Participant's Restoration Account hereunder may be made in the form of
a lump sum to the Participant or his Beneficiary, paid as soon as
practicable after the Participant's employment with the Employer and
its Affiliates has been terminated for any reason. Payment to a
Participant's Beneficiary shall be made only in the event of the
Participant's death prior to the distribution of the vested portion of
his Restoration Account.
(b) Ten Year Installment Distribution. Payment of the vested
------------------------------------
portion of the Participant's Restoration Account hereunder may be made
in the form of a series of ten annual distributions to the Participant
or his Beneficiary, commencing as soon as practicable after the
Participant's employment with the Employer and its Affiliates has
terminated for any reason. The amount of each installment shall be
equal to the then current value of the vested portion of the
Participant's Restoration Account multiplied by a fraction, the
numerator of which shall be one and the denominator of which shall be
the number of installments remaining to be paid. Payment to the
Participant's Beneficiary shall be made only in the event of the
Participant's death prior to the distribution of the vested portion of
his Restoration Account. The balance of the Participant's Restoration
Account during such pay-out period shall be credited with deemed
interest and earnings (or debited with losses and expenses) using the
same measure as used under Section 4.1(c) hereof. In the event that a
Participant no longer has an account under the Profit Sharing Plan,
the deemed earnings credit or debit shall be determined by the
<PAGE>
Committee based on the weighted average earnings for all Participants
in the Profit Sharing Plan.
(c) Deferred Lump Sum Distribution Payment of the vested portion
------------------------------
of the Participant's Restoration Account hereunder may be made in the
form of a deferred lump sum distribution, whereby a lump sum shall be
paid in the first quarter of the calendar year next following the
calendar year in which the Participant's employment with the Employer
and its Affiliates terminated for any reason. Payment to the
Participant's Beneficiary shall be made only in the event of the
Participant's death prior to the distribution of the vested portion of
his Restoration Account. During the delay period, the Participant's
Restoration Account shall be credited with deemed interest and
earnings (or debited with losses and expenses) using the same measure
as used under Section 4.1(c) hereof. In the event the Participant no
longer has an account under the Profit Sharing Plan, the deemed
earnings credit or debit shall be determined by the Committee based on
the weighted average earnings for all Participants in the Profit
Sharing Plan.
A Participant may elect, at least two years before any
distribution is to be made or would commence pursuant to this Article
V, to change the optional form of distribution that he previously
elected, provided that he elects one of the distribution options
specified above, and provided further that any acceleration of a
distribution requires prior Committee consent. Any election under this
Section 5.1 to change a distribution which is made within two years of
a distribution event shall be null and void.
<PAGE>
TIG HOLDINGS, INC.
------------------
PROFIT SHARING RESTORATION PLAN (the "PSRP")
- - -------------------------------
RESOLVED, that the PSRP, in such form as authorized and approved by the
Board of Directors as of September 21, 1994 shall be hereby amended to delete in
its entirety Section 4.1(e), such section having been mistakenly included in the
form of the PSRP, the effect of this section being contrary to the intended
purpose of the PSRP as presented to the Board of Directors for approval.
<PAGE>
EXHIBIT 11
<PAGE>
<TABLE>
<CAPTION>
TIG HOLDINGS, INC. EXHIBIT 11
COMPUTATION OF EARNINGS PER SHARE
(unaudited)
Years Ended December 31,
-----------------------------------------
(In millions, except per share data) 1996 1995 1994
====================================================================================================================
Primary:
<S> <C> <C> <C>
Weighted average shares outstanding 56.4 60.8 63.1
Net effect of dilutive stock options - based on the
treasury stock method using average market price 2.9 0.8 -
- - --------------------------------------------------------------------------------------------------------------------
Total primary common shares 59.3 61.6 63.1
- - --------------------------------------------------------------------------------------------------------------------
Net income $78.9 $118.3 $51.5
Less preferred stock dividend requirements (1.9) (1.9) (1.9)
- - --------------------------------------------------------------------------------------------------------------------
Net income available to common stock $77.0 $116.4 $49.6
- - --------------------------------------------------------------------------------------------------------------------
Net income per common share $1.30 $1.89 $0.79
====================================================================================================================
====================================================================================================================
Fully diluted:
Weighted average shares outstanding 56.4 60.8 63.1
Net effect of dilutive stock options - based on the
treasury stock method using higher of average market price
or end of period market price 3.9 2.5 -
- - --------------------------------------------------------------------------------------------------------------------
Total fully diluted common stock 60.3 63.3 63.1
- - --------------------------------------------------------------------------------------------------------------------
Net income $78.9 $118.3 $51.5
Less preferred stock dividend requirements (1.9) (1.9) (1.9)
- - --------------------------------------------------------------------------------------------------------------------
Net income available to common stock $77.0 $116.4 $49.6
- - --------------------------------------------------------------------------------------------------------------------
Net income per common share $1.28 $1.84 $0.79
====================================================================================================================
</TABLE>
<PAGE>
EXHIBIT 12
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT 12
TIG HOLDINGS, INC.
COMPUTATION OF RATIO OF CONSOLIDATED EARNINGS
TO FIXED CHARGES AND PREFERRED STOCK DIVIDENDS
(unaudited)
Years Ended December 31,
---------------------------------------------------------
(In millions) 1996 1995 1994 1993
- - --------------------------------------------------------------------------------------------------------------------
EARNINGS:
<S> <C> <C> <C> <C>
Pretax income from continuing operations $75 $155 $45 $(218)
Fixed charges, excluding preferred
stock dividends 16 15 11 13
- - --------------------------------------------------------------------------------------------------------------------
Earnings $91 $170 $56 $(205)
====================================================================================================================
FIXED CHARGES:
Interest expense $ 9 $ 6 $ - $ 1
Interest portion of operating leases,
net of subleasing income 7 9 11 12
Preferred stock dividends requirements 2 2 2 2
- - --------------------------------------------------------------------------------------------------------------------
Fixed charges $18 $17 $13 $15
====================================================================================================================
RATIO OF EARNINGS TO FIXED CHARGES 5.1 10.0 4.3 -
====================================================================================================================
</TABLE>
<PAGE>
EXHIBIT 21
<PAGE>
TIG HOLDINGS, INC.
LIST OF SUBSIDIARIES
State of
Incorporation
-------------
TIG Holdings, Inc. Delaware
TIG Holdings 1, Inc. Delaware
TIG Excess & Surplus Lines, Inc. Delaware
TIG Specialty Insurance Company California
TIG Insurance Group California
Rusco Services, Inc. California
TIG Holdings 3, Inc. Delaware
PW Financial Solutions Delaware
TIG Insurance Company California
TIG Holdings 4, Inc. Delaware
TIG Premier Insurance Company California
TIG Countrywide Insurance Company California
Countrywide Corporation Texas
Industrial County Mutual Insurance Company Texas
TIG Lloyds Insurance Company Texas
TIG Indemnity Company California
TIG Insurance Company of Texas Texas
TIG Reinsurance Company Connecticut
Investment Subsidiary Two Corporation Delaware
Investment Subsidiary Three Corporation Delaware
Investment Subsidiary Four Corporation Delaware
TIG RE UK Holdings Company Delaware
Fairmont Insurance Company California
TIG American Specialty Insurance Company Texas
TIG Insurance Company of Colorado Colorado
TIG Insurance Corporation of America Michigan
TIG Insurance Company of Michigan Michigan
TIG Insurance Company of New York New York
Investment Subsidiary One Corporation Delaware
<PAGE>
EXHIBIT 23.1
<PAGE>
Exhibit 23.1 - Consent of Independent Auditors
We consent to the incorporation by reference in the Registration Statement
(Form S-8) No. 33-61564) pertaining to the TIG Holdings, Inc. 1993
Long-Term Incentive Plan, in the Registration Statement (Form S-8 No.
33-61970) pertaining to the TIG Holdings, Inc. Diversified Savings Plan,
in the Registration Statement (Form S-8 No. 33-63148) pertaining to the
TIG Holdings, Inc. 1993 Non-Employee Directors Restricted Share Program,
in the Registration Statement (Form S-8 No. 33-66650) pertaining to the
Common Stock Restricted Share Agreement, in the Registration Statement
(Form S-3 No. 33-90594) of TIG Holdings, Inc. and related Prospectus
pertaining to the registration of $100,000,000 of 8 1/8% Notes due 2005,
in the Registration Statement (Form S-8 No. 333-18281) pertaining to the
TIG Holdings, Inc. Diversified Savings Restoration, in the Post Effective
Amendment No. 1 to the Registration Statement (Form S-8 No. 33-61564)
pretaining to the TIG Holdings, Inc. 1993 Long-Term Incentive Plan, the
TIG Holdings, Inc. 1996 Long-Term Incentive Plan, the TIG Holdings, Inc.
1996 Non-Employee Directors Compensation Program and the TIG Holdings,
Inc. September 1996 Consultant Stock Option Agreement and in the
Registration Statements (Form S-8 No. 333-15735) pertaining to the TIG
Holdings, Inc. 1996 Long-Term Incentive Plan, the TIG Holdings, Inc. 1996
Non-Employee Directors Compensation Program and the TIG Holdings Inc.
September 1996 Consultant Stock Option Agreement of our report dated
January 31, 1997 with respect to the consolidated financial statements and
schedules of TIG Holdings, Inc. included in the Annual Report (Form 10-K)
for the year ended December 31, 1996.
/s/ERNST & YOUNG LLP
Dallas, Texas
March 21, 1997
<PAGE>
EXHIBIT 24.1
<PAGE>
POWER OF ATTORNEY
-----------------
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Jon W. Rotenstreich, Louis J. Paglia,
Edwin G. Pickett and Steven A. Cook (each of them with full power of
substitution and with full power to act without the others) his or her true and
lawful attorneys-in-fact and agent for the undersigned in such person's name,
place and stead, in any and all capacities, to sign an Annual Report for 1996 on
Form 10-K and any and all subsequent amendments thereto and to file them so
signed, with all exhibits thereto, and any and all other documents in connection
therewith, with the Securities and Exchange Commission, hereby granting unto
said attorneys-in-fact and agents, and each of them, full power and authority to
do and perform any and all acts and things requisite and necessary to be done in
and about the premises, as fully to all intents and purposes as he or she might
or could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents or any of them, or their substitutes, may lawfully
do or cause to be done by virtue hereof.
Dated: March 19, 1997
--------------
By /s/JON W. ROTENSTREICH By /s/DON D. HUTSON
- - ------------------------------------- ----------------------------------------
Name: Jon W. Rotenstreich Name: Don D. Hutson
Title: Director, Chairman of the Board Title: Director, President and
and Chief Executive Officer Chief Operating Officer
(Principal Executive Officer)
By /s/EDWIN G. PICKETT By /s/STEVEN A. COOK
- - ------------------------------------- ----------------------------------------
Name: Edwin G. Pickett Name: Steven A. Cook
Title: Executive Vice President and Title: Controller
Chief Financial Officer (Principal Accounting Officer)
(Principal Financial Officer)
By /s/GEORGE B. BEITZEL By /s/WILLIAM G. CLARK
- - ------------------------------------- ----------------------------------------
Name: George B. Beitzel Name: William G. Clark
Title: Director Title: Director
By /s/JOEL S. EHRENKRANZ By /S/GEORGE D. GOULD
- - ------------------------------------- ----------------------------------------
Name: Joel S. Ehrenkranz Name: George D. Gould
Title: Director Title: Director
By /s/LORD MOORE By /s/WILLIAM W. PRIEST
- - ------------------------------------- ----------------------------------------
The Rt. Hon. Lord Moore Name: William W. Priest
Director Title: Director
By /S/ANN W. RICHARDS By /s/HAROLD TANNER
- - ------------------------------------- ----------------------------------------
Name: Ann W. Richards Name: Harold Tanner
Title: Director Title: Director
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
(Replace this text with the legend)
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<DEBT-HELD-FOR-SALE> 0
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 4,057
<EQUITIES> 0
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 4,233
<CASH> 19
<RECOVER-REINSURE> 1,264
<DEFERRED-ACQUISITION> 144
<TOTAL-ASSETS> 6,476
<POLICY-LOSSES> 3,760
<UNEARNED-PREMIUMS> 696
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 123
25
0
<COMMON> 1,198
<OTHER-SE> 285
<TOTAL-LIABILITY-AND-EQUITY> 6,476
1,539
<INVESTMENT-INCOME> 290
<INVESTMENT-GAINS> (4)
<OTHER-INCOME> 0
<BENEFITS> 1,138
<UNDERWRITING-AMORTIZATION> 0
<UNDERWRITING-OTHER> 466
<INCOME-PRETAX> 75
<INCOME-TAX> (4)
<INCOME-CONTINUING> 79
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 79
<EPS-PRIMARY> 1.30
<EPS-DILUTED> 1.28
<RESERVE-OPEN> 3,886
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 3,760
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
