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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
_______________
FORM 10-Q
(X) Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the Quarterly Period Ended June 30, 1997
OR
( )TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period from to
Commission File Number 1-11856
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TIG HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
Delaware 94-3172455
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
65 East 55th Street, 28th Floor
New York, New York 10022
(Address of principal executive offices)
(212) 446-2700
(Registrant's telephone number, including area code)
================================================================================
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ---
Number of shares of Common Stock, $0.01 par value per share, outstanding as of
close of business on June 30, 1997: 51,487,675 excluding 13,834,736 treasury
shares.
<PAGE>
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TIG HOLDINGS, INC.
INDEX TO FORM 10-Q
PART I. FINANCIAL INFORMATION Page
Item 1. Financial Statements
Condensed consolidated balance sheets as of
June 30, 1997 (unaudited) and December 31, 1996 ...................3
Condensed consolidated statements of income
for the three and six months ended June 30, 1997
(unaudited) and June 30, 1996 (unaudited)..........................4
Condensed consolidated statement of changes in
shareholders' equity for the six months ended
June 30, 1997 (unaudited)..........................................5
Condensed consolidated statements of cash flow
for the six months ended June 30, 1997 (unaudited)
and June 30, 1996 (unaudited)......................................6
Notes to condensed consolidated financial
statements (unaudited).............................................7
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations..............................................10
2.1 Consolidated Results...............................................10
2.2 Reinsurance........................................................13
2.3 Commercial Specialty...............................................15
2.4 Retail.............................................................17
2.5 Other Lines........................................................18
2.6 Investments........................................................19
2.7 Reserves...........................................................22
2.8 Liquidity and Capital Resources....................................23
2.9 Forward-Looking Statements.........................................24
2.10 Glossary...........................................................25
PART II. OTHER INFORMATION
Item 1. Legal Proceedings..................................................27
Item 4. Submission of Matters to a Vote of Security Holders................27
Item 6. Exhibits and Reports on Form 8-K...................................28
Exhibit 10.1 - Separation Agreement
Exhibit 11 - Computation of Earnings Per Share (unaudited)...................29
SIGNATURE....................................................................30
2
<PAGE>
<TABLE>
<CAPTION>
TIG HOLDINGS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
June 30, December 31,
(In millions, except share data) 1997 1996
============================================================================ ================== ==================
(unaudited)
<S> <C> <C>
ASSETS
Investments:
Fixed maturities at market
(cost: $4,078 in 1997 and $3,976 in 1996) $4,151 $4,057
Short-term and other investments (cost: $170 in 1997
and $176 in 1996) 174 176
- ---------------------------------------------------------------------------- ------------------ ------------------
Total investments 4,325 4,233
Cash 24 19
Accrued investment income 61 57
Premium receivable (net of allowance of: $4 in 1997 and 1996) 457 420
Reinsurance recoverable (net of allowance of: $9 in 1997 and 1996) 1,327 1,264
Deferred policy acquisition costs 158 144
Prepaid reinsurance premium 91 105
Income taxes 81 102
Other assets 176 132
- ---------------------------------------------------------------------------- ------------------ ------------------
Total assets $6,700 $6,476
============================================================================ ================== ==================
LIABILITIES
Reserves for:
Losses $3,213 $3,215
Loss adjustment expenses 471 545
Unearned premium 725 696
- ---------------------------------------------------------------------------- ------------------ ------------------
Total reserves 4,409 4,456
Reinsurance premium payable 129 88
Funds withheld under reinsurance agreements 306 255
Notes payable 124 123
Other liabilities 418 322
- ---------------------------------------------------------------------------- ------------------ ------------------
Total liabilities 5,386 5,244
- ---------------------------------------------------------------------------- ------------------ ------------------
MANDATORY REDEEMABLE 8.597% CAPITAL SECURITIES OF SUBSIDIARY TRUST 125 -
- ---------------------------------------------------------------------------- ------------------ ------------------
MANDATORY REDEEMABLE PREFERRED STOCK 25 25
- ---------------------------------------------------------------------------- ------------------ ------------------
SHAREHOLDERS' EQUITY
Common stock - par value $0.01 per share
(authorized: 180,000,000 shares; issued and outstanding:
65,322,411 shares in 1997 and 64,610,109 shares in 1996) 1,209 1,198
Retained earnings 292 234
Net unrealized gain on fixed maturity investments, net of taxes 50 52
Net unrealized loss on foreign currency, net of taxes (1) (1)
- ---------------------------------------------------------------------------- ------------------ ------------------
1,550 1,483
Treasury stock (13,834,736 shares in 1997 and 10,306,000
shares in 1996) (386) (276)
- ---------------------------------------------------------------------------- ------------------ ------------------
Total shareholders' equity 1,164 1,207
- ---------------------------------------------------------------------------- ------------------ ------------------
Total liabilities and shareholders' equity $6,700 $6,476
============================================================================ ================== ==================
<FN>
See Notes to Condensed Consolidated Financial Statements.
</FN>
</TABLE>
3
<PAGE>
<TABLE>
<CAPTION>
TIG HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three Months Six Months
Ended June 30, Ended June 30,
--------------------------- ----------------------------
(In millions, except per share data) 1997 1996 1997 1996
======================================================== =========================== ============================
<S> <C> <C> <C> <C>
REVENUES
Net premium earned $358 $389 $711 $775
Net investment income 73 73 148 143
Net realized investment gain (loss) 4 (5) 5 (5)
- -------------------------------------------------------- ------------- ------------- -------------- -------------
Total revenues 435 457 864 913
- -------------------------------------------------------- ------------- ------------- -------------- -------------
LOSSES AND EXPENSES
Net losses and loss adjustment expenses incurred 250 281 502 587
Commissions and premium related expenses 80 88 158 177
Other underwriting expenses 32 27 64 60
Corporate expenses 11 10 19 18
Interest expense 5 2 10 4
Restructuring charges - - - 100
- -------------------------------------------------------- ------------- ------------- -------------- -------------
Total losses and expenses 378 408 753 946
- -------------------------------------------------------- ------------- ------------- -------------- -------------
Income (loss) before income tax (expense) benefit 57 49 111 (33)
Income tax (expense) benefit (18) (15) (36) 36
- -------------------------------------------------------- ------------- ------------- -------------- -------------
NET INCOME $39 $34 $75 $3
======================================================== ============= ============= ============== =============
NET INCOME PER COMMON SHARE $0.71 $0.55 $1.33 $0.03
======================================================== ============= ============= ============== =============
DIVIDEND PER COMMON SHARE $0.15 $0.05 $0.30 $0.10
======================================================== ============= ============= ============== =============
<FN>
See Notes to Condensed Consolidated Financial Statements.
</FN>
</TABLE>
4
<PAGE>
<TABLE>
<CAPTION>
TIG HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENT
OF CHANGES IN SHAREHOLDERS' EQUITY
(Unaudited)
Foreign Total
Unrealized Currency Share-
Common Retained Investment Translation Treasury holders'
(In millions) Stock Earnings Gain Adjustment Stock Equity
======================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1996 $1,198 $234 $52 $(1) $(276) $1,207
Net income 75 75
Common and preferred stock
dividends (17) (17)
Common stock issued 9 9
Amortization of unearned
compensation 2 2
Treasury stock purchased (110) (110)
Change in net unrealized gain on
fixed maturity investments (2) (2)
- ----------------------------------- ------------- ------------- ------------- ------------- -------------- -------------
Balance at June 30, 1997 $1,209 $292 $50 $(1) $(386) $1,164
=================================== ============= ============= ============= ============= ============== =============
<FN>
See Notes to Condensed Consolidated Financial Statements.
</FN>
</TABLE>
5
<PAGE>
<TABLE>
<CAPTION>
TIG HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW
(Unaudited)
Six Months Ended
June 30,
------------------------------------
(In millions) 1997 1996
==================================================================================================
<S> <C> <C>
Operating Activities
Net income $75 $3
Adjustments to reconcile net income to cash provided
by operating activities:
Changes in:
Accrued investment income (4) -
Premium receivable (37) (29)
Reinsurance recoverable (63) (63)
Deferred policy acquisition costs (14) (4)
Prepaid reinsurance premium 14 15
Income taxes 23 (39)
Loss reserves (2) 22
Loss adjustment expenses reserves (74) (22)
Unearned premium reserves 29 (4)
Reinsurance premium payable 41 (33)
Funds withheld under reinsurance agreements 51 51
Other assets, other liabilities and other (52) 103
------------------------------------------------------------- ----------------- ------------------
Net cash used in operating activities (13) -
------------------------------------------------------------- ----------------- ------------------
INVESTING ACTIVITIES
Purchases of fixed maturity investments (1,470) (1,184)
Sales of fixed maturity investments 1,357 1,279
Maturities and calls of fixed maturity investments 134 -
Net (decrease) increase in short-term investments (11) 33
Other (4) 2
------------------------------------------------------------- ----------------- ------------------
Net cash provided by investing activities 6 130
------------------------------------------------------------- ----------------- ------------------
FINANCING ACTIVITIES
Common stock issued 9 5
Mandatory redeemable capital securities issued 125 -
Treasury stock purchased (106) (126)
Common stock and preferred stock dividends (17) (7)
Other 1 (2)
------------------------------------------------------------- ----------------- ------------------
Net cash provided by (used in) financing activities 12 (130)
------------------------------------------------------------- ----------------- ------------------
Increase in cash 5 -
Cash at beginning of period 19 4
------------------------------------------------------------- ----------------- ------------------
Cash at end of period $24 $4
============================================================= ================= ==================
<FN>
See Notes to Condensed Consolidated Financial Statements.
</FN>
</TABLE>
6
<PAGE>
TIG HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the Six Months Ended June 30, 1997
(Unaudited)
================================================================================
NOTE A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
- --------------------------------------------------------------------------------
BASIS OF PRESENTATION. TIG Holdings, Inc. ("TIG Holdings") is primarily engaged
in the business of property/casualty insurance and reinsurance through its 15
domestic subsidiaries (collectively "TIG" or the "Company"). The accompanying
unaudited condensed consolidated financial statements include the accounts of
TIG Holdings and its subsidiaries and have been prepared in accordance with
generally accepted accounting principles ("GAAP") for interim financial
information and with the instructions to Form 10-Q and Article 10 of Regulation
S-X. Accordingly, they do not include all of the information and footnotes
required by GAAP for complete financial statements. Financial statements
prepared in accordance with GAAP require the use of management estimates. In the
opinion of management, all adjustments, including normal recurring accruals,
considered necessary for a fair presentation have been included. Certain
reclassifications of prior year amounts have been made to conform with the 1997
presentation.
Operating results for the six months ended June 30, 1997 are not necessarily
indicative of the results to be expected for the full year. For further
information, refer to the consolidated financial statements and footnotes
thereto included in TIG's annual report on Form 10-K for the year ended December
31, 1996.
EARNINGS PER SHARE ("EPS"). Primary EPS is calculated based upon the weighted
average common shares outstanding ("average shares") during the period. In order
to calculate average shares, unallocated ESOP shares and treasury shares are
deducted from outstanding common shares. Common stock options are considered
common stock equivalents and are included in average share calculations if
dilutive. To obtain net income attributable to common shareholders for EPS
computations, the preferred stock dividend is deducted from net income. Refer
also to Exhibit 11.
INVESTMENTS. Fixed maturities are classified as available for sale, as TIG has
no intent to hold such securities until maturity, and are carried at market
value. 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 securities held by the
Company. 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.
LOSS AND LOSS ADJUSTMENT EXPENSE RESERVES. The liability for unpaid losses and
loss adjustment expense ("LAE") is based on an evaluation of reported losses and
on estimates of incurred but unreported losses. The reserve liabilities are
determined using adjusters' individual case estimates and statistical
projections. The liability is reported net of estimated salvage and subrogation
recoverable. Adjustments to the liability resulting from subsequent developments
or revisions to the estimates are reflected in results of operations in the
period in which such adjustments become known. While there can be no assurance
that the reserves at any given date are adequate to meet TIG's obligations, the
amounts reported on the balance sheet are management's best estimate of that
amount.
TREASURY STOCK. At June 30, 1997, the Board of Directors had authorized the
repurchase of up to 16.25 million shares of TIG Holdings common stock. As of
June 30, 1997, the Company has repurchased 13.8 million shares at an aggregate
cost of $386 million. The Company uses the cost method to record the purchase of
treasury shares.
7
<PAGE>
TIG HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the Six Months Ended June 30, 1997
(Unaudited)
================================================================================
NOTE B. MANDATORY REDEEMABLE 8.597% CAPITAL SECURITIES OF SUBSIDIARY TRUST
- --------------------------------------------------------------------------------
In January 1997, TIG Capital Trust I ("TIG Capital" or the "Trust"), a statutory
business trust 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 initial 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. Interest on the 8.597% capital securities is payable semi-annually
commencing in July 1997.
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 are being used for
general corporate purposes which includes repurchases of TIG Holding's common
stock.
================================================================================
NOTE C. 1996 ACTIONS
- --------------------------------------------------------------------------------
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 to administer
contractually required policy renewals for run-off lines of business, and 5)
notified approximately 600 employees that their positions would be eliminated.
Net premium written for Other Lines has been reduced to $3 million for the first
six months of 1997, and management estimates that the last renewals for
remaining policies in force will be processed by late 1997.
TIG recorded a $100 million accrual in first quarter 1996 for estimated
restructuring charges comprised of severance of $17 million; contractual policy
obligations of $37 million; office lease terminations 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.
Charges against the 1996 restructure accrual of $62 million have been recorded
since March 1996 and are comprised of $11 million in severance, $33 million in
contractual policy obligations, $12 million in lease termination costs, and $6
million in asset write-downs.
TIG re-evaluated the $100 million restructuring charge as of June 30, 1997.
Although the total amount of the restructuring charge remained unchanged, the
components were revised to the following: severance of $13 million; contractual
policy obligations of $43 million; office lease terminations of $16 million;
furniture, equipment and capitalized software write-downs of $10 million; and a
reserve for litigation and credit issues related to terminated producers of $18
million. Severance costs were less than originally estimated due to the
employment of certain TIG associates by third party service providers. The
reduction in severance was effectively offset by increased costs for contractual
policy obligations associated with outsourcing contracts. The revised estimates
for leases, asset write-downs, and producer credit issues reflect minor
adjustments to original assumptions based on activity through June 30, 1997.
8
<PAGE>
TIG HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the Six Months Ended June 30, 1997
(unaudited)
================================================================================
LOSS RESERVES. In connection with the February 1996 restructuring, TIG completed
a re-evaluation of loss and LAE reserves related to run-off lines using
additional loss development data received during first quarter 1996. This data
confirmed adverse loss development trends observed in the second half of 1995
and was a consideration in the decision to exit certain lines of business as
previously discussed. As a result of this re-evaluation and management's belief
that the restructuring decision will make the claims settlement process for
run-off lines less consistent and more volatile, TIG increased loss and LAE
reserves by $31 million in the first quarter of 1996 for run-off lines,
principally for the Transportation and Large Programs units.
INCOME TAXES. In March 1996, TIG entered into settlement agreements with the IRS
on several outstanding audit assessments, which resulted in a redetermination of
certain tax liabilities related to prior tax years. As a result of the
redetermination, a $20 million deferred tax benefit was recognized in first
quarter 1996.
================================================================================
NOTE D. CONTINGENCIES
- --------------------------------------------------------------------------------
TIG's insurance subsidiaries are routinely engaged in litigation in the normal
course of their business. As a liability insurer, the Company defends
third-party claims brought against its insureds. As an insurer, the Company
defends against coverage claims.
On January 11, 1994, a Los Angeles County Superior Court jury returned a verdict
of $28 million for punitive damages against TIG Insurance Company ("TIC") in
Talbot Partners v. Cates Construction, Inc. and TIC (the "Talbot Case"). The
award arose out of TIC's handling of a surety bond claim on a construction
project. On March 28, 1997, the California Court of Appeal reduced the trial
court's punitive damage award to $15 million. On July 23, 1997, the California
Supreme Court granted TIC's petition to review the Court of Appeal's decision.
Management believes that the ultimate liability arising from the Talbot Case
will not materially impact consolidated operating results.
================================================================================
NOTE E. STATEMENT OF FINANCIAL ACCOUNTING STANDARDS 128
"EARNINGS PER SHARE"
- --------------------------------------------------------------------------------
In February 1997, the Financial Accounting Standards Board issued Statement 128
"Earnings per Share" ("Statement 128"), which established a new calculation for
earnings per share showing both the "Basic" and "Diluted" earnings per share
effective for periods ending after December 15, 1997. Basic earnings per share
will be calculated using only weighted average shares outstanding with no
dilutive impact from common stock equivalents while the diluted earnings per
share calculation is similar to the current fully diluted earnings per share
calculation. All prior period earnings per share will be restated to be
consistent with the new requirements. If earnings per share had been calculated
in accordance with Statement 128, the basic earnings per share for second
quarter 1997 and 1996 would have been $0.74 and $0.58, respectively, and the
first six months of 1997 and 1996 would have been $1.41 and $0.03, respectively.
The diluted earnings per share according to Statement 128 for second quarter
1997 and 1996 would have been $0.70 and $0.55, respectively, and for the first
six months of 1997 and 1996 would have been $1.33 and $0.03, respectively.
9
<PAGE>
TIG HOLDINGS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
================================================================================
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
The following discussion provides management's assessment of financial results
for the three and six months ended June 30, 1997 as compared to the three and
six months ended June 30, 1996 and material changes in financial position from
December 31, 1996 to June 30, 1997 for TIG Holdings, Inc. ("TIG Holdings") and
its subsidiaries (collectively "TIG" or the "Company"). The analysis focuses on
the performance of TIG's three major operating divisions, Reinsurance,
Commercial Specialty and Retail, and its investment portfolio and presents
management's expectations for the near future. Lines of business that have
been de-emphasized ("Other Lines") are discussed at Item 2.5. This discussion
updates the "Management's Discussion and Analysis" in the 1996 Annual Report to
Shareholders and should be read in conjunction therewith. Key industry terms
that appear in the Management's Discussion and Analysis and elsewhere in this
document are defined at Item 2.10 - Glossary. Certain reclassifications of prior
years' amounts have been made to conform with the 1997 presentation.
Statements contained in the Management's Discussion and Analysis, and elsewhere
in this document which are based on management's projections, estimates and
assumptions are forward-looking statements. Management would like to caution
readers regarding its forward-looking statements (see Item 2.9 - Forward-Looking
Statements).
================================================================================
2.1 CONSOLIDATED RESULTS
- --------------------------------------------------------------------------------
OVERVIEW. Results of operations for the three and six months ended June 30, 1997
and 1996 are presented below:
<TABLE>
<CAPTION>
Three Months Six Months
Ended June 30, Ended June 30,
--------------------------- ---------------------------
(In millions) 1997 1996 1997 1996
============================================================================= ===========================
<S> <C> <C> <C> <C>
Gross premium written $464 $467 $933 $975
- ------------------------------------------------- ------------- ------------- ------------- -------------
Net premium written $380 $383 $769 $787
- ------------------------------------------------- ------------- ------------- ------------- -------------
Net premium earned $358 $389 $711 $775
Less: Net loss and LAE incurred 250 281 502 587
Commission expense 70 75 137 149
Premium related expense 10 13 21 28
Other underwriting expense 32 27 64 60
- ------------------------------------------------- ------------- ------------- ------------- -------------
Underwriting loss (4) (7) (13) (49)
Net investment income 73 73 148 143
Net realized investment gain (loss) 4 (5) 5 (5)
Corporate expenses 11 10 19 18
Interest expense 5 2 10 4
Restructuring charges - - - 100
- ------------------------------------------------- ------------- ------------- ------------- -------------
Income (loss) before tax (expense) benefit 57 49 111 (33)
Income tax (expense) benefit (18) (15) (36) 36
- ------------------------------------------------- ------------- ------------- ------------- -------------
Net income $39 $34 $75 $3
================================================= ============= ============= ============= =============
Income excluding investment gains (losses)
and restructuring charges $36 $37 $72 $71
================================================= ============= ============= ============= =============
</TABLE>
10
<PAGE>
TIG HOLDINGS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
Net income of $39 million for second quarter 1997 increased 14.7% over 1996
primarily due to an approximate $6 million increase in after-tax realized
investment gains. Income excluding investment gains and losses decreased
slightly as improved underwriting results were offset by increased interest
expense. In January 1997, $125 million of mandatory redeemable capital
securities were issued (See Note B to the Condensed Consolidated Financial
Statements), the proceeds of which are be using for general corporate purposes,
which includes repurchases of TIG Holding's common stock.
Net income for the first six months of 1997 increased by $72 million over 1996
due to restructuring charges of $100 million ($65 million after tax) recorded in
1996 in connection with the reorganization of commercial operations and the
decision to exit certain underperforming programs. Income excluding
restructuring charges and investment gains and losses increased slightly.
Underwriting loss decreased by $36 million in the first six months of 1997 as
compared to 1996 due to reserve strengthening of $31 million recorded in Other
Lines in first quarter 1996. The impact of reserve strengthening on 1996 results
was offset by a deferred tax benefit also recorded in first quarter 1996. For
additional information regarding first quarter 1996 restructuring charges,
reserve strengthening and income tax benefit, see Note C to the Condensed
Consolidated Financial Statements. Net investment income increased by 3.5% in
the first six months of 1997 over 1996 primarily as a result of the Company's
efforts in 1996 to dispose of tax-exempt municipal bonds and certain other lower
yielding securities in favor of higher yielding corporate bonds and
mortgage-backed securities. Interest expense increased due to the aforementioned
issuance of $125 million in mandatory redeemable capital securities in January
1997.
PREMIUM. Overall market conditions remain extremely competitive in 1997.
Oversupply of capital in the insurance industry has resulted in significant
downward pricing pressure, making it increasingly difficult for TIG to write
business which meets its profitability standards. TIG's marketing focus for all
divisions is to develop program business which caters to market niches. The
following table summarizes net premium written ("NPW") by division:
<TABLE>
<CAPTION>
Three Months Six Months
Ended June 30, Ended June 30,
------------------------------------- -------------------------------------
1997 1996 1997 1996
------------------------------------- -------------------------------------
(In millions) NPW % NPW % NPW % NPW %
================================================================= =====================================
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Reinsurance $139 36% $145 38% $284 37% $282 36%
Commercial Specialty 136 36% 107 28% 272 35% 216 27%
Retail 110 29% 88 23% 210 27% 178 23%
Other Lines (5) (1)% 43 11% 3 1% 111 14%
--------------------------- -------- --------- --------- -------- -------- --------- --------- --------
Net premium written $380 100% $383 100% $769 100% $787 100%
=========================== ================== ================== ================== ==================
</TABLE>
11
<PAGE>
TIG HOLDINGS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
================================================================================
Second quarter 1997 premiums were relatively flat compared to 1996; however, the
Company's on-going operating divisions had premium growth of $45 million, or
13.2%. Growth in Commercial Specialty premium resulted from new business in the
Workers' Compensation and Primary Casualty units as discussed at Item 2.3.
Growth in Retail premium was driven by the Non-standard Auto unit as well as
production from the new Alternative Distribution unit as discussed at Item 2.4.
The premium growth in on-going operating divisions was more than offset by a $48
million decline in other lines premium as a result of the Company's on-going
efforts to non-renew Other Lines business.
UNDERWRITING RESULTS. The following table presents the components of the
Company's statutory combined ratio:
<TABLE>
<CAPTION>
Three Months Six Months
Ended June 30, Ended June 30,
---------------------------------- ----------------------------------
Statutory ratios 1997 1996 1997 1996
==================================================================== ================= ================
<S> <C> <C> <C> <C>
Loss and LAE 69.7 72.4 70.6 75.7
-------------------------------- ----------------- ---------------- ----------------- ----------------
Commission expense 19.4 20.2 19.2 19.8
Premium related expense 2.7 3.2 2.8 3.3
Other underwriting expense 8.8 6.4 8.4 7.0
-------------------------------- ----------------- ---------------- ----------------- ----------------
Total underwriting expense 30.9 29.8 30.4 30.1
Policyholder dividends ratio 0.9 0.7 1.1 1.1
-------------------------------- ----------------- ---------------- ----------------- ----------------
Combined ratio 101.5 102.9 102.1 106.9
================================ ================= ================= ================= ================
</TABLE>
The combined ratio for both the second quarter and first six months of 1997
improved over 1996. Factors positively impacting 1997 were lower catastrophe and
property loss activity, reduced commission structures in the Reinsurance and
Retail division, and premium tax refunds. However, the other underwriting
expense ratio increased substantially due primarily to start up costs incurred
by all ongoing operating divisions for program development. For the six months
ended June 30, 1996, the consolidated loss and LAE ratios were increased by 4.0
percentage points due to reserve strengthening of $31 million recorded in first
quarter 1996 for Other Lines.
12
<PAGE>
TIG HOLDINGS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
================================================================================
2.2 REINSURANCE
- --------------------------------------------------------------------------------
TIG's reinsurance operations are conducted through TIG Reinsurance Company ("TIG
Re") which is based in Stamford, Connecticut. TIG Re operates through eight
business units which employ similar underwriting principles but serve differing
market needs: Specialty Casualty, Traditional Treaty, London Branch, a Lloyd's
Syndicate, Reverse Flow, Specialty Property, Finite Reinsurance and Facultative.
Specialty Casualty emphasizes general liability and professional liability
lines. TIG Re is often a lead underwriter in these transactions which are
usually structured on an excess-of-loss basis. Traditional Treaty reinsures
"standard" property/casualty business. The London Branch focuses on worldwide
property exposures, with casualty underwriting having been introduced in late
1996, while a fully integrated Lloyd's vehicle was introduced in December 1996.
Reverse Flow business is characterized by the construction of an insurance
program focused around appropriate specialist-underwriters at TIG Re. Specialty
Property covers both domestic and international exposures. Finite Reinsurance
provides clients with integrated underwriting approaches to control the
volatility of financial results over time. In late 1996, TIG Re opened nine
facultative offices which currently offer casualty risks, writing both single
risk and automatic facility business.
PREMIUM. The following table summarizes TIG Re's premium production:
<TABLE>
<CAPTION>
Three Months Six Months
Ended June 30, Ended June 30,
-------------------------------------- --------------------------------------
1997 1996 1997 1996
====================================== ======================================
(In millions) NPW % NPW % NPW % NPW %
==================================================================== ======================================
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Specialty Casualty $54 39% $ 94 65% $112 39% $185 66%
Traditional Treaty 23 17% 15 10% 40 14% 23 8%
London Branch & Lloyd's 22 16% 6 4% 42 15% 14 5%
Reverse Flow 12 8% 11 8% 29 10% 20 7%
Specialty Property 15 11% 16 11% 26 9% 28 10%
Finite 7 5% 3 2% 24 9% 12 4%
Facultative 6 4% - -% 11 4% - -%
---------------------------- --------- --------- -------- --------- --------- --------- -------- ---------
Net premium written $139 100% $145 100% $284 100% $282 100%
---------------------------- --------- --------- -------- --------- --------- --------- -------- ---------
Gross premium written $156 $147 $312 $295
============================ ========= ========= ======== ========= ========= ========= ======== =========
</TABLE>
13
<PAGE>
TIG HOLDINGS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
================================================================================
Gross premium written increased by approximately 6% for both the second quarter
and first six months of 1997 as compared to 1996 as new business written more
than offset the non-renewal of several significant treaties. The majority of new
business is attributable to production in marketing segments established during
the past two years such as London Branch, a Lloyd's syndicate, Reverse Flow,
Finite and Facultative. In response to highly competitive market conditions in
its core Specialty Casualty market, TIG Re has focused on the development of new
distribution channels. However, the increase in aggregate reinsurance cessions
resulted in decreased premium retention. Net premium written declined by 4% for
second quarter 1997 and increased by less than 1% for the first six months of
1997.
Approximately 75% of business eligible for renewal for the first six months of
1997 was retained as compared to 85% for 1996. The decline is primarily
attributable to the non-renewal of two significant Specialty Casualty programs
as a result of re-underwriting initiatives instituted by TIG Re in response to
soft market conditions and re-evaluations of current treaty profitability.
Furthermore, one other Specialty Casualty program was renewed at a reduced
participation in 1997, and one Reverse Flow program has been canceled with an
effective date of January 1, 1998. Net premium related to these four programs
was $6 million and $13 million for the second quarter and the first six months
of 1997, respectively, as compared to $27 million and $58 million for the
corresponding 1996 periods.
UNDERWRITING RESULTS. The following table summarizes TIG Re's underwriting
results:
<TABLE>
<CAPTION>
Three Months Six Months
Ended June 30, Ended June 30,
--------------------------- ---------------------------
(In millions) 1997 1996 1997 1996
========================================================================== ===========================
<S> <C> <C> <C> <C>
Net premium earned $119 $136 $248 $265
Less:
Net loss and LAE incurred 84 98 179 191
Commission expense 28 34 57 67
Other underwriting expense 11 6 21 12
---------------------------------------------- ------------- ------------- ------------- -------------
Underwriting loss $(4) $(2) $(9) $(5)
---------------------------------------------- ------------- ------------- ------------- -------------
Statutory ratios
---------------------------------------------- ------------- ------------- ------------- -------------
Loss and LAE 70.9 72.1 72.4 71.9
Commission 23.0 25.5 22.9 25.5
Other underwriting 7.6 4.3 7.2 4.5
---------------------------------------------- ------------- ------------- ------------- -------------
Combined ratio 101.5 101.9 102.5 101.9
============================================== ============= ============= ============= =============
</TABLE>
Start up costs for TIG Re's facultative reinsurance unit, established in late
1996, are principally responsible for the increase in other underwriting expense
and underwriting loss for both second quarter 1997 and the first six months of
1997 as compared to 1996. In addition to facultative start-up costs, overall
premium growth has been slower than anticipated due to soft market conditions,
resulting in a 2.7 percentage point increase in TIG Re's other underwriting
expense ratio for the first six months of 1997 as compared to 1996.
TIG Re's loss and LAE ratio improved by 1.2 percentage points in the second
quarter of 1997 as compared to second quarter 1996 due to the non-renewal of
underperforming treaties and decreased premium retention. However, the loss and
LAE ratio for the first six months of 1997 increased by .5 percentage points,
reflecting the change in TIG Re's mix of business away from excess-of-loss
Specialty Casualty programs which comprised 27% of business for year-to-date
1997 as compared to 47% for year-to-date 1996. TIG Re's recent growth has been
in pro rata treaties and property programs. Due to the recent change in mix of
business, loss ratios are somewhat higher and commission rates lower than TIG
Re's historical book. Pro rata business accounted for 47% of premium written for
the first six months of 1997 as compared to 40% for 1996. Property risks
accounted for 26% of premium written for the first six months of 1997 as
compared to 22% for 1996. (See also Item 2.7 - Reserves).
14
<PAGE>
TIG HOLDINGS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
================================================================================
2.3 COMMERCIAL SPECIALTY
- --------------------------------------------------------------------------------
Commercial Specialty, based in Irving, Texas, provides specialized insurance
products through five main business units: Sports and Leisure, Workers'
Compensation, Lloyd's Syndicates, Primary Casualty and Excess Casualty. The
Sports and Leisure unit offers coverages for professional and amateur sports
events. Coverages include spectator liability and participant legal liability,
including property and liability packages for a variety of entertainment and
leisure activities. Workers' Compensation provides benefits to employees as
mandated by state laws for employment-related accidents, injuries or illnesses.
TIG participates in three Lloyd's syndicates which principally write marine,
U.K. property and aviation business. 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 offers lead umbrella and excess
umbrella policies. Lead umbrella policies provide liability protection for
manufacturing, financial, and service related business above the limits of the
primary coverage. Excess umbrella policies provide similar coverage above the
lead excess limits.
PREMIUM. Net premium written increased by 27% for the second quarter of 1997 and
26% for the first six months of 1997 as compared to the corresponding 1996
periods. This growth was derived primarily from the Workers' Compensation and
Primary Casualty units. Workers' Compensation premium increased while Primary
Casualty premium growth was attributable to new construction business. For the
first six months of 1997, Lloyd's Syndicates production was also a significant
contributor to premium growth. In December 1996, TIG acquired a majority
interest in a Lloyd's agency which manages three syndicates and established a
corporate name with an approximate 20% share of the managed syndicates' stamp
capacity. As the majority of syndicate business renews in the first quarter,
syndicate premium will not significantly impact the remainder of 1997. The
following table summarizes Commercial Specialty net premium written by business
unit:
<TABLE>
<CAPTION>
Three Months Six Months
Ended June 30, Ended June 30,
-------------------------------------- --------------------------------------
1997 1996 1997 1996
====================================== ======================================
(In millions) NPW % NPW % NPW % NPW %
=================================================================== ======================================
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Workers' Compensation $54 40% $39 36% $107 39% $96 44%
Sports and Leisure 48 35% 49 46% 86 32% 79 37%
Primary Casualty 23 17% 14 13% 40 15% 30 14%
Lloyd's Syndicates 4 3% - - 24 9% - -
Excess Casualty 7 5% 5 5% 15 5% 11 5%
---------------------------- --------- --------- -------- --------- --------- --------- -------- ---------
Net premium written $136 100% $107 100% $272 100% $216 100%
---------------------------- --------- --------- -------- --------- --------- --------- -------- ---------
Gross premium written $170 $137 $348 $281
============================ ========= ========= ======== ========= ========= ========= ======== =========
</TABLE>
15
<PAGE>
TIG HOLDINGS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
UNDERWRITING RESULTS. Underwriting results for Commercial Specialty are
presented below:
<TABLE>
<CAPTION>
Three Months Six Months
Ended June 30, Ended June 30,
--------------------------- ---------------------------
(In millions) 1997 1996 1997 1996
========================================================================= ===========================
<S> <C> <C> <C> <C>
Net premium earned $120 $100 $224 $193
Less:
Net loss and LAE incurred 83 70 155 136
Commission expense 22 18 40 35
Premium related expense 5 5 10 10
Other underwriting expense 13 8 23 15
Policyholder dividends incurred 1 1 3 2
---------------------------------------------- ------------- ------------- ------------- -------------
Underwriting (loss) $(4) $(2) $(7) $(5)
---------------------------------------------- ------------- ------------- ------------- -------------
STATUTORY RATIOS
---------------------------------------------- ------------- ------------- ------------- -------------
Loss and LAE 69.2 70.0 69.3 70.3
Commission 18.9 18.0 18.3 18.3
Premium related 3.7 4.5 3.7 4.7
Other underwriting 9.7 7.4 9.0 7.0
Policyholder dividends 2.6 2.5 3.0 4.1
---------------------------------------------- ------------- ------------- ------------- -------------
Combined ratio 104.1 102.4 103.3 104.4
============================================== ============= ============= ============= =============
</TABLE>
COMMERCIAL SPECIALTY'S underwriting loss increased by $2 million for both the
second quarter and first six months of 1997 as compared to 1996 due to increased
other underwriting expenses primarily attributable to new program start up
costs. A decline in the loss and LAE ratio for both the second quarter and first
six months of 1997 is attributable to decreased property losses compared to the
1996 periods. The commission ratio increased in second quarter 1997 due to
higher commission rates paid for a major Workers' Compensation program. The
premium related ratio decreased for both the second quarter and first six months
of 1997 due to the receipt of premium tax refunds.
16
<PAGE>
TIG HOLDINGS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
================================================================================
2.4 RETAIL
- --------------------------------------------------------------------------------
The Retail division provides personal lines and small business insurance
products through four main business units: Independent Agents, Non-standard
Auto, Alternative Distribution and Small Business. Independent Agents based in
Battle Creek, Michigan, markets principally standard personal auto and
homeowners coverages through approximately 400 active independent agents focused
in ten core states. Non-standard Auto provides auto physical damage and
liability coverages to higher risk insureds principally through managing general
agents. Alternative Distribution markets personal lines insurance through
non-traditional channels, such as direct marketing, group and affiliation
marketing, and electronic commerce. Small Business provides commercial property,
liability, and auto coverages to small business owners through independent
agents, primarily in Hawaii, Arizona and California.
PREMIUM. Retail net premium written increased by approximately 25% and 18% for
the second quarter and first six months of 1997, respectively, as compared to
the corresponding 1996 periods. Premium growth for second quarter 1997 was
driven by the Non-Standard Auto unit and resulted primarily from increased
production in California and Texas. The Alternative Distribution unit recently
commenced operations generating $6 million and $7 million of production in the
second quarter and first six months of 1997,respectively. The increasing
production is attributable to additional sales staff and licensing in additional
states. Independent Agents premium increased by approximately 9% in second
quarter 1997 as compared to 1996 due primarily to new automobile business in
core state. However, the Company re-evaluated its relationship with certain
agents and identified underperforming business which had aggregate net premium
written of approximately $24 million and $52 million for the second quarter and
first six months of 1997, respectively, as compared to $28 million and $57
million for the corresponding 1996 periods. TIG does not intend to renew this
underperforming business over the next several years.
<TABLE>
<CAPTION>
Three Months Six Months
Ended June 30, Ended June 30,
-------------------------------------- --------------------------------------
1997 1996 1997 1996
====================================== ======================================
(In millions) NPW % NPW % NPW % NPW %
===============================================================================================================
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Independent Agents $71 65% $65 74% $142 68% $131 73%
Non-standard Auto 18 16% 9 10% 29 14% 17 10%
Alternative Distributions 6 6% - - 7 3% - -
Small Business 15 13% 14 16% 32 15% 30 17%
---------------------------- --------- --------- -------- --------- --------- --------- -------- -----------
Net premium written $110 100% $88 100% $210 100% $178 100%
---------------------------- --------- --------- -------- --------- --------- --------- -------- -----------
Gross premium written $121 $99 $229 $201
============================ ========= ========= ======== ========= ========= ========= ======== ===========
</TABLE>
17
<PAGE>
TIG HOLDINGS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
================================================================================
UNDERWRITING RESULTS. Underwriting results for Retail are presented below:
<TABLE>
<CAPTION>
Three Months Six Months
Ended June 30, Ended June 30,
--------------------------- ---------------------------
(In millions) 1997 1996 1997 1996
=============================================================================================================
<S> <C> <C> <C> <C>
Net premium earned $107 $87 $206 $172
Less:
Net loss and LAE incurred 75 62 146 122
Commission expense 17 14 32 27
Premium related expense 3 4 8 9
Other underwriting expense 8 8 17 16
---------------------------------------------- ------------- ------------- ------------- -------------
Underwriting gain (loss) $4 $(1) $3 $(2)
---------------------------------------------- ------------- ------------- ------------- -------------
Statutory ratios
---------------------------------------------- ------------- ------------- ------------- -------------
Loss and LAE 69.9 71.7 70.7 71.1
Commission 15.1 15.7 15.2 16.1
Premium related 3.4 4.4 4.0 4.7
Other underwriting 9.2 8.7 9.3 8.9
---------------------------------------------- ------------- ------------- ------------- -------------
Combined ratio 97.6 100.5 99.2 100.8
---------------------------------------------- ------------- ------------- ------------- -------------
Combined ratio excluding catastrophes 97.2 98.8 98.0 98.0
============================================== ============= ============= ============= =============
</TABLE>
The improvement in Retail's underwriting results for the second quarter and the
first six months of 1997 as compared to 1996 is primarily due to decreased
property and catastrophe losses incurred during the second quarter of 1997.
Catastrophe losses contributed 0.4 percentage points to Retail's loss and LAE
ratio for the second quarter of 1997 as compared to 1.7 percentage points for
the second quarter of 1996. A general reduction in commission rates by the
Independent Agents unit and premium tax refunds also contributed to the
improvement in Retail's 1997 results.
================================================================================
2.5 OTHER LINES
- --------------------------------------------------------------------------------
Other Lines principally includes commercial products which have been placed in
run-off due to the failure to meet profitability standards. Approximately 95% of
this business was placed in run-off in the first quarter of 1996. Most premium
written in run-off programs after the "exit date" represents contractually
required renewals. Net premium written in the second quarter of 1997 was
negative due to a $14 million premium cession connection with the finalization
of a quota share reinsurance arrangement with respect to certain Excess and
Surplus lines business. Non-renewal of Other Lines business has generally
progressed at a faster rate than originally expected by management. Costs to
administer required renewals were accrued through a $100 million restructure
charge and loss and LAE reserves for Other Lines were increased by $31 million
during first quarter 1996 (See Note C. to Condensed Consolidated Financial
Statements). Underwriting results for Other Lines are presented below:
<TABLE>
<CAPTION>
Three Months Six Months
Ended June 30, Ended June 30,
--------------------------- ---------------------------
(In millions) 1997 1996 1997 1996
==============================================================================================================
<S> <C> <C> <C> <C>
Gross premium written $17 $84 $44 $198
---------------------------------------------- ------------- ------------- ------------- -------------
Net premium written $(5) $43 $ 3 $111
---------------------------------------------- ------------- ------------- ------------- -------------
Net premium earned $12 $66 $33 $145
Less:
Net loss and LAE incurred 8 51 22 138
Commission expense 3 9 8 20
Premium related expense 1 4 2 9
Other underwriting expense - 4 1 15
---------------------------------------------- ------------- ------------- ------------- -------------
Underwriting (loss) $- $(2) $- $(37)
============================================== ============= ============= ============= =============
</TABLE>
18
<PAGE>
TIG HOLDINGS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
================================================================================
2.6 INVESTMENTS
- --------------------------------------------------------------------------------
INVESTMENT MIX. TIG's ongoing investment strategies strive to provide the
Company with a balance of liquidity and return, within corporate credit
guidelines and regulatory restrictions. The following chart summarizes TIG's
investment portfolio by investment type:
<TABLE>
<CAPTION>
June 30, 1997 December 31, 1996
----------------------------- -----------------------------
Market % of Market Market % of Market
(In millions) Value Portfolio Value Portfolio
===========================================================================================================
<S> <C> <C> <C> <C>
Corporate and other bonds $1,302 30.1% $1,242 29.3%
U.S. government bonds 1,111 25.6% 1,070 25.3%
Mortgage-backed securities 1,092 25.8% 1,210 28.6%
Municipal bonds 646 14.5% 535 12.6%
------------------------------------- -------------- -------------- --------------- ---------------
Total fixed maturity investments 4,151 96.0% 4,057 95.8%
Short-term investments 150 3.5% 139 3.3%
Other investments 24 0.5% 37 0.9%
------------------------------------- -------------- -------------- --------------- ---------------
Total invested assets $4,325 100.0% $4,233 100.0%
===================================== ============== ============== =============== ===============
</TABLE>
The portfolio gross book yield at June 30, 1997 was 7.4%, as compared to 7.5% at
December 31, 1996, primarily as a result of an increase in tax preferred bonds.
Just over one-fourth of TIG's portfolio consists of mortgage-backed securities
("MBS"). AAA rated United States federal government agency mortgages now
represent approximately 92% of TIG's exposure to MBS. A risk inherent in MBS is
prepayment risk related to interest rate volatility. The underlying mortgages
may be repaid earlier or later than originally anticipated, depending on the
repayment and refinancing activity of the underlying homeowners. Should this
occur, TIG would receive paydowns on the principal amount 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. Additionally, interest rate volatility can affect the market value of
MBS. All MBS held in the portfolio can be traded in the public market.
DERIVATIVES/HEDGES. In the normal course of business, TIG may choose to hedge
some of its interest rate risk with futures contracts and/or interest rate
swaps. Alternatively, derivative financial instruments may also be utilized to
enhance prospective returns. TIG's interest rate swap arrangements generally
provide that one party pays interest at a floating rate in relation to movements
in an underlying index, and the other party pays interest at a fixed rate. While
TIG is exposed to credit risk in the event of nonperformance by the other party,
nonperformance is not anticipated due to the credit rating of the
counterparties.
No futures contracts positions were open at June 30, 1997, or December 31, 1996.
There were $14 million notional face amount of interest rate swaps at June 30,
1997, unchanged from December 31, 1996. Total derivative positions were
approximately $80 million, representing 1.85% of the total investment asset
holdings at June 30, 1997 as compared to $85 million at December 31, 1996. All
TIG derivative financial instruments were with financial institutions rated "A"
or better by one or more of the major credit rating agencies.
19
<PAGE>
TIG HOLDINGS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
================================================================================
INVESTMENT LIFE AND DURATION. TIG's objective is to maintain the weighted
average life of its investment portfolio between 8 and 11 years and the weighted
average duration between 4 and 7 years. At June 30, 1997, the weighted average
life of TIG's investment portfolio was 8.1 years compared to 10.3 years at
December 31, 1996. At June 30, 1997, the weighted average duration of TIG's
investment portfolio was 5.2 years compared to 5.6 years at December 31, 1996.
INVESTMENTS IN TBA'S. 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 and
losses only when they are realized. TIG currently maintains cash and short-term
investments with a fair value exceeding the amount of its TBA purchase
commitments. At June 30, 1997, the TBA purchase commitments amounted to $96.1
million and had a fair value of $96.5 million compared to TBA commitments of
$46.3 million and a fair value of $45.9 million at December 31, 1996.
UNREALIZED GAINS. Net pre-tax unrealized gains decreased by $4 million during
the first six months of 1997 due to a rise in market interest rates. As of June
30, 1997, the aggregate net unrealized gain on TIG's investment portfolio was
$77 million. The following is a summary of net unrealized gains (losses) by type
of security:
<TABLE>
<CAPTION>
(In millions) June 30, 1997 December 31, 1996 Change
=======================================================================================================
<S> <C> <C> <C>
Municipal bonds $32 $33 $(1)
Mortgage-backed securities (5) (9) 4
US government bonds 24 32 (8)
Corporate and other bonds 22 25 (3)
Other investments 4 - 4
-------------------------------------------- --------------------- --------------------- --------------
Net unrealized gains $77 $81 $(4)
============================================ ===================== ===================== ==============
</TABLE>
INVESTMENT INCOME. The following table displays the components of TIG's
investment income and mean after-tax investment yields. The yields include
interest earned and exclude realized investment gains and losses. These yields
are computed using the average of the end of the month asset balances during the
period.
<TABLE>
<CAPTION>
Three Months Six Months
Ended June 30, Ended June 30,
--------------------------- ---------------------------
(In millions) 1997 1996 1997 1996
======================================================================================================
<S> <C> <C> <C> <C>
Fixed maturity investments:
Taxable $68 $65 $137 $128
Tax-exempt 8 8 15 18
Short-term and other investments 1 2 3 4
----------------------------------------- ------------- ------------- ------------- -------------
Total gross investment income 77 75 155 150
Investment expenses, interest and other (4) (2) (7) (7)
----------------------------------------- ------------- ------------- ------------- -------------
Total net investment income $73 $73 $148 $143
----------------------------------------- ------------- ------------- ------------- -------------
After-tax net investment yield 4.53% 4.55% 4.55% 4.47%
========================================= ============= ============= ============= =============
</TABLE>
20
<PAGE>
TIG HOLDINGS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
================================================================================
INVESTMENT QUALITY. The table below shows the rating distribution of TIG's fixed
maturity portfolio:
<TABLE>
<CAPTION>
June 30, 1997 December 31, 1996
--------------------------- ---------------------------
Market % of Market % of
Standard & Poor's/Moody's Value Portfolio Value Portfolio
========================================================================================================
<S> <C> <C> <C> <C>
(In millions)
AAA/Aaa $2,890 69.6% $2,787 68.7%
AA/Aa 212 5.1% 194 4.8%
A/A 270 6.5% 329 8.1%
BBB/Baa 282 6.8% 232 5.7%
Below BBB/Baa 497 12.0% 515 12.7%
------------------------------------------ ------------- ------------- ------------- -------------
Total fixed maturity investments $4,151 100.0% $4,057 100.0%
========================================== ============= ============= ============= =============
</TABLE>
TIG minimizes the credit risk of its fixed maturity portfolio by investing
primarily in investment grade securities; however, management has authorized the
purchase of up to $700 million in high yield, less than investment grade
securities. The Company's high yield portfolio is comprised of bonds whose
issuers are subjected to rigorous credit analysis, including tests of
prospective profitability, liquidity, leverage, and interest coverage. This
analysis is updated regularly as financial results are released, and bonds are
constantly evaluated for their value.
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 or Moody's. Where neither Standard & Poor's nor Moody's has
assigned a rating to a particular fixed maturity issue, classification is based
on 1) ratings available from other recognized rating services, 2) ratings
assigned by the National Association of Insurance Commissioners Securities
Valuation Office (the "SVO"), or 3) an internal assessment of the
characteristics of the individual security, if no other rating is available.
The SVO assigns bond ratings for most publicly held bonds. The SVO ratings are
used by insurers when preparing their annual statutory financial statements.
State departments of insurance use the bond rating data when attempting to
determine whether an insurer's holdings are sound. Investments must fit within
certain regulatory guidelines of an insurer's domicilary state in order for an
insurer to be licensed to do business in that state. The SVO ratings range from
"1" to "6", with "1" and "2" being the higher quality, "3" being medium grade,
and "4" through "6" being lower grade obligations. As of June 30, 1997 and
December 31, 1996, approximately 87% of TIG's portfolio, measured on a statutory
carrying value basis, was invested in securities rated as "1" or "2".
21
<PAGE>
TIG HOLDINGS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
================================================================================
2.7 RESERVES
- --------------------------------------------------------------------------------
TIG maintains reserves to cover its estimated ultimate liability for losses and
loss adjustment expenses ("LAE") with respect to reported and unreported claims.
TIG's reserves for losses and LAE totaled $3,684 million and $3,760 million at
June 30, 1997 and December 31, 1996, respectively. The process of estimating
loss and LAE reserves involves the active participation of an experienced
actuarial staff with input from underwriting, claims, reinsurance, financial and
legal departments. Management, using the advice of loss reserve specialists,
makes a judgment as to the appropriate amount to record in the financial
statements. Because reserves are estimates of ultimate losses and LAE,
management monitors reserve adequacy over time, evaluating new information as it
becomes known and adjusting reserves, as necessary. Such adjustments are
reflected in current operations.
The inherent uncertainty in estimating reserves is increased when significant
changes occur. Examples of such changes include: (1) changes in production
sources for existing lines of business; (2) writings of significant blocks of
new business; (3) changes in economic conditions; and (4) changes in state or
federal laws and regulations, particularly insurance reform measures. TIG has
experienced significant changes in each of these areas during the past several
years. The inherent uncertainties in estimating reserves are greater with
respect to reinsurance than for primary insurance due to the diversity of the
development patterns among different types of reinsurance contracts, the
necessary reliance on ceding companies for information regarding reported claims
and differing reserving practices among ceding companies.
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" loss and LAE
reserves totaled $36 million and $39 million at June 30, 1997 and December 31,
1996, respectively. TIG's environmental claims activity is predominately from
hazardous waste and pollution-related claims rising from commercial insurance
policies written prior to 1985. In connection with TIG's initial public offering
in April 1993, an affiliate of TIG's former parent, Transamerica Corporation,
agreed to pay 75% of up to $119 million of reserve development and newly
reported claims, up to a maximum reimbursement of $89 million, on policies
written prior to January 1, 1993, with respect to certain environmental claims
involving paid losses and certain LAE in excess of TIG's environmental loss and
LAE reserves at December 31, 1992. At June 30, 1997, the Transamerica affiliate
had incurred no liability under this agreement.
During second quarter 1997 TIG completed a study of company-wide loss reserves
based on year-end 1996 data. The study indicated that the Company's reserve
position net of available reinsurance coverage continues to be adequate. TIG
will continue to monitor its reserve position and periodically conduct thorough
loss reserve reviews. Management considers many factors when setting reserves,
including: (i) current legal intrepretations of coverage and liability; (ii)
economic conditions; and (iii) internal methodologies which analyze TIG's
experience with similar cases, information from ceding companies and histroical
trends, such as reserving patterns, loss payments, pending levels of unpaid
claims and product mix. Based on these considerations, management believes that
adequate provision has been made for TIG loss and LAE reserves. Actual losses
and LAE paid may deviate, perhaps substantially, from such reserves.
22
<PAGE>
TIG HOLDINGS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
================================================================================
2.8 LIQUIDITY AND CAPITAL RESOURCES
- --------------------------------------------------------------------------------
Liquidity is a measure of an entity's ability to secure enough cash to meet its
contractual obligations and operating needs. TIG requires cash primarily to pay
policyholders' claims, operating expenses, and interest expenses. 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, operating expenses
and interest expenses.
CASH FLOW FROM OPERATING ACTIVITIES. The following table summarizes the
significant components of cash flow from operations:
<TABLE>
<CAPTION>
Three Months Six Months
Ended June 30, Ended June 30,
---------------------------- ---------------------------
(In millions) 1997 1996 1997 1996
========================================================================================================
<S> <C> <C> <C> <C>
Reinsurance operations $40 $27 $69 $88
Primary operations and corporate 25 (17) 36 (16)
------------------------------------- ------------- -------------- ------------- -------------
On-going operations 65 10 105 72
Run-off (Other Lines operations) (82) (60) (118) (72)
------------------------------------- ------------- -------------- ------------- -------------
Total $(17) $(50) $(13) $ -
===================================== ============= ============== ============= =============
</TABLE>
The increase in ongoing operations cash flow for second quarter and first six
months 1997 as compared to 1996 is principally attributable to premium growth
partially offset by a corresponding increase in paid losses. Primary operations
and corporate cash flow was negative for 1996 due to timing of loss payments and
reinsurance recoverable collections. Run-off cash outflow has increased during
1997 due to the planned decline in run-off premium production. Net premium
written for run-off lines was $3 million for the first six months of 1997 as
compared to $111 million for 1996. As of June 30, 1997, loss and LAE reserves
for run-off business, net of reinsurance, were approximately $412 million, 90%
of which are expected to be paid within the next 5 years.
RESTRICTIONS ON DIVIDENDS FROM INSURANCE SUBSIDIARIES. The maximum amount of
shareholders dividends which the insurance subsidiaries can pay to TIG Holdings
is limited to the greater of (i) 10% of statutory surplus as of the end of the
preceding year or (ii) the statutory net income for the preceding year except
that such amount may not exceed earned surplus. Accordingly, the maximum
dividend payout to TIG Holdings from its subsidiaries that can be made without
regulatory approval during 1997 is $155 million. TIG Holdings received $60
million in dividends from its insurance subsidiaries in the first six months of
1997, as compared to $50 million for the first six months of 1996. Aggregate
investments and cash at TIG Holdings were $54 million at June 30, 1997, compared
to $40 million at December 31, 1996.
NOTES PAYABLE. In December 1995, TIG Holdings established an unsecured revolving
line of credit with maximum borrowings of $250 million. At June 30, 1997, TIG
had no outstanding borrowings under this facility. In 1995, TIG Insurance
Company entered into a five-year $50 million credit facility of which
approximately $26 million was outstanding as of June 30, 1997 and $25 million
was outstanding as of December 31, 1996. The facility is a direct financing
arrangement with a third-party related to the sale leaseback of certain fixed
assets. In addition, TIG Holdings had $98 million of 8.125% notes payable
maturing in 2005 outstanding at June 30, 1997 and December 31, 1996.
In January 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 are being used for general corporate
purposes which includes repurchases of TIG Holding's common stock.
23
<PAGE>
TIG HOLDINGS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
================================================================================
SHAREHOLDERS' EQUITY. Shareholders' equity decreased by $43 million during the
first six months of 1997, primarily due to $110 million of common stock
repurchases and $17 million of common and preferred dividends, partially offset
by $75 million in net income and $9 million in common stock issues. Book value
per share increased to $22.80 at June 30, 1997 from $22.41 at December 31, 1996.
Excluding the impact of unrealized investment gains, the book value per share
would have been $21.84 at June 30, 1997 and $21.45 at December 31, 1996.
As of June 30, 1997, the Board of Directors has authorized common stock
repurchases of up to 16.25 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.
Through June 30, 1997, 13.8 million shares have been repurchased (21.2% of total
issued and outstanding including treasury shares at June 30, 1997) at an average
cost per share of $27.91, for an aggregate cost of $386 million.
In January and April 1997, TIG Holdings declared quarterly common stock
dividends of $.15 per share. The quarterly dividend rate for 1996 was $.05 per
share.
================================================================================
2.9 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-Q. Statements which are based on management's projections, estimates and
assumptions are forward looking statements. 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 limitations:
* changes in interest rates which could impact investment yields, the
market value of invested assets and ultimately product pricing
* changes in the frequency and severity of catastrophes which could
impact net income, reinsurance costs and cash flow
* increased competition (on the basis of price, services, or other
factors) which could generally reduce operating margins
* regulatory and legislative changes which could increase the
Company's overhead costs, increase federal and state tax
assessments, restrict access to profitable markets or force
participation in unprofitable markets
* changes in loss payment patterns which could impact cash flow and
net investment income
* 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
* 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
* loss of key management personnel which could impact the development
and execution of the Company's business strategy and impact key
customer and vendor relationships.
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.
24
<PAGE>
TIG HOLDINGS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
================================================================================
2.10 GLOSSARY
- --------------------------------------------------------------------------------
CATASTROPHE: An event that is designated to be a "catastrophe" by the Property
Claim Service Division of American Services Group, an industry body. It
generally defines events which are estimated to cause more that $5 million in
insured property damage and which affect a significant number of insureds and
insurers.
COMBINED RATIO: A combination of the underwriting expense ratio, the loss and
LAE ratio, and the policyholder dividends ratio, determined in accordance with
statutory accounting practices. A combined ratio below 100% generally indicates
profitable underwriting results. A combined ratio over 100% generally indicates
unprofitable underwriting results.
FACULTATIVE REINSURANCE: The reinsurance of all or a portion of the insurance
coverage provided by a single policy. Each policy reinsured is separately
negotiated.
FINITE REINSURANCE: Reinsurance that contains an ultimate negotiated limit of
risk to the reinsurer with respect to minimum and maximum exposure.
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 estimate for
specific accident years and for specific lines of business.
LOSS AND LAE RATIO: The ratio of incurred losses and LAE to earned premium,
determined in accordance with statutory accounting practices.
LOSS AND LAE RESERVES: Liabilities established by insurers and reinsurers to
reflect the estimated cost of claims payments that the insurer will ultimately
be required to pay in respect to insurance or reinsurance it has written.
Reserves are established for losses and for LAE, and consist of case reserves
and IBNR reserves.
NET PREMIUM EARNED: The portion of net premium written in a particular period
that is recognized for accounting purposes as income during that period.
NET PREMIUM WRITTEN: Direct premium written plus premium on assumed reinsurance
less premium on ceded business for a given period.
POLICYHOLDER DIVIDEND RATIO: The ratio of dividends paid to policyholders to
earned premium determined in accordance with statutory accounting practices.
PROGRAM BUSINESS: Tailored products developed for a particular industry segment
(i.e., sporting events, railroads) or distribution system (i.e., trade
associations, affinity groups). Programs are often developed and controlled by
managing general agents.
25
<PAGE>
TIG HOLDINGS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
================================================================================
REINSURANCE: The practice whereby one party, called the reinsurer, in
consideration of a premium paid to it agrees to indemnify another party, called
the reinsured, for part or all of the liability assumed by the reinsured under a
policy or policies of insurance which it has issued. The reinsured may be
referred to as the original or primary insurer, the direct writing company, or
the ceding company. Reinsurance does not legally discharge the primary insurer
from its liability to the insured.
RETENTION: Retention level: The amount or portion of risk which an insurer or
reinsurer retains for its own account. Losses in excess of the retention level
are paid by the reinsurer or retrocessionaire. In 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.
REVERSE FLOW BUSINESS: Alternative distribution mechanism whereby general agents
submit program business to a reinsurer. The reinsurer then works with a
reinsurance intermediary to provide a primary insurer to the transaction who
will issue the primary policy and then cede a significant portion of the risk to
the reinsurer.
TREATY REINSURANCE: The reinsurance of a specified type or category of risks
defined in a reinsurance agreement (a "treaty") between a primary insurer or
other reinsured and a reinsurer. Typically, in treaty reinsurance, the primary
insurer or reinsured is obligated to offer and the reinsurer is obligated to
accept a specified portion of all such type or category of risks originally
underwritten by the primary insurer or reinsured.
UNDERWRITING: The insurer's process of reviewing applications submitted for
insurance coverage, deciding whether to accept all or part of the coverage
requested and determining the applicable premium.
UNDERWRITING EXPENSE RATIO: The ratio of underwriting expenses to net premium
written, determined in accordance with statutory accounting practices.
UNDERWRITING EXPENSES: The aggregate of policy acquisition costs, including
commissions, and the portion of administrative, general, and other expenses
attributable to underwriting operations.
UNDERWRITING RESULTS: The measure of profitability of the insurance operations
of an insurer, calculated as the result of earned premium, less losses, loss
expenses, and underwriting expenses. Underwriting results is an indicator of a
company's underwriting success.
WORKERS' COMPENSATION INSURANCE: Insurance that covers medical care,
rehabilitation, and lost wages of employees who suffer work-related injuries,
and provides death benefits for dependents of employees killed in work-related
accidents.
26
<PAGE>
TIG HOLDINGS, INC.
PART II. OTHER INFORMATION
================================================================================
ITEM 1. LEGAL PROCEEDINGS
- --------------------------------------------------------------------------------
TIG's insurance subsidiaries are routinely engaged in litigation in the normal
course of their business. As a liability insurer, the Company defends
third-party claims brought against its insureds. As an insurer, the Company
defends against coverage claims.
On January 11, 1994, a Los Angeles County Superior Court jury returned a verdict
of $28 million for punitive damages against TIG Insurance Company ("TIC") in
Talbot Partners v. Cates Construction, Inc. and TIC (the "Talbot Case"). The
award arose out of TIC's handling of a surety bond claim on a construction
project. On March 28, 1997, the California Court of Appeal reduced the trial
court's punitive damage award to $15 million. On July 23, 1997, the California
Supreme Court granted TIC's petition to review the Court of Appeal's decision.
Management believes that the ultimate liability arising from the Talbot Case
will not materially impact consolidated operating results.
================================================================================
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- --------------------------------------------------------------------------------
At the Company's annual meeting of stockholders on May 1, 1997, the stockholders
elected four director's each for terms expiring at the annual meeting of
stockholders in the year 2000. The voting results are as follows:
Election of Director for a term
expiring in 2000:
For Withheld
------------ ----------
Joel S. Ehrenkranz 49,860,318 127,138
The Rt. Hon. Lord Moore 49,858,093 129,363
William W. Priest, Jr. 49,861,029 126,427
Ann W. Richards 49,839,522 147,934
Directors whose terms continued and the years their terms expire are as follows:
George B. Bietzel (1998), William G. Clark (1999), George D. Gould (1998), Don
D. Hutson (1998), Jon W. Rotenstreich (1999), Harold Tanner (1999).
The stockholders also ratified the appointment of Ernst & Young LLP to serve as
independent auditors of the Company for the year 1997. The voting results are as
follows:
Abstain and
Broker
For Against Non-Votes
---------------- ----------------- ----------------
49,805,020 32,150 99,086
27
<PAGE>
TIG HOLDINGS, INC.
PART II. OTHER INFORMATION
================================================================================
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
- --------------------------------------------------------------------------------
(a) EXHIBITS:
EXHIBIT 3.1: Amended and Restated Certificates 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 4.3: Junior Subordinated Indenture, dated January 30, 1997, between
TIG Holdings, Inc. and The Chase Manhattan Bank, as Trustee (incorporated
by reference to Exhibit 4.3 to TIG Holdings' Quarterly Report on Form 10-Q
for the quarter ended March 31, 1997).
EXHIBIT 4.4: Certificate of Trust of TIG Capital Trust I, dated January 24,
1997 between TIG Holdings, Inc. and The Chase Manhattan Bank, Chase
Manhattan Bank Delaware, as Trustees (incorporated by reference to Exhibit
4.4 to TIG Holdings' Quarterly Report on Form 10-Q for the quarter ended
March 31, 1997).
EXHIBIT 4.5: Capital Securities Guarantee Agreement, dated January 30,
1997, between TIG Holdings, Inc. and The Chase Manhattan Bank, as Trustee
(incorporated by reference to Exhibit 4.5 to TIG Holdings' Quarterly Report
on Form 10-Q for the quarter ended March 31, 1997).
EXHIBIT 4.6: Trust Agreement, dated January 24, 1997, between TIG Holdings,
Inc. and The Chase Manhattan Bank, Chase Manhattan Bank Delaware, as
Trustees (incorporated by reference to Exhibit 4.6 to TIG Holdings'
Quarterly Report on Form 10-Q for the quarter ended March 31, 1997).
EXHIBIT 4.7: Amended and Restated Trust Agreement, dated January 30, 1997,
between TIG Holdings, Inc., the Administrators named therein and The Chase
Manhattan Bank, Chase Manhattan Bank Delaware, as Trustees (incorporated
by reference to Exhibit 4.7 to TIG Holdings' Quarterly Report on Form 10-Q
for the quarter ended March 31, 1997).
EXHIBIT 4.8: Form of Capital Securities Certificate of TIG Capital Trust I,
(included as Exhibit E to Exhibit 4.7).
EXHIBIT 10.1: Separation Agreement (in replacement of employment
agreement)dated May 1, 1997, between TIG Holdings, and Don D. Hutson.
EXHIBIT 11: Computation of Earnings Per Share.
(b) The Company did not file any reports on Form 8-K during the three months
ended June 30, 1997.
28
<PAGE>
================================================================================
EXHIBIT 10:1
================================================================================
<PAGE>
SEPARATION AGREEMENT
THIS SEPARATION AGREEMENT (this "Separation Agreement") is made and
entered into as of this 1st day of May, 1997 by and between Don D. Hutson,
residing at 3401 Woodhaven Court, Dallas, Texas 75234 (the "Executive"),
and TIG Holdings, Inc., a Delaware corporation, having its principal
executive offices at 65 East 55th Street, New York, New York 10022 (the
"Corporation").
W I T N E S E T H:
WHEREAS, the Executive has been employed by the Corporation as its
President and Chief Operating Officer pursuant to an Employment Agreement,
dated as of April 19, 1993 (the "Employment Agreement"); and
WHEREAS, the Executive and the Corporation have agreed that the
Executive shall resign and retire from his positions as President and Chief
Operating Officer of the Corporation, and as a member of the Board of
Directors of the Corporation (the "Board"), at a date not later than
December 31, 1997, but in the event that such resignation and retirement
occur prior to December 31, 1997, the Executive may at his election remain
employed by the Corporation in a non-officer capacity until a date not
later than December 31, 1997; and
WHEREAS, the Executive and the Corporation desire to settle fully and
finally all matters between them, including, but not limited to, any issues
that might arise out of the Executive's employment or the Employment
Agreement or the termination of his employment, and accordingly, have
agreed that it is in the best interests of the Corporation and the
Executive that they enter into this Separation Agreement;
NOW, THEREFORE, in consideration of the mutual covenants and promises
contained herein, the parties hereto, intending to be legally bound, agree
as follows:
1
<PAGE>
1. Agreement to Resign.
1.1. The Executive hereby resigns, effective December 31, 1997 or such
earlier date as the Executive and the Corporation may mutually agree (the
earlier of such dates being referred to herein as the "Resignation Date"),
as President and Chief Operating Officer of the Corporation, and from all
other officer and employee positions with the Corporation and its
subsidiaries and affiliates. The Executive also hereby resigns, effective
the Resignation Date, the Executive's membership on the Board (and all
committees of the Board), and his membership on the boards of directors
(and any committees thereunder) of the Corporation's subsidiaries and
affiliates.
1.2. Notwithstanding the foregoing, in the event that the Resignation
Date occurs prior to December 31, 1997, the Executive may in his sole
discretion elect, by delivery of a written notice to the Corporation on or
prior to the Resignation Date (the "Election"), to remain employed by the
Corporation (unless terminated for cause), until a date not later than
December 31, 1997 (such date being herein referred to as the "Election
Date"), at his current rate of base salary compensation, as a non-officer
employee reporting solely and directly to the Chief Executive Officer of
the Corporation (the "CEO") and performing such services, consistent with
his current status with the Corporation and experience, as the CEO may from
time to time direct.
1.3. In any event, the Executive's employment with the Corporation and
its subsidiaries and affiliates shall automatically terminate (unless
earlier terminated for cause) at the close of business on the earlier of
(a) the Resignation Date, if the Executive does not make the Election on or
prior to the Resignation Date, (b) the Election Date (which date shall be
not later than December 31, 1997 and shall be set forth in a written notice
from the Executive to the Corporation), if the Executive makes the Election
on or prior to the Resignation Date, or (c) December 31, 1997 (the earlier
of such dates being referred to herein as the "Termination Date").
2
<PAGE>
1.4. Until the Termination Date, the Corporation will continue to pay
the Executive at his current rate of base salary ($600,000 per annum) and
Executive shall be entitled to an appropriate office of a size and with
furnishings and other appointments, and to secretarial and other
assistance, as is commensurate with the Executive's position and duties
with the Corporation and/or its subsidiaries. Until the Termination Date,
the Executive shall be considered an executive employee of the Corporation
and as such shall be entitled to participate in and to receive all benefits
under any and all welfare benefit plans, practices, policies and programs
(including, without limitation, vacation plan) maintained or provided by
the Corporation and/or its subsidiaries, in accordance with their terms,
for the benefit of senior executives of the Corporation. Until the
Termination Date, the Executive shall be entitled to perquisites and/or
fringe benefits in accordance with the plans, practices, policies and
programs maintained or provided by the Corporation and/or its subsidiaries
from time to time for the benefit of senior executives of the Corporation.
Upon termination of the Executive's employment with the Corporation and its
subsidiaries in accordance herewith (i) the Executive shall be entitled to
receive from the Corporation, and the Corporation shall promptly pay to the
Executive, all amounts, if any, constituting (x) the Executive's base
salary through the Termination Date at the aforementioned rate in effect,
(y) any compensation previously deferred by the Executive (together with
any accrued interest thereon) and not yet paid by the Corporation, and (z)
any accrued vacation pay not yet paid by the Corporation, (ii) the
Executive shall be entitled to receive from the Corporation, and the
Corporation shall promptly fund, pay or grant directly to the Executive, as
the case may be, such benefits, if any, that are due and payable to the
Executive upon termination of employment under the terms of the
aforementioned welfare benefit plans, practice, policies and programs and
fringe benefit plans, practices, policies and programs. Upon termination of
the Executive's employment with the Corporation in accordance herewith, the
Executive shall cease to have any status as an officer or employee of the
Corporation and/or its subsidiaries or affiliates and, except as provided
in, or pursuant to, this Separation Agreement, the Executive shall not be
entitled to participate in the aforementioned fringe benefit and welfare
benefit plans, practices, policies and programs, or to any payments or
benefits from the Corporation or any of its subsidiaries or affiliates.
3
<PAGE>
1.5. Upon the execution of this Separation Agreement, the Employment
Agreement, including specifically any and all covenants and provisions
contained therein which, under the terms of the Employment Agreement are to
survive the termination of the Employment Agreement, shall automatically
terminate, and the Executive shall thereupon cease to be entitled to
receive any payments or benefits under the Employment Agreement.
2. Consulting Arrangement. On or prior to the Termination Date, at the
election of the Executive by written notice to the Corporation, the
Corporation will enter into a Consulting Agreement with the Executive on
terms mutually satisfactory to the parties in their sole discretion (the
"Consulting Agreement"), pursuant to which the Executive will agree to
provide consulting services as specified therein.
3. Cash Payments. In addition to the other benefits to be paid by the
Corporation to the Executive pursuant to this Separation Agreement or
specifically provided for hereunder, and in lieu of any other cash payments
or benefits to which the Executive may be entitled under the Employment
Agreement or otherwise as a result of the termination of his employment,
the Corporation shall make ten (10) annual cash payments to the Executive
or, in the event of the Executive's death, to his designated beneficiary
or, in the absence of any such designation, to his estate, each in the
amount of $500,000 and payable within the first ten (10) business days of
each calendar year following the Termination Date, commencing with the
calendar year beginning January 1, 1998. Notwithstanding the foregoing, if
a Change of Control (as defined below) occurs prior to the Executive, or
his designated beneficiary or estate, as the case may be, receiving all of
the ten (10) annual cash payments specified in the previous sentence, the
Executive, or his designated beneficiary or estate, as the case may be,
shall, upon thirty (30) days' prior written notice to the Corporation, be
entitled to receive in one lump sum an amount equal to the present value of
such remaining annual cash payments, determined using a discount rate equal
to 8% per annum. For the purpose of this Agreement, "Change of Control"
shall mean:
4
<PAGE>
(a) The acquisition 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 outstanding shares of common stock, par value $.01 per
share, of the Corporation (the "Common Stock"), or (ii) the combined voting
power of the voting securities of the Corporation 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: (x) any acquisition by any employee benefit plan (or related
trust) sponsored or maintained by the Corporation or any of its
subsidiaries, or (y) 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 on the date hereof 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 date hereof whose election, or nomination for election by
the Corporation's stockholders, 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
5
<PAGE>
(c) Approval by the stockholders of the Corporation 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 stockholders of the Corporation of (i) a complete
liquidation or dissolution of the Corporation, or (ii) the sale or other
disposition of all or substantially all of the assets of the Corporation,
other than to a direct or indirect wholly-owned subsidiary of the
Corporation. For purposes of this Agreement and without limiting the
generality of the preceding sentence, the sale or other disposition by the
Corporation of more than 50% of the common stock or the voting securities
(entitled to vote generally in the election of directors) of TIG Insurance
Corporation shall be deemed to constitute a sale or other disposition of
substantially all the assets of the Corporation.
4. Retirement Status. The Compensation Committee of the Board has
approved a plan, a copy of which is attached hereto as Exhibit A (the
"Retirement Plan"), providing for, among other things, the Executive's
coverage under the TIG Insurance Company Health Care Plan (which plan
includes spousal coverage) and the Executive's status as an individual in
"Retirement" and the entitlements arising as a result of such status
following his termination of employment under the Corporation's 1993
Long-Term Incentive Plan and the Corporation's 1996 Long-Term Incentive
Plan. By signing this Separation Agreement, the Executive agrees to be
bound by the terms of the Retirement Plan in all respects.
6
<PAGE>
5. Employee Benefits Continuation. From and after January 1, 1998, and
regardless of whether the Termination Date occurs on or prior to December
31, 1997, in addition to the cash payments payable under Section 3 of this
Separation Agreement and any benefits to which the Executive or his
designated beneficiary and/or estate may be entitled under the Retirement
Plan, (i) until he reaches age 65, the Executive shall receive life
insurance coverage equal to $600,000 through the TIG Holdings, Inc. Group
Term Life program, and (ii) until he reaches age 70, the Executive shall be
entitled to participate in any annual physical program and any financial
planning program maintained by the Corporation for senior officers. From
and after the Termination Date, the Executive shall not be treated as or
deemed to be an employee for purposes of participation or eligibility under
any plan, program or arrangement maintained or sponsored by the Corporation
or any of its subsidiaries or affiliates, other than as specifically
provided in the preceding sentence and except that, if the Termination Date
is December 31, 1997, the CEO will recommend to the Compensation Committee
that the Executive be awarded a lump sum cash bonus in the amount of
$350,000, to be paid on or before January 31, 1998, in respect of services
rendered by the Executive during 1997, on the condition that the Executive
shall enter into a mutual release with the Corporation substantially in the
form attached hereto as Exhibit B (the "General Release") concurrently with
the Executive's receipt of the $350,000 bonus payment.
6. Confidential Information. During and after the Executive's
employment with the Corporation, the Executive shall hold in confidence and
shall not, without the prior written consent of the Corporation,
communicate, use or divulge to any person or entity any secret,
confidential or proprietary information, knowledge or data (collectively,
"Confidential Information") relating to the Corporation (and/or any of its
subsidiaries or affiliates) which has been obtained by the Executive during
or by reason of his employment with the Corporation and/or any of its
subsidiaries or affiliates, or by reason of his serving on the board of
directors of the Corporation or any such subsidiary or affiliate.
Notwithstanding the foregoing, for purposes hereof, the term "Confidential
Information" shall not include any information which (i) is or becomes
publicly available without breach of this Agreement or (ii) the Executive
rightfully received from a third party without obligation of confidence.
7
<PAGE>
7. Non-Disparagement. Unless otherwise required by a court of
competent jurisdiction, pursuant to any recognized subpoena power or as is
reasonably necessary in connection with any adversarial process between the
parties hereto, the Executive agrees and promises that the Executive will
not hereafter make any oral or written statements or reveal any information
to any person, company, or agency which may be construed to be negative,
disparaging or damaging to the reputation or business of the Corporation
and/or any of its subsidiaries or affiliates (and their respective
directors and officers).
8. Nonsolicitation. For a period of four (4) years following the
Termination Date, the Executive shall not knowingly, directly or indirectly
(a) solicit or induce customers, clients, suppliers, agents or other
persons under contract or otherwise associated or doing business with the
Corporation or any subsidiary or affiliate of the Corporation (a "Business
Associate"), or any of such persons or entities with whom the Corporation
or any of its subsidiaries or affiliates is in active negotiations to
become a Business Associate, to terminate, reduce or alter any such
association or business with or from the Corporation or any subsidiary or
affiliate of the Corporation, and/or (b) solicit or induce any person then
in the employment of the Corporation or any subsidiary or affiliate of the
Corporation or any consultant to the Corporation or any subsidiary or
affiliate of the Corporation to (i) terminate such employment or consulting
arrangement, and/or (ii) accept employment, or enter into any consulting
arrangement, with anyone other than the Corporation or any subsidiary or
affiliate of the Corporation.
8
<PAGE>
9. Releases.
9.1. In consideration of the payments and benefits to the Executive
under this Separation Agreement and for other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged
by the Executive, the Executive knowingly, voluntarily and unconditionally
hereby forever waives, releases and discharges, and covenants never to sue
on, any and all claims, liabilities, causes of actions, judgments, orders,
assessments, penalties, fines, expenses and costs (including without
limitation attorneys' fees) and/or suits of any kind arising out of any
actions, events or circumstances before the date of this Separation
Agreement ("Claims") which the Executive has, ever had or may have, or
which the Executive's heirs, executors, administrators and assigns, or any
of them hereafter can, shall or may have, against the Corporation and/or
any of its subsidiaries, shareholders, officers, directors, agents,
affiliates, employee benefit plan fiduciaries, trustees and administrators,
and employees, past or present, and their respective heirs, successors and
assigns (collectively, the "Releasees"), including, without limitation, any
Claims arising in whole or in part from the Executive's employment with the
Corporation and/or any of its subsidiaries or affiliates or the Employment
Agreement or the termination of the Executive's employment with the
Corporation or the manner of such termination; provided, however, that this
Section 9 shall not apply to any of the obligations of the Corporation
specifically provided for in or pursuant to this Separation Agreement. This
Separation Agreement is intended as a full and final settlement and
compromise of each, every and all Claims of every kind and nature, whether
known or unknown, which have been or could be asserted against any of the
Releasees, including, without limitation:
(1) any Claims arising out of any employment agreement or other
contract (including, without limitation, the Employment Agreement),
side-letter, resolution, promise or understanding of any kind, whether
written or oral or express or implied; and
9
<PAGE>
(2) Any claims arising under any federal, state, or local civil
rights, human rights, anti-discrimination, labor, employment, contract or
tort law, rule, regulation, order or decision, including, without
limitation, the family and medical leave act, the employee retirement
income security act of 1974, the americans with disabilities act of 1990,
42 u.S.C. Section 12101 et seq., And title vii of the civil rights act of
1964, 42 u.S.C. Section 2000 et seq., And as each of these laws have been
or will be amended.
9.2. In consideration of the obligations of the Executive under this
Separation Agreement and for other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged by the
Corporation, the Corporation knowingly, voluntarily and unconditionally
hereby forever waives, releases and discharges, and covenants never to sue
on, any and all Claims which the Corporation has, ever had or may have,
including, without limitation, any Claims arising in whole or in part from
the Executive's employment with the Corporation and/or any of its
subsidiaries or affiliates or the Employment Agreement or the termination
of the Executive's employment with the Corporation or the manner of said
termination; provided, however, that this Section 9 shall not apply to any
of the obligations of the Executive specifically provided for in or
pursuant to this Separation Agreement. This Separation Agreement is
intended as a full and final settlement and compromise of each, every and
all Claims of every kind and nature, whether known or unknown, which have
been or could be asserted against the Executive and his respective heirs,
successors and assigns.
9.3. Notwithstanding anything to the contrary in this Section 9, the
Executive does not release any claim he may have under any employee benefit
plan, program or arrangement (including, without limitation, any qualified
plans and related restoration plans) in which he was a participant during
his employment with the Corporation or any of its subsidiaries for the
payment of a benefit thereunder to which he would be entitled upon his
termination of employment in accordance with the terms of any such plan,
program or arrangement.
10
<PAGE>
9.4. The Executive acknowledges that the Executive has carefully read
and fully understands all of the terms of this Separation Agreement,
including without limitation the releases contained herein. The Executive
further acknowledges that the Executive has entered into this Separation
Agreement willingly, freely, without duress or coercion and after having
had explained to him by counsel of his choice, his rights under all laws
referred to in this Separation Agreement and the terms and consequences of
this Separation Agreement. The Executive also acknowledges that he has been
given the opportunity to take at least twenty-one (21) days to consider and
accept or reject this Separation Agreement and has chosen to execute,
deliver and agree to this Separation Agreement as of the date of this
Separation Agreement. The Executive agrees that the Executive has been
given a fair, reasonable and sufficient time to fully consider all terms.
The Executive may revoke this Separation Agreement at any time within seven
(7) days after the date of execution of this Separation Agreement, by
notifying the Corporation in writing. The Executive agrees that prior to
any such revocation and in order for such revocation to be effective, he
shall pay back to the Corporation any amounts or benefits received pursuant
to this Separation Agreement.
9.5. Except as specifically provided for in or pursuant to this
Separation Agreement, the Executive shall not be entitled to any
compensation, remuneration or other payments from the Corporation and/or
the Corporation's subsidiaries or affiliates and the Corporation (and its
subsidiaries and affiliates) shall have no further obligations to the
Executive, including without limitation under any contract, plan,
agreement, understanding or resolution. Without limiting the foregoing,
except as expressly provided for in or pursuant to this Separation
Agreement, the Executive shall have no further rights and shall be entitled
to no further benefits under the Employment Agreement, which the Executive
agrees is superseded in all respects by this Separation Agreement and shall
be of no further force or effect on and as of the date hereof.
11
<PAGE>
10. Scope of Agreement; Enforceability. This Separation Agreement
(together with the exhibits hereto) constitutes the entire understanding
and agreement between the Corporation and the Executive with regard to all
matters herein and supersedes all prior oral and written agreements and
understandings of the parties with respect to such matters, whether express
or implied, including, to the extent provided in Section 9.5 of this
Separation Agreement, the Employment Agreement. Notwithstanding the
foregoing, this Separation Agreement shall not supersede the stock option
and restricted share award agreements previously entered into between the
Corporation and the Executive on the terms of the Corporation's 1993
Long-Term Incentive Plan and 1996 Long-Term Incentive Plan, which shall
survive the execution and delivery of this Separation Agreement and the
General Release and the termination of the Executive's employment with the
Corporation and shall remain binding upon the Corporation and the Executive
in accordance with their respective terms. This Separation Agreement shall
inure to the benefit of and be enforceable by the Executive's heirs,
beneficiaries and/or legal representatives. This Separation Agreement shall
inure to the benefit of and be binding upon the Corporation and its
respective successors and assigns. If any term or provision of this
Separation Agreement, or the application thereof to any person or
circumstances, will to any extent be invalid or unenforceable, the
remainder of this Separation Agreement, or the application of such terms to
persons or circumstances other than those as to which it is invalid or
unenforceable, will not be affected thereby, and each term of this
Separation Agreement will be valid and enforceable to the fullest extent
permitted by law.
12
<PAGE>
11. Remedies. The Executive acknowledges and agrees that the
Corporation will have no adequate remedy at law for a breach of any of the
provisions of Sections 6, 7 and/or 8 of this Separation Agreement, and
would be irreparably harmed, if the Executive breaches any of the
provisions of Sections 6, 7 and/or 8 of this Separation Agreement. The
Executive further agrees that the Corporation shall be entitled to
equitable and/or injunctive relief to prevent any breach or threatened
breach of Sections 6, 7 and/or 8 of this Separation Agreement, and to
specific performance of each of the terms of such Sections in addition to
any other legal or equitable remedies that the Corporation may have. The
Executive also agrees that he shall not, in any equity proceeding relating
to the enforcement of the terms of Sections 6, 7 and/or 8 of this
Separation Agreement, raise the defense that the Corporation has an
adequate remedy at law. Anything herein to the contrary notwithstanding,
the Corporation specifically hereby acknowledges and agrees that its
remedies hereunder, in the event of a breach or an alleged breach of this
Separation Agreement by the Executive, shall not include the right of
offset against amounts otherwise due to the Executive hereunder.
12. Amendments/Waiver. This Separation Agreement may not be amended,
waived, or modified otherwise than by a written agreement executed by the
parties to this Separation Agreement or their respective successors and
legal representatives. No waiver by any party to this Separation Agreement
of any breach of any term, provision or condition of this Separation
Agreement by the other party shall be deemed a waiver of a similar or
dissimilar condition or provision at the same time, or any prior or
subsequent time.
13. Notices. All notices and other communications hereunder shall be
in writing and shall be deemed effective upon receipt if by hand-delivery
to the other party, receipt if by facsimile transmission, the next business
day if by overnight courier, or the third business day after mailing if by
registered or certified mail, return receipt requested, postage prepaid,
addressed as follows:
If to the Executive: Don D. Hutson
3401 Woodhaven Court
Dallas, Texas 75234
If to the Corporation: TIG Holdings, Inc.
65 East 55th Street
New York, New York 10022
Att: General Counsel
or to such other address as either party shall have furnished to the
other in writing in accordance herewith.
14. Governing Law; Binding Effect. This Separation Agreement shall be
governed by and construed and enforced in accordance with the laws of the
State of New York without reference to its choice of law provisions, and
shall be binding upon the parties and their respective heirs, executors,
successors and assigns.
15. Counterparts. This Separation Agreement may be executed in
counterparts, each of which shall be deemed to be an original, but which
together shall constitute one and the same instrument.
16. Withholding. The Corporation may withhold from any amounts or
benefits payable under this Separation Agreement such federal, state and
local income and payroll taxes as shall be required to be withheld pursuant
to any applicable law or regulation.
13
<PAGE>
IN WITNESS WHEREOF, the Corporation and the Executive have caused this
Separation Agreement to be executed on and as of the date first above
written.
TIG HOLDINGS, INC.
By:__________________________________
Name:
Title:
__________________________________
Executive
14
<PAGE>
EXHIBIT A
TIG HOLDINGS, INC.
SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN
FOR DON D. HUTSON
I. Introduction
TIG Holdings, Inc. (the "Company") hereby establishes the TIG
Holdings, Inc. Supplemental Executive Retirement Plan for Don D. Hutson
(the "Plan") to provide supplemental benefits to Don D. Hutson
("Participant").
II. Participation
(a) Participant will voluntarily retire from the Company and all
related and affiliated entities (collectively, the "Employer") on or before
December 31, 1997;
(b) Participant will sign a Separation Agreement satisfactory to the
Company's General Counsel, which: (i) waives and releases the Employer and
related parties from any liability in connection with participant's
employment or the termination thereof; and (ii) contains such other terms
and conditions deemed appropriate by the Company's General Counsel.
III. Benefits
Participant shall be entitled to the following benefits hereunder upon
his voluntary retirement and compliance with all terms and conditions
specified above:
(a) Participant shall be deemed to have satisfied the definition of
"Retirement" contained in his stock option agreements and restricted stock
award agreements (as amended by resolution of the Compensation Committee of
the Board of Directors of the Company on February 21, 1996 and May 2, 1996,
respectively) under the TIG Holdings, Inc. 1993 Long-Term Incentive Plan,
and contained in Section 2.21 of the TIG Holdings, Inc. 1996 Long-Term
Incentive Plan ("1996 LTIP"), regardless of his actual age at time of
retirement.
(b) Participant shall be entitled to retiree medical coverage under
the TIG Insurance Company Retiree Health Care Plan ("Medical Plan")
regardless of his actual age and years of service. However, such coverage
(i) is subject to all other terms and conditions of the Medical Plan,
including payment of the appropriate contributions or premiums, as
established from time to time; (ii) is not considered a "vested" benefit
thereunder; and (iii) is subject to amendments that may be made to the
Medical Plan from time to time and to termination of the Medical Plan at
any time. Any retiree medical coverage will be in lieu of any rights to
COBRA continuation coverage.
15
<PAGE>
IV. Miscellaneous
The Plan shall be binding upon and shall inure to the benefit of the
Employer, its successors, purchasers, and assigns, and Participant and his
heirs, administrators, successors and assigns.
ATTEST TIG HOLDINGS, INC.
________________________ By: ________________________
Secretary Title: ________________________
16
<PAGE>
EXHIBIT B
GENERAL RELEASE
THIS GENERAL RELEASE (this "General Release") is made and entered into
as of this ____ day of _____, 1997 by and between Don D. Hutson, residing
at 3401 Woodhaven Court, Dallas, Texas 75234 (the "Executive"), and TIG
Holdings, Inc., a Delaware corporation, having its principal executive
offices at 65 East 55th Street, New York, New York 10022 (the
"Corporation").
W I T N E S E T H:
WHEREAS, the Executive and the Corporation have entered into a
Separation Agreement dated as of May 1, 1997 (the "Separation Agreement")
providing for the terms upon which the Executive has, on the date hereof,
resigned and retired from his positions with the Corporation and its
subsidiaries and affiliates and as a member of the Board of Directors of
the Corporation; and
WHEREAS, the Separation Agreement contemplates that, on the
"Termination Date" under the Separation Agreement, the Executive and the
Corporation will enter into this General Release;
NOW, THEREFORE, the parties hereto, intending to be legally bound,
agree as follows:
17
<PAGE>
1. In consideration of the payments and benefits to the Executive
under the Separation Agreement, including without limitation the
recommendation of the Chief Executive Officer of the Corporation (the
"CEO") referred to in Section 5 of the Separation Agreement, and for other
good and valuable consideration, the receipt and sufficiency of which are
hereby acknowledged by the Executive, the Executive knowingly, voluntarily
and unconditionally hereby forever waives, releases and discharges, and
covenants never to sue on, any and all claims, liabilities, causes of
actions, judgments, orders, assessments, penalties, fines, expenses and
costs (including without limitation attorneys' fees) and/or suits of any
kind arising out of any actions, events or circumstances before the date of
this General Release ("Claims") which the Executive has, ever had or may
have, or which the Executive's heirs, executors, administrators and
assigns, or any of them hereafter can, shall or may have, against the
Corporation and/or any of its subsidiaries, shareholders, officers,
directors, agents, affiliates, employee benefit plan fiduciaries, trustees
and administrators, and employees, past or present, and their respective
heirs, successors and assigns (collectively, the "Releasees"), including,
without limitation, any Claims arising in whole or in part from the
Executive's employment with the Corporation and/or any of its subsidiaries
or affiliates, either before or after the execution and delivery of the
Separation Agreement, or the Employment Agreement dated as of April 19,
1993 between the Executive and the Corporation (the "Employment
Agreement"), or the termination of the Executive's employment with the
Corporation or the manner of such termination; provided, however, that this
paragraph shall not apply to any of the obligations of the Corporation
specifically provided for in or pursuant to the Separation Agreement. This
General Release and the Separation Agreement are intended as a full and
final settlement and compromise of each, every and all Claims of every kind
and nature, whether known or unknown, which have been or could be asserted
against any of the Releasees, including, without limitation:
18
<PAGE>
(1) any Claims arising out of any employment agreement or other
contract (including, without limitation, the Employment Agreement),
side-letter, resolution, promise or understanding of any kind, whether
written or oral or express or implied; and
(2) any Claims arising under any federal, state, or local civil
rights, human rights, anti-discrimination, labor, employment, contract or
tort law, rule, regulation, order or decision, including, without
limitation, the Family and Medical Leave Act, the Employee Retirement
Income Security Act of 1974, the Americans with Disabilities Act of 1990,
42 U.S.C. Section 12101 et seq., and Title VII of the Civil Rights Act of
1964, 42 U.S.C. Section 2000 et seq., and as each of these laws have been
or will be amended.
2. In consideration of the obligations of the Executive under the
Separation Agreement and for other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged by the
Corporation, the Corporation knowingly, voluntarily and unconditionally
hereby forever waives, releases and discharges, and covenants never to sue
on, any and all Claims which the Corporation has, ever had or may have,
including, without limitation, any Claims arising in whole or in part from
the Executive's employment with the Corporation and/or any of its
subsidiaries or affiliates, either before or after the execution and
delivery of the Separation Agreement, or the Employment Agreement or the
termination of the Executive's employment with the Corporation or the
manner of said termination; provided, however, that this paragraph shall
not apply to any of the obligations of the Executive specifically provided
for in or pursuant to the Separation Agreement. This General Release and
the Separation Agreement are intended as a full and final settlement and
compromise of each, every and all Claims of every kind and nature, whether
known or unknown, which have been or could be asserted against the
Executive and his respective heirs, successors and assigns.
19
<PAGE>
3. Notwithstanding anything to the contrary in the Separation
Agreement or in this General Release, the Executive does not release any
claim he may have under any employee benefit plan, program or arrangement
(including, without limitation, any qualified plans and related restoration
plans) in which he was a participant during his employment with the
Corporation or any of its subsidiaries for the payment of a benefit
thereunder to which he would be entitled upon his termination of employment
in accordance with the terms of any such plan, program or arrangement.
4. The Executive acknowledges that the Executive has carefully read
and fully understands all of the terms of this General Release and the
Separation Agreement, including without limitation the releases contained
herein and therein. The Executive further acknowledges that the Executive
has entered into this General Release and the Separation Agreement
willingly, freely, without duress or coercion and after having had
explained to him by counsel of his choice, his rights under all laws
referred to in this General Release and the Separation Agreement and the
terms and consequences of this General Release and the Separation
Agreement. The Executive also acknowledges that he has been given the
opportunity to take at least twenty-one (21) days to consider and accept or
reject this General Release and has chosen to execute, deliver and agree to
this General Release as of the date of this General Release. The Executive
agrees that the Executive has been given a fair, reasonable and sufficient
time to fully consider all terms. The Executive may revoke this General
Release at any time within seven (7) days after the date of execution of
this General Release by notifying the Corporation in writing. The Executive
agrees that, in the event of any such revocation, the CEO may withdraw any
recommendation made to the Compensation Committee of the Board of Directors
of the Corporation pursuant to the last sentence of Section 5 of the
Separation Agreement and that, prior to any such revocation and in order
for such revocation to be effective, he shall pay back to the Corporation
any cash bonus in respect of services rendered during 1997 as described in
the penultimate sentence of Section 5 of the Separation Agreement.
Notwithstanding the foregoing, no such revocation of this General Release
shall affect or alter any term or provision of the Separation Agreement or
any release granted thereunder, which shall survive any such revocation of
this General Release in accordance with its terms.
20
<PAGE>
5. This General Release shall be governed by and construed and
enforced in accordance with the laws of the State of New York without
reference to its choice of law provisions, and shall be binding upon the
parties and their respective heirs, executors, successors and assigns. If
any provision of this General Release is held invalid or unenforceable for
any reason, the remaining provisions shall not be affected thereby and
shall be construed as if the invalid or unenforceable provision had not
been included.
6. This General Release may be executed in counterparts, each of which
shall be deemed to be an original, but which together shall constitute one
and the same instrument.
IN WITNESS WHEREOF, the Corporation and the Executive have caused this
General Release to be executed on and as of the date first written above.
TIG HOLDINGS, INC.
By:_____________________________________
Name:
Title:
____________________________________
Executive
21
<PAGE>
TIG HOLDINGS, INC.
COMPUTATION OF EARNINGS PER SHARE
(Unaudited)
================================================================================
<TABLE>
<CAPTION>
Exhibit 11
Three Months Six Months
Ended June 30, Ended June 30,
(In millions, except per share data) 1997 1996 1997 1996
===============================================================================================================
<S> <C> <C> <C> <C>
PRIMARY:
Weighted average shares outstanding 51.8 56.9 52.7 58.0
Net effect of dilutive stock options - based on
the treasury stock method using
average market price 2.3 2.9 3.1 2.9
- --------------------------------------------------- ----------- ------------ ------------ -----------
Total primary common shares 54.1 59.8 55.8 60.9
- --------------------------------------------------- ----------- ------------ ------------ -----------
Net income $38.8 $33.5 $75.3 $2.7
Less preferred stock dividend requirements (0.5) (0.5) (1.0) (1.0)
- --------------------------------------------------- ----------- ------------ ------------ -----------
Net income available to common stock $38.3 $33.0 $74.3 $1.7
- --------------------------------------------------- ----------- ------------ ------------ -----------
Net income per common share $0.71 $0.55 $1.33 $0.03
- --------------------------------------------------- ----------- ------------ ------------ -----------
FULLY DILUTED:
Weighted average shares outstanding 51.8 56.9 52.7 58.0
Net effect of dilutive stock options - based on
the treasury stock method using higher of
average or end of period market price 2.9 2.9 3.1 2.9
- --------------------------------------------------- ----------- ------------ ------------ -----------
Total fully diluted common shares 54.7 59.8 55.8 60.9
- --------------------------------------------------- ----------- ------------ ------------ -----------
Net income $38.8 $33.5 $75.3 $2.7
Less preferred stock dividend requirements (0.5) (0.5) (1.0) (1.0)
- --------------------------------------------------- ----------- ------------ ------------ -----------
Net income available to common stock $38.3 $33.0 $74.3 $1.7
- --------------------------------------------------- ----------- ------------ ------------ -----------
Net income per common share $0.70 $0.55 $1.33 $0.03
=================================================== =========== ============ ============ ===========
</TABLE>
29
<PAGE>
TIG HOLDINGS, INC.
SIGNATURES
================================================================================
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated: August 14, 1997 TIG HOLDINGS, INC.
By: /s/CYNTHIA B. KOENIG
---------------------
Name: Cynthia B. Koenig
Title: Controller of TIG Insurance Co.
(Chief Accounting Officer)
By: /s/EDWIN G. PICKETT
---------------------
Name: Edwin G. Pickett
Title: Executive Vice President
(Chief Financial Officer)
30
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
</LEGEND>
<CIK> 0000897430
<NAME> TIG Holdings, Inc.
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> APR-01-1997
<PERIOD-END> JUN-30-1997
<DEBT-HELD-FOR-SALE> 0
<DEBT-CARRYING-VALUE> 4,151
<DEBT-MARKET-VALUE> 4,151
<EQUITIES> 0
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 4,325
<CASH> 24
<RECOVER-REINSURE> 1,327
<DEFERRED-ACQUISITION> 158
<TOTAL-ASSETS> 6,700
<POLICY-LOSSES> 3,684
<UNEARNED-PREMIUMS> 725
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 124
150
0
<COMMON> 1,209
<OTHER-SE> (45)
<TOTAL-LIABILITY-AND-EQUITY> 6,700
358
<INVESTMENT-INCOME> 73
<INVESTMENT-GAINS> 4
<OTHER-INCOME> 0
<BENEFITS> 250
<UNDERWRITING-AMORTIZATION> 0
<UNDERWRITING-OTHER> 0
<INCOME-PRETAX> 57
<INCOME-TAX> (18)
<INCOME-CONTINUING> 39
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 39
<EPS-PRIMARY> 0.71
<EPS-DILUTED> 0.70
<RESERVE-OPEN> 3,684
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 3,684
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
