- --------------------------------------------------------------------------------
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 September 30, 1998
OR
( )TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period from to
Commission File Number 1-11856
=============================================================
TIG HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
Delaware 94-3172455
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
65 East 55th Street, 28th Floor
New York, New York 10022
(Address of principal executive offices)
(212) 446-2700
(Registrant's telephone number, including area code)
==============================================================
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No _____
Number of shares of Common Stock, $0.01 par value per share, outstanding as
of close of business on September 30, 1998: 51,314,515 excluding 16,258,097
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
September 30, 1998 (unaudited) and December 31, 1997 ..............3
Condensed consolidated statements of income for the
three and nine months ended September 30, 1998
(unaudited) and September 30, 1997 (unaudited).....................4
Condensed consolidated statement of changes in
shareholders' equity for the nine months ended
September 30, 1998 (unaudited).....................................5
Condensed consolidated statements of cash flow
for the nine months ended September 30, 1998
(unaudited) and September 30, 1997 (unaudited).....................6
Notes to condensed consolidated financial
statements (unaudited).............................................7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations.....................14
2.1 Consolidated Results..............................................15
2.2 Reinsurance.......................................................18
2.3 Commercial Specialty..............................................20
2.4 Custom Markets....................................................22
2.5 Other Lines.......................................................24
2.6 Investments.......................................................25
2.7 Reserves..........................................................28
2.8 Liquidity and Capital Resources...................................29
2.9 Year 2000.........................................................31
2.10 Forward-Looking Statements........................................34
2.11 Glossary..........................................................35
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.................................................37
Item 6. Exhibits and Reports on Form 8-K..................................39
SIGNATURE..................................................................41
<PAGE>
TIG HOLDINGS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, December 31,
(In millions, except share data) 1998 1997
- --------------------------------------------------------------- --------------- ---------------
<S> <C> <C>
Assets (unaudited)
Investments:
Fixed maturities at market $3,967 $3,874
(cost: $3,792 in 1998 and $3,725 in 1997)
Short-term and other investments (cost: $242 in 1998
and $316 in 1997) 236 318
- --------------------------------------------------------------- --------------- ---------------
Total investments 4,203 4,192
Cash 36 18
Accrued investment income 52 56
Premium receivable (net of allowance of: $13 in 1998
and $5 in 1997) 540 453
Reinsurance recoverable (net of allowance of: $33 in
1998 and $6 in 1997) 1,848 1,529
Deferred policy acquisition costs 147 155
Prepaid reinsurance premium 190 177
Income taxes 111 140
Other assets 169 147
- --------------------------------------------------------------- --------------- ---------------
Total assets $7,296 $6,867
- --------------------------------------------------------------- --------------- ---------------
Liabilities
Reserves for:
Losses $3,566 $3,459
Loss adjustment expenses 466 476
Unearned premium 766 738
- --------------------------------------------------------------- --------------- ---------------
Total reserves 4,798 4,673
Reinsurance premium payable 115 61
Funds withheld under reinsurance agreements 530 319
Notes payable 164 122
Other liabilities 376 379
- --------------------------------------------------------------- --------------- ---------------
Total liabilities 5,983 5,554
- --------------------------------------------------------------- --------------- ---------------
Mandatory redeemable 8.597% capital securities of subsidiary 125 125
trust
- --------------------------------------------------------------- --------------- ---------------
Mandatory redeemable preferred stock 25 25
- --------------------------------------------------------------- --------------- ---------------
Shareholders' Equity
Common stock - par value $0.01 per share 1,272 1,257
(authorized: 180,000,000 shares; issued and
outstanding:67,574,664 shares in 1998 and
66,955,288 shares in 1997)
Retained earnings 244 253
Accumulated other comprehensive income 108 96
- --------------------------------------------------------------- --------------- ---------------
1,624 1,606
Treasury stock (16,258,097 shares in 1998 and 15,597,021
shares in 1997) (461) (443)
- --------------------------------------------------------------- --------------- ---------------
Total shareholders' equity 1,163 1,163
- --------------------------------------------------------------- --------------- ---------------
Total liabilities and shareholders' equity $7,296 $6,867
- --------------------------------------------------------------- --------------- ---------------
<FN>
See Notes to Condensed Consolidated Financial Statements.
</FN>
</TABLE>
1
<PAGE>
TIG HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30, Ended September 30,
---------------------- ----------------------
(In millions, except per share data) 1998 1997 1998 1997
- ------------------------------------------------ ---------- ----------- ---------- -----------
<S> <C> <C> <C> <C>
Revenues
Net premium earned $383 $380 $1,117 $1,092
Net investment income 58 70 184 219
Net realized investment gain (loss) (2) 2 2 6
- ------------------------------------------------ ---------- ----------- ---------- -----------
Total revenues 439 452 1,303 1,317
- ------------------------------------------------ ---------- ----------- ---------- -----------
Losses and expenses
Net losses and loss adjustment expenses 326 259 818 762
incurred
Commissions and premium related expenses 98 93 261 251
Other underwriting expenses 61 29 140 93
Corporate expenses 22 11 52 30
Interest expense 7 5 17 15
- ------------------------------------------------ ---------- ----------- ---------- -----------
Total losses and expenses 514 397 1,288 1,151
- ------------------------------------------------ ---------- ----------- ---------- -----------
Income (loss) before income tax benefit (75) 55 15 166
(expense)
Income tax benefit (expense) 28 (15) 1 (51)
- ------------------------------------------------ ---------- ----------- ---------- -----------
Net income (loss) ($47) $40 $16 $115
- ------------------------------------------------ ---------- ----------- ---------- -----------
Net income (loss) per common share ($0.93) $0.74 $0.28 $2.10
- ------------------------------------------------ ---------- ----------- ---------- -----------
Dividend per common share $0.15 $0.15 $0.45 $0.45
- ------------------------------------------------ ---------- ----------- ---------- -----------
<FN>
See Notes to Condensed Consolidated Financial Statements.
</FN>
</TABLE>
2
<PAGE>
TIG HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENT
OF CHANGES IN SHAREHOLDERS' EQUITY
(Unaudited)
<TABLE>
<CAPTION>
Accumulated Total
Other Share-
Common Retained Comprehensive Treasury holders'
(In millions) Stock Earnings Income Stock Equity
------------------------------ ----------- ---------- --------------- ---------- -----------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1997 $1,257 $253 $96 $(443) $1,163
Net income 16 16
Common and preferred stock
dividends (25) (25)
Common stock issued 10 10
Amortization of unearned
compensation 5 5
Change in net unrealized
gain on investments 12 12
Treasury stock purchased (18) (18)
------------------------------ ----------- ---------- --------------- ---------- -----------
Balance at September 30, 1998 $1,272 $244 $108 $(461) $1,163
------------------------------ ----------- ---------- --------------- ---------- -----------
<FN>
See Notes to Condensed Consolidated Financial Statements.
</FN>
</TABLE>
3
<PAGE>
TIG HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
-----------------------------
(In millions) 1998 1997
----------------------------------------------------------- -------------- --------------
<S> <C> <C>
Operating Activities
Net income $16 $115
Adjustments to reconcile net income to cash provided
by operating activities:
Changes in:
Accrued investment income 4 (2)
Premium receivable (87) (60)
Reinsurance recoverable (319) (70)
Deferred policy acquisition costs 8 (27)
Prepaid reinsurance premium (13) 13
Income taxes 29 37
Loss reserves 107 23
Loss adjustment expenses reserves (10) (92)
Unearned premium reserves 28 63
Reinsurance premium payable 54 10
Funds held under reinsurance agreements 211 98
Other assets, other liabilities and other 30 (83)
----------------------------------------------------------- -------------- --------------
Net cash provided by operating activities 58 25
----------------------------------------------------------- -------------- --------------
Investing Activities
Purchases of fixed maturity investments (2,040) (2,071)
Sales of fixed maturity investments 1,683 1,896
Maturities and calls of fixed maturity investments 277 180
Net decrease (increase) in short-term and other 74 (20)
investments
Net additions to property, furniture and equipment (14) (29)
Other (30) 15
----------------------------------------------------------- -------------- --------------
Net cash used in investing activities (50) (29)
----------------------------------------------------------- -------------- --------------
Financing Activities
Common stock issued 10 29
Treasury stock purchased (18) (140)
Mandatory redeemable capital securities issued - 125
Common stock and preferred stock dividends (25) (26)
Increase in notes payable 42 1
Other 1 1
----------------------------------------------------------- -------------- --------------
Net cash provided by (used in) financing activities 10 (10)
----------------------------------------------------------- -------------- --------------
Increase (decrease) in cash 18 (14)
Cash at beginning of period 18 19
----------------------------------------------------------- -------------- --------------
Cash at end of period $36 $5
----------------------------------------------------------- -------------- --------------
<FN>
See Notes to Condensed Consolidated Financial Statements.
</FN>
</TABLE>
4
<PAGE>
TIG HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the Nine Months Ended September 30, 1998
(unaudited)
- --------------------------------------------------------------------------------
NOTE A. DESCRIPTION OF BUSINESS
- --------------------------------------------------------------------------------
TIG Holdings, Inc. ("TIG Holdings") is primarily engaged in the business of
property/casualty insurance and reinsurance through its 14 domestic insurance
subsidiaries, collectively "TIG" or "the Company". TIG markets its products
through three principal operating divisions. A description of each operating
division's principal products follows.
Reinsurance. TIG's reinsurance operations are conducted through TIG Reinsurance
Company ("TIG Re"). Reinsurance is a form of insurance whereby the reinsurer
(i.e. TIG Re) agrees to indemnify another insurance company (the "ceding
company") for all or a portion of the insurance risks underwritten by the ceding
company under an insurance policy or policies. TIG Re writes both pro rata and
excess of loss coverages. TIG Re's primary strategy for excess of loss treaties
is to take large participations in working layers of a limited number of
programs. TIG Re's predominant source of business is through reinsurance
intermediaries. Net premium written for the Reinsurance division was 31% of
consolidated net premium written for the three months and nine months ended
September 30, 1998, respectively.
Commercial Specialty. Commercial Specialty coverages provide protection against
property loss and legal liability for injuries to other persons or damage to
their property arising from the policyholder's business operations. Commercial
Specialty primarily develops and markets insurance programs where the nature of
the risk does not lend itself to traditional commercial insurance. Significant
programs include Sports and Leisure, with products for professional and amateur
sports events; Workers' Compensation, which provides liability coverage to
employers for payment of employee benefits associated with employment related
accidents as mandated by state laws; Primary Casualty which focuses on
commercial auto, professional liability, construction and marine programs;
Excess Casualty which offers lead umbrella and excess umbrella policies; and
participation in three Lloyd's of London syndicates writing marine, UK property
and aviation business. Commercial Specialty products are principally marketed
through large general agents, with which TIG sometimes has exclusive marketing
contracts. Net premium written for the Commercial Specialty division comprised
52% and 53% of consolidated net premium written for the three months and nine
months ended September 30, 1998, respectively.
Custom Markets. Custom Markets provides personal lines coverages, principally
standard automobile, non-standard automobile and homeowners. Automobile policies
cover liability to third parties for bodily injury and property damage and
physical damage to the insured's own vehicle resulting from collision or various
other causes of loss. Homeowners policies protect against loss of dwellings and
contents arising from a variety of perils, as well as liability arising from
ownership or occupancy. Products are distributed through strategic relationships
with general agents ("GAs") and other key distribution partners. Net premium
written for the Custom Markets division comprised 19% and 17% of consolidated
net premium written for the three and nine months ended September 30, 1998,
respectively.
5
<PAGE>
TIG HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the Nine Months Ended September 30, 1998
(unaudited)
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NOTE B. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
- --------------------------------------------------------------------------------
Basis of Presentation. 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 1998 presentation.
Operating results for the nine months ended September 30, 1998 are not
necessarily indicative of the results to be expected for the full year. In
addition, the Company is actively considering strategic alternatives with its
investment banker, Goldman Sachs, including a sale, restructuring or
recapitalization of the Company, any of which could cause full year operating
results to be materially different from those during the first nine months of
1998. For further information, refer to Item 2. Management's Discussion and
Analysis of Financial Condition and Results of Operations included in this Form
10-Q and TIG's annual report on Form 10-K for the year ended December 31, 1997.
Earnings per Share ("EPS"). Basic EPS is calculated based upon the weighted
average common shares outstanding ("average shares") during the period. In order
to calculate EPS, unallocated Employee Stock Ownership Plan shares and treasury
shares are deducted from the outstanding common shares. For diluted EPS, common
stock options increase weighted average shares outstanding to the extent that
they are dilutive. To obtain net income attributable to common shareholders for
EPS computations, the preferred stock dividend is deducted from net income. The
following schedule presents the calculation of Basic and Diluted EPS:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------ ------------ ------------
(In millions, except earnings per 1998 1997 1998 1997
share)
- ---------------------------------------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Numerator:
Net income (loss) ($47) $40 $16 $115
Less: Preferred stock dividends - - 1 1
- ---------------------------------------- ------------ ------------ ------------ ------------
Income available to common ($47) $40 15 114
stockholders
Denominator:
Weighted average shares
outstanding for basic EPS 51.0 51.2 51.1 52.2
Effect of dilutive options 0.3 1.8 0.8 1.8
- ---------------------------------------- ------------ ------------ ------------ ------------
Adjusted weighted average shares
for diluted EPS 51.3 53.0 51.9 54.0
Basic EPS ($0.93) $0.77 $0.29 $2.18
- ---------------------------------------- ------------ ------------ ------------ ------------
Diluted EPS - $0.74 $0.28 $2.10
- ---------------------------------------- ------------ ------------ ------------ ------------
</TABLE>
6
<PAGE>
TIG HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the Nine Months Ended September 30, 1998
(unaudited)
- --------------------------------------------------------------------------------
Investments. Fixed maturities are classified as available for sale, as TIG has
no positive intent to hold such securities until maturity, and are carried at
market value. 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 as a component of accumulated other comprehensive income directly in
shareholders' equity and, accordingly, has no effect on net income.
Deferred Policy Acquisition Costs. Acquisition costs that vary with and are
primarily related to the production of new business are generally deferred and
amortized ratably over the terms of the underlying policies. These costs
principally consist of commissions, premium taxes, and other expenses incurred
at policy issuance and renewal.
Premium Deficiency Recognition. A premium deficiency is recognized for an
operating division when the sum of expected claim costs and claim adjustment
expenses, expected dividends to policyholders, maintenance costs and unamortized
acquisition costs exceeds future earned premiums related to non-cancelable
in-force policies and related anticipated investment income. A premium
deficiency is first recognized by charging unamortized deferred policy
acquisition costs to expense and then accruing a liability for any remaining
deficiency.
Loss and Loss Adjustment Expense Reserves. The liability for loss and loss
adjustment expenses ("LAE") is based on an evaluation of reported losses and on
estimates of incurred but unreported losses ("IBNR"). The reserve liabilities
are determined using estimates of losses for individual claims (case basis
reserves) and statistical projections of reserves for IBNR. Management considers
many factors when setting reserves, including: (i) current legal interpretations
of coverage and liability; (ii) economic conditions; and (iii) internal
methodologies which analyze TIG's experience with similar cases, information
from ceding companies and historical 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's loss and LAE reserves. Actual losses and subsequent developments or
revisions to the estimate are reflected in results of operations in the period
in which such adjustments become known.
Loss Portfolio Reinsurance. Effective January 1, 1998, the Company entered into
a loss portfolio reinsurance agreement on a funds held basis for loss and LAE
reserves of $265 million related to certain run-off programs. The gain on the
cession was deferred and will be amortized into income as losses are paid.
Amortization of deferred gain of $2 million and $6 million was recorded as a
reduction of incurred losses for the three and nine months ended September 30,
1998, respectively. The contract covers 80% of any adverse loss development
incurred in excess of $280 million up to a maximum of $343 million. Any
additional future benefit from the contract triggered by adverse loss
development will also be deferred and amortized into income as the related
losses are paid. Funds held bear interest at 1.7% per quarter beginning April 1,
1998. Related funds held interest of $4 million and $8 million was recorded as a
reduction of net investment income for the three months and nine months ended
September 30, 1998.
7
<PAGE>
TIG HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the Nine Months Ended September 30, 1998
(unaudited)
- --------------------------------------------------------------------------------
Treasury Stock. At September 30, 1998, the Board of Directors had authorized the
repurchase of up to 18.75 million shares of TIG Holdings common stock. As of
September 30, 1998, the Company has repurchased 16.3 million shares at an
aggregate cost of $461 million. The Company uses the cost method to record the
repurchase of treasury shares.
Independent Agents Business Ceding Commission. On December 31, 1997, TIG
completed the sale of its Independent Agents personal lines operations, which
was principally effected through reinsurance transactions. At close, TIG
received a ceding commission in excess of related deferred acquisition costs of
$20 million related to the 100% reinsurance of certain Independent Agents
business. This ceding commission was recognized in income during 1998 as the
related ceded premium was earned. TIG recognized $3 million and $20 million of
pre-tax ceding commissions for the three and nine months ended September 30,
1998, respectively.
- --------------------------------------------------------------------------------
NOTE C. PREMIUM DEFICIENCY RECOGNITION
- --------------------------------------------------------------------------------
In third quarter 1998, a contract dispute arose between the Company and MBNA
America Bank, N.A., the producer of an automobile insurance program within the
Custom Markets division ("the MBNA program"). The dispute related to certain
underwriting and pricing changes to be made by TIG to produce contractually
guaranteed rates of return. In September 1998, the MBNA program was terminated.
The producer elected under the termination provisions of the agency contract to
require TIG to provide a renewal market through September 1, 1999. As a result,
TIG recognized a premium deficiency of $33 million in third quarter 1998 related
to future earned premium from existing Custom Markets business and mandatory
renewals through September 1, 1999, for the MBNA program. The premium deficiency
was recorded in TIG's third quarter 1998 income statement by expensing all
Custom Markets deferred policy acquisition costs, which totaled $19 million, and
establishing additional loss reserves of $14 million. Net premium written for
the MBNA program was $30 million for the year ended December 31, 1997 and $65
million for the nine months ended September 30, 1998.
- --------------------------------------------------------------------------------
NOTE D. ALLOWANCE FOR REINSURANCE RECOVERABLE
- --------------------------------------------------------------------------------
In third quarter 1998, TIG recorded a $30 million provision for reinsurance
recoverables. This provision was based upon new information resulting primarily
from an analysis as of the third quarter 1998 and recent dispute negotiations.
8
<PAGE>
TIG HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the Nine Months Ended September 30, 1998
(unaudited)
- --------------------------------------------------------------------------------
NOTE E. CONTINGENCIES
- --------------------------------------------------------------------------------
TIG's insurance subsidiaries are routinely engaged in litigation in the normal
course of their business. As a liability insurer, the Company defends
third-party claims brought against its insureds. As an insurer, the Company
defends against coverage claims.
On January 11, 1994, a Los Angeles County Superior Court jury returned a verdict
of $28 million for punitive damages against TIG Insurance Company ("TIC") in
Talbot Partners v. Cates Construction, Inc. and TIC (the "Talbot Case"). The
award arose out of TIC's handling of a surety bond claim on a construction
project. On March 28, 1997, the California Court of Appeals 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 Appeals' decision.
Management believes that the ultimate liability arising from the Talbot Case
will not materially impact consolidated operating results.
TIG's Federal income tax returns are routinely audited by the Internal Revenue
Service (IRS) and provisions are made in the financial statements in
anticipation of the results of these audits. Following a routine federal income
tax audit by the IRS, in September 1997, the IRS issued a Statutory Notice of
Deficiency for the tax year 1993 and a Revenue Agents Report for 1994 asserting
a tax liability of approximately $170 million excluding interest. The IRS's
asserted tax adjustments principally relate to the acquisition made by TIG under
the Section 338(h)(10) election of April 27, 1993 in conjunction with TIG's
Initial Public Offering and primarily generate temporary differences by creating
income in 1993 with corresponding deductions in 1993 and future tax years. TIG
strongly disagrees with the IRS's position and, on December 11, 1997, TIG filed
a Tax Court Petition challenging it. In connection with the Statutory Notice of
Deficiency issued by the IRS for the 1993 tax year, TIG made a $40 million
advance tax payment in December 1997, that has been reflected as a current tax
asset. While the timing of cash tax payments may be impacted, management
believes that revisions to TIG's recorded tax liability, if any, arising from
the IRS's audit will not materially impact consolidated net income or the
financial condition of the Company.
On February 12, 1998, a purported class action complaint, naming TIG and two of
its executive officers as defendants, was filed in the United States District
Court for the Southern District of New York on behalf of persons who purchased
TIG common stock during the period from October 21, 1997, to January 30, 1998,
when TIG announced its fourth quarter 1997 results. Subsequently, on July 12,
1998, the complaint was amended. The amended complaint alleges that TIG violated
the federal securities laws by misrepresenting the adequacy of its underwriting
and monitoring standards and loss reserves, and that five of its officers and
directors sold shares at prices that were artificially inflated as a result of
the alleged misrepresentations. Plaintiffs seek unspecified monetary damages,
including punitive damages. Management believes that the lawsuit is without
merit and it will be vigorously defended.
9
<PAGE>
TIG HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the Nine Months Ended September 30, 1998
(unaudited)
- --------------------------------------------------------------------------------
On July 17, 1998, TIG Premier Insurance Company ("TIG Premier") filed a
complaint and jury demand against MBNA America Bank, N.A. d.b.a. MBNA Insurance
Services ("MBNA") in federal court in the Northern District of Texas that was
based on an agency agreement between TIG Premier and MBNA (the "Agency
Agreement") pursuant to which TIG Premier offered an insurance program that was
marketed by MBNA to its customers. In its complaint, TIG Premier sought a
declaratory relief judgement declaring that TIG Premier could reduce the
commission payable to MBNA and lengthen the 5-year term of the Agency Agreement
in order to, at a minimum, reduce TIG Premier's underwriting losses and improve
the possibility of TIG Premier achieving the agreed upon 15% minimum rate of
return. On August 19, 1998, TIG Premier filed an amended complaint seeking money
damages for MBNA's repudiation and breach of the Agency Agreement, including,
without limitation the underwriting losses that TIG Premier incurred and the
minimum 15% rate of return over the entire five-year initial term of the Agency
Agreement, in an amount to be determined at trial. In its amended answer, dated
August 31, 1998, MBNA instituted a counterclaim against TIG Premier based on TIG
Premier's alleged breach and repudiation of the Agency Agreement, seeking
damages in an amount not less than $100 million dollars. Management believes
that the liability arising from this case, if any, will not materially impact
consolidated operating results.
10
<PAGE>
TIG HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the Nine Months Ended September 30, 1998
(unaudited)
- --------------------------------------------------------------------------------
NOTE F. COMPREHENSIVE INCOME
- --------------------------------------------------------------------------------
In January 1998, TIG adopted Statement of Financial Accounting Standards No.
130, "Reporting Comprehensive Income" ("Statement 130"). Statement 130
establishes new rules for the reporting and display of comprehensive income and
its components. Statement 130 requires changes in unrealized gains or losses on
the Company's available-for-sale securities and foreign currency translation
adjustments, which prior to adoption were reported separately in shareholders'
equity, be included in other comprehensive income. Prior year financial
statements have been reclassified to conform to the requirements of Statement
130. The adoption of this statement had no impact on TIG's net income or
shareholders' equity.
During the first nine months of 1998 and 1997, total comprehensive income was
$28 million and $151 million, respectively. The components of comprehensive
income, net of related tax are as follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------- ----------------------
(In millions) 1998 1997 1998 1997
- --------------------------------------------- ---------- ----------- ----------- ----------
<S> <C> <C> <C> <C>
Net income (loss) ($47) $40 $16 $115
Unrealized gain on marketable securities 12 38 12 36
- --------------------------------------------- ---------- ----------- ----------- ----------
Comprehensive income (loss) ($35) $78 $28 $151
- --------------------------------------------- ---------- ----------- ----------- ----------
</TABLE>
The components of accumulated other comprehensive income, net of related tax, at
September 30, 1998 and December 31, 1997 are as follows:
<TABLE>
<CAPTION>
September 30, December 31,
(In millions) 1998 1997
------------------------------------------ ----------------- ----------------
<S> <C> <C>
Unrealized gain on marketable securities $110 $98
Foreign currency translation adjustments (2) (2)
------------------------------------------ ----------------- ----------------
Accumulated other comprehensive income $108 $96
------------------------------------------ ----------------- ----------------
</TABLE>
- --------------------------------------------------------------------------------
NOTE G. NOTES PAYABLE
- --------------------------------------------------------------------------------
The Company borrowed $70 million on its $250 million revolving line of credit in
the first quarter of 1998, of which $40 million is currently outstanding at
September 30, 1998. The proceeds of the borrowing were utilized for general
corporate purposes, including capital contributions to insurance subsidiaries.
This borrowing bears interest at a floating rate, currently 5.8275 %.
11
<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 nine months ended September 30, 1998 as compared to the three
and nine months ended September 30, 1997 and material changes in financial
position from December 31, 1997 to September 30, 1998 for TIG Holdings, Inc.
("TIG Holdings") and its subsidiaries (collectively "TIG" or the "Company") and
presents management's expectations for the near term. The analysis focuses on
the performance of TIG's three major operating divisions, Reinsurance,
Commercial Specialty, and Custom Markets, and its investment portfolio, which
are discussed at Items 2.2, 2.3, 2.4, and 2.6, respectively. 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 1997 Annual
Report on Form 10-K and should be read in conjunction therewith. In addition,
reference should be made to Item 1 - Financial Statements of this Form 10-Q. Key
industry terms that appear in the Management's Discussion and Analysis and
elsewhere in this document are defined at Item 2.11 - Glossary. Certain
reclassifications of prior years' amounts have been made to conform with the
1998 presentation.
Statements contained in the Management's Discussion and Analysis, and elsewhere
in this document that are not based on historical information are
forward-looking statements and are based on management's projections, estimates
and assumptions. Management would like to caution readers regarding its
forward-looking statements (see Item 2.10 - Forward-Looking Statements).
12
<PAGE>
TIG HOLDINGS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
2.1 CONSOLIDATED RESULTS
- --------------------------------------------------------------------------------
Overview. Results of operations for the three and nine months ended September
30, 1998 and 1997 are presented below:
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30, Ended September 30,
---------------------- ----------------------
(In millions) 1998 1997 1998 1997
- ---------------------------------------- ----------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
Gross premium written $551 $533 $1,668 $1,467
- ---------------------------------------- ----------- ---------- ----------- ----------
Net premium written $361 $410 $1,135 $1,179
- ---------------------------------------- ----------- ---------- ----------- ----------
Net premium earned $383 $380 $1,117 $1,092
Less: Net loss and LAE incurred 326 259 818 762
Commission expense 88 82 232 219
Premium related expense 10 11 29 32
Other underwriting expense 53 27 123 88
Policyholder dividends incurred 8 2 17 5
- ---------------------------------------- ----------- ---------- ----------- ----------
Underwriting loss (102) (1) (102) (14)
Net investment income 58 70 184 219
Net realized investment gain (losses) (2) 2 2 6
Corporate expenses 22 11 52 30
Interest expense 7 5 17 15
- ---------------------------------------- ----------- ---------- ----------- ----------
Income (loss) before tax benefit (75) 55 15 166
(expense)
Income tax benefit (expense) 28 (15) 1 (51)
- ---------------------------------------- ----------- ---------- ----------- ----------
Net income (loss) ($47) $40 $16 $115
- ---------------------------------------- ----------- ---------- ----------- ----------
</TABLE>
Net income declined by $87 million in the third quarter and $99 million for the
first nine months of 1998 as compared to the corresponding 1997 periods. Third
quarter 1998 results were impacted by a number of adjustments and expenses which
totaled $101 million pre-tax or $66 million after tax. These adjustments and
expenses were composed of the following: a) $47 million of pre-tax adjustments
and expenses related to a program within the Custom Markets division, which was
placed in run-off in the third quarter. This included the recognition of a
premium deficiency of $33 million (See Notes B and C to the Condensed
Consolidated Financial Statements) and underwriting losses of $14 million which
reflected revised loss incurred and reinsurance benefit assumptions; b) a
provision for reinsurance recoverable of $30 million (see Note D to the
Condensed Consolidated Financial Statements); c) an increase in premium
receivable allowances for TIG Re and Other Lines of $5 million and $3 million,
respectively; and d) other adjustments and expenses including severance for
former employees of $6 million, Year 2000 expenditures of $4 million, and other
adjustments of $6 million pre-tax, net of $3 million of ceding commission income
arising from the December 1997 sale of TIG's Independent Agents business.
13
<PAGE>
TIG HOLDINGS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
Excluding these adjustments and expenses, income declined by approximately $21
million after-tax or $29 million pre-tax in the third quarter and $33 million
after-tax or $50 million pre-tax for the first nine months of 1998 compared to
the corresponding 1997 periods. The adjusted decline in third quarter 1998
pre-tax income was principally attributable to an increase in underwriting
losses of $11 million in Commercial Specialty and Other Lines, a decline in net
investment income of $12 million and a decline in capital gains of $4 million.
The adjusted decline in pre-tax income for the first nine months of 1998 was
principally due to a $35 million reduction in investment income and a $12
million increase in selling and administration expense attributable to planned
corporate systems and other projects.
Increased utilization of aggregate stop loss and other finite reinsurance
coverages provided an additional underwriting benefit of approximately $7
million and $21 million for the third quarter and first nine months of 1998,
respectively, as compared to the corresponding 1997 periods. The increased
utilization of finite reinsurance coverages is partially in response to
favorable market conditions and partially to mitigate the inherent financial
volatility of a changing book of business. In addition, ceding commission income
arising from the December 1997 sale of TIG's Independent Agents business
benefited underwriting results by $3 million and $20 million for the third
quarter and first nine months of 1998, respectively. As described below, both
the sale of Independent Agents business and increased utilization of finite
reinsurance has had a negative impact on investment income.
As previously mentioned, net investment income decreased $12 million or 17% and
$35 million or 16% for the third quarter and first nine months of 1998,
respectively, as compared to the corresponding 1997 periods. Approximately, $7
million of the year-to-date 1998 decrease is attributable to net assets
transferred in December 1997 in connection with the sale of Independent Agents
business while approximately $17 million results from increased funds held
interest expense resulting from additional utilization of finite reinsurance
coverages. The remaining decrease in net investment income is principally
attributable to declining gross market investment yields in 1998.
Consideration of Strategic Alternatives. In October 1998, the Company made a
public announcement that it is actively considering strategic alternatives with
its investment banker, Goldman Sachs, including a sale, restructuring, or
recapitalization of the Company. As a result, future operating results could
vary materially from those reported for the first nine months of the year.
Ratings. During third quarter 1998 and in October 1998, Standard and Poor's
lowered TIG's insurance subsidiaries financial strength rating and TIG Holdings,
Inc.'s senior debt rating. These two actions resulted in TIG's insurance
subsidiaries financial strength rating being lowered to A from AA- and TIG
Holdings, Inc.'s senior debt rating being lowered to BBB from A-. Additionally,
A.M. Best Co. placed the "A" (excellent) ratings of TIG Insurance (including
subsidiaries which cede 100% of net premium written to TIG Insurance) and TIG
Re, under review with negative implications. Further, Moody's Investors Service
placed TIG Holdings, Inc.'s senior debt rating of Baa1 under review for possible
downgrade. TIG's ability to compete for insurance and reinsurance business and
the cost of financing arrangements could be materially impacted by these and any
future actions by these agencies.
14
<PAGE>
TIG HOLDINGS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
Premium. Oversupply of capital in the insurance industry has resulted in
significant downward pricing pressure and has provided additional leverage to
brokers and ceding companies in establishing terms, including commission rates,
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 a specific market niche. The following table
summarizes net premium written by division:
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30, Ended September 30,
------------------------------- -------------------------------
1998 1997 1998 1997
------- ------- ------- ------- ------- ------- ------- -------
(In millions) NPW % NPW % NPW % NPW %
------------------------ ------- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Reinsurance $111 31% $124 30% $348 31% $409 35%
Commercial Specialty 187 52% 179 44% 607 53% 455 39%
Custom Markets 70 19% 49 12% 197 17% 120 10%
Other Lines (7) (2%) 58 14% (17) (1%) 195 16%
------------------------ ------- ------- ------- ------- ------- ------- ------- -------
Net premium written $361 100% $410 100% $1,135 100% $1,179 100%
------------------------ ------- ------- ------- ------- ------- ------- ------- -------
</TABLE>
Consolidated net premium written decreased by $49 million or 12% and $44 million
or 4% for the third quarter and first nine months of 1998, respectively, as
compared to the corresponding 1997 periods, while ongoing operations net premium
written increased $16 million or 5% and $168 million or 17%, respectively.
Growth in ongoing operations net premium written slowed in the third quarter of
1998 compared to the first nine months of 1998 due to the seasonality of Lloyd's
syndicates and workers compensation premium and the buying down of net
retentions in the Managed Compensation business unit from $1 million to $100
thousand in second quarter 1998 (see Item 2.3). Management expects that the
termination of the MBNA program in third quarter 1998 will put further pressure
on premium growth for the remainder of the year (see Item 2.4). As expected,
ongoing operations premium growth was offset in 1998 by a decline in Other Lines
net premium written resulting from the sale and 100% reinsurance of TIG's
Independent Agents business in December 1997 (see Item 2.5).
Statutory Combined Ratio. The following table presents the components of the
Company's statutory combined ratio:
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30, Ended September 30,
--------------------------- ----------------------------
Statutory ratios 1998 1997 1998 1997
----------------------------- ------------- ------------- -------------- -------------
<S> <C> <C> <C> <C>
Loss and LAE 82.2 68.1 72.6 69.8
----------------------------- ------------- ------------- -------------- -------------
Commission expense 20.4 21.3 21.0 19.9
Premium related expense 2.1 2.9 2.6 2.8
Other underwriting expense 11.8 8.2 10.1 8.4
----------------------------- ------------- ------------- -------------- -------------
Total underwriting expense 34.3 32.4 33.7 31.1
Policyholder dividends 0.7 0.7 1.0 0.9
----------------------------- ------------- ------------- -------------- -------------
Combined 117.2 101.2 107.3 101.8
----------------------------- ------------- ------------- -------------- -------------
</TABLE>
15
<PAGE>
TIG HOLDINGS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
The statutory combined ratio for the third quarter and first nine months of 1998
increased 16.0 and 5.5 percentage points as compared to the corresponding 1997
periods. Excluding the pre-tax adjustments and expenses of $101 million recorded
in third quarter 1998, the combined ratio deteriorated approximately 2.1
percentage points for the third quarter and 0.8 percentage points for the first
nine months of 1998 compared to the corresponding 1997 periods. The increase in
the combined ratio is primarily attributable to an increase in other
underwriting expenses for TIG Re and Commercial Specialty which reflects
start-up costs incurred for new business initiatives in conjunction with lower
consolidated net premium written. Increased benefits in 1998 from finite
reinsurance coverages and a decrease in retention limits for Managed
Compensation business from $1 million to $100 thousand (See Item 2.3), have
offset, for the most part, a general decline in margins resulting from soft
market conditions.
- --------------------------------------------------------------------------------
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 a number
of 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 (underwriting syndicate) was
introduced in December 1996. 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. TIG Re maintains eight branch offices dedicated to the marketing and
underwriting of direct facultative reinsurance on an automatic and individual
risk basis. Beginning in the second quarter of 1998, the majority of Reverse
Flow business has been placed in run-off, with the remainder being transferred
to the Company's Commercial Specialty operations.
16
<PAGE>
TIG HOLDINGS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
Premium. The following table summarizes TIG Re's premium production:
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30, Ended September 30,
------------------------------ -------------------------------
1998 1997 1998 1997
--------------- -------------- --------------- ---------------
(In millions) NPW % NPW % NPW % NPW %
-------------------------- ------- ------- ------- ------ ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Specialty Casualty $48 43% $56 45% $146 42% $168 41%
London Branch & Lloyd's 25 23% 16 13% 73 21% 61 15%
Traditional Treaty 22 20% 25 20% 59 17% 81 20%
Reverse Flow 19 17% 24 19% 58 17% 55 13%
Facultative 10 9% 5 4% 28 8% 17 4%
Specialty Property 6 5% 8 7% 16 4% 37 9%
Finite 3 3% 4 3% 13 4% 28 7%
Other (22) (20%) (14) (11%) (45) (13%) (38) (9%)
-------------------------- ------- ------- ------- ------ ------- ------- ------- -------
-------------------------- ------- ------- ------- ------ ------- ------- ------- -------
Net premium written $111 100% $124 100% $348 100% $409 100%
-------------------------- ------- ------- ------- ------ ------- ------- ------- -------
Gross premium written $141 $147 $420 $459
-------------------------- ------- ------- ------- ------ ------- ------- ------- -------
</TABLE>
Net premium written declined by $13 million or 10% in the third quarter of 1998
and $61 million or 15% in the first nine months of 1998 compared to the
corresponding 1997 periods. The decrease in net premium written is due to the
non-renewal or reduced participation in several large and unprofitable accounts
combined with increased use of reinsurance to manage the Company's net
underwriting exposure. These declines are being somewhat offset by increased
production from new initiatives such as London Branch, Lloyd's and Facultative.
During the first nine months of 1998, TIG Re appointed a new Chief Executive
Officer, a new Chief Actuary, a new Chief Financial Officer and replaced several
senior underwriters. The appointment of these new executives and the departure
of their predecessors, could impact, positively or negatively, existing producer
relationships and the availability of new business opportunities
Underwriting Results. The following table summarizes TIG Re's underwriting
results:
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September Ended September
30, 30,
---------------------- ----------------------
(In millions) 1998 1997 1998 1997
---------------------------------------- ----------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
Net premium earned $127 $146 $391 $394
Less:
Net loss and LAE incurred 88 101 264 281
Commission expense 34 40 107 97
Other underwriting expense 18 9 43 29
---------------------------------------- ----------- ---------- ---------- -----------
Underwriting loss ($13) ($4) ($23) $(13)
---------------------------------------- ----------- ---------- ---------- -----------
Statutory ratios
---------------------------------------- ----------- ---------- ---------- -----------
Loss and LAE 69.6 69.4 67.7 71.3
Commission 26.1 27.2 28.0 24.2
Premium related 0.6 0.8 0.6 0.4
Other underwriting 9.8 8.3 10.0 7.3
---------------------------------------- ----------- ---------- ---------- -----------
Combined ratio 106.1 105.7 106.3 103.2
---------------------------------------- ----------- ---------- ---------- -----------
</TABLE>
17
<PAGE>
TIG HOLDINGS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
TIG Re's underwriting loss for the third quarter and first nine months of 1998
increased $9 million and $10 million, respectively, compared to the
corresponding 1997 periods. Results for both 1998 periods include approximately
$8 million of adjustments related to an increase in the allowance for
uncollectible premiums ($5 million) and for adjustments related to
retrospectively rated premiums ($3 million). Results for both 1998 periods
reflect overall lower program profitability expectations, partially offset by
increased aggregate stop loss reinsurance utilization. The first nine months of
1998 include a favorable arbitration award which reduced first quarter 1998
incurred losses and LAE, while a similar unplanned benefit from a novation
transaction reduced incurred losses and LAE in the second quarter of 1998.
The statutory combined ratio increased slightly in the third quarter 1998 and
3.1 points for the first nine months of 1998 compared to the corresponding 1997
periods. The increase in the combined ratio for the first nine months of 1998 is
primarily due to an increase in the statutory other underwriting expense ratio
as a result of spending on new initiatives and lower net premium volume in 1998
compared to the 1997 periods.
- --------------------------------------------------------------------------------
2.3 COMMERCIAL SPECIALTY
- --------------------------------------------------------------------------------
Commercial Specialty, based in Irving, Texas, provides specialized insurance
products through five main business units: Managed Compensation, Sports and
Leisure, Lloyd's Syndicates, Primary Casualty and Excess Casualty. Managed
Compensation provides workers' compensation insurance coverages and occupational
care management. Workers Compensation insurance 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. 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. Commercial Specialty 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. The Excess Casualty unit offers
lead umbrella and excess umbrella policies. Included in the Excess Casualty and
Other unit is an operation which began in 1997, the Special Risk Operation,
which focuses on healthcare, excess property and excess casualty business.
Premium. The following table summarizes Commercial Specialty's premium
production:
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30, Ended September 30,
------------------------------- -------------------------------
1998 1997 1998 1997
--------------- --------------- --------------- ---------------
(In millions) NPW % NPW % NPW % NPW %
-------------------------- ------- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Managed Compensation $71 38% $80 44% $260 43% $189 41%
Sports & Leisure 50 27% 57 32% 149 24% 145 32%
Lloyd's Syndicates 21 11% 3 2% 89 15% 27 6%
Primary Casualty 28 15% 30 17% 73 12% 71 16%
Excess Casualty and other 17 9% 9 5% 36 6% 23 5%
-------------------------- ------- ------- ------- ------- ------- ------- ------- -------
Net premium written $187 100% $179 100% $607 100% $455 100%
-------------------------- ------- ------- ------- ------- ------- ------- ------- -------
Gross premium written $267 $245 $823 $594
-------------------------- ------- ------- ------- ------- ------- ------- ------- -------
</TABLE>
18
<PAGE>
TIG HOLDINGS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
Net premium written increased $8 million and $152 million for the third quarter
and first nine months of 1998 compared to the corresponding 1997 periods. The
increase in the third quarter of 1998 is principally attributable to increased
production from Lloyd's Syndicates, while the increase for the first nine months
of 1998 is attributable to increased production in the Managed Compensation
business unit, from Lloyd's Syndicates, as well as new programs brought on since
the beginning of the year. The increase in Managed Compensation for the first
nine months is primarily attributable to TIG entering into a strategic
relationship in the third quarter of 1997 with a general agent that writes
program business and also provides loss management services. This relationship
contributed $17 million and $84 million of premium in the third quarter and
first nine months of 1998 compared to $52 million in both the third quarter and
first nine months of 1997. Also contributing to the increase in Managed
Compensation premium for the first nine months of 1998 is a better competitive
environment in Illinois, and growth in Arizona. The increased production in
Lloyd's Syndicates is primarily due to increased participation in the capacity
of the syndicates from approximately 18% in 1997 to 41% in 1998.
Growth in the third quarter of 1998 has slowed relative to the first nine months
of 1998. This is due to the seasonality of both Lloyd's Syndicates premium
production (a large portion of premium is written in the first quarter) and
workers compensation renewals (premium writings are greatest in the first
quarter), and the second quarter 1998 decision to buy down the net retention in
the Managed Compensation business unit from $1 million to $100 thousand. The
change in net retention was made to take advantage of favorable reinsurance
pricing available due to soft market conditions.
Underwriting Results. Underwriting results for Commercial Specialty are
presented below:
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September Ended September
30, 30,
---------------------- ----------------------
(In millions) 1998 1997 1998 1997
---------------------------------------- ----------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
Net premium earned $191 $129 $546 $357
Less:
Net loss and LAE incurred 138 87 374 246
Commission expense 29 27 94 67
Premium related expense 6 4 19 13
Other underwriting expense 21 9 54 32
Policyholder dividends incurred 8 2 16 5
---------------------------------------- ----------- ---------- ---------- -----------
Underwriting loss ($11) $ - ($11) $(6)
---------------------------------------- ----------- ---------- ---------- -----------
Statutory ratios
---------------------------------------- ----------- ---------- ---------- -----------
Loss and LAE 72.8 67.0 68.6 68.8
Commission 17.5 20.9 18.4 19.1
Premium related 2.8 2.6 3.6 3.2
Other underwriting 10.1 6.6 9.0 8.0
Policyholder dividends 1.4 1.9 1.9 2.6
---------------------------------------- ----------- ---------- ---------- -----------
Combined ratio 104.6 99.0 101.5 101.7
---------------------------------------- ----------- ---------- ---------- -----------
</TABLE>
19
<PAGE>
TIG HOLDINGS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
Commercial Specialty's underwriting loss increased by $11 million in the third
quarter and $5 million for the first nine months of 1998 compared to the
corresponding 1997 periods. Third quarter 1998 results include adjustments and
expenses of $4 million to increase policyholder dividend reserves and $2 million
of reinsurance recoverable write-offs. In addition, the 1998 underwriting loss
is net of benefits realized as a result of changes in the Managed Compensation
unit's reinsurance strategy. As previously described, the Managed Compensation
unit's net retention was reduced to $100 thousand from $1 million effective
April 1, 1998. Managed Compensation also purchased finite reinsurance that
allows the unit to stay competitive with other insurers whose states of domicile
allow discounting of workers' compensation loss reserves effective January 1,
1998. These changes improved Commercial Specialty's underwriting results by $11
million and $26 million for the third quarter and first nine months of 1998,
respectively, compared to the corresponding 1997 periods.
Excluding the 1998 increase in policyholder dividend reserves, write-off of
reinsurance recoverables and benefits derived from changing Managed
Compensation's reinsurance strategy, Commercial Specialty's underwriting loss
increased $16 million in the third quarter and $25million for the first nine
months of 1998, respectively, compared to the corresponding 1997 periods. This
deterioration is primarily due to pricing pressures in most business units due
to soft market conditions and increased underwriting expenses to support new
business initiatives and the development of new business processes.
- --------------------------------------------------------------------------------
2.4 CUSTOM MARKETS
- --------------------------------------------------------------------------------
Custom Markets division provides personal lines and small business insurance
products through three main business units: Non-standard Auto, Alternative
Distribution and Small Business. Non-standard Auto provides auto physical damage
and liability coverages to higher risk insureds principally through general
agents. Alternative Distribution markets personal lines insurance through
non-traditional channels, such as direct marketing, and group and affiliation
marketing. Small Business provides commercial property, liability, and auto
coverages to small business owners through independent agents, primarily in
Hawaii, Arizona and California.
Premium. The following table summarizes Custom Markets premium production:
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30, Ended September 30,
--------------- --------------- -------------------------------
1998 1997 1998 1997
--------------- --------------- --------------- ---------------
(In millions) NPW % NPW % NPW % NPW %
-------------------------- ------- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Non-standard Auto $31 44% $26 53% $85 43% $56 47%
Alternative Distributions 29 41% 9 18% 73 37% 16 13%
Small Business 15 22% 14 29% 49 25% 48 40%
Other (5) (7%) - - (10) (5%) - -
-------------------------- ------- ------- ------- ------- ------- ------- ------- -------
Net premium written $70 100% $49 100% $197 100% $120 100%
-------------------------- ------- ------- ------- ------- ------- ------- ------- -------
Gross premium written $81 $57 $223 $134
-------------------------- ------- ------- ------- ------- ------- ------- ------- -------
</TABLE>
20
<PAGE>
TIG HOLDINGS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
Custom Markets net premium written increased $21 million for the third quarter
of 1998 and $77 million for the first nine months of 1998 as compared to the
corresponding 1997 periods. The increased production noted in Alternative
Distribution is due to this unit having been formed in late 1996 with limited
production in the 1997 periods. The increases noted in Non-standard Auto are
principally due to new general agent relationships in California and Texas.
In the third quarter of 1998, the MBNA program within the Alternative
Distribution unit was placed in run-off. Under termination provisions of the
agency contract, the Company is required to provide a renewal market through
September 1, 1999, for this program; however, no new policies are expected to be
written during this period. Accordingly, Alternative Distribution net premium
written is expected to decline in future quarters. Net premium written for the
MBNA program was $30 million for the year ended December 31, 1997 and $65
million for the nine months ended September 30, 1998.
Underwriting Results. Underwriting results for Custom Markets are presented
below:
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September Ended September
30, 30,
---------------------- ----------------------
(In millions) 1998 1997 1998 1997
---------------------------------------- ----------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
Net premium earned $71 $42 $195 $112
Less:
Net loss and LAE incurred 78 28 175 73
Commission expense 27 8 51 22
Premium related expense 3 3 6 6
Other underwriting expense 11 6 23 15
---------------------------------------- ----------- ---------- ---------- -----------
Underwriting loss ($48) ($3) ($60) ($4)
---------------------------------------- ----------- ---------- ---------- -----------
Statutory ratios
---------------------------------------- ----------- ---------- ---------- -----------
Loss and LAE 90.2 67.3 82.3 65.0
Commission 17.8 19.7 18.7 18.9
Premium related 1.8 5.3 1.9 5.6
Other underwriting 11.9 13.1 10.2 13.2
---------------------------------------- ----------- ---------- ---------- -----------
Combined ratio 121.7 105.4 113.1 102.7
---------------------------------------- ----------- ---------- ---------- -----------
</TABLE>
Custom Markets underwriting losses increased by $45 million in the third quarter
of 1998 and $56 million for the first nine months of 1998 compared to the
corresponding 1997 periods. This deterioration is principally due to $47 million
of pre-tax adjustments and expenses related to the placement of the
aforementioned MBNA program in run-off. These adjustments and expenses included
the recognition of a premium deficiency of $33 million in third quarter 1998
(See Notes B and C to the Condensed Consolidated Financial Statements), and
underwriting losses of $14 million which incorporated revised loss and
reinsurance benefit assumptions. The premium deficiency adjustment was based on
an analysis by management which estimated future earned premium from existing
Custom Markets business and mandatory renewals related to the MBNA program. The
estimate of future earned premium and related losses incorporated management's
expectations that corrective pricing actions initiated in third quarter 1998
will be completed by the end of 1998 for major state filings, with all filings
completed by April 1999. Should management's estimates of future earned premium
and losses vary from actual results, future operating results could be impacted
either positively or negatively by the MBNA program.
21
<PAGE>
TIG HOLDINGS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
Excluding the third quarter 1998 adjustments and expenses, the third quarter
1998 Custom Markets underwriting loss was comparable to third quarter 1997,
while the first nine months of 1998 deteriorated approximately $9 million
compared to the 1997 period. The deterioration is primarily due to a $10 million
increase in underwriting losses in the Alternative Distribution unit during the
first six months of 1998.
- --------------------------------------------------------------------------------
2.5 OTHER LINES
- --------------------------------------------------------------------------------
Other Lines principally includes the results of Independent Agents personal
lines operations which were sold and 100% reinsured effective December 31, 1997,
commercial products which have been placed in run-off, and aggregate stop loss
reinsurance activity not related to a specific division.
Underwriting Results. Underwriting results for Other Lines are presented below:
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September Ended September
30, 30,
---------------------- ----------------------
(In millions) 1998 1997 1998 1997
---------------------------------------- ----------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
Gross premium written $62 $84 $202 $280
---------------------------------------- ----------- ---------- ---------- -----------
Net premium written ($7) $58 ($17) $195
---------------------------------------- ----------- ---------- ---------- -----------
Net premium earned ($6) $63 ($15) $229
Less:
Net loss and LAE incurred 22 43 5 162
Commission expense (2) 7 (20) 33
Premium related expense - 3 2 11
Other underwriting expense 4 4 5 14
Policyholder dividends incurred - - 1 -
---------------------------------------- ----------- ---------- ---------- -----------
Underwriting gain (loss) ($30) $6 ($8) $9
---------------------------------------- ----------- ---------- ---------- -----------
</TABLE>
Other Lines underwriting loss of $30 million in third quarter 1998 and $8
million in the first nine months of 1998 compares to underwriting gains of $6
million and $9 million for the corresponding 1997 periods. The third quarter and
first nine months of 1998 include an approximate $28 million increase in
reinsurance recoverable allowances and write-offs (see Note D to the Condensed
Consolidated Financial Statements), a $3 million increase in premium receivable
allowances and $2 million for the write-off of certain capitalized software.
Partially offsetting these charges is the recognition of $3 million and $20
million in the third quarter and first nine months of 1998, respectively, of
ceding commissions related to the sale of the Independent Agents unit in
December 1997 (see Note B to the Condensed Consolidated Financial Statements).
Other Lines results for third quarter 1998 and first nine months of 1998 include
$7 million and $22 million, respectively, of benefit recorded under aggregate
stop loss and other reinsurance coverage compared to $2 million and $11 million
for the corresponding 1997 periods.
22
<PAGE>
TIG HOLDINGS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
2.6 INVESTMENTS
- --------------------------------------------------------------------------------
Investment Mix. The goal of ongoing investment strategies is to provide TIG with
the most advantageous balance of liquidity with the highest possible return over
inflation, within corporate credit guidelines and regulatory restrictions and
subject to management's risk tolerance. The following chart summarizes TIG's
investment portfolio by investment type:
<TABLE>
<CAPTION>
September 30, 1998 December 31, 1997
-------------------------- ------------------------
Market % of Market Market % of Market
(In millions) Value Portfolio Value Portfolio
--------------------------------- ----------- -------------- ------------ ------------
<S> <C> <C> <C> <C>
Corporate and other bonds $1,197 28.5% $1,282 30.6%
Mortgage-backed securities 1,094 26.0% 941 22.4%
U.S. government bonds 1,030 24.5% 1,014 24.2%
Municipal bonds 646 15.4% 637 15.2%
--------------------------------- ----------- -------------- ------------ ------------
Total fixed maturity investments 3,967 94.4% 3,874 92.4%
Short-term and other investments 236 5.6% 318 7.6%
--------------------------------- ----------- -------------- ------------ ------------
Total invested assets $4,203 100.0% $4,192 100.0%
--------------------------------- ----------- -------------- ------------ ------------
</TABLE>
The portfolio gross book yield at September 30, 1998 was 7.1%, as compared to
7.4% at December 31, 1997. The weighted average duration of the portfolio
increased to 6.1 years at September 30, 1998 as compared to 5.4 years at
December 31, 1997 due to a decline in short-term investments. TIG's objective is
to maintain the weighted average duration of its investment portfolio between 4
and 7 years.
Approximately 26% of TIG's portfolio consists of mortgage-backed securities
("MBS"). AAA rated United States federal government agency mortgages now
represent approximately 91% 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. Pre-payments
of MBS securities during 1998 and the subsequent reinvestment of such funds in
lower market yield securities have contributed to the aforementioned 1998
decline in portfolio gross book yield. 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.
23
<PAGE>
TIG HOLDINGS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
No futures contracts positions were open at September 30, 1998, or December 31,
1997. There were no interest rate swaps at September 30, 1998 compared to $14
million notional face amount of interest rate swaps at December 31, 1997. The
total fair value of derivative positions was approximately $63 million,
representing 1.6% of total investment asset holdings at September 30, 1998, a
slight decrease from December 31, 1997. All TIG derivative financial instruments
were with financial institutions rated "A" or better by one or more of the major
credit rating agencies.
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 maintains cash and short-term
investments with a fair value exceeding the amount of its TBA purchase
commitments. At September 30, 1998, there were no outstanding TBA commitments,
compared to TBA commitments of $24 million with a fair value of $26 million at
December 31, 1997.
Unrealized Gains. Net pre-tax unrealized gains increased $18 million at
September 30, 1998, compared to December 31,1997. The following is a summary of
net unrealized gains by type of security.
<TABLE>
<CAPTION>
(In millions) September 30, December 31,
1998 1997 Change
-------------------------------------- ----------------- ----------------- ------------
<S> <C> <C> <C>
Municipal bonds $45 $41 $4
Mortgage-backed securities 13 8 5
US government bonds 130 73 57
Corporate and other bonds (13) 27 (40)
Other investments (6) 2 (8)
-------------------------------------- ----------------- ----------------- ------------
Net unrealized gains $169 $151 $18
-------------------------------------- ----------------- ----------------- ------------
</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 Nine Months
Ended September 30, Ended September 30,
---------------------- ----------------------
(In millions) 1998 1997 1998 1997
------------------------------------ ---------- ----------- ----------- ----------
<S> <C> <C> <C> <C>
Fixed maturity investments:
Taxable $58 $66 $179 $203
Tax-exempt 9 8 28 23
Short-term and other investments 2 1 6 4
------------------------------------ ---------- ----------- ----------- ----------
Total gross investment income 69 75 213 230
Investment expenses - - 1 -
Interest expense on funds held 11 5 28 11
------------------------------------ ---------- ----------- ----------- ----------
Total net investment income $58 $70 $184 $219
------------------------------------ ---------- ----------- ----------- ----------
Gross investment yield 7.0% 7.3% 7.1% 7.4%
------------------------------------ ---------- ----------- ----------- ----------
After-tax gross investment yield 4.8% 5.0% 4.9% 5.0%
------------------------------------ ---------- ----------- ----------- ----------
</TABLE>
24
<PAGE>
TIG HOLDINGS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
The $6 million and $17 million decline in gross investment income for the three
and nine month periods ended September 30, 1998 compared to the corresponding
1997 periods is due to a lower average invested asset base and a lower average
gross yield for the 1998 periods compared to the 1997 periods. The decline in
average investable assets is principally due to the transfer of $149 million of
investment assets related to the sale of the Independent Agents personal lines
operations on December 31, 1997. The decline in gross investment yield is due to
a general decline in market yields and a $300 million shift away from high-risk,
high-yield securities. The increase in interest expense on funds held is the
result of increased utilization of finite reinsurance in 1997 and 1998. As a
result of this increased utilization, funds held interest expense is expected to
continue to increase in future periods.
Investment Quality. The table below shows the rating distribution of TIG's fixed
maturity portfolio:
<TABLE>
<CAPTION>
(In millions) September 30, 1998 December 31, 1997
---------------------- ----------------------
Market % of Market % of
Standard & Poor's/Moody's Value Portfolio Value Portfolio
------------------------------------- ----------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
AAA/Aaa $2,710 68.3% $2,541 65.6%
AA/Aa 252 6.4% 261 6.7%
A/A 294 7.4% 209 5.4%
BBB/Baa 296 7.4% 220 5.7%
Below BBB/Baa 415 10.5% 643 16.6%
------------------------------------- ----------- ---------- ---------- -----------
Total fixed maturity investments $3,967 100.0% $3,874 100.0%
------------------------------------- ----------- ---------- ---------- -----------
</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 high yield, less than investment grade securities up to statutory
limitations. 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 or Moody's has
assigned a rating to a particular fixed maturity issue, classification is based
on 1) ratings available from other recognized rating services, 2) ratings
assigned by the National Association of Insurance Commissioners 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 domiciliary 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 September 30, 1998 and
December 31, 1997, approximately 89% and 84%, respectively, of TIG's portfolio,
measured on a statutory carrying value basis, was invested in securities rated
as "1" or "2".
25
<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 liability for losses and loss
adjustment expenses ("LAE") with respect to reported and unreported claims.
TIG's reserves for losses and LAE totaled $4,032 million and $3,935 million at
September 30, 1998 and December 31, 1997, respectively. The process of
estimating loss and LAE reserves involves the active participation of an
experienced actuarial staff with input from the underwriting, claims,
reinsurance, financial, and legal departments. Management, using the advice of
loss reserve specialists, makes a judgment as to the appropriate amount to
record in the financial statements. 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 $29 million and $34 million at September 30, 1998 and December
31, 1997, respectively. TIG's environmental claims activity is predominately
from hazardous waste and pollution-related claims arising from commercial
insurance policies. In connection with TIG's Initial Public Offering in April
1993, an affiliate of TIG's former parent, Transamerica Corporation, agreed to
pay 75% of up to $119 million of reserve development and newly reported claims,
up to a maximum reimbursement of $89 million, on policies written prior to
January 1, 1993, with respect to certain environmental claims involving paid
losses and certain LAE in excess of TIG's environmental loss and LAE reserves at
December 31, 1992. At September 30, 1998, the Transamerica affiliate had
incurred no liability under this agreement.
Management considers many factors when setting reserves, including: (i) current
legal interpretations of coverage and liability; (ii) economic conditions; and
(iii) internal methodologies which analyze TIG's experience with similar cases,
information from ceding companies and historical 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's loss and LAE reserves. Actual losses and LAE paid may deviate,
perhaps substantially, from such reserves.
26
<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, policyholder dividends, interest
expenses and debt obligations. Generally, premium is collected months or years
before claims are paid under the policies purchased by the premium. These funds
are used first to pay current claims and expenses. The balance is invested in
securities to augment the investment income generated by the existing portfolio.
Historically, TIG has had, and expects to continue to have, more than sufficient
funds to pay claims, operating expenses, policyholder dividends, interest
expenses and debt obligations.
Cash Flow From Operating Activities. The following table summarizes the
significant components of cash flow from operations:
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30, Ended September 30,
---------------------- ----------------------
(In millions) 1998 1997 1998 1997
--------------------------------- ---------- ----------- ---------- -----------
<S> <C> <C> <C> <C>
Reinsurance operations $2 $21 $84 $91
Primary operations and
corporate 23 28 94 63
--------------------------------- ---------- ----------- ---------- -----------
On-going operations 25 49 178 154
Run-off (Other Lines operations) (24) (11) (120) (129)
--------------------------------- ---------- ----------- ---------- -----------
Total $1 $38 $58 $25
--------------------------------- ---------- ----------- ---------- -----------
</TABLE>
The decline in ongoing operations cash flow for third quarter 1998 compared to
1997 is driven by decreased reinsurance operations premium in conjunction with
increased loss payments on programs that have been non-renewed. The decrease in
primary operations and corporate cash flow is primarily due to increased loss
payments and a decrease in investment income received, offset in part by
increased premium receipts. Cash outflow for runoff operations increased due to
the timing of loss payments.
Both ongoing operations and runoff operations cash flow improved for the first
nine months of 1998 compared to 1997. Reinsurance operations benefited from the
net receipt of $62 million in connection with the assumption of certain runoff
liabilities of another reinsurer offset in part by increased loss payments
relative to premium collections. Primary operations generated increased cash
flow due to increased premium production. Contributing to the improvement in
runoff cash flow is the expected decline in losses paid.
In October 1998, Standard and Poor's Financial Strength rating ("S&P rating")
for TIG's insurance subsidiaries was lowered from A+ to A. Under one of the
Company's reinsurance arrangements, the reinsurer has the right to convert the
treaty to a funds transferred basis from a funds held basis if the S&P rating
falls below A+. Funds withheld subject to transfer were approximately $169
million at September 30, 1998. Any such transfer would result in an
approximately equal reduction in gross investment income and funds held interest
expense in future periods.
27
<PAGE>
TIG HOLDINGS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
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 insurance subsidiaries that can be made
without regulatory approval during 1998 is $180 million. TIG Holdings received
$125 million in dividends from its insurance subsidiaries in the first nine
months of 1998, as compared to $95 million for the first nine months of 1997.
Aggregate investments and cash at TIG Holdings were $85 million at September 30,
1998, compared to $39 million at December 31, 1997.
Notes Payable. In December 1995, TIG Holdings established an unsecured revolving
line of credit with maximum borrowings of $250 million. During first quarter
1998, TIG borrowed $70 million against this facility, of which $40 million
remains outstanding at September 30, 1998. In 1995, TIG Insurance Company
entered into a five-year $50 million credit facility of which approximately $25
million and $24 million was outstanding as of September 30, 1998 and December
31, 1997, respectively. 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 $99 million of 8.125% notes payable maturing in 2005
outstanding at September 30, 1998 and December 31, 1997.
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).
Shareholder's Equity. Shareholders' equity was unchanged during the first nine
months of 1998, primarily due to $16 million in net income, a $12 million
increase in unrealized gains, $12 million in common stock issued, and $3 million
of unearned compensation amortization which was offset by $18 million of common
stock repurchases, and $25 million of common and preferred stock dividends. Book
value per share was $22.82 at September 30, 1998 and December 31, 1997.
Excluding the impact of unrealized investment gains, the book value per share
would have been $20.65 at September 30, 1998 and $20.90 at December 31, 1997.
As of September 30, 1998, the Board of Directors has authorized common stock
repurchases of up to 18.75 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 September 30, 1998, 16.3 million shares have been repurchased (24% of
total issued and outstanding including treasury shares at September 30, 1998) at
an average cost per share of $28.34, for an aggregate cost of $461 million.
There were no shares repurchased in the third quarter 1998.
In February, May and August 1998, TIG Holdings paid quarterly stock dividends of
$0.15 per share, the same as the quarterly dividend rate for 1997.
28
<PAGE>
TIG HOLDINGS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
2.9 YEAR 2000
- --------------------------------------------------------------------------------
The Year 2000 issue relates to the ability or inability of systems (including
computer hardware, software and embedded microprocessors) to properly interpret
date information relating to the year 2000 and beyond. Many existing systems,
including many of TIG's existing systems, use only the last two digits to refer
to a year (i.e., "98" is used for 1998). Therefore, these systems may not
properly recognize a year that begins with "20" instead of "19". If not
corrected, these systems could fail or create erroneous results.
Specific information technology systems that are utilized by TIG, and by third
parties with whom TIG has business relationships, include policy, claim and
reinsurance processing and administration, accounting, payroll, financial
reporting, product development, rate and form development and maintenance,
business planning, tax, accounts receivable, accounts payable and numerous word
processing and spreadsheet programs. In addition, TIG and third parties with
whom TIG has a business relationship are dependent on many non-information
technology based systems, such as utility, communication and security systems.
TIG's State of Readiness. TIG has conducted an extensive review of its core
processing computer systems, including computer hardware and software vendors,
to identify and address all changes, testing and implementation procedures
required to make such systems Year 2000 compliant. The Company has a coordinated
process to facilitate the necessary changes, testing and implementation
procedures. TIG has completed and implemented substantially all of the required
code changes of its Year 2000 system remediation project. The Year 2000 system
project testing remains slightly behind schedule, and TIG now expects necessary
third party software implementation and most major testing of its computer
systems to be completed by March 31, 1999. TIG will continue testing its
internal systems, as well as its internal systems' abilities to operate with the
systems of key third parties, during the remainder of 1999.
TIG has significant business relationships with numerous third parties (other
than computer software and hardware vendors discussed above) that impact
virtually all aspects of TIG's business, including, without limitation, general
agents and brokers which produce and service policies, third party
administrators which provide services such as claims adjusting, banks, general
suppliers and facility related vendors. In the event that one or more key third
parties are unable to make their systems Year 2000 compliant, TIG's operations
could suffer a material adverse impact. TIG has a coordinated process to
identify key third parties, request information regarding Year 2000 compliance,
assess potential risk based upon responses received, and determine any action
required to mitigate potential risks. TIG expects to complete mailing requests
for information to key third parties by the end of November 1998. TIG has
evaluated approximately 35% of the responses received to date from such third
parties and is analyzing the need for further action on a case-by-case basis.
TIG expects to complete substantially all of its initial evaluation of third
party responses by December 31, 1998. Determination of any action required is
expected to be completed by March 31, 1999, and TIG will continue to monitor
Year 2000 issues relating to such key third parties during the remainder of
1999. Notwithstanding efforts by TIG to assess the third party's systems, there
can be no guarantee that such systems will be Year 2000 compliant.
29
<PAGE>
TIG HOLDINGS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
The Cost to Address TIG's Year 2000 Issues. TIG currently estimates that
approximately $10 to $12 million will be incurred for services rendered by
outside vendors related to Year 2000 system modifications, of which
approximately $8 million has been incurred to date. During the nine months ended
September 30, 1998, such Year 2000 system project costs represented
approximately 15% of TIG's actual information systems costs during that period.
Substantially all of the amounts incurred on Year 2000 systems modifications
have been used for software remediation and testing. To date, TIG's Year 2000
system project has not caused any significant delays in other key information
system projects.
In addition to the costs incurred for Year 2000 system modifications, TIG will
incur expenses in ascertaining whether key third parties with which it has a
material relationship are Year 2000 compliant. TIG estimates that such expenses
will not exceed $1 million.
All estimates of future costs related to assessing and achieving Year 2000
compliance are based on management's best estimates and there can be no
guarantee that actual amounts expended will not differ from such estimates.
The Risks of TIG's Year 2000 Issues. The insurance business, by its nature, is
date sensitive. Proper processing of core policy, reinsurance and claims data is
dependent upon correct policy effective dates, policy expiration dates,
endorsement dates, premium payment dates, loss dates, loss report dates, and the
like. Inaccurate date processing of policy, reinsurance, claims and other
information could have a significant adverse impact on the conduct of TIG's
daily business operations and the preparation of accurate financial information.
During the fourth quarter of 1998, TIG has begun processing insurance contracts
expiring in Year 2000. Although some minor Year 2000 related problems have been
encountered in processing such contracts, there has not been any material
processing disruption to date. However, some Year 2000 related problems may only
become apparent over time, beginning as early as the end of 1998. It is possible
that future Year 2000 related problems could result in disruptions of TIG's
operations in the event that TIG is unable to make its systems fully Year 2000
compliant.
In addition, TIG's policyholders may incur losses stemming from Year 2000
problems. A small percentage of these losses may be insured under certain TIG
professional liability policies. In general, however, the types of problems
expected to arise from Year 2000 problems will be business risks which are not
insurable under standard property and casualty policies. It is possible,
however, that certain TIG policies may be reformed by judicial decisions to
cover Year 2000 losses which were not contemplated. Further, one of the
insurance industry's actuarial methodologies utilizes past losses in order to
determine the potential for future losses. The unique nature of the Year 2000
problem, and the resulting unknown impact of this problem, make such an
actuarial analysis based on past losses indeterminable at this time. As a
result, TIG is unable to determine to what extent Year 2000 claims would be held
to have merit or whether such claims, if upheld, would have a material impact on
TIG's financial results. To date, TIG has not incurred any losses relating to
Year 2000 claims under its insurance and reinsurance policies.
30
<PAGE>
TIG HOLDINGS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
Although the Company has taken the actions described above to address the Year
2000 problem, if those actions are not sufficient, the most reasonably likely
worst case Year 2000 scenario is that TIG would experience widespread internal
and third party systems failures and would be temporarily unable, through
automated means, to receive or process new policies, reinsurance, claims and
other information and transactions. In addition, the most reasonably likely
worst case scenario would include some judicial reformation of policies
extending coverage beyond the scope contemplated by TIG's underwriting
practices. Depending on the duration and severity of any systems failures and
the extent of any insurable Year 2000 losses, and any other unknowns, including
those mentioned above, the most reasonably likely worst case scenario could
result in a material adverse effect on the Company.
TIG's Contingency Plans. TIG is in the process of determining the risks it would
face in the event certain aspects of its Year 2000 readiness plan fail. TIG is
also developing a contingency plan for mission-critical processes and expects to
complete this plan by March 31, 1999.
31
<PAGE>
TIG HOLDINGS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
2.10 FORWARD-LOOKING STATEMENTS
- --------------------------------------------------------------------------------
TIG Holdings would like to caution readers regarding certain forward-looking
statements in the Management's Discussion and Analysis and elsewhere in this
Form 10-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 limitation:
* 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 or result in
loss of key producer relationships
* 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
* delays in regulatory approvals for rate and form filings
* changes in ratings assigned to TIG which could impact demand for the
Company's products
* 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
* inability of the Company or third parties with whom the Company has
material relations to address Year 2000 issues on a timely basis
* change in strategic business plans due to sale, restructure or
recapitalization of the Company
Many of these uncertainties and contingencies can affect TIG's 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.
32
<PAGE>
TIG HOLDINGS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
2.11 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. This form of
reinsurance can be used to mitigate the financial volatility of new programs, or
cover exposure to large deductibles under other reinsurance treaties. It can
also be used to provide surplus relief or loss development protection.
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.
33
<PAGE>
TIG HOLDINGS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
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.
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.
34
<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 Appeals 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 Appeals' decision.
Management believes that the ultimate liability arising from the Talbot Case
will not materially impact consolidated operating results.
TIG's Federal income tax returns are routinely audited by the Internal Revenue
Service (IRS) and provisions are made in the financial statements in
anticipation of the results of these audits. Following a routine federal income
tax audit by the IRS, in September 1997, the IRS issued a Statutory Notice of
Deficiency for the tax year 1993 and a Revenue Agents Report for 1994 asserting
a tax liability of approximately $170 million excluding interest. The IRS's
asserted tax adjustments principally relate to the acquisition made by TIG under
the Section 338(h)(10) election of April 27, 1993 in conjunction with TIG's
Initial Public Offering and primarily generate temporary differences by creating
income in 1993 with corresponding deductions in 1993 and future tax years. TIG
strongly disagrees with the IRS's position and, on December 11, 1997, TIG filed
a Tax Court Petition challenging it. In connection with the Statutory Notice of
Deficiency issued by the IRS for the 1993 tax year, TIG made a $40 million
advance tax payment in December 1997, that has been reflected as a current tax
asset. While the timing of cash tax payments may be impacted, management
believes that revisions to TIG's recorded tax liability, if any, arising from
the IRS's audit will not materially impact consolidated net income or the
financial condition of the Company.
On February 12, 1998, a purported class action complaint, naming TIG and two of
its executive officers as defendants, was filed in the United States District
Court for the Southern District of New York on behalf of persons who purchased
TIG common stock during the period from October 21, 1997, to January 30, 1998,
when TIG announced its fourth quarter 1997 results. Subsequently, on July 12,
1998, the complaint was amended. The amended complaint alleges that TIG violated
the federal securities laws by misrepresenting the adequacy of its underwriting
and monitoring standards and loss reserves, and that five of its officers and
directors sold shares at prices that were artificially inflated as a result of
the alleged misrepresentations. Plaintiffs seek unspecified monetary damages,
including punitive damages. Management believes that the lawsuit is without
merit and it will be vigorously defended.
35
<PAGE>
TIG HOLDINGS, INC.
PART II. OTHER INFORMATION
- --------------------------------------------------------------------------------
On July 17, 1998, TIG Premier Insurance Company ("TIG Premier") filed a
complaint and jury demand against MBNA America Bank, N.A. d.b.a. MBNA Insurance
Services ("MBNA") in federal court in the Northern District of Texas that was
based on an agency agreement between TIG Premier and MBNA (the "Agency
Agreement") pursuant to which TIG Premier offered an insurance program that was
marketed by MBNA to its customers. In its complaint, TIG Premier sought a
declaratory relief judgement declaring that TIG Premier could reduce the
commission payable to MBNA and lengthen the 5-year term of the Agency Agreement
in order to, at a minimum, reduce TIG Premier's underwriting losses and improve
the possibility of TIG Premier achieving the agreed upon 15% minimum rate of
return. On August 19, 1998, TIG Premier filed an amended complaint seeking money
damages for MBNA's repudiation and breach of the Agency Agreement, including,
without limitation the underwriting losses that TIG Premier incurred and the
minimum 15% rate of return over the entire five-year initial term of the Agency
Agreement, in an amount to be determined at trial. In its amended answer, dated
August 31, 1998, MBNA instituted a counterclaim against TIG Premier based on TIG
Premier's alleged breach and repudiation of the Agency Agreement, seeking
damages in an amount not less than $100 million dollars. Management believes
that the liability arising from this case, if any, will not materially impact
consolidated operating results.
36
<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 Holding' 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).
37
<PAGE>
TIG HOLDINGS, INC.
PART II. OTHER INFORMATION
- --------------------------------------------------------------------------------
Exhibit 10.1: Transition Services Agreement dated June 11, 1998 between TIG
Holdings, Inc. and Edwin G. Pickett.
Exhibit 10.2: Employment Agreement dated August 18, 1998 between TIG
Holdings, Inc. and Mary R. Hennessy.
(b) The Company did not file any reports on Form 8-K during the three months
ended September 30, 1998.
38
TRANSITION SERVICES AGREEMENT
This TRANSITION SERVICES AGREEMENT ("Transition Services Agreement") is
made and entered into as of the 11th day of June, 1998 by and between Edwin G.
Pickett, residing at Green Valley Farm, Route 2, Box 304X, Aubrey, Texas
76227(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 at its Irving,
Texas offices as its Executive Vice President and Chief Financial Officer
pursuant to a letter agreement dated June 15, 1993, as supplemented by a letter
dated June 22, 1993 (as so supplemented, the "Letter Agreement"); and
WHEREAS, the Corporation has advised the Executive that it has determined
that it is in the best interests of the Corporation that its chief financial
officer be located at the Corporation's principal executive offices in New York,
New York along with the Corporation's chief executive officer and chief
operating officer, and the Executive has determined that he does not wish to
relocate from Texas to New York and would prefer to resign his positions with
the Corporation and its subsidiaries and assume retirement status;
WHEREAS, the Corporation is willing to accept the Executive's resignation
but has requested, and the Executive has agreed, that the Executive remain with
the Corporation through the end of the year while the Corporation conducts a
search for and completes the transition to a new chief financial officer; and
WHEREAS, the Executive and the Corporation desire to establish the terms
for the Executive's retirement status with the Corporation and 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 Letter 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 Transition Services 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. Agreement to Resign; Termination of Employment.
1.1 The Executive hereby resigns, effective as of the close of business on
December 31, 1998 or such earlier date as the Corporation appoints a new chief
financial officer (the earlier of such dates being referred to herein as the
"Resignation Date"), as Executive Vice President and Chief Financial Officer of
the Corporation, from all other officer and employee positions with the
Corporation and its subsidiaries and affiliates and from all directorships that
he holds with subsidiaries and other affiliates of the Corporation. Until the
Resignation Date, the Executive will continue in his current positions with the
Corporation and its subsidiaries and will, consistent with the duties and
responsibilities of a chief financial officer of a public company, assist the
Corporation and its subsidiaries in good faith and to the best of his abilities
as directed by the Chief Executive Officer of the Corporation in order to help
the Corporation achieve its objectives.
<PAGE>
1.2 Notwithstanding the foregoing, in the event that the Resignation Date
occurs prior to December 31, 1998, the Executive will, as of the Resignation
Date, become an "inactive" employee of the Corporation and will continue in that
capacity through the close of business on December 31, 1998 (the "Termination
Date"). As a result, the Executive will qualify for contributions made in
respect of 1998 under the Corporation's Employee Stock Ownership Plan and
Diversified Savings and Profit Sharing Plan, including under the "top hat"
supplemental plans established with respect to such plans. In the event that the
Resignation Date occurs prior to the Termination Date, the Executive will
provide such reasonable assistance to the new Chief Financial Officer of the
Corporation in facilitating his or her transition as may be requested from time
to time by the Chief Executive Officer of the Corporation or the new Chief
Financial Officer prior to the Termination Date. During the first thirty (30)
days of such period, the Executive will be entitled to retain his office and
secretarial support. Thereafter, until the Termination Date, the Executive will
be provided with an appropriate office and secretarial support to the extent
that he is required to work out of the Corporation's Irving, Texas offices in
order to carry out his duties pursuant to the third sentence of this paragraph.
In addition, as soon as possible following the Resignation Date, the Corporation
will transfer to the Executive title to the cellular telephone and Libretto
computer currently made available by the Corporation to the Executive, subject
to the Executive arranging for the billing on the cellular telephone to be
transferred to his name and for the issuance of licenses to him to use the
software in connection with the computer.
1.3 Following the Resignation Date and until the Termination Date, the
Corporation will continue to pay the Executive at his current rate of base
salary ($467,500 per annum), and the Executive shall continue to be considered
an employee of the Corporation for purposes of eligibility to participate in and
to receive all benefits under any and all welfare benefit plans, practices,
policies and programs maintained or provided by the Corporation and/or its
subsidiaries, in accordance with their terms, for the benefit of employees of
the Corporation (other than the Corporation's vacation plan, in which the
Executive shall be entitled to participate only through the Resignation Date to
the extent provided in the next sentence). The Executive will cease to accrue
additional vacation days as of and from the Resignation Date through the
Termination Date and will, on the Resignation Date, be entitled to receive a
cash payment for his unused accrued vacation days based upon his $467,500
current rate of base salary and otherwise determined in accordance with the
Corporation's policies.
1.4 Notwithstanding anything to the contrary contained in this Section 1,
the Executive's employment with the Corporation may be terminated by the
Corporation at any time following the date hereof for "cause". For purposes of
this Transition Services Agreement, "cause" means (i) an act or acts of personal
dishonesty taken by the Executive and intended to result in the Executive's
personal enrichment at the expense of the Corporation or any of its
subsidiaries, excluding for this purpose any isolated, insubstantial or
inadvertent action not taken in bad faith which is remedied by the Executive in
a reasonable period of time after receipt of written notice thereof from the
Corporation, (ii) repeated violations by the Executive of his obligations under
this Transition Services Agreement which are demonstrably willful and deliberate
and which are not remedied in a reasonable period of time by the Executive after
receipt of written notice thereof from the Corporation or (iii) the Executive's
conviction of a felony involving moral turpitude. In the event that the
Executive's employment is terminated for "cause", the Executive shall cease to
be an employee of the Corporation and its subsidiaries for all purposes and the
Corporation shall have no further obligations to the Executive under this
Transition Services Agreement (including, without limitation, under the second
sentence of Section 1.2, the first sentence of Section 1.3 and the third
sentence of Section 4), other than (a) to pay his base salary and other benefits
accrued through the date of termination and (b) to make the Cash Payment
pursuant to Section 2.
<PAGE>
2. Cash Payments.
2.1 Upon the execution of this Transition Services Agreement, the Letter
Agreement shall automatically terminate, and the Executive shall thereupon cease
to be entitled to receive any payments or benefits payable under the Letter
Agreement or under any other plan, arrangement or practice maintained by the
Corporation or any of its subsidiaries as a result of his termination of
employment. In lieu of any other cash payments or benefits to which the
Executive may have been entitled under the Letter Agreement or otherwise as a
result of the termination of his employment, the Corporation shall, following
the Termination Date and regardless of whether the Executive's employment has
previously been terminated for "cause", make a cash payment to the Executive in
the amount of $1,076,250 (the "Cash Payment") payable in two installments as
follows: (a) the first installment in the amount of $315,000 (the "First
Installment") shall be payable on the eighth day (or if such day is not a
business day, on the next succeeding business day) following the date (which
shall not be earlier than December 31, 1998) on which the Executive signs a
general release in the form of Exhibit A hereto, provided that the Executive
shall not have revoked such release during such interim period and the release
shall remain in full force and effect on the date of payment, and (b) the second
installment in an amount equal to the difference between the First Installment
and the Cash Payment (the "Second Installment") shall be payable on April 1,
1999, together with interest on the Second Installment, payable at the rate of
8.5% per annum, from and including the date of payment of the First Installment
to but excluding April 1, 1999.
2.2 Simultaneous with the payment of the First Installment, the Corporation
shall make a cash payment of $10,000 to the Executive in full satisfaction of
expenses incurred and to be incurred by the Executive in connection with the
negotiation of this Transition Services Agreement, the transition of his
relationship with the Corporation and other miscellaneous expenses.
3 Retirement Status. The Compensation Committee of the Board of Directors
of the Corporation (the "Compensation Committee") has approved a Supplemental
Executive Retirement Plan, a copy of which is attached hereto as Exhibit B (the
"Retirement Plan"), providing for 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
Transition Services Agreement, the Executive agrees to be bound by the terms of
the Retirement Plan in all respects.
4. Employee Benefits. Following the Termination Date (or, if earlier, the
date that the Executive's employment is terminated for "cause"), 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 second sentence of Section 1.2 and except
as provided in the next sentence. If (x) in the sole, good faith judgment of the
Chief Executive Officer of the Corporation the Executive has performed his
obligations under this Transition Services Agreement to the best of his
abilities, (y) the Corporation has achieved its targeted performance goals for
1998 and (z) the Executive has executed a general release when and as
contemplated by Section 2, the Chief Executive Officer will recommend to the
Compensation Committee that the Executive receive a cash bonus in respect of
1998 services equal to the cash bonus paid to the Executive in respect of 1997
services (determined by adding the amount of the Executive's cash bonus to the
value of his restricted stock grants valued as of the date of grant), pro rated
based on the portion of 1998 that the Executive is not deemed an "inactive"
employee in accordance with this Transition Services Agreement. The Compensation
Committee will take into account the Chief Executive Officer's recommendation in
considering whether the Executive should receive a cash bonus in recognition of
the Executive's performance, contribution and cooperation during 1998 and, if
so, the amount of such bonus. The determination regarding the Executive's cash
bonus for 1998 will be made at the time that the Compensation Committee
generally considers bonus awards for employees in respect of 1998 services. In
addition, if the Executive elects health, medical and dental welfare benefit
continuation under the Consolidated Omnibus Budget Reconciliation Act of 1985,
as amended ("COBRA"), the Corporation will pay the COBRA premium amounts
required to maintain the same level and type of coverage the Executive (and his
dependents, if applicable) enjoys on the date of this Transition Services
Agreement for the period commencing January 1, 1999 and terminating on June 30,
2000. The payment referred to in the preceding sentence will be grossed-up by
the Corporation to take account of income taxes payable by the Executive in
respect of such payment. The Executive acknowledges that, for COBRA purposes
only, a COBRA "qualifying event" will occur on December 31, 1998 and that the
Executive's COBRA coverage period will commence on January 1, 1999.
<PAGE>
5. Confidential Information. During the Executive's employment with the
Corporation and for a period of four (4) years thereafter, 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. 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 Transition Services Agreement
or (ii) the Executive rightfully received from a third party without obligation
of confidence.
6. Non-solicitation. For a period of four (4) years following the
Termination Date (or, if earlier, the date that the Executive's employment is
terminated for "cause"), 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 (other than the
Executive's current senior executive secretary) 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.
7. Non-Disparagement; Publicity. Neither the Executive nor the Corporation
will hereafter make any oral or written statement concerning the other to any
person, company or agency which is not made in good faith and is intended to
disparage or damage the personal or professional reputation or interfere with
business opportunities of the Executive, on the one hand, or the Corporation
and/or any of its subsidiaries or affiliates (and their respective directors and
officers), on the other.
(b) The Corporation will give the Executive a reasonable opportunity
to review any press release or public filing with the Securities and
Exchange Commission which announces the Executive's termination of
employment with the Corporation, and the Corporation will consider in good
faith any reasonable comments provided by the Executive on a timely basis
with respect to such press release or filing.
<PAGE>
8. Releases.
8.1 In consideration of the payments and benefits to the Executive under
this Transition Services 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 occurring before the date of this Transition Services 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 Letter Agreement or the termination of the
Executive's employment with the Corporation or the manner of such termination;
provided, however, that this Section 8 shall not apply to any of the obligations
of the Corporation specifically provided for in or pursuant to this Transition
Services Agreement. This Transition Services 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
Letter 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. S. 12101 et seq.,
and Title VII of the Civil Rights Act of 1964, 42
U.S.C. S. 2000 et seq., and as each of these laws have
been or will be amended.
8.2 In consideration of the obligations of the Executive under this
Transition Services 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
arising out of any actions, events or circumstances occurring before the date of
this Transition Services Agreement 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 Letter Agreement or the termination of the Executive's
employment with the Corporation or the manner of said termination; provided,
however, that this Section 8.2 shall not apply to any of the obligations of the
Executive specifically provided for in or pursuant to this Transition Services
Agreement. This Transition Services 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.
<PAGE>
8.3 Notwithstanding anything to the contrary in Section 8.2, but subject to
the other provisions of this Transition Services Agreement, 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.
8.4 The Executive acknowledges that the Executive has carefully read and
fully understands all of the terms of this Transition Services Agreement,
including without limitation the releases contained herein. The Executive
further acknowledges that the Executive has entered into this Transition
Services 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 Transition Services Agreement and the terms and consequences
of this Transition Services 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 Transition Services Agreement and has chosen to
execute, deliver and agree to this Transition Services Agreement as of the date
of this Transition Services Agreement. The Executive agrees that the Executive
has been given a fair, reasonable and sufficient time to fully consider all of
the terms of this Transition Services Agreement. The Executive may revoke the
portion of this Transition Services Agreement that relates to the release of any
claim the Executive may have under the Age Discrimination in Employment Act of
1967 (including, without limitation, the Older Workers Benefit Protection Act)
at any time within seven (7) days after the date of execution of this Transition
Services Agreement by notifying the Corporation of such revocation in writing.
Notwithstanding the foregoing, no such revocation shall affect or alter any
other term or provision of this Transition Services Agreement or any other
release granted hereunder, all of which shall survive any such revocation in
accordance with their terms.
8.5 Except as specifically provided for in or pursuant to this Transition
Services 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 Transition Services Agreement, the Executive shall have no
further rights and shall be entitled to no further benefits under the Letter
Agreement, which the Executive agrees is superseded in all respects by this
Transition Services Agreement and shall be of no further force or effect on and
as of the date hereof.
<PAGE>
9. Scope of Agreement; Enforceability. This Transition Services 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 8.5 of this Transition Services
Agreement, the Letter Agreement. Notwithstanding the foregoing, this Transition
Services 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 Transition Services 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 Transition Services Agreement shall inure to the benefit of and be
enforceable by the Executive's heirs, beneficiaries and/or legal
representatives. This Transition Services 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 Transition Services Agreement, or the
application thereof to any person or circumstances, will to any extent be
invalid or unenforceable, the remainder of this Transition Services 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 Transition Services Agreement will be valid and enforceable to the
fullest extent permitted by law.
10. 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 5, 6 and/or 7 of this Transition Services Agreement, and would be
irreparably harmed, if the Executive breaches any of the provisions of
Sections 5, 6 and/or 7 of this Transition Services 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 5, 6
and/or 7 of this Transition Services 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 5, 6 and/or 7 of this Transition Services 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 Transition Services Agreement by the Executive, shall not include
the right of offset against amounts otherwise due to the Executive hereunder.
11. Amendments/Waiver. This Transition Services Agreement may not be
amended, waived, or modified otherwise than by a written agreement executed by
the parties to this Transition Services Agreement or their respective successors
and legal representatives. No waiver by any party to this Transition Services
Agreement of any breach of any term, provision or condition of this Transition
Services 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.
<PAGE>
12. 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: Edwin G. Pickett
Green Valley Farm
Route 2
Box 304X
Aubrey, Texas 76227
If to the Corporation: TIG Holdings, Inc.
65 East 55th Street
New York, New York 10022
Attn: General Counsel
with a copy to: Milbank, Tweed, Hadley & McCloy
1 Chase Manhattan Plaza
New York, New York 10005
Facsimile No.: 212-530-5219
Attn: Robert S. Reder, Esq.
or to such other address as either party shall have furnished to the other
in writing in accordance herewith.
12. Governing Law; Binding Effect. This Transition Services 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.
14. Counterparts. This Transition Services 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.
15. Withholding. The Corporation may withhold from any amounts or benefits
payable under this Transition Services Agreement such federal, state and local
income and payroll taxes as shall be required to be withheld pursuant to any
applicable law or regulation.
IN WITNESS WHEREOF, the Corporation and the Executive have caused this
Transition Services Agreement to be executed on and as of the date first above
written.
TIG HOLDINGS, INC.
By: /s/Jon W. Rotenstreich
Name: Jon W. Rotenstreich
Title: Chairman and
Chief Executive Officer
/s/Edwin G. Pickett
Executive
NY1:#3167578v7
<PAGE>
EXHIBIT A
GENERAL RELEASE
THIS GENERAL RELEASE (this "General Release") is made and entered into as
of the ____ day of __________, 199_ by and between Edwin G. Pickett, residing at
Green Valley Farm, Route 2, Box 304X, Aubrey, Texas 76227 (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 Transition
Services Agreement dated as of June 11, 1998 (the "Transition Services
Agreement") providing for the terms upon which the Executive has resigned and
retired from his positions with the Corporation and its subsidiaries and
affiliates; and
WHEREAS, the Transition Services Agreement contemplates that, on the
"Termination Date" under the Transition Services 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:
8. In consideration of the payments and benefits to the Executive under the
Transition Services 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 occurring
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 Transition Services
Agreement, or the letter agreement dated June 15, 1993 between the Executive and
the Corporation, as supplemented by a letter dated June 22, 1993 (as so
supplemented, the "Letter 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 Transition Services
Agreement. This General Release and the Transition Services 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:
(1) any Claims arising out of any employment agreement or other contract
(including, without limitation, the Letter Agreement), side-letter,
resolution, promise or understanding of any kind, whether written or
oral or express or implied; and
<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. S. 12101 et seq., and Title VII of the Civil Rights
Act of 1964, 42 U.S.C. S. 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
Transition Services 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
arising out of any actions, events or circumstances occurring before the date of
this General Release 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 Transition Services
Agreement, or the Letter 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 Transition Services
Agreement. This General Release and the Transition Services 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.
3. Notwithstanding anything to the contrary in Section 8.2 of the
Transition Services Agreement or in this General Release, but subject to the
other provisions of the Transition Services Agreement and the Retirement Plan
(as defined in the Transition Services Agreement), 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 Transition
Services 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 Transition Services 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 Transition Services Agreement and the terms and consequences of
this General Release and the Transition Services 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 of the terms of the
Transition Services Agreement. The Executive may revoke the portion of this
General Release that relates to any claim the Executive may have under the Age
Discrimination in Employment Act of 1967 (including, without limitation, the
Older Workers Benefit Protection Act) at any time within seven (7) days after
the date of execution of this General Release by notifying the Corporation of
such revocation in writing. The Executive agrees that, in the event of any such
revocation, the Corporation shall not be obligated to make the cash payment to
the Executive contemplated by Section 2 of the Transition Services Agreement or
to pay any cash bonus pursuant to Section 4 of the Transition Services
Agreement. Notwithstanding the foregoing, no such revocation shall affect or
alter any other term or provision of the Transition Services Agreement or any
other release granted under this General Release, all of which shall survive any
such revocation in accordance with their terms.
<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
<PAGE>
EXHIBIT B
TIG HOLDINGS, INC.
SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN
FOR EDWIN G. PICKETT
I. Introduction
TIG Holdings, Inc. (the "Company") hereby establishes the TIG Holdings,
Inc. Supplemental Executive Retirement Plan for Edwin G. Pickett (the "Plan") to
provide supplemental benefits to Edwin G. Pickett ("Participant").
II. Participation
Participant shall be eligible to retire from the Company and all related
and affiliated entities (collectively, the "Employer") effective as of the close
of business on December 31, 1998, provided that:
a) Participant executes a Transition Services Agreement in a form and
containing such terms and conditions deemed appropriate by the Company's
General Counsel; and
b) Participant remains employed by the Employer through the close of
business on December 31, 1998 under the terms of the Transition Services
Agreement and Participant's employment thereunder is not terminated for
"cause" as defined in such Agreement; and
c) Participant resigns and retires from Employer on and effective as
of the close of business on December 31, 1998; and
d) Concurrent with his retirement, Participant executes and timely
delivers to the Company a General Release in a form and containing such
terms and conditions deemed appropriate by the Company's General Counsel.
III. Benefits
Participant shall be entitled to the following benefits hereunder upon his
retirement and compliance with all terms and conditions specified above:
Participant shall be deemed to have satisfied the definition of
"Retirement" contained in his stock option agreements and restricted shares
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.
Nothing herein shall entitle Participant to retiree medical coverage under
the TIG Insurance Company Retiree HealthCare Plan. Medical coverage, if any,
shall apply to Participant only as set forth in the Transition Services
Agreement or as otherwise agreed in a writing signed by the Participant and the
Company or its subsidiaries.
<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:_____________________
August 18, 1998
Ms. Mary R. Hennessy
1 Nostrand Road
Cranbury, New Jersey 08512
Re: Employment Agreement
Dear Mary:
The purpose of this letter agreement is to set forth the terms and
conditions of your employment with TIG Holdings, Inc. (the "Company") for the
employment period described below. Such terms and conditions shall be as
follows:
1. Term of Employment; Renewal
The term of your employment under this letter agreement shall commence on
the date of this letter agreement (the "Effective Date") and, unless sooner
terminated in accordance with paragraph 4 of this letter agreement or
extended as provided below, shall terminate on the third annual anniversary
of the Effective Date (the "Employment Period").
Commencing on the third annual anniversary of the Effective Date and on
each annual anniversary of such date (each, a "Renewal Date"), the
Employment Period shall be automatically extended so as to terminate on the
first annual anniversary of each Renewal Date unless either the Company or
you shall have given the other written notice, not less than sixty (60)
days prior to any Renewal Date, of the Company's or your election, as the
case may be, not to so extend the Employment Period, in which case the
Employment Period shall terminate on such Renewal Date. The election by the
Company not to extend the Employment Period in accordance with the
preceding sentence shall not be deemed a termination without "cause" or
give you grounds to terminate your employment for "good reason" for
purposes of paragraph 4(b) of this letter agreement.
2. Position and Responsibilities
During the Employment Period, you shall be employed as the President and
Chief Operating Officer of the Company, having the duties, authority and
responsibilities normally associated with the positions and offices of
President and Chief Operating Officer of a publicly-traded corporation. In
that position, you will report solely to the Chairman of the Board and
Chief Executive Officer of the Company. During the Employment Period, you
will devote your full attention and business time to the business and
affairs of the Company and its subsidiaries, and you will use your best
efforts to perform faithfully and efficiently and to discharge the duties
and responsibilities assumed by you under this letter agreement.
Nevertheless, you will be entitled to manage your personal affairs and to
serve on community, corporate, civic, professional or charitable boards or
committees, so long as such activities do not unreasonably interfere with
the performance of your duties and responsibilities under this letter
agreement.
<PAGE>
3. Compensation; Stock Options
Your base salary during the Employment Period shall be no less than
$600,000 per year, payable in accordance with the Company's payroll
practices as in effect from time to time. Your base salary will be reviewed
annually by the Compensation Committee of the Company's Board of Directors
(the "Compensation Committee") to determine whether an increase is
warranted or appropriate. In addition, you shall be entitled to participate
in the employment benefits provided by the Company under the TIG Executive
Benefit Plan, including five (5) weeks of paid vacation. You also will be
entitled to be considered for awards under the Company's then existing
incentive bonus program which, in your case, will take into account
individual and Company-wide performance, or such other performance criteria
as the Compensation Committee may from time to time apply.
It is understood and agreed that your initial target total annual
compensation (i.e., base salary plus annual cash bonus plus the value of
restricted stock grants valued as of the date of grant) will be
$1.25 million. Your target total annual compensation will be reviewed
annually by the Compensation Committee to determine whether an increase is
warranted or appropriate.
In addition, simultaneous with the execution and delivery of this letter
agreement, you are being granted options to purchase 200,000 shares of
common stock of the Company under the Company's 1996 Long-Term Incentive
Plan, as amended from time to time (the "Plan"). The options will have an
exercise price equal to the fair market value of the common stock of the
company on the date of grant as determined in accordance with the Plan and
will vest in four equal annual installments commencing on the first
anniversary of the date of grant. The grant of such options will be
evidenced by the Company's standard form Executive Non-Qualified Stock
Option Agreement.
4. Termination of Employment
(a) Your employment with the Company may be terminated prior to the
scheduled expiration of the Employment Period (i) by the Company with
or without "cause" (as defined below), (ii) by you with or without
"good reason" (as defined below) or (iii) due to your death or
disability in accordance with the applicable programs and policies of
the Company. In the event that you wish to resign from the Company
without "good reason" prior to the scheduled expiration of the
Employment Period, you shall provide the Company with three (3)
months' advance written notice and, in such case, the Company may
terminate your employment prior to the end of such three (3) month
period provided that the Company makes the payments to you described
in paragraph (d) below. A termination of your employment by the
Company as provided in the preceding sentence shall not be deemed a
termination without "cause" or give you grounds to terminate your
employment for "good reason" for purposes of paragraph (b) below.
<PAGE>
(b) In the event that your employment with the Company is terminated
pursuant to paragraph (a) above (i) by the Company without "cause" or
(ii) by you with "good reason", you shall be entitled to receive, in
addition to accrued salary and benefits payable to you through the
date of termination of your employment, a severance payment from the
Company in the amount of $2,500,000; provided that if any such
termination of employment occurs within two (2) years following a
"change of control" (as such term is defined in the Company's 1996
Long-Term Incentive Plan) of the Company, the amount of the severance
payment that you shall be entitled to receive shall be $3,000,000;
provided further that the severance payments provided for in this
paragraph shall be in lieu of any severance, bonus or retention
payment that you otherwise would be entitled to receive upon
termination of your employment with the Company and its subsidiaries
(whether in the event of a "change of control" of the Company or
otherwise) under the terms of any program or agreement maintained by
the Company and its subsidiaries. The Company's obligation to make the
severance payments referred to in this paragraph shall be conditioned
on your execution of a general release agreement in accordance with
the Company's customary practice.
(c) In the event of the termination of your employment for one of the
reasons described in paragraph (b) above, all outstanding restricted
stock grants and stock options previously granted to you by the
Company will automatically become fully vested as of the date of such
termination, notwithstanding anything to the contrary contained in the
terms or provisions of such grants or the related plans.
(d) In the event that your employment with the Company is terminated
pursuant to paragraph (a) above (i) by the Company for "cause", (ii)
by you without "good reason" or (iii) due to your death or disability,
you shall be entitled to receive only the accrued salary and benefits
payable to you through the date of termination of your employment or
otherwise payable to you under plans maintained by the Company in
accordance with their terms and nothing else. In addition, in the
event that you terminate your employment with the Company without
"good reason" in accordance with the second sentence of paragraph 4(a)
of this letter agreement, the Company shall be required (even if the
Company subsequently elects to terminate your employment prior to the
effective date of your termination in accordance with the second
sentence of paragraph 4(a) of this letter agreement) to continue to
provide you with your salary and benefits until the earlier of the
effective date of your termination and the end of the Employment
Period.
(e) If, in the event of the termination of your employment for one of the
reasons described in paragraph (b) above, you are required, pursuant
to Section 4999 of the Internal Revenue Code of 1986, as amended (the
"Code"), to pay (through withholding or otherwise) an excise tax on
"excess parachute payments" (as defined in Section 280G of the Code),
the Company shall pay you the amount necessary to place you in the
same after-tax financial position that you would have been in if you
had not incurred any excise tax liability under Section 4999 of the
Code. In addition, it is hereby confirmed that the Company's
obligations to you under the Tax Reimbursement Agreement dated
November 11, 1996 between the Company and you will survive the
termination of your employment with the Company for any reason.
<PAGE>
(f) For purposes of this letter agreement:
(ii) "cause" means (x) an act or acts of personal dishonesty taken by
you and intended to result in your material personal enrichment
at the expense of the Company and its subsidiaries, excluding for
this purpose any isolated, insubstantial or inadvertent action
not taken in bad faith which is remedied by you in a reasonable
period of time after receipt of reasonably prompt written notice
thereof from the Company, (y) repeated violations by you of your
obligations under this letter agreement which are demonstrably
willful and deliberate and which are not remedied in a reasonable
period of time by you after receipt of reasonably prompt written
notice thereof from the Company or (z) your conviction of a
felony involving moral turpitude; and
(ii) "good reason" means (w) without your consent, the assignment to
you of any duties inconsistent in any material respect with your
position, authority, duties or responsibilities as contemplated
by paragraph 2 of this letter agreement, excluding for this
purpose any isolated, insubstantial or inadvertent action not
taken in bad faith which is remedied by the Company in a
reasonable period of time after receipt of reasonably prompt
written notice thereof from you, (x) the sale or other
disposition by the Company of all or substantially all of its
primary insurance operations or its reinsurance operations, or if
the head of the Company's primary insurance operations or
reinsurance operations does not report directly to the Executive
or to a subordinate of the Executive who reports directly to the
Executive, (y) repeated violations by the Company of its
obligations under this letter agreement which are demonstrably
willful and deliberate and which are not remedied in a reasonable
period of time by the Company after receipt of reasonably prompt
written notice thereof from you, or (z) without your consent, the
Company reduces your then current base salary or reduces your
then current target total annual compensation.
5. Confidential Information
During the Employment Period, you shall hold in a fiduciary capacity for
the benefit of the Company and its subsidiaries all secret or confidential
information, knowledge or data relating to the Company and its subsidiaries, and
their respective businesses, which you shall have obtained as a result of your
employment by the Company and which shall not be or become public knowledge
(other than by acts taken by you in violation of this letter agreement) or which
shall not be required to be disclosed by law, by applicable rule or regulation,
by court order or by any recognized subpoena power. Following the end of the
Employment Period and, if you remain employed with the Company following the end
of the Employment Period, after the termination of your employment with the
Company and its subsidiaries for any reason, you shall not, without the prior
written consent of the Company, communicate or divulge any such information,
knowledge or data to anyone other than the Company or its designees, except as
may be required by law, by applicable rule or regulation, by court order or by
any recognized subpoena power.
<PAGE>
6. Non-Competition; Non-Solicitation
During the Employment Period and, if your employment with the Company is
terminated prior to the scheduled expiration of the Employment Period by the
Company for "cause" or by you without "good reason", for six (6) months after
the date of termination (in the case of paragraph (a) below) and for one (1)
year after the date of termination (in the case of paragraph (b) below), without
the prior consent of the Company, you will not, directly or indirectly:
(a) either as principal, manager, agent, consultant, officer,
stockholder, partner, investor, lender or employee or in any
other capacity, carry on, engage in or have any financial
interest in any business which is in competition with any of the
businesses of the Company and its subsidiaries (a "Competing
Business"); provided that you may act as an independent
consultant to the insurance industry so long as (i) you are in
compliance with your confidentiality obligations set forth in
paragraph 5 of this letter agreement and (ii) you do not, on
behalf of any Competing Business for whom you are acting as an
independent consultant, solicit business from any customer or
client of the Company or any of its subsidiaries, or any person,
firm or company known to you as of the date of the termination of
your employment to have been targeted for solicitation by the
Company or any of its subsidiaries in the reasonably foreseeable
future, or otherwise seek to disrupt or reduce the business
provided by such customer or client to the Company and its
subsidiaries; or
(b) solicit or induce (i) customers, clients, suppliers, agents or
other persons under contract or otherwise associated or doing
business with the Company or any subsidiary or affiliate of the
Company (a "Business Associate"), or any of such persons or
entities with whom the Company 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 Company or any subsidiary or affiliate
of the Company, and/or (ii) any person then in the employment of
the Company or any subsidiary or affiliate of the Company or any
consultant to the Company or any subsidiary or affiliate of the
Company to (x) terminate such employment or consulting
arrangement, and/or (y) accept employment, or enter into any
consulting arrangement, with anyone other than the Company or any
subsidiary or affiliate of the Company, provided, however, that
this clause (y) shall not apply to a consultant who does not
perform substantially all of such person's consulting services
for the Company and its subsidiaries and affiliates.
Nothing in subparagraph (a) of this paragraph 6 shall be construed to
preclude you from investing in any publicly-held company, provided that your
beneficial ownership of any class of any such company's securities does not
exceed five percent (5%) of the outstanding securities of such class.
7. Successors and Assigns
Without the prior written consent of the Company, your rights and
obligations under this letter agreement shall not be assignable otherwise than
by will or the laws of descent and distribution. This letter agreement shall (i)
inure to the benefit of, and be enforceable by, your legal representatives and
(ii) inure to the benefit of, be enforceable by, and be binding upon the Company
and its successors and assigns.
8. Withholding
The Company shall have the right to deduct from any payments due hereunder
any amount in respect of federal, state or local taxes that the Company deems
necessary to be withheld.
<PAGE>
9. Resolution of Disputes
Any disputes arising under or in connection with this letter agreement
shall at the request of either party be resolved by binding arbitration in the
Borough of Manhattan in New York, New York by three arbitrators, in accordance
with the rules and procedures of the American Arbitration Association. Judgment
upon the award rendered by the arbitrators may be entered in any court having
jurisdiction thereof. Each party shall bear such party's own costs of the
arbitration or litigation.
10. Notices
All notices and other communications under this letter agreement 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 you: Mary R. Hennessy
1 Nostrand Road
Cranbury, New Jersey 08512
with a copy to: Sullivan & Cromwell
125 Broad Street
New York, New York 10004-2498
Facsimile No.: 212-558-3588
Attn: Theodore O. Rogers, Jr., Esq.
If to the Corporation: TIG Holdings, Inc.
65 East 55th Street
New York, New York 10022
Attn: General Counsel
with a copy to: Milbank, Tweed, Hadley & McCloy
1 Chase Manhattan Plaza
New York, New York 10005
Facsimile No.: 212-530-5219
Attn: Robert S. Reder, Esq.
or to such other address as either party shall have furnished to the other
in writing in accordance herewith.
11. Expenses
The Company will reimburse you for any amounts that you have paid or are
required to pay to Sullivan & Cromwell as your legal counsel in connection with
the negotiation, execution and delivery of this letter agreement.
<PAGE>
12. Miscellaneous
This letter agreement shall be governed by and shall be construed in
accordance with the laws of the State of New York, without reference to the
principles of conflict of laws thereof. If any provision of this letter
agreement 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. This letter agreement
contains the entire agreement between the Company and you with respect to the
subject matter contained herein, and supersedes all prior agreements or prior
understandings, whether oral or written, between the Company and you relating to
such subject matter; provided that certain Tax Reimbursement Agreement dated
November 11, 1996 between the Company and you, and that certain Indemnification
Agreement dated November 11, 1996 between the Company and you, and any and all
stock option agreements and restricted stock agreements between the Company and
you shall all remain in full force and effect in accordance with their terms.
This letter agreement may only be modified by a writing executed by each of the
Company and you.
* * *
If you are in agreement with the terms of this letter agreement, please so
indicate by signing in the space provided below, at which time this letter
agreement will become a binding agreement between the Company and you.
Very truly yours,
TIG HOLDINGS, INC.
By: /s/ Jon W. Rotenstreich
Jon W. Rotenstreich
Chairman of the Board
and Chief Executive Officer
AGREED AND ACCEPTED AS OF
THE DATE FIRST ABOVE WRITTEN:
/s/Mary R. Hennessy
Mary R. Hennessy
<PAGE>
TIG HOLDINGS, INC.
SIGNATURES
- --------------------------------------------------------------------------------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated: November 13, 1998 TIG HOLDINGS, INC.
By: /s/CYNTHIA B. KOENIG
Name: Cynthia B. Koenig
Title: Controller
(Principal Accounting Officer)
By: /s/LOUIS J. PAGLIA
Name: Louis J. Paglia
Title: Executive Vice President,
Chief Financial Officer and Treasurer
(Principal Financial Officer)
39
<PAGE>
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