<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1996 Commission file number 1-11868
--------------------------------
ZURICH REINSURANCE CENTRE
HOLDINGS, INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 13-3703575
(State or other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
ONE CHASE MANHATTAN PLAZA--43RD FLOOR
NEW YORK, NEW YORK 10005
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (212) 898-5000
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
<TABLE>
<CAPTION>
TITLE OF EACH CLASS: NAME OF EACH EXCHANGE ON WHICH REGISTERED:
<S> <C>
Common Stock, par value $0.01 per share New York Stock Exchange
7 1/8% Senior Notes, due October 2023 New York Stock Exchange
</TABLE>
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
None
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value on March 21, 1997 of the voting stock held by
non-affiliates of the Registrant was approximately $341,543,886. As of March 21,
1997, the number of shares issued and outstanding of the Registrant's common
stock, par value $0.01 per share, was 26,205,569.
<PAGE> 2
ZURICH REINSURANCE CENTRE HOLDINGS, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
ITEM PAGE NUMBER
- ---- -----------
PART I
1. Business ............................................................. 3
2. Properties............................................................ 21
3. Legal Proceedings..................................................... 21
4. Submission of Matters to a Vote of Security Holders................... 21
PART II
5. Market for Registrant's Common Equity and Related Stockholder Matters. 22
6. Selected Financial Data............................................... 23
7. Management's Discussion and Analysis of Financial Condition
and Results of Operations.......................................... 24
8. Financial Statements and Supplementary Data........................... 30
9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure .......................................... 53
PART III
10. Directors and Executive Officers of the Registrant.................... 53
11. Executive Compensation................................................ 57
12. Security Ownership of Certain Beneficial Owners and Management........ 70
13. Certain Relationships and Related Transactions ....................... 71
PART IV
14. Exhibits, Financial Statement Schedules and Reports on Form 8-K....... 71
<PAGE> 3
PART I
ITEM 1. BUSINESS.
THE COMPANY
Zurich Reinsurance Centre Holdings, Inc. ("ZRCH"), a Delaware corporation,
serves as the holding company for Zurich Reinsurance Centre, Inc. ("ZRC"), a
Connecticut reinsurance company, and ZC Insurance Company ("ZCIC"), a New Jersey
insurance company. ZRCH, together with its wholly-owned operating subsidiaries
(the "Company"), is the principal underwriting affiliate of the Zurich Insurance
Group ("Zurich"), a Swiss financial services holding company, in the North
American market for traditional property and casualty reinsurance. Data
published by the Reinsurance Association of America (the "RAA") indicates that
ZRC is the third largest broker reinsurer and the eighth largest professional
reinsurer in the United States based on statutory capital and surplus at
December 31, 1996. As of that date, ZRC had statutory capital and surplus of
$690.1 million, an "AA-" claims-paying ability rating from Standard & Poor's
Corporation ("S&P"), an "Aa3" financial strength rating from Moody's Investors
Service ("Moody's") and an "A" rating from A.M. Best Company, Inc. ("A.M.
Best").
During 1993, ZRCH was organized and issued 26.1 million shares of its
common stock, par value $0.01 per share (the "Common Stock"), including 8.55
million shares of Common Stock in ZRCH's initial public offering, for aggregate
proceeds, net of underwriting expenses, of $637.7 million. In 1993, ZRCH
acquired ZRC from an affiliate of Zurich for an aggregate consideration of $63.3
million and issued $200 million principal amount of its 7 1/8% Senior Notes due
2023 (the "Senior Notes"). During April 1995, ZRCH acquired Re Capital
Corporation ("Re Capital") and its wholly-owned subsidiary, Re Capital
Reinsurance Corporation (subsequently renamed ZC Insurance Company). During
1996, ZCIC commenced writing primary casualty business and serves as a
production source for ZRC. ZCIC is licensed to write business in 33 states and
is rated "A" by A.M. Best.
ZRCH is a 65.7%-owned indirect subsidiary of Zurich. Founded in 1872,
Zurich is engaged in operations in over 40 countries. Zurich has a significant
influence over the policies and affairs of the Company and is in a position to
determine the outcome of substantially all corporate actions requiring
stockholder approval, including the election of directors, the merger of the
Company, the sale of all or substantially all of the Company's assets and the
adoption of most amendments to the Company's certificate of incorporation. A
majority of the members of the Company's Board of Directors are executive
officers of Zurich or its affiliates.
During January 1997, Zurich announced a proposal to acquire all of the
remaining shares of ZRCH not currently owned by Zurich for $36.00 per share.
ZRCH's Board of Directors has appointed a special committee of its members to
determine the advisability and fairness of that offer to ZRCH's other
stockholders. The special committee has retained independent investment banking
advisors and legal counsel to advise it on the fairness of the offer and is in
the process of considering the offer. The special committee has indicated its
intention to make a recommendation to ZRCH's Board of Directors with respect to
the offer as soon as practicable. Consummation of the proposed transaction is
subject to the approval of the Board of Directors and the stockholders of ZRCH
and other conditions customary in this type of transaction. See Item 3 "Legal
Proceedings" and Item 7 "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Subsequent Event."
The Company's executive offices are located at One Chase Manhattan Plaza,
43rd Floor, New York, New York 10005 and its telephone number is (212) 898-5000.
3
<PAGE> 4
REINSURANCE
Reinsurance is an arrangement in which an insurance company, the
reinsurer, agrees to indemnify another insurance company, the ceding company,
against all or a portion of the insurance risks underwritten by the ceding
company under one or more insurance policies. Reinsurance can provide a ceding
company with several major benefits, including a reduction in net liability on
individual risks, catastrophe protection from large or multiple losses and
assistance in maintaining acceptable financial ratios. Reinsurance also provides
a ceding company with additional underwriting capacity by permitting it to
accept larger risks and write more business than would otherwise be possible.
The two basic types of property/casualty reinsurance arrangements are
treaty and facultative reinsurance. In treaty reinsurance, the ceding company is
obligated to cede and the reinsurer is obligated to assume a specified portion
of a type or category of risk insured by the ceding company. In facultative
reinsurance, the ceding company cedes and the reinsurer generally assumes all or
part of the risk under a single insurance policy.
Both treaty and facultative reinsurance can be written on either a pro rata
(also known as quota share or proportional) basis or an excess of loss basis. In
reinsurance written on a pro rata basis, the reinsurer, in return for a
predetermined portion or share of the insurance premium charged by the ceding
company, indemnifies the ceding company against a predetermined portion of the
losses and the allocated portion of loss adjustment expenses ("ALAE") of the
ceding company under the covered insurance policy or policies. In reinsurance
written on an excess of loss basis, the reinsurer generally indemnifies the
ceding company against all or a specified portion of losses and ALAE on
underlying insurance policies in excess of a specified dollar amount, known as
the ceding company's retention or attachment point, subject to a negotiated
limit.
Reinsurance is written by broker reinsurers through professional
reinsurance brokers or by reinsurers directly for ceding companies. The domestic
broker market consists of several substantial national brokers and a number of
smaller, specialized brokers. In brokered transactions, the reinsurance
intermediary generally is responsible for identifying and structuring the risk
to be placed on behalf of its client, the ceding company. The reinsurance broker
obtains quotations as to price, terms and conditions from lead reinsurers and,
when a firm order is authorized by the ceding company, the broker solicits
participations in that program from a number of "following" reinsurers. Once the
risk has been placed, the broker typically is responsible for premium and loss
administration for the coverage, including the billing and collection of premium
and loss amounts among the syndicate of participating reinsurers. Brokers
normally are paid commissions by the reinsurer that are calculated as a
percentage of the premiums received by the reinsurer. ZRC's primary source of
business is through reinsurance brokers.
During 1996, three reinsurance intermediaries, E.W. Blanch Company, Aon
Reinsurance, Inc. and Guy Carpenter & Company, Inc., produced approximately 22%,
18% and 12% of ZRC's gross premiums written, respectively. Business produced by
members of the Zurich American Insurance Group ("Zurich American"), an
affiliate, generated 29% of gross premiums written. It is likely that one or
more intermediary firms and/or ceding companies will continue to account for
more than 10% of the Company's consolidated revenue.
4
<PAGE> 5
BUSINESS STRATEGY
The Company believes that certain elements of ZRC's business strategy
differ from those prevalent in the traditional broker reinsurance market. The
principal elements of the Company's strategy are summarized below:
MAINTAIN A CONSISTENT AND SUBSTANTIAL UNDERWRITING CAPACITY IN ORDER TO
ESTABLISH LONG-TERM RELATIONSHIPS WITH HIGH QUALITY CEDING COMPANIES. The
Company believes that by maintaining a consistent and substantial underwriting
capacity, ZRC has the ability to establish and maintain long-term relationships
with ceding companies. As one of the largest reinsurance companies in the United
States, the Company believes that ZRC has the capacity to serve ceding companies
during all stages of the underwriting cycle. The Company believes that this
ability contributes to improved terms and conditions in ZRC's treaties.
OPERATE AS A LEAD REINSURER. The Company believes that, as a lead
reinsurer, ZRC effectively influences the terms and conditions of its business.
In addition, as a lead reinsurer, ZRC develops close and continuing
relationships with its clients and can develop more innovative, cost-effective
risk management solutions. In 1996, ZRC operated as lead reinsurer in respect of
contracts representing approximately 87% and 92% of its non-affiliated and
total gross premiums written, respectively.
FORGE CLOSE WORKING RELATIONSHIPS WITH REINSURANCE BROKERS BASED ON
EFFECTIVE COMPETITION WITH DIRECT REINSURERS. The Company believes that
providing brokers with a consistent and well capitalized market permits
effective competition with direct reinsurers. ZRC's relationships with
reinsurance intermediaries provide access to a wide range of ceding companies
with varying reinsurance needs. In addition, the Company believes the use of
brokers results in a more manageable cost structure for the Company and
preserves for its clients a number of advantages resulting from broker-assisted
placements.
APPLY SOPHISTICATED ANALYTICAL TECHNIQUES TO LIMIT RISK AND MAXIMIZE NET
RETURN ON DEPLOYED CAPITAL ON EACH TREATY WRITTEN. In addition to employing
traditional reinsurance underwriting techniques, ZRC's underwriters generally
perform a variety of statistical analyses, including analyses of the frequency,
severity and timing of expected losses, that emphasize limitation of risk and
maximization of net return on deployed capital.
LIMIT AGGREGATE RISK PER TREATY BY INCLUDING LIMITATIONS OF LIABILITY IN
TREATIES. In the Company's view, extraordinarily poor results on a small number
of risks (for example, those covering asbestos, environmental pollution or
professional liabilities related to derivative losses) have contributed to the
adverse financial performance of certain reinsurers. In order to limit this
risk, thereby enhancing its ability to provide consistent underwriting capacity,
ZRC continues to seek contractual limitations of liability on the business it
writes. ZRC had aggregate loss limits on reinsurance contracts representing 58%
of its 1996 non-affiliated reinsurance contracts written.
BUILD ON ZRC'S AFFILIATIONS. In addition to business assumed from
affiliates, the Company believes that ZRC assists clients and brokers through
its affiliations with Zurich. Through this network, ZRC offers clients
alternatives to traditional reinsurance, including finite reinsurance and
financial market instruments.
5
<PAGE> 6
EMPHASIZE A HIGH LEVEL OF SERVICE TO CEDING COMPANIES WHILE MAINTAINING
EFFICIENT OPERATIONS. ZRC emphasizes a high level of service to its clients. ZRC
has a team of experienced, professional underwriters oriented toward the
development of innovative, cost-effective reinsurance solutions. Particularly
with respect to working layer excess of loss coverages (where more frequent
claims are anticipated), ZRC emphasizes timely claims administration and
payment.
EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers of the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE TITLE
---- --- -----
<S> <C> <C>
Steven M. Gluckstern ................. 45 Chairman
Richard E. Smith ..................... 51 Director, President and Chief Executive Officer
Peter R. Porrino ..................... 40 Executive Vice President
Gerald S. King ....................... 48 Senior Vice President and Chief Facultative
Underwriting Officer
Isaac Mashitz ........................ 44 Senior Vice President and Chief Actuarial Officer
Adrienne W. Reid ..................... 42 Senior Vice President and Chief Treaty
Underwriting Officer
Karen O'Connor Rubsam ................ 37 Senior Vice President, Chief Financial Officer and Treasurer
Mark R. Sarlitto ..................... 39 Senior Vice President, General Counsel and Secretary
</TABLE>
STEVEN M. GLUCKSTERN has been Chairman of the Company since March 1993.
From March 1993 to June 1996 he served as Chief Executive Officer of the Company
and from March 1993 to June 1995 as President of the Company. In March 1997, Mr.
Gluckstern was appointed to serve as a member of Zurich's Corporate Executive
Board. Mr. Gluckstern is President and a director of Zurich Centre Investments
Limited ("ZCI") and serves as a director of ZCI's operating subsidiaries. During
1995, he served as a director of Zurich Kemper Investment Management, Inc. and
certain of their respective operating subsidiaries. Since 1987, he has served as
an executive officer and a director of Centre Reinsurance Holdings Limited
("Centre Reinsurance") as well as a director of certain of its operating
subsidiaries. Before joining Centre Reinsurance, Mr. Gluckstern was President of
Columbia Insurance Company and Senior Vice President of National Indemnity
Company, each insurance subsidiaries of Berkshire Hathaway, Inc. Mr. Gluckstern
was previously employed as Chief Financial Officer and Vice President for
Finance and Administration of Healthco International Inc. Mr. Gluckstern also
has experience as an educator and holds a B.A. degree from Amherst College, a
Doctor of Education degree from the University of Massachusetts and an M.B.A.
degree from Stanford University where he was an Arjay Miller Scholar.
RICHARD E. SMITH has been a Director of the Company since March 1993.
Since June 1996 he has served as Chief Executive Officer of the Company and
since June 1995 as President of the Company. From March 1993 to June 1996 Mr.
Smith served as Chief Operating Officer. Mr. Smith served as Senior Vice
President, Business Development of Centre Reinsurance from 1992 until March
1993. From 1982 until 1992, Mr. Smith was employed by Guy Carpenter & Company,
Inc., most recently as Senior Vice President, and was a member of the board of
directors. From 1975 to 1982, Mr. Smith was employed by A.M. Best Company, Inc.,
most recently as Vice President in charge of the property-casualty ratings
division. He holds a B.A. degree from United States International University in
San Diego.
6
<PAGE> 7
PETER R. PORRINO has been Executive Vice President of the Company since
June 1996. From April 1993 to June 1996, Mr. Porrino served as Senior Vice
President, Chief Financial Officer and Treasurer of the Company. Between 1978
and 1993, Mr. Porrino was employed by Ernst & Young, where he specialized in the
insurance and reinsurance industries. From 1988 until March 1993, Mr. Porrino
was a partner in Ernst & Young's New York insurance practice and a member of
Ernst & Young's Insurance Industry Accounting and Auditing Committee. He is a
member of the American Institute of Certified Public Accountants, serving on its
Insurance Companies Committee, and the New York Society of Certified Public
Accountants. Mr. Porrino holds a B.B.A. degree from Pace University and an
M.B.A. degree from New York University.
GERALD S. KING has been Senior Vice President of ZRC since July 1993 and
Senior Vice President and Chief Facultative Underwriting Officer of the Company
since June 1995. Mr. King served in various capacities relating to facultative
operations for Skandia American Reinsurance Corp., from 1990 to 1993. From 1978
to 1990 he served as President of Facultative Managers Corporation. Mr. King
holds a B.A. degree from St. Francis College.
ISAAC MASHITZ has been Senior Vice President and Chief Actuarial Officer of
the Company since April 1993. Prior to April 1993, Mr. Mashitz was Vice
President and Actuary (Pricing) of North American Reinsurance Corporation, where
he had been employed since 1986. Mr. Mashitz has served as the President of
Casualty Actuaries in Reinsurance and as the Chairman of the Casualty Actuarial
Society's Committee on Theory of Risk. From 1984 to 1986, he was employed by The
Insurance Services Office; previously from 1978 to 1984 he was employed by The
Home Insurance Company. Mr. Mashitz has a B.A. degree from Brooklyn College and
a Ph.D. in Mathematics from the Courant Institute of New York University. He is
a Fellow of the Casualty Actuarial Society and is a Member of the American
Academy of Actuaries.
ADRIENNE W. REID has been Senior Vice President of ZRC since August 1993
and Senior Vice President and Chief Treaty Underwriting Officer of the Company
since June 1995. For the 16 years prior, she was employed by General Reinsurance
Corporation, most recently as Vice President and Facultative Account Executive
where she managed General Reinsurance Corporation's New York Casualty Program
business. Ms. Reid holds a B.A. degree from Mount Holyoke College.
KAREN O'CONNOR RUBSAM has been Senior Vice President, Chief Financial
Officer and Treasurer of the Company since June 1996. From May 1993 to June
1996, Ms. O'Connor Rubsam served as Corporate Controller of ZRC. From 1992 to
1993, Ms. O'Connor Rubsam served as a financial analyst at Paulsen Dowling
Securities. From 1981 to 1986 and from 1988 to 1992, Ms. O'Connor Rubsam held
positions at Coopers & Lybrand, most recently as a senior audit manager. From
1986 until 1988, Ms. O'Connor Rubsam was Assistant Vice President and Audit
Director for NAC Re Corporation. Ms. O'Connor Rubsam holds a B.B.A. degree from
the University of Notre Dame and is a Certified Public Accountant and a
Chartered Financial Analyst.
MARK R. SARLITTO has been Senior Vice President, General Counsel and
Secretary of ZRC since June 1993 and Senior Vice President, General Counsel and
Secretary of the Company since August 1995. Mr. Sarlitto was an attorney at
Willkie Farr & Gallagher from 1988 to 1993. Between 1983 and 1986, Mr. Sarlitto
served as Vice President of Charter Security Life Insurance Company. Prior to
1983, Mr. Sarlitto was an auditor at Ernst & Young. He holds a J.D. Degree from
Columbia University School of Law and B.S. and M.B.A degrees from the State
University of New York at Buffalo.
7
<PAGE> 8
REINSURANCE UNDERWRITING
Treaty Coverages
ZRC offers treaty reinsurance to providers of commercial and personal lines
of property and casualty insurance. The composition of ZRC's business reflects
market conditions, including the adequacy of reinsurance and insurance pricing
for various classes and types of business, which vary over time. In evaluating
treaty opportunities, ZRC relies heavily on an underwriting process that
emphasizes a close collaboration among its Underwriting, Actuarial, Claims and
Finance Departments. Excess of loss and pro rata reinsurance treaties are
customarily written on an annual basis with contract terms enabling the lead
reinsurer to engage in periodic reviews and to renegotiate price, terms and
conditions when necessary. ZRC analyzes various aspects of a prospective
reinsured's business including, but not limited to, historical and projected
loss and exposure data, future loss costs, financial stability and history,
classes and nature of underlying business and policy forms, underwriting and
claims guidelines, aggregation of loss potential (between contracts), existing
reinsurance programs (including potential uncollectible reinsurance) and the
quality and experience of management.
Facultative Coverages
ZRC's facultative group consists of regional branch offices located in New
York City, Atlanta, Boston, Chicago, Dallas, San Francisco and Stamford. ZRC
underwrites facultative casualty coverages both with and without the assistance
of reinsurance intermediaries. ZRC's facultative guidelines generally are
consistent with its treaty underwriting standards. Particularly complex or
volatile facultative risks, or risks that fall outside ZRC's prescribed
guidelines and procedures, are reviewed by senior management prior to
authorization. ZRC conducts branch audits and other review procedures to ensure
adherence to underwriting guidelines, procedures, proper use of daily home
office referrals and appropriate class selection, limitations of authority per
underwriter and proper rating per submission.
8
<PAGE> 9
ANALYSIS OF BUSINESS WRITTEN
ZRC's mix of business, on the basis of gross premiums written, net premiums
written and net premiums earned, including certain periods prior to its
acquisition by the Company, is set forth in the following table for the periods
indicated (dollars in thousands). ZRC's mix of business for periods prior to its
acquisition by the Company is not indicative of the mix of business ZRC is
likely to have in the future.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------------------------------------
1996 1995 1994
----------------------- ------------------------- -----------------------
PERCENT PERCENT PERCENT
OF OF OF
AMOUNT TOTAL AMOUNT TOTAL AMOUNT TOTAL
------ ----- ------ ----- ------ -----
GROSS PREMIUMS WRITTEN: )
Treaty:
<S> <C> <C> <C> <C> <C> <C>
Property .................. $117,229 15.9 $114,052 18.6 $ 47,193 15.1
Casualty .................. 521,187 70.7 409,085 66.6 214,596 68.5
Multi-Peril ............... 42,757 5.8 36,016 5.9 14,806 4.7
-------- --------- -------- --------- -------- ---------
Subtotal ............... 681,173 92.4 559,153 91.1 276,595 88.3
-------- --------- -------- --------- -------- ---------
Facultative:
Casualty .................. 56,272 7.6 54,786 8.9 36,554 11.7
-------- --------- -------- --------- -------- ---------
Total ........................ $737,445 100.0 $613,939 100.0 $313,149 100.0
======== ========= ======== ========= ======== =========
Pro rata .................. $276,653 37.5 $199,046 32.4 $106,969 34.2
Excess of loss ............ 279,009 37.8 321,549 52.4 206,180 65.8
Zurich American Quota Share 181,783 24.7 93,344 15.2 -- --
-------- --------- -------- --------- -------- ---------
Total ........................ $737,445 100.0 $613,939 100.0 $313,149 100.0
======== ========= ======== ========= ======== =========
NET PREMIUMS WRITTEN:
Treaty:
Property .................. $115,633 15.8 $111,799 18.6 $ 45,349 14.7
Casualty .................. 515,394 70.7 402,007 66.7 214,098 69.1
Multi-Peril ............... 42,092 5.8 35,537 5.9 14,805 4.8
-------- --------- -------- --------- -------- ---------
Subtotal ............... 673,119 92.3 549,343 91.2 274,252 88.6
-------- --------- -------- --------- -------- ---------
Facultative:
Casualty .................. 56,187 7.7 52,951 8.8 35,375 11.4
-------- --------- -------- --------- -------- ---------
Total ........................ $729,306 100.0 $602,294 100.0 $309,627 100.0
======== ========= ======== ========= ======== =========
Pro rata .................. $275,343 37.8 $191,745 31.8 $106,806 34.5
Excess of loss ............ 277,179 38.0 319,772 53.1 202,821 65.5
Zurich American Quota Share 176,784 24.2 90,777 15.1 -- --
-------- --------- -------- --------- -------- ---------
Total ............... $729,306 100.0 $602,294 100.0 $309,627 100.0
======== ========= ======== ========= ======== =========
NET PREMIUMS EARNED:
Treaty:
Property .................. $111,372 16.3 $ 92,608 18.4 $ 33,280 14.8
Casualty .................. 478,190 69.9 338,268 67.3 151,822 67.6
Multi-Peril ............... 41,357 6.0 25,234 5.0 14,613 6.5
-------- --------- -------- --------- -------- ---------
Subtotal ............... 630,919 92.2 456,110 90.7 199,715 88.9
-------- --------- -------- --------- -------- ---------
Facultative:
Casualty .................. 53,410 7.8 46,478 9.3 24,888 11.1
-------- --------- -------- --------- -------- ---------
Total ........................ $684,329 100.0 $502,588 100.0 $224,603 100.0
======== ========= ======== ========= ======== =========
Pro rata .................. $235,278 34.4 $181,874 36.2 $ 70,378 31.3
Excess of loss ............ 296,291 43.3 293,649 58.4 154,225 68.7
Zurich American Quota Share 152,760 22.3 27,065 5.4 -- --
-------- --------- -------- --------- -------- ---------
Total ........................ $684,329 100.0 $502,588 100.0 $224,603 100.0
======== ========= ======== ========= ======== =========
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------------
1993 1992
-------------------------- -----------------------
PERCENT PERCENT
OF OF
AMOUNT TOTAL AMOUNT TOTAL
------ ----- ------ -----
GROSS PREMIUMS WRITTEN: (Predecessor Company)
Treaty:
<S> <C> <C> <C> <C>
Property .................. $ 23,217 20.3 $ 18,377 26.0
Casualty .................. 46,374 40.6 25,208 35.7
Multi-Peril ............... 31,907 27.9 19,314 27.3
-------- --------- -------- ---------
Subtotal ............... 101,498 88.8 62,899 89.0
-------- --------- -------- ---------
Facultative:
Casualty .................. 12,776 11.2 7,773 11.0
-------- --------- -------- ---------
Total ........................ $114,274 100.0 $ 70,672 100.0
======== ========= ======== =========
Pro rata .................. $39,471 34.5 $ 25,442 36.0
Excess of loss ............ 74,803 65.5 45,230 64.0
Zurich American Quota Share -- -- -- --
-------- --------- -------- ---------
Total ........................ $114,274 100.0 $ 70,672 100.0
======== ========= ======== =========
NET PREMIUMS WRITTEN:
Treaty:
Property .................. $ 14,991 14.7 $ 6,091 11.4
Casualty .................. 45,593 44.9 23,922 44.6
Multi-Peril ............... 30,373 29.9 17,464 32.6
-------- --------- -------- ---------
Subtotal ............... 90,957 89.5 47,477 88.6
-------- --------- -------- ---------
Facultative:
Casualty .................. 10,667 10.5 6,123 11.4
-------- --------- -------- ---------
Total ........................ $101,624 100.0 $ 53,600 100.0
======== ========= ======== =========
Pro rata .................. $ 37,330 36.7 $ 21,681 40.4
Excess of loss ............ 64,294 63.3 31,919 59.6
Zurich American Quota Share -- -- -- --
-------- --------- -------- ---------
Total ............... $101,624 100.0 $ 53,600 100.0
======== ========= ======== =========
NET PREMIUMS EARNED:
Treaty:
Property .................. $ 14,570 16.9 $6,699 14.5
Casualty .................. 35,795 41.5 18,283 39.6
Multi-Peril ............... 27,877 32.3 17,702 38.3
-------- --------- -------- ---------
Subtotal ............... 78,242 90.7 42,684 92.4
-------- --------- -------- ---------
Facultative:
Casualty .................. 8,052 9.3 3,534 7.6
-------- --------- -------- ---------
Total ........................ $ 86,294 100.0 $ 46,218 100.0
======== ========= ======== =========
Pro rata .................. $ 36,011 44.0 $ 23,881 51.7
Excess of loss ............ 50,283 56.0 22,337 48.3
Zurich American Quota Share -- -- -- --
-------- --------- -------- ---------
Total ........................ $ 86,294 100.0 $ 46,218 100.0
======== ========= ======== =========
</TABLE>
9
<PAGE> 10
RESERVES
In many cases, years may elapse between the occurrence of a loss, the
reporting of the loss to the reinsurer and payment by the reinsurer. To
recognize obligations for unpaid losses, ZRC establishes reserves, which are
balance sheet liabilities representing estimates of future amounts required to
pay losses and loss adjustment expenses ("LAE"). Generally, reserves for
reported losses are established in an amount equal to the greater of the reserve
recommended by the reinsured or the reserve established by ZRC's Claims
Management Department. For excess of loss reinsurance, reserves are established
on a case-by-case basis using several factors, including the type of risk
involved, the circumstances surrounding the claim, severity of injury or damage,
estimated ultimate exposure and ZRC's experience with the reinsured by reference
to the underlying policy and reinsurance provisions. ZRC conducts periodic
claims audits to determine the adequacy of recommended reserves and maintains an
in-house actuarial staff to establish reserves for incurred but not reported
("IBNR") losses on the basis of actuarial analyses of statistical loss
information used to project ultimate losses. IBNR reserves are bulk reserves
recorded in addition to specific case reserves which reflect assumed additional
development with respect to known losses, as well as reserves for claims that
have not yet been reported to the reinsurer. ZRC's actuaries determine the
amount of IBNR reserves utilizing methodologies that reflect both ZRC's original
pricing estimates of ultimate losses as well as analyses of reported losses and
anticipated reporting patterns.
The process of estimating reserves is inherently imprecise and involves an
evaluation of many variables, including social and economic conditions. The
uncertainties of estimating such reserves are greater for reinsurers than for
primary insurers due primarily to the longer-term reporting nature of the
reinsurance business, the diversity of development patterns among different
types of reinsurance treaties and facultative certificates, the necessary
reliance on ceding companies for information regarding reported claims and
differing reserving practices among ceding companies. During the loss settlement
period, additional facts regarding individual claims may become known. As the
insurer or reinsurer learns such facts, it often becomes necessary to refine and
adjust the estimates of liability for a claim. Such changes are reported in
earnings at that time.
In 1993, Zurich and ZRC entered into an Excess of Loss Reinsurance
Agreement (the "Excess of Loss Reinsurance Agreement") under which Zurich agreed
to reinsure adverse loss development in respect of ZRC's reserves as of December
31, 1992 and a Stop Loss Reinsurance Agreement (the "Stop Loss Reinsurance
Agreement" and together with the Excess of Loss Reinsurance Agreement, the "Stop
Loss Agreement") under which Zurich agreed to reinsure adverse loss development
on ZRC's reserves as of May 31, 1993 for losses occurring between January 1,
1993 and May 31, 1993. In addition, under the Stop Loss Reinsurance Agreement,
ZRC will be reimbursed for incurred losses and allocated loss adjustment
expenses in excess of 75% of earned premiums for losses occurring after May 31,
1993 on business written by ZRC prior to June 1993. Coverage provided under the
Stop Loss Agreement is on an incurred basis (rather than as any such losses are
paid), net of recoveries and claims under other retrocessional policies except
for any claims in respect of which recovery is precluded by the insolvency or
receivership of one of ZRC's other retrocessionaires or by a verdict of a court
or arbitration panel. As of December 31, 1996, there were no recoverables under
the Stop Loss Agreement. See Item 8 "Financial Statements and Supplementary Data
- - Footnote 12: Related Party Transactions" for a further discussion of the Stop
Loss Agreement.
The Company believes that ZRC's exposure to asbestos-related and
environmental pollution claims is minimal due to the diminutive amount of
business written prior to 1987 and the protection provided by the Stop Loss
Agreement.
10
<PAGE> 11
The table which follows presents the development of reserves for the
Company's losses and LAE for calendar years 1986 through 1996. The first line of
the table sets forth the estimated liability for losses and LAE, including IBNR,
for claims arising in each of the indicated years and all prior years that are
unpaid, as recorded on the Company's balance sheet as of the end of the
indicated year. The upper portion of the table shows the cumulative amounts paid
as of the end of each successive year for such claims. The lower portion of the
table shows the re-estimated amount of the previously recorded liability based
on experience as of the end of each succeeding year including cumulative
payments. Estimates change as more information becomes known about the frequency
and severity of claims for each year. A cumulative redundancy (deficiency)
exists when the original liability shown in the table is greater (less) than the
most recently re-estimated amount.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------------------------
1986 1987 1988 1989 1990 1991 1992 1993
---- ---- ---- ---- ---- ---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Liability for unpaid losses and LAE,
net of reinsurance recoverables ...... $ 12,918 $ 18,750 $ 23,579 $ 27,609 $ 39,895 $ 53,947 $ 71,066 $ 97,712
Liability assumed from Re Capital,
net of reinsurance recoverables .....
Adjusted liability for unpaid losses and
LAE, net of reinsurance recoverables . 12,918 18,750 23,579 27,609 39,895 53,947 71,066 97,712
PAID (CUMULATIVE) AS OF:
One year later ......................... 3,425 5,192 5,310 22,521 14,200 16,947 23,096 21,986
Two years later ........................ 5,416 7,415 16,332 22,521 18,688 23,323 33,033 35,919
Three years later ...................... 6,162 14,283 16,332 22,521 21,583 28,511 39,707 47,136
Four years later ....................... 10,602 14,283 16,332 22,521 24,674 30,896 44,472
Five years later ....................... 10,602 14,283 16,332 22,521 26,402 32,916
Six years later ........................ 10,602 14,283 16,332 22,521 27,815
Seven years later ...................... 10,602 14,283 16,332 22,521
Eight years later ...................... 10,602 14,283 16,332
Nine years later ....................... 10,602 14,283
Ten years later ........................ 10,602
LIABILITY ESTIMATED AS OF:
End of year ............................ 12,918 18,750 23,579 27,609 39,895 53,947 71,066 97,712
One year later ......................... 13,143 18,357 19,785 22,521 42,029 51,793 71,447 106,624
Two years later ........................ 13,205 16,391 16,332 22,521 37,456 49,669 72,256 106,686
Three years later ...................... 12,030 14,283 16,332 22,521 35,325 50,071 72,232 106,300
Four years later ....................... 10,602 14,283 16,332 22,521 35,861 49,256 72,106
Five years later ....................... 10,602 14,283 16,332 22,521 35,999 47,535
Six years later ........................ 10,602 14,283 16,332 22,521 35,312
Seven years later ...................... 10,602 14,283 16,332 22,521
Eight years later ...................... 10,602 14,283 16,332
Nine years later ....................... 10,602 14,283
Ten years later ........................ 10,602
Net redundancy (deficiency) ............ $ 2,316 $ 4,467 $ 7,247 $ 5,088 $ 4,583 $ 6,412 $ (1,040) $ (8,588)
Redundancy resulting from
1992 commutation ..................... 0 0 0 0 756 3,064 0 0
Redundancy (deficiency)
as adjusted .......................... $ 2,316 $ 4,467 $ 7,247 $ 5,088 $ 3,827 $ 3,348 $ (1,040) $ (8,588)
Reserve for loss and LAE, gross ........ $ 116,088 $ 123,074
Reinsurance recoverables ............... 45,022 25,362
--------- ---------
Reserve for loss and LAE, net .......... 71,066 97,712
Gross re-estimated liability-latest .... $ 112,991 $ 127,155
Re-estimated recoverable-latest ........ 40,885 20,855
--------- ---------
Net re-estimated liability-latest ...... 72,106 106,300
Gross redundancy (deficiency) .......... $ 3,097 $ (4,081)
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------
1994 1995 1996
---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C>
Liability for unpaid losses and LAE,
net of reinsurance recoverables ...... $ 241,974 $ 658,628 $ 898,746
Liability assumed from Re Capital,
net of reinsurance recoverables ..... 193,606
---------
Adjusted liability for unpaid losses and
LAE, net of reinsurance recoverables . 435,580 658,628 898,746
PAID (CUMULATIVE) AS OF:
One year later ......................... 90,561 162,952
Two years later ........................ 121,841
Three years later ......................
Four years later .......................
Five years later .......................
Six years later ........................
Seven years later ......................
Eight years later ......................
Nine years later .......................
Ten years later ........................
LIABILITY ESTIMATED AS OF:
End of year ............................ 241,974 658,628 898,746
One year later ......................... 432,106 650,986
Two years later ........................ 433,135
Three years later ......................
Four years later .......................
Five years later .......................
Six years later ........................
Seven years later ......................
Eight years later ......................
Nine years later .......................
Ten years later ........................
Net redundancy (deficiency) ............ $ 2,445 $ 7,642 $ 0
Redundancy resulting from
1992 commutation ..................... 0 0 0
Redundancy (deficiency)
as adjusted .......................... $ 2,445 $ 7,642 $ 0
Reserve for loss and LAE, gross ........ $ 464,931 $ 689,609 $ 938,800
Reinsurance recoverables ............... 29,351 30,981 40,054
--------- --------- ---------
Reserve for loss and LAE, net .......... 435,580 658,628 898,746
Gross re-estimated liability-latest .... $ 460,148 $ 680,210
Re-estimated recoverable-latest ........ 27,013 29,224
--------- ---------
Net re-estimated liability-latest ...... 433,135 650,986
Gross redundancy (deficiency) .......... $ 4,783 $ 9,399
</TABLE>
11
<PAGE> 12
There were no significant deficiencies or redundancies in recent years. Any
incurred loss development is primarily attributable to corresponding premium
development. The 1992 aggregate deficiency relates solely to unallocated LAE
which is not covered by the Stop Loss Agreement. Favorable reserve development
in 1987, 1988 and 1989 is principally attributable to the effects of a loss
portfolio transfer transaction with Hansa Reinsurance Company of America
("Hansa") effected by ZRC in 1990 for accident years 1989 and prior. As part of
this transaction, all business underwritten by StellaRe Management Corporation
on behalf of ZRC (which represented ZRC's entire portfolio of business on
December 31, 1989) was retroceded to Hansa. As a result of this transaction,
Hansa is now responsible for the payment of ZRC's pre-1990 reserves.
Such retrocession is covered under the terms of the Stop Loss Agreement.
The reconciliation of ZRC's and ZCIC's reserves for losses and LAE
determined on the basis of statutory accounting principles ("SAP") and generally
accepted accounting principles ("GAAP") for each of the three years in the
period ended December 31, 1996 is shown below.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------
1996 1995 1994
---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C>
SAP reserves (net of reinsurance recoverables) $ 906,897 $ 667,355 $ 251,444
Adjustments to GAAP basis:
Hansa loss portfolio transfer ............ (8,151) (8,727) (9,470)
--------- --------- ---------
Net reserves on a GAAP basis ................. 898,746 658,628 241,974
Reinsurance recoverables on unpaid losses 40,054 30,981 20,892
--------- --------- ---------
Gross reserves on a GAAP basis ............... $ 938,800 $ 689,609 $ 262,866
========= ========= =========
</TABLE>
SAP requires that loss and LAE reserves be reported gross of loss portfolio
transfers with an offsetting contra-liability account on the balance sheet. For
GAAP reporting purposes, loss portfolio transfers are included in the
reinsurance recoverables on unpaid losses. For GAAP purposes, ZRC's reinsurance
recoverables on unpaid losses, including the loss portfolio transfer with Hansa,
have been reclassified as an asset.
See Item 8 "Financial Statements and Supplementary Data - Footnote 5:
Losses and Loss Adjustment Expenses" for further discussion of the Company's
reserves.
12
<PAGE> 13
RETROCESSIONS
There were no significant changes to the Company's retention levels or
retrocessional programs during 1996. In addition to the Stop Loss Agreement
(discussed above), effective July 1, 1995, ZRC entered into an excess of loss
reinsurance agreement with Zurich, primarily to provide an aggregate loss
limitation on business assumed from members of Zurich American under a domestic
whole account quota share treaty. Effective July 1, 1994, ZRC implemented a
workers' compensation excess retrocessional cover with limits of $98 million
excess of $2 million. This treaty functions as a workers' compensation clash
cover. Clash cover retrocessions are designed to protect the reinsured from
unusual accumulations of exposure resulting from a single casualty occurrence
involving two or more reinsured policies. Based on its assessments of risk
aggregation and the availability of acceptable retrocessional protection, the
Company may in the future seek to purchase additional clash cover retrocessional
coverage for its excess of loss casualty business. At December 31, 1996, there
were no recoverables from any one retrocessionaire that exceeded 10% of
stockholders' equity.
INVESTMENTS
The Company has specific investment guidelines with respect to the
management of its consolidated investment portfolio. Although these guidelines
stress diversification of risks and conservation of principal and liquidity, the
Company's investments are subject to market-wide risks and fluctuations, as well
as to risks inherent in particular securities. The Company's investment
guidelines, which are subject to change at the discretion of the Company's Board
of Directors, address the duration of the portfolio, currency denomination and
credit standards as well as diversification and liquidity constraints. The
Company's consolidated investment guidelines incorporate the qualitative and
quantitative limits prescribed by the Connecticut Insurance Code and the
Investments of Insurers Model Act promulgated by the National Association of
Insurance Commissioners (the "NAIC"). See the discussion below under the caption
"Regulatory Matters."
13
<PAGE> 14
The following table summarizes the cash and invested assets of the Company
on a consolidated basis (at market and carrying values) as of December 31, 1996:
<TABLE>
<CAPTION>
DECEMBER 31, 1996
----------------------
AMOUNT PERCENT
------ -------
(Dollars in thousands)
<S> <C> <C>
Cash and cash equivalents ...................... $ 251,506 14.4%
Short-term investments ......................... 120,720 6.9
U.S. government and government agency
fixed maturity securities(1) ............... 534,176 30.6
Mortgage-backed fixed maturity securities(1) ... 311,261 17.8
Asset-backed fixed maturity securities ......... 65,740 3.8
Corporate fixed maturity securities ............ 162,934 9.3
Obligations of states and political subdivisions 110,528 6.3
Foreign fixed maturity securities .............. 15,484 0.9
Investment in affiliate ........................ 8,204 0.5
Common stock ................................... 166,494 9.5
Preferred stock ................................ 968 0
---------- -----
Total cash and invested assets(2) .......... $1,748,015 100.0%
========== =====
</TABLE>
- ----------------------
(1) As of December 31, 1996, all the U.S. government and government agency
fixed maturity securities held represented obligations of the U.S.
government and $250.5 million of the mortgage-backed securities were
obligations of U.S. federal issuing agencies.
(2) As of December 31, 1996, the amortized cost of the consolidated cash and
invested assets portfolio of the Company was $1,697.8 million.
The following table indicates the composition of the consolidated fixed
maturities portfolio of the Company (at market and carrying values) by
investment rating as of December 31, 1996:
<TABLE>
<CAPTION>
DECEMBER 31, 1996
---------------------
AMOUNT PERCENT
-------- ---------
(Dollars in thousands)
<S> <C> <C>
U.S. government and government agency
fixed maturity securities ....... $ 549,660 45.8%
Aaa/AAA(1) .......................... 442,144 36.8
Aa/AA(1) ............................ 91,668 7.6
A(1) ................................ 116,651 9.8
---------- -----
Total ..................... $1,200,123 100.0%
========== =====
</TABLE>
- --------------------
(1) The investment rating system used by Moody's and S&P assigns symbols to
indicate the relative investment quality of a rated bond. "Triple-A" rated
bonds are judged to be of the best quality and are considered to carry the
smallest degree of investment risk. "Double-A" rated bonds are also judged
to be of high quality by all standards. Together with "Triple-A" rated
bonds, these bonds comprise what are generally known as high grade bonds.
"Single-A" rated bonds possess many favorable investment attributes and are
considered to be upper medium grade obligations. "Triple-B" rated bonds are
considered as medium grade obligations; they are neither highly protected
nor poorly secured. Bonds rated "Double-B" or lower are considered to be
speculative. Such ratings are generally assigned upon the issuance of the
securities subject to revision on the basis of ongoing evaluations. Ratings
shown above are as of December 31, 1996.
14
<PAGE> 15
Ratings assigned by the NAIC range from Class 1 to Class 6 with Class 1 as
the highest quality rating. ZRC's and ZCIC's fixed maturities portfolio is
composed 99.6% of securities rated by the NAIC as Class 1, with the balance
rated as Class 2.
See Item 8 "Financial Statements and Supplementary Data - Footnote 4:
Investments" for contractual maturities of the Company's consolidated fixed
maturity securities and the gross gains (losses) on sales of fixed maturities.
The Company has no investments in any entity in excess of 10% of
stockholders' equity at December 31, 1996, other than investments issued or
guaranteed by the U.S. government or its agencies.
The following table reflects investment results for ZRC for the year ended
December 31, 1992 and the consolidated results of the Company for each year in
the four-year period ended December 31, 1996. Investments made prior to the
Company's acquisition of ZRC were made pursuant to an investment policy
different from the Company's current investment policy.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Average invested assets(1) .... $ 1,630,058 $ 1,306,856 $ 958,877 $ 602,366 $ 162,367
Direct investment income(2) ... 95,176 82,374 53,283 30,614 13,642
Net investment income(3) ...... 92,203 80,049 51,044 28,964 13,275
Direct effective yield(4) ..... 5.8% 6.3% 5.6% 5.1% 8.4%
Net effective yield(5) ........ 5.7% 6.1% 5.3% 4.8% 8.2%
Realized capital gains (losses) $ (5,071) $ 33,526 $ (35,631) $ 22,699 $ 1,478
</TABLE>
- -------------------------
(1) Average of beginning and ending amounts of cash and investments for the
period (at carrying values) for the years ended 1992, 1994 and 1996. For
1995, reflects a monthly weighted average to recognize assets acquired in
the April 1995 acquisition of Re Capital Corporation. For 1993, reflects a
monthly weighted average to recognize proceeds of the Company's equity
sales in March 1993 and May 1993 ($340 million and $240 million,
respectively) as well as $196 million representing proceeds of the October
1993 issuance of the Senior Notes.
(2) Before investment expenses, excluding realized capital gains (losses).
(3) After investment expenses, excluding realized capital gains (losses).
(4) Direct investment income for the period divided by average invested assets
for the same period.
(5) Net investment income for the period divided by average invested assets for
the same period.
15
<PAGE> 16
The following table summarizes the net investment income by type of investment
of the Company for the three years ended December 31, 1996:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------
1996 1995 1994
-------- -------- --------
(Dollars in thousands)
<S> <C> <C> <C>
Short-term investments and
cash and cash equivalents ................. $ 13,739 $ 8,040 $ 4,405
U.S. government and government agency
fixed maturity securities ................. 30,904 31,672 24,642
Mortgage-backed fixed maturity securities ...... 21,327 19,180 9,889
Asset-backed fixed maturity securities ......... 6,923 6,271 4,668
Corporate fixed maturity securities ............ 11,530 10,465 3,919
Obligations of states and political subdivisions 6,452 4,003 4,898
Foreign fixed maturity securities .............. 876 228 832
Common stock ................................... 3,348 2,431 30
Preferred stock ................................ 77 84 0
Investment expenses ............................ (2,973) (2,325) (2,239)
-------- -------- --------
Net investment income ..................... $ 92,203 $ 80,049 $ 51,044
======== ======== ========
</TABLE>
16
<PAGE> 17
REGULATORY MATTERS
The Company, ZRC and ZCIC are subject to regulation under the insurance
statutes of various states, including Connecticut and New Jersey, the
domiciliary state of ZRC and ZCIC, respectively. The New Jersey insurance
holding company laws and laws pertaining to the investments of insurers are
substantially similar to the insurance laws of the State of Connecticut
discussed below.
Insurance Holding Company Regulation
Pursuant to the terms of the Connecticut Insurance Code and related
regulations (the "Connecticut Code"), ZRC is required to register annually and
file certain reports with the Commissioner of Insurance of the State of
Connecticut (the "Connecticut Commissioner"). The annual registration statement
calls for current information regarding the capital structure, general financial
condition, ownership and management of ZRC and persons controlling it and for
disclosure of the identity and relationship of every member of ZRC's insurance
holding company system. The registration statement must also disclose certain
agreements and transactions between ZRC and its affiliates, which agreements and
transactions must satisfy certain standards set forth in the Connecticut Code.
In general, under the Connecticut Code, no person may acquire control of
ZRC or a corporation that controls ZRC (including ZRCH), unless such person has
filed a statement containing specified information with the Connecticut
Commissioner and the Connecticut Commissioner has approved such acquisition of
control. For the purposes of the Connecticut Code, any person acquiring,
directly or indirectly, 10% or more of the voting securities of any other person
is presumed to have acquired "control" of such other person. The Connecticut
Commissioner, however, may find that "control" exists in circumstances in which
a person owns or controls a smaller amount of voting securities. In addition,
the Connecticut Commissioner may exempt from the approval requirement any
acquisition not made for the purpose and not having the effect of changing or
influencing the control of the insurance company.
The payment of dividends by ZRC is subject to restrictions set forth in the
Connecticut Code which limit the aggregate amount of dividends or other
distributions that ZRC may declare or pay within any 12-month period absent
prior regulatory notification and approval. The Connecticut Code provides that
no dividend or other distribution may be paid by a subject insurer (i) when the
surplus of such insurer is less than (a) the minimum surplus required under the
Connecticut Code to write specified lines of insurance or (b) the amount of
surplus which bears a reasonable relationship to such insurer's liabilities
based upon the type, volume and nature of the insurance business transacted, or
(ii) when the payment of a dividend or other distribution would reduce such
insurer's surplus to less than such amounts. The Connecticut Code further
provides that a subject insurer may not pay any dividend or other distribution,
without the Connecticut Commissioner's prior approval, in an amount exceeding
such insurer's earned surplus, determined in accordance with SAP, as of the
prior year end (adjusted to reflect a discount of certain unrealized gains on
investments). In addition, the Connecticut Code provides that subject insurers
may not pay any "extraordinary" dividends or distributions until (i) 30 days
after the Connecticut Commissioner has received notice of the declaration
thereof and has not within such period disapproved such payment or (ii) the
Connecticut Commissioner has approved such payment. The Connecticut Code
provides that an extraordinary dividend or distribution means any dividend or
distribution of cash or other property, whose fair market value, together with
that of other dividends or distributions made within the preceding 12-month
period, exceeds the greater of 10% of surplus with respect to policyholders as
of December 31 of the preceding year or 100% of net income for the 12-month
period ending December 31 of the preceding year, both determined in accordance
with SAP. As of December 31, 1996, ZRC's policyholders' surplus was $690.1
million. As of December 31, 1996, ZRC's earned surplus for purposes of certain
general statutory dividend tests was and, accordingly, its
17
<PAGE> 18
1997 maximum dividend payment is $46.0 million. Dividends are declared only with
prior approval of ZRC's Board of Directors. There were no dividends paid by ZRC
during 1996.
Under the Connecticut Code, ZRC may not enter into certain transactions,
including certain reinsurance transactions, significant management agreements
and service contracts, with members of its insurance holding company system
unless ZRC has notified the Connecticut Commissioner of its intention to enter
into such transactions and the Connecticut Commissioner has not disapproved of
them within the period specified by the Connecticut Code. Among other things,
such transactions are subject to the requirements that their terms be fair and
reasonable, charges or fees for services performed be reasonable and the
interests of policyholders not be adversely affected.
Regulation of Reinsurance
The terms and conditions of reinsurance agreements generally are not
subject to regulation by any governmental authority with respect to rates or
policy terms. This absence of regulation contrasts with primary insurance
policies and agreements, the rates and terms of which generally are closely
regulated by state insurance regulators. As a practical matter, however, the
premium rates charged by primary insurers do have a direct effect on the rates
charged by reinsurers.
A primary insurer will generally enter into a reinsurance agreement only if
it can obtain credit for the reinsurance ceded on its statutory financial
statements. In general, credit is allowed for reinsurance if: (i) the reinsurer
is licensed in the state in which the primary insurer is domiciled and, in some
instances, in certain states in which the primary insurer is licensed; (ii) the
reinsurer is an "accredited" or "approved" reinsurer in the state in which the
primary insurer is domiciled and, in some instances, in certain states in which
the primary insurer is licensed; (iii) in some instances, if the reinsurer (a)
is licensed in a state that is deemed to have substantially similar credit for
reinsurance standards as the state in which the primary insurer is domiciled and
(b) meets certain financial requirements; or (iv) if none of the above apply, to
the extent that the reinsurance obligations of the reinsurer are collateralized
appropriately, typically through the posting of a letter of credit for the
benefit of the primary issuer or the deposit of assets into a trust fund
established for the benefit of the primary insurer.
ZRC is licensed, accredited, approved or qualified in all 50 states and the
District of Columbia. ZRC is licensed in Arkansas, California, Colorado,
Connecticut, Georgia, Illinois, Indiana, Iowa, Kansas, Louisiana, Massachusetts,
Michigan, Montana, Nebraska, Nevada, New Jersey, New Mexico, New York, Ohio,
Oklahoma, Pennsylvania, South Dakota, Tennessee, Texas, Utah, Washington, West
Virginia and Wisconsin. ZRC is an accredited or approved reinsurer in Alabama,
Alaska, Arizona, Delaware, District of Columbia, Florida, Hawaii, Idaho,
Kentucky, Maine, Maryland, Minnesota, Mississippi, New Hampshire, North
Carolina, North Dakota, Oregon, Rhode Island, South Carolina, Vermont, Virginia
and Wyoming. In addition, ZRC is qualified in Missouri.
The Company believes that ZRC is in compliance with all applicable laws and
regulations that materially affect its business and operations.
Regulation of Insurance
ZCIC is licensed to engage in insurance business in 33 states and the
District of Columbia and licensed to engage in reinsurance business in 6
additional states. Certain of ZCIC's business is subject to regulation and
supervision by the insurance regulatory authority of each state in which it is
licensed to do business. Such regulators grant licenses to transact business;
regulate trade practices; approve policy
18
<PAGE> 19
forms and rates; license agents; establish minimum reserve and loss ratio
requirements; review form and content of required financial statements;
prescribe the type and amount of investments permitted; and assure that capital,
surplus and solvency requirements are met. Insurance companies can also be
required under the solvency or guaranty laws of most states in which they do
business to pay assessments up to the prescribed limits to fund policyholders
losses or liabilities of insolvent insurance companies. In addition, they may be
required to participate in assigned risk plans or pools that provide coverage to
uninsurable risks.
Investment Limitations
The Connecticut Code contains rules governing the types and amounts of
investments that are permissible for Connecticut-domiciled insurers, including
ZRC. These rules are designed to ensure the safety and liquidity of a subject
insurer's investment portfolio and require investments to be diversified. During
1996, the NAIC's Investments of Insurers Model Act (the "Investment Model Act")
was adopted which places further restrictions on the composition of insurers'
investment portfolios. As of December 31, l996, the composition of ZRC's
investment portfolio complied with the pertinent provisions of the Connecticut
Code and the Investment Model Act.
Triennial Examinations
As part of its general regulatory oversight process, the Connecticut
Insurance Department (the "Connecticut Department") conducts detailed triennial
examinations of the books, records and accounts of Connecticut insurance
companies. During 1996, the Connecticut Department completed its examination of
ZRC's financial statements for the period ended December 31, 1993. There were no
adjustments made or proposed to ZRC's statutory-basis financial statements as a
result of the Connecticut Department's examination.
Insurance Regulatory Information System Ratios
The NAIC's Insurance Regulatory Information System ("IRIS") was developed
by a committee of state insurance regulators and is intended primarily to assist
state insurance departments in executing their statutory mandates to oversee the
financial condition of insurance companies operating in their respective states.
IRIS identifies eleven industry ratios and specifies "usual values" for each
ratio. Departure from the usual values on four or more of the ratios can lead to
inquiries from individual state insurance commissioners as to certain aspects of
an insurer's business. As of December 31, 1994 and 1995, due to premium growth,
ZRC's results were outside of the usual values for the change in writings ratio.
Due to premium growth, ZRC's results were outside of the usual values for the
estimated current reserve deficiency to surplus ratio as of December 31, 1995
and 1996.
Risk-Based Capital
The NAIC's model risk-based capital regulations (the "RBC Model Act")
requires companies to calculate and report information under a risk-based
capital formula which attempts to measure statutory capital and surplus needs
based on the risks in a company's mix of business and its investment portfolio.
Under the formula, a subject company determines its risk-based capital by taking
into account certain risks related to its asset composition (including risks
related to its investment portfolio and ceded reinsurance) and its liability
structure (including underwriting risks related to the nature and experience of
its insurance business). The Connecticut Code provides that a subject insurer's
risk-based capital must be adequate for the types of business transacted by such
insurer and prescribes various reports which must be filed documenting its
risk-based capital. The Connecticut Code also provides for four different
capital levels of regulatory attention depending on the ratio of a company's
total adjusted capital to its
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<PAGE> 20
risk-based capital. Based on calculations made by the Company, as of December
31, 1996, ZRC exceeded all of the capital levels prescribed in the RBC Model Act
and the Connecticut Code.
Legislative and Regulatory Proposals
From time to time, various regulatory and legislative changes have been
proposed in the insurance and reinsurance industry, some of which could have an
effect on reinsurers. Among the proposals that have in the past been or are at
present being considered are the possible introduction of federal regulation in
addition to, or in lieu of, the current system of state regulation of insurers
and proposals in various state legislatures to conform portions of certain
insurance laws and regulations to various model acts adopted by the NAIC. The
Company is unable to predict whether any of these laws and regulations will be
adopted, the form in which any such laws and regulations would be adopted, or
the effect, if any, these laws and regulations would have on the operations and
financial condition of the Company or ZRC. One of these legislative and
regulatory proposals is the following:
Codification of Statutory Accounting Principles. In an effort to create and
codify a comprehensive set of statutory accounting principles, in 1994 the NAIC
adopted a statutory accounting concepts statement. In addition to listing the
objectives of statutory accounting, the statutory accounting concepts statement
provides a statutory hierarchy of sources for statutory accounting principles.
Currently, the NAIC is redefining current industry practices through the release
of issue papers addressing various statutory accounting practices. As the final
set of issues papers and transition rules have not yet been released, the
Company is unable to predict the effect, if any, that the codification process
will have on the operations and financial condition of the Company or ZRC.
COMPETITION
The property and casualty reinsurance industry is highly competitive. ZRC
competes with domestic and foreign insurers and reinsurers, some of which have
greater financial, marketing and management resources than ZRC. The significant
domestic broker reinsurance companies with which ZRC competes include
Transatlantic Reinsurance Company, Everest Reinsurance Company, NAC Reinsurance
Corporation, TIG Reinsurance Company, and Trenwick America Reinsurance
Corporation. The significant domestic direct reinsurance companies with which
ZRC competes include General Reinsurance Corporation, Employers Reinsurance
Corporation, American Re-Insurance Company, Swiss Re America Corporation, and
Munich Reinsurance Group. Competition in the types of reinsurance that ZRC
writes is based on many factors, including the perceived financial strength of
the reinsurer, pricing and other terms and conditions, services provided,
ratings assigned by independent rating organizations (including A.M. Best), the
speed of claims payment and the reputation and experience in the line of
reinsurance to be written. Ultimately, this competition, coupled with the
prolonged effects of the current market conditions for insurance and reinsurance
coverages, could affect ZRC's ability to attract business having appropriate
risk and return characteristics. The reinsurance industry traditionally has not
had significant barriers to entry. Traditional reinsurers, such as ZRC, also
face competition from financial institutions and investment banks that promote
financial market instruments as alternatives to traditional reinsurance. In
addition, there are currently pending a number of federal and state legislative
proposals for the establishment of government-sponsored risk pools that would
write certain property catastrophe risks. These pools, if created, would supply
insurance capacity currently provided by traditional reinsurance. Therefore, in
the future, ZRC may face competition from new market entrants or from market
participants which now devote relatively immaterial amounts of capital to the
reinsurance business.
Ratings have become increasingly important in establishing the competitive
position of a reinsurer. As of December 31, 1996, ZRC has a rating of "A" from
A.M. Best, a claims-paying ability rating of "AA-" from S&P and a financial
strength rating of "Aa3" from Moody's. Management believes that a
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<PAGE> 21
reduction generally below an "A" level in any of the Company's ratings could
have a material adverse effect on its financial condition, results of operations
and cash flows. These ratings are not in any way a measure of protection offered
to investors in the Common Stock. Each of these agencies reviews its ratings
periodically and there can be no assurance that the Company's ratings will be
maintained in the future.
EMPLOYEES
On December 31, 1996, the Company employed 235 persons. The Company
believes that its employee relations are satisfactory. None of the Company's
employees are subject to collective bargaining agreements, and the Company knows
of no current efforts to implement such agreements.
ITEM 2. PROPERTIES.
ZRC is party to a sublease agreement, dated as of January 1, 1994, and
amended as of January 26, 1996 (the "Sublease") with a subsidiary of Zurich.
Under the Sublease, ZRC leases approximately 60,000 rentable square feet of
space in New York City for its underwriting, actuarial and certain executive
offices (the "Office Space"). The Sublease has a term of approximately seventeen
years. Together with another Zurich affiliate which occupies space contiguous to
the Office Space, ZRC has guaranteed the performance of the tenants' obligations
under the lease covering the Office Space. Under this guarantee, ZRC is
contingently liable for 36.2% of monetary obligations to the lessor in respect
of the Office Space and other contiguous space leased thereby (together with the
Office Space, the "Group Office Space"). This percentage represents the
approximate percentage which the Office Space bears to the Group Office Space.
In addition, ZRC occupies approximately 40,000 square feet of office space in
Stamford, Connecticut. The Company believes that its facilities are adequate for
the conduct of its current and expected business.
ITEM 3. LEGAL PROCEEDINGS.
In January 1997, four stockholders, each purporting to represent a class,
filed separate complaints against the Company, certain of the Company's
directors and officers and certain affiliates of the Company in the Court of
Chancery of the State of Delaware. On March 14, 1997, the four actions (William
Steiner v. Detlef Steiner et al., C.A. No. 15457-NC, filed January 13, 1997,
Crandon Capital Partners v. Steven M. Gluckstern et al., C.A. No. 15480-NC,
filed January 13, 1997, Howard Sande Feldman, Custodian for Jan Sharone Feldman
v. Steven M. Gluckstern et al., C.A. No. 15462-NC, filed January 14, 1997 and
Harvey Greenfield v. Zurich Reinsurance Centre Holdings, Inc. et al., C.A. No.
15466-NC, filed January 16, 1997) were consolidated into one suit captioned In
Re Zurich Reinsurance Centre Holdings, Inc. Shareholders Litigation, Cons. C.A.
No. 15457. The consolidated action alleges, among other things, breaches of the
defendants' fiduciary duties in connection with Zurich's proposal made during
January 1997 to acquire all of the Company's publicly held shares for $36.00 per
share. The action seeks unspecified damages, injunctive relief and attorneys'
fees and expenses. The Company and the other defendants intend to defend this
action. See Item 1 "Business -- The Company" and Item 7 "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Subsequent Event".
Other litigation pending against the Company and its subsidiaries is not
considered material or is ordinary routine litigation or arbitration incidental
to the business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
There were no matters submitted to a vote of security holders during the
fourth quarter of 1996.
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<PAGE> 22
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
Shares of the Common Stock are listed on the New York Stock Exchange and
trade under the symbol "ZRC." The following table sets forth for the periods
indicated the quarterly high and low closing sales prices of the Common Stock on
the New York Stock Exchange.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
---------------------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
1996 1996 1996 1996
--------- -------- ------------- ------------
<S> <C> <C> <C> <C>
High.................................... $32 5/8 $32 1/4 $31 3/8 $32 3/4
Low..................................... $29 3/8 $29 7/8 $28 5/8 $29 1/8
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED
---------------------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
1995 1995 1995 1995
--------- -------- ------------- ------------
<S> <C> <C> <C> <C>
High.................................... $30 3/8 $30 3/4 $30 $30 1/2
Low..................................... $28 1/2 $28 5/8 $28 $28 1/4
</TABLE>
On March 21, 1997, the number of registered holders of the Common Stock was
272 and the closing price for a share of the Common Stock was $38.00. See Item 1
"Business" for a discussion of Zurich's proposal during January 1997 to acquire
all of the remaining shares of ZRCH not currently owned by Zurich.
In November 1996, the Board of Directors declared a regular $0.10 per share
annual cash dividend, payable in January 1997. The declaration and payment of
dividends by the Company are subject to the discretion of its Board of
Directors. Any determination as to the payment of dividends in the future will
depend upon, among other things, general business conditions, legal and
regulatory restrictions regarding the payment of dividends by ZRC and other
factors which the Company's Board of Directors may in the future consider to be
relevant. As a reinsurance holding company, ZRCH depends in part on dividends
and other permitted payments from ZRC to pay cash dividends to its stockholders.
See Item 1 "Business" and Item 7 "Management's Discussion and Analysis of
Financial Condition and Results of Operations" as well as Item 8 "Financial
Statements and Supplementary Data - Footnote 11: Dividend Restrictions and
Statutory Financial Information" for further discussion.
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<PAGE> 23
ITEM 6. SELECTED FINANCIAL DATA.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------------------------------------------------------
1996 1995 1994 1993(1) 1992(1)
---- ---- ---- ------- -------
(Dollars in thousands, except per share data)
(Predecessor
Company)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA (GAAP)
Gross premiums written ................ $ 737,445 $ 613,939 $ 313,149 $ 114,274 $ 70,672
Net premiums written .................. 729,306 602,294 309,627 101,624 53,600
Net premiums earned ................... 684,329 502,588 224,603 86,294 46,218
Net investment income ................. 92,203 80,049 51,044 28,964 13,275
Realized capital gains (losses) ....... (5,071) 33,526 (35,631) 22,699 1,478
Total revenues ........................ 775,497 616,683 243,222 137,899 61,370
Losses and loss adjustment
expenses .......................... 485,805 376,348 182,845 70,147 47,869
Commissions and operating
costs and expenses ................ 232,405 167,696 87,985 38,417 19,470
Interest and amortization ............. 15,519 15,882 14,288 4,287 3,150
Pre-tax income (loss) ................. 41,768 56,757 (41,896) 25,048 (9,119)
Federal income tax expense (benefit) .. 12,505 13,319 (10,704) 7,540 (3,100)
Net income (loss) ..................... 29,263 43,438 (31,192) 17,508 (6,019)
BALANCE SHEET DATA (GAAP)
Cash and invested assets .............. $ 1,748,015 $ 1,512,100 $ 989,395 $ 928,359 $ 169,185
Total assets .......................... 2,243,044 1,923,664 1,167,912 1,019,981 256,368
Gross unpaid losses and LAE ........... 938,800 689,609 262,866 123,074 116,088
Net unpaid losses and LAE ............. 898,746 658,628 241,974 97,712 71,066
Note payable to affiliate ............. -- -- -- -- 35,000
7-1/8% Senior Notes due 2023 .......... 198,413 198,394 198,376 198,359 --
Total stockholders' equity ............ 711,869 681,570 565,247 637,682 58,382
SELECTED ZRC SAP DATA(2)
Loss and commission ratio ............. 98.6% 100.7% 105.0% 110.8% 122.4%
Other underwriting expense ratio ...... 5.1 5.8 9.6 15.3 6.9
----------- ----------- ----------- ----------- -----------
SAP Combined ratio .................... 103.7% 106.5% 114.6% 126.1% 129.3%
=========== =========== =========== =========== ===========
Policyholders' surplus ................ $ 690,099 $ 657,197 $ 607,470 $ 614,650 $ 104,059
=========== =========== =========== =========== ===========
PER SHARE DATA
Net income (loss) ..................... $ 1.12 $ 1.66 $ (1.19) $ 0.77 $ (0.35)
Cash dividends declared ............... $ 0.10 $ 0.10 -- -- --
</TABLE>
See Item 7 "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
(1) The Company's 1993 acquisition of ZRC was accounted for at historical cost
similar to pooling-of-interests accounting. Based on this methodology, the
Company's consolidated results of operations for 1993 are presented as if
the acquisition of ZRC had occurred on January 1, 1993. As a result of its
recapitalization and strategic redirection in 1993, ZRC has a new senior
management, a new business strategy and underwriting approach, and
significantly more capital. The Company believes that ZRC's historical
financial results are not indicative of results that it may achieve in the
future.
(2) ZRC's statutory combined ratio differs from the Company's GAAP combined
ratio primarily due to the deferral of certain acquisition costs and the
inclusion of certain holding company expenses, each of which is considered
in the Company's GAAP combined ratio.
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<PAGE> 24
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
INDUSTRY OVERVIEW
The property and casualty reinsurance industry's revenue and profitability is
influenced by financial and market trends concerning its client insurers, by
prevailing general economic and capital market conditions as well as by recent
trends in the reinsurance sector including increased competition, continued
consolidation and the introduction of financial market instruments as
alternatives to reinsurance. The industry is also subject to other developments
concerning risks insured and reinsured such as natural disasters (including
hurricanes, windstorms, earthquakes) and the emergence of latent casualty
exposures (including environmental and asbestos-related claims).
The demand for reinsurance will depend on the underwriting results, capital
adequacy, perceived exposure of primary insurers, perceived attractiveness of
available reinsurance terms and prevailing general economic conditions. Each of
these factors affects liability retention decisions by primary insurers. The
degree of competition among reinsurers is driven in part by many of the same or
similar factors. Industry capacity is a function largely of aggregate
capitalization, which in turn fluctuates based on, among other things, pricing
adequacy on current business, reserve development with respect to historical
business, market interest rates and new capital entrants.
The table below provides some comparative information about trends in revenue,
profitability and capacity for primary insurance companies and reinsurers as
well as some general economic and financial market trends:
<TABLE>
<CAPTION>
1993 1994 1995 1996
---- ---- ---- ----
INDUSTRY FACTORS(1) (estimated)
<S> <C> <C> <C> <C>
Premium Growth:
Property Casualty Industry ..... 6.2% 3.8% 3.6% 3.6%
Professional Reinsurers ........ 13.1% 6.4% 9.7% 2.5%
Capitalization Growth:
Property Casualty Industry ..... 11.8% 6.1% 19.0% 13.0%
Professional Reinsurers ........ 11.7% 6.7% 31.9% 20.0%
Combined Ratio:
Property Casualty Industry ..... 106.9% 108.5% 106.5% 107.0%
Professional Reinsurers ........ 107.4% 108.3% 110.6% 105.5%
After-tax Return on Surplus:
Property Casualty Industry ..... 11.2% 5.8% 9.7% 8.8%
Professional Reinsurers ........ 9.1% 5.9% 5.2% 10.0%
ECONOMIC AND FINANCIAL MARKET FACTORS
U.S. Gross Domestic Product Growth(2) 2.3% 3.5% 2.0% 2.5%
Lehman Aggregate Bond Index Return(3) 9.8% (2.9)% 18.5% 3.6%
S&P 500 Equity Index Return(4) ...... 10.1% 1.3% 37.6% 23.0%
</TABLE>
(1) Review Preview, Best Week Property and Casualty Supplement, A.M. Best,
January, 1997 and 1996.
(2) U.S. Department of Commerce, Bureau of Economic Analysis.
(3) Lehman Brothers Inc.'s Aggregate Bond Index.
(4) S&P 500 Information Bulletin.
24
<PAGE> 25
Financial information has been included herein related to the consolidated
financial statements of Zurich Reinsurance Centre Holdings, Inc. ("ZRCH") and
its wholly-owned subsidiaries, Zurich Reinsurance Centre, Inc. ("ZRC") and ZC
Insurance Company ("ZCIC", collectively referred to as the "Company"). The
Company, through its principal subsidiary, ZRC, operates primarily as a broker
reinsurer in the property and casualty reinsurance market. During April 1995,
the Company acquired Re Capital Corporation ("Re Capital", subsequently renamed
ZC Insurance Company) and accounted for the acquisition using purchase
accounting. The operating results of Re Capital are included in the Company's
consolidated results of operations from the date of acquisition.
RESULTS OF OPERATIONS
The Company's pre-tax operating income (excluding realized capital gains and
losses) increased 101.6% to $46.8 million in 1996. The increase is primarily due
to growth in net investment income and improved underwriting results. The
Company's pre-tax operating income for 1995 was $23.2 million compared to a
pre-tax operating loss of $6.3 million for 1994. This increase was primarily due
to growth in net investment income and the absence of significant catastrophe
losses. The Company incurred no significant catastrophe losses in either 1996 or
1995. Results for 1994 reflect the impact of pre-tax catastrophe losses of $12.2
million.
Net income was $29.3 million for 1996 compared to $43.4 million for 1995, due to
a $30.4 million decline in after-tax realized capital gain (loss) activity
offset by a $16.3 million increase in after-tax operating income. Net income was
$43.4 million for 1995 compared to net loss of $31.2 million for 1994, due to a
$55.3 million increase in after-tax realized capital gain (loss) activity and a
$19.3 million increase in after-tax operating income.
Gross premiums written in 1996 were $737.4 million, a 20.1% increase over 1995.
The Company entered into a domestic whole account quota share treaty with
members of the Zurich American Insurance Group (the "ZA Quota Share Agreement")
during the third quarter of 1995. The ZA Quota Share Agreement contributed
$181.8 million and $93.3 million to 1996 and 1995 gross premiums written,
respectively. Net premiums written in 1996 were $729.3 million, representing an
increase of 21.1% over 1995. The growth exhibited by net premiums written was
consistent with that of gross premiums written since there were no significant
changes in the Company's retention levels or retrocessional programs during 1996
or 1995. Net premiums earned in 1996 were $684.3 million, a 36.2% increase over
1995. Net premiums written increased less on a percentage basis than net
premiums earned due to the maturing of the Company's book of business, including
the ZA Quota Share Agreement. For 1995, net premiums written increased to $602.3
million or 94.5% over 1994, and net premiums earned increased to $502.6 million
or 123.8% over 1994. The 1995 premium growth was due to an increasing proportion
of renewal business as well as new bound business, including the ZA Quota Share
Agreement.
Losses and loss adjustment expenses ("LAE") incurred for 1996 increased to
$485.8 million, a 29.1% increase over 1995. The Company incurred no significant
catastrophe losses in either 1996 or 1995. Commissions were $184.7 million and
$124.3 million for 1996 and 1995, respectively. The increase in both losses and
commissions is due to significant growth in earned premiums as discussed above.
The GAAP loss and commission ratios for 1996 and 1995 were 98.0% and 99.6%,
respectively. The loss and commission ratio has trended downward due to
refinement of the loss reserving process and a greater percentage of well
performing renewal business. In addition, the components of the loss and
commission ratio have shifted primarily due to a greater percentage of business
written on a pro rata basis. Pro rata treaties generally have lower loss ratios
but higher commission ratios than excess of loss treaties. The 1995 GAAP loss
and commission ratio decreased to 99.6% from 105.1% in 1994. During
25
<PAGE> 26
1994, the Northridge earthquake and 1994 East Coast winter storms contributed
5.4 percentage points to ZRC's GAAP loss and commission ratio. The gross and net
of reinsurance impact of the 1994 Northridge earthquake was $9.3 million and
$8.7 million, respectively. The 1994 East Coast winter storms increased both
gross and net reinsurance losses and LAE by $3.5 million.
Other operating costs and expenses were $47.7 million in 1996 compared to $43.4
million in 1995 and $34.8 million in 1994. The GAAP expense ratios for 1996,
1995 and 1994 were 6.5%, 7.2% and 11.2%, respectively. The decrease in the GAAP
expense ratio is attributable to growth in the Company's written premium volume
as discussed above.
ZRC's statutory combined ratio for 1996 declined to 103.7% from 106.5% for 1995,
primarily due to the lower loss and commission ratio discussed above. ZRC's
statutory combined ratio for 1995 declined 8.1 percentage points from 114.6% in
1994 due to the absence of significant catastrophe losses and the improvement in
the underwriting expense ratio. ZRC's statutory combined ratio differs from the
Company's GAAP combined ratio primarily due to the deferral of certain
acquisition costs and the inclusion of certain holding company expenses, each of
which is considered in the Company's GAAP combined ratio.
Net investment income for 1996 was $92.2 million, a 15.2% increase over 1995.
Growth in net investment income continues as the cash and invested asset base
expands due to strong cash flows, primarily attributable to underwriting
operations. In addition, profit from the Company's investment in Insurance
Partners, L.P., increased 1996 operating results by $3.3 million, compared to
$0.7 million in 1995. The 1996 after-tax annualized net investment income yield
of 4.1% was consistent with 1995. Net investment income for 1995 increased 56.8%
to $80.0 million due to an increased invested asset base resulting from strong
cash flows and Re Capital's acquired assets (after payments to stockholders and
holders of Re Capital's 5 1/2% Convertible Debentures due August 1, 2000).
Pre-tax realized capital losses for 1996 were $5.1 million compared to pre-tax
realized capital gains of $33.5 million for 1995 and pre-tax realized capital
losses of $35.6 million for 1994. The realized capital gain (loss) activity is
reflective of market conditions and is consistent with the Company's investment
philosophy, whereby capital gains (losses) are realized to maximize the total
investment return.
Interest and amortization expense for 1996 was $15.5 million compared to $15.9
million in 1995. The decline is primarily due to the conversion of Re Capital's
5 1/2% Convertible Debentures, due August 1, 2000 (the "Convertible Debentures")
offset by an increase in amortization expense related to the acquisition of Re
Capital. Interest and amortization expense for 1995 was $15.9 million
representing an increase of 11.2% from 1994, due to the Company's assumption of
the Convertible Debentures and increased amortization expense discussed above.
The Company's overall effective federal income tax rate for 1996 and 1995 was
29.9% and 23.5%, respectively. The Company's overall effective tax rate for 1996
and 1995 had both operating income and realized capital gain (loss) components.
The 1996 and 1995 effective tax rate on operating income of 30.5% and 29.8%,
respectively, differed from the federal statutory rate of 35.1% primarily due to
tax-exempt investment income and dividends. The effective tax (benefit) on 1996
realized capital losses approximated the federal statutory rate of 35.1%. The
effective tax rate on 1995 realized capital gains of 19.1% differed from the
federal statutory rate of 35.1% due to the reversal of a valuation allowance
previously established by the Company to offset potential tax benefits from
realized capital losses. The Company's 1994 effective federal income tax
(benefit) of (25.5)% varied from the federal statutory rate of 35.1% primarily
because of the recognition of the valuation allowance discussed above.
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<PAGE> 27
FINANCIAL CONDITION
The Company's cash and invested assets increased 15.6% during 1996 to $1,748.0
million. The increase is principally due to cash flows from operations. As of
December 31, 1996, approximately 69% of the Company's cash and investment
portfolio was invested in fixed maturity securities, 10% in equity securities
and 21% in short-term investments and cash and cash equivalents, compared with
74%, 9% and 17%, respectively, as of December 31, 1995. As of December 31, 1996,
the composition of ZRC's investment portfolio complied with the pertinent
provisions of the NAIC's Investments of Insurers Model Act. Consistent with
previous years, the Company maintains a high quality fixed maturity portfolio
with approximately 83% invested in U.S. government obligations or securities
rated "triple-A" by Moody's or S&P as of December 31, 1996. The balance of the
fixed maturity portfolio was invested in "A" rated fixed maturities. The
duration of the Company's fixed maturity portfolio of 4.2 years at December 31,
1996 approximated the 4.3 years duration at December 31, 1995. The Company's
investment strategy is to maximize total investment return consistent with
appropriate safety, diversification, tax and regulatory considerations, and to
provide sufficient liquidity to enable the Company to meet its obligations on a
timely basis. As a result of the Company's investment strategy, fixed maturities
are classified as available-for-sale and are carried at market value.
Mortgage pass-through and collateralized mortgage-backed obligations ("MBS")
represent approximately 17.8% (or $311.3 million) of the Company's cash and
invested assets as of December 31, 1996. While the Company believes that there
is negligible default risk associated with these securities since most are rated
"triple-A", such investments are, however, subject to risks associated with the
timing of principal payments. The degree to which a MBS is susceptible to either
gains or losses is influenced by the difference between its amortized cost and
par value, the relative sensitivity of the underlying assets backing the
securities to prepayment in a changing interest rate environment and the
repayment priority of the securities in the overall securitization structure.
The net unamortized discount as of December 31, 1996 for such securities was
approximately $6.6 million. Prepayment risk is associated with securities having
an amortized cost greater than par value ("premium securities"), which are
collateralized by assets that prepay faster than expected, as these securities
will incur a reduction in yield or a loss. Conversely, securities having an
amortized cost less than par value ("discount securities") that prepay faster
than expected, will generate an increase in yield or a gain. As of December 31,
1996, the gross unamortized premium for MBS purchased at a premium to par (and
thus subject to prepayment risk) was $3.1 million. There is also extension risk
associated with MBS when rates increase and prepayments slow, since the maturity
of these securities will be later than anticipated at the time of purchase,
thereby delaying the point when proceeds can be reinvested at prevailing yields.
Premium securities which are collateralized by assets that prepay slower than
expected will generate an increase in yield or a gain. Conversely, discount
securities that prepay slower than expected will generate a decrease in yield or
a loss. As of December 31, 1996, the gross unamortized discount for MBS
purchased at a discount to par (and thus subject to extension risk) was $9.7
million.
The Company limits the extent of prepayment or extension risks by generally
avoiding securities with costs significantly in excess of par value, by
purchasing securities that are backed by stable collateral, and by concentrating
on securities with enhanced priority in their trust structure. The Company has
no securities such as interest only securities ("IOs"), principal only
securities ("POs") or MBS purchased at a substantial premium to par that have
the potential for loss of a significant portion of the original investment due
to changes in the prepayment rate of the underlying loans supporting the
security. In addition to MBS, the Company may also enter into forward commitment
mortgage-backed security dollar roll transactions ("dollar rolls"). Such
transactions are typically for one month and effectively provide the Company
with the price exposure of the underlying MBS. The Company manages this exposure
by establishing duration guidelines for the total portfolio and the duration of
the dollar rolls is
27
<PAGE> 28
included in the overall duration. As of December 31, 1996, the cost and market
value of the outstanding dollar rolls were $270.1 million and $269.0 million,
respectively. There is no leverage related to these transactions since
sufficient cash equivalents are retained to cover settlement of the underlying
position.
Liabilities for gross losses and loss adjustment expenses (together referred to
as "loss reserves") amounted to $938.8 million at December 31, 1996, an increase
of 36.1% over December 31, 1995. The increase in loss reserves in 1996 is
principally due to the significant premium growth. Under the terms of the Stop
Loss Agreement, Zurich has reinsured the adverse development, if any, of ZRC's
net loss reserves as of May 31, 1993. As of December 31, 1996 and 1995 there
were no accrued recoverables under the Stop Loss Agreement. Zurich has an "AA+"
claims-paying ability rating from Standard & Poor's and a "Aa1" financial
strength rating from Moody's. The Company believes that its exposure to
environmental impairment liability and asbestos-related claims is minimal due to
the diminutive amount of business written prior to 1987 and the protection
provided by the Stop Loss Agreement.
Stockholders' equity at December 31, 1996 was $711.9 million compared to $681.6
million as of December 31, 1995. The increase in stockholder's equity is
primarily attributable to after-tax operating income partially offset by the
declaration of a regular $0.10 per share annual dividend, or $2.6 million, in
December 1996.
The NAIC requires insurance companies to calculate and report information under
a risk-based capital ("RBC") formula that measures statutory capital and surplus
needs based on the risks in a company's mix of business and investment
portfolio. Based on its calculation as of December 31, 1996, ZRC exceeds all of
the capital levels prescribed by the NAIC.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents and short-term investments increased to $372.2 million
as of December 31, 1996 compared to $260.8 million as of December 31, 1995, as a
result of operating cash flows and sector shifts consistent with the Company's
investment strategy.
Net cash provided by operating activities for 1996 was $282.1 million compared
to $242.5 million in 1995 and $154.1 million in 1994. The increase in cash flow
is primarily attributable to underwriting operations and net investment income.
Net cash used in financing activities of $9.7 million in 1996 resulted from the
Company's repurchase of its Common Stock, a regular dividend payment and the
conversion of the remaining Re Capital Convertible Debentures. Net cash used in
financing activities was $71.9 million in 1995 due to the conversion of the
Convertible Debentures. There were no cash flows from financing activities in
1994.
The Company believes that ZRCH, ZRC and ZCIC have sufficient cash flow and
liquid investments to meet both short- and long-term liquidity needs. In
planning for its liquidity needs, the Company distinguishes between capital
funds and liability funds. The Company considers the duration of its reinsurance
liabilities in the investment of funds supporting those liabilities. Management
believes that ZRCH's investment income and liquid investments will be sufficient
to offset interest and other expense payments. The amount of future cash flow
available to ZRCH from ZRC may be influenced by a variety of factors, including
cyclical changes in the property and casualty reinsurance market, insurance
regulatory changes and changes in general economic conditions. ZRC's ability to
pay dividends to ZRCH is subject to provisions of the Connecticut Insurance Code
restricting the ability of Connecticut insurance companies to make certain
dividends and distributions without prior regulatory notification
28
<PAGE> 29
and approval. See Item 8 "Financial Statements and Supplementary Data - Footnote
11: Dividend Restrictions and Statutory Financial Information" for further
discussion of these restrictions.
SUBSEQUENT EVENT
During January 1997, Zurich announced a proposal to acquire all of the remaining
shares of ZRCH not currently owned by Zurich for $36.00 per share (the "Proposed
Transaction"). ZRCH's Board of Directors has appointed a special committee of
its members to determine the advisability and fairness of that offer to ZRCH's
other stockholders. The special committee has retained independent investment
banking advisors and legal counsel to advise it on the fairness of the offer and
is in the process of considering the offer. The special committee has indicated
its intention to make a recommendation to ZRCH's Board of Directors with respect
to the offer as soon as practicable. Consummation of the Proposed Transaction is
subject to the approval of the Board of Directors and the stockholders of ZRCH
and other conditions customary in this type of transaction. There can be no
assurance that Zurich and the Board of Directors of ZRCH will reach an agreement
with respect to the fairness of the Proposed Transaction or that, in the absence
of such agreement, Zurich would proceed with the Proposed Transaction. See Item
3 "Legal Proceedings."
EFFECTS OF INFLATION
The ultimate loss and loss adjustment expense costs on claims not yet settled
are increased by the effects of inflation, and therefore it is a factor in
determining appropriate loss reserves as well as reinsurance premium rates.
Generally, the Company's methods, used both to estimate loss reserves for claims
incurred but not reported ("IBNR") and to calculate reinsurance premium rates it
charges, add the estimated effects of inflation into the ultimate loss costs.
The Company uses both insurance industry data and government economic indices in
estimating the effects of inflation on reinsurance premium rates and loss
reserves. Nevertheless, until claims are ultimately settled, the full effect of
inflation on the Company's results cannot be known. Due to inflationary
pressures in certain sectors, premium rates and loss reserves, including IBNR
loss reserves, are reevaluated regularly to incorporate the effects of
inflation.
NEW ACCOUNTING STANDARDS AFFECTING THE COMPANY
In June 1996, the Financial Accounting Standard Board (the "FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 125, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishment of Liabilities."
SFAS No. 125 provides accounting and reporting standards for sales,
securitizations and servicing of receivables and other financial assets, for
certain secured borrowing and collateral transactions, and for extinguishment of
liabilities. The Statement establishes guidelines for determining whether a
transfer of financial assets, including securities lending, constitutes a sale
and if so, measurement of the gain or loss. SFAS No. 125 is effective for
transactions occurring after December 31, 1996. (Note SFAS No. 127 "Deferral of
the Effective Date of Certain Provisions of FASB Statement No. 125" provides a
one year deferral for certain sections of SFAS No. 125.) The Company does not
expect that the provisions of SFAS No. 125 will have a material effect on its
financial statements.
29
<PAGE> 30
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
INDEX TO FINANCIAL STATEMENTS AND SCHEDULES
<TABLE>
<S> <C>
ZURICH REINSURANCE CENTRE HOLDINGS, INC. AND SUBSIDIARIES
Report of Independent Auditors ...................................................... 31
Consolidated Balance Sheets at December 31, 1996 and 1995 ........................... 32
Consolidated Statements of Operations for the years ended December 31, 1996, 1995
and 1994 ........................................................................ 33
Consolidated Statements of Stockholders' Equity for the years ended December 31,
1996, 1995 and 1994 ............................................................. 34
Consolidated Statements of Cash Flows for the years ended December 31, 1996
1995 and 1994 ................................................................... 35
Notes to Consolidated Financial Statements .......................................... 36
SCHEDULES
I Summary of Investments Other than Investments in Related Parties at
December 31, 1996 ......................................................... S-1
II Condensed Financial Information of Registrant for the years ended December 31,
1996, 1995 and 1994 ....................................................... S-2 to S-4
IV Reinsurance for the years ended December 31, 1996, 1995 and 1994 ............. S-5
</TABLE>
Schedules other than those listed above are omitted for the reason that
they are not applicable or that the information has been included in the
financial statements.
30
<PAGE> 31
REPORT OF INDEPENDENT AUDITORS
TO THE BOARD OF DIRECTORS AND STOCKHOLDERS
OF ZURICH REINSURANCE CENTRE HOLDINGS, INC.
We have audited the accompanying consolidated balance sheets of Zurich
Reinsurance Centre Holdings, Inc. and Subsidiaries as of December 31, 1996 and
1995, and the related consolidated statements of operations, stockholders'
equity and cash flows for each of the three years in the period ended December
31, 1996. Our audits also included the financial statement schedules listed in
the index at Item 8. These financial statements and schedules are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and schedules based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Zurich Reinsurance
Centre Holdings, Inc. and Subsidiaries at December 31, 1996 and 1995, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1996, in conformity with generally
accepted accounting principles. Also, in our opinion, the related financial
statement schedules, when considered in relation to the basic financial
statements taken as a whole, present fairly in all material respects the
information set forth therein.
/s/ ERNST & YOUNG LLP
Stamford, Connecticut
February 11, 1997
31
<PAGE> 32
ZURICH REINSURANCE CENTRE HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands except share data)
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------
1996 1995
---- ----
<S> <C> <C>
ASSETS
Fixed maturities available-for-sale
(amortized cost: 1996 $1,188,344; 1995 $1,096,903) ..................... $ 1,200,123 $ 1,122,822
Equity securities available-for-sale
(cost: 1996 $129,051; 1995 $105,542) ................................... 167,462 124,543
Investment in affiliate (cost: 1996 $8,204; 1995 $3,973) .................. 8,204 3,973
Short-term investments, at cost, which approximates market ................ 120,720 54,063
Cash and cash equivalents ................................................. 251,506 206,699
----------- -----------
Total cash and invested assets ......................................... 1,748,015 1,512,100
----------- -----------
Accrued investment income ................................................. 18,517 15,734
Premiums receivable (Footnote 12) ......................................... 235,960 205,410
Reinsurance recoverables:
Paid losses ............................................................ 1,600 1,312
Unpaid losses .......................................................... 40,054 30,981
Prepaid reinsurance premiums .............................................. 3,208 7,126
Deferred policy acquisition costs ......................................... 88,304 72,200
Deferred federal income taxes ............................................. 34,674 31,369
Other assets .............................................................. 72,712 47,432
----------- -----------
Total assets ........................................................... $ 2,243,044 $ 1,923,664
=========== ===========
LIABILITIES
Losses and loss adjustment expenses (Footnote 12) ......................... $ 938,800 $ 689,609
Unearned premiums (Footnote 12) ........................................... 313,191 272,132
7 1/8% Senior Notes due 2023 .............................................. 198,413 198,394
Other liabilities ......................................................... 80,771 81,959
----------- -----------
Total liabilities ...................................................... 1,531,175 1,242,094
----------- -----------
STOCKHOLDERS' EQUITY
Preferred stock ($0.10 par value, 20,000,000 shares authorized;
no shares outstanding) ................................................ -- --
Common stock ($0.01 par value; 50,000,000 shares authorized; 26,191,953 and
26,197,541 shares issued and outstanding at
1996 and 1995, respectively) ........................................... 262 262
Paid-in capital ........................................................... 624,466 624,068
Unrealized appreciation of investments (net of deferred
taxes of $17,627 and $15,776 at 1996 and 1995, respectively) ........... 32,563 29,144
Retained earnings ......................................................... 54,740 28,096
Treasury stock, at cost (5,588 and 0 shares at 1996 and 1995,
respectively) ......................................................... (162) --
----------- -----------
Total stockholders' equity ........................................... 711,869 681,570
----------- -----------
Total liabilities and stockholders' equity ........................... $ 2,243,044 $ 1,923,664
=========== ===========
</TABLE>
See Notes to Consolidated Financial Statements
32
<PAGE> 33
ZURICH REINSURANCE CENTRE HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands except per share data)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
REVENUES
Net premiums written (net of premiums ceded
of $8,139, $11,645 and $3,522 for 1996, 1995
and 1994, respectively) ........................... $ 729,306 $ 602,294 $ 309,627
Increase in unearned premiums ......................... 44,977 99,706 85,024
--------- --------- ---------
Net premiums earned (net of premiums ceded
of $12,057, $10,424 and $4,072 for 1996, 1995
and 1994, respectively) (Footnote 12) ............. 684,329 502,588 224,603
Net investment income ................................. 92,203 80,049 51,044
Income from investment in Insurance Partners .......... 3,290 650 --
Realized capital gains (losses) ....................... (5,071) 33,526 (35,631)
Other income (loss) ................................... 746 (130) 3,206
--------- --------- ---------
Total revenues .................................... $ 775,497 $ 616,683 $ 243,222
--------- --------- ---------
EXPENSES
Losses and loss adjustment expenses (net of reinsurance
recoveries of $15,523, $6,815 and $905 for 1996,
1995 and 1994, respectively) (Footnote 12) ........ $ 485,805 $ 376,348 $ 182,845
Commissions (Footnote 12) ............................. 184,662 124,276 53,196
Other operating costs and expenses .................... 47,743 43,420 34,789
Interest and amortization ............................. 15,519 15,882 14,288
--------- --------- ---------
Total expenses .................................... 733,729 559,926 285,118
--------- --------- ---------
Income (loss) before income taxes ................. 41,768 56,757 (41,896)
Federal income tax expense (benefit) .................. 12,505 13,319 (10,704)
--------- --------- ---------
Net income (loss) ................................. $ 29,263 $ 43,438 $ (31,192)
========= ========= =========
PER SHARE DATA
Weighted average shares outstanding (in 000's) ........ 26,165 26,161 26,112
Net income (loss) ..................................... $ 1.12 $ 1.66 $ (1.19)
========= ========= =========
Cash dividends declared ............................... $ 0.10 $ 0.10 --
========= ========= =========
</TABLE>
See Notes to Consolidated Financial Statements
33
<PAGE> 34
ZURICH REINSURANCE CENTRE HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Dollars in thousands)
<TABLE>
<CAPTION>
UNREALIZED RETAINED TOTAL
COMMON PAID-IN APPRECIATION EARNINGS TREASURY STOCKHOLDERS'
STOCK CAPITAL (DEPRECIATION) (DEFICIT) STOCK EQUITY
--------- ------- -------------- --------- -------- ------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1993 $ 261 $ 621,181 $ (2,229) $ 18,469 $ -- $ 637,682
Net income -- -- -- (31,192) -- (31,192)
Issuance of stock, net of
unearned compensation of $2,048 -- 1,007 -- -- -- 1,007
Change in unrealized depreciation -- -- (42,250) -- -- (42,250)
--------- --------- --------- --------- --------- ---------
BALANCE AT DECEMBER 31, 1994 261 622,188 (44,479) (12,723) -- 565,247
Net income -- -- -- 43,438 -- 43,438
Issuance of stock, net of
unearned compensation of $1,085 1 1,880 -- -- -- 1,881
Change in unrealized appreciation,
net of tax of $15,776 -- -- 73,623 -- -- 73,623
Cash dividends declared -- -- -- (2,619) -- (2,619)
--------- --------- --------- --------- --------- ---------
BALANCE AT DECEMBER 31, 1995 262 624,068 29,144 28,096 -- 681,570
Net income -- -- -- 29,263 -- 29,263
Purchases of treasury stock -- -- -- -- (5,891) (5,891)
Issuance of stock -- 90 -- -- 5,729 5,819
Change in unrealized appreciation,
net of tax of $1,851 -- -- 3,419 -- -- 3,419
Cash dividends declared -- -- -- (2,619) -- (2,619)
Other -- 308 -- -- -- 308
--------- --------- --------- --------- --------- ---------
BALANCE AT DECEMBER 31, 1996 $ 262 $ 624,466 $ 32,563 $ 54,740 $ (162) $ 711,869
========= ========= ========= ========= ========= =========
</TABLE>
See Notes to Consolidated Financial Statements
34
<PAGE> 35
ZURICH REINSURANCE CENTRE HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
CASH FLOWS PROVIDED BY OPERATING ACTIVITIES:
Net income (loss) .................................... $ 29,263 $ 43,438 $ (31,192)
Adjustments to reconcile net income (loss) ...........
to net cash provided by operating activities:
Losses and loss adjustment expenses, net ......... 240,118 223,048 144,262
Unearned premiums, net ........................... 44,977 99,706 85,024
Premiums receivable .............................. (30,550) (65,559) (59,973)
Deferred policy acquisition costs ................ (16,104) (27,121) (22,393)
Current and deferred taxes ....................... (12,993) 4,247 (11,065)
Other assets and other liabilities ............... 22,297 (1,769) 13,809
Realized capital (gains) losses .................. 5,071 (33,526) 35,631
----------- ----------- -----------
NET CASH PROVIDED BY OPERATING ACTIVITIES ............ 282,079 242,464 154,103
----------- ----------- -----------
CASH FLOWS USED IN INVESTING ACTIVITIES:
Sales of fixed maturities ........................ 1,981,388 2,172,411 1,414,010
Maturities or calls of fixed maturities .......... 88,631 42,005 24,592
Purchases of fixed maturities .................... (2,203,754) (2,203,326) (1,544,167)
Sales of equity securities ....................... 63,737 46,720 31,053
Purchases of equity securities ................... (86,184) (174,729) (31,551)
Net purchases of short-term investments .......... (66,657) (42,780) (11,133)
Purchase of Re Capital, net of cash acquired(1) .. -- 17,818 --
Cost of additions to property and equipment ...... (4,717) (2,275) (5,488)
----------- ----------- -----------
NET CASH USED IN INVESTING ACTIVITIES ................ (227,556) (144,156) (122,684)
----------- ----------- -----------
CASH FLOWS USED IN FINANCING ACTIVITIES:
Payments of cash dividend to stockholders ........ (2,619) -- --
Purchases of treasury stock ...................... (5,891) -- --
Conversion of Re Capital Debentures .............. (1,206) (71,929) --
----------- ----------- -----------
NET CASH USED IN FINANCING ACTIVITIES ................ (9,716) (71,929) --
----------- ----------- -----------
CHANGE IN CASH AND CASH EQUIVALENTS .................. 44,807 26,379 31,419
Cash and cash equivalents, beginning of period ....... 206,699 180,320 148,901
----------- ----------- -----------
Cash and cash equivalents, end of period ............. $ 251,506 $ 206,699 $ 180,320
=========== =========== ===========
</TABLE>
(1) Refer to Footnote 3.
See Notes to Consolidated Financial Statements
35
<PAGE> 36
ZURICH REINSURANCE CENTRE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND NATURE OF OPERATIONS
Zurich Reinsurance Centre Holdings, Inc. ("ZRCH") a Delaware corporation, serves
as the holding company for Zurich Reinsurance Centre, Inc. ("ZRC"), a
Connecticut stock insurance company and ZC Insurance Company ("ZCIC"), a New
Jersey stock insurance company. ZRCH, together with ZRC and ZCIC (the
"Company"), is a 65.7%-owned indirect subsidiary of the Zurich Insurance Group,
a Swiss financial services holding company. The Company, through its principal
operating subsidiary, ZRC, operates in the North American market primarily as a
reinsurer of property and casualty risks including general liability, automobile
liability, workers' compensation and property exposures. The Company provides
pro rata and excess of loss reinsurance through reinsurance treaties and
facultative arrangements. The Company's treaty business is written through
intermediaries while its facultative business is primarily written on a direct
basis. ZCIC commenced writing primary casualty business during the fourth
quarter of 1996.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Financial information has been included herein related to the consolidated
financial statements of ZRCH and its wholly-owned subsidiaries, ZRC and ZCIC.
All significant intercompany transactions have been eliminated. The preparation
of the financial statements in conformity with generally accepted accounting
principles ("GAAP") includes amounts that are based on management's best
estimates and judgments. Actual results could differ from those estimates. The
following are the Company's significant accounting policies:
INVESTMENTS
The Company's fixed maturity securities and equity securities are classified as
available-for-sale and are carried at market value with changes in the market
value of such securities reported as unrealized appreciation (depreciation)
directly in stockholders' equity, net of related tax effects, if any. The
difference between cost and market value for fixed maturity securities and
equity securities with declines in market value that are other than temporary,
if any, are treated as realized losses and reflected in net income. Investments
in equity securities are carried under the equity method of accounting when the
Company has 20% or more of the voting power or has the ability to exert
significant influence over the investee. Short-term investments, investments
with a maturity of less than one year but greater than three months, are carried
at cost, which approximates market.
Forward commitment mortgage-backed security dollar rolls ("dollar rolls") which
are purchased to provide the Company with the price exposure of the underlying
security, are reflected in the financial statements on a settlement date basis
as the Company does not intend to take delivery of the underlying securities.
The Company manages this exposure by establishing duration guidelines for the
total portfolio and the duration of these commitments is included in the overall
duration. There is no leverage related to these transactions since sufficient
cash equivalents are retained to cover settlement of the underlying position.
Changes in the market values between the trade date and settlement date for such
securities are recorded currently in net income as realized capital gains or
losses. As of December 31, 1996, the cost and market value of dollar rolls held
were $270.1 million and $269.0 million, respectively.
Market values are based on quoted market prices, when available, or estimates
based on market prices for similar securities when quotes are not available.
Realized capital gains or losses on the sale or maturity of investments are
determined on the basis of the specific identification method. Investment
income, consisting of dividends and interest, is recognized when earned.
Dividends on equity securities
36
<PAGE> 37
ZURICH REINSURANCE CENTRE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
are recorded on the ex-dividend date. The amortization of premium and accretion
of discount for fixed maturity securities is computed using the interest method.
For certain investments, such as mortgage-backed and certain other asset-backed
securities, the Company considers estimates of future principal prepayments in
the calculation of the constant effective yield necessary to apply the interest
method. If a difference arises between the prepayments anticipated and the
actual prepayments received, the Company recalculates the effective yield to
reflect the actual payments to date and the anticipated future payments.
CASH AND CASH EQUIVALENTS
The Company considers all short-term, highly liquid investments with a maturity
date of three months or less to be cash equivalents. The carrying amount of cash
and cash equivalents approximates fair market value due to their short maturity.
PREMIUM REVENUES AND RELATED EXPENSES
Premiums are recognized over the terms of the related reinsurance contracts.
Unearned premium reserves represent that portion of premiums written that
relates to the unexpired terms of contracts in force. Such reserves are computed
by pro rata methods based on statistical data or reports received from ceding
companies. Premium and commission adjustments on contracts are accrued on an
estimated basis throughout the terms of such contracts. Ceded premiums are
expensed on a pro rata basis over the contract period.
The Company recognizes a liability or an asset to the extent that there is an
obligation to pay or receive cash or other consideration that would not have
been required absent experience under the contract.
During 1996, three reinsurance intermediaries produced approximately 22%, 18%
and 12% of the Company's gross premiums written, respectively. Business produced
by Zurich American Insurance Group ("Zurich American"), an affiliate (refer to
Footnote 12 for further discussion of related party transactions), generated 29%
of gross premiums written. No other intermediaries or ceding companies accounted
for more than 10% of the Company's consolidated revenues for the year ended
December 31, 1996.
Acquisition costs, principally consisting of commissions and brokerage expenses,
net of allowances from retrocessionaires, and certain other acquisition costs
incurred at the time a contract is issued, are deferred and amortized over the
period in which the related premiums are earned. Deferred policy acquisition
costs are limited to their estimated realizable value based on the related
unearned premiums and consider anticipated losses and loss adjustment expenses
and anticipated investment income.
LOSSES AND LOSS ADJUSTMENT EXPENSES
The Company's liability for losses and loss adjustment expenses is based on
reports and individual case estimates received from ceding companies. An amount
is included for losses and loss adjustment expenses incurred but not reported on
the basis of past experience of the Company, its ceding companies and the
reinsurance industry. The Company discounts certain tabular workers'
compensation indemnity reserves to present value using a 5% interest rate.
Losses and loss adjustment expense estimates are reviewed regularly and, as
experience develops and new information becomes known, the reserves are adjusted
as necessary. Such adjustments, if any, are reflected in results of operations
in the period in which they become known.
37
<PAGE> 38
ZURICH REINSURANCE CENTRE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
RETROCESSIONS
In the normal course of business, the Company sometimes seeks to reduce losses
that could arise from events that cause unfavorable underwriting results by
reinsuring certain levels of risk with retrocessionaires. Amounts recoverable
from retrocessionaires are estimated in a manner consistent with the claim
liability associated with the reinsured policy.
Recoverables, if any, under the Company's aggregate excess of loss reinsurance
contracts with Zurich Insurance Company ("Zurich") (together, the "Stop Loss
Agreement"), which are retroactive contracts, will be recognized immediately
since the Company is reimbursed on an incurred basis. Refer to Footnote 12 for
further discussion of the Stop Loss Agreement.
The Company establishes a reserve for potentially uncollectible recoverables
from retrocessionaires. In addition, the Company immediately charges operations
for any recoverable balances that are deemed to be uncollectible. Collateral and
other offsets are considered in determining the reserve or expense.
STOCK-BASED COMPENSATION
Effective January 1, 1996, the Company adopted the accounting provisions of the
Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for
Stock-Based Compensation". Under SFAS No. 123, the Company recognizes
compensation expense based on the fair value of employee stock-based
compensation plans on the date of grant. Refer to Footnote 10 for further
discussion of employee stock-based compensation plans.
GOODWILL
Goodwill represents the excess of cost over the fair value of net assets
acquired and is amortized on a straight line basis over twenty years. At
December 31, 1996 and 1995, the amount of goodwill included in other assets was
$23.8 million and $22.0 million, respectively. The amortization of goodwill for
the years ended December 31, 1996 and 1995 was $1.2 million and $0.8 million,
respectively. Refer to Footnote 3 for a further discussion of the acquisition of
Re Capital Corporation ("Re Capital").
INCOME TAXES
Income taxes have been provided under the liability method using the applicable
enacted tax rate and laws. Deferred federal income taxes are recorded for
differences between the tax basis of an asset or liability and its reported
value in the financial statements and for loss carryforwards. A valuation
allowance is recorded using the "more-likely-than-not" criterion when some or
all of a deferred tax asset may not be realized.
EARNINGS PER SHARE
Earnings per common share are determined by dividing net income available to
common stockholders by the weighted average common shares outstanding during the
relevant period. Common stock equivalents had no dilutive effect on net income
(loss) per share for any of the periods presented.
RECLASSIFICATIONS
The Company has reclassified the presentation of certain prior year information
to conform with the current presentation.
38
<PAGE> 39
ZURICH REINSURANCE CENTRE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NEW ACCOUNTING STANDARDS
In June 1996, the Financial Accounting Standards Board ("FASB") issued SFAS No.
125, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishment of Liabilities." SFAS No. 125 provides accounting and reporting
standards for sales, securitizations and servicing of receivables and other
financial assets, for certain secured borrowing and collateral transactions, and
for extinguishment of liabilities. The Statement establishes guidelines for
determining whether a transfer of financial assets, including securities
lending, constitutes a sale and if so, measurement of the gain or loss. SFAS No.
125 is effective for transactions occurring after December 31, 1996. (Note SFAS
No. 127 "Deferral of the Effective Date of Certain Provisions of FASB Statement
No. 125" provides a one year deferral for certain sections of SFAS No. 125.) The
Company does not expect that the provisions of SFAS No. 125 will have a material
effect on its financial statements.
3. ACQUISITION OF RE CAPITAL CORPORATION
During April 1995, ZRCH acquired Re Capital. Through its wholly-owned
subsidiary, Re Capital Reinsurance Corporation, Re Capital was principally
engaged in underwriting domestic property and casualty reinsurance. As a result
of the acquisition: (i) each share of Re Capital's former common stock which was
issued and outstanding was converted into the right to receive $18.50 in cash
per share; and (ii) ZRCH assumed all obligations under Re Capital's 5 1/2%
Convertible Debentures, due August 1, 2000 (the "Convertible Debentures"). Total
consideration paid in 1995 by ZRCH in connection with the acquisition was
approximately $205.7 million. The acquisition was funded by the sale of $147.6
million of Re Capital's investments, $4.0 million of cash acquired from Re
Capital and $54.1 million of the Company's funds. The acquisition of Re Capital
has been accounted for as a purchase in accordance with APB No. 16, "Business
Combinations." The operating results of Re Capital have been included in the
Company's consolidated results of operations from the date of acquisition.
39
<PAGE> 40
ZURICH REINSURANCE CENTRE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. INVESTMENTS
<TABLE>
<CAPTION>
INVESTMENT INCOME YEARS ENDED DECEMBER 31,
----------------------------------
1996 1995 1994
---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C>
Fixed maturities ...................................... $78,012 $71,819 $48,848
Equity securities ..................................... 3,425 2,515 30
Short-term investments and
cash and cash equivalents ......................... 13,739 8,040 4,405
------- ------- -------
Gross investment income ..................... 95,176 82,374 53,283
Investment expenses ................................... 2,973 2,325 2,239
------- ------- -------
Net investment income ......................... $92,203 $80,049 $51,044
======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
INVESTMENT GAINS (LOSSES) YEARS ENDED DECEMBER 31,
-----------------------------------
1996 1995 1994
---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C>
NET REALIZED CAPITAL GAINS (LOSSES):
Fixed maturities (includes gains
(losses) related to dollar rolls of
$(1,773), $12,099 and $(1,100) for
1996, 1995 and 1994, respectively) ............... $(11,048) $ 27,715 $(38,787)
Equity securities ................................. 5,977 5,811 3,156
-------- -------- --------
Subtotal ..................................... (5,071) 33,526 (35,631)
Tax expense (benefit) ............................. (1,781) 6,390 (7,424)
-------- -------- --------
Net realized capital gains (losses), net of tax .. $ (3,290) $ 27,136 $(28,207)
======== ======== ========
CHANGE IN UNREALIZED APPRECIATION
(DEPRECIATION) OF INVESTMENTS:
Fixed maturities .................................. $(14,140) $ 70,339 $(42,191)
Equity securities ................................. 19,410 19,060 (59)
-------- -------- --------
Subtotal ...................................... 5,270 89,399 (42,250)
Provision for deferred income tax ................. 1,851 15,776 --
-------- -------- --------
Net change reflected in stockholders' equity .. $ 3,419 $ 73,623 $(42,250)
======== ======== ========
</TABLE>
40
<PAGE> 41
ZURICH REINSURANCE CENTRE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following tables reconcile amortized cost to the estimated market value of
fixed maturity and non-affiliated equity securities:
<TABLE>
<CAPTION>
DECEMBER 31, 1996
----------------------------------------------------------
GROSS GROSS MARKET AND
AMORTIZED UNREALIZED UNREALIZED CARRYING
COST GAINS LOSSES VALUE
--------- ---------- ---------- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Fixed Maturities:
U.S. government and
government agencies ...... $ 530,654 $ 4,978 $ 1,456 $ 534,176
Obligations of states and
political subdivisions ... 108,588 2,065 125 110,528
Foreign ....................... 15,256 274 46 15,484
Corporate ..................... 160,811 2,883 760 162,934
Mortgage-backed ............... 308,315 3,734 788 311,261
Asset-backed .................. 64,720 1,023 3 65,740
---------- ---------- ---------- ----------
Subtotal ................. 1,188,344 14,957 3,178 1,200,123
Equity securities ............. 129,051 40,612 2,201 167,462
---------- ---------- ---------- ----------
Total .................... $1,317,395 $ 55,569 $ 5,379 $1,367,585
========== ========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1995
----------------------------------------------------------
GROSS GROSS MARKET AND
AMORTIZED UNREALIZED UNREALIZED CARRYING
COST GAINS LOSSES VALUE
--------- ---------- ---------- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Fixed Maturities:
U.S. government and
government agencies .. $ 452,991 $ 10,229 $ 33 $ 463,187
Obligations of states and
political subdivisions 137,643 3,127 4 140,766
Foreign ................... 6,479 446 -- 6,925
Corporate ................. 134,184 4,461 891 137,754
Mortgage-backed ........... 291,942 5,800 722 297,020
Asset-backed .............. 73,664 3,507 1 77,170
---------- ---------- ---------- ----------
Subtotal ............. 1,096,903 27,570 1,651 1,122,822
Equity securities ......... 105,542 21,778 2,777 124,543
---------- ---------- ---------- ----------
Total ................ $1,202,445 $ 49,348 $ 4,428 $1,247,365
========== ========== ========== ==========
</TABLE>
41
<PAGE> 42
ZURICH REINSURANCE CENTRE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Contractual maturities of fixed maturity securities are shown below. Expected
maturities, which are best estimates, will differ from contractual maturities
because certain borrowers may have the right to call or prepay obligations.
<TABLE>
<CAPTION>
DECEMBER 31, 1996
-----------------------------
AMORTIZED MARKET AND
COST CARRYING VALUE
----------- --------------
(Dollars in thousands)
<S> <C> <C>
Due after one year through five years .. $ 499,740 $ 504,595
Due after five years through ten years . 210,199 212,610
Due after ten years through twenty years 50,126 51,245
Due after twenty years ................. 55,244 54,672
---------- ----------
Subtotal .......................... 815,309 823,122
Mortgage- and asset-backed securities .. 373,035 377,001
---------- ----------
Total ............................. $1,188,344 $1,200,123
========== ==========
</TABLE>
Gross gains on sales of fixed maturities, excluding calls, were $15.2 million,
$51.2 million and $2.0 million during 1996, 1995 and 1994, respectively. Gross
losses on sales of fixed maturities, excluding calls, were $24.5 million, $23.5
million and $40.8 million during 1996, 1995 and 1994, respectively.
Approximately 83% and 84% of the fixed maturity portfolio as of December 31,
1996 and 1995, respectively, are U.S. government obligations or are rated
"triple-A" by Moody's Investors Service or Standard & Poor's Corporation. The
remaining 17% and 16%, respectively, are "A" rated fixed maturities. There are
no investments in any entity in excess of 10% of the Company's stockholders'
equity at December 31, 1996, other than investments issued or guaranteed by the
U.S. government or its agencies.
The Company participates in a securities lending program, whereby certain
securities from its portfolio are loaned to counterparties, with the Company
retaining the right to recall such securities at will. A fee is paid to the
Company by the borrower, which is reported as a component of net investment
income. The program is designed to minimize the Company's exposure to credit and
interest rate risk by including specification of collateral requirements and
collateral investment criteria and limits on the amount of securities that can
be lent subject to such arrangements to any single counterparty and in the
aggregate, by requiring collateral to be maintained in excess of the market
value of the loaned securities for the period that the loan is outstanding, and
by specifying how the collateral can be invested. As of December 31, 1996,
$236.7 million was on loan, with no single borrower's loan representing more
than 5% of cash and invested assets or 10% of stockholders' equity.
Securities having a par value of $21.5 million and $24.2 million at December 31,
1996 and 1995, respectively, were on deposit with various state or governmental
insurance departments in order to comply with applicable state insurance laws.
42
<PAGE> 43
ZURICH REINSURANCE CENTRE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. LOSSES AND LOSS ADJUSTMENT EXPENSES
The reconciliation of loss and loss adjustment expense reserves for each of the
three years in the period ended December 31, 1996 is shown below.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
-------------------------------------------------
1996 1995 1994
--------- --------- ---------
(Dollars in thousands)
<S> <C> <C> <C>
Gross loss and loss adjustment expense
reserves, beginning of period ........ $ 689,609 $ 262,866 $ 123,074
Reinsurance recoverables on unpaid losses,
beginning of period .................. (30,981) (20,892) (25,362)
Acquisition of Re Capital ................ -- 193,606(1) --
Incurred losses relating to:
Current year ......................... 493,447 379,822 173,933
Prior years .......................... (7,642)(2) (3,474)(2) 8,912(2)
--------- --------- ---------
Total incurred .................. 485,805 376,348 182,845
--------- --------- ---------
Paid losses relating to:
Current year ......................... 82,735 62,739 16,597
Prior years .......................... 162,952 90,561 21,986
--------- --------- ---------
Total paid ...................... 245,687 153,300 38,583
--------- --------- ---------
Reinsurance recoverables on unpaid losses,
end of period ........................ 40,054 30,981 20,892
--------- --------- ---------
Gross loss and loss adjustment expense
reserves, end of period .............. $ 938,800 $ 689,609 $ 262,866
========= ========= =========
</TABLE>
(1) The April 1995 acquisition of Re Capital increased the Company's gross loss
and loss adjustment expense reserves and reinsurance recoverables on unpaid
losses by $202.1 million and $8.5 million, respectively, as of the date of
acquisition (refer to Footnote 3 for further discussion of the Re Capital
acquisition).
(2) The Company estimates premiums for treaty accounts that are not yet due
from its reinsureds. Prior year incurred loss development is primarily
attributable to the corresponding development of premium estimates.
Effective January 1, 1996, the Company discounts certain tabular workers'
compensation indemnity reserves. This method is preferable as it is more
representationally faithful to the economics of the underlying business and it
will enhance comparability of the Company's financial statements as it is the
prevalent method used in the reinsurance industry. Such reserves were discounted
to present value using a 5% interest rate. Since the effect of such discount as
of January 1, 1996 was $0.8 million, it has been reported as a component of
earnings. Discounting had no material effect on net income for 1996 or on the
proforma net income for 1995. Tabular workers' compensation indemnity reserves,
net of discount, were $3.6 million as of December 31, 1996.
The Company believes that its exposure to environmental impairment liability and
asbestos-related claims is minimal due to the diminutive amount of business
written prior to 1987 and the protection provided by the Stop Loss Agreement
(refer to Footnote 12 for further discussion).
43
<PAGE> 44
ZURICH REINSURANCE CENTRE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. RETROCESSIONS
The Company utilizes retrocessional agreements to reduce its total loss
exposure. These agreements provide for recovery of a portion of losses and loss
adjustment expenses from retrocessionaires. The Company is liable to reinsureds
regardless of whether retrocessionaires meet their obligations under these
retrocessional agreements. Failure of retrocessionaires to honor their
obligations could result in losses to the Company; consequently, allowances are
established for amounts considered potentially uncollectible, if any.
At December 31, 1996, there were no recoverables from any one retrocessionaire
that exceeded 10% of stockholders' equity. The Company holds collateral under
related reinsurance agreements in the form of letters of credit totaling $19.3
million that can be drawn on for amounts that remain unpaid for more than 120
days. Pursuant to the terms of the Stop Loss Agreement, in the event that
retrocessional recoverables on business effected prior to June 1, 1993 are
uncollectible from retrocessionaires due to insolvency, the Company will be
reimbursed from Zurich. Refer to Footnote 12 for a further discussion of the
retrocessional agreements with affiliates.
7. INCOME TAXES
Federal income tax expense (benefit) was as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
------------------------------------
1996 1995 1994
---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C>
Current tax expense (benefit) ............ $ 17,661 $ 22,593 $ (1,896)
Deferred tax benefit ..................... (5,156) (9,274) (8,808)
-------- -------- --------
Total federal income tax expense (benefit) $ 12,505 $ 13,319 $(10,704)
======== ======== ========
</TABLE>
Federal income taxes paid were $25.5 million, $9.1 million and $0.7 million in
1996, 1995 and 1994, respectively.
An analysis of the Company's effective federal income tax rate (benefit)
follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
-------------------------------------
1996 1995 1994
---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C>
Income taxes at statutory rate (benefit) 35.0% 35.0% (35.0)%
Investment income (4.5) (2.9) (3.5)
Establishment (reversal) of valuation allowance -- (9.5) 12.9
Other (0.6) 0.9 0.1
------ ------ ------
Total tax provision (benefit) 29.9% 23.5% (25.5)%
====== ====== ======
</TABLE>
44
<PAGE> 45
ZURICH REINSURANCE CENTRE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts reported for income tax purposes. Significant
components of the Company's deferred tax liabilities and assets as of December
31, 1996 and 1995 are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1996 1995
---- ----
(Dollars in thousands)
Deferred tax liabilities:
<S> <C> <C>
Deferred policy acquisition costs .... $31,012 $25,357
Unrealized appreciation of investments 17,627 15,776
Other ................................ 2,586 1,676
------- -------
Total deferred tax liabilities ..... 51,225 42,809
------- -------
Deferred tax assets:
Loss reserve discounting ............. 55,013 43,815
Unearned premium reserve ............. 21,773 18,614
Other ................................ 9,113 11,749
------- -------
Total deferred tax assets .......... 85,899 74,178
------- -------
Net deferred tax assets ............ $34,674 $31,369
======= =======
</TABLE>
In 1996, the Company had realized capital losses of $5.1 million, which can be
carried back and offset against capital gains generated in 1995. As of December
31, 1996, no capital loss carry forward remains.
8. LEASES
As of December 31, 1996, the Company and its branch offices occupy office space
under various operating leases that have remaining noncancelable lease terms in
excess of one year. The Company recognizes rental expense on a straight line
basis over the term of the lease. The Company also leases certain computer and
communications equipment, software and office equipment under various operating
leases with terms of one year or less. Rental expense was approximately $3.0
million, $2.9 million and $2.8 million for the years ended December 31, 1996,
1995 and 1994, respectively.
The future minimum rental payments as of December 31, 1996 are as follows
(dollars in thousands):
<TABLE>
<S> <C>
1997................................... $ 3,382
1998................................... 3,723
1999................................... 3,755
2000 .................................. 3,068
2001 and thereafter.................... 25,095
--------
$ 39,023
========
</TABLE>
45
<PAGE> 46
ZURICH REINSURANCE CENTRE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ZRC is party to a sublease agreement, dated as of January 1, 1994, and amended
as of January 26, 1996 (the "Sublease") with a subsidiary of Zurich. Under the
Sublease, ZRC leases approximately 60,000 rentable square feet of space in New
York City for its underwriting, actuarial and certain executive offices (the
"Office Space"). The Sublease has a term of approximately seventeen years.
Together with another Zurich affiliate which occupies space contiguous to the
Office Space, ZRC has guaranteed the performance of the tenants' obligations
under the lease covering the Office Space. Under this guarantee, ZRC is
contingently liable for 36.2% of monetary obligations to the lessor in respect
of the Office Space and other contiguous space leased thereby (together with the
Office Space, the "Group Office Space"). This percentage represents the
approximate percentage which the Office Space bears to the Group Office Space.
9. SENIOR NOTES AND FINANCING AGREEMENTS
During October 1993, the Company issued $200 million principal amount of
non-convertible, unsecured, unsubordinated Senior Notes (the "Senior Notes").
The Senior Notes mature on October 15, 2023 and bear interest at the rate of 7
1/8%, payable semiannually in arrears on April 15 and October 15. Debt issuance
costs of approximately $2.2 million incurred in connection with the issuance of
the Senior Notes have been deferred and are being amortized over the term of the
Senior Notes. The interest expense on the Senior Notes was $14.3 million during
1996, 1995 and 1994. Interest paid on the Senior Notes was $14.3 million in 1996
and 1995 and $14.1 million in 1994. The estimated fair value of the Senior Notes
based on quoted market prices was approximately $190.7 million at December 31,
1996.
10. EMPLOYEE BENEFITS AND COMPENSATION ARRANGEMENTS
The Company maintains a non-contributory defined contribution Money Purchase
Pension Plan (the "Pension Plan") under which the Company contributes for each
eligible employee an amount equal to the sum of (i) 4% of eligible compensation
up to the taxable wage base (as such term is defined in the Pension Plan) (for
1997 set at $65,400) and (ii) 8% of eligible compensation in excess of the
taxable wage base (up to the applicable earnings cap which for 1997 is
$160,000). Substantially all employees of the Company are eligible for
participation in the Pension Plan. The Company expensed $0.6 million, $0.7
million and $0.6 million for the years ended December 31, 1996, 1995, and 1994
respectively, related to the Pension Plan.
The Company maintains a tax-qualified employee thrift plan (the "Employee Thrift
Plan"). Pursuant to Section 401(k) of the Internal Revenue Code, eligible
employees of the Company are able to defer receipt of up to 12% of their annual
salaries. Subject to limitations under applicable law, the Company matches up to
100% of the first 3% of annual salary deferred by employees and 50% of the next
3% of salary so deferred. The Company maintains a supplemental, non-qualified
executive thrift plan (the "Executive Thrift Plan") under which members of
executive management may defer certain amounts of base salary and receive
limited matching contributions from the Company. Under the Executive Thrift
Plan, ZRC matches, dollar-for-dollar, amounts deferred by participants under the
Executive Thrift Plan up to 3% of annual salary in excess of $160,000 in 1997
and provides a 50% matching contribution for the next 3% of such excess salary
so deferred. The Company expensed $0.7 million, $0.6 million and $0.5 million
for the years ended December 31, 1996, 1995, and 1994, respectively, related to
its Employee Thrift Plan and the Executive Thrift Plan.
The Company maintains a restricted stock plan (the "Restricted Stock Plan")
pursuant to which participants may be granted an award of shares of the
Company's Common Stock ("Restricted Stock") subject to certain restrictions
including vesting requirements. As of December 31, 1996, the Company
46
<PAGE> 47
ZURICH REINSURANCE CENTRE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
had reserved 450,000 shares under the Restricted Stock Plan. Grants of
Restricted Stock will generally vest upon completion of three to four years of
continuous employment with the Company from the date of grant. The Company
recognizes the related expense, which is the market value of the shares at the
date of grant, over the vesting period using the straight-line method. During
1996, the Company issued 171,065 shares of non-vested restricted stock, with a
weighted-average grant date fair value of $29.47 per share. The expense for the
Restricted Stock Plan was $3.6 million, $1.7 million and $1.0 million for the
years ended December 31, 1996, 1995 and 1994, respectively.
Effective January 1, 1996, the Company adopted a stock option plan (the "Stock
Option Plan") pursuant to which the Company may issue options for the purchase
of up to 1,844,000 shares of Common Stock. Initial grants under the Stock Option
Plan consist of two types of options, each having ten year terms and generally
vesting over four years. "Type A" options may not be exercised unless the
appreciation of the Company's Common Stock exceeds 150% of the effective yield
on 5-year U.S. Treasury obligations. "Type B" options may not be exercised
unless the appreciation of the Company's economic book value exceeds 150% of the
effective yield on 5-year U.S. Treasury obligations.
Grants of 503,575 shares of Common Stock were authorized (half Type A and half
Type B), with exercise prices ranging from $29.88 per share to $30.36 per share.
All of these options remain outstanding at December 31, 1996 and have a
remaining contractual life of 9 years. None of these options were exercisable
during the year or at December 31, 1996.
The fair value of the options granted were estimated on the date of grant using
recognized option-pricing models. These models were developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, these models do
not necessarily provide a reliable measure of the fair value of the employee
stock options. The Company's valuation method utilized the following
assumptions: a risk-free interest rate of 5.3%, which was adjusted by the annual
percentage increase in the exercise price for the Type B option, a dividend
yield of 0.2%, expected volatility of 14% and an expected life of 4 years. Based
on these assumptions, the options granted have a weighted-average grant-date
fair value of $5.60 per share. The Company recognizes the related expense,
which is the fair value of the options at the date of grant, over the vesting
period using the straight-line method. The Company expensed $0.7 million
related to the Stock Option Plan in 1996.
The Company maintains a tax-qualified employee stock purchase plan (the
"Purchase Plan"). An aggregate of 100,000 shares of the Common Stock has been
reserved for issuance under the Purchase Plan. Subject to certain restrictions,
substantially all full-time and certain part-time employees are eligible to
purchase shares of the Common Stock at 85% of fair market value by means of
payroll deductions of up to 10% of their salary. At December 31, 1996, 52,730
shares were outstanding under the Purchase Plan.
The Company maintains a stock repurchase program pursuant to which the Company's
Board of Directors has authorized the repurchase of 500,000 shares of Common
Stock. During 1996, the Company repurchased 200,000 shares of Common Stock for
approximately $29.50 per share. These shares were repurchased for issuance to
employees under various benefit and compensation arrangements.
47
<PAGE> 48
ZURICH REINSURANCE CENTRE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11. DIVIDEND RESTRICTIONS AND STATUTORY FINANCIAL INFORMATION
DIVIDEND RESTRICTIONS
The payment of dividends by ZRC is subject to restrictions set forth in the
Connecticut Insurance Code (the "Connecticut Code") which limit the aggregate
amount of dividends or other distributions that ZRC may declare or pay within
any 12-month period absent prior regulatory notification and approval. The
Connecticut Code provides that no dividend or other distribution may be paid by
a subject insurer (i) when the surplus of such insurer is less than (a) the
minimum surplus required under the Connecticut Code to write specified lines of
insurance or (b) the amount of surplus which bears a reasonable relationship to
such insurer's liabilities based upon the type, volume and nature of the
insurance business transacted, or (ii) when the payment of a dividend or other
distribution would reduce such insurer's surplus to less than such amounts. The
Connecticut Code further provides that a subject insurer may not pay any
dividend or other distribution, without the Connecticut Commissioner's prior
approval, in an amount exceeding such insurer's earned surplus, determined in
accordance with Statutory Accounting Principles ("SAP"), as of the prior year
end (adjusted to reflect a discount of certain unrealized gains on investments).
In addition, the Connecticut Code provides that subject insurers may not pay any
"extraordinary" dividends or distributions until (i) 30 days after the
Connecticut Commissioner has received notice of the declaration thereof and has
not within such period disapproved such payment or (ii) the Connecticut
Commissioner has approved such payment. The Connecticut Code provides that an
extraordinary dividend or distribution means any dividend or distribution of
cash or other property, whose fair market value, together with that of other
dividends or distributions made within the preceding 12-month period, exceeds
the greater of 10% of surplus with respect to policyholders as of December 31 of
the preceding year or 100% of net income for the 12-month period ending December
31 of the preceding year, both determined in accordance with SAP.
As of December 31, 1996, ZRC's total capital and surplus was $690.1 million and
its earned surplus for purposes of certain general statutory dividend tests and,
accordingly, its 1997 maximum dividend payment is $46.0 million. Dividends are
declared only with prior approval of ZRC's Board of Directors. There were no
dividends paid by ZRC to ZRCH during 1996.
STATUTORY FINANCIAL INFORMATION
Net income (loss) and statutory surplus of ZRC were as follows:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C>
Net income (loss).......................................... $ 17,754 $ 6,136 $ (41,933)
Statutory surplus.......................................... 690,099 657,197 607,470
</TABLE>
48
<PAGE> 49
ZURICH REINSURANCE CENTRE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ZRC prepares its statutory financial statements in accordance with accounting
practices prescribed by the Insurance Department of the State of Connecticut
(the "Connecticut Department"). Prescribed statutory accounting practices
include a variety of publications of the National Association of Insurance
Commissioners ("NAIC"), as well as state laws, regulations, and general
administrative rules.
The NAIC's model risk-based capital regulations (the "RBC Model Act") requires
insurance companies to calculate and report information under a risk-based
capital formula which measures statutory capital and surplus needs based on the
risks in a company's mix of business and investment portfolio. Based on its
calculation as of December 31, 1996, ZRC exceeds all of the capital levels
prescribed in the RBC Model Act.
12. RELATED PARTY TRANSACTIONS
In the normal course of business, the Company enters into both reinsurance and
retrocessional agreements with its affiliates. The amounts assumed (net of
cessions by the Company) pursuant to these agreements, including those discussed
below, were as follows:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C>
Premiums receivable (net of ceded balances
payable of $3,018, $2,379 and $426 for
1996, 1995 and 1994, respectively) .......... $ 64,767 $ 50,019 $ 383
Losses and loss adjustment expenses reserves
(net of reinsurance recoveries of
$16,624, $6,244 and $6,185 for 1996, 1995 and
1994, respectively) ......................... 140,008 36,702 5,880
Unearned premiums (net of prepaid reinsurance
premiums of $2,481, $1,802 and $0 for 1996,
1995 and 1994, respectively) ................ 103,784 75,153 1,949
Premiums earned (net of premiums ceded of
$4,427, $1,462 and $2,074 for 1996, 1995
and 1994, respectively) ..................... 182,952 41,256 2,148
Losses and loss adjustment expenses
(net of reinsurance recoveries of $11,530,
$1,062 and $(530) for 1996, 1995 and 1994,
respectively) ............................... 132,608 32,979 3,275
Other underwriting expenses incurred (net of ceded
commissions of $6, $50 and $180 for 1996,
1995 and 1994, respectively) ................ 50,071 11,451 680
</TABLE>
Effective July 1, 1995, the Company entered into a domestic whole account quota
share treaty with Zurich American (the "ZA Quota Share Agreement") and
concurrently an excess of loss reinsurance agreement with Zurich (the
"Retrocessional Agreement"), primarily to provide an aggregate loss limitation
on business assumed under the ZA Quota Share Agreement. As of December 31, 1996
and 1995, net premiums written under these agreements were $176.8 million and
$90.8 million, respectively,
49
<PAGE> 50
ZURICH REINSURANCE CENTRE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
and net premiums earned were $152.8 million and $27.1 million, respectively. The
terms of the ZA Quota Share Agreement and the Retrocessional Agreement were
negotiated and evaluated by ZRC by application of the actuarial pricing
methodologies generally used by ZRC in evaluating contracts.
During May 1993, ZRC purchased two aggregate excess of loss reinsurance
contracts from Zurich. The first contract provides for reimbursement by Zurich
of all losses and allocated loss adjustment expenses incurred by ZRC subsequent
to December 31, 1992, in connection with risks assumed prior to that date. While
this coverage is considered retroactive, recoverables thereunder will be
recognized immediately as ZRC will be reimbursed by Zurich as covered losses are
incurred rather than as such losses are paid. The second contract provides for
reimbursement by Zurich of all losses and allocated loss adjustment expenses
incurred by ZRC subsequent to May 31, 1993 with respect to risks assumed from
January 1, 1993 through May 31, 1993. In addition, under the second contract,
Zurich will reimburse ZRC for losses and allocated loss adjustment expenses
incurred by ZRC in excess of 75% of premiums earned after May 31, 1993 on
business written prior to June 1, 1993. The total premiums for these contracts
of $4.0 million were negotiated and evaluated by ZRC by application of the
actuarial pricing methodologies generally used by ZRC in evaluating reinsurance
contracts. As of December 31, 1996, there were no recoverables recorded pursuant
to either of the aggregate excess of loss reinsurance contracts with Zurich.
Zurich has a "AA+" claims-paying ability rating from Standard & Poor's
Corporation and a "Aa1" financial strength rating from Moody's Investors
Service.
The Company has entered into an investment management agreement (the "Investment
Management Agreement") with Centre Investment Services, Limited ("CIS"), a
wholly owned subsidiary of Zurich Centre Investments Limited, an indirect
subsidiary of Zurich. Under the Investment Management Agreement, CIS manages a
portion of the Company's investment portfolio in return for a fee based upon the
average total market value of the assets under management as well as the
performance of the portfolio. The 1996, 1995 and 1994 investment management fees
related to CIS were $1.1 million, $1.0 million and $1.1 million, respectively.
In February 1994, ZRCH committed to invest $25.0 million in the limited
partnership interests of Insurance Partners, L.P., a Delaware limited
partnership ("Insurance Partners"). Insurance Partners is an investment fund
established to sponsor and participate in acquisitions, recapitalizations,
demutualizations and other structured transactions in the insurance industry. As
of December 31, 1996 and 1995, ZRCH had invested approximately $8.2 million and
$4.0 million, respectively, in Insurance Partners. Affiliates of the Company
have interests in the general partner of Insurance Partners.
Refer to Footnote 8 for a discussion of an affiliated office lease arrangement.
50
<PAGE> 51
ZURICH REINSURANCE CENTRE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
13. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
The following is a summary of quarterly financial data, in thousands of dollars
except per share data. Such quarterly information includes all adjustments,
consisting solely of normal recurring accruals, necessary to present fairly the
results of operations for such periods. Quarterly results may be affected by
changes in the interest rate environment and catastrophic losses.
<TABLE>
<CAPTION>
1ST QUARTER 2ND QUARTER 3RD QUARTER 4TH QUARTER
----------- ----------- ----------- -----------
1996 1995 1996 1995 1996 1995 1996 1995
---- ---- ---- ---- ---- ---- ---- ----
REVENUES
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net premiums written ..... $ 176,622 $ 115,623 $ 188,210 $ 129,102 $ 188,599 $ 173,784 $ 175,875 $ 183,785
Net premiums earned ...... 173,812 90,999 164,818 117,245 174,425 133,144 171,274 161,200
Net investment income .... 21,582 16,722 22,385 20,620 23,309 21,500 24,927 21,207
Income from investment
in Insurance Partners 258 650 0 0 145 0 2,887 0
Realized capital gains
(losses) ............. 1,421 (5,896) (6,844) 12,654 (5,483) 7,772 5,835 18,996
Other income (loss) ...... 46 (96) 27 (93) 373 50 300 9
--------- --------- --------- --------- --------- --------- --------- ---------
Total revenues ..... 197,119 102,379 180,386 150,426 192,769 162,466 205,223 201,412
EXPENSES
Losses and loss
adjustment expenses .. 126,277 67,673 115,335 88,817 123,001 101,687 121,192 118,171
Commissions and other
operating costs and
expenses ............. 56,436 32,150 57,715 39,532 59,424 43,521 58,830 52,493
Interest and amortization
expense .............. 3,844 3,524 3,841 4,268 3,917 4,177 3,917 3,913
--------- --------- --------- --------- --------- --------- --------- ---------
Total expenses ..... 186,557 103,347 176,891 132,617 186,342 149,385 183,939 174,577
Income (loss) before
income taxes ......... 10,562 (968) 3,495 17,809 6,427 13,081 21,284 26,835
Federal income tax
expense (benefit) .... 3,156 1,625 682 (1,507) 1,613 4,191 7,054 9,010
--------- --------- --------- --------- --------- --------- --------- ---------
Net income (loss) .. $ 7,406 $ (2,593) $ 2,813 $ 19,316 $ 4,814 $ 8,890 $ 14,230 $ 17,825
========= ========= ========= ========= ========= ========= ========= =========
PER SHARE DATA
Weighted average shares
outstanding (in 000's) 26,133 26,132 26,161 26,169 26,185 26,182 26,192 26,196
========= ========= ========= ========= ========= ========= ========= =========
Net income (loss) ........ $ 0.28 $ (0.10) $ 0.11 $ 0.74 $ 0.18 $ 0.34 $ 0.54 $ 0.68
========= ========= ========= ========= ========= ========= ========= =========
Cash dividends declared... -- -- -- -- -- -- $ 0.10 $ 0.10
Stock prices:
High ..................... $ 32.63 $ 30.38 $ 32.25 $ 30.75 $ 31.38 $ 30.00 $ 32.75 $ 30.50
Low ...................... $ 29.38 $ 28.50 $ 29.88 $ 28.63 $ 28.63 $ 28.00 $ 29.13 $ 28.25
</TABLE>
51
<PAGE> 52
ZURICH REINSURANCE CENTRE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
14. SUBSEQUENT EVENT
During January 1997, Zurich announced a proposal to acquire all of the remaining
shares of ZRCH not currently owned by Zurich for $36.00 per share (the "Proposed
Transaction"). ZRCH's Board of Directors has appointed a special committee of
its members to determine the advisability and fairness of that offer to ZRCH's
other stockholders. The special committee has retained independent investment
banking advisors and legal counsel to advise it on the fairness of the offer and
is in the process of considering the offer. The special committee has indicated
its intention to make a recommendation to ZRCH's Board of Directors with respect
to the offer as soon as practicable. Consummation of the Proposed Transaction is
subject to the approval of the Board of Directors and the stockholders of ZRCH
and other conditions customary in this type of transaction. There can be no
assurance that Zurich and the Board of Directors of ZRCH will reach an agreement
with respect to the fairness of the Proposed Transaction or that, in the absence
of such agreement, Zurich would proceed with the Proposed Transaction.
52
<PAGE> 53
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
See Item 1 "Business - Executive Officers of the Registrant" for information
concerning the Executive Officers of the Company. Information concerning the
Directors of the Company is set forth below.
The Board of Directors is divided into three classes. The regular terms of
office for the Class I, Class II and Class III Directors expire at the 1997,
1998 and 1999 Annual Meetings of Stockholders, respectively. Four persons are to
be elected at the 1997 Annual Meeting to hold office as Class I Directors for a
term of three years and until their respective successors are elected and
qualified. Class II and Class III Directors will not be elected at the Annual
Meeting as their respective terms will continue.
CLASS I DIRECTORS
(To serve in office until 1997 Annual Meeting)
LAURENCE W. CHENG, age 49, has been a Director of the Company since March 1993.
Mr. Cheng is Chief Investment Officer of Zurich Insurance Company. In 1996, Mr.
Cheng was appointed President of Zurich Investment Management, Inc. He has
served as a director of Centre Reinsurance since its founding in 1987 and as an
executive officer since 1991. Mr. Cheng is a Fellow of the Casualty Actuarial
Society, a Fellow of the Canadian Institute of Actuaries and a Member of the
American Academy of Actuaries. Mr. Cheng holds a B.Sc. degree from the
University of Hong Kong, an M.Sc. degree from the University of Western Ontario
in Canada and an M.B.A. degree from York University in Toronto.
JUDITH RICHARDS HOPE, age 56, has been a Director of the Company since April
1993. Since 1981, Mrs. Hope has served as a senior partner in the law firm of
Paul, Hastings, Janofsky & Walker. Previously, she served as Associate Director
of the White House Domestic Council and Vice Chairman of the President's
Commission on Organized Crime. Mrs. Hope is a director of General Mills, Inc.,
the Union Pacific Corporation, Zurich Holding Company of America (a Zurich
affiliate) and American Guarantee & Liability Insurance Co. (a Zurich
affiliate). She is a member of the Harvard Corporation, president of the
International Law Institute, a trustee of the United States Supreme Court
Historical Society and a member of the Council on Foreign Relations.
MICHAEL D. PALM, age 45, has been a Director of the Company since March 1993.
Mr. Palm is an Executive Vice President and director of ZCI. Mr. Palm co-founded
Centre Reinsurance Holdings Limited ("Centre Reinsurance") in 1987 and currently
serves as Vice Chairman and a director of that company and its subsidiaries.
Prior to joining Centre Reinsurance, Mr. Palm was Vice President of National
Indemnity Company, a subsidiary of Berkshire Hathaway, Inc., with reinsurance
underwriting responsibility. Previously, Mr. Palm was a commercial lending
officer in the International Division of the Bank of Boston. Mr. Palm holds an
A.B. degree from Yale College and an M.A. degree from Harvard University.
GEORGE G.C. PARKER, age 58, has been a Director of the Company since March 1994.
Since 1993, Mr. Parker has served as the Dean Witter Professor of Finance,
Associate Dean for Academic Affairs, and
53
<PAGE> 54
director of the MBA Program at the Graduate School of Business at Stanford
University. Mr. Parker has been affiliated with Stanford University since 1973,
holding such positions as director of Stanford Sloan Program for Executives,
director of Executive Education, Stanford Business School and Co-Director,
Executive Program for Smaller Companies. Mr. Parker is a director of the
California Casualty Group of Insurance Companies, Continental Airlines, Inc.,
RCM Mutual Funds, Bailard, Biehl and Kaiser, Inc. (Investment Advisors),
Peninsula Banking Group and H. Warshow & Sons, Inc. Mr. Parker is a published
author and a consultant to various corporations and banks on financial
management, strategy and organizational development. Mr. Parker holds a B.A.
degree from Haverford College and an M.B.A. degree and Ph.D. from Stanford
University.
CLASS II DIRECTORS
(To serve in office until 1998)
WILLIAM H. BOLINDER, age 53, has been a Director of the Company since June 1993.
Since October 1994, Mr. Bolinder has served as a Member of Zurich's Corporate
Executive Board. Mr. Bolinder joined Zurich in 1986 as chief operating officer
of Zurich American Insurance Group ("ZA") and in 1987 was appointed ZA's chief
executive officer. Between 1987 and 1994, Mr. Bolinder served as President,
Chief Executive Officer and a director of Zurich's affiliated companies in the
U.S. Mr. Bolinder serves on the executive committee of the American Institute
for Chartered Property and Casualty Underwriters and the Insurance Institute of
America. He is the founding president of the Northwest Cultural Council and
serves on its board of directors. Mr. Bolinder holds a B.S. degree from the
University of Massachusetts - Dartmouth.
PHILIP CALDWELL, age 77, has been a Director of the Company since April 1993.
Since 1985, Mr. Caldwell has been a director and a senior managing director of
Lehman Brothers Inc. (and its predecessor company, Shearson Lehman Brothers,
Inc.). He succeeded Henry Ford II as Chief Executive Officer of Ford Motor
Company in 1979 and as Chairman and Chief Executive Officer in 1980. He retired
from these positions at Ford Motor Company in 1985 and from its board of
directors in 1990. Mr. Caldwell is a director of Zurich Holding Company of
America (a Zurich affiliate), American Guarantee & Liability Insurance Co. (a
Zurich affiliate), The Mexico Fund, Waters Corporation and Russell Reynolds
Associates, Inc. and is Chairman of MT Investors Inc. He has served as a
director of The Chase Manhattan Corporation, The Chase Manhattan Bank, N.A.,
Digital Equipment Corporation, Federated Department Stores, Inc., the Kellogg
Company, Shearson Lehman Brothers Holdings, Inc., Specialty Coatings
International, Inc. and Castech Aluminum Group Inc. He is a member of the
Business Council, The Conference Board, the Council on Foreign Relations, the
U.S. Council of the Mexico-United States Business Committee, the Board of
Advisors of the Jerome Levy Economics Institute, the U.S. Advisory Board of The
European Institute of Business Administration, and a trustee of Muskingum
College, the Committee for Economic Development and the Winterthur Museum and
Gardens. Mr. Caldwell holds a B.A. degree from Muskingum College and an M.B.A.
degree from the Harvard Business School.
ROBERT T. MARTO, age 51, has been a Director of the Company since March 1993.
Since 1993, he has served as President, Chief Executive Officer and a director
of White River Corporation. Between 1990 and 1993, Mr. Marto served as President
and a director of Fund American Enterprises, Inc., a subsidiary of Fund American
Enterprises Holdings, Inc. and as Executive Vice President, Chief Financial
Officer and a director of Fund American Enterprises Holdings, Inc. Mr. Marto
joined Fireman's Fund Insurance Company, formerly a subsidiary of Fund American,
in 1975 and served there in various capacities from 1975 to 1990. Mr. Marto
serves as a director of Vicorp Restaurants, Inc. and CCC Information Services
Group, Inc. Mr. Marto holds a B.A. degree from Iona College.
54
<PAGE> 55
PETER J. NEFF, age 58, has been a Director of the Company since June 1996. Since
January 1997, he has served as Chairman and Chief Executive Officer of Genovo,
Inc. From 1991 to 1996, Mr. Neff served as President and Chief Executive Officer
of, and from 1987 to 1991 he served as President and Chief Operating Officer of,
Rhone Poulenc, Inc. From 1985 to 1987, Mr. Neff served as President and Chief
Executive Officer of St. Joe Minerals Corporation. Mr. Neff serves as a director
on the boards of Envirogen, Inc., the French-American Chamber of Commerce and
the Rider University Board of Trustees. Mr. Neff holds a B.S. degree from
Rutgers University and an M.B.A degree from Rider College.
CLASS III DIRECTORS
(To serve until 1999)
ROLF HUEPPI, age 54, has been a Director of the Company since March 1993. Mr.
Hueppi has been employed by Zurich in various capacities since 1963. In 1990 he
was appointed Chief Operating Officer and in 1991 was appointed President and
Chief Executive Officer. Since 1995 he has served as its Chairman and Chief
Executive Officer. In addition to his executive responsibilities, Mr. Hueppi
serves as a director of various affiliates of Zurich, including Chairman of ZCI.
Mr. Hueppi holds a Swiss commercial diploma.
STEVEN M. GLUCKSTERN, age 45, has been Chairman of the Company since March 1993.
From March 1993 to June 1996 he served as Chief Executive Officer of the Company
and from March 1993 to June 1995 as President of the Company. In March 1997, Mr.
Gluckstern was appointed to serve as a member of Zurich's Corporate Executive
Board. Mr. Gluckstern is President and a director of ZCI and serves as a
director of ZCI's operating subsidiaries. During 1995, he served as a director
of Zurich Kemper Investment Management, Inc. and certain of their respective
operating subsidiaries. Since 1987, he has served as an executive officer and a
director of Centre Reinsurance as well as a director of certain of its operating
subsidiaries. Before joining Centre Reinsurance, Mr. Gluckstern was President of
Columbia Insurance Company and Senior Vice President of National Indemnity
Company, each insurance subsidiaries of Berkshire Hathaway, Inc. Mr. Gluckstern
was previously employed as Chief Financial Officer and Vice President for
Finance and Administration of Healthco International Inc. Mr. Gluckstern also
has experience as an educator and holds a B.A. degree from Amherst College, a
Doctor of Education degree from the University of Massachusetts and an M.B.A.
degree from Stanford University where he was an Arjay Miller Scholar.
RICHARD E. SMITH, age 51, has been a Director of the Company since March 1993.
Since June 1996 he has served as Chief Executive Officer of the Company and
since June 1995 as President of the Company. From March 1993 to June 1996 Mr.
Smith served as Chief Operating Officer. Mr. Smith served as Senior Vice
President, Business Development of Centre Reinsurance from 1992 until March
1993. From 1982 until 1992, Mr. Smith was employed by Guy Carpenter & Company,
Inc., most recently as Senior Vice President, and was a member of the board of
directors. From 1975 to 1982, Mr. Smith was employed by A.M. Best Company, Inc.,
most recently as Vice President in charge of the property-casualty ratings
division. He holds a B.A. degree from United States International University in
San Diego.
DETLEF STEINER, age 50, has been a Director of the Company since September 1994.
He joined Zurich in July 1991 as Deputy General Manager and in 1993 was
appointed General Manager and Senior Executive Vice President of Zurich. In
addition to these responsibilities, Mr. Steiner serves as a director of various
affiliates and subsidiaries of Zurich. Between 1987 and 1991, he was the Deputy
General Manager of Deutsche Lloyd Life Insurance and Deutsche Lloyd Insurance.
Mr. Steiner holds a Doctor of Mathematics degree from the Technical University
of Munich, Germany.
55
<PAGE> 56
COMMITTEES
EXECUTIVE COMMITTEE
The Executive Committee of the Board of Directors consists of Messrs.
Gluckstern, Steiner, Hueppi, Palm, Parker and Smith. The Executive Committee has
all the powers of the Board of Directors, when it is not in session, in the
management of the business and affairs of the Company, except as otherwise
provided in the Company's by-laws or in resolutions of the Board of Directors
and under applicable law. The Executive Committee conducted four meetings during
1996.
FINANCE/INVESTMENT COMMITTEE
The Finance/Investment Committee of the Board of Directors consists of Messrs.
Cheng, Gluckstern, Neff, Parker and Palm. The Finance/Investment Committee is
responsible for reviewing investment guidelines for the portfolios of the
Company, for assessing the performance of the Company's investment advisors with
respect to such portfolios and for providing advice and assistance to management
as appropriate in the evaluation of specific investments and other business
opportunities. The Finance/Investment Committee conducted five meetings during
1996.
COMPENSATION COMMITTEE
The Compensation Committee of the Board of Directors (the "Compensation
Committee") consists of Messrs. Caldwell, Hueppi and Palm. The Compensation
Committee administers the Company's various long-term incentive and stock plans
and periodically reviews the Company's executive compensation arrangements and
makes recommendations to the Board of Directors with respect thereto. No member
of the Compensation Committee may be an employee of the Company or be eligible
to receive grants under any plan that the Compensation Committee administers for
the benefit of employees of the Company. The Compensation Committee conducted
six meetings during 1996.
AUDIT COMMITTEE
The Audit Committee of the Board of Directors consists of Messrs. Caldwell,
Marto and Neff. The Audit Committee submits recommendations to the Board of
Directors with respect to the selection of the Company's independent public
accountants and on any other matters it deems appropriate. It reviews the annual
financial statements of the Company with the Company's independent public
accountants, the practices and procedures adopted by the Company in the
preparation of such statements and the scope of the independent public
accountant's annual audit. The Audit Committee is required to meet at least
twice yearly with such accountants and at any time when considered appropriate
by the committee. The Audit Committee conducted four meetings during 1996.
CONFLICT COMMITTEE
The Conflict Committee of the Board of Directors consists of Mrs. Hope and
Messrs. Marto, Neff and Parker. The Conflict Committee reviews transactions
between the Company and its operating subsidiaries and other affiliates. All
transactions between Zurich, ZCI or their affiliates (other than the Company),
on the one hand, and the Company, on the other hand, are subject to the approval
of the Conflict Committee. The Conflict Committee conducted four meetings during
1996.
The Board of Directors has no nominating committee or committee which serves a
similar function.
56
<PAGE> 57
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Exchange Act requires the Company's directors and executive
officers, and persons who own more than ten percent of the common stock, to file
with the SEC and the New York Stock Exchange initial reports of beneficial
ownership and reports of changes in beneficial ownership of common stock of the
Company. Such persons are also required by SEC regulation to furnish the Company
with copies of all Section 16(a) forms they file. To the Company's knowledge,
based solely on a review of the copies of such reports furnished to the Company
and representations that no other reports were required and except as noted in
the next two sentences, during 1996 all Section 16(a) filing requirements
applicable to such persons were complied with. A Form 4 timely filed on behalf
of Isaac Mashitz for March 1994 disclosing his acquisition of 848 shares of
Common Stock inadvertently failed to note that 400 of such shares were
immediately transferred to two of his minor children. Once the omission was
discovered, an amendment was promptly filed.
ITEM 11. EXECUTIVE COMPENSATION.
SUMMARY COMPENSATION TABLE
The following table sets forth cash and other compensation paid or earned for
services rendered in 1996 (except as otherwise provided) to the two individuals
serving as Chief Executive Officer of the Company during 1996 and each of the
four most highly compensated executive officers of the Company (other than the
Chief Executive Officer) whose cash compensation exceeded $100,000 (together,
the "Named Executives" and each a "Named Executive"):
<TABLE>
<CAPTION>
LONG TERM COMPENSATION
----------------------
ANNUAL COMPENSATION AWARDS PAYOUTS
------------------- ------ -------
OTHER
ANNUAL RESTRICTED SECURITIES ALL OTHER
COMP- STOCK UNDERLYING LTIP COMP-
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS ENSATION AWARD(S) OPTIONS/SARS PAYOUTS ENSATION
--------------------------- ---- ------ ----- -------- ------- ------------ ------- --------
(1) ($) ($)(2) ($) ($)(3) (#)(4) ($) ($)(5)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Steven M. Gluckstern, Chairman 1996 $ 250,000(6) $ -- $ -- $ -- -- -- $ 48,020
1995 795,500 600,000 -- 728,125 -- -- 46,589
1994 772,500 500,000 -- -- (65,175) -- 36,894
Richard E. Smith, Director, 1996 $ 479,166 $ 575,000 $ -- $ -- 80,000 -- $ 31,802
President and Chief Executive 1995 424,000 550,000 -- 728,125 -- -- 29,293
Officer 1994 412,000 350,000 -- 158,813 -- -- 20,270
Peter R. Porrino, Executive Vice 1996 $ 318,958 $ 400,000 $ -- $ -- 44,000 -- $ 24,342
President 1995 265,000 300,000 -- 356,781 -- -- 21,890
1994 257,500 190,000 -- 98,313 -- -- 12,081
Isaac Mashitz, Senior Vice 1996 $ 275,500 $ 310,000 $ -- $ -- 24,000 -- $ 22,319
President and Chief Actuarial 1995 265,000 300,000 -- 356,781 -- -- 21,890
Officer 1994 257,500 190,000 -- 98,313 -- -- 12,298
Adrienne W. Reid, Senior Vice 1996 $ 260,000 $ 310,000 $ -- $ -- 24,000 -- $ 19,947
President and Chief Treaty 1995 231,000 275,000 -- 415,700 -- -- 20,307
Underwriting Officer 1994 206,000 110,000 -- 30,250 -- -- 9,665
Gerald S. King, Senior Vice 1996 $ 260,000 $ 290,000 $ -- $ -- 24,000 -- $ 21,597
President and Chief Facultative 1995 244,500 275,000 -- 372,763 -- -- 20,935
Underwriting Officer 1994 232,000 116,000 -- 30,250 -- -- 11,414
</TABLE>
- ----------
57
<PAGE> 58
1. In accordance with applicable SEC rules, information regarding cash and
other compensation paid or earned by the Named Executives has been provided
for calendar years 1994, 1995 and 1996. Mr. Gluckstern commenced employment
with the Company and ZRC on March 9, 1993; Mr. Smith commenced employment
with the Company and ZRC on March 9, 1993; Mr. Porrino commenced employment
with the Company and ZRC on March 29, 1993; Mr. Mashitz commenced
employment with the Company and ZRC on April 30, 1993; Ms. Reid commenced
employment with the Company on June 29, 1995 and ZRC on August 9, 1993 and
Mr. King commenced employment with the Company on June 29, 1995 and ZRC on
July 16, 1993.
2. The basis for determining annual incentive bonus awards for 1996 is
described in the Compensation Committee Report included elsewhere in this
Item 11 "Executive Compensation".
3. Values for grants of restricted stock determined based on per share grant
date closing price for the Common Stock. At December 31, 1996, each
individual in the Summary Compensation Table had outstanding shares of
restricted stock with aggregate values as follows: Mr. Gluckstern, 25,000
shares worth $781,250; Mr. Smith, 48,107 shares worth $1,503,344; Messrs.
Mashitz and Porrino, each 24,429 shares worth $763,406; Ms. Reid and Mr.
King, each 16,900 shares worth $528,125. Mr. Gluckstern's shares of
restricted stock will vest in three equal annual increments commencing in
1997. Of Mr. Smith's 48,107 shares of restricted stock, 1,312 shares vested
during 1995, 1,313 shares vested during 1996, 27,502 shares will vest
during 1997, 9,646 shares will vest during 1998 and 8,334 shares will vest
during 1999. Of the 24,429 shares of restricted stock granted to each of
Messrs. Mashitz and Porrino, 812 shares vested during 1995, 813 shares
vested during 1996, 13,824 shares will vest during 1997, 4,896 shares will
vest during 1998 and 4,084 shares will vest during 1999. Of the 16,900
shares of restricted stock granted to Ms. Reid, 250 shares vested during
1995, 250 shares vested during 1996, 4,083 shares will vest during 1997,
2,583 shares will vest in 1998, 4,734 shares will vest in 1999 and 2,500
shares will vest in each of 2000 and 2001. Of the 16,900 shares of
restricted stock granted to Mr. King, 250 shares vested during 1995, 250
shares vested during 1996, 5,583 shares will vest during 1997, 2,583 shares
will vest during 1998, 4,234 shares will vest in 1999 and 2,000 shares will
vest in each of 2000 and 2001. The Compensation Committee of the Company's
Board of Directors may provide for acceleration of the vesting period and
pro rata vesting upon certain events, including, without limitation,
termination of a participant's employment by reason of death, disability or
by the Company without cause. Holders of shares of restricted stock are
entitled to receive the same dividends as those paid on the outstanding
shares of Common Stock. During the restriction period, shares of restricted
stock remain unvested and may not be sold, assigned, transferred, pledged,
encumbered or otherwise disposed of or hypothecated. Holders of shares of
restricted stock are entitled to all of the rights of stockholders of the
Company, including the right to vote the shares and to receive any cash
dividends. Stock dividends issued with respect to such shares, if any, are
treated as additional grants of restricted stock subject to the same
restrictions and other terms and conditions that apply to the shares of
restricted stock with respect to which such stock dividends are issued.
4. Figures for 1996 represent the number of shares of Common Stock of the
Company underlying stock options granted pursuant to the Zurich Reinsurance
Centre Holdings, Inc. 1995 Stock Option Plan during fiscal year ending
December 31, 1996. See the discussion elsewhere in this Item 11 "Executive
Compensation" captioned "Other Company Benefit Plans -- Stock Option Plan."
The figure for 1994 for Mr. Gluckstern represents a release by Mr.
Gluckstern of 65,175 participations under the Company's then existing Long
Term Performance Incentive Plan for regrant to other participants.
Effective December 31, 1995, the Compensation Committee resolved to
terminate the Company's Long Term Performance Incentive Plan.
5. Represents the dollar value of life insurance premiums paid on behalf of
the named persons and employer contributions under ZRC's 401(k), money
purchase pension and executive thrift plans. The aggregate amount paid on
behalf of Mr. Gluckstern during 1996 for life insurance premiums was $1,290
and the total amount paid as employer plan contributions was $46,730. The
aggregate amount paid on behalf of Mr. Smith during 1996 for life insurance
premiums was $747 and the total amount paid as employer plan contributions
was $31,055. The aggregate amount paid on behalf of Mr. Porrino during 1996
for life insurance premiums was $497 and the total amount paid as employer
plan contributions was $23,845. The aggregate amount paid on behalf of Mr.
Mashitz during 1996 for life insurance premiums was $429 and the total
amount paid as employer plan contributions was $21,890. The aggregate
amount paid on behalf of Ms. Reid during 1996 for life insurance premiums
was $405 and the total amount paid as employer plan contributions was
$19,542. The aggregate amount paid on behalf of Mr. King during 1996 for
life insurance premiums was $405 and the total amount paid as employer plan
contributions was $21,192.
6. On June 1, 1996, Mr. Gluckstern resigned as Chief Executive Officer of the
Company but remained as Chairman. In 1996 Mr. Gluckstern was paid $827,500
as base salary of which $577,500 is to be reimbursed to the Company by ZCI
or its affiliates. In addition, Mr. Gluckstern is party to certain
employment agreements with ZCI. Amounts paid to, or earned by Mr.
Gluckstern under the terms of such agreements have not been reflected in
the foregoing balances. Such amounts related solely to services rendered by
Mr. Gluckstern to ZCI and its subsidiaries other than the Company.
58
<PAGE> 59
LETTER AGREEMENTS OF EMPLOYMENT, TERMINATION OF EMPLOYMENT AND CHANGE IN
CONTROL ARRANGEMENTS
The Company has entered into letter agreements of employment (the "Agreements")
with the Named Executives. In general, the Agreements provide for payment of the
base salary and other benefits outlined on the Summary Compensation Table and
eligibility for annual salary reviews and incentive compensation. The Agreements
generally provide that if the Company terminates the employment of a Named
Executive without Cause (as such term is defined in the Agreements), the Company
will continue to pay amounts of base salary and will continue all employee
benefits, as in effect immediately prior to such termination, until such
executive shall secure permanent employment, subject to a maximum of twelve
months. In the event of a termination of employment by the Company without
Cause, or in the event of death or permanent and total disability (as defined in
the Agreements) of a Named Executive, awards made pursuant to the Company's
Restricted Stock Plan (as described below) will become immediately vested and
redeemable. In connection with the Stock Option Plan (defined below), the
Company has entered into stock option agreements (the "Option Agreements") with
the Named Executives, other than Mr. Gluckstern. The Option Agreements
generally provide that in the event the Named Executive's employment with the
Company is terminated (i) by the Company without Cause (as such term is defined
in the Option Agreements, the Stock Option Plan or any applicable employment
agreement or employment letter) or (ii) by the Named Executive with Good Reason
(as such term is defined in the Option Agreements, the Stock Option Plan or any
applicable employment agreement or employment letter) in conjunction with or
within two years of a "Change of Control" of the Company, then all outstanding
options held by such Named Executive will become fully vested and immediately
exercisable. Change of Control is defined as any transaction, circumstance or
occurrence following which Zurich, taken together with all of its
majority-owned subsidiaries, does not, directly or indirectly, own more than
25% of the outstanding capital stock of the Company.
BOARD AND COMMITTEE COMPENSATION AND BENEFITS
Each Director who is not an employee of the Company, ZCI, Zurich or their
affiliates receives an annual retainer of $25,000, $2,000 for each Board of
Directors meeting attended, $1,000 for each Audit, Compensation, Conflict,
Executive or Finance/Investment committee meeting attended, and $1,500 for
attendance at each meeting of the Special Committee formed to review the
Proposed Transaction. In addition, Directors are reimbursed for reasonable
out-of-pocket expenses incurred in attending meetings of the Board of Directors
and committees thereof. Directors who are employees of the Company, ZCI, Zurich
or their affiliates, do not receive any fees for serving on the Company's Board
of Directors or for committee service. Certain of the Company's Directors are
entitled to participate in the Company's Common Stock Purchase Plan for
Non-Employee Directors. Pursuant to this plan, Directors may defer receipt of
board fees and receive the amount of these fees in an equivalent number of
shares of Common Stock.
The Board of Directors conducted four meetings during 1996. Each Director was
present for at least 75% of the total number of meetings of the Board and any
committee in respect of which such Director is a member.
STOCK OPTIONS
The following table contains information concerning the grant of options under
the Zurich Reinsurance Centre Holdings, Inc. 1995 Stock Option Plan (the "Stock
Option Plan") to each of the Named Executives during the fiscal year ended
December 31, 1996. The Stock Option Plan does not permit the issuance of stock
appreciation rights.
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OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
------------------------------------------------------------
PER CENT OF POTENTIAL REALIZABLE VALUE AT
NUMBER OF SE- TOTAL OPTIONS ASSUMED ANNUAL RATES OF STOCK PRICE
CURITIES UNDER- GRANTED TO APPRECIATION FOR OPTION TERM(2)
LYING OPTIONS EMPLOYEES IN EXERCISE EXPIRATION ------------------------------------
NAME GRANTED(#)(1) FISCAL YEAR PRICE ($/SH) DATE 5% 10%
- ---- ------------- ------------ ------------ ---------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
Steven M. Gluckstern... -- --% $ -- -- $ -- $ --
Richard E. Smith....... 60,000 11.9 29.875 1/1/2006 1,127,280 2,856,780
20,000 4.0 30.356 1/1/2006 381,800 967,600
Peter R. Porrino....... 24,000 4.8 29.875 1/1/2006 450,912 1,142,712
20,000 4.0 30.356 1/1/2006 381,800 967,600
Isaac Mashitz.......... 24,000 4.8 29.875 1/1/2006 450,912 1,142,712
Adrienne W. Reid....... 24,000 4.8 29.875 1/1/2006 450,912 1,142,712
Gerald S. King......... 24,000 4.8 29.875 1/1/2006 450,912 1,142,712
</TABLE>
- --------------------
(1) Represents number of shares covered by non-qualified stock options to
acquire shares of Common Stock granted pursuant to the terms of the Stock
Option Plan. Each of these grants consists of an equal share number of Type
A Options and Type B Options. The exercisability of Type A Options is
contingent upon the satisfaction of financial performance hurdles relating
to the Common Stock's share price performance during the term of the
Option. The exercisability of Type B Options is contingent upon the
satisfaction of financial performance hurdles relating to increases in the
Company's Intrinsic Value (as such term is used in the Stock Option Plan)
per common share during the term of the Option. See the discussion
elsewhere in this Item 11 "Executive Compensation" captioned "Other Company
Benefit Plans -- Stock Option Plan."
(2) Foregoing values estimated assuming the full satisfaction of financial
exercisability conditions respecting Type A Options and Type B Options
issued to date under the Stock Option Plan. The exercisability of Type A
Options is contingent upon the satisfaction of financial performance
hurdles relating to the Common Stock's share price performance during the
term of the Option. The exercisability of Type B Options is contingent upon
the satisfaction of financial performance hurdles relating to increases in
the Company's Intrinsic Value (as such term is used in the Stock Option
Plan) per common share during the term of the Option. See the discussion
elsewhere in this Report captioned "Other Company Benefit Plans -- Stock
Option Plan."
The following table sets forth information for each of the Named Executives with
respect to the value of options exercised during the fiscal year ended December
31, 1996 and the value of outstanding and unexercised options held as of that
date, based upon the market value of the Common Stock of $31.25 per share on
that date. There were no options exercised by the Named Executives during the
fiscal year ended December 31, 1996.
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<PAGE> 61
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
SHARES UNDERLYING UNEXERCISED OPTIONS VALUE OF UNEXERCISED IN-THE-MONEY
ACQUIRED ON VALUE AT FISCAL YEAR-END OPTIONS AT FISCAL YEAR-END($)(1)
EXERCISE(#) REALIZED ---------------------------- -----------------------------------
NAME ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- ------------- ------------ ------------ ------------- ---------- -------------
<S> <C> <C> <C> <C> <C> <C>
Steven M. Gluckstern... -- -- -- -- $-- $ --
Richard E. Smith....... -- -- -- 80,000 -- $100,380
Peter R. Porrino....... -- -- -- 44,000 -- $ 50,880
Isaac Mashitz.......... -- -- -- 24,000 -- $ 33,000
Adrienne W. Reid....... -- -- -- 24,000 -- $ 33,000
Gerald S. King......... -- -- -- 24,000 -- $ 33,000
</TABLE>
- ----------------------------------------
(1) Represents the difference between the closing market price of the Common
Stock at December 31, 1996 of $31.25 per share and the exercise price per
share of in-the-money options multiplied by the number of shares underlying
the in-the-money options. The options are subject to the vesting and
exercisability requirements set forth in the Stock Option Plan. See the
discussion elsewhere in this Report captioned "Other Benefit Plans -- Stock
Option Plan."
OTHER COMPANY BENEFIT PLANS
STOCK OPTION PLAN
The Zurich Reinsurance Centre Holdings, Inc. 1995 Stock Option Plan (the "Stock
Option Plan") was adopted in November 1995 as a replacement for the Company's
then-existing, cash-based long term incentive compensation plan. The Stock
Option Plan provides for grants of incentive stock options and non-qualified
stock options covering up to 1,844,000 shares of Common Stock representing
approximately 7% of the total number of shares of Common Stock issued and
outstanding at the time of the Stock Option Plan. Grants under the Stock Option
Plan have been made effective as of January 1, 1996 covering approximately
504,000 shares of Common Stock (representing approximately 2.0% of the number of
shares of Common Stock issued and outstanding as of December 31, 1996 and 27% of
the aggregate number of Options authorized to be granted under the terms of the
Stock Option Plan). These grants consisted of an equal number of Type A Options
and Type B Options.
For grants of both Type A and Type B Options made to date, exercise prices have
been set at prices ranging between $29.875 and $30.356 per share reflecting the
trading values for the Company's Common Stock in the ten trading days
immediately preceding the grant date. As of December 31, 1996, the closing per
share price for the Common Stock on the New York Stock Exchange was $31.25. Each
Type A Option and Type B Option granted to date vests in full on the fourth
anniversary of the date of grant (the "Grant Date") provided that the Optionee
has been continuously employed by the Company from the Grant Date until the date
on which such Option is scheduled to vest. Each Type A Option, to the extent
vested, becomes exercisable only if the "Share Appreciation Amount" (as such
term is used in the Stock Option Plan) for the period from the Grant Date until
the fourth anniversary of such date (the "Initial Exercisability Date") exceeds
the "Share Appreciation Hurdle" (as such term is used in the Stock Option Plan)
determined with respect to the same period, or, in the event such condition is
not satisfied with respect to the Initial Exercisability Date, on any subsequent
annual anniversary of the Initial Exercisability Date (each, a "Subsequent
Exercisability Date") as to which the Share Appreciation Amount for the period
from the Grant Date until the such Subsequent Exercisability Date shall exceed
the
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<PAGE> 62
Share Appreciation Hurdle determined for that period and provided, further, that
the Optionee therefor shall remain a full-time employee of the Company on and as
of such Subsequent Exercisability Date. Each Type B Option, to the extent
vested, will become exercisable only if the Intrinsic Value Appreciation Amount
(as such term is used in the Stock Option Plan) for the period from the Grant
Date until the Initial Exercisability Date exceeds the Intrinsic Value
Appreciation Hurdle (as such term is used in the Stock Option Plan) determined
with respect to the same period, or, in the event such condition is not
satisfied with respect to the Initial Exercisability Date, on any Subsequent
Exercisability Date in respect of which the Intrinsic Value Appreciation Amount
for the period from the Grant Date until the such Subsequent Exercisability Date
shall exceed the Intrinsic Value Appreciation Hurdle determined with respect to
the same period and provided that the Optionee therefor shall remain a full-time
employee of the Company on such Subsequent Exercisability Date.
Vested Options which do not become exercisable in accordance with the foregoing
will be forfeited. Vested Options which become exercisable in accordance with
the foregoing will not become non-exercisable in the event that the conditions
set forth above are later not met as of a date subsequent to the Initial
Exercisability Date or Subsequent Exercisability Date, as the case may be.
RESTRICTED STOCK PLAN
The Company maintains a Restricted Stock Plan (the "Restricted Stock Plan")
under which participants are granted an award of restricted stock (the
"Restricted Stock") by the Compensation Committee. There are 450,000 shares
of Common Stock which may be granted thereunder. Each award is subject to such
restrictions, terms and conditions as the Compensation Committee may deem
appropriate. Such restrictions include requirements that the Restricted Stock be
deposited with the Company while subject to any restrictions and the requirement
that the Restricted Stock be forfeited upon termination of employment for
specified reasons within a specified period of time. Under the Restricted Stock
Plan, shares of Restricted Stock become unrestricted and vest in accordance with
the vesting schedule relating to the service performance restriction applicable
to each grant.
During the restriction period, the Restricted Stock remains unvested and may not
be sold, assigned, transferred, pledged, encumbered or otherwise disposed of or
hypothecated. Holders of shares of Restricted Stock are entitled to all of the
rights of a stockholder of the Company, including the right to vote the shares
and to receive any cash dividends. The Compensation Committee may determine the
number of shares of Restricted Stock to be granted in the future and may impose
different terms and conditions on any particular Restricted Stock grant made to
any employee.
All employees of the Company are eligible to receive grants under the Restricted
Stock Plan. As of December 31, 1996, the Company and ZRC together had
approximately 235 employees. As of March 21, 1997, the Compensation Committee
has granted 368,398 shares under the Restricted Stock Plan, of which 153,360
have vested and 24,949 have been forfeited.
EMPLOYEE STOCK PURCHASE PLAN
The Company maintains an employee stock purchase plan (the "Purchase Plan")
which is intended to meet the applicable requirements of Section 423 of the
Internal Revenue Code of 1986, as amended (the "Code"). All full-time and
certain part-time employees of the Company designated by the Compensation
Committee are eligible to purchase shares of the Common Stock by means of
payroll deductions, subject to any minimum service requirements imposed by the
Compensation Committee. Eligible employees may elect to participate in
semi-annual offering periods ("Offering Periods") under the Purchase Plan by
authorizing after-tax payroll deductions of up to 10% (in whole percentages) of
their salary for the purchase of shares of the Common Stock. The Purchase Plan
has a term of 10 years. An aggregate of
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<PAGE> 63
100,000 shares of the Common Stock has been reserved for issuance under the
Purchase Plan. (The Company may also purchase shares of the Company's common
stock in the open market for sale to employees under the Purchase Plan.)
Unless the Compensation Committee determines at the inception of an Offering
Period that a higher price will apply, the price at which shares of the Common
Stock will be purchased under the Purchase Plan at the end of each Offering
Period will be 85% of the Fair Market Value (as defined in the Purchase Plan) of
the shares at the beginning or end of an Offering Period, whichever is less. No
participating employee will be entitled in any offering period under the
Purchase Plan to purchase the Common Stock having an aggregate Fair Market Value
at the beginning of such Offering Period in excess of $12,500. Additional
restrictions apply to persons deemed to be "insiders" under Section 16 of the
Securities Exchange Act of 1934 (the "Exchange Act") in order to comply with the
exemption provided by Rule 16b-3 of the Exchange Act.
OTHER EMPLOYEE BENEFIT PLANS
Effective as of January 1, 1994, ZRC adopted an employee thrift plan (the
"Employee Thrift Plan") qualified under the Code. Pursuant to Section 401(k) of
the Code, eligible employees of ZRC are able to defer receipt of up to 12% of
their annual salaries with discretionary matching contributions made by ZRC for
up to 6% of such amounts. Subject to limitations under applicable law, ZRC
matches up to 100% of the first 3% of annual salary deferred by employees and up
to 50% of the next 3% of salary so deferred. In addition, effective as of
January 1, 1994, ZRC adopted a non-contributory, defined contribution money
purchase pension plan (the "Pension Plan") under which ZRC contributes for each
eligible employee an amount equal to the sum of (i) 4% of eligible compensation
up to the Taxable Wage Base (as such term is defined in the Pension Plan) (for
1997, set at $65,400) and (ii) 8% of eligible compensation (up to the applicable
earnings cap which, for 1997, is $160,000) in excess of the Taxable Wage Base.
Effective as of February 1, 1994, ZRC adopted a supplemental, non-qualified
executive thrift plan (the "Executive Thrift Plan") under which select members
of executive management may defer certain amounts of base salary and receive
limited matching contributions from ZRC. Under the Executive Thrift Plan, ZRC
matches, dollar-for-dollar, amounts deferred by participants under the Executive
Thrift Plan up to 3% of annual salary in excess of $160,000 for 1997 and
provides a 50% matching contribution for the next 3% of such excess salary so
deferred. Effective January 1997, participants may also defer certain amounts of
bonus compensation without receiving a matching contribution.
COMPENSATION COMMITTEE REPORT
During 1996, the Compensation Committee consisted of Messrs. Caldwell, Hueppi
and Palm. The Compensation Committee is charged, among other things, to make
periodic reviews of the Company's compensation arrangements and to make
recommendations to the Board of Directors with respect to such arrangements. The
Compensation Committee has worked with management of the Company to specify a
compensation approach responsive to the short-term and long-term considerations
described below.
BASE BENEFITS
The Compensation Committee intends that the core group of base benefits (base
salary and fringe benefits such as thrift and insurance packages) afforded the
Company's senior executives be sufficient to attract and retain executives of
the caliber required to manage the Company and ZRC in the implementation of its
overall business strategy. The Compensation Committee believes such benefits to
be reasonable by reference to both the Compensation Committee's expectations and
its assessment of industry norms. In reaching these conclusions, the
Compensation Committee considered both Company performance (based on the
analyses described below under the caption "Annual Incentive Compensation") and
the individual
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<PAGE> 64
performance of members of Senior Management (defined to include Named Executives
and the Senior Vice Presidents of the Company's operating subsidiaries).
Assessments of individual performance have been based principally on the
recommendations of management. The Compensation Committee conducted no
independent assessment of industry salary standards but rather relied on the
general familiarity and experience of the members of the Compensation Committee.
ANNUAL INCENTIVE COMPENSATION
The annual incentive award represents an important element of the Company's
overall compensation scheme. This is due in part to the competing opportunities
available to members of the Company's management. Also, however, annual
incentive awards are useful complements to long term compensation arrangements.
These awards can be tailored to respond to the achievement of controllable,
individual objectives during the year and reward strong individual performance
in the face of less encouraging overall results.
The Compensation Committee believes that annual incentive awards must be linked
to both (1) quantitative measures of the total economic value provided by
management to the Company's stockholders and (2) the achievement of qualitative
individual objectives which have, or will in the future, produce quantifiable
value for the Company's investors. For 1996, the Company's annual incentive
compensation framework (the "AIC Plan") synthesized four quantitative financial
measures (the "Financial Measures") of the Company's performance and more
qualitative plan and activity measures (the "Plan & Activity Measures") in order
to determine the overall pool of incentive compensation available for award to
management. Under the AIC Plan, the Financial Measures and the Plan & Activity
Measures determine roughly equivalent shares of total incentive compensation.
For 1996, the AIC Plan contemplated ceiling and floor values based on the
Company's aggregate base compensation earned of 80% and 10%, respectively.
The AIC Plan for 1996 provided for four specific, measurable items to gauge the
Company's overall financial performance. The first measure related to the
Company's consolidated net operating income determined in accordance with GAAP.
The second measure, Return on Deployed Equity (the "RDE"), is the implied
measure of financial returns on capital based on the Company's assessment of its
underwriting results for the year. The RDE is determined as a function of the
Company's acquisition expense-adjusted, discounted loss ratio relative to the
balance of capital deployed in the Company's underwriting operations. At target
levels under the AIC Plan, the Company's net operating income and RDE together
determined 30% of the total 1996 pool of annual incentive compensation. For
purposes of the Company's 1996 AIC Plan, the other Financial Measures reflected
the Company's premium growth rate and internal expense level. Taken together,
these measures accounted for 20% of the total pool of annual incentive
compensation. During 1996, the Company was modestly over the target for
Financial Measures as a whole. The Company exceeded the targets for net
operating income, RDE and internal expenses and was under the target for premium
growth.
The members of the Compensation Committee believe that in the future the
financial criteria used to determine the Company's annual incentive benefits
ultimately will be determined in larger part by reference to GAAP and
statutory-basis accounting information. The incorporation of a net operating
income measure in the Company's 1996 AIC Plan reflects this development. For
1996, the weight accorded the net operating income measure was increased
relative to other financial and non-financial measures (from approximately 8% of
total AIC at target levels to approximately 18% of these targets).
The Plan & Activity Measures specified in the AIC Plan are the indirect drivers
of investor value. Plan measures identify and measure the progress of projects
determined to be critical to the Company's mid- to
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<PAGE> 65
long-term development. Plan measures for 1996 were specified in connection with
the development of the Company's 1996 strategic and operating plans and
included, among other things, differentiating ZRC from other reinsurers,
establishing effective account prioritization systems and improving operating
efficiency. Activity measures reflected the key activities which the Company
must perform well in order to succeed. Activity measures for 1996 included,
among other things, measures of underwriting productivity (including retention
of significant clients), lead reinsurer positions and client service. Under the
AIC Plan, the Company's performance with respect to the Plan & Activity Measures
determines one-half of the total amount of AIC Plan payments. Based on its
assessment of the foregoing factors, the Compensation Committee determined that
the Company's performance for 1996 approximated the target criteria for the Plan
& Activity Measures taken as a whole.
Taken together, the Financial Measures and the Plan & Activity Measures
suggested 1996 Annual Incentive Compensation awards in the aggregate
approximating 104% of the target amount for such awards. The Compensation
Committee approved this amount.
In addition to determining the total amount of 1996 AIC Plan awards made by the
Company, the Compensation Committee reviewed and approved the allocation of this
total amount to the individual members of the Company's management. This
allocation was achieved based in part on standards articulated by the
Compensation Committee when the AIC Plan was adopted and on the recommendations
of management. In the Compensation Committee's view, the Company's performance
during 1996 -- measured by reference to the Financial Measures and the Plan &
Activity Measures and the composition of the awards as described above --
justified the annual incentive payments to management described elsewhere in
this Report on Form 10-K.
RESTRICTED STOCK AWARDS
The Company's Restricted Stock Plan was designed to align the interests of
management and investors by providing value to management as the Company's stock
price increases. To date, the Compensation Committee has granted 368,398 shares
under the Restricted Stock Plan, of which 153,360 shares have vested and 24,949
shares have been forfeited. For 1996, the Compensation Committee made grants
under the plan totaling approximately 8,950 shares. These grants relate to new
hires, promotions and relocations. Awards of restricted stock are generally
recommended by management and determined by the Compensation Committee
considering a number of factors, including individual performance and the
Compensation Committee's experience concerning general and industry competitive
practice.
STOCK OPTION PLAN
In November 1995, the Compensation Committee and the Company's Board of
Directors adopted the Stock Option Plan to substitute for the Company's former
Long Term Performance Plan (the "Former LTIP") as the principal long term
compensation vehicle for management of the Company. The Stock Option Plan, which
was approved by the Company's stockholders in May 1996, provides for grants of
incentive stock options and non-qualified stock options covering up to 1,844,000
shares of Common Stock representing approximately 7% of the total number of
shares of Common Stock issued and outstanding at the time the Stock Option Plan
was adopted by the Board. Initial grants under the Stock Option Plan were made
effective as of January 1, 1996, and, following certain modifications made
during 1996 as a result of management changes, cover approximately 504,000
shares of Common Stock (representing approximately 2.0% of the number of shares
of Common Stock issued and outstanding as of December 31, 1996 and 27% of the
aggregate number of Options authorized to be granted under the terms of the
Stock Option Plan). Exercise of these Options is dependent upon the satisfaction
of traditional conditions, such as continuity of employment through a four-year
vesting period, as well as conditions relating to the satisfaction of certain
corporate financial hurdles. As described in the Stock Option Plan
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and last year's report of the Compensation Committee, these financial hurdles
relate to both share price performance of the Common Stock and the "Intrinsic
Value" per share of Common Stock generated by the Company's operations. The
members of the Compensation Committee believe that the Stock Option Plan's
increased flexibility will enable the Company to modify its long term
compensation perspectives in response to changing circumstances. Also, the Stock
Option Plan will provide more apparent value to managers while requiring that
substantial stockholders benefit is derived before values are generated. The
inclusion of the "Intrinsic Value" hurdle is consistent with the Company's
approach of maximizing long-term value to stockholders.
BASIS FOR CEO COMPENSATION
On June 1, 1996, Mr. Gluckstern resigned as Chief Executive Officer of the
Company, but remained as Chairman. Effective on the same date, Mr. Smith was
appointed Chief Executive Officer of the Company. For 1996, Mr. Gluckstern
received from the Company a base salary of $827,500, of which $577,500 is to be
reimbursed to the Company from ZCI or its affiliates. For 1996, Mr. Gluckstern
did not receive any annual incentive compensation payments or any awards of long
term incentive compensation. The Compensation Committee believes Mr.
Gluckstern's total ZRC compensation package is appropriate in light of, among
other things, the positioning of ZRC as a strong leader in the broker
reinsurance market segment, the continued aggressive development of the
Company's underwriting infrastructure and the expansion of business
opportunities available to the Company and ZRC by virtue of Mr. Gluckstern's
efforts. The Compensation Committee also understands that Mr. Gluckstern will
continue to receive cash compensation and substantial long-term incentive
compensation from ZCI and its affiliates.
For 1996, Mr. Smith received from the Company a base salary of $479,166 per
annum and annual incentive compensation payments of $575,000. In addition,
during 1996 Mr. Smith received grants of 80,000 Options under the Stock Option
Plan. The Compensation Committee believes Mr. Smith's total ZRC compensation
package is appropriate in light of, among other things, the general enhancement
of the Company's market profile, the continued development of the Company's
highly efficient operating infrastructure and the continued cultivation of
broker and client relationships by virtue of Mr. Smith's efforts.
COMPLIANCE WITH INTERNAL REVENUE CODE SECTION 162(m)
Section 162(m) of the Code generally disallows a tax deduction to public
companies for compensation over $1 million paid to the corporation's Chief
Executive Officer and four other most highly compensated executive officers.
Qualifying performance-based compensation and compensation paid pursuant to
plans adopted prior to a company's initial public offering of securities are not
subject to the limit if certain requirements are met. In considering 1996
compensation to be paid to Messrs. Gluckstern and Smith, the Compensation
Committee recognized that a portion of such compensation may exceed the Section
162(m) threshold amount. The Compensation Committee believes that the terms of
the Stock Option Plan qualify such plan as "performance-based" for purposes of
Section 162(m).
Rolf Hueppi (Chairperson)
Philip Caldwell
Michael D. Palm
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION.
During 1996, the Compensation Committee of the Board of Directors consisted of
Messrs. Caldwell, Hueppi and Palm, all of whom are non-employee Directors. No
member of the Compensation Committee is, or has been, an officer of the Company
or any subsidiary.
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RELATIONSHIP WITH ZURICH AND ZCI
The principal stockholder of the Company is ZCI, which beneficially owns
approximately 65.7% of the issued and outstanding shares of Common Stock. Zurich
beneficially owns all of the outstanding voting equity of ZCI. Each of Steven M.
Gluckstern, Chairman, Detlef Steiner, Vice-Chairman, Rolf Hueppi, Director,
Michael D. Palm, Director, William H. Bolinder, Director, and Laurence W. Cheng,
Director, holds positions with Zurich or certain of its affiliates other than
the Company and the Company's wholly owned subsidiaries, Zurich Reinsurance
Centre, Inc., a Connecticut stock insurance company ("ZRC") and ZC Insurance
Company ("ZCIC"), a New Jersey stock insurance company. The compensation of such
persons with respect to such positions may be dependent upon the financial
performance of such affiliates, certain of which may, from time to time, be
party to transactions or arrangements with the Company.
BUSINESS WITH ZURICH AND ITS AFFILIATES
From time to time in the ordinary course of their respective businesses, ZRC
enters into reinsurance transactions with Zurich and certain of its domestic
affiliates. Approximately $132.9 million (26.6%) of ZRC's 1996 net premiums
earned (net of commissions) were attributable to reinsurance transactions
between ZRC and various affiliates of Zurich. Net ceding commissions incurred by
ZRC with respect to this business during 1996 were approximately $50.1 million.
ZRC's objective in determining its business mix is to evaluate each underwriting
opportunity individually with a view to maximizing overall profitability.
In 1993, Zurich and ZRC entered into the Excess of Loss Reinsurance Agreement
under which Zurich agreed to reinsure adverse loss development in respect of
ZRC's reserves as of December 31, 1992 and the Stop Loss Reinsurance Agreement
under which Zurich agreed to reinsure adverse loss development on ZRC's reserves
as of May 31, 1993 for losses occurring between January 1, 1993 and May 31,
1993. Under the Stop Loss Reinsurance Agreement, ZRC will be reimbursed for
incurred losses and allocated loss adjustment expenses in excess of 75% of
earned premiums for losses occurring after May 31, 1993 on business written by
ZRC prior to June 1993. Coverage provided under the Excess of Loss Reinsurance
Agreement and the Stop Loss Reinsurance Agreement (together, the "Stop Loss
Agreement") is on an incurred basis (rather than as any such losses are paid),
net of recoveries and claims under other retrocessional policies, except for any
claims in respect of which recovery is precluded by the insolvency or
receivership of one of ZRC's other retrocessionaires or by a verdict of a court
or arbitration panel. As of December 31, 1996, there were no recoverables under
the terms of the Stop Loss Agreement.
Effective as of July 1, 1995, ZRC entered into a domestic whole account quota
share agreement (the "ZA Quota Share Agreement") with Zurich Insurance Company
(U.S. Branch), American Guarantee & Liability Insurance Company, a New York
stock insurance company, American Zurich Insurance Company, an Illinois stock
insurance company, Zurich American Insurance Company of Illinois, an Illinois
stock insurance company, and Steadfast Insurance Company, a Delaware stock
insurance company (collectively, "Zurich American") and concurrently an Excess
of Loss Retrocession Agreement (the "Retrocessional Agreement") primarily to
provide loss limitations with respect to business assumed under the ZA Quota
Share Agreement.
INSURANCE PARTNERS, L.P.
In February 1994, the Company committed $25.0 million to investment as a limited
partner in Insurance Partners, L.P., a Delaware limited partnership ("Insurance
Partners"). Insurance Partners is an equity investment fund established to
sponsor and participate in acquisitions, recapitalizations, demutualizations and
other structured transactions in the insurance and reinsurance industries. ZCI
and Centre Reinsurance are limited partners in Insurance Partners and have an
economic interest in the fund's general partner.
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Certain of the directors and executive officers of ZCI and the Company have also
committed to invest in Insurance Partners.
INVESTMENT MANAGEMENT AGREEMENTS
Each of the Company and ZRC has entered into Investment Management Agreements
(together, the "Investment Agreements") with Centre Investment Services, Limited
("CIS"), a wholly owned subsidiary of ZCI. Under the Investment Agreements, CIS
manages a portion of the Company's consolidated portfolio of investment
securities. Investment management fees incurred in the aggregate during 1996 by
the Company and ZRC under the Investment Agreements were approximately $1.1
million.
REAL ESTATE LEASING ARRANGEMENTS
ZRC is party to a sublease agreement, dated as of January 1, 1994, and amended
as of January 26, 1996 (the "Sublease") with a subsidiary of ZCI. Under the
Sublease, ZRC leases approximately 60,000 rentable square feet of space in New
York City for its underwriting, actuarial and certain executive offices (the
"Office Space"). The Sublease has a term of approximately seventeen years.
Together with another ZCI affiliate which occupies space contiguous to the
Office Space, ZRC has guaranteed the performance of the tenant's obligations
under the lease covering the Office Space. Under this guarantee, ZRC is
contingently liable for 36.2% of monetary obligations to the lessor in respect
of the Office Space and other contiguous space leased thereby (together with the
Office Space, the "Group Office Space"). This percentage represents the
approximate percentage which the Office Space bears to the Group Office Space.
68
<PAGE> 69
COMPARISON OF CUMULATIVE TOTAL STOCKHOLDER RETURN
The following graph compares the change in the Company's cumulative total
stockholder return on shares of the Common Stock with cumulative total return
for S&P's 500 Composite Stock Index and a Company-constructed composite industry
index, consisting of domestic professional casualty reinsurers with more than
$100 million of total capital and surplus measured on the basis of statutory
accounting principles over the period from May 12, 1993 (the date of the
Company's initial public offering of Common Stock) through December 31, 1996.
Companies included in the Peer Group for 1996 are: General Re Corporation, NAC
Re Corporation, Transatlantic Holdings, Inc., and Trenwick Group, Inc.
COMPARISON OF TOTAL RETURN
<TABLE>
<CAPTION>
5/12/93 12/31/93 12/31/94 12/31/95 12/31/96
---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
ZRC $100.00 $ 80.36 $ 82.50 $ 86.79 $ 89.29
Peer Group $100.00 94.24 109.32 139.12 144.16
S&P 500 $100.00 104.87 103.25 138.47 166.53
</TABLE>
69
<PAGE> 70
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
As of the close of business on March 21, 1997, there were outstanding and
entitled to vote 26,205,569 shares of Common Stock, all of one class and each
having one vote. The table below sets forth certain information with respect to
the beneficial ownership of the Common Stock, by each beneficial owner of more
than 5% of the Common Stock, each of the Company's Directors and the Named
Executives and all Directors and executive officers of the Company as a group:
<TABLE>
<CAPTION>
NAME AND ADDRESS NUMBER OF SHARES PERCENTAGE
OF BENEFICIAL OWNER BENEFICIALLY OWNED OWNERSHIP
------------------- ------------------ ---------
<S> <C> <C>
Zurich Insurance Company
2 Mythenquai
CH-8002 Zurich, Switzerland (1)(2) 17,217,572 65.7%
Steven M. Gluckstern 106,228 *
Richard E. Smith 61,679 *
Peter R. Porrino 27,848 *
Gerald S. King 18,773 *
Isaac Mashitz 28,261 *
Adrienne W. Reid 18,132 *
William H. Bolinder 900 *
Philip Caldwell 1,000 *
Laurence W. Cheng 2,500 *
Judith Richards Hope 3,000 *
Rolf Hueppi 3,000 *
Robert T. Marto 1,000 *
George G.C. Parker 2,798 *
All Directors and Executive Officers as a
group (18 persons) 301,670 1.2%
</TABLE>
* Less than 1% .
- ----------
1. Zurich beneficially owns all of the outstanding voting equity of ZCI and
Zurich International (Bermuda) Ltd. ("ZIB") and therefore may be deemed a
beneficial owner of the 16,217,572 shares of Common Stock beneficially owned
by ZCI and 350,000 shares of Common Stock beneficially owned by ZIB. In
addition, Zurich owns 650,000 shares of the Common Stock. ZCI's address is
Cumberland House, One Victoria Street, Hamilton HM HX Bermuda. ZIB's address
is Crawford House, 50 Cedar Avenue, Hamilton HM11 Bermuda.
2. Based upon a Schedule 13D filed with the Securities and Exchange Commission
(the "SEC") by ZCI, dated March 31, 1994 and amendments thereto filed on
January 23, 1996 and January 14, 1997.
The table below sets forth certain information with respect to the beneficial
ownership of the common stock of Zurich as of December 31, 1996 by each of the
Company's Directors, the Named Executives and all Directors and executive
officers of the Company as a group:
<TABLE>
<CAPTION>
NUMBER OF SHARES PERCENTAGE
NAME BENEFICIALLY OWNED(1) OWNERSHIP
---- --------------------- ---------
<S> <C> <C>
Rolf Hueppi 8,065 *
Detlef Steiner 6,000 *
Steven M. Gluckstern 15 *
Richard E. Smith 15 *
All Directors and Executive Officers as
a group (18 persons) 14,095 *
</TABLE>
70
<PAGE> 71
* Less than 1%.
- ----------
1. For purposes of this table, a person or group of persons is deemed to have
"beneficial ownership" of any shares which such person or persons has the
right to acquire within sixty days. For purposes of computing the
percentages of outstanding shares held by each person or group of persons
named above on a given date, any security which such person or persons has
the right to acquire within sixty days is deemed to be outstanding but is
not deemed to be outstanding for the purpose of computing the percentage
ownership of any other person.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
See information under the heading "Compensation Committee Interlocks and Insider
Participation" in Item 11.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS AND SCHEDULES AND REPORTS ON FORM 8-K.
FINANCIAL STATEMENTS AND SCHEDULES
Financial Statements and Schedules listed in the accompanying Index to
Financial Statements and Schedules in Item 8 are filed as part of this Report.
EXHIBITS
The exhibits listed in the accompanying Index to Exhibits are filed as part
of this Report. Such exhibits include, without limitation, certain management
contracts and compensatory plans as therein described.
REPORTS ON FORM 8-K
No reports on Form 8-K were filed by the Company during the fourth quarter of
1996.
71
<PAGE> 72
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized in New York, New York,
on March 28, 1997.
ZURICH REINSURANCE CENTRE HOLDINGS, INC.
By: /S/ KAREN O'CONNOR RUBSAM
-------------------------------
Senior Vice President, Chief Financial
Officer and Treasurer (Principal
Accounting Officer)
March 28, 1997
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/S/ STEVEN M. GLUCKSTERN
- -------------------------------------------- Chairman of the Board of Directors March 28, 1997
Steven M. Gluckstern*
/S/ KAREN O'CONNOR RUBSAM
- -------------------------------------------- Senior Vice President, Chief Financial March 28, 1997
Karen O'Connor Rubsam Officer and Treasurer (Principal
Accounting Officer)
/S/ RICHARD E. SMITH
- -------------------------------------------- Director, President and March 28, 1997
Richard E. Smith* Chief Executive Officer
/S/ DETLEF STEINER
- -------------------------------------------- Vice Chairman of the Board of March 28, 1997
Detlef Steiner* Directors
/S/ WILLIAM H. BOLINDER
- -------------------------------------------- Director March 28, 1997
William H. Bolinder*
/S/ PHILIP CALDWELL
- -------------------------------------------- Director March 28, 1997
Philip Caldwell*
</TABLE>
72
<PAGE> 73
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/S/ LAURENCE W. CHENG
- -------------------------------------------- Director March 28, 1997
Laurence W. Cheng*
/S/ JUDITH RICHARDS HOPE
- -------------------------------------------- Director March 28, 1997
Judith Richards Hope*
/S/ ROLF HUEPPI
- -------------------------------------------- Director March 28, 1997
Rolf Hueppi*
/S/ ROBERT T. MARTO
- -------------------------------------------- Director March 28, 1997
Robert T. Marto*
/S/ PETER J. NEFF
- -------------------------------------------- Director** March 28, 1997
Peter J. Neff*
/S/ MICHAEL D. PALM
- -------------------------------------------- Director March 28, 1997
Michael D. Palm*
/S/ GEORGE G.C. PARKER
- -------------------------------------------- Director March 28, 1997
George G.C. Parker*
</TABLE>
- ----------
*By: Karen O'Connor Rubsam, as attorney-in-fact and agent, pursuant to a power
of attorney, a copy of which has been filed with the Securities and
Exchange Commission as Exhibit 24 hereto.
/S/ KAREN O'CONNOR RUBSAM
- --------------------------------------------
Karen O'Connor Rubsam
(Attorney-in-fact)
** Mr. Neff was elected a Director of the Board effective June, 1996.
73
<PAGE> 74
INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ------ ----------------------
2.1 -- Agreement and Plan of Merger, dated January 11, 1995, among
Zurich Reinsurance Centre Holdings, Inc., Re Capital Corporation
and ZRC Merger-Sub Corp. (d)
2.2 -- Amendment to Agreement and Plan of Merger, dated April 24,
1995, among Zurich Reinsurance Centre Holdings, Inc., Re Capital
Corporation and ZRC Merger-Sub Corp. (e)
3.1 -- Certificate of Incorporation of Zurich Reinsurance Centre
Holdings, Inc. (a)
3.2 -- Bylaws of Zurich Reinsurance Centre Holdings, Inc. (a)
4.1 -- Subscription and Stockholders' Agreement, dated as of March 8,
1993, among Zurich Reinsurance Centre Holdings, Inc., Centre
Reinsurance, Fund American, John J. Byrne and Steven M.
Gluckstern, as amended (c)
4.2 -- Indenture, dated as of October 20, 1993, for the Senior Notes
between Zurich Reinsurance Centre Holdings, Inc. and The Bank of
New York, as trustee (b)
4.3 -- Indenture, dated as of July 27, 1993, between Re Capital
Corporation and Chemical Bank, as Trustee, relating to Re Capital
Corporation's 5 1/2% Convertible Debentures due August 1, 2000 (f)
4.4 -- First Supplemental Indenture, dated as of April 26, 1995,
between Re Capital Corporation and Chemical Bank, as Trustee (e)
4.5 -- Second Supplemental Indenture, dated as of April 27, 1995,
among Zurich Reinsurance Centre Holdings, Inc., Re Capital
Corporation and Chemical Bank, as Trustee (e)
10.1 -- Investment Management Agreements between Centre Investment
Services, Inc. and Zurich Reinsurance Centre, Inc. and Centre
Investment Services, Inc. and Zurich Reinsurance Centre Holdings,
Inc. (c)
10.2 -- Excess of Loss Reinsurance Agreement, dated February 2, 1993,
between Zurich Reinsurance Centre, Inc. and Zurich Insurance
Company (a)
10.3 -- Stop Loss Reinsurance Agreement, dated March 5, 1993, between
Zurich Reinsurance Centre, Inc. and Zurich Insurance Company (a)
74
<PAGE> 75
10.4 -- Stock Purchase Agreement, dated March 9, 1993, by and among
Zurich Reinsurance Centre Holdings, Inc., Maryland Casualty,
Zurich Holding Company of America, Inc. and Zurich Insurance
Company (U.S. Branch) (a)
10.5 -- Unsecured Subordinated Note Purchase Agreement, dated as of
December 14, 1990, between Zurich Reinsurance Company of New York
and Universal Underwriters Insurance Company and Surplus Note of
Zurich Reinsurance Company of New York, dated December 14, 1990
(a)
10.6 -- Long Term Performance Incentive Plan of Zurich Reinsurance
Centre Holdings, Inc., as amended (c)(i)
10.8 -- Restricted Stock Plan of Zurich Reinsurance Centre Holdings,
Inc., as amended and restated (g)(i)
10.9 -- Sublease between Centre Reinsurance Holdings (Delaware) Limited
and Zurich Reinsurance Centre, Inc., dated as of January 1, 1994;
Lease between the Chase Manhattan (National Association) and
Centre Reinsurance Holdings (Delaware) Limited, dated January 1,
1994 (c)
10.9(a) -- First amendment to lease, dated January 26, 1996, between the
Chase Manhattan Bank (National Association) and Zurich Centre
Resource Limited (h)
10.9(b) -- Amended and Restated Guaranty, dated as of January 26, 1996, by
Centre Reinsurance Company of New York, Zurich Reinsurance Centre,
Inc. and Zurich Centre Investments Limited (h)
10.10 -- Agreement and Plan of Merger of Zurich Reinsurance Company of
New York into Zurich Reinsurance Centre, Inc., dated as of January
2, 1993 (a)
10.11 -- Employee Stock Purchase Plan of the Company, as amended and
restated (c)(i)
10.13 -- Multiple Line Quota Share Reinsurance Contract, dated October
20, 1995, between Zurich Insurance Company U.S. Branch, American
Guarantee & Liability Insurance Company, American Zurich Insurance
Company, Zurich American Insurance Company of Illinois, Steadfast
Insurance Company and Zurich American Lloyds and Zurich
Reinsurance Centre, Inc. (h)
10.14 -- Retrocession Agreement, dated November 20, 1995, between Zurich
Reinsurance Centre, Inc. and Zurich Insurance Company (h)
10.15 -- Zurich Reinsurance Centre Holdings, Inc. 1995 Stock Option
Plan (i)
10.16 -- Zurich Reinsurance Centre Holdings, Inc. Common Stock Purchase
Plan for Non-Employee Directors, dated January 1, 1995 (i)
75
<PAGE> 76
21 -- Subsidiaries of the Registrant (h)
23 -- Consent of Ernst & Young LLP
24 -- Power of Attorney
27 -- Financial Data Schedule
- ----------
(a) Incorporated by reference to Registrant's Registration Statement on Form
S-1 (No. 33-59334).
(b) Incorporated by reference to Registrant's Registration Statement on Form
S-1 (No. 33-68986).
(c) Incorporated by reference to Registrant's 1993
Annual Report on Form 10-K (No. 1-11868).
(d) Incorporated by reference to Registrant's Current Report on Form 8-K,
dated January 12, 1995 (except list of omitted schedules, which list is
filed herewith).
(e) Incorporated by reference to Registrant's Current Report on Form 8-K,
dated May 9, 1995 (except list of omitted schedules, which list is filed
herewith).
(f) Incorporated by reference from Amendment No. 2 to Re Capital Corporation's
Form S-2 Registration Statement (Registration No. 33-63590), filed with
the Commission on July 8, 1993.
(g) Incorporated by reference to Registrant's 1994 Annual Report on Form 10-K
(No. 1-11868).
(h) Incorporated by reference to Registrant's 1995 Annual Report on Form 10-K
(No. 1 - 11868).
(i) A management contract or compensatory plan or arrangement required to be
filed as an exhibit to this Report pursuant to Item 14 (c).
76
<PAGE> 77
AGREEMENT TO FURNISH OMITTED SCHEDULES UPON REQUEST AND LIST OF OMITTED
SCHEDULES
AGREEMENT: Agreement and Plan of Merger, dated January 11, 1995, among Zurich
Reinsurance Centre Holdings, Inc. (the "Registrant"), ZRC Merger-Sub Corp.
("Merger Sub") and Re Capital Corporation ("Re Capital").*
The Registrant hereby agrees to furnish supplementally a copy of any omitted
schedule to the Commission upon request.
LIST OF OMITTED SCHEDULES:
Schedule 3.6 - Stock Options of Re Capital
Schedule 3.7 - Warrants of Re Capital
Schedule 4.2 - Approvals
Schedule 5.1 - Certificate of Incorporation and By-Laws of Re Capital
Schedule 5.3 - Subsidiaries of Re Capital
Schedule 5.4 - Default and/or Rights of Termination, Cancellation or
Acceleration (Re Capital)
Schedule 5.6 - Absence of Certain Changes or Events (Re Capital)
Schedule 5.7 - Litigation (Re Capital)
Schedule 5.9 - Employee Benefit Plans of Re Capital
Schedule 5.10 - ERISA (Re Capital)
Schedule 5.15 - Compliance with Applicable Laws (Re Capital)
Schedule 5.16 - Taxes (Re Capital)
Schedule 5.18 - List of Insurance Licenses/Certificates of Authority of
Re Capital Reinsurance Corporation to Conduct its
Reinsurance Business in the Ordinary Course in the
Jurisdiction Indicated
Schedule 5.19 - Reinsurance; Retrocession (Re Capital)
Schedule 5.20 - Re Capital Material Adverse Effects
Schedule 6.1 - Certificate of Incorporation and By-Laws
of Merger Sub
Schedule 7.1 - Certain Contractual Obligations Affecting Conduct
of Business Pending the Merger (Re Capital)
Schedule 7.3 - Notice of Breach (Re Capital)
- ----------
* Incorporated by reference to the Registrant's Current Report on Form
8-K, dated January 12, 1995.
77
<PAGE> 78
SCHEDULE I
ZURICH REINSURANCE CENTRE HOLDINGS, INC. AND SUBSIDIARIES
SUMMARY OF INVESTMENTS
OTHER THAN INVESTMENTS IN RELATED PARTIES
AT DECEMBER 31, 1996
(Dollars in thousands)
<TABLE>
<CAPTION>
AMOUNT
SHOWN
IN THE
AMORTIZED MARKET BALANCE
TYPE OF INVESTMENT COST VALUE SHEET
---------- ---------- ----------
<S> <C> <C> <C>
Fixed maturities:
U.S. government and government
agencies and authorities .......................... $ 530,654 $ 534,176 $ 534,176
Mortgage-backed securities .......................... 308,315 311,261 311,261
Asset-backed securities ............................. 64,720 65,740 65,740
Obligations of states and political subdivisions ... 108,588 110,528 110,528
Public utilities .................................... 5,114 5,144 5,144
Foreign ............................................. 15,256 15,484 15,484
All other corporate ................................. 155,697 157,790 157,790
---------- ---------- ----------
Total fixed maturities ................. 1,188,344 1,200,123 1,200,123
Common stock:
Public utilities .................................... 4,097 4,232 4,232
Banks, trusts, and insurance companies .............. 11,186 18,239 18,239
Industrial, miscellaneous, and all other .......... 112,711 144,023 144,023
---------- ---------- ----------
Total common stock ..................... 127,994 166,494 166,494
Nonredeemable preferred stocks ........................... 1,057 968 968
---------- ---------- ----------
Total equity securities ................ 129,051 167,462 167,462
Short-term investments ................................... 120,720 120,720 120,720
---------- ---------- ----------
Total investments ...................... $1,438,115 $1,488,305 $1,488,305
========== ========== ==========
</TABLE>
S-1
<PAGE> 79
SCHEDULE II
ZURICH REINSURANCE CENTRE HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
BALANCE SHEETS
(Dollars in thousands)
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
ASSETS 1996 1995
--------- ---------
<S> <C> <C>
Investment in subsidiaries ............................................... $ 802,480 $ 755,385
Fixed maturities available-for-sale (amortized cost: 1996 $72,476;
1995 $96,443) ........................................................... 73,504 99,288
Equity securities available-for-sale (cost: 1996 $3,899; 1995 $0) ........ 3,853 --
Investment in affiliate (cost: 1996 $8,204; 1995 $3,973) ................. 8,204 3,973
Short-term-investments, at cost, which approximate market ................ 1,675 --
Cash and cash equivalents ................................................ 15,542 19,716
Other assets ............................................................. 20,825 20,723
--------- ---------
Total assets ........................................................ $ 926,083 $ 899,085
========= =========
LIABILITIES
7 1/8% Senior Notes due 2023 ............................................. $ 198,413 $ 198,394
Other liabilities ........................................................ 15,801 19,121
--------- ---------
Total liabilities ................................................... 214,214 217,515
--------- ---------
STOCKHOLDERS' EQUITY
Common stock ($.01 par value; 50,000,000 shares
authorized; 26,191,953 and 26,197,541 shares issued and outstanding at
1996 and 1995, respectively) ........................................... 262 262
Paid-in capital .......................................................... 624,466 624,068
Unrealized appreciation of investments (net of
deferred taxes of $17,627 and $15,776 at 1996 and 1995, respectively) .. 32,563 29,144
Retained earnings ........................................................ 54,740 28,096
Treasury stock at cost (5,588 and 0 shares at 1996 and 1995,
respectively) .......................................................... (162) --
--------- ---------
Total stockholders' equity .......................................... 711,869 681,570
--------- ---------
Total liabilities and stockholders' equity .......................... $ 926,083 $ 899,085
========= =========
</TABLE>
The condensed financial statements should be read in conjunction with the
consolidated financial statements and the accompanying notes thereto.
S-2
<PAGE> 80
SCHEDULE II
ZURICH REINSURANCE CENTRE HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
STATEMENTS OF OPERATIONS
(Dollars in thousands)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
REVENUES
Net investment income ........................................ $ 6,368 $ 9,576 $ 9,058
Realized capital gains (losses) .............................. (375) 2,452 (8,614)
Other income ................................................. 3,279 652 1,959
-------- -------- --------
Total revenues ............................................ 9,272 12,680 2,403
-------- -------- --------
EXPENSES
Interest and amortization .................................... 15,519 15,882 14,288
Other operating costs and expenses ........................... 9,340 8,580 6,266
-------- -------- --------
Total expenses ............................................ 24,859 24,462 20,554
-------- -------- --------
Loss before income taxes and equity
in earnings (loss) of subsidiaries ...................... (15,587) (11,782) (18,151)
Federal income tax benefit .............................. (4,155) (7,416) (7,094)
-------- -------- --------
Net loss before equity in earnings (loss) of subsidiaries (11,432) (4,366) (11,057)
Equity in earnings (loss) of subsidiaries .................... 40,695 47,804 (20,135)
-------- -------- --------
NET INCOME (LOSS) ....................................... $ 29,263 $ 43,438 $(31,192)
======== ======== ========
</TABLE>
The condensed financial statements should be read in conjunction with the
consolidated financial statements and the accompanying notes thereto.
S-3
<PAGE> 81
SCHEDULE II
ZURICH REINSURANCE CENTRE HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
STATEMENTS OF CASH FLOWS
(Dollars in thousands)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
CASH FLOWS USED IN OPERATING ACTIVITIES:
Net income (loss) ...................................................... $ 29,263 $ 43,438 $ (31,192)
Adjustments to reconcile net income (loss) to net cash used in operating
activities:
Equity in (earnings) loss of subsidiaries ....................... (40,695) (47,804) 20,135
Other adjustments to net income (loss) .......................... 5,057 (3,548) 6,287
--------- --------- ---------
Net cash used in operating activities .................................. (6,375) (7,914) (4,770)
--------- --------- ---------
CASH FLOWS PROVIDED BY (USED IN) INVESTING ACTIVITIES:
Purchases of fixed maturities ....................................... (181,348) (266,958) (220,041)
Sales of fixed maturities ........................................... 203,519 302,447 226,500
Purchases of common stock ........................................... (7,362) (1,732) (2,241)
Sale of common stock ................................................ 1,565 -- --
Net purchase of short-term investments .............................. (1,675) -- --
Purchase of Re Capital, net of cash acquired ........................ -- 17,818 --
Dividend payments from ZRC .......................................... -- 28,000 --
Cash capital contributions to ZRC (1) ............................... -- -- (10,000)
Cost of additions to property and equipment ......................... (2,782) (289) (3,408)
--------- --------- ---------
Net cash provided by (used in) investing activities .................... 11,917 79,286 (9,190)
--------- --------- ---------
CASH FLOWS USED IN FINANCING ACTIVITIES:
Payments of cash dividends to stockholders .......................... (2,619) -- --
Purchase of treasury stock .......................................... (5,891) -- --
Conversion of Re Capital Debentures ................................. (1,206) (71,929) --
--------- --------- ---------
Net cash used in financing activities .................................. (9,716) (71,929) --
--------- --------- ---------
CHANGE IN CASH AND CASH EQUIVALENTS .................................... (4,174) (557) (13,960)
Cash and cash equivalents, beginning of period ......................... 19,716 20,273 34,233
--------- --------- ---------
Cash and cash equivalents, end of period ............................... $ 15,542 $ 19,716 $ 20,273
========= ========= =========
</TABLE>
(1) During 1995, Zurich Reinsurance Centre Holdings, Inc. contributed ZC
Insurance Company carried at $8,102,000 to ZRC. During 1994, Zurich Reinsurance
Centre Holdings, Inc. contributed an investment in an affiliate carried at
$25,108,000 to ZRC in addition to a cash capital contribution of $10,000,000.
The condensed financial statements should be read in conjunction with the
consolidated financial statements and the accompanying notes thereto.
S-4
<PAGE> 82
SCHEDULE IV
ZURICH REINSURANCE CENTRE HOLDINGS, INC. AND SUBSIDIARIES
REINSURANCE
(Dollars in thousands)
<TABLE>
<CAPTION>
Percentage
Ceded Assumed of Amount
Gross to Other From Other Net Assumed
Amount Companies Companies Amount to Net
------ --------- --------- ------ ------
<S> <C> <C> <C> <C> <C>
Property and Casualty Premiums Written:
December 31, 1996 ................... $ 1,124 $ 8,139 $736,321 $729,306 101.0%
December 31, 1995 ................... $ -- $ 11,645 $613,939 $602,294 101.9%
December 31, 1994 ................... $ -- $ 3,522 $313,149 $309,627 101.1%
</TABLE>
S-5
<PAGE> 1
12/4/95
ZURICH REINSURANCE CENTRE HOLDINGS, INC.
1995 STOCK OPTION PLAN
1. General. The Zurich Reinsurance Centre Holdings, Inc. 1995 Stock
Option Plan (the "Plan") has been established in order to promote the interests
of Zurich Reinsurance Centre Holdings, Inc. (the "Company") and the Company's
investors by enabling the Company and its subsidiaries to attract and retain key
employees and to align the interests of key employees with those of the
Company's shareholders. These aims will be effected through the granting of
options ("Options") to purchase shares of the Company's common stock, par value
$0.01 per share (the "Common Stock"). The exercisability of each option issued
under the Plan shall be contingent upon the achievement by the Company of
financial performance thresholds. Subject to the aggregate limitation set forth
in Section 3(a) hereof, under the Plan the Company may grant "incentive stock
options" ("ISOs") within the meaning of Section 422 of the Internal Revenue Code
of 1986, as amended (the "Code") or Options which are not intended to be ISOs
("Non-Qualified Options").
2. Administration of the Plan. The Plan shall be administered by a
committee (the "Committee") consisting of at least two persons, appointed by the
Board of Directors of the Company (the "Board of Directors") from among its
members, each of whom shall be a "disinterested person" within the meaning of
Rule 16b-3 under the Securities Exchange Act of 1934 (the "Exchange Act") and an
"outside director" within the meaning of Section 162(m)(4)(c)(i) of the Code and
regulations thereunder. Within the limits of the express provisions of the Plan,
the Committee shall have the authority, in its discretion, to take the following
actions under the Plan:
(i) to determine the individuals (each, an "Optionee") to whom,
and the time or times at which, Options shall be granted, the
number of shares of Common Stock to be subject to each Option
and whether such Options shall be ISOs or Non-Qualified
Options;
(ii) to determine the terms and provisions of the respective stock
option agreements (each, an "Option Agreement") granting
Options, including the date or dates upon which Options shall
become exercisable, which terms need not be identical,
including, without limitation, the Exercisability Conditions
(as hereinafter defined) therefor;
(iii) as respects any Options granted hereunder, to determine the
extent to which the Exercisability Conditions shall have been
satisfied;
(iv) to accelerate the vesting, exercisability or both of any
outstanding Options;
(v) to interpret the Plan and to prescribe, amend and rescind
rules and regulations relating thereto; and
(viii) to make all other determinations and take all other actions
necessary or advisable for the administration of the Plan, to
resolve controversies and disputes regarding the
interpretation of the Plan and to correct any defect, to cure
any mistake or omission or reconcile any inconsistency in the
Plan as may be necessary or appropriate to carry out the
purposes and intents of the Plan.
<PAGE> 2
In making any such determinations, the Committee may take into account the
nature of the services rendered by such individuals and such other factors as
the Committee, in its discretion, shall deem relevant. All decisions, actions or
interpretations of the Committee shall be final, conclusive and binding upon all
parties, including, without limitation, all Optionees and any beneficiaries or
other permitted assignees, transferees or other successors thereto or thereof.
3. Shares Subject to the Plan.
(a) The total number of shares of Common Stock for which Options may be
granted under the Plan shall not exceed 1,844,000 provided that such balance may
be adjusted in accordance with the provisions of Sections 3(c) and 7 hereof.
(b) The Company shall at all times while the Plan is in force reserve
such number of shares of Common Stock as will be sufficient to satisfy the
requirements of outstanding Options. The shares of Common Stock to be issued
upon exercise of Options shall be authorized and unissued or reacquired shares
of Common Stock.
(c) The shares of Common Stock relating to the unexercised portion of
any expired, terminated or canceled Option shall thereafter be available for the
grant of new Options under the Plan.
4. Eligibility.
(a) Options may be granted under the Plan only to employees of the
Company or any "subsidiary corporation" of the Company, within the meaning of
section 424(f) of the Code (a "Subsidiary"). For purposes of this Plan, the term
"Company" shall be deemed to include the Company and its Subsidiaries.
(b) Nothing contained in the Plan shall be construed to limit the right
of the Company to grant stock options otherwise than under the Plan.
5. Terms of Options. The terms of each Option granted under the Plan
shall be determined by the Committee consistent with the provisions of the Plan,
including the following:
(a) Price. The purchase price of the shares of Common Stock subject to
each Option shall be fixed by the Committee, in its discretion, at the time such
Option is granted; provided, however, that, as respects any officer of the
Company having annual compensation subject to Section 162(m) of the Code and as
to any ISO issued hereunder, in no event shall such purchase price be less than
the Fair Market Value (as hereinafter defined) of the shares of Common Stock as
of the date such Option or ISO is granted.
(b) Vesting and Exercisability. Each Option granted under the Plan
shall be subject to vesting and exercisability conditions (together, the
"Exercisability Conditions") which, from time to time shall be specified by the
Committee. Exercisability Conditions as respects the initial grants of Options
hereunder (the "Initial Exercisability Conditions") are specified in clause (i)
of this Section 5(b) and, absent specific action by the Committee pursuant to
clause (ii) of this Section 5(b), shall apply to each and every grant of Options
hereunder.
(i) Initial Exercisability Conditions. Each grant of Options made
hereunder shall be designated as a "Type A" Option with
respect to 50% of the shares subject thereto and as a "Type B"
Option with respect to the remaining 50% of the shares subject
thereto, and shall be subject to the respective vesting and
exercisability conditions for Type A Options and Type B
Options set forth in this Section 5(b).
<PAGE> 3
(A) Type A Options. Except as otherwise may be specified by the
Committee in writing, each Type A Option granted under the Plan shall vest in
full on the fourth anniversary of the date of the grant of such Option (the
"Grant Date") provided that the Optionee has been continuously employed by the
Company from the Grant Date until the date on which such Option is scheduled to
vest. Each Type A Option, to the extent vested, shall become exercisable only if
the Share Appreciation Amount (as hereinafter defined) for the period from the
Grant Date until the fourth anniversary of such date (the "Initial
Exercisability Date) exceeds the Share Appreciation Hurdle (as hereinafter
defined) determined with respect to the same period, or, in the event such
condition is not satisfied with respect to the Initial Exercisability Date, on
any subsequent annual anniversary of the Initial Exercisability Date (each, a
"Subsequent Exercisability Date") in respect of which the Share Appreciation
Amount for the period from the Grant Date until the such Subsequent
Exercisability Date shall exceed the Share Appreciation Hurdle determined with
respect to the same period and provided that the Optionee therefor shall remain
a full-time employee of the Company on and as of such Subsequent Exercisability
Date. Vested Type A Options which do not become exercisable in accordance with
the foregoing shall be forfeited. Vested Type A Options which become exercisable
in accordance with the foregoing shall not become non-exercisable in the event
that the conditions set forth above are not met with respect to a date
subsequent to the Initial Exercisability Date or Subsequent Exercisability Date,
as the case may be.
For purposes of this Section 5(b)(i):
(1) "Share Appreciation Amount" means, with respect to any
period for which such amount is to be determined, the sum of (y) the
appreciation in the Fair Market Value of a share of Common Stock during
such period plus (z) the Distribution Adjustment (as hereinafter
defined) for such period.
(2) "Share Appreciation Hurdle" means, with respect to any
period for which such amount is to be determined, the amount by which
the Fair Market Value of a share of Common Stock would have appreciated
during such period at a rate of return (compounded annually) equal to
150% of the average yield on U.S. Treasury obligations having a term to
maturity of five years as determined annually in arrears by the
Committee (to the extent practicable) as a five year rolling average of
post-grant yields.
(3) "Distribution Adjustment" means, with respect to any
period for which such amount is to be determined, the sum of (x) the
cumulative aggregate per share amount of all cash dividends or
distributions made by or on behalf of the Company in respect of a share
of Common Stock during such period (or, as to any such share held as a
treasury share by the Company, which would have been so distributed by
the Company had such share been held by a person other than the
Company) plus (y) the cumulative aggregate per share amounts of any
other net payments or distributions made to all or any holders of the
Common Stock which are determined by the Committee to constitute in
substance payments or distributions made by or on behalf of the Company
in respect of the Common Stock or any other equity security of the
Company (other than any payments or distributions for which an
adjustment has been made pursuant to Section 7 hereof) during such
period plus (z) an assumed investment return in respect of any amounts
included pursuant to clause (x) or clause (y) above, which assumed
return shall be determined over the period from the date of such
dividend, distribution or other payment through the date of
determination of the Share Appreciation Amount and shall be based upon
the Share Appreciation Hurdle.
<PAGE> 4
(B) Type B Options. Except as otherwise may be specified by
the Committee in writing, each Type B Option granted under the Plan
shall vest in full on the fourth anniversary of the Grant Date therefor
provided that the Optionee has been continuously employed by the
Company from the Grant Date until the date on which such Option is
scheduled to vest. Each Type B Option, to the extent vested, shall
become exercisable only if the Intrinsic Value Appreciation Amount (as
hereinafter defined) for the period from the Grant Date until the
Initial Exercisability Date exceeds the Intrinsic Value Appreciation
Hurdle (as hereinafter defined) determined with respect to the same
period, or, in the event such condition is not satisfied with respect
to the Initial Exercisability Date, on any Subsequent Exercisability
Date in respect of which the Intrinsic Value Appreciation Amount for
the period from the Grant Date until the such Subsequent Exercisability
Date shall exceed the Intrinsic Value Appreciation Hurdle determined
with respect to the same period and provided that the Optionee therefor
shall remain a full-time employee of the Company on such Subsequent
Exercisability Date. Vested Type B Options which do not become
exercisable in accordance with the foregoing shall be forfeited. Vested
Type B Options which become exercisable in accordance with the
foregoing shall not become non-exercisable in the event that the
conditions set forth above are not met with respect to a date
subsequent to the Initial Exercisability Date or Subsequent
Exercisability Date, as the case may be.
For purposes of this Section 5(b)(i):
(1) "Intrinsic Value" means the intrinsic value of a share of
Common Stock as determined by the Committee from time to time as the
Company's consolidated tangible book value per share of Common Stock
determined in accordance with generally accepted accounting principles
("GAAP") adjusted to reflect (i) the then-current estimated fair values
of each of the Company's material assets, liabilities and obligations,
including, without limitation, the discounted values of the Company's
reserves for unpaid losses and loss adjustment expenses; (ii) estimates
of expected profits in business which has been bound but not yet
reflected in the Company's GAAP financial statements and (iii) such
other adjustments as shall be determined by the Committee as then
necessary or appropriate to more fully and timely recognize the
economic value of the Company's business. Consistent with the foregoing
and to the greatest extent practicable, determinations of Intrinsic
Value shall be made based on the expected payout of the Company's
then-existing loss and loss adjustment expense reserves established on
a basis consistent with its regular actuarial duration analyses and
otherwise on a basis generally consistent with and based upon the
assumptions and using the general methodologies then-employed by the
Company in determining such balance as part of its regular managerial
reporting.
(2) "Intrinsic Value Appreciation Amount" means, with respect
to any period for which such amount is to be calculated, the sum of
(y), the appreciation, if any, in the Intrinsic Value determined with
respect to such period and (z) the Distribution Adjustment, if any, as
respects such period.
(3) "Intrinsic Value Appreciation Hurdle" means, with respect
to any period for which such Hurdle is to be calculated, the amount by
which the Intrinsic Value would have appreciated during such period at
a rate of return (compounded annually) equal to 150% of the average
yield on U.S. Treasury obligations having a term to maturity of five
years as determined annually in arrears by the Committee (to the extent
practicable) as a five year rolling average of post-grant yields.
<PAGE> 5
(ii) Other Exercisability Conditions. To the extent determined by
the Committee to more fully align the interests of the
Company's investors with the interests of its managers or
otherwise as may be required in the best interests of the
Company, the Committee may from time to time adopt, as
respects grants of Options made after any such determination,
Exercisability Conditions different the Initial Exercisability
Conditions.
(c) Change of Control. Upon the occurrence of any Control Termination
(as hereinafter defined), all then-outstanding Options held by the Optionee
subject to such termination shall vest immediately and without the requirement
of any further action by any person and shall then become exercisable in full.
For purposes of this Section 5(c), the term: (i) "Control Termination" shall
mean any Subject Termination (as hereinafter defined) which occurs in
conjunction with or within two years following any Change of Control (as
hereinafter defined); (ii) Subject Termination shall mean a termination of
employment of the subject Optionee other than by reason of the death or
permanent disability of the Optionee (y) effected by the Company other than for
Cause (as such term is defined in clause (d) of this Section 5 or,
alternatively, as otherwise provided in an employment agreement with, or letter
of employment issued to, such Optionee or otherwise as provided in such
Optionee's Option Agreement) or (z) effected by the Optionee with Good Reason
(as hereinafter defined); (iii) "Change of Control" shall mean any transaction,
circumstance or occurrence following which Zurich Insurance Company ("Zurich"),
taken together with all of Zurich's majority-owned subsidiaries, shall not,
directly or indirectly, own more than 25% of the issued and outstanding capital
stock of the Company and (iv) "Good Reason" shall, as respects each Optionee,
(A) have the meaning ascribed to such terms or a parallel term in an employment
agreement with, or letter of employment issued to, the subject Optionee or
otherwise as provided in such Optionee's Option Agreement and (B) otherwise
mean, without the Optionee's prior consent, (1) a material reduction or adverse
alteration in the duties, authorities or responsibilities of Optionee's
position; (2) a reduction in Employee's annual base salary, bonus or other
compensation arrangements provided by the Company; (3) a relocation of the
Optionee's principal place of employment in excess of thirty-five miles; (4) a
material reduction in or the discontinuance of any employee benefit plan (as
defined in Section 3(3) of the Employee Retirement Income Security Act of 1974)
in which the Optionee participates and which represents a material portion of
Optionee's total compensation or retirement benefits; or (5) a material
reduction in or the discontinuance of any other material perquisites provided by
the Company to the Optionee.
(d) Expiration. The term of each Option shall be fixed by the
Committee, in its discretion, at the time such Option is granted. Subject to
exception by the Committee relating to unusual circumstances, the term of each
Option granted hereunder shall be ten (10) years provided, however, that no
Option shall be exercisable after the expiration of ten (10) years from the
relevant Grant Date and each Option shall be subject to earlier termination upon
termination of an Optionee's employment and in accordance with this Section
5(d). Unless otherwise determined by the Committee as of the date an Option is
granted and subject to clause (c) of this Section 5:
(i) Termination for Cause. If an Optionee's employment with the
Company is terminated by the Company for Cause, the Optionee
shall forfeit all outstanding Options, whether or not such
Options were vested or exercisable on the date of such
termination.
(ii) Voluntary Termination; Termination without Cause. If an
Optionee voluntarily terminates employment with the Company,
or if the Optionee's employment with the Company is terminated
by the Company without Cause, the Optionee shall forfeit: (y)
all outstanding Options which have not vested as of the date
of such termination and (ii) all outstanding vested Options
which are not exercisable as the date upon which such
employment is terminated. Such Optionee's outstanding vested
and exercisable Options shall remain outstanding until the
date which is 90 days after the date of such termination.
<PAGE> 6
(iii) Other Terminations. Following any termination of employment of
an Optionee by reason of death, disability or retirement after
age 62 with the Company's consent, the Optionee shall forfeit
all outstanding Options which have not vested as of the date
of such termination. Such Optionee's outstanding vested
Options shall remain outstanding until the earlier of (A) the
expiration of such Options and (B) one year after the date of
such termination but may be exercised only if the
exercisability conditions set forth in Section 5(b) hereof
have been satisfied or waived.
(iv) Special Cases. Except as respects any ISO, in the event that
the Committee determines that the provisions of clause (ii) of
this Section 5(d) should not apply, if an Optionee agrees at
the request of the Company to terminate employment with the
Company and accept employment with any Affiliate (as
hereinafter defined) thereof, the Committee in its discretion
may continue in effect all or any portion of the Options
previously granted to such Optionee on terms determined by the
Committee to be in the best interests of the Company. For
purposes of this Plan, the term Affiliate shall mean, with
respect to any Person, any other Person directly or indirectly
controlling, controlled by, or under direct or indirect common
control with, such Person. A Person shall be deemed to control
another Person if such Person possesses, directly or
indirectly, the power to direct or cause the direction of the
management and policies of such corporation, whether through
the ownership of voting securities, by contract or otherwise.
For purposes of this Plan, the term "Person" shall mean and
include an individual, a partnership, a joint venture, a
corporation, a trust, an unincorporated organization and a
government or any department or agency thereof.
(v) Definition of Cause. For purposes of this Section 5(c), the
term "Cause" means, unless otherwise provided in an employment
agreement with, or letter of employment issued to, any
Optionee or otherwise as provided in an Optionee's Option
Agreement: (i) repeated and material failure to render
services to the Company in accordance with such Optionee's
obligations under any employment agreement to which such
Optionee is a party with the Company or otherwise under
applicable law; (ii) repeated or gross neglect or repeated or
gross misconduct inconsistent with the Optionee's obligations
to the Company under applicable law; (iii) the commission by
the Optionee of an act of fraud or embezzlement against the
Company, or any other act or omission to act intended to
result in the Optionee's personal enrichment (or the
enrichment of such Optionee's friends, family, associates or
affiliates) at the expense, directly or indirectly, of the
Company; or (iv) the Optionee's commission of a felony or
other serious crime involving moral turpitude.
(d) Method of Exercise. Options shall be exercised by the delivery to
the Company at its principal office or at such other address as may be
established by the Committee (Attention: Corporate Secretary) of written notice
(an "Exercise Notice") of the number of shares of Common Stock with respect to
which the Option is being exercised accompanied by payment in full of the
purchase price of such shares. Unless otherwise determined by the Committee at
the time of grant, payment for such shares may be made (i) in cash, (ii) by
certified check or bank cashier's check payable to the order of the Company in
the amount of such purchase price, (iii) by delivery to the Company of shares of
Common Stock having a Fair Market Value equal to such purchase price, (iv) at
the discretion of the Committee, by simultaneously exercising Options and
selling the shares of Common Stock acquired thereby, pursuant to a brokerage or
similar arrangement approved by the Committee, and using the proceeds as payment
of such purchase price, or (v) by any combination of the methods of payment
described in (i) through (iv) above.
<PAGE> 7
(e) No Shareholder Rights. An Optionee shall not have any of the rights
of a holder of the Common Stock with respect to the shares of Common Stock
subject to an Option until such shares are issued to such Optionee upon the
exercise of such Option.
(f) Transferability. Options are not assignable or transferable by
Optionees other than by will or the laws of descent and distribution. No
assignment or transfer of any Option or of any interest therein or of any of the
rights represented thereby, whether voluntary or involuntary, by operation of
law or otherwise (other than by will or the laws of descent and distribution)
shall vest in the assignee or transferee any interest or right whatsoever, but
immediately upon such assignment or transfer, such Option shall terminate and
become of no further effect.
(g) Fair Market Value. For purposes of the Plan, the "Fair Market
Value" of a share of Common Stock on any date shall be the average, as
reasonably determined by the Committee, of the closing prices of the Common
Stock's sales on the principal domestic securities exchange on which the Common
Stock may be at the time listed, or, if there have been no sales on any such
exchange on any day, the average of the highest bid and lowest asked prices on
all such exchanges at the end of such day, or, if on any day the Common Stock is
not so listed, the average of the representative bid and asked prices quoted in
the NASDAQ System as of the close of trading in New York City on such day, or,
if on any day the Common Stock is not quoted in the NASDAQ System, the average
of the high and low bid and asked prices on such day in the domestic
over-the-counter market as reported by the National Quotation Bureau,
Incorporated, or any similar successor organization, in each such case averaged
over a period of ten (10) consecutive business days consisting of the business
day immediately preceding the day as of which "Fair Market Value" is being
determined and the nine (9) consecutive business days prior to such day;
provided, however, that if the Common Stock is listed on any domestic securities
exchange or quoted in the NASDAQ System, the term "business day" or "business
days" as used in this sentence means a day or days, as applicable, on which such
exchange or the NASDAQ System is open for trading or quotation, as the case may
be. If at any time the Common Stock is not listed on any domestic securities
exchange or quoted in the NASDAQ System or the domestic securities exchange or
quoted in the NASDAQ System or the domestic over-the-counter market, the "Fair
Market Value" will be the fair value thereof determined by the Committee.
(h) Maximum Grants. In no event shall any single Optionee be granted
under the Plan Options covering more than 150,000 shares of Common Stock during
any calendar year that the Plan is in effect.
6. Special Provisions Applicable to ISOs. The following special
provisions shall be applicable to ISOs granted under the Plan.
(a) No ISOs shall be granted under the Plan after ten (10) years from
the earlier of (i) the date the Plan is adopted, or (ii) the date the Plan is
approved by the Company's shareholders as provided in Section 10 hereof.
(b) ISOs may not be granted to a person who owns stock possessing more
than 10% of the total combined voting power of all classes of stock of the
Company, any Subsidiary, or any "parent corporation" (a "Parent") of the Company
within the meaning of Section 424(e) of the Code.
(c) If the aggregate Fair Market Value of the Common Stock with respect
to which ISOs are exercisable for the first time by any Optionee during a
calendar year (under all plans of the Company and its Parents and Subsidiaries)
exceeds $100,000, such ISOs shall be treated, to the extent of such excess, as
Non-Qualified Options. For purposes of the preceding sentence, the Fair Market
Value of the Common Stock shall be determined at the time the ISOs covering such
shares were granted.
<PAGE> 8
7. Special Adjustments. In the event of any additional issuance of
Common Stock or options or rights to acquire shares of Common Stock, redemption
or reacquisition of shares of Common Stock or instruments evidencing the right
to acquire same whether by conversion or otherwise, reorganization, merger,
consolidation, recapitalization, reclassification, stock split, combination or
exchange of shares and the like involving the Company, or dividends payable in
shares of Common Stock, an appropriate adjustment shall be made by the Committee
to one or more of the following: (i) the aggregate number of shares of Common
Stock available under the Plan, (ii) the maximum number of shares which may be
granted to any single Optionee, (iii) the number of shares of Common Stock and
price per share of Common Stock subject to outstanding Options, and (iv) one or
more of the Share Appreciation Amount, Share Appreciation Hurdle, Distribution
Adjustment, Intrinsic Value Appreciation Amount, Intrinsic Value Appreciation
Hurdle as respects all or fewer than all of the options issued hereunder; which
adjustment(s) shall be determined by the Committee so as to preserve to the
greatest extent practicable the economic value of the Options issued or issuable
hereunder while advancing the essential intent and principles hereof. If the
Company shall be sold, reorganized, consolidated, taken private, or merged with
another corporation, or if all or substantially all of the assets of the Company
shall be sold or exchanged (a "Corporate Event"), an Optionee shall at the time
of issuance of the stock under such Corporate Event be entitled to receive upon
the exercise of his Option the same number and kind of shares of stock or the
same amount of property, cash or securities as he would have been entitled to
receive upon the occurrence of any such Corporate Event as if he had been,
immediately prior to such event, the holder of the number of shares of Common
Stock covered by his Option; provided, however, that the Committee may, in its
discretion, (i) accelerate the exercisability of outstanding Options, and
shorten the term thereof, to any date prior to the occurrence of such Corporate
Event, or (ii) provide for the cancellation of outstanding Options in exchange
for cash equal to the aggregate in-the-money value of such Options at the time
of such Corporate Event as determined in its discretion. In the event that the
outstanding shares of the Common Stock of the Company are changed into or
exchanged for a different number or kind of shares or other securities of the
Company or of another corporation by reason of any corporate transaction not
described above or any event shall occur as to which the foregoing is not
strictly applicable but the failure to make any adjustment would not fairly
protect the economic rights of the Optionees hereunder in accordance with the
essential intent and principles hereof, then the Committee shall make such
equitable adjustments in the terms and provisions governing outstanding Options
and in the number of Options available for issuance under the Plan, as it deems
appropriate in order to preserve to the greatest extent practicable the economic
value of the Plan and such outstanding Options while advancing the essential
intent and principles hereof. Any adjustment under this Section 7 in the number
of shares of Common Stock subject to Options shall apply proportionately to only
the unexercised portion of any Option granted hereunder. If fractions of a share
would result from any such adjustment, the adjustment shall be revised to the
next lower whole number of shares.
8. Further Conditions of Exercise.
(a) Unless prior to the exercise of an Option the shares of Common
Stock issuable upon such exercise are the subject of a registration statement
filed with the Securities and Exchange Commission pursuant to the Securities Act
of 1933, as amended (the "Securities Act"), and there is then in effect a
prospectus filed as part of such registration statement meeting the requirements
of Section 10(a)(3) of the Securities Act, the notice of exercise with respect
to such Option shall be accompanied by a representation or agreement of the
Optionee to the Company to the effect that such shares are being acquired for
investment only and not with a view to the resale or distribution thereof, or
such other documentation as may be required by the Company, unless, in the
opinion of counsel to the Company, such representation, agreement or
documentation is not necessary to comply with the Securities Act.
<PAGE> 9
(b) Anything in subparagraph (a) of this Section 8 to the contrary
notwithstanding, the Company shall not be obligated to issue or sell any shares
of Common Stock until they have been listed on each securities exchange on which
the shares of Common Stock may then be listed and until and unless, in the
opinion of counsel to the Company, the Company may issue such shares pursuant to
a qualification or an effective registration statement, or an exemption from
registration, under such state and federal laws, rules or regulations as such
counsel may deem applicable. The Company shall use reasonable efforts to effect
such listing, qualification and registration, as the case may be.
9. Termination, Modification and Amendment.
(a) The Plan (but not Options previously granted under the Plan) shall
terminate ten (10) years from the date of its adoption by the Board of Directors
and no Option shall be granted after termination of the Plan.
(b) The Plan may at any time be terminated or, from time to time, be
modified or amended by the Board of Directors; provided, however, that the Board
of Directors shall not, without approval by the affirmative vote of the holders
of a majority of the shares of the capital stock of the Company present in
person or by proxy and entitled to vote at a meeting duly held in accordance
with Delaware law, (i) increase (except as provided by Section 7) the maximum
number of shares of Common Stock as to which Options may be granted under the
Plan or (ii) reduce the minimum purchase price at which Options may be granted
under the Plan.
(c) No termination, modification or amendment of the Plan may adversely
affect the rights conferred by the grant of any Option without the prior consent
of the affected Optionee.
10. Effectiveness of the Plan. The Plan shall become effective upon
adoption by the Board of Directors of the Company, subject to the affirmative
vote of the holders of a majority of the shares of Common Stock outstanding
present in person or by proxy and entitled to vote at a meeting duly held in
accordance with the provisions of applicable law. Options may be granted under
the Plan prior to receipt of such approval, provided that, in the event such
approval is not obtained, the Plan and all Options granted under the Plan shall
be null and void and of no force and effect.
11. Not a Contract of Employment. No employee or other person shall
have any claim or right to be granted any Options under the Plan. Nothing
contained in the Plan or in any stock option agreement executed pursuant hereto
confers or shall be deemed to confer upon any Optionee any right to remain in
the employ of the Company or any Subsidiary.
12. Governing Law. The Plan shall be governed by the laws of the state
of Delaware without reference to principles of conflict of laws thereof.
13. Withholding. As a condition to the exercise of any Option, the
Committee may require that an Optionee satisfy, through withholding from other
compensation, the disposition of shares acquired by exercise of Options or
otherwise, the full amount of all federal, state and local income and other
taxes required to be withheld in connection with such exercise.
<PAGE> 1
ZURICH REINSURANCE CENTRE HOLDINGS, INC.
COMMON STOCK PURCHASE PLAN
FOR NON-EMPLOYEE DIRECTORS
EFFECTIVE AS OF JANUARY 1, 1995
SECTION 1. PURPOSE. The purpose of the Zurich Reinsurance Centre Holdings,
Inc. Common Stock Purchase Plan for Non-Employee Directors (the "Plan") is to
provide to non-employee directors of Zurich Reinsurance Centre Holdings, Inc.
(the "Company") the opportunity to elect to defer payment of all or a portion of
their retainer fees and receive them in the form of Common Stock of the Company.
The Plan is first effective as of January 1, 1995 (the "Effective Date").
SECTION 2. DEFINITIONS. As used in the Plan, the following terms shall have
the meanings set forth below:
(a) "Administrator" means the Compensation Committee of the Company's
Board of Directors, as the same may be constituted from time to time hereafter.
(b) "Annual Retainer" means the amount paid by the Company to a
Non-Employee Director as an annual retainer for services to be rendered as a
member of the Board of Directors during any Plan Year, including retainers,
meeting attendance fees and fees otherwise payable for acting on or as a member
of the Board of Directors or any committee thereof, but not including
reimbursements of expenses.
(c) "Beneficiary" means a person (including any trustee) designated by
a Participant in accordance with Section 9 to receive the benefits specified
hereunder in the event of the Participant's death or, if there is no surviving
designated Beneficiary, the Participant's estate.
(d) "Board of Directors" means the Board of Directors of the Company.
(e) "Deferral Account" means the account established and maintained by
the Company for each Participant, which is to be credited, as set forth in
Section 6, with the portion of a Participant's Annual Retainer which is deferred
pursuant to the Plan, together with earnings thereon as provided for herein. In
accordance with Section 6, amounts credited to a Participant's Deferral Account
will be expressed as a number of Stock equivalents and cash, if any. Deferral
Accounts will be maintained solely as bookkeeping entries by the Company;
provided, however, that the Company shall establish the Trust in accordance with
Section 7 to fund the obligations of the Company hereunder.
(f) "ERISA" means the Employee Retirement Income Security Act of 1974,
as amended.
(g) "Fair Market Value" means, if the Stock is listed on one or more
national securities exchanges, the mean between the highest and lowest sale
prices reported on the principal national securities exchange on which such
stock is listed and traded on the date immediately preceding the date of
determination, or, if there is no such sale on that date, then on the last
preceding date on which such a sale was reported. If the Stock is quoted on the
National Association of Securities Dealers Automated Quotation System
("NASDAQ"), the fair market value shall be deemed to be the mean between the
last quoted bid and asked prices on NASDAQ on the date immediately preceding the
date of determination, or if not quoted on that day, then on the last preceding
date on which such stock is quoted. If the Stock is not quoted on NASDAQ or
listed on an exchange, or representative quotes are not otherwise available, the
fair market value of the
1
<PAGE> 2
Stock shall mean the amount determined by the Compensation Committee to be the
fair market value based upon a good faith attempt to value the Stock accurately.
(h) "Non-Employee Director" means a member of the Board of Directors
who, on the first day of any Plan Year (or such later date as he is first
elected or appointed to the Board of Directors), is not an employee of the
Company or any affiliate thereof.
(i) "Participant" means any Non-Employee Director who elects under the
Plan to defer payment of all or a portion of such Participant's Annual Retainer
for any Plan Year.
(j) "Plan Year" means each year beginning on the first day of January
and ending on the 31st day of December.
(k) "Stock" means the Company's Common Stock, $0.01 par value per
share.
(l) "Trust" means the Trust Under Zurich Reinsurance Centre Holdings,
Inc. Common Stock Purchase Plan for Non-Employee Directors.
(m) "Trust Agreement" means the agreement between the Company and the
Trustee establishing the Trust.
(n) "Trustee" means the trustee of the Trust, which shall be an
independent third party that may be granted corporate trust powers under state
law.
SECTION 3. PARTICIPATION. Only Non-Employee Directors may participate
in the Plan. Participation in the Plan is voluntary. To participate in the Plan
for any Plan Year, a Non-Employee Director must file a written application with
the Administrator no later than the June 30 immediately preceding such Plan
Year, provided, however, that (i), with respect to the initial Plan Year, a
Non-Employee Director will have 30 days following the date the Plan is first
effective to file such application relating to such Plan Year, but then only
with respect to that portion of such Participant's Annual Retainer for such Plan
Year not earned at the time such election is filed, and (ii) the application of
a Non-Employee Director who was not a member of the Board of Directors as of
such June 30 with respect to a given Plan Year (or, with respect to the first
Plan Year, as of the date which is 30 days following the date the Plan is first
effective) must be filed within 30 days of the date the individual becomes a
Non-Employee Director, but then only with respect to that portion of such
Participant's Annual Retainer for such Plan Year(s) which is payable at least
six months after such election is filed. The Administrator shall notify each
Non-Employee Director of such Participant's prospective eligibility to
participate in the Plan at least 10 days prior to the deadline for the filing of
an application for participation; provided, however, that, with respect to the
initial Plan Year, Non-Employee Directors will be notified of prospective
eligibility as promptly as possible after the adoption of the Plan. The
application for participation shall evidence the Non-Employee Director's
acceptance of the benefits and terms of the Plan, and set forth the irrevocable
elections described in Section 5. Any application and all elections set forth
therein shall be applicable only to the Plan Year(s) referenced therein.
SECTION 4. ADMINISTRATION.
(a) The Administrator. The Compensation Committee of the Company's
Board of Directors shall serve as the Administrator of the Plan. The
Administrator shall administer and enforce the Plan in accordance with its terms
and shall have all powers necessary to accomplish those purposes, including but
not limited to the following: (1) to compute and certify the amount and kind of
benefits payable to
2
<PAGE> 3
Participants and their Beneficiaries; (2) to maintain or to designate any person
or entity to maintain all records necessary for the administration of the Plan;
(3) to make and publish such rules for the regulation of the Plan as are not
inconsistent with the terms hereof; and (4) to provide for disclosure of such
information, including reports and statements to Participants or Beneficiaries,
and to provide for the making of applications and elections by Participants
under the Plan as may be required by the Plan or otherwise deemed appropriate by
the Administrator. Notwithstanding the above, no person who serves on such
committee shall participate in any matter which involves solely a determination
of the benefits payable to such person under the Plan. Any action of the
Administrator with respect to the Plan shall be conclusive and binding upon all
persons interested in the Plan except to the extent otherwise specifically
provided herein. The Administrator may appoint agents and delegate thereto such
powers and duties in connection with the administration of the Plan as the
Administrator may from time to time prescribe.
(b) Annual Statements. As soon as practicable following the end of each
Plan Year, the Administrator shall furnish to each Participant a statement
indicating the number of Stock equivalents credited to such Participant's
Deferral Account as of the end of such Plan Year and the status of such Account.
SECTION 5. ELECTIONS BY PARTICIPANTS. Each Non-Employee Director
electing to participate in the Plan for any Plan Year must irrevocably elect, in
accordance with the procedure set forth in Section 3, the following:
(a) A percentage (up to 100%) of such Participant's Annual Retainer for
the Plan Year to be deferred under the Plan and paid in the form of Stock; and
(b) The date on which such portion of the Participant's Annual Retainer
shall be paid or commence to be paid and the method in which such payment shall
be made. Such date and method shall be among those described in Section 8.
In the event the Annual Retainer of a Participant is increased during any Plan
Year, elections for such Participant in effect for such Plan Year shall apply to
the amount of such increase.
SECTION 6. DEFERRAL ACCOUNTS.
(a) Crediting of Annual Retainer. The portion of each Participant's
Annual Retainer deferred with respect to a Plan Year in accordance with Section
5 shall be credited to the Participant's Deferral Account (i) with respect to
amounts which otherwise would have been paid on the first day of any month, on
such day, and (ii) with respect to amounts which otherwise would have been paid
on other than the first day of any month, on the first day of the month
following the month in which such amounts otherwise would have been paid. The
amount credited to each Participant's Deferral Account on such day shall be
computed by applying the percentage elected by the Participant pursuant to
Section 5(a) to the amount of each such payment. (For example, if a Participant
has elected to defer 75% of such Participant's Annual Retainer for a Plan Year,
and if such Annual Retainer would otherwise be paid in monthly installments of
$1,000 on the first day of each month, then on each such day $750 would be
credited to the Participant's Deferral Account and $250 would be paid to the
Participant in cash.) As of each date on which amounts are credited to Deferral
Accounts, such amounts (without interest) shall be converted into that number of
Stock equivalents (rounded down to the nearest whole share) which equals the
amount so credited divided by the Fair Market Value of one share of Stock on
such date.
3
<PAGE> 4
(b) Crediting of Dividends. Dividends payable with respect to Stock
equivalents credited to each Participant's Deferral Account shall be credited to
such Deferral Account as of the date dividends are actually paid with respect to
shares of Stock. As of the first day of the month following the month in which
such dividends are so credited, such dividends (without earnings) shall be
converted into the number of Stock equivalents (rounded down to the nearest
whole share) determined by applying the formula in the last sentence of Section
6(a) above.
(c) Adjustments to Deferral Accounts. The amount of Stock equivalents
in each Participant's Deferral Account shall be appropriately adjusted upon the
occurrence of any stock split, reverse stock split, or stock dividend or other
non-cash distribution.
(d) Effect of Payments. The amount of Stock equivalents and cash, if
any, credited to each Participant's Deferral Account shall be reduced by the
number of shares of Stock and amount of cash distributed to each Participant or
such Participant's Beneficiary from the Trust or directly from the Company as
payment of benefits due under the Plan.
(e) Vesting. The interest of each Participant in any benefit payable
with respect to a Deferral Account hereunder shall be at all times fully vested
and non-forfeitable.
SECTION 7. THE TRUST.
(a) Creation of the Trust. The Board of Directors shall cause the Trust
to be created, shall appoint the Trustee and shall authorize the appropriate
officers of the Company to execute all necessary trust agreements and other
instruments necessary therefor; provided, however, that (i) the terms of the
Trust shall be consistent with the status of the Plan as "unfunded" for purposes
of ERISA and (ii) the Trust shall conform to the terms of the model grantor
trust contained in Revenue Procedure 92-64, 1992-33 I.R.B.11.
(b) Contributions to, and Purchase of Stock By, the Trust.
(i) Not later than 10 days following each day on which amounts are
converted into Stock equivalents, the Company shall contribute to the Trust
either (A) that number of shares of Stock, or (B) cash in an amount sufficient
to allow the Trustee to purchase from the Company or on the open market that
number of shares of Stock, equal to the aggregate number of Stock equivalents
credited to Participants' Deferral Accounts on such day in accordance with
Section 6(a). Notwithstanding the above, the Company shall not be required to
contribute cash to the Trust pursuant to clause (B) above in an amount greater
than that which can be used by the Trustee on the date of such contribution to
purchase Stock within any purchase volume limitations imposed on the Trust by
applicable law or the rules of any exchange on which Stock is traded. In the
event the Company's total required contribution to the Trust cannot be made by
the above deadline pursuant to the preceding sentence, the Company shall make
periodic contributions to the Trust after such deadline until the Trust has
purchased the requisite number of shares of Stock.
(ii) Also not later than 10 days following each day on which amounts
are credited to Deferral Accounts and converted into Stock equivalents, the
Administrator shall instruct the Trustee to purchase from the Company, or on the
open market, that number of shares of Stock equal to the aggregate number of
Stock equivalents, if any, credited to Participants' Deferral Accounts on such
day in accordance with Section 6(b). Any such purchase from the Company shall be
made from Stock held in the treasury, or authorized but unissued shares of
Stock, using cash dividends paid on Stock held in the Trust. The purchase price
for each such share of Stock purchased from the Company shall be determined by
the formula in the last sentence of Section 6(a). Notwithstanding the above, (i)
if such purchase is made on the
4
<PAGE> 5
open market, and if the cash dividends held in the Trust are insufficient to
purchase the necessary number of shares of Stock, the Company shall contribute
to the Trust additional cash in the amount required to allow the Trustee to
purchase such shares, and (ii) the Administrator shall not instruct the Trustee
to purchase Stock on the open market, and the Company shall not make any
additional contribution to the Trust pursuant to clause (i) of this sentence, to
the extent that the Trustee would be prevented from purchasing the requisite
shares of Stock due to any purchase volume limitations imposed on the Trust by
applicable law or the rules of any exchange on which Stock is traded. In the
event such instructions or contribution to the Trust cannot be made by the above
deadline pursuant to clause (ii) above, such instructions and contributions
shall be periodically made after such deadline until the Trust has purchased the
requisite number of shares of Stock.
(iii) The Company shall impose such legends, stop transfer and other
restrictions on certificates evidencing Stock sold to the Trust by the Company
hereunder as it may deem advisable in order to comply with the Securities Act of
1933, as amended, the requirements of the New York Stock Exchange or any other
stock exchange or automated quotation system upon which the Stock is then listed
or quoted, any state securities laws applicable to such a sale or any provision
of the Company's Certificate of Incorporation or By-Laws or any contract to
which the Company is a party.
(c) Treatment of Dividends Pending Purchase of Stock. Cash dividends
paid on Stock held in the Trust shall be invested in non-interest-bearing
accounts of a financial institution pending the use of such dividends to acquire
Stock in accordance with Section 6(b).
(d) Distributions From the Trust. At each time payment of all or a
portion of each Participant's Deferral Account is due pursuant to an election
made in accordance with Section 5 (or pursuant to the death of a Participant in
accordance with Section 8(b)), the Administrator shall instruct the Trustee to
distribute Stock and cash from the Trust directly to such Participant or such
Participant's Beneficiary in an amount equal to the portion of such
Participant's Deferral Account which is so payable. Distributable amounts
expressed in the form of Stock equivalents shall be paid in Stock, and
distributable amounts expressed in the form of cash shall be paid in cash. In
the absence of such an instruction to the Trustee by the Administrator, a
Participant may directly instruct the Trustee to make such distribution, and the
Trustee shall do so if it determines that such distribution is in accordance
with the Participant's Section 5 election. If the Trustee fails to make any
distribution from the Trust required hereunder, the Company shall make such
distribution directly to the Participant entitled thereto from its general
assets, treasury Stock and authorized but unissued Stock; provided, however,
that in the event no treasury Stock or authorized but unissued Stock is
available, distributable amounts from a Participant's Deferral Account expressed
in the form of Stock equivalents shall be paid by the Company in the form of
cash, in an amount equal to the Fair Market Value of Stock represented by such
Stock equivalents as of the date of payment. If any payment is made to a
Participant by the Company pursuant to the preceding sentence, the Participant
shall be deemed to have assigned to the Company such Participant's rights to
receive such payment from the Trust, and the Company shall be subrogated to all
rights of the Participant therein.
SECTION 8. DISTRIBUTIONS.
(a) Date of Commencement. A Participant may elect in accordance with
Section 5 that payment of the portion of such Participant's Deferral Account
attributable to the particular Annual Retainer being deferred be made in the
form of a single lump sum on either (i) any specific day selected by the
Participant
5
<PAGE> 6
(but in no event earlier than the second anniversary of the last day
of the Plan Year to which such deferral relates) or (ii) immediately upon
termination as a Non-Employee Director.
(b) Distribution Upon Death. If a Participant dies before payment of
such Participant's Deferral Account is completed, the balance remaining in such
Deferral Account shall be paid to the Participant's Beneficiary in one lump sum
as soon as practicable following the Participant's death.
SECTION 9. DESIGNATION OF BENEFICIARIES. Each Participant may designate
one or more Beneficiaries to receive the amounts distributable from the
Participant's Deferral Account under the Plan in the event of such Participant's
death. Such designations shall be made on forms provided by the Administrator. A
Participant may from time to time change such Participant's designated
Beneficiaries, without the consent of such Beneficiaries, by filing a new
designation in writing with the Administrator. The Company, Trustee and
Administrator may rely conclusively upon the Beneficiary designation last filed
in accordance with the terms of the Plan.
SECTION 10. AMENDMENTS TO THE PLAN; TERMINATION OF THE PLAN. The Board
of Directors of the Company may amend, alter, suspend, discontinue or terminate
the Plan without the consent of any Participant; provided, however, that no such
amendment, alteration, suspension, discontinuation, or termination of the Plan
shall materially and adversely affect the rights of such Participant with
respect to payment of amounts already credited to such Participant's Deferral
Account, or amounts elected to be so credited for the Plan Year in which such
action is taken. The Plan has no fixed termination date. Notwithstanding
anything herein contained to the contrary, if approval of the Plan by the
Company's shareholders is not obtained at the annual meeting of shareholders
immediately following the Effective Date, the following shall occur as soon as
practicable following such meeting: (1) amounts credited to Deferral Accounts
shall be expressed in the form of cash, rather than Stock equivalents; (2) the
Company shall exercise its authority under the Trust to instruct the Trustee to
sell all Stock held in the Trust; (3) deferral elections with respect to the
remainder of the Plan Year in which such annual meeting occurs shall become null
and void, and no further deferral elections shall be allowed or amounts credited
to Deferral Accounts; and (4) payments of Deferral Accounts shall be made from
the Trust in the form of cash, as soon as practicable following the sale of
Stock held in the Trust. In addition, the Administrator may take such other
action as it deems necessary to ensure that Participants are not deemed to have
engaged in a "purchase" or "sale" of Stock pursuant to their participation in
the Plan, as such terms are used in Section 16(b) of the Securities Exchange Act
of 1934 and the rules and regulations promulgated thereunder.
SECTION 11. GENERAL PROVISIONS.
(a) Limits on Transfer of Rights; Beneficiaries. No right or interest
of a Participant under the Plan shall be subject in any manner to anticipation,
alienation, sale, transfer, assignment, pledge, encumbrance, attachment or
garnishment by creditors of the Participant or such Participant's Beneficiary,
or shall be transferable by a Participant otherwise than by will or the laws of
descent and distribution; provided, however, that a Participant may designate a
Beneficiary in accordance with Section 9 to receive any payment or distribution
under the Plan in the event of death of the Participant. A Beneficiary,
guardian, legal representative or other person claiming any rights under the
Plan from or through any Participant shall be subject to all terms and
conditions of the Plan applicable to such Participant, except to the extent the
Plan otherwise provides with respect to such persons.
6
<PAGE> 7
(b) Receipt and Release. Any payment to any Participant or Beneficiary
in accordance with the provisions of the Plan, whether made from the Trust or
directly from the Company, shall, to the extent thereof, be in full satisfaction
of all claims against the Company, the Administrator, the Trust and the Trustee,
and the Administrator may require such Participant or Beneficiary, as a
condition to such payment, to execute a receipt and release to such effect.
(c) Status of the Plan. The Plan is not intended to be subject to
ERISA. To the extent the Plan is determined to be so subject, it is intended to
constitute a "plan which is unfunded and is maintained by the employer primarily
for the purpose of providing deferred compensation for a select group of
management or highly compensated employees," as such phrase is used in ERISA,
and the terms of the Plan shall be interpreted consistent with such intent. With
respect to any payment not yet made to a Participant under the Plan, nothing
contained in the Plan shall give a Participant any rights that are greater than
those of a general creditor of the Company; provided, however, that the assets
of the Trust shall be used solely to provide benefits under the Plan in the
absence of the insolvency of the Company.
(d) No Rights of a Stockholder. Except as provided in the Trust
Agreement with respect to Stock held in the Trust, no Participant shall have any
of the rights or privileges of a shareholder of the Company as a result of the
making of an election under Section 5(b) of the Plan, or as a result of the
establishing of or crediting of any amounts to a Deferral Account under the
Plan, until Stock is actually distributed to the Participant pursuant to Section
7(d) of the Plan.
(e) No Right to Continued Election as a Director. Nothing contained in
the Plan shall confer, and no establishment of or crediting of any amounts to a
Deferral Account shall be construed as conferring, upon any Participant, any
right to continue as a member of the Board of Directors, or to interfere in any
way with the right of the Company to increase or decrease the amount of the
Annual Retainer or any other compensation payable to Non-Employee Directors.
(f) Plan Expenses. All expenses and costs incurred in connection with
the operation of the Plan and the Trust shall be borne by the Company.
(g) Governing Law. The validity, construction and effect of the Plan
and any rules and regulations relating to the Plan shall be determined in
accordance with the laws of the State of Delaware, without giving effect to
principles of conflicts of laws, and applicable Federal law.
(h) Interpretation. Whenever necessary or appropriate in the Plan,
where the context admits, the singular term and the related pronouns shall
include the plural and the masculine gender shall include the feminine gender.
7
<PAGE> 1
EXHIBIT 23
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement (Form
S-8 No. 33-75598) pertaining to the Zurich Reinsurance Centre, Inc. Employees'
Stock Purchase Plan, the Registration Statement (Form S-8 No. 33-93390)
pertaining to the Zurich Reinsurance Centre, Inc. 401(k) Plan and the
Registration Statement (Form S-8 No. 333-04629) pertaining to the Zurich
Reinsurance Centre Holdings, Inc. 1995 Stock Option Plan of our report dated
February 11, 1997, with respect to the consolidated financial statements and
schedules Zurich Reinsurance Centre Holdings, Inc. included in the Annual Report
(Form 10-K) for the year ended December 31, 1996.
/s/ ERNST & YOUNG LLP
Stamford, Connecticut
March 26, 1997
<PAGE> 1
EXHIBIT 24
POWER OF ATTORNEY
We, the undersigned officers and directors of Zurich Reinsurance Centre
Holdings, Inc. (the "Company"), hereby severally constitute and appoint Peter
Porrino, Mark Sarlitto and Karen O'Connor Rubsam, each of them singly, as our
true and lawful attorneys with full power to them, and each of them singly, to
sign for us and in our names in the capacities indicated below, the Company's
1996 Annual Report on Form 10-K. Pursuant to the requirements of the Securities
Exchange Act of 1934, as amended, this Power of Attorney has been executed and
delivered by the following persons in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
Chairman of the Board and
/s/ Steven M. Gluckstern Director March 28, 1997
Steven M. Gluckstern
Director, President and
/s/ Richard E. Smith Chief Executive Officer March 28, 1997
Richard E. Smith
Vice Chairman of the
/s/ Detlef Steiner Board of Directors March 28, 1997
Detlef Steiner
/s/ William H. Bolinder Director March 28, 1997
William H. Bolinder
/s/ Philip Caldwell Director March 28, 1997
Philip Caldwell
/s/ Laurence W. Cheng Director March 28, 1997
Laurence W. Cheng
/s/ Judith Richards Hope Director March 28, 1997
Judith Richards Hope
/s/ Rolf Hueppi Director March 28, 1997
Rolf Hueppi
/s/ Robert T. Marto Director March 28, 1997
Robert T. Marto
/s/ Peter J. Neff Director March 28, 1997
Peter J. Neff
/s/ Michael D. Palm Director March 28, 1997
Michael D. Palm
/s/ George G.C. Parker Director March 28, 1997
George G.C. Parker
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 7
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<EXCHANGE-RATE> 1
<DEBT-HELD-FOR-SALE> 1,200,123
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 167,462
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 1,488,305
<CASH> 251,506
<RECOVER-REINSURE> 1,600
<DEFERRED-ACQUISITION> 88,304
<TOTAL-ASSETS> 2,243,044
<POLICY-LOSSES> 938,800
<UNEARNED-PREMIUMS> 313,191
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 198,413
0
0
<COMMON> 262
<OTHER-SE> 711,607
<TOTAL-LIABILITY-AND-EQUITY> 2,243,044
684,329
<INVESTMENT-INCOME> 92,203
<INVESTMENT-GAINS> (5,071)
<OTHER-INCOME> 4,036
<BENEFITS> 485,805
<UNDERWRITING-AMORTIZATION> 184,662
<UNDERWRITING-OTHER> 47,743
<INCOME-PRETAX> 41,768
<INCOME-TAX> 12,505
<INCOME-CONTINUING> 29,263
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 29,263
<EPS-PRIMARY> 1.12
<EPS-DILUTED> 1.12
<RESERVE-OPEN> 658,628
<PROVISION-CURRENT> 493,447
<PROVISION-PRIOR> (7,642)
<PAYMENTS-CURRENT> 82,735
<PAYMENTS-PRIOR> 162,952
<RESERVE-CLOSE> 898,746
<CUMULATIVE-DEFICIENCY> (7,642)
</TABLE>
