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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1997
or
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 1-11868
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
Former name, former address and former fiscal year, if changed since last
report:
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 the number of shares outstanding of each of the issuer's classes of
common stock:
<TABLE>
<CAPTION>
(Class) (Outstanding at August 1, 1997)
<S> <C>
Common Stock, $.01 par value 26,202,943 Shares
</TABLE>
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ZURICH REINSURANCE CENTRE HOLDINGS, INC. AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
Page No.
--------
<S> <C>
PART I. FINANCIAL INFORMATION
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Item 1 - Consolidated Financial Statements
Independent Accountants' Review Report 3
Consolidated Balance Sheets -
June 30, 1997 and December 31, 1996 4
Consolidated Statements of Operations -
Three and six months ended June 30, 1997 and 1996 5
Consolidated Statements of Cash Flows -
Six months ended June 30, 1997 and 1996 6
Notes to Consolidated Financial Statements 7
Item 2 - Management's Discussion and Analysis of Financial Condition
and Results of Operations 9
PART II. OTHER INFORMATION
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Item 1 - Legal Proceedings 14
Item 6 - Exhibits and Reports on Form 8-K 15
Signatures 16
</TABLE>
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<PAGE> 3
INDEPENDENT ACCOUNTANTS' REVIEW REPORT
Board of Directors and Stockholders
Zurich Reinsurance Centre Holdings, Inc.
We have reviewed the accompanying consolidated balance sheet of Zurich
Reinsurance Centre Holdings, Inc. and Subsidiaries as of June 30, 1997, and the
related consolidated statements of operations for the three-month and six-month
periods ended June 30, 1997 and 1996 and the consolidated statements of cash
flows for the six-month periods ended June 30, 1997 and 1996. These financial
statements are the responsibility of the Company's management.
We conducted our reviews in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted in
accordance with generally accepted auditing standards, which will be performed
for the full year with the objective of expressing an opinion regarding the
financial statements taken as a whole. Accordingly, we do not express such an
opinion.
Based on our reviews, we are not aware of any material modifications that should
be made to the accompanying consolidated financial statements referred to above
for them to be in conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet of Zurich Reinsurance Centre Holdings,
Inc. and Subsidiaries as of December 31, 1996, and the related consolidated
statements of operations, stockholders' equity and cash flows for the year then
ended (not presented herein) and in our report dated February 11, 1997, we
expressed an unqualified opinion on those consolidated financial statements.
/s/ ERNST & YOUNG LLP
Stamford, Connecticut
August 12, 1997
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<PAGE> 4
ZURICH REINSURANCE CENTRE HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except share amounts)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1997 1996
---- ----
(UNAUDITED)
<S> <C> <C>
ASSETS
Fixed maturities available-for-sale (amortized cost: 6/30/97
$1,213,369; 12/31/96 $1,188,344) $1,222,253 $1,200,123
Equity securities available-for-sale (cost: 6/30/97 $163,758;
12/31/96 $129,051) 230,363 167,462
Investment in affiliate 24,753 8,204
Short-term investments, at cost, which approximates market 138,532 120,720
Cash and cash equivalents 343,808 251,506
---------- ----------
Total cash and invested assets 1,959,709 1,748,015
---------- ----------
Accrued investment income 21,836 18,517
Premiums receivable 233,311 235,960
Reinsurance recoverables:
Paid losses 2,352 1,600
Unpaid losses 61,637 40,054
Prepaid reinsurance premiums 10,222 3,208
Deferred policy acquisition costs 84,624 88,304
Deferred federal income taxes 27,339 34,674
Other assets 43,378 72,712
---------- ----------
Total assets $2,444,408 $2,243,044
========== ==========
LIABILITIES
Losses and loss adjustment expenses $1,090,004 $ 938,800
Unearned premiums 303,844 313,191
7 1/8% Senior Notes due 2023 198,423 198,413
Other liabilities 93,864 80,771
---------- ----------
Total liabilities 1,686,135 1,531,175
---------- ----------
STOCKHOLDERS' EQUITY
Preferred stock ($.10 par value, 20,000,000 shares
authorized; no shares outstanding) -- --
Common stock ($.01 par value, 50,000,000 shares
authorized; 26,205,443 and 26,191,953 shares issued
and outstanding at 6/30/97 and 12/31/96, respectively) 262 262
Paid-in capital 625,971 624,466
Unrealized appreciation of investments (net of deferred taxes of
$26,421 and $17,627 at 6/30/97 and 12/31/96, respectively) 49,068 32,563
Retained earnings 82,972 54,740
Treasury stock, at cost (0 and 5,588 shares at 6/30/97 and
12/31/96, respectively) -- (162)
---------- ----------
Total stockholders' equity 758,273 711,869
---------- ----------
Total liabilities and stockholders' equity $2,444,408 $2,243,044
========== ==========
</TABLE>
See Notes to Consolidated Financial Statements
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<PAGE> 5
ZURICH REINSURANCE CENTRE HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED FOR THE SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------------- ------------------------
1997 1996 1997 1996
---- ---- ---- ----
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
REVENUES
Net premiums written (net of premiums ceded of
$19,126 and $2,418 for the three months and
$36,228 and $2,674 for the six months ended
June 30, 1997 and 1996, respectively) $169,135 $188,210 $348,372 $364,832
Increase (decrease) in unearned premiums (10,648) 23,392 (16,361) 26,202
-------- -------- -------- --------
Net premiums earned (net of premiums ceded of
$17,388 and $3,318 for the three months and
$29,216 and $6,756 for the six months ended
June 30, 1997 and 1996, respectively) 179,783 164,818 364,733 338,630
Net investment income 28,104 22,385 54,754 43,967
Income from investment in Insurance Partners 1,985 -- 12,934 258
Realized capital gains (losses) 6,595 (6,844) 11,883 (5,423)
Other income 169 27 331 73
-------- -------- -------- --------
Total revenues 216,636 180,386 444,635 377,505
-------- -------- -------- --------
EXPENSES
Losses and loss adjustment expenses (net of reinsurance
recoveries of $15,863 and $4,715 for the three months
and $26,669 and $8,554 for the six months
ended June 30, 1997 and 1996, respectively) 131,297 115,335 269,937 241,612
Commissions 48,123 46,143 95,021 90,756
Premium taxes on primary business 2,567 -- 4,254 --
Other operating costs and expenses 12,442 11,572 24,879 23,395
Interest and amortization 4,263 3,841 8,466 7,685
-------- -------- -------- --------
Total expenses 198,692 176,891 402,557 363,448
-------- -------- -------- --------
Income before income taxes 17,944 3,495 42,078 14,057
Federal income tax expense 5,850 682 13,846 3,838
-------- -------- -------- --------
NET INCOME $ 12,094 $ 2,813 $ 28,232 $ 10,219
======== ======== ======== ========
PER SHARE DATA
Weighted average shares outstanding (in 000's) 26,205 26,161 26,201 26,147
======== ======== ======== ========
Net income $ 0.46 $ 0.11 $ 1.08 $ 0.39
======== ======== ======== ========
</TABLE>
See Notes to Consolidated Financial Statements
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ZURICH REINSURANCE CENTRE HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED
JUNE 30,
----------------------------
1997 1996
---- ----
(UNAUDITED)
<S> <C> <C>
CASH FLOWS PROVIDED BY OPERATING ACTIVITIES:
Net income $ 28,232 $ 10,219
Adjustments to reconcile net income to net cash provided by
operating activities:
Losses and loss adjustment expenses, net 129,621 137,360
Unearned premiums, net (16,361) 26,202
Premiums receivable 2,649 (39,491)
Deferred policy acquisition costs 3,680 (8,531)
Current and deferred taxes 6,192 (17,138)
Other assets and other liabilities 1,852 3,350
Realized capital (gains) losses (11,883) 5,423
--------- -----------
Net cash provided by operating activities 143,982 117,394
--------- -----------
CASH FLOWS PROVIDED BY (USED IN) INVESTING ACTIVITIES:
Sales of fixed maturities 794,799 1,223,434
Maturities or calls of fixed maturities 54,621 50,104
Purchases of fixed maturities (850,340) (1,219,733)
Sales of equity securities 48,848 30,760
Purchases of equity securities (77,808) (37,417)
Net (purchases) sales of short-term investments (17,812) 18,770
Cost of additions to property and equipment (1,369) (2,533)
--------- -----------
Net cash provided by (used in) investing activities (49,061) 63,385
--------- -----------
CASH FLOWS USED IN FINANCING ACTIVITIES:
Payments of cash dividend to stockholders (2,619) (2,619)
Purchases of treasury stock -- (3,000)
Conversion of Re Capital Debentures -- (1,079)
--------- -----------
Net cash used in financing activities (2,619) (6,698)
--------- -----------
CHANGE IN CASH AND CASH EQUIVALENTS 92,302 174,081
Cash and cash equivalents, beginning of period 251,506 206,699
--------- -----------
Cash and cash equivalents, end of period $ 343,808 $ 380,780
========= ===========
</TABLE>
See Notes to Consolidated Financial Statements
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<PAGE> 7
ZURICH REINSURANCE CENTRE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. GENERAL
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles ("GAAP") for interim
financial information and in accordance with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, such financial statements do not
include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the opinion of
management, all adjustments (consisting solely of normal recurring accruals)
considered necessary for a fair presentation have been included. The results of
operations for the interim period are not necessarily indicative of the results
that may be expected for the year ended December 31, 1997, as quarterly results
may be affected by several factors including, but not limited to, changes in the
interest rate environment and catastrophic losses. These consolidated financial
statements should be read in conjunction with the consolidated financial
statements included in Zurich Reinsurance Centre Holdings, Inc.'s Annual Report
on Form 10-K for the year ended December 31, 1996.
Financial information has been included herein related to the consolidated
financial statements of Zurich Reinsurance Centre Holdings, Inc. ("ZRCH") and
its wholly-owned subsidiaries, principally Zurich Reinsurance Centre, Inc.
("ZRC") and ZC Insurance Company ("ZCIC"), (together with ZRCH, the "Company").
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 128, "Earnings Per Share", effective
for periods ending after December 15, 1997. SFAS No. 128 requires the
calculation and presentation on the face of the income statement of "basic"
earnings per share ("EPS") and, if applicable, "diluted" EPS. The adoption of
SFAS No. 128 is not expected to have a material effect on the Company's reported
EPS.
In June 1997, the Financial Accounting Standards Board issued SFAS No. 130,
"Reporting Comprehensive Income", effective for periods beginning after December
15, 1997. SFAS No. 130 establishes standards for the reporting and disclosure of
comprehensive income and its components (revenues, expenses, gains and losses)
in a prominently displayed financial statement and requires that the accumulated
balance of other comprehensive income be presented on the balance sheet as a
distinct component of equity. The adoption of SFAS No. 130 will not affect
results of operations or financial position.
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<PAGE> 8
ZURICH REINSURANCE CENTRE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. INCOME TAXES
The Company's overall effective tax rate for the three and six months ended June
30, 1997 was 32.6% and 32.9%, respectively. For the three and six months ended
June 30, 1996, the Company's overall effective tax rate was 19.5% and 27.3%,
respectively. The overall effective tax rates for 1997 and 1996 had both
operating income and realized capital gain (loss) components. The effective tax
rate on operating income for the three and six months ended June 30, 1997 was
31.3% and 32.1%, respectively. For the three and six months ended June 30, 1996,
the effective tax rate on operating income was 29.8% and 29.5%, respectively.
The effective tax rates on operating income for 1997 and 1996 differed from the
federal statutory rate of 35.0% due principally to tax-exempt investment income
and dividends. The effective tax rate (benefit) on realized capital gains
(losses) approximated the federal statutory rate for the three and six months
ended June 30, 1997 and 1996.
4. PROPOSED MERGER
On April 17, 1997, the Company entered into a definitive agreement to merge with
a subsidiary of the Zurich Group, its 65.7% shareholder. Under the agreement,
which was approved by unanimous vote of the Company's Board of Directors, the
Company's public shareholders will receive cash consideration at closing of
$39.50 per share. The agreement contains terms and conditions customary in
transactions of this type including provisions relating to approval of the
transaction by the Company's shareholders and certain regulatory consents. A
special meeting of shareholders will be held on August 29, 1997 to vote on the
transaction, which is expected to close during the third quarter. The Company
has also reached an agreement in principle for the settlement of the shareholder
class action lawsuits pending in Delaware, which settlement is subject to court
approval.
-8-
<PAGE> 9
ZURICH REINSURANCE CENTRE HOLDINGS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
The Company's pre-tax operating income (excluding realized capital gains and
losses) increased 9.8% to $11.3 million in the second quarter of 1997, compared
to $10.3 million for the second quarter of 1996. The Company's pre-tax operating
income increased 55.0% to $30.2 million for the six months ended June 30, 1997,
compared to $19.5 million for the six months ended June 30, 1996. The Company's
investment in Insurance Partners, L.P. increased pre-tax operating results by
$2.0 million for the second quarter of 1997 and $12.9 million and $0.3 million
for the six months ended June 30, 1997 and 1996, respectively.
Net income was $12.1 million for the second quarter of 1997, compared to $2.8
million for the corresponding period of 1996, due to a $8.7 million increase in
after-tax realized capital gain (loss) activity and a $0.6 million increase in
after-tax operating income. Net income was $28.2 million for the six months
ended June 30, 1997, compared to $10.2 million for the corresponding period of
1996, due to a $11.2 million increase in after-tax realized capital gain (loss)
activity and a $6.8 million increase in after-tax operating income.
The 1997 premium writings reflect a continued highly competitive reinsurance
market. Gross premiums written for the three and six months ended June 30, 1997
were $188.3 million and $384.6 million, respectively, representing a 1.2%
decrease and a 4.7% increase, respectively, over the comparable 1996 periods.
Gross premiums written in 1997 reflect increased premiums from new bound
business and growth in renewal business, offset by a decline in premiums written
on a quota share treaty with members of the Zurich American Insurance Group (the
"ZA Quota Share"). The ZA Quota Share contributed $44.8 million and $52.6
million to second quarter 1997 and 1996 gross premiums written, respectively,
and $85.3 million and $105.0 million to gross premiums written for the six
months ended June 30, 1997 and 1996, respectively. Net premiums written for the
three and six months ended June 30, 1997 were $169.1 million and $348.4 million,
respectively, representing a 10.1% and 4.5% decrease, respectively, over the
comparable 1996 periods. The difference between 1997 gross and net premiums
written is due to a new ceded reinsurance program that covers certain workers'
compensation business written on a primary basis. Net premiums earned for the
three and six months ended June 30, 1997 were $179.8 million and $364.7 million,
respectively, representing a 9.1% and 7.7% increase, respectively, over the
comparable 1996 periods. For the three and six months ended June 30, 1997, net
premiums earned increased due to the maturing of the Company's book of business.
Losses and loss adjustment expenses for the second quarter of 1997 increased to
$131.3 million, a 13.8% increase over the comparable 1996 period. For the six
months ended June 30, 1997, losses and loss adjustment expenses increased to
$269.9 million, a 11.7% increase over the comparable 1996 period. There were no
significant catastrophe losses in either 1997 or 1996.
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<PAGE> 10
ZURICH REINSURANCE CENTRE HOLDINGS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Commissions for the three and six months ended June 30, 1997 were $48.1 million
and $95.0 million, respectively, compared to $46.1 million and $90.8 million for
the three and six months ended June 30, 1996, respectively. The increase in
losses and commissions is primarily due to the growth in earned premiums as
discussed above. The GAAP loss and commission ratio for the three and six months
ended June 30, 1997 was 99.8% and 100.1%, respectively, compared to 98.0% and
98.2% for the three and six months ended June 30, 1996, respectively. The 1997
loss and commission ratios reflect continued highly competitive market
conditions on the pricing of 1997 earned premiums. The loss and commission ratio
for the six months ended June 30, 1997 also reflects an aggregate net addition
to the Company's loss reserves of approximately $4.3 million during the first
quarter of 1997 as a result of the Company's regular loss reserve analyses
principally attributable to: (i) management's assessment of the effects of
continued highly competitive market conditions on the pricing of premiums earned
during the first quarter of 1997, particularly as respects professional and
umbrella liability coverages and facultative casualty certificate business
(accounting for approximately $0.7 million of additional loss reserves) and (ii)
the receipt by the Company of new information indicating the need for additional
reserve amounts as to certain pre-1997 excess general liability, proportional
workers' compensation and excess umbrella coverages. The Company reported an
aggregate net addition to its pre-1997 loss reserves of approximately $3.6
million comprising $5.3 million of additional case reserves offset by favorable
development with respect to pre-1997 IBNR amounts of $1.7 million. The
additional information received by the Company with respect to pre-1997 reserve
balances included reported losses (paid and case reserves) during the quarter
which exceeded management's expectations (accounting for approximately $5.6
million of additional reserve amounts) and new information received as a result
of reviews performed during the quarter and in connection with proposed renewals
(accounting for approximately $1.1 million of additional reserve amounts). Such
additional incurred losses exceeded favorable reserve development as to other
accounts of approximately $3.1 million.
Other operating costs and expenses for the second quarter of 1997 were $12.4
million, a 7.5% increase over the comparable 1996 period. For the six months
ended June 30, 1997, other operating costs and expenses increased to $24.9
million, a 6.3% increase over the comparable 1996 period. The GAAP other
operating costs and expenses ratio for the three and six months ended June 30,
1997 increased to 7.4% and 7.1%, respectively, compared to 6.1% and 6.4%, the
change being reflective of the corresponding premium volume. Interest and
amortization expense for the three and six months ended June 30, 1997 was $4.3
million and $8.5 million, respectively, compared to $3.8 million and $7.7
million for the three and six months ended June 30, 1996, respectively.
-10-
<PAGE> 11
ZURICH REINSURANCE CENTRE HOLDINGS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
ZRC's statutory combined ratio for the second quarter of 1997 was 107.9%
compared to 102.9% for the same period of 1996. ZRC's statutory combined ratio
for the six months ended June 30, 1997 was 107.2% compared to 103.5% for the
same period of 1996. ZRC's statutory combined ratio differs from the Company's
GAAP combined ratio primarily due to the accounting for certain acquisition
costs and the inclusion of certain holding company expenses.
Net investment income for the second quarter of 1997 was $28.1 million, a 25.5%
increase over the comparable 1996 period. Net investment income for the first
six months of 1997 was $54.8 million, a 24.5% increase over the comparable 1996
period. Growth in net investment income continues as the cash and invested asset
base expands due to cash flows, primarily attributable to underwriting
operations. The after-tax annualized net investment income yield of 4.1% for the
three and six months ended June 30, 1997 was comparable to 4.0% for the three
and six months ended June 30, 1996.
Pre-tax realized capital gains (losses) were $6.6 million for the second quarter
of 1997, compared to $(6.8) million for the second quarter of 1996. For the six
months ended June 30, 1997, pre-tax realized capital gains (losses) were $11.9
million, compared to $(5.4) million for the corresponding period of 1996. The
1997 and 1996 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 total investment return.
The Company's overall effective tax rate for the three and six months ended June
30, 1997 was 32.6% and 32.9%, respectively. For the three and six months ended
June 30, 1996, the Company's overall effective tax rate was 19.5% and 27.3%,
respectively. The overall effective tax rates for 1997 and 1996 had both
operating income and realized capital gain (loss) components. The effective tax
rate on operating income for the three and six months ended June 30, 1997 was
31.3% and 32.1%, respectively. For the three and six months ended June 30, 1996,
the effective tax rate on operating income was 29.8% and 29.5%, respectively.
The effective tax rates on operating income for 1997 and 1996 differed from the
federal statutory rate of 35.0% due principally to tax-exempt investment income
and dividends. The effective tax rate (benefit) on realized capital gains
(losses) approximated the federal statutory rate for the three and six months
ended June 30, 1997 and 1996.
-11-
<PAGE> 12
ZURICH REINSURANCE CENTRE HOLDINGS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FINANCIAL CONDITION
During the first six months of 1997, the Company's cash and invested assets
increased 12.1% to $1,959.7 million. The increase is principally due to cash
flows from operations. As of June 30, 1997, approximately 62% of the Company's
cash and invested assets were invested in fixed maturity securities, 13% in
equity securities and 25% in short-term investments and cash and cash
equivalents, compared to 69%, 10% and 21%, respectively, as of December 31,
1996.
Approximately 80% and 83% of the fixed maturity portfolio at June 30, 1997 and
December 31, 1996, respectively, was invested in U.S. government obligations or
securities rated "triple-A" by Moody's Investors Service or Standard & Poor's
Corporation. The balance of the fixed maturity portfolio was invested in other
investment-grade fixed maturities. The duration of the Company's fixed maturity
portfolio of 4.0 years as of June 30, 1997 approximated the 4.2 years duration
at December 31, 1996.
Liabilities for gross losses and loss adjustment expenses (together, "loss
reserves") were $1,090.0 million as of June 30, 1997, a $151.2 million increase
from December 31, 1996 as loss reserves established for 1997 business offset
loss payments.
Stockholders' equity at June 30, 1997 was $758.3 million compared to $711.9
million at December 31, 1996. The increase in stockholders' equity is primarily
due to net income and unrealized appreciation on the invested asset portfolio.
Cash and cash equivalents and short-term investments as of June 30, 1997
increased to $482.3 million, or 29.6% since December 31, 1996, as a result of
operating cash flows and sector shifts consistent with the Company's investment
strategy.
Net cash provided by operating activities for the six months ended June 30, 1997
was $144.0 million, compared to $117.4 million for the six months ended June 30,
1996. The increase in operating cash flows is primarily attributable to
underwriting operations and net investment income. For the six months ended June
30, 1997, net cash used in financing activities of $2.6 million resulted from
the Company's dividend payment. Net cash used in financing activities for the
first six months of 1996 was $6.7 million and resulted from the Company's stock
repurchase program, dividend payment and the conversion of the Company's 5 1/2%
Convertible Debentures, due 2000 (assumed from Re Capital Corporation during
April 1995).
-12-
<PAGE> 13
ZURICH REINSURANCE CENTRE HOLDINGS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
PROPOSED MERGER
On April 17, 1997, the Company entered into a definitive agreement to merge with
a subsidiary of the Zurich Group, its 65.7% shareholder. Under the agreement,
which was approved by unanimous vote of the Company's Board of Directors, the
Company's public shareholders will receive cash consideration at closing of
$39.50 per share. The agreement contains terms and conditions customary in
transactions of this type including provisions relating to approval of the
transaction by the Company's shareholders and certain regulatory consents. A
special meeting of shareholders will be held on August 29, 1997 to vote on the
transaction, which is expected to close during the third quarter. The Company
has also reached an agreement in principle for the settlement of the shareholder
class action lawsuits pending in Delaware, which settlement is subject to court
approval.
-13-
<PAGE> 14
ZURICH REINSURANCE CENTRE HOLDINGS, INC. AND SUBSIDIARIES
PART II. OTHER INFORMATION
- ---------------------------
Item 1. 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 the Zurich Group'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. On April 17, 1997, the Company reached an
agreement in principle for the settlement of this consolidated action, which
settlement is subject to court approval.
Other litigation pending against the Company and its subsidiaries is not
considered material or is ordinary routine litigation or arbitration incidental
to the business.
-14-
<PAGE> 15
ZURICH REINSURANCE CENTRE HOLDINGS, INC. AND SUBSIDIARIES
Item 6. Exhibits and Reports on Form 8-K
- -----------------------------------------
(a) Exhibit Index
<TABLE>
<CAPTION>
Exhibit Description Page
------- ----------- ----
<S> <C> <C>
2.1 Agreement and Plan of Merger, dated as of April 17, 1997, by *
and among Zurich Centre Investments Limited, a Bermuda
corporation, Centre Merger Corp., a Delaware corporation, and
Zurich Reinsurance Centre Holdings, Inc., a Delaware
corporation.
15 Letter regarding unaudited interim financial information 17
27 Financial Data Schedule 18
</TABLE>
- -----------------
* Incorporated herein by reference from Registrant's Current Report on
Form 8-K, dated April 17, 1997.
(b) Reports on Form 8-K
The Company filed a Current Report on Form 8-K dated April 17, 1997 with
the SEC regarding the agreement to merge with a subsidiary of the Zurich Group.
Omitted from this Part II are items which are inapplicable or to which
the answer is negative for the period covered.
-15-
<PAGE> 16
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Zurich Reinsurance Centre Holdings, Inc.
----------------------------------------
(Registrant)
Date August 12, 1997 /s/ Richard E. Smith
--------------- -------------------------------------------
Richard E. Smith
President and Chief Executive Officer
Date August 12, 1997 /s/ Karen O'Connor Rubsam
--------------- -------------------------------------------
Karen O'Connor Rubsam
Sr. Vice President, Chief Financial Officer
and Treasurer
-16-
<PAGE> 1
Exhibit 15
Acknowledgment Letter
Board of Directors and Stockholders
Zurich Reinsurance Centre Holdings, Inc.
We are aware of 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 of our report dated August 12, 1997 relating to
the unaudited consolidated interim financial statements of Zurich Reinsurance
Centre Holdings, Inc. which is included in its Form 10-Q for the quarter ended
June 30, 1997.
We are also aware of the incorporation by reference in the Registration
Statement (Form S-8 No. 33-93390) pertaining to the Zurich Reinsurance Centre,
Inc. 401(k) Plan of our report dated August 12, 1997 relating to the unaudited
consolidated interim financial statements of Zurich Reinsurance Centre Holdings,
Inc. which is included in its Form 10-Q for the quarter ended June 30, 1997.
We are also aware of the incorporation by reference in 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 August 12, 1997
relating to the unaudited consolidated interim financial statements of Zurich
Reinsurance Centre Holdings, Inc. which is included in its Form 10-Q for the
quarter ended June 30, 1997.
Pursuant to Rule 436(c) of the Securities Act of 1933, our report is not part of
these registration statements prepared or certified by accountants within the
meaning of Section 7 or 11 of the Securities Act of 1933.
/s/ ERNST & YOUNG LLP
Stamford, Connecticut
August 12, 1997
-17-
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