The 1994 results were adversely impacted by bulk reserve strengthening of $75 million for professional liability, and additions to loss reserves for known Asbestos/Pollution Policies of $60 million.
In 1995, REM, in its capacity as manager of Home Insurance's operations, established a single Environmental and Mass Tort Division, which includes a new team to merge financial, legal, and environmental engineering expertise in negotiation with policyholders and reinsurers to find alternative resolutions to claims in the environmental and mass tort areas. Management believes that these organizational changes increase operational efficiency, while assuring that Home Insurance takes a unified and consistent approach to these claims. This division has also prepared an inventory of potential exposures for Asbestos/Pollution Policies, which Home Insurance has utilized to evaluate its use of industry benchmarks to establish reserves.
The underwriting loss was $161 million in 1996, compared with losses of $98 million and $164 million in 1995 and 1994. The 1996 loss was primarily due to loss and loss adjustment expense reserve bulk additions of $132 million, and to lower earned premiums and expenses incurred in managing the run-off of its operations. The 1995 underwriting loss was impacted by lower earned premiums, unfavorable loss experience and providing for higher loss ratios on current year business. The loss in 1994 was primarily due to adverse loss development on recent accident years accompanied with a bulk reserve strengthening of $75 million relating to higher than expected case emergence.
Pursuant to the Bondholder Agreement, in exchange for the consent by each Bondholder to the waivers and amendments to the indentures governing the Public Indebtedness necessary to consummate the Recapitalization, the Company completed an exchange offer on August 25, 1995, in which approximately $179 million principal value of the 2003 Senior Notes were exchanged for the New Notes, which provide for sinking fund payments (to be applied to the mandatory retirement of the New Notes) in installments of approximately $36 million each in year 1999 through 2003. All other terms and conditions of the New Notes are substantially the same as the 2003 Senior Notes. See note 1 to the consolidated financial statements.
On May 15, 1996 an agreement in principle was announced for the sale of a substantial part of Sterling Forest lands for public parkland. A letter of intent between Sterling Forest, as seller, and Trust for Public Land and Open Space Institute, as purchaser, was later signed and a formal contract was signed on February 18, 1997. Under the terms of the agreement, more than 15,000 acres will be acquired as parkland, at a total acquisition cost of $55 million, and Sterling Forest will continue to own approximately 2,200 acres of land and existing improvements, for future development. There is no accounting recognition of the sale in the financial statements until the transaction is consummated. However, no material impact on net income is anticipated upon consummation.
i) Make any single claim payment in excess of $1 million except under conditions specified therein. ii) Make any payment to creditors or other persons in excess of $500,000, except as set forth in clause (i) above. iii) Make any single payment to cedents or reinsurers (a) in excess of $250,000 or (b) out of the ordinary course of business, or any commutation of any amount with any cedents or reinsurers. iv) Release any obligation or collateral in excess of $500,000. v) Materially change the terms of any contracts or enter into any new contracts in excess of $500,000. vi) Engage in any transactions with the Company, REM, ZHI, Zurich or Trygg-Hansa or any subsidiaries, other affiliates or agents of such entities.
The following tables set forth Home Insurance's loss and loss adjustment expense experience for Asbestos/Pollution Policies for each of the years in the three-year period ended December 31, 1996:
Number of Series A Common Shares outstanding: At December 31, 1994 23,349,201 Purchase of Series A Common Stock (9,234,701) ---------- At December 31, 1995 14,114,500 ---------- - At December 31, 1996 14,114,500 ==========
In connection with the Department's involvement in approving the Recapitalization, it had appointed in 1995, a representative to act as an on-site monitor for the Company's operations, with certain rights of access and cooperation from the Company and REM.
Realized capital losses include foreign currency transaction loss of $2 million in 1994.
Effective January 1, 1991, Home Insurance entered into the Stop Loss Treaty with a group of reinsurers, including Centre Reinsurance Limited and Trygg-Hansa Insurance Company Limited ("THI"), a subsidiary of Trygg-Hansa, which had 50% and 15% participations in the treaty, respectively. The treaty protected Home Insurance against losses sustained in all years prior to the year in which the treaty is cancelled.
In the ordinary course of its business Home Insurance cedes premiums and losses, via reinsurance, to other insurers and reinsurers under various contracts which cover individual risks or entire classes of business. These reinsurance arrangements allow for greater diversification of business and stabilize Home Insurance's net losses arising from large risks or from hazards of an unusual nature. Home Insurance determines, by product line, an appropriate retention level based on an assessment of risk and portfolio size. As a general rule, the per risk retention does not exceed $5 million, and is generally lower. Although the ceding of insurance does not discharge the original insurer from its primary liability to its policyholder, the insurer or reinsurer that assumes the coverage also assumes the related liability.
On January 13, 1997 Home Insurance was served with suit papers issued from the Chancery Court of Davidson County, Tennessee in a purported class action. The allegations of the complaint are similar to those in the Texas litigation case that was recently settled.
The disgorgement amounts and fines described above in connection with the Commission, NYSE and NASD regulatory matters were accrued in the December 1995 financial statements. The Company has made timely payments of the disgorgement amounts and fines as required under these settlements.
(a) Excludes ceded unpaid losses of $787 million and $415 million in 1996 and 1995, respectively, relating to the Excess of Loss Rein- surance Agreement. See note 7 to the consolidated financial statements.
10.1 Recapitalization Agreement, dated as of February 9, 1995 by and among the Company, Trygg-Hansa AB ("Trygg-Hansa"), Zurich Insurance Company ("Zurich"), Zurich Centre Investments Limited, Insurance Partners Advisors, L.P. and ZCI Investments Limited (incorporated by reference to the Company's Report on Form 8-K filed on February 13, 1995).
10.8 Amendment No. 3 to the Recapitalization Agreement dated as of April 6, 1995. (incorporated by reference to Exhibit 10.1(g) of the Company's Form 10-K for the fiscal year ended December 31, 1994, File No. 0-19347).
10.11 Loan Documentation dated as of March 31, 1995 between the Company and ZCI Investments Limited. (incorporated by reference to Exhibit 10.1(h) of the Company's Form 10-K for the fiscal year ended December 31, 1994, File No. 0-19347).
10.27 Amendment No. 1 to Portfolio Value Swap Agreement with Home operating companies dated December 26, 1995 (incorporated by reference to Exhibit 10.27 of the Company's Form 10-K for the fiscal year ended December 31, 1995, File No. 0-19347).