Home Insurance rents approximately 583,000 square feet of space for use as its headquarters office building at 59 Maiden Lane, New York, New York, under a 15-year lease expiring in 1999. Of such space, approximately 93,000 square feet is sublet to third parties for periods approximately the same as the primary lease. The Company is involved in a dispute with its landlord, Olympia and York Maiden Lane Company (the "Landlord"), with respect to its lease at 59 Maiden Lane. See note 14 to the consolidated financial statements for further discussion.
(1) Effective January 1, 1991, Home Insurance entered into a Stop Loss Treaty with a group of reinsurers which protected Home Insurance against losses in all years prior to the year in which the treaty is cancelled. Home Insurance did not cede any additional premiums or losses to the Stop Loss Treaty after December 31, 1992. In 1995, in connection with the Recapitalization, Home Insurance commuted and assigned the Stop Loss Treaty. See note 7 to the consolidated financial statements.
(3) GAAP ratios and statutory loss ratios are expressed as a percentage of net earned premiums. Statutory expense ratios are expressed as a percentage of net written premiums. Both GAAP and statutory expense ratios include dividends to policyholders as a percentage of net earned premiums. As a result of the run-off of all Home Insurance operations effective June 12, 1995, disclosure of 1996 and 1995 ratios as a percentage of premiums is not meaningful.
(5) The Company adopted Statement of Financial Accounting Standards ("SFAS") No. 115, "Accounting for Certain Investments in Debt and Equity Securities", on December 31, 1993 and, accordingly, the carrying value of fixed maturities available for sale increased by $87 million, representing the unrealized gains on these investments and, after the effect of related deferred taxes, total stockholders' equity increased by $57 million.
(6) In connection with the Services Agreement between the Company and REM, effective January 1, 1996 all employees of Home Insurance became employees of REM. There are approximately 850 employees in REM, at the end of 1996, dedicated to serving the Company and Home Insurance.
The following should be read in conjunction with the consolidated financial statements and accompanying notes included elsewhere herein.
The net loss of $468 million included $662 million of bulk additions to loss and loss adjustment expense reserves, partially offset by an increased recoverable of $372 million under the Excess of Loss Reinsurance Agreement.
The 1995 net loss reflected incurred losses of $549 million related to Asbestos/Pollution Policies, which included $440 million of bulk reserve additions, and one-time losses of $418 million related to transactions in connection with the Recapitalization. The one-time losses of $418 million included a loss of $189 million due to the commutation and assignment of the Stop Loss Treaty and net realized capital losses of $208 million pertaining to previously recorded unrealized losses. The recognition of the capital losses results from the classification of its investments as a trading portfolio in connection with the Swap. The Company also recorded $21 million of transaction expenses. See notes 6 and 7 to the consolidated financial statements for further discussion of the Swap and the Stop Loss Treaty, respectively.
Underwriting loss $ (964) $ (1,294) $ (368) Excess of Loss Reinsurance Agreement 372 14 - Net investment income 146 219 225 Realized capital gains 9 (225) 16 --------- --------- -------- INSURANCE PRE-TAX OPERATING LOSS $ (437) $ (1,286) $ (127) ========= ========= ========
In connection with the Recapitalization which closed on June 12, 1995, Home Insurance ceased writing new and renewal business except for limited risks that Home Insurance is obligated to continue writing for an interim period. All Home Insurance operations are being run-off subsequent to June 12, 1995. The Company was downgraded in November 1994 by three primary insurance rating agencies, and the decline in earned premiums is attributable to the impact of such downgrades and the ceasing of business effective June 12, 1995. Prior to the Closing, the Company had attempted to mitigate the effect of the downgrades by entering into a Facility Agreement which allowed Home Insurance's clients to have access to the security of Zurich American, a Company that is A+ rated by A.M. Best. See notes 1 and 3 to the consolidated financial statements for further discussion of the Recapitalization Agreement and the Facility Agreement, respectively. Net earned premiums were as follows:
The 1996 underwriting loss was impacted by bulk additions to reserves of $662 million, including a $100 million increase in unallocated loss adjustment expense reserves, distributed among all product lines to reflect Home Insurance's experience in run-off during 1995 and 1996. The bulk reserve additions included a $225 million increase for Asbestos/Pollution Polices, $132 million for professional liability, $121 million for Commercial Casualty, $68 million for Other Specialty Lines, $65 million for excess run-off, $35 million for assumed reinsurance and $16 million for personal lines. The bulk additions to reserves were partially offset by an increased recoverable of $372 million under the Excess of Loss Reinsurance Agreement. The underwriting loss was also impacted by lower earned premiums and expenses incurred in managing the run-off of its operations.
Also, Home Insurance and Centre Reinsurance Dublin entered into the Excess of Loss Reinsurance Agreement, dated as of June 12, 1995. Home Insurance is provided with an aggregate limit of $1.3 billion subject to certain adjustments, attaching at the point that Home Insurance has no remaining cash or assets readily convertible into cash to pay any of its obligations. Among such adjustments, in the event that Home Insurance pays any dividends to the Company prior to the third anniversary of the Closing to fund interest payments on the Public Indebtedness, the limit will be increased by the amount of such dividends plus interest thereon at the rate of 7.5% per annum, compounded, from the date such dividends were paid to the date the reinsurers commence making payments under the Excess of Loss Reinsurance Agreement. See "Insurance Regulation - Dividend Restrictions". Also, up to $290 million of additional coverage provided by the Excess of Loss Reinsurance Agreement is linked to certain factors including dividend payments from Home Insurance to the Company funding principal payments on the Public Indebtedness (as defined in note 1 to the consolidated financial statements) as such debts become payable. The Excess of Loss Reinsurance Agreement became effective on June 12, 1995 upon (i) the payment by Home Insurance to Centre Reinsurance Dublin of $63 million and (ii) the transfer by Home Insurance of $166 million to Centre Reinsurance Dublin, representing the respective amounts received by Home Insurance from Zurich International (Bermuda) Ltd. and Centre Reinsurance Limited as a reinsurance commutation (exclusive of refunds of security costs).
Home Insurance recorded a $662 million bulk addition to reserves during the fourth quarter of 1996, including a $100 million increase in unallocated loss adjustment expense reserves, distributed among all product lines to reflect Home Insurance's experience in run-off during 1995 and 1996. The Company has compared industrywide payment trends to its own payments for Asbestos/Pollution Policies, and has considered it appropriate at this time to review industry ratios of reserves to payments in establishing its own reserves. The bulk reserve additions included a $225 million increase for Asbestos/Pollution Policies, reflecting higher aggregate annual payments in the last two years as Home Insurance has pursued more early settlement opportunities and simultaneously sought to strengthen its relative reserve position. The 1996 bulk reserve additions for other product lines was $437 million, including $132 million for professional liability, $121 million for Commercial Casualty, $68 million for Other Specialty Lines, $65 million for excess run-off, $35 million for assumed reinsurance and $16 million for personal lines. The professional liability increase reflects consolidation of a trend to a new level of higher claim severities which has persisted over the last three years compared to prior periods. The Commercial Casualty increases reflect a higher exposure measured for products liability, compared to earlier years, with associated increases in loss ratios, claim severities and tail factors. The increases for excess run-off and assumed reinsurance are less a reflection of the company's own immediate past experience than a response to higher tail factors for excess casualty exposure indicated by recent industry experience.
Home Insurance recorded a $440 million bulk addition to reserves during the fourth quarter of 1995 for Asbestos/Pollution Policies. Home Insurance also recorded a $75 million bulk reserve strengthening during the third quarter of 1994 for professional liability business. Strengthening for professional liability related to higher than expected case emergence in 1994 on recent accident years. This emergence related to an increased frequency of moderately-severe cases affecting the lawyers' professional liability line of business which, in the judgment of the Company at that time, represented a new, higher level of average settlement value for this business.
At December 31, 1996, the gross, ceded and net loss and loss adjustment expense reserves for Asbestos/Pollution Policies amounted to $1,501 million, $682 million and $819 million, respectively. Net reserves for Asbestos/Pollution Policies claims increased $140 million from $679 million at December 31, 1995.
Estimation of loss reserves for Asbestos/Pollution Policies is one of the most difficult aspects of establishing reserves, especially in view of changes in the legal and tort environment which affect the development of loss reserves. There is a high degree of uncertainty with respect to future exposure from these types of claims because significant issues exist as to the liabilities of the insureds, the extent to which insurance coverage exists, diverging legal interpretations and judgments state by state relating to, among other things, when the loss occurred and what policies provide coverage; what claims are covered; whether there is an insurer obligation to defend; how policy limits are determined; how policy exclusions are applied and interpreted; and whether clean-up costs represent insured property damage, and other matters. Home Insurance is engaged in litigation over the interpretation of policy coverage and other liability issues. If the courts expand the intent of the policies and the scope of coverage, as they sometimes have in the past, additional liabilities may emerge. Conversely, proposals for regulatory reform may serve to reduce or limit future liabilities. Among other complications, there are uncertainties regarding the number and identity of insureds with potential exposure, lack of historical data and long reporting delays. Management believes these issues are not likely to be resolved in the near future. Given these uncertainties, management believes that it is virtually impossible to determine ultimate losses in this area and no meaningful range for adequate reserves for such ultimate losses can be established at this time.
The process of estimating reserve requirements is necessarily imperfect and involves an evaluation of a large number of variables discussed above. Therefore, there can be no assurance that the ultimate liability will not exceed amounts reserved. However, on the basis of (i) current legal interpretations, and political, economic and social conditions, (ii) Home Insurance's internal procedures, which analyze Home Insurance's experience with similar cases and historical trends, such as reserving patterns, loss payments, pending levels of unpaid claims and product mix, and (iii) management's judgments of the relevant factors regarding reserve requirements for claims relating to Asbestos/ Pollution Policies, management believes that adequate provision has been made for Home Insurance's loss reserves.
At December 31, 1996, unpaid losses and loss adjustment expenses were net of a discount to unpaid losses of $134 million relating to all workers' compensation pension liabilities which are carried at present value, discounted at an interest rate of 7.5%. Home Insurance recorded decreases to the discount of $50 million in 1996 and $19 million in 1995, and an increase of $52 million in 1994. The 1996 decrease reflects a reduction in the escalation benefit and associated discount foreseen for claims in certain states, and also the natural unwinding of the discount as Home Insurance has ceased writing business. The increase in 1994 related to an increase in the number of workers' compensation pension cases as well as strengthened case development estimates. The decreases in the discount increased underwriting losses, while recording additional discount reduced underwriting losses. See note 4 to the consolidated financial statements for discussion of discount of loss reserves for statutory purposes.
Subsequent to the Recapitalization, all employees of Home Insurance were leased to REM and effective January 1, 1996, all personnel became employees of REM. All benefits under the Company's pension plans were frozen, and in 1995 a gain of $6 million was recorded due to settlement and curtailment of the plans.
ZIM manages the cash and invested assets of the Company and Home Insurance pursuant to an investment management agreement. Additionally, upon Closing, the Company and Home Insurance entered into the Swap effective January 1, 1995 with Centre Reinsurance Dublin whereby Centre Reinsurance Dublin will pay annually to the Company and Home Insurance any negative differences between the actual total return on such assets and a target total return of 7.5% per year (net of asset management fees) on such assets and, the Company and Home Insurance will pay annually to Centre Reinsurance Dublin any positive difference between the actual total return on such assets and the 7.5% target total return (net of asset management fees) on such assets.
As of December 31, 1996, the Company has recorded, as a component of the Portfolio Swap Receivable, an amount due from Centre Reinsurance Dublin of $48 million because of a negative difference from the 7.5% target return. The negative difference since January 1, 1996 resulted from the net of (i) a $35 million difference in favor of the Company due to a decrease in the fair value of investments underlying the Swap and (ii) a $13 million difference in favor of the Company for investment income representing an upward adjustment to reach the 7.5% target yield. Actual investment income before such adjustments was $133 million.
Principal transactions $ 152 $ 199 $ 109 Interest 127 117 89 Commissions 92 87 68 Underwriting and investment banking 36 32 34 Other 35 28 23 ------ ------ ------ Total revenues 442 463 323 Total expenses 417 430 313 ------ ------ ------ INCOME BEFORE INCOME TAXES $ 25 $ 33 $ 10 - --- ====== ====== ======
Total securities broker-dealer revenues decreased $21 million to $442 million for the year ended December 31, 1996, when compared to the prior year. Principal transactions revenues were $152 million for the year ended December 31, 1996, a decrease of $47 million or 24% for the year. This was primarily due to the firm discontinuing the proprietary trading of listed equities, municipal bonds, as well as, closing the mortgage brokerage operations. Commissions increased $5 million or 6% from the prior year to $92 million due to increased investor participation in the equities markets.
The decrease in securities broker-dealer expenses to $417 million from $430 million in the same period last year primarily reflects decreases in compensable revenues and decreased legal and audit costs related to a defalcation in 1994. Income before taxes was $25 million for the year compared to $33 million for the prior year a decrease of 24%.
Corporate interest expense was $49 million, $46 million and $38 million in 1996, 1995 and 1994, respectively, and was related to debt incurred in connection with the Recapitalization and the acquisition of Home Insurance and its consolidated subsidiaries in 1991 by the Company. Corporate interest expense increased during 1996 and 1995 as compared to 1994 due to the increased debt incurred in connection with the Recapitalization. As a result of the Company's debt rating being reduced to BB- by S&P, the interest rate on the 1998 Senior Notes increased from 7% to 7 3/4% and the interest rate on the 2003 Senior Notes increased from 7 7/8% to 8 5/8% in November 1994. See note 5 to the consolidated financial statements for additional information on corporate debt.
Other expenses were nil, $24 million, and $8 million in 1996, 1995 and 1994, respectively. Other expenses in 1995 were due primarily to transaction expenses incurred in connection with the Recapitalization. Other expenses in 1994 were primarily due to corporate expenses.
Income tax expense was $7 million, $3 million and $7 million in 1996, 1995 and 1994, respectively. In 1996, 1995 and 1994, the Company's federal income tax expense was insignificant due to its pre- tax losses. No income tax benefit was recognized as a result of such losses. A reconciliation between income taxes computed at the statutory federal rate and the provision for income taxes is included in note 8 to the consolidated financial statements.
Effective December 13, 1996, pursuant to Amendment No. 2 to the Amended and Restated Purchase Agreement, dated as of April 26, 1995, between the Company and ZHI, the Amended and Restated Note Exchange Agreement, dated as of April 26, 1995, between the Company and Trygg- Hansa, the Amended and Restated Securities Purchase Agreement, dated as of April 26, 1995, between ZHI and Trygg-Hansa, the Amended and Restated Standby Working Capital Credit Agreement, dated as of April 26, 1995, between the Company and ZHI, and the notes issued thereunder, such documents were amended to effectuate the original intent of the parties thereto to permit the issuance of up to an aggregate principal amount of $46,550,000 Series B Senior Working Capital Notes, which aggregate principal amount is equal to the aggregate amount of interest payments made by the Company with respect to the Public Indebtedness up to December 31, 1996. The proceeds of the Series B Senior Working Capital Notes, as so amended, were used by the Company to make required interest payments on the Public Indebtedness up to December 31, 1996.
The sources of funds of the Company consist primarily of dividends from Home Insurance. Accordingly, the Company's ability to pay its obligations depends on the receipt of sufficient funds from Home Insurance. Home Insurance is subject to regulatory restrictions on the amount of dividends that must be paid as described above. The Company did not receive any common stock dividends from Home Insurance in 1996 and 1995. Based on the Company's most current cash flow projections, without dividends from Home Insurance, the Company is unlikely to be able to meet its cash flow needs during 1997.
At December 31, 1996, the Company's outstanding corporate debt was $567 million and, at December 31, 1995, was $517 million. As part of the Recapitalization, Trygg-Hansa refinanced the sum of $178 million of indebtedness outstanding under the Credit Agreement ($170 million) and the Interest Deferral Agreement ($8 million). In exchange the Company issued $98 million of 12% Senior Subordinated Notes, at original issue discount ($303 million principal value) and $80 million of 8% Junior Subordinated Notes at original issue discount ($171 million principal value). See note 1 to the consolidated financial statements for further discussion. The principal repayments under the Public Indebtedness are $100 million in 1998 and $180 million in 2003, however the repayment of the 2003 Senior Notes have changed as a result of an exchange (see discussion below). The Company would need to fund the required principal payments for the Public Indebtedness through dividend income from Home Insurance.
On March 3, 1997, Home Insurance was placed under formal supervision by the Department. The Department states in its Order that this action was taken in response to Home Insurance's RBC report filed with the Department which indicates that a Mandatory Control Level Event has occurred. See "Risk Based Capital", for further discussion. The Order establishes that the Department will oversee and supervise Home Insurance for the purpose of continuing and intensifying an economic, actuarial and accounting review of the books, records and business affairs of Home Insurance so as to determine what future actions may be appropriate. The Order also provides that Home Insurance may not take certain actions without the prior approval of the Department, including, among other matters, payment of claims and other obligations within certain dollar limits, and changes in the terms and conditions of certain existing contracts and entering into of certain new contracts. See "Insurance Regulation".
The Department gave Home Insurance permission to include in the 1996 Statutory Annual Statement a non-tabular discount which results from discounting all loss reserves, and allocated and unallocated loss adjustment expense reserves at 7%. Home Insurance has sufficient assets that will earn 7% to meet the expected stream of loss and loss adjustment expense payments. Home Insurance calculated that the non-tabular discount is $469 million. The non-tabular discount is not included in the Company's consolidated financial statements prepared under GAAP. Home Insurance's consolidated policyholders' surplus determined in accordance with statutory practices, and after reflecting the benefit of non-tabular discount, was $55 million. Statutory surplus at December 31, 1995 was $230 million. The decline is attributable primarily to the net loss in 1996. Home Insurance reported a consolidated statutory net loss of $685 million in 1996, $272 million in 1995 and $204 million in 1994. The 1996 net loss reflects loss and loss adjustment expense reserve bulk additions of $662 million, lower earned premiums and expenses incurred in managing the run-off of its operations.
In order to enhance the regulation of insurer solvency, on December 5, 1993 the NAIC approved a formula and model law to implement RBC requirements for property and casualty insurance companies, which are designed to assess capital adequacy and to raise the level of protection that statutory surplus provides for policyholder obligations. The RBC formula for property and casualty insurance companies measures three major areas of risk facing property and casualty insurers: (i) underwriting, which encompasses the risk of adverse loss development and inadequate pricing; (ii) declines in asset values arising from credit risk; and (iii) declines in asset values arising from investment risks. Pursuant to the model law, insurers having less statutory surplus than required by the RBC calculation will be subject to varying degrees of regulatory action, depending on the level of capital inadequacy.
Securities broker-dealer debt of $246 million and $304 million at December 31, 1996 and 1995, respectively, consists principally of loans from banks which are payable on demand. See note 10 to the consolidated financial statements.
Securities broker-dealer liquid assets of $1,677 million and $1,389 million at December 31, 1996 and 1995, respectively, consisted of cash, marketable securities, receivables from brokers and dealers and securities purchased under agreements to resell. Another major component of assets is receivables from customers, primarily consisting of margin debt, which are collateralized by customers' securities. Receivables from customers were $982 million and $979 million at December 31, 1996 and 1995, respectively. At December 31, 1996 and 1995, securities broker-dealer total assets were $2,831 million and $2,553 million, respectively, and were financed by equity capital, subordinated borrowing, term notes, short-term borrowing, customers' interest-bearing and non-interest-bearing free credit balances and other payables.
Certain minimum amounts of capital must be maintained by securities broker-dealer subsidiaries to satisfy the requirements of the Uniform Net Capital Rule (Rule 15c3-1) of the Commission and the capital rules of other regulatory authorities. At December 31, 1996, Gruntal & Co.'s net capital, as defined by the Commission and other regulatory authorities, was approximately $125 million, which was $104 million in excess of the aggregate minimum required.
On February 24, 1997, Gruntal, and The 1880 Group LLC entered into the Reorganization Agreement, under which Gruntal will be restructured as a limited liability company, Gruntal Financial, and partially transferred to a management group led by Gruntal officers. Home Insurance will be the sole owner of Gruntal after the consummation of the Reorganization. The Reorganization involves the issuance of several classes of securities to Gruntal and The 1880 Group, including preferred securities, in an aggregate nominal amount of approximately $235 million as follows: (i) Gruntal Financial will issue to Gruntal, the direct wholly-owned subsidiary of Home Insurance, securities called Preferred A Interests in a nominal amount of $155.5 million and securities called Preferred B Interests in a nominal amount of $70 million; and (ii) Gruntal Financial will issue to The 1880 Group securities called Preferred C Interests in an approximate nominal amount of $9 million. As a result of the Reorganization, Gruntal will own 40% of the common interest of Gruntal Financial and The 1880 Group will own 60% of the common interest of Gruntal Financial. In connection with the issuance of certain preferred securities to Gruntal, Home Insurance and Centre Reinsurance Dublin will enter into a swap agreement intended to ensure that Home Insurance's investment in Gruntal Financial yields at least $155.5 million plus a 7.5% per annum rate of return thereon, subject to certain modifications with respect to certain distributions and sales proceeds of the common and preferred interests of Gruntal Financial. The closing of the Reorganization occurred on March 28, 1997, and did not result in a gain or loss to the Company. See note 15 to the consolidated financial statements for further discussion.
We have audited the consolidated financial statements of Home Holdings Inc. and subsidiaries as listed in the accompanying index. In connection with our audits of the consolidated financial statements, we have also audited the financial statement schedules as listed in the accompanying index. These consolidated financial statements and financial statement schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedules based on our audits.
The accompanying consolidated financial statements have been prepared in accordance with generally accepted accounting principles. Amounts included therein for non-tabular loss and loss adjustment expense reserves have not been discounted for the time value of money as described above.
Because of the significance of the uncertainty discussed in the fourth paragraph, we are unable to express, and we do not express, an opinion on the accompanying 1996 consolidated financial statements. Also we are unable to express, and we do not express, an opinion on the related financial statement schedules.
As discussed in Note 12 to the consolidated financial statements, the Company adopted the provisions of the Financial Accounting Standards Board's Statement of Financial Accounting Standards No. 112, "Employers' Accounting for Postemployment Benefits," effective January 1, 1994.
KPMG Peat Marwick LLP New York, New York March 27, 1997
Home Holdings Inc., a Delaware corporation (the "Company"), is a holding company for its wholly-owned subsidiaries, The Home Insurance Company, a New Hampshire corporation, and its insurance subsidiaries ("Home Insurance"). Home Insurance generally ceased writing new or renewal insurance on June 12, 1995 in connection with a recapitalization agreement described below. Home Insurance also owns Gruntal Financial Corp. ("Gruntal"), a securities brokerage business, and Sterling Forest Corporation ("Sterling Forest"), a property development business. See note 15 for further discussion.
On March 3, 1997, Home Insurance was placed under formal supervision by the New Hampshire Insurance Department (the "Department"). The Department states in its Order of Supervision (the "Order") that this action was taken in response to Home Insurance's Risk-Based Capital ("RBC") report filed with the Department which indicates that a mandatory control level event has occurred within the meaning of New Hampshire Revised Statutes of Annotated 404-F:6 (a "Mandatory Control Level Event"). See note 4 for further discussion of RBC. The Order establishes that the Department will oversee and supervise Home Insurance for the purpose of continuing and intensifying an economic, actuarial and accounting review of the books, records and business affairs of Home Insurance so as to determine what future actions may be appropriate. The Order provides that Home Insurance may not take certain actions without the prior approval of the Department, including, but not limited to:
In addition, without limiting the general authority of the Department as set forth above, the Department shall have the final authority to approve, disapprove or control (including the power to direct) the following:
ii) The location and material terms of all banking, investment, trust, deposit and custodial accounts for assets of Home Insurance, including but not limited to reserves.
Following the Closing, Home Insurance has generally ceased writing new or renewal insurance or reinsurance business, except for limited risks that it is obligated to continue writing for an interim period. Zurich and its affiliates have been afforded rights of access and cooperation assisting them in assessing the existing business of Home Insurance and the business and assets of the Company and its subsidiaries are being managed by affiliates of Zurich.
o The Company issued to Trygg-Hansa (a) $98 million aggregate principal amount of the Company's 12% Senior Subordinated Notes due December 31, 2004 (the "Senior Subordinated Notes") and (b) $80 million aggregate principal amount of the Company's 8% Junior Subordinated Notes due December 31, 2004 (the "Junior Subordinated Notes") in exchange for all notes and other obligations of the Company outstanding under the Credit Agreement, dated as of November 20, 1991, as amended, between the Company and Trygg-Hansa (the "Credit Agreement") and in exchange for the aggregate principal amount of the notes and all other obligations of the Company outstanding under the Interest Deferral Agreement (the "Interest Deferral Agreement"), dated as of February 9, 1995, by and between the Company and Trygg-Hansa, representing interest deferred on the Credit Agreement Notes from February 9, 1995 to June 12, 1995. See note 5 for further discussion.
o ZCI issued a commitment to extend a line of credit of up to $30 million to Sterling Forest to fund the commercial and residential development of land owned by Sterling Forest. Sterling Forest borrowed $7.5 million as of December 31, 1996, bearing interest at a rate of 10% per annum.
o As of April 7, 1995, ZHI, ZCI, and certain of the holders of the Company's 7% Senior Notes due 1998 and 77/8% Senior Notes due 2003 (collectively, the "Senior Notes") entered into an agreement (the "Bondholder Agreement") pursuant to which each such Bondholder delivered to the trustee under the Indentures governing the Senior Notes on April 18, 1995, a Waiver, Consent and Release consenting to waivers and amendments to the Indentures necessary to consummate the Recapitalization. Also pursuant to the Bondholder Agreement, on August 25, 1995, the Company completed an exchange offer in which approximately $179 million principal value of the 77/8% Senior Notes due 2003 were exchanged for the Company's 77/8% Senior Sinking Fund Notes due December 15, 2003 (the "New Notes") which provide for a sinking fund payment (to be applied to the mandatory retirement of the New Notes) in installments of approximately $36 million each in years 1999 through 2003. The Senior Notes and the New Notes are collectively referred to as the public indebtedness (the "Public Indebtedness"). See note 5.
was appointed by Centre Investment Services Limited to manage the cash and invested assets of the Company and Home Insurance pursuant to an investment management agreement, which was amended to add ZIM as an additional party.
The accompanying consolidated financial statements have been prepared on the basis of generally accepted accounting principles ("GAAP") which assumes that the Company will continue as a going concern. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported revenues and expenses during the reporting period. Actual results could differ from those estimates. Certain reclassifications have been made to the 1995 and 1994 financial statements to conform to the 1996 presentation.
The consolidated financial statements include the accounts of the Company and its subsidiaries, principally Home Insurance. All material intercompany accounts and transactions have been eliminated.
Premiums are generally recognized as earned on a pro rata basis over the contract period. Revenues include estimates of premiums for policies with audit or retrospectively-rated features. The liability for unearned premiums represents the portion of premiums written relating to the unexpired terms of coverage.
The Company has reclassified its insurance investments including fixed maturities, equity securities and short-term investments underlying the Swap, as a balance receivable from Centre Reinsurance Dublin ("Portfolio Swap Receivable"). See note 6. The Swap is designed to transfer control and market risk of the portfolio to Centre Reinsurance Dublin for a fixed return of 7.5%.
Reinsurance receivables other than the recoverable from the Excess of Loss Reinsurance Agreement, represent estimates of the amount that will be recovered from reinsurers on both paid and unpaid losses and loss adjustment expenses, determined in a manner consistent with the liabilities associated with the reinsured policies. The recoverable from the Excess of Loss Reinsurance Agreement is calculated based on the present value of the Company's projected future cash flows. (See note 7)
Earned premiums and losses and loss adjustment expenses are net of ceded reinsurance.
Unpaid losses are determined using case and case development estimates for reported claims and estimates based on experience and expected loss development for unreported claims. Unpaid loss adjustment expenses are estimated based on experience and expected future emergence. The liability for unpaid losses and loss adjustment expenses excludes ceded reserves included within reinsurance receivable and is net of salvage and subrogation recoverable and discounts on workers' compensation pension liabilities at a rate of 7.5% which represents the risk free rate. At December 31, 1996 and 1995, unpaid loss and loss adjustment expenses were net of discount of $134 million and $184 million, respectively, relating to all workers' compensation pension liabilities. The process of estimating loss reserves is necessarily imperfect and involves an evaluation of several variables such as claim frequency and severity as well as social and economic conditions. Consequently, there can be no assurance that the ultimate liability will not exceed amounts reserved.
Policy acquisition costs, consisting of commissions, premium taxes and certain underwriting expenses, are deferred and amortized ratably over the terms of the related policies. The method followed in computing deferred policy acquisition costs limits the amount of such costs to their estimated realizable value. In determining estimated realizable value, the computation gives effect to the premium to be earned, related investment income, losses, loss adjustment expenses and certain other costs expected to be incurred as the premium is earned. Amortization of deferred policy acquisition costs was $32 million in 1996, $118 million in 1995 and $124 million in 1994.
Substantially all investments of securities broker-dealer operations are carried at fair value. Realized and unrealized gains or losses and investment income on these securities are included in securities broker-dealer operations revenues.
The Company and its domestic subsidiaries file a consolidated federal income tax return.
Deferred tax assets and liabilities are established for the temporary differences between the financial reporting basis and tax basis of the Company's assets and liabilities at enacted tax rates expected to be in effect when such amounts are recovered or settled. Deferred tax assets are reduced by a valuation allowance, if it is more likely than not that some portion or all of the related tax benefits will not be realized.
The accounts of foreign insurance operations are translated into U.S. dollars based on current exchange rates. Translation adjustments relating to City International Insurance Company Limited, a U.K. subsidiary, are reflected as a separate component of stockholders' equity.
Prior to 1995, loss per common share was based on the weighted average number of common shares outstanding. The weighted average number of shares of common stock outstanding were 34,803,000 for the year ended December 31, 1994. In 1994, per share amounts reflect an increase of common shares outstanding as a result of an initial public offering of shares of Series A Common Stock, par value $.01 per share, which was completed in December 1993.
LOSSES AND LOSS ADJUSTMENT EXPENSES Direct $ 1,202 $ 1,732 $ 2,104 Assumed 186 418 155 Ceded (800) (386)* (687) ---------- --------- --------- Net $ 588 $ 1,764 $ 1,572 ========== ========= =========
(a) In connection with the Recapitalization, on December 24, 1994, Zurich Insurance Company U.S. Branch ("Zurich American"), the Company and Trygg-Hansa entered into the Facultative Reinsurance Facility Agreement (the "Facility Agreement"). Pursuant to the Facility Agreement, Zurich American agreed to issue facultative reinsurance certificates and related cut-through endorsements with respect to policies issued by Home Insurance, if requested by Home Insurance and if such risks met Zurich American's underwriting criteria. On February 9, 1995, the Facility Agreement was amended to provide that existing or prospective insureds of Home Insurance that decline a Zurich American reinsurance certificate will be offered a Zurich American insurance policy with associated premiums and liabilities being assumed by Home Insurance through a 100% quota share reinsurance agreement.
The effect of the Facility Agreement for the years ended December 31, 1996 and 1995 are as follows:
Written premiums: Direct** $ (6) $ (181) Assumed 4 521 Ceded (8) (38) --------- --------- Net $ (10) $ 302 ========= =========
The Company's loss and loss adjustment expense payments for claims on Asbestos/Pollution Policies have not been material in relation to the Company's total losses and loss adjustment expense payments. Losses and loss adjustment expense payments relating to these claims were $93 million, $109 million and $76 million and total payments for all policy claims and related loss expenses were $1.1 billion in 1996, $1.0 billion in 1995 and $1.5 billion in 1994.
As of December 31, 1996, Home Insurance had approximately 2,100 policies for which one or more claims were open relating to asbestos and pollution matters. Some policies have both asbestos and pollution claims open against them. As of the end of 1996, the Company has open approximately 900 asbestos claims and 3,300 pollution claims. The Company has provided claim count information in an effort to provide additional insight into the magnitude of the management effort required to deal with the case load in the areas of Asbestos/Pollution Policies. Claim counts for these exposures are not, however, subject to the same level of consistent definition that is common for other insured perils. A claim count for a Pollution Policy might involve a single waste site in a single year for which coverage is being sought under a single policy. Alternatively, a single claim count might involve a settlement covering many waste sites over many years and/or several policies in several layers of coverage per year. As a result, the interpretation of this data is complicated and the use of average values calculated on the basis of this data is likely to be misleading. The number of open asbestos claims has been fairly stable over the last five years. The number of pollution claims has also been fairly stable over the last four years. In addition, as of December 31, 1996, Home Insurance was involved in approximately 330 coverage disputes (where an action seeking a declaratory judgment had been filed, the resolution of which will require a judicial interpretation or compromise resolutions of an insurance policy) related to claims on Asbestos/Pollution Policies.
The process of estimating reserve requirements is necessarily imperfect and involves an evaluation of a large number of variables discussed above. Therefore, there can be no assurance that the ultimate liability will not exceed amounts reserved. However, on the basis of (i) current legal interpretations, and political, economic and social conditions, (ii) Home Insurance's internal procedures, which analyze Home Insurance's experience with similar cases and historical trends, such as reserving patterns, loss payments, pending levels of unpaid claims and product mix, and (iii) management's judgments of the relevant factors regarding reserve requirements for claims relating to Asbestos/Pollution Policies, management believes that adequate provision has been made for Home Insurance's loss reserves.
In connection with the Recapitalization, ZHI purchased 170 shares of the Company's Preferred Stock, having an aggregate liquidation preference equal to $98 million to fund the Equity Repurchase Transaction. On June 12, 1995, the Company repurchased 9,234,701 shares of its Series A Common Stock for $10 in cash plus an additional payment of $.20 per share in settlement of certain litigation related to the Recapitalization. The repurchase has the effect of Trygg-Hansa and the Investor Group owning virtually the entire equity in the Company. As a result of the Equity Repurchase Transaction, it is not meaningful to display 1996 and 1995 per share data.
On March 3, 1997, Home Insurance was placed under formal supervision by the Department. The Department states in its Order that this action was taken in response to Home Insurance's RBC report filed with the Department, as discussed below, which indicates that a Mandatory Control Level Event has occurred. The Order establishes that the Department will oversee and supervise Home Insurance for the purpose of continuing and intensifying an economic, actuarial and accounting review of the books, records and business affairs of Home Insurance so as to determine what future actions may be appropriate. The Order also provides that Home Insurance may not take certain actions without the prior approval of the Department, including, among other matters, payment of claims and other obligations within certain dollar limits, and changes in the terms and conditions of certain existing contracts and entering into of certain new contracts. See note 1.
Insurance Regulatory Information System ("IRIS") was developed by a committee of state insurance regulators primarily to assist state insurance departments in executing their statutory mandate to oversee the financial condition of insurance companies. IRIS helps to select those companies that merit highest priority in the allocation of the regulators' resources on the basis of eleven financial ratios which are calculated annually. The analytical phase is a review of annual statements and the financial ratios. The ratios and trends are valuable in pointing to companies likely to experience financial difficulties, but are not themselves indicative of adverse financial condition. The ratios and benchmark comparisons are mechanically produced and are not intended to replace the state insurance departments' own in-depth financial analyses or on-site examinations.
An unusual range of ratio results has been established from studies of the ratios for companies that have become insolvent or have experienced financial difficulties. falling outside the usual range. In the analytical phase, all companies that receive four or more financial ratio values outside the usual range are analyzed in order to identify those companies that appear to require immediate regulatory attention. Subsequently, a more comprehensive review of the ratio results and an insurer's annual statement is performed to confirm that an insurer's situation in fact calls for increased and closer regulatory attention.
In 1996, Home Insurance was outside the usual values of seven IRIS test ratios. Two of the failed ratios relate to loss reserves, one to change in writings, one to the two-year overall operating ratio, one to the change in surplus and one to the relationship of total liabilities to liquid assets and one to the relationship of agent's balances to surplus. Upon Closing of the Recapitalization, Home Insurance ceased underwriting insurance business, except as required by regulation or contractual obligation.
In order to enhance the regulation of insurer solvency, on December 5, 1993 The National Association of Insurance Commissioners ("NAIC") approved a formula and model law to implement RBC requirements for property and casualty insurance companies, which are designed to assess capital adequacy and to raise the level of protection that statutory surplus provides for policyholder obligations. The RBC formula for property and casualty insurance companies measures three major areas of risk facing property and casualty insurers: (i) underwriting, which encompasses the risk of adverse loss development and inadequate pricing; (ii) declines in asset values arising from credit risk; and (iii) declines in asset values arising from investment risks. Pursuant to the model law, insurers having less statutory surplus than required by the RBC calculation will be subject to varying degrees of regulatory action, depending on the level of capital inadequacy.
In December 1993, as part of a 1993 recapitalization, the Company sold the Public Indebtedness subject to an interest rate adjustment of 3/4% depending on debt ratings assigned by Moody's Investors Service, Inc. or Standard & Poor's Corporation ("S&P"). On November 7, 1994, as a result of a reduction in the Company's debt rating to BB- by S&P, the interest rate on the Public Indebtedness increased by 3/4% to 7 3/4% for the Senior Notes due in 1998 and 85/8% for the Senior Notes due in 2003.
Pursuant to the Bondholder Agreement (as described in note 1), on August 25, 1995, the Company completed an exchange offer in which approximately $179 million principal value of the 7 7/8% Senior Notes due 2003 were exchanged for the Company's 7 7/8% New Notes which provide for a Sinking Fund payment (to be applied to the mandatory retirement of the New Notes) in installments of approximately $36 million each in years 1999 through 2003.
As part of the Recapitalization, Trygg-Hansa refinanced the sum of $178 million of indebtedness outstanding under the Credit Agreement ($170 million) and the Interest Deferral Agreement ($8 million). In exchange the Company issued $98 million of 12% Senior Subordinated notes, issued at original issue discount ($303 million principal value) and $80 million of 8% Junior Subordinated Notes issued at original issue discount ($171 million principal value). The carrying value of the Senior Subordinated Notes reflect amortization of a discount of $20 million and $7 million as of December 31, 1996 and 1995, respectively. The Junior Subordinated Notes reflect amortization of discount of $11 million and $4 million as of December 31, 1996 and 1995, respectively. The Company is not required to pay any interest or principal on the Senior Subordinated Notes or the Junior Subordinated Notes until maturity at December 31, 2004. See note 1.
During 1995 and 1996, the Company issued to Centre Finance approximately $46 million aggregate principal amount on the Company's 7% Series B Senior Working Capital Notes to fund interest payments occurring through December 1996 on the Public Indebtedness. The principal on these notes is due on the successive one year anniversaries of the Closing date; however, the date can be extended for annual periods at the option of either Centre Finance or the Company until December 15, 2003. The Company elected in 1996 to extend the due date until June of 1997.
At December 31, 1995 the Company had outstanding a series of forward interest rate swap agreements for an aggregate notional amount of $120 million to hedge against interest rate volatility in connection with the Credit Agreement (see note 1). Under the agreements, the Company paid interest at rates ranging from 7.9% to 8.0% and received interest at London Interbank Offered Rate ("LIBOR"). The agreements expired in February, 1996, with a final payment by the Company of $659,000.
The cost and estimated fair values of the securities managed by ZIM and underlying the Portfolio Swap Receivable from Centre Reinsurance Dublin at December 31, 1996 and 1995 are as follows:
The estimated fair value of fixed maturities underlying the Swap at December 31, 1996, by contractual maturity, are as follows. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties:
Due in one year or less $ 21 Due after one year through five years 554 Due after five years through ten years 218 Due after ten years 43 Mortgage-backed 292 --------- TOTAL $ 1,128 =========
The mortgage-backed securities portfolio is primarily comprised of high-quality collateralized mortgage obligations and agency pass-through securities with an average life of 5.0 years and an average yield to market of 7.9%. The portfolio consists of securities for which there is an actively traded market and, accordingly, the fair value is based on quoted market prices.
Fixed maturities and equity securities not underlying the Swap at December 31, 1996 were $28 million and $21 million, respectively. Certain securities which were non-income producing for twelve months or more were $8 million and $9 million at December 31, 1996 and 1995, respectively.
Investments valued at $230 million at December 31, 1996 were carried on deposit with various state insurance departments.
In 1996 and 1995, the Company's insurance investment income was based on a 7.5% return as discussed above. The sources of insurance net investment income for 1994 are as follows:
Insurance realized capital gains and losses and the change in net unrealized gains (losses) for 1994 are as follows:
Fixed maturities (6) Equity securities (4) ---------- Total realized capital losses (10) ---------- NET REALIZED CAPITAL GAINS $ 16 ==========
Under the Stop Loss Treaty, the reinsurers indemnified Home Insurance to the extent its ultimate net loss exceeded the sum of (i) the loss and loss adjustment expense reserves as of December 31, 1990 and (ii) for 1991 through cancellation, a specified percentage of net earned premiums. Premiums paid to the reinsurers under the Stop Loss Treaty were $59 million in 1994 and $9 million in 1993. At December 31, 1994, premiums and losses and loss adjustment expenses ceded under the Stop Loss Treaty were $295 million and $590 million, respectively. At December 31, 1994, the amount recoverable net of premium payable of $100 million under the Stop Loss Treaty was $490 million.
Based on cash flow forecasts at December 31, 1996 the Company is projecting that the coverage limits of the Excess of Loss Reinsurance Agreement will be exhausted, and due to these projected future recoveries, loss reserves with a net present value of $787 million were recorded as of December 31, 1996 as a recoverable from the Excess of Loss Reinsurance Agreement, including an additional $372 million during 1996. As of December 31, 1995, the recoverable from the Excess of Loss Reinsurance Aggreement was $415 million. The increase resulted primarily from changes to cash flow projections which now forecast that the cover will be exhausted, and changes in the net present value of the receivable based on current projections of amounts and timing of cash inflows and outflows.
At December 31, 1996, 1995 and 1994, the Company has available for federal income tax purposes regular net operating loss carryforwards of $1,986 million, $1,267 million and $717 million, respectively. The Company has available alternative minimum tax loss carryforwards of $1,882 million, $1,163 million, and $615 million at December 31, 1996, 1995 and 1994, respectively.
DEFERRED TAX LIABILITIES Deferred acquisition costs 1 12 Other 9 5 ------- ------ Gross deferred tax liabilities 10 17 ------- ------ Net deferred tax liability $ - $ - ======= ======
The net increase in the valuation allowance in 1996 of $160 million was due to increases in temporary differences and net operating losses.
The securities broker-dealer has a revolving credit agreement with a maximum amount permitted to be outstanding of $7 million at December 31, 1996 and December 31, 1995. The loan is due in July 1997 and can be repaid earlier with three days written notice. Interest accrues at a premium above various short-term rates. In 1996 and 1995, the interest rates were a premium above the 90-day LIBOR rate and 90-day certificate of deposit rate, respectively.
The securities broker-dealer has term notes with lending institutions which are collateralized by furniture and equipment with a net book value of $1 million and securities owned by the securities broker-dealer with a fair value of $15 million at December 31, 1996.
The revolving credit agreement and term notes have certain restrictive covenants that require the securities broker-dealer to maintain minimum aggregate levels of stockholder's equity, subordinated borrowings, debt service coverage ratio and net capital.
At December 31, 1996, there were no amounts due from any individual reinsurer in excess of 10% of the Company's stockholders' deficiency, excluding amounts due from Centre Reinsurance Dublin, General Reinsurance Corporation and Lloyds of London which were $787 million, $187 million and $261 million, respectively.
Reinsurance receivables, excluding recoverables from the Excess of Loss Reinsurance Agreement, at December 31, 1996 include $1,842 million for unpaid losses and loss adjustment expenses, and $136 million for paid losses and loss adjustment expenses. Home Insurance has recorded reserves for recoverable reinsurance of doubtful collection of $126 million and $146 million as of December 31, 1996 and 1995, respectively. The effect of reinsurance on the Company's premiums and losses is shown in note 3.
Rental expense was $41 million in 1996, $63 million in 1995, $74 million in 1994. Sublease income was $3 million in 1996 and $2 million in 1995 and 1994.
Home Insurance is involved in a dispute with its landlord, Olympia and York Maiden Lane Company, with respect to its lease of its principle offices at 59 Maiden Lane, New York, New York. See note 14 for further discussion.
While the aggregate dollar amounts involved in these legal proceedings cannot be determined with certainty, if the Company or its subsidiaries were required to pay the amounts at issue, such payment or payments could have a material adverse effect on the Company's financial condition or results of operations. However, in the opinion of management, the ultimate aggregate liability in these actions is not expected to exceed the amounts currently reserved in an amount which would have a material adverse effect on the Company's financial condition or results of operations. There are no assurances that the outcome of these matters will not vary materially from management's estimates.
Pursuant to the Order, the Department has the final authority to approve, disapprove or otherwise control (including the power to direct) the initiation, settlement or withdrawal of any action, dispute, arbitration, litigation or proceeding of any kind involving Home Insurance other than in the ordinary course of business. In addition, pursuant to the Order, Home Insurance is prohibited from making certain payments, as specified in the Order, without the prior approval of the Department. See note 1 for further discussion of the Order.
A settlement between fourteen of the primary defendants, including Home Insurance, was reached. Home Insurance has contributed approximately $8 million, which had been accrued as of December 31, 1995, under a trust agreement pending final court approval. On July 5, 1996 the Texas District Court gave preliminary approval to the settlement. The defendants submitted to a verification process of their damage calculations. Final orders of approval were issued by the court on November 1, 1996. The settlement is being implemented through refunds to insureds.
The principal causes of action are for breach of contract, fraud, misrepresentation, conspiracy, unjust enrichment, and violation of the Tennessee Consumer Protection and Trade Practices Acts. Compensatory and punitive damages are sought in unspecified amounts plus treble damages.
A complaint and temporary restraining order issued from the New York State Supreme Court were served upon Home Insurance by Bertholon-Rowland Corp., a large producer of Home Insurance's professional liability business in New York and Massachusetts. The action arose out of the producer's decision to terminate its business relationship with Home Insurance on six months' notice, and Home Insurance's subsequent immediate suspension of the producer's authority to act on its behalf. The complaint sought an injunction and damages nullifying the suspension of authority and enforcing the producer's contractual rights to its customer accounts and commissions. Compensatory and punitive damages were sought. By stipulation of the parties the restraining order was dissolved and legal proceedings stayed pending submission of the dispute to an arbitration panel. The final award of the arbitration panel dated August 7, 1995 ordered, among other things, that Bertholon-Rowland's damages claim against Home Insurance be denied. Home Insurance's motion to confirm the arbitration award was submitted to the court on October 12, 1995. On November 8, 1995, Bertholon-Rowland obtained a court order temporarily restraining alleged violations of its ownership rights to policy expirations, and filed a motion for a preliminary injunction against Home Insurance and Zurich-American Insurance Group and Professional Liability Underwriting Managers Inc. due to the alleged violations and seeking other relief as well. Subsequently, Bertholon-Rowland filed a motion to amend the temporary restraining order based upon alleged continuing violations of its expiration rights. The motions are pending before the court. The Company does not believe that the outcome of this action will have a material adverse effect on its financial condition or results of operations.
Home Insurance, as a member of the AmBase affiliated group, joined in filing consolidated federal income tax returns with AmBase during tax years through February 13, 1991, and is severally liable for any federal income tax, including interest, ultimately assessed against AmBase for years during such period. In the event AmBase federal income tax and interest assessments exceed the amount held back pursuant to the Stock Purchase Agreement, as amended, and AmBase does not have sufficient financial resources to pay the excess amount, Home Insurance would be severally liable for such excess amount.
AmBase federal tax years through 1991 have been examined and settled by the Internal Revenue Service, with the exception of a "Fresh Start" issue for the 1987 tax year and no additional assessments can be made. Based upon public disclosures by AmBase and information provided by AmBase to the Company under the terms of the Stock Purchase Agreement, as amended, (i) AmBase believes that it has meaningful defenses with respect to the "Fresh Start" tax issue that is material to AmBase and (ii) the Company believes that if AmBase does not have sufficient financial resources to pay federal income tax and interest assessments for the 1987 tax year for which Home Insurance is severally liable and for the additional AmBase withholding tax issue still open for which Home Insurance believes it is not liable, any liability of Home Insurance for such amounts in excess of the amount held back pursuant to the Stock Purchase Agreement, as amended, would not have a material adverse effect on the Company's or Home Insurance's financial condition or results of operations. No amounts have been accrued by Home Insurance or the Company in excess of the amount held back pursuant to the Stock Purchase Agreement, as amended.
On June 1, 1996, Home Insurance began withholding rent and tax payments to the Landlord. Subsequently, the Trustee and the Landlord issued several notices to Home Insurance threatening to terminate its lease and/or seek possession of the premises. On July 19, 1996, Home Insurance brought an action against the Landlord and the Trustee in its capacity as trustee in New York State Supreme Court entitled, The Home Insurance Company v. Olympia & York Maiden Lane Company, et al., seeking a preliminary injunction to prohibit the Landlord from terminating the lease or beginning an independent rent action in Landlord-Tenant court. In this action, Home Insurance seeks damages from the Landlord for rent overcharges, refusal to obtain tax relief which would benefit Home Insurance, failure to maintain the building including certain life safety systems, and failure to meet its obligations (including statutory and regulatory obligations) with respect to The Americans with Disabilities Act and asbestos in the building.
As a condition for continuing the preliminary injunction, Home Insurance increased its deposit in escrow to $10.7 million. The Landlord moved for summary judgment for past due rent. Home Insurance moved to amend its complaint (i) to add a cause for constructive eviction from approximately 23% of its premises, where its environmental expert has identified "significantly damaged" asbestos containing materials ("ACM"); (ii) to increase the amount of damages sought by Home Insurance for the Landlord's refusal to obtain tax relief to more than $20 million; (iii) to join the bondholders as a class action; and (iv) to consolidate the foreclosure action brought by the Trustee against the Landlord. On December 30, 1996 the Court granted (i) Home's motion to amend with respect to items (i) and (ii), but denied Home Insurance's motion with respect to item (iii) pending mediation, and also with respect to item (iv) without prejudice to renew before the assigned judge. The Court granted the Landlord's motion for partial summary judgment on its counterclaims holding Home Insurance liable for rent due and owing from June 1, 1996 to November 30, 1996, plus interest from September 1, 1996, together with costs and disbursements. The remainder of the Landlord's motion was denied without prejudice. The Court stayed entry and execution of the Landlord's judgment. In accordance with the Court's order, Home Insurance filed its amended and supplemental verified complaint. The Landlord and Trustee counterclaimed, and Home Insurance replied. On March 4, 1997, the Court directed Home Insurance to deposit into escrow, without prejudice, rent for the period September 1, 1996 through November 30, 1996, which payment is currently due to be made by April 1, 1997. On March 27, the Landlord moved for summary judgment on additional rent, for entry of the earlier summary judgement, and for other relief. Concurrent with the litigation, the Company and the Landlord are currently engaged in mediation. Management believes that it is too early to predict with certainty the ultimate outcome of this dispute. However, an unfavorable outcome could have a material adverse impact on the Company's financial condition.
On or about January 17, 1997, Marine Midland (the trustee in the action described above), brought an action entitled Marine Midland Bank v. Zurich Insurance Company, et al. in New York State Supreme Court against Zurich and certain affiliates, Home Insurance and REM alleging, among other things, that the conveyance to Zurich of the right to write renewal business on policies of Home Insurance constituted a fraudulent transfer under New York State law because Home Insurance purportedly was rendered insolvent as a result and did not receive adequate consideration from Zurich for this right. Plaintiff in its complaint disregards that the transaction, which permitted the conveyance of this right to Zurich, was approved by the Department in April 1995. The complaint, which does not seek any relief against Home Insurance, demands judgment against Zurich and certain of its affiliates for all past and future rent due under the lease between Home Insurance and its landlord, not paid by Home Insurance, plus interest, or alternatively, for the imposition of a constructive trust upon the proceeds obtained by Zurich from the conveyance noted above, which according to plaintiff would secure the repayment of Home Insurance's purported obligations under its lease, as well as attorneys' fees. The complaint also seeks from REM damages in the amount of all rents due and owing under the lease plus interest, as well as, a declaration that REM is obligated to make all future rent payments. On March 27, 1997, REM and Home Insurance moved to dismiss the complaint.
In April 1996, pursuant to a settlement entered into between Gruntal and the Commission, and without admitting or denying the allegations therein, Gruntal consented to the entry of an administrative order in which the Commission found that Gruntal's practices with respect to Abandoned Property violated antifraud and broker-dealer reporting and recordkeeping provisions of the federal securities laws, and aided and abetted violations of the federal securities laws by the Company. The Commission order censured Gruntal and required Gruntal to pay $5.5 million in disgorgement and prejudgment interest and a monetary fine of $4 million, and reimburse any customers determined by an independent consultant acceptable to the Commission to have been financially harmed by Gruntal's OTC execution and reporting practices. The disgorgement fund will be administered and disbursed by a fund administrator pursuant to a report and a plan which will be submitted to the Commission and require court approval. Under the terms of the settlement, the fund administrator is also required to verify Gruntal's representation to the Commission that it has repaid, recredited, escheated or segregated and scheduled for escheatment $6.7 million which Gruntal has identified as escheatable, or presently believes to be escheatable, or has identified as belonging to customers, contra-parties, vendors and other third parties. In June 1996, at the direction of the Commission and as approved by the order of the United States District Court for the Southern District of New York in SEC v. Gruntal & Co., Incorporated, et al., 96 Civ. 2514, James R. Doty, Esq., a partner in the law firm of Baker & Botts, LLP and a former General Counsel of the Commission, was engaged to serve as Fund Administrator (hereinafter, the "Fund Administrator").
In addition, Gruntal entered into a stipulation with the NYSE staff in March 1996 to resolve the NYSE's investigation of Abandoned Property and other issues relating to the supervision of pricing and valuation of certain collateralized mortgage obligations and certain proprietary trading accounts, as well as the accuracy of FOCUS reports previously filed with the NYSE and the late filing of certain other required reports with the NYSE. Pursuant to the stipulation, which was approved by the NYSE in April 1996, Gruntal was censured and required to pay a $1 million fine to the NYSE. Gruntal also agreed to retain the Independent Consultant to review Gruntal's systems and procedures and make recommendations for additional systems and procedures, if necessary, reasonably designed to ensure Gruntal's compliance with federal securities laws and NYSE rules and to prevent the recurrence of the violations described in the stipulation.
In April 1996, pursuant to a consent between Gruntal and the NASD, and without admitting or denying the allegations therein, Gruntal also consented, among other things, to findings by the NASD that during 1995 through the date of the consent, Gruntal violated certain provisions of the NASD Bylaws and Rules of Fair Practice by trading ahead of certain customer limit orders, failing to report or timely report certain trading transactions and failing to enforce written supervisory procedures relating to the execution of limit orders. Pursuant to the terms of the consent, Gruntal was censured and required to pay a fine of $200,000, up to $100,000 of which may be waived to the extent of payment by Gruntal to customers harmed by certain trading practices, as discussed below. In addition, Gruntal agreed to retain the Independent Consultant to review and, if appropriate, make recommendations with respect to Gruntal's practices and written procedures pertaining to Gruntal's trading, execution and reporting practices in Nasdaq securities. Gruntal is also required to pay to each customer identified by the Independent Consultant as harmed by practices described above the amount by which each customer was harmed plus accrued interest.
As discussed above, the USAO undertook a separate investigation relating to the Abandoned Property matter. Based upon the information presently available, Gruntal cannot predict whether the USAO will charge Gruntal with any criminal violations. Gruntal believes that any decision by the USAO to prosecute Gruntal would have a materially adverse impact on Gruntal's financial condition. Gruntal has advised the USAO of its views and has also communicated a number of factors that in Gruntal's view would support a decision not to indict Gruntal, including Gruntal's self-reporting to, and cooperation with, governmental, regulatory and self-regulatory bodies, remediation of past non-compliance with state abandoned property laws and recrediting of customer accounts, adoption of new policies and procedures, management and personnel changes, ongoing review of its business practices, and willingness to agree to the appointment of an independent monitor with authority to review Gruntal's business activities and recommend further changes in policies and procedures.
Gruntal has also brought the Abandoned Property and other matters referred to above to the attention of the Commodity Futures Trading Commission ("CFTC") and the North American Securities Administrators Association, a national association of state securities regulators. These matters could result in additional investigations and proceedings by the CFTC and state securities regulators, in connection with which such authorities may seek to impose additional sanctions against Gruntal. Although the ultimate outcome cannot be predicted with certainty, management presently believes that any such sanctions would not have a materially adverse effect on the consolidated financial condition of Gruntal or the Company.
During the third quarter of 1996, Gruntal discovered that approximately 2,800 principal transactions involved customers that were employee benefit plans or individual retirement arrangements under the Employee Retirement Income Security Act of 1974, as amended ("ERISA") or parallel provisions of the Internal Revenue Code. In the absence of an available exemption, these transactions would be "prohibited transactions" under Section 406 of ERISA and Section 4975 of the Code. Gruntal is examining the availability of certain exemptions. Management believes it is too early to predict with certainty the ultimate outcome of this matter, but management does not believe that such costs will have a material adverse effect on the financial position of Gruntal or the Company.
In connection with the Reorganization, the management of The 1880 Group LLC will enter into management services agreements with The 1880 Group LLC which, in turn, will provide such services to Gruntal Financial.
SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF REGISTRANT BALANCE SHEET DECEMBER 31,
ASSETS Cash $ - $ - Other assets 3 4 -------- -------- Total assets $ 3 $ 4 ======== ========
LIABILITIES AND STOCKHOLDERS' DEFICIENCY Corporate debt $ 567 $ 517 Equity in deficiency of Home Insurance 947 533 Other liabilities 28 31
Equity in loss of Home Insurance(a) $ (419) $ (1,259) $ (132) Goodwill writeoff - - (206) Interest expense (49) (46) (38) Other expenses - (21) (9) --------- --------- -------- Net loss $ (468) $ (1,326) $ (385) ========= ========= ========
Steven D. Germain 43 Class I Director, President and Chief Executive Officer Michael D. Palm 45 Class III Director Zaid O.B. Pedersen 49 Class II Director
Set forth below is certain information concerning the directors and executive officers of the Company as of March 25, 1997.
Mr. Pedersen has served as a director of the Company since January, 1994. Mr. Bruneheim has served as director of the Company since February 1995 and Messrs. Germain and Palm have served as directors of the Company since June 1995.
On April 15, 1996 the Board of Directors of the Company appointed John C. Vlahoplus to serve as President and Chief Executive Officer of the Company, replacing Jan Bruneheim of Trygg-Hansa, who resigned April 15, 1996. Mr. Vlahoplus was Vice President of Zurich Centre ReSource Limited and previously was an attorney with Sullivan & Cromwell. He resigned as President and Chief Executive Officer on December 10, 1996.
Mr. Germain was appointed President and Chief Executive Officer of the Company on January 9, 1997. He had been Secretary and General Counsel of the Company since June, 1995 and resigned from such position on May 20, 1996. He also has served as Managing Director of Zurich Centre ReSource Limited and General Counsel of Zurich Centre Investments Limited and its wholly owned subsidiaries since 1994. Since 1988, Mr. Germain has served as General Counsel of the Centre Reinsurance Group of Companies. Mr. Germain also serves on the Board of Directors of Superior National Insurance Company (a California workers' compensation insurer).
Mr. Palm has been Executive Vice President of Centre Reinsurance Limited since its founding in 1987. He also serves as Executive Vice President of Zurich Centre Investments Limited since March 1994 and Chief Executive Officer of Centre Reinsurance Holdings Limited. since September 1995. Mr. Palm also serves on the Board of Directors of Zurich Reinsurance Centre Holdings, Inc.
The Board of Directors may, from time to time, establish certain committees to facilitate the management of the Company, but currently there are no committees.
(3) The amounts in this column represent premiums on executive supplementary insurance benefits in the amounts of $12,786 and $11,715 for Mr. Bruneheim for 1996 and 1995, respectively. Amount paid in 1996 to Mr. Bruneheim's behalf for the pension plan was $2,138.
(1) Trygg-Hansa and Centre Re might be deemed to be members of a "group" as that term is used in Section 13(d)(3) of the Exchange Act. The group members might be deemed to collectively beneficially own 22,872,388 shares, representing approximately 95% of the outstanding shares of Series A Common Stock (including shares deemed outstanding pursuant to Rule 13d-3(d)(1) under the Exchange Act). The share ownership reflected in this table includes only shares owned beneficially by each individual group member, and excludes shares owned by virtue of group membership.
(2) Including (i) 11,091,844 shares which Trygg-Hansa has the right to acquire, and (ii) 333,333 shares which ZHI has, the right to acquire upon conversion of the Series B Convertible Stock and which are deemed outstanding for purposes of Rule 13d-3(d)(1) under the Exchange Act.
(3) Includes (i) 10,248,988 shares of Series A Common Stock owned of record and beneficially by Trygg-Hansa, and (ii) 11,091,844 shares which Trygg-Hansa has the right to acquire upon conversion of the 11,091,844 shares of Series B Convertible Stock owned by it.
(4) Trygg-Hansa omsesidig livforsakring and Forsakringsbolaget SPP, omsesidigt may be deemed, because of their shared control over Trygg-Hansa to own beneficially the aggregate number of Series A Common Stock beneficially owned by Trygg-Hansa.
(7) Zurich might be deemed to beneficially own those shares of Series A Common Stock beneficially owned by Centre Re, by virtue of Zurich's indirect ownership of all of the shares of voting stock of Centre Re and the fact that Centre Re is a party to the Governance Agreement. Zurich might be deemed to beneficially own 24,253,381 shares of Series A Common Stock, representing approximately 95% of the outstanding shares (including shares deemed outstanding pursuant to Rule 13d-3(d)(1) under the Exchange Act).
The Company, Trygg-Hansa, Zurich, ZCI, IP and ZHI are parties to the Recapitalization Agreement, dated as of February 9, 1995, as subsequently amended. For a summary of the Recapitalization Agreement and other agreements entered into among the Company and the other parties in connection with the Recapitalization Agreement, including the Facility Agreement between the Company, Trygg-Hansa and Zurich and the amendments thereto, see notes 1 and 3 to the consolidated financial statements. Additionally, Risk Enterprise Management Limited, which is a subsidiary of Zurich, is party to a Services Agreement with the Company. See "Business - Recapitalization Agreement and Related Agreements."
In connection with the Recapitalization, Home Insurance commuted or assigned its right to receive payment under the Stop Loss Treaty, with a group of reinsurers including Centre Reinsurance Limited, Zurich International (Bermuda) Ltd. and Trygg-Hansa Insurance Company Limited ("THI"), a wholly owned subsidiary of Trygg-Hansa. Also, Home Insurance purchased an Aggregate Excess of Loss Reinsurance Agreement with Centre Reinsurance Dublin, an indirect subsidiary of Zurich. Mr. Germain who serves as President, Chief Executive Officer and director of the Company, and Mr. Palm, who serves as director of the Company, also have positions in the Centre Reinsurance Group of Companies, which includes Centre Reinsurance Dublin. Mr. Germain serves as General Counsel of the Centre Reinsurance Group of Companies and Mr. Palm serves as Executive Vice President of Centre Reinsurance Limited, Executive Vice President of ZCI and Chief Executive Officer of Centre Reinsurance Holdings Limited.
Prior to June 30, 1996, the Company and Trygg-Hansa had together purchased, from an unaffiliated insurer, directors' and officers' insurance coverage insuring directors and officers of all their affiliated companies. The Company recorded an expense, relating to this coverage, of $2.6 million, $2.9 million, $2.4 million, $3.4 million and $3.9 million in 1996, 1995, 1994 and 1993, respectively, for its share of the cost of this coverage. As of July 1, 1996, the Company purchased a separate policy.
Trygg-Hansa, Trygg-Hansa omsesidig livforsakring, Industrial Insurance Company, Centre Re (Bermuda), and the Bishop Estate are parties to a Governance Agreement. The Governance Agreement has not been terminated, however, the parties to the Securityholders' Agreement described below have agreed that Trygg-Hansa will exercise its voting rights under the Governance Agreement and will otherwise take, and cause the Company to take all actions permitted under the Governance Agreement or the Certificate and the Company's by-laws so that, to the extent possible, the purpose and intent of the Securityholders' Agreement are effectuated.
The following description of the Securityholders' Agreement is qualified in its entirety by the provisions of the Securityholders' Agreement, a copy of which is filed herewith as an exhibit.
Trygg-Hansa has further agreed that, at any time after the first anniversary of the Closing Date and until December 31, 2003, it will vote its shares of Common Stock in the manner designated by ZHI with respect to a merger or consolidation of the Company.
The Charter provides that the Insurance Company Stockholders shall have no duty to refrain from (i) engaging in the same or similar business activities or lines of business as the Company, (ii) doing business with any client or customer of the Company or (iii) employing or otherwise engaging any officer or employee of the Company. Accordingly, no Insurance Company Stockholder nor any officer or director thereof (except as provided in the following paragraph) will be liable to the Company or to its stockholders for breach of any fiduciary duty by reason of any such activities. The Charter also provides that no Insurance Company Stockholder is under any duty to present any corporate opportunity to the Company which may be a corporate opportunity for such Insurance Company Stockholder and the Company, and such Insurance Company Stockholder will not be liable to the Company or its stockholders for breach of any fiduciary duty as a stockholder of the Company by reason of the fact that such Insurance Company Stockholder pursues or acquires such corporate opportunity for itself, directs such corporate opportunity to another person or does not present such corporate opportunity to the Company.
Where persons who are directors or officers of both the Company and an Insurance Company Stockholder acquire knowledge of a potential transaction or matter which may be a corporate opportunity for both the Company and such Insurance Company Stockholder, the Charter provides that such directors or officers of the Company (a) shall have fully satisfied their fiduciary duties to the Company and its stockholders with respect to such corporate opportunity, (b) shall not be liable to the Company or its stockholders for breach of fiduciary duty by reason of such Insurance Company Stockholder's actions with respect to such corporate opportunity, (c) shall, for proposes of the Charter, be deemed to have acted in good faith and in a manner such officers and directors believed to be in and not opposed to the best interests of the Company and (d) shall, for purposes of the Charter, be deemed not to have breached their duties of loyalty to the Company or its stockholders or to have derived an improper personal benefit therefrom, if such persons act in good faith in a manner consistent with the following policy. A corporate opportunity offered to any person who is a director or an officer of the Company and who is also a director or an officer of an Insurance Company Stockholder shall belong to the Company only if such opportunity is expressly offered to such person solely in his capacity as a director or an officer of the Company, and otherwise shall belong to such Insurance Company Stockholder.
Presently, Messrs. Bruneheim and Pedersen who are officers of Trygg-Hansa, serve as directors of the Company.
For purposes of the Charter, "corporate opportunities" include business opportunities which the Company is financially able to undertake, which are, from their nature, in the Company's line of business, are of practical advantage to it and are ones in which it has an interest or a reasonable expectancy, and in which, by embracing the opportunities, the self-interest of an Insurance Company Stockholder or its officers or directors will be brought into conflict with that of the Company.
(i) the material facts as to the contract, agreement, arrangement or transaction are disclosed or are known to the Board or the committee thereof which authorizes the contract, agreement, arrangement or transaction, and the Board or such committee in good faith authorizes the contract, agreement, arrangement or transaction by the affirmative vote of a majority of the disinterested directors, even though the disinterested directors be less than a quorum; or
Any person purchasing or otherwise acquiring any interest in any shares of capital stock of the Company will be deemed to have notice of and to have consented to such provisions of the Charter.
Although the Company does not anticipate any material adverse effect to occur as a result of the foregoing provisions, it is impossible to predict whether any transaction or event will occur in the future that may implicate such provisions. Accordingly, there can be no assurance that the application of the foregoing provisions will not have a material adverse effect on the Company.
1. Financial Statements The list of financial statements appears in the accompanying index on page 49.
All other schedules have been omitted because they are not applicable.
2.1 Reorganization Agreement dated February 24, 1997 between Gruntal Financial Corp. ("GFC") and The 1880 Group LLC ("The 1880 Group") (incorporated by reference to the Company's Report on Form 8-K filed on February 25, 1997).
10.4 Amended and Restated Note Exchange Agreement, dated as of April 26, 1995 (incorporated by reference to Amendment No. 1 to Schedule 13E-4).
10.6 Amendment No. 1 to the Recapitalization Agreement dated as of March 24, 1995 (incorporated by reference to the Company's Report on Form 8-K filed April 6, 1995).
10.9 Amendment No. 4 to the Recapitalization Agreement, dated as of April 24, 1995 (incorporated by reference to the Company's Schedule 13E-4 dated April 25, 1995).
10.14 Amendment No. 1 to Facultative Reinsurance Facility Agreement, dated as of February 9, 1995 by and among Zurich, the Company and Trygg-Hansa. (incorporated by reference to Exhibit 10.2(a) of the Company's Form 10-K for the fiscal year ended December 31, 1994, File No. 0-19347).
10.15 Amendment No. 2 to Facultative Reinsurance Facility Agreement dated as of June 12, 1995 by and among Zurich, the Company and Trygg-Hansa (incorporated by reference to Exhibit 10.15 of the Company's Form 10-K for the fiscal year ended December 31, 1995, File No. 0-19347).
10.16 Services Agreement dated as of June 12, 1995 by and among Risk Enterprise Management Limited, Zurich Centre Investments Limited, the Company, The Home Insurance Company and its insurance subsidiaries (incorporated by reference to Exhibit 10.16 of the Company's Form 10-K for the fiscal year ended December 31, 1995, File No. 0-19347).
10.17 Investment Management Agreement dated as of June 12, 1995 by and among Centre Investment Services Limited, Zurich Centre Investments Limited, the Company, The Home Insurance Company and its insurance subsidiaries (incorporated by reference to Exhibit 10.17 of the Company's Form 10-K for the fiscal year ended December 31, 1995, File No. 0-19347).
10.19 Aggregate Excess of Loss Reinsurance Agreement dated as of June 12, 1995 by and between The Home Insurance Company and Centre Reinsurance International Company (incorporated by reference to Exhibit 10.19 of the Company's Form 10-K for the fiscal year ended December 31, 1995, File No. 0-19347).
10.23 Guaranty Agreement dated as of June 12, 1995 by Zurich Insurance Company for the benefit of The Home Insurance Company (incorporated by reference to Exhibit 10.23 of the Company's Form 10-K for the fiscal year ended December 31, 1995, File No. 0-19347).
10.26 Portfolio Value Swap Agreement dated as of June 12, 1995 by and between Centre Reinsurance International Company, The Home Insurance Company and its insurance subsidiaries (incorporated by reference to Exhibit 10.26 of the Company's Form 10-K for the fiscal year ended December 31, 1995, File No. 0-19347).
10.28 Portfolio Value Swap Agreement by and between Centre Reinsurance International Company and the Company (incorporated by reference to Exhibit 10.28 of the Company's Form 10-K for the fiscal year ended December 31, 1995, File No. 0-19347).
10.32 Agreement dated as of February 5, 1996 among the Company, Zurich Home Investments Limited and Trygg-Hansa regarding consent to issuance of additional Series A Senior Working Capital Notes (incorporated by reference to Exhibit 10.32 of the Company's Form 10-K for the fiscal year ended December 31, 1995, File No. 0-19347).
10.33 Governance Agreement among Trygg-Hansa SPP Holding AB (now known as Trygg-Hansa AB), Trygg-Hansa omsesidig livforsakring, Industrial Mutual Insurance Company, International Insurance Investors L.P., Centre Reinsurance Limited and the Trustees of the Estate of Bernice Pauahi Bishop (incorporated by reference to the Company's Registration Statement on Form S-1, File No. 33-69308).
10.34 Amendment No. 1 to Governance Agreement, dated as of January 12, 1994 (incorporated by reference to Exhibit 10.1(a) of the Company's Form 10-K for the fiscal year ended December 31, 1993, File No. 0-19347).
10.36 Stock Purchase Agreement among AmBase Corporation, The Home Insurance Company and TVH Acquisition Corporation, dated as of Septem- ber 28, 1990, as amended as of December 12, 1990, December 21, 1990 and February 4, 1991 (incorporated by reference to Exhibit 10A of The Home Insurance Company's Form 10-K for the fiscal year ended December 31, 1990, File No. 1-8963).
10.38 Consulting Agreement dated as of February 13, 1991 among AmBase Corporation, The Home Insurance Company and TVH Acquisition Corporation (incorporated by reference to Exhibit 10C of The Home Insurance Company's Form 10-K for the fiscal year ended December 31, 1990, File No. 1-8963).
10.40 Consolidated Group Tax Agreement dated as of February 13, 1991 between TVH Acquisition Corporation and Gruntal Financial Services, Inc. (incorporated by reference to Exhibit 10B of Company's Form 10-Q for the fiscal quarter ended March 31, 1991, File No. 0-19347).
10.44 Office lease dated as of June 29, 1984 between The Home Insurance Company and Olympia and York Maiden Lane Company (incorporated by reference to The Home Insurance Company's Registration Statement on Form S-1, File No. 2-98576).
10.46 Partnership Agreement of Reinsurance dated June 19, 1992 between The Home Insurance Company and Trygg-Hansa Forsakrings AB (incorporated by reference to the Company's Registration Statement on Form S-1, File No. 33-693080).
10.49 Form of Indenture dated as of December 28, 1993 of $180,000,000 77/8% Senior Notes Due December 15, 2003 between the Company as Issuer and The Bank of New York as Trustee (incorporated by reference to Post-Effective Amendment No. 1 to the Company's Registration Statement on Form S-1, File No. 33-69470).
10.50 Indenture dated as of August 22, 1995 of $180,000,000 77/8% Senior Sinking Fund Notes due December 15, 2003 between the Company as Issuer and The Bank of New York as Trustee (incorporated by reference to Exhibit 10.50 of the Company's Form 10-K for the fiscal year ended December 31, 1995, File No. 0-19347).
10.51 Interest and Liabilities Agreement and Property Surplus Share Treaty between The Home Insurance Company and certain subscribing reinsurers (incorporated by reference to Amendment No. 1 to the Company's Registration Statement on Form S-1, File No. 33-69308).
10.52 Property and Casualty Corporate Catastrophe Program Agreements between The Home Insurance Company and various reinsurers (incorporated by reference to Amendment No. 1 to the Company's Registration Statement on Form S-1, File No. 33-69308).
10.53 First Amendment to the Service Agreement dated March 4, 1997 among Risk Enterprise Management Limited, Zurich Centre Investments Limited, the Company, US International Reinsurance Company and The Home Insurance Company (incorporated by reference to the Company's Report on Form 8-K filed on March 10, 1997).
10.54 Joint Unanimous Written Consent dated December 31, 1996 of Holders, namely, Centre Reinsurance Holdings Limited, Zurich Home Investments Limited and Centre Finance Dublin, of Home Holdings Inc. Series A and Series B Working Capital Notes issued by the Company pursuant to the Amended and Restated Standby Working Capital Credit Agreement dated as of April 26, 1995 (incorporated by reference to the Company's Report on Form 8-K filed on January 3, 1997).
*10.57 Amendment No. 2, dated as of December 13, 1996, to the Amended and Restated Purchase Agreement, dated as of April 26, 1995, between the Company and ZCI Investments Limited, the Amended and Restated Note Exchange Agreement, dated as of April 26, 1995, between the Company and Trygg-Hansa AB, the Amended and Restated Securities Purchase Agreement, dated as of April 26, 1995, between ZCI Investments Limited and Trygg-Hansa AB, the Amended and Restated Standby Working Capital Credit Agreement, dated as of April 26, 1995, between the Company and ZCI Investments Limited and the notes issued thereunder.
99.2 Form of Limited Liability Company Agreement of Gruntal Financial, LLC, to be dated as of the date of the consummation of the Reorganization between GFC and The 1880 Group (attached to the Reorganization Agreement as Exhibit 3.1C) (incorporated by reference to the Company's report on Form 8-K filed on February 25, 1997).
99.3 Form of Amendment No. 2 to the Portfolio Value Swap Agreement to be dated as of the date of the consummation of the Reorganization by and among The Home Insurance Company and Centre Reinsurance Dublin (attached to the Reorganization Agreement as Exhibit 3.1E) (incorporated by reference to the Company's report on Form 8-K filed on February 25, 1997).
Pursuant to the requirements of the Securities Exchange Act of 1934, Home Holdings Inc., the Registrant, has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of New York, State of New York, on the 28th day of March 1997.