NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - - -------------------------------------------------------------------------------- NOTE A. DESCRIPTION OF BUSINESS ================================================================================
REINSURANCE. TIG's reinsurance operations are conducted through TIG Reinsurance Company ("TIG Re"). Reinsurance is a form of insurance whereby the reinsurer (i.e. TIG Re) agrees to indemnify another insurance company (the "ceding company") for all or a portion of the insurance risks underwritten by the ceding company under an insurance policy or policies. TIG Re focuses on excess of loss casualty coverages, written on a treaty basis, generally taking large participations in a limited number of programs. TIG Re's predominant source of business is through reinsurance intermediaries. Net premium written for the Reinsurance division comprised 36%, 32%, and 27% of consolidated net premium written for the years ended December 31, 1996, 1995 and 1994, respectively.
COMMERCIAL SPECIALTY. Commercial Specialty coverages provide protection against property loss and legal liability for injuries to other persons or damage to their property arising from the policyholder's business operations. Commercial Specialty develops and markets insurance programs where the nature of the risk does not lend itself to traditional commercial insurance. Significant programs include Sports and Leisure, with products for professional and amateur sports events, and Workers' Compensation, which provides liability coverage to employers for payment of employee benefits associated with employment-related accidents as mandated by state laws. Commercial Specialty products are principally marketed through large managing general agents, with which TIG sometimes has exclusive marketing contracts. Net premium written for the Commercial Specialty division comprised 30%, 27%, and 29% of consolidated net premium written for the years ended December 31, 1996, 1995 and 1994, respectively.
Interest on fixed maturity investments is recorded as income when earned and is adjusted for any amortization of purchase premium or accrual of discount. Realized gains and losses on the sale of investments are generally determined on a first-in-first-out basis. Realized losses are recorded when an investment's net realizable value is below cost, and the decline is considered other than temporary.
obligations, the amounts reported in the balance sheet are management's best estimate of that amount. Certain liabilities for unpaid losses related to long-term workers' compensation coverage are discounted to present value. The discount on these workers' compensation loss reserves was $39 million at December 31, 1996 and 1995.
DEFERRED POLICY ACQUISITION COSTS. Acquisition costs that vary with and are primarily related to the production of new business, consist principally of commissions, premium taxes, and other expenses incurred at policy issuance and renewal. The costs are generally deferred and amortized ratably over the terms of the underlying policies. Anticipated losses, loss expenses, and remaining costs of servicing the policies are considered in determining the amount of costs to be deferred. Anticipated investment income is considered in determining whether a premium deficiency exists. Amortization of deferred policy acquisition costs totaled $347 million, $335 million, and $299 million for the years ended December 31, 1996, 1995 and 1994, respectively.
TIG recorded a $100 million accrual in first quarter 1996 for estimated restructuring charges comprised of severance of $17 million; contractual policy obligations of $37 million; office lease termination of $18 million; furniture, equipment and capitalized software write-downs of $12 million; and a reserve for litigation and credit issues related to terminated producers of $16 million. The remaining reserve at December 31, 1996 is $53 million. Charges against the 1996 restructure accrual of $47 million have been recorded during 1996 and are comprised of $9 million in severance, $23 million in contractual policy obligations, $10 million in lease termination costs and $5 million in asset write-downs. Management estimates that the last renewals for remaining policies in-force at December 31, 1996 will be processed by late 1997 and that related net written premium will decline by over 75% in 1997 as compared to 1996. The underwriting loss from Other Lines operations was $34 million, $32 million and $88 million for 1996, 1995 and 1994, respectively.
Less than one-third of TIG's portfolio consists of mortgage-backed securities ("MBS"). United States federal government and government agency mortgages now represent approximately 91% of TIG's exposure to MBS, offering AAA credit quality and high yields. A risk inherent to MBS is prepayment risk related to interest rate volatility. The underlying mortgages may be repaid earlier or later than originally anticipated, dependent on the repayment and refinancing activity of the underlying homeowners. Should this occur, TIG would receive paydowns on principal amounts which may have been purchased at a premium or discount, and TIG's investment income would be affected by any adjustments to amortization resulting from the prepayments. TIG's consolidated financial results have not been materially impacted by prepayments of MBS. In addition, interest rate volatility can affect the market value of MBS. All MBS held in the portfolio can be actively traded in the public market.
one open derivative position for an interest rate swap with a notional amount of $14 million and such derivative financial instrument was with a financial institution rated A or better by the major credit rating agencies. There were no open future contracts at December 31, 1996 as compared to open futures contracts of $25 million at December 31, 1995. Net unrealized losses of $4.4 million at December 31, 1996 related to previous futures contracts are accounted for as a net increase in the cost basis of the underlying securities and are being amortized over the life of the hedged securities.
TIG routinely enters into commitments to purchase securities on a "To Be Announced" ("TBA") basis for which the interest rate risk remains with TIG until the date of delivery and payment. Delivery and payment of securities purchased on a TBA basis can take place a month or more after the date of the transaction. These securities are subject to market fluctuations during this period and it is the Company's policy to recognize any gains or losses only when they are realized. TIG maintains cash and securities with a fair value exceeding the amount of its TBA purchase commitments. At December 31, 1996, the TBA purchase commitments amounted to $46.3 million, and had a fair value of $45.9 million, compared to TBA commitments of $152.2 million with a fair value of $153.1 million at December 31, 1995.
The estimated market value and amortized cost of the portfolio, by contractual maturity, at December 31, 1996 are presented below. Expected maturities will differ from contractual maturities as certain borrowers have the right to call or prepay obligations.
Years Ended December 31, ------------------------ (In millions) 1996 1995 1994 ========================================================== Fixed maturity investments $298 $273 $252 Short-term and other investments 6 7 6 - - ---------------------------------------------------------- Total gross investment income 304 280 258 Investment expenses, interest and other (14) (12) (9) - - ---------------------------------------------------------- Total net investment income $290 $268 $249 ==========================================================
(In millions) 1996 1995 ============================================================== Balance January 1, net of reinsurance recoverables of $1,134 and $1,152 $2,752 $2,721 Incurred related to: Current year 1,122 1,200 Prior years 16 (24) - - -------------------------------------------------------------- Total losses and LAE incurred 1,138 1,176 - - -------------------------------------------------------------- Loss and LAE payments related to: Current year 374 367 Prior years 882 778 - - -------------------------------------------------------------- Total losses and LAE payments 1,256 1,145 - - -------------------------------------------------------------- Balance December 31, net of reinsurance recoverables of $1,126 and $1,134 $2,634 $2,752 ==============================================================
Loss and LAE reserve development during 1995 was favorable by $24 million and was primarily comprised of $18 million and $16 million of favorable development, in the commercial multi peril reserves related primarily to Other Lines and in Commercial Specialty workers' compensation, respectively. The commercial multi peril result is due in part to the favorable loss ratio trend stemming from corrective underwriting action instituted during 1993. Most of the favorable development applies to general liability coverages which benefit greatly from TIG's litigation management effort as well as other operational initiatives designed to improve the handling of claims for long-tail coverages. Workers' compensation reserve development continued to benefit from external factors driving the industry-wide improvement observed in 1994 and 1993. During 1995, both paid loss development and case reserve development remained well below the historical patterns underlying TIG's carried reserves. Higher than expected loss ratio results during 1995 account for offsetting unfavorable development recorded in Other Lines automobile liability coverages. Much of the 1995 adverse development for Other Lines occurred in long haul trucking programs which were discontinued in 1996.
TIG files a consolidated federal income tax return. At December 31, 1996, TIG had a net operating loss carryover of $101 million, of which $3 million will expire in 2008 and $98 million will expire in 2009. Additionally, TIG has a $47 million capital loss carryover, of which $18 million will expire in 1999, $18 million will expire in 2000 and $11 million will expire in 2001. For the tax years ended December 31, 1996 and 1995, TIG made tax payments of $5.2 and $1.0 million, respectively. For the tax year ended December 31, 1994, no federal income tax payments were made.
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting
December 31, -------------- (In millions) 1996 1995 =========================================================== DEFERRED TAX ASSETS: Discounting of loss reserves for losses and loss adjustment expenses $ 167 $ 172 Discounting of unearned premium reserves 42 43 Net operating loss carryforward 35 46 Restructuring charges 20 4 Capital loss carryforward 17 14 Business in force 14 20 Policyholder dividends 6 10 Postretirement benefits other than pensions 8 8 Other, net 15 12 - - ----------------------------------------------------------- Total deferred tax assets 324 329 - - -----------------------------------------------------------
In accordance with the provisions of Statement of Financial Accounting Standards No 109, "Accounting for Income Taxes", TIG's management has reviewed its deferred tax asset balance and concluded that it is more likely than not the entire deferred tax asset will be realized. Management's conclusion is based on its expectation that sufficient taxable income will be generated in future periods within the carryforward period. TIG has reported profits in 1996, 1995 and 1994, and is expected to be profitable in the future. If TIG does not achieve its anticipated earnings level in future periods but maintains its 1996 earnings level and converts all of its tax-exempt securities into taxable securities, it anticipates that all of its net operating loss and capital loss carryforward and 90% of its existing deferred tax asset will be utilized by the year 2001.
Years Ended December 31, ------------------------ (In millions) 1996 1995 1994 ========================================================================== Current benefit (expense) $ (9) $ (2) -- Deferred benefit (expense) 13 (35) $ 7 - - -------------------------------------------------------------------------- Total income tax benefit (expense) $ 4 $ (37) $ 7 ==========================================================================
Years Ended December 31, ------------------------ (In millions) 1996 1995 1994 ========================================================================== Discounting of reserves for losses and loss adjustment expenses $ (5) $ (7) $ (5) Discounting of unearned premium reserves 1 -- 4 Net operating loss carryforward (11) 2 19 Restructuring charges 16 (3) (9) Capital loss carryforward 3 3 11 Business in force (6) (7) (6) Policyholder dividends (4) (5) (1) Tax liability adjustment 20 -- -- Deferred investment income (4) (15) -- Deferred policy acquisition costs (1) (3) (8) Other 4 -- 2 - - -------------------------------------------------------------------------- Total deferred income tax benefit (expense) $ 13 $ (35) $ 7 - - --------------------------------------------------------------------------
NOTES PAYABLE. In April 1995, TIG Holdings issued $100 million of 8.125% Notes maturing 2005. Interest is payable on a semi-annual basis, and a lump sum principal repayment for the non-callable notes is due April 15, 2005. Included in the restrictive covenants are limitations on the disposition of the stock of TIG Insurance Company ("TIC"), limitations on liens and limitations on the merger of the Company. Interest expense was $8 million in 1996 and $6 million in 1995. Interest paid was $8 million and $4 million in 1996 and 1995, respectively. No interest was expensed or paid in 1994.
SALE - LEASEBACK. In December 1995, TIG entered into a $50 million credit facility, of which approximately $25 million was outstanding as of December 31, 1996. The facility is a direct financing arrangement with a third party related to the sale and leaseback of certain fixed assets, excluding data processing equipment. The initial draw of $22 million against the facility in December 1995 is being amortized over 5 years with interest at 5.9% payable quarterly. Subsequent draws against the facility are amortized over 5 years and interest, based on a floating rate, is payable quarterly. Interest rates during 1996 ranged from 6.440% to 6.475%.
AUTHORIZED CAPITAL STOCK. TIG Holdings' authorized capital stock consists of one million shares of $0.01 par value Class A convertible common stock, 180 million shares of $0.01 par value common stock, and 15 million shares of $0.01 par value preferred stock.
SUBSIDIARY DIVIDEND RESTRICTIONS. Payment of dividends to TIG Holdings by its insurance subsidiaries is subject to certain restrictions. State insurance laws limit the amount that may be paid without prior notice or approval by insurance regulatory authorities. As of December 31, 1996, $155 million of dividends are currently available for payment to TIG Holdings from its insurance subsidiaries during 1997 without restriction. Dividends paid by the insurance subsidiaries in 1996 and 1995 were $130 million and $75 million, respectively. Dividends paid in 1996 consisted of cash of $130 million. Dividends paid in 1995 consisted of cash of $55 million and subsidiary common stock of $20 million. There were no dividends paid to TIG Holdings in 1994 by its insurance subsidiaries.
As of December 31, 1996, the Company has three stock based compensation plans, which are described below. The Company adopted SFAS 123 effective January 1, 1996 and has elected to continue to account for employee stock-based compensation as prescribed by APB Opinion No. 25 (See Note B).
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - - -------------------------------------------------------------------------------- shares units. These awards are not to exceed 200,000 shares. As of December 31, 1996, there were 30,636 shares of restricted stock units and 61,272 shares of stock options outstanding. The 1996 Program will terminate on the close of business on the date of the Company's annual meeting of stockholders in 1999. Restricted stock units and stock options granted prior to the date of the annual meeting of stockholders in 1997 will vest in three substantially equal installments on the dates of each annual meeting of stockholders in 1997, 1998 and 1999. Restricted share units and stock options granted on or after the date of the 1997 annual meeting of stockholders but prior to the date of the 1998 annual meeting of stockholders will vest in two equal installments on the dates of each annual meeting of stockholders in 1998 and 1999. Restricted share units and stock options granted on or after the date of the 1998 annual meeting of stockholders but prior to the 1999 annual meeting of stockholders will vest in one installment on the date of the 1999 annual meeting of stockholders. The maximum term of any stock option granted will be ten years from the date of grant.
A summary of the status of the Company's three stock based compensation plans as of December 31, 1996 and changes during the three years ended December 31, 1996 is presented below:
Restricted Class A Shares Shares Options ============================================================================== Oustanding at January 1, 1994 77,047 173,938 9,305,278 Granted 13,800 -- 1,142,670 Exercised/Earned (30,234) (67,816) (42,076) Forfeited or cancelled (4,599) (29,863) (409,675) - - ------------------------------------------------------------------------------ Outstanding at December 31, 1994 56,014 76,259 9,996,197 - - ------------------------------------------------------------------------------ Granted 4,600 -- 1,391,100 Exercised/Earned (30,911) (39,800) (100,133) Forfeited or cancelled (843) (666) (275,982) - - ------------------------------------------------------------------------------ Outstanding at December 31, 1995 28,860 35,793 11,011,182 - - ------------------------------------------------------------------------------ Granted 110,170 -- 1,456,736 Exercised/Earned (25,436) (35,793) (383,594) Forfeited or cancelled (14,380) -- (472,089) - - ------------------------------------------------------------------------------ Outstanding at December 31, 1996 99,214 -- 11,612,235 ==============================================================================
The weighted average option exercise price was $22.08 and $22.74 for options outstanding at December 31, 1995 and 1996, respectively. The weighted average option exercise price was $27.39 for options granted during 1996, $20.37 for options exercised in 1996 and $23.67 for options forfeited in 1996.
The weighted average fair value of options granted during 1996 was $8.78 while the weighted average fair value of restricted stock granted during the year was $27.46. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions used for grants in 1995 and 1996, respectively: dividend yield of 1.75 percent of all years; expected volatility of .201;
If the fair value of the stock compensation granted had been accounted for under SFAS 123, the proforma net income for 1996 would have been $73.4 million or $1.21 per share and $115.5 million or $1.84 per share for 1995. For purposes of proforma disclosures, the estimated fair value of the stock compensation is amortized to expense over the stock compensation's vesting period. The effect on net income of the stock compensation amortization for the years presented above is not likely to be representative of the effects on reported net income for future years.
Options Outstanding ------------------------------------------------ Range of Number Weighted-Avg Weighted-Avg Excercise Outstanding @ Remaining Exercise Prices 12/31/96 Contractual Life Price ===================================================================== $13.00 to $18.00 274,272 4.4 yrs $16.40 $18.01 to $24.00 9,857,927 6.7 yrs $22.24 $24.01 to $28.00 1,036,300 8.9 yrs $26.11 $28.01 to $32.00 443,736 9.9 yrs $29.89 - - --------------------------------------------------------------------- $13.00 to $32.00 11,612,235 6.9 yrs $22.74 =====================================================================
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - - -------------------------------------------------------------------------------- an employee vested 25% after three years of service, 50% after four years of service, and 100% after five years of service. Effective January 1, 1995, an employee vests 25% after one year of service, 50% after two years of service and 100% after three years of service. Employer matching contributions were $3.3 million, $3.8 million, and $4.0 million for 1996, 1995 and 1994, respectively.
EMPLOYEE STOCK OWNERSHIP PLAN. Prior to the IPO closing, TIG Holdings adopted the TIG Holdings, Inc. Employees Stock Ownership Plan (the "ESOP"). Most salaried employees are eligible to participate in the ESOP. Generally, TIG Holdings will contribute, for each calendar year, an amount equal to one percent of Employee Compensation, as defined, on behalf of each participant employed on the last working day of that year or who was employed but died during the year. No employee contributions are permitted to be made to the ESOP. Prior to January 1, 1995 an employee fully vested at the end of five years. Effective January 1, 1995, an employee vests 25% after one year of service, 50% after two years of service and 100% after three years of service. In April 1993, the ESOP borrowed $24.1 million from TIG Holdings to purchase 1,124,754 newly issued shares of common stock. The loan obligation of the ESOP is considered unearned employee compensation, and as such, is recorded as a reduction of TIG Holdings' shareholders' equity. As loan repayments are made by the ESOP, common stock is released to participant accounts. Unearned compensation is amortized based on the number of shares committed to be released and compensation expense is recognized based on the current market price. Compensation expense of $2.1million, $2.3 million and $1.3 million was recognized in 1996, 1995 and 1994, respectively. At December 31, 1996, 230,928 shares are allocated, 58,601 shares are committed to be released, and 503,766 shares are in suspense. As of December 31, 1996, the market value of unallocated shares was $17.1 million. Contributions to the ESOP were $2.0 million, $2.3 million and $1.2 million for 1996, 1995 and 1994, respectively. A participant's ESOP account will be distributed in full shares of common stock or cash after termination of service.
ESOP RESTORATION PLAN. The TIG Holdings, Inc. ESOP Restoration Plan is an unfunded plan for the purpose of providing deferred compensation for a select group of management or highly compensated employees whose allocations under the qualified ESOP plan are limited by annual restrictions as determined by the Internal Revenue Code. Highly compensated employees whose allocations under the qualified plan are limited by the Internal Revenue Code restrictions will be eligible for participation immediately upon the date of hire if annual earnings, including bonus in the year paid, exceed a specified threshold. The threshold for each year will be the amount of the cap on compensation that may be taken into account under the qualified plan for that year, or such greater amount as may be determined by the Committee in its discretion. Effective January 1, 1995, a Participant vests 25% after one year of service, 50% after two years of service and 100% after three years of service. Participants' accounts are credited in dollar amounts for the difference between the cash value of the stock that would have been allocated to the participant's account under the qualified ESOP plan and the cash value of the stock that would have been allocated in the absence of the restrictions noted above. Participants' accounts are adjusted for gains, losses and earnings as if invested in the same manner as such associate's account under the qualified ESOP plan. Liabilities due to the participants were approximately $227 thousand, $118 thousand and $28 thousand as of December 31, 1996, 1995 and 1994.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - - -------------------------------------------------------------------------------- salaried employee is eligible to participate in the Profit Sharing Plan. Prior to January 1, 1995 an employee fully vested at the end of five years. Effective January 1, 1995, an employee vests 25% after one year of service, 50% after two years of service, and 100% after three years of service. No employee contributions are permitted to be made to the Profit Sharing Plan. The amount of any contribution for any calendar year made by TIG Holdings will be determined at the sole discretion of the TIG Holdings' Board of Directors. For 1996, 1995 and 1994, TIG contributed on behalf of each participant an amount equal to the sum of (i) two percent of the participant's Employee Compensation, as defined, for the Plan Year and (ii) four percent of the participant's annual Employee Compensation in excess of a determined wage base. Contributions were $1.4 million, $2.0 million and $2.1 million for 1996, 1995 and 1994, respectively.
POSTRETIREMENT BENEFITS OTHER THAN PENSIONS. TIG participated in Transamerica's defined benefit health care plan that provided postretirement benefits to eligible retirees of Transamerica and affiliates. TIG assumed all liabilities with respect to its retirees and active employees at the date of the IPO. Contributions for these contributory plans are adjusted annually. Considerations for the adjustments include deductibles and coinsurance. Medical benefits are based on the employee's length of service and age at retirement from the Company. Assets held in trust consist of short term investments with a fair value of approximately $4.5 million and $3.0 million at December 31, 1996 and 1995, respectively.
Years Ended December 31, ------------------------ (In millions) 1996 1995 1994 ============================================================== Service cost - benefits earned during the period $0.3 $0.3 $0.3 Interest cost on projected benefit obligation 1.4 1.4 1.4 Amortization of prior service cost (0.1) (0.1) (0.1) - - -------------------------------------------------------------- Net periodic other postretirement benefit cost $1.6 $1.6 $1.6 ==============================================================
December 31, ---------------- (In millions) 1996 1995 ============================================================== Actuarial present value of other postretirement obligations: Retirees $17.2 $17.8 Active participants 3.4 3.5 Unrecognized net gain (loss) - (0.1) Prior service cost 0.7 0.8 - - -------------------------------------------------------------- Other postretirement benefit obligation $21.3 $22.0 ==============================================================
The weighted average annual assumed rate of increase in the health care cost trend rate is 11.0 percent for 1996 and 10.0 percent for 1997 and is
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - - -------------------------------------------------------------------------------- assumed to decrease gradually to 8.0 percent in 1999 and remain at that level thereafter. The health care cost trend rate assumption has a significant effect on the amounts reported.
(In millions) =========================================== 1997 $16 1998 15 1999 14 2000 13 2001 10 Thereafter 46 - - ------------------------------------------- Sublease rental income 9 - - ------------------------------------------- Net commitments $105 ===========================================
Substantially all of the leases are for rental of office space, the initial terms of which range from 1 to 20 years. Total rental expense for 1996, 1995 and 1994 was $35.1 million, $29.9 million and $30.0 million, respectively. As a result of reorganization of TIG's commercial operations in the first quarter of 1996, certain lease termination costs in the amount of $18 million were incurred and are included in the $100 million restructuring charges recorded in 1996 as discussed in Note C.
LITIGATION. TIG's insurance subsidiaries are routinely engaged in litigation in the normal course of their business. As a liability insurer, the Company defends third-party claims brought against its insureds. As an insurer, the Company defends against coverage claims. In the opinion of TIG, based upon information available on the date of this report, no individual item of litigation, or group of similar items of litigation (including asbestos-related and environmental pollution matters and the matter referred to below), taken net of reserves established therefor and giving effect to insurance and reinsurance, is likely to result in judgments for amounts material to TIG's consolidated results of operations.
On January 11, 1994, a Los Angeles County Superior Court jury returned a verdict of $28 million for punitive damages against TIG Insurance Company ("TIC") in Talbot Partners v. Cates Construction, Inc. and TIC (the "Talbot Case"). The award arose out of TIC's handling of a surety bond claim on a construction project. Management is vigorously pursuing its right to appeal the judgment. Management believes that the ultimate liability, if any, arising from the Talbot Case will not materially impact consolidated operating results.
LONDON MARKET ACTIVITY. Through various indirect subsidiaries, the Company will become a limited liability participant in the Lloyd's of London ("Lloyd's") market in 1997. As a prerequisite to admittance to the Lloyd's market, irrevocable letters of credit totalling (pound)42.5 million and collateralized by $79.0 million of the Company's investment securities were provided in favor of the Society and Council of Lloyd's in 1996. The letters of credit effectively secure the future contingent obligations of the Company should the Lloyd's underwriting syndicates in which the Company participates incur net losses. The Company's contingent liability to the Society and Council of Lloyd's is limited to the amount of the letters of credit.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - - -------------------------------------------------------------------------------- NOTE N. REGULATORY MATTERS ================================================================================
REGULATORY RISK-BASED CAPITAL. The states of domicile of TIG's insurance subsidiaries impose minimum risk-based capital requirements on insurance companies which were developed by the National Association of Insurance Commissioners ("NAIC"). The formulas for determining the amount of risk-based capital specify various weighting factors that are applied to financial balances or various levels of activity based on the perceived degree of risk. Regulatory compliance is determined by a ratio of the enterprise's regulatory total adjusted capital, as defined by the NAIC, to its authorized control level risk-based capital, as defined by the NAIC. Enterprises below specific trigger points or ratios are classified within certain levels, each of which requires specified corrective action. The levels and ratios are as follows:
Ratio of Total Adjusted Capital to Authorized Control Level Risk-Based Regulatory Event Capital (Less Than or Equal to) - - --------------------------------------------------------------------- Company action level 2.0 (or 2.5 with negative trends) Regulatory action level 1.5 Authorized control level 1.0 Mandatory control level 0.7 =====================================================================
December 31, ---------------------- (In millions) 1996 1995 1994 ====================================================== STATUTORY SURPLUS: Primary operations $460 $512 $529 Reinsurance operations 515 440 372 - - ------------------------------------------------------ Total $975 $952 $901 ======================================================
Under the State of California insurance regulations, TIG is required to maintain minimum capital and surplus of $5,400,000. The Company's surplus and capital exceeds the NAIC's "risk-based-capital" requirements at the end of 1996.
TIG's operations are comprised of two business segments. Reinsurance operations and Primary Insurance operations. Primary Insurance operations are further broken down into Commercial Specialty, Retail, and Other Lines. Premium produced through Aon Corporation and its subsidiaries accounted for 23%, 22% and 21% of consolidated net premium written in 1996, 1995 and 1994, respectively. In addition, inter-segment premium for 1995 was $43 million. Revenues, pre-tax operating income and identifiable assets for each segment were as follows:
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - - -------------------------------------------------------------------------------- The following table is a summary of TIG's Primary insurance operations by major division:
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - - -------------------------------------------------------------------------------- NOTE Q. SUBSEQUENT EVENT ================================================================================