Underwriting losses were $52 million, $67 million and $69 million in 1996, 1995 and 1994, respectively. The 1996 losses were primarily due to lower earned premiums and expenses incurred in managing the run-off of its operations. The 1995 loss reflected lower earned premiums and unfavorable loss experience. The 1994 loss reflected catastrophe losses of $31 million, including reinstatement premiums of $12 million, primarily from the Northridge, California earthquake.
Underwriting losses were $435 million, $690 million and $138 million in 1996, 1995 and 1994, respectively. The underwriting loss includes losses from Asbestos/Pollution Policies of $233 million, $549 million and $126 million in 1996, 1995 and 1994, respectively. The 1996 results include loss and loss adjustment expense reserve bulk additions of $341 million including $225 million relating to Asbestos/Pollution policies, $65 million for excess run-off, $35 million for assumed reinsurance and $16 million for personal lines. The 1995 results include reserve additions of $440 million. In 1994, the Company added $60 million to loss reserves for known environmental and toxic tort claims.
In March 1995, FASB issued SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," effective for financial statements with fiscal years beginning after December 15, 1995. Among other provisions, SFAS No. 121 requires that long-lived assets and certain identifiable intangibles to be held and used by an entity be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. In performing the review for recoverability, an entity should estimate the future cash flows expected to result from the use of the assets and their eventual disposition. Measurement of an impairment loss for long-lived assets and identifiable intangibles expected to be held and used should be based on the fair value of the asset. The Company has determined that this pronouncement does not have any impact on the financial condition and results of operations.
On June 12, 1995, the Facility Agreement was further amended to provide for settlements of balances after June 12, 1995 due between Home Insurance and Zurich American and to delete a provision for a 1% renewal premium payable by Zurich American with respect to direct policies issued by Zurich American under the Facility Agreement. The Facility Agreement terminated as of June 12, 1995.
At December 31, 1996, the gross, ceded and net loss and loss adjustment expense reserves for policies which have been alleged to contain asbestos/pollution exposure ("Asbestos/Pollution Policies") amounted to $1,501 million, $682 million and $819 million, respectively. The table above includes $225 million of loss and loss adjustment expense reserve bulk additions for Asbestos/Pollution policies in 1996 and $440 million of bulk reserve additions in 1995. Bulk reserve strengthening of $565 million is included for years prior to 1995, including $75 million in 1994 for professional liability, and $290 million in the beginning reserves for 1994 which included $100 million for professional liability, $40 million for Asbestos/Pollution Policies, and $100 million for Commercial Casualty and $50 million for various products. The incurred losses and loss adjustment expenses for insured events of prior years included asbestos/pollution losses of $ 233 million, $549 million and $126 million in 1996, 1995 and 1994, respectively. The 1995 incurred losses and loss adjustment expenses for insured events of prior years also includes $189 million related to the commutation and assignment of the Stop Loss Treaty as discussed in note 7.
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, 1996 and 1995 are presented as follows:
Loans payable to banks generally payable on demand, weighted average interest rate of 6.6% and 6.3% at December 31, 1996 and 1995, respectively $ 198 $ 250 Revolving credit agreement due in 1997, interest rate of 6.5% and 6.6% at December 31, 1996 and 1995, respectively 7 7 Term notes, average interest rate of 7.4% at December 31, 1996 and 1995, respectively 3 4 Other payables to banks 38 43 -------- ------- $ 246 $ 304 ======== =======
The following tables summarize the plans' funded status, the amounts recognized in the consolidated balance sheets at December 31 and the major assumptions used to determine these amounts:
In the ordinary course of its business, Home Insurance is involved in insurance litigation, including claims litigation involving the defense of policyholders arising from suits brought by third parties, litigation or arbitration to recover sums due from reinsurers, actions brought by policyholders alleging the improper failure to settle or defend suits, and actions to recover premiums due from insureds, including premiums due under retrospectively-rated insurance policies and premium balances due from agents or brokers. In addition, Home Insurance is involved in non-insurance litigation arising out of investments and employment-related matters.
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.
Mr. Pedersen has been Executive Vice President and Controller of Trygg-Hansa since 1993. Prior thereto he served as Senior Vice President and Controller of Trygg-Hansa from 1980 to 1993.
The Charter also provides that no contract, agreement, arrangement or transaction between the Company and an Insurance Company Stockholder, an entity in which a director of the Company has a financial interest (a "Related Entity") or a director or officer of the Company, an Insurance Company Stockholder or any Related Entity shall be void or voidable solely for the reason that an Insurance Company Stockholder, a Related Entity or any one or more of the officers or directors of the Company, the Insurance Company Stockholder or any Related Entity are parties thereto, or solely because any such directors or officers are present at, participate in or vote with respect to the authorization of the contract, agreement, arrangement or transaction, and that the Insurance Company Stockholder, any Related Entity and such directors and officers (a) shall have fully satisfied and fulfilled their fiduciary duties to the Company and its stockholders with respect thereto, (b) shall not be liable to the Company or its stockholders for any breach of fiduciary duty by reason of the entering into, performance or consummation of any such contract, agreement, arrangement or transaction, (c) shall, for purposes of the Charter, be deemed to have acted in good faith and in a manner such persons reasonably 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 and its stockholders and not to have derived an improper personal benefit therefrom; if:
Prior to the first date that Trygg-Hansa and its permitted transferees cease to have beneficial ownership of 25% or more of the then outstanding shares of common stock (the "Trigger Date"), the affirmative vote of the holders of more than 75% of the outstanding shares of Series A Common Stock is required to amend or repeal or adopt any provision inconsistent with the Charter provisions described above. Accordingly, prior to the Trigger Date, Trygg-Hansa can prevent any such alteration, adoption, amendment or repeal.
10.5 Amended and Restated Standby Working Capital Credit Agreement, dated as of April 26, 1995 (incorporated by reference to Amendment No. 1 to Schedule 13E-4).
10.7 Amendment No. 2 to the Recapitalization Agreement dated as of March 24, 1995 (incorporated by reference to the Company's Report on Form 8-K filed March 27, 1995).
10.24 Amendment No. 1 to Guaranty Agreement dated as of December 26, 1995 (incorporated by reference to Exhibit 10.24 of the Company's Form 10-K for the fiscal year ended December 31, 1995, File No. 0-19347).