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FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Quarterly Report Pursuant to Section 13 of the
Securities Exchange Act of 1934
For the quarterly period ended March 31, 1997
Commission file number 0-19347
HOME HOLDINGS INC.
(Exact name of registrant as specified in its charter)
Delaware 13-3584978
(State of incorporation) (I.R.S. Employer
Identification No.)
59 Maiden Lane, New York, New York 10038-4548
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (212) 530-6600
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 of the Securities Exchange Act of 1934 during the
preceding 12 months and (2) has been subject to such filing requirements for the
past 90 days.
YES X NO
------ ------
At March 31, 1997, there were 14,114,500 shares of registrant's Series A Common
Stock, par value $.01 per share, outstanding.
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
HOME HOLDINGS INC.
Consolidated Statements of Income
Quarter ended March 31,
(Unaudited)
($ millions)
1997 1996
---- -----
REVENUES:
Net earned premiums (note 3) $ 3 $ 80
Insurance net investment income 27 43
Insurance realized capital gains 2 --
Securities broker-dealer operations -- 117
---- -----
Total revenues 32 240
---- -----
OPERATING EXPENSES:
Losses and loss adjustment expenses (note 3) 1 105
Policy acquisition and other insurance expenses 19 47
Corporate interest expense 13 12
Securities broker-dealer operations -- 110
---- -----
Total expenses 33 274
---- -----
(1) (34)
Equity in loss of securities broker-dealer (8) --
---- -----
Loss before income taxes (9) (34)
Income tax benefit (expense) 1 (1)
---- -----
NET LOSS $ (8) $ (35)
==== =====
- ------------------
See accompanying notes to consolidated financial statements.
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HOME HOLDINGS INC.
Consolidated Balance Sheets
($ millions)
March 31, December 31,
ASSETS 1997 1996
------- -------
(Unaudited)
Insurance investments at fair value:
Portfolio swap receivable (note 6) $ 1,068 $ 1,243
Fixed maturities available for sale
(cost $28 and $26) 30 28
Equity securities (cost $16 and $17) 23 21
------- -------
Total insurance investments 1,121 1,292
Cash 19 36
Premiums receivable 276 290
Funds held by affiliate 235 248
Reinsurance receivables 2,720 2,765
Securities broker-dealer investments -- 392
Receivables from brokers, dealers and customers -- 2,258
Investment in securities broker-dealer (note 7) 156 --
Other assets 162 312
------- -------
Total assets $ 4,689 $ 7,593
======= =======
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
Liabilities:
Unpaid losses and loss adjustment expenses $ 5,405 $ 5,687
Payables to brokers, dealers and customers -- 2,060
Debt of securities broker-dealer -- 246
Corporate debt (note 5) 573 567
Other liabilities 256 572
------- -------
Total liabilities 6,234 9,132
------- -------
Litigation and contingencies (note 8)
Stockholders' deficiency: (note 4)
Series A preferred stock, $.01 par value; 170
shares authorized, issued and outstanding -- --
Series A common stock, $.01 par value;
40,000,000 shares authorized;
14,114,500 shares outstanding -- --
Series B convertible stock, $.01 par value;
15,000,000 shares authorized;
11,425,177 shares outstanding --
Paid-in capital 777 777
Deficit (2,328) (2,320)
Unrealized gains on insurance investments (note 6) 9 6
Unrealized currency translation adjustments (3) (2)
------- -------
Total stockholders' deficiency (1,545) (1,539)
------- -------
Total liabilities and stockholders' deficiency $ 4,689 $ 7,593
======= =======
- -------
See accompanying notes to consolidated financial statements.
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HOME HOLDINGS INC.
Consolidated Statements of Cash Flows
Quarter ended March 31,
(Unaudited)
($ millions)
1997 1996
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (8) $ (35)
Adjustments to reconcile net loss to net cash
used for operating activities:
Insurance realized capital gains (2) --
Unpaid losses and loss adjustment expenses (282) (227)
Premiums and reinsurance receivables 60 87
Funds held by affiliate 13 (17)
Unearned premiums (2) (91)
Broker-dealer investments and receivables,
net of payables -- (141)
Other 22 20
----- -----
Net cash used for operating
activities (199) (404)
----- -----
CASH FLOWS FROM INVESTING ACTIVITIES:
Portfolio swap receivable 175 260
Purchase of fixed maturities (2) --
Sales of equity securities 3 3
Other -- (5)
----- -----
Net cash provided by investing
activities 176 258
----- -----
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in corporate debt 6 9
Increase of debt of broker-dealer -- 130
Other -- --
----- -----
Net cash provided by financing
activities 6 139
----- -----
Net increase (decrease) in cash (17) (7)
Cash at beginning of period 36 34
----- -----
CASH AT END OF PERIOD $ 19 $ 27
===== =====
SUPPLEMENTAL DISCLOSURES OF CASH FLOW:
Broker-dealer interest paid -- 19
- ------------------
See accompanying notes to consolidated financial statements.
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HOME HOLDINGS INC.
Notes to Consolidated Financial Statements
1. GENERAL
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
(the "Recapitalization Agreement" or the "Recapitalization") as defined in
note 1b to the 1996 Annual Report on Form 10-K ("Annual Report") filed with
the Securities and Exchange Commission (the "Commission"). Home Insurance
also owns Gruntal Financial Corp. ("Gruntal"), a holding company for a
securities brokerage business, and Sterling Forest Corporation ("Sterling
Forest"), a property development business. See note 7 for discussion of the
restructuring of Gruntal.
Order of Supervision
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"). 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:
i) Make any single claim payment in excess of $1 million except under
conditions specified therein.
ii) Make any payment to creditors or other persons in excess of
$500,000, except as set forth in clause (i) above.
iii)Make any single payment to cedents or reinsurers (a) in excess of
$250,000 or (b) out of the ordinary course of business, or any
commutation of any amount with any cedents or reinsurers.
iv) Release any obligation or collateral in excess of $500,000.
v) Materially change the terms of any contracts or enter into any new
contracts in excess of $500,000.
vi) Engage in any transactions with the Company, Risk Enterprise
Management Limited ("REM"), Zurich Home Investments Limited
("ZHI"), Zurich Insurance Company ("Zurich") or Trygg-Hansa AB
("Trygg-Hansa") or any subsidiaries, other affiliates or agents of
such entities.
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HOME HOLDINGS INC.
Notes to Consolidated Financial Statements
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:
i) 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.
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.
2. ACCOUNTING POLICIES
The Company follows the accounting policies set forth in the 1996 Annual
Report. Users of financial information produced for interim periods are
encouraged to refer to the footnotes contained in the Annual Report when
reviewing interim financial results, and to note 1 of such Annual Report
for discussion of the Company's recapitalization and related terms
mentioned herein.
As a result of a reorganization, which closed on March 28, 1997, between
Gruntal and The 1880 Group LLC (the "Reorganization Agreement"), as
described in note 7, Home Insurance will report its investment in its
securities broker-dealer under the equity method of accounting in 1997. The
1997 consolidated statement of income reflects the equity in the income of
the securities broker-dealer as if the transaction was effective January 1,
1997.
The accompanying interim consolidated financial statements are unaudited.
These financial statements reflect all adjustments, consisting of normal
recurring adjustments, necessary for a fair presentation of financial
position and results of operations. Results of interim periods are not
necessarily indicative of results for the full year.
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HOME HOLDINGS INC.
Notes to Consolidated Financial Statements
3.PREMIUMS AND LOSSES
Premium and loss information for the quarter ended March 31, follows:
1997 1996
---- ----
($ millions)
Earned premiums:
Direct $ 5 $ 28
Assumed - 86
Ceded (2) (34)
--------- ---------
Net $ 3 $ 80
========= =========
Losses and loss adjustment expenses:
Direct $ 22 $ 139
Assumed 5 37
Ceded (26) (71)
--------- ---------
Net $ 1 $ 105
========= =========
Asbestos/Pollution Losses and Loss Adjustment Expenses
The 1997 and 1996 first quarter incurred loss and loss adjustment
expenses relating to policies which have been alleged to contain
asbestos/pollution exposure ("Asbestos/Pollution Policies") were nil. The
1997 first quarter result for Asbestos/Pollution Policies reflected $10
million of paid losses, partially offset by decreases of $10 million to
unpaid losses and loss adjustment expenses. The 1996 first quarter result
reflected $26 million of paid losses offset by a $26 million decrease to
unpaid losses and loss adjustment expenses.
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
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HOME HOLDINGS INC.
Notes to Consolidated Financial Statements
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.
With respect to claims involving exposures to asbestos and certain other
toxic torts, the development of the legal insurance coverage issues is more
advanced and the insurance companies have had a longer history in defending
and settling such claims. As a result, Home Insurance establishes specific
case reserves for these asbestos and toxic tort claims at such time as Home
Insurance is able to estimate the probable ultimate cost to Home Insurance
over reasonably foreseeable future periods of time. Pollution claims,
however, continue to present the range of issues presented above.
Policyholders generally do not make available sufficient information from
which the reasonable costs of clean-up or remediation, even if covered by a
Home Insurance policy, might be estimated. Moreover, successful defense by
Home Insurance on coverage issues might eliminate all coverage for a
particular claim or group of claims. Accordingly, the development of a
factual basis from which a claim can be evaluated with respect to exposure
and coverage can take months to years from receipt of an initial claim.
Thus, reserves with respect to specific pollution cases typically are set,
if at all, only after substantial factual discovery is completed in the
action.
In 1995, REM, in its capacity as manager of Home Insurance's operations,
established a single Environmental and Mass Tort Division, which includes a
new team to merge financial, legal and environmental engineering expertise
in negotiation with policyholders and reinsurers to find alternative
resolutions to claims in the environmental and mass tort areas. Management
believes that these organizational changes increase operational efficiency,
while assuring that Home Insurance takes a unified and consistent approach
to these claims. This division has also prepared an inventory of potential
exposures for Asbestos/Pollution Policies, which Home Insurance has
utilized to evaluate its use of industry benchmarks to establish reserves.
Losses for such claims are likely to be reflected in future years and,
due to the uncertainties discussed above, the ultimate losses may vary
materially from current reserves and could have a materially adverse effect
on the Company's financial condition and results of operations.
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
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HOME HOLDINGS INC.
Notes to Consolidated Financial Statements
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.
Excess of Loss Reinsurance Agreement and Stop Loss Treaty
In connection with the recapitalization agreement, 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 the 1996 Annual Report - note 4 to the consolidated
financial statements for discussion of 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 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). In 1996
an additional $43 million was transferred to Centre Reinsurance Dublin,
representing the amount received by Home Insurance from THI as a
reinsurance commutation.
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. Due to these projected future recoveries, loss
reserves with a net present value of $787 million were recorded as of March
31, 1997 and December 31, 1996 as a recoverable from the Excess of Loss
Reinsurance Agreement.
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HOME HOLDINGS INC.
Notes to Consolidated Financial Statements
4. LIQUIDITY AND STATUTORY SURPLUS
Dividend Restrictions and Liquidity
The Company has not received common stock dividends from Home Insurance
in 1997 and 1996.
The Company was notified in 1995 by the Department that, in light of the
Recapitalization, Home Insurance cannot pay any dividends without prior
approval of the Department. If the Department rejects future dividends
filings, the Company will be forced to raise cash through capital
infusions, the issuance of additional debt, or the sale of assets in order
to meet its current obligations; however there are no assurances that such
sources will be available. Based on the Company's most current cash flow
projections, without dividends from Home Insurance, the Company is not
likely to meet its cash flow needs during 1997. Under the terms of the
Recapitalization Agreement, Centre Finance Dublin ("Centre Finance") has
purchased approximately $46 million aggregate principal amount of the
Company's 7% Series B Senior Working Capital Notes to fund interest
payments occurring through December 1996 on the Public Indebtedness.
Statutory Surplus
The accounting practices of insurance companies are prescribed or
permitted by certain regulatory authorities. Certain of these practices
differ from generally accepted accounting principles ("GAAP") used in
preparing the consolidated financial statements of the Company. 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 $444 million and $469
million at March 31, 1997 and December 31, 1996. 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 $30 million at March 31, 1997 compared with $55
million at December 31, 1996.
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
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HOME HOLDINGS INC.
Notes to Consolidated Financial Statements
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.
In connection with the Department's involvement in approving the
Recapitalization, it had appointed in 1995, a representative to act as an
on-site monitor for the Company's operations, with certain rights of access
and cooperation from the Company and REM.
The Company's loss reserves are determined through a process of
estimation which is necessarily imperfect, and ultimate losses may exceed
such estimates. See note 3 for further discussion. As the Company's
statutory surplus levels have continued to decline since December 31, 1994,
management can give no assurance that statutory surplus levels will be
sufficient to absorb materially deficient estimates of loss and loss
adjustment expenses reserves, if any. Management continues to believe that
its provision for loss reserves is adequate.
The Department also continues to direct a consulting actuarial firm to
perform a review of Home Insurance's loss reserves, and has retained a
second actuarial firm to perform a peer review of the findings. Such
reviews are expected to be completed during the second quarter of 1997.
Management cannot predict whether reserve estimates to be prepared by these
consultants will change the Department's view of the level of regulatory
intervention required for Home Insurance.
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HOME HOLDINGS INC.
Notes to Consolidated Financial Statements
5. CORPORATE DEBT
March 31, December 31,
1997 1996
($ millions) ----------- ----------
7% Senior Notes due in 1998, net of
unamortized discount of nil in 1997 and 1996 $ 100 $ 100
7 7/8% Senior Notes due in 2003, net of
unamortized discount of $2 million in 1997
and 1996 177 177
7 7/8% Senior Notes due in 2003, net of
unamortized discount of nil in 1997 and 1996 1 1
12% Senior Subordinated Notes, issued at
original issue discount, $303 million
principal value due in 2004 121 118
8% Junior Subordinated Notes, issued at
original issue discount, $171 million
principal value due in 2004 93 91
12% Senior Subordinated Working Capital
Notes, issued at original issue discount,
$46 million principal value due in 2004 19 18
7% Series A Senior Working Capital Notes 16 16
7% Series B Senior Working Capital Notes 46 46
----------- ----------
Total Corporate Debt $ 573 $ 567
=========== ==========
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.
In addition, effective December 31, 1996, each of the Series A and Series
B Senior Working Capital Notes, was amended to change the timing of the
payment of interest. Prior to such amendment, interest was payable
quarterly. However, according to the amended terms, interest shall not be
due or payable until seven business days following the receipt by the
Company of written demand from holders of these notes, or when the
principal of the Series A and Series B Senior Working Capital Notes becomes
due and payable. If interest is not paid within seven business days of such
written demand, all interest accrued shall be deemed overdue and shall
immediately become due and payable. If interest becomes overdue, the
interest rate is adjusted upwards to the greater of (i) the rate of
interest on the
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HOME HOLDINGS INC.
Notes to Consolidated Financial Statements
notes, plus 3% or (ii) the prime rate plus 3%. As of March 31, 1997,
approximately $5 million of interest has been accrued but not paid on the
Series A and Series B Senior Working Capital Notes. As a result of the
amended terms, the interest is not overdue.
Neither Centre Finance nor Zurich nor Trygg-Hansa has any obligations
pursuant to the Recapitalization or otherwise to provide any capital or
other financial support to the Company or its subsidiaries other than the
limited amounts specifically provided for pursuant to the Recapitalization
and related agreements. Centre Finance, Zurich and Trygg-Hansa have
informed the Company that they do not intend to provide any financial
support beyond such limited amounts as may be required pursuant to the
Recapitalization.
6. PORTFOLIO SWAP RECEIVABLE AND OTHER INSURANCE INVESTMENTS
The Portfolio Value Swap Agreement (the "Swap") is designed to transfer
control and market risk of the portfolio to Centre Reinsurance Dublin. The
Company has accounted for the Swap as if the investments underlying the
Swap were sold to Centre Reinsurance Dublin. The Company, however,
continues to retain legal ownership. As a result, the Company has
reclassified its investments underlying the Swap to a Portfolio Swap
Receivable from Centre Reinsurance Dublin ("Portfolio Swap Receivable"),
valued at the fair value of the portfolio investments on the effective date
(January 1, 1995) less withdrawals made to fund operations plus the total
return of 7.5%. Subsequent changes to fair value of securities have not and
will not be recognized, as Centre Reinsurance Dublin bears the market risk.
As of March 31, 1997, the Company has recorded, as a component of the
Portfolio Swap Receivable, an amount due from Centre Reinsurance Dublin of
$15 million because of a negative difference from the 7.5% target return.
The negative difference since January 1, 1997 resulted from the net of (i)
a $13 million difference in favor of the Company due to a decrease in the
fair value of investments underlying the Swap and (ii) a $2 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 $25 million.
The Company received $48 million from Centre Reinsurance Dublin on
January 21, 1997, to settle the 1996 Swap receivable. Securities and cash
totaling $210 million were transferred to Centre Reinsurance Dublin on
January 22, 1996, to settle the 1995 Swap liability.
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HOME HOLDINGS INC.
Notes to Consolidated Financial Statements
The fair value of securities managed by Zurich Investment Management Inc.
("ZIM") and underlying the Portfolio Swap Receivable from Centre
Reinsurance Dublin as of March 31, 1997 is as follows:
Estimated
Fair
Value
($ millions)
Fixed Maturities:
U.S. Government and agency $ 541
Mortgage-backed securities 214
Corporate securities 191
Foreign governments 36
Other 2
----------
Total 984
Equity securities 1
Short-term investments 68
----------
Total Swap investments 1,053
Receivable from Centre Reinsurance Dublin 15
----------
Portfolio Swap Receivable $ 1,068
==========
7. SECURITIES BROKER-DEALER
On February 24, 1997, Gruntal, and The 1880 Group LLC, a limited
liability company organized under the laws of Delaware, ("The 1880 Group"),
entered into the Reorganization Agreement. The Gruntal reorganization was
consummated on March 28, 1997. The reorganization resulted in Gruntal
transferring its securities broker-dealer operating companies, Gruntal &
Co. and The GMS Group, to a newly formed limited liability company, Gruntal
Financial, LLC ("Gruntal Financial"). In connection with the
reorganization, Gruntal changed its name to Home Financial Corp. ("Home
Financial") on April 1, 1997. Home Insurance is the sole owner of Home
Financial.
The Reorganization involved the issuance of several classes of securities
to Home Financial and The 1880 Group, including preferred securities, in an
aggregate nominal amount of $235 million as follows: (i) Gruntal Financial
issued to Home Financial 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
issued to The 1880 Group securities called Preferred C Interests in an
nominal amount of $9 million. As a result of the Reorganization, Home
Financial owns 40% of the common interest of Gruntal Financial and The 1880
Group owns 60% of the common interest of Gruntal Financial. In connection
with the issuance of certain preferred securities to Home Financial,
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HOME HOLDINGS INC.
Notes to Consolidated Financial Statements
Home Insurance and Centre Reinsurance Dublin entered 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. Expenses incurred by Gruntal in connection with the
transaction were $9 million. There was no gain or loss to Home Insurance
from the Reorganization after the impact to Gruntal of the transaction
expenses.
In connection with the Reorganization, the members of The 1880 Group
entered into management services agreements with The 1880 Group which, in
turn, will provide such services to Gruntal Financial.
Summarized financial information of Gruntal Financial for the first quarter
ended March 31 is set forth in the following tables:
1997 1996
---- ----
($ millions)
Summarized Income Statement
Commissions $ 23 $ 25
Principal transactions 32 45
Underwriting and investment banking 8 9
Interest 32 29
Other 8 9
-------- ---------
Total revenues 103 117
Total expenses (111) (110)
-------- ---------
Income before income taxes $ (8) $ 7
======== =========
Summarized Balance Sheet
March 31
1997
--------
Cash $ 6
Investments 427
Receivables from brokers, dealers and customers 2,332
Total assets 2,818
Payables to brokers, dealers and customers 2,030
Debt 337
Total liabilities 2,662
Stockholders' equity 156
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HOME HOLDINGS INC.
Notes to Consolidated Financial Statements
8. LITIGATION AND CONTINGENCIES
Home Insurance, in common with the insurance industry, is subject to
litigation, including claims for punitive damages and for extra-contractual
damages, in the normal course of its business.
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.
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.
A petition was filed on December 13, 1993, in the District Court of
Dallas County, Texas, joining Home Insurance as a defendant in a previously
filed action. The action sought certification of both plaintiff and
defendant classes. The purported plaintiff class consisted of all Texas
insureds who were charged premiums above state-approved rates for casualty
coverage through the use of retrospectively-rated policies for a period
beginning prior to May 15, 1987, through April 1, 1992. Plaintiffs sought
to certify a defendant class of all insurers doing business in Texas who
charged the alleged excessive rates, plus certain brokers and the National
Council on Compensation Insurance ("NCCI"). The Complaint alleged that
defendants entered into a conspiracy to devise various methods of charging
and collecting the allegedly excessive rates and, in doing so, breached
their contracts with plaintiffs, breached their fiduciary duty and violated
the Texas Insurance Code and the Deceptive Trade Practices Act.
Compensatory and punitive damages were sought in unspecified amounts plus
treble damages.
15
17
HOME HOLDINGS INC.
Notes to Consolidated Financial Statements
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.
On January 13, 1997 Home Insurance was served with suit papers issued
from the Chancery Court of Davidson County, Tennessee in a purported class
action. The allegations of the complaint are similar to those in the Texas
litigation case that was recently settled.
Plaintiffs allege that from 1987 until the present, the defendants,
individually, and in conspiracy with each other, used rates of premium and
policy forms for workers compensation retro policies other than those filed
with, and approved by, the Tennessee Commissioner of Insurance.
Specifically, the companies are alleged to have illegally passed through
residual market changes to their insureds during the class period. The NCCI
is alleged to be the conduit for sharing of information and the
instrumentality for making the illegal filings.
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 nearly identical class action complaint naming the same parties was
also filed in the Superior Court of Richmond Country, Georgia. It includes
the same common law causes of action that are asserted in the Tennessee
complaint, and others that allege violation of various provisions of the
Georgia statutory code, as well as RICO. Compensatory, punitive, and treble
damages are sought.
Both actions have been removed to federal court. Motions to remand the
actions to state court have been filed.
With respect to the Tennessee and Georgia actions discussed above, it is
too early to predict the outcome of these actions and whether or not they
will have a material adverse impact on the Company's financial condition.
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
16
18
HOME HOLDINGS INC.
Notes to Consolidated Financial Statements
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.
On February 13, 1991, Home Insurance and its subsidiaries were acquired
from AmBase (the "Acquisition") pursuant to a stock purchase agreement (the
"Stock Purchase Agreement"). As part of the Stock Purchase Agreement, as
amended, AmBase provided Home Insurance a tax indemnification for certain
taxes assessed against AmBase and its consolidated group, which included
Home Insurance, for all periods ending on or before December 31, 1989. The
Stock Purchase Agreement, as amended, also provided for a "hold-back" of a
portion of the purchase consideration by the Company to be used to pay (i)
liabilities for federal or state income taxes, including interest thereon,
assessed against AmBase, Home Insurance or any other member of the AmBase
affiliated group for years ending on or before December 31, 1989, and (ii)
certain other liabilities, and to the extent not used for these purposes,
to be paid to AmBase.
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
17
19
HOME HOLDINGS INC.
Notes to Consolidated Financial Statements
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.
Home Insurance is involved in a dispute with its landlord, Olympia and
York Maiden Lane Company (the "Landlord"), with respect to its lease of its
principal offices at 59 Maiden Lane, New York, New York. The Landlord is in
default of certain bond obligations that are secured by the building and,
consequently, the Landlord has made an assignment of rents to the trustee
(the "Trustee") representing the Landlord's bondholders. On June 24, 1996,
the Landlord's bondholders obtained a judgment of foreclosure and it is
anticipated that the Landlord's bondholders will complete the foreclosure,
and gain possession of the building shortly.
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.
The Court granted a temporary restraining order on July 19, 1996, in
favor of Home Insurance. On August 9, 1996 the Court entered a decision and
interim order, which, as amended through September 12, 1996, appointed a
mediator and provided that Home Insurance deposit in escrow with a receiver
approximately $7.4 million representing the June and July rent and June tax
payment. The order states that the escrow payment "shall not per se
constitute a secured claim under New Hampshire Revised Statutes Annotated
402 - C: 3 but may be subject to the provisions of New Hampshire Insurance
Laws, Chapter 402 - C in the event of proceedings thereunder or similar
proceedings in this or any other jurisdiction". Home Insurance made this
escrow payment and the mediation proceeded.
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
18
20
HOME HOLDINGS INC.
Notes to Consolidated Financial Statements
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 was due to be made by April 1,
1997. Home Insurance has sought an extension of time to make this payment.
The court has not ruled on this request. On March 27, the landlord moved
for summary judgement for additional rent, purportedly due and owing for
entry of the earlier summary judgment, and for other relief. The court has
not ruled on the landlords motion. Concurrent with the litigation, the
Company, the Landlord and the Trustee 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. Marine Midland Bank served its
responsive papers on May 9, 1997. Defendants have until June 6, 1997 to
file their reply. Management believes that it is too early to predict with
certainty the ultimate outcome of this dispute.
19
21
HOME HOLDINGS INC.
Notes to Consolidated Financial Statements
Home Insurance is involved in a dispute with the NCCI as administrator of
the National Workers' Compensation Reinsurance Pool ("the Pool"). The Pool
collects premium and pays losses for various residual market plans around
the country. The premium is supposed to be distributed to pool members in
proportion to their market share and held in reserve. The NCCI sends a
quarterly invoice to each pool member for its share of the losses as
calculated and paid by the Pool in that quarter.
Home Insurance is a participant in the Pool, and, as of March 31, 1997,
Home Insurance is carrying loss reserves, calculated on an undiscounted
basis, of approximately $251 million allocated to the Pool. On May 6, 1997,
Home Insurance received notice from the NCCI that the Pool's invoices
totaling $35,324,555 were due and unpaid and that the Board of Governors of
the Pool had voted on April 28, 1997 to approve (i) the NCCI's
determination that Home Insurance's allocable share of outstanding reserve
obligations to the Pool was $236,237,269 and (ii) the acceleration of such
amount. On May 7, 1997, Home Insurance received from NCCI a demand that
Home Insurance obtain a letter of credit to secure this alleged obligation
to the Pool of $271,561,824.
Home Insurance disputes the extent of its obligations to the Pool, and
believes that it has meaningful legal defenses to both the acceleration and
the demand for security. In addition, Home Insurance has on several
occasions demanded an audit to determine the actual amount of its
obligation. To date, however, Home Insurance's demands for an audit have
been refused. Home Insurance and the NCCI currently are engaged in
settlement negotiations with respect to these matters. Management believes
it is too early to predict with certainty the ultimate outcome of this
matter; however, an unfavorable outcome could have a material adverse
impact on the Company's financial condition.
In or about October 1994, Gruntal discovered a defalcation in its back
office operations area. Gruntal notified the New York Stock Exchange Inc.
("NYSE"), the Commission and the United States Attorney's Office for the
Southern District of New York ("USAO"). Gruntal also undertook an inquiry
into the circumstances and facts of the defalcation and into related
matters. Gruntal presently believes that approximately $14 million,
consisting in substantial part of funds that should have or potentially
could have been abandoned property under the laws of various states
("Abandoned Property"), was embezzled or improperly diverted, including
approximately $5 million in such funds that was used in substantial part to
benefit Gruntal. Gruntal has submitted claims to its insurer, Home
Insurance, under the applicable insurance policy and to date, approximately
$8.5 million has been advanced to Gruntal by the carrier. Home Insurance's
net retention on the claim was approximately $1 million, with the balance
reinsured.
Based upon information furnished by Gruntal, inquiries were undertaken by
the NYSE, the Commission and USAO. Gruntal discussed its investigation
relating to Abandoned Property with the governmental and self-regulatory
bodies involved. In addition, Gruntal
20
22
HOME HOLDINGS INC.
Notes to Consolidated Financial Statements
advised the NYSE, the Commission, USAO and the National Association of
Securities Dealers, Inc. ("NASD") that it was conducting a separate review
relating to the execution and reporting of certain Over-the-Counter ("OTC")
orders.
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 June 1996, with the approval of the Commission, the NYSE and the NASD,
Gruntal engaged Irving M. Pollack, Esq., a former Commissioner of the
Commission, to serve as Independent Consultant (hereinafter the
"Independent Consultant"), pursuant to the settlement with the Commission,
and, additionally, pursuant to other settlements with the Commission, NYSE
and NASD, described below. The Independent Consultant will review Gruntal's
operating policies and procedures with respect to the operations and OTC
areas and recommend further changes, if deemed appropriate. In performing
these reviews, the Fund Administrator and Independent Consultant are
authorized to rely upon work performed or to be performed by the Quality
Assurance Task Force established by Gruntal's Chief Executive Officer to
conduct a diagnostic review of Gruntal's departments and business
activities, and upon work by other representatives of Gruntal.
Gruntal also entered into a separate settlement with the Commission in
April 1996, pursuant to which Gruntal consented, without admitting or
denying the allegations therein, to the entry of an administrative order in
which the Commission found that Gruntal violated antifraud and
recordkeeping provisions of the federal securities laws in connection with
the execution of certain transactions for investment advisory clients and
the non-disclosure to advisory clients of the receipt of certain payments
for order flow. The Commission's order
21
23
HOME HOLDINGS INC.
Notes to Consolidated Financial Statements
censured Gruntal and required Gruntal to pay a monetary fine of $1 million,
reimburse any clients determined by the Independent Consultant to have been
financially harmed as a result of the violations, and pay into the United
States Treasury the amount of payment that the Independent Consultant
determines Gruntal received for order flow on transactions executed for
advisory client accounts plus accrued interest thereon. Under the terms of
the settlement, the Independent Consultant also will review Gruntal's
policies and procedures with respect to the execution of orders for
advisory client accounts and the coding, and reporting on client
confirmations and internal Gruntal records, of transactions executed by
Gruntal and recommend further changes, if deemed appropriate. In performing
this review, the Independent Consultant is entitled to rely upon work
performed or to be performed by Gruntal's Quality Assurance Task Force and
upon work by other representatives of Gruntal.
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.
The disgorgement amounts and fines described above in connection with the
Commission, NYSE and NASD regulatory matters were accrued in the December
1995 financial statements. The Company has made timely payments of the
disgorgement amounts and fines as required under these settlements.
22
24
HOME HOLDINGS INC.
Notes to Consolidated Financial Statements
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.
REM's service agreement with the Company provides that REM will receive a
contingent fee amounting to 15% in excess of its actual costs, accumulating
with interest, as follows: 100% of the annual amounts for the years 1995
through 2000 and 33% of the amounts from years 2000 until 2005, payable on
and after 2005. The fee is payable by Home Insurance contingent upon prior
approval of the Department. Based on the issuance of the Order, and based
on projections that the Excess of Loss Reinsurance Agreement will be fully
exhausted, the payment of such fees is considered remote and therefore has
not been accrued in the consolidated financial statements. The contingent
liability as of March 31, 1997 was $41 million.
23
25
HOME HOLDINGS INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
The following should be read in conjunction with the consolidated financial
statements.
Insurance revenues were $32 million in the three months ended March 31,
1997, compared with $123 million in the same period of 1996. The net loss
was $8 million in the three months ended March 31, 1997, as compared to $35
million in the same period in 1996.
Insurance revenues and pre-tax loss were as follows:
1997 1996
---- ----
($ millions)
Net earned premiums $ 3 $ 80
Net investment income 27 43
Realized capital gains 2 -
-------- ---------
Insurance revenues $ 32 $ 123
======== =========
Underwriting loss $ (17) $ (72)
Net investment income 27 43
Realized capital gains 2 -
-------- ---------
Insurance pre-tax income (loss) $ 12 $ (29)
======== =========
24
26
HOME HOLDINGS INC.
Underwriting Results
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.
Underwriting results by product were as follows:
Underwriting Loss
1997 1996
---- ----
($ millions)
Commercial casualty $ (8) $(25)
Commercial property (2) (26)
---- ----
Commercial accounts group (10) (51)
Professional liability (3) (10)
Other specialty lines (2) (4)
---- ----
Specialty lines group (5) (14)
---- ----
Run-off operations (2) (7)
---- ----
Total $(17) $(72)
==== ====
Underwriting losses were $17 million in the three months of 1997,
compared with $72 million in the same period of 1996. The 1997 underwriting
losses were primarily due to general expenses incurred managing the run-off
of Home Insurance's operations. The 1996 underwriting losses were primarily
due to lower earned premiums and expenses incurred in managing the run-off
of Home Insurance's operations.
The commercial accounts group underwriting loss was $10 million in the
three months of 1997, compared with $51 million, in the same period of
1996. The 1997 underwriting loss included commercial casualty and property
losses of $8 million and $2 million, respectively, compared to $25 million
and $26 million, respectively, in the same period of 1996. The 1997
commercial accounts group losses were primarily due to general expenses
incurred in managing the run-off of its operations. The 1996 losses were
primarily due to lower earned premiums and expenses incurred in managing
the run-off of its operations.
25
27
HOME HOLDINGS INC.
The specialty lines group loss was $5 million in the three months of 1997
compared with $14 million in the same period of 1996. The 1997 specialty
lines group loss was due to general expenses incurred in managing the
run-off of its operations. The 1996 loss was primarily due to lower earned
premiums and expenses incurred in managing the run-off of its operations.
The run-off operations loss was $2 million in the three months of 1997,
compared with $7 million in the same period of 1996. Underwriting losses
from Asbestos/Pollution Policies for the first quarter of 1997 and 1996
were nil.
Investments
As of March 31, 1997, the Company has recorded, as a component of the
Portfolio Swap Receivable, an amount due from Centre Reinsurance Dublin of
$15 million because of a negative difference from the 7.5% target return.
The negative difference since January 1, 1997 resulted from the net of (i)
a $13 million difference in favor of the Company due to a decrease in the
fair value of investments underlying the Swap and (ii) a $2 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 $25 million.
In the three months ended March 31, 1997, the Company recorded a $3
million increase in unrealized gains on insurance equity investments not
underlying the Swap.
Other
Corporate interest expense was $13 million in the three months ended
March 31, 1997, compared with $12 million in the same period of 1996.
Equity in the income of the securities broker-dealer was a loss of $8
million for the three months ended March 31, 1997. The 1997 first quarter
loss was primarily due to $9 million of transaction expenses relating to
the restructuring of Gruntal. See note 7 of the consolidated financial
statements for further discussion.
Income tax benefit was $1 million in the three months of 1997 compared
with an expense of $1 million in the same period of 1996. Taxes in 1997 and
1996 were comprised of state and foreign taxes. The Company was unable to
recognize a federal income tax benefit against its 1997 or 1996 pre-tax
losses because there was no available taxable income in the carryback
period.
26
28
HOME HOLDINGS INC.
FINANCIAL CONDITION
Consolidated
Following the Closing, Home Insurance has generally ceased writing new or
renewal insurance or reinsurance business, except for limited risks that
Home Insurance is obligated to continue writing for an interim period. The
Company has been notified by the Department that, in light of the
Recapitalization, Home Insurance cannot pay any dividends without prior
approval of the Department.
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. 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.
If the Department rejects future dividends filings, the Company will be
forced to raise cash through capital infusions, the issuance of additional
debt, or the sale of assets in order to meet its current obligations;
however there are no assurances that such sources will be available. 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, which include interest payments on the Public
Indebtedness of $11.6 million due on June 15, 1997 and December 15, 1997,
respectively. Under the terms of the Recapitalization Agreement, Centre
Finance has purchased approximately $46 million aggregate principal amount
of the Company's 7% Series B Senior Working Capital Notes to fund interest
payments occurring through December 1996 on the Public Indebtedness.
To fund additional cash requirements incurred in connection with the
Equity Repurchase Transaction, as defined in note 1b to the 1996 Annual
Report, the Recapitalization and other extraordinary needs, Centre Finance
and ZCI purchased, in 1995 and 1996, $15 million principal amount of the
Company's 12% Senior Subordinated Working Capital Notes due and $16 million
principal amount of the Company's 7% Series A Senior Working Capital Notes.
Effective December 31, 1996, each of the Series A and Series B Senior
Working Capital Notes, was amended to change the timing of the payment of
interest. Prior to such amendment, interest was payable quarterly. However,
according to the amended terms, interest shall not be due or payable until
seven business days following the receipt by the Company of written demand
from holders of these notes, or when the principal of the Series
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HOME HOLDINGS INC.
A and Series B Senior Working Capital Notes becomes due and payable. If
interest is not paid within seven business days of such written demand, all
interest accrued shall be deemed overdue and shall immediately become due
and payable. If interest becomes overdue, the interest rate is adjusted
upwards to the greater of (i) the rate of interest on the notes, plus 3% or
(ii) the prime rate plus 3%. As of March 31, 1997, approximately $5 million
of interest has been accrued but not paid on the Series A and Series B
Senior Working Capital Notes. As a result of the amended terms, the
interest is not overdue.
Neither Centre Finance nor Zurich nor Trygg-Hansa has any obligations
pursuant to the Recapitalization or otherwise to provide any capital or
other financial support to the Company or its subsidiaries other than the
limited amounts specifically provided for pursuant to the Recapitalization
and related agreements. Centre Finance, Zurich and Trygg-Hansa have
informed the Company that they do not intend to provide any financial
support beyond such limited amounts as may be required pursuant to the
Recapitalization.
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 1997 and 1996. 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 March 31, 1997, the Company's outstanding corporate debt was $573
million and, at December 31, 1996, was $567 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). 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.
Pursuant to the Bondholder Agreement, in exchange for the consent by each
Bondholder to the waivers and amendments to the indentures governing the
Public Indebtedness necessary to consummate the Recapitalization, the
Company completed an exchange offer on August 25, 1995, in which
approximately $179 million principal value of the 2003 Senior Notes were
exchanged for the New Notes, which provide for sinking fund payments (to be
applied to the mandatory retirement of the New Notes) in installments of
approximately $36 million each in year 1999 through 2003. All other terms
and conditions of the New Notes are substantially the same as the 2003
Senior Notes.
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HOME HOLDINGS INC.
In March, 1997, Moody's lowered its rating of the Company's debt security
to Ca from B3, and Standard and Poor's Corporation ("S&P") lowered its
ratings to CC from B-.
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 commenced making payments under the Excess of Loss
Reinsurance Agreement. Also, up to $290 million of additional coverage
provided by the Excess of Loss Reinsurance Agreement shall be linked to
certain factors including dividend payments from Home Insurance to the
Company funding principal payments on the Public Indebtedness and the New
Notes, as defined in note 1b to the 1996 Annual Report as such debts become
payable.
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. Due to these projected future recoveries, loss
reserves with a net present value of $787 million were recorded as of March
31, 1997 and December 31, 1996 as a recoverable from the Excess of Loss
Reinsurance Agreement.
Beginning June 1996, Home Insurance is withholding rent and tax payments
to its Landlord. Amounts withheld for rent of approximately $3 million per
month, are being accrued pending resolution of litigation. Home Insurance
was required to deposit in escrow with a court appointed receiver
approximately $10.7 million. See note 8 to the consolidated financial
statements for further discussion.
Home Insurance is involved in a dispute with NCCI. Home Insurance is a
participant in the Pool, and, as of March 31, 1997, Home Insurance is
carrying loss reserves, calculated on an undiscounted basis, of
approximately $251 million allocated to the Pool. On May 6, 1997, Home
Insurance received notice from the NCCI that the Pool's invoices totaling
$35,324,555 were due and unpaid and that the Board of Governors of the Pool
had voted on April 28, 1997 to approve (i) the NCCI's determination that
Home Insurance's allocable share of outstanding reserve obligations to the
Pool was $236,237,269 and (ii) the acceleration of such amount. On May 7,
1997, Home Insurance received from NCCI a demand that Home Insurance obtain
a letter of credit to secure this alleged obligation to the Pool of
$271,561,824. See note 8 to the consolidated financial statements for
further discussion.
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HOME HOLDINGS INC.
Home Insurance
Following the closing of the Recapitalization, Home Insurance has
generally ceased accepting business except as required by regulation or
contractual obligations. As a result, payment of future claims and
operating expenses would be met by primarily earning investment income,
collection of premiums receivable and reinsurance receivables, collection
of the Portfolio Swap Receivable and sale of assets. At March 31, 1997, the
Portfolio Swap Receivable of $1,068 million was available to provide for
any foreseeable immediate cash requirements.
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. 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.
Cash used for insurance operating activities was $221 million in the
three months ended March 31, 1997 compared with $263 million in the same
period in 1996. The net outflows in 1997 and 1996 were primarily due to
paid losses and lower premium collections, resulting from the run-off of
operations.
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 $444 million and $469 million at March 31, 1997 and December 31, 1996,
respectively. 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
$30 million and $55 million at March 31, 1997 and December 31, 1996,
respectively.
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HOME HOLDINGS INC.
The Company's loss reserves are determined through a process of
estimation which is necessarily imperfect, and involves an evaluation of a
large number of variables. 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. See note 3 to the consolidated financial
statements for further discussion.
The Department also continues to direct a consulting actuarial firm to
perform a review of Home Insurance's loss reserves, and has retained a
second actuarial firm to perform a peer review of the findings. Such
reviews are expected to be completed during the second quarter of 1997.
Management cannot predict whether reserve estimates to be prepared by these
consultants will change the Department's view of the level of regulatory
intervention required for Home Insurance.
Securities Broker-Dealer
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 March 27, 1997, Gruntal & Co.'s net capital, as
defined by the Commission and other regulatory authorities, was
approximately $118 million, which was $97 million in excess of the
aggregate minimum required.
On February 24, 1997, Gruntal, and The 1880 Group LLC a limited liability
company organized under the laws of Delaware, ("The 1880 Group"), entered
into the Reorganization Agreement. The Gruntal reorganization was
consummated on March 28, 1997. The reorganization resulted in Gruntal
transferring its securities broker-dealer operating companies, Gruntal &
Co. and The GMS Group, to a newly formed limited liability company, Gruntal
Financial, LLC ("Gruntal Financial"). In connection with the reorganization
Gruntal changed its name to Home Financial Corp. ("Home Financial") on
April 1, 1997. Home Insurance is the sole owner of Home Financial.
The Reorganization involved the issuance of several classes of securities
to Home Financial and The 1880 Group, including preferred securities, in an
aggregate nominal amount of $235 million as follows: (i) Gruntal Financial
issued to Home Financial 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
issued to The 1880 Group securities called Preferred C Interests in an
nominal amount of $9 million. As a result of the Reorganization, Home
Financial owns 40% of the common interest of Gruntal Financial and The 1880
Group owns 60% of the common interest of Gruntal
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HOME HOLDINGS INC.
Financial. In connection with the issuance of certain preferred securities
to Home Financial, Home Insurance and Centre Reinsurance Dublin entered
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. Expenses incurred by Gruntal in connection
with the transaction were $9 million. There was no gain or loss to Home
Insurance from the Reorganization after the impact to Gruntal of the
transaction expenses.
Sterling Forest
On May 15, 1996 Governors Pataki of New York and Whitman of New Jersey,
and Speaker of the House Gingrich, announced an agreement in principle for
the purchase and sale of a substantial part of Sterling Forest lands for
public parkland. In connection therewith, a Purchase and Sale Agreement
between Sterling Forest and Sterling Lake Associates, as seller, and Trust
for Public Land and Open Space Institute, as buyer, was signed on February
18, 1997 (the "Sterling Forest Agreement").
Under the terms of the Sterling Forest Agreement more than 15,000 acres
of Sterling Forest land will be acquired as parkland by the state of New
York under the management of the Palisades Interstate Park Commission, at a
total purchase price of $55 million. Under the Sterling Forest Agreement
the buyers have up to two years to raise the funding. The purchase price
for any lands not yet acquired, however, will increase annually if the
purchase has not been fully consummated by the first anniversary of the
agreement. A total of $49 million has been committed, as of May 14, 1997,
by a combination of federal and state governments, and one not-for-profit
conservation foundation. Sterling Forest will continue to own approximately
2,200 acres of land and existing improvement for future sale or
development.
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HOME HOLDINGS INC.
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the annual meeting of the stockholders of the Company held
on May 13, 1997 (The "Annual Meeting"), the following matters
were submitted to a vote of security holders:
(i) the election of directors
(ii) amendments to the Restated Certificate of
Incorporation of the Company; and
(iii) amendments to the By-Laws of the Company.
All of the present directors of the Company, including Mr. Jan
Bruneheim, Mr. Steven D. Germain, Mr. Michael Palm and Mr. Zaid
O.B. Pedersen, were elected to serve as directors of the
Company until their successors are duly elected and qualified.
Amendments to the Restated Certificate of Incorporation of the
Company and amendments to the By-Laws of the Company were
approved.
With respect to the election of directors, 12,586,697 shares of
Series A Common Stock were voted in favor of the slate of
directors nominated for re-elections. There were no votes cast
against any of the directors, nor were there any abstentions.
With respect to the amendments to the Restated Certificate of
Incorporation of the Company, 12,586,697 shares of Series A
Common Stock of the Company were voted in favor of the proposed
amendments and 11,425,177 shares of Series B Convertible Stock
of the Company were voted in favor of the proposed amendments.
There were no votes cast against any of the amendments, nor
were there any abstentions.
With respect to the amendments to the By-Laws of the Company,
12,586,697 Shares of Series A Common Stock of the Company were
voted in favor of the proposed amendments and 11,425,177 shares
of Series B Convertible Stock of the Company were voted in
favor of the proposed amendments. There were no votes cast
against any of the amendments, nor were there any abstentions.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
EXHIBITS
3.1 Form of Amended and Restated Certificate of
Incorporation of the Company, as approved by the
stockholders of the Company on May 13, 1997.
3.2 By-Laws of the Company, as approved by the stockholders
of the Company on May 13, 1997.
10.1 Governance Agreement Termination and Mutual Release
dated as of April 15, 1997 by and among Trygg-Hansa AB
(formerly Trygg-Hansa SPP Holdings AB), Trygg-Hansa
Omsesidig Livforsakring, Trygg-Hansa Holding B.V.,
Centre Reinsurance (Bermuda) Limited and Zurich Home
Investments Limited (formerly ZCI Investments Limited).
10.2 Amendment No. 1 dated as of April 15, 1997 to the
Securityholders' Agreement dated as of June 12, 1995 by
and among the Company, Zurich Home Investments Limited
(formerly ZCI Investments Limited), Centre Reinsurance
(Bermuda) Limited, Insurance Partners Advisors, L.P.,
Trygg-Hansa AB and Trygg-Hansa Holding B.V.
Form 8-K
Report on Form 8-K was filed by the Company on April 14, 1997.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HOME HOLDINGS INC.
By: /s/ RICHARD H. HERSHMAN
---------------------------
May 14, 1997 Richard H. Hershman
Treasurer
(Principal Financial and Accounting Officer
through the Services Agreement with
Risk Enterprise Management Limited)
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EXHIBIT INDEX
3.1 Form of Amended and Restated Certificate of
Incorporation of the Company, as approved by the
stockholders of the Company on May 13, 1997.
3.2 By-Laws of the Company, as approved by the stockholders
of the Company on May 13, 1997.
10.1 Governance Agreement Termination and Mutual Release
dated as of April 15, 1997 by and among Trygg-Hansa AB
(formerly Trygg-Hansa SPP Holdings AB), Trygg-Hansa
Omsesidig Livforsakring, Trygg-Hansa Holding B.V.,
Centre Reinsurance (Bermuda) Limited and Zurich Home
Investments Limited (formerly ZCI Investments Limited).
10.2 Amendment No. 1 dated as of April 15, 1997 to the
Securityholders' Agreement dated as of June 12, 1995 by
and among the Company, Zurich Home Investments Limited
(formerly ZCI Investments Limited), Centre Reinsurance
(Bermuda) Limited, Insurance Partners Advisors, L.P.,
Trygg-Hansa AB and Trygg-Hansa Holding B.V.