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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 June 30, 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 June 30, 1997, there were 14,114,500 shares of registrant's Series A Common
Stock, par value $.01 per share, outstanding.
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
HOME HOLDINGS INC.
Consolidated Statements of Income
Second Quarter and Six Months ended June 30,
(Unaudited)
($ millions)
Second Quarter Six Months
-------------- ----------
1997 1996 1997 1996
----- ----- ----- -----
REVENUES:
Net earned premiums (note 3) $ 5 $ 33 $ 8 $ 113
Insurance net investment income 25 38 52 81
Insurance realized capital gains (loss) (3) 10 (1) 10
Securities broker-dealer operations -- 122 -- 239
----- ----- ----- -----
Total revenues 27 203 59 443
----- ----- ----- -----
OPERATING EXPENSES:
Losses and loss adjustment expenses (note 3) (175) 86 (174) 191
Policy acquisition and other insurance expenses 19 34 38 81
Corporate interest expense 13 12 26 24
Securities broker-dealer operations -- 110 -- 220
----- ----- ----- -----
Total expenses (143) 242 (110) 516
----- ----- ----- -----
Income before equity in income (loss) of
securities broker-dealer and income taxes 170 (39) 169 (73)
Equity in income (loss) of securities broker-dealer 7 -- (1) --
----- ----- ----- -----
Income (loss) before income taxes 177 (39) 168 (73)
Income tax expense (1) (1) -- (2)
----- ----- ----- -----
NET INCOME (LOSS) $ 176 $ (40) $ 168 $ (75)
===== ===== ===== =====
See accompanying notes to consolidated financial statements.
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HOME HOLDINGS INC.
Consolidated Balance Sheets
($ millions)
June 30, December 31,
ASSETS 1997 1996
------- -------
(Unaudited)
Insurance investments at fair value:
Portfolio swap receivable (note 6) $ 962 $ 1,243
Fixed maturities available for sale
(cost $27 and $26) 29 28
Equity securities (cost $16 and $17) 23 21
------- -------
Total insurance investments 1,014 1,292
Cash 4 36
Premiums receivable 272 290
Funds held by affiliate 221 248
Reinsurance receivables 2,647 2,765
Securities broker-dealer investments -- 392
Receivables from brokers, dealers and customers -- 2,258
Investment in securities broker-dealer (note 7) 159 --
Other assets 158 312
------- -------
Total assets $ 4,475 $ 7,593
======= =======
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
Liabilities:
Unpaid losses and loss adjustment expenses $ 4,954 $ 5,687
Payables to brokers, dealers and customers -- 2,060
Debt of securities broker-dealer -- 246
Corporate debt (note 5) 579 567
Other liabilities 310 572
------- -------
Total liabilities 5,843 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 (2,152) (2,320)
Unrealized gains on insurance investments (note 6) 9 6
Unrealized currency translation adjustments (2) (2)
------- -------
Total stockholders' deficiency (1,368) (1,539)
------- -------
Total liabilities and stockholders' deficiency $ 4,475 $ 7,593
======= =======
See accompanying notes to consolidated financial statements.
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HOME HOLDINGS INC.
Consolidated Statements of Cash Flows
Six Months ended June 30,
(Unaudited)
($ millions)
1997 1996
----- -----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 168 $ (75)
Adjustments to reconcile net loss to net cash
used for operating activities:
Insurance realized capital (gains) loss 1 (10)
(10)
Unpaid losses and loss adjustment expenses (733) (510)
Premiums and reinsurance receivables 137 197
Funds held by affiliate 27 (8)
Unearned premiums (4) (117)
Broker-dealer investments and receivables,
net of payables -- (109)
Other 74 7
----- -----
Net cash used for operating
activities (330) (625)
----- -----
CASH FLOWS FROM INVESTING ACTIVITIES:
Portfolio swap receivable 281 506
Purchase of fixed maturities (1) --
Sales of equity securities 3 15
Sales of fixed securities -- 2
Other 3 (5)
----- -----
Net cash provided by investing
activities 286 518
----- -----
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in corporate debt 12 27
Increase of debt of broker-dealer -- 103
----- -----
Net cash provided by financing
activities 12 130
----- -----
Net increase (decrease) in cash (32) 23
Cash at beginning of period 36 34
----- -----
CASH AT END OF PERIOD $ 4 $ 57
===== =====
SUPPLEMENTAL DISCLOSURES OF CASH FLOW:
Corporate interest paid $ -- $ 12
Broker-dealer interest paid $ -- $ 40
Income taxes paid (received) $ (1) $ 1
See accompanying notes to consolidated financial statement
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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 Home Financial Corp., a holding
company for a securities brokerage business, and Sterling Forest Corporation, a
property development business, which on June 27 was reorganized as a limited
liability company and changed its name to Sterling Forest LLC ("Sterling
Forest"). 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 second quarter and six months ended
June 30, follows:
Second Quarter Six Months
-------------- ----------
1997 1996 1997 1996
----- ---- ----- -----
($ millions)
Earned premiums:
Direct $ 3 $ 10 $ 8 $ 38
Assumed -- 30 -- 116
Ceded 2 (7) -- (41)
----- ---- ----- -----
Net $ 5 $ 33 $ 8 $ 113
===== ==== ===== =====
Losses and loss adjustment expenses:
Direct $ 3 $ 35 $ 25 $ 174
Assumed (168) 41 (163) 78
Ceded (10) 10 (36) (61)
----- ---- ----- -----
Net $(175) $ 86 $(174) $ 191
===== ==== ===== =====
Settlement with National Council on Compensation Insurance ("NCCI')
As discussed further in note 8, Home Insurance entered into an agreement
with NCCI, the National Workers' Compensation Reinsurance Pool ("the Pool") and
its participants to commute $228 million of undiscounted loss and loss
adjustment expense reserves and settle $43 million of losses payable to NCCI for
$60 million. The payment of $60 million made by Home Insurance in connection
with the settlement is reported as a payable to NCCI and included with other
liabilities. The Company recognized a gain of $174 million from the settlement
based upon generally accepted accounting principles, reported as a reduction to
loss and loss adjustment expenses. Included in the June 1997 statutory surplus
is a benefit of $115 million relating to the settlement with NCCI. The impact to
statutory surplus of the NCCI settlement reflects related adjustments to tabular
and non-tabular discount.
Asbestos/Pollution Losses and Loss Adjustment Expenses
The 1997 and 1996 second quarter and six months 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
second quarter and six months incurred loss for Asbestos/Pollution Policies
reflected $18 million and $10 million of paid losses, respectively, offset by
decreases of $18 million and $10 million, respectively, to unpaid
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HOME HOLDINGS INC.
Notes to Consolidated Financial Statements
losses and loss adjustment expenses for the same periods. The 1996 second
quarter and six months incurred loss for Asbestos\Pollution Policies reflected
$16 million and $42 million of paid losses, respectively, offset by decreases of
$16 million and $42 million, respectively, 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 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.
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HOME HOLDINGS INC.
Notes to Consolidated Financial Statements
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
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
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HOME HOLDINGS INC.
Notes to Consolidated Financial Statements
Centre Reinsurance Dublin, representing the amount received by Home Insurance
from Trygg-Hansa Insurance Company Limited, a subsidiary of Trygg- Hansa, 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 June 30, 1997 and
December 31, 1996 as a recoverable from the Excess of Loss Reinsurance
Agreement.
4. LIQUIDITY AND STATUTORY SURPLUS
Dividend Restrictions and Liquidity
The Company did not receive common stock dividends from Home Insurance
in 1996 and during the first six months of 1997. On July 14, 1997, the Company
received an $11.7 million dividend from Home Insurance for the purpose of
funding the payment of interest by the Company on its Public Indebtedness due
June 15, 1997, plus 29 days interest thereon. As discussed in note 3, the
dividend will have no effect on Home Insurance's statutory surplus, as it
increases the aggregate limit of the Excess of Loss Reinsurance Agreement.
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
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HOME HOLDINGS INC.
Notes to Consolidated Financial Statements
discount is $348 million and $469 million at June 30, 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 $123
million at June 30, 1997 compared with $55 million at December 31, 1996.
Included in the June 1997 statutory surplus is a benefit of $115 million
relating to the settlement with NCCI (see note 3). The impact to statutory
surplus of the NCCI settlement reflects related adjustments to tabular and
non-tabular discount.
On March 3, 1997, Home Insurance was placed under formal supervision by
the Department. The Department states in its Order that this action was taken in
response to Home Insurance's RBC report filed with the Department, as discussed
below, which indicates that a Mandatory Control Level Event has occurred. The
Order establishes that the Department will oversee and supervise Home Insurance
for the purpose of continuing and intensifying an economic, actuarial and
accounting review of the books, records and business affairs of Home Insurance
so as to determine what future actions may be appropriate. The Order also
provides that Home Insurance may not take certain actions without the prior
approval of the Department, including, among other matters, payment of claims
and other obligations within certain dollar limits, and changes in the terms and
conditions of certain existing contracts and entering into of certain new
contracts.
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. 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 in
process, and the completion date has not yet been determined. 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
June 30, December 31,
1997 1996
----------- -----------
($ millions)
7% Senior Notes due in 1998, net of
unamortized discount of nil in 1997
and 1996 $ 100 $ 100
77/8% Senior Notes due in 2003, net of
unamortized discount of $1 million in 1997
and $2 million 1996 178 177
77/8% 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 125 118
8% Junior Subordinated Notes, issued at
original issue discount, $171 million
principal value due in 2004 94 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 $ 579 $ 567
=========== ===========
During 1995 and 1996, the Company issued to Centre Finance 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. 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 1997 to extend the due
date until June of 1998.
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
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HOME HOLDINGS INC.
Notes to Consolidated Financial Statements
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 June 30,
1997, approximately $6 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 June 30, 1997, the Company has recorded, as a component of the
Portfolio Swap Receivable, an amount due from Centre Reinsurance Dublin of $6
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 $2
million difference in favor of the Company due to a decrease in the fair value
of investments underlying the Swap and (ii) a $4 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 $48
million.
The Company received $48 million from Centre Reinsurance Dublin on
January 21, 1997, to settle the 1996 Swap receivable. Securities and cash
totaling $210 million were transferred to Centre Reinsurance Dublin on January
22, 1996, to settle the 1995 Swap liability.
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HOME HOLDINGS INC.
Notes to Consolidated Financial Statements
The fair value of securities managed by Zurich Investment Management Inc.
("ZIM") and underlying the Portfolio Swap Receivable from Centre Reinsurance
Dublin as of June 30, 1997 is as follows:
Estimated
Fair
Value
($ millions)
Fixed Maturities:
U.S. Government and agency $436
Mortgage-backed securities 172
Corporate securities 244
Foreign governments 36
Other 2
----
Total 890
Equity securities 1
Short-term investments 65
Total Swap investments 956
Receivable from Centre Reinsurance Dublin 6
Portfolio Swap Receivable $962
====
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HOME HOLDINGS INC.
Notes to Consolidated Financial Statements
7. SECURITIES BROKER-DEALER
On February 24, 1997, Gruntal Financial Corp. ("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 $155.9 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 a nominal amount of $9 million.
The nominal amount of the Preferred A Interest was adjusted from the amount
previously disclosed of $155.5 million to reflect actual March 1997 results and
final transaction expenses. 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, 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 $155.9 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 Company accrued $8 million of income from
the swap during the second quarter. Expenses incurred by Gruntal in connection
with the transaction were $9 million. There was no gain or loss to Home
Insurance from the Reorganization after the impact to Gruntal of the transaction
expenses.
In connection with the Reorganization, the members of The 1880 Group
entered into management services agreements with The 1880 Group which, in turn,
will provide such services to Gruntal Financial.
15
16
HOME HOLDINGS INC.
Notes to Consolidated Financial Statements
Summarized financial information of Gruntal Financial for the second quarter and
six months ended June 30 is set forth in the following tables:
Second Quarter Six Months
------------------ ------------------
1997 1996 1997 1996
----- ----- ----- -----
($ millions)
Summarized Income Statement
Commissions $ 23 $ 26 $ 46 $ 51
Principal transactions 33 47 65 92
Underwriting and investment banking 10 9 18 18
Interest 31 31 63 60
Other 8 9 16 18
----- ----- ----- -----
Total revenues 105 122 208 239
Total expenses (106) (110) (217) (220)
----- ----- ----- -----
Income (loss) before income taxes (1) 12 (9) 19
----- ----- ----- -----
Income from swap agreement 8 -- 8 --
----- ----- ----- -----
Total income (loss) from broker-dealer $ 7 $ 12 $ (1) $ 19
===== ===== ===== =====
Summarized Balance Sheet
June 30,
1997
----
Cash $ --
Investments 446
Receivables from brokers, dealers and customers 2,335
Total assets 2,970
Payables to brokers, dealers and customers 2,104
Debt 328
Total liabilities 2,819
Stockholders' equity 151
16
17
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.
17
18
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. 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. Plaintiffs have filed a motion to amend
the complaint to add 150 additional defendants and other named Plaintiffs in
both actions.
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.
An action was recently instituted in the Massachusetts Superior Court,
Suffolk County by Service of a Verified Complaint and preliminary Injunction
papers seeking to have Home Insurance immediately: 1) pay $756,961.53 to the
Massachusetts Workers' Compensation Assigned Risk Pool ("Assigned Risk Pool"),
as its billed but unpaid assessment for the Fourth Quarter of 1996, 2) deposit
$17,854,205.30 in past premium payments from the Assigned
18
19
HOME HOLDINGS INC.
Notes to Consolidated Financial Statements
Risk Pool to Home Insurance into an escrow fund, to be held in trust to cover
Home Insurance's obligations for losses and expenses as they become due and
owing.
The complaint alleges that the Assigned Risk Pool, established under
G.L.c Section152 65A, is subject to supervision by the Massachusetts Insurance
Commissioner, who has designated the Workers Compensation Rating Bureau ("WCRB")
as administrator. It is further alleged that the WCRB and the Insurance
Commissioner both previously directed the defendants to pay all outstanding
amounts, and to pay the remainder of all prior premium payments to Home
Insurance into a trust account for the benefit of the Assigned Risk Pool. The
complaint contains four counts asserting statutory violations, unjust
enrichment, declaratory relief, and breach of fiduciary obligation.
On June 20, 1997, Justice Peter Lauriat of the Massachusetts Superior
Court denied plaintiff's Motion for a Preliminary Injunction. Plaintiffs' Motion
for Reconsideration was denied. Plaintiffs' Petition for Interlocutory Relief to
the Appeals Court seeking reversal of the denial of plaintiffs' prior requests
for relief was recently denied. Home Insurance has filed a Motion to Dismiss the
complaint for failure to exhaust administrative remedies. Management believes it
is too early to predict the ultimate outcome of this action and whether an
unfavorable outcome will have a material adverse impact on the Company's
financial condition.
A Petition in Intervention has been filed by Sandwich Chef of Texas, Inc.
in its own right and on behalf of others similarly situated, against its
insurer, Reliance Insurance Company, and dozens of insurance companies,
including Home Insurance, that are alleged to be members of the Texas Workers'
Compensation Insurance Facility ("TWCIF"). The action seeks to have a surplus in
the amount of $467 million that was returned by the TWCIF to its member
insurance companies for the 1992-1994 years, refunded to the members' respective
retro insureds.
The TWCIF is alleged to be an unincorporated association of insurers that
served as the Texas workers' compensation insurer of last resort from January 1,
1991 through December 31, 1993 for employers unable to obtain coverage in the
voluntary market. It is alleged that the Texas Department of Insurance ("TDI")
was required to establish an appropriate pass through allowance so that each
retro rated risk written during the calendar year would get a proportion of
any assessment or rebate made by the TWCIF to its member companies.
19
20
HOME HOLDINGS INC.
Notes to Consolidated Financial Statements
The Petition seeks a declaratory judgment and formation of a constructive trust
against Reliance and the insurer defendants, and asserts antitrust and tortious
interference claims against them.
By order of the Texas Insurance Commissioner, Elton Bomer, effective
August 6, 1997 rules have been issued directing insurers to refund $272 million
in premium to Texas employers who purchased retro workers' compensation
insurance policies with effective dates between May 1, 1991 through December 31,
1994. Insurers have 6 months from the effective date to make the refunds based
on surpluses received since 1991.
Numerous insurance companies recently filed a new lawsuit in the District
Court of Travis County, Texas against the TDI and the Commissioner challenging
the new rules insofar as they apply to the 1991 and 1992 policy years.
Management believes it is too early to predict with certainty the ultimate
outcome of this dispute, and whether an unfavorable outcome could have a
material adverse impact on the Company's financial condition.
A purported class action complaint has been filed in the U.S. District
Court for the Southern District of Miami against dozens of insurance companies,
including Home Insurance, and the NCCI seeking redress for an alleged wrongful
scheme, combination and conspiracy perpetrated by the defendants in the sale of
retrospectively rated workers' compensation policies. The representative class
plaintiffs are alleged to be insureds of AIG, CIGNA, CNA and Hartford companies.
The class action is brought on behalf of all persons who purchased a renewed
retrospective workers' compensation policies from the insurer defendants from
January 1, 1988 until the present, covering risks located in Florida.
The defendants are alleged to have conspired with each other to charge
unlawful fees, charges and assessments that varied from filings made and
approved by the Insurance Commissioner. Specifically, the defendants are alleged
to have illegally charged their insureds for their own residual market losses
through various means. The NCCI is alleged to be both the instrumentality for
the alleged scheme, and a direct participant in the illegal activity. The
complaint contains causes of action for violation of the Sherman Antitrust Act,
violation of the Florida antitrust statute, RICO counts, breach of contract,
civil conspiracy and unjust enrichment. It seeks compensatory, punitive, and
treble damages. Management believes it is too early to predict with certainty
the ultimate outcome of this dispute, and whether an unfavorable outcome could
have a material adverse impact on the Company's financial condition.
20
21
HOME HOLDINGS INC.
Notes to Consolidated Financial Statements
A complaint and temporary restraining order issued from the New York
State Supreme Court were served upon Home Insurance by Bertholon-Rowland Corp.,
a large producer of Home Insurance's professional liability business in New York
and Massachusetts. The action arose out of the producer's decision to terminate
its business relationship with Home Insurance on six months' notice, and Home
Insurance's subsequent immediate suspension of the producer's authority to act
on its behalf. The complaint sought an injunction and damages nullifying the
suspension of authority and enforcing the producer's contractual rights to its
customer accounts and commissions. Compensatory and punitive damages were
sought. By stipulation of the parties the restraining order was dissolved and
legal proceedings stayed pending submission of the dispute to an arbitration
panel. The final award of the arbitration panel dated August 7, 1995 ordered,
among other things, that Bertholon-Rowland's damages claim against Home
Insurance be denied. Home Insurance's motion to confirm the arbitration award
was submitted to the court on October 12, 1995. On November 8, 1995,
Bertholon-Rowland obtained a court order temporarily restraining alleged
violations of its ownership rights to policy expirations, and filed a motion for
a preliminary injunction against Home Insurance and Zurich-American Insurance
Group and Professional Liability Underwriting Managers Inc. due to the alleged
violations and seeking other relief as well. Subsequently, Bertholon-Rowland
filed a motion to amend the temporary restraining order based upon alleged
continuing violations of its expiration rights. By court order dated July 7,
1997, Justice Herman Cahn confirmed the arbitration award of August 7, 1995. An
additional payment was made to Home Insurance. All other pending motions will be
withdrawn. The case has now been fully resolved.
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
21
22
HOME HOLDINGS INC.
Notes to Consolidated Financial Statements
income tax and interest assessments exceed the amount held back pursuant to the
Stock Purchase Agreement, as amended, and AmBase does not have sufficient
financial resources to pay the excess amount, Home Insurance would be severally
liable for such excess amount.
AmBase federal tax years through 1991 have been examined and settled by
the Internal Revenue Service, with the exception of a "Fresh Start" issue for
the 1987 tax year and no additional assessments can be made. Based upon public
disclosures by AmBase and information provided by AmBase to the Company under
the terms of the Stock Purchase Agreement, as amended, (i) AmBase believes that
it has meaningful defenses with respect to the "Fresh Start" tax issue that is
material to AmBase and (ii) the Company believes that if AmBase does not have
sufficient financial resources to pay federal income tax and interest
assessments for the 1987 tax year for which Home Insurance is severally liable
and for the additional AmBase withholding tax issue still open for which Home
Insurance believes it is not liable, any liability of Home Insurance for such
amounts in excess of the amount held back pursuant to the Stock Purchase
Agreement, as amended, would not have a material adverse effect on the Company's
or Home Insurance's financial condition or results of operations. No amounts
have been accrued by Home Insurance or the Company in excess of the amount held
back pursuant to the Stock Purchase Agreement, as amended.
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 or otherwise 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.
Following a hearing set on July 1, 1997, the Court issued an Order and
Judgment and Decision and Order, both dated July 2, 1997 granting judgment in
the sum of $18,795,262.33
22
23
HOME HOLDINGS INC.
Notes to Consolidated Financial Statements
against Home Insurance and in favor or O & Y Maiden, together with statutory
interest (9%) per annum from September 1, 1996, and providing for the deposit
of certain additional rent payments with the court-appointed Temporary
Receiver of Rents. The Court continued to stay entry until July 7, 1997.
On July 7, 1997, Home Insurance filed a Notice of Motion for a stay of
the judgment or for an injunction against enforcement of the judgment or an
attachment of any assets executed upon and for a preference in the hearing of
the appeal with the Supreme Court of the State of New York, Appellate Division,
First Department. On that day, the Appellate Division ordered the stay to be
continued pending a decision on the motion. On July 24, 1997, the Appellate
Division denied Home Insurance's motion, but continued the stay for ten days
until August 4, 1997.
Home Insurance has entered into an agreement in principle to settle the
litigation under which Home Insurance's prior rent obligation will be reduced by
at least $44 million, and Home Insurance will be allowed to retain a reduced
amount of space at 59 Maiden Lane at a lower rent rate. The settlement is
subject to approval by O & Y Maiden's bondholders and the Department.
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, Zurich, REM and
Home Insurance moved to dismiss the complaint. Marine Midland Bank served its
responsive papers on May 9, 1997. Management believes that it is too early
to predict with certainty the ultimate outcome of this dispute.
Home Insurance is involved in a dispute with NCCI as administrator
of the the Pool. The Pool collects premium and pays
23
24
HOME HOLDINGS INC.
Notes to Consolidated Financial Statements
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. 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 was 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 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) 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 disputed the extent of its obligations to the Pool, and
believed that it had meaningful legal defenses to both the acceleration and the
demand for security. In addition, Home Insurance had on several occasions
demanded an audit to determine the actual amount of its obligation. Home
Insurance's demands for an audit were refused. On June 4, 1997, the NCCI served
its Summons and Complaint upon Home Insurance seeking to recover the total
amount alleged to be due and owing. On August 8, 1997. Home Insurance, NCCI,
the Pool and its participants entered into an agreement to settle and release
all of Home Insurance's obligations in connection with this dispute pursuant to
which Home Insurance made a payment of $60 million, resulting in a statutory
surplus benefit to Home Insurance of $115 million.
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 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
24
25
HOME HOLDINGS INC.
Notes to Consolidated Financial Statements
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 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
25
26
HOME HOLDINGS INC.
Notes to Consolidated Financial Statements
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.
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,
26
27
HOME HOLDINGS INC.
Notes to Consolidated Financial Statements
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 June 30, 1997
was $45 million.
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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 $27 million and $59 million in the second quarter
and six months ended June 30, 1997, respectively, compared with $81 million and
$204 million, in the same periods of 1996. Net income was $176 million and $168
million in the second quarter and six months ended June 30, 1997, respectively,
as compared to losses of $40 million and $75 million, respectively, during the
same periods in 1996. Net income for the second quarter and six months ended
June 30, 1997 includes a gain of $174 million from the settlement with NCCI.
Insurance revenues and pre-tax income (loss) were as follows:
Second Quarter Six Months
----------------- ------------------
1997 1996 1997 1996
----- ---- ----- -----
($ millions)
Net earned premiums $ 5 $ 33 $ 8 $ 113
Net investment income 25 38 52 81
Realized capital gains (loss) (3) 10 (1) 10
----- ---- ----- -----
Insurance revenues $ 27 $ 81 $ 59 $ 204
===== ==== ===== =====
Underwriting income (loss) $ 161 $(87) $ 144 $(159)
Net investment income 25 38 52 81
Realized capital gains (loss) (3) 10 (1) 10
----- ---- ----- -----
Insurance pre-tax income (loss) $ 183 $(39) $ 195 $ (68)
===== ==== ===== =====
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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 Income (Loss)
Second Quarter Six Months
------------------ ------------------
1997 1996 1997 1996
----- ----- ----- -----
($ millions)
Commercial casualty $ 167 $ (55) $ 159 $ (80)
Commercial property (2) (16) (4) (42)
----- ----- ----- -----
Commercial accounts group 165 (71) 155 (122)
Professional liability (1) (8) (4) (18)
Other specialty lines (2) (4) (4) (8)
----- ----- ----- -----
Specialty lines group (3) (12) (8) (26)
----- ----- ----- -----
Run-off operations (1) (4) (3) (11)
----- ----- ----- -----
Total $ 161 $ (87) $ 144 $(159)
===== ===== ===== =====
Underwriting income was $161 million and $144 million in the second
quarter and six months of 1997, respectively, compared to losses of $87 million
and $159 million in the same periods of 1996. Underwriting results for the
second quarter and six months ended June 30, 1997 includes a gain of $174
million from the settlement with NCCI, partially offset by general expenses
incurred managing the run-off. 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 income was $165 million and
$155 million, respectively, in the second quarter and six months of 1997,
compared with losses of $71 million and $122 million, respectively, in the same
periods of 1996. The 1997 underwriting income included commercial casualty of
$167 million and $159 million in the second quarter and six months,
respectively, compared to losses of $55 million and $80 million, respectively,
in the same periods of 1996. Commercial property losses of $2 million and $4
million in the second quarter and six months, respectively, were also included
in the 1997 underwriting loss compared with $16 million and $42 million for the
same 1996 periods. The 1997 commercial accounts group income was primarily due
to the gain of $174 million from the settlement with NCCI, partially offset by
general expenses incurred in
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HOME HOLDINGS INC.
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.
The specialty lines group losses were $3 million and $8 million in the
second quarter and six months of 1997, respectively, compared with $12 million
and $26 million, respectively, in the same periods 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 losses were $1 million and $3 million in the
second quarter and six months of 1997, respectively, compared with $4 million
and $11 million, respectively, in the same periods of 1996. Underwriting losses
from Asbestos/Pollution Policies for the first quarter of 1997 and 1996 were
nil.
Investments
As of June 30, 1997, the Company has recorded, as a component of the
Portfolio Swap Receivable, an amount due from Centre Reinsurance Dublin of $6
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 $2
million difference in favor of the Company due to a decrease in the fair value
of investments underlying the Swap and (ii) a $4 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 $48 million.
In the six months ended June 30, 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 and $26 million in the second
quarter and six months ended June 30, 1997, respectively, compared with $12
million and $24 million, respectively, in the same periods of 1996.
Equity in the income of the securities broker-dealer was income of $7
million and a loss of $1 million for the second quarter and six months ended
June 30, 1997, respectively. The second quarter of 1997 included $8 million of
income from the swap. The loss for the six months ended June 30, 1997 included
$9 million of transaction expenses relating to the restructuring of Gruntal. See
note 7 of the consolidated financial statements for further discussion.
Income tax expense was $ 1 million and nil in the second quarter and six
months of 1997, respectively, compared with an expense of $1 million and $2
million, respectively, in the same periods 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.
30
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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 the second
half of 1997, which includes an interest payment on the Public Indebtedness of
$11.6 million due on December 15, 1997. On July 14, 1997, the Company received
an $11.7 million dividend from Home Insurance for the purpose of funding the
payment of interest by the Company on its Public Indebtedness due June 15, 1997,
plus 29 days interest thereon. As discussed in note 3 to the consolidated
financial statements, the dividend will have no effect on Home Insurance's
statutory surplus, as it increases the aggregate limit of the Excess of Loss
Reinsurance Agreement. 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
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HOME HOLDINGS INC.
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 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 June 30,
1997, approximately $6 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 1996 and for the first six months of 1997. However, on
July 14, 1997, the Company received an $11.7 million dividend from Home
Insurance for the purpose of funding the payment of interest by the Company on
its Public Indebtedness, which dividend will have no effect on Home Insurance's
statutory surplus, as it increases the aggregate limit of the Excess of Loss
Reinsurance Agreement, as discussed below. 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 the second half of 1997.
At June 30, 1997, the Company's outstanding corporate debt was $579
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.
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HOME HOLDINGS INC.
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.
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 June 30, 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. In August 1997, Home Insurance has entered into an agreement in
principle to settle the litigation under which Home Insurance's prior rent
obligation will be reduced by at least $44 million, and Home Insurance will be
allowed to retain a reduced amount of space at 59 Maiden Lane at a lower rent
rate. The settlement is subject to approval by O & Y Maiden's bondholders and
the Department.
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HOME HOLDINGS INC.
Home Insurance has settled its dispute with NCCI. Home Insurance entered
into an agreement with NCCI to commute $228 million of undiscounted loss and
loss adjustment expense reserves and settle $43 million of losses payable to
NCCI for $60 million. The payment of $60 million made by Home Insurance in
connection with this settlement is reported as a payable to NCCI and included
with other liabilities. The Company recognized a gain of $174 million from the
settlement reported as a reduction to loss and loss adjustment expenses.
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 June 30, 1997, the Portfolio Swap
Receivable of $962 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 $349 million in the six
months ended June 30, 1997 compared with $516 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 $348 million and $469 million at
June 30, 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 $123 million and $55 million at June 30, 1997 and
December 31, 1996, respectively.
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HOME HOLDINGS INC.
Included in June 30, 1997 statutory surplus is a gain of $115 million from the
settlement with NCCI, which is net of non-tabular discount of $70 million.
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
in process, and the completion date has not yet been determined. 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 June 30, 1997, Gruntal & Co.'s net capital, as
defined by the Commission and other regulatory authorities, was approximately
$106.8 million, which was $85.8 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 $155.9 million and securities called
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36
HOME HOLDINGS INC.
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. The nominal amount of the Preferred A Interest was
adjusted from the amount previously disclosed of $155.5 million, to reflect
actual March 1997 results and final transaction expenses. 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, 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 $155.9 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 company accrued $8 million of income from the swap during the second quarter
of 1997. 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. On August 11,
1997, the sale of approximately 1,400 acres to the not-for-profit conservation
foundation was consummated, resulting in estimated net proceeds of $4.8
million. The projected closing for the sale of the remaining property is
projected to occur during February, 1998. 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 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-election.
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.
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HOME HOLDINGS INC.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
Exhibits
2.1 Reorganization Agreement, dated February 24, 1997, between Gruntal
Financial Corp. and The 1880 Group (incorporated by reference to the
Registrant's Report on Form 8-K filed on February 25, 1997).
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 (incorporated by
reference to the Registrant's Report on Form 10-Q for the quarterly period
ending March 31, 1997).
3.2 By-Laws of the Company, as approved by the stockholders of the Company on
May 13, 1997 (incorporated by reference to the Registrant's Report on Form 10-Q
for the quarterly period ending March 31, 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) (incorporated by reference to the Registrant's Report on
Form 10-Q for the quarterly period ending March 31, 1997).
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), Center Reinsurance
(Bermuda) Limited, Insurance Partners Advisors, L.P., Trygg-Hansa AB and
Trygg-Hansa Holding B.V. (incorporated by reference to the Registrant's Report
on Form 10-Q for the quarterly period ending March 31, 1997).
10.3 Term Sheet dated August 1, 1997 in connection with the settlement of 59
Maiden Lane litigation (incorporated by reference to the Registrant's Report on
Form 8-K filed on August 4, 1997).
10.4 Form of Settlement Agreement by and among Home Insurance, REM, Centre
Reinsurance Dublin, the National Council on Compensation Insurance, Inc., the
National Workers' Compensation Reinsurance Pool and the participants in the
National Workers' Compensation Reinsurance Pool (incorporated by reference to
the Registrant's Report on Form 8-K filed on August 11, 1997).
99.1 Form of Gruntal Financial, L.L.C. Agreement between Gruntal Financial
Corp. and The 1880 Group (attached to the Reorganization Agreement as Exhibit
3.1C) (incorporated by reference to the Registrant's Report on Form 8-K filed
on February 25, 1997).
99.2 Form of Swap and Investment Management Amendment, by and among Home
Insurance and Centre Reinsurance Dublin (attached to the Reorganization
Agreement as Exhibit 3.1E) (incorporated by reference to the Registrant's
Report on Form 8-K filed on February 25, 1997).
99.3 Press release issued on February 25, 1997 announcing the completion of the
reorganization of Gruntal Financial Corp. (incorporated by reference to the
Registrant's Report on Form 8-K filed on February 25, 1997).
99.4 Press Release issued on June 13, 1997, announcing that the Registrant
would not make the June 15 interest payment on the Public Indebtedness
(incorporated by reference to the Registrant's Report on Form 8-K filed on June
16, 1997).
99.5 Press release issued on July 15, 1997, announcing that the New Hampshire
Insurance Commissioner approved a dividend payment to the Registrant by Home
Insurance to enable the Registrant to make the June 15 interest payment on the
Public Indebtedness (incorporated by reference to the Registrant's Report on
Form 8-K filed on July 16, 1997).
99.6 Press release issued on August 4, 1997, announcing that Home Insurance
entered into an agreement in principle to settle litigation regarding 59 Maiden
Lane (incorporated by reference to the Registrant's Report on Form 8-K filed on
August 4, 1997).
99.7 Press release issued on August 11, 1997, announcing that Home Insurance has
entered into an agreement to settle and release its obligations to the National
Council on Compensation Insurance, Inc., the National Workers Compensation
Reinsurance Pool and the participants in the National Workers Compensation
Reinsurance Pool (incorporated by reference to the Registrant's Report on
Form 8-K filed on August 11, 1997).
Form 8-K
Reports on Form 8-K were filed by the Company on April 14, 1997, June 16, 1997,
June 20, 1997, July 10, 1997, July 16, 1997, August 5, 1997 and August 11, 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
---------------------------------------
August 14, 1997 Richard H. Hershman
Treasurer
(Principal Financial and Accounting Officer
through the Services Agreement with
Risk Enterprise Management Limited)
39