ITEM 1. DESCRIPTION OF BUSINESS - - -------------------------------------------------------------------------------- 1.1 GENERAL ================================================================================
TIG Holdings, Inc. ("TIG Holdings") is primarily engaged in the business of property/casualty insurance and reinsurance through its 15 domestic insurance subsidiaries (collectively "TIG" or "the Company"), one or more of which is licensed to write substantially all lines of property/casualty insurance in all states of the United States. Reinsurance products are offered through TIG Reinsurance Company ("TIG Re") which is based in Stamford, Connecticut, and has a London branch office. Primary property/casualty insurance products are offered through TIG Insurance Company ("TIG Insurance") and the remaining general insurance subsidiaries. Primary products are marketed through two divisions, Commercial Specialty and Retail, which are based in Irving, Texas and Battle Creek, Michigan, respectively.
As of December 31, 1996, TIG had approximately 1,300 salaried employees providing sales, underwriting, claims and service support in 46 active offices. Of direct premium written by TIG in 1996, 26% was written in California, 8% in Michigan, 6% in New York, and 7% each in Hawaii and Texas. No other geographical area, including foreign operations, accounted for more than 5% of direct premium written. Premium produced through Aon Corporation and its subsidiaries, an unaffiliated company that owns among other businesses numerous insurance agencies, accounted for 23%, 22% and 21% of consolidated net premium written in 1996, 1995 and 1994, respectively. In early 1997, Aon Corporation acquired another of the Company's significant producers. If this acquisition had been in effect for all of 1996, Aon Corporation and its subsidiaries would have accounted for 33% of 1996 net premium written.
The following table sets forth consolidated net premium written, classified by statutory line of business:
Years Ended December 31, ------------------------- (In millions) 1996 1995 1994 ============================================================ Reinsurance operations net premium written $548 $511 $440 - - ------------------------------------------------------------ Workers' compensation 260 285 342 Automobile liability 244 260 242 Automobile physical damage 133 136 136 General liability 110 144 122 Homeowners 80 81 113 Commercial multiple peril 59 81 103 Ocean and inland marine 24 25 24 Fire and allied lines 14 28 55 Other 57 59 44 - - ------------------------------------------------------------ Primary operations net premium written 981 1,099 1,181 - - ------------------------------------------------------------ Total TIG net premium written $1,529 $1,610 $1,621 ============================================================
Financial information about TIG's business segments is set forth in Note O of the Consolidated Financial Statements at Item 8 of this Form 10-K. A description of TIG's three operating divisions, Reinsurance, Commercial Specialty and Retail follows at Items 1.2, 1.3, and 1.4, respectively. Lines of business that have been de-emphasized are discussed at Item 1.5. Statements contained in the Description of Business and elsewhere in the document that are not based on historical information are forward-looking statements and are based on managements projections, estimates and assumptions. Management would like to caution readers regarding its forward-looking statements (see Item 7.10 - Forward-Looking Statements). Key industry terms that appear in the Description of Business and elsewhere in this document are defined at Item 7.11.
- 1 -
PART I - - -------------------------------------------------------------------------------- 1.2 REINSURANCE ================================================================================
NATURE OF BUSINESS. Reinsurance is a form of insurance whereby an insurance company (the "reinsurer") agrees to indemnify another insurance company (the "ceding company") for all or a portion of the insurance risks underwritten by the ceding company under an insurance policy or policies. Reinsurance can benefit a ceding company in a number of ways, including reducing net liability on individual risks, providing catastrophe protection from large or multiple losses, stabilizing results and assisting in maintaining acceptable operating leverage ratios. Reinsurance also provides a ceding company with additional underwriting capacity by permitting it to accept larger risks and underwrite a greater number of risks without a corresponding increase in its capital and surplus.
There are two basic types of reinsurance agreements: treaty contracts and facultative certificates. A treaty is an agreement under which the ceding company is required to cede and the reinsurer is required to assume a specified portion or category of risks under all qualifying policies issued by the ceding company during the term of the treaty contract. Facultative reinsurance arrangements are separately negotiated for each insurance policy to be reinsured and result in a facultative certificate under which the ceding company cedes, and the reinsurer assumes, all or part of the risk under a specific insurance policy.
Reinsurance can be written on either a pro rata or excess of loss basis. Under pro rata reinsurance, the reinsurer receives a predetermined percentage of the insurance premium charged by the ceding company and indemnifies the ceding company against a predetermined percentage of the losses and loss adjustment expenses ("LAE") incurred by the ceding company under the covered primary policy or policies. Under excess of loss reinsurance, the reinsurer, in return for a negotiated premium, indemnifies the ceding company against all or a specified portion of losses and LAE on underlying insurance policies in excess of a specified dollar amount, known as the ceding company's retention, subject to a negotiated policy limit. Excess of loss reinsurance is often written in layers, with one or a group of reinsurers assuming the risk for each layer. The layer or layers just above the ceding company's retention are termed "working layers".
PRODUCTS. The following table shows TIG Re's net premium written by statutory line of business:
Years Ended December 31, -------------------------- (In millions) 1996 1995 1994 ======================================================= Property $116 $96 $58 Errors and omissions 88 118 81 General liability 88 94 99 Medical malpractice 85 72 75 Automobile liability 80 44 43 Workers' compensation 33 15 7 Umbrella 32 37 41 Directors and officers 26 35 36 - - ------------------------------------------------------- Total net premium written $548 $511 $440 - - ------------------------------------------------------- Percentage of consolidated net premium written 36% 32% 27% =======================================================
Approximately 52%, 63% and 55% of TIG Re's net premium written in 1996, 1995 and 1994, respectively, was written on an excess of loss basis. TIG Re's primary strategy is to focus on excess of loss casualty coverages, written on a treaty basis, generally taking large participations in working layers of a limited number of programs. By assuming a significant participation in each treaty, TIG Re exercises significant control over the terms and structure of each treaty. Management believes that its emphasis on writing excess of loss treaties in lines of business for which it has specific expertise improves its underwriting results by allowing it to price reinsurance based on its own underwriting rather than on the premium charged by the primary insurer. TIG Re generally seeks to write treaties with working or low layers of attachment, where losses are more quantifiable and which typically carry higher premium.
Approximately 48%, 37%, and 45% of TIG Re's net premium written in 1996, 1995 and 1994, respectively, was written on a pro rata basis. TIG Re provides
- 2 -
PART I - - --------------------------------------------------------------------------------
pro rata coverages when the ceding company's underwriting capabilities are considered superior and where the relationship with the ceding company provides an opportunity for long-term profitability. Pro-rata coverage is preferred in certain segments of the reinsurance market where low limits are sold by the ceding company. Non-standard auto is the prime example of this type of business. Certain other highly volatile lines such as directors and officers liability also merit a pro-rata position as the losses are infrequent but potentially large. The reinsurer would thus want to capture a pro-rata share of the premium to cover this volatile exposure.
DISTRIBUTION SYSTEM. TIG Re's predominant source of business is through reinsurance intermediaries. TIG Re writes through over 60 brokers, the largest of which accounted for approximately 26%, 30% and 29% of TIG Re's net premium written in 1996, 1995 and 1994, respectively. The five largest brokers accounted for 71%, 83% and 87% of TIG Re's net premium written during the same periods. There was no change in the top four brokers in 1996 from 1995 or 1994. A subsidiary of Aon Corporation accounted for 19% of net premium written in 1996. In early 1997, Aon Corporation acquired TIG Re's largest broker. If this acquisition had been in effect for all of 1996, subsidiaries of Aon Corporation would have accounted for 45% of 1996 net premium written.
TIG Re has approximately 330 insurance company "clients". TIG Re's top five insurance company clients represent 36% of TIG Re's 1996 net premium written, exclusive of business assumed from TIG Insurance's Commercial Specialty division. TIG Re maintains an audit staff responsible for performing reinsurance reviews at the clients' office. The auditors primarily test for treaty compliance, including the accuracy and timeliness of premium and loss cessions.
Approximately $50 million of TIG Re's net premium written in each of 1996, 1995, and 1994 was assumed from the Commercial Specialty division of TIG Insurance. Of premium assumed from TIG Insurance, $18 million and $8 million was "reverse flow" business in 1996 and 1995 respectively. There was no reverse flow business written in 1994. Reverse flow is an alternative distribution mechanism whereby general agents submit program business to TIG Re. TIG Re then works with select reinsurance intermediaries to provide a primary insurer to the transaction who will issue the primary policy and then cede a significant portion of the risk to TIG Re. Use of this alternative distribution mechanism allows TIG Re to increase its reinsurance opportunities and to develop or expand relationships with insurance clients (including TIG Insurance) as they expand into new products and territories.
In January 1994, TIG Re established an office in London, England. On December 29, 1995, the United Kingdom ("U. K.") Department of Trade and Industry authorized the London office to operate as a branch and underwrite stipulated classes of general insurance business in the U. K. Net premium produced by the London office was $29 million for 1996 as compared to $23 million and $8 million for 1995 and 1994, respectively. Approximately 74% of the 1996 London office net premium written pertained to international risks.
In October 1996, TIG Re established a new operating unit dedicated to the marketing and underwriting of direct facultative reinsurance on an automatic and individual risk basis. This initiative is designed to diversify TIG Re's premium base while allowing it access to a new market segment management believes will be characterized by higher underwriting margins and long-term profitability. As of December 31, 1996, the unit had opened nine branch offices throughout the United States, with headquarters in New York.
During 1996, TIG Re established a fully integrated Lloyd's vehicle through the formation and capitalization of a wholly owned managing agent that will manage, and a wholly owned corporate name that will provide sole support for, syndicate 1218. This was the first fully integrated corporate vehicle to have been approved in the history of Lloyd's of London. The formation of the syndicate will allow TIG Re to write insurance and reinsurance world-wide. The syndicate has a stamp capacity of (pound)20 million for the 1997 account to access international non-marine casualty and property business. Also, during December 1996, TIG Re was approved as a licensed reinsurer in Canada.
- 3 -
PART I - - --------------------------------------------------------------------------------
COMPETITION. Reinsurance prices and conditions are not normally subject to the same state regulation applicable to the primary insurance market because reinsurers contract solely with other insurance companies. Reinsurers compete based on many factors, including the financial strength of the reinsurer, the A.M. Best ("Best") rating of the reinsurer, premium charged, other terms and conditions of the reinsurance offered, services offered, timeliness of claims payments, ongoing business relationships, reputation and experience. Based on net premium written, TIG Re is the ninth largest property/casualty reinsurer in the United States as of September 30, 1996, according to the Reinsurance Association of America. TIG Re has a stand-alone rating of "A" (Excellent) by Best for financial size IX which corresponds to policyholder surplus levels from $250 million to $500 million. The ratings assigned by Best are based upon factors of concern to policyholders, agents and intermediaries.
TIG Re competes with independent reinsurance companies, subsidiaries or affiliates of established domestic or worldwide insurance companies, reinsurance departments of certain primary insurance companies, and underwriting syndicates. TIG Re, as a broker market reinsurer, competes with the four major direct marketers of reinsurance. TIG Re also competes with a number of reinsurers who write reinsurance through brokers, although in most instances, TIG Re participates on treaties with one or more of these companies as a co-reinsurer.
- 4 -
PART I - - -------------------------------------------------------------------------------- 1.3 COMMERCIAL SPECIALTY ================================================================================
NATURE OF BUSINESS. Commercial insurance policies are generally issued to business and governmental entities, organizations, associations and individual professionals. Commercial coverages provide protection against property loss, legal liability for injuries to other persons or damage to their property arising from the policyholder's business operations. Workers' compensation products provide benefits to employees as mandated by state laws for employement-related accidents, injuries or illnesses. The principal benefits provided by workers' compensation policies are medical and indemnity. Medical benefits cover physician, hospitalization and rehabilitation expenses incurred as a result of the work-related injury while indemnity benefits compensate the employee for lost wages.
PRODUCTS. The table below shows Commercial Specialty net premium written by statutory line of business:
Years Ended December 31, -------------------------- (In millions) 1996 1995 1994 ====================================================== Workers' compensation $203 $228 $288 Other liability 119 115 96 Automobile liability 31 18 23 Commercial multiple peril 30 22 14 Other accident and health 25 33 19 Automobile physical damage 20 14 21 Other 32 7 1 - - ------------------------------------------------------ Total net premium written $460 $437 $462 - - ------------------------------------------------------ Percentage of consolidated net premium written 30% 27% 29% ======================================================
Commercial Specialty offers products that are distinctive due to the unique nature of risks covered or due to the discrete composition of insured groups. Significant business units include Sports and Leisure, Workers' Compensation, Primary Casualty and Excess Casualty. The Sports and Leisure unit offers coverages for professional and amateur sports events and represents 36% of Commercial Specialty 1996 net premium written. This unit offers spectator liability and participant legal liability coverages, including property and liability packages for a variety of activities such as motorsports, fairs, festivals, ice skating rinks, stadiums, arenas, gaming facilities, ski resorts and bowling facilities. The maximum retention on any one policy or event is $2 million. During 1995, the unit expanded product offerings into the Canadian market.
The Workers' Compensation business unit produced approximately 42% of Commercial Specialty net premium written in 1996. Among the products offered are non-participating plans, sliding scale and group participating plans, deferral plans and small deductible plans. During 1995, TIG began targeting workers' compensation premium growth in smaller businesses using a template underwriting approach. Approximately 65% and 54% of workers' compensation business was underwritten using the template approach in 1996 and 1995 respectively. TIG's business plan also includes development of strategic alliances with providers of health care coverages to offer a managed care product. The maximum retention under a workers' compensation policy is $1 million.
TIG is targeting workers' compensation premium growth in approximately 10 states where management believes that reasonable reform has occurred and a favorable long-term operating environment exists. Net premium written in California has declined from $72 million in 1994 to $21 million in 1996. Repeal of California's minimum rate laws effective January 1, 1995 intensified competitive market conditions in that state. Due to the changing environment, Workers' Compensation premium growth plans for the State of California will continue to be cautious. Net premium written by state for the Workers' Compensation business unit of Commercial Specialty (excluding incidental workers' compensation premium written by other units) is shown in the table below:
Years Ended December 31, -------------------------- (In millions) 1996 1995 1994 ====================================================== Illinois $62 $68 $66 California 21 48 72 Colorado 13 15 21 Wisconsin 13 13 14 Hawaii 11 6 6 All Other 71 66 105 - - ------------------------------------------------------ Total net premium written $191 $216 $284 ======================================================
- 5 -
PART I - - --------------------------------------------------------------------------------
The Primary Casualty unit focuses on commercial auto, professional liability, construction and marine programs. These programs generally offer a customized package of coverages designed for a specific "niche" market and are produced through a limited number of managing general agents. The Excess Casualty unit principally offers lead umbrella and excess umbrella policies. Lead umbrella policies provide liability protection for manufacturing, financial, and service business above the limits of the primary coverage. Excess umbrella policies provide similar coverage above the lead excess limits. The maximum retention under a Primary Casualty and/or an Excess Casualty policy is $1 million.
DISTRIBUTION SYSTEM. Commercial Specialty programs are generally marketed through selected managing general agents ("MGAs") which have a demonstrated knowledge of the particular specialty class, the coverages offered, the competition, and the pricing. Management's objective is to develop strategic long-term relationships with profitable managing general agents by developing tailored programs for these key producers and providing responsive service. Management believes that these strategic relationships will enable TIG to maintain a variable cost structure while developing specialized underwriting expertise. TIG sometimes has exclusive contracts with managing general agents. Sports and Leisure business is produced under an exclusive contract with K&K Insurance Agency, Inc., a wholly-owned subsidiary of Aon Corporation. TIG's strategic relationship with Aon Corporation, which includes lines of business other than Sports and Leisure, accounted for approximately 54% of Specialty Commercial operations' 1996 net premium written, compared to 51% in 1995 and 43% in 1994.
Workers' compensation and excess casualty policies are marketed principally through 10 hub locations throughout the United States which work with large regional independent agents and brokers. In addition, regional offices in San Francisco, Chicago, New York City and Dallas assist with sales, underwriting and administrative functions for specialty program business. Additional sales positions in strategic locations nationwide develop accounts in targeted segments.
In December 1996, TIG Insurance purchased a majority interest in a Lloyd's agency which manages three syndicates with an estimated 1997 stamp capacity of (pound)180 million. In addition, TIG Insurance established a corporate name with an approximate 20% share of the managed syndicates 1997 stamp capacity. The syndicates are expected to principally write marine, U.K. property, and aviation business.
COMPETITION. The commercial insurance market is highly competitive on the bases of price, service and ratings. TIG competes with other multi-line property/casualty companies, specialty workers' compensation carriers and other underwriting organizations, some of which are substantially larger and have greater financial resources than TIG. The Company also faces competition from foreign insurance companies, captive insurance companies, as well as from the use of self insurance. With respect to workers' compensation, management's strategy has been to distinguish TIG from its competitors in four areas: dedicated workers' compensation underwriting, state and substate segmentation, dedicated and local market-focused claims expertise and intensive loss management. Recent legislative reforms in most states have restored the price/cost balance in the workers' compensation system. These reforms, affecting benefits, fraud and managed care policies, significantly increased competition in the workers' compensation market, especially in California, during 1995 and 1996.
- 6 -
PART I - - -------------------------------------------------------------------------------- 1.4 RETAIL ================================================================================
NATURE OF BUSINESS. Retail products provide property and liability coverages for individuals and small businesses. Automobile policies cover liability to third parties for bodily injury and property damage, and cover physical damage to the insured's own vehicle resulting from collision or various other causes of loss. Homeowners/commercial property policies protect against loss of dwellings/buildings and contents arising from a variety of perils, as well as liability arising from ownership or occupancy.
PRODUCTS. The following table shows Retail net premium written by statutory line of business.
Years Ended December 31, -------------------------- (In millions) 1996 1995 1994 ====================================================== Automobile liability $130 $116 $98 Homeowners 107 133 81 Automobile physical damage 95 84 73 All other 38 25 62 - - ------------------------------------------------------ Total net premium written $370 $358 $314 - - ------------------------------------------------------ Percentage of consolidated net premium written 24% 22% 19% ======================================================
Retail provides single-risk property and automobile coverages to targeted markets, including products such as standard and upscale property, preferred and standard automobile, non-standard automobile, and small business owners. Other premium written is comprised primarily of small commercial coverages and surety bonds. Approximately 22% of TIG's 1996 automobile policies written were for non-standard risks, most of which carry comprehensive and collision coverage only. Non-standard auto policies are purchased by insureds who do not have clean motor vehicle records, who are considered high risk due to certain driver characteristics or who drive non-standard performance cars. Premium per exposure amount is generally higher for non-standard auto policies due to the higher risk involved.
Of the preferred and standard automobile policies written, substantially all have liability coverage and approximately 70% have comprehensive and collision coverage. Standard homeowners' premium accounts for approximately 77%, 80% and 82% of total 1996, 1995 and 1994 property premium, while the emerging upscale programs account for the remainder. Almost all of the upscale policies have home value limits of $300 thousand or higher. Retail targets risks that lend themselves to template underwriting. For automobile policies, "template" risks would include insureds with clean motor vehicle records or which drive standard performance cars. For property policies, template risks are those that have a three year loss-free record. Template underwriting is used for risks not exceeding $500 thousand for automobile liability, $250 thousand for automobile physical damage and $500 thousand for combined aggregate risks on homeowners/commercial property policies. Maximum policy limits for Retail products are $1 million for automobile liability, $250 thousand for automobile physical damage, and $3 million for homeowners/commercial property as of December 31, 1996.
DISTRIBUTION SYSTEM. Retail products are distributed principally through independent agents and a limited number of MGAs. The distribution of Retail net premium written by state is displayed in the following chart:
Years Ended December 31, -------------------------- (Dollars in millions) 1996 1995 1994 ========================================================= California $140 $144 $129 Michigan 87 74 67 Hawaii 41 36 29 New York 31 31 24 Other 71 73 65 - - --------------------------------------------------------- Total $370 $358 $314 =========================================================
During 1996, refinement of TIG's distribution system continued, focusing on profitable independent agents who have made a commitment to TIG. One of Retail's key customer service and expense savings initiatives has been to establish electronic systems interfaces with its agents. The percentage of electronically interfaced agencies was 93%, 75% and 51% as of December 31, 1996, 1995 and 1994, respectively.
The percentage of retail net premium written that was generated by independent agents was 83.7%, 87.0%, and 96.2% for 1996, 1995 and 1994,
- 7 -
PART I - - -------------------------------------------------------------------------------- respectively, while MGAs, which principally produce non-standard auto, accounted for the remainder. The average premium written for Retail independent agents increased to $461 thousand in 1996, compared to $398 thousand in 1995 and $329 thousand in 1994. Approximately 57% of the total 627 agents in 1996 were located in California and Michigan compared to 62% of the total 652 agents in 1995 and 64% of the total 752 agents in 1994. The average tenure with TIG for independent agents was more than 10 years as of December 31, 1996. The number of active MGAs has declined from approximately 25 at December 31, 1994 to 5 at December 31, 1996. No single production source accounted for more than 5% of Retail net premium written in 1996. Consistent with TIG's overall marketing plan, Retail is focusing on expanding its distribution channels through the development of strategic relationships with MGAs and other key distribution partners. Premium produced through these initiatives was insignificant in 1996.
COMPETITION. The retail insurance market is highly cyclical and has experienced lower underwriting profitability and excess underwriting capacity during the past several years. TIG's Retail operations compete against direct writers, national (upscale) companies and regional companies, some of which are substantially larger and have greater financial resources than TIG.
- - -------------------------------------------------------------------------------- 1.5 OTHER LINES ================================================================================
NATURE OF BUSINESS. Other Lines principally includes commercial products which have been placed in run-off due to failure to meet profitability standards along with inter-divisional reinsurance activity in 1995. Approximately 41% of 1994 premium written was placed in run-off in June 1995 with the remainder being place in run-off in March 1996. Most premium written in run-off programs after the "exit date" represents contractually required renewals.
PRODUCTS. The following table shows net premium written by statutory line of business:
Years Ended December 31, -------------------------- (In millions) 1996 1995 1994 ======================================================= Automobile liability $61 $103 $106 Automobile physical damage 16 28 52 Commercial multiple peril 11 65 95 Fire and allied lines 5 15 44 Other 58 93 108 - - ------------------------------------------------------- Net premium written $151 $304 $405 - - ------------------------------------------------------- Percentage of consolidated net premium written 10% 19% 25% =======================================================
In May 1995, TIG sold an MGA subsidiary, which marketed collateral protection insurance to more than 200 financial institutions, to a third party. This MGA may produce business for TIG through March 1999, however, the majority of this book is expected to be placed with other insurance carriers in 1997. This business was reinsured 90% by a third party in April 1995. As a result, net premium written declined to $6.5 million in 1996 and $(4) million in 1995 from $79 million in 1994.
In June 1995, TIG announced plans to discontinue small individually underwritten commercial policies. As a result, net premium written from these policies declined to $4.4 million in 1996 from $95 million and $154 million in 1995 and 1994, respectively. As a result of this action, TIG consolidated field offices and outsourced approximately 155 claims positions. Additionally, approximately 180 underwriting and other positions were eliminated.
In February 1996, TIG announced the reorganization of its commercial operations and plans to exit certain lines of business that failed to meet profitability standards (see Item 7.1 - Consolidated Results). Net premium written for 1996, 1995 and 1994 from lines of business placed in run-off as a result of the 1996 restructure was $140 million, $190 million, and $166 million, respectively. Management estimates that the last renewals for remaining policies in-force at December 31, 1996 will be processed by late 1997 and that related net written premium will decline by over 75% in 1997 as compared to 1996.
- 8 -
PART I - - -------------------------------------------------------------------------------- 1.6 RESERVES ================================================================================
GENERAL. The reserve liabilities for property/casualty losses and loss adjustment expenses ("LAE") represent estimates of the ultimate net cost of all unpaid losses and LAE incurred through December 31 of each year. The reserves are determined using estimates of losses for individual claims ("case basis reserves") and statistical projections of reserves for incurred but not reported ("IBNR") claims, allocated LAE and unallocated LAE.
Case basis reserves: The claims department of TIG Insurance establishes case basis reserves for all primary lines policies and is managed centrally from TIG's offices in Irving, Texas. As of December 31, 1996 TIG Insurance's dedicated claims staff totaled approximately 580 of which 173 are located in Battle Creek, Michigan, 280 are located in 22 offices across the United States and the remainder in Irving, Texas. Case basis reserves for TIG Re are established based on bordereaux and individual case estimates received from ceding companies and additional estimates provided by TIG Re's claims department, consisting of 12 employees located in Stamford, Connecticut.
The adequacy of case basis reserves is evaluated by TIG's actuarial department which concentrates on those lines of business (third party liability coverages and workers' compensation) for which claims settle over a long period of time. The loss projection procedures used in this analysis contain explicit provisions for quantifying the effect of inflation on loss payments expected to be made in the future. In those instances where case reserves are determined to be deficient, a bulk supplemental reserve is added to the total reserve. TIG uses accident year methodology to calculate IBNR reserves that provide for both case reserve deficiency and late reported claims emergence.
IBNR reserves: The IBNR reserve is based on the historical relationship of the emergence of late reported claims to earned premium. The IBNR reserve calculation contains an adjustment of the earned premium data base to compensate for changes in relative rate adequacy. The adjustment includes components for changes in claim cost resulting from trends in claims' frequency and severity. The effect of inflation on IBNR estimates is thereby incorporated into the calculations.
Loss adjustment expense reserves: Loss adjustment expenses are comprised of allocated and unallocated expenses. Allocated LAE reserves are based on long-term historical relationships of paid loss adjustment expenses to ultimate incurred losses. By using incurred losses as a base, inflation assumptions applicable to loss reserves apply equally to allocated expense reserves. Unallocated LAE reserves are based on historical relationships of paid unallocated expenses to paid losses. As with allocated LAE, the inflation assumption applicable to loss reserves are presumed to apply equally to unallocated expense reserves.
Inherent Uncertainties: The process of estimating reserves involves the active participation of an experienced actuarial staff with input from the underwriting, claims, reinsurance, financial and legal departments. Management, using the advice of loss reserve specialists, makes a judgment as to the appropriate amount to record in the financial statements. This process is a continuous one, involving regular updates for new information and adjustments of loss reserves based on the application of management's best evaluation of the revised data. Such adjustments are reflected in current operations.
When significant changes occur, the inherent uncertainty in estimating reserves is increased. The ultimate impact of these changes may not be known for several years. Examples of such changes include (1) changes in production sources for existing lines of business; (2) writings of significant blocks of new business; (3) non-renewal or cancellation of significant blocks of existing business; (4) changes in economic conditions; and (5) changes in state or federal laws and regulations, particularly insurance reform measures. TIG has experienced significant changes in each of these areas during the past several years.
The inherent uncertainties in estimating reserves are greater with respect to reinsurance than for primary insurance due to the diversity of the development patterns among different types of reinsurance
- 9 -
PART I - - -------------------------------------------------------------------------------- contracts, the necessary reliance on ceding companies for information regarding reported claims and differing reserving practices among ceding companies. This uncertainty is compounded in the case of TIG Re by its relatively short operating history (TIG Re was formed in 1987) and rapid growth in net premium written. Internal data must be supplemented with industry data to provide the basis for reserve analysis. Applying industry data to TIG Re's business adds an additional element of uncertainty to the reserving process.
While there can be no assurance that the reserves at any given date are adequate to meet TIG's obligations, the amounts reported in TIG's balance sheet are management's best estimate of that amount.
ANALYSIS OF LOSS AND LOSS ADJUSTMENT EXPENSE DEVELOPMENT. The following table shows the cumulative amount paid against the previously recorded liability at the end of each succeeding year and the cumulative development of the estimated liability for the ten years ended December 31, 1996:
- 10 -
PART I - - --------------------------------------------------------------------------------
Conditions and trends that have affected the development of these reserves and payments in the past will not necessarily recur in the future. Accordingly, it would not be appropriate to use this cumulative history to project future performance. The re-estimated liability portion of the preceeding table shows the year by year development of the previously estimated liability at the end of each succeeding year.
The variability in reserve estimates was affected in 1988 and subsequent periods as a result of TIG's 1987 acquisition of Fairmont Insurance Company, a workers' compensation insurer. The acquisition resulted in TIG's existing workers' compensation operation being merged into the Fairmont operation and new operating procedures and automation support being developed to integrate these two dissimilar operations. In 1994, TIG restructured its reinsurance ceded program (See Item 7.6 - Exposure Management) which changed the pattern of net reserve development for some business units. For the Sports and Leisure business unit, excess of loss covers will attach at higher amounts, lengthening the development tail.
The re-estimated liabilities are increased or decreased as additional information becomes known about the frequency and severity of claims for individual years. The increases or decreases are reflected in the current year's operating earnings. Each column shows the reserve held at the indicated calendar year end and cumulative data on re-estimated liabilities for the year and all prior years making up that calendar year end liability. The effect on income of the change during the current period (i.e., the difference between the estimated liability at December 31 and the liability re-estimated one year later) is shown in the following table for each of the three most recent years as "Increase (decrease) in estimated ultimate losses and LAE for prior years' claims".
Rollforward of Net Liability for LOSS and LOSS ADJUSTMENT EXPENSES. The following table provides a reconciliation of beginning and ending liability balances, net of reinsurance recoverable, for the years indicated:
Years Ended December 31, -------------------------- (In millions) 1996 1995 1994 ============================================================================ Liability for losses and LAE at beginning of year, net of reinsurance recoverable $2,752 $2,721 $2,738 - - ---------------------------------------------------------------------------- Provision for losses and LAE for current year claims 1,122 1,200 1,240 Increase (decrease) in estimated ultimate losses and LAE for prior years' claims 16 (24) (75) - - ---------------------------------------------------------------------------- Total losses and LAE incurred 1,138 1,176 1,165 - - ---------------------------------------------------------------------------- Loss and LAE payments for claims attributable to: Current year 374 367 386 Prior years 882 778 796 Total losses and LAE payments 1,256 1,145 1,182 Liability for losses and LAE at end of year, net of reinsurance recoverable $2,634 $2,752 $2,721 ============================================================================ Liability for losses and LAE at end of year (statutory basis) (a) $2,649 $2,767 $2,730 ============================================================================
(a) Difference from GAAP basis due to inclusion of Loss and LAE reserves related to discontinued operations.
TIG experienced unfavorable loss and LAE reserve development for prior years in 1996 of $16 million due primarily to adverse development in Other Lines. In connection with the February 1996 restructuring, TIG completed a re-evaluation of loss and LAE reserves related to run-off lines using additional loss development data received during the first quarter of 1996. This data confirmed adverse loss development trends observed in the second half of 1995 and was a consideration in the decision to exit certain lines of business as discussed at Item 7.1 - Consolidated Results. As a result of this re-evaluation and management's belief that the restructuring decision will make the claims settlement process less consistent and more volatile, TIG increased loss and LAE reserves by $31 million in the first quarter of 1996 for run-off lines, principally for long haul trucking and large accounts. This reserve strengthening was partially offset by continuing favorable development of 1993 and prior workers' compensation reserves.
Loss and LAE reserve development during 1995 was favorable by $24 million and was primarily comprised of $18 million and $16 million of favorable
- 11 -
PART I - - --------------------------------------------------------------------------------
development in commercial multi-peril reserves related primarily to Other Lines policies and Commercial Specialty workers' compensation, respectively. The commercial multi-peril result is due in part to the favorable loss ratio trend stemming from corrective underwriting action instituted since 1993. Most of the favorable development applies to general liability coverages which benefit greatly from TIG's litigation management effort as well as other operational initiatives designed to improve the handling of claims for long-tail coverages. Workers' Compensation reserve development continues to benefit from external factors driving the industry-wide improvement observed in 1994 and 1993. During 1995, both paid loss development and case reserve development remained well below the historical patterns underlying TIG's carried reserves. Higher than expected loss ratio results during 1995 account for offsetting unfavorable development recorded in Other Lines automobile liability coverages. Much of the 1995 adverse development for Other Lines occurred in long-haul trucking programs which were discontinued in 1996.
In 1994, TIG experienced favorable development on prior year reserves of $75 million, principally related to workers' compensation reserves for which results improved nationwide for TIG as well as the rest of the insurance industry. For TIG, payments for prior period losses were less than previously projected, causing the favorable loss development. The improvement was quite extensive in the state of California due to the combined impacts of reform legislation, tough anti-fraud measures, and an improving economy. The majority of this favorable development, which primarily related to 1993 reserves, was reallocated to 1994 accident year reserves and policyholder dividend reserves.
ENVIRONMENTAL RESERVES. TIG's reserves include an estimate of TIG's ultimate liability for asbestos-related matters, environmental pollution, toxic tort and other non-sudden and accidental claims for which ultimate values cannot be estimated using traditional reserving techniques. Establishing reserves with respect to environmental liabilities is one of the most difficult aspects of the reserving process. The legal definition and assignment of responsibility for environmental damage vary widely by state and are still evolving. Defense costs on individual claims are often much greater than the claims costs themselves. Assignment of damages to the time covered by a particular policy can be difficult to assess and may ultimately be assigned judicially. Claims frequently emerge long after the policy has expired.
TIG Re was formed in December 1987 and has no pre-1985 liabilities. Prior to 1985, policy forms did not typically limit coverage for latent liabilities such as pollution, asbestos and other long-tail environmental liabilities. After that date, policy forms began to limit exposures to certain types of latent liabilities. As a result, management believes that TIG Re has minimal exposures to such liabilities.
TIG's environmental claims activity is predominately from hazardous waste and pollution-related claims arising from commercial insurance policies. TIG has not written primary coverage for the major oil or chemical companies. Most of TIG's pollution claims are from small, regional operations or local business involved with disposing wastes at dump sites or having pollution on their own property due to hazardous material use or leaking underground storage tanks. These insureds include small manufacturing operations, tool makers, automobile dealerships, contractors, gasoline stations and real estate developers. About 22% of open environmental claims and 39% of environmental case reserves relate to losses in years 1972 and prior, with the oldest open loss year being 1946. The following table presents selected data on environmental losses and LAE incurred and reserves outstanding:
(In millions, except number Years Ended December 31, -------------------------- of outstanding claims) 1996 1995 1994 ============================================================== Net liability for environmental losses and LAE at the beginning of the year $48 $56 $62 Incurred losses and LAE 2 1 2 Loss and LAE payments (11) (9) (8) - - -------------------------------------------------------------- Net liability for environmental losses and LAE at end of year 39 48 56 Reinsurance recoverable 24 36 25 - - -------------------------------------------------------------- Gross environmental reserves $63 $84 $81 - - -------------------------------------------------------------- Number of outstanding claims 545 543 576 ==============================================================
Gross and net environmental loss and LAE reserves declined by 25% and 19% respectively in 1996 as
- 12 -
PART I - - --------------------------------------------------------------------------------
compared to 1995 due primarily to the settlement of a mass tort action involving implants. The number of outstanding claims indicates the number of impacted insured accounts and not individual claimants.
An affiliate of Transamerica Corporation ("Transamerica"), TIG's former parent, has agreed to pay 75% of up to $119 million of reserve development and newly incurred claims, up to a maximum reimbursement of $89 million, on policies written prior to January 1, 1993 with respect to certain environmental claims involving paid losses and certain LAE in excess of TIG's environmental loss and LAE reserves at December 31, 1992. Approximately 99% of environmental reserves at December 31, 1996 related to policies written prior to 1993. At December 31, 1996, the Transamerica affiliate had incurred no liability under this agreement.
Management regularly reassesses the adequacy of environmental reserves as part of the reserve review process. Based upon information available on the date of this report and the aforementioned agreement with Transamerica, management believes that stated environmental reserves are adequate and that the ultimate resolution of environmental claims incurred as of December 31, 1996 will not materially impact TIG's consolidated financial position or results of operations.
- - -------------------------------------------------------------------------------- 1.7 REGULATION ================================================================================ GENERAL. TIG's property/casualty insurance companies are subject to regulation by governmental agencies in the states in which they conduct business. The nature and extent of this regulation varies among jurisdictions, but typically involves the following: (1) prior approval of the acquisition of control of an insurance company or any company controlling an insurance company, (2) regulation of certain transactions entered into by an insurance company with any of its affiliates, (3) approval of premium rates for many lines of insurance, (4) standards of solvency and minimum amounts of capital and surplus which must be maintained, (5) limitations on types and amounts of investments, (6) restrictions on the size of risks which may be insured by a single company, (7) licensing of insurers and their agents, (8) deposits of securities for the benefit of policyholders, (9) approval of policy forms, methods of accounting, establishing reserves for losses and LAE, and (10) filing of annual and other reports with respect to financial condition and other matters. In addition, state regulatory examiners perform periodic examinations of insurance companies, primarily for the protection of policyholders.
As a result of the regulatory supervision of TIG's insurance company subsidiaries under the California Insurance Holding Company System Regulatory Act, and other similar acts in states where TIG has domestic insurance company subsidiaries (the "Holding Company Act"), the insurance company subsidiaries are required to report information on TIG Holdings. Although TIG has relocated the majority of its personnel to Irving, Texas, TIG plans to retain significant operations in California and maintain TIG Insurance's and other insurance company subsidiaries domicile in that state. The Holding Company Act contains certain reporting requirements including those requiring the insurance companies to file information relating to TIG's capital structure, ownership, financial condition and general business operations of its insurance subsidiaries. The Holding Company Act contains reporting and prior approval requirements with respect to transactions among affiliates.
RESTRICTIONS ON DIVIDENDS FROM INSURANCE SUBSIDIARIES. TIG's insurance subsidiaries are subject to various state statutory and regulatory restrictions, applicable generally to each insurance company in its state of incorporation, which limit the amount of dividends or distributions by an insurance company to its shareholders. The restrictions are generally based on certain levels of surplus, investment income and operating income, as determined under statutory accounting practices. If insurance regulators determine that payment of a dividend or any other payment to an affiliate (such as a payment under a tax allocation agreement) would, because of the financial condition of the paying insurance companyor otherwise, be detrimental to such insurance company's policyholders or creditors, the regulators
- 13 -
PART I - - -------------------------------------------------------------------------------- may block payment of such dividends or such other payment to the affiliates that would otherwise be permitted without prior approval.
Subject to the requirements discussed below, the California Insurance Code (the "California Code") permits the payment of dividends in any year which, together with other dividends or distributions made within the preceding 12 months, do not exceed the greater of (1) 10% of statutory surplus as of the end of the preceding year or (2) the statutory net income for the preceding year, with larger dividends ("extraordinary dividends") payable only upon prior regulatory approval. All extraordinary dividends must be reported to the commissioner thirty days prior to payment. In addition, California law requires that an insurer report all dividends within five days of declaration and at least ten days prior to payment. The interim period would allow the California Department of Insurance (the "Department") time to take regulatory action if it so elected, with respect to the dividend declared.
The California Code provides that stock property/casualty insurers may declare dividends only from earned surplus. "Earned surplus" is defined as unassigned funds, as required to be reported on the insurer's annual statement. The California Code prohibits dividends from being paid out of earned surplus derived from unrealized net appreciation of assets or derived from an exchange of assets, unless either such earned surplus has been realized or the assets are currently realizable in cash. An exception to the prohibition allows payment of dividends if, following the dividend, the insurer's surplus as regards policyholders is, (1) reasonable in relation to its outstanding liabilities and (2) adequate to the insurer's financial needs, as prescribed in the California Code, and the insurance commissioner's prior approval has been obtained.
In June 1993, the California Department of Insurance permitted TIG Insurance Company ("TIC"), TIG's lead insurer, to record a quasi-reorganization of its statutory capital accounts. The effect of the quasi-reorganization was to increase the earned surplus of TIC to zero from a negative $285 million and to decrease contributed surplus by the same amount. This transaction significantly increased TIC's future dividend paying capability as insurance companies may only pay dividends from earned surplus.
Certain other extraordinary transactions between an insurance company and its affiliates, including sales, loans, or investments which in any twelve-month period aggregate at least 5% of its admitted assets or 25% of its statutory capital and surplus, also are subject to prior approval by state insurance regulatory authorities. Service agreements and reinsurance agreements are included within such requirements.
RISK-BASED CAPITAL RULES. The NAIC adopted a formula to calculate risk-based-capital ("RBC") for property/casualty insurance companies. The primary objective of the RBC requirements is to raise the safety net that statutory surplus provides for policyholder obligations. The formula first applied to the property/casualty insurance industry beginning in 1994. The RBC rules do not have a material impact on TIG's business or on its financial condition. The statutory "risk adjusted" capital for each of TIG's insurance subsidiaries as of December 31, 1996 exceeded minimum requirements.
GUARANTY ASSOCIATIONS AND INVOLUNTARY MARKETS. Most states require property/casualty insurers to become members of insolvency funds or associations which generally protect policyholders against the insolvency of an insurer writing insurance in the state. Members of the fund or association must contribute to the payment of certain claims made against insolvent insurers. Maximum contributions required by law in any one year vary between 1% and 2% of annual premium written by a member in that state. Assessments from guaranty funds were $1 million for 1996, 1995 and 1994. Most of these payments are recoverable through future policy surcharges and premium tax reductions.
Provision of coverage for less desirable risks through participation in mandatory programs is also required by most states. TIG's participation in assigned risk pools and similar plans, mandated now or in the future, creates downward pressure on earnings. Involuntary costs resulted in increases in underwriting loss of $18 million, $16 million and $22 million in 1996, 1995, and 1994, respectively. Excluding a one time buyout payment of $3.3 million for a New Jersey auto facility, involuntary costs for 1996 would have declined to $14 million.
- 14 -
PART I - - -------------------------------------------------------------------------------- ITEM 2.
ITEM 2. BUSINESS PROPERTIES ================================================================================
TIG's business properties include 53 leased locations, one owned facility in Battle Creek, Michigan and two locations where client office space is utilized. The leased locations represent approximately 0.9 million square feet, and the owned location occupies approximately 220,000 square feet.
TIG occupies approximately 275,000 square feet of space in Irving, Texas for which the lease expires in 2009 and may be extended by TIG for two renewal periods of five years each. All of TIG's other existing leases expire by the end of 2007.
- - -------------------------------------------------------------------------------- ITEM 3.
ITEM 3. LEGAL PROCEEDINGS ================================================================================
TIG's insurance subsidiaries are routinely engaged in litigation in the normal course of their business. As a liability insurer, the Company defends third-party claims brought against its insureds. As an insurer, the Company defends against coverage claims. In the opinion of TIG, based upon information available on the date of this report, no individual item of litigation, or group of similar items of litigation (including asbestos-related and environmental pollution matters and the matter referred to below), taken net of reserves established therefor and giving effect to insurance and reinsurance, is likely to result in judgments for amounts material to TIG's consolidated results of operations.
On January 11, 1994, a Los Angeles County Superior Court jury returned a verdict of $28 million for punitive damages against TIG Insurance Company ("TIC") in Talbot Partners v. Cates Construction, Inc. and TIC (the "Talbot Case"). The award arose out of TIC's handling of a surety bond claim on a construction project. Management is vigorously pursuing its right to appeal the judgment. Management believes that the ultimate liability, if any, arising from the Talbot Case will not materially impact consolidated operating results.
- - -------------------------------------------------------------------------------- ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS ================================================================================
There were no matters submitted to a vote of security holders, through solicitation of proxies or otherwise, during the fourth quarter of 1996.
- 15 -
PART II - - -------------------------------------------------------------------------------- ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS ================================================================================
The principal market in which TIG Holdings' common stock is traded is the New York Stock Exchange. There were 375 shareholders of record on December 31, 1996, representing approximately 12,500 beneficial owners. Information concerning restrictions on the ability of TIG Holdings' subsidiaries to transfer funds to TIG Holdings in the form of cash dividends is set forth in Item 7.8 - Liquidity and Capital Resources - Liquidity Restrictions and Note J to the Consolidated Financial Statements at Item 8. In February 1997, a dividend of $0.15 per share was paid.
The closing market price and cash dividends paid by calendar quarter for 1996 and 1995 are as follows:
- 16 -
PART II - - -------------------------------------------------------------------------------- ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA ================================================================================
The following information should be read in conjunction with Item 7
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - - -------------------------------------------------------------------------------- 7.1 CONSOLIDATED RESULTS ================================================================================
The following discussion provides management's assessment of financial results and material changes in financial position for TIG Holdings, Inc. ("TIG Holdings") and its subsidiaries (collectively "TIG") and presents management's expectations for the near term future. The analysis focuses on the performance of TIG's three major operating divisions, Reinsurance, Commercial Specialty and Retail, and its investment portfolio, which are discussed at Items 7.2, 7.3, 7.4 and 7.7, respectively. Lines of business that have been de-emphasized ("Other Lines") are discussed at Item 7.5. For a better understanding of this analysis, reference should be made to Item 1 - Description of Business and to Item 8
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA ================================================================================
Page Report of Independent Auditors ..............................................38
Consolidated Balance Sheets at December 31, 1996 and 1995 ...................39
Consolidated Statements of Income for each of the three years in the period ended December 31, 1996 .......................................40
Consolidated Statements of Cash Flows for each of the three years in the period ended December 31, 1996 .................................41
Consolidated Statements of Changes in Shareholders' Equity for each of the three years in the period ended December 31, 1996 ...........42
Notes to Consolidated Financial Statements ..................................43
- 37 -
REPORT OF INDEPENDENT AUDITORS
Board of Directors TIG Holdings, Inc.
We have audited the accompanying consolidated balance sheets of TIG Holdings, Inc. and subsidiaries as of December 31, 1996 and 1995, and the related consolidated statements of income, shareholders' equity, and cash flows for each of the three years in the period ended December 31, 1996. Our audits also included the financial statement schedules listed in the Index at Item 14(a). These financial statements and schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedules based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of TIG Holdings, Inc. and subsidiaries at December 31, 1996 and 1995, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1996, in conformity with generally accepted accounting principles. Also, in our opinion, the related financial statement schedules, when considered in relation to the basic financial statements taken as a whole, present fairly in all material respects the information set forth therein.
ERNST & YOUNG LLP
Dallas, Texas January 31, 1997
- 38 -
PART II - - --------------------------------------------------------------------------------
- 39 -
PART II - - --------------------------------------------------------------------------------
- 40 -
PART II - - --------------------------------------------------------------------------------
- 41 -
PART II - - --------------------------------------------------------------------------------
- 42 -
PART II
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - - -------------------------------------------------------------------------------- NOTE A. DESCRIPTION OF BUSINESS ================================================================================
TIG Holdings is primarily engaged in the business of property/casualty insurance and reinsurance through its 16 insurance subsidiaries collectively "TIG" or "the Company". Of direct premium written by TIG in 1996, 26% was written in California, 8% in Michigan, 6% in New York and 7% each in Hawaii and Texas. No other geographical area, including foreign operations, accounted for more than 5% of direct premium written. A description of each operating division's principal products follows (see also Note O - Business Segments).
REINSURANCE. TIG's reinsurance operations are conducted through TIG Reinsurance Company ("TIG Re"). Reinsurance is a form of insurance whereby the reinsurer (i.e. TIG Re) agrees to indemnify another insurance company (the "ceding company") for all or a portion of the insurance risks underwritten by the ceding company under an insurance policy or policies. TIG Re focuses on excess of loss casualty coverages, written on a treaty basis, generally taking large participations in a limited number of programs. TIG Re's predominant source of business is through reinsurance intermediaries. Net premium written for the Reinsurance division comprised 36%, 32%, and 27% of consolidated net premium written for the years ended December 31, 1996, 1995 and 1994, respectively.
RETAIL. Retail's principal products are standard automobile, non-standard automobile, homeowners and small business owner's insurance. Automobile policies cover liability to third parties for bodily injury and property damage and physical damage to the insured's own vehicle resulting from collision or various other causes of loss. Homeowners and small commercial property policies protect against loss of dwellings/buildings and contents arising from a variety of perils, as well as liability arising from ownership or occupancy. Retail's products are distributed through approximately 630 independent agents. Net premium written for the Retail division comprised 24%, 22%, and 19% of consolidated net premium written for the years ended December 31, 1996, 1995 and 1994, respectively.
COMMERCIAL SPECIALTY. Commercial Specialty coverages provide protection against property loss and legal liability for injuries to other persons or damage to their property arising from the policyholder's business operations. Commercial Specialty develops and markets insurance programs where the nature of the risk does not lend itself to traditional commercial insurance. Significant programs include Sports and Leisure, with products for professional and amateur sports events, and Workers' Compensation, which provides liability coverage to employers for payment of employee benefits associated with employment-related accidents as mandated by state laws. Commercial Specialty products are principally marketed through large managing general agents, with which TIG sometimes has exclusive marketing contracts. Net premium written for the Commercial Specialty division comprised 30%, 27%, and 29% of consolidated net premium written for the years ended December 31, 1996, 1995 and 1994, respectively.
- 43 -
PART II
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - - -------------------------------------------------------------------------------- NOTE B. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES ================================================================================
BASIS OF PRESENTATION. The consolidated financial statements are prepared in accordance with generally accepted accounting principles ("GAAP") and include the accounts of TIG Holdings, Inc. and its subsidiaries. Financial statements prepared in accordance with GAAP require the use of management's estimates. Intercompany transactions are eliminated in consolidation. Certain reclassifications of prior years' amounts have been made to conform with the 1996 presentation.
EARNINGS PER SHARE ("EPS"). Primary earnings per share is calculated based upon the weighted average common shares outstanding during the period. In order to calculate EPS, unallocated ESOP shares and treasury shares are deducted from the outstanding common shares. Class A common stock and the common stock options (See Note K - Incentive Compensation Plans) are considered common stock equivalents and are included in EPS calculations to the extent that they are dilutive. To obtain net income attributable to common shareholders for EPS computations, the annual preferred stock dividend is deducted from net income.
INVESTMENTS. Fixed maturities are classified as available for sale, as TIG has no positive intent to hold such securities until maturity, and are carried at market value. Equity securities are also carried at market value while short-term investments are carried at cost, which approximates market value. Market value is principally based upon quoted market prices. Quoted market prices are available for substantially all equity securities. The difference between the aggregate market value and amortized cost of securities, after deferred income tax effect, is reported as unrealized gain or loss directly in shareholders' equity and, accordingly, has no effect on net income.
Interest on fixed maturity investments is recorded as income when earned and is adjusted for any amortization of purchase premium or accrual of discount. Realized gains and losses on the sale of investments are generally determined on a first-in-first-out basis. Realized losses are recorded when an investment's net realizable value is below cost, and the decline is considered other than temporary.
ADOPTION OF SFAS 123. TIG adopted Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123") effective January 1, 1996. SFAS 123 establishes financial accounting and reporting standards for stock-based employee compensation plans. TIG elected to continue to account for employee stock-based compensation as prescribed by APB Opinion No. 25, "Accounting for Stock Issued to Employees" and to provide pro forma disclosures in the Notes to Financial Statements of the effects of SFAS 123 on net income and earnings per share. There was no effect on net income as a result of adopting SFAS 123.
RECOGNITION OF PREMIUM REVENUES. Premium is earned principally on a pro rata basis over the terms of the policies which are generally not more than one year. Unearned premium represents the portion of premium written applicable to the unexpired terms of policies in force.
LOSS AND LOSS ADJUSTMENT EXPENSE RESERVES. The liability for loss and loss adjustment expenses is based on an evaluation of reported losses and on estimates of incurred but unreported losses. The reserve liabilities are determined using adjusters' individual case estimates and statistical projections. The liability is reported net of estimated salvage and subrogation recoverables of $29 million and $31 million at December 31, 1996 and 1995, respectively. The liability is considered to be adequate to cover all payments that will ultimately be made in settling the claims. However, final claim payments may differ from these reserves. Adjustments to the reserves resulting from subsequent developments or revisions to the estimate are reflected in results of operations in the period in which such adjustments become known. While there can be no assurance that the reserves at any given date are adequate to meet TIG's
- 44 -
PART II
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - - --------------------------------------------------------------------------------
obligations, the amounts reported in the balance sheet are management's best estimate of that amount. Certain liabilities for unpaid losses related to long-term workers' compensation coverage are discounted to present value. The discount on these workers' compensation loss reserves was $39 million at December 31, 1996 and 1995.
DEFERRED POLICY ACQUISITION COSTS. Acquisition costs that vary with and are primarily related to the production of new business, consist principally of commissions, premium taxes, and other expenses incurred at policy issuance and renewal. The costs are generally deferred and amortized ratably over the terms of the underlying policies. Anticipated losses, loss expenses, and remaining costs of servicing the policies are considered in determining the amount of costs to be deferred. Anticipated investment income is considered in determining whether a premium deficiency exists. Amortization of deferred policy acquisition costs totaled $347 million, $335 million, and $299 million for the years ended December 31, 1996, 1995 and 1994, respectively.
PARTICIPATING INSURANCE BUSINESS. Dividends to policyholders, which relate primarily to workers' compensation policies, are accrued during the period in which the related premium is earned. Approximately 4%, 5% and 9% in 1996, 1995 and 1994, respectively, of TIG's total premium was subject to participation in such dividends.
OTHER ASSETS. Property, leasehold improvements and furniture and equipment of $41 million and $42 million at December 31, 1996 and 1995, respectively, are included in other assets. These balances are carried at cost less accumulated depreciation of $38 million and $28 million at December 31, 1996 and 1995, respectively. Depreciation is computed under the straight-line method over the estimated useful lives of the assets. Goodwill and other intangible assets of $2 million and $3 million at December 31, 1996 and 1995, respectively, are also included in other assets. These balances are amortized on a straight-line basis over periods ranging from 10 to 40 years. TIG's accounting policy governing the measurement of goodwill impairment includes an annual analysis of the recoverability of goodwill as of each balance sheet date.
SALE OF AGENCY SUBSIDIARIES. On May 1, 1995, TIG sold 100% of the outstanding common stock of certain agency subsidiaries which market force-placed collateral protection insurance to financial institution ("FI") accounts on behalf of TIG's insurance subsidiaries. These FI agency subsidiaries had total assets of approximately $25.6 million at the date of sale. TIG recognized no gain or loss on the transaction.
In connection with the sale, effective April 1, 1995, TIG reinsured 90% of the gross premium produced by the FI agency subsidiaries with reinsurers unaffiliated with either TIG or the purchaser. FI gross premium written for the years ended December 31, 1996, 1995 and 1994 totaled $77 million, $88 million and $92 million, respectively. Net earned premium for the same periods was $8 million, $31 million and $90 million, respectively. TIG also reinsured 90% of the FI unearned premium reserves at April 1, 1995 which resulted in a net transfer of cash to the reinsurers of $34.3 million, but had no impact on net income.
- 45 -
PART II
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - - -------------------------------------------------------------------------------- NOTE C. RESTRUCTURING CHARGES ================================================================================
RESTRUCTURING CHARGES. In February 1996, TIG announced the reorganization of its commercial operations and plans to exit certain lines of business that failed to meet profitability standards. As a result of this reorganization, TIG took the following actions: 1) combined its Specialty Commercial and Workers' Compensation divisions to form a new division called Commercial Specialty, 2) identified field offices for consolidation and closure, 3) identified lines of business for non-renewal or cancellation for which 1995 net premium written was approximately $190 million or 12% of consolidated 1995 net premium written, 4) formed a run-off division (called "Other Lines") to administer contractually required policy renewals for run-off lines of business, and 5) notified approximately 600 employees that their positions would be eliminated. At December 31, 1996, the consolidation/closure of field offices was complete although various lease obligations remain; net written premium for Other Lines had declined by 50% for the year ended December 31, 1996 as compared to 1995; and approximately 600 employees' responsibilities had been outsourced to third party service providers or their employment had been otherwise terminated. At December 31, 1996, TIG had approximately 1,300 employees as compared to approximately 2,000 employees at December 31, 1995.
TIG recorded a $100 million accrual in first quarter 1996 for estimated restructuring charges comprised of severance of $17 million; contractual policy obligations of $37 million; office lease termination of $18 million; furniture, equipment and capitalized software write-downs of $12 million; and a reserve for litigation and credit issues related to terminated producers of $16 million. The remaining reserve at December 31, 1996 is $53 million. Charges against the 1996 restructure accrual of $47 million have been recorded during 1996 and are comprised of $9 million in severance, $23 million in contractual policy obligations, $10 million in lease termination costs and $5 million in asset write-downs. Management estimates that the last renewals for remaining policies in-force at December 31, 1996 will be processed by late 1997 and that related net written premium will decline by over 75% in 1997 as compared to 1996. The underwriting loss from Other Lines operations was $34 million, $32 million and $88 million for 1996, 1995 and 1994, respectively.
- 46 -
PART II
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - - -------------------------------------------------------------------------------- NOTE D. INVESTMENTS ================================================================================
Less than one-third of TIG's portfolio consists of mortgage-backed securities ("MBS"). United States federal government and government agency mortgages now represent approximately 91% of TIG's exposure to MBS, offering AAA credit quality and high yields. A risk inherent to MBS is prepayment risk related to interest rate volatility. The underlying mortgages may be repaid earlier or later than originally anticipated, dependent on the repayment and refinancing activity of the underlying homeowners. Should this occur, TIG would receive paydowns on principal amounts which may have been purchased at a premium or discount, and TIG's investment income would be affected by any adjustments to amortization resulting from the prepayments. TIG's consolidated financial results have not been materially impacted by prepayments of MBS. In addition, interest rate volatility can affect the market value of MBS. All MBS held in the portfolio can be actively traded in the public market.
In the normal course of business, TIG may choose to hedge some of its interest rate risk with derivative financial instruments. Such arrangements are intended to help TIG to more closely match the cash flow received from its assets to the payments on its liabilities. TIG's interest rate swap arrangements generally provide that one party pays interest at a floating rate in relation to movement in an underlying index and the other party pays interest at a fixed rate. While TIG is exposed to credit risk in the event of non-performance by the other party, non-performance is not anticipated due to credit rating of the counterparties. At December 31, 1996, TIG had
- 47 -
PART II
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - - --------------------------------------------------------------------------------
one open derivative position for an interest rate swap with a notional amount of $14 million and such derivative financial instrument was with a financial institution rated A or better by the major credit rating agencies. There were no open future contracts at December 31, 1996 as compared to open futures contracts of $25 million at December 31, 1995. Net unrealized losses of $4.4 million at December 31, 1996 related to previous futures contracts are accounted for as a net increase in the cost basis of the underlying securities and are being amortized over the life of the hedged securities.
TIG routinely enters into commitments to purchase securities on a "To Be Announced" ("TBA") basis for which the interest rate risk remains with TIG until the date of delivery and payment. Delivery and payment of securities purchased on a TBA basis can take place a month or more after the date of the transaction. These securities are subject to market fluctuations during this period and it is the Company's policy to recognize any gains or losses only when they are realized. TIG maintains cash and securities with a fair value exceeding the amount of its TBA purchase commitments. At December 31, 1996, the TBA purchase commitments amounted to $46.3 million, and had a fair value of $45.9 million, compared to TBA commitments of $152.2 million with a fair value of $153.1 million at December 31, 1995.
TIG has less than $2 million of non-income producing investments and has no geographic or other concentrations of investment risk which has not been disclosed. Assets of TIG, carried at $712 million and $649 million at December 31, 1996 and 1995, respectively, were either on deposit with government agencies as required by law in various states in which TIG insurance subsidiaries conduct business or were held as collateral for various business transactions.
The estimated market value and amortized cost of the portfolio, by contractual maturity, at December 31, 1996 are presented below. Expected maturities will differ from contractual maturities as certain borrowers have the right to call or prepay obligations.
Market Amortized (In millions) Value Cost ============================================================== Due in one year or less $39 $38 Due after one year through five years 753 736 Due after five years through ten years 658 645 Due after ten years 1,397 1,338 Mortgage-backed securities 1,210 1,219 - - -------------------------------------------------------------- Total fixed maturity investments $4,057 $3,976 ==============================================================
COMPONENTS OF NET INVESTMENT INCOME.
Years Ended December 31, ------------------------ (In millions) 1996 1995 1994 ========================================================== Fixed maturity investments $298 $273 $252 Short-term and other investments 6 7 6 - - ---------------------------------------------------------- Total gross investment income 304 280 258 Investment expenses, interest and other (14) (12) (9) - - ---------------------------------------------------------- Total net investment income $290 $268 $249 ==========================================================
NET INVESTMENT GAIN (LOSS).
Years Ended December 31, ------------------------ (In millions) 1996 1995 1994 - - ---------------------------------------------------------- Fixed maturity investments Gross gains $37 $18 $6 Gross losses (41) (29) (26) - - ---------------------------------------------------------- Net investment loss before tax (4) (11) (20) Less related taxes 1 4 7 - - ---------------------------------------------------------- Net investment loss, net of taxes $(3) $(7) $(13) ==========================================================
- 48 -
PART II
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - - -------------------------------------------------------------------------------- NOTE E. LOSS AND LOSS ADJUSTMENT EXPENSE RESERVES ================================================================================
Activity in the loss and loss adjustment expense reserve account is summarized as follows:
(In millions) 1996 1995 ============================================================== Balance January 1, net of reinsurance recoverables of $1,134 and $1,152 $2,752 $2,721 Incurred related to: Current year 1,122 1,200 Prior years 16 (24) - - -------------------------------------------------------------- Total losses and LAE incurred 1,138 1,176 - - -------------------------------------------------------------- Loss and LAE payments related to: Current year 374 367 Prior years 882 778 - - -------------------------------------------------------------- Total losses and LAE payments 1,256 1,145 - - -------------------------------------------------------------- Balance December 31, net of reinsurance recoverables of $1,126 and $1,134 $2,634 $2,752 ==============================================================
TIG experienced unfavorable loss and LAE reserve development in 1996 of $16 million due primarily to adverse development in Other Lines. In connection with the February 1996 restructuring, TIG completed a re-evaluation of loss and LAE reserves related to run-off lines using additional loss development data received during the first quarter of 1996. This data confirmed adverse loss development trends observed in the second half of 1995 and was a consideration in the decision to exit certain lines of business as discussed at Note C. - Restructuring Charges. As a result of this re-evaluation and management's belief that the restructuring decision will make the claims settlement process less consistent and more volatile, TIG increased loss and LAE reserves by $31 million in the first quarter of 1996 for run-off lines, principally for long haul trucking and large accounts. This reserve strengthening was partially offset by continuing favorable development of 1993 and prior workers' compensation reserves.
Loss and LAE reserve development during 1995 was favorable by $24 million and was primarily comprised of $18 million and $16 million of favorable development, in the commercial multi peril reserves related primarily to Other Lines and in Commercial Specialty workers' compensation, respectively. The commercial multi peril result is due in part to the favorable loss ratio trend stemming from corrective underwriting action instituted during 1993. Most of the favorable development applies to general liability coverages which benefit greatly from TIG's litigation management effort as well as other operational initiatives designed to improve the handling of claims for long-tail coverages. Workers' compensation reserve development continued to benefit from external factors driving the industry-wide improvement observed in 1994 and 1993. During 1995, both paid loss development and case reserve development remained well below the historical patterns underlying TIG's carried reserves. Higher than expected loss ratio results during 1995 account for offsetting unfavorable development recorded in Other Lines automobile liability coverages. Much of the 1995 adverse development for Other Lines occurred in long haul trucking programs which were discontinued in 1996.
TIG's reserves include an estimate of TIG's ultimate liability for asbestos-related matters, environmental pollution, toxic tort and other non-sudden and accidental claims for which ultimate values cannot be estimated using traditional reserving techniques. TIG's environmental claims activity is predominately from hazardous waste and pollution-related claims arising from commercial insurance policies. Most of TIG's pollution claims are from small regional operations or local business involved with disposing wastes at dump sites or having pollution on their own property due to hazardous material use or leaking underground storage tanks. In connection with the initial public offering of TIG Holding's common stock ("IPO"), an affiliate of Transamerica agreed to pay 75% of up to $119 million of reserve development and newly incurred claims, up to a maximum reimbursement of $89 million, on policies written prior to January 1, 1993 with respect to certain environmental claims involving paid losses and certain LAE in excess of TIG's environmental loss and LAE reserves at December 31, 1992. At December 31, 1996, the Transamerica affiliate had incurred no liability under this agreement.
- 49 -
PART II
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - - -------------------------------------------------------------------------------- NOTE F. REINSURANCE ================================================================================
Years Ended December 31, ------------------------ (In millions) 1996 1995 1994 ====================================================== Written premium: Direct $1,274 $1,387 $1,401 Assumed 650 649 586 Ceded (395) (426) (366) - - ------------------------------------------------------ Net $1,529 $1,610 $1,621 - - ------------------------------------------------------ Earned premium: Direct $1,307 $1,377 $1,422 Assumed 632 629 549 Ceded (400) (388) (422) - - ------------------------------------------------------ Net $1,539 $1,618 $1,549 - - ------------------------------------------------------ Incurred losses and LAE: Gross $1,417 $1,443 $1,451 Ceded (279) (267) (286) - - ------------------------------------------------------ Net $1,138 $1,176 $1,165 ======================================================
TIG reinsures portions of its policy risks with other insurance companies or underwriters and remains liable under these contracts. Reinsurance is used to transfer some policy risks such that the amount of individual claims can be limited to a fixed percentage or amount. Reinsurance is also utilized to limit the amount of claims related to catastrophes. This strategy allows TIG to insure larger risks while controlling exposure to large losses. Reinsurance agreements currently in place are structured on both a treaty basis, where all risks meeting a certain criteria are automatically reinsured, and on a facultative basis, where each policy reinsured is separately negotiated. Amounts recoverable from reinsurers are estimated in a manner consistent with the claim liability associated with the reinsured policy. As a part of its overall business strategy, TIG also engages in assumed reinsurance transactions, primarily through TIG Re, a wholly-owned subsidiary.
Reinsurance contracts do not relieve TIG from its obligations to policyholders. Failure of reinsurers to honor their obligations could result in losses to TIG; accordingly, allowances are established for amounts estimated to be ultimately uncollectible. TIG evaluates the financial condition of its reinsurers and monitors concentrations of credit risk arising from similar geographic regions, activities, or economic characteristics of the reinsurers to minimize its exposure to significant losses from reinsurer insolvencies. At December 31, 1996, TIG held collateral related to reinsurance amounts that remain unpaid for more than 120 days in the form of letters of credit totaling $370 million, trust funds totaling $252 million, and funds held totaling $136 million.
- - -------------------------------------------------------------------------------- NOTE G. INCOME TAXES ================================================================================
TIG files a consolidated federal income tax return. At December 31, 1996, TIG had a net operating loss carryover of $101 million, of which $3 million will expire in 2008 and $98 million will expire in 2009. Additionally, TIG has a $47 million capital loss carryover, of which $18 million will expire in 1999, $18 million will expire in 2000 and $11 million will expire in 2001. For the tax years ended December 31, 1996 and 1995, TIG made tax payments of $5.2 and $1.0 million, respectively. For the tax year ended December 31, 1994, no federal income tax payments were made.
The components of the income tax asset balance are as follows:
(In millions) 1996 1995 ======================================================= Current payable $ (9) $ (6) Net deferred tax asset 111 66 - - ------------------------------------------------------- Total $102 $60 =======================================================
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting
- 50 -
PART II
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - - --------------------------------------------------------------------------------
purposes and the amounts used for income tax purposes. Significant components of TIG's deferred tax assets and liabilities as of December 31, 1996 and 1995 are shown in the following table:
December 31, -------------- (In millions) 1996 1995 =========================================================== DEFERRED TAX ASSETS: Discounting of loss reserves for losses and loss adjustment expenses $ 167 $ 172 Discounting of unearned premium reserves 42 43 Net operating loss carryforward 35 46 Restructuring charges 20 4 Capital loss carryforward 17 14 Business in force 14 20 Policyholder dividends 6 10 Postretirement benefits other than pensions 8 8 Other, net 15 12 - - ----------------------------------------------------------- Total deferred tax assets 324 329 - - -----------------------------------------------------------
DEFERRED TAX LIABILITIES: Deferred policy acquisition costs 52 51 Section 338 - marketable securities 128 124 Unrealized gain - marketable securities 28 59 Section 338 - other 5 29 - - ----------------------------------------------------------- Total deferred tax liabilities 213 263 - - ----------------------------------------------------------- Net deferred tax asset $ 111 $ 66 ===========================================================
In accordance with the provisions of Statement of Financial Accounting Standards No 109, "Accounting for Income Taxes", TIG's management has reviewed its deferred tax asset balance and concluded that it is more likely than not the entire deferred tax asset will be realized. Management's conclusion is based on its expectation that sufficient taxable income will be generated in future periods within the carryforward period. TIG has reported profits in 1996, 1995 and 1994, and is expected to be profitable in the future. If TIG does not achieve its anticipated earnings level in future periods but maintains its 1996 earnings level and converts all of its tax-exempt securities into taxable securities, it anticipates that all of its net operating loss and capital loss carryforward and 90% of its existing deferred tax asset will be utilized by the year 2001.
Significant components of the income tax benefit (expense) are as follows:
Years Ended December 31, ------------------------ (In millions) 1996 1995 1994 ========================================================================== Current benefit (expense) $ (9) $ (2) -- Deferred benefit (expense) 13 (35) $ 7 - - -------------------------------------------------------------------------- Total income tax benefit (expense) $ 4 $ (37) $ 7 ==========================================================================
The components of benefit (expense) for total deferred income taxes are as follows:
Years Ended December 31, ------------------------ (In millions) 1996 1995 1994 ========================================================================== Discounting of reserves for losses and loss adjustment expenses $ (5) $ (7) $ (5) Discounting of unearned premium reserves 1 -- 4 Net operating loss carryforward (11) 2 19 Restructuring charges 16 (3) (9) Capital loss carryforward 3 3 11 Business in force (6) (7) (6) Policyholder dividends (4) (5) (1) Tax liability adjustment 20 -- -- Deferred investment income (4) (15) -- Deferred policy acquisition costs (1) (3) (8) Other 4 -- 2 - - -------------------------------------------------------------------------- Total deferred income tax benefit (expense) $ 13 $ (35) $ 7 - - --------------------------------------------------------------------------
The reconciliation of income tax computed at the U.S. federal statutory rates to total income tax benefit (expense) is as follows:
Years Ended December 31, ------------------------ (In millions) 1996 1995 1994 ========================================================================== Federal income tax benefit (expense) at statutory rates $(26) $ (54) $ (15) Tax-exempt investment income 9 17 23 Tax liability adjustment 20 -- -- Other 1 -- (1) - - -------------------------------------------------------------------------- Total income tax benefit (expense) $ 4 $ (37) $ 7 ==========================================================================
In March 1996, TIG entered into settlement agreements with the IRS on several outstanding audit assessments, which resulted in a redetermination of certain tax liabilities related to prior tax years. A $20 million deferred tax benefit was recognized in first quarter of 1996 as a result of the redetermination.
- 51 -
PART II
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - - -------------------------------------------------------------------------------- NOTE H. FINANCING ARRANGEMENTS ================================================================================
NOTES PAYABLE. In April 1995, TIG Holdings issued $100 million of 8.125% Notes maturing 2005. Interest is payable on a semi-annual basis, and a lump sum principal repayment for the non-callable notes is due April 15, 2005. Included in the restrictive covenants are limitations on the disposition of the stock of TIG Insurance Company ("TIC"), limitations on liens and limitations on the merger of the Company. Interest expense was $8 million in 1996 and $6 million in 1995. Interest paid was $8 million and $4 million in 1996 and 1995, respectively. No interest was expensed or paid in 1994.
SALE - LEASEBACK. In December 1995, TIG entered into a $50 million credit facility, of which approximately $25 million was outstanding as of December 31, 1996. The facility is a direct financing arrangement with a third party related to the sale and leaseback of certain fixed assets, excluding data processing equipment. The initial draw of $22 million against the facility in December 1995 is being amortized over 5 years with interest at 5.9% payable quarterly. Subsequent draws against the facility are amortized over 5 years and interest, based on a floating rate, is payable quarterly. Interest rates during 1996 ranged from 6.440% to 6.475%.
LINE OF CREDIT. In December 1995, TIG established an unsecured revolving line of credit with maximum borrowings of $250 million. The full amount of the five year credit facility was available for general corporate purposes as of December 31, 1996.
- - -------------------------------------------------------------------------------- NOTE I. MANDATORY REDEEMABLE PREFERRED STOCK ================================================================================
In April 1993, in connection with its IPO, TIG Holdings issued 250,000 shares of non-voting mandatory redeemable preferred stock with a cumulative annual cash dividend rate of $7.75 per share and an aggregate liquidation preference/redemption value of $25 million plus accrued and unpaid dividends. The preferred stock must be redeemed on April 27, 2000. With each regular quarterly dividend declared on the preferred shares, each holder also receives one non-transferable right (a "Right"). Each Right will constitute the right to receive an additional amount to the extent that the regular cash dividend to which the related Right was, in whole or in part, not made out of TIG Holdings' current or accumulated earnings and profits, as calculated for federal income tax purposes. In such event, the holder of a Right will be entitled to receive an amount which, when taken together with the regular cash dividend to which the Right was related, would cause the net after-tax return to such holder to equal what the net after-tax return on the mandatory redeemable preferred stock would have been had the regular cash dividend been paid entirely out of the current or accumulated earnings and profits of TIG Holdings. No additional payments were required during 1996. During 1995, TIG paid an additional $0.7 million in respect to these Rights in connection with dividends declared on the mandatory redeemable preferred stock during 1994. Transamerica agreed to indemnify TIG Holdings for any amounts paid with regard to any rights issued by TIG Holdings in connection with dividends declared on the mandatory redeemable preferred stock during 1993. Accordingly, $0.4 million was paid by Transamerica under this indemnification in 1994 with respect to dividends declared in 1993.
- 52 -
PART II
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - - -------------------------------------------------------------------------------- NOTE J. SHAREHOLDERS' EQUITY ================================================================================
AUTHORIZED CAPITAL STOCK. TIG Holdings' authorized capital stock consists of one million shares of $0.01 par value Class A convertible common stock, 180 million shares of $0.01 par value common stock, and 15 million shares of $0.01 par value preferred stock.
CLASS A COMMON STOCK. In April 1993, TIG Holdings issued 224,600 shares of Class A common stock of which 81,191 had been canceled as of December 31, 1996. The Class A common stock is convertible into shares of common stock one year after issuance but not prior to the vesting of such shares in accordance with the terms of their issuance. Accordingly, as of December 31, 1996, the number of Class A common shares converted to common stock was 143,409 (see Note K - Incentive Compensation Plans). As of December 31, 1996, no Class A common stock is outstanding.
SUBSIDIARY DIVIDEND RESTRICTIONS. Payment of dividends to TIG Holdings by its insurance subsidiaries is subject to certain restrictions. State insurance laws limit the amount that may be paid without prior notice or approval by insurance regulatory authorities. As of December 31, 1996, $155 million of dividends are currently available for payment to TIG Holdings from its insurance subsidiaries during 1997 without restriction. Dividends paid by the insurance subsidiaries in 1996 and 1995 were $130 million and $75 million, respectively. Dividends paid in 1996 consisted of cash of $130 million. Dividends paid in 1995 consisted of cash of $55 million and subsidiary common stock of $20 million. There were no dividends paid to TIG Holdings in 1994 by its insurance subsidiaries.
- - -------------------------------------------------------------------------------- NOTE K. INCENTIVE COMPENSATION PLANS ================================================================================
As of December 31, 1996, the Company has three stock based compensation plans, which are described below. The Company adopted SFAS 123 effective January 1, 1996 and has elected to continue to account for employee stock-based compensation as prescribed by APB Opinion No. 25 (See Note B).
THE 1996 LONG-TERM INCENTIVE PLAN. The 1996 Long-Term Incentive Plan (the "1996 Plan") provides for awards of stock options, stock appreciation rights, restricted stock grants, restricted stock units and/or performance units. The maximum number of shares of Common Stock in respect for which awards may be granted or paid out under the 1996 Plan is 5 million shares plus, effective January 1, 2000, the Limitation Amount. The "Limitation Amount" is 1.5% of the total number of issued and outstanding shares of Common Stock as of January 1, 2000, plus, effective each January 1 thereafter through and including January 1, 2006, 1.5% of the total number of issued and outstanding shares of Common Stock as of such January 1. In addition to the shares available for grant as previously mentioned, 2 million shares of Common Stock will be available solely for the grant of awards to employees in connection with acquisitions of other entities or businesses by the Company and its Related Companies. As of December 31, 1996, there were no stock appreciation rights, restricted stock units or performance units outstanding. The 1996 Plan will terminate on the date of the Company's annual meeting of stockholders in 2006. Thereafter, no awards may be granted. Stock options under the 1996 Plan have a term of ten years from the date of the grant and vest in equal annual installments over four years. Restricted stock grants vest in equal annual installments over three years.
THE 1996 NON-EMPLOYEE DIRECTORS COMPENSATION PROGRAM. The 1996 Non-Employee Directors Compensation Program (the "1996 Program") provides for awards of stock options and/or restricted
- 53 -
PART II
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - - -------------------------------------------------------------------------------- shares units. These awards are not to exceed 200,000 shares. As of December 31, 1996, there were 30,636 shares of restricted stock units and 61,272 shares of stock options outstanding. The 1996 Program will terminate on the close of business on the date of the Company's annual meeting of stockholders in 1999. Restricted stock units and stock options granted prior to the date of the annual meeting of stockholders in 1997 will vest in three substantially equal installments on the dates of each annual meeting of stockholders in 1997, 1998 and 1999. Restricted share units and stock options granted on or after the date of the 1997 annual meeting of stockholders but prior to the date of the 1998 annual meeting of stockholders will vest in two equal installments on the dates of each annual meeting of stockholders in 1998 and 1999. Restricted share units and stock options granted on or after the date of the 1998 annual meeting of stockholders but prior to the 1999 annual meeting of stockholders will vest in one installment on the date of the 1999 annual meeting of stockholders. The maximum term of any stock option granted will be ten years from the date of grant.
THE 1993 LONG-TERM INCENTIVE PLAN. The 1993 Long-Term Incentive Plan (the "1993 Plan") provides for awards of stock options, stock appreciation rights, restricted stock grants and/or performance units (collectively referred to as "awards"). These awards are not to exceed 15 million shares in the aggregate. As of December 31, 1996, there were no stock appreciation rights or performance units outstanding. The 1993 Plan terminated May 2, 1996, except with respect to outstanding awards, with the approval of the 1996 Plan. Stock options under the 1993 Plan have a term of ten years from the date of grant and vest in equal annual installments over four years. Restricted stock grants vest in equal annual installments over three years.
In connection with the IPO, TIG and Transamerica agreed that TIG employees could surrender their options to purchase Transamerica common stock by May 14, 1993, and receive options to purchase TIG Holdings common stock, retaining the taxable spread, vesting schedule and term of the surrendered Transamerica stock options as of the IPO closing date. Options relating to 820,498 shares of common stock were issued in connection with this agreement and are included in outstanding options in the following table.
A summary of the status of the Company's three stock based compensation plans as of December 31, 1996 and changes during the three years ended December 31, 1996 is presented below:
Restricted Class A Shares Shares Options ============================================================================== Oustanding at January 1, 1994 77,047 173,938 9,305,278 Granted 13,800 -- 1,142,670 Exercised/Earned (30,234) (67,816) (42,076) Forfeited or cancelled (4,599) (29,863) (409,675) - - ------------------------------------------------------------------------------ Outstanding at December 31, 1994 56,014 76,259 9,996,197 - - ------------------------------------------------------------------------------ Granted 4,600 -- 1,391,100 Exercised/Earned (30,911) (39,800) (100,133) Forfeited or cancelled (843) (666) (275,982) - - ------------------------------------------------------------------------------ Outstanding at December 31, 1995 28,860 35,793 11,011,182 - - ------------------------------------------------------------------------------ Granted 110,170 -- 1,456,736 Exercised/Earned (25,436) (35,793) (383,594) Forfeited or cancelled (14,380) -- (472,089) - - ------------------------------------------------------------------------------ Outstanding at December 31, 1996 99,214 -- 11,612,235 ==============================================================================
The weighted average option exercise price was $22.08 and $22.74 for options outstanding at December 31, 1995 and 1996, respectively. The weighted average option exercise price was $27.39 for options granted during 1996, $20.37 for options exercised in 1996 and $23.67 for options forfeited in 1996.
The weighted average fair value of options granted during 1996 was $8.78 while the weighted average fair value of restricted stock granted during the year was $27.46. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions used for grants in 1995 and 1996, respectively: dividend yield of 1.75 percent of all years; expected volatility of .201;
- 54 -
PART II
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - - -------------------------------------------------------------------------------- risk-free interest rate of 7 percent; and expected life of 7 years. Because the Company's employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options.
If the fair value of the stock compensation granted had been accounted for under SFAS 123, the proforma net income for 1996 would have been $73.4 million or $1.21 per share and $115.5 million or $1.84 per share for 1995. For purposes of proforma disclosures, the estimated fair value of the stock compensation is amortized to expense over the stock compensation's vesting period. The effect on net income of the stock compensation amortization for the years presented above is not likely to be representative of the effects on reported net income for future years.
The following tables summarize information about stock options outstanding and exercisable at December 31, 1996:
Options Outstanding ------------------------------------------------ Range of Number Weighted-Avg Weighted-Avg Excercise Outstanding @ Remaining Exercise Prices 12/31/96 Contractual Life Price ===================================================================== $13.00 to $18.00 274,272 4.4 yrs $16.40 $18.01 to $24.00 9,857,927 6.7 yrs $22.24 $24.01 to $28.00 1,036,300 8.9 yrs $26.11 $28.01 to $32.00 443,736 9.9 yrs $29.89 - - --------------------------------------------------------------------- $13.00 to $32.00 11,612,235 6.9 yrs $22.74 =====================================================================
Options Excercisable ------------------------------------------- Range of Number Weighted-Avg Exercise Excercisable @ Exercise Prices 12/31/96 Price ===================================================================== $13.00 to $18.00 259,522 $16.34 $18.01 to $24.00 8,688,232 $22.53 $24.01 to $28.00 128,350 $25.66 $28.01 to $32.00 - - - - --------------------------------------------------------------------- $13.00 to $32.00 9,076,104 $22.39 =====================================================================
- - -------------------------------------------------------------------------------- NOTE L. EMPLOYEE BENEFIT PLANS ================================================================================
TIG Holdings' employee benefit plans (the "Plans") include the Diversified Savings Plan, the Employee Stock Ownership Plan, and the Profit Sharing Plan. Effective January 1, 1994, TIG Holdings adopted the ESOP and Profit Sharing Restoration Plans. TIG Holdings may amend, terminate, or suspend contributions to the Plans at any time as it may deem advisable. TIG Holdings is the administrator of the Plans. Any subsidiary of TIG Holdings participating in the Plans may withdraw at any time with the consent of the Holdings' Board of Directors. The Board of Directors has fiduciary responsibilities relating to the interpretation and operation of the Plans. As of January 1, 1997, the Diversified Savings Plan and Profit Sharing Plan were combined into the TIG Holdings, Inc. Diversified Savings and Profit Sharing Plan.
DIVERSIFIED SAVINGS PLAN. TIG Holdings, Inc. Diversified Savings Plan (the "DSP") is qualified under Section 401 (a) of the Internal Revenue Code ("IRC") and the trust established to hold the assets of the DSP is tax-exempt under Section 501 (a) of the IRC. The DSP is available to all salaried employees. Most employees who elect to participate may contribute up to 12% of their pre-tax salary, plus bonuses, commissions, and overtime pay ("Employee Compensation") for each calendar year. TIG Holdings administers the DSP and will make matching contributions to the DSP in an amount equal to 75% of the participant's contribution up to a maximum of 6% of Employee Compensation. Certain IRC required limitations may be imposed for participants who are treated as "highly compensated employees" for purposes of the IRC. Generally, an employee vests in the matching employer contributions based upon years of service. Prior to January 1, 1995,
- 55 -
PART II
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - - -------------------------------------------------------------------------------- an employee vested 25% after three years of service, 50% after four years of service, and 100% after five years of service. Effective January 1, 1995, an employee vests 25% after one year of service, 50% after two years of service and 100% after three years of service. Employer matching contributions were $3.3 million, $3.8 million, and $4.0 million for 1996, 1995 and 1994, respectively.
EMPLOYEE STOCK OWNERSHIP PLAN. Prior to the IPO closing, TIG Holdings adopted the TIG Holdings, Inc. Employees Stock Ownership Plan (the "ESOP"). Most salaried employees are eligible to participate in the ESOP. Generally, TIG Holdings will contribute, for each calendar year, an amount equal to one percent of Employee Compensation, as defined, on behalf of each participant employed on the last working day of that year or who was employed but died during the year. No employee contributions are permitted to be made to the ESOP. Prior to January 1, 1995 an employee fully vested at the end of five years. Effective January 1, 1995, an employee vests 25% after one year of service, 50% after two years of service and 100% after three years of service. In April 1993, the ESOP borrowed $24.1 million from TIG Holdings to purchase 1,124,754 newly issued shares of common stock. The loan obligation of the ESOP is considered unearned employee compensation, and as such, is recorded as a reduction of TIG Holdings' shareholders' equity. As loan repayments are made by the ESOP, common stock is released to participant accounts. Unearned compensation is amortized based on the number of shares committed to be released and compensation expense is recognized based on the current market price. Compensation expense of $2.1million, $2.3 million and $1.3 million was recognized in 1996, 1995 and 1994, respectively. At December 31, 1996, 230,928 shares are allocated, 58,601 shares are committed to be released, and 503,766 shares are in suspense. As of December 31, 1996, the market value of unallocated shares was $17.1 million. Contributions to the ESOP were $2.0 million, $2.3 million and $1.2 million for 1996, 1995 and 1994, respectively. A participant's ESOP account will be distributed in full shares of common stock or cash after termination of service.
Employees who were actively employed on April 27, 1993 received an initial allocation of 100 shares of TIG Holdings common stock in which they were immediately fully vested. Effective January 1, 1995, all active associates who did not previously receive the initial allocation of shares in 1993 are eligible for 100 shares of TIG Holdings, Inc. common stock upon attainment of six months of service. These shares are allocated to the associates' accounts as of the last day of the plan year.
ESOP RESTORATION PLAN. The TIG Holdings, Inc. ESOP Restoration Plan is an unfunded plan for the purpose of providing deferred compensation for a select group of management or highly compensated employees whose allocations under the qualified ESOP plan are limited by annual restrictions as determined by the Internal Revenue Code. Highly compensated employees whose allocations under the qualified plan are limited by the Internal Revenue Code restrictions will be eligible for participation immediately upon the date of hire if annual earnings, including bonus in the year paid, exceed a specified threshold. The threshold for each year will be the amount of the cap on compensation that may be taken into account under the qualified plan for that year, or such greater amount as may be determined by the Committee in its discretion. Effective January 1, 1995, a Participant vests 25% after one year of service, 50% after two years of service and 100% after three years of service. Participants' accounts are credited in dollar amounts for the difference between the cash value of the stock that would have been allocated to the participant's account under the qualified ESOP plan and the cash value of the stock that would have been allocated in the absence of the restrictions noted above. Participants' accounts are adjusted for gains, losses and earnings as if invested in the same manner as such associate's account under the qualified ESOP plan. Liabilities due to the participants were approximately $227 thousand, $118 thousand and $28 thousand as of December 31, 1996, 1995 and 1994.
PROFIT SHARING PLAN. The TIG Holdings, Inc. Employees' Profit Sharing Plan (the "Profit Sharing Plan"), benefits eligible employees of TIG Holdings. Eligible employees are those who either were employed by TIG Holdings on December 31, each year or were employed during the plan year but who died prior to the plan year end. Generally, each
- 56 -
PART II
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - - -------------------------------------------------------------------------------- salaried employee is eligible to participate in the Profit Sharing Plan. Prior to January 1, 1995 an employee fully vested at the end of five years. Effective January 1, 1995, an employee vests 25% after one year of service, 50% after two years of service, and 100% after three years of service. No employee contributions are permitted to be made to the Profit Sharing Plan. The amount of any contribution for any calendar year made by TIG Holdings will be determined at the sole discretion of the TIG Holdings' Board of Directors. For 1996, 1995 and 1994, TIG contributed on behalf of each participant an amount equal to the sum of (i) two percent of the participant's Employee Compensation, as defined, for the Plan Year and (ii) four percent of the participant's annual Employee Compensation in excess of a determined wage base. Contributions were $1.4 million, $2.0 million and $2.1 million for 1996, 1995 and 1994, respectively.
PROFIT SHARING RESTORATION PLAN. The TIG Holdings, Inc. Profit Sharing Restoration Plan is an unfunded plan for the purpose of providing deferred compensation for a select group of management or highly compensated employees whose allocations under the qualified Profit Sharing plan are limited by the annual restrictions as determined by the Internal Revenue Code. Highly compensated employees will be eligible for participation immediately upon the date of hire if annual earnings, including bonus in the year paid, exceed a specified threshold. The threshold for each year will be the amount of the cap on compensation that may be taken into account under the qualified plan for that year, or such greater amount as may be determined by the Committee in its discretion. Effective January 1, 1995, a Participant vests 25% after one year of service, 50% after two years of service and 100% after three years of service. Participants' accounts are credited for the difference between the dollar amount credited to the participants' account under the qualified Profit Sharing Plan and the amount that would have been credited in the absence of the restrictions noted above. Participants' accounts are adjusted for gains, losses and earnings as if invested in the same manner as such associate's account under the qualified Profit Sharing Plan. Liabilities due to the participants were approximately $916 thousand, $447 thousand and $111 thousand as of December 31, 1996, 1995 and 1994.
POSTRETIREMENT BENEFITS OTHER THAN PENSIONS. TIG participated in Transamerica's defined benefit health care plan that provided postretirement benefits to eligible retirees of Transamerica and affiliates. TIG assumed all liabilities with respect to its retirees and active employees at the date of the IPO. Contributions for these contributory plans are adjusted annually. Considerations for the adjustments include deductibles and coinsurance. Medical benefits are based on the employee's length of service and age at retirement from the Company. Assets held in trust consist of short term investments with a fair value of approximately $4.5 million and $3.0 million at December 31, 1996 and 1995, respectively.
A summary of the components of net periodic other postretirement benefit cost is as follows:
Years Ended December 31, ------------------------ (In millions) 1996 1995 1994 ============================================================== Service cost - benefits earned during the period $0.3 $0.3 $0.3 Interest cost on projected benefit obligation 1.4 1.4 1.4 Amortization of prior service cost (0.1) (0.1) (0.1) - - -------------------------------------------------------------- Net periodic other postretirement benefit cost $1.6 $1.6 $1.6 ==============================================================
The following table sets forth the amounts recognized in the balance sheet for other postretirement benefit plans:
December 31, ---------------- (In millions) 1996 1995 ============================================================== Actuarial present value of other postretirement obligations: Retirees $17.2 $17.8 Active participants 3.4 3.5 Unrecognized net gain (loss) - (0.1) Prior service cost 0.7 0.8 - - -------------------------------------------------------------- Other postretirement benefit obligation $21.3 $22.0 ==============================================================
The weighted average annual assumed rate of increase in the health care cost trend rate is 11.0 percent for 1996 and 10.0 percent for 1997 and is
- 57 -
PART II
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - - -------------------------------------------------------------------------------- assumed to decrease gradually to 8.0 percent in 1999 and remain at that level thereafter. The health care cost trend rate assumption has a significant effect on the amounts reported.
Increasing the trend rate by one percentage point in each year would increase the actuarial present value obligation for postretirement medical benefits as of December 31, 1996, 1995 and 1994 by $1.9 million, $2.0 million and $1.9 million, respectively, and the aggregate of the service and interest cost components of net periodic postretirement benefit cost by $0.1 million for 1996, 1995 and 1994. The weighted average discount rate used in determining the postretirement benefit obligation was 7.0% at December 31, 1996 and 1995.
- - -------------------------------------------------------------------------------- NOTE M. COMMITMENTS AND CONTINGENCIES ================================================================================
Leases. Future minimum rental commitments as of December 31, 1996 for all noncancelable operating leases are as follows:
(In millions) =========================================== 1997 $16 1998 15 1999 14 2000 13 2001 10 Thereafter 46 - - ------------------------------------------- Sublease rental income 9 - - ------------------------------------------- Net commitments $105 ===========================================
Substantially all of the leases are for rental of office space, the initial terms of which range from 1 to 20 years. Total rental expense for 1996, 1995 and 1994 was $35.1 million, $29.9 million and $30.0 million, respectively. As a result of reorganization of TIG's commercial operations in the first quarter of 1996, certain lease termination costs in the amount of $18 million were incurred and are included in the $100 million restructuring charges recorded in 1996 as discussed in Note C.
LITIGATION. TIG's insurance subsidiaries are routinely engaged in litigation in the normal course of their business. As a liability insurer, the Company defends third-party claims brought against its insureds. As an insurer, the Company defends against coverage claims. In the opinion of TIG, based upon information available on the date of this report, no individual item of litigation, or group of similar items of litigation (including asbestos-related and environmental pollution matters and the matter referred to below), taken net of reserves established therefor and giving effect to insurance and reinsurance, is likely to result in judgments for amounts material to TIG's consolidated results of operations.
On January 11, 1994, a Los Angeles County Superior Court jury returned a verdict of $28 million for punitive damages against TIG Insurance Company ("TIC") in Talbot Partners v. Cates Construction, Inc. and TIC (the "Talbot Case"). The award arose out of TIC's handling of a surety bond claim on a construction project. Management is vigorously pursuing its right to appeal the judgment. Management believes that the ultimate liability, if any, arising from the Talbot Case will not materially impact consolidated operating results.
LONDON MARKET ACTIVITY. Through various indirect subsidiaries, the Company will become a limited liability participant in the Lloyd's of London ("Lloyd's") market in 1997. As a prerequisite to admittance to the Lloyd's market, irrevocable letters of credit totalling (pound)42.5 million and collateralized by $79.0 million of the Company's investment securities were provided in favor of the Society and Council of Lloyd's in 1996. The letters of credit effectively secure the future contingent obligations of the Company should the Lloyd's underwriting syndicates in which the Company participates incur net losses. The Company's contingent liability to the Society and Council of Lloyd's is limited to the amount of the letters of credit.
- 58 -
PART II
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - - -------------------------------------------------------------------------------- NOTE N. REGULATORY MATTERS ================================================================================
REGULATORY RISK-BASED CAPITAL. The states of domicile of TIG's insurance subsidiaries impose minimum risk-based capital requirements on insurance companies which were developed by the National Association of Insurance Commissioners ("NAIC"). The formulas for determining the amount of risk-based capital specify various weighting factors that are applied to financial balances or various levels of activity based on the perceived degree of risk. Regulatory compliance is determined by a ratio of the enterprise's regulatory total adjusted capital, as defined by the NAIC, to its authorized control level risk-based capital, as defined by the NAIC. Enterprises below specific trigger points or ratios are classified within certain levels, each of which requires specified corrective action. The levels and ratios are as follows:
Ratio of Total Adjusted Capital to Authorized Control Level Risk-Based Regulatory Event Capital (Less Than or Equal to) - - --------------------------------------------------------------------- Company action level 2.0 (or 2.5 with negative trends) Regulatory action level 1.5 Authorized control level 1.0 Mandatory control level 0.7 =====================================================================
At December 31, 1996, the statutory "risk-based" capital for each TIG insurance subsidiary was such that no action (company or regulatory) would be required.
PERMITTED STATUTORY ACCOUNTING PRACTICES. TIG prepares its statutory financial statements in accordance with accounting principles and practices prescribed or permitted by the domiciliary state insurance department. Prescribed statutory accounting practices include state laws, regulations, and general administrative rules, as well as a variety of publications of the NAIC. Permitted statutory accounting practices encompass all accounting practices that are not prescribed; such practices differ from state to state, may differ from company to company within a state, and may change in the future. Furthermore, the NAIC has a project to codify statutory accounting practices, the result of which is expected to constitute the only source of "prescribed" statutory accounting practices. Accordingly, that project, which is expected to be completed in 1997 and implemented in 1998 will likely change the definitions of what comprises prescribed versus permitted statutory accounting practices, and may result in changes to the accounting policies that insurance enterprises use to prepare their statutory financial statements.
Statutory amounts for TIG's business segments are as follows (see Note O - Business Segments):
Years Ended December 31, ------------------------ (In millions) 1996 1995 1994 ====================================================== STATUTORY NET INCOME (LOSS): Primary operations $ 88 $ 67 $(29) Reinsurance operations 96 69 42 - - ------------------------------------------------------ Total $184 $136 $13 ======================================================
December 31, ---------------------- (In millions) 1996 1995 1994 ====================================================== STATUTORY SURPLUS: Primary operations $460 $512 $529 Reinsurance operations 515 440 372 - - ------------------------------------------------------ Total $975 $952 $901 ======================================================
In June 1993, the California Department of Insurance permitted TIG Insurance Company ("TIC"), TIG's lead insurer, to record a quasi-reorganization of its statutory capital accounts. The effect of the quasi-reorganization was to increase the earned surplus of TIC to zero from a negative $285 million and to decrease contributed surplus by the same amount. This transaction significantly increased TIC's future dividend paying capability as insurance companies may only pay dividends from earned surplus.
Under the State of California insurance regulations, TIG is required to maintain minimum capital and surplus of $5,400,000. The Company's surplus and capital exceeds the NAIC's "risk-based-capital" requirements at the end of 1996.
- 59 -
PART II
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - - -------------------------------------------------------------------------------- NOTE O. BUSINESS SEGMENTS ================================================================================
TIG's operations are comprised of two business segments. Reinsurance operations and Primary Insurance operations. Primary Insurance operations are further broken down into Commercial Specialty, Retail, and Other Lines. Premium produced through Aon Corporation and its subsidiaries accounted for 23%, 22% and 21% of consolidated net premium written in 1996, 1995 and 1994, respectively. In addition, inter-segment premium for 1995 was $43 million. Revenues, pre-tax operating income and identifiable assets for each segment were as follows:
- 60 -
PART II
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - - -------------------------------------------------------------------------------- The following table is a summary of TIG's Primary insurance operations by major division:
- - -------------------------------------------------------------------------------- NOTE P. INTERIM FINANCIAL DATA (Unaudited) ================================================================================
The 1994 first and third quarters were impacted by pre-tax catastrophe costs of $32 and $13 million, respectively, arising from the January 1994 Northridge earthquake. In the second quarter of 1995, a reserve of $6.3 million was established for exit costs resulting from management's decision to reduce small individually underwritten commercial policies, while a normal re-evaluation of the Company's allowance for reinsurance recoverables in the fourth quarter of 1995 resulted in an increase to pretax income of approximately $11 million for the quarter. In the first quarter of 1996, an after-tax restructuring change of $65 million was taken for costs related to management's decision to restructure operations (see Note C. - Restructuring Charges).
- 61 -
PART II
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - - -------------------------------------------------------------------------------- NOTE Q. SUBSEQUENT EVENT ================================================================================
In January of 1997, TIG Capital Trust I ("TIG Capital" or the "Trust"), a statutory business trust created under Delaware law and a trust subsidiary of TIG Holdings, completed a private offering for $125 million of 8.597% capital securities. TIG Holdings is the inital holder of 100% of the common securities of TIG Capital. Holders of the capital securities of the Trust will have a preference under certain circumstances over the holders of common securities of the Trust with respect to cash distributions and amounts payable on liquidation, redemption, or otherwise.
TIG Holdings issued $128.75 million in 8.597% Junior Subordinated Debentures to TIG Capital Trust I (including approximately $3.75 million with respect to the capital contributed to the Trust by TIG Holdings). TIG Holdings guaranteed the payment of distributions and payments on liquidation or redemption of the capital securities but only in each case to the extent of funds held by the Trust. The guarantee does not cover payment of distributions when the Trust does not have sufficient funds to pay such distributions. All of the net proceeds received by TIG Holdings from the issuance of the debentures will be used for general corporate purposes which may include repurchases of the Company's common stock.
- - -------------------------------------------------------------------------------- ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE ================================================================================
Not applicable.
- 62 -
PART III - - -------------------------------------------------------------------------------- ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT ================================================================================
Information required by this item is incorporated herein by reference from the sections entitled "Election of Directors", "Stock Ownership and Section 16(a) Beneficial Ownership Compliance" and "Certain Information Regarding the Executive Officers" in the Company's definitive proxy statement for its annual meeting of shareholders to be held May 1, 1997. Notwithstanding the foregoing, the subsection entitled "Compensation Committee Report on Executive Compensation" is not incorporated herein by reference.
- - -------------------------------------------------------------------------------- ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION ================================================================================
Information required by this item is incorporated by reference from the section entitled "Certain Information Regarding the Executive Officers" in the Company's definitive proxy statement for its annual meeting of shareholders to be held May 1, 1997. Notwithstanding the foregoing, the subsection entitled "Compensation Committee Report on Executive Compensation" is not incorporated herein by reference.
- - -------------------------------------------------------------------------------- ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT ================================================================================
Information required by this item is incorporated by reference from the sections entitled "Stock Ownership and Section 16 (a) Beneficial Ownership Compliance" from the Company's definitive proxy statement for its annual meeting of shareholders to be held May 1, 1997.
- - -------------------------------------------------------------------------------- ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS ================================================================================
Not applicable.
- 63 -
PART IV - - -------------------------------------------------------------------------------- ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K ================================================================================
Page (A) (1) FINANCIAL STATEMENTS
Consolidated Balance Sheets at December 31, 1996 and 1995 ...................39
Consolidated Statements of Income for each of the three years in the period ended December 31, 1996 ...............40
Consolidated Statements of Cash Flows for each of the three years in the period ended December 31, 1996 ...............41
Consolidated Statements of Changes in Shareholders' Equity for each of the three years in the period ended December 31, 1996 ...............42
Notes to Consolidated Financial Statements ..................................43
(A) (2) SCHEDULES SUPPORTING FINANCIAL STATEMENTS
Schedule II. Financial Statements of TIG Holdings, Inc. (Parent Company Only) .......................................................65
Schedule III. Supplementary Insurance Information ...........................68
Schedule IV. Reinsurance ....................................................69
All other schedules specified by Article 7 of Regulation S-X are not required pursuant to the related instructions or are inapplicable and, therefore, have been omitted.
(A) (3) EXHIBITS ............................................................70
Exhibit 11. Computation of Earnings Per Share ...............................73
Exhibit 12. Computation of Ratio of Consolidated Earnings to Fixed Charges and Preferred Stock Dividends ........74
A copy of exhibits not included with this Form 10-K may be obtained upon request and payment of the cost of reproduction to the Secretary at the Company's principal executive office, 65 East 55th Street, 28th Floor, New York, New York 10022.
(B) REPORTS ON FORM 8-K
No reports on Form 8-K were filed during the fourth quarter of 1996.
- 64 -
PART IV - - --------------------------------------------------------------------------------
These financial statements should be read in conjunction with the Consolidated Financial Statements and the accompanying notes thereto.
- 65 -
PART IV - - --------------------------------------------------------------------------------
These financial statements should be read in conjunction with the Consolidated Financial Statements and the accompanying notes thereto.
- 66 -
PART IV - - --------------------------------------------------------------------------------
These financial statements should be read in conjunction with the Consolidated Financial Statements and the accompanying notes thereto.
- 67 -
PART IV - - --------------------------------------------------------------------------------
- 68 -
PART IV - - --------------------------------------------------------------------------------
- 69 -
PART IV - - --------------------------------------------------------------------------------
EXHIBIT 3.1: Amended and Restated Certificate of Incorporation of TIG Holdings as filed with the Delaware Secretary of State on April 16, 1993 (incorporated by reference to Exhibit 3.1 to TIG Holdings' Quarterly Report on Form 10-Q for the quarter ended March 31, 1993, Commission File No. 1-11856).
EXHIBIT 3.2: Amended and Restated Bylaws of TIG Holdings as adopted by TIG Holdings' Board of Directors on May 18, 1993 (incorporated by reference to Exhibit 3.2 to TIG Holdings' Registration Statement on Form S-8, File No. 33-63148).
EXHIBIT 4.1: Certificate of Designation of TIG Holdings relating to the $7.75 Cumulative Preferred Stock of TIG Holdings as filed with the Delaware Secretary of State on April 16, 1993 (incorporated by reference to Exhibit 4.1 to TIG Holdings' Quarterly Report on Form 10-Q for the quarter ended March 31, 1993, Commission File No. 1-11856).
EXHIBIT 4.2: Indenture dated as of April 1, 1995, between TIG Holdings and the First National Bank of Chicago, as Trustee (incorporated by reference to Exhibit 4.2 to Registration Statement No. 33-90594, filed March 24, 1995).
EXHIBIT 10.1: Master Leasing Agreement dated December 1, 1995 between BLC Corporation as Lessor, and TIG Insurance Company, as Lessee (incorporated by reference to Exhibit 10.1 to TIG Holdings' Annual Report on Form 10-K for the year ended December 31, 1995, Commission File No. 1-11856).
EXHIBIT 10.2: Trade Name and Service Mark License Agreement dated April 16, 1993 by and between Transamerica and TIG Insurance Group (incorporated by reference to Exhibit 10.5 to TIG Holdings' Quarterly Report on Form 10-Q for the quarter ended March 31, 1993, Commission File No. 1-11856).
EXHIBIT 10.3: Employment Agreement dated April 19, 1993 by and between TIG Holdings and Jon W. Rotenstreich (incorporated by reference to Exhibit 10.10 to TIG Holdings' Quarterly Report on Form 10-Q for the quarter ended March 31, 1993, Commission File No. 1-11856).
EXHIBIT 10.4: Employment Agreement dated April 19, 1993 by and between TIG Holdings and Don D. Hutson (incorporated by reference to Exhibit 10.11 to TIG Holdings' Quarterly Report on Form 10-Q for the quarter ended March 31, 1993, Commission File No. 1-11856).
EXHIBIT 10.5: Employment Agreement dated March 23, 1993 by and between Transamerica Reinsurance Company and William G. Clark (incorporated by reference to Exhibit 10.12 to TIG Holdings' Quarterly Report on Form 10-Q for the quarter ended March 31, 1993, Commission File No. 1-11856).
EXHIBIT 10.6: Employment Agreement dated March 23, 1993 by and between Transamerica Reinsurance Company and Edwin M. Millette (incorporated by reference to Exhibit 10.18 to TIG Holdings' Annual Report on Form 10-K for the year ended December 31, 1994, Commission File No. 1-11856).
EXHIBIT 10.7: Letter to Edwin M. Millette re: Employment Agreement (incorporated by reference to Exhibit 10.19 to TIG Holdings' Annual Report on Form 10-K for the year ended December 31, 1994, Commission File No. 1-11856).
EXHIBIT 10.8: Letter from TIG Holdings to Edwin G. Pickett dated June 15, 1993 and June 22, 1993 concerning certain provisions of Mr. Pickett's employment with TIG Holdings (incorporated by reference to Exhibit 10.32 to Amendment No. 1 to TIG Holdings' Annual Report on Form 10-K for the year ended December 31, 1993, Commission File No. 1-11856).
EXHIBIT 10.9: TIG Holdings, Inc. 1993 Non-Employee Directors Restricted Share Program (incorporated by reference to Exhibit 10.21 to TIG Holdings' Quarterly Report on Form 10-Q for the quarter ended March 31, 1993, Commission File No. 1-11856).
- 70 -
PART IV - - --------------------------------------------------------------------------------
EXHIBIT 10.10: Amendment to TIG Holdings, Inc. 1993 Non-Employee Directors Restricted Share Program (incorporated by reference to Exhibit 10.22 to Amendment No. 1 to TIG Holdings' Annual Report on Form 10-K for the year ended December 31, 1993, Commission File No. 1-11856).
EXHIBIT 10.11: TIG Holdings, Inc. Common Stock Restricted Share Agreement (incorporated by reference to Exhibit 4.1 to TIG Holdings' Registration Statement on Form S-8, File No. 33-66650).
EXHIBIT 10.12: TIG Holdings, Inc. 1993 Long-Term Incentive Plan (incorporated by reference to Exhibit 10.13 to TIG Holdings' Quarterly Report on Form 10-Q for the quarter ended March 31, 1993, Commission File No. 1-11856).
EXHIBIT 10.13: TIG Holdings, Inc. Employee Stock Ownership Plan (incorporated by reference to Exhibit 10.14 to TIG Holdings' Quarterly Report on Form 10-Q for the quarter ended March 31, 1993, Commission File No. 1-11856).
EXHIBIT 10.14: Employee Stock Ownership Plan Trust Agreement dated April 27, 1993 by and between TIG Holdings and Bank of America National Trust and Savings Association, as trustee (incorporated by reference to Exhibit 10.15 to TIG Holdings' Quarterly Report on Form 10-Q for the quarter ended March 31, 1993, Commission File No. 1-11856).
EXHIBIT 10.15: Loan and Stock Purchase Agreement dated April 27, 1993 by and between TIG Holdings and Bank of America National Trust and Savings Association, as trustee of the TIG Holdings, Inc. Employee Stock Ownership Plan (incorporated by reference to Exhibit 10.16 to TIG Holdings' Quarterly Report on Form 10-Q for the quarter ended March 31, 1993, Commission File No. 1-11856).
EXHIBIT 10.16: TIG Holdings, Inc. Diversified Savings Plan (incorporated by reference to Exhibit 10.17 to TIG Holdings' Quarterly Report on Form 10-Q for the quarter ended March 31, 1993, Commission File No. 1-11856).
EXHIBIT 10.17: Diversified Savings Plan Trust Agreement dated April 27, 1993 by and between Holdings and Bank of America National Trust and Savings Association, as trustee (incorporated by reference to Exhibit 10.18 to TIG Holdings' Quarterly Report on Form 10-Q for the quarter ended March 31, 1993, Commission File No. 1-11856).
EXHIBIT 10.18: TIG Holdings, Inc. Employee Profit Sharing Plan (incorporated by reference to Exhibit 10.19 to TIG Holdings' Quarterly Report on Form 10-Q for the quarter ended March 31, 1993, Commission File No. 1-11856).
EXHIBIT 10.19: Profit Sharing Plan Trust Agreement dated April 27, 1993 by and between TIG Holdings and Bank of America National Trust and Savings Association, as trustee (incorporated by reference to Exhibit 10.19 to TIG Holdings' Quarterly Report on Form 10-Q for the quarter ended March 31, 1993, Commission File No. 1-11856).
EXHIBIT 10.20: Amendment No. 3 dated February 16, 1995 to each of Employee Stock Ownership Plan, Employees' Profit Sharing Plan and Diversified Savings Plan (incorporated by reference to Exhibit 10.34 to TIG Holdings' Annual Report on Form 10-K for the year ended December 31, 1994, Commission File No. 1-11856).
EXHIBIT 10.21: Credit Agreement, dated as of December 14, 1995, by and among TIG Holdings, Inc., the lenders party thereto, Chemical Bank, as the Administrative Agent, and Morgan Guaranty Trust Company of New York, as the Document Agent (incorporated by reference to Exhibit 10.21 to TIG Holdings' Annual Report on Form 10-K for the year ended December 31, 1995, Commission File No. 1-11856).
EXHIBIT 10.22: Office Lease dated October 4, 1993 by and between T-Las Colinas Towers Corp. and TIC (incorporated by reference to Exhibit 10.28 to TIG Holdings' Registration Statement on Form S-1, File No. 33-71818).
EXHIBIT 10.23: Amendment No. 1 dated November 7, 1994 to each of TIG Holdings, Inc. Employee Stock Ownership Plan, Employees' Profit Sharing
- 71 -
PART IV - - -------------------------------------------------------------------------------- Plan and Diversified Savings Plan (incorporated by reference to Exhibit 10.32 to TIG Holdings' Annual Report on 10-K for the year ended December 31, 1994, Commission File No. 1-11856).
EXHIBIT 10.24: Amendment No. 2 dated December 14, 1994 to each of TIG Holdings, Inc. Employee Stock Ownership Plan, Employees' Profit Sharing Plan and Diversified Savings Plan (incorporated by reference to Exhibit 10.33 to TIG Holdings' Annual Report on 10-K for the year ended December 31, 1994, Commission File No. 1-11856).
EXHIBIT 10.25: Environmental Reimbursement of Loss Agreement dated April 27, 1993 by and between Transamerica Insurance Company and Pyramid Insurance Company of Bermuda, Ltd. (incorporated by reference to Exhibit 10.2 to TIG Holdings' Quarterly Report on Form 10-Q for the quarter ended March 31, 1993, Commission File No. 1-11856.)
EXHIBIT 10.26: TIG Holding, Inc. 1996 Long-Term Incentive Plan (incorporated by reference to Exhibit 10.1 to TIG Holdings' Quarterly Report on Form 10-Q for the quarter ended June 30, 1996, Commission File No. 1-11856).
EXHIBIT 10.27: TIG Holdings, Inc. 1996 Non-Employee Directors Program (incorporated by reference to Exhibit 10.2 to TIG Holdings' Quarterly Report on Form 10-Q for the quarter ended June 30, 1996, Commission File No. 1-11856).
EXHIBIT 10.28: TIG Holdings, Inc. Annual Incentive Compensation Plan for Certain Executives (incorporated by reference to Exhibit 10.4 to TIG Holdings Quarterly Report on Form 10-Q for the quarter ended June 30, 1996, Commission File No.1-11856).
EXHIBIT 10.29: TIG Holdings Inc. 1993 Long Term Incentive Plan Stock Option Agreement (incorporated by reference to Exhibit 10.4 to TIG Holdings' Quarterly Report on Form 10-Q for the quarter ended June 30, 1996, Commission File 1-11856).
EXHIBIT 10.30: TIG Holdings, Inc. 1993 Long Term Incentive Plan Restricted Share Award Agreement (incorporated by reference to Exhibit 10.5 to TIG Holdings' Quarterly Report on Form 10-Q for the quarter ended June 30, 1996, Commission File 1-11856).
EXHIBIT 10.31: TIG Holdings Inc. 1996 Long-Term Incentive Plan Stock Option Agreement (incorporated by reference to Exhibit 10.6 to TIG Holdings, Inc. Quarterly Report on Form 10-Q for the quarter ended June 30, 1996, Commission File 1-11856).
EXHIBIT 10.32: TIG Holdings, Inc. 1996 Long-Term Incentive Plan Executive Non-Qualified Stock Option Agreement (incorporated by reference to Exhibit 10.7 to TIG Holdings' Quarterly Report on Form 10-Q for the quarter ended June 30, 1996, Commission File 1-11856).
EXHIBIT 10.33: TIG Holdings, Inc. ESOP Restoration Plan.
EXHIBIT 10.34: TIG Holdings, Inc. Profit Sharing Restoration Plan.
EXHIBIT 10.35: Amendment effective January 1, 1997 to the TIG Holdings, Inc. Diversified Savings Plan.
EXHIBIT 10.36: Amendment effective January 1, 1997 to the TIG Holdings, Inc. ESOP Restoration Plan.
EXHIBIT 10.37: Amendment effective January 1, 1997 to the TIG Holdings, Inc. Profit Sharing Plan.
EXHIBIT 11.1: Statement re: Computation of Per Share Earnings.
Exhibit 12.1: Statement re: Computation of Ratio of Consolidated Earnings to Fixed Charges and Preferred Stock Dividends.
EXHIBIT 21: Subsidiaries of TIG Holdings, Inc.
EXHIBIT 23.1: Consent of Ernst & Young LLP
EXHIBIT 24.1: Powers of Attorney.
- 72 -
PART IV - - --------------------------------------------------------------------------------
- 73 -
PART IV - - --------------------------------------------------------------------------------
- 74 -
SIGNATURES - - --------------------------------------------------------------------------------
Pursuant to the requirements of Section 13 or 15(d) 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.
TIG HOLDINGS, INC.
By /s/STEVEN A. COOK ----------------------- Steven A. Cook Controller
Date: March 21, 1997
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
By /s/JON W. ROTENSTREICH* By /s/GEORGE B. BEITZEL* - - ------------------------------------ ------------------------------------ Jon W. Rotenstreich George B. Beitzel Chairman of the Board and Director Chief Executive Officer and Director (Principal Executive Officer) By /s/WILLIAM G. CLARK* By /s/DON D. HUTSON* ------------------------------------ - - ------------------------------------ William G. Clark Don D. Hutson Director President, Chief Operating Officer and Director By /s/JOEL S. EHRENKRANZ* By /s/EDWIN G. PICKETT* ------------------------------------ - - ------------------------------------ Joel S. Ehrenkranz Edwin G. Pickett Director Executive Vice President and Chief Financial Officer By /s/GEORGE D. GOULD* (Principal Financial Officer) ------------------------------------ George D. Gould By /s/STEVEN A. COOK Director - - ------------------------------------ Steven A. Cook By /s/THE RT. HON. LORD MOORE* Controller ------------------------------------ (Principal Accounting Officer) The Rt. Hon. Lord Moore Director
By /s/WILLIAM W. PRIEST, JR.* ------------------------------------ William W. Priest, Jr. Director
By /s/ANN W. RICHARDS* ------------------------------------ Ann W. Richards Director
By /s/HAROLD TANNER* ------------------------------------ Harold Tanner Director
Date: March 21, 1997
*By /s/LOUIS J. PAGLIA - - ------------------------------------
INDEX TO EXHIBITS - - -------------------------------------------------------------------------------
EXHIBIT 3.1: Amended and Restated Certificate of Incorporation of TIG Holdings as filed with the Delaware Secretary of State on April 16, 1993 (incorporated by reference to Exhibit 3.1 to TIG Holdings' Quarterly Report on Form 10-Q for the quarter ended March 31, 1993, Commission File No. 1-11856).
EXHIBIT 3.2: Amended and Restated Bylaws of TIG Holdings as adopted by TIG Holdings' Board of Directors on May 18, 1993 (incorporated by reference to Exhibit 3.2 to TIG Holdings' Registration Statement on Form S-8, File No. 33-63148).
EXHIBIT 4.1: Certificate of Designation of TIG Holdings relating to the $7.75 Cumulative Preferred Stock of TIG Holdings as filed with the Delaware Secretary of State on April 16, 1993 (incorporated by reference to Exhibit 4.1 to TIG Holdings' Quarterly Report on Form 10-Q for the quarter ended March 31, 1993, Commission File No. 1-11856).
EXHIBIT 4.2: Indenture dated as of April 1, 1995, between TIG Holdings and the First National Bank of Chicago, as Trustee (incorporated by reference to Exhibit 4.2 to Registration Statement No. 33-90594, filed March 24, 1995).
EXHIBIT 10.1: Master Leasing Agreement dated December 1, 1995 between BLC Corporation as Lessor, and TIG Insurance Company, as Lessee (incorporated by reference to Exhibit 10.1 to TIG Holdings' Annual Report on Form 10-K for the year ended December 31, 1995, Commission File No. 1-11856).
EXHIBIT 10.2: Trade Name and Service Mark License Agreement dated April 16, 1993 by and between Transamerica and TIG Insurance Group (incorporated by reference to Exhibit 10.5 to TIG Holdings' Quarterly Report on Form 10-Q for the quarter ended March 31, 1993, Commission File No. 1-11856).
EXHIBIT 10.3: Employment Agreement dated April 19, 1993 by and between TIG Holdings and Jon W. Rotenstreich (incorporated by reference to Exhibit 10.10 to TIG Holdings' Quarterly Report on Form 10-Q for the quarter ended March 31, 1993, Commission File No. 1-11856).
EXHIBIT 10.4: Employment Agreement dated April 19, 1993 by and between TIG Holdings and Don D. Hutson (incorporated by reference to Exhibit 10.11 to TIG Holdings' Quarterly Report on Form 10-Q for the quarter ended March 31, 1993, Commission File No. 1-11856).
EXHIBIT 10.5: Employment Agreement dated March 23, 1993 by and between Transamerica Reinsurance Company and William G. Clark (incorporated by reference to Exhibit 10.12 to TIG Holdings' Quarterly Report on Form 10-Q for the quarter ended March 31, 1993, Commission File No. 1-11856).
EXHIBIT 10.6: Employment Agreement dated March 23, 1993 by and between Transamerica Reinsurance Company and Edwin M. Millette (incorporated by reference to Exhibit 10.18 to TIG Holdings' Annual Report on Form 10-K for the year ended December 31, 1994, Commission File No. 1-11856).
EXHIBIT 10.7: Letter to Edwin M. Millette re: Employment Agreement (incorporated by reference to Exhibit 10.19 to TIG Holdings' Annual Report on Form 10-K for the year ended December 31, 1994, Commission File No. 1-11856).
EXHIBIT 10.8: Letter from TIG Holdings to Edwin G. Pickett dated June 15, 1993 and June 22, 1993 concerning certain provisions of Mr. Pickett's employment with TIG Holdings (incorporated by reference to Exhibit 10.32 to Amendment No. 1 to TIG Holdings' Annual Report on Form 10-K for the year ended December 31, 1993, Commission File No. 1-11856).
EXHIBIT 10.9: TIG Holdings, Inc. 1993 Non-Employee Directors Restricted Share Program (incorporated by reference to Exhibit 10.21 to TIG Holdings' Quarterly Report on Form 10-Q for the quarter ended March 31, 1993, Commission File No. 1-11856).
INDEX TO EXHIBITS - - -------------------------------------------------------------------------------
EXHIBIT 10.10: Amendment to TIG Holdings, Inc. 1993 Non-Employee Directors Restricted Share Program (incorporated by reference to Exhibit 10.22 to Amendment No. 1 to TIG Holdings' Annual Report on Form 10-K for the year ended December 31, 1993, Commission File No. 1-11856).
EXHIBIT 10.11: TIG Holdings, Inc. Common Stock Restricted Share Agreement (incorporated by reference to Exhibit 4.1 to TIG Holdings' Registration Statement on Form S-8, File No. 33-66650).
EXHIBIT 10.12: TIG Holdings, Inc. 1993 Long-Term Incentive Plan (incorporated by reference to Exhibit 10.13 to TIG Holdings' Quarterly Report on Form 10-Q for the quarter ended March 31, 1993, Commission File No. 1-11856).
EXHIBIT 10.13: TIG Holdings, Inc. Employee Stock Ownership Plan (incorporated by reference to Exhibit 10.14 to TIG Holdings' Quarterly Report on Form 10-Q for the quarter ended March 31, 1993, Commission File No. 1-11856).
EXHIBIT 10.14: Employee Stock Ownership Plan Trust Agreement dated April 27, 1993 by and between TIG Holdings and Bank of America National Trust and Savings Association, as trustee (incorporated by reference to Exhibit 10.15 to TIG Holdings' Quarterly Report on Form 10-Q for the quarter ended March 31, 1993, Commission File No. 1-11856).
EXHIBIT 10.15: Loan and Stock Purchase Agreement dated April 27, 1993 by and between TIG Holdings and Bank of America National Trust and Savings Association, as trustee of the TIG Holdings, Inc. Employee Stock Ownership Plan (incorporated by reference to Exhibit 10.16 to TIG Holdings' Quarterly Report on Form 10-Q for the quarter ended March 31, 1993, Commission File No. 1-11856).
EXHIBIT 10.16: TIG Holdings, Inc. Diversified Savings Plan (incorporated by reference to Exhibit 10.17 to TIG Holdings' Quarterly Report on Form 10-Q for the quarter ended March 31, 1993, Commission File No. 1-11856).
EXHIBIT 10.17: Diversified Savings Plan Trust Agreement dated April 27, 1993 by and between Holdings and Bank of America National Trust and Savings Association, as trustee (incorporated by reference to Exhibit 10.18 to TIG Holdings' Quarterly Report on Form 10-Q for the quarter ended March 31, 1993, Commission File No. 1-11856).
EXHIBIT 10.18: TIG Holdings, Inc. Employee Profit Sharing Plan (incorporated by reference to Exhibit 10.19 to TIG Holdings' Quarterly Report on Form 10-Q for the quarter ended March 31, 1993, Commission File No. 1-11856).
EXHIBIT 10.19: Profit Sharing Plan Trust Agreement dated April 27, 1993 by and between TIG Holdings and Bank of America National Trust and Savings Association, as trustee (incorporated by reference to Exhibit 10.19 to TIG Holdings' Quarterly Report on Form 10-Q for the quarter ended March 31, 1993, Commission File No. 1-11856).
EXHIBIT 10.20: Amendment No. 3 dated February 16, 1995 to each of Employee Stock Ownership Plan, Employees' Profit Sharing Plan and Diversified Savings Plan (incorporated by reference to Exhibit 10.34 to TIG Holdings' Annual Report on Form 10-K for the year ended December 31, 1994, Commission File No. 1-11856).
EXHIBIT 10.21: Credit Agreement, dated as of December 14, 1995, by and among TIG Holdings, Inc., the lenders party thereto, Chemical Bank, as the Administrative Agent, and Morgan Guaranty Trust Company of New York, as the Document Agent (incorporated by reference to Exhibit 10.21 to TIG Holdings' Annual Report on Form 10-K for the year ended December 31, 1995, Commission File No. 1-11856).
EXHIBIT 10.22: Office Lease dated October 4, 1993 by and between T-Las Colinas Towers Corp. and TIC (incorporated by reference to Exhibit 10.28 to TIG Holdings' Registration Statement on Form S-1, File No. 33-71818).
EXHIBIT 10.23: Amendment No. 1 dated November 7, 1994 to each of TIG Holdings, Inc. Employee Stock Ownership Plan, Employees' Profit Sharing
INDEX TO EXHIBITS - - ------------------------------------------------------------------------------- Plan and Diversified Savings Plan (incorporated by reference to Exhibit 10.32 to TIG Holdings' Annual Report on 10-K for the year ended December 31, 1994, Commission File No. 1-11856).
EXHIBIT 10.24: Amendment No. 2 dated December 14, 1994 to each of TIG Holdings, Inc. Employee Stock Ownership Plan, Employees' Profit Sharing Plan and Diversified Savings Plan (incorporated by reference to Exhibit 10.33 to TIG Holdings' Annual Report on 10-K for the year ended December 31, 1994, Commission File No. 1-11856).
EXHIBIT 10.25: Environmental Reimbursement of Loss Agreement dated April 27, 1993 by and between Transamerica Insurance Company and Pyramid Insurance Company of Bermuda, Ltd. (incorporated by reference to Exhibit 10.2 to TIG Holdings' Quarterly Report on Form 10-Q for the quarter ended March 31, 1993, Commission File No. 1-11856.)
EXHIBIT 10.26: TIG Holding, Inc. 1996 Long-Term Incentive Plan (incorporated by reference to Exhibit 10.1 to TIG Holdings' Quarterly Report on Form 10-Q for the quarter ended June 30, 1996, Commission File No. 1-11856).
EXHIBIT 10.27: TIG Holdings, Inc. 1996 Non-Employee Directors Program (incorporated by reference to Exhibit 10.2 to TIG Holdings' Quarterly Report on Form 10-Q for the quarter ended June 30, 1996, Commission File No. 1-11856).
EXHIBIT 10.28: TIG Holdings, Inc. Annual Incentive Compensation Plan for Certain Executives (incorporated by reference to Exhibit 10.4 to TIG Holdings Quarterly Report on Form 10-Q for the quarter ended June 30, 1996, Commission File No.1-11856).
EXHIBIT 10.29: TIG Holdings Inc. 1993 Long Term Incentive Plan Stock Option Agreement (incorporated by reference to Exhibit 10.4 to TIG Holdings' Quarterly Report on Form 10-Q for the quarter ended June 30, 1996, Commission File 1-11856).
EXHIBIT 10.30: TIG Holdings, Inc. 1993 Long Term Incentive Plan Restricted Share Award Agreement (incorporated by reference to Exhibit 10.5 to TIG Holdings' Quarterly Report on Form 10-Q for the quarter ended June 30, 1996, Commission File 1-11856).
EXHIBIT 10.31: TIG Holdings Inc. 1996 Long-Term Incentive Plan Stock Option Agreement (incorporated by reference to Exhibit 10.6 to TIG Holdings, Inc. Quarterly Report on Form 10-Q for the quarter ended June 30, 1996, Commission File 1-11856).
EXHIBIT 10.32: TIG Holdings, Inc. 1996 Long-Term Incentive Plan Executive Non-Qualified Stock Option Agreement (incorporated by reference to Exhibit 10.7 to TIG Holdings' Quarterly Report on Form 10-Q for the quarter ended June 30, 1996, Commission File 1-11856).
EXHIBIT 10.33: TIG Holdings, Inc. ESOP Restoration Plan.
EXHIBIT 10.34: TIG Holdings, Inc. Profit Sharing Restoration Plan.
EXHIBIT 10.35: Amendment effective January 1, 1997 to the TIG Holdings, Inc. Diversified Savings Plan.
EXHIBIT 10.36: Amendment effective January 1, 1997 to the TIG Holdings, Inc. ESOP Restoration Plan.
EXHIBIT 10.37: Amendment effective January 1, 1997 to the TIG Holdings, Inc. Profit Sharing Plan.
EXHIBIT 11.1: Statement re: Computation of Per Share Earnings.
Exhibit 12.1: Statement re: Computation of Ratio of Consolidated Earnings to Fixed Charges and Preferred Stock Dividends.
EXHIBIT 21: Subsidiaries of TIG Holdings, Inc.
EXHIBIT 23.1: Consent of Ernst & Young LLP
EXHIBIT 24.1: Powers of Attorney.
EXHIBIT 10.33
TIG HOLDINGS, INC.
ESOP RESTORATION PLAN
Effective January 1, 1994
TIG HOLDINGS, INC. ESOP RESTORATION PLAN
TABLE OF CONTENTS PAGE - - ----------------- ----
ARTICLE I - PURPOSE AND ESTABLISHMENT..................................... 1 1.1 Purpose................................................. 1 1.2 Establishment........................................... 1
ARTICLE II - DEFINITIONS.................................................. 2 2.1 Beneficiary............................................. 2 2.2 Board................................................... 2 2.3 Committee............................................... 2 2.4 Disability.............................................. 2 2.5 Effective Date.......................................... 2 2.6 Eligible Employee....................................... 2 2.7 Employee Stock Ownership Plan........................... 2 2.8 Employer................................................ 3 2.9 Employer Contributions.................................. 3 2.10 ESOP Restoration Account ............................... 3 2.11 Minimum Eligible Salary ................................ 3 2.12 Participant............................................. 3 2.13 Plan ................................................... 4 2.14 Plan Year............................................... 4 2.15 Profit Sharing Plan..................................... 4 2.16 Profit Sharing Restoration Plan......................... 4 2.17 Vested ................................................. 4
ARTICLE III - ELIGIBILITY AND PARTICIPATION............................... 5 3.1 Eligibility............................................. 5 3.2 Participation........................................... 5
ARTICLE IV - ESTABLISHMENT OF ACCOUNT..................................... 6 4.1 ESOP Restoration Account................................ 6 4.2 Vesting/Forfeiture of Benefits.......................... 8
ARTICLE V - PAYMENT OF BENEFITS........................................... 11 5.1 Lump Sum Distribution................................... 11 5.2 Separateness of Plan ................................... 11 5.3 Inapplicability of Retirement Equity Act of 1984........ 11
ARTICLE VI - UNFUNDED NATURE OF PLAN...................................... 12
TABLE OF CONTENTS PAGE - - ----------------- ----
ARTICLE VII - ADMINISTRATION; AMENDMENTS AND TERMINATION; RIGHTS AGAINST THE EMPLOYER............................. 14 7.1 Administration.......................................... 14 7.2 Liability of Committee; Indemnification................. 14 7.3 Amendment and/or Termination............................ 15 7.4 Rights Against the Employer............................. 16 7.5 Expenses................................................ 16
ARTICLE VIII - GENERAL AND MISCELLANEOUS.................................. 17 8.1 Spendthrift Clause...................................... 17 8.2 Severability............................................ 17 8.3 Construction............................................ 17 8.4 Governing Law........................................... 17 8.5 Payment Due an Incompetent.............................. 18 8.6 Taxes................................................... 18
TIG HOLDINGS, INC. ESOP RESTORATION PLAN ---------------------
ARTICLE I PURPOSE AND ESTABLISHMENT -------------------------
1.1 Purpose. TIG Holdings, Inc. ("the Employer") desires to establish an "a ------- plan which is unfunded and is maintained by the employer primarily for the purpose of providing deferred compensation for a select group of management or highly compensated employees," within the meaning of Sections 201(2), 301(a)(3) and 401(a)(1) of the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), solely for the purpose of benefiting participants in the Employee Stock Ownership Plan (as hereinafter defined) who (i) are precluded from receiving a full allocation of Employer Contributions under the Employee Stock Ownership Plan by the limitations of Section 415 of the Internal Revenue Code of 1986 ("the Code") or by the limitation on the compensation taken into account under such Plan, imposed by Section 401(a)(17) of the Code, as amended by the Omnibus Budget Reconciliation Act of 1993 ("OBRA 93"), and (ii) are designated for participation in this Plan, in accordance with the terms hereof.
1.2 Establishment. The Employer hereby establishes the TIG Holdings, Inc. ------------- ESOP Restoration Plan, effective January 1, 1994.
ARTICLE II DEFINITIONS -----------
2.1 Beneficiary means the person or persons whom the Participant has ----------- designated or, pursuant to the provisions of Section 7.7 of the Employee Stock Ownership Plan is deemed to have designated, to receive a distribution from the Employee Stock Ownership Plan, in the event of the Participant's death.
2.2 Board means the Board of Directors of the Employer. -----
2.3 Committee means the TIG Benefits Committee established pursuant to --------- Section 10.2 of the Employee Stock Ownership Plan or any such other committee designated by the Board, which shall consist of at least three members.
2.4 Disability shall have the meaning set forth in Section 2.12 of the ---------- Employee Stock Ownership Plan and shall be determined pursuant to procedures established by the Committee.
2.5 Effective Date means January 1, 1994. --------------
2.6 Eligible Employee means an employee of the Employer who has satisfied ------------------ the requirements of Section 3.1.
2.7 Employee Stock Ownership Plan means the TIG Holdings, Inc. Employee ------------------------------- Stock Ownership Plan, effective as of April 27, 1993, and as in effect from time to time.
2.8 Employer means TIG Holdings, Inc. and any Affiliate, within the meaning -------- of Section 2.3 of the Profit Sharing Plan, that has become a participating Affiliate in the Profit Sharing Plan in accordance with Section 2.16 of the Profit Sharing Plan, provided however, that for the purpose of Sections 4.2(b) and 7.3 the term Employer shall refer only to TIG Holdings, Inc.
2.9 Employer Contributions means the ESOP Contributions as defined in ----------------------- Section 2.17 of the Employee Stock Ownership Plan, made in accordance with Section 4.1 of the Employee Stock Ownership Plan.
2.10 ESOP Restoration Account means the book reserve account established on ------------------------ behalf of a Participant in accordance with Section 4.1.
2.11 Minimum Eligible Salary means, for any Plan Year, a Salary equal to ------------------------- the greater of (a) the maximum amount of compensation that may be taken into account under a qualified plan in accordance with Section 4019a)(17) of the Code, as in effect for such Plan Year, or (b) an amount determined and designated for such Plan Year by the Committee in its sole discretion. In exercising the discretion to determine the amount described in item (b) of the foregoing sentence, the Committee shall not designate an amount that would cause the Minimum Eligible Salary for any Plan Year to be inconsistent with the status of the Plan as a plan which is unfunded and is maintained by the Employer primarily for the purpose of providing deferred compensation for a select group of management or highly compensated employees, within the meaning of Sections 201(2), 301(a)(3), and 401(a)(1) of ERISA.
2.12 Participant means an employee or former employee of the Employer who ----------- has satisfied the requirements of Section 3.2 hereof.
2.13 Plan means the TIG Holdings, Inc. ESOP Restoration Plan, as set forth ---- in this document, and as it may be amended from time to time.
2.14 Plan Year means the twelve consecutive month period commencing January --------- 1, 1994 and ending December 31, 1994 and each successive twelve consecutive month period thereafter, each commencing on January 1st.
2.15 Profit Sharing Plan means the TIG Holdings, Inc. Employees' Profit -------------------- Sharing Plan, effective as of April 27, 1993, and as in effect from time to time.
2.16 Profit Sharing Restoration Plan means the TIG Holdings, Inc. Profit --------------------------------- Sharing Restoration Plan, established and maintained by the Employer, as in effect from time to time.
2.17 "Vested", as used herein, refers only to the restriction provided --------- hereunder against the reduction of a Participant's Restoration Account. Notwithstanding the use of the term "vested," no provision of the Plan is intended to grant to any Participant any right, title, interest or claim to property, within the meaning of Section 83 of the Code or any other applicable provision of the Code, except upon the payment of benefits hereunder.
ARTICLE III ELIGIBILITY AND PARTICIPATION -----------------------------
3.1 Eligibility. An employee of the Employer shall be an Eligible Employee ----------- for any Plan Year hereunder if (i) he is a participant in the Employee Stock Ownership Plan, (ii) the amount of the ESOP Contributions allocable to his account under the Employee Stock Ownership Plan for such Plan Year beginning on or after the Effective Date is less than the amount that would have been allocable to his account, if the limitations imposed by Sections 401(a)(17) and 415 of the Code had not been in effect, and (iii) his salary exceeds the Minimum Eligible Salary for such Plan Year.
3.2 Participation. An Eligible Employee shall become a Participant -------------- hereunder on the date as of which any amount is credited to his ESOP Restoration Account in accordance with Section 4.1. A Participant shall cease to participate in the Plan on the date that the balance of his ESOP Restoration Account is reduced to zero as a result of a distribution pursuant to Section 5.1, a forfeiture pursuant to Section 4.2(a), or a combination of such distribution and such forfeiture.
ARTICLE IV ESTABLISHMENT OF ACCOUNT ------------------------
4.1 ESOP Restoration Account. -------------------------
(a) For each Plan Year beginning on or after January 1, 1994, the Employer shall credit to the ESOP Restoration Account established on behalf of each Participant who is an Eligible Employee for such Plan Year an amount equal to the excess, if any, determined by subtracting item (ii) from item (i), where:
(i) equals the cash value of Employer Contributions that would have been allocated to the Participant's account under the Employee Stock Ownership Plan for such Plan Year, if (1) the limitation imposed by Section 401(a)(17) of the Code on the amount of compensation taken into account under the Employee Stock Ownership Plan had not been in effect and (2) the limitation of Section 415 of the Code had not been in effect; and
(ii) equals the cash value of Employer Contributions allocated to the Participant's account under the Employee Stock Ownership Plan for such Plan Year.
(b) For purposes of subsection (a), the term cash value of Employer Contributions means the fair market value, as determined by the Committee, of the shares of Holdings Common Stock, within the meaning of Section 2.21 of the Employee Stock Ownership Plan, that are allocated to the Participant's account under the Employee Stock Ownership Plan, pursuant to Sections 4.4.2 or 4.4.3(b) of the Employee Stock Ownership Plan (or would be so allocated, but for the limitations of Sections 401(a)(17) or 415 of the Code).
(c) The amount determined in accordance with subsection (a) shall be credited to the Participant's ESOP Restoration Account as of the last day of each Plan Year during the term of this Plan.
(d) The Employer shall credit each Participant's ESOP Restoration Account, as of the last day of each Plan Year, with an earnings credit (or debit) equal to the amount of investment gain (or loss) that would have been earned on the amount credited to such ESOP Restoration Account as of the first day of such Plan Year, if such amount had been held in the Employee Stock Ownership Plan as of such date and invested during such Plan Year in the same manner as the Participant's account under the Employee Stock Ownership Plan, in accordance with Sections 4.4.1, 4.4.2, 4.6, 5.6, 5.7, and 6.3 of the Employee Stock Ownership Plan. In the event that a Participant becomes entitled to receive a distribution from the Plan in accordance with Section 5.1, the date of his retirement, death, termination of employment or Disability shall be treated for purposes of this Section 4.1(d) as the last day of a Plan Year. The Committee in its sole discretion may determine amounts to be credited under this subsection without reference to any charges made against accounts under the Employee Stock Ownership Plan in accordance with Section 6.4.7 of the Employee Stock Ownership Plan, but in any event such charges shall not be deemed expenses of the Plan, for purposes of Section 7.5.
(e) The ESOP Restoration Account established hereunder for each Participant shall be maintained as a book reserve on the books of the Employer, and amounts credited thereto in accordance with this Section shall be added to such book reserve.
(f) In addition to amounts credited in accordance with subsection (a), there shall be credited to a Participant's ESOP Restoration Account, as of the Effective Date, an amount determined in accordance with subsection (a), with respect to the Plan Year of the Employee Stock Ownership Plan that ended on December 31, 1993, if and only if such Participant's Salary, for such Plan Year of the Employee Stock Ownership Plan exceeded the maximum amount of compensation permitted to be taken into account under a qualified plan, in accordance
4.2 Vesting/Forfeiture of Benefits. ------------------------------
(a) Except as provided in paragraph (b) of this Section 4.2, a Participant shall become vested in his ESOP Restoration Account in accordance with the vesting provisions set forth under Sections 8.1 and 8.3 of the Employee Stock Ownership Plan. If a Participant's employment with the Employer and all of its affiliates is terminated (whether such termination is initiated by the Participant, or the Employer or its affiliates, and without regard to the reason therefor) before a Participant is fully vested in his account under the Employee Stock Ownership Plan, said Participant or his Beneficiary shall be entitled to receive, in accordance with Article V of this Plan, that portion of his ESOP Restoration Account (inclusive of deemed earnings thereunder) determined by multiplying the value of said ESOP Restoration Account by the Participant's non-forfeitable percentage determined pursuant to Section 8.1 of the Employee Stock Ownership Plan and any other applicable provisions of the Employee Stock Ownership Plan. The nonvested portion of the Participant's ESOP Restoration Account, if any, shall be forfeited upon such termination date.
(b) Upon a change of control of Employer, each Participant who is then an employee shall become fully vested in his ESOP Restoration Account.
4.2(b).1 Change of Control. For the purpose of this Section ------------------ 4.2(b), "Change of Control" shall mean:
(a) The acquisition, after the Effective Date, by an individual, entity or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934, as amended ("the Exchange Act")) of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of 20% or more of either (i) the shares of the issued and outstanding common stock of the Employer (the "Common Stock"), or (ii) the combined voting power of the voting securities of the Employer entitled to
vote generally in the election of directors (the "Voting Securities"); provided, however, that the following --------- -------- acquisitions shall not constitute a Change of Control: (A) any acquisition by an employee benefit plan (or related trust) sponsored or maintained by the Employer or any Affiliate, or (B) any acquisition by any corporation if, immediately following such acquisition, more than 80% of the then outstanding shares of common stock of such corporation and the combined voting power of the then outstanding voting securities of such corporation (entitled to vote generally in the election of directors), is beneficially owned, directly or indirectly, by all or substantially all of the individuals and entities who, immediately prior to such acquisition, were the beneficial owners of the Common Stock and the Voting Securities in substantially the same proportions, respectively, as their ownership, immediately prior to such acquisition, of the Common Stock and Voting Securities; or
(b) Individuals who, as of the Effective Date, constitute the Board (the "Incumbent Board") cease for any reason to constitute at least a majority of the Board; provided, -------- however, that any individual becoming a director subsequent ------- to the Effective Date whose election, or nomination for election by the Employer's shareholders, was approved by a vote of at least a majority of the directors then serving and comprising the Incumbent Board shall be considered as though such individual were a member of the Incumbent Board, but excluding, for this purpose, any such individual whose initial assumption of office occurs as a result of either an actual or threatened election contest (as such terms are used in Rule 14a-11 of Regulation 14A promulgated under the Exchange Act) or other actual or threatened solicitation of proxies or consents; or
(c) Approval by shareholders of the Employer of a reorganization, merger or consolidation, other than a reorganization, merger or consolidation with respect to which all or substantially all of the individuals and entities who were the beneficial owners, immediately prior to such reorganization, merger or consolidation, of the Common Stock and Voting Securities beneficially own, directly or indirectly, immediately after such reorganization, merger or consolidation more than 80% of the then outstanding common stock and voting securities (entitled to vote generally in the election of directors) of the corporation resulting from such reorganization, merger or consolidation in substantially the same proportions as their respective ownership, immediately prior to such reorganization, merger or consolidation, of the Common Stock and the Voting Securities; or
(d) Approval by the shareholders of the Employer of (i) a complete liquidation or dissolution of the Employer, or (ii) the sale or other disposition of all or substantially all of the assets of the Employer, other than to an Affiliate, wholly-owned, directly or indirectly, by the Employer.
(c) If a Change of Control, within the meaning of Section 4.2(b).1, occurs and if a Participant's employment is terminated before such Change of Control and its is reasonably demonstrated by the Participant that such employment termination (i) was at the request, directly or indirectly, of a third party who has taken steps reasonably calculated to effect the Change of Control, or (ii) otherwise arose in connection with or in anticipation of the Change of Control, then for purposes of Section 4.2(b), the Change of Control shall be deemed to have occurred immediately prior to such Participant's employment termination.
ARTICLE V PAYMENT OF BENEFITS -------------------
5.1 Lump Sum Distribution. Payment of the Participant's vested ESOP ----------------------- Restoration Account hereunder shall be made in the form of a cash lump sum to the Participant or his Beneficiary as soon as practicable after the Participant's employment with the Employer and any of its affiliates has been terminated for any reason. Payment to a Participant's Beneficiary shall be made only in the event of a Participant's death prior to his receipt of a distribution of his ESOP Restoration Account.
5.2 Separateness of Plan. Any benefit payable under the Employee Stock --------------------- Ownership Plan shall be determined solely in accordance with the terms and provisions thereof. Any benefit payable under the Profit Sharing Plan and Profit Sharing Restoration Plan shall be determined solely in accordance with the terms and provisions thereof. Nothing in this Plan shall operate or be construed in any way to modify, amend or affect the terms and provisions of the Employee Stock Ownership Plan, the Profit Sharing Plan or the Profit Sharing Restoration Plan .
5.3 Inapplicability of Retirement Equity Act of 1984. Nothing contained in ------------------------------------------------ this Plan is intended to give or shall give any spouse or former spouse of a Participant or any other person any right to benefits under the Plan by virtue of Sections 401(a)(11) and 417 of the Code or Section 205 of ERISA (relating to qualified pre-retirement survivor annuities and qualified joint and survivor annuities) or Sections 401(a)(13)(B) and 414(p) of the Code or Section 206(d) of ERISA (relating to qualified domestic relations orders).
ARTICLE VI UNFUNDED NATURE OF PLAN -----------------------
6.1 The Plan is an "unfunded plan primarily for the purpose of providing deferred compensation for a select group of management or highly compensated employees," within the meaning of Section 301(a)(3) of ERISA. The Employer has established ESOP Restoration Accounts on its books solely as a bookkeeping convenience, in order to account for the amounts earned by each Participant hereunder. The Employer shall not be required to segregate any funds representing the ESOP Restoration Accounts and nothing in this Plan shall be construed as providing for such segregation. In addition, the Employer shall not be deemed to be a Trustee for the Participants and their Beneficiaries with respect to any amounts deferred hereunder. The Participant, his Beneficiary and any other person or persons having or claiming a right to payments hereunder or to any interest in this Plan shall rely solely on the unsecured promise of the Employer to make payments hereunder. Nothing herein shall be construed to give the Participant, his Beneficiary or any other person or persons any right, title, interest or claim in or to any specific asset, fund, reserve, account or property of any kind whatsoever owned by the Employer or in which it may have any right, title or interest now or in the future; provided, however, that the Participant or any Beneficiary shall have the right to enforce his claim against the Employer in the same manner as any unsecured creditor. Nothing herein shall be construed to give the Participant, his Beneficiary, or any other person any rights, including, without limitation, voting rights, with respect to any capital stock of the Employer, nor to cause any person to be deemed an owner or holder of any capital stock of the Employer.
6.2 Notwithstanding Section 6.1, the Employer may, in its absolute discretion, establish a trust fund and contribute to such trust fund assets that shall be held therein, subject to the claims of the Employer's creditors in the event of the insolvency of the Employer, until paid to Participants or Beneficiaries in accordance with the terms of the Plan. The Employer shall not establish any trust fund that would cause the Plan not to be deemed an unfunded plan for purposes of Title I of ERISA.
ARTICLE VII ADMINISTRATION; AMENDMENTS AND TERMINATION; RIGHTS AGAINST THE EMPLOYER ----------------------------------------
7.1 Administration. --------------
(a) The Committee shall administer the Plan and shall have the full and absolute discretionary power and authority to construe and interpret the provisions of the Plan and to determine a Participant's eligibility for benefits hereunder.
(b) In exercising the power and authority granted to it by subsection (a), the Committee shall adhere to the claims and appeal procedure adopted by it pursuant to Section 10.4(n) of the Employee Stock Ownership Plan.
(c) Any determination made by the Committee pursuant to the authority granted under subsection (a) and, if applicable, in accordance with subsection (b), shall be conclusive and binding on all Participants, Beneficiaries and any other person who at any time have, or claim to have, any interest whatsoever under this Plan.
(d) Pursuant to Section 401(a)(1) of ERISA, it is intended that the Plan and the administration thereof shall be exempt from Part 4 of Title I of ERISA. The Committee and the members thereof shall not be deemed to be fiduciaries, within the meaning of Section 3(21) of ERISA, and shall not be subject to the terms of Part 4 of Title 1 of ERISA.
7.2 Liability of Committee; Indemnification. To the extent permitted ----------------------------------------- by law, no member of the Committee shall be liable to any person for any action taken or omitted in connection with the interpretation and administration of this Plan, unless attributable to his own gross negligence or willful misconduct. The Employer shall indemnify the members of the Committee against any and all claims, losses, damages, and expenses, including any amounts paid in settlement with their approval, arising from their action or failure to act to the maximum extent
required or permitted under the Delaware General Corporation Law as presently in effect and as hereafter amended from time to time.
7.3 Amendment and/or Termination. (a) The Employer reserves the right ------------------------------ to alter, amend or terminate the Plan or any part hereof. Any such alteration, amendment or termination may be effected by resolution of the Board acting in accordance with the by-laws (or other applicable governing document) of the Employer, in such manner as the Board may determine and for any reason whatsoever. Without limiting the power and decision of a majority of the members of the Committee then in office constituting the final and binding act of the Committee acting with or without a meeting being called or held, and keeping minutes of all meetings held and a record of all actions taken by written consent, may alter or amend the Plan, or any part hereof, in any manner, provided that the Committee determines, which determination shall be conclusive and binding on all persons, that any such alteration or amendment is (a) necessary or appropriate to comply with any applicable law, regulation or administrative pronouncement or (b) of an administrative nature and has no material adverse cost effect on the Employer or any Affiliate of the Employer. Any such amendment or termination shall become effective upon the date stated herein and shall be binding upon all Participants and Beneficiaries; provided, however, that no such amendment or termination shall reduce the amount of, or the vested interest in, the ESOP Restoration Account of a Participant or Beneficiary hereunder as of the effective date of such amendment or termination.
(b) Unless otherwise, specifically provided in any amendment to the Employee Stock Ownership Plan made after the Effective Date, the terms of the Plan shall be subject to the terms of the Employee Stock Ownership Plan, as amended from time to time.
7.4 Rights Against the Employer. The establishment of this Plan shall ---------------------------- not be construed as giving to any Participant, Beneficiary or any person whomsoever, any legal, equitable or other rights against the Employer, or its officers, directors, agents or shareholders, or as giving to any Participant or Beneficiary any equity or other interest in the assets or business of the Employer or in shares of Employer stock or giving any employee the right to be retained in the employment of
Employer. All Participants shall be subject to discharge to the same extent they would have been if this Plan had never been adopted.
7.5 Expenses. The cost of this Plan and the expenses of administering --------- the Plan shall be borne by the Employer.
ARTICLE VIII GENERAL AND MISCELLANEOUS -------------------------
8.1 Spendthrift Clause. No right, title or interest of any kind in the Plan ------------------- shall be transferable or assignable by any Participant or Beneficiary or be subject to alienation, anticipation, encumbrance, garnishment, attachment, execution or levy of any kind, whether voluntary or involuntary, nor subject to the debts, contracts, liabilities, engagements, or torts of the Participant or Beneficiary. Any attempt to alienate, anticipate, encumber, sell, transfer, assign, pledge, garnish, attach or otherwise subject to legal or equitable process or dispose of any interest in the Plan shall be void.
8.2 Severability. In the event that any provision of this Plan shall be ------------ declared illegal or invalid for any reason, said illegality or invalidity shall not affect the remaining provisions of this Plan but shall be fully severable and this Plan shall be construed and enforced as if said illegal or invalid provision had never been a part of this Plan.
8.3 Construction. The article and section headings and numbers are included ------------ only for convenience of reference and are not to be taken as limiting or extending the meaning of any of the terms and provisions of this Plan. Whenever appropriate, words used in the singular shall include the plural or the plural may be read as the singular. When used herein, the masculine gender includes the feminine gender.
8.4 Governing Law. The validity and effect of this Plan and the rights and -------------- obligations of all persons affected hereby shall be construed and determined in accordance with the laws of the State of New York, unless superseded by federal law.
8.5 Payment Due an Incompetent. If the Committee receives evidence that a -------------------------- Participant or Beneficiary entitled to receive any payment under the Plan is physically or mentally incompetent to receive such payment, the Committee may, in its sole discretion, direct the payment to any other person or trust which has been legally appointed by a court of competent jurisdiction or, in the event that no such person has been appointed, to any person whom the Committee, in its sole discretion, determines to be responsible for the care of the Participant or Beneficiary. Payment to any person or trust in accordance with this Section will fully discharge the obligations of the Plan to such Participant or Beneficiary.
8.6 Taxes. All amounts payable hereunder to any Participant or Beneficiary ------ shall be reduced by any and all federal, state and local taxes imposed upon the Participant or Beneficiary which are required to be paid or withheld by the Employer.
IN WITNESS WHEREOF, the Employer, as authorized by its Board of Directors, has caused this Plan to be signed by its duly appointed officers as of the effective date set forth in Section 1.2 above.
ATTEST: TIG Holdings, Inc.
__________________ By: Secretary Title:
EXHIBIT 10.34
TIG HOLDINGS, INC.
PROFIT SHARING RESTORATION PLAN
Effective January 1, 1994
TIG HOLDINGS, INC. PROFIT SHARING RESTORATION PLAN
TABLE OF CONTENTS PAGE - - ----------------- ----
ARTICLE I - PURPOSE AND ESTABLISHMENT........................................1 1.1 Purpose....................................................1 1.2 Establishment..............................................1
ARTICLE II - DEFINITIONS.....................................................2 2.1 Beneficiary................................................2 2.2 Board......................................................2 2.3 Committee..................................................2 2.4 Disability.................................................2 2.5 Effective Date.............................................2 2.6 Eligible Employee..........................................2 2.7 Employee Stock Ownership Plan..............................2 2.8 Employer...................................................3 2.9 Employer Contributions.....................................3 2.10 ESOP Restoration Plan .....................................3 2.11 Minimum Eligible Salary ...................................3 2.12 Participant................................................3 2.13 Plan ......................................................3 2.14 Plan Year..................................................4 2.15 Profit Sharing Plan........................................4 2.16 Restoration Account .......................................4 2.17 Salary ....................................................4 2.18 Vested.....................................................4
ARTICLE III - ELIGIBILITY AND PARTICIPATION..................................5 3.1 Eligibility................................................5 3.2 Participation..............................................5
ARTICLE IV - ESTABLISHMENT OF ACCOUNT........................................6 4.1 Restoration Account........................................6 4.2 Vesting/Forfeiture of Benefits.............................8
ARTICLE V - PAYMENT OF BENEFITS.............................................11 5.1 Lump Sum Distribution.....................................11 5.2 Separateness of Plan .....................................11 5.3 Inapplicability of Retirement Equity Act of 1984..........11
ARTICLE VI - UNFUNDED NATURE OF PLAN........................................12
TABLE OF CONTENTS PAGE - - ----------------- ----
ARTICLE VII - ADMINISTRATION; AMENDMENTS AND TERMINATION; RIGHTS AGAINST THE EMPLOYER...............................13 7.1 Administration............................................13 7.2 Liability of Committee; Indemnification...................13 7.3 Amendment and/or Termination..............................14 7.4 Rights Against the Employer...............................15 7.5 Expenses..................................................15
ARTICLE VIII - GENERAL AND MISCELLANEOUS....................................16 8.1 Spendthrift Clause........................................16 8.2 Severability..............................................16 8.3 Construction..............................................16 8.4 Governing Law.............................................16 8.5 Payment Due an Incompetent................................17 8.6 Taxes.....................................................17
TIG HOLDINGS, INC. PROFIT SHARING RESTORATION PLAN -------------------------------
ARTICLE I PURPOSE AND ESTABLISHMENT -------------------------
1.1 Purpose. TIG Holdings, Inc. ("the Employer") desires to establish "a -------- plan which is unfunded and is maintained by the employer primarily for the purpose of providing deferred compensation for a select group of management or highly compensated employees," within the meaning of Sections 201(2), 301(a)(3) and 401(a)(1) of the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), solely for the purpose of benefiting participants in the Profit Sharing Plan (as hereinafter defined) who (i) are precluded from receiving a full allocation of Employer Contributions under the Profit Sharing Plan by the limitations of Section 415 of the Internal Revenue Code of 1986 ("the Code") or by the limitation on the compensation taken into account under such Plan, imposed by Section 401(a)(17) of the Code, as amended by the Omnibus Budget Reconciliation Act of 1993 ("OBRA 93") and (ii) are designated for participation in this Plan, in accordance with the terms hereof.
1.2 Establishment. The Employer hereby establishes the TIG Holdings, Inc. -------------- Profit Sharing Restoration Plan, effective January 1, 1994.
ARTICLE II DEFINITIONS -----------
2.1 Beneficiary means the person or persons whom the Participant has ----------- designated or, pursuant to the provisions of Section 7.6 of the Profit Sharing Plan is deemed to have designated, to receive a distribution from the Profit Sharing Plan, in the event of the Participant's death.
2.2 Board means the Board of Directors of TIG Holdings, Inc. -----
2.3 Committee means the TIG Benefits Committee established pursuant to --------- Section 10.2 of the Profit Sharing Plan or any such other committee designated by the Board, which shall consist of at least three members.
2.4 Disability shall have the meaning set forth in Section 2.12 of the ---------- Profit Sharing Plan and shall be determined pursuant to procedures established by the Committee.
2.5 Effective Date means January 1, 1994. --------------
2.6 Eligible Employee means an employee of the Employer who has satisfied ------------------- the requirements of Section 3.1.
2.7 Employee Stock Ownership Plan means the TIG Holdings, Inc. Employee ------------------------------- Stock Ownership Plan, effective as of April 27, 1993, and as in effect from time to time.
2.8 Employer means TIG Holdings, Inc. and any Affiliate, within the meaning -------- of Section 2.3 of the Profit Sharing Plan, that has become a participating Affiliate in the Profit Sharing Plan in accordance with Section 2.16 of the Profit Sharing Plan, provided, however, that for the purpose of Sections 4.2(b) and 7.3, the term Employer shall refer only to TIG Holdings, Inc.
2.9 Employer Contributions means Employer Profit Sharing Contributions as ----------------------- defined in Section 2.17 of the Profit Sharing Plan, made in accordance with Section 4.1 of the Profit Sharing Plan.
2.10 ESOP Restoration Plan means the TIG Holdings, Inc. ESOP Restoration ----------------------- Plan, established and maintained by the Employer, as in effect from time to time.
2.11 Minimum Eligible Salary means, for any Plan Year, a Salary equal to ------------------------- the greater of (a) the maximum amount of compensation that may be taken into account under a qualified plan in accordance with Section 401(a)(17) of the Code, as in effect for such Plan Year, or (b) an amount determined and designated for such Plan year by the Committee in its sole discretion. In exercising the discretion to determine the amount described in item (b) of the foregoing sentence, the Committee shall not designate an amount that would cause the Minimum Eligible Salary for any Plan Year to be inconsistent with the status of the Plan as a plan which is unfunded and is maintained by the Employer primarily for the purpose of providing deferred compensation for a select group of management or highly compensated employees, within the meaning of Sections 201(2), 301(a)(3), and 401(a)(1) of ERISA.
2.12 Participant means an employee or former employee of the Employer who ----------- has satisfied the requirements of Section 3.2 hereof.
2.13 Plan means the TIG Holdings, Inc. Profit Sharing Restoration Plan, as ---- set forth in this document, and as it may be amended from time to time.
2.14 Plan Year means the twelve consecutive month period commencing January --------- 1, 1994 and ending December 31, 1994 and each successive twelve consecutive month period thereafter, each commencing on January 1st.
2.15 Profit Sharing Plan means the TIG Holdings, Inc. Employees' Profit -------------------- Sharing Plan, effective as of April 27, 1993, and as in effect from time to time.
2.16 Restoration Account means the book reserve account established on -------------------- behalf of a Participant in accordance with Section 4.1.
2.17 Salary shall have the meaning set forth in Section 2.32 of the Profit ------ Sharing Plan, without regard to the second sentence thereof.
2.18 "Vested", as used herein, refers only to the restriction provided --------- hereunder against the reduction of a Participant's Restoration Account. Notwithstanding the use of the term "vested," no provision of the Plan is intended to grant to any Participant any right, title, interest or claim to property, within the meaning of Section 83 of the Code or any other applicable provision of the Code, except upon the payment of benefits hereunder.
ARTICLE III ELIGIBILITY AND PARTICIPATION -----------------------------
3.1 Eligibility. An employee of the Employer shall be an Eligible Employee ------------ for any Plan Year hereunder if (i) he is a participant in the Profit Sharing Plan, (ii) the amount of contributions allocable to his account under the Profit Sharing Plan for such Plan Year beginning on or after the Effective Date is less than what would have been allocable to his account, if the limitations imposed by Sections 401(a)(17) and 415 of the Code had not been in effect, and (iii) his salary exceeds the Minimum Eligible Salary for such Plan Year.
3.2 Participation. An Eligible Employee shall become a Participant -------------- hereunder on the date as of which any amount is credited to his Restoration Account in accordance with Section 4.1. A Participant shall cease to participate in the Plan on the date that the balance of his Restoration Account is reduced to zero as a result of a distribution pursuant to Section 5.1, a forfeiture pursuant to Section 4.2(a), or a combination of such distribution and such forfeiture.
ARTICLE IV ESTABLISHMENT OF ACCOUNT ------------------------
4.1 Restoration Account. --------------------
(a) For each Plan Year beginning on or after January 1, 1994, the Employer shall credit to the Restoration Account established on behalf of each Participant who is an Eligible Employee for such Plan Year an amount equal to the excess, if any, determined by subtracting item (ii) from item (i), where:
(i) equals the amount of Employer Contributions that would have been allocated to the Participant's account under the Profit Sharing Plan for such Plan Year, if (1) the limitation imposed by Section 401(a)(17) of the Code on the amount of compensation taken into account under the Profit Sharing Plan had not been in effect and (2) the limitation of Section 415 of the Code had not been in effect; and
(ii) equals the amount of Employer Contributions allocated to the Participant's account under the Profit Sharing Plan for such Plan Year.
(b) The amount determined in accordance with subsection (a) shall be credited to the Participant's Restoration Account as of the last day of each Plan Year during the term of this Plan.
(c) The Employer shall credit each Participant's Restoration Account, as of the last day of each Plan Year, with an earnings credit (or debit) equal to the amount of investment gain (or loss) that would have been earned on the amount credited to such Restoration Account as of the first day of such Plan Year, if such amount had been held in the Profit Sharing Plan as of such date
and invested during such Plan Year in the same manner as the Participant's account under the Profit Sharing Plan, in accordance with Section 5 of the Profit Sharing Plan. In the event that a Participant becomes entitled to receive a distribution from the Plan in accordance with Section 5.1, the date of his retirement, death, termination of employment or Disability shall be treated for purposes of this Section 4.1(c) as the last day of a Plan Year. The Committee in its sole discretion may determine amounts to be credited under this subsection without reference to any charges made against accounts under the Profit Sharing Plan in accordance with Section 6.3.2 of the Profit Sharing Plan, but in any event such charges shall not be deemed expenses of this Plan, for purposes of Section 7.5.
(d) The Restoration Account established hereunder for each Participant shall be maintained as a book reserve on the books of the Employer, and amounts credited thereto in accordance with this Section shall be added to such book reserve.
(e) In addition to amounts credited in accordance with subsection (a), there shall be credited to a Participant's Restoration Account, as of the Effective Date, an amount determined in accordance with subsection (a), with respect to the Plan Year of the Profit Sharing Plan that ended on December 31, 1993, if and only if such Participant's Salary, for such Plan Year of the Profit Sharing Plan exceeded the maximum amount of compensation permitted to be taken into account under a qualified plan, in accordance with Section 401(a)(17) of the Code as in effect during such Plan Year of the Profit Sharing.
4.2 Vesting/Forfeiture of Benefits. -------------------------------
(a) Except as provided in paragraph (b) of this Section 4.2, a Participant shall become vested in his Restoration Account in accordance with the vesting provisions set forth under Sections 8.1, 8.3, 12.3, and 12.4 of the Profit Sharing Plan. If a Participant's employment with the Employer and all of its affiliates is terminated (whether such termination is initiated by the Participant, or the Employer or its affiliates, and without regard to the reason therefor) before a Participant is fully vested in his account under the Profit Sharing Plan, said Participant or his Beneficiary shall be entitled to receive, in accordance with Article V of this Plan, that portion of his
Restoration Account (inclusive of deemed earnings thereunder) determined by multiplying the value of said Restoration Account by the Participant's non-forfeitable percentage determined pursuant to Section 8.1 of the Profit Sharing Plan and any other applicable provisions of the Profit Sharing Plan. The nonvested portion of the Participant's Restoration Account, if any, shall be forfeited upon such termination date.
(b) Upon a Change of Control of the Employer, each Participant who is then an employee shall become fully vested in his Restoration Account.
4.2(b).1 Change of Control. For the purpose of this Section 4.2(b), "Change of Control" shall mean:
(a) The acquisition, after the Effective Date, by an individual, entity or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934, as amended ("the Exchange Act")) of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of 20% or more of either (i) the shares of the issued and outstanding common stock of the Employer (the "Common Stock"), or (ii) the combined voting power of the voting securities of the Employer entitled to vote generally in the election of directors (the "Voting Securities"); provided, --------- however, that the following acquisitions shall not ------- constitute a Change of Control: (A) any acquisition by an employee benefit plan (or related trust) sponsored or maintained by the Employer or any Affiliate, or (B) any acquisition by any corporation if, immediately following such acquisition, more than 80% of the then outstanding shares of common stock of such corporation and the combined voting power of the then outstanding voting securities of such corporation (entitled to vote generally in the election of directors), is beneficially owned, directly or indirectly, by all or substantially all of the individuals and entities who, immediately prior to such acquisition, were the beneficial owners of the Common Stock and the Voting Securities in
substantially the same proportions, respectively, as their ownership, immediately prior to such acquisition, of the Common Stock and Voting Securities; or
(b) Individuals who, as of the Effective Date, constitute the Board (the "Incumbent Board") cease for any reason to constitute at least a majority of the Board; provided, -------- however, that any individual becoming a director subsequent ------- to the Effective Date whose election, or nomination for election by the Employer's shareholders, was approved by a vote of at least a majority of the directors then serving and comprising the Incumbent Board shall be considered as though such individual were a member of the Incumbent Board, but excluding, for this purpose, any such individual whose initial assumption of office occurs as a result of either an actual or threatened election contest (as such terms are used in Rule 14a-11 of Regulation 14A promulgated under the Exchange Act) or other actual or threatened solicitation of proxies or consents; or
(c) Approval by shareholders of the Employer of a reorganization, merger or consolidation, other than a reorganization, merger or consolidation with respect to which all or substantially all of the individuals and entities who were the beneficial owners, immediately prior to such reorganization, merger or consolidation, of the Common Stock and Voting Securities beneficially own, directly or indirectly, immediately after such reorganization, merger or consolidation more than 80% of the then outstanding common stock and voting securities (entitled to vote generally in the election of directors) of the corporation resulting from such reorganization, merger or consolidation in substantially the same proportions as their respective ownership, immediately prior to such reorganization, merger or consolidation, of the Common Stock and the Voting Securities; or
(d) Approval by the shareholders of the Employer of (i) a complete liquidation or dissolution of the Employer, or (ii) the sale or other disposition of all or substantially all of the assets of the Employer, other than to an Affiliate, wholly-owned, directly or indirectly, by the Employer.
(c) If a Change of Control, within the meaning of Section 4.2(b).1, occurs and if a Participant's employment is terminated before such Change of Control and its is reasonably demonstrated by the Participant that such employment termination (i) was at the request, directly or indirectly, of a third party who has taken steps reasonably calculated to effect the Change of Control, or (ii) otherwise arose in connection with or in anticipation of the Change of Control, then for purposes of Section 4.2(b), the Change of Control shall be deemed to have occurred immediately prior to such Participant's employment termination.
ARTICLE V PAYMENT OF BENEFITS -------------------
5.1 Lump Sum Distribution. Payment of the Participant's vested Restoration ---------------------- Account hereunder shall be made in the form of a lump sum to the Participant or his Beneficiary as soon as practicable after the Participant's employment with the Employer and any of its affiliates has been terminated for any reason. Payment to a Participant's Beneficiary shall be made only in the event of a Participant's death prior to his receipt of a distribution of his Restoration Account.
5.2 Separateness of Plan. Any benefit payable under the Profit Sharing --------------------- Plan shall be determined solely in accordance with the terms and provisions thereof, any benefit payable under the Employee Stock Ownership and ESOP Restoration Plan shall be determined solely in accordance with the terms and provisions thereof. Nothing in this Plan shall operate or be construed in any way to modify, amend or affect the terms and provisions of the Profit Sharing Plan, the Employee Stock Ownership Plan or the ESOP Restoration Plan .
5.3 Inapplicability of Retirement Equity Act of 1984. Nothing contained in ------------------------------------------------ this Plan is intended to give or shall give any spouse or former spouse of a Participant or any other person any right to benefits under the Plan by virtue of Sections 401(a)(11) and 417 of the Code or Section 205 of ERISA (relating to qualified pre-retirement survivor annuities and qualified joint and survivor annuities) or Sections 401(a)(13)(B) and 414(p) of the Code or Section 206(d) of ERISA (relating to qualified domestic relations orders).
ARTICLE VI UNFUNDED NATURE OF PLAN -----------------------
6.1 The Plan is an "unfunded plan primarily for the purpose of providing deferred compensation for a select group of management or highly compensated employees," within the meaning of Section 301(a)(3) of ERISA. The Employer has established Restoration Accounts on its books solely as a bookkeeping convenience, in order to account for the amounts earned by each Participant hereunder. The Employer shall not be required to segregate any funds representing the Restoration Accounts and nothing in this Plan shall be construed as providing for such segregation. In addition, the Employer shall not be deemed to be a Trustee for the Participants and their Beneficiaries with respect to any amounts deferred hereunder. The Participant, his Beneficiary and any other person or persons having or claiming a right to payments hereunder or to any interest in this Plan shall rely solely on the unsecured promise of the Employer to make payments hereunder. Nothing herein shall be construed to give the Participant, his Beneficiary or any other person or persons any right, title, interest or claim in or to any specific asset, fund, reserve, account or property of any kind whatsoever owned by the Employer or in which it may have any right, title or interest now or in the future; provided, however, that the Participant or any Beneficiary shall have the right to enforce his claim against the Employer in the same manner as any unsecured creditor.
6.2 Notwithstanding Section 6.1, the Employer may, in its absolute discretion, establish a trust fund and contribute to such trust fund assets that shall be held therein, subject to the claims of the Employer's creditors in the event of the insolvency of the Employer, until paid to Participants or Beneficiaries in accordance with the terms of the Plan. The Employer shall not establish any trust fund that would cause the Plan not to be deemed an unfunded plan for purposes of Title I of ERISA.
ARTICLE VII ADMINISTRATION; AMENDMENTS AND TERMINATION; RIGHTS AGAINST THE EMPLOYER ----------------------------------------
7.1 Administration. --------------
(a) The Committee shall administer the Plan and shall have the full and absolute discretionary power and authority to construe and interpret the provisions of the Plan and to determine a Participant's eligibility for benefits hereunder.
(b) In exercising the power and authority granted to it by subsection (a), the Committee shall adhere to the claims and appeal procedure adopted by it pursuant to Section 10.4(o) of the Profit Sharing Plan.
(c) Any determination made by the Committee pursuant to the authority granted under subsection (a) and, if applicable, in accordance with subsection (b), shall be conclusive and binding on all Participants, Beneficiaries and any other person who at any time have, or claim to have, any interest whatsoever under this Plan.
(d) Pursuant to Section 401(a)(1) of ERISA, it is intended that the Plan and the administration thereof shall be exempt from Part 4 of Title I of ERISA. The Committee and the members thereof shall not be deemed to be fiduciaries, within the meaning of Section 3(21) of ERISA, and shall not be subject to the terms of Part 4 of Title 1 of ERISA.
7.2 Liability of Committee; Indemnification. To the extent permitted by ------------------------------------------ law, no member of the Committee shall be liable to any person for any action taken or omitted in connection with the interpretation and administration of this Plan, unless attributable to his own gross negligence or willful misconduct. The Employer shall indemnify the members of the Committee against any and all claims, losses, damages, and expenses, including any amounts paid in settlement with their approval, arising from their action or failure to act to the maximum extent
required or permitted under the Delaware General Corporation Law as presently in effect and as hereafter amended from time to time.
7.3 Amendment and/or Termination. (a) The Board shall have the right to ------------------------------- alter, amend or terminate the Plan or any part hereof. Any such alteration, amendment or termination may be effected by resolution of the Board acting in accordance with the by-laws (or other applicable governing document) of the Employer, in such manner as the Board may determine and for any reason whatsoever. Without limiting the power and authority of the Board, as described in the previous sentence, the Committee may, by decision of a majority of the members of the Committee then in office constituting the final and binding act of the Committee acting with or without a meeting being called or held, and keeping minutes of all meetings held and a record of all actions taken by written consent, may alter or amend the Plan, or any part hereof, in any manner, provided that the Committee determines, which determination shall be conclusive and binding on all persons, that any such alteration or amendment is (a) necessary or appropriate to comply with any applicable law, regulation or administrative pronouncement or (b) of an administrative nature and has no material adverse cost effect on the Employer or any Affiliate of the herein and shall be binding upon all Participants and Beneficiaries; provided, however, that no such amendment or termination shall reduce the amount of, or the vested interest in, the Restoration Account of a Participant or Beneficiary hereunder as of the effective date of such amendment or termination.
(b) Unless otherwise specifically provided in any amendment to the Profit Sharing Plan made after the Effective Date, the terms of the Plan shall be subject to the terms of the Profit Sharing Plan, as amended from time to time.
7.4 Rights Against the Employer. The establishment of this Plan shall not ---------------------------- be construed as giving to any Participant, Beneficiary or any person whomsoever, any legal, equitable or other rights against the Employer, or its officers, directors, agents or shareholders, or as giving to any Participant or Beneficiary any equity or other interest in the assets or business of the Employer or in shares of Employer stock or giving any employee the right to be retained in the employment of
Employer. All Participants shall be subject to discharge to the same extent they would have been if this Plan had never been adopted.
7.5 Expenses. The cost of this Plan and the expenses of administering the --------- Plan shall be borne by the Employer.
ARTICLE VIII GENERAL AND MISCELLANEOUS -------------------------
8.1 Spendthrift Clause. No right, title or interest of any kind in the Plan ------------------ shall be transferable or assignable by any Participant or Beneficiary or be subject to alienation, anticipation, encumbrance, garnishment, attachment, execution or levy of any kind, whether voluntary or involuntary, nor subject to the debts, contracts, liabilities, engagements, or torts of the Participant or Beneficiary. Any attempt to alienate, anticipate, encumber, sell, transfer, assign, pledge, garnish, attach or otherwise subject to legal or equitable process or dispose of any interest in the Plan shall be void.
8.2 Severability. In the event that any provision of this Plan shall be ------------- declared illegal or invalid for any reason, said illegality or invalidity shall not affect the remaining provisions of this Plan but shall be fully severable and this Plan shall be construed and enforced as if said illegal or invalid provision had never been a part of this Plan.
8.3 Construction. The article and section headings and numbers are included ------------- only for convenience of reference and are not to be taken as limiting or extending the meaning of any of the terms and provisions of this Plan. Whenever appropriate, words used in the singular shall include the plural or the plural may be read as the singular. When used herein, the masculine gender includes the feminine gender.
8.4 Governing Law. The validity and effect of this Plan and the rights and --------------- obligations of all persons affected hereby shall be construed and determined in accordance with the laws of the State of the State of New York, unless superseded by federal law.
8.5 Payment Due an Incompetent. If the Committee receives evidence that a --------------------------- Participant or Beneficiary entitled to receive any payment under the Plan is physically or mentally incompetent to receive such payment, the Committee may, in its sole discretion, direct the payment to any other person or trust which has been legally appointed by a court of competent jurisdiction or, in the event that no such person has been appointed, to any person whom the Committee, in its sole discretion, determines to be responsible for the care of the Participant or Beneficiary. Payment to any person or trust in accordance with this Section will fully discharge the obligations of the Plan to such Participant or Beneficiary.
8.6 Taxes. All amounts payable hereunder to any Participant or Beneficiary ------ shall be reduced by any and all federal, state and local taxes imposed upon the Participant or Beneficiary which are required to be paid or withheld by the Employer.
IN WITNESS WHEREOF, the Employer, as authorized by its Board of Directors, has caused this Plan to be signed by its duly appointed officers as of the effective date set forth in Section 1.2 above.
ATTEST: TIG Holdings, Inc.
______________ By: Secretary Title:
EXHIBIT 10.35
AMENDMENT OF TIG HOLDINGS, INC. DIVERSIFIED SAVINGS PLAN
1. Section 4.1 is amended to read as follows:
4.1 Pre-Tax Contributions. Pursuant to the elections described ----------------------- in Section 3.3, a Participant may defer, and have the amount of such deferral contributed by his or her Employer to the Trust Fund as his or her Pre-Tax Contributions, a portion of each payment of Salary that would otherwise be made to the Participant after his or her election becomes effective and while it remains so pursuant to Section 4.2.1 equal to any whole percentage from 1% through 12%; provided, however, that the Committee may increase the maximum percentage from 12% to any other whole percentage by action taken and communicated to Participants prior to the period with respect to which the Committee determines that such increased percentage may be elected; and, provided further, however, that the maximum percentage of deferral permitted with respect to a Senior Participant (as defined in Section 4.1.2) is 8%.
EXHIBIT 10.36
AMENDMENT OF THE TIG HOLDINGS, INC. ESOP RESTORATION PLAN
1. Section 4.2(b) is amended so that the first sentence thereof reads as follows:
To the extent (but only to the extent) that the general applicability of this Section 4.2(b) to Participants will not cause any transaction under the Plan (other than a "discretionary transaction" as defined by Rule 16b-3(b)(1)) to fail to qualify as an exempt transaction under Rule 16b-3 of the Securities Exchange Act of 1934, then, upon a Change of Control of the Employer, each Participant who is then an employee of the Employer or an Affiliate shall become fully vested in his ESOP Restoration Account.
2. Section 5.1 is amended in its entirety to read as follows:
5.1 Form of Distribution Effective January 1,1997, each new --------------------- Participant shall elect, upon commencement of participation in the Plan (which election shall be irrevocable except as otherwise provided in the Plan), which of the forms of distribution set forth in subsections (a), (b) and (c) of this Section 5.1 will apply to the distribution of his benefits (if any) under the Plan. Each Participant who commenced participation prior to January 1, 1997 shall be required to make a similar election with respect to the distribution of his Plan benefits, except that the election shall apply to benefits accrued prior to January 1, 1997 only if a distribution is not otherwise required before January 1, 1999; any distribution of such pre-1997 accrued benefits before January 1, 1999 shall be made as a Lump Sum Distribution in accordance with Section 5.1(a) hereof.
All Participant elections shall be made in the manner and on the form selected by the Committee, and shall be final and binding upon the Participant, except as otherwise provided by the Plan.
(a) Lump Sum Distribution. Payment of the vested portion of the ----------------------- Participant's ESOP Restoration Account hereunder may be made in the form of a lump sum to the Participant or his Beneficiary, paid as soon as practicable after the Participant's employment with the Employer and any of its Affiliates has terminated for any reason. Payment to the Participant's Beneficiary shall be made only in the event of the Participant's death prior to the distribution of the vested portion of his ESOP Restoration Account.
(b) Ten Year Installment Distribution. Payment of the vested ------------------------------------ portion of the Participant's ESOP Restoration Account hereunder may be made in the form of a series of ten annual distributions to the Participant or his Beneficiary, commencing as soon as practicable after the Participant's employment with the Employer and its Affiliates has been terminated for any reason. The amount of each installment shall be equal to the then current value of the vested portion of the Participant's ESOP Restoration Account multiplied by a fraction, the numerator of which shall be one and the denominator of which shall be the
number of installments remaining to be paid. Payment to a Participant's Beneficiary shall be made only in the event of the Participant's death prior to the distribution of the vested portion of his ESOP Restoration Account. The balance of the Participant's ESOP Restoration Account during such pay-out period shall be credited with deemed interest and earnings (or debited with losses and expenses) using the same measure as used under Section 4.1(d) hereof. In the event that a Participant no longer has an account under the Employee Stock Ownership Plan, the deemed earnings credit or debit shall be determined by the Committee based on the weighted average earnings for all Participants in the Employee Stock Ownership Plan.
(c) Deferred Lump Sum Distribution Payment of the vested portion ------------------------------ of the Participant's ESOP Restoration Account hereunder may be made in the form of a deferred lump sum distribution, whereby a lump sum shall be paid in the first quarter of the calendar year next following the calendar year in which the Participant's employment with the Employer and its Affiliates terminated for any reason. Payment to a Participant's Beneficiary shall be made only in the event of the Participant's death prior to the distribution of the vested portion of his ESOP Restoration Account. During the delay period, the Participant's ESOP Restoration Account shall be credited with deemed interest and earnings (or debited with losses and expenses) using the same measure as used under Section 4.1(d) hereof. In the event the Participant no longer has an account under the Employee Stock Ownership Plan, the deemed earnings credit or debit shall be determined by the Committee based on the weighted average earnings for all Participants in the Employee Stock Ownership Plan.
Participant may elect, at least two years before any distribution is to be made or would commence pursuant to this Article V, to change the optional form of distribution that he previously elected, provided that he elects one of the distribution options specified above, and provided further that any acceleration of a distribution requires prior Committee consent. Any election under this Section 5.1 to change a distribution which is made within two years of a distribution event shall be null and void.
TIG HOLDINGS, INC. ------------------
EMPLOYEE STOCK OWNERSHIP RESTORATION PLAN (the "ESORP") - - -----------------------------------------
RESOLVED, that the ESORP, in such form as authorized and approved by the Board of Directors as of September 21, 1994 shall be hereby amended to delete in its entirety Section 4.1(f), such section having been mistakenly included in the form of the ESORP, the effect of this section being contrary to the intended purpose of the ESORP, as presented to the Board of Directors for approval.
EXHIBIT 10.37
AMENDMENT OF THE TIG HOLDINGS, INC. PROFIT SHARING RESTORATION PLAN
1. Section 5.1 is amended in its entirety to read as follows:
5.1 Form of Distribution Effective January 1,1997, each new --------------------- Participant shall elect, upon commencement of participation in the Plan (which election shall be irrevocable except as otherwise provided in the Plan), which of the forms of distribution set forth in subsections (a), (b) and (c) of this Section 5.1 will apply to the distribution of his benefits (if any) under the Plan. Each Participant who commenced participation prior to January 1, 1997 shall be required to make a similar election with respect to the distribution of his Plan benefits, except that the election shall apply to benefits accrued prior to January 1, 1997 only if a distribution is not otherwise required before January 1, 1999; any distribution of such pre-1997 accrued benefits before January 1, 1999 shall be made as a Lump Sum Distribution in accordance with Section 5.1(a) hereof.
All Participant elections shall be made in the manner and on the form selected by the Committee, and shall be final and binding upon the Participant, except as otherwise provided by the Plan.
(a) Lump Sum Distribution. Payment of the vested portion of the ----------------------- Participant's Restoration Account hereunder may be made in the form of a lump sum to the Participant or his Beneficiary, paid as soon as practicable after the Participant's employment with the Employer and its Affiliates has been terminated for any reason. Payment to a Participant's Beneficiary shall be made only in the event of the Participant's death prior to the distribution of the vested portion of his Restoration Account.
(b) Ten Year Installment Distribution. Payment of the vested ------------------------------------ portion of the Participant's Restoration Account hereunder may be made in the form of a series of ten annual distributions to the Participant or his Beneficiary, commencing as soon as practicable after the Participant's employment with the Employer and its Affiliates has terminated for any reason. The amount of each installment shall be equal to the then current value of the vested portion of the Participant's Restoration Account multiplied by a fraction, the numerator of which shall be one and the denominator of which shall be the number of installments remaining to be paid. Payment to the Participant's Beneficiary shall be made only in the event of the Participant's death prior to the distribution of the vested portion of his Restoration Account. The balance of the Participant's Restoration Account during such pay-out period shall be credited with deemed interest and earnings (or debited with losses and expenses) using the same measure as used under Section 4.1(c) hereof. In the event that a Participant no longer has an account under the Profit Sharing Plan, the deemed earnings credit or debit shall be determined by the
Committee based on the weighted average earnings for all Participants in the Profit Sharing Plan.
(c) Deferred Lump Sum Distribution Payment of the vested portion ------------------------------ of the Participant's Restoration Account hereunder may be made in the form of a deferred lump sum distribution, whereby a lump sum shall be paid in the first quarter of the calendar year next following the calendar year in which the Participant's employment with the Employer and its Affiliates terminated for any reason. Payment to the Participant's Beneficiary shall be made only in the event of the Participant's death prior to the distribution of the vested portion of his Restoration Account. During the delay period, the Participant's Restoration Account shall be credited with deemed interest and earnings (or debited with losses and expenses) using the same measure as used under Section 4.1(c) hereof. In the event the Participant no longer has an account under the Profit Sharing Plan, the deemed earnings credit or debit shall be determined by the Committee based on the weighted average earnings for all Participants in the Profit Sharing Plan.
A Participant may elect, at least two years before any distribution is to be made or would commence pursuant to this Article V, to change the optional form of distribution that he previously elected, provided that he elects one of the distribution options specified above, and provided further that any acceleration of a distribution requires prior Committee consent. Any election under this Section 5.1 to change a distribution which is made within two years of a distribution event shall be null and void.
TIG HOLDINGS, INC. ------------------
PROFIT SHARING RESTORATION PLAN (the "PSRP") - - -------------------------------
RESOLVED, that the PSRP, in such form as authorized and approved by the Board of Directors as of September 21, 1994 shall be hereby amended to delete in its entirety Section 4.1(e), such section having been mistakenly included in the form of the PSRP, the effect of this section being contrary to the intended purpose of the PSRP as presented to the Board of Directors for approval.
EXHIBIT 11
EXHIBIT 12
EXHIBIT 21
TIG HOLDINGS, INC. LIST OF SUBSIDIARIES
State of Incorporation ------------- TIG Holdings, Inc. Delaware TIG Holdings 1, Inc. Delaware TIG Excess & Surplus Lines, Inc. Delaware TIG Specialty Insurance Company California TIG Insurance Group California Rusco Services, Inc. California TIG Holdings 3, Inc. Delaware PW Financial Solutions Delaware TIG Insurance Company California TIG Holdings 4, Inc. Delaware TIG Premier Insurance Company California TIG Countrywide Insurance Company California Countrywide Corporation Texas Industrial County Mutual Insurance Company Texas TIG Lloyds Insurance Company Texas TIG Indemnity Company California TIG Insurance Company of Texas Texas TIG Reinsurance Company Connecticut Investment Subsidiary Two Corporation Delaware Investment Subsidiary Three Corporation Delaware Investment Subsidiary Four Corporation Delaware TIG RE UK Holdings Company Delaware Fairmont Insurance Company California TIG American Specialty Insurance Company Texas TIG Insurance Company of Colorado Colorado TIG Insurance Corporation of America Michigan TIG Insurance Company of Michigan Michigan TIG Insurance Company of New York New York Investment Subsidiary One Corporation Delaware
EXHIBIT 23.1
Exhibit 23.1 - Consent of Independent Auditors
We consent to the incorporation by reference in the Registration Statement (Form S-8) No. 33-61564) pertaining to the TIG Holdings, Inc. 1993 Long-Term Incentive Plan, in the Registration Statement (Form S-8 No. 33-61970) pertaining to the TIG Holdings, Inc. Diversified Savings Plan, in the Registration Statement (Form S-8 No. 33-63148) pertaining to the TIG Holdings, Inc. 1993 Non-Employee Directors Restricted Share Program, in the Registration Statement (Form S-8 No. 33-66650) pertaining to the Common Stock Restricted Share Agreement, in the Registration Statement (Form S-3 No. 33-90594) of TIG Holdings, Inc. and related Prospectus pertaining to the registration of $100,000,000 of 8 1/8% Notes due 2005, in the Registration Statement (Form S-8 No. 333-18281) pertaining to the TIG Holdings, Inc. Diversified Savings Restoration, in the Post Effective Amendment No. 1 to the Registration Statement (Form S-8 No. 33-61564) pretaining to the TIG Holdings, Inc. 1993 Long-Term Incentive Plan, the TIG Holdings, Inc. 1996 Long-Term Incentive Plan, the TIG Holdings, Inc. 1996 Non-Employee Directors Compensation Program and the TIG Holdings, Inc. September 1996 Consultant Stock Option Agreement and in the Registration Statements (Form S-8 No. 333-15735) pertaining to the TIG Holdings, Inc. 1996 Long-Term Incentive Plan, the TIG Holdings, Inc. 1996 Non-Employee Directors Compensation Program and the TIG Holdings Inc. September 1996 Consultant Stock Option Agreement of our report dated January 31, 1997 with respect to the consolidated financial statements and schedules of TIG Holdings, Inc. included in the Annual Report (Form 10-K) for the year ended December 31, 1996.
/s/ERNST & YOUNG LLP
Dallas, Texas March 21, 1997
EXHIBIT 24.1
POWER OF ATTORNEY -----------------
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Jon W. Rotenstreich, Louis J. Paglia, Edwin G. Pickett and Steven A. Cook (each of them with full power of substitution and with full power to act without the others) his or her true and lawful attorneys-in-fact and agent for the undersigned in such person's name, place and stead, in any and all capacities, to sign an Annual Report for 1996 on Form 10-K and any and all subsequent amendments thereto and to file them so signed, with all exhibits thereto, and any and all other documents in connection therewith, with the Securities and Exchange Commission, hereby granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform any and all acts and things requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he or she might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents or any of them, or their substitutes, may lawfully do or cause to be done by virtue hereof.
Dated: March 19, 1997 --------------
By /s/JON W. ROTENSTREICH By /s/DON D. HUTSON - - ------------------------------------- ---------------------------------------- Name: Jon W. Rotenstreich Name: Don D. Hutson Title: Director, Chairman of the Board Title: Director, President and and Chief Executive Officer Chief Operating Officer (Principal Executive Officer)
By /s/EDWIN G. PICKETT By /s/STEVEN A. COOK - - ------------------------------------- ---------------------------------------- Name: Edwin G. Pickett Name: Steven A. Cook Title: Executive Vice President and Title: Controller Chief Financial Officer (Principal Accounting Officer) (Principal Financial Officer)
By /s/GEORGE B. BEITZEL By /s/WILLIAM G. CLARK - - ------------------------------------- ---------------------------------------- Name: George B. Beitzel Name: William G. Clark Title: Director Title: Director
By /s/JOEL S. EHRENKRANZ By /S/GEORGE D. GOULD - - ------------------------------------- ---------------------------------------- Name: Joel S. Ehrenkranz Name: George D. Gould Title: Director Title: Director
By /s/LORD MOORE By /s/WILLIAM W. PRIEST - - ------------------------------------- ---------------------------------------- The Rt. Hon. Lord Moore Name: William W. Priest Director Title: Director
By /S/ANN W. RICHARDS By /s/HAROLD TANNER - - ------------------------------------- ---------------------------------------- Name: Ann W. Richards Name: Harold Tanner Title: Director Title: Director