ITEM 1. BUSINESS.
THE COMPANY
Zurich Reinsurance Centre Holdings, Inc. ("ZRCH"), a Delaware corporation, serves as the holding company for Zurich Reinsurance Centre, Inc. ("ZRC"), a Connecticut reinsurance company, and ZC Insurance Company ("ZCIC"), a New Jersey insurance company. ZRCH, together with its wholly-owned operating subsidiaries (the "Company"), is the principal underwriting affiliate of the Zurich Insurance Group ("Zurich"), a Swiss financial services holding company, in the North American market for traditional property and casualty reinsurance. Data published by the Reinsurance Association of America (the "RAA") indicates that ZRC is the third largest broker reinsurer and the eighth largest professional reinsurer in the United States based on statutory capital and surplus at December 31, 1996. As of that date, ZRC had statutory capital and surplus of $690.1 million, an "AA-" claims-paying ability rating from Standard & Poor's Corporation ("S&P"), an "Aa3" financial strength rating from Moody's Investors Service ("Moody's") and an "A" rating from A.M. Best Company, Inc. ("A.M. Best").
During 1993, ZRCH was organized and issued 26.1 million shares of its common stock, par value $0.01 per share (the "Common Stock"), including 8.55 million shares of Common Stock in ZRCH's initial public offering, for aggregate proceeds, net of underwriting expenses, of $637.7 million. In 1993, ZRCH acquired ZRC from an affiliate of Zurich for an aggregate consideration of $63.3 million and issued $200 million principal amount of its 7 1/8% Senior Notes due 2023 (the "Senior Notes"). During April 1995, ZRCH acquired Re Capital Corporation ("Re Capital") and its wholly-owned subsidiary, Re Capital Reinsurance Corporation (subsequently renamed ZC Insurance Company). During 1996, ZCIC commenced writing primary casualty business and serves as a production source for ZRC. ZCIC is licensed to write business in 33 states and is rated "A" by A.M. Best.
ZRCH is a 65.7%-owned indirect subsidiary of Zurich. Founded in 1872, Zurich is engaged in operations in over 40 countries. Zurich has a significant influence over the policies and affairs of the Company and is in a position to determine the outcome of substantially all corporate actions requiring stockholder approval, including the election of directors, the merger of the Company, the sale of all or substantially all of the Company's assets and the adoption of most amendments to the Company's certificate of incorporation. A majority of the members of the Company's Board of Directors are executive officers of Zurich or its affiliates.
During January 1997, Zurich announced a proposal to acquire all of the remaining shares of ZRCH not currently owned by Zurich for $36.00 per share. ZRCH's Board of Directors has appointed a special committee of its members to determine the advisability and fairness of that offer to ZRCH's other stockholders. The special committee has retained independent investment banking advisors and legal counsel to advise it on the fairness of the offer and is in the process of considering the offer. The special committee has indicated its intention to make a recommendation to ZRCH's Board of Directors with respect to the offer as soon as practicable. Consummation of the proposed transaction is subject to the approval of the Board of Directors and the stockholders of ZRCH and other conditions customary in this type of transaction. See Item 3 "Legal Proceedings" and Item 7 "Management's Discussion and Analysis of Financial Condition and Results of Operations - Subsequent Event."
The Company's executive offices are located at One Chase Manhattan Plaza, 43rd Floor, New York, New York 10005 and its telephone number is (212) 898-5000.
REINSURANCE
Reinsurance is an arrangement in which an insurance company, the reinsurer, agrees to indemnify another insurance company, the ceding company, against all or a portion of the insurance risks underwritten by the ceding company under one or more insurance policies. Reinsurance can provide a ceding company with several major benefits, including a reduction in net liability on individual risks, catastrophe protection from large or multiple losses and assistance in maintaining acceptable financial ratios. Reinsurance also provides a ceding company with additional underwriting capacity by permitting it to accept larger risks and write more business than would otherwise be possible.
The two basic types of property/casualty reinsurance arrangements are treaty and facultative reinsurance. In treaty reinsurance, the ceding company is obligated to cede and the reinsurer is obligated to assume a specified portion of a type or category of risk insured by the ceding company. In facultative reinsurance, the ceding company cedes and the reinsurer generally assumes all or part of the risk under a single insurance policy.
Both treaty and facultative reinsurance can be written on either a pro rata (also known as quota share or proportional) basis or an excess of loss basis. In reinsurance written on a pro rata basis, the reinsurer, in return for a predetermined portion or share of the insurance premium charged by the ceding company, indemnifies the ceding company against a predetermined portion of the losses and the allocated portion of loss adjustment expenses ("ALAE") of the ceding company under the covered insurance policy or policies. In reinsurance written on an excess of loss basis, the reinsurer generally indemnifies the ceding company against all or a specified portion of losses and ALAE on underlying insurance policies in excess of a specified dollar amount, known as the ceding company's retention or attachment point, subject to a negotiated limit.
Reinsurance is written by broker reinsurers through professional reinsurance brokers or by reinsurers directly for ceding companies. The domestic broker market consists of several substantial national brokers and a number of smaller, specialized brokers. In brokered transactions, the reinsurance intermediary generally is responsible for identifying and structuring the risk to be placed on behalf of its client, the ceding company. The reinsurance broker obtains quotations as to price, terms and conditions from lead reinsurers and, when a firm order is authorized by the ceding company, the broker solicits participations in that program from a number of "following" reinsurers. Once the risk has been placed, the broker typically is responsible for premium and loss administration for the coverage, including the billing and collection of premium and loss amounts among the syndicate of participating reinsurers. Brokers normally are paid commissions by the reinsurer that are calculated as a percentage of the premiums received by the reinsurer. ZRC's primary source of business is through reinsurance brokers.
During 1996, three reinsurance intermediaries, E.W. Blanch Company, Aon Reinsurance, Inc. and Guy Carpenter & Company, Inc., produced approximately 22%, 18% and 12% of ZRC's gross premiums written, respectively. Business produced by members of the Zurich American Insurance Group ("Zurich American"), an affiliate, generated 29% of gross premiums written. It is likely that one or more intermediary firms and/or ceding companies will continue to account for more than 10% of the Company's consolidated revenue.
BUSINESS STRATEGY
The Company believes that certain elements of ZRC's business strategy differ from those prevalent in the traditional broker reinsurance market. The principal elements of the Company's strategy are summarized below:
MAINTAIN A CONSISTENT AND SUBSTANTIAL UNDERWRITING CAPACITY IN ORDER TO ESTABLISH LONG-TERM RELATIONSHIPS WITH HIGH QUALITY CEDING COMPANIES. The Company believes that by maintaining a consistent and substantial underwriting capacity, ZRC has the ability to establish and maintain long-term relationships with ceding companies. As one of the largest reinsurance companies in the United States, the Company believes that ZRC has the capacity to serve ceding companies during all stages of the underwriting cycle. The Company believes that this ability contributes to improved terms and conditions in ZRC's treaties.
OPERATE AS A LEAD REINSURER. The Company believes that, as a lead reinsurer, ZRC effectively influences the terms and conditions of its business. In addition, as a lead reinsurer, ZRC develops close and continuing relationships with its clients and can develop more innovative, cost-effective risk management solutions. In 1996, ZRC operated as lead reinsurer in respect of contracts representing approximately 87% and 92% of its non-affiliated and total gross premiums written, respectively.
FORGE CLOSE WORKING RELATIONSHIPS WITH REINSURANCE BROKERS BASED ON EFFECTIVE COMPETITION WITH DIRECT REINSURERS. The Company believes that providing brokers with a consistent and well capitalized market permits effective competition with direct reinsurers. ZRC's relationships with reinsurance intermediaries provide access to a wide range of ceding companies with varying reinsurance needs. In addition, the Company believes the use of brokers results in a more manageable cost structure for the Company and preserves for its clients a number of advantages resulting from broker-assisted placements.
APPLY SOPHISTICATED ANALYTICAL TECHNIQUES TO LIMIT RISK AND MAXIMIZE NET RETURN ON DEPLOYED CAPITAL ON EACH TREATY WRITTEN. In addition to employing traditional reinsurance underwriting techniques, ZRC's underwriters generally perform a variety of statistical analyses, including analyses of the frequency, severity and timing of expected losses, that emphasize limitation of risk and maximization of net return on deployed capital.
LIMIT AGGREGATE RISK PER TREATY BY INCLUDING LIMITATIONS OF LIABILITY IN TREATIES. In the Company's view, extraordinarily poor results on a small number of risks (for example, those covering asbestos, environmental pollution or professional liabilities related to derivative losses) have contributed to the adverse financial performance of certain reinsurers. In order to limit this risk, thereby enhancing its ability to provide consistent underwriting capacity, ZRC continues to seek contractual limitations of liability on the business it writes. ZRC had aggregate loss limits on reinsurance contracts representing 58% of its 1996 non-affiliated reinsurance contracts written.
BUILD ON ZRC'S AFFILIATIONS. In addition to business assumed from affiliates, the Company believes that ZRC assists clients and brokers through its affiliations with Zurich. Through this network, ZRC offers clients alternatives to traditional reinsurance, including finite reinsurance and financial market instruments.
EMPHASIZE A HIGH LEVEL OF SERVICE TO CEDING COMPANIES WHILE MAINTAINING EFFICIENT OPERATIONS. ZRC emphasizes a high level of service to its clients. ZRC has a team of experienced, professional underwriters oriented toward the development of innovative, cost-effective reinsurance solutions. Particularly with respect to working layer excess of loss coverages (where more frequent claims are anticipated), ZRC emphasizes timely claims administration and payment.
EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers of the Company are as follows:
STEVEN M. GLUCKSTERN has been Chairman of the Company since March 1993. From March 1993 to June 1996 he served as Chief Executive Officer of the Company and from March 1993 to June 1995 as President of the Company. In March 1997, Mr. Gluckstern was appointed to serve as a member of Zurich's Corporate Executive Board. Mr. Gluckstern is President and a director of Zurich Centre Investments Limited ("ZCI") and serves as a director of ZCI's operating subsidiaries. During 1995, he served as a director of Zurich Kemper Investment Management, Inc. and certain of their respective operating subsidiaries. Since 1987, he has served as an executive officer and a director of Centre Reinsurance Holdings Limited ("Centre Reinsurance") as well as a director of certain of its operating subsidiaries. Before joining Centre Reinsurance, Mr. Gluckstern was President of Columbia Insurance Company and Senior Vice President of National Indemnity Company, each insurance subsidiaries of Berkshire Hathaway, Inc. Mr. Gluckstern was previously employed as Chief Financial Officer and Vice President for Finance and Administration of Healthco International Inc. Mr. Gluckstern also has experience as an educator and holds a B.A. degree from Amherst College, a Doctor of Education degree from the University of Massachusetts and an M.B.A. degree from Stanford University where he was an Arjay Miller Scholar.
RICHARD E. SMITH has been a Director of the Company since March 1993. Since June 1996 he has served as Chief Executive Officer of the Company and since June 1995 as President of the Company. From March 1993 to June 1996 Mr. Smith served as Chief Operating Officer. Mr. Smith served as Senior Vice President, Business Development of Centre Reinsurance from 1992 until March 1993. From 1982 until 1992, Mr. Smith was employed by Guy Carpenter & Company, Inc., most recently as Senior Vice President, and was a member of the board of directors. From 1975 to 1982, Mr. Smith was employed by A.M. Best Company, Inc., most recently as Vice President in charge of the property-casualty ratings division. He holds a B.A. degree from United States International University in San Diego.
PETER R. PORRINO has been Executive Vice President of the Company since June 1996. From April 1993 to June 1996, Mr. Porrino served as Senior Vice President, Chief Financial Officer and Treasurer of the Company. Between 1978 and 1993, Mr. Porrino was employed by Ernst & Young, where he specialized in the insurance and reinsurance industries. From 1988 until March 1993, Mr. Porrino was a partner in Ernst & Young's New York insurance practice and a member of Ernst & Young's Insurance Industry Accounting and Auditing Committee. He is a member of the American Institute of Certified Public Accountants, serving on its Insurance Companies Committee, and the New York Society of Certified Public Accountants. Mr. Porrino holds a B.B.A. degree from Pace University and an M.B.A. degree from New York University.
GERALD S. KING has been Senior Vice President of ZRC since July 1993 and Senior Vice President and Chief Facultative Underwriting Officer of the Company since June 1995. Mr. King served in various capacities relating to facultative operations for Skandia American Reinsurance Corp., from 1990 to 1993. From 1978 to 1990 he served as President of Facultative Managers Corporation. Mr. King holds a B.A. degree from St. Francis College.
ISAAC MASHITZ has been Senior Vice President and Chief Actuarial Officer of the Company since April 1993. Prior to April 1993, Mr. Mashitz was Vice President and Actuary (Pricing) of North American Reinsurance Corporation, where he had been employed since 1986. Mr. Mashitz has served as the President of Casualty Actuaries in Reinsurance and as the Chairman of the Casualty Actuarial Society's Committee on Theory of Risk. From 1984 to 1986, he was employed by The Insurance Services Office; previously from 1978 to 1984 he was employed by The Home Insurance Company. Mr. Mashitz has a B.A. degree from Brooklyn College and a Ph.D. in Mathematics from the Courant Institute of New York University. He is a Fellow of the Casualty Actuarial Society and is a Member of the American Academy of Actuaries.
ADRIENNE W. REID has been Senior Vice President of ZRC since August 1993 and Senior Vice President and Chief Treaty Underwriting Officer of the Company since June 1995. For the 16 years prior, she was employed by General Reinsurance Corporation, most recently as Vice President and Facultative Account Executive where she managed General Reinsurance Corporation's New York Casualty Program business. Ms. Reid holds a B.A. degree from Mount Holyoke College.
KAREN O'CONNOR RUBSAM has been Senior Vice President, Chief Financial Officer and Treasurer of the Company since June 1996. From May 1993 to June 1996, Ms. O'Connor Rubsam served as Corporate Controller of ZRC. From 1992 to 1993, Ms. O'Connor Rubsam served as a financial analyst at Paulsen Dowling Securities. From 1981 to 1986 and from 1988 to 1992, Ms. O'Connor Rubsam held positions at Coopers & Lybrand, most recently as a senior audit manager. From 1986 until 1988, Ms. O'Connor Rubsam was Assistant Vice President and Audit Director for NAC Re Corporation. Ms. O'Connor Rubsam holds a B.B.A. degree from the University of Notre Dame and is a Certified Public Accountant and a Chartered Financial Analyst.
MARK R. SARLITTO has been Senior Vice President, General Counsel and Secretary of ZRC since June 1993 and Senior Vice President, General Counsel and Secretary of the Company since August 1995. Mr. Sarlitto was an attorney at Willkie Farr & Gallagher from 1988 to 1993. Between 1983 and 1986, Mr. Sarlitto served as Vice President of Charter Security Life Insurance Company. Prior to 1983, Mr. Sarlitto was an auditor at Ernst & Young. He holds a J.D. Degree from Columbia University School of Law and B.S. and M.B.A degrees from the State University of New York at Buffalo.
REINSURANCE UNDERWRITING
Treaty Coverages
ZRC offers treaty reinsurance to providers of commercial and personal lines of property and casualty insurance. The composition of ZRC's business reflects market conditions, including the adequacy of reinsurance and insurance pricing for various classes and types of business, which vary over time. In evaluating treaty opportunities, ZRC relies heavily on an underwriting process that emphasizes a close collaboration among its Underwriting, Actuarial, Claims and Finance Departments. Excess of loss and pro rata reinsurance treaties are customarily written on an annual basis with contract terms enabling the lead reinsurer to engage in periodic reviews and to renegotiate price, terms and conditions when necessary. ZRC analyzes various aspects of a prospective reinsured's business including, but not limited to, historical and projected loss and exposure data, future loss costs, financial stability and history, classes and nature of underlying business and policy forms, underwriting and claims guidelines, aggregation of loss potential (between contracts), existing reinsurance programs (including potential uncollectible reinsurance) and the quality and experience of management.
Facultative Coverages
ZRC's facultative group consists of regional branch offices located in New York City, Atlanta, Boston, Chicago, Dallas, San Francisco and Stamford. ZRC underwrites facultative casualty coverages both with and without the assistance of reinsurance intermediaries. ZRC's facultative guidelines generally are consistent with its treaty underwriting standards. Particularly complex or volatile facultative risks, or risks that fall outside ZRC's prescribed guidelines and procedures, are reviewed by senior management prior to authorization. ZRC conducts branch audits and other review procedures to ensure adherence to underwriting guidelines, procedures, proper use of daily home office referrals and appropriate class selection, limitations of authority per underwriter and proper rating per submission.
ANALYSIS OF BUSINESS WRITTEN
ZRC's mix of business, on the basis of gross premiums written, net premiums written and net premiums earned, including certain periods prior to its acquisition by the Company, is set forth in the following table for the periods indicated (dollars in thousands). ZRC's mix of business for periods prior to its acquisition by the Company is not indicative of the mix of business ZRC is likely to have in the future.
RESERVES
In many cases, years may elapse between the occurrence of a loss, the reporting of the loss to the reinsurer and payment by the reinsurer. To recognize obligations for unpaid losses, ZRC establishes reserves, which are balance sheet liabilities representing estimates of future amounts required to pay losses and loss adjustment expenses ("LAE"). Generally, reserves for reported losses are established in an amount equal to the greater of the reserve recommended by the reinsured or the reserve established by ZRC's Claims Management Department. For excess of loss reinsurance, reserves are established on a case-by-case basis using several factors, including the type of risk involved, the circumstances surrounding the claim, severity of injury or damage, estimated ultimate exposure and ZRC's experience with the reinsured by reference to the underlying policy and reinsurance provisions. ZRC conducts periodic claims audits to determine the adequacy of recommended reserves and maintains an in-house actuarial staff to establish reserves for incurred but not reported ("IBNR") losses on the basis of actuarial analyses of statistical loss information used to project ultimate losses. IBNR reserves are bulk reserves recorded in addition to specific case reserves which reflect assumed additional development with respect to known losses, as well as reserves for claims that have not yet been reported to the reinsurer. ZRC's actuaries determine the amount of IBNR reserves utilizing methodologies that reflect both ZRC's original pricing estimates of ultimate losses as well as analyses of reported losses and anticipated reporting patterns.
The process of estimating reserves is inherently imprecise and involves an evaluation of many variables, including social and economic conditions. The uncertainties of estimating such reserves are greater for reinsurers than for primary insurers due primarily to the longer-term reporting nature of the reinsurance business, the diversity of development patterns among different types of reinsurance treaties and facultative certificates, the necessary reliance on ceding companies for information regarding reported claims and differing reserving practices among ceding companies. During the loss settlement period, additional facts regarding individual claims may become known. As the insurer or reinsurer learns such facts, it often becomes necessary to refine and adjust the estimates of liability for a claim. Such changes are reported in earnings at that time.
In 1993, Zurich and ZRC entered into an Excess of Loss Reinsurance Agreement (the "Excess of Loss Reinsurance Agreement") under which Zurich agreed to reinsure adverse loss development in respect of ZRC's reserves as of December 31, 1992 and a Stop Loss Reinsurance Agreement (the "Stop Loss Reinsurance Agreement" and together with the Excess of Loss Reinsurance Agreement, the "Stop Loss Agreement") under which Zurich agreed to reinsure adverse loss development on ZRC's reserves as of May 31, 1993 for losses occurring between January 1, 1993 and May 31, 1993. In addition, under the Stop Loss Reinsurance Agreement, ZRC will be reimbursed for incurred losses and allocated loss adjustment expenses in excess of 75% of earned premiums for losses occurring after May 31, 1993 on business written by ZRC prior to June 1993. Coverage provided under the Stop Loss Agreement is on an incurred basis (rather than as any such losses are paid), net of recoveries and claims under other retrocessional policies except for any claims in respect of which recovery is precluded by the insolvency or receivership of one of ZRC's other retrocessionaires or by a verdict of a court or arbitration panel. As of December 31, 1996, there were no recoverables under the Stop Loss Agreement. See Item 8 "Financial Statements and Supplementary Data - - Footnote 12: Related Party Transactions" for a further discussion of the Stop Loss Agreement.
The Company believes that ZRC's exposure to asbestos-related and environmental pollution claims is minimal due to the diminutive amount of business written prior to 1987 and the protection provided by the Stop Loss Agreement.
The table which follows presents the development of reserves for the Company's losses and LAE for calendar years 1986 through 1996. The first line of the table sets forth the estimated liability for losses and LAE, including IBNR, for claims arising in each of the indicated years and all prior years that are unpaid, as recorded on the Company's balance sheet as of the end of the indicated year. The upper portion of the table shows the cumulative amounts paid as of the end of each successive year for such claims. The lower portion of the table shows the re-estimated amount of the previously recorded liability based on experience as of the end of each succeeding year including cumulative payments. Estimates change as more information becomes known about the frequency and severity of claims for each year. A cumulative redundancy (deficiency) exists when the original liability shown in the table is greater (less) than the most recently re-estimated amount.
There were no significant deficiencies or redundancies in recent years. Any incurred loss development is primarily attributable to corresponding premium development. The 1992 aggregate deficiency relates solely to unallocated LAE which is not covered by the Stop Loss Agreement. Favorable reserve development in 1987, 1988 and 1989 is principally attributable to the effects of a loss portfolio transfer transaction with Hansa Reinsurance Company of America ("Hansa") effected by ZRC in 1990 for accident years 1989 and prior. As part of this transaction, all business underwritten by StellaRe Management Corporation on behalf of ZRC (which represented ZRC's entire portfolio of business on December 31, 1989) was retroceded to Hansa. As a result of this transaction, Hansa is now responsible for the payment of ZRC's pre-1990 reserves. Such retrocession is covered under the terms of the Stop Loss Agreement.
The reconciliation of ZRC's and ZCIC's reserves for losses and LAE determined on the basis of statutory accounting principles ("SAP") and generally accepted accounting principles ("GAAP") for each of the three years in the period ended December 31, 1996 is shown below.
SAP requires that loss and LAE reserves be reported gross of loss portfolio transfers with an offsetting contra-liability account on the balance sheet. For GAAP reporting purposes, loss portfolio transfers are included in the reinsurance recoverables on unpaid losses. For GAAP purposes, ZRC's reinsurance recoverables on unpaid losses, including the loss portfolio transfer with Hansa, have been reclassified as an asset.
See Item 8 "Financial Statements and Supplementary Data - Footnote 5: Losses and Loss Adjustment Expenses" for further discussion of the Company's reserves.
RETROCESSIONS
There were no significant changes to the Company's retention levels or retrocessional programs during 1996. In addition to the Stop Loss Agreement (discussed above), effective July 1, 1995, ZRC entered into an excess of loss reinsurance agreement with Zurich, primarily to provide an aggregate loss limitation on business assumed from members of Zurich American under a domestic whole account quota share treaty. Effective July 1, 1994, ZRC implemented a workers' compensation excess retrocessional cover with limits of $98 million excess of $2 million. This treaty functions as a workers' compensation clash cover. Clash cover retrocessions are designed to protect the reinsured from unusual accumulations of exposure resulting from a single casualty occurrence involving two or more reinsured policies. Based on its assessments of risk aggregation and the availability of acceptable retrocessional protection, the Company may in the future seek to purchase additional clash cover retrocessional coverage for its excess of loss casualty business. At December 31, 1996, there were no recoverables from any one retrocessionaire that exceeded 10% of stockholders' equity.
INVESTMENTS
The Company has specific investment guidelines with respect to the management of its consolidated investment portfolio. Although these guidelines stress diversification of risks and conservation of principal and liquidity, the Company's investments are subject to market-wide risks and fluctuations, as well as to risks inherent in particular securities. The Company's investment guidelines, which are subject to change at the discretion of the Company's Board of Directors, address the duration of the portfolio, currency denomination and credit standards as well as diversification and liquidity constraints. The Company's consolidated investment guidelines incorporate the qualitative and quantitative limits prescribed by the Connecticut Insurance Code and the Investments of Insurers Model Act promulgated by the National Association of Insurance Commissioners (the "NAIC"). See the discussion below under the caption "Regulatory Matters."
The following table summarizes the cash and invested assets of the Company on a consolidated basis (at market and carrying values) as of December 31, 1996:
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(1) As of December 31, 1996, all the U.S. government and government agency fixed maturity securities held represented obligations of the U.S. government and $250.5 million of the mortgage-backed securities were obligations of U.S. federal issuing agencies.
(2) As of December 31, 1996, the amortized cost of the consolidated cash and invested assets portfolio of the Company was $1,697.8 million.
The following table indicates the composition of the consolidated fixed maturities portfolio of the Company (at market and carrying values) by investment rating as of December 31, 1996:
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(1) The investment rating system used by Moody's and S&P assigns symbols to indicate the relative investment quality of a rated bond. "Triple-A" rated bonds are judged to be of the best quality and are considered to carry the smallest degree of investment risk. "Double-A" rated bonds are also judged to be of high quality by all standards. Together with "Triple-A" rated bonds, these bonds comprise what are generally known as high grade bonds. "Single-A" rated bonds possess many favorable investment attributes and are considered to be upper medium grade obligations. "Triple-B" rated bonds are considered as medium grade obligations; they are neither highly protected nor poorly secured. Bonds rated "Double-B" or lower are considered to be speculative. Such ratings are generally assigned upon the issuance of the securities subject to revision on the basis of ongoing evaluations. Ratings shown above are as of December 31, 1996.
Ratings assigned by the NAIC range from Class 1 to Class 6 with Class 1 as the highest quality rating. ZRC's and ZCIC's fixed maturities portfolio is composed 99.6% of securities rated by the NAIC as Class 1, with the balance rated as Class 2.
See Item 8 "Financial Statements and Supplementary Data - Footnote 4: Investments" for contractual maturities of the Company's consolidated fixed maturity securities and the gross gains (losses) on sales of fixed maturities.
The Company has no investments in any entity in excess of 10% of stockholders' equity at December 31, 1996, other than investments issued or guaranteed by the U.S. government or its agencies.
The following table reflects investment results for ZRC for the year ended December 31, 1992 and the consolidated results of the Company for each year in the four-year period ended December 31, 1996. Investments made prior to the Company's acquisition of ZRC were made pursuant to an investment policy different from the Company's current investment policy.
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(1) Average of beginning and ending amounts of cash and investments for the period (at carrying values) for the years ended 1992, 1994 and 1996. For 1995, reflects a monthly weighted average to recognize assets acquired in the April 1995 acquisition of Re Capital Corporation. For 1993, reflects a monthly weighted average to recognize proceeds of the Company's equity sales in March 1993 and May 1993 ($340 million and $240 million, respectively) as well as $196 million representing proceeds of the October 1993 issuance of the Senior Notes.
(2) Before investment expenses, excluding realized capital gains (losses).
(3) After investment expenses, excluding realized capital gains (losses).
(4) Direct investment income for the period divided by average invested assets for the same period.
(5) Net investment income for the period divided by average invested assets for the same period.
The following table summarizes the net investment income by type of investment of the Company for the three years ended December 31, 1996:
REGULATORY MATTERS
The Company, ZRC and ZCIC are subject to regulation under the insurance statutes of various states, including Connecticut and New Jersey, the domiciliary state of ZRC and ZCIC, respectively. The New Jersey insurance holding company laws and laws pertaining to the investments of insurers are substantially similar to the insurance laws of the State of Connecticut discussed below.
Insurance Holding Company Regulation
Pursuant to the terms of the Connecticut Insurance Code and related regulations (the "Connecticut Code"), ZRC is required to register annually and file certain reports with the Commissioner of Insurance of the State of Connecticut (the "Connecticut Commissioner"). The annual registration statement calls for current information regarding the capital structure, general financial condition, ownership and management of ZRC and persons controlling it and for disclosure of the identity and relationship of every member of ZRC's insurance holding company system. The registration statement must also disclose certain agreements and transactions between ZRC and its affiliates, which agreements and transactions must satisfy certain standards set forth in the Connecticut Code.
In general, under the Connecticut Code, no person may acquire control of ZRC or a corporation that controls ZRC (including ZRCH), unless such person has filed a statement containing specified information with the Connecticut Commissioner and the Connecticut Commissioner has approved such acquisition of control. For the purposes of the Connecticut Code, any person acquiring, directly or indirectly, 10% or more of the voting securities of any other person is presumed to have acquired "control" of such other person. The Connecticut Commissioner, however, may find that "control" exists in circumstances in which a person owns or controls a smaller amount of voting securities. In addition, the Connecticut Commissioner may exempt from the approval requirement any acquisition not made for the purpose and not having the effect of changing or influencing the control of the insurance company.
The payment of dividends by ZRC is subject to restrictions set forth in the Connecticut Code which limit the aggregate amount of dividends or other distributions that ZRC may declare or pay within any 12-month period absent prior regulatory notification and approval. The Connecticut Code provides that no dividend or other distribution may be paid by a subject insurer (i) when the surplus of such insurer is less than (a) the minimum surplus required under the Connecticut Code to write specified lines of insurance or (b) the amount of surplus which bears a reasonable relationship to such insurer's liabilities based upon the type, volume and nature of the insurance business transacted, or (ii) when the payment of a dividend or other distribution would reduce such insurer's surplus to less than such amounts. The Connecticut Code further provides that a subject insurer may not pay any dividend or other distribution, without the Connecticut Commissioner's prior approval, in an amount exceeding such insurer's earned surplus, determined in accordance with SAP, as of the prior year end (adjusted to reflect a discount of certain unrealized gains on investments). In addition, the Connecticut Code provides that subject insurers may not pay any "extraordinary" dividends or distributions until (i) 30 days after the Connecticut Commissioner has received notice of the declaration thereof and has not within such period disapproved such payment or (ii) the Connecticut Commissioner has approved such payment. The Connecticut Code provides that an extraordinary dividend or distribution means any dividend or distribution of cash or other property, whose fair market value, together with that of other dividends or distributions made within the preceding 12-month period, exceeds the greater of 10% of surplus with respect to policyholders as of December 31 of the preceding year or 100% of net income for the 12-month period ending December 31 of the preceding year, both determined in accordance with SAP. As of December 31, 1996, ZRC's policyholders' surplus was $690.1 million. As of December 31, 1996, ZRC's earned surplus for purposes of certain general statutory dividend tests was and, accordingly, its
1997 maximum dividend payment is $46.0 million. Dividends are declared only with prior approval of ZRC's Board of Directors. There were no dividends paid by ZRC during 1996.
Under the Connecticut Code, ZRC may not enter into certain transactions, including certain reinsurance transactions, significant management agreements and service contracts, with members of its insurance holding company system unless ZRC has notified the Connecticut Commissioner of its intention to enter into such transactions and the Connecticut Commissioner has not disapproved of them within the period specified by the Connecticut Code. Among other things, such transactions are subject to the requirements that their terms be fair and reasonable, charges or fees for services performed be reasonable and the interests of policyholders not be adversely affected.
Regulation of Reinsurance
The terms and conditions of reinsurance agreements generally are not subject to regulation by any governmental authority with respect to rates or policy terms. This absence of regulation contrasts with primary insurance policies and agreements, the rates and terms of which generally are closely regulated by state insurance regulators. As a practical matter, however, the premium rates charged by primary insurers do have a direct effect on the rates charged by reinsurers.
A primary insurer will generally enter into a reinsurance agreement only if it can obtain credit for the reinsurance ceded on its statutory financial statements. In general, credit is allowed for reinsurance if: (i) the reinsurer is licensed in the state in which the primary insurer is domiciled and, in some instances, in certain states in which the primary insurer is licensed; (ii) the reinsurer is an "accredited" or "approved" reinsurer in the state in which the primary insurer is domiciled and, in some instances, in certain states in which the primary insurer is licensed; (iii) in some instances, if the reinsurer (a) is licensed in a state that is deemed to have substantially similar credit for reinsurance standards as the state in which the primary insurer is domiciled and (b) meets certain financial requirements; or (iv) if none of the above apply, to the extent that the reinsurance obligations of the reinsurer are collateralized appropriately, typically through the posting of a letter of credit for the benefit of the primary issuer or the deposit of assets into a trust fund established for the benefit of the primary insurer.
ZRC is licensed, accredited, approved or qualified in all 50 states and the District of Columbia. ZRC is licensed in Arkansas, California, Colorado, Connecticut, Georgia, Illinois, Indiana, Iowa, Kansas, Louisiana, Massachusetts, Michigan, Montana, Nebraska, Nevada, New Jersey, New Mexico, New York, Ohio, Oklahoma, Pennsylvania, South Dakota, Tennessee, Texas, Utah, Washington, West Virginia and Wisconsin. ZRC is an accredited or approved reinsurer in Alabama, Alaska, Arizona, Delaware, District of Columbia, Florida, Hawaii, Idaho, Kentucky, Maine, Maryland, Minnesota, Mississippi, New Hampshire, North Carolina, North Dakota, Oregon, Rhode Island, South Carolina, Vermont, Virginia and Wyoming. In addition, ZRC is qualified in Missouri.
The Company believes that ZRC is in compliance with all applicable laws and regulations that materially affect its business and operations.
Regulation of Insurance
ZCIC is licensed to engage in insurance business in 33 states and the District of Columbia and licensed to engage in reinsurance business in 6 additional states. Certain of ZCIC's business is subject to regulation and supervision by the insurance regulatory authority of each state in which it is licensed to do business. Such regulators grant licenses to transact business; regulate trade practices; approve policy
forms and rates; license agents; establish minimum reserve and loss ratio requirements; review form and content of required financial statements; prescribe the type and amount of investments permitted; and assure that capital, surplus and solvency requirements are met. Insurance companies can also be required under the solvency or guaranty laws of most states in which they do business to pay assessments up to the prescribed limits to fund policyholders losses or liabilities of insolvent insurance companies. In addition, they may be required to participate in assigned risk plans or pools that provide coverage to uninsurable risks.
Investment Limitations
The Connecticut Code contains rules governing the types and amounts of investments that are permissible for Connecticut-domiciled insurers, including ZRC. These rules are designed to ensure the safety and liquidity of a subject insurer's investment portfolio and require investments to be diversified. During 1996, the NAIC's Investments of Insurers Model Act (the "Investment Model Act") was adopted which places further restrictions on the composition of insurers' investment portfolios. As of December 31, l996, the composition of ZRC's investment portfolio complied with the pertinent provisions of the Connecticut Code and the Investment Model Act.
Triennial Examinations
As part of its general regulatory oversight process, the Connecticut Insurance Department (the "Connecticut Department") conducts detailed triennial examinations of the books, records and accounts of Connecticut insurance companies. During 1996, the Connecticut Department completed its examination of ZRC's financial statements for the period ended December 31, 1993. There were no adjustments made or proposed to ZRC's statutory-basis financial statements as a result of the Connecticut Department's examination.
Insurance Regulatory Information System Ratios
The NAIC's Insurance Regulatory Information System ("IRIS") was developed by a committee of state insurance regulators and is intended primarily to assist state insurance departments in executing their statutory mandates to oversee the financial condition of insurance companies operating in their respective states. IRIS identifies eleven industry ratios and specifies "usual values" for each ratio. Departure from the usual values on four or more of the ratios can lead to inquiries from individual state insurance commissioners as to certain aspects of an insurer's business. As of December 31, 1994 and 1995, due to premium growth, ZRC's results were outside of the usual values for the change in writings ratio. Due to premium growth, ZRC's results were outside of the usual values for the estimated current reserve deficiency to surplus ratio as of December 31, 1995 and 1996.
Risk-Based Capital
The NAIC's model risk-based capital regulations (the "RBC Model Act") requires companies to calculate and report information under a risk-based capital formula which attempts to measure statutory capital and surplus needs based on the risks in a company's mix of business and its investment portfolio. Under the formula, a subject company determines its risk-based capital by taking into account certain risks related to its asset composition (including risks related to its investment portfolio and ceded reinsurance) and its liability structure (including underwriting risks related to the nature and experience of its insurance business). The Connecticut Code provides that a subject insurer's risk-based capital must be adequate for the types of business transacted by such insurer and prescribes various reports which must be filed documenting its risk-based capital. The Connecticut Code also provides for four different capital levels of regulatory attention depending on the ratio of a company's total adjusted capital to its
risk-based capital. Based on calculations made by the Company, as of December 31, 1996, ZRC exceeded all of the capital levels prescribed in the RBC Model Act and the Connecticut Code.
Legislative and Regulatory Proposals
From time to time, various regulatory and legislative changes have been proposed in the insurance and reinsurance industry, some of which could have an effect on reinsurers. Among the proposals that have in the past been or are at present being considered are the possible introduction of federal regulation in addition to, or in lieu of, the current system of state regulation of insurers and proposals in various state legislatures to conform portions of certain insurance laws and regulations to various model acts adopted by the NAIC. The Company is unable to predict whether any of these laws and regulations will be adopted, the form in which any such laws and regulations would be adopted, or the effect, if any, these laws and regulations would have on the operations and financial condition of the Company or ZRC. One of these legislative and regulatory proposals is the following:
Codification of Statutory Accounting Principles. In an effort to create and codify a comprehensive set of statutory accounting principles, in 1994 the NAIC adopted a statutory accounting concepts statement. In addition to listing the objectives of statutory accounting, the statutory accounting concepts statement provides a statutory hierarchy of sources for statutory accounting principles. Currently, the NAIC is redefining current industry practices through the release of issue papers addressing various statutory accounting practices. As the final set of issues papers and transition rules have not yet been released, the Company is unable to predict the effect, if any, that the codification process will have on the operations and financial condition of the Company or ZRC.
COMPETITION
The property and casualty reinsurance industry is highly competitive. ZRC competes with domestic and foreign insurers and reinsurers, some of which have greater financial, marketing and management resources than ZRC. The significant domestic broker reinsurance companies with which ZRC competes include Transatlantic Reinsurance Company, Everest Reinsurance Company, NAC Reinsurance Corporation, TIG Reinsurance Company, and Trenwick America Reinsurance Corporation. The significant domestic direct reinsurance companies with which ZRC competes include General Reinsurance Corporation, Employers Reinsurance Corporation, American Re-Insurance Company, Swiss Re America Corporation, and Munich Reinsurance Group. Competition in the types of reinsurance that ZRC writes is based on many factors, including the perceived financial strength of the reinsurer, pricing and other terms and conditions, services provided, ratings assigned by independent rating organizations (including A.M. Best), the speed of claims payment and the reputation and experience in the line of reinsurance to be written. Ultimately, this competition, coupled with the prolonged effects of the current market conditions for insurance and reinsurance coverages, could affect ZRC's ability to attract business having appropriate risk and return characteristics. The reinsurance industry traditionally has not had significant barriers to entry. Traditional reinsurers, such as ZRC, also face competition from financial institutions and investment banks that promote financial market instruments as alternatives to traditional reinsurance. In addition, there are currently pending a number of federal and state legislative proposals for the establishment of government-sponsored risk pools that would write certain property catastrophe risks. These pools, if created, would supply insurance capacity currently provided by traditional reinsurance. Therefore, in the future, ZRC may face competition from new market entrants or from market participants which now devote relatively immaterial amounts of capital to the reinsurance business.
Ratings have become increasingly important in establishing the competitive position of a reinsurer. As of December 31, 1996, ZRC has a rating of "A" from A.M. Best, a claims-paying ability rating of "AA-" from S&P and a financial strength rating of "Aa3" from Moody's. Management believes that a
reduction generally below an "A" level in any of the Company's ratings could have a material adverse effect on its financial condition, results of operations and cash flows. These ratings are not in any way a measure of protection offered to investors in the Common Stock. Each of these agencies reviews its ratings periodically and there can be no assurance that the Company's ratings will be maintained in the future.
EMPLOYEES
On December 31, 1996, the Company employed 235 persons. The Company believes that its employee relations are satisfactory. None of the Company's employees are subject to collective bargaining agreements, and the Company knows of no current efforts to implement such agreements.
ITEM 2.

ITEM 2. PROPERTIES.
ZRC is party to a sublease agreement, dated as of January 1, 1994, and amended as of January 26, 1996 (the "Sublease") with a subsidiary of Zurich. Under the Sublease, ZRC leases approximately 60,000 rentable square feet of space in New York City for its underwriting, actuarial and certain executive offices (the "Office Space"). The Sublease has a term of approximately seventeen years. Together with another Zurich affiliate which occupies space contiguous to the Office Space, ZRC has guaranteed the performance of the tenants' obligations under the lease covering the Office Space. Under this guarantee, ZRC is contingently liable for 36.2% of monetary obligations to the lessor in respect of the Office Space and other contiguous space leased thereby (together with the Office Space, the "Group Office Space"). This percentage represents the approximate percentage which the Office Space bears to the Group Office Space. In addition, ZRC occupies approximately 40,000 square feet of office space in Stamford, Connecticut. The Company believes that its facilities are adequate for the conduct of its current and expected business.
ITEM 3.

ITEM 3. LEGAL PROCEEDINGS.
In January 1997, four stockholders, each purporting to represent a class, filed separate complaints against the Company, certain of the Company's directors and officers and certain affiliates of the Company in the Court of Chancery of the State of Delaware. On March 14, 1997, the four actions (William Steiner v. Detlef Steiner et al., C.A. No. 15457-NC, filed January 13, 1997, Crandon Capital Partners v. Steven M. Gluckstern et al., C.A. No. 15480-NC, filed January 13, 1997, Howard Sande Feldman, Custodian for Jan Sharone Feldman v. Steven M. Gluckstern et al., C.A. No. 15462-NC, filed January 14, 1997 and Harvey Greenfield v. Zurich Reinsurance Centre Holdings, Inc. et al., C.A. No. 15466-NC, filed January 16, 1997) were consolidated into one suit captioned In Re Zurich Reinsurance Centre Holdings, Inc. Shareholders Litigation, Cons. C.A. No. 15457. The consolidated action alleges, among other things, breaches of the defendants' fiduciary duties in connection with Zurich's proposal made during January 1997 to acquire all of the Company's publicly held shares for $36.00 per share. The action seeks unspecified damages, injunctive relief and attorneys' fees and expenses. The Company and the other defendants intend to defend this action. See Item 1 "Business -- The Company" and Item 7 "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Subsequent Event".
Other litigation pending against the Company and its subsidiaries is not considered material or is ordinary routine litigation or arbitration incidental to the business.
ITEM 4.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
There were no matters submitted to a vote of security holders during the fourth quarter of 1996.
PART II
ITEM 5.

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
Shares of the Common Stock are listed on the New York Stock Exchange and trade under the symbol "ZRC." The following table sets forth for the periods indicated the quarterly high and low closing sales prices of the Common Stock on the New York Stock Exchange.
On March 21, 1997, the number of registered holders of the Common Stock was 272 and the closing price for a share of the Common Stock was $38.00. See Item 1 "Business" for a discussion of Zurich's proposal during January 1997 to acquire all of the remaining shares of ZRCH not currently owned by Zurich.
In November 1996, the Board of Directors declared a regular $0.10 per share annual cash dividend, payable in January 1997. The declaration and payment of dividends by the Company are subject to the discretion of its Board of Directors. Any determination as to the payment of dividends in the future will depend upon, among other things, general business conditions, legal and regulatory restrictions regarding the payment of dividends by ZRC and other factors which the Company's Board of Directors may in the future consider to be relevant. As a reinsurance holding company, ZRCH depends in part on dividends and other permitted payments from ZRC to pay cash dividends to its stockholders. See Item 1 "Business" and Item 7 "Management's Discussion and Analysis of Financial Condition and Results of Operations" as well as Item 8 "Financial Statements and Supplementary Data - Footnote 11: Dividend Restrictions and Statutory Financial Information" for further discussion.
ITEM 6.

ITEM 6. SELECTED FINANCIAL DATA.
See Item 7

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
INDUSTRY OVERVIEW The property and casualty reinsurance industry's revenue and profitability is influenced by financial and market trends concerning its client insurers, by prevailing general economic and capital market conditions as well as by recent trends in the reinsurance sector including increased competition, continued consolidation and the introduction of financial market instruments as alternatives to reinsurance. The industry is also subject to other developments concerning risks insured and reinsured such as natural disasters (including hurricanes, windstorms, earthquakes) and the emergence of latent casualty exposures (including environmental and asbestos-related claims).
The demand for reinsurance will depend on the underwriting results, capital adequacy, perceived exposure of primary insurers, perceived attractiveness of available reinsurance terms and prevailing general economic conditions. Each of these factors affects liability retention decisions by primary insurers. The degree of competition among reinsurers is driven in part by many of the same or similar factors. Industry capacity is a function largely of aggregate capitalization, which in turn fluctuates based on, among other things, pricing adequacy on current business, reserve development with respect to historical business, market interest rates and new capital entrants.
The table below provides some comparative information about trends in revenue, profitability and capacity for primary insurance companies and reinsurers as well as some general economic and financial market trends:
(1) Review Preview, Best Week Property and Casualty Supplement, A.M. Best, January, 1997 and 1996.
(2) U.S. Department of Commerce, Bureau of Economic Analysis.
(3) Lehman Brothers Inc.'s Aggregate Bond Index.
(4) S&P 500 Information Bulletin.
Financial information has been included herein related to the consolidated financial statements of Zurich Reinsurance Centre Holdings, Inc. ("ZRCH") and its wholly-owned subsidiaries, Zurich Reinsurance Centre, Inc. ("ZRC") and ZC Insurance Company ("ZCIC", collectively referred to as the "Company"). The Company, through its principal subsidiary, ZRC, operates primarily as a broker reinsurer in the property and casualty reinsurance market. During April 1995, the Company acquired Re Capital Corporation ("Re Capital", subsequently renamed ZC Insurance Company) and accounted for the acquisition using purchase accounting. The operating results of Re Capital are included in the Company's consolidated results of operations from the date of acquisition.
RESULTS OF OPERATIONS
The Company's pre-tax operating income (excluding realized capital gains and losses) increased 101.6% to $46.8 million in 1996. The increase is primarily due to growth in net investment income and improved underwriting results. The Company's pre-tax operating income for 1995 was $23.2 million compared to a pre-tax operating loss of $6.3 million for 1994. This increase was primarily due to growth in net investment income and the absence of significant catastrophe losses. The Company incurred no significant catastrophe losses in either 1996 or 1995. Results for 1994 reflect the impact of pre-tax catastrophe losses of $12.2 million.
Net income was $29.3 million for 1996 compared to $43.4 million for 1995, due to a $30.4 million decline in after-tax realized capital gain (loss) activity offset by a $16.3 million increase in after-tax operating income. Net income was $43.4 million for 1995 compared to net loss of $31.2 million for 1994, due to a $55.3 million increase in after-tax realized capital gain (loss) activity and a $19.3 million increase in after-tax operating income.
Gross premiums written in 1996 were $737.4 million, a 20.1% increase over 1995. The Company entered into a domestic whole account quota share treaty with members of the Zurich American Insurance Group (the "ZA Quota Share Agreement") during the third quarter of 1995. The ZA Quota Share Agreement contributed $181.8 million and $93.3 million to 1996 and 1995 gross premiums written, respectively. Net premiums written in 1996 were $729.3 million, representing an increase of 21.1% over 1995. The growth exhibited by net premiums written was consistent with that of gross premiums written since there were no significant changes in the Company's retention levels or retrocessional programs during 1996 or 1995. Net premiums earned in 1996 were $684.3 million, a 36.2% increase over 1995. Net premiums written increased less on a percentage basis than net premiums earned due to the maturing of the Company's book of business, including the ZA Quota Share Agreement. For 1995, net premiums written increased to $602.3 million or 94.5% over 1994, and net premiums earned increased to $502.6 million or 123.8% over 1994. The 1995 premium growth was due to an increasing proportion of renewal business as well as new bound business, including the ZA Quota Share Agreement.
Losses and loss adjustment expenses ("LAE") incurred for 1996 increased to $485.8 million, a 29.1% increase over 1995. The Company incurred no significant catastrophe losses in either 1996 or 1995. Commissions were $184.7 million and $124.3 million for 1996 and 1995, respectively. The increase in both losses and commissions is due to significant growth in earned premiums as discussed above. The GAAP loss and commission ratios for 1996 and 1995 were 98.0% and 99.6%, respectively. The loss and commission ratio has trended downward due to refinement of the loss reserving process and a greater percentage of well performing renewal business. In addition, the components of the loss and commission ratio have shifted primarily due to a greater percentage of business written on a pro rata basis. Pro rata treaties generally have lower loss ratios but higher commission ratios than excess of loss treaties. The 1995 GAAP loss and commission ratio decreased to 99.6% from 105.1% in 1994. During
1994, the Northridge earthquake and 1994 East Coast winter storms contributed 5.4 percentage points to ZRC's GAAP loss and commission ratio. The gross and net of reinsurance impact of the 1994 Northridge earthquake was $9.3 million and $8.7 million, respectively. The 1994 East Coast winter storms increased both gross and net reinsurance losses and LAE by $3.5 million.
Other operating costs and expenses were $47.7 million in 1996 compared to $43.4 million in 1995 and $34.8 million in 1994. The GAAP expense ratios for 1996, 1995 and 1994 were 6.5%, 7.2% and 11.2%, respectively. The decrease in the GAAP expense ratio is attributable to growth in the Company's written premium volume as discussed above.
ZRC's statutory combined ratio for 1996 declined to 103.7% from 106.5% for 1995, primarily due to the lower loss and commission ratio discussed above. ZRC's statutory combined ratio for 1995 declined 8.1 percentage points from 114.6% in 1994 due to the absence of significant catastrophe losses and the improvement in the underwriting expense ratio. ZRC's statutory combined ratio differs from the Company's GAAP combined ratio primarily due to the deferral of certain acquisition costs and the inclusion of certain holding company expenses, each of which is considered in the Company's GAAP combined ratio.
Net investment income for 1996 was $92.2 million, a 15.2% increase over 1995. Growth in net investment income continues as the cash and invested asset base expands due to strong cash flows, primarily attributable to underwriting operations. In addition, profit from the Company's investment in Insurance Partners, L.P., increased 1996 operating results by $3.3 million, compared to $0.7 million in 1995. The 1996 after-tax annualized net investment income yield of 4.1% was consistent with 1995. Net investment income for 1995 increased 56.8% to $80.0 million due to an increased invested asset base resulting from strong cash flows and Re Capital's acquired assets (after payments to stockholders and holders of Re Capital's 5 1/2% Convertible Debentures due August 1, 2000).
Pre-tax realized capital losses for 1996 were $5.1 million compared to pre-tax realized capital gains of $33.5 million for 1995 and pre-tax realized capital losses of $35.6 million for 1994. The realized capital gain (loss) activity is reflective of market conditions and is consistent with the Company's investment philosophy, whereby capital gains (losses) are realized to maximize the total investment return.
Interest and amortization expense for 1996 was $15.5 million compared to $15.9 million in 1995. The decline is primarily due to the conversion of Re Capital's 5 1/2% Convertible Debentures, due August 1, 2000 (the "Convertible Debentures") offset by an increase in amortization expense related to the acquisition of Re Capital. Interest and amortization expense for 1995 was $15.9 million representing an increase of 11.2% from 1994, due to the Company's assumption of the Convertible Debentures and increased amortization expense discussed above.
The Company's overall effective federal income tax rate for 1996 and 1995 was 29.9% and 23.5%, respectively. The Company's overall effective tax rate for 1996 and 1995 had both operating income and realized capital gain (loss) components. The 1996 and 1995 effective tax rate on operating income of 30.5% and 29.8%, respectively, differed from the federal statutory rate of 35.1% primarily due to tax-exempt investment income and dividends. The effective tax (benefit) on 1996 realized capital losses approximated the federal statutory rate of 35.1%. The effective tax rate on 1995 realized capital gains of 19.1% differed from the federal statutory rate of 35.1% due to the reversal of a valuation allowance previously established by the Company to offset potential tax benefits from realized capital losses. The Company's 1994 effective federal income tax (benefit) of (25.5)% varied from the federal statutory rate of 35.1% primarily because of the recognition of the valuation allowance discussed above.
FINANCIAL CONDITION
The Company's cash and invested assets increased 15.6% during 1996 to $1,748.0 million. The increase is principally due to cash flows from operations. As of December 31, 1996, approximately 69% of the Company's cash and investment portfolio was invested in fixed maturity securities, 10% in equity securities and 21% in short-term investments and cash and cash equivalents, compared with 74%, 9% and 17%, respectively, as of December 31, 1995. As of December 31, 1996, the composition of ZRC's investment portfolio complied with the pertinent provisions of the NAIC's Investments of Insurers Model Act. Consistent with previous years, the Company maintains a high quality fixed maturity portfolio with approximately 83% invested in U.S. government obligations or securities rated "triple-A" by Moody's or S&P as of December 31, 1996. The balance of the fixed maturity portfolio was invested in "A" rated fixed maturities. The duration of the Company's fixed maturity portfolio of 4.2 years at December 31, 1996 approximated the 4.3 years duration at December 31, 1995. The Company's investment strategy is to maximize total investment return consistent with appropriate safety, diversification, tax and regulatory considerations, and to provide sufficient liquidity to enable the Company to meet its obligations on a timely basis. As a result of the Company's investment strategy, fixed maturities are classified as available-for-sale and are carried at market value.
Mortgage pass-through and collateralized mortgage-backed obligations ("MBS") represent approximately 17.8% (or $311.3 million) of the Company's cash and invested assets as of December 31, 1996. While the Company believes that there is negligible default risk associated with these securities since most are rated "triple-A", such investments are, however, subject to risks associated with the timing of principal payments. The degree to which a MBS is susceptible to either gains or losses is influenced by the difference between its amortized cost and par value, the relative sensitivity of the underlying assets backing the securities to prepayment in a changing interest rate environment and the repayment priority of the securities in the overall securitization structure. The net unamortized discount as of December 31, 1996 for such securities was approximately $6.6 million. Prepayment risk is associated with securities having an amortized cost greater than par value ("premium securities"), which are collateralized by assets that prepay faster than expected, as these securities will incur a reduction in yield or a loss. Conversely, securities having an amortized cost less than par value ("discount securities") that prepay faster than expected, will generate an increase in yield or a gain. As of December 31, 1996, the gross unamortized premium for MBS purchased at a premium to par (and thus subject to prepayment risk) was $3.1 million. There is also extension risk associated with MBS when rates increase and prepayments slow, since the maturity of these securities will be later than anticipated at the time of purchase, thereby delaying the point when proceeds can be reinvested at prevailing yields. Premium securities which are collateralized by assets that prepay slower than expected will generate an increase in yield or a gain. Conversely, discount securities that prepay slower than expected will generate a decrease in yield or a loss. As of December 31, 1996, the gross unamortized discount for MBS purchased at a discount to par (and thus subject to extension risk) was $9.7 million.
The Company limits the extent of prepayment or extension risks by generally avoiding securities with costs significantly in excess of par value, by purchasing securities that are backed by stable collateral, and by concentrating on securities with enhanced priority in their trust structure. The Company has no securities such as interest only securities ("IOs"), principal only securities ("POs") or MBS purchased at a substantial premium to par that have the potential for loss of a significant portion of the original investment due to changes in the prepayment rate of the underlying loans supporting the security. In addition to MBS, the Company may also enter into forward commitment mortgage-backed security dollar roll transactions ("dollar rolls"). Such transactions are typically for one month and effectively provide the Company with the price exposure of the underlying MBS. The Company manages this exposure by establishing duration guidelines for the total portfolio and the duration of the dollar rolls is
included in the overall duration. As of December 31, 1996, the cost and market value of the outstanding dollar rolls were $270.1 million and $269.0 million, respectively. There is no leverage related to these transactions since sufficient cash equivalents are retained to cover settlement of the underlying position.
Liabilities for gross losses and loss adjustment expenses (together referred to as "loss reserves") amounted to $938.8 million at December 31, 1996, an increase of 36.1% over December 31, 1995. The increase in loss reserves in 1996 is principally due to the significant premium growth. Under the terms of the Stop Loss Agreement, Zurich has reinsured the adverse development, if any, of ZRC's net loss reserves as of May 31, 1993. As of December 31, 1996 and 1995 there were no accrued recoverables under the Stop Loss Agreement. Zurich has an "AA+" claims-paying ability rating from Standard & Poor's and a "Aa1" financial strength rating from Moody's. The Company believes that its exposure to environmental impairment liability and asbestos-related claims is minimal due to the diminutive amount of business written prior to 1987 and the protection provided by the Stop Loss Agreement.
Stockholders' equity at December 31, 1996 was $711.9 million compared to $681.6 million as of December 31, 1995. The increase in stockholder's equity is primarily attributable to after-tax operating income partially offset by the declaration of a regular $0.10 per share annual dividend, or $2.6 million, in December 1996.
The NAIC requires insurance companies to calculate and report information under a risk-based capital ("RBC") formula that measures statutory capital and surplus needs based on the risks in a company's mix of business and investment portfolio. Based on its calculation as of December 31, 1996, ZRC exceeds all of the capital levels prescribed by the NAIC.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents and short-term investments increased to $372.2 million as of December 31, 1996 compared to $260.8 million as of December 31, 1995, as a result of operating cash flows and sector shifts consistent with the Company's investment strategy.
Net cash provided by operating activities for 1996 was $282.1 million compared to $242.5 million in 1995 and $154.1 million in 1994. The increase in cash flow is primarily attributable to underwriting operations and net investment income.
Net cash used in financing activities of $9.7 million in 1996 resulted from the Company's repurchase of its Common Stock, a regular dividend payment and the conversion of the remaining Re Capital Convertible Debentures. Net cash used in financing activities was $71.9 million in 1995 due to the conversion of the Convertible Debentures. There were no cash flows from financing activities in 1994.
The Company believes that ZRCH, ZRC and ZCIC have sufficient cash flow and liquid investments to meet both short- and long-term liquidity needs. In planning for its liquidity needs, the Company distinguishes between capital funds and liability funds. The Company considers the duration of its reinsurance liabilities in the investment of funds supporting those liabilities. Management believes that ZRCH's investment income and liquid investments will be sufficient to offset interest and other expense payments. The amount of future cash flow available to ZRCH from ZRC may be influenced by a variety of factors, including cyclical changes in the property and casualty reinsurance market, insurance regulatory changes and changes in general economic conditions. ZRC's ability to pay dividends to ZRCH is subject to provisions of the Connecticut Insurance Code restricting the ability of Connecticut insurance companies to make certain dividends and distributions without prior regulatory notification
and approval. See Item 8

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
INDEX TO FINANCIAL STATEMENTS AND SCHEDULES
Schedules other than those listed above are omitted for the reason that they are not applicable or that the information has been included in the financial statements.
REPORT OF INDEPENDENT AUDITORS
TO THE BOARD OF DIRECTORS AND STOCKHOLDERS OF ZURICH REINSURANCE CENTRE HOLDINGS, INC.
We have audited the accompanying consolidated balance sheets of Zurich Reinsurance Centre Holdings, Inc. and Subsidiaries as of December 31, 1996 and 1995, and the related consolidated statements of operations, stockholders' 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 8. 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 financial statements referred to above present fairly, in all material respects, the consolidated financial position of Zurich Reinsurance Centre 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.
/s/ ERNST & YOUNG LLP
Stamford, Connecticut February 11, 1997
ZURICH REINSURANCE CENTRE HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Dollars in thousands except share data)
See Notes to Consolidated Financial Statements
ZURICH REINSURANCE CENTRE HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (Dollars in thousands except per share data)
See Notes to Consolidated Financial Statements
ZURICH REINSURANCE CENTRE HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (Dollars in thousands)
See Notes to Consolidated Financial Statements
ZURICH REINSURANCE CENTRE HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Dollars in thousands)
(1) Refer to Footnote 3.
See Notes to Consolidated Financial Statements
ZURICH REINSURANCE CENTRE HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND NATURE OF OPERATIONS
Zurich Reinsurance Centre Holdings, Inc. ("ZRCH") a Delaware corporation, serves as the holding company for Zurich Reinsurance Centre, Inc. ("ZRC"), a Connecticut stock insurance company and ZC Insurance Company ("ZCIC"), a New Jersey stock insurance company. ZRCH, together with ZRC and ZCIC (the "Company"), is a 65.7%-owned indirect subsidiary of the Zurich Insurance Group, a Swiss financial services holding company. The Company, through its principal operating subsidiary, ZRC, operates in the North American market primarily as a reinsurer of property and casualty risks including general liability, automobile liability, workers' compensation and property exposures. The Company provides pro rata and excess of loss reinsurance through reinsurance treaties and facultative arrangements. The Company's treaty business is written through intermediaries while its facultative business is primarily written on a direct basis. ZCIC commenced writing primary casualty business during the fourth quarter of 1996.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Financial information has been included herein related to the consolidated financial statements of ZRCH and its wholly-owned subsidiaries, ZRC and ZCIC. All significant intercompany transactions have been eliminated. The preparation of the financial statements in conformity with generally accepted accounting principles ("GAAP") includes amounts that are based on management's best estimates and judgments. Actual results could differ from those estimates. The following are the Company's significant accounting policies:
INVESTMENTS The Company's fixed maturity securities and equity securities are classified as available-for-sale and are carried at market value with changes in the market value of such securities reported as unrealized appreciation (depreciation) directly in stockholders' equity, net of related tax effects, if any. The difference between cost and market value for fixed maturity securities and equity securities with declines in market value that are other than temporary, if any, are treated as realized losses and reflected in net income. Investments in equity securities are carried under the equity method of accounting when the Company has 20% or more of the voting power or has the ability to exert significant influence over the investee. Short-term investments, investments with a maturity of less than one year but greater than three months, are carried at cost, which approximates market.
Forward commitment mortgage-backed security dollar rolls ("dollar rolls") which are purchased to provide the Company with the price exposure of the underlying security, are reflected in the financial statements on a settlement date basis as the Company does not intend to take delivery of the underlying securities. The Company manages this exposure by establishing duration guidelines for the total portfolio and the duration of these commitments is included in the overall duration. There is no leverage related to these transactions since sufficient cash equivalents are retained to cover settlement of the underlying position. Changes in the market values between the trade date and settlement date for such securities are recorded currently in net income as realized capital gains or losses. As of December 31, 1996, the cost and market value of dollar rolls held were $270.1 million and $269.0 million, respectively.
Market values are based on quoted market prices, when available, or estimates based on market prices for similar securities when quotes are not available. Realized capital gains or losses on the sale or maturity of investments are determined on the basis of the specific identification method. Investment income, consisting of dividends and interest, is recognized when earned. Dividends on equity securities
ZURICH REINSURANCE CENTRE HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
are recorded on the ex-dividend date. The amortization of premium and accretion of discount for fixed maturity securities is computed using the interest method. For certain investments, such as mortgage-backed and certain other asset-backed securities, the Company considers estimates of future principal prepayments in the calculation of the constant effective yield necessary to apply the interest method. If a difference arises between the prepayments anticipated and the actual prepayments received, the Company recalculates the effective yield to reflect the actual payments to date and the anticipated future payments.
CASH AND CASH EQUIVALENTS The Company considers all short-term, highly liquid investments with a maturity date of three months or less to be cash equivalents. The carrying amount of cash and cash equivalents approximates fair market value due to their short maturity.
PREMIUM REVENUES AND RELATED EXPENSES Premiums are recognized over the terms of the related reinsurance contracts. Unearned premium reserves represent that portion of premiums written that relates to the unexpired terms of contracts in force. Such reserves are computed by pro rata methods based on statistical data or reports received from ceding companies. Premium and commission adjustments on contracts are accrued on an estimated basis throughout the terms of such contracts. Ceded premiums are expensed on a pro rata basis over the contract period.
The Company recognizes a liability or an asset to the extent that there is an obligation to pay or receive cash or other consideration that would not have been required absent experience under the contract.
During 1996, three reinsurance intermediaries produced approximately 22%, 18% and 12% of the Company's gross premiums written, respectively. Business produced by Zurich American Insurance Group ("Zurich American"), an affiliate (refer to Footnote 12 for further discussion of related party transactions), generated 29% of gross premiums written. No other intermediaries or ceding companies accounted for more than 10% of the Company's consolidated revenues for the year ended December 31, 1996.
Acquisition costs, principally consisting of commissions and brokerage expenses, net of allowances from retrocessionaires, and certain other acquisition costs incurred at the time a contract is issued, are deferred and amortized over the period in which the related premiums are earned. Deferred policy acquisition costs are limited to their estimated realizable value based on the related unearned premiums and consider anticipated losses and loss adjustment expenses and anticipated investment income.
LOSSES AND LOSS ADJUSTMENT EXPENSES The Company's liability for losses and loss adjustment expenses is based on reports and individual case estimates received from ceding companies. An amount is included for losses and loss adjustment expenses incurred but not reported on the basis of past experience of the Company, its ceding companies and the reinsurance industry. The Company discounts certain tabular workers' compensation indemnity reserves to present value using a 5% interest rate. Losses and loss adjustment expense estimates are reviewed regularly and, as experience develops and new information becomes known, the reserves are adjusted as necessary. Such adjustments, if any, are reflected in results of operations in the period in which they become known.
ZURICH REINSURANCE CENTRE HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
RETROCESSIONS In the normal course of business, the Company sometimes seeks to reduce losses that could arise from events that cause unfavorable underwriting results by reinsuring certain levels of risk with retrocessionaires. Amounts recoverable from retrocessionaires are estimated in a manner consistent with the claim liability associated with the reinsured policy.
Recoverables, if any, under the Company's aggregate excess of loss reinsurance contracts with Zurich Insurance Company ("Zurich") (together, the "Stop Loss Agreement"), which are retroactive contracts, will be recognized immediately since the Company is reimbursed on an incurred basis. Refer to Footnote 12 for further discussion of the Stop Loss Agreement.
The Company establishes a reserve for potentially uncollectible recoverables from retrocessionaires. In addition, the Company immediately charges operations for any recoverable balances that are deemed to be uncollectible. Collateral and other offsets are considered in determining the reserve or expense.
STOCK-BASED COMPENSATION Effective January 1, 1996, the Company adopted the accounting provisions of the Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based Compensation". Under SFAS No. 123, the Company recognizes compensation expense based on the fair value of employee stock-based compensation plans on the date of grant. Refer to Footnote 10 for further discussion of employee stock-based compensation plans.
GOODWILL Goodwill represents the excess of cost over the fair value of net assets acquired and is amortized on a straight line basis over twenty years. At December 31, 1996 and 1995, the amount of goodwill included in other assets was $23.8 million and $22.0 million, respectively. The amortization of goodwill for the years ended December 31, 1996 and 1995 was $1.2 million and $0.8 million, respectively. Refer to Footnote 3 for a further discussion of the acquisition of Re Capital Corporation ("Re Capital").
INCOME TAXES Income taxes have been provided under the liability method using the applicable enacted tax rate and laws. Deferred federal income taxes are recorded for differences between the tax basis of an asset or liability and its reported value in the financial statements and for loss carryforwards. A valuation allowance is recorded using the "more-likely-than-not" criterion when some or all of a deferred tax asset may not be realized.
EARNINGS PER SHARE Earnings per common share are determined by dividing net income available to common stockholders by the weighted average common shares outstanding during the relevant period. Common stock equivalents had no dilutive effect on net income (loss) per share for any of the periods presented.
RECLASSIFICATIONS The Company has reclassified the presentation of certain prior year information to conform with the current presentation.
ZURICH REINSURANCE CENTRE HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NEW ACCOUNTING STANDARDS
In June 1996, the Financial Accounting Standards Board ("FASB") issued SFAS No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities." SFAS No. 125 provides accounting and reporting standards for sales, securitizations and servicing of receivables and other financial assets, for certain secured borrowing and collateral transactions, and for extinguishment of liabilities. The Statement establishes guidelines for determining whether a transfer of financial assets, including securities lending, constitutes a sale and if so, measurement of the gain or loss. SFAS No. 125 is effective for transactions occurring after December 31, 1996. (Note SFAS No. 127 "Deferral of the Effective Date of Certain Provisions of FASB Statement No. 125" provides a one year deferral for certain sections of SFAS No. 125.) The Company does not expect that the provisions of SFAS No. 125 will have a material effect on its financial statements.
3. ACQUISITION OF RE CAPITAL CORPORATION
During April 1995, ZRCH acquired Re Capital. Through its wholly-owned subsidiary, Re Capital Reinsurance Corporation, Re Capital was principally engaged in underwriting domestic property and casualty reinsurance. As a result of the acquisition: (i) each share of Re Capital's former common stock which was issued and outstanding was converted into the right to receive $18.50 in cash per share; and (ii) ZRCH assumed all obligations under Re Capital's 5 1/2% Convertible Debentures, due August 1, 2000 (the "Convertible Debentures"). Total consideration paid in 1995 by ZRCH in connection with the acquisition was approximately $205.7 million. The acquisition was funded by the sale of $147.6 million of Re Capital's investments, $4.0 million of cash acquired from Re Capital and $54.1 million of the Company's funds. The acquisition of Re Capital has been accounted for as a purchase in accordance with APB No. 16, "Business Combinations." The operating results of Re Capital have been included in the Company's consolidated results of operations from the date of acquisition.
ZURICH REINSURANCE CENTRE HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. INVESTMENTS
ZURICH REINSURANCE CENTRE HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following tables reconcile amortized cost to the estimated market value of fixed maturity and non-affiliated equity securities:
ZURICH REINSURANCE CENTRE HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Contractual maturities of fixed maturity securities are shown below. Expected maturities, which are best estimates, will differ from contractual maturities because certain borrowers may have the right to call or prepay obligations.
Gross gains on sales of fixed maturities, excluding calls, were $15.2 million, $51.2 million and $2.0 million during 1996, 1995 and 1994, respectively. Gross losses on sales of fixed maturities, excluding calls, were $24.5 million, $23.5 million and $40.8 million during 1996, 1995 and 1994, respectively.
Approximately 83% and 84% of the fixed maturity portfolio as of December 31, 1996 and 1995, respectively, are U.S. government obligations or are rated "triple-A" by Moody's Investors Service or Standard & Poor's Corporation. The remaining 17% and 16%, respectively, are "A" rated fixed maturities. There are no investments in any entity in excess of 10% of the Company's stockholders' equity at December 31, 1996, other than investments issued or guaranteed by the U.S. government or its agencies.
The Company participates in a securities lending program, whereby certain securities from its portfolio are loaned to counterparties, with the Company retaining the right to recall such securities at will. A fee is paid to the Company by the borrower, which is reported as a component of net investment income. The program is designed to minimize the Company's exposure to credit and interest rate risk by including specification of collateral requirements and collateral investment criteria and limits on the amount of securities that can be lent subject to such arrangements to any single counterparty and in the aggregate, by requiring collateral to be maintained in excess of the market value of the loaned securities for the period that the loan is outstanding, and by specifying how the collateral can be invested. As of December 31, 1996, $236.7 million was on loan, with no single borrower's loan representing more than 5% of cash and invested assets or 10% of stockholders' equity.
Securities having a par value of $21.5 million and $24.2 million at December 31, 1996 and 1995, respectively, were on deposit with various state or governmental insurance departments in order to comply with applicable state insurance laws.
ZURICH REINSURANCE CENTRE HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. LOSSES AND LOSS ADJUSTMENT EXPENSES
The reconciliation of loss and loss adjustment expense reserves for each of the three years in the period ended December 31, 1996 is shown below.
(1) The April 1995 acquisition of Re Capital increased the Company's gross loss and loss adjustment expense reserves and reinsurance recoverables on unpaid losses by $202.1 million and $8.5 million, respectively, as of the date of acquisition (refer to Footnote 3 for further discussion of the Re Capital acquisition).
(2) The Company estimates premiums for treaty accounts that are not yet due from its reinsureds. Prior year incurred loss development is primarily attributable to the corresponding development of premium estimates.
Effective January 1, 1996, the Company discounts certain tabular workers' compensation indemnity reserves. This method is preferable as it is more representationally faithful to the economics of the underlying business and it will enhance comparability of the Company's financial statements as it is the prevalent method used in the reinsurance industry. Such reserves were discounted to present value using a 5% interest rate. Since the effect of such discount as of January 1, 1996 was $0.8 million, it has been reported as a component of earnings. Discounting had no material effect on net income for 1996 or on the proforma net income for 1995. Tabular workers' compensation indemnity reserves, net of discount, were $3.6 million as of December 31, 1996.
The Company believes that its exposure to environmental impairment liability and asbestos-related claims is minimal due to the diminutive amount of business written prior to 1987 and the protection provided by the Stop Loss Agreement (refer to Footnote 12 for further discussion).
ZURICH REINSURANCE CENTRE HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. RETROCESSIONS
The Company utilizes retrocessional agreements to reduce its total loss exposure. These agreements provide for recovery of a portion of losses and loss adjustment expenses from retrocessionaires. The Company is liable to reinsureds regardless of whether retrocessionaires meet their obligations under these retrocessional agreements. Failure of retrocessionaires to honor their obligations could result in losses to the Company; consequently, allowances are established for amounts considered potentially uncollectible, if any.
At December 31, 1996, there were no recoverables from any one retrocessionaire that exceeded 10% of stockholders' equity. The Company holds collateral under related reinsurance agreements in the form of letters of credit totaling $19.3 million that can be drawn on for amounts that remain unpaid for more than 120 days. Pursuant to the terms of the Stop Loss Agreement, in the event that retrocessional recoverables on business effected prior to June 1, 1993 are uncollectible from retrocessionaires due to insolvency, the Company will be reimbursed from Zurich. Refer to Footnote 12 for a further discussion of the retrocessional agreements with affiliates.
7. INCOME TAXES
Federal income tax expense (benefit) was as follows:
Federal income taxes paid were $25.5 million, $9.1 million and $0.7 million in 1996, 1995 and 1994, respectively.
An analysis of the Company's effective federal income tax rate (benefit) follows:
ZURICH REINSURANCE CENTRE HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts reported for income tax purposes. Significant components of the Company's deferred tax liabilities and assets as of December 31, 1996 and 1995 are as follows:
In 1996, the Company had realized capital losses of $5.1 million, which can be carried back and offset against capital gains generated in 1995. As of December 31, 1996, no capital loss carry forward remains.
8. LEASES
As of December 31, 1996, the Company and its branch offices occupy office space under various operating leases that have remaining noncancelable lease terms in excess of one year. The Company recognizes rental expense on a straight line basis over the term of the lease. The Company also leases certain computer and communications equipment, software and office equipment under various operating leases with terms of one year or less. Rental expense was approximately $3.0 million, $2.9 million and $2.8 million for the years ended December 31, 1996, 1995 and 1994, respectively.
The future minimum rental payments as of December 31, 1996 are as follows (dollars in thousands):
ZURICH REINSURANCE CENTRE HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ZRC is party to a sublease agreement, dated as of January 1, 1994, and amended as of January 26, 1996 (the "Sublease") with a subsidiary of Zurich. Under the Sublease, ZRC leases approximately 60,000 rentable square feet of space in New York City for its underwriting, actuarial and certain executive offices (the "Office Space"). The Sublease has a term of approximately seventeen years. Together with another Zurich affiliate which occupies space contiguous to the Office Space, ZRC has guaranteed the performance of the tenants' obligations under the lease covering the Office Space. Under this guarantee, ZRC is contingently liable for 36.2% of monetary obligations to the lessor in respect of the Office Space and other contiguous space leased thereby (together with the Office Space, the "Group Office Space"). This percentage represents the approximate percentage which the Office Space bears to the Group Office Space.
9. SENIOR NOTES AND FINANCING AGREEMENTS
During October 1993, the Company issued $200 million principal amount of non-convertible, unsecured, unsubordinated Senior Notes (the "Senior Notes"). The Senior Notes mature on October 15, 2023 and bear interest at the rate of 7 1/8%, payable semiannually in arrears on April 15 and October 15. Debt issuance costs of approximately $2.2 million incurred in connection with the issuance of the Senior Notes have been deferred and are being amortized over the term of the Senior Notes. The interest expense on the Senior Notes was $14.3 million during 1996, 1995 and 1994. Interest paid on the Senior Notes was $14.3 million in 1996 and 1995 and $14.1 million in 1994. The estimated fair value of the Senior Notes based on quoted market prices was approximately $190.7 million at December 31, 1996.
10. EMPLOYEE BENEFITS AND COMPENSATION ARRANGEMENTS
The Company maintains a non-contributory defined contribution Money Purchase Pension Plan (the "Pension Plan") under which the Company contributes for each eligible employee an amount equal to the sum of (i) 4% of eligible compensation up to the taxable wage base (as such term is defined in the Pension Plan) (for 1997 set at $65,400) and (ii) 8% of eligible compensation in excess of the taxable wage base (up to the applicable earnings cap which for 1997 is $160,000). Substantially all employees of the Company are eligible for participation in the Pension Plan. The Company expensed $0.6 million, $0.7 million and $0.6 million for the years ended December 31, 1996, 1995, and 1994 respectively, related to the Pension Plan.
The Company maintains a tax-qualified employee thrift plan (the "Employee Thrift Plan"). Pursuant to Section 401(k) of the Internal Revenue Code, eligible employees of the Company are able to defer receipt of up to 12% of their annual salaries. Subject to limitations under applicable law, the Company matches up to 100% of the first 3% of annual salary deferred by employees and 50% of the next 3% of salary so deferred. The Company maintains a supplemental, non-qualified executive thrift plan (the "Executive Thrift Plan") under which members of executive management may defer certain amounts of base salary and receive limited matching contributions from the Company. Under the Executive Thrift Plan, ZRC matches, dollar-for-dollar, amounts deferred by participants under the Executive Thrift Plan up to 3% of annual salary in excess of $160,000 in 1997 and provides a 50% matching contribution for the next 3% of such excess salary so deferred. The Company expensed $0.7 million, $0.6 million and $0.5 million for the years ended December 31, 1996, 1995, and 1994, respectively, related to its Employee Thrift Plan and the Executive Thrift Plan.
The Company maintains a restricted stock plan (the "Restricted Stock Plan") pursuant to which participants may be granted an award of shares of the Company's Common Stock ("Restricted Stock") subject to certain restrictions including vesting requirements. As of December 31, 1996, the Company
ZURICH REINSURANCE CENTRE HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
had reserved 450,000 shares under the Restricted Stock Plan. Grants of Restricted Stock will generally vest upon completion of three to four years of continuous employment with the Company from the date of grant. The Company recognizes the related expense, which is the market value of the shares at the date of grant, over the vesting period using the straight-line method. During 1996, the Company issued 171,065 shares of non-vested restricted stock, with a weighted-average grant date fair value of $29.47 per share. The expense for the Restricted Stock Plan was $3.6 million, $1.7 million and $1.0 million for the years ended December 31, 1996, 1995 and 1994, respectively.
Effective January 1, 1996, the Company adopted a stock option plan (the "Stock Option Plan") pursuant to which the Company may issue options for the purchase of up to 1,844,000 shares of Common Stock. Initial grants under the Stock Option Plan consist of two types of options, each having ten year terms and generally vesting over four years. "Type A" options may not be exercised unless the appreciation of the Company's Common Stock exceeds 150% of the effective yield on 5-year U.S. Treasury obligations. "Type B" options may not be exercised unless the appreciation of the Company's economic book value exceeds 150% of the effective yield on 5-year U.S. Treasury obligations.
Grants of 503,575 shares of Common Stock were authorized (half Type A and half Type B), with exercise prices ranging from $29.88 per share to $30.36 per share. All of these options remain outstanding at December 31, 1996 and have a remaining contractual life of 9 years. None of these options were exercisable during the year or at December 31, 1996.
The fair value of the options granted were estimated on the date of grant using recognized option-pricing models. These models were developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company's 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, these models do not necessarily provide a reliable measure of the fair value of the employee stock options. The Company's valuation method utilized the following assumptions: a risk-free interest rate of 5.3%, which was adjusted by the annual percentage increase in the exercise price for the Type B option, a dividend yield of 0.2%, expected volatility of 14% and an expected life of 4 years. Based on these assumptions, the options granted have a weighted-average grant-date fair value of $5.60 per share. The Company recognizes the related expense, which is the fair value of the options at the date of grant, over the vesting period using the straight-line method. The Company expensed $0.7 million related to the Stock Option Plan in 1996.
The Company maintains a tax-qualified employee stock purchase plan (the "Purchase Plan"). An aggregate of 100,000 shares of the Common Stock has been reserved for issuance under the Purchase Plan. Subject to certain restrictions, substantially all full-time and certain part-time employees are eligible to purchase shares of the Common Stock at 85% of fair market value by means of payroll deductions of up to 10% of their salary. At December 31, 1996, 52,730 shares were outstanding under the Purchase Plan.
The Company maintains a stock repurchase program pursuant to which the Company's Board of Directors has authorized the repurchase of 500,000 shares of Common Stock. During 1996, the Company repurchased 200,000 shares of Common Stock for approximately $29.50 per share. These shares were repurchased for issuance to employees under various benefit and compensation arrangements.
ZURICH REINSURANCE CENTRE HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11. DIVIDEND RESTRICTIONS AND STATUTORY FINANCIAL INFORMATION
DIVIDEND RESTRICTIONS The payment of dividends by ZRC is subject to restrictions set forth in the Connecticut Insurance Code (the "Connecticut Code") which limit the aggregate amount of dividends or other distributions that ZRC may declare or pay within any 12-month period absent prior regulatory notification and approval. The Connecticut Code provides that no dividend or other distribution may be paid by a subject insurer (i) when the surplus of such insurer is less than (a) the minimum surplus required under the Connecticut Code to write specified lines of insurance or (b) the amount of surplus which bears a reasonable relationship to such insurer's liabilities based upon the type, volume and nature of the insurance business transacted, or (ii) when the payment of a dividend or other distribution would reduce such insurer's surplus to less than such amounts. The Connecticut Code further provides that a subject insurer may not pay any dividend or other distribution, without the Connecticut Commissioner's prior approval, in an amount exceeding such insurer's earned surplus, determined in accordance with Statutory Accounting Principles ("SAP"), as of the prior year end (adjusted to reflect a discount of certain unrealized gains on investments). In addition, the Connecticut Code provides that subject insurers may not pay any "extraordinary" dividends or distributions until (i) 30 days after the Connecticut Commissioner has received notice of the declaration thereof and has not within such period disapproved such payment or (ii) the Connecticut Commissioner has approved such payment. The Connecticut Code provides that an extraordinary dividend or distribution means any dividend or distribution of cash or other property, whose fair market value, together with that of other dividends or distributions made within the preceding 12-month period, exceeds the greater of 10% of surplus with respect to policyholders as of December 31 of the preceding year or 100% of net income for the 12-month period ending December 31 of the preceding year, both determined in accordance with SAP.
As of December 31, 1996, ZRC's total capital and surplus was $690.1 million and its earned surplus for purposes of certain general statutory dividend tests and, accordingly, its 1997 maximum dividend payment is $46.0 million. Dividends are declared only with prior approval of ZRC's Board of Directors. There were no dividends paid by ZRC to ZRCH during 1996.
STATUTORY FINANCIAL INFORMATION
Net income (loss) and statutory surplus of ZRC were as follows:
ZURICH REINSURANCE CENTRE HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ZRC prepares its statutory financial statements in accordance with accounting practices prescribed by the Insurance Department of the State of Connecticut (the "Connecticut Department"). Prescribed statutory accounting practices include a variety of publications of the National Association of Insurance Commissioners ("NAIC"), as well as state laws, regulations, and general administrative rules.
The NAIC's model risk-based capital regulations (the "RBC Model Act") requires insurance companies to calculate and report information under a risk-based capital formula which measures statutory capital and surplus needs based on the risks in a company's mix of business and investment portfolio. Based on its calculation as of December 31, 1996, ZRC exceeds all of the capital levels prescribed in the RBC Model Act.
12. RELATED PARTY TRANSACTIONS
In the normal course of business, the Company enters into both reinsurance and retrocessional agreements with its affiliates. The amounts assumed (net of cessions by the Company) pursuant to these agreements, including those discussed below, were as follows:
Effective July 1, 1995, the Company entered into a domestic whole account quota share treaty with Zurich American (the "ZA Quota Share Agreement") and concurrently an excess of loss reinsurance agreement with Zurich (the "Retrocessional Agreement"), primarily to provide an aggregate loss limitation on business assumed under the ZA Quota Share Agreement. As of December 31, 1996 and 1995, net premiums written under these agreements were $176.8 million and $90.8 million, respectively,
ZURICH REINSURANCE CENTRE HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
and net premiums earned were $152.8 million and $27.1 million, respectively. The terms of the ZA Quota Share Agreement and the Retrocessional Agreement were negotiated and evaluated by ZRC by application of the actuarial pricing methodologies generally used by ZRC in evaluating contracts.
During May 1993, ZRC purchased two aggregate excess of loss reinsurance contracts from Zurich. The first contract provides for reimbursement by Zurich of all losses and allocated loss adjustment expenses incurred by ZRC subsequent to December 31, 1992, in connection with risks assumed prior to that date. While this coverage is considered retroactive, recoverables thereunder will be recognized immediately as ZRC will be reimbursed by Zurich as covered losses are incurred rather than as such losses are paid. The second contract provides for reimbursement by Zurich of all losses and allocated loss adjustment expenses incurred by ZRC subsequent to May 31, 1993 with respect to risks assumed from January 1, 1993 through May 31, 1993. In addition, under the second contract, Zurich will reimburse ZRC for losses and allocated loss adjustment expenses incurred by ZRC in excess of 75% of premiums earned after May 31, 1993 on business written prior to June 1, 1993. The total premiums for these contracts of $4.0 million were negotiated and evaluated by ZRC by application of the actuarial pricing methodologies generally used by ZRC in evaluating reinsurance contracts. As of December 31, 1996, there were no recoverables recorded pursuant to either of the aggregate excess of loss reinsurance contracts with Zurich. Zurich has a "AA+" claims-paying ability rating from Standard & Poor's Corporation and a "Aa1" financial strength rating from Moody's Investors Service.
The Company has entered into an investment management agreement (the "Investment Management Agreement") with Centre Investment Services, Limited ("CIS"), a wholly owned subsidiary of Zurich Centre Investments Limited, an indirect subsidiary of Zurich. Under the Investment Management Agreement, CIS manages a portion of the Company's investment portfolio in return for a fee based upon the average total market value of the assets under management as well as the performance of the portfolio. The 1996, 1995 and 1994 investment management fees related to CIS were $1.1 million, $1.0 million and $1.1 million, respectively.
In February 1994, ZRCH committed to invest $25.0 million in the limited partnership interests of Insurance Partners, L.P., a Delaware limited partnership ("Insurance Partners"). Insurance Partners is an investment fund established to sponsor and participate in acquisitions, recapitalizations, demutualizations and other structured transactions in the insurance industry. As of December 31, 1996 and 1995, ZRCH had invested approximately $8.2 million and $4.0 million, respectively, in Insurance Partners. Affiliates of the Company have interests in the general partner of Insurance Partners.
Refer to Footnote 8 for a discussion of an affiliated office lease arrangement.
ZURICH REINSURANCE CENTRE HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
13. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
The following is a summary of quarterly financial data, in thousands of dollars except per share data. Such quarterly information includes all adjustments, consisting solely of normal recurring accruals, necessary to present fairly the results of operations for such periods. Quarterly results may be affected by changes in the interest rate environment and catastrophic losses.
ZURICH REINSURANCE CENTRE HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
14. SUBSEQUENT EVENT
During January 1997, Zurich announced a proposal to acquire all of the remaining shares of ZRCH not currently owned by Zurich for $36.00 per share (the "Proposed Transaction"). ZRCH's Board of Directors has appointed a special committee of its members to determine the advisability and fairness of that offer to ZRCH's other stockholders. The special committee has retained independent investment banking advisors and legal counsel to advise it on the fairness of the offer and is in the process of considering the offer. The special committee has indicated its intention to make a recommendation to ZRCH's Board of Directors with respect to the offer as soon as practicable. Consummation of the Proposed Transaction is subject to the approval of the Board of Directors and the stockholders of ZRCH and other conditions customary in this type of transaction. There can be no assurance that Zurich and the Board of Directors of ZRCH will reach an agreement with respect to the fairness of the Proposed Transaction or that, in the absence of such agreement, Zurich would proceed with the Proposed Transaction.
ITEM 9.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10.

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
See Item 1 "Business - Executive Officers of the Registrant" for information concerning the Executive Officers of the Company. Information concerning the Directors of the Company is set forth below.
The Board of Directors is divided into three classes. The regular terms of office for the Class I, Class II and Class III Directors expire at the 1997, 1998 and 1999 Annual Meetings of Stockholders, respectively. Four persons are to be elected at the 1997 Annual Meeting to hold office as Class I Directors for a term of three years and until their respective successors are elected and qualified. Class II and Class III Directors will not be elected at the Annual Meeting as their respective terms will continue.
CLASS I DIRECTORS (To serve in office until 1997 Annual Meeting)
LAURENCE W. CHENG, age 49, has been a Director of the Company since March 1993. Mr. Cheng is Chief Investment Officer of Zurich Insurance Company. In 1996, Mr. Cheng was appointed President of Zurich Investment Management, Inc. He has served as a director of Centre Reinsurance since its founding in 1987 and as an executive officer since 1991. Mr. Cheng is a Fellow of the Casualty Actuarial Society, a Fellow of the Canadian Institute of Actuaries and a Member of the American Academy of Actuaries. Mr. Cheng holds a B.Sc. degree from the University of Hong Kong, an M.Sc. degree from the University of Western Ontario in Canada and an M.B.A. degree from York University in Toronto.
JUDITH RICHARDS HOPE, age 56, has been a Director of the Company since April 1993. Since 1981, Mrs. Hope has served as a senior partner in the law firm of Paul, Hastings, Janofsky & Walker. Previously, she served as Associate Director of the White House Domestic Council and Vice Chairman of the President's Commission on Organized Crime. Mrs. Hope is a director of General Mills, Inc., the Union Pacific Corporation, Zurich Holding Company of America (a Zurich affiliate) and American Guarantee & Liability Insurance Co. (a Zurich affiliate). She is a member of the Harvard Corporation, president of the International Law Institute, a trustee of the United States Supreme Court Historical Society and a member of the Council on Foreign Relations.
MICHAEL D. PALM, age 45, has been a Director of the Company since March 1993. Mr. Palm is an Executive Vice President and director of ZCI. Mr. Palm co-founded Centre Reinsurance Holdings Limited ("Centre Reinsurance") in 1987 and currently serves as Vice Chairman and a director of that company and its subsidiaries. Prior to joining Centre Reinsurance, Mr. Palm was Vice President of National Indemnity Company, a subsidiary of Berkshire Hathaway, Inc., with reinsurance underwriting responsibility. Previously, Mr. Palm was a commercial lending officer in the International Division of the Bank of Boston. Mr. Palm holds an A.B. degree from Yale College and an M.A. degree from Harvard University.
GEORGE G.C. PARKER, age 58, has been a Director of the Company since March 1994. Since 1993, Mr. Parker has served as the Dean Witter Professor of Finance, Associate Dean for Academic Affairs, and
director of the MBA Program at the Graduate School of Business at Stanford University. Mr. Parker has been affiliated with Stanford University since 1973, holding such positions as director of Stanford Sloan Program for Executives, director of Executive Education, Stanford Business School and Co-Director, Executive Program for Smaller Companies. Mr. Parker is a director of the California Casualty Group of Insurance Companies, Continental Airlines, Inc., RCM Mutual Funds, Bailard, Biehl and Kaiser, Inc. (Investment Advisors), Peninsula Banking Group and H. Warshow & Sons, Inc. Mr. Parker is a published author and a consultant to various corporations and banks on financial management, strategy and organizational development. Mr. Parker holds a B.A. degree from Haverford College and an M.B.A. degree and Ph.D. from Stanford University.
CLASS II DIRECTORS (To serve in office until 1998)
WILLIAM H. BOLINDER, age 53, has been a Director of the Company since June 1993. Since October 1994, Mr. Bolinder has served as a Member of Zurich's Corporate Executive Board. Mr. Bolinder joined Zurich in 1986 as chief operating officer of Zurich American Insurance Group ("ZA") and in 1987 was appointed ZA's chief executive officer. Between 1987 and 1994, Mr. Bolinder served as President, Chief Executive Officer and a director of Zurich's affiliated companies in the U.S. Mr. Bolinder serves on the executive committee of the American Institute for Chartered Property and Casualty Underwriters and the Insurance Institute of America. He is the founding president of the Northwest Cultural Council and serves on its board of directors. Mr. Bolinder holds a B.S. degree from the University of Massachusetts - Dartmouth.
PHILIP CALDWELL, age 77, has been a Director of the Company since April 1993. Since 1985, Mr. Caldwell has been a director and a senior managing director of Lehman Brothers Inc. (and its predecessor company, Shearson Lehman Brothers, Inc.). He succeeded Henry Ford II as Chief Executive Officer of Ford Motor Company in 1979 and as Chairman and Chief Executive Officer in 1980. He retired from these positions at Ford Motor Company in 1985 and from its board of directors in 1990. Mr. Caldwell is a director of Zurich Holding Company of America (a Zurich affiliate), American Guarantee & Liability Insurance Co. (a Zurich affiliate), The Mexico Fund, Waters Corporation and Russell Reynolds Associates, Inc. and is Chairman of MT Investors Inc. He has served as a director of The Chase Manhattan Corporation, The Chase Manhattan Bank, N.A., Digital Equipment Corporation, Federated Department Stores, Inc., the Kellogg Company, Shearson Lehman Brothers Holdings, Inc., Specialty Coatings International, Inc. and Castech Aluminum Group Inc. He is a member of the Business Council, The Conference Board, the Council on Foreign Relations, the U.S. Council of the Mexico-United States Business Committee, the Board of Advisors of the Jerome Levy Economics Institute, the U.S. Advisory Board of The European Institute of Business Administration, and a trustee of Muskingum College, the Committee for Economic Development and the Winterthur Museum and Gardens. Mr. Caldwell holds a B.A. degree from Muskingum College and an M.B.A. degree from the Harvard Business School.
ROBERT T. MARTO, age 51, has been a Director of the Company since March 1993. Since 1993, he has served as President, Chief Executive Officer and a director of White River Corporation. Between 1990 and 1993, Mr. Marto served as President and a director of Fund American Enterprises, Inc., a subsidiary of Fund American Enterprises Holdings, Inc. and as Executive Vice President, Chief Financial Officer and a director of Fund American Enterprises Holdings, Inc. Mr. Marto joined Fireman's Fund Insurance Company, formerly a subsidiary of Fund American, in 1975 and served there in various capacities from 1975 to 1990. Mr. Marto serves as a director of Vicorp Restaurants, Inc. and CCC Information Services Group, Inc. Mr. Marto holds a B.A. degree from Iona College.
PETER J. NEFF, age 58, has been a Director of the Company since June 1996. Since January 1997, he has served as Chairman and Chief Executive Officer of Genovo, Inc. From 1991 to 1996, Mr. Neff served as President and Chief Executive Officer of, and from 1987 to 1991 he served as President and Chief Operating Officer of, Rhone Poulenc, Inc. From 1985 to 1987, Mr. Neff served as President and Chief Executive Officer of St. Joe Minerals Corporation. Mr. Neff serves as a director on the boards of Envirogen, Inc., the French-American Chamber of Commerce and the Rider University Board of Trustees. Mr. Neff holds a B.S. degree from Rutgers University and an M.B.A degree from Rider College.
CLASS III DIRECTORS (To serve until 1999)
ROLF HUEPPI, age 54, has been a Director of the Company since March 1993. Mr. Hueppi has been employed by Zurich in various capacities since 1963. In 1990 he was appointed Chief Operating Officer and in 1991 was appointed President and Chief Executive Officer. Since 1995 he has served as its Chairman and Chief Executive Officer. In addition to his executive responsibilities, Mr. Hueppi serves as a director of various affiliates of Zurich, including Chairman of ZCI. Mr. Hueppi holds a Swiss commercial diploma.
STEVEN M. GLUCKSTERN, age 45, has been Chairman of the Company since March 1993. From March 1993 to June 1996 he served as Chief Executive Officer of the Company and from March 1993 to June 1995 as President of the Company. In March 1997, Mr. Gluckstern was appointed to serve as a member of Zurich's Corporate Executive Board. Mr. Gluckstern is President and a director of ZCI and serves as a director of ZCI's operating subsidiaries. During 1995, he served as a director of Zurich Kemper Investment Management, Inc. and certain of their respective operating subsidiaries. Since 1987, he has served as an executive officer and a director of Centre Reinsurance as well as a director of certain of its operating subsidiaries. Before joining Centre Reinsurance, Mr. Gluckstern was President of Columbia Insurance Company and Senior Vice President of National Indemnity Company, each insurance subsidiaries of Berkshire Hathaway, Inc. Mr. Gluckstern was previously employed as Chief Financial Officer and Vice President for Finance and Administration of Healthco International Inc. Mr. Gluckstern also has experience as an educator and holds a B.A. degree from Amherst College, a Doctor of Education degree from the University of Massachusetts and an M.B.A. degree from Stanford University where he was an Arjay Miller Scholar.
RICHARD E. SMITH, age 51, has been a Director of the Company since March 1993. Since June 1996 he has served as Chief Executive Officer of the Company and since June 1995 as President of the Company. From March 1993 to June 1996 Mr. Smith served as Chief Operating Officer. Mr. Smith served as Senior Vice President, Business Development of Centre Reinsurance from 1992 until March 1993. From 1982 until 1992, Mr. Smith was employed by Guy Carpenter & Company, Inc., most recently as Senior Vice President, and was a member of the board of directors. From 1975 to 1982, Mr. Smith was employed by A.M. Best Company, Inc., most recently as Vice President in charge of the property-casualty ratings division. He holds a B.A. degree from United States International University in San Diego.
DETLEF STEINER, age 50, has been a Director of the Company since September 1994. He joined Zurich in July 1991 as Deputy General Manager and in 1993 was appointed General Manager and Senior Executive Vice President of Zurich. In addition to these responsibilities, Mr. Steiner serves as a director of various affiliates and subsidiaries of Zurich. Between 1987 and 1991, he was the Deputy General Manager of Deutsche Lloyd Life Insurance and Deutsche Lloyd Insurance. Mr. Steiner holds a Doctor of Mathematics degree from the Technical University of Munich, Germany.
COMMITTEES
EXECUTIVE COMMITTEE The Executive Committee of the Board of Directors consists of Messrs. Gluckstern, Steiner, Hueppi, Palm, Parker and Smith. The Executive Committee has all the powers of the Board of Directors, when it is not in session, in the management of the business and affairs of the Company, except as otherwise provided in the Company's by-laws or in resolutions of the Board of Directors and under applicable law. The Executive Committee conducted four meetings during 1996.
FINANCE/INVESTMENT COMMITTEE The Finance/Investment Committee of the Board of Directors consists of Messrs. Cheng, Gluckstern, Neff, Parker and Palm. The Finance/Investment Committee is responsible for reviewing investment guidelines for the portfolios of the Company, for assessing the performance of the Company's investment advisors with respect to such portfolios and for providing advice and assistance to management as appropriate in the evaluation of specific investments and other business opportunities. The Finance/Investment Committee conducted five meetings during 1996.
COMPENSATION COMMITTEE The Compensation Committee of the Board of Directors (the "Compensation Committee") consists of Messrs. Caldwell, Hueppi and Palm. The Compensation Committee administers the Company's various long-term incentive and stock plans and periodically reviews the Company's executive compensation arrangements and makes recommendations to the Board of Directors with respect thereto. No member of the Compensation Committee may be an employee of the Company or be eligible to receive grants under any plan that the Compensation Committee administers for the benefit of employees of the Company. The Compensation Committee conducted six meetings during 1996.
AUDIT COMMITTEE The Audit Committee of the Board of Directors consists of Messrs. Caldwell, Marto and Neff. The Audit Committee submits recommendations to the Board of Directors with respect to the selection of the Company's independent public accountants and on any other matters it deems appropriate. It reviews the annual financial statements of the Company with the Company's independent public accountants, the practices and procedures adopted by the Company in the preparation of such statements and the scope of the independent public accountant's annual audit. The Audit Committee is required to meet at least twice yearly with such accountants and at any time when considered appropriate by the committee. The Audit Committee conducted four meetings during 1996.
CONFLICT COMMITTEE The Conflict Committee of the Board of Directors consists of Mrs. Hope and Messrs. Marto, Neff and Parker. The Conflict Committee reviews transactions between the Company and its operating subsidiaries and other affiliates. All transactions between Zurich, ZCI or their affiliates (other than the Company), on the one hand, and the Company, on the other hand, are subject to the approval of the Conflict Committee. The Conflict Committee conducted four meetings during 1996.
The Board of Directors has no nominating committee or committee which serves a similar function.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Exchange Act requires the Company's directors and executive officers, and persons who own more than ten percent of the common stock, to file with the SEC and the New York Stock Exchange initial reports of beneficial ownership and reports of changes in beneficial ownership of common stock of the Company. Such persons are also required by SEC regulation to furnish the Company with copies of all Section 16(a) forms they file. To the Company's knowledge, based solely on a review of the copies of such reports furnished to the Company and representations that no other reports were required and except as noted in the next two sentences, during 1996 all Section 16(a) filing requirements applicable to such persons were complied with. A Form 4 timely filed on behalf of Isaac Mashitz for March 1994 disclosing his acquisition of 848 shares of Common Stock inadvertently failed to note that 400 of such shares were immediately transferred to two of his minor children. Once the omission was discovered, an amendment was promptly filed.
ITEM 11.

ITEM 11. EXECUTIVE COMPENSATION.
SUMMARY COMPENSATION TABLE The following table sets forth cash and other compensation paid or earned for services rendered in 1996 (except as otherwise provided) to the two individuals serving as Chief Executive Officer of the Company during 1996 and each of the four most highly compensated executive officers of the Company (other than the Chief Executive Officer) whose cash compensation exceeded $100,000 (together, the "Named Executives" and each a "Named Executive"):
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1. In accordance with applicable SEC rules, information regarding cash and other compensation paid or earned by the Named Executives has been provided for calendar years 1994, 1995 and 1996. Mr. Gluckstern commenced employment with the Company and ZRC on March 9, 1993; Mr. Smith commenced employment with the Company and ZRC on March 9, 1993; Mr. Porrino commenced employment with the Company and ZRC on March 29, 1993; Mr. Mashitz commenced employment with the Company and ZRC on April 30, 1993; Ms. Reid commenced employment with the Company on June 29, 1995 and ZRC on August 9, 1993 and Mr. King commenced employment with the Company on June 29, 1995 and ZRC on July 16, 1993.
2. The basis for determining annual incentive bonus awards for 1996 is described in the Compensation Committee Report included elsewhere in this Item 11 "Executive Compensation".
3. Values for grants of restricted stock determined based on per share grant date closing price for the Common Stock. At December 31, 1996, each individual in the Summary Compensation Table had outstanding shares of restricted stock with aggregate values as follows: Mr. Gluckstern, 25,000 shares worth $781,250; Mr. Smith, 48,107 shares worth $1,503,344; Messrs. Mashitz and Porrino, each 24,429 shares worth $763,406; Ms. Reid and Mr. King, each 16,900 shares worth $528,125. Mr. Gluckstern's shares of restricted stock will vest in three equal annual increments commencing in 1997. Of Mr. Smith's 48,107 shares of restricted stock, 1,312 shares vested during 1995, 1,313 shares vested during 1996, 27,502 shares will vest during 1997, 9,646 shares will vest during 1998 and 8,334 shares will vest during 1999. Of the 24,429 shares of restricted stock granted to each of Messrs. Mashitz and Porrino, 812 shares vested during 1995, 813 shares vested during 1996, 13,824 shares will vest during 1997, 4,896 shares will vest during 1998 and 4,084 shares will vest during 1999. Of the 16,900 shares of restricted stock granted to Ms. Reid, 250 shares vested during 1995, 250 shares vested during 1996, 4,083 shares will vest during 1997, 2,583 shares will vest in 1998, 4,734 shares will vest in 1999 and 2,500 shares will vest in each of 2000 and 2001. Of the 16,900 shares of restricted stock granted to Mr. King, 250 shares vested during 1995, 250 shares vested during 1996, 5,583 shares will vest during 1997, 2,583 shares will vest during 1998, 4,234 shares will vest in 1999 and 2,000 shares will vest in each of 2000 and 2001. The Compensation Committee of the Company's Board of Directors may provide for acceleration of the vesting period and pro rata vesting upon certain events, including, without limitation, termination of a participant's employment by reason of death, disability or by the Company without cause. Holders of shares of restricted stock are entitled to receive the same dividends as those paid on the outstanding shares of Common Stock. During the restriction period, shares of restricted stock remain unvested and may not be sold, assigned, transferred, pledged, encumbered or otherwise disposed of or hypothecated. Holders of shares of restricted stock are entitled to all of the rights of stockholders of the Company, including the right to vote the shares and to receive any cash dividends. Stock dividends issued with respect to such shares, if any, are treated as additional grants of restricted stock subject to the same restrictions and other terms and conditions that apply to the shares of restricted stock with respect to which such stock dividends are issued.
4. Figures for 1996 represent the number of shares of Common Stock of the Company underlying stock options granted pursuant to the Zurich Reinsurance Centre Holdings, Inc. 1995 Stock Option Plan during fiscal year ending December 31, 1996. See the discussion elsewhere in this Item 11 "Executive Compensation" captioned "Other Company Benefit Plans -- Stock Option Plan." The figure for 1994 for Mr. Gluckstern represents a release by Mr. Gluckstern of 65,175 participations under the Company's then existing Long Term Performance Incentive Plan for regrant to other participants. Effective December 31, 1995, the Compensation Committee resolved to terminate the Company's Long Term Performance Incentive Plan.
5. Represents the dollar value of life insurance premiums paid on behalf of the named persons and employer contributions under ZRC's 401(k), money purchase pension and executive thrift plans. The aggregate amount paid on behalf of Mr. Gluckstern during 1996 for life insurance premiums was $1,290 and the total amount paid as employer plan contributions was $46,730. The aggregate amount paid on behalf of Mr. Smith during 1996 for life insurance premiums was $747 and the total amount paid as employer plan contributions was $31,055. The aggregate amount paid on behalf of Mr. Porrino during 1996 for life insurance premiums was $497 and the total amount paid as employer plan contributions was $23,845. The aggregate amount paid on behalf of Mr. Mashitz during 1996 for life insurance premiums was $429 and the total amount paid as employer plan contributions was $21,890. The aggregate amount paid on behalf of Ms. Reid during 1996 for life insurance premiums was $405 and the total amount paid as employer plan contributions was $19,542. The aggregate amount paid on behalf of Mr. King during 1996 for life insurance premiums was $405 and the total amount paid as employer plan contributions was $21,192.
6. On June 1, 1996, Mr. Gluckstern resigned as Chief Executive Officer of the Company but remained as Chairman. In 1996 Mr. Gluckstern was paid $827,500 as base salary of which $577,500 is to be reimbursed to the Company by ZCI or its affiliates. In addition, Mr. Gluckstern is party to certain employment agreements with ZCI. Amounts paid to, or earned by Mr. Gluckstern under the terms of such agreements have not been reflected in the foregoing balances. Such amounts related solely to services rendered by Mr. Gluckstern to ZCI and its subsidiaries other than the Company.
LETTER AGREEMENTS OF EMPLOYMENT, TERMINATION OF EMPLOYMENT AND CHANGE IN CONTROL ARRANGEMENTS
The Company has entered into letter agreements of employment (the "Agreements") with the Named Executives. In general, the Agreements provide for payment of the base salary and other benefits outlined on the Summary Compensation Table and eligibility for annual salary reviews and incentive compensation. The Agreements generally provide that if the Company terminates the employment of a Named Executive without Cause (as such term is defined in the Agreements), the Company will continue to pay amounts of base salary and will continue all employee benefits, as in effect immediately prior to such termination, until such executive shall secure permanent employment, subject to a maximum of twelve months. In the event of a termination of employment by the Company without Cause, or in the event of death or permanent and total disability (as defined in the Agreements) of a Named Executive, awards made pursuant to the Company's Restricted Stock Plan (as described below) will become immediately vested and redeemable. In connection with the Stock Option Plan (defined below), the Company has entered into stock option agreements (the "Option Agreements") with the Named Executives, other than Mr. Gluckstern. The Option Agreements generally provide that in the event the Named Executive's employment with the Company is terminated (i) by the Company without Cause (as such term is defined in the Option Agreements, the Stock Option Plan or any applicable employment agreement or employment letter) or (ii) by the Named Executive with Good Reason (as such term is defined in the Option Agreements, the Stock Option Plan or any applicable employment agreement or employment letter) in conjunction with or within two years of a "Change of Control" of the Company, then all outstanding options held by such Named Executive will become fully vested and immediately exercisable. Change of Control is defined as any transaction, circumstance or occurrence following which Zurich, taken together with all of its majority-owned subsidiaries, does not, directly or indirectly, own more than 25% of the outstanding capital stock of the Company.
BOARD AND COMMITTEE COMPENSATION AND BENEFITS
Each Director who is not an employee of the Company, ZCI, Zurich or their affiliates receives an annual retainer of $25,000, $2,000 for each Board of Directors meeting attended, $1,000 for each Audit, Compensation, Conflict, Executive or Finance/Investment committee meeting attended, and $1,500 for attendance at each meeting of the Special Committee formed to review the Proposed Transaction. In addition, Directors are reimbursed for reasonable out-of-pocket expenses incurred in attending meetings of the Board of Directors and committees thereof. Directors who are employees of the Company, ZCI, Zurich or their affiliates, do not receive any fees for serving on the Company's Board of Directors or for committee service. Certain of the Company's Directors are entitled to participate in the Company's Common Stock Purchase Plan for Non-Employee Directors. Pursuant to this plan, Directors may defer receipt of board fees and receive the amount of these fees in an equivalent number of shares of Common Stock.
The Board of Directors conducted four meetings during 1996. Each Director was present for at least 75% of the total number of meetings of the Board and any committee in respect of which such Director is a member.
STOCK OPTIONS The following table contains information concerning the grant of options under the Zurich Reinsurance Centre Holdings, Inc. 1995 Stock Option Plan (the "Stock Option Plan") to each of the Named Executives during the fiscal year ended December 31, 1996. The Stock Option Plan does not permit the issuance of stock appreciation rights.
OPTION GRANTS IN LAST FISCAL YEAR
- -------------------- (1) Represents number of shares covered by non-qualified stock options to acquire shares of Common Stock granted pursuant to the terms of the Stock Option Plan. Each of these grants consists of an equal share number of Type A Options and Type B Options. The exercisability of Type A Options is contingent upon the satisfaction of financial performance hurdles relating to the Common Stock's share price performance during the term of the Option. The exercisability of Type B Options is contingent upon the satisfaction of financial performance hurdles relating to increases in the Company's Intrinsic Value (as such term is used in the Stock Option Plan) per common share during the term of the Option. See the discussion elsewhere in this Item 11 "Executive Compensation" captioned "Other Company Benefit Plans -- Stock Option Plan."
(2) Foregoing values estimated assuming the full satisfaction of financial exercisability conditions respecting Type A Options and Type B Options issued to date under the Stock Option Plan. The exercisability of Type A Options is contingent upon the satisfaction of financial performance hurdles relating to the Common Stock's share price performance during the term of the Option. The exercisability of Type B Options is contingent upon the satisfaction of financial performance hurdles relating to increases in the Company's Intrinsic Value (as such term is used in the Stock Option Plan) per common share during the term of the Option. See the discussion elsewhere in this Report captioned "Other Company Benefit Plans -- Stock Option Plan."
The following table sets forth information for each of the Named Executives with respect to the value of options exercised during the fiscal year ended December 31, 1996 and the value of outstanding and unexercised options held as of that date, based upon the market value of the Common Stock of $31.25 per share on that date. There were no options exercised by the Named Executives during the fiscal year ended December 31, 1996.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES
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(1) Represents the difference between the closing market price of the Common Stock at December 31, 1996 of $31.25 per share and the exercise price per share of in-the-money options multiplied by the number of shares underlying the in-the-money options. The options are subject to the vesting and exercisability requirements set forth in the Stock Option Plan. See the discussion elsewhere in this Report captioned "Other Benefit Plans -- Stock Option Plan."
OTHER COMPANY BENEFIT PLANS
STOCK OPTION PLAN The Zurich Reinsurance Centre Holdings, Inc. 1995 Stock Option Plan (the "Stock Option Plan") was adopted in November 1995 as a replacement for the Company's then-existing, cash-based long term incentive compensation plan. The Stock Option Plan provides for grants of incentive stock options and non-qualified stock options covering up to 1,844,000 shares of Common Stock representing approximately 7% of the total number of shares of Common Stock issued and outstanding at the time of the Stock Option Plan. Grants under the Stock Option Plan have been made effective as of January 1, 1996 covering approximately 504,000 shares of Common Stock (representing approximately 2.0% of the number of shares of Common Stock issued and outstanding as of December 31, 1996 and 27% of the aggregate number of Options authorized to be granted under the terms of the Stock Option Plan). These grants consisted of an equal number of Type A Options and Type B Options.
For grants of both Type A and Type B Options made to date, exercise prices have been set at prices ranging between $29.875 and $30.356 per share reflecting the trading values for the Company's Common Stock in the ten trading days immediately preceding the grant date. As of December 31, 1996, the closing per share price for the Common Stock on the New York Stock Exchange was $31.25. Each Type A Option and Type B Option granted to date vests in full on the fourth anniversary of the date of grant (the "Grant Date") provided that the Optionee has been continuously employed by the Company from the Grant Date until the date on which such Option is scheduled to vest. Each Type A Option, to the extent vested, becomes exercisable only if the "Share Appreciation Amount" (as such term is used in the Stock Option Plan) for the period from the Grant Date until the fourth anniversary of such date (the "Initial Exercisability Date") exceeds the "Share Appreciation Hurdle" (as such term is used in the Stock Option Plan) determined with respect to the same period, or, in the event such condition is not satisfied with respect to the Initial Exercisability Date, on any subsequent annual anniversary of the Initial Exercisability Date (each, a "Subsequent Exercisability Date") as to which the Share Appreciation Amount for the period from the Grant Date until the such Subsequent Exercisability Date shall exceed the
Share Appreciation Hurdle determined for that period and provided, further, that the Optionee therefor shall remain a full-time employee of the Company on and as of such Subsequent Exercisability Date. Each Type B Option, to the extent vested, will become exercisable only if the Intrinsic Value Appreciation Amount (as such term is used in the Stock Option Plan) for the period from the Grant Date until the Initial Exercisability Date exceeds the Intrinsic Value Appreciation Hurdle (as such term is used in the Stock Option Plan) determined with respect to the same period, or, in the event such condition is not satisfied with respect to the Initial Exercisability Date, on any Subsequent Exercisability Date in respect of which the Intrinsic Value Appreciation Amount for the period from the Grant Date until the such Subsequent Exercisability Date shall exceed the Intrinsic Value Appreciation Hurdle determined with respect to the same period and provided that the Optionee therefor shall remain a full-time employee of the Company on such Subsequent Exercisability Date.
Vested Options which do not become exercisable in accordance with the foregoing will be forfeited. Vested Options which become exercisable in accordance with the foregoing will not become non-exercisable in the event that the conditions set forth above are later not met as of a date subsequent to the Initial Exercisability Date or Subsequent Exercisability Date, as the case may be.
RESTRICTED STOCK PLAN The Company maintains a Restricted Stock Plan (the "Restricted Stock Plan") under which participants are granted an award of restricted stock (the "Restricted Stock") by the Compensation Committee. There are 450,000 shares of Common Stock which may be granted thereunder. Each award is subject to such restrictions, terms and conditions as the Compensation Committee may deem appropriate. Such restrictions include requirements that the Restricted Stock be deposited with the Company while subject to any restrictions and the requirement that the Restricted Stock be forfeited upon termination of employment for specified reasons within a specified period of time. Under the Restricted Stock Plan, shares of Restricted Stock become unrestricted and vest in accordance with the vesting schedule relating to the service performance restriction applicable to each grant.
During the restriction period, the Restricted Stock remains unvested and may not be sold, assigned, transferred, pledged, encumbered or otherwise disposed of or hypothecated. Holders of shares of Restricted Stock are entitled to all of the rights of a stockholder of the Company, including the right to vote the shares and to receive any cash dividends. The Compensation Committee may determine the number of shares of Restricted Stock to be granted in the future and may impose different terms and conditions on any particular Restricted Stock grant made to any employee.
All employees of the Company are eligible to receive grants under the Restricted Stock Plan. As of December 31, 1996, the Company and ZRC together had approximately 235 employees. As of March 21, 1997, the Compensation Committee has granted 368,398 shares under the Restricted Stock Plan, of which 153,360 have vested and 24,949 have been forfeited.
EMPLOYEE STOCK PURCHASE PLAN The Company maintains an employee stock purchase plan (the "Purchase Plan") which is intended to meet the applicable requirements of Section 423 of the Internal Revenue Code of 1986, as amended (the "Code"). All full-time and certain part-time employees of the Company designated by the Compensation Committee are eligible to purchase shares of the Common Stock by means of payroll deductions, subject to any minimum service requirements imposed by the Compensation Committee. Eligible employees may elect to participate in semi-annual offering periods ("Offering Periods") under the Purchase Plan by authorizing after-tax payroll deductions of up to 10% (in whole percentages) of their salary for the purchase of shares of the Common Stock. The Purchase Plan has a term of 10 years. An aggregate of
100,000 shares of the Common Stock has been reserved for issuance under the Purchase Plan. (The Company may also purchase shares of the Company's common stock in the open market for sale to employees under the Purchase Plan.)
Unless the Compensation Committee determines at the inception of an Offering Period that a higher price will apply, the price at which shares of the Common Stock will be purchased under the Purchase Plan at the end of each Offering Period will be 85% of the Fair Market Value (as defined in the Purchase Plan) of the shares at the beginning or end of an Offering Period, whichever is less. No participating employee will be entitled in any offering period under the Purchase Plan to purchase the Common Stock having an aggregate Fair Market Value at the beginning of such Offering Period in excess of $12,500. Additional restrictions apply to persons deemed to be "insiders" under Section 16 of the Securities Exchange Act of 1934 (the "Exchange Act") in order to comply with the exemption provided by Rule 16b-3 of the Exchange Act.
OTHER EMPLOYEE BENEFIT PLANS Effective as of January 1, 1994, ZRC adopted an employee thrift plan (the "Employee Thrift Plan") qualified under the Code. Pursuant to Section 401(k) of the Code, eligible employees of ZRC are able to defer receipt of up to 12% of their annual salaries with discretionary matching contributions made by ZRC for up to 6% of such amounts. Subject to limitations under applicable law, ZRC matches up to 100% of the first 3% of annual salary deferred by employees and up to 50% of the next 3% of salary so deferred. In addition, effective as of January 1, 1994, ZRC adopted a non-contributory, defined contribution money purchase pension plan (the "Pension Plan") under which ZRC contributes for each eligible employee an amount equal to the sum of (i) 4% of eligible compensation up to the Taxable Wage Base (as such term is defined in the Pension Plan) (for 1997, set at $65,400) and (ii) 8% of eligible compensation (up to the applicable earnings cap which, for 1997, is $160,000) in excess of the Taxable Wage Base. Effective as of February 1, 1994, ZRC adopted a supplemental, non-qualified executive thrift plan (the "Executive Thrift Plan") under which select members of executive management may defer certain amounts of base salary and receive limited matching contributions from ZRC. Under the Executive Thrift Plan, ZRC matches, dollar-for-dollar, amounts deferred by participants under the Executive Thrift Plan up to 3% of annual salary in excess of $160,000 for 1997 and provides a 50% matching contribution for the next 3% of such excess salary so deferred. Effective January 1997, participants may also defer certain amounts of bonus compensation without receiving a matching contribution.
COMPENSATION COMMITTEE REPORT
During 1996, the Compensation Committee consisted of Messrs. Caldwell, Hueppi and Palm. The Compensation Committee is charged, among other things, to make periodic reviews of the Company's compensation arrangements and to make recommendations to the Board of Directors with respect to such arrangements. The Compensation Committee has worked with management of the Company to specify a compensation approach responsive to the short-term and long-term considerations described below.
BASE BENEFITS The Compensation Committee intends that the core group of base benefits (base salary and fringe benefits such as thrift and insurance packages) afforded the Company's senior executives be sufficient to attract and retain executives of the caliber required to manage the Company and ZRC in the implementation of its overall business strategy. The Compensation Committee believes such benefits to be reasonable by reference to both the Compensation Committee's expectations and its assessment of industry norms. In reaching these conclusions, the Compensation Committee considered both Company performance (based on the analyses described below under the caption "Annual Incentive Compensation") and the individual
performance of members of Senior Management (defined to include Named Executives and the Senior Vice Presidents of the Company's operating subsidiaries). Assessments of individual performance have been based principally on the recommendations of management. The Compensation Committee conducted no independent assessment of industry salary standards but rather relied on the general familiarity and experience of the members of the Compensation Committee.
ANNUAL INCENTIVE COMPENSATION The annual incentive award represents an important element of the Company's overall compensation scheme. This is due in part to the competing opportunities available to members of the Company's management. Also, however, annual incentive awards are useful complements to long term compensation arrangements. These awards can be tailored to respond to the achievement of controllable, individual objectives during the year and reward strong individual performance in the face of less encouraging overall results.
The Compensation Committee believes that annual incentive awards must be linked to both (1) quantitative measures of the total economic value provided by management to the Company's stockholders and (2) the achievement of qualitative individual objectives which have, or will in the future, produce quantifiable value for the Company's investors. For 1996, the Company's annual incentive compensation framework (the "AIC Plan") synthesized four quantitative financial measures (the "Financial Measures") of the Company's performance and more qualitative plan and activity measures (the "Plan & Activity Measures") in order to determine the overall pool of incentive compensation available for award to management. Under the AIC Plan, the Financial Measures and the Plan & Activity Measures determine roughly equivalent shares of total incentive compensation. For 1996, the AIC Plan contemplated ceiling and floor values based on the Company's aggregate base compensation earned of 80% and 10%, respectively.
The AIC Plan for 1996 provided for four specific, measurable items to gauge the Company's overall financial performance. The first measure related to the Company's consolidated net operating income determined in accordance with GAAP. The second measure, Return on Deployed Equity (the "RDE"), is the implied measure of financial returns on capital based on the Company's assessment of its underwriting results for the year. The RDE is determined as a function of the Company's acquisition expense-adjusted, discounted loss ratio relative to the balance of capital deployed in the Company's underwriting operations. At target levels under the AIC Plan, the Company's net operating income and RDE together determined 30% of the total 1996 pool of annual incentive compensation. For purposes of the Company's 1996 AIC Plan, the other Financial Measures reflected the Company's premium growth rate and internal expense level. Taken together, these measures accounted for 20% of the total pool of annual incentive compensation. During 1996, the Company was modestly over the target for Financial Measures as a whole. The Company exceeded the targets for net operating income, RDE and internal expenses and was under the target for premium growth.
The members of the Compensation Committee believe that in the future the financial criteria used to determine the Company's annual incentive benefits ultimately will be determined in larger part by reference to GAAP and statutory-basis accounting information. The incorporation of a net operating income measure in the Company's 1996 AIC Plan reflects this development. For 1996, the weight accorded the net operating income measure was increased relative to other financial and non-financial measures (from approximately 8% of total AIC at target levels to approximately 18% of these targets).
The Plan & Activity Measures specified in the AIC Plan are the indirect drivers of investor value. Plan measures identify and measure the progress of projects determined to be critical to the Company's mid- to
long-term development. Plan measures for 1996 were specified in connection with the development of the Company's 1996 strategic and operating plans and included, among other things, differentiating ZRC from other reinsurers, establishing effective account prioritization systems and improving operating efficiency. Activity measures reflected the key activities which the Company must perform well in order to succeed. Activity measures for 1996 included, among other things, measures of underwriting productivity (including retention of significant clients), lead reinsurer positions and client service. Under the AIC Plan, the Company's performance with respect to the Plan & Activity Measures determines one-half of the total amount of AIC Plan payments. Based on its assessment of the foregoing factors, the Compensation Committee determined that the Company's performance for 1996 approximated the target criteria for the Plan & Activity Measures taken as a whole.
Taken together, the Financial Measures and the Plan & Activity Measures suggested 1996 Annual Incentive Compensation awards in the aggregate approximating 104% of the target amount for such awards. The Compensation Committee approved this amount.
In addition to determining the total amount of 1996 AIC Plan awards made by the Company, the Compensation Committee reviewed and approved the allocation of this total amount to the individual members of the Company's management. This allocation was achieved based in part on standards articulated by the Compensation Committee when the AIC Plan was adopted and on the recommendations of management. In the Compensation Committee's view, the Company's performance during 1996 -- measured by reference to the Financial Measures and the Plan & Activity Measures and the composition of the awards as described above -- justified the annual incentive payments to management described elsewhere in this Report on Form 10-K.
RESTRICTED STOCK AWARDS The Company's Restricted Stock Plan was designed to align the interests of management and investors by providing value to management as the Company's stock price increases. To date, the Compensation Committee has granted 368,398 shares under the Restricted Stock Plan, of which 153,360 shares have vested and 24,949 shares have been forfeited. For 1996, the Compensation Committee made grants under the plan totaling approximately 8,950 shares. These grants relate to new hires, promotions and relocations. Awards of restricted stock are generally recommended by management and determined by the Compensation Committee considering a number of factors, including individual performance and the Compensation Committee's experience concerning general and industry competitive practice.
STOCK OPTION PLAN In November 1995, the Compensation Committee and the Company's Board of Directors adopted the Stock Option Plan to substitute for the Company's former Long Term Performance Plan (the "Former LTIP") as the principal long term compensation vehicle for management of the Company. The Stock Option Plan, which was approved by the Company's stockholders in May 1996, provides for grants of incentive stock options and non-qualified stock options covering up to 1,844,000 shares of Common Stock representing approximately 7% of the total number of shares of Common Stock issued and outstanding at the time the Stock Option Plan was adopted by the Board. Initial grants under the Stock Option Plan were made effective as of January 1, 1996, and, following certain modifications made during 1996 as a result of management changes, cover approximately 504,000 shares of Common Stock (representing approximately 2.0% of the number of shares of Common Stock issued and outstanding as of December 31, 1996 and 27% of the aggregate number of Options authorized to be granted under the terms of the Stock Option Plan). Exercise of these Options is dependent upon the satisfaction of traditional conditions, such as continuity of employment through a four-year vesting period, as well as conditions relating to the satisfaction of certain corporate financial hurdles. As described in the Stock Option Plan
and last year's report of the Compensation Committee, these financial hurdles relate to both share price performance of the Common Stock and the "Intrinsic Value" per share of Common Stock generated by the Company's operations. The members of the Compensation Committee believe that the Stock Option Plan's increased flexibility will enable the Company to modify its long term compensation perspectives in response to changing circumstances. Also, the Stock Option Plan will provide more apparent value to managers while requiring that substantial stockholders benefit is derived before values are generated. The inclusion of the "Intrinsic Value" hurdle is consistent with the Company's approach of maximizing long-term value to stockholders.
BASIS FOR CEO COMPENSATION
On June 1, 1996, Mr. Gluckstern resigned as Chief Executive Officer of the Company, but remained as Chairman. Effective on the same date, Mr. Smith was appointed Chief Executive Officer of the Company. For 1996, Mr. Gluckstern received from the Company a base salary of $827,500, of which $577,500 is to be reimbursed to the Company from ZCI or its affiliates. For 1996, Mr. Gluckstern did not receive any annual incentive compensation payments or any awards of long term incentive compensation. The Compensation Committee believes Mr. Gluckstern's total ZRC compensation package is appropriate in light of, among other things, the positioning of ZRC as a strong leader in the broker reinsurance market segment, the continued aggressive development of the Company's underwriting infrastructure and the expansion of business opportunities available to the Company and ZRC by virtue of Mr. Gluckstern's efforts. The Compensation Committee also understands that Mr. Gluckstern will continue to receive cash compensation and substantial long-term incentive compensation from ZCI and its affiliates.
For 1996, Mr. Smith received from the Company a base salary of $479,166 per annum and annual incentive compensation payments of $575,000. In addition, during 1996 Mr. Smith received grants of 80,000 Options under the Stock Option Plan. The Compensation Committee believes Mr. Smith's total ZRC compensation package is appropriate in light of, among other things, the general enhancement of the Company's market profile, the continued development of the Company's highly efficient operating infrastructure and the continued cultivation of broker and client relationships by virtue of Mr. Smith's efforts.
COMPLIANCE WITH INTERNAL REVENUE CODE SECTION 162(m) Section 162(m) of the Code generally disallows a tax deduction to public companies for compensation over $1 million paid to the corporation's Chief Executive Officer and four other most highly compensated executive officers. Qualifying performance-based compensation and compensation paid pursuant to plans adopted prior to a company's initial public offering of securities are not subject to the limit if certain requirements are met. In considering 1996 compensation to be paid to Messrs. Gluckstern and Smith, the Compensation Committee recognized that a portion of such compensation may exceed the Section 162(m) threshold amount. The Compensation Committee believes that the terms of the Stock Option Plan qualify such plan as "performance-based" for purposes of Section 162(m).
Rolf Hueppi (Chairperson) Philip Caldwell Michael D. Palm
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION. During 1996, the Compensation Committee of the Board of Directors consisted of Messrs. Caldwell, Hueppi and Palm, all of whom are non-employee Directors. No member of the Compensation Committee is, or has been, an officer of the Company or any subsidiary.
RELATIONSHIP WITH ZURICH AND ZCI The principal stockholder of the Company is ZCI, which beneficially owns approximately 65.7% of the issued and outstanding shares of Common Stock. Zurich beneficially owns all of the outstanding voting equity of ZCI. Each of Steven M. Gluckstern, Chairman, Detlef Steiner, Vice-Chairman, Rolf Hueppi, Director, Michael D. Palm, Director, William H. Bolinder, Director, and Laurence W. Cheng, Director, holds positions with Zurich or certain of its affiliates other than the Company and the Company's wholly owned subsidiaries, Zurich Reinsurance Centre, Inc., a Connecticut stock insurance company ("ZRC") and ZC Insurance Company ("ZCIC"), a New Jersey stock insurance company. The compensation of such persons with respect to such positions may be dependent upon the financial performance of such affiliates, certain of which may, from time to time, be party to transactions or arrangements with the Company.
BUSINESS WITH ZURICH AND ITS AFFILIATES From time to time in the ordinary course of their respective businesses, ZRC enters into reinsurance transactions with Zurich and certain of its domestic affiliates. Approximately $132.9 million (26.6%) of ZRC's 1996 net premiums earned (net of commissions) were attributable to reinsurance transactions between ZRC and various affiliates of Zurich. Net ceding commissions incurred by ZRC with respect to this business during 1996 were approximately $50.1 million. ZRC's objective in determining its business mix is to evaluate each underwriting opportunity individually with a view to maximizing overall profitability.
In 1993, Zurich and ZRC entered into the Excess of Loss Reinsurance Agreement under which Zurich agreed to reinsure adverse loss development in respect of ZRC's reserves as of December 31, 1992 and the Stop Loss Reinsurance Agreement under which Zurich agreed to reinsure adverse loss development on ZRC's reserves as of May 31, 1993 for losses occurring between January 1, 1993 and May 31, 1993. Under the Stop Loss Reinsurance Agreement, ZRC will be reimbursed for incurred losses and allocated loss adjustment expenses in excess of 75% of earned premiums for losses occurring after May 31, 1993 on business written by ZRC prior to June 1993. Coverage provided under the Excess of Loss Reinsurance Agreement and the Stop Loss Reinsurance Agreement (together, the "Stop Loss Agreement") is on an incurred basis (rather than as any such losses are paid), net of recoveries and claims under other retrocessional policies, except for any claims in respect of which recovery is precluded by the insolvency or receivership of one of ZRC's other retrocessionaires or by a verdict of a court or arbitration panel. As of December 31, 1996, there were no recoverables under the terms of the Stop Loss Agreement.
Effective as of July 1, 1995, ZRC entered into a domestic whole account quota share agreement (the "ZA Quota Share Agreement") with Zurich Insurance Company (U.S. Branch), American Guarantee & Liability Insurance Company, a New York stock insurance company, American Zurich Insurance Company, an Illinois stock insurance company, Zurich American Insurance Company of Illinois, an Illinois stock insurance company, and Steadfast Insurance Company, a Delaware stock insurance company (collectively, "Zurich American") and concurrently an Excess of Loss Retrocession Agreement (the "Retrocessional Agreement") primarily to provide loss limitations with respect to business assumed under the ZA Quota Share Agreement.
INSURANCE PARTNERS, L.P. In February 1994, the Company committed $25.0 million to investment as a limited partner in Insurance Partners, L.P., a Delaware limited partnership ("Insurance Partners"). Insurance Partners is an equity investment fund established to sponsor and participate in acquisitions, recapitalizations, demutualizations and other structured transactions in the insurance and reinsurance industries. ZCI and Centre Reinsurance are limited partners in Insurance Partners and have an economic interest in the fund's general partner.
Certain of the directors and executive officers of ZCI and the Company have also committed to invest in Insurance Partners.
INVESTMENT MANAGEMENT AGREEMENTS Each of the Company and ZRC has entered into Investment Management Agreements (together, the "Investment Agreements") with Centre Investment Services, Limited ("CIS"), a wholly owned subsidiary of ZCI. Under the Investment Agreements, CIS manages a portion of the Company's consolidated portfolio of investment securities. Investment management fees incurred in the aggregate during 1996 by the Company and ZRC under the Investment Agreements were approximately $1.1 million.
REAL ESTATE LEASING ARRANGEMENTS ZRC is party to a sublease agreement, dated as of January 1, 1994, and amended as of January 26, 1996 (the "Sublease") with a subsidiary of ZCI. Under the Sublease, ZRC leases approximately 60,000 rentable square feet of space in New York City for its underwriting, actuarial and certain executive offices (the "Office Space"). The Sublease has a term of approximately seventeen years. Together with another ZCI affiliate which occupies space contiguous to the Office Space, ZRC has guaranteed the performance of the tenant's obligations under the lease covering the Office Space. Under this guarantee, ZRC is contingently liable for 36.2% of monetary obligations to the lessor in respect of the Office Space and other contiguous space leased thereby (together with the Office Space, the "Group Office Space"). This percentage represents the approximate percentage which the Office Space bears to the Group Office Space.
COMPARISON OF CUMULATIVE TOTAL STOCKHOLDER RETURN
The following graph compares the change in the Company's cumulative total stockholder return on shares of the Common Stock with cumulative total return for S&P's 500 Composite Stock Index and a Company-constructed composite industry index, consisting of domestic professional casualty reinsurers with more than $100 million of total capital and surplus measured on the basis of statutory accounting principles over the period from May 12, 1993 (the date of the Company's initial public offering of Common Stock) through December 31, 1996. Companies included in the Peer Group for 1996 are: General Re Corporation, NAC Re Corporation, Transatlantic Holdings, Inc., and Trenwick Group, Inc.
COMPARISON OF TOTAL RETURN
ITEM 12.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
As of the close of business on March 21, 1997, there were outstanding and entitled to vote 26,205,569 shares of Common Stock, all of one class and each having one vote. The table below sets forth certain information with respect to the beneficial ownership of the Common Stock, by each beneficial owner of more than 5% of the Common Stock, each of the Company's Directors and the Named Executives and all Directors and executive officers of the Company as a group:
* Less than 1% .
- ---------- 1. Zurich beneficially owns all of the outstanding voting equity of ZCI and Zurich International (Bermuda) Ltd. ("ZIB") and therefore may be deemed a beneficial owner of the 16,217,572 shares of Common Stock beneficially owned by ZCI and 350,000 shares of Common Stock beneficially owned by ZIB. In addition, Zurich owns 650,000 shares of the Common Stock. ZCI's address is Cumberland House, One Victoria Street, Hamilton HM HX Bermuda. ZIB's address is Crawford House, 50 Cedar Avenue, Hamilton HM11 Bermuda.
2. Based upon a Schedule 13D filed with the Securities and Exchange Commission (the "SEC") by ZCI, dated March 31, 1994 and amendments thereto filed on January 23, 1996 and January 14, 1997.
The table below sets forth certain information with respect to the beneficial ownership of the common stock of Zurich as of December 31, 1996 by each of the Company's Directors, the Named Executives and all Directors and executive officers of the Company as a group:
* Less than 1%.
- ---------- 1. For purposes of this table, a person or group of persons is deemed to have "beneficial ownership" of any shares which such person or persons has the right to acquire within sixty days. For purposes of computing the percentages of outstanding shares held by each person or group of persons named above on a given date, any security which such person or persons has the right to acquire within sixty days is deemed to be outstanding but is not deemed to be outstanding for the purpose of computing the percentage ownership of any other person.
ITEM 13.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
See information under the heading "Compensation Committee Interlocks and Insider Participation" in Item 11.
PART IV
ITEM 14.

ITEM 14. EXHIBITS, FINANCIAL STATEMENTS AND SCHEDULES AND REPORTS ON FORM 8-K.
FINANCIAL STATEMENTS AND SCHEDULES Financial Statements and Schedules listed in the accompanying Index to Financial Statements and Schedules in Item 8 are filed as part of this Report.
EXHIBITS The exhibits listed in the accompanying Index to Exhibits are filed as part of this Report. Such exhibits include, without limitation, certain management contracts and compensatory plans as therein described.
REPORTS ON FORM 8-K No reports on Form 8-K were filed by the Company during the fourth quarter of 1996.
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 in New York, New York, on March 28, 1997.
ZURICH REINSURANCE CENTRE HOLDINGS, INC.
By: /S/ KAREN O'CONNOR RUBSAM ------------------------------- Senior Vice President, Chief Financial Officer and Treasurer (Principal Accounting Officer)
March 28, 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: Karen O'Connor Rubsam, as attorney-in-fact and agent, pursuant to a power of attorney, a copy of which has been filed with the Securities and Exchange Commission as Exhibit 24 hereto.
/S/ KAREN O'CONNOR RUBSAM - -------------------------------------------- Karen O'Connor Rubsam (Attorney-in-fact)
** Mr. Neff was elected a Director of the Board effective June, 1996.
INDEX TO EXHIBITS
EXHIBIT NUMBER DESCRIPTION OF EXHIBIT - ------ ----------------------
2.1 -- Agreement and Plan of Merger, dated January 11, 1995, among Zurich Reinsurance Centre Holdings, Inc., Re Capital Corporation and ZRC Merger-Sub Corp. (d)
2.2 -- Amendment to Agreement and Plan of Merger, dated April 24, 1995, among Zurich Reinsurance Centre Holdings, Inc., Re Capital Corporation and ZRC Merger-Sub Corp. (e)
3.1 -- Certificate of Incorporation of Zurich Reinsurance Centre Holdings, Inc. (a)
3.2 -- Bylaws of Zurich Reinsurance Centre Holdings, Inc. (a)
4.1 -- Subscription and Stockholders' Agreement, dated as of March 8, 1993, among Zurich Reinsurance Centre Holdings, Inc., Centre Reinsurance, Fund American, John J. Byrne and Steven M. Gluckstern, as amended (c)
4.2 -- Indenture, dated as of October 20, 1993, for the Senior Notes between Zurich Reinsurance Centre Holdings, Inc. and The Bank of New York, as trustee (b)
4.3 -- Indenture, dated as of July 27, 1993, between Re Capital Corporation and Chemical Bank, as Trustee, relating to Re Capital Corporation's 5 1/2% Convertible Debentures due August 1, 2000 (f)
4.4 -- First Supplemental Indenture, dated as of April 26, 1995, between Re Capital Corporation and Chemical Bank, as Trustee (e)
4.5 -- Second Supplemental Indenture, dated as of April 27, 1995, among Zurich Reinsurance Centre Holdings, Inc., Re Capital Corporation and Chemical Bank, as Trustee (e)
10.1 -- Investment Management Agreements between Centre Investment Services, Inc. and Zurich Reinsurance Centre, Inc. and Centre Investment Services, Inc. and Zurich Reinsurance Centre Holdings, Inc. (c)
10.2 -- Excess of Loss Reinsurance Agreement, dated February 2, 1993, between Zurich Reinsurance Centre, Inc. and Zurich Insurance Company (a)
10.3 -- Stop Loss Reinsurance Agreement, dated March 5, 1993, between Zurich Reinsurance Centre, Inc. and Zurich Insurance Company (a)
10.4 -- Stock Purchase Agreement, dated March 9, 1993, by and among Zurich Reinsurance Centre Holdings, Inc., Maryland Casualty, Zurich Holding Company of America, Inc. and Zurich Insurance Company (U.S. Branch) (a)
10.5 -- Unsecured Subordinated Note Purchase Agreement, dated as of December 14, 1990, between Zurich Reinsurance Company of New York and Universal Underwriters Insurance Company and Surplus Note of Zurich Reinsurance Company of New York, dated December 14, 1990 (a)
10.6 -- Long Term Performance Incentive Plan of Zurich Reinsurance Centre Holdings, Inc., as amended (c)(i)
10.8 -- Restricted Stock Plan of Zurich Reinsurance Centre Holdings, Inc., as amended and restated (g)(i)
10.9 -- Sublease between Centre Reinsurance Holdings (Delaware) Limited and Zurich Reinsurance Centre, Inc., dated as of January 1, 1994; Lease between the Chase Manhattan (National Association) and Centre Reinsurance Holdings (Delaware) Limited, dated January 1, 1994 (c)
10.9(a) -- First amendment to lease, dated January 26, 1996, between the Chase Manhattan Bank (National Association) and Zurich Centre Resource Limited (h)
10.9(b) -- Amended and Restated Guaranty, dated as of January 26, 1996, by Centre Reinsurance Company of New York, Zurich Reinsurance Centre, Inc. and Zurich Centre Investments Limited (h)
10.10 -- Agreement and Plan of Merger of Zurich Reinsurance Company of New York into Zurich Reinsurance Centre, Inc., dated as of January 2, 1993 (a)
10.11 -- Employee Stock Purchase Plan of the Company, as amended and restated (c)(i)
10.13 -- Multiple Line Quota Share Reinsurance Contract, dated October 20, 1995, between Zurich Insurance Company U.S. Branch, American Guarantee & Liability Insurance Company, American Zurich Insurance Company, Zurich American Insurance Company of Illinois, Steadfast Insurance Company and Zurich American Lloyds and Zurich Reinsurance Centre, Inc. (h)
10.14 -- Retrocession Agreement, dated November 20, 1995, between Zurich Reinsurance Centre, Inc. and Zurich Insurance Company (h)
10.15 -- Zurich Reinsurance Centre Holdings, Inc. 1995 Stock Option Plan (i)
10.16 -- Zurich Reinsurance Centre Holdings, Inc. Common Stock Purchase Plan for Non-Employee Directors, dated January 1, 1995 (i)
21 -- Subsidiaries of the Registrant (h)
23 -- Consent of Ernst & Young LLP
24 -- Power of Attorney
27 -- Financial Data Schedule
- ---------- (a) Incorporated by reference to Registrant's Registration Statement on Form S-1 (No. 33-59334). (b) Incorporated by reference to Registrant's Registration Statement on Form S-1 (No. 33-68986). (c) Incorporated by reference to Registrant's 1993 Annual Report on Form 10-K (No. 1-11868). (d) Incorporated by reference to Registrant's Current Report on Form 8-K, dated January 12, 1995 (except list of omitted schedules, which list is filed herewith). (e) Incorporated by reference to Registrant's Current Report on Form 8-K, dated May 9, 1995 (except list of omitted schedules, which list is filed herewith). (f) Incorporated by reference from Amendment No. 2 to Re Capital Corporation's Form S-2 Registration Statement (Registration No. 33-63590), filed with the Commission on July 8, 1993. (g) Incorporated by reference to Registrant's 1994 Annual Report on Form 10-K (No. 1-11868). (h) Incorporated by reference to Registrant's 1995 Annual Report on Form 10-K (No. 1 - 11868). (i) A management contract or compensatory plan or arrangement required to be filed as an exhibit to this Report pursuant to Item 14 (c).
AGREEMENT TO FURNISH OMITTED SCHEDULES UPON REQUEST AND LIST OF OMITTED SCHEDULES
AGREEMENT: Agreement and Plan of Merger, dated January 11, 1995, among Zurich Reinsurance Centre Holdings, Inc. (the "Registrant"), ZRC Merger-Sub Corp. ("Merger Sub") and Re Capital Corporation ("Re Capital").*
The Registrant hereby agrees to furnish supplementally a copy of any omitted schedule to the Commission upon request.
LIST OF OMITTED SCHEDULES:
Schedule 3.6 - Stock Options of Re Capital Schedule 3.7 - Warrants of Re Capital Schedule 4.2 - Approvals Schedule 5.1 - Certificate of Incorporation and By-Laws of Re Capital Schedule 5.3 - Subsidiaries of Re Capital Schedule 5.4 - Default and/or Rights of Termination, Cancellation or Acceleration (Re Capital) Schedule 5.6 - Absence of Certain Changes or Events (Re Capital) Schedule 5.7 - Litigation (Re Capital) Schedule 5.9 - Employee Benefit Plans of Re Capital Schedule 5.10 - ERISA (Re Capital) Schedule 5.15 - Compliance with Applicable Laws (Re Capital) Schedule 5.16 - Taxes (Re Capital) Schedule 5.18 - List of Insurance Licenses/Certificates of Authority of Re Capital Reinsurance Corporation to Conduct its Reinsurance Business in the Ordinary Course in the Jurisdiction Indicated Schedule 5.19 - Reinsurance; Retrocession (Re Capital) Schedule 5.20 - Re Capital Material Adverse Effects Schedule 6.1 - Certificate of Incorporation and By-Laws of Merger Sub Schedule 7.1 - Certain Contractual Obligations Affecting Conduct of Business Pending the Merger (Re Capital) Schedule 7.3 - Notice of Breach (Re Capital)
- ---------- * Incorporated by reference to the Registrant's Current Report on Form 8-K, dated January 12, 1995.
SCHEDULE I
ZURICH REINSURANCE CENTRE HOLDINGS, INC. AND SUBSIDIARIES
SUMMARY OF INVESTMENTS OTHER THAN INVESTMENTS IN RELATED PARTIES AT DECEMBER 31, 1996 (Dollars in thousands)
S-1 SCHEDULE II
ZURICH REINSURANCE CENTRE HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED FINANCIAL INFORMATION OF REGISTRANT BALANCE SHEETS (Dollars in thousands)
The condensed financial statements should be read in conjunction with the consolidated financial statements and the accompanying notes thereto.
S-2 SCHEDULE II
ZURICH REINSURANCE CENTRE HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED FINANCIAL INFORMATION OF REGISTRANT STATEMENTS OF OPERATIONS (Dollars in thousands)
The condensed financial statements should be read in conjunction with the consolidated financial statements and the accompanying notes thereto.
S-3 SCHEDULE II
ZURICH REINSURANCE CENTRE HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED FINANCIAL INFORMATION OF REGISTRANT STATEMENTS OF CASH FLOWS (Dollars in thousands)
(1) During 1995, Zurich Reinsurance Centre Holdings, Inc. contributed ZC Insurance Company carried at $8,102,000 to ZRC. During 1994, Zurich Reinsurance Centre Holdings, Inc. contributed an investment in an affiliate carried at $25,108,000 to ZRC in addition to a cash capital contribution of $10,000,000.
The condensed financial statements should be read in conjunction with the consolidated financial statements and the accompanying notes thereto.
S-4 SCHEDULE IV
ZURICH REINSURANCE CENTRE HOLDINGS, INC. AND SUBSIDIARIES
REINSURANCE (Dollars in thousands)
S-5