RELIANCE SURETY GROUP INC, S-1, 1999-10-27

RELIANCE SURETY GROUP INC
S-1, 1999-10-27

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<PAGE>

AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 27, 1999

REGISTRATION NO. 333-
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

------------------------

FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933

------------------------

RELIANCE SURETY GROUP, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

------------------------

<TABLE>
<S> <C> <C>
DELAWARE 6331 23-3016889
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
</TABLE>

------------------------

THREE PARKWAY
PHILADELPHIA, PA 19102
(215) 864-4000
(ADDRESS, INCLUDING ZIP CODE AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)

------------------------

VINCENT G. FASANO
RELIANCE SURETY GROUP, INC.
THREE PARKWAY
PHILADELPHIA, PA 19102
(215) 864-4000
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF AGENT FOR SERVICE)

------------------------

Copies to:

<TABLE>
<S> <C> <C>
HOWARD E. STEINBERG, ESQ. JONATHAN L. FREEDMAN, ESQ. MICHAEL A. BECKER, ESQ.
RELIANCE GROUP HOLDINGS, INC. DEWEY BALLANTINE LLP CAHILL GORDON & REINDEL
55 EAST 52ND STREET 1301 AVENUE OF THE AMERICAS 80 PINE STREET
NEW YORK, NEW YORK 10055 NEW YORK, NEW YORK 10019 NEW YORK, NEW YORK 10005-1702
(212) 909-1100 (212) 259-8000 (212) 701-3000
</TABLE>

------------------------

APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.

------------------------

If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, as amended (the "Securities Act"), check the following box. / /

If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. / /

If this Form is a post-effective amendment filed pursuant to Rule
462(c) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering. / /

If this Form is a post-effective amendment filed pursuant to Rule
462(d) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering. / /

If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /

------------------------

CALCULATION OF REGISTRATION FEE

<TABLE>
<CAPTION>
PROPOSED MAXIMUM
TITLE OF EACH CLASS AGGREGATE OFFERING AMOUNT OF
OF SECURITIES TO BE REGISTERED PRICE(1) REGISTRATION FEE
<S> <C> <C>
Common Stock, par value $0.10 per share....................................... $100,000,000 $27,800
</TABLE>

(1) Estimated solely for purposes of calculating the registration fee pursuant
to Rule 457(o) under the Securities Act.

------------------------

THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------

<PAGE>

WE WILL AMEND AND COMPLETE THE INFORMATION IN THIS PROSPECTUS. ALTHOUGH WE ARE
PERMITTED BY US FEDERAL SECURITIES LAWS TO OFFER THESE SECURITIES USING THIS
PROSPECTUS, WE MAY NOT SELL THEM OR ACCEPT YOUR OFFER TO BUY THEM UNTIL THE
DOCUMENTATION FILED WITH THE SEC RELATING TO THESE SECURITIES HAS BEEN DECLARED
EFFECTIVE BY THE SEC. THIS PROSPECTUS IS NOT AN OFFER TO SELL THESE
SECURITIES OR OUR SOLICITATION OF YOUR OFFER TO BUY THESE SECURITIES IN ANY
JURISDICTION THAT WOULD NOT BE PERMITTED OR LEGAL.

SUBJECT TO COMPLETION--OCTOBER 27, 1999

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- --------------------------------------------------------------------------------
PROSPECTUS
, 1999

RELIANCE SURETY GROUP, INC.
SHARES OF COMMON STOCK

- --------------------------------------------------------------------------------

THE COMPANY:

o We develop, market and underwrite
a broad array of surety and fidelity bonds.

o Reliance Surety Group, Inc.
Three Parkway
Philadelphia, Pennsylvania 19102
(215) 864-4000
www.reliancesurety.com

PROPOSED SYMBOL & MARKET:

o RSF/NYSE

THE OFFERING:

o The Company is offering all of the shares.

o The underwriters have an option to purchase an additional shares from
the Company to cover over-allotments.

o This is our initial public offering, and no public market currently exists
for our shares.

o We plan to contribute substantially all of the net proceeds of this offering
to the statutory capital of our wholly-owned insurance subsidiary, but will
retain a portion for the payment of our future expenses and stockholder
dividends.

o Closing: , .

<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------
Per Share Total
- --------------------------------------------------------------------------------------------
<S> <C> <C>
Public offering price (estimated): $ $
Underwriting fees:
Proceeds to Company:
- --------------------------------------------------------------------------------------------
</TABLE>

This investment involves risk. See "Risk Factors" beginning on Page 9.

- --------------------------------------------------------------------------------

NEITHER THE SEC NOR ANY STATE SECURITIES COMMISSION HAS DETERMINED WHETHER THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. NOR HAVE THEY MADE, NOR WILL THEY MAKE, ANY
DETERMINATION AS TO WHETHER ANYONE SHOULD BUY THESE SECURITIES. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.

- --------------------------------------------------------------------------------

JOINT BOOK-RUNNING MANAGERS

DONALDSON, LUFKIN & JENRETTE BEAR, STEARNS & CO. INC.

<PAGE>

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary............................. 3
Risk Factors................................... 9
Use of Proceeds................................ 13
Dividend Policy................................ 13
Capitalization................................. 13
Dilution....................................... 14
The Company.................................... 15
Historical Selected Financial Data............. 16
Management's Discussion and Analysis........... 17
Business....................................... 23
Management..................................... 36

<CAPTION>
PAGE
----
<S> <C>
Related Party Transactions..................... 40
Principal Stockholder.......................... 43
Description of Capital Stock................... 44
Shares Eligible for Future Sale................ 46
Underwriting................................... 47
Legal Matters.................................. 49
Experts........................................ 49
Forward Looking Statements..................... 49
Where You Can Find More Information............ 50
Index to Financial Statements.................. F-1
</TABLE>

You should rely only on the information contained in this prospectus. We
have not, and the underwriters have not, authorized any other person to provide
you with different information. If anyone provides you with different or
inconsistent information, you should not rely on it. We are not, and the
underwriters are not, making an offer to sell these securities in any
jurisdiction where the offer or sale is not permitted.

Unless otherwise stated, all of the information in this prospectus assumes
that the underwriters do not exercise their over-allotment option. All
references to "we," "us," "our," or "Reliance Surety Group" mean Reliance Surety
Group, Inc. or, if the context so indicates, its predecessor, the Reliance
Surety operating unit of Reliance Insurance Company. See "The Company." All
references to "Reliance Surety" mean the wholly-owned subsidiary of Reliance
Surety Group, Reliance Surety Company. All references to "the Reliance Insurance
companies" mean the various other insurance companies which are part of the
Reliance Group Holdings, Inc. companies, including Reliance Insurance Company.

Statistical information presented in this prospectus with respect to the
surety and fidelity sector has been obtained from the Surety Association of
America (which compiles the information from the statutory statements of its
member companies), and statistical information with respect to the property and
casualty industry has been obtained from A.M. Best. All loss ratios presented in
this prospectus include both loss and loss adjustment expense.

All financial data contained in this prospectus have been prepared in
accordance with generally accepted accounting principles, except where we have
indicated statutory data, which have been prepared in accordance with applicable
statutory accounting practices.

<PAGE>

PROSPECTUS SUMMARY

This summary highlights information contained elsewhere in this prospectus.
It is not complete and may not contain all the information that you should
consider before investing in our common stock. You should read the entire
prospectus carefully, including the "Risk Factors" section and the financial
statements and the related notes, all of which appear elsewhere in this
prospectus.

RELIANCE SURETY GROUP, INC.

We develop, market and underwrite a broad array of surety and fidelity
bonds for a diverse range of customers. In 1998, we were the third largest
provider of surety bonds and the ninth largest provider of fidelity bonds in the
U.S. based on direct written premium. We market our products in all 50 states,
the District of Columbia and Puerto Rico through approximately 3,500 independent
agents. For 1998 and the six months ended June 30, 1999, we reported
$246.4 million and $125.6 million of direct written premium, respectively, and
achieved statutory combined ratios of 75.3% and 79.6%, respectively. The
combined ratio, which is calculated by dividing expenses and losses by net
premium, measures underwriting profitability. A ratio of less than 100%
represents an underwriting profit.

The surety and fidelity sector has been among the most profitable sectors
of the U.S. insurance industry over the past five calendar years, and we have
significantly outperformed the surety and fidelity sector during that period.
From 1994 through 1998, we achieved a statutory combined ratio of 73.7% compared
to a surety and fidelity sector combined ratio of 87.0% and a property and
casualty industry combined ratio of 105.5%. During that period, our direct
written premium grew at a compounded annual rate of 9.8% compared to 2.7% for
the surety and fidelity sector and 3.1% for the property and casualty industry.
We attribute our success to the following:

o WE UNDERWRITE OUR SURETY BONDS TO A ZERO-LOSS GOAL. Unlike property
and casualty losses, surety losses generally result from failure of
the principal (the entity whose performance we guarantee) to perform
due to financial weakness or poor management. As part of our
underwriting process, we carefully analyze the principal's
creditworthiness and management capabilities. We have achieved loss
ratios that have outperformed the surety and fidelity sector because
of our emphasis on credit analysis and field office diligence, our
unique compensation structure and the training and teamwork among
our experienced underwriters and claims personnel.

o WE OFFER ONE OF THE BROADEST ARRAYS OF CONTRACT AND COMMERCIAL
SURETY AND FIDELITY PRODUCTS IN THE INDUSTRY. Our products are
designed for a diverse range of customers including large, medium
and small contractors--our core markets--and other companies,
including financial institutions and retailers. As a result, we can
provide our independent agents with products that address almost all
of their customers' surety and fidelity needs.

o WE ARE DEDICATED TO "BUILDING RELATIONSHIPS AND KEEPING THEM
STRONG."(REGISTERED) We believe that the strength of our
relationships with agents and customers and our high level of
service have been instrumental to our ability to grow significantly
faster than the overall surety and fidelity sector. The underwriters
in our 34 field offices are highly responsive to our customers,
understand their businesses and provide continuity of service at the
local level.

o WE COMPENSATE OUR UNDERWRITERS TO ENCOURAGE PROFITABLE GROWTH. Our
field office underwriters receive bonuses based on the profitability
and production of their respective field offices. We believe that
our focus on profitable growth encouraged by this compensation
structure has been a major factor in enabling us to achieve growth
rates and combined ratios that are among the best in the surety and
fidelity sector.

o OUR HIGHLY SKILLED CLAIMS DEPARTMENT HAS BEEN INSTRUMENTAL IN
ACHIEVING OUR LOW LOSS RATIO. Our claims personnel are proactive in
identifying potential losses and taking the necessary actions to
mitigate them. In addition to attorneys, our claims department
includes accountants and engineers which enables us to resolve a
high percentage of our claims without using outside consultants. As
a result, we believe our claims department handles claims on a more
timely and cost effective basis and achieves better results than our
competitors.

<PAGE>

o OUR EXPERIENCED SENIOR MANAGEMENT TEAM HAS WORKED TOGETHER FOR
15 YEARS. Our five senior managers have an average of 22 years of
experience in the surety and fidelity business and four of them have
worked together at the Reliance Surety operations for the last
15 years. Our field office managers have an average of 16 years of
experience in the surety and fidelity business.

As a result of these factors we have gained market share over the past five
years while achieving a lower loss ratio than the surety and fidelity sector.
Our objective is to maximize our profitability while maintaining our position as
one of the leading providers of surety and fidelity products in the United
States. We expect to benefit from the anticipated growth in the surety market,
in part driven by anticipated higher government spending on public works
projects.

Contract surety bonds accounted for 69% of our gross written premium during
both 1998 and the six months ended June 30, 1999. Most of the contract surety
bonds we write are for contractors engaged in the construction of public works
projects, such as highways, bridges and schools, and, to a lesser extent,
commercial real estate and multifamily housing. According to FMI Corporation, a
leading provider of management consulting and education services to the
construction industry, for the five year period ending in 1998, U.S. Government
infrastructure spending on non-building projects (including highways, water
supply, sewers, utilities and conservation) grew at a compounded annual rate of
2.8% and is expected to grow at a compounded annual rate of 9.8% from
1998 to 2000.

Surety bonds, unlike other property and casualty policies, are three-party
agreements in which the issuer of the bond (the surety) guarantees to a second
party (the owner/obligee) the fulfillment of some obligation on the part of a
third party (the principal). Contract surety bonds secure the payment and/or
performance of a contractual obligation generally with respect to a construction
project. Contract surety bonds are generally required by federal, state and
local governments for public works projects. Commercial surety bonds include all
surety bonds other than contract surety bonds and usually cover obligations
required by law. Fidelity bonds are insurance policies against employee theft,
as well as forgery, burglary or robbery.

Relationship with the Reliance Insurance Companies. We write our business
through several of the Reliance Insurance companies. We plan to continue our
relationship with the Reliance Insurance companies. Additionally, we are
planning to take all steps, including obtaining the necessary regulatory
approvals, to enable us to write the full array of our products on our own
insurance forms. We believe we will also have the ability to use other third
parties, including one or more of our reinsurers, until we can write all of our
business on our own. In this regard, we have entered into an agreement with a
large international reinsurer rated A++ by A.M. Best, pursuant to which that
company has agreed for five years to act, when we request, as co-surety on our
bonds. We describe the material terms of that agreement in "Business--Co-surety
Arrangement".

Our principal executive offices are located at Three Parkway, Philadelphia,
Pennsylvania 19102. Our telephone number is (215) 864-4000. Our Web site is
http://www.reliancesurety.com.

<PAGE>

THE OFFERING

<TABLE>
<S> <C>
Common stock offered......................

Common stock outstanding after this
offering................................

Use of proceeds........................... We expect to retain $10.0 million of the net proceeds from this
offering at Reliance Surety Group for the payment of holding company
expenses and stockholder dividends, and contribute the remaining
amount to the capital of our subsidiary, Reliance Surety.

Proposed NYSE Symbol...................... RSF
</TABLE>

<PAGE>

HISTORICAL SELECTED FINANCIAL DATA

<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
---------------------------------------------------- -------------------
1994 1995 1996 1997 1998 1998 1999
-------- -------- -------- -------- -------- -------- --------
($ IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
OPERATING DATA:
Gross premium written............... $170,543 $185,887 $204,060 $223,503 $249,307 $112,558 $126,895
-------- -------- -------- -------- -------- -------- --------
-------- -------- -------- -------- -------- -------- --------
Net premium written................. $117,989 $139,298 $159,183 $176,500 $204,367 $ 91,795 $103,409
-------- -------- -------- -------- -------- -------- --------
-------- -------- -------- -------- -------- -------- --------
Net premium earned.................. $108,833 $127,355 $147,416 $167,251 $196,693 $ 93,670 $101,391
Loss and loss adjustment
expenses ......................... 25,214 21,379 37,833 42,890 42,712 21,355 31,531
Acquisition costs and other
insurance expenses................ 52,307 58,590 69,129 80,151 94,059 43,663 48,992
Other operating expenses............ 3,317 3,564 4,220 5,740 5,512 2,781 3,085
-------- -------- -------- -------- -------- -------- --------
Underwriting income................. $ 27,995 $ 43,822 $ 36,234 $ 38,470 $ 54,410 $ 25,871 $ 17,783
-------- -------- -------- -------- -------- -------- --------
-------- -------- -------- -------- -------- -------- --------
LOSS RESERVES:
Gross loss reserves (at period
end).............................. $ 82,262 $ 69,974 $ 78,243 $105,882 $112,920 $103,644 $122,225
Net loss reserves (at period end)... $ 50,802 $ 46,602 $ 56,173 $ 67,075 $ 75,193 $ 71,674 $ 82,217
GAAP RATIOS:
Loss ratio.......................... 23.2% 16.8% 25.7% 25.7% 21.7% 22.8% 31.1%
Expense ratio....................... 51.1 48.8 49.8 51.3 50.7 49.5 51.4
-------- -------- -------- -------- -------- -------- --------
Combined ratio...................... 74.3% 65.6% 75.5% 77.0% 72.4% 72.3% 82.5%
-------- -------- -------- -------- -------- -------- --------
-------- -------- -------- -------- -------- -------- --------
STATUTORY RATIOS:
Loss ratio.......................... 23.6% 19.0% 24.5% 24.7% 25.3% 21.7% 27.0%
Expense ratio....................... 51.5 49.5 48.4 51.1 50.0 49.9 52.6
-------- -------- -------- -------- -------- -------- --------
Combined ratio...................... 75.1% 68.5% 72.9% 75.8% 75.3% 71.6% 79.6%
-------- -------- -------- -------- -------- -------- --------
-------- -------- -------- -------- -------- -------- --------
SURETY AND FIDELITY SECTOR STATUTORY
RATIOS:(1)
Loss ratio.......................... 38.9% 34.0% 35.9% 38.7% 40.6% N/A N/A
Expense ratio....................... 48.7 48.7 49.7 48.7 50.4 N/A N/A
-------- -------- -------- -------- -------- -------- --------
Combined ratio...................... 87.6% 82.7% 85.6% 87.4% 91.0% N/A N/A
-------- -------- -------- -------- -------- -------- --------
-------- -------- -------- -------- -------- -------- --------
</TABLE>

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(1) Industry ratios for the six months ended June 30, 1998 and 1999 are not
available.

<PAGE>

PRO FORMA SUMMARY FINANCIAL DATA

The pro forma summary financial data presented below are based on
historical financial information that has been derived from the financial
statements and accompanying notes included elsewhere in this prospectus. The
following pro forma summary financial data give effect to the assumed
transactions described below as if they had occurred on January 1, 1999 for
purposes of computing pro forma net income for the six months ended June 30,
1999 and as of June 30, 1999 for purposes of computing certain pro forma balance
sheet items.

The pro forma selected financial data are based on available information
and on assumptions we believe are reasonable. The pro forma selected financial
data are provided for informational purposes only and should not be construed to
be indicative of our financial position or results of operations had the
transactions described below been consummated on the dates assumed, and do not
in any way represent a projection or forecast of our financial position or
results of operations for any future date or period.

The pro forma summary financial information for the six months ended
June 30, 1999 and as of June 30, 1999 was prepared using the following
assumptions:

Pro Forma Balance Sheet Assumptions

o The receivable from parent of $168,462,000 at June 30, 1999 is converted
into interest bearing fixed income securities as of June 30, 1999.

o Reliance Surety Group is initially capitalized by the net proceeds of
this offering and by Reliance Insurance Company making a capital
contribution which together equal $219,394,000, and which is invested in
interest bearing fixed income securities as of June 30, 1999.

Pro Forma Income Statement Assumptions

o Net investment income for the six month period ending June 30, 1999
is based on the average invested asset portfolio over that period of
$376,618,000. The investment portfolio at December 31, 1998 is computed
by subtracting from the June 30, 1999 portfolio the estimated after tax
underwriting cash flow of $14,610,000 for the first six months of 1999
and the assumed after tax net investment income of $7,865,000 for the
first six months of 1999.

o In computing net investment income we assumed that the portfolio is fully
invested on January 1, 1999. The assumed average portfolio yield is 6.92%
per annum as determined by using average interest rates for the first six
months of 1999 using Standard & Poor's Corporate and Government Bond
Yield Index (which is based on securities with maturities of 15 years),
assuming an "A" rated portfolio, less 10 basis points for investment
management charges. Net investment income was reduced by interest paid on
funds held as collateral which averaged $36,220,000 during the first six
months of 1999 and to which an assumed average rate of 5.14% per annum
was applied based on a short term U.S. Treasury rate yield.

o The incremental pro forma pretax income resulting from the pro forma net
investment income was taxed at 35%.

<PAGE>

<TABLE>
<CAPTION>
PRO FORMA
SIX MONTHS
ENDED
JUNE 30, 1999
---------------
($ IN
THOUSANDS)
<S> <C>
Net premium written.................................................................. $ 103,409
---------
---------
Net premium earned................................................................... $ 101,391
Loss and loss adjustment expenses.................................................... 31,531
Acquisition costs and other insurance expenses....................................... 48,992
Other operating expenses............................................................. 3,085
---------
Underwriting income.................................................................. $ 17,783
---------
---------
Net investment income................................................................ $ 12,100(1)
---------
---------
Pretax income........................................................................ $ 29,730
---------
---------
Net income........................................................................... $ 19,222
---------
---------

<CAPTION>
AS OF JUNE 30,
1999
---------
<S> <C>
Invested assets...................................................................... $ 387,856(2)
Total assets......................................................................... 568,013
Gross loss reserves.................................................................. 122,225
Net loss reserves.................................................................... 82,217
Shareholders' equity................................................................. 219,394(3)
</TABLE>

- ------------------

<TABLE>
<S> <C> <C> <C>
(1) Pro forma net investment income
Average pro forma invested assets......................................... $ 376,618
Assumed average portfolio yield........................................... x 6.92%
---------
$ 26,062
Less:
Average funds held as collateral.......................................... $36,220
Assumed average yield paid on funds held as collateral.................... x 5.14% 1,862
------- ---------
$ 24,200
Adjustment to reflect six month time frame................................ x 1/2
---------
Pro forma net investment income--six months ended June 30, 1999........... $ 12,100
---------
---------
(2) Assumed capital contribution.............................................. $ 219,394
Payment of parent receivable.............................................. 168,462
---------
Total pro forma invested assets, at June 30, 1999......................... $ 387,856
---------
---------
(3) Pro forma shareholders' equity
Closing date assumed statutory policyholders' surplus of
Reliance Surety......................................................... $ 150,000
Cash retained at Reliance Surety Group.................................... 10,000
Assets recognized for GAAP but not for statutory purposes:
Deferred acquisition costs................................................ 50,785
Salvage and subrogation accrual........................................... 12,225
Liabilities recognized for GAAP but not for statutory purposes:
Deferred tax liability.................................................... (3,616)
---------
Pro forma shareholders' equity............................................ $ 219,394
---------
---------
</TABLE>

<PAGE>

RISK FACTORS

An investment in our common stock involves a number of risks. You should
carefully consider the following risks, together with the other information
contained in this prospectus, including the information set forth under "Forward
Looking Statements", before investing in our common stock. Any of the risks
described below could result in a significant or material adverse effect on our
business, financial condition, results of operations, or prospects and a
corresponding decline in the market price of our common stock.

OUR BUSINESS WOULD BE ADVERSELY AFFECTED IF OUR RELATIONSHIP WITH THE RELIANCE
INSURANCE COMPANIES IS AFFECTED

Our business is written on Reliance Insurance companies' insurance forms, and
we rely on their bond rate and form filings.

Since we have not operated as a stand-alone entity prior to the offering,
we did not need, and do not have a complete set of, our own bond rate and form
filings. Therefore, our ability to continue to write our business largely
depends on our continuing ability, through various agreements, to utilize the
bond rate and form filings of the Reliance Insurance companies. See "The
Company" and "Related Party Transactions--Power of Attorney". These agreements
make available to us the Reliance Insurance companies' insurance forms for the
next five years, and are subject to renewal. However, we cannot assure you that
this arrangement will be extended beyond five years or, if extended, that the
arrangement will have the same terms and conditions. If this arrangement with
the Reliance Insurance companies were for any reason to become unavailable to us
or we deem it to be not the best alternative for us, we would need to establish
an arrangement with another insurer similar to this arrangement. We do not have
in place an alternative arrangement and therefore cannot assure you that we
would be able to secure one. Failure to secure an alternative arrangement on a
timely basis could have a material adverse effect on us.

We depend upon the Reliance Insurance companies maintaining an A.M. Best
rating of at least A- (Excellent).

We believe that A.M. Best ratings are one of the most important factors in
maintaining a competitive position in the markets in which we do business. Many
states and municipal authorities require that issuers of a surety bond have a
minimum rating of A- (Excellent) in instances when the bond is issued for their
benefit or when they require the bond for a person to engage in a certain
activity like selling motor vehicles. In addition, other bond purchasers may be
more reluctant to purchase a bond from a company with a rating lower than
A- (Excellent). A.M. Best ratings are based upon factors relevant to
policyholders, agents, insurance brokers and intermediaries and are not meant to
protect investors.

We rely upon the A.M. Best rating of the Reliance Insurance companies due
to our dependence on them as described above. The Reliance Insurance companies,
as well as Reliance Surety, as a subsidiary of the Reliance Insurance Company,
are currently rated A- (Excellent) by A.M. Best. If the rating of the Reliance
Insurance companies changes, it is possible that our rating may change as well.

If the Reliance Insurance companies' A.M. Best rating were downgraded for
any reason, it could have a material adverse effect on us. In October 1999, A.M.
Best announced that it had placed the A- (Excellent) rating of the Reliance
Insurance companies under review with negative implications. A.M. Best stated
that it will closely monitor various factors with respect to the Reliance
Insurance companies and their parent companies and that it expects to complete
its review during the first quarter of 2000.

In the event of a downgrade of the Reliance Insurance companies, we would
have to rely on an arrangement with another insurer similar to our present
arrangement with the Reliance Insurance companies. In this regard, we have
entered into an agreement with a large international reinsurer rated A++ by A.M.
Best, pursuant to which that company has agreed for five years to act, when we
request, as co-surety on our bonds so long as, among other things, either
C. Brian Schmalz or David T. Akers continues to serve as one of our executive
officers. We describe the other material terms of the agreement in
"Business--Co-surety Arrangement".

<PAGE>

We depend upon the Reliance Insurance companies' U.S. Treasury limitations.

We are currently bound by U.S. Treasury Department regulations which set
underwriting limitations on surety bonds for federal and other public works
projects. U.S. Treasury limitations are based upon risk-adjusted capital and
surplus and are established annually. Reliance Surety's stand-alone underwriting
limitations are currently $2.25 million per bond. In the absence of other
arrangements, the limitation would prevent Reliance Surety from underwriting
large federal and other public works project bonds. Through various agreements
with the Reliance Insurance companies, Reliance Surety's U.S. Treasury
limitation is $125.1 million per bond through June 30, 2000. These agreements
make available to us the Reliance Insurance companies' U.S. Treasury limitations
for the next five years and may be renewed upon expiration. However, we cannot
assure you that the annual limitations with respect to the Reliance Insurance
companies in the future will not be significantly lower than the current amount
or that once the term of the reinsurance and related agreements expires, they
will be extended. If these agreements are not extended or the future limitation
is not sufficient for our business, Reliance Surety will not have access to the
larger U.S. Treasury limitations of the Reliance Insurance companies and would
need to rely on an arrangement with another insurer similar to the present
arrangement with the Reliance Insurance companies. In this regard, the agreement
with the A++ rated co-surety described above makes available to us their U.S.
Treasury limitations, which exceed those currently available to us. We describe
the material terms of the agreement in "Business--Co-surety Arrangement". Not
having access to sufficient U.S. Treasury limitations would have a material
adverse effect on us.

The Reliance Insurance companies will provide administrative services to us.

Significant administrative and service functions necessary for our
operations are currently provided by the Reliance Insurance companies under an
administrative services agreement. The services include investment management
services, telecommunications services, computer access and support, human
resource assistance, accounting, financial and actuarial support, and legal, tax
and various other business services. See "Related Party Transactions".

RELIANCE GROUP HOLDINGS WILL RETAIN CONTROL OVER OUR COMPANY AFTER THIS
OFFERING. RELIANCE GROUP HOLDINGS MAY MAKE DECISIONS THAT ARE IN ITS BEST
INTEREST AND NOT IN OUR BEST INTEREST OR IN THE BEST INTEREST OF OUR OTHER
STOCKHOLDERS

Upon completion of this offering, Reliance Group Holdings will own
indirectly over 80% of our outstanding common stock. As a result, Reliance Group
Holdings will have the ability to elect a majority of the members of our board
of directors. Therefore, Reliance Group Holdings will be able to control our
policy decisions, including the issuance of securities and payment of dividends.
For example, Reliance Group Holdings may delay, defer or prevent a change in
control or other business combination even if such a transaction would be
beneficial to other stockholders. See "Principal Stockholder".

WE MAY EXPERIENCE CONFLICTS OF INTEREST WITH RELIANCE GROUP HOLDINGS, WHICH MAY
NOT BE RESOLVED IN OUR FAVOR

Reliance Group Holdings and Reliance Surety Group may have conflicts of
interest with respect to certain decisions involving business opportunities and
similar matters that may arise in the ordinary course of our business or the
business of Reliance Group Holdings. Conflicts, if any, could be resolved in a
manner adverse to us and our stockholders.

WE WILL BE A NEW STAND-ALONE COMPANY; WE DO NOT HAVE AN INDEPENDENT OPERATING
HISTORY

We are a newly-formed subsidiary of Reliance Group Holdings. Therefore, we
have never before operated as a separate, stand-alone company. Prior to this
offering, our insurance operations have been conducted as an operating unit of
the Reliance Insurance companies, and we did not have separate statutory
policyholders' surplus or invested assets.

As a result, the historical financial information included in this
prospectus does not reflect what the financial position and results of our
operations would have been had we operated as a separate, stand-alone entity
during the periods presented and is not necessarily indicative of future
results. For example, because no

<PAGE>

investment portfolio has been historically allocated to us, net investment
income and related capital gains and losses have not been allocated to our
business.

OUR BUSINESS COULD BE ADVERSELY AFFECTED BY CHANGES IN LAW

Contract surety bonds are required generally by federal, state and local
governments for public works projects. In addition, a significant portion of our
business consists of writing commercial surety and fidelity bonds required by
various state statutes and local ordinances to cover acts of public officials
and private businesses, such as realtors, automobile dealers and others who
generally interact with members of the public. In recent years, several
jurisdictions have repealed, or considered action to repeal, legislation
mandating the use of various types of these bonds, often replacing them with
alternatives such as recovery funds administered by the states for the benefit
of citizens who assert claims against the officials or businesses. The repeal of
legislation mandating the use of bonds we write could have a material adverse
effect on us.

CHANGES IN ECONOMIC CONDITIONS OR REDUCTIONS IN GOVERNMENT SPENDING ON PUBLIC
WORKS COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS

Contract surety bonds accounted for 69% of our gross written premium during
both 1998 and the six months ended June 30, 1999. Most of the contract surety
bonds we write are for contractors engaged in the construction of public works
projects, such as highways, bridges and schools, and, to a lesser extent,
commercial real estate and multifamily housing. An economic downturn could
result in financial weakness and bankruptcies of contractors, and a decline in
the number of construction projects. This could result in an increase in claims
against us. In addition, our business volume could decline if federal, state or
local governments reduce their expenditures for public works, or if less
construction is undertaken.

WE MAY NOT BE ABLE TO PAY STOCKHOLDER DIVIDENDS OR MEET OUR OBLIGATIONS IF OUR
INSURANCE SUBSIDIARY CANNOT PAY US DIVIDENDS

We are an insurance holding company. We will depend principally on
dividends from our insurance subsidiary, Reliance Surety, to satisfy our
financial obligations, pay our expenses and pay dividends to our stockholders.
The Delaware insurance law, to a significantly greater extent than Delaware's
general corporation law, limits the amount and timing of shareholder dividends
payable by Reliance Surety to Reliance Surety Group. If Reliance Surety is
unable to pay stockholder dividends in the future, we may not be able to pay
dividends to our stockholders or meet our cash obligations.

OUR RESERVES MAY NOT BE ADEQUATE AND FUTURE ADJUSTMENTS MAY BE REQUIRED

Our reserves are based on loss estimates that may differ from actual future
loss payments due to the inherent uncertainties involved in the process of
establishing reserves. We have had both favorable and unfavorable reserve
adjustments in recent periods. Unfavorable reserve adjustments required to cure
any deficiencies are charged against earnings and could have a material adverse
effect on us. Our reserves, including the stated amount of salvage and
subrogation, are reviewed by the Reliance Insurance companies' internal
actuaries. In addition, the adequacy of our reserves has been, and is expected
to continue to be, reviewed periodically by a nationally recognized independent
actuarial consulting firm.

WE MAY BE ADVERSELY AFFECTED IF OUR YEAR 2000 EFFORTS ARE NOT SUCCESSFUL

The Year 2000 issue relates to computer systems that were designed using
two digits, rather than four, to represent a given year. Computer programs that
have date-sensitive software may recognize "2000" as the year 1900, rather than
2000, possibly resulting in major system failures or miscalculations and
disruption of our operations. Any failure of our internal systems or failure of
the systems of third parties with which we have relationships, including
customers and business partners, as a result of the Year 2000 issue could have a
material adverse effect on us.

<PAGE>

OUR CLAIMS EXPERIENCE MAY BE MATERIALLY ADVERSELY AFFECTED IF OUR CUSTOMERS'
YEAR 2000 EFFORTS ARE NOT SUCCESSFUL

If our customers do not successfully address their Year 2000 issue, they
could be materially adversely affected. This may make it more likely that they
will fail to perform the obligations with respect to which we have issued surety
bonds. In addition, failure of computer systems could adversely affect the
safeguards against the type of risks covered by our fidelity bonds. In those
events we could experience more frequent and/or larger claims than historically
has been the case, which could have a material adverse effect on us.

THERE HAS BEEN NO PRIOR MARKET FOR OUR COMMON STOCK, AND AN ACTIVE TRADING
MARKET MAY NOT DEVELOP FOLLOWING THIS OFFERING

Before this offering, there has not been a public market for our common
stock, and the trading market price for our common stock may decline below the
initial public offering price. We cannot predict the extent to which a market
will develop or how liquid that market might become. The initial public offering
price for the shares of our common stock will be determined by negotiations
among Reliance Group Holdings, us and the representatives of the underwriters
and may not be indicative of prices that will prevail in the trading market. See
"Underwriting" for a discussion of the factors to be considered in determining
the initial public offering price.

FUTURE SALES OF OUR COMMON STOCK MAY CAUSE OUR STOCK PRICE TO DECLINE

Sales of significant amounts of our common stock in the public market after
this offering or the perception that sales will occur could adversely affect the
market price of our common stock or our future ability to raise capital through
an offering of our equity securities. Of the shares of common stock to be
outstanding upon the closing of this offering, the shares offered hereby
will be eligible for immediate sale in the public market without restriction,
unless the shares are purchased by our "affiliates" within the meaning of
Rule 144 under the Securities Act of 1933. The remaining shares of our
common stock held by Reliance Insurance Company upon the closing of this
offering will be "restricted securities", as that term is defined in Rule 144 of
the Securities Act. Restricted securities may be sold in the public market only
in compliance with the registration requirements of the Securities Act or
pursuant to an exemption from registration, including the exemption provided by
Rule 144. All of the restricted securities held by Reliance Insurance Company
will be subject to 180-day lock-up agreements (subject to any restrictions
applicable to Reliance Insurance Company under the insurance laws of the
Commonwealth of Pennsylvania), but are entitled to the benefits of the
registration rights agreement described in "Related Party
Transaction--Registration Rights Agreement".

In addition, as of , 1999, there were outstanding options to
purchase shares of common stock which will be eligible for sale in the
public market from time to time subject to vesting. See "Management", "Shares
Eligible for Future Sale" and "Underwriting".

<PAGE>

USE OF PROCEEDS

We estimate that the net proceeds to us from the sale of the shares of
common stock sold by us in this offering will be approximately $ , at an
assumed initial public offering price of $ per share after deducting the
estimated underwriting discount and estimated offering expenses. If the
underwriters' over-allotment option is exercised in full, we estimate the net
proceeds will be $ . We expect to retain $10.0 million of the net proceeds
at Reliance Surety Group for the payment of holding company expenses and
stockholder dividends and contribute the remaining amount to the capital of our
subsidiary, Reliance Surety.

DIVIDEND POLICY

We intend to recommend to our board that it declare a cash dividend of
$ per quarter on our common stock. We intend that the first dividend will
be paid in the first full fiscal quarter commencing after this offering. The
declaration of dividends will be reviewed quarterly by our board of directors in
light of our earnings, financial condition and capital requirements. The
dividend may be adjusted or eliminated at the discretion of our board of
directors on the basis of these or other considerations.

As an insurance holding company, we will depend almost entirely on
dividends and other payments from our insurance subsidiary Reliance Surety for
the payment of cash dividends to our stockholders. The payments to us by
Reliance Surety are restricted by the insurance laws of the State of Delaware,
the state of domicile of Reliance Surety. In addition, the Insurance
Commissioner of the State of Delaware has authority in certain circumstances to
prohibit the payment of dividends and other amounts by Reliance Surety to us
that would otherwise be permitted without regulatory approval. See
"Business--Regulation".

CAPITALIZATION

The following table sets forth our capitalization as of June 30, 1999 on an
"as adjusted" basis to reflect the net proceeds of the offering to be received
by us and the amount of capital to be contributed by Reliance Insurance Company.
See "Pro Forma Summary Financial Data".

<TABLE>
<CAPTION>
JUNE 30, 1999
-------------
(THOUSANDS)
<S> <C>
Debt............................................................................. $ --
Shareholders' equity:
Preferred stock, par value $1.00 per share: 20,000,000 shares authorized and no
shares issued and outstanding, as adjusted.................................. --
Common stock, par value $0.10 per share: 100,000,000 shares authorized and
shares issued and outstanding, as adjusted............................. 219,394
---------
Total capitalization........................................................ $ 219,394
---------
---------
</TABLE>

The net proceeds from this offering, together with the amount of capital
contributed by Reliance Insurance Company, will provide Reliance Surety with a
statutory policyholders' surplus of $150.0 million as of the consummation of
this offering.

<PAGE>

DILUTION

The pro forma net tangible book value of our common stock on June 30, 1999
was $ million, or approximately $ per share. Pro forma net tangible book
value per share represents the amount of our total tangible assets less total
liabilities, divided by the pro forma number of shares outstanding. Dilution
in net tangible book value per share represents the difference between the
amount per share paid by purchasers of shares in this offering and the net
tangible book value per share immediately after the offering. After giving
effect to our sale of the shares offered hereby and after deducting the
underwriting discounts and commissions and estimated offering expenses payable
by us, our net tangible book value would have been $ or $ per share. This
represents an immediate increase in net tangible book value of $ per share to
our existing stockholder and an immediate dilution in net tangible book value of
$ per share to new investors. The following table illustrates this per share
dilution.

<TABLE>
<S> <C> <C>
Assumed initial public offering price per share........................................... $
Pro forma net tangible book value per share as of June 30, 1999......................... $
Increase per share attributed to new investors.......................................... $
Pro forma net tangible book value per share after the offering............................ $
Dilution in pro forma net tangible book value per share to new investors.................. $
</TABLE>

Assuming the exercise in full of the underwriters' over-allotment option,
our pro forma as adjusted net tangible book value at June 30, 1999 would be
approximately $ per share, representing an immediate increase in the pro forma
net tangible book value of $ per share to our existing stockholder and an
immediate decrease in net tangible book value of $ per share to new investors.
The following table summarizes, on a pro forma as adjusted basis, as of ,
1999, the difference between the number of shares of common stock purchased from
us, the total consideration paid to us, and the average price per share paid by
our existing stockholder and by new investors at the initial public offering
price of $ per share, before deducting the estimated underwriting discounts
and offering expenses.

<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
------------------ ------------------- PRICE PER
NUMBER PERCENT AMOUNT PERCENT SHARE
------- ------- -------- ------- ---------
<S> <C> <C> <C> <C> <C>
Existing stockholders....................................... % $ % $
New investors...............................................
------- ----- -------- ----- ---------
Total..................................................... % $ % $
------- ----- -------- ----- ---------
------- ----- -------- ----- ---------
</TABLE>

The discussion and the tables above assume no exercise of stock options
outstanding on the date of this prospectus and no issuance of shares reserved
for future issuance under our equity plans. As of the date of this prospectus,
there were options outstanding to purchase shares of common stock at a
weighted average exercise price of $ per share. Assuming the exercise in full
of all of these options, our pro forma as adjusted net tangible book value at
June 30, 1999 would be $ per share, representing an immediate increase in the
pro forma net tangible book value of $ per share to our existing stockholder
and an immediate decrease in net tangible book value of $ per share to new
investors. See "Capitalization" and "Management".

<PAGE>

THE COMPANY

PREDECESSOR OPERATIONS

Prior to this offering, our insurance operations have been conducted as an
operating unit of the Reliance Insurance companies. We write most of our
business using the insurance rate and form filings of the Reliance Insurance
companies. In addition, we receive a number of administrative and other services
(such as investment management services, telecommunications services, computer
access and support, human resource assistance, accounting, financial and
actuarial support, and legal, tax and various other business services) from the
Reliance Insurance companies. However, we have been managed as a separate profit
center of the Reliance Insurance companies by our own management team.

FORMATION OF RELIANCE SURETY GROUP

Reliance Surety Group, Inc. was incorporated in Delaware on September 27,
1999. Reliance Insurance Company subscribed for all of the then outstanding
shares of our common stock, and subsequently contributed to us all of the
outstanding capital stock of Reliance Surety Company. Prior to the consummation
of the offering, we intend to enter into the Quota Share and Loss Portfolio
Reinsurance Agreement, which provides for the reinsurance and loss portfolio
transfer transactions described in "Related Party Transactions--Quota Share and
Loss Portfolio Reinsurance Agreement".

Reliance Insurance Company will also make a capital contribution to us.
Following the capital contribution, the transfers pursuant to the Quota Share
and Loss Portfolio Reinsurance Agreement, and the receipt of the net proceeds of
this offering (x) the statutory policyholders' surplus of Reliance Surety will
be at least $150 million and (y) our shareholders' equity will be at least an
amount which, had this offering been consummated on June 30, 1999, would have
been $219,394,000, the amount of our pro forma stockholders' equity at June 30,
1999. See "Summary--Pro Forma Summary Financial Data". The amounts transferred
both pursuant to the Quota Share and Loss Portfolio Reinsurance Agreement and as
a capital contribution will be a combination of cash or investment grade fixed
income securities. Any fixed income securities transferred will comply with our
investment guidelines described in "Business--Investments" and will be valued
using the Merrill Lynch Matrix Pricing model, a standard pricing model in the
insurance industry.

We also will enter into the Assignment and Assumption, Administrative
Services, Tax Allocation, Trademark Assignment and Trademark License Agreements,
and the Power of Attorney with the Reliance Insurance companies described in
"Related Party Transactions". We plan to continue our relationship with the
Reliance Insurance companies for the next few years and to take all steps,
including obtaining the necessary regulatory approvals, to enable us to write
the full array of our products on our own insurance forms.

In connection with this offering, Reliance Group Holdings and its
subsidiaries on behalf of itself and its subsidiaries (other than Reliance
Surety Group) will indemnify us and our subsidiaries for all ordinary course
liabilities relating to Reliance Group Holdings and its subsidiaries which arose
prior to the consummation of this offering other than those ordinary course
liabilities relating to the Reliance Surety operating unit of Reliance Insurance
Company or those expressly assumed in the Quota Share and Loss Portfolio
Reinsurance Agreement and pursuant to the other agreements described in "Related
Party Transactions". Similarly, Reliance Surety Group will indemnify Reliance
Group Holdings and its subsidiaries (other than Reliance Surety Group) for all
ordinary course liabilities relating to the Reliance Surety operating units of
Reliance Insurance Company other than those liabilities expressly assumed in the
agreements described in "Related Party Transactions".

<PAGE>

HISTORICAL SELECTED FINANCIAL DATA

The following historical selected financial data should be read in
conjunction with our financial statements and "Management's Discussion and
Analysis" included elsewhere in this prospectus. The historical selected
financial data presented below as of December 31, 1997 and 1998 and for each of
the years ended December 31, 1996 through 1998 are derived from our audited
special-purpose Statement of Certain Assets and Liabilities and special-purpose
Statement of Certain Revenues and Claims and Expenses. The historical selected
financial data as of December 31, 1994, 1995 and 1996 and as of and for the six
months ended June 30, 1998 and 1999 and for each of the years ended
December 31, 1994 and 1995 have been derived from our unaudited special-purpose
statements. In the opinion of management, our unaudited special-purpose
statements include all adjustments, consisting of normal recurring adjustments,
necessary for the fair presentation of certain assets and liabilities and
certain revenues and claims and expenses at the dates and for the periods
presented. Results of operations for the six months ended June 30, 1999 are not
necessarily indicative of the results of operations to be expected for the full
fiscal year or in future periods. The historical selected financial data of
Reliance Surety Group do not include data with respect to assets, liabilities
(other than loss reserves) and shareholder's equity because Reliance Group
Holdings did not historically allocate the investment portfolio or capital of
its subsidiaries to its operating units.

Underwriting income..................... $ 27,995 $ 43,822 $ 36,234 $ 38,470 $ 54,410 $ 25,871 $ 17,783
-------- -------- -------- -------- -------- -------- --------
-------- -------- -------- -------- -------- -------- --------
LOSS RESERVES:
Gross loss reserves (at period end)..... $ 82,262 $ 69,974 $ 78,243 $105,882 $112,920 $103,644 $122,225
Net loss reserves (at period end)....... $ 50,802 $ 46,602 $ 56,173 $ 67,075 $ 75,193 $ 71,674 $ 82,217

GAAP RATIOS:
Loss ratio.............................. 23.2% 16.8% 25.7% 25.7% 21.7% 22.8% 31.1%
Expense ratio........................... 51.1 48.8 49.8 51.3 50.7 49.5 51.4
-------- -------- -------- -------- -------- -------- --------

Combined ratio.......................... 74.3% 65.6% 75.5% 77.0% 72.4% 72.3% 82.5%
-------- -------- -------- -------- -------- -------- --------
-------- -------- -------- -------- -------- -------- --------
STATUTORY RATIOS:
Loss ratio.............................. 23.6% 19.0% 24.5% 24.7% 25.3% 21.7% 27.0%
Expense ratio........................... 51.5 49.5 48.4 51.1 50.0 49.9 52.6
-------- -------- -------- -------- -------- -------- --------

Combined ratio.......................... 75.1% 68.5% 72.9% 75.8% 75.3% 71.6% 79.6%
-------- -------- -------- -------- -------- -------- --------
-------- -------- -------- -------- -------- -------- --------
SURETY AND FIDELITY SECTOR STATUTORY
RATIOS:(1)
Loss ratio.............................. 38.9% 34.0% 35.9% 38.7% 40.6% N/A N/A
Expense ratio........................... 48.7 48.7 49.7 48.7 50.4 N/A N/A
-------- -------- -------- -------- -------- -------- --------

Combined ratio.......................... 87.6% 82.7% 85.6% 87.4% 91.0% N/A N/A
-------- -------- -------- -------- -------- -------- --------
-------- -------- -------- -------- -------- -------- --------
</TABLE>

- ------------------

(1) Industry ratios for the six months ended June 30, 1998 and 1999 are not
available.

<PAGE>

MANAGEMENT'S DISCUSSION AND ANALYSIS

This discussion contains forward-looking statements based upon current
expectations that involve risks and uncertainties. See "Risk Factors" and
"Forward Looking Statements".

We are a newly formed company, incorporated in September 1999. We have had
no independent operating history. Therefore, the financial results which follow
are not indicative of what our results would have been had we operated as a
separate stand-alone company during these periods or of our future results. The
following discussion and analysis should be read in conjunction with our
statement of certain revenues and claims and expenses and certain assets and
liabilities and the related notes thereto. Our financial statements reflect
assets and liabilities identified as being attributable to our business. Because
Reliance Group Holdings did not historically allocate the investment portfolio
or capital of its subsidiaries to its business units, including us, our
financial statements do not include an investment portfolio or shareholder's
equity and, accordingly, do not include net investment income and realized gains
and losses on investments. Historically, we have not maintained our own cash
accounts nor engaged in cash management activities. Accordingly, cash flow data
and information is not included in our financial statements nor in this
management's discussion and analysis. Following this offering, we will have our
own investment portfolio and future financial statements will reflect investment
activities, including net investment income.

Premium on contract surety bonds is earned over the estimated term of the
bond, which varies with the estimated length of the underlying construction
period. Premium on commercial surety bonds and fidelity bonds is earned ratably
over the effective period of the bond.

Loss and loss adjustment expenses are estimated based on an evaluation of
both reported claims and statistical projections of claims incurred but not
reported and loss adjustment expenses. Loss and loss adjustment expense and the
unpaid loss and loss adjustment expense liability are net of estimates of
salvage and subrogation. We apply generally accepted actuarial techniques to
determine the estimates of ultimate liability. We do not discount reserves. The
process of estimating claims is a complex task and the ultimate liability may be
more or less than such estimates indicate. Adjustments of the probable ultimate
liability, based on subsequent developments, are included in operations in the
same period of such development. Our reserves, including the stated amount of
salvage and subrogation, are reviewed by the Reliance Insurance companies'
internal actuaries. In addition, the adequacy of our reserves has been, and is
expected to continue to be, reviewed periodically by a nationally recognized
independent actuarial consulting firm.

The costs associated with the acquisition of surety and fidelity business
are capitalized and amortized on a straight-line basis over the expected terms
of the bonds in force. Such deferred acquisition costs consist of commissions,
premium taxes and other bond issuance and underwriting expenses management deems
variable. Deferred acquisition costs are periodically reviewed to determine
whether they exceed recoverable amounts.

OUR BUSINESS AND INDUSTRY

We develop, market and underwrite a broad array of surety and fidelity
bonds for a diverse range of customers.

Contract surety bonds, which represented 69% of our gross written premium
during both 1998 and the six months ended June 30, 1999, secure the payment
and/or performance of a contractual obligation generally with respect to a
construction project. Contract surety bonds are generally required by federal,
state and local governments for public works projects. The volume of contract
surety business is influenced by a number of factors, including the general
state of the economy and government spending. According to FMI Corporation, a
leading provider of management consulting and education services to the
construction industry, for the five year period ending in 1998, U.S. Government
infrastructure spending on non-building projects (including highways, water
supply, sewers, utilities and conservation) grew at a compounded annual rate of
2.8% and is expected to grow at a compounded annual rate of 9.8% from
1998 to 2000.

Commercial surety bonds include all surety bonds other than contract surety
bonds and usually cover obligations required by law. Fidelity bonds are
insurance policies against employee theft, as well as forgery, burglary and
robbery.

<PAGE>

For the five years ended 1998, our direct written premium grew at a
compounded annual rate of 9.8% compared to 2.7% for the surety and fidelity
sector.

Total surety sector direct written premium has grown at a compounded annual
rate of 5.3% over the five calendar years ended 1998. We have grown our surety
direct written premium at a compounded annual rate of 9.6% over that same
period. The following table sets forth a comparison of the growth of our surety
direct written premium and the surety sector's direct written premium for the
past five years on a statutory basis.

RELIANCE SURETY GROUP--SURETY OPERATIONS

<TABLE>
<CAPTION>
FIVE-YEAR
COMPOUNDED
YEAR ENDED DECEMBER 31, ANNUAL
-------------------------------------------------------- GROWTH
1994 1995 1996 1997 1998 RATE
-------- -------- -------- -------- -------- ----------
($ IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
Direct written premium................... $148.0 $161.5 $176.0 $191.7 $214.5
Growth rate vs. prior year............... 9.3% 9.1% 9.0% 8.9% 11.9% 9.6%
</TABLE>

SURETY SECTOR

<TABLE>
<CAPTION>
FIVE-YEAR
COMPOUNDED
YEAR ENDED DECEMBER 31, ANNUAL
-------------------------------------------------------- GROWTH
1994 1995 1996 1997 1998 RATE
-------- -------- -------- -------- -------- ----------
($ IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
Direct written premium................... $2,354.7 $2,469.4 $2,730.7 $2,795.8 $2,930.6
Growth rate vs. prior year............... 4.1% 4.9% 10.6% 2.4% 4.8% 5.3%
</TABLE>

Unlike property and casualty insurance losses, surety losses generally do
not arise from acts of nature or accidents. Rather, surety losses generally
result from failure of the principal (the entity whose performance we guarantee)
to perform due to financial weakness or poor management. For example, a
contractor might not finish a project due to cash flow difficulties arising from
poor cash management or becoming over extended by taking on too many projects.
The surety business is characterized by low frequency and relatively high
severity of claims. As a result, our earnings and combined ratios can vary
significantly from quarter to quarter. They may also be affected by changes in
general economic conditions and governmental spending on public works projects.
Our business also tends to be seasonal. In general, we write a majority of our
premium in the second half of the year.

Our claims personnel are proactive in identifying potential losses and
taking the necessary actions to mitigate them. In addition to attorneys, our
claims department includes accountants and engineers which enables us to process
a higher percentage of our claims without using outside consultants. As a
result, we believe our claims department handles claims on a more timely and
cost effective basis and achieves better results than our competitors. Our
claims personnel draw on their skills and experience in evaluating alternative
ways of handling a claim. In some cases, this may simply mean negotiating a cash
settlement for a claim. In other cases, our claims personnel may decide to
finance a contractor experiencing financial difficulty so that he can complete
the project, or to hire a new contractor to complete the project. If we hire a
contractor, it will typically be one of our customers, and one of our engineers
will manage the project to completion.

For the five calendar years ended 1998, fidelity sector direct written
premium has decreased at a compounded annual rate of 4.3%. At the same time, our
fidelity direct written premium has grown at a compounded annual rate of 10.8%,
primarily as a result of our marketing of fidelity insurance products to
commercial customers.

The following table sets forth a comparison of our underwriting results and
the surety and fidelity sector's underwriting results for the past five calendar
years on a statutory basis.

<PAGE>

RELIANCE SURETY GROUP--SURETY AND FIDELITY OPERATIONS

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------ FIVE-YEAR
1994 1995 1996 1997 1998 PERIOD
---- ---- ---- ---- ---- ---------
<S> <C> <C> <C> <C> <C> <C>
Loss ratio........................................................ 23.6% 19.0% 24.5% 24.7% 25.3% 23.6%
Expense ratio..................................................... 51.5 49.5 48.4 51.1 50.0 50.1
---- ---- ---- ---- ---- -----
Combined ratio.................................................... 75.1% 68.5% 72.9% 75.8% 75.3% 73.7%
---- ---- ---- ---- ---- -----
---- ---- ---- ---- ---- -----
</TABLE>

SURETY AND FIDELITY SECTOR

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------ FIVE-YEAR
1994 1995 1996 1997 1998 PERIOD
---- ---- ---- ---- ---- ---------
<S> <C> <C> <C> <C> <C> <C>
Loss ratio........................................................ 38.9% 34.0% 35.9% 38.7% 40.6% 37.8%
Expense ratio..................................................... 48.7 48.7 49.7 48.7 50.4 49.2
---- ---- ---- ---- ---- -----
Combined ratio.................................................... 87.6% 82.7% 85.6% 87.4% 91.0% 87.0%
---- ---- ---- ---- ---- -----
---- ---- ---- ---- ---- -----
</TABLE>

- ------------------

RESULTS OF OPERATIONS--YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998

Premium. Net premium written (premium written net of ceded premium) and
net premium earned for the years 1996, 1997 and 1998 were as follows:

<TABLE>
<CAPTION>
NET PREMIUM WRITTEN NET PREMIUM EARNED
-------------------------------- --------------------------------
YEAR ENDED DECEMBER 31, YEAR ENDED DECEMBER 31,
-------------------------------- --------------------------------
1996 1997 1998 1996 1997 1998
-------- -------- -------- -------- -------- --------
(THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Contract surety......................... $101,449 $114,320 $137,288 $ 93,604 $109,248 $135,020
Commercial surety....................... 32,726 34,877 38,258 30,849 32,845 36,316
Fidelity................................ 25,008 27,303 28,821 22,963 25,158 25,357
-------- -------- -------- -------- -------- --------
$159,183 $176,500 $204,367 $147,416 $167,251 $196,693
-------- -------- -------- -------- -------- --------
-------- -------- -------- -------- -------- --------
</TABLE>

The 15.8% increase in net premium written in 1998, when compared to 1997,
and the 17.6% increase in net premium earned primarily resulted from growth in
contract surety net premium written of 20.1% and net premium earned of 23.6%.
Our contract surety business increased as a result of increased construction
activity by existing customers, the addition of new customers and, to a lesser
extent, a reduction in ceded premium as a result of a change in our reinsurance
program. The increase in our new customers resulted in part from the hiring, in
May 1998, of new underwriters with existing relationships. The growth in
contract surety business was achieved despite price competition and the impact
of consolidation among contractors in 1998. The 9.7% and 10.6% increase in
commercial surety net premium written and net premium earned in 1998, when
compared to 1997, primarily reflects increased premium from new customers
obtained. The 5.6% increase in fidelity net premium written in 1998, and the
0.8% increase in net premium earned, when compared to 1997, resulted from growth
in commercial fidelity where price competition has been less intense when
compared to fidelity bonds written for financial institutions.

The 10.9% increase in net premium written in 1997, when compared to 1996,
and the 13.5% increase in net premium earned primarily resulted from growth in
contract surety, particularly small contractor business. Contract surety net
premiums written and net premium earned increased 12.7% and 16.7% in 1997,
respectively. The increase in commercial surety net premium written and net
premium earned in 1997, when compared to 1996, reflects an increase in the
number of commercial surety bonds written. The increase in fidelity net premium
written of 9.2% and net premium earned of 9.6% for 1997 as compared to 1996
resulted from growth in commercial fidelity business.

<PAGE>

Underwriting Results. The following table is an analysis of our
underwriting income for each of the three years ended December 31, 1998:

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
1996 1997 1998
-------- -------- --------
($ IN THOUSANDS)
<S> <C> <C> <C>
Net premium earned........................................................... $147,416 $167,251 $196,693
-------- -------- --------
Loss and loss adjustment expenses............................................ 37,833 42,890 42,712
Other insurance expenses(1).................................................. 73,349 85,891 99,571
-------- -------- --------
111,182 128,781 142,283
-------- -------- --------
Underwriting income.......................................................... $ 36,234 $ 38,470 $ 54,410
-------- -------- --------
-------- -------- --------
Loss ratio................................................................... 25.7% 25.7% 21.7%
Expense ratio................................................................ 49.8 51.3 50.7
-------- -------- --------
Combined ratio............................................................... 75.5% 77.0% 72.4%
-------- -------- --------
-------- -------- --------
</TABLE>

- ------------------

(1) Includes expenses allocated from Reliance Insurance Company of $7.0 million,
$8.8 million and $9.2 million for the years ended December 31, 1996, 1997
and 1998, including rent expense of $3.2 million, $3.5 million and
$4.4 million, respectively.

The improvement in underwriting income in 1998 compared to 1997 reflects
growth in net premium earned and a decline in both the loss and expense ratios.
The decline in the loss ratio resulted from a low level of losses, particularly
in contract surety, and to a lesser extent from favorable development in prior
years' reserves as discussed below.

Loss and loss adjustment expenses in 1998 and 1997 includes favorable
development of prior years' reserves of $13.6 million and $9.5 million,
respectively, which reduced the 1998 and 1997 loss ratio by 6.9 and 5.7 points,
respectively. These favorable developments primarily occurred in contract surety
and, to a lesser extent, in the fidelity line of business.

The improvement in underwriting income in 1997, when compared to 1996,
reflects growth in net premium earned, as well as the favorable development of
prior years' reserves of $9.5 million in 1997. These favorable developments were
partially offset in 1997 by an increase in the expense ratio due to increased
incentive compensation plan accruals and higher agent commissions paid.

INTERIM RESULTS OF OPERATIONS--SIX MONTHS ENDED JUNE 30, 1999 AND 1998

Premium. Net premium written and net premium earned for the six months
ended June 30, 1998 and 1999 are as follows:

<TABLE>
<CAPTION>
NET PREMIUM WRITTEN NET PREMIUM EARNED
------------------- -------------------
SIX MONTHS ENDED JUNE 30,
------------------------------------------
1998 1999 1998 1999
------- -------- ------- --------
(THOUSANDS)
<S> <C> <C> <C> <C>
Contract surety.......................................... $61,760 $ 70,263 $63,563 $ 69,263
Commercial surety........................................ 18,487 19,800 17,806 18,292
Fidelity................................................. 11,548 13,346 12,301 13,836
------- -------- ------- --------
$91,795 $103,409 $93,670 $101,391
------- -------- ------- --------
------- -------- ------- --------
</TABLE>

The 12.7% and 8.2% increase in net premium written and net premium earned
in the first six months of 1999, when compared to the corresponding prior year
period, resulted primarily from new contractor surety business. This was due in
part to the hiring, in May 1998, of new underwriters with existing customer
relationships. We also experienced growth in our fidelity line of business as a
result of increased commercial fidelity business.

<PAGE>

Underwriting Results. The following table is an analysis of our
underwriting income for the first six months of 1998 and 1999:

<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
-------------------
1998 1999
------- --------
($ IN THOUSANDS)
<S> <C> <C>
Net premium earned......................................................................... $93,670 $101,391
------- --------
Loss and loss adjustment expenses.......................................................... 21,355 31,531
Other insurance expenses(1)................................................................ 46,444 52,077
------- --------
67,799 83,608
------- --------
Underwriting income........................................................................ $25,871 $ 17,783
------- --------
------- --------
Loss ratio................................................................................. 22.8% 31.1%
Expense ratio.............................................................................. 49.5 51.4
------- --------
Combined ratio............................................................................. 72.3% 82.5%
------- --------
------- --------
</TABLE>

- ------------------

(1) Includes expenses allocated from Reliance Insurance Company of $4.5 million
and $5.0 million for the six months ended June 30, 1998 and 1999 including
rent expense of $2.1 million and $2.3 million, respectively.

The decrease in underwriting income in 1999 reflects an increase in large
losses, primarily in contract surety. Losses over $1.0 million (net of
recoveries), were $11.4 million in 1999 compared to $2.8 million in 1998. We
believe the losses of over $1.0 million for the first six months of 1998 were
unusually low. The amount of such losses can vary significantly from period to
period, particularly with respect to short periods such as six months, due to
the large size of such losses and their low frequency. In addition, in the
second quarter of 1999, and in conjunction with an overall review of loss
reserves of the Reliance Insurance companies, we increased loss reserves for
business written in prior years by $4.1 million (4.0 loss ratio points) as
indicated by the results of a review related to our loss reserves.

The increase in the expense ratio in 1999 reflects higher net commission
expense incurred.

LIQUIDITY AND CAPITAL RESOURCES

Reliance Surety Group is an insurance holding company and it will have no
significant operations or assets other than its ownership of all of the capital
stock of its subsidiary, Reliance Surety. Reliance Surety Group intends to rely
on cash dividends from its subsidiary to pay dividends to its stockholders and
pay any operating expenses incurred. See "Dividend Policy".

Reliance Surety's primary source of liquidity will be its net cash flow
from operations, principally premium received, interest on investments, and
proceeds from the sale or maturity of investments. Its cash flow will also be
affected by operating expenses and by claims payments, which could include large
loss payments. As a result, its cash flow could fluctuate significantly from
period to period.

We do not currently have material commitments for capital expenditures over
the next twelve months. We expect that our financing and operating needs for the
foreseeable future will be met by proceeds from this offering as well as by
funds generated from operations.

The indentures and other financing documents pursuant to which Reliance
Group Holdings has issued indebtedness or otherwise borrowed money contain
covenants which restrict in specified ways the activities of the subsidiaries of
Reliance Group Holdings. Following this offering, we will continue to be deemed
a subsidiary of Reliance Group Holdings for purposes of these documents. The
restrictions include, among other things, the incurrence of indebtedness in
excess of specified amounts. Although we have no current plans to incur any
indebtedness, the covenants described in this paragraph may limit our ability to
incur indebtedness should we decide to do so in the future. A substantial
portion of the Reliance Group Holdings indebtedness matures during 2000.

<PAGE>

YEAR 2000

In general, the Year 2000 issue concerns many existing computers and
software products which were originally coded to accept only two digit entries
in the date code field. These computers and software products have been, or will
need to be, either replaced or reprogrammed in order for computer systems to
distinguish 21st century dates from 20th century dates.

Our Information Technology. Our surety and fidelity bonds contain date
sensitive data, such as expiration dates and premium payment dates. If our
material computer systems are not Year 2000 compliant, our business operations,
including claims and premium processing operations, financial reporting systems
and actuarial calculations, could be materially adversely affected.

Commencing in 1995, we replaced several obsolete systems, some of which
were not Year 2000 compliant, with two primary business practice software
applications. One of the applications processes our premiums and claims, and the
other application performs underwriting and marketing functions. Both
applications were installed as Year 2000 compliant. We have tested these systems
to confirm their Year 2000 compliance, a process which we completed in the
second quarter of 1999.

We rely on many of the Reliance Insurance companies' information technology
systems to provide us with administrative services which include, but are not
limited to, e-mail, telephone and human resources. The Reliance Insurance
companies have informed us that these systems have been tested where necessary
and that they believe such systems are Year 2000 compliant.

Third Party Information Technology. Even if all of our computer systems
and software products are Year 2000 compliant, the failure of third parties with
whom we do significant business to be Year 2000 compliant could materially
adversely affect us. Accordingly, as part of our Year 2000 process, we have
substantially completed our process of identifying certain third parties with
whom we do significant business to determine whether they are, or will be, Year
2000 compliant. We have sent Year 2000 compliance questionnaires to our major
reinsurers, reinsurance intermediaries, insurance brokers and agents, government
and private agencies to which we electronically transmit, and from which we
electronically receive, financial and other information, and to financial
institutions and other vendors with which we do business. We have substantially
completed our initial follow-up with third parties who either had not responded
to such questionnaires or who had provided insufficiently detailed or inadequate
responses to such questionnaires. We have conducted, and will conduct, selected
systems testing as appropriate with third parties during 1999.

We have been relying on the statements of third parties in assessing their
Year 2000 readiness and in most cases we have not independently verified the
accuracy of their statements. In certain cases, third parties have not
responded, or have not responded adequately, to our inquiries, and therefore we
have not been able to obtain reliable information regarding their Year 2000
readiness. We are in the process of assessing whether the failure of any of
those third parties to be Year 2000 compliant would have a material adverse
effect on us. Of the responses that we have received to date, no third party has
advised us that it has a Year 2000 issue that would have a material adverse
effect on us. While we have taken, and are taking, what we believe are
appropriate safeguards based on the assumption that the information provided by
third parties who have responded adequately is accurate, there can be no
assurances that the failure of such third parties to be Year 2000 compliant will
not have a material adverse effect on us.

Contingency Plans. We recently completed our contingency planning process
to deal with situations in which various of our systems, or of third parties
with whom we do business, may not be Year 2000 compliant. The contingency plans
produced by us address matters including alternative means of recording and
processing information if our computer systems could not process information due
to a Year 2000 problem, alternative means of transmitting information if our
e-mail systems and fax machines were rendered unusable due to a Year 2000
problem, and alternative supply and distribution channels if selected key
business partners were unavailable due to a Year 2000 problem.

Costs. Through September 30, 1999, we had incurred $305,000 in costs
related to compliance assurance testing, confirming the Year 2000 compliance of
third parties, and contingency planning. We expect to incur additional costs of
$26,000 through year-end 2000.

Our Customers' Year 2000 Efforts. If our customers do not successfully
address their Year 2000 issue, they could be materially adversely affected. This
may make it more likely that they will fail to perform the obligations with
respect to which we have issued surety bonds. In addition, failure of computer
systems could adversely affect the safeguards against the type of risks covered
by our fidelity bonds. In those events we could experience more frequent and/or
larger claims than historically has been the case, which could have a material
adverse effect on us.

<PAGE>

BUSINESS

We are an insurance holding company that, through our insurance subsidiary,
develops, markets and underwrites a broad array of surety and fidelity bonds for
a diverse range of customers. We market our products in all 50 states, as well
as the District of Columbia and Puerto Rico.

In 1998 we were the third largest provider of surety bonds and the ninth
largest provider of fidelity bonds in the U.S. based on direct written premium.
Direct written premium is the amount of premium we write before giving effect to
reinsurance ceded or assumed.

Our business is organized around a system of 34 field offices supported by
home office underwriting and claims teams. We believe that the strength and
experience of our field underwriters and our home office claims and underwriting
departments are critical factors in our success.

For 1998 and the six months ended June 30, 1999, we reported
$246.4 million and $125.6 million of direct written premium, respectively, and
achieved statutory combined ratios of 75.3% and 79.6%, respectively.

We write contract and commercial surety bonds and fidelity bonds. Contract
surety bonds secure the payment and/or performance of a contractual obligation
generally with respect to a construction project. Contract surety bonds are
generally required by federal, state and local governments for public works
projects. Commercial surety bonds include all surety bonds other than contract
surety bonds and usually cover obligations required by law. Fidelity bonds are
insurance policies against employee theft, as well as forgery, burglary or
robbery. Contract surety bonds accounted for 69% of our gross written premium
during both 1998 and the six months ended June 30, 1999. Most of the contract
surety bonds we write are for contractors engaged in the construction of public
works projects, such as highway, bridges and schools, and, to a lesser extent,
commercial real estate and multifamily housing.

In 1998 the U.S. surety sector aggregated approximately $2.9 billion in
direct written premium and the U.S. fidelity sector aggregated approximately
$0.8 billion in direct written premium.

STRATEGY

Our objective is to maximize our profitability while maintaining our
position as one of the leading providers of surety and fidelity products in the
United States. In order to accomplish this objective:

o WE UNDERWRITE OUR SURETY BONDS TO A ZERO-LOSS GOAL. Unlike property and
casualty losses, surety losses generally result from failure of the
principal (the entity whose performance we guarantee) to perform due to
financial weakness or poor management. As part of our underwriting
process, we carefully analyze the principal's creditworthiness and
management capabilities. We have achieved loss ratios that have
outperformed the surety and fidelity sector because of our emphasis on
credit analysis and field office diligence, our unique compensation
structure and the training and teamwork among our experienced
underwriters and claims personnel.

o WE OFFER ONE OF THE BROADEST ARRAYS OF CONTRACT AND COMMERCIAL SURETY AND
FIDELITY PRODUCTS IN THE INDUSTRY. Our products are designed for a
diverse range of customers including large, medium and small
contractors--our core markets--and other companies, including financial
institutions and retailers. As a result, we can provide our independent
agents with products that address almost all of their customers' surety
and fidelity needs.

o WE ARE DEDICATED TO "BUILDING RELATIONSHIPS AND KEEPING THEM
STRONG."(REGISTERED) We believe that the strength of our relationships
with agents and customers and our high level of service have been
instrumental to our ability to grow significantly faster than the overall
surety and fidelity sector. The underwriters in our 34 field offices are
highly responsive to our customers, understand their businesses and
provide continuity of service at the local level.

o WE COMPENSATE OUR UNDERWRITERS TO ENCOURAGE PROFITABLE GROWTH. Our field
office underwriters receive bonuses based on the profitability and
production of their respective field offices. We believe that our focus
on profitable growth encouraged by this compensation structure has been a
major factor

<PAGE>

in enabling us to achieve growth rates and combined ratios that are among
the best in the surety and fidelity sector.

o WE HAVE A HIGHLY SKILLED CLAIMS DEPARTMENT WHICH HAS BEEN INSTRUMENTAL IN
ACHIEVING OUR LOW LOSS RATIOS. Our claims personnel are proactive in
identifying potential losses and taking the necessary actions to mitigate
them. In addition to attorneys, our claims department includes
accountants and engineers which enables us to resolve a high percentage
of our claims without using outside consultants. As a result, we believe
our claims department handles claims on a more timely and cost effective
basis and achieves better results than our competitors.

o WE RECRUIT AND DEVELOP HIGHLY QUALIFIED EMPLOYEES. We actively recruit
experienced surety professionals, engineers and accountants, and recent
college graduates. We have also implemented a training program for both
our new underwriters and our existing employees, which we believe is the
most extensive in the surety and fidelity sector and which is headed by a
full-time training officer. We believe that our emphasis on recruiting
and retaining highly qualified personnel enables us to provide our
clients with outstanding service and has been critical to our success.

o WE USE REINSURANCE TO PROTECT OUR CAPITAL AND REDUCE THE VOLATILITY OF
OUR EARNINGS. We have structured our reinsurance program to reflect the
nature of the losses which may be incurred in the surety and fidelity
businesses. Through a combination of quota share and excess of loss
reinsurance agreements with highly rated reinsurance companies we protect
our capital and substantially limit our losses.

o WE CREATE MORE EFFICIENT PRODUCT DISTRIBUTION THROUGH THE USE OF ADVANCED
TECHNOLOGY. We intend to have a web-based bond form library system
on-line by the end of the first quarter of 2000. We also intend to pursue
other technological advances that could streamline our underwriting and
distribution processes. We believe that technology will allow us to
expand our distribution capabilities while at the same time reducing our
distribution costs.

PRODUCTS

Surety bonds, unlike other property and casualty policies, are three-party
agreements in which the issuer of the bond (the surety) guarantees to a second
party (the owner/obligee) the fulfillment of some obligation on the part of a
third party (the principal). For example, a contractor (the party being bonded,
or the principal) generally requires bonds to demonstrate that it, or a suitable
third party (the surety), has the financial resources to complete the project.
The bond effectively transfers the risk of the contractor's failure to complete
the project from the owner of the project (the obligee) to the surety.

Contract surety bonds secure the payment and/or performance of a
contractual obligation, generally with respect to a construction project such as
the construction of a highway or the installation of a ventilation system.
Commercial surety bonds include all surety bonds other than contract surety
bonds and usually cover obligations required by law. An example is a bond
securing the payment of a money judgment by a defendant pending the outcome of
an appeal. Fidelity bonds are insurance policies against employee theft, as well
as forgery, burglary and robbery.

The following table sets forth, for the periods shown, gross written
premium from our contract surety, commercial surety and fidelity businesses:

<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
-------------------------------- --------------------
1996 1997 1998 1998 1999
-------- -------- -------- -------- --------
(THOUSANDS)
<S> <C> <C> <C> <C> <C>
Contract surety............................ $138,404 $152,216 $171,276 $ 77,607 $ 87,625
Commercial surety.......................... 38,247 40,418 44,717 21,346 23,924
Fidelity................................... 27,409 30,869 33,314 13,605 15,346
-------- -------- -------- -------- --------
Total................................. $204,060 $223,503 $249,307 $112,558 $126,895
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
</TABLE>

<PAGE>

Contract Surety Bonds. Our largest line of business, contract surety bonds
accounted for 69% of total gross written premium during both 1998 and the six
months ended June 30, 1999. Our underwriters are dedicated to either the
standard or small contractor business. Underwriters specializing in the small
contractor business apply different techniques, such as placing a greater
reliance on credit checks and personal references. During 1998, standard
contractors accounted for 77% of our total contract surety gross written
premium, while small contractors accounted for the remaining 23%.

Most of the contract surety bonds we write are for contractors engaged in
the construction of public works projects and, to a lesser extent, commercial
real estate and multi-family housing. Spending on public works projects is
generally expected to increase over the next few years in light of recent
actions by governmental authorities to increase spending on infrastructure
projects.

We typically issue three types of contract surety bonds during the course
of a construction project: a bid bond, a performance bond and a payment bond.
The bid bond, used by contractors submitting bids on potential projects,
guarantees that the contractor will enter into the contract if the bid is
accepted. Once the contract is executed, the bid bond is replaced with a
performance bond and payment bond. The performance bond guarantees the
performance of the contract in accordance with its terms and provisions, while
the payment bond guarantees the contractor's payment for labor, sub-contractors
and materials for the project. Bid bonds are issued as an accommodation to our
customers and accordingly we usually do not charge to issue them. We price the
performance and payment bonds together based, in part, on the size of the
overall project.

The following table sets forth the type of contractors that accounted for
our contract surety gross written premium for the periods indicated:

<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, 1998 SEPTEMBER 30, 1999
--------------------------- ---------------------------
GROSS WRITTEN GROSS WRITTEN
PREMIUM % OF TOTAL PREMIUM % OF TOTAL
------------- ---------- ------------- ----------
($ IN MILLIONS)
<S> <C> <C> <C> <C>
General building................................ $ 61.4 35.8% $ 52.7 38.6%
Heavy highway................................... 23.6 13.8 18.1 13.3
Electrical...................................... 9.3 5.4 7.5 5.5
Mechanical/HVAC(1).............................. 9.1 5.3 8.1 5.9
Other trade(2).................................. 27.2 15.9 18.2 13.3
All other(3).................................... 40.7 23.8 31.9 23.4
------- ------ ------- ------
Total...................................... $ 171.3 100.0% $ 136.5 100.0%
------- ------ ------- ------
------- ------ ------- ------
</TABLE>

- ------------------
(1) Heating, ventilation and air conditioning.

(2) Includes dry wall, painting, landscaping and plumbing.

(3) Includes supply contracts, service contracts, garbage collection contracts,
school bus contracts and janitorial services contracts.

Commercial Surety Bonds. Commercial surety bonds accounted for 18% and
19%, respectively, of total gross written premium during 1998 and the six months
ended June 30, 1999. We write a wide range of commercial surety bonds for a
diverse mix of customers, from individuals to Fortune 1000 companies. The
following are examples of commercial surety bonds we write:

o License and permit bonds: used by persons who engage in certain
activities like selling real estate, selling automobiles, operating a
travel agency, operating a grain elevator or selling liquor.

o Court bonds: used by a plaintiff or defendant to pursue a legal action.

o Self-insurer's bonds: used by corporations who want to self-insure their
obligations, including workers' compensation obligations.

<PAGE>

o Fiduciary bonds: used by fiduciaries, including executors and
administrators of estates and guardians of minors and incompetents, for
the protection of those on whose behalf the fiduciary acts.

o Reclamation bonds: used by mining companies to assure restoration of the
surrounding area to a government-approved condition.

The following table sets forth the type of bonds that accounted for our
commercial surety gross written premium for the periods indicated:

<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, 1998 SEPTEMBER 30, 1999
--------------------------- ---------------------------
GROSS WRITTEN GROSS WRITTEN
PREMIUM % OF TOTAL PREMIUM % OF TOTAL
------------- ---------- ------------- ----------
($ IN MILLIONS)
<S> <C> <C> <C> <C>
License and permit bonds........................ $13.7 30.6% $10.7 29.4%
Court bonds..................................... 6.0 13.4 5.3 14.6
Self-insurer's bonds............................ 4.5 10.1 3.3 9.1
Fiduciary bonds................................. 2.6 5.8 2.2 6.0
Reclamation bonds............................... 2.8 6.3 1.5 4.1
Other........................................... 15.1 33.8 13.4 36.8
----- ------ ----- ------
Total...................................... $44.7 100.0% $36.4 100.0%
----- ------ ----- ------
----- ------ ----- ------
</TABLE>

Fidelity Bonds. Fidelity bonds represented approximately 13% and 12%,
respectively, of total gross written premium during 1998 and the six months
ended June 30, 1999.

Both our commercial customers and our financial institution customers
purchase fidelity bonds as protection against risks generally associated with
employee theft, as well as forgery, burglary and robbery.

In 1993 we recognized that consolidation in the financial services industry
could negatively impact what was then our core fidelity insurance business with
commercial banks and thrifts. As a result we intensified the marketing of our
fidelity insurance products to commercial customers, including manufacturing,
retail and service businesses. Sales to commercial customers as a percentage of
our total fidelity bond sales have increased from 45% in 1996 to 60% in 1998
based on total fidelity gross written premium.

MARKETING AND DISTRIBUTION

We market our products in all 50 states, as well as the District of
Columbia and Puerto Rico, through independent agents. As of June 30, 1999, we
distributed our products through approximately 3,500 independent agents located
throughout the United States. Distribution of our products is managed by
underwriters from our 34 field offices in the United States who are specifically
trained to market and sell our surety and fidelity products. These underwriters
are our main link to our independent agents and customers and are primarily
responsible for developing and maintaining those relationships. We believe that
the strength of these relationships creates customer loyalty.

Our field underwriters' relationships with our agents and customers also
provide our main source of information with respect to the developing surety and
fidelity needs of the marketplace generally and of our customers. If our
underwriters identify a need, they report it to our senior management who assess
whether we can profitably capitalize on it.

For example, in response to an expressed agent and customer desire for a
quicker, more efficient way of purchasing and processing small commercial surety
and fidelity bonds, we created our Express Surety program. Express Surety
handles our customers' commercial surety and routine fidelity needs of under
$100,000. We have given our agents underwriting authority for the conventional,
low loss risk bonds that qualify for the Express Surety program. We have
provided our agents with pre-executed bond forms for certain of those bonds. If
an agent does not have underwriting authority for a bond, the agent can call us
for a decision, which we generally provide within two hours. We have also
reduced the agent's reporting requirements and simplified the bond renewal
process for bonds that qualify for the Express Surety program.

<PAGE>

Marsh & McLennan and Aon, two large international insurance brokers, were
responsible for 13.1% and 8.4%, respectively, of our gross written premium in
1998, and 12.6% and 8.5%, respectively, of our gross written premium in the six
months ended June 30, 1999.

The following table sets forth the distribution of our business by state,
based on direct written premium for the periods indicated. No other state
accounted for more than 5% of our direct written premium.

<TABLE>
<CAPTION>
PERCENTAGE OF DIRECT WRITTEN PREMIUM
---------------------------------------
DECEMBER 31, 1998 SEPTEMBER 30, 1999
----------------- ------------------
<S> <C> <C>
California............................................. 15.9% 15.4%
New York............................................... 7.5 8.6
Texas.................................................. 6.0 6.6
Florida................................................ 5.8 6.3
Washington............................................. 5.8 5.9
</TABLE>

We also write commercial and contract surety bonds in Europe and other
parts of the world through our London field office. For the most part, these
bonds are written to satisfy the overseas needs of our U.S. customers.
International premium represented less than one percent of our direct written
premium for 1998.

ORGANIZATION

We operate through three divisions that are organized by region--Eastern,
Central and Western. Each division is headed by a Vice President of Operations
who reports directly to our Chief Operating Officer. Each division head is
responsible for the administration and management of the field offices in his or
her division and for all types of bonds written through the field offices. Each
division head directs all activities of the field offices, including sales,
marketing and underwriting. The Eastern division has 13 field offices, the
Central division has 10 field offices and the Western division has 11 field
offices.

The following table sets forth the gross written premium for each division
for the periods indicated:

<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED DECEMBER 31, ENDED JUNE 30,
-------------------------------------------------------- ----------------
1996 1997 1998 1999
---------------- ---------------- ---------------- ----------------
GROSS GROSS GROSS GROSS
WRITTEN % OF WRITTEN % OF WRITTEN % OF WRITTEN % OF
PREMIUM TOTAL PREMIUM TOTAL PREMIUM TOTAL PREMIUM TOTAL
------- ----- ------- ----- ------- ----- ------- -----
($ IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Eastern................... $ 70.3 34.5% $ 80.9 36.2% $ 88.4 35.4% $ 45.0 35.5%
Central................... 69.9 34.2 74.6 33.4 84.2 33.8 40.6 32.0
Western................... 63.9 31.3 68.0 30.4 76.7 30.8 41.3 32.5
------- ----- ------- ----- ------- ----- ------- -----
Total................ $204.1 100.0% $223.5 100.0% $249.3 100.0% $126.9 100.0%
------- ----- ------- ----- ------- ----- ------- -----
------- ----- ------- ----- ------- ----- ------- -----
</TABLE>

UNDERWRITING

Surety Bonds. Our field office underwriters generally initiate the
underwriting process. Underwriters in our home office review information
concerning the customer provided by the field office underwriter and make the
final underwriting decision. The home office underwriters generally grant the
field office underwriters authority to approve bonds for a customer that
aggregate no more than an established dollar amount. In addition, home office
underwriters limit the authority of the field office underwriter to bonds
containing standard provisions and which cover approved risks. Bonds that do not
meet these parameters are required to be reviewed by an underwriter in our home
office. Division heads, working out of our home office, generally have
underwriting authority for bonds up to $40 million. Bonds in excess of that
amount or that contain provisions or cover risks that our senior management
believe require more extensive underwriting review are submitted to our Chief
Operating Officer for final approval. We believe that this process enables us to
be responsive to customer requests for new bonds while providing consistent
underwriting standards.

During 1997 and 1998, our surety business had a statutory loss ratio of
21.8% and 22.9%, respectively, as compared to 29.9% and 29.7%, respectively, for
the surety sector. We underwrite our surety bonds to a

<PAGE>

zero-loss goal. We believe our favorable loss ratios are largely attributable to
our underwriting culture and practices, including:

o CREDIT ANALYSIS. A detailed credit analysis is critical to our
underwriting function because the likelihood of loss is related to the
financial strength of our customer.

o FIELD OFFICE DILIGENCE. Underwriters in our field offices obtain
third-party references and, in many instances, have face-to-face meetings
with a potential customer. Field office underwriters also provide the
home office with other information concerning a potential customer,
including experience, performance in prior contracts and credit history.

o OUR UNIQUE COMPENSATION STRUCTURE. Our underwriters receive bonuses
based on the profitability and production of their respective field
offices.

o OUR UNDERWRITERS' EXPERIENCE AND TRAINING. Our underwriters have
extensive experience in our industry and knowledge of the business being
bonded. Our home office underwriters have an average of more than twenty
years of experience in the surety business. We also have a formal
training program for our underwriters.

o TEAM-WORK. We stress team-work among our underwriters and claims
specialists who can combine their expertise to make the underwriting
decision.

Our agents generally have underwriting authority with respect to the
underwriting of bonds covering low loss risks sold by our Express Surety area.
However, we regularly review the performance of each of the types of bonds our
agents issue to ensure that they continue to be marketed and priced
appropriately. We underwrite the larger and more risky bonds sold by our Express
Surety area, which may include credit and other checks of the applicant. See
"--Marketing and Distribution".

Fidelity Bonds. Fidelity bonds more closely resemble traditional property
and casualty policies than surety bonds because the insurer is primarily liable
in the event of a loss. Like traditional property and casualty insurance, we use
deductibles (below which we do not have to pay for a loss) and exclusions
(events that we do not insure against) as part of underwriting and pricing a
fidelity bond.

For our fidelity bonds, our underwriters assess the risk based on a
detailed analysis that includes a review of:

o the customer's financial strength;

o the customer's relationship with employees;

o the internal controls and safeguards the customer has in-place;

o the risks associated with the nature of the customer's business; and

o general economic factors.

Authority to underwrite commercial fidelity bonds is given to our field
office underwriters for commercial fidelity bonds of less than $1 million. Home
office underwriters, with input from our field office underwriters, are
responsible for commercial fidelity bonds greater than $1 million.

<PAGE>

REINSURANCE

We have structured our reinsurance program to reflect the nature of the
losses which may be incurred in the surety and fidelity businesses. The general
effect of our reinsurance coverage is to reduce our ultimate retained loss in
any of our product areas to:

o Standard contractor--$4 million per customer account

o Small contractor--$2 million per customer account

o Commercial surety--$4 million per customer account

o Fidelity--$1.5 million per bond

We achieve this result through a program that includes quota share and
excess of loss reinsurance coverage. We have had similar reinsurance
arrangements in place since 1993.

Our quota share reinsurance coverage operates to reduce our retained loss
on each bond written for over $5 million on our contract and $2 million on our
commercial surety products and $10 million on our fidelity products. This quota
share reinsurance program covers a percentage of the loss on bonds of up to
$100 million in the contract and commercial surety areas and of up to
$50 million in the fidelity area.

Our retained losses after giving effect to our quota share reinsurance are
further reduced by application of our excess of loss coverage. Our excess of
loss coverage in the contract and commercial surety areas covers us on an
aggregate loss per customer account basis. That coverage in the fidelity area
covers us on a per bond basis. Our excess of loss policies have a limit of
$50 million per customer account for contractor and commercial surety bonds and
a limit of $20 million per bond for fidelity bonds. Our reinsurance program also
contains overall aggregate limits beyond which we retain exposure, and permits a
specified number of reinstatements subject, in certain cases, to the payment of
additional premium.

The reinsurers at all levels of our reinsurance program are rated A or
better by A.M. Best. At December 31, 1998 and September 30, 1999, our three
principal reinsurers based on ceded premium and their A.M. Best ratings were:

<TABLE>
<CAPTION>
DECEMBER 31, 1998 SEPTEMBER 30, 1999
--------------------- ---------------------
A.M. BEST PREMIUM % OF CEDED PREMIUM % OF CEDED
RATING CEDED PREMIUM CEDED PREMIUM
--------- ------- ---------- ------- ----------
($ IN MILLIONS)
<S> <C> <C> <C> <C> <C>
Employers Re.......................................... A++ $11.4 25.4% $ 7.9 21.6%
Everest Reinsurance................................... A+ 8.6 19.2 7.4 20.5
SCOR Reinsurance...................................... A+ 5.9 13.1 5.1 14.0
</TABLE>

We remain liable to our customers, notwithstanding any failure of a
reinsurer to fulfill its obligations under its reinsurance agreement. Our
reinsurance agreements are for one year unless canceled by either party upon
90 days notice.

CLAIMS

We believe that, along with underwriting, our claims personnel's ability to
minimize losses and maximize recoveries in the claims process is critical to our
success. Our claims personnel include 60 professional and administrative
employees operating out of our divisional offices. The professionals on our
staff include four accountants, four engineers and 21 attorneys who are
dedicated to handling either surety or fidelity claims exclusively. This enables
us to process a high percentage of our claims without using outside consultants.
As a result, we believe our claims department handles claims on a more timely
and cost effective basis and achieves better results than our competitors. Our
professional claims personnel have on average 12 years of experience handling
surety and fidelity claims.

We have nine claims processors who handle our less complex, lower dollar
claims. These claims processors handle claims at a relatively low cost to us and
afford our claims professionals more time to focus on the more complicated,
higher dollar claims. Files are assigned to these claims processors by a senior

<PAGE>

claims attorney who evaluates the size and nature of each claim to ensure that
it is within the parameters set for review by them.

Our claims personnel draw on their skills and experience in evaluating
alternative ways of handling a claim. In some cases, this may simply mean
negotiating a cash settlement for a claim. In other cases, our claims personnel
may decide to finance a contractor experiencing financial difficulty so that he
can complete the project, or to hire a new contractor to complete the project.
If we hire a contractor, it will typically be one of our customers, and one of
our engineers will manage the project to completion.

Generally, we are entitled to recover amounts paid under a surety bond from
the principal party whose performance it guarantees. Our ability to do so
depends, however, on many factors, primarily the financial condition of the
principal.

RESERVES FOR UNPAID LOSSES AND LOSS ADJUSTMENT EXPENSES

Reserves are balance sheet liabilities representing estimates of future
amounts needed to pay claims and related expenses with respect to insured events
that have occurred. We employ generally accepted reserving approaches in
establishing the estimated liability for unpaid loss and loss adjustment
expenses that give consideration to the inherent difficulty and variability in
the estimation process. However, given the complexity of the reserving process,
reserves require continual updates and the ultimate liability may be more or
less than the reserve estimates. Our reserves, including the stated amount of
salvage and subrogation, are reviewed by the Reliance Insurance companies'
internal actuaries. In addition, the adequacy of our reserves has been, and is
expected to continue to be, reviewed periodically by a nationally recognized
independent actuarial consulting firm.

The estimated liability for unpaid losses and loss adjustment expenses
includes, on an undiscounted basis, estimates of:

o the ultimate settlement that will be paid on reported claims,

o the ultimate settlement that will be paid on incurred but not reported
claims,

o future expenses to be incurred in the settlement of claims, and

o claim recoveries (salvage and subrogation), exclusive of reinsurance
recoveries, which are reported as an asset. Estimates of claims
recoveries are netted against unpaid losses and loss adjustment expenses.

These estimates are determined based on our loss experience and that of the
surety and fidelity sector as well as our consideration of current trends and
conditions. The estimated liability for unpaid losses and loss adjustment
expenses is an estimate, and there is the potential that actual future loss
payments will differ significantly from initial estimates. The methods of
determining such estimates and the resulting estimated liability are regularly
reviewed and updated. Changes in the estimated liability are reflected in
operating income in the year in which such changes are determined to be needed.

<PAGE>

The following table presents the activity in the reserves for unpaid losses
and loss adjustment expenses (loss reserves). This table highlights the impact
of revisions to the estimated liability established in prior periods.

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, SIX MONTHS
------------------------------- ENDED JUNE
1996 1997 1998 30, 1999
------- -------- -------- -------------
(THOUSANDS)
<S> <C> <C> <C> <C>
Loss reserves, beginning of period........................... $69,974 $ 78,243 $105,882 $ 112,920
Less reinsurance recoverables related to loss reserves..... 23,372 22,070 38,807 37,727
------- -------- -------- ---------
Net loss reserves, beginning of period....................... 46,602 56,173 67,075 75,193
------- -------- -------- ---------
Provision for loss and loss adjustment expenses:
Provision for insured events of the current period......... 35,912 52,371 56,325 29,543
Increase (decrease) in provision for insured events of
prior periods........................................... 1,921 (9,481) (13,613) 1,988
------- -------- -------- ---------
Total provision......................................... 37,833 42,890 42,712 31,531
------- -------- -------- ---------
Payments for loss and loss adjustment expenses:
Attributable to insured events of the current period....... 10,690 18,222 17,491 3,173
Attributable to insured events of prior periods............ 17,572 13,766 17,103 21,334
------- -------- -------- ---------
Total payments.......................................... 28,262 31,988 34,594 24,507
------- -------- -------- ---------
Net loss reserves, end of period(1).......................... 56,173 67,075 75,193 82,217
Plus reinsurance recoverables related to loss reserves..... 22,070 38,807 37,727 40,008
------- -------- -------- ---------
Loss reserves, end of period................................. $78,243 $105,882 $112,920 $ 122,225
------- -------- -------- ---------
------- -------- -------- ---------
</TABLE>

- ------------------
(1) Net of salvage and subrogation of $10,925,000, $9,325,000, $16,325,000 and
$12,225,000 as of December 31, 1996, 1997, 1998 and June 30, 1999,
respectively.

The following table sets forth a reconciliation of our net loss reserves
reported in accordance with generally accepted accounting principles, and our
net reserves reported to state insurance regulatory authorities in accordance
with statutory accounting principles for the period indicated:

<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
-------------------------------------------- ------------
1996 1997 1998 1999
------------ ------------ ------------ ------------
(THOUSANDS)
<S> <C> <C> <C> <C>
GAAP balance......................................... $ 56,173 $ 67,075 $ 75,193 $ 82,217
Add back: Salvage and subrogation.................... 10,925 9,325 16,325 12,225
------------ ------------ ------------ ------------
Statutory balance.................................... $ 67,098 $ 76,400 $ 91,518 $ 94,442
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
</TABLE>

The table below summarizes the development of the estimated liability for
loss reserves (net of reinsurance recoverables) as of December 31 of each of the
prior ten years. The amounts shown on the top line of the table represent the
estimated liability for loss reserves (net of reinsurance recoverables) for
claims that are unpaid at the particular balance sheet date as originally
reported at that date, including losses that had been incurred but not reported
to us. The upper portion of the table indicates the loss reserves as they are
re-estimated in subsequent periods. These estimates change as losses are paid
and more accurate information becomes available about remaining loss reserves. A
redundancy exists when the original loss reserve estimate is greater, and a
deficiency exists when the original loss reserve estimate is less, than the
re-estimated loss reserve at December 31, 1998. A redundancy or deficiency
indicates a cumulative change, as of December 31, 1998, compared to originally
recorded loss reserves. The lower portion of the table indicates the cumulative
amounts paid as of successive periods.

<PAGE>

HISTORICAL RESERVE DEVELOPMENT
NET OF REINSURANCE

<TABLE>
<CAPTION>
AS OF DECEMBER 31,
----------------------------------------------------------------------------------------
1988 1989 1990 1991 1992 1993 1994 1995 1996
-------- ------- ------- ------- ------- ------- ------- ------- -------
(THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Liability for unpaid claims and
related expenses, originally
reported...................... $ 21,683 $21,340 $26,288 $26,707 $34,547 $39,051 $50,802 $46,602 $56,173
Liability re-estimated as of:
One year later................ 35,957 31,206 36,582 29,919 42,823 36,130 47,188 48,523 46,692
Two years later............... 42,694 38,502 35,732 31,831 35,515 33,676 42,005 37,268 44,097
Three years later............. 44,698 36,129 37,625 25,231 32,256 28,133 29,583 36,839
Four years later.............. 42,033 37,199 32,163 22,000 28,982 21,113 30,649
Five years later.............. 44,580 33,232 29,363 19,455 22,737 22,326
Six years later............... 41,466 33,395 28,342 14,795 22,773
Seven years later............. 40,956 32,001 23,584 14,160
Eight years later............. 40,013 30,977 22,857
Nine years later.............. 38,866 29,755
Ten years later............... 37,545
Redundancy/(deficiency):....... (15,862) (8,415) 3,431 12,547 11,774 16,725 20,153 9,763 12,076
Paid (cumulative) as of:
One year later................ 26,259 17,692 20,510 8,957 15,295 6,906 21,220 17,572 13,766
Two years later............... 35,048 28,586 23,901 15,435 14,629 14,806 23,546 20,843 24,303
Three years later............. 39,576 28,656 27,244 12,317 18,218 15,332 18,329 22,045
Four years later.............. 37,021 30,122 22,144 12,297 18,685 11,163 19,663
Five years later.............. 38,007 25,269 21,548 11,536 14,083 12,132
Six years later............... 34,092 27,268 21,016 7,644 14,686
Seven years later............. 35,817 25,719 17,121 8,347
Eight years later............. 34,064 25,396 17,827
Nine years later.............. 33,861 25,949
Ten years later............... 34,461

<CAPTION>
1997 1998
------- -------
<S> <C> <C>
Liability for unpaid claims and
related expenses, originally
reported...................... $67,075 $75,193
Liability re-estimated as of:
One year later................ 53,462
Two years later...............
Three years later.............
Four years later..............
Five years later..............
Six years later...............
Seven years later.............
Eight years later.............
Nine years later..............
Ten years later...............
Redundancy/(deficiency):....... 13,613
Paid (cumulative) as of:
One year later................ 17,103
Two years later...............
Three years later.............
Four years later..............
Five years later..............
Six years later...............
Seven years later.............
Eight years later.............
Nine years later..............
Ten years later...............
</TABLE>

INVESTMENTS

Our investment operations will be managed by the Reliance Insurance
companies under an administrative services agreement in accordance with
guidelines set by our board of directors. See "Related Party
Transactions--Administrative Services Agreement". The investment guidelines may
be modified by our board of directors from time to time.

We intend to use a portion of any cash we will receive from the Reliance
Insurance companies, as well as a portion of the proceeds from this offering, to
purchase investments for our investment portfolio consistent with the investment
philosophy and guidelines described below. See "The Company" and "Use of
Proceeds". Currently, we have no investments of our own.

Our current investment guidelines are summarized below.

We will seek to maintain a diversified and balanced fixed maturity
portfolio representing a broad spectrum of industries and types of securities.
The portfolio generally will be managed to maximize investment returns, while
minimizing credit risks, with investments concentrated in high quality
securities. We will hold no investments in commercial real estate mortgages and
will have no exposure to derivative securities (other than through ownership of
an option, warrant or convertible security with an exercise or conversion price
related to an equity security). Under our guidelines we will maintain an average
Standard & Poor's rating of A- or better with respect to our fixed income
portfolio. Additionally, we will limit below investment grade securities to no
more than 10% of the fixed income portfolio. We will seek to target an average
duration of four to five years for our fixed income portfolio.

We may also invest in equity securities of companies that we believe have
strong growth prospects or that appear to be undervalued relative to the
issuer's business fundamentals, such as earnings, cash flows, balance sheet and
future prospects. Our guidelines require that investments in equity securities
be less than 20% of statutory surplus.

<PAGE>

We will maintain a diversified portfolio. Our guidelines limit investments
in a single issuer to no more than 5% of invested assets. The market value of
the securities in our investment portfolio will vary depending upon general
economic and market conditions and the interest rate environment.

REGULATION

Our insurance subsidiary, Reliance Surety, is subject to varying degrees of
regulation and supervision in the jurisdictions in which it transacts business
under statutes which delegate regulatory, supervisory and administrative powers
to state insurance regulators. In general, an insurer's state of domicile has
principal responsibility for that regulation which is designed generally to
protect policyholders rather than investors and relates to matters such as:

o the standards of solvency which must be maintained;

o the licensing of insurers and their agents;

o the examination of the affairs of insurance companies, including periodic
financial and market conduct examinations;

o the filing of annual and other reports on the financial condition of
insurers or for other purposes; and

o establishment and maintenance of reserves for unearned premium and
losses.

A licensed or admitted insurer generally must file with the insurance
regulators in the states in which it transacts business, or have filed on its
behalf, the premium rates and bond and policy forms used within each state. In
some states, approval of those rates and forms must be received from the
insurance regulators in advance of their use. Reliance Surety is domiciled in
Delaware and licensed in 49 states, the District of Columbia and Puerto Rico.

Insurance regulations generally also require registration and periodic
disclosure of certain information concerning ownership, financial condition,
capital structure, general business operations and any material transactions or
agreements by or among affiliates. Such regulations also typically restrict the
ability of any one person to acquire 10% or more, either directly or indirectly,
of an insurance company's voting stock without prior approval of the applicable
insurance regulatory authority.

Under Delaware law, Reliance Surety may not pay a dividend from any source
other than earned surplus without the approval of the Delaware Insurance
Commissioner. In addition, Reliance Surety may not pay an "extraordinary"
dividend until 30 days after the Delaware Insurance Commissioner has received
notice of the dividend and has either (1) not disapproved such dividend within
the 30-day period or (2) approved the dividend within the 30-day period. Under
Delaware law, an "extraordinary" dividend is defined as being an amount which,
together with all other dividends made in the preceding 12 months, exceeds the
greater of: (1) 10% of statutory policyholders' surplus as of the immediate
preceding December 31 and (2) statutory net income not including realized
capital gains for the preceding calendar year. Reliance Surety must provide
notice to the Delaware Insurance Commissioner of all dividends and other
distributions to shareholders within five business days after declaration and at
least ten days prior to payment. Delaware law requires that the statutory
policyholders' surplus of Reliance Surety following any dividend or distribution
be reasonable in relation to its outstanding liabilities and adequate to its
financial needs. See "Dividend Policy".

Because Reliance Group Holdings will continue to be a significant
shareholder of Reliance Surety Group following this offering, the companies are
considered to be within an insurance holding company system under applicable
insurance laws. As a result, Reliance Surety is required to notify regulatory
authorities and occasionally to obtain prior approval from the regulatory
authorities for certain transactions between Reliance Surety and its affiliates,
including the Reliance Insurance companies, Reliance Group Holdings and Reliance
Surety Group.

Reliance Surety is subject to periodic financial and market conduct
examinations. Financial examinations are generally performed by the domiciliary
state insurance regulatory authorities while market conduct examinations can be
performed by any state in which we are licensed.

<PAGE>

All 50 states and the District of Columbia require insurers to join a
guaranty association. Guaranty associations provide protection to policyholders
of insurers licensed in those states against the insolvency of those insurers.
In order to provide the associations with funds to pay claims under policies
issued by insolvent insurers, the guaranty associations charge members
assessments based on the amount of gross premium written in that state.

U.S. Treasury regulations set underwriting limitations on surety bonds for
federal and other public works projects. U.S. Treasury limitations are based
upon adjusted statutory policyholders' surplus (as defined by U.S. Treasury
guidelines) and are established annually. Reliance Surety qualifies as an
acceptable surety pursuant to the U.S. Treasury regulations.

COMPETITION

The surety and fidelity market is highly competitive. We compete on the
basis of service, price and other terms of the products, and ratings. We believe
our primary competitors are approximately 20 national, multi-line companies
participating in the surety market throughout the country. A number of these
companies have greater financial resources, offer alternative products or more
competitive pricing and/or have higher ratings than we do.

In 1998, the U.S. surety sector aggregated approximately $2.9 billion in
direct written premium and the U.S. fidelity sector aggregated approximately
$0.8 billion in direct written premium. Based on direct written premium in 1998,
the 20 largest surety companies accounted for 69.7% of the domestic surety
market and the 20 largest fidelity companies accounted for 90.5% of the domestic
fidelity market.

Competition in our business has typically manifested itself through lower
pricing and relaxation of underwriting standards. Management believes that this
high level of competition will continue.

LEGAL PROCEEDINGS

We are a party to a number of lawsuits arising in the normal course of our
business. We do not believe that the resolution of any of these lawsuits will
have a material adverse effect on us.

RATINGS

Ratings by A.M. Best are an important factor in establishing our
competitive position. Reliance Surety is currently rated A- (Excellent) by A.M.
Best. A.M. Best continually reviews our financial performance and condition and
that of our competitors.

We rely upon the A.M. Best rating of the Reliance Insurance companies. Many
states and municipal authorities require that issuers of a surety bond have a
minimum rating of A- (Excellent) in instances when the bond is issued for their
benefit or when they require the bond for a person to engage in a certain
activity like selling motor vehicles. In addition, certain other bond purchasers
may be more reluctant to purchase a bond from a company with a rating lower than
A- (Excellent).

The Reliance Insurance companies are currently rated A- (Excellent) by A.M.
Best. If the rating of the Reliance Insurance companies changes, it is possible
that our rating may change as well. If the Reliance Insurance companies' A.M.
Best rating were downgraded for any reason, it could have a material adverse
effect on our business. In October 1999, A.M. Best announced that it had placed
the A- rating of the Reliance Insurance companies under review with negative
implications. A.M. Best stated that it will closely monitor various factors with
respect to the Reliance Insurance companies and their parent companies and that
it expects to complete its review during the first quarter of 2000.

In the event of a downgrade of the Reliance Insurance companies, we would
have to rely on an arrangement with another insurer similar to our present
arrangement with the Reliance Insurance companies. In this regard, we have
entered into an agreement with a large international reinsurer rated A++ by A.M.
Best, pursuant to which that company has agreed for five years to act, when we
request, as co-surety on our bonds so long as either C. Brian Schmalz or David
T. Akers continues to serve as one of our executive officers. We describe the
other material terms of the agreement in "--Co-surety Arrangement".

<PAGE>

A.M. Best's ratings for insurance companies currently range from A++ to F.
Some companies are not rated. A.M. Best publications indicate that A- ratings
are assigned to those companies that in A.M. Best's opinion have achieved
excellent overall performance when compared to the standards established by A.M.
Best. A and A- companies are considered to have a strong ability to meet their
obligations to policyholders over a long period of time. A.M. Best ratings are
based upon factors relevant to policyholders, agents, insurance brokers and
intermediaries and are not meant to protect investors.

CO-SURETY ARRANGEMENT

Reliance Surety has entered into an agreement with a reinsurer rated A++ by
A.M. Best pursuant to which the reinsurer will, at Reliance Surety's request,
act as co-surety on surety and fidelity bonds written by the Reliance Insurance
companies or Reliance Surety. This co-surety arrangement will give Reliance
Surety access to the A++ rating and treasury limits of the reinsurer, which in
both cases exceed those currently available from the Reliance Insurance
companies. However, we will continue to rely on the form and rate filings of the
Reliance Insurance companies, until we replace them with all necessary form and
rate filings of our own or develop access to another insurer's rate and form
filings. The co-surety agreement has a term of five years commencing January 1,
2000 and can only be terminated by the reinsurer if (i) Reliance Surety does not
offer to cede a specified percentage of its premium to the reinsurer during the
term of the agreement, (ii) there is a change in control of Reliance Insurance
Company or Reliance Surety, (iii) both C. Brian Schmalz and David T. Akers leave
their positions as executive officers of Reliance Surety (other than by reason
of death or disability), (iv) Reliance Insurance Company is placed under
supervision, liquidation or under a cease and desist order that is material to
the surety business by any regulatory authority, (v) the Reliance Insurance
companies and Reliance Surety lose their U.S. Treasury listing or their A.M.
Best rating falls below A- (Excellent) and, in either case, we or the Reliance
Insurance companies do not timely deliver to the reinsurer cash collateral or an
irrevocable letter of credit of $10 million. The agreement also provides that
the co-surety must approve any bond in excess of $50 million.

EMPLOYEES

We had 493 employees at September 30, 1999, 204 of whom worked at our
divisional offices and 289 of whom worked in our field offices. All of our
personnel are currently employees of Reliance Insurance Company, but are
expected to become employees of Reliance Surety on January 1, 2000. We believe
that our relations with our employees are excellent.

PROPERTIES

We share our divisional offices and most of our field office locations with
Reliance Insurance Company. We use approximately 201,000 square feet at our
divisional and field offices. Our aggregate yearly rent in 1998 was
approximately $4.4 million.

<PAGE>

MANAGEMENT

EXECUTIVE OFFICERS AND DIRECTORS

The executive officers and directors of Reliance Surety Group are as
follows:

<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------------------------- --- -------------------------------------------------
<S> <C> <C>
C. Brian Schmalz........................... 56 President, Chief Executive Officer and Director

David T. Akers............................. 45 Executive Vice President, Chief Operating Officer

Vincent G. Fasano.......................... 54 Senior Vice President--Claims

George F. Thompson......................... 59 Senior Vice President

Edward M. Titus............................ 47 Senior Vice President and Chief Financial Officer

George E. Bello............................ 64 Director

Robert M. Steinberg........................ 57 Director

Saul P. Steinberg.......................... 60 Director
</TABLE>

C. Brian Schmalz has been President and Chief Executive Officer and a
Director of Reliance Surety Group since it was formed in September 1999. He has
been President and Chief Executive Officer of Reliance Surety since October
1995. Prior to that time, since 1980, he served in different capacities at
Reliance Surety, including from 1986 to October 1995 as Executive Vice President
and Chief Operating Officer of Reliance Surety's Eastern Division. Mr. Schmalz
is a combat veteran and a former major in the United States Marine Corps.

David T. Akers has been Executive Vice President and Chief Operating
Officer of Reliance Surety Group and Reliance Surety since October 1999. He was
Senior Vice President and Chief Operating Officer of Reliance Surety from 1995
through October 1999. Prior to that time, since 1982, Mr. Akers served in
different capacities at Reliance Surety, including from 1992 through 1993 as
Vice President of the Eastern Commercial Surety Division and from 1994 through
October 1995, as Vice President of the Eastern Division.

Vincent G. Fasano has been Senior Vice President--Claims of Reliance Surety
Group and Reliance Surety since October 1999. He was Senior Vice President and
Chief Claims Officer of Reliance Surety from December 1986 through October 1999.
Prior to that time, since 1982 Mr. Fasano served Reliance Surety in different
capacities.

George F. Thompson has been a Senior Vice President of Reliance Surety
Group since October 1999 and joined Reliance Surety in May 1998. Prior to that
time, since 1983, Mr. Thompson was President and Chief Executive Officer of
Seabord Surety Company.

Edward M. Titus has been Senior Vice President and Chief Financial Officer
of Reliance Surety Group and Reliance Surety since October 1999. He was Vice
President and Chief Financial Officer of Reliance Surety from 1994 through
October 1999. Prior to that time, since 1983, Mr. Titus served Reliance Surety
in different capacities, including, from 1983 through 1993, as Controller. He is
a Certified Public Accountant and a member of the American and Pennsylvania
Institutes of Certified Public Accountants.

George E. Bello has been a director of Reliance Surety Group since October
1999. He has been Executive Vice President and Controller of Reliance Group
Holdings since 1982 and has held various other positions at predecessors of
Reliance Group Holdings since 1968. He is a director of Reliance Group Holdings,
Horizon Health Corporation and LandAmerica Financial Group, Inc.

Robert M. Steinberg has been a director of Reliance Surety Group since
October 1999. He has been President and Chief Operating Officer of Reliance
Group Holdings since 1982 and Chairman of the Board and Chief Executive Officer
of Reliance Insurance Company since 1984. Mr. Steinberg has held various other
positions with Reliance Group Holdings and its predecessors since 1965. He is a
director of Reliance Group Holdings and LandAmerica Financial Group, Inc.

Saul P. Steinberg has been a director of Reliance Surety Group since
October 1999. He has been the Chief Executive Officer and a Director of Reliance
Group Holdings and its predecessors since 1961. Mr. Steinberg is a director of
Symbol Technologies, Inc.

<PAGE>

Saul P. Steinberg and Robert M. Steinberg are brothers.

We intend to add , and , who are otherwise
unaffiliated with Reliance Group Holdings, to our board of directors upon
consummation of this offering.

DIRECTOR COMPENSATION

Directors, except for those employed by us or one of our affiliates, will
be compensated at the annual rate of $25,000. They will also receive $1,000 for
being chairman of a committee of our board of directors and $500 for each
committee meeting they attend.

COMMITTEES OF THE BOARD OF DIRECTORS

Our board of directors has an Audit Committee consisting of directors,
none of whom is an officer or employee of our company. Messrs. , ,
and are the members of such committee. The board of directors also has a
Special Compensation Committee consisting of directors, which makes
determinations with respect to cash and non-cash compensation to our executive
officers and a Compensation Committee consisting of directors, which makes
determinations as to cash compensation for some of our more senior officers
(other than executive officers) and as to certain non-cash compensation as to
all of our employees (other than executive officers). Messrs. and
are the members of the Special Compensation Committee, neither
of whom is an officer or employee of our company. Messrs. C. Brian Schmalz and
are the members of the Compensation Committee. Our board of
directors has a Nominating Committee consisting of directors, which
establishes procedures for the nominating process and recommends candidates for
election to the board. Messrs. , , and are
the members of the Nominating Committee.

EXECUTIVE COMPENSATION

The following table sets forth the total compensation for fiscal 1998 of
our Chief Executive Officer and the other four most highly compensated executive
officers whose total salary and bonus for fiscal 1998 exceeded $100,000. These
people are referred to as the "Named Executive Officers". All cash compensation
was paid by Reliance Insurance Company and all stock compensation was in the
form of Reliance Group Holdings common stock.

<TABLE>
<CAPTION>
LONG TERM
COMPENSA-
TION AWARDS
ANNUAL COMPENSATION -------------
----------------------------- SECURITIES
BONUS UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY($) ($)(1) OPTIONS(#) COMPENSATION
- --------------------------------------------------- ---- --------- -------- ------------- -------------
<S> <C> <C> <C> <C> <C>
C. Brian Schmalz................................... 1998 $ 350,000 $327,200 250,000 $ 7,500(2)
President and Chief Executive Officer

David T. Akers..................................... 1998 207,000 84,500 15,000 90,200(2)(3)
Executive Vice President and Chief Operating
Officer

Vincent G. Fasano.................................. 1998 201,700 121,600 7,500 31,900(2)(3)
Senior Vice President--Claims

George F. Thompson................................. 1998 161,058 161,058 -- --
Senior Vice President

Edward M. Titus.................................... 1998 147,600 78,300 2,000 4,250(2)
Senior Vice President and Chief Financial Officer
</TABLE>

(Footnotes on next page)

<PAGE>

(Footnotes from previous page)

- ------------------
(1) $187,200, $81,000, $83,500 and $43,300 of the bonus amounts for C. Brian
Schmalz, Vincent G. Fasano, David T. Akers and Edward M. Titus,
respectively, were earned under Reliance Surety's "Key" Management Incentive
Bonus Plan for 1996. Pursuant to that 1996 plan, each Named Executive
Officer was entitled to a potential bonus award of up to a specified
percentage of his 1996 base salary. The potential bonus awards to Messrs.
Schmalz, Fasano, Akers and Titus under the 1996 "Key" Management Incentive
Plan were 100%, 75%, 75% and 55%, respectively, of their base salaries for
1996. Pursuant to that 1996 Plan, a specified percentage of each Named
Executive Officer's 1998 bonus was calculated based upon the statutory
combined ratio for all or a portion of Reliance Surety's operations in 1996,
as determined in the first quarter of 1999. The remaining bonus amounts for
each of the Named Executive Officers was earned under Reliance Surety's
"Key" Management Bonus Plan for 1998. Pursuant to that 1998 Plan, each Named
Executive Officer was entitled to a potential bonus award of up to a
specified percentage of his 1998 base salary. The potential bonus awards to
Messrs. Schmalz, Fasano, Akers and Titus under the 1998 "Key" Management
Incentive Plan were 100%, 75%, 100% and 55%, respectively, of their 1998
base salaries. A specified percentage of each Named Executive Officer's 1998
bonus was calculated based upon the growth in direct written premium income
and actual salary expenses versus budget, in each case, with respect to all
or a portion of Reliance Surety's operations. The portion of each Named
Executive Officer's bonus under his 1998 "Key" Management Incentive Plan
that is dependent upon combined ratio will be determined and paid in early
2001.

(2) Includes 1998 contributions under the savings incentive plan of Reliance
Group Holdings and in which the Named Executive Officers participate as
follows: Messrs. Schmalz, Akers and Fasano--$5,000 and Mr. Titus--$4,250.
Includes bonuses that were used to obtain certain life insurance benefits as
follows: C. Brian Schmalz--$2,500, David T. Akers--$700 and Vincent G.
Fasano--$1,900.

(3) Includes for David T. Akers and Vincent G. Fasano $84,500 and $25,000,
respectively, representing the amount of the bonus such executive elected to
replace with options to purchase shares of mutual funds pursuant to the
terms of Reliance Group Holdings Key Employee Share Option Plan.

<PAGE>

OPTION GRANTS IN LAST FISCAL YEAR

The following table sets forth certain summary information concerning
grants of stock options to each of the Named Executive Officers for the year
ended December 31, 1998.

<TABLE>
<CAPTION>
INDIVIDUAL GRANTS(1)
-------------------------------
NUMBER OF PERCENT OF
SECURITIES TOTAL
UNDERLYING OPTIONS GRANTED EXERCISE OR
OPTIONS TO EMPLOYEES IN BASE PRICE EXPIRATION GRANT DATE
NAME GRANTED (#) FISCAL YEAR(2) ($/SH) DATE VALUE $(3)
- -------------------------------------------- ----------- --------------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C>
C. Brian Schmalz............................ 250,000 2.8% $ 13.0625 9/19/08 $1,127,500
David T. Akers.............................. 15,000 0.2 13.0625 9/19/08 67,700
Vincent G. Fasano........................... 7,500 0.1 13.0625 9/19/08 33,800
George F. Thompson.......................... -- -- -- -- --
Edward M. Titus............................. 2,000 * 13.0625 9/19/08 9,020
</TABLE>

- ------------------

* Indicates less than one tenth of one percent.

(1) All options listed in this table are options to purchase common stock of
Reliance Group Holdings. The options vest and become exercisable in
cumulative installments of one-fourth of the number of shares of Common
Stock after each of the second, third, fourth and fifth anniversaries of the
date of grant if the optionee is an employee on such anniversaries.

(2) Represents percent of options granted all employees of Reliance Group
Holdings and its subsidiaries.

(3) Based on the Black-Scholes option pricing model adapted for use in valuing
employee stock options. The actual value, if any, a Named Executive Officer
will realize will depend on the excess of the stock price over the exercise
price on the date the options are exercised, so that there is no assurance
the value realized by an executive will be at or near the value estimated by
the Black-Scholes model. The estimated values under the model are based upon
certain assumptions as to variables such as stock price volatility,
risk-free rate of return, future dividend yield and term of the option. In
calculating the grant date present values set forth in the table a factor of
35.16% has been assigned to the volatility of the Reliance Group Holdings
common stock, based on weekly stock market quotations for the twelve months
preceding September 9, 1998, the yield on the Reliance Group Holdings common
stock has been set at 2.45%, based upon its annual dividend rate of $0.32
per share at September 9, 1998 divided by the price of the Reliance Group
Holdings common stock on such date, the risk-free rate of return has been
fixed at 4.76%, which equals the average monthly rate of a seven-year U.S.
Treasury Note in September 1998, as reported in the Federal Reserve
Bulletin, and a term of seven years from the date of grant has been used. A
seven-year term has been used in lieu of the actual term of the options of
ten years and ten days based on the expected life of the options.

FISCAL YEAR END OPTION VALUES

The following table provides certain summary information concerning stock
options held as of December 31, 1998 by each of the Named Executive Officers.
None of the Named Executive Officers exercised options in 1998.

<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING
UNEXERCISABLE OPTIONS VALUE OF UNEXERCISABLE IN
HELD AT THE MONEY OPTIONS AT
DECEMBER 31, 1998(1)(2) DECEMBER 31, 1998
----------------------------- -----------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- -------------------------------------------------------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
C. Brian Schmalz........................................ 46,250 363,750 $ 281,700 $ 457,700
David T. Akers.......................................... 4,000 39,000 21,900 50,100
Vincent G. Fasano....................................... 5,625 24,375 33,500 53,700
George F. Thompson...................................... -- -- -- --
Edward M. Titus......................................... 5,750 5,750 33,900 10,700
</TABLE>

(Footnotes on next page)

<PAGE>

(Footnotes from previous page)

- ------------------
(1) All options are options to purchase shares of common stock of Reliance Group
Holdings.

(2) Options are classified as "in-the-money" if the fair market value of the
underlying common stock exceeds the exercise or base price of the option.
The value of such "in-the-money" options is the difference between the
exercise or base price and the fair market value of the underlying Reliance
Group Holdings common stock as of December 31, 1998. The fair market value
of the Reliance Group Holdings common stock on December 31, 1998 was $12.875
per share.

PENSION PLAN TABLE

The Named Executive Officers will continue to participate in the Reliance
Insurance Pension Plan. The following table sets forth the approximate annual
pension that a Named Executive Officer may receive under the Reliance Insurance
Pension Plan assuming selection of a single life annuity, retirement at age 65
and the current level of covered compensation, based on the indicated
assumptions as to covered compensation and years of service. Under the Internal
Revenue Code of 1986, as amended, for the Reliance Insurance Pension Plan, the
maximum annual benefit currently allowed is $130,000 and the maximum annual
compensation that may be taken into account is currently $160,000.

<TABLE>
<CAPTION>
YEARS OF SERVICE
---------------------------------------------------------------------------
COVERED COMPENSATION 5 10 15 20 25 30 35
- ---------------------------------- ------- ------- ------- ------- ------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
$125,000.......................... $10,490 $20,980 $31,470 $41,960 $52,450 $ 62,940 $ 73,430
150,000.......................... 12,803 25,605 38,408 51,210 64,013 76,815 89,618
175,000.......................... 15,115 30,230 45,345 60,460 75,575 90,690 105,805
200,000.......................... 17,428 34,855 52,283 69,710 87,138 104,565 121,993
</TABLE>

For purposes of calculating pension benefits under the Reliance Insurance
Pension Plan, C. Brian Schmalz, David T. Akers, Vincent G. Fasano, George F.
Thompson and Edward M. Titus had 19, 16, 16, 1, and 20 years of credited service
and salaries of $154,000, $145,000, $154,000, $160,000 and $129,000,
respectively. Benefits under the Reliance Insurance Pension Plan are calculated
on the basis of a single life annuity and are not subject to any deduction for
Social Security benefits or offset amounts.

EMPLOYMENT CONTRACTS

Prior to the consummation of this offering, we intend to enter into
employment agreements with Messrs. Schmalz, Akers, Fasano and Titus.

RELATED PARTY TRANSACTIONS

ADMINISTRATIVE SERVICES AGREEMENT

We have entered into an Administrative Services Agreement with Reliance
Insurance Company to allow for our continued use of office space and office
equipment currently owned or leased by Reliance Insurance Company. Reliance
Insurance Company will also make available to us under the Administrative
Services Agreement, the following services:

o investment management services;

o telecommunications services;

o computer access and support;

o human resource assistance;

o accounting, financial and actuarial support;

o legal;

o tax; and

o various other business services.

Under the agreement we will pay an annual fee of $5.3 million (subject to
increase based on the Consumer Price Index (Urban)) which shall be payable in
twelve equal installments for all services (other than investment management
services) to Reliance Insurance Company. We will also pay a fee of 10 basis
points on the average outstanding balance in our investment portfolio for
investment management services. In addition, we will reimburse Reliance
Insurance Company for out of pocket expenses clearly identifiable as being
attributable to our business. Rental charges for office space (which are not
included in the monthly fee

<PAGE>

described above) will be allocated pro rata under the agreement based upon the
square footage actually used by us and will be payable until expiration of the
underlying lease.

The Administrative Services Agreement has a term of five years. We may
terminate the agreement in its entirety, or in part, with respect to any
services, at any time upon at least 90 days notice to Reliance Insurance
Company, except with respect to the office space as described above. In the
event that Reliance Surety elects to discontinue a particular service during the
term of the agreement, the parties will negotiate in good faith a reduction in
the annual fee which is mutually agreeable in light of the then prevailing
circumstances.

Prior to this offering, Reliance Surety was party to an expense allocation
arrangement with Reliance Insurance Company and its subsidiaries. Under the
expense allocation arrangement, Reliance Insurance Company provided operational
and administrative services and facilities to us. Under the arrangement, all
joint expenses were allocated equitably by type of expense in accordance with
the regulations regarding uniform classification of expenses set forth in the
regulations of the Pennsylvania Department of Insurance and are based on
standard allocation techniques and procedures acceptable under general cost
accounting practices.

Under the expense allocation arrangement, we made payments to Reliance
Insurance Company totaling $9.2 million (including rent expense of $4.4 million)
and $5.0 million (including rent expense of $2.3 million) for 1998 and for the
six months ended June 30, 1999, respectively.

REGISTRATION RIGHTS AGREEMENT

We have entered into a Registration Rights Agreement with Reliance
Insurance Company. Following this offering, Reliance Insurance Company will
continue to own over 80% of our issued and outstanding common stock. The
Registration Rights Agreement entitles Reliance Insurance Company to certain
rights with respect to registration under the Securities Act of these shares.

The Registration Rights Agreement generally provides that at any time after
the completion of this offering, Reliance Insurance Company may require us to
use our best efforts to register all or a portion of the shares of our common
stock owned by Reliance Insurance Company. The maximum number of these "demand
registrations" that Reliance Insurance Company may make under the Registration
Rights Agreement is five. Reliance Insurance Company may not demand the
registration of shares within 90 days after the effective date of a registration
statement filed in connection with an earlier demand by it under the
Registration Rights Agreement. If, at the time a demand registration request is
made by Reliance Insurance Company, we have fixed plans to engage in a public
offering of shares within 30 days of the time of the request, we may at our
option delay the request for up to 60 days after the effective date of the
public offering.

After the completion of this offering, in the event that we propose to
register any of our shares of common stock under the Securities Act (other than
with respect to employee compensation plans or with respect to mergers,
acquisitions or similar transactions), Reliance Insurance Company is entitled to
include all or a portion of the shares of our common stock owned by it in the
registration, subject to certain cutbacks specified in the agreement.

We have agreed to pay all expenses incurred (other than the underwriting
discounts and commissions) in connection with any registrations of shares
requested by Reliance Insurance Company under the Registration Rights Agreement.
The Registration Rights Agreement contains customary terms regarding
registration procedures and regarding indemnification rights granted by us to
Reliance Insurance Company, its officers, directors and affiliates in connection
with the registration of common stock under the agreement, including
indemnification with respect to liabilities under the federal securities laws.

TAX ALLOCATION AGREEMENT

Following this offering, we expect to file consolidated federal income tax
returns with Reliance Group Holdings and Reliance Insurance Company for each
period of time during which we and our subsidiary are qualified to file
consolidated tax returns with Reliance Group Holdings and Reliance Insurance
Company as members of an "affiliated group", as defined in the Internal Revenue
Code of 1986, as amended. To this end, we have entered into a tax allocation
agreement with Reliance Group Holdings and Reliance Insurance Company, effective
as of January 1, 1999, under which we will pay to Reliance Insurance Company an
amount equal to the federal income tax applied to our separate taxable income,
at the current year's statutory

<PAGE>

rate, adjusted for all tax credits. Under the agreement, we are not permitted in
certain circumstances to claim tax deductions that result directly or indirectly
from the exercise of options to purchase Reliance Group Holdings common stock by
our employees or from their participation in the Reliance Group Holdings
employee stock purchase plan. Reliance Group Holdings has agreed to indemnify us
for the tax liabilities of Reliance Group Holdings and its subsidiaries (other
than us).

In connection with the tax allocation agreement described in the previous
paragraph, Reliance Surety Group, Inc. and Reliance Surety Company have entered
into a tax allocation agreement under which Reliance Surety Company will pay to
or receive from Reliance Surety Group, Inc. an amount equal to the federal
income tax or benefit applied to Reliance Surety Company's separate taxable
income or loss, at the current year's statutory rate, adjusted for all tax
credits. Under this agreement, Reliance Surety Company is not permitted in
certain circumstances to claim tax deductions that result directly or indirectly
from the exercise of options to purchase Reliance Group Holdings common stock by
Reliance Surety Company's employees or from their participation in the Reliance
Group Holdings employee stock purchase plan.

QUOTA SHARE AND LOSS PORTFOLIO REINSURANCE AGREEMENT

We have entered into a Quota Share and Loss Portfolio Reinsurance Agreement
with Reliance Insurance Company and certain of the other Reliance Insurance
companies. Under this agreement, these companies will cede to us 100% of the
unearned portion of the gross net premium (as defined in the agreement) of the
surety and fidelity business written by our underwriters and in force on the
day immediately preceding the date of consummation of this offering (the
effective time). They will also cede to us all premium from such new and renewal
surety and fidelity business that they write through our underwriters after the
effective time. We will reinsure 100% of all loss and loss expense arising from
that business incurred as a result of losses with a date of loss after the
effective time. The agreement is subject to termination at any anniversary of
the effective time on or after the fifth anniversary of the effective time upon
90 days prior written notice by either party.

In addition, these Reliance Insurance companies will transfer an amount (in
the form of either cash or investment grade fixed income securities (or a
combination of both)) equal to the statutory net loss and loss expense reserves
(including reserves for incurred but not reported claims) at the effective time
with respect to the surety and fidelity business previously written by our
underwriters, and they will assign to us all reinsurance recoverables with
respect to that business. The amount of the reserves will be established in
accordance with the same methodologies we utilized in establishing our June 30,
1999 reserves. As consideration for these transfers, we will reinsure these
companies in full for all loss and loss expense arising from surety and fidelity
losses with respect to bonds written by our underwriters with a date of loss
prior to the effective time that have not been paid in full as of that date.

Pursuant to the agreement, we will reimburse the Reliance Insurance
companies by way of ceding commission for premium taxes and other fees on
premiums ceded to us for surety bonds and fidelity bonds written after the
effective time. We will also reimburse Reliance Insurance Company for amounts
paid to agents as commissions.

ASSIGNMENT AND ASSUMPTION AGREEMENT

The Reliance Insurance companies and Reliance Surety have entered into an
Assignment and Assumption Agreement pursuant to which the Reliance Insurance
companies will assign to Reliance Surety all of the assets related to the surety
and fidelity business written by our underwriters prior to the consummation of
the offering and Reliance Surety will assume all of the related liabilities
(except as to such assets and liabilities as are transferred pursuant to the
Quota Share and Loss Portfolio Reinsurance Agreement). To the extent the assets
cannot be so assigned at the effective time (including because third party
consents have not been obtained), the Reliance Insurance companies and Reliance
Surety will use all commercially reasonable efforts to effectuate such transfer
as soon as practicable, and the Reliance Insurance companies will hold such
assets for the sole benefit of Reliance Surety.

POWER OF ATTORNEY

Reliance Insurance Company and some of the other Reliance Insurance
companies have granted Reliance Surety a Power of Attorney, effective as of
the effective time. Under the Power Attorney, Reliance Surety has authority to
write surety and fidelity bonds on the forms of those Reliance Insurance
companies so long as the bonds are reinsured under the Quota Share and Loss
Portfolio Reinsurance Agreement. The Power of Attorney also grants Reliance
Surety the authority to pay, settle or litigate any and all claims relating to
the

<PAGE>

bonds written pursuant to the Power of Attorney. The Power of Attorney has a
term of five (5) years and is revocable before that time only if Reliance Surety
fails to act in good faith or in a commercially reasonable manner under the
Power of Attorney or more than 50% of Reliance Surety's voting stock is not
owned directly or indirectly by one or more of the Reliance Insurance companies.
In the event that the Reliance Insurance companies revoke the Power of Attorney
because of a change in their ownership of Reliance Surety prior to the fifth
anniversary of the effective time, Reliance Insurance Company will, at Reliance
Surety's option, enter into a general agency agreement with an affiliate of
Reliance Surety pursuant to which the affiliate will have the authority to write
surety and fidelity bonds on forms of the Reliance Insurance companies for a fee
and, in some cases, subject to approval of the Reliance Insurance companies. The
general agency agreement will be effective until the fifth anniversary of the
effective time and may be extended by mutual agreement of the parties.

TRADEMARK LICENSE AGREEMENT

Reliance Insurance Company has assigned to us the registered "RELIANCE
SURETY COMPANY(Registered)" trademark and the unregistered "RELIANCE SURETY
GROUP(Trademark)" trademark. We have entered into a Trademark License Agreement
pursuant to which Reliance Insurance Company has granted us the nonexclusive
right to use the registered "firemark" design trademark; however, the license
for that trademark will terminate in the event control of our company changes.
The license granted under the agreement is royalty-free and may not be assigned
by us to anyone else.

EMPLOYEE BENEFIT PLANS

Retirement benefits for certain of our active and inactive employees are
provided by our participation in Reliance Insurance Company's non-contributory
trusteed defined benefit pension plan. We were allocated $1,022,000 of pension
expense for the year ended December 31, 1998.

Reliance Insurance Company sponsors a defined contribution plan covering
employees who meet eligibility requirements. Our contribution under the defined
contribution plan was $538,000 for the year ended December 31, 1998, and was
based on a formula specified in the plan agreement.

Certain of our officers and key employees participated in Reliance Group
Holding's stock option plans, which provide for the granting of nonstatutory
stock options. Under the option plans, 362,000 and 275,000 options to purchase
Reliance Group Holdings' common stock were granted to our officers and key
employees in the year ended December 31, 1998 and the six months ended June 30,
1999, respectively. See "Management--Option Grants in Last Fiscal Year".

PRINCIPAL STOCKHOLDER

Prior to the consummation of this offering, all of the outstanding shares
of our common stock will be indirectly owned by Reliance Group Holdings. After
this offering, Reliance Group Holdings will own shares of our common stock.
These shares will represent % ( % if the underwriter's over-allotment is
exercised in full) of the total number of shares of common stock outstanding
following this offering.

<PAGE>

DESCRIPTION OF CAPITAL STOCK

Our authorized capital stock consists of 100,000,000 shares of common
stock, par value $0.10 per share, and 20,000,000 shares of undesignated
preferred stock, par value $1.00 per share.

COMMON STOCK

Holders of common stock are entitled to one vote per share on all matters
on which the holders of common stock are entitled to vote and do not have any
cumulative voting rights. Holders of common stock have no preemptive,
conversion, redemption or sinking fund rights. In the event of our liquidation,
dissolution or winding up, holders of common stock are entitled to share equally
and ratably in our assets, if any, remaining after the payment of all of our
liabilities and the liquidation preference of any outstanding class or series of
preferred stock. The outstanding shares of common stock are, and the shares of
common stock sold by us in this offering, when issued, will be fully paid and
nonassessable. The holders of common stock are entitled to receive ratably such
dividends as may be declared by our Board of Directors. See "Dividend Policy".
The rights and privileges of holders of common stock, including with respect to
the receipt of dividends, are subject to any series of preferred stock that we
may issue in the future, as described below.

PREFERRED STOCK

Our certificate of incorporation authorizes our board of directors to
create and issue one or more series of preferred stock and determine the rights
and preferences of each series within the limits set forth in our certificate of
incorporation and applicable law. Among other things, the board of directors may
determine, without further vote or action by our stockholders:

o the number of shares constituting the series, the distinctive designation
of the series and the stated value, if different from par;

o the dividend rate on the shares of the series, whether dividends will be
cumulative, and if so, from which date or dates, and the relative rights
of priority, if any, of payment of dividends on shares of the series;

o whether the series will have voting rights in addition to the voting
rights provided by law and, if so, the terms of these voting rights;

o whether the series will have conversion privileges and, if so, the terms
and conditions of the conversion;

o whether or not the shares of the series will be redeemable or
exchangeable, and if so, the dates, terms and conditions of redemption or
exchange, as the case may be;

o whether the series will have a sinking fund for the redemption or
purchase of shares of that series, and, if so, the terms and amounts of
the sinking fund; and

o the rights of the shares of the series in the event of our voluntary or
involuntary liquidation, dissolution or winding up and the relative
rights or priority, if any, of payment of shares of the series.

Unless otherwise provided by our Board of Directors, the shares of all
series of preferred stock will rank on a parity with respect to the payment of
dividends and to the distribution of assets upon liquidation. Although we have
no present plans to issue any shares of preferred stock, any future issuance of
shares of preferred stock, or the issuance of rights to purchase preferred
shares, may have the effect of delaying, deferring or preventing a change of
control in our company or an unsolicited acquisition proposal. The issuance of
preferred stock also could decrease the amount of earnings and assets available
for distribution to the holders of common stock or could adversely affect the
rights and powers, including voting rights, of the holders of common stock.
Accordingly, the issuance of shares of preferred stock may discourage bids for
the common stock at a premium or may otherwise adversely affect the market price
of the common stock.

There are no shares of preferred stock presently issued or outstanding.

<PAGE>

LIMITATIONS ON DIRECTOR LIABILITY

Our certificate of incorporation provides that, to the fullest extent
permitted by the Delaware General Corporation Law, none of our directors will be
personally liable to us or our stockholders for monetary damages.
Section 102(b)(7) of the Delaware General Corporation Law currently provides
that a director's liability for breach of fiduciary duty to a corporation may be
eliminated, except for liability:

o for any breach of the director's duty of loyalty to the corporation or
its stockholders;

o for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law;

o under Section 174 of the Delaware General Corporation Law, for unlawful
dividends or unlawful stock repurchases or redemptions; and

o for any transaction from which the director derives an improper personal
benefit.

Any amendment to these provisions of the Delaware General Corporation Law
will automatically be incorporated by reference into our certificate of
incorporation without any vote on the part of our stockholders unless otherwise
required, including this provision. These provisions may, however, discourage or
deter stockholders from bringing a lawsuit against directors for a breach of
their fiduciary duties, even though such an action, if successful, might
otherwise benefit us and our stockholders.

Our By-Laws provide that we will indemnify our directors and officers to
the fullest extent permitted by Delaware law. Generally, we are required to
indemnify our directors and officers for all:

o judgments;

o fines;

o settlements;

o legal fees; and

o other expenses

incurred in connection with pending or threatened legal proceedings because of
the director's or officer's position with us.

TRANSFER AGENT AND REGISTRAR

The transfer agent and registrar for the common stock is .

<PAGE>

SHARES ELIGIBLE FOR FUTURE SALE

Prior to this offering, there has been no market for our common stock.
Future sales of substantial amounts of common stock in the public market could
adversely affect prevailing market prices from time to time.

Immediately following this offering, there will be shares of our
common stock issued and outstanding. Of these shares, the shares of common
stock to be sold in this offering will be immediately eligible for sale in the
public market without restriction, unless the shares are purchased by our
"affiliates" within the meaning of Rule 144 under the Securities Act of 1933.
All of the remaining shares, which are held by Reliance Insurance Company,
will be restricted securities as that term is defined in Rule 144 and may not be
publicly resold, except in compliance with the registration requirements of the
Securities Act or pursuant to an exemption from registration, including the
exemption provided by Rule 144. All of the shares held by Reliance Insurance
Company are subject to the 180-day lock-up agreements described below, but are
entitled to the benefits of the registration rights agreement described in
"Related Party Transactions--Registration Rights Agreement".

RULE 144

In general, under Rule 144, a person, or persons whose shares are
aggregated, who has beneficially owned restricted securities for at least one
year, including a person who may be deemed an affiliate, is entitled to sell
within any three month period a number of our shares of common stock that does
not exceed the greater of:

o 1% of the then-outstanding shares of our common stock; or

o the average weekly trading volume of our common stock on the New York
Stock Exchange during the four calendar weeks preceding the date on which
notice of sale is filed with the Securities and Exchange Commission.

Sales under Rule 144 are subject to restrictions relating to manner of sale,
notice and the availability of current public information about us.

A person who is not deemed an affiliate of ours at any time during the
90 days preceding a sale and who has beneficially owned shares for at least two
years would be entitled to sell shares following this offering under
Rule 144(k) without regard to the volume limitations, manner of sale provisions
or notice requirements of Rule 144.

LOCK-UP AGREEMENTS

Reliance Group Holdings, Reliance Insurance Company (subject to any
restrictions applicable to Reliance Insurance Company under the insurance laws
of the Commonwealth of Pennsylvania), Reliance Surety Group and the executive
officers and directors of Reliance Surety Group have agreed to sign lock-up
agreements under which they agree to be restricted from the transfers or sale of
any of our common stock for a period of 180 days from the date of this
prospectus, without the prior written consent of Donaldson, Lufkin & Jenrette
Securities Corporation, which consent may be granted at any time, or from time
to time, without notice. See "Underwriting".

EFFECT OF SALES OF SHARES

No prediction can be made as to the effect, if any, that future sales of
shares of common stock or the availability of shares for future sale will have
on the prevailing market price for the common stock. Sales of substantial
amounts of common stock, or the perception that such sales could occur, could
adversely affect prevailing market prices for the common stock and could impair
our ability to raise capital through an offering of equity securities.

<PAGE>

UNDERWRITING

Subject to the terms and conditions contained in an underwriting agreement
dated , 1999, the underwriters named below, who are represented by Donaldson,
Lufkin & Jenrette Securities Corporation and Bear, Stearns & Co. Inc. have
severally agreed to purchase from us the respective number of shares of common
stock set forth opposite their names below.

<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITERS SHARES
- ------------------------------------------------------------------------ ---------
<S> <C>
Donaldson, Lufkin & Jenrette Securities Corporation.....................
Bear, Stearns & Co. Inc.................................................
-------
Total.................................................................
-------
-------
</TABLE>

The underwriting agreement provides that the obligations of the several
underwriters to purchase and accept delivery of the shares of common stock
included in this offering are subject to approval of legal matters by their
counsel and to customary conditions, including the effectiveness of the
registration statement, the continuing correctness of our representations, the
receipt of a "comfort letter" from our accountants, the listing of the common
stock for quotation on the New York Stock Exchange and no occurrence of an event
that would have a material adverse effect on us. The underwriters are obligated
to purchase and accept delivery of all the shares of common stock, other than
those covered by the over-allotment option described below, if they purchase any
of the shares of common stock.

The underwriters propose to initially offer some of the shares of common
stock directly to the public at the initial public offering price set forth on
the cover page of this prospectus and some of the shares of common stock to
dealers (including the underwriters) at the initial public offering price less a
concession not in excess of $ per share. The underwriters may allow, and
such dealers may re-allow, a concession not in excess of $ per share on
sales to other dealers. After the initial offering of the common stock to the
public, the representatives of the underwriters may change the public offering
price and such concessions. The underwriters do not intend to confirm sales to
any accounts over which they exercise discretionary authority.

The following table shows the underwriting fees to be paid to the
underwriters by us in connection with this offering. These amounts are shown
assuming both no exercise and full exercise of the underwriters' option to
purchase additional shares of common stock.

<TABLE>
<CAPTION>
NO FULL
EXERCISE EXERCISE
-------- --------
<S> <C> <C>
Reliance Surety Group:
Per share................................................. $ $
Total..................................................... $ $
</TABLE>

We have granted to the underwriters an option, exercisable for 30 days
after the date of the underwriting agreement, to purchase up to additional
shares of common stock at the initial public offering price less the
underwriting fees. The underwriters may exercise such option solely to cover
overallotments, if any, made in connection with this offering. To the extent
that the underwriters exercise such option, each underwriter will become
obligated, subject to conditions, to purchase a number of additional shares
approximately proportionate to such underwriter's initial purchase commitment.
We estimate expenses relating to this offering will be $ .

We have agreed to indemnify the underwriters against liabilities which may
arise in connection with the offering, including liabilities under the
Securities Act of 1933, or to contribute to payments that the underwriters may
be required to make.

<PAGE>

of 180 days from the date of this prospectus and subject to certain exceptions,
they will not, without the prior written consent of Donaldson, Lufkin & Jenrette
Securities Corporation, do either of the following:

o offer, pledge, sell, contract to sell, sell any option or contract to
purchase, purchase any option or contract to sell, grant any option,
right or warrant to purchase or otherwise transfer or dispose of,
directly or indirectly, any shares of our common stock or any securities
convertible into or exercisable or exchangeable for our common stock; or

o enter into any swap or other arrangement that transfers all or a portion
of the economic consequences associated with the ownership of any of our
common stock.

Either of the foregoing transfer restrictions will apply regardless of
whether a covered transaction is to be settled by the delivery of common stock
or such other securities, in cash or otherwise. In addition, during such period
and subject to certain exceptions, Reliance Surety and Reliance Group Holdings
have agreed not to file any registration statement with respect to, not to make
any demand for, or exercise any right with respect to, the registration of any
shares of our common stock or any securities convertible into or exercisable for
our common stock without the prior written consent of
.

We intend to apply for quotation on the New York Stock Exchange under the
symbol "RSF".

Other than in the United States, no action has been taken by the
underwriters or us that would permit a public offering of the shares of common
stock included in this offering in any jurisdiction where action for that
purchase is required. The shares of common stock included in this offering may
not be offered or sold, directly or indirectly, nor may this prospectus or any
other offering material or advertisement in connection with the offer and sale
of any shares of common stock be distributed or published in any jurisdiction,
except under circumstances that will result in compliance with the applicable
rules and regulations of such jurisdiction. Persons who receive this prospectus
are advised to inform themselves about and to observe any restrictions relating
to this offering of the common stock and the distribution of this prospectus.
This prospectus is not an offer to sell or a solicitation of an offer to buy any
shares of common stock included in this offering in any jurisdiction in which
that would not be permitted or legal.

At our request, the underwriters have reserved up to of the shares
offered by this prospectus for sale at the initial public offering price to our
employees, officers and directors. The number of shares of common stock
available for sale to the general public will be reduced to the extent these
individuals purchase or confirm for purchase, orally or in writing, such
reserved shares. Any reserved shares not purchased or confirmed for purchase
will be offered by the underwriters to the general public on the same basis as
the other shares offered by this prospectus.

Donaldson, Lufkin & Jenrette Securities Corporation and Bear, Stearns & Co.
Inc. have provided corporate finance and financial advisory services to Reliance
Group Holdings and the Reliance Insurance companies.

PRICING OF THIS OFFERING

Prior to this offering, there has been no established market for our common
stock. The initial public offering price for the shares of common stock offered
by this prospectus will be determined by negotiation among the representatives
of the underwriters, Reliance Group Holdings and us. The factors to be
considered in determining the initial public offering price will include:

o the history of, and the prospects for, the industry in which we compete;

o our past and present operations;

o our historical results of operations;

o our prospects for future earnings;

o the recent market prices of securities of generally comparable companies;
and

o the general conditions of the securities market at the time of this
offering.

<PAGE>

STABILIZATION

In connection with this offering, any of the underwriters may engage in
transactions that stabilize, maintain or otherwise affect the price of the
common stock. Specifically, the underwriters may overallot this offering,
creating a syndicate short position. The underwriters may bid for and purchase
shares of common stock in the open market to cover such syndicate short position
or to stabilize the price of the common stock. In addition, the underwriting
syndicate may reclaim selling concessions from syndicate members and selected
dealers if they repurchase previously distributed common stock in syndicate
covering transactions, in stabilizing transactions or otherwise. These
activities may stabilize or maintain the market price of the common stock above
independent market levels. The underwriters are not required to engage in these
activities, and may end any of these activities at any time.

LEGAL MATTERS

The validity of the shares of common stock offered hereby will be passed
upon for us by Dewey Ballantine LLP, New York, New York. Certain legal matters
in connection with the offering will be passed upon for the underwriters by
Cahill Gordon & Reindel, New York, New York (a partnership including a
professional corporation).

EXPERTS

The special purpose Statement of Certain Assets and Liabilities as of
December 31, 1998 and 1997 and the special-purpose Statement of Certain Revenues
and Claims and Expenses for each of the three years in the period ended
December 31, 1998 included in this prospectus have been audited by Deloitte &
Touche LLP, independent auditors, as stated in their report appearing herein
(which report expresses an unqualified opinion and includes an explanatory
paragraph regarding the basis of presentation), and have been so included in
reliance upon the report of such firm given upon their authority as experts in
accounting and auditing.

FORWARD LOOKING STATEMENTS

The Private Securities Litigation Reform Act of 1995 provides a "safe
harbor" for forward-looking statements. This document or any other written or
oral statements made by or on behalf of our company may include forward-looking
statements which reflect our current views with respect to future events and
financial performance. These statements include forward-looking statements both
with respect to our company and the businesses in which we operate including the
insurance and reinsurance sectors in general, and with respect to the
construction sector. Statements which include the words "expect", "intend",
"plan", "estimate", "believe", "project", "anticipate", "will" and similar
statements of a future or forward-looking nature identify forward-looking
statements for purposes of the PSLRA.

All forward-looking statements address matters that involve inherent risks
and uncertainties. Accordingly, there are or will be important factors that
could cause actual results to differ materially from those indicated in those
statements. We believe that these factors include, but are not limited to, the
following:

o decreases in construction activity, including as a result of changes in
the amount or timing of local, state or federally financed public works
projects;

o changes in our A.M. Best ratings (or our perceived credit) or that of the
Reliance Insurance companies or one or more other insurance and/or
reinsurance companies through whom we write or may write our business
from time to time, whether through co-surety arrangements, traditional
reinsurance, 100% quota share arrangements or otherwise;

o changes in current law or regulatory conditions, including laws requiring
bonding for public works projects;

o changes in the continuing relationship between us, on the one hand, and
Reliance Group Holdings and its subsidiaries, including the Reliance
Insurance companies, on the other hand;

<PAGE>

o the impact of Year 2000-related issues on the ability of our insureds to
meet their contractual obligations or the likelihood of their suffering
losses of the type covered by our fidelity bonds;

o loss of key personnel;

o increased competition on the basis of pricing, excess capacity, coverage
terms or other factors;

o greater frequency or severity of claims and loss activity;

o our ability to collect amounts recorded as salvage and subrogation;

o changes in the availability, cost or quality of reinsurance or other
capacity; and

o changes in general economic conditions.

The foregoing review of important factors should not be construed as
exhaustive and should be read in conjunction with other cautionary statements
that are included herein or elsewhere. We undertake no obligation to publicly
update or revise any forward-looking statement, whether as a result of new
information, future developments or otherwise.

WHERE YOU CAN FIND MORE INFORMATION

We have filed with the Securities and Exchange Commission a registration
statement on Form S-1 under the Securities Act registering the common stock to
be sold in this offering. As permitted by the Commission's rules and
regulations, this prospectus omits certain information contained in the
registration statement and the exhibits and schedules filed as a part of the
registration statement. For further information concerning Reliance Surety Group
and the common stock to be sold in this offering, you should refer to the
registration statement and to the exhibits and schedules filed as part of the
registration statement. Statements contained in this prospectus regarding the
contents of any agreement or other document filed as an exhibit to the
registration statement are not necessarily complete, and in each instance we
refer you to the copy of the agreement filed as an exhibit to the registration
statement, each statement being qualified by this reference.

You may read and copy all or any portion of the registration statement or
any reports, statements or other information we file with the Commission at the
Commission's public reference room at Room 1024, Judiciary Plaza, 450 Fifth
Street, N.W., Washington, D.C. 20549 and at the regional offices of the
Commission located at Seven World Trade Center, 13th Floor, New York, New York
10048 and the Northwestern Atrium Center, 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661. You can request copies of these documents, upon payment
of a duplicating fee, by writing to the commission. Please call the Commission
at 1-800-SEC-0330 for further information on the operation of the public
reference rooms. Our Commission filings, including the registration statement,
will also be available to you on the Commission's Internet site. The address of
this site is http://www.sec.gov.

We intend to apply for listing of our common stock on the New York Stock
Exchange. Periodic reports, proxy statements and other information concerning us
will be available for inspection at the offices of the New York Stock Exchange,
20 Broad Street, New York, New York 10005.

We intend to send to our stockholders annual reports containing audited
financial statements for each fiscal year and quarterly reports containing
unaudited financial statements for the first three quarters of each fiscal year.

<PAGE>

INDEX TO FINANCIAL STATEMENTS

CONTENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditors' Report............................................................................... F-2
Statement of Certain Revenues and Claims and Expenses for the Years Ended
December 31, 1996, 1997 and 1998......................................................................... F-3
Statement of Certain Assets and Liabilities as of December 31, 1997 and 1998............................... F-4
Notes to Financial Statements.............................................................................. F-5
Statement of Certain Revenues and Claims and Expenses for the Six Months ended
June 30, 1998 and 1999 (Unaudited)....................................................................... F-12
Statement of Certain Assets and Liabilities as of December 31, 1998 and
June 30, 1999 (Unaudited)................................................................................ F-13
Notes to Financial Statements (Unaudited).................................................................. F-14
</TABLE>

F-1

<PAGE>

INDEPENDENT AUDITORS' REPORT

Board of Directors and Shareholders
Reliance Group Holdings, Inc.

We have audited the accompanying special-purpose statement of certain assets and
liabilities of Reliance Surety Group, Inc. (the "Company"), a business unit of
Reliance Group Holdings, Inc., as of December 31, 1997 and 1998, and the
special-purpose statement of certain revenues and claims and expenses for each
of the three years in the period ended December 31, 1998. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements 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.

The accompanying special-purpose financial statements were prepared to present
certain assets and liabilities and certain revenues and claims and expenses of
the Company and are not intended to be a complete presentation of the Company's
assets, liabilities, revenues and expenses. Note 1 to the financial statements
describes the basis of presentation of these special-purpose financial
statements.

In our opinion, such special-purpose financial statements present fairly, in all
material respects, certain assets and liabilities of the Company at
December 31, 1997 and 1998, and certain revenues and claims and expenses for
each of the three years in the period ended December 31, 1998, in conformity
with generally accepted accounting principles.

Deloitte & Touche LLP
Philadelphia, Pennsylvania
October 22, 1999

F-2

<PAGE>

RELIANCE SURETY GROUP, INC.

STATEMENT OF CERTAIN REVENUES AND CLAIMS AND EXPENSES

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
1996 1997 1998
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
CERTAIN REVENUES:
Net premium earned........................................................... $147,416 $167,251 $196,693
-------- -------- --------

CERTAIN CLAIMS AND EXPENSES:
Loss and loss adjustment expenses............................................ 37,833 42,890 42,712
Acquisition costs and other insurance expenses............................... 69,129 80,151 94,059
Other operating expenses..................................................... 4,220 5,740 5,512
-------- -------- --------
111,182 128,781 142,283
-------- -------- --------

UNDERWRITING INCOME.......................................................... 36,234 38,470 54,410
Other expenses............................................................... 1,813 737 64
-------- -------- --------

PRETAX INCOME................................................................ 34,421 37,733 54,346
Provision for income taxes................................................... 12,183 13,385 19,284
-------- -------- --------

NET INCOME................................................................... $ 22,238 $ 24,348 $ 35,062
-------- -------- --------
-------- -------- --------
</TABLE>

See notes to financial statements

F-3

<PAGE>

RELIANCE SURETY GROUP, INC.

STATEMENT OF CERTAIN ASSETS AND LIABILITIES

<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1997 1998
-------- --------
(IN THOUSANDS)
<S> <C> <C>
CERTAIN ASSETS
Receivable from parent................................................................. $141,173 $169,469
Premium and other receivables, net of a $500 allowance................................. 34,264 41,936
Reinsurance recoverables............................................................... 73,178 71,636
Deferred acquisition costs............................................................. 45,028 48,029
Other assets........................................................................... 19,696 17,584
-------- --------
$313,339 $348,654
-------- --------
-------- --------
CERTAIN LIABILITIES
Unearned premium....................................................................... $148,625 $150,973
Unpaid loss and loss adjustment expenses............................................... 105,882 112,920
Accounts payable and accrued expenses, including funds held as collateral of $23,812
and $36,367.......................................................................... 49,130 71,045
Reinsurance ceded premium payable...................................................... 5,550 10,325
Deferred income taxes.................................................................. 4,152 3,391

Commitments and contingencies (see note 8)
-------- --------
$313,339 $348,654
-------- --------
-------- --------
</TABLE>

See notes to financial statements

F-4

<PAGE>

RELIANCE SURETY GROUP, INC.

NOTES TO FINANCIAL STATEMENTS

1. NATURE OF OPERATIONS/SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Current Organization

Reliance Insurance Company (the "parent"), through its operating
subsidiaries, writes multiple lines of property and casualty insurance,
including surety and fidelity insurance. The principal operating unit of the
parent that writes the surety and fidelity line of business is Reliance Surety.
Reliance Group Holdings, Inc. owns 100% of Reliance Insurance Company. Reliance
Surety Group, Inc. was incorporated in Delaware on September 27, 1999. Reliance
Insurance Company subscribed for all of the then outstanding shares of the
Company's common stock.

Nature of Operations

The Company is an insurance holding company, that, through its insurance
subsidiary, develops, markets and underwrites surety and fidelity bonds for a
diverse range of customers. It markets its products in all 50 states, as well as
the District of Columbia and Puerto Rico.

The Company is a leading provider of surety and fidelity bonds. The Company
manages its business and operates in one business segment, the development,
marketing and underwriting of contract and commercial surety bonds and fidelity
bonds. Contract surety bonds secure the payment and/or performance of a
contractual obligation generally with respect to a construction project.
Contract surety bonds are generally required by federal, state and local
governments for public works projects. Commercial surety bonds include all
surety bonds other than contract surety bonds and usually cover obligations
required by law. Fidelity bonds are insurance policies against employee theft,
as well as forgery, burglary or robbery. Contract surety bonds accounted for 69%
of Reliance Surety's gross written premium during 1998. Most of the contract
surety bonds Reliance Surety writes are for contractors engaged in the
construction of public works projects, such as highways, bridges and schools,
and, to a lesser extent, commercial real estate and multifamily housing. The
Company's business tends to be seasonal. In general, the Company writes a
majority of its premiums in the second half of the year. Marsh & McLennan and
Aon, two large international insurance brokers, were responsible for 13.1% and
8.4%, respectively, of the Company's gross written premium in 1998.

Basis of Presentation

The accompanying statement of certain assets and liabilities reflects
assets and liabilities identified as being attributable to the business of
Reliance Surety. Because Reliance Group Holdings, Inc. did not historically
allocate the investment portfolio or capital of its subsidiaries to its business
units like Reliance Surety, the statement of certain assets and liabilities does
not include an investment portfolio or shareholder's equity. The Company did not
maintain its own cash accounts, accordingly, no statement of cash flows is
presented. The receivable from parent is calculated at an amount necessary to
balance all other identified assets with the total of all identified
liabilities. The Company believes the receivable from parent approximates fair
value. It is intended that the receivable from parent will be converted into a
combination of cash or fixed income securities.

The accompanying statement of certain revenues and claims and expenses
reflects premium earned, loss and loss adjustment expenses, acquisition costs
and other insurance expenses and other operating expenses of Reliance Surety.
Revenues such as net investment income and realized gains and losses on
investments, are not included since these items were not historically allocated
to Reliance Surety by the parent.

Since the accompanying financial statements exclude certain assets and
revenues, as described in the preceding two paragraphs, these financial
statements are not intended to be a complete presentation of the Company's
financial position or results of operations. Those assets, liabilities, revenues
and expenses that are

F-5

<PAGE>

RELIANCE SURETY GROUP, INC.

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

1. NATURE OF OPERATIONS/SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)

reflected in the accompanying financial statements have been determined in
accordance with generally accepted accounting principles.

Certain administrative items, including rent, information technology and
financial services are provided by the parent to the Company. The costs of such
services were $7,000,000, $8,800,000 and $9,200,000 for the years ended December
31, 1996, 1997 and 1998 (including rent expense of $3,200,000, $3,500,000 and
$4,400,000), respectively, and are included in the statement of certain revenue
and claims and expenses. These costs were allocated to the Company either on a
direct basis or by using allocation methods which the parent believes are
reasonable. Management of the Company believes that the cost of these services
are reasonable and substantially similar to the costs that would have been
incurred if the Company had operated as an unaffiliated entity.

Reliance Insurance Company has assigned to the Company the registered
"RELIANCE SURETY COMPANY(Registered)" trademark and the unregistered "RELIANCE
SURETY GROUP(Trademark)" trademark. The Company has entered into a Trademark
License Agreement pursuant to which Reliance Insurance Company has granted the
Company the nonexclusive right to use the registered "firemark" design
trademark; however, the license for that trademark will terminate in the event
control of the Company changes (as defined). The license granted under the
agreement is royalty-free and may not be assigned.

Premium on contract surety bonds are earned over the estimated term of the
bond, which vary with the length of the underlying construction period. Premium
on commercial surety bonds and fidelity bonds are earned ratably over the
effective period of the bond.

The costs associated with the acquisition of surety and fidelity business
are deferred and amortized on a straight-line basis over the terms of the bonds
in force. Such deferred acquisition costs consist of commissions, premium taxes
and other bond issuance and underwriting expenses the Company deems variable.
Deferred acquisition costs are periodically reviewed to determine whether they
exceed recoverable amounts.

Loss and loss adjustment expenses are estimated based on an evaluation of
reported claims in addition to statistical projections of claims incurred but
not reported and loss adjustment expenses. Estimates of salvage and subrogation
are deducted from the liability. The Company applies generally accepted
actuarial techniques to determine the estimates of ultimate liability. The
process of estimating claims is a complex task and the ultimate liability may be
more or less than such estimates indicate. Adjustments of the probable ultimate
liability, based on subsequent developments, are included in operations in the
period of such development.

Income Taxes

The Company is included in the consolidated federal income tax return of
Reliance Group Holdings, Inc. Deferred income taxes are provided under the asset
and liability method, whereby deferred income taxes result from temporary
differences between the tax bases of assets and liabilities and their reported
amounts in the financial statements. The provision for income taxes has been
computed as if the Company filed a separate tax return.

Use of Estimates

The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.

F-6

<PAGE>

RELIANCE SURETY GROUP, INC.

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

1. NATURE OF OPERATIONS/SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)

Adoption of New Accounting Standards

In 1997, the American Institute of Certified Public Accountants issued
Statement of Position No. 97-3, "Accounting by Insurance and Other Enterprises
for Insurance-Related Assessments". This Statement provides guidance on
accounting by entities subject to insurance-related assessments in an effort to
improve the comparability of amounts reported and disclosures made. This
Statement was adopted in the first quarter of 1999, and had no material effect
on the Company's financial statements.

In March 1998, the American Institute of Certified Public Accountants
issued Statement of Position No. 98-1, "Accounting for Costs of Computer
Software Developed or Obtained for Internal Use". This Statement was adopted in
the first quarter of 1999, and had no effect on the Company's financial
statements.

In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities". This Statement established accounting and reporting
standards for derivative instruments, including certain derivative instruments
embedded in other contracts and for hedging activities. The adoption of this
Statement, which is not required until 2001, is not expected to have a material
effect on the Company's financial statements.

In October 1998, the American Institute of Certified Public Accountants
issued Statement of Position No. 98-7, "Deposit Accounting: Accounting for
Insurance and Reinsurance Contracts That Do Not Transfer Insurance Risk". The
adoption of this Statement, which is not required until 2000, is not expected to
have a material effect on the Company's financial statements.

In 1998, the National Association of Insurance Commissioners adopted the
Codification of Statutory Accounting Principles ("Codification") and the state
of Delaware (the state where the Company is domiciled) will consider adopting
the Codification. The Codification, which is intended to standardize regulatory
accounting and reporting for the insurance industry, is proposed to be effective
January 1, 2001. The Company has not finalized the quantification of the effects
of Codification on its statutory financial statements.

2. REINSURANCE

In the normal course of business, the Company assumes and cedes reinsurance
on both a pro-rata and excess basis. Reinsurance provides greater
diversification of business and limits the maximum net loss potential arising
from large claims. Although the ceding of reinsurance does not discharge an
insurer from its primary legal liability to a policyholder, the reinsuring
company assumes the related liability.

Amounts recoverable from reinsurers are estimated in a manner consistent
with the liability for unpaid loss and loss adjustment expenses associated with
the reinsurance. Estimated amounts of reinsurance recoverables are reported as
assets in the accompanying statement of certain assets and liabilities. As of
December 31, 1997 and 1998, reinsurance recoverables included $28,926,000 and
$23,602,000 of prepaid insurance premium which represents the portion of premium
ceded to reinsurers applicable to unearned premium, $5,445,000 and $10,307,000
of paid loss recoverables and $38,807,000 and $37,727,000 related to unpaid loss
and loss adjustment expenses.

The Company's three principal reinsurers, based on 1998 ceded premium, are
as follows:

<TABLE>
<CAPTION>
(IN THOUSANDS)
--------------
<S> <C>
Employers Re................................................................... $ 11,425
Everest Reinsurance............................................................ 8,644
SCOR Reinsurance............................................................... 5,897
</TABLE>

F-7

<PAGE>

RELIANCE SURETY GROUP, INC.

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

2. REINSURANCE--(CONTINUED)

The reconciliation of direct premium to net premium was as follows:

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
--------------------------------------------------------------------
1996 1997 1998
-------------------- -------------------- --------------------
PREMIUM PREMIUM PREMIUM PREMIUM PREMIUM PREMIUM
WRITTEN EARNED WRITTEN EARNED WRITTEN EARNED
-------- -------- -------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Direct........................ $201,663 $190,863 $220,233 $209,597 $246,427 $243,700
Assumed....................... 2,397 1,815 3,270 2,380 2,880 2,916
Ceded......................... (44,877) (45,262) (47,003) (44,726) (44,940) (49,923)
-------- -------- -------- -------- -------- --------
Net premium................... $159,183 $147,416 $176,500 $167,251 $204,367 $196,693
-------- -------- -------- -------- -------- --------
-------- -------- -------- -------- -------- --------
</TABLE>

The reconciliation of gross loss and loss adjustment expenses to net loss
and loss adjustment expenses was as follows:

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
--------------------------------
1996 1997 1998
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Gross................................................................ $ 50,486 $ 74,237 $ 70,014
Reinsurance recoveries............................................... (12,653) (31,347) (27,302)
-------- -------- --------
Net loss and loss adjustment expenses................................ $ 37,833 $ 42,890 $ 42,712
-------- -------- --------
-------- -------- --------
</TABLE>

3. LOSS AND LOSS ADJUSTMENT EXPENSES

The reconciliation of the beginning to ending liability for unpaid loss and
loss adjustment expenses ("loss reserves") was as follows:

<TABLE>
<CAPTION>
DECEMBER 31
-------------------------------
1996 1997 1998
------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Loss reserves, beginning of year..................................... $69,974 $ 78,243 $105,882
Less reinsurance recoverables related to loss reserves............. 23,372 22,070 38,807
------- -------- --------
Net loss reserves, beginning of year................................. 46,602 56,173 67,075
------- -------- --------
Provision for loss and loss adjustment expenses:
Provision for insured events of the current year................... 35,912 52,371 56,325
Increase (decrease) in provision for insured events of prior
years........................................................... 1,921 (9,481) (13,613)
------- -------- --------
Total provision................................................. 37,833 42,890 42,712
------- -------- --------
Payments for loss and loss adjustment expenses:
Attributable to insured events of the current year................. 10,690 18,222 17,491
Attributable to insured events of prior years...................... 17,572 13,766 17,103
------- -------- --------
Total payments.................................................. 28,262 31,988 34,594
------- -------- --------
Net loss reserves, end of year(1).................................... 56,173 67,075 75,193
Plus reinsurance recoverables related to loss reserves............. 22,070 38,807 37,727
------- -------- --------
Loss reserves, end of year........................................... $78,243 $105,882 $112,920
------- -------- --------
------- -------- --------
</TABLE>

- ------------------
(1) Net of salvage and subrogation of $10,925,000, $9,325,000 and $16,325,000 as
of December 31, 1996, 1997 and 1998, respectively.

F-8

<PAGE>

RELIANCE SURETY GROUP, INC.

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

3. LOSS AND LOSS ADJUSTMENT EXPENSES--(CONTINUED)

The provision for loss and loss adjustment expenses in 1997 and 1998
includes favorable development of prior years' loss reserves. These favorable
developments primarily occurred in contract surety and, to a lesser extent, in
fidelity. The adverse development in 1996 primarily resulted from contract
surety.

4. DEFERRED ACQUISITION COSTS AND OTHER INSURANCE EXPENSES

The reconciliation of the beginning to ending deferred acquisition costs in
each of the past three years were as follows:

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
--------------------------------
1996 1997 1998
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Balance, beginning of year........................................... $ 37,029 $ 40,934 $ 45,028
Costs deferred....................................................... 58,792 66,490 77,100
Amortization of deferred acquisition costs........................... (54,887) (62,396) (74,099)
-------- -------- --------
Balance, end of year................................................. $ 40,934 $ 45,028 $ 48,029
-------- -------- --------
-------- -------- --------
</TABLE>

Other insurance expenses primarily includes salaries and related benefits
of $9,900,000, $12,300,000 and $14,300,000 for the years ended December 31,
1996, 1997 and 1998, respectively.

5. FIXED ASSETS

Fixed assets, net of accumulated depreciation, were $1,625,000 and
$2,008,000 at December 31, 1997 and 1998, respectively, and are included in
other assets in the statement of certain assets and liabilities. Fixed assets,
which primarily consists of computer equipment, are recorded at cost and
depreciated over their estimated useful lives of three to seven years using the
straight-line method. Depreciation expense was $730,000, $1,042,000 and
$1,314,000 in 1996, 1997 and 1998.

6. INCOME TAXES

The provision for income taxes has been computed as if the Company filed a
separate tax return. The current tax so computed is payable to or due from its
parent pursuant to a tax allocation arrangement. Since the Company is included
in the consolidated federal income tax return of Reliance Group Holdings, Inc.,
it is jointly and severally liable for the consolidated income tax liability;
however, Reliance Group Holdings, Inc., has agreed to indemnify the Company for
the tax liabilities of Reliance Group Holdings, Inc., and its subsidiaries
(other than the Company).

The provision for income taxes consisted of:

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-----------------------------
1996 1997 1998
------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Current taxes.......................................................... $11,906 $14,233 $20,045
Deferred taxes......................................................... 277 (848) (761)
------- ------- -------
$12,183 $13,385 $19,284
------- ------- -------
------- ------- -------
</TABLE>

F-9

<PAGE>

RELIANCE SURETY GROUP, INC.

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

6. INCOME TAXES--(CONTINUED)

The reconciliation of taxes computed at the statutory rate of 35% to the
provision for income taxes is as follows:

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-----------------------------
1996 1997 1998
------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Tax provision at statutory rate........................................ $12,047 $13,207 $19,021
Nondeductible expenses................................................. 130 176 181
Other.................................................................. 6 2 82
------- ------- -------
Provision for income taxes............................................. $12,183 $13,385 $19,284
------- ------- -------
------- ------- -------
</TABLE>

The tax effects of items comprising the Company's net deferred tax
liability were as follows:

<TABLE>
<CAPTION>
DECEMBER 31
--------------------
1997 1998
------- -------
(IN THOUSANDS)
<S> <C> <C>
Deferred tax assets:
Discounting of loss reserves................................................. $ 1,468 $ 1,871
Unearned premium reserve..................................................... 8,379 8,916
Long-term incentive plan..................................................... 1,260 2,153
Other........................................................................ 880 1,031
------- -------
11,987 13,971
Deferred tax liabilities:
Deferred acquisition costs................................................... 15,761 16,811
Other........................................................................ 378 551
------- -------
Net deferred tax liability..................................................... $ 4,152 $ 3,391
------- -------
------- -------
</TABLE>

7. BENEFIT PLANS

Retirement benefits for certain active and inactive employees are provided
by the Company's participation in its parent's noncontributory trusteed defined
benefit pension plan (the "Plan"). Actuarial information for the Company is not
separately identified; however, as of December 31, 1998, the date of the latest
actuarial valuation, the Plan had projected benefit obligations of $200,024,000
and assets of $151,770,000. The Company was allocated $723,000, $372,000 and
$1,022,000 of pension expense for the years ended December 31, 1996, 1997 and
1998.

The assumptions used to measure the projected benefit obligation at
December 31, 1998 include a discount rate of 7.0% and a weighted average rate of
compensation increase of 5.2%. The expected long-term investment rate of return
on plan assets for the year ended December 31, 1998 was 10.0%.

The parent sponsors a defined contribution plan covering employees who meet
eligibility requirements. The Company's contributions under the defined
contribution plan were $452,000, $479,000 and $538,000 in 1996, 1997 and 1998,
and were based on a formula specified in the plan agreement.

Certain officers and key employees of the Company participate in Reliance
Group Holdings, Inc.'s stock option plans (the "Option Plans") which provide for
the granting of nonstatutory stock options. Under the Option Plans, options have
a maximum term of 10 years from the date of grant and 150,000, 73,000 and
362,000 options were granted in 1996, 1997 and 1998.

Certain officers of the Company participate in the Reliance Surety Division
Long-Term Incentive Plan. Under the terms of the plan, and based on the
Company's financial performance during the three-year period

F-10

<PAGE>

RELIANCE SURETY GROUP, INC.

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

7. BENEFIT PLANS--(CONTINUED)

ending December 31, 1998, participants were awarded 548,000 shares of Reliance
Group Holdings, Inc. common stock. Subject to certain restrictions, participants
will vest in such shares on January 1, 2001. In connection with this plan,
compensation expense of $3,600,000 and $2,550,000 was recorded in 1997 and 1998.

8. COMMITMENTS AND CONTINGENCIES

The Company is involved in certain legal matters arising in the normal
course of its business and believes, based on current knowledge, that the
outcome of such matters will not have a material adverse effect on its financial
statements.

The surety business is subject to regulation and supervision by the various
state insurance regulatory authorities in which business is conducted. Such
regulation is generally designed to protect policyholders.

Regulatory authority also extends to premium charged and requires that
rates not be excessive, inadequate or discriminatory.

9. DIVIDENDS OF SUBSIDIARY

The Company may not pay an "extraordinary" dividend until 30 days after the
Delaware Insurance Commissioner has received notice of the dividend and has
either (1) not disapproved such dividend within the 30-day period or
(2) approved the dividend within the 30-day period. Under Delaware law, an
"extraordinary" dividend is defined as being an amount which, together with all
other dividends made in the preceding 12 months, exceeds the greater of:
(1) 10% of statutory policyholders' surplus as of the immediate preceding
December 31, and (2) statutory net income not including realized capital gains
for the preceding calendar year. The Company must provide notice to the Delaware
Insurance Commissioner of all dividends and other distributions to shareholders
within five business days after declaration and at least ten days prior to
payment. Delaware law requires that the statutory policyholders' surplus of the
Company following any dividend or distribution be reasonable in relation to its
outstanding liabilities and adequate to its financial needs.

10. STATUTORY ACCOUNTING PRACTICES (UNAUDITED)

Generally accepted accounting principles vary in some respects from
statutory accounting practices prescribed or permitted by insurance regulatory
authorities. For example, financial statements prepared in accordance with
statutory accounting practices do not reflect capitalization or amortization of
deferred acquisition costs, accrued salvage and subrogation or deferred income
taxes. Based on statutory accounting practices, the total underwriting income
was $33,169,000, $35,520,000 and $44,580,000 for the years ended December 31,
1996, 1997 and 1998, respectively.

11. SUBSEQUENT EVENT

Subsequent to December 31, 1998, the Board of Directors of Reliance Group
Holdings, Inc. approved the sale of approximately 20% of the Company's common
stock to the public. It is intended that, upon consummation of the sale, the
Company and Reliance Group Holdings, Inc. or certain of its affiliates will
enter into various agreements covering among other matters, reinsurance,
administrative services and tax allocation.

* * * * *

F-11

<PAGE>

RELIANCE SURETY GROUP, INC.

STATEMENT OF CERTAIN REVENUES AND CLAIMS AND EXPENSES (UNAUDITED)

<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
-------------------
1998 1999
------- --------
(IN THOUSANDS)
<S> <C> <C>
CERTAIN REVENUES:
Net premium earned......................................................................... $93,670 $101,391
------- --------
CERTAIN CLAIMS AND EXPENSES:
Loss and loss adjustment expenses.......................................................... 21,355 31,531
Acquisition costs and other insurance expenses............................................. 43,663 48,992
Other operating expenses................................................................... 2,781 3,085
------- --------
67,799 83,608
------- --------
UNDERWRITING INCOME........................................................................ 25,871 17,783
Other expenses............................................................................. 55 153
------- --------
PRETAX INCOME.............................................................................. 25,816 17,630
Provision for income taxes................................................................. 9,168 6,273
------- --------
NET INCOME................................................................................. $16,648 $ 11,357
------- --------
------- --------
</TABLE>

See notes to financial statements

F-12

<PAGE>

RELIANCE SURETY GROUP, INC.

STATEMENT OF CERTAIN ASSETS AND LIABILITIES

<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1998 1999
------------ -----------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C>
CERTAIN ASSETS
Receivable from parent............................................................. $169,469 $ 168,462
Premium and other receivables, net of a $500 allowance............................. 41,936 44,370
Reinsurance recoverables........................................................... 71,636 69,833
Deferred acquisition costs......................................................... 48,029 50,785
Other assets....................................................................... 17,584 15,169
-------- ---------
$348,654 $ 348,619
-------- ---------
-------- ---------
CERTAIN LIABILITIES
Unearned premium................................................................... $150,973 $ 152,525
Unpaid loss and loss adjustment expenses........................................... 112,920 122,225
Accounts payable and accrued expenses, including funds held as collateral of
$36,367 and $36,072.............................................................. 71,045 63,453
Reinsurance ceded premium payable.................................................. 10,325 6,800
Deferred income taxes.............................................................. 3,391 3,616
-------- ---------
$348,654 $ 348,619
-------- ---------
-------- ---------
</TABLE>

See notes to financial statements.

F-13

<PAGE>

RELIANCE SURETY GROUP, INC.

NOTES TO FINANCIAL STATEMENTS (UNAUDITED)

1. UNAUDITED FINANCIAL STATEMENTS

Interim Financial Statements

In the opinion of management, the accompanying unaudited financial
statements include all adjustments (consisting of normal recurring accruals
only) considered necessary to present fairly certain assets and liabilities at
June 30, 1999, and the statement of certain revenues and claims and expenses for
all periods presented. The statement of certain revenues and claims and expenses
for the interim periods are not necessarily indicative of the results that may
be expected for any other interim period or for the entire year.

For a summary of significant accounting policies (which have not changed
from December 31, 1998) and additional financial information, see the Company's
financial statements on pages F-2 through F-11 for the year ended December 31,
1998.

Basis of Presentation

2. REINSURANCE

Amounts recoverable from reinsurers are estimated in a manner consistent
with the liability for unpaid loss and loss adjustment expenses associated with
the reinsurance. Estimated amounts of reinsurance recoverables are reported as
assets in the accompanying statement of certain assets and liabilities. As of
December 31, 1998 and June 30, 1999, reinsurance recoverables included
$23,602,000 and $23,183,000 of prepaid insurance premium which represents the
portion of premium ceded to reinsurers applicable to unearned premium,
$10,307,000 and $6,642,000 of paid loss recoverables and $37,727,000 and
$40,008,000 related to unpaid loss and loss adjustment expenses.

F-14

<PAGE>

RELIANCE SURETY GROUP, INC.

NOTES TO FINANCIAL STATEMENTS (UNAUDITED)--(CONTINUED)

2. REINSURANCE--(CONTINUED)

The reconciliation of direct premium to net premium was as follows:

<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
--------------------------------------------
1998 1999
-------------------- --------------------
PREMIUM PREMIUM PREMIUM PREMIUM
WRITTEN EARNED WRITTEN EARNED
-------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Direct................................................. $111,176 $116,849 $125,642 $123,412
Assumed................................................ 1,382 1,447 1,253 1,523
Ceded.................................................. (20,763) (24,626) (23,486) (23,544)
-------- -------- -------- --------
Net premium............................................ $ 91,795 $ 93,670 $103,409 $101,391
-------- -------- -------- --------
-------- -------- -------- --------
</TABLE>

The reconciliation of gross loss and loss adjustment expenses to net loss
and loss adjustment expenses was as follows:

<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
-----------------------
1998 1999
------- -------
(IN THOUSANDS)
<S> <C> <C>
Gross....................................................................... $33,005 $41,090
Reinsurance recoveries...................................................... (11,650) (9,559)
------- -------
Net loss and loss adjustment expenses....................................... $21,355 $31,531
------- -------
------- -------
</TABLE>

F-15

<PAGE>

- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------

, 1999

RELIANCE SURETY GROUP, INC.

SHARES OF COMMON STOCK

------------------------------

PROSPECTUS

------------------------------

DONALDSON, LUFKIN & JENRETTE
BEAR, STEARNS & CO. INC.

- --------------------------------------------------------------------------------

We have not authorized any dealer, salesperson or other person to give you
written information other than this prospectus or to make representations as to
matters not stated in this prospectus. You must not rely on unauthorized
information. This prospectus is not an offer to sell these securities or our
solicitation of your offer to buy these securities in any jurisdiction where
that would not be permitted or legal. Neither the delivery of this prospectus
nor any sales made hereunder after the date of this prospectus should create an
implication that the information contained in this prospectus or the affairs of
Reliance Surety Group, Inc. have not changed since the date of this prospectus.

- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------

Until , 1999 (25 days after the date of this prospectus), all dealers
that effect transactions in these securities, whether or not participating in
this offering, may be required to deliver a prospectus. This is in addition to
the dealer's obligation to deliver a prospectus when acting as an underwriter in
this offering and when selling previously unsold allotments or subscriptions.

- --------------------------------------------------------------------------------

<PAGE>

PART II

INFORMATION NOT REQUIRED IN PROSPECTUS

ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.

The following table sets forth the costs and expenses, other than the
underwriting discounts, payable by the Registrant in connection with the sale of
the securities being registered. All amounts are estimates except the SEC
registration fee, the NASD filing fee and the NYSE listing fee

<TABLE>
<S> <C>
SEC Registration Fee.......................................... $ *
NASD Filing Fee............................................... *
NYSE Listing Fee.............................................. *
Printing Costs................................................ *
Legal Fees and Expenses....................................... *
Accounting Fees and Expenses.................................. *
Blue Sky Fees and Expenses.................................... *
Transfer Agent and Registrar Fees............................. *
Miscellaneous................................................. *
Total......................................................... *
</TABLE>

- ------------------
*To be filed by amendment.

ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.

Section 145(a) of the General Corporation Law of the State of Delaware (the
"DGCL") provides that a Delaware corporation may indemnify any person who was or
is a party or is threatened to be made a party to any threatened, pending or
completed action, suit or proceeding, whether civil, criminal, administrative or
investigative (other than an action by or in the right of the corporation) by
reason of the fact that he is or was a director, officer, employee or agent of
the corporation or is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation or enterprise,
against expenses, judgments, fines and amounts paid in settlement actually and
reasonably incurred by him in connection with such action, suit or proceeding if
he acted in good faith and in a manner he reasonably believed to be in or not
opposed to the best interests of the corporation, and, with respect to any
criminal action or proceeding, had no cause to believe his conduct was unlawful.

Section 145(b) of the DGCL provides that a Delaware corporation may
indemnify any person who was or is a party or is threatened to be made a party
to any threatened, pending or completed action or suit by or in the right of the
corporation to procure a judgment in its favor by reason of the fact that such
person acted in any of the capacities set forth above, against expenses actually
and reasonably incurred by him in connection with the defense or settlement of
such action or suit if he acted under similar standards, except that no
indemnification may be made in respect of any claim, issue or matter as to which
such person shall have been adjudged to be liable to the corporation unless and
only to the extent that the court in which such action or suit was brought shall
determine that despite the adjudication of liability, such person is fairly and
reasonably entitled to be indemnified for such expenses which the court shall
deem proper.

Section 145 of the DGCL further provides that to the extent a director or
officer of a corporation has been successful in the defense of any action, suit
or proceeding referred to in subsections (a) and (b) or in the defense of any
claim, issue, or matter therein, he shall be indemnified against any expenses
actually and reasonably incurred by him in connection therewith; that
indemnification provided for by Section 145 shall not be deemed exclusive of any
rights to which the indemnified party may be entitled; and that the corporation
may purchase and maintain insurance on behalf of a director or officer of the
corporation against any liability asserted against him or incurred by him in any
such capacity or arising out of his status as such whether or not the
corporation would have the power to indemnify him against such liabilities under
Section 145.

Section 102(b)(7) of the DGCL provides that a corporation in its original
certificate of incorporation or an amendment thereto validly approved by
stockholders may eliminate or limit personal liability of members of its board
of directors or governing body for breach of a director's fiduciary duty.
However, no such provision may eliminate or limit the liability of a director
for breaching his duty of loyalty, failing to act in

II-1

<PAGE>

good faith, engaging in intentional misconduct or knowingly violating a law,
paying a dividend or approving a stock repurchase which was illegal, or
obtaining an improper personal benefit. A provision of this type has no effect
on the availability of equitable remedies, such as injunction or rescission, for
breach of fiduciary duty. Our Certificate of Incorporation contains such a
provision.

Our By-Laws provide that we shall indemnify officers and directors and, to
the extent permitted by the Board of Directors, our employees and agents, to the
full extent permitted by and in the manner permissible under the laws of the
State of Delaware. In addition, the By-Laws permit the Board of Directors to
authorize us to purchase and maintain insurance against any liability asserted
against any of our directors, officers, employees or agents arising out of their
capacity as such.

ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.

On September 27, 1999, we issued 100 shares of common stock to Reliance
Insurance Company in exchange for $1,000. This exchange is exempt from
registration under the Securities Act pursuant to Section 4(2) thereunder.

ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

The following Exhibits are filed as part of this Registration Statement:

(a) Exhibits

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------------------------------------------------------------------------------------------------------
<S> <C> <C>
1.1 -- Form of Underwriting Agreement*
3.1 -- Amended and Restated Certificate of Incorporation of Reliance Surety Group, Inc.*
3.2 -- By-Laws of Reliance Surety Group, Inc.*
4.1 -- Specimen certificate representing the common stock*
5.1 -- Opinion of Dewey Ballantine LLP*
10.1 -- Reliance Surety Group Stock Option Plan*
10.2 -- Reliance Surety Company Management Incentive Bonus Plan for 1996*
10.3 -- Reliance Surety Company Management Incentive Bonus Plan for 1997*
10.4 -- Reliance Surety Company Management Incentive Bonus Plan for 1998*
10.5 -- Reliance Surety Company Management Incentive Bonus Plan for 1999*
10.6 -- Reliance Surety Company Field Incentive Bonus Plan*
10.7 -- Reliance Insurance Company Savings Incentive Plan, as amended and restated effective January 1, 1996*
10.8 -- Reliance Surety Company Specialty Division Premium Growth Incentive Plan, dated May 11, 1998*
10.9 -- Employment Agreement dated as of , 1999 between Reliance Surety Company and C. Brian Schmalz*
10.10 -- Employment Agreement dated as of , 1999 between Reliance Surety Company and David T. Akers*
10.11 -- Employment Agreement dated as of , 1999 between Reliance Surety Company and Vincent G.
Fasano*
10.12 -- Employment Agreement dated as of , 1999 between Reliance Surety Company and Edward M. Titus*
10.13 -- Employment Agreement dated as of May 11, 1998 between Reliance Surety Company and George F. Thompson*
10.14 -- Reliance Group Holdings, Inc. Savings Incentive Plan*
10.15 -- Form of Administrative Services Agreement by and between Reliance Surety Group, Inc. and Reliance
Insurance Company*
10.16 -- Form of Registration Rights Agreement by and between Reliance Surety Group, Inc. and Reliance
Insurance Company*
10.17 -- Form of Reliance Surety Group Quota Share and Loss Portfolio Reinsurance Agreement by and among
Reliance Insurance Company, Reliance National Indemnity Company, United Pacific Insurance Company,
Reliance Insurance Company of Illinois, Reliance National Insurance Company (Europe) Ltd. and
Reliance Surety Company*
</TABLE>

II-2

<PAGE>

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------------------------------------------------------------------------------------------------------
<S> <C> <C>
10.18 -- Form of Trademark License Agreement by and between Reliance Surety Group, Inc. and Reliance Insurance
Company*
10.19 -- Form of Tax Allocation Agreement between Reliance Insurance Company and Reliance Surety Group, Inc.*
10.20 -- Form of Tax Allocation Agreement between Reliance Surety Company and Reliance Surety Group, Inc.*
10.21 -- Form of Power of Attorney granted by Reliance Insurance Company, Reliance National Indemnity Company,
United Pacific Insurance Company, Reliance Insurance Company of Illinois and Reliance National
Insurance Company (Europe) Ltd. to Reliance Surety Company*
10.22 -- Form of Assignment of Trademarks from Reliance Insurance Company to Reliance Surety Group*
10.23 -- Form of Assignment and Assumption Agreement by and among Reliance Insurance Company, Reliance
National Indemnity Company, United Pacific Insurance Company, Reliance Insurance Company of Illinois,
Reliance National Insurance Company (Europe) Ltd. and Reliance Surety Company*
21.1 -- Subsidiaries of the Registrant*
23.1 -- Consent of Dewey Ballantine LLP (included in Exhibit 5.1)*
23.2 -- Consent of Deloitte & Touche LLP
24.1 -- Powers of Attorney (see Signature Page)
27.1 -- Financial Data Schedule
</TABLE>

- ------------------
* To be filed by amendment.

(b) Financial Statement Schedules

All schedules have been omitted because they are not required or because
the required information is given in the financial statements or notes thereto.

ITEM 17. UNDERTAKINGS.

The undersigned registrant hereby undertakes to provide to the underwriters
at the closing specified in the underwriting agreements certificates in such
denominations and registered in such names as required by the underwriters to
permit prompt delivery to each purchaser.

Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant of expenses
incurred or paid by a director, officer, or controlling person of the registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.

The undersigned registrant hereby undertakes that:

(1) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part
of this registration statement in reliance upon Rule 430A and contained in
a form of prospectus filed by the registrant pursuant to
Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to
be part of this registration statement as of the time it was declared
effective.

(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.

II-3

<PAGE>

SIGNATURES

PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT
HAS DULY CAUSED THIS REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF PHILADELPHIA, STATE OF
PENNSYLVANIA, ON THE 25TH DAY OF OCTOBER, 1999.

By: /s/ C. BRIAN SCHMALZ
----------------------------------
NAME: C. BRIAN SCHMALZ
TITLE: President and Chief Executive
Officer

POWER OF ATTORNEY

KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below hereby constitutes and appoints, jointly and severally, George E.
Bello and Albert A. Benchimol and each of them, as his attorney-in-fact, with
full power of substitution, for him or her in any and all capacities, to sign
any and all amendments to this registration statement (including post-effective
amendments), and any and all registration statements filed pursuant to Rule 462
under the Securities Act of 1933, as amended, in connection with or related to
the offering contemplated by this registration statement and its amendments, if
any, and to file the same, with exhibits thereto and other documents in
connection therewith, with the Securities and Exchange Commission, hereby
ratifying and confirming our signatures as they may be signed by our said
attorney to any and all amendments to said registration statement.

PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS
REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE
CAPACITIES AND ON THE DATES INDICATED:

<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------------------ ------------------------------------------- -------------------
<S> <C> <C>
/s/ C. BRIAN SCHMALZ President, Chief Executive Officer and October 25, 1999
- ------------------------------------------ Director (Principal Executive Officer)
C. Brian Schmalz

/s/ EDWARD M. TITUS Senior Vice President and Chief Financial October 25, 1999
- ------------------------------------------ Officer (Principal Financial Officer and
Edward M. Titus Principal Accounting Officer)

/s/ GEORGE E. BELLO Director October 25, 1999
- ------------------------------------------
George E. Bello

/s/ ROBERT M. STEINBERG Director October 25, 1999
- ------------------------------------------
Robert M. Steinberg

/s/ SAUL P. STEINBERG Director October 25, 1999
- ------------------------------------------
Saul P. Steinberg
</TABLE>

<PAGE>
Exhibit 23.2

INDEPENDENT AUDITORS' CONSENT

We consent to the use in this Registration Statement of Reliance Surety Group,
Inc. on Form S-1 of our report dated October 22, 1999, appearing in the
Prospectus, which is part of this Registration Statement, on our audit of the
special purpose statement of certain assets and liabilities of Reliance Surety
Group, Inc., a business unit of Reliance Group Holdings, Inc. as of December 31,
1997 and 1998, as well as the special purpose statement of certain revenues and
claims and expenses for each of the three years in the period ended December 31,
1998. Our report on the special purpose financial statements expresses an
unqualified opinion and includes an explanatory paragraph related to the basis
of presentation.

We also consent to the reference to us under the heading "Experts" in such
Prospectus.

Deloitte & Touche LLP
Philadelphia, Pennsylvania
October 22, 1999

<ARTICLE> 7
<MULTIPLIER> 1000

<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<DEBT-HELD-FOR-SALE> 0
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 0
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 0
<CASH> 0
<RECOVER-REINSURE> 69,833
<DEFERRED-ACQUISITION> 50,785
<TOTAL-ASSETS> 348,619
<POLICY-LOSSES> 122,225
<UNEARNED-PREMIUMS> 152,525
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 0
0
0
<COMMON> 0
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 348,619
101,391
<INVESTMENT-INCOME> 0
<INVESTMENT-GAINS> 0
<OTHER-INCOME> 0
<BENEFITS> 31,531
<UNDERWRITING-AMORTIZATION> 48,992
<UNDERWRITING-OTHER> 3,085
<INCOME-PRETAX> 17,630
<INCOME-TAX> 6,273
<INCOME-CONTINUING> 11,357
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 11,357
<EPS-BASIC> 0.000
<EPS-DILUTED> 0.000
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0

</TABLE>

<ARTICLE> 7
<MULTIPLIER> 1000

<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<DEBT-HELD-FOR-SALE> 0
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 0
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 0
<CASH> 0
<RECOVER-REINSURE> 71,636
<DEFERRED-ACQUISITION> 48,029
<TOTAL-ASSETS> 348,654
<POLICY-LOSSES> 112,920
<UNEARNED-PREMIUMS> 150,973
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 0
0
0
<COMMON> 0
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 348,654
196,693
<INVESTMENT-INCOME> 0
<INVESTMENT-GAINS> 0
<OTHER-INCOME> 0
<BENEFITS> 42,712
<UNDERWRITING-AMORTIZATION> 94,059
<UNDERWRITING-OTHER> 5,512
<INCOME-PRETAX> 54,346
<INCOME-TAX> 19,284
<INCOME-CONTINUING> 35,062
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 35,062
<EPS-BASIC> 0.000
<EPS-DILUTED> 0.000
<RESERVE-OPEN> 67,075
<PROVISION-CURRENT> 56,325
<PROVISION-PRIOR> (13,613)
<PAYMENTS-CURRENT> 17,491
<PAYMENTS-PRIOR> 17,103
<RESERVE-CLOSE> 75,193
<CUMULATIVE-DEFICIENCY> (13,613)

</TABLE>