<PAGE>
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
- - -------------
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 1994
OR
_____________ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period From_______________To______________
Commission File Number 1-8278
RELIANCE GROUP HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
Delaware 13-3082071
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
Park Avenue Plaza
55 East 52nd Street
New York, New York 10055
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (212) 909-1100
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No________
--------
As of November 1, 1994, 113,112,000 shares of common stock of Reliance Group
Holdings, Inc. were outstanding.
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RELIANCE GROUP HOLDINGS, INC. AND SUBSIDIARIES
I N D E X
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Page
No.
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statement of Income for the Quarters and Nine-Month
Periods Ended September 30, 1994 and 1993 (Unaudited)................ 2
Consolidated Balance Sheet at September 30, 1994 (Unaudited) and
December 31, 1993.................................................... 3
Consolidated Statement of Changes in Shareholders' Equity for the
Nine-Month Period Ended September 30, 1994 (Unaudited)............... 4
Consolidated Condensed Statement of Cash Flows for the Nine-Month
Periods Ended September 30, 1994 and 1993 (Unaudited)................ 5
Notes to Consolidated Financial Statements (Unaudited).................. 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.................................. 8
PART II. OTHER INFORMATION, AS APPLICABLE.................................. 16
SIGNATURES..................................................................... 17
</TABLE>
<PAGE>
RELIANCE GROUP HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME (UNAUDITED)
<TABLE>
<CAPTION>
Quarter Ended Nine Months Ended
September 30 September 30
1994 1993 1994 1993
- - ------------------------------------------------------------------------------------------------------------------
(In thousands, except per-share amounts)
<S> <C> <C> <C> <C>
Revenues:
Premiums earned............................................... $ 623,547 $ 612,768 $2,044,020 $1,797,201
Net investment income......................................... 65,362 58,366 192,615 182,399
Gain on sales of investments.................................. 3,403 42,221 7,261 112,998
Other......................................................... 38,072 31,579 108,819 91,939
--------- --------- ---------- ----------
730,384 744,934 2,352,715 2,184,537
--------- --------- ---------- ----------
Claims and expenses:
Policy claims and settlement expenses......................... 308,941 312,484 1,038,250 948,988
Policy acquisition costs and other insurance expenses......... 326,948 320,739 1,070,214 933,419
Interest...................................................... 22,261 26,932 66,022 81,540
Other operating expenses...................................... 47,535 44,581 140,283 127,604
--------- --------- ---------- ----------
705,685 704,736 2,314,769 2,091,551
--------- --------- ---------- ----------
Income before income taxes, minority interests
and equity in investee company............................ 24,699 40,198 37,946 92,986
Provision for income taxes.................................... (7,400) (11,700) (11,100) (27,000)
Minority interests............................................ (769) (920) (2,357) (2,842)
Equity in investee company.................................... 2,776 2,971 7,566 9,443
--------- --------- ---------- ----------
Income before cumulative effect of change in
accounting for income taxes............................ 19,306 30,549 32,055 72,587
Cumulative effect of change in accounting for income taxes.... - - - 15,911
--------- --------- ---------- ----------
Net income.................................................... $ 19,306 $ 30,549 $ 32,055 $ 88,498
========= ========= ========== ==========
Per-share information:
Income before cumulative effect of change in
accounting for income taxes............................ $ .17 $ .34 $ .28 $ .81
Cumulative effect of change in accounting for income taxes.... - - - .18
--------- --------- ---------- ----------
Net income.................................................... $ .17 $ .34 $ .28 $ .99
========= ========= ========== ==========
Average number of common and common equivalent
shares outstanding..................................... 115,165 89,695 115,073 89,440
</TABLE>
See notes to consolidated financial statements
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<TABLE>
<CAPTION>
RELIANCE GROUP HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
September 30 December 31
ASSETS 1994 1993
- - ------------------------------------------------------------------------------------------------------
(In thousands, except per-share amount)
<S> <C> <C>
Marketable securities:
Fixed maturities held for investment - at amortized cost
(quoted market $1,062,608 and $973,113)....................... $ 1,157,529 $ 933,536
Fixed maturities available for sale - at quoted market
(cost $1,884,398 and $1,856,969).............................. 1,824,826 1,944,099
Equity securities - at quoted market (cost $502,373
and $458,217)................................................. 594,606 547,173
Short-term investments........................................... 193,067 372,507
Cash.................................................................. 55,370 94,114
Premiums and other receivables........................................ 1,256,520 1,089,772
Reinsurance recoverables.............................................. 2,997,313 2,573,688
Federal and foreign income taxes, principally deferred taxes.......... 91,677 63,391
Investments in real estate - at cost, less accumulated
depreciation..................................................... 290,590 284,796
Investment in investee company........................................ 150,577 158,279
Deferred policy acquisition costs..................................... 185,763 178,129
Excess of cost over fair value of net assets acquired, less
accumulated amortization........................................ 271,919 279,404
Other assets.......................................................... 332,294 337,445
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$ 9,402,051 $ 8,856,333
============ ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
- - ------------------------------------------------------------------------------------------------------
Unearned premiums..................................................... $ 1,301,036 $ 1,276,331
Unpaid claims and related expenses.................................... 5,792,669 5,253,137
Accounts payable and accrued expenses................................. 692,160 690,795
Reinsurance ceded premiums payable.................................... 313,809 206,373
Term loans and short-term debt........................................ 103,343 137,373
Debentures and notes.................................................. 749,878 749,863
Minority interests - redeemable preferred stock of a
subsidiary....................................................... 20,516 23,835
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8,973,411 8,337,707
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Contingencies and commitments
Shareholders' equity:
Common stock, par value $.10 per share, 225,000
shares authorized, 113,110 and 111,517 shares
issued and outstanding......................................... 11,311 11,152
Additional paid-in capital....................................... 534,057 525,289
Retained earnings (deficit)...................................... (113,197) (118,143)
Net unrealized gain on investments............................... 11,324 115,023
Net unrealized loss on foreign currency translation.............. (14,855) (14,695)
------------ -----------
428,640 518,626
------------ -----------
$ 9,402,051 $ 8,856,333
============ ===========
</TABLE>
See notes to consolidated financial statements
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<TABLE>
<CAPTION>
RELIANCE GROUP HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY (UNAUDITED)
Net
Unrealized
Net Loss on
Additional Retained Unrealized Foreign
Common Paid-In Earnings Gain on Currency Shareholders'
Stock Capital (Deficit) Investments Translation Equity
- - ---------------------------------------------------------------------------------------------------------------------------
(In thousands, except per-share amount)
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1993............... $11,152 $525,289 $(118,143) $115,023 $(14,695) $518,626
Issuance of common stock................. 159 8,687 8,846
Transactions of investee
company and other .................. 81 (7,711) (7,630)
Net income .............................. 32,055 32,055
Dividends ($.24 per share)............... (27,109) (27,109)
Depreciation after deferred
income taxes........................ (95,988) (95,988)
Foreign currency translation............. (160) (160)
------- -------- ---------- ------- -------- --------
Balance, September 30, 1994.............. $11,311 $534,057 $(113,197) $11,324 $(14,855) $428,640
======= ======== ========== ======= ======== ========
</TABLE>
See notes to consolidated financial statements
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<TABLE>
<CAPTION>
RELIANCE GROUP HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENT OF CASH FLOWS (UNAUDITED)
Nine Months Ended September 30 1994 1993
- - ------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES........................ $ 164,774 $ 170,483
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Sales of fixed maturities available for sale................ 305,281 315,367
Sales of fixed maturities held for investment............... 15,111 -
Redemptions of fixed maturities available for sale.......... 44,294 95,448
Redemptions of fixed maturities held for investment......... 14,541 140,885
Sales of equity securities.................................. 140,351 931,336
Sales of short-term investments - net....................... 189,255 130,679
Purchases of fixed maturities available for sale............ (396,638) (665,006)
Purchases of fixed maturities held for investment........... (256,947) (390,741)
Purchases of equity securities.............................. (172,338) (668,592)
Discontinued operations..................................... - 69,157
Other - net................................................. (29,186) (38,595)
----------- -----------
(146,276) (80,062)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in term loans...................................... 35,202 35,000
Decrease in short-term debt - net........................... (290) (1,171)
Repayments of term loans.................................... (68,942) (82,042)
Issuance of common stock.................................... 7,257 1,172
Repurchases of debentures and notes......................... - (3,777)
Collection of receivable pertaining to the issuance
of common stock........................................ - 10,625
Dividends................................................... (27,109) (20,731)
Redemption of redeemable preferred stock
of a subsidiary........................................ (3,360) (3,360)
----------- -----------
(57,242) (64,284)
----------- -----------
Increase (decrease) in cash................................. (38,744) 26,137
Cash, beginning of period................................... 94,114 63,575
----------- -----------
Cash, end of period......................................... $ 55,370 $ 89,712
=========== ===========
Supplemental disclosures of cash flow information:
Interest paid............................................... $ 54,200 $ 56,000
=========== ===========
Income taxes refunded (paid)................................ $ 8,400 $ (82,800)
=========== ===========
</TABLE>
See notes to consolidated financial statements
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<PAGE>
RELIANCE GROUP HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
================================================================================
1. UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
In the opinion of management, the accompanying unaudited consolidated financial
statements include all adjustments (consisting of normal recurring accruals
only) considered necessary to present fairly the financial position at September
30, 1994, and the results of operations, changes in shareholders' equity and
cash flows for all periods presented. The results of operations 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, 1993) and additional financial information, see the Company's
Annual Report on Form 10-K for the year ended December 31, 1993.
2. EQUITY IN INVESTEE COMPANY
Equity income in Zenith National Insurance Corp. was $2.8 million and $7.6
million for the third quarter and first nine months of 1994 compared to equity
income of $3.0 million and $9.4 million in the corresponding 1993 periods.
Summarized financial information for Zenith National Insurance Corp. is as
follows:
<TABLE>
<CAPTION>
Nine Months Ended September 30 1994 1993
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(In thousands, except per-share amounts)
<S> <C> <C>
Revenues.................................. $442,796 $441,936
Income before income taxes................ 44,169 55,144
Net income................................ 29,200 41,200
Net income per share...................... 1.53 2.13
</TABLE>
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<PAGE>
3. REINSURANCE
The reconciliation of property and casualty insurance direct premiums to net
premiums is as follows (in thousands):
<TABLE>
<CAPTION>
Nine Months Ended September 30
-------------------------------------------------
1994 1993
----------------------- -----------------------
Premiums Premiums Premiums Premiums
Written Earned Written Earned
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Direct........ $1,999,501 $1,973,609 $1,889,560 $1,891,532
Assumed....... 253,369 256,923 243,661 225,436
Ceded......... (869,360) (864,384) (807,423) (956,715)
---------- ---------- ---------- ----------
Net premiums.. $1,383,510 $1,366,148 $1,325,798 $1,160,253
========== ========== ========== ==========
</TABLE>
The reconciliation of property and casualty insurance gross policy claims and
settlement expenses to net policy claims and settlement expenses is as follows
(in thousands):
<TABLE>
<CAPTION>
Nine Months Ended
September 30
-----------------------
1994 1993
---------- ----------
<S> <C> <C>
Gross...................................... $1,731,724 $1,717,451
Reinsurance recoveries..................... (753,715) (824,617)
---------- ----------
Net policy claims and settlement expenses.. $ 978,009 $ 892,834
========== ==========
</TABLE>
4. ADOPTION OF NEW ACCOUNTING STANDARD
Effective January 1, 1994, the Company adopted Statement of Financial
Accounting Standards No. 112, "Employers' Accounting for Postemployment
Benefits". The adoption of this Statement had no material effect on the
Company's consolidated financial statements.
5. INCOME TAXES
On September 22, 1994, the Company filed a Petition in the U.S. Tax Court for a
redetermination of the deficiencies for the tax years ended December 31, 1980
and December 31, 1981 as set forth by the Commissioner of Internal Revenue in a
Notice of Deficiency dated June 27, 1994. The Internal Revenue Service ("IRS")
seeks, among other things, to disallow an investment tax credit of $36,499,000
with respect to intermodal cargo containers leased to others by a former
subsidiary of the Company. The IRS asserts that the deficiencies would result in
an increase in tax of $32,105,000 for 1980 and $74,000 for 1981, with interest
compounded at the statutorily prescribed rates for the periods since those
years. While the outcome of any litigation is uncertain, the Company believes,
after consultation with counsel, that the additional tax liability, if any,
including interest, will not have a material adverse effect on its consolidated
financial statements.
-7-
<PAGE>
RELIANCE GROUP HOLDINGS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
================================================================================
OVERVIEW
Net income in the third quarter and first nine months of 1994 was $19.3 million
($.17 per share) and $32.1 million ($.28 per share) compared to $30.5 million
($.34 per share) and $88.5 million ($.99 per share) in the corresponding 1993
periods. Net income for the first nine months of 1993 included income of $15.9
million ($.18 per share) resulting from the adoption of Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes". The decline in net
income in 1994 also reflects substantially lower realized gains from sales of
investments, which were $3.4 million and $7.3 million pretax in the third
quarter and first nine months of 1994 compared to $42.2 million and $113.0
million pretax in the corresponding 1993 periods. The lower levels of realized
gains were partially offset by improved underwriting results in property and
casualty insurance.
PROPERTY AND CASUALTY INSURANCE OPERATIONS
Net premiums written, net premiums earned and underwriting results were as
follows (in thousands):
<TABLE>
<CAPTION>
QUARTER ENDED SEPTEMBER 30
----------------------------------- ------------------------------------
1994 1993
----------------------------------- ------------------------------------
Net Net Net Net
Premiums Premiums Underwriting Premiums Premiums Underwriting
Written Earned Gain(Loss) Written Earned Gain(Loss)
---------- ---------- ------------ ---------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
Standard
Commercial $ 257,740 $ 277,549 $(11,602) $ 304,901 $ 256,760 $ (43,255)
Specialty
Commercial 155,542 150,369 (3,089) 134,281 127,593 6,215
---------- ---------- ------------ ---------- ---------- ------------
$ 413,282 $ 427,918 $(14,691) $ 439,182 $ 384,353 $ (37,040)
========== ========== ============ ========== ========== ============
NINE MONTHS ENDED SEPTEMBER 30
------------------------------------ ------------------------------------
1994 1993
------------------------------------ ------------------------------------
Net Net Net Net
Premiums Premiums Underwriting Premiums Premiums Underwriting
Written Earned Gain(Loss) Written Earned Gain(Loss)
---------- ---------- ------------ ---------- ---------- ------------
Standard
Commercial $ 940,074 $ 920,441 $(73,060) $ 935,116 $ 785,553 $(134,029)
Specialty
Commercial 443,436 445,707 (2,644) 390,682 374,700 18,674
---------- ---------- ------------ ---------- ---------- ------------
$1,383,510 $1,366,148 $(75,704) $1,325,798 $1,160,253 $(115,355)
========== ========== ============= ========== ========== ============
</TABLE>
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<PAGE>
Standard commercial net premiums written in the first nine months of 1993 were
reduced by $54.9 million, and standard commercial net premiums earned were
reduced by $191.2 million, for premiums ceded under quota share treaties which
were not renewed in 1993. These ceded premiums also reduced standard commercial
net premiums earned in the third quarter of 1993 by $42.7 million. The increase
in specialty commercial net premiums written during 1994 resulted from higher
surety and general liability premiums and growth in reinsurance assumed.
The cost of catastrophes for both standard commercial and specialty commercial
lines in the third quarter and first nine months of 1994 were $4.7 million and
$40.0 million, arising primarily from the January 1994 California earthquake and
severe winter storms. Catastrophe losses in the corresponding 1993 periods were
$5.7 million and $25.3 million. Gross catastrophe losses, before reinsurance,
were $107.8 million during the first nine months of 1994 compared to $69.0
million in the corresponding 1993 period. The combined ratio (calculated on a
GAAP basis), after policyholders' dividends, was 102.8% and 105.1% for the third
quarter and first nine months of 1994 compared to 108.3% and 109.5% in the
corresponding 1993 periods. Excluding the effects of catastrophes, the combined
ratios were 101.6% and 102.1% in the third quarter and first nine months of 1994
compared to 106.8% and 107.3% in the corresponding 1993 periods.
Underwriting results during 1994 for standard commercial lines have improved,
despite a higher level of catastrophe losses primarily in the first half of the
year. The improvement has resulted from lower loss and loss adjustment expenses
particularly in the commercial automobile line and workers' compensation, as
well as continued lower losses from involuntary pools. The underwriting results
in specialty commercial lines remain strong. The decline in specialty commercial
underwriting results in 1994 resulted from higher catastrophe losses in assumed
reinsurance and higher loss experience in certain general liability lines.
These declines were partially offset by improved results in surety lines
reflecting a decline in contractor defaults.
On November 8, 1988, voters in California approved Proposition 103, which
requires a rollback of rates for property and casualty insurance policies issued
or renewed after November 8, 1988 of 20% from November 1987 levels and freezes
rates at such lower levels until November 1989. Proposition 103 also requires
that subsequent rate changes be justified to, and approved by, an elected
Insurance Commissioner, that automobile insurance rates be determined primarily
by the driver's safety record and mileage driven, and that "good drivers" be
given a 20% discount (in addition to the 20% rollback).
In 1989, the California Department of Insurance directed to United Pacific
Insurance Company, one of the Company's California subsidiaries which writes
business in California, a notice to reduce its current rates and make refunds to
its policyholders by approximately $10.0 million. In January 1991, the
regulations which formed the basis of the notice were repealed by the newly
elected Insurance Commissioner. Since then, there have been several
administrative hearings on rate rollback and several different sets of
regulations issued.
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<PAGE>
Although the most recent regulations expired in June 1992, they were subject to
ongoing administrative and legal challenges. In February 1993, the Los Angeles
Superior Court issued a decision declaring several sections of the regulations
invalid and enjoining the enforcement of the regulations. On August 18, 1994,
the California Supreme Court issued a decision reversing the Superior Court and
upholding the validity of the regulations issued by the Insurance Commissioner.
Whether an appeal to the United States Supreme Court will be granted, and the
outcome of any such appeal, are subject to significant uncertainties. No new
regulations have been issued by the Commissioner. However, regulations which are
ultimately adopted and upheld could result in the Company being ordered to make
a refund to policyholders in an amount which may be greater than the amount
specified in the Department's 1989 notice. Due to the uncertainty of the content
of any new regulations and whether they will be subject to administrative or
legal challenges, the Company is unable to predict the amount and timing of any
rate rollback or refunds. If one or more of the Company's subsidiaries receives
a rate rollback order, the Company is entitled to a hearing to present evidence
to establish what it believes to be an appropriate rollback or refund amount, if
any. The Company believes that even after considering investment income it did
not earn a fair rate of return on its California business and the Company will
contest vigorously any unreasonable premium rollback determination by the
California Insurance Department. While the Company does not believe that it is
probable that its premium revenues will be subject to a refund which would have
a material effect on its financial condition, in light of the various
significant uncertainties discussed above, the amount of a refund, if any, is
not currently reasonably estimable; consequently, the Company is unable to
determine whether any such refund would have a material effect on its results of
operations in future periods.
From time to time, other states have considered adopting legislation or
regulations which could adversely affect the manner in which the Company sets
rates for policies of insurance, particularly as they relate to personal lines.
No assurance can be given as to what effect the adoption of any such legislation
or regulation would have on the ability of the Company to raise its rates.
However, since the Company is transferring or running off its personal lines
business and, as a result, has substantially withdrawn from personal lines, the
Company believes that these initiatives will not have a material effect on its
on-going business.
PROPERTY AND CASUALTY INSURANCE INVESTMENT RESULTS
Net investment income of the property and casualty insurance operations
increased to $58.7 million and $172.9 million in the third quarter and first
nine months of 1994 from $52.3 million and $164.6 million in the corresponding
1993 periods. These increases resulted from growth in the size of the fixed
maturity investment portfolio.
Gains on sales of investments were $3.4 million and $8.2 million in the third
quarter and first nine months of 1994 compared to $41.4 million and $108.8
million in the corresponding 1993 periods. Gains on sales of investments during
the 1993 periods primarily resulted from sales of convertible preferred and
common stocks and, in the third quarter of 1993, sales of fixed maturity
investments.
TITLE INSURANCE OPERATIONS
Premiums and fees in the third quarter and first nine months of 1994 were $195.6
million and $677.9 million compared to $228.4 million and $636.9 million in the
corresponding 1993 periods. The decline in premiums and fees in the third
quarter of 1994 when compared to the prior 1993 period resulted from lower
levels of residential refinancing
-10-
<PAGE>
activity. Refinancing activity has declined steadily since March 1994 when
mortgage interest rates began to rise. The Company does not anticipate an
increase in refinancing activity in the fourth quarter. The increase in premiums
and fees in the first nine months of 1994 when compared to the prior 1993 period
resulted from an increase in lower margin agency premiums, reflecting the strong
market conditions that existed in the fourth quarter of 1993 and the first
quarter of 1994. The increase in agency premiums was partially offset by a
decline in premiums from direct operations.
Agency commissions represent the portion of premiums retained by agents pursuant
to the terms of their agency contracts and are the title insurance operations'
single largest expense. Agency commissions were $94.9 million and $345.1
million in the third quarter and first nine months of 1994 compared to $104.0
million and $299.2 million in the corresponding 1993 periods. The change in
agency commissions in 1994 when compared to 1993 reflects the volume of agency
revenues. Other expenses of the title insurance operations include personnel
costs relating to marketing activities, title searches, information gathering on
specific properties and preparation of insurance policies, as well as costs
associated with the maintenance of title plants. Other expenses were $82.5
million and $266.2 million in the third quarter and first nine months of 1994
compared to $93.3 million and $259.0 million in the corresponding 1993 periods.
The reduction in other expenses in the third quarter of 1994 when compared to
the prior-year third quarter reflects various cost control measures, including
staff reductions, undertaken by the Company. The expense ratio of the title
insurance operations (which includes agency commissions) increased to 90.5% and
89.7% in the third quarter and first nine months of 1994 from 86.2% and 87.5% in
the comparable 1993 periods resulting from the decline in premiums from direct
operations.
The provision for claim losses were $17.3 million and $60.2 million for the
quarter and nine months ended September 30, 1994 compared to $20.0 million and
$56.2 million in the corresponding 1993 periods. Changes in the provision for
claims during 1994, when compared to 1993, reflect corresponding changes in
premiums and fees.
INVESTMENT PORTFOLIO
At September 30, 1994, the Company's investment portfolio aggregated $3.74
billion (at cost), of which 13% was invested in equity securities. The Company
seeks to maintain a diversified and balanced fixed maturity portfolio
representing a broad spectrum of industries and types of securities. At
September 30, 1994, no one issuer comprised more than 2.5% of the fixed
maturity and short-term investment portfolio. Furthermore, the Company holds
virtually no investments in commercial real estate mortgages in its investment
portfolio. Purchases of fixed maturity securities are researched individually
based on in-depth analysis and objective predetermined investment criteria and
the portfolio is managed to achieve a proper balance of safety, liquidity and
investment yields.
The Company invests primarily in investment grade securities (those rated "BBB"
or better by Standard & Poor's) and, to a lesser extent, non-investment grade
and non-rated securities. The risk of default is generally considered to be
greater for non-investment grade securities, when compared to investment grade
securities, since these issues may be more susceptible to severe economic
downturns. At September 30, 1994, the carrying values of non-investment grade
securities and securities not rated by Standard & Poor's
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<PAGE>
were $384.1 million (12 % of the fixed income portfolio) and $107.1 million (3 %
of the fixed income portfolio), respectively. Substantially all of the
Company's non-investment grade securities are classified as "available for sale"
and, accordingly, are carried at quoted market value.
OTHER OPERATIONS
The Company's consulting and technical services operations provide services in
the information technology and energy and environmental fields. Revenues for
these operations were $36.8 million and $105.4 million in the three-month and
nine-month periods ended September 30, 1994, compared to $29.7 million and $86.5
million in the corresponding 1993 periods. The increase in revenues during 1994
reflects growth in the information technology business. Operating expenses
incurred by these operations were $34.3 million and $100.4 million in the three-
month and nine-month periods ended September 30, 1994, compared to $28.2 million
and $82.9 million in the corresponding 1993 periods. Revenues and expenses of
these operations are included in other revenues and other operating expenses in
the accompanying statement of income.
At September 30, 1994, the Company's real estate holdings had a carrying value
of $290.6 million, which includes 11 shopping centers with an aggregate carrying
value of $128.7 million, office buildings and other commercial properties, with
an aggregate carrying value of $101.2 million, and undeveloped land with a
carrying value of $60.7 million.
INTEREST EXPENSE
Interest expense declined to $22.3 million and $66.0 million in the three-month
and nine-month periods ended September 30, 1994 from $26.9 million, and $81.5
million in the corresponding 1993 periods. These declines resulted from the
refinancing completed on November 15, 1993, which decreased the amount of debt
outstanding and the interest rates on such debt.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal sources of funds consist of dividends, advances and net
tax payments from its subsidiaries. These net payments aggregated $88.7 million
for the nine months ended September 30, 1994. The Company's ability to receive
cash dividends has depended upon and continues to depend upon the dividend
paying ability of its insurance subsidiaries. The Insurance Law of
Pennsylvania, where Reliance Insurance Company (the Company's principal property
and casualty insurance subsidiary) is domiciled, limits the maximum amount of
dividends which may be paid without approval by the Pennsylvania Insurance
Department. Under such law, Reliance Insurance Company may pay dividends during
the year equal to the greater of (a) 10% of the preceding year-end
policyholders' surplus or (b) the preceding year's statutory net income, but in
no event to exceed the amount of unassigned funds, which are defined as
"undistributed, accumulated surplus including net income and unrealized gains
since the organization of the insurer". In addition, the Pennsylvania law
specifies factors to be considered by the Pennsylvania Insurance Department to
allow it to determine that
-12-
<PAGE>
statutory surplus after the payment of dividends is reasonable in relation to an
insurance company's outstanding liabilities and adequate for its financial
needs. Such factors include the size of the company, the extent to which its
business is diversified among several lines of insurance, the number and size of
risks insured, the nature and extent of the company's reinsurance and the
adequacy of the company's reserves. The maximum dividend permitted by law is
not indicative of an insurer's actual ability to pay dividends, which may be
constrained by business and regulatory considerations, such as the impact of
dividends on surplus, which could affect an insurer's ratings, competitive
position, the amount of premiums that can be written and the ability to pay
future dividends. Furthermore, the Pennsylvania Insurance Department has broad
discretion to limit the payment of dividends by insurance companies.
In addition, under California Insurance law, Reliance Insurance Company is
deemed to be a "commercially domiciled" California insurer and therefore subject
to the dividend payment laws of California. However, the California laws that
limit the maximum amount of dividends which may be paid without approval by the
California Insurance Department and specify the factors to be considered by the
California Insurance Department to determine if the payment of the dividend is
reasonable in relation to an insurance company's outstanding liabilities and
financial needs are substantially the same as the laws of Pennsylvania. As in
Pennsylvania, the California Insurance Department has broad discretion to limit
the payment of dividends by insurance companies.
There is no assurance that Reliance Insurance Company will meet the tests in
effect from time to time under Pennsylvania or California law for the payment of
dividends without prior Insurance Department approvals or that any requested
approvals will be obtained. However, Reliance Insurance Company has been advised
by the California Insurance Department that any required prior approval will be
based on the financial stability of the Company. Reliance Insurance Company has
also been advised by the Pennsylvania Insurance Department that any required
prior approval will be based upon a solvency standard and will not be
unreasonably withheld. Any significant limitation of Reliance Insurance
Company's dividends would adversely affect the Company's ability to service its
debt and to pay dividends on its common stock.
Total common and preferred stock dividends paid by Reliance Insurance Company
during the first nine months of 1994 were $77.8 million ($75.8 million for
common stock). During 1994, $126.8 million would be available for dividend
payments by Reliance Insurance Company under Pennsylvania and California law.
The Company believes such amount will be sufficient to meet its cash needs.
Reliance Insurance Company collects and invests premiums prior to payment of
associated claims, which are generally made months or years subsequent to the
receipt of premiums. For the nine months ended September 30, 1994, Reliance
Insurance Company generated $220.1 million of cash flow from operating
activities compared to $197.8 million in the corresponding 1993 period.
Reliance Insurance Company carefully monitors its cash, short-term investments
and marketable securities to maintain adequate balances for the timely payment
of claims and other operating requirements. At September 30, 1994, Reliance
Insurance Company had $243.4 million of cash and short-term investments.
-13-
<PAGE>
For the nine months ended September 30, 1994, the Company generated $164.8
million of cash flow from operating activities compared to operating cash flow
of $170.5 million in the corresponding 1993 period. The decline in operating
cash flow reflects lower net income, partially offset by $11.8 million of state
and local tax refunds received in the first nine months of 1994. In the
corresponding 1993 period, operating cash flow was reduced by state and local
tax payments of $30.0 million related to the sale of Frank B. Hall & Co. Inc.
The Company utilized $146.3 million of cash flow from investing activities for
the nine months ended September 30, 1994 compared to $80.1 million in the
corresponding 1993 period. Net purchases of marketable securities utilized cash
flow of $117.1 million in the nine-month period ended September 30, 1994
compared to $110.6 million in the corresponding 1993 period. During the first
nine months of 1994, the Company sold $15.1 million of fixed maturity
investments classified as held for investment. These sales were in response to
a significant deterioration in the issuers' creditworthiness.
The Company utilized $57.2 million and $64.3 million of cash flow from financing
activities for the nine months ended September 30, 1994 and 1993, respectively.
Cash was utilized principally for the reduction of debt and payment of
dividends. Partially offsetting the utilization of cash flow from financing
activities in the 1994 period was $7.3 million of cash received from the
issuance of common stock.
The Company has a revolving credit facility with various banks providing for
aggregate maximum outstanding borrowings of $100 million through December 31,
1998. At September 30, 1994, borrowings aggregating $5.0 million were
outstanding under this facility. The Company had $853.2 million of debt
outstanding at September 30, 1994 with approximately $26 million maturing on or
before December 31, 1995, and an additional $104 million maturing on or before
December 31, 1999. The Company expects to either generate sufficient cash flow
from operations to repay these amounts at their existing maturities or refinance
a portion of these obligations.
The National Association of Insurance Commissioners has adopted a risk-based
capital requirement for the property and casualty insurance industry which
becomes effective in 1995 (based on 1994 financial results). Risk-based capital
refers to the determination of the amount of statutory capital required for an
insurer based on the risks assumed by the insurer (including, for example,
investment risks, credit risks relating to reinsurance recoverables and
underwriting risks) rather than just the amount of net premiums written by the
insurer. A formula that applies prescribed factors to the various risk elements
in an insurer's business would be used to determine the minimum statutory
capital requirement for the insurer. An insurer having less statutory capital
than the formula calculates would be subject to varying degrees of regulatory
intervention, depending on the level of capital inadequacy. Although the
regulations governing risk-based capital are not effective until 1995 (based on
1994 financial results), the Company has calculated that its capital exceeds the
risk-based capital that would be required if the formula was currently in effect
(based on 1993 financial results). Management cannot predict the ultimate
impact of risk-based capital requirements on the Company's competitive position
and its resulting capital requirements.
Maintaining appropriate levels of statutory surplus is considered important by
the Company's management , state insurance regulatory authorities, and the
agencies that
-14-
<PAGE>
rate insurers' claims-paying abilities and financial strength. Failure to
maintain certain levels of statutory capital and surplus could result in
increased scrutiny or, in some cases, action taken by state regulatory
authorities and/or downgrades in an insurer's ratings.
-15-
<PAGE>
RELIANCE GROUP HOLDINGS, INC. AND SUBSIDIARIES
PART II. OTHER INFORMATION
- - --------------------------------------------------------------------------------
Item 6. Exhibits and Reports on Form 8-K.
--------------------------------
(a) Exhibits.
--------
27. Financial Data Schedule
(b) Reports on Form 8-K.
-------------------
No reports on Form 8-K were filed during the quarter ended September
30, 1994.
-16-
<PAGE>
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
RELIANCE GROUP HOLDINGS, INC.
---------------------------------------
(Registrant)
Date: November 14, 1994 /s/ George E. Bello
----------------- ---------------------------------------
George E. Bello
Executive Vice President and Controller
(Chief Accounting Officer)
-17-
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 7
<LEGEND> This schedule contains summary financial information extracted from the
Company's Consolidated Balance Sheet and the Consolidated Statement of Income
and is qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-START> JAN-01-1994
<PERIOD-END> SEP-30-1994
<EXCHANGE-RATE> 1
<DEBT-HELD-FOR-SALE> 1,824,826
<DEBT-CARRYING-VALUE> 1,157,529
<DEBT-MARKET-VALUE> 1,062,608
<EQUITIES> 594,606
<MORTGAGE> 0
<REAL-ESTATE> 290,590
<TOTAL-INVEST> 4,060,618
<CASH> 55,370
<RECOVER-REINSURE> 2,997,313
<DEFERRED-ACQUISITION> 185,763
<TOTAL-ASSETS> 9,402,051
<POLICY-LOSSES> 5,792,669
<UNEARNED-PREMIUMS> 1,301,036
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 853,221
<COMMON> 11,311
0
0
<OTHER-SE> 417,329
<TOTAL-LIABILITY-AND-EQUITY> 9,402,051
2,044,020
<INVESTMENT-INCOME> 192,615
<INVESTMENT-GAINS> 7,261
<OTHER-INCOME> 108,819
<BENEFITS> 1,038,250
<UNDERWRITING-AMORTIZATION> 1,070,214
<UNDERWRITING-OTHER> 0
<INCOME-PRETAX> 37,946
<INCOME-TAX> (11,100)
<INCOME-CONTINUING> 32,055
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 32,055
<EPS-PRIMARY> 0.28
<EPS-DILUTED> 0.28
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
