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, 1995
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, 1995, 113,310,000 shares of common stock of Reliance
Group Holdings, Inc. were outstanding.
RELIANCE GROUP HOLDINGS, INC. AND SUBSIDIARIES
I N D E X
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, 1995 and 1994 (Unaudited) . . . . . . .2
Consolidated Balance Sheet at September 30, 1995 (Unaudited) and
December 31, 1994 . . . . . . . . . . . . . . . . . . . . . . . . .3
Consolidated Statement of Changes in Shareholders' Equity for the
Nine-Month Period Ended September 30, 1995 (Unaudited). . . . . . .4
Consolidated Condensed Statement of Cash Flows for the Nine-Month
Periods Ended September 30, 1995 and 1994 (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 . . . . . . . . . . . . . . . 15
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
RELIANCE GROUP HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME (UNAUDITED)
<TABLE>
<CAPTION>
Quarter Ended Nine Months Ended
September 30 September 30
1995 1994 1995 1994
(In thousands, except per-share amounts)
<S> <C> <C> <C> <C>
Revenues:
Premiums earned......................................................... $ 618,831 $ 623,547 $ 1,823,454 $ 2,044,020
Net investment income................................................... 68,727 65,362 204,467 192,615
Gain on sales of investments............................................ 8,454 3,403 24,409 7,261
Other................................................................... 38,103 38,072 119,268 108,819
---------- ---------- ------------ ------------
734,115 730,384 2,171,598 2,352,715
---------- ---------- ------------ ------------
Claims and expenses:
Policy claims and settlement expenses................................... 319,068 308,941 947,632 1,038,250
Policy acquisition costs and other insurance expenses................... 308,795 326,948 911,011 1,070,214
Interest................................................................ 22,342 22,261 67,050 66,022
Other operating expenses................................................ 48,085 47,535 148,894 140,283
---------- ---------- ------------ ------------
698,290 705,685 2,074,587 2,314,769
---------- ---------- ------------ ------------
Income before income taxes, minority interests
and equity in investee company..................................... 35,825 24,699 97,011 37,946
Provision for income taxes.............................................. (9,900) (7,400) (26,300) (11,100)
Minority interests...................................................... - (769) (961) (2,357)
Equity in investee company.............................................. 2,072 2,776 6,225 7,566
---------- ---------- ------------ ------------
Income from continuing operations....................................... 27,997 19,306 75,975 32,055
Loss on disposal of discontinued operations of
investee company................................................... (4,497) - (4,497) -
---------- ---------- ------------ ------------
Income before extraordinary item........................................ 23,500 19,306 71,478 32,055
Extraordinary item - early extinguishment of debt....................... - - (3,363) -
---------- ---------- ------------ ------------
Net income.............................................................. $ 23,500 $ 19,306 $ 68,115 $ 32,055
========== ========== ============ ============
Per-share information:
Income from continuing operations....................................... $ .24 $ .17 $ .66 $ .28
Loss on disposal of discontinued operations of
investee company................................................... (.04) - (.04) -
---------- ---------- ------------ ------------
Income before extraordinary item........................................ .20 .17 .62 .28
Extraordinary item - early extinguishment of debt....................... - - (.06) -
---------- ---------- ------------ ------------
Net Income.............................................................. $ .20 $ .17 $ .56 $ .28
========== ========== ============ ============
Average number of common and common equivalent
shares outstanding................................................. 116,413 115,165 115,607 115,073
</TABLE>
See notes to consolidated financial statements
-2-
RELIANCE GROUP HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
September 30 December 31
ASSETS 1995 1994
(In thousands, except per-share amount)
<S> <C> <C>
Marketable securities:
Fixed maturities held for investment - at amortized cost
(quoted market $1,221,739 and $1,053,551)............................ $ 1,202,856 $ 1,166,020
Fixed maturities available for sale - at quoted market
(amortized cost $1,834,918 and $1,945,919)........................... 1,863,772 1,839,312
Equity securities - at quoted market (cost $373,294
and $482,529)........................................................ 539,220 564,636
Short-term investments.................................................. 437,849 229,906
Cash......................................................................... 47,578 48,977
Premiums and other receivables............................................... 1,278,713 1,262,554
Reinsurance recoverables..................................................... 3,173,459 2,928,533
Federal and foreign income taxes, including deferred taxes................... - 84,899
Investments in real estate - at cost, less accumulated
depreciation............................................................ 281,990 291,666
Investment in investee company............................................... 158,880 148,776
Deferred policy acquisition costs............................................ 191,362 181,938
Excess of cost over fair value of net assets acquired, less
accumulated amortization................................................ 261,939 269,424
Other assets................................................................. 383,719 352,912
------------ ------------
$ 9,821,337 $ 9,369,553
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Unearned premiums............................................................ $ 1,272,554 $ 1,288,454
Unpaid claims and related expenses........................................... 6,072,832 5,809,546
Accounts payable and accrued expenses........................................ 686,236 700,380
Reinsurance ceded premiums payable........................................... 318,766 291,844
Federal and foreign income taxes, including deferred taxes................... 19,225 -
Term loans and short-term debt............................................... 182,536 141,355
Debentures and notes......................................................... 690,315 730,596
Minority interests - redeemable preferred stock of a
subsidiary.............................................................. - 20,628
------------ ------------
9,242,464 8,982,803
------------ ------------
Contingencies and commitments
Shareholders' equity:
Common stock, par value $.10 per share, 225,000
shares authorized, 113,307 and 113,127 shares
issued and outstanding............................................... 11,331 11,313
Additional paid-in capital.............................................. 534,966 533,979
Retained earnings (deficit)............................................. (72,569) (110,479)
Net unrealized gain (loss) on investments............................... 126,531 (27,881)
Net unrealized loss on foreign currency translation..................... (21,386) (20,182)
------------ ------------
578,873 386,750
------------ ------------
$ 9,821,337 $ 9,369,553
============ ============
</TABLE>
See notes to consolidated financial statements
-3-
RELIANCE GROUP HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY (UNAUDITED)
<TABLE>
<CAPTION>
Net
Unrealized
Net Loss on
Additional Retained Unrealized Foreign
Common Paid-In Earnings Gain (Loss) on Currency Shareholders'
Stock Capital (Deficit) Investments Translation Equity
(In thousands, except per-share amount)
<S> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1995................. $11,313 $ 533,979 $ (110,479) $ (27,881) $ (20,182) $ 386,750
Issuance of common stock................. 18 672 690
Transactions of investee
company and other................... 315 9,142 9,457
Net income............................... 68,115 68,115
Loss on early extinguishment of
redeemable preferred stock
of a subsidiary..................... (3,029) (3,029)
Dividends ($.24 per share)............... (27,176) (27,176)
Appreciation after deferred
income taxes........................ 145,270 145,270
Foreign currency translation............. (1,204) (1,204)
------- ---------- ---------- -------------- ----------- -------------
Balance, September 30, 1995.............. $11,331 $ 534,966 $ (72,569) $ 126,531 $ (21,386) $ 578,873
======= ========== ========== ============== =========== =============
</TABLE>
See notes to consolidated financial statements
-4-
RELIANCE GROUP HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENT OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended September 30 1995 1994
(In thousands)
<S> <C> <C>
CASH FLOWS (USED BY) FROM OPERATING ACTIVITIES............................. $ (17,510) $ 144,907
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of fixed maturities available for sale................. 358,728 323,869
Proceeds from sales of fixed maturities held for investment................ 39,218 15,405
Proceeds from redemptions of fixed maturities available for sale........... 20,640 45,912
Proceeds from redemptions of fixed maturities held for investment.......... 17,811 15,129
Proceeds from sales of equity securities................................... 350,508 149,788
(Increase) decrease in short-term investments - net........................ (209,403) 189,315
Purchases of fixed maturities available for sale........................... (256,386) (396,638)
Purchases of fixed maturities held for investment.......................... (95,012) (256,947)
Purchases of equity securities............................................. (146,126) (172,338)
Other - net................................................................ (13,445) (39,904)
--------- ---------
66,533 (126,409)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in term loans..................................................... 75,222 35,202
Decrease in short-term debt - net.......................................... (31,179) (290)
Repayments of term loans................................................... (2,862) (68,942)
Issuance of common stock................................................... 690 7,257
Repurchases of senior reset notes.......................................... (40,348) -
Debt issuance costs........................................................ (1,000) -
Dividends.................................................................. (27,176) (27,109)
Redemption of redeemable preferred stock of a subsidiary................... (23,769) (3,360)
--------- ---------
(50,422) (57,242)
--------- ---------
Decrease in cash........................................................... (1,399) (38,744)
Cash, beginning of period.................................................. 48,977 94,114
--------- ---------
Cash, end of period........................................................ $ 47,578 $ 55,370
========= =========
Supplemental disclosures of cash flow information:
Interest paid.............................................................. $ 42,200 $ 54,200
========= =========
Income taxes refunded (paid)............................................... $ (2,800) $ 8,400
========= =========
</TABLE>
See notes to consolidated financial statements
-5-
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, 1995, 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, 1994) and additional financial information, see the
Company's Annual Report on Form 10-K for the year ended December 31, 1994.
On April 26, 1995, the Company extended its revolving credit facility
through March 31, 2000 from December 31, 1998. In addition, the Company
increased term loan borrowings to $137.5 million from $62.5 million and
extended the maturity dates of the term loan borrowings through March 31,
2000. The additional $75.0 million of borrowings under the term loan were
used to redeem $25.0 million of the Company's 10.36% senior reset notes and
$25.0 million of 9.48% senior reset notes, including $9.7 million of notes
held by Reliance Insurance Company. These transactions resulted in an
after-tax extraordinary loss of $3.4 million ($.03 per share). In
addition, in the second quarter of 1995, all of the outstanding redeemable
preferred stock of Reliance Insurance Company ($23.8 million) was redeemed.
The cost of the early redemption in excess of the carrying value of the
preferred stock, $3.0 million ("Redemption Premium"), was charged directly
to shareholders' equity. For purposes of computing earnings per share, the
Redemption Premium was deducted from net income available to common
shareholders' and classified as an extraordinary loss. This reduced
earnings per share by an additional $.03.
2. Equity In Investee Company
Equity income in Zenith National Insurance Corp. ("Zenith") was $2.1
million and $6.2 million for the third quarter and first nine months of
1995 compared to $2.8 million and $7.6 million in the corresponding 1994
periods. In addition, in the third quarter and first nine months of 1995,
the Company recognized an after-tax loss of $4.5 million ($.04 per share)
on the disposal of discontinued life insurance operations by Zenith. The
Company's prior period results of operations have not been reclassified
since amounts attributable to these operations are not significant.
-6-
Summarized financial information for Zenith National Insurance Corp. is as
follows:
Nine Months Ended September 30 1995 1994
(In thousands, except per-share amounts)
Revenues . . . . . . . . . . . . . . . . . $ 388,328 $ 381,943
Income from continuing operations
before income taxes . . . . . . . . . . 26,449 35,774
Loss on disposal of discontinued operations (19,000) -
Net income . . . . . . . . . . . . . . . . 5,300 29,200
Net income per share . . . . . . . . . . . .29 1.53
3. Reinsurance
The reconciliation of property and casualty insurance direct premiums to
net premiums is as follows (in thousands):
Nine Months Ended September 30
1995 1994
Premiums Premiums Premiums Premiums
Written Earned Written Earned
Direct. . . . . $2,027,009 $2,027,769 $1,999,501 $1,973,609
Assumed . . . . 264,566 268,665 253,369 256,923
Ceded . . . . . (928,255) (954,874) (869,360) (864,384)
---------- ---------- ---------- ----------
Net premiums. . $1,363,320 $1,341,560 $1,383,510 $1,366,148
========== ========== ========== ==========
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):
Nine Months Ended
September 30
1995 1994
Gross . . . . . . . . . . . . . . . . . $1,472,419 $1,731,724
Reinsurance recoveries. . . . . . . . . (566,697) (753,715)
---------- ----------
Net policy claims and settlement expenses $ 905,722 $ 978,009
========== ==========
Effective January 1, 1995, the Company has entered into an aggregate excess
of loss reinsurance agreement. This agreement indemnifies the Company for
ultimate net property and casualty insurance losses in excess of a
specified retention for the 1995 accident year up to a maximum aggregate
limit of $100 million.
-7-
RELIANCE GROUP HOLDINGS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Overview
The Company had income from operations, before gain on sales of
investments, of $22.5 million ($.19 per share) and $58.4 million ($.51 per
share) in the third quarter and first nine months of 1995 compared to $17.1
million ($.15 per share) and $27.4 million ($.24 per share) in the
corresponding 1994 periods. The increase in operating income resulted from
improved results in the property and casualty insurance operations. Net
income in the third quarter and first nine months of 1995 was $23.5 million
($.20 per share) and $68.1 million ($.56 per share) which included after-
tax gains of $5.5 million ($.05 per share) and $17.6 million ($.15 per
share) on sales of investments and, in the first nine months of 1995, from
the sale of certain consulting operations. 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) which included an after-tax gain on sales of
investments of $2.2 million ($.02 per share) and $4.7 million ($.04 per
share). In the third quarter and first nine months of 1995, the Company
recognized an after-tax loss of $4.5 million ($.04 per share) on the disposal
of discontinued life insurance operations by an investee company. In the
first nine months of 1995, the early extinguishment of debt resulted in an
after-tax extraordinary loss of $3.4 million and reduced earnings per-share
by $.03. In addition, the cost of the early redemption of all of the
outstanding redeemable preferred stock of Reliance Insurance Company in
excess of the carrying value of the preferred stock, $3.0 million, was
charged directly to shareholders' equity and reduced earnings per share by
$.03 in the first nine months of 1995.
Property and Casualty Insurance Operations
Net premiums written and net premiums earned increased in the third quarter of
1995 to $458.3 million and $447.2 million from $413.3 million and $427.9 million
in the corresponding 1994 period. These increases are primarily due to growth
in retrospectively rated workers' compensation premiums. During the first half
of 1995, workers' compensation premiums had declined resulting from the shift to
high deductible insurance and captive insurance programs, as well as an increase
in return premiums on retrospectively rated policies. As a result, net premiums
written and net premiums earned for the first nine months of 1995 declined to
$1.36 billion and $1.34 billion from $1.38 billion and $1.37 billion in the
corresponding 1994 period.
The property and casualty insurance operations continue to experience
strong underwriting results particularly in workers' compensation, surety,
and ocean and inland marine lines of business. Underwriting losses for the
third quarter and first nine months of 1995 were $10.9 million and $24.0
million compared to $14.7 million and $75.7 million in the
-8-
corresponding 1994 periods. The improved underwriting results reflect
increased underwriting profits in the surety line of business of $12.8 million
and $37.7 million in the third quarter and first nine months of 1995 compared
to $6.2 million and $18.4 million in the corresponding 1994 periods.
Catastrophe losses totalled $5.9 million and $13.2 million in the quarter and
nine months ended September 30, 1995 compared to $4.7 million and $40.0
million in the corresponding 1994 periods. Catastrophe losses in the first
nine months of 1994 arose primarily from the January 1994 California
earthquake. The combined ratio (calculated on a GAAP basis), after
policyholders' dividends, was 101.8% and 101.5% in the third quarter and first
nine months of 1995 (100.5% and 100.5%, excluding the effects of
catastrophes), compared to 102.8% and 105.1% in the corresponding 1994 periods
(101.6% and 102.1%, excluding the effects of catastrophes).
On October 23, 1995, the Company agreed to settle two actions in the
District Court of Dallas County, Texas, regarding alleged overcharges for
workers' compensation insurance and multiple line retrospectively rated
casualty insurance between 1987 and 1992. Under the terms of the
settlement, which were preliminarily approved by the Court on October 27,
1995 and which are subject to final court approval, the amount to be paid
is to be determined after a review conducted by an independent accounting
firm. The Company estimates that it will pay approximately $12 million
under the settlement. This will not affect the Company's financial results
since the Company had previously provided for this matter. The actions
were previously disclosed in the Company's Annual Report on Form 10-K for
the year ended December 31, 1994.
Property and Casualty Insurance Investment Results
Net investment income of the property and casualty insurance operations
increased to $61.7 million and $183.7 million in the three-month and nine-
month periods ended September 30, 1995 from $58.7 million and $172.9
million in the corresponding 1994 periods. These increases resulted from
growth in the size of the fixed maturity investment portfolio and an
increase in interest rates.
Gain on sales of investments increased to $10.1 million and $25.9 million
in the third quarter and first nine months of 1995 from $3.4 million and
$8.1 million in the corresponding 1994 periods. These increases primarily
resulted from sales of certain equity securities.
Title Insurance Operations
Premiums and fees in the third quarter and first nine months of 1995
declined to $171.6 million and $481.9 million from $195.6 million and
$677.9 million in the comparable 1994 periods. These declines resulted
from a decrease in lower margin agency revenues. The 1994 periods
benefitted from strong agency revenues resulting from the typical
reporting lag of 90-120 days and reflected the strong market
-9-
conditions that existed in early 1994 and late 1993.
As a result of lower agency revenues, agency commissions in the third
quarter and first nine months of 1995 declined to $75.0 million and $221.5
million from $94.9 million and $345.1 million in the corresponding 1994
periods. The expense ratio of the title insurance operations (which
includes agency commissions) was 90.7% and 94.2% in the third quarter and
first nine months of 1995 compared to 90.0% and 89.6% in the corresponding
1994 periods. The increase in the 1995 expense ratios resulted from the
decline in premiums. Other expenses were $81.6 million and $235.0 million
in the three-month and nine-month periods ended September 30, 1995 compared
to $82.5 million and $266.2 million in the corresponding 1994 periods. The
decline in other expenses during the first nine months of 1995 reflects
various cost control programs, including staff reductions, undertaken by
the Company. As a result of lower premiums, the provision for claim losses
declined to $14.9 million and $41.9 million in the third quarter and first
nine months of 1995 from $17.3 million and $60.2 million in the
corresponding 1994 periods.
Investment Portfolio
At September 30, 1995, the Company's investment portfolio aggregated $3.89
billion (at cost) of which 10% 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, 1995, 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's fixed maturity portfolio consists of 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,
1995, the carrying values of non-investment grade securities and securities
not rated by Standard & Poor's were $300.1 million (8% of the fixed income
portfolio) and $78.5 million (2% of the fixed income portfolio),
respectively. Substantially all of the Company's non-investment grade and
non-rated securities are classified as available for sale and, accordingly,
are carried at market value.
-10-
Other Operations
The Company's consulting and technical services operations provide services
in the information technology and energy fields. Revenues for these
operations were $36.5 million and $115.0 million in the third quarter and
first nine months of 1995. Revenues for the first nine months of 1995
includes a pre-tax gain of $2.6 million resulting from the sales of certain
consulting operations. These sales are not expected to have a material
effect on the Company's operations. Revenues in the third quarter and
first nine months of 1994 were $36.8 million and $105.4 million. Operating
expenses were $34.9 million and $108.0 million in the three-month and nine-
month periods ending September 30, 1995 compared to $34.3 million and
$100.4 million in the corresponding 1994 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, 1995, the Company's real estate holdings had a carrying
value of $282.0 million, which includes nine shopping centers with an
aggregate carrying value of $121.5 million, office buildings and other
commercial properties, with an aggregate carrying value of $99.4 million,
and undeveloped land with a carrying value of $61.1 million.
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
$86.5 million for the nine months ended September 30, 1995. 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 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
-11-
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. The California laws
which 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.
Total common stock dividends paid by Reliance Insurance Company during the
first nine months of 1995 were $75.8 million. During 1995, $124.5 million
would be available for dividend payments by Reliance Insurance Company
under Pennsylvania and California law. The Company believes such amount,
together with net tax payments from its subsidiaries, will be sufficient to
meet its cash needs.
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 effect the Company's ability to service its debt and to pay
dividends on its common stock.
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, 1995,
Reliance Insurance Company generated $14.4 million of cash flow from
operating activities. 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, 1995, Reliance Insurance Company had $480.1 million of
cash and short-term investments.
For the nine months ended September 30, 1995, the Company utilized $17.5
million of cash flow for operating activities while, in the comparable 1994
period, the Company generated $144.9 million of operating cash flow. The
decline in operating cash flow in 1995, when compared to 1994, reflects
higher net payments for property and casualty policy claims and related
expenses as well as lower net written premiums. In addition,
-12-
operating cash flow for the title insurance operations declined in 1995
primarily due to lower levels of title insurance income.
The Company generated $66.5 million of cash flow from investing activities
for the nine months ended September 30, 1995. For the nine months ended
September 30, 1994, the Company used $126.4 million of cash flow for
investing activities. Net sales of marketable securities generated $80.0
million of cash flow in 1995 while net purchases of marketable securities
used $86.5 million of cash flow in the corresponding 1994 period. During
the first nine months of 1995 and 1994, the Company sold fixed maturities
held for investment with an amortized cost of $41.0 million and $15.1
million. These sales were in response to a significant deterioration in
the issuers' creditworthiness.
The Company used $50.4 million and $57.2 million of cash flow for financing
activities for the nine months ended September 30, 1995 and 1994. Cash was
used principally for the reduction of debt, the redemption of all of the
outstanding redeemable preferred stock of a subsidiary and the payment of
dividends which, in the aggregate, were partially offset by additional
term loan borrowings.
The Company has a revolving credit facility with various banks providing
for aggregate maximum outstanding borrowings of $100.0 million. At
September 30, 1995, borrowings aggregating $15.0 million were outstanding
under this facility. On April 26, 1995, the Company extended the revolving
credit facility through March 31, 2000 from December 31, 1998. In
addition, the Company increased term loan borrowings to $137.5 million from
$62.5 million and extended the maturity dates of the term loan borrowings
through March 31, 2000. The additional $75.0 million of borrowings under
the term loan were used to redeem $25.0 million of the Company's 10.36%
senior reset notes and $25.0 million of 9.48% senior reset notes, including
$9.7 million of notes held by Reliance Insurance Company. These
transactions resulted in an after-tax extraordinary loss of $3.4 million
($.03 per share). In addition, in the second quarter of 1995, all of the
outstanding redeemable preferred stock of Reliance Insurance Company ($23.8
million) was redeemed. The cost of the early redemption in excess of the
carrying value of the preferred stock, $3.0 million, was charged directly
to shareholders' equity.
The National Association of Insurance Commissioners has adopted a risk-
based capital requirement for the property and casualty insurance industry,
effective in 1995, based on 1994 annual statutory financial statements.
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 is
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. All of the Company's
statutory insurance companies have statutory capital
-13-
in excess of the minimum required risk-based capital.
Maintaining appropriate levels of statutory surplus is considered important
by the Company's management, state insurance regulatory authorities and the
agencies that 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.
-14-
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, 1995.
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, 1995 /s/ George E. Bello
George E. Bello
Executive Vice President and Controller
(Chief Accounting Officer)
-16-
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
Exhibit 27
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
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> SEP-30-1995
<DEBT-HELD-FOR-SALE> 1,863,772
<DEBT-CARRYING-VALUE> 1,202,856
<DEBT-MARKET-VALUE> 1,221,739
<EQUITIES> 539,220
<MORTGAGE> 0
<REAL-ESTATE> 281,990
<TOTAL-INVEST> 4,325,687
<CASH> 47,578
<RECOVER-REINSURE> 3,173,459
<DEFERRED-ACQUISITION> 191,362
<TOTAL-ASSETS> 9,821,337
<POLICY-LOSSES> 6,072,832
<UNEARNED-PREMIUMS> 1,272,554
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 872,851
0
0
<COMMON> 11,331
<OTHER-SE> 567,542
<TOTAL-LIABILITY-AND-EQUITY> 9,821,337
1,823,454
<INVESTMENT-INCOME> 204,467
<INVESTMENT-GAINS> 24,409
<OTHER-INCOME> 119,268
<BENEFITS> 947,632
<UNDERWRITING-AMORTIZATION> 911,011
<UNDERWRITING-OTHER> 0
<INCOME-PRETAX> 97,011
<INCOME-TAX> (26,300)
<INCOME-CONTINUING> 75,975
<DISCONTINUED> (4,497)
<EXTRAORDINARY> (3,363)
<CHANGES> 0
<NET-INCOME> 68,115
<EPS-PRIMARY> $0.56
<EPS-DILUTED> 0
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
