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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1994
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
FOR THE TRANSITION PERIOD FROM ..................... TO .....................
COMMISSION FILE NUMBER 1-8278
................................................
RELIANCE GROUP HOLDINGS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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<S> <C>
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)
</TABLE>
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (212) 909-1100
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
Common Stock, $.10 Par Value New York Stock Exchange and
Pacific Stock Exchange
9% Senior Notes, Due November 15, 2000 New York Stock Exchange
9 3/4% Senior Subordinated Debentures,
Due November 15, 2003 New York Stock Exchange
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
Putable Common Stock Purchase Warrants
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 __
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
As of March 15, 1995, 113,072,619 shares of the common stock of Reliance
Group Holdings, Inc. were outstanding, and the aggregate market value of the
voting stock held by nonaffiliates was approximately $301,636,953.
DOCUMENTS INCORPORATED BY REFERENCE:
(1) Reliance Group Holdings, Inc. 1994 Annual Report--Parts I,
II and IV.
(2) Reliance Group Holdings, Inc. Proxy Statement for the
Annual Meeting of Stockholders to be held May 11,
1995--Part III.
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PART I
ITEM 1. BUSINESS.
GENERAL
Reliance Group Holdings, Inc. (the 'Company' or 'Reliance Group Holdings')
is a holding company whose principal business is the ownership of property and
casualty and title insurance companies. Reliance Insurance Company ('Reliance
Insurance Company') and its property and casualty insurance subsidiaries (such
subsidiaries, together with Reliance Insurance Company, the 'Reliance Property
and Casualty Companies') and its title insurance subsidiaries (collectively, the
'Reliance Insurance Group') underwrite a broad range of commercial lines of
property and casualty insurance, as well as title insurance. Reliance Insurance
Company has conducted business since 1817, making it one of the oldest property
and casualty insurance companies in the United States.
The Reliance Property and Casualty Companies consist of four principal
operations: Reliance National, Reliance Insurance, Reliance Reinsurance and
Reliance Surety. Established in 1987, Reliance National offers, through national
and regional brokers, a broad range of commercial property and casualty
insurance products and services for large companies and specialty line
customers. Reliance National selects market segments where it can provide
specialized coverages and services, and it conducts business nationwide and in
certain international markets. In 1994, Reliance National accounted for 50% of
the net premiums written by the Reliance Property and Casualty Companies.
Reliance Insurance offers commercial property and casualty insurance coverages
for mid-sized companies throughout the United States. Reliance Insurance also
offers traditional and specialized coverages for more complex risks as well as
insurance programs for groups with common insurance needs. Reliance Reinsurance
primarily provides property and casualty treaty reinsurance for small to medium
sized regional and specialty insurance companies located in the United States.
Reliance Surety is a leading writer of surety bonds and fidelity bonds in the
United States. The Reliance Property and Casualty Companies accounted for
$1,777.3 million (67%) of the Reliance Insurance Group's 1994 net premiums
earned.
The Reliance Insurance Group's title insurance business consists of
Commonwealth Land Title Insurance Company ('Commonwealth') and Transamerica
Title Insurance Company ('Transamerica Title', together with Commonwealth and
their respective subsidiaries, 'Commonwealth/Transamerica Title').
Commonwealth/Transamerica Title is the third largest title insurance operation
in the United States, in terms of 1993 total premiums and fees.
Commonwealth/Transamerica Title accounted for $856.8 million (33%) of the
Reliance Insurance Group's 1994 net premiums earned.
Business segment information for the years ended December 31, 1994, 1993
and 1992 is set forth in Note 17 to the Company's consolidated financial
statements (the 'Consolidated Financial Statements'), which segment information
is included in the Company's 1994 Annual Report and incorporated herein by
reference. All financial information in this Annual Report on Form 10-K is
presented in accordance with generally accepted accounting principles ('GAAP')
unless otherwise specified.
The Company owns all of the common stock of Reliance Financial Services
Corporation ('Reliance Financial') which in turn owns all of the common stock of
Reliance Insurance Company. The common stock of Reliance Insurance Company is
pledged to secure certain indebtedness. See Note 7 to the Consolidated Financial
Statements.
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OPERATING UNITS
Property and Casualty Insurance. The Reliance Property and Casualty
Companies consist of four principal operations: Reliance National, Reliance
Insurance, Reliance Reinsurance and Reliance Surety. The following table sets
forth the amount of net premiums written in each line of business by Reliance
National, Reliance Insurance, Reliance Reinsurance and Reliance Surety for the
years ended December 31, 1994, 1993 and 1992.
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<CAPTION>
1994 1993 1992
-------------------------------------------- -------------------------------------------- --------
RELIANCE RELIANCE
RELIANCE RELIANCE REINSURANCE/ RELIANCE RELIANCE REINSURANCE/ RELIANCE
NATIONAL INSURANCE SURETY TOTAL NATIONAL INSURANCE SURETY TOTAL NATIONAL
-------- --------- ------------ ------ -------- --------- ------------ ------ --------
(IN MILLIONS, EXCEPT PERCENTAGES)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
General Liability........ $347 $ 76 $ -- $ 423 $288 $ 82 $ -- $ 370 $291
Workers' Compensation.... 179 134 -- 313 232 146 -- 378 251
Automobile............... 109 135 -- 244 119 141 -- 260 151
Multiple Peril........... 32 148 -- 180 33 154 -- 187 12
Reinsurance.............. -- -- 125 125 -- -- 124 124 --
Surety................... -- -- 118 118 -- -- 107 107 --
Involuntary.............. 82 32 -- 114 87 27 -- 114 82
Ocean and Inland
Marine................. 44 60 -- 104 54 51 -- 105 10
Accident and Health...... 52 -- -- 52 36 -- -- 36 8
Other.................... 45 46 -- 91 23 67 -- 90 24
-------- --------- ----- ------ -------- --------- ----- ------ --------
Total................ $890 $ 631 $243 $1,764 $872 $ 668 $231 $1,771 $829
-------- --------- ----- ------ -------- --------- ----- ------ --------
-------- --------- ----- ------ -------- --------- ----- ------ --------
Percent of Total......... 50% 36% 14% 100% 49% 38% 13% 100% 54%
-------- --------- ----- ------ -------- --------- ----- ------ --------
-------- --------- ----- ------ -------- --------- ----- ------ --------
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RELIANCE
RELIANCE REINSURANCE/
INSURANCE SURETY TOTAL
--------- ------------ ------
<S> <C> <C> <C>
General Liability........ $ 59 $ -- $ 350
Workers' Compensation.... 168 -- 419
Automobile............... 111 -- 262
Multiple Peril........... 114 -- 126
Reinsurance.............. -- 108 108
Surety................... -- 94 94
Involuntary.............. 28 -- 110
Ocean and Inland
Marine................. 39 -- 49
Accident and Health...... -- -- 8
Other.................... (8) -- 16
--------- ----- ------
Total................ $ 511 $202 $1,542
--------- ----- ------
--------- ----- ------
Percent of Total......... 33% 13% 100%
--------- ----- ------
--------- ----- ------
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The following table sets forth underwriting results for the Reliance
Property and Casualty Companies for the years ended December 31, 1994, 1993 and
1992.
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<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
1994 1993 1992
-------- -------- --------
(IN MILLIONS, EXCEPT RATIOS)
<S> <C> <C> <C>
Net premiums written....................................... $1,764.3 $1,770.6 $1,541.6
Underwriting loss(1)....................................... (97.3) (175.2) (219.3)
Combined ratio............................................. 104.4% 110.8% 114.1%
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(1) Includes catastrophe losses for the years ended December 31, 1994,
1993 and 1992 of $50.1 million, $39.3 million and $61.1 million,
respectively.
The following table sets forth certain financial information of the
Reliance Property and Casualty Companies based upon statutory accounting
practices and common shareholder's equity of Reliance Insurance Company based
upon GAAP, in thousands:
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<CAPTION>
STATUTORY ACCOUNTING GAAP
------------------------------------------------------------------------ -------------
TOTAL POLICY- COMMON
YEAR ENDED PREMIUMS UNEARNED LOSS ADMITTED TOTAL HOLDERS SHAREHOLDER'S
DECEMBER 31, WRITTEN PREMIUMS RESERVES ASSETS LIABILITIES SURPLUS* EQUITY
------------------------ ---------- -------- ---------- ---------- ----------- -------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
1994.................... $1,773,196 $833,643 $3,033,020 $5,296,931 $ 4,388,393 $908,538 $ 1,076,840
1993.................... 1,810,070 834,855 2,846,073 4,968,714 4,066,424 902,290 1,171,490
1992.................... 1,548,819 648,705 2,617,040 4,521,153 3,663,542 857,611 1,060,774
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* Includes Reliance Insurance Company's investment in title insurance operations
of $180.8 million at December 31, 1994.
The Reliance Property and Casualty Companies write insurance in every state
of the United States, the District of Columbia, Puerto Rico, Guam and The Virgin
Islands. The Reliance Property and Casualty Companies also write insurance in
the European Community through offices in the United Kingdom, the Netherlands
and Spain, and in the Americas through offices in Canada, Mexico and Argentina.
In 1994, California, New York, Texas, Pennsylvania and Florida accounted for
approximately 18%, 9%, 7%, 6% and 5%, respectively, of direct premiums written.
No other state accounted for more than 5% of direct premiums written by the
Reliance Property and Casualty Companies. The Reliance Property and Casualty
Companies write insurance through independent agents, program agents and
brokers. No single insurance agent or broker accounts for 10% or more of the
direct premiums written by the Reliance Property and Casualty Companies.
The Reliance Property and Casualty Companies ranked 32nd among property and
casualty insurance companies and groups in terms of net premiums written during
1993, according to Best's Insurance Management Reports. A. M. Best & Company,
Inc. ('Best'), publisher of Best's Insurance Reports, Property-Casualty, has
assigned an A- (Excellent) rating to the Reliance Property and Casualty
Companies. Best's ratings are based on an analysis of the financial condition
and operations of an insurance company as they relate to the industry in
general. An A- (Excellent) rating is assigned to those companies which have
demonstrated excellent overall performance when compared to the norms of the
property and casualty industry. Standard & Poor's ('S&P') rates the
claims-paying ability of the Reliance Property and Casualty Companies A. S&P's
ratings are based on quantitative and qualitative analysis including
consideration of ownership and support factors, if applicable. An A rating is
assigned to those companies which have good financial security, but capacity to
meet policyholder obligations is somewhat susceptible to adverse economic and
underwriting conditions. Best's ratings are not designed for the protection of
investors and do not constitute recommendations to buy, sell or hold any
security. Although the Best and S&P ratings of the Reliance Property and
Casualty Companies are lower than those of many of the insurance companies with
which the Reliance Property and Casualty Companies compete, management believes
that the current ratings are adequate to enable the Reliance Property and
Casualty Companies to compete successfully.
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Reliance National. Established in 1987, Reliance National offers a broad
range of commercial insurance products and services to selected segments of the
property and casualty market which do not lend themselves to traditional
insurance products and services. Reliance National selects market segments where
it can provide specialized coverages and services. In 1994, Reliance National
accounted for 50% of the net premiums written by the Reliance Property and
Casualty Companies. Reliance National, which conducts business nationwide, is
headquartered in New York City and has regional offices in seven states.
Reliance National also conducts business in the European Community through
offices located in the United Kingdom, the Netherlands and Spain and in the
Americas through offices in Canada, Mexico and Argentina. In 1994, Reliance
National completed its acquisition of a Mexican insurance company and purchased
an Argentinean insurance company. Reliance National distributes its products
primarily through national insurance brokers. Reliance National maintains an
underwriting staff in the United States, the United Kingdom, Canada and Mexico,
an actuarial staff in the United States and makes extensive use of third party
administrators and technical consultants for certain claims and loss control
services. Net premiums written by Reliance National were $889.7 million, $872.2
million and $828.6 million for the years ended December 31, 1994, 1993 and 1992,
respectively.
Reliance National is organized into eight major divisions. Each division is
comprised of individual departments, each focusing on a particular type of
business, program or market segment. Each department makes use of underwriters,
actuaries and other professionals to market, structure and price its products.
Reliance National's eight major divisions are:
o Risk Management Services, Reliance National's largest division, targets
Fortune 1,000 companies and multinationals with a broad array of
coverages and services. Its use of risk financing techniques such as
retrospectively rated policies, self-insured retentions, deductibles,
captives, alternative risk funding and fronting arrangements all help
clients to reduce costs and/or manage cash flow more efficiently. It
provides workers' compensation, commercial automobile, general liability
and pollution coverages. In 1994, this division had net premiums written
of $290.8 million.
o Special Operations provides coverages for construction, transportation
and ocean marine risks and offers non-standard personal automobile
insurance for drivers unable to obtain insurance in the standard market.
In 1994, this division had net premiums written of $181.4 million.
o Excess and Surplus Lines provides professional liability insurance to
architects and engineers, lawyers, healthcare providers and other
professions, and markets excess and umbrella coverages. It also provides
employment practices liability insurance and develops and provides
insurance products to certain markets requiring specialized underwriting,
such as the entertainment industry market. In 1994, this division had net
premiums written of $121.6 million.
o International writes predominantly commercial property and casualty
insurance products, including specialized coverages such as excess
casualty, directors and officers liability, and fidelity insurance, in
the European Community, Canada, Mexico and Argentina. It also provides
certain risk management services for foreign subsidiaries of United
States multinational corporations. In 1994, this division had net
premiums written of $86.4 million.
o Financial Products provides directors and officers liability insurance
and, for financial institutions, errors and omissions insurance. In 1994,
this division had net premiums written of $70.7 million.
o Financial Specialty Coverages provides aviation and space satellite risk
coverages on an assumed and direct basis, and also underwrites complex
non-traditional insurance and reinsurance products, including finite risk
transactions. In 1994, this division had net written premiums of $53.9
million.
o Accident and Health provides high limit disability, group accident,
blanket special risk and medical excess of loss programs. In 1994, this
division had net premiums written of $48.1 million.
o Property provides commercial property coverage focusing on excess and
specialty commercial property. In 1994, this division had net premiums
written of $23.0 million.
Reliance National attempts to limit its exposure to losses through the use
of certain methods such as claims-made policies, retrospectively rated policies,
high deductible policies and reinsurance. Approximately 23% of Reliance
National's net premiums written during 1994 were written on a 'claims-made'
basis which provides
4
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coverage only for claims reported during the policy period or within an
established reporting period, as opposed to 'occurrence' basis policies which
provide coverage for events during the policy period without regard for when the
claim is reported. Claims-made policies mitigate the 'long tail' nature of the
risks insured.
Approximately 13% of Reliance National's net premiums written during 1994
were written on a retrospectively rated or loss sensitive basis, whereby the
insured effectively pays for a large portion or, in many cases, all of its
losses. Approximately 6% of Reliance National's net premiums written during
1994 were written on a high deductible basis, whereby the insured pays for all
of its losses up to the deductible amount. The use of high deductible policies
results in lower premiums and losses for Reliance National as loss payments made
by an insured under a high deductible policy are not considered premium or
losses to an insurer. With retrospectively rated and high deductible policies
Reliance National provides insurance and loss control management services, while
reducing its underwriting risk. Reliance National assumes a credit risk in
connection with retrospectively rated and high deductible policies and,
therefore, accounts with such policies undergo extensive credit analysis by a
centralized credit department. Collateral in the form of bank letters of credit,
trust accounts or cash collateral is generally provided by the insured to cover
a significant portion of Reliance National's credit exposure.
To further limit exposures, approximately 91% of Reliance National's net
premiums written during 1994 were for policies with net retentions equal to or
lower than $1.5 million per risk. By reinsuring a large proportion of its
business, Reliance National seeks to limit its exposure to losses on each line
of business it writes. Its largest single exposure, net of reinsurance, at
December 31, 1994, was $2.3 million per occurrence.
Reliance Insurance. Reliance Insurance offers commercial lines property
and casualty insurance products, primarily focusing on the diverse needs of
mid-sized companies nationwide. Reliance Insurance distributes its products
through approximately 2,800 independent agents, program agents and brokers.
Reliance Insurance's customers are primarily closely held companies with 25 to
1,000 employees and annual sales of $5 million to $300 million. Reliance
Insurance underwrites a variety of commercial insurance coverages, including
property, general liability, commercial automobile and workers' compensation
(the majority of which is written on a loss sensitive or retrospectively rated
basis). Reliance Insurance is headquartered in Philadelphia and operates in 50
states and the District of Columbia. Net written premiums by Reliance Insurance
were $631.0 million (including $20.7 million of personal lines premiums), $668.2
million (including $45.4 million of personal lines premiums) and $510.8 million
(including $8.8 million of personal lines premiums) for the years ended
December 31, 1994, 1993 and 1992, respectively.
Reliance Insurance is organized into the Commercial Insurance Division,
comprised of the Standard Commercial department and the Large Accounts
department, and the Custom Underwriting Facility, comprised of the Special Risk
department and the Program department. The Commercial Insurance Division
provides its products and services through a decentralized network of regional
and branch offices. This organization allows it to place major responsibility
and accountability for underwriting, sales, claims, and customer service close
to the insured. The Custom Underwriting Facility's Special Risk department has
three regional offices and the Program department has one central office.
The Commercial Insurance Division's Standard Commercial department focuses
on accounts with annual premiums of up to $1 million. This department offers a
broad range of traditional commercial coverages, primarily written on a
guaranteed cost basis. The Standard Commercial department had net written
premiums of $312.8 million in 1994. The Commercial Insurance Division's Large
Accounts department focuses on casualty exposures of accounts with annual
premiums in excess of $1 million, where it is able to offer more flexible
coverages through the use of retrospectively rated and high deductible policies.
The Large Accounts department primarily provides workers' compensation insurance
and approximately 85% of its business was written on a loss sensitive basis.
Accounts with retrospectively rated and high deductible policies undergo
extensive credit analysis by a centralized credit department and collateral is
generally provided by the insured to cover a significant portion of Reliance
Insurance's credit exposure. The Large Accounts department wrote $115.7 million
of net premiums in 1994.
The Custom Underwriting Facility's Special Risk department provides
underwriting of excess and surplus coverages (generally with lower net
retentions than for other commercial lines written by Reliance Insurance) for
risks with unique exposures. The Special Risk department had net written
premiums of $109.5 million in 1994.
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The Custom Underwriting Facility's Program department provides property and
liability insurance programs, targeting homogeneous groups of insureds with
particular insurance needs, such as auto rental companies, day care centers and
municipalities. These programs are administered by independent program agents,
with Reliance Insurance retaining authority for all underwriting and pricing
decisions. Program agents market the programs, gather the initial underwriting
data and, if authorized by Reliance Insurance, issue the policies. All claims
and other services are handled by Reliance Insurance. The Program department had
net written premiums of $73.4 million in 1994.
Reliance Insurance has substantially withdrawn from personal lines, where
it has had unfavorable experience and does not perceive a potential for
long-term profitability. The Reliance Property and Casualty Companies derived
1.2% of their net premiums written from personal lines in 1994, compared with
2.6% in 1993.
Reliance Reinsurance. Reliance Reinsurance provides property reinsurance
on a treaty basis and casualty reinsurance on a treaty and facultative basis.
All treaty business is marketed through reinsurance brokers who negotiate
contracts of reinsurance on behalf of the primary insurer or ceding reinsurer,
while facultative business is produced both directly and through reinsurance
brokers. While Reliance Reinsurance's treaty clients include all types and sizes
of insurers, Reliance Reinsurance typically targets treaty reinsurance for small
to medium sized regional and specialty insurance companies, as well as captives,
risk retention groups and other alternative markets, providing both pro rata and
excess of loss coverage. Reliance Reinsurance believes that this market is
subject to less competition and provides Reliance Reinsurance an opportunity to
develop and market innovative programs where pricing is not the key competitive
factor. Reliance Reinsurance typically avoids participating in large capacity
reinsurance treaties where price is the predominant competitive factor. It
generally writes reinsurance in the 'lower layers,' the first $1 million of
primary coverage, where losses are more predictable and quantifiable. The
assumed reinsurance business of the Reliance Property and Casualty Companies is
conducted nationwide and is headquartered in Philadelphia. Net written premiums
by Reliance Reinsurance were $125.6 million, $123.6 million and $107.9 million
for the years ended December 31, 1994, 1993 and 1992, respectively.
Reliance Surety. Reliance Surety is a leading writer of surety bonds and
fidelity bonds in the United States. Reliance Surety concentrates on writing
performance and payment bonds for contractors of public works projects,
commercial real estate and multi-family housing. It also writes financial
institution and commercial fidelity bonds. Reliance Surety performs extensive
credit analysis on its clients, and actively manages the claims function to
minimize losses and maximize recoveries. Reliance Surety has enjoyed long
relationships with the major contractors it has insured. Reliance Surety has
established an operation targeting smaller contractors, an area traditionally
less fully serviced by national surety companies and one providing potential
growth for Reliance Surety. Reliance Surety is headquartered in Philadelphia and
conducts business nationwide through 43 branch offices and approximately 3,200
independent agents and brokers. Net written premiums by Reliance Surety were
$118.0 million, $106.7 million and $94.3 million for the years 1994, 1993 and
1992, respectively.
Surety bonds guarantee the payment or performance of one party (called the
principal) to another party (called the obligee). This guarantee is typically
evidenced by a written agreement by the surety (e.g., Reliance Insurance
Company) to discharge the payment or performance obligations of the principal
pursuant to the underlying contract between the obligee and the principal.
Fidelity bonds insure against losses arising from employee dishonesty. Financial
institution fidelity bonds insure against losses arising from employee
dishonesty and other specifically named theft and fraud perils.
Title Insurance. Through Commonwealth/Transamerica Title, the Company
writes title insurance for residential and commercial real estate nationwide and
provides escrow and settlement services in connection with real estate closings.
The National Title Services division of Commonwealth/Transamerica Title provides
title services for large and multi-state commercial transactions. Through the
Commonwealth OneStop(Trademark) program, Commonwealth/Transamerica Title
provides national lenders with a full range of residential closing services,
including title insurance through its National Residential Title Services
division, appraisal management through its CLT Appraisal Services, Inc.
subsidiary, and other real estate related services. Commonwealth/Transamerica
Title is the third largest title insurance operation in the United States, based
on 1993 total premiums and fees. Commonwealth/Transamerica Title had premiums
and fees (excluding Commonwealth Mortgage Assurance
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Corporation, its mortgage insurance subsidiary which was sold in the fourth
quarter of 1992) of $856.8 million, $893.4 million and $770.5 million for the
years 1994, 1993 and 1992, respectively.
Commonwealth/Transamerica Title is organized into six regions with more
than 325 offices covering all 50 states, as well as Puerto Rico and the Virgin
Islands. In 1994, Texas, California, Florida, Pennsylvania, New York, Washington
and Michigan accounted for approximately 11%, 10%, 10%, 8%, 7%, 6% and 6%,
respectively, of revenues for premiums and services related to title insurance.
No other state accounted for more than 5% of such revenues.
Commonwealth/Transamerica Title is committed to increasing its market share
through a carefully developed plan of expanding its direct and agency
operations, including selective acquisitions.
A title insurance policy protects the insured party and certain successors
in interest against losses resulting from title defects, liens and encumbrances
existing as of the date of the policy and not specifically excepted from the
policy's provisions. Generally, a title policy is obtained by the buyer, the
mortgage lender or both at the time real property is transferred or refinanced.
The policy is written for an indefinite term for a single premium which is due
in full upon issuance of the policy. The face amount of the policy is usually
either the purchase price of the property or the amount of the loan secured by
the property. Title policies issued to lenders insure the priority position of
the lender's lien. Many lenders require title insurance as a condition to making
loans secured by real estate. Title insurers, unlike other types of insurers,
seek to eliminate future losses through the title examination process and the
closing process, and a substantial portion of the expenses of a title insurer
relate to those functions.
Consulting and Technical Services. RCG International, Inc. ('RCG'), a
subsidiary of the Reliance Insurance Group, and its subsidiaries provide
consulting and technical services to industry, government and nonprofit
organizations, principally in the United States and Europe, and also in Canada,
Asia, South America, Africa and Australia. The services provided by RCG include
consulting in two principal areas: information technology, which provides
computer-related professional services to large corporate clients, and
energy/environmental services. RCG and its subsidiaries had revenues of $141.6
million, $116.8 million and $109.1 million for 1994, 1993 and 1992,
respectively.
SALE OF NON-CORE OPERATIONS
The Company has realigned its operations to emphasize commercial property
and casualty insurance, particularly specialized insurance products and complex
risks of larger accounts, and title insurance. In July 1993, the Company
completed the sale of its life insurance subsidiary, United Pacific Life
Insurance Company ('UPL'). In the fourth quarter of 1992, the Company sold
substantially all of the operating assets and insurance brokerage, employee
benefits consulting and related services businesses of its insurance brokerage
subsidiary, Frank B. Hall & Co. Inc. ('Hall'). Also in the fourth quarter of
1992, the Company sold its mortgage insurance subsidiary, Commonwealth Mortgage
Assurance Corporation ('CMAC'), through a public offering of 100% of the common
stock of CMAC Investment Corporation ('CMAC Investment'). For a further
description of the above referenced transactions, see Notes 13 and 15 to the
Consolidated Financial Statements.
INSURANCE CEDED
All of the Reliance Insurance Group's insurance operations purchase
reinsurance to limit the Company's exposure to losses. Although the ceding of
insurance does not discharge an insurer from its primary legal liability to a
policyholder, the reinsuring company assumes a related liability and,
accordingly, it is the practice of the industry, as permitted by statutory
regulations, to treat properly reinsured exposures as if they were not exposures
for which the primary insurer is liable. The Reliance Insurance Group enters
into reinsurance arrangements that are both facultative (individual risks) and
treaty (blocks of risk). Limits and retentions are based on a number of factors,
including the previous loss history of the operating unit, policy limits and
exposure data, industry studies as to potential severity, and market terms,
conditions and capacity, and may change over time. Reliance National and
Reliance Insurance limit their exposure to individual risks by purchasing excess
of loss and quota share reinsurance, with treaty structures and net retentions
varying with the specific requirements of the line of business or program being
reinsured. In many cases, Reliance National and Reliance Insurance purchase
additional facultative reinsurance to further reduce their retentions below the
treaty levels.
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During 1994, the highest net retention per occurrence for casualty risk was
$2.2 million for Reliance National and $3.0 million for Reliance Insurance. In
addition, both Reliance National and Reliance Insurance purchase 'casualty
clash' coverage to provide protection in the event of losses incurred by
multiple coverages on one occurrence.
During 1994, the highest net retention per occurrence for property risk was
$2.3 million for Reliance National and $3.2 million for Reliance Insurance. In
addition, during 1994, Reliance National and Reliance Insurance together had
reinsurance for 95% of net retained property catastrophe losses in excess of $15
million and up to $107 million. Thus, for all net retained losses attributable
to a single catastrophe of $107 million, Reliance National and Reliance
Insurance together retained a maximum exposure of $19.6 million. Any net
retained loss from a single catastrophe beyond $107 million is not reinsured and
is retained by Reliance National and Reliance Insurance together. Renewal of
catastrophe coverage during the term of the treaty is provided by a provision
for one automatic reinstatement of the original coverage at a contractually
determined premium. The Company believes that the limit of $107 million of net
retained losses per occurrence is sufficient to cover its probable maximum loss
in the event of a catastrophe.
Catastrophe losses, including losses incurred by Reliance Reinsurance on
insurance assumed, were $50.1 million in 1994 ($134.0 million before insurance
ceded), which included $44.9 million ($127.0 million before insurance ceded)
arising from the January 1994 California earthquake, compared to $39.3 million
in 1993 ($88.5 million before insurance ceded). Catastrophe losses, including
losses incurred by Reliance Reinsurance on insurance assumed, were $61.1 million
in 1992 ($119.2 million before insurance ceded), which included $45.6 million
($94.1 million before insurance ceded) arising from Hurricane Andrew.
A catastrophic event can cause losses in lines of insurance other than
property. Both Reliance National and Reliance Insurance purchase workers'
compensation reinsurance coverage up to $200 million to provide protection
against losses under workers' compensation policies which might be caused by
catastrophes. Such workers' compensation reinsurance applies after retentions by
Reliance National of up to $500,000 and Reliance Insurance of up to $1 million.
For Reliance Insurance, any such losses over $200 million would be covered by
the property catastrophe treaty to the extent of available capacity. For
Reliance National, any such losses over $200 million and up to $255 million
would be covered by Reliance National's casualty clash coverage.
Reliance National and Reliance Insurance have also purchased reinsurance to
cover aggregate retained catastrophe losses in the event of multiple
catastrophes in any one year. This reinsurance agreement provides coverage for
up to 93% of aggregate catastrophe losses between $12.5 million and $31.0
million, after applying a deductible of $3.8 million per catastrophe.
Reliance Surety retains 100% of surety bond limits up to $2 million. For
surety bonds in excess of $2 million, up to $40 million, Reliance Surety obtains
50% quota share reinsurance. For surety bonds between $40 million and $50
million, Reliance Surety obtains 60% quota share reinsurance. In addition,
Reliance Surety has excess of loss protection, with a net retention of up to
$4.3 million, for losses up to $30 million on any one principal insured. For
fidelity business, Reliance Surety retains 100% of each loss up to $1.5 million.
Reliance Surety has obtained reinsurance above that retention up to a maximum of
$8.5 million on each loss.
Reliance Reinsurance writes treaty property and casualty reinsurance and
facultative casualty reinsurance with limits of $1.5 million per program.
Facultative property reinsurance, which was discontinued in February 1994, was
written with limits of $10 million per risk, of which the Company retained
$500,000 after the purchase of reinsurance. Reliance Reinsurance purchases
catastrophe protection for its property treaty and facultative insurance assumed
of $5.0 million in excess of a $2.5 million per occurrence retention, with a
contractual provision for a reinstatement. In 1994, Reliance Reinsurance also
wrote a specific catastrophe book of business with an aggregate limit of $17.7
million for any one event, not subject to the above protection. In 1994, losses
and expenses of $12.5 million incurred under this specific catastrophe program
were offset by premiums of $11.0 million. As of December 31, 1994, Reliance
Reinsurance no longer writes a specific catastrophe book of business.
Commonwealth/Transamerica Title generally retains no more than $60 million
on any one risk, although it often retains significantly less than this amount,
with reinsurance placed with other title companies. Commonwealth/Transamerica
Title also purchases reinsurance from Lloyd's of London which provides coverage
8
<PAGE>
for 80% of losses between $20 million and $60 million, on any one risk. The
largest net loss paid by Commonwealth or, since its acquisition, Transamerica
Title on any one risk was approximately $5 million.
Premiums ceded by the Reliance Insurance Group to reinsurers were $1.2
billion and $1.1 billion in 1994 and 1993, respectively. The Reliance Insurance
Group is subject to credit risk with respect to its reinsurers, as the ceding of
risk to reinsurers does not relieve the Reliance Insurance Group of its
liability to insureds. At December 31, 1994, the Reliance Insurance Group had
reinsurance recoverables of $2.9 billion, representing estimated amounts
recoverable from reinsurers pertaining to paid claims, unpaid claims, claims
incurred but not reported and unearned premiums. In order to minimize losses
from uncollectible reinsurance, the Reliance Insurance Group places its
reinsurance with a number of different reinsurers, and utilizes a security
committee or a credit department to approve in advance the reinsurers which meet
its standards of financial strength and are acceptable for use by Reliance
Insurance Group. The Reliance Insurance Group holds substantial amounts of
collateral, consisting of letters of credit, trust accounts and cash collateral,
to secure recoverables from unauthorized reinsurers. The Company had $8.2
million reserved for potentially unrecoverable reinsurance at December 31, 1994.
The Company is not aware of any impairment of the creditworthiness of any of the
Reliance Insurance Group's significant reinsurers. While the Company is aware of
financial difficulties experienced by certain Lloyd's of London syndicates, the
Company has not experienced deterioration of payments from the Lloyd's of London
syndicates from which it has reinsurance. The Company has no reason to believe
that the Lloyd's of London syndicates from which it has reinsurance will be
unable to satisfy claims that may arise with respect to ceded losses.
In 1994, the Reliance Property and Casualty Companies did not cede more
than 5.1% of direct premiums to any one reinsurer and no one reinsurer accounted
for more than 10.9% of total ceded premiums. The Reliance Insurance Group's ten
largest reinsurers, based on 1994 ceded premiums, are as follows:
<TABLE>
<CAPTION>
1994
CEDED BEST
PREMIUM RATING
------------- ------
(IN MILLIONS)
<S> <C> <C>
American Re-Insurance Company............................................. $ 132.8 A+
North American Reinsurance Corp........................................... 98.8 A
Lloyd's of London......................................................... 93.5 (1)
Hertz International Reinsurance Ltd....................................... 67.3 (2)
Commercial Risk Re-Insurance Co........................................... 45.8 (3)
GIO Insurance Ltd......................................................... 35.9 (4)
TRN Insurance Company..................................................... 34.7 (2)
Employers Reinsurance Corp................................................ 34.5 A++
TIG Reinsurance Company................................................... 29.6 A
Transatlantic Reinsurance Company......................................... 26.7 A+
</TABLE>
------------------
(1) Individual Lloyd's of London syndicates are not rated by Best.
(2) An unrated captive reinsurer that is not affiliated with the Company.
Recoverables from such reinsurer are fully collateralized.
(3) Assigned a Best's Rating of NA-3 (Insufficient Operating Experience) as the
reinsurer has not accumulated five years of representative operating
experience.
(4) Reinsurer is not rated by Best. The S&P Rating for such reinsurer is A.
The Reliance Insurance Group maintains no 'Funded Cover' reinsurance
agreements. 'Funded Cover' reinsurance agreements are multi-year retrospectively
rated reinsurance agreements which may not meet relevant accounting standards
for risk transfer and under which the reinsured must pay additional premiums in
subsequent years if losses in the current year exceed levels specified in the
reinsurance agreement.
PROPERTY AND CASUALTY LOSS RESERVES
As of March 15, 1995, the Reliance Insurance Group maintains a staff of 101
actuaries, of whom 17 are fellows of the Casualty Actuarial Society and one is a
fellow of the Society of Actuaries. This staff regularly performs comprehensive
analyses of reserves and reviews the pricing and reserving methodologies of the
Reliance Insurance Group. Although the Company believes, in light of present
facts and current legal interpretations, that the Reliance Insurance Group's
overall property and casualty reserve levels are adequate to
9
<PAGE>
meet its obligations under existing policies, due to the inherent uncertainty
and complexity of the reserving process, the ultimate liability may be more or
less than such reserves.
The following tables present information relating to the liability for
unpaid claims and related expenses ('loss reserves') for the Reliance Property
and Casualty Companies. The table below provides a reconciliation of beginning
and ending liability balances for the years ended December 31, 1994, 1993 and
1992.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------
1994 1993 1992
---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
Liability for unpaid claims and related expenses (loss reserves),
beginning of year..................................................... $5,048,442 $4,571,792 $3,685,049
Less reinsurance recoverables......................................... 2,116,914 1,868,800 1,309,814
---------- ---------- ----------
Net liability for unpaid claims and related expenses (loss reserves),
beginning of year..................................................... 2,931,528 2,702,992 2,375,235
---------- ---------- ----------
Provision for policy claims and related expenses:
Provision for insured events of the current year...................... 1,274,649 1,195,425 1,258,111
Increase in provision for insured events of prior years............... 22,444 40,169 31,487
---------- ---------- ----------
Total provision.................................................... 1,297,093 1,235,594 1,289,598
---------- ---------- ----------
Payments for policy claims and related expenses:
Attributable to insured events of the current year.................... 321,538 229,778 271,878
Attributable to insured events of prior years......................... 780,961 776,881 689,181
---------- ---------- ----------
Total payments..................................................... 1,102,499 1,006,659 961,059
---------- ---------- ----------
Foreign currency translation............................................ 1,659 (399) (782)
---------- ---------- ----------
Net liability for unpaid claims and related expenses (loss reserves),
end of year........................................................... 3,127,781 2,931,528 2,702,992
Plus reinsurance recoverables......................................... 2,453,702 2,116,914 1,868,800
---------- ---------- ----------
Liability for unpaid claims and related expenses (loss reserves), end of
year*................................................................. $5,581,483 $5,048,442 $4,571,792
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
------------------
* Loss reserves exclude the loss reserves of title operations of $228.1 million,
$204.7 million and $173.3 million at December 31, 1994, 1993 and 1992,
respectively.
Policy claims and settlement expenses includes a provision for insured
events of prior years of $22.4 million, $40.2 million and $31.5 million for the
years 1994, 1993 and 1992, respectively. The 1994 provision includes $17.0
million of adverse development related to prior year asbestos-related and
environmental pollution claims. Development in asbestos-related and
environmental pollution claims primarily affects general liability and multiple
peril lines of business. The 1994 provision also includes $14.7 million of
adverse development from other general liability lines. This development was
partially offset by $13.3 million of favorable development in workers'
compensation. The 1993 provision includes $21.1 million of adverse development
from workers' compensation reinsurance pools and $35.2 million of adverse
development related to prior-year asbestos-related and environmental pollution
claims. This development was partially offset by favorable development in other
lines of business, including other general liability lines. The 1992 provision
includes $55.6 million of adverse development from workers' compensation and
automobile reinsurance pools. This development was partially offset by favorable
development of $11.9 million from two general liability claims and favorable
development of $10.7 million related to unallocated loss adjustment expenses.
10
<PAGE>
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, including losses
that had been incurred but not reported to the Reliance Property and Casualty
Companies. The upper portion of the table indicates the loss reserves as they
are reestimated in subsequent periods as a percentage of the originally recorded
reserves. 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 reestimated loss reserve at
December 31, 1994. A redundancy or deficiency indicates the cumulative
percentage change, as of December 31, 1994, of originally recorded loss
reserves. The lower portion of the table indicates the cumulative amounts paid
as of successive periods as a percentage of the original loss reserve liability.
In calculating the percentage of cumulative paid losses to the loss reserve
liability in each year, unpaid losses of General Casualty Company of Wisconsin,
a former wholly-owned subsidiary, and its subsidiaries ('General Casualty') at
April 30, 1990 (the date of sale of General Casualty), relating to 1984 to 1989,
were deducted from the original liability in each year. Each amount in the
following table includes the effects of all changes in amounts for prior
periods. The table does not present accident or policy year development data.
For the years 1984 through 1993, the Company has experienced deficiencies in its
estimated liability for loss reserves. Included in these deficiencies were
provisions of $156.0 million in 1991 and $100.0 million in 1986 specifically
made to strengthen prior-years' loss reserves. The Company's loss reserves
during this period have been adversely affected by a number of factors beyond
the Company's control as follows: (i) significant increases in claim settlements
reflecting, among other things, inflation in medical costs; (ii) increases in
the costs of settling claims, particularly legal expenses; (iii) more frequent
resort to litigation in connection with claims; and (iv) a widening
interpretation of what constitutes a covered claim.
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------------------------------------------------------------------------
1994 1993 1992 1991 1990 1989 1988 1987 1986
---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
(IN THOUSANDS, EXCEPT PERCENTAGES)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net liability for
unpaid claims and
related expenses
(loss
reserves)(1)........ $3,127,781 $2,931,528 $2,702,992 $2,375,235 $1,893,421 $1,962,822 $1,644,057 $1,494,227 $1,425,942
Net liability
reestimated as of:
One year later...... -- 100.8% 101.5% 101.3% 114.4% 104.8% 104.8% 107.8% 106.6%
Two years later..... -- -- 103.1% 104.4% 115.2% 117.0% 113.5% 112.0% 115.6%
Three years later... -- -- -- 105.7% 119.6% 118.2% 121.8% 118.5% 121.6%
Four years later.... -- -- -- -- 120.7% 120.9% 123.2% 125.0% 127.2%
Five years later.... -- -- -- -- -- 122.2% 127.8% 126.7% 132.3%
Six years later..... -- -- -- -- -- -- 128.7% 131.8% 135.1%
Seven years later... -- -- -- -- -- -- -- 133.1% 140.0%
Eight years later... -- -- -- -- -- -- -- -- 141.4%
Nine years later.... -- -- -- -- -- -- -- -- --
Ten years later..... -- -- -- -- -- -- -- -- --
Redundancy
(Deficiency)........ -- (0.8%) (3.1%) (5.7%) (20.7%) (22.2%) (28.7%) (33.1%) (41.4%)
----- ----- ----- ----- ----- ----- ----- ----- -----
Paid (cumulative) as
of:
One year later...... -- 26.6% 28.7% 29.0% 36.6% 40.7% 41.6% 38.6% 42.0%
Two years later..... -- -- 48.0% 48.6% 57.9% 65.4% 71.6% 65.8% 68.4%
Three years later... -- -- -- 62.1% 72.8% 82.2% 86.4% 88.2% 88.1%
Four years later.... -- -- -- -- 83.0% 91.3% 97.2% 99.5% 103.9%
Five years later.... -- -- -- -- -- 97.8% 103.0% 106.2% 112.1%
Six years later..... -- -- -- -- -- -- 107.3% 110.7% 117.1%
Seven years later... -- -- -- -- -- -- -- 113.9% 120.8%
Eight years later... -- -- -- -- -- -- -- -- 123.7%
Nine years later.... -- -- -- -- -- -- -- -- --
Ten years later..... -- -- -- -- -- -- -- -- --
<CAPTION>
1985 1984
---------- ----------
<S> <C> <C>
Net liability for
unpaid claims and
related expenses
(loss
reserves)(1)........ $1,248,713 $1,162,200
Net liability
reestimated as of:
One year later...... 122.1% 109.3%
Two years later..... 134.5% 126.3%
Three years later... 142.5% 135.7%
Four years later.... 150.4% 142.3%
Five years later.... 155.1% 149.2%
Six years later..... 161.2% 152.4%
Seven years later... 163.5% 157.8%
Eight years later... 168.5% 159.6%
Nine years later.... 169.3% 165.1%
Ten years later..... -- 165.7%
Redundancy
(Deficiency)........ (69.3%) (65.7%)
------ ------
Paid (cumulative) as
of:
One year later...... 48.1% 47.2%
Two years later..... 79.1% 76.2%
Three years later... 98.9% 98.5%
Four years later.... 114.4% 111.0%
Five years later.... 127.3% 121.2%
Six years later..... 134.9% 130.1%
Seven years later... 138.5% 135.8%
Eight years later... 141.9% 138.6%
Nine years later.... 144.1% 142.2%
Ten years later..... -- 144.2%
</TABLE>
------------------
(1) The gross liability for unpaid claims and related expenses was $5.6 billion
at December 31, 1994. The gross liability for unpaid claims and related
expenses for years 1993 and prior was redundant by $144.4 million at
December 31, 1994.
11
<PAGE>
The difference between the property and casualty liability for loss
reserves at December 31, 1994 and 1993 reported in the Company's consolidated
financial statements (net of reinsurance recoverables) and the liability which
would be reported in accordance with statutory accounting practices is as
follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1994 1993
---------- ----------
(IN THOUSANDS)
<S> <C> <C>
Net Liability reported under statutory accounting practices........................... $3,033,016 $2,846,073
Adjustment for GAAP basis accrual of estimated salvage and subrogation recoveries..... (9,858) (9,360)
Additional discount of workers' compensation reserves................................. 104,145 95,996
Foreign currency translation.......................................................... 478 (1,181)
---------- ----------
Net Liability reported................................................................ $3,127,781 $2,931,528
---------- ----------
---------- ----------
</TABLE>
The difference between the property and casualty liability for loss
reserves at December 31, 1994 and 1993 reported in the Company's consolidated
financial statements and the liability which would be reported in accordance
with statutory accounting practices is as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1994 1993
---------- ----------
(IN THOUSANDS)
<S> <C> <C>
Liability reported under statutory accounting practices............................... $5,395,846 $4,878,016
Adjustment for GAAP basis accrual of estimated salvage and subrogation recoveries..... (11,984) (11,484)
Additional discount of workers' compensation reserves................................. 198,808 186,556
Foreign currency translation.......................................................... (1,187) (4,646)
---------- ----------
Liability reported.................................................................... $5,581,483 $5,048,442
---------- ----------
---------- ----------
</TABLE>
Property and casualty loss reserves are 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 for unpaid claims. Also considered are other factors
such as the promptness with which claims are reported, the history of the
ultimate liability for such claims compared with initial and intermediate
estimates, the type of insurance coverage involved, the experience of the
property and casualty industry and other economic indicators, when applicable.
The establishment of loss reserves requires an estimate of the ultimate
liability based primarily on past experience. The Reliance Property and Casualty
Companies apply a variety of generally accepted actuarial techniques to
determine the estimates of ultimate liability. The techniques recognize, among
other factors, the Reliance Insurance Group's and the industry's experience with
similar business, historical trends in reserving patterns and loss payments,
pending level of unpaid claims, the cost of claim settlements, the Reliance
Insurance Group's product mix, the economic environment in which property and
casualty companies operate and the trend toward increasing claims and awards.
Estimates are continually reviewed and adjustments of the probable ultimate
liability based on subsequent developments and new data are included in
operating results for the periods in which they are made. In general, reserves
are initially established based upon the actuarial and underwriting data
utilized to set pricing levels, and are reviewed as additional information,
including claims experience, becomes available. The Reliance Property and
Casualty Companies regularly analyze their reserves and review their pricing and
reserving methodologies, using Reliance Insurance Group actuaries, so that
future adjustments to prior year reserves can be minimized. From time to time,
the Reliance Property and Casualty Companies consult with independent actuarial
firms concerning reserving practices and levels. The Reliance Property and
Casualty Companies are required by state insurance regulators to file, along
with their statutory reports, a statement of actuarial reserve opinion setting
forth an actuary's assessment of their reserve status and, in 1994, the Reliance
Property and Casualty Companies used an independent actuarial firm to meet such
requirements. However, given the complexity of this process, reserves require
continual updates. The process of estimating claims is a complex task and the
ultimate liability may be more or less than such estimates indicate.
12
<PAGE>
Since 1989, the Reliance Property and Casualty Companies have increased their
premium writings in long tail lines of business. Estimation of loss reserves for
these lines of business is more difficult than for short tail lines because
claims may not become apparent for a number of years, and a relatively higher
proportion of ultimate losses are considered incurred but not reported. As a
result, variations in loss development are more likely in these lines of
business. The Reliance Property and Casualty Companies attempt to reduce these
variations in certain of its long tail lines, primarily directors and officers
liability, professional liability and general liability, by writing policies on
a claims-made basis, which mitigates the long tail nature of the risks. The
Reliance Property and Casualty Companies also seek to limit the loss from a
single event through the use of reinsurance.
In calculating the liability for loss reserves, the Reliance Property and
Casualty Companies discount workers' compensation pension claims which are
expected to have regular, periodic payment patterns. These claims are discounted
for mortality and for interest using statutory annual rates ranging from 3.5% to
6%. In addition, the reserves for claims assumed through the participation of
the Reliance Property and Casualty Companies in workers' compensation
reinsurance pools are discounted. The discounting of all claims (net of
reinsurance recoverables) resulted in a decrease in the liability for loss
reserves of $245.7 million, $284.7 million and $289.5 million at December 31,
1994, 1993 and 1992, respectively. The discount in 1994 was reduced by $27.3
million plus discount amortization of $11.7 million, resulting in a reduction in
pre-tax income of $39.0 million. The discount in 1993 was increased by $7.9
million, which was more than offset by discount amortization resulting in a
decrease in pre-tax income of $4.8 million. The discount in 1992 was increased
by $54.1 million which was partially offset by discount amortization, resulting
in an increase in pre-tax income of $45.7 million.
The liability for loss reserves includes provisions for inflation in
several ways, depending on how the reserve is established. An explicit provision
for inflation is used where estimates of ultimate loss are based on pricing. A
provision for inflation is also included for certain discounted workers'
compensation claims. In these cases, the provision for inflation is based on
factors supplied by the respective workers' compensation rating bureaus which
have jurisdiction for states which provide for cost-of-living increases in
indemnity benefits. In other reserves, the analysis reflects the effect of
inflationary trends as part of the overall effect on claim costs, as well as
changes in marketing, underwriting, reporting and processing systems, claims
settlement and coverages purchased.
Included in the liability for loss reserves at December 31, 1994 are $182.2
million ($130.1 million net of reinsurance recoverables) of loss reserves
pertaining to asbestos-related and environmental pollution claims. The following
table presents information relating to the liability for unpaid claims and
related expenses pertaining to asbestos-related and environmental pollution
claims (such information is for the years 1994 and 1993 only as certain 1992
information is not available):
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1994 1993
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Net liability for unpaid claims and related expenses, beginning of year................... $122,034 $ 94,253
Provision for policy claims and related expenses.......................................... 28,279 52,630
Payments for policy claims and related expenses........................................... (20,170) (24,849)
-------- --------
Net liability for unpaid claims and related expenses, end of year......................... $130,143 $122,034
-------- --------
-------- --------
</TABLE>
Included in the December 31, 1994 net liability for unpaid claims and
related expenses for asbestos-related and environmental pollution claims are
$36.5 million of loss costs for claims incurred but not reported, $49.4 million
of loss costs for reported claims and $44.2 million of related expenses. The
Company continues to receive claims asserting injuries from hazardous materials
and alleged damages to cover various clean-up costs. Asbestos-related and
environmental pollution claims primarily result from the Company's general
liability and multiple peril lines of business. Loss and loss expense reserves
for asbestos-related and environmental pollution claims are established using
standard actuarial techniques as well as management's judgment. Coverage and
claim settlement issues, related to policies written in prior years, such as the
determination that coverage exists and the definition of an occurrence, may
cause the actual loss development for asbestos-related and environmental
pollution claims to exhibit more variation than the remainder of the Company's
book of business.
13
<PAGE>
The Company's net paid losses and related expenses for asbestos-related and
environmental pollution claims have not been material in relation to the
Company's total net paid losses and related expenses. Net paid losses and
related expenses relating to these claims were $20.2 million (including $7.9
million of related expenses), $24.8 million (including $8.1 million of related
expenses) and $16.1 million (including $6.2 million of related expenses) for the
years ended December 31, 1994, 1993 and 1992, respectively. Related expenses
consist primarily of legal costs. Total payments for all property and casualty
insurance policy claims and related expenses were $1.1 billion, $1.0 billion and
$961.1 million for the years ended December 31, 1994, 1993 and 1992,
respectively. The following table presents information related to the number of
insureds with asbestos-related and environmental pollution claims outstanding:
<TABLE>
<CAPTION>
DECEMBER 31,
------------
1994 1993
---- ----
<S> <C> <C>
Number of insureds with outstanding claims, beginning of year..................................... 661 807
Additional insureds with claims during the year................................................... 307 369
Insureds with closed or settled claims during the year............................................ (302) (515)
---- ----
Number of insureds with outstanding claims, end of year........................................... 666 661
---- ----
---- ----
</TABLE>
The average net paid loss per insured for asbestos-related and
environmental pollution claims was $34,200 and $28,200 for the years 1994 and
1993, respectively. As of December 31, 1994, the Company was involved in
approximately 45 coverage disputes (where a motion for declaratory judgment had
been filed, the resolution of which will require a judicial interpretation of an
insurance policy) related to asbestos or environmental pollution claims. The
Company is not aware of any pending litigation or pending claim which will
result in significant contingent liabilities in these areas. The Company
believes it has made reasonable provisions for these claims, although the
ultimate liability may be more or less than such reserves. The Company believes
that future losses associated with these claims will not have a material adverse
effect on its financial position, although there is no assurance that such
losses will not materially affect the Company's results of operations for any
period.
Although the Company believes, in light of present facts and current legal
interpretations, that the overall loss reserves of the Reliance Property and
Casualty Companies are adequate to meet their obligations under existing
policies, due to the inherent uncertainty and complexity of the reserving
process, the ultimate liability may be more or less than such reserves.
PORTFOLIO INVESTMENTS
Investment activities are an integral part of the business of the Reliance
Insurance Group. The Reliance Insurance Group believes that the investment
objectives of safety and liquidity, while seeking the best available return, can
be achieved by active portfolio management and intensive monitoring of
investments. Reference is made to 'Financial Review--Investment Portfolio' on
page 24 of the Company's 1994 Annual Report, which section is incorporated
herein by reference, and Note 2 to the Consolidated Financial Statements.
14
<PAGE>
At December 31, 1994, the Company's investment portfolio was $3.8 billion
(at cost) with 87.4% in fixed maturities and short-term securities (including
redeemable preferred stock) and 12.6% in equity securities, approximately half
of which were convertible preferred stock. The following table details the
distribution of the Company's investments at December 31, 1994:
<TABLE>
<CAPTION>
AMORTIZED MARKET CARRYING
COST VALUE VALUE
---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
Fixed maturities available for sale:
Bonds and notes:
United States Government and government agencies
and authorities............................................. $ 528,297 $ 495,007 $ 495,007
Foreign government............................................ 66,677 63,512 63,512
Foreign-other................................................. 103,263 99,032 99,032
Public utilities.............................................. 96,631 88,602 88,602
Convertibles and bonds with warrants.......................... 88,230 113,398 113,398
All other corporate bonds and notes........................... 713,460 638,962 638,962
Redeemable preferred stock......................................... 349,361 340,799 340,799
---------- ---------- ----------
1,945,919 1,839,312 1,839,312
---------- ---------- ----------
Fixed maturities held for investment:
Bonds and notes:
States, municipalities and political subdivisions............. 11,835 10,980 11,835
Foreign government............................................ 123,306 115,647 123,306
Foreign-other................................................. 20,630 20,501 20,630
Public utilities.............................................. 536,746 477,942 536,746
All other corporate bonds and notes........................... 322,750 285,521 322,750
Redeemable preferred stock......................................... 150,753 142,960 150,753
---------- ---------- ----------
1,166,020 1,053,551 1,166,020
---------- ---------- ----------
Total fixed maturities................................... 3,111,939 2,892,863 3,005,332
---------- ---------- ----------
Equity securities(1):
Common stocks:
Public utilities.............................................. 56,403 55,439 55,439
Industrial and other.......................................... 117,076 221,231 221,231
Nonredeemable preferred stock...................................... 309,050 287,966 287,966
---------- ---------- ----------
482,529 564,636 564,636
---------- ---------- ----------
Short-term investments.................................................. 229,906 229,906 229,906
---------- ---------- ----------
Total investment portfolio............................... $3,824,374 $3,687,405 $3,799,874
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
<TABLE>
<CAPTION>
COST AND
CARRYING
VALUE
----------
(IN THOUSANDS)
<S> <C>
Mortgage Loans(2)....................................................... $ 15,680
Investments in real estate.............................................. 291,666
</TABLE>
------------------
(1) Does not include investment in Zenith National Insurance Corp. which is
accounted for by the equity method and which, as of December 31, 1994, had a
carrying value of $148.8 million and a market value of $149.6 million. See
'--Investee Company.'
(2) In the Company's Consolidated Financial Statements, mortgage loans are
included in premiums and other receivables.
The Company seeks to maintain a diversified and balanced fixed maturity
portfolio representing a broad spectrum of industries and types of securities.
The Company holds virtually no investments in commercial real estate mortgages
and has no exposure to derivative securities (other than through its ownership
of any option, warrant or convertible security with an exercise or conversion
price related to an equity security). Purchases of fixed maturity securities are
researched individually based on in-depth analysis and objective predetermined
investment criteria and are managed to achieve a proper balance of safety,
liquidity and investment yields. The
15
<PAGE>
Reliance Insurance Group primarily invests in investment grade securities (those
rated 'BBB' or better by S&P), and, to a lesser extent, non-investment grade and
non-rated securities.
At December 31, 1994, the aggregate carrying value and market value of
fixed maturities (other than short-term investments and cash) that either have
been rated by S&P in the following categories or are non-rated were as follows:
<TABLE>
<CAPTION>
PERCENT
CARRYING MARKET OF MARKET
VALUE VALUE VALUE
---------- ---------- ---------
(IN THOUSANDS, EXCEPT PERCENTAGES)
<S> <C> <C> <C>
AAA to A.................................... $1,565,849 $1,494,459 52%
BBB......................................... 944,153 903,830 31
---------- ---------- ---
Total investment grade................. 2,510,002 2,398,289 83
BB to B..................................... 326,657 326,034 11
CCC to C.................................... 23,526 23,526 1
Non-rated................................... 145,147 145,014 5
---------- ---------- ---
Total.................................. $3,005,332 $2,892,863 100%
---------- ---------- ---
---------- ---------- ---
</TABLE>
Substantially all of the non-investment grade fixed maturities are
classified as 'available for sale' and, accordingly, are carried at quoted
market value. All publicly traded investment grade securities are priced using
the Merrill Lynch Matrix Pricing model, which model is one of the standard
methods of pricing such securities in the industry. All publicly traded
non-investment grade securities, except as indicated below, are priced from
broker-dealers who make markets in these and other similar securities. For fixed
maturities not publicly traded, prices are estimated based on values obtained
from independent third parties or quoted market prices of comparable
instruments. Upon sale, such prices may not be realized when the size of a
particular investment in an issue is significant in relation to the total size
of such issue. Non-investment grade securities that are thinly traded are priced
using internally developed calculations. Such securities represent less than 1%
of the Reliance Insurance Group's fixed maturities portfolio.
Equity investments are made after in-depth analysis of individual
companies' fundamentals by the Reliance Insurance Group's staff of investment
professionals. They seek to identify equities of large capitalization companies
with strong growth prospects and equities that appear to be undervalued relative
to the issuer's business fundamentals, such as earnings, cash flows, balance
sheet and future prospects. Subsequent to purchase, the business fundamentals of
each equity investment are carefully monitored.
As of March 15, 1995, the Reliance Insurance Group owned 3,568,634 shares
of common stock of Symbol Technologies, Inc. ('Symbol'), representing 13.9% of
the then outstanding common stock of Symbol. Symbol is the nation's largest
manufacturer of bar code-based data capture systems. As of March 15, 1995, the
market value of the Reliance Insurance Group's investment in Symbol was
$105,274,703 (based upon the closing price on such date as reported by the
NYSE), with a cost basis of $26,890,000.
At December 31, 1994, the Company's real estate holdings had a carrying
value of $291.7 million, which includes 11 shopping centers with an aggregate
carrying value of $129.9 million, office buildings and other commercial
properties with an aggregate carrying value of $101.0 million, and undeveloped
land with a carrying value of $60.8 million.
16
<PAGE>
The following table presents the investment results of the Reliance
Insurance Group's investment portfolio for each of the years ended December 31,
1994, 1993, and 1992:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1994 1993 1992
---------- ---------- ----------
(IN THOUSANDS, EXCEPT PERCENTAGES)
<S> <C> <C> <C>
Fixed Maturities:
Average investments(1)............................................ $3,213,556 $2,987,052 $2,597,268
Net investment income............................................. 221,771 200,889 185,810
Realized gains.................................................... 16,705 34,860 33,719
Increase (decrease) in unrealized gains........................... (345,783) 73,122 42,517
Average annual yield:
Net investment income........................................ 6.90% 6.72% 7.15%
Realized gains............................................... 0.52 1.17 1.30
Increase (decrease) in unrealized gains...................... (10.76) 2.45 1.64
---------- ---------- ----------
Return on fixed maturities........................................ (3.34)% 10.34% 10.09%
---------- ---------- ----------
Equity Securities(2):
Average investments(1)............................................ $ 540,139 $ 622,435 $ 510,986
Net investment income............................................. 26,251 28,201 20,937
Realized gains.................................................... 1,611 98,944 19,628
Increase (decrease) in unrealized gains...................... (6,849) (9,670) 31,619
Average annual yield:
Net investment income........................................ 4.86% 4.53% 4.10%
Realized gains............................................... 0.30 15.89 3.84
Increase (decrease) in unrealized gains...................... (1.27) (1.55) 6.19
---------- ---------- ----------
Return on equity securities....................................... 3.89% 18.87% 14.13%
---------- ---------- ----------
---------- ---------- ----------
Total weighted average return on fixed maturities and equity
securities(3)................................................... (2.30)% 11.81% 10.75%
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
------------------
(1) The average is computed by dividing the total market value of investments at
the beginning of the period plus the individual quarter-end balances by five
for the years ended December 31, 1994, 1993 and 1992.
(2) Does not include investment in Zenith National Insurance Corp. See
'--Investee Company.'
(3) The impact on the overall rate of return of a one percent increase or
decrease in the December 31, 1994 fixed maturity portfolio market value
would be approximately 0.77%.
The carrying value and market value at December 31, 1994 of fixed
maturities for which interest is payable on a deferred basis was $114.0 million.
INVESTEE COMPANY
As of March 15, 1995, the Reliance Insurance Group owned 6,574,445 shares
of common stock of Zenith National Insurance Corp. ('Zenith'), representing
34.7% of the outstanding common stock of Zenith, a California-based insurance
company with significant workers' compensation and standard commercial and
personal lines business. As of March 15, 1995 the market value of the Reliance
Insurance Group's investment in Zenith was $129,023,483 (based upon the closing
price on such date as reported by the NYSE), with a carrying value of
$148,776,000.
The board of directors of Zenith includes certain executive officers of the
Company. The Company's investment in Zenith is accounted for by the equity
method. See Note 3 to the Consolidated Financial Statements.
17
<PAGE>
REGULATION
The businesses of the Reliance Insurance Group, in common with those of
other insurance companies, are subject to comprehensive, detailed regulation in
the jurisdictions in which they do business. Such regulation is primarily for
the protection of policyholders rather than for the benefit of investors.
Although their scope varies from place to place, insurance laws in general grant
broad powers to supervisory agencies or officials to examine companies and to
enforce rules or exercise discretion touching almost every significant aspect of
the conduct of the insurance business. These include the licensing of companies
and agents to transact business, the imposition of monetary penalties for rules
violations, varying degrees of control over premium rates (particularly for
property and casualty companies), the forms of policies offered to customers,
financial statements, periodic reporting, permissible investments and adherence
to financial standards relating to surplus, dividends and other criteria of
solvency intended to assure the satisfaction of obligations to policyholders.
Other legislation obliges the Reliance Property and Casualty Companies to offer
policies or assume risks in various markets which they would not seek if they
were acting solely in their own interest. While such regulation and legislation
is sometimes burdensome, inasmuch as all insurance companies similarly situated
are subject to such controls, the Company does not believe that the competitive
position of the Reliance Insurance Group is adversely affected.
State holding company acts also regulate changes of control in insurance
holding companies and transactions and dividends between an insurance company
and its parent or affiliates. Although the specific provisions vary, the holding
company acts generally prohibit a person from acquiring a controlling interest
in an insurer incorporated in the state promulgating the act or in any other
controlling person of such insurer unless the insurance authority has approved
the proposed acquisition in accordance with the applicable regulations. In many
states, including Pennsylvania, where Reliance Insurance Company is domiciled,
'control' is presumed to exist if 10% or more of the voting securities of the
insurer are owned or controlled by a party, although the insurance authority may
find that 'control' in fact does or does not exist where a person owns or
controls either a lesser or a greater amount of securities. The holding company
acts also impose standards on certain transactions with related companies, which
generally include, among other requirements, that all transactions be fair and
reasonable and that certain types of transactions receive prior regulatory
approval either in all instances or when certain regulatory thresholds have been
exceeded.
Other states, in addition to an insurance company's state of domicile, may
regulate affiliated transactions and the acquisition of control of licensed
insurers. The State of California, for example, presently treats certain
insurance subsidiaries of the Company which are not domiciled in California as
though they were domestic insurers for insurance holding company purposes and
such subsidiaries are required to comply with the holding company provisions of
the California Insurance Code, certain of which provisions are more restrictive
than the comparable laws of the states of domicile of such subsidiaries.
The Insurance Law of Pennsylvania, where Reliance Insurance Company 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 the ability to pay future dividends.
Furthermore, the Pennsylvania Insurance Department has broad discretion to limit
the payment of dividends by insurance companies.
18
<PAGE>
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 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.
Total common and preferred stock dividends paid by Reliance Insurance
Company during 1994, 1993 and 1992 were, $114.1 million ($111.5 million for
common stock), $133.7 million ($130.6 million for common stock) and $143.7
million ($140.4 million for common stock), respectively. 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 affect the Company's ability to service its
debt and to pay dividends on its Common Stock.
The National Association of Insurance Commissioners (the 'NAIC') has
adopted a 'risk-based capital' requirement for the property and casualty
insurance industry which became effective in 1995 based on annual statements as
of December 31, 1994. '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
policyholders' surplus in excess of the minimum required risk-based capital.
Management cannot predict the ultimate impact of risk-based capital requirements
on the Company's competitive position.
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.
The Company's principal property and casualty insurance subsidiary,
Reliance Insurance Company, has operated outside of the NAIC financial ratio
range concerning liabilities to liquid assets (the 'NAIC liquidity test'). This
ratio is intended only as a guideline for an insurance company to follow. The
Company believes that it has sufficient marketable assets on hand to make timely
payment of claims and other operating requirements.
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.
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. Subsequently, there were several administrative
hearings on rate rollback and several different sets of regulations were issued.
The regulations were subject to ongoing administrative and legal challenges. In
February 1993, a Los Angeles
19
<PAGE>
Superior Court issued a decision declaring several sections of the regulations
invalid and enjoined 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.
A petition filed with the United States Supreme Court seeking review of the
California Supreme Court decision was denied on February 21, 1995. On November
28, 1994, Reliance Insurance Company and several of its affiliates received an
order from the outgoing Insurance Commissioner ordering refunds totaling $44.8
million plus interest of $27.5 million. The Company believes that the refund
order is based on incomplete and erroneous data. Furthermore, the Company
believes that it did not earn a fair rate of return on its California business
during the year at issue, 1989. Consequently, it intends to contest the order
vigorously. 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. In the fourth quarter of 1994, the Company recorded a pre-tax charge of
$11.6 million related to Proposition 103. While this charge reflects the
Company's assessment of the impact of potential refunds to policyholders under
Proposition 103, the Company nevertheless intends to contest the imposition of
any refund on the basis of the matters set forth above. The Company does not
believe that it is probable that it will be subject to a refund in an amount
which will have a material adverse effect on the Consolidated Financial
Statements.
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 adverse effect
on its on-going business.
COMPETITION
All of the Company's businesses are highly competitive. The property and
casualty insurance business is fragmented and no single company dominates any of
the markets in which the Company operates. The Reliance Property and Casualty
Companies compete with individual companies and with groups of affiliated
companies with greater financial resources, larger sales forces and more
widespread agency and broker relationships. Competition in the property and
casualty insurance industry is based primarily on price, product design and
service. In addition, because the Reliance Property and Casualty Companies sell
policies through independent agents and insurance brokers who are not obligated
to choose the policies of the Reliance Property and Casualty Companies over
those of another insurer, the Reliance Property and Casualty Companies must
compete for agents and brokers and for the business they control. Such
competition is based upon price, product design, policyholder service,
commissions and service to agents and brokers.
Commonwealth/Transamerica Title compete with large national title insurance
companies and with smaller, locally established businesses which may possess
distinct competitive advantages. Competition in the title insurance business is
based primarily on the quality and timeliness of service. In some market areas,
abstracts and title opinions issued by attorneys are used as an alternative to
title insurance and other services provided by title companies. In addition,
certain jurisdictions have title registration systems which can lessen the
demand for title insurance.
ITEM 2. PROPERTIES.
The Company and its consolidated subsidiaries own and lease offices in
various locations primarily in the United States. None of these properties is
material to the Company's business. At December 31, 1994, the Company and its
consolidated subsidiaries employed approximately 9,165 persons in approximately
440 offices.
ITEM 3. LEGAL PROCEEDINGS.
The Company and its subsidiaries are involved in certain litigation arising
in the course of their businesses, some of which involve claims of substantial
amounts. Although the ultimate outcome of these matters cannot be ascertained at
this time, and the results of legal proceedings cannot be predicted with
certainty, the Company is contesting the allegations of the complaints in each
pending action and believes, based on current knowledge and
20
<PAGE>
after consultation with counsel, that the resolution of these matters will not
have a material adverse effect on the Consolidated Financial Statements. In
addition, the Company is subject to the litigation set forth below.
In June 1989, Hall, the predecessor corporation of Prometheus Funding
Corp., a subsidiary of the Company ('Prometheus'), entered into a settlement
agreement, which is subject to court approval, with the Superintendent of
Insurance of the State of New York (the 'Superintendent'), arising out of the
insolvency of Union Indemnity Insurance Company of New York, Inc. ('Union
Indemnity'). The settlement agreement was submitted to the court for approval in
October 1989 and objections were filed by various parties. In March 1994, the
Superintendent informed Prometheus that he did not intend to pursue court
approval of the settlement until the resolution of appellate proceedings in a
pending litigation between the Superintendent and certain of Union Indemnity's
reinsurers. Prometheus has advised the Superintendent that this position is in
breach of the settlement agreement's requirement that the parties diligently
make every effort to obtain court approval of the settlement, and Prometheus has
reserved all of its rights with respect thereto. There is no assurance that such
approval will be obtained. The settlement agreement will not become effective
until final approval by the court.
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 Company intends to pursue the
action vigorously. The Internal Revenue Service ('IRS') seeks, among other
things, to disallow investment tax credits of approximately $36.5 million 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 approximately $32.2 million for 1980 and 1981, plus interest
at the statutorily prescribed rates for the periods since those years. On
January 11, 1995, the U.S. Tax Court handed down a decision in Norfolk Southern
Corp. v. Commissioner, a case involving a taxpayer, which, like the Company, had
claimed investment tax credits in connection with the leasing of intermodal
cargo containers. In the decision, which is the first pronouncement by the
courts on this issue, the Tax Court articulated a standard, different from that
proposed by the IRS, which, if applied to the Company, would result in the
disallowance of a substantial percentage (although significantly less than that
sought by the IRS) of the investment tax credits claimed by the Company. The
Company believes that it has appropriately provided for this matter in light of
its exposure in the event a standard such as the one articulated in Norfolk
Southern is applied to the Company's facts and circumstances. On February 22,
1995, the Tax Court granted the joint motion of the Company and the Commissioner
to postpone the trial of the investment tax credit issue until after the
resolution of appellate proceedings in Norfolk Southern. The Company does not
believe that it is probable that its additional liability, if any, in respect of
this matter will have a material adverse effect on the Consolidated Financial
Statements.
Thirty-one employers doing business in Texas have brought two actions in
the District Court of Dallas County, Texas, against, among others, approximately
200 individual insurance companies, including Reliance Insurance Company and
several of its subsidiaries. The plaintiffs in the actions, which were commenced
against the Reliance parties in April 1992 and February 1995 respectively (and
the second of which has been stayed in light of the pendency of the first),
assert that they were overcharged for workers' compensation insurance and
multiple line retrospectively rated casualty insurance between 1987 and 1992. In
August 1994, the plaintiffs in the first action moved for certification of a
purported plaintiff class consisting of all employers who purchased Texas
workers' compensation insurance from the insurance company defendants during the
years in question. Plaintiffs seek monetary damages, with interest and
attorneys' fees, against all defendants jointly and severally, together with a
release of all purported class members from liability for payment of unlawful
premiums, and injunctive relief. The Company has filed answers denying the
allegations and is contesting the actions vigorously. The Company does not
believe that it is probable that its liability, if any, in excess of what the
Company has provided for in respect of this matter will have a material adverse
effect on the Consolidated Financial Statements.
See Note 16 to the Consolidated Financial Statements for additional
information concerning the above referenced legal proceedings affecting the
Company and its subsidiaries.
21
<PAGE>
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matter was submitted to a vote of security holders in the fourth quarter
of the fiscal year covered by this Annual Report on Form 10-K.
EXECUTIVE OFFICERS OF THE REGISTRANT
Set forth below is the name, age and position of each of the executive
officers of the Company:
<TABLE>
<CAPTION>
NAME AND AGE POSITION
--------------------------------------------- ------------------------------------------------------
<S> <C>
Saul P. Steinberg (55)....................... Chairman of the Board and Chief Executive Officer
Robert M. Steinberg (52)..................... President, Chief Operating Officer and Director
George E. Bello (59)......................... Executive Vice President, Controller and Director
Lowell C. Freiberg (55)...................... Senior Vice President, Chief Financial Officer and
Director
Henry A. Lambert (59)........................ Senior Vice President--Real Estate Investments and
Operations
Dennis J. O'Leary (47)....................... Senior Vice President--Taxes
Fred M. Schriever (64)....................... Senior Vice President
Philip S. Sherman (46)....................... Senior Vice President--Group Controller
Bruce L. Sokoloff (46)....................... Senior Vice President--Administration
Howard E. Steinberg (50)..................... Senior Vice President, General Counsel and Corporate
Secretary
James E. Yacobucci (43)...................... Senior Vice President--Investments and Director
</TABLE>
The association between the Company and each of its executive officers is
described below. Each director of the Company is also a director of Reliance
Financial Services Corporation and Reliance Insurance Company.
Saul P. Steinberg founded and has been the Chief Executive Officer and a
Director of the Company and predecessors of the Company since 1961. Mr.
Steinberg is a Director of Symbol Technologies, Inc. and Zenith National
Insurance Corp. He is Chairman of the Executive Committee and the Regular
Compensation Committee of the Board of Directors. He is the brother of Mr.
Robert M. Steinberg and the brother-in-law of Bruce L. Sokoloff.
Robert M. Steinberg became a Director of the Company in 1981 and President
and Chief Operating Officer in 1982. He has held various positions with
predecessors of the Company since 1965. In October 1984, Mr. Steinberg was
elected Chairman of the Board and Chief Executive Officer of Reliance Insurance.
He is a Director of Zenith National Insurance Corp. Mr. Steinberg is a member of
the Executive Committee and the Regular Compensation Committee of the Board of
Directors. Mr. Steinberg is the brother of Mr. Saul P. Steinberg and the
brother-in-law of Bruce L. Sokoloff.
George E. Bello became Executive Vice President and Controller and a
Director of the Company in 1982. He has held various positions with predecessors
of the Company since 1968. He is a Director of Zenith National Insurance Corp.
Mr. Bello is a member of the Finance Committee of the Board of Directors.
Lowell C. Freiberg became Senior Vice President and a Director of the
Company in 1982 and Chief Financial Officer in 1985. He also served as Treasurer
of the Company from 1982 until March 1994. Mr. Freiberg has held various
positions with predecessors of the Company since 1969. He is a Director of
Symbol Technologies, Inc. Mr. Freiberg is a member of the Finance Committee of
the Board of Directors.
Henry A. Lambert was elected Senior Vice President--Real Estate Investments
and Operations of the Company in 1982. He has held various positions with
predecessors of the Company since 1977. He is President and Chief Executive
Officer of Reliance Development Group, Inc., the real estate management
subsidiary of the Company.
Dennis J. O'Leary joined the Company in 1985 as Vice President--Director of
Taxes. Prior thereto, he was a partner at the accounting firm of Touche Ross &
Co. (predecessor of Deloitte & Touche LLP) since 1980 and was associated with
the firm since 1975. In 1987 he was elected Senior Vice President--Taxes.
22
<PAGE>
Fred M. Schriever was elected Senior Vice President of the Company in 1982.
He has held various positions with predecessors of the Company since 1971. Mr.
Schriever is the Chairman of the Board and President of RCG International, Inc.
Philip S. Sherman was elected Vice President--Group Controller of the
Company in l984 and in 1987 he was elected Senior Vice President--Group
Controller. He has held various positions with predecessors of the Company since
l980.
Bruce L. Sokoloff was elected Senior Vice President--Administration of the
Company in 1982. He has held various positions with predecessors of the Company
since 1973. He is a director of Individual Investor Group, Inc. Mr. Sokoloff is
the brother-in-law of Messrs. Saul P. Steinberg and Robert M. Steinberg.
Howard E. Steinberg, Esq. joined the Company in March 1983, as Senior Vice
President, General Counsel and Corporate Secretary. Prior thereto, he was a
partner in the law firm of Dewey, Ballantine, Bushby, Palmer & Wood.
James E. Yacobucci became a Director of the Company and Senior Vice
President--Investments of Reliance Insurance in May 1989. He became Senior Vice
President--Investments of the Company in December 1990. From January 1982
through April 1989 he was a general partner of Cumberland Associates, a private
investment manager.
Officers are not elected for a fixed term of office but serve at the
discretion of the Board of Directors.
23
<PAGE>
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
See the information in 'Market and Dividend Information for Common Stock'
on page 56 of the Reliance Group Holdings' 1994 Annual Report, which information
is incorporated herein by reference.
ITEM 6. SELECTED FINANCIAL DATA.
See the information in 'Reliance Group Holdings, Inc. & Subsidiaries
Selected Financial Data' on pages 17 and 18 of the Reliance Group Holdings' 1994
Annual Report, which information is incorporated herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
See the information in 'Reliance Group Holdings, Inc. & Subsidiaries
Financial Review' on pages 20 through 27 of the Reliance Group Holdings' 1994
Annual Report, which information is incorporated herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The financial statements of the Company and its consolidated subsidiaries,
included on pages 28 through 53 of the Reliance Group Holdings' 1994 Annual
Report, which information is incorporated herein by reference, are listed in
Item 14 below.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Information regarding the executive officers of the Company is included in
Part I of this report under the caption 'Executive Officers of the Registrant.'
Information regarding the directors of the Company is incorporated herein
by reference from its Proxy Statement for the Annual Meeting of Stockholders to
be held May 11, 1995, under the caption 'Proposal 1-- Election of Directors.'
ITEM 11. EXECUTIVE COMPENSATION.
See the information in the Company's Proxy Statement for the Annual Meeting
of Stockholders to be held May 11, 1995, under the caption 'Executive
Compensation,' which information (other than the information under the captions
'Executive Compensation--Report of Compensation Committees of the Board' and
'Executive Compensation--Performance Graph') is incorporated herein by
reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
See the information in the Company's Proxy Statement for the Annual Meeting
of Stockholders to be held May 11, 1995, under the caption 'Security Ownership
of Certain Beneficial Owners and Management,' which information is incorporated
herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
See the information in the Company's Proxy Statement for the Annual Meeting
of Stockholders to be held May 11, 1995, under the captions 'Executive
Compensation--Compensation Committee Interlocks and Insider Participation' and
'Related Party Transactions,' which information is incorporated herein by
reference.
24
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(A) 1. FINANCIAL STATEMENTS.
The consolidated financial statements of Reliance Group Holdings, Inc. and
Subsidiaries, which appear on pages 28 through 53 of the Reliance Group Holdings
1994 Annual Report, are incorporated herein by reference.
<TABLE>
<CAPTION>
PAGE REFERENCE
---------------------
1994
ANNUAL
FORM 10-K REPORT
--------- ------
<S> <C> <C>
RELIANCE GROUP HOLDINGS, INC. AND SUBSIDIARIES:
Independent Auditors' Report........................................................... A-1
Consolidated Financial Statements at December 31, 1994 and 1993 and for the three years
ended December 31, 1994:
Statement of Operations........................................................... 28
Balance Sheet..................................................................... 29
Statement of Changes in Shareholders' Equity...................................... 30
Statement of Cash Flows........................................................... 31
Notes to Financial Statements (1-18).............................................. 32-53
</TABLE>
2. FINANCIAL STATEMENT SCHEDULES
<TABLE>
<S> <C> <C>
I --Summary of Investments--Other Than Investments in Related Parties.................... A-2
II --Condensed Financial Information of the Registrant at December 31, 1994 and
1993 and for the three years ended December 31, 1994:
Statement of Operations......................................................... A-3
Balance Sheet................................................................... A-4
Statement of Cash Flows......................................................... A-5
III--Supplementary Insurance Information................................................. A-6
IV--Reinsurance.......................................................................... A-7
VI--Supplemental Information Concerning Property and
Casualty Insurance Operations..................................................... A-8
</TABLE>
Pursuant to Rule 1-02(v) of Regulation S-X, Reliance Insurance Group's
investment in Zenith National Insurance Corp. meets the definition of a
'significant subsidiary.' Zenith National Insurance Corp. files financial
statements with the Securities and Exchange Commission which should be referred
to for additional information.
25
<PAGE>
3. EXHIBITS
<TABLE>
<S> <C>
3.1 Reliance Group Holdings' Certificate of Incorporation, as amended (incorporated by reference to
Exhibit 3(a) to Registration Statement No. 2-77043).
3.2 Amendment to Exhibit 3.1, as filed with the Secretary of State of the State of Delaware on July 22,
1986 (incorporated by reference to Exhibit 3.2 to Registration Statement No. 33-7493).
3.3 Reliance Group Holdings' By-Laws, as amended (incorporated by reference to Exhibit 3.3 to Reliance
Group Holdings' Annual Report on Form 10-K for the year ended December 31, 1991).
3.4 Amendment to Exhibit 3.1, as filed with the Secretary of State of the State of Delaware on May 27,
1993 (incorporated by reference to Exhibit 4.5 to Registration Statement No. 33-67396).
*4.
+10.1 1990 Management Incentive Plan of Reliance Insurance Company (incorporated by reference to Exhibit
10.2 to Reliance Insurance Company's Annual Report on Form 10-K for the year ended December 31, 1990).
+10.2 1991 Management Incentive Plan of Reliance Insurance Company (incorporated by reference to Exhibit
10.3 to Reliance Insurance Company's Annual Report on Form 10-K for the year ended December 31, 1991).
+10.3 1992 Management Incentive Plan of Reliance Insurance Company (incorporated by reference to Exhibit
10.4 to Reliance Insurance Company's Annual Report on Form 10-K for the year ended December 31, 1992).
+10.4 1993 Management Incentive Plan of Reliance Insurance Company (incorporated by reference to Exhibit
10.4 to Reliance Insurance Company's Annual Report on Form 10-K for the year ended December 31, 1993).
+10.5 1994 Management Incentive Plan of Reliance Insurance Company (incorporated by reference to Exhibit
10.5 to Reliance Insurance Company's Annual Report on Form 10-K for the year ended December 31, 1994).
+10.6 Employment Agreement between Reliance Group Holdings and Saul P. Steinberg, dated as of January 1,
1992 (incorporated by reference to Exhibit 10.6 to Reliance Group Holdings' Annual Report on Form 10-K
for the year ended December 31, 1991).
+10.7 First Amendment, dated as of January 1, 1994, to Employment Agreement between Reliance Group Holdings
and Saul P. Steinberg, dated as of January 1, 1992 (incorporated by reference to Exhibit 10.6 to
Reliance Group Holdings' Annual Report on Form 10-K for the year ended December 31, 1993).
+10.8 Second Amendment, dated as of March 31, 1994, to Employment Agreement, dated as of January 1, 1992,
between Reliance Group Holdings and Saul P. Steinberg (incorporated by reference to Exhibit 10.1 to
Reliance Group Holdings' Quarterly Report on Form 10-Q for the quarter ended March 31, 1994).
+10.9 Employment Agreement between Reliance Insurance Company and Saul P. Steinberg, dated as of January 1,
1992 (incorporated by reference to Exhibit 10.7 to Reliance Group Holdings' Annual Report on Form 10-K
for the year ended December 31, 1991).
</TABLE>
------------------
* Neither Reliance Group Holdings nor its subsidiaries is a party to any
instrument relating to long-term debt under which the securities authorized
exceed 10% of the total consolidated assets of Reliance Group Holdings and
its subsidiaries. Copies of instruments relating to long-term debt of lesser
amounts will be provided to the Securities and Exchange Commission upon
request.
+ Management contract or compensatory plan or arrangement required to be filed
as an Exhibit to this Form 10-K pursuant to Item 14(c).
26
<PAGE>
<TABLE>
<S> <C>
+10.10 First Amendment, dated as of January 1, 1994, to Employment Agreement between Reliance Insurance
Company and Saul P. Steinberg, dated as of January 1, 1992 (incorporated by reference to Exhibit 10.6
to Reliance Insurance Company's Annual Report on Form 10-K for the year ended December 31, 1993).
+10.11 Second Amendment, dated as of March 31, 1994, to Employment Agreement, dated as of January 1, 1992,
between Reliance Insurance Company and Saul P. Steinberg (incorporated by reference to Exhibit 10.1 to
Reliance Insurance Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1994).
+10.12 Employment Agreement between Reliance Group Holdings and Robert M. Steinberg, dated as of January 1,
1994 (incorporated by reference to Exhibit 10.9 to Reliance Group Holdings' Annual Report on Form 10-K
for the year ended December 31, 1993).
+10.13 First Amendment, dated as of March 31, 1994, to Employment Agreement, dated as of January 1, 1994,
between Reliance Group Holdings and Robert M. Steinberg (incorporated by reference to Exhibit 10.3 to
Reliance Group Holdings' Quarterly Report on Form 10-Q for the quarter ended March 31, 1994).
+10.14 Employment Agreement between Reliance Insurance Company and Robert M. Steinberg, dated as of January
1, 1994 (incorporated by reference to Exhibit 10.7 to Reliance Insurance Company's Annual Report on
Form 10-K for the year ended December 31, 1993).
+10.15 First Amendment, dated as of March 31, 1994, to Employment Agreement, dated as of January 1, 1994,
between Reliance Insurance Company and Robert M. Steinberg (incorporated by reference to Exhibit 10.2
to Reliance Insurance Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1994).
+10.16 1986 Stock Option Plan of Reliance Group Holdings, as amended (incorporated by reference to Exhibit
19.2 to Reliance Group Holdings' Quarterly Report on Form 10-Q for the quarter ended June 30, 1990).
+10.17 The 1994 Stock Option Plan for Non-Employee Directors (incorporated by reference to Exhibit 10.1 to
Reliance Group Holdings' Quarterly Report on Form 10-Q for the quarter ended June 30, 1994).
+10.18 The Reliance Group Holdings, Inc. 1994 Stock Option Plan (incorporated by reference to Exhibit 10.2 to
Reliance Group Holdings' Quarterly Report on Form 10-Q for the quarter ended June 30, 1994).
+10.19 The Reliance Group Holdings, Inc. Executive Bonus Plan (incorporated by reference to Exhibit 10.3 to
Reliance Group Holdings' Quarterly Report on Form 10-Q for the quarter ended June 30, 1994).
+10.20 The 1995 Amendment to The Reliance Group Holdings, Inc. Executive Bonus Plan.
+10.21 The Executive Bonus Plan for James E. Yacobucci, Senior Vice President-Investments, of Reliance Group
Holdings (incorporated by reference to Exhibit 10.4 to Reliance Group Holdings' Quarterly Report on
Form 10-Q for the quarter ended June 30, 1994).
+10.22 Reliance National Risk Specialists 1988 Key Management Incentive Plan (incorporated by reference to
Exhibit 10.9 to Reliance Insurance Company's Annual Report on Form 10-K for the year ended December
31, 1988).
+10.23 Reliance National Risk Specialists 1992 Key Management Incentive Plan (incorporated by reference to
Exhibit 10.9 to Reliance Insurance Company's Annual Report on Form 10-K for the year ended December
31, 1993).
</TABLE>
------------------
+ Management contract or compensatory plan or arrangement required to be filed
as an Exhibit to this Form 10-K pursuant to Item 14(c).
27
<PAGE>
<TABLE>
<S> <C>
+10.24 Reliance National Risk Specialists 1993 Key Management Incentive Plan (incorporated by reference to
Exhibit 10.10 to Reliance Insurance Company's Annual Report on Form 10-K for the year ended December
31, 1993).
+10.25 Reliance National Risk Specialists 1994 Key Management Incentive Plan (incorporated by reference to
Exhibit 10.14 to Reliance Insurance Company's Annual Report on Form 10-K for the year ended December
31, 1994).
+10.26 Memorandum, dated February 8, 1989, summarizing employment arrangements between Reliance Insurance
Company and Dennis Busti (incorporated by reference to Exhibit 10.8 to Reliance Insurance Company's
Annual Report on Form 10-K for the year ended December 31, 1988).
+10.27 Employment Agreement, dated as of September 12, 1994, between Reliance Insurance Company and Dean W.
Case (incorporated by reference to Exhibit 10.3 to Reliance Insurance Company's Quarterly Report on
Form 10-Q for the quarter ended September 30, 1994).
10.28 Asset Purchase Agreement, dated July 24, 1992, between Frank B. Hall & Co. Inc. ('Hall') and Aon
Corporation ('Aon') (incorporated by reference to Exhibit 2.1 to Reliance Group Holdings' Quarterly
Report on Form 10-Q for the quarter ended June 30, 1992).
10.29 Agreement and Plan of Merger, dated as of July 24, 1992, among Reliance Group Holdings, Hall and
Prometheus Liquidating Corp. (incorporated by reference to Exhibit 2.2 to Reliance Group Holdings'
Quarterly Report on Form 10-Q for the quarter ended June 30, 1992).
10.30 Parent Undertaking Agreement, dated July 24, 1992, among Reliance Group Holdings, Inc., Reliance
Insurance Company and Aon (incorporated by reference to Exhibit 28.1 to Reliance Group Holdings'
Quarterly Report on Form 10-Q for the quarter ended June 30, 1992).
10.31 Employee Benefit Agreement, dated July 24, 1992, among Reliance Group Holdings and Aon (incorporated
by reference to Exhibit 28.2 to Reliance Group Holdings' Quarterly Report on Form 10-Q for the quarter
ended June 30, 1992).
10.32 Amendment, dated November 2, 1992, to Exhibit 10.28 (incorporated by reference to Exhibit 2.1 to
Reliance Group Holdings' Quarterly Report on Form 10-Q for the quarter ended September 30, 1992).
10.33 Underwriting Agreement, dated October 30, 1992, among Shearson Lehman Brothers Inc., Salomon Brothers,
Inc., Commonwealth Land Title Insurance Company ('Commonwealth'), Commonwealth Mortgage Assurance
Company ('CMAC') and CMAC Investment Corporation ('CIC') (incorporated by reference to Exhibit 10.1 to
Reliance Group Holdings' Quarterly Report on Form 10-Q for the quarter ended September 30, 1992).
10.34 International Underwriting Agreement, dated October 30, 1992, among Lehman Brothers International
Limited, Salomon Brothers International Limited, Commonwealth, CMAC and CIC (incorporated by reference
to Exhibit 10.2 to Reliance Group Holdings' Quarterly Report on Form 10-Q for the quarter ended
September 30, 1992).
10.35 Settlement Agreement and Release, dated June 2, 1989, between James P. Corcoran, Superintendent of
Insurance of the State of New York, as Liquidator of Union Indemnity Insurance Company of New York,
Inc. and Hall (now known as Prometheus Funding Corp.) (incorporated herein by reference to Exhibit
10.01 to Frank B. Hall & Co. Inc.'s report on Form 10-Q for the quarter ended June 30, 1989).
10.36 Stock Purchase Agreement, dated April 3, 1993, by and among Reliance Group Holdings, Inc., Reliance
Insurance Company and General Electric Capital Corporation (incorporated by reference to Exhibit 10.22
to Reliance Insurance Company's Annual Report on Form 10-K for the year ended December 31, 1992).
</TABLE>
------------------
+ Management contract or compensatory plan or arrangement required to be
filed as an Exhibit to this Form 10-K pursuant to Item 14(c).
28
<PAGE>
<TABLE>
<S> <C>
10.37 First Amendment, dated as of May 31, 1993, to Exhibit 10.36 (incorporated by reference to Exhibit 2.2
to Reliance Insurance Company's Current Report on Form 8-K dated (date of earliest event reported)
July 14, 1993).
10.38 Amendment, dated July 14, 1993, to Exhibit 10.36 (incorporated by reference to Exhibit 2.3 to Reliance
Insurance Company's Current Report on Form 8-K dated (date of earliest event reported) July 14, 1993).
13.1 Reliance Group Holdings 1994 Annual Report.
21.1 List of Subsidiaries of Reliance Group Holdings.
23.1 Consent of Deloitte & Touche LLP.
27.1 Financial Data Schedule.
**++28.1 Schedule P from the statutory reports of the Reliance Property and Casualty Companies.
**99.1 Annual Report on Form 11-K of Reliance Insurance Company Savings Incentive Plan for the year ended
December 31, 1994.
</TABLE>
------------------
++ Schedule P from the statutory reports of Zenith National Insurance Corp.,
34.7% of the outstanding common stock of which is owned by the Reliance
Insurance Group, is omitted herefrom as such Schedule P is filed directly
with the Securities and Exchange Commission.
** To be filed by Amendment.
(B) REPORTS ON FORM 8-K
During the last quarter of the period for which this report is filed, the
Company filed a Report on Form 8-K, dated (date of earliest event reported)
November 28, 1994, reporting an Item 5 matter regarding an order of the
insurance commissioner of California.
29
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON
ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, ON THE 30TH DAY OF
MARCH, 1995.
RELIANCE GROUP HOLDINGS, INC.
By: SAUL P. STEINBERG
---------------------------------
SAUL P. STEINBERG
CHAIRMAN OF THE BOARD
AND CHIEF EXECUTIVE OFFICER
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS
REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE
REGISTRANT AND IN THE CAPACITIES AND ON THE DATES INDICATED.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
------------------------------------------------------ --------------------------------- --------------
<S> <C> <C>
SAUL P. STEINBERG Chairman of the Board, Principal March 30, 1995
--------------------- Executive Officer and Director
SAUL P. STEINBERG
GEORGE E. BELLO Principal Accounting Officer and March 30, 1995
--------------------- Director
GEORGE E. BELLO
LOWELL C. FREIBERG Principal Financial Officer and March 30, 1995
--------------------- Director
LOWELL C. FREIBERG
GEORGE R. BAKER Director March 30, 1995
---------------------
GEORGE R. BAKER
CARTER BURDEN Director March 30, 1995
---------------------
CARTER BURDEN
DENNIS A. BUSTI Director March 30, 1995
---------------------
DENNIS A. BUSTI
</TABLE>
30
<PAGE>
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
------------------------------------------------------ --------------------------------- --------------
<S> <C> <C>
DEAN W. CASE Director March 30, 1995
---------------------
DEAN W. CASE
THOMAS P. GERRITY Director March 30, 1995
---------------------
THOMAS P. GERRITY
JEWELL J. MCCABE Director March 30, 1995
---------------------
JEWELL J. MCCABE
IRVING SCHNEIDER Director March 30, 1995
---------------------
IRVING SCHNEIDER
--------------------- Director
BERNARD L. SCHWARTZ
RICHARD E. SNYDER Director March 30, 1995
---------------------
RICHARD E. SNYDER
THOMAS J. STANTON, JR. Director March 30, 1995
---------------------
THOMAS J. STANTON, JR.
ROBERT M. STEINBERG Director March 30, 1995
---------------------
ROBERT M. STEINBERG
JAMES E. YACOBUCCI Director March 30, 1995
---------------------
JAMES E. YACOBUCCI
</TABLE>
31
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors and Shareholders
Reliance Group Holdings, Inc.
New York, New York
We have audited the consolidated financial statements of Reliance Group
Holdings, Inc. and subsidiaries as of December 31, 1994 and 1993, and for each
of the three years in the period ended December 31, 1994, and have issued our
report thereon dated February 22, 1995 (which report includes an explanatory
paragraph concerning the adoption of Statement of Financial Accounting Standards
No. 109); such financial statements and report are included in your 1994 Annual
Report to Shareholders and are incorporated herein by reference. Our audits also
included the financial statement schedules of Reliance Group Holdings, Inc.,
listed in Item 14. These financial statement schedules are the responsibility of
the Company's management. Our responsibility is to express an opinion based on
our audits. In our opinion, such financial statement schedules, when considered
in relation to the basic consolidated financial statements taken as a whole,
present fairly in all material respects the information set forth therein.
/s/ DELOITTE & TOUCHE LLP
New York, New York
February 22, 1995
A-1
<PAGE>
SCHEDULE I
ITEM 14(A)2
RELIANCE GROUP HOLDINGS, INC. AND SUBSIDIARIES
SUMMARY OF INVESTMENTS OF INSURANCE SUBSIDIARIES--OTHER THAN INVESTMENTS IN
RELATED PARTIES
DECEMBER 31, 1994
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------
COLUMN A COLUMN B COLUMN C COLUMN D
------------------------------------------------------------------------------------------------------------------
AMOUNT AT WHICH
SHOWN IN THE
TYPE OF INVESTMENT COST VALUE BALANCE SHEET
------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
(In thousands)
Fixed maturities available for sale:
Bonds and notes:
United States government and government agencies and
authorities............................................... $ 528,297 $ 495,007 $ 495,007
States, municipalities and political subdivisions............ 36,982 37,306 37,306
Foreign--government.......................................... 66,677 63,512 63,512
Foreign--other............................................... 103,263 99,032 99,032
Public utilities............................................. 96,631 88,602 88,602
Convertibles and bonds with warrants attached................ 88,230 113,398 113,398
All other corporate bonds and notes.......................... 676,478 601,656 601,656
Redeemable preferred stocks....................................... 349,361 340,799 340,799
---------- ---------- ---------------
1,945,919 1,839,312 1,839,312
---------- ---------- ---------------
Fixed maturities held for investment:
Bonds and notes:
States, municipalities and political subdivisions............ 11,835 10,980 11,835
Foreign--government.......................................... 123,306 115,647 123,306
Foreign--other............................................... 20,630 20,501 20,630
Public utilities............................................. 536,746 477,942 536,746
All other corporate bonds and notes.......................... 322,750 285,521 322,750
Redeemable preferred stocks....................................... 150,753 142,960 150,753
---------- ---------- ---------------
1,166,020 1,053,551 1,166,020
---------- ---------- ---------------
Equity securities:
Common stocks:
Public utilities............................................. 56,403 55,439 55,439
Industrial and other......................................... 117,076 221,231 221,231
Nonredeemable preferred stocks.................................... 309,050 287,966 287,966
---------- ---------- ---------------
482,529 564,636 564,636
---------- ---------- ---------------
Short-term investments.............................................. 229,906 229,906 229,906
---------- ---------- ---------------
$3,687,405
----------
----------
Mortgage loans(1)................................................... 15,680 15,680
Investments in real estate(2)....................................... 279,292 279,292
---------- ---------------
$4,119,346 $ 4,094,846
---------- ---------------
---------- ---------------
</TABLE>
(1) In the consolidated financial statements, mortgage loans are included in
premiums and other receivables.
(2) Excludes investments in real estate held by non-insurance subsidiaries with
a cost and carrying value of $12,374,000.
A-2
<PAGE>
SCHEDULE II
ITEM 14(A)2
RELIANCE GROUP HOLDINGS, INC.
(PARENT COMPANY)
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31 1994 1993 1992
----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
(In thousands)
REVENUES:
Dividends from subsidiaries.................................................. $110,000 $200,000 $120,000
Interest (including $4,392, $5,949 and $6,879 from subsidiaries)............. 4,485 6,611 7,497
Other........................................................................ -- 197 222
-------- -------- --------
114,485 206,808 127,719
-------- -------- --------
EXPENSES:
Interest (including $14,864, $20,605 and $22,821 to subsidiaries)............ 82,239 102,051 108,770
General and administrative................................................... 37,024 34,846 34,464
-------- -------- --------
119,263 136,897 143,234
-------- -------- --------
(4,778) 69,911 (15,515)
Income tax benefit........................................................... 35,067 79,781 49,417
-------- -------- --------
INCOME BEFORE EQUITY IN SUBSIDIARIES AND INVESTEE COMPANY.................... 30,289 149,692 33,902
Equity in subsidiaries (net income (loss) less dividends received):
Income (loss) from continuing operations................................ 4,054 (76,597) (82,328)
Income from discontinued operations..................................... -- -- 64,105
Loss on disposal of discontinued operations............................. -- -- (60,000)
Equity in investee company.............................................. 9,478 12,441 5,206
-------- -------- --------
INCOME (LOSS) BEFORE EXTRAORDINARY ITEMS AND CUMULATIVE EFFECT OF ACCOUNTING
CHANGE..................................................................... 43,821 85,536 (39,115)
Extraordinary item--early extinguishment of debt............................. -- (23,017) --
Extraordinary item--early extinguishment of subsidiary debt.................. -- (4,905) 3,460
Cumulative effect of change in accounting for income taxes................... -- 1,576 --
Cumulative effect of change in accounting for subsidiaries'
income taxes............................................................... -- 14,335 --
-------- -------- --------
NET INCOME (LOSS)............................................................ $ 43,821 $ 73,525 $(35,655)
-------- -------- --------
-------- -------- --------
</TABLE>
A-3
<PAGE>
SCHEDULE II
ITEM 14(A)2
RELIANCE GROUP HOLDINGS, INC.
(PARENT COMPANY)
BALANCE SHEET
<TABLE>
<CAPTION>
ASSETS DECEMBER 31 1994 1993
-----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
(in thousands, except per-share amount)
Cash.................................................................................. $ 404 $ 748
Investments in subsidiaries........................................................... 1,338,617 1,471,355
Due from subsidiaries................................................................. 97,996 90,786
Excess of cost over fair value of net assets acquired, less accumulated
amortization........................................................................ 30,200 31,309
Other assets.......................................................................... 28,090 32,158
---------- ----------
$1,495,307 $1,626,356
---------- ----------
---------- ----------
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY
-----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Accounts payable and accrued expenses................................................. $ 49,092 $ 42,007
Federal income taxes, including deferred taxes........................................ 86,946 83,040
Debentures............................................................................ 650,000 650,000
Due to subsidiaries................................................................... 322,519 332,683
---------- ----------
1,108,557 1,107,730
---------- ----------
Contingencies and commitments
Shareholders' equity:
Common stock, par value $.10 per-share, 225,000 shares authorized,
113,127 and 111,517 shares issued and outstanding................................ 11,313 11,152
Additional paid-in capital.......................................................... 533,979 525,289
Retained earnings (deficit) (including undistributed net income of subsidiaries of
$328,457 and $314,925)........................................................... (110,479) (118,143)
Net unrealized gain (loss) on investments of subsidiaries........................... (27,881) 115,023
Net unrealized loss on foreign currency translation of subsidiaries................. (20,182) (14,695)
---------- ----------
386,750 518,626
---------- ----------
$1,495,307 $1,626,356
---------- ----------
---------- ----------
</TABLE>
A-4
<PAGE>
SCHEDULE II
ITEM 14(A)2
RELIANCE GROUP HOLDINGS, INC.
(PARENT COMPANY)
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31 1994 1993 1992
-----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)............................................................ $ 43,821 $ 73,525 $(35,655)
Excess of dividends received over equity in net loss of subsidiaries
and investee company....................................................... -- -- 69,557
Equity in undistributed net income of subsidiaries
and investee company....................................................... (38,345) (45,210) --
Accounts payable, accrued expenses and other................................. 16,962 11,893 7,932
-------- --------- --------
22,438 40,208 41,834
-------- --------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in subsidiary..................................................... -- (79,728) --
Other--net................................................................... (1,388) (573) 9,753
-------- --------- --------
(1,388) (80,301) 9,753
-------- --------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in term loans....................................................... -- 35,000 20,000
Increase in amount due to/from subsidiaries--net............................. 7,439 38,564 6,358
Decrease in short-term debt--net............................................. -- -- (8,667)
Repayments of term loans..................................................... -- (294,500) (30,000)
Issuance of debentures....................................................... -- 650,000 --
Issuance of common stock..................................................... 7,324 189,536 --
Repurchases of debentures and notes.......................................... -- (536,193) (25,905)
Dividends.................................................................... (36,157) (29,652) (24,618)
Repayment of preferred stock................................................. -- (25,000) --
Collection of receivable pertaining to the issuance of common stock.......... -- 10,625 --
-------- --------- --------
(21,394) 38,380 (62,832)
-------- --------- --------
Decrease in cash............................................................. (344) (1,713) (11,245)
Cash, beginning of year...................................................... 748 2,461 13,706
-------- --------- --------
Cash, end of year............................................................ $ 404 $ 748 $ 2,461
-------- --------- --------
-------- --------- --------
</TABLE>
SUPPLEMENTAL DISCLOSURE OF NON-CASH FINANCING ACTIVITIES:
In 1994 and 1993, non-cash dividends from subsidiaries of $24,813,000 and
$99,936,000 were recorded as a reduction of due to subsidiaries.
A-5
<PAGE>
SCHEDULE III
ITEM 14(A)2
RELIANCE GROUP HOLDINGS, INC. AND SUBSIDIARIES
SUPPLEMENTARY INSURANCE INFORMATION
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------------------
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E COLUMN F COLUMN G COLUMN H
------------------------------------------------------------------------------------------------------------------------------
AMORTIZATION
DEFERRED UNPAID POLICY OF DEFERRED
POLICY CLAIMS AND NET CLAIMS AND POLICY
ACQUISITION RELATED UNEARNED PREMIUMS INVESTMENT SETTLEMENT ACQUISITION
SEGMENT COSTS EXPENSES PREMIUMS EARNED INCOME EXPENSES COSTS
------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
(In thousands)
YEAR ENDED DECEMBER 31, 1994:
Property and casualty............. $ 181,938 $5,581,483 $1,288,454 $1,777,318 $232,299 $1,297,093 $387,924
Title............................. -- 228,063 -- 856,774 26,613 75,867 --
----------- ---------- ---------- ---------- ---------- ---------- ------------
$ 181,938 $5,809,546 $1,288,454 $2,634,092 $258,912 $1,372,960 $387,924
----------- ---------- ---------- ---------- ---------- ---------- ------------
----------- ---------- ---------- ---------- ---------- ---------- ------------
Year Ended December 31, 1993:
Property and casualty............. $ 178,129 $5,048,442 $1,276,331 $1,571,539 $216,432 $1,235,594 $327,437
Title............................. -- 204,695 -- 893,364 24,282 81,803 --
----------- ---------- ---------- ---------- ---------- ---------- ------------
$ 178,129 $5,253,137 $1,276,331 $2,464,903 $240,714 $1,317,397 $327,437
----------- ---------- ---------- ---------- ---------- ---------- ------------
----------- ---------- ---------- ---------- ---------- ---------- ------------
Year Ended December 31, 1992:
Property and casualty............. $ 123,350 $4,571,792 $1,203,207 $1,535,740 $189,287 $1,289,598 $276,154
Title and mortgage................ -- 173,328 -- 826,493 26,224 100,562 13,437
----------- ---------- ---------- ---------- ---------- ---------- ------------
$ 123,350 $4,745,120 $1,203,207 $2,362,233 $215,511 $1,390,160 $289,591
----------- ---------- ---------- ---------- ---------- ---------- ------------
----------- ---------- ---------- ---------- ---------- ---------- ------------
<CAPTION>
---------------------------------------------------------
---------------------------------------------------------
COLUMN A COLUMN I COLUMN J
---------------------------------------------------------
OTHER
INSURANCE PREMIUMS
SEGMENT EXPENSES WRITTEN
---------------------------------------------------------
<S> <C> <C>
(In thousands)
YEAR ENDED DECEMBER 31, 1994:
Property and casualty............. $183,755 $1,764,290
----------
----------
Title............................. 776,149
--------
$959,904
--------
--------
Year Ended December 31, 1993:
Property and casualty............. $174,609 $1,770,597
----------
----------
Title............................. 780,138
--------
$954,747
--------
--------
Year Ended December 31, 1992:
Property and casualty............. $188,826 $1,541,560
----------
----------
Title and mortgage................ 691,048
--------
$879,874
--------
--------
</TABLE>
A-6
<PAGE>
SCHEDULE IV
ITEM 14(A)2
RELIANCE GROUP HOLDINGS, INC. AND SUBSIDIARIES
REINSURANCE
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------------------------
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E COLUMN F
-------------------------------------------------------------------------------------------------------------------
CEDED ASSUMED PERCENTAGE
TO FROM OF AMOUNT
GROSS OTHER OTHER NET ASSUMED
AMOUNT COMPANIES COMPANIES AMOUNT TO NET
-------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
(Dollars in thousands)
YEAR ENDED DECEMBER 31, 1994:
Premiums:
Property and casualty........................ $2,630,549 $1,198,629 $ 345,398 $1,777,318 19.43%
Title........................................ 854,679 1,370 3,465 856,774 .40
---------- ---------- --------- ----------
$3,485,228 $1,199,999 $ 348,863 $2,634,092 13.24
---------- ---------- --------- ----------
---------- ---------- --------- ----------
Year Ended December 31, 1993:
Premiums:
Property and casualty........................ $2,531,478 $1,264,361 $ 304,422 $1,571,539 19.37
Title........................................ 891,843 1,411 2,932 893,364 .33
---------- ---------- --------- ----------
$3,423,321 $1,265,772 $ 307,354 $2,464,903 12.47
---------- ---------- --------- ----------
---------- ---------- --------- ----------
Year Ended December 31, 1992:
Premiums:
Property and casualty........................ $2,350,216 $1,127,206 $ 312,730 $1,535,740 20.36
Title and mortgage........................... 828,886 6,080 3,687 826,493 .45
---------- ---------- --------- ----------
$3,179,102 $1,133,286 $ 316,417 $2,362,233 13.39
---------- ---------- --------- ----------
---------- ---------- --------- ----------
</TABLE>
A-7
<PAGE>
SCHEDULE VI
ITEM 14(A)2
RELIANCE GROUP HOLDINGS, INC. AND SUBSIDIARIES
SUPPLEMENTAL INFORMATION CONCERNING PROPERTY AND CASUALTY INSURANCE OPERATIONS
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------------------------------------
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E COLUMN F COLUMN G COLUMN H
-------------------------------------------------------------------------------------------------------------------------------
CLAIMS AND
UNPAID SETTLEMENT EXPENSES
DEFERRED CLAIMS INCURRED RELATED TO
AFFILIATION POLICY AND DISCOUNT NET --------------------
WITH ACQUISITION RELATED DEDUCTED IN UNEARNED EARNED INVESTMENT CURRENT PRIOR
REGISTRANT COSTS EXPENSES COLUMN C (A) PREMIUMS PREMIUMS INCOME YEAR YEARS
-------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
(In thousands)
Consolidated
subsidiaries:
YEAR ENDED
DECEMBER 31, 1994..... $ 181,938 $5,581,483 $245,737 $1,288,454 $1,777,318 $ 232,299 $1,274,649 $22,444
----------- ---------- ------------ ---------- ---------- ---------- ---------- -------
----------- ---------- ------------ ---------- ---------- ---------- ---------- -------
Year Ended
December 31, 1993..... $ 178,129 $5,048,442 $284,681 $1,276,331 $1,571,539 $ 216,432 $1,195,425 $40,169
----------- ---------- ------------ ---------- ---------- ---------- ---------- -------
----------- ---------- ------------ ---------- ---------- ---------- ---------- -------
Year Ended
December 31, 1992..... $ 123,350 $4,571,792 $289,500 $1,203,207 $1,535,740 $ 189,287 $1,258,111 $31,487
----------- ---------- ------------ ---------- ---------- ---------- ---------- -------
----------- ---------- ------------ ---------- ---------- ---------- ---------- -------
<CAPTION>
----------------------------------------------------------------
----------------------------------------------------------------
COLUMN A COLUMN I COLUMN J COLUMN K
----------------------------------------------------------------
AMORTIZATION PAID
OF DEFERRED CLAIMS
AFFILIATION POLICY AND
WITH ACQUISITION SETTLEMENT PREMIUMS
REGISTRANT COST EXPENSES WRITTEN
<S> <C> <C> <C>
----------------------------------------------------------------
(In thousands)
Consolidated
subsidiaries:
YEAR ENDED
DECEMBER 31, 1994..... $387,924 $1,102,499 $1,764,290
------------ ---------- ----------
------------ ---------- ----------
Year Ended
December 31, 1993..... $327,437 $1,006,659 $1,770,597
------------ ---------- ----------
------------ ---------- ----------
Year Ended
December 31, 1992..... $276,154 $ 961,059 $1,541,560
------------ ---------- ----------
------------ ---------- ----------
</TABLE>
(a) Liabilities for unpaid claims and related expenses for short-duration
contracts which are expected to have fixed, periodic payment patterns are
discounted to present values using statutory annual rates ranging from
3 1/2% to 6% in 1994 and 3% to 6% in 1993 and 1992.
A-8
<PAGE>
EXHIBITS
TO
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED COMMISSION FILE NUMBER
DECEMBER 31, 1994 1-8278
RELIANCE GROUP HOLDINGS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<PAGE>
RELIANCE GROUP HOLDINGS
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER
----------
<S> <C>
3.1 Reliance Group Holdings' Certificate of Incorporation, as amended (incorporated by reference to
Exhibit 3(a) to Registration Statement No. 2-77043).
3.2 Amendment to Exhibit 3.1, as filed with the Secretary of State of the State of Delaware on July 22,
1986 (incorporated by reference to Exhibit 3.2 to Registration Statement No. 33-7493).
3.3 Reliance Group Holdings' By-Laws, as amended (incorporated by reference to Exhibit 3.3 to Reliance
Group Holdings' Annual Report on Form 10-K for the year ended December 31, 1991).
3.4 Amendment to Exhibit 3.1, as filed with the Secretary of State of the State of Delaware on May 27,
1993 (incorporated by reference to Exhibit 4.5 to Registration Statement No. 33-67396).
*4.
+10.1 1990 Management Incentive Plan of Reliance Insurance Company (incorporated by reference to Exhibit
10.2 to Reliance Insurance Company's Annual Report on Form 10-K for the year ended December 31,
1990).
+10.2 1991 Management Incentive Plan of Reliance Insurance Company (incorporated by reference to Exhibit
10.3 to Reliance Insurance Company's Annual Report on Form 10-K for the year ended December 31,
1991).
+10.3 1992 Management Incentive Plan of Reliance Insurance Company (incorporated by reference to Exhibit
10.4 to Reliance Insurance Company's Annual Report on Form 10-K for the year ended December 31,
1992).
+10.4 1993 Management Incentive Plan of Reliance Insurance Company (incorporated by reference to Exhibit
10.4 to Reliance Insurance Company's Annual Report on Form 10-K for the year ended December 31,
1993).
+10.5 1994 Management Incentive Plan of Reliance Insurance Company (incorporated by reference to Exhibit
10.5 to Reliance Insurance Company's Annual Report on Form 10-K for the year ended December 31,
1994).
+10.6 Employment Agreement between Reliance Group Holdings and Saul P. Steinberg, dated as of January 1,
1992 (incorporated by reference to Exhibit 10.6 to Reliance Group Holdings' Annual Report on Form
10-K for the year ended December 31, 1991).
+10.7 First Amendment, dated as of January 1, 1994, to Employment Agreement between Reliance Group Holdings
and Saul P. Steinberg, dated as of January 1, 1992 (incorporated by reference to Exhibit 10.6 to
Reliance Group Holdings' Annual Report on Form 10-K for the year ended December 31, 1993).
+10.8 Second Amendment, dated as of March 31, 1994, to Employment Agreement, dated as of January 1, 1992,
between Reliance Group Holdings and Saul P. Steinberg (incorporated by reference to Exhibit 10.1 to
Reliance Group Holdings' Quarterly Report on Form 10-Q for the quarter ended March 31, 1994).
</TABLE>
------------------
* Neither Reliance Group Holdings nor its subsidiaries is a party to any
instrument relating to long-term debt under which the securities authorized
exceed 10% of the total consolidated assets of Reliance Group Holdings and
its subsidiaries. Copies of instruments relating to long-term debt of lesser
amounts will be provided to the Securities and Exchange Commission upon
request.
+ Management contract or compensatory plan or arrangement required to be filed
as an Exhibit to this Form 10-K pursuant to Item 14(c).
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER
----------
<S> <C>
+10.9 Employment Agreement between Reliance Insurance Company and Saul P. Steinberg, dated as of January 1,
1992 (incorporated by reference to Exhibit 10.7 to Reliance Group Holdings' Annual Report on Form
10-K for the year ended December 31, 1991).
+10.10 First Amendment, dated as of January 1, 1994, to Employment Agreement between Reliance Insurance
Company and Saul P. Steinberg, dated as of January 1, 1992 (incorporated by reference to Exhibit 10.6
to Reliance Insurance Company's Annual Report on Form 10-K for the year ended December 31, 1993).
+10.11 Second Amendment, dated as of March 31, 1994, to Employment Agreement, dated as of January 1, 1992,
between Reliance Insurance Company and Saul P. Steinberg (incorporated by reference to Exhibit 10.1
to Reliance Insurance Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1994).
+10.12 Employment Agreement between Reliance Group Holdings and Robert M. Steinberg, dated as of January 1,
1994 (incorporated by reference to Exhibit 10.9 to Reliance Group Holdings' Annual Report on Form
10-K for the year ended December 31, 1993).
+10.13 First Amendment, dated as of March 31, 1994, to Employment Agreement, dated as of January 1, 1994,
between Reliance Group Holdings and Robert M. Steinberg (incorporated by reference to Exhibit 10.3 to
Reliance Group Holdings' Quarterly Report on Form 10-Q for the quarter ended March 31, 1994).
+10.14 Employment Agreement between Reliance Insurance Company and Robert M. Steinberg, dated as of January
1, 1994 (incorporated by reference to Exhibit 10.7 to Reliance Insurance Company's Annual Report on
Form 10-K for the year ended December 31, 1993).
+10.15 First Amendment, dated as of March 31, 1994, to Employment Agreement, dated as of January 1, 1994,
between Reliance Insurance Company and Robert M. Steinberg (incorporated by reference to Exhibit 10.2
to Reliance Insurance Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1994).
+10.16 1986 Stock Option Plan of Reliance Group Holdings, as amended (incorporated by reference to Exhibit
19.2 to Reliance Group Holdings' Quarterly Report on Form 10-Q for the quarter ended June 30, 1990).
+10.17 The 1994 Stock Option Plan for Non-Employee Directors (incorporated by reference to Exhibit 10.1 to
Reliance Group Holdings' Quarterly Report on Form 10-Q for the quarter ended June 30, 1994).
+10.18 The Reliance Group Holdings, Inc. 1994 Stock Option Plan (incorporated by reference to Exhibit 10.2
to Reliance Group Holdings' Quarterly Report on Form 10-Q for the quarter ended June 30, 1994).
+10.19 The Reliance Group Holdings, Inc. Executive Bonus Plan (incorporated by reference to Exhibit 10.3 to
Reliance Group Holdings' Quarterly Report on Form 10-Q for the quarter ended June 30, 1994).
+10.20 The 1995 Amendment to The Reliance Group Holdings, Inc. Executive Bonus Plan.
+10.21 The Executive Bonus Plan for James E. Yacobucci, Senior Vice President-Investments, of Reliance Group
Holdings (incorporated by reference to Exhibit 10.4 to Reliance Group Holdings' Quarterly Report on
Form 10-Q for the quarter ended June 30, 1994).
+10.22 Reliance National Risk Specialists 1988 Key Management Incentive Plan (incorporated by reference to
Exhibit 10.9 to Reliance Insurance Company's Annual Report on Form 10-K for the year ended December
31, 1988).
</TABLE>
------------------
+ Management contract or compensatory plan or arrangement required to be
filed as an Exhibit to this Form 10-K pursuant to Item 14(c).
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER
----------
<S> <C>
+10.23 Reliance National Risk Specialists 1992 Key Management Incentive Plan (incorporated by reference to
Exhibit 10.9 to Reliance Insurance Company's Annual Report on Form 10-K for the year ended December
31, 1993).
+10.24 Reliance National Risk Specialists 1993 Key Management Incentive Plan (incorporated by reference to
Exhibit 10.10 to Reliance Insurance Company's Annual Report on Form 10-K for the year ended December
31, 1993).
+10.25 Reliance National Risk Specialists 1994 Key Management Incentive Plan (incorporated by reference to
Exhibit 10.14 to Reliance Insurance Company's Annual Report on Form 10-K for the year ended December
31, 1994).
+10.26 Memorandum, dated February 8, 1989, summarizing employment arrangements between Reliance Insurance
Company and Dennis Busti (incorporated by reference to Exhibit 10.8 to Reliance Insurance Company's
Annual Report on Form 10-K for the year ended December 31, 1988).
+10.27 Employment Agreement, dated as of September 12, 1994, between Reliance Insurance Company and Dean W.
Case (incorporated by reference to Exhibit 10.3 to Reliance Insurance Company's Quarterly Report on
Form 10-Q for the quarter ended September 30, 1994).
10.28 Asset Purchase Agreement, dated July 24, 1992, between Frank B. Hall & Co. Inc. ('Hall') and Aon
Corporation ('Aon') (incorporated by reference to Exhibit 2.1 to Reliance Group Holdings' Quarterly
Report on Form 10-Q for the quarter ended June 30, 1992).
10.29 Agreement and Plan of Merger, dated as of July 24, 1992, among Reliance Group Holdings, Hall and
Prometheus Liquidating Corp. (incorporated by reference to Exhibit 2.2 to Reliance Group Holdings'
Quarterly Report on Form 10-Q for the quarter ended June 30, 1992).
10.30 Parent Undertaking Agreement, dated July 24, 1992, among Reliance Group Holdings, Inc., Reliance
Insurance Company and Aon (incorporated by reference to Exhibit 28.1 to Reliance Group Holdings'
Quarterly Report on Form 10-Q for the quarter ended June 30, 1992).
10.31 Employee Benefit Agreement, dated July 24, 1992, among Reliance Group Holdings and Aon (incorporated
by reference to Exhibit 28.2 to Reliance Group Holdings' Quarterly Report on Form 10-Q for the
quarter ended June 30, 1992).
10.32 Amendment, dated November 2, 1992, to Exhibit 10.28 (incorporated by reference to Exhibit 2.1 to
Reliance Group Holdings' Quarterly Report on Form 10-Q for the quarter ended September 30, 1992).
10.33 Underwriting Agreement, dated October 30, 1992, among Shearson Lehman Brothers Inc., Salomon
Brothers, Inc., Commonwealth Land Title Insurance Company ('Commonwealth'), Commonwealth Mortgage
Assurance Company ('CMAC') and CMAC Investment Corporation ('CIC') (incorporated by reference to
Exhibit 10.1 to Reliance Group Holdings' Quarterly Report on Form 10-Q for the quarter ended
September 30, 1992).
10.34 International Underwriting Agreement, dated October 30, 1992, among Lehman Brothers International
Limited, Salomon Brothers International Limited, Commonwealth, CMAC and CIC (incorporated by
reference to Exhibit 10.2 to Reliance Group Holdings' Quarterly Report on Form 10-Q for the quarter
ended September 30, 1992).
10.35 Settlement Agreement and Release, dated June 2, 1989, between James P. Corcoran, Superintendent of
Insurance of the State of New York, as Liquidator of Union Indemnity Insurance Company of New York,
Inc. and Hall (now known as Prometheus Funding Corp.) (incorporated herein by reference to Exhibit
10.01 to Frank B. Hall & Co. Inc.'s report on Form 10-Q for the quarter ended June 30, 1989).
</TABLE>
------------------
+ Management contract or compensatory plan or arrangement required to be
filed as an Exhibit to this Form 10-K pursuant to Item 14(c).
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER
----------
<S> <C>
10.36 Stock Purchase Agreement, dated April 3, 1993, by and among Reliance Group Holdings, Inc., Reliance
Insurance Company and General Electric Capital Corporation (incorporated by reference to Exhibit
10.22 to Reliance Insurance Company's Annual Report on Form 10-K for the year ended December 31,
1992).
10.37 First Amendment, dated as of May 31, 1993, to Exhibit 10.36 (incorporated by reference to Exhibit 2.2
to Reliance Insurance Company's Current Report on Form 8-K dated (date of earliest event reported)
July 14, 1993).
10.38 Amendment, dated July 14, 1993, to Exhibit 10.36 (incorporated by reference to Exhibit 2.3 to
Reliance Insurance Company's Current Report on Form 8-K dated (date of earliest event reported) July
14, 1993).
13.1 Reliance Group Holdings 1994 Annual Report.
21.1 List of Subsidiaries of Reliance Group Holdings.
23.1 Consent of Deloitte & Touche LLP
27.1 Financial Data Schedule.
**++28.1 Schedule P from the statutory reports of the Reliance Property and Casualty Companies.
**99.1 Annual Report on Form 11-K of Reliance Insurance Company Savings Incentive Plan for the year ended
December 31, 1994.
</TABLE>
------------------
++ Schedule P from the statutory reports of Zenith National Insurance Corp.,
34.7% of the outstanding common stock of which is owned by the Reliance
Insurance Group, is omitted herefrom as such Schedule P is filed directly
with the Securities and Exchange Commission.
** To be filed by Amendment.
Exhibit 10.20
1995 AMENDMENT TO
RELIANCE GROUP HOLDINGS, INC.
EXECUTIVE BONUS PLAN
The Reliance Group Holdings, Inc. Executive Bonus Plan (the
"Plan") was adopted by the Board of Directors of Reliance Group
Holdings, Inc. (the "Company") on March 10, 1994 and approved by
the stockholders of the Company on May 12, 1994. Pursuant to
Article VII, Section 7.1 of the Plan, the Compensation Committee
determined to amend the Plan as set forth below, and by resolution
duly adopted at a meeting held on February 16, 1995 voted to
approve such amendment. Capitalized terms used herein without
definition shall have the meetings assigned to them in the Plan.
1. Section 4.3 of the Plan shall be amended to read in its
entirety as follows:
"4.3 The specific targets for the performance goals set
forth in paragraph 4.2 above shall be as determined by
the Compensation Committee at the time of adoption of
this Plan by the Compensation Committee. For any year
commencing on or after January 1, 1995, the Compensation
Committee shall have the discretion (but not be required)
to modify such specific targets for the performance goals
set forth in paragraph 4.2 above. Any such modification
shall be made in writing (which may be through approved
minutes) by the Compensation Committee in advance of the
deadlines applicable under Section 162(m) of the Code
and while the performance relating to the performance
goals remains substantially uncertain."
2. Section 7.1 of the Plan shall be amended to read in its
entirety as follows:
"7.1 Subject to the limitations of the Plan, the
Compensation Committee shall have the sole and complete
authority to interpret this Plan and to make all the
determinations necessary or advisable in the
administration of this Plan (including without limitation
the determination to amend this Plan). In furtherance
and not in limitation of the foregoing, in the event of
(i) a change in corporate capitalization, a corporate
transaction or a complete or partial corporate
liquidation, or (ii) any extraordinary gain or loss or
other event that is treated for accounting purposes as an
extraordinary item under generally accepted accounting
principles, or (iii) any material change in accounting
policies or practices affecting the Company and or the
performance goals or targets, then, to the extent any of
the forgoing events (or a material effect thereof) was
not anticipated at the time the targets were set, the
Compensation Committee may make adjustments to the
performance goals and/or targets, applied as of the date
of the event, and based solely on objective criteria, so
as to neutralize, in the Compensation Committee's
judgment, the effect of the event on the applicable
performance based award."
3. A new section 7.2 shall be added to the Plan to read in its
entirety as follows:
"7.2 The Compensation Committee shall be entitled to rely
on representations and certifications of appropriate
officers of the Company with respect to the financial and
statistical data set forth in paragraph 4.2 hereof. The
Compensation Committee's determinations on matters within
its authority shall be conclusive and binding upon the
Company and all other persons. The Compensation
Committee shall not be liable for any action or
determination made in good faith with respect to this
Plan."
<PAGE>
Financial Highlights
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
(In thousands, except per-share amounts) 1994 1993 1992
<S> <C> <C> <C>
Revenues $3,047,050 $2,962,819 $2,757,334
Income (loss) from continuing operations
before gain on sales of investments 38,790 (1,437) (85,928)
Net income (loss) 43,821 73,525 (35,655)
Per-share information:
Income (loss) from continuing operations
before gain on sales of investments .34 (.02) (1.14)
Net income (loss) .38 .79 (.47)
Assets 9,369,553 8,815,214 8,185,611
Shareholders' equity 386,750 518,626 257,800
</TABLE>
--------------------------------------------------------------------------------
Delivering on the Promise Over the past several years, Reliance has made
significant strides in changing its operating strategies, business focus,
structure and culture to respond to the insurance markets and customer needs of
the 1990's. These strategic moves are producing positive operating results.
Reliance established a clear pattern of improved operating earnings in 1994, and
the company strongly believes it has the people, the products, the business mix
and the strategies for growth to sustain this positive momentum.
<PAGE>
Reliance Group Holdings, Inc. At-A-Glance
Property
& Casualty Insurance
Reliance National
Market Focus
------------
A broad range of insurance products and services for Fortune 1,000 companies and
their private equivalents, and for specialty lines customers served by national
brokers. Business conducted in U.S. and selected international markets.
Percentage of Property
and Casualty Premiums
-----------------------
50%
$890 million
Net Written
Premiums
Reliance Insurance
Market Focus
------------
Traditional and innovative coverages for the more complex standard commercial
risks of "Business America" customers--corporations with up to 1,000 employees
and revenues up to $300 million. Also, custom underwriting for selected classes
of non-standard risks and programs for groups with common insurance needs.
Percentage of Property
and Casualty Premiums
-----------------------
35%
$611 million
Net Written
Premiums
Excluding personal lines
Reliance Reinsurance
Market Focus
------------
Treaty and facultative reinsurance for small and mid-sized specialty insurers,
and for specialty divisions of larger insurers. Also, customized reinsurance
products for specialized needs.
Percentage of Property
and Casualty Premiums
-----------------------
7%
$126 million
Net Written
Premiums
Reliance Surety
Market Focus
------------
Contract surety bonds (primarily for mid-sized contractors), commercial surety
bonds and fidelity bonds (for financial institutions and a variety of other
customers).
Percentage of Property
and Casualty Premiums
-----------------------
7%
$118 million
Net Written
Premiums
Title Insurance
Commonwealth Land Title
Market Focus
------------
Title insurance, appraisal services, escrow services and a range of other
real-estate-related services, for residential and commercial property owners,
financial intermediaries and mortgage originators.
Commonwealth Land Title
Premiums and Fees
$602 $676 $826 $893 $857
90 91 92 93 94
(dollars in millions)
2
<PAGE>
(Reliance National)
Distribution System
-------------------
. National brokers
. Program agents
1994 Results
------------
Profitability improved significantly. Net premiums written increased to $890
million and the combined ratio improved to 104.5%. The business mix continued to
shift, as attractive opportunities were pursued in ocean marine, aviation and
other segments. International operations continued their profitable expansion.
Distribution of Premiums Percentage
------------------------ ----------
[PIE CHART]
1 Risk Management 33%
2 Special Operations 20
3 Excess and Surplus 14
4 International 10
5 Financial Products 8
6 Financial and Specialty 6
7 Accident and Health 5
8 Other 4
(Reliance Insurance)
Distribution System
-------------------
o Independent agents
o Regional and national brokers
o Program agents
1994 Results
------------
The company continued to write more of its targeted business, and the combined
ratio and bottom line improved accordingly. Net premiums written were flat at
$611 million and the combined ratio improved to 106.4%, the best since 1988.
Distribution of Premiums Percentage
------------------------ ----------
[PIE CHART]
1 Standard Commercial 51%
2 Custom Underwriting 30
3 Large Accounts 19
(Reliance Reinsurance)
Distribution System
-------------------
o Reinsurance intermediaries
1994 Results
------------
Results were adversely affected by catastrophes, primarily California's
Northridge earthquake. Net premiums written grew modestly to $126 million, while
the combined ratio increased to 111.3%, including 11.2 points for catastrophes.
Distribution of Premiums Percentage
------------------------ ----------
[PIE CHART]
1 Treaty 93%
2 Facultative 7
(Reliance Surety)
Distribution System
-------------------
o Independent agents
o Regional and national brokers
1994 Results
------------
Reliance Surety reported record performance again in 1994, as the company
continued to outperform the surety industry. Net written premiums increased 11%
to $118 million, and the combined ratio improved further, to 74.3%.
Distribution of Premiums Percentage
------------------------ ----------
[PIE CHART]
1 Contract Surety 65%
2 Other Surety 22
3 Fidelity 13
(Commonwealth)
Distribution System
-------------------
o Company-owned branch offices
o Independent title insurance agents
1994 Results
------------
Results reflected the dramatic rise in interest rates which drastically cut
residential refinancings and slowed the rate of growth in the new-home and
home-resale markets. Revenues slipped to $857 million, and pre-tax operating
profit dropped to $31 million. While Commonwealth took aggressive cost-control
measures during the year, it continued to invest for the future.
Distribution of Premiums
------------------------
[PIE CHART]
1 Residential Pie Chart depicting the distribution of Commonwealth's
2 Commercial premiums between residential and commercial business.
3
<PAGE>
Reliance Group Holdings, Inc. 1994 Annual Report
------------------------------------------------
To Our Shareholders
[Photograph of Saul P. Steinberg and Robert M. Steinberg]
Saul P. Steinberg (right)
Chairman and Chief Executive Officer
Robert M. Steinberg (left)
President and Chief Operating Officer
-------------------------------------------------------------------------------
For property and casualty operations, the combined ratio improved significantly
and pretax operating income tripled.
-------------------------------------------------------------------------------
Our property and casualty operations are more focused and disciplined than ever.
[GRAPH]
Reliance's Improving
Combined Ratio
Property and Casualty
Operations
121.0% 91
114.1% 92
110.8% 93
104.4% 94
The ratio of claims and expenses to earned premiums--the better the performance,
the lower the ratio.
-------------------------------------------------------------------------------
Our goal is to achieve an ROE which consistently exceeds 15%.
-------------------------------------------------------------------------------
Reliance is delivering on the promise. The company's 1994 operating results
validate the strategies we have executed over the past several years.
Our progress is apparent in most key performance measures. In particular, our
property and casualty operations are demonstrating that they are positioned for
growth in profitability, regardless of the state of the insurance markets.
We are pleased to report that Reliance's 1994 operating income was $38.8
million, or $.34 per share, compared with the 1993 operating loss of $1.4
million, or $.02 per share. The 1994 results include a special pretax charge of
$11.6 million, or $.07 per share after tax, reflecting the company's assessment
of the potential impact of California Proposition 103.
Net realized capital gains were much lower in 1994. Accordingly, 1994 net
income, including gains, was $43.8 million, or $.38 per share, compared with
$73.5 million, or $.79 per share, for 1993.
The significant improvement in operating income is the direct result of
fundamental changes made in recent years:
o Sharpening our operational focus by divesting non-core businesses and
committing resources to our property and casualty insurance and title insurance
operations;
o Shifting our property and casualty operations towards specialty and larger
commercial accounts and away from the more price-competitive commodity lines,
and
o Reducing balance sheet leverage and interest expense through an equity issue
and debt refinancing in November 1993.
Property & Casualty Insurance
The increase in operating income was directly attributable to the outstanding
performance of our property and casualty businesses. The property and casualty
combined ratio--the ratio of claims and expenses to earned premiums--improved
significantly, and pre-tax operating income tripled.
Our combined ratio, which has improved every year since 1991 despite highly
competitive market conditions, was 104.4% for 1994, about eight points better
than the average for commercial lines companies.
We are very pleased with the progress achieved by our property-casualty
operations. They are more focused and disciplined than ever, they have an
international as well as a national orientation, and they have a work force with
superior skills trained on attractive market niches. We believe you will not
find a company today more sophisticated than Reliance in combining actuarial,
underwriting and claims management disciplines to compete successfully in the
marketplace. We continue to pursue profitable opportunities, both domestically
and internationally, and we expect our property and casualty operations to
improve further in 1995.
Title Insurance
Following record performances in 1992 and 1993, title insurance results were
lower in 1994. This decline reflected the dramatic rise in interest rates, which
drastically cut residential refinancings and slowed growth rates in new-home and
home-resale markets.
Commonwealth Land Title met this challenge with aggressive cost-control measures
throughout the year. Between the first and fourth quarters, the level of
quarterly managed costs was cut by $10 million, or $40 million on an annualized
basis. Although it appears that market conditions in 1995 will not differ much
from the second half of 1994, this does not change our positive longer term
view of the title insurance business. We are continuing to invest in technology
and other resources at Commonwealth with an eye toward the future.
Sustaining
the Momentum
This is a critical time for the insurance industry. As we enter yet
another year of soft market pricing, the companies succeeding and prospering are
those, like Reliance, that provide real added benefit to their customers and
manage their businesses for
4-5
<PAGE>
profitability, regardless of the insurance cycle.
We believe weaker players will continue to be weeded out and the quality gap
will widen further, with top companies capitalizing on their strengths and
expertise. These companies will satisfy their customers, earn superior returns
on equity and generate real value for their shareholders--the key measures of
any company's success.
We are absolutely convinced that Reliance is emerging as one of those companies.
While our 1994 return on equity of 10% is significantly better than the
unacceptably low industry average, we are not satisfied. Our goal is to achieve
a return on equity which consistently exceeds 15%. We believe that the changes
we have made to date, together with additional improvements anticipated in 1995,
have positioned Reliance to reach that goal.
Our accomplishments have not come easily, nor overnight. Many Reliance people
have worked diligently to produce these positive results, and we would like to
express our deep appreciation to them. In particular, Dean W. Case, vice
chairman of Reliance Insurance Company and its president since 1988, retired
from operating management in 1994, having provided extraordinary leadership and
vision through a period of remarkable transformation.
We have accomplished a lot, and we are dedicated to completing the task. Our
commitment to provide top quality service to our customers and create long-term
value for our shareholders is stronger than it has ever been. There is
undeniable pride and excitement at Reliance these days, as well as a strong
belief that we have the drive, the determination and the discipline to sustain
the momentum.
Saul P. Steinberg
Chairman and Chief Executive Officer
Robert M. Steinberg
President and Chief Operating Officer
6
<PAGE>
Reliance Group Holdings, Inc. 1994 Annual Report
------------------------------------------------
Review of Operations
[LOGO]
Reliance's insurance operations are focused in two clearly defined areas:
property and casualty insurance and title insurance.
Property and Casualty: While they focus on different product lines, the
company's four property and casualty companies share a common business
philosophy. Each seeks to identify specialty market segments where it can offer
value-added services that go beyond risk assumption. Each strives to recruit and
retain top professionals and reward them for their accomplishments. And each
maintains the discipline and flexibility to move into and out of market segments
quickly, as circumstances dictate.
Title: Commonwealth Land Title is the nation's third largest title insurer. With
branches or agents in every major U.S. market, the company provides a growing
range of title insurance and other real-estate-related services to residential
and commercial markets.
7
<PAGE>
Reliance Group Holdings, Inc. 1994 Annual Report
------------------------------------------------
Dennis A. Busti, President
[Photo of Dennis A. Busti]
"The remarkable growth of Reliance National can be traced in large part to an
entrepreneurial culture and a flat organizational structure, which enable us to
quickly identify attractive segments of the specialty lines market, both
domestically and internationally, and to provide value-added coverages and
services for customers in these segments . . . ."
Reliance
National
Reliance National was created in 1987 to compete in the Fortune 1000 and
specialty lines markets served by the national brokers. Since then, Reliance
National has emerged as a singular success story. It now accounts for half of
Reliance Group's property and casualty premiums.
A large measure of Reliance National's success stems from its approach
to the market. The company seeks attractive specialty market segments where it
can provide innovative coverages and responsive, value-added service. These
segments are served by skilled and specialized insurance professionals.
Operations are divided into eight major divisions, and subdivided into about 50
separate and distinct profit centers, all with their own underwriting and claims
capabilities, and many with their own actuarial capabilities.
As one indication of its success, Reliance National has established
leadership positions in important segments of the specialty property and
casualty market, including risk management, directors and officers liability,
boiler and machinery and environmental coverages.
While these strong market positions have been achieved through innovative
program design, Reliance National's profitability is due to careful
underwriting. Risk is controlled through policy
8
<PAGE>
Reliance Group Holdings, Inc. 1994 Annual Report
-------------------------------------------------
--------------------------------------------------------------------------------
Reliance National
[GRAPH]
$599 90
$786 91
$829 92
$872 93
$890 94
Net Premiums Written (in millions)
--------------------------------------------------------------------------------
Reliance National has strong positions in important segments of the specialty
market.
--------------------------------------------------------------------------------
structure, low net retentions, retrospectively rated and loss sensitive
coverages (where the final premium is based on the insured's actual loss
experience), and increased use of claims-made policies (which provide coverage
only for events occurring and reported during the policy period).
For 1994, Reliance National's net written premiums increased to $890
million and the combined ratio improved to 104.5% from 109.2% in 1993. These
results reflect shifts in several lines of business, consistent with the
company's strategy. Attractive opportunities in ocean marine, aviation and other
market segments were pursued in 1994. Conversely, poorly performing business
representing over $100 million in premiums was cancelled or non-renewed.
Reliance National's international operations, which operate on the same
strategy of identifying attractive specialty markets, continued their profitable
expansion in 1994, and have grown to account for over 10% of Reliance National's
premiums. Existing operations in Canada and the United Kingdom experienced
excellent growth, and branch offices were opened in Spain and the Netherlands.
Reliance National also completed the acquisitions of companies in Mexico and
Argentina, and is in the process of opening a branch in Germany and acquiring a
company in Hong Kong.
Outlook:
--------
Reliance National will maintain its focus on identifying profitable
opportunities in specialty lines and retain its discipline and flexibility to
move in and out of market segments as circumstances dictate. With attractive
opportunities in select segments of the domestic market and strong growth
expected from international operations, Reliance National should continue to
grow in terms of premiums and profitability in 1995 and beyond.
9
<PAGE>
Reliance Group Holdings, Inc. 1994 Annual Report
------------------------------------------------
Dean W. Case, Vice Chairman
[Photo of Dean W. Case]
"The middle market in commercial property and casualty insurance offers
significant opportunities for companies which are able to focus on areas where
they excel, execute the fundamentals day after day and maintain underwriting
discipline. Reliance Insurance is definitely one of those companies . . . ."
Reliance
Insurance
Steadily and incrementally in recent years, Reliance Insurance Company has
executed a dramatic shift in market focus and profitability. Historically a main
street, small commercial and personal lines underwriter, Reliance Insurance
today targets larger, more complex commercial risks, through a network of
independent agents and brokers.
Reliance Insurance has maintained and communicated a consistent
underwriting strategy for these agents and brokers and has paid careful
attention to service and other business fundamentals. As a result, even as it
has been exiting less profitable lines, the company has established a strong
presence in the "Business America" market --mid-sized companies with up to 1,000
employees and annual revenues up to $300 million. Today this market accounts for
over 80% of the company's premiums.
Reliance Insurance offers these customers a range of tailor-made products and
services usually available only to larger companies.
As the company writes more of this targeted business, its combined ratio
and bottom line are improving accordingly. Net premiums written in 1994 were
$611 million, flat with 1993. However, the combined ratio improved to 106.4%
from 109.6% in 1993 -- the best combined ratio since 1988.
10
<PAGE>
Reliance Group Holdings, Inc. 1994 Annual Report
------------------------------------------------
--------------------------------------------------------------------------------
Reliance Insurance
[GRAPH]
$651 90
$672 91
$600 92
$617 93
$611 94
Net Premiums Written (in millions)
--------------------------------------------------------------------------------
Reliance insurance has executed a dramatic shift in focus and
profitability.
--------------------------------------------------------------------------------
For the company's standard commercial coverages, underwriting results
improved significantly in 1994, despite significant competitive activity. The
average account size increased during the year as the shift to targeted market
segments continued.
The Large Accounts Division focuses on accounts with annual premiums over
$500,000. This division now generates about 20% of Reliance Insurance's premiums
and continues to write at an underwriting profit. The division's primary
business line is workers compensation insurance, much of which is written on a
retrospectively rated or loss-sensitive basis.
The Custom Underwriting Division, which accounts for about 30% of Reliance
Insurance's premiums, reported excellent results for 1994. This division's risk
underwriting operation, which writes selected classes of non-standard risks,
benefited from rate increases in property lines and an improved mix of business.
Results also improved in program business for groups with common insurance
needs, as incremental growth was achieved from several existing programs.
Reliance Insurance now operates programs for moving and storage companies, day
care centers, marinas and Masonic lodges, among other groups.
Outlook:
--------
Through consistent sales and service initiatives, disciplined underwriting and
careful attention to costs and other business fundamentals, Reliance Insurance
will continue its consistent progress of recent years. The standard commercial
business will increasingly reflect the company's "Business America" target
market, and the large accounts and custom underwriting areas will continue to
grow.
11
<PAGE>
Reliance Group Holdings, Inc. 1994 Annual Report
------------------------------------------------
George H. Roberts, President
[Photograph of George H. Roberts]
"Reliance Reinsurance seeks to identify under-served market segments where we
can provide true value-added service, and where we can obtain compensation
commensurate with the underwriting risk we are willing to take and the technical
expertise we offer. We are decidedly not just another 'me-too' company. . . ."
--------------------------------------------------------------------------------
Reliance Reinsurance
[GRAPH]
$ 91 90
$106 91
$108 92
$124 93
$126 94
Net Premiums Written (in millions)
--------------------------------------------------------------------------------
Reliance
Reinsurance
Reliance Reinsurance offers treaty and casualty facultative reinsurance for
small and mid-sized specialty insurers,and for specialty divisions of larger
insurers. It focuses on market segments where technical expertise and experience
can make a difference to the client.
Results were mixed in 1994. Net premiums written grew to $126 million,
while the combined ratio increased to 111.3% from 104.8% in 1993, including 11.2
points for catastrophes, primarily the Northridge earthquake.
Casualty treaty operations, which comprise the bulk of Reliance Re's
writings, continued to post impressive results, while the new ocean marine and
aviation operation achieved outstanding underwriting profitability. Also,
premiums nearly doubled for customized reinsurance products.
Offsetting strong casualty results, property operations were adversely
affected by intense competition and the impact of a retrocessional property
catastrophe program. Reliance Reinsurance has not renewed this program for 1995,
and believes that this non-renewal will enhance earnings stability going
forward.
Outlook:
--------
Reliance Re will continue its proven strategy in casualty, and participate
prudently in property coverages. Growth is expected in new market segments and
customized reinsurance products.
12
<PAGE>
Reliance Group Holdings, Inc. 1994 Annual Report
------------------------------------------------
George T. Holbrook Jr., President
[Photo of George T. Holbrook Jr., President]
"More than any of our surety peers, Reliance Surety markets itself through its
underwriting. We're an underwriting company first, and a marketing company
second. We certainly want to grow this business, but we aren't about to
compromise our underwriting standards to achieve that growth . . . ."
Reliance Surety
$ 96 90
$ 91 91
$ 94 92
$107 93
$118 94
Net Premiums Written (in millions)
--------------------------------------------------------------------------------
Reliance
Surety
Reliance Surety, the second largest U.S. surety company, is widely recognized as
the premiere company in quality and profitability in its primary markets.
Providing bonds for a wide range of contractors, it has established valuable
long-term relationships with major clients, through comprehensive knowledge of
the construction industry, clear underwriting standards and a reputation for
creative problem-solving.
Reliance Surety reported record performance in 1994, as it continued to
outperform the surety industry. Net written premiums increased 11% to $118
million and the combined ratio improved to 74.3% from 81.0% in 1993.
All of Reliance Surety's businesses exhibited strong growth. In
construction bonds, which now account for nearly two thirds of premiums, the
company benefited from improvements in the construction industry, writing
additional performance bonds for existing clients and establishing new business
relationships. Newer programs targeting smaller contracting firms and commercial
and license bonds also contributed to the improved 1994 results.
Outlook:
--------
The core business should continue to expand, and newer programs offer
significant growth potential. Combined with disciplined underwriting, this
should enable Reliance Surety to sustain its outstanding performance.
13
<PAGE>
Reliance Group Holdings, Inc. 1994 Annual Report
------------------------------------------------
Herbert Wender, Chairman
[Photo of Herbert Wender, Chairman]
"At Commonwealth we are continuing to invest in the future. We see significant
longer-term opportunities, both in title insurance and a range of other
real-estate- related services. Information technology is bringing dramatic
change to our business, and Commonwealth is at the forefront of that
movement . . . ."
Commonwealth
Land Title
Insurance
The nation's third largest title insurance company, Commonwealth provides a
growing range of residential and commercial title insurance and
real-estate-related services. Faced with a difficult business environment in
1994, Commonwealth took aggressive steps to reduce costs and reshape its
operations to reinforce its position as a leading force in the real estate
markets of the future.
Following two record years in 1992 and 1993, Commonwealth's 1994 results
reflected the dramatic rise in interest rates, which drastically cut residential
refinancings and slowed the rate of growth in the new-home and home-resale
markets. As one measure of the decline, mortgage originations dropped by almost
50% during the second half of 1994.
Revenues and pretax operating income were below the record levels of 1993.
Commonwealth responded swiftly to these changed market conditions, and has
become a leaner, more aggressive marketer. Staffing levels were reduced by 20%
and other cost-control measures were taken throughout the year. Between the
first and fourth quarters, the level of quarterly managed costs was cut by $10
million, or $40 million on an annualized basis.
14
<PAGE>
Reliance Group Holdings, Inc. 1994 Annual Report
------------------------------------------------
--------------------------------------------------------------------------------
Commonwealth
Land Title
Revenues
[GRAPH]
(including investment income)
$626 90
$695 91
$865 92
$922 93
$884 94
(dollars in millions)
Commonwealth Land Title
Income From Operations
[GRAPH]
$15 90
$23 91
$47 92
$55 93
$31 94
(dollars in millions)
--------------------------------------------------------------------------------
Despite the difficult business environment, Commonwealth continued to invest for
the future.
--------------------------------------------------------------------------------
Despite the difficult business environment, Commonwealth continued to
invest for the future. "Commonwealth OneStop" was introduced during the year to
provide major national lenders with all the closing services required to
complete residential real estate transactions through a single, computer-based
contact point. Among the services offered through this state-of-the-art program
are: title insurance (provided by the Company's National Residential Title
Services Division), appraisal management (through Commonwealth's new appraisal
management subsidiary, CLT Appraisal Services, Inc.), appraisal information
systems, credit reporting, flood certification and employee relocation.
Commercial business continued its excellent growth, highlighted by strong
performance from the National Title Services Division, which focuses on large,
complex, multi-state commercial customers.
Commonwealth was awarded an "A" claims-paying rating from
Standard & Poor's in 1994. This rating represents an objective measure of the
company's financial strength and stability, and offers distinct competitive
advantages in the marketplace, particularly for large commercial customers.
Outlook:
--------
There are few signs that the title insurance market will be much different in
1995 than in the second half of 1994. Over the longer term, as interest rates
stabilize, it is anticipated that the new-home and home-resale markets,
Commonwealth's traditional core business, should improve. In addition,
commercial business continues to exhibit strength.
With its focus on providing a broad range of real-estate-related services
and its strong financial rating, Commonwealth is now extremely well positioned
to capitalize on opportunities that become available in both the residential and
commercial segments.
15
<PAGE>
Financial Section Contents
Selected Financial Data 17
Financial Review 20
Consolidated Financial Statements 28
Notes to Consolidated
Financial Statements 32
Independent
Auditors' Report 54
Report of Management 55
Market and Dividend Information 56
Directors and Officers 57
Corporate Data 58
16
<PAGE>
Selected Financial Data
-----------------------
Reliance Group Holdings, Inc. & Subsidiaries
--------------------------------------------
<TABLE>
<CAPTION>
Year Ended December 31 1994 1993 1992 1991 1990
---------------------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
(In thousands)
Income Statement Data:
Revenues:
Property and casualty insurance
Premiums earned(1) $1,777,318 $1,571,539 $1,535,740 $1,548,838 $1,630,021
Net investment income 232,299 216,432 189,287 193,375 209,799
Gain (loss) on sales of investments 8,851 129,018 50,080 (692) (52,124)
Gain on sale of subsidiary(1) -- -- -- -- 380,500
---------- ---------- ---------- ----------- ----------
2,018,468 1,916,989 1,775,107 1,741,521 2,168,196
---------- ---------- ---------- ----------- ----------
Title and mortgage insurance
Premiums earned(2) 856,774 893,364 826,493 675,904 602,089
Net investment income 26,613 24,282 26,224 25,521 23,795
Gain (loss) on sales of investments 516 4,786 3,267 (5,971) (45)
Gain on sale of subsidiary(2) -- -- 8,999 -- --
---------- ---------- ---------- ----------- ----------
883,903 922,432 864,983 695,454 625,839
---------- ---------- ---------- ----------- ----------
Other 144,679 123,398 117,244 113,378 118,157
---------- ---------- ---------- ----------- ----------
$3,047,050 $2,962,819 $2,757,334 $2,550,353 $2,912,192
========== ========== ========== =========== ==========
Income (loss) from continuing operations
before gain on sales of investments,
income taxes, minority interests and
equity in investee companies:
Property and casualty insurance $ 134,956 $ 41,212 $ (29,999) $ (133,479) $ 60,110
Title and mortgage insurance 30,810 55,180 47,031 23,360 15,250
Corporate interest expense (75,619) (89,517) (95,574) (100,659) (113,796)
Corporate overhead and other (48,166) (52,979) (60,970) (47,979) (86,324)
---------- ---------- ---------- ----------- ----------
41,981 (46,104) (139,512) (258,757) (124,760)
Income tax (provision) benefit (9,464) 35,831 52,138 86,803 61,030
Minority interests (3,205) (3,605) (3,760) (4,198) (4,602)
Equity in investee companies 9,478 12,441 5,206 (16,574) (17,192)
---------- ---------- ---------- ----------- ----------
Income (loss) from continuing operations
before gain on sales of investments 38,790 (1,437) (85,928) (192,726) (85,524)
After-tax gain on sales of investments(3) 5,031 86,973 42,708 13,059 212,925
---------- ---------- ---------- ----------- ----------
Income (loss) from continuing operations 43,821 85,536 (43,220) (179,667) 127,401
Income (loss) from discontinued operations -- -- 64,105 31,444 (45,722)
Loss on disposal of discontinued operations -- -- (60,000) -- --
---------- ---------- ---------- ----------- ----------
Income (loss) before extraordinary items and
cumulative effect of accounting change 43,821 85,536 (39,115) (148,223) 81,679
---------- ---------- ---------- ----------- ----------
Extraordinary item - early extinguishment
of debt -- (27,922) 3,460 1,715 15,310
Extraordinary items of investee companies -- -- -- 894 7,461
Cumulative effect of change in accounting
for income taxes -- 15,911 -- -- --
---------- ---------- ---------- ----------- ----------
Net income (loss) $ 43,821 $ 73,525 $ (35,655) $ (145,614) $ 104,450
========== ========== ========== =========== ==========
</TABLE>
17
<PAGE>
Selected Financial Data
-----------------------
Reliance Group Holdings, Inc. & Subsidiaries
--------------------------------------------
<TABLE>
<CAPTION>
Year Ended December 31 1994 1993 1992 1991 1990
---------------------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
(In thousands, except per-share amounts and ratios)
Per-share information:
Income (loss) from continuing operations
before gain on sales of investments $.34 $(.02) $(1.14) $(2.61) $(1.15)
After-tax gain on sales of investments(3) .04 .94 .57 .18 2.86
---------- ---------- ---------- ---------- ----------
Income (loss) from continuing operations .38 .92 (.57) (2.43) 1.71
Income (loss) from discontinued operations -- -- .84 .43 (.61)
Loss on disposal of discontinued operations -- -- (.79) -- --
---------- ---------- ---------- ---------- ----------
Income (loss) before extraordinary items and
cumulative effect of accounting change .38 .92 (.52) (2.00) 1.10
Extraordinary items -- (.30) .05 .03 .30
Cumulative effect of change in accounting
for income taxes -- .17 -- -- --
---------- ---------- ---------- ---------- ----------
Net income (loss) $.38 $ .79 $ (.47) $(1.97) $ 1.40
========== ========== ========== ========== ==========
Average number of common and common
equivalent shares outstanding 115,097 92,858 75,555 73,918 74,530
Cash dividends per common share $.32 $.32 $.32 $.32 $.32
Other Operating Data(4):
Underwriting (loss) $ (97,343) $ (175,220) $ (219,286) $ (326,854) $ (149,689)
Loss and loss expense ratio 73.0% 78.6% 84.0% 90.1% 78.5%
Underwriting expense ratio 31.4 32.2 30.1 30.9 30.4
---------- ---------- ---------- ---------- ----------
Combined ratio(5) 104.4% 110.8% 114.1% 121.0% 108.9%
========== ========== ========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
December 31 1994 1993 1992 1991 1990
---------------------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
(In thousands)
Balance Sheet Data:
Assets $9,369,553 $8,815,214 $8,185,611 $7,201,548 $6,176,000
Marketable securities 3,799,874 3,797,315 3,435,595 2,916,214 2,871,648
Excess of cost over fair value of net
assets acquired 269,424 279,404 289,385 303,503 313,621
Debt outstanding 871,951 887,236 973,803 1,053,379 1,132,770
Shareholders' equity 386,750 518,626 257,800 219,302 337,407
Statutory policyholders' surplus of property
and casualty insurance subsidiaries 908,538 902,290 857,611 840,538 846,440
(1) On April 30, 1990, the Company sold General Casualty Company of Wisconsin
("General Casualty"). Premiums earned by the property and casualty insurance
subsidiaries excluding General Casualty were $1.50 billion for the year ended
December 31, 1990.
(2) On October 30, 1992, the Company sold Commonwealth
Mortgage Assurance Company ("CMAC"). Premiums earned by the title insurance
subsidiaries excluding CMAC were $770.5 million, $613.7 million and $548.6
million for the years ended December 31, 1992, 1991 and 1990, respectively.
(3) Includes net gain on sale of CMAC of $7.5 million ($.10 per share) in 1992
and net gain on sale of General Casualty of $245.5 million ($3.29 per share) in
1990.
(4) The data relates to the property and casualty insurance subsidiaries.
Underwriting results include policyholders' dividends and other income and
expense.
(5) In 1994, the combined ratio excludes the effect of the $11.6
million charge pertaining to Proposition 103.
18
<PAGE>
Property and Casualty Insurance Operations
------------------------------------------
Reliance Group Holdings, Inc. & Subsidiaries
--------------------------------------------
Net premiums written for each line of property and casualty insurance were as
follows:
</TABLE>
<TABLE>
<CAPTION>
Year Ended December 31 1994 1993 1992 1991 1990
---------------------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
(In thousands)
General Liability $ 423,377 $ 369,895 $ 349,777 $ 312,935 $ 322,959
Workers' Compensation 312,808 377,592 418,685 503,323 366,295
Automobile 244,000 260,180 261,520 255,848 243,336
Multiple Peril 180,074 187,438 126,070 134,286 193,531
Reinsurance 125,597 123,742 108,095 155,667 90,953
Surety 117,989 106,664 94,316 90,721 95,670
Involuntary 113,483 113,498 109,583 77,624 56,362
Ocean and Inland Marine 103,865 105,254 49,658 51,651 51,394
Other(1) 143,097 126,334 23,856 28,989 191,925
General Casualty -- -- -- -- 82,281
---------- ---------- ---------- ---------- ----------
$1,764,290 $1,770,597 $1,541,560 $1,611,044 $1,694,706
========== ========== ========== ========== ==========
</TABLE>
Combined ratios (on a GAAP basis), after policyholders' dividends, for each line
of property and casualty insurance were as follows:
<TABLE>
<CAPTION>
Year Ended December 31 1994(2) 1993 1992 1991 1990
---------------------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
General Liability 106.0% 105.0% 100.4% 100.1% 97.0%
Workers' Compensation 95.3 96.5 105.8 121.7 108.6
Automobile 116.6 125.5 119.4 114.2 106.8
Multiple Peril 114.8 121.6 145.3 158.4 123.0
Reinsurance 111.3 104.8 122.0 113.5 106.5
Surety 74.3 81.0 80.9 89.4 80.8
Involuntary 100.3 133.6 147.6 179.4 149.2
Ocean and Inland Marine 124.9 113.9 120.0 91.2 104.2
Other(1) 93.5 147.9 N/M N/M 124.0
General Casualty -- -- -- -- 88.8
---------- ---------- ---------- ---------- ----------
104.4% 110.8% 114.1% 121.0% 108.9%
========== ========== ========== ========== ==========
</TABLE>
N/M - Not Meaningful
(1) Includes personal lines.
(2) Excludes the effect of Proposition 103.
19
<PAGE>
Financial Review
----------------
Reliance Group Holdings, Inc. & Subsidiaries
--------------------------------------------
Overview
The Company had income from continuing operations, before gains on sales of
investments, of $38.8 million ($.34 per share) in 1994, which included improved
underwriting results in property and casualty insurance operations, compared to
a loss of $1.4 million ($.02 per share) in 1993, and a loss of $85.9 million
($1.14 per share) in 1992. After-tax gains on sales of investments were $5.0
million ($.04 per share) in 1994 compared to $87.0 million ($.94 per share) in
1993 and $42.7 million ($.57 per share) in 1992.
Net income was $43.8 million ($.38 per share) in 1994 compared to $73.5
million ($.79 per share) in 1993, which included a $27.9 million ($.30 per
share) extraordinary loss from early extinguishment of debt, and income of $15.9
million ($.17 per share) representing the cumulative effect of adopting
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes". The net loss in 1992, which included results pertaining to discontinued
operations, was $35.7 million ($.47 per share).
Property and Casualty Insurance Operations
The property and casualty insurance operations reported pretax income, before
gains on sales of investments, of $135.0 million in 1994 compared to $41.2
million in 1993 and a loss of $30.0 million in 1992. Gains on sales of
investments were $8.9 million in 1994 compared to $129.0 million in 1993 and
$50.1 million in 1992.
The property and casualty insurance operations had strong underwriting
results in 1994, including continued underwriting profits in workers'
compensation and surety lines, as well as improved underwriting results in
personal lines, commercial automobile and involuntary insurance facilities.
Underwriting losses were $97.3 million in 1994 compared to $175.2 million in
1993 and $219.3 million in 1992. Underwriting results continue to be adversely
affected by catastrophe losses. Catastrophe losses were $50.1 million in 1994
($134.0 million before reinsurance) which included $44.9 million arising from
the January 1994 California earthquake, compared to $39.3 million in 1993 ($88.5
million before reinsurance) and $61.1 million in 1992 ($119.2 million before
reinsurance), which included $45.6 million arising from Hurricane Andrew. The
combined ratios (calculated on a GAAP basis), after policyholders' dividends
were 104.4%, 110.8% and 114.1% for 1994, 1993 and 1992, respectively.
Net premiums written and premiums earned for each line of property and
casualty insurance were as follows:
<TABLE>
<CAPTION>
1994 1993 1992
------------------------ ---------------------- -----------------------
Net Net Net Net Net Net
Premiums Premiums Premiums Premiums Premiums Premiums
Year Ended December 31 Written Earned Written Earned Written Earned
---------------------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
(In thousands)
General Liability $ 423,377 $ 427,864 $ 369,895 $ 337,151 $ 349,777 $ 325,963
Workers' Compensation 312,808 323,891 377,592 360,613 418,685 427,337
Automobile 244,000 251,038 260,180 225,910 261,520 250,246
Multiple Peril 180,074 170,230 187,438 147,158 126,070 126,263
Reinsurance 125,597 132,694 123,742 124,150 108,095 155,402
Surety 117,989 108,833 106,664 97,414 94,316 93,246
Involuntary 113,483 115,963 113,498 112,700 109,583 98,038
Ocean and Inland Marine 103,865 95,103 105,254 82,451 49,658 47,364
Other 143,097 151,702 126,334 83,992 23,856 11,881
---------- ---------- ---------- ---------- ---------- ----------
$1,764,290 $1,777,318 $1,770,597 $1,571,539 $1,541,560 $1,535,740
========== ========== ========== ========== ========== ==========
</TABLE>
20
<PAGE>
The decline in net premiums written in 1994, when compared to 1993, is primarily
attributable to lower writings in workers' compensation reflecting an increase
in return premiums on retrospectively rated policies due to improved loss
experience, and the trend toward high deductible non-retrospectively rated
insurance, which results in lower premiums and lower losses. In addition,
workers' compensation net premiums written in 1994 were reduced as a result of
certain litigation claims in Texas. See note 16 to the consolidated financial
statements. This decline was substantially offset by growth in general
liability, surety and other lines. The increase in other lines net premiums
written during 1994 reflects continued growth in accident and health premiums,
partially offset by a decline in personal lines premiums. The increase in net
premiums earned in 1994, when compared to 1993, is due to the non-renewal of
certain quota share reinsurance treaties. These treaties reduced 1993 net
premiums earned by $209.2 million. The increase in net written premiums in 1993,
when compared to 1992, reflects higher net retentions in multiple peril, general
liability and inland marine lines of business, as well as growth in reinsurance,
surety and accident and health premiums.
Despite higher catastrophe losses, particularly in reinsurance,
underwriting results in 1994 improved, when compared to 1993, reflecting lower
underwriting losses in commercial automobile and multiple peril lines of
business, as well as lower losses from involuntary insurance facilities.
Underwriting losses from involuntary insurance facilities were $338,000 in 1994
compared to $37.9 million in 1993 and $46.7 million in 1992. The improvement in
1994 underwriting results also reflects lower losses in personal lines, as the
Company continues to exit this business, and an increase in underwriting profits
in the surety line of business. Underwriting profits in surety lines grew to
$27.5 million in 1994 compared to $18.4 million in 1993 and $17.4 million in
1992. The 1994 underwriting results include a charge of $11.6 million reflecting
the Company's assessment of the impact of California Proposition 103. See note
16 to the consolidated financial statements. The improvement in underwriting
results in 1993, when compared to 1992, reflects a lower level of catastrophe
losses as well as improved underwriting results in workers' compensation.
The property and casualty insurance operations assume and cede reinsurance
in the normal course of business. See note 8 to the consolidated financial
statements.
Policy claims and settlement expenses includes a provision for insured
events of prior years of $22.4 million in 1994 compared to $40.2 million in 1993
and $31.5 million in 1992. The 1994 provision includes $17.0 million of adverse
development related to prior year asbestos-related and environmental pollution
claims. Development of asbestos-related and environmental pollution claims
primarily effects general liability and multiple peril lines of business. The
1994 provision also includes $14.7 million of adverse development from other
general liability lines. This development was partially offset by $13.3 million
of favorable development in workers' compensation. The 1993 provision includes
$21.1 million of adverse development from workers' compensation reinsurance
pools and $35.2 million of adverse development related to prior year
asbestos-related and environmental pollution claims. This development was
partially offset by favorable development in other lines of business, including
other general liability lines. The 1992 provision included $55.6 million of
adverse development from workers' compensation and automobile reinsurance pools.
This development was partially offset by favorable development of $11.9 million
from two general liability claims and favorable development of $10.7 million
related to unallocated loss adjustment expenses.
The Company records involuntary assessments when such assessments are
billed by the respective state insurance facilities. These assessments are
subject to large variations in timing and amount and, accordingly, the Company
cannot reasonably estimate a minimum amount of liability prior to billing. While
the amount of any involuntary assessments cannot be predicted with certainty,
the Company believes that future assessments will not have a material effect on
its liquidity or capital resources.
The liability for property and casualty insurance loss reserves at
December 31, 1994 was $5.58 billion compared to $5.05 billion at December 31,
1993. This liability is 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.
Reinsurance recoverables of $2.45 billion and $2.12 billion at December 31, 1994
and 1993, respectively, are included in the liability in accordance with
Statement of Financial Accounting Standards No. 113, "Accounting and Reporting
for Reinsurance of Short-Duration and Long-Duration Contracts".
21
<PAGE>
Financial Review Continued
--------------------------
Reliance Group Holdings, Inc. & Subsidiaries
--------------------------------------------
The establishment of loss reserves requires an estimate of the ultimate
liability based primarily on past experience. The Company applies a variety of
generally accepted actuarial techniques to determine the estimates of ultimate
liability. The techniques recognize, among other factors, the Company's and
industry's experience with similar business, historical trends in reserving
patterns and loss payments, pending level of unpaid claims, cost of claim
settlements, product mix, the economic environment in which property and
casualty companies operate and the trend toward increasing claims and awards.
Estimates are continually reviewed and adjustments of the probable ultimate
liability based on subsequent developments and new data are included in
operating results for the periods in which they are made. In general, reserves
are initially established based upon the actuarial and underwriting data
utilized to set pricing levels and are reviewed as additional information,
including claims experience, becomes available. The Company regularly analyzes
its reserves and reviews its pricing and reserving methodologies so that future
adjustments to prior year reserves can be minimized. However, given the
complexity of this process, reserves will require continual updates and the
ultimate liability may be more or less than such estimates indicate. Over the
past five years, the Company has increased its premium writings in long tail
lines of business. Estimation of loss reserves for these lines of business is
more difficult than for short tail lines because claims may not become apparent
for a number of years, and a relatively higher proportion of ultimate losses are
considered incurred but not reported. As a result, variation in loss development
is more likely in these lines of business. The Company attempts to reduce these
variations in certain of its long tail lines, primarily directors and officers
liability, professional liability and general liability, by writing policies on
a claims-made basis which mitigates the long tail nature of the risks. The
Company also limits the loss from a single event through the use of reinsurance.
Included in the liability for loss reserves at December 31, 1994 are $182.2
million ($130.1 million net of recoverables from reinsurers) of loss reserves
pertaining to asbestos-related and environmental pollution claims. Included in
these reserves are reserves for claims incurred but not reported and reserves
for loss expenses, which include litigation expenses. The Company continues to
receive claims asserting injuries from hazardous materials and alleged damages
to cover various clean-up costs. Coverage and claim settlement issues, related
to policies written in prior years, such as the determination that coverage
exists and the definition of an occurrence, may cause the actual loss
development to exhibit more variation than the remainder of the Company's book
of business. The Company's net paid losses and related expenses for
asbestos-related and environmental pollution claims have not been material in
relation to the Company's total net paid losses and related expenses. Net paid
losses and related expenses (primarily legal fees and expenses) relating to
these claims were $20.2 million (including $7.9 million of related expenses),
$24.8 million (including $8.1 million of related expenses) and $16.1 million
(including $6.2 million of related expenses) for the years ended December 31,
1994, 1993 and 1992, respectively. Total payments for all property and casualty
insurance policy claims and related expenses were $1.1 billion, $1.0 billion and
$961.1 million for the years ended December 31, 1994, 1993 and 1992,
respectively. The following table presents information related to the number of
insureds with asbestos-related and environmental pollution claims outstanding:
Year Ended December 31 1994 1993
---------------------- ---- ----
Number of insureds with outstanding claims, beginning of year 661 807
Additional insureds with claims during the year 307 369
Insureds with closed or settled claims during the year (302) (515)
---- ----
Number of insureds with outstanding claims, end of year 666 661
==== ====
22
<PAGE>
The average net paid loss for asbestos-related and environmental pollution
claims was $34,200 and $28,200 for the years 1994 and 1993, respectively. As of
December 31, 1994, the Company was involved in approximately 45 coverage
disputes (where a motion for declaratory judgement had been filed, the
resolution of which will require a judicial interpretation of an insurance
policy) related to asbestos or environmental pollution claims. The Company is
not aware of any pending litigation or pending claim which will result in
significant contingent liabilities in these areas. The Company believes it has
made reasonable provisions for these claims, although the ultimate liability may
be more or less than such reserves. The Company believes that future losses
associated with these claims will not have a material adverse effect on its
financial position, although there is no assurance that such losses will not
materially effect the Company's results of operations for any period.
Property and Casualty Insurance Investment Results
Net investment income of the property and casualty insurance operations
increased to $232.3 million in 1994 from $216.4 million in 1993 and $189.3
million in 1992. These increases resulted from growth in the size of the fixed
maturity investment portfolio.
Gains on sales of investments were $8.9 million in 1994 compared to $129.0
million in 1993, which primarily resulted from sales of equity securities, and
$50.1 million in 1992.
Title Insurance Operations
The title insurance operations reported pretax income, before gains on sales of
investments, of $30.8 million in 1994, $55.2 million in 1993 and $47.0 million
in 1992.
Premiums and fees were $856.8 million in 1994 compared to $893.4 million in
1993 and $826.5 million in 1992. Included in the 1992 premiums and fees were
$56.0 million from the Company's mortgage insurance unit ("CMAC"), which was
sold through a public offering in the fourth quarter of 1992. The decline in
premiums and fees in 1994 resulted from a decline in direct title insurance
premiums due to lower levels of residential refinancing activity. Refinancing
activity has declined steadily since March 1994 when mortgage interest rates
began to rise. This decline in direct title insurance premiums was partially
offset by an increase in agency premiums resulting from the strong market
conditions that existed in the fourth quarter of 1993 and the first quarter of
1994 and the typical reporting lag of 60-90 days for agency premiums. The
Company does not anticipate an increase in residential activity during 1995.
Partially offsetting the decline in 1994 premiums and fees from residential
transactions was an increase in commercial real estate activity where operating
margins are generally higher. The increase in premiums and fees in 1993, when
compared to 1992, reflected increased residential refinancing activity and, to a
lesser extent, increased residential resale activity and an acquisition
completed in late 1992.
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 $432.0 million in
1994 compared to $418.4 million in 1993 and $382.1 million in 1992. Agency
commissions as a percentage of agency premiums declined in 1994 and 1993. These
declines reflect a lower portion of agency business in the Western states where
agent commissions are generally higher. 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 $344.7 million in 1994 compared to $362.3 million in
1993 and $323.0 million in 1992. Included in the 1992 other expenses were $17.1
million from CMAC. The decline in other expenses in 1994, when compared to 1993,
reflects various cost control programs, including staff reductions, undertaken
by the Company. The expense ratio of the title insurance operations (which
includes agency commissions) was 90.2% in 1994 compared to 87.3% in 1993 and
89.2% in 1992. The increase in the 1994 expense ratio resulted from the decline
in premiums. The provision for claim losses was $75.9 million in 1994 compared
to $81.8 million in 1993 and $100.6 million in 1992, which included $32.4
million from CMAC.
23
<PAGE>
Financial Review Continued
--------------------------
Reliance Group Holdings, Inc. & Subsidiaries
--------------------------------------------
Investment Portfolio
At December 31, 1994, the Company's investment portfolio aggregated $3.82
billion (at cost), of which 12.6% 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 December
31, 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'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 December 31, 1994, the carrying
values of non-investment grade securities and securities not rated by Standard &
Poor's were $350.2 million (11% of the fixed income portfolio) and $145.1
million (4% 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.
Due to the rise in interest rates during 1994, the market value of the
Company's fixed maturity investments designated available for sale has declined.
At December 31, 1994, the unrealized loss on fixed maturities available for sale
was $106.6 million compared to an unrealized gain of $87.1 million at December
31, 1993. This decline in market value was the principal reason the Company's
shareholders' equity decreased to $386.8 million at December 31, 1994 from
$518.6 million at December 31, 1993.
At December 31, 1994, approximately 32% of the Company's fixed maturity and
short-term investment portfolio was comprised of securities issued by utilities,
the vast majority of which are rated investment grade and are first mortgage or
senior secured bonds. The utility portfolio is widely diversified among various
geographic regions in the United States and is not dependent on the economic
stability of any one particular region. No other industry group comprises more
than 10% of the fixed maturity and short-term investment portfolio.
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 $141.6 million in 1994, $116.8 million in 1993 and $109.1
million in 1992. The increase in revenues during 1994 resulted from growth in
the information technology business. Operating expenses incurred by these
operations were $134.7 million in 1994, $111.7 million in 1993 and $104.6
million in 1992. Revenues and expenses of these operations are included in other
revenues and other operating expenses in the accompanying statement of
operations.
At December 31, 1994, the Company's real estate holdings had a carrying
value of $291.7 million, which includes 11 shopping centers with an aggregate
carrying value of $129.9 million, office buildings and other commercial
properties, with an aggregate carrying value of $101.0 million, and undeveloped
land with a carrying value of $60.8 million.
Other operating expenses in 1992 reflect a $7.3 million write-down of real
estate properties.
24
<PAGE>
Interest Expense
Interest expense declined to $87.9 million in 1994 from $105.4 million in 1993
and $110.1 million in 1992. These declines resulted from the refinancing of
certain of the Company's debt, completed on November 15, 1993, which decreased
the amount of debt outstanding and the interest rates on such debt.
Income Taxes
Effective January 1, 1993, the Company adopted Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes" ("FAS 109"). The cumulative
effect of adopting FAS 109 was to increase 1993 net income by $15.9 million. See
note 5 to the consolidated financial statements.
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 $130.8 million
for the year ended December 31, 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 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. 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.
25
<PAGE>
Financial Review Continued
--------------------------
Reliance Group Holdings, Inc. & Subsidiaries
--------------------------------------------
Total common and preferred stock dividends paid by Reliance Insurance
Company during 1994, 1993 and 1992 were $114.1 million ($111.5 million for
common stock), $133.7 million ($130.6 million for common stock) and $143.7
million ($140.4 million for common stock), respectively. 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 year ended December 31, 1994, Reliance Insurance
Company generated $321.3 million of cash flow from operating activities compared
to $274.7 million in 1993 and $331.2 million in 1992. 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 December 31, 1994, Reliance Insurance Company had $267.8
million of cash and short-term investments.
For the year ended December 31, 1994, the Company generated $245.8 million
of cash flow from operating activities compared to $195.5 million in 1993 and
$241.8 million in 1992. The increase in 1994 operating cash flow, when compared
to 1993, reflects improvement in the operating results of the Company's property
and casualty insurance subsidiaries. The decline in the 1993 operating cash
flow, when compared to 1992, reflects increased income tax payments in 1993,
including $30.0 million related to the 1992 sale of Frank B. Hall & Co. Inc.,
compared to income tax refunds in 1992. Operating cash flows in 1994, 1993 and
1992 were positively impacted by the increase in unearned premiums and unpaid
claims and related expenses in excess of the increase in premiums and other
receivables and reinsurance recoverables.
The Company used $243.6 million, $209.2 million and $124.8 million of cash
flow for investing activities for the years ended December 31, 1994, 1993 and
1992, respectively. Net purchases of marketable securities were $184.5 million,
$263.4 million and $210.1 million in 1994, 1993 and 1992, respectively. Sales of
discontinued life insurance operations and of a subsidiary provided cash of
$15.6 million, $69.2 million and $118.5 million in 1994, 1993 and 1992,
respectively.
The Company used $47.3 million of cash flow for financing activities for
the year ended December 31, 1994 principally for the reduction of debt and
payment of dividends. The Company generated $44.3 million of cash flow from
financing activities for the year ended December 31, 1993 and used cash of
$112.2 million for financing activities for the year ended December 31, 1992.
26
<PAGE>
The Company has a revolving credit facility with various banks providing
for aggregate maximum outstanding borrowings of $100 million though December 31,
1998. At December 31, 1994, borrowings aggregating $35.0 million were
outstanding under this facility. Under a minimum net worth test, contained in
the revolving credit facility agreement, Reliance Financial Services Corporation
("Reliance Financial") could pay up to $47.1 million in dividends at December
31, 1994. Reliance Financial's net worth increases with its net income, subject
to increases or decreases in net worth resulting from changes in the market
value of fixed maturities available for sale and of equity securities. The
Company is confident that Reliance Financial will continue to pay all dividends
necessary to meet the Company's cash needs. The Company had $872.0 million of
debt outstanding at December 31, 1994 with approximately $29 million maturing on
or before December 31, 1995 and an additional $120 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,
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. The
Company's statutory capital is in excess of the minimum required risk-based
capital. Management cannot predict the ultimate impact of risk-based capital
requirements on the Company's competitive position.
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.
The Company and its subsidiaries are involved in certain litigation
arising in the course of their businesses, some of which involve claims of
substantial amounts. Although the ultimate outcome of these matters cannot be
ascertained at this time, and the results of legal proceedings cannot be
predicted with certainty, the Company is contesting the allegations of the
complaints in each pending action and believes, based on current knowledge and
after consultation with outside counsel, that the resolution of these matters
will not have a material adverse effect on the consolidated financial
statements of the Company.
27
<PAGE>
Consolidated Statement of Operations
------------------------------------
Reliance Group Holdings, Inc. & Subsidiaries
--------------------------------------------
<TABLE>
<CAPTION>
Year Ended December 31 1994 1993 1992
---------------------- ---------- ---------- ----------
<S> <C> <C> <C>
(In thousands, except per-share amounts)
Revenues:
Premiums earned $2,634,092 $2,464,903 $2,362,233
Net investment income 258,912 240,714 215,511
Gain on sales of investments 7,767 133,804 53,347
Gain on sale of subsidiary -- -- 8,999
Other 146,279 123,398 117,244
---------- ---------- ----------
3,047,050 2,962,819 2,757,334
---------- ---------- ----------
Claims and expenses:
Policy claims and settlement expenses 1,372,960 1,317,397 1,390,160
Policy acquisition costs and other insurance expenses 1,347,828 1,282,184 1,169,465
Interest 87,931 105,378 110,066
Other operating expenses 188,583 170,160 164,809
---------- ---------- ----------
2,997,302 2,875,119 2,834,500
---------- ---------- ----------
Income (loss) from continuing operations
before income taxes, minority interests
and equity in investee company 49,748 87,700 (77,166)
Income tax (provision) benefit (12,200) (11,000) 32,500
Minority interests (3,205) (3,605) (3,760)
Equity in investee company 9,478 12,441 5,206
---------- ---------- ----------
Income (loss) from continuing operations 43,821 85,536 (43,220)
Income from discontinued operations -- -- 64,105
Loss on disposal of discontinued operations -- -- (60,000)
---------- ---------- ----------
Income (loss) before extraordinary item and
cumulative effect of accounting change 43,821 85,536 (39,115)
Extraordinary item -- early extinguishment of debt -- (27,922) 3,460
Cumulative effect of change in accounting
for income taxes -- 15,911 --
---------- ---------- ----------
Net income (loss) $ 43,821 $ 73,525 $ (35,655)
========== ========== ==========
Per-share information:
Income (loss) from continuing operations $.38 $ .92 $(.57)
Income from discontinued operations -- -- .84
Loss on disposal of discontinued operations -- -- (.79)
---------- ---------- ----------
Income (loss) before extraordinary item and
cumulative effect of accounting change .38 .92 (.52)
Extraordinary item -- (.30) .05
Cumulative effect of change in accounting
for income taxes -- .17 --
---------- ---------- ----------
Net income (loss) $.38 $ .79 $(.47)
========== ========== ==========
Average number of common and common
equivalent shares outstanding 115,097 92,858 75,555
</TABLE>
See notes to consolidated financial statements
28
<PAGE>
Consolidated Balance Sheet
--------------------------
Reliance Group Holdings, Inc. & Subsidiaries
--------------------------------------------
<TABLE>
<CAPTION>
Assets December 31 1994 1993
---------------------------------------------------------------- ----------- ----------
<S> <C> <C>
(In thousands, except per-share amount)
Marketable securities:
Fixed maturities held for investment -- at amortized
cost (quoted market $1,053,551 and $973,113) $1,166,020 $ 933,536
Fixed maturities available for sale -- at quoted
market (cost $1,945,919 and $1,856,969) 1,839,312 1,944,099
Equity securities -- at quoted market (cost
$482,529 and $458,217) 564,636 547,173
Short-term investments 229,906 372,507
Cash 48,977 94,114
Premiums and other receivables 1,262,554 1,089,772
Reinsurance recoverables 2,928,533 2,573,688
Federal and foreign income taxes, including
deferred taxes 84,899 22,272
Investments in real estate -- at cost, less
accumulated depreciation 291,666 284,796
Investment in investee company 148,776 158,279
Deferred policy acquisition costs 181,938 178,129
Excess of cost over fair value of net assets
acquired, less accumulated amortization 269,424 279,404
Other assets 352,912 337,445
----------- ----------
$9,369,553 $8,815,214
=========== ==========
Liabilities and Shareholders' Equity
Unearned premiums $1,288,454 $1,276,331
Unpaid claims and related expenses 5,809,546 5,253,137
Accounts payable and accrued expenses 700,380 649,676
Reinsurance ceded premiums payable 291,844 206,373
Term loans and short-term debt 141,355 137,373
Debentures and notes 730,596 749,863
Minority interests -- redeemable preferred stock
of a subsidiary 20,628 23,835
----------- ----------
8,982,803 8,296,588
----------- ----------
Contingencies and commitments
Shareholders' equity:
Common stock, par value $.10 per share, 225,000
shares authorized, 113,127 and 111,517
shares issued and outstanding 11,313 11,152
Additional paid-in capital 533,979 525,289
Retained earnings (deficit) (110,479) (118,143)
Net unrealized gain (loss) on investments (27,881) 115,023
Net unrealized loss on foreign currency translation (20,182) (14,695)
----------- ----------
386,750 518,626
----------- ----------
$9,369,553 $8,815,214
=========== ==========
</TABLE>
See notes to consolidated financial statements
29
<PAGE>
Consolidated Statement of Changes
in Shareholders' Equity
---------------------------------
Reliance Group Holdings, Inc. & Subsidiaries
--------------------------------------------
<TABLE>
<CAPTION>
Net
Net Unrealized
Unrealized Gain (Loss)
Additional Retained Gain on Foreign
Common Paid-In Earnings (Loss) on Currency Shareholders'
Stock Capital (Deficit) Investments Translation Equity
------- ---------- --------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
(In thousands, except per-share amounts)
Balance, January 1, 1992 $ 7,455 $269,731 $(101,743) $ 40,216 $ 3,643 $ 219,302
Issuance of common stock 1,164 59,367 -- -- -- 60,531
Transactions of investee company
and other -- 7,368 -- 3,818 -- 11,186
Net loss -- -- (35,655) -- -- (35,655)
Dividends ($.32 per share) -- -- (24,618) -- -- (24,618)
Appreciation after deferred income taxes -- -- -- 41,987 -- 41,987
Foreign currency translation -- -- -- -- (14,933) (14,933)
------- ---------- --------- ----------- ----------- -------------
Balance, December 31, 1992 8,619 336,466 (162,016) 86,021 (11,290) 257,800
Issuance of common stock 2,533 187,003 -- -- -- 189,536
Transactions of investee company
and other -- 1,820 -- 1,244 -- 3,064
Net income -- -- 73,525 -- -- 73,525
Dividends ($.32 per share) -- -- (29,652) -- -- (29,652)
Appreciation after deferred income taxes -- -- -- 27,758 -- 27,758
Foreign currency translation -- -- -- -- (3,405) (3,405)
------- ---------- --------- ----------- ----------- -------------
Balance, December 31, 1993 11,152 525,289 (118,143) 115,023 (14,695) 518,626
Issuance of common stock 161 8,752 -- -- -- 8,913
Transactions of investee company
and other -- (62) -- (9,002) -- (9,064)
Net income -- -- 43,821 -- -- 43,821
Dividends ($.32 per share) -- -- (36,157) -- -- (36,157)
Depreciation after deferred income taxes -- -- -- (133,902) -- (133,902)
Foreign currency translation -- -- -- -- (5,487) (5,487)
------- ---------- --------- ----------- ----------- -------------
Balance, December 31, 1994 $11,313 $533,979 $(110,479) $ (27,881) $(20,182) $ 386,750
======= ========== ========= =========== =========== =============
</TABLE>
See notes to consolidated financial statements
30
<PAGE>
Consolidated Statement of Cash Flows
------------------------------------
Reliance Group Holdings, Inc. & Subsidiaries
--------------------------------------------
<TABLE>
<CAPTION>
Year Ended December 31 1994 1993 1992
---------------------------------------- ---------- ---------- ----------
<S> <C> <C> <C>
(In thousands)
Cash flows from operating activities:
Net income (loss) $ 43,821 $ 73,525 $ (35,655)
Adjustments to reconcile net income (loss) to net
cash provided from operating activities:
Cumulative effect of change in accounting
for income taxes -- (15,911) --
Gain on sales of investments (7,767) (133,804) (53,347)
Deferred policy acquisition costs (3,809) (54,779) (13,182)
Premiums and other receivables and
reinsurance recoverables (507,557) (219,529) (711,434)
Unearned premiums, unpaid claims and
related expenses 566,873 581,141 997,889
Accounts payable, accrued expenses and
other 154,213 (35,189) 57,490
---------- ---------- ----------
245,774 195,454 241,761
---------- ---------- ----------
Cash flows from investing activities:
Proceeds from sales of fixed maturities available for
sale 441,401 341,168 317,093
Proceeds from sales of fixed maturities held for
investment 18,481 -- 148,953
Proceeds from redemptions of fixed maturities available
for sale 60,752 170,281 42,019
Proceeds from redemptions of fixed maturities held for
investment 15,785 194,193 243,694
Proceeds from sales of equity securities 189,895 1,016,308 469,900
(Increase) decrease in short-term investments -- net 151,965 240,884 (59,050)
Sale of net assets of a subsidiary -- -- 118,500
Purchases of fixed maturities available for sale (587,581) (958,817) (422,395)
Purchases of fixed maturities held for investment (265,672) (586,677) (478,209)
Purchases of equity securities (209,506) (680,760) (472,072)
Discontinued operations 15,550 69,157 8,569
Other -- net (74,708) (14,943) (41,816)
---------- ---------- ----------
(243,638) (209,206) (124,814)
---------- ---------- ----------
Cash flows from financing activities:
Increase in term loans 75,272 140,248 20,221
Increase (decrease) in short-term debt -- net 10,652 183 (30,392)
Repayments of term loans (81,942) (297,036) (38,519)
Issuance of debentures -- 650,000 --
Issuance of common stock 7,324 189,536 --
Repurchases of debentures and notes (19,062) (616,253) (35,533)
Collection of receivable pertaining to the issuance
of common stock -- 10,625 --
Dividends (36,157) (29,652) (24,618)
Redemption of redeemable preferred stock of a
subsidiary (3,360) (3,360) (3,360)
---------- ---------- ----------
(47,273) 44,291 (112,201)
---------- ---------- ----------
Increase (decrease) in cash (45,137) 30,539 4,746
Cash, beginning of year 94,114 63,575 58,829
---------- ---------- ----------
Cash, end of year $ 48,977 $ 94,114 $ 63,575
========== ========== ==========
Supplemental disclosures of cash flow
information:
Interest paid $ 91,100 $ 94,000 $ 100,100
========== ========== ==========
Income taxes refunded (paid) $ (3,300) $ (83,800) $ 37,900
========== ========== ==========
</TABLE>
Supplemental disclosure of noncash financing activities:
In connection with the 1992 sale of the operating assets of Frank B. Hall & Co.
Inc. ("Hall"), the Company issued shares of its common stock as merger
consideration to certain holders of Hall common stock. See note 15 to the
consolidated financial statements.
See notes to consolidated financial statements
31
<PAGE>
Notes to Consolidated Financial Statements
------------------------------------------
Reliance Group Holdings, Inc. & Subsidiaries
--------------------------------------------
NOTE 1 Summary of Significant Accounting Policies
Basis of Consolidation and Presentation
The consolidated financial statements of the Company include the
accounts of all subsidiaries. All material intercompany balances and
transactions have been eliminated in consolidation.
Insurance
The financial statements of the insurance subsidiaries have been
prepared in accordance with generally accepted accounting principles,
which differ in certain respects from those followed in reports to
regulatory authorities.
Fixed maturity investments, the vast majority of which are publicly
traded securities, include bonds, notes and redeemable preferred
stocks. Fixed maturity investments classified as "available for sale"
represent securities that will be held for an indefinite period of
time and are carried at quoted market value with the net unrealized
gain or loss included in shareholders' equity. Such investments may
be sold in response to changes in interest rates, future general
liquidity needs and similar factors. Fixed maturity investments
classified as "held for investment" are carried at amortized cost
since the Company has the positive intent and ability to hold these
securities to maturity. Prior to June 30, 1992, the Company held all
of its fixed maturity portfolio as "held for investment".
Accordingly, sales of fixed maturities held for investment during
1992, as shown in the accompanying consolidated statement of cash
flows, represent sales of all fixed maturity investments during the
period January 1, 1992 through June 30, 1992. Investments in equity
securities include common stocks, where ownership of outstanding
voting stock is less than 20%, and nonredeemable preferred stocks and
are carried at quoted market value with the net unrealized gain or
loss included in shareholders' equity. Investments in which the
Company has a 20% to 50% ownership interest, or otherwise exercises
significant influence, are reported using the equity method of
accounting. Short-term investments primarily consist of U.S. treasury
securities, certificates of deposit and commercial paper carried at
cost which approximates market. Investments whose declines in market
values are deemed to be other than temporary are written down to
market value and the accrual of investment income is discontinued. In
circumstances where market values are not available, investments are
written down to estimated fair value. In determining estimated fair
value of investments, the Company reviews the issuer's financial
condition and the stability of its income, as well as the discounted
cash flow to be received by the Company. Write-downs and other
realized gains and losses, determined on a specific identification
basis, are included in income.
Property and casualty insurance premiums reported as earned
represent the portion of premiums written applicable to the current
period, computed on a pro-rata basis over the terms of the policies
in force. Premiums include estimated audit premiums and estimated
premiums on retrospectively rated policies.
The costs associated with the acquisition of property and casualty
business are deferred and amortized on a straight-line basis over the
terms (principally one year) of the policies in force. Such deferred
policy acquisition costs consist of commissions, premium taxes and
other variable policy issuance and underwriting expenses. Deferred
policy acquisition costs are reviewed to determine that they do not
exceed recoverable amounts, including anticipated investment income.
Property and casualty unpaid claims and related expenses are 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. Adjustments of the probable ultimate liability, based on
subsequent developments, are included in operations currently. At
December 31, 1994 and 1993, liabilities for unpaid claims and related
expenses include $437,900,000 and $411,023,000 relating to
short-duration contracts which are expected to have fixed, periodic
payment patterns and have been discounted to present values using
statutory annual rates ranging from 3 1/2% to 6%.
32
<PAGE>
Direct title insurance premiums and fees are recognized as revenue
when policies become effective. Agency title insurance premiums are
recognized as revenue when reported by the agent. Title insurance
claims arise principally from unknown title defects which exist at
the time policies become effective. The reserve for title losses,
which is based on historical and anticipated loss experience,
represents the estimated costs to settle reported claims and
estimated future claims relating to policies issued. Changes in loss
estimates, resulting from management's continuing review process and
differences between estimates and actual payments, are included in
operations currently.
Investments in Real Estate
Investments in real estate consist primarily of shopping centers
and office buildings, and are recorded at cost (less accumulated
depreciation), which includes real estate taxes, interest and other
carrying costs incurred prior to substantial completion of the real
estate development projects. Investments in real estate at December
31, 1994 include $60,800,000 related to undeveloped land which has
been rezoned for mixed use development. Interest capitalized
relating to the development of real estate properties was $1,100,000
in 1992. No interest was capitalized in 1994 or 1993. Depreciation
expense is provided using the straight-line method.
The Company periodically evaluates the discounted cash flow of
each of its real estate properties over a ten-year period to
determine whether they are carried at or below net realizable value.
These cash flow projections reflect changes in occupancy, new
leases, current rent roll, future expirations and general market
conditions. Based on this analysis, impairment write-downs, if
required, are made on a property-by-property basis. The Company does
not rely on market value appraisals in determining net realizable
value and obtains such appraisals on an infrequent basis.
Excess of Cost Over Fair Value of Net Assets Acquired
The excess of cost over fair value of net assets acquired is being
amortized over 40 years using the straight-line method. The Company
evaluates the carrying amount of the excess of cost over fair value
of net assets acquired by analyzing historical and expected future
income and undiscounted cash flows of its operations.
Income Taxes
The Company and its domestic subsidiaries, where their ownership is
at least 80% of outstanding voting stock, file a consolidated federal
income tax return. The Company provides for deferred income taxes
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.
In addition, deferred income taxes are provided for unrealized
appreciation and depreciation on investments carried at quoted market
value.
Postretirement Benefit Plans
Retirement pension benefits, covering substantially all employees,
are provided under noncontributory trusteed defined benefit pension
plans. Contributions to the pension plans are based on the minimum
funding requirements of the Employee Retirement Income Security Act
of 1974. In addition, the Company sponsors defined contribution plans
covering employees who meet eligibility requirements and unfunded
postretirement medical and life insurance plans for certain employees
of a subsidiary.
Translation of Foreign Currency Financial Statements
Assets and liabilities of foreign subsidiaries are translated at
year-end exchange rates. Results of operations are translated at
average rates during the year. The effects of exchange rate changes
in translating foreign financial statements are excluded from the
consolidated results of operations and are presented as a separate
component of shareholders' equity.
Fair Value of Financial Instruments
The estimated fair value of publicly traded financial instruments is
determined by the Company using quoted market prices, dealer quotes
and prices obtained from independent third parties. For financial
instruments not publicly traded, fair values are estimated based on
values obtained from independent
33
<PAGE>
Notes to Consolidated Financial Statements Continued
----------------------------------------------------
Reliance Group Holdings Inc. & Subsidiaries
-------------------------------------------
third parties or quoted market prices of comparable instruments.
However, judgment is required to interpret market data to develop the
estimates of fair value. Accordingly, the estimates are not
necessarily indicative of the amounts that could be realized in a
current market exchange. See notes 2, 3 and 7 regarding fair value
information for the Company's financial instruments.
Per-Share Information
Income (loss) per share is computed by using the average number of
common shares outstanding during the period reduced, when
appropriate, by shares of common stock held for contribution to the
Company's defined contribution plans. Common stock equivalents have
been included in shares outstanding where such effects are dilutive.
Reclassifications
The 1993 and 1992 consolidated statement of cash flows has been
reclassified to include gains on sales of investments as a component
of cash flows from investing activities, rather than a component of
cash flows from operating activities. Certain other reclassifications
have been made to the Company's 1993 and 1992 consolidated financial
statements to conform with the current year's consolidated financial
statements.
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.
Note 2 Investments
Fixed maturities held for investment at December 31, 1994
consisted of:
<TABLE>
<CAPTION>
Gross Gross
Amortized Market Unrealized Unrealized
Cost Value Gains Losses(1)
---------- --------- ---------- ----------
<S> <C> <C> <C> <C>
(In thousands)
Bonds and notes:
Public utilities $ 536,746 $ 477,942 $ 202 $ 59,006
Corporate bonds and
notes and other 478,521 432,649 899 46,771
Redeemable preferred
stock 150,753 142,960 1,613 9,406
---------- ---------- ---------- ----------
$1,166,020 $1,053,551 $ 2,714 $115,183
---------- ---------- ---------- ----------
</TABLE>
(1)The amortized cost and market value of fixed maturity investments which have
unrealized losses were $1,065,908,000 and $950,725,000.
Fixed maturities available for sale at December 31, 1994 consisted of:
<TABLE>
<CAPTION>
Gross Gross
Market Amortized Unrealized Unrealized
Value Cost Gains Losses(1)
------ --------- ---------- ----------
<S> <C> <C> <C> <C>
(In thousands)
Bonds and notes:
United States government and
government agencies and authorities $ 495,007 $ 528,297 $ 615 $ 33,905
Public utilities 88,602 96,631 177 8,206
Corporate bonds and notes and other 914,904 971,630 32,020 88,746
Redeemable preferred stock 340,799 349,361 5,695 14,257
---------- ---------- ------- --------
$1,839,312 $1,945,919 $38,507 $145,114
========== ========== ======= ========
</TABLE>
(1) The amortized cost and market value of fixed maturity investments
which have unrealized losses were $1,533,070,000 and $1,387,956,000.
34
<PAGE>
Fixed maturities held for investment at December 31, 1993 consisted of:
<TABLE>
<CAPTION>
Gross Gross
Amortized Market Unrealized Unrealized
Cost Value Gains Losses(1)
--------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
(In thousands)
Bonds and notes:
Public utilities $ 433,073 $ 446,506 $ 14,733 $ 1,300
Corporate bonds and notes and other 364,655 383,517 20,232 1,370
Redeemable preferred stock 135,808 143,090 7,382 100
---------- ---------- ---------- ---------
$ 933,536 $ 973,113 $ 42,347 $ 2,770
========== ========== ========== =========
</TABLE>
(1) The amortized cost and market value of fixed maturity investments which have
unrealized losses were $78,143,000 and $75,373,000.
Fixed maturities available for sale at December 31, 1993 consisted of:
<TABLE>
<CAPTION>
Gross Gross
Market Amortized Unrealized Unrealized
Value Cost Gains Losses(1)
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
(In thousands)
Bonds and notes:
United States government and government
agencies and authorities $ 475,060 $ 466,897 $ 10,087 $ 1,924
Public utilities 91,556 86,943 4,725 112
Corporate bonds and notes and other 994,154 943,921 59,013 8,780
Redeemable preferred stock 383,329 359,208 25,796 1,675
---------- ---------- ---------- ----------
$1,944,099 $1,856,969 $ 99,621 $ 12,491
========== ========== ========== ==========
</TABLE>
(1) The amortized cost and market value of fixed maturity investments which have
unrealized losses were $386,455,000 and $373,964,000.
As of December 31, 1994, the contractual maturities of fixed maturity
investments are as follows:
<TABLE>
<CAPTION>
Held for investment Available for sale
------------------------ ----------------------------
Amortized Market Amortized Market
Cost Value Cost Value
---------- ----------- -------------- ----------
<S> <C> <C> <C> <C>
(In thousands)
Due after one year through five years $ 34,383 $ 33,924 $ 633,427 $ 596,571
Due after five years through ten years 355,174 327,308 446,452 444,450
Due after ten years 776,463 692,319 846,234 779,436
---------- ----------- --------- ----------
1,166,020 1,053,551 1,926,113 1,820,457
Mortgage-backed securities -- -- 19,806 18,855
---------- ----------- ---------- ----------
$1,166,020 $1,053,551 $1,945,919 $1,839,312
========== =========== ========== ==========
</TABLE>
Short-term investments represent securities which are scheduled to mature within
one year.
Net investment income consisted of:
<TABLE>
<CAPTION>
Year Ended December 31 1994 1993 1992
---------------------- ---------- ---------- ----------
<S> <C> <C> <C>
(In thousands)
Investment income:
Fixed maturities $ 218,970 $ 183,095 $ 170,119
Equity securities 27,390 29,640 22,229
Short-term investments 9,159 19,920 17,615
Other 14,159 15,832 13,664
---------- ---------- ----------
269,678 248,487 223,627
Investment expenses (10,766) (7,773) (8,116)
--------- ---------- ----------
$ 258,912 $ 240,714 $ 215,511
========== ========== ==========
</TABLE>
35
<PAGE>
Notes to Consolidated Financial Statements Continued
-------------------------------------------------------------------------------
Reliance Group Holdings, Inc. & Subsidiaries
-------------------------------------------------------------------------------
Gain on sales of investments consisted of:
<TABLE>
<CAPTION>
Year Ended December 31 1994 1993 1992
---------------------- ---------- ---------- ----------
<S> <C> <C> <C>
(In thousands)
Fixed maturities(1):
Realized gains $ 44,661 $ 58,946 $ 40,359
Realized losses(2) (28,016) (21,179) (6,175)
---------- ----------- ----------
16,645 37,767 34,184
Equity securities 7,290 98,944 19,628
Other(3) (16,168) (2,907) (465)
---------- ----------- ----------
$ 7,767 $133,804 $ 53,347
========== =========== ==========
</TABLE>
(1) For the year ended December 31, 1994, the Company sold fixed maturities held
for investment with an amortized cost of $18,100,000. These sales were
principally in response to a significant deterioration in the issuers'
creditworthiness.
(2) Includes $21,900,000, $18,400,000 and $5,800,000 in 1994, 1993 and 1992,
respectively, related to non-investment grade securities.
(3) Includes realized losses of $14,500,000 in 1994 related to certain foreign
currency contracts. As of December 31, 1994, the Company did not hold any
derivative financial instruments.
Gain on sales of investments in 1994 and 1993 included write-downs of
$23,500,000 and $23,400,000 equal to the difference between cost and market
values of certain investments to reflect other than temporary declines.
Net unrealized appreciation (depreciation) on investments consisted of:
<TABLE>
<CAPTION>
Year Ended December 31 1994 1993 1992
---------------------- ---------- ---------- ----------
<S> <C> <C> <C>
(In thousands)
Unrealized appreciation (depreciation):
Equity securities $ (6,849) $ (9,670) $ 31,347
Fixed maturities available for sale (193,737) 48,689 38,441
---------- ---------- ----------
(200,586) 39,019 69,788
Deferred income tax (provision) benefit 66,684 (11,261) (27,801)
Net unrealized appreciation (depreciation) in
investments of investee company (9,002) 1,244 3,818
---------- ---------- ----------
$ (142,904) $ 29,002 $ 45,805
========== =========== ==========
Unrealized appreciation (depreciation) on
fixed maturities held for investment $ (152,046) $ 24,433 $ 4,076
========== =========== ==========
</TABLE>
Net unrealized gain (loss) on investments consisted of:
<TABLE>
<CAPTION>
December 31 1994 1993 1992
----------------------- ---------- ---------- ----------
<S> <C> <C> <C>
(In thousands)
Equity securities:
Unrealized gains $ 114,231 $100,179 $ 99,986
Unrealized losses (32,124) (11,223) (1,360)
---------- ---------- ----------
82,107 88,956 98,626
---------- ---------- ----------
Fixed maturities available for sale:
Unrealized gains 38,507 99,621 66,392
Unrealized losses (145,114) (12,491) (27,951)
---------- ---------- ----------
(106,607) 87,130 38,441
---------- ---------- ----------
(24,500) 176,086 137,067
Deferred income tax (provision) benefit 5,053 (61,631) (50,370)
Net unrealized gain (loss) in investments of investee
company (8,434) 568 (676)
---------- ---------- ----------
$ (27,881) $115,023 $ 86,021
========== =========== ==========
</TABLE>
36
<PAGE>
Fixed maturity investments carried at $482,500,000 at December 31, 1994 were on
deposit under requirements of regulatory authorities, including deposits
related to workers' compensation reinsurance pools.
Investments in a single issuer, other than obligations of the U.S. government,
whose aggregate carrying value is in excess of 10% of the Company's
shareholders' equity at December 31, 1994 are as follows:
Carrying Value Market Value
-------------- ------------
(In thousands)
Fixed Maturity Investments:
Boston Edison Co. $ 42,264 $ 39,201
Central Power & Lighting Co. 39,844 35,744
CMAC Investment Corporation 40,700 40,700
Commonwealth Edison Co. 65,782 59,592
Consumers Power Co. 46,837 39,738
Duke Power Co. 43,713 41,560
Ford Motor Credit Co. 77,708 66,577
General Motors Acceptance Corp. 40,036 39,203
Public Service Electric & Gas Co. 48,445 45,217
Tele-Communications, Inc. 60,384 60,384
Texas Utilities Electric Company 51,810 51,810
Time Warner Entertainment Co. 56,277 56,277
Zenith Electronics Corporation 47,790 47,790
Equity Securities:
Aon Corporation preferred stock 123,132 123,132
Citicorp Inc. preferred stock 50,857 50,857
Symbol Technologies, Inc. 110,182 110,182
Note 3 Investment in Investee Company
Investment in investee company at December 31, 1994 and 1993 was $148,776,000
and $158,279,000 which represents the Company's investment in Zenith National
Insurance Corp. ("Zenith"). Equity income in Zenith was $9,478,000, $12,441,000
and $5,206,000 for the years ended December 31, 1994, 1993 and 1992,
respectively. Dividends received by the Company from Zenith were $6,574,000 for
each of the years ended December 31, 1994, 1993 and 1992.
Summarized financial information for Zenith is as follows:
<TABLE>
<CAPTION>
Year Ended December 31 1994 1993 1992
----------------------- ---------- ---------- ----------
<S> <C> <C> <C>
(In thousands, except per-share amounts)
Revenues $595,113 $ 585,782 $ 549,335
Income before income taxes and
extraordinary item 57,571 73,479 19,706
Net income 37,900 53,200 28,700
Net income per share 1.99 2.76 1.52
</TABLE>
<TABLE>
<CAPTION>
December 31 1994 1993
----------- ---------- ----------
<S> <C> <C>
(In thousands, except percentage of ownership)
Total assets $1,840,758 $1,857,790
Senior notes 74,111 73,989
Common shareholders' equity 309,860 349,465
Percentage of ownership 34.7% 34.5%
Market value of investment in equity securities 149,569 147,103
</TABLE>
The Company's equity in net income includes amortization of excess of cost over
fair value of net assets acquired. At December 31, 1994, retained earnings
(deficit) included undistributed net income of $31,091,000 from Zenith.
37
<PAGE>
Notes to Consolidated Financial Statements Continued
-------------------------------------------------------------------------------
Reliance Group Holdings, Inc. & Subsidiaries
-------------------------------------------------------------------------------
Note 4 Premiums and Other Receivables
<TABLE>
<CAPTION>
December 31 1994 1993
--------------------------------------------- ---------- ----------
<S> <C> <C>
(In thousands)
Premiums receivable $1,079,393 $ 963,570
Investment income receivable 64,205 54,540
Accounts, notes and other receivables 118,956 71,662
---------- ----------
$1,262,554 $1,089,772
========== ==========
</TABLE>
At December 31, 1994, substantially all receivables were due within one year.
As of December 31, 1994 and 1993, the Company sold with recourse $126,700,000
and $117,900,000 of reinsurance recoverables and premiums receivable relating to
its property and casualty insurance operations.
Note 5 Income Taxes
Income tax (provision) benefit from continuing operations consisted of:
<TABLE>
<CAPTION>
Year Ended December 31 1994 1993 1992
----------------------- ---------- ---------- ----------
<S> <C> <C> <C>
(In thousands)
Current:
Federal $ (8,996) $ (29,671) $ 12,738
Foreign (6,204) (1,949) (1,621)
---------- ---------- ----------
(15,200) (31,620) 11,117
Deferred federal 3,000 (2,680) 21,383
Reversal of valuation allowance -- 23,300 --
---------- ---------- ----------
$ (12,200) $ (11,000) $ 32,500
========== ========== ==========
</TABLE>
Domestic and foreign income (loss) from continuing operations before income
taxes, minority interests and equity in investee company were:
<TABLE>
<CAPTION>
Year Ended December 31 1994 1993 1992
----------------------- ---------- ---------- ----------
<S> <C> <C> <C>
(In thousands)
Domestic $ 31,250 $ 82,131 $ (81,934)
Foreign 18,498 5,569 4,768
---------- ---------- ----------
$ 49,748 $ 87,700 $ (77,166)
========== ========== ==========
</TABLE>
The reconciliation of taxes computed at the statutory rate (35% in 1994 and 1993
and 34% in 1992) to the income tax (provision) benefit is as follows:
<TABLE>
<CAPTION>
Year Ended December 31 1994 1993 1992
----------------------- ---------- ---------- ----------
<S> <C> <C> <C>
(In thousands)
Tax (provision) benefit at statutory rate $(17,412) $ (30,695) $ 26,236
Nontaxable investment income 13,989 1,743 7,999
Amortization of excess of cost over fair
value of net assets acquired (3,150) (2,975) (3,060)
(Increase) decrease of valuation allowance (5,774) 23,300 --
Impact of change in statutory rate
from new tax act -- 3,500 --
Other 147 (5,873) 1,325
---------- ---------- ----------
Income tax (provision) benefit $(12,200) $ (11,000) $ 32,500
========== ========== ==========
</TABLE>
38
<PAGE>
The tax effects of items comprising the Company's net deferred tax asset are as
follows:
<TABLE>
<CAPTION>
December 31 1994 1993
------------ ---------- ----------
<S> <C> <C>
(In thousands)
Deferred tax assets:
Discounting of loss reserves $ 197,655 $ 190,862
Tax basis differential of subsidiary not
included in consolidated tax return 120,600 120,600
Operating loss carryforwards of subsidiary not
included in consolidated tax return 57,925 54,600
Unearned premium reserve 40,748 41,198
Accruals not currently deductible 59,176 55,178
Other 77,208 58,507
---------- ----------
553,312 520,945
Deferred tax liabilities:
Deferred policy acquisition costs 62,874 61,915
Unrealized investment gains -- 61,631
Investment in investee company 17,499 20,898
Other 109,891 105,077
---------- ----------
363,048 271,424
Valuation allowance (171,058) (158,546)
---------- ----------
Net deferred tax asset $ 191,990 $ 112,878
========== ==========
</TABLE>
The Company believes that its net deferred tax asset will be fully recoverable
under Section 847 of the Internal Revenue Code and from the utilization of
certain net operating loss carryforwards ("NOL"). For the year ended December
31, 1994, the Company's valuation allowance and income tax provision were
increased by $5,774,000 relating primarily to deferred tax assets for which it
is likely that tax benefits will not be realized. The remaining increase in the
1994 valuation allowance relates principally to a subsidiary that is not
included in the consolidated tax return. For the year ended December 31, 1993,
the Company's valuation allowance and income tax provision were reduced by
$23,300,000 from the utilization of $7,100,000 of NOL's and $16,200,000 of
deferred tax benefits previously not recognized.
At December 31, 1994, a subsidiary of the Company, not included in the
consolidated tax return, had available NOL's of approximately $165,500,000. For
federal income tax purposes, approximately $131,500,000 expires in 2001,
$17,000,000 in 2002 and $17,000,000 in 2004. The Internal Revenue Code imposes
limitations on the availability of these NOL's since the subsidiary experienced
a more than 50 percentage point ownership change in 1989. The amount of the NOL
incurred prior to the ownership change which can be utilized in each subsequent
year is limited (the "Loss Limitation") based on the value of the subsidiary on
the date of the ownership change. The annual Loss Limitation approximates
$25,000,000.
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 Company intends to pursue the
action vigorously. 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 $32,179,000 for 1980 and 1981, plus interest at the statutorily
prescribed rates for the periods since those years. On January 11, 1995, the
U.S. Tax Court handed down a decision in Norfolk Southern Corp. v. Commissioner,
a case involving a taxpayer, which, like the Company, had claimed investment tax
credits in connection with the leasing of intermodal cargo containers. In the
decision, which is the first pronouncement by the courts on this issue, the Tax
Court articulated a standard, different from that proposed by the IRS, which, if
applied to the Company, would result in the disallowance of a substantial
percentage (although significantly less than that sought by the IRS) of the
investment tax credits claimed by the Company. The Company believes that it has
appropriately provided for this matter in light of its exposure in the event a
standard such as the one articulated in Norfolk Southern is applied to the
Company's facts and circumstances. On February 22, 1995, the Tax Court granted
the joint motion of the Company and the Commissioner to
39
<PAGE>
Reliance Group Holdings, Inc. & Subsidiaries
--------------------------------------------
Notes to Consolidated Financial Statements Continued
----------------------------------------------------
postpone the trial of the investment tax credit issue until after the resolution
of appellate proceedings in Norfolk Southern. The Company does not believe that
it is probable that its additional liability, if any, in respect of this matter
will have a material adverse effect on its consolidated financial statements.
The IRS is currently examining the Company's 1986 through 1990 federal
income tax returns. While the outcome of the current examinations is uncertain,
the Company does not believe that it is probable that its additional tax
liability, if any, will have a material adverse effect on its consolidated
financial statements.
Effective January 1, 1993, the Company adopted Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes" ("FAS 109"). The
effect of adopting FAS 109 in 1993 was to increase net income by $32,311,000
representing a decrease in the provision for income taxes of $26,800,000, an
increase in income for the cumulative effect of the change in accounting
principle of $15,911,000 and a decrease in extraordinary income from the
utilization of NOL's of $10,400,000. As a result of adopting FAS 109, previously
unrecorded deferred tax benefits from NOL's were recognized. These benefits
amounted to $29,400,000, net of a valuation allowance of $35,500,000.
Note 6 Unpaid Claims and Related Expenses
The following table presents information relating to the liability for unpaid
claims and related expenses for the Company's property and casualty insurance
operations. The reconciliation of beginning and ending liability balances are
as follows:
<TABLE>
<CAPTION>
December 31 1994 1993 1992
------------ ---------- ---------- ----------
<S> <C> <C> <C>
(In thousands)
Liability for unpaid claims and related expenses,
beginning of year $5,048,442 $4,571,792 $3,685,049
Less reinsurance recoverables 2,116,914 1,868,800 1,309,814
---------- ---------- ----------
Net liability for unpaid claims and related expenses,
beginning of year 2,931,528 2,702,992 2,375,235
---------- ---------- ----------
Provision for policy claims and related expenses:
Provision for insured events of the current year 1,274,649 1,195,425 1,258,111
Increase in provision for insured events of prior
years 22,444 40,169 31,487
---------- ---------- ----------
Total provision 1,297,093 1,235,594 1,289,598
---------- ---------- ----------
Payments for policy claims and related expenses:
Attributable to insured events of the current year 321,538 229,778 271,878
Attributable to insured events of prior years 780,961 776,881 689,181
---------- ---------- ----------
Total payments 1,102,499 1,006,659 961,059
---------- ---------- ----------
Foreign currency translation 1,659 (399) (782)
---------- ---------- ----------
Net liability for unpaid claims and related expenses,
end of year 3,127,781 2,931,528 2,702,992
Plus reinsurance recoverables 2,453,702 2,116,914 1,868,800
---------- ---------- ----------
Liability for unpaid claims and related expenses, end
of year $5,581,483 $5,048,442 $4,571,792
========== ========== ==========
</TABLE>
40
<PAGE>
The 1994 provision for property and casualty insured events of prior years
includes $17,000,000 of adverse development related to prior year
asbestos-related and environmental pollution claims. Development of
asbestos-related and environmental pollution claims primarily effects general
liability and multiple peril lines of business. The 1994 provision also includes
$14,700,000 of adverse development from other general liability lines. This
development was partially offset by $13,300,000 of favorable development in
workers' compensation. The 1993 provision includes $21,100,000 of adverse
development from workers' compensation reinsurance pools and $35,200,000 of
adverse development related to prior year asbestos-related and environmental
pollution claims. This development was partially offset by favorable development
in other lines of business, including other general liability lines. The 1992
provision included $55,600,000 of adverse development from workers' compensation
and automobile reinsurance pools. This development was partially offset by
favorable development of $11,900,000 from two general liability claims and
favorable development of $10,700,000 related to unallocated loss adjustment
expenses.
The following table presents information relating to the liability for unpaid
claims and related expenses for the Company's title insurance operations. The
reconciliation of beginning and ending liability balances are as follows:
<TABLE>
<CAPTION>
December 31 1994 1993 1992
----------------------- ---------- ---------- ----------
<S> <C> <C> <C>
(In thousands)
Liability for unpaid claims and related expenses,
beginning of year $204,695 $173,328 $177,449
---------- ---------- ----------
Provision for policy claims and related expenses:
Provision for insured events of the current year 71,060 76,955 95,963
Increase in provision for insured events of prior
years 4,807 4,848 4,599
---------- ---------- ----------
Total provision 75,867 81,803 100,562
---------- ---------- ----------
Payments for policy claims and related expenses:
Attributable to insured events of the current year 4,475 2,356 7,450
Attributable to insured events of prior years 48,024 48,080 78,950
---------- ---------- ----------
Total payments 52,499 50,436 86,400
---------- ---------- ----------
Other(1) -- -- (18,283)
---------- ---------- ----------
Liability for unpaid claims and related expenses, end
of year $228,063 $204,695 $173,328
========== ========== ==========
</TABLE>
(1) Represents the effects of the sale and acquisition of certain subsidiaries.
The following table presents information relating to the net liability for
unpaid claims and related expenses pertaining to asbestos-related and
environmental pollution claims. Information is presented for 1994 and 1993 only,
as certain 1992 data is not available. The reconciliation of beginning and
ending net liability balances are as follows:
<TABLE>
<CAPTION>
December 31 1994 1993
----------------------- ---------- ----------
<S> <C> <C>
(In thousands)
Net liability for unpaid claims and related expenses,
beginning of year $122,034 $ 94,253
Provision for policy claims and related expenses 28,279 52,630
Payments for policy claims and related expenses (20,170) (24,849)
---------- ----------
Net liability for unpaid claims and related expenses,
end of year $130,143 $122,034
========== ==========
</TABLE>
41
<PAGE>
Reliance Group Holdings, Inc. & Subsidiaries
--------------------------------------------
Notes to Consolidated Financial Statements Continued
----------------------------------------------------
Included in the December 31, 1994 net liability for unpaid claims and related
expenses for asbestos-related and environmental pollution claims are $36,500,000
of loss costs for claims incurred but not reported, $49,400,000 of loss costs
for reported claims and $44,243,000 of related expenses. The Company continues
to receive claims asserting injuries from hazardous materials and alleged
damages to cover various clean-up costs. Loss and loss expense reserves for
asbestos-related and environmental pollution claims are established using
standard actuarial techniques as well as management's judgment. Coverage and
claim settlement issues, related to policies written in prior years, such as the
determination that coverage exists and the definition of an occurrence, may
cause the actual loss development for asbestos-related and environmental
pollution claims to exhibit more variation than the remainder of the Company's
book of business. See Financial Review section for further discussion.
Note 7 Debentures, Notes, Term Loans and Short-Term Debt
In 1993, the Company completed the simultaneous public offering of $200,000,000
of its common stock, $400,000,000 principal amount of 9% Senior Notes due 2000
and $250,000,000 principal amount of 9 3/4% Senior Subordinated Debentures due
2003. In addition, Reliance Financial Services Corporation ("Reliance
Financial") entered into a revolving credit facility and term loan agreement
("Credit Facility"). The net proceeds from the offerings were $820,910,000 after
deducting underwriting discounts and commissions and related expenses. These
proceeds, together with borrowings under the Credit Facility, were used to repay
in full the previously existing term loans and revolving credit agreement and to
redeem all outstanding debentures and notes, other than the senior reset notes.
As a result of the early extinguishment of this debt, the Company incurred an
extraordinary loss of $27,922,000, net of income taxes of $16,470,000, in 1993.
Debentures and notes outstanding are as follows:
<TABLE>
<CAPTION>
December 31 1994 1993
----------------------- ---------- ----------
<S> <C> <C>
(Dollars in thousands)
9% senior notes due 2000 $400,000 $400,000
9 3/4% senior subordinated debentures due 2003 250,000 250,000
10.36% senior reset notes (interest rate is adjustable
every five years based on Treasury Rate) due
1998-2000 30,713 50,000
9.48% senior reset notes (interest rate is adjustable
every three years based on Treasury Rate) due
1995-2000; ($50,000 principal amount,
less unamortized discount of $117 at December 31,
1994) 49,883 49,863
---------- ----------
$730,596 $749,863
========== ==========
</TABLE>
The fair value of the Company's debentures and notes at December 31, 1994 and
1993 was $674,003,000 and $766,155,000 based on quoted market prices.
42
<PAGE>
Term Loans And Short-Term Debt
At December 31, 1994, term loans and short-term debt aggregated $141,355,000 and
consisted of $128,102,000 of term loans which are payable in varying amounts
through 2015 with interest rates ranging from 3.4% to 10.5% and $13,253,000 of
short-term debt. The weighted average interest rate on short-term debt was 7.4%
and 5.3% at December 31, 1994 and 1993. During 1992, the Company retired real
estate debt which resulted in an extraordinary gain of $3,460,000, net of
income taxes of $1,800,000. The Company believes that the fair value of its term
loans and short-term debt at December 31, 1994 and 1993 approximates carrying
value.
Maturities and sinking fund payments of debentures and notes and term loans and
short-term debt for each of the next five years are as follows:
Term Loans
and
Debentures Short-Term
and Notes Debt
---------- ----------
(In thousands)
1995 $ 5,000 $23,736
1996 5,000 15,652
1997 5,000 23,267
1998 5,713 55,000
1999 10,000 --
Reliance Financial's Credit Facility includes a revolving credit facility with
various banks providing for aggregate maximum outstanding borrowings of
$100,000,000 through December 31, 1998. At Reliance Financial's option, all
borrowings under the revolving credit facility will bear interest at a floating
rate based on a bank reference rate (or, if higher, the Federal Funds rate plus
1/2%) or at a rate based on the Eurodollar rate. At December 31, 1994,
borrowings aggregating $35,000,000 were outstanding under this facility. All of
the common stock of Reliance Insurance Company ("Reliance Insurance"), the
principal subsidiary of Reliance Financial, has been pledged to secure the
Credit Facility and the senior reset notes.
The provisions of certain notes and debentures contain limitations on the
payment of dividends. At December 31, 1994 the Company could pay up to
$68,700,000 in dividends without violating the most restrictive provisions. See
note 9 to the consolidated financial statements.
Note 8 Reinsurance
In the normal course of business, the property and casualty insurance companies
assume and cede 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 claims and related expenses associated with the
reinsurance. Estimated amounts of reinsurance recoverables are reported as
assets in the accompanying consolidated balance sheet. As of December 31, 1994
and 1993, reinsurance recoverables include $463,380,000 and $439,337,000 of
prepaid reinsurance premiums which represents the portion of property and
casualty premiums ceded to reinsurers applicable to unearned premiums.
43
<PAGE>
Reliance Group Holdings, Inc. & Subsidiaries
--------------------------------------------
Notes to Consolidated Financial Statements Continued
----------------------------------------------------
The reconciliation of property and casualty insurance direct premiums to net
premiums is as follows:
<TABLE>
<CAPTION>
Year Ended December 31 1994 1993 1992
------------------------ --------------------------- ---------------------------
Premiums Premiums Premiums Premiums Premiums Premiums
Written Earned Written Earned Written Earned
----------- ----------- ----------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
(In thousands)
Direct $ 2,654,437 $ 2,630,549 $ 2,587,149 $ 2,531,478 $ 2,480,417 $ 2,350,216
Assumed 330,261 345,398 323,422 304,422 280,530 312,730
Ceded (1,220,408) (1,198,629) (1,139,974) (1,264,361) (1,219,387) (1,127,206)
----------- ----------- ----------- ----------- ----------- ------------
Net premiums $ 1,764,290 $ 1,777,318 $ 1,770,597 $ 1,571,539 $ 1,541,560 $ 1,535,740
=========== =========== =========== =========== =========== ============
</TABLE>
The reconciliation of property and casualty insurance gross policy claims and
settlement expenses to net policy claims and settlement expenses is as follows:
Year Ended December 31 1994 1993 1992
---------------------- ----------- ----------- -----------
(In thousands)
Gross $ 2,220,285 $ 2,097,428 $ 2,383,349
Reinsurance recoveries (923,192) (861,834) (1,093,751)
----------- ----------- -----------
Net policy claims and
settlement expenses $ 1,297,093 $ 1,235,594 $ 1,289,598
=========== =========== ===========
The Company holds substantial amounts of funds and letters of credit as
collateral pursuant to recoverables from unauthorized reinsurers. The Company is
not aware of any impairment of the creditworthiness of any of its significant
reinsurers.
Reliance Insurance's ten largest reinsurers, based
on 1994 ceded premiums, are as follows:
----------------------------------------------------
(In thousands)
American Re-Insurance Company $ 132,778
North American Reinsurance Corp. 98,756
Lloyd's of London 93,503
Hertz International Reinsurance Ltd. 67,309
Commercial Risk Re-Insurance Co. 45,822
G.I.O. Insurance Ltd. 35,869
TRN Insurance Company 34,692
Employers Reinsurance Corp. 34,537
TIG Reinsurance Company 29,550
Transatlantic Reinsurance Company 26,725
44
<PAGE>
Note 9 Redeemable Preferred Stock and Dividends of Subsidiaries
The Reliance Insurance preferred stock (940,725 shares) has cumulative dividend
rights of $2.68 per share and is redeemable, at Reliance Insurance's option, at
various prices decreasing to $25 per share in 1996. Reliance Insurance redeemed
134,389 shares during each of 1994 and 1993, which were used to satisfy the
mandatory annual redemption of one-fifteenth of all shares issued. Dividends on
the preferred stock are included in minority interests in the consolidated
statement of operations.
Dividends from Reliance Financial are subject to provisions of certain notes.
These provisions are less restrictive than the provisions in the Credit Facility
of Reliance Financial which requires, among other things, a minimum net worth
requirement and a limitation of indebtedness. At December 31, 1994, Reliance
Financial could pay up to $47,100,000 in dividends without violating the most
restrictive provisions. Reliance Financial's net worth increases with its net
income, subject to increases or decreases in net worth resulting from changes in
the market value of fixed maturities available for sale and of equity
securities. The Company is confident that Reliance Financial will continue to
pay all dividends necessary to meet the Company's cash needs. Dividend payments
by Reliance Insurance, without prior regulatory approval, are limited to the
greater of 10% of the preceding year-end policyholders' surplus or the preceding
year's statutory net income, but in no event to exceed the amount of unassigned
funds. In accordance with these regulatory restrictions, $124,500,000 is
available for the payment of dividends to Reliance Financial in 1995, subject to
the broad discretionary powers of insurance regulatory authorities to further
limit dividend payments of insurance companies.
Note 10 Shareholders' Equity
Common Stock
During 1993, the Company completed a public offering of 25,000,000 shares of its
common stock at a price of $8.00 per share. After deducting for underwriting
commissions and related expenses this offering increased shareholders' equity by
$188,289,000.
Warrants
The Company has warrants outstanding to purchase 4,999,969 shares of the
Company's common stock at $12.50 per share through January 1997. Unexercised
warrants may be redeemed during the sixty days preceding their expiration at the
option of the holder, for $2.50 per warrant.
Stock Options
The Company's Stock Option Plan, as amended, (the "Plan") provides for the
granting of incentive stock options, nonstatutory stock options and stock
appreciation rights to officers, non-employee directors and key employees of the
Company and certain of its affiliates. Under the terms of the Plan, options
which have a maximum term of 10 years from the date of grant are available to
purchase 11,850,000 shares of the Company's common stock.
45
<PAGE>
Reliance Group Holdings, Inc. & Subsidiaries
--------------------------------------------
Notes to Consolidated Financial Statements Continued
----------------------------------------------------
A summary of Plan activity is as follows:
<TABLE>
<CAPTION>
Year Ended December 31 1994 1993 1992
---------------------- -------------------------- ------------------------ -------------------------
Number of Price Range Number of Price Range Number of Price Range
Shares Per Share Shares Per Share Shares Per Share
--------- ----------- --------- ----------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
(In thousands, except per-share
amounts)
Balance, beginning of year 6,748 3.825-7 3/4 7,612 3.825-6 5/8 7,502 3 7/8 - 6 5/8
Granted 1,713 5-6 1/8 142 6 1/4-7 3/4 7,267 3.825 - 5 1/8
Exercised 145 3.825 326 3.825 -- --
Cancelled 187 3.825-6 1/2 680 3.825-6 1/2 7,157 3.825 - 6 5/8
--------- ------------ -------- ----------- --------- -------------
Balance, end of year 8,129 3.825-7 3/4 6,748 3.825-7 3/4 7,612 3.825 - 6 5/8
========= ============ ======== =========== ========= =============
Exercisable portion 3,085 3.825-7 3/4 1,514 3.825-6 5/8 361 4 1/2 - 6 5/8
========= ============ ======== =========== ========= =============
</TABLE>
Note 11 Policy Acquisition Costs and Other Insurance Expenses
<TABLE>
<CAPTION>
Year Ended December 31 1994 1993 1992
------------------------------------------------- ---------- ---------- ----------
<S> <C> <C> <C>
(In thousands)
Policy acquisition costs amortized during the year $ 387,924 $ 327,437 $ 289,591
---------- ---------- ----------
Other insurance expenses:
Salaries and commissions 704,254 684,362 613,743
Taxes, other than income taxes 34,849 54,049 52,161
Rent 54,863 50,852 52,108
Policyholders' dividends 2,630 6,342 9,827
Other 163,308 159,142 152,035
---------- ---------- ----------
959,904 954,747 879,874
---------- ---------- ----------
$1,347,828 $1,282,184 $1,169,465
========== ========== ==========
</TABLE>
Note 12 Postretirement Benefit Plans
Retirement benefits under the Company's noncontributory trusteed defined benefit
pension plans are paid to eligible employees based primarily on years of service
and compensation. Plan assets principally consist of corporate and government
debt securities and 1,430,300 shares of the Company's common stock and 460,869
warrants to purchase shares of the Company's common stock.
Pension cost includes the following components:
<TABLE>
<CAPTION>
Year Ended December 31 1994 1993 1992
------------------------------------------------- ------------ ----------- ----------
<S> <C> <C> <C>
(In thousands)
Service cost -- benefits earned during the period $ 10,559 $ 8,041 $ 9,953
Interest cost on projected benefit obligation 14,309 13,884 12,871
Actual return on plan assets 10,300 (29,161) (19,727)
Net amortization and deferral (30,222) 11,342 4,150
Effect of plan curtailment -- (1,310) (542)
---------- ----------- ----------
$ 4,946 $ 2,796 $ 6,705
========== =========== ==========
</TABLE>
46
<PAGE>
A reconciliation of the funded status of the plans with the accrued pension cost
included in accounts payable and accrued expenses is as follows:
<TABLE>
<CAPTION>
December 31 1994 1993
------------------------------------------------- ---------- -----------
<S> <C> <C>
(In thousands)
Actuarial present value of benefit obligation:
Vested $ 133,747 $ 145,183
Nonvested 7,063 7,449
---------- -----------
Accumulated benefit obligation 140,810 152,632
Effect of anticipated future compensation levels 27,639 41,846
---------- -----------
Projected benefit obligation 168,449 194,478
Plan assets at market value (164,545) (180,128)
---------- -----------
Projected benefit obligation in excess of plan assets 3,904 14,350
Unrecognized net asset at date of adoption 11,486 13,336
Unrecognized net loss (1,622) (15,473)
---------- -----------
Accrued pension cost $ 13,768 $ 12,213
========== ===========
</TABLE>
Contributions under the Company's noncontributory trusteed defined benefit
pension plans were $3,391,000, $4,381,000 and $7,914,000 in 1994, 1993 and 1992,
respectively.
The assumptions used to measure the projected benefit obligation at December 31,
1994 and 1993 include a discount rate of 9.0% and 7.5%, respectively. The
weighted average rate of compensation increase was 5.9% at December 31, 1994
compared to a fixed rate of compensation increase of 5.0% at December 31, 1993.
The expected long-term investment rate of return on plan assets for the years
ended December 31, 1994 and 1993 was 10.0%.
Contributions under the Company's defined contribution plans were $5,277,000,
$6,560,000 and $5,838,000 in 1994, 1993 and 1992, respectively, and were based
on a formula specified in the plan agreements.
The Company offers unfunded postretirement medical and life insurance plans to
certain employees of a subsidiary. Postretirement benefit cost includes the
following components:
<TABLE>
<CAPTION>
Year Ended December 31 1994 1993
---------------------- ---------- -----------
<S> <C> <C>
(In thousands)
Service cost -- benefits earned during the period $ 226 $ 242
Interest cost on accumulated postretirement benefit obligation 715 893
Net amortization and deferral 790 1,141
---------- -----------
$ 1,731 $ 2,276
========== ===========
</TABLE>
The components of the accumulated postretirement benefit obligation are as
follows:
<TABLE>
<CAPTION>
Year Ended December 31 1994 1993
------------------------------------------------- ---------- -----------
<S> <C> <C>
(In thousands)
Accumulated postretirement benefit obligation:
Retirees $ 5,743 $ 7,131
Other active plan participants 3,001 4,693
---------- -----------
Accumulated benefit obligation 8,744 11,824
Unrecognized net gain (loss) 853 (1,755)
Unrecognized transition obligation (8,630) (9,406)
---------- -----------
Accrued postretirement benefit cost $ 967 $ 663
========== ===========
</TABLE>
47
<PAGE>
Reliance Group Holdings, Inc. & Subsidiaries
--------------------------------------------
Notes to Consolidated Financial Statements Continued
----------------------------------------------------
The assumed health care cost trend rate used in measuring the accumulated
postretirement benefit obligation as of December 31, 1994 was 15.0% for 1995
decreasing until it reaches 7.0% in 2007, after which it remains constant. A
one-percentage-point change in the assumed health care cost trend rate for each
year would change the accumulated postretirement benefit obligation as of
December 31, 1994 and the 1994 net postretirement health care cost by
approximately 4.1% and 2.2%, respectively. The assumed discount rate used in
determining the accumulated postretirement benefit obligation at December 31,
1994 and 1993 was 9.0% and 7.5%, respectively.
Note 13 Sale of Subsidiary
During 1992, Commonwealth Land Title Insurance Company ("Commonwealth") sold its
mortgage insurance operations, Commonwealth Mortgage Assurance Company ("CMAC"),
through a public offering of common stock of CMAC Investment Corporation ("CMAC
Investment"). Commonwealth sold 100% of its CMAC Investment common stock for net
proceeds of $118,500,000 resulting in a pretax gain of $8,999,000. Commonwealth
continues to own 800,000 shares of $4.125 Redeemable Preferred Stock of CMAC
Investment, which were purchased for $40,000,000 in connection with the
offering. For the ten months ended October 30, 1992, CMAC had revenues of
$65,354,000, income before income taxes of $15,875,000 and net income of
$10,649,000.
Note 14 Statutory Information
Statutory net income was as follows:
<TABLE>
<CAPTION>
Year Ended December 31 1994 1993 1992
------------------------------------------------- ---------- ----------- -----------
<S> <C> <C> <C>
(In thousands)
Property and casualty insurance operations $123,970 $217,353 $100,648
Title insurance operations 32,421 43,904 22,575
</TABLE>
Statutory policyholders' surplus was as follows:
<TABLE>
<CAPTION>
December 31 1994 1993
------------------------------------------------- ---------- -----------
<S> <C> <C>
(In thousands)
Property and casualty insurance operations(1) $908,538 $902,290
Title insurance operations 180,757 176,868
</TABLE>
(1) Includes Reliance Insurance's investment in title insurance operations. Also
reflects a reduction in statutory loss reserves of $104,100,000 and $96,000,000
at December 31, 1994 and 1993, representing discounts of workers' compensation
reserves in excess of GAAP discounts.
Note 15 Discontinued Operations
Discontinued operations include the operations of United Pacific Life Insurance
Company ("UPL"), an indirect wholly-owned subsidiary of the Company, and the
insurance brokerage operations of Frank B. Hall & Co. Inc. ("Hall").
During 1993, the Company sold its life insurance subsidiary, UPL, to
General Electric Capital Corporation. In connection with the sale, the Company
purchased, from UPL, securities and real estate with a carrying value of
$482,000,000. The aggregate consideration was $567,000,000. The sale resulted in
a loss of $100,000,000 which was recorded in 1992. For the year ended December
31, 1992, UPL had revenues of $638,770,000, income before income taxes of
$86,445,000 and net income of $57,352,000.
48
<PAGE>
During 1992, Hall, the Company's discontinued insurance brokerage
operation, completed the sale of substantially all of its operating
assets and its insurance brokerage, employee benefits consulting and
related services businesses to Aon Corporation ("Aon"). Total
consideration received by Hall was $457,000,000, plus the assumption by
Aon of certain of Hall's operating liabilities. The Company's gain on
the sale of Hall's operating assets was $40,000,000, net of state and
federal taxes of $30,000,000. For the six months ended June 30, 1992,
Hall had revenues of $241,460,000, income before income taxes of
$9,471,000 and net income of $6,753,000. Pursuant to the terms of an
Agreement and Plan of Merger, each outstanding share of Hall, other than
shares owned by the Company, was converted into the right to receive
.625 of a share of the Company's common stock. As a result, in 1992, the
Company issued 9,232,968 shares of its common stock as merger
consideration to certain holders of Hall common stock. In addition, the
Company issued 2,407,730 shares of its common stock in order to fulfill
its potential obligations to holders of Hall options and Convertible
Preferred Stock (other than the Company) to deliver its common stock
upon the exercise or conversion of such securities. These issuances of
the Company's common stock increased shareholders' equity by $60,531,000
in 1992. The Company has also agreed to provide $18,000,000 per year
until 2007 of reinsurance brokerage commissions to Aon. In the first
quarter of 1994, in connection with the settlement of litigation, the
Company issued 305,635 shares of its common stock as additional merger
consideration to former shareholders of Hall. The issuance of the
Company's common stock increased shareholders' equity by $1,589,000 in
1994.
Note 16 Contingencies and Commitments
Contingencies
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.
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
$10,000,000. In January 1991, the regulations which formed the basis of
the notice were repealed by the newly elected Insurance Commissioner.
Subsequently, there were several administrative hearings on rate
rollback and several different sets of regulations were issued. The
regulations were subject to ongoing administrative and legal challenges.
In February 1993, a Los Angeles Superior Court issued a decision
declaring several sections of the regulations invalid and enjoined 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. A petition filed with the United States Supreme Court
seeking review of the California Supreme Court decision was denied on
February 21, 1995. On November 28, 1994, Reliance Insurance Company and
several of its affiliates received an order from the outgoing Insurance
Commissioner ordering refunds totaling $44,800,000 plus interest of
$27,500,000. The Company believes that the refund order is based on
incomplete and erroneous data. Furthermore, the Company believes that it
did not earn a fair rate of return on its California business during the
year at issue, 1989. Consequently, it intends to contest the order
vigorously. 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. In the fourth quarter of 1994, the Company recorded a
pre-tax charge of $11,600,000 related to Proposition 103. While this
charge reflects the Company's assessment of the impact of potential
refunds to policyholders under Proposition 103, the Company nevertheless
intends to contest the imposition of any refund on the basis of the
matters set forth above. The Company does not believe that it is
probable that it will be subject to a refund in an amount which will
have a material adverse effect on its consolidated financial statements.
49
<PAGE>
Reliance Group Holdings, Inc. & Subsidiaries
--------------------------------------------
Notes to Consolidated Financial Statements Continued
----------------------------------------------------
Legal Proceedings
The Company and its subsidiaries are involved in certain litigation
arising in the course of their businesses, some of which involve claims
of substantial amounts. Although the ultimate outcome of these matters
cannot be ascertained at this time, and the results of legal
proceedings cannot be predicted with certainty, the Company is
contesting the allegations of the complaints in each pending action and
believes, based on current knowledge and after consultation with
counsel, that the resolution of these matters will not have a material
adverse effect on the consolidated financial statements of the Company.
In addition, the Company is subject to the litigation set forth below.
In March 1987, the Superintendent of Insurance of New York (the
"Superintendent"), as liquidator of Union Indemnity Insurance Company of
New York ("Union Indemnity"), formerly a wholly-owned subsidiary of Hall
which the Superintendent took possession of in 1985, commenced an action
in the Supreme Court of the State of New York seeking damages of not
less than $140,000,000 against Hall, various subsidiaries of Hall,
Hall's and Union Indemnity's independent auditors and certain
individuals who were former officers and directors of Union Indemnity.
The Superintendent sought to hold the defendants liable for the
insolvency of Union Indemnity alleging, among other claims, that Hall
breached fiduciary and other duties owed to Union Indemnity and violated
provisions of the New York State Insurance Code, that Union Indemnity
did not have a separate operating identity, and that Hall and the Hall
subsidiaries named as defendants constituted a single enterprise which
was liable for Union Indemnity's obligations to its policyholders and
other creditors.
In July 1987, American Centennial Insurance Company, International
Fidelity Insurance Company, and Ranger Insurance Company (the "American
Centennial Plaintiffs") commenced an action in the Supreme Court of the
State of New York against Hall, two subsidiaries of Hall, and certain
individuals who were former officers and directors of Union Indemnity
seeking to hold the defendants liable for certain alleged reinsurance
obligations of Union Indemnity, certain misrepresentations concerning
Union Indemnity's financial position and the breach of certain duties
owed to the American Centennial Plaintiffs. The American Centennial
Plaintiffs sought damages of at least $54,900,000 and punitive damages
against all defendants.
The action brought by the Superintendent was settled by an
agreement, dated June 2, 1989, under which Hall, now known as Prometheus
Funding Corp. ("Prometheus"), will make an initial payment of
$19,000,000 and additional payments aggregating $29,000,000 over a
ten-year-period without interest as follows: $1,500,000 each in years
one and two; $2,000,000 each in years three and four; $5,000,000 in year
five; $4,500,000 each in years six and seven; $4,000,000 in year eight;
and $2,000,000 each in years nine and ten. The settlement agreement
provides for the entry of an order by the court barring other claims
against Hall relating to Union Indemnity, including the claims by the
American Centennial Plaintiffs described above. The settlement agreement
was submitted to the court for approval in October 1989 and objections
were filed by various parties. In March 1994, the Superintendent
informed Prometheus that he did not intend to pursue court approval of
the settlement until the resolution of appellate proceedings in a
pending litigation between the Superintendent and certain of Union
Indemnity's reinsurers. Prometheus has advised the Superintendent that
this position is in breach of the settlement agreement's requirement
that the parties diligently make every effort to obtain court approval
of the settlement, and Prometheus has reserved all of its rights with
respect thereto. There is no assurance that such approval will be
obtained. The settlement agreement will not become effective until final
approval by the court. Prometheus has recorded a reserve of $36,000,000
representing the initial payment of $19,000,000 and the present value of
the additional remaining annual payments over a ten-year period. In
1994, Prometheus received $600,000 in insurance proceeds and, in prior
years, had received an aggregate of $19,400,000 in insurance proceeds in
connection with this matter from its insurance carrier.
50
<PAGE>
Thirty-one employers doing business in Texas have brought two
actions in the District Court of Dallas County, Texas, against, among
others, approximately 200 individual insurance companies, including
Reliance Insurance Company and several of its subsidiaries. The
plaintiffs in the actions, which were commenced against the Reliance
parties in April 1992 and February 1995 respectively (and the second of
which has been stayed in light of the pendency of the first), assert
that they were overcharged for workers' compensation insurance and
multiple line retrospectively rated casualty insurance between 1987 and
1992. In August 1994, the plaintiffs in the first action moved for
certification of a purported plaintiff class consisting of all employers
who purchased Texas workers' compensation insurance from the insurance
company defendants during the years in question. Plaintiffs seek
monetary damages, with interest and attorneys' fees, against all
defendants jointly and severally, together with a release of all
purported class members from liability for payment of unlawful premiums,
and injunctive relief. The Company has filed answers denying the
allegations and is contesting the actions vigorously. The Company does
not believe that it is probable that its liability, if any, in excess of
what the Company has provided for in respect of this matter, will have a
material adverse effect on its consolidated financial statements.
Commitments
A subsidiary of Reliance Financial, Saul P. Steinberg and other
executives of the Company are partners in a partnership which owns
certain real estate properties. As of December 31, 1994, Reliance
Financial guaranteed $38,000,000 of the partnership's outstanding debt
which matures on December 29, 1996. At December 31, 1994, the
partnership's total outstanding debt was $171,902,000. Reliance
Financial receives a fee of .5% per annum on the average outstanding
debt covered by the guarantee. The Company has issued a line of credit
to the partnership in the amount of $8,000,000. Borrowings under the
line of credit mature on June 1, 2005 and bear interest at 4% over the
prime rate. At December 31, 1994, borrowings of $3,928,000 were
outstanding under the line of credit. In addition, Reliance Financial
will receive 48% of any cumulative net profit (as defined) realized from
the activities of the partnership.
Lease Commitments
The Company and its subsidiaries lease certain office facilities and
equipment under lease agreements that expire at various dates through
2011. Rent expense for the years ended December 31, 1994, 1993 and 1992
was $96,000,000, $95,700,000 and $94,000,000, respectively.
At December 31, 1994, future net minimum rental payments required under
noncancelable leases were as follows:
<TABLE>
<CAPTION>
(In thousands)
<S> <C>
1995 $ 65,629
1996 54,875
1997 43,022
1998 28,786
1999 21,822
2000 and thereafter 22,584
--------
$236,718
--------
</TABLE>
51
<PAGE>
Reliance Group Holdings, Inc. & Subsidiaries
--------------------------------------------
Notes to Consolidated Financial Statements Continued
----------------------------------------------------
Note 17 Business Segment Information
<TABLE>
<CAPTION>
Year Ended December 31 1994 1993 1992
---------- ---------- ----------
(In thousands)
<S> <C> <C> <C>
Revenues:
Property and casualty insurance
Premiums earned $1,777,318 $1,571,539 $1,535,740
Net investment income 232,299 216,432 189,287
Gain on sales of investments 8,851 129,018 50,080
---------- ---------- ----------
2,018,468 1,916,989 1,775,107
---------- ---------- ----------
Title and mortgage insurance
Premiums earned 856,774 893,364 826,493
Net investment income 26,613 24,282 26,224
Gain on sales of investments 516 4,786 3,267
Gain on sale of subsidiary -- -- 8,999
---------- ---------- ----------
883,903 922,432 864,983
---------- ---------- ----------
Other 144,679 123,398 117,244
---------- ---------- ----------
$3,047,050 $2,962,819 $2,757,334
========== ========== ==========
Income (loss) from continuing
operations before income taxes,
minority interests and equity
in investee company:
Property and casualty insurance
Underwriting $ (97,343) $ (175,220) $ (219,286)
Net investment income 232,299 216,432 189,287
Gain on sales of investments 8,851 129,018 50,080
---------- ---------- ----------
143,807 170,230 20,081
---------- ---------- ----------
Title and mortgage insurance 31,326 59,966 59,297
---------- ---------- ----------
Other (125,385) (142,496) (156,544)
---------- ---------- ----------
$ 49,748 $ 87,700 $ (77,166)
========== ========== ==========
Identifiable assets at year-end:
Property and casualty insurance $8,529,300 $7,948,113 $7,315,919
Title insurance 547,000 544,548 471,193
Other 293,253 322,553 398,499
---------- ---------- ----------
$9,369,553 $8,815,214 $8,185,611
========== ========== ==========
</TABLE>
Income (loss) from continuing operations before income taxes, minority
interests and equity in investee company relating to property and casualty
insurance underwriting has been reduced by policyholders' dividends and other
income and expense. Income (loss) from continuing operations before income
taxes, minority interests and equity in investee company by segment is before
allocation of corporate overhead and corporate interest expense, which relates
primarily to the Company and its financing subsidiary. Corporate overhead and
corporate interest expense are included in Other.
Identifiable assets by industry segment are those assets which are used in the
Company's operations in each segment.
52
<PAGE>
Note 18 Quarterly Financial Data (Unaudited)
1994 Quarter
--------------------------------------
First Second Third Fourth
----- ------ ----- ------
(In thousands, except per-share amounts)
Revenues:
Premiums earned $685,885 $734,588 $623,547 $590,072
Net investment income 62,650 64,603 65,362 66,297
Gain on sales of investments 2,037 1,821 3,403 506
Other 32,390 38,357 38,072 37,460
--------- -------- -------- --------
$782,962 $839,369 $ 730,384 $694,335
======== ======== ========= ========
Net income (loss) $ (5,649) $ 18,398 $ 19,306 $ 11,766
======== ======== ========= ========
Per-share information:
Net income (loss) $(.05) $.16 $.17 $.10
======== ======== ========= ========
Average number of common and
common equivalent shares
outstanding 112,086 115,075 115,165 115,172
1993 Quarter
--------------------------------------
First Second Third Fourth
----- ------ ----- ------
(In thousands, except per-share amounts)
Revenues:
Premiums earned $550,028 $634,405 $612,768 $667,702
Net investment income 62,733 61,300 58,366 58,315
Gain on sales of investments 35,582 35,195 42,221 20,806
Other 28,997 31,363 31,579 31,459
-------- -------- -------- --------
$677,340 $762,263 $744,934 $778,282
======== ======== ======== ========
Income from continuing
operations(1) $ 12,356 $ 29,682 $ 30,549 $ 12,949
Extraordinary item-early
extinguishment of debt -- -- -- (27,922)
Cumulative effect of change in
accounting for income taxes 15,911 -- -- --
-------- -------- -------- --------
Net income (loss) $ 28,267 $ 29,682 $ 30,549 $ (14,973)
======== ======== ======== =========
Per-share information:
Income from continuing
operations $.14 $.33 $.34 $.13
Extraordinary item-early
extinguishment of debt -- -- -- (.28)
Cumulative effect of change in
accounting for income taxes .18 -- -- --
-------- -------- -------- ---------
Net income (loss) $.32 $.33 $.34 $(.15)
======== ======== ======== =========
Average number of common and
common equivalent shares
outstanding 88,935 89,604 89,695 99,281
(1) Income from continuing operations for the fourth quarter includes a
tax benefit of $16,200,000 resulting from deferred tax benefits
previously not recognized.
53
<PAGE>
Independent Auditors' Report
----------------------------
Reliance Group Holdings, Inc. & Subsidiaries
--------------------------------------------
Board of Directors and Shareholders
Reliance Group Holdings, Inc.
New York, New York
We have audited the accompanying consolidated balance sheets of Reliance
Group Holdings, Inc. and subsidiaries as of December 31, 1994 and 1993,
and the related statements of operations, changes in shareholders'
equity and cash flows for each of the three years in the period ended
December 31, 1994. 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.
In our opinion, such consolidated financial statements present
fairly, in all material respects, the financial position of Reliance
Group Holdings, Inc. and subsidiaries at December 31, 1994 and 1993 and
the results of their operations and their cash flows for each of the
three years in the period ended December 31, 1994 in conformity with
generally accepted accounting principles.
As discussed in note 5 to the consolidated financial statements, in
1993 the Company adopted Statement of Financial Accounting Standards No.
109 and, accordingly, changed its method of accounting for income taxes.
/s/ Deloitte & Touche LLP
-----------------------------------
New York, New York
February 22, 1995
54
<PAGE>
Report of Management
--------------------
Reliance Group Holdings, Inc. & Subsidiaries
--------------------------------------------
Scope of responsibility
Management is responsible for the financial information included in this
annual report and for ascertaining that such information presents fairly
the financial position and operating results of the Company. The
accompanying consolidated financial statements have been prepared in
conformity with generally accepted accounting principles. Such
statements include informed estimates and judgments of management for
those transactions that are not yet complete or for which the ultimate
effects cannot be precisely determined. Financial information presented
elsewhere in this annual report is consistent with that in the financial
statements.
Internal Controls
The Company maintains a system of internal accounting controls designed
to provide reasonable assurance that assets are safeguarded against
losses from unauthorized use or disposition, that transactions are
executed in accordance with management's authorization and are recorded
properly. Qualified personnel throughout the organization maintain and
monitor these internal accounting controls on an ongoing basis. In
addition, the Company's Internal Audit Department systematically reviews
these controls, evaluates their adequacy and effectiveness, and reports
thereon.
Independent Auditors
The Company engages Deloitte & Touche LLP as independent auditors to
audit its financial statements and express their opinion thereon. They
have full access to each member of management in conducting their
audits. Such audits are conducted in accordance with generally accepted
auditing standards and include a review and evaluation of the system of
internal accounting controls, tests of the accounting records and other
auditing procedures they consider necessary to express their opinion on
the consolidated financial statements.
Audit Committee
The Audit Committee of the Board of Directors is comprised solely of
non-employee outside directors, and is responsible for overseeing and
monitoring the quality of the Company's accounting practices and
internal controls. The Committee meets regularly with management, the
internal auditors and the independent auditors to review the accounting
practices employed by the Company and to discuss auditing, internal
control and financial reporting matters. Both the internal and
independent auditors have unrestricted access to the Audit Committee,
without members of management present.
Saul P. Steinberg
Chairman of the Board and
Chief Executive Officer
George E. Bello
Executive Vice President
and Controller
55
<PAGE>
Market and Dividend Information
for Common Stock
-------------------------------
Reliance Group Holdings, Inc. & Subsidiaries
--------------------------------------------
The Company's common stock, $.10 par value, is traded on the New York Stock
Exchange and the Pacific Stock Exchange under the symbol "REL". As of March 1,
1995, there were 3,100 holders of record of the Company's common stock. The high
and low sales prices of the common stock, as reported by the New York Stock
Exchange, were as follows:
1994 1993
------------------ ------------------
Quarter High Low High Low
---- --- ---- ---
First 8 1/8 5 1/2 8 1/2 5 5/8
Second 6 5/8 4 7/8 8 3/8 6 3/8
Third 6 3/4 4 7/8 8 3/8 5 7/8
Fourth 6 1/2 4 7/8 10 3/8 7 1/8
Cash dividends for each share of the Company's common stock were $.08
for each quarter in 1994 and 1993.
The provisions of certain notes and debentures contain limitations
on the payment of dividends. As of December 31, 1994, the Company could
pay up to $68,700,000 in dividends, without violating the most
restrictive provisions. As a holding company, the Company is dependent
upon dividends, advances and net tax payments from its wholly-owned
subsidiaries to meet its debt service obligations, to pay its expenses
and to pay dividends to its shareholders. In addition to the terms of
certain notes and bank covenants limiting the payment of dividends by
Reliance Financial, dividends from the Company's principal operating
subsidiaries are subject to regulatory limitations.
56
<PAGE>
Directors and Officers
----------------------
Reliance Group Holdings, Inc. & Subsidiaries
--------------------------------------------
DIRECTORS
George R. Baker(2),(5),(6)
Corporate Director/Advisor
George E. Bello(3)
Executive Vice President
and Controller
Reliance Group
Holdings, Inc.
Carter Burden(6)
Managing General Partner
William A.M. Burden & Co.
Dennis A. Busti
President and
Chief Executive Officer
Reliance National
Insurance Company
Dean W. Case
Vice Chairman of the Board
Reliance Insurance
Company
Lowell C. Freiberg(3)
Senior Vice President and
Chief Financial Officer
Reliance Group
Holdings, Inc.
Dr. Thomas P. Gerrity(2)
Dean of the Wharton School
University of Pennsylvania
Jewell Jackson McCabe(3),(4),(6)
President, Jewell Jackson
McCabe Associates
Irving Schneider(2),(6)
Executive Vice President
Helmsley-Spear, Inc.
Bernard L. Schwartz(1)
Chairman of the Board
President and Chief
Executive Officer
Loral Corporation
Richard E. Snyder(3)
Corporate Director/Advisor
Thomas J. Stanton, Jr.(2),(5)
Chairman Emeritus
National Westminster
Bank NJ
Robert M. Steinberg(1),(4)
President and
Chief Operating Officer
Reliance Group
Holdings, Inc.
Saul P. Steinberg(1),(4)
Chairman of the Board and
Chief Executive Officer
Reliance Group
Holdings, Inc.
James E. Yacobucci
Senior Vice President
Investments Reliance Group
Holdings, Inc.
(1) Executive Committee
(2) Audit Committee
(3) Finance Committee
(4) Regular Compensation
Committee
(5) Special Compensation Committee
(6) Stock Option Committee
OFFICERS
Saul P. Steinberg
Chairman of the Board and
Chief Executive Officer
Robert M. Steinberg
President and
Chief Operating Officer
George E. Bello
Executive Vice President
and Controller
Lowell C. Freiberg
Senior Vice President and
Chief Financial Officer
Dennis J. O'Leary
Senior Vice President
Taxes
Philip S. Sherman
Senior Vice President and
Group Controller
Bruce L. Sokoloff
Senior Vice President
Administration
Howard E. Steinberg
Senior Vice President,
General Counsel and
Corporate Secretary
James E. Yacobucci
Senior Vice President
Investments
Albert A. Benchimol
Vice President and Treasurer
Thomas G. Butler
Vice President
Taxes
Andrew B. Donnellan, Jr.
Vice President and
Chief Litigation Counsel
David F. Noyes
Vice President and
Chief Credit Officer
Joel H. Rothwax
Vice President
Human Resources
Thomas J. Sanders
Vice President and
Assistant Controller
Thomas L. Wright
Vice President and
Assistant Treasurer
Paul W. Zeller
Vice President,
Deputy General
Counsel and
Assistant Secretary
Ronald S. Ziemba
Vice President
Communications
OFFICERS OF
OPERATING UNITS
RELIANCE
INSURANCE GROUP
Robert M. Steinberg
Chairman and
Chief Executive Officer
Jerome H. Carr
Senior Vice President and
Chief Financial Officer
Kenneth R. Frohlich
Senior Vice President and
Chief Actuarial Officer
PROPERTY AND
CASUALTY INSURANCE
Dennis A. Busti
President and
Chief Executive Officer
Reliance National
Insurance Company
George T. Holbrook, Jr.
President and
Chief Executive Officer
Reliance Surety Company
Robert C. Olsman
President and
Chief Operating Officer
Reliance Insurance Company
George H. Roberts
President
Reliance Reinsurance
Corp.
TITLE INSURANCE
Herbert Wender
Chairman and
Chief Executive Officer
Commonwealth Land Title
Insurance Company
RELIANCE
DEVELOPMENT GROUP
Henry A. Lambert
President and
Chief Executive Officer
Reliance Development
Group, Inc.
RELIANCE
CONSULTING GROUP
Fred M. Schriever
Chairman and President
RCG International, Inc.
57
<PAGE>
Corporate Data
--------------
Reliance Group Holdings, Inc. & Subsidiaries
--------------------------------------------
Corporate Offices
Reliance Group Holdings, Inc.
Park Avenue Plaza
55 East 52nd Street
New York, NY 10055
(212) 909-1100
FAX (212) 909-1864
Common Stock Transfer Agent
Chemical Bank
J.A.F. Building
P.O. Box 3068
New York, NY 10116-3068
(800) 851-9677
Independent Auditors
Deloitte & Touche LLP
New York, NY
Annual Meeting
The annual meeting of shareholders
of Reliance Group Holdings, Inc.
will be held on Thursday, May 11, 1995
at 10:30 A.M. in the New York Public
Library, Fifth Avenue and 42nd Street,
New York, NY
Form 10-K
A copy of the Company's Annual Report on Form 10-K to the Securities and
Exchange Commission will be furnished to any security holder upon
written request to Corporate Communications, Reliance Group Holdings,
Inc., 55 East 52nd Street, New York, NY 10055.
-------------------
Listed Securities
Unless otherwise indicated, securities
are listed on the New York Stock Exchange.
Reliance Group Holdings, Inc.
Common Stock (Symbol: REL;
New York and Pacific Stock Exchanges)
9% Senior Notes, due 2000
9 3/4% Senior Subordinated Debentures, due 2003
Reliance Financial Services Corporation
10.36% Senior Reset Notes, due 2000
9.48% Senior Reset Notes, due 2000
Reliance Insurance Company
$2.68 Series A Cumulative Preferred
Stock (Philadelphia Stock Exchange)
EXHIBIT 21.1
Set forth below is a list of subsidiaries of the Registrant.
Omitted from the following list are the names of particular
subsidiaries which, considered in the aggregate as a single
subsidiary, do not constitute a significant subsidiary.
Subsidiaries of subsidiaries are indented.
Jurisdiction
of
Name Incorporation
---- -------------
..Reliance Financial Services Corporation Delaware
....Reliance Insurance Group, Inc. Delaware
......Reliance Corporate Services Inc. Delaware
....Reliance Development Figueroa, Inc. California
......Reliance Figueroa Associates Limited
Partnership California
....Reliance Insurance Company Pennsylvania
SEE ANNEX 1 FOR RELIANCE INSURANCE SUBSIDIARIES
..Reliance Development Group, Inc. Delaware
SEE ANNEX 2 FOR REAL ESTATE SUBSIDIARIES
..Leasco Intercontinental N.V. Neth. Antilles
..LCEC Corporation Delaware
..Reliance Protective Services, Inc. Delaware
..Reliance General Services, Inc. Delaware
..Convenience & Safety Corporation Delaware
....CSC of Washington, D.C., Inc. D.C.
ANNEX 1 - INSURANCE SUBSIDIARIES
Jurisdiction
of
Name Incorporation
---- -------------
Reliance Insurance Company Pennsylvania
..Diamond Insurance Services, Inc. Delaware
..Onyx, Inc. Delaware
..Reliance Reinsurance Company Delaware
..Sterling Administrative Services, Inc. Pennsylvania
..Platinum Investors, Inc. Delaware
..Cananwill, Ltd. Bermuda
..Reliance Insurance Company of California California
..Firemark Insurance Company Pennsylvania
..Reliance National Indemnity Company Wisconsin
..Regent International Insurance Company, Ltd. Bermuda
..Reliance Insurance Company of Illinois Illinois
..Reliance National Insurance Company of New York New York
..Reliance Life Companies Pennsylvania
..Reliance Surety Company Delaware
..United Pacific Insurance Company Pennsylvania
....Uni-Pac Corporation Washington
..RDG, Inc. Delaware
..Marketing Management, Inc. Delaware
..United Pacific Insurance Company of New York New York
..Reliance Custom Underwriting Facility, Inc. Pennsylvania
..Reliance Surety Managers, Inc. Pennsylvania
..Reliance Reinsurance Corp. Pennsylvania
..Reliance Consumer Services, Inc. Texas
..Reliance Special Risk, Inc. Pennsylvania
....Reliance Specialty Programs, Inc. Pennsylvania
..Reliance Lloyds Texas
..Reliance Insurance Companies Foundation Pennsylvania
..Reliance National Risk Specialists, Inc. Pennsylvania
..Reliance National Insurance Company Delaware
..Seguros Proteccion Mutua, S.A. Mexico
....Reliance National Risk Services, Inc. New York
....Blackmoor Group, Inc. New York
......Blackmoor Insurance Agency, Inc. New York
..Reliance National (U.K.) Ltd. England
....Reliance National Insurance Company
(U.K.) Ltd. England
..Reliance National (Barbados) Insurance, Ltd. Barbados
..Reliance Insurance Group Brokerage
Division, Inc. Pennsylvania
..Transamerica Title Insurance Company Arizona
....Transamerica Title Insurance Company of
New York New York
....Title Transfer Services, Inc. Colorado
..State Title Insurance Company Pennsylvania
....Commonwealth Land Title Insurance Company Pennsylvania
......CLT Appraisal Services, Inc. Pennsylvania
......Commonwealth Land Title Company California
......Commonwealth Land Title Company of Austin Texas
......Commonwealth Land Title Company of Dallas Texas
......Commonwealth Land Title Company of El Paso Texas
......Commonwealth Land Title Company of Fort
Worth Texas
......Commonwealth Land Title Company of Houston Texas
......Commonwealth Land Title Company of
Jefferson County Texas
......Commonwealth Land Title Company of
San Antonio Texas
......Commonwealth Land Title Company of
Washington Washington
......Commonwealth Land Title Corporation (Iowa) Iowa
......Commonwealth Relocation Services, Inc. Pennsylvania
......Commonwealth Title of Arizona Arizona
......CRS Financial Services, Inc. Pennsylvania
......Day One, Inc. Pennsylvania
......DelPenn Land Company Delaware
......District-Realty Title Insurance Corporation Maryland
......El Paso Abstract Co. Colorado
......Industrial Valley Title Insurance Company Pennsylvania
........Continental Title Insurance Company New Jersey
......Monumental Title Corporation Maryland
......Osage Corporation Pennsylvania
......Property Services, Inc. Pennsylvania
......Ranier Title Company Washington
......T & T Co. Holding Company Florida
........Title & Trust Company of Florida Florida
........Lauderdale Title Insurance Corporation Florida
......The National 1031 Exchange Corporation California
......Title Guarantee Company of Rhode Island Rhode Island
......Title Insurance Company Alabama
..Reliance Development Company, Inc. of Tucson Delaware
....Reliance Centro Limited Partnership Arizona
..Reliance Development Pueblo Parking, Inc. Arizona
....Reliance Pueblo Limited Partnership Arizona
..Prometheus Funding Corp. Delaware
..RCG International, Inc. Delaware
....RCG-Moody International Limited England
......ICSB B.V. Holland
........ICSB G.m.b.H. Germany
........ICSB Ltd. Hong Kong
........ICSB Sarl France
......Maghraby Moody International BV (MMI BV) Netherlands
......MMI Italia SRL Italy
......MMI Maghraby Moody International GmbH Germany
......Moody-Tottrup Gulf Limited Channel Is.
........Moody-Tottrup International Ltd. (Japan) Japan
......RCG International (Trade Name - Canada) Canada
......BMIQA Limited England
......Associated Offices Quality Certification
Ltd. England
......Maghraby Moody International Limited England
........Moody International, Inc. Delaware
......The Steel Protection Consultancy Ltd. England
....Herbert W. Davis and Company New Jersey
....RCG/Asbach, Inc. Delaware
....RCG/Hagler, Bailly, Inc. Dist. of Columbia
....RCG/Pro-Access, Inc. Delaware
....RCG Information Technology, Inc. New Jersey
....Werner International, Inc. Delaware
......Werner Management Consultants, Inc. New York
ANNEX 2 - REAL ESTATE SUBSIDIARIES
Jurisdiction
of
Name Incorporation
---- -------------
Reliance Development Group, Inc. Delaware
..Continental Villages Company, Inc. Delaware
..Reliance Advisory Group, Inc. California
..Reliance Development Company, Inc. of Glendale California
..Reliance Development Parking Company Arizona
..Reliance
..Reliance Oriental Warehouse, Inc. Delaware
....Reliance Oriental Warehouse Associates
(A California Limited Partnership) California
......Oriental Warehouse Associates
(A California Limited Partnership) California
..Reliance River Center Associates New York
..Relibro Corp. New York
Exhibit 23.1
Independent Auditors' Consent
We consent to the incorporation by reference in Registration
Statements Nos. 33-19897 and 33-31709 of Reliance Group Holdings,
Inc. on Form S-8 of our reports dated February 22, 1995 (which
reports include an explanatory paragraph concerning the adoption of
Statement of Financial Accounting Standards No. 109), appearing in
and incorporated by reference in the Annual Report on Form 10-K of
Reliance Group Holdings, Inc. for the year ended December 31, 1994.
We also consent to the use of Touche Ross, and statements with
respect to Touche Ross, as appearing under the heading "Experts" in
the Prospectuses which are part of the Registration Statements.
/s/ Deloitte & Touche LLP
New York, New York
March 27, 1995
<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
Operations and is qualified in its entirety by reference to such financial
statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-END> DEC-31-1994
<DEBT-HELD-FOR-SALE> 1,839,312
<DEBT-CARRYING-VALUE> 1,166,020
<DEBT-MARKET-VALUE> 1,053,551
<EQUITIES> 564,636
<MORTGAGE> 0
<REAL-ESTATE> 291,666
<TOTAL-INVEST> 4,091,540
<CASH> 48,977
<RECOVER-REINSURE> 2,928,533
<DEFERRED-ACQUISITION> 181,938
<TOTAL-ASSETS> 9,369,553
<POLICY-LOSSES> 5,809,546
<UNEARNED-PREMIUMS> 1,288,454
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 871,951
0
0
<COMMON> 11,313
<OTHER-SE> 375,437
<TOTAL-LIABILITY-AND-EQUITY> 9,369,553
2,634,092
<INVESTMENT-INCOME> 258,912
<INVESTMENT-GAINS> 7,767
<OTHER-INCOME> 146,279
<BENEFITS> 1,372,960
<UNDERWRITING-AMORTIZATION> 1,347,828
<UNDERWRITING-OTHER> 0
<INCOME-PRETAX> 49,748
<INCOME-TAX> (12,200)
<INCOME-CONTINUING> 43,821
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 43,821
<EPS-PRIMARY> $0.38
<EPS-DILUTED> $0.00
<RESERVE-OPEN> 2,931,528
<PROVISION-CURRENT> 1,274,649
<PROVISION-PRIOR> 22,444
<PAYMENTS-CURRENT> 321,538
<PAYMENTS-PRIOR> 780,961
<RESERVE-CLOSE> 3,127,781
<CUMULATIVE-DEFICIENCY> 22,444
</TABLE>
