<PAGE>
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended June 30, 1995
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period From________ To________
Commission File Number 1-8278
RELIANCE GROUP HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
Delaware 13-3082071
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
Park Avenue Plaza
55 East 52nd Street
New York, New York 10055
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (212) 909-1100
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes X
No________
As of August 1, 1995, 113,247,000 shares of common stock of Reliance
Group Holdings, Inc. were outstanding.
RELIANCE GROUP HOLDINGS, INC. AND SUBSIDIARIES
I N D E X
Page
No.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statement of Income for the Quarters and Six-Month
Periods Ended June 30, 1995 and 1994 (Unaudited). . . . . . . 2
Consolidated Balance Sheet at June 30, 1995 (Unaudited) and
December 31, 1994 . . . . . . . . . . . . . . . . . . . . . . 3
Consolidated Statement of Changes in Shareholders' Equity for
the Six-Month Period Ended June 30, 1995 (Unaudited). . . . . 4
Consolidated Condensed Statement of Cash Flows for the Six-Month
Periods Ended June 30, 1995 and 1994 (Unaudited). . . . . . . 5
Notes to Consolidated Financial Statements (Unaudited). . . . . 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations. . . . . . . . . . . . . . . . 9
PART II. OTHER INFORMATION, AS APPLICABLE . . . . . . . . . . . . . 16
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
RELIANCE GROUP HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME (UNAUDITED)
<TABLE>
<CAPTION>
Quarter Ended Six Months Ended
June 30 June 30
1995 1994 1995 1994
<S> <C> <C> <C> <C>
(In thousands, except per-share amounts)
Revenues:
Premiums earned............................... $599,957 $734,588 $1,204,623 $1,420,473
Net investment income......................... 66,362 64,603 135,740 127,253
Gain on sales of investments.................. 7,669 1,821 15,955 3,858
Other......................................... 42,189 38,357 81,165 70,747
-------- -------- ---------- ----------
716,177 839,369 1,437,483 1,622,331
-------- -------- ---------- ----------
Claims and expenses:
Policy claims and settlement expenses......... 304,809 360,735 628,564 729,309
Policy acquisition costs and other insurance
expenses.................................. 306,812 384,462 602,216 743,266
Interest...................................... 22,330 21,940 44,708 43,761
Other operating expenses...................... 49,585 49,205 100,809 92,748
-------- -------- ---------- ----------
683,536 816,342 1,376,297 1,609,084
-------- -------- ---------- ----------
Income before income taxes, minority interests
and equity in investee company............ 32,641 23,027 61,186 13,247
Provision for income taxes.................... (8,400) (6,400) (16,400) (3,700)
Minority interests............................ (202) (734) (961) (1,588)
Equity in investee company.................... 2,399 2,505 4,153 4,790
-------- -------- ---------- ----------
Income before extraordinary item.............. 26,438 18,398 47,978 12,749
Extraordinary item - early extinguishment of
debt...................................... (3,363) - (3,363) -
-------- -------- ---------- ----------
Net income.................................... $ 23,075 $18,398 $ 44,615 $ 12,749
======== ======== ========== ==========
Per-share information:
Income before extraordinary item.............. $ .23 $ .16 $ .42 $ .11
Extraordinary item - early extinguishment of
debt...................................... (.06) - (.06) -
-------- -------- ---------- ----------
Net income.................................... $ .17 $ .16 $ .36 $ .11
======== ======== ========== ==========
Average number of common and common equivalent
shares outstanding...................... 115,548 115,075 115,180 115,009
</TABLE>
See notes to consolidated financial statements
-2-
RELIANCE GROUP HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
June 30 December 31
ASSETS 1995 1994
(In thousands, except per-share amount)
<S> <C> <C>
Marketable securities:
Fixed maturities held for investment - at amortized cost
(quoted market $1,216,259 and $1,053,551)..................... $1,207,725 $1,166,020
Fixed maturities available for sale - at quoted market
(amortized cost $1,779,792 and $1,945,919).................... 1,793,315 1,839,312
Equity securities - at quoted market (cost $446,115
and $482,529)................................................. 622,616 564,636
Short-term investments........................................... 222,402 229,906
Cash.................................................................. 72,816 48,977
Premiums and other receivables........................................ 1,324,518 1,262,554
Reinsurance recoverables.............................................. 3,180,003 2,928,533
Federal and foreign income taxes, including deferred taxes............ - 84,899
Investments in real estate - at cost, less accumulated
depreciation..................................................... 288,701 291,666
Investment in investee company........................................ 156,017 148,776
Deferred policy acquisition costs..................................... 192,049 181,938
Excess of cost over fair value of net assets acquired, less
accumulated amortization........................................ 264,434 269,424
Other assets.......................................................... 373,374 352,912
---------- ----------
$9,697,970 $9,369,553
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Unearned premiums..................................................... $1,303,574 $1,288,454
Unpaid claims and related expenses.................................... 6,023,749 5,809,546
Accounts payable and accrued expenses................................. 614,245 700,380
Reinsurance ceded premiums payable.................................... 302,321 291,844
Federal and foreign income taxes, including deferred taxes 9,267 -
Term loans and short-term debt........................................ 197,286 141,355
Debentures and notes.................................................. 690,312 730,596
Minority interests - redeemable preferred stock of a
subsidiary....................................................... - 20,628
---------- ----------
9,140,754 8,982,803
---------- ----------
Contingencies and commitments
Shareholders' equity:
Common stock, par value $.10 per share, 225,000
shares authorized, 113,236 and 113,127 shares
issued and outstanding......................................... 11,324 11,313
Additional paid-in capital....................................... 534,574 533,979
Retained earnings (deficit)...................................... (87,006) (110,479)
Net unrealized gain (loss) on investments........................ 117,657 (27,881)
Net unrealized loss on foreign currency translation.............. (19,333) (20,182)
---------- ----------
557,216 386,750
---------- ----------
$9,697,970 $9,369,553
========== ==========
</TABLE>
See notes to consolidated financial statements
-3-
RELIANCE GROUP HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY (UNAUDITED)
<TABLE>
<CAPTION>
Net
Unrealized
Net Loss on
Additional Retained Unrealized Foreign
Common Paid-In Earnings Gain (Loss) on Currency Shareholders'
Stock Capital (Deficit) Investments Translation Equity
(In thousands, except per-share amount)
<S> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1995.................. $ 11,313 $ 533,979 $ (110,479) $ (27,881) $ (20,182) $ 386,750
Issuance of common stock.................. 11 405 416
Transactions of investee
company and other ................... 190 3,441 3,631
Net income ............................... 44,615 44,615
Loss on early extinguishment of
redeemable preferred stock
of a subsidiary...................... (3,029) (3,029)
Dividends ($.16 per share)................ (18,113) (18,113)
Appreciation after deferred
income taxes......................... 142,097 142,097
Foreign currency translation.............. 849 849
-------- ---------- ----------- ------------ ----------- -----------
Balance, June 30, 1995.................... $ 11,324 $ 534,574 $ (87,006) $ 117,657 $ (19,333) $ 557,216
======== ========== =========== ============ =========== ===========
</TABLE>
See notes to consolidated financial statements
-4-
RELIANCE GROUP HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENT OF CASH FLOWS (UNAUDITED)
Six Months Ended June 30 1995 1994
(In thousands)
CASH FLOWS (USED BY) FROM OPERATING ACTIVITIES...... $(128,028) $ 26,746
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of fixed maturities available
for sale....................................... 265,736 221,236
Proceeds from sales of fixed maturities held for
investment..................................... 14,419 15,405
Proceeds from redemptions of fixed maturities
available for sale............................. 18,060 35,963
Proceeds from redemptions of fixed maturities held
for investment................................. 667 13,384
Proceeds from sales of equity securities............ 170,522 146,399
Decrease in short-term investments - net............ 4,760 192,646
Purchases of fixed maturities available for sale.... (110,903) (312,912)
Purchases of fixed maturities held for investment... (57,413) (201,984)
Purchases of equity securities...................... (128,745) (107,576)
Other - net......................................... 647 (25,859)
---------- ----------
177,750 (23,298)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in term loans.............................. 75,146 5,133
Increase (decrease) in short-term debt - net........ (16,474) 143
Repayments of term loans............................ (2,741) (30,964)
Issuance of common stock............................ 416 7,184
Repurchases of senior reset notes................... (40,348) -
Dividends........................................... (18,113) (18,061)
Redemption of redeemable preferred stock
of a subsidiary................................ (23,769) (3,360)
---------- ----------
(25,883) (39,925)
---------- ----------
Increase (decrease) in cash......................... 23,839 (36,477)
Cash, beginning of period........................... 48,977 94,114
---------- ----------
Cash, end of period................................. $ 72,816 $ 57,637
========== ==========
Supplemental disclosures of cash flow information:
Interest paid....................................... $ 38,900 $ 38,200
========== ==========
Income taxes refunded (paid)........................ $ (100) $ 10,000
========== ==========
See notes to consolidated financial statements
-5-
RELIANCE GROUP HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. Unaudited Consolidated Financial Statements
In the opinion of management, the accompanying unaudited consolidated financial
statements include all adjustments (consisting of normal recurring accruals
only) considered necessary to present fairly the financial position at June 30,
1995, and the results of operations, changes in shareholders' equity and cash
flows for all periods presented. The results of operations for the interim
periods are not necessarily indicative of the results that may be expected for
any other interim period or for the entire year.
For a summary of significant accounting policies (which have not changed from
December 31, 1994) and additional financial information, see the Company's
Annual Report on Form 10-K for the year ended December 31, 1994.
On April 26, 1995, the Company extended its revolving credit facility through
March 31, 2000 from December 31, 1998. In addition, the Company increased term
loan borrowings to $137.5 million from $62.5 million and extended the maturity
dates of the term loan borrowings through March 31, 2000. The additional $75.0
million of borrowings under the term loan were used to redeem $25.0 million of
the Company's 10.36% senior reset notes and $25.0 million of 9.48% senior reset
notes, including $9.7 million of notes held by Reliance Insurance Company.
These transactions resulted in an after-tax extraordinary loss of $3.4 million
($.03 per share). In addition, in the second quarter of 1995, the Company
redeemed all of the outstanding redeemable preferred stock of Reliance Insurance
Company ($23.8 million). The cost of the early redemption in excess of the
carrying value of the preferred stock was $3.0 million ("Redemption Premium")
and was charged directly to shareholders' equity. For purposes of computing
earnings per share, the Redemption Premium was deducted from net income
available to common shareholders' and classified as an extraordinary loss.
This reduced earnings per share by an additional $.03.
2. Equity In Investee Company
Equity income in Zenith National Insurance Corp. was $2.4 million and $4.2
million for the second quarter and first six months of 1995 compared to $2.5
million and $4.8 million in the corresponding 1994 periods.
-6-
Summarized financial information for Zenith National Insurance Corp. is as
follows:
Six Months Ended June 30 1995 1994
(In thousands, except per-share amounts)
Revenues. . . . . . . . . . . . . . . . . . $ 302,623 $ 289,577
Income before income taxes . . . . . . . . 26,023 28,751
Net income. . . . . . . . . . . . . . . . . 17,100 19,100
Net income per share. . . . . . . . . . . . .91 1.00
3. Reinsurance
The reconciliation of property and casualty insurance direct premiums to net
premiums is as follows (in thousands):
<TABLE>
<CAPTION>
Six Months Ended June 30
1995 1994
Premiums Premiums Premiums Premiums
Written Earned Written Earned
<S> <C> <C> <C> <C>
Direct . . . . . . . . . . . . $ 1,322,851 $ 1,323,347 $1,360,423 $1,337,567
Assumed. . . . . . . . . . . . 201,811 188,878 178,592 180,076
Ceded. . . . . . . . . . . . . (619,607) (617,862) (568,787) (579,413)
------------- ------------- ----------- -----------
Net Premiums . . . . . . . . . $ 905,055 $ 894,363 $ 970,228 $ 938,230
============= ============= =========== ===========
</TABLE>
The reconciliation of property and casualty insurance gross policy claims and
settlement expenses to net policy claims and settlement expenses is as follows
(in thousands):
<TABLE>
<CAPTION>
Six Months Ended
June 30
1995 1994
<S> <C> <C>
Gross. . . . . . . . . . . . . . . . . . . . . . . . $1,004,698 $ 1,104,732
Reinsurance recoveries . . . . . . . . . . . . . . . (403,186) (418,363)
----------- ------------
Net policy claims and settlement expenses. . . . . . $ 601,512 $ 686,369
=========== ============
</TABLE>
-7-
Effective January 1, 1995, the Company has entered into an aggregate excess of
loss reinsurance agreement. This agreement indemnifies the Company for ultimate
net property and casualty insurance losses in excess of a specified retention
for the 1995 accident year up to a maximum aggregate limit of $100 million.
-8-
RELIANCE GROUP HOLDINGS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Overview
The Company had income from operations, before gain on sales of investments and
certain consulting operations, of $19.8 million ($.17 per share) and $35.9
million ($.31 per share) in the second quarter and first six months of 1995
compared to $17.2 million ($.15 per share) and $10.3 million ($.09 per share) in
the corresponding 1994 periods. The improvement in operating income resulted
from stronger underwriting results in the property and casualty insurance
operations, partially offset by lower results in title insurance operations. In
the second quarter and first six months of 1995, the early extinguishment of
debt resulted in an after-tax extraordinary loss of $3.4 million and reduced
earnings per-share by $.03. In addition, the cost of the early redemption of
all of the outstanding redeemable preferred stock of Reliance Insurance Company
in excess of the carrying value of the preferred stock, $3.0 million, was
charged directly to shareholders' equity and reduced earnings per share by $.03
in the second quarter and first six months of 1995. Net income in the second
quarter and first six months of 1995 was $23.1 million ($.17 per share) and
$44.6 million ($.36 per share) which included an after-tax gain on sales of
investments and certain consulting operations of $6.7 million ($.06 per share)
and $12.1 million ($.11 per share). Net income in the second quarter and first
six months of 1994 was $18.4 million ($.16 per share) and $12.7 million ($.11
per share) which included an after-tax gain on sales of investments of $1.2
million ($.01 per share) and $2.5 million ($.02 per share).
-9-
Property and Casualty Insurance Operations
Net premiums written declined in the quarter and six months ended June 30, 1995
to $444.1 million and $905.1 million from $473.9 million and $970.2 million in
the corresponding 1994 periods. Net premiums earned also declined in the
quarter and six months ended June 30, 1995 to $442.6 million and $894.4 million
from $477.6 million and $938.2 million in the corresponding 1994 periods. These
declines in net written and net earned premiums in 1995 reflects lower writings
in workers' compensation business resulting from the trend towards high
deductible insurance and captive insurance programs, both of which result in
lower premiums and lower losses. Workers' compensation premiums also reflect an
increase in return premiums on retrospectively rated policies due to improved
loss experience. The decline in workers' compensation net premiums written was
partially offset by growth in general liability, surety and inland and ocean
marine lines of business.
Underwriting losses for the second quarter and first six months of 1995 were
$7.9 million and $13.1 million compared to $16.7 million and $61.0 million in
the corresponding 1994 periods. The improved underwriting results reflect
record underwriting profits in the surety line of business of $13.6 million and
$25.0 million in the second quarter and first six months of 1995 compared to
$6.1 million and $12.2 million in the corresponding 1994 periods. Underwriting
results in 1995 also reflect increased underwriting profits in workers'
compensation business, partially offset by higher underwriting losses in
commercial multiple peril lines. Underwriting results in 1995 have also
benefitted from a lower level of catastrophe losses which totalled $4.0
million and $7.3 million in the quarter and six months ended June 30, 1995
compared to $6.7 million and $35.4 million in the corresponding 1994 periods.
Catastrophe losses in the first six months of 1994 arose primarily from the
January 1994 California earthquake. The combined ratio (calculated on a GAAP
basis), after policyholders' dividends, was 101.3% in both the second quarter
and first six months of 1995, (100.4% and 100.5%, excluding the effects of
catastrophes) compared to 103.0% and 106.1% in the corresponding 1994 periods
(101.6% and 102.3%, excluding the effects of catastrophes).
Property and Casualty Insurance Investment Results
Net investment income of the property and casualty insurance operations
increased to $59.5 million and $121.9 million in the three-month and six-month
periods ended June 30, 1995 from $58.1 million and $114.1 million in the
corresponding 1994 periods. These increases resulted from growth in the size of
the fixed maturity investment portfolio and an increase in interest rates.
Gain on sales of investments was $7.7 million and $15.7 million in the second
quarter and first six months of 1995 compared to $1.7 million and $4.8 million
in the corresponding 1994 periods.
Title Insurance Operations
Premiums and fees in the second quarter and first six months of 1995 declined to
$157.4 million and $310.3 million from $257.0 million and $482.2 million in the
comparable 1994 periods. These declines resulted from lower levels of
residential real estate activity in the first half of 1995 when compared to the
first half of 1994. The 1994 periods benefitted from strong agency revenues
resulting from the typical reporting lag of 60-90 days and reflected the strong
market conditions that existed in early 1994 and late 1993.
As a result of lower agency revenues, agency commissions in the second quarter
and first six months of 1995 declined to $71.3 million and $146.5 million from
$140.2 million and $250.2 million in the corresponding 1994 periods. The
expense ratio of the title insurance operations (which includes agency
commissions) was 93.6% and 96.2% in the second quarter and first six months of
1995 compared to 88.5% and 89.4% in the corresponding 1994 periods. The
increase in the 1995 expense ratios resulted from the decline in premiums.
Other expenses were $77.9 million and $153.5 million in the three-month and
six-month periods ended June 30, 1995 compared to $89.9 million and $183.7
million in the corresponding 1994 periods. These declines reflect various cost
control programs, including staff reductions undertaken by the Company. As a
result of lower premiums, the provision for claim losses declined to $13.8
million and $27.1 million in the second quarter and first six months of 1995
from $22.7 million and $42.9 million in the corresponding 1994 periods.
Investment Portfolio
At June 30, 1995, the Company's investment portfolio aggregated $3.72 billion
(at cost) of which 12% 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 June 30, 1995, no one
issuer comprised more than 2.5% of the fixed maturity and short-term investment
portfolio. Furthermore, the Company holds virtually no investments in
commercial real estate mortgages in its investment portfolio. Purchases of
fixed maturity securities are researched individually based on in-depth analysis
and objective predetermined investment criteria and the portfolio is managed to
achieve a proper balance of safety, liquidity and investment yields.
The Company's fixed maturity portfolio consists of investment grade securities
(those rated "BBB" or better by Standard & Poor's) and, to a lesser extent,
non-investment grade and non-rated securities. The risk of default is generally
considered to be greater for non-investment grade securities, when compared to
investment grade securities since these issues may be more susceptible to severe
economic downturns. At June 30, 1995, the carrying values of non-investment
grade securities and securities not rated by Standard & Poor's were $322.5
million (10% of the fixed income portfolio) and $86.5 million (3% 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.
Other Operations
The Company's consulting and technical services operations provide services in
the information technology and energy fields. Revenues for these operations
were $40.7 million and $78.5 million in the second quarter and first six months
of 1995, which included a pre-tax gain of $2.6 million resulting from the second
quarter sales of certain consulting operations. These sales are not expected to
have a material effect on the Company's operations. Revenues in the second
quarter and first six months of 1994 were $37.1 million and $68.6 million.
Operating expenses were $36.3 million and $73.2 million in the three-month and
six-month periods ending June 30, 1995 compared to $35.4 million and $66.1
million in the corresponding 1994 periods. Revenues and expenses of these
operations are included in other revenues and other operating expenses in the
accompanying statement of income.
At June 30, 1995, the Company's real estate holdings had a carrying value of
$288.7 million, which includes 11 shopping centers with an aggregate carrying
value of $127.7 million, office buildings and other commercial properties, with
an aggregate carrying value of $100.0 million, and undeveloped land with a
carrying value of $61.0 million.
Interest Expense
Interest expense increased to $22.3 million and $44.7 million in the second
quarter and first six months of 1995 from $21.9 million and $43.8 million in the
corresponding 1994 periods reflecting increased interest rates on amounts
borrowed under the Company's revolving credit facility.
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 $70.5 million
for the six months ended June 30, 1995. The Company's ability to receive cash
dividends has depended upon and continues to depend upon the dividend paying
ability of its insurance subsidiaries. The Insurance Law of Pennsylvania, where
Reliance Insurance Company (the Company's principal property and casualty
insurance subsidiary) is domiciled, limits the maximum amount of dividends which
may be paid without approval by the Pennsylvania Insurance Department. Under
such law, Reliance Insurance Company may pay dividends during the year equal to
the greater of (a) 10% of the preceding year-end policyholders' surplus or (b)
the preceding year's statutory net income, but in no event to exceed the amount
of unassigned funds, which are defined as "undistributed, accumulated surplus
including net income and unrealized gains since the organization of the
insurer". In addition, the Pennsylvania law specifies factors to be considered
by the Pennsylvania Insurance Department to allow it to determine that statutory
surplus after the payment of dividends is reasonable in relation to an insurance
company's outstanding liabilities and adequate for its financial needs. Such
factors include the size of the company, the extent to which its business is
diversified among several lines of insurance, the number and size of risks
insured, the nature and extent of the company's reinsurance and the adequacy of
the company's reserves. The maximum dividend permitted by law is not indicative
of an insurer's actual ability to pay dividends, which may be constrained by
business and regulatory considerations, such as the impact of dividends on
surplus, which could affect an insurer's ratings, competitive position, the
amount of premiums that can be written and the ability to pay future dividends.
Furthermore, the Pennsylvania Insurance Department has broad discretion to limit
the payment of dividends by insurance companies.
In addition, under California Insurance law, Reliance Insurance Company is
deemed to be a "commercially domiciled" California insurer and therefore subject
to the dividend payment laws of California. The California laws which limit the
maximum amount of dividends which may be paid without approval by the California
Insurance Department and specify the factors to be considered by the California
Insurance Department to determine if the payment of the dividend is reasonable
in relation to an insurance company's outstanding liabilities and financial
needs are substantially the same as the laws of Pennsylvania. As in
Pennsylvania, the California Insurance Department has broad discretion to limit
the payment of dividends by insurance companies.
Total common stock dividends paid by Reliance Insurance Company during the first
six months of 1995 were $55.7 million. During 1995, $124.5 million would be
available for dividend payments by Reliance Insurance Company under Pennsylvania
and California law. The Company believes such amount, together with net tax
payments from its subsidiaries, will be sufficient to meet its cash needs.
There is no assurance that Reliance Insurance Company will meet the tests in
effect from time to time under Pennsylvania or California law for the payment of
dividends without prior Insurance Department approvals or that any requested
approvals will be obtained. However, Reliance Insurance Company has been
advised by the California Insurance Department that any required prior approval
will be based on the financial stability of the Company. Reliance Insurance
Company has also been advised by the Pennsylvania Insurance Department that any
required prior approval will be based upon a solvency standard and will not be
unreasonably withheld. Any significant limitation of Reliance Insurance
Company's dividends would adversely effect the Company's ability to service its
debt and to pay dividends on its common stock.
Reliance Insurance Company collects and invests premiums prior to payment of
associated claims, which are generally made months or years subsequent to the
receipt of premiums. For the six months ended June 30, 1995, Reliance Insurance
Company utilized $89.8 million of cash flow for operating activities. Reliance
Insurance Company carefully monitors its cash, short-term investments and
marketable securities to maintain adequate balances for the timely payment of
claims and other operating requirements. At June 30, 1995, Reliance Insurance
Company had $290.2 million of cash and short-term investments.
For the six months ended June 30, 1995, the Company utilized $128.0 million of
cash flow for operating activities while, in the comparable 1994 period, the
Company generated $26.7 million of operating cash flow. Although the Company's
gross written premiums have remained constant during 1995, when compared to
1994, net written premiums and operating cash flow have declined due to higher
ceded premium payments. The increase in ceded premium payments reflects a
greater level of writings in those types of business which require larger levels
of reinsurance. In addition, the decline in operating cash flow in 1995, when
compared to 1994, reflects higher payments for property and casualty policy
claims and related expenses as well as the lower levels of net income generated
by the title insurance operations.
The Company generated $177.8 million of cash flow from investing activities for
the six months ended June 30, 1995. For the six months ended June 30, 1994, the
Company used $23.3 million of cash flow for investing activities. Net sales of
marketable securities generated $177.1 million of cash flow in 1995 while net
sales of marketable securities generated $2.6 million of cash flow in the
corresponding 1994 period. During the first six months of 1995 and 1994 the
Company sold fixed maturities held for investment with an amortized cost of
$15.0 million and $15.1 million. These sales were in response to a significant
deterioration in the issuers' creditworthiness.
The Company used $25.9 million and $39.9 million of cash flow for financing
activities for the six months ended June 30, 1995 and 1994. Cash was used
principally for the reduction of debt, the redemption of a subsidiary's
redeemable preferred stock and payment of dividends which, in 1995, was
partially offset by additional term loan borrowings.
The Company has a revolving credit facility with various banks providing for
aggregate maximum outstanding borrowings of $100.0 million. At June 30, 1995,
borrowings aggregating $30.0 million were outstanding under this facility. On
April 26, 1995, the Company extended the revolving credit facility through
March 31, 2000 from December 31, 1998. In addition, the Company increased term
loan borrowings to $137.5 million from $62.5 million and extended the maturity
dates of the term loan borrowings through March 31, 2000. The additional $75.0
million of borrowings under the term loan were used to redeem $25.0 million of
the Company's 10.36% senior reset notes and $25.0 million of 9.48% senior reset
notes, including $9.7 million of notes held by Reliance Insurance Company.
These transactions resulted in an after-tax extraordinary loss of $3.4 million
($.03 per share). In addition, in the second quarter of 1995, the Company
redeemed all of the outstanding redeemable preferred stock of Reliance Insurance
Company ($23.8 million). The cost of the early redemption in excess of the
carrying value of the preferred stock, $3.0 million, was charged directly to
shareholders' equity.
The National Association of Insurance Commissioners has adopted a risk-based
capital requirement for the property and casualty insurance industry, effective
in 1995, based on 1994 annual statutory financial statements. Risk-based
capital refers to the determination of the amount of statutory capital required
for an insurer based on the risks assumed by the insurer (including, for
example, investment risks, credit risks relating to reinsurance recoverables and
underwriting risks) rather than just the amount of net premiums written by the
insurer. A formula that applies prescribed factors to the various risk elements
in an insurer's business is used to determine the minimum statutory capital
requirement for the insurer. An insurer having less statutory capital than the
formula calculates would be subject to varying degrees of regulatory
intervention, depending on the level of capital inadequacy. All of the
Company's statutory insurance companies have statutory capital in excess of the
minimum required risk-based capital.
Maintaining appropriate levels of statutory surplus is considered important by
the Company's management, state insurance regulatory authorities and the
agencies that rate insurers' claims-paying abilities and financial strength.
Failure to maintain certain levels of statutory capital and surplus could result
in increased scrutiny or, in some cases, action taken by state regulatory
authorities and/or downgrades in an insurer's ratings.
RELIANCE GROUP HOLDINGS, INC. AND SUBSIDIARIES
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders.
On May 11, 1995, at the annual meeting of stockholders of the
Company, the stockholders elected the fourteen directors set forth
below. The number of votes cast for or withheld were as follows:
PROPOSAL - ELECTION OF DIRECTORS
For Withheld
Saul P. Steinberg 100,383,412 1,344,641
Robert M. Steinberg 100,707,431 1,020,622
George R. Baker 100,702,566 1,025,487
George E. Bello 100,715,128 1,012,925
Carter Burden 100,719,555 1,008,498
Dennis A. Busti 100,068,304 1,659,749
Lowell C. Freiberg 100,060,125 1,667,928
Dr. Thomas P. Gerrity 100,721,110 1,006,943
Jewell Jackson McCabe 99,989,354 1,738,699
Irving Schneider 100,705,302 1,022,751
Bernard L. Schwartz 100,057,875 1,670,178
Richard E. Snyder 100,694,227 1,033,826
Thomas J. Stanton, Jr. 100,692,100 1,035,953
James E. Yacobucci 100,716,920 1,011,133
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
27. Financial Data Schedule
(b) Reports on Form 8-K.
No reports on Form 8-K were filed during the quarter ended
June 30, 1995.
-16-
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
RELIANCE GROUP HOLDINGS, INC.
(Registrant)
Date: August 11, 1995 /s/ George E. Bello
-------------------
George E. Bello
Executive Vice President and Controller
(Chief Accounting Officer)
-17-
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
Exhibit 27
This schedule contains summary financial information extracted from the
Company's Consolidated Balance Sheet and the Consolidated Statement of
Income and is qualified in its entirety by reference to such financial
statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> JUN-30-1995
<DEBT-HELD-FOR-SALE> 1,793,315
<DEBT-CARRYING-VALUE> 1,207,725
<DEBT-MARKET-VALUE> 1,216,259
<EQUITIES> 622,616
<MORTGAGE> 0
<REAL-ESTATE> 288,701
<TOTAL-INVEST> 4,134,759
<CASH> 72,816
<RECOVER-REINSURE> 3,180,003
<DEFERRED-ACQUISITION> 192,049
<TOTAL-ASSETS> 9,697,970
<POLICY-LOSSES> 6,023,749
<UNEARNED-PREMIUMS> 1,303,574
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 887,598
0
0
<COMMON> 11,324
<OTHER-SE> 545,892
<TOTAL-LIABILITY-AND-EQUITY> 9,697,970
1,204,623
<INVESTMENT-INCOME> 135,740
<INVESTMENT-GAINS> 15,955
<OTHER-INCOME> 81,165
<BENEFITS> 628,564
<UNDERWRITING-AMORTIZATION> 602,216
<UNDERWRITING-OTHER> 0
<INCOME-PRETAX> 61,186
<INCOME-TAX> (16,400)
<INCOME-CONTINUING> 47,978
<DISCONTINUED> 0
<EXTRAORDINARY> (3,363)
<CHANGES> 0
<NET-INCOME> 44,615
<EPS-PRIMARY> $0.36
<EPS-DILUTED> 0
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
