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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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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, 1995
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 .....................
1-8278
COMMISSION FILE NUMBER ........................................................
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 (ZIP CODE)
OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (212) 909-1100
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
NAME OF EACH EXCHANGE ON WHICH
TITLE OF EACH CLASS REGISTERED
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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, New York Stock Exchange
Due November 15, 2003
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 1, 1996, 113,970,273 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 $507,000,000.
DOCUMENTS INCORPORATED BY REFERENCE:
(1) Reliance Group Holdings, Inc. 1995 Annual Report--Parts I, II and
IV.
(2) Reliance Group Holdings, Inc. Proxy Statement for the Annual
Meeting of Stockholders to be held May 8, 1996--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 and its property and casualty insurance
subsidiaries (the 'Reliance Property and Casualty Companies') underwrite a broad
range of commercial lines of property and casualty 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 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 1995, Reliance National accounted for 49% of
the net premiums written by the Reliance Property and Casualty Companies.
Reliance Insurance offers commercial property and casualty insurance coverages
primarily 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 casualty treaty and facultative
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 $1,774.6 million (73%) of the 1995 premiums
earned by Reliance Insurance Company and its property and casualty and title
insurance subsidiaries (the 'Reliance Insurance Group').
Title insurance business is conducted by Commonwealth Land Title Insurance
Company and Transnation Title Insurance Company (formerly Transamerica Title
Insurance Company) and their respective subsidiaries ('Commonwealth/Transnation
Title'). Commonwealth/Transnation Title is the third largest title insurance
operation in the United States, in terms of 1994 total premiums and fees.
Commonwealth/Transnation Title accounted for $671.9 million (27%) of the
Reliance Insurance Group's 1995 premiums earned.
Business segment information for the years ended December 31, 1995, 1994
and 1993 is set forth in Note 15 to the Company's consolidated financial
statements (the 'Consolidated Financial Statements'), which segment information
is included in the Company's 1995 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. Reliance Insurance Company owns all of the common stock of
Commonwealth Land Title Insurance Company and Transnation Title Insurance
Company.
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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, 1995, 1994 and 1993.
<TABLE>
<CAPTION>
1995 1994
-------------------------------------------- --------------------------------------------
RELIANCE RELIANCE
RELIANCE RELIANCE REINSURANCE/ RELIANCE RELIANCE REINSURANCE/
NATIONAL INSURANCE SURETY TOTAL NATIONAL INSURANCE SURETY TOTAL
-------- --------- ------------ ------ -------- --------- ------------ ------
(IN MILLIONS, EXCEPT PERCENTAGES)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
General Liability....... $371 $ 98 $ -- $ 469 $347 $ 76 $ -- $ 423
Workers' Compensation... 141 125 -- 266 179 134 -- 313
Automobile.............. 88 152 -- 240 109 135 -- 244
Multiple Peril.......... 26 159 -- 185 32 148 -- 180
Surety.................. -- -- 139 139 -- -- 118 118
Reinsurance............. -- -- 119 119 -- -- 125 125-
Ocean and Inland
Marine................. 66 53 -- 119 44 60 -- 104
Involuntary............. 53 28 -- 81 82 32 -- 114
Fire and Allied......... 34 34 -- 68 26 24 -- 50
Accident and Health..... 58 -- -- 58 52 -- -- 52
Other................... 27 8 -- 35 19 22 -- 41
--- --- --- ------ --- --- --- ------
Total.................. $864 $ 657 $258 $1,779 $890 $ 631 $243 $1,764
--- --- --- ------ --- --- --- ------
--- --- --- ------ --- --- --- ------
Percent of Total........ 49% 37% 14% 100% 50% 36% 14% 100%
--- --- --- ------ --- --- --- ------
--- --- --- ------ --- --- --- ------
<CAPTION>
1993
------------------------------------------------
RELIANCE
RELIANCE RELIANCE REINSURANCE/
NATIONAL INSURANCE SURETY TOTAL
-------- --------- ------------ ------
(IN MILLIONS, EXCEPT PERCENTAGES)
<S> <C> <C> <C> <C>
General Liability....... $288 $ 82 $ -- $ 370
Workers' Compensation... 232 146 -- 378
Automobile.............. 119 141 -- 260
Multiple Peril.......... 33 154 -- 187
Surety.................. -- -- 107 107
Reinsurance............. -- -- 124 124
Ocean and Inland
Marine................. 54 51 -- 105
Involuntary............. 87 27 -- 114
Fire and Allied......... 19 21 -- 40
Accident and Health..... 35 -- -- 36
Other................... 4 46 -- 50
--- --- ------
Total.................. $872 $ 668 $231 $1,771
--- --- --- ------
--- --- --- ------
Percent of Total........ 49% 38% 13% 100%
--- --- --- ------
--- --- --- ------
</TABLE>
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The following table sets forth underwriting results for the Reliance
Property and Casualty Companies for the years ended December 31, 1995, 1994 and
1993.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
1995 1994 1993
-------- -------- --------
(IN MILLIONS, EXCEPT RATIOS)
<S> <C> <C> <C>
Net premiums written... $1,779.0 $1,764.3 $1,770.6
Underwriting loss(1)... (45.6) (97.3) (175.2)
Combined ratio......... 101.8% 104.4% 110.8%
</TABLE>
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(1) Includes catastrophe losses (net of reinsurance) for the years ended
December 31, 1995, 1994 and 1993 of $25.7 million, $50.1 million and $39.3
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, in
thousands:
<TABLE>
<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>
1995........ $1,769,064 $841,127 $3,102,688 $5,538,533 $ 4,410,197 $1,128,336 $ 1,404,781
1994........ 1,773,196 833,643 3,033,016 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
</TABLE>
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* Includes Reliance Insurance Company's investment in title insurance operations
of $182.2 million at December 31, 1995.
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,
Spain and Germany, and in the Americas through offices in Canada, Mexico and
Argentina. In 1995, California, New York, Texas and Pennsylvania accounted for
approximately 14%, 10%, 8% 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 37th among property and
casualty insurance companies and groups in terms of net premiums written during
1994, 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') has assigned an 'A'
rating to the claims-paying ability of the Reliance Property and Casualty
Companies. S&P's ratings are based on a 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. The Best and S&P 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
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Companies compete, management believes that the current ratings are adequate to
enable the Reliance Property and Casualty Companies to compete successfully.
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 1995, Reliance National
accounted for 49% 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 marketing offices in seven states.
Reliance National also conducts business in the European Community through
offices located in the United Kingdom, the Netherlands, Spain and Germany and in
the Americas through offices in Canada, Mexico and Argentina. Reliance National
distributes its products through national and regional insurance brokers, as
well as program agents. Net premiums written by Reliance National were $864.4
million, $889.7 million and $872.2 million for the years ended December 31,
1995, 1994 and 1993, respectively.
Reliance National is organized into eight major divisions. Each division is
comprised of one or more departments which focus 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, provides
workers' compensation, commercial automobile and general liability
coverages (primarily on a retrospectively rated, high deductible and
captive insurance arrangement basis) to Fortune 1,000 companies,
multinationals and the construction and transportation industries. It
also provides environmental pollution coverages (primarily on a claims
made basis) for consultants, contractors, transporters and certain other
insureds.
o Excess and Surplus Lines primarily provides professional liability
insurance to architects, engineers, lawyers, healthcare providers and
other professionals, and excess and umbrella coverages.
o Financial and Specialty Coverages provides ocean marine, aviation and
space satellite risk coverages, as well as certain non-traditional
insurance products.
o International writes predominantly commercial casualty and property
insurance products, including specialized coverages, such as excess
casualty, directors and officers liability and fidelity insurance, in
certain international markets.
o Financial Products provides directors and officers liability insurance,
errors and omissions insurance and fidelity and fiduciary coverages.
o Accident and Health provides high limit disability, group accident,
blanket special risk and medical excess of loss programs.
o Property primarily provides commercial property coverage focusing on
excess and specialty commercial property.
o Non-Standard Automobile, a recently constituted division, expects to
provide primarily non-standard personal automobile insurance for drivers
unable to obtain insurance in the standard automobile insurance market.
Reliance National attempts to limit its exposure to losses through the use
of claims-made policies, retrospectively rated policies, high deductible
policies and reinsurance. Approximately 22% of Reliance National's net premiums
written during 1995 were written on a 'claims-made' basis which provides
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 that occur during the policy
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period without regard for when the claim is reported. Claims-made policies
mitigate the 'long tail' nature of the risks insured.
Approximately 9% of Reliance National's net premiums written during 1995
were written on a retrospectively rated basis, whereby the insured effectively
pays for a large portion or, in many cases, all of its losses. Approximately 9%
of Reliance National's net premiums written during 1995 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 payments for losses made by an insured under
a high deductible policy are not considered premiums 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, insureds 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 90% of Reliance National's net
premiums written during 1995 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, 1995, was $2.5 million per occurrence. Reliance National also wrote
a finite risk policy under which its maximum loss for 1995, after application of
retrospective premium payments, could have been $3.3 million.
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 2,600 independent agents, program agents and brokers.
Reliance Insurance's insureds 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
multiple peril, property, general liability, commercial automobile and workers'
compensation (a majority of workers' compensation insurance is written on a
retrospectively rated basis). Reliance Insurance is headquartered in
Philadelphia and operates in 50 states, the District of Columbia, Puerto Rico,
Guam and the Virgin Islands. Net premiums written by Reliance Insurance were
$656.4 million (including $7.8 million of personal lines premiums), $631.0
million (including $20.7 million of personal lines premiums) and $668.2 million
(including $45.4 million of personal lines premiums) for the years ended
December 31, 1995, 1994 and 1993, respectively.
Reliance Insurance is organized into the following four operating
divisions:
o The Commercial Accounts division focuses on accounts with annual premiums
of up to $1 million. This division offers a broad range of traditional
commercial coverages, primarily written on a guaranteed cost basis.
o The Special Risk division provides underwriting of excess and surplus
coverages (generally with lower net retentions than for other commercial
lines written by Reliance Insurance) for risks with non-standard
exposures.
o The Large Accounts division 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 division primarily provides
workers' compensation insurance and approximately 80% 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 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 Insurance's credit
exposure.
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o The Program division 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 Commercial Accounts division and the Large Accounts division provide
their products and services through a decentralized network of regional and
branch offices. This organization allows the Commercial Accounts division and
the Large Accounts division to place major responsibility and accountability for
underwriting, sales, and customer service close to the insured. The Special Risk
division has three regional offices and the Program division has one central
office. Reliance Insurance manages its claims through a decentralized network of
regional and branch offices, which allows the point of service to be close to
the insured.
Reliance Insurance has substantially withdrawn from traditional 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 0.4% of their net premiums written from traditional personal lines in
1995, compared with 1.2% in 1994 and 2.6% in 1993.
Reliance Surety. Reliance Surety is a leading writer of surety 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 claims to minimize losses
and maximize recoveries. Reliance Surety has enjoyed long relationships with the
major contractors it has insured. Reliance Surety's Firemark and Express Surety
operations target smaller contractors, a market traditionally less fully
serviced by national surety companies. Reliance Surety is headquartered in
Philadelphia and conducts business nationwide through 32 branch offices and
approximately 2,250 independent agents and brokers. Net premiums written by
Reliance Surety were $139.3 million, $118.0 million and $106.7 million for the
years 1995, 1994 and 1993, 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.
Reliance Reinsurance. Reliance Reinsurance provides casualty reinsurance
on both a treaty (blocks of risk) and facultative (individual risks) basis and,
to a lesser extent, property reinsurance on a treaty basis. The business of
Reliance Reinsurance is primarily conducted on a treaty 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 with 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 premiums
written by
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Reliance Reinsurance were $119.0 million, $125.6 million and $123.6 million for
the years ended December 31, 1995, 1994 and 1993, respectively.
Title Insurance. Commonwealth/Transnation Title 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/Transnation Title provides title services for
large and multi-state commercial transactions. Through the Commonwealth OneStop
operation, Commonwealth/Transnation Title provides national and regional 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/Transnation Title is the third largest title
insurance operation in the United States, based on 1994 total premiums and fees.
Commonwealth/Transnation Title had premiums and fees of $671.9 million, $856.8
million and $893.4 million for the years 1995, 1994 and 1993, respectively.
S&P has assigned an 'A' rating to the claims-paying ability of
Commonwealth/Transnation Title. S&P's ratings are based on a 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. Duff & Phelps
Credit Rating Co. ('Duff & Phelps') has assigned an 'A+' rating to the
claims-paying ability of Commonwealth/Transnation Title. Duff & Phelps ratings
are based on a quantitative and qualitative analysis, with particular emphasis
on fundamental factors, recent operating results, reserves, capitalization and
invested assets. An 'A+' rating is assigned to those companies which have a high
claims paying ability; protection factors are average and there is an
expectation of variability in risk over time due to economic and/or underwriting
conditions. The S&P and Duff & Phelps ratings are not designed for the
protection of investors and do not constitute recommendations to buy, sell or
hold any security.
Commonwealth/Transnation Title is organized into ten regions with more than
325 offices covering all 50 states, as well as Puerto Rico and the Virgin
Islands. In 1995, California, Texas, Florida, New York, Pennsylvania, Washington
and Michigan accounted for approximately 11%, 11%, 10%, 7%, 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.
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.
Information Technology and Inspection Services. RCG International, Inc.
('RCG'), a subsidiary of the Reliance Insurance Group, and its subsidiaries
primarily provide information technology and inspection services to industry,
government and non-profit organizations, principally in the United States and
Europe, as well as in Canada, Asia, South America, Africa and Australia. The
information technology services consist of computer-related professional
services to large corporate clients. The inspection services consist of pipeline
and equipment inspection and procurement services in the energy industry. RCG
and its subsidiaries had revenues of $150.8 million, $141.6 million and $116.8
million for 1995, 1994 and 1993, respectively.
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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.
Reliance National and Reliance Insurance. During 1995, the highest net
retention per occurrence for a casualty loss was $2.4 million for Reliance
National and $2.8 million for Reliance Insurance. In addition, in 1995 each of
Reliance National and Reliance Insurance purchased 'casualty clash' coverage to
provide protection in the event of losses incurred by multiple coverages on one
occurrence. Under such casualty clash coverages, Reliance National's highest net
retention for casualty losses up to $70 million was $5 million and Reliance
Insurance's highest net retention for casualty losses up to $60 million was $4.6
million. Where appropriate, Reliance National and Reliance Insurance obtain
facultative reinsurance to provide protection in addition to such casualty
treaty coverages.
During 1995, the highest net retention per loss for a property risk was
$2.5 million for Reliance National and $3.2 million for Reliance Insurance.
Reliance National also wrote a finite risk policy under which its maximum loss
for 1995, after application of retrospective premium payments, could have been
$3.3 million. In addition, during 1995, 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
property losses attributable to a single catastrophe of $107 million, Reliance
National and Reliance Insurance together retained a maximum loss exposure of
$19.6 million. Any net retained property loss from a single catastrophe beyond
$107 million is not reinsured and is retained by Reliance National and Reliance
Insurance together. Renewal of property 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 property 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 $25.7 million in 1995 ($78.5 million before insurance
ceded), compared to $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. Catastrophe losses,
including losses incurred by Reliance Reinsurance on insurance assumed, were
$39.3 million in 1993 ($88.5 million before insurance ceded).
A catastrophic event can cause losses in lines of insurance other than
property. Each of 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 $270 million
would be covered by Reliance National's casualty clash coverage.
8
<PAGE>
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.
In 1995, Reliance Insurance Company entered into an aggregate excess of
loss reinsurance agreement. This agreement indemnifies the Reliance Property and
Casualty Companies 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.
Reliance Surety. Reliance Surety retains 100% of losses on surety bonds up
to $2 million. For surety bonds in excess of $2 million, Reliance Surety obtains
reinsurance that provides various layers of coverage such that the maximum
retained loss for a single surety bond of $50 million is not greater than $20
million. In addition, to protect against multiple losses from any one principal
insured, Reliance Surety reinsures approximately 95% of net losses between $3
million and $30 million for any one principal insured. Thus, the maximum loss on
any one principal insured, where net retained losses by Reliance Surety after
primary reinsurance is $30 million, would not exceed $4.25 million. 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. Where appropriate, Reliance Surety obtains facultative
reinsurance to provide protection in addition to such reinsurance.
Reliance Reinsurance. 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 assumed property
reinsurance of $6.75 million in excess of a $1.75 million per occurrence
retention, with a contractual provision for a reinstatement. In 1994, Reliance
Reinsurance also wrote a specific catastrophe book of business within an
aggregate limit of $17.7 million for any one event, not subject to the above
protection. As of December 31, 1994, Reliance Reinsurance ceased writing a
specific catastrophe book of business.
Commonwealth/Transnation Title. Commonwealth/Transnation Title generally
retains no more than $60 million on any one risk, although it often retains less
than this amount, with reinsurance placed with other title companies.
Commonwealth/Transnation Title also purchases reinsurance from an international
syndicate, including Lloyd's of London, which provides coverage for 80% of
losses between $20 million and $60 million, on any one risk. The largest net
loss that has been paid by Commonwealth/Transnation Title on any one risk was
approximately $4 million.
Reinsurers of the Reliance Insurance Group. Premiums ceded by the Reliance
Insurance Group to reinsurers were $1.3 billion and $1.2 billion in 1995 and
1994, 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, 1995,
the Reliance Insurance Group had reinsurance recoverables of $3.2 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 and a staff of analysts 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 $6.4 million reserved for potentially unrecoverable
reinsurance at December 31, 1995. 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.
9
<PAGE>
In 1995, the Reliance Property and Casualty Companies did not cede more
than 4% of direct premiums to any one reinsurer and no one reinsurer accounted
for more than 8.4% of total ceded premiums. The Reliance Insurance Group's ten
largest reinsurers, based on 1995 ceded premiums, are as follows:
<TABLE>
<CAPTION>
1995
CEDED BEST
PREMIUM RATING
------------- ------
(IN MILLIONS)
<S> <C> <C>
Lloyd's of London................................. $ 108.1 (1)
American Re-Insurance Company..................... 105.9 A+
Hertz International Reinsurance Ltd............... 59.6 (2)
Commercial Risk Re-Insurance Company.............. 42.6 (3)
Swiss Reinsurance America Corporation............. 34.4 A
Zurich Reinsurance Centre, Inc.................... 32.7 A
Kemper Reinsurance Company........................ 32.3 A-
International Industrial Indemnity Company
(formerly TRN Insurance Company)................ 32.1 (2)
Transatlantic Reinsurance Company................. 30.0 A+
G.I.O. Insurance Ltd.............................. 29.3 (4)
</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 rating of NA-3 (Insufficient Operating Experience), as the
reinsurer has not accumulated five years of representative operating
experience. Recoverables from such reinsurer are fully collateralized.
(4) Reinsurer is not rated by Best. The S&P rating for the claims paying ability
of such reinsurer is 'A'. Recoverables from such reinsurer are fully
collateralized.
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.
10
<PAGE>
PROPERTY AND CASUALTY LOSS RESERVES
As of March 1, 1996, the Reliance Insurance Group had a staff of 101
actuaries, of whom 20 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 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 the
beginning to ending liability balances for the years ended December 31, 1995,
1994 and 1993.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------
1995 1994 1993
---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
Loss reserves, beginning of year........ $5,581,483 $5,048,442 $4,571,792
Less reinsurance recoverables........... 2,453,702 2,116,914 1,868,800
---------- ---------- ----------
Net loss reserves, beginning of year.... 3,127,781 2,931,528 2,702,992
---------- ---------- ----------
Provision for policy claims and related
expenses:
Provision for insured events of the
current year..................... 1,163,447 1,274,649 1,195,425
Increase in provision for insured
events of prior years............ 38,512 22,444 40,169
---------- ---------- ----------
Total provision.................. 1,201,959 1,297,093 1,235,594
---------- ---------- ----------
Payments for policy claims and related
expenses:
Attributable to insured events of
the current year................. 271,915 321,538 229,778
Attributable to insured events of
prior years...................... 868,622 780,961 776,881
---------- ---------- ----------
Total payments................... 1,140,537 1,102,499 1,006,659
---------- ---------- ----------
Foreign currency translation............ (9,768) 1,659 (399)
---------- ---------- ----------
Net loss reserves, end of year.......... 3,179,435 3,127,781 2,931,528
Plus reinsurance recoverables........... 2,679,917 2,453,702 2,116,914
---------- ---------- ----------
Loss reserves, end of year*............. $5,859,352 $5,581,483 $5,048,442
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
- ------------------
* Loss reserves exclude the loss reserves of title insurance operations of
$240.8 million, $228.1 million and $204.7 million at December 31, 1995, 1994
and 1993, respectively.
Policy claims and settlement expenses include a provision for insured
events of prior years of $38.5 million, $22.4 million and $40.2 million for the
years 1995, 1994 and 1993, respectively. The provision for all years includes
adverse development related to prior year asbestos-related and environmental
pollution claims, which primarily affect general liability and multiple peril
lines of business. The 1995 provision also includes adverse development in other
general liability, automobile and reinsurance lines, partially offset by
favorable development in workers' compensation. The 1994 provision also included
adverse development in other general liability lines, partially offset by
favorable development in workers' compensation. The 1993 provision also included
adverse development from workers' compensation reinsurance pools, partially
offset by favorable development in other general liability lines.
11
<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, 1995. A redundancy or deficiency indicates the cumulative
percentage change, as of December 31, 1995, 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 1985 through
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 1985 through 1994, the Company has experienced deficiencies in its
estimated liability for loss reserves. The table includes provisions
specifically made to strengthen prior years' loss reserves of $156.0 million in
1991 and $100.0 million in 1986. 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,
----------------------------------------------------------------------------------------------------
1995 1994 1993 1992 1991 1990 1989 1988
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
(IN THOUSANDS, EXCEPT PERCENTAGES)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net liability for unpaid
claims and related
expenses (loss
reserves)(1)............. $3,179,435 $3,127,781 $2,931,528 $2,702,992 $2,375,235 $1,893,421 $1,962,822 $1,644,057
Net liability reestimated
as of:
One year later........... -- 101.2% 100.8% 101.5% 101.3% 114.4% 104.8% 104.8%
Two years later.......... -- -- 101.7% 103.1% 104.4% 115.2% 117.0% 113.5%
Three years later........ -- -- -- 104.0% 105.7% 119.6% 118.2% 121.8%
Four years later......... -- -- -- -- 106.7% 120.7% 120.9% 123.2%
Five years later......... -- -- -- -- -- 122.0% 122.2% 127.8%
Six years later.......... -- -- -- -- -- -- 123.8% 128.7%
Seven years later........ -- -- -- -- -- -- -- 130.7%
Eight years later........ -- -- -- -- -- -- -- --
Nine years later......... -- -- -- -- -- -- -- --
Ten years later.......... -- -- -- -- -- -- -- --
Redundancy (Deficiency)... -- (1.2%) (1.7%) (4.0%) (6.7%) (22.0%) (23.8%) (30.7%)
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Paid (cumulative) as of:
One year later........... -- 27.8% 26.6% 28.7% 29.0% 36.6% 40.7% 41.6%
Two years later.......... -- -- 44.9% 48.0% 48.6% 57.9% 65.4% 71.6%
Three years later........ -- -- -- 61.1% 62.1% 72.8% 82.2% 86.4%
Four years later......... -- -- -- -- 71.6% 83.0% 91.3% 97.2%
Five years later......... -- -- -- -- -- 90.3% 97.8% 103.0%
Six years later.......... -- -- -- -- -- -- 103.1% 107.3%
Seven years later........ -- -- -- -- -- -- -- 111.5%
Eight years later........ -- -- -- -- -- -- -- --
Nine years later......... -- -- -- -- -- -- -- --
Ten years later.......... -- -- -- -- -- -- -- --
<CAPTION>
DECEMBER 31,
-------------------------------------
1987 1986 1985
----------- ---------- ----------
(IN THOUSANDS, EXCEPT PERCENTAGES)
<S> <C> <C> <C>
Net liability for unpaid
claims and related
expenses (loss
reserves)(1)............. $1,494,227 $1,425,942 $1,248,713
Net liability reestimated
as of:
One year later........... 107.8% 106.6% 122.1%
Two years later.......... 112.0% 115.6% 134.5%
Three years later........ 118.5% 121.6% 142.5%
Four years later......... 125.0% 127.2% 150.4%
Five years later......... 126.7% 132.3% 155.1%
Six years later.......... 131.8% 135.1% 161.2%
Seven years later........ 133.1% 140.0% 163.5%
Eight years later........ 135.4% 141.4% 168.5%
Nine years later......... -- 143.4% 169.3%
Ten years later.......... -- -- 170.8%
Redundancy (Deficiency)... (35.4%) (43.4%) (70.8%)
---------- ---------- ----------
Paid (cumulative) as of:
One year later........... 38.6% 42.0% 48.1%
Two years later.......... 65.8% 68.4% 79.1%
Three years later........ 88.2% 88.1% 98.9%
Four years later......... 99.5% 103.9% 114.4%
Five years later......... 106.2% 112.1% 127.3%
Six years later.......... 110.7% 117.1% 134.9%
Seven years later........ 113.9% 120.8% 138.5%
Eight years later........ 117.4% 123.7% 141.9%
Nine years later......... -- 126.9% 144.1%
Ten years later.......... -- -- 146.7%
</TABLE>
- ------------------
(1) The gross liability for unpaid claims and related expenses was $5.9 billion
at December 31, 1995. The gross liability for unpaid claims and related
expenses for years 1994 and prior was redundant by $30.7 million at December
31, 1995.
12
<PAGE>
The difference between the property and casualty liability for loss
reserves at December 31, 1995 and 1994 reported in the 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,
------------------------
1995 1994
---------- ----------
(IN THOUSANDS)
<S> <C> <C>
Net liability reported under statutory accounting
practices....................................... $3,102,688 $3,033,016
Adjustment for GAAP basis accrual of estimated
salvage and subrogation recoveries.............. (12,758) (9,858)
Additional discount of workers' compensation
reserves........................................ 98,799 104,145
Foreign currency translation...................... (9,294) 478
---------- ----------
Net liability reported............................ $3,179,435 $3,127,781
---------- ----------
---------- ----------
</TABLE>
The difference between the property and casualty liability for gross
loss reserves at December 31, 1995 and 1994 reported in the Consolidated
Financial Statements and the liability which would be reported in accordance
with statutory accounting practices is as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1995 1994
---------- ----------
(IN THOUSANDS)
<S> <C> <C>
Liability reported under statutory accounting
practices....................................... $5,717,321 $5,395,846
Adjustment for GAAP basis accrual of estimated
salvage and subrogation recoveries.............. (14,884) (11,984)
Additional discount of workers' compensation
reserves........................................ 179,987 198,808
Foreign currency translation...................... (23,072) (1,187)
---------- ----------
Liability reported................................ $5,859,352 $5,581,483
---------- ----------
---------- ----------
</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 and the economic environment in which property and
casualty companies operate. 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 1995, the Reliance Property and Casualty Companies used an independent
actuarial
13
<PAGE>
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. Estimation of loss reserves for long tail 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 long tail 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 and professional
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
limit the potential loss from a single event through the extensive 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 $235.7 million, $245.7 million and $284.7 million at December 31,
1995, 1994 and 1993, respectively. The discount in 1995 was increased by $1.8
million, which was more than offset by discount amortization of $11.8 million,
resulting in a reduction in pre-tax income of $10.0 million. 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 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, 1995 are $178.6
million ($130.7 million net of reinsurance recoverables) of loss reserves
pertaining to asbestos-related and environmental pollution claims. The following
table presents information relating to the net loss reserves pertaining to
asbestos-related and environmental pollution claims for the years ending
December 31, 1995, 1994 and 1993:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------
1995 1994 1993
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Net loss reserves, beginning of year......... $130,143 $122,034 $ 94,253
Provision for policy claims and related
expenses................................... 25,904 28,279 52,630
Payments for policy claims and related
expenses................................... (25,341) (20,170) (24,849)
-------- -------- --------
Net loss reserves, end of year............... $130,706 $130,143 $122,034
-------- -------- --------
-------- -------- --------
</TABLE>
Included in the December 31, 1995 net loss reserves for asbestos-related
and environmental pollution claims are $33.8 million of loss costs for claims
incurred but not reported, $51.9 million of loss costs for reported claims and
$45.0 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
affect 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 analysis by specialized claims personnel, actuarial
techniques and management's judgment. Coverage and claim settlement issues,
related to policies written in prior years, such as the
14
<PAGE>
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.
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 $25.3 million (including $7.3
million of related expenses), $20.2 million (including $7.9 million of related
expenses) and $24.8 million (including $8.1 million of related expenses) for the
years ended December 31, 1995, 1994 and 1993, respectively. The increase in net
paid losses and related expenses in 1995 from 1994 reflects the settlement of a
large environmental pollution claim. Related expenses consist primarily of legal
costs. Total payments for all property and casualty insurance policy claims and
related expenses were $1.14 billion, $1.10 billion and $1.01 billion for the
years ended December 31, 1995, 1994 and 1993, respectively. The following table
presents information related to the number of insureds with asbestos-related and
environmental pollution claims outstanding:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------
1995 1994
---- ----
<S> <C> <C>
Number of insureds with outstanding claims, beginning of
year...................................................... 666 661
Additional insureds with claims during the year............. 463 307
Insureds with closed or settled claims during the year...... (379) (302)
---- ----
Number of insureds with outstanding claims, end of year..... 750 666
---- ----
---- ----
</TABLE>
The average net paid loss per insured for asbestos-related and
environmental pollution claims was $37,500 and $34,200 for the years 1995 and
1994, respectively. The increase in the average net paid loss reflects the
settlement of a large environmental pollution claim. As of December 31, 1995,
the Company was involved in approximately 46 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 28 of the Company's 1995 Annual Report, which section is incorporated
herein by reference, and Note 2 to the Consolidated Financial Statements.
15
<PAGE>
At December 31, 1995, the Company's investment portfolio was $4.0 billion
(at cost) with 90% in fixed maturities and short-term securities (including
redeemable preferred stock and cash) and 10% in equity securities, approximately
40% of which were convertible preferred stock. The following table details the
distribution of the Company's investments at December 31, 1995:
<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...................... $ 679,007 $ 685,376 $ 685,376
States, municipalities and
political subdivisions........... 125,967 133,093 133,093
Foreign-government................. 30,253 31,765 31,765
Foreign-other...................... 85,889 89,380 89,380
Public utilities................... 305,652 313,906 313,906
Convertibles and bonds with
warrants attached................ 41,146 47,253 47,253
All other corporate bonds and
notes............................ 679,772 699,893 699,893
Redeemable preferred stock............ 351,824 371,329 371,329
---------- ---------- ----------
2,299,510 2,371,995 2,371,995
---------- ---------- ----------
Fixed maturities held for investment:
Bonds and notes:
States, municipalities and
political subdivisions........... 11,822 11,797 11,822
Foreign-government................. 133,252 139,042 133,252
Foreign-other...................... 21,000 23,008 21,000
Public utilities................... 296,456 309,920 296,456
All other corporate bonds and
notes............................ 149,027 158,282 149,027
Redeemable preferred stock............ 142,006 149,410 142,006
---------- ---------- ----------
753,563 791,459 753,563
---------- ---------- ----------
Total fixed maturities........... 3,053,073 3,163,454 3,125,558
---------- ---------- ----------
Equity securities(1):
Common stocks:
Public utilities................... 3,333 5,339 5,339
Banks, trusts and insurance
companies........................ 38,289 38,335 38,335
Industrial and other............... 190,863 430,275 430,275
Nonredeemable preferred stock......... 175,569 198,719 198,719
---------- ---------- ----------
408,054 672,668 672,668
---------- ---------- ----------
Short-term investments(2)............... 551,093 551,093 551,093
---------- ---------- ----------
Total investment portfolio....... $4,012,220 $4,387,215 $4,349,319
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
<TABLE>
<CAPTION>
COST AND CARRYING
VALUE
-----------------
<S> <C>
(IN THOUSANDS)
Mortgage loans(3)............. $ 17,465
Investments in real estate.... 281,923
</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, 1995, had a
carrying value of $157.7 million and a market value of $140.5 million. See
'--Investee Company.'
(2) Includes cash of $50.8 million.
(3) In the Company's Consolidated Financial Statements, mortgage loans are
included in premiums and other receivables.
16
<PAGE>
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 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, 1995, 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...................... $1,921,040 $1,945,017 61%
BBB........................... 846,049 857,198 27
---------- ---------- ---
Total investment grade..... 2,767,089 2,802,215 88
---------- ---------- ---
BB to B....................... 298,964 301,697 10
CCC to C...................... 80 80 --
Non-rated..................... 59,425 59,462 2
---------- ---------- ---
Total...................... $3,125,558 $3,163,454 100%
---------- ---------- ---
---------- ---------- ---
</TABLE>
Substantially all of the non-investment grade and non-rated 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 an in-depth analysis of individual
company's fundamentals by the Reliance Insurance Group's staff of investment
professionals. They seek to identify equities of 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 1, 1996, the Reliance Insurance Group owned 3,578,634 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 1, 1996, the
market value of the Reliance Insurance Group's investment in Symbol was
$132,857,000 (based upon the closing price on such date as reported by the
NYSE), with a cost basis of $27,252,000. The board of directors of Symbol
includes certain executive officers of the Company.
As of March 1, 1996, the Reliance Insurance Group owned 2,176,000 shares of
Human Genome Sciences, Inc. ('Human Genome'), representing 12.0% of the then
outstanding common stock of Human
17
<PAGE>
Genome. Human Genome specializes in human genetic research designed to detect
and treat human illnesses. As of March 1, 1996, the market value of the Reliance
Insurance Group's investment in Human Genome was $84,864,000 (based upon the
last reported sales price on such date as reported by the Nasdaq National
Market), with a cost basis of $42,219,000.
At December 31, 1995, the Company's real estate operations had holdings
with a carrying value of $281.9 million, which includes nine shopping centers
with an aggregate carrying value of $120.6 million, office buildings and other
commercial properties with an aggregate carrying value of $100.1 million, and
undeveloped land with a carrying value of $61.2 million.
The following table presents the investment results of the Reliance
Insurance Group's investment portfolio for each of the years ended December 31,
1995, 1994, and 1993:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------
1995 1994 1993
---------- ---------- ----------
(IN THOUSANDS, EXCEPT PERCENTAGES)
<S> <C> <C> <C>
Fixed Maturities:
Average investments(1).................. $3,394,988 $3,213,556 $2,987,052
Net investment income................... 243,268 221,771 200,889
Realized gains.......................... 10,521 16,705 34,860
Increase (decrease) in unrealized
gains................................. 329,457 (345,783) 73,122
Average annual yield:
Net investment income.............. 7.17% 6.90% 6.72%
Realized gains..................... 0.31 0.52 1.17
Increase (decrease) in unrealized
gains............................ 9.70 (10.76) 2.45
---------- ---------- ----------
Return on fixed maturities.............. 17.18% (3.34)% 10.34%
---------- ---------- ----------
---------- ---------- ----------
Equity Securities(2):
Average investments(1).................. $ 600,206 $ 540,139 $ 622,435
Net investment income................... 19,317 26,251 28,201
Realized gains.......................... 23,811 1,611 98,944
Increase (decrease) in unrealized
gains................................. 182,507 (6,849) (9,670)
Average annual yield:
Net investment income.............. 3.22% 4.86% 4.53%
Realized gains..................... 3.97 0.30 15.89
Increase (decrease) in unrealized
gains............................ 30.40 (1.27) (1.55)
---------- ---------- ----------
Return on equity securities............. 37.59% 3.89% 18.87%
---------- ---------- ----------
---------- ---------- ----------
Total weighted average return on fixed
maturities and equity securities(3)... 20.25% (2.30)% 11.81%
---------- ---------- ----------
---------- ---------- ----------
</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, 1995, 1994 and 1993.
(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, 1995 fixed maturity portfolio market value
would be approximately 0.75%.
The carrying value and market value at December 31, 1995 of fixed
maturities for which interest is payable on a deferred basis was $100.2 million.
18
<PAGE>
INVESTEE COMPANY
As of March 1, 1996, the Reliance Insurance Group owned 6,574,445 shares of
common stock of Zenith National Insurance Corp. ('Zenith'), representing 37.0%
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 1, 1996 the market value of the Reliance Insurance
Group's investment in Zenith was $156,143,000 (based upon the closing price on
such date as reported by the NYSE), with a carrying value of $157,667,000.
Certain executive officers of the Company serve, at the Company's request, as
directors of Zenith. The Company's investment in Zenith is accounted for by the
equity method. See Note 3 to the Consolidated Financial Statements.
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.
In addition, other states may regulate licensed insurers as though they
were domestic insurers for insurance holding company purposes. The State of
California, for example, presently treats certain insurance subsidiaries of
Reliance Insurance Company, which are not domiciled in California, as
'commercially domiciled' California insurers. As a result, 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 law of the states of domicile of such subsidiaries. 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
a dividend is reasonable in relation to an insurance company's outstanding
liabilities and financial needs are substantially the same as the laws of the
states of domicile of such subsidiaries of Reliance Insurance Company that are
'commercially domiciled' California insurers.
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
19
<PAGE>
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.
Total common stock dividends paid by Reliance Insurance Company during
1995, 1994 and 1993 were $111.5 million, $111.5 million and $130.6 million,
respectively. During 1996, $165.4 million would be available for dividend
payments by Reliance Insurance Company under Pennsylvania law. The Company
believes such amount will be sufficient to meet its cash needs.
There is no assurance that Reliance Insurance Company will meet the test in
effect from time to time under Pennsylvania law for the payment of dividends
without prior Insurance Department approval or that any requested approval will
be obtained. Reliance Insurance Company has 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 a
'risk-based capital' requirement for the property and casualty insurance
industry. '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.
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.
20
<PAGE>
On November 28, 1994, Reliance Insurance Company and several of its
affiliates received an order from the outgoing Insurance Commissioner ordering
refunds totaling $72.3 million, inclusive of interest. On January 31, 1996, the
Company reached a settlement with the California Department of Insurance
resolving its total liability for refunds and interest under Proposition 103.
The settlement requires the Company to pay $15.6 million in refunds and interest
on certain policies issued or renewed between November 8, 1988 and November 7,
1989. Although the Company believes that the California Department of Insurance
misapplied Proposition 103 as it relates to it, the Company agreed to the
settlement to avoid prolonging the matter further. In the fourth quarter of
1995, the Company recorded a pre-tax charge of $4.0 million related to
Proposition 103. The fourth quarter 1995 charge represents the difference
between the settlement amount and the pre-tax charge of $11.6 million the
Company had taken in the fourth quarter of 1994 to provide for Proposition 103
refunds and interest.
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.
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/Transnation Title competes with other 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.
SALE OF NON-CORE OPERATIONS
In July 1993, the Company completed the sale of its life insurance
subsidiary, United Pacific Life Insurance Company. 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, through a public offering of 100%
of the common stock of CMAC Investment Corporation.
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, 1995, the Company and its
consolidated subsidiaries employed approximately 8,775 persons in approximately
460 offices.
21
<PAGE>
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 against it 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. 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. The Superintendent
has informed Prometheus that he intends to pursue court approval of the
settlement. The settlement agreement will not become effective until final
approval by the court and there is no assurance that such approval will be
obtained.
The Company is seeking a redetermination in the U.S. Tax Court of an
asserted tax deficiency for the year ended December 31, 1980, 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 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 Company estimates that, if the IRS were to
prevail, the deficiency would result in an increase in tax of approximately
$31.0 million for 1980, plus interest at the statutorily prescribed rates for
the periods since that year. 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 this matter 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.
See Note 14 to the Consolidated Financial Statements for additional
information concerning the above referenced legal proceedings affecting the
Company and its subsidiaries.
22
<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:
NAME AND AGE POSITION
- ------------------------------- -----------------------------------------------
Saul P. Steinberg (56)......... Chairman of the Board and Chief Executive
Officer
Robert M. Steinberg (53)....... President, Chief Operating Officer and Director
George E. Bello (60)........... Executive Vice President, Controller and
Director
Lowell C. Freiberg (56)........ Senior Vice President, Chief Financial Officer
and Director
Henry A. Lambert (60).......... Senior Vice President--Real Estate Investments
and Operations
Dennis J. O'Leary (48)......... Senior Vice President--Taxes
Fred M. Schriever (65)......... Senior Vice President
Philip S. Sherman (47)......... Senior Vice President--Group Controller
Bruce L. Sokoloff (47)......... Senior Vice President--Administration
Howard E. Steinberg (51)....... Senior Vice President, General Counsel and
Corporate Secretary
James E. Yacobucci (44)........ Senior Vice President--Investments and Director
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 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 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.,
United Dental Care, Inc. and Horizon Mental Health Management, Inc. Mr. Bello is
a member of the Finance Committee of the Board of Directors.
23
<PAGE>
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 Deloitte &
Touche LLP (formerly Touche Ross & Co.) since 1980 and was associated with the
firm since 1975. In 1987 he was elected Senior Vice President--Taxes.
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. From
1973 to 1995, Mr. Schriever was President of RCG International, Inc. ('RCG') and
from 1983 to 1995, he was Chairman of the Board of RCG.
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. Mr.
Steinberg also serves as the Chairman of the New York State Thruway Authority,
an unpaid position to which he was appointed in January 1996.
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.
24
<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 58 of the Reliance Group Holdings 1995 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 21 and 22 of the Reliance Group Holdings 1995
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 24 through 31 of the Reliance Group Holdings 1995
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 32 through 55 of the Reliance Group Holdings 1995 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 8, 1996, 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 8, 1996, 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 8, 1996, 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 8, 1996, under the captions 'Executive
Compensation--Compensation Committee Interlocks and Insider Participation' and
'Related Party Transactions,' which information is incorporated herein by
reference.
25
<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 32 through 55 of the Reliance Group Holdings
1995 Annual Report, are incorporated herein by reference.
PAGE REFERENCE
-------------------
1995
ANNUAL
FORM 10-K REPORT
--------- ------
RELIANCE GROUP HOLDINGS, INC. AND SUBSIDIARIES:
Independent Auditors' Report............................ A-1 56
Consolidated Financial Statements at December 31, 1995
and 1994 and for the three years ended December 31,
1995:
Statement of Income................................ 32
Balance Sheet...................................... 33
Statement of Changes in Shareholders' Equity....... 34
Statement of Cash Flows............................ 35
Notes to Financial Statements (1-16)............... 36-55
2. FINANCIAL STATEMENT SCHEDULES.
I -- Summary of Investments of Insurance Subsidiaries --
Other Than Investments in Related Parties......... A-2
II -- Condensed Financial Information of the Registrant
at December 31, 1995 and 1994 and for the three
years ended December 31, 1995:
Statement of Income.............................. 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
Pursuant to Rule 1-02(w) of Regulation S-X, Reliance Insurance Group's
investment in Zenith National Insurance Corp. met the definition of a
'significant subsidiary' in 1993 and 1994. Zenith National Insurance Corp. files
financial statements with the Securities and Exchange Commission which should be
referred to for additional information.
26
<PAGE>
3. EXHIBITS.
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- --------- --------------------------------------------------------------------
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 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).
+10.2 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).
+10.3 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).
+10.4 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).
+10.5 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).
+10.6 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).
+10.7 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).
- ------------------
* 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).
27
<PAGE>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- --------- --------------------------------------------------------------------
+10.8 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).
+10.9 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).
+10.10 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).
+10.11 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).
+10.12 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).
+10.13 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).
+10.14 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).
+10.15 The 1995 Amendment to The Reliance Group Holdings, Inc. Executive
Bonus Plan.
+10.16 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).
+10.17 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).
+10.18 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).
+10.19 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).
+10.20 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).
+10.21 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).
- ------------------------
+ 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>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- --------- --------------------------------------------------------------------
10.22 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).
10.23 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).
10.24 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).
10.25 Amendment, dated November 2, 1992, to Exhibit 10.22 (incorporated by
reference to Exhibit 2.1 to Reliance Group Holdings' Quarterly
Report on Form 10-Q for the quarter ended September 30, 1992).
10.26 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).
13.1 Reliance Group Holdings 1995 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, 1995.
- ------------------
++ Schedule P from the statutory reports of Zenith National Insurance Corp.,
37.0% 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.
** Schedule P is being filed with the Securities and Exchange Commission under
cover of Form SE concurrently herewith.
*** To be filed by Amendment.
(b) REPORTS ON FORM 8-K.
No reports on Form 8-K were filed during the year ended December 31, 1995.
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 27TH DAY OF
MARCH, 1996.
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.
SIGNATURES TITLE DATE
- ---------------------- ---------------------------------------- --------------
SAUL P. STEINBERG Chairman of the Board, Principal March 27, 1996
- ---------------------- Executive Officer and Director
SAUL P. STEINBERG
GEORGE E. BELLO Principal Accounting March 27, 1996
- ---------------------- Officer and Director
GEORGE E. BELLO
LOWELL C. FREIBERG Principal Financial Officer and March 27, 1996
- ---------------------- Director
LOWELL C. FREIBERG
GEORGE R. BAKER Director March 27, 1996
- ----------------------
GEORGE R. BAKER
DENNIS A. BUSTI Director March 27, 1996
- ----------------------
DENNIS A. BUSTI
THOMAS P. GERRITY Director March 27, 1996
- ----------------------
THOMAS P. GERRITY
30
<PAGE>
SIGNATURES TITLE DATE
- ---------------------- ---------------------------------------- --------------
JEWELL J. MCCABE Director March 27, 1996
- ----------------------
JEWELL J. MCCABE
IRVING SCHNEIDER Director March 27, 1996
- ----------------------
IRVING SCHNEIDER
BERNARD L. SCHWARTZ Director March 27, 1996
- ----------------------
BERNARD L. SCHWARTZ
RICHARD E. SNYDER Director March 27, 1996
- ----------------------
RICHARD E. SNYDER
- ---------------------- March 27, 1996
THOMAS J. STANTON, JR. Director
ROBERT M. STEINBERG Director March 27, 1996
- ----------------------
ROBERT M. STEINBERG
JAMES E. YACOBUCCI Director March 27, 1996
- ----------------------
JAMES E. YACOBUCCI
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, 1995 and 1994, and for each
of the three years in the period ended December 31, 1995, and have issued our
report thereon dated February 26, 1996 (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 1995 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 26, 1996
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, 1995
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
COLUMN A COLUMN B COLUMN C COLUMN D
- --------------------------------------------------------------------------------
AMOUNT AT WHICH
SHOWN IN THE
TYPE OF INVESTMENT COST VALUE BALANCE SHEET
- --------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C>
Fixed maturities available for
sale:
Bonds and notes:
United States government and
government agencies
and authorities............ $ 679,007 $ 685,376 $ 685,376
States, municipalities and
political subdivisions..... 125,967 133,093 133,093
Foreign--government.......... 30,253 31,765 31,765
Foreign--other............... 85,889 89,380 89,380
Public utilities............. 305,652 313,906 313,906
Convertibles and bonds with
warrants attached.......... 41,146 47,253 47,253
All other corporate bonds and
notes...................... 679,772 699,893 699,893
Redeemable preferred stocks..... 351,824 371,329 371,329
---------- ---------- ---------------
2,299,510 2,371,995 2,371,995
---------- ---------- ---------------
Fixed maturities held for
investment:
Bonds and notes:
States, municipalities and
political subdivisions..... 11,822 11,797 11,822
Foreign--government.......... 133,252 139,042 133,252
Foreign--other............... 21,000 23,008 21,000
Public utilities............. 296,456 309,920 296,456
All other corporate bonds and
notes...................... 149,027 158,282 149,027
Redeemable preferred stocks..... 142,006 149,410 142,006
---------- ---------- ---------------
753,563 791,459 753,563
---------- ---------- ---------------
Equity securities:
Common stocks:
Public utilities............. 3,333 5,339 5,339
Banks, trusts and insurance
companies.................. 38,289 38,335 38,335
Industrial and other......... 190,863 430,275 430,275
Nonredeemable preferred
stocks....................... 175,569 198,719 198,719
---------- ---------- ---------------
408,054 672,668 672,668
---------- ---------- ---------------
Short-term investments............ 500,284 500,284 500,284
---------- ---------- ---------------
Cash.............................. 50,809 50,809 50,809
---------- ---------- ---------------
$4,387,215
----------
----------
Mortgage loans(1)................. 17,465 17,465
Investments in real estate(2)..... 266,842 266,842
---------- ---------------
$4,296,527 $ 4,633,626
---------- ---------------
---------- ---------------
</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 $15,081,000.
A-2
<PAGE>
SCHEDULE II
ITEM 14(A)2
RELIANCE GROUP HOLDINGS, INC.
(PARENT COMPANY)
STATEMENT OF INCOME
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31 1995 1994 1993
- ------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C>
REVENUES:
Dividends from subsidiaries................ $110,000 $110,000 $200,000
Interest (including $5,543, $4,392 and
$5,949 from subsidiaries)................ 6,153 4,485 6,611
Other...................................... -- -- 197
-------- -------- --------
116,153 114,485 206,808
-------- -------- --------
EXPENSES:
Interest (including $20,408, $14,864 and
$20,605 to subsidiaries)................. 88,391 82,239 102,051
General and administrative................. 35,600 37,024 34,846
-------- -------- --------
123,991 119,263 136,897
-------- -------- --------
(7,838) (4,778) 69,911
Income tax benefit......................... 49,699 35,067 79,781
-------- -------- --------
INCOME BEFORE EQUITY IN SUBSIDIARIES AND
INVESTEE COMPANY......................... 41,861 30,289 149,692
Equity in subsidiaries (net income less
dividends received)...................... 46,263 4,054 (76,597)
Equity in investee company................. 7,792 9,478 12,441
Loss on disposal of discontinued operations
of investee company...................... (4,497) -- --
-------- -------- --------
INCOME BEFORE EXTRAORDINARY ITEMS AND
CUMULATIVE EFFECT OF ACCOUNTING CHANGE... 91,419 43,821 85,536
Extraordinary item--early extinguishment of
debt..................................... -- -- (23,017)
Extraordinary item--early extinguishment of
subsidiary debt.......................... (3,363) -- (4,905)
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................................. $ 88,056 $ 43,821 $ 73,525
-------- -------- --------
-------- -------- --------
</TABLE>
A-3
<PAGE>
SCHEDULE II
ITEM 14(A)2
RELIANCE GROUP HOLDINGS, INC.
(PARENT COMPANY)
BALANCE SHEET
<TABLE>
<CAPTION>
ASSETS DECEMBER 31 1995 1994
- -----------------------------------------------------------------------------
(In thousands, except per-share amount)
<S> <C> <C>
Cash.............................................. $ 187 $ 404
Investments in subsidiaries....................... 1,582,133 1,338,617
Due from subsidiaries............................. 87,218 97,996
Excess of cost over fair value of net assets
acquired, less accumulated amortization......... 29,091 30,200
Other assets...................................... 28,559 28,090
---------- ----------
$1,727,188 $1,495,307
---------- ----------
---------- ----------
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY
- -----------------------------------------------------------------------------
<S> <C> <C>
Accounts payable and accrued expenses............. $ 49,181 $ 49,092
Federal income taxes, including deferred taxes.... 90,410 86,946
Debentures........................................ 650,000 650,000
Due to subsidiaries............................... 259,249 322,519
---------- ----------
1,048,840 1,108,557
---------- ----------
Contingencies and commitments
Shareholders' equity:
Common stock, par value $.10 per-share, 225,000
shares authorized, 113,440 and 113,127 shares
issued and outstanding....................... 11,344 11,313
Additional paid-in capital...................... 535,091 533,979
Retained earnings (deficit) (including
undistributed net income of subsidiaries of
$374,652 and $328,457)....................... (61,694) (110,479)
Net unrealized gain (loss) on investments of
subsidiaries................................. 219,356 (27,881)
Net unrealized loss on foreign currency
translation of subsidiaries.................. (25,749) (20,182)
---------- ----------
678,348 386,750
---------- ----------
$1,727,188 $1,495,307
---------- ----------
---------- ----------
</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 1995 1994 1993
- ------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................................ $ 88,056 $ 43,821 $ 73,525
Equity in undistributed net income of
subsidiaries and investee company....... (46,195) (38,345) (45,210)
Accounts payable, accrued expenses and
other................................... 4,583 16,962 29,272
-------- -------- ---------
46,444 22,438 57,587
-------- -------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
- -106Investment in subsidiary.................. -- -- (79,728)
Other--net................................ (290) (1,388) (573)
-------- -------- ---------
(290) (1,388) (80,301)
-------- -------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in term loans.................... -- -- 35,000
Increase (decrease) in amounts due to/from
subsidiaries--net....................... (11,325) 7,439 38,564
Repayments of term loans.................. -- -- (294,500)
Issuance of debentures.................... -- -- 650,000
Issuance of common stock.................. 1,196 7,324 189,536
Repurchases of debentures and notes....... -- -- (536,193)
Debt issuance costs....................... -- -- (17,379)
Dividends................................. (36,242) (36,157) (29,652)
Repayment of preferred stock.............. -- -- (25,000)
Collection of receivable pertaining to the
issuance of common stock................ -- -- 10,625
-------- -------- ---------
(46,371) (21,394) 21,001
-------- -------- ---------
Decrease in cash.......................... (217) (344) (1,713)
Cash, beginning of year................... 404 748 2,461
-------- -------- ---------
Cash, end of year......................... $ 187 $ 404 $ 748
-------- -------- ---------
-------- -------- ---------
</TABLE>
SUPPLEMENTAL DISCLOSURE OF NON-CASH FINANCING ACTIVITIES:
In 1995, investments in subsidiaries and due to subsidiaries were reduced by
$41,167,000 to reflect the elimination of intercompany balances of certain
dormant subsidiaries. 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
- ---------------------------------------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1995:
Property and casualty......... $ 194,648 $5,859,352 $1,299,465 $1,774,591 $247,343 $1,201,959 $411,979
Title......................... -- 240,777 -- 671,947 27,946 58,486 --
----------- ---------- ---------- ---------- ---------- ---------- ------------
$ 194,648 $6,100,129 $1,299,465 $2,446,538 $275,289 $1,260,445 $411,979
----------- ---------- ---------- ---------- ---------- ---------- ------------
----------- ---------- ---------- ---------- ---------- ---------- ------------
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
----------- ---------- ---------- ---------- ---------- ---------- ------------
----------- ---------- ---------- ---------- ---------- ---------- ------------
<CAPTION>
- -----------------------------------------------------
- -----------------------------------------------------
COLUMN A COLUMN I COLUMN J
- -----------------------------------------------------
OTHER
INSURANCE PREMIUMS
SEGMENT EXPENSES WRITTEN
- -----------------------------------------------------
(In thousands)
<S> <C> <C>
YEAR ENDED DECEMBER 31, 1995:
Property and casualty......... $197,112 $1,779,040
----------
----------
Title......................... 629,051
--------
$826,163
--------
--------
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
--------
--------
</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
- --------------------------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1995:
Premiums:
Property and casualty....... $2,707,978 $1,284,023 $ 350,636 $1,774,591 19.76%
Title....................... 671,222 1,649 2,374 671,947 .35
---------- ---------- --------- ----------
$3,379,200 $1,285,672 $ 353,010 $2,446,538 14.43
---------- ---------- --------- ----------
---------- ---------- --------- ----------
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
---------- ---------- --------- ----------
---------- ---------- --------- ----------
</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
- ----------------------------------------------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Consolidated subsidiaries:
YEAR ENDED
DECEMBER 31, 1995........ $ 194,648 $5,859,352 $235,664 $1,299,465 $1,774,591 $ 247,343 $1,163,447 $38,512
----------- ---------- ------------ ---------- ---------- ---------- ---------- -------
----------- ---------- ------------ ---------- ---------- ---------- ---------- -------
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
----------- ---------- ------------ ---------- ---------- ---------- ---------- -------
----------- ---------- ------------ ---------- ---------- ---------- ---------- -------
<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
- -------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C>
Consolidated subsidiaries:
YEAR ENDED
DECEMBER 31, 1995........ $411,979 $1,140,537 $1,779,040
------------ ---------- ----------
------------ ---------- ----------
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
------------ ---------- ----------
------------ ---------- ----------
</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 1995 and 1994 and 3% to 6% in 1993. Discount shown relates
to net liabilities for unpaid claims and related expenses for short-duration
contracts which are expected to have fixed, periodic payment patterns.
A-8
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
SEQUENTIAL
EXHIBIT PAGE
NUMBER DESCRIPTION OF EXHIBIT NUMBER
- --------- -------------------------------------------------------------------------------- -----------
<S> <C> <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 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).
+10.2 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).
+10.3 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).
+10.4 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).
+10.5 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).
+10.6 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).
+10.7 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).
</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>
SEQUENTIAL
EXHIBIT PAGE
NUMBER DESCRIPTION OF EXHIBIT NUMBER
- --------- -------------------------------------------------------------------------------- -----------
<S> <C> <C>
+10.8 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).
+10.9 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).
+10.10 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).
+10.11 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).
+10.12 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).
+10.13 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).
+10.14 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).
+10.15 The 1995 Amendment to The Reliance Group Holdings, Inc. Executive Bonus Plan.
+10.16 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).
+10.17 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).
+10.18 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).
+10.19 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).
+10.20 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).
+10.21 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).
</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>
SEQUENTIAL
EXHIBIT PAGE
NUMBER DESCRIPTION OF EXHIBIT NUMBER
- --------- -------------------------------------------------------------------------------- -----------
<S> <C> <C>
10.22 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).
10.23 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).
10.24 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).
10.25 Amendment, dated November 2, 1992, to Exhibit 10.22 (incorporated by reference
to Exhibit 2.1 to Reliance Group Holdings' Quarterly Report on Form 10-Q for the
quarter ended September 30, 1992).
10.26 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).
13.1 Reliance Group Holdings 1995 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, 1995.
</TABLE>
- ------------------
++ Schedule P from the statutory reports of Zenith National Insurance Corp.,
37.0% 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.
** Schedule P is being filed with the Securities and Exchange Commission under
cover of Form SE concurrently herewith.
*** To be filed by Amendment.
<PAGE>
Financial Highlights
(in thousands, except per share amounts) 1995 1994 1993
Revenues $2,905,987 $3,047,050 $2,962,819
Income (loss) from continuing operations
before gain on sales of investments 76,431 38,790 (1,437)
Net income 88,056 43,821 73,525
Per share information:
Income (loss) from continuing operations
before gain on sales of investments .66 .34 (.02)
Net income .73 .38 .79
Assets 9,988,213 9,369,553 8,815,214
Shareholders' equity 678,348 386,750 518,626
---------------------------------------------------------------------------
[GRAPH]
Operating Income
Dollars in Millions
1993 1994 1995
(1.4) 38.8 76.4
---------------------------------------------------------------------------
---------------------------------------------------------------------------
[GRAPH]
Shareholders' Equity
Dollars in Millions
1993 1994 1995
518.6 386.8 678.3
---------------------------------------------------------------------------
---------------------------------------------------------------------------
[GRAPH]
Assets
Dollars in Millions
1993 1994 1995
8.8 9.4 10.0
---------------------------------------------------------------------------
Table of Contents
Reliance At-A-Glance 2
Letter to Shareholders 4
Review of Operations 7
Financial Information
Selected Financial Data 21
Financial Review 24
Consolidated Financial Statements 32
Notes to Consolidated Financial Statements 36
Independent Auditors' Report 56
Report of Management 57
Market and Dividend Information 58
Directors and Officers 59
Corporate Data 60
1
<PAGE>
RELIANCE GROUP HOLDINGS, INC.
AT-A-GLANCE
Reliance is...
Property & Casualty
Insurance & Title Insurance
---------------------------------------------------------------------------
[GRAPH]
Vital Statistics
Percent of Net P & C Premiums Written
Reliance Surety 8%
Reliance Reinsurance 7%
Reliance Insurance 36%
Reliance National 49%
---------------------------------------------------------------------------
RELIANCE NATIONAL
Market Focus
Operating in the U.S. and selected international markets with a broad range of
innovative and specialized coverages and risk management services for Fortune
1000 companies.
Vital Statistics
- ---------------------------------------------------------------------------
[GRAPH]
Reliance National Combined Ratio*
Percent
1993 1994 1995
109.2 104.5 99.1
---------------------------------------------------------------------------
1995 Results
Excellent combined ratio of 99.1%. Net premiums written of $864.4 million
declined 3%, reflecting the shift to high deductible policies. Markets where
Reliance National played an active role in 1995 included directors and
officers liability and ocean marine. Reliance National also pioneered
coverage in 1995 in areas including satellite launches. International
operations achieved excellent growth and profitability.
Outlook
Attractive opportunities anticipated in the international markets for
specialized products including directors and officers, ocean marine, accident
and health and aviation. Expansion into Asia expected in 1996. Domestically,
will seek to continue to identify profitable new market opportunities and
move quickly to serve them.
RELIANCE INSURANCE
Market Focus
Traditional and innovative coverages for the more complex commercial risks of
midmarket customers -- typically, corporations with 25 to 1,000 employees and
revenues from $5 million to $300 million. Also, custom underwriting for
selected classes of nonstandard risks and programs for groups with common
insurance needs.
Vital Statistics
- ----------------------------------------------------------------------------
[GRAPH]
Reliance Insurance Combined Ratio*
Percent
1993 1994 1995
109.6 106.4 106.3
---------------------------------------------------------------------------
1995 Results
Combined ratio of 106.3% in 1995 includes catastrophe losses that contributed
three combined ratio points to underwriting results. Net premiums written
totaled $649.4 million, up 6%. Achieved strong results in areas including the
Commercial Accounts Division and affinity group programs.
Outlook
Further expansion planned in the midwestern states. Also anticipate growing
opportunities for serving southeastern U.S. market with nonstandard
underwriting capabilities. Other opportunities include a "24-Hour Comp"
product that combines workers' compensation with employee benefits and
providing claims service to other entities.
- ----------
*The combined ratio is the ratio of claims and expenses to earned premiums --
the better the performance, the lower the ratio.
2
<PAGE>
RELIANCE REINSURANCE
Market Focus
Treaty and facultative reinsurance for small and midsize insurers, and for
specialty division of larger insurers. Primary emphasis is casualty coverage.
Vital Statistics
- ---------------------------------------------------------------------------
[GRAPH]
Reliance Reinsurance Combined Ratio*
Percent
1993 1994 1995
104.8 111.3 114.9
---------------------------------------------------------------------------
1995 Results
Net premiums written declined 5% to $119.0 million as Reliance Reinsurance
de-emphasized unprofitable property coverage and refocused on profitable
casualty reinsurance. Combined ratio of 114.9% was adversely impacted by
unprofitable property coverage and catastrophe losses. Established program
business capability and stepped up activity in finite risk area. Strong
year-end renewals.
Outlook
Expect to reduce property coverage's share of total reinsurance book.
Emphasis will be placed on solutions to complex problems where underwriting
and financial knowledge add value.
RELIANCE SURETY
Market Focus
Contract surety bonds (primarily for midsize contractors), commercial surety
bonds and fidelity bonds (for financial institutions and a variety of other
customers).
Vital Statistics
- ---------------------------------------------------------------------------
[GRAPH]
Reliance Surety Combined Ratio*
Percent
1993 1994 1995
81.0 74.3 65.6
---------------------------------------------------------------------------
1995 Results
Record results in terms of both underwriting quality and premiums. Strong
premium growth of 18% in 1995 to a total of $139.3 million. Exceptional
combined ratio of 65.6%.
Outlook
Anticipate strong growth from small contractor market and from Express Surety
product. Large and midsize contractor business segments will remain competitive
but Reliance Surety's long-standing relationships with producers and clients
should favorably impact results.
COMMONWEALTH LAND TITLE INSURANCE
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.
Vital Statistics
- ---------------------------------------------------------------------------
[GRAPH]
Commonwealth Land Title
1995 Revenues and Pretax Operating Income
Dollars in Millions
1st Q 2nd Q 3rd Q 4th Q
Revenue 152.9 157.4 171.6 190.0
Pretax (4.2) 1.3 7.2 8.0
Operating
Income
---------------------------------------------------------------------------
1995 Results
The real estate market bottomed out in the first quarter of 1995. From a loss
position in the first quarter, Commonwealth achieved positive results and
growth in revenues and income in each of the subsequent three quarters.
Premiums and fees for 1995 totaled $671.9 million. Financial strength
continued to be a hallmark of Commonwealth. A national appraisal management
service was introduced.
Outlook
Given current real estate market, anticipate growth in revenues and
profitability in 1996. Investments in technology are expected to continue to
contribute to productivity gains. Areas of opportunity and emphasis include
commercial market, mortgage lenders served by Commonwealth OneStopTM
operations and local business through product and geographic expansion.
3
<PAGE>
TO OUR
SHAREHOLDERS:
By virtually every important measure, 1995 was an outstanding year for
Reliance. Operating income grew 97% to $76.4 million ($.66 per share) in 1995,
compared with $38.8 million ($.34 per share) a year ago. We have achieved 11
consecutive quarters of year-over-year growth in operating income.
Net income in 1995 was $88.1 million ($.73 per share), up substantially
from 1994's results of $43.8 million ($.38 per share).
The combined ratio of our property and casualty operations, which has been
improving steadily since 1991, improved again in 1995 to 101.8%, among the best
in the industry.
---------------------------------------------------------------------------
[PHOTO]
Saul P. Steinberg (left)
Chairman and Chief Executive Officer
Robert M. Steinberg
President and Chief Operating Officer
---------------------------------------------------------------------------
We significantly strengthened our financial position. Through a
combination of investment appreciation and earnings growth, we have
substantially increased shareholders' equity to $678 million and reduced the
corporation's financial leverage. The statutory surplus of our insurance
operations grew to a record level of $1.128 billion.
Return on equity increased to 16.6%, even with substantial growth in
shareholders' equity.
Our shareholders achieved excellent returns in 1995, and we are determined
to work to continue this progress.
A Strategic Transformation
This success is particularly gratifying because we have made significant
progress accomplishing what we set out to do when we first began transforming
the company to respond to fundamental changes in market conditions.
We made a commitment to build Reliance into a family of insurance
companies that would thrive even in adverse and competitive markets.
We saw then that the traditional market cycles of the property and
casualty industry were eroding and that the strongest competitors would need to
excel and differentiate their performance in both weak and strong markets. The
notion of waiting for better times was -- and remains -- unacceptable to us.
Reliance is succeeding by aggressively targeting underserved markets,
adding value by engineering creative solutions to customer needs and providing
superior service and support. Each business unit stays close to its customers
with a strategy designed to meet the specific requirements of its market. At
Reliance, there is no one-size-fits-all approach to business.
We have brought together many talented and experienced people, and have
built a flexible organization that is able to identify and seize new
opportunities when market conditions change.
Reliance is a "right-sized" company, large enough to be among the leaders
in its chosen markets -- and small enough to be agile and grow without losing
focus.
We believe that Reliance has the people, strategy, structure and
commitment to be the very best.
Property and Casualty Insurance
The successful transformation of Reliance into a more profitable,
value-added competitor is dramatically evident in our property and casualty
businesses, which account for about 70% of our revenues.
In 1995, property and casualty pretax operating income grew 47%, to $208.3
million, compared with $141.9 million in 1994. Our combined ratio of 101.8% was
markedly superior to the industry average.
---------------------------------------------------------------------------
[GRAPH]
Consolidated Property and Casualty Combined Ratio
Percent
1993 1994 1995
110.8 104.4 101.8
The ratio of claims and expenses to earned premiums - the better the
performance, the lower the ratio.
---------------------------------------------------------------------------
Each of Reliance's property and casualty operations is highly focused on
distinct market segments, but they share a common business philosophy: We focus
primarily on specialized and less-traditional risks, where there are fewer
competitors, and where we can price products profitably and provide customers
with services and solutions that go beyond risk assumption.
We are disciplined and flexible. When competition increases and prices
fall, we look for other profitable approaches that serve client needs.
4
<PAGE>
We will not compromise our strict underwriting discipline for the sake of
market share. Yet we have demonstrated that underwriting excellence and market
leadership can be compatible. For example, Reliance Surety, a leading provider
of contract surety and fidelity bonds, achieved both strong premium growth of
18% and an outstanding combined ratio of 65.6% in 1995.
Reliance has successfully managed risks and reduced its exposure to
catastrophes through a number of initiatives, which include conservative
catastrophe reinsurance and withdrawal from traditional personal lines. We also
benefit from an advanced computer system that monitors property exposures by
region.
---------------------------------------------------------------------------
"Management is delivering on the promise."
CS First Boston--
Sept. 1995
---------------------------------------------------------------------------
In addition, Reliance has benefited from intensified efforts to combat
insurance fraud. While we process claims quickly and efficiently, our
outstanding antifraud unit has helped preserve the company's assets by
effectively rooting out fraudulent claims.
One area of growing opportunity and success for our specialized and less
traditional property and casualty insurance products is the international
marketplace. Currently, we have subsidiaries in Canada, the United Kingdom,
Mexico and Argentina, and have offices in several European cities. We are very
satisfied with the early results of our international expansion.
Title Insurance
Our title insurance company -- Commonwealth Land Title -- has taken a
disciplined approach to managing costs across the real estate cycle. We
carefully control expenses, and because we generate our business through an
extensive agency network as well as through our own branch offices, we are able
to keep our fixed costs down. This reduces the volatility of our results
compared to competitors'. In addition, we are giving added emphasis to more
profitable commercial business and building fee-based services -- including a
recently created national appraisal management service.
Pretax operating income from title insurance totaled $12.3 million in
1995, compared with $30.8 million in 1994. These 1995 results reflected the
initially weak but gradually improving conditions in real estate markets.
Market conditions in the seasonally slow first quarter were exacerbated by high
interest rates and low real estate activity, resulting in an operating loss in
the first quarter. However, revenues and operating income increased in each
successive quarter of 1995. We are encouraged by rece nt results and the outlook
for 1996 is positive.
A Strengthened Financial Position
Reliance's excellent progress in its operating businesses was matched by
its success in strengthening its financial position.
Our record statutory surplus of $1.128 billion underscores the financial
strength of our insurance operations and provides us with capacity for growth.
With shareholders' equity of $678 million at year-end, Reliance's
debt-to-capitalization ratio improved to 56% from 70% in 1994. Our goal is to
continue to reduce leverage and obtain further upgrades in our corporate debt
and insurance companies' ratings.
---------------------------------------------------------------------------
[GRAPH]
Statutory Surplus
Dollars in Millions
1993 1994 1995
902 909 1,128
---------------------------------------------------------------------------
Solid investment appreciation was a major contributor to our strengthened
financial position. Reliance's investment portfolio is balanced, diversified
and liquid. In 1995, our fixed-income portfolio achieved total returns of
17.2%, and our equity portfolio achieved total returns of 37.6%. By actively
managing and intensively monitoring our portfolio, we have achieved safety and
liquidity while seeking the best available total returns. The insight and
skill Reliance brings to its investment activities are integral business
strengths.
Leadership
With deep regret, we mourn the loss of an esteemed colleague and close
friend -- our Director, Carter Burden who died in January 1996. We will miss his
wisdom and good counsel.
The people of Reliance make a difference. The talented and experienced
team we have in place at Reliance is a key competitive advantage. We
successfully develop, advance and retain good people. When we need new talent
to augment our team, we recruit from among the best -- both inside and outside
the industry.
5
<PAGE>
We design incentive compensation plans that align managers'
interests with those of our shareholders. Our compensation plans are tied to
profitability, and for many of our managers, we pay out deferred compensation
over time frames structured to ensure that managers write business that
develops profitably over the long term.
---------------------------------------------------------------------------
"The New Reliance! A Company on the Rise."
Fox-Pitt, Kelton --
Jan. 1996
---------------------------------------------------------------------------
We firmly believe that the men and women of Reliance are the best and most
committed in the industry. We deeply appreciate their efforts.
Outlook
The current environment is creating exciting opportunities for those who
are able to adapt to change. Our industry is in the midst of a dramatic
restructuring; we believe we have a competitive edge in this environment. At
Reliance, the refocusing and restructuring are largely behind us. While many of
our competitors are looking inward, we are able to focus on our customers and
to pioneer the next generation of risk management tools for them.
Over the longer term, the industry's consolidation could prove to be a
very welcome trend for shareholders. Markets and pricing could become more
rational if fewer, and better managed, competitors focus on their core
strengths and show less patience with poorly performing operations.
The international markets hold great promise for Reliance. Our goal is to
double the share of our business from overseas operations by the year 2000 --
an expansion consistent with controlled and profitable results.
Technology is also reshaping our business. Whether the application is a
highly efficient and accurate data entry system in property and casualty or the
imaging of title records at Commonwealth, our approach is lean, mobile and
flexible. Looking further ahead, we are paying close attention to the potential
of serving brokers, agents and policyholders through new technology channels.
Reliance is also profiting from teamwork. For example, when underwriters,
actuaries, and loss control, claims and marketing specialists work together,
the client receives better service and solutions -- and we can achieve superior
results. While our business units are highly differentiated and
self-sufficient, teamwork between them ensures that we do not leave good
business on the table in instances where our markets converge.
Success in the future also will be advanced by more sophisticated and
productive approaches to balance-sheet and risk management. Insurers have many
more options for serving clients than simply writing and holding comprehensive
policies. Reinsurance and other vehicles are making coverage and risks more
transferable. Large and complex risks can be divided into layers of coverage
that are consistent with the types and degrees of risks desired by different
insurers. The strongest competitors will have the data and skills to profit
from this enhanced liquidity and flexibility by managing risks better, limiting
exposures and identifying opportunities to optimize returns, while satisfying
customer needs.
---------------------------------------------------------------------------
"1995 proved
to be an excellent year for REL."
Donaldson, Lufkin, & Jenrette -- Feb. 1996
---------------------------------------------------------------------------
Even as we envision the convergence of several positive trends, we never
depend on market conditions that are better than today's. If we can position
our operations to be highly profitable in difficult market conditions, then we
will be very successful in good markets.
A year ago, we said we have the drive, determination and discipline to
sustain our momentum. Again in 1995, we have delivered on the promise.
Customers, analysts and investors have recognized our progress. We believe
strongly that the steps we are taking in 1996 will lead to continued success
and create superior long-term value for our investors.
/s/ Saul P. Steinberg /s/ Robert M. Steinberg
Saul P. Steinberg Robert M. Steinberg
Chairman and Chief Executive Officer President and Chief Operating Officer
6
<PAGE>
REVIEW
OF
OPERATIONS
Reliance National
Reliance Insurance
Reliance Reinsurance
Reliance Surety
Commonwealth
Land Title Insurance Company
Accountable
Innovative
Market driven
Entrepreneurial
Reliance is succeeding by aggressively targeting underserved markets, adding
value by engineering creative solutions to
customer needs and providing superior service and support.
7
<PAGE>
---------------------------------------------------------------------------
[PHOTO]
Hertz car return lot.
---------------------------------------------------------------------------
Reliance National tailors specialized coverage for FORTUNE 1000 companies and
their equivalents. Sharing a commitment to quality and service, since 1988 the
Hertz Corporation and Reliance National have developed solutions in areas
including auto liability and workers' compensation.
8
<PAGE>
RELIANCE NATIONAL
From its inception in 1987, Reliance National has focused on
specialized risks, moving rapidly into underserved markets,
tailoring coverage and engineering solutions to specific client
needs.
Accounting for approximately half of the company's total
property and casualty net premiums written, Reliance National
provides specialized coverages and serves Fortune 1000 companies
with risk management services. In addition, it has a growing
international presence. Reliance National's 1995 combined ratio of
99.1% reflects the success of its specialization strategy. Its
president, Dennis Busti, discusses how Reliance National's flexible
approach is well suited to the current competitive environment:
---------------------------------------------------------------------------
[PHOTO]
Dennis A. Busti seated.
Dennis A. Busti
President
Reliance National
---------------------------------------------------------------------------
Q. Competition is growing, placing pressure on pricing. How is
Reliance National responding to this challenge?
Challenging market conditions are nothing new to Reliance
National. It's important to remember that Reliance National was
conceived and structured specifically to thrive in competitive
environments by identifying product needs that were not being served
by the mainstream competition. While other insurers have entered some
of the market segments Reliance National helped pioneer, we believe we
will stay competitive by maintaining a flat organization and by
rapidly identifying new opportunities. We'll continue to provide
innovative coverage with responsive service that involves quick
approvals and efficient claims management.
---------------------------------------------------------------------------
[PHOTO]
Mr. Busti talking.
---------------------------------------------------------------------------
Q. What are some of the market segments that exemplify Reliance
National's approach to the property and casualty business?
Reliance National is one of the few insurers writing primary
coverage for satellite launches. We began in 1993 through reinsurance
and became a direct underwriter in 1995. By drawing on existing
resources from every part of the company, we didn't have to build a
huge infrastructure to support this product. We identified technical
experts to assist in the underwriting and then outsourced some of the
operations support.
Another example is directors and officers liability. From
start-up several years ago, we have built significant market share.
Asbestos coverage is another illustration. A few years ago, it
was difficult for asbestos abatement and removal companies to obtain
insurance coverage. By specifically defining and limiting risk
exposures, Reliance National developed sound and profitable
structures for serving this market need. Other insurers eventually
saw the opportunity and followed us into this business. And when the
competition made pricing unattractive, we then were quick to
de-emphasize this market.
---------------------------------------------------------------------------
"Reliance National has been extremely successful in identifying and exploiting
profitable underwriting niches, both domestically and internationally."
Sanford C. Bernstein & Co., Inc. -- Aug. 1995
---------------------------------------------------------------------------
Q. Could you discuss the growing trend toward high-
deductible policies and similar products?
From our customers' standpoint, these products provide
cost-efficient coverage in areas such as workers' compensation and
general liability. We develop policy structures that take into account
the cash flow, tax considerations and servicing needs of clients.
While high deductibles result in lower premium growth and, therefore,
higher expense ratios, when managed properly, these products can
achieve good combined ratios and profitability. Reliance has a strong
credit analysis capability, which is critical to executing this
business on a sound basis.
9
<PAGE>
Q. How does Reliance National manage risks as it
introduces new products and enters new markets?
First, our actuaries, underwriters, engineers, other technical
experts and claims people work together to understand and measure each
risk, determine which facets of it we believe we can profitably cover,
and then set a rational price. We further manage risk through policy
language that precisely defines and limits our exposures,
loss-sensitive pricing structures, claims-made policies that provide
for coverage only during an established time frame and extensive use
of reinsurance. Mitigating counterparty risk is an integral part of
risk management at Reliance. We analyze the strength of our reinsurers
as well as the creditworthiness of policyholders who have obligations
to us.
Q. Where do the international markets fit into the strategy of Reliance
National?
We have found Canada, Europe and Mexico fertile new ground for
capabilities such as directors and officers, ocean marine, excess
casualty, excess liability, accident and health, commercial auto and
aviation coverage. Reliance National was among the first American
companies to own a subsidiary in Mexico once NAFTA opened the door to
this market. While economic conditions there have been difficult, we
remain very optimistic for the longer term. Europe has been a
wide-ranging success. In 1996, we intend to establish ourselves in
Asia.
---------------------------------------------------------------------------
[PHOTO]
Robert C. Olsman seated.
Robert C. Olsman
President
Reliance Insurance
---------------------------------------------------------------------------
RELIANCE INSURANCE
Reliance Insurance provides "business America" customers --
typically, corporations with 25 to 1,000 employees and with revenues
from $5 million to $300 million -- both traditional and innovative
coverages for more complex commercial risks. Reliance Insurance also
offers custom underwriting for selected classes of nonstandard risks
and programs for groups with common insurance needs. In recent years,
Reliance Insurance has significantly improved its combined ratio which
stood at 106.3% in 1995. Net premiums written grew to $649.4 million.
Bob Olsman, president of Reliance Insurance, discusses the company's
successful strategy of bringing specialized capabilities and a
customer-focused service standard to midmarket companies:
---------------------------------------------------------------------------
[PHOTO]
Mr. Olsman talking.
---------------------------------------------------------------------------
Q. In a competitive market, how does Reliance Insurance distinguish itself?
Reliance Insurance, with as broad a product line as any insurer
serving midmarket companies, provides one-stop shopping for many
clients. We have also brought to these midsize firms many products
that were first developed for Fortune 1000 companies. Also important
is the emphasis we place on consistent execution of the fundamentals
of underwriting, claims management and customer service.
Q. What differentiates service at Reliance Insurance from that of its
competitors?
First, Reliance Insurance deploys its resources close to the point
of sale. Unlike many of our competitors, who have closed offices and
regionalized their operations, we offer a local presence -- with
offices in more than 50 locations nationwide. Typical midmarket
customers are owner/operators of closely held corporations, who are
seeking peace of mind and balance-sheet protection. Local,
personalized service is important to them and to their insurance
agents and brokers.
10
<PAGE>
---------------------------------------------------------------------------
Reliance Insurance has served Dennis Trucking through all phases of the trucking
industry business cycle and has helped the company develop creative solutions
that contribute to a safer workplace. Shown at right are Christine McNichol,
President of Dennis Trucking and Dennis McNichol, Chief Executive Officer.
---------------------------------------------------------------------------
---------------------------------------------------------------------------
[PHOTO]
Christine McNichol (left) and Dennis McNichol standing next to a truck.
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Reliance Insurance and its producers build long-term relationships and pool
their technical expertise on behalf of clients. Pictured above are Bill
Graham, President and Mike Tiagwad, VP-Sales, The Graham Company.
---------------------------------------------------------------------------
---------------------------------------------------------------------------
[PHOTO]
Bill Graham (left) and Mike Tiagwad standing.
---------------------------------------------------------------------------
11
<PAGE>
---------------------------------------------------------------------------
[PHOTO]
Businessman talking to businesswoman.
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Reliance Reinsurance actively seeks situations where its understanding of
clients, experience and creativity are of value, and avoids business where
purchasing decisions are made strictly on price.
---------------------------------------------------------------------------
12
<PAGE>
Second, we take a collaborative approach to service: Our
underwriters, loss control, claims and other people work together to
build client solutions. As part of the process of improving service in
areas such as claims management, we try to measure our results against
our customers' own expectations as well as against our competitors'
performance.
Q. Where are your opportunities coming from?
From our specialized underwriting capabilities -- we can readily
deploy them to serve changing needs because we stay close to the
customer.
From our people -- we've recruited new talent, and we develop the
skills of our staff, giving them the tools necessary to replicate and
customize new product ideas, in essence, to capitalize on our
experience.
From our competitors -- we never underestimate the competition
but frankly, with all of the mergers and restructurings in the
insurance industry today, some insurers are more internally-focused
than customer-focused. That in itself presents opportunities.
Q. What products and services look most promising for the future?
To give just three examples, in nonstandard business -- excess and
surplus lines -- we've done well in 1995 and expect continued success.
Second, we pioneered with Reliance National a "24-Hour Comp" product
that combines workers' compensation with employee benefits. We're also
providing claims service to other companies including self-insured
entities.
---------------------------------------------------------------------------
[PHOTO]
George H. Roberts standing.
George H. Roberts
President
Reliance Reinsurance
- ---------------------------------------------------------------------------
Q. What about geographic expansion?
Reliance Insurance is building in the Midwest. We have opened
offices in Pittsburgh, Chicago, Minneapolis and St. Louis, and have
targeted Dallas and Kansas City for 1996. This is a good market where
Reliance Insurance has been underrepresented.
RELIANCE REINSURANCE
Reliance Reinsurance provides treaty and facultative reinsurance
for small and midsize insurers, and for specialty divisions of larger
insurers. A combined ratio of 114.9% in 1995 was the result of
unprofitable property coverage and catastrophe losses. Reliance
Reinsurance discontinued participation in a property treaty that
accounted for 7.3 points of the total combined ratio. George Roberts,
president of Reliance Reinsurance, discusses its emphasis on tailored
solutions to clients' casualty reinsurance needs:
---------------------------------------------------------------------------
[PHOTO]
Mr. Roberts talking.
---------------------------------------------------------------------------
Q. What is Reliance Reinsurance's success strategy?
We are committed to maintaining our pricing and underwriting
standards during all phases of the marketing cycle. We try to avoid
highly competitive situations. Reliance Reinsurance prefers to
reinsure in the first $1 million of exposure, where sound actuarial
techniques apply and where results are more predictable and subject to
less volatility.
Q. How does Reliance Reinsurance add value?
First of all, we actively seek situations where our experience and
creativity are of value and where we can establish close working
relationships with our clients. We try to avoid large-capacity
business, where the purchasing decision is based strictly on price.
13
<PAGE>
Second, our approach to underwriting in both our customized
products area and in our traditional treaty division is based upon
thoroughly understanding our clients' needs. We perform a
comprehensive due diligence process, meeting with various levels of
management, and reviewing claims, financial, actuarial and
underwriting operations. We are then in an excellent position to
develop innovative solutions that achieve a client's objectives while
providing Reliance with an appropriate return for the risk assumed.
In addition, we try to provide the primary market with what it
currently needs most. For example, within our customized products
division, we recently have established new capabilities to write
program business and have stepped up our activity in the finite-risk
area. Also, we have developed interactive models to assist our
clients in optimizing the mix of reinsurance and capital on their
balance sheets.
---------------------------------------------------------------------------
[PHOTO]
C. Brian Schmalz seated.
C. Brian Schmalz
President
Reliance Surety
---------------------------------------------------------------------------
Q. What does Reliance Reinsurance see for the future?
We see significant opportunities. As we reduce unprofitable
property exposures, we are emphasizing casualty markets where we have
been more successful. Year-end 1995 was the busiest renewal season in
recent history for Reliance Reinsurance. To reinforce our commitment
to reinsurance and take a more prominent role in the marketplace, we
capitalized a new reinsurance company in Delaware and in 1996 are
seeking to license it in all 50 states.
RELIANCE SURETY
Reliance Surety is a top provider of surety bonds and fidelity
bonds in the United States, and has consistently led the industry in
terms of quality underwriting and service. Again in 1995, Reliance
Surety achieved a stellar combined ratio -- 65.6%. Construction and
fidelity bonds are provided to contractors, financial institutions
and other businesses. Reliance Surety has built long-term
relationships with these clients and with producers.
Brian Schmalz, president of Reliance Surety, attributes its
sustained success to its people and to a strong underwriting culture:
- ---------------------------------------------------------------------------
"Reliance is the #1 surety writer in
the country and the surety business is
one of the company's crown jewels."
Oppenheimer & Co., Inc. -- Nov. 1995
---------------------------------------------------------------------------
Q. How has Reliance Surety remained the best in its business?
Reliance Surety is first and foremost an underwriting company. We
match this strong technical orientation with relationship-driven
marketing strategies and unsurpassed claims management service.
Reliance Surety also works to structure business to meet clients'
needs for surety when competitors cannot. For example, we might
structure an indemnity agreement that isolates one set of risks from
another. We have worked with complex loan structures, identifying
untapped collateral or other safeguards that are consistent with a
loan agreement. Reliance Surety is able to provide surety for
challenging construction and environmental projects that integrate
the design and building stages.
---------------------------------------------------------------------------
[PHOTO]
Mr. Schmalz talking.
---------------------------------------------------------------------------
Q. How does a relationship focus differentiate Reliance Surety in the
marketplace?
Relationships matter in our business. We have 32 field offices,
which enable us to stay close to our producers and clients. Our
underwriters and claims personnel work closely with customers.
Reliance Surety builds strong two-way relationships with producers.
We recognize that they have ideas to contribute to the underwriting
process and to quality service delivery.
14
<PAGE>
- ---------------------------------------------------------------------------
Reliance Surety, a top provider of surety bonds and fidelity bonds, has
consistently led the industry in terms of quality underwriting and service.
Reliance Surety wrote the bond in support of the Hardaway Construction
Company's construction of the Willis Corroon national headquarters in
Nashville, Tennessee.
---------------------------------------------------------------------------
---------------------------------------------------------------------------
[PHOTO]
Interior lobby of Willis Corroon headquarters.
---------------------------------------------------------------------------
15
<PAGE>
---------------------------------------------------------------------------
Commercial real estate transactions are of growing importance to Commonwealth
Land Title. Wal-Mart Stores, Inc. is a client that has utilized Commonwealth's
capabilities for executing complex multisite and multistate transactions.
---------------------------------------------------------------------------
---------------------------------------------------------------------------
[PHOTO]
Exterior of Wal-Mart store.
---------------------------------------------------------------------------
16
<PAGE>
Q. Can Reliance Surety grow and maintain its underwriting quality?
Reliance Surety is a conservative company and understands that
surety, properly executed, is a conservative business. Once we set
risk and profitability parameters, we aggressively pursue the
business that meets our standards. Our ability to say "No" to weaker,
high-risk business is reinforced by our ability to say "Yes" to solid
new opportunities.
We conduct rigorous credit analyses on an ongoing basis and
actively manage the claims function to minimize exposures to all
involved.
Surety and fidelity will continue to be highly competitive
businesses. However, we anticipate strong growth from the small
contractor market and from our Express Surety product, which is an
efficient provider of smaller commercial surety coverage. The midsize
and large contractor segments are the most competitive, but we
believe we will be able to capitalize on our strong relationships
with producers and customers.
---------------------------------------------------------------------------
[PHOTO]
Herbert Wender seated.
Herbert Wender
Chairman
Commonwealth Land Title Insurance
---------------------------------------------------------------------------
COMMONWEALTH LAND TITLE INSURANCE
Commonwealth Land Title Insurance is the third-largest title
insurance company in the United States. In the slow title insurance
and real estate environment of 1995, Commonwealth's premiums and fees
were $671.9 million and pretax operating income totaled $12.3
million. Serving its customers better by investing in advanced
technology and expanding its product offerings, Commonwealth is
transforming itself from a traditional title insurer into a real
estate information services company. Herbert Wender, Commonwealth
chairman, discusses this continuing evolution:
---------------------------------------------------------------------------
"The Commonwealth A+ claims paying ability rating is based on Commonwealth
Group's market position in the title insurance industry, and loss reserving
processes and controls that appear stronger than most other title insurers."
Duff & Phelps Credit Rating Co.
-- Feb. 1996
---------------------------------------------------------------------------
Q. What forces are shaping the title industry of the future?
The single most important trend is the growing rapidity with
which mortgages are issued, packaged, sold and securitized.
Technology contributes to faster mortgage cycles and reduces
transaction costs.
Commonwealth is able to thrive in this faster-paced environment
by bringing a number of valuable capabilities to the market. For
example, Commonwealth OneStopTM enables national and regional lenders
to obtain virtually all of the key closing services -- title,
appraisal, flood certification, mortgage documentation and tax
certification -- required to complete residential real estate
transactions through a single point of contact.
---------------------------------------------------------------------------
[PHOTO]
Mr. Wender talking.
---------------------------------------------------------------------------
Q. What is Commonwealth's approach to the application of new technology?
Within our operations, we're investing in new production systems
that simplify work flows and enhance efficiency. In the field,
Commonwealth is utilizing imaging technology to automate work flows.
Serving customers, the technology we deploy is directly a function of
the way our customers want to do business. This last point is
probably the most important. We have a paper-free operating
environment for functions such as appraisal management, but we
recognize that our customers have differing comfort levels with
technology and different capabilities. In doing business with us, our
customers of every size and location can choose fax, e-mail or full
electronic data interchange -- whatever works best for them.
Q. What are the opportunities in the commercial market?
Commercial real estate transactions are of growing importance to
our business. Over the last three years, our commercial premium
volumes have
17
<PAGE>
increased substantially. On a per-transaction basis,
they are more profitable than are residential transactions.
Commercial transactions also require the specialized capabilities we
have built to serve this market. We can undertake complex multistate
and/or multisite transactions. For example, corporations have
sophisticated requirements that must be met in very short time frames
when they acquire or securitize properties. Commonwealth serves
national commercial customers with specialized offices in 13 major
markets, including a location we recently added in the Southwest. We
have the expertise required for this business, and our strong
claims-paying ability ratings are highly valued by commercial
customers.
Q. How does Commonwealth manage through market cycles--
the large swings in mortgage origination volume?
By planning, anticipating and moving rapidly. Commonwealth
reacted when interest rates first moved up in early 1994. Throughout
the balance of that year, we substantially reduced our cost
structure. By mid-1995, when volumes began rising again, we had
achieved sufficient productivity gains through technology and other
initiatives to handle increased business without making substantial
additions to our infrastructure.
Q. How will Commonwealth grow its business?
While market conditions over the last two years have been
difficult for title insurers, we believe Commonwealth has meaningful
growth opportunities in each of its market segments. In our local
business, increased market penetration should result from continuing
to build relationships through existing branches and agencies,
broadening the sales of our newer products and expanding
geographically into those markets where we may be underrepresented.
Among national and regional clients, mortgage lenders are an important
focus for growth. We want to be the vendor of choice to the lender
community. We believe that our Commonwealth OneStop operation gives
us the industry's strongest capability for serving lenders. Our
commercial business continues to expand its geographic base. Here,
Commonwealth's technical skills and strong financial ratings will
help us enhance our strong market position.
In all three markets we don't believe we need to make major
positioning moves to succeed. But as an integral part of our planning
process, we regularly review the potential of new offices, strategic
alliances and acquisitions to build our business.
---------------------------------------------------------------------------
[PHOTO]
James E. Yacobucci standing.
James E. Yacobucci
Senior Vice President
Investments
Reliance Group
---------------------------------------------------------------------------
PORTFOLIO MANAGEMENT
The investment skill Reliance brings to its portfolio management
is a fundamental strength that distinguishes Reliance from the
competition. Reliance's total portfolio of approximately $4.35
billion at year-end is comprised of about $3.68 billion (85%) in
fixed-income instruments and $670 million (15%) in equities.
The total rate of return on the company's fixed-income portfolio
was 17.2%, as declining interest rates increased the value of
fixed-income securities. Equity investments generated a total rate of
return of 37.6%.
Jim Yacobucci, senior vice president for investments, discusses
Reliance's investment performance, strategy and outlook:
18
<PAGE>
---------------------------------------------------------------------------
Reliance takes an active, hands-on approach to maximizing total returns and
avoiding risks that it is not adequately compensated for taking. In 1995, the
total rate of return on the company's fixed-income portfolio was 17.2%.
Equity investments generated a 37.6% total rate of return.
---------------------------------------------------------------------------
---------------------------------------------------------------------------
[PHOTO]
Two businessmen talking.
---------------------------------------------------------------------------
19
<PAGE>
Q. Reliance has been described as having an aggressive approach to managing its
investment portfolio. Is that an accurate characterization?
We are certainly aggressive in the sense that we take an active,
hands-on approach to maximizing total returns and avoiding risks that
we are not adequately compensated for taking. We are not passive,
index-oriented investors. On the other hand, our approach can also be
described as conservative in the sense that our investment analysis
is bottom-up, value based and research oriented. We regularly conduct
rigorous portfolio analyses of credit and other fundamentals. We
believe that the risks in our portfolio are well diversified, and we
take only those risks that we are comfortable we can analyze and
manage.
---------------------------------------------------------------------------
"Reliance Group has posted strong and
consistent earnings in recent quarters."
Wall Street Journal --
Dec. 6, 1995
---------------------------------------------------------------------------
Q. What are the portfolio investment objectives of Reliance?
First, we want to grow investment income consistently from year
to year. Second, we seek to generate capital through our equity
holdings. We look for equity returns substantially higher than our
fixed-income portfolio returns but consistent with prudent risk
parameters. By focusing on these two objectives, we believe we can
maximize total rates of return on invested assets over long periods
of time.
---------------------------------------------------------------------------
[PHOTO]
Mr. Yacobucci talking.
---------------------------------------------------------------------------
Q. What is Reliance's approach to fixed-income investments?
Our focus is much more on credit analysis than on market timing.
We attempt to identify improving or deteriorating credit conditions
earlier than they are reflected in the market, and to take advantage
of these inefficiencies when buying and selling bonds and preferred
stocks. We carefully monitor the portfolio, and as part of our credit
analysis, we regularly visit companies -- investment- as well as
non-investment-grade issuers of debt. The opportunities may shift
from government securities to corporate or tax-exempt securities. Our
fixed-income portfolio is highly diversified.
We have steered away from whole classes of instruments where
returns do not compensate for lack of liquidity and higher levels of
risk -- for example, commercial mortgages.
Q. What is Reliance's approach to equity investments?
Our common stock portfolio is comprised of investments where we
see outstanding opportunities as opposed to a highly diffused
portfolio that will tend to behave more like the overall stock
market, which is something we cannot control. We do fundamental
research and analysis to identify the most promising companies, and
we're also mindful of the importance of avoiding risks that are not
justified by potential returns.
Q. What is your outlook for 1996?
We anticipate a steeper yield curve by year-end. Accordingly, in
very late 1995 and early 1996, we began to take some duration risk
out of the portfolio by reducing our holdings of instruments with
very long maturities.
The U.S. economy should resume its upward trend after working off
the effects of adverse weather and the government shutdown. However,
com-petition in several industries will put corporate earnings under
pressure. Therefore, we will continue to look for equity investments
in companies with distinctive strategies and capabilities where there
is potential to outperform the overall market.
20
<PAGE>
SELECTED FINANCIAL DATA
Reliance Group Holdings, Inc. and Subsidiaries
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31 1995 1994 1993 1992 1991
- ---------------------------------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
REVENUES:
Property and casualty insurance
Premiums earned $ 1,774,591 $ 1,777,318 $ 1,571,539 $ 1,535,740 $ 1,548,838
Net investment income 247,343 232,299 216,432 189,287 193,375
Gain (loss) on sales of investments 27,381 8,851 129,018 50,080 (692)
----------- ----------- ----------- ----------- -----------
2,049,315 2,018,468 1,916,989 1,775,107 1,741,521
----------- ----------- ----------- ----------- -----------
Title and mortgage insurance
Premiums earned(1) 671,947 856,774 893,364 826,493 675,904
Net investment income 27,946 26,613 24,282 26,224 25,521
Gain (loss) on sales of investments 1,729 516 4,786 3,267 (5,971)
Gain on sale of subsidiary(1) -- -- -- 8,999 --
----------- ----------- ----------- ----------- -----------
701,622 883,903 922,432 864,983 695,454
----------- ----------- ----------- ----------- -----------
Other 155,050 144,679 123,398 117,244 113,378
----------- ----------- ----------- ----------- -----------
$ 2,905,987 $ 3,047,050 $ 2,962,819 $ 2,757,334 $ 2,550,353
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
INCOME (LOSS) FROM CONTINUING OPERATIONS
BEFORE GAIN ON SALES OF INVESTMENTS,
INCOME TAXES, MINORITY INTERESTS AND
EQUITY IN INVESTEE COMPANIES:
Property and casualty insurance $ 201,699 $ 134,956 $ 41,212 $ (29,999) $ (133,479)
Title and mortgage insurance 12,283 30,810 55,180 47,031 23,360
Corporate interest expense (76,230) (75,619) (89,517) (95,574) (100,659)
Corporate overhead and other (46,223) (48,166) (52,979) (60,970) (47,979)
----------- ----------- ----------- ----------- -----------
91,529 41,981 (46,104) (139,512) (258,757)
Income tax (provision) benefit (21,929) (9,464) 35,831 52,138 86,803
Minority interests (961) (3,205) (3,605) (3,760) (4,198)
Equity in investee companies 7,792 9,478 12,441 5,206 (16,574)
----------- ----------- ----------- ----------- -----------
INCOME (LOSS) FROM CONTINUING OPERATIONS
BEFORE GAIN ON SALES OF INVESTMENTS 76,431 38,790 (1,437) (85,928) (192,726)
After-tax gain on sales of investments(2) 19,485 5,031 86,973 42,708 13,059
----------- ----------- ----------- ----------- -----------
INCOME (LOSS) FROM CONTINUING OPERATIONS 95,916 43,821 85,536 (43,220) (179,667)
Income from discontinued operations(3) -- -- -- 64,105 31,444
Loss on disposal of discontinued operations(3) -- -- -- (60,000) --
Loss on disposal of discontinued operations of
investee company(3) (4,497) -- -- -- --
----------- ----------- ----------- ----------- -----------
INCOME (LOSS) BEFORE EXTRAORDINARY ITEMS AND
CUMULATIVE EFFECT OF ACCOUNTING CHANGE 91,419 43,821 85,536 (39,115) (148,223)
Extraordinary item - early extinguishment
of debt (3,363) -- (27,922) 3,460 1,715
Extraordinary item of investee company -- -- -- -- 894
Cumulative effect of change in accounting
for income taxes -- -- 15,911 -- --
----------- ----------- ----------- ----------- -----------
NET INCOME (LOSS) $ 88,056 $ 43,821 $ 73,525 $ (35,655) $ (145,614)
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
</TABLE>
21
<PAGE>
SELECTED FINANCIAL DATA
Reliance Group Holdings, Inc. and Subsidiaries
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31 1995 1994 1993 1992 1991
- ---------------------------------------------------------------------------------------------------------------------
(In thousands, except per-share amounts and ratios)
<S> <C> <C> <C> <C> <C>
PER-SHARE INFORMATION:
INCOME (LOSS) FROM CONTINUING OPERATIONS
BEFORE GAIN ON SALES OF INVESTMENTS $ .66 $ .34 $ (.02) $ (1.14) $ (2.61)
After-tax gain on sales of investments(2) .17 .04 .94 .57 .18
-------- --------- --------- --------- ---------
INCOME (LOSS) FROM CONTINUING OPERATIONS .83 .38 .92 (.57) (2.43)
Income from discontinued operations(3) -- -- -- .84 .43
Loss on disposal of discontinued operations(3) (.04) -- -- (.79) --
-------- --------- --------- --------- ---------
INCOME (LOSS) BEFORE EXTRAORDINARY ITEMS AND
CUMULATIVE EFFECT OF ACCOUNTING CHANGE .79 .38 .92 (.52) (2.00)
Extraordinary items(4) (.06) -- (.30) .05 .03
Cumulative effect of change in accounting
for income taxes -- -- .17 -- --
-------- --------- --------- --------- ---------
NET INCOME (LOSS) $ .73 $ .38 $ .79 $ (.47) $ (1.97)
-------- --------- --------- --------- ---------
-------- --------- --------- --------- ---------
Average number of common and common
equivalent shares outstanding 116,045 115,097 92,858 75,555 73,918
CASH DIVIDENDS PER COMMON SHARE $ .32 $ .32 $ .32 $ .32 $ .32
OTHER OPERATING DATA(5):
Underwriting loss $(45,644) $ (97,343) $(175,220) $(219,286) $(326,854)
Loss and loss expense ratio 67.7% 73.0% 78.6% 84.0% 90.1%
Underwriting expense ratio 34.1 31.4 32.2 30.1 30.9
-------- --------- --------- --------- ---------
Combined ratio(6) 101.8% 104.4% 110.8% 114.1% 121.0%
-------- --------- --------- --------- ---------
-------- --------- --------- --------- ---------
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31 1995 1994 1993 1992 1991
- -------------------------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Assets $9,988,213 $9,369,553 $8,815,214 $8,185,611 $7,201,548
Marketable securities 4,298,510 3,799,874 3,797,315 3,435,595 2,916,214
Excess of cost over fair value of net
assets acquired 259,444 269,424 279,404 289,385 303,503
Debt outstanding(7) 878,419 892,579 911,071 1,000,698 1,082,986
Shareholders' equity 678,348 386,750 518,626 257,800 219,302
Statutory policyholders' surplus of property
and casualty insurance subsidiaries 1,128,336 908,538 902,290 857,611 840,538
</TABLE>
(1) 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 and $613.7 million for the years ended
December 31, 1992 and 1991.
(2) Includes net gain of $1.7 million ($.01 per-share) from the sale of
certain consulting operations in 1995 and net gain of $7.5 million ($.10
per-share) from the sale of CMAC in 1992.
(3) In 1995, discontinued operations reflects the loss on the disposal of
life insurance operations by Zenith National Insurance Corp. Discontinued
operations in 1992 and 1991 include the operations of United Pacific Life
Insurance Company and the insurance brokerage operations of Frank B. Hall
& Co. Inc.
(4) Per-share information in 1995 includes a charge of $3.0 million ($.03
per-share) related to the early redemption of a subsidiary's preferred
stock. The cost of the early redemption in excess of the carrying value
of the preferred stock was charged directly to shareholders' equity.
(5) The data relate to the property and casualty insurance subsidiaries.
Underwriting results include policyholders' dividends and other income
and expense.
(6) In 1995 and 1994, the combined ratio excludes the effect of the $4.0
million and $11.6 million charge pertaining to Proposition 103.
(7) Debt outstanding includes a subsidiary's preferred stock which was
redeemed in 1995.
22
<PAGE>
PROPERTY AND CASUALTY INSURANCE OPERATIONS
Reliance Group Holdings, Inc. and Subsidiaries
Net premiums written for each line of property and casualty insurance are as
follows:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31 1995 1994 1993 1992 1991
- ----------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C> <C> <C>
General Liability $ 468,951 $ 423,377 $ 369,895 $ 349,777 $ 312,935
Workers' Compensation 265,882 312,808 377,592 418,685 503,323
Automobile 239,819 244,000 260,180 261,520 255,848
Multiple Peril 184,600 180,074 187,438 126,070 134,286
Surety 139,298 117,989 106,664 94,316 90,721
Reinsurance 118,969 125,597 123,742 108,095 155,667
Ocean and Inland Marine 118,757 103,865 105,254 49,658 51,651
Involuntary 81,006 113,483 113,498 109,583 77,624
Fire and Allied 68,118 49,977 40,372 15,891 11,225
Other(1) 93,640 93,120 85,962 7,965 17,764
---------- ---------- ---------- ---------- ----------
$1,779,040 $1,764,290 $1,770,597 $1,541,560 $1,611,044
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
</TABLE>
Combined ratios (on a GAAP basis), after policyholders' dividends, for each
line of property and casualty insurance are as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------
YEAR ENDED DECEMBER 31 1995(2) 1994(2) 1993 1992 1991
- --------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
General Liability 102.4% 106.0% 105.0% 100.4% 100.1%
Workers' Compensation 79.1 95.3 96.5 105.8 121.7
Automobile 126.3 116.6 125.5 119.4 114.2
Multiple Peril 117.3 114.8 121.6 145.3 158.4
Surety 65.6 74.3 81.0 80.9 89.4
Reinsurance 114.9 111.3 104.8 122.0 113.5
Ocean and Inland Marine 96.0 124.9 113.9 120.0 91.2
Involuntary 94.6 100.3 133.6 147.6 179.4
Fire and Allied 117.4 75.5 158.4 186.5 N/M
Other(1) 113.1 104.2 144.4 N/M N/M
----- ----- ----- ----- -----
101.8% 104.4% 110.8% 114.1% 121.0%
----- ----- ----- ----- -----
----- ----- ----- ----- -----
</TABLE>
N/M - Not Meaningful
(1) Includes personal lines.
(2) Excludes the effect of Proposition 103.
23
<PAGE>
FINANCIAL REVIEW
Reliance Group Holdings, Inc. and Subsidiaries
OVERVIEW
The Company had income from continuing operations, before gains on sales of
investments, of $76.4 million ($.66 per share) in 1995 compared to $38.8 million
($.34 per share) in 1994 and a loss of $1.4 million ($.02 per share) in 1993.
These increases resulted from continued improvement in the underwriting results
of the property and casualty insurance operations. After-tax gains on sales of
investments were $19.5 million ($.17 per share) in 1995, which included a gain
of $1.7 million from the sales of certain consulting operations, compared to
$5.0 million ($.04 per share) in 1994 and $87.0 million ($.94 per share) in
1993.
Net income was $88.1 million ($.73 per share) in 1995, which included a
loss of $4.5 million on the disposal of discontinued life insurance operations
by Zenith National Insurance Corp. ("Zenith"), an investee company, and an
extraordinary loss of $3.4 million from the early extinguishment of debt. In
addition, in 1995, the early redemption of all the outstanding shares of
redeemable preferred stock of Reliance Insurance Company resulted in a charge to
shareholders' equity of $3.0 million. Net income in 1994 was $43.8 million ($.38
per share) and $73.5 million ($.79 per share) in 1993, which included a $27.9
million ($.30 per share) extraordinary loss from the 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."
PROPERTY AND CASUALTY INSURANCE OPERATIONS
The property and casualty insurance operations reported pretax income,
before gains on sales of investments, of $201.7 million in 1995 compared to
$135.0 million in 1994 and $41.2 million in 1993. Gains on sales of investments
were $27.4 million in 1995 compared to $8.9 million in 1994 and $129.0 million
in 1993.
Property and casualty insurance underwriting results improved significantly
in 1995. The combined ratios (calculated on a GAAP basis), after policyholders'
dividends, were 101.8%, 104.4% and 110.8% for 1995, 1994 and 1993, respectively.
The 1995 results reflect improved performance in workers' compensation, ocean
and inland marine and general liability lines, as well as record underwriting
profits in surety lines. Underwriting losses were $45.6 million in 1995 compared
to $97.3 million in 1994 and $175.2 million in 1993. Underwriting results in
1995 benefitted from lower catastrophes losses, which were $25.7 million ($78.5
million before reinsurance) compared to $50.1 million in 1994 ($134.0 million
before reinsurance) which included $44.9 million arising from the January 1994
California earthquake, and $39.3 million in 1993 ($88.5 million before
reinsurance).
Net premiums written and premiums earned for each line of property and
casualty insurance are as follows:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31 1995 1994 1993
- -----------------------------------------------------------------------------------------------------
Net Net Net Net Net Net
Premiums Premiums Premiums Premiums Premiums Premiums
Written Earned Written Earned Written Earned
- -----------------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
General Liability $ 468,951 $ 451,867 $ 423,377 $ 427,864 $ 369,895 $ 337,151
Workers' Compensation 265,882 290,241 312,808 323,891 377,592 360,613
Automobile 239,819 236,592 244,000 251,038 260,180 225,910
Multiple Peril 184,600 180,166 180,074 170,230 187,438 147,158
Surety 139,298 127,355 117,989 108,833 106,664 97,414
Reinsurance 118,969 119,921 125,597 132,694 123,742 124,150
Ocean and Inland Marine 118,757 115,590 103,865 95,103 105,254 82,451
Involuntary 81,006 88,734 113,483 115,963 113,498 112,700
Fire and Allied 68,118 61,430 49,977 56,495 40,372 20,850
Other 93,640 102,695 93,120 95,207 85,962 63,142
---------- ---------- ---------- ---------- ---------- ----------
$1,779,040 $1,774,591 $1,764,290 $1,777,318 $1,770,597 $1,571,539
---------- ---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ---------- ----------
</TABLE>
24
<PAGE>
The increase in net premiums written in 1995, when compared to 1994,
reflects growth in international operations, particularly in general liability
and ocean and inland marine lines of business. In addition, surety premiums
increased in 1995 resulting from an increase in construction activity by
insureds and increased retentions from restructuring certain reinsurance
programs. These increases were partially offset by declines in workers'
compensation premiums resulting from the shift by insureds to high deductible
and captive insurance programs, as well as a decline in premiums from
involuntary insurance facilities. The decline in net premiums written in 1994,
when compared to 1993, is primarily attributable to lower writings in workers'
compensation, including a reduction of $11.0 million in premiums as a result of
certain litigation claims in Texas. These claims were settled in 1995 for a
total of $12.2 million. This decline was substantially offset by growth in
general liability, surety and fire and allied lines of business. 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.
In addition to the effect of lower catastrophe losses, the improvement in
1995 underwriting results reflect higher underwriting profits in workers'
compensation, which were $58.5 million in 1995 compared to $12.0 million in 1994
and $11.4 million in 1993. These improvements resulted from continued favorable
trends in loss development. Underwriting results in 1995 also benefitted from
record underwriting profits in surety lines, reflecting fewer large losses.
Underwriting profits in surety lines were $41.5 million in 1995 compared to
$27.5 million in 1994 and $18.4 million in 1993. These improvements were
partially offset by higher underwriting losses in automobile lines which
experienced adverse development in various programs. The improvement in
underwriting results in 1994, when compared to 1993, reflects lower underwriting
losses in automobile and multiple peril lines and involuntary insurance
facilities. On January 31, 1996, the Company reached a settlement with the
California Department of Insurance resolving its total liability for refunds and
interest under Proposition 103. The 1995 and 1994 underwriting results include
charges of $4.0 million and $11.6 million, respectively, resulting from this
matter. See note 14 to the consolidated financial statements.
The property and casualty insurance operations assume and cede reinsurance
in the normal course of business. The Company's aggregate reinsurance
recoverables were $3.16 billion at December 31, 1995, representing estimated
amounts recoverable from reinsurers pertaining to unpaid claims, claims incurred
but not reported, unearned premiums and paid claims. The Company is subject to
credit risk with respect to its reinsurers, as the ceding of risk to reinsurers
does not relieve the Company of its liability to insureds. In order to minimize
losses from uncollectible reinsurance, the Company places its reinsurance with a
number of different reinsurers and utilizes a security committee to approve, in
advance, the reinsurers which meet its standards of financial strength. The
Company holds substantial amounts of collateral to secure recoverables from
unauthorized reinsurers. See note 8 to the consolidated financial statements.
Policy claims and settlement expenses include a provision for insured
events of prior years of $38.5 million in 1995 compared to $22.4 million in 1994
and $40.2 million in 1993. The provision for all years includes adverse
development related to prior year asbestos-related and environmental pollution
claims, which primarily affect general liability and multiple peril lines of
business. The 1995 provision also includes adverse development in other general
liability, automobile and reinsurance lines, partially offset by favorable
development in workers' compensation. The 1994 provision also included adverse
development in other general liability lines, partially offset by favorable
development in workers' compensation. The 1993 provision also included adverse
development from workers' compensation reinsurance pools, partially offset by
favorable development in other general liability lines.
25
<PAGE>
FINANCIAL REVIEW continued
Reliance Group Holdings, Inc. and Subsidiaries
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, 1995 was $5.86 billion compared to $5.58 billion at December 31, 1994. 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 $2.68 billion and $2.45 billion at December 31, 1995
and 1994, respectively, are included in the liability.
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 and the economic environment in which property and
casualty companies operate. 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. Estimation of loss reserves for long tail lines of business
is more difficult than for short tail lines because long tail 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 long tail lines of business. The Company
attempts to reduce these variations in certain of its long tail lines, primarily
directors and officers liability and professional liability, by writing policies
on a claims-made basis which mitigates the long tail nature of the risks. The
Company also limits the potential loss from a single event through the extensive
use of reinsurance.
Included in the liability for loss reserves at December 31, 1995 are $178.6
million ($130.7 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 $25.3 million (including $7.3 million of related expenses),
$20.2 million (including $7.9 million of related expenses) and $24.8 million
(including $8.1 million of related expenses) for the years ended December 31,
1995, 1994 and 1993, respectively. Net payments for all property and casualty
insurance policy claims and related expenses were $1.14 billion, $1.10 billion
and $1.01 billion for the years ended December 31, 1995, 1994 and 1993,
respectively.
26
<PAGE>
The following table presents information related to the number of insureds
with asbestos-related and environmental pollution claims outstanding:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------
YEAR ENDED DECEMBER 31 1995 1994
- ----------------------------------------------------------------------------
<S> <C> <C>
Number of insureds with outstanding claims, beginning of year 666 661
Additional insureds with claims during the year 463 307
Insureds with closed or settled claims during the year (379) (302)
---- ----
Number of insureds with outstanding claims, end of year 750 666
---- ----
---- ----
</TABLE>
The average net paid loss for asbestos-related and environmental pollution
claims was $37,500 and $34,200 for the years 1995 and 1994, respectively. The
increase in the average net paid loss reflects the settlement of a large
environmental pollution claim. As of December 31, 1995, the Company was
involved in approximately 46 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 affect 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.
PROPERTY AND CASUALTY INSURANCE INVESTMENT RESULTS
Net investment income of the property and casualty insurance operations
increased to $247.3 million in 1995 from $232.3 million in 1994 and $216.4
million in 1993. These increases reflect growth in the size of the fixed
maturity investment portfolio.
Gains on sales of investments were $27.4 million in 1995 compared to $8.9
million in 1994 and $129.0 million in 1993. Gains on sales of investments in
1993 primarily resulted from sales of equity securities.
TITLE INSURANCE OPERATIONS
The title insurance operations reported pretax income, before gains on
sales of investments, of $12.3 million in 1995, $30.8 million in 1994 and $55.2
million in 1993.
Premiums and fees were $671.9 million in 1995 compared to $856.8 million in
1994 and $893.4 million in 1993. The decline in premiums and fees in 1995
primarily resulted from decreased agency revenues reflecting the weak real
estate markets that existed in late 1994 and early 1995. Premiums and fees in
1994 benefitted from increased agency revenues reflecting the strong real estate
market conditions that existed in late 1993 and early 1994. Premiums and fees in
1993 benefitted from high levels of residential refinancing activity that
existed throughout the year.
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, which fluctuate in
direct relation to agency premiums, were $310.7 million in 1995 compared to
$432.0 million in 1994 and $418.4 million in 1993. 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 $318.4 million in 1995 compared to $344.7 million in
1994 and $362.3 million in 1993. The decline in other expenses reflects cost
control programs, including staff reductions, implemented by the title insurance
operations. The expense ratio of the title insurance operations (which includes
agency commissions) increased to 93.1% in 1995 from 90.0% in 1994 and 87.3% in
1993. These increases in the expense ratio resulted from a proportionately
greater decline in premiums than expenses. The provision for policy claims
decreased to $58.5 million in 1995 from $75.9 million in 1994 and $81.8 million
in 1993 reflecting a decline in the amount of premiums.
27
<PAGE>
FINANCIAL REVIEW continued
Reliance Group Holdings, Inc. and Subsidiaries
INVESTMENT PORTFOLIO
At December 31, 1995, the Company's investment portfolio aggregated $4.01
billion (at cost), of which 10% was invested in equity securities. The Company
seeks to maintain a diversified and balanced fixed maturity portfolio
representing a broad spectrum of industries and types of securities. At December
31, 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 December 31, 1995, the carrying
values of non-investment grade securities and securities not rated by Standard &
Poor's were $299.0 million (8% of the fixed income portfolio) and $64.4 million
(2% of the fixed income portfolio), respectively. Substantially all of the
Company's non-investment grade and non-rated securities are classified as
available for sale and, accordingly, are carried at market value. See note 2 to
the consolidated financial statements.
At December 31, 1995, approximately 29% 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.
In November 1995, the Financial Accounting Standards Board issued a special
report which permitted a one-time reassessment of the classification of
securities designated held for investment. Accordingly, the Company reclassified
fixed maturity securities with a market value of $426.4 million and an amortized
cost of $410.4 million from the held for investment portfolio into the available
for sale portfolio. This reclassification resulted in an increase in
shareholders' equity of $10.4 million.
OTHER OPERATIONS
RCG International, Inc., a subsidiary of the Company, provides technical
services in the information technology and energy industries. Revenues for these
operations were $150.8 million in 1995, $141.6 million in 1994 and $116.8
million in 1993. Revenues for 1995 include a pretax gain of $2.6 million
resulting from the sales of certain consulting operations. These sales are not
expected to have a material effect on the Company's ongoing operations. The
increase in revenues in both 1995 and 1994 resulted from growth in the
information technology business. Operating expenses incurred by these operations
were $141.6 million in 1995, $134.7 million in 1994 and $111.7 million in 1993.
Revenues and expenses of the technical services operations are included in other
revenues and other operating expenses in the accompanying consolidated statement
of income.
At December 31, 1995, the Company's real estate operations had holdings
with a carrying value of $281.9 million, which includes nine shopping centers
with an aggregate carrying value of $120.6 million, office buildings and other
commercial properties with an aggregate carrying value of $100.1 million, and
undeveloped land with a carrying value of $61.2 million.
28
<PAGE>
INTEREST EXPENSE
Consolidated interest expense was $89.3 million in 1995 compared to $87.9
million in 1994 and $105.4 million in 1993. The decline in interest expense in
1994, when compared to 1993, resulted from the refinancing of certain of the
Company's debt in late 1993, which decreased the amount of debt outstanding and
the interest rates on such debt.
EQUITY IN INVESTEE COMPANY
Equity in investee company income was $7.8 million, $9.5 million and $12.4
million in 1995, 1994 and 1993, respectively, from the Company's investment
in Zenith. In addition, in 1995, the Company recognized an after-tax loss of
$4.5 million on the disposal of discontinued life insurance operations by
Zenith. The decline in equity income in 1995, when compared to 1994, reflects
an increase in Zenith's property and casualty underwriting losses
particularly in workers' compensation. The decline in equity income in 1994,
when compared to 1993, reflects a lower level of gains on sales of
investments by Zenith.
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 $132.7
million for the year ended December 31, 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.
Total common stock dividends paid by Reliance Insurance Company during
1995, 1994 and 1993 were $111.5 million, $111.5 million and $130.6 million,
respectively. During 1996, $165.4 million would be available for dividend
payments by Reliance Insurance Company under Pennsylvania law. The Company
believes such amount will be sufficient to meet its cash needs.
29
<PAGE>
FINANCIAL REVIEW continued
Reliance Group Holdings, Inc. and Subsidiaries
There is no assurance that Reliance Insurance Company will meet the tests
in effect from time to time under Pennsylvania law for the payment of dividends
without prior Insurance Department approval or that any requested approval will
be obtained. Reliance Insurance Company has 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.
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, 1995, Reliance Insurance
Company generated $235.7 million of cash flow from operating activities.
Reliance Insurance Company carefully monitors its cash, short-term investments
and marketable securities to maintain adequate balances for the timely payment
of claims and other operating requirements. At December 31, 1995, Reliance
Insurance Company had $551.1 million of cash and short-term investments.
For the year ended December 31, 1995, the Company generated $168.5 million
of cash flow from operating activities compared to $245.8 million in 1994 and
$219.6 million in 1993. The decrease in the 1995 operating cash flow, when
compared to 1994, reflects higher net payments for property and casualty policy
claims and related expenses. In addition, operating cash flow for the title
insurance operations declined in 1995 primarily due to lower levels of title
insurance income. 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. Operating cash flows in 1995, 1994 and 1993
were positively affected 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 $111.2 million, $243.6 million and $209.2 million of cash
flow for investing activities for the years ended December 31, 1995, 1994 and
1993, respectively. Net purchases of marketable securities were $87.9 million,
$184.5 million and $263.4 million in 1995, 1994 and 1993, respectively. The sale
of the Company's discontinued life insurance operations provided cash of $15.6
million and $69.2 million in 1994 and 1993.
The Company used $53.4 million and $47.3 million of cash flow for financing
activities for the years ended December 31, 1995 and 1994, principally for the
payment of dividends and reduction of debt. The Company generated $20.2 million
of cash flow from financing activities for the year ended December 31, 1993.
The Company has a revolving credit facility with various banks providing
for aggregate maximum outstanding borrowings of $100 million. At December 31,
1995, borrowings aggregating $21 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
million of borrowings under the term loan were used, in part, to redeem $25
million of the 7.866% senior reset notes and $25 million of the 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.
In addition, on May 1, 1995, all of the outstanding shares of redeemable
preferred stock of Reliance Insurance Company, which had a carrying value of
$20.7 million, were redeemed. The cost of the early redemption in excess of the
carrying value of the preferred stock, $3.0 million, was charged directly to
shareholders' equity. The Company had $878.4 million of debt outstanding at
December 31, 1995 with approximately $8.3 million maturing on or before December
31, 1996. In addition, Reliance Financial Services Corporation has guaranteed
$38 million of partnership debt which matures on December 29, 1996. See note 14
to the consolidated financial statements. An additional $596.4 million of debt
matures on or before December 31, 2000 of which $505.4 million matures in the
year 2000. The Company expects to repay these amounts, at their existing
maturities, utilizing a combination of refinancing a portion of these
obligations and cash flow generated from operations.
30
<PAGE>
The National Association of Insurance Commissioners has a risk-based
capital requirement for the property and casualty insurance industry. 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.
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
action pending against it 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. See notes 5 and 14 to the consolidated financial statements.
31
<PAGE>
CONSOLIDATED STATEMENT OF INCOME
Reliance Group Holdings, Inc. and Subsidiaries
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31 1995 1994 1993
- -------------------------------------------------------------------------------------------------
(In thousands, except per-share amounts)
<S> <C> <C> <C>
REVENUES:
Premiums earned $ 2,446,538 $ 2,634,092 $ 2,464,903
Net investment income 275,289 258,912 240,714
Gain on sales of investments 27,377 7,767 133,804
Other 156,783 146,279 123,398
----------- ----------- -----------
2,905,987 3,047,050 2,962,819
----------- ----------- -----------
CLAIMS AND EXPENSES:
Policy claims and settlement expenses 1,260,445 1,372,960 1,317,397
Policy acquisition costs and other insurance expenses 1,238,142 1,347,828 1,282,184
Interest 89,284 87,931 105,378
Other operating expenses 196,631 188,583 170,160
----------- ----------- -----------
2,784,502 2,997,302 2,875,119
----------- ----------- -----------
INCOME BEFORE INCOME TAXES, MINORITY INTERESTS
AND EQUITY IN INVESTEE COMPANY 121,485 49,748 87,700
Provision for income taxes (32,400) (12,200) (11,000)
Minority interests (961) (3,205) (3,605)
Equity in investee company 7,792 9,478 12,441
----------- ----------- -----------
INCOME FROM CONTINUING OPERATIONS 95,916 43,821 85,536
Loss on disposal of discontinued operations of
investee company (4,497) -- --
----------- ----------- -----------
INCOME BEFORE EXTRAORDINARY ITEM AND CUMULATIVE
EFFECT OF ACCOUNTING CHANGE 91,419 43,821 85,536
Extraordinary item - early extinguishment of debt (3,363) -- (27,922)
Cumulative effect of change in accounting for
income taxes -- -- 15,911
----------- ----------- -----------
NET INCOME $ 88,056 $ 43,821 $ 73,525
----------- ----------- -----------
----------- ----------- -----------
PER-SHARE INFORMATION:
INCOME FROM CONTINUING OPERATIONS $ .83 $ .38 $ .92
Loss on disposal of discontinued operations of
investee company (.04) -- --
----------- ----------- -----------
INCOME BEFORE EXTRAORDINARY ITEM AND CUMULATIVE
EFFECT OF ACCOUNTING CHANGE .79 .38 .92
Extraordinary item - early extinguishment of debt (.06) -- (.30)
Cumulative effect of change in accounting for
income taxes -- -- .17
----------- ----------- -----------
NET INCOME $ .73 $ .38 $ .79
----------- ----------- -----------
----------- ----------- -----------
Average number of common and common
equivalent shares outstanding 116,045 115,097 92,858
</TABLE>
See notes to consolidated financial statements
32
<PAGE>
CONSOLIDATED BALANCE SHEET
Reliance Group Holdings, Inc. and Subsidiaries
<TABLE>
<CAPTION>
ASSETS DECEMBER 31 1995 1994
- ------------------------------------------------------------------------------------------------
(In thousands, except per-share amount)
<S> <C> <C>
Marketable securities:
Fixed maturities held for investment - at amortized cost
(quoted market $791,459 and $1,053,551) $ 753,563 $ 1,166,020
Fixed maturities available for sale - at quoted market
(amortized cost $2,299,510 and $1,945,919) 2,371,995 1,839,312
Equity securities - at quoted market (cost
$408,054 and $482,529) 672,668 564,636
Short-term investments 500,284 229,906
Cash 52,914 48,977
Premiums and other receivables 1,211,027 1,258,770
Reinsurance recoverables 3,163,073 2,937,533
Federal and foreign income taxes, including deferred taxes -- 84,899
Investments in real estate - at cost, less accumulated depreciation 281,923 291,666
Investment in investee company 157,667 148,776
Deferred policy acquisition costs 194,648 181,938
Excess of cost over fair value of net assets acquired,
less accumulated amortization 259,444 269,424
Other assets 369,007 347,696
----------- -----------
$ 9,988,213 $ 9,369,553
----------- -----------
----------- -----------
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------------------------------------------------------------------
<S> <C> <C>
Unearned premiums $ 1,299,465 $ 1,288,454
Unpaid claims and related expenses 6,100,129 5,809,546
Accounts payable and accrued expenses 638,009 700,380
Reinsurance ceded premiums payable 325,246 291,844
Federal and foreign income taxes, including deferred taxes 68,597 --
Term loans and short-term debt 188,101 141,355
Debentures and notes 690,318 730,596
Minority interests - redeemable preferred stock of a subsidiary -- 20,628
----------- -----------
9,309,865 8,982,803
----------- -----------
Contingencies and commitments
Shareholders' equity:
Common stock, par value $.10 per-share, 225,000
shares authorized, 113,440 and 113,127 shares
issued and outstanding 11,344 11,313
Additional paid-in capital 535,091 533,979
Retained earnings (deficit) (61,694) (110,479)
Net unrealized gain (loss) on investments 219,356 (27,881)
Net unrealized loss on foreign currency translation (25,749) (20,182)
----------- -----------
678,348 386,750
----------- -----------
$ 9,988,213 $ 9,369,553
----------- -----------
----------- -----------
</TABLE>
See notes to consolidated financial statements
33
<PAGE>
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
Reliance Group Holdings, Inc. and Subsidiaries
<TABLE>
<CAPTION>
Net
Net Unrealized
Unrealized Loss on
Additional Retained Gain Foreign
Common Paid-In Earnings (Loss) on Currency Shareholders'
Stock Capital (Deficit) Investments Translation Equity
- ---------------------------------------------------------------------------------------------------------------------
(In thousands, except per-share amounts)
<S> <C> <C> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1993 $ 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
Issuance of common stock 31 1,165 -- -- -- 1,196
Transactions of investee company
and other -- (53) -- 8,693 -- 8,640
Net income -- -- 88,056 -- -- 88,056
Loss on early extinguishment of
redeemable preferred stock
of a subsidiary -- -- (3,029) -- -- (3,029)
Dividends ($.32 per-share) -- -- (36,242) -- -- (36,242)
Appreciation after deferred income taxes -- -- -- 238,544 -- 238,544
Foreign currency translation -- -- -- -- (5,567) (5,567)
--------- --------- --------- --------- --------- ---------
BALANCE, DECEMBER 31, 1995 $ 11,344 $ 535,091 $ (61,694) $ 219,356 $ (25,749) $ 678,348
--------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- ---------
</TABLE>
See notes to consolidated financial statements
34
<PAGE>
CONSOLIDATED STATEMENT OF CASH FLOWS
Reliance Group Holdings, Inc. and Subsidiaries
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31 1995 1994 1993
- ---------------------------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 88,056 $ 43,821 $ 73,525
Adjustments to reconcile net income to net cash
provided from operating activities:
Cumulative effect of change in accounting for income taxes -- -- (15,911)
Gain on sales of investments (27,377) (7,767) (133,804)
Deferred policy acquisition costs (12,710) (3,809) (54,779)
Premiums and other receivables and reinsurance recoverables (240,742) (482,557) (219,529)
Unearned premiums, unpaid claims and related expenses 315,288 566,873 581,141
Accounts payable, accrued expenses and other 45,991 129,213 (11,060)
----------- ----------- -----------
168,506 245,774 219,583
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of fixed maturities available for sale 536,795 441,401 341,168
Proceeds from sales of fixed maturities held for investment 39,218 18,481 --
Proceeds from redemptions of fixed maturities available for sale 49,218 60,752 170,281
Proceeds from redemptions of fixed maturities held for investment 54,038 15,785 194,193
Proceeds from sales of equity securities 400,635 189,895 1,016,308
(Increase) decrease in short-term investments - net (283,141) 151,965 240,884
Purchases of fixed maturities available for sale (514,491) (587,581) (958,817)
Purchases of fixed maturities held for investment (108,053) (265,672) (586,677)
Purchases of equity securities (262,075) (209,506) (680,760)
Discontinued operations -- 15,550 69,157
Other - net (23,296) (74,708) (14,943)
----------- ----------- -----------
(111,152) (243,638) (209,206)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in term loans 120,298 75,272 140,248
Increase (decrease) in short-term debt - net (5,400) 10,652 183
Repayments of term loans (68,152) (81,942) (297,036)
Issuance of debentures -- -- 650,000
Issuance of common stock 1,196 7,324 189,536
Repurchases of debentures and notes (40,348) (19,062) (616,253)
Debt issuance costs (1,000) -- (24,129)
Collection of receivable pertaining to the issuance of common stock -- -- 10,625
Dividends (36,242) (36,157) (29,652)
Redemption of redeemable preferred stock of a subsidiary (23,769) (3,360) (3,360)
----------- ----------- -----------
(53,417) (47,273) 20,162
----------- ----------- -----------
Increase (decrease) in cash 3,937 (45,137) 30,539
Cash, beginning of year 48,977 94,114 63,575
----------- ----------- -----------
Cash, end of year $ 52,914 $ 48,977 $ 94,114
----------- ----------- -----------
----------- ----------- -----------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Interest paid $ 77,200 $ 91,100 $ 94,000
----------- ----------- -----------
----------- ----------- -----------
Income taxes paid $ 9,500 $ 3,300 $ 83,800
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
See notes to consolidated financial statements
35
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Reliance Group Holdings, Inc. and Subsidiaries
NOTE 1
NATURE OF OPERATIONS/SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS
The Company's principal operations consist of property and casualty
insurance and title insurance. The Company's property and casualty insurance
business consists of four principal operations: Reliance National, Reliance
Insurance, Reliance Reinsurance and Reliance Surety. Reliance National offers,
through national and regional brokers and program agents, 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 1995,
Reliance National accounted for 49% of the net premiums written by the Company's
property and casualty insurance operations. The Reliance Insurance operation
offers, through independent agents, program agents and brokers, commercial
property and casualty insurance coverages for mid-sized companies primarily
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 offers, through
reinsurance brokers, treaty and facultative 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 and conducts its business through branch offices, independent
agents and brokers. The Company's property and casualty insurance operations
accounted for $1,774,591,000 (73%) of the Company's 1995 net premiums earned.
The Company's title insurance business consists of Commonwealth Land Title
Insurance Company, Transnation Title Insurance Company and their subsidiaries
("Commonwealth/Transnation"). Commonwealth/ Transnation writes, through direct
and agency operations, title insurance for residential and commercial real
estate nationwide and provides escrow and settlement services in connection with
real estate closings. Commonwealth/Transnation accounted for $671,947,000 (27%)
of the Company's 1995 net premiums earned.
BASIS OF CONSOLIDATION AND PRESENTATION
The consolidated financial statements of the Company include the accounts of all
subsidiaries. The consolidated financial statements have been prepared in
conformity with generally accepted accounting principles. Such statements
include informed estimates and judgements of management for those transactions
that are not yet complete or for which the ultimate effects cannot be precisely
determined. Actual results may differ from these estimates.
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. In November
1995, the Financial Accounting Standards Board issued a special report which
permitted a one-time reassessment of the classification of securities designated
held for investment. Accordingly, the Company reclassified fixed maturity
securities with a market value of $426,442,000 and an amortized cost of
$410,395,000 from the held for investment portfolio into the available for sale
portfolio. This reclassification resulted in an increase in shareholders' equity
of $10,431,000. Investments in equity securities include common stocks, where
the Company's 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 of voting stock, or
otherwise exercises significant influence, are reported using the equity method
of accounting. Short-term investments primarily consist of United States
government and other foreign government securities,
36
<PAGE>
certificates of deposit and commercial paper carried at cost which
approximates market value. 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 estimated
based on an evaluation of reported claims in addition to statistical projections
of claims incurred but not reported and loss adjustment expenses. Estimates of
salvage and subrogation are deducted from the liability. The Company applies a
variety of generally accepted actuarial techniques to determine the estimates of
ultimate liability. The process of estimating claims is a complex task and the
ultimate liability may be more or less than such estimates indicate. Adjustments
of the probable ultimate liability, based on subsequent developments, are
included in operations currently.
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. The process of estimating
claims is a complex task and the actual payments may be more or less than such
estimates indicate. Changes in loss estimates, resulting from management's
continuing review process, are included in operations currently.
INVESTMENTS IN REAL ESTATE
Investments in real estate consist primarily of shopping centers and office
buildings, and are carried 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, 1995 include $61,200,000 related to undeveloped land
which is zoned for mixed use development. Depreciation expense is provided using
the straight-line method.
The Company's real estate properties are reviewed for impairment whenever
events or circumstances indicate that the carrying value of such properties may
not be recoverable. In performing the review for recoverability of carrying
value, the Company estimates the future undiscounted cash flows expected to
result from the use of each of its properties and their eventual disposition.
These cash flow projections reflect changes in occupancy, new leases, current
rent roll, future expirations and general market conditions. If the total
expected future undiscounted cash flows are less than the carrying value of such
properties, impairment losses are recognized on a property-by-property basis. An
impairment loss is measured by the amount that the carrying value of the
property exceeds its fair value.
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.
37
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS continued
Reliance Group Holdings, Inc. and Subsidiaries
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 statement of income and are
presented as a separate component of shareholders' equity. Exchange gains and
losses resulting from foreign currency transactions are included in operations
currently.
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 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 per-share is computed by using the weighted 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.
In 1995, all of the outstanding shares of redeemable preferred stock of
Reliance Insurance Company, which had a carrying value of $20,740,000, were
redeemed. The cost of the early redemption in excess of the carrying value of
the preferred stock, $3,029,000 ("Redemption Premium"), was charged directly to
shareholders' equity. For purposes of computing earnings per-share, the
Redemption Premium was deducted from net income available to common shareholders
and classified as an extraordinary loss. This reduced earnings per-share by
$.03.
RECLASSIFICATIONS
Certain reclassifications have been made to the Company's 1994 and 1993
consolidated financial statements to conform with the current year's
consolidated financial statements.
38
<PAGE>
ADOPTION OF NEW ACCOUNTING STANDARDS
In October 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation." This Statement is effective for 1996 and encourages, but does not
require, companies to adopt a new accounting method that accounts for employee
stock compensation awards based on their estimated fair value at the date they
are granted. The resulting cost would be charged to income. Companies that do
not adopt this Statement and continue to follow current accounting requirements
are required to disclose in a footnote to the consolidated financial statements
the effect on net income and earnings per-share had they adopted this
Statement. The Company does not currently anticipate that it will adopt this
Statement.
Effective January 1, 1994, the Company adopted Statement of Financial
Accounting Standards No. 112, "Employers' Accounting for Postemployment
Benefits" and effective January 1, 1995, the Company adopted Statement of
Financial Accounting Standards No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of." The adoption of
these Statements had no material effect on the Company's consolidated financial
statements.
NOTE 2
INVESTMENTS
Fixed maturities held for investment at December 31, 1995 consisted of:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------
Gross Gross
Amortized Market Unrealized Unrealized
Cost Value Gains Losses(1)
- -----------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C> <C>
Bonds and notes:
Public utilities $296,456 $309,920 $ 13,470 $ 6
Foreign government 133,252 139,042 6,715 925
Corporate bonds and notes and other 181,849 193,087 11,526 288
Redeemable preferred stock 142,006 149,410 7,405 1
-------- -------- -------- --------
$753,563 $791,459 $ 39,116 $ 1,220
-------- -------- -------- --------
-------- -------- -------- --------
</TABLE>
(1) The amortized cost and market value of fixed maturity investments which
have unrealized losses were $41,358,000 and $40,138,000.
Fixed maturities available for sale at December 31, 1995 consisted of:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------
Gross Gross
Market Amortized Unrealized Unrealized
Value Cost Gains Losses(1)
- ---------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C> <C>
Bonds and notes:
United States government and government
agencies and authorities $ 685,376 $ 679,007 $ 7,867 $ 1,498
States, municipalities and political
subdivisions 133,093 125,967 7,151 25
Public utilities 313,906 305,652 8,900 646
Corporate bonds and notes and other 868,291 837,060 44,864 13,633
Redeemable preferred stock 371,329 351,824 21,445 1,940
---------- ---------- ---------- ----------
$2,371,995 $2,299,510 $ 90,227 $ 17,742
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
</TABLE>
(1) The amortized cost and market value of fixed maturity investments which
have unrealized losses were $603,568,000 and $585,826,000.
39
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS continued
Reliance Group Holdings, Inc. and Subsidiaries
Fixed maturities held for investment at December 31, 1994 consisted of:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------
Gross Gross
Amortized Market Unrealized Unrealized
Cost Value Gains Losses(1)
- -----------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C> <C>
Bonds and notes:
Public utilities $ 536,746 $ 477,942 $ 202 $ 59,006
Foreign government 123,306 115,647 138 7,797
Corporate bonds and notes and other 355,215 317,002 761 38,974
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)
- ---------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C> <C>
Bonds and notes:
United States government and government
agencies and authorities $ 495,007 $ 528,297 $ 615 $ 33,905
States, municipalities and political
subdivisions 37,306 36,982 757 433
Public utilities 88,602 96,631 177 8,206
Corporate bonds and notes and other 877,598 934,648 31,263 88,313
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.
As of December 31, 1995, 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
- ------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C> <C>
Due within one year $ 6,473 $ 6,558 $ 58,999 $ 59,636
Due after one year through five years 53,181 56,365 568,469 577,205
Due after five years through ten years 289,905 303,838 451,229 460,217
Due after ten years 404,004 424,698 1,063,474 1,114,732
---------- ---------- ---------- ----------
753,563 791,459 2,142,171 2,211,790
Mortgage-backed securities -- -- 157,339 160,205
---------- ---------- ---------- ----------
$ 753,563 $ 791,459 $2,299,510 $2,371,995
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
</TABLE>
Net investment income consisted of:
- --------------------------------------------------------------
YEAR ENDED DECEMBER 31 1995 1994 1993
- --------------------------------------------------------------
(In thousands)
Investment income:
Fixed maturities $ 221,279 $ 218,970 $ 183,095
Equity securities 20,187 27,390 29,640
Short-term investments 30,292 9,159 19,920
Other 15,359 14,159 15,832
--------- --------- ---------
287,117 269,678 248,487
Investment expenses (11,828) (10,766) (7,773)
--------- --------- ---------
$ 275,289 $ 258,912 $ 240,714
--------- --------- ---------
--------- --------- ---------
40
<PAGE>
Gain on sales of investments consisted of:
- ------------------------------------------------------------
YEAR ENDED DECEMBER 31 1995 1994 1993
- ------------------------------------------------------------
(In thousands)
Fixed maturities(1):
Realized gains $ 47,764 $ 44,661 $ 58,946
Realized losses(2) (28,406) (28,016) (21,179)
--------- --------- ---------
19,358 16,645 37,767
Equity securities(3) 19,457 7,290 98,944
Other(3),(4) (11,438) (16,168) (2,907)
--------- --------- ---------
$ 27,377 $ 7,767 $ 133,804
--------- --------- ---------
--------- --------- ---------
(1) During 1995 and 1994, the Company sold fixed maturities held for investment
with an amortized cost of $41,000,000 and $18,100,000. These sales were in
response to a significant deterioration in the issuers' creditworthiness.
(2) Includes realized losses of $7,600,000, $11,600,000 and $5,200,000 in 1995,
1994 and 1993, respectively, and write-downs of $15,700,000, $10,300,000 and
$13,200,000 in 1995, 1994 and 1993, respectively, related to non-investment
grade securities.
(3) Gain on sales of equity securities and other in 1995, 1994 and 1993 includes
write-downs of $1,500,000, $13,200,000 and $10,200,000, respectively.
(4) Includes exchange losses of $10,400,000 in 1995 related to certain foreign
currency denominated investments and realized losses of $14,500,000 in 1994
related to certain foreign currency contracts.
Net unrealized appreciation (depreciation) on investments consisted of:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31 1995 1994 1993
- -----------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C>
Unrealized appreciation (depreciation):
Equity securities $182,507 $ (6,849) $ (9,670)
Fixed maturities available for sale 179,092 (193,737) 48,689
-------- --------- ---------
361,599 (200,586) 39,019
Deferred income tax (provision) benefit (123,055) 66,684 (11,261)
Net unrealized appreciation (depreciation) in
investments of investee company 8,693 (9,002) 1,244
-------- --------- ---------
$247,237 $(142,904) $ 29,002
-------- --------- ---------
-------- --------- ---------
Unrealized appreciation (depreciation) on
fixed maturities held for investment $150,365 $(152,046) $ 24,433
-------- --------- ---------
-------- --------- ---------
</TABLE>
Net unrealized gain (loss) on investments consisted of:
- -------------------------------------------------------------------------------
DECEMBER 31 1995 1994 1993
- -------------------------------------------------------------------------------
(In thousands)
Equity securities:
Unrealized gains $ 276,760 $ 114,231 $ 100,179
Unrealized losses (12,146) (32,124) (11,223)
--------- --------- ---------
264,614 82,107 88,956
--------- --------- ---------
Fixed maturities available for sale:
Unrealized gains 90,227 38,507 99,621
Unrealized losses (17,742) (145,114) (12,491)
--------- --------- ---------
72,485 (106,607) 87,130
--------- --------- ---------
337,099 (24,500) 176,086
Deferred income tax (provision) benefit (118,002) 5,053 (61,631)
Net unrealized gain (loss) in investments
of investee company 259 (8,434) 568
--------- --------- ---------
$ 219,356 $ (27,881) $ 115,023
--------- --------- ---------
--------- --------- ---------
Fixed maturity investments carried at $529,200,000 at December 31, 1995 were on
deposit under requirements of regulatory authorities, including deposits
related to workers' compensation reinsurance pools.
41
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS continued
Reliance Group Holdings, Inc. and Subsidiaries
Investments in a single issuer, other than obligations of the United States
government, whose aggregate carrying value is in excess of 10% of the Company's
shareholders' equity at December 31, 1995 are as follows:
- -------------------------------------------------------
Carrying Market
Value Value
- -------------------------------------------------------
(In thousands)
Fixed Maturity Investments:
Ford Motor Credit Co. $ 80,749 $ 80,749
United Kingdom Gilts 69,689 70,250
Equity Securities:
Aon Corporation preferred stock 72,137 72,137
Human Genome Sciences, Inc. 79,216 79,216
Symbol Technologies, Inc. 141,356 141,356
NOTE 3
INVESTMENT IN INVESTEE COMPANY
Investment in investee company at December 31, 1995 and 1994 was $157,667,000
and $148,776,000 which represents the Company's investment in Zenith National
Insurance Corp. ("Zenith"). Equity income in Zenith was $7,792,000, $9,478,000
and $12,441,000 for the years ended December 31, 1995, 1994 and 1993,
respectively. In addition, in 1995, the Company recognized an after-tax loss of
$4,497,000 on the disposal of discontinued life insurance operations by Zenith.
The Company's prior period results of operations have not been reclassified
since amounts attributable to Zenith's life insurance operations are not
significant. Dividends received by the Company from Zenith were $6,574,000 for
each of the years ended December 31, 1995, 1994 and 1993.
Summarized financial information for Zenith is as follows:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31 1995 1994 1993
- -----------------------------------------------------------------------------------------------
(In thousands, except per-share amounts)
<S> <C> <C> <C>
Revenues $ 519,020 $ 512,455 $ 508,412
Income from continuing operations before income taxes 29,422 45,106 62,486
Loss on disposal of discontinued life insurance operations (19,553) -- --
Net income 6,600 37,900 53,200
Net income per-share .36 1.99 2.76
</TABLE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
DECEMBER 31 1995 1994
- -------------------------------------------------------------------------------
(In thousands, except percentage of ownership)
<S> <C> <C>
Total assets $1,115,433 $1,093,675
Senior notes 74,232 74,111
Common shareholders' equity 330,432 309,860
Percentage of ownership 37.0% 34.7%
Market value of the Company's investment in Zenith 140,529 149,569
</TABLE>
The Company's equity in net income includes amortization of excess of cost over
fair value of net assets acquired. At December 31, 1995, retained earnings
(deficit) included undistributed net income of $27,812,000 from Zenith.
42
<PAGE>
NOTE 4
PREMIUMS AND OTHER RECEIVABLES
- ---------------------------------------------------------------
DECEMBER 31 1995 1994
- ---------------------------------------------------------------
(In thousands)
Premiums receivable $1,075,226 $1,079,393
Investment income receivable 54,524 64,205
Accounts, notes and other receivables 81,277 115,172
---------- ----------
$1,211,027 $1,258,770
---------- ----------
---------- ----------
At December 31, 1995, substantially all receivables were due within one year.
As of December 31, 1995, the Company sold with limited recourse
$122,400,000 and, in 1994, sold with full recourse $126,700,000 of reinsurance
recoverables and premiums receivable relating to its property and casualty
insurance operations. Pursuant to these recourse provisions, the maximum amount,
at December 31, 1995, that the Company may be obligated to repurchase is
$9,600,000.
NOTE 5
INCOME TAXES
Provision for income taxes consisted of:
- -----------------------------------------------------------------
YEAR ENDED DECEMBER 31 1995 1994 1993
- -----------------------------------------------------------------
(In thousands)
Current:
Federal $ 11,611 $ 8,996 $ 29,671
Foreign 6,830 6,204 1,949
-------- -------- --------
18,441 15,200 31,620
Deferred federal 13,959 (3,000) 2,680
Reversal of valuation allowance -- -- (23,300)
-------- -------- --------
$ 32,400 $ 12,200 $ 11,000
-------- -------- --------
-------- -------- --------
Domestic and foreign income before income taxes, minority interests and equity
in investee company is as follows:
- -----------------------------------------------------------------
YEAR ENDED DECEMBER 31 1995 1994 1993
- -----------------------------------------------------------------
(In thousands)
Domestic $101,971 $ 31,250 $ 82,131
Foreign 19,514 18,498 5,569
-------- -------- --------
$121,485 $ 49,748 $ 87,700
-------- -------- --------
-------- -------- --------
The reconciliation of taxes computed at the statutory rate of 35% to the
provision for income taxes is as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31 1995 1994 1993
- --------------------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C>
Tax provision at statutory rate $ 42,520 $ 17,412 $ 30,695
Nontaxable investment income (13,405) (13,989) (1,743)
Amortization of excess of cost over fair value of net assets acquired 3,150 3,150 2,975
Net increase (decrease) in valuation allowance 1,226 5,774 (23,300)
Impact of change in statutory rate from new tax act -- -- (3,500)
Other (1,091) (147) 5,873
-------- -------- --------
Provision for income taxes $ 32,400 $ 12,200 $ 11,000
-------- -------- --------
-------- -------- --------
</TABLE>
43
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS continued
Reliance Group Holdings, Inc. and Subsidiaries
The tax effects of items comprising the Company's net deferred tax asset are as
follows:
- ------------------------------------------------------------------------
DECEMBER 31 1995 1994
- ------------------------------------------------------------------------
(In thousands)
Deferred tax assets:
Discounting of loss reserves $ 200,907 $ 197,655
Tax basis differential of subsidiary
not included in consolidated tax return 111,815 120,600
Operating loss carryforwards of subsidiary
not included in consolidated tax return 57,925 57,925
Unearned premium reserve 40,354 40,748
Accruals not currently deductible 61,492 59,176
Other 68,120 77,208
--------- ---------
540,613 553,312
Deferred tax liabilities:
Deferred policy acquisition costs 67,785 62,874
Unrealized investment gains 118,002 --
Investment in investee company 20,576 17,499
Other 109,220 109,891
--------- ---------
225,030 363,048
Valuation allowance (166,848) (171,058)
--------- ---------
Net deferred tax asset $ 58,182 $ 191,990
--------- ---------
--------- ---------
For the years ended December 31, 1995 and 1994, the Company's valuation
allowance and income tax provision were increased by $1,226,000 and $5,774,000
relating primarily to deferred tax assets for which it is likely that tax
benefits will not be realized. The remaining changes in the 1995 and 1994
valuation allowances relate 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 net operating loss carryforwards ("NOL") and
$16,200,000 of deferred tax benefits previously not recognized.
At December 31, 1995, 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 $129,300,000 expires in 2001,
$17,000,000 in 2002, $17,000,000 in 2004 and $2,200,000 in 2010. 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.
The Company is seeking a redetermination in the U.S. Tax Court of an
asserted tax deficiency for the year ended December 31, 1980, 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 to disallow investment tax credits of approximately
$36,500,000 with respect to intermodal cargo containers leased to others by a
former subsidiary of the Company. The Company estimates that, if the IRS were to
prevail, the deficiency would result in an increase in tax of approximately
$31,000,000 for 1980, plus interest at the statutorily prescribed rates for the
periods since that year. 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 this matter 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.
44
<PAGE>
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 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 reconciliation of the beginning to ending liability for unpaid claims
and related expenses ("loss reserves") for the Company's property and casualty
insurance operations is as follows:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------
DECEMBER 31 1995 1994 1993
- ----------------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C>
Loss reserves, beginning of year $ 5,581,483 $ 5,048,442 $ 4,571,792
Less reinsurance recoverables 2,453,702 2,116,914 1,868,800
----------- ----------- -----------
Net loss reserves, beginning of year 3,127,781 2,931,528 2,702,992
----------- ----------- -----------
Provision for policy claims and related expenses:
Provision for insured events of the current year 1,163,447 1,274,649 1,195,425
Increase in provision for insured events of prior years 38,512 22,444 40,169
----------- ----------- -----------
Total provision 1,201,959 1,297,093 1,235,594
----------- ----------- -----------
Payments for policy claims and related expenses:
Attributable to insured events of the current year 271,915 321,538 229,778
Attributable to insured events of prior years 868,622 780,961 776,881
----------- ----------- -----------
Total payments 1,140,537 1,102,499 1,006,659
----------- ----------- -----------
Foreign currency translation (9,768) 1,659 (399)
----------- ----------- -----------
Net loss reserves, end of year 3,179,435 3,127,781 2,931,528
Plus reinsurance recoverables 2,679,917 2,453,702 2,116,914
----------- ----------- -----------
Loss reserves, end of year $ 5,859,352 $ 5,581,483 $ 5,048,442
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
The provision for insured events of prior years for 1995, 1994 and 1993 includes
adverse development related to asbestos-related and environmental pollution
claims, which primarily affect general liability and multiple peril lines of
business. The 1995 provision also includes adverse development in other general
liability, automobile and reinsurance lines, partially offset by favorable
development in workers' compensation. The 1994 provision also included adverse
development in other general liability lines, partially offset by favorable
development in workers' compensation. The 1993 provision also included adverse
development from workers' compensation reinsurance pools, partially offset by
favorable development in other general liability lines.
At December 31, 1995 and 1994, loss reserves include $400,200,000 and
$437,900,000 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%.
45
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS continued
Reliance Group Holdings, Inc. and Subsidiaries
The reconciliation of the beginning to ending loss reserves for the Company's
title insurance operations is as follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------
DECEMBER 31 1995 1994 1993
- ------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C>
Loss reserves, beginning of year $228,063 $204,695 $173,328
-------- -------- --------
Provision for policy claims and related expenses:
Provision for insured events of the current year 57,900 71,060 76,955
Increase in provision for insured events of prior years 586 4,807 4,848
-------- -------- --------
Total provision 58,486 75,867 81,803
-------- -------- --------
Payments for policy claims and related expenses:
Attributable to insured events of the current year 2,187 4,475 2,356
Attributable to insured events of prior years 43,585 48,024 48,080
-------- -------- --------
Total payments 45,772 52,499 50,436
-------- -------- --------
Loss reserves, end of year $240,777 $228,063 $204,695
-------- -------- --------
-------- -------- --------
</TABLE>
The reconciliation of the beginning to ending net loss reserves pertaining to
asbestos-related and environmental pollution claims is as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------
DECEMBER 31 1995 1994 1993
- --------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C>
Net loss reserves, beginning of year $ 130,143 $ 122,034 $ 94,253
Provision for policy claims and related expenses 25,904 28,279 52,630
Payments for policy claims and related expenses (25,341) (20,170) (24,849)
--------- --------- ---------
Net loss reserves, end of year $ 130,706 $ 130,143 $ 122,034
--------- --------- ---------
--------- --------- ---------
</TABLE>
Included in the December 31, 1995 net loss reserves for asbestos-related and
environmental pollution claims are $33,782,000 of loss costs for claims
incurred but not reported, $51,875,000 of loss costs for reported claims and
$45,049,000 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 judgement. 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 from 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.
46
<PAGE>
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 $137,500,000 from $62,500,000 and extended the
maturity dates of the term loan borrowings through March 31, 2000. The
additional $75,000,000 of borrowings under the term loan were used, in part, to
redeem $25,000,000 of the 7.866% senior reset notes and $25,000,000 of the 9.48%
senior reset notes, including $9,652,000 of notes held by Reliance Insurance
Company. These transactions resulted in an extraordinary loss of $3,363,000, net
of income taxes of $1,811,000. In addition, on May 1, 1995, all of the
outstanding shares of redeemable preferred stock of Reliance Insurance Company,
which had a carrying value of $20,740,000, were redeemed. The cost of the early
redemption in excess of the carrying value of the preferred stock, $3,029,000,
was charged directly to shareholders' equity.
Debentures and notes outstanding are as follows:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------
DECEMBER 31 1995 1994
- ---------------------------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C>
9% senior notes due 2000 $400,000 $400,000
9 3/4% senior subordinated debentures due 2003 250,000 250,000
7.866% senior reset notes (interest rate is adjustable every five years
based on Treasury Rate) due 2000 15,365 30,713
9.48% senior reset notes (interest rate is adjustable every three years based
on Treasury Rate) due 2000; ($25,000 and $50,000 principal amount, less
unamortized discount of $47 and $117 at December 31, 1995 and 1994) 24,953 49,883
-------- --------
$690,318 $730,596
-------- --------
-------- --------
</TABLE>
The fair value of the Company's debentures and notes at December 31, 1995 and
1994 was $711,540,000 and $674,003,000 based on quoted market prices.
TERM LOANS AND SHORT-TERM DEBT
At December 31, 1995, term loans and short-term debt aggregated $188,101,000 and
consisted of $180,248,000 of term loans which are payable in varying amounts
through 2015 with interest rates ranging from 4.3% to 10.5% and $7,853,000 of
short-term debt. The weighted average interest rate on short-term debt was 7.5%
and 7.4% at December 31, 1995 and 1994. The Company believes that the fair value
of its term loans and short-term debt at December 31, 1995 and 1994 approximates
carrying value.
Maturities and sinking fund payments of debentures and notes as well as 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)
1996 -- $ 8,336
1997 -- 21,065
1998 -- 20,000
1999 -- 50,000
2000 440,365 65,000
Reliance Financial's Credit Facility includes a revolving credit facility with
various banks providing for aggregate maximum outstanding borrowings of
$100,000,000 through March 31, 2000. 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, 1995,
borrowings aggregating $21,000,000 were outstanding under this facility. All of
the common stock of Reliance Insurance Company, the principal subsidiary of
Reliance Financial, has been pledged to secure the Credit Facility and the
senior reset notes.
47
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS continued
Reliance Group Holdings, Inc. and Subsidiaries
The provisions of certain notes and debentures contain limitations on the
payment of dividends. At February 14, 1996, the Company could pay up to
$77,800,000 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, 1995
and 1994, reinsurance recoverables include $472,925,000 and $463,380,000 of
prepaid reinsurance premiums which represents the portion of property and
casualty premiums ceded to reinsurers applicable to unearned premiums.
The reconciliation of property and casualty insurance direct premiums to net
premiums is as follows:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31 1995 1994 1993
- -----------------------------------------------------------------------------------------------------
Premiums Premiums Premiums Premiums Premiums Premiums
Written Earned Written Earned Written Earned
- -----------------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Direct $ 2,748,439 $ 2,707,978 $ 2,654,437 $ 2,630,549 $ 2,587,149 $ 2,531,478
Assumed 325,226 350,636 330,261 345,398 323,422 304,422
Ceded (1,294,625) (1,284,023) (1,220,408) (1,198,629) (1,139,974) (1,264,361)
----------- ----------- ----------- ----------- ----------- -----------
Net premiums $ 1,779,040 $ 1,774,591 $ 1,764,290 $ 1,777,318 $ 1,770,597 $ 1,571,539
----------- ----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- ----------- -----------
</TABLE>
The reconciliation of property and casualty insurance gross policy claims and
settlement expenses to net policy claims and settlement expenses is as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31 1995 1994 1993
- --------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C>
Gross $ 1,987,055 $ 2,220,285 $ 2,097,428
Reinsurance recoveries (785,096) (923,192) (861,834)
----------- ----------- -----------
Net policy claims and settlement expenses $ 1,201,959 $ 1,297,093 $ 1,235,594
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
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 Company's ten largest reinsurers, based on 1995 ceded
premiums, are as follows:
- -----------------------------------------------------
(In thousands)
Lloyd's of London $108,070
American Re-Insurance Company 105,938
Hertz International Reinsurance Ltd. 59,583
Commercial Risk Re-Insurance Co. 42,593
Swiss Reinsurance America Corporation 34,380
Zurich Reinsurance Centre, Inc. 32,741
Kemper Reinsurance Company 32,291
International Industrial Indemnity Company
(formerly TRN Insurance Company) 32,126
Transatlantic Reinsurance Company 29,986
G.I.O. Insurance Ltd. 29,288
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 $100,000,000.
48
<PAGE>
NOTE 9
DIVIDENDS OF SUBSIDIARIES
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 February 14, 1996, Reliance
Financial could pay up to $352,400,000 in dividends without violating the most
restrictive provisions. Dividend payments by Reliance Insurance Company, 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, $165,400,000 is available for the payment of
dividends to Reliance Financial in 1996, 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 28, 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 Plans, as amended, (the "Plans") provide 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 Plans,
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.
A summary of the Plans' activity is as follows:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31 1995 1994 1993
- -----------------------------------------------------------------------------------------------------------------------------
Number of Price Range Number of Price Range Number of Price Range
Shares Per-Share Shares Per-Share Shares Per-Share
- -----------------------------------------------------------------------------------------------------------------------------
(In thousands, except per-share amounts)
<S> <C> <C> <C> <C> <C> <C>
Balance, beginning of year 8,129 3.825 - 7 3/4 6,748 3.825 - 7 3/4 7,612 3.825 - 6 5/8
Granted 789 5 1/2 - 7 5/8 1,713 5 - 6 1/8 142 6 1/4 - 7 3/4
Exercised 313 3.825 - 5 1/8 145 3.825 326 3.825
Cancelled 143 3.825 - 7 187 3.825 - 6 1/2 680 3.825 - 6 1/2
----- ------------- ----- ------------- ----- -------------
Balance, end of year 8,462 3.825 - 7 3/4 8,129 3.825 - 7 3/4 6,748 3.825 - 7 3/4
----- ------------- ----- ------------- ----- -------------
----- ------------- ----- ------------- ----- -------------
Exercisable portion 4,700 3.825 - 7 3/4 3,085 3.825 - 7 3/4 1,514 3.825 - 6 5/8
----- ------------- ----- ------------- ----- -------------
----- ------------- ----- ------------- ----- -------------
</TABLE>
49
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS continued
Reliance Group Holdings, Inc. and Subsidiaries
NOTE 11
POLICY ACQUISITION COSTS AND OTHER INSURANCE EXPENSES
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31 1995 1994 1993
- -----------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C>
Policy acquisition costs amortized during the year $ 411,979 $ 387,924 $ 327,437
---------- ---------- ----------
Other insurance expenses:
Salaries and commissions 563,680 704,254 684,362
Taxes, other than income taxes 48,603 34,849 54,049
Rent 55,848 54,863 50,852
Policyholders' dividends 7,065 2,630 6,342
Other 150,967 163,308 159,142
---------- ---------- ----------
826,163 959,904 954,747
---------- ---------- ----------
$1,238,142 $1,347,828 $1,282,184
---------- ---------- ----------
---------- ---------- ----------
</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 1995 1994 1993
- -----------------------------------------------------------------------------------
<S> <C> <C> <C>
(In thousands)
Service cost - benefits earned during the period $ 8,252 $ 10,559 $ 8,041
Interest cost on projected benefit obligation 15,112 14,309 13,884
Actual return on plan assets (33,552) 10,300 (29,161)
Net amortization and deferral 15,849 (30,222) 11,342
Effect of plan curtailment -- -- (1,310)
-------- -------- --------
$ 5,661 $ 4,946 $ 2,796
-------- -------- --------
-------- -------- --------
</TABLE>
A reconciliation of the funded status of the plans with the accrued pension
cost included in accounts payable and accrued expenses is as follows:
- ------------------------------------------------------------------------------
DECEMBER 31 1995 1994
- ------------------------------------------------------------------------------
(In thousands)
Actuarial present value of benefit obligation:
Vested $ 177,353 $ 133,747
Nonvested 10,150 7,063
--------- ---------
Accumulated benefit obligation 187,503 140,810
Effect of anticipated future compensation levels 37,237 27,639
--------- ---------
Projected benefit obligation 224,740 168,449
Plan assets at market value (189,018) (164,545)
--------- ---------
Projected benefit obligation in excess of plan assets 35,722 3,904
Unrecognized net asset at date of adoption 9,636 11,486
Unrecognized net loss (25,929) (1,622)
--------- ---------
Accrued pension cost $ 19,429 $ 13,768
--------- ---------
--------- ---------
No contributions under the Company's noncontributory trusteed defined benefit
pension plans were made during 1995. Contributions were $3,391,000 and
$4,381,000 in 1994 and 1993.
The assumptions used to measure the projected benefit obligation at
December 31, 1995 and 1994 include a discount rate of 7.5% and 9.0% and a
weighted average rate of compensation increase of 5.4% and 5.9%. The expected
long-term investment rate of return on plan assets for the years ended December
31, 1995 and 1994 was 9.5% and 10.0%.
50
<PAGE>
Contributions under the Company's defined contribution plans were
$4,302,000, $5,277,000 and $6,560,000 in 1995, 1994 and 1993, 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 1995 1994 1993
- -----------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C>
Service cost - benefits earned during the period $ 167 $ 226 $ 242
Interest cost on accumulated postretirement benefit obligation 713 715 893
Net amortization and deferral 624 790 1,141
------ ------ ------
$1,504 $1,731 $2,276
------ ------ ------
------ ------ ------
</TABLE>
The components of the accumulated postretirement benefit obligation are as
follows:
- -------------------------------------------------------------------
DECEMBER 31 1995 1994
- -------------------------------------------------------------------
(In thousands)
Accumulated postretirement benefit obligation:
Retirees $ 5,597 $ 5,743
Other active plan participants 3,618 3,001
------- -------
Accumulated benefit obligation 9,215 8,744
Unrecognized net gain 92 853
Unrecognized transition obligation (7,963) (8,630)
------- -------
Accrued postretirement benefit cost $ 1,344 $ 967
------- -------
------- -------
The assumed health care cost trend rate used in measuring the accumulated
postretirement benefit obligation as of December 31, 1995 was 12.0% for 1996
decreasing until it reaches 6.0% in 2008, 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, 1995 and the 1995 net postretirement health care cost by
approximately 2.9% and 2.2%. The assumed discount rate used in determining the
accumulated postretirement benefit obligation at December 31, 1995 and 1994 was
7.5% and 9.0%.
NOTE 13
STATUTORY INFORMATION
Statutory net income is as follows:
- ---------------------------------------------------------------------------
YEAR ENDED DECEMBER 31 1995 1994 1993
- ---------------------------------------------------------------------------
(In thousands)
Property and casualty insurance operations $225,989 $123,970 $217,353
Title insurance operations 12,439 32,421 43,904
Statutory policyholders' surplus is as follows:
- -----------------------------------------------------------------------
DECEMBER 31 1995 1994
- -----------------------------------------------------------------------
(In thousands)
Property and casualty insurance operations(1) $1,128,336 $ 908,538
Title insurance operations 182,167 180,757
(1) Includes Reliance Insurance Company's investment in title insurance
operations. Also reflects a reduction in statutory loss reserves of
$98,800,000 and $104,100,000 at December 31, 1995 and 1994, representing
discounts of workers' compensation reserves in excess of GAAP discounts.
51
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS continued
Reliance Group Holdings, Inc. and Subsidiaries
NOTE 14
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.
On November 28, 1994, Reliance Insurance Company and several of its
affiliates received an order from the outgoing Insurance Commissioner ordering
refunds totaling $72,300,000 inclusive of interest. On January 31, 1996, the
Company reached a settlement with the California Department of Insurance
resolving its total liability for refunds and interest under Proposition 103.
The settlement requires the Company to pay $15,600,000 in refunds and interest
on certain policies issued or renewed between November 8, 1988 and November 7,
1989. Although the Company believes that the California Department of Insurance
misapplied Proposition 103 as it relates to it, the Company agreed to the
settlement to avoid prolonging the matter further. In the fourth quarter of
1995, the Company recorded a pre-tax charge of $4,000,000 related to Proposition
103. The fourth quarter 1995 charge represents the difference between the
settlement amount and the pre-tax charge of $11,600,000 the Company had taken in
the fourth quarter of 1994 to provide for Proposition 103 refunds and interest.
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 against it 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 Frank B. Hall
& Co. Inc. ("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.
52
<PAGE>
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. The Superintendent has informed
Prometheus that he intends to pursue court approval of the settlement. The
settlement agreement will not become effective until final approval by the
court and there is no assurance that such approval will be obtained.
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. Prometheus has received an aggregate
of $20,000,000 in insurance proceeds in connection with this matter from its
insurance carrier.
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. At December 31, 1995, the partnership's total outstanding debt was
$172,080,000. As of December 31, 1995, Reliance Financial guaranteed $38,000,000
of the partnership's outstanding debt which matures on December 29, 1996. The
Company believes that, to the extent such debt cannot be fully refinanced at
maturity, the partnership will need to seek additional financing from other
sources, which may include the Company. 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 30, 2005 and bear a fixed
interest rate of 10%. At December 31, 1995, borrowings of $6,563,000 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.
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"). Under the terms of the sale, the Company
agreed to provide $18,000,000 per year until 2007 of reinsurance brokerage
commissions to Aon.
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, 1995, 1994 and 1993 was $95,900,000,
$96,000,000 and $95,700,000, respectively.
At December 31, 1995, future net minimum rental payments required under
noncancelable leases are as follows:
- ------------------------------
(In thousands)
1996 $ 61,918
1997 50,011
1998 34,014
1999 25,945
2000 9,993
2001 and thereafter 13,328
--------
$195,209
--------
--------
53
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS continued
Reliance Group Holdings, Inc. and Subsidiaries
NOTE 15
BUSINESS SEGMENT INFORMATION
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31 1995 1994 1993
- ----------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C>
REVENUES:
Property and casualty insurance
Premiums earned $ 1,774,591 $ 1,777,318 $ 1,571,539
Net investment income 247,343 232,299 216,432
Gain on sales of investments 27,381 8,851 129,018
----------- ----------- -----------
2,049,315 2,018,468 1,916,989
----------- ----------- -----------
Title insurance
Premiums earned 671,947 856,774 893,364
Net investment income 27,946 26,613 24,282
Gain on sales of investments 1,729 516 4,786
----------- ----------- -----------
701,622 883,903 922,432
----------- ----------- -----------
Other 155,050 144,679 123,398
----------- ----------- -----------
$ 2,905,987 $ 3,047,050 $ 2,962,819
----------- ----------- -----------
----------- ----------- -----------
INCOME BEFORE INCOME TAXES, MINORITY INTERESTS AND
EQUITY IN INVESTEE COMPANY:
Property and casualty insurance
Underwriting $ (45,644) $ (97,343) $ (175,220)
Net investment income 247,343 232,299 216,432
Gain on sales of investments 27,381 8,851 129,018
----------- ----------- -----------
229,080 143,807 170,230
----------- ----------- -----------
Title insurance 14,012 31,326 59,966
----------- ----------- -----------
Other (121,607) (125,385) (142,496)
----------- ----------- -----------
$ 121,485 $ 49,748 $ 87,700
----------- ----------- -----------
----------- ----------- -----------
IDENTIFIABLE ASSETS AT YEAR-END:
Property and casualty insurance $ 9,077,897 $ 8,529,300 $ 7,948,113
Title insurance 547,510 547,000 544,548
Other 362,806 293,253 322,553
----------- ----------- -----------
$ 9,988,213 $ 9,369,553 $ 8,815,214
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
Income 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 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,
corporate interest expense and the pre-tax results of RCG International, Inc. (a
subsidiary of the property and casualty insurance operations) are included in
Other.
Identifiable assets by industry segment are those assets which are used in
the Company's operations in each segment.
54
<PAGE>
NOTE 16
QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
1995 Quarter
- ----------------------------------------------------------------------------------------------------
First Second Third Fourth
- ----------------------------------------------------------------------------------------------------
(In thousands, except per-share amounts)
<S> <C> <C> <C> <C>
REVENUES:
Premiums earned $ 604,666 $ 599,957 $ 618,831 $ 623,084
Net investment income 69,378 66,362 68,727 70,822
Gain on sales of investments 8,286 7,669 8,454 2,968
Other 38,976 42,189 38,103 37,515
--------- --------- --------- ---------
$ 721,306 $ 716,177 $ 734,115 $ 734,389
--------- --------- --------- ---------
--------- --------- --------- ---------
INCOME FROM CONTINUING OPERATIONS $ 21,540 $ 26,438 $ 27,997 $ 19,941
Loss on disposal of discontinued operations
of investee company -- -- (4,497) --
--------- --------- --------- ---------
INCOME BEFORE EXTRAORDINARY ITEM 21,540 26,438 23,500 19,941
Extraordinary item - early extinguishment of debt -- (3,363) -- --
--------- --------- --------- ---------
NET INCOME $ 21,540 $ 23,075 $ 23,500 $ 19,941
--------- --------- --------- ---------
--------- --------- --------- ---------
PER-SHARE INFORMATION:
INCOME FROM CONTINUING OPERATIONS $ .19 $ .23 $ .24 $ .17
Loss on disposal of discontinued operations
of investee company -- -- (.04) --
--------- --------- --------- ---------
INCOME BEFORE EXTRAORDINARY ITEM .19 .23 .20 .17
Extraordinary item - early extinguishment of debt -- (.06) -- --
--------- --------- --------- ---------
NET INCOME $ .19 $ .17 $ .20 $ .17
--------- --------- --------- ---------
--------- --------- --------- ---------
Average number of common and common
equivalent shares outstanding 114,805 115,548 116,413 117,160
</TABLE>
<TABLE>
<CAPTION>
1994 Quarter
- ----------------------------------------------------------------------------------------------------
First Second Third Fourth
- ----------------------------------------------------------------------------------------------------
(In thousands, except per-share amounts)
<S> <C> <C> <C> <C>
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
</TABLE>
55
<PAGE>
INDEPENDENT AUDITORS' REPORT
Reliance Group Holdings, Inc. and 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, 1995 and 1994, and
the related statements of income, changes in shareholders' equity and cash
flows for each of the three years in the period ended December 31, 1995.
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, 1995 and 1994 and the results of their
operations and their cash flows for each of the three years in the period
ended December 31, 1995 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 26, 1996
56
<PAGE>
REPORT OF MANAGEMENT
Reliance Group Holdings, Inc. and 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
57
<PAGE>
MARKET AND DIVIDEND INFORMATION FOR COMMON STOCK
Reliance Group Holdings, Inc. and 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,
1996, there were 2,700 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, are as follows:
1995 1994
- -------------------------------------------
Quarter HIGH LOW High Low
- -------------------------------------------
First 5 3/4 4 7/8 8 1/8 5 1/2
Second 6 3/4 5 1/4 6 5/8 4 7/8
Third 8 1/8 6 1/4 6 3/4 4 7/8
Fourth 9 1/4 7 1/8 6 1/2 4 7/8
Cash dividends for each share of the Company's common stock were $.08 for each
quarter in 1995 and 1994.
The provisions of certain notes and debentures of the Company contain
limitations on the payment of dividends. As of February 14, 1996, the Company
could pay up to $77,800,000 in dividends, without violating the most restrictive
of these 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.
58
<PAGE>
DIRECTORS AND OFFICERS
Reliance Group Holdings, Inc. and Subsidiaries
DIRECTORS
George R. Baker(2),(5),(6),(7)
Corporate Director/Advisor
George E. Bello(3)
Executive Vice President
and Controller
Reliance Group Holdings, Inc.
President and
Chief Executive Officer
Reliance National Insurance
Company
Lowell C. Freiberg(3)
Senior Vice President and
Chief Financial Officer
Reliance Group Holdings, Inc.
Dr. Thomas P. Gerrity(2),(7)
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 & CEO of Loral
Space & Communications Ltd.
and Chairman & CEO of Globalstar
Richard E. Snyder(3),(7)
President
Western Publishing Group
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
(7) Nominating 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
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
Steven A. Rautenberg
Vice President
Communications
Joel H. Rothwax
Vice President
Human Resources
Thomas J. Sanders
Vice President and
Assistant Controller
Paul W. Zeller
Vice President,
Deputy General Counsel
and Assistant Secretary
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
Robert C. Olsman
President and
Chief Operating Officer
Reliance Insurance Company
George H. Roberts
President
Reliance Reinsurance Corp.
C. Brian Schmalz
President and
Chief Executive Officer
Reliance Surety Company
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.
RCG INFORMATION TECHNOLOGY
Robert P. Buttacavoli
President and
Chief Executive Officer
RCG Information Technology, Inc.
59
<PAGE>
CORPORATE DATA
Reliance Group Holdings, Inc. and 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 Mellon Shareholder Services, L.L.C.
P.O. Box 590
Ridgefield Park, NJ 07660
(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 Wednesday, May 8, 1996 at 10:00 A.M. in the third floor auditorium of
Chemical Bank, 270 Park Avenue, 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. This Report can also be obtained by calling
(888) REL-FACT.
- --------------------------------------------------------------------------------
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
7.866% Senior Reset Notes, due 2000
9.48% Senior Reset Notes, due 2000
- --------------------------------------------------------------------------------
Reliance Group Holdings, Inc. quarterly results, as well as Annual Reports on
Form 10-K, Form 10-Q, Annual Reports to shareholders, dividend declarations and
other corporate information can be obtained by calling (888) REL-FACT
[(888) 735-3228].
The text of this annual report is printed on recycled paper
Design: The Graphic Expression, Inc., New York
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
..Garnet Company Delaware
..Reliance Reinsurance Company Delaware
..Sterling Administrative Services, Inc. Pennsylvania
..Platinum Investors, Inc. Delaware
..Cananwill, Ltd. Bermuda
..Reliance Insurance Company of California California
..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 Compania Argentina
De Seguros S.A. Argentina
..Reliance National Insurance Company Delaware
....Seguros Renamex Mexico
....Reliance National Risk Services, Inc. New York
....Blackmoor Group, Inc. New York
......Blackmoor Insurance Agency, Inc. New York
......Waverly 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
..Transnation Title Insurance Company Arizona
....Transnation Title Insurance Company of
New York New York
....Title Transfer Services, Inc. Colorado
....Xenia Property Company Pennsylvania
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
Jurisdiction
of
Name Incorporation
- ---- -------------
..Commonwealth Land Title Insurance Company Pennsylvania
....CLT Appraisal Services, Inc. Pennsylvania
....Commercial Settlements, Inc. Dist. of Columbia
....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
San Antonio Texas
....Commonwealth Land Title Company of
Washington Washington
....Commonwealth Relocation Services, Inc. Pennsylvania
....CRS Financial Services, Inc. Pennsylvania
....Day One, Inc. Pennsylvania
....DelPenn Land Company Delaware
....District-Realty Title Insurance Corporation Maryland
....Industrial Valley Title Insurance Company Pennsylvania
......Commonwealth Land Title Insurance Company
of New Jersey New Jersey
....Osage Corporation Pennsylvania
....Property Services, Inc. Pennsylvania
....Ranier Title Company Washington
....State Title Insurance Company Pennsylvania
....T & T Co. Holding Company Florida
......Title & Trust Company of Florida Florida
....The National l03l Exchange Corporation California
....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
Jurisdiction
of
Name Incorporation
- ---- -------------
..Prometheus Funding Corp. Delaware
..RCG International, Inc. Delaware
....RCG-Moody International Limited England
......ICSB B.V. Holland
........ICSB G.m.b.H. Germany
........ICSB Sarl France
........International Container Survey
Bureau (UK) Limited England
......Maghraby Moody International BV (MMI BV) Netherlands
......MMI Italia SRL Italy
......MMI - BMIQA 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
......Moody International Pty. Ltd. Australia
......Moody International (SA)(PTY) Limited
......The Steel Protection Consultancy Ltd. England
....RCG/Asbach, Inc. Delaware
....RCG/Pro-Access, Inc. Delaware
....RCG Information Technology, Inc. New Jersey
....Werner International, Inc. Delaware
......Werner Management Consultants, Inc. New York
Exhibit 23.1
Independent Auditors' Consent
We consent to the incorporation by reference in Registration
Statements Nos. 33-19897, 33-31709, 33-63517 and 33-63519 of
Reliance Group Holdings, Inc. on Form S-8 of our reports dated
February 26, 1996 (which reports include explanatory paragraphs
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, 1995. 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 Registration Statements Nos. 33-19897 and 33-31709.
/s/ Deloitte & Touche LLP
New York, New York
March 27, 1996
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
Exhibit 27.1
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> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> DEC-31-1995
<DEBT-HELD-FOR-SALE> 2,371,995
<DEBT-CARRYING-VALUE> 753,563
<DEBT-MARKET-VALUE> 791,459
<EQUITIES> 672,668
<MORTGAGE> 0
<REAL-ESTATE> 281,923
<TOTAL-INVEST> 4,580,433
<CASH> 52,914
<RECOVER-REINSURE> 3,163,073
<DEFERRED-ACQUISITION> 194,648
<TOTAL-ASSETS> 9,988,213
<POLICY-LOSSES> 6,100,129
<UNEARNED-PREMIUMS> 1,299,465
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 878,419
0
0
<COMMON> 11,344
<OTHER-SE> 667,004
<TOTAL-LIABILITY-AND-EQUITY> 9,988,213
2,446,538
<INVESTMENT-INCOME> 275,289
<INVESTMENT-GAINS> 27,377
<OTHER-INCOME> 156,783
<BENEFITS> 1,260,445
<UNDERWRITING-AMORTIZATION> 1,238,142
<UNDERWRITING-OTHER> 0
<INCOME-PRETAX> 121,485
<INCOME-TAX> (32,400)
<INCOME-CONTINUING> 95,916
<DISCONTINUED> (4,497)
<EXTRAORDINARY> (3,363)
<CHANGES> 0
<NET-INCOME> 88,056
<EPS-PRIMARY> $0.73
<EPS-DILUTED> 0
<RESERVE-OPEN> 3,127,781
<PROVISION-CURRENT> 1,163,447
<PROVISION-PRIOR> 38,512
<PAYMENTS-CURRENT> 271,915
<PAYMENTS-PRIOR> 868,622
<RESERVE-CLOSE> 3,179,435
<CUMULATIVE-DEFICIENCY> 38,512
</TABLE>
