<PAGE>
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
----- OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 1996
OR
----- TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period From_____ To_____
Commission File Number 1-8278
RELIANCE GROUP HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
Delaware 13-3082071
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
Park Avenue Plaza
55 East 52nd Street
New York, New York 10055
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (212) 909-1100
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
----- -----
As of November 1, 1996, 114,237,000 shares of common stock of Reliance Group
Holdings, Inc. were outstanding.
<PAGE>
RELIANCE GROUP HOLDINGS, INC. AND SUBSIDIARIES
I N D E X
Page
No.
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statement of Income for the Quarters and Nine-Month
Periods Ended September 30, 1996 and 1995 (Unaudited)......... 2
Consolidated Balance Sheet at September 30, 1996 (Unaudited) and
December 31, 1995............................................. 3
Consolidated Statement of Changes in Shareholders' Equity for the
Nine-Month Period Ended September 30, 1996 (Unaudited)........ 4
Consolidated Condensed Statement of Cash Flows for the Nine-Month
Periods Ended September 30, 1996 and 1995 (Unaudited)......... 5
Notes to Consolidated Financial Statements (Unaudited)........... 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations............................... 8
PART II. OTHER INFORMATION, AS APPLICABLE.............................. 14
SIGNATURES............................................................. 15
<PAGE>
RELIANCE GROUP HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME (UNAUDITED)
<TABLE>
<CAPTION>
Quarter Ended Nine Months Ended
September 30 September 30
1996 1995 1996 1995
==========================================================================================================
(In thousands, except per-share amounts)
<S> <C> <C> <C> <C>
Revenues:
Premiums earned ..................................... $ 661,980 $ 618,831 $ 1,908,599 $ 1,823,454
Net investment income ............................... 72,040 68,727 213,200 204,467
Gain on sales of investments ........................ 16,542 8,454 39,946 24,409
Other ............................................... 43,548 38,103 124,047 119,268
----------- ----------- ----------- -----------
794,110 734,115 2,285,792 2,171,598
----------- ----------- ----------- -----------
Claims and expenses:
Policy claims and settlement expenses ............... 326,612 319,068 1,083,679 947,632
Policy acquisition costs and other insurance expenses 339,531 308,795 979,721 911,011
Interest ............................................ 22,167 22,342 66,439 68,011
Other operating expenses ............................ 54,837 48,085 156,815 148,894
----------- ----------- ----------- -----------
743,147 698,290 2,286,654 2,075,548
----------- ----------- ----------- -----------
Income (loss) before income taxes and equity
in investee company ............................. 50,963 35,825 (862) 96,050
Income tax (provision) benefit ...................... (15,800) (9,900) 5,900 (26,300)
Equity in investee company .......................... 2,488 2,072 7,424 6,225
----------- ----------- ----------- -----------
Income from continuing operations ................... 37,651 27,997 12,462 75,975
Loss on disposal of discontinued operations
of investee company ........................... -- (4,497) -- (4,497)
----------- ----------- ----------- -----------
Income before extraordinary item .................... 37,651 23,500 12,462 71,478
Extraordinary item - early extinguishment of debt ... -- -- -- (3,363)
----------- ----------- ----------- -----------
Net income .......................................... $ 37,651 $ 23,500 $ 12,462 $ 68,115
=========== =========== =========== ===========
Per-share information:
Income from continuing operations ................... $ .32 $ .24 $ .11 $ .66
Loss on disposal of discontinued operations
of investee company ........................... -- (.04) -- (.04)
----------- ----------- ----------- -----------
Income before extraordinary item .................... .32 .20 .11 .62
Extraordinary item - early extinguishment of debt ... -- -- -- (.06)
----------- ----------- ----------- -----------
Net income .......................................... $ .32 $ .20 $ .11 $ .56
=========== =========== =========== ===========
Average number of common and common equivalent
shares outstanding ............................ 117,355 116,413 117,487 115,607
</TABLE>
See notes to consolidated financial statements
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<PAGE>
RELIANCE GROUP HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
September 30 December 31
ASSETS 1996 1995
========================================================================================
(In thousands, except per-share amount)
<S> <C> <C>
Marketable securities:
Fixed maturities held for investment - at amortized cost
(quoted market $776,759 and $791,459) ................ $ 776,457 $ 753,563
Fixed maturities available for sale - at quoted market
(amortized cost $2,530,735 and $2,299,510) ........... 2,528,576 2,371,995
Equity securities - at quoted market (cost $424,039
and $408,054) ........................................ 688,917 672,668
Short-term investments .................................. 266,575 500,284
Cash ...................................................... 35,254 52,914
Premiums and other receivables ............................ 1,355,372 1,211,027
Reinsurance recoverables .................................. 3,646,711 3,163,073
Investments in real estate - at cost, less accumulated
depreciation ............................................ 289,726 281,923
Investment in investee company ............................ 158,961 157,667
Deferred policy acquisition costs ......................... 214,100 194,648
Excess of cost over fair value of net assets acquired, less
accumulated amortization ................................ 251,959 259,444
Other assets .............................................. 375,987 369,007
------------ -----------
$ 10,588,595 $ 9,988,213
============ ===========
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY
========================================================================================
<S> <C> <C>
Unearned premiums ......................................... $ 1,542,129 $ 1,299,465
Unpaid claims and related expenses ........................ 6,498,610 6,100,129
Accounts payable and accrued expenses ..................... 629,394 638,009
Reinsurance ceded premiums payable ........................ 362,130 325,246
Federal and foreign income taxes, including deferred taxes 42,470 68,597
Term loans and short-term debt ............................ 204,581 188,101
Debentures and notes ...................................... 690,327 690,318
------------ -----------
9,969,641 9,309,865
------------ -----------
Contingencies and commitments
Shareholders' equity:
Common stock, par value $.10 per-share, 225,000
shares authorized, 114,121 and 113,440 shares
issued and outstanding ................................ 11,412 11,344
Additional paid-in capital .............................. 539,743 535,091
Retained earnings (deficit) ............................. (76,614) (61,694)
Net unrealized gain on investments ...................... 168,801 219,356
Net unrealized loss on foreign currency translation ..... (24,388) (25,749)
------------ -----------
618,954 678,348
------------ -----------
$ 10,588,595 $ 9,988,213
============ ===========
</TABLE>
See notes to consolidated financial statements
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<PAGE>
RELIANCE GROUP HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY (UNAUDITED)
<TABLE>
<CAPTION>
Net
Unrealized
Net Loss on
Additional Retained Unrealized Foreign
Common Paid-In Earnings Gain on Currency Shareholders'
Stock Capital (Deficit) Investments Translation Equity
=================================================================================================================================
(In thousands, except per-share amount)
<S> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1996................. $ 11,344 $ 535,091 $ (61,694) $ 219,356 $ (25,749) $ 678,348
Issuance of common stock................. 68 5,047 5,115
Transactions of investee
company ............................... (395) (1,646) (2,041)
Net income .............................. 12,462 12,462
Dividends ($.24 per-share)............... (27,382) (27,382)
Depreciation after deferred
income taxes........................ (48,909) (48,909)
Foreign currency translation............. 1,361 1,361
---------- ------------ ------------- ------------- -------------- -------------
Balance, September 30, 1996.............. $ 11,412 $ 539,743 $ (76,614) $ 168,801 $ (24,388) $ 618,954
========== ============ ============= ============= ============== =============
</TABLE>
See notes to consolidated financial statements
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<PAGE>
RELIANCE GROUP HOLDINGS, INC.
CONSOLIDATED CONDENSED STATEMENT OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended September 30 1996 1995
========================================================================================
(In thousands)
<S> <C> <C>
CASH FLOWS FROM (USED BY) OPERATING ACTIVITIES .................. $ 23,093 $ (17,510)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of fixed maturities available for sale ...... 561,938 358,728
Proceeds from sales of fixed maturities held for investment ..... 28,910 39,218
Proceeds from redemptions of fixed maturities available for sale 88,505 20,640
Proceeds from redemptions of fixed maturities held for investment 28,602 17,811
Proceeds from sales of equity securities ........................ 283,607 350,508
Decrease (increase) in short-term investments - net ............. 244,423 (209,403)
Purchases of fixed maturities available for sale ................ (881,509) (256,386)
Purchases of fixed maturities held for investment ............... (75,431) (95,012)
Purchases of equity securities .................................. (263,559) (146,126)
Other - net ..................................................... (47,528) (13,445)
--------- ---------
(32,042) 66,533
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in term loans .......................................... 40,977 120,222
Decrease in short-term debt - net ............................... (2,058) (11,179)
Repayments of term loans ........................................ (25,363) (67,862)
Issuance of common stock ........................................ 5,115 690
Repurchases of senior reset notes ............................... -- (40,348)
Debt issuance costs ............................................. -- (1,000)
Dividends ....................................................... (27,382) (27,176)
Redemption of redeemable preferred stock of a subsidiary ........ -- (23,769)
--------- ---------
(8,711) (50,422)
--------- ---------
Decrease in cash ................................................ (17,660) (1,399)
Cash, beginning of period ....................................... 52,914 48,977
--------- ---------
Cash, end of period ............................................. $ 35,254 $ 47,578
========= =========
Supplemental disclosures of cash flow information:
Interest paid ................................................... $ 41,000 $ 42,200
========= =========
Income taxes paid ............................................... $ 4,700 $ 2,800
========= =========
</TABLE>
See notes to consolidated financial statements
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<PAGE>
RELIANCE GROUP HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
================================================================================
1. UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
In the opinion of management, the accompanying unaudited consolidated financial
statements include all adjustments (consisting of normal recurring accruals
only) considered necessary to present fairly the financial position at September
30, 1996, and the results of operations, changes in shareholders' equity and
cash flows for all periods presented. The results of operations for the interim
periods are not necessarily indicative of the results that may be expected for
any other interim period or for the entire year.
For a summary of significant accounting policies (which have not changed from
December 31, 1995) and additional financial information, see the Company's
Annual Report on Form 10-K for the year ended December 31, 1995.
2. EQUITY IN INVESTEE COMPANY
Equity income in Zenith National Insurance Corp. ("Zenith") was $2.5 million and
$7.4 million for the third quarter and first nine months of 1996 compared to
$2.1 million and $6.2 million in the corresponding 1995 periods. In addition, in
the third quarter and first nine months of 1995, the Company recognized an
after-tax loss of $4.5 million ($.04 per share) on the disposal of discontinued
life insurance operations by Zenith.
Summarized financial information for Zenith is as follows:
Nine Months Ended September 30 1996 1995
---------------------------------------------------------------------------
(In thousands, except per-share amounts)
Revenues........................................ $ 405,293 $ 388,328
Income from continuing operations
before income taxes .......................... 48,811 26,449
Loss on disposal of discontinued operations..... - (19,000)
Net income...................................... 32,200 5,300
Net income per-share............................ 1.81 .29
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<PAGE>
3. REINSURANCE
The reconciliation of property and casualty insurance direct premiums to net
premiums is as follows (in thousands):
Nine Months Ended September 30
-------------------------------------------------
1996 1995
-------------------------------------------------
Premiums Premiums Premiums Premiums
Written Earned Written Earned
----------- ----------- ----------- -----------
Direct.......... $ 2,242,993 $ 2,135,825 $ 2,027,009 $ 2,027,769
Assumed......... 248,527 244,052 264,566 268,665
Ceded........... (1,105,855) (1,047,258) (928,255) (954,874)
----------- ----------- ----------- -----------
Net Premiums.... $ 1,385,665 $ 1,332,619 $ 1,363,320 $ 1,341,560
=========== =========== =========== ===========
The reconciliation of property and casualty insurance gross policy claims and
settlement expenses to net policy claims and settlement expenses is as follows
(in thousands):
Nine Months Ended
September 30
-----------------------
1996 1995
----------- -----------
Gross...................................... $ 1,707,396 $ 1,472,419
Reinsurance recoveries..................... (671,178) (566,697)
----------- -----------
Net policy claims and settlement expenses.. $ 1,036,218 $ 905,722
=========== ===========
For the nine months ended September 30, 1996, gross policy claims and settlement
expenses include a charge of $134.5 million and net policy claims and settlement
expenses include a charge of $134.0 million to increase property and casualty
insurance loss reserves for asbestos-related and environmental pollution claims
for business written in or before 1987.
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<PAGE>
RELIANCE GROUP HOLDINGS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
OVERVIEW
The Company had income from continuing operations, before gains on sales of
investments, of $26.9 million ($.23 per share) in the third quarter of 1996
compared to $22.5 million ($.19 per share) in the corresponding 1995 period. The
improved results reflect increased title insurance operating income and the
continued strong performance of the property and casualty insurance operations.
The Company had a loss from continuing operations of $13.5 million ($.11 per
share) for the first nine months of 1996. This operating loss resulted from a
second quarter after-tax charge of $87.1 million ($.74 per share) to increase
property and casualty insurance net loss reserves for asbestos-related and
environmental pollution claims for business written in or before 1987. Excluding
the effects of this charge, income from continuing operations increased to $73.6
million ($.63 per share) for the first nine months of 1996 from $58.4 million
($.51 per share) in the corresponding prior year period reflecting improved
results in title insurance operations and the continued strong performance of
the property and casualty insurance operations. After-tax gains on sales of
investments were $10.8 million ($.09 per share) and $26.0 million ($.22 per
share) in the third quarter and first nine months of 1996 compared to $5.5
million ($.05 per share) and $17.6 million ($.15 per share) in the corresponding
1995 periods.
Net income was $37.7 million ($.32 per share) and $12.5 million ($.11 per share)
in the third quarter and first nine months of 1996 compared to $23.5 million
($.20 per share) and $68.1 million ($.56 per share) in the corresponding 1995
periods. In the third quarter and first nine months of 1995, the Company
recognized an after-tax loss of $4.5 million ($.04 per share) on the disposal of
discontinued life insurance operations by Zenith National Insurance Corp.
("Zenith"), an investee company. In the first nine months of 1995, the early
extinguishment of debt resulted in an after-tax extraordinary loss of $3.4
million ($.03 per share) and the early redemption of all the outstanding shares
of redeemable preferred stock of Reliance Insurance Company reduced earnings per
share by an additional $.03.
PROPERTY AND CASUALTY INSURANCE OPERATIONS
Net premiums written in the quarter and nine months ended September 30, 1996
were $470.4 million and $1.39 billion compared to $458.3 million and $1.36
billion in the corresponding 1995 periods. The increase in net premiums written
in 1996 reflects increases in commercial multiple peril, surety, reinsurance and
ocean and inland marine lines of business partially offset by lower net premiums
in workers' compensation business resulting from the shift by insureds to
captive insurance programs and other arrangements that reduce net premium
retention. Net premiums earned in the quarter and nine months ended September
30, 1996 were $453.8 million and $1.33 billion compared to $447.2 million and
$1.34 billion in the corresponding 1995 periods.
-8-
<PAGE>
Underwriting loss for the third quarter of 1996 was $10.8 million compared to
$10.9 million in the corresponding period of 1995. Underwriting results reflect
improvements in general liability, commercial multiple peril and reinsurance
lines offset by continued but lower profits from workers' compensation business
and an increase in losses from catastrophes. Underwriting loss for the first
nine months of 1996 was $161.6 million compared to $24.0 million in the
corresponding 1995 period. Included in the underwriting results for the first
nine months of 1996, is a second quarter pretax charge of $134.0 million to
increase net loss reserves for asbestos-related and environmental pollution
claims for business written in or before 1987. In the second quarter of 1996,
the Company completed a study of its asbestos-related and environmental
pollution reserves. The study entailed an extensive and detailed review of the
Company's claims, analysis of new industry data, review of policies and classes
of business written by the Company and industry at large, and new actuarial
methodologies for projecting ultimate losses based on payment patterns and
claims analyses. The loss reserve levels established represent the Company's
best estimate of its ultimate losses, based on the most current information and
actuarial methodologies available.
For the third quarter and first nine months of 1996, the combined ratios
(calculated on a GAAP basis), after policyholders' dividends, were 101.7% and
111.7% (101.6% for the first nine months of 1996 excluding the effects of the
$134.0 million pretax charge) compared to 101.8% and 101.5% in the corresponding
prior year periods.
PROPERTY AND CASUALTY INSURANCE INVESTMENT RESULTS
Net investment income of the property and casualty insurance operations
increased to $64.2 million and $190.5 million in the three-month and nine-month
periods ended September 30, 1996 from $61.7 million and $183.7 million in the
corresponding 1995 periods. These increases resulted from growth in the size of
the fixed maturity investment portfolio.
Gains on sales of investments increased to $15.7 million and $39.6 million in
the third quarter and first nine months of 1996 from $10.1 million and $25.9
million in the corresponding 1995 periods. Gains on sales of investments in 1996
primarily resulted from sales of equity securities.
TITLE INSURANCE OPERATIONS
Premiums and fees in the third quarter and first nine months of 1996 were $208.2
million and $576.0 million compared to $171.6 million and $481.9 million in the
corresponding 1995 periods. The increase in premiums and fees in 1996 resulted
from growth in residential resale and new home sale activity as well as
increased commercial real estate transactions.
-9-
<PAGE>
As a result of increased agency revenues, agency commissions in the third
quarter and first nine months of 1996 increased to $98.7 million and $263.1
million from $75.0 million and $221.5 million in the corresponding 1995 periods.
Other expenses were $88.8 million and $263.6 million in the third quarter and
first nine months of 1996 compared to $81.6 million and $235.0 million in the
corresponding 1995 periods. The expense ratios of the title insurance operations
(which includes agent commissions) were 89.5% and 90.8% in the third quarter and
first nine months of 1996 compared to 90.7% and 94.2% in the corresponding 1995
periods. The improvement in the expense ratios resulted from the increase in
direct title insurance premiums and effective expense control. The provision for
claim losses was $15.6 million and $47.5 million in the three-month and
nine-month periods ended September 30, 1996 compared to $14.9 million and $41.9
million in the corresponding 1995 periods.
INVESTMENT PORTFOLIO
At September 30, 1996, the Company's investment portfolio aggregated $4.03
billion (at cost), of which 11% 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. The
portfolio is managed to achieve a proper balance of safety, liquidity and
investment yields.
The Company's fixed maturity portfolio consists of investment grade securities
(those rated "BBB" or better by Standard & Poor's) and, to a lesser extent,
non-investment grade and non-rated securities. The risk of default is generally
considered to be greater for non-investment grade securities, when compared to
investment grade securities, since these issues may be more susceptible to
severe economic downturns. At September 30, 1996, the carrying values of
non-investment grade securities and securities not rated by Standard & Poor's
were $488.7 million (14% of the fixed income portfolio) and $80.7 million (2% of
the fixed income portfolio), respectively. At December 31, 1995, the carrying
values of non-investment grade and non-rated securities 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.
OTHER OPERATIONS
RCG International, Inc. ("RCG"), a subsidiary of the Company, provides technical
services in the information technology and energy industries. RCG's revenues
were $41.6 million and $119.2 million in the third quarter and first nine months
of 1996 compared to $36.5 million and $115.0 million in the corresponding 1995
periods which included, in the first nine months of 1995, $14.5 million related
to certain consulting operations which were sold in the second quarter of 1995.
The sale of these operations resulted in a pretax gain of $2.6 million. The
increase in revenues in 1996 resulted from continued growth in the information
technology business. RCG's operating expenses were $41.1 million and $116.9
million in the third quarter and first nine months of 1996 compared to $34.9
million
-10-
<PAGE>
and $108.0 million in the corresponding 1995 periods which included, in the
first nine months of 1995, $11.0 million related to the consulting operations
sold during the second quarter of 1995. RCG's revenues and expenses are included
in other revenues and other operating expenses in the accompanying consolidated
statement of income.
At September 30, 1996, the Company's real estate operations had holdings with a
carrying value of $289.7 million, which includes nine shopping centers with an
aggregate carrying value of $119.1 million, office buildings and other
commercial properties, with an aggregate carrying value of $108.5 million, and
undeveloped land with a carrying value of $62.1 million.
INTEREST EXPENSE
Interest expense declined to $22.2 million and $66.4 million in the third
quarter and first nine months of 1996 from $22.3 million and $68.0 million in
the corresponding 1995 periods resulting from lower interest rates partially
offset by higher average outstanding borrowings.
EQUITY IN INVESTEE COMPANY
Equity in investee company income was $2.5 million and $7.4 million in the third
quarter and the first nine months of 1996 compared to $2.1 million and $6.2
million in the corresponding 1995 periods from the Company's investment in
Zenith. These increases reflect Zenith's improved property and casualty
insurance underwriting results.
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 $93.7 million
for the nine months ended September 30, 1996. The Company's ability to pay cash
dividends and receive cash dividends has depended upon the provisions of certain
notes and debentures of the Company and upon the dividend paying abilities of
its insurance subsidiaries, respectively. 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
-11-
<PAGE>
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 the first
nine months of 1996 were $75.8 million. During 1996, $165.4 million would be
available for dividend payments by Reliance Insurance Company under Pennsylvania
law. The Company believes that Reliance Insurance Company's dividend paying
capability will be sufficient to meet its cash needs.
There is no assurance that Reliance Insurance Company will meet the tests in
effect from time to time under Pennsylvania 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 nine months ended September 30, 1996, Reliance
Insurance Company generated $74.9 million of cash flow from operating
activities. Reliance Insurance Company carefully monitors its cash, short-term
investments and marketable securities to maintain adequate balances for the
timely payment of claims and other operating requirements. At September 30,
1996, Reliance Insurance Company had $298.7 million of cash and short-term
investments.
For the nine months ended September 30, 1996, the Company generated $23.1
million of cash flow from operating activities, while in the corresponding 1995
period, the Company utilized $17.5 million of operating cash flow. This
improvement resulted from higher levels of operating cash flow from the title
insurance operations, reflecting an increase in their operating income.
The Company utilized $32.0 million of cash flow for investing activities for the
nine months ended September 30, 1996. For the nine months ended September 30,
1995, the Company generated $66.5 million of cash flow from investing
activities. Net sales of marketable securities generated $15.5 million of cash
flow in the first nine months of 1996 compared to $80.0 million in the
corresponding 1995 period.
The Company used $8.7 million of cash for financing activities for the nine
months ended September 30, 1996, primarily for the payment of dividends,
partially offset by additional
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<PAGE>
term loan borrowings. For the nine months ended September 30, 1995, the Company
used $50.4 million of cash for financing activities, principally for the
reduction of debt and the payment of dividends.
The Company has a revolving credit facility with various banks providing for
aggregate maximum outstanding borrowings of $100 million. At September 30, 1996,
borrowings aggregating $31 million were outstanding under this facility. On
November 8, 1996, the Company increased term loan borrowings by $25 million to
$162.5 million. The additional borrowings were used to redeem all outstanding
($25 million face amount) 9.48% senior reset notes due 2000.
A subsidiary of Reliance Financial Services Corporation, Saul P. Steinberg and
other executives of the Company are partners in a partnership which owns certain
real estate properties. At September 30, 1996, the partnership's total
outstanding debt was $172.6 million. As of September 30, 1996, Reliance
Financial Services Corporation ("Reliance Financial") guaranteed $38 million 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 $13 million.
Borrowings under the line of credit mature on June 30, 2005 and bear a fixed
interest rate of 10%. At September 30, 1996, borrowings of $8.8 million were
outstanding under the line of credit.
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.
-13-
<PAGE>
RELIANCE GROUP HOLDINGS, INC. AND SUBSIDIARIES
PART II. OTHER INFORMATION
- --------------------------------------------------------------------------------
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
27. Financial Data Schedule
(b) Reports on Form 8-K.
No reports on Form 8-K were filed during the quarter ended September
30, 1996.
-14-
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
RELIANCE GROUP HOLDINGS, INC.
(Registrant)
Date: November 13, 1996 /s/ George E. Bello
----------------- ----------------------------------------
George E. Bello
Executive Vice President and Controller
(Chief Accounting Officer)
-15-
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
Exhibit 27
This schedule contains summary financial information extracted from the
Company's Consolidated Balance Sheet and the Consolidated Statement of Income
and is qualified in its entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<DEBT-HELD-FOR-SALE> 2,528,576
<DEBT-CARRYING-VALUE> 776,457
<DEBT-MARKET-VALUE> 776,759
<EQUITIES> 688,917
<MORTGAGE> 0
<REAL-ESTATE> 289,726
<TOTAL-INVEST> 4,550,251
<CASH> 35,254
<RECOVER-REINSURE> 3,646,711
<DEFERRED-ACQUISITION> 214,100
<TOTAL-ASSETS> 10,588,595
<POLICY-LOSSES> 6,498,610
<UNEARNED-PREMIUMS> 1,542,129
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 894,908
0
0
<COMMON> 11,412
<OTHER-SE> 607,542
<TOTAL-LIABILITY-AND-EQUITY> 10,588,595
1,908,599
<INVESTMENT-INCOME> 213,200
<INVESTMENT-GAINS> 39,946
<OTHER-INCOME> 124,047
<BENEFITS> 1,083,679
<UNDERWRITING-AMORTIZATION> 979,721
<UNDERWRITING-OTHER> 0
<INCOME-PRETAX> (862)
<INCOME-TAX> 5,900
<INCOME-CONTINUING> 12,462
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 12,462
<EPS-PRIMARY> $0.11
<EPS-DILUTED> 0
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
