<PAGE>
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
X
--- QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended June 30, 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 August 1, 1996, 114,093,000 shares of common stock of Reliance Group
Holdings, Inc. were outstanding.
<PAGE>
RELIANCE GROUP HOLDINGS, INC. AND SUBSIDIARIES
INDEX
Page
No.
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statement of Operations for the Quarters
and Six-Month Periods Ended June 30, 1996
and 1995 (Unaudited)..................................... 2
Consolidated Balance Sheet at June 30, 1996 (Unaudited) and
December 31, 1995........................................ 3
Consolidated Statement of Changes in Shareholders' Equity
for the Six-Month Period Ended June 30, 1996
(Unaudited).............................................. 4
Consolidated Condensed Statement of Cash Flows for the
Six-Month Periods Ended June 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........................................................... 16
<PAGE>
RELIANCE GROUP HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
Quarter Ended Six Months Ended
June 30 June 30
1996 1995 1996 1995
(In thousands, except per-share amounts)
==========================================================================================================
<S> <C> <C> <C> <C>
Revenues:
Premiums earned...................................... $ 636,752 $ 599,957 $1,246,619 $1,204,623
Net investment income................................ 70,443 66,362 141,160 135,740
Gain on sales of investments......................... 18,936 7,669 23,404 15,955
Other................................................ 41,765 42,189 80,499 81,165
--------- --------- ---------- ----------
767,896 716,177 1,491,682 1,437,483
--------- --------- ---------- ----------
Claims and expenses:
Policy claims and settlement expenses................ 440,360 304,809 757,067 628,564
Policy acquisition costs and other insurance
expenses........................................... 334,695 306,812 640,190 602,216
Interest............................................. 22,015 22,532 44,272 45,669
Other operating expenses............................. 52,339 49,585 101,978 100,809
--------- --------- ---------- ----------
849,409 683,738 1,543,507 1,377,258
--------- --------- ---------- ----------
Income (loss) before income taxes and equity
in investee company.............................. (81,513) 32,439 (51,825) 60,225
Income tax (provision) benefit....................... 30,900 (8,400) 21,700 (16,400)
Equity in investee company........................... 2,912 2,399 4,936 4,153
--------- --------- ---------- ----------
Income (loss) before extraordinary item.............. (47,701) 26,438 (25,189) 47,978
Extraordinary item - early extinguishment of debt.... -- (3,363) -- (3,363)
--------- --------- ---------- ----------
Net income (loss).................................... $ (47,701) $ 23,075 $ (25,189) $ 44,615
========= ======== ========== ==========
Per-share information:
Income (loss) before extraordinary item.............. $ (.41) $ .23 $ (.21) $ .42
Extraordinary item - early extinguishment of debt.... -- (.06) -- (.06)
--------- --------- ---------- ----------
Net income (loss).................................... $ (.41) $ .17 $ (.21) $ .36
========= ======== ========== ==========
Average number of common and common equivalent
shares outstanding................................. 117,610 115,548 117,552 115,180
</TABLE>
See notes to consolidated financial statements
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<PAGE>
RELIANCE GROUP HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
June 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 $771,303 and $791,459)................... $ 773,314 $ 753,563
Fixed maturities available for sale - at quoted market
(amortized cost $2,445,725 and $2,299,510).............. 2,423,934 2,371,995
Equity securities - at quoted market (cost $434,755
and $408,054)........................................... 710,652 672,668
Short-term investments..................................... 256,452 500,284
Cash............................................................ 41,847 52,914
Premiums and other receivables.................................. 1,368,895 1,211,027
Reinsurance recoverables........................................ 3,365,620 3,163,073
Investments in real estate - at cost, less accumulated
depreciation............................................... 285,261 281,923
Investment in investee company.................................. 159,510 157,667
Deferred policy acquisition costs............................... 207,315 194,648
Excess of cost over fair value of net assets acquired, less
accumulated amortization.................................. 254,454 259,444
Other assets.................................................... 350,272 369,007
----------- ----------
$10,197,526 $9,988,213
=========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Unearned premiums............................................... $ 1,396,879 $1,299,465
Unpaid claims and related expenses.............................. 6,324,153 6,100,129
Accounts payable and accrued expenses........................... 617,393 638,009
Reinsurance ceded premiums payable.............................. 354,347 325,246
Federal and foreign income taxes, including deferred taxes...... 23,044 68,597
Term loans and short-term debt.................................. 205,171 188,101
Debentures and notes............................................ 690,324 690,318
----------- ----------
9,611,311 9,309,865
----------- ----------
Contingencies and commitments
Shareholders' equity:
Common stock, par value $.10 per-share, 225,000
shares authorized, 114,073 and 113,440 shares
issued and outstanding................................... 11,407 11,344
Additional paid-in capital................................. 539,812 535,091
Retained earnings (deficit)................................ (105,136) (61,694)
Net unrealized gain on investments......................... 164,087 219,356
Net unrealized loss on foreign currency translation........ (23,955) (25,749)
----------- ----------
586,215 678,348
----------- ----------
$10,197,526 $9,988,213
=========== ==========
</TABLE>
See notes to consolidated financial statements
-3-
<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) $678,348
Issuance of common stock....... 63 4,869 4,932
Transactions of investee
company .................. (148) (562) (710)
Net loss ...................... (25,189) (25,189)
Dividends ($.16 per-share)..... (18,253) (18,253)
Depreciation after deferred
income taxes.............. (54,707) (54,707)
Foreign currency translation... 1,794 1,794
------- -------- --------- -------- -------- --------
Balance, June 30, 1996......... $11,407 $539,812 $(105,136) $164,087 $(23,955) $586,215
======= ======== ========= ======== ======== ========
</TABLE>
See notes to consolidated financial statements
-4-
<PAGE>
RELIANCE GROUP HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENT OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
Six Months Ended June 30 1996 1995
(In thousands)
==================================================================================================
<S> <C> <C>
CASH FLOWS USED BY OPERATING ACTIVITIES................................. $ (72,582) $(127,028)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of fixed maturities available for sale.............. 526,810 265,736
Proceeds from sales of fixed maturities held for investment............. -- 14,419
Proceeds from redemptions of fixed maturities available for sale....... 45,317 18,060
Proceeds from redemptions of fixed maturities held for investment...... 24,790 667
Proceeds from sales of equity securities............................... 214,307 170,522
Decrease in short-term investments - net............................... 250,256 4,760
Purchases of fixed maturities available for sale....................... (724,354) (110,903)
Purchases of fixed maturities held for investment...................... (42,976) (57,413)
Purchases of equity securities......................................... (202,061) (128,745)
Other - net............................................................ (34,300) 647
--------- ---------
57,789 177,750
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in term loans................................................. 30,894 110,146
Decrease in short-term debt - net...................................... (3,606) (11,474)
Repayments of term loans............................................... (10,241) (42,741)
Issuance of common stock............................................... 4,932 416
Repurchases of senior reset notes...................................... -- (40,348)
Debt issuance costs.................................................... -- (1,000)
Dividends.............................................................. (18,253) (18,113)
Redemption of redeemable preferred stock of a subsidiary............... -- (23,769)
--------- ---------
3,726 (26,883)
--------- ---------
Increase (decrease) in cash............................................ (11,067) 23,839
Cash, beginning of period.............................................. 52,914 48,977
--------- ---------
Cash, end of period.................................................... $ 41,847 $ 72,816
========= =========
Supplemental disclosures of cash flow information:
Interest paid.......................................................... $ 38,100 $ 38,900
========= =========
Income taxes paid...................................................... $ 2,900 $ 100
========= =========
</TABLE>
See notes to consolidated financial statements
-5-
<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 June 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. was $2.9 million and $4.9
million for the second quarter and first six months of 1996 compared to $2.4
million and $4.2 million in the corresponding 1995 periods.
Summarized financial information for Zenith National Insurance Corp. is as
follows:
Six Months Ended June 30 1996 1995
- ------------------------------------------------------------------------
(In thousands, except per-share amounts)
Revenues................................... $ 268,227 $ 258,010
Income from continuing operations
before income taxes .................... 35,065 17,975
Net income................................. 23,100 17,100
Net income per-share....................... 1.30 .91
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<PAGE>
3. REINSURANCE
The reconciliation of property and casualty insurance direct premiums to net
premiums is as follows (in thousands):
Six Months Ended June 30
---------------------------------------------
1996 1995
---------------------------------------------
Premiums Premiums Premiums Premiums
Written Earned Written Earned
--------- -------- -------- --------
Direct.................... $1,464,406 $1,394,503 $1,322,851 $1,323,347
Assumed................... 181,028 163,302 201,811 188,878
Ceded..................... (730,179) (678,993) (619,607) (617,862)
---------- ---------- --------- ----------
Net Premiums.............. $ 915,255 $ 878,812 $ 905,055 $ 894,363
========== ========== ========= ==========
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):
Six Months Ended June 30
------------------------
1996 1995
---------- ----------
Gross.......................................... $1,120,321 $1,004,698
Reinsurance recoveries......................... (395,067) (403,186)
---------- ----------
Net policy claims and settlement expenses...... $ 725,254 $ 601,512
========== ==========
For the six months ended June 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 1987 and prior years.
-7-
<PAGE>
RELIANCE GROUP HOLDINGS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
================================================================================
OVERVIEW
The Company had a loss from operations, before gains on sales of investments, of
$60.0 million ($.51 per share) and $40.4 million ($.34 per share) in the second
quarter and first six months of 1996. These losses 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 1987 and prior years. This charge more
than offset the otherwise positive underwriting results of the Company's
property and casualty insurance operations and the improved results of its title
insurance operations. Excluding the effects of this charge, income from
operations was $27.1 million ($.23 per share) and $46.7 million ($.40 per share)
in the quarter and six months ended June 30, 1996 compared to $19.8 million
($.17 per share) and $35.9 million ($.31 per share) in the corresponding 1995
periods. After-tax gains on sales of investments were $12.3 million ($.10 per
share) and $15.2 million ($.13 per share) in the second quarter and first six
months of 1996 compared to $6.7 million ($.06 per share) and $12.1 million ($.11
per share) in the corresponding 1995 periods, which included a second quarter
gain of $1.7 million related to the sale of certain consulting operations.
The net loss was $47.7 million ($.41 per share) and $25.2 million ($.21 per
share) in the second quarter and first six months of 1996. Net income was $23.1
million ($.17 per share) and $44.6 million ($.36 per share) in the second
quarter and first six months of 1995. In the second quarter of 1995, the early
extinguishment of debt resulted in an 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 six months ended June 30, 1996 were
$439.8 million and $915.3 million compared to $444.1 million and $905.1 million
in the corresponding 1995 periods. The decline in net premiums written in the
second quarter of 1996, when compared to the corresponding 1995 period,
primarily reflects lower net premiums in workers' compensation business
resulting from the shift by insureds to high deductibles, captive insurance
programs and other arrangements that reduce net premium retention, as well as a
decline in premiums in the general liability line. These declines were partially
offset by growth in commercial automobile and reinsurance lines. Net premiums
earned in the quarter and six months ended June 30,1996 were $439.0 million and
$878.8 million compared to $442.6 million and $894.4 million in the
corresponding 1995 periods.
-8-
<PAGE>
Underwriting losses for the second quarter and first six months of 1996 were
$140.7 million and $150.8 million. Included in the 1996 underwriting results 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
1987 and prior years. 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.
Excluding the effects of this pretax charge, underwriting losses were $6.7
million and $16.8 million in the second quarter and first six months of 1996
compared to $7.9 million and $13.1 million in the corresponding prior-year
periods. Underwriting results in the second quarter of 1996, when compared to
the corresponding 1995 period, reflect improvements in general liability and
fire and allied lines offset by increased underwriting losses in the commercial
automobile line. Underwriting results for the first six months of 1996 reflect
losses resulting from the harsh winter conditions in the first quarter. For the
second quarter and first six months of 1996, the combined ratios (calculated on
a GAAP basis), after policyholders' dividends, were 131.6% and 116.8% (101.1%
and 101.6% excluding the effects of the $134.0 million pretax charge) compared
to 101.3% in both the second quarter and first six months of 1995.
PROPERTY AND CASUALTY INSURANCE INVESTMENT RESULTS
Net investment income of the property and casualty insurance operations
increased to $63.0 million and $126.3 million in the three-month and six-month
periods ended June 30,1996 from $59.5 million and $121.9 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 $19.9 million and $23.8 million in
the second quarter and first six months of 1996 from $7.7 million and $15.7
million in the corresponding 1995 periods, reflecting increased gains on sales
of equity securities.
TITLE INSURANCE OPERATIONS
Premiums and fees in the second quarter and first six months of 1996 were $197.7
million and $367.8 million compared to $157.4 million and $310.3 million in the
corresponding 1995 periods. The increase in premium and fees in 1996 resulted
from growth in residential resale and refinancing activity as well as increased
commercial real estate transactions.
-9-
<PAGE>
As a result of increased agency revenues, agency commissions in the second
quarter and first six months of 1996 increased to $88.7 million and $164.5
million from $71.3 million and $146.5 million in the corresponding 1995 periods.
Other expenses were $90.9 million and $174.7 million in the second quarter and
first half of 1996 compared to $77.9 million and $153.5 million in the
corresponding 1995 periods. The expense ratios of the title insurance operations
(which includes agent commissions) were 90.2% and 91.5% in the second quarter
and first six months of 1996 compared to 93.6% and 96.2% in the corresponding
1995 periods. The improvement in the expense ratios resulted from the increase
in direct title insurance premiums. The provision for claim losses was $17.2
million and $31.8 million in the three-month and six-month periods ended June
30, 1996 compared to $13.8 million and $27.1 million in the corresponding 1995
periods.
INVESTMENT PORTFOLIO
At June 30, 1996, the Company's investment portfolio aggregated $3.95 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 June 30, 1996, the carrying values of
non-investment grade securities and securities not rated by Standard & Poor's
were $420.7 million (12% of the fixed income portfolio) and $47.6 million (1% 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 $40.0 million and $77.6 million in the second quarter and first half of
1996 compared to $40.7 million and $78.5 million in the corresponding 1995
periods, which included $7.4 million and $14.5 million, respectively, 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. Excluding
revenues pertaining to operations sold, revenues increased 20.2% and 21.4% in
the second quarter and first six months of 1996 compared to the corresponding
1995 periods, resulting from continued growth in the information technology
business. RCG's
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<PAGE>
operating expenses were $39.2 million and $75.8 million in the
second quarter and first half of 1996 compared to $36.3 million and $73.2
million in the corresponding 1995 periods, which included $4.4 million and $11.0
million, respectively, 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 operations.
At June 30, 1996, the Company's real estate operations had holdings with a
carrying value of $285.3 million, which includes nine shopping centers with an
aggregate carrying value of $119.6 million, office buildings and other
commercial properties, with an aggregate carrying value of $103.8 million, and
undeveloped land with a carrying value of $61.9 million.
INTEREST EXPENSE
Interest expense declined to $22.0 million and $44.3 million in the second
quarter and first six months of 1996 from $22.5 million and $45.7 million in the
corresponding 1995 periods reflecting lower interest rates.
EQUITY IN INVESTEE COMPANY
Equity in investee company income was $2.9 million and $4.9 million in the
second quarter and the first six months of 1996 compared to $2.4 million and
$4.2 million in the corresponding 1995 periods from the Company's investment in
Zenith National Insurance Corp. ("Zenith"). These increases reflect Zenith's
improved property and casualty 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 $72.7 million
for the six months ended June 30, 1996. The Company's ability to receive and pay
cash dividends has depended upon and continues to depend upon the dividend
paying abilities 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
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<PAGE>
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 the first
six months of 1996 were $55.7 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 six months ended June 30, 1996, Reliance Insurance
Company utilized $23.0 million of cash flow for operating activities. Cash flow
from operating activities is traditionally low during the first half of the
year, reflecting the increase in accounts receivable and payments of certain
expenses, such as premium taxes and contingent commissions of the property and
casualty insurance operations, which are accrued during the previous year.
Reliance Insurance Company carefully monitors its cash, short-term investments
and marketable securities to maintain adequate balances for the timely payment
of claims and other operating requirements. At June 30, 1996, Reliance Insurance
Company had $295.1 million of cash and short-term investments.
For the six months ended June 30, 1996, the Company utilized $72.6 million of
cash flow for operating activities compared to $127.0 million in the
corresponding 1995 period. This improvement resulted from higher levels of
operating cash flow from the title insurance operations, reflecting an increase
in their operating income.
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<PAGE>
The Company generated $57.8 million of cash flow from investing activities for
the six months ended June 30, 1996 compared to $177.8 million in the
corresponding 1995 period. Net sales of marketable securities generated $92.1
million of cash flow in the first six months of 1996 compared to $177.1 million
in the corresponding 1995 period.
The Company generated $3.7 million of cash flow from financing activities for
the six months ended June 30, 1996, primarily from term loan borrowings. For the
six months ended June 30, 1995, the Company used $26.9 million of cash flow 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 June 30, 1996,
borrowings aggregating $35 million were outstanding under this facility.
On July 17, 1996, the Company announced that it intends to purchase up to
1,650,000 shares of its outstanding common stock in the open market. The shares
are subject to purchase from time to time depending upon market conditions.
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 June 30, 1996, the partnership's total outstanding
debt was $171.9 million. As of June 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 $13.0 million. Borrowings under the
line of credit mature on June 30, 2005 and bear a fixed interest rate of 10%. At
June 30, 1996, borrowings of $7.9 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 4. Submission of Matters to a Vote of Security Holders.
On May 8, 1996, at the annual meeting of stockholders of the Company,
the stockholders elected the thirteen directors set forth below and
voted upon and authorized the adoption by the Company of the Amended
Reliance Group Holdings, Inc. Executive Bonus Plan. The number of votes
cast for, against (where applicable) or withheld, as well as the number
of abstentions and broker non-votes (where applicable), were as
follows:
Proposal - Election of Directors:
For Withheld
---------- --------
Saul P. Steinberg 96,588,499 642,904
Robert M. Steinberg 96,583,383 648,020
George R. Baker 96,605,356 626,047
George E. Bello 96,608,460 622,943
Dennis A. Busti 96,610,349 621,054
Lowell C. Freiberg 96,607,557 623,846
Dr. Thomas P. Gerrity 96,607,753 623,650
Jewell Jackson McCabe 96,604,964 626,439
Irving Schneider 96,598,120 633,283
Bernard L. Schwartz 96,601,517 629,886
Richard E. Snyder 96,605,873 625,530
Thomas J. Stanton, Jr. 96,597,656 633,747
James E. Yacobucci 96,609,535 621,868
Proposal - Amended Reliance Group Holdings, Inc. Executive Bonus Plan
---------------------------------------------------------------------
For: 90,767,130
Against: 4,962,746
Abstain: 294,775
Broker Non-Votes: 1,206,752
-14-
<PAGE>
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
10.1 Employment Agreement between Reliance Group Holdings, Inc. and
Bruce L. Sokoloff, dated as of May 15, 1996.
27. Financial Data Schedule
(b) Reports on Form 8-K.
No reports on Form 8-K were filed during the quarter ended June
30, 1996.
-15-
<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: August 13, 1996 /s/ George E. Bello
---------------------------------------
George E. Bello
Executive Vice President and Controller
(Chief Accounting Officer)
-16-
<PAGE>
EMPLOYMENT AGREEMENT
THIS AGREEMENT is made and entered into and as of the 15th day
of May 1996, by and between Bruce L. Sokoloff (the "Executive") and RELIANCE
GROUP HOLDINGS, INC., a Delaware corporation having its principal place of
business at Park Avenue Plaza, 55 East 52nd Street, New York, New York 10055
(the "Company").
1. Employment.
(a) The Company agrees to employ the Executive, and the
Executive agrees to be employed by the Company, as a senior executive officer of
the Company having his existing title and duties. During the term hereinafter
specified, the Executive agrees to perform such duties and render such services,
consistent with his current duties and services, as from time to time may be
requested of him by the chief executive officer or the Board of Directors of the
Company or any duly empowered committee thereof (the "Board of Directors").
(b) During the term of this Agreement, the Executive shall
devote his full working time during customary business hours and his best
efforts, and apply all of his skill and experience, to the proper performance of
his duties hereunder and to the business and affairs of the Company and its
subsidiaries.
2. Term. Subject to Sections 4 and 5 hereof, the term of
employment of the Executive hereunder shall be for the period commencing on the
date hereof and ending on February 14, 2001; provided that such term may be
extended, at the option of either the Company or the Executive, for three
successive one year periods thereafter by written notice to the Executive from
the Company or to the Company from the Executive, as the case may be, given at
least sixty (60) days prior to the end of the then applicable term of
employment.
3. Compensation.
(a) Base Salary. The Company will pay to the Executive during
the term of his employment hereunder a base salary ("Base Salary") of not less
than Executive's annual base salary on January 1, 1996, payable in accordance
with the Company's usual and customary pay procedures. The Base Salary shall be
subject to increase by the Board of Directors in their absolute discretion
during the term of the Executive's employment hereunder. Any increase in the
base salary shall become the new Base Salary for all purposes hereof.
Notwithstanding the foregoing, in any year in which the current chief executive
officer and the current chief operating officer of the Company have their base
salaries from the Company and its affiliates reduced, the Executive's Base
Salary may be reduced by a percentage equal to the percentage reduction of base
salary of the chief executive officer or the chief operating officer, whichever
is lower, provided that the
<PAGE>
reduction of the Executive's Base Salary shall in no case exceed 15% of his
prior year's Base Salary.
(b) Bonus. For each calendar year of the Company during the
term of the Executive's employment, the Executive shall be eligible to receive a
bonus based on a percentage of his Base Salary for such year as determined by
the Company in its discretion, provided that, except in the case of the bonus
for the calendar year in which this Agreement terminates in accordance with
Section 2 hereof, the Executive has not "voluntarily resigned" or been
terminated for "cause" prior to the time of payment of the bonus.
(c) Reimbursement of Expenses. The Company shall pay or
reimburse the Executive for all reasonable business expenses actually incurred
or paid by the Executive during the term of his employment under this Agreement
in the performance of his services hereunder in accordance with the current
policies of the Company applicable to the Executive, subject to modification
from time to time hereafter, provided that such modification does not
significantly and adversely affect the Executive's payments or reimbursements
thereunder. Such payment or reimbursement shall be made upon presentation of
expense statements or vouchers or such other supporting information as the
Company may customarily require of its senior executives.
(d) Vacations. The Executive shall be entitled to not less
than four weeks' paid vacation. Vacation shall be taken at times reasonably
consistent with the needs of the Company. Vacation earned for a year but not
taken during that year shall not be paid for nor taken in a subsequent year.
(e) Supplementary Pension Benefits. For purposes of the
Company's Supplemental Pension Plan, (i) the pension benefit payable to the
Executive shall be calculated using total IRS Form W-2 compensation (excluding
any compensation attributable to exercise of employee stock options) for the
immediately preceding five years instead of Base Salary for such period, and
(ii) the Executive will be credited with all years of actual service with the
Company and its predecessors and with all years during which the Executive could
have received payments pursuant to Section 2 hereof, unless he is terminated for
cause in which case he be credited only with all years of actual service with
the Company and its predecessors.
(f) Perquisites. The Executive shall be entitled to such
other perquisites as are currently provided to the Executive.
(g) Withholding. The Executive acknowledges and agrees that
the Company shall be entitled to withhold from his compensation, or otherwise
provide for, all federal, state or local income or other taxes which the Company
determines are required to be withheld on amounts payable to the Executive
pursuant to this Agreement or otherwise.
2
<PAGE>
4. Termination of Employment.
(a) With or Without Cause; Resignation. The Company shall have
the right to terminate the employment of the Executive with or without "cause"
(as hereinafter defined) and the Executive shall have the right to resign from
his employment by the Company. If (i) the Executive's employment with the
Company is (i) terminated for "cause", or (ii) the Executive has "voluntarily
resigned" (as hereinafter defined) his employment, the Company shall have no
further obligation to the Executive hereunder, except, in the case of clause
(ii), to pay to the Executive the amounts, if any, due him pursuant to
subsections (c), (d) and (e) of Section 3 hereof.
(b) Definitions of Cause and Voluntarily Resigned. For
purposes of this Agreement, "cause" shall mean:
(i) conviction of the Executive of a felony, or
of any lesser crime or offense involving the property
of the Company or any of its subsidiaries or
affiliates;
(ii) willful misconduct by the Executive in
connection with the performance of his duties
hereunder, or material and wilful breach by him of
any of the provisions of this Agreement and failure
to cure such misconduct or breach within two (2)
weeks after receipt of written notice thereof;
(iii) the Executive's conviction in a court of law of
any criminal offense involving moral turpitude under
the laws of the United States or any other
jurisdiction the laws of which may apply; and
(iv) the Executive's willful failure to perform
specific written directives of the Board of Directors
of the Company, which directives are consistent with
the scope and nature of the Executive's existing
duties and responsibilities as set forth in Section 1
hereof, and failure to cure such failure within two
(2) weeks after receipt of written notice thereof.
For purposes of this Agreement, "voluntarily resigned" shall mean the
Executive's decision to no longer serve as an executive officer of the Company,
which decision shall not have resulted from any of the following:
(i) a substantial diminution of the Executive's
duties without the Executive's written consent;
(ii) a demotion in title;
3
<PAGE>
(iii) a relocation or attempted relocation of the
Executive without the Executive's written consent to
an office outside a 25-mile radius of New York City;
or
(iv) an increase in any year in the amount of travel
required of the Executive by more than 20% of the
average amount of travel required during the previous
three years.
(c) Discharge Without Cause; Resignation. If the Executive is
discharged without "cause" or has not "voluntarily resigned", the Company shall
have no obligation to the Executive hereunder, except (i) to continue to provide
the Executive with the benefits under the medical and dental plans of the
Company then in effect for senior executives of the Company until February 14,
2004, at the same charge to the Executive as he would have paid as an active
employee of the Company, (ii) to fully vest all stock option grants held by the
Executive and permit the immediate exercise thereof for a period of 12 months
after the date of such discharge or such resignation, (iii) to pay to the
Executive, within 20 days after the date of such discharge or such resignation,
a lump sum in the amount determined by multiplying (A) the number of years
(including fractional years) remaining from the date of such discharge or such
resignation to February 14, 2004, times (B) the sum of Base Salary and the
average bonus paid pursuant to subsection (b) of Section 3 hereof for the two
years immediately prior to the date of such discharge or such resignation and
(iv) to pay the amounts due him under subsections (c), (d) and (e) of Section 3
hereof.
5. Death or Disability.
(a) Termination. The term of employment of the Executive shall
terminate forthwith in the event of the death of the Executive, and, at the
option of the Company upon written notice to the Executive, in the event that
the Executive shall fail for a period of four consecutive months to render and
perform the services required of him under this Agreement because of
"disability" (as currently defined in the Company's existing long-term
disability plan). Upon a termination of the Executive's employment hereunder
because of death or "disability", the Executive shall be entitled to receive and
shall be paid as provided for in subsection (b) of Section 5 hereof and the
Company shall have no further obligation to him hereunder, except (i) to pay to
the Executive or his estate, as the case may be, the amounts, if any, due him
pursuant to subsection (c), (d) and (e) of Section 3 hereof and (ii) solely in
the case of "disability", to continue to provide the Executive with the benefits
under the medical and dental plans of the Company then in effect for senior
executives of the Company until February 14, 2004, at the same charge to the
Executive as he would have paid as an active employee of the Company.
(b) Payments Required.
(i) In the event of the death of the Executive, his
estate shall be paid, within 20 days after the date
of his death, a lump sum in the
4
<PAGE>
amount equal to the sum of (A) Base Salary for one
year from the date of his death and (B) the average
bonus paid pursuant to subsection (b) of Section 3
hereof for the two years immediately prior to the
date of the Executive's death.
(ii) In the event of a "total disability" (as
currently defined in the Company's existing long-term
disability plan), the Executive shall continue to be
paid, until the third anniversary of the date of his
termination for "disability", his Base Salary and
shall receive a bonus, at the time bonuses are paid
to other senior executives, in an amount equal to the
average bonus paid pursuant to subsection (b) of
Section 3 hereof for the two years immediately prior
to the date of the Executive's termination for
"disability".
(iii) In the event of a "partial disability" (as
currently defined in the Company's existing long-term
disability plan), the Executive shall continue to be
paid, until the fifth (fourth, if such termination
occurs in 2002, third, if such event occurs in 2003,
second, if such event occurs in 2004) anniversary of
the date of his termination for "disability", his
Base Salary and shall receive a bonus, at the time
bonuses are paid to other senior executives, in an
amount equal to the average bonus paid pursuant to
subsection (b) of Section 3 hereof for the two years
immediately prior to the date of the Executive's
termination for "disability".
(iv) All amounts payable pursuant to clause (ii) or
(iii) of this subsection (b) shall be reduced by
amounts paid to the Executive under any of the
Company's disability plans.
6. Covenant Not to Interfere; Confidential Information; and
Injunctive Relief.
(a) Covenant Not to Interfere. The Executive agrees and
covenants that, for a period of two (2) years after the date of expiration or
termination of this Agreement, the Executive shall not, without the prior
written approval of the Board of Directors, Interfere directly or indirectly in
any way with the Company or any of its affiliates. For purposes of this
Agreement, "Interfere" shall mean, to influence or attempt to influence,
directly or indirectly, present or prospective clients (i.e., persons or
entities identified by the Company as prospective clients of the Company or any
of its affiliates within twelve (12) months of termination or expiration of the
Executive's employment hereunder and with whom the Company or such affiliates
have had substantial contact), employees, or independent contractors of the
Company or any of its affiliates to restrict, reduce, sever or otherwise alter
their relationship with the Company or any of its affiliates. In the event any
court having jurisdiction shall reduce the duration or scope of the covenant not
to interfere set forth in this subsection (a), such covenant, in its reduced
form, shall be enforceable.
5
<PAGE>
(b) Confidential Information. The Executive agrees that during
the term of his employment and thereafter, he shall not disclose, without the
prior written consent of the Board of Directors, directly or indirectly, any
confidential or non-public proprietary knowledge or information pertaining to
the Company or any of its affiliates, including, without limitation, with
respect to their management, financial condition, subscription, mailing or
customer lists, sources of supply, business, personnel, policies or prospects,
to any person, firm, corporation or other entity, for any reason or purposes
whatsoever or use such knowledge or information (other than in connection with
his duties hereunder).
(c) Memoranda, Etc. The Executive acknowledges and agrees that
all memoranda, notes, reports, records and other documents made or compiled by
the Executive, or made available to the Executive during the term of his
employment concerning the business of the Company or any of its affiliates,
shall be the Company's property and shall be delivered to the Company upon the
termination of the Executive's employment hereunder or at any other time upon
request by the Board of Directors. Following the expiration or termination of
the Executive's employment hereunder, the Executive agrees to cooperate, for a
period of five (5) years with respect to legal matters and for a period of one
(1) year with respect to all other matters, with the Company and its affiliates
with respect to matters with which the Executive was involved during the term of
his employment.
(d) Survival. The provisions of this Section 6 shall survive
the termination or expiration of this Agreement and the Executive's term of
employment hereunder.
(e) Injunctive Relief. The Executive consents and agrees that,
if he violates any of the provisions of this Agreement with respect to
non-interference or confidentiality, the Company would sustain irreparable harm
and, therefore, in addition to any other remedies which the Company may have
under this Agreement or otherwise, the Company shall be entitled to apply to any
court of competent jurisdiction for an injunction restraining the Executive from
committing or continuing any such violation of this Agreement, and the Executive
shall not object to any such application.
7. Assignment.
(a) This Agreement is personal as to the Executive and shall
not be assignable by the Executive.
(b) This Agreement shall not be assigned by the Company
without the prior written consent of the Executive.
8. Notices. All notices, requests, demands and other
communications hereunder shall be in writing and shall be deemed to have been
duly given if delivered personally (when delivered), sent by registered mail,
return receipt requested (upon confirmation of receipt) or by recognized
overnight courier (one day after being sent) to the address shown
6
<PAGE>
below, or to such other address as the applicable party hereto may designate by
notice to the other party given as herein provided:
If to the Company, to:
Reliance Group Holdings, Inc.
55 East 52nd Street
New York, New York 10055
Attention: Chief Executive Officer
If to the Executive to:
Bruce L. Sokoloff
16 East 68th Street
New York, New York 10021
9. Complete Understanding. This Agreement constitutes the sole
and entire agreement between the Executive and the Company with respect to the
Company's continued employment of the Executive and shall not be altered,
modified or amended except by written instrument signed by the party against
whom such alteration, modification or amendment is sought to be enforced. This
Agreement does not alter, amend or modify any rights of the Executive to
indemnification under either the Company's Charter or By-laws or his
indemnification agreement with the Company.
10. Binding Effect. This Agreement shall be binding upon and shall
inure to the benefit of and be enforceable by the parties hereto and their
respective heirs, executors, administrators, successors and assigns.
11. Termination of Agreement. This Agreement (other than the
provisions of Sections 3(e), 4 (c), 5(b) and 6 hereof) shall terminate upon the
expiration or termination, in accordance with the terms hereof, of the
Executive's employment hereunder.
12. Governing Law. This Agreement shall be governed by and
construed in accordance with the laws of the State of New York.
13. Severability. The invalidity of all or any part of any
provision of this Agreement shall not invalidate the remainder of this Agreement
or the remainder of any paragraph which can be given effect without such invalid
provision.
14. Paragraph Headings. The paragraph headings contained in this
Agreement are for reference purposes only and shall not affect in any way the
meaning or interpretation of this Agreement.
7
<PAGE>
IN WITNESS WHEREOF, the Company has caused this Agreement to
be executed by its duly authorized representative and the Executive has executed
this Agreement, in each case, as of the day and year first above written.
RELIANCE GROUP HOLDINGS, INC.
By: /s/ Robert M. Steinberg
-----------------------------
Title: President
/s/ Bruce L. Sokoloff
----------------------------------
Name: Bruce L. Sokoloff
8
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
EXHIBIT 27
This schedule contains summary financial information extracted from the
Company's Consolidated Balance Sheet and the Consolidated Statement of
Operations and is qualified in its entirety by reference to such financial
statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
<DEBT-HELD-FOR-SALE> 2,423,934
<DEBT-CARRYING-VALUE> 773,314
<DEBT-MARKET-VALUE> 771,303
<EQUITIES> 710,652
<MORTGAGE> 0
<REAL-ESTATE> 285,261
<TOTAL-INVEST> 4,449,613
<CASH> 41,847
<RECOVER-REINSURE> 3,365,620
<DEFERRED-ACQUISITION> 207,315
<TOTAL-ASSETS> 10,197,526
<POLICY-LOSSES> 6,324,153
<UNEARNED-PREMIUMS> 1,396,879
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 895,495
0
0
<COMMON> 11,407
<OTHER-SE> 574,808
<TOTAL-LIABILITY-AND-EQUITY> 10,197,526
1,246,619
<INVESTMENT-INCOME> 141,160
<INVESTMENT-GAINS> 23,404
<OTHER-INCOME> 80,499
<BENEFITS> 757,067
<UNDERWRITING-AMORTIZATION> 640,190
<UNDERWRITING-OTHER> 0
<INCOME-PRETAX> (51,825)
<INCOME-TAX> 21,700
<INCOME-CONTINUING> (25,189)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (25,189)
<EPS-PRIMARY> ($0.21)
<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>
