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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 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 (ZIP CODE)
OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (212) 909-1100
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
NAME OF EACH EXCHANGE ON WHICH
TITLE OF EACH CLASS REGISTERED
- --------------------------------------- ---------------------------------------
Common Stock, $.10 Par Value New York Stock Exchange and Pacific
Stock Exchange
9% Senior Notes, Due November 15, 2000 New York Stock Exchange
9 3/4% Senior Subordinated Debentures, New York Stock Exchange
Due November 15, 2003
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No ___
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
As of March 1, 1997, 114,305,067 shares of the common stock of Reliance
Group Holdings, Inc. were outstanding, and the aggregate market value of the
voting stock held by nonaffiliates was approximately $667,000,000.
DOCUMENTS INCORPORATED BY REFERENCE:
(1) Reliance Group Holdings, Inc. 1996 Annual Report--Parts I, II and
IV.
(2) Reliance Group Holdings, Inc. Proxy Statement for the Annual
Meeting of Stockholders to be held May 8, 1997--Part III.
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<PAGE>
PART I
ITEM 1. BUSINESS.
GENERAL
Reliance Group Holdings, Inc. (the 'Company' or 'Reliance Group Holdings')
is a holding company whose principal business is the ownership of property and
casualty and title insurance companies. The Company also owns an information
technology consulting company.
Reliance Insurance Company and its property and casualty insurance
subsidiaries (the 'Reliance Property and Casualty Companies') underwrite a broad
range of commercial lines of property and casualty insurance. Reliance Insurance
Company has conducted business since 1817, making it one of the oldest property
and casualty insurance companies in the United States. The Reliance Property and
Casualty Companies consist of four principal operations: Reliance National,
Reliance Insurance, Reliance Surety and Reliance Reinsurance. Reliance National
offers a broad range of commercial property and casualty insurance products and
services for large companies and specialty line customers. Reliance National
selects market segments where it can provide specialized coverages and services,
and it conducts business nationwide and in international markets. In 1996,
Reliance National accounted for 45% of the net premiums written by the Reliance
Property and Casualty Companies. Reliance Insurance offers commercial property
and casualty insurance coverages primarily for mid-sized companies throughout
the United States. Reliance Insurance also offers traditional and specialized
coverages for more complex risks as well as insurance programs for groups with
common insurance needs. In 1996, Reliance Insurance accounted for 38% of the net
premiums written by the Reliance Property and Casualty Companies. Reliance
Surety is a leading writer of surety bonds and fidelity bonds in the United
States. Reliance Reinsurance primarily provides casualty treaty and facultative
reinsurance for small to medium sized regional and specialty insurance companies
located in the United States. The Reliance Property and Casualty Companies
accounted for $1.8 billion (70%) of the 1996 premiums earned by Reliance
Insurance Company and its property and casualty and title insurance subsidiaries
(the 'Reliance Insurance Group').
Title insurance business is conducted by Commonwealth Land Title Insurance
Company and Transnation Title Insurance Company and their respective
subsidiaries ('Commonwealth/Transnation Title'). Commonwealth/Transnation Title
is the third largest title insurance operation in the United States, in terms of
1995 total premiums and fees. Commonwealth/Transnation Title accounted for
$780.2 million (30%) of the Reliance Insurance Group's 1996 premiums earned.
The Company's Information technology consulting unit is RCG Information
Technology, Inc. ('RCG Information Technology'), which had revenues of $136.7
million in 1996.
Business segment information for the years ended December 31, 1996, 1995
and 1994 is set forth in Note 15 to the Company's consolidated financial
statements (the 'Consolidated Financial Statements'), which segment information
is included in the Company's 1996 Annual Report and incorporated herein by
reference. All financial information in this Annual Report on Form 10-K is
presented in accordance with generally accepted accounting principles ('GAAP')
unless otherwise specified.
The Company owns all of the common stock of Reliance Financial Services
Corporation ('Reliance Financial') which in turn owns all of the common stock of
Reliance Insurance Company. The common stock of Reliance Insurance Company is
pledged to secure certain indebtedness. See Note 7 to the Consolidated Financial
Statements. Reliance Insurance Company owns all of the common stock of
Commonwealth Land Title Insurance Company, Transnation Title Insurance Company
and RCG Information Technology.
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OPERATING UNITS
Property and Casualty Insurance. The following table sets forth the amount
of net premiums written in each line of business for the years ended December
31, 1996, 1995 and 1994 by the Reliance Property and Casualty Companies four
principal operations: Reliance National, Reliance Insurance, Reliance Surety and
Reliance Reinsurance.
<TABLE>
<CAPTION>
1996 1995
-------------------------------------------- --------------------------------------------
RELIANCE RELIANCE
RELIANCE RELIANCE SURETY/ RELIANCE RELIANCE SURETY/
NATIONAL INSURANCE REINSURANCE TOTAL NATIONAL INSURANCE REINSURANCE TOTAL
-------- --------- ------------ ------ -------- --------- ------------ ------
(IN MILLIONS, EXCEPT PERCENTAGES)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
General Liability............. $368 $ 99 $ -- $ 467 $371 $ 98 $ -- $ 469
Automobile.................... 86 179 -- 265 88 152 -- 240
Workers' Compensation......... 127 123 -- 250 141 125 -- 266
Multiple Peril................ 20 192 -- 212 26 159 -- 185
Surety........................ -- -- 159 159 -- -- 139 139
Reinsurance................... -- -- 151 151 -- -- 119 119
Ocean and Inland Marine....... 83 46 -- 129 66 53 -- 119
Fire and Allied............... 22 42 -- 64 34 34 -- 68
Accident and Health........... 62 -- -- 62 58 -- -- 58
Involuntary................... 25 19 -- 44 53 28 -- 81
Other......................... 41 2 -- 43 27 8 -- 35
--- --- --- ------ --- --- --- ------
Total........................ $834 $ 702 $310 $1,846 $864 $ 657 $258 $1,779
--- --- --- ------ --- --- --- ------
--- --- --- ------ --- --- --- ------
Percent of Total.............. 45% 38% 17% 100% 49% 37% 14% 100%
--- --- --- ------ --- --- --- ------
--- --- --- ------ --- --- --- ------
<CAPTION>
1994
--------------------------------------------
RELIANCE
RELIANCE RELIANCE SURETY/
NATIONAL INSURANCE REINSURANCE TOTAL
-------- --------- ------------ ------
<S> <C> <C> <C> <C>
General Liability............. $347 $ 76 $ -- $ 423
Automobile.................... 109 135 -- 244
Workers' Compensation......... 179 134 -- 313
Multiple Peril................ 32 148 -- 180
Surety........................ -- -- 118 118
Reinsurance................... -- -- 125 125
Ocean and Inland Marine....... 44 60 -- 104
Fire and Allied............... 26 24 -- 50
Accident and Health........... 52 -- -- 52
Involuntary................... 82 32 -- 114
Other......................... 19 22 -- 41
--- --- --- ------
Total........................ $890 $ 631 $243 $1,764
--- --- --- ------
--- --- --- ------
Percent of Total.............. 50% 36% 14% 100%
--- --- --- ------
--- --- --- ------
</TABLE>
2
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The following table sets forth underwriting results for the Reliance
Property and Casualty Companies for the years ended December 31, 1996, 1995 and
1994.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------
1996 1995 1994
-------- -------- --------
(IN MILLIONS, EXCEPT RATIOS)
<S> <C> <C> <C>
Net premiums written... $1,846.2 $1,779.0 $1,764.3
Underwriting loss(1)... (38.4)(2) (45.6) (97.3)
Combined ratio......... 101.6%(2) 101.8%(3) 104.4%(3)
</TABLE>
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(1) Includes catastrophe losses (net of reinsurance) for the years ended
December 31, 1996, 1995 and 1994 of $19.9 million, $25.7 million and $50.1
million, respectively.
(2) Excludes a charge of $134.0 million (7.4 combined ratio points) to increase
net loss reserves for asbestos-related and environmental pollution claims
for business written in or before 1987. The actual underwriting loss was
$172.4 million and the combined ratio was 109.0%.
(3) Excludes a charge of $4.0 million in 1995 and $11.6 million in 1994
pertaining to Proposition 103.
The following table sets forth certain financial information of the
Reliance Property and Casualty Companies based upon statutory accounting
practices and common shareholder's equity of Reliance Insurance Company in
thousands:
<TABLE>
<CAPTION>
STATUTORY ACCOUNTING GAAP
-------------------------------------------------------------------------- -------------
TOTAL POLICY- COMMON
YEAR ENDED PREMIUMS UNEARNED LOSS ADMITTED TOTAL HOLDERS' SHAREHOLDER'S
DECEMBER 31, WRITTEN PREMIUMS RESERVES ASSETS LIABILITIES SURPLUS* EQUITY
- ------------ ---------- -------- ---------- ---------- ----------- ---------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
1996........ $1,848,159 $885,799 $3,228,792 $5,669,276 $ 4,482,220 $1,187,056 $ 1,410,484
1995........ 1,769,064 841,127 3,102,688 5,538,533 4,410,197 1,128,336 1,404,781
1994........ 1,773,196 833,643 3,033,016 5,296,931 4,388,393 908,538 1,076,840
</TABLE>
- ------------------
* Includes Reliance Insurance Company's investment in title insurance operations
of $199.6 million at December 31, 1996.
The Reliance Property and Casualty Companies write insurance in every state
of the United States, the District of Columbia, Puerto Rico, Guam and the Virgin
Islands. The Reliance Property and Casualty Companies also write insurance in
the European Community through offices in the United Kingdom, the Netherlands,
Sweden, Spain, Germany, in the Americas through offices in Canada, Mexico and
Argentina and in the Pacific Rim through an office in Singapore. In 1996,
California, New York, Texas and Florida accounted for approximately 15%, 10%, 7%
and 6%, respectively, of direct premiums written. No other state accounted for
more than 5% of direct premiums written by the Reliance Property and Casualty
Companies. The Reliance Property and Casualty Companies write insurance through
independent agents, program agents and brokers. No single insurance agent or
broker accounts for 10% or more of the direct premiums written by the Reliance
Property and Casualty Companies.
A. M. Best & Company, Inc. ('Best'), publisher of Best's Insurance Reports,
Property-Casualty, has assigned an 'A-(Excellent)' rating to the Reliance
Property and Casualty Companies. Best's ratings are based on an analysis of the
financial condition and operations of an insurance company as they relate to the
industry in general. An 'A-(Excellent)' rating is assigned to those companies
which have demonstrated excellent overall performance when compared to the norms
of the property and casualty industry. Standard & Poor's ('S&P') has assigned an
'A' rating to the claims-paying ability of the Reliance Property and Casualty
Companies. S&P's ratings are based on a quantitative and qualitative analysis,
including consideration of ownership and support factors, if applicable. An 'A'
rating is assigned to those companies which have good financial security, but
capacity to meet policyholder obligations is somewhat susceptible to adverse
economic and underwriting conditions. The Best and S&P ratings are not designed
for the protection of investors and do not constitute recommendations to buy,
sell or hold any security. Although the Best and S&P ratings of the Reliance
Property and Casualty Companies are lower than those of many of the insurance
companies with which the Reliance Property and Casualty Companies compete,
management believes that the current ratings are adequate to enable the Reliance
Property and Casualty Companies to compete successfully.
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Reliance National. Reliance National offers a broad range of commercial
insurance products and services to selected segments of the property and
casualty market which do not lend themselves to traditional insurance products
and services. Reliance National selects market segments where it can provide
specialized coverages and services, such as providing captive insurance
arrangements to the alternative risk markets. In addition, Reliance National
provides non-standard personal automobile insurance and certain traditional
insurance products, including guaranteed cost workers' compensation insurance.
In 1996, Reliance National accounted for 45% of the net premiums written by the
Reliance Property and Casualty Companies. Reliance National, which conducts
business nationwide, is headquartered in New York City and has offices in
fifteen states. Reliance National also conducts business in the European
Community through offices located in the United Kingdom, the Netherlands,
Sweden, Spain and Germany, in the Americas through offices in Canada, Mexico and
Argentina and in the Pacific Rim through an office in Singapore. Reliance
National distributes its products through national and regional insurance
brokers, program agents and, with respect to non-standard automobile insurance,
independent insurance agents. Net premiums written by Reliance National were
$833.7 million, $864.4 million and $889.7 million for the years ended December
31, 1996, 1995 and 1994, respectively.
Reliance National is organized into eight major divisions. Each division is
comprised of one or more departments which focus on a particular type of
business, program or market segment. Each department makes use of underwriters,
actuaries and other professionals to market, structure and price its products.
Reliance National's eight major divisions are:
o Casualty Risk Services, Reliance National's largest division, provides
workers' compensation, commercial automobile and general liability
coverages to Fortune 1,000 companies, multinationals and the construction
and transportation industries. These coverages are provided on a
retrospectively rated and high deductible basis, and to the alternative
risk markets on a captive insurance arrangement basis. This division also
provides environmental pollution coverages (primarily on a claims made
basis) for consultants, contractors, transporters and certain other
insureds. In early 1997, this division began providing comprehensive
insurance coverages for public and private entities engaged in the
development of infrastructure projects outside of North America and
guaranteed cost workers' compensation coverages.
o International writes predominantly commercial casualty and property
insurance products, including specialized coverages such as excess
casualty, directors and officers liability and fidelity insurance, in
certain international markets. This division also provides ocean marine
coverages in domestic and certain international markets.
o Excess and Surplus Lines primarily provides professional liability
insurance to architects, engineers, lawyers, healthcare providers and
other professionals, and excess and umbrella coverages.
o Financial and Specialty Coverages provides aviation and space satellite
risk coverages, as well as certain non-traditional insurance products.
o Financial Products provides directors and officers liability insurance,
errors and omissions insurance and fidelity and fiduciary coverages in
the domestic market.
o Accident and Health provides high limit disability, group accident,
blanket special risk and medical excess of loss programs.
o Property primarily provides commercial property coverage focusing on
excess and specialty commercial property.
o Non-Standard Automobile primarily provides non-standard personal
automobile insurance for drivers unable to obtain insurance in the
standard automobile insurance market. This division was formed in
February of 1996 and had a minimal amount of net premiums written in
1996.
Reliance National attempts to limit its exposure to losses through the use
of claims-made policies, reinsurance and policies written on a loss sensitive
basis, which include retrospectively rated and high deductible policies.
Approximately 26% of Reliance National's net premiums written during 1996 were
written on a 'claims-made' basis which provides coverage only for claims
reported during the policy
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period or within an established reporting period, as opposed to 'occurrence'
basis policies which provide coverage for events that occur during the policy
period without regard for when the claim is reported. Claims-made policies
mitigate the 'long tail' nature of the risks insured.
Approximately 7% of Reliance National's net premiums written during 1996
were written on a retrospectively rated basis, whereby the insured effectively
pays for a large portion or, in many cases, all of its losses. Approximately 14%
of Reliance National's net premiums written during 1996 were written on a high
deductible basis, whereby the insured pays for all of its losses up to the
deductible amount. The use of high deductible policies results in lower premiums
and losses for Reliance National as payments for losses made by an insured under
a high deductible policy are not considered premiums or losses to an insurer.
With retrospectively rated and high deductible policies, Reliance National
provides insurance and loss control management services while reducing its
underwriting risk. Reliance National assumes a credit risk in connection with
retrospectively rated and high deductible policies and, therefore, insureds with
such policies undergo extensive credit analysis by a centralized credit
department that is independent from the underwriting process. Collateral in the
form of bank letters of credit, trust accounts or cash is generally provided by
the insured to cover a significant portion of Reliance National's credit
exposure.
To further limit exposures, the vast majority of Reliance National's net
premiums written during 1996 were for policies with net retentions equal to or
lower than $1.5 million per risk. By reinsuring a large proportion of its
business, Reliance National seeks to limit its exposure to losses on each line
of business it writes.
Reliance Insurance. Reliance Insurance offers commercial lines property
and casualty insurance products, primarily focusing on the diverse needs of
mid-sized companies nationwide. Reliance Insurance distributes its products
through approximately 2,600 independent agents, program agents and brokers.
Reliance Insurance's insureds are primarily closely held companies with 100 to
1,000 employees and annual sales of $5 million to $300 million. Reliance
Insurance underwrites a variety of commercial insurance coverages, including
multiple peril, property, general liability, commercial automobile and workers'
compensation. In 1996, Reliance Insurance accounted for 38% of the net premiums
written by the Reliance Property and Casualty Companies. Reliance Insurance is
headquartered in Philadelphia and operates in 50 states, the District of
Columbia, Puerto Rico, Guam and the Virgin Islands. Net premiums written by
Reliance Insurance were $702.2 million, $656.4 million and $631.0 million for
the years ended December 31, 1996, 1995 and 1994, respectively.
Reliance Insurance is organized into the following three operating
divisions:
o The Commercial Accounts division focuses on accounts with annual premiums
of up to $1 million. This division offers a broad range of traditional
commercial coverages, primarily written on a guaranteed cost basis.
o The Specialty division provides underwriting of excess and surplus
coverages (generally with lower net retentions than for other commercial
lines written by Reliance Insurance) for insureds with non-standard
exposures. This division also provides property and liability insurance
programs to homogeneous groups of insureds with particular insurance
needs, such as auto rental companies, day care centers and
municipalities. These programs are administered directly by Reliance
Insurance or by independent program agents, with Reliance Insurance
retaining authority for all underwriting and pricing decisions and
handling claims and other services. When utilized, program agents market
the programs, gather the initial underwriting data and, if authorized by
Reliance Insurance, issue the policies.
o The Large Accounts division focuses on casualty exposures of accounts
with annual premiums in excess of $1 million where it is able to offer
more flexible coverages through the use of retrospectively rated and high
deductible policies. The Large Accounts division primarily provides
workers' compensation insurance and approximately 69% of its business was
written on a loss sensitive basis. Accounts with retrospectively rated
and high deductible policies undergo extensive credit analysis by a
centralized credit department and collateral in the form of bank letters
of credit,
5
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trust accounts or cash collateral is generally provided by the insured to
cover a significant portion of Reliance Insurance's credit exposure.
The Commercial Accounts division and the Large Accounts division provide
their products and services through a decentralized network of regional and
branch offices. This organization allows the Commercial Accounts division and
the Large Accounts division to place major responsibility and accountability for
underwriting, sales, and customer service close to the insured. The Specialty
division has three regional offices. Reliance Insurance manages its claims
through a decentralized network of regional and branch offices, which allows the
point of service to be close to the insured.
Reliance Surety. Reliance Surety is a leading writer of surety and
fidelity bonds in the United States. Reliance Surety concentrates on writing
performance and payment bonds for contractors of public works projects,
commercial real estate and multi-family housing. It also writes commercial
surety, financial institution and commercial fidelity bonds. Reliance Surety
performs extensive credit analysis on its clients, and actively manages claims
to minimize losses and maximize recoveries. Reliance Surety has enjoyed long
relationships with a large majority of the contractors and accounts it has
insured. Reliance Surety's Firemark and Express Surety operations target smaller
contractors and accounts, a market traditionally less fully serviced by national
surety companies. Reliance Surety is headquartered in Philadelphia and conducts
business nationwide through 32 branch offices and approximately 2,250
independent agents and brokers. Net premiums written by Reliance Surety were
$159.2 million, $139.3 million and $118.0 million for the years 1996, 1995 and
1994, respectively.
Surety bonds guarantee the payment or performance of one party (called the
principal) to another party (called the obligee). This guarantee is typically
evidenced by a written agreement by the surety (e.g., Reliance Surety) to
discharge the payment or performance obligations of the principal pursuant to
the underlying contract between the obligee and the principal. Fidelity bonds
insure against losses arising from employee dishonesty. Financial institution
fidelity bonds insure against losses arising from employee dishonesty and other
specifically named theft and fraud perils.
Reliance Reinsurance. Reliance Reinsurance provides casualty reinsurance
on both a treaty (blocks of risk) and facultative (individual risks) basis and,
to a lesser extent, property reinsurance on a treaty basis. The business of
Reliance Reinsurance is primarily conducted on a treaty basis. All treaty
business is marketed through reinsurance brokers who negotiate contracts of
reinsurance on behalf of the primary insurer or ceding reinsurer, while
facultative business is produced both directly and through reinsurance brokers.
While Reliance Reinsurance's treaty clients include all types and sizes of
insurers, Reliance Reinsurance typically targets treaty reinsurance for small to
medium sized regional and specialty insurance companies, as well as captives,
risk retention groups and other alternative risk markets, providing both pro
rata and excess of loss coverage. Reliance Reinsurance believes that this market
is subject to less competition and provides Reliance Reinsurance with an
opportunity to develop and market innovative programs where pricing is not the
key competitive factor. Reliance Reinsurance typically avoids participating in
large capacity reinsurance treaties where price is the predominant competitive
factor. It generally writes reinsurance in the 'lower layers,' the first $1
million of primary coverage, where losses are more predictable and quantifiable.
The assumed reinsurance business of the Reliance Property and Casualty Companies
is conducted nationwide and is headquartered in Philadelphia. Net premiums
written by Reliance Reinsurance were $151.1 million, $119.0 million and $125.6
million for the years ended December 31, 1996, 1995 and 1994, respectively.
Title Insurance. Commonwealth/Transnation Title writes title insurance for
residential and commercial real estate nationwide and provides escrow and
settlement services in connection with real estate closings. The National Title
Services division of Commonwealth/Transnation Title provides title services for
large and multi-state commercial transactions. Through the Commonwealth
OneStop(Registered) operation, Commonwealth/Transnation Title provides national
and regional lenders with a full range of residential closing services,
including title insurance through its National Residential Title Services
division, appraisal management through its CLT Appraisal Services, Inc.
subsidiary, and other real estate related services. Commonwealth/Transnation
Title is the third largest title insurance operation in the United
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States, based on 1995 total premiums and fees. Commonwealth/Transnation Title
had premiums and fees of $780.2 million, $671.9 million and $856.8 million for
the years 1996, 1995 and 1994, respectively.
S&P has assigned an 'A' rating to the claims-paying ability of
Commonwealth/Transnation Title. S&P's ratings are based on a quantitative and
qualitative analysis, including consideration of ownership and support factors,
if applicable. An 'A' rating is assigned to those companies which have good
financial security, but capacity to meet policyholder obligations is somewhat
susceptible to adverse economic and underwriting conditions. Duff & Phelps
Credit Rating Co. ('Duff & Phelps') has assigned an 'A+' rating to the
claims-paying ability of Commonwealth/ Transnation Title. Duff & Phelps ratings
are based on a quantitative and qualitative analysis, with particular emphasis
on fundamental factors, recent operating results, reserves, capitalization and
invested assets. An 'A+' rating is assigned to those companies which have a high
claims paying ability; protection factors are average and there is an
expectation of variability in risk over time due to economic and/or underwriting
conditions. The S&P and Duff & Phelps ratings are not designed for the
protection of investors and do not constitute recommendations to buy, sell or
hold any security.
Commonwealth/Transnation Title is organized into nine regions with more
than 325 offices and over 4,000 independent agents covering all 50 states, as
well as Puerto Rico and the Virgin Islands. In 1996, California, Texas, Florida,
New York, Pennsylvania, Washington and Michigan accounted for approximately 11%,
11%, 10%, 8%, 6%, 6% and 6%, respectively, of revenues for premiums and services
related to title insurance. No other state accounted for more than 5% of such
revenues.
A title insurance policy protects the insured party and certain successors
in interest against losses resulting from title defects, liens and encumbrances
existing as of the date of the policy and not specifically excepted from the
policy's provisions. Generally, a title policy is obtained by the buyer, the
mortgage lender or both at the time real property is transferred or refinanced.
The policy is written for an indefinite term for a single premium which is due
in full upon issuance of the policy. The face amount of the policy is usually
either the purchase price of the property or the amount of the loan secured by
the property. Title policies issued to lenders insure the priority position of
the lender's lien. Most lenders require title insurance as a condition to making
loans secured by real estate. Title insurers, unlike other types of insurers,
seek to eliminate losses through the title examination process and the closing
process, and a substantial portion of the expenses of a title insurer relate to
those functions.
Information Technology Consulting Services. RCG Information Technology
provides a full range of information technology services to large corporate
clients in the United States. Such services include providing supplemental
computer professional staffing, Year 2000 solutions, software outsourcing,
computer programming and development services and other computer consulting
services. RCG Information Technology had revenues of $136.7 million, $106.5
million and $90.0 million for 1996, 1995 and 1994, respectively.
INSURANCE CEDED
All of the Reliance Insurance Group's insurance operations purchase
reinsurance to limit the Company's exposure to losses. The ceding of insurance
does not discharge an insurer from its primary legal liability to a
policyholder, even though the reinsuring company assumes a related liability.
The Reliance Insurance Group enters into reinsurance arrangements that are both
facultative (individual risks) and treaty (blocks of risk). Limits and
retentions are based on a number of factors, including the previous loss history
of the operating unit, policy limits and exposure data, industry studies as to
potential severity, and market terms, conditions and capacity, and may change
over time. Where appropriate, the Reliance Insurance Group limits its exposure
to individual risks by purchasing excess of loss and quota share reinsurance,
with treaty structures and net retentions varying with the specific requirements
of the line of business or program being reinsured. In many cases, the Reliance
Insurance Group purchases additional facultative reinsurance to further reduce
its retentions below treaty levels.
Reinsurers of the Reliance Insurance Group. Premiums ceded by the Reliance
Insurance Group to reinsurers were $1.6 billion and $1.3 billion in 1996 and
1995, respectively. The Reliance Insurance Group is subject to credit risk with
respect to its reinsurers, as the ceding of risk to reinsurers does not relieve
the
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Reliance Insurance Group of its liability to insureds. At December 31, 1996, the
Reliance Insurance Group had reinsurance recoverables of $3.6 billion,
representing estimated amounts recoverable from reinsurers pertaining to paid
claims, unpaid claims, claims incurred but not reported and unearned premiums.
In order to minimize losses from uncollectible reinsurance, the Reliance
Insurance Group places its reinsurance with a number of different reinsurers,
and utilizes a security committee and a staff of analysts to approve in advance
the reinsurers which meet its standards of financial strength and are acceptable
for use by Reliance Insurance Group. The Reliance Insurance Group holds
substantial amounts of collateral, consisting of letters of credit, trust
accounts and cash collateral, to secure recoverables from unauthorized
reinsurers. The Company had $6.4 million reserved for potentially unrecoverable
reinsurance at December 31, 1996. The Company is not aware of any impairment of
the creditworthiness of any of the Reliance Insurance Group's significant
reinsurers. While the Company is aware of financial difficulties experienced by
certain Lloyd's of London syndicates, the Company has not experienced
deterioration of payments from the Lloyd's of London syndicates from which it
has reinsurance.
In 1996, the Reliance Property and Casualty Companies did not cede more
than 4.4% of direct premiums to any one reinsurer and no one reinsurer accounted
for more than 8.6% of total ceded premiums. The Reliance Insurance Group's ten
largest reinsurers, based on 1996 ceded premiums, are as follows:
<TABLE>
<CAPTION>
1996
CEDED BEST
PREMIUM RATING
------------- ------
(IN MILLIONS)
<S> <C> <C>
American Re-Insurance Company..................... $ 133.3 A+
Hertz International Reinsurance Ltd............... 63.3 (1)
Swiss Reinsurance America Corporation............. 56.5 A
Commercial Risk Re-Insurance Company.............. 46.5 (2)
Zurich Reinsurance Centre, Inc.................... 46.0 A
General Reinsurance Corporation................... 45.3 A++
Kemper Reinsurance Company........................ 43.5 A-
Everest Reinsurance Company....................... 33.5 A
Lloyd's of London................................. 30.8 (3)
Cedar Hill Assurance Company...................... 30.8 (4)
</TABLE>
- ------------------
(1) An unrated captive reinsurer that is not affiliated with the Company.
Recoverables from such reinsurer are fully collateralized.
(2) Assigned a Best rating of NR-2 (Less than Minimum Size and/or Operating
Experience), as the reinsurer does not meet the minimum size and/or
operating experience requirement. Recoverables from such reinsurer are fully
collateralized.
(3) Individual Lloyd's of London syndicates are not rated by Best.
(4) Assigned a Best rating of NR-2 (Less than Minimum Size and/or Operating
Experience), as the reinsurer does not meet the minimum size and/or
operating experience requirement. The vast majority of recoverables
from such reinsurer are fully collateralized.
The Reliance Insurance Group maintains no 'Funded Cover' reinsurance
agreements. 'Funded Cover' reinsurance agreements are multi-year retrospectively
rated reinsurance agreements which may not meet relevant accounting standards
for risk transfer and under which the reinsured must pay additional premiums in
subsequent years if losses in the current year exceed levels specified in the
reinsurance agreement.
PROPERTY AND CASUALTY LOSS RESERVES
The Reliance Insurance Group's staff of over 100 actuaries regularly
performs comprehensive analyses of reserves and reviews the pricing and
reserving methodologies of the Reliance Insurance Group. Although the Company
believes, in light of present facts and current legal interpretations, that the
Reliance Insurance Group's overall property and casualty reserve levels are
adequate to meet its obligations under existing policies, due to the inherent
uncertainty and complexity of the reserving process, the ultimate liability may
be more or less than such reserves.
8
<PAGE>
The following tables present information relating to the liability for
unpaid claims and related expenses ('loss reserves') for the Reliance Property
and Casualty Companies. The table below provides a reconciliation of the
beginning to ending liability balances for the years ended December 31, 1996,
1995 and 1994.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------
1996 1995 1994
---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
Loss reserves, beginning of year........ $5,859,352 $5,581,483 $5,048,442
Less reinsurance recoverables........... 2,679,917 2,453,702 2,116,914
---------- ---------- ----------
Net loss reserves, beginning of year.... 3,179,435 3,127,781 2,931,528
---------- ---------- ----------
Provision for policy claims and related
expenses:
Provision for insured events of the
current year..................... 1,211,672 1,163,447 1,274,649
Increase in provision for insured
events of prior years............ 138,665(1) 38,512 22,444
---------- ---------- ----------
Total provision................ 1,350,337 1,201,959 1,297,093
---------- ---------- ----------
Payments for policy claims and related
expenses:
Attributable to insured events of
the current year................. 298,838 271,915 321,538
Attributable to insured events of
prior years...................... 926,996 868,622 780,961
---------- ---------- ----------
Total payments................. 1,225,834 1,140,537 1,102,499
---------- ---------- ----------
Foreign currency translation............ 7,668 (9,768) 1,659
---------- ---------- ----------
Net loss reserves, end of year.......... 3,311,606 3,179,435 3,127,781
Plus reinsurance recoverables........... 2,953,814 2,679,917 2,453,702
---------- ---------- ----------
Loss reserves, end of year(2)........... $6,265,420 $5,859,352 $5,581,483
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
- ------------------
(1) The 1996 increase in provision for insured events of prior years includes a
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.
(2) Loss reserves exclude the loss reserves of title insurance operations of
$264.8 million, $240.8 million and $228.1 million at December 31, 1996, 1995
and 1994, respectively.
Policy claims and settlement expenses include a provision for insured
events of prior years of $138.7 million, $38.5 million and $22.4 million for the
years 1996, 1995 and 1994, respectively. The provision for all years includes
adverse development related to prior year asbestos-related and environmental
pollution claims, which primarily affect general liability, multiple peril and
reinsurance lines of business, and includes a pretax charge of $134.0 million in
1996 to increase net loss reserves for asbestos-related and environmental
pollution claims for business written in or before 1987. The 1996 provision also
includes adverse development in the automobile line, offset by favorable
development in workers' compensation. The 1995 provision also included adverse
development in other general liability, automobile and reinsurance lines,
partially offset by favorable development in workers' compensation. The 1994
provision also included adverse development in other general liability lines,
partially offset by favorable development in workers' compensation.
9
<PAGE>
The table below summarizes the development of the estimated liability for
loss reserves (net of reinsurance recoverables) as of December 31 of each of the
prior ten years. The amounts shown on the top line of the table represent the
estimated liability for loss reserves (net of reinsurance recoverables) for
claims that are unpaid at the particular balance sheet date, including losses
that had been incurred but not reported to the Reliance Property and Casualty
Companies. The upper portion of the table indicates the loss reserves as they
are reestimated in subsequent periods as a percentage of the originally recorded
reserves. These estimates change as losses are paid and more accurate
information becomes available about remaining loss reserves. A redundancy exists
when the original loss reserve estimate is greater, and a deficiency exists when
the original loss reserve estimate is less, than the reestimated loss reserve at
December 31, 1996. A redundancy or deficiency indicates the cumulative
percentage change, as of December 31, 1996, of originally recorded loss
reserves. The lower portion of the table indicates the cumulative amounts paid
as of successive periods as a percentage of the original loss reserve liability.
In calculating the percentage of cumulative paid losses to the loss reserve
liability in each year, unpaid losses of General Casualty Company of Wisconsin,
a former wholly-owned subsidiary, and its subsidiaries ('General Casualty') at
April 30, 1990 (the date of sale of General Casualty), relating to 1986 through
1989, were deducted from the original liability in each year. Each amount in the
following table includes the effects of all changes in amounts for prior
periods. The table does not present accident or policy year development data.
For the years 1986 through 1995, the Company has experienced deficiencies in its
estimated liability for loss reserves. The table includes provisions
specifically made to strengthen prior-years' loss reserves of $134.0 million in
1996, $156.0 million in 1991 and $100.0 million in 1986. The Company's loss
reserves during this period have been adversely affected by a number of factors
beyond the Company's control as follows: (i) significant increases in claim
settlements reflecting, among other things, inflation in medical costs; (ii)
increases in the costs of settling claims, particularly legal expenses; (iii)
more frequent resort to litigation in connection with claims; and (iv) a
widening interpretation of what constitutes a covered claim.
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992 1991 1990 1989
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
(IN THOUSANDS, EXCEPT PERCENTAGES)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net liability for unpaid
claims and related
expenses (loss
reserves)(1)............. $3,311,606 $3,179,435 $3,127,781 $2,931,528 $2,702,992 $2,375,235 $1,893,421 $1,962,822
Net liability reestimated
as of:
One year later........... -- 104.4% 101.2% 100.8% 101.5% 101.3% 114.4% 104.8%
Two years later.......... -- -- 104.8% 101.7% 103.1% 104.4% 115.2% 117.0%
Three years later........ -- -- -- 104.2% 104.0% 105.7% 119.6% 118.2%
Four years later......... -- -- -- -- 107.2% 106.7% 120.7% 120.9%
Five years later......... -- -- -- -- -- 110.5% 122.0% 122.2%
Six years later.......... -- -- -- -- -- -- 127.0% 123.8%
Seven years later........ -- -- -- -- -- -- -- 129.1%
Eight years later........ -- -- -- -- -- -- -- --
Nine years later......... -- -- -- -- -- -- -- --
Ten years later.......... -- -- -- -- -- -- -- --
Redundancy (Deficiency)... -- (4.4%) (4.8%) (4.2%) (7.2%) (10.5%) (27.0%) (29.1%)
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Paid (cumulative) as of:
One year later........... -- 29.2% 27.8% 26.6% 28.7% 29.0% 36.6% 40.7%
Two years later.......... -- -- 46.8% 44.9% 48.0% 48.6% 57.9% 65.4%
Three years later........ -- -- -- 58.4% 61.1% 62.1% 72.8% 82.2%
Four years later......... -- -- -- -- 70.5% 71.6% 83.0% 91.3%
Five years later......... -- -- -- -- -- 78.1% 90.3% 97.8%
Six years later.......... -- -- -- -- -- -- 95.5% 103.1%
Seven years later........ -- -- -- -- -- -- -- 106.8%
Eight years later........ -- -- -- -- -- -- -- --
Nine years later......... -- -- -- -- -- -- -- --
Ten years later.......... -- -- -- -- -- -- -- --
<CAPTION>
1988 1987 1986
---------- ---------- ----------
<S> <C> <C> <C>
Net liability for unpaid
claims and related
expenses (loss
reserves)(1)............. $1,644,057 $1,494,227 $1,425,942
Net liability reestimated
as of:
One year later........... 104.8% 107.8% 106.6%
Two years later.......... 113.5% 112.0% 115.6%
Three years later........ 121.8% 118.5% 121.6%
Four years later......... 123.2% 125.0% 127.2%
Five years later......... 127.8% 126.7% 132.3%
Six years later.......... 128.7% 131.8% 135.1%
Seven years later........ 130.7% 133.1% 140.0%
Eight years later........ 138.0% 135.4% 141.4%
Nine years later......... -- 143.9% 143.4%
Ten years later.......... -- -- 152.5%
Redundancy (Deficiency)... (38.0%) (43.9%) (52.5%)
---------- ---------- ----------
Paid (cumulative) as of:
One year later........... 41.6% 38.6% 42.0%
Two years later.......... 71.6% 65.8% 68.4%
Three years later........ 86.4% 88.2% 88.1%
Four years later......... 97.2% 99.5% 103.9%
Five years later......... 103.0% 106.2% 112.1%
Six years later.......... 107.3% 110.7% 117.1%
Seven years later........ 111.5% 113.9% 120.8%
Eight years later........ 114.3% 117.4% 123.7%
Nine years later......... -- 119.7% 126.9%
Ten years later.......... -- -- 128.8%
</TABLE>
- ------------------
(1) The gross liability for unpaid claims and related expenses was $6.3 billion
at December 31, 1996. The gross liability for unpaid claims and related
expenses for years 1995 and prior was deficient by $55.0 million at December
31, 1996.
10
<PAGE>
The difference between the property and casualty liability for loss
reserves at December 31, 1996 and 1995 reported in the Company's consolidated
financial statements (net of reinsurance recoverables) and the liability which
would be reported in accordance with statutory accounting practices is as
follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1996 1995
---------- ----------
(IN THOUSANDS)
<S> <C> <C>
Net liability reported under statutory accounting
practices....................................... $3,228,792 $3,102,688
Adjustment for GAAP basis accrual of estimated
salvage and subrogation recoveries.............. (10,925) (12,758)
Additional discount of workers' compensation
reserves........................................ 93,739 98,799
Foreign currency translation...................... -- (9,294)
---------- ----------
Net liability reported.......................... $3,311,606 $3,179,435
---------- ----------
---------- ----------
</TABLE>
The difference between the property and casualty liability for gross loss
reserves at December 31, 1996 and 1995 reported in the Company's consolidated
financial statements and the liability which would be reported in accordance
with statutory accounting practices is as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1996 1995
---------- ----------
(IN THOUSANDS)
<S> <C> <C>
Liability reported under statutory accounting
practices....................................... $6,097,395 $5,717,321
Adjustment for GAAP basis accrual of estimated
salvage and subrogation recoveries.............. (13,884) (14,884)
Additional discount of workers' compensation
reserves........................................ 181,909 179,987
Foreign currency translation...................... -- (23,072)
---------- ----------
Liability reported.............................. $6,265,420 $5,859,352
---------- ----------
---------- ----------
</TABLE>
Property and casualty loss reserves are based on an evaluation of reported
claims, in addition to statistical projections of claims incurred but not
reported and loss adjustment expenses. Estimates of salvage and subrogation are
deducted from the liability for unpaid claims. Also considered are other factors
such as the promptness with which claims are reported, the history of the
ultimate liability for such claims compared with initial and intermediate
estimates, the type of insurance coverage involved, the experience of the
property and casualty industry and other economic indicators, when applicable.
The establishment of loss reserves requires an estimate of the ultimate
liability based primarily on past experience. The Reliance Property and Casualty
Companies apply a variety of generally accepted actuarial techniques to
determine the estimates of ultimate liability. The techniques recognize, among
other factors, the Reliance Insurance Group's and the industry's experience with
similar business, historical trends in reserving patterns and loss payments,
pending level of unpaid claims, the cost of claim settlements, the Reliance
Insurance Group's product mix and the economic environment in which property and
casualty companies operate. Estimates are continually reviewed and adjustments
of the probable ultimate liability based on subsequent developments and new data
are included in operating results for the periods in which they are made. In
general, reserves are initially established based upon the actuarial and
underwriting data utilized to set pricing levels, and are reviewed as additional
information, including claims experience, becomes available. The Reliance
Property and Casualty Companies regularly analyze their reserves and review
their pricing and reserving methodologies, using Reliance Insurance Group
actuaries, so that future adjustments to prior year reserves can be minimized.
From time to time, the Reliance Property and Casualty Companies consult with
independent actuarial firms concerning reserving practices and levels. The
Reliance Property and Casualty Companies are required by state insurance
regulators to file, along with their statutory reports, a statement of actuarial
reserve opinion setting forth an actuary's assessment of their reserve status.
Since 1992, the Reliance Property and Casualty Companies have used an
independent actuarial firm to meet such requirements. However, given the
complexity of this process, reserves will require continual updates and the
ultimate liability may be more or less than such estimates indicate. Estimation
of loss reserves for long tail lines of business is more difficult than for
short tail lines because long tail claims may not become apparent for a number
of years, and a relatively higher proportion of ultimate losses are considered
incurred but not reported. As a result, variation in loss development is more
11
<PAGE>
likely in long tail lines of business. The Reliance Property and Casualty
Companies attempt to reduce these variations in certain of its long tail lines,
primarily directors and officers liability and professional liability, by
writing policies on a claims-made basis, which mitigates the long tail nature of
the risks. The Reliance Property and Casualty Companies also limit the potential
loss from a single event through the extensive use of reinsurance.
In calculating the liability for loss reserves, the Reliance Property and
Casualty Companies discount workers' compensation pension claims which are
expected to have regular, periodic payment patterns. These claims are discounted
for mortality and for interest using statutory annual rates ranging from 3.5% to
6%. In addition, the reserves for claims assumed through the participation of
the Reliance Property and Casualty Companies in workers' compensation
reinsurance pools are discounted. The discounting of all claims (net of
reinsurance recoverables) resulted in a decrease in the liability for loss
reserves of $230.0 million, $235.7 million and $245.7 million at December 31,
1996, 1995 and 1994, respectively. The discount in 1996 was increased by $5.4
million which was more than offset by discount amortization of $11.1 million,
resulting in a reduction in pre-tax income of $5.7 million. The discount in 1995
was increased by $1.8 million, which was more than offset by discount
amortization of $11.8 million, resulting in a reduction in pre-tax income of
$10.0 million. The discount in 1994 was reduced by $27.3 million plus discount
amortization of $11.7 million, resulting in a reduction in pre-tax income of
$39.0 million.
The liability for loss reserves includes provisions for inflation in
several ways, depending on how the reserve is established. An explicit provision
for inflation is used where estimates of ultimate loss are based on pricing. A
provision for inflation is also included for certain discounted workers'
compensation claims. In these cases, the provision for inflation is based on
factors supplied by the respective workers' compensation rating bureaus which
have jurisdiction for states which provide for cost-of-living increases in
indemnity benefits. In other reserves, the analysis reflects the effect of
inflationary trends as part of the overall effect on claim costs, as well as
changes in marketing, underwriting, reporting and processing systems, claims
settlement and coverages purchased.
Included in the liability for loss reserves at December 31, 1996 are $238.3
million ($213.0 million net of reinsurance recoverables) of loss reserves
pertaining to asbestos-related and environmental pollution claims for business
written in or before 1987. The following table presents information relating to
the net loss reserves pertaining to asbestos-related and environmental pollution
claims for business written in or before 1987 for the years ending December 31,
1996, 1995 and 1994:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------
1996 1995 1994
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Net loss reserves, beginning of year............................. $101,008 $100,404 $ 97,040
Provision for policy claims and related expenses................. 135,801 23,547 17,996
Payments for policy claims and related expenses.................. (23,762) (22,943) (14,632)
-------- -------- --------
Net loss reserves, end of year................................... $213,047 $101,008 $100,404
-------- -------- --------
-------- -------- --------
</TABLE>
The 1996 provision for policy claims and related expenses includes a 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 a 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
estimate of its ultimate losses, based on current information and actuarial
methodologies.
Included in the December 31, 1996 net loss reserves pertaining to
asbestos-related and environmental pollution claims for business written in or
before 1987 are $78.2 million of loss costs for claims incurred but not
reported, $49.2 million of loss costs for reported claims and $85.6 million of
related expenses.
12
<PAGE>
The following table presents information related to the number of insureds
with asbestos-related and environmental pollution claims outstanding for
business written in or before 1987:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------
1996 1995
---- ----
<S> <C> <C>
Number of insureds with outstanding claims, beginning of year..................... 447 477
Additional insureds with claims during the year................................... 153 188
Insureds with closed or settled claims during the year............................ (252) (218)
---- ----
Number of insureds with outstanding claims, end of year........................... 348 447
---- ----
---- ----
</TABLE>
The average net paid loss per insured for asbestos-related and
environmental pollution claims for business written in or before 1987 was
$50,200 and $61,100 for the years 1996 and 1995, respectively.
The Company continues to receive claims asserting injuries from hazardous
materials and alleged damages to cover various clean-up costs. Asbestos-related
and environmental pollution claims primarily affect the Company's general
liability, multiple peril and reinsurance lines of business. For business
written in or before 1987, coverage and claim settlement issues, such as the
determination that coverage exists and the definition of an occurrence, may
cause the actual loss development for asbestos-related and environmental
pollution claims to exhibit more variation than the remainder of the Company's
book of business.
Since 1987, the Company has generally excluded coverage for most types of
asbestos-related and environmental pollution claims from its general liability
policies, other than policies specifically intended to provide environmental
pollution and asbestos removal coverages. Policies written by the Company after
1987 ('post-1987 A&E business') which specifically intend to provide
environmental pollution coverages are written primarily on a claims made basis
and those which specifically intend to provide asbestos removal coverages are
written on an occurrence basis, generally with liability limits of $1.1 million
(net of reinsurance), including defense costs.
The liability for loss reserves at December 31, 1996 also included $40.8
million ($27.8 million net of reinsurance recoverables) of loss reserves
pertaining to post-1987 A&E business. The following table presents information
relating to the net loss reserves pertaining to claims for post-1987 A&E
business for the years ending December 31, 1996, 1995 and 1994:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------
1996 1995 1994
------- ------- -------
(In thousands)
<S> <C> <C> <C>
Net loss reserves, beginning of year.............................. $29,698 $29,739 $24,994
Provision for policy claims and related expenses.................. 5,857 2,357 10,283
Payments for policy claims and related expenses................... (7,791) (2,398) (5,538)
------- ------- -------
Net loss reserves, end of year.................................... $27,764 $29,698 $29,739
------- ------- -------
------- ------- -------
</TABLE>
The December 31, 1996 net loss reserves pertaining to claims for post-1987
A&E business include $13.2 million of loss costs for claims incurred but not
reported, $4.3 million of loss costs for reported claims and $10.3 million of
related expenses.
The following table presents information related to the number of insureds
with claims outstanding for post-1987 A&E business:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------
1996 1995
---- ----
<S> <C> <C>
Number of insureds with outstanding claims, beginning of year..................... 303 189
Additional insureds with claims during the year................................... 385 275
Insureds with closed or settled claims during the year............................ (214) (161)
---- ----
Number of insureds with outstanding claims, end of year........................... 474 303
---- ----
---- ----
</TABLE>
The average net paid loss per insured for claims for post-1987 A&E business
was $20,500 and $5,600 for the years 1996 and 1995, respectively.
Although the Company believes, in light of present facts and current legal
interpretations, that the overall loss reserves of the Reliance Property and
Casualty Companies are adequate to meet their obligations under existing
policies, due to the inherent uncertainty and complexity of the reserving
process, the ultimate liability may be more or less than such reserves.
13
<PAGE>
PORTFOLIO INVESTMENTS
Investment activities are an integral part of the business of the Reliance
Insurance Group. The Reliance Insurance Group believes that the investment
objectives of safety and liquidity, while seeking the best available return, can
be achieved by active portfolio management and intensive monitoring of
investments. Reference is made to 'Financial Review--Investment Portfolio' on
page 27 of the Company's 1996 Annual Report, which section is incorporated
herein by reference, and Note 2 to the Consolidated Financial Statements.
At December 31, 1996, the Company's investment portfolio was $4.2 billion
(at cost) with 90% in fixed maturities and short-term securities (including
redeemable preferred stock and cash) and 10% in equity securities, approximately
24% of which were convertible preferred stock. The following table details the
distribution of the Company's investments at December 31, 1996:
<TABLE>
<CAPTION>
AMORTIZED MARKET CARRYING
COST VALUE VALUE
---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
Fixed maturities available for sale:
Bonds and notes:
United States government and
government agencies and
authorities...................... $ 704,386 $ 702,472 $ 702,472
States, municipalities and
political subdivisions........... 128,874 132,163 132,163
Foreign-government................. 42,955 46,172 46,172
Foreign-other...................... 96,051 103,976 103,976
Public utilities................... 374,404 373,389 373,389
Convertibles and bonds with
warrants attached................ 87,625 87,134 87,134
All other corporate bonds and
notes............................ 662,385 654,809 654,809
Redeemable preferred stocks........... 499,249 523,554 523,554
---------- ---------- ----------
2,595,929 2,623,669 2,623,669
---------- ---------- ----------
Fixed maturities held for investment:
Bonds and notes:
States, municipalities and
political subdivisions........... 8,382 8,169 8,382
Foreign-government................. 145,065 150,622 145,065
Foreign-other...................... 17,978 20,172 17,978
Public utilities................... 355,567 357,377 355,567
All other corporate bonds and
notes............................ 148,026 150,059 148,026
Redeemable preferred stocks........... 112,818 115,339 112,818
---------- ---------- ----------
787,836 801,738 787,836
---------- ---------- ----------
Total fixed maturities........... 3,383,765 3,425,407 3,411,505
---------- ---------- ----------
Equity securities(1):
Common stocks:
Public utilities................... 3,333 4,928 4,928
Banks, trusts and insurance
companies........................ 24,622 38,284 38,284
Industrial and other............... 292,365 556,463 556,463
Nonredeemable preferred stocks........ 115,733 116,931 116,931
---------- ---------- ----------
436,053 716,606 716,606
---------- ---------- ----------
Short-term investments(2)............... 355,967 355,967 355,967
---------- ---------- ----------
Total investment portfolio....... $4,175,785 $4,497,980 $4,484,078
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
<TABLE>
<CAPTION>
COST AND CARRYING
VALUE
-----------------
<S> <C>
(IN THOUSANDS)
Mortgage Loans(3)............. $ 19,506
Investments in real estate.... 286,664
</TABLE>
- ------------------
(1) Does not include investment in Zenith National Insurance Corp. which is
accounted for by the equity method and which, as of December 31, 1996, had a
carrying value of $159.2 million and a market value of $180.0 million. See
'--Investee Company.'
(2) Includes cash of $36.8 million.
(3) In the Company's Consolidated Financial Statements, mortgage loans are
included in premiums and other receivables.
14
<PAGE>
The Company seeks to maintain a diversified and balanced fixed maturity
portfolio representing a broad spectrum of industries and types of securities.
The Company holds virtually no investments in commercial real estate mortgages
and has no exposure to derivative securities (other than through its ownership
of any option, warrant or convertible security with an exercise or conversion
price related to an equity security). Purchases of fixed maturity securities are
researched individually based on in-depth analysis and objective predetermined
investment criteria and are managed to achieve a proper balance of safety,
liquidity and investment yields. The Reliance Insurance Group primarily invests
in investment grade securities (those rated 'BBB' or better by S&P), and, to a
lesser extent, non-investment grade and non-rated securities.
At December 31, 1996, the aggregate carrying value and market value of
fixed maturities (other than short-term investments and cash) that either have
been rated by S&P in the following categories or are non-rated were as follows:
<TABLE>
<CAPTION>
PERCENT
CARRYING MARKET OF MARKET
VALUE VALUE VALUE
---------- ---------- ---------
(IN THOUSANDS, EXCEPT PERCENTAGES)
<S> <C> <C> <C>
AAA to A...................... $2,056,676 $2,066,354 60%
BBB........................... 761,756 765,619 23
---------- ---------- ---
Total investment grade..... 2,818,432 2,831,973 83
---------- ---------- ---
BB to B....................... 488,167 488,506 14
CCC to D...................... 11,301 11,301 --
Non-rated..................... 93,605 93,627 3
---------- ---------- ---
Total...................... $3,411,505 $3,425,407 100%
---------- ---------- ---
---------- ---------- ---
</TABLE>
Substantially all of the non-investment grade and non-rated fixed
maturities are classified as 'available for sale' and, accordingly, are carried
at quoted market value. All publicly traded investment grade securities are
priced using the Merrill Lynch Matrix Pricing model, which model is one of the
standard methods of pricing such securities in the industry. All publicly traded
non-investment grade securities, except as indicated below, are priced from
broker-dealers who make markets in these and other similar securities. For fixed
maturities not publicly traded, prices are estimated based on values obtained
from independent third parties or quoted market prices of comparable
instruments. Upon sale, such prices may not be realized when the size of a
particular investment in an issue is significant in relation to the total size
of such issue. Non-investment grade securities that are thinly traded are priced
using internally developed calculations. Such securities represent less than 1%
of the Reliance Insurance Group's fixed maturities portfolio.
Equity investments are made after an in-depth analysis of individual
company's fundamentals by the Reliance Insurance Group's staff of investment
professionals. They seek to identify equities of companies with strong growth
prospects and equities that appear to be undervalued relative to the issuer's
business fundamentals, such as earnings, cash flows, balance sheet and future
prospects. Subsequent to purchase, the business fundamentals of each equity
investment are carefully monitored.
As of March 1, 1997, the Reliance Insurance Group owned 3,578,634 shares of
common stock of Symbol Technologies, Inc. ('Symbol'), representing 13.7% of the
then outstanding common stock of Symbol. Symbol is the nation's largest
manufacturer of bar code-based data capture systems. As of March 1, 1997, the
market value of the Reliance Insurance Group's investment in Symbol was
$179,826,000 (based upon the closing price on such date as reported by the
NYSE), with a cost basis of $27,252,000. The board of directors of Symbol
includes certain executive officers of the Company.
As of March 1, 1997, the Reliance Insurance Group owned 2,449,624 shares of
Human Genome Sciences, Inc. ('Human Genome'), representing 13.1% of the then
outstanding common stock of Human Genome. Human Genome specializes in human
genetic research designed to detect and treat human illnesses. As of March 1,
1997, the market value of the Reliance Insurance Group's investment in Human
Genome was $93,086,000 (based upon
15
<PAGE>
the last reported sales price on such date as reported by the Nasdaq National
Market), with a cost basis of $52,382,000.
At December 31, 1996, the Company's real estate operations had holdings
with a carrying value of $286.7 million, which includes nine shopping centers
with an aggregate carrying value of $118.8 million, office buildings and other
commercial properties with an aggregate carrying value of $105.5 million, and
undeveloped land with a carrying value of $62.4 million.
The following table presents the investment results of the Reliance
Insurance Group's investment portfolio for each of the years ended December 31,
1996, 1995, and 1994:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------
1996 1995 1994
---------- ---------- ----------
(IN THOUSANDS, EXCEPT PERCENTAGES)
<S> <C> <C> <C>
Fixed Maturities:
Average investments(1).................. $3,625,144 $3,394,988 $3,213,556
Net investment income................... 260,275 243,268 221,771
Realized gains (losses)................. (5,686) 10,521 16,705
Increase (decrease) in unrealized
gains................................. (68,739) 329,457 (345,783)
Average annual yield:
Net investment income.............. 7.18% 7.17% 6.90%
Realized gains (losses)............ (0.15) 0.31 0.52
Increase (decrease) in unrealized
gains............................ (1.90) 9.70 (10.76)
---------- ---------- ----------
Return on fixed maturities.............. 5.13% 17.18% (3.34)%
---------- ---------- ----------
---------- ---------- ----------
Equity Securities(2):
Average investments(1).................. $ 703,121 $ 600,206 $ 540,139
Net investment income................... 12,425 19,317 26,251
Realized gains.......................... 58,296 23,811 1,611
Increase (decrease) in unrealized
gains................................. 15,939 182,507 (6,849)
Average annual yield:
Net investment income.............. 1.77% 3.22% 4.86%
Realized gains..................... 8.29 3.97 0.30
Increase (decrease) in unrealized
gains............................ 2.27 30.40 (1.27)
---------- ---------- ----------
Return on equity securities............. 12.33% 37.59% 3.89%
---------- ---------- ----------
---------- ---------- ----------
Total weighted average return on fixed
maturities and equity securities(3)... 6.30% 20.25% (2.30)%
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
- ------------------
(1) The average is computed by dividing the total market value of investments at
the beginning of the period plus the individual quarter-end balances by five
for the years ended December 31, 1996, 1995 and 1994.
(2) Does not include investment in Zenith National Insurance Corp. See
'--Investee Company.'
(3) The impact on the overall rate of return of a one percent increase or
decrease in the December 31, 1996 fixed maturity portfolio market value
would be approximately 0.78%
The carrying value and market value at December 31, 1996 of fixed
maturities for which interest is payable on a deferred basis was $152.2 million.
16
<PAGE>
INVESTEE COMPANY
As of March 1, 1997, the Reliance Insurance Group owned 6,574,445 shares of
common stock of Zenith National Insurance Corp. ('Zenith'), representing 37.4%
of the outstanding common stock of Zenith, a California-based insurance company
with significant workers' compensation and standard commercial and personal
lines business. As of March 1, 1997 the market value of the Reliance Insurance
Group's investment in Zenith was $174,223,000 (based upon the closing price on
such date as reported by the NYSE), with a carrying value of $159,157,000.
Certain executive officers of the Company serve, at the Company's request, as
directors of Zenith. The Company's investment in Zenith is accounted for by the
equity method. See Note 3 to the Consolidated Financial Statements.
REGULATION
The businesses of the Reliance Insurance Group, in common with those of
other insurance companies, are subject to comprehensive, detailed regulation in
the jurisdictions in which they do business. Such regulation is primarily for
the protection of policyholders rather than for the benefit of investors.
Although their scope varies from place to place, insurance laws in general grant
broad powers to supervisory agencies or officials to examine companies and to
enforce rules or exercise discretion touching almost every significant aspect of
the conduct of the insurance business. These include the licensing of companies
and agents to transact business, the imposition of monetary penalties for rules
violations, varying degrees of control over premium rates (particularly for
property and casualty companies), the forms of policies offered to customers,
financial statements, periodic reporting, permissible investments and adherence
to financial standards relating to surplus, dividends and other criteria of
solvency intended to assure the satisfaction of obligations to policyholders.
Other legislation obliges the Reliance Property and Casualty Companies to offer
policies or assume risks in various markets which they would not seek if they
were acting solely in their own interest. While such regulation and legislation
is sometimes burdensome, inasmuch as all insurance companies similarly situated
are subject to such controls, the Company does not believe that the competitive
position of the Reliance Insurance Group is adversely affected.
State holding company acts also regulate changes of control in insurance
holding companies and transactions and dividends between an insurance company
and its parent or affiliates. Although the specific provisions vary, the holding
company acts generally prohibit a person from acquiring a controlling interest
in an insurer incorporated in the state promulgating the act or in any other
controlling person of such insurer unless the insurance authority has approved
the proposed acquisition in accordance with the applicable regulations. In many
states, including Pennsylvania, where Reliance Insurance Company is domiciled,
'control' is presumed to exist if 10% or more of the voting securities of the
insurer are owned or controlled by a party, although the insurance authority may
find that 'control' in fact does or does not exist where a person owns or
controls either a lesser or a greater amount of securities. The holding company
acts also impose standards on certain transactions with related companies, which
generally include, among other requirements, that all transactions be fair and
reasonable and that certain types of transactions receive prior regulatory
approval either in all instances or when certain regulatory thresholds have been
exceeded.
The Insurance Law of Pennsylvania, where Reliance Insurance Company is
domiciled, limits the maximum amount of dividends which may be paid without
approval by the Pennsylvania Insurance Department. Under such law, Reliance
Insurance Company may pay dividends during the year equal to the greater of (a)
10% of the preceding year-end policyholders' surplus or (b) the preceding year's
statutory net income, but in no event to exceed the amount of unassigned funds,
which are defined as 'undistributed, accumulated surplus including net income
and unrealized gains since the organization of the insurer.' In addition, the
Pennsylvania law specifies factors to be considered by the Pennsylvania
Insurance Department to allow it to determine that statutory surplus after the
payment of dividends is reasonable in relation to an insurance company's
outstanding liabilities and adequate for its financial needs. Such factors
include the size of the company, the extent to which its business is diversified
among several lines of insurance, the number and size of risks insured, the
nature and extent of the company's reinsurance and the adequacy of the company's
reserves. The maximum dividend permitted by law is not indicative of an
insurer's actual ability to pay dividends, which may be constrained by business
and regulatory considerations, such as the impact of dividends on surplus, which
could affect an insurer's ratings, competitive position, the amount of
17
<PAGE>
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.
The total amount of common stock dividends paid by Reliance Insurance
Company was $111.5 million in each of 1996, 1995 and 1994. During 1997, $118.5
million would be available for dividend payments by Reliance Insurance Company
under Pennsylvania law. The Company believes such amount will be sufficient to
meet its cash needs.
There is no assurance that Reliance Insurance Company will meet the test in
effect from time to time under Pennsylvania law for the payment of dividends
without prior Insurance Department approval or that any requested approval will
be obtained. Reliance Insurance Company has been advised by the Pennsylvania
Insurance Department that any required prior approval will be based upon a
solvency standard and will not be unreasonably withheld. Any significant
limitation of Reliance Insurance Company's dividends would adversely affect the
Company's ability to service its debt and to pay dividends on its common stock.
The National Association of Insurance Commissioners (the 'NAIC') has a
'risk-based capital' requirement for the property and casualty insurance
industry. 'Risk-based capital' refers to the determination of the amount of
statutory capital required for an insurer based on the risks assumed by the
insurer (including, for example, investment risks, credit risks relating to
reinsurance recoverables and underwriting risks) rather than just the amount of
net premiums written by the insurer. A formula that applies prescribed factors
to the various risk elements in an insurer's business is used to determine the
minimum statutory capital requirement for the insurer. An insurer having less
statutory capital than the formula calculates would be subject to varying
degrees of regulatory intervention, depending on the level of capital
inadequacy. All of the Company's statutory insurance companies have statutory
capital in excess of the minimum required risk-based capital.
Maintaining appropriate levels of statutory surplus is considered important
by the Company's management, state insurance regulatory authorities, and the
agencies that rate insurers' claims-paying abilities and financial strength.
Failure to maintain certain levels of statutory capital and surplus could result
in increased scrutiny or, in some cases, action taken by state regulatory
authorities and/or downgrades in an insurer's ratings.
The Company's principal property and casualty insurance subsidiary,
Reliance Insurance Company, has operated outside of the NAIC financial ratio
range concerning liabilities to liquid assets (the 'NAIC liquidity test'). This
ratio is intended only as a guideline for an insurance company to follow. The
Company believes that it has sufficient marketable assets on hand to make timely
payment of claims and other operating requirements.
In 1994, Reliance Insurance Company and several of its affiliates received
an order from the outgoing Insurance Commissioner ordering refunds under
California Proposition 103 totaling $72.3 million, inclusive of interest. On
January 31, 1996, the Company reached a settlement with the California
Department of Insurance resolving its total liability for refunds and interest
under Proposition 103. The settlement requires the Company to pay $15.6 million
in refunds and interest on certain policies issued or renewed between November
8, 1988 and November 7, 1989. Although the Company believes that the California
Department of Insurance misapplied Proposition 103 as it relates to it, the
Company agreed to the settlement to avoid prolonging the matter further. In the
fourth quarter of 1995, the Company recorded a pre-tax charge of $4.0 million
related to Proposition 103. The fourth quarter 1995 charge represents the
difference between the settlement amount and the pre-tax charge of $11.6 million
the Company had taken in the fourth quarter of 1994 to provide for Proposition
103 refunds and interest.
From time to time, other states have considered adopting legislation or
regulations which could adversely affect the manner in which the Company sets
rates for policies of insurance, particularly as they relate to personal lines.
No assurance can be given as to what effect the adoption of any such legislation
or regulation would have on the ability of the Company to raise its rates.
18
<PAGE>
COMPETITION
All of the Company's businesses are highly competitive. The property and
casualty insurance business is fragmented and no single company dominates any of
the markets in which the Company operates. The Reliance Property and Casualty
Companies compete with individual companies and with groups of affiliated
companies with greater financial resources, larger sales forces and more
widespread agency and broker relationships. Competition in the property and
casualty insurance industry is based primarily on price, product design and
service. In addition, because the Reliance Property and Casualty Companies sell
policies through independent agents and insurance brokers who are not obligated
to choose the policies of the Reliance Property and Casualty Companies over
those of another insurer, the Reliance Property and Casualty Companies must
compete for agents and brokers and for the business they control. Such
competition is based upon price, product design, policyholder service,
commissions and service to agents and brokers.
Commonwealth/Transnation Title competes with other large national title
insurance companies and with smaller, locally established businesses which may
possess distinct competitive advantages. Competition in the title insurance
business is based primarily on the quality and timeliness of service. In some
market areas, abstracts and title opinions issued by attorneys are used as an
alternative to title insurance and other services provided by title companies.
In addition, certain jurisdictions have title registration systems which can
lessen the demand for title insurance.
RCG Information Technology competes with other national mid-size
information technology services companies, as well as smaller computer
professional supplemental staffing firms. Competition in the information
technology consulting business is based primarily on price, service and quality
of the solutions provided and the availability of qualified computer
professionals.
SALE OF NON-CORE OPERATIONS
In July 1993, the Company completed the sale of its life insurance
subsidiary, United Pacific Life Insurance Company. In the fourth quarter of
1992, the Company sold substantially all of the operating assets and insurance
brokerage, employee benefits consulting and related services businesses of its
insurance brokerage subsidiary, Frank B. Hall & Co. Inc. ('Hall'). Also in the
fourth quarter of 1992, the Company sold its mortgage insurance subsidiary,
Commonwealth Mortgage Assurance Corporation, through a public offering of 100%
of the common stock of CMAC Investment Corporation.
ITEM 2. PROPERTIES.
The Company and its consolidated subsidiaries own and lease offices in
various locations primarily in the United States. None of these properties is
material to the Company's business. At December 31, 1996, the Company and its
consolidated subsidiaries employed approximately 9,300 persons in approximately
480 offices.
ITEM 3. LEGAL PROCEEDINGS.
The Company and its subsidiaries are involved in certain litigation arising
in the course of their businesses, some of which involve claims of substantial
amounts. Although the ultimate outcome of these matters cannot be ascertained at
this time, and the results of legal proceedings cannot be predicted with
certainty, the Company is contesting the allegations of the complaints in each
action pending against it and believes, based on current knowledge and after
consultation with counsel, that the resolution of these matters will not have a
material adverse effect on the Consolidated Financial Statements. In addition,
the Company is subject to the litigation set forth below.
In June 1989, Hall, the predecessor corporation of Prometheus Funding
Corp., a subsidiary of the Company ('Prometheus'), entered into a settlement
agreement, which is subject to court approval, with the Superintendent of
Insurance of the State of New York (the 'Superintendent'), arising out of the
insolvency of Union Indemnity Insurance Company of New York, Inc. ('Union
Indemnity'). The settlement agreement was submitted to the court for approval in
October 1989 and objections were filed and continue
19
<PAGE>
to be pursued by various parties. The Superintendent has informed Prometheus
that he intends to pursue court approval of the settlement. The settlement
agreement will not become effective until final approval by the court and there
is no assurance that such approval will be obtained.
The Company is seeking a redetermination in the U.S. Tax Court of an
asserted tax deficiency for the year ended December 31, 1980, as set forth by
the Commissioner of Internal Revenue in a Notice of Deficiency dated June 27,
1994. The Company intends to pursue the action vigorously. The Internal Revenue
Service ('IRS') seeks to disallow investment tax credits of approximately $36.5
million with respect to intermodal cargo containers leased to others by a former
subsidiary of the Company. The Company estimates that, if the IRS were to
prevail, the deficiency would result in an increase in tax of approximately
$31.0 million for 1980, plus interest at the statutorily prescribed rates for
the periods since that year. On January 11, 1995, the U.S. Tax Court handed down
a decision in Norfolk Southern Corp. v. Commissioner, a case involving a
taxpayer, which, like the Company, had claimed investment tax credits in
connection with the leasing of intermodal cargo containers. In the decision,
which is the first pronouncement by the courts on this issue, the Tax Court
articulated a standard, different from that proposed by the IRS, which, if
applied to the Company, would result in the disallowance of a substantial
percentage (although significantly less than that sought by the IRS) of the
investment tax credits claimed by the Company. The Company believes that it has
appropriately provided for this matter in light of its exposure in the event a
standard such as the one articulated in Norfolk Southern is applied to the
Company's facts and circumstances.
On February 22, 1995, the Tax Court granted the joint motion of the Company
and the Commissioner to postpone the trial of this matter until after the
resolution of appellate proceedings in Norfolk Southern. The Company does not
believe that it is probable that its additional liability, if any, in respect of
this matter will have a material adverse effect on its Consolidated Financial
Statements.
See Note 14 to the Consolidated Financial Statements for additional
information concerning the above referenced legal proceedings affecting the
Company and its subsidiaries.
20
<PAGE>
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matter was submitted to a vote of security holders in the fourth quarter
of the fiscal year covered by this Annual Report on Form 10-K.
EXECUTIVE OFFICERS OF THE REGISTRANT
Set forth below is the name, age and position of each of the executive
officers of the Company:
<TABLE>
<CAPTION>
NAME AND AGE POSITION
- ------------------------------- -----------------------------------------------
<S> <C>
Saul P. Steinberg (57)......... Chairman of the Board and Chief Executive
Officer
Robert M. Steinberg (54)....... President, Chief Operating Officer and Director
George E. Bello (61)........... Executive Vice President, Controller and
Director
Lowell C. Freiberg (57)........ Senior Vice President, Chief Financial Officer
and Director
Henry A. Lambert (61).......... Senior Vice President--Real Estate Investments
and Operations
Dennis J. O'Leary (49)......... Senior Vice President--Taxes
Philip S. Sherman (48)......... Senior Vice President--Group Controller
Bruce L. Sokoloff (48)......... Senior Vice President--Administration
Howard E. Steinberg (52)....... Senior Vice President, General Counsel and
Corporate Secretary
James E. Yacobucci (45)........ Senior Vice President--Investments and Director
</TABLE>
The association between the Company and each of its executive officers is
described below. Each director of the Company is also a director of Reliance
Financial Services Corporation and Reliance Insurance Company.
Saul P. Steinberg founded and has been the Chief Executive Officer and a
Director of the Company and predecessors of the Company since 1961. Mr.
Steinberg is a Director of Symbol Technologies, Inc. and Zenith National
Insurance Corp. He is Chairman of the Executive Committee and the Regular
Compensation Committee of the Board of Directors. He is the brother of Robert M.
Steinberg and the brother-in-law of Bruce L. Sokoloff.
Robert M. Steinberg became a Director of the Company in 1981 and President
and Chief Operating Officer in 1982. He has held various positions with
predecessors of the Company since 1965. In October 1984, Mr. Steinberg was
elected Chairman of the Board and Chief Executive Officer of Reliance Insurance.
He is a Director of Zenith National Insurance Corp. Mr. Steinberg is a member of
the Executive Committee and the Regular Compensation Committee of the Board of
Directors. Mr. Steinberg is the brother of Saul P. Steinberg and the
brother-in-law of Bruce L. Sokoloff.
George E. Bello became Executive Vice President and Controller and a
Director of the Company in 1982. He has held various positions with predecessors
of the Company since 1968. He is a Director of Zenith National Insurance Corp.,
United Dental Care, Inc. and Horizon Mental Health Management, Inc. Mr. Bello is
a member of the Finance Committee of the Board of Directors.
Lowell C. Freiberg became Senior Vice President and a Director of the
Company in 1982 and Chief Financial Officer in 1985. He also served as Treasurer
of the Company from 1982 until March 1994.
21
<PAGE>
Mr. Freiberg has held various positions with predecessors of the Company since
1969. He is a Director of Symbol Technologies, Inc. Mr. Freiberg is a member of
the Finance Committee of the Board of Directors.
Henry A. Lambert was elected Senior Vice President--Real Estate Investments
and Operations of the Company in 1982. He has held various positions with
predecessors of the Company since 1977. He is President and Chief Executive
Officer of Reliance Development Group, Inc., the real estate management
subsidiary of the Company.
Dennis J. O'Leary joined the Company in 1985 as Vice President--Director of
Taxes. Prior thereto, he was a partner at the accounting firm of Deloitte &
Touche LLP (formerly Touche Ross & Co.) since 1980 and was associated with the
firm since 1975. In 1987 he was elected Senior Vice President--Taxes.
Philip S. Sherman was elected Vice President--Group Controller of the
Company in l984 and in 1987 he was elected Senior Vice President--Group
Controller. He has held various positions with predecessors of the Company since
l980.
Bruce L. Sokoloff was elected Senior Vice President--Administration of the
Company in 1982. He has held various positions with predecessors of the Company
since 1973. He is a director of Individual Investor Group, Inc. Mr. Sokoloff is
the brother-in-law of Messrs. Saul P. Steinberg and Robert M. Steinberg.
Howard E. Steinberg, Esq. joined the Company in March 1983, as Senior Vice
President, General Counsel and Corporate Secretary. Prior thereto, he was a
partner in the law firm of Dewey, Ballantine, Bushby, Palmer & Wood. Mr.
Steinberg also serves as the Chairman of the New York State Thruway Authority,
an unpaid position to which he was appointed in January 1996.
James E. Yacobucci became a Director of the Company and Senior Vice
President--Investments of Reliance Insurance in May 1989. He became Senior Vice
President--Investments of the Company in December 1990.
Officers are not elected for a fixed term of office but serve at the
discretion of the Board of Directors.
22
<PAGE>
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
See the information in 'Market and Dividend Information for Common Stock'
on page 58 of the Reliance Group Holdings 1996 Annual Report, which information
is incorporated herein by reference.
ITEM 6. SELECTED FINANCIAL DATA.
See the information in 'Reliance Group Holdings, Inc. & Subsidiaries
Selected Financial Data' on pages 21 and 22 of the Reliance Group Holdings 1996
Annual Report, which information is incorporated herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
See the information in 'Reliance Group Holdings, Inc. & Subsidiaries
Financial Review' on pages 24 through 31 of the Reliance Group Holdings 1996
Annual Report, which information is incorporated herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The financial statements of the Company and its consolidated subsidiaries,
included on pages 32 through 55 of the Reliance Group Holdings 1996 Annual
Report, which information is incorporated herein by reference, are listed in
Item 14 below.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Information regarding the executive officers of the Company is included in
Part I of this report under the caption 'Executive Officers of the Registrant.'
Information regarding the directors of the Company is incorporated herein
by reference from its Proxy Statement for the Annual Meeting of Stockholders to
be held May 8, 1997, under the caption 'Proposal 1-- Election of Directors.'
ITEM 11. EXECUTIVE COMPENSATION.
See the information in the Company's Proxy Statement for the Annual Meeting
of Stockholders to be held May 8, 1997, under the caption 'Executive
Compensation,' which information (other than the information under the captions
'Executive Compensation--Report of Compensation Committees of the Board' and
'Executive Compensation--Performance Graph') is incorporated herein by
reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
See the information in the Company's Proxy Statement for the Annual Meeting
of Stockholders to be held May 8, 1997, under the caption 'Security Ownership of
Certain Beneficial Owners and Management,' which information is incorporated
herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
See the information in the Company's Proxy Statement for the Annual Meeting
of Stockholders to be held May 8, 1997, under the captions 'Executive
Compensation--Compensation Committee Interlocks and Insider Participation' and
'Related Party Transactions,' which information is incorporated herein by
reference.
23
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(A) 1. FINANCIAL STATEMENTS.
The consolidated financial statements of Reliance Group Holdings, Inc. and
Subsidiaries, which appear on pages 32 through 55 of the Reliance Group Holdings
1996 Annual Report, are incorporated herein by reference.
<TABLE>
<CAPTION>
PAGE REFERENCE
-------------------
1996
ANNUAL
FORM 10-K REPORT
--------- ------
<S> <C> <C>
RELIANCE GROUP HOLDINGS, INC. AND SUBSIDIARIES:
Independent Auditors' Report............................ A-1 56
Consolidated Financial Statements at December 31, 1996
and 1995 and for the three years ended December 31,
1996:
Statement of Income................................ 32
Balance Sheet...................................... 33
Statement of Changes in Shareholders' Equity....... 34
Statement of Cash Flows............................ 35
Notes to Financial Statements (1-16)............... 36-55
</TABLE>
2. FINANCIAL STATEMENT SCHEDULES.
<TABLE>
<S> <C>
I -- Summary of Investments of Insurance Subsidiaries --
Other Than Investments in Related Parties............. A-2
II -- Condensed Financial Information of the Registrant at
December 31, 1996 and 1995 and for the three years
ended December 31, 1996:
Statement of Income................................. A-3
Balance Sheet....................................... A-4
Statement of Cash Flows............................. A-5
III -- Supplementary Insurance Information................... A-6
IV -- Reinsurance........................................... A-7
VI -- Supplemental Information Concerning Property and
Casualty Insurance Operations........................ A-8
</TABLE>
Pursuant to Rule 1-02(w) of Regulation S-X, Reliance Insurance Group's
investment in Zenith National Insurance Corp. met the definition of a
'significant subsidiary' in 1996 and 1994. Zenith National Insurance Corp. files
financial statements with the Securities and Exchange Commission which should be
referred to for additional information.
3. EXHIBITS.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- --------- --------------------------------------------------------------------
<S> <C>
3.1 Reliance Group Holdings' Certificate of Incorporation, as amended
(incorporated by reference to Exhibit 3(a) to Registration Statement
No. 2-77043).
3.2 Amendment to Exhibit 3.1, as filed with the Secretary of State of
the State of Delaware on July 22, 1986 incorporated by reference to
Exhibit 3.2 to Registration Statement No. 33-7493).
</TABLE>
24
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- --------- --------------------------------------------------------------------
<S> <C>
3.3 Reliance Group Holdings' By-Laws, as amended incorporated by
reference to Exhibit 3.3 to Reliance Group Holdings' Annual Report
on Form 10-K for the year ended December 31, 1991).
3.4 Amendment to Exhibit 3.1, as filed with the Secretary of State of
the State of Delaware on May 27, 1993 (incorporated by reference to
Exhibit 4.5 to Registration Statement No. 33-67396).
*4.
+10.1 Employment Agreement between Reliance Group Holdings and Saul P.
Steinberg, dated as of January 1, 1992 (incorporated by reference to
Exhibit 10.6 to Reliance Group Holdings' Annual Report on Form 10-K
for the year ended December 31, 1991).
+10.2 First Amendment, dated as of January 1, 1994, to Employment
Agreement between Reliance Group Holdings and Saul P. Steinberg,
dated as of January 1, 1992 (incorporated by reference to Exhibit
10.6 to Reliance Group Holdings' Annual Report on Form 10-K for the
year ended December 31, 1993).
+10.3 Second Amendment, dated as of March 31, 1994, to Employment
Agreement, dated as of January 1, 1992, between Reliance Group
Holdings and Saul P. Steinberg (incorporated by reference to Exhibit
10.1 to Reliance Group Holdings' Quarterly Report on Form 10-Q for
the quarter ended March 31, 1994).
+10.4 Employment Agreement between Reliance Group Holdings and Saul P.
Steinberg, dated as of February 15, 1996 (and Schedule attached
thereto pursuant to Instruction 1 to Item 601 of Regulation S-K)
(incorporated by reference to Exhibit 10.1 to Reliance Group
Holdings' Quarterly Report on Form 10-Q for the quarter ended March
31, 1996).
+10.5 Employment Agreement between Reliance Insurance Company and Saul P.
Steinberg, dated as of January 1, 1992 (incorporated by reference to
Exhibit 10.7 to Reliance Group Holdings' Annual Report on Form 10-K
for the year ended December 31, 1991).
+10.6 First Amendment, dated as of January 1, 1994, to Employment
Agreement between Reliance Insurance Company and Saul P. Steinberg,
dated as of January 1, 1992 (incorporated by reference to Exhibit
10.6 to Reliance Insurance Company's Annual Report on Form 10-K for
the year ended December 31, 1993).
+10.7 Second Amendment, dated as of March 31, 1994, to Employment
Agreement, dated as of January 1, 1992, between Reliance Insurance
Company and Saul P. Steinberg (incorporated by reference to Exhibit
10.1 to Reliance Insurance Company's Quarterly Report on Form 10-Q
for the quarter ended March 31, 1994).
+10.8 Employment Agreement between Reliance Insurance Company and Saul P.
Steinberg, dated as of February 15, 1996 (and Schedule attached
thereto pursuant to Instruction 1 to Item 601 of Regulation S-K)
(incorporated by reference to Exhibit 10.1 to Reliance Group
Holdings' Quarterly Report on Form 10-Q for the quarter ended March
31, 1996).
+10.9 Employment Agreement between Reliance Group Holdings and Robert M.
Steinberg, dated as of January 1, 1994 (incorporated by reference to
Exhibit 10.9 to Reliance Group Holdings' Annual Report on Form 10-K
for the year ended December 31, 1993).
</TABLE>
- ------------------
* Neither Reliance Group Holdings nor its subsidiaries is a party to any
instrument relating to long-term debt under which the securities authorized
exceed 10% of the total consolidated assets of Reliance Group Holdings and its
subsidiaries. Copies of instruments relating to long-term debt of lesser
amounts will be provided to the Securities and Exchange Commission upon
request.
+ Management contract or compensatory plan or arrangement required to be filed
as an Exhibit to this Form 10-K pursuant to Item 14(c).
25
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- --------- --------------------------------------------------------------------
<S> <C>
+10.10 First Amendment, dated as of March 31, 1994, to Employment
Agreement, dated as of January 1, 1994, between Reliance Group
Holdings and Robert M. Steinberg (incorporated by reference to
Exhibit 10.3 to Reliance Group Holdings' Quarterly Report on Form
10-Q for the quarter ended March 31, 1994).
+10.11 Employment Agreement between Reliance Insurance Company and Robert
M. Steinberg, dated as of January 1, 1994 (incorporated by reference
to Exhibit 10.7 to Reliance Insurance Company's Annual Report on
Form 10-K for the year ended December 31, 1993).
+10.12 First Amendment, dated as of March 31, 1994, to Employment
Agreement, dated as of January 1, 1994, between Reliance Insurance
Company and Robert M. Steinberg (incorporated by reference to
Exhibit 10.2 to Reliance Insurance Company's Quarterly Report on
Form 10-Q for the quarter ended March 31, 1994).
+10.13 Employment Agreement between Reliance Group Holdings and Bruce L.
Sokoloff, dated as of May 15, 1996 (incorporated by reference to
Exhibit 10.1 to Reliance Group Holdings' Quarterly Report on Form
10-Q for the quarter ended June 30, 1996).
+10.14 1986 Stock Option Plan of Reliance Group Holdings, as amended
(incorporated by reference to Exhibit 19.2 to Reliance Group
Holdings' Quarterly Report on Form 10-Q for the quarter ended June
30, 1990).
+10.15 The 1994 Stock Option Plan for Non-Employee Directors (incorporated
by reference to Exhibit 10.1 to Reliance Group Holdings' Quarterly
Report on Form 10-Q for the quarter ended June 30, 1994).
+10.16 The Reliance Group Holdings, Inc. 1994 Stock Option Plan
(incorporated by reference to Exhibit 10.2 to Reliance Group
Holdings' Quarterly Report on Form 10-Q for the quarter ended June
30, 1994).
+10.17 The Reliance Group Holdings, Inc. Executive Bonus Plan (incorporated
by reference to Exhibit 10.3 to Reliance Group Holdings' Quarterly
Report on Form 10-Q for the quarter ended June 30, 1994).
+10.18 The 1995 Amendment to The Reliance Group Holdings, Inc. Executive
Bonus Plan (incorporated by reference to Exhibit 10.15 to Reliance
Group Holdings' Annual Report on Form 10-K for the year ended
December 31, 1995).
+10.19 The 1996 Amendment to The Reliance Group Holdings, Inc. Executive
Bonus Plan.
+10.20 The Executive Bonus Plan for James E. Yacobucci, Senior Vice
President--Investments, of Reliance Group Holdings (incorporated by
reference to Exhibit 10.4 to Reliance Group Holdings' Quarterly
Report on Form 10-Q for the quarter ended June 30, 1994).
+10.21 Reliance National Risk Specialists 1988 Key Management Incentive
Plan (incorporated by reference to Exhibit 10.9 to Reliance
Insurance Company's Annual Report on Form 10-K for the year ended
December 31, 1988).
+10.22 Reliance National Risk Specialists 1992 Key Management Incentive
Plan (incorporated by reference to Exhibit 10.9 to Reliance
Insurance Company's Annual Report on Form 10-K for the year ended
December 31, 1993).
+10.23 Reliance National Risk Specialists 1993 Key Management Incentive
Plan (incorporated by reference to Exhibit 10.10 to Reliance
Insurance Company's Annual Report on Form 10-K for the year ended
December 31, 1993).
</TABLE>
- ------------------
+ Management contract or compensatory plan or arrangement required to be filed
as an Exhibit to this Form 10-K pursuant to Item 14(c).
26
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- --------- --------------------------------------------------------------------
<S> <C>
+10.24 Reliance National Risk Specialists 1994 Key Management Incentive
Plan (incorporated by reference to Exhibit 10.14 to Reliance
Insurance Company's Annual Report on Form 10-K for the year ended
December 31, 1994).
+10.25 Reliance National Risk Specialists 1995 Key Management Incentive
Plan.
+10.26 Reliance National Risk Specialists Supplemental Key Management
Incentive Plan (effective for policy years 1993, 1994 and 1995).
+10.27 Reliance National Risk Specialists 1996 Key Management Incentive
Plan.
+10.28 Memorandum, dated February 8, 1989, summarizing employment
arrangements between Reliance Insurance Company and Dennis Busti
(incorporated by reference to Exhibit 10.8 to Reliance Insurance
Company's Annual Report on Form 10-K for the year ended December 31,
1988).
10.29 Asset Purchase Agreement, dated July 24, 1992, between Frank B. Hall
& Co. Inc. ('Hall') and Aon Corporation ('Aon') (incorporated by
reference to Exhibit 2.1 to Reliance Group Holdings' Quarterly
Report on Form 10-Q for the quarter ended June 30, 1992).
10.30 Agreement and Plan of Merger, dated as of July 24, 1992, among
Reliance Group Holdings, Hall and Prometheus Liquidating Corp.
(incorporated by reference to Exhibit 2.2 to Reliance Group
Holdings' Quarterly Report on Form 10-Q for the quarter ended June
30, 1992).
10.31 Employee Benefit Agreement, dated July 24, 1992, among Reliance
Group Holdings and Aon (incorporated by reference to Exhibit 28.2 to
Reliance Group Holdings' Quarterly Report on Form 10-Q for the
quarter ended June 30, 1992).
10.32 Amendment, dated November 2, 1992, to Exhibit 10.29 (incorporated by
reference to Exhibit 2.1 to Reliance Group Holdings' Quarterly
Report on Form 10-Q for the quarter ended September 30, 1992).
10.33 Settlement Agreement and Release, dated June 2, 1989, between James
P. Corcoran, Superintendent of Insurance of the State of New York,
as Liquidator of Union Indemnity Insurance Company of New York, Inc.
and Hall (now known as Prometheus Funding Corp.) (incorporated
herein by reference to Exhibit 10.01 to Frank B. Hall & Co. Inc.'s
report on Form 10-Q for the quarter ended June 30, 1989).
13.1 Reliance Group Holdings 1996 Annual Report.
21.1 List of Subsidiaries of Reliance Group Holdings.
23.1 Consent of Deloitte & Touche LLP.
27.1 Financial Data Schedule.
**99.1 Annual Report on Form 11-K of Reliance Insurance Company Savings
Incentive Plan for the year ended December 31, 1996.
</TABLE>
- ------------------
+ Management contract or compensatory plan or arrangement required to be filed
as an Exhibit to this Form 10-K pursuant to Item 14(c).
** To be filed by Amendment.
(B) REPORTS ON FORM 8-K.
No reports on Form 8-K were filed during the year ended December 31, 1996.
27
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON
ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, ON THE 21ST DAY OF
MARCH, 1997.
RELIANCE GROUP HOLDINGS, INC.
BY: /s/ SAUL P. STEINBERG
----------------------------------
SAUL P. STEINBERG
CHAIRMAN OF THE BOARD
AND CHIEF EXECUTIVE OFFICER
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS
REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE
REGISTRANT AND IN THE CAPACITIES AND ON THE DATES INDICATED.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ---------------------- ---------------------------------------- --------------
<S> <C> <C>
SAUL P. STEINBERG Chairman of the Board, March 21, 1997
- ----------------------
SAUL P. STEINBERG Principal Executive Officer
and Director
GEORGE E. BELLO Principal Accounting March 21, 1997
- ---------------------- Officer and Director
GEORGE E. BELLO
LOWELL C. FREIBERG Principal Financial March 21, 1997
- ---------------------- Officer and Director
LOWELL C. FREIBERG
GEORGE R. BAKER Director March 21, 1997
- ----------------------
GEORGE R. BAKER
DENNIS A. BUSTI Director March 21, 1997
- ----------------------
DENNIS A. BUSTI
THOMAS P. GERRITY Director March 21, 1997
- ----------------------
THOMAS P. GERRITY
</TABLE>
28
<PAGE>
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ---------------------- ---------------------------------------- --------------
<S> <C> <C>
JEWELL J. MCCABE Director March 21, 1997
- ----------------------
JEWELL J. MCCABE
IRVING SCHNEIDER Director March 21, 1997
- ----------------------
IRVING SCHNEIDER
BERNARD L. SCHWARTZ Director March 21, 1997
- ----------------------
BERNARD L. SCHWARTZ
RICHARD E. SNYDER Director March 21, 1997
- ----------------------
RICHARD E. SNYDER
THOMAS J. STANTON, JR. Director March 21, 1997
- ----------------------
THOMAS J. STANTON, JR.
ROBERT M. STEINBERG Director March 21, 1997
- ----------------------
ROBERT M. STEINBERG
JAMES E. YACOBUCCI Director March 21, 1997
- ----------------------
JAMES E. YACOBUCCI
</TABLE>
29
<PAGE>
Independent Auditors' Report
Board of Directors and Shareholders
Reliance Group Holdings, Inc.
New York, New York
We have audited the consolidated financial statements of Reliance Group
Holdings, Inc. and subsidiaries as of December 31, 1996 and 1995, and for each
of the three years in the period ended December 31, 1996, and have issued our
report thereon dated February 14, 1997; such financial statements and report are
included in your 1996 Annual Report to Shareholders and are incorporated herein
by reference. Our audits also included the financial statement schedules of
Reliance Group Holdings, Inc., listed in Item 14. These financial statement
schedules are the responsibility of the Company's management. Our responsibility
is to express an opinion based on our audits. In our opinion, such financial
statement schedules, when considered in relation to the basic consolidated
financial statements taken as a whole, present fairly in all material respects
the information set forth therein.
DELOITTE & TOUCHE LLP
New York, New York
February 14, 1997
A-1
<PAGE>
SCHEDULE I
Item 14(a)2
Reliance Group Holdings, Inc. and Subsidiaries
Summary of Investments of Insurance Subsidiaries - Other Than Investments
in Related Parties
December 31, 1996
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------
Column A Column B Column C Column D
- ----------------------------------------------------------------------------------------------------------------------------
Amount at which
shown in the
Type of investment Cost Value balance sheet
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
(In thousands)
Fixed maturities available for sale:
Bonds and notes:
United States government and government agencies
and authorities $ 704,386 $ 702,472 $ 702,472
States, municipalities and political subdivisions 128,874 132,163 132,163
Foreign - government 42,955 46,172 46,172
Foreign - other 96,051 103,976 103,976
Public utilities 374,404 373,389 373,389
Convertibles and bonds with warrants attached 87,625 87,134 87,134
All other corporate bonds and notes 662,385 654,809 654,809
Redeemable preferred stocks 499,249 523,554 523,554
-------------- -------------- --------------
2,595,929 2,623,669 2,623,669
-------------- -------------- --------------
Fixed maturities held for investment:
Bonds and notes:
States, municipalities and political subdivisions 8,382 8,169 8,382
Foreign - government 145,065 150,622 145,065
Foreign - other 17,978 20,172 17,978
Public utilities 355,567 357,377 355,567
All other corporate bonds and notes 148,026 150,059 148,026
Redeemable preferred stocks 112,818 115,339 112,818
-------------- -------------- --------------
787,836 801,738 787,836
-------------- -------------- --------------
Equity securities:
Common stocks:
Public utilities 3,333 4,928 4,928
Banks, trusts and insurance companies 24,622 38,284 38,284
Industrial and other 292,365 556,463 556,463
Nonredeemable preferred stocks 115,733 116,931 116,931
-------------- -------------- --------------
436,053 716,606 716,606
-------------- -------------- --------------
Short-term investments 319,165 319,165 319,165
-------------- -------------- --------------
Cash 36,802 36,802 36,802
-------------- -------------- --------------
$ 4,497,980
==============
Mortgage loans(1) 19,506 19,506
Investments in real estate(2) 263,569 263,569
-------------- --------------
$ 4,458,860 $ 4,767,153
============== ==============
</TABLE>
(1) In the consolidated financial statements, mortgage loans are included in
premiums and other receivables.
(2) Excludes investments in real estate held by non-insurance subsidiaries
with a cost and carrying value of $23,095,000.
A-2
<PAGE>
SCHEDULE II
Item 14(a)2
Reliance Group Holdings, Inc
(Parent Company)
<TABLE>
<CAPTION>
Statement of Income
Year Ended December 31 1996 1995 1994
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
(In thousands)
Revenues:
Dividends from subsidiaries $ 110,000 $ 110,000 $ 110,000
Interest (including $6,415, $5,543 and $4,392 from subsidiaries) 7,246 6,153 4,485
------------ ------------ ------------
117,246 116,153 114,485
------------ ------------ ------------
Expenses:
Interest (including $21,212, $20,408 and $14,864 to subsidiaries) 89,220 88,391 82,239
General and administrative 36,081 35,600 37,024
------------ ------------ ------------
125,301 123,991 119,263
------------ ------------ ------------
(8,055) (7,838) (4,778)
Income tax benefit 42,488 49,699 35,067
------------ ------------ ------------
Income before equity in subsidiaries and investee company 34,433 41,861 30,289
Equity in subsidiaries (net income less dividends received) 4,866 46,263 4,054
Equity in investee company 8,908 7,792 9,478
Loss on disposal of discontinued operations of investee company - (4,497) -
------------ ------------ ------------
Income before extraordinary item 48,207 91,419 43,821
Extraordinary item - early extinguishment of subsidiary debt - (3,363) -
------------ ------------ ------------
Net income $ 48,207 $ 88,056 $ 43,821
============ ============ ============
</TABLE>
A-3
<PAGE>
SCHEDULE II
Item 14(a)2
Reliance Group Holdings, Inc.
(Parent Company)
<TABLE>
<CAPTION>
Balance Sheet
Assets December 31 1996 1995
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
(In thousands, except per-share amount)
Cash $ 184 $ 187
Investments in subsidiaries 1,576,719 1,582,133
Due from subsidiaries 101,529 87,218
Excess of cost over fair value of net assets acquired, less
accumulated amortization 27,982 29,091
Other assets 30,719 28,559
-------------- --------------
$ 1,737,133 $ 1,727,188
============== ==============
<CAPTION>
Liabilities and Shareholders' Equity
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Accounts payable and accrued expenses $ 46,981 $ 49,181
Federal income taxes, including deferred taxes 87,752 90,410
Debentures 650,000 650,000
Due to subsidiaries 275,720 259,249
-------------- --------------
1,060,453 1,048,840
-------------- --------------
Contingencies and commitments
Shareholders' equity:
Common stock, par value $.10 per-share, 225,000 shares authorized,
114,282 and 113,440 shares issued and outstanding 11,428 11,344
Additional paid-in capital 540,465 535,091
Retained earnings (deficit) (including undistributed net income of
subsidiaries of $388,426 and $374,652) (50,012) (61,694)
Net unrealized gain on investments of subsidiaries 198,786 219,356
Net unrealized loss on foreign currency translation of subsidiaries (23,987) (25,749)
-------------- --------------
676,680 678,348
-------------- --------------
$ 1,737,133 $ 1,727,188
============== ==============
</TABLE>
A-4
<PAGE>
SCHEDULE II
Item 14(a)2
Reliance Group Holdings, Inc.
(Parent Company)
<TABLE>
<CAPTION>
Statement of Cash Flows
Year Ended December 31 1996 1995 1994
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
(In thousands)
Cash flows from operating activities:
Net income $ 48,207 $ 88,056 $ 43,821
Equity in undistributed net income of subsidiaries and investee company (13,774) (46,195) (38,345)
Other-net (5,354) 4,583 16,962
-------------- -------------- --------------
29,079 46,444 22,438
-------------- -------------- --------------
Cash flows from investing activities:
Other-net (555) (290) (1,388)
-------------- -------------- --------------
(555) (290) (1,388)
-------------- -------------- --------------
Cash flows from financing activities:
Increase (decrease) in amounts due to/from subsidiaries-net 2,160 (11,325) 7,439
Issuance of common stock 5,838 1,196 7,324
Dividends (36,525) (36,242) (36,157)
-------------- -------------- --------------
(28,527) (46,371) (21,394)
-------------- -------------- --------------
Decrease in cash (3) (217) (344)
Cash, beginning of year 187 404 748
-------------- -------------- --------------
Cash, end of year $ 184 $ 187 $ 404
============== ============== ==============
</TABLE>
Supplemental disclosure of non-cash financing activities:
In 1995, investments in subsidiaries and due to subsidiaries were reduced by
$41,167,000 to reflect the elimination of intercompany balances of certain
dormant subsidiaries. In 1994, non-cash dividends from subsidiaries of
$24,813,000 were recorded as a reduction of due to subsidiaries.
A-5
<PAGE>
SCHEDULE III
Item 14(a)2
Reliance Group Holdings, Inc. and Subsidiaries
Supplementary Insurance Information
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
Column A Column B Column C Column D Column E Column F Column G Column H
- ----------------------------------------------------------------------------------------------------------------------------------
Amortization
Deferred Unpaid Policy of deferred
policy claims and Net claims and policy
acquisition related Unearned Premiums investment settlement acquisition
Segment costs expenses premiums earned income expenses costs
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
(In thousands)
Year Ended December 31, 1996:
Property and casualty $215,438 $6,265,420 $1,468,299 $1,800,854 $257,133 $1,350,337 $414,636
Title - 264,838 - 780,157 30,455 61,116 -
--------- ----------- ----------- ----------- ----------- ----------- -----------
$215,438 $6,530,258 $1,468,299 $2,581,011 $287,588 $1,411,453 $414,636
========= =========== =========== =========== =========== =========== ===========
Year Ended December 31, 1995:
Property and casualty $194,648 $5,859,352 $1,299,465 $1,774,591 $247,343 $1,201,959 $411,979
Title - 240,777 - 671,947 27,946 58,486 -
--------- ----------- ----------- ----------- ----------- ----------- -----------
$194,648 $6,100,129 $1,299,465 $2,446,538 $275,289 $1,260,445 $411,979
========= =========== =========== =========== =========== =========== ===========
Year Ended December 31, 1994:
Property and casualty $181,938 $5,581,483 $1,288,454 $1,777,318 $232,299 $1,297,093 $387,924
Title - 228,063 - 856,774 26,613 75,867 -
--------- ----------- ----------- ----------- ----------- ----------- -----------
$181,938 $5,809,546 $1,288,454 $2,634,092 $258,912 $1,372,960 $387,924
========= =========== =========== =========== =========== =========== ===========
<CAPTION>
- ---------------------------------------------------------------
Column I Column J
- ---------------------------------------------------------------
Other
insurance Premiums
Segment expenses written
- ---------------------------------------------------------------
(In thousands)
Year Ended December 31, 1996:
Property and casualty $201,485 $1,846,199
Title 711,185 ===========
-----------
$912,670
===========
Year Ended December 31, 1995:
Property and casualty $197,112 $1,779,040
Title 629,051 ===========
-----------
$826,163
===========
Year Ended December 31, 1994:
Property and casualty $183,755 $1,764,290
Title 776,149 ===========
-----------
$959,904
===========
</TABLE>
A-6
<PAGE>
SCHEDULE IV
Item 14(a)2
Reliance Group Holdings, Inc. and Subsidiaries
Reinsurance
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
Column A Column B Column C Column D Column E Column F
- ----------------------------------------------------------------------------------------------------------------------------------
Ceded Assumed Percentage
to from of amount
Gross other other Net assumed
amount companies companies amount to net
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
(Dollars in thousands)
Year Ended December 31, 1996:
Premiums:
Property and casualty $ 2,894,096 $ 1,449,731 $ 356,489 $ 1,800,854 19.80%
Title 779,318 1,406 2,245 780,157 0.29
-------------- -------------- ------------ --------------
$ 3,673,414 $ 1,451,137 $ 358,734 $ 2,581,011 13.90
============== ============== ============ ==============
Year Ended December 31, 1995:
Premiums:
Property and casualty $ 2,707,978 $ 1,284,023 $ 350,636 $ 1,774,591 19.76
Title 671,222 1,649 2,374 671,947 .35
-------------- -------------- ------------ --------------
$ 3,379,200 $ 1,285,672 $ 353,010 $ 2,446,538 14.43
============== ============== ============ ==============
Year Ended December 31, 1994:
Premiums:
Property and casualty $ 2,630,549 $ 1,198,629 $ 345,398 $ 1,777,318 19.43
Title 854,679 1,370 3,465 856,774 .40
-------------- -------------- ------------ --------------
$ 3,485,228 $ 1,199,999 $ 348,863 $ 2,634,092 13.24
============== ============== ============ ==============
</TABLE>
A-7
<PAGE>
SCHEDULE VI
Item 14(a)2
Reliance Group Holdings, Inc. and Subsidiaries
Supplemental Information Concerning Property and Casualty Insurance Operations
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
Column A Column B Column C Column D Column E Column F Column G
- --------------------------------------------------------------------------------------------------------------
Unpaid
Deferred claims
Affiliation policy and Discount Net
with acquisition related deducted in Unearned Earned investment
registrant costs expenses column C (a) premiums premiums income
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
(In thousands)
Consolidated subsidiaries:
Year Ended
December 31, 1996 $215,438 $6,265,420 $229,963 $1,468,299 $1,800,854 $257,133
======== ========== ========== =========== =========== ===========
Year Ended
December 31, 1995 $194,648 $5,859,352 $235,664 $1,299,465 $1,774,591 $247,343
======== ========== ========== =========== =========== ===========
Year Ended
December 31, 1994 $181,938 $5,581,483 $245,737 $1,288,454 $1,777,318 $232,299
======== ========== ========== =========== =========== ===========
<CAPTION>
- --------------------------------------------------------------------------------------------------
Column H Column I Column J Column K
- --------------------------------------------------------------------------------------------------
Claims and
settlement expenses Amortization Paid
incurred related to of deferred claims
Affiliation ----------------------- policy and
with current prior acquisition settlement Premiums
registrant year years cost expenses written
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
(In thousands)
Consolidated subsidiaries:
Year Ended
December 31, 1996 $1,211,672 $138,665 $414,636 $1,225,834 $1,846,199
=========== ========= =========== ========== ==========
Year Ended
December 31, 1995 $1,163,447 $38,512 $411,979 $1,140,537 $1,779,040
=========== ========= =========== ========== ==========
Year Ended
December 31, 1994 $1,274,649 $22,444 $387,924 $1,102,499 $1,764,290
=========== ========= =========== ========== ==========
</TABLE>
(a) Liabilities for unpaid claims and related expenses for short-duration
contracts which are expected to have fixed, periodic payment patterns are
discounted to present values using statutory annual rates ranging from 3
1/2% to 6%. Discount shown relates to net liabilities for unpaid claims
and related expenses for short-duration contracts which are expected to
have fixed, periodic payment patterns.
A-8
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- --------- --------------------------------------------------------------------
3.1 Reliance Group Holdings' Certificate of Incorporation, as amended
(incorporated by reference to Exhibit 3(a) to Registration Statement
No. 2-77043).
3.2 Amendment to Exhibit 3.1, as filed with the Secretary of State of
the State of Delaware on July 22, 1986 incorporated by reference to
Exhibit 3.2 to Registration Statement No. 33-7493).
3.3 Reliance Group Holdings' By-Laws, as amended incorporated by
reference to Exhibit 3.3 to Reliance Group Holdings' Annual Report
on Form 10-K for the year ended December 31, 1991).
3.4 Amendment to Exhibit 3.1, as filed with the Secretary of State of
the State of Delaware on May 27, 1993 (incorporated by reference to
Exhibit 4.5 to Registration Statement No. 33-67396).
*4.
+10.1 Employment Agreement between Reliance Group Holdings and Saul P.
Steinberg, dated as of January 1, 1992 (incorporated by reference to
Exhibit 10.6 to Reliance Group Holdings' Annual Report on Form 10-K
for the year ended December 31, 1991).
+10.2 First Amendment, dated as of January 1, 1994, to Employment
Agreement between Reliance Group Holdings and Saul P. Steinberg,
dated as of January 1, 1992 (incorporated by reference to Exhibit
10.6 to Reliance Group Holdings' Annual Report on Form 10-K for the
year ended December 31, 1993).
+10.3 Second Amendment, dated as of March 31, 1994, to Employment
Agreement, dated as of January 1, 1992, between Reliance Group
Holdings and Saul P. Steinberg (incorporated by reference to Exhibit
10.1 to Reliance Group Holdings' Quarterly Report on Form 10-Q for
the quarter ended March 31, 1994).
+10.4 Employment Agreement between Reliance Group Holdings and Saul P.
Steinberg, dated as of February 15, 1996 (and Schedule attached
thereto pursuant to Instruction 1 to Item 601 of Regulation S-K)
(incorporated by reference to Exhibit 10.1 to Reliance Group
Holdings' Quarterly Report on Form 10-Q for the quarter ended March
31, 1996).
+10.5 Employment Agreement between Reliance Insurance Company and Saul P.
Steinberg, dated as of January 1, 1992 (incorporated by reference to
Exhibit 10.7 to Reliance Group Holdings' Annual Report on Form 10-K
for the year ended December 31, 1991).
+10.6 First Amendment, dated as of January 1, 1994, to Employment
Agreement between Reliance Insurance Company and Saul P. Steinberg,
dated as of January 1, 1992 (incorporated by reference to Exhibit
10.6 to Reliance Insurance Company's Annual Report on Form 10-K for
the year ended December 31, 1993).
+10.7 Second Amendment, dated as of March 31, 1994, to Employment
Agreement, dated as of January 1, 1992, between Reliance Insurance
Company and Saul P. Steinberg (incorporated by reference to Exhibit
10.1 to Reliance Insurance Company's Quarterly Report on Form 10-Q
for the quarter ended March 31, 1994).
+10.8 Employment Agreement between Reliance Insurance Company and Saul P.
Steinberg, dated as of February 15, 1996 (and Schedule attached
thereto pursuant to Instruction 1 to Item 601 of Regulation S-K)
(incorporated by reference to Exhibit 10.1 to Reliance Group
Holdings' Quarterly Report on Form 10-Q for the quarter ended March
31, 1996).
+10.9 Employment Agreement between Reliance Group Holdings and Robert M.
Steinberg, dated as of January 1, 1994 (incorporated by reference to
Exhibit 10.9 to Reliance Group Holdings' Annual Report on Form 10-K
for the year ended December 31, 1993).
+10.10 First Amendment, dated as of March 31, 1994, to Employment
Agreement, dated as of January 1, 1994, between Reliance Group
Holdings and Robert M. Steinberg (incorporated by reference to
Exhibit 10.3 to Reliance Group Holdings' Quarterly Report on Form
10-Q for the quarter ended March 31, 1994).
+10.11 Employment Agreement between Reliance Insurance Company and Robert
M. Steinberg, dated as of January 1, 1994 (incorporated by reference
to Exhibit 10.7 to Reliance Insurance Company's Annual Report on
Form 10-K for the year ended December 31, 1993).
+10.12 First Amendment, dated as of March 31, 1994, to Employment
Agreement, dated as of January 1, 1994, between Reliance Insurance
Company and Robert M. Steinberg (incorporated by reference to
Exhibit 10.2 to Reliance Insurance Company's Quarterly Report on
Form 10-Q for the quarter ended March 31, 1994).
+10.13 Employment Agreement between Reliance Group Holdings and Bruce L.
Sokoloff, dated as of May 15, 1996 (incorporated by reference to
Exhibit 10.1 to Reliance Group Holdings' Quarterly Report on Form
10-Q for the quarter ended June 30, 1996).
+10.14 1986 Stock Option Plan of Reliance Group Holdings, as amended
(incorporated by reference to Exhibit 19.2 to Reliance Group
Holdings' Quarterly Report on Form 10-Q for the quarter ended June
30, 1990).
+10.15 The 1994 Stock Option Plan for Non-Employee Directors (incorporated
by reference to Exhibit 10.1 to Reliance Group Holdings' Quarterly
Report on Form 10-Q for the quarter ended June 30, 1994).
+10.16 The Reliance Group Holdings, Inc. 1994 Stock Option Plan
(incorporated by reference to Exhibit 10.2 to Reliance Group
Holdings' Quarterly Report on Form 10-Q for the quarter ended June
30, 1994).
+10.17 The Reliance Group Holdings, Inc. Executive Bonus Plan (incorporated
by reference to Exhibit 10.3 to Reliance Group Holdings' Quarterly
Report on Form 10-Q for the quarter ended June 30, 1994).
+10.18 The 1995 Amendment to The Reliance Group Holdings, Inc. Executive
Bonus Plan (incorporated by reference to Exhibit 10.15 to Reliance
Group Holdings' Annual Report on Form 10-K for the year ended
December 31, 1995).
+10.19 The 1996 Amendment to The Reliance Group Holdings, Inc. Executive
Bonus Plan.
+10.20 The Executive Bonus Plan for James E. Yacobucci, Senior Vice
President--Investments, of Reliance Group Holdings (incorporated by
reference to Exhibit 10.4 to Reliance Group Holdings' Quarterly
Report on Form 10-Q for the quarter ended June 30, 1994).
+10.21 Reliance National Risk Specialists 1988 Key Management Incentive
Plan (incorporated by reference to Exhibit 10.9 to Reliance
Insurance Company's Annual Report on Form 10-K for the year ended
December 31, 1988).
+10.22 Reliance National Risk Specialists 1992 Key Management Incentive
Plan (incorporated by reference to Exhibit 10.9 to Reliance
Insurance Company's Annual Report on Form 10-K for the year ended
December 31, 1993).
+10.23 Reliance National Risk Specialists 1993 Key Management Incentive
Plan (incorporated by reference to Exhibit 10.10 to Reliance
Insurance Company's Annual Report on Form 10-K for the year ended
December 31, 1993).
+10.24 Reliance National Risk Specialists 1994 Key Management Incentive
Plan (incorporated by reference to Exhibit 10.14 to Reliance
Insurance Company's Annual Report on Form 10-K for the year ended
December 31, 1994).
+10.25 Reliance National Risk Specialists 1995 Key Management Incentive
Plan.
+10.26 Reliance National Risk Specialists Supplemental Key Management
Incentive Plan (effective for policy years 1993, 1994 and 1995).
+10.27 Reliance National Risk Specialists 1996 Key Management Incentive
Plan.
+10.28 Memorandum, dated February 8, 1989, summarizing employment
arrangements between Reliance Insurance Company and Dennis Busti
(incorporated by reference to Exhibit 10.8 to Reliance Insurance
Company's Annual Report on Form 10-K for the year ended December 31,
1988).
10.29 Asset Purchase Agreement, dated July 24, 1992, between Frank B. Hall
& Co. Inc. ('Hall') and Aon Corporation ('Aon') (incorporated by
reference to Exhibit 2.1 to Reliance Group Holdings' Quarterly
Report on Form 10-Q for the quarter ended June 30, 1992).
10.30 Agreement and Plan of Merger, dated as of July 24, 1992, among
Reliance Group Holdings, Hall and Prometheus Liquidating Corp.
(incorporated by reference to Exhibit 2.2 to Reliance Group
Holdings' Quarterly Report on Form 10-Q for the quarter ended June
30, 1992).
10.31 Employee Benefit Agreement, dated July 24, 1992, among Reliance
Group Holdings and Aon (incorporated by reference to Exhibit 28.2 to
Reliance Group Holdings' Quarterly Report on Form 10-Q for the
quarter ended June 30, 1992).
10.32 Amendment, dated November 2, 1992, to Exhibit 10.29 (incorporated by
reference to Exhibit 2.1 to Reliance Group Holdings' Quarterly
Report on Form 10-Q for the quarter ended September 30, 1992).
10.33 Settlement Agreement and Release, dated June 2, 1989, between James
P. Corcoran, Superintendent of Insurance of the State of New York,
as Liquidator of Union Indemnity Insurance Company of New York, Inc.
and Hall (now known as Prometheus Funding Corp.) (incorporated
herein by reference to Exhibit 10.01 to Frank B. Hall & Co. Inc.'s
report on Form 10-Q for the quarter ended June 30, 1989).
13.1 Reliance Group Holdings 1996 Annual Report.
21.1 List of Subsidiaries of Reliance Group Holdings.
23.1 Consent of Deloitte & Touche LLP.
27.1 Financial Data Schedule.
**99.1 Annual Report on Form 11-K of Reliance Insurance Company Savings
Incentive Plan for the year ended December 31, 1996.
- ------------------
* Neither Reliance Group Holdings nor its subsidiaries is a party to any
instrument relating to long-term debt under which the securities authorized
exceed 10% of the total consolidated assets of Reliance Group Holdings and its
subsidiaries. Copies of instruments relating to long-term debt of lesser
amounts will be provided to the Securities and Exchange Commission upon
request.
+ Management contract or compensatory plan or arrangement required to be filed
as an Exhibit to this Form 10-K pursuant to Item 14(c).
** To be filed by Amendment.
<PAGE>
AMENDMENT TO
RELIANCE GROUP HOLDINGS, INC.
EXECUTIVE BONUS PLAN
The Reliance Group Holdings, Inc. Executive Bonus Plan (the "Plan") was
adopted by the Special Compensation Committee of the Board of Directors of
Reliance Group Holdings, Inc. (the "Company") on March 10, 1994 and approved
by the stockholders of the Company on May 12, 1994. The Plan was amended by
the Special Compensation Committee on February 16, 1995. Pursuant to Article
VII, Section 7.1 of the Plan, the Special Compensation Committee determined to
amend the Plan as set forth below, and by resolution duly adopted at a meeting
held on March 27, 1996 voted to approve such amendment, subject to approval of
the Company's stockholders in accordance with Section 162(m) of the Internal
Revenue Code of 1986, as amended at the Annual Meeting of stockholders of the
Company scheduled for May 8, 1996. Capitalized terms used herein without
definition shall have the meanings assigned to them in the Plan.
1. Article IV of the Plan shall be amended to read in its entirety as follows:
"ARTICLE IV
Participants; Preestablished Performance Goals
4.1 This Plan shall apply as to any year only to persons who are Covered
Employees for such year.
4.2 The performance goals applicable to all Covered Employees, other
than any Covered Employee with a separate performance-based bonus plan with
the Company, shall be established in accordance with paragraph 4.3 hereof and
shall be related to the following criteria (the "Original Performance Goals")
and the criterion set forth in Section 4.2A below (the "Additional Performance
Goal" and together with the Original Performance Goals, the "performance
goals"):
(a) average return on shareholders' equity of the Company for the
12 months ending December 31 of the year to which
performance-based compensation is applicable, calculated in
accordance with GAAP (the "Average Return Goal");
(b) combined ratio of the Reliance Insurance Group for the 12
months ending December 31 of the year to which
performance-based compensation is applicable, calculated in
accordance with SAP, compared to the combined ratio of the
Reliance Insurance Group for the preceding 12 month period,
calculated in accordance with SAP;
(c) combined ratio of the Reliance Insurance Group for the 12
months ending December 31 of the year to which
performance-based compensation is applicable, calculated in
accordance with SAP, compared to the combined ratio of the
Industry (as reported on an estimated basis) for the
comparable period, calculated in accordance with SAP;
(d) total return on the combined investment portfolio of the
Reliance Insurance Group and CLTIC for any calendar year to
which performance-based compensation is applicable;
(e) amount of pre-tax net realized capital gains, calculated in
accordance with GAAP, of the combined investment portfolio
of the Reliance Insurance Group and CLTIC during any
calendar year to which performance-based compensation is
applicable;
(f) pre-tax operating income (exclusive of capital gains),
calculated in accordance with GAAP, of the Reliance Insurance
Group for any calendar year to which performance-based
compensation is applicable;
(g) shareholders' equity of the Company, calculated in
accordance with GAAP, as of the end of any calendar year to
which performance-based compensation is applicable;
(h) net premiums written, calculated in accordance with GAAP, of
the Reliance Insurance Group for any calendar year to which
performance-based compensation is applicable;
(i) pre-tax operating income (exclusive of realized capital gains),
calculated in accordance with GAAP, of CLTIC for any
calendar year to which performance-based compensation is
applicable;
(j) net premiums earned, calculated in accordance with GAAP, of
CLTIC for any calendar year to which performance-based
compensation is applicable;
(k) the Company's debt to total capitalization ratio, calculated in
accordance with GAAP, as of the end of any calendar year to
which performance-based compensation is applicable;
(l) the price of the Company's common stock;
(m) pre-tax operating earnings per share (exclusive of realized
capital gains of the combined portfolio of the Reliance
Insurance Group and CLTIC), calculated in accordance with
GAAP, of the Company for any calendar year to which
performance-based compensation is applicable; and
(n) net investment income, calculated in accordance with GAAP,
of the combined investment portfolio of the Reliance
Insurance Group and CLTIC for any calendar year to which
performance-based compensation is applicable.
4.2A The Additional Performance Goal shall relate to the following
criterion: shareholders' equity of the Company, calculated in accordance with
GAAP, as of the end of any calendar year to which performance-based
compensation is applicable, except that such calculation shall be made by
adding back to shareholders' equity dividends on the Company's common stock
declared during such year ("Modified GAAP").
4.3 The specific targets for the performance goals set forth in paragraphs
4.2 and 4.2A above shall be as determined in any year by the Compensation
Committee in advance of the deadlines applicable under Section 162(m) of the
Code and while the performance relating to the performance goals remains
substantially uncertain. Any such targets shall be set in writing (which may be
through approved minutes) by the Compensation Committee."
2. Article V of the Plan shall be amended to read in its entirety as follows:
"ARTICLE V
Calculation and Payment of Bonus
5.1 All Covered Employees, other than any Covered Employee with a
separate performance-based bonus plan, shall be eligible to receive a bonus
under this Plan of up to 115% of their respective Base Salaries plus an
additional bonus of up to 85% of their respective base salaries if either or
both of the target relating to the Additional Performance Goal and the
additional target relating to the Average Return Goal (together, the "Additional
Bonus Performance Targets") are achieved.
5.2 The Compensation Committee shall certify in writing (which may be
through approved minutes), prior to payment of any bonus under this Plan, the
extent to which the performance goals set forth in paragraphs 4.2 and 4.2A
hereof have been met.
5.3 Subject to paragraph 5.4 hereof, all Covered Employees, other than
any Covered Employee with a separate performance-based bonus plan, shall be
entitled to receive, and shall be paid not later than 60 days after the end of
any calendar year to which performance-based compensation is applicable, cash
bonuses equal to 115% of their respective Base Salaries if at least eight of
the Original Performance Goals have been met. If fewer than eight of the
Original Performance Goals have been met, then the bonuses to be paid to such
Covered Employees shall be reduced by 5% of their respective Base Salaries
multiplied by the difference between the number of Original Performance Goals
achieved and the number "eight," provided, however, that if fewer than two
goals are achieved, no bonuses shall be paid hereunder. In the event that at
least eight of the Original Performance Goals are achieved, all Covered
Employees, other than any Covered Employee with a separate performance-based
bonus plan, shall be entitled to receive, and shall be paid not later than 60
days after the end of any calendar year to which performance-based
compensation is applicable, cash bonuses of up to an additional 85% of their
respective Base Salaries if either or both of the Additional Bonus Performance
Targets are achieved. Responsibilities for any bonuses payable under this Plan
shall be allocated between the Company and any Subsidiary in proportion to the
amount of Base Salary paid to a Covered Employee by the Company and such
Subsidiary.
5.4 The Compensation Committee shall have the discretion to reduce or
eliminate amounts payable under this Plan to any Covered Employee who the
Compensation Committee determines has breached a duty to the Company which
has or will result in material harm to the Company."
3. Article VII of the Plan shall be amended to read in its entirety as
follows:
"ARTICLE VII
Authority and Administration
7.1 Subject to the limitations of the Plan, the Compensation Committee
shall have the sole and complete authority to interpret this Plan and to make
all the determinations necessary or advisable in the administration of this
Plan (including without limitation the determination to amend or terminate
this Plan). In furtherance and not in limitation of the foregoing, in the event
of (i) any extraordinary gain or loss or other event that is treated for
accounting purposes as an extraordinary item under generally accepted accounting
principles, or (ii) any material change in accounting policies or practices
affecting the Company and/or the performance goals or targets, then, to the
extent any of the foregoing events (or a material effect thereof) was not
anticipated at the time the targets were set, the Compensation Committee shall
make adjustments to the performance goals and/or targets, applied as of the date
of the event, and based solely on objective criteria, so as to neutralize, in
the Compensation Committee's judgment, the effect of the event on the applicable
performance based award.
7.2 The Compensation Committee shall be entitled to rely on
representations and certifications of appropriate officers of the Company with
respect to the financial and statistical data set forth in paragraphs 4.2 and
4.2A hereof. The Compensation Committee's determinations on matters within its
authority shall be conclusive and binding upon the Company and all other
persons. The Compensation Committee shall not be liable for any action or
determination made in good faith with respect to this Plan."
<PAGE>
RELIANCE NATIONAL (RN)
1995 KEY MANAGEMENT INCENTIVE
PLAN (KMIP)
EFFECTIVE FOR POLICY YEAR 1995
<PAGE>
Table of Contents
PARTICIPATION .............................................. Page 2
ADMINISTRATION ............................................. Page 3
KMIP BONUS POOL ............................................ Page 4
PLAN YEAR .................................................. Page 4
PRETAX OPERATION PROFIT .................................... Page 5
POLICY YEAR NET INVESTMENT INCOME .......................... Page 6
POLICY YEAR AVERAGE INVESTED ASSETS ........................ Page 7
VESTING .................................................... Page 8
VESTING ADVISORY COMMITTEE ................................. Page 9
DISTRIBUTION SCHEDULE ...................................... Page 11
CHANGE OF CONTROL .......................................... Page 12
PARTICIPANTS STATEMENTS .................................... Page 13
MISCELLANEOUS .............................................. Page 13
EXHIBITS
- --------
la & lb - Hypothetical Example of Distribution Schedule
2 - Example of Participants Statement
<PAGE>
PARTICIPATION
Participation for the plan year is represented by units assigned to each
participant at the inception of the plan year. Each plan year will contain 1,300
units in total. This total may be reduced for forfeitures as a result of
voluntary or involuntary terminations, or maintained by a redistribution of
forfeited units to other participants at the discretion of the C.E.O. of
Reliance National with the approval of the C.E.O. of Reliance Insurance Group.
Units may be granted only to officers and key employees of RN selected by the
Committee (as hereinafter defined).
Nothing in this Plan, nor in the instrument evidencing the grant of units, shall
in any manner be construed to limit in any way the right of RN to terminate a
participant's employment at any time, without regard to the effect of such
termination on any rights such participant would otherwise have under this Plan,
or give any right to such a participant to remain employed by RN in any
particular position, or at any particular rate of compensation, or to receive a
grant of units for any other plan year.
Reliance National Page 2
1995 Key Management Incentive Plan
<PAGE>
ADMINISTRATION
This Plan shall be administered by the Compensation Committee of the Board of
Directors of Reliance Insurance Company or such body as may be designated by the
Board of Directors of Reliance Insurance Company (the "Committee"). A majority
of the Committee shall constitute a quorum thereof and the actions of a majority
of the Committee at a meeting at which a quorum is present, or actions
unanimously approved in writing by all members of the Committee, shall be the
actions of the Committee. The Committee shall have full and final authority to
interpret this Plan and the instruments granting units hereunder (which
instruments need not be identical), to prescribe, amend and rescind rules and
regulations, if any, relating to this Plan and, except as expressly provided to
the contrary, to make all determinations necessary or advisable for the
administration of this Plan (including, without limitation, determinations of
pretax operating profits, policy year investment income, and all other financial
calculations called for by this Plan). The Committee's determination in all
matters referred to herein shall be conclusive and binding for al1 purposes and
upon all persons including, but without limitation, participants under the Plan.
No member of the Committee shall be liable for anything done or omitted to be
done by such member or by any other member of the Committee in connection with
the Plan, except for the willful misconduct or gross negligence of such member.
The Committee shall have power to engage outside consultants, auditors or other
professional help to assist in the fulfillment of the Committee's duties under
the Plan at RN's expense.
In making its determinations concerning the officers and key employees who shall
receive grants under the Plan, as well as the number of units to be covered
thereby and time or times at which they shall be granted, the Committee shall
take into account the nature of the services rendered by the respective officers
and key employees, their past, present and potential contribution to RN's
success and such other factors as the Committee may deem relevant. The Committee
shall also determine the form of instrument granting units hereunder and the
terms and conditions to be included therein, provided such terms and conditions
are not inconsistent with the terms of this Plan. The Committee may, in its
discretion, waive any provisions of any grant, provided such waiver is not
inconsistent with the terms of the Plan as then in effect.
The Plan may be terminated or amended at any time and from time to time by the
Board of Directors of Reliance Insurance Company. No termination or amendment of
this Plan, without the consent of the holder of any units then granted, may
terminate such holder's units or materially and adversely affect such holder's
rights thereunder.
Reliance National Page 3
1995 Key Management Incentive Plan
<PAGE>
KMIP BONUS POOL
The maximum bonus pool expressed as a percentage of policy year pretax operating
profit (as defined) before bonuses for any plan year beginning on or after
January 1, 1995 is 13 percent, subject to the limitation described in the
following section.
The total of bonuses earned under all incentive plans of RN including KMIP,
Regular MIP, and "Mini-MIP" may not exceed 13 percent of policy year pretax
operating profits (as defined herein) before bonuses. The total of bonuses
earned under all incentive plans of RN excluding KMIP may not exceed eight
percent of calendar year GAAP pretax operating income before any provisions for
bonus expenses. For example:
1995 policy year projected pretax operating profit
(before bonuses) = $ 100,000,000
-------------
Limitation 13% = 13,000,000
Bonus earned under all other incentive plans (1)
(Not to exceed 8% of calendar year GAAP pretax
operating income before bonuses) = 7,000,000
Maximum KMIP bonus pool $ 6,000,000
=============
(1) This includes projected policy year earnings projected to ultimate for
the Mini-Mip.
A total of 1,300 KMIP units will be issued for each plan year and allocated to
participants by the RN CEO.
The bonus earned per unit for the plan year is equal to the KMIP bonus pool for
the year divided by 1,300 units. In the above example, the amount earned per
unit is equal to $4,615.00 ($6,000,000 / 1,300). If an individual was awarded
100 units, his/her share of the bonus pool would be $461,500 (100 units x $4,615
per unit).
PLAN YEAR
The term "plan year" comprises the period from January 1 to December 31 of the
specified year during which an accounting will be made of premiums written and
losses incurred on policies with effective dates from January 1 to December 31
of such year (termed "policy year").
Reliance National Page 4
1995 Key Management Incentive Plan
<PAGE>
PRETAX OPERATING PROFIT
Pretax operating profit for a plan year will be calculated on a policy year
basis using statutory accounting principles as follows:
Net policy year written premium
(including retro, audit and
similar adjustments) $ XXXX
------
Less:
Net Policy year losses incurred $ XXXX
Net Policy year loss expenses incurred $ XXXX
Net Calendar year underwriting expenses* $ XXXX
Underwriting gain (loss) XXXX
Plus: Policy year cumulative net investment income
(excluding realized capital gain or loss) XXXX
----
Total
Plus: Other calendar year income $ XXXX
(excluding realized capital gain/loss)
Less: Other calendar year expenses
(including policy year policyholder dividends) $ XXXX
Pretax operating profit $ XXXX
======
* Defined as the sum of calendar year operating expenses and
acquisition expenses.
- Operating expenses exclude all bonuses recorded
under all incentive plans of Reliance National during the year.
- Acquisition expenses are determined by multiplying the
calendar year acquisition expense ratio by the policy year
written premium.
Pretax operating profit for a plan year will be recalculated at the end of
subsequent calendar years. Policy year losses and loss adjustment expenses
incurred will be based on loss and loss expense ratios provided by the Corporate
Actuarial Department under the supervision of Reliance Insurance Company's Chief
Actuary.
Reasonable allocations will be made by Reliance Insurance Company to RN for
Reliance Insurance Company's corporate overhead under the normal allocation
methods.
Reliance National Page 5
1995 Key Management Incentive Plan
<PAGE>
POLICY YEAR NET INVESTMENT INCOME
Policy year net investment income will be calculated by multiplying the average
portfolio yield (excluding realized or unrealized capital gains or losses), net
of investment expenses per Reliance's statutory Consolidated Annual Statement
for the calendar year which coincides with the plan year, by the average policy
year invested assets (as defined) of RN for each calendar year. For example, for
plan year 1995 the yield determined from the calendar year 1995 consolidated
statutory statement would be used. This yield will be used in all subsequent
calendar years to determine policy year net investment income for plan year
1995.
For example: Calendar Year
------------------------------
1998-
1995 1996 1997 2003 Total
---- ---- ---- ---- -----
Average Invested Assets (RN)
Policy Year l995 xxxx xxxx xxxx xxxx xxxx
Reliance Insurance Company Portfolio
Yield Per l995 Consolidated Annual
Statement (yield for illustrative
purposes only) 7% 7% 7% 7%
Policy Year Investment Income:
(Yield x Invested Assets) xxxx xxxx xxxx xxxx xxxx
Policy year investment income for the plan year is calculated on a cumulative
basis for nine calendar years.
Reliance National Page 6
1995 Key Management Incentive Plan
<PAGE>
POLICY YEAR AVERAGE INVESTED ASSETS
Average invested assets will be calculated for each policy year as follows:
Average loss and loss expense reserves
Plus: Average unearned premium reserves
Plus: Average accrued bonuses
Plus: Other identifiable liabilities
Less: Average receivable balances (including retro accruals,
bonus advances and TPA impress fund balances)
Less: Average policy year fixed assets net of accumulated
depreciation. (Additions to fixed assets in the calendar year 1994
are deemed to be the policy year assets for 1994)
Less: Average surplus deficit (note)
Less: Other identifiable assets (paid loss recoverables, funds held, etc.)
note: no adjustment is made if average surplus is positive
Surplus Deficit
- ---------------
Surplus deficit for a policy year is equal to the cumulative net operating loss
including underwriting gain or loss, net investment income, other income and
expenses and federal income taxes for the policy year.
Hypothetica1 Example P/Y 1995
- -----------------------------
Calendar Year
----------------------------------
1995 1996 1997
-------- -------- ------
Surplus Deficit beginning of yr. 0 (101,000) (1,000)
Underwriting gain (loss) (100,000) 110,000 0
-------- -------- ------
Net investment income 20,000 30,000 18,000
Federal Income Taxes (19,000) (30,000) 500
-------- -------- ------
Net Income (loss) (101,000) 100,000 18,500
-------- -------- ------
Surplus Deficit end of yr. (101,000) (1,000) 17,500
======== ======== ======
Average Surplus (deficit) (50,500)(1) (51,000)(1) 8,250(1)
======== ======== ======
(1) Beginning and Ending Surplus (deficit) divided by 2
Reliance National Page 7
1995 Key Management Incentive Plan
<PAGE>
VESTING
Participants will become vested (subject to the provisions of the next
paragraph) based upon completing the years of employment as set in the following
standard vesting schedule:
Number of Years
------------------------------------
Plan year plus 1 2 3 4 5 6 7 8
Cumulative vesting
percentage 10% 30% 50% 60% 70% 80% 90% 100%
A participant who is an employee of Reliance National when a change in control
(as hereinafter defined under CHANGE OF CONTROL) of Reliance National occurs
will become fully vested in the units awarded to him for all plan years. A
participant whose employment terminates for reasons of death or total
disability, as defined in the benefit plans of Reliance National, will become
fully vested in the units awarded to him for all plan years. A participant whose
employment terminates by reason of normal retirement, as defined in the benefit
plans of Reliance National, will fully vest in the units awarded to him for all
plan years preceding the year of retirement and will vest in that percentage of
the units awarded to him for the plan year in which he retires which equals the
number of months of employment completed during the plan year divided by 12. If
(1) a participant's employment terminates for any reason other than death, total
disability or normal retirement and (2) the participant has not become fully
vested in the units awarded to him as a result of a change in control, then the
number of units in which the participant is vested (if any) for each plan year
will be determined by the Chief Executive Officer of Reliance National with the
non-binding advice of the Vesting Advisory Committee.
Reliance National Page 8
1995 Key Management Incentive Plan
<PAGE>
VESTING ADVISORY COMMITTEE
The Vesting Advisory Committee shall consist of five rotating members. The CEO
of Reliance National will appoint the five rotating members from among the MIP
participants. Each rotating member will serve a term of two years.
The purpose of the Vesting Advisory Committee is to make a non-binding
recommendation to the CEO of Reliance National whether the standard vesting
schedule contained in the Plan shall be followed with respect to a participant
who: (1) terminates from the Company for any reason other than a termination by
death, total disability or normal retirement and (2) has not become fully vested
in the units awarded to him as a result of a change in control. In determining
the recommendation whether to follow the standard schedule, the Vesting Advisory
Committee shall consider:
The reasons for the participant's termination,
The past performance of the participant,
The past contributions of the participant to Reliance National,
The future employer of the participant and
Any other factors the committee shall deem relevant.
The recommendation of the Committee shall be by a simple majority and the
decision of the CEO of Reliance National with respect thereto shall be absolute,
final and binding on all parties including, without limitation, participants
under the plan. The CEO of Reliance National may in his sole and absolute
discretion, specify conditions for the receipt by a terminating participant
(other than a participant who has fully vested in the units awarded to him as a
result of a change in control) of any payments under the Plan, including but not
limited to requiring the terminating participant to enter into a written
Non-compete or Non-interference Agreement with Reliance National. Such
agreement, if any, will be binding on all parties.
In the event that a member of the Committee terminates from Reliance National,
the CEO of Reliance National shall appoint another rotating member to serve on
the Committee to participate in the recommendation of the application of the
vesting schedule with respect to the terminating participant Vesting Schedule.
In the event the CEO of Reliance National is unavailable, or that office is
vacant, the Chairman of the Reliance Insurance Group will act in his place.
Reliance National Page 9
1995 Key Management Incentive Plan
<PAGE>
Neither the CEO of Reliance National nor any member of the Vesting Advisory
Committee shall be liable for anything done or omitted to be done in connection
with the Plan, except for his or her own willful misconduct or gross negligence.
Reliance National Page 10
1995 Key Management Incentive Plan
<PAGE>
DISTRIBUTION SCHEDULE
Participation units will be paid as shown below after the end of the years
indicated (except as provided to the contrary in the next paragraph and in the
second paragraph under CHANGE OF CONTROL):
Plan year plus 1 2 3 4 5 6 7 8
Cumulative Percentage 10% 30% 50% 60% 70% 80% 90% 100%
Distribution of Projected
Ultimate Awards
In the event a participant's employment terminates by reason of death, his or
her estate shall receive within 90 days following the date of death the net
present value (using a discount rate equal to the then prime lending rate of
Chase Manhattan Bank), less any advance payments previously made, for all units
for all policy years in which he or she was a participant. The basis for valuing
the outstanding units for each policy year will be the projected final value for
each policy year which is outstanding.
In all cases, distributions will be adjusted for any prior distributions or
advances paid and for losses from other plan years as described in the next
paragraph. Any calculated overpayments for a plan year are not refundable by a
participant except to offset amounts due the participant for other plan years.
Amounts due a participant in accordance with the distribution schedule above
will be offset by losses from other plan years in which the participant was a
member of KMIP. For example, in Exhibit l.a the plan experienced an operating
loss before bonuses of $50 million in plan year 1997. The loss per unit of
$5,000 calculated on the pretax loss of $50 million before other bonuses earned
is deducted from amounts per unit due for other plan years in accordance with
the distribution schedule until absorbed (see exhibit l.b).
The above applies only when the plan experiences an operating loss before other
bonuses earned. In the example in Exhibit l.a, all other bonuses earned exceeded
the maximum bonus pool for plan year 1995, therefore no amounts are allocable to
the KMIP. This excess is not deducted from amounts due for other plan years
because the plan did not experience an operating loss in 1995.
Reliance National Page 11
1995 Key Management Incentive Plan
<PAGE>
CHANGE OF CONTROL
In the event of a change of control of Reliance National, whether directly or
indirectly (including, for example, through the sale of Reliance Insurance
Company or Reliance Group Holdings, Inc.), any successor to all or substantially
all of the business or assets of Reliance National or Reliance Insurance Company
shall assume all liabilities to participants under this Plan and perform all
duties and responsibilities in the same manner that would have been required of
Reliance National and Reliance Insurance Company if no such change had taken
place, and all participants will automatically become fully (100%) vested for
all plan years.
In the event the employment of a participant (a) is terminated by Reliance
National within 18 months following a change of control without Cause or (b) is
terminated by the participant within 18 months following a change of control
with Good Reason, he/she shall receive within 90 days following the date of
his/her termination the net present value (using a discount rate equal to the
then prime lending rate of Chase Manhattan Bank) less any advance payments made
for all units for all policy years in which he/she was a participant. The basis
for valuing the outstanding units for each policy year will be the projected
final value for each policy year which is outstanding.
For purposes of this section, Cause shall be defined as: (1) conviction of a
crime, (2) material and deliberate violation of Reliance National's Code of
Conduct or (3) dishonest acts in connection with the participant's employment by
Reliance National. For purposes of this section, Good Reason shall be defined as
a reduction in the participant's authority, duties, responsibilities or title
(as determined by the participant in his reasonable judgment), any reduction in
his/her compensation, or any change caused by Reliance in his/her office
location of more than 35 miles from its location on the date of the change of
control.
Reliance National Page 12
1995 Key Management Incentive Plan
<PAGE>
PARTICIPANT STATEMENT
Each participant shall be provided a statement of his/her account for each plan
year showing actual and projected amounts earned, paid and payable. See exhibit
2 for an example of the report to be provided.
MISCELLANEOUS
No award under this Plan shall be considered as compensation in calculating any
insurance, pension or other benefit for which the recipient is eligible unless
any such insurance, pension or other benefit is granted under a plan which
expressly provides that compensation under this Plan shall be considered as
compensation under such plan.
<PAGE>
EXHIBIT 1.a
HYPOTHETICAL EXAMPLE
OF DISTRIBUTION SCHEDULE
($000's omitted - except per unit amounts)
<TABLE>
<CAPTION>
Policy Years
----------------------------------------------------------------------
1995 1996 1997 1998 1999
----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Projected Ultimate Pretax Operating
Income - Before Bonuses: 50,000 120,000 (50,000) 150,000 170,000
----------------------------------------------------------------------
Maximum Bonus Pool @ 13%: 6,500 15,600 (6,500) 19,500 22,100
All Other (non-KMIP) Bonuses Earned: 8,000 8,000 5,000 10,000 12,000
---------------------------------------------------------------------
Remainder Available For KMIP Bonus: (1,500)(a) 7,600 (11,500) 9,500 10,100
=====================================================================
KMIP Bonus Earned Per Unit: 0 (a) 5,846 (5,000)(b) 7,308 7,769
====================================================================
</TABLE>
(a) Since all other bonuses earned exceeded the maximum bonus pool, the
KMIP bonus is $0. Because the profit center pretax operating income is
a profit this excess is not deducted from amounts due for other
years.
(b) Since the profit center ultimate pretax operating income is a loss for
1997 this loss must be deducted from other policy years.
Projected Ultimate Pretax Operating Loss: (50,000)
All Other Bonuses (5,000)
--------
Projected Ultimate Pretax Operating Loss: (55,000)
========
Amount Deducted From Other Policy Years:
13% of $50,000 (the loss before all other
bonuses earned) (6,500)
========
Amount Deducted Per Unit ($6.5 million/1300
units): (5,000)
========
<PAGE>
EXHIBIT 1.b
HYPOTHETICAL EXAMPLE
DISTRIBUTION PAID PER UNIT
- --------------------------
<TABLE>
<CAPTION>
Distribution Calendar Year
Schedule ------------------------------------------------------------------------------------------------
Cumulative (A) 1995 1996 1997 1998 1999 2000 2001 2002 2003
- -------------------- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Plan Years 1995 0% 10% 30% 50% 60% 70% 80% 90% 100%
1996 0% 10% 30% 50% 60% 70% 80% 90%
1997 10% 0% 30% 50% 60% 70% 80%
1998 0% 10% 30% 50% 60% 70%
1999 0% 10% 30% 50% 60%
Ultimate
Bonus Earned (B)
- ------------------
Plan Years 1995 0 0 0 0 0 0 0 0
1996 5,846 5,846 5,846 5,846 5,846 5,846 5,846
1997 (5,000) (5,000) (5,000) (5,000) (5,000) (5,000)
1998 7,308 7,308 7,308 7,308 7,308
1999 7,769 7,769 7,769 7,769
Distributions Due
Cumulative (C)
- ------------------
(C = A x B)
Plan Years 1995 0 0 0 0 0 0 0 0
1996 585 1,754 2,923 3,508 4,092 4,677 5,262
1997 (500) (1,500) (2,500) (3,000) (3,500) (4,000)
1998 731 2,192) 3,654 4,385 5,115
1999 777 2,331 3,885 4,662
Net --------------------------------------------------------------------------------------------
Cumulative Payable 0 585 1,254 2,154 3,977 7,077 9,446 11,038
Less
Cumulative Paid * 0 0 585 1,254 2,154 3,977 7,077 9,446
Cumulative --------------------------------------------------------------------------------------------
Balance Due 0 585 669 900 1,823 3,100 2,369 1,592
============================================================================================
</TABLE>
* Payment is generally made in February of the succeeding year.
<PAGE>
Reliance National KMIP Exhibit 2
Status as of December 31, 1996
(Hypothetical)
1995 Plan Year
Actual Projected
as of Ultimate to
12/31/96 12/31/03
--------- -----------
Written Premium 973,366,000 973,366,000
Policy Year Earned Premium 535,190,000 973,366,000
Loss & Lae 398,181,360 724,184,304
Expense 250,772,966 250,772,966
----------- -----------
Underwriting Gain (Loss) (113,764,326) (1,591,270)
Investment Income 48,117,793 116,354,670
----------- -----------
Pretax Profit (65,646,533) 114,763,400
=========== ===========
Loss Ratio 74.4% 74.4%
Expense Ratio 25.8% 25.8%
----------- ----------
Combined Ratio 100.2% 100.2%
Investment Income 4.9% 12.0%
----------- ----------
Pretax Profit 95.2% 88.2%
=========== ==========
<TABLE>
<CAPTION>
Bonus Calculation @12/31/96 Per Unit @12/31/03 Per Unit
--------------------------------------------------------
<S> <C> <C> <C> <C>
Cumulative Bonus Earned
(Pretax X 13%) 0 14,919,242
Less: bonuses paid under all
other plans 6,289,628 6,289,628
---------------------------------------------------------
Adjusted Award (Available
for KMIP) (6,289,628) 0 8,629,614 6,638
Cumulative Bonus Payable 862,961 664
Cumulative Paid/Advanced
(Thru 02/96) 260,000 200
--------------------------
Balance Payable 602,961 464
==========================
</TABLE>
<TABLE>
<CAPTION>
Projected
Payable Earned Advanced Payable in Payable in
Participants Units Earned @12/31/96 to 2003 1996 1997 1998
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Per Unit 0 664 6,638 200 464 1,328
Individual 65 0 43,148 431,481 13,000 30,148 86,296
<CAPTION>
Total
Payable in Payable in Payable in Payable in Payable in Payable in Award
1999 2000 2001 2002 2003 2004 PY 1995
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1,328 664 664 664 664 664 6,638
86,296 43,148 43,148 43,148 43,148 43,148 431,481
</TABLE>
<PAGE>
RELIANCE NATIONAL (RN)
SUPPLEMENTAL KEY MANAGEMENT INCENTIVE PLAN (KMIP)
EFFECTIVE FOR POLICY YEARS, 1993, 1994 AND 1995
<PAGE>
GENERAL
All of the provisions of the Reliance National KMIP for policy year 1995 shall
apply to this Supplemental Plan except as set forth below.
SUPPLEMENTAL KMIP
Policy Years 1993, 1994 and 1995
Page 1
<PAGE>
BONUS POOL
The supplemental bonus pool shall consist of the excess amount (if any) of the
pool as calcualted under this Supplemental Plan over the total pool as
calculated under the original 1993, 1994 and 1995 plans. For example ($000
omitted):
Policy Year(1)
-----------------------------
1994 1995 Total
-----------------------------
Projected policy year pretax operating profit
before bonus under Supplemental Plan $ 81,575 $131,943
Limitation % 14% 13%
Limitation amount 11,420 17,153
Bonus earned under all other incentive plans (8,732) (10,290)
KMIP bonus pool (Supplemental Plan) 2,688 6,863
KMIP bonus pool (Original Plan) 1,946 4,629
--------- -------- -------
Supplemental KMIP bonus pool $ 742 $ 2,234 $ 2,976
========= ======== =======
(1) As estimated at 7/1/96
Note: Policy year 1993 is not shown above because there is no forecasted
supplemental KMIP pool.
Supplemental KMIP
Policy Years 1993, 1994 and 1995
Page 2
<PAGE>
POLICY YEAR AVERAGE INVESTED ASSETS
Average invested assets for each policy year will be calculated as described
below.
Invested assets shall be equal to cumulative net cash flow from operations
including cash flow from underwriting, other income and expenses, net investment
income and federal income taxes and assumed shareholder dividends from
accumulated surplus. In determining cash flow, identifiable Reliance National
balance sheet accounts as of the close of the calendar year which coincides with
the policy year shall be allocated wholly to the current policy year unless
other reasonable estimation methods are available to allocate balance sheet
accounts.
In determining cash flow, a dividend to shareholders of 10% of ending calendar
year surplus (if any) shall be assumed.
Average invested assets for each calendar year is equal to the beginning and
ending invested asset balance divided by two. An example of the calculation of
net invested assets is contained in Exhibit 1.
<PAGE>
Reliance National KMIP Exhibit 1
Plan Year 1996
Investment Income Calculation
Cash Flow Method:
<TABLE>
<CAPTION>
1996 1997 1998 1999 2000 2001 2002 2003 2004
------------------------------------------------------------------------------------------------
CASH FLOW
- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Premiums Written 935,028
Change in Rec 273,701 (105,894) (41,956) (40,856) (40,856) (6,738) (2,338) (2,338) (32,726)
(+) Net Premiums Collected 661,327 105,894 41,956 40,856 40,856 6,738 2,338 2,338 32,726
(-) Losses Paid 105,314 132,993 102,614 83,711 61,433 42,531 29,704 20,928 14,177
(-) Expenses Paid 265,471 0 0 0 0 0 0 0 0
(-) Imprest Funds 70,000 (70,000)
(-) Reinsurance Recoverables 100,000 (100,000)
(-) Advances to TPA's 55,000 (55,000)
(+) Other Liab 450,000 (450,000)
(-) Fixed assets 4,000 (1,250) (1,000) (1,000) (500) (250) 0 0 0
------------------------------------------------------------------------------------------------
Cash Flow 511,542 (250,849) (59,658) (41,855) (20,077) (35,543) (27,366) (18,590) 18,549
Net Inv. Income 17,592 26,400 16,086 13,567 12,161 10,745 8,999 7,680 7,735
Income Taxes (7,876) (35,853) (507) 1,989 (601) (851) 683 (1,353) (3,092)
Paid Surplus Dividend (722) (2,017) (2,837) (3,436) (3,968) (4,152) (4,166)
Paid Bonus 0 0 (501) (1,001) (1,001) (501) (501) (501) (501)
-------------------------------------------------------------------------------------------------
Net Cash 521,259 (260,303) (45,302) (29,317) (12,355) (29,586) (22,154) (16,916) 18,525
Invested Assets (Beginning) 0 521,259 260,956 215,654 186,337 173,981 144,396 122,242 105,326
Invested Assets (Ending) 521,259 260,956 215,654 186,337 173,981 144,396 122,242 105,326 123,851
Avg. Invested Assets 260,629 391,107 238,305 200,995 180,159 159,188 133,319 113,784 114,588
Rate 6.75% 6.75% 6.75% 6.75% 6.75% 6.75% 6.75% 6.75% 6.75%
Net Investment Income 17,592 26,400 16,086 13,567 12,161 10,745 8,999 7,680 7,735
BALANCE SHEET
- -------------
Assets
Net Inv. assets 521,259 260,956 215,654 186,337 173,981 144,396 122,242 105,326 123,851
Imprest Funds 70,000
Reins Recoverables 100,000
Advances to TPA's 55,000
Receivables 273,701 167,807 125,851 84,995 44,139 37,401 35,064 32,726 0
Fixed assets 4,000 2,750 1,750 750 250 0 0 0 0
-------------------------------------------------------------------------------------------------
Total 1,023,959 431,513 343,255 272,082 218,370 181,797 157,306 138,052 123,851
=================================================================================================
Liabilities
UPR 467,514
Acrued Bonus 0 1,668 1,865 1,452 978 944 833 666 501
Reserves 232,231 436,783 334,170 250,458 189,025 146,495 116,791 95,863 81,686
Accrued Dividend
Other 450,000
-------------------------------------------------------------------------------------------------
Total 1,149,745 438,451 336,035 251,911 190,004 147,438 117,624 96,529 82,187
=================================================================================================
Surplus (125,786) (6,939) 7,220 20,171 28,367 34,359 39,682 41,524 41,664
=================================================================================================
Pre Dividend Surplus (125,786) (6,939) 7,220 20,171 28,367 34,359 39,682 41,524 41,664
Dividend Percent: 10%
Dividend 722 2,017 2,837 3,436 3,968 4,152 4,166
Surplus Reconciliation
Beginning of Year 0 (125,786) (6,939) 7,220 20,171 28,367 34,359 39,682 41,524
Pretax Income (117,910) 156,369 16,086 13,567 12,161 10,745 8,999 7,680 7,735
Taxes (7,876) (35,853) (507) 1,989 (601) (851) 683 (1,353) (3,092)
Paid Surplus Dividend (722) (2,017) (2,837) (3,436) (3,968) (4,152) (4,166)
Earned Award (1,668) (698) (588) (527) (466) (390) (333) (335)
-------------------------------------------------------------------------------------------------
End of Year (125,786) (6,939) 7,220 20,171 28,367 34,359 39,682 41,524 41,664
=================================================================================================
Difference (0) (0) (0) 0 (0) (0) (0) (0) (0)
</TABLE>
<PAGE>
RELIANCE NATIONAL (RN)
1996 KEY MANAGEMENT INCENTIVE PLAN (KMIP)
EFFECTIVE FOR POLICY YEAR 1996
<PAGE>
Table of Contents
PARTICIPATION .............................................. Page 2
ADMINISTRATION ............................................. Page 3
KMIP BONUS POOL ............................................ Page 4
PLAN YEAR .................................................. Page 4
PRETAX OPERATING PROFIT .................................... Page 5
POLICY YEAR NET INVESTMENT INCOME .......................... Page 6
POLICY YEAR AVERAGE INVESTED ASSETS ........................ Page 7
VESTING .................................................... Page 8
VESTING ADVISORY COMMITTEE ................................. Page 9
DISRTIBUTION SCHEDULE ...................................... Page 11
CHANGE OF CONTROL .......................................... Page 12
PARTICIPANTS STATEMENTS .................................... Page 13
MISCELLANEOUS .............................................. Page 13
EXHIBITS
- --------
la & lb - Hypothetical Example of Distribution Schedule
2 - Example of Participants Statement
3 - Example of Investment Income Calculation
<PAGE>
PARTICIPATION
Participation for the plan year is represented by units assigned to each
participant at the inception of the plan year. Each plan year will contain 1,300
units in total. This total may be reduced for forfeitures as a result of
voluntary or involuntary terminations, or maintained by a redistribution of
forfeited units to other participants at the discretion of the C.E.O. of
Reliance National with the approval of the C.E.O. of Reliance Insurance Group.
Units may be granted only to officers and key employees of RN selected by the
Committee (as hereinafter defined).
Nothing in this Plan, nor in the instrument evidencing the grant of units, shall
in any manner be construed to limit in any way the right of RN to terminate a
participant's employment at any time, without regard to the effect of such
termination on any rights such participant would otherwise have under this Plan,
or give any right to such a participant to remain employed by RN in any
particular position, or at any particular rate of compensation, or to receive a
grant of units for any other plan year.
Reliance National
1996 Key Management Incentive Plan Page 2
<PAGE>
ADMINISTRATION
This Plan shall be administered by the Compensation Committee of the Board of
Directors of Reliance Insurance Company or such body as may be designated by the
Board of Directors of Reliance Insurance Company (the "Committee"). A majority
of the Committee shall constitute a quorum thereof and the actions of a majority
of the Committee at a meeting at which a quorum is present, or actions
unanimously approved in writing by all members of the Committee, shall be the
actions of the Committee. The Committee shall have full and final authority to
interpret this Plan and the instruments granting units hereunder (which
instruments need not be identical), to prescribe, amend and rescind rules and
regulations, if any, relating to this Plan and, except as expressly provided to
the contrary, to make all determinations necessary or advisable for the
administration of this Plan (including, without limitation, determinations of
pretax operating profits, policy year investment income, and all other financial
calculations called for by this Plan). The Committee's determination in all
matters referred to herein shall be conclusive and binding for all purposes and
upon all persons including, but without limitation, participants under the Plan.
No member of the Committee shall be liable for anything done or omitted to be
done by such member or by any other member of the Committee in connection with
the Plan, except for the willful misconduct or gross negligence of such member.
The Committee shall have power to engage outside consultants, auditors or other
professional help to assist in the fulfillment of the Committee's duties under
the Plan at RN's expense.
In making its determinations concerning the officers and key employees who shall
receive grants under the Plan, as well as the number of units to be covered
thereby and time or times at which they shall be granted, the Committee shall
take into account the nature of the services rendered by the respective officers
and key employees, their past, present and potential contribution to RN's
success and such other factors as the Committee may deem relevant. The Committee
shall also determine the form of instrument granting units hereunder and the
terms and conditions to be included therein, provided such terms and conditions
are not inconsistent with the terms of this Plan. The Committee may, in its
discretion, waive any provisions of any grant, provided such waiver is not
inconsistent with the terms of the Plan as then in effect.
The Plan may be terminated or amended at any time and from time to time by the
Board of Directors of Reliance Insurance Company. No termination or amendment of
this Plan, without the consent of the holder of any units then granted, may
terminate such holder's units or materially and adversely affect such holder's
rights thereunder.
Reliance National
1996 Key Management Incentive Plan Page 3
<PAGE>
KMIP BONUS POOL
The maximum bonus pool expressed as a percentage of policy year pretax operating
profit (as defined) before bonuses for any plan year beginning on or after
January 1, 1996 is 13 percent, subject to the limitation described in the
following section.
The total of bonuses earned under all incentive plans of RN including KMIP,
Regular MIP, and "Mini-MIP" may not exceed 13 percent of policy year pretax
operating profits (as defined herein) before bonuses. The total of bonuses
earned under all incentive plans of RN excluding KMIP may not exceed eight
percent of calendar year GAAP pretax operating income before any provisions for
bonus expenses. For example:
1996 policy year projected pretax operating profit
(before bonuses) $ 100,000,000
-------------
Limitation 13% 13,000,000
Bonus earned under all other incentive plans (1)
(Not to exceed 8% of calendar year GAAP pretax
operating income before bonuses) 7,000,000
-------------
Maximum KMIP bonus pool $ 6,000,000
=============
(1) This includes projected policy year earnings projected to ultimate for the
Mini-Mip.
A total of 1,300 KMIP units will be issued for each plan year and allocated to
participants by the RN CEO.
The bonus earned per unit for the plan year is equal to the KMIP bonus pool for
the year divided by 1,300 units. In the above example, the amount earned per
unit is equal to $4,615.00 ($6,000,000 / 1,300). If an individual was awarded
100 units, his/her share of the bonus pool would be $461,500 (100 units x $4,615
per unit).
PLAN YEAR
The term "plan year" comprises the period from January 1 to December 31 of the
specified year during which an accounting will be made of premiums written and
losses incurred on policies with effective dates from January 1 to December 31
of such year (termed "policy year").
Reliance National
1996 Key Management Incentive Plan Page 4
<PAGE>
PRETAX OPERATING PROFIT
Pretax operating profit for a plan year will be calculated on a policy year
basis using statutory accounting principles as follows:
Net policy year written premium
(including retro, audit and
similar adjustments) $ XXXX
------
Less:
Net Policy year losses incurred $ XXXX
Net Policy year loss expenses incurred $ XXXX
Net Calendar year underwriting expenses* $ XXXX
------ ------
Underwriting gain (loss) XXXX
Plus: Policy year cumulative net investment income
(excluding realized capital gain or loss) XXXX
----
Total $ XXXX
------
Plus: Other calendar year income
(excluding realized capital gain/loss) XXXX
Less: Other calendar year expenses
(including policy year policyholder dividends) $ XXXX
------
Pretax operating profit $ XXXX
======
* Defined as the sum of calendar year operating expenses and acquisition
expenses.
- Operating expenses exclude all bonuses recorded under all
incentive plans of Reliance National during the year.
- Acquisition expenses are determined by multiplying the calendar
year acquisition expense ratio by the policy year written premium.
Pretax operating profit for a plan year will be recalculated at the end of
subsequent calendar years. Policy year losses and loss adjustment expenses
incurred will be based on loss and loss expense ratios provided by the Corporate
Actuarial Department under the supervision of Reliance Insurance Company's Chief
Actuary.
Reasonable allocations will be made by Reliance Insurance Company to RN for
Reliance Insurance Company's corporate overhead under the normal allocation
methods.
Reliance National
1996 Key Management Incentive Plan Page 5
<PAGE>
POLICY YEAR NET INVESTMENT INCOME
Policy year net investment income will be calculated by multiplying the average
portfolio yield (excluding realized or unrealized capital gains or losses), net
of investment expenses per Reliance's statutory Consolidated Annual Statement
for the calendar year which coincides with the plan year, by the average policy
year invested assets (as defined) of RN for each calendar year. For example, for
plan year 1996 the yield determined from the calendar year 1996 consolidated
statutory statement would be used. This yield will be used in all subsequent
calendar years to determine policy year net investment income for plan year
1996.
For example: Calendar Year
1999-
1996 1997 1998 2004 Total
Average Invested Assets (RN)
Policy Year l996 xxxx xxxx xxxx xxxx xxxx
Reliance Insurance Company Portfolio
Yield Per l996 Consolidated Annual
Statement (yield for illustrative
purposes only) 7% 7% 7% 7%
Policy Year Investment Income:
(Yield x Invested Assets) xxxx xxxx xxxx xxxx xxxx
Policy year investment income for the plan year is calculated on a cumulative
basis for nine calendar years.
Reliance National
1996 Key Management Incentive Plan Page 6
<PAGE>
POLICY YEAR AVERAGE INVESTED ASSETS
Average invested assets for each policy year will be calculated as described
below.
Invested assets shall be equal to cumulative net cash flow from operations
including cash flow from underwriting, other income and expenses, net investment
income and federal income taxes and assumed shareholder dividends from
accumulated surplus. In determining cash flow, identifiable Reliance National
balance sheet accounts as of the close of the calendar year which coincides with
the policy year shall be allocated wholly to the current policy year unless
other reasonable estimation methods are available to allocate balance sheet
accounts.
In determining cash flow a dividend to shareholders of 10% of ending calendar
year surplus (if any) shall be assumed.
Average invested assets for each calendar year is equal to the beginning and
ending invested asset balances divided by 2.
An example of the calculation of net invested assets is contained in Exhibit 3.
Reliance National
1996 Key Management Incentive Plan Page 7
<PAGE>
VESTING
Participants will become vested (subject to the provisions of the next
paragraph) based upon completing the years of employment as set in the following
standard vesting schedule:
Number of Years
Plan year plus 1 2 3 4 5 6 7 8
Cumulative vesting
percentage 10% 30% 50% 60% 70% 80% 90% 100%
A participant who is an employee of Reliance National when a change in control
(as hereinafter defined under CHANGE OF CONTROL) of Reliance National occurs
will become fully vested in the units awarded to him for all plan years. A
participant whose employment terminates for reasons of death or total
disability, as defined in the benefit plans of Reliance National, will become
fully vested in the units awarded to him for all plan years. A participant whose
employment terminates by reason of normal retirement, as defined in the benefit
plans of Reliance National, will fully vest in the units awarded to him for all
plan years preceding the year of retirement and will vest in that percentage of
the units awarded to him for the plan year in which he retires which equals the
number of months of employment completed during the plan year divided by 12. If
(1) a participant's employment terminates for any reason other than death, total
disability or normal retirement and (2) the participant has not become fully
vested in the units awarded to him as a result of a change in control, then the
number of units in which the participant is vested (if any) for each plan year
will be determined by the Chief Executive Officer of Reliance National with the
non-binding advice of the Vesting Advisory Committee.
Reliance National
1996 Key Management Incentive Plan Page 8
<PAGE>
VESTING ADVISORY COMMITTEE
The Vesting Advisory Committee shall consist of five rotating members. The CEO
of Reliance National will appoint the five rotating members from among the MIP
participants. Each rotating member will serve a term of two years.
The purpose of the Vesting Advisory Committee is to make a non-binding
recommendation to the CEO of Reliance National whether the standard vesting
schedule contained in the Plan shall be followed with respect to a participant
who: (1) terminates from the Company for any reason other than a termination by
death, total disability or normal retirement and (2) has not become fully vested
in the units awarded to him as a result of a change in control. In determining
the recommendation whether to follow the standard schedule, the Vesting Advisory
Committee shall consider:
The reasons for the participant's termination,
The past performance of the participant,
The past contributions of the participant to Reliance National,
The future employer of the participant and
Any other factors the committee shall deem relevant.
The recommendation of the Committee shall be by a simple majority and the
decision of the CEO of Reliance National with respect thereto shall be absolute,
final and binding on all parties including, without limitation, participants
under the plan. The CEO of Reliance National may in his sole and absolute
discretion, specify conditions for the receipt by a terminating participant
(other than a participant who has fully vested in the units awarded to him as a
result of a change in control) of any payments under the Plan, including but not
limited to requiring the terminating participant to enter into a written
Non-compete or Noninterference Agreement with Reliance National. Such agreement,
if any, will be binding on all parties.
In the event that a member of the Committee terminates from Reliance National,
the CEO of Reliance National shall appoint another rotating member to serve on
the Committee to participate in the recommendation of the application of the
vesting schedule with respect to the terminating participant Vesting Schedule.
In the event the CEO of Reliance National is unavailable, or that office is
vacant, the Chairman of the Reliance Insurance Group will act in his place.
Reliance National
1996 Key Management Incentive Plan Page 9
<PAGE>
Neither the CEO of Reliance National nor any member of the Vesting Advisory
Committee shall be liable for anything done or omitted to be done in connection
with the Plan, except for his or her own willful misconduct or gross negligence.
Reliance National
1996 Key Management Incentive Plan Page 10
<PAGE>
DISTRIBUTION SCHEDULE
Participation units will be paid as shown below after the end of the years
indicated (except as provided to the contrary in the next paragraph and in the
second paragraph under CHANGE OF CONTROL):
Plan year plus 1 2 3 4 5 6 7 8
Cumulative Percentage 10% 30% 50% 60% 70% 80% 90% 100%
Distribution of Projected
Ultimate Awards
In the event a participant's employment terminates by reason of death, his or
her estate shall receive within 90 days following the date of death the net
present value (using a discount rate equal to the then prime lending rate of
Chase Manhattan Bank), less any advance payments previously made, for all units
for all policy years in which he or she was a participant. The basis for valuing
the outstanding units for each policy year will be the projected final value for
each policy year which is outstanding.
In all cases, distributions will be adjusted for any prior distributions or
advances paid and for losses from other plan years as described in the next
paragraph. Any calculated overpayments for a plan year are not refundable by a
participant except to offset amounts due the participant for other plan years.
Amounts due a participant in accordance with the distribution schedule above
will be offset by losses from other plan years in which the participant was a
member of KMIP. For example, in Exhibit l.a the plan experienced an operating
loss before bonuses of $50 million in plan year 1997. The loss per unit of
$5,000 calculated on the pretax loss of $50 million before other bonuses earned
is deducted from amounts per unit due for other plan years in accordance with
the distribution schedule until absorbed (see exhibit l.b).
The above applies only when the plan experiences an operating loss before other
bonuses earned. In the example in Exhibit l.a, all other bonuses earned exceeded
the maximum bonus pool for plan year 1995, therefore no amounts are allocable to
the KMIP. This excess is not deducted from amounts due for other plan years
because the plan did not experience an operating loss in 1995.
Reliance National
1996 Key Management Incentive Plan Page 11
<PAGE>
CHANGE OF CONTROL
In the event of a change of control of Reliance National, whether directly or
indirectly (including, for example, through the sale of Reliance Insurance
Company or Reliance Group Holdings, Inc.), any successor to all or substantially
all of the business or assets of Reliance National or Reliance Insurance Company
shall assume all liabilities to participants under this Plan and perform all
duties and responsibilities in the same manner that would have been required of
Reliance National and Reliance Insurance Company if no such change had taken
place, and all participants will automatically become fully (100%) vested for
all plan years.
In the event the employment of a participant (a) is terminated by Reliance
National within 18 months following a change of control without Cause or (b) is
terminated by the participant within 18 months following a change of control
with Good Reason, he/she shall receive within 90 days following the date of
his/her termination the net present value (using a discount rate equal to the
then prime lending rate of Chase Manhattan Bank) less any advance payments made
for all units for all policy years in which he/she was a participant. The basis
for valuing the outstanding units for each policy year will be the projected
final value for each policy year which is outstanding.
For purposes of this section, Cause shall be defined as: (1) conviction of a
crime, (2) material and deliberate violation of Reliance National's Code of
Conduct or (3) dishonest acts in connection with the participant's employment by
Reliance National. For purposes of this section, Good Reason shall be defined as
a reduction in the participant's authority, duties, responsibilities or title
(as determined by the participant in his reasonable judgment), any reduction in
his/her compensation, or any change caused by Reliance in his/her office
location of more than 35 miles from its location on the date of the change of
control.
Reliance National
1996 Key Management Incentive Plan Page 12
<PAGE>
PARTICIPANT STATEMENT
Each participant shall be provided a statement of his/her account for each plan
year showing actual and projected amounts earned, paid and payable. See exhibit
2 for an example of the report to be provided.
MISCELLANEOUS
No award under this Plan shall be considered as compensation in calculating any
insurance, pension or other benefit for which the recipient is eligible unless
any such insurance, pension or other benefit is granted under a plan which
expressly provides that compensation under this Plan shall be considered as
compensation under such plan.
Reliance National
1996 Key Management Incentive Plan Page 13
<PAGE>
EXHIBIT 1.a
-----------
HYPOTHETICAL EXAMPLE
OF DISTRIBUTION SCHEDULE
- ------------------------
($000's omitted - except per unit amounts)
Policy Years
------------------------------------------------
1995 1996 1997 1998 1999
------------------------------------------------
Projected Ultimate Pretax
Operating Income - Before
Bonuses: 50,000 120,000 (50,000) 150,000 170,000
------------------------------------------------
Maximum Bonus Pool @ 13%: 6,500 15,600 (6,500) 19,500 22,100
All Other (non-KMIP)
Bonuses Earned: 8,000 8,000 5,000 10,000 12,000
------------------------------------------------
Remainder Available for
KMIP Bonus: (1,500)(a) 7,500 (11,500) 9,500 10,100
================================================
KMIP Bonus Earned Per Unit 0(a) 5,846 (5,000)(b) 7,308 7,759
================================================
(a) Since all other bonuses earned exceeded the maximum bonus
pool, the KMIP bonus is $0. Because the profit center
pretax operating income is a profit this excess is not
deducted from amounts due for other years.
(b) Since the profit center ultimate pretax operating income
is a loss for 1997 this loss must be deducted from other
policy years.
Projected Ultimate Pretax Operating Loss: (50,000)
All Other Bonuses (5,000)
--------
Projected Utimate Pretax Operating Loss: (55,000)
========
Amount Deducted From Other Policy Years:
13% of $50,000 (the loss before all other
bonuses earned) (6,500)
========
Amount Deducted Per Unit ($6.5 million / 1300 units): (5,000)
========
<PAGE>
EXHIBIT 1.b
<TABLE>
<CAPTION>
HYPOTHETICAL EXAMPLE
DISTRIBUTION PAID PER UNIT
Distribution Calendar Year
Schedule -------------------------------------------------------------------------------
Cumulative (A) 1995 1996 1997 1998 1999 2000 2001 2002 2003
- --------------- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Plan Years 1995 0% 10% 30% 50% 60% 70% 80% 90% 100%
1996 0% 10% 30% 50% 60% 70% 80% 90%
1997 0% 10% 30% 50% 60% 70% 80%
1998 0% 10% 30% 50% 60% 70%
1999 0% 10% 30% 50% 60%
Ultimate
Bonus Earned (B)
- ----------------
Plan Years 1995 0 0 0 0 0 0 0 0
1996 5,846 5,846 5,846 5,846 5,846 5,846 5,846
1997 (5,000) (5,000) (5,000) (5,000) (5,000) (5,000)
1998 7,308 7,308 7,308 7,308 7,308
1999 7,769 7,769 7,769 7,769
Distribution Due
Cumulative (C)
- ----------------
(C = A x B)
Plan Years 1995 0 0 0 0 0 0 0 0
1996 585 1,754 2,923 3,508 4,092 4,677 5,262
1997 (500) (1,500) (2,500) (3,000) (3,500) (4,000)
1998 731 2,192 3,654 4,385 5,115
1999 777 2,331 3,885 4,662
Net --------------------------------------------------------------------------------
Cumulative Payable 0 585 1,254 2,154 3,977 7,077 9,446 11,038
Less
Cumulative Paid * 0 0 585 1,254 2,154 3,977 7,077 9,446
Cumulative -------------------------------------------------------------------------------
Balance Due 0 585 669 900 1,823 3,100 2,369 1,592
===============================================================================
</TABLE>
* Payment is generally made in February of the succeeding year.
<PAGE>
Reliance National KMIP
Status as of December 31, 1996
Exhibit 2
(Hypothetical)
1996 Plan Year
Actual Projected
as of Ultimate to
12/31/96 12/31/04
----------- -----------
Written Premium 935,028,000 935,028,000
Policy Year Earned Premium 467,514,000 935,028,000
Loss & Lae 337,545,108 675,090,216
Expense 265,470,884 265,470,884
------------ ------------
Underwriting Gain (Loss) (135,501,992) (5,533,100)
Investment Income 17,592,477 120,965,069
------------ ------------
Pretax Profit (117,909,515) 115,431,969
============ ============
Loss Ratio 72.2% 72.2%
Expense Ratio 28.4% 28.4%
------------ ------------
Combined Ratio 100.6% 100.6%
Investment Income 1.9% 12.9%
------------ ------------
Pretax Profit 98.7% 87.7%
============ ============
<TABLE>
<CAPTION>
Bonus Calculation @ 12/31/96 Per Unit @ 12/31/04 Per Unit
-----------------------------------------------------
<S> <C> <C> <C> <C>
Cumulative Bonus Earned (Pretax X 13%) 0 15,006,156
Less: bonuses paid under all other plans 8,300,000 8,300,000
-----------------------------------------------------
Adjusted Award (Available for KMIP) (8,300,000) 0 6,706,156 5,159
Cumulative Bonus Payable 0 0
Cumulative Paid/Advanced 0 0
-----------------
Balance Payable 0 0
=================
</TABLE>
<TABLE>
<CAPTION>
Projected
Payable Earned Paid Payable in Payable in Payable in Payable in Payable in Payable in
Participants Units Earned @ 12/31/96 To 2004 1997 1998 1999 2000 2001 2002 2003
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Bonus Per Unit 0 0 5,159 0 516 1,032 1,032 516 516 516
Individual 65 0 0 335,308 0 33,531 67,062 67,062 33,531 33,531 33,531
<CAPTION>
Total
Payable in Payable in Award
Participants 2004 2005 PY 1996
- -----------------------------------------------------------------
<S> <C> <C> <C>
Bonus Per Unit 516 516 5,159
Individual 33,531 33,531 335,308
</TABLE>
<PAGE>
Exhibit 3
(Hypothetical)
Reliance National KMIP
Plan Year 1996
Investment Income Calculation
Cash Flow Method:
- ----------------------------
<TABLE>
<CAPTION>
Cash Flow 1996 1997 1998 1999 2000 2001 2002 2003 2004
- --------- ---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Premiums Written 935,028
Change in Rec 273,701 (105,894) (41,956) (40,856) (40,856) (6,738) (2,338) (2,338) 32,726
Net Premiums
Collected (+) 661,327 105,894 41,956 40,856 40,856 6,738 2,338 2,338 32,726
Losses Paid (-) 105,314 132,993 102,614 83,711 61,433 42,531 29,704 20,928 14,177
Expenses Paid (-) 265,471 0 0 0 0 0 0 0 0
Imprest Funds (-) 70,000 (70,000)
Reinsurance
Recoverables (-) 100,000 (100,000)
Advances to TPA's (-) 55,000 (55,000)
Other Liab (+) 450,000 (450,000)
Fixed assets (-) 4,000 (1,250) (1,000) (1,000) (500) (250) 0 0 0
-------------------------------------------------------------------------------------------------
Cash Flow 511,542 (250,849) (59,658) (41,855) (20,077) (35,543) (27,366) (18,590) 18,549
Net Inv. Income 17,592 26,400 16,086 13,567 12,161 10,745 8,999 7,680 7,735
Income Taxes (7,876) (35,853) (507) 1,989 (601) (851) 683 (1,353) (3,092)
Paid Surplus
Dividend (722) (2,017) (2,837) (3,436) (3,968) (4,152) (4,166)
Paid Bonus 0 0 (501) (1,001) (1,001) (501) (501) (501) (501)
-------------------------------------------------------------------------------------------------
Net Cash Flow 521,259 (260,303) (45,302) (29,317) (12,355) (29,586) (22,154) (16,916) 18,525
Investment Income
- -----------------
Invested Assets
(Beginning) 0 521,259 260,956 215,654 186,337 173,981 144,396 122,242 105,326
Invested Assets
(Ending) 521,259 260,956 215,654 186,337 173,981 144,396 122,242 105,326 123,851
Avg. Invested Assets 260,629 391,107 238,305 200,995 180,159 159,188 133,319 113,784 114,588
Rate 6.75% 6.75% 6.75% 6.75% 6.75% 6.75% 6.75% 6.75% 6.75%
Net Investment
Income 17,592 26,400 16,086 13,567 12,161 10,745 8,999 7,680 7,735
-------------------------------------------------------------------------------------------------
Balance Sheet
- -------------
Assets
Net Inv. Assets 521,259 260,956 215,654 186,337 173,981 144,396 122,242 105,326 123,851
Imprest Funds 70,000
Reins Recoverables 100,000
Advances to TPA's 55,000
Receivables 273,701 167,807 125,851 84,995 44,139 37,401 35,064 32,726 0
Fixed assets 4,000 2,750 1,750 750 250 0 0 0 0
-------------------------------------------------------------------------------------------------
Total 1,023,959 431,513 343,255 272,082 218,370 181,797 157,306 138,052 123,851
-------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------
Liabilities
UPR 467,514
Accrued Bonus 0 1,668 1,865 1,452 978 944 833 666 501
Reserves 232,231 436,783 334,170 250,458 189,025 146,495 116,791 95,863 81,686
Accrued Dividend
Other 450,000
-------------------------------------------------------------------------------------------------
Total 1,149,745 438,451 336,035 251,911 190,004 147,438 117,624 96,529 82,187
-------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------
Surplus (125,786) (6,939) 7,220 20,171 28,367 34,359 39,682 41,524 41,664
-------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------
Surplus Reconciliation
- ----------------------
Beginning of Year 0 (125,786) (6,939) 7,220 20,171 28,367 34,359 39,682 41,524
Pretax Income (117,910) 156,369 16,086 13,567 12,161 10,745 8,999 7,680 7,735
Taxes (7,876) (35,853) (507) 1,989 (601) (851) 683 (1,353) (3,092)
Paid Surplus
Dividend (722) (2,017) (2,837) (3,436) (3,968) (4,152) (4,166)
Earned Award (1,668) (698) (588) (527) (466) (390) (333) (335)
-------------------------------------------------------------------------------------------------
End of Year (125,786) (6,939) 7,220 20,171 28,367 34,359 39,682 41,524 41,664
-------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------
Dividend Calculation
- --------------------
Pre Dividend Surplus (125,786) (6,939) 7,220 20,171 28,367 34,359 39,682 41,524 41,664
Dividend as %: 10.00%
------
Dividend as $: 0 0 722 2,017 2,837 3,436 3,968 4,152 4,166
-------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
- --------------------------------------------------------------------------------
RELIANCE
- --------------------------------------------------------------------------------
RELIANCE GROUP HOLDINGS, INC.
1996 ANNUAL REPORT
[LOGO]
<PAGE>
ABOUT THE COMPANY
Reliance Group Holdings, Inc. (NYSE: REL) is both a leading property and
casualty insurer with specialized capabilities and coverages, and the nation's
third-largest title insurer. In addition to these core businesses, Reliance has
an information technology consulting operation.
In the past five years, Reliance has achieved:
o A dramatic shift to more profitable, specialized property and casualty
insurance coverages
o Commercial business growth, productivity and service enhancements from its
title insurance operations
o Excellent operating income
o Superior underwriting
o A significantly strengthened balance sheet
o Outstanding investment returns
o Strong returns on equity
TABLE OF CONTENTS
Reliance At A Glance 2
Letter to Shareholders 4
Review of Operations 10
Financial Information 20
Directors and Officers 59
Corporate Data 60
<PAGE>
FINANCIAL HIGHLIGHTS
in thousands, except per share amounts 1996 1995 1994
- --------------------------------------------------------------------------------
Revenues $3,090,587 $2,905,987 $3,047,050
Income from continuing operations
before gain on sales of investments
and 1996 charge to increase net loss
reserves for asbestos-related and
environmental pollution claims
(A&E reserves) 103,061 76,431 38,790
Income from continuing operations
before gain on sales of investments 15,961 76,431 38,790
Net income 48,207 88,056 43,821
Per share information:
Income from continuing operations
before gain on sales of investments
and 1996 charge to increase
A&E reserves .88 .66 .34
Income from continuing operations
before gain on sales of investments .14 .66 .34
Net income .41 .73 .38
Assets 10,591,131 9,988,213 9,369,553
Shareholders' equity 676,680 678,348 386,750
- --------------------------------------------------------------------------------
Operating Income
Dollars in Millions
96* 103.1*
96 16.0
95 76.4
94 38.8
* Excluding charge to increase A&E reserves
Shareholders' Equity
Dollars in Millions
96 676.7
95 678.3
94 386.8
Assets
Dollars in Billions
96 10.6
95 10.0
94 9.4
1
<PAGE>
RELIANCE GROUP HOLDINGS, INC. AT A GLANCE
4 pie charts stacked
Percent of Net Property and Casualty Premiums
Written
Reliance National 45%
Reliance Insurance 38%
Reliance Surety 9%
Reliance Reinsurance 8%
Consolidated Combined Ratio
Percent
96 101.6*
95 101.8
94 104.4
The combined ratio is the ratio of claims and expenses to earned premiums -- the
better the performance, the lower the ratio.
- --------------------------------------------------------------------------------
RELIANCE NATIONAL
Market Focus
Operating in the U.S. and selected international markets with a broad range of
innovative and specialized coverages and risk management services for Fortune
1,000 companies.
Vital Statistics
Reliance National
Combined Ratio
Percent
96 101.7
95 99.1
94 104.5
1996 Highlights
o Broadened international presence with new offices in Amsterdam, Cologne,
Stockholm, Singapore and Bahia Blanca, Argentina
o Established Reliant, nonstandard auto insurer
o Established global infrastructure department to underwrite coverage for roads,
ports, power stations and related projects in emerging nations
Looking Ahead
Will continue expanding in both U.S. and selected international markets.
Domestically, growth is anticipated in nonstandard auto, accident and health,
workers' compensation and employment practices coverages.
RELIANCE INSURANCE
Market Focus
Traditional and innovative coverages for the more complex commercial risks of
middle-market customers, typically, corporations with 25 to 1,000 employees, and
with revenues from $5 million to $300 million.
Vital Statistics
Reliance Insurance
Combined Ratio
Percent
96 104.9*
95 106.3
94 106.4
1996 Highlights
o Premium growth of 8%
o Invested in technology and people to enhance claims management capabilities
and service excellence
o Opened new offices in Dallas and Kansas City
Looking Ahead
Reliance Insurance will continue to meet middle-market demands by delivering a
wide array of products and services through its nationwide network of local
offices.
2
<PAGE>
RELIANCE SURETY
Market Focus
Contract surety bonds, commercial surety bonds and fidelity bonds.
Vital Statistics
Reliance Surety
Combined Ratio
Percent
96 75.5
95 65.6
94 74.3
1996 Highlights
o Excellent premium growth of 14%
o Success meeting needs of smaller contractors through "Firemark"
program; new Firemark offices opened in Atlanta, Phoenix, Richmond,
San Diego and San Francisco
o Recorded strong growth in fidelity and commercial bond business
Looking Ahead
Anticipate growth in Firemark surety program serving smaller contractors,
fidelity bonds and Express Surety product (small, high-volume bonds sold through
cost-efficient distribution system).
RELIANCE REINSURANCE
Market Focus
Treaty and facultative casualty reinsurance for small and midsize insurers, and
for specialty divisions of larger insurers.
Vital Statistics
Reliance Reinsurance
Combined Ratio
Percent
96 102.7*
95 114.9
94 111.3
1996 Highlights
o Achieved solid growth with renewed focus on casualty coverages; premiums grew
27% in 1996
o Targeted attractive markets including standard and nonstandard auto and
workers' compensation coverages
o Customized products division active in providing finite risk contracts
Looking Ahead
Will build on close relationships with clients to develop tailored solutions in
areas such as capital deployment. Continued focus on writing lower layers of
risk where loss experience is more predictable and pricing more attractive.
COMMONWEALTH LAND TITLE INSURANCE
Market Focus
Title insurance, appraisal services, escrow services and a range of related real
estate services for residential and commercial property owners, financial
intermediaries and mortgage originators.
Vital Statistics
Commonwealth Land Title
Revenues and Pretax Operating Income
Dollars in Millions
Revenue
96 780.2
95 671.9
94 856.8
Pretax Operating Income
96 38.2
95 12.3
94 30.8
1996 Highlights
o Commonwealth continues to be a market leader, the third-largest title
insurance company in the United States; premiums and fees up 16% over prior
year
o Achieved record commercial title revenues
o Augmented commercial market presence with new offices in Atlanta, Chicago and
Seattle
o Acquired new offices in rapidly growing Rocky Mountain region
Looking Ahead
Positive trends include continuing favorable housing affordability, fee income
opportunities, more frequent residential refinancings, increased commercial real
estate transaction activity and lower claims over the past few years, leading to
declining loss ratios.
RCG INFORMATION TECHNOLOGY
Market Focus
A full-service computer consulting company with expertise in year 2000 software
solutions and other programming, development and consulting services.
Vital Statistics
RCG Information Technology
Revenues
Dollars in Millions
96 136.7
95 106.5
94 90.0
1996 Highlights
o Grew in excess of industry rate; 1996 revenues up 28% over prior year
o Enhanced year 2000 software solution capabilities by acquiring both Quintic
Systems and Century Conversion Software
o Invested in corporate infrastructure and opened offices in Atlanta, Columbia,
Danbury, Raleigh and Tarrytown
Looking Ahead
RCG Information Technology will continue investing in capability-enhancing
resources to take advantage of trends toward outsourcing of computer
programming, systems analysis, design and related services including year 2000
reprogramming.
- --------------------------------------------------------------------------------
* Excludes second quarter $134 million asbestos-related and environmental
pollution reserve addition. Including this reserve addition, the 1996
consolidated property and casualty combined ratio was 109.0%, the combined
ratio for Reliance Insurance was 121.9%, and the combined ratio for Reliance
Reinsurance was 115.5%.
3
<PAGE>
TO OUR SHAREHOLDERS
Reliance Group's progress over the last several years continued in 1996. We
achieved solid operating income, sound investment returns and a strengthened
financial position.
- --------------------------------------------------------------------------------
This was an excellent year for us, and we have entered 1997 confident in what we
can accomplish for our shareholders with our valuable franchise, our specialized
capabilities, and an unremitting focus on our customers and markets.
o Operating income in 1996 was $103.1 million ($ .88 per share), excluding an
after-tax charge of $87.1 million ($ .74 per share) to increase our
asbestos-related and environmental pollution (A&E) reserves. Including the A&E
charge, operating income was $16.0 million ($ .14 per share).
o Net income in 1996 was $135.3 million ($1.15 per share), excluding the A&E
charge. Including this charge, net income was $48.2 million ($ .41 per share)
in 1996.
o Although our reported return on equity was 7.48%, Reliance achieved a return
on equity of 19.43%, excluding the A&E charge. This return is consistent with
our goal of achieving returns on equity of 15% or better and is a more
meaningful measure of the performance of our ongoing business, since the A&E
charge is for claims from policies written in or before 1987.
o The addition of $134 million to our net loss reserves for asbestos-related
and environmental pollution claims, which we made in the second quarter, is
another important step in becoming a stronger company. Utilizing newly
developed data and methodologies, we performed an extensive study and
established conservative reserves. At year-end, total A&E reserves for
policies written in or before 1987 stood at $213 million, or 10.4 times
average paid losses over the past three years. Our action helps put behind
us an issue that has beset much of the property and casualty industry.
o Even with the charge to strengthen reserves, shareholders' equity at
year-end was $676.7 million, and book value per share was $5.92. Also,
Reliance grew its statutory surplus in 1996 to $1.2 billion.
o Including the A&E charge, our property and casualty pretax operating income
was $86.8 million, and our combined ratio was 109.0%. Our property and
casualty pretax operating income, excluding the A&E charge, was $220.8
million. We also had an outstanding combined ratio of 101.6%, excluding the
A&E charge. This ratio is among the best in the industry and demonstrates
our ability to succeed in what continues to be a challenging and competitive
environment.
GOALS
o Continued growth in our core business
o Consistent growth in earnings per share
o A return on equity of at least 15%
o Reductions in financial leverage leading to higher credit ratings
4
<PAGE>
Photo - Executive Portraiture/Silhouetted.
Standing, left to right: George E. Bello, Saul P. Steinberg, Robert M.
Steinberg, Lowell C Freiberg.
Seated, left to right: Howard E Steinberg, James E. Yacobucci
(Photo caption)
Standing, left to right:
George E. Bello, EVP and Controller;
Saul P. Steinberg, Chairman and Chief Executive Officer;
Robert M. Steinberg, President and Chief Operating Officer;
and Lowell C. Freiberg, SVP and Chief Financial Officer.
Howard E. Steinberg, SVP and General Counsel;
and James E. Yacobucci, SVP-Investments.
- --------------------------------------------------------------------------------
o Our title insurance business was an important contributor to our progress.
Title revenues were up 16%, to $780.2 million in 1996, and pretax operating
income grew substantially to $38.2 million.
Reliance today is acknowledged by customers, brokers, agents and its peers
as one of the most disciplined and successful specialized property and casualty
and title insurers. And we are totally committed to translating our success in
the marketplace into success for our shareholders.
While Reliance has accomplished much in the past several years, we have set
high goals for the future:
o Continued growth in our core business
o Consistent growth in earnings per share
o A return on equity of at least 15%
o Reductions in financial leverage leading to higher credit ratings
As we build our core property and casualty and title businesses, strengthen
our financial position and unlock the value of our investments, we are confident
in our ability to achieve our goals.
Property and Casualty Insurance
Reliance Group continues to intensify its focus on specialized property and
casualty insurance coverages.
Just about every insurer is talking specialization today, but for many
years, Reliance has been successfully executing a strategy of specialization. We
define this strategy as a disciplined focus on markets and products where we can
provide distinctive capabilities and achieve above-average returns. Each of our
four property and casualty profit centers, Reliance National, Reliance
Insurance, Reliance Surety and Reliance Reinsurance, has built a valuable
franchise serving targeted markets.
We are succeeding in what is generally considered a soft market by growing
and investing in those segments where opportunities are most rewarding, while
cutting back business in segments that are unattractive. It's a simple strategy,
but its successful execution
5
<PAGE>
requires discipline, the willingness to say "No" to business that yields
inadequate risk-adjusted returns for shareholders. This strategy also requires
unremitting attention to markets and customers. A flat and focused management
structure helps Reliance stay close to the marketplace and move quickly to seize
opportunities.
For example, in 1996 we reduced our writings in excess and surplus lines to
the large corporate market and property reinsurance coverages. At the same time,
we wrote profitable new business in surety, casualty reinsurance, directors and
officers, and the more complex commercial risks for middle-market customers.
Reinsurance demonstrates the flexible, market-driven approach that Reliance
Group brings to all of its businesses. We have found reinsurance pricing for
large-account, large-capacity, excess-of-loss treaties to be attractive. So
Reliance National has been a large buyer of this coverage. On the other hand,
providing reinsurance in the lower layers of risk to smaller companies is a
profitable, growing business for Reliance Reinsurance.
Even within a specific line of business, opportunities and risks may vary
dramatically by the nature of each specific risk, by the precise policy language
chosen, and by the state or region where the business is written. While
competitors sometimes paint with a broader brush, we pay close attention to
these distinctions, and profit from them.
We also have reduced our exposure to catastrophes through several
refinements to our underwriting, including our exit a few years ago from most
homeowner coverages. Catastrophes added only 1.1 points to our property and
casualty combined ratio, compared with an industry average of approximately 3
points.
Gross property and casualty premiums grew 11% in 1996, while net premiums
grew 4%. The primary reasons for the difference are our extensive use of
reinsurance to limit our risk exposures and the growing popularity of
self-insurance arrangements for large corporate clients. We are a leader in this
attractive business. While it generates lower premiums than traditional policies
do, it also results in lower losses.
We do not pursue premium growth at the expense of underwriting excellence
and profitability, but we have been successful at retaining profitable accounts
and winning quality new business.
Underwriting excellence and premium growth are compatible when building
business on a foundation of strong relationships, value-added services and
technical expertise. A perfect example is Reliance Surety, the industry leader,
which grew premiums 14% and achieved an excellent combined ratio of 75.5%.
Our diverse book of business is one of our most important advantages. We are
not overly dependent on any one market.
- --------------------------------------------------------------------------------
Statutory Surplus
Dollars in Millions
96 1,187
95 1,128
94 909
"Property-casualty operations positioned to continue to outperform the industry,
a result of successful implementation of specialist strategy"
Sanford C. Bernstein & Co.
February 1997
6
<PAGE>
Title Insurance
Reliance's title insurance operations, Commonwealth Land Title and Transnation
Title, achieved excellent results in 1996, having significantly increased
revenues from both residential and commercial business. Revenues grew to
$780.2 million in 1996 from $671.9 million a year ago. Pretax operating income
was $38.2 million, compared with $12.3 million a year ago.
As the third-largest title insurance company in the United States,
Commonwealth has achieved strong operating efficiencies. By carefully managing
expenses and staying on top of market conditions, Commonwealth has enhanced its
productivity.
We continue to be optimistic for 1997. Lower claims over the past few years
should result in a declining loss ratio. A healthy economy and stable mortgage
rates would contribute to a solid real estate market and superior results at
Commonwealth.
RCG Information Technology
In addition to our core property and casualty and title insurance operations,
Reliance has a valuable investment in the information technology consulting
business. RCG Information Technology had revenues of $136.7 million in 1996,
up 28% over 1995. Approximately 1,700 professionals operate through 14
locations across the United States and provide computer-related professional
services to Fortune 1,000 clients. In 1996, we took steps to grow this
business, building corporate infrastructure, opening new branches, hiring
additional management and technical talent, and making targeted acquisitions.
RCG Information Technology has built its capacity to serve clients in areas
where demand for computer-based solutions is greatest, such as software
outsourcing, supplemental staffing and client-server technologies. One of our
areas of expertise is the reprogramming of systems to accommodate the year 2000
and beyond, a task costing businesses and governments billions of dollars to
complete.
We believe our information technology consulting business is a valuable
asset, and we intend to enhance its long-term value to our shareholders by
continuing to build its operations.
Investment Performance
Outstanding investment returns are a hallmark of Reliance. At year-end 1996,
Reliance's total portfolio of $4.5 billion was comprised of $3.8 billion (84%)
in fixed-income instruments and $700 million (16%) in equities. In 1996, a
year of rising interest rates, our total return on the fixed-income portfolio
was 5.1%. Our equity investments, including nonredeemable preferred stocks,
returned 12.3%. Over the past five years, the total annual return on our
fixed-income portfolio averaged 7.8%. Our equity portfolio generated an
average annual five-year return of 17.6%.
Fundamental credit analysis continues to be the cornerstone of our
fixed-income investment strategy. We conduct extensive research on companies,
focusing not only on financial statements but on overall business trends,
- --------------------------------------------------------------------------------
"Reliance Group Holdings Prospects continue to brighten"
Oppenheimer & Co., Inc.
February 1997
7
<PAGE>
TO OUR SHAREHOLDERS, continued
including competition, demographics and technological change, attempting to
identify deteriorating or improving trends before they are reflected in credit
ratings. Additionally, we are sensitive to the duration of our fixed-income
portfolio. We adjust it to reflect our expectations about the level and term
structure of interest rates, while always taking into account the duration of
our claims liabilities.
Our investments in common stocks remain targeted at those businesses and
companies that offer the potential for extraordinary returns over intermediate
and longer-term time horizons.
Just as information technology and wireless communications have proven to be
important industries in the 1990s, biotechnology, we believe, will be extremely
important and profitable in the first decade of the next century. Accordingly,
we have made several investments in the field over the past two years. Our
enthusiasm for biotechnology is bolstered by the substantial number of new drug
applications now being filed by the young companies in this industry and by the
improved efficacy and lower costs of treating disease using these new drug
therapies. In addition, the industry's financial management is increasingly
sophisticated, and the large pharmaceutical companies are demonstrating an
appetite for joint ventures and acquisitions in the field.
Our investments in biotechnology companies have been very successful. We
made our first investments in this field in 1994. At year-end, the portfolio
totaled $197 million, including unrealized gains of $87 million. In addition, in
1996, we realized gains on this portfolio of $16 million.
Investment returns are a critical component of every insurer's success; we
believe it is important to optimize results consistent with prudent risk
parameters.
Outlook
We are investing for the future. Continuing our international expansion, we
opened an office in Singapore to serve as a base for our Asia operations. We
have begun to write business in Hong Kong, Indonesia and South Korea. In Europe
this past year, we added offices in Amsterdam, Cologne and Stockholm to our
continental presence, and we continue to grow in London, our headquarters for
the region. In the Western Hemisphere, where we have offices in Canada and
wholly owned subsidiaries in Argentina and Mexico, in 1996 we opened a new
office in Bahia Blanca, Argentina.
Nonstandard auto is one of our promising new lines of business. We began
writing policies in the summer of 1996. The market is huge, $18 billion and
growing. We recognize the unique characteristics of this business, so we are
building a stand-alone organization with the culture, systems and structure
specifically tailored to it.
- --------------------------------------------------------------------------------
"Better than industry average results... Reliance is well positioned for future
earnings growth."
Donaldson, Lufkin & Jenrette
February 1997
8
<PAGE>
"The outlook for 1997 and 1998 remains positive due to growth in attractive
property casualty segments as well as continued favorable operating conditions
for title operations."
Fox-Pitt, Kelton
February 1997
- --------------------------------------------------------------------------------
We also have opened offices and appointed new producers to accelerate our
progress serving the more complex commercial risks of middle-market clients.
Other areas we've targeted for growth include casualty reinsurance, the small
contractor surety market and fidelity bonds.
In the title business, Commonwealth is increasing its penetration of the
commercial market and is growing in the rapidly developing Rocky Mountain
region, where it acquired several additional offices in 1996.
Looking forward, we see opportunity for Reliance in many of the major trends
affecting our industry. Consolidation and reorganization are causing many
competitors to look inward. Having begun our evolution several years ago, we
have a competitive advantage. We are better able to focus on customers. Risks
are becoming more complex, playing to our strong technical skills and
specialized capabilities. Also, the pace of change is accelerating. With the
demise of predictable market cycles, adjustments to strategy, pricing and risk
assessments need to be made on a continuous basis. Reliance is well placed to
respond rapidly to changes in market conditions. Our resources are close to the
marketplace, and we have a culture with a strong bias for action based on market
insight.
We hope this letter conveys our conviction that Reliance is no ordinary
insurer. Conventional products and business-as-usual behavior can only lead to
disappointing performance. Reliance is accountable, innovative, market driven
and entrepreneurial.
We are confident and enthusiastic because the people of Reliance have built
a valuable franchise that distinguishes us in our business. Our outstanding
management team works together very effectively and brings together
complementary skills and experience. Our insurance industry knowledge is
unsurpassed; our managers and professionals have perspective and experience
drawn from a wide range of disciplines. We understand the forces at work in the
larger financial arena and in our clients' industries.
Our commitment to superior service, market acumen, and innovative property
and casualty coverages has differentiated us. Our clients know what we stand for
and what we aspire to achieve.
We own our future. Reliance has moved beyond the industry's restructuring
and refocusing stage, and is executing strategies for achieving outstanding
shareholder returns. We have delivered on our promises and are focusing with
increasing precision on what we do best. We're pleased with the growing
recognition that Reliance Group has been earning from the investment community,
and are totally committed to achieving outstanding results on your behalf in
1997 and beyond.
/s/ Saul P. Steinberg /s/ Robert M. Steinberg
Saul P. Steinberg Robert M. Steinberg
Chairman and Chief Executive Officer President and Chief Operating
Officer
9
<PAGE>
REVIEW OF OPERATIONS
Reliance is successfully executing a strategy of specialization: a disciplined
focus on markets and products where we can provide customers with distinctive
capabilities and solutions while achieving above-average returns.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Reliance National provides a broad range of specialized coverages and risk
management services for Fortune 1,000 companies.
Reliance Insurance serves the middle market with a full range of product
offerings and a strong local presence.
Reliance Surety, the nation's most successful surety company, writes contract
surety bonds, commercial surety bonds and fidelity bonds.
Reliance Reinsurance has a profitable focus on casualty reinsurance for small to
midsize insurers.
Commonwealth Land Title is the nation's third-largest title insurer, serving
both the commercial and residential markets.
RCG Information Technology is a full-service computer consulting company with
expertise in areas such as year 2000 software solutions and other programming,
development and consulting services.
- --------------------------------------------------------------------------------
(Photo Caption)
Standing, left to right:
Robert C. Olsman,
President, Reliance Insurance;
Robert M. Steinberg,
President and Chief Operating Officer, Reliance Group Holdings, Inc.;
Dennis A. Busti,
President, Reliance National; and
Robert P. Buttacavoli,
President, RCG Information Technology.
Seated, left to right:
Herbert Wender,
Chairman, Commonwealth Land Title;
C. Brian Schmalz, President, Reliance Surety; and
George H. Roberts,
President, Reliance Reinsurance.
Photo
Executive Portraiture/Silhouetted
Standing, left to right: Robert C. Olsman, Robert M. Steinberg, Dennis A.
Busti, Robert P. Buttacavoli
Seated, left to right: Herbert Wender, C. Brian Schmalz, George H. Roberts]
10
<PAGE>
RELIANCE NATIONAL
101.7%
Reliance National achieved an outstanding combined ratio even as it invests for
the future. Start-up expenses for new businesses contributed 1.4 points to this
ratio.
- --------------------------------------------------------------------------------
Reliance National has the right people, skills, culture, structure and
incentives to serve national and international markets for specialty lines, and
risk management services for Fortune 1,000 companies.
- --------------------------------------------------------------------------------
An undistracted focus on its targeted market distinguishes Reliance National
from the majority of its competition. Reliance National is fast moving,
innovative, efficient and prudent in providing tailored coverages and addressing
the needs of risk managers and national brokers.
To ensure underwriting excellence, Reliance National utilizes a team
approach, which brings together underwriters, actuaries, loss-control
specialists and claims experts who review, structure and price all policies. In
1996, the combined ratio was 101.7%.
Reliance National has been in the forefront of the move, first by very large
corporations, now by others as well, to self-insured, "captive" arrangements.
These innovations have cash-flow and cost-control benefits for companies willing
to assume a greater share of the risks that they had traditionally placed with
insurance carriers. For Reliance National, these arrangements are a profitable
business and entail less risk than traditional policies do.
A leader in attractive segments such as risk management, directors and
officers, aviation and marine coverages, Reliance National continues to expand
its market presence both domestically and internationally. Growth opportunities
include international business, accident and health, and nonstandard auto
coverages.
Internationally, Reliance National has 15 offices in 10 countries. It writes
policies in about 25 countries, and through direct presences and alliances, it
has the capacity to do business in more than 50 countries. In 1996, Reliance
National opened new offices in Amsterdam, Cologne, Stockholm, Singapore and
Bahia Blanca, Argentina.
In addition, Reliance National has established a global infrastructure
department to underwrite comprehensive international coverage for public and
private entities engaged in the development of roads, ports, industrial
facilities, power stations and related projects in emerging economies.
Reliant, the new nonstandard auto business, wrote its first business in July
1996. Its goal for 1997 is $100 million in premiums. Recognizing the unique
11
<PAGE>
characteristics of the market, Reliant has a management team recruited from
industry leaders in nonstandard auto insurance and has built an efficient
organization with the right systems and structure for this business. Reliant is
focusing its efforts on independent agents who account for approximately
three-quarters of this growing, $18 billion market.
MARKET LAUNCH
An employee-leasing company wanted to reduce its sizable workers' compensation
insurance costs by adopting a high-deductible policy. However, the rapidly
growing company did not want to tie up the collateral that these policies
require. Reliance National stepped forward with a solution, an innovative
structure that required less up-front capital. Before long, the company was
ranked in the top three of its industry, and it embarked on an initial public
offering (IPO). Working with the insured and the broker, Reliance National then
tailored a guaranteed-cost policy that limited the company's potential
liabilities and gave investors added confidence, contributing to a successful
IPO.
[Middle, right hand side
Photo illustration of freestanding letters "IPO"]
RELIANCE INSURANCE
Reliance Insurance has a compelling middle-market strategy, offering a full
range of specialized products and services through a strong local network.
- --------------------------------------------------------------------------------
Middle-market clients, typically corporations with 25 to 1,000 employees,
and with revenues from $5 million to $300 million, have increasingly
sophisticated insurance needs. At the same time, these clients want to be served
locally. Yet regional insurers often lack strong product capabilities, and many
larger companies have closed local offices. Reliance Insurance bridges this gap
with its distinctive middle-market focus, providing effective solutions for
managing complex risks and quality service. By offering a full range of
products through a broad-based office network, Reliance Insurance answers the
needs of those producers and insureds who want ready access to all of their
insurance solutions from one source.
12
<PAGE>
SOPHISTICATED AND LOCAL
Reliance Insurance has both sophisticated product capabilities and a broad local
presence. Middle-market clients look for both from their insurers.
- --------------------------------------------------------------------------------
Reliance Insurance has long had strong skills for underwriting more complex
risks. These capabilities are being actively marketed on a nationwide basis.
Reliance Insurance appointed new producers to serve this growing market and
expanded its network of underwriting and service facilities. In 1996, it opened
new offices in Dallas and Kansas City.
Claims management is another area where Reliance Insurance intends to
differentiate itself from the competition. The claims division has invested in
technology and people, and now manages claims for third parties as well as other
Reliance businesses. Superior claims capabilities will reduce losses and
solidify relationships with producers and clients, leading to high business
retention and a reputation that will attract new business.
As a consequence of all of these efforts, premium growth at Reliance
Insurance was 8% in 1996.
The combined ratio was 104.9%, excluding the asbestos and environmental
charge (121.9% including the A&E charge). Reliance Insurance is working toward
further improvements through a combination of continued strong underwriting,
premium growth and productive expense management.
- --------------------------------------------------------------------------------
CLAIM FAME
A large West Coast roofing contractor wanted its small claims handled without
going through a lot of administrative hoopla. Under traditional arrangements,
for example, if a drop of roofing tar falls on an auto, it results in a small
claim, and a large amount of red tape for the insured. After talking
unsuccessfully to several carriers, the company turned to Reliance Insurance,
whose underwriting and specialty claims units developed an innovative solution.
The liability policy provides for on-site adjustment of small property damage
claims with subsequent audits and controls. Time and administrative costs have
been reduced, and claims experience continues to be favorable.
[Lower right hand side
Photo illustration of papers bound with red tape, with tin snips on top]
13
<PAGE>
RELIANCE SURETY
Outstanding results at Reliance Surety demonstrate that underwriting excellence
and solid premium growth can be compatible when a company has the right people,
capabilities and customer relationships.
- --------------------------------------------------------------------------------
The continuing success of Reliance Surety is the result of strong, long-term
relationships with producers and core contractors, industry expertise, efficient
technology, creative problem solving and active management of the claims
function. Over the past five years, Reliance Surety has achieved average annual
premium growth of 12% and an average combined ratio of 74.9%. Reliance Surety, a
surety industry leader, is demonstrably the best in the business. In 1996,
premiums grew 14%, and the combined ratio was an excellent 75.5%.
The core business of Reliance Surety, serving large and midsize contractors,
continues strong. Just as rewarding, investments in the small contractor segment
and in the fidelity and the commercial bond businesses have contributed to
growth and profitability.
The Firemark program, serving smaller contractors, achieved 33% premium
growth in 1996. This market offers Reliance Surety an opportunity to develop
relationships with smaller growing companies, tailoring surety solutions to
their specific needs. During the year, Firemark offices opened in Atlanta,
Phoenix, Richmond, San Diego and San Francisco.
- --------------------------------------------------------------------------------
GROWTH
Premiums at Reliance Surety grew 14% in 1996. Annual premium growth since 1991
has averaged 12%.
- --------------------------------------------------------------------------------
SURE ENOUGH
A construction contractor had a difficult dilemma. Surety coverage was essential
to its business but virtually unobtainable because its corporate parent had
filed for bankruptcy. By working closely with the producer, the parent company,
the contractor and lenders, Reliance Surety developed a solution. Bringing
together its underwriting, financial and claims experts, Reliance Surety was
able to address the risks and resolve the problem. A bond program was put in
place, which gives Reliance sufficient protection while allowing the contractor
to continue its business without disruption.
[Lower right hand side
Photo illustration of building construction combined with puzzle]
14
<PAGE>
Fidelity premiums also recorded strong growth, 31%, in 1996. Express
Surety--small, high-volume, low-risk bonds sold through a cost-efficient
distribution system--is another area of growth in 1996 and beyond.
These products are becoming a larger share of the business of Reliance
Surety, contributing to continued growth and excellence.
- --------------------------------------------------------------------------------
RELIANCE REINSURANCE
Superior service, underwriting expertise and a renewed focus on casualty
coverages have led to a dramatic resurgence at Reliance Reinsurance.
- --------------------------------------------------------------------------------
Reliance Reinsurance has had long-standing success from its core book of
casualty reinsurance for small to midsize insurers and the specialty divisions
of larger companies. In the early 1990s, expansion into property reinsurance led
to disappointing results. However, in 1996, Reliance Reinsurance renewed its
focus on casualty coverages and achieved sound underwriting results and solid
growth.
Property coverages as a percentage of total premiums were only 10% in 1996,
compared with 33% in 1995. Even with this substantial refocus, total net
premiums grew 27% in 1996. Growth has come from both existing relationships and
new clients and from lines of business where loss experience has proven
favorable. This past year, Reliance Reinsurance had a combined ratio of 102.7%,
excluding the asbestos and environmental charge (115.5% including the A&E
charge).
By establishing close working relationships with clients, Reliance
Reinsurance is able to develop innovative solutions tailor-made for their
individual needs. This partnership approach also enables Reliance Reinsurance to
assist its clients in developing balance-sheet and capital-planning strategies
to support their overall financial objectives. The customized products division,
for example, is particularly active in providing finite risk contracts and other
products to assist clients in improving their capital position relative to
premium writings.
Reliance Reinsurance continues to write in the lower layers of risk, where
pricing is more attractive and loss experience more predictable. Targeted
classes of business such as standard and nonstandard auto insurance and workers'
compensation have generated excellent returns and now account for more than half
of total premiums.
- --------------------------------------------------------------------------------
TAILOR-MADE
The emphasis at Reliance Reinsurance is on providing service and underwriting
expertise--custom solutions that result from close working relationships with
clients.
15
<PAGE>
A CAPITAL SOLUTION FOR GROWTH
A midsize workers' compensation insurer had an opportunity to write additional
quality business, but its capital position limited its ability to grow. Reliance
Reinsurance developed a multifaceted solution including a quota share
reinsurance treaty on the existing book. In addition, Reliance appointed the
insurer as a program manager for new business, enabling it to issue Reliance
policies under strict underwriting guidelines. The marketing and claims
functions were structured so that the insurer could continue to provide seamless
service to its producers and insureds. Now the company is again able to grow and
serve its customers.
[Upper right hand side
Photo illustration of broken eggshell with newly hatched chick]
- --------------------------------------------------------------------------------
COMMONWEALTH LAND TITLE INSURANCE
The nation's third-largest title company, Commonwealth Land Title, profits from
a high level of professional expertise and service, productivity management and
a wide range of real estate information products for the residential and
commercial markets.
- --------------------------------------------------------------------------------
Its market leadership and strong financial position have enabled Commonwealth
to maximize opportunities in a solid real estate market. According to a 1996
Harvard University study, with improved housing affordability, the number of
homeowners in the United States is growing at a record pace.
Commonwealth has positioned itself to be an effective presence serving
decision makers at every decision point in the real estate transaction. Real
estate investment trusts and other principals in commercial transactions, real
estate brokers, national and regional mortgage lenders, and attorneys are all
efficiently served by Commonwealth's national network of branch offices and
agents.
- --------------------------------------------------------------------------------
16%
Title revenues grew 16% in 1996 to $780.2 million. Pretax operating income
reached $38.2 million.
16
<PAGE>
This network was augmented in 1996 by expanding its commercial capabilities
in key markets including Atlanta, Phoenix, Seattle and Washington, DC, and by
acquiring several offices in the rapidly growing Rocky Mountain region.
Commonwealth achieved solid results in 1996. Revenues grew 16% to $780.2
million, and as a result of the significant operating leverage of Commonwealth
and lower paid losses, pretax operating income grew substantially to $38.2
million.
Several important factors should contribute to continued success. Over the
past few years, paid losses have substantially declined, increasing overall
underwriting profitability. Also, real estate information service products are
creating fee income opportunities. Homeowners are refinancing with greater
frequency, which creates additional transaction opportunities and reduces the
length of time that policies are subject to claims. Favorable interest rates
and strong economic activity are contributing to a sound residential and
commercial real estate market.
- --------------------------------------------------------------------------------
THE RIGHT INGREDIENTS
An investor group seeking to acquire three food manufacturing companies with
sizable real estate holdings throughout the United States had only five business
days to meet its lenders' title insurance, collateral and disbursement
requirements. The investor group turned to Commonwealth, which tied together
title policies initially issued by three separate insurers and produced
commitments for 17 properties located in eight states. Commonwealth served as
escrow agent for the three acquisitions, as well as for the related real estate
transactions. During a single weekend, Commonwealth professionals finalized the
complex escrow agreement, and coordinated the payment of prior loans and the
release of liens, readying for the following business day an intricate series of
electronic fund transfers totaling hundreds of millions of dollars.
[Lower left hand side
Photo illustration of table place setting (fork, plate, knife and spoon) with
alarm clock on plate]
17
<PAGE>
Title insurance, an array of related services and a strong customer focus
place Commonwealth at the center of opportunity within America's crucial real
estate industry.
- --------------------------------------------------------------------------------
RCG INFORMATION TECHNOLOGY
Software systems, services and integration firms--a $50 billion industry--are
projected to grow 15% to 18% annually. RCG Information Technology is investing
in new offices, management and technical resources to capture a larger share of
this profitable market.
- --------------------------------------------------------------------------------
Growth at RCG Information Technology actually has exceeded the industry rate:
Revenues in 1996 were $136.7 million, up 28% over the prior year. RCG
Information Technology is a full-service computer consulting company with
expertise in areas including year 2000 software conversions, programming,
project management and consulting, systems analysis, development and design.
Capabilities cover a variety of platforms, from PC applications to large-scale
mainframe systems. Clients are provided with individual consultants or entire
project teams.
Through its system development centers and offices in 14 states, RCG
Information Technology serves corporations in a wide variety of industries
including communications, electronics, publishing, pharmaceuticals, energy,
transportation, retail and finance, as well as government and not-for-profit
entities.
RCG Information Technology is building its capabilities to take further
advantage of industry opportunities created by the trend toward outsourcing and
the growing demand for programmers and technology-driven solutions. New
management, marketing and systems professionals have been recruited. Offices
were opened in 1996 in Atlanta, Columbia, Danbury, Raleigh and Tarrytown. In
addition, focused acquisitions have enhanced the company's capabilities, market
reach and revenue potential.
- --------------------------------------------------------------------------------
1999 2000
RCG Information Technology has strong capabilities for assisting
companies to ready their computer systems for the year 2000 and beyond.
18
<PAGE>
In 1996, RCG Information Technology acquired Quintic Systems and an
affiliated company, Century Conversion Software, which provide year 2000
software assessment and conversion tools, client support and project management
services. Many large companies will be spending $40 million or more on year 2000
systems conversions. The total cost of addressing the year 2000 problem
worldwide is estimated at hundreds of billions of dollars. RCG Information
Technology is positioned to support clients in meeting this challenge.
- --------------------------------------------------------------------------------
SYSTEM SUCCESS
One of the world's largest banks needed to develop global systems for its
business units and integrate them into its centralized operating environment.
The bank turned to RCG Information Technology (RCG IT) for the right solutions.
RCG IT designed and developed multiplatform systems utilizing mainframe,
midrange and client server technologies that support the bank's global
relationship banking, global trust accounting and mutual fund loan operations.
RCG IT also manages and maintains the systems under a long-term operating
agreement and is assisting the bank with its year 2000 compliance needs. This
ongoing relationship is consistent with RCG IT's long-term client partnership
philosophy.
[Middle right hand side
Photo illustration of globe with computer mouse attached]
19
<PAGE>
FINANCIAL INFORMATION
Selected Financial Data 21
Financial Review 24
Consolidated Financial Statements 32
Notes to Consolidated Financial Statements 36
Independent Auditors' Report 56
Report of Management 57
Market and Dividend Information 58
Directors and Officers 59
Corporate Data 60
20
<PAGE>
<TABLE>
<CAPTION>
Selected Financial Data Reliance Group Holdings, Inc. and Subsidiaries
- ----------------------------------------------------------------------------------------------------------------------------------
Year Ended December 31 1996 1995 1994 1993 1992
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
(In thousands, except per-share amounts)
Income Statement Data:
Revenues:
Property and casualty insurance
Premiums earned................................ $ 1,800,854 $ 1,774,591 $ 1,777,318 $ 1,571,539 $ 1,535,740
Net investment income.......................... 257,133 247,343 232,299 216,432 189,287
Gain on sales of investments................... 49,264 27,381 8,851 129,018 50,080
------------ ------------ ------------ ------------- ------------
2,107,251 2,049,315 2,018,468 1,916,989 1,775,107
------------ ------------ ------------ ------------- ------------
Title and mortgage insurance
Premiums earned(1)............................. 780,157 671,947 856,774 893,364 826,493
Net investment income.......................... 30,455 27,946 26,613 24,282 26,224
Gain on sales of investments................... 346 1,729 516 4,786 3,267
Gain on sale of subsidiary(1).................. - - - - 8,999
------------ ------------ ------------ ------------- ------------
810,958 701,622 883,903 922,432 864,983
------------ ------------ ------------ ------------- ------------
Other............................................. 172,378 155,050 144,679 123,398 117,244
------------ ------------ ------------ ------------- ------------
$ 3,090,587 $ 2,905,987 $ 3,047,050 $ 2,962,819 $ 2,757,334
============ ============ ============ ============= ============
Income (loss) from continuing operations before
gain on sales of investments, income taxes
and equity in investee company:
Property and casualty insurance................... $ 218,746 $ 201,699 $ 134,956 $ 41,212 $ (29,999)
Asbestos and environmental loss
reserve increase............................... (134,000)(2) - - - -
------------ ------------ ------------ ------------- ------------
84,746 201,699 134,956 41,212 (29,999)
Title and mortgage insurance...................... 38,234 12,283 30,810 55,180 47,031
Corporate interest expense........................ (74,253) (76,230) (75,619) (89,517) (95,574)
Corporate overhead and other...................... (51,738) (47,184) (51,371) (56,584) (64,730)
------------ ------------- ------------ ------------- ------------
(3,011) 90,568 38,776 (49,709) (143,272)
Income tax (provision) benefit ................... 10,064 (21,929) (9,464) 35,831 52,138
Equity in investee company........................ 8,908 7,792 9,478 12,441 5,206
------------ ------------ ------------ ------------- ------------
Income (loss) from continuing operations
before gain on sales of investments............ 15,961(2) 76,431 38,790 (1,437) (85,928)
After-tax gain on sales of investments............ 32,246 19,485 5,031 86,973 42,708
------------ ------------ ------------ ------------- -------------
Income (loss) from continuing operations.......... $ 48,207(2) $ 95,916 $ 43,821 $ 85,536 $ (43,220)
============ ============ ============= ============ ============
Net income (loss)................................. $ 48,207 $ 88,056 $ 43,821 $ 73,525 $ (35,655)
============ ============ ============ ============= ============
Per-share information:
Income (loss) from continuing operations
before gain on sales of investments............ $ .14(2) $ .66 $ .34 $ (.02) $ (1.14)
After-tax gain on sales of investments............ .27 .17 .04 .94 .57
------ ------- ------- ------- -------
Income (loss) from continuing operations.......... $ .41(2) $ .83 $ .38 $ .92 $ (.57)
===== ======= ======= ======= =======
Net income (loss)................................. $ .41 $ .73 $ .38 $ .79 $ (.47)
====== ======= ======= ======= =======
Weighted average number of common and
common equivalent shares outstanding 117,563 116,045 115,097 92,858 75,555
Cash dividends per common share................... $ .32 $ .32 $ .32 $ .32 $ .32
</TABLE>
21
<PAGE>
<TABLE>
<CAPTION>
Selected Financial Data Reliance Group Holdings, Inc. and Subsidiaries
- ----------------------------------------------------------------------------------------------------------------------------------
Year Ended December 31 1996 1995 1994 1993 1992
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
(In thousands, except ratios)
Other Operating Data(3):
Underwriting loss................................. $ (38,387)(4) $ (45,644) $ (97,343) $ (175,220) $ (219,286)
Loss and loss expense ratio....................... 67.6%(4) 67.7% 73.0% 78.6% 84.0%
Underwriting expense ratio........................ 34.0 34.1 31.4 32.2 30.1
------ ------- ------- ------- -------
Combined ratio(5)................................. 101.6%(4) 101.8% 104.4% 110.8% 114.1%
===== ======= ======= ======= =======
<CAPTION>
December 31 1996 1995 1994 1993 1992
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
(In thousands)
Balance Sheet Data:
Assets............................................ $ 10,591,131 $ 9,988,213 $ 9,369,553 $ 8,815,214 $ 8,185,611
Marketable securities............................. 4,447,276 4,298,510 3,799,874 3,797,315 3,435,595
Excess of cost over fair value of net
assets acquired................................ 249,464 259,444 269,424 279,404 289,385
Debt outstanding(6)............................... 901,532 878,419 892,579 911,071 1,000,698
Shareholders' equity.............................. 676,680 678,348 386,750 518,626 257,800
Statutory policyholders' surplus of property
and casualty insurance subsidiaries............ 1,187,056 1,128,336 908,538 902,290 857,611
</TABLE>
(1) On October 30, 1992, the Company sold Commonwealth Mortgage Assurance
Company ("CMAC"). Premiums earned by the title insurance subsidiaries
excluding CMAC were $770.5 million for the year ended December 31, 1992.
(2) The 1996 results include a charge of $134.0 million ($87.1 million
after-tax, or $.74 per-share) to increase net loss reserves for
asbestos-related and environmental pollution claims for business written
in or before 1987.
(3) The data relate to the property and casualty insurance subsidiaries.
Underwriting results include policyholders' dividends and other income and
expense.
(4) The 1996 data excludes the charge of $134.0 million (7.4 combined ratio
points) to increase net loss reserves for asbestos-related and
environmental pollution claims for business written in or before 1987.
The actual 1996 underwriting loss was $172.4 million, the loss and loss
expense ratio was 75.0% and the combined ratio was 109.0%.
(5) In 1995 and 1994, the combined ratio excluded the effect of the $4.0
million and $11.6 million charge pertaining to Proposition 103.
(6) Debt outstanding included a subsidiary's preferred stock which was
redeemed in 1995.
22
<PAGE>
<TABLE>
<CAPTION>
Property and Casualty Insurance Operations Reliance Group Holdings, Inc. and Subsidiaries
- ----------------------------------------------------------------------------------------------------------------------------------
Net premiums written for each line of property and casualty insurance are as
follows:
- ----------------------------------------------------------------------------------------------------------------------------------
Year Ended December 31 1996 1995 1994 1993 1992
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
(In thousands)
General Liability................................. $ 466,636 $ 468,951 $ 423,377 $ 369,895 $ 349,777
Automobile........................................ 265,206 239,819 244,000 260,180 261,520
Workers' Compensation............................. 249,638 265,882 312,808 377,592 418,685
Multiple Peril.................................... 211,857 184,600 180,074 187,438 126,070
Surety............................................ 159,183 139,298 117,989 106,664 94,316
Reinsurance....................................... 151,099 118,969 125,597 123,742 108,095
Ocean and Inland Marine........................... 129,148 118,757 103,865 105,254 49,658
Fire and Allied................................... 64,250 68,118 49,977 40,372 15,891
Accident and Health............................... 61,873 58,426 51,976 35,649 7,965
Involuntary....................................... 44,229 81,006 113,483 113,498 109,583
Other............................................. 43,080 35,214 41,144 50,313 -
------------ ------------ ------------ ------------- ------------
$ 1,846,199 $ 1,779,040 $ 1,764,290 $ 1,770,597 $ 1,541,560
============ ============ ============ ============= ============
<CAPTION>
Combined ratios (on a GAAP basis), after policyholders' dividends, for each line
of property and casualty insurance are as follows:
- ----------------------------------------------------------------------------------------------------------------------------------
Year Ended December 31 1996(1) 1995(2) 1994(2) 1993 1992
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
General Liability................................. 95.5% 102.4% 106.0% 105.0% 100.4%
Automobile........................................ 123.7 126.3 116.6 125.5 119.4
Workers' Compensation............................. 94.1 79.1 95.3 96.5 105.8
Multiple Peril.................................... 107.0 117.3 114.8 121.6 145.3
Surety............................................ 75.5 65.6 74.3 81.0 80.9
Reinsurance....................................... 102.7 114.9 111.3 104.8 122.0
Ocean and Inland Marine........................... 100.3 96.0 124.9 113.9 120.0
Fire and Allied................................... 100.9 117.4 75.5 158.4 186.5
Accident and Health............................... 96.0 81.2 88.9 94.2 94.6
Involuntary....................................... 98.8 94.6 100.3 133.6 147.6
Other............................................. 156.6 155.7 120.7 187.8 -
----- ----- ----- ----- -----
101.6% 101.8% 104.4% 110.8% 114.1%
===== ===== ===== ===== =====
</TABLE>
(1) Excludes the effect of the $134.0 million increase in net loss reserves
for asbestos-related and environmental pollution claims for business
written in or before 1987. This charge impacted the general liability,
automobile, multiple peril and reinsurance lines of business. Including
this charge, the total combined ratio was 109.0%, while the combined
ratios of the general liability, automobile, multiple peril and
reinsurance lines of business were 113.8%, 124.5%, 123.9% and 115.5%,
respectively.
(2) Excludes the effect of the $4.0 million and $11.6 million charge
pertaining to Proposition 103 in 1995 and 1994.
23
<PAGE>
RELIANCE GROUP HOLDINGS, INC. AND SUBSIDIARIES
FINANCIAL REVIEW
- --------------------------------------------------------------------------------
OVERVIEW
The Company had income from continuing operations, before gains on sales of
investments, of $16.0 million ($.14 per share) in 1996. Operating results in
1996 include an 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, before gains on
sales of investments, was $103.1 million ($.88 per share) compared to $76.4
million ($.66 per share) in 1995 and $38.8 million ($.34 per share) in 1994. The
improved results in 1996 and 1995 reflect the continued strong performance of
the property and casualty insurance operations. In addition, the 1996 results
benefitted from improved title insurance operations. After-tax gains on sales of
investments were $32.2 million ($.27 per share) in 1996 compared to $19.5
million ($.17 per share) in 1995 and $5.0 million ($.04 per share) in 1994.
Net income in 1996 was $48.2 million ($.41 per share). Excluding the effects of
the charge to strengthen asbestos and environmental net loss reserves, net
income in 1996 was $135.3 million ($1.15 per share), compared to $88.1 million
($.73 per share) in 1995 and $43.8 million ($.38 per share) in 1994. Net income
in 1995 included a loss of $4.5 million on the disposal of discontinued life
insurance operations by Zenith National Insurance Corp. ("Zenith"), an investee
company, and an extraordinary loss of $3.4 million from the early extinguishment
of debt.
PROPERTY AND CASUALTY INSURANCE OPERATIONS
Based on a study of their asbestos-related and environmental pollution reserves,
the property and casualty insurance operations recorded a charge of $134.0
million in the second quarter of 1996 to increase net loss reserves for
asbestos-related and environmental pollution claims for business written in or
before 1987. 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 the 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
estimate of ultimate losses, based on current information and actuarial
methodologies. Excluding the effects of the $134.0 million charge to strengthen
asbestos and environmental net loss reserves, property and casualty insurance
pretax operating income was $218.7 million in 1996 compared to $201.7 million in
1995 and $135.0 million in 1994. Pretax gains on sales of investments were $49.3
million in 1996 compared to $27.4 million in 1995 and $8.9 million in 1994.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Net premiums written and premiums earned for each line of property and casualty
insurance are as follows:
- ------------------------------------------------------------------------------------------------------------------------------------
Year Ended December 31 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------------------------
(In thousands) Net Net Net Net Net Net
Premiums Premiums Premiums Premiums Premiums Premiums
Written Earned Written Earned Written Earned
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
General Liability..................... $ 466,636 $ 437,634 $ 468,951 $ 451,867 $ 423,377 $ 427,864
Automobile............................ 265,206 260,735 239,819 236,592 244,000 251,038
Workers' Compensation................. 249,638 276,938 265,882 290,241 312,808 323,891
Multiple Peril........................ 211,857 200,301 184,600 180,166 180,074 170,230
Surety................................ 159,183 147,416 139,298 127,355 117,989 108,833
Reinsurance........................... 151,099 140,334 118,969 119,921 125,597 132,694
Ocean and Inland Marine............... 129,148 123,352 118,757 115,590 103,865 95,103
Fire and Allied....................... 64,250 63,020 68,118 61,430 49,977 56,495
Accident and Health................... 61,873 60,394 58,426 58,636 51,976 49,550
Involuntary........................... 44,229 50,489 81,006 88,734 113,483 115,963
Other................................. 43,080 40,241 35,214 44,059 41,144 45,657
-------------- ----------- ----------- ----------- ----------- -----------
$1,846,199 $1,800,854 $1,779,040 $1,774,591 $1,764,290 $1,777,318
============== =========== =========== =========== =========== ===========
</TABLE>
24
<PAGE>
Premiums written and earned in 1996 benefitted from increased writings in the
commercial multiple peril and automobile lines and increased reinsurance
premiums resulting from new casualty treaties. Net premiums written and earned
in 1996 and 1995 also benefitted from growth in surety premiums, resulting from
a higher level of construction activity by insureds and growth in small
contractor business. These increases were partially offset by declines in
involuntary premiums as well as a decline in workers' compensation premiums
resulting from the shift by insureds to captive insurance programs and other
arrangements that reduce net premium retention.
The underwriting loss in 1996 was $172.4 million and the combined ratio
(calculated on a GAAP basis), after policyholders' dividends, was 109.0%.
Excluding the effects of the charge to strengthen asbestos and environmental
net loss reserves, the 1996 underwriting loss was $38.4 million and the
combined ratio was 101.6%, compared to an underwriting loss of $45.6 million in
1995 with a combined ratio of 101.8% and an underwriting loss of $97.3 million
in 1994 with a combined ratio of 104.4%. The strong underwriting results in
1996 and 1995 reflect continued underwriting profits in workers' compensation,
surety and accident and health lines of business, partially offset by
underwriting losses in automobile lines. The Company has undertaken several
initiatives to improve automobile underwriting results including, (i)
elimination of certain unprofitable programs, (ii) increasing prices and
deductible limits, and (iii) strengthening the automobile claims function. The
1996 underwriting results also benefitted from improved results in general
liability, as well as in multiple peril, reinsurance and fire and allied lines
of business, reflecting lower catastrophe losses which were $19.9 million
($26.1 million before reinsurance) in 1996, $25.7 million ($78.5 million before
reinsurance) in 1995 and $50.1 million ($134.0 million before reinsurance) in
1994. The low level of catastrophe losses reflects the Company's efforts to
reduce its catastrophe exposures by exiting homeowners' coverage, reducing
property coverage in the reinsurance line of business and establishing rigorous
underwriting criteria in catastrophe prone regions. The 1995 and 1994
underwriting results included charges of $4.0 million and $11.6 million,
respectively, relating to the Company's settlement with the California
Department of Insurance resolving its total liability for refunds and interest
under Proposition 103.
The property and casualty insurance operations assume and cede reinsurance in
the normal course of business. The Company's aggregate reinsurance recoverables
were $3.58 billion at December 31, 1996, representing estimated amounts
recoverable from reinsurers pertaining to unpaid claims, claims incurred but
not reported, unearned premiums and paid claims. The Company is subject to
credit risk with respect to its reinsurers, as the ceding of risk to reinsurers
does not relieve the Company of its liability to insureds. In order to minimize
losses from uncollectible reinsurance, the Company places its reinsurance with
a number of different reinsurers and utilizes a security committee to approve,
in advance, the reinsurers which meet its standards of financial strength. The
Company holds substantial amounts of collateral to secure recoverables from
unauthorized reinsurers. See note 8 to the consolidated financial statements.
Policy claims and settlement expenses include a provision for insured events of
prior years of $138.7 million in 1996 compared to $38.5 million in 1995 and
$22.4 million in 1994. The provision for all years includes adverse development
related to prior year asbestos-related and environmental pollution claims,
which primarily affect general liability, multiple peril and reinsurance lines
of business, and includes a pretax charge of $134.0 million in 1996 to
increase net loss reserves for asbestos-related and environmental pollution
claims for business written in or before 1987. The 1996 provision also
includes adverse development in the automobile line, offset by favorable
development in workers' compensation. The 1995 provision also included
adverse development in other general liability, automobile and reinsurance
lines, partially offset by favorable development in workers' compensation. The
1994 provision also included adverse development in other general liability
lines, partially offset by favorable development in workers' compensation.
25
<PAGE>
The Company records involuntary assessments when such assessments are billed by
the respective state insurance facilities. These assessments are subject to
large variations in timing and amount and, accordingly, the Company cannot
reasonably estimate a minimum amount of liability prior to billing. While the
amount of any involuntary assessments cannot be predicted with certainty, the
Company believes that future assessments will not have a material effect on its
liquidity or capital resources.
The liability for property and casualty insurance loss reserves at December 31,
1996 was $6.27 billion compared to $5.86 billion at December 31, 1995. This
liability is based on an evaluation of reported claims in addition to
statistical projections of claims incurred but not reported and loss adjustment
expenses. Estimates of salvage and subrogation are deducted from the liability.
Reinsurance recoverables of $2.95 billion and $2.68 billion at December 31,
1996 and 1995, respectively, are included in the liability.
The establishment of loss reserves requires an estimate of the ultimate
liability based primarily on past experience. The Company applies a variety of
generally accepted actuarial techniques to determine the estimates of ultimate
liability. The techniques recognize, among other factors, the Company's and
industry's experience with similar business, historical trends in reserving
patterns and loss payments, pending level of unpaid claims, cost of claim
settlements, product mix and the economic environment in which property and
casualty companies operate. Estimates are continually reviewed and adjustments
of the probable ultimate liability based on subsequent developments and new
data are included in operating results for the periods in which they are made.
In general, reserves are initially established based upon the actuarial and
underwriting data utilized to set pricing levels and are reviewed as additional
information, including claims experience, becomes available. The Company
regularly analyzes its reserves and reviews its pricing and reserving
methodologies so that future adjustments to prior years reserves can be
minimized. However, given the complexity of this process, reserves will require
continual updates and the ultimate liability may be more or less than such
estimates indicate. Estimation of loss reserves for long tail lines of business
is more difficult than for short tail lines because long tail claims may not
become apparent for a number of years, and a relatively higher proportion of
ultimate losses are considered incurred but not reported. As a result,
variation in loss development is more likely in long tail lines of business.
The Company attempts to reduce these variations in certain of its long tail
lines, primarily directors and officers liability and professional liability,
by writing policies on a claims-made basis which mitigates the long tail nature
of the risks. The Company also limits the potential loss from a single event
through the extensive use of reinsurance.
PROPERTY AND CASUALTY INSURANCE INVESTMENT RESULTS
Net investment income of the property and casualty insurance operations
increased to $257.1 million in 1996 from $247.3 million in 1995 and $232.3
million in 1994. These increases reflect growth in the size of the fixed
maturity investment portfolio.
Gains on sales of investments were $49.3 million in 1996 compared to $27.4
million in 1995 and $8.9 million in 1994. Gains on sales of investments in
1996 resulted from sales of equity securities.
26
<PAGE>
TITLE INSURANCE OPERATIONS
The title insurance operations reported pretax income, before gains on sales of
investments, of $38.2 million in 1996, $12.3 million in 1995 and $30.8 million
in 1994.
Premiums and fees were $780.2 million in 1996 compared to $671.9 million in
1995 and $856.8 million in 1994. The increase in premiums and fees in 1996,
when compared to 1995, resulted from an increase in residential resale and new
home sale activity reflecting a strong economy and favorable mortgage interest
rates. In addition, the title insurance operations achieved a record level of
commercial title insurance premiums. Premiums and fees in 1994 benefitted from
increased agency revenues reflecting the strong real estate market conditions
that existed in late 1993 and early 1994.
Agency commissions represent the portion of premiums retained by agents
pursuant to the terms of their agency contracts and are the title insurance
operations' single largest expense. Agency commissions, which fluctuate in
direct relation to agency premiums, were $355.8 million in 1996 compared to
$310.7 million in 1995 and $432.0 million in 1994. Other expenses of the title
insurance operations include personnel costs relating to marketing activities,
title searches, information gathering on specific properties and preparation of
insurance policies, as well as costs associated with the maintenance of title
plants. Other expenses were $355.4 million in 1996 compared to $318.4 million
in 1995 and $344.7 million in 1994. The expense ratio of the title insurance
operations (which includes agency commissions) was 90.5% in 1996 compared to
93.1% in 1995 and 90.0% in 1994. The decline in the expense ratio in 1996, when
compared to 1995, resulted from an increase in direct title insurance premiums
and effective expense control measures. The provision for policy claims was
$61.1 million in 1996 compared to $58.5 million in 1995 and $75.9 million in
1994. The title insurance operations have benefitted from favorable claims
experience in recent years, a trend which is expected to continue. Paid claim
losses have declined to $37.1 million in 1996 from $45.8 million in 1995 and
$52.5 million in 1994.
INVESTMENT PORTFOLIO
At December 31, 1996, the Company's investment portfolio aggregated $4.18
billion (at cost), of which 10% was invested in equity securities. The Company
seeks to maintain a diversified and balanced fixed maturity portfolio
representing a broad spectrum of industries and types of securities. At
December 31, 1996, no one issuer comprised more than 3.0% of the fixed maturity
and short-term investment portfolio. 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 securities and non-rated securities. The risk of default
is generally considered to be greater for non-investment grade securities, when
compared to investment grade securities, since these issues may be more
susceptible to severe economic downturns. At December 31, 1996, the carrying
values of non-investment grade securities and securities not rated by Standard
& Poor's were $499.5 million (13% of the fixed income portfolio) and $93.6
million (2% of the fixed income portfolio), respectively. At December 31, 1995,
the carrying values of non-investment grade securities and securities not rated
by Standard & Poor's were $299.0 million (8% of the fixed income portfolio) and
$64.4 million (2% of the fixed income portfolio), respectively. Substantially
all of the Company's non-investment grade and non-rated securities are
classified as available for sale and, accordingly, are carried at market value.
See note 2 to the consolidated financial statements.
27
<PAGE>
At December 31, 1996, approximately 31% of the Company's fixed maturity and
short-term investment portfolio was comprised of securities issued by
utilities, the vast majority of which are rated investment grade and are first
mortgage or senior note secured bonds. The utility portfolio is widely
diversified among various geographic regions in the United States and is not
dependent on the economic stability of any one particular region. No other
industry group comprises more than 10% of the fixed maturity and short-term
investment portfolio.
OTHER OPERATIONS
RCG International, Inc. ("RCG"), a subsidiary of the Company, primarily
provides technical services in the information technology industry. Information
technology revenues were $136.7 million in 1996, $106.5 million in 1995 and
$90.0 million in 1994. The increase in revenues in both 1996 and 1995 resulted
from increased assignments from existing clients and new clients. Information
technology operating expenses were $134.4 million in 1996, $101.0 million in
1995 and $84.6 million in 1994. RCG's revenues and expenses are included in
other revenues and other operating expenses in the accompanying consolidated
statement of income. For the years 1995 and 1994 other revenues and other
operating expenses included certain consulting operations which were sold in
1995.
At December 31, 1996, the Company's real estate operations had holdings with a
carrying value of $286.7 million, which includes nine shopping centers with an
aggregate carrying value of $118.8 million, office buildings and other
commercial properties with an aggregate carrying value of $105.5 million and
undeveloped land with a carrying value of $62.4 million.
INTEREST EXPENSE
Consolidated interest expense was $87.7 million in 1996 compared to $90.2
million in 1995 and $91.1 million in 1994. The decline in interest expense
resulted from the refinancing of certain of the Company's debt in 1996 and
1995, which decreased the interest rates on such debt.
EQUITY IN INVESTEE COMPANY
Equity in investee company income was $8.9 million, $7.8 million and $9.5
million in 1996, 1995 and 1994, respectively, from the Company's investment in
Zenith. The increase in equity income in 1996, when compared to 1995, reflects
improved underwriting results due, in part, to lower catastrophe losses. The
decline in equity income in 1995, when compared to 1994, reflects an increase
in Zenith's property and casualty underwriting losses, particularly in workers'
compensation. In 1995, the Company recognized an after-tax loss of $4.5 million
on the disposal of discontinued life insurance operations by Zenith.
28
<PAGE>
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 $139.2
million for the year ended December 31, 1996. The Company's ability to receive
cash dividends has depended upon and continues to depend upon the dividend
paying ability of its insurance subsidiaries. The Insurance Law of
Pennsylvania, where Reliance Insurance Company (the Company's principal
property and casualty insurance subsidiary) is domiciled, limits the maximum
amount of dividends which may be paid without approval by the Pennsylvania
Insurance Department. Under such law, Reliance Insurance Company may pay
dividends during the year equal to the greater of (a) 10% of the preceding
year-end policyholders' surplus or (b) the preceding year's statutory net
income, but in no event to exceed the amount of the unassigned funds, which are
defined as "undistributed, accumulated surplus including net income and
unrealized gains since the organization of the insurer." In addition, the
Pennsylvania law specifies factors to be considered by the Pennsylvania
Insurance Department to allow it to determine that statutory surplus after the
payment of dividends is reasonable in relation to an insurance company's
outstanding liabilities and adequate for its financial needs. Such factors
include the size of the company, the extent to which its business is
diversified among several lines of insurance, the number and size of risks
insured, the nature and extent of the company's reinsurance and the adequacy of
the company's reserves. The maximum dividend permitted by law is not indicative
of an insurer's actual ability to pay dividends, which may be constrained by
business and regulatory considerations, such as the impact of dividends on
surplus, which could affect an insurer's ratings, competitive position, the
amount of premiums that can be written and the ability to pay future dividends.
Furthermore, the Pennsylvania Insurance Department has broad discretion to
limit the payment of dividends by insurance companies.
Common stock dividends paid by Reliance Insurance Company were $111.5 million
in each of 1996, 1995 and 1994. During 1997, $118.5 million would be available
for dividend payments by Reliance Insurance Company under Pennsylvania law. The
Company believes such amount will be sufficient to meet its cash needs.
There is no assurance that Reliance Insurance Company will meet the tests in
effect from time to time under Pennsylvania law for the payment of dividends
without prior Insurance Department approval or that any requested approval will
be obtained. Reliance Insurance Company has been advised by the Pennsylvania
Insurance Department that any required prior approval will be based upon a
solvency standard and will not be unreasonably withheld. Any significant
limitation of Reliance Insurance Company's dividends would adversely affect the
Company's ability to service its debt and to pay dividends on its common stock.
Reliance Insurance Company collects and invests premiums prior to payment of
associated claims, which are generally made months or years subsequent to the
receipt of premiums. For the year ended December 31, 1996, Reliance Insurance
Company generated $243.6 million of cash flow from operating activities.
Reliance Insurance Company carefully monitors its cash, short-term investments
and marketable securities to maintain adequate balances for the timely payment
of claims and other operating requirements. At December 31, 1996, Reliance
Insurance Company had $356 million of cash and short-term investments.
29
<PAGE>
For the year ended December 31, 1996, the Company generated $160.4 million of
cash flow from operating activities compared to $168.5 million in 1995 and
$245.8 million in 1994. The decrease in the 1996 operating cash flow, when
compared to 1995, reflects higher net payments for property and casualty
insurance policy claims and related expenses, partially offset by higher
levels of operating cash flow from the title insurance operations, reflecting
an increase in their operating income and a decline in paid claims. The
decrease in the 1995 operating cash flow, when compared to 1994, reflected
higher net payments for property and casualty insurance policy claims and
related expenses. In addition, operating cash flow for the title insurance
operations declined in 1995 primarily due to lower levels of title insurance
income.
The Company used $159.9 million, $111.2 million and $243.6 million of cash flow
for investing activities for the years ended December 31, 1996, 1995 and 1994,
respectively. Net purchases of marketable securities were $102.1 million, $87.9
million and $184.5 million in 1996, 1995 and 1994, respectively.
The Company used $12.5 million of cash flow for financing activities for the
year ended December 31, 1996, primarily for the payment of dividends, partially
offset by additional term loan borrowings. The Company used $53.4 million and
$47.3 million of cash flow for financing activities for the years ended
December 31, 1995 and 1994, principally for the payment of dividends and
reduction of debt.
The Company has a revolving credit facility and term loan agreement with
various banks. 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 principal amount) 9.48% senior reset notes. The
revolving credit facility provides for aggregate maximum outstanding borrowings
of $100 million. At December 31, 1996, borrowings aggregating $35 million were
outstanding under this facility. The Company had $901.5 million of debt
outstanding at December 31, 1996 with approximately $6.6 million maturing on or
before December 31, 1997. An additional $620.4 million of debt matures on or
before December 31, 2001 of which $563.6 million matures in the year 2000. The
Company expects to repay these amounts, at their existing maturities, utilizing
a combination of refinancing these obligations and cash flow generated from
operations. In addition, at December 31, 1996, Reliance Financial Services
Corporation guaranteed $38 million of partnership debt. See note 14 to the
consolidated financial statements.
30
<PAGE>
The National Association of Insurance Commissioners has a risk-based capital
requirement for the property and casualty insurance industry. Risk-based
capital refers to the determination of the amount of statutory capital required
for an insurer based on the risks assumed by the insurer (including, for
example, investment risks, credit risks relating to reinsurance recoverables
and underwriting risks) rather than just the amount of net premiums written by
the insurer. A formula that applies prescribed factors to the various risk
elements in an insurer's business is used to determine the minimum statutory
capital requirement for the insurer. An insurer having less statutory capital
than the formula calculates would be subject to varying degrees of regulatory
intervention, depending on the level of capital inadequacy. All of the
Company's statutory insurance companies have statutory capital in excess of the
minimum required risk-based capital.
Maintaining appropriate levels of statutory surplus is considered important by
the Company's management, state insurance regulatory authorities and the
agencies that rate insurers' claims-paying abilities and financial strength.
Failure to maintain certain levels of statutory capital and surplus could
result in increased scrutiny or, in some cases, action taken by state
regulatory authorities and/or downgrades in an insurer's ratings.
The Company and its subsidiaries are involved in certain litigation arising in
the course of their businesses, some of which involve claims of substantial
amounts. Although the ultimate outcome of these matters cannot be ascertained
at this time, and the results of legal proceedings cannot be predicted with
certainty, the Company is contesting the allegations of the complaints in each
action pending against it and believes, based on current knowledge and after
consultation with outside counsel, that the resolution of these matters will
not have a material adverse effect on the consolidated financial statements of
the Company. See note 14 to the consolidated financial statements.
31
<PAGE>
<TABLE>
<CAPTION>
Consolidated Statement of Income Reliance Group Holdings, Inc. and Subsidiaries
- ----------------------------------------------------------------------------------------------------------------------------------
Year Ended December 31 1996 1995 1994
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
(In thousands, except per-share amounts)
Revenues:
Premiums earned................................................................. $ 2,581,011 $ 2,446,538 $ 2,634,092
Net investment income........................................................... 287,588 275,289 258,912
Gain on sales of investments.................................................... 49,610 27,377 7,767
Other........................................................................... 172,378 156,783 146,279
------------ ------------- ------------
3,090,587 2,905,987 3,047,050
------------ ------------- ------------
Claims and expenses:
Policy claims and settlement expenses........................................... 1,411,453 1,260,445 1,372,960
Policy acquisition costs and other insurance expenses........................... 1,327,306 1,238,142 1,347,828
Interest........................................................................ 87,724 90,245 91,136
Other operating expenses........................................................ 217,505 196,631 188,583
------------ ------------- ------------
3,043,988 2,785,463 3,000,507
------------ ------------- ------------
Income before income taxes and equity
in investee company.......................................................... 46,599 120,524 46,543
Provision for income taxes...................................................... (7,300) (32,400) (12,200)
Equity in investee company...................................................... 8,908 7,792 9,478
------------ ------------- ------------
Income from continuing operations .............................................. 48,207 95,916 43,821
Loss on disposal of discontinued operations of
investee company........................................................... - (4,497) -
------------ -------------- ------------
Income before extraordinary item ............................................... 48,207 91,419 43,821
Extraordinary item - early extinguishment of debt............................... - (3,363) -
------------ ------------- ------------
Net income...................................................................... $ 48,207 $ 88,056 $ 43,821
============ ============= ============
Per-share information:
Income from continuing operations .............................................. $ .41 $ .83 $ .38
Loss on disposal of discontinued operations of
investee company............................................................ - (.04) -
----- ------ -----
Income before extraordinary item ............................................... .41 .79 .38
Extraordinary item - early extinguishment of debt............................... - (.06) -
----- ------ -----
Net income...................................................................... $ .41 $ .73 $ .38
===== ====== =====
Weighted average number of common and
common equivalent shares outstanding......................................... 117,563 116,045 115,097
</TABLE>
See notes to consolidated financial statements
32
<PAGE>
<TABLE>
<CAPTION>
Consolidated Balance Sheet Reliance Group Holdings, Inc. and Subsidiaries
- ----------------------------------------------------------------------------------------------------------------------------------
Assets December 31 1996 1995
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
(In thousands, except per-share amount)
Marketable securities:
Fixed maturities held for investment - at amortized cost
(quoted market $801,738 and $791,459).................................................. $ 787,836 $ 753,563
Fixed maturities available for sale - at quoted market
(amortized cost $2,595,929 and $2,299,510)............................................. 2,623,669 2,371,995
Equity securities - at quoted market (cost
$436,053 and $408,054)............................................................... 716,606 672,668
Short-term investments.................................................................... 319,165 500,284
Cash......................................................................................... 40,853 52,914
Premiums and other receivables............................................................... 1,250,331 1,211,027
Reinsurance recoverables..................................................................... 3,576,953 3,163,073
Investments in real estate - at cost, less accumulated depreciation.......................... 286,664 281,923
Investment in investee company............................................................... 159,157 157,667
Deferred policy acquisition costs............................................................ 215,438 194,648
Excess of cost over fair value of net assets acquired,
less accumulated amortization.......................................................... 249,464 259,444
Other assets................................................................................. 364,995 369,007
-------------- ------------
$ 10,591,131 $ 9,988,213
============== ============
<CAPTION>
Liabilities and Shareholders' Equity
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Unearned premiums............................................................................ $ 1,468,299 $ 1,299,465
Unpaid claims and related expenses........................................................... 6,530,258 6,100,129
Accounts payable and accrued expenses........................................................ 578,002 638,009
Reinsurance ceded premiums payable........................................................... 365,412 325,246
Federal and foreign income taxes, including deferred taxes................................... 70,948 68,597
Term loans and short-term debt............................................................... 236,167 188,101
Debentures and notes......................................................................... 665,365 690,318
-------------- ------------
9,914,451 9,309,865
-------------- ------------
Contingencies and commitments
Shareholders' equity:
Common stock, par value $.10 per-share, 225,000
shares authorized, 114,282 and 113,440 shares
issued and outstanding................................................................ 11,428 11,344
Additional paid-in capital................................................................ 540,465 535,091
Retained earnings (deficit)............................................................... (50,012) (61,694)
Net unrealized gain on investments........................................................ 198,786 219,356
Net unrealized loss on foreign currency translation....................................... (23,987) (25,749)
-------------- ------------
676,680 678,348
-------------- ------------
$ 10,591,131 $ 9,988,213
============== ============
</TABLE>
See notes to consolidated financial statements
33
<PAGE>
<TABLE>
<CAPTION>
Consolidated Statement of Changes
in Shareholders' Equity Reliance Group Holdings, Inc. and Subsidiaries
- -----------------------------------------------------------------------------------------------------------------------------------
Net
Net Unrealized
Unrealized Loss on
Additional Retained Gain Foreign
Common Paid-In Earnings (Loss) on Currency Shareholders'
Stock Capital (Deficit) Investments Translation Equity
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
(In thousands, except per-share
amounts)
Balance, January 1, 1994 $ 11,152 $ 525,289 $ (118,143) $ 115,023 $ (14,695) $ 518,626
Issuance of common stock 161 8,752 - - - 8,913
Transactions of investee
company and other - (62) - (9,002) - (9,064)
Net income - - 43,821 - - 43,821
Dividends ($.32 per-share) - - (36,157) - - (36,157)
Depreciation after deferred income
taxes - - - (133,902) - (133,902)
Foreign currency translation - - - - (5,487) (5,487)
---------- ---------- ----------- ----------- ---------- ----------
Balance, December 31, 1994 11,313 533,979 (110,479) (27,881) (20,182) 386,750
Issuance of common stock 31 1,165 - - - 1,196
Transactions of investee company
and other - (53) - 8,693 - 8,640
Net income - - 88,056 - - 88,056
Loss on early extinguishment of
redeemable preferred stock
of a subsidiary - - (3,029) - - (3,029)
Dividends ($.32 per-share) - - (36,242) - - (36,242)
Appreciation after deferred
income taxes - - - 238,544 - 238,544
Foreign currency translation - - - - (5,567) (5,567)
---------- ---------- ----------- ----------- ---------- ----------
Balance, December 31, 1995 11,344 535,091 (61,694) 219,356 (25,749) 678,348
Issuance of common stock 84 5,754 - - - 5,838
Transactions of investee company - (380) - (1,504) - (1,884)
Net income - - 48,207 - - 48,207
Dividends ($.32 per-share) - - (36,525) - - (36,525)
Depreciation after deferred
income taxes - - - (19,066) - (19,066)
Foreign currency translation - - - - 1,762 1,762
---------- ---------- ----------- ----------- ---------- ----------
Balance, December 31, 1996 $ 11,428 $ 540,465 $ (50,012) $ 198,786 $ (23,987) $ 676,680
========== ========== =========== =========== ========== ==========
</TABLE>
See notes to consolidated financial statements
34
<PAGE>
<TABLE>
<CAPTION>
Consolidated Statement of Cash Flows Reliance Group Holdings, Inc. and Subsidiaries
- ----------------------------------------------------------------------------------------------------------------------------------
Year Ended December 31 1996 1995 1994
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
(In thousands)
Cash flows from operating activities:
Net income........................................................................ $ 48,207 $ 88,056 $ 43,821
Adjustments to reconcile net income to net cash
provided from operating activities:
Gain on sales of investments................................................. (49,610) (27,377) (7,767)
Deferred policy acquisition costs............................................ (20,790) (12,710) (3,809)
Premiums and other receivables and reinsurance recoverables.................. (452,785) (240,742) (482,557)
Unearned premiums, unpaid claims and related expenses........................ 590,760 315,288 566,873
Accounts payable, accrued expenses and other................................. 44,583 45,991 129,213
------------ ------------- ------------
160,365 168,506 245,774
------------ ------------- ------------
Cash flows from investing activities:
Proceeds from sales of:
Fixed maturities available for sale............................................ 629,688 536,795 441,401
Fixed maturities held for investment........................................... 28,910 39,218 18,481
Equity securities.............................................................. 360,983 400,635 189,895
Maturities and repayments of:
Fixed maturities available for sale............................................ 106,811 49,218 60,752
Fixed maturities held for investment........................................... 31,141 54,038 15,785
Purchases of:
Fixed maturities available for sale............................................ (1,027,256) (514,491) (587,581)
Fixed maturities held for investment........................................... (83,190) (108,053) (265,672)
Equity securities.............................................................. (343,146) (262,075) (209,506)
(Increase) decrease in short-term investments - net............................... 193,940 (283,141) 151,965
Other - net....................................................................... (57,810) (23,296) (59,158)
------------ ------------- ------------
(159,929) (111,152) (243,638)
------------ ------------- ------------
Cash flows from financing activities:
Increase in term loans............................................................ 86,327 120,298 75,272
Increase (decrease) in short-term debt - net...................................... (2,174) (5,400) 10,652
Repayments of term loans.......................................................... (40,483) (68,152) (81,942)
Issuance of common stock.......................................................... 5,838 1,196 7,324
Repurchases of senior reset notes................................................. (25,000) (40,348) (19,062)
Debt issuance costs............................................................... (480) (1,000) -
Dividends......................................................................... (36,525) (36,242) (36,157)
Redemption of redeemable preferred stock of a subsidiary.......................... - (23,769) (3,360)
------------ ------------- ------------
(12,497) (53,417) (47,273)
------------ ------------- ------------
Increase (decrease) in cash....................................................... (12,061) 3,937 (45,137)
Cash, beginning of year........................................................... 52,914 48,977 94,114
------------ ------------- ------------
Cash, end of year................................................................. $ 40,853 $ 52,914 $ 48,977
============ ============= ============
Supplemental disclosures of cash flow information:
Interest paid..................................................................... $ 75,100 $ 77,200 $ 91,100
============ ============= ============
Income taxes paid................................................................. $ 8,900 $ 9,500 $ 3,300
============ ============= ============
</TABLE>
See notes to consolidated financial statements
35
<PAGE>
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Reliance Group Holdings, Inc. and Subsidiaries
1. Nature of Operations/Summary of Significant Accounting Policies
NATURE OF OPERATIONS
The Company's principal operations consist of property and casualty insurance
and title insurance. The Company's property and casualty insurance business
consists of four principal operations: Reliance National, Reliance Insurance,
Reliance Surety and Reliance Reinsurance. Reliance National offers, through
national and regional brokers and program agents, a broad range of commercial
property and casualty insurance products and services for large companies and
specialty line customers. Reliance National selects market segments where it
can provide specialized coverages and services, and it conducts business
nationwide and in certain international markets. In addition, in 1996, Reliance
National began to offer nonstandard automobile insurance. In 1996, Reliance
National accounted for 45% of the net premiums written by the Company's
property and casualty insurance operations. The Reliance Insurance operation
offers, through independent agents, program agents and brokers, commercial
property and casualty insurance coverages for mid-sized companies primarily
throughout the United States. Reliance Insurance also offers traditional and
specialized coverages for more complex risks as well as insurance programs for
groups with common insurance needs. In 1996, Reliance Insurance accounted for
38% of the net premiums written by the Company's property and casualty
insurance operations. Reliance Surety is a leading writer of surety bonds and
fidelity bonds in the United States and conducts its business through branch
offices, independent agents and brokers. Reliance Reinsurance offers, through
reinsurance brokers, treaty and facultative reinsurance for small to medium
sized regional and specialty insurance companies located in the United States.
The Company's property and casualty insurance operations accounted for
$1,800,854,000 (70%) of the Company's 1996 net premiums earned.
The Company's title insurance business consists of Commonwealth Land Title
Insurance Company, Transnation Title Insurance Company and their subsidiaries
("Commonwealth/Transnation"). Commonwealth/Transnation writes, through direct
and agency operations, title insurance for residential and commercial real
estate nationwide and provides escrow, appraisal and settlement services in
connection with real estate closings. Commonwealth/Transnation accounted for
$780,157,000 (30%) of the Company's 1996 net premiums earned.
The Company also provides information technology consulting services offering
computer-related professional services to large corporate clients throughout
the United States. Information technology revenues were $136,700,000 in 1996.
BASIS OF CONSOLIDATION AND PRESENTATION
The consolidated financial statements of the Company include the accounts of
all subsidiaries. The consolidated financial statements have been prepared in
conformity with generally accepted accounting principles. Such statements
include informed estimates and judgments of management for those transactions
that are not yet complete or for which the ultimate effects cannot be precisely
determined. Actual results may differ from these estimates.
All material intercompany balances and transactions have been eliminated in
consolidation.
INSURANCE
The financial statements of the insurance subsidiaries have been prepared in
accordance with generally accepted accounting principles, which differ in
certain respects from those followed in reports to regulatory authorities.
Fixed maturity investments, the vast majority of which are publicly traded
securities, include bonds, notes and redeemable preferred stocks. Fixed
maturity investments classified as "available for sale" represent securities
that will be held for an indefinite period of time and are carried at quoted
market value with the net unrealized gain or loss included in shareholders'
equity. Such investments may be sold in response to changes in interest rates,
future general liquidity needs and similar factors. Fixed maturity investments
classified as "held for investment" are carried at amortized cost since the
Company has the positive intent and ability to hold these securities to
maturity. In 1995, the Financial Accounting Standards Board issued a special
report which permitted a one-time reassessment of the classification of
securities designated held for investment. Accordingly, the Company
reclassified fixed maturity securities with a market value of $426,442,000 and
an amortized cost of $410,395,000 from the held for investment portfolio into
the available for sale portfolio. This reclassification resulted in an increase
in shareholders' equity of $10,431,000. Investments in equity securities
include common stocks, where the Company's ownership of outstanding voting
stock is less than 20%, and nonredeemable preferred stocks and are carried at
quoted market value with the net unrealized gain or loss included in
shareholders' equity. Investments in which the Company has a 20% to 50%
ownership interest of voting stock, or otherwise exercises significant
influence, are reported using the equity method of accounting. Short-term
investments primarily consist of United States government and other foreign
government securities, certificates of deposit and commercial paper carried at
cost which approximates market value. Investments whose declines in market
36
<PAGE>
values are deemed to be other than temporary are written down to market value.
In circumstances where market values are not available, investments are written
down to estimated fair value. In determining estimated fair value of
investments, the Company reviews the issuer's financial condition and the
stability of its income, as well as the discounted cash flow to be received by
the Company. Write-downs and other realized gains and losses, determined on a
specific identification basis, are included in income.
Property and casualty insurance premiums reported as earned represent the
portion of premiums written applicable to the current period, computed on a
pro-rata basis over the terms of the policies in force. Premiums include
estimated audit premiums and estimated premiums on retrospectively rated
policies.
The costs associated with the acquisition of property and casualty business are
deferred and amortized on a straight-line basis over the terms (principally one
year) of the policies in force. Such deferred policy acquisition costs consist
of commissions, premium taxes and other variable policy issuance and
underwriting expenses. Deferred policy acquisition costs are reviewed to
determine that they do not exceed recoverable amounts, including anticipated
investment income.
Property and casualty unpaid claims and related expenses are estimated based on
an evaluation of reported claims in addition to statistical projections of
claims incurred but not reported and loss adjustment expenses. Estimates of
salvage and subrogation are deducted from the liability. The Company applies a
variety of generally accepted actuarial techniques to determine the estimates
of ultimate liability. The process of estimating claims is a complex task and
the ultimate liability may be more or less than such estimates indicate.
Adjustments of the probable ultimate liability, based on subsequent
developments, are included in operations currently.
Direct title insurance premiums and fees are recognized as revenue when
policies become effective. Agency title insurance premiums are recognized as
revenue when reported by the agent. Title insurance claims arise principally
from unknown title defects which exist at the time policies become effective.
The reserve for title losses, which is based on historical and anticipated loss
experience, represents the estimated costs to settle reported claims and claims
incurred but not reported. The process of estimating claims is a complex task
and the actual payments may be more or less than such estimates indicate.
Changes in loss estimates, based on subsequent developments, are included in
operations currently.
INVESTMENTS IN REAL ESTATE
Investments in real estate consist primarily of shopping centers and office
buildings, and are carried at cost (less accumulated depreciation), which
includes real estate taxes, interest and other carrying costs incurred prior to
substantial completion of the real estate development projects. Investments in
real estate at December 31, 1996 include $62,400,000 related to undeveloped
land which is zoned for mixed use development. Depreciation expense is provided
using the straight-line method.
The Company's real estate properties are reviewed for impairment whenever
events or circumstances indicate that the carrying value of such properties may
not be recoverable. In performing the review for recoverability of carrying
value, the Company estimates the future undiscounted cash flows expected to
result from the use of each of its properties and their eventual disposition.
These cash flow projections reflect changes in occupancy, new leases, current
rent roll, future expirations and general market conditions. If the total
expected future undiscounted cash flows are less than the carrying value of
such properties, impairment losses are recognized on a property-by-property
basis. An impairment loss is measured by the amount that the carrying value of
the property exceeds its fair value.
EXCESS OF COST OVER FAIR VALUE OF NET ASSETS ACQUIRED
The excess of cost over fair value of net assets acquired is being amortized
over 40 years using the straight-line method. The Company evaluates the
carrying amount of the excess of cost over fair value of net assets acquired by
analyzing historical and expected future income and undiscounted cash flows of
its operations.
INCOME TAXES
The Company and its domestic subsidiaries, where their ownership is at least
80% of outstanding voting stock, file a consolidated federal income tax return.
The Company provides for deferred income taxes under the asset and liability
method, whereby deferred income taxes result from temporary differences between
the tax bases of assets and liabilities and their reported amounts in the
financial statements. In addition, deferred income taxes are provided for
unrealized appreciation and depreciation on investments carried at quoted
market value.
37
<PAGE>
POSTRETIREMENT BENEFIT PLANS
Retirement pension benefits, covering substantially all employees, are provided
under noncontributory trusteed defined benefit pension plans. Contributions to
the pension plans are based on the minimum funding requirements of the Employee
Retirement Income Security Act of 1974. In addition, the Company sponsors
defined contribution plans covering employees who meet eligibility requirements
and unfunded postretirement medical and life insurance plans for certain
employees of a subsidiary.
TRANSLATION OF FOREIGN CURRENCY FINANCIAL STATEMENTS
Assets and liabilities of foreign subsidiaries are translated at year-end
exchange rates. Results of operations are translated at average rates during
the year. The effects of exchange rate changes in translating foreign financial
statements are excluded from the consolidated statement of income and are
presented as a separate component of shareholders' equity. Exchange gains and
losses resulting from foreign currency transactions are included in operations
currently.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair value of publicly traded financial instruments is determined
by the Company using quoted market prices, dealer quotes and prices obtained
from independent third parties. For financial instruments not publicly traded,
fair values are estimated based on values obtained from independent third
parties or quoted market prices of comparable instruments. However, judgment is
required to interpret market data to develop the estimates of fair value.
Accordingly, the estimates are not necessarily indicative of the amounts that
could be realized in a current market exchange.
The carrying values and fair values of financial instruments are as follows:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
December 31 1996 1995
- ----------------------------------------------------------------------------------------------------------------------------------
Carrying Fair Carrying Fair
Value Value Value Value
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
(In thousands)
Assets:
Marketable securities:
Fixed maturities:
Held for investment............................. $ 787,836 $ 801,738 $ 753,563 $ 791,459
Available for sale.............................. 2,623,669 2,623,669 2,371,995 2,371,995
Equity securities.................................. 716,606 716,606 672,668 672,668
Short-term investments............................. 319,165 319,165 500,284 500,284
Investment in investee company........................ 159,157 179,975 157,667 140,529
Liabilities:
Term loans and short-term debt........................ 236,167 236,167 188,101 188,101
Debentures and notes.................................. 665,365 684,553 690,318 711,540
</TABLE>
PER-SHARE INFORMATION
Income per-share is computed by using the weighted average number of common
shares outstanding during the period, reduced, when appropriate, by shares of
common stock held for contribution to the Company's defined contribution plans.
Common stock equivalents have been included in shares outstanding where such
effects are dilutive.
In 1995, all of the outstanding shares of redeemable preferred stock of
Reliance Insurance Company, which had a carrying value of $20,740,000, were
redeemed. The cost of the early redemption in excess of the carrying value of
the preferred stock, $3,029,000 ("Redemption Premium"), was charged directly to
shareholders' equity. For purposes of computing net income per-share in 1995,
the Redemption Premium was deducted from net income available to common
shareholders' and classified as an extraordinary loss. This reduced net income
per-share by $.03.
RECLASSIFICATIONS
Certain reclassifications have been made to the Company's 1995 and 1994
consolidated financial statements to conform with the current year's
consolidated financial statements.
38
<PAGE>
ADOPTION OF NEW ACCOUNTING STANDARDS
In June 1996, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 125, "Accounting for Transfers and Servicing
of Financial Assets and Extinguishments of Liabilities." The adoption of this
Statement, which is not required until 1997, is not expected to have a material
effect on the Company's consolidated financial statements.
Effective January 1, 1995, the Company adopted Statement of Financial
Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of." The adoption of this
Statement had no material effect on the Company's consolidated financial
statements.
In October 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("FAS 123"). This Statement was effective for 1996 and
encouraged, but did not require, companies to adopt a fair value based method
of accounting for stock compensation plans, under which compensation cost is
measured based on the fair value of the award at the grant date. The resulting
compensation cost would be charged to income. Companies may continue to account
for these plans as prescribed in Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees," and related interpretations ("APB
25"), under which compensation cost is measured as the excess, if any, of the
quoted market price of the stock at the grant date over the exercise price to
acquire the stock. Companies not adopting the fair value based method of FAS
123 must present pro forma disclosures of net income and net income per-share
as if this method had been applied. The Company has elected to continue to
follow APB 25 in accounting for its plans. See note 10 for the pro forma
disclosures of net income and net income per-share.
2. Investments
Fixed maturities held for investment at December 31, 1996 consisted of:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
Gross Gross
Amortized Market Unrealized Unrealized
Cost Value Gains Losses(1)
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
(In thousands)
Bonds and notes:
Public utilities....................................... $ 355,567 $ 357,377 $ 4,759 $ 2,949
Foreign government..................................... 145,065 150,622 6,583 1,026
Corporate bonds and notes and other.................... 174,386 178,400 6,870 2,856
Redeemable preferred stock................................ 112,818 115,339 2,657 136
------------ ------------ ------------ ------------
$ 787,836 $ 801,738 $ 20,869 $ 6,967
============ ============ ============ ============
</TABLE>
(1) The amortized cost and market value of fixed maturities held for
investment which have unrealized losses were $242,880,000 and
$235,913,000.
Fixed maturities available for sale at December 31, 1996 consisted of:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
Gross Gross
Market Amortized Unrealized Unrealized
Value Cost Gains Losses(1)
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
(In thousands)
Bonds and notes:
United States government and government
agencies and authorities............................. $ 702,472 $ 704,386 $ 2,928 $ 4,842
States, municipalities and political
subdivisions......................................... 132,163 128,874 4,221 932
Public utilities....................................... 373,389 374,404 5,792 6,807
Corporate bonds and notes and other.................... 892,091 889,016 31,498 28,423
Redeemable preferred stock................................ 523,554 499,249 26,776 2,471
------------ ------------ ------------ ------------
$ 2,623,669 $ 2,595,929 $ 71,215 $ 43,475
============ ============ ============ ============
</TABLE>
(1) The amortized cost and market value of fixed maturities available for
sale which have unrealized losses were $1,116,139,000 and $1,072,664,000.
39
<PAGE>
Fixed maturities held for investment at December 31, 1995 consisted of:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
Gross Gross
Amortized Market Unrealized Unrealized
Cost Value Gains Losses(1)
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
(In thousands)
Bonds and notes:
Public utilities....................................... $ 296,456 $ 309,920 $ 13,470 $ 6
Foreign government..................................... 133,252 139,042 6,715 925
Corporate bonds and notes and other.................... 181,849 193,087 11,526 288
Redeemable preferred stock................................ 142,006 149,410 7,405 1
------------ ------------ ------------ ------------
$ 753,563 $ 791,459 $ 39,116 $ 1,220
============ ============ ============ ============
</TABLE>
(1) The amortized cost and market value of fixed maturities held for
investment which have unrealized losses were $41,358,000 and $40,138,000.
Fixed maturities available for sale at December 31, 1995 consisted of:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
Gross Gross
Market Amortized Unrealized Unrealized
Value Cost Gains Losses(1)
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
(In thousands)
Bonds and notes:
United States government and government
agencies and authorities............................. $ 685,376 $ 679,007 $ 7,867 $ 1,498
States, municipalities and political
subdivisions......................................... 133,093 125,967 7,151 25
Public utilities....................................... 313,906 305,652 8,900 646
Corporate bonds and notes and other.................... 868,291 837,060 44,864 13,633
Redeemable preferred stock................................ 371,329 351,824 21,445 1,940
------------ ------------ ------------ ------------
$ 2,371,995 $ 2,299,510 $ 90,227 $ 17,742
============ ============ ============ ============
</TABLE>
(1) The amortized cost and market value of fixed maturities available for
sale which have unrealized losses were $603,568,000 and $585,826,000.
As of December 31, 1996, the contractual maturities of fixed maturity
investments are as follows:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
Held for investment Available for sale
Amortized Market Amortized Market
Cost Value Cost Value
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
(In thousands)
Due within one year....................................... $ 2,046 $ 2,079 $ 62,538 $ 62,915
Due after one year through five years..................... 102,270 107,114 537,805 541,773
Due after five years through ten years.................... 315,437 323,020 597,028 599,049
Due after ten years....................................... 368,083 369,525 1,113,204 1,134,904
------------ ------------ ------------- ------------
787,836 801,738 2,310,575 2,338,641
Mortgage-backed securities................................ - - 285,354 285,028
------------ ------------ ------------- ------------
$ 787,836 $ 801,738 $ 2,595,929 $ 2,623,669
============ ============ ============= ============
</TABLE>
40
<PAGE>
Net investment income consisted of:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
Year Ended December 31 1996 1995 1994
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
(In thousands)
Investment income:
Fixed maturities.............................................................. $ 236,093 $ 221,279 $ 218,970
Equity securities............................................................. 12,990 20,187 27,390
Short-term investments........................................................ 32,244 30,292 9,159
Other......................................................................... 18,652 15,359 14,159
------------ ------------- ------------
299,979 287,117 269,678
Investment expenses............................................................. (12,391) (11,828) (10,766)
------------ ------------- ------------
$ 287,588 $ 275,289 $ 258,912
============ ============= ============
</TABLE>
Gain on sales of investments consisted of:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
Year Ended December 31 1996 1995 1994
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
(In thousands)
Fixed maturities(1):
Realized gains............................................................... $ 15,302 $ 47,764 $ 44,661
Realized losses(2)........................................................... (18,022) (28,406) (28,016)
------------ ------------- ------------
(2,720) 19,358 16,645
Equity securities(3)............................................................ 58,296 19,457 7,290
Other(3),(4).................................................................... (5,966) (11,438) (16,168)
------------ ------------- ------------
$ 49,610 $ 27,377 $ 7,767
============ ============= ============
</TABLE>
(1) The Company sold fixed maturities held for investment with an amortized
cost of $26,100,000, $41,000,000 and $18,100,000 in 1996, 1995 and 1994,
respectively. These sales were in response to a significant deterioration
in the issuers' creditworthiness.
(2) Includes realized losses of $600,000, $7,600,000 and $11,600,000 in 1996,
1995 and 1994, respectively, and write-downs of $3,200,000, $15,700,000
and $10,300,000 in 1996, 1995 and 1994, respectively, related to
securities not rated investment grade.
(3) Gain on sales of equity securities and other in 1996, 1995 and 1994
includes write-downs of $3,600,000, $1,500,000 and $13,200,000,
respectively.
(4) Includes exchange losses of $3,300,000 in 1996 and $10,400,000 in 1995
related to certain foreign currency denominated investments and realized
losses of $14,500,000 in 1994 related to certain foreign currency
contracts.
Net unrealized appreciation (depreciation) on investments consisted of:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
Year Ended December 31 1996 1995 1994
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
(In thousands)
Unrealized appreciation (depreciation):
Equity securities............................................................ $ 15,939 $ 182,507 $ (6,849)
Fixed maturities available for sale.......................................... (44,745) 179,092 (193,737)
------------ ------------- ------------
(28,806) 361,599 (200,586)
Deferred income tax (provision) benefit......................................... 9,740 (123,055) 66,684
Net unrealized appreciation (depreciation) in
investments of investee company.............................................. (1,504) 8,693 (9,002)
------------ ------------- ------------
$ (20,570) $ 247,237 $ (142,904)
============ ------------- ============
Unrealized appreciation (depreciation) on
fixed maturities held for investment......................................... $ (23,994) $ 150,365 $ (152,046)
============ ============= ============
</TABLE>
41
<PAGE>
Net unrealized gain (loss) on investments consisted of:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
December 31 1996 1995 1994
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
(In thousands)
Equity securities:
Unrealized gains............................................................. $ 293,269 $ 276,760 $ 114,231
Unrealized losses............................................................ (12,716) (12,146) (32,124)
------------ ------------- ------------
280,553 264,614 82,107
------------ ------------- ------------
Fixed maturities available for sale:
Unrealized gains............................................................. 71,215 90,227 38,507
Unrealized losses............................................................ (43,475) (17,742) (145,114)
------------ ------------- ------------
27,740 72,485 (106,607)
------------ ------------- ------------
308,293 337,099 (24,500)
Deferred income tax (provision) benefit......................................... (108,262) (118,002) 5,053
Net unrealized gain (loss) in investments of investee company................... (1,245) 259 (8,434)
------------ ------------- ------------
$ 198,786 $ 219,356 $ (27,881)
============ ============= ============
</TABLE>
Fixed maturity investments carried at $553,600,000 at December 31, 1996 were on
deposit under requirements of regulatory authorities, including deposits related
to workers' compensation reinsurance pools.
Investments in a single issuer, other than obligations of the United States
government, whose aggregate carrying value is in excess of 10% of the Company's
shareholders' equity at December 31, 1996 are as follows:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
Carrying Value Market Value
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
(In thousands)
Fixed Maturity Investments:
Commonwealth Edison Co.................................................................... $ 73,552 $ 73,031
Ford Motor Credit Co...................................................................... 76,368 76,368
Time Warner Inc........................................................................... 85,319 85,319
United Kingdom Gilts...................................................................... 98,931 98,710
Equity Securities:
Human Genome Sciences, Inc................................................................ 99,822 99,822
Occidental Petroleum Corp................................................................. 67,848 67,848
Symbol Technologies, Inc.................................................................. 158,355 158,355
</TABLE>
3. Investment in Investee Company
Investment in investee company at December 31, 1996 and 1995 was $159,157,000
and $157,667,000 which represents the Company's investment in Zenith National
Insurance Corp. ("Zenith"). Equity income in Zenith was $8,908,000, $7,792,000
and $9,478,000 for the years ended December 31, 1996, 1995 and 1994,
respectively. In addition, in 1995, the Company recognized an after-tax loss of
$4,497,000 on the disposal of discontinued life insurance operations by Zenith.
The Company's prior period results of operations were not reclassified since
amounts attributable to Zenith's life insurance operations were not significant.
Dividends received by the Company from Zenith were $6,574,000 for each of the
years ended December 31, 1996, 1995 and 1994.
42
<PAGE>
Summarized financial information for Zenith is as follows:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
Year Ended December 31 1996 1995 1994
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
(In thousands, except per-share amounts)
Revenues ....................................................................... $ 556,371 $ 519,020 $ 512,455
Income from continuing operations before income taxes........................... 57,117 29,422 45,106
Loss on disposal of discontinued life insurance operations...................... - (19,553) -
Net income...................................................................... 37,600 6,600 37,900
Net income per-share............................................................ 2.11 .36 1.99
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
December 31 1996 1995
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
(In thousands, except percentage of ownership)
Total assets................................................................................... $ 1,242,724 $ 1,115,433
Senior notes................................................................................... 74,353 74,232
Common shareholders' equity.................................................................... 337,503 330,432
Percentage of ownership........................................................................ 37.4% 37.0%
</TABLE>
The Company's equity in net income includes amortization of excess of cost over
fair value of net assets acquired. At December 31, 1996, retained earnings
(deficit) included undistributed net income of $30,146,000 from Zenith.
4. Premiums and Other Receivables
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
December 31 1996 1995
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
(In thousands)
Premiums receivable............................................................................ $ 1,104,331 $ 1,075,226
Investment income receivable................................................................... 57,571 54,524
Accounts, notes and other receivables.......................................................... 88,429 81,277
------------ ------------
$ 1,250,331 $ 1,211,027
============ ============
</TABLE>
At December 31, 1996, substantially all receivables were due within one year.
As of December 31, 1996 and 1995, the Company sold with limited recourse
$97,200,000 and $122,400,000 of reinsurance recoverables and premiums receivable
relating to its insurance operations. Pursuant to these recourse provisions, the
maximum amount, at December 31, 1996, that the Company may be obligated to
repurchase is $7,500,000.
5. Income Taxes
Provision for income taxes consisted of:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
Year Ended December 31 1996 1995 1994
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
(In thousands)
Current:
Federal...................................................................... $ (6,313) $ 11,611 $ 8,996
Foreign...................................................................... 7,888 6,830 6,204
------------ ------------- ------------
1,575 18,441 15,200
Deferred federal................................................................ 5,725 13,959 (3,000)
------------ ------------- ------------
$ 7,300 $ 32,400 $ 12,200
============ ============= ============
</TABLE>
Domestic and foreign income before income taxes and equity in investee company
is as follows:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
Year Ended December 31 1996 1995 1994
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
(In thousands)
Domestic........................................................................ $ 24,062 $ 101,010 $ 28,045
Foreign......................................................................... 22,537 19,514 18,498
------------ ------------- ------------
$ 46,599 $ 120,524 $ 46,543
============ ============= ============
</TABLE>
43
<PAGE>
The reconciliation of taxes computed at the statutory rate of 35% to the
provision for income taxes is as follows:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
Year Ended December 31 1996 1995 1994
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
(In thousands)
Tax provision at statutory rate................................................. $ 16,310 $ 42,183 $ 16,290
Nontaxable investment income.................................................... (14,403) (13,405) (13,989)
Amortization of excess of cost over fair value of net assets acquired........... 3,150 3,150 3,150
Net increase in valuation allowance............................................. 2,400 1,226 5,774
Other........................................................................... (157) (754) 975
------------- ------------- ------------
Provision for income taxes...................................................... $ 7,300 $ 32,400 $ 12,200
============ ============= ============
</TABLE>
The tax effects of items comprising the Company's net deferred tax asset are as
follows:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
December 31 1996 1995
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
(In thousands)
Deferred tax assets:
Discounting of loss reserves................................................................ $ 195,442 $ 200,907
Tax basis differential of subsidiary not included in consolidated tax return................ 111,815 111,815
Operating loss carryforwards of subsidiary not included in consolidated tax return.......... 61,110 57,925
Unearned premium reserve.................................................................... 43,063 40,354
Accruals not currently deductible........................................................... 62,481 61,492
Other....................................................................................... 66,445 68,120
------------ ------------
540,356 540,613
Deferred tax liabilities:
Deferred policy acquisition costs........................................................... 75,062 67,785
Unrealized investment gains................................................................. 108,262 118,002
Investment in investee company.............................................................. 21,098 20,576
Other....................................................................................... 103,445 109,220
------------ ------------
232,489 225,030
Valuation allowance............................................................................ (169,215) (166,848)
------------ ------------
Net deferred tax asset......................................................................... $ 63,274 $ 58,182
============ ============
</TABLE>
For the years ended December 31, 1996, 1995 and 1994, the Company's valuation
allowance and income tax provision were increased by $2,400,000, $1,226,000 and
$5,774,000 relating primarily to deferred tax assets for which it is likely that
tax benefits will not be realized.
At December 31, 1996, a subsidiary of the Company, not included in the
consolidated tax return, had available net operating loss carryforwards ("NOL")
of approximately $174,600,000, of which $129,700,000 is subject to a valuation
allowance. For federal income tax purposes, approximately $129,300,000 expires
in 2001, $17,000,000 in 2002, $17,000,000 in 2004, $2,200,000 in 2010 and
$9,100,000 in 2011. The Internal Revenue Code imposes limitations on the
availability of these NOL's since the subsidiary experienced a more than 50
percentage point ownership change in 1989. The amount of the NOL incurred prior
to the ownership change which can be utilized in each subsequent year is limited
(the "Loss Limitation") based on the value of the subsidiary on the date of the
ownership change. The annual Loss Limitation approximates $25,000,000.
The Company is seeking a redetermination in the U.S. Tax Court of an asserted
tax deficiency for the year ended December 31, 1980, as set forth by the
Commissioner of Internal Revenue in a Notice of Deficiency dated June 27, 1994.
See note 14 to the consolidated financial statements.
The IRS is currently examining the Company's 1986 through 1991 federal income
tax returns. While the outcome of the current examinations is uncertain, the
Company does not believe it is probable that its additional tax liability, if
any, will have a material adverse effect on its consolidated financial
statements.
44
<PAGE>
6. Unpaid Claims and Related Expenses
The reconciliation of the beginning to ending liability for unpaid claims and
related expenses ("loss reserves") for the Company's property and casualty
insurance operations is as follows:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
December 31 1996 1995 1994
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
(In thousands)
Loss reserves, beginning of year................................................ $ 5,859,352 $ 5,581,483 $ 5,048,442
Less reinsurance recoverables................................................ 2,679,917 2,453,702 2,116,914
------------ ------------- ------------
Net loss reserves, beginning of year............................................ 3,179,435 3,127,781 2,931,528
------------ ------------- ------------
Provision for policy claims and related expenses:
Provision for insured events of the current year............................. 1,211,672 1,163,447 1,274,649
Increase in provision for insured events of prior years...................... 138,665 38,512 22,444
------------ ------------- ------------
Total provision............................................................ 1,350,337 1,201,959 1,297,093
------------ ------------- ------------
Payments for policy claims and related expenses:
Attributable to insured events of the current year........................... 298,838 271,915 321,538
Attributable to insured events of prior years................................ 926,996 868,622 780,961
------------ ------------- ------------
Total payments............................................................. 1,225,834 1,140,537 1,102,499
------------ ------------- ------------
Foreign currency translation.................................................... 7,668 (9,768) 1,659
------------ -------------- ------------
Net loss reserves, end of year.................................................. 3,311,606 3,179,435 3,127,781
Plus reinsurance recoverables................................................ 2,953,814 2,679,917 2,453,702
------------ ------------- ------------
Loss reserves, end of year...................................................... $ 6,265,420 $ 5,859,352 $ 5,581,483
============ ============= ============
</TABLE>
The provision for insured events of prior years for 1996, 1995 and 1994 includes
adverse development related to asbestos-related and environmental pollution
claims, which primarily affect general liability, multiple peril and reinsurance
lines of business, and includes a pretax charge of $134,000,000 in the second
quarter of 1996 to increase net loss reserves for asbestos-related and
environmental pollution claims for business written in or before 1987. The 1996
provision also includes adverse development in the automobile line, offset by
favorable development in workers' compensation. The 1995 provision also
included adverse development in other general liability, automobile and
reinsurance lines, partially offset by favorable development in workers'
compensation. The 1994 provision also included adverse development in other
general liability lines, partially offset by favorable development in workers'
compensation.
At December 31, 1996 and 1995, loss reserves include $396,700,000 and
$400,200,000 relating to short-duration contracts which are expected to have
fixed, periodic payment patterns and have been discounted to present values
using statutory annual rates ranging from 3 1/2% to 6%.
45
<PAGE>
The reconciliation of the beginning to ending loss reserves for the Company's
title insurance operations is as follows:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
December 31 1996 1995 1994
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
(In thousands)
Loss reserves, beginning of year................................................ $ 240,777 $ 228,063 $ 204,695
------------ ------------- ------------
Provision for policy claims and related expenses:
Provision for insured events of the current year............................. 59,771 57,900 71,060
Increase in provision for insured events of prior years...................... 1,345 586 4,807
------------- ------------ ------------
Total provision............................................................ 61,116 58,486 75,867
------------ ------------- ------------
Payments for policy claims and related expenses:
Attributable to insured events of the current year........................... 1,755 2,187 4,475
Attributable to insured events of prior years................................ 35,300 43,585 48,024
------------ ------------- ------------
Total payments............................................................. 37,055 45,772 52,499
------------ ------------- ------------
Loss reserves, end of year...................................................... $ 264,838 $ 240,777 $ 228,063
============ ============= ============
</TABLE>
The reconciliation of the beginning to ending net loss reserves for business
written in or before 1987 pertaining to asbestos-related and environmental
pollution claims is as follows:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
December 31 1996 1995 1994
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
(In thousands)
Net loss reserves, beginning of year............................................ $ 101,008 $ 100,404 $ 97,040
Provision for policy claims and related expenses................................ 135,801 23,547 17,996
Payments for policy claims and related expenses................................. (23,762) (22,943) (14,632)
------------ ------------- ------------
Net loss reserves, end of year.................................................. $ 213,047 $ 101,008 $ 100,404
============ ============= ============
</TABLE>
The 1996 provision for policy claims and related expenses includes a pretax
charge of $134,000,000 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 a 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
estimate of its ultimate losses, based on current information and actuarial
methodologies.
Included in the December 31, 1996 net loss reserves for business written in or
before 1987 pertaining to asbestos-related and
environmental pollution claims are $78,184,000 of loss costs for claims
incurred but not reported, $49,245,000 of loss costs for reported claims and
$85,618,000 of related expenses.
For business written in or before 1987, the number of insureds with asbestos-
related and environmental pollution claims outstanding is as follows:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
December 31 1996 1995
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Number of insureds with outstanding claims, beginning of year.................................... 447 477
Additional insureds with claims during the year.................................................. 153 188
Insureds with closed or settled claims during the year........................................... (252) (218)
-------- ---------
Number of insureds with outstanding claims, end of year.......................................... 348 447
======== =========
</TABLE>
For business written in or before 1987, the average net paid loss for
asbestos-related and environmental pollution claims was $50,200 and $61,100 for
the years 1996 and 1995.
46
<PAGE>
In addition, the Company currently underwrites policies covering asbestos
removal and provides environmental pollution coverages for other insureds,
primarily on a claims made basis. The net loss reserves for these policies as of
December 31, 1996, 1995 and 1994 were $27,764,000, $29,698,000 and $29,739,000,
respectively. The provisions for these policy claims and related expenses for
the years 1996, 1995 and 1994 were $5,857,000, $2,357,000 and $10,283,000,
respectively, and related payments were $7,791,000, $2,398,000 and $5,538,000,
respectively. Included in the December 31, 1996 net loss reserves for these
policies are $13,154,000 of loss costs for claims incurred but not reported,
$4,282,000 of loss costs for reported claims and $10,328,000 of related
expenses. The number of outstanding claims related to these policies as of
December 31, 1996 and 1995 were 474 and 303. Additional claims reported during
the years 1996 and 1995 were 385 and 275, and claims closed or settled during
1996 and 1995 were 214 and 161. The average net paid loss for these claims was
$20,500 and $5,600 for the years 1996 and 1995.
7. Debentures, Notes, Term Loans and Short-Term Debt
Debentures and notes outstanding are as follows:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
December 31 1996 1995
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
(Dollars in thousands)
9% senior notes due 2000....................................................................... $ 400,000 $ 400,000
9 3/4% senior subordinated debentures due 2003................................................. 250,000 250,000
7.866% senior reset notes due 2000............................................................. 15,365 15,365
9.48% senior reset notes due 2000; ($25,000 principal amount,
less unamortized discount of $47 at December 31, 1995)...................................... - 24,953
------------ ------------
$ 665,365 $ 690,318
============ ============
</TABLE>
At December 31, 1996, term loans and short-term debt aggregated $236,167,000 and
consisted of $230,488,000 of term loans which are payable in varying amounts
through 2015 with interest rates ranging from 3.0% to 9.6% and $5,679,000 of
short-term debt. The weighted average interest rate on term loans and short-term
debt was 6.0% and 6.6% at December 31, 1996 and 1995.
Maturities of term loans and short-term debt for each of the next five
years are as follows: $6,627,000 in 1997; $4,489,000 in 1998; $50,767,000
in 1999; $148,267,000 in 2000; and $1,467,000 in 2001. In addition,
$415,365,000 of debentures and notes mature in the year 2000.
Reliance Financial Services Corporation ("Reliance Financial") has a revolving
credit facility and term loan agreement with various banks ("Credit Facility").
In 1995, the Company extended its revolving credit facility through March 31,
2000 from December 31, 1998. In addition, the Company increased term loan
borrowings to $137,500,000 from $62,500,000 and extended the maturity dates of
the term loan borrowings through March 31, 2000. The additional $75,000,000 of
borrowings under the term loan were used, in part, to redeem $25,000,000 of the
7.866% senior reset notes and $25,000,000 of the 9.48% senior reset notes,
including $9,652,000 of notes held by Reliance Insurance Company. These
transactions resulted in an extraordinary loss of $3,363,000, net of income
taxes of $1,811,000, in 1995. In addition, all of the outstanding shares of
redeemable preferred stock of Reliance Insurance Company, which had a carrying
value of $20,740,000, were redeemed. The cost of the early redemption in excess
of the carrying value of the preferred stock, $3,029,000, was charged directly
to shareholders' equity in 1995. On November 8, 1996, the Company increased term
loan borrowings by an additional $25,000,000 to $162,500,000. The additional
borrowings were used to redeem all outstanding ($25,000,000 principal amount)
9.48% senior reset notes.
The revolving credit facility provides for aggregate maximum outstanding
borrowings of $100,000,000. At Reliance Financial's option, all borrowings under
the revolving credit facility will bear interest at a floating rate based on a
bank reference rate (or, if higher, the Federal Funds rate plus 1/2%) or at a
rate based on the Eurodollar rate. At December 31, 1996, borrowings aggregating
$35,000,000 were outstanding under this facility. All of the common stock of
Reliance Insurance Company, the principal subsidiary of Reliance Financial, has
been pledged to secure the Credit Facility and the senior reset notes.
The provisions of certain notes and debentures contain limitations on the
payment of dividends, including maintaining a minimum fixed charge coverage
ratio. At February 14, 1997, the Company could pay up to $41,400,000 in
dividends without violating the most restrictive provisions. The Company's
dividend paying capacity will increase to the extent that 50% of the Company's
cumulative net income (as defined) exceeds cumulative restricted payments
(primarily dividends). The Company does not expect to change its dividend
payment practices in the foreseeable future. See note 9 to the consolidated
financial statements.
47
<PAGE>
8. Reinsurance
In the normal course of business, the property and casualty insurance companies
assume and cede reinsurance on both a pro-rata and excess basis. Reinsurance
provides greater diversification of business and limits the maximum net loss
potential arising from large claims. Although the ceding of reinsurance does not
discharge an insurer from its primary legal liability to a policyholder, the
reinsuring company assumes the related liability.
Amounts recoverable from reinsurers are estimated in a manner consistent with
the liability for unpaid claims and related expenses associated with the
reinsurance. Estimated amounts of reinsurance recoverables are reported as
assets in the accompanying consolidated balance sheet. As of December 31, 1996
and 1995, reinsurance recoverables include $596,743,000 and $472,925,000 of
prepaid reinsurance premiums which represents the portion of property and
casualty premiums ceded to reinsurers applicable to unearned premiums.
The reconciliation of property and casualty insurance direct premiums to net
premiums is as follows:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
Year Ended December 31 1996 1995 1994
- ----------------------------------------------------------------------------------------------------------------------------------
(In thousands)
Premiums Premiums Premiums Premiums Premiums Premiums
Written Earned Written Earned Written Earned
------------- ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Direct........... $ 3,070,944 $ 2,894,096 $ 2,748,439 $ 2,707,978 $ 2,654,437 $ 2,630,549
Assumed.......... 329,318 356,489 325,226 350,636 330,261 345,398
Ceded............ (1,554,063) (1,449,731) (1,294,625) (1,284,023) (1,220,408) (1,198,629)
------------ ------------ ------------ ------------ ------------ ------------
Net premiums $ 1,846,199 $ 1,800,854 $ 1,779,040 $ 1,774,591 $ 1,764,290 $ 1,777,318
============ ============ ============ ============ ============= =============
</TABLE>
The reconciliation of property and casualty insurance gross policy claims and
settlement expenses to net policy claims and settlement expenses is as follows:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
Year Ended December 31 1996 1995 1994
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
(In thousands)
Gross........................................................................... $ 2,262,809 $ 1,987,055 $ 2,220,285
Reinsurance recoveries.......................................................... (912,472) (785,096) (923,192)
------------ ------------- ------------
Net policy claims and settlement expenses....................................... $ 1,350,337 $ 1,201,959 $ 1,297,093
============ ============= ============
</TABLE>
For the year ended December 31, 1996, gross policy claims and settlement
expenses include a charge of $134,500,000 and net policy claims and settlement
expenses include a charge of $134,000,000 to increase property and casualty
insurance loss reserves for asbestos-related and environmental pollution claims
for business written in or before 1987.
The Company holds substantial amounts of funds and letters of credit as
collateral pursuant to recoverables from unauthorized reinsurers. The Company is
not aware of any impairment of the creditworthiness of any of its significant
reinsurers.
Reliance Insurance Company's ten largest reinsurers, based on 1996 ceded
premiums, are as follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
(In thousands)
<S> <C>
American Re-Insurance Company................................................................................. $ 133,324
Hertz International Reinsurance Ltd........................................................................... 63,259
Swiss Reinsurance America Corporation......................................................................... 56,455
Commercial Risk Re-Insurance Company.......................................................................... 46,512
Zurich Reinsurance Centre, Inc................................................................................ 45,954
General Reinsurance Corporation............................................................................... 45,280
Kemper Reinsurance Company.................................................................................... 43,547
Everest Reinsurance Company................................................................................... 33,485
Lloyd's of London............................................................................................. 30,827
Cedar Hill Assurance Company.................................................................................. 30,755
</TABLE>
The Company has entered into aggregate excess of loss reinsurance agreements.
These agreements indemnify the Company for ultimate net property and casualty
insurance losses in excess of a specified retention for the 1995 and 1996
accident years up to a maximum aggregate limit of $100,000,000 for each year. No
premiums or losses have been ceded under these agreements.
48
<PAGE>
9. Dividends of Subsidiaries
The Company's principal sources of funds consist of dividends, advances and net
tax payments from its subsidiaries. Dividends from Reliance Financial are
subject to provisions of certain notes. These provisions are less restrictive
than the provisions in the Credit Facility of Reliance Financial which requires,
among other things, a minimum net worth requirement and a limitation of
indebtedness. At February 14, 1997, Reliance Financial could pay up to
$288,300,000 in cash dividends without violating the most restrictive
provisions. Dividend payments by Reliance Insurance Company, without prior
regulatory approval, are limited to the greater of 10% of the preceding year-end
policyholders' surplus or the preceding year's statutory net income, but in no
event to exceed the amount of unassigned funds. In accordance with these
regulatory restrictions, $118,500,000 is available for the payment of dividends
to Reliance Financial in 1997, subject to the broad discretionary powers of
insurance regulatory authorities to further limit dividend payments of insurance
companies.
10. Stock Options
The Company's Stock Option plans (the "Plans") provide for the granting of
incentive stock options and nonstatutory stock options to officers, non-employee
directors and key employees of the Company. Under the terms of the Plans,
options have a maximum term of 10 years. At December 31, 1996, there were no
options available for future grants; however, the Company plans to seek
shareholder approval in 1997 to increase the number of options available to
purchase its common stock.
A summary of the Plans' activity is as follows:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
Year Ended December 31 1996 1995 1994
- ----------------------------------------------------------------------------------------------------------------------------------
Weighted Average Weighted Average Weighted Average
Number of Exercise Number of Exercise Number of Exercise
Shares Price Shares Price Shares Price
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
(Shares in thousands)
Balance, beginning of year.... 8,462 $ 4.48 8,129 $ 4.28 6,748 $ 3.92
Granted....................... 2,839 8.03 789 6.26 1,713 5.66
Exercised..................... 292 4.21 313 3.83 145 3.83
Cancelled..................... 104 5.52 143 4.57 187 4.20
----------- --------- ----------- --------- ----------- ---------
Balance, end of year.......... 10,905 $ 5.40 8,462 $ 4.48 8,129 $ 4.28
=========== ========= =========== ========= =========== ==========
Exercisable portion........... 6,196 $ 4.04 4,624 $ 3.96 3,142 $ 3.86
=========== ========= =========== ========= =========== =========
Weighted average fair value
of options granted during
the year................... $ 2.08 $ 1.64
========= =========
</TABLE>
Summarized information about stock options outstanding at December 31, 1996 is
as follows:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
-------------------------------------------------------- -----------------------------------
Number of Weighted Average Number of
Range of Shares Remaining Weighted Average Shares Weighted Average
Exercise Prices Outstanding Contractual Life Exercise Price Exercisable Exercise Price
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
(Shares in thousands)
$3.825 to $5.75 6,084 5.46 years $ 3.94 5,679 $ 3.86
$5.875 to $8.75 4,821 8.70 7.24 517 6.04
-------- ---- ----------- ----- -------
$3.825 to $8.75 10,905 6.89 years $ 5.40 6,196 $ 4.04
======== ==== =========== ===== =======
</TABLE>
The Company has elected to follow APB 25 in accounting for its Plans. Since the
exercise price of the Company's stock options equals the market value of the
underlying stock on the grant date, no compensation cost has been recognized.
49
<PAGE>
Pro forma information regarding net income and net income per-share is required
by FAS 123, and has been determined as if the Company had accounted for its
Plans under the fair value based method of FAS 123. The fair value of stock
options granted under the Company's Plans was estimated on the grant dates using
the Black-Scholes option-pricing model. The following weighted average
assumptions were used for grants in 1996 and 1995, respectively: dividend yields
of 4.0% and 5.1%, expected volatility of 27.3% and 33.7%, risk-free interest
rates of 6.4% and 6.5% and an expected life of 7 years for both years.
Pro forma information regarding net income and net income per-share is as
follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Year Ended December 31 1996 1995
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
(In thousands, except per-share amounts)
Net income as reported........................................................ $ 48,207 $ 88,056
pro forma.......................................................... 47,724 87,956
Net income per-share as reported........................................................ .41 .73
pro forma.......................................................... .41 .73
</TABLE>
11. Policy Acquisition Costs and Other Insurance Expenses
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
Year Ended December 31 1996 1995 1994
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
(In thousands)
Policy acquisition costs amortized during the year.............................. $ 414,636 $ 411,979 $ 387,924
------------ ------------- ------------
Other insurance expenses:
Salaries and commissions...................................................... 630,777 563,680 704,254
Taxes, other than income taxes................................................ 41,564 48,603 34,849
Rent.......................................................................... 61,305 55,848 54,863
Policyholders' dividends...................................................... 3,158 7,065 2,630
Other......................................................................... 175,866 150,967 163,308
------------ ------------- ------------
912,670 826,163 959,904
------------ ------------- ------------
$ 1,327,306 $ 1,238,142 $ 1,347,828
============ ============= ============
</TABLE>
12. Postretirement Benefit Plans
Retirement benefits under the Company's noncontributory trusteed defined benefit
pension plans are paid to eligible employees based primarily on years of service
and compensation. Plan assets principally consist of corporate and government
debt securities and 1,430,300 shares of the Company's common stock.
Pension cost includes the following components:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
Year Ended December 31 1996 1995 1994
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
(In thousands)
Service cost - benefits earned during the period................................ $ 11,146 $ 8,252 $ 10,559
Interest cost on projected benefit obligation................................... 16,500 15,112 14,309
Actual return on plan assets.................................................... (9,126) (33,552) 10,300
Net amortization and deferral................................................... (12,245) 15,849 (30,222)
------------ ------------- ------------
$ 6,275 $ 5,661 $ 4,946
============ ============= ============
</TABLE>
50
<PAGE>
A reconciliation of the funded status of the plans with the accrued pension cost
included in accounts payable and accrued expenses is as follows:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
December 31 1996 1995
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
(In thousands)
Actuarial present value of benefit obligation:
Vested...................................................................................... $ 184,101 $ 177,353
Nonvested................................................................................... 7,685 10,150
------------ ------------
Accumulated benefit obligation................................................................. 191,786 187,503
Effect of anticipated future compensation levels............................................... 34,078 37,237
------------ ------------
Projected benefit obligation................................................................... 225,864 224,740
Plan assets at market value.................................................................... (199,954) (189,018)
------------ ------------
Projected benefit obligation in excess of plan assets.......................................... 25,910 35,722
Unrecognized net asset at date of adoption..................................................... 7,785 9,636
Unrecognized net loss.......................................................................... (14,526) (25,929)
------------ ------------
Accrued pension cost........................................................................... $ 19,169 $ 19,429
============ ============
</TABLE>
Contributions under the Company's noncontributory trusteed defined benefit
pension plans were $6,535,000 and $3,391,000 in 1996 and 1994. No contributions
were made during 1995.
The assumptions used to measure the projected benefit obligation at December 31,
1996 and 1995 include a discount rate of 8.0% and 7.5% and a weighted average
rate of compensation increase of 4.0% and 4.5%. The expected long-term
investment rate of return on plan assets for the years ended December 31, 1996
and 1995 was 10.0% and 9.5%.
Contributions under the Company's defined contribution plans were $5,930,000,
$4,302,000 and $5,277,000 in 1996, 1995 and 1994, respectively, and were based
on a formula specified in the plan agreements.
The Company offers unfunded postretirement medical and life insurance plans to
certain employees of a subsidiary. Postretirement benefit cost includes the
following components:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
Year Ended December 31 1996 1995 1994
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
(In thousands)
Service cost - benefits earned during the period................................ $ 168 $ 167 $ 226
Interest cost on accumulated postretirement benefit obligation 622 713 715
Net amortization and deferral................................................... 754 624 790
------------ ------------- ------------
$ 1,544 $ 1,504 $ 1,731
============ ============= ============
</TABLE>
The components of the accumulated postretirement benefit obligation are as
follows:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
December 31 1996 1995
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
(In thousands)
Accumulated postretirement benefit obligation:
Retirees.................................................................................... $ 5,020 $ 5,597
Other active plan participants.............................................................. 3,241 3,618
------------ ------------
Accumulated benefit obligation................................................................. 8,261 9,215
Unrecognized net gain.......................................................................... 671 92
Unrecognized transition obligation............................................................. (7,204) (7,963)
------------ ------------
Accrued postretirement benefit cost............................................................ $ 1,728 $ 1,344
============ ============
</TABLE>
The assumed health care cost trend rate used in measuring the accumulated
postretirement benefit obligation as of December 31, 1996 was 10.0% for 1997
decreasing until it reaches 6.0% in 2007, after which it remains constant. A
one-percentage-point change in the assumed health care cost trend rate for each
year would change the accumulated postretirement benefit obligation as of
December 31, 1996 and the 1996 net postretirement health care cost by
approximately 3.0% and 1.8%. The assumed discount rate used in determining the
accumulated postretirement benefit obligation at December 31, 1996 and 1995 was
8.0% and 7.5%.
51
<PAGE>
13. Statutory Information
Statutory net income is as follows:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
Year Ended December 31 1996 1995 1994
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
(In thousands)
Property and casualty insurance operations...................................... $ 121,665 $ 225,989 $ 123,970
Title insurance operations...................................................... 40,094 12,439 32,421
</TABLE>
Statutory policyholders' surplus is as follows:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
December 31 1996 1995
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
(In thousands)
Property and casualty insurance operations(1).................................................. $ 1,187,056 $ 1,128,336
Title insurance operations..................................................................... 199,587 182,167
</TABLE>
(1) Includes Reliance Insurance Company's investment in title insurance
operations. Also reflects a reduction in statutory loss reserves of
$93,700,000 and $98,800,000 at December 31, 1996 and 1995, representing
discounts of workers' compensation reserves in excess of GAAP discounts.
14. Contingencies and Commitments
LEGAL PROCEEDINGS
The Company and its subsidiaries are involved in certain litigation arising in
the course of their businesses, some of which involve claims of substantial
amounts. Although the ultimate outcome of these matters cannot be ascertained at
this time, and the results of legal proceedings cannot be predicted with
certainty, the Company is contesting the allegations of the complaints in each
pending action against it and believes, based on current knowledge and after
consultation with counsel, that the resolution of these matters will not have a
material adverse effect on the consolidated financial statements of the Company.
In addition, the Company is subject to the litigation set forth below.
In March 1987, the Superintendent of Insurance of New York (the
"Superintendent"), as liquidator of Union Indemnity Insurance Company of New
York ("Union Indemnity"), formerly a wholly-owned subsidiary of Frank B. Hall &
Co. Inc. ("Hall") which the Superintendent took possession of in 1985, commenced
an action in the Supreme Court of the State of New York seeking damages of not
less than $140,000,000 against Hall, various subsidiaries of Hall, Hall's and
Union Indemnity's independent auditors and certain individuals who were former
officers and directors of Union Indemnity. The Superintendent sought to hold the
defendants liable for the insolvency of Union Indemnity alleging, among other
claims, that Hall breached fiduciary and other duties owed to Union Indemnity
and violated provisions of the New York State Insurance Code, that Union
Indemnity did not have a separate operating identity, and that Hall and the Hall
subsidiaries named as defendants constituted a single enterprise which was
liable for Union Indemnity's obligations to its policyholders and other
creditors.
In July 1987, American Centennial Insurance Company, International Fidelity
Insurance Company, and Ranger Insurance Company (the "American Centennial
Plaintiffs") commenced an action in the Supreme Court of the State of New York
against Hall, two subsidiaries of Hall, and certain individuals who were former
officers and directors of Union Indemnity seeking to hold the defendants liable
for certain alleged reinsurance obligations of Union Indemnity, certain
misrepresentations concerning Union Indemnity's financial position and the
breach of certain duties owed to the American Centennial Plaintiffs. The
American Centennial Plaintiffs sought damages of at least $54,900,000 and
punitive damages against all defendants.
The action brought by the Superintendent was settled by an agreement, dated June
2, 1989, under which Hall, now known as Prometheus Funding Corp. ("Prometheus"),
will make an initial payment of $19,000,000 and additional payments aggregating
$29,000,000 over a ten-year period without interest as follows: $1,500,000 each
in years one and two; $2,000,000 each in years three and four; $5,000,000 in
year five; $4,500,000 each in years six and seven; $4,000,000 in year eight; and
$2,000,000 each in years nine and ten. The settlement agreement provides for the
entry of an order by the court barring other claims against Hall relating to
Union Indemnity, including the claims by the American Centennial Plaintiffs
described above. The settlement agreement was submitted to the court for
approval in October 1989 and objections were filed and continue to be pursued
by various parties. The Superintendent has informed Prometheus that he intends
to pursue court approval of the settlement. The settlement agreement will not
become effective until final approval by the court and there is no assurance
that such approval will be obtained. Prometheus has recorded a reserve of
$36,000,000 representing the initial payment of $19,000,000 and the present
value of the additional remaining annual payments over a ten-year period.
Prometheus has received an aggregate of $20,000,000 in insurance proceeds in
connection with this matter from its insurance carrier.
52
<PAGE>
The Company is also subject to the litigation set forth below.
The Company is seeking a redetermination in the U.S. Tax Court of an asserted
tax deficiency for the year ended December 31, 1980, as set forth by the
Commissioner of Internal Revenue in a Notice of Deficiency dated June 27, 1994.
The Company intends to pursue the action vigorously. The Internal Revenue
Service ("IRS") seeks to disallow investment tax credits of approximately
$36,500,000 with respect to intermodal cargo containers leased to others by a
former subsidiary of the Company. The Company estimates that, if the IRS were to
prevail, the deficiency would result in an increase in tax of approximately
$31,000,000 for 1980, plus interest at the statutorily prescribed rates for the
periods since that year. On January 11, 1995, the U.S. Tax Court handed down a
decision in Norfolk Southern Corp. v. Commissioner, a case involving a taxpayer,
which, like the Company, had claimed investment tax credits in connection with
the leasing of intermodal cargo containers. In the decision, which is the first
pronouncement by the courts on this issue, the Tax Court articulated a standard,
different from that proposed by the IRS, which, if applied to the Company, would
result in the disallowance of a substantial percentage (although significantly
less than that sought by the IRS) of the investment tax credits claimed by the
Company. The Company believes that it has appropriately provided for this matter
in light of its exposure in the event a standard such as the one articulated in
Norfolk Southern is applied to the Company's facts and circumstances. On
February 22, 1995, the Tax Court granted the joint motion of the Company and the
Commissioner to postpone the trial of this matter until after the resolution of
appellate proceedings in Norfolk Southern. The Company does not believe that it
is probable that its additional liability, if any, in respect of this matter
will have a material adverse effect on its consolidated financial statements.
COMMITMENTS
A subsidiary of Reliance Insurance Company, Saul P. Steinberg and other
executives of the Company are partners in a partnership which owns certain
real estate properties. At December 31, 1996, the partnership's total
outstanding debt was $172,167,000. As of December 31, 1996, Reliance Financial
guaranteed $38,000,000 of the partnership's outstanding debt which matures on
June 30, 1997. The Company believes that, to the extent such debt cannot be
fully refinanced at maturity, the partnership will 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
$13,000,000. Borrowings under the line of credit mature on June 30, 2005 and
bear a fixed interest rate of 10%. At December 31, 1996, borrowings of
$9,829,000 were outstanding under the line of credit.
LEASE COMMITMENTS
The Company and its subsidiaries lease certain office facilities and equipment
under lease agreements that expire at various dates through 2011. Rent expense
for the years ended December 31, 1996, 1995 and 1994 was $97,300,000,
$95,900,000 and $96,000,000, respectively.
At December 31, 1996, future net minimum rental payments required under
noncancelable leases are as follows:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
(In thousands)
<S> <C>
1997.......................................................................................................... $ 63,142
1998.......................................................................................................... 47,654
1999.......................................................................................................... 38,438
2000.......................................................................................................... 17,703
2001.......................................................................................................... 10,482
2002 and thereafter........................................................................................... 21,642
------------
$ 199,061
============
</TABLE>
53
<PAGE>
15. Business Segment Information
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
Year Ended December 31 1996 1995 1994
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
(In thousands)
Revenues:
Property and casualty insurance
Premiums earned.............................................................. $ 1,800,854 $ 1,774,591 $ 1,777,318
Net investment income........................................................ 257,133 247,343 232,299
Gain on sales of investments................................................. 49,264 27,381 8,851
------------ ------------- ------------
2,107,251 2,049,315 2,018,468
------------ ------------- ------------
Title insurance
Premiums earned.............................................................. 780,157 671,947 856,774
Net investment income........................................................ 30,455 27,946 26,613
Gain on sales of investments................................................. 346 1,729 516
------------ ------------- ------------
810,958 701,622 883,903
------------ ------------- ------------
Other........................................................................... 172,378 155,050 144,679
------------ ------------- ------------
$ 3,090,587 $ 2,905,987 $ 3,047,050
============ ============= ============
Income before income taxes and equity
in investee company:
Property and casualty insurance
Underwriting(1).............................................................. $ (172,387) $ (45,644) $ (97,343)
Net investment income........................................................ 257,133 247,343 232,299
Gain on sales of investments................................................. 49,264 27,381 8,851
------------ ------------- ------------
134,010 229,080 143,807
------------ ------------- ------------
Title insurance................................................................. 38,580 14,012 31,326
------------ ------------- ------------
Other........................................................................... (125,991) (122,568) (128,590)
------------ ------------- ------------
$ 46,599 $ 120,524 $ 46,543
============ ============= ============
Identifiable assets at year-end:
Property and casualty insurance................................................. $ 9,619,869 $ 9,077,897 $ 8,529,300
Title insurance................................................................. 590,137 547,510 547,000
Other........................................................................... 381,125 362,806 293,253
------------ ------------- ------------
$ 10,591,131 $ 9,988,213 $ 9,369,553
============ ============= ============
</TABLE>
(1) The 1996 results include a charge of $134,000,000 to increase net loss
reserves for asbestos-related and environmental pollution claims for
business written in or before 1987.
Income before income taxes and equity in investee company relating to property
and casualty insurance underwriting has been reduced by policyholders' dividends
and other income and expense. Income before income taxes and equity in investee
company by segment is before allocation of corporate overhead and corporate
interest expense, which relates primarily to the Company and its financing
subsidiary. Corporate overhead, corporate interest expense and the pre-tax
results of RCG International, Inc. (a subsidiary of the property and casualty
insurance operations) are included in Other.
Identifiable assets by industry segment are those assets which are used in the
Company's operations in each segment.
54
<PAGE>
16. Quarterly Financial Data (Unaudited)
<TABLE>
<CAPTION>
1996 Quarter
- ----------------------------------------------------------------------------------------------------------------------------------
First Second Third Fourth
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
(In thousands, except per-share amounts)
Revenues:
Premiums earned............................................... $ 609,867 $ 636,752 $ 661,980 $ 672,412
Net investment income......................................... 70,717 70,443 72,040 74,388
Gain on sales of investments.................................. 4,468 18,936 16,542 9,664
Other......................................................... 38,734 41,765 43,548 48,331
---------- ---------- ---------- ----------
$ 723,786 $ 767,896 $ 794,110 $ 804,795
========== ========== ========== ==========
Net income (loss)(1).......................................... $ 22,512 $ (47,701) $ 37,651 $ 35,745
========== ========== ========== ==========
Per-share information:
Net income (loss)(1),(2)...................................... $ .19 $ (.41) $ .32 $ .30
===== ====== ====== =====
Weighted average number of common and
common equivalent shares outstanding....................... 117,490 117,610 117,355 117,921
</TABLE>
(1) Includes a second quarter after-tax charge of $87,100,000, or $.74
per-share, to increase net loss reserves for asbestos-related and
environmental pollution claims for business written in or before 1987.
(2) Net income (loss) per-share is computed independently for each of the
quarters presented. Therefore, the sum of the quarterly net income (loss)
per-share does not equal the total for the year.
<TABLE>
<CAPTION>
1995 Quarter
- ----------------------------------------------------------------------------------------------------------------------------------
First Second Third Fourth
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
(In thousands, except per-share amounts)
Revenues:
Premiums earned............................................... $ 604,666 $ 599,957 $ 618,831 $ 623,084
Net investment income......................................... 69,378 66,362 68,727 70,822
Gain on sales of investments.................................. 8,286 7,669 8,454 2,968
Other......................................................... 38,976 42,189 38,103 37,515
---------- ---------- ---------- ----------
$ 721,306 $ 716,177 $ 734,115 $ 734,389
========== ========== ========== ==========
Income from continuing operations............................. $ 21,540 $ 26,438 $ 27,997 $ 19,941
Loss on disposal of discontinued operations
of investee company........................................ - - (4,497) -
---------- ---------- ---------- ----------
Income before extraordinary item.............................. 21,540 26,438 23,500 19,941
Extraordinary item - early extinguishment of debt............. - (3,363) - -
---------- ---------- ---------- ----------
Net income.................................................... $ 21,540 $ 23,075 $ 23,500 $ 19,941
========== ========== ========== ==========
Per-share information:
Income from continuing operations............................. $ .19 $ .23 $ .24 $ .17
Loss on disposal of discontinued operations
of investee company........................................ - - (.04) -
----- ------ ------ -----
Income before extraordinary item.............................. .19 .23 .20 .17
Extraordinary item - early extinguishment of debt............. - (.06) - -
------ ------ ----- ----
Net income.................................................... $ .19 $ .17 $ .20 $ .17
===== ====== ===== =====
Weighted average number of common and
common equivalent shares outstanding....................... 114,805 115,548 116,413 117,160
</TABLE>
55
<PAGE>
Independent Auditors' Report Reliance Group Holdings, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
Board of Directors and Shareholders
Reliance Group Holdings, Inc.
New York, New York
We have audited the accompanying consolidated balance sheets of Reliance Group
Holdings, Inc. and subsidiaries as of December 31, 1996 and 1995, and the
related statements of income, changes in shareholders' equity and cash flows for
each of the three years in the period ended December 31, 1996. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Reliance Group Holdings, Inc. and
subsidiaries at December 31, 1996 and 1995 and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 1996 in conformity with generally accepted accounting principles.
Deloitte & Touche LLP
NEW YORK, NEW YORK
FEBRUARY 14, 1997
56
<PAGE>
REPORT OF MANAGEMENT Reliance Group Holdings, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
SCOPE OF RESPONSIBILITY
Management is responsible for the financial information included in this annual
report and for ascertaining that such information presents fairly the financial
position and operating results of the Company. The accompanying consolidated
financial statements have been prepared in conformity with generally accepted
accounting principles. Such statements include informed estimates and judgments
of management for those transactions that are not yet complete or for which the
ultimate effects cannot be precisely determined. Financial information presented
elsewhere in this annual report is consistent with that in the financial
statements.
INTERNAL CONTROLS
The Company maintains a system of internal accounting controls designed to
provide reasonable assurance that assets are safeguarded against losses from
unauthorized use or disposition, that transactions are executed in accordance
with management's authorization and are recorded properly. Qualified personnel
throughout the organization maintain and monitor these internal accounting
controls on an ongoing basis. In addition, the Company's Internal Audit
Department systematically reviews these controls, evaluates their adequacy and
effectiveness, and reports thereon.
INDEPENDENT AUDITORS
The Company engages Deloitte & Touche LLP as independent auditors to audit its
financial statements and express their opinion thereon. They have full access to
each member of management in conducting their audits. Such audits are conducted
in accordance with generally accepted auditing standards and include a review
and evaluation of the system of internal accounting controls, tests of the
accounting records and other auditing procedures they consider necessary to
express their opinion on the consolidated financial statements.
AUDIT COMMITTEE
The Audit Committee of the Board of Directors is comprised solely of
non-employee outside directors, and is responsible for overseeing and monitoring
the quality of the Company's accounting practices and internal controls. The
Committee meets regularly with management, the internal auditors and the
independent auditors to review the accounting practices employed by the Company
and to discuss auditing, internal control and financial reporting matters. Both
the internal and independent auditors have unrestricted access to the Audit
Committee, without members of management present.
SAUL P. STEINBERG
Chairman of the Board and
Chief Executive Officer
GEORGE E. BELLO
Executive Vice President
and Controller
57
<PAGE>
MARKET AND DIVIDEND INFORMATION FOR COMMON STOCK
- --------------------------------------------------------------------------------
Reliance Group Holdings, Inc. and Subsidiaries
The Company's common stock, $.10 par value, is traded on the New York Stock
Exchange and the Pacific Stock Exchange under the symbol "REL". As of March 1,
1997, there were approximately 2,400 holders of record of the Company's common
stock. The high and low sales prices of the common stock, as reported by the New
York Stock Exchange, are as follows:
<TABLE>
<CAPTION>
1996 1995
- -------------------------------------------------------------------------------------------------------------------
Quarter High Low High Low
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
First ..................................................... 8 3/4 7 1/2 5 3/4 4 7/8
Second ..................................................... 8 3/4 7 1/8 6 3/4 5 1/4
Third ..................................................... 8 1/8 6 1/2 8 1/8 6 1/4
Fourth ..................................................... 9 1/8 7 5/8 9 1/4 7 1/8
</TABLE>
Cash dividends for each share of the Company's common stock were $.08 for each
quarter in 1996 and 1995.
The provisions of certain notes and debentures of the Company contain
limitations on the payment of dividends, including maintaining a minimum fixed
charge coverage ratio. At February 14, 1997, the Company could pay up to
$41,400,000 in dividends without violating the most restrictive of these
provisions. The Company's dividend paying capacity will increase to the extent
that 50% of the Company's cumulative net income (as defined) exceeds cumulative
restricted payments (primarily dividends). The Company does not expect to change
its dividend payment practices in the foreseeable future. As a holding company,
the Company is dependent upon dividends, advances and net tax payments from its
wholly-owned subsidiaries to meet its debt service obligations, to pay its
expenses and to pay dividends to its shareholders. In addition to the terms of
certain notes and bank covenants limiting the payment of dividends by Reliance
Financial, dividends from the Company's principal operating subsidiaries are
subject to regulatory limitations.
58
<PAGE>
DIRECTORS AND OFFICERS
- --------------------------------------------------------------------------------
Reliance Group Holdings, Inc. and Subsidiaries
DIRECTORS
GEORGE R. BAKER(2),(5),(6),(7)
Corporate Director/Advisor
GEORGE E. BELLO(3)
Executive Vice President
and Controller
Reliance Group Holdings, Inc.
DENNIS A. BUSTI
President and
Chief Executive Officer
Reliance National Insurance
Company
LOWELL C. FREIBERG(3)
Senior Vice President and
Chief Financial Officer
Reliance Group Holdings, Inc.
DR. THOMAS P. GERRITY(2),(7)
Dean of the Wharton School
University of Pennsylvania
JEWELL JACKSON MCCABE(3),(4),(6)
President, Jewell Jackson
McCabe Associates
IRVING SCHNEIDER(2),(6)
Executive Vice President
Helmsley-Spear, Inc.
BERNARD L. SCHWARTZ(1)
Chairman & CEO of Loral
Space & Communications Ltd.
and Chairman & CEO of
Globalstar
RICHARD E. SNYDER(3),(7)
Chairman and
Chief Executive Officer
Golden Books Family
Entertainment, Inc.
THOMAS J. STANTON, JR.(2),(5)
Chairman Emeritus
National Westminster Bank NJ
ROBERT M. STEINBERG(1),(4)
President and
Chief Operating Officer
Reliance Group Holdings, Inc.
SAUL P. STEINBERG(1),(4)
Chairman of the Board and
Chief Executive Officer
Reliance Group Holdings, Inc.
JAMES E. YACOBUCCI
Senior Vice President
Investments
Reliance Group Holdings, Inc.
(1) Executive Committee
(2) Audit Committee
(3) Finance Committee
(4) Regular Compensation
Committee
(5) Special Compensation
Committee
(6) Stock Option Committee
(7) Nominating Committee
OFFICERS
SAUL P. STEINBERG
Chairman of the Board and
Chief Executive Officer
ROBERT M. STEINBERG
President and
Chief Operating Officer
GEORGE E. BELLO
Executive Vice President
and Controller
LOWELL C. FREIBERG
Senior Vice President and
Chief Financial Officer
DENNIS J. O'LEARY
Senior Vice President
Taxes
PHILIP S. SHERMAN
Senior Vice President and
Group Controller
BRUCE L. SOKOLOFF
Senior Vice President
Administration
HOWARD E. STEINBERG
Senior Vice President,
General Counsel and
Corporate Secretary
JAMES E. YACOBUCCI
Senior Vice President
Investments
ALBERT A. BENCHIMOL
Vice President and
Treasurer
EILENE S. BLOOM
Vice President
Administrative Services
THOMAS G. BUTLER
Vice President
Taxes
ANDREW B. DONNELLAN, JR.
Vice President and
Chief Litigation Counsel
DAVID F. NOYES
Vice President and
Chief Credit Officer
STEVEN A. RAUTENBERG
Vice President
Communications
JOEL H. ROTHWAX
Vice President
Human Resources
THOMAS J. SANDERS
Vice President and
Assistant Controller
PAUL W. ZELLER
Vice President,
Deputy General Counsel
and Assistant Secretary
OFFICERS OF
OPERATING UNITS
RELIANCE INSURANCE GROUP
ROBERT M. STEINBERG
Chairman and
Chief Executive Officer
JEROME H. CARR
Senior Vice President
and Chief Financial Officer
KENNETH R. FROHLICH
Senior Vice President
and Chief Actuarial Officer
PROPERTY AND
CASUALTY INSURANCE
DENNIS A. BUSTI
President and
Chief Executive Officer
Reliance National Insurance
Company
ROBERT C. OLSMAN
President and
Chief Operating Officer
Reliance Insurance Company
GEORGE H. ROBERTS
President
Reliance Reinsurance Corp.
C. BRIAN SCHMALZ
President and
Chief Executive Officer
Reliance Surety Company
TITLE INSURANCE
HERBERT WENDER
Chairman and
Chief Executive Officer
Commonwealth Land Title
Insurance Company
RCG INFORMATION
TECHNOLOGY
ROBERT P. BUTTACAVOLI
President and
Chief Executive Officer
RCG Information Technology, Inc.
RELIANCE DEVELOPMENT
GROUP
HENRY A. LAMBERT
President and
Chief Executive Officer
Reliance Development Group, Inc.
59
<PAGE>
CORPORATE DATA Reliance Group Holdings, Inc. & Subsidiaries
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
Corporate Offices Common Stock Transfer Agent Form 10-K
Reliance Group Holdings, Inc. Chase Mellon Shareholder Services, L.L.C. A copy of the Company's Annual Report
Park Avenue Plaza P. O. Box 590 on Form 10-K to the Securities and
55 East 52nd Street Ridgefield Park, NJ 07660 Exchange Commission will be furnished
New York, NY 10055 (800) 851-9677 to any security holder upon written
(212) 909-1100 request to Corporate Communications,
FAX (212) 909-1864 Independent Auditors Reliance Group Holdings, Inc., 55 East
Deloitte & Touche LLP 52nd Street, New York, NY 10055. This
New York, NY Report can also be obtained by calling
(888) REL-FACT or by visiting our
Internet web site at http://www.rgh.com.
Annual Meeting
The annual meeting of shareholders
of Reliance Group Holdings, Inc.
will be held on Thursday, May 8, 1997
at 10:00 A.M. in the
Solomon R. Guggenheim Museum,
1071 Fifth Avenue, New York, NY.
------------------------------------------------------------------------------------------
Listed Securities
Unless otherwise indicated, securities
are listed on the New York Stock
Exchange.
Reliance Group Holdings, Inc.
Common Stock (Symbol: REL; New York and
Pacific Stock Exchanges)
9% Senior Notes, due 2000
9 3/4% Senior Subordinated Debentures, due 2003
Reliance Financial Services Corporation
7.866% Senior Reset Notes, due 2000
------------------------------------------------------------------------------------------
Reliance Group Holdings, Inc. quarterly
results, as well as Annual Reports on
Form 10-K, Form 10-Q, Annual Reports to
shareholders, dividend declarations and
other corporate information can be
obtained by calling (888) REL-FACT or
by visiting our Internet web site at
http://www.rgh.com.
</TABLE>
60
<PAGE>
Design: The Graphic Expression, Inc., New York
<PAGE>
[LOGO] Reliance
Reliance Group Holdings, Inc.
<PAGE>
Exhibit 21.1
Set forth below is a list of subsidiaries of the Registrant. Omitted from
the following list are the names of particular subsidiaries which, considered in
the aggregate as a single subsidiary, do not constitute a significant
subsidiary. Subsidiaries of subsidiaries are indented.
<TABLE>
<CAPTION>
Jurisdiction
of
Name Incorporation
<S> <C>
..Reliance Financial Services Corporation Delaware
....Reliance Insurance Group, Inc. Delaware
......Reliance Corporate Services Inc. Delaware
....Reliance Insurance Company Pennsylvania
Delaware
<CAPTION>
SEE ANNEX 1 FOR RELIANCE INSURANCE SUBSIDIARIES
<S> <C>
..Reliance Development Group, Inc. Delaware
<CAPTION>
SEE ANNEX 2 FOR REAL ESTATE SUBSIDIARIES
<S> <C>
..Leasco Intercontinental N.V. Neth. Antilles
..LCEC Corporation Delaware
..Reliance Protective Services, Inc. Delaware
..Reliance General Services, Inc. Delaware
..Convenience & Safety Corporation Delaware
....CSC of Washington, D.C., Inc. D.C.
</TABLE>
<PAGE>
ANNEX 1 - INSURANCE SUBSIDIARIES
<TABLE>
<CAPTION>
Jurisdiction
of
Name Incorporation
<S> <C>
Reliance Insurance Company Pennsylvania
..Diamond Insurance Services, Inc. Delaware
..Garnet Company Delaware
..Reliance Reinsurance Company Delaware
..Sterling Administrative Services, Inc. Pennsylvania
..Platinum Investors, Inc. Delaware
..Cananwill, Ltd. Bermuda
..Reliance Insurance Company of California California
..Reliance National Indemnity Company Wisconsin
..Regent International Insurance Company, Ltd. Bermuda
..Reliance Insurance Company of Illinois Illinois
..Reliance National Insurance Company of New York New York
....Reliance Direct Insurance Company Pennsylvania
..Reliance Life Companies Pennsylvania
..Reliance Surety Company Delaware
..United Pacific Insurance Company Pennsylvania
....Uni-Pac Corporation Washington
......100 Bellevue Parkway Partners, L.P. Delaware
..RDG, Inc. Delaware
..Marketing Management, Inc. Delaware
..United Pacific Insurance Company of New York New York
..Reliance Custom Underwriting Facility, Inc. Pennsylvania
..Reliance Surety Managers, Inc. Pennsylvania
..Reliance Reinsurance Corp. Pennsylvania
..Reliance Consumer Services, Inc. Texas
..Reliance Special Risk, Inc. Pennsylvania
....Reliance Specialty Programs, Inc. Pennsylvania
..Reliance Lloyds Texas
..Reliance Insurance Companies Foundation Pennsylvania
..Reliance National Risk Specialists, Inc. Pennsylvania
..Reliance National Compania Argentina
De Seguros S.A. Argentina
..Reliance National Insurance Company Delaware
....Seguros Renamex Mexico
....Reliance National Risk Services, Inc. New York
....Blackmoor Group, Inc. New York
......Waverly Insurance Agency, Inc. New York
..Reliance National Asia Re Pte Ltd. Singapore
..Petroleum Interests, Inc. Delaware
..Reliance National (U.K.) Ltd. England
....Reliance National Insurance Company
(Europe) Ltd. England
..Reliance Servicios Y Comissiones Mexico
..Reliant Insurance Corp. Delaware
..Reliance National (Barbados) Insurance, Ltd. Barbados
..Reliance Insurance Group Brokerage
Division, Inc. Pennsylvania
..Transnation Title Insurance Company Arizona
....Transnation Title Insurance Company of
New York New York
....Transnation Title & Escrow, Inc. Delaware
....Title Transfer Services, Inc. Colorado
....Xenia Property Company Pennsylvania
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Jurisdiction
of
Name Incorporation
<S> <C>
..Commonwealth Land Title Insurance Company Pennsylvania
....Albuquerque Title Company, Inc. New Mexico
....CLT Appraisal Services, Inc. Pennsylvania
....CLTIC-RELO, Inc. Delaware
......The Resource Alliance Group, Inc. Delaware
......The Resource Alliance Limited Partnership New Jersey
....Commercial Settlements, Inc. Dist. of Columbia
....Commonwealth Land Title Company California
....Commonwealth Land Title Company of Austin Texas
....Commonwealth Land Title Company of Dallas Texas
....Commonwealth Land Title Company of El Paso Texas
....Commonwealth Land Title Company of Fort
Worth Texas
....Commonwealth Land Title Company of Houston Texas
....Commonwealth Land Title Company of
San Antonio Texas
....Commonwealth Land Title Company of
Washington Washington
....Commonwealth Relocation Services, Inc. Pennsylvania
....CRS Financial Services, Inc. Pennsylvania
....Day One, Inc. Pennsylvania
....DelPenn Land Company Delaware
....District-Realty Title Insurance Corporation Maryland
....Goliath, Inc. Pennsylvania
......Goliath One, L.P. Pennsylvania
......Goliath Two, L.P. Pennsylvania
......Goliath Three, L.P. Pennsylvania
....Industrial Valley Title Insurance Company Pennsylvania
......Commonwealth Land Title Insurance Company
of New Jersey New Jersey
....Osage Corporation Pennsylvania
....Property Services, Inc. Pennsylvania
....Ranier Title Company Washington
....State Title Insurance Company Pennsylvania
....T & T Co. Holding Company Florida
......Title & Trust Company of Florida Florida
....The National l03l Exchange Corporation California
....Title Insurance Company Alabama
..Onyx, Inc. Delaware
....Reliance Development Figueroa, Inc. California
......Reliance Figueroa Associates Limited
Partnership California
..Reliance Development Company, Inc. of Tucson Delaware
....Reliance Centro Limited Partnership Arizona
..Reliance Development Pueblo Parking, Inc. Arizona
....Reliance Pueblo Limited Partnership Arizona
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Jurisdiction
of
Name Incorporation
<S> <C>
..Prometheus Funding Corp. Delaware
..RCG International, Inc. Delaware
....RCG-Moody International Limited England
......AOQC BV England
......AOQC GmbH Germany
......AOQC SRL Italy
......Associated Office Quality Certification
Ltd. England
......BMIQA Limited England
......ICSB B.V. Holland
........ICSB G.m.b.H. Germany
........ICSB Ltd. Hong Kong
........ICSB Sarl France
........International Container Survey
Bureau (UK) Limited England
......Maghraby Moody International BV (MMI BV) Netherlands
......Maghraby Moody International Limited England
......MMI International Technical Inspection GmbH Germany
......MMI Italia SRL Italy
......Moody International, Inc. Delaware
........Moody International Ltd. (Japan) Japan
........AOQC Incorporated Texas
......Moody-Tottrup Gulf Limited Channel Is.
......Moody International (Australia) Pty. Ltd. Australia
......Moody International Scandinavia AB Sweden
....Moody International (SA)(PTY) Limited
....RCG/Asbach, Inc. Delaware
....RCG Information Technology, Inc. New Jersey
......RCG IT Corp. Delaware
........Century Conversion Software, Inc. Delaware
........Quintic Systems, Inc. Delaware
....Werner International, Inc. Delaware
......Werner Management Consultants, Inc. New York
</TABLE>
<PAGE>
ANNEX 2 - REAL ESTATE SUBSIDIARIES
<TABLE>
<CAPTION>
Jurisdiction
of
Name Incorporation
<S> <C>
Reliance Development Group, Inc. Delaware
..Continental Villages Company, Inc. Delaware
..Reliance Advisory Group, Inc. California
..Reliance Development Company, Inc. of Glendale California
..Reliance Development Parking Company Arizona
..Reliance Oriental Warehouse, Inc. Delaware
....Reliance Oriental Warehouse Associates
(A California Limited Partnership) California
......Oriental Warehouse Associates
(A California Limited Partnership) California
..Reliance River Center Associates New York
..Relibro Corp. New York
</TABLE>
<PAGE>
Independent Auditors' Consent
We consent to the incorporation by reference in Registration Statements
Nos. 33-19897, 33-31709, 33-63517, 33-63519 and 333-21389 of Reliance
Group Holdings, Inc. on Form S-8 of our reports dated February 14, 1997,
appearing in and incorporated by reference in the Annual Report on Form
10-K of Reliance Group Holdings, Inc. for the year ended December 31,
1996. We also consent to the use of Touche Ross, and statements with
respect to Touche Ross, as appearing under the heading "Experts" in the
Prospectuses which are part of Registration Statements Nos. 33-19897 and
33-31709.
/s/ Deloitte & Touche LLP
New York, New York
March 21, 1997
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
Exhibit 27.1
This schedule contains summary financial information extracted from the
Company's Consolidated Balance Sheet and the Consolidated Statement of Income
and is qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<DEBT-HELD-FOR-SALE> 2,623,669
<DEBT-CARRYING-VALUE> 787,836
<DEBT-MARKET-VALUE> 801,738
<EQUITIES> 716,606
<MORTGAGE> 0
<REAL-ESTATE> 286,664
<TOTAL-INVEST> 4,733,940
<CASH> 40,853
<RECOVER-REINSURE> 3,576,953
<DEFERRED-ACQUISITION> 215,438
<TOTAL-ASSETS> 10,591,131
<POLICY-LOSSES> 6,530,258
<UNEARNED-PREMIUMS> 1,468,299
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 901,532
0
0
<COMMON> 11,428
<OTHER-SE> 665,252
<TOTAL-LIABILITY-AND-EQUITY> 10,591,131
2,581,011
<INVESTMENT-INCOME> 287,588
<INVESTMENT-GAINS> 49,610
<OTHER-INCOME> 172,378
<BENEFITS> 1,411,453
<UNDERWRITING-AMORTIZATION> 1,327,306
<UNDERWRITING-OTHER> 0
<INCOME-PRETAX> 46,599
<INCOME-TAX> 7,300
<INCOME-CONTINUING> 48,207
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 48,207
<EPS-PRIMARY> $0.41
<EPS-DILUTED> 0
<RESERVE-OPEN> 3,179,435
<PROVISION-CURRENT> 1,211,672
<PROVISION-PRIOR> 138,665
<PAYMENTS-CURRENT> 298,838
<PAYMENTS-PRIOR> 926,996
<RESERVE-CLOSE> 3,311,606
<CUMULATIVE-DEFICIENCY> 138,665
</TABLE>
