<PAGE>
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
(Mark One) WASHINGTON, D.C. 20549
X
- ---------- QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 1997
OR
- ------------- TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period From To
---------- ----------
Commission File Number 1-8278
RELIANCE GROUP HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
Delaware 13-3082071
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
Park Avenue Plaza
55 East 52nd Street
New York, New York 10055
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (212) 909-1100
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
As of November 1, 1997, 114,817,000 shares of common stock of Reliance Group
Holdings, Inc. were outstanding.
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RELIANCE GROUP HOLDINGS, INC. AND SUBSIDIARIES
I N D E X
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Page
No.
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statement of Income for the Quarters and Nine-Month
Periods Ended September 30, 1997 and 1996 (Unaudited).............. 2
Consolidated Balance Sheet at September 30, 1997 (Unaudited) and
December 31, 1996.................................................. 3
Consolidated Statement of Changes in Shareholders' Equity for the
Nine-Month Period Ended September 30, 1997 (Unaudited)............. 4
Consolidated Condensed Statement of Cash Flows for the Nine-Month
Periods Ended September 30, 1997 and 1996 (Unaudited).............. 5
Notes to Consolidated Financial Statements (Unaudited).............. 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 9
PART II. OTHER INFORMATION, AS APPLICABLE............................. 14
SIGNATURES............................................................ 15
<PAGE>
RELIANCE GROUP HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME (UNAUDITED)
<TABLE>
<CAPTION>
Quarter Ended Nine Months Ended
September 30 September 30
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
(In thousands, except per share amounts)
Revenues:
Premiums earned....................................... $ 702,703 $ 661,980 $ 2,034,827 $ 1,908,599
Net investment income................................. 73,571 72,040 218,494 213,200
Gain on sales of investments.......................... 36,070 16,542 64,805 39,946
Other................................................. 68,901 43,548 184,626 124,047
----------- ----------- ----------- -----------
881,245 794,110 2,502,752 2,285,792
----------- ----------- ----------- -----------
Claims and expenses:
Policy claims and settlement expenses................. 308,885 326,612 954,147 1,083,679
Policy acquisition costs and other insurance expenses. 387,266 339,531 1,076,394 979,721
Interest.............................................. 22,239 22,167 66,465 66,439
Other operating expenses.............................. 81,506 54,837 219,353 156,815
----------- ----------- ----------- ----------
799,896 743,147 2,316,359 2,286,654
----------- ----------- ----------- ---------
Income (loss) before income taxes and equity
in investee company.............................. 81,349 50,963 186,393 (862)
Income tax (provision) benefit....................... (26,600) (15,800) (60,100) 5,900
Equity in investee company........................... 2,567 2,488 6,471 7,424
----------- ----------- ----------- ---------
Income from continuing operations.................... 57,316 37,651 132,764 12,462
Litigation settlement of discontinued operation...... -- -- (7,500) --
----------- ----------- ----------- ---------
Net income........................................... $ 57,316 $ 37,651 $ 125,264 $ 12,462
=========== =========== =========== ==========
Per share information:
Income from continuing operations.................... $ .47 $ .32 $ 1.10 $ .11
Litigation settlement of discontinued operation...... -- -- (.06) --
----------- ----------- ----------- ----------
Net income........................................... $ .47 $ .32 $ 1.04 $ .11
=========== =========== =========== ==========
Weighted average number of common and common
equivalent shares outstanding.................. 120,757 117,355 120,188 117,487
</TABLE>
See notes to consolidated financial statements
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RELIANCE GROUP HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
September 30 December 31
1997 1996
------------- -----------
<S> <C> <C>
ASSETS
(In thousands, except per share amount)
Marketable securities:
Fixed maturities held for investment - at
amortized cost (quoted market $808,172 and
$801,738)..................................... $ 781,037 $ 787,836
Fixed maturities available for sale - at
quoted market (amortized cost $2,588,426
and $2,595,929)............................... 2,682,383 2,623,669
Equity securities - at quoted market
(cost $382,739 and $436,053).................. 782,767 716,606
Short-term investments ......................... 248,775 319,165
Cash.............................................. 70,925 40,853
Premiums and other receivables.................... 1,452,655 1,250,331
Reinsurance recoverables.......................... 4,152,543 3,576,953
Investments in real estate - at cost, less
accumulated depreciation........................ 257,734 286,664
Investment in investee company.................... 164,501 159,157
Deferred policy acquisition costs................. 238,225 215,438
Excess of cost over fair value of net assets
acquired, less accumulated amortization......... 241,979 249,464
Other assets...................................... 484,375 364,995
------------- -------------
$ 11,557,899 $ 10,591,131
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Unearned premiums................................. $ 1,644,388 $ 1,468,299
Unpaid claims and related expenses................ 6,960,253 6,530,258
Accounts payable and accrued expenses............. 591,666 578,002
Reinsurance ceded premiums payable ............... 392,363 365,412
Federal and foreign income taxes, including
deferred taxes.................................. 173,279 70,948
Term loans and short-term debt.................... 249,084 236,167
Debentures and notes.............................. 650,000 665,365
------------- -------------
10,661,033 9,914,451
------------- -------------
Contingencies and commitments
Shareholders' equity:
Common stock, par value $.10 per share,
225,000 shares authorized, 114,814 and
114,282 shares issued and outstanding......... 11,481 11,428
Additional paid-in capital...................... 542,984 540,465
Retained earnings (deficit)..................... 47,734 (50,012)
Net unrealized gain on investments.............. 320,982 198,786
Net unrealized loss on foreign currency
translation................................... (26,315) (23,987)
------------- -------------
896,866 676,680
------------- -------------
$ 11,557,899 $ 10,591,131
============= =============
</TABLE>
See notes to consolidated financial statements
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RELIANCE GROUP HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY (UNAUDITED)
<TABLE>
<CAPTION>
Net
Unrealized
Net Loss on
Additional Retained Unrealized Foreign
Common Paid-In Earnings Gain on Currency Shareholders'
Stock Capital (Deficit) Investments Translation Equity
------ ---------- --------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
(In thousands, except per share amount)
Balance, January 1, 1997.............. $ 11,428 $ 540,465 $ (50,012) $ 198,786 $ (23,987) $ 676,680
Issuance of common stock.............. 53 2,204 2,257
Transactions of investee
company......................... 315 1,231 1,546
Net income........................... 125,264 125,264
Dividends ($.24 per share)........... (27,518) (27,518)
Appreciation after deferred
income taxes.................... 120,965 120,965
Foreign currency translation......... (2,328) (2,328)
---------- --------- ---------- ---------- ---------- ---------
Balance, September 30, 1997.......... $ 11,481 $ 542,984 $ 47,734 $ 320,982 $ (26,315) $ 896,866
========== ========= =========== ========== ========== =========
</TABLE>
See notes to consolidated financial statements
4
<PAGE>
RELIANCE GROUP HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENT OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended September 30 1997 1996
- ------------------------------ ---- ----
<S> <C> <C>
(In thousands)
CASH FLOWS (USED BY) FROM OPERATING ACTIVITIES.... $(101,073) $ 23,093
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of:
Fixed maturities available for sale........... 348,685 561,938
Fixed maturities held for investment.......... -- 28,910
Equity securities............................. 336,064 283,607
Maturities and repayments of:
Fixed maturities available for sale.......... 214,521 88,505
Fixed maturities held for investment......... 35,790 28,602
Purchases of:
Fixed maturities available for sale.......... (564,000) (881,509)
Fixed maturities held for investment......... (32,541) (75,431)
Equity securities............................ (195,569) (263,559)
Decrease in short-term investments - net......... 78,527 244,423
Other - net...................................... (61,732) (47,528)
--------- ---------
159,745 (32,042)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in term loans........................... 70,000 40,977
Increase (decrease) in short-term debt - net..... 2,775 (2,058)
Repayments of term loans......................... (60,749) (25,363)
Issuance of common stock......................... 2,257 5,115
Repurchases of senior reset notes................ (15,365) --
Dividends........................................ (27,518) (27,382)
--------- ---------
(28,600) (8,711)
--------- ---------
Increase (decrease) in cash...................... 30,072 (17,660)
Cash, beginning of period........................ 40,853 52,914
--------- ---------
Cash, end of period.............................. $ 70,925 $ 35,254
========= =========
Supplemental disclosures of cash flow information:
Interest paid.................................... $ 42,100 $ 41,000
========= =========
Income taxes paid................................ $ 31,900 $ 4,700
========= =========
</TABLE>
See notes to consolidated financial statements
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<PAGE>
RELIANCE GROUP HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
- ------------------------------------------------------------------------------
1. UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
In the opinion of management, the accompanying unaudited consolidated financial
statements include all adjustments (consisting of normal recurring accruals
only) considered necessary to present fairly the financial position at September
30, 1997, and the results of operations, changes in shareholders' equity and
cash flows for all periods presented. The results of operations for the interim
periods are not necessarily indicative of the results that may be expected for
any other interim period or for the entire year.
For a summary of significant accounting policies (which have not changed from
December 31, 1996) and additional financial information, see the Company's
Annual Report on Form 10-K for the year ended December 31, 1996.
2. SALE OF TITLE INSURANCE OPERATIONS
On August 20, 1997, the Company entered into an agreement to sell to Lawyers
Title Corporation all of the issued and outstanding shares of capital stock of
Commonwealth Land Title Insurance Company and Transnation Title Insurance
Company. (See Management's Discussion and Analysis of Financial Condition and
Results of Operations - "Sale of Title Insurance Operations").
3. EQUITY IN INVESTEE COMPANY
Equity income in Zenith National Insurance Corp. ("Zenith") was $2.6 million and
$6.5 million for the third quarter and first nine months of 1997 compared to
$2.5 million and $7.4 million in the corresponding 1996 periods.
Summarized financial information for Zenith is as follows:
Nine Months Ended September 30 1997 1996
- --------------------------------------- ---- ----
(In thousands, except per share amounts)
Revenues........................................ $ 446,145 $ 405,293
Income before income taxes...................... 35,453 48,811
Net income...................................... 23,000 32,200
Net income per share............................ 1.28 1.81
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4. REINSURANCE
The reconciliation of property and casualty insurance direct premiums to net
premiums is as follows (in thousands):
Nine Months Ended September 30
---------------------------------------------
1997 1996
---------------------------------------------
Premiums Premiums Premiums Premiums
Written Earned Written Earned
--------- -------- -------- --------
Direct................ $2,561,983 $2,411,434 $2,242,993 $2,135,825
Assumed............... 344,281 300,833 248,527 244,052
Ceded................. (1,369,431) (1,290,337) (1,105,855) (1,047,258)
----------- ----------- ----------- -----------
Net Premiums.......... $1,536,833 $1,421,930 $1,385,665 $1,332,619
=========== =========== =========== ===========
The reconciliation of property and casualty insurance gross policy claims and
settlement expenses to net policy claims and settlement expenses is as follows
(in thousands):
Nine Months Ended
September 30
------------------------
1997 1996
-------- --------
Gross........................................... $1,866,173 $1,707,396
Reinsurance recoveries.......................... (941,496) (671,178)
----------- -----------
Net policy claims and settlement expenses....... $ 924,677 $1,036,218
=========== ===========
For the nine months ended September 30, 1996, gross policy claims and settlement
expenses included a charge of $134.5 million and net policy claims and
settlement expenses included a charge of $134.0 million to increase property and
casualty insurance loss reserves for asbestos-related and environmental
pollution claims for business written in or before 1987.
5. LEGAL PROCEEDINGS OF DISCONTINUED OPERATION
On June 13, 1997, a Judgment was entered dismissing the claims asserted by the
Superintendent of Insurance of New York against Frank B. Hall & Co. Inc.
("Hall") and the other Hall defendants in the action described in note 14 of the
Company's 1996 Annual Report. The Judgment approved the amended settlement
agreement described in note 4 of the Company's Report on Form 10-Q for the
quarterly period ended March 31, 1997. In connection with the amended settlement
agreement, the Company recorded a charge of $7.5 million in the first nine
months of 1997 which was classified as a charge pertaining to a discontinued
operation.
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6. ADOPTION OF NEW ACCOUNTING STANDARD
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, "Earnings per Share." This Statement
requires dual presentation of basic and diluted income per share. Basic income
per share is computed by dividing net income by the weighted average common
shares outstanding for the period. Diluted income per share reflects the
potential dilution that could occur if securities, such as stock options, were
exercised or otherwise converted into common stock. This Statement will be
effective for financial statements for periods ending after December 15, 1997
and early application is not permitted.
Pro forma income per share, assuming the Company had adopted the Statement
effective January 1, 1996, is as follows:
Quarter Ended Nine Months Ended
September 30 September 30
--------------- -----------------
1997 1996 1997 1996
---- ---- ---- ----
Basic income per share:
Income from continuing operations...... $ .50 $ .33 $1.16 $ .11
Litigation settlement of discontinued
operation............................. - - (.07) -
----- ----- ----- -----
Net income............................. $ .50 $ .33 $1.09 $ .11
===== ===== ===== =====
Diluted income per share:
Income from continuing operations...... $ .47 $ .32 $1.10 $ .11
Litigation settlement of discontinued
operation............................. - - (.06) -
----- ----- ----- -----
Net income............................. $ .47 $ .32 $1.04 $ .11
===== ===== ===== =====
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<PAGE>
RELIANCE GROUP HOLDINGS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
- -----------------------------------------------------------------------------
SALE OF TITLE INSURANCE OPERATIONS
On August 20, 1997, the Company and Lawyers Title Corporation ("Lawyers Title"),
entered into a Stock Purchase Agreement pursuant to which the Company will sell,
to Lawyers Title, its title insurance operations comprised of all of the issued
and outstanding shares of capital stock of Commonwealth Land Title Insurance
Company and Transnation Title Insurance Company.
As consideration for the sale of such capital stock, the Company will receive
approximately $245 million in cash, 4,473,684 shares of Lawyers Title common
stock and 2,200,000 shares of Lawyers Title 7% cumulative convertible preferred
stock having a stated value of $110 million and being convertible into 4,824,561
shares of Lawyers Title common stock. Such shares of common stock and preferred
stock are subject to various terms, conditions and restrictions with regard to
sale, conversion and voting. Upon the closing of the transaction, the Company
will own approximately 30% of Lawyers Title's common stock and 48% of Lawyers
Title on a fully diluted basis, and will have three representatives on its 14
member board of directors. The transaction would result in an after-tax gain of
approximately $160 million for the Company (assuming a market price at closing
of Lawyers Title's common stock of $30 per share - its closing price on
November 12, 1997), of which approximately $85 million would be recognized at
closing. The balance of the gain, will be recognized as the equity securities
received from Lawyers Title are sold.
The consummation of the transaction is subject to various conditions, including
expiration of the waiting period under the Hart-Scott-Rodino Antitrust
Improvements Act of 1976, as amended, and approvals by state insurance
regulators and the shareholders of Lawyers Title.
OVERVIEW
Income from continuing operations, before gains on sales of investments,
increased to $33.9 million ($.28 per share) in the third quarter of 1997 from
$26.9 million ($.23 per share) in the corresponding 1996 quarter. The growth in
operating income resulted from increased profitability in both property and
casualty and title insurance operations. For the first nine months of 1997,
income from operations was $90.6 million ($.75 per share) compared to an
operating loss of $13.5 million ($.11 per share) in the corresponding 1996
period which included an after-tax charge of $87.1 million ($.74 per share) to
increase property and casualty net loss reserves for asbestos-related and
environmental pollution claims. Excluding the effects of this charge, income
from operations for the first nine months of 1996 was $73.6 million ($.63 per
share).
Net income was $57.3 million ($.47 per share) and $125.3 million ($1.04 per
share) in the three months and nine months ended September 30, 1997 which
includes after-tax gains
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on sales of investments of $23.4 million ($.19 per share) and $42.1 million
($.35 per share), respectively. Net income for the first nine months of 1997
also includes a charge of $7.5 million ($.06 per share) for a litigation
settlement pertaining to a subsidiary which was discontinued in 1991. (See note
5 to the accompanying unaudited consolidated financial statements). Net income
was $37.7 million ($.32 per share) and $12.5 million ($.11 per share) in the
third quarter and first nine months of 1996 which included after-tax gains on
sales of investments of $10.8 million ($.09 per share) and $26.0 million ($.22
per share), respectively.
PROPERTY AND CASUALTY INSURANCE OPERATIONS
Net premiums written in the quarter and nine months ended September 30, 1997
increased to $517.0 million and $1.54 billion from $470.4 million and $1.39
billion in the corresponding 1996 periods. Net premiums earned in the quarter
and nine months ended September 30, 1997 likewise increased to $476.5 million
and $1.42 billion from $453.8 million and $1.33 billion in the corresponding
1996 periods. These increases resulted from continued growth in both domestic
and international operations and reflect increased writings in workers'
compensation, commercial automobile, surety, and accident and health lines of
business, as well as premiums generated from the start-up of the Company's
non-standard automobile insurance business. These increases were partially
offset by the ceding of $24.7 million of premiums written and earned in the
third quarter of 1997, under certain excess of loss reinsurance agreements.
Underwriting losses for the third quarter and first nine months of 1997 were
$7.8 million and $21.6 million and the combined ratios (calculated on a GAAP
basis), after policyholders' dividends, were 101.0% and 100.9% reflecting
continued strong underwriting results in surety, ocean and inland marine, and
multiple peril lines of business as well as improved results in the commercial
automobile line of business. Underwriting losses for the third quarter and first
nine months of 1996 were $10.8 million and $161.6 million, and the combined
ratios were 101.7% and 111.7%. Included in the first nine month 1996
underwriting results is a second quarter pretax charge of $134.0 million to
increase net loss reserves for asbestos-related and environmental pollution
claims for business written in or before 1987. Excluding the effects of this
pretax charge, the underwriting loss for the first nine months of 1996 was $27.6
million and the combined ratio was 101.6%.
PROPERTY AND CASUALTY INSURANCE INVESTMENT RESULTS
Net investment income of the property and casualty insurance operations was
$66.1 million and $195.3 million in the three-month and nine-month periods ended
September 30,1997 compared to $64.2 million and $190.5 million in the
corresponding 1996 periods. These increases in net investment income in 1997,
when compared to the prior year, reflect growth in the size of the fixed
maturity investment portfolio, partially offset by the effect of lower interest
rates.
Gains on sales of investments were $36.0 million and $63.6 million in the third
quarter and first nine months of 1997 compared to $15.7 million and $39.6
million in the corresponding 1996 periods. These gains primarily resulted from
sales of equity securities.
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<PAGE>
TITLE INSURANCE OPERATIONS
On August 20, 1997, the Company entered into an agreement to sell its title
insurance operations. See "Sale of Title Insurance Operations" for further
discussion.
Premiums and fees in the third quarter and first nine months of 1997 were $226.2
million and $612.9 million compared to $208.2 million and $576.0 million in the
corresponding 1996 periods. These increases in premiums and fees in 1997 reflect
the continued strong residential resale markets and commercial real estate
markets.
Agency commissions in the third quarter and first nine months of 1997 were $98.5
million and $268.9 million compared to $98.7 million and $263.1 million in the
corresponding 1996 periods. Other expenses increased to $104.4 million and
$294.8 million in the third quarter and first nine months of 1997 from $88.8
million and $263.6 million in the corresponding 1996 periods reflecting
increased employee related expenses due to the higher levels of business
activity. The expense ratios of the title insurance operations (which includes
agent commissions) were 89.2% and 91.4% in the third quarter and first nine
months of 1997 compared to 89.5% and 90.8% in the corresponding 1996 periods.
The provision for claim losses was $10.7 million and $29.5 million in the third
quarter and first nine months of 1997 compared to $15.6 million and $47.5
million in the corresponding 1996 periods. The title insurance operations have
benefitted from favorable paid claims experience in recent years.
INVESTMENT PORTFOLIO
At September 30, 1997, the Company's investment portfolio aggregated $4.07
billion (at cost), of which 9% was invested in equity securities. The Company
seeks to maintain a diversified and balanced fixed maturity portfolio
representing a broad spectrum of industries and types of securities. The
portfolio is managed to achieve a proper balance of safety, liquidity and
investment yields.
The Company's fixed maturity portfolio consists of investment grade securities
(those rated "BBB" or better by Standard & Poor's) and, to a lesser extent,
non-investment grade and non-rated securities. The risk of default is generally
considered to be greater for non-investment grade securities, when compared to
investment grade securities, since these issues may be more susceptible to
severe economic downturns. At September 30, 1997, the carrying values of
non-investment grade securities and securities not rated by Standard & Poor's
were $534.9 million (14% of the fixed income portfolio) and $152.9 million (4%
of the fixed income portfolio), respectively. Substantially all of the Company's
non-investment grade and non-rated securities are classified as available for
sale and, accordingly, are carried at market value.
OTHER OPERATIONS
RCG International, Inc. ("RCG"), a subsidiary of the Company, primarily provides
computer- related professional services to large corporate clients throughout
the United States. Information technology revenues increased to $51.3 million
and $136.1 million in the third
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<PAGE>
quarter and first nine months of 1997 from $35.3 million and $98.4 million in
the corresponding 1996 periods resulting from increased assignments from
existing and new clients. Information technology operating expenses were $49.9
million and $134.6 million in the third quarter and first nine months of 1997
compared to $34.7 million and $96.0 million in the corresponding 1996 periods.
These increases in operating expenses resulted from higher employee related
expenses associated with the increased revenues and higher selling, recruiting
and administrative costs associated with building the infrastructure of the
information technology operations. RCG's revenues and expenses are included in
other revenues and other operating expenses in the accompanying consolidated
statement of income.
At September 30, 1997, the Company's real estate operations had holdings with a
carrying value of $257.7 million, which includes nine shopping centers with an
aggregate carrying value of $116.5 million, office buildings and other
commercial properties, with an aggregate carrying value of $78.2 million, and
undeveloped land with a carrying value of $63.0 million. In the third quarter of
1997, the Company sold, for $16.1 million, an office building located in Fort
Worth, Texas. The gain on this sale was not significant.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal sources of funds consist of dividends, advances and net
tax payments from its subsidiaries. These payments aggregated $88.4 million for
the nine months ended September 30, 1997. 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. Furthermore, the Pennsylvania
Insurance Department has broad discretion to limit the payment of dividends by
insurance companies. 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 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.
Total common stock dividends paid by Reliance Insurance Company during the first
nine months of 1997 were $82.5 million. 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.
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. Reliance Insurance Company carefully monitors its cash,
short-term
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<PAGE>
investments and marketable securities to maintain adequate balances for timely
payment of claims and other operating requirements. At September 30, 1997,
Reliance Insurance Company had $313.4 million of cash and short-term
investments.
For the nine months ended September 30, 1997, the Company utilized $101.1
million of cash flow for operating activities, while in the corresponding 1996
period, the Company generated $23.1 million of cash flow from operating
activities. The decline in operating cash flow reflects higher payments for
property and casualty policy claims and related expenses due, in part, to a
shift in the mix of business to shorter tailed lines. The decline in operating
cash flow also reflects lower levels of operating cash flow from the title
insurance operations.
The Company generated $159.7 million of cash flow from investing activities for
the nine months ended September 30, 1997. For the nine months ended September
30, 1996, the Company used $32.0 million of cash flow for investing activities.
Net sales of marketable securities generated $221.5 million of cash flow in 1997
compared to $15.5 million in the corresponding 1996 period.
For the nine months ended September 30, 1997, the Company used $28.6 million of
cash flow for financing activities, principally for the payment of dividends.
For the nine months ended September 30, 1996, the Company used $8.7 million of
cash flow for financing activities. On July 8, 1997, the Company increased term
loan borrowings by $25 million to $187.5 million. The additional borrowings were
used to redeem all outstanding 7.866% senior reset notes, due December 1, 2000.
The outstanding principal amount of such notes was $25 million, including $9.6
million held by Reliance Insurance Company. The redemption price was 100% of the
principal amount of such notes plus interest from June 1, 1997 to the redemption
date.
The Company has a revolving credit facility with various banks providing for
aggregate maximum outstanding borrowings of $100 million. At September 30, 1997,
borrowings aggregating $20 million were outstanding under this facility.
The National Association of Insurance Commissioners has a risk-based capital
requirement for the property and casualty insurance industry. Risk-based capital
refers to the determination of the amount of statutory capital required for an
insurer based on the risks assumed by the insurer (including, for example,
investment risks, credit risks relating to reinsurance recoverables and
underwriting risks) rather than just the amount of net premiums written by the
insurer. A formula that applies prescribed factors to the various risk elements
in an insurer's business is used to determine the minimum statutory capital
requirement for the insurer. An insurer having less statutory capital than the
formula calculates would be subject to varying degrees of regulatory
intervention, depending on the level of capital inadequacy. All of the Company's
statutory insurance companies have statutory capital in excess of the minimum
required risk-based capital.
Maintaining appropriate levels of statutory surplus is considered important by
the Company's management, state insurance regulatory authorities and the
agencies that rate insurers' claims-paying abilities and financial strength.
Failure to maintain certain levels of statutory capital and surplus could result
in increased scrutiny or, in some cases, action taken by state regulatory
authorities and/or downgrades in an insurer's ratings.
-13-
<PAGE>
RELIANCE GROUP HOLDINGS, INC. AND SUBSIDIARIES
PART II. OTHER INFORMATION
- ----------------------------------------------------------------------------
Item 6. Exhibits and Reports on Form 8-K.
---------------------------------
(a) Exhibits.
10.1 Stock Purchase Agreement by and among Lawyers Title Corporation,
Lawyers Title Insurance Corporation, Reliance Insurance Company
and Reliance Group Holdings, Inc. dated as of August 20, 1997.
Incorporated by reference to Appendix A to the Preliminary Proxy
Statement filed by Lawyers Title Corporation with the SEC on
September 30, 1997 (Commission File No. 1-13990).
27. Financial Data Schedule
(b) Reports on Form 8-K.
--------------------
During the quarter for which this report is filed, the Company
filed a Report on Form 8-K, dated (date of earliest event
reported) August 20, 1997, reporting an Item 5 matter, an
agreement to sell its title insurance subsidiaries.
-14-
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
RELIANCE GROUP HOLDINGS, INC.
(Registrant)
Date: November 14, 1997 /s/ George E. Bello
----------------- -----------------------------------
George E. Bello
Executive Vice President and Controller
(Chief Accounting Officer)
-15-
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 7
<LEGEND>
This schedule contains summary financial information extracted from the
Company's Consolidated Balance Sheet and the Consolidated Statement of Income
and is qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<DEBT-HELD-FOR-SALE> 2,682,383
<DEBT-CARRYING-VALUE> 781,037
<DEBT-MARKET-VALUE> 808,172
<EQUITIES> 782,767
<MORTGAGE> 0
<REAL-ESTATE> 257,734
<TOTAL-INVEST> 4,752,696
<CASH> 70,925
<RECOVER-REINSURE> 4,152,543
<DEFERRED-ACQUISITION> 238,225
<TOTAL-ASSETS> 11,557,899
<POLICY-LOSSES> 6,960,253
<UNEARNED-PREMIUMS> 1,644,388
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 899,084
0
0
<COMMON> 11,481
<OTHER-SE> 885,385
<TOTAL-LIABILITY-AND-EQUITY> 11,557,899
2,034,827
<INVESTMENT-INCOME> 218,494
<INVESTMENT-GAINS> 64,805
<OTHER-INCOME> 184,626
<BENEFITS> 954,147
<UNDERWRITING-AMORTIZATION> 1,076,394
<UNDERWRITING-OTHER> 0
<INCOME-PRETAX> 186,393
<INCOME-TAX> 60,100
<INCOME-CONTINUING> 132,764
<DISCONTINUED> (7,500)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 125,264
<EPS-PRIMARY> $1.04
<EPS-DILUTED> 0
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
