FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended March 31, 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 May 1, 1997, 114,561,000 shares of common stock of Reliance Group
Holdings, Inc. were outstanding.
<PAGE>
RELIANCE GROUP HOLDINGS, INC. AND SUBSIDIARIES
I N D E X
Page
No.
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statement of Income for the Quarters Ended
March 31, 1997 and 1996 (Unaudited)..................... 2
Consolidated Balance Sheet at March 31, 1997 (Unaudited)
and December 31, 1996................................... 3
Consolidated Statement of Changes in Shareholders' Equity
for the Quarter Ended March 31, 1997 (Unaudited)........ 4
Consolidated Condensed Statement of Cash Flows for the
Quarters Ended March 31, 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)
Quarter Ended March 31 1997 1996
- --------------------------------------------------------------------------------
(In thousands, except per share amounts)
Revenues:
Premiums earned.................................... $642,195 $609,867
Net investment income.............................. 74,279 70,717
Gain on sales of investments....................... 15,304 4,468
Other.............................................. 50,167 38,734
-------- --------
781,945 723,786
-------- --------
Claims and expenses:
Policy claims and settlement expenses.............. 319,226 316,707
Policy acquisition costs and other insurance
expenses....................................... 329,462 305,495
Interest........................................... 22,120 22,257
Other operating expenses........................... 61,105 49,639
-------- --------
731,913 694,098
-------- --------
Income before income taxes and equity in
investee company............................... 50,032 29,688
Provision for income taxes......................... (15,700) (9,200)
Equity in investee company......................... 1,554 2,024
-------- --------
Income from continuing operations................ 35,886 22,512
Litigation settlement of discontinued operation.. (7,500) -
-------- --------
Net income ........................................ $ 28,386 $ 22,512
======== ========
Per share information:
Income from continuing operations................ $ .30 $ .19
Litigation settlement of discontinued operation.. (.06) -
-------- --------
Net income ...................................... $ .24 $ .19
======== ========
Weighted average number of common and common
equivalent shares outstanding................ 119,468 117,490
See notes to consolidated financial statements
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<PAGE>
RELIANCE GROUP HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
March 31 December 31
ASSETS 1997 1996
===================================================================================================================================
(In thousands, except per share amount)
<S> <C> <C>
Marketable securities:
Fixed maturities held for investment - at amortized cost
(quoted market $800,493 and $801,738) .................................... $ 803,852 $ 787,836
Fixed maturities available for sale - at quoted market
(amortized cost $2,527,711 and $2,595,929) ............................... 2,508,622 2,623,669
Equity securities - at quoted market (cost $458,756 and $436,053) ........... 708,575 716,606
Short-term investments ...................................................... 203,659 319,165
Cash ............................................................................. 44,299 40,853
Premiums and other receivables ................................................... 1,407,180 1,250,331
Reinsurance recoverables ......................................................... 3,824,298 3,576,953
Investments in real estate - at cost, less accumulated depreciation .............. 280,746 286,664
Investment in investee company ................................................... 160,989 159,157
Deferred policy acquisition costs ................................................ 221,814 215,438
Excess of cost over fair value of net assets acquired, less
accumulated amortization ................................................... 246,969 249,464
Other assets ..................................................................... 386,054 364,995
----------- -----------
$10,797,057 $10,591,131
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
===================================================================================================================================
Unearned premiums ................................................................ $ 1,640,272 $ 1,468,299
Unpaid claims and related expenses ............................................... 6,639,520 6,530,258
Accounts payable and accrued expenses ............................................ 520,169 578,002
Reinsurance ceded premiums payable ............................................... 390,000 365,412
Federal and foreign income taxes, including deferred taxes ....................... 61,155 70,948
Term loans and short-term debt ................................................... 234,504 236,167
Debentures and notes ............................................................. 665,365 665,365
----------- -----------
10,150,985 9,914,451
----------- -----------
Contingencies and commitments
Shareholders' equity:
Common stock, par value $.10 per-share, 225,000
shares authorized, 114,505 and 114,282 shares
issued and outstanding .................................................... 11,450 11,428
Additional paid-in capital .................................................. 541,357 540,465
Retained earnings (deficit) ................................................. (30,786) (50,012)
Net unrealized gain on investments .......................................... 149,428 198,786
Net unrealized loss on foreign currency translation ......................... (25,377) (23,987)
----------- -----------
646,072 676,680
----------- -----------
$10,797,057 $10,591,131
=========== ===========
</TABLE>
See notes to consolidated financial statements
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<PAGE>
RELIANCE GROUP HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY (UNAUDITED)
<TABLE>
<CAPTION>
Net
Unrealized
Net Loss on
Additional Retained Unrealized Foreign
Common Paid-In Earnings Gain on Currency Shareholders'
Stock Capital (Deficit) Investments Translation Equity
==============================================================================================================================
(In thousands, except per share amount)
<S> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1997................. $ 11,428 $ 540,465 $(50,012) $ 198,786 $ (23,987) $ 676,680
Issuance of common stock................. 22 950 972
Transactions of investee company......... (58) 1,209 1,151
Net income............................... 28,386 28,386
Dividends ($.08 per share)............... (9,160) (9,160)
Depreciation after deferred income
taxes............................... (50,567) (50,567)
Foreign currency translation............. (1,390) (1,390)
--------- ---------- -------- ----------- ---------- ------------
Balance, March 31, 1997.................. $ 11,450 $ 541,357 $(30,786) $ 149,428 $ (25,377) $ 646,072
========= ========== ======== =========== ========== ============
See notes to consolidated financial statements
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<PAGE>
RELIANCE GROUP HOLDINGS, INC AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENT OF CASH FLOWS (UNAUDITED)
Quarter Ended March 31 1997 1996
================================================================================
(In thousands)
CASH FLOWS USED BY OPERATING ACTIVITIES ................ $(115,775) $ (84,344)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of:
Fixed maturities available for sale ................ 155,885 263,753
Equity securities .................................. 52,516 81,805
Maturities and repayments of:
Fixed maturities available for sale ................ 95,702 18,073
Fixed maturities held for investment ............... 1,070 22,421
Purchases of:
Fixed maturities available for sale ................ (174,762) (456,544)
Fixed maturities held for investment ............... (20,446) (21,545)
Equity securities .................................. (79,942) (143,816)
Decrease in short-term investments - net ............... 118,575 313,538
Other - net ............................................ (19,373) (8,362)
--------- ---------
129,225 69,323
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in term loans ................................. 30,000 20,816
Increase (decrease) in short-term debt - net ........... 3,906 (1,908)
Repayments of term loans ............................... (35,722) (10,122)
Issuance of common stock ............................... 972 4,751
Dividends .............................................. (9,160) (9,127)
--------- ---------
(10,004) 4,410
--------- ---------
Increase (decrease) in cash ............................ 3,446 (10,611)
Cash, beginning of period .............................. 40,853 52,914
--------- ---------
Cash, end of period .................................... $ 44,299 $ 42,303
========= =========
Supplemental disclosures of cash flow information:
Interest paid .......................................... $ 4,000 $ 3,300
========= =========
Income taxes paid ...................................... $ 1,200 $ 1,600
========= =========
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 March 31,
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. EQUITY IN INVESTEE COMPANY
Equity income in Zenith National Insurance Corp. ("Zenith") was $1.6 million
for the quarter ended March 31, 1997 compared to $2.0 million in the
corresponding 1996 period.
Summarized financial information for Zenith is as follows:
Quarter Ended March 31 1997 1996
- --------------------------------------------------------------------------------
(In thousands, except per share amounts)
Revenues...................................... $ 146,650 $ 134,548
Income before income taxes.................... 10,721 18,914
Net income.................................... 7,100 12,400
Net income per share.......................... .40 .70
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<PAGE>
3. REINSURANCE
The reconciliation of property and casualty insurance direct premiums to net
premiums is as follows (in thousands):
Quarter Ended March 31
----------------------------------------------------
1997 1996
----------------------------------------------------
Premium Premiums Premiums Premiums
Written Earned Written Earned
--------- --------- --------- --------
Direct............ $ 910,488 $ 777,480 $ 774,655 $ 713,714
Assumed........... 110,199 83,029 96,495 73,542
Ceded............. (513,359) (400,199) (395,667) (347,455)
---------- ---------- ---------- ---------
Net Premiums...... $ 507,328 $ 460,310 $ 475,483 $ 439,801
========== ========== ========== =========
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):
Quarter Ended March 31
-----------------------------
1997 1996
------------ -----------
Gross.......................... $ 587,662 $ 464,763
Reinsurance recoveries......... (277,196) (162,622)
----------- ----------
Net policy claims and
settlement expenses.......... $ 310,466 $ 302,141
=========== ==========
4. LEGAL PROCEEDINGS OF DISCONTINUED OPERATION
On April 21, 1997, Prometheus Funding Corp., formerly known as Frank B. Hall &
Co. Inc. ("Hall"), agreed to amend the settlement agreement dated June 2, 1989,
which is described in note 14 of the Company's 1996 Annual Report, and pursuant
to which Hall, subject to court approval, settled the action brought by the
Superintendent of Insurance of New York relating to the liquidation of Union
Indemnity Insurance Company of New York, formerly a subsidiary of Hall. In
connection with the amendment, (i) Hall agreed to pay an additional $7.5
million, and (ii) certain parties that had filed an objection to the settlement
agreement have withdrawn that objection and have agreed to support the
settlement. Other objections remain on file. The settlement agreement, as
amended, will not become effective until final court approval and there is no
assurance that such approval will be obtained.
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<PAGE>
5. 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 this Statement
effective January 1, 1996, is as follows:
Quarter Ended March 31 1997 1996
- -------------------------------------------------------------------------------
Basic income per share:
Income from continuing operations..................... $ .31 $ .20
Litigation settlement of discontinued operation....... (.06) -
------ ------
Net income............................................ $ .25 $ .20
====== ======
Diluted income per share:
Income from continuing operations..................... $ .30 $ .19
Litigation settlement of discontinued operation....... (.06) -
------ ------
Net income............................................ $ .24 $ .19
====== ======
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<PAGE>
RELIANCE GROUP HOLDINGS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
- -------------------------------------------------------------------------------
OVERVIEW
The Company had income from continuing operations, before gains on sales of
investments, of $25.9 million ($.22 per share) in the first quarter of 1997
compared to $19.6 million ($.17 per share) in the first quarter of 1996. This
increase resulted from greater operating profits in the property and casualty
and title insurance operations. Net income in the first quarter of 1997 was
$28.4 million ($.24 per share) and includes after-tax gains on sales of
investments of $9.9 million ($.08 per share) and a charge of $7.5 million ($.06
per share) for a litigation settlement pertaining to a subsidiary which was
discontinued in 1991. (See note 4 to the accompanying unaudited consolidated
financial statements for further discussion of this charge). Net income in the
first quarter of 1996 was $22.5 million ($.19 per share) which included
after-tax gains on sales of investments of $2.9 million ($.02 per share).
PROPERTY AND CASUALTY INSURANCE OPERATIONS
Net premiums written and net premiums earned were $507.3 million and $460.3
million in the first quarter of 1997 compared to $475.5 million and $439.8
million in the corresponding 1996 period. The increases in net premiums written
and earned resulted from growth in both domestic and international operations
and reflect increased writings in ocean and inland marine, accident and health
and surety lines, as well as premiums generated from the start-up of the
Company's non-standard automobile insurance business.
Property and casualty underwriting results remain strong. The combined ratio
(calculated on a GAAP basis), after policyholders' dividends, was 101.1% in the
first quarter of 1997 compared to 101.9% in the corresponding 1996 period. The
underwriting loss for the first three months of 1997 was $7.1 million compared
to $10.1 million in the corresponding 1996 period. The strong underwriting
results in 1997 reflect underwriting profits in surety, general liability and
workers' compensation lines of business, partially offset by continued
underwriting losses in the commercial automobile line.
PROPERTY AND CASUALTY INSURANCE INVESTMENT RESULTS
Net investment income of the property and casualty insurance operations
increased to $66.3 million during the three-month period ending March 31, 1997
from $63.4 million in the corresponding 1996 period. This increase resulted from
growth in the size of the fixed maturity investment portfolio.
-9-
<PAGE>
Gains on sales of investments were $14.3 million in the first quarter of 1997,
resulting from sales of equity securities and fixed maturity investments
available for sale, compared to $4.0 million in the corresponding 1996 period.
TITLE INSURANCE OPERATIONS
Premiums and fees increased in the first quarter of 1997 to $181.9 million from
$170.1 million in the corresponding quarter of 1996. The growth in premiums and
fees resulted from higher agency revenues reflecting the strong market
conditions that existed in the latter half of 1996. In addition, commercial
title insurance revenues increased in the first three months of 1997 when
compared to the corresponding 1996 period.
Agency commissions were $84.3 million during the three-month period ended March
31, 1997 compared to $75.8 million in the corresponding 1996 period. Other
expenses were $90.4 million in the first quarter of 1997 compared to $83.8
million in the corresponding 1996 period, and the expense ratio of the title
insurance operations (which includes agency commissions) was 95.5% in the first
quarter of 1997 compared to 93.0% in the corresponding 1996 period. The expense
ratios are generally at their highest during the first quarter as title
insurance revenues are at a seasonal low point. The provision for policy claims
was $8.8 million in the first quarter of 1997 compared to $14.6 million in the
corresponding 1996 period. The title insurance operations have benefitted from
favorable claims experience in recent years, a trend which is expected to
continue.
INVESTMENT PORTFOLIO
At March 31, 1997, the Company's investment portfolio aggregated $4.04 billion
(at cost), of which 11% was invested in equity securities. The Company seeks to
maintain a diversified and balanced fixed maturity portfolio representing a
broad spectrum of industries and types of securities. The portfolio is managed
to achieve a proper balance of safety, liquidity and investment yields.
The Company's fixed maturity portfolio consists of investment grade securities
(those rated "BBB" or better by Standard & Poor's) and, to a lesser extent,
non-investment grade and non-rated securities. The risk of default is generally
considered to be greater for non-investment grade securities, when compared to
investment grade securities, since these issues may be more susceptible to
severe economic downturns. At March 31, 1997, the carrying values of
non-investment grade securities and securities not rated by Standard & Poor's
were $470.1 million (13% of the fixed income portfolio) and $100.9 million (3%
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.
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<PAGE>
OTHER OPERATIONS
RCG International Inc. ("RCG"), a subsidiary of the Company, primarily provides
technical services in the information technology industry. Information
technology revenues were $38.4 million in the first quarter of 1997 compared to
$30.3 million in the first quarter of 1996. The increase in revenues resulted
from increased assignments from existing and new clients. Information technology
operating expenses were $38.4 million in the first quarter of 1997 compared to
$29.4 million in the corresponding 1996 period. The increase in operating
expenses reflect 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 March 31, 1997, the Company's real estate operations had holdings with a
carrying value of $280.7 million, which includes nine shopping centers with an
aggregate carrying value of $118.9 million, office buildings and other
commercial properties, with an aggregate carrying value of $99.1 million, and
undeveloped land with a carrying value of $62.7 million.
EQUITY IN INVESTEE COMPANY
Equity in investee company income was $1.6 million in the first quarter of 1997
compared to $2.0 million in the corresponding 1996 period, from the Company's
investment in Zenith National Insurance Corp. ("Zenith"). The decline in
investee company income resulted from increased underwriting losses in Zenith's
workers' compensation business.
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 $29.8 million
for the three months ended March 31, 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.
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<PAGE>
Total common stock dividends paid by Reliance Insurance Company during the first
three months of 1997 were $35.7 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. For the three months ended March 31, 1997, Reliance
Insurance Company utilized $84.5 million of cash flow for operating activities.
Cash flow from operating activities is traditionally low during the first
quarter of the year, reflecting the increase in accounts receivable and payments
of certain expenses, such as premium taxes and contingent commissions of the
property and casualty insurance operations, which are accrued during the
previous year. Reliance Insurance Company carefully monitors its cash,
short-term investments and marketable securities to maintain adequate balances
for the timely payment of claims and other operating requirements. At March 31,
1997, Reliance Insurance Company had $244.9 million of cash and short-term
investments.
For the three months ended March 31, 1997, the Company utilized $115.8 million
of cash flow for operating activities compared to $84.3 million in the
corresponding 1996 period. The decline in operating cash flow reflects higher
payments for property and casualty policy claims and related expenses and lower
levels of operating cash flow from the title insurance operations.
The Company generated $129.2 million of cash flow from investing activities for
the three months ended March 31, 1997 compared to $69.3 million in the
corresponding 1996 period. Net sales of marketable securities generated $148.6
million of cash flow in 1997 compared to $77.7 million in the corresponding 1996
period.
For the three months ended March 31, 1997, the Company used $10.0 million of
cash flow for financing activities, principally for the payment of dividends.
The Company generated $4.4 million of cash flow from financing activities for
the three months ended March 31, 1996, primarily from term loan borrowings. On
May 9, 1997, Reliance Financial Services Corporation ("Reliance Financial")
announced it would redeem all of its outstanding 7.866% senior reset notes, due
December 1, 2000. The redemption price will be 100% of the principal amount
of such notes plus interest from June 1, 1997 to the July 8, 1997 redemption
date. The outstanding principal amount of such notes is $25 million, including
$9.6 million held by Reliance Insurance Company.
The Company has a revolving credit facility with various banks providing for
aggregate maximum outstanding borrowings of $100 million. At March 31, 1997,
borrowings aggregating $32 million were outstanding under this facility.
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<PAGE>
The provisions of certain of the Company's notes and debentures contain
limitations on the payment of dividends to shareholders, including maintaining a
minimum fixed charge coverage ratio. At May 6, 1997, the Company could pay up to
$32.3 million 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.
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 March 31, 1997, the partnership's total outstanding debt
was $174.6 million. As of March 31, 1997, Reliance Financial guaranteed $38
million 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 need to seek additional financing from other
sources, which may include the Company. Reliance Financial receives a fee of .5%
per annum on the average outstanding debt covered by the guarantee. The Company
has issued a line of credit to the partnership in the amount of $13 million.
Borrowings under the line of credit mature on June 30, 2005 and bear a fixed
interest rate of 10%. At March 31, 1997, borrowings of $12.4 million were
outstanding under the line of credit.
The National Association of Insurance Commissioners has a risk-based capital
requirement for the property and casualty insurance industry. Risk-based capital
refers to the determination of the amount of statutory capital required for an
insurer based on the risks assumed by the insurer (including, for example,
investment risks, credit risks relating to reinsurance recoverables and
underwriting risks) rather than just the amount of net premiums written by the
insurer. A formula that applies prescribed factors to the various risk elements
in an insurer's business is used to determine the minimum statutory capital
requirement for the insurer. An insurer having less statutory capital than the
formula calculates would be subject to varying degrees of regulatory
intervention, depending on the level of capital inadequacy. All of the Company's
statutory insurance companies have statutory capital in excess of the minimum
required risk-based capital.
Maintaining appropriate levels of statutory surplus is considered important by
the Company's management, state insurance regulatory authorities and the
agencies that rate insurers' claims-paying abilities and financial strength.
Failure to maintain certain levels of statutory capital and surplus could result
in increased scrutiny or, in some cases, action taken by state regulatory
authorities and/or downgrades in an insurer's ratings.
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<PAGE>
RELIANCE GROUP HOLDINGS, INC. AND SUBSIDIARIES
PART II. OTHER INFORMATION
- -------------------------------------------------------------------------------
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
10.1 Amendment No. 1 , dated April 21, 1997, to the 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 Frank B. Hall & Co. Inc. (now known
as Prometheus Funding Corp.)
. 27. Financial Data Schedule.
(b) Reports on Form 8-K.
No reports on Form 8-K were filed during the quarter ended March
31, 1997.
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<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: May 13, 1997 /s/ George E. Bello
---------------------------------
George E. Bello
Executive Vice President and Controller
(Chief Accounting Officer)
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<PAGE>
AMENDMENT NO. 1 TO SETTLEMENT AGREEMENT
---------------------------------------
WHEREAS, a Settlement Agreement dated as of June 2, 1989, was entered
into by and between the parties listed below.
WHEREAS, the parties to that Settlement Agreement desire to amend the
Settlement Agreement as set forth herein.
ACCORDINGLY, the parties to that Settlement Agreement, through their
respective undersigned counsel, in accordance with paragraph 6.1 of the
Settlement Agreement, agree as follows:
1. Paragraph 1.1 set forth on page three of the Settlement Agreement
is hereby amended to read:
1.1 On or before the effective date of this Settlement
Agreement, as described in Article Three hereof (the "Effective
Date"), Hall will pay or cause to be paid to the Liquidator the sum of
TWENTY SIX MILLION, FOUR HUNDRED THOUSAND DOLLARS ($26,400,000.00)
plus interest as set forth below (the "Down Payment"). The interest
included in the Down Payment shall be eight percent (8%) per annum for
the period commencing with the last day to file a notice of appeal
from entry of the Trial Court's order with respect to the Settlement
Agreement, as described in paragraph 3.3(b) herein, and ending with
the day the Down Payment is received by the Liquidator. Said Down
Payment shall be made by wire transfer in accordance with the written
instructions to be provided by the Liquidator to Hall.
2. Paragraph 1.3 of the Settlement Agreement is hereby amended to
read:
1.3 The Annual Payments (but not the Down Payment) shall be
reduced to the extent that any of the Settling Defendants incurs any
liability for any judgment(s) or settlement(s) and related costs or
expenses ("Paid Loss") as a result of any claim, suit or action brought
at any time against any one or more of them by any person, partnership,
corporation or other legal or governmental
<PAGE>
entity on any claim, suit or action arising out of or relating to the
operations, business, insolvency or liquidation of Union as provided
below ("Accepted Claims"). Accepted Claims shall include: (i) any
claims asserted against the Settling Defendants which are based upon
any legitimate proof of claim in the Union liquidation proceeding,
(ii) any claims alleged against any of the Settling Defendants in the
Liquidator Action, and (iii) the claims set forth in the lawsuits
listed in Exhibit F hereto. The Settling Defendants represent and
warrant that as of the date of Amendment No. 1 to this Settlement
Agreement, (i) no Settling Defendant has received any notice of any
claim, suit, or action which constitutes an Accepted Claim other than
those claims which are listed in Exhibit F to the Settlement
Agreement, and (ii) no Paid Loss has occurred. Any suit or action
brought against any of the Settling Defendants prior to the date of
this Amendment No. 1 to this Settlement Agreement which is not listed
in Exhibit F shall not be deemed an Accepted Claim; any claim existing
prior to the date of Amendment No. 1 to this Settlement Agreement of
which the Settling Defendants are aware which is not listed in Exhibit
F shall not be deemed an Accepted Claim; and the Annual Payment shall
not be reduced by the amounts of any Paid Loss incurred prior to the
date of Amendment No. 1 to this Settlement Agreement. Subject to the
foregoing, any Paid Loss incurred in connection with Accepted Claims
shall be subtracted from the next scheduled Annual Payment (but not
any Annual Payments previously paid to the Liquidator); if the Paid
Loss is greater than the next scheduled Annual Payment, the remaining
balance shall be subtracted from the scheduled Annual Payment
immediately following the next scheduled Annual Payment and so on (if
necessary) to continue until the entire Paid Loss is set-off. For
example, if a $1 million Paid Loss is incurred in the first year after
the Effective Date in connection with an Accepted Claim, this Amount
shall be subtracted from the $1.5 million Annual Payment due on the
first anniversary of the Effective Date and Hall shall pay only $.5
million on the first anniversary date of the Effective Date. If a $10
million Paid Loss is incurred in
2
<PAGE>
the first year after the Effective Date in connection with an Accepted
Claim, then the $29 million Annual Payments owed by Hall shall be
reduced to $19 million, and Hall shall not make any payments until Year
5, when it shall pay $2 million.
3. Paragraph 5.4 of the Settlement Agreement is hereby amended to
read:
5.4 Each Settling Defendant shall individually indemnify and hold
harmless the Liquidator from and against any and all claims, debts,
damages, liabilities, demands, obligations, costs, expenses (including
reasonable attorneys' fees), disputes, actions and causes of action of
every nature in connection with, arising from, or relating to any
breach of warranty or representations made by such Settling Defendant
in, or failure to fulfill his obligations under, this Settlement
Agreement. The Settling Defendants and the Liquidator agree that as of
the date of Amendment No. 1 to this Settlement Agreement, neither the
Liquidator nor any individual Settling Defendant has breached any
representation or warranty or failed to fulfill obligations under this
Settlement Agreement, and that no claims for indemnification or breach
shall be asserted on account of any alleged action or failure to act
prior to the date of Amendment No. 1 to this Settlement Agreement.
4. Paragraph 6.6 of the Settlement Agreement is hereby amended to
read:
6.6 Communications with respect to this Settlement Agreement
shall be in writing and shall be sent certified mail, return receipt
requested, or by Federal Express to:
To the Superintendent:
Joseph Termini, Esq.
General Counsel
New York Superintendent of Insurance
Liquidation Bureau
123 William Street
New York, New York 10038
(212) 341-6395
3
<PAGE>
To Hall on behalf of all Settling Defendants,
care of:
Joseph S. Allerhand, Esq.
WEIL, GOTSHAL & MANGES LLP
767 Fifth Avenue
New York, New York 10153
(212) 310-8211
5. Except as provided herein, this Amendment shall not constitute a waiver
to or modification of any provision, term, condition, representation or warranty
of the Settlement Agreement.
6. This Amendment may be executed in two or more counterparts, each of
which shall be deemed an original but all of which together shall constitute one
and the same instrument.
Dated: April 21, 1997
ANDERSON KILL & OLICK, P.C. WEIL, GOTSHAL & MANGES LLP
By /s/ R. Mark Keenan By /s/ Joseph S. Allerhand
------------------------ ---------------------------
R. Mark Keenan Joseph S. Allerhand
1251 Avenue of the Americas 767 Fifth Avenue
New York, NY 10020-1182 New York, NY 10153
(212) 278-1888 (212) 310-8000
Counsel for the Superintendent Counsel for Defendants Prometheus
of Insurance of the State of Funding Corp. (formerly known as
New York Frank B. Hall & Co. Inc.), Frank B.
Hall & Co. Brokerage, Inc., Frank
DANIEL P. LEVITT, ESQ. B. Hall Ltd. (Bermuda), FBH
Underwriting Managers Ltd., Parker
By /s/ Daniel P. Levitt & Co., Interocean Ltd., Frank B.
------------------------ Hall Re of New York, Inc., R.J.
Daniel P. Levitt Saey Insurance Agency, Inc., Union
Group, Inc., Union Treaty and
551 Fifth Avenue Excess Co., Inc., Intercontinental
Suite 1922 Re, Inc., Frank B. Hall & Co. of
New York, NY 10176 Alaska, Frank B. Hall & Co. of
(212) 687-3455 Connecticut, Inc., Frank B. Hall &
Co. of Michigan, Frank B. Hall &
Counsel for Defendants Michael Co. of Florida,
J. Cloherty, Melvin A. Holmes
and Joseph R. Wiedemann
4
<PAGE>
SKADDEN, ARPS, SLATE, MEAGHER & FLOM Frank B. Hall & Co. of Louisiana,
Frank B. Hall & Co. of Illinois,
By /s/ Irene A. Sullivan Frank B. Hall & Co. of
----------------------- Massachusetts, Associated Insurance
Irene A. Sullivan Agencies Inc., Frank B. Hall & Co.
of Pennsylvania, Inc., I.I.U.
919 Third Avenue Management Inc., Frank B. Hall &
New York, NY 10022 Co. of Wisconsin, Inc., Frank B.
(212) 735-2091 Hall & Co. of Colorado, Great
Plains Insurance Co., Inc., Frank
Counsel for Defendant Marvin J. Cashion B. Hall & Co. of Missouri, Frank B.
Hall & Co. of Texas, Inc., Frank B.
Hall & Co. of New York, Inc., Frank
KAPLAN, THOMASHOWER & LANDAU B. Hall & Co. of California,
Sherwood Insurance Services, Inc.,
By /s/ Mark S. Landau Frank B. Hall & Co. of Rhode
----------------------- Island, Inc., Frank B. Hall & Co.
Mark S. Landau of Washington, Inc., Frank B. Hall
& Co. of Ohio, Inc., Frank B. Hall
747 Third Avenue & Co. of Southern Nevada, Inc.
New York, NY 10017 Global Surplus Insurance Services,
(212) 593-1700 Inc., Leslie & Godwin Holdings Co.
Counsel for Defendant (P.L.C.), Sixty-Seven Brokerage
John J. Tickner Corporation, Hall Companies 1-30,
John Addeo, George Corde, Robert K.
BAER, MARKS & UPHAM LLP Conroy, Clarke deWaters, William R.
Dolan, Archibald M. Foster, Jr.,
By /s/ Neal S. Barila Henry E. Froebel, John P. Iacono,
----------------------- Douglas L. King, Thomas G. O'Brien,
Neal S. Barila III, Albert J. Tahmoush and Robert
A. Wilson.
805 Third Avenue
New York, NY 10022
(212) 702-5917
Counsel for Defendants Francis T. Barley,
Monroe Birnberg, Richard L. Boyle,
George L. Casler, Simeon P. Crandall,
Joseph J. Jaworski, Winifred Mohr, Carol
J. Popp, Morris Rafkin, and William G.
Sigismondo.
5
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND> This schedule contains summary financial information from
the Company's Consolidated Balance Sheet and the Consolidated
Statement of Income and is qualified in its entirety by
reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<DEBT-HELD-FOR-SALE> 2,508,622
<DEBT-CARRYING-VALUE> 803,852
<DEBT-MARKET-VALUE> 800,493
<EQUITIES> 708,575
<MORTGAGE> 0
<REAL-ESTATE> 280,746
<TOTAL-INVEST> 4,505,454
<CASH> 44,299
<RECOVER-REINSURE> 3,824,298
<DEFERRED-ACQUISITION> 221,814
<TOTAL-ASSETS> 10,797,057
<POLICY-LOSSES> 6,639,520
<UNEARNED-PREMIUMS> 1,640,272
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 899,869
0
0
<COMMON> 11,450
<OTHER-SE> 634,622
<TOTAL-LIABILITY-AND-EQUITY> 10,797,057
642,195
<INVESTMENT-INCOME> 74,279
<INVESTMENT-GAINS> 15,304
<OTHER-INCOME> 50,167
<BENEFITS> 319,226
<UNDERWRITING-AMORTIZATION> 329,462
<UNDERWRITING-OTHER> 0
<INCOME-PRETAX> 50,032
<INCOME-TAX> 15,700
<INCOME-CONTINUING> 35,886
<DISCONTINUED> (7,500)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 28,386
<EPS-PRIMARY> $0.24
<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>
