<PAGE>
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 1998
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, 1998, 116,040,000 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.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statement of Income for the Quarters and
Nine-Month Periods Ended September 30, 1998 and 1997
(Unaudited)...................................................... 2
Consolidated Balance Sheet at September 30, 1998
(Unaudited) and December 31, 1997................................ 3
Consolidated Statement of Changes in Shareholders' Equity
for the Nine-Month Period Ended September 30, 1998 (Unaudited)... 4
Consolidated Condensed Statement of Cash Flows for the
Nine-Month Periods Ended September 30, 1998 and 1997
(Unaudited)...................................................... 5
Notes to Consolidated Financial Statements (Unaudited)........... 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.................... 14
PART II. OTHER INFORMATION, AS APPLICABLE............................... 21
SIGNATURES.............................................................. 22
<PAGE>
RELIANCE GROUP HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME (UNAUDITED)
<TABLE>
<CAPTION>
Quarter Ended Nine Months Ended
September 30 September 30
1998 1997 1998 1997
- ----------------------------------------------------------------------------------------------------------------------------------
(In thousands, except per share amounts)
<S> <C> <C> <C> <C>
Revenues:
Premiums earned............................................... $ 588,341 $ 702,703 $ 1,808,588 $ 2,034,827
Net investment income......................................... 74,908 73,571 224,608 218,494
Gain on sales of investments.................................. 1,483 36,070 107,421 64,805
Gain on sales of subsidiaries................................. - - 197,258 -
Other......................................................... 83,339 68,901 235,927 184,626
---------- ---------- ------------ -----------
748,071 881,245 2,573,802 2,502,752
---------- ---------- ------------ -----------
Claims and expenses:
Policy claims and settlement expenses......................... 376,471 308,885 1,092,056 954,147
Policy acquisition costs and other insurance expenses......... 226,240 387,266 733,218 1,076,394
Interest...................................................... 18,906 22,239 61,675 66,465
Other operating expenses...................................... 93,858 81,206 269,581 218,953
---------- ---------- ------------ -----------
715,475 799,596 2,156,530 2,315,959
---------- ---------- ------------ -----------
Income before income taxes and equity
in investee companies..................................... 32,596 81,649 417,272 186,793
Provision for income taxes.................................... (9,000) (26,900) (131,100) (60,500)
Equity in investee companies.................................. 6,410 2,567 17,017 6,471
---------- ---------- ------------ -----------
Income from continuing operations............................. 30,006 57,316 303,189 132,764
Litigation settlement of discontinued operation............... - - - (7,500)
---------- ---------- ------------ -----------
Income before extraordinary item.............................. 30,006 57,316 303,189 125,264
Extraordinary item - early extinguishment of debt............. - - (7,504) -
---------- ---------- ------------ -----------
Net income.................................................... $ 30,006 $ 57,316 $ 295,685 $ 125,264
========== ========== ============ ===========
Basic per share information:
Income from continuing operations............................. $ .26 $ .50 $ 2.62 $ 1.16
========== ========== ============ ===========
Net income ................................................... $ .26 $ .50 $ 2.56 $ 1.09
========== ========== ============ ===========
Diluted per share information:
Income from continuing operations............................. $ .25 $ .48 $ 2.52 $ 1.12
========== ========== ============ ===========
Net income ................................................... $ .25 $ .48 $ 2.46 $ 1.06
========== ========== ============ ===========
</TABLE>
See notes to consolidated financial statements
-2-
<PAGE>
RELIANCE GROUP HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
September 30 December 31
ASSETS 1998 1997
- --------------------------------------------------------------------------------------------------------------------------
(In thousands, except per share amount)
<S> <C> <C>
Marketable securities:
Fixed maturities held for investment - at amortized cost
(quoted market $631,182 and $663,744)......................... $ 588,013 $ 636,119
Fixed maturities available for sale - at quoted market
(amortized cost $2,492,445 and $2,214,963).................... 2,540,064 2,317,673
Equity securities - at quoted market (cost $292,082
and $376,065)................................................. 679,171 708,563
Short-term investments........................................... 499,216 487,614
Cash.................................................................. 51,521 53,661
Premiums and other receivables........................................ 1,690,391 1,460,426
Reinsurance recoverables.............................................. 4,617,267 4,241,015
Investment in investee companies...................................... 575,717 166,673
Deferred policy acquisition costs..................................... 292,691 248,572
Excess of cost over fair value of net assets acquired, less
accumulated amortization........................................ 222,244 229,484
Other assets.......................................................... 521,656 494,067
Net assets of title insurance operations.............................. - 288,619
------------ -------------
$ 12,277,951 $ 11,332,486
============ =============
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Unearned premiums..................................................... $ 1,896,482 $ 1,722,258
Unpaid claims and related expenses.................................... 6,947,460 6,669,508
Accounts payable and accrued expenses................................. 812,193 579,582
Reinsurance ceded premiums payable.................................... 513,582 402,972
Federal and foreign income taxes, including deferred taxes............ 155,415 92,568
Term loans and short-term debt........................................ 255,671 253,083
Debentures and notes.................................................. 470,686 650,000
------------ -------------
11,051,489 10,369,971
------------ -------------
Contingencies and commitments
Shareholders' equity:
Common stock, par value $.10 per share, 225,000
shares authorized, 116,036 and 114,857 shares
issued and outstanding......................................... 11,604. 11,486
Additional paid-in capital....................................... 549,557 542,049
Retained earnings ............................................... 410,618 142,701
Accumulated other comprehensive income........................... 254,683 266,279
------------ -------------
1,226,462 962,515
------------ -------------
$ 12,277,951 $ 11,332,486
============ =============
</TABLE>
See notes to consolidated financial statements
-3-
<PAGE>
RELIANCE GROUP HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY (UNAUDITED)
<TABLE>
<CAPTION>
Accumulated Other
Comprehensive Income
------------------------
Net
Unrealized
Net Loss on
Additional Unrealized Foreign
Common Paid-In Retained Gain on Currency Shareholders'
Stock Capital Earnings Investments Translation Equity
- ------------------------------------------------------------------------------------------------------------------------------------
(In thousands, except per share amount)
<S> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1998..................... $ 11,486 $ 542,049 $ 142,701 $ 292,081 $ (25,802) $ 962,515
Issuance of common stock..................... 118 5,287 5,405
Transactions of investee
companies and other.................. 2,221 (402) 1,819
Net income................................... 295,685 295,685
Dividends ($.24 per share)................... (27,768) (27,768)
Depreciation after deferred
income taxes....................... (7,482) (7,482)
Foreign currency translation................. (3,712) (3,712)
-------- ---------- --------- ----------- ---------- ------------
Balance, September 30, 1998.................. $ 11,604 $ 549,557 $ 410,618 $ 284,197 $ (29,514) $ 1,226,462
======== ========== ========= =========== =========== ============
</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 1998 1997
- -------------------------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C>
CASH FLOWS USED BY OPERATING ACTIVITIES............................. $ (44,086) $ (101,073)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of:
Fixed maturities available for sale............................. 376,715 301,636
Equity securities............................................... 362,617 336,064
Maturities and repayments of:
Fixed maturities available for sale............................. 301,641 200,600
Fixed maturities held for investment............................ 76,115 30,526
Purchases of:
Fixed maturities available for sale............................. (917,922) (529,444)
Fixed maturities held for investment............................ (26,807) (28,852)
Equity securities............................................... (114,306) (195,569)
(Increase) decrease in short-term investments - net................. (32,700) 86,554
Proceeds from sales of subsidiaries................................. 271,852 -
Other - net......................................................... (48,761) (41,770)
------------ ------------
248,444 159,745
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in term loans.............................................. 135,000 70,000
Increase in short-term debt - net................................... 317 2,775
Repayments of term loans............................................ (130,741) (60,749)
Redemption of debentures and notes.................................. (188,711) -
Issuance of common stock............................................ 5,405 2,257
Repurchases of senior reset notes................................... - (15,365)
Dividends........................................................... (27,768) (27,518)
------------ ------------
(206,498) (28,600)
------------ ------------
(Decrease) increase in cash......................................... (2,140) 30,072
Decrease in cash of the title insurance operations.................. - 2,582
Cash, beginning of period........................................... 53,661 26,525
------------ ------------
Cash, end of period................................................. $ 51,521 $ 59,179
============ ============
Supplemental disclosures of cash flow information:
Interest paid....................................................... $ 41,000 $ 42,100
============ ============
Income taxes paid................................................... $ 77,100 $ 31,900
============ ============
</TABLE>
See notes to consolidated financial statements
-5-
<PAGE>
RELIANCE GROUP HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
================================================================================
1. Unaudited Consolidated Financial Statements
In the opinion of management, the accompanying unaudited consolidated
financial statements include all adjustments (consisting of normal recurring
accruals only) considered necessary to present fairly the financial position
at September 30, 1998, 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, 1997) and additional financial information, see the Company's
Annual Report on Form 10-K for the year ended December 31, 1997.
Certain reclassifications have been made to the Company's prior year
consolidated financial statements to conform with the current year's
consolidated financial statements.
2. Sale of Subsidiaries
On February 27, 1998, the Company completed the sale of its title insurance
operations to Lawyers Title Corporation whose name was changed to LandAmerica
Financial Group, Inc. ("LandAmerica") on that date. As consideration for the
sale, the Company received $266.6 million in cash, 4,039,473 shares of
LandAmerica common stock and 2,200,000 shares of LandAmerica 7% cumulative
convertible preferred stock having a stated value of $110.0 million and which
is initially convertible into 4,824,561 shares of LandAmerica 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. The
total sale proceeds were $662.1 million. The Company owns approximately 27% of
LandAmerica's outstanding common stock and, on a diluted basis, 45% of
LandAmerica's common stock, assuming the conversion of the preferred stock,
and has three representatives on its 14 member board of directors.
Accordingly, the Company accounts for its investment in LandAmerica by the
equity method of accounting for periods subsequent to the sale date. The
transaction resulted in an after-tax gain of $242.9 million of which $133.6
million ($1.11 per diluted share) was recognized in the first nine months of
1998. The deferred gain of $109.3 million will be recognized as the equity
securities received from LandAmerica are sold. The deferred gain, exclusive of
a related deferred tax amount, is included in "accounts payable and accrued
expenses" in the accompanying consolidated balance sheet.
6
<PAGE>
Revenues and expenses of the title insurance operations included in the
accompanying unaudited consolidated statement of income are as follows:
<TABLE>
<CAPTION>
Quarter Ended Nine Months Ended
September 30 September 30
1997 1998 (1) 1997
- -----------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C>
Revenue:
Premiums earned.......................... $ 226,194 $ 139,132 $ 612,897
Net investment income.................... 7,464 5,276 23,236
Gain on sales of investments............. 86 305 1,187
--------- --------- ---------
233,744 144,713 637,320
--------- --------- ---------
Expenses:
Agency commissions(2).................... 98,459 56,815 268,906
Other expenses(2)........................ 104,406 69,936 294,773
Provision for policy claims.............. 10,725 6,676 29,470
--------- --------- ---------
213,590 133,427 593,149
--------- --------- ---------
Income before income taxes............... $ 20,154 $ 11,286 $ 44,171
========= ========= =========
</TABLE>
(1) Amounts for the nine months ended September 30, 1998 are through the date
of the sale, February 27, 1998.
(2) Included in "policy acquisition costs and other insurance expenses" in the
accompanying unaudited consolidated statement of income.
In addition, in the first quarter of 1998 the Company sold a subsidiary, CSC
of Washington D.C., Inc., which resulted in an after-tax gain of $1.3 million,
net of tax expense of $1.8 million.
7
<PAGE>
3. Equity In Investee Companies
The Company's investment in investee companies is as follows:
<TABLE>
<CAPTION>
September 30 December 31
1998 1997
- -----------------------------------------------------------------------------
(In thousands)
<S> <C> <C>
LandAmerica Financial Group, Inc............... $ 408,073 $ -
Zenith National Insurance Corp................. 167,644 166,673
--------- ---------
$ 575,717 $ 166,673
========= =========
</TABLE>
The Company's equity in investee companies is as follows:
<TABLE>
<CAPTION>
Quarter Ended Nine Months Ended
September 30 September 30
1998 1997 1998 1997
- --------------------------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C> <C>
LandAmerica Financial Group, Inc. (1)....................... $ 4,837 $ - $ 11,159 $ -
Zenith National Insurance Corp.............................. 1,573 2,567 5,858 6,471
------- ------- -------- -------
$ 6,410 $ 2,567 $ 17,017 $ 6,471
======= ======= ======== =======
</TABLE>
(1) The equity in investee company for the nine months ended September 30,
1998 includes equity earnings for the seven month period ending
September 30, 1998.
Summarized financial information for LandAmerica Financial Group, Inc. is as
follows:
<TABLE>
<CAPTION>
Nine Months Ended September 30 1998
- -------------------------------------------------------------------------------
(In thousands, except per share amount)
<S> <C>
Revenues...................................................... $ 1,277,870
Income before income taxes.................................... 99,979
Net income.................................................... 64,122
Net income per diluted share.................................. 3.61
</TABLE>
8
<PAGE>
Summarized financial information for Zenith National Insurance Corp. is as
follows:
<TABLE>
<CAPTION>
Nine Months Ended September 30 1998 1997
- -------------------------------------------------------------------------------
(In thousands, except per share amounts)
<S> <C> <C>
Revenues............................................ $ 474,363 $ 446,145
Income before income taxes.......................... 27,820 35,453
Net income.......................................... 18,200 23,000
Net income per diluted share........................ 1.06 1.29
</TABLE>
4. Reinsurance
The reconciliation of property and casualty insurance direct premiums to net
premiums is as follows (in thousands):
<TABLE>
<CAPTION>
Nine Months Ended September 30
----------------------------------------------------------------
1998 1997
----------------------------------------------------------------
Premiums Premiums Premiums Premiums
Written Earned Written Earned
----------- ----------- ----------- ------------
<S> <C> <C> <C> <C>
Direct............................. $ 2,925,751 $ 2,777,039 $ 2,561,983 $ 2,411,434
Assumed............................ 532,029 499,189 344,281 300,833
Ceded.............................. (1,639,053) (1,606,772) (1,369,431) (1,290,337)
----------- ----------- ----------- -----------
Net Premiums....................... $ 1,818,727 $ 1,669,456 $ 1,536,833 $ 1,421,930
=========== =========== =========== ===========
</TABLE>
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):
<TABLE>
<CAPTION>
Nine Months Ended
September 30
---------------------------
1998 1997
------------ -----------
<S> <C> <C>
Gross.............................. $ 2,129,625 $ 1,853,776
Reinsurance recoveries............. (1,044,245) (929,099)
----------- -----------
Net policy claims and settlement
expenses....................... $ 1,085,380 $ 924,677
=========== ===========
</TABLE>
9
<PAGE>
5. Earnings Per Share
The basic and diluted per share reconciliations of income from continuing
operations to net income is as follows:
<TABLE>
<CAPTION>
Quarter Ended Nine Months Ended
September 30 September 30
1998 1997 1998 1997
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Basic income per share:
Income from continuing operations................................. $ .26 $ .50 $ 2.62 $ 1.16
Litigation settlement of discontinued operation................... - - - (.07)
------- ------ ------- --------
Income before extraordinary item.................................. .26 .50 2.62 1.09
Extraordinary item - early extinguishment of debt................. - - (.06) -
------- ------ ------- --------
Net income........................................................ $ .26 $ .50 $ 2.56 $ 1.09
======= ====== ======= ========
Diluted income per share:
Income from continuing operations................................. $ .25 $ .48 $ 2.52 $ 1.12
Litigation settlement of discontinued operation................... - - - (.06)
------- ------ ------- --------
Income before extraordinary item.................................. .25 .48 2.52 1.06
Extraordinary item - early extinguishment of debt................. - - (.06) -
------- ------ ------- --------
Net income........................................................ $ .25 $ .48 $ 2.46 $ 1.06
======= ====== ======= ========
</TABLE>
10
<PAGE>
The reconciliation of the basic to diluted per share information is as
follows:
<TABLE>
<CAPTION>
Quarter Ended September 30 1998 1997
- ------------------------------------------------------------------------------------------------------------------
Per Share Per Share
Income Shares Amount Income Shares Amount
- ------------------------------------------------------------------------------------------------------------------
(In thousands, except per share amounts)
<S> <C> <C> <C> <C> <C> <C>
Basic income
per share:
Income from
continuing
operations $ 30,006 116,015 $ .26 $ 57,316 114,754 $ .50
====== ======
Effect of dilutive
securities:
Options - 4,376 - 3,902
--------- ------- -------- -------
Diluted income
per share:
Income from
continuing
operations $ 30,006 120,391 $ .25 $ 57,316 118,656 $ .48
========= ======= ====== ======== ======= ======
</TABLE>
<TABLE>
<CAPTION>
Nine Months Ended September 30 1998 1997
- ------------------------------------------------------------------------------------------------------------------
Per Share Per Share
Income Shares Amount Income Shares Amount
- ------------------------------------------------------------------------------------------------------------------
(In thousands, except per share amounts)
<S> <C> <C> <C> <C> <C> <C>
Basic income
per share:
Income from
continuing
operations $ 303,189 115,539 $ 2.62 $132,764 114,588 $ 1.16
====== ======
Effect of dilutive
securities:
Options - 4,678 - 3,605
--------- ------- -------- -------
Diluted income
per share:
Income from
continuing
operations $ 303,189 120,217 $2.52 $132,764 118,193 $ 1.12
========= ======= ===== ======== ======= ======
</TABLE>
11
<PAGE>
6. Legal Proceedings
Employers who purportedly purchased workers' compensation insurance policies
on a retrospectively rated or other loss-sensitive basis have brought several
putative class actions against, among others, individual insurance companies
ranging in number from approximately 30 to approximately 270, including
Reliance Insurance Company and several of its subsidiaries. The plaintiffs in
the actions assert that, from as early as January 1, 1985 through the present,
they and the members of the putative classes they purport to represent were
overcharged for such insurance covering workers' compensation risks in the
states in which the actions have been brought. In each of the cases, the
plaintiffs, on behalf of themselves and the putative class members, seek
unspecified monetary damages, with interest and attorneys' fees, against all
defendants jointly and severally, and injunctive and other equitable relief.
Such actions in which the Company is a defendant have been brought in Georgia,
Tennessee, Florida, New Jersey, Pennsylvania, Illinois, Missouri, California,
Alabama, Michigan, New York and Kentucky. In addition to these putative class
actions, approximately 85 employers, individually and not as a class, have
brought an action in Arizona asserting overcharge claims against approximately
125 defendants, including the Company.
The Company is also a defendant in a putative class action commenced in
federal court in Texas against approximately 150 individual insurance
companies, in which the plaintiff claims that the defendants violated the
federal RICO statue by allegedly overcharging employers from 1988 to 1998 for
retrospectively rated workers' compensation insurance policies covering risks
in 44 states and the District of Columbia. The plaintiff, on behalf of itself
and the putative class of employers, seeks unspecified monetary damages and
attorneys' fees against all defendants jointly and severally, and injunctive
and other equitable relief.
The foregoing actions are in their early stages and there have been no rulings
on any motions by the plaintiffs for certification of the putative classes
they purport to represent. The Company has denied or intends to deny the
material allegations in each of the lawsuits and intends to contest each
action vigorously.
The Company does not believe that it is probable that its aggregate liability,
if any, in respect of these actions will have a material adverse effect on the
Company's financial position, although there is no assurance that the
disposition of the actions will not materially affect the Company's results of
operations for any period.
12
<PAGE>
7. Adoption of New Accounting Standard
Effective January 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income" ("FAS 130").
This Statement established standards for the reporting and presentation of
comprehensive income and its components. Net unrealized appreciation and
depreciation of investments and net unrealized gains and losses on foreign
currency translation are the items that are added to net income to arrive at
comprehensive income. The adoption of FAS 130 had no effect on the Company's
financial position or net income.
The Company's comprehensive income is as follows:
<TABLE>
<CAPTION>
Quarter Ended Nine Months Ended
September 30 September 30
1998 1997 1998 1997
- ----------------------------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C> <C>
Net income..................................... $ 30,006 $ 57,316 $ 295,685 $ 125,264
Appreciation (depreciation) of
investments, net.......................... 16,560 109,433 (7,884) 122,196
Foreign currency translation................... (933) (381) (3,712) (2,328)
-------- ---------- --------- ---------
Comprehensive income........................... $ 45,633 $ 166,368 $ 284,089 $ 245,132
======== ========== ========= =========
</TABLE>
13
<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 $29.0 million ($.24 per diluted share) in the third
quarter of 1998 compared to $33.9 million ($.28 per diluted share) in the
corresponding 1997 period. The decline in operating income resulted from
an increase in catastrophe losses. Catastrophe losses were $11.8 million
after-tax ($.10 per diluted share) in the third quarter of 1998 compared
to $2.6 million after-tax ($.02 per diluted share) in the corresponding
1997 period. For the first nine months of 1998 income from continuing
operations, before gains on sales of investments, was $98.4 million ($.82
per diluted share) compared to $90.6 million ($.77 per diluted share) in
the first nine months of 1997. This improvement reflects higher levels of
net investment income in the property and casualty insurance operations
and increased profits in the information technology business.
Net income was $30.0 million ($.25 per diluted share) and $295.7 million
($2.46 per diluted share) for the three months and nine months ended
September 30, 1998, which includes after-tax gains on sales of
investments of $1.0 million ($.01 per diluted share) and $69.8 million
($.58 per diluted share). Net income in the first nine months of 1998
also includes after-tax gains on sales of subsidiaries of $135.0 million
($1.12 per diluted share), substantially all of which relates to the
February 27, 1998 sale of the Company's title insurance operations (see
note 2 to the accompanying unaudited consolidated financial statements
for further discussion) and an after-tax extraordinary charge of $7.5
million ($.06 per diluted share) related to early extinguishment of debt.
Net income was $57.3 million ($.48 per diluted share) and $125.3 million
($1.06 per diluted share) in the third quarter and first nine months of
1997, which included after-tax gains on sales of investments of $23.4
million ($.20 per diluted share) and $42.1 million ($.35 per diluted
share). Net income in the first nine months of 1997 also included an
after-tax charge of $7.5 million ($.06 per diluted share) for a
litigation settlement of a discontinued subsidiary.
Property and Casualty Insurance Operations
Net premiums written in the quarter and nine months ended September 30,
1998 increased to $608.5 million and $1.82 billion from $517.0 million
and $1.54 billion in the corresponding prior year periods. Net premiums
earned in the quarter and nine months ended September 30, 1998 likewise
increased to $588.3 million and $1.67 billion from $476.5 million and
$1.42 billion in the corresponding prior year periods. These increases
reflect growth in both domestic and international operations and reflect
increased writings in general liability, non-standard automobile,
reinsurance, accident and health and surety lines of business partially
offset by lower premiums in the commercial automobile line.
The combined ratio (calculated on a GAAP basis), after policyholders'
dividends, was 102.3% and 101.4% in the third quarter and first nine
months of 1998 compared to 101.0% and
14
<PAGE>
100.9% in the corresponding 1997 periods. The underwriting losses were
$16.3 million and $28.3 million in the third quarter and first nine
months of 1998 compared to $7.8 million and $21.6 million in the
corresponding prior year periods. The increased underwriting losses, and
the higher combined ratios, resulted from an increase in catastrophe
losses which were $18.2 million and $26.7 million in the third quarter
and first nine months of 1998 compared to $4.1 million and $11.4 million
in the corresponding 1997 periods. The third quarter 1998 catastrophe
losses primarily resulted from Hurricanes Georges and Bonnie.
Property and Casualty Insurance Investment Results
Net investment income of the property and casualty insurance operations
increased to $74.9 million and $219.3 million in the third quarter and
first nine months of 1998 from $66.1 million and $195.3 million in the
comparable 1997 periods. These increases resulted from growth in the size
of the property and casualty insurance fixed maturity investment
portfolio due to the sale of certain equity securities in late 1997 and
the first half of 1998, and the reinvestment of the proceeds into higher
yielding fixed income securities.
Gains on sales of investments were $1.5 million and $107.1 million in the
three month and nine month periods ending September 30, 1998 compared to
$36.0 million and $63.6 million in the corresponding 1997 periods. Gains
on sales of investments in the first nine months of 1998 primarily
resulted from sales of equity securities, partially offset by write-downs
of $32.2 million equal to the difference between the cost and market
values of certain investments to reflect other than temporary declines.
Investment Portfolio
At September 30, 1998, the Company's investment portfolio aggregated
$3.91 billion (at cost), of which 7% 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, 1998, the carrying values of non-investment grade securities and
securities not rated by Standard & Poor's were $397.9 million (11% of the
fixed income portfolio) and $187.4 million (5% 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.
15
<PAGE>
Information Technology Operations
RCG Information Technology, 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 $64.4 million and $182.0 million in the third quarter
and first nine months of 1998 from $51.3 million and $136.1 million in the
corresponding 1997 periods resulting from increased assignments from
existing and new clients, together with an increase in billing rates. Gross
margins (revenues less cost of services) were $20.8 million and $57.0
million, or 32% and 31% of revenues, in the third quarter and first nine
months of 1998 compared to $13.9 million and $34.8 million, or 27% and 26%
of revenues, in the corresponding prior year periods. Selling, general and
administrative expenses were $15.4 million and $42.4 million in the three
month and nine month periods ended September 30, 1998 compared to $12.0
million and $32.4 million in the corresponding 1997 periods. The increase
in these expenses reflects costs related to increased revenue, as well as
costs associated with the Company's continued geographic expansion and
investments in technical and sales capabilities, both of which are intended
to contribute to future revenue growth. RCG's revenues and expenses are
included in "other revenues and other operating expenses" in the
accompanying unaudited consolidated statement of income.
Equity in Investee Companies
Equity in investee companies income was $6.4 million and $17.0 million in
the third quarter and first nine months of 1998 which includes equity
earnings of $4.8 million and $11.2 million from the Company's investment
in LandAmerica Financial Group, Inc. since March 1, 1998. Equity in
investee companies income was $2.6 million and $6.5 million in the third
quarter and first nine months of 1997 from the Company's Zenith National
Insurance Corp. investment.
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
$258.1 million for the nine months ended September 30, 1998 of which
$188.7 million was used by the Company to purchase certain of its
outstanding debt. 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
16
<PAGE>
adversely affect the Company's ability to service its debt and to pay
dividends on its common stock.
Regular common stock dividends paid by Reliance Insurance Company during
the first nine months of 1998 were $96.3 million. In addition, during the
first nine months of 1998, Reliance Insurance Company paid special
dividends of $135.0 million representing a portion of the gain from the
sale of the title insurance operations. The Company believes that
Reliance Insurance Company has sufficient dividend paying capacity to
meet the Company's operating 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 investments and marketable securities to maintain
adequate balances for the timely payment of claims and other operating
requirements. At September 30, 1998, Reliance Insurance Company had
$537.1 million of cash and short-term investments.
For the nine months ended September 30, 1998, the Company utilized $44.1
million of cash flow for operating activities compared to $101.1 million
in the corresponding 1997 period. The improvement in operating cash flow
reflects higher levels of operating cash flow from the property and
casualty insurance operations primarily due to an increase in reinsurance
ceded premiums payable, partially offset by increases in reinsurance
recoverables and premiums receivable.
The Company generated $248.4 million of cash flow from investing
activities for the nine months ended September 30, 1998 primarily from
the sales of subsidiaries partially offset by net purchases of marketable
securities. The Company generated $159.7 million of cash flow from
investing activities for the nine months ended September 30, 1997
primarily from the net sales of marketable securities.
For the nine months ended September 30, 1998, the Company used $206.5
million of cash flow for financing activities. During the first nine
months of 1998, the Company purchased $179.3 million of its outstanding
senior notes and senior subordinated debentures utilizing the dividends
from Reliance Insurance Company. These purchases resulted in an after-tax
extraordinary charge of $7.5 million, net of a $4.0 million tax benefit.
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.
The Company has a revolving credit facility with various banks providing
for aggregate maximum outstanding borrowings of $100 million. At
September 30, 1998, borrowings aggregating $30 million were outstanding
under this facility.
17
<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.
Year 2000
In general, the year 2000 issue concerns many existing computers and
software products which were originally coded to accept only two digit
entries in the date code field. These computers and software products
will need to be either replaced or reprogrammed in order for computer
systems to distinguish 21st century dates from 20th century dates.
Company Information Technology. The Company's insurance policies contain
date sensitive data, such as policy expiration dates and premium payment
dates. If the Company's material computer systems are not year 2000
compliant, the Company's business operations, including claims and
premiums processing operations, financial reporting systems and actuarial
calculations, could be materially adversely affected.
The Company commenced its efforts to address the year 2000 issue in 1996.
All but one of its claims and premiums processing systems and corporate
financial recording and reporting systems have been remediated and tested
where necessary and the Company believes they are year 2000 compliant.
While the Company has completed its originally scheduled testing for these
systems, in light of the additional time available to it, the Company is
implementing a second round of compliance assurance testing of these
systems, which the Company plans to substantially complete by the third
quarter of 1999. The Company also plans to transfer the data from its one
noncompliant claims system to a year 2000 compliant system. In addition,
the Company plans to complete remediation of its actuarial pricing system
by the end of 1998, to remediate certain of its other actuarial systems by
the third quarter of 1999, and to perform compliance assurance testing on
such other actuarial systems by the last quarter of 1999. The year 2000
issue is constantly evolving, so the Company anticipates that it may from
time to time revise its year 2000 compliance schedule; however, the
Company expects that its year 2000 efforts will be completed in a timely
fashion.
18
<PAGE>
Third Party Information Technology. Even if all of the Company's computer
systems and software products are year 2000 compliant, the failure of third
parties with whom the Company does significant business to be year 2000
compliant could materially adversely affect the financial position, results
of operations or cash flows of the Company. Accordingly, as part of its
year 2000 process, the Company is identifying certain third parties with
whom the Company does significant business to determine whether such third
parties are, or will be, year 2000 compliant. The Company has sent year
2000 compliance questionnaires to its property managers, third party
administrators, and major reinsurers and to government and private agencies
to which the Company electronically transmits, and from which the Company
electronically receives, financial and other information. The Company
plans to follow-up with certain parties who have not responded to
such questionnaires by year end 1998, in some cases, and by the end of the
first quarter of 1999, in other cases where the Company believes the
additional time will allow such parties to produce a better assessment of
their year 2000 compliance. The Company has not yet contacted, but plans to
contact as part of this process, insurance brokers and agents, financial
institutions and other vendors with whom the Company does significant
business by year end 1998, in some cases, and by the end of the first
quarter of 1999, in other cases where the Company believes the additional
time will allow such parties to produce a better assessment of their year
2000 compliance. The Company plans to conduct systems testing as
appropriate with third parties in 1999. While the Company is taking what it
believes are appropriate safeguards, there can be no assurances that the
failure of such third parties to be year 2000 compliant will not have a
material adverse effect on the Company's financial position, results of
operations or cash flows in future financial periods.
Contingency Plans. After evaluating its internal compliance efforts as
well as the compliance of third parties as described above, the Company
will develop during fiscal year 1999 appropriate contingency plans to
address situations in which various systems of the Company, or of third
parties with whom the Company does business, are not year 2000 compliant.
Costs. Through year-end 1997, the Company had incurred approximately $5
million to address the year 2000 issue and expects to incur an additional
$1.7 million through year-end 1999.
Insurance Policies. As an insurer, the Company may incur losses and loss
adjustment expenses (including attorneys' fees and other legal expenses)
arising from property and casualty insurance claims by its insureds, who
may incur losses as a result of the failure of such insureds, or the
customers or vendors of such insureds, to be year 2000 compliant. The
Company is in the process of assessing its exposures, if any, under its
policies with respect to year 2000 noncompliance by its insureds, and the
third parties who do business with its insureds, through various means
which include communications with insureds and distribution of year 2000
written questionnaires. The Company is also in the process of assessing
potential strategies to manage and mitigate such exposures, if any,
including, without limitation, policy exclusions and reinsurance.
However, because coverage determinations depend on unique factual
situations, specific policy language and other variables, it is not
possible to determine in advance whether and to what extent insureds will
incur losses, the amount of the losses or whether any such losses would
be covered under the Company's insurance policies.
19
<PAGE>
Forward Looking Information
Certain statements in this document may be considered to be "forward
looking statements" as that term is defined in the Private Securities
Litigation Reform Act of 1995, such as statements that include the words
"expects", "probable", "estimate", or similar expressions. Such
statements are subject to certain risks and uncertainties. The factors
which could cause actual results to differ materially from those
suggested by any such statements include, but are not limited to, those
discussed or identified from time to time in the Company's public filings
with the Securities and Exchange Commission and specifically to: risks or
uncertainties associated with general economic conditions including
changes in interest rates and the performance of the financial markets,
changes in domestic and foreign laws, regulations and taxes, changes in
competition and pricing environments, regional or general changes in
asset valuations, the occurrence of significant natural disasters, the
inability to reinsure certain risks economically, the adequacy of loss
reserves, as well as general market conditions, competition, pricing and
restructurings.
20
<PAGE>
RELIANCE GROUP HOLDINGS, INC. AND SUBSIDIARIES
PART II. OTHER INFORMATION
- --------------------------------------------------------------------------------
Item 5. Other Information.
The Securities and Exchange Commission (the "SEC") recently
amended Rule 14a-4 of the Securities Exchange Act of 1934, as
amended. As amended, Rule 14a-4(c)(1) provides that a proxy may
confer discretionary authority on the management of a company to
vote on a stockholder proposal for an annual meeting of
stockholders if such stockholder's proposal is not submitted to
the Company at least 45 days prior to the month and day of mailing
the prior year's proxy statement. For purposes of the Company's
1999 Annual Meeting of Stockholders, management may use its
discretionary voting authority to vote on any proposal with
respect to which the Company receives notice after March 3, 1999,
even if such proposal is not discussed in the proxy statement for
the 1999 Annual Meeting of Stockholders.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
27. Financial Data Schedule.
(b) Reports on Form 8-K.
No reports on Form 8-K were filed during the quarter ended
September 30, 1998.
21
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
RELIANCE GROUP HOLDINGS, INC.
-----------------------------
(Registrant)
Date: November 13, 1998 /s/ George E. Bello
----------------- -------------------------------------
George E. Bello
Executive Vice President and Controller
(Chief Accounting Officer)
22
<TABLE> <S> <C>
<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-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<DEBT-HELD-FOR-SALE> 2,540,064
<DEBT-CARRYING-VALUE> 588,013
<DEBT-MARKET-VALUE> 631,182
<EQUITIES> 679,171
<MORTGAGE> 0
<REAL-ESTATE> 132,199
<TOTAL-INVEST> 4,438,663
<CASH> 51,521
<RECOVER-REINSURE> 4,617,267
<DEFERRED-ACQUISITION> 292,691
<TOTAL-ASSETS> 12,277,951
<POLICY-LOSSES> 6,947,460
<UNEARNED-PREMIUMS> 1,896,482
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 726,357
0
0
<COMMON> 11,604
<OTHER-SE> 1,214,858
<TOTAL-LIABILITY-AND-EQUITY> 12,277,951
1,808,588
<INVESTMENT-INCOME> 224,608
<INVESTMENT-GAINS> 107,421
<OTHER-INCOME> 433,185
<BENEFITS> 1,092,056
<UNDERWRITING-AMORTIZATION> 733,218
<UNDERWRITING-OTHER> 0
<INCOME-PRETAX> 417,272
<INCOME-TAX> 131,100
<INCOME-CONTINUING> 303,189
<DISCONTINUED> 0
<EXTRAORDINARY> (7,504)
<CHANGES> 0
<NET-INCOME> 295,685
<EPS-PRIMARY> $2.56
<EPS-DILUTED> $2.46
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
