<PAGE>
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------------
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ......... TO .........
1-8278
COMMISSION FILE NUMBER ...............................
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
(ADDRESS OF PRINCIPAL EXECUTIVE 10055
OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE:(212) 909-1100
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
NAME OF EACH EXCHANGE ON WHICH
TITLE OF EACH CLASS REGISTERED
- --------------------------------------- ---------------------------------------
New York Stock Exchange and Pacific
Common Stock, $.10 Par Value Exchange
9% Senior Notes, Due November 15, 2000 New York Stock Exchange
9 3/4% Senior Subordinated Debentures,
Due November 15, 2003 New York Stock Exchange
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No_
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
As of February 27, 1998, 115,091,309 shares of the common stock of Reliance
Group Holdings, Inc. were outstanding, and the aggregate market value of the
voting stock held by nonaffiliates was approximately $1,068,200,525.
DOCUMENTS INCORPORATED BY REFERENCE:
(1) Reliance Group Holdings, Inc. 1997 Annual Report--Parts I, II and
IV.
(2) Reliance Group Holdings, Inc. Proxy Statement for the Annual
Meeting of Stockholders to be held May 14, 1998--Part III.
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<PAGE>
PART I
ITEM 1. BUSINESS.
GENERAL
Reliance Group Holdings, Inc. (the 'Company' or 'Reliance Group Holdings')
is a holding company whose principal business is the ownership of Reliance
Insurance Company and its property and casualty insurance subsidiaries (the
'Reliance Insurance Group'). The Reliance Insurance Group underwrites a broad
range of commercial lines of property and casualty insurance and also
underwrites personal automobile coverage. The Company also owns RCG Information
Technology, Inc. ('RCG Information Technology'), an information technology
consulting company.
On February 27, 1998, the Company completed the sale of its title insurance
companies, Commonwealth Land Title Insurance Company and Transnation Title
Insurance Company and their respective subsidiaries ('Commonwealth/Transnation
Title') 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 $110,000,000 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
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 LandAmerica's 14-member
board of directors. Accordingly, the Company will account for its investment in
LandAmerica by the equity method of accounting and will classify LandAmerica as
an investee company for periods subsequent to the sale date. The transaction
resulted in an after-tax gain of approximately $245 million, of which
approximately $135 million will be recognized in the first quarter of 1998. The
deferred gain of approximately $110 million will be recognized as the equity
securities received from LandAmerica are sold. Commonwealth/Transnation Title
accounted for $863.7 million (31%) of the 1997 net premiums earned by the
Reliance Insurance Group and Commonwealth/Transnation Title. See Note 2 to the
Company's consolidated financial statements (the 'Consolidated Financial
Statements') and 'Investee Companies'.
Reliance Insurance Company has conducted business since 1817, making it one
of the oldest property and casualty insurance companies in the United States.
The Reliance Insurance Group consists of four principal operations: Reliance
National, Reliance Insurance, Reliance Surety and Reliance Reinsurance. Reliance
National offers, through brokers and agents, a broad range of commercial
property and casualty insurance products and services for large companies and
specialty lines customers. Reliance National also offers, through agents,
non-standard automobile and smaller account workers' compensation insurance.
Reliance National selects market segments where it can provide specialized
coverages and services, and it conducts business nationwide and in certain
international markets. In 1997, Reliance National accounted for 48% of the net
premiums written by the Reliance Insurance Group. Reliance Insurance provides,
through agents and brokers, commercial property and casualty insurance coverages
for mid-sized companies primarily throughout the United States. Reliance
Insurance also offers traditional and specialized coverages for more complex
risks as well as insurance programs for groups with common insurance needs. In
1997, Reliance Insurance accounted for 36% of the net premiums written by the
Reliance Insurance Group. Reliance Surety is a leading writer of surety bonds
and fidelity bonds in the United States and conducts its business through agents
and brokers. Reliance Reinsurance offers, primarily through brokers, treaty and
facultative reinsurance for small to medium sized regional and specialty
insurance companies located in the United States. The Reliance Insurance Group
accounted for $1.9 billion (69%) of the 1997 net premiums earned by the Reliance
Insurance Group and Commonwealth/Transnation Title.
RCG Information Technology provides computer-related professional services
to large corporate clients throughout the United States and had revenues of
$191.9 million in 1997.
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Business segment information for the years ended December 31, 1997, 1996
and 1995 is set forth in Note 17 to the Consolidated Financial Statements. All
financial information in this Annual Report on Form 10-K is presented in
accordance with generally accepted accounting principles ('GAAP') unless
otherwise specified.
The Company owns all of the common stock of Reliance Financial Services
Corporation ('Reliance Financial') which in turn owns all of the common stock of
Reliance Insurance Company. The common stock of Reliance Insurance Company is
pledged to secure certain indebtedness. See Note 8 to the Consolidated Financial
Statements. Reliance Insurance Company owns all of the common stock of RCG
Information Technology.
OPERATING UNITS
Property and Casualty Insurance. The following table sets forth the amount
of net premiums written in each line of business for the years ended December
31, 1997, 1996 and 1995 by the Reliance Insurance Group's four principal
operations: Reliance National, Reliance Insurance, Reliance Surety and Reliance
Reinsurance.
<TABLE>
<CAPTION>
1997 1996
-------------------------------------------- --------------------------------------------
RELIANCE RELIANCE
RELIANCE RELIANCE SURETY/ RELIANCE RELIANCE SURETY/
NATIONAL INSURANCE REINSURANCE TOTAL NATIONAL INSURANCE REINSURANCE TOTAL
-------- --------- ------------ ------ -------- --------- ------------ ------
(IN MILLIONS, EXCEPT PERCENTAGES)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
General Liability............. $311 $ 112 $ -- $ 423 $368 $ 99 $ -- $ 467
Commercial Automobile......... 97 198 -- 295 86 179 -- 265
Workers' Compensation......... 128 148 -- 276 127 123 -- 250
Multiple Peril................ 18 203 -- 221 20 192 -- 212
Ocean and Inland Marine....... 150 41 -- 191 83 46 -- 129
Surety........................ -- -- 177 177 -- -- 159 159
Reinsurance................... -- -- 159 159 -- -- 151 151
Non-Standard Automobile....... 98 -- -- 98 -- -- -- --
Accident and Health........... 92 -- -- 92 62 -- -- 62
Fire and Allied............... 20 26 -- 46 22 42 -- 64
Involuntary................... 23 11 -- 34 25 19 -- 44
Other......................... 50 4 -- 54 41 2 -- 43
--- --- --- ------ --- --- --- ------
Total........................ $987 $ 743 $336 $2,066 $834 $ 702 $310 $1,846
--- --- --- ------ --- --- --- ------
--- --- --- ------ --- --- --- ------
Percent of Total.............. 48% 36% 16% 100% 45% 38% 17% 100%
--- --- --- ------ --- --- --- ------
--- --- --- ------ --- --- --- ------
<CAPTION>
1995
--------------------------------------------
RELIANCE
RELIANCE RELIANCE SURETY/
NATIONAL INSURANCE REINSURANCE TOTAL
-------- --------- ------------ ------
<S> <C> <C> <C> <C>
General Liability............. $371 $ 98 $ -- $ 469
Commercial Automobile......... 88 152 -- 240
Workers' Compensation......... 141 125 -- 266
Multiple Peril................ 26 159 -- 185
Ocean and Inland Marine....... 66 53 -- 119
Surety........................ -- -- 139 139
Reinsurance................... -- -- 119 119
Non-Standard Automobile....... -- -- -- --
Accident and Health........... 58 -- -- 58
Fire and Allied............... 34 34 -- 68
Involuntary................... 53 28 -- 81
Other......................... 27 8 -- 35
--- --- --- ------
Total........................ $864 $ 657 $258 $1,779
--- --- --- ------
--- --- --- ------
Percent of Total.............. 49% 37% 14% 100%
--- --- --- ------
--- --- --- ------
</TABLE>
2
<PAGE>
The following table sets forth underwriting results for the Reliance
Insurance Group for the years ended December 31, 1997, 1996 and 1995.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------
1997 1996 1995
-------- -------- --------
(IN MILLIONS, EXCEPT RATIOS)
<S> <C> <C> <C>
Net premiums written... $2,065.8 $1,846.2 $1,779.0
Underwriting loss(1)... (31.7) (38.4)(2) (45.6)
Combined ratio......... 100.9% 101.6%(2) 101.8%(3)
</TABLE>
- ------------------
(1) Includes catastrophe losses (net of reinsurance) for the years ended
December 31, 1997, 1996 and 1995 of $11.1 million, $19.9 million and $25.7
million, respectively.
(2) Excludes a charge of $134.0 million (7.4 combined ratio points) to increase
net loss reserves for asbestos-related and environmental pollution claims
for business written in or before 1987. The actual underwriting loss was
$172.4 million and the combined ratio was 109.0%.
(3) Excludes a charge of $4.0 million in 1995 pertaining to California's
Proposition 103.
The following table sets forth certain financial information of the
Reliance Insurance Group based upon statutory accounting practices and common
shareholder's equity of Reliance Insurance Company based upon GAAP (in
thousands):
<TABLE>
<CAPTION>
STATUTORY ACCOUNTING GAAP
-------------------------------------------------------------------------- -------------
NET TOTAL POLICY- COMMON
YEAR ENDED PREMIUMS UNEARNED LOSS ADMITTED TOTAL HOLDERS' SHAREHOLDER'S
DECEMBER 31, WRITTEN PREMIUMS RESERVES ASSETS LIABILITIES SURPLUS EQUITY
- ------------ ---------- -------- ---------- ---------- ----------- ---------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
1997........ $2,081,991 $980,146 $3,172,266 $5,955,177 $ 4,652,687 $1,302,490 $ 1,704,256
1996........ 1,848,159 885,799 3,228,792 5,669,276 4,482,220 1,187,056 1,410,484
1995........ 1,769,064 841,127 3,102,688 5,538,533 4,410,197 1,128,336 1,404,781
</TABLE>
The Reliance Insurance Group writes insurance in every state of the United
States, the District of Columbia, Puerto Rico, Guam and the Virgin Islands. In
1997, California, New York, Florida and Texas accounted for approximately 15%,
11%, 7% and 6%, respectively, of direct premiums written. No other state
accounted for more than 5% of direct premiums written by the Reliance Insurance
Group. The Reliance Insurance Group writes insurance primarily through agents
and brokers. No single insurance agent or broker accounts for 12% or more of the
direct premiums written by the Reliance Insurance Group. The Reliance Insurance
Group also underwrites personal lines automobile insurance utilizing the
Internet, direct mail and other direct marketing channels.
The Reliance Insurance Group also writes insurance in the European
Community through Reliance National offices in the United Kingdom, the
Netherlands, Sweden, Spain and Germany, in the Americas through Reliance
National offices in Canada, Mexico and Argentina and in the Pacific Rim through
a Reliance National office in Singapore. In early 1998, Reliance National opened
offices in Switzerland and in South Africa. Also, Reliance National established
a cooperation agreement with the Huatai Insurance Company in China in 1997 and a
joint venture insurance operation through Lippo Reliance Insurance Company Ltd.
in Hong Kong in early 1998.
A. M. Best & Company, Inc. ('Best'), publisher of Best's Insurance Reports,
Property-Casualty, has assigned an 'A- (Excellent)' rating to the Reliance
Insurance Group. Best's ratings are based on an analysis of the financial
condition and operations of an insurance company as they relate to the industry
in general. An 'A- (Excellent)' rating is assigned to those companies which have
demonstrated excellent overall performance when compared to the norms of the
property and casualty industry. Standard & Poor's ('S&P') has assigned an 'A'
rating to the claims-paying ability of the Reliance Insurance Group. S&P's
ratings are based on a quantitative and qualitative analysis, including
consideration of ownership and support factors, if applicable. An 'A' rating is
assigned to those companies which have good financial security, but capacity to
meet policyholder obligations is somewhat susceptible to adverse economic and
underwriting conditions. The Best and S&P ratings are not designed for the
protection of investors and do
3
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not constitute recommendations to buy, sell or hold any security. Although the
Best and S&P ratings of the Reliance Insurance Group are not as high as many of
the insurance companies with which the Reliance Insurance Group competes,
management believes that the current ratings are adequate to enable the Reliance
Insurance Group to compete successfully.
Reliance National. Reliance National offers a broad range of commercial
insurance products and services with a focus on large accounts and specialty
lines customers. Reliance National selects market segments where it can provide
specialized coverages, such as directors and officers liability insurance, or
specialized services, such as providing captive insurance arrangements to the
alternative risk markets. In addition, Reliance National provides non-standard
personal automobile insurance and traditional commercial insurance products,
including guaranteed cost workers' compensation insurance. In 1997, Reliance
National accounted for 48% of the net premiums written by the Reliance Insurance
Group. Reliance National, which conducts business nationwide, is headquartered
in New York City and has offices in nineteen states. Reliance National also
conducts business in the European Community, the Americas and the Pacific Rim.
In early 1998, Reliance National opened offices in Switzerland and in South
Africa. Also, Reliance National established a cooperation agreement with the
Huatai Insurance Company in China in 1997 and a joint venture insurance
operation through Lippo Reliance Insurance Company Ltd. in Hong Kong in early
1998. Reliance National distributes its products through insurance brokers and
agents. Net premiums written by Reliance National were $987.3 million, $833.7
million and $864.4 million for the years ended December 31, 1997, 1996 and 1995,
respectively.
Reliance National is organized into eight major divisions. Each division is
comprised of one or more departments which focus on a particular type of
business, program or market segment. Each department makes use of underwriters,
actuaries and other professionals to market, structure and price its products.
Reliance National's eight major divisions are:
o Casualty Risk Services, Reliance National's largest division, provides
workers' compensation, commercial automobile and general liability
coverages to Fortune 1,000 companies, multinationals and the construction
and transportation industries. These coverages are provided on a large
deductible basis and to the alternative risk markets through captive
reinsurance arrangements. This division also provides environmental
pollution coverages (primarily on a claims-made basis) for consultants,
contractors, transporters and certain other insureds. In early 1997, this
division began providing comprehensive insurance coverages for public and
private entities engaged in the development of infrastructure projects
outside of North America. This division in 1997 also introduced
CyberComp, which permits Reliance National to utilize the Internet to
write, through agents, single-state guaranteed cost workers' compensation
coverages for smaller accounts.
o International writes predominantly commercial casualty and property
insurance products, including specialized coverages such as excess
casualty, directors and officers liability insurance, fidelity insurance
and accident and health coverage in certain international markets. This
division also provides ocean marine coverages in domestic and certain
international markets.
o Excess and Surplus Lines primarily provides professional liability
insurance to architects, engineers, lawyers, healthcare providers and
other professionals, and excess and umbrella coverages.
o International Reinsurance and Special Risk provides aviation and space
satellite risk coverages, as well as certain non-traditional insurance
products, both on a primary and on a reinsurance basis, in domestic and
certain international markets.
o Property/Custom Casualty primarily provides commercial property, casualty
and inland marine coverages focusing on excess and specialty commercial
accounts.
o Financial Products provides directors and officers liability insurance,
errors and omissions insurance, employment practices liability insurance
and fidelity and fiduciary coverages in the domestic market.
o Accident and Health provides high limit disability, group accident,
blanket special risk and medical excess of loss programs.
4
<PAGE>
o Non-Standard Automobile primarily provides non-standard personal
automobile insurance for drivers unable to obtain insurance in the
standard automobile insurance market.
Reliance National attempts to limit its exposure to losses through the use
of claims-made policies, policies written on a large deductible basis and
reinsurance. Policies written on a 'claims-made' basis accounted for
approximately 23%, 26% and 22% of Reliance National's net premiums written
during 1997, 1996 and 1995, respectively. Policies written on a 'claims-made'
basis provide coverage only for claims reported during the policy period or
within an established reporting period, as opposed to 'occurrence' basis
policies which provide coverage for events that occur during the policy period
without regard for when the claim is reported. Claims-made policies mitigate the
'long tail' nature of the risks insured. Policies written on a large deductible
basis accounted for approximately 9%, 14% and 9% of Reliance National's net
premiums written during 1997, 1996 and 1995, respectively. Under policies
written on a large deductible basis, the insured pays for all of its losses up
to the deductible amount. The use of large deductible policies results in lower
premiums and losses for Reliance National as payments for losses made by an
insured under a large deductible policy are not considered premiums or losses to
an insurer. With large deductible policies, Reliance National provides insurance
and loss control management services while reducing its underwriting risk.
Reliance National assumes a credit risk in connection with large deductible
policies and, therefore, insureds with such policies undergo extensive credit
analysis by a centralized credit department that is independent from the
underwriting process. Collateral in the form of bank letters of credit, trust
accounts or cash is generally provided by the insured to cover a significant
portion of Reliance National's credit exposure.
To further limit exposures, a substantial majority of Reliance National's
net premiums written during 1997 were for policies with net retentions equal to
or lower than $1.5 million per risk. By reinsuring a large proportion of its
business, Reliance National seeks to limit its exposure to losses on each line
of business it writes.
Reliance Insurance. Reliance Insurance offers commercial lines property
and casualty insurance products, primarily focusing on the diverse needs of
mid-sized companies nationwide. Reliance Insurance conducts business through 36
offices and distributes its products through approximately 2,600 agents and
brokers. Reliance Insurance's insureds are primarily closely held companies with
100 to 1,000 employees and annual sales of $5 million to $300 million. Reliance
Insurance underwrites a variety of commercial insurance coverages, including
multiple peril, general liability, commercial automobile and workers'
compensation. In 1997, Reliance Insurance accounted for 36% of the net premiums
written by the Reliance Insurance Group. Reliance Insurance is headquartered in
Philadelphia and operates in 50 states, the District of Columbia, Puerto Rico,
Guam and the Virgin Islands. Net premiums written by Reliance Insurance were
$743.1 million, $702.2 million and $656.4 million for the years ended December
31, 1997, 1996 and 1995, respectively.
Reliance Insurance is organized into the following three operating
divisions:
o The Commercial Accounts division focuses on accounts with annual premiums
of up to $1 million. This division offers a broad range of traditional
commercial coverages, primarily written on a guaranteed cost basis.
o The Specialty division provides underwriting for industry segments with
special exposures and in 1997 targeted specific business segments:
transportation, manufacturing, contracting, public entities, social
services and special properties. This division also provides property and
liability insurance programs to homogeneous groups of insureds with
particular insurance needs.
o The Large Accounts division focuses on casualty exposures of accounts
with annual premiums in excess of $1 million where it is able to offer
more flexible coverages through the use of large deductible and
retrospectively rated policies. With retrospectively rated policies, the
insured effectively pays for a large portion or, in many cases, all of
its losses. The Large Accounts division primarily provides workers'
compensation insurance and approximately 51% of its business was written
on a large deductible and retrospectively rated basis. Accounts with
large deductible and retrospectively rated policies undergo extensive
credit analysis by a centralized credit department
5
<PAGE>
that is independent from the underwriting process. Collateral in the form
of bank letters of credit, trust accounts or cash is generally provided
by the insured to cover a significant portion of Reliance Insurance's
credit exposure.
The Commercial Accounts division and the Large Accounts division provide
their products and services through a decentralized network of regional and
branch offices. This organization allows the Commercial Accounts division and
the Large Accounts division to place major responsibility and accountability for
underwriting, sales and customer service close to the insured. The Specialty
division has three regional offices. Reliance Insurance manages its claims
through a decentralized network of regional and branch offices, which allows the
point of service to be close to the insured.
Reliance Surety. Reliance Surety is a leading writer of surety and
fidelity bonds in the United States. Reliance Surety concentrates on writing
performance and payment bonds for contractors of public works projects,
commercial real estate and multi-family housing. It also writes commercial
surety, financial institution and commercial fidelity bonds. Reliance Surety
performs extensive credit analysis on its clients and actively manages claims to
minimize losses and maximize recoveries. Reliance Surety has enjoyed long
relationships with a large majority of the contractors and accounts it has
insured. Reliance Surety's Firemark and Express Surety operations target smaller
contractors and accounts, a market traditionally less fully serviced by national
surety companies. Reliance Surety is headquartered in Philadelphia and conducts
business nationwide through 33 branch offices and distributes its products
through approximately 2,250 agents and brokers. In addition, in 1997 Reliance
Surety established a presence in London. Net premiums written by Reliance Surety
were $176.5 million, $159.2 million and $139.3 million for the years ended
December 31, 1997, 1996 and 1995, respectively.
Surety bonds guarantee the payment or performance of one party (called the
principal) to another party (called the obligee). This guarantee is typically
evidenced by a written agreement by the surety (e.g., Reliance Surety) to
discharge the payment or performance obligations of the principal pursuant to
the underlying contract between the obligee and the principal. Fidelity bonds
insure against losses arising from employee dishonesty. Financial institution
fidelity bonds insure against losses arising from employee dishonesty and other
specifically named theft and fraud perils.
Reliance Reinsurance. Reliance Reinsurance provides casualty reinsurance
on both a treaty (blocks of risk) and facultative (individual risks) basis and,
to a lesser extent, property reinsurance on a treaty basis. The business of
Reliance Reinsurance is primarily conducted on a treaty basis. All treaty
business is marketed through reinsurance brokers who negotiate contracts of
reinsurance on behalf of the primary insurer or ceding reinsurer, while
facultative business is produced both directly and through reinsurance brokers.
While Reliance Reinsurance's treaty clients include all types and sizes of
insurers, Reliance Reinsurance typically targets treaty reinsurance for small to
medium sized regional and specialty insurance companies, as well as captives,
risk retention groups and other alternative risk markets, providing both pro
rata and excess of loss coverage. Reliance Reinsurance believes that this market
is subject to less competition and provides Reliance Reinsurance with an
opportunity to develop and market innovative programs where pricing is not the
key competitive factor. Reliance Reinsurance typically avoids participating in
large capacity reinsurance treaties where price is the predominant competitive
factor. It generally writes reinsurance in the 'lower layers,' the first $1
million of primary coverage, where losses are more predictable and quantifiable.
Reliance Reinsurance conducts its business nationwide and is headquartered in
Philadelphia. In 1997, Reliance Reinsurance established an Agriculture division
reinsuring insurers whose products include crop insurance and other products for
agricultural-related risks. Net premiums written by Reliance Reinsurance were
$159.0 million, $151.1 million and $119.0 million for the years ended December
31, 1997, 1996 and 1995, respectively.
Information Technology Consulting Services. RCG Information Technology
provides a full range of information technology services to large corporate
clients in the United States including clients in the following sectors:
banking, brokerage, insurance, electronics, telecommunications, petroleum,
chemical, retail, transportation, manufacturing and travel. Such services
include providing supplemental computer professional staffing, Year 2000
solutions, software outsourcing, computer programming and development services
and other computer consulting services. RCG Information Technology conducts
operations through
6
<PAGE>
17 offices in the United States. RCG Information Technology recruits programmers
both in the United States and internationally to meet demands for its services,
and has established recruiting capabilities in India, Ireland, the Philippines
and South Africa. RCG Information Technology had revenues of $191.9 million,
$136.7 million and $106.4 million for the years ended December 31, 1997, 1996
and 1995, respectively, and its pretax operating income was $4.8 million, $2.3
million and $5.4 million for the years ended December 31, 1997, 1996 and 1995,
respectively.
INSURANCE CEDED
All of the Reliance Insurance Group's insurance operations purchase
reinsurance to limit the Company's exposure to losses. The ceding of insurance
does not discharge an insurer from its primary legal liability to a
policyholder, even though the reinsuring company assumes a related liability.
The Reliance Insurance Group enters into reinsurance arrangements that are both
facultative (individual risks) and treaty (blocks of risk). Limits and
retentions, which may change from time to time, are based on a number of
factors, including the previous loss history of the operating unit, policy
limits and exposure data, industry studies as to potential severity, and market
terms, conditions and capacity. Where appropriate, the Reliance Insurance Group
limits its exposure to individual risks by purchasing excess of loss and quota
share reinsurance, with treaty structures and net retentions varying with the
specific requirements of the line of business or program being reinsured. In
many cases, the Reliance Insurance Group purchases additional facultative
reinsurance to further reduce its retentions below treaty levels.
Reinsurers of the Reliance Insurance Group. Premiums ceded by the Reliance
Insurance Group to reinsurers were $1.9 billion and $1.6 billion in 1997 and
1996, respectively. The Reliance Insurance Group is subject to credit risk with
respect to its reinsurers, as the ceding of risk to reinsurers does not relieve
the Reliance Insurance Group of its liability to insureds. At December 31, 1997,
the Reliance Insurance Group had reinsurance recoverables of $4.2 billion,
representing estimated amounts recoverable from reinsurers pertaining to paid
claims, unpaid claims, claims incurred but not reported and unearned premiums.
In order to minimize losses from uncollectible reinsurance, the Reliance
Insurance Group places its reinsurance with a number of different reinsurers,
and utilizes a security committee and a staff of analysts to approve in advance
the reinsurers which meet its standards of financial strength and are acceptable
for use by the Reliance Insurance Group. The Reliance Insurance Group holds
substantial amounts of collateral, consisting of letters of credit, trust
accounts and cash to secure recoverables from unauthorized reinsurers. The
Company had $6.4 million reserved for potentially unrecoverable reinsurance at
December 31, 1997. The Company is not aware of any impairment of the
creditworthiness of any of the Reliance Insurance Group's significant
reinsurers.
In 1997, the Reliance Insurance Group did not cede more than 5.0% of direct
premiums to any one reinsurer and only one reinsurer accounted for more than
4.0% of total ceded premiums. The Reliance Insurance Group's ten largest
reinsurers, based on 1997 ceded premiums, are as follows:
<TABLE>
<CAPTION>
1997
CEDED BEST
PREMIUM RATING
------------- ------
(IN MILLIONS)
<S> <C> <C>
American Re-Insurance Company..................... $ 171.1 A+
General Reinsurance Corporation................... 70.3 A++
Hertz International Reinsurance Ltd............... 60.4 (1)
Commercial Risk Re-Insurance Company.............. 60.2 A
Kemper Reinsurance Company........................ 58.6 A
Swiss Reinsurance America Corporation............. 57.0 A
Everest Reinsurance Company....................... 56.3 A
Zurich Reinsurance (North America), Inc........... 49.7 A
Employers Reinsurance Group....................... 41.4 A++
SCOR Reinsurance Company.......................... 38.4 A+
</TABLE>
- ------------------
(1) An unrated captive reinsurer that is not affiliated with the Company.
Recoverables from such reinsurer are fully collateralized.
7
<PAGE>
The Reliance Insurance Group maintains no 'Funded Cover' reinsurance
agreements. 'Funded Cover' reinsurance agreements are multi-year retrospectively
rated reinsurance agreements which may not meet relevant accounting standards
for risk transfer and under which the reinsured must pay additional premiums in
subsequent years if losses in the current year exceed levels specified in the
reinsurance agreement.
PROPERTY AND CASUALTY LOSS RESERVES
The Reliance Insurance Group's staff of over 100 actuaries regularly
performs comprehensive analyses of reserves and reviews the pricing and
reserving methodologies of the Reliance Insurance Group. Although the Company
believes, in light of present facts and current legal interpretations, that the
Reliance Insurance Group's overall property and casualty reserve levels are
adequate to meet its obligations under existing policies, due to the inherent
uncertainty and complexity of the reserving process, the ultimate liability may
be more or less than such reserves.
The following tables present information relating to the liability for
unpaid claims and related expenses ('loss reserves') for the Reliance Insurance
Group. The table below provides a reconciliation of the beginning to ending
liability balances for the years ended December 31, 1997, 1996 and 1995.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------
1997 1996 1995
---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
Loss reserves, beginning of year........ $6,136,420 $5,764,352 $5,517,483
Less reinsurance recoverables........... 2,824,814 2,584,917 2,389,702
---------- ---------- ----------
Net loss reserves, beginning of year.... 3,311,606 3,179,435 3,127,781
---------- ---------- ----------
Provision for policy claims and related
expenses:
Provision for insured events of the
current year....................... 1,299,066 1,211,672 1,163,447
Increase (decrease) in provision
for insured events
of prior years................... (35,980) 138,665(1) 38,512
---------- ---------- ----------
Total provision.................. 1,263,086 1,350,337 1,201,959
---------- ---------- ----------
Payments for policy claims and related
expenses:
Attributable to insured events of
the current year................... 367,763 298,838 271,915
Attributable to insured events of
prior years........................ 963,135 926,996 868,622
---------- ---------- ----------
Total payments................... 1,330,898 1,225,834 1,140,537
---------- ---------- ----------
Foreign currency translation............ (1,476) 7,668 (9,768)
---------- ---------- ----------
Net loss reserves, end of year.......... 3,242,318 3,311,606 3,179,435
Plus reinsurance recoverables........... 3,427,190 2,824,814 2,584,917
---------- ---------- ----------
Loss reserves, end of year.............. $6,669,508 $6,136,420 $5,764,352
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
- ------------------
(1) The 1996 increase in provision for insured events of prior years included a
pretax charge of $134.0 million to increase net loss reserves for
asbestos-related and environmental pollution claims for business written in
or before 1987.
The provision for policy claims and related expenses for 1997 includes
favorable development in workers' compensation partially offset by adverse
development in the commercial automobile line. The redundancy in workers'
compensation is due, in part, to favorable development in retrospectively rated
policies, which was more than offset by a corresponding reduction in premiums
earned. The provision for insured events of prior years for 1996 and 1995
included adverse development related to asbestos-related and environmental
pollution claims, which primarily affected general liability, multiple peril and
reinsurance lines of business, and included a pretax charge of $134.0 million in
1996 to increase net loss reserves for asbestos-related and environmental
pollution claims for business written in or before 1987. The 1996 provision also
included adverse development in the commercial automobile line, offset by
favorable
8
<PAGE>
development in workers' compensation. The 1995 provision also included adverse
development in other general liability, commercial automobile and reinsurance
lines, partially offset by favorable development in workers' compensation.
The table below summarizes the development of the estimated liability for
loss reserves (net of reinsurance recoverables) as of December 31 of each of the
prior ten years. The amounts shown on the top line of the table represent the
estimated liability for loss reserves (net of reinsurance recoverables) for
claims that are unpaid at the particular balance sheet date, including losses
that had been incurred but not reported to the Reliance Insurance Group. The
upper portion of the table indicates the loss reserves as they are reestimated
in subsequent periods as a percentage of the originally recorded reserves. These
estimates change as losses are paid and more accurate information becomes
available about remaining loss reserves. A redundancy exists when the original
loss reserve estimate is greater, and a deficiency exists when the original loss
reserve estimate is less, than the reestimated loss reserve at December 31,
1997. A redundancy or deficiency indicates the cumulative percentage change, as
of December 31, 1997, of originally recorded loss reserves. The lower portion of
the table indicates the cumulative amounts paid as of successive periods as a
percentage of the original loss reserve liability. In calculating the percentage
of cumulative paid losses to the loss reserve liability in each year, unpaid
losses of General Casualty Company of Wisconsin, a former wholly-owned
subsidiary, and its subsidiaries ('General Casualty') at April 30, 1990 (the
date of sale of General Casualty), relating to 1987 through 1989, were deducted
from the original liability in each year. Each amount in the following table
includes the effects of all changes in amounts for prior periods. The table does
not present accident or policy year development data. For the years 1987 through
1995, the Company has experienced deficiencies in its estimated liability for
loss reserves and for 1996 the Company experienced a redundancy. The table
includes provisions specifically made to strengthen prior-years' loss reserves
of $134.0 million in 1996 and $156.0 million in 1991. The Company's loss
reserves during this period had been adversely affected by a number of factors
beyond the Company's control as follows: (i) significant increases in claim
settlements reflecting, among other things, inflation in medical costs; (ii)
increases in the costs of settling claims, particularly legal expenses; (iii)
more frequent resort to litigation in connection with claims; and (iv) a
widening interpretation of what constitutes a covered claim.
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993 1992 1991 1990
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
(IN THOUSANDS, EXCEPT PERCENTAGES)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net liability for unpaid
claims and related
expenses (loss
reserves)(1)............. $3,242,318 $3,311,606 $3,179,435 $3,127,781 $2,931,528 $2,702,992 $2,375,235 $1,893,421
Net liability reestimated
as of:
One year later........... -- 98.9% 104.4% 101.2% 100.8% 101.5% 101.3% 114.4%
Two years later.......... -- -- 104.4% 104.8% 101.7% 103.1% 104.4% 115.2%
Three years later........ -- -- -- 103.6% 104.2% 104.0% 105.7% 119.6%
Four years later......... -- -- -- -- 103.0% 107.2% 106.7% 120.7%
Five years later......... -- -- -- -- -- 106.2% 110.5% 122.0%
Six years later.......... -- -- -- -- -- -- 109.7% 127.0%
Seven years later........ -- -- -- -- -- -- -- 126.2%
Eight years later........ -- -- -- -- -- -- -- --
Nine years later......... -- -- -- -- -- -- -- --
Ten years later.......... -- -- -- -- -- -- -- --
Redundancy (Deficiency)... -- 1.1% (4.4%) (3.6%) (3.0%) (6.2%) (9.7%) (26.2%)
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Paid (cumulative) as of:
One year later........... -- 29.1% 29.2% 27.8% 26.6% 28.7% 29.0% 36.6%
Two years later.......... -- -- 48.7% 46.8% 44.9% 48.0% 48.6% 57.9%
Three years later........ -- -- -- 59.8% 58.4% 61.1% 62.1% 72.8%
Four years later......... -- -- -- -- 67.3% 70.5% 71.6% 83.0%
Five years later......... -- -- -- -- -- 76.5% 78.1% 90.3%
Six years later.......... -- -- -- -- -- -- 82.7% 95.5%
Seven years later........ -- -- -- -- -- -- -- 99.2%
Eight years later........ -- -- -- -- -- -- -- --
Nine years later......... -- -- -- -- -- -- -- --
Ten years later.......... -- -- -- -- -- -- -- --
<CAPTION>
1989 1988 1987
---------- ---------- ----------
<S> <C> <C> <C>
Net liability for unpaid
claims and related
expenses (loss
reserves)(1)............. $1,962,822 $1,644,057 $1,494,227
Net liability reestimated
as of:
One year later........... 104.8% 104.8% 107.8%
Two years later.......... 117.0% 113.5% 112.0%
Three years later........ 118.2% 121.8% 118.5%
Four years later......... 120.9% 123.2% 125.0%
Five years later......... 122.2% 127.8% 126.7%
Six years later.......... 123.8% 128.7% 131.8%
Seven years later........ 129.1% 130.7% 133.1%
Eight years later........ 128.5% 138.0% 135.4%
Nine years later......... -- 137.7% 143.9%
Ten years later.......... -- -- 143.3%
Redundancy (Deficiency)... (28.5%) (37.7%) (43.3%)
---------- ---------- ----------
Paid (cumulative) as of:
One year later........... 40.7% 41.6% 38.6%
Two years later.......... 65.4% 71.6% 65.8%
Three years later........ 82.2% 86.4% 88.2%
Four years later......... 91.3% 97.2% 99.5%
Five years later......... 97.8% 103.0% 106.2%
Six years later.......... 103.1% 107.3% 110.7%
Seven years later........ 106.8% 111.5% 113.9%
Eight years later........ 109.9% 114.3% 117.4%
Nine years later......... -- 117.2% 119.7%
Ten years later.......... -- -- 122.1%
</TABLE>
- ------------------
(1) The gross liability for unpaid claims and related expenses was $6.7 billion
at December 31, 1997. The gross liability for unpaid claims and related
expenses for years 1996 and prior was redundant by $36.6 million at December
31, 1997.
9
<PAGE>
The difference between the property and casualty liability for loss
reserves at December 31, 1997 and 1996 reported in the Company's consolidated
financial statements (net of reinsurance recoverables) and the liability which
would be reported in accordance with statutory accounting practices is as
follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1997 1996
---------- ----------
(IN THOUSANDS)
<S> <C> <C>
Net liability reported under statutory accounting
practices....................................... $3,172,266 $3,228,792
Adjustment for GAAP basis accrual of estimated
salvage and subrogation recoveries.............. (9,325) (10,925)
Additional discount of workers' compensation
reserves........................................ 79,377 93,739
---------- ----------
Net liability reported on a GAAP basis............ $3,242,318 $3,311,606
---------- ----------
---------- ----------
</TABLE>
The difference between the property and casualty liability for gross loss
reserves at December 31, 1997 and 1996 reported in the Company's consolidated
financial statements and the liability which would be reported in accordance
with statutory accounting practices is as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1997 1996
---------- ----------
(IN THOUSANDS)
<S> <C> <C>
Liability reported under statutory accounting
practices....................................... $6,496,144 $5,968,395
Adjustment for GAAP basis accrual of estimated
salvage and subrogation recoveries.............. (13,884) (13,884)
Additional discount of workers' compensation
reserves........................................ 187,248 181,909
---------- ----------
Liability reported on a GAAP basis................ $6,669,508 $6,136,420
---------- ----------
---------- ----------
</TABLE>
Property and casualty loss reserves are based on an evaluation of reported
claims, in addition to statistical projections of claims incurred but not
reported and loss adjustment expenses. Estimates of salvage and subrogation are
deducted from the liability for unpaid claims. Also considered are other factors
such as the promptness with which claims are reported, the history of the
ultimate liability for such claims compared with initial and intermediate
estimates, the type of insurance coverage involved, the experience of the
property and casualty industry and other economic indicators, when applicable.
The establishment of loss reserves requires an estimate of the ultimate
liability based primarily on past experience. The Reliance Insurance Group
applies a variety of generally accepted actuarial techniques to determine the
estimates of ultimate liability. The techniques recognize, among other factors,
the Reliance Insurance Group's and the industry's experience with similar
business, historical trends in reserving patterns and loss payments, pending
level of unpaid claims, the cost of claim settlements, the Reliance Insurance
Group's product mix and the economic environment in which property and casualty
companies operate. Estimates are continually reviewed and adjustments of the
probable ultimate liability based on subsequent developments and new data are
included in operating results for the periods in which they are made. In
general, reserves are initially established based upon the actuarial and
underwriting data utilized to set pricing levels, and are reviewed as additional
information, including claims experience, becomes available. The establishment
of loss reserves makes no provision for the broadening of coverage by
legislative action or judicial interpretation or for extraordinary future
emergence of new classes of losses not sufficiently represented in the Reliance
Insurance Group's data base, or which are not yet able to be quantified. The
Reliance Insurance Group regularly analyzes its reserves and reviews its pricing
and reserving methodologies, using Reliance Insurance Group actuaries, so that
future adjustments to prior year reserves can be minimized. From time to time,
the Reliance Insurance Group consults with independent actuarial firms
concerning reserving practices and levels. The subsidiaries of the Reliance
Insurance Group are required by state insurance regulators to file, along with
their statutory reports, an actuarial reserve opinion setting forth an actuary's
assessment of its reserve status. Since 1992, the Reliance Insurance Group has
used an independent actuarial firm to meet such requirements. However, given the
complexity of this process, reserves will require continual updates and the
ultimate liability may be more or less than such estimates indicate. Estimation
of loss reserves for long tail lines of business is more difficult than for
short tail lines because long tail claims may not become apparent for a number
of years, and a relatively higher proportion of ultimate losses are considered
incurred but not reported. As a result, variation in loss development is more
likely in long tail lines of business. The Reliance Insurance Group attempts to
reduce
10
<PAGE>
these variations in certain of its long tail lines, primarily directors and
officers liability and professional liability, by writing policies on a
claims-made basis, which mitigates the long tail nature of the risks. The
Reliance Insurance Group also limits the potential loss from a single event
through the extensive use of reinsurance.
In calculating the liability for loss reserves, the Reliance Insurance
Group discounts workers' compensation pension claims which are expected to have
regular, periodic payment patterns. These claims are discounted for mortality
and for interest using statutory annual rates ranging from 3.5% to 6%. In
addition, the reserves for claims assumed through the participation of the
Reliance Insurance Group in workers' compensation reinsurance pools are
discounted. The discounting of all claims (net of reinsurance recoverables)
resulted in a decrease in the liability for loss reserves of $216.7 million,
$230.0 million and $235.7 million at December 31, 1997, 1996 and 1995,
respectively. The discount in 1997 was decreased by $0.5 million, in addition to
discount amortization of $12.8 million, resulting in a decrease in pre-tax
income of $13.3 million. The discount in 1996 was increased by $5.4 million,
which was more than offset by discount amortization of $11.1 million, resulting
in a reduction in pre-tax income of $5.7 million. The discount in 1995 was
increased by $1.8 million, which was more than offset by discount amortization
of $11.8 million, resulting in a reduction in pre-tax income of $10.0 million.
The liability for loss reserves includes provisions for inflation in
several ways, depending on how the reserve is established. An explicit provision
for inflation is used where estimates of ultimate loss are based on pricing. A
provision for inflation is also included for certain discounted workers'
compensation claims. In these cases, the provision for inflation is based on
factors supplied by the respective workers' compensation rating bureaus which
have jurisdiction for states which provide for cost-of-living increases in
indemnity benefits. In other reserves, the analysis reflects the effect of
inflationary trends as part of the overall effect on claim costs, as well as
changes in marketing, underwriting, reporting and processing systems, claims
settlement and coverages purchased.
Included in the liability for loss reserves at December 31, 1997 are $211.5
million ($192.9 million net of reinsurance recoverables) of loss reserves
pertaining to asbestos-related and environmental pollution claims for business
written in or before 1987. The following table presents information relating to
the net loss reserves pertaining to asbestos-related and environmental pollution
claims for business written in or before 1987 for the years ended December 31,
1997, 1996 and 1995:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------
1997 1996 1995
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Net loss reserves, beginning of year............................. $213,047 $101,008 $100,404
Provision for policy claims and related expenses................. -- 135,801 23,547
Payments for policy claims and related expenses.................. (20,114) (23,762) (22,943)
-------- -------- --------
Net loss reserves, end of year................................... $192,933 $213,047 $101,008
-------- -------- --------
-------- -------- --------
</TABLE>
The 1996 provision for policy claims and related expenses includes a pretax
charge of $134.0 million to increase net loss reserves for asbestos-related and
environmental pollution claims for business written in or before 1987. In the
second quarter of 1996, the Company completed a study of its asbestos-related
and environmental pollution reserves. The study entailed a detailed review of
the Company's claims, analysis of new industry data, review of policies and
classes of business written by the Company and industry at large, and new
actuarial methodologies for projecting ultimate losses based on payment patterns
and claims analyses. The loss reserve levels established represent the Company's
estimate of its ultimate losses, based on current information and actuarial
methodologies.
Included in the December 31, 1997 net loss reserves pertaining to
asbestos-related and environmental pollution claims for business written in or
before 1987 are $69.1 million of loss costs for claims incurred but not
reported, $43.9 million of loss costs for reported claims and $79.9 million of
related expenses.
11
<PAGE>
The following table presents information related to the number of insureds
with asbestos-related and environmental pollution claims outstanding for
business written in or before 1987:
<TABLE>
<CAPTION>
DECEMBER 31,
------------
1997 1996
---- ----
<S> <C> <C>
Number of insureds with outstanding claims, beginning of year........................... 402 447
Additional insureds with claims during the year......................................... 168 207
Insureds with closed or settled claims during the year.................................. (225) (252)
---- ----
Number of insureds with outstanding claims, end of year................................. 345 402
---- ----
---- ----
</TABLE>
The average net paid loss per insured for asbestos-related and
environmental pollution claims for business written in or before 1987 was
$44,200 and $50,200 for the years 1997 and 1996, respectively.
The Company continues to receive claims asserting injuries from hazardous
materials and alleged damages to cover various clean-up costs. Asbestos-related
and environmental pollution claims primarily affect the Company's general
liability, multiple peril and reinsurance lines of business. For business
written in or before 1987, coverage and claim settlement issues, such as the
determination that coverage exists and the definition of an occurrence, may
cause the actual loss development for asbestos-related and environmental
pollution claims to exhibit more variation than the remainder of the Company's
book of business.
Since 1987, the Company has generally excluded coverage for most types of
asbestos-related and environmental pollution claims from its general liability
policies, other than policies specifically intended to provide environmental
pollution and asbestos removal coverages. Policies written by the Company after
1987 ('post-1987 A&E business') which specifically intend to provide
environmental pollution coverages are written primarily on a claims-made basis
and those which specifically intend to provide asbestos removal coverages are
written on an occurrence basis, generally with liability limits of $1.1 million
(net of reinsurance), including defense costs.
The liability for loss reserves at December 31, 1997 also included $29.6
million ($20.2 million net of reinsurance recoverables) of loss reserves
pertaining to post-1987 A&E business. The following table presents information
relating to the net loss reserves pertaining to claims for post-1987 A&E
business for the years ended December 31, 1997, 1996 and 1995:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------
1997 1996 1995
------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Net loss reserves, beginning of year................................. $16,554 $15,829 $14,929
Provision for policy claims and related expenses..................... 6,758 4,053 1,891
Payments for policy claims and related expenses...................... (3,119) (3,328) (991)
------- ------- -------
Net loss reserves, end of year....................................... $20,193 $16,554 $15,829
------- ------- -------
------- ------- -------
</TABLE>
The December 31, 1997 net loss reserves pertaining to claims for post-1987
A&E business include $13.6 million of loss costs for claims incurred but not
reported, $2.3 million of loss costs for reported claims and $4.3 million of
related expenses.
The following table presents information related to the number of insureds
with claims outstanding for post-1987 A&E business:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------
1997 1996
---- ----
<S> <C> <C>
Number of insureds with outstanding claims, beginning of year.......................... 86 88
Additional insureds with claims during the year........................................ 155 44
Insureds with closed or settled claims during the year................................. (74) (46)
---- ----
Number of insureds with outstanding claims, end of year................................ 167 86
---- ----
---- ----
</TABLE>
The average net paid loss per insured for claims for post-1987 A&E business
was $24,000 and $56,800 for the years 1997 and 1996, respectively.
Although the Company believes, in light of present facts and current legal
interpretations, that the overall loss reserves of the Reliance Insurance Group
are adequate to meet their obligations under existing policies, due to the
inherent uncertainty and complexity of the reserving process, the ultimate
liability may be more or less than such reserves.
12
<PAGE>
PORTFOLIO INVESTMENTS
Investment activities are an integral part of the business of the Reliance
Insurance Group. The Reliance Insurance Group believes that the investment
objectives of safety and liquidity, while seeking to maximize total return, can
be achieved by active portfolio management and intensive monitoring of
investments. Reference is made to 'Financial Review--Property and Casualty
Insurance Investment Portfolio' on page 27 of the Company's 1997 Annual Report
and Note 3 to the Consolidated Financial Statements.
At December 31, 1997, the Reliance Insurance Group's investment portfolio
was $3.8 billion (at cost) with 90% in fixed maturities and short-term
securities (including redeemable preferred stock and cash) and 10% in equity
securities, approximately 25% of which were convertible preferred stock. The
following table details the distribution of the Reliance Insurance Group's
investments at December 31, 1997:
<TABLE>
<CAPTION>
AMORTIZED MARKET CARRYING
COST VALUE VALUE
---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
Fixed maturities available for sale:
Bonds and notes:
United States government and
government agencies and
authorities...................... $ 438,885 $ 443,032 $ 443,032
States, municipalities and
political subdivisions........... 130,922 139,473 139,473
Foreign-government................. 68,766 72,403 72,403
Foreign-other...................... 20,150 22,665 22,665
Public utilities................... 340,477 351,680 351,680
Convertibles and bonds with
warrants attached................ 60,736 69,450 69,450
All other corporate bonds and
notes............................ 730,416 755,206 755,206
Redeemable preferred stocks........... 424,611 463,764 463,764
---------- ---------- ----------
2,214,963 2,317,673 2,317,673
---------- ---------- ----------
Fixed maturities held for investment:
Bonds and notes:
States, municipalities and
political subdivisions........... 6,796 6,752 6,796
Foreign-government................. 129,571 137,544 129,571
Foreign-other...................... 17,218 18,432 17,218
Public utilities................... 249,202 257,434 249,202
All other corporate bonds and
notes............................ 141,620 147,211 141,620
Redeemable preferred stocks........... 91,712 96,371 91,712
---------- ---------- ----------
636,119 663,744 636,119
---------- ---------- ----------
Total fixed maturities........... 2,851,082 2,981,417 2,953,792
---------- ---------- ----------
Equity securities (1):
Common stocks:
Public utilities................... 11,142 13,214 13,214
Banks, trusts and insurance
companies........................ 19,435 38,067 38,067
Industrial and other............... 213,325 491,437 491,437
Nonredeemable preferred stocks........ 132,163 165,845 165,845
---------- ---------- ----------
376,065 708,563 708,563
---------- ---------- ----------
Short-term investments (2)............ 527,367 527,367 527,367
---------- ---------- ----------
Total investment portfolio....... $3,754,514 $4,217,347 $4,189,722
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
<TABLE>
<CAPTION>
COST AND CARRYING
VALUE
-----------------
<S> <C>
(IN THOUSANDS)
Mortgage Loans (3)............ $ 3,686
Investments in real estate.... 126,800
</TABLE>
- ------------------
(1) Does not include investment in Zenith National Insurance Corp. which, as of
December 31, 1997, had a carrying value of $166.7 million and a market value
of $169.3 million. See 'Investee Companies.'
(2) Includes cash of $39.8 million.
(3) In the Consolidated Financial Statements, mortgage loans are included in
premiums and other receivables.
13
<PAGE>
The Company seeks to maintain a diversified and balanced fixed maturity
portfolio representing a broad spectrum of industries and types of securities.
The Company holds virtually no investments in commercial real estate mortgages
and has no exposure to derivative securities (other than through its ownership
of any option, warrant or convertible security with an exercise or conversion
price related to an equity security). Purchases of fixed maturity securities are
researched individually based on in-depth analysis and objective predetermined
investment criteria and are managed to achieve a proper balance of safety,
liquidity and investment yields. The Reliance Insurance Group primarily invests
in investment grade securities (those rated 'BBB' or better by S&P), and, to a
lesser extent, non-investment grade and non-rated securities.
At December 31, 1997, the aggregate carrying value and market value of
fixed maturities (other than short-term investments and cash) that either have
been rated by S&P in the following categories or are non-rated were as follows:
<TABLE>
<CAPTION>
PERCENT
CARRYING MARKET OF MARKET
VALUE VALUE VALUE
---------- ---------- ---------
(IN THOUSANDS, EXCEPT PERCENTAGES)
<S> <C> <C> <C>
AAA to A...................... $1,641,451 $1,659,480 56%
BBB........................... 591,839 601,386 20
---------- ---------- ---
Total investment grade... 2,233,290 2,260,866 76
---------- ---------- ---
BB to B....................... 527,941 527,992 18
CCC to D...................... 11,701 11,701 --
Non-rated..................... 180,860 180,858 6
---------- ---------- ---
Total.................... $2,953,792 $2,981,417 100%
---------- ---------- ---
---------- ---------- ---
</TABLE>
Substantially all of the non-investment grade and non-rated fixed
maturities are classified as 'available for sale' and, accordingly, are carried
at quoted market value. All publicly traded investment grade securities are
priced using the Merrill Lynch Matrix Pricing model, which model is one of the
standard methods of pricing such securities in the industry. All publicly traded
non-investment grade securities, except as indicated below, are priced from
broker-dealers who make markets in these and other similar securities. For fixed
maturities not publicly traded, prices are estimated based on values obtained
from independent third parties or quoted market prices of comparable
instruments. Upon sale, such prices may not be realized when the size of a
particular investment in an issue is significant in relation to the total size
of such issue. Non-investment grade securities that are thinly traded are priced
using internally developed calculations. Such securities represent less than 1%
of the Reliance Insurance Group's fixed maturities portfolio.
Equity investments are made after an in-depth analysis of individual
company's fundamentals by the Reliance Insurance Group's staff of investment
professionals. They seek to identify equities of companies with strong growth
prospects and equities that appear to be undervalued relative to the issuer's
business fundamentals, such as earnings, cash flows, balance sheet and future
prospects. Subsequent to purchase, the business fundamentals of each equity
investment are carefully monitored.
As of February 27, 1998, the Reliance Insurance Group owned 5,367,951
shares of common stock of Symbol Technologies, Inc. ('Symbol'), representing
13.7% of the then outstanding common stock of Symbol. Symbol is the nation's
largest manufacturer of bar code-based data capture systems. As of February 27,
1998, the market value of the Reliance Insurance Group's investment in Symbol
was $274,101,000 (based upon the closing price of Symbol common stock on such
date as reported by the NYSE), with a cost basis of $27,252,000. Certain
executive officers of the Company serve, at the Company's request, as directors
of Symbol.
At December 31, 1997, the Company's real estate operations had holdings
with a carrying value of $126.8 million, which includes office buildings and
other commercial properties with an aggregate carrying value of $91.8 million,
and undeveloped land with a carrying value of $35.0 million.
14
<PAGE>
The following table presents the investment results of the Reliance
Insurance Group's investment portfolio (including Commonwealth/Transnation's
investment portfolio) for each of the years ended December 31, 1997, 1996 and
1995:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------
1997 1996 1995
---------- ---------- ----------
(IN THOUSANDS, EXCEPT PERCENTAGES)
<S> <C> <C> <C>
Fixed Maturities:
Average investments (1)................. $3,764,220 $3,625,144 $3,394,988
Net investment income................... 267,895 260,275 243,268
Realized gains (losses)................. 476 (5,686) 10,521
Increase (decrease) in unrealized
gains................................. 103,992 (68,739) 329,457
Average annual yield:
Net investment income.............. 7.12% 7.18% 7.17%
Realized gains (losses)............ 0.01 (0.15) 0.31
Increase (decrease) in unrealized
gains............................ 2.76 (1.90) 9.70
---------- ---------- ----------
Return on fixed maturities.............. 9.89% 5.13% 17.18%
---------- ---------- ----------
---------- ---------- ----------
Equity Securities (2):
Average investments (1)................. $ 727,287 $ 703,121 $ 600,206
Net investment income................... 11,017 12,425 19,317
Realized gains.......................... 55,666 58,296 23,811
Increase in unrealized gains............ 51,945 15,939 182,507
Average annual yield:
Net investment income.............. 1.51% 1.77% 3.22%
Realized gains..................... 7.66 8.29 3.97
Increase in unrealized gains....... 7.14 2.27 30.40
---------- ---------- ----------
Return on equity securities............. 16.31% 12.33% 37.59%
---------- ---------- ----------
---------- ---------- ----------
Total weighted average return on fixed
maturities and equity securities
(3)................................... 10.93% 6.30% 20.25%
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
- ------------------
(1) The average is computed by dividing the total market value of investments at
the beginning of the period plus the individual quarter-end balances by five
for the years ended December 31, 1997, 1996 and 1995.
(2) Does not include investment in Zenith National Insurance Corp. See 'Investee
Companies.'
(3) The impact on the overall rate of return of a one percent increase or
decrease in the December 31, 1997 fixed maturity portfolio market value
would be approximately 0.74%.
The carrying value and market value at December 31, 1997 of fixed
maturities for which interest is payable on a deferred basis was $115.1 million.
15
<PAGE>
INVESTEE COMPANIES
As of February 27, 1998, the Reliance Insurance Group owned 6,574,445
shares of common stock of Zenith National Insurance Corp. ('Zenith'),
representing 38.9% of the outstanding common stock of Zenith, a California-based
insurance company with significant workers' compensation and standard commercial
and personal lines business. As of February 27, 1998 the market value of the
Reliance Insurance Group's investment in Zenith was $179,565,000 (based upon the
closing price of Zenith common stock on such date as reported by the NYSE), with
a carrying value of $166,673,000. Certain executive officers of the Company
serve, at the Company's request, as directors of Zenith. The Company's
investment in Zenith is accounted for by the equity method. See Note 4 to the
Consolidated Financial Statements.
As of February 27, 1998, the date of the completion of the Title Sale, the
Reliance Insurance Group owned 4,039,473 shares of common stock of LandAmerica,
representing 26.8% of the outstanding common stock of LandAmerica, a
Viginia-based title insurance company which is the largest title insurer in the
United States based on the combined revenues of LandAmerica and
Commonwealth/Transnation Title, and owned 2,200,000 shares of the 7% preferred
stock of LandAmerica having an aggregate stated value of $110,000,000 and
initially convertible into 4,824,561 shares of LandAmerica common stock. As of
February 27, 1998 the market value and carrying value of the Reliance Insurance
Group's investment in LandAmerica was $395,512,000 (based upon the average price
of LandAmerica common stock on such date as reported by the NYSE and upon an
investment banker's valuation of the preferred stock). Certain executive
officers of the Company serve, at the Company's request, as directors of
LandAmerica. The Company's investment in LandAmerica for periods subsequent to
the sale of Commonwealth/Transnation Title will be accounted for by the equity
method. See Note 2 to the Consolidated Financial Statements.
REGULATION
The businesses of the Reliance Insurance Group, in common with those of
other insurance companies, are subject to comprehensive, detailed regulation in
the jurisdictions in which they do business. Such regulation is primarily for
the protection of policyholders rather than for the benefit of investors.
Although their scope varies from place to place, insurance laws in general grant
broad powers to supervisory agencies or officials to examine companies and to
enforce rules or exercise discretion touching almost every significant aspect of
the conduct of the insurance business. These include the licensing of companies
and agents to transact business, the imposition of monetary penalties for rules
violations, varying degrees of control over premium rates, the forms of policies
offered to customers, financial statements, periodic reporting, permissible
investments and adherence to financial standards relating to surplus, dividends
and other criteria of solvency intended to assure the satisfaction of
obligations to policyholders. Other legislation obliges the Reliance Insurance
Group to offer policies or assume risks in various markets which it would not
seek if it were acting solely in its own interest. While such regulation and
legislation is sometimes burdensome, inasmuch as all insurance companies
similarly situated are subject to such controls, the Company does not believe
that the competitive position of the Reliance Insurance Group is affected
adversely.
State holding company acts also regulate changes of control in insurance
holding companies and transactions and dividends between an insurance company
and its parent or affiliates. Although the specific provisions vary, the holding
company acts generally prohibit a person from acquiring a controlling interest
in an insurer incorporated in the state promulgating the act or in any other
controlling person of such insurer unless the insurance authority has approved
the proposed acquisition in accordance with the applicable regulations. In many
states, including Pennsylvania, where Reliance Insurance Company is domiciled,
'control' is presumed to exist if 10% or more of the voting securities of the
insurer are owned or controlled by a party, although the insurance authority may
find that 'control' in fact does or does not exist where a person owns or
controls either a lesser or a greater amount of securities. The holding company
acts also impose standards on certain transactions with related companies, which
generally include, among other requirements, that all transactions be fair and
reasonable and that certain types of transactions receive prior regulatory
approval either in all instances or when certain regulatory thresholds have been
exceeded.
The Insurance Law of Pennsylvania limits the maximum amount of dividends
which may be paid without approval by the Pennsylvania Insurance Department.
Under such law, Reliance Insurance Company
16
<PAGE>
may pay dividends during the year equal to the greater of (a) 10% of the
preceding year-end policyholders' surplus or (b) the preceding year's statutory
net income, but in no event to exceed the amount of unassigned funds, which are
defined as 'undistributed, accumulated surplus including net income and
unrealized gains since the organization of the insurer.' In addition, the
Pennsylvania law specifies factors to be considered by the Pennsylvania
Insurance Department to allow it to determine that statutory surplus after the
payment of dividends is reasonable in relation to an insurance company's
outstanding liabilities and adequate for its financial needs. Such factors
include the size of the company, the extent to which its business is diversified
among several lines of insurance, the number and size of risks insured, the
nature and extent of the insurance company's reinsurance and the adequacy of the
insurance company's reserves. The maximum dividend permitted by law is not
indicative of an insurer's actual ability to pay dividends, which may be
constrained by business and regulatory considerations, such as the impact of
dividends on surplus, which could affect an insurer's ratings, competitive
position, the amount of premiums that can be written and the ability to pay
future dividends. Furthermore, the Pennsylvania Insurance Department has broad
discretion to limit the payment of dividends by insurance companies. 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.
The total amount of common stock dividends paid by Reliance Insurance
Company during 1997, 1996 and 1995 was $114.6 million, $111.5 million and $111.5
million, respectively. During 1998, $130.1 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 operating cash
needs. On March 5, 1998, Reliance Insurance Company obtained the approval of the
Pennsylvania Insurance Department to pay an extraordinary dividend in the amount
of an additional $135.0 million, representing a portion of the gain from the
sale of Commonwealth/Transnation Title. The Company plans to use funds provided
by the dividend to purchase approximately $125 million of its outstanding debt.
Maintaining appropriate levels of statutory surplus is considered important
by the Company's management, state insurance regulatory authorities, and the
agencies that rate insurers' claims-paying abilities and financial strength.
Failure to maintain certain levels of statutory capital and surplus could result
in increased scrutiny or, in some cases, action taken by state regulatory
authorities and/or downgrades in an insurer's ratings.
The National Association of Insurance Commissioners (the 'NAIC') has a
'risk-based capital' requirement for the property and casualty insurance
industry. 'Risk-based capital' refers to the determination of the amount of
statutory capital required for an insurer based on the risks assumed by the
insurer (including, for example, investment risks, credit risks relating to
reinsurance recoverables and underwriting risks) rather than just the amount of
net premiums written by the insurer. A formula that applies prescribed factors
to the various risk elements in an insurer's business is used to determine the
minimum statutory capital requirement for the insurer. An insurer having less
statutory capital than the formula calculates would be subject to varying
degrees of regulatory intervention, depending on the level of capital
inadequacy. All of the Company's statutory insurance companies have statutory
capital in excess of the minimum required risk-based capital.
Reliance Insurance Company had values which in 1997 fell outside of the
usual range for two NAIC financial ratio ranges. Both financial ratio ranges are
intended to permit the NAIC to monitor insurance companies' performance with
respect to such ranges. With respect to the first test, Liabilities to Liquid
Assets, investments in affiliates are excluded from the definition of liquid
assets. Reliance Insurance Company is the parent company of all of the property
and casualty companies of the Reliance Insurance Group and therefore the results
for this test consistently fall outside the usual range. The Company believes
that it has sufficient marketable assets on hand to make timely payment of
claims and to meet other operating requirements. With respect to the second
test, Estimated Current Reserve Deficiency to Surplus, Reliance Insurance
Company's growth in earned premiums in 1997, in conjunction with a change in the
mix
17
<PAGE>
of business to more short-tailed lines, caused test results to fall outside of
the usual range. The Company believes that its value for this range is not
reflective of the adequacy of Reliance Insurance Company's current reserves.
From time to time, states have adopted or considered adopting legislation
or regulations which could adversely affect the manner in which the Company sets
rates for policies of insurance, particularly as they relate to personal lines.
In 1988, California approved an initiative statute designated as Proposition
103. Proposition 103 contained, among others, provisions relating to the
rollback of rates for property and casualty insurance policies issued or renewed
between November 8, 1988 and November 7, 1989 (the 'Rollback Year') to levels
which were at least 20% less than rates for the same coverage which were in
effect on November 8, 1987. On January 31, 1996, the Company reached a
settlement with the California Department of Insurance resolving the Company's
total liability under Proposition 103 with respect to the Rollback Year. No
assurance can be given as to what effect the adoption of similar legislation or
regulations in the future would have on the ability of the Company to raise its
rates.
COMPETITION
The markets in which the Company's businesses compete are highly
competitive. The property and casualty insurance business is fragmented and no
single company dominates any of the markets in which the Company operates. The
Reliance Insurance Group competes with individual companies and with groups of
affiliated companies with greater financial resources, larger sales forces and
more widespread agency and broker relationships. Competition in the property and
casualty insurance industry is based primarily on price, product design and
service. In addition, because the Reliance Insurance Group sells policies
primarily through agents and insurance brokers who are not obligated to choose
the policies of the Reliance Insurance Group over those of another insurer, the
Reliance Insurance Group must compete for agents and brokers and for the
business they control. Such competition is based upon price, product design,
policyholder service, commissions and service to agents and brokers.
RCG Information Technology competes with other national mid-size
information technology services companies, as well as smaller computer
professional supplemental staffing firms. Competition in the information
technology consulting business is based primarily on price, service, quality of
the solutions provided and the availability of qualified computer professionals.
SALE OF SUBSIDIARY
On December 31, 1997, the Company sold all of the issued and outstanding
common stock of its subsidiary, Prometheus Funding Corp. ('Prometheus'),
formerly known as Frank B. Hall & Co. Inc. ('Hall'), an insurance broker.
Prometheus had previously sold substantially all of its operating assets and
insurance brokerage, employee benefits consulting and related services
businesses.
ITEM 2. PROPERTIES
The Company and its consolidated subsidiaries own and lease offices in
various locations primarily in the United States. None of these properties is
material to the Company's business. At December 31, 1997, the Company and its
consolidated subsidiaries (excluding Commonwealth/Transnation) employed
approximately 5,850 persons in approximately 150 offices.
ITEM 3. LEGAL PROCEEDINGS
The Company and its subsidiaries are involved in certain litigation arising
in the course of their businesses, some of which involve claims of substantial
amounts. Although the ultimate outcome of these matters cannot be ascertained at
this time, and the results of legal proceedings cannot be predicted with
certainty, the Company is contesting the allegations of the complaints in each
action pending against it and believes, based on current knowledge and after
consultation with counsel, that the resolution of these matters will not have a
material adverse effect on the Consolidated Financial Statements.
In addition, the Company is subject to the litigation set forth in Note 15
to the Consolidated Financial Statements.
18
<PAGE>
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matter was submitted to a vote of security holders in the fourth quarter
of the fiscal year covered by this Annual Report on Form 10-K.
EXECUTIVE OFFICERS OF THE REGISTRANT
Set forth below is the name, age and position of each of the executive
officers of the Company:
<TABLE>
<CAPTION>
NAME AND AGE POSITION
- ------------------------------- -----------------------------------------------
<S> <C>
Saul P. Steinberg (58)......... Chairman of the Board and Chief Executive
Officer
Robert M. Steinberg (55)....... President, Chief Operating Officer and Director
George E. Bello (62)........... Executive Vice President, Controller and
Director
Lowell C. Freiberg (58)........ Senior Vice President, Chief Financial Officer
and Director
Henry A. Lambert (62).......... Senior Vice President--Real Estate Investments
and Operations
Dennis J. O'Leary (50)......... Senior Vice President--Taxes
Philip S. Sherman (49)......... Senior Vice President--Group Controller
Bruce L. Sokoloff (49)......... Senior Vice President--Administration
Howard E. Steinberg (53)....... Senior Vice President, General Counsel and
Corporate Secretary
James E. Yacobucci (46)........ Senior Vice President--Investments and Director
</TABLE>
The association between the Company and each of its executive officers is
described below.
Saul P. Steinberg founded and has been the Chief Executive Officer and a
Director of the Company and predecessors of the Company since 1961. Mr.
Steinberg is a Director of Symbol Technologies, Inc. and Zenith National
Insurance Corp. He is Chairman of the Executive Committee and the Regular
Compensation Committee of the Board of Directors. He is the brother of Robert M.
Steinberg and the brother-in-law of Bruce L. Sokoloff.
Robert M. Steinberg became a Director of the Company in 1981 and President
and Chief Operating Officer in 1982. He has held various positions with
predecessors of the Company since 1965. In October 1984, Mr. Steinberg was
elected Chairman of the Board and Chief Executive Officer of Reliance Insurance
Company. He is a Director of LandAmerica Financial Group, Inc. and Zenith
National Insurance Corp. Mr. Steinberg is a member of the Executive Committee
and the Regular Compensation Committee of the Board of Directors. Mr. Steinberg
is the brother of Saul P. Steinberg and the brother-in-law of Bruce L. Sokoloff.
George E. Bello became Executive Vice President and Controller and a
Director of the Company in 1982. He has held various positions with predecessors
of the Company since 1968. He is a Director of Horizon Health Corporation,
LandAmerica Financial Group, Inc., United Dental Care, Inc. and Zenith National
Insurance Corp. Mr. Bello is a member of the Finance Committee of the Board of
Directors.
Lowell C. Freiberg became Senior Vice President and a Director of the
Company in 1982 and Chief Financial Officer in 1985. He also served as Treasurer
of the Company from 1982 until March 1994. Mr. Freiberg has held various
positions with predecessors of the Company since 1969. He is a Director of
19
<PAGE>
LandAmerica Financial Group, Inc. and Symbol Technologies, Inc. Mr. Freiberg is
a member of the Finance Committee of the Board of Directors.
Henry A. Lambert was elected Senior Vice President--Real Estate Investments
and Operations of the Company in 1982. He has held various positions with
predecessors of the Company since 1977. He is President and Chief Executive
Officer of Reliance Development Group, Inc., the real estate management
subsidiary of the Company.
Dennis J. O'Leary joined the Company in 1985 as Vice President--Director of
Taxes. Prior thereto, he was a partner at the accounting firm of Deloitte &
Touche LLP (formerly Touche Ross & Co.) since 1980 and was associated with the
firm since 1975. In 1987 he was elected Senior Vice President--Taxes.
Philip S. Sherman was elected Vice President--Group Controller of the
Company in l984 and in 1987 he was elected Senior Vice President--Group
Controller. He has held various positions with predecessors of the Company since
l980.
Bruce L. Sokoloff was elected Senior Vice President--Administration of the
Company in 1982. He has held various positions with predecessors of the Company
since 1973. He is a Director of Individual Investor Group, Inc. Mr. Sokoloff is
the brother-in-law of Messrs. Saul P. Steinberg and Robert M. Steinberg.
Howard E. Steinberg, Esq. joined the Company in March 1983, as Senior Vice
President, General Counsel and Corporate Secretary. Prior thereto, he was a
partner in the law firm of Dewey, Ballantine, Bushby, Palmer & Wood. Mr.
Steinberg also serves as the Chairman of the New York State Thruway Authority,
an unpaid position to which he was appointed in January 1996.
James E. Yacobucci became a Director of the Company and Senior Vice
President--Investments of Reliance Insurance Company in May 1989. He became
Senior Vice President--Investments of the Company in December 1990.
Officers are not elected for a fixed term of office but serve at the
discretion of the Board of Directors. Certain executive officers have employment
agreements with the Company.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
See the information in 'Market and Dividend Information for Common Stock'
on page 60 of the Reliance Group Holdings 1997 Annual Report, which information
is incorporated herein by reference.
ITEM 6. SELECTED FINANCIAL DATA.
See the information in 'Reliance Group Holdings, Inc. & Subsidiaries
Selected Financial Data' on pages 21 and 22 of the Reliance Group Holdings 1997
Annual Report, which information is incorporated herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
See the information in 'Reliance Group Holdings, Inc. & Subsidiaries
Financial Review' on pages 24 through 30 of the Reliance Group Holdings 1997
Annual Report, which information is incorporated herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The financial statements of the Company and its consolidated subsidiaries,
included on pages 31 through 57 of the Reliance Group Holdings 1997 Annual
Report, which information is incorporated herein by reference, are listed in
Item 14 below.
20
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Information regarding the executive officers of the Company is included in
Part I of this report under the caption 'Executive Officers of the Registrant.'
Information regarding the directors of the Company is incorporated herein
by reference from its Proxy Statement for the Annual Meeting of Stockholders to
be held May 14, 1998, under the caption 'Proposal 1--Election of Directors.'
ITEM 11. EXECUTIVE COMPENSATION.
See the information in the Company's Proxy Statement for the Annual Meeting
of Stockholders to be held May 14, 1998, under the caption 'Executive
Compensation,' which information (other than the information under the captions
'Executive Compensation--Report of Compensation Committees of the Board' and
'Executive Compensation--Performance Graph') is incorporated herein by
reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
See the information in the Company's Proxy Statement for the Annual Meeting
of Stockholders to be held May 14, 1998, under the caption 'Security Ownership
of Certain Beneficial Owners and Management,' which information is incorporated
herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
See the information in the Company's Proxy Statement for the Annual Meeting
of Stockholders to be held May 14, 1998, under the captions 'Executive
Compensation--Compensation Committee Interlocks and Insider Participation' and
'Related Party Transactions,' which information is incorporated herein by
reference.
21
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(A) 1. FINANCIAL STATEMENTS.
The consolidated financial statements of Reliance Group Holdings, Inc. and
Subsidiaries, which appear on pages 31 through 57 of the Reliance Group Holdings
1997 Annual Report, are incorporated herein by reference.
<TABLE>
<CAPTION>
PAGE REFERENCE
-------------------
1997
ANNUAL
FORM 10-K REPORT
--------- ------
<S> <C> <C>
RELIANCE GROUP HOLDINGS, INC. AND SUBSIDIARIES:
Independent Auditors' Report............................ A-1 58
Consolidated Financial Statements at December 31, 1997
and 1996 and for the three years ended December 31,
1997:
Statement of Income................................ 31
Balance Sheet...................................... 32
Statement of Changes in Shareholders' Equity....... 33
Statement of Cash Flows............................ 34
Notes to Financial Statements (1-18)............... 35-57
</TABLE>
2. FINANCIAL STATEMENT SCHEDULES.
<TABLE>
<S><C> <C>
I -- Summary of Investments of Insurance Subsidiaries --
Other Than Investments in Related Parties.......... A-2
II -- Condensed Financial Information of the Registrant at
December 31, 1997 and 1996 and for the three years
ended December 31, 1997:
Statement of Income................................. A-3
Balance Sheet....................................... A-4
Statement of Cash Flows............................. A-5
III -- Supplementary Insurance Information................ A-6
IV -- Reinsurance......................................... A-7
VI -- Supplemental Information Concerning Property and
Casualty Insurance Operations...................... A-8
</TABLE>
Pursuant to Rule 1-02(w) of Regulation S-X, Reliance Insurance Group's
investment in Zenith National Insurance Corp. met the definition of a
'significant subsidiary' in 1996. Zenith National Insurance Corp. files
financial statements with the Securities and Exchange Commission which should be
referred to for additional information.
3. EXHIBITS.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- --------- --------------------------------------------------------------------
<S> <C>
3.1 Reliance Group Holdings' Certificate of Incorporation, as amended
(incorporated by reference to Exhibit 3(a) to Registration Statement
No. 2-77043).
3.2 Amendment to Exhibit 3.1, as filed with the Secretary of State of
the State of Delaware on July 22, 1986 (incorporated by reference to
Exhibit 3.2 to Registration Statement No. 33-7493).
3.3 Reliance Group Holdings' By-Laws, as amended (incorporated by
reference to Exhibit 3.3 to Reliance Group Holdings' Annual Report
on Form 10-K for the year ended December 31, 1991).
</TABLE>
22
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- --------- --------------------------------------------------------------------
<S> <C>
3.4 Amendment to Exhibit 3.1, as filed with the Secretary of State of
the State of Delaware on May 27, 1993 (incorporated by reference to
Exhibit 4.5 to Registration Statement No. 33-67396).
*4.
+10.1 Employment Agreement between Reliance Group Holdings and Saul P.
Steinberg, dated as of February 15, 1996 (and the Schedule attached
thereto pursuant to Instruction 2 to Item 601 of Regulation S-K
listing George E. Bello, Lowell C. Freiberg, Howard E. Steinberg and
Robert M. Steinberg as having employment agreements identical in all
respects to Exhibit 10.1 other than as specified in such schedule)
(incorporated by reference to Exhibit 10.1 to Reliance Group
Holdings' Quarterly Report on Form 10-Q for the quarter ended March
31, 1996).
+10.2 Amendment, dated as of December 29, 1997, to Employment Agreement
between Reliance Group Holdings and Saul P. Steinberg, dated as of
February 15, 1996 (and the Schedule attached thereto pursuant to
Instruction 2 to Item 601 of Regulation S-K listing George E. Bello,
Lowell C. Freiberg, Howard E. Steinberg and Robert M. Steinberg as
having amendments to their employment agreements identical in all
respects to Exhibit 10.2 other than as specified in such schedule).
+10.3 Employment Agreement between Reliance Insurance Company and Saul P.
Steinberg, dated as of February 15, 1996 (and Schedule attached
thereto pursuant to Instruction 2 to Item 601 of Regulation S-K
listing Robert M. Steinberg as having an employment agreement
identical in all respects to Exhibit 10.3) (incorporated by
reference to Exhibit 10.1 to Reliance Group Holdings' Quarterly
Report on Form 10-Q for the quarter ended March 31, 1996).
+10.4 Employment Agreement between Reliance Group Holdings and Bruce L.
Sokoloff, dated as of May 15, 1996 (incorporated by reference to
Exhibit 10.1 to Reliance Group Holdings' Quarterly Report on Form
10-Q for the quarter ended June 30, 1996).
+10.5 Amendment, dated as of December 29, 1997, to Employment Agreement
between Reliance Group Holdings and Bruce L. Sokoloff, dated as of
May 15, 1996.
+10.6 1986 Stock Option Plan of Reliance Group Holdings, as amended
(incorporated by reference to Exhibit 19.2 to Reliance Group
Holdings' Quarterly Report on Form 10-Q for the quarter ended June
30, 1990).
+10.7 Amended and Restated 1994 Stock Option Plan for Non-Employee
Directors.
+10.8 The Reliance Group Holdings, Inc. 1994 Stock Option Plan
(incorporated by reference to Exhibit 10.2 to Reliance Group
Holdings' Quarterly Report on Form 10-Q for the quarter ended June
30, 1994).
+10.9 The Reliance Group Holdings, Inc. 1997 Stock Option Plan
(incorporated by reference to Exhibit 10.2 to Reliance Group
Holdings' Quarterly Report on Form 10-Q for the quarter ended June
30, 1997).
+10.10 The Reliance Group Holdings, Inc. Employee Stock Purchase Plan
(incorporated by reference to Exhibit 10.1 to Reliance Group
Holdings' Quarterly Report on Form 10-Q for the quarter ended June
30, 1997).
</TABLE>
- ------------------
* Neither Reliance Group Holdings nor its subsidiaries is a party to any
instrument relating to long-term debt under which the securities authorized
exceed 10% of the total consolidated assets of Reliance Group Holdings and its
subsidiaries. Copies of instruments relating to long-term debt of lesser
amounts will be provided to the Securities and Exchange Commission upon
request.
+ Management contract or compensatory plan or arrangement required to be filed
as an Exhibit to this Form 10-K pursuant to Item 14(c).
23
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- --------- --------------------------------------------------------------------
<S> <C>
+10.11 The Reliance Group Holdings, Inc. Key Employee Share Option Plan.
+10.12 The Reliance Group Holdings, Inc. Executive Bonus Plan (incorporated
by reference to Exhibit 10.3 to Reliance Group Holdings' Quarterly
Report on Form 10-Q for the quarter ended June 30, 1994).
+10.13 The 1995 Amendment to The Reliance Group Holdings, Inc. Executive
Bonus Plan (incorporated by reference to Exhibit 10.15 to Reliance
Group Holdings' Annual Report on Form 10-K for the year ended
December 31, 1995).
+10.14 The 1996 Amendment to The Reliance Group Holdings, Inc. Executive
Bonus Plan (incorporated by reference to Exhibit 10.19 to Reliance
Group Holdings' Annual Report on Form 10-K for the year ended
December 31, 1996).
+10.15 The Executive Bonus Plan for James E. Yacobucci, Senior Vice
President-Investments, of Reliance Group Holdings (incorporated by
reference to Exhibit 10.4 to Reliance Group Holdings' Quarterly
Report on Form 10-Q for the quarter ended June 30, 1994).
+10.16 Reliance National Risk Specialists 1988 Key Management Incentive
Plan (incorporated by reference to Exhibit 10.9 to Reliance
Insurance Company's Annual Report on Form 10-K for the year ended
December 31, 1988).
+10.17 Reliance National Risk Specialists 1992 Key Management Incentive
Plan (incorporated by reference to Exhibit 10.9 to Reliance
Insurance Company's Annual Report on Form 10-K for the year ended
December 31, 1993).
+10.18 Reliance National Risk Specialists 1993 Key Management Incentive
Plan (incorporated by reference to Exhibit 10.10 to Reliance
Insurance Company's Annual Report on Form 10-K for the year ended
December 31, 1993).
+10.19 Reliance National Risk Specialists 1994 Key Management Incentive
Plan (incorporated by reference to Exhibit 10.14 to Reliance
Insurance Company's Annual Report on Form 10-K for the year ended
December 31, 1994).
+10.20 Reliance National Risk Specialists 1995 Key Management Incentive
Plan (incorporated by reference to Exhibit 10.25 to Reliance Group
Holdings' Annual Report on Form 10-K for the year ended December 31,
1996).
+10.21 Reliance National Risk Specialists Supplemental Key Management
Incentive Plan (effective for policy years 1993, 1994 and 1995)
(incorporated by reference to Exhibit 10.26 to Reliance Group
Holdings' Annual Report on Form 10-K for the year ended December 31,
1996).
+10.22 Reliance National Risk Specialists 1996 Key Management Incentive
Plan (incorporated by reference to Exhibit 10.27 to Reliance Group
Holdings' Annual Report on Form 10-K for the year ended December 31,
1996).
+10.23 Reliance National Risk Specialists 1997 Key Management Incentive
Plan.
+10.24 Memorandum, dated February 8, 1989, summarizing employment
arrangements between Reliance Insurance Company and Dennis Busti
(incorporated by reference to Exhibit 10.8 to Reliance Insurance
Company's Annual Report on Form 10-K for the year ended December 31,
1988).
10.25 Asset Purchase Agreement, dated July 24, 1992, between Frank B. Hall
& Co. Inc. ('Hall') and Aon Corporation ('Aon') (incorporated by
reference to Exhibit 2.1 to Reliance Group Holdings' Quarterly
Report on Form 10-Q for the quarter ended June 30, 1992).
</TABLE>
- ------------------
+ Management contract or compensatory plan or arrangement required to be filed
as an Exhibit to this Form 10-K pursuant to Item 14(c).
24
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- --------- --------------------------------------------------------------------
<S> <C>
10.26 Agreement and Plan of Merger, dated as of July 24, 1992, among
Reliance Group Holdings, Hall and Prometheus Liquidating Corp.
(incorporated by reference to Exhibit 2.2 to Reliance Group
Holdings' Quarterly Report on Form 10-Q for the quarter ended June
30, 1992).
10.27 Employee Benefit Agreement, dated July 24, 1992, among Reliance
Group Holdings and Aon (incorporated by reference to Exhibit 28.2 to
Reliance Group Holdings' Quarterly Report on Form 10-Q for the
quarter ended June 30, 1992).
10.28 Amendment, dated November 2, 1992, to Exhibit 10.25 (incorporated by
reference to Exhibit 2.1 to Reliance Group Holdings' Quarterly
Report on Form 10-Q for the quarter ended September 30, 1992).
10.29 Settlement Agreement and Release, dated June 2, 1989, between James
P. Corcoran, Superintendent of Insurance of the State of New York,
as Liquidator of Union Indemnity Insurance Company of New York, Inc.
and Hall (now known as Prometheus Funding Corp.)(incorporated herein
by reference to Exhibit 10.01 to Frank B. Hall & Co. Inc.'s report
on Form 10-Q for the quarter ended June 30, 1989).
10.30 Amendment No. 1, dated April 21, 1997, to Exhibit 10.29
(incorporated by reference to Exhibit 10.1 to Reliance Group
Holdings' Quarterly Report on Form 10-Q for the quarter ended March
31, 1997).
10.31 Stock Purchase Agreement, dated as of December 31, 1997, among Bear
Stearns Acquisition Corp. XVI, Reliance National (U.K.) Ltd. and
Reliance Insurance Company.
10.32 Amended and Restated Stock Purchase Agreement, dated as of December
11, 1997 by and among Reliance Insurance Company, LandAmerica and
Lawyers Title Insurance Corporation (incorporated by reference to
Appendix A to LandAmerica's definitive Proxy Statement filed with
the Securities and Exchange Commission on January 29, 1998).
10.33 Voting and Standstill Agreement, dated as of February 27, 1998, by
and among LandAmerica, Reliance Group Holdings and Reliance
Insurance Company (incorporated by reference to Exhibit 10.26 to
LandAmerica's Annual Report on Form 10-K for the year ended December
31, 1997).
10.34 Registration Rights Agreement, dated as of February 27, 1998, by and
among LandAmerica and Reliance Insurance Company (incorporated by
reference to Exhibit 10.27 to LandAmerica's Annual Report on Form
10-K for the year ended December 31, 1997).
10.35 Articles of Amendment to LandAmerica's Articles of Incorporation
(incorporated by reference to Exhibit 4.2 to LandAmerica's Form 8-A
filed with the Securities and Exchange Commission on February 27,
1998).
13.1 Reliance Group Holdings 1997 Annual Report.
21.1 List of Subsidiaries of Reliance Group Holdings.
23.1 Consent of Deloitte & Touche LLP.
27.1 Financial Data Schedule.
**99.1 Annual Report on Form 11-K of Reliance Insurance Company Savings
Incentive Plan for the year ended December 31, 1997.
</TABLE>
- ------------------
** To be filed by Amendment.
(B) REPORTS ON FORM 8-K.
No reports on Form 8-K were filed during the three months ended December
31, 1997.
25
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON
ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, ON THE 30TH DAY OF
MARCH, 1998.
RELIANCE GROUP HOLDINGS, INC.
BY: /s/ SAUL P. STEINBERG
-----------------------------
SAUL P. STEINBERG
CHAIRMAN OF THE BOARD
AND CHIEF EXECUTIVE OFFICER
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS
REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE
REGISTRANT AND IN THE CAPACITIES AND ON THE DATES INDICATED.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ---------------------- ---------------------------------------- --------------
<S> <C> <C>
<CAPTION>
/s/ SAUL P. STEINBERG Chairman of the Board, March 30, 1998
- ------------------------
SAUL P. STEINBERG Principal Executive Officer
and Director
/s/ GEORGE E. BELLO Principal Accounting March 30, 1998
- ------------------------
GEORGE E. BELLO Officer and Director
/s/ LOWELL C. FREIBERG Principal Financial March 30, 1998
- ------------------------
LOWELL C. FREIBERG Officer and Director
/s/ GEORGE R. BAKER Director March 30, 1998
- ------------------------
GEORGE R. BAKER
/s/ DENNIS A. BUSTI Director March 30, 1998
- ------------------------
DENNIS A. BUSTI
/s/ THOMAS P. GERRITY Director March 30, 1998
- ------------------------
THOMAS P. GERRITY
</TABLE>
26
<PAGE>
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ---------------------- ---------------------------------------- --------------
<S> <C> <C>
/s/ JEWELL J. MCCABE Director March 30, 1998
- ------------------------
JEWELL J. MCCABE
/s/ IRVING SCHNEIDER Director March 30, 1998
- ------------------------
IRVING SCHNEIDER
/s/ BERNARD L. SCHWARTZ Director March 30, 1998
- ------------------------
BERNARD L. SCHWARTZ
/s/ RICHARD E. SNYDER Director March 30, 1998
- ------------------------
RICHARD E. SNYDER
/s/ ROBERT M. STEINBERG Director March 30, 1998
- ------------------------
ROBERT M. STEINBERG
/s/ JAMES E. YACOBUCCI Director March 30, 1998
- ------------------------
JAMES E. YACOBUCCI
</TABLE>
27
<PAGE>
INDEPENDENT AUDITORS' REPORT
- --------------------------------------------------------------------------------
Board of Directors and Shareholders
Reliance Group Holdings, Inc.
New York, New York
We have audited the consolidated financial statements of Reliance Group
Holdings, Inc. and subsidiaries as of December 31, 1997 and 1996, and for each
of the three years in the period ended December 31, 1997, and have issued our
report thereon dated February 13, 1998, except as to notes 1 and 2, as to which
the date is February 27, 1998 and note 10, as to which the date is March 5,
1998, which report expresses an unqualified opinion and includes an explanatory
paragraph relating to the adoption of Emerging Issues Task Force Issue No.
97-13, 'Accounting for Costs Incurred in Connection with a Consulting Contract
or an Internal Project That Combines Business Process Reengineering and
Information Technology Transformation'; such consolidated financial statements
and report are included in the 1997 Annual Report to Shareholders and are
incorporated herein by reference. Our audits also included the financial
statement schedules of Reliance Group Holdings, Inc. listed in Item 14. These
financial statement schedules are the responsibility of the Company's
management. Our responsibility is to express an opinion based on our audits. In
our opinion, such financial statement schedules, when considered in relation to
the basic consolidated financial statements taken as a whole, present fairly in
all material respects the information set forth therein.
Deloitte & Touche LLP
New York, New York
February 13, 1998, except as to notes 1
and 2 of the consolidated financial statements,
as to which the date is February 27, 1998,
and note 10 of the consolidated financial statements,
as to which the date is March 5, 1998
A-1
<PAGE>
SCHEDULE I
ITEM 14(A)2
RELIANCE GROUP HOLDINGS, INC. AND SUBSIDIARIES
SUMMARY OF INVESTMENTS OF INSURANCE SUBSIDIARIES -- OTHER THAN INVESTMENTS IN
RELATED PARTIES
DECEMBER 31, 1997
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
COLUMN A COLUMN B COLUMN C COLUMN D
- -----------------------------------------------------------------------------------------------------------------
AMOUNT AT
WHICH
SHOWN IN
THE
BALANCE
TYPE OF INVESTMENT COST VALUE SHEET
- -----------------------------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C>
Fixed maturities available for sale:
Bonds and notes:
United States government and government agencies
and authorities..................................................... $ 438,885 $ 443,032 $ 443,032
States, municipalities and political subdivisions..................... 130,922 139,473 139,473
Foreign -- government................................................. 68,766 72,403 72,403
Foreign -- other...................................................... 20,150 22,665 22,665
Public utilities...................................................... 340,477 351,680 351,680
Convertibles and bonds with warrants attached......................... 60,736 69,450 69,450
All other corporate bonds and notes................................... 730,416 755,206 755,206
Redeemable preferred stocks.............................................. 424,611 463,764 463,764
---------- ---------- ----------
2,214,963 2,317,673 2,317,673
---------- ---------- ----------
Fixed maturities held for investment:
Bonds and notes:
States, municipalities and political subdivisions..................... 6,796 6,752 6,796
Foreign -- government................................................. 129,571 137,544 129,571
Foreign -- other...................................................... 17,218 18,432 17,218
Public utilities...................................................... 249,202 257,434 249,202
All other corporate bonds and notes................................... 141,620 147,211 141,620
Redeemable preferred stocks.............................................. 91,712 96,371 91,712
---------- ---------- ----------
636,119 663,744 636,119
---------- ---------- ----------
Equity securities:
Common stocks:
Public utilities...................................................... 11,142 13,214 13,214
Banks, trusts and insurance companies................................. 19,435 38,067 38,067
Industrial and other.................................................. 213,325 491,437 491,437
Nonredeemable preferred stocks........................................... 132,163 165,845 165,845
---------- ---------- ----------
376,065 708,563 708,563
---------- ---------- ----------
Short-term investments..................................................... 487,614 487,614 487,614
---------- ---------- ----------
Cash....................................................................... 39,753 39,753 39,753
---------- ---------- ----------
$4,217,347
----------
----------
Mortgage loans(1).......................................................... 3,686 3,686
Investments in real estate(2).............................................. 114,223 114,223
---------- ----------
$3,872,423 $4,307,631
---------- ----------
---------- ----------
</TABLE>
(1) In the consolidated financial statements, mortgage loans are included in
premiums and other receivables.
(2) Excludes investments in real estate held by non-insurance subsidiaries with
a cost and carrying value of $12,599,000.
A-2
<PAGE>
SCHEDULE II
ITEM 14(A)2
RELIANCE GROUP HOLDINGS, INC.
(PARENT COMPANY)
STATEMENT OF INCOME
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31 1997 1996 1995
- -----------------------------------------------------------------------------
<S> <C> <C> <C>
(In thousands)
REVENUES:
Dividends from subsidiaries........... $315,272 $110,000 $110,000
Interest (including $4,598, $6,415 and
$5,543 from subsidiaries)........... 5,214 7,246 6,153
---------- ---------- ----------
320,486 117,246 116,153
---------- ---------- ----------
EXPENSES:
Interest (including $8,032, $21,212
and $20,408 to subsidiaries)........ 76,032 89,220 88,391
General and administrative............ 42,268 36,081 35,600
---------- ---------- ----------
118,300 125,301 123,991
---------- ---------- ----------
202,186 (8,055) (7,838)
Income tax benefit.................... 40,219 42,488 49,699
---------- ---------- ----------
INCOME BEFORE EQUITY IN SUBSIDIARIES
AND INVESTEE COMPANY................ 242,405 34,433 41,861
Equity in subsidiaries (net income
less dividends received)............ (12,907) 4,866 46,263
Equity in investee company............ 7,675 8,908 7,792
Loss on sale of discontinued
operation........................... (1,312) -- --
Loss on disposal of discontinued
operations of investee company...... -- -- (4,497)
---------- ---------- ----------
INCOME BEFORE EXTRAORDINARY ITEM AND
CUMULATIVE EFFECT OF ACCOUNTING
CHANGE.............................. 235,861 48,207 91,419
Extraordinary item--early
extinguishment of subsidiary debt... -- -- (3,363)
Cumulative effect of change in
accounting for subsidiaries' process
reengineering costs................. (6,442) -- --
---------- ---------- ----------
NET INCOME............................ $ 229,419 $ 48,207 $88,056
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
A-3
<PAGE>
SCHEDULE II
ITEM 14(a)2
RELIANCE GROUP HOLDINGS, INC.
(PARENT COMPANY)
BALANCE SHEET
<TABLE>
<CAPTION>
ASSETS
DECEMBER 31 1997 1996
- ----------------------------------------------------------------
<S> <C> <C>
(In thousands, except per share
amount)
Cash.................................. $ 147 $ 184
Investments in subsidiaries........... 1,618,853 1,576,719
Due from subsidiaries................. 80,849 101,529
Excess of cost over fair value of net
assets acquired, less accumulated
amortization........................ 26,873 27,982
Other assets.......................... 41,353 30,719
---------- ----------
$1,768,075 $1,737,133
---------- ----------
---------- ----------
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY
- ----------------------------------------------------------------
<S> <C> <C>
Accounts payable and accrued
expenses............................ $ 46,772 $ 46,981
Federal income taxes, including
deferred taxes...................... 94,346 87,752
Debentures............................ 650,000 650,000
Due to subsidiaries................... 14,442 275,720
---------- ----------
805,560 1,060,453
---------- ----------
Contingencies and commitments
Shareholders' equity:
Common stock, par value $.10 per
share, 225,000 shares authorized,
114,857 and 114,282 shares issued
and outstanding.................. 11,486 11,428
Additional paid-in capital.......... 542,049 540,465
Retained earnings (deficit)
(including undistributed net income
of subsidiaries of $376,752 and
$388,426)........................ 142,701 (50,012)
Net unrealized gain on investments
of subsidiaries.................. 292,081 198,786
Net unrealized loss on foreign
currency translation of
subsidiaries..................... (25,802) (23,987)
---------- ----------
962,515 676,680
---------- ----------
$1,768,075 $1,737,133
---------- ----------
---------- ----------
</TABLE>
A-4
<PAGE>
SCHEDULE II
ITEM 14(a)2
RELIANCE GROUP HOLDINGS, INC.
(PARENT COMPANY)
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31 1997 1996 1995
- -----------------------------------------------------------------------------
<S> <C> <C> <C>
(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income............................ $ 229,419 $ 48,207 $ 88,056
Equity in undistributed net income of
subsidiaries and investee company... (190,598) (13,774) (46,195)
Other--net............................ 9,982 (5,354) 4,583
---------- ---------- ----------
48,803 29,079 46,444
---------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Other--net............................ (8,386) (555) (290)
---------- ---------- ----------
(8,386) (555) (290)
---------- ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase (decrease) in amounts due
to/from subsidiaries--net........... (6,199) 2,160 (11,325)
Issuance of common stock.............. 2,451 5,838 1,196
Dividends............................. (36,706) (36,525) (36,242)
---------- ---------- ----------
(40,454) (28,527) (46,371)
---------- ---------- ----------
Decrease in cash...................... (37) (3) (217)
Cash, beginning of year............... 184 187 404
---------- ---------- ----------
Cash, end of year..................... $ 147 $ 184 $ 187
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
SUPPLEMENTAL DISCLOSURE OF NON-CASH FINANCING ACTIVITIES:
In 1997, investments in subsidiaries and due to subsidiaries were reduced by
$202,272,000 to reflect a non-cash dividend from subsidiaries. Also in 1997,
investments in subsidiaries, due to subsidiaries and due from subsidiaries were
reduced to reflect the elimination of intercompany balances of a dormant
subsidiary.
In 1995, investments in subsidiaries and due to susidiaries were reduced by
$41,167,000 to reflect the elimination of intercompany balances of certain
dormant subsidiaries.
A-5
<PAGE>
SCHEDULE III
ITEM 14(A)2
RELIANCE GROUP HOLDINGS, INC. AND SUBSIDIARIES
SUPPLEMENTARY INSURANCE INFORMATION
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E COLUMN F COLUMN G
- -------------------------------------------------------------------------------------------------------------------------
DEFERRED UNPAID POLICY
POLICY CLAIMS AND NET CLAIMS AND
ACQUISITION RELATED UNEARNED PREMIUMS INVESTMENT SETTLEMENT
SEGMENT COSTS EXPENSES PREMIUMS EARNED INCOME EXPENSES
- -------------------------------------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1997:
Property and casualty.......... $ 248,572 $6,669,508 $1,722,258 $1,947,016 $263,981 $1,263,086
Title.......................... -- 272,792 -- 863,746 30,990 41,473
----------- ---------- ---------- ---------- ---------- ----------
$ 248,572 $6,942,300 $1,722,258 $2,810,762 $294,971 $1,304,559
----------- ---------- ---------- ---------- ---------- ----------
----------- ---------- ---------- ---------- ---------- ----------
Year Ended December 31, 1996:
Property and casualty.......... $ 215,438 $6,136,420 $1,468,299 $1,800,854 $257,133 $1,350,337
Title.......................... -- 264,838 -- 780,157 30,455 61,116
----------- ---------- ---------- ---------- ---------- ----------
$ 215,438 $6,401,258 $1,468,299 $2,581,011 $287,588 $1,411,453
----------- ---------- ---------- ---------- ---------- ----------
----------- ---------- ---------- ---------- ---------- ----------
Year Ended December 31, 1995:
Property and casualty.......... $ 194,648 $5,764,352 $1,299,465 $1,774,591 $247,343 $1,201,959
Title.......................... -- 240,777 -- 671,947 27,946 58,486
----------- ---------- ---------- ---------- ---------- ----------
$ 194,648 $6,005,129 $1,299,465 $2,446,538 $275,289 $1,260,445
----------- ---------- ---------- ---------- ---------- ----------
----------- ---------- ---------- ---------- ---------- ----------
<CAPTION>
- --------------------------------------------------------------------------
COLUMN A COLUMN H COLUMN I COLUMN J
- ---------------------------------------------------------------------------
AMORTIZATION
OF DEFERRED
POLICY OTHER
ACQUISITION INSURANCE PREMIUMS
SEGMENT COSTS EXPENSES WRITTEN
- ---------------------------------------------------------------------------
<S> <C> <C> <C>
(In thousands)
YEAR ENDED DECEMBER 31, 1997:
Property and casualty.......... $487,432 $ 219,698 $2,065,847
----------
----------
Title.......................... -- 789,853
------------ ----------
$487,432 $1,009,551
------------ ----------
------------ ----------
Year Ended December 31, 1996:
Property and casualty.......... $414,636 $ 201,485 $1,846,199
----------
----------
Title.......................... -- 711,185
------------ ----------
$414,636 $ 912,670
------------ ----------
------------ ----------
Year Ended December 31, 1995:
Property and casualty.......... $411,979 $ 197,112 $1,779,040
----------
----------
Title.......................... -- 629,051
------------ ----------
$411,979 $ 826,163
------------ ----------
------------ ----------
</TABLE>
A-6
<PAGE>
SCHEDULE IV
ITEM 14(A)2
RELIANCE GROUP HOLDINGS, INC. AND SUBSIDIARIES
REINSURANCE
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E COLUMN F
- ------------------------------------------------------------------------------------------------------------------
CEDED ASSUMED PERCENTAGE
TO FROM OF AMOUNT
GROSS OTHER OTHER NET ASSUMED TO
AMOUNT COMPANIES COMPANIES AMOUNT NET
- ------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1997:
Premiums:
Property and casualty............................. $3,232,403 $1,733,311 $447,924 $1,947,016 23.01%
Title............................................. 862,499 1,338 2,585 863,746 0.30
---------- ---------- -------- ----------
$4,094,902 $1,734,649 $450,509 $2,810,762 16.03
---------- ---------- -------- ----------
---------- ---------- -------- ----------
Year Ended December 31, 1996:
Premiums:
Property and casualty............................. $2,894,096 $1,449,731 $356,489 $1,800,854 19.80
Title............................................. 779,318 1,406 2,245 780,157 0.29
---------- ---------- -------- ----------
$3,673,414 $1,451,137 $358,734 $2,581,011 13.90
---------- ---------- -------- ----------
---------- ---------- -------- ----------
Year Ended December 31, 1995:
Premiums:
Property and casualty............................. $2,707,978 $1,284,023 $350,636 $1,774,591 19.76
Title............................................. 671,222 1,649 2,374 671,947 .35
---------- ---------- -------- ----------
$3,379,200 $1,285,672 $353,010 $2,446,538 14.43
---------- ---------- -------- ----------
---------- ---------- -------- ----------
</TABLE>
A-7
<PAGE>
SCHEDULE VI
ITEM 14(A)2
RELIANCE GROUP HOLDINGS, INC. AND SUBSIDIARIES
SUPPLEMENTAL INFORMATION CONCERNING PROPERTY AND CASUALTY INSURANCE OPERATIONS
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E COLUMN F COLUMN G COLUMN H
- ----------------------------------------------------------------------------------------------------------------------------
CLAIMS AND
UNPAID SETTLEMENT EXPENSES
DEFERRED CLAIMS (REDUNDANCY)
AFFILIATION POLICY AND DISCOUNT NET INCURRED RELATED TO
WITH ACQUISITION RELATED DEDUCTED IN UNEARNED EARNED INVESTMENT CURRENT PRIOR
REGISTRANT COSTS EXPENSES COLUMN C(A) PREMIUMS PREMIUMS INCOME YEAR YEARS
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
(In thousands)
Consolidated
subsidiaries:
YEAR ENDED
DECEMBER 31, 1997.... $ 248,572 $6,669,508 $216,704 $1,722,258 $1,947,016 $263,981 $1,299,066 ($35,980)
----------- ---------- ------------ ---------- ---------- ---------- ---------- --------
----------- ---------- ------------ ---------- ---------- ---------- ---------- --------
Year Ended
December 31, 1996.... $ 215,438 $6,136,420 $229,963 $1,468,299 $1,800,854 $257,133 $1,211,672 $138,665
----------- ---------- ------------ ---------- ---------- ---------- ---------- --------
----------- ---------- ------------ ---------- ---------- ---------- ---------- --------
Year Ended
December 31, 1995.... $ 194,648 $5,764,352 $235,664 $1,299,465 $1,774,591 $247,343 $1,163,447 $38,512
----------- ---------- ------------ ---------- ---------- ---------- ---------- --------
----------- ---------- ------------ ---------- ---------- ---------- ---------- --------
<CAPTION>
- ------------------------------------------------------------
COLUMN A COLUMN I COLUMN J COLUMN K
- ------------------------------------------------------------
AMORTIZATION PAID
OF DEFERRED CLAIMS
AFFILIATION POLICY AND
WITH ACQUISITION SETTLEMENT PREMIUMS
REGISTRANT COSTS EXPENSES WRITTEN
- -------------------------------------------------------------
(In thousands)
<S> <C> <C> <C>
Consolidated
subsidiaries:
YEAR ENDED
DECEMBER 31, 1997.... $487,432 $1,330,898 $2,065,847
------------ ---------- ----------
------------ ---------- ----------
Year Ended
December 31, 1996.... $414,636 $1,225,834 $1,846,199
------------ ---------- ----------
------------ ---------- ----------
Year Ended
December 31, 1995.... $411,979 $1,140,537 $1,779,040
------------ ---------- ----------
------------ ---------- ----------
</TABLE>
(a) Liabilities for unpaid claims and related expenses for short-duration
contracts which are expected to have fixed, periodic payment patterns are
discounted to present values using statutory annual rates ranging from
3 1/2% to 6%. Discount shown relates to net liabilities for unpaid claims
and related expenses for short-duration contracts which are expected to have
fixed, periodic payment patterns.
A-8
EXHIBITS
TO
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED COMMISSION FILE NUMBER
DECEMBER 31, 1997 1-8278
RELIANCE GROUP HOLDINGS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- --------- --------------------------------------------------------------------
<S> <C>
3.1 Reliance Group Holdings' Certificate of Incorporation, as amended
(incorporated by reference to Exhibit 3(a) to Registration Statement
No. 2-77043).
3.2 Amendment to Exhibit 3.1, as filed with the Secretary of State of
the State of Delaware on July 22, 1986 (incorporated by reference to
Exhibit 3.2 to Registration Statement No. 33-7493).
3.3 Reliance Group Holdings' By-Laws, as amended (incorporated by
reference to Exhibit 3.3 to Reliance Group Holdings' Annual Report
on Form 10-K for the year ended December 31, 1991).
3.4 Amendment to Exhibit 3.1, as filed with the Secretary of State of
the State of Delaware on May 27, 1993 (incorporated by reference to
Exhibit 4.5 to Registration Statement No. 33-67396).
*4.
+10.1 Employment Agreement between Reliance Group Holdings and Saul P.
Steinberg, dated as of February 15, 1996 (and the Schedule attached
thereto pursuant to Instruction 2 to Item 601 of Regulation S-K
listing George E. Bello, Lowell C. Freiberg, Howard E. Steinberg and
Robert M. Steinberg as having employment agreements identical in all
respects to Exhibit 10.1 other than as specified in such schedule)
(incorporated by reference to Exhibit 10.1 to Reliance Group
Holdings' Quarterly Report on Form 10-Q for the quarter ended March
31, 1996).
+10.2 Amendment, dated as of December 29, 1997, to Employment Agreement
between Reliance Group Holdings and Saul P. Steinberg, dated as of
February 15, 1996 (and the Schedule attached thereto pursuant to
Instruction 2 to Item 601 of Regulation S-K listing George E. Bello,
Lowell C. Freiberg, Howard E. Steinberg and Robert M. Steinberg as
having amendments to their employment agreements identical in all
respects to Exhibit 10.2 other than as specified in such schedule).
+10.3 Employment Agreement between Reliance Insurance Company and Saul P.
Steinberg, dated as of February 15, 1996 (and Schedule attached
thereto pursuant to Instruction 2 to Item 601 of Regulation S-K
listing Robert M. Steinberg as having an employment agreement
identical in all respects to Exhibit 10.3) (incorporated by
reference to Exhibit 10.1 to Reliance Group Holdings' Quarterly
Report on Form 10-Q for the quarter ended March 31, 1996).
+10.4 Employment Agreement between Reliance Group Holdings and Bruce L.
Sokoloff, dated as of May 15, 1996 (incorporated by reference to
Exhibit 10.1 to Reliance Group Holdings' Quarterly Report on Form
10-Q for the quarter ended June 30, 1996).
+10.5 Amendment, dated as of December 29, 1997, to Employment Agreement
between Reliance Group Holdings and Bruce L. Sokoloff, dated as of
May 15, 1996.
+10.6 1986 Stock Option Plan of Reliance Group Holdings, as amended
(incorporated by reference to Exhibit 19.2 to Reliance Group
Holdings' Quarterly Report on Form 10-Q for the quarter ended June
30, 1990).
+10.7 Amended and Restated 1994 Stock Option Plan for Non-Employee
Directors.
+10.8 The Reliance Group Holdings, Inc. 1994 Stock Option Plan
(incorporated by reference to Exhibit 10.2 to Reliance Group
Holdings' Quarterly Report on Form 10-Q for the quarter ended June
30, 1994).
+10.9 The Reliance Group Holdings, Inc. 1997 Stock Option Plan
(incorporated by reference to Exhibit 10.2 to Reliance Group
Holdings' Quarterly Report on Form 10-Q for the quarter ended June
30, 1997).
+10.10 The Reliance Group Holdings, Inc. Employee Stock Purchase Plan
(incorporated by reference to Exhibit 10.1 to Reliance Group
Holdings' Quarterly Report on Form 10-Q for the quarter ended June
30, 1997).
</TABLE>
- ------------------
* Neither Reliance Group Holdings nor its subsidiaries is a party to any
instrument relating to long-term debt under which the securities authorized
exceed 10% of the total consolidated assets of Reliance Group Holdings and its
subsidiaries. Copies of instruments relating to long-term debt of lesser
amounts will be provided to the Securities and Exchange Commission upon
request.
+ Management contract or compensatory plan or arrangement required to be filed
as an Exhibit to this Form 10-K pursuant to Item 14(c).
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- --------- --------------------------------------------------------------------
<S> <C>
+10.11 The Reliance Group Holdings, Inc. Key Employee Share Option Plan.
+10.12 The Reliance Group Holdings, Inc. Executive Bonus Plan (incorporated
by reference to Exhibit 10.3 to Reliance Group Holdings' Quarterly
Report on Form 10-Q for the quarter ended June 30, 1994).
+10.13 The 1995 Amendment to The Reliance Group Holdings, Inc. Executive
Bonus Plan (incorporated by reference to Exhibit 10.15 to Reliance
Group Holdings' Annual Report on Form 10-K for the year ended
December 31, 1995).
+10.14 The 1996 Amendment to The Reliance Group Holdings, Inc. Executive
Bonus Plan (incorporated by reference to Exhibit 10.19 to Reliance
Group Holdings' Annual Report on Form 10-K for the year ended
December 31, 1996).
+10.15 The Executive Bonus Plan for James E. Yacobucci, Senior Vice
President-Investments, of Reliance Group Holdings (incorporated by
reference to Exhibit 10.4 to Reliance Group Holdings' Quarterly
Report on Form 10-Q for the quarter ended June 30, 1994).
+10.16 Reliance National Risk Specialists 1988 Key Management Incentive
Plan (incorporated by reference to Exhibit 10.9 to Reliance
Insurance Company's Annual Report on Form 10-K for the year ended
December 31, 1988).
+10.17 Reliance National Risk Specialists 1992 Key Management Incentive
Plan (incorporated by reference to Exhibit 10.9 to Reliance
Insurance Company's Annual Report on Form 10-K for the year ended
December 31, 1993).
+10.18 Reliance National Risk Specialists 1993 Key Management Incentive
Plan (incorporated by reference to Exhibit 10.10 to Reliance
Insurance Company's Annual Report on Form 10-K for the year ended
December 31, 1993).
+10.19 Reliance National Risk Specialists 1994 Key Management Incentive
Plan (incorporated by reference to Exhibit 10.14 to Reliance
Insurance Company's Annual Report on Form 10-K for the year ended
December 31, 1994).
+10.20 Reliance National Risk Specialists 1995 Key Management Incentive
Plan (incorporated by reference to Exhibit 10.25 to Reliance Group
Holdings' Annual Report on Form 10-K for the year ended December 31,
1996).
+10.21 Reliance National Risk Specialists Supplemental Key Management
Incentive Plan (effective for policy years 1993, 1994 and 1995)
(incorporated by reference to Exhibit 10.26 to Reliance Group
Holdings' Annual Report on Form 10-K for the year ended December 31,
1996).
+10.22 Reliance National Risk Specialists 1996 Key Management Incentive
Plan (incorporated by reference to Exhibit 10.27 to Reliance Group
Holdings' Annual Report on Form 10-K for the year ended December 31,
1996).
+10.23 Reliance National Risk Specialists 1997 Key Management Incentive
Plan.
+10.24 Memorandum, dated February 8, 1989, summarizing employment
arrangements between Reliance Insurance Company and Dennis Busti
(incorporated by reference to Exhibit 10.8 to Reliance Insurance
Company's Annual Report on Form 10-K for the year ended December 31,
1988).
10.25 Asset Purchase Agreement, dated July 24, 1992, between Frank B. Hall
& Co. Inc. ('Hall') and Aon Corporation ('Aon') (incorporated by
reference to Exhibit 2.1 to Reliance Group Holdings' Quarterly
Report on Form 10-Q for the quarter ended June 30, 1992).
</TABLE>
- ------------------
+ Management contract or compensatory plan or arrangement required to be filed
as an Exhibit to this Form 10-K pursuant to Item 14(c).
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- --------- --------------------------------------------------------------------
<S> <C>
10.26 Agreement and Plan of Merger, dated as of July 24, 1992, among
Reliance Group Holdings, Hall and Prometheus Liquidating Corp.
(incorporated by reference to Exhibit 2.2 to Reliance Group
Holdings' Quarterly Report on Form 10-Q for the quarter ended June
30, 1992).
10.27 Employee Benefit Agreement, dated July 24, 1992, among Reliance
Group Holdings and Aon (incorporated by reference to Exhibit 28.2 to
Reliance Group Holdings' Quarterly Report on Form 10-Q for the
quarter ended June 30, 1992).
10.28 Amendment, dated November 2, 1992, to Exhibit 10.25 (incorporated by
reference to Exhibit 2.1 to Reliance Group Holdings' Quarterly
Report on Form 10-Q for the quarter ended September 30, 1992).
10.29 Settlement Agreement and Release, dated June 2, 1989, between James
P. Corcoran, Superintendent of Insurance of the State of New York,
as Liquidator of Union Indemnity Insurance Company of New York, Inc.
and Hall (now known as Prometheus Funding Corp.)(incorporated herein
by reference to Exhibit 10.01 to Frank B. Hall & Co. Inc.'s report
on Form 10-Q for the quarter ended June 30, 1989).
10.30 Amendment No. 1, dated April 21, 1997, to Exhibit 10.29
(incorporated by reference to Exhibit 10.1 to Reliance Group
Holdings' Quarterly Report on Form 10-Q for the quarter ended March
31, 1997).
10.31 Stock Purchase Agreement, dated as of December 31, 1997, among Bear
Stearns Acquisition Corp. XVI, Reliance National, (U.K.) Ltd. and
Reliance Insurance Company.
10.32 Amended and Restated Stock Purchase Agreement, dated as of December
11, 1997 by and among Reliance Insurance Company, LandAmerica and
Lawyers Title Insurance Corporation (incorporated by reference to
Appendix A to LandAmerica's definitive Proxy Statement filed with
the Securities and Exchange Commission on January 29, 1998).
10.33 Voting and Standstill Agreement, dated as of February 27, 1998, by
and among LandAmerica, Reliance Group Holdings and Reliance
Insurance Company (incorporated by reference to Exhibit 10.26 to
LandAmerica's Annual Report on Form 10-K for the year ended December
31, 1997).
10.34 Registration Rights Agreement, dated as of February 27, 1998, by and
among LandAmerica and Reliance Insurance Company (incorporated by
reference to Exhibit 10.27 to LandAmerica's Annual Report on Form
10-K for the year ended December 31, 1997).
10.35 Articles of Amendment to LandAmerica's Articles of Incorporation
(incorporated by reference to Exhibit 4.2 to LandAmerica's Form 8-A
filed with the Securities and Exchange Commission on February 27,
1998).
13.1 Reliance Group Holdings 1997 Annual Report.
21.1 List of Subsidiaries of Reliance Group Holdings.
23.1 Consent of Deloitte & Touche LLP.
27.1 Financial Data Schedule.
**99.1 Annual Report on Form 11-K of Reliance Insurance Company Savings
Incentive Plan for the year ended December 31, 1997.
</TABLE>
- ------------------
** To be filed by Amendment.
<PAGE>
AMENDMENT, dated, December 29, 1997, to Employment Agreement (the
"Employment Agreement"), dated as of February 15, 1996, between Saul P.
Steinberg (the "Executive") and Reliance Group Holdings, Inc., a Delaware
corporation (the "Company").
1. Effective December 10, 1997, the Company adopted a Key Employee Stock
Option Plan (the "KEYSOP(TM)", such term to include any similar
compensation replacement plan hereafter adopted by the Company), in
order to establish a compensation replacement program designed to
provide key executives with the opportunity to maximize financial
security while minimizing tax consequences. If the Executive elects to
participate in KEYSOP(TM) then certain of the provisions of the
Employment Agreement are affected, in some cases adversely to the
Executive and in other cases adversely to the Company. Accordingly, the
Company and the Executive wish to amend the Employment Agreement so
that participation by the Executive in the KEYSOP(TM) is deemed not to
affect the Employment Agreement.
2. The Company and the Executive agree that, notwithstanding the effects
of the KEYSOP(TM) on the Executive's compensation:
(a) amounts of bonus compensation replaced in any year shall be deemed
to be a part of Executive's bonus for purposes of Sections 3(b),
4(c), 5(b)(i), 5(b)(ii) and 5(b)(iii) of the Employment Agreement
and a part of the Executive's W-2 income for purposes of Section
3(e) of the Employment Agreement; and
(b) amounts of compensation received by the Executive pursuant to his
exercise of any options issued the Executive under the KEYSOP(TM)
(or equivalent compensation received under the KEYSOP(TM)) shall
not be deemed a part of the Executive's bonus for purposes of
Sections 3(b), 4(c), 5(b)(i), 5(b)(ii) and 5(b)(iii) of the
Employment Agreement or a part of the Executive's W-2 income for
purposes of Section 3(e) of the Employment Agreement.
3. In all other respects the Employment Agreement shall remain in full force
and effect.
4. This Amendment shall be governed by and construed in accordance with the
laws of the State of New York.
IN WITNESS WHEREOF, the Company has caused the Amendment to be executed by
its duly authorized representative and the Executive has executed the
Agreement, in each case, as of the day and year first above written.
RELIANCE GROUP HOLDINGS, INC.
By: /s/ Robert M. Steinberg
---------------------------
Name: Robert M. Steinberg
Title: President
/s/ Saul P. Steinberg
---------------------------
Name: Saul P. Steinberg
Schedule to Exhibit 10.2
Each of George E. Bello, Lowell C. Freiberg, Howard E. Steinberg and Robert M.
Steinberg entered into an Amendment to their respective Employment Agreements
with Reliance Group Holdings, Inc. which is identical to Exhibit 10.2 hereto in
all material respects.
<PAGE>
AMENDMENT, dated December 29, 1997, to Employment Agreement (the "Employment
Agreement"), dated as of May 15, 1996, between Bruce L. Sokoloff (the
"Executive") and Reliance Group Holdings, Inc., a Delaware corporation (the
"Company").
1. Effective December 10, 1997, the Company adopted a Key Employee Stock Option
Plan (the "KEYSOP(TM)", such term to include any similar compensation
replacement plan hereafter adopted by the Company) in order to establish a
compensation replacement program designed to provide key executives with the
opportunity to maximize financial security while minimizing tax consequences. If
the Executive elects to participate in KEYSOP(TM) then certain of the provisions
of the Employment Agreement are affected, in some cases adversely to the
Executive and in other cases adversely to the Company. Accordingly, the Company
and the Executive wish to amend the Employment Agreement so that participation
by the Executive in the KEYSOP(TM) is deemed not to affect the Employment
Agreement.
2. The Company and the Executive agree that, notwithstanding the effects of the
KEYSOP(TM) on the Executive's compensation:
(a) amounts of bonus compensation replaced in any year shall be deemed
to be a part of Executive's bonus for purposes of Sections 4(c),
5(b)(i), 5(b)(ii) and 5(b)(iii) of the Employment Agreement and a part
of the Executive's W-2 income for purposes of Section 3(e) of the
Employment Agreement; and
(b) amounts of compensation received by the Executive pursuant to his
exercise of any options issued the Executive under the KEYSOP(TM) (or
equivalent compensation received under the KEYSOP(TM)) shall not be
deemed a part of the Executive's bonus for purposes of Sections 4(c),
5(b)(i), 5(b)(ii) and 5(b)(iii) of the Employment Agreement or a part
of the Executive's W-2 income for purposes of Section 3(e) of the
Employment Agreement.
3. In all other respects the Employment Agreement shall remain in full force and
effect.
4. This Amendment shall be governed by and construed in accordance with the laws
of the State of New York.
IN WITNESS WHEREOF, the Company has caused the Amendment to be executed
by its duly authorized representative and the Executive has executed the
Agreement, in each case, as of the day and year first above written.
RELIANCE GROUP HOLDINGS, INC.
By: /s/ Robert M. Steinberg
-------------------------------
Name: Robert M. Steinberg
Title: President
/s/ Bruce L. Sokoloff
----------------------------------
Name: Bruce L. Sokoloff
<PAGE>
AMENDED AND RESTATED
RELIANCE GROUP HOLDINGS, INC.
1994 STOCK OPTION PLAN
FOR NON-EMPLOYEE DIRECTORS
--------------------------
PART I
PURPOSES; DEFINITIONS; RESERVATION OF SHARES;
PARTICIPATION IN PLAN
ARTICLE I
Purposes
1.1 Purposes of Plan. The purpose of this Reliance Group Holdings, Inc.
1994 Stock Option Plan for Non-Employee directors (this "Plan") is to encourage
the directors of the Company who are neither officers nor employees of the
Company or any subsidiary of the Company (the "Non-employee Directors") to own
shares of the Company's stock and thereby to align their interests more closely
with the interests of the other stockholders of the Company, to encourage the
highest level of Non-employee Director performance by providing the Non-employee
Directors with a direct interest in the Company's attainment of its financial
goals, and to provide a financial incentive that will help attract and retain
the most qualified Non-employee Directors.
ARTICLE II
Definitions
Certain terms used herein shall have the meaning below stated,
subject to the provisions of Section 7.1.
"Board" or "Board of Directors" means the Board of Directors of the
Company.
"Chairman" means the Chairman of the Board of the Company.
"Code" means the Internal Revenue Code of 1986, as amended.
<PAGE>
"Common Stock" means, subject to the provisions of Section 9.3, the
authorized common stock of the Company, par value $.10 per share.
"Company" means Reliance Group Holdings, Inc.
"Exchange Act" means the Securities Exchange Act of 1934, as amended
from time to time.
"Fair Market Value" means the closing price at which the Common Stock
of the Company shall have been sold regular way on the New York Stock Exchange
on the date as of which such value is being determined or, if no sales occurred
on such day, then on the next preceding day on which there were such sales, or,
if at any time the Common Stock shall not be listed on the New York Stock
Exchange, the fair market value as determined by the Board on the basis of
available prices for such Common Stock or in such manner as may be authorized by
applicable regulations under the Code.
"Non-employee Director" has the meaning assigned to it in Section 1.1
hereof.
"Option" means an option to purchase Common Stock, granted by the
Company under the Plan.
"Option Agreement" has the meaning assigned to it in Section 5.1(c)
hereof.
"Plan" means the Amended and Restated Reliance Group Holdings, Inc.
1994 Stock Option Plan for Non-Employee Directors, as set forth herein and as
further from time to time amended.
ARTICLE III
Reservation of Shares
3.1 Effective Date. This 1994 Stock Option Plan for Non-Employee
Directors originally became effective as of May 12, 1994. The Plan, as amended
and restated, shall be effective as of November 19, 1997.
3.2 Shares Reserved Under Plan. Subject to adjustment under the
provisions of Section 9.3 hereof, the maximum number of shares of Common Stock
which may be issued and sold under this Plan is 700,000 shares, provided that if
the Board shall establish a new Non-Employee Director Plan and obtain approval
of the Company's stockholders thereof, then effective upon such stockholder
approval the number of shares which may be issued and sold under the Plan shall
be deemed to be the number of Options then outstanding. The shares which may be
issued and sold under this Plan may be either authorized and unissued shares or
shares issued and thereafter acquired by the Company. Shares issued pursuant to
this Plan shall
2
<PAGE>
be subject to all applicable provisions of the Certificate of Incorporation and
By-Laws of the Company in existence at the time of issuance of such shares and
at all times thereafter. If Options granted under this Plan shall terminate or
cease to be exercisable by reason of expiration, surrender for cancellation or
otherwise without having been wholly exercised, new Options may be granted under
this Plan covering the number of shares to which such termination or cessation
relates.
ARTICLE IV
Participation in Plan
4.1 Eligibility to Receive Options. Options under this Plan may be
granted only to persons who are Non-employee Directors on the date the
Option is granted.
4.2 Participation Not Guarantee of Continued Service. Nothing in this
Plan or in the instrument evidencing the grant of an Option shall in any manner
confer upon any Non-employee Director the right to continue service as a member
of the Board.
PART II
OPTIONS;
TERMINATION OF SERVICE AND DEATH
ARTICLE V
Options
5.1 Grants of Options.
(a) Grant. The Board may grant Options to persons who are Non-employee
Directors on the date of grant. All Options under this Plan shall be granted
within ten years of May 12, 1994.
(b) Option Price. The purchase price per share of Common Stock under
each Option shall be 100% of the Fair Market Value per share of such Common
Stock on the date such Option is granted. The Option price may be subject to
adjustment in accordance with the provisions of Section 9.3 hereof.
(c) Option Agreements. Options shall be evidenced by Option Agreements
in such form and containing such terms and conditions, which are not
inconsistent with the Plan, as the Board shall approve, which terms and
conditions need not be the same for all Options (each an "Option Agreement").
(d) Options Nontransferable. An Option granted under this Plan shall by
its terms be nontransferable by the Non-employee
3
<PAGE>
Director otherwise than by will or the laws of descent and distribution, and
except, solely to the extent permitted by the Board in an Option Agreement, to
such persons or entities that may be approved by the Board, in each case subject
to the condition that the Board be satisfied that such transfer is being made
for estate or tax planning purposes for the benefit of an immediate family
member of the Non-employee Director (as determined by the Board, in its
discretion), without consideration being received therefor. No transfer of an
Option by a Non-employee Director shall be effective to bind the Company unless
the Company shall have been furnished with written notice thereof and a copy of
such evidence as the Board may determine necessary to establish the validity of
the transfer.
5.2 Exercise of Options.
(a) Term of Options; Vesting. The term of each Option granted under
this Plan shall be ten (10) years from the date of grant. Each Option shall vest
and become exercisable on the first anniversary of the date of grant, if the
person who received the Option is a member of the board on such anniversary.
In its sole discretion, the Board may prescribe shorter installments or
accelerate the exercisability of any Option at any time.
(b) Payment on Exercise. No shares of Common Stock shall be issued on
the exercise of an Option unless paid for in full at the time of purchase.
Payment for shares of Common Stock purchased upon the exercise of an Option
shall be made in cash or, with the consent of the Board, in whole or in part in
shares of Common Stock valued at the then Fair Market Value thereof. Stock
certificates for the shares of Common Stock so paid for will be issued and
delivered to the person entitled thereto only at the Company's office in New
York, New York. No Non-employee Director shall have any rights as a stockholder
with respect to any share of Common Stock covered by an Option unless and until
such Non-employee Director shall have become the holder of record of such share,
and, except as otherwise permitted in Section 9.3 hereof, no adjustment shall be
made for dividends (ordinary or extraordinary, whether in cash, securities or
other property or distributions or other rights) in respect of such share for
which the record date is prior to the date on which such Non-employee Director
shall have become the holder of record thereof.
(c) Exercise upon Dissolution, Liquidation or Winding Up. If at any
time after an Option has become exercisable and prior to its exercise and
expiration, a voluntary dissolution, liquidation (other than a liquidation into
another corporation which agrees to continue this Plan) or winding up of the
affairs of the Company shall be proposed, the Company shall cause notice in
writing to be mailed to each person holding an Option under this Plan, which
notice shall be mailed not less than twenty days prior to the closing of the
transfer books of the Company or the record date for
4
<PAGE>
determination of the holders of Common Stock of the Company entitled to
participate in such dissolution, liquidation or winding up, as the case may be,
to the end that during such notice period the holder of any Option, to the
extent that the same is then exercisable by such holder, may, subject to the
terms of Article V hereof, purchase Common Stock in accordance with the terms of
the Option and be entitled, in respect of the number of shares so purchased, to
all the rights of the other holders of Common Stock of the Company with respect
to such proposed dissolution, liquidation or winding up of the affairs of the
Company. Each Option at the time outstanding shall terminate at the close of
business on the twentieth day after mailing of such notice to the holder of such
Option or on the record date for determination of holders of Common Stock
entitled to participate in such dissolution, liquidation or winding up,
whichever date is later.
ARTICLE VI
Termination of Service and Death and Removal
Section 6.1 Termination of Service, Death and Removal
(a) Termination of Service. If a Non-employee Director's service as a
member of the Board shall be terminated for any reason other than death or
removal for cause, the Non-employee Director shall have the right, during the
ninety (90) day period ending after such termination (subject to Section 5.2
hereof concerning the maximum term of an Option), to exercise such Option to the
extent that it was exercisable at the date of such termination of service and
shall not have been previously exercised.
(b) Death. If a director shall die at any time after the date of an
Option, and while he/she is a member of the Board, the executor or administrator
of the estate of the decedent, or the person or persons to whom an Option shall
have been validly transferred in accordance with Section 5.1 hereof shall have
the right, during the period ending one year after the date of the Non-employee
Director's death (subject to Section 5.2 hereof concerning the maximum term of
an Option), to exercise such Option to the extent that it was exercisable at the
date of such Non-employee Director's death and shall not have been previously
exercised.
(c) Removal for cause. If a Non-employee Director shall be removed from
the Board for cause, the Non-employee Director's right to exercise any
unexercised portion of his/her Option shall immediately terminate and all rights
thereunder shall cease. A Non-employee Director shall be considered to have been
removed for "cause" for purposes of this Section 6.1 when he/she shall have been
removed from the Board by the stockholders of the Company for cause in
accordance with applicable state law and the Certificate
5
<PAGE>
of Incorporation and By-laws of the Company, if applicable.
PART III
ADMINISTRATION, AMENDMENT AND TERMINATION
OF PLAN; MISCELLANEOUS
ARTICLE VII
Administration of Plan
7.1 The Board. This Plan shall be administered by the Board. The Board
shall have full and final authority to interpret this Plan and the Option
Agreements (which agreements need not be identical), to prescribe, amend and
rescind rules and regulations, if any, relating to this Plan and to make all
determinations necessary or advisable for the administration of this Plan. The
Board's determination in all matters referred to herein shall be conclusive and
binding for all purposes and upon all persons including, without limitation,
the Company, the stockholders of the Company, the Board and each of the members
thereof (including the Non-employee Directors receiving Options hereunder), and
their respective successors in interest.
7.2 Liability of Board. No member of the Board shall be liable for
anything done or omitted to be done by such member or by any other member of the
Board in connection with this Plan, except for the willful misconduct or gross
negligence of such member. The Board shall have power to engage outside
consultants, auditors or other professional help to assist in the fulfillment of
the Board's duties under this Plan at the Company's expense.
7.3 Determinations of the Board. In making its determinations
concerning the Non-employee Directors who shall receive Options, as well as the
number of shares to be covered thereby and time or times at which they shall be
granted, the Board shall take into account the nature of the services rendered
by the respective Non-employee Directors, their past, present and potential
contribution to the Company's success and such other factors as the Board may
deem relevant. The Board shall also determine the form of Option Agreements to
be issued under this Plan and the terms and conditions to be included therein,
provided such terms and conditions are not inconsistent with the terms of this
Plan. The Board may, in its discretion, waive any provisions of any Option
Agreement, provided such waiver is not inconsistent with the terms of this Plan
as then in effect.
7.4 Plan Sponsors; Expenses. The Board shall act on behalf of the
Company as sponsor of the Plan. All expenses associated with the Plan shall be
borne by the Company.
6
<PAGE>
ARTICLE VIII
Amendment and Termination of Plan
8.1 Amendment of Plan. This Plan may be amended at any time and from
time to time by the Board of Directors of the Company. Solely to the extent
deemed necessary or advisable by the Board, for purposes of complying with the
rules of any securities exchange or for any other reason, the Board of Directors
of the Company may seek the approval of any such amendment by the Company's
stockholders.
8.2 Termination. The Board may at any time terminate this Plan as of
any date specified in a resolution adopted by the Board, provided that this Plan
shall terminate automatically on such date as the Company's stockholders approve
a new Non-employee Director Plan established by the Board. This Plan shall
terminate on May 12, 2004 if not earlier terminated. No Options may be granted
after this Plan has terminated. After this Plan shall terminate, the function of
the Board will be limited to supervising the administration of Options
previously granted.
8.3 Rights of Holders. No termination or amendment of this Plan,
without the consent of the holder of any Option then existing, may terminate
such holder's Option or materially and adversely affect such holder's rights
thereunder.
ARTICLE IX
Miscellaneous Provisions
9.1 Restrictions Upon Grant of Options. The listing upon the New York
Stock Exchange or the registration or qualification under any Federal or state
law of any shares of Common Stock to be delivered pursuant to this Plan (whether
to permit the grant of Options or the resale or other disposition of any such
shares of Common Stock by or on behalf of the Non-employee Directors receiving
such shares) may be necessary or desirable and, in any such event, delivery of
the certificates for such shares of Common Stock shall, if the Board of
Directors, in its sole discretion, shall determine, not be made until such
listing, registration or qualification shall have been completed. In such
connection, the Company agrees that it will use its best efforts to effect any
such listing, registration or qualification, provided, however, that the Company
shall not be required to use its best efforts to effect such registration under
the Securities Act of 1933, as amended ("1933 Act"), other than on Form S-8, as
presently in effect, or such other forms as may be in effect from time to time
calling for information comparable to that presently required to be furnished
under Form S-8.
7
<PAGE>
9.2 Restrictions upon Resale of Unregistered Stock. If the shares of
Common Stock that have been transferred to a Non-employee Director pursuant to
the terms of this Plan are not registered under the 1933 Act pursuant to an
effective registration statement, such Non-employee Director, if the Board shall
deem it advisable, may be required to represent and agree in writing (i) that
any shares of Common Stock acquired by such Non-employee Director pursuant to
this Plan will not be sold except pursuant to an effective registration
statement under the 1933 Act, or pursuant to an exemption from registration
under the 1933 Act and (ii) that such Non-employee Director is acquiring such
shares of Common Stock for such Non-employee Director's own account and not with
a view to the distribution thereof.
9.3 Adjustments. In the event of any change (through recapitalization,
merger, consolidation, stock dividend, split-up, combination or exchange of
shares or otherwise) in the character or amount of the Company's capital stock
(or any other transaction described in Section 424(a) of the Code) after any
Option is granted hereunder and prior to the exercise thereof, each Option, to
the extent that it has not been exercised, shall entitle the holder to such
number and kind of securities as such holder would have been entitled to had
such holder actually owned the stock subject to the Option at the time of the
occurrence of such change. If any such event should occur, the number of shares
subject to Options which are authorized to be issued hereunder, but which have
not been issued, shall be similarly adjusted. If any other event shall occur,
prior to the exercise of an Option granted to a Non-employee Director hereunder,
which shall increase or decrease the number of shares of capital stock
outstanding and which the Board, in its sole discretion, shall determine
equitably requires an adjustment in the number of shares which the holder
should be permitted to acquire, such adjustment as the Board shall determine
may be made, and when so made shall be effective and binding for all
purposes of this Plan.
8
<PAGE>
RELIANCE GROUP HOLDINGS, INC.
KEY EMPLOYEE SHARE OPTION PLAN
Effective Date of Plan: December 10, 1997
<PAGE>
RELIANCE GROUP HOLDINGS, INC.
KEY EMPLOYEE SHARE OPTION PLAN
Table of Contents
Page
Preamble...................................................................1
ARTICLE I Definitions..............................................1
ARTICLE II Grant of Options.........................................3
ARTICLE III Exercise of Options......................................5
ARTICLE IV Amendment or Termination of the Plan.....................7
ARTICLE V Plan Administration......................................8
ARTICLE VI Miscellaneous............................................10
<PAGE>
Preamble
Reliance Group Holdings, Inc. (the "Sponsor") hereby establishes the
Reliance Group Holdings, Inc. Key Employee Share Option Plan (the "Plan"),
effective as of the date specified herein.
The purpose of the Plan is to provide alternate forms of compensation
to certain key employees of the Employer, commensurate with their contributions
to the success of the Employer's activities, in a form that will provide
incentives and rewards for meritorious performance and encourage the recipients'
continuance as employees of the Employer.
ARTICLE I
Definitions
As used in this Plan, the following capitalized words and phrases have
the meanings indicated, unless the context requires a different meaning:
1.1 "Administrative Committee" means the committee appointed in
accordance with Section 5.1 to administer the Plan, and shall initially consist
of the members of the Sponsor's Benefit Plans Committee.
1.2 "Beneficiary" means the person or persons designated by a
Participant, or who is otherwise entitled, to exercise Options after a
Participant's death.
1.3 "Board" means the Board of Directors of the Sponsor.
1.4 "Compensation Committee" means the Compensation Committee of the
Board or, with respect to Section 162(m) Reporting Persons, the Special
Compensation Committee of the Board.
1.5 "Designated Property" means shares of regulated investment
companies (mutual funds) designated by the Compensation Committee as subject to
purchase through the exercise of an Option, or the property substituted under
Section 2.5.
1.6 "Disability" means a mental or physical condition that would
entitle a Participant to receive benefits under the applicable Employer's
long-term disability plan.
1.7 "Effective Date" means December 10, 1997.
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1.8 "Employee" means any common law employee of the Sponsor or any
other Employer.
1.9 "Employer" means the Sponsor, any other affiliate or subsidiary of
the Sponsor which is a member of its controlled group of corporations (within
the meaning of Section 1563 of the Internal Revenue Code of 1986, as amended)
which has been designated by the Sponsor to participate in this Plan as a
participating employer, and any successor to the Sponsor.
1.10 "Exercise Date" means, with respect to any Option, the date on
which the Participant exercises the Option in accordance with Section 3.3,
except that for purposes of determining any reduction in Option Exercise Price
under Section 2.4.1, the Option Exercise Price percentage shall be determined as
of the date on which occurred the Termination of Employment.
1.11 "Exercise Period" means the period of time stated in Section
3.1.1.
1.12 "Fair Market Value" means, with respect to shares of a regulated
investment company (mutual fund), the price of, or for mutual funds whose shares
are traded on the basis of net asset value, the net asset value ascribed to, the
shares of the applicable mutual fund as quoted at the close of the market on the
applicable date.
1.13 "Grant Date" means, with respect to any Option, the date on which
the Option Agreement has been made effective.
1.14 "Option" means the right of a Participant, granted by the Employer
in accordance with the terms of this Plan, to purchase Designated Property from
the Employer at the Option Exercise Price established under Section 2.
1.15 "Option Agreement" means an agreement from the Employer to a
Participant to whom Options have been granted, acknowledging the issuance of the
Options and setting forth certain terms governing the Option, including, but not
limited to a description of the Designated Property, the Option Exercise Price
and the Exercise Period.
1.16 "Option Exercise Price" means the price that a Participant must
pay in order to exercise an Option.
1.17 "Participant" means any Employee who has received a grant of
Options in accordance with Section 2.1 and whose Options have not been
completely exercised. After a Participant's death, his Beneficiary, or upon a
valid transfer under Section 3.4, the transferee, is considered to be a
Participant to the extent necessary to facilitate the exercise of any Options
that continue to be exercisable under the terms of the Plan.
1.18 "Plan" means the Reliance Group Holdings, Inc. Key Employee Share
Option Plan, as set forth herein and as from time to time amended.
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1.19 "Retirement" means Termination of Employment on or after the date
on which a Participant attains age 65.
1.20 "Section 162(m) Reporting Person" means any Participant whose
remuneration is, or as an executive officer of Sponsor may become, subject to
Section 162(m) of the Internal Revenue Code of 1986, as amended.
1.21 "Sponsor" means the Reliance Group Holdings, Inc., a Delaware
corporation or any successor thereto.
1.22 "Termination of Employment" means a Participant's separation from
the service of the Sponsor or any other Employer by reason of his resignation,
Retirement, discharge or death; other than any separation which results in a
transfer to another Employer.
1.23 "Termination of Employment for Cause" means Termination of
Employment as a result of (i) the willful and material failure of Employee to
timely perform duties assigned to him by Employer, (ii) the commission by
Employee of gross negligence or wanton misconduct in the conduct of his or her
assigned duties, (iii) the material violation of any guidelines established by
Employer, (iv) theft, misappropriation or defalcation of Employer funds by
Employee or (v) the indictment of Employee for, or the entry of a pleading of
nolo contendere by Employee to, any crime involving moral turpitude or any
felony.
ARTICLE II
Grant of Options
2.1 Eligibility for Grants. Grants of Options may be made to any
Employee of the Employer who, in the judgment of the Compensation Committee,
plays a key role with a significant impact on the Employer's fulfillment of the
purposes specified in its Articles of Incorporation and By-Laws.
2.2 Procedure for Granting Options. The recipients of Options are
determined from time to time by the Compensation Committee. Grants become
effective upon the execution and delivery by the Employer to the Participant of
an Option Agreement which shall contain such provisions as the Compensation
Committee in its sole discretion deems necessary or desirable. Grants may be
made at any time on or after the Effective Date and prior to the termination of
the Plan.
2.3 Selection of Designated Property. When an Option is granted, the
Compensation Committee will specify the Designated Property that may be
purchased by exercise of the Option and will determine the Exercise Price in
accordance with Section 2.4.
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2.4 Establishment of Exercise Price.
2.4.1 Unless the Option Agreement provides otherwise, the
Exercise Price of an Option shall be the greater of 25% of the Fair
Market Value of the shares on the Grant Date and a percentage of the
Fair Market Value of the shares on the Exercise Date, which percentage
varies with the earlier of Termination of Employment and Exercise Date.
Initially, such percentage will be 25% of the Fair Market Value of the
shares on the Exercise Date. However, for every two years the Option is
outstanding until the sixteenth anniversary of the Grant Date such
percentage of the Fair Market Value of the shares on the Exercise Date
will decrease by one-half of one percent (.5%), so that by the
sixteenth anniversary of the Grant Date such percentage would be 21%
instead of 25%. Finally, if the Option remains outstanding for the full
twenty years, such percentage will be reduced to 15% of the Fair Market
Value of the shares on the Exercise Date. No reduction of such
percentage of Fair Market Value of any Option shall be made for periods
after the Termination of Employment.
2.4.2 In the event of a stock split, reverse stock split,
stock dividend, rights offering, return of capital distribution,
recapitalization or similar transaction that materially affects the
Fair Market Value of the Designated Property, the Compensation
Committee may adjust the Option Exercise Price or increase the number
of Options that can be exercised so that it retains the same ratio to
the Fair Market Value of the Designated Property as existed immediately
before the transaction.
2.5 Substitution of Other Property for Designated Property. The
Compensation Committee may, in its sole discretion, at any time substitute the
Designated Property with any other property of at least equal value. Such
substituted property shall be deemed Designated Property for all purposes under
the Plan.
2.6 Cash Payment for Option in Lieu of Exercise and Sale. Options which
are exercisable pursuant to Section 3.1, but which have not yet been exercised,
may upon Termination of Employment For Cause be canceled by the Compensation
Committee, at its discretion, for a cash payment of an amount equal to the Fair
Market Value of the full number of exercisable shares or units of Designated
Property less the total Option Exercise Price of such shares or units (in lieu
of requiring or allowing actual exercise and sale of the shares).
2.7 Adjustment of Shares Deliverable under Option Agreement. The
Compensation Committee shall include a dividend or other distribution equivalent
right entitling the Optionee to receive amounts equal to the distributions paid,
during the time such Option is outstanding and unexercised, with respect to the
shares or units of Designated Property covered by such Option. The Compensation
Committee shall determine whether such payments shall be made in cash or in
additional Options to purchase shares or units of the Designated Property and
the time or times at which such
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payments shall be made. In the event additional Options are granted, the Options
shall be subject to all terms of the Plan, including, but not limited to the six
month waiting period before the Options could be exercised as provided under
Section 3.1, as of the Grant Date of such Options.
ARTICLE III
Exercise of Options
3.1 When Options are Exercisable. Unless the Option Agreement provides
otherwise, an Option shall be exercisable as follows:
3.1.1. A Participant may exercise an Option, in whole or in
part, at any time during the period commencing six months after the
Grant Date and ending on the twentieth anniversary of the Grant Date
(the "Normal Exercise Period").
3.1.2 Notwithstanding the above, the Exercise Period shall
end on the earlier of the following:
(a) Twenty-four months from the date of the
Participant's Termination of Employment, if his employment
terminates as a result of Retirement or Disability;
(b) Twenty-four months from the date of the
Participant's death, unless the Beneficiary is the
Participant's spouse, in which case the Exercise Period
shall end five (5) years from the date of the Participant's
death;
(c) Thirty (30) days from the date of the
Participant's Termination of Employment For Cause or, if
longer, seven months from the Grant Date;
(d) Ninety (90) from the date of the Participant's
Termination of Employment, or, if longer, nine months from
the Grant Date, if his employment terminates for any reason
other than as specified in (a), (b) or (c) above, unless
otherwise agreed in writing by the Compensation Committee
as in the best interests of the Employer under the
circumstances of a Termination of Employment; or
(e) Twenty-four months from the date the Plan is
terminated pursuant to Article IV hereof.
3.2 Vesting. Unless the Option Agreement provides otherwise, a
Participant shall be immediately vested in any Option granted to such
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Participant, regardless of such Participant's ability to exercise the Option
under Section 3.1.1.
3.3 Procedure for Exercising Option. Unless the Option Agreement
provides otherwise, the procedure for exercising an Option shall be as set
forth below.
3.3.1 Notice of Exercise. A Participant may exercise all or
a portion of his or her exercisable Options by giving written notice to
the Administrative Committee, or its delegate, in a form and at the
time acceptable to the Administrative Committee and tendering payment
of the applicable Exercise Price.
3.3.2 Payment of Exercise Price. The method of payment
shall be cash, cash equivalent (i.e., money order, cashier's check or
certified check) or any other method of payment approved by the
Administrative Committee.
3.3.3 Delivery of Option Shares. As soon as is reasonably
possible after receiving payment of the full Option Exercise Price, the
Sponsor shall, subject to the provisions of Sections 3.1, transfer to
the Participant, or to such other person as may then have the right to
exercise the Option, the number of shares or units of Designated
Property for which the Option has been exercised. If the method of
payment employed upon exercise so requires, and if applicable law
permits, a Participant may direct the Sponsor to deliver the
certificate(s) to the Participant's stockbroker or other investment
manager.
3.3.4 Payment of Applicable Taxes. The Sponsor shall be
entitled to require as a condition of transfer of the Designated
Property pursuant to the exercise of the Option that the Participant
remit to the Sponsor an amount sufficient in the opinion of the Sponsor
to satisfy all federal, state and other governmental tax withholding
requirements related thereto. The Sponsor may permit the Participant to
satisfy the foregoing condition by electing to have the Sponsor
withhold from other income earned by the Participant and paid by the
Sponsor or by electing to have the Sponsor withhold shares of
Designated Property deliverable under the Option.
3.4 Inalienability of Options. No Option granted under this Plan may be
transferred, assigned or alienated, except to a Beneficiary under this Plan, or,
if permitted by the Compensation Committee, to (i) a member of the Participant's
immediate family, such as the Participant's spouse, child, parent, brother or
sister, or to a trust, partnership or limited liability company for the benefit
of any such individual, or (ii) an inter vivos trust for the benefit of the
Participant. An Option may be exercised only by the Participant to whom it was
granted, by his Beneficiary, executor or administrator of his or her estate
after death, by a person or entity to whom the Option was validly transferred,
or by a person holding a valid power of attorney, or legally appointed as
guardian, to act on behalf of the person entitled to exercise the Option.
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3.5 Designation of Beneficiary
3.5.1 Designation or Change of Beneficiary by Participant.
Prior to the grant of an Option, a Participant may designate one or
more Beneficiaries and successor Beneficiaries. A Participant may
change his Beneficiary designation at any time by filing the prescribed
form with the Administrative Committee. The consent of the
Participant's current Beneficiary is not required for a change of
Beneficiary, and no Beneficiary has any rights under this Plan except
as are provided by its terms. The rights of a Beneficiary who
predeceases the Participant who designated him immediately terminate,
unless the Participant has specified otherwise.
3.5.2 Beneficiary if No Designation is Made. Unless a
different Beneficiary has been designated in accordance with Section
3.5.1, the Beneficiary of any Participant who is lawfully married on
the date of his death is his surviving spouse. The Beneficiary of any
other Participant who dies without having designated a Beneficiary is
his estate.
ARTICLE IV
Amendment or Termination of the Plan
4.1 Sponsor's Right to Amend or Terminate Plan. The Sponsor may, at any
time and from time to time, amend, in whole or in part, any of the provisions of
this Plan or may terminate it as a whole or with respect to any Participant or
group of Participants. Any such amendment is binding upon all Employers and
Participants, the Compensation Committee, the Administrative Committee and all
other parties in interest.
4.2 When Amendments Take Effect. A resolution amending or terminating
the Plan becomes effective as of the date specified therein or, if no date is
otherwise specified, upon the date the resolution is finally approved by the
Board.
4.3 Exercisability upon Termination. In the event that the Plan is
terminated, the Sponsor reserves the right to require all outstanding Options to
be exercised within two years of the date of such termination.
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ARTICLE V
Plan Administration
5.1 Administration of Plan. The Plan shall be administered by the
Administrative Committee appointed by the Compensation Committee; provided,
however, that with respect to any Participant who is a Section 162(m) Reporting
Person, the Plan shall be administered by the Compensation Committee.
5.1.1 Interested Parties. No member of the Administrative
Committee may participate in any decision if that member is not
disinterested with respect to the issue being considered.
5.1.2 Action by the Administrative Committee. The
Administrative Committee acts by a majority of its members at the time
in office and may take action either by vote at a meeting or by consent
in writing without a meeting. The Administrative Committee may adopt
such rules and appoint such subcommittees as it deems desirable for the
conduct of its affairs and the administration of the Plan.
5.1.3 Removal, Resignation, Action During Vacancies. The
Compensation Committee has the power to remove any member of the
Administrative Committee at any time, with or without cause, and may
fill any vacancy. If a vacancy occurs, the remaining member or members
of the Administrative Committee have full authority to act. In the
absence of any Administrative Committee members being appointed or
continuing in that capacity, the Compensation Committee shall
constitute the Administrative Committee. Any member of the
Administrative Committee may resign by delivering his written
resignation to the Compensation Committee. Any such resignation becomes
effective upon its receipt by the Compensation Committee, or on such
other date as is agreed to by the Compensation Committee and the
resigning member. Any Administrative Committee member who is an officer
of the Employer shall be deemed to submit his or her resignation upon
submitting a resignation from employment or upon being terminated from
employment by the Employer, which resignation shall be effective upon
the effective date of the resignation or termination from employment.
5.2 Powers of the Administrative Committee. In carrying out its duties
with respect to the general administration of the Plan, the Administrative
Committee has, in addition to any other powers conferred by the Plan or by law,
the following powers:
(a) to compute and certify to the Sponsor the amount of
distributions payable to Participants;
(b) to maintain all records necessary for the administration of
the Plan that are
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not maintained by the Sponsor;
(c) to interpret the provisions of the Plan and to make and
publish such rules for the administration of the Plan as are not
inconsistent with the terms thereof;
(d) to establish and modify the method of accounting for the
Plan;
(e) to employ counsel, accountants and other consultants to aid
in exercising its powers and carrying out its duties hereunder; and
(f) to perform any other acts necessary and proper for the
administration of the Plan, except those that are performed by the
Sponsor or the Compensation Committee.
5.3 Indemnification.
5.3.1 Indemnification of Members of the Compensation
Committee and Administrative Committee by the Employer. The Sponsor
agrees to indemnify and hold harmless each member of either the
Compensation or Administrative Committee against any and all expenses
and liabilities arising out of his action or failure to act in such
capacity, excepting only expenses and liabilities arising out of his
own willful misconduct or gross negligence. This right of
indemnification is in addition to any other rights to which any member
of either the Compensation or Administrative Committee may be entitled.
5.3.2 Liabilities for Which Members of the Compensation and
Administrative Committees are Indemnified. Liabilities and expenses
against which a member of either the Compensation or Administrative
Committee is indemnified hereunder include, without limitation, the
amount of any settlement or judgment, costs, counsel fees and related
charges reasonably incurred in connection with a claim asserted or a
proceeding brought against him or the settlement thereof, and any
penalties or fines imposed by any federal, state or local statute or
governmental entity.
5.3.3 Employer's Right to Settle Claims. The Sponsor may,
at its own expense, settle any claim asserted or proceeding brought
against any member of either the Compensation or Administrative
Committee when such settlement appears to be in the best interests of
the Sponsor.
5.4 Claims Procedure. If a dispute arises between the Administrative
Committee and a Participant over the amount of benefits payable under the Plan,
the Participant may file a claim for benefits by notifying the Administrative
Committee in writing of his claim. The Administrative Committee will review and
adjudicate the claim. If the claimant and the Administrative Committee are
unable to reach a mutually satisfactory resolution of the dispute, it may be
submitted by the claimant to the Compensation Committee for final adjudication.
5.5 Expenses of the Plan and the Administrative Committee. The members
of the Administrative Committee serve without compensation for services as such.
All
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expenses of the Administrative Committee are paid by the Sponsor.
ARTICLE VI
Miscellaneous
6.1 Plan not a Contract of Employment. The adoption and maintenance of
the Plan do not constitute a contract between any Employer and any Participant
and is not consideration for the employment of any person. Nothing herein
contained gives any Participant the right to be retained in the employ of any
Employer or derogates from the right of any Employer to discharge any
Participant at any time without regard to the effect of such discharge upon his
rights as a Participant in the Plan.
6.2 No Rights Under Plan Except as Set Forth Herein. Nothing in this
Plan, express or implied, is intended, or shall be construed, to confer upon or
give to any person, firm, association, or corporation, other than the parties
hereto and their successors in interest, any right, remedy, or claim under or by
reason of this Plan or any covenant, condition, or stipulation hereof, and all
covenants, conditions and stipulations in this Plan, by or on behalf of any
party, are for the sole and exclusive benefit of the parties hereto.
6.3 Rules of construction.
6.3.1 Governing law. The construction and operation of this
Plan are governed by the laws of the State of New York.
6.3.2 Headings. The headings of Articles, Sections and
Subsections are for reference only and are not to be utilized in
construing the Plan.
6.3.3 Gender. Unless clearly inappropriate, all pronouns of
whatever gender refer indifferently to persons or objects of any
gender.
6.3.4 Singular and plural. Unless clearly inappropriate,
singular terms refer also to the plural number and vice versa.
6.3.5 Severability. If any provision of this Plan is held
illegal or invalid for any reason, the remaining provisions are to
remain in full force and effect and to be construed and enforced in
accordance with the purposes of the Plan as if the illegal or invalid
provision did not exist.
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IN WITNESS WHEREOF, Reliance Group Holdings, Inc. has caused this Plan
to be executed by its duly authorized officer and its corporate seal to be
hereunto affixed by authority of its Board of Directors this 10th day of
December 1997.
RELIANCE GROUP HOLDINGS, INC.
[Corporate Seal]
By /s/ Robert M. Steinberg
--------------------------------
President
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RELIANCE NATIONAL (RN)
1997 KEY MANAGEMENT INCENTIVE PLAN (KMIP)
EFFECTIVE FOR POLICY YEAR 1997
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Table of Contents
PARTICIPATION .. ...........................................Page 2
ADMINISTRATION .............................................Page 3
KMIP BONUS POOL ............................................Page 4
PLAN YEAR ..................................................Page 4
PRETAX OPERATING PROFIT ....................................Page 5
POLICY YEAR NET INVESTMENT INCOME ..........................Page 6
POLICY YEAR AVERAGE INVESTED ASSETS ........................Page 7
VESTING ....................................................Page 8
VESTING ADVISORY COMMITTEE .................................Page 9
DISTRIBUTION SCHEDULE ......................................Page 11
CHANGE OF CONTROL ..........................................Page 12
PARTICIPANTS STATEMENTS ....................................Page 13
MISCELLANEOUS ..............................................Page 13
EXHIBITS
1a & 1b - Hypothetical Example of Distribution Schedule
2 - Example of Participants Statement
3 - Example of Investment Income Calculation
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PARTICIPATION
Participation for the plan year is represented by units assigned to each
participant at the inception of the plan year. Each plan year will contain
1,300 units in total. This total may be reduced for forfeitures as a result of
voluntary or involuntary terminations, or maintained by a redistribution of
forfeited units to other participants at the discretion of the C.E.O. of
Reliance National with the approval of the C.E.O. of Reliance Insurance Group.
Units may be granted only to officers and key employees of RN selected by the
Committee (as hereinafter defined).
Nothing in this Plan, nor in the instrument evidencing the grant of units,
shall in any manner be construed to limit in any way the right of RN to
terminate a participant's employment at any time, without regard to the effect
of such termination on any rights such participant would otherwise have under
this Plan, or give any right to such a participant to remain employed by RN in
any particular position, or at any particular rate of compensation, or to
receive a grant of units for any other plan year.
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ADMINISTRATION
This Plan shall be administered by the Compensation Committee of the Board of
Directors of Reliance Insurance Company or such body as may be designated by
the Board of Directors of Reliance Insurance Company (the "Committee"). A
majority of the Committee shall constitute a quorum thereof and the actions of
a majority of the Committee at a meeting at which a quorum is present, or
actions unanimously approved in writing by all members of the Committee, shall
be the actions of the Committee. The Committee shall have full and final
authority to interpret this Plan and the instruments granting units hereunder
(which instruments need not be identical), to prescribe, amend and rescind
rules and regulations, if any, relating to this Plan and, except as expressly
provided to the contrary, to make all determinations necessary or advisable
for the administration of this Plan (including, without limitation,
determinations of pretax operating profits, policy year investment income, and
all other financial calculations called for by this Plan). The Committee's
determination in all matters referred to herein shall be conclusive and
binding for all purposes and upon all persons including, but without
limitation, participants under the Plan.
No member of the Committee shall be liable for anything done or omitted to be
done by such member or by any other member of the Committee in connection with
the Plan, except for the willful misconduct or gross negligence of such
member. The Committee shall have power to engage outside consultants, auditors
or other professional help to assist in the fulfillment of the Committee's
duties under the Plan at RN's expense.
In making its determinations concerning the officers and key employees who
shall receive grants under the Plan, as well as the number of units to be
covered thereby and time or times at which they shall be granted, the
Committee shall take into account the nature of the services rendered by the
respective officers and key employees, their past, present and potential
contribution to RN's success and such other factors as the Committee may deem
relevant. The Committee shall also determine the form of instrument granting
units hereunder and the terms and conditions to be included therein, provided
such terms and conditions are not inconsistent with the terms of this Plan.
The Committee may, in its discretion, waive any provisions of any grant,
provided such waiver is not inconsistent with the terms of the Plan as then in
effect.
The Plan may be terminated or amended at any time and from time to time by the
Board of Directors of Reliance Insurance Company. No termination or amendment
of this Plan, without the consent of the holder of any units then granted, may
terminate such holder's units or materially and adversely affect such holder's
rights thereunder.
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KMIP BONUS POOL
The maximum bonus pool expressed as a percentage of policy year pretax
operating profit (as defined) before bonuses is 13 percent, subject to the
limitation described in the following section.
The total of bonuses earned under all incentive plans of RN including KMIP,
Regular MIP, and "Mini-MIP" may not exceed 13 percent of policy year pretax
operating profits (as defined herein) before bonuses. The total of bonuses
earned under all incentive plans of RN excluding KMIP may not exceed eight
percent of calendar year GAAP pretax operating income before any provisions
for bonus expenses. For example:
1997 policy year projected pretax operating profit
(before bonuses) = $ 100,000,000
-------------
Limitation 13% = 13,000,000
Bonus earned under all other incentive = 7,000,000
plans (1) (Not to exceed 8% of calendar -------------
year GAAP pretax operating income
before bonuses)
Maximum KMIP bonus pool $ 6,000,000
=============
(1) This includes projected policy year earnings projected to ultimate for the
Mini-Mip.
A total of 1,300 KMIP units will be issued for each plan year and allocated to
participants by the RN CEO.
The bonus earned per unit for the plan year is equal to the KMIP bonus pool
for the year divided by 1,300 units. In the above example, the amount earned
per unit is equal to $4,615.00 ($6,000,000 / 1,300). If an individual was
awarded 100 units, his/her share of the bonus pool would be $461,500 (100
units x $4,615 per unit).
PLAN YEAR
The term "plan year" comprises the period from January 1 to December 31 of the
specified year during which an accounting will be made of premiums written and
losses incurred on policies with effective dates from January 1 to December 31
of such year (termed "policy year").
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PRETAX OPERATING PROFIT
Pretax operating profit for a plan year will be calculated on a policy year
basis using statutory accounting principles as follows:
Net policy year written premium $ xxxx
(including retro, audit and similar ------
adjustments)
Less:
Net Policy year losses incurred $ xxxx
Net Policy year loss expenses incurred $ xxxx
Net Calendar year underwriting expenses* $ xxxx
------ ------
Underwriting gain (loss) xxxx
Plus: Policy year cumulative net investment income
(excluding realized capital gain or loss) xxxx
------
Total $ xxxx
Plus: Other calendar year income
(excluding realized capital gain/loss) xxxx
Less: Other calendar year expenses
(including policy year policyholder dividends) $ xxxx
------
Pretax operating profit $ xxxx
======
* Defined as the sum of calendar year operating expenses and acquisition
expenses.
- Operating expenses exclude all bonuses recorded under all
incentive plans of Reliance National during the year.
- Acquisition expenses are determined by multiplying the calendar
year acquisition expense ratio by the policy year written premium.
Pretax operating profit for a plan year will be recalculated at the end of
subsequent calendar years. Policy year losses and loss adjustment expenses
incurred will be based on loss and loss expense ratios provided by the
Corporate Actuarial Department under the supervision of Reliance Insurance
Company's Chief Actuary.
Reasonable allocations will be made by Reliance Insurance Company to RN for
Reliance Insurance Company's corporate overhead under the normal allocation
methods. There will be no allocation to RN for "excess rent" and "excess lease
costs."
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POLICY YEAR NET INVESTMENT INCOME
Policy year net investment income will be calculated by multiplying the
average fixed income yield (excluding realized or unrealized capital gains or
losses), net of investment expenses (excluding interest expense) per
Reliance's statutory Consolidated Annual Statement for the calendar year which
coincides with the plan year, by the average policy year invested assets (as
defined) of RN for each calendar year. For example, for plan year 1997 the
fixed income yield determined from the calendar year 1997 consolidated
statutory statement would be used. This yield will be used in all subsequent
calendar years to determine policy year net investment income for plan year
1997.
For example: Calendar Year
1999-
1997 1998 2005 Total
Average Invested Assets (RN)
Policy Year 1997 xxxx xxxx xxxx xxxx
Reliance Insurance Company net fixed income
Yield Per 1997 Consolidated Annual
Statement (yield for
illustrative purposes only) 7% 7% 7%
Policy Year Net Investment Income:
(Yield x Invested Assets) xxxx xxxx xxxx xxxx
Policy year net investment income for the plan year is calculated on a
cumulative basis for nine calendar years. In the ninth calendar year a
"run-off" calculation will be made to project policy year net investment
income for the ensuing five calendar years assuming the balance of loss and
loss expense resumes at the end of calendar year nine is reduced ratably to
zero over the four years. The average invested assets (average loss and loss
reserve balances) will be multiplied by the net fixed income yield described
above to determine the "run-off" calculation of net investment income for
calendar years ten to thirteen.
Total net investment income shall consist of the cumulative net investment for
the nine calendar years plus the "run-off" period.
6
<PAGE>
POLICY YEAR AVERAGE INVESTED ASSETS
Average invested assets for each policy year will be calculated as described
below.
Invested assets shall be equal to cumulative net cash flow from operations
including cash flow from underwriting, other income and expenses, net
investment income and federal income taxes and assumed shareholder dividends
from accumulated surplus. In determining cash flow, identifiable Reliance
National balance sheet accounts as of the close of the calendar year which
coincides with the policy year shall be allocated wholly to the current policy
year unless other reasonable estimation methods are available to allocate
balance sheet accounts.
In determining cash flow a dividend to shareholders of 10% of ending calendar
year surplus (if any) shall be assumed.
Average invested assets for each calendar year is equal to the beginning and
ending invested asset balances divided by 2.
An example of the calculation of net invested assets is contained in Exhibit
3.
7
<PAGE>
VESTING
Participants will become vested (subject to the provisions of the next
paragraph) based upon completing the years of employment as set in the
following standard vesting schedule:
Number of Years
Plan year plus 1 2 3 4 5 6 7 8
Cumulative vesting
percentage 10% 30% 50% 60% 70% 80% 90% 100%
A participant who is an employee of Reliance National when a change in control
(as hereinafter defined under CHANGE OF CONTROL) of Reliance National occurs
will become fully vested in the units awarded to him for all plan years. A
participant whose employment terminates for reasons of death or total
disability, as defined in the benefit plans of Reliance National, will become
fully vested in the units awarded to him for all plan years. A participant
whose employment terminates by reason of normal retirement, as defined in the
benefit plans of Reliance National, will fully vest in the units awarded to
him for all plan years preceding the year of retirement and will vest in that
percentage of the units awarded to him for the plan year in which he retires
which equals the number of months of employment completed during the plan year
divided by 12. If (1) a participant's employment terminates for any reason
other than death, total disability or normal retirement and (2) the
participant has not become fully vested in the units awarded to him as a
result of a change in control, then the number of units in which the
participant is vested (if any) for each plan year will be determined by the
Chief Executive Officer of Reliance National with the non-binding advice of
the Vesting Advisory Committee.
8
<PAGE>
VESTING ADVISORY COMMITTEE
The Vesting Advisory Committee shall consist of five rotating members. The CEO
of Reliance National will appoint the five rotating members from among the MIP
participants. Each rotating member will serve a term of two years.
The purpose of the Vesting Advisory Committee is to make a non-binding
recommendation to the CEO of Reliance National whether the standard vesting
schedule contained in the Plan shall be followed with respect to a participant
who: (1) terminates from the Company for any reason other than a termination
by death, total disability or normal retirement and (2) has not become fully
vested in the units awarded to him as a result of a change in control. In
determining the recommendation whether to follow the standard schedule, the
Vesting Advisory Committee shall consider:
The reasons for the participant's termination,
The past performance of the participant,
The past contributions of the participant to Reliance National,
The future employer of the participant and
Any other factors the committee shall deem relevant.
The recommendation of the Committee shall be by a simple majority and the
decision of the CEO of Reliance National with respect thereto shall be
absolute, final and binding on all parties including, without limitation,
participants under the plan. The CEO of Reliance National may in his sole and
absolute discretion, specify conditions for the receipt by a terminating
participant (other than a participant who has fully vested in the units
awarded to him as a result of a change in control) of any payments under the
Plan, including but not limited to requiring the terminating participant to
enter into a written Non-compete or Non-interference Agreement with Reliance
National. Such agreement, if any, will be binding on all parties.
In the event that a member of the Committee terminates from Reliance National,
the CEO of Reliance National shall appoint another rotating member to serve on
the Committee to participate in the recommendation of the application of the
vesting schedule with respect to the terminating participant Vesting Schedule.
In the event the CEO of Reliance National is unavailable, or that office is
vacant, the Chairman of the Reliance Insurance Group will act in his place.
9
<PAGE>
Neither the CEO of Reliance National nor any member of the Vesting Advisory
Committee shall be liable for anything done or omitted to be done in
connection with the Plan, except for his or her own willful misconduct or
gross negligence.
10
<PAGE>
DISTRIBUTION SCHEDULE
Participation units will be paid as shown below after the end of the years
indicated (except as provided to the contrary in the next paragraph and in the
second paragraph under CHANGE OF CONTROL):
Plan year plus 1 2 3 4 5 6 7 8
Cumulative Percentage 10% 30% 50% 60% 70% 80% 90% 100%
Distribution of Projected
Ultimate Awards
In the event a participant's employment terminates by reason of death, his or
her estate shall receive within 90 days following the date of death the net
present value (using a discount rate equal to the then prime lending rate of
Chase Manhattan Bank), less any advance payments previously made, for all
units for all policy years in which he or she was a participant. The basis for
valuing the outstanding units for each policy year will be the projected final
value for each policy year which is outstanding.
In all cases, distributions will be adjusted for any prior distributions or
advances paid and for losses from other plan years as described in the next
paragraph. Any calculated overpayments for a plan year are not refundable by a
participant except to offset amounts due the participant for other plan years.
At the sole discretion of the C.E.O. of Reliance National, one (1) Year may be
selected to be excluded from this Plan. In this event, the results of that
Year would not serve to reduce or alter any other payments, either earned or
outstanding, computed from all other Plan Years. The selection of an excluded
year may be made in writing at anytime during which a plan year is open and is
irrevocable.
Amounts due a participant in accordance with the distribution schedule above
will be offset by losses from other plan years in which the participant was a
member of KMIP. For example, in Exhibit 1.a the plan experienced an operating
loss before bonuses of $50 million in plan year 1997. The loss per unit of
$5,000 calculated on the pretax loss of $50 million before other bonuses
earned is deducted from amounts per unit due for other plan years in
accordance with the distribution schedule until absorbed (see exhibit 1.b).
The above applies only when the plan experiences an operating loss before
other bonuses earned. In the example in Exhibit 1.a, all other bonuses earned
exceeded the maximum bonus pool for plan year 1995, therefore no amounts are
allocable to the KMIP. This excess is not deducted from amounts due for other
plan years because the plan did not experience an operating loss in 1995.
11
<PAGE>
CHANGE OF CONTROL(1)
In the event of a change of control of Reliance National, whether directly or
indirectly (including, for example, through the sale of Reliance Insurance
Company or Reliance Group Holdings, Inc.), any successor to all or
substantially all of the business or assets of Reliance National or Reliance
Insurance Company shall assume all liabilities to participants under this Plan
and perform all duties and responsibilities in the same manner that would have
been required of Reliance National and Reliance Insurance Company if no such
change had taken place, and all participants will automatically become fully
(100%) vested for all plan years.
In the event the employment of a participant (a) is terminated by Reliance
National within 18 months following a change of control without Cause or (b)
is terminated by the participant within 18 months following a change of
control with Good Reason, he/she may elect to receive within 90 days following
the date of his/her termination the net present value (using a discount rate
equal to the then prime lending rate of Chase Manhattan Bank) less any advance
payments made for all units for all policy years in which he/she was a
participant. The basis for valuing the outstanding units for each policy year
will be the projected final value for each policy year which is outstanding.
For purposes of this section, Cause shall be defined as: (1) conviction of a
crime, (2) material and deliberate violation of Reliance National's Code of
Conduct or (3) dishonest acts in connection with the participant's employment
by Reliance National. For purposes of this section, Good Reason shall be
defined as a reduction in the participant's authority, duties,
responsibilities or title, any reduction in his/her compensation, or any
change caused by Reliance in his/her office location of more than 35 miles
from its location on the date of the change of control.
Subsequent to a change of control, if there is a disagreement as to the
calculation of KMIP awards for any open plan year or years then such
calculations may be submitted for arbitration provided a simple majority of
the KMIP participants for such year or years are in favor of submitting such
disagreement for arbitration. An independent certified actuary accountable to
both the participants and the company will be selected and the findings of the
independent actuary will be binding on both parties. The cost of the
independent actuary will be paid by the participants .
(1) this provision applies to all open plan years.
12
<PAGE>
PARTICIPANT STATEMENT
Each participant shall be provided a statement of his/her account for each
plan year showing actual and projected amounts earned, paid and payable. See
exhibit 2 for an example of the report to be provided.
MISCELLANEOUS
No award under this Plan shall be considered as compensation in calculating
any insurance, pension or other benefit for which the recipient is eligible
unless any such insurance, pension or other benefit is granted under a plan
which expressly provides that compensation under this Plan shall be considered
as compensation under such plan
13
<PAGE>
Exhibit 1.a
HYPOTHETICAL EXAMPLE
OF DISTRIBUTION SCHEDULE
($000's omitted - except per unit amounts)
<TABLE>
<CAPTION>
Policy Years
1995 1996 1997 1998 1999
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Projected Ultimate Pretax Operating Income - Before Bonuses: 50,000 120,000 (50,000) 150,000 170,000
------- ------- ------- ------- -------
Maximum Bonus Pool @ 13%: 6,500 15,600 (6,500) 19,500 22,100
All Other (non-KMIP) Bonuses Earned: 8,000 8,000 5,000 10,000 12,000
------- ------- ------- ------- -------
Remainder Available for KMIP Bonus: (1,500) 7,600 (11,500) 9,500 10,100
======= ======= ======= ======= =======
KMIP Bonus Earned per Unit 0 (a) 5,846 (5,000)(b) 7,308 7,769
======= ======= ======= ======= =======
</TABLE>
(a) Since all other bonuses earned exceeded the maximum
bonus pool, the KMIP bonus is $0. Because the profit
center pretax operating income is a profit, this
excess is not deducted from amounts due for other
years.
(b) Since the profit center ultimate pretax operating
income is a loss for 1997, this loss must be deducted
from other policy years.
<TABLE>
<S> <C>
Projected Ultimate Pretax Operating Loss: (50,000)
All Other Bonuses (5,000)
==================
Projected Ultimate Pretax Operating Loss: (55,000)
==================
Amount Deducted From Other Policy Years:
13% of $50,000 (the loss before all other bonuses earned) (6,500)
==================
Amount Deducted Per Unit ($6.5 million / 1300 units): (5,000)
==================
</TABLE>
<PAGE>
Exhibit 1.b
HYPOTHETICAL EXAMPLE
DISTRIBUTION PAID PER UNIT
<TABLE>
<CAPTION>
Distribution Calendar Year
Schedule
Cumulative (A) 1995 1996 1997 1998 1999 2000 2001 2002 2003
---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
- ----------------------------------
Plan Years 1995 0% 10% 30% 50% 60% 70% 80% 90% 100%
1996 0% 10% 30% 50% 60% 70% 80% 90%
1997 0% 10% 30% 50% 60% 70% 80%
1998 0% 10% 30% 50% 60% 70%
1999 0% 10% 30% 50% 60%
Ultimate
Bonus Earned (B)
- ----------------------------------
Plan Years 1995 0 0 0 0 0 0 0 0
1996 5,846 5,846 5,846 5,846 5,846 5,846 5,846
1997 (5,000) 5,000) (5,000) (5,000) (5,000) (5,000)
1998 7,308 7,308 7,308 7,308 7,308
1999 7,769 7,769 7,769 7,769
Distribution Due
Cumulative (C)
- ----------------------------------
(C = A x B)
Plan Years 1995 0 0 0 0 0 0 0 0
1996 585 1,754 2,923 3,508 4,092 4,677 5,261
1997 (500) (1,500) (2,500) (3,000) (3,500) (4,000)
1998 731 2,192 3,654 4,385 5,116
1999 777 2,331 3,885 4,661
Net ----- ----- ----- ----- ----- ----- ----- ----- -----
Cumulative Payable 0 585 1,254 2,154 3,977 7,077 9,446 11,038
Less
Cumulative Paid * 0 0 585 1,254 2,154 3,977 7,077 9,446
Cumulative ----- ----- ----- ----- ----- ----- ----- ----- -----
Balance Due 0 585 669 900 1,823 3,100 2,369 1,592
===== ===== ===== ===== ===== ===== ===== ===== =====
</TABLE>
* Payment is generally made in February of the succeding year.
<PAGE>
Reliance National KMIP Exhibit 2
Status as of December 31, 1997
(Hypothetical)
<TABLE>
<CAPTION>
1997 Policy Year Calculated Projected
as of Ultimate to
12/31/97 12/31/05
------------------------- -------------------------
<S> <C> <C>
Written Premium 1,006,664,847 1,006,664,847
Policy Year Earned Premium 507,996,847 1,006,664,847
Loss & Lae 380,489,639 753,991,971
Expense 266,981,882 266,981,882
------------------------- -------------------------
Underwriting Gain (Loss) (139,474,674) (14,309,006)
Investment Income 19,393,499 136,284,697
========================= =========================
Pretax Profit (120,081,175) 121,975,692
========================= =========================
Loss Ratio 74.9% 74.9%
Expense Ratio 26.5% 26.5%
------------------------- -------------------------
Combined Ratio 101.4% 101.4%
Investment Income 1.9% 13.5%
========================= =========================
Pretax Profit 99.5% 87.9%
========================= =========================
</TABLE>
<TABLE>
<CAPTION>
Bonus Calculation 12/31/97 Per Unit 12/31/05 Per Unit
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Cumulative Bonus Earned (Pretax X 13%) 0 15,856,840
Less: bonuses paid under all other plans 12,500,000 12,500,000
Less: surplus charge 0
----------- ------ ---------- --------
Adjusted Award (Available for KMIP) (12,500,000) 0 3,356,840 2,582
Cumulative Bonus Payable 0 0
Cumulative Paid/Advanced 0 0
----------- ------
Balance Payable 0 0
=========== ======
</TABLE>
<TABLE>
<CAPTION>
Total
Earned Payable
Prelim as of as of Payable in Payable In Payable In Payable In Payable In Payable In
Participants Units 12/31/97 12/31/97 1998 1999 2000 2001 2002 2003
----- -------- -------- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Bonus Per Unit 0 0 0 258 516 516 258 258
Individual 80 0 0 0 20,657 41,315 41,315 20,657 20,657
</TABLE>
<TABLE>
<CAPTION>
(Projected
Payable)
Policy Yr 1997
Projected
Projected Earned
Payable In Payable In Payable In Earned Less Pd Thru
Participants 2004 2005 2006 To 2005 Dec-97
---- ---- ---- ------- ------
<S> <C> <C> <C> <C> <C>
Bonus Per Unit 258 258 258 2,582 2,582
Individual 20,657 20,657 20,657 206,575 206,575
</TABLE>
<PAGE>
Reliance National KMIP Exhibit 3
Plan Year 1997 (Hypothetical)
Investment Income Calculation
Cash Flow Method:
<TABLE>
<CAPTION>
Reserve
1997 1998 1999 2000 2001 2002 2003 2004 2005 Runoff
---- ---- ---- ---- ---- ---- ---- ---- ---- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Cash Flow
Premiums Written 1,006,665
Change In Rec 450,645 (143,738) (105,919) (84,853) (80,488) (5,447) (5,033) (5,033) 0
Net Premiums Collected (+) 556,020 143,738 105,919 84,853 80,488 5,447 5,033 5,033 0
Losses Paid (-) 128,931 154,570 106,313 89,725 72,383 41,470 33,930 21,112 13,572 91,987
Expenses Paid (-) 266,982 0 0 0 0 0 0 0 0
Imprest Funds (-) 53,132 (53,132)
Reinsurance Recoverables (-) 49,760 (49,760)
Other Liab (+) 492,360 (492,360)
Fixed assets (-) 11,892 (3,641) (3,641) (2,518) (1,395) (698) 0 0
-----------------------------------------------------------------------------------------------------
Cash Flow 537,683 (396,659) 3,247 (2,354) 9,500 (35,325) (28,896) (16,078) (13,572) (91,987)
Net Inv.Income 19,393 24,570 10,980 11,791 12,657 12,367 10,555 9,264 8,448 16,259
Income Taxes (8,462) (30,076) 4,304 (2,270) 75 (1,134) (1,486) (1,720) (579) (5,691)
Paid Surplus Dividend (480) (1,273) (2,283) (3,065) (3,585) (3,922) (4,259)
Paid Bonus 0 0 (336) (671) (671) (336) (336) (336) (336)
-----------------------------------------------------------------------------------------------------
Net Cash 548,614 (402,164) 17,715 5,223 19,279 (27,493) (23,747) (12,792) (10,298) (81,419)
Investment Income
Invested Assets (Beginning) 0 548,614 146,449 164,165 169,387 188,666 161,173 137,426 124,633
Invested Assets (Ending) 548,614 146,449 164,165 169,387 188,666 161,173 137,426 124,633 114,335
Avg. Invested Assets 274,307 347,532 155,307 166,776 179,027 174,919 149,299 131,029 119,484
Rate 7.07% 7.07% 7.07% 7.07% 7.07% 7.07% 7.07% 7.07% 7.07% 7.07%
Net Investment Income 19,393 24,570 10,980 11,791 12,657 12,367 10,555 9,264 8,448 16,259
Balance Sheet
Assets
Net inv. assets 548,614 146,449 164,165 169,387 188,666 161,173 137,426 124,633 114,335
Imprest Funds 53,132
Reins Recoverables 49,760
Receivables 450,645 306,907 200,988 116,135 35,647 30,200 25,167 20,133 20,133 0
Fixed assets 11,892 8,252 4,611 2,093 698 0 0 0 0 0
--------------------------------------------------------------------------------------------------
Total 1,114,043 461,608 369,763 287,615 225,010 191,373 162,592 144,767 134,468 0
==================================================================================================
Liabilities
UPR 498,668
Accrued Bonus 0 816 783 436 113 117 72 (9) (112) 0
Reserves 251,559 470,491 364,178 274,453 202,070 160,600 126,671 105,559 91,987 0
Accrued Dividend
Other 492,360
--------------------------------------------------------------------------------------------------
Total 1,242,587 471,307 364,961 274,889 202,183 160,718 126,743 105,550 91,875 0
==================================================================================================
Surplus (128,544) (9,699) 4,803 12,726 22,828 30,655 35,849 39,216 42,593 0
==================================================================================================
Dividend Calculation
Pre Dividend Surplus (128,544) (9,699) 4,803 12,726 22,828 30,655 35,849 39,216 42,593 0
Dividend Percent: 10.00%
Dividend 0 480 1,273 2,283 3,065 3,585 3,922 4,259
Surplus Reconciliation
Beginning of Year 0 (128,544) (9,699) 4,803 12,726 22,828 30,655 35,849 39,216
Pretax Income (120,081) 149,736 10,980 11,791 12,657 12,367 10,555 9,264 8,448
Taxes (8,462) (30,076) 4,304 (2,270) 75 (1,134) (1,486) (1,720) (579)
Paid Surplus Dividend (480) (1,273) (2,283) (3,065) (3,585) (3,922) (4,259)
Earned Award (816) (302) (324) (348) (340) (290) (255) (232)
-------------------------------------------------------------------------------------------------
End of Year (128,544) (9,699) 4,803 12,726 22,828 30,655 35,849 39,216 42,593 0
=================================================================================================
</TABLE>
<PAGE>
STOCK PURCHASE AGREEMENT
THIS PURCHASE AGREEMENT ("Agreement") is entered into as of December
31, 1997 among Bear Stearns Acquisition Corp. XVI ("Buyer"), Reliance National
(U.K.) Ltd. ("RNUK") and Reliance Insurance Company ("RIC", and together with
RNUK, "Sellers").
R E C I T A L S
WHEREAS, Sellers own all of the outstanding Common Stock, par value
$.50 per share (the "Common Stock"), of Prometheus Funding Corp. ("Prometheus")
free and clear of all liens; and
WHEREAS, Sellers wish to sell, and Buyer wishes to purchase, the Common
Stock.
A G R E E M E N T
NOW, THEREFORE, in consideration of the matters recited above, and the
mutual covenants and agreements contained herein, the parties to this Agreement
hereby agree as follows:
1. Sale and Purchase of the Common Stock. Subject to all terms and
conditions of this Agreement and effective upon receipt by Sellers of the
Purchase Price (as defined below), Sellers hereby irrevocably sell and transfer
to Buyer all of Sellers' right, title, and interest in and to the Common Stock,
free and clear of all liens and encumbrances of any nature whatsoever, other
than applicable registration requirements under federal and state securities
laws with respect to the resale of the Common Stock. The sale of the Common
Stock is without any representation or warranty, express or implied, except as
expressly set forth in this Agreement. Sellers will deliver to Buyer
certificates representing the Common Stock, duly registered in the name of Buyer
with all signatures guaranteed. Sellers will pay any transfer taxes required to
be paid in connection with the transfer of the Common Stock.
2. Purchase Price. Upon receipt by Buyer of the certificates
representing the Common Stock, Buyer hereby agrees to pay to Sellers on the date
hereof (the "Closing Date") the amount of $7,454,000 (the "Purchase Price"). The
Purchase Price shall be paid in immediately available U.S. dollar funds by wire
transfer to the accounts of Sellers as provided to Buyer under separate cover,
which shall be allocated to Sellers pro rata in accordance with their respective
ownership of the Common Stock.
3. Representations and Warranties of Both Buyer and Sellers.
(a) Each party to this Agreement represents and warrants that no
registration or filing with, notice to, or consent or approval of, or
any other action by any federal, state or other governmental agency,
authority or regulatory body, foreign or domestic, or any other person
is required to be made or obtained by such party for or in connection
with the due execution, delivery and performance of this Agreement by
such party.
<PAGE>
(b) Each party to this Agreement represents and warrants that no
proceedings are pending and, to the best of such party's knowledge, no
proceeding is threatened against or affecting such party, before any
federal, state or other governmental agency, authority, administrative
or regulatory body, arbitrator, court or other tribunal, foreign or
domestic, that individually or in the aggregate could adversely affect
any action taken or to be taken by such party under this Agreement.
(c) Each party to this Agreement represents and warrants that it (i) has
become a party hereto solely in reliance upon its independent
investigation of Prometheus, this Agreement, all applicable laws and
regulations, and all aspects of the transactions evidenced by or
referred to in this Agreement as it deemed necessary or appropriate,
except that each party acknowledges that the other party is relying on
the representations, warranties, covenants, agreements and indemnities
contained in this Agreement, (ii) is an "accredited investor" as such
term is defined in Regulation D promulgated under the Securities Act of
1933, as amended, (iii) has substantial experience in making
investments of the type contemplated by this Agreement, (iv) is capable
of evaluating the merits and risks of the transactions contemplated by
this Agreement, and (v) has received and reviewed copies of such
information including, without limitation, the representations and
warranties referred to herein as is necessary or appropriate to enable
it to decide whether to enter into this Agreement.
(d) Each party to this Agreement represents and warrants that (i) it has
full power and authority to enter into this Agreement and to perform
its obligations under this Agreement in accordance with the terms of
this Agreement, (ii) this Agreement has been duly authorized, executed
and delivered by such party and such action and the performance of its
obligations hereunder will not violate any provision of its charter,
bylaws, any contract to which it is a party, or any law, rule,
regulation, order, writ, judgment, decree, determination or award
applicable to it, and (iii) this Agreement constitutes a legal, valid
and binding obligation of such party, enforceable against it in
accordance with its terms.
(e) Each party to this Agreement acknowledges and agrees that neither the
other party nor any director, officer, agent, employee, legal counsel
or other representative of the other has made or given any
representation, indemnity or warranty, express or implied, of any kind
or character with respect to Prometheus, any applicable law or
regulation, this Agreement, the transactions contemplated by this
Agreement or any other matter, except as expressly set forth in this
Agreement.
(f) Each party to this Agreement represents and warrants that (i) it has
not retained a broker or other intermediary to act on its behalf in
connection with the transactions contemplated by this Agreement, and
(ii) there are no claims or rights against it for brokerage commissions
or finder's fees in connection with this Agreement or the transactions
contemplated by this Agreement except that Sellers have engaged Bear
Stearns & Co. Inc. as their financial advisor and are responsible for
the fees thereof.
4. Representations and Warranties of Sellers. Sellers, jointly and
severally, represent, warrant and covenant to Buyer as follows:
2
<PAGE>
(a) Prometheus is duly organized, validly existing and in good standing
under the laws of the State of Delaware. Prometheus has the requisite
power and authority to carry on its business as presently conducted.
(b) Except as listed in Schedule 4(b) of the Sellers' letter of even date
hereof (the "Sellers' Letter"), there are no actions, suits,
proceedings, arbitrations or investigations pending or, to the
knowledge of Prometheus or Sellers, threatened in any court or before
any governmental or regulatory authority, agency, commission or
official, or any arbitration panel, against Prometheus or its
subsidiaries. Neither Prometheus nor any of its subsidiaries is in
default with respect to any order, writ, injunction or decree of any
court or other governmental or regulatory authority, agency, commission
or official.
(c) Neither Prometheus nor any of its subsidiaries has any employees or,
except as described in Schedule 4(c) of the Sellers' Letter, is a party
to or bound by any (i) employment contracts for any officers or
employees, (ii) stock option or stock appreciation plans or
arrangements, (iii) employee benefit plans, or other plans maintained
for the benefit of employees, whether subject to the Employee
Retirement Income Security Act of 1974, as amended, or otherwise, (iv)
profit sharing, bonus, incentive compensation, deferred compensation,
severance pay, pension, retirement or any similar employee benefit
plans or agreements, or (v) contracts with any labor union.
(d) Prometheus has authorized capital stock consisting of 200 shares of
Common Stock. There are 100.57 shares of the Common Stock issued and
outstanding, 78.57 shares of which are beneficially owned by RIC and 22
shares of which are beneficially owned by RNUK. All of the Common Stock
has been duly and validly issued, is fully paid and non-assessable, and
is owned by Sellers, free and clear of all liens, charges, claims and
encumbrances. There are no preemptive or similar rights to purchase or
otherwise acquire the Common Stock pursuant to any provisions of law,
the Certificate of Incorporation and/or by any other agreement. There
are no outstanding rights, subscriptions, warrants, options, conversion
rights or agreements of any kind to issue, purchase or otherwise
acquire any capital stock of Prometheus or any securities or other
instruments convertible into capital stock of Prometheus or any
agreements relating to the voting or other matters relating to such
capital stock.
(e) There are no outstanding declarations or any undistributed payments of
dividends or other distributions with respect to the capital stock of
Prometheus.
(f) Except as described in Schedule 4(f) of the Sellers' Letter, neither
Prometheus nor any of its subsidiaries is a party to any contract,
mortgage, indenture, note, guaranty, lease or agreement of any kind for
which it or they may be subject to any liability.
(g) The total assets of Prometheus consist only of cash and securities of
the types, quality and maturities listed in Schedule 4(g) of the
Sellers' Letter.
(h) Prometheus has never been included in the consolidated returns of
either Seller or any parent of either Seller. All taxes in respect of
periods beginning before the date hereof, have been paid, or an
adequate reserve has been established therefor on the books and records
of Prometheus.
3
<PAGE>
There are no liens for taxes (other than for current taxes not yet due
and payable) on the assets of Prometheus.
(i) Sellers have previously delivered to Buyer the audited balance sheet of
Prometheus as of December 31, 1996 (the "Audited Balance Sheet") and
the related statements of cash flow, income and changes in
shareholders' equity of Prometheus for the fiscal year then ended
(collectively, the "Audited Financial Statements"). Sellers have also
previously delivered to the Buyer the unaudited balance sheet of
Prometheus as of September 30, 1997 (the "Current Balance Sheet") and
the related statements of cash flow, income and changes in
shareholders' equity of Prometheus for the nine-month period then ended
(collectively, the "Current Financial Statements"). The Audited
Financial Statements and the Current Financial Statements
(collectively, the "Financial Statements") have been prepared in
accordance with generally accepted accounting principles applied
consistently with past practices and, in the case of the Audited
Financial Statements, have been certified without qualification by
Deloitte & Touche, LLP, Prometheus' independent public accountants,
and, in the case of the Current Financial Statements, have been
certified by Prometheus' chief financial officer. The Financial
Statements fairly present, as of their respective dates, the financial
condition, retained earnings, assets and liabilities of Prometheus and
the results of operations of Prometheus' business for the periods
indicated.
(j) As of the Closing Date, neither Prometheus nor any of its subsidiaries
have liabilities or obligations of any nature whether accrued,
absolute, contingent, unasserted or otherwise, and whether due or to
become due, other than those listed on Schedule 4(j) of the Sellers'
Letter.
(k) Sellers have in place the insurance program described on Schedule 4(k)
of the Sellers' Letter and such program names or will name Buyer as an
additional insured thereon. Sellers will not cancel such program during
the currently scheduled term thereof, unless such program is being
replaced with a program which contains similar coverage.
(l) Prometheus has in place the insurance program described in Schedule
4(l) of the Sellers' Letter.
5. Indemnification; Expenses.
(a) Sellers, jointly and severally, hereby agree to indemnify, defend and
hold Buyer and its officers, partners, directors, employees, agents,
representatives, and affiliates, other than Prometheus and its
subsidiaries, (each a "Buyer Indemnitee") harmless from and against any
and all claims, demands, actions, controversies, suits, liabilities,
losses, damages, set-offs, judgments, awards, fines, penalties, costs
and expenses (including all reasonable attorneys' fees and
disbursements) (collectively, "Losses") as incurred by Buyer
Indemnitees arising by reason of or resulting from (i) the settlement
of the Union Indemnity litigation with the New York Insurance
Department in excess of the scheduled payments as listed on Schedule
5(a) of the Sellers' Letter; (ii) payments in excess of an aggregate of
$9,037,837 (net of any insurance or reinsurance recoveries) that relate
to improper sales practices or errors or omissions by Prometheus or its
subsidiaries or their predecessors (such $9,037,837 includes payments
of fees under the Management Agreement referred to in Schedule 4(f) of
the Sellers' Letter); provided, however, in the case of
4
<PAGE>
payments by Prometheus for the Pension Opt Out matter referred to in
Schedule 4(b) of the Sellers' Letter, payments aggregating in excess of
$4,000,000, provided further that no indemnification shall be made with
respect to Losses arising out of liabilities assumed by Prometheus
pursuant to the proviso to Section 1.2 of such Management Agreement or
arising after the termination of such Management Agreement, if such
Management Agreement is terminated by Buyer or Prometheus (other than
RIC acting on behalf of Prometheus) without RIC's consent prior to
December 31, 2012; (iii) claims asserted by any and all creditors,
claimants or policyholders of Union Indemnity with respect to any
Losses suffered in connection with the management, operations or
insolvency of Union Indemnity; (iv) liabilities relating to Frank B.
Hall employee post-retirement medical, long-term disability and life
insurance claims; (v) liabilities relating to items 2, 3, 4, 6 (to the
extent it relates to any liabilities of Prometheus to any person other
than RIC) and 8 on Schedule 4(f) of the Sellers' Letter; and (vi) any
breach of Sellers' representations, warranties, covenants, agreements
or covenants contained herein to the extent such breach involves
matters other than those covered by clauses (i), (ii), (iii), (iv) and
(v) above. In the event that any Buyer Indemnitee has a judgment
rendered against it (whether or not final) with respect to liabilities
of Prometheus and its subsidiaries, Sellers will promptly, but no later
than three days thereafter, post a bond against such judgment or
discharge such judgment. Sellers agree that they will not assert any
claims, counterclaims, defenses or setoffs with regard to its
obligation to such Buyer Indemnitees to post such bond or discharge
such judgment.
(b) Notwithstanding anything in this Agreement to the contrary, in the
event that Sellers (i) make payment to Buyer or any other person or
entity pursuant to the preceding paragraph, and (ii) hold rights,
claims or causes of action (collectively, the "Sellers Reimbursement
Rights") against any person or entity by reason thereof, (x) the
Sellers Reimbursement Rights shall, as between Sellers and Buyer, be
Sellers' alone, and (y) Buyer shall have no interest in the Sellers
Reimbursement Rights.
(c) Buyer hereby agrees to indemnify, defend and hold Sellers and their
respective officers, directors, employees, agents, representatives, and
controlling persons or entities (each a "Seller Indemnitee") harmless
from and against any and all claims, demands, actions, controversies,
suits, liabilities, losses, damages, set-offs, judgments, awards,
fines, penalties, costs and expenses (including all reasonable
attorneys' fees and disbursements) as incurred arising by reason of or
resulting from any breach of Buyer's representations, warranties,
agreements or covenants contained herein.
(d) Notwithstanding anything in this Agreement to the contrary, in the
event that Buyer (i) makes payment to Sellers or any other person or
entity pursuant to the preceding paragraph, and (ii) holds rights,
claims or causes of action (collectively, "Buyer Reimbursement Rights")
against Prometheus or any other person or entity by reason thereof, (x)
the Buyer Reimbursement Rights shall, as between Sellers and Buyer, be
Buyer's alone, and (y) Sellers shall have no interest in the Buyer
Reimbursement Rights.
(e) If a third party commences any action against either of Sellers or
against Buyer for which such party (the "Indemnified Party") is
entitled to indemnification under this Agreement, such Indemnified
Party will promptly notify the other party (the "Indemnifying Party")
in writing of
5
<PAGE>
such commencement. The Indemnifying Party may, at its election and at
its own expense and without limiting its obligation to indemnify the
Indemnified Party, assume control of the defense of such action. Each
Indemnified Party shall cooperate in the defense or prosecution of such
action. In any event, the party that has assumed defense of such action
shall provide the other party with copies of all notices, pleadings,
and other papers filed or received in connection with such action, and
in no event shall the Indemnified Party consent or agree to a
settlement of any such action without the prior written consent of the
Indemnifying Party, which consent shall not be unreasonably withheld.
(f) Except as otherwise expressly provided for herein, each party to this
Agreement shall bear its own costs and expenses (including but not
limited to attorneys' fees and expenses) incurred in connection with
this Agreement and the transactions contemplated hereby.
(g) If any Indemnifying Party shall fail to pay its obligation to any
Indemnified Party within three days after its obligation to make such
payment arises, such Indemnifying Party shall pay such Indemnified
Party, in addition to such payment obligation, interest on such payment
obligation at the "prime rate" (as set forth in the Eastern Edition of
the Wall Street Journal) from the date such obligation was due until
the date of payment.
6. Acknowledgements by Buyer. Buyer acknowledges that (a) the Common
Stock has not been registered under the Securities Act of 1933, as amended, and
may only be sold pursuant to an effective registration statement under such Act,
or pursuant to an exemption from such Act; (b) Sellers are shareholders of
Prometheus, and prior to November 2, 1992, were not involved in the day-to-day
operations of Prometheus and its subsidiaries and predecessors, all of which
operations were sold on such date, and (c) while Sellers have endeavored to
determine the status of all matters covered by the representations, warranties
and covenants contained in Section 4 hereof, none of Sellers, their affiliates
or any of their respective officers, directors, employees or agents has
knowledge sufficient to assess the accuracy of such representations, warranties
and covenants, and, accordingly, such representations, warranties and covenants
are made solely to allocate risk of loss as between Buyer on one hand and
Sellers on the other hand. This acknowledgement in no way limits the rights of
Buyer Indemnitees under Section 5 hereof.
7. Retiree Benefits. RIC has assumed all of the liabilities of
Prometheus and its subsidiaries under the (a) Frank B. Hall retiree medical
program for retired and disabled participants, (b) Frank B. Hall long term
disability program and (b) Frank B. Hall retiree life insurance program. To the
extent reasonably practicable, Buyer agrees that it will cause Prometheus and
its subsidiaries to execute and deliver to RIC, at RIC's expense, such other
documents or instruments as may be necessary or desirable, in the opinion of
RIC, to reflect RIC's retention of such programs and the absence of any rights
or liabilities of Prometheus and its subsidiaries with respect thereto,
including, but not limited to, any right of Prometheus or its subsidiaries to
receive premiums from participants in such programs.
8. Notices.
(a) Unless otherwise specifically provided herein, any notice or other
communication required or permitted to be given hereunder shall be in
writing addressed to the parties at their addresses set
6
<PAGE>
forth below and shall be deemed to have been properly given only if
telecopied, delivered, sent by an overnight mail, or messenger service,
or sent by first-class mail, postage prepaid, addressed to the party to
be notified at the address for such party set forth below, and shall be
deemed to have been given on the day it is received (if telecopied or
hand-delivered), on the first business day after it is sent (if sent by
an overnight mail or messenger service), or the third business day
after it is sent (if sent by first-class mail); by giving notice as
provided above, any party may designate a different address for
notices, statements, demands, consents, approvals or other
communications intended for it:
Notices to Buyer:
Bear Stearns Acquisition Corp. XVI
245 Park Avenue
New York, New York 10017
Telephone: (212) 272-8744
Telecopy: (212) 272-1750
Attention: Mr. Lawrence E. Rogers
with a copy to:
Weil Gotshal & Manges LLP
767 Fifth Avenue
New York, New York 10153-0190
Telephone: (212) 310-8187
Telecopy: (212) 310-8774
Attention: Dennis J. Block, Esq.
Notices to Sellers:
Reliance Insurance Company
Park Avenue Plaza
New York, New York 10055
Telephone: (212) 909-1160
Telecopy: (212) 909-1241
Attention: Lowell C. Freiberg
and
Reliance National (U.K.) Ltd.
c/o Reliance Group Holdings, Inc.
Park Avenue Plaza
New York, New York 10055
Telephone: (212) 909-1177
Telecopy: (212) 909-1864
Attention: Howard E. Steinberg, Esq.
7
<PAGE>
(b) Each party hereby irrevocably consents to the service by certified or
registered mail, return receipt requested, to be sent to its address
stated above or to such other address as it may designate from time to
time by notice given in the manner provided above, of any process in
any action to enforce, interpret or construe any provision of this
Agreement.
9. Survival of Representations and Warranties. The representations,
warranties, covenants and indemnities of the parties contained herein shall
survive the execution, delivery and performance of this Agreement.
10. Confidentiality. The terms of this Agreement shall remain
confidential and shall not be disclosed by either party hereto without the prior
written consent of the other, except that (i) either party to this Agreement may
disclose such terms if and to the extent required by applicable laws, rules, or
regulations, including, without limitation, the rules of any self regulatory
organization, or ordered by a court of competent jurisdiction or a governmental
agency, (ii) either party to this Agreement may disclose such terms to its
representatives and advisors if they agree to keep all such information
confidential, and (iii) either party to this Agreement may disclose such terms
in connection with enforcement of its rights hereunder.
11. Miscellaneous Provisions.
(a) Neither this Agreement nor any term hereof may be changed, waived,
discharged or terminated, except by an instrument in writing signed by
all of the parties hereto. No failure on the part of any party to
exercise, and no delay in exercising, any right under this Agreement
shall operate as a waiver thereof by such party, nor shall any single
or partial exercise of any right under this Agreement preclude any
other or further exercise thereof or the exercise of any other right.
The rights and remedies of each party provided in this Agreement (i)
are cumulative and are in addition to, and not exclusive of, any rights
or remedies provided by law, except to the extent that this Agreement
expressly limits or otherwise expressly affects any party's rights or
remedies, and (ii) are not conditional or contingent on any attempt by
such party to exercise any of its rights under any other document
against any other party or any other entity.
(b) This Agreement and, to the extent permitted by law, the transactions
contemplated by this Agreement shall be governed by, and construed and,
to the extent permitted by law, enforced in accordance with, the laws
of the State of New York without giving effect to the principles of
conflicts of law thereof.
(c) Any controversy or claim arising under or pursuant to this Agreement
shall be referred to a panel of three arbitrators, each of whom shall
be selected by the American Arbitration Association. The arbitration
panel shall settle any controversy, dispute or claim between Sellers
and Buyer. The prevailing party shall be entitled to be reimbursed for
its reasonable attorneys' fees and expenses incurred in connection with
such arbitration. Such arbitration shall be conducted in accordance
with the Commercial Arbitration Rules of the American Arbitration
Association and judgment upon the award rendered by such arbitration
panel shall be binding on the parties hereto and may be entered in any
court having jurisdiction. The locale of the arbitration shall be New
York, New York.
8
<PAGE>
(d) This Agreement (including, without limitation, the representations,
warranties, and covenants contained herein) shall be binding upon and
inure to the benefit of Sellers and Buyer and their respective
successors and assigns.
(e) Each party to this Agreement hereby agrees to take such additional
actions and to execute and deliver such additional documents and
instruments as may be necessary to effect the transactions contemplated
by, and to carry out the intent of, this Agreement.
(f) Title and headings of sections in this Agreement are for convenience of
reference only and shall not be used to define or limit or otherwise
affect the provisions hereof.
(g) This Agreement may be executed in one or more counterparts, each of
which, when executed and delivered, shall be an original, but all of
which together shall constitute but one agreement binding on all of the
parties hereto. Transmission by telecopier of an executed counterpart
of this Agreement shall be deemed to constitute due and sufficient
delivery of such counterpart, provided that any party that delivers a
counterpart by telecopier shall, promptly after such delivery, deliver
the original of such counterpart of this Agreement to the other party
hereto.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the date first above written.
BUYER:
BEAR STEARNS ACQUISITION CORP. XVI
By: /s/ Nicos Koulis
-------------------------------
Name: Nicos Koulis
Title: Secretary
SELLERS:
RELIANCE NATIONAL (U.K.) LTD. RELIANCE INSURANCE COMPANY
By: /s/ Albert A. Benchimol By: /s/ Lowell C. Freiberg
----------------------- ----------------------
Name: Albert A. Benchimol Name: Lowell C. Freiberg
Title: Attorney-in-fact Title: Senior Vice President
9
<PAGE>
RELIANCE GROUP HOLDINGS, INC. 1997 ANNUAL REPORT
Cover Photo: Starry night with comet in sky and semitransparent oval image,
in upper right hand corner, of Reliance's logo - fire hydrant
wrapped with firehose and year 1817 underneath.
Text: Reliance
How can we be so old and move so fast?
Lower Left: Reliance logo
Along Right Side: RELIANCE GROUP HOLDINGS, INC. 1997 ANNUAL REPORT
<PAGE>
About the Company
Reliance Group Holdings, Inc. is a leading property and casualty insurer with
specialized capabilities and coverages. In addition to its core property and
casualty business, Reliance has an information technology consulting operation.
In 1997, Reliance achieved:
o Record operating income and net income
o Record property and casualty insurance premiums and operating income
o Record revenues and improved margins in the information technology
consulting business
o Record shareholders' equity
<PAGE>
RELIANCE GROUP HOLDINGS, INC. 1997 ANNUAL REPORT 1
financial highlights
<TABLE>
<CAPTION>
in thousands, except per share amounts 1997 1996 1995
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues $ 3,442,636 $ 3,090,587 $ 2,905,987
Income from continuing operations
before gain on sales of investments 127,033 103,061(1) 76,431
Net income 229,419 135,307(1) 88,056
Diluted per share information:
Income from continuing operations
before gain on sales of investments 1.07 .89(1) .66
Net income 1.94 1.16(1) .74
Assets 11,332,486 10,143,692 9,612,808
Shareholders' equity 962,515 676,680 678,348
Shareholders' equity per share 8.38 5.92 5.98
Pro forma shareholders' equity 1,089,913(2) -- --
Pro forma shareholders' equity per share 9.49(2) -- --
</TABLE>
(1) 1996 excludes an after-tax charge of $87.1 million, or $ .75 per
diluted share, to strengthen net loss reserves for asbestos-related
and environmental pollution claims.
(2) Pro forma 1997 shareholders' equity includes $135 million after-tax
recognized gain from February 27, 1998, title insurance transaction.
(Bar Charts)
Operating Income
Dollars in Millions
- -------------------------------
1995 76.4
1996 103.1(1)
1997 127.0
Shareholders' Equity
Dollars in Millions
- -------------------------------
1995 678.3
1996 676.7
1997 962.5
1997 Pro forma 1,090 (2)
Assets
Dollars in Billions
- -------------------------------
1995 9.6
1996 10.1
1997 11.3
Statutory Surplus
Dollars in Millions
- -------------------------------
1995 1,128
1996 1,187
1997 1,302
<PAGE>
2 RELIANCE GROUP HOLDINGS, INC. 1997 ANNUAL REPORT
Reliance at a Glance
Reliance National
Market Focus
- --------------------------------------------------------------------------------
Operates in the U.S. and selected international markets with a broad
range of specialized property and casualty insurance coverages and risk
management services for Fortune 1,000 companies.
Vital Statistics
- --------------------------------------------------------------------------------
Reliance National
Combined Ratio
Percent
(Bar Chart)
1995 99.1
1996 101.7
1997 102.0
1997 Highlights
- --------------------------------------------------------------------------------
o Strong operating results even as investments in new businesses increased
the combined ratio more than two points.
o Reliant, the nonstandard auto insurance unit, wrote $98 million in premiums
during its first full year of operation.
o Created CyberComp and became the first insurer to sell workers'
compensation insurance over the Internet.
o Expanded international presence by forming a strategic alliance with the
Huatai Insurance Company of China.
Looking Ahead
- --------------------------------------------------------------------------------
International expansion will continue with new presences in Hong Kong,
Johannesburg, Munich, Sao Paulo and Zurich. Further growth expected in
nonstandard auto, workers' compensation and casualty risk management areas.
Reliance Insurance
Market Focus
- --------------------------------------------------------------------------------
Provides traditional and innovative coverages for the more complex risks
of middle-market commercial customers, typically companies with up to
1,000 employees and revenues from $5 million to $300 million.
Vital Statistics
- --------------------------------------------------------------------------------
Reliance Insurance
Combined Ratio
Percent
(Bar Chart)
1995 106.3
1996 104.9*
1997 103.7
1997 Highlights
- --------------------------------------------------------------------------------
o Continued to increase average account size by offering customized casualty
insurance solutions.
o Reliance Specialty targeted specific business segments: transportation,
manufacturing, contracting, public entities, social services and special
properties.
o Nine new claims offices opened nationwide, and dedicated claims units
formed to serve Reliance Specialty customers.
Looking Ahead
- --------------------------------------------------------------------------------
New Large Account capabilities will be established in Boston, Kansas City
and San Francisco. Reliance Insurance will continue to meet the needs of
the middle market with outstanding products and superior claims
management and customer service delivered through a strong local network.
Percent of Net Property and Casualty
Premiums Written
(Pie Chart)
Reliance National 48%
Reliance Insurance 36%
Reliance Surety 8%
Reliance Reinsurance 8%
Total net written premiums $2.07 billion
Consolidated
Combined Ratio
Percent
(Bar Chart)
1995 101.8
1996 101.6*
1997 100.9
The combined ratio is the ratio of claims and expenses to earned premiums--the
lower the ratio, the better the performance.
<PAGE>
RELIANCE GROUP HOLDINGS, INC. 1997 ANNUAL REPORT 3
Reliance Surety
Market Focus
- --------------------------------------------------------------------------------
A leader in the contract surety bond market and a major underwriter of
commercial surety bonds and fidelity bonds.
Vital Statistics
- --------------------------------------------------------------------------------
Reliance Surety
Combined Ratio
Percent
(Bar Chart)
1995 65.6
1996 75.5
1997 77.0
1997 Highlights
- --------------------------------------------------------------------------------
o Achieved excellent results, with 11% premium growth and continued
outstanding underwriting.
o Successfully served midsize contractors and broadened customer base with
Small Contractor Bond Program, offered through 33 offices nationwide, and
Express Surety (cost-efficient distribution of small, high-volume
commercial bonds).
o Expanded to London to take advantage of international growth opportunities.
Looking Ahead
- --------------------------------------------------------------------------------
Additional market penetration with the Small Contractor Bond Program and
Express Surety. Fidelity bonds and other commercial bond products to
contribute to profitable growth.
Reliance Reinsurance
Market Focus
- --------------------------------------------------------------------------------
Specializing in treaty and facultative casualty reinsurance for midsize insurers
and for the specialty divisions of larger insurers.
Vital Statistics
- --------------------------------------------------------------------------------
Reliance
Reinsurance
Combined Ratio
Percent
(Bar Chart)
1995 114.9
1996 102.7*
1997 101.8
1997 Highlights
- --------------------------------------------------------------------------------
o Maintained casualty reinsurance focus and expanded into ocean marine and
general aviation markets.
o Enhanced service capabilities with electronic data interchange (EDI)
technology, improving the flow of information to brokers and clients.
o Created and utilized sophisticated interactive modeling systems to analyze
risks and assist clients in optimizing the amount of reinsurance and
capital on their balance sheets.
Looking Ahead
- --------------------------------------------------------------------------------
Focus on building business by delivering exceptional value and developing
custom-tailored reinsurance solutions. Pursue growth opportunities in
select liability coverages and agricultural reinsurance, as well as in
capital planning and reinsurance for mutual insurance companies.
RCG Information Technology
Market Focus
- --------------------------------------------------------------------------------
A full-service information technology company with expertise in software
programming, client-server technologies, supplemental staffing and Year 2000
conversions.
Vital Statistics
- --------------------------------------------------------------------------------
RCG Information Technology
Revenue and Pretax
Operating Income
Dollars in Millions
(Bar Chart)
Revenue Pretax Operating
Income
1995 106.4 5.4
1996 136.7 2.3
1997 191.9 4.8
1997 Highlights
- --------------------------------------------------------------------------------
o One of the fastest-growing information technology companies; revenues up
40% in 1997.
o Acquired Integrated Systems Resources, Inc. of Hartford, a systems
consulting firm specializing in testing and quality assurance.
o Established in-country recruiting capabilities in India, Ireland, the
Philippines and South Africa. Significant investments made in personnel and
training.
Looking Ahead
- --------------------------------------------------------------------------------
Escalating demand for programming, outsourcing services and
technology-based solutions will fuel future growth. RCG Information
Technology has the full-service computer consulting capabilities that
public and private entities will require into the next millennium.
* 1996 excludes $134 million pretax charge for increasing reserves for
asbestos-related and environmental pollution claims. Including this reserve
addition, Reliance's 1996 consolidated property and casualty combined ratio
was 109.0%, the combined ratio for Reliance Insurance was 121.9%, and the
combined ratio for Reliance Reinsurance was 115.5%.
<PAGE>
4 RELIANCE GROUP HOLDINGS, INC. 1997 ANNUAL REPORT
[PHOTO]
Photo of Reliance Executives
Seated, left to right:
George H. Roberts, C. Brian Schmalz
Standing, left to right:
Robert P. Buttacavoli, Robert C. Olsman, Dennis A. Busti, Saul P. Steinberg,
Robert M. Steinberg
(Photo Caption)
Seated, left to right:
George H. Roberts, President, Reliance Reinsurance
C. Brian Schmalz, President, Reliance Surety
Standing, left to right:
Robert P. Buttacavoli, President,
RCG Information Technology
Robert C. Olsman, President, Reliance Insurance
Dennis A. Busti, President, Reliance National
Saul P. Steinberg, Chairman and Chief Executive Officer,
Reliance Group Holdings, Inc.
Robert M. Steinberg, President and Chief Operating Officer,
Reliance Group Holdings, Inc.
To Our Shareholders
Reliance Group's results in 1997 were outstanding. We achieved every one of our
goals for building shareholder value.
You may recall these goals from last
year's letter:
o Continued profitable growth in our core business
o Growth in earnings per share
o A return on equity of at least 15%
o Reductions in financial leverage
Here's what we accomplished in 1997:
o Operating income was a record $127.0 million, or $1.07 per diluted share.
Net income was a record $229.4 million, or $1.94 per diluted share.
o Our return on equity was excellent -- 16.2% based on operating income.
o Shareholders' equity increased by 42% to $962.5 million, and book value per
share reached $8.38.
o Our debt to total capitalization was 48% on December 31, 1997, a
significant improvement compared with 57% a year earlier.
We also are very pleased that shareholders of Reliance received a total
return of 58.3% in 1997, outpacing the S&P 500 and exceeding the average
return of property and casualty insurance companies.
With a five-year average annual return of 23.3%, Reliance ranked fourth
out of 24 property and casualty insurers in a Wall Street Journal
shareholder scoreboard of total returns to investors.
Once again, Reliance Group delivered on its promises and demonstrated that it
can succeed -- even in a soft market -- with fast-moving, focused and
disciplined management.
A MORE VALUABLE TITLE INVESTMENT
One of the highlights of 1997 was our landmark title transaction, which is a
prime example of our ability to identify and take bold strategic action to
benefit our shareholders.
Our title insurance results were excellent in 1997. Reliance's title premiums
rose to $863.7 million from $780.2 million in 1996. Pretax operating income was
$63.4 million, compared with $38.2 million in 1996. While these were very strong
results, we recognized that the way to maximize the value of our investment, in
an industry where critical mass is a key to success, was to consolidate.
The combination of our title operations, Commonwealth Land Title and Transnation
Title, with Lawyers Title creates the largest title insurer in the U.S., based
on combined revenues. The company, renamed LandAmerica Financial Group, Inc.,
will benefit from dramatic synergies. Specifically identified cost savings total
approximately $40 million per year. With the largest capital base in the
industry, a broad distribution network, strong geographic diversification,
improved market position and product breadth, LandAmerica is a
<PAGE>
RELIANCE GROUP HOLDINGS, INC. 1997 ANNUAL REPORT 5
leader in the residential title business and number one in the highly profitable
commercial sector.
Reliance owns 45% of LandAmerica on a diluted basis, comprised of 4.039 million
shares of LandAmerica common stock and 7% preferred stock convertible into 4.825
million common shares. At closing on February 27, 1998, these securities had a
market value of $395.5 million. In addition, Reliance received $266.6 million in
cash, for a total value to Reliance of $662.1 million.
The transaction resulted in an after-tax gain for Reliance Group of
approximately $245 million, or $2.07 per diluted share. Of this total, $135
million, or $1.14 per diluted share, will be recognized immediately. The
balance, a deferred gain of $110 million, or $ .93 per diluted share, is
recognized as Reliance sells its LandAmerica securities.
The transaction boosts year-end book value to $9.49 per share on a pro forma
basis, and to $10.45 per share taking into account the deferred gain.
Furthermore, we are significantly accelerating Reliance's deleveraging process.
We plan to use part of the cash proceeds to reduce debt by $125 million. This
would improve our debt to total capitalization to 42% on a pro forma basis, from
48% at year-end 1997 -- a level much closer to the range that would enable us to
obtain further upgrades from the various rating agencies.
PROPERTY AND CASUALTY SUCCESS
The title transaction also benefits Reliance by enabling us to commit
more resources to our successful and growing core business -- property
and casualty insurance.
Property and casualty pretax operating income grew to a record $232.3
million in 1997, and our combined ratio was 100.9%. We have achieved
these excellent results while investing to ensure continued growth.
- --------------------------------------------------------------------------------
Fast-moving, focused and disciplined
Reliance is a fundamentally different kind of insurance company.
- --------------------------------------------------------------------------------
In 1997, net written premiums grew 12%. Because we are quick to identify
promising new opportunities and lay the necessary groundwork for them, Reliance
has achieved growth that surpasses the industry average even as we reduce
exposures to unattractive lines of business.
Each of our four property and casualty profit centers has a successful track
record building profitable new business.
Reliance recognizes that innovation and creativity in the insurance business
mean more than simply developing new coverages. We develop unconventional
capabilities for our customers where we can be rewarded with above-average
returns. We tailor individualized solutions for our customers. We build market-
and client-focused organizations that better understand customer requirements
and risks.
We manage risks prudently. One example is our extensive use of reinsurance to
limit exposures and maximize risk-adjusted returns under all market conditions.
Instead of focusing on processes, our claims organization works toward optimal
outcomes that benefit our customers and, ultimately, our shareholders. We are
more agile than larger companies, yet we provide a broader range of capabilities
than smaller insurers can offer. In short, we believe Reliance has the right
capabilities, people and culture to be the best in property and casualty
insurance.
- --------------------------------------------------------------------------------
"In our view, the title transaction with Lawyers Title is a win-win,
providing financial strength and flexibility...a key accomplishment in
the company's overall strategic plan."
Advest, Inc., February 1998
- --------------------------------------------------------------------------------
"A lengthening track record of consistent earnings
growth."
CIBC Oppenheimer Corp.
November 1997
- --------------------------------------------------------------------------------
<PAGE>
6 RELIANCE GROUP HOLDINGS, INC. 1997 ANNUAL REPORT
- --------------------------------------------------------------------------------
Bold strategic action
The title transaction is a prime example of how we've built value for our
shareholders.
- --------------------------------------------------------------------------------
RCG INFORMATION TECHNOLOGY
Another way we are working to create value is through RCG Information
Technology. We serve clients in areas where demand for computer-based solutions
is greatest, such as software outsourcing, supplemental staffing, client-server
technologies and Year 2000 solutions.
Business growth is strong. Revenues in 1997 were up 40% over 1996. We are
starting to achieve improved margins and profits, after making large business
development expenditures over the past several years. We believe this business
is worth well in excess of its carrying value and intend to make it an even more
valuable asset for our shareholders.
OUTLOOK FOR GROWTH
As we write this letter, the property and casualty market is increasingly
competitive. In a soft market, some companies will pursue premium growth at the
expense of their shareholders' interests. Not Reliance. We will stay focused on
the bottom line. Accordingly, growth in most of our lines will be modest.
However, we do have opportunities to grow profitably in several targeted areas
of promise where we have been assiduously planting the seeds of our future
success.
Our international operations have had a good deal of success, but we have only
begun to tap the potential in overseas markets. In 1990, we had virtually no
foreign-sourced premiums. Today, they exceed $270 million. Reliance now conducts
business in 50 countries, through direct operations, joint ventures and
alliances. By offering specialized expertise and capabilities, Reliance can add
value and prosper even in markets with entrenched local competitors.
Reliant, our nonstandard auto insurance company, began operations in 1996 and,
during 1997, wrote $98 million in premiums. We have built a topflight management
team and organization to serve the huge -- $22 billion and growing --
nonstandard market.
Reliance is utilizing new technology in its CyberComp unit -- the first company
to quote and bind workers' compensation policies on the Internet. CyberComp is
an efficient writer of single-state policies for smaller companies through a
select group of independent agents. These agents and their customers appreciate
the fast response and transaction simplicity that CyberComp's technology
affords. From a start-up earlier in the year, CyberComp generated more than $30
million in business in 1997.
Technology is also playing a role as we enter the standard and preferred
personal auto insurance market. Reliance has begun selling auto insurance
utilizing an Internet web site, direct mail and other direct marketing channels.
We plan to expand sales by offering coverage through Intuit's Quicken and other
web-based systems. With our low-cost structure, we should be able to offer
savings to consumers and carve out a niche in the largest insurance line in the
United States.
We also expect to thrive by taking advantage of economies of scale. For example,
we see opportunities for making more productive and profitable use of our
nationwide network serving the property and casualty needs of the middle market.
We are already achieving good underwriting results. Continued growth would
enable us to lower the expense ratio and generate higher profits. We are
developing new capabilities and seeking additional opportunities to accelerate
our progress.
- --------------------------------------------------------------------------------
"Reliance Group has undergone broad-based and far-reaching positive
change...Today, Reliance is a specialty markets insurer with a much
strengthened balance sheet and highly favorable prospects."
Credit Suisse
First Boston Corporation
January 1998
- --------------------------------------------------------------------------------
<PAGE>
RELIANCE GROUP HOLDINGS, INC. 1997 ANNUAL REPORT 7
Reliance Surety, a leader in contract surety for midsize contractors, is working
to replicate that success among small contractors. We are serving small
contractors through each of our 33 Surety offices nationwide and have more than
$30 million in small contractor surety premiums.
These are just a few of the businesses where Reliance is investing to build
tomorrow's success. Within each profit center and line, we identify what we
should be doing new, different and better for our customers in order to be
rewarded with attractive risk-adjusted returns for our shareholders.
We follow a proven formula that begins by recruiting and cultivating the best
people to lead our efforts. We free them from the straitjacket of large
corporate bureaucracies and allow them to build an organization with the right
structure, culture and resources for their specific line of business. We incent
and reward their long-term success. And we always set standards to ensure
disciplined underwriting and quality service.
REMEMBERING TOM STANTON
On a sad note, we mourn the loss of our esteemed director, Thomas J. Stanton,
Jr., who died in January 1998. For more than 30 years, he faithfully and
diligently shared his knowledge and wisdom with our company. His enormous talent
will be sorely missed.
CONCLUSION
In our advertising we ask the question, how can Reliance, founded in 1817, "be
so OLD and move so FAST?" We'd like to conclude by answering that question.
We built an organization, unique in the insurance industry, that combines an
entrepreneurial culture with disciplined management intent on minimizing risks
and capitalizing on opportunities. We stay focused on the marketplace and are
driven by the goal of building shareholder value. We manage with the commitment
and responsibility that owners bring to their business.
- --------------------------------------------------------------------------------
The right people, culture and capabilities
Reliance has what it takes to be the best in property and casualty insurance.
- --------------------------------------------------------------------------------
The marketplace is beginning to share our conviction that Reliance is a
fundamentally different kind of insurance company. The people of Reliance are
determined to stand above the industry, make further progress toward our stated
goals and deliver exceptional results for our customers and shareholders.
/s/ Saul P. Steinberg
SAUL P. STEINBERG
Chairman and Chief Executive Officer
/s/Robert M. Steinberg
ROBERT M. STEINBERG
President and Chief Operating Officer
<PAGE>
8 RELIANCE GROUP HOLDINGS, INC. 1997 ANNUAL REPORT
- --------------------------------------------------------------------------------
Market-Driven
One hundred and eighty years young.
Reliance is thriving. We are fast and agile when it comes to identifying and
seizing new opportunities, and we never stop finding new ways to enhance the
value of our franchise for our customers, our shareholders and our employees.
- --------------------------------------------------------------------------------
<PAGE>
Reliance Group Ad - Photo in center of page, copy on left side
Photo: Dog sitting; close up of dog's face
Headline: WHEN YOUR CORPORATE LOGO IS A FIRE
HYDRANT YOU CAN'T SIT STILL FOR A MINUTE.
Text:
Reliance began in 1817. And we've never looked back. We've been too busy
hounding our competition.
Today, we're an $11 billion group of companies in worldwide property and
casualty insurance.
We're old, established, big. And anything but staid.
In fact, it's our unusually innovative approach to insurance that's helping us
grow at twice the rate of the rest of the industry.
It might sound self-serving for us to tell you we're regarded as the most
dynamic and creative company in insurance today. Yet ask our customers about
us--many of whom are Fortune 500 companies--and they'll likely agree.
In any event, should you come across the Reliance fireplug on a letterhead, an
annual report, a business card, or a building, you can at least be certain of
one thing.
Nobody's parked there.
1-800-241-4487
http://www.rgh.com
(Copyright) Reliance Group Holdings, Inc., 1997
Bottom Center: Reliance Group Holdings, Inc. [LOGO]
Reliance Logo - Fire hydrant wrapped with fire hose and year 1817 underneath
HOW CAN WE BE SO OLD AND MOVE SO FAST? (Service Mark)
Lower Right: Reliance National
Reliance Insurance
Reliance Surety
Reliance Reinsurance
<PAGE>
10 RELIANCE GROUP HOLDINGS, INC. 1997 ANNUAL REPORT
- --------------------------------------------------------------------------------
Reliance on the move
[Photo: Dog Running]
- --------------------------------------------------------------------------------
Reliance National
Specialty Leader
If Reliance is the industry's most youthful 180-year-old, then Reliance National
certainly can be regarded as insurance's most mature 10-year-old.
Reliance National has grown from a start-up business in 1987 to become
Reliance's largest property and casualty profit center, accounting for about
half of net premiums written in 1997.
Reliance National is composed of several highly focused business units that
provide specialized commercial property and casualty insurance coverages and
risk management services to Fortune 1,000 companies and other major corporations
throughout the world.
In 1997, premiums grew 18%, and Reliance National's combined ratio was 102.0%.
In today's challenging environment, success requires underwriting discipline and
swift response to the marketplace's opportunities and risks.
Alternative risk transfer represents an area where Reliance National cultivated
skills beyond those of traditional carriers and became a market leader by
offering unbundled risk management services to support loss-sensitive,
high-deductible and captive insurance arrangements. Ideally suited for
commercial general liability, workers' compensation and commercial automobile
liability coverages, this business has produced a solid rate of return.
Other lines that have performed exceptionally well include accident and health,
directors and officers liability, aviation and marine insurance.
Over the last decade, Reliance National has developed extraordinary expertise in
each of the coverages it writes. Integrated underwriting, actuarial, claims and
loss control teams are vital to Reliance National's success in meeting the
diverse needs of the clients and brokers it serves.
The entrepreneurial spirit that founded Reliance National is a driving force
behind custom-tailored products and services and innovations, including
underwriting coverage for the first captive insurance company domiciled in New
York and a newly created online workers' compensation initiative, known as
CyberComp.
With CyberComp, Reliance National became the first commercial property and
casualty insurer to sell workers' compensation insurance over the Internet.
CyberComp enables authorized independent agents to obtain quotes and bind
single-state workers' compensation coverage for small to midsize accounts
quickly and easily, 24 hours a day, via a dedicated web site. Reliance National
has gained a competitive advantage by utilizing advanced technology to maximize
cost savings and boost efficiency in the delivery of this product. CyberComp
expects strong premium growth in 1998.
<PAGE>
RELIANCE GROUP HOLDINGS, INC. 1997 ANNUAL REPORT 11
- --------------------------------------------------------------------------------
Insuring Global Infrastructure
Trillions of dollars will be spent on international infrastructure in the next
decade. To capitalize on this opportunity, Reliance National created a Global
Infrastructure Division. Major development initiatives, such as ports, power
plants and roadways, have complex coverage requirements, and Reliance National
is the only insurer with a single unit that provides multiline insurance and
risk management solutions for the consortia that build and finance these
projects in rapidly industrializing nations throughout the world.
- --------------------------------------------------------------------------------
Reliant, Reliance National's nonstandard automobile insurance operation,
generated $98 million in premiums in 1997. Working through independent agents in
11 states, Reliant has grown selectively in the most attractive markets. The
focus is on building an infrastructure and quality systems to support future
premium growth. Reliant has a tremendous opportunity to carve out a niche in the
profitable $22 billion U.S. nonstandard auto insurance market.
Internationally, Reliance National conducts business through direct operations,
joint ventures and alliances in 50 countries. Foreign-sourced premiums grew 39%
in 1997 and now represent more than 25% of Reliance National's book of business.
In 1997, Reliance National entered into an agreement to provide the Huatai
Insurance Company of China with product development assistance and reinsurance
support. This market offers enormous long-term growth potential.
In 1997 and early 1998, Reliance National opened additional offices in both
Germany and Mexico, and its first office in Switzerland. By year-end, it expects
to have new presences in Brazil, Hong Kong and South Africa.
Reliance National will continue to pursue growth domestically as well as abroad,
while underwriting and pricing risk to ensure profitability.
- --------------------------------------------------------------------------------
Reliance Insurance
Middle-Market Success
Continuing improvements in underwriting results at Reliance Insurance reflect
the transformation that has taken place within this profit center over the past
several years.
Today, Reliance Insurance is focused on insuring midsize companies, typically
those with up to 1,000 employees and annual revenues of up to $300 million. A
shift toward larger, middle-market accounts has enabled Reliance Insurance to
grow selectively in areas where its expertise is valued and the premium
potential is greater. Unlike small, regional insurers, Reliance Insurance has
the capabilities to meet virtually all the property and casualty insurance needs
of middle-market businesses.
With a broad spectrum of products and services and a nationwide network of 40
offices, Reliance Insurance provides a high level of personalized service.
Producers and middle-market customers value Reliance Insurance's strong, local
presence and customized coverages.
In 1997, Reliance Insurance's Large Accounts Division, which serves accounts
with annual premiums in excess of $1 million, grew by expanding its casualty
offerings to include construction wrap-ups, domestic and offshore captives,
fronting services, finite risk arrangements and loss portfolio transfer
contracts.
continued on page 14
<PAGE>
Reliance Group Ad - photo is center of page, copy on left side
Photo: Volcano erupting
Headline: 1817:
DISASTER FOLLOWS VOLCANIC
ERUPTION IN INDONESIA,
THE FIRST SEMINOLE UPRISING BEGINS,
JEAN LAFFITE RESUMES PIRACY,
AND OTHER OPPORTUNITIES FOR A
BRIGHT NEW INSURANCE COMPANY.
Text:
You can still see our distinctive "fire hydrant" logo emblazoned on Independence
Hall in Philadelphia. We covered it against fire back in the early days.
Since then we've grown to an $11 billion group of companies that provides
property and casualty insurance for many of the world's best known companies.
If someone needs insurance we don't have, we'll even invent it.
No doubt you've heard talk about sexual harassment in the workplace. We're the
ones who did something about it. We created insurance that covers and audits
companies for their employee practices.
This is the kind of innovation that makes us a standout in insurance today. It's
also one of the reasons we've been growing at twice the rate of the rest of the
industry.
How long can we keep it up? Hard to say. We've been at it for 180 years and
probably couldn't figure out how to stop.
1-800-241-4487
http://www.rgh.com
(Copyright) Reliance Group Holdings, Inc., 1997
Bottom Center: Reliance Group Holdings, Inc. [LOGO]
Reliance Logo - Fire hydrant wrapped with fire hose and year 1817 underneath
HOW CAN WE BE SO OLD AND MOVE SO FAST?(Service Mark)
Lower Right: Reliance National
Reliance Insurance
Reliance Surety
Reliance Reinsurance
<PAGE>
RELIANCE GROUP HOLDINGS, INC. 1997 ANNUAL REPORT 13
- --------------------------------------------------------------------------------
Accountable
Reliance has built an organization that has withstood the test of time and
continues to flourish today as the industry's entrepreneurial insurance company.
Shareholder-driven and customer-focused, Reliance remains a source of strength,
stability and superior service.
- --------------------------------------------------------------------------------
<PAGE>
14 RELIANCE GROUP HOLDINGS, INC. 1997 ANNUAL REPORT
Reliance Insurance
continued from page 11
In 1998, Reliance Insurance offices in Boston, Kansas City and San Francisco
will have new capabilities to serve this market.
Additional producers were appointed throughout the country this year, and the
Specialty Division developed new business by emphasizing its insurance expertise
in six key areas: contracting, manufacturing, transportation, public entities,
social services and special properties. Specialty claims units are aligned with
underwriting teams to support customers in each of these industry segments.
Reliance Insurance's ability to serve customers at the local level also was
enhanced by the opening of new claims offices in Kansas City, Louisville,
Minneapolis, New Orleans, Philadelphia, San Diego, San Francisco, St. Louis and
West Palm Beach.
Reliance Insurance has an innovative, outcome-driven approach to claims
management. Instead of focusing narrowly on processes, claim professionals have
the resources and incentives to produce optimal results for policyholders as
well as for the company. For example, enhancing the quality of investigations or
improving litigation management can lead to lower losses for Reliance and help
control customers' insurance costs. Similarly, a higher standard of medical care
can improve disability claims outcomes by enabling injured workers to return to
their jobs stronger and sooner.
Throughout Reliance Group, results are a determining factor in compensation. At
Reliance Insurance, a growing number of employees -- currently about half of the
total staff -- participate in incentive plans, which reward results that
contribute to operating income and balance premium growth with improvements in
the company's combined ratio.
Premiums grew 5% in 1997. Growth was achieved even as Reliance Insurance made
greater use of reinsurance and discontinued certain program business that was
not producing an adequate rate of return.
Reliance Insurance maintained its underwriting integrity and commitment to the
fundamentals while achieving a combined ratio of 103.7%. Progress will
continue as Reliance Insurance leverages producer relationships, adheres
firmly to underwriting standards and builds business on the basis of
outstanding service.
- --------------------------------------------------------------------------------
Reliance Surety
Best in the Business
A leader in serving midsize contractors, Reliance Surety has been widely
recognized for many years as the nation's top surety operation in terms of
profitability, overall performance and customer service.
Reliance Surety offers a full range of performance and payment bonds for the
construction industry; license, permit and probate bonds; bonds for public
officials; and fidelity bonds for financial institutions and other commercial
enterprises.
- --------------------------------------------------------------------------------
Service with a difference
[Photo]
Photo Description: Firemark - plaque with imprint of fire hydrant wrapped with
fire hose and the letter "F" on the left side of the hydrant and the letter "A"
on the right side of the hydrant. The firemark was the symbol of The Fire
Association of Philadelphia, founded in 1817, which later became Reliance
Insurance Company.
- --------------------------------------------------------------------------------
<PAGE>
RELIANCE GROUP HOLDINGS, INC. 1997 ANNUAL REPORT 15
Reliance Surety's track record is outstanding. Over the past five years,
Reliance Surety has posted average premium growth of 13% and an average combined
ratio of 74.6%. In 1997, Reliance Surety achieved both good premium growth of
11% and an excellent combined ratio of 77.0%. Consistent profitability and low
loss levels are reflective of strict underwriting controls, rigorous credit
analyses and close management of the claims function.
Contributing to superb results this year was the Reliance Small Contractor Bond
Program. Premiums grew 36% this year as all 33 of Reliance Surety's branch
offices actively marketed contract surety bonds and bonds guaranteed by the
Small Business Administration to producers with small contractor accounts.
Additional penetration of the small business sector was achieved through Express
Surety, which expedites the issuance of low-risk surety and fidelity bonds for
smaller commercial accounts. Advanced technology streamlines bond processing,
ensuring quick turnaround for producers and customers, and making it more
cost-effective to manage a high volume of small bonds.
At Reliance Surety, success is definitely a team effort. Underwriters, claims
personnel, actuaries and loss control specialists work together to provide
seamless service and creative solutions. In-house experts in the areas of
finance, law, accounting and engineering consult on each account,
troubleshooting and sharing the benefit of their experience with producers and
clients.
The focus is on building relationships and keeping them strong. A branch office
system is an important part of this strategy. By keeping in close contact with
producers and customers, Reliance Surety gains an in-depth understanding of
their needs and is able to respond with customized bond programs. When a client
faces a difficult situation, Reliance Surety has the knowledge necessary to
react quickly and resolve the problem.
New customers have been attracted by the offering of workers' compensation
program bonds, coal reclamation bonds for mining companies and bonding for
complex risks, such as environmental remediation projects and design-build
operations.
To take advantage of overseas opportunities, Reliance Surety in 1997 opened for
business in London -- a gateway to international markets.
Reliance Surety will continue to pursue profitable growth in the contract surety
and commercial bond business. Relationships established now will generate
greater returns in the future as customers grow and succeed, and as they count
on Reliance Surety to fulfill their expanded bond requirements.
Underwriting excellence will remain a company benchmark, integral to Reliance
Surety's industry leadership and success.
- --------------------------------------------------------------------------------
Claims Management at its Best
Since 1817, we have delivered on our promises to our customers by responding
promptly when a loss occurs and managing claims effectively. Now Reliance is
taking claims service to a new level. It's not about following a manual or
processing paperwork; it's about finding the right solution for any given
situation. This may involve litigation experts or settlement conferences, fraud
investigation, subrogation, medical consultations, return-to-work programs or
even placing a Reliance claims specialist at a customer's location. We've
lowered caseloads, so our claims professionals can devote more time to each
claim and produce better results. They do whatever it takes to achieve the
optimal outcome for insureds, for Reliance and for our shareholders.
- --------------------------------------------------------------------------------
<PAGE>
16 RELIANCE GROUP HOLDINGS, INC. 1997 ANNUAL REPORT
- --------------------------------------------------------------------------------
Entrepreneurial
The difference is our people. Talented and experienced individuals perform at
the top of their profession in an environment that fosters creativity and
rewards success. A vital, dynamic organization, Reliance stands out as a company
committed to innovation and service excellence.
- --------------------------------------------------------------------------------
<PAGE>
Reliance Group Ad - photo in center of page, copy on left side
Photo: City skyline at night showing silhouette of large office building with
lights on in three floors of building.
Headline: IN A BUSINESS
FAMOUS FOR
SLEEPING GIANTS,
THERE IS AN ALARM CLOCK.
Text:
Even though Reliance Group Holdings is an $11 billion corporation in property
and casualty insurance, we're not one of the industry's giants.
Not in size and not in the way we do business.
Talk to some big insurance companies and if you want what they've got, you can
get it. But if you want something new and unheard of, or a program that's a
little differently tailored, they'd rather not bother.
We'd rather bother. Even though our roots go all the way back to 1817, we
haven't gotten hardening of the policies. We've built a successful business by
giving companies the coverage they want and need, even if it isn't off the
shelf.
This is one of the reasons why we're working with some of the biggest names in
business, worldwide. And growing twice as fast as the rest of the industry.
So we're burning some midnight oil. We like to think it's our competitors who
are losing the sleep.
1-212-838-4239
http://www.rgh.com
(Copyright) Reliance Group Holdings, Inc., 1997
Bottom Center: Reliance Group Holdings, Inc. [LOGO]
Reliance Logo - Fire hydrant wrapped with fire hose and year 1817 underneath
HOW CAN WE BE SO OLD AND MOVE SO FAST?(Service Mark)
Lower Right: Reliance National
Reliance Insurance
Reliance Surety
Reliance Reinsurance
<PAGE>
18 RELIANCE GROUP HOLDINGS, INC. 1997 ANNUAL REPORT
- --------------------------------------------------------------------------------
An industry wake-up call
[Photo - Alarm Clock]
- --------------------------------------------------------------------------------
Reliance Reinsurance
Service and Solutions
Insurance companies seek to maintain close ties with reinsurers that understand
their needs and are responsive. Insurers and reinsurance brokers count on
Reliance Reinsurance for underwriting acumen, security, superior claims service
and custom-tailored solutions.
Reliance Reinsurance has long-standing relationships with a broad range of
clients, including small and midsize insurers, the specialty divisions of larger
insurance companies, captive insurers, risk retention groups and other
alternative facilities. Reliance Reinsurance focuses primarily on reinsuring in
the lower layers -- the first $1 million of primary coverage -- where risk is
more actuarially predictable and there is less volatility.
While continuing to emphasize casualty reinsurance, Reliance Reinsurance also
has established itself in the ocean marine and general aviation markets.
Reliance Reinsurance's combined ratio was 101.8% in 1997. In a reinsurance
market where there has been a tendency toward more relaxed underwriting
standards, Reliance Reinsurance has redoubled its commitment to disciplined
underwriting.
Before entering a new market, Reliance Reinsurance utilizes sophisticated
modeling techniques and actuarial analysis to thoroughly evaluate and manage
risk effectively. For example, Reliance Reinsurance developed proprietary
interactive computer models using extensive data on crop yields to evaluate
geographic concentrations before it began writing agricultural reinsurance.
To ensure quality underwriting and help clients achieve their objectives,
Reliance Reinsurance reviews each client's underwriting, claims, financial and
actuarial operations before accounts are bound. Reliance Reinsurance's
underwriting and actuarial teams draw on their extensive experience to structure
optimal reinsurance arrangements, including finite risk programs and other risk
transfer alternatives. Strategic alliances with offshore reinsurers enable
Reliance Reinsurance to offer cost-effective liability coverages.
Client service is a top priority, and electronic data interchange speeds and
simplifies communication between Reliance Reinsurance, brokers and insurers.
Reliance Reinsurance will continue to identify profitable niches and pursue
growth opportunities in specialty liability lines. Reliance Reinsurance also has
positioned itself as a resource for mutual insurance companies that need
capital-planning and reinsurance support.
<PAGE>
RELIANCE GROUP HOLDINGS, INC. 1997 ANNUAL REPORT 19
- --------------------------------------------------------------------------------
At Reliance, there's no such thing as business as usual.
When you think like owners, you're constantly motivated to come up with new
ideas and fresh approaches for satisfying customers and staying ahead of the
competition. Employees at every level have equity investments in the company
through various plans and incentives to own Reliance stock. Management's
interests are totally aligned with those of shareholders, as top management has
a substantial equity investment in the company, and compensation plans for key
managers are structured to reward long-term underwriting profitability.
- --------------------------------------------------------------------------------
RCG Information
Technology
Creating Value
Heavy demand for technology-driven solutions has made RCG Information Technology
(RCG IT) one of the nation's fastest-growing computer consulting companies.
From programming, project management and consulting to supplemental staffing,
systems analysis, design and integration, and end-to-end Year 2000 compliance,
RCG IT provides a full range of highly customized services to help organizations
operate more efficiently.
RCG IT serves clients in various business sectors, including banking, brokerage,
insurance, electronics, telecommunications, petroleum, chemicals, retail,
transportation, manufacturing and the travel industry. RCG IT's clients also
include government and not-for-profit entities.
In 1997, revenues rose to $191.9 million, from $136.7 million in 1996. Pretax
income was $4.8 million in 1997, up from $2.3 million in 1996. Profit margins
increased significantly in the latter part of 1997.
Progress was impressive this year as substantial investments made in building
the business and creating an infrastructure with the right management and
technical staff produced positive returns.
RCG IT enhanced its capabilities by acquiring Integrated Systems Resources, Inc.
of Hartford, an information systems consulting firm specializing in testing and
quality assurance.
While unprecedented demand for information technology services is fueling RCG
IT's growth, it has created an industry-wide shortage of computer programming
talent. To meet demand and continue to grow, RCG IT is recruiting heavily
internationally, as well as in the United States. Professional staffing has
increased 58% in the past two years. In 1997, RCG IT expanded its network to 17
offices in 11 states and established recruiting capabilities in India, Ireland,
the Philippines and South Africa. In 1998, RCG IT plans to open offices in
Boston and San Francisco.
The Year 2000 problem has presented RCG IT with a unique opportunity to expand
its client base and demonstrate its extensive capabilities. RCG IT is well
positioned to help leading public and private entities tackle the Year 2000
problem and other challenges they face now and in the next millennium.
Success in meeting clients' diverse needs is a key to growing profitably and
succeeding as a full-service provider of comprehensive information technology
solutions.
<PAGE>
20
Financial Information
21 Selected Financial Data
24 Financial Review
31 Consolidated Financial Statements
35 Notes to Consolidated Financial Statements
58 Independent Auditors' Report
59 Report of Management
60 Market and Dividend Information
61 Directors and Officers
62 Corporate Data
<PAGE>
Reliance Group Holdings, Inc. and Subsidiaries 21
Selected Financial Data
<TABLE>
<CAPTION>
Year Ended December 31 1997 1996 1995 1994 1993
- ----------------------------------------------------------------------------------------------------- ----------------------------
(In thousands, except per share amounts)
<S> <C> <C> <C> <C> <C>
Income Statement Data:
Revenues:
Property and casualty insurance
Premiums earned $1,947,016 $1,800,854 $1,774,591 $1,777,318 $1,571,539
Net investment income 263,981 257,133 247,343 232,299 216,432
Gain on sales of investments 71,501 49,264 27,381 8,851 129,018
----------------------------------------------------------------------------------
2,282,498 2,107,251 2,049,315 2,018,468 1,916,989
Title insurance(1) 896,332 810,958 701,622 883,903 922,432
Other 263,806 172,378 155,050 144,679 123,398
----------------------------------------------------------------------------------
$3,442,636 $3,090,587 $2,905,987 $3,047,050 $2,962,819
==================================================================================
Income (loss) from continuing operations
before gain on sales of investments,
income taxes and equity in investee company:
Property and casualty insurance $ 232,259 $ 218,746 $ 201,699 $ 134,956 $ 41,212
Asbestos and environmental loss
reserve increase(2) - (134,000)(2) - - -
----------------------------------------------------------------------------------
232,259 84,746 201,699 134,956 41,212
Title insurance(1) 63,367 38,234 12,283 30,810 55,180
Corporate interest expense (74,407) (74,253) (76,230) (75,619) (89,517)
Corporate overhead and other (53,095) (51,738) (47,184) (51,371) (56,584)
----------------------------------------------------------------------------------
168,124 (3,011) 90,568 38,776 (49,709)
Income tax (provision) benefit (48,766) 10,064 (21,929) (9,464) 35,831
Equity in investee company 7,675 8,908 7,792 9,478 12,441
----------------------------------------------------------------------------------
Income (loss) from continuing operations
before gain on sales of investments 127,033 15,961(2) 76,431 38,790 (1,437)
After-tax gain on sales of investments 47,463 32,246 19,485 5,031 86,973
----------------------------------------------------------------------------------
Income from continuing operations 174,496 48,207(2) 95,916 43,821 85,536
Gain on sale of discontinued operation 68,865 - - - -
Other-net (13,942) - (7,860) - (12,011)
----------------------------------------------------------------------------------
Net income $ 229,419 $ 48,207 $ 88,056 $ 43,821 $ 73,525
==================================================================================
Diluted per share information:
Income (loss) from continuing operations
before gain on sales of investments $1.07 $.14(2) $.66 $.34 $(.02)
After-tax gain on sales of investments .40 .27 .17 .04 .95
----------------------------------------------------------------------------------
Income from continuing operations $1.47 $.41(2) $.83 $.38 $ .93
==================================================================================
Net income $1.94 $.41 $.74 $.38 $ .80
==================================================================================
Weighted average number of
diluted shares outstanding 118,363 116,281 115,054 114,306 91,708
Cash dividends per common share $ .32 $.32 $.32 $.32 $ .32
</TABLE>
<PAGE>
22 Reliance Group Holdings, Inc. and Subsidiaries
<TABLE>
<CAPTION>
Selected Financial Data
Year Ended December 31 1997 1996 1995 1994 1993
- ----------------------------------------------------------------------------------------------------------------------------------
(In thousands, except ratios)
<S> <C> <C> <C> <C> <C>
Other Operating Data(3):
Underwriting loss $ (31,722) $ (38,387)(4) $ (45,644) $ (97,343) $ (175,220)
Loss and loss expense ratio 64.8% 67.6%(4) 67.7% 73.0% 78.6%
Underwriting expense ratio 36.1 34.0 34.1 31.4 32.2
----------------------------------------------------------------------------------
Combined ratio(5) 100.9% 101.6%(4) 101.8% 104.4% 110.8%
==================================================================================
</TABLE>
<TABLE>
<CAPTION>
December 31 1997 1996 1995 1994 1993
- ----------------------------------------------------------------------------------------------------------------------------------
(In thousands, except per share amounts)
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Assets $11,332,486 $10,143,692 $9,612,808 $9,011,198 $8,496,596
Marketable securities 4,149,969 3,991,627 3,876,551 3,394,068 3,398,779
Excess of cost over fair value of net
assets acquired 229,484 239,047 248,610 258,173 267,736
Debt outstanding 903,083 901,532 878,419 892,579 911,071
Shareholders' equity 962,515 676,680 678,348 386,750 518,626
Shareholders' equity per common share 8.38 5.92 5.98 3.42 4.65
Statutory policyholders' surplus
of property and casualty
insurance subsidiaries 1,302,490 1,187,056 1,128,336 908,538 902,290
</TABLE>
(1) On February 27, 1998, the Company completed the sale of its title insurance
operations to LandAmerica Financial Group, Inc. See note 2 to the
consolidated financial statements.
(2) The 1996 results included a charge of $134.0 million ($87.1 million
after-tax, or $.75 per diluted share) to increase net loss reserves for
asbestos-related and environmental pollution claims for business written in
or before 1987. Excluding this charge, 1996 income from continuing
operations, before gains on sales of investments, would have been $103.1
million, or $.89 per diluted share.
(3) The data relate to the property and casualty insurance subsidiaries.
Underwriting results include policyholders' dividends and other income and
expense.
(4) The 1996 data excluded the charge of $134.0 million (7.4 combined ratio
points) to increase net loss reserves for asbestos-related and
environmental pollution claims for business written in or before 1987. The
actual 1996 underwriting loss was $172.4 million, the loss and loss expense
ratio was 75.0% and the combined ratio was 109.0%.
(5) In 1995 and 1994, the combined ratio excluded the effect of the $4.0
million and $11.6 million charge pertaining to California's Proposition
103.
<PAGE>
Reliance Group Holdings, Inc. and Subsidiaries 23
Property and Casualty Insurance Operations
Net premiums written for each line of property and casualty insurance are as
follows:
<TABLE>
<CAPTION>
Year Ended December 31 1997 1996 1995 1994 1993
- ----------------------------------------------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C> <C> <C>
General Liability $ 423,278 $ 466,636 $ 468,951 $ 423,377 $ 369,895
Commercial Automobile 295,014 265,206 239,819 244,000 260,180
Workers' Compensation 275,898 249,638 265,882 312,808 377,592
Multiple Peril 221,021 211,857 184,600 180,074 187,438
Ocean and Inland Marine 191,055 129,148 118,757 103,865 105,254
Surety 176,500 159,183 139,298 117,989 106,664
Reinsurance 159,032 151,099 118,969 125,597 123,742
Non-Standard Automobile 97,939 - - - -
Accident and Health 91,714 61,873 58,426 51,976 35,649
Fire and Allied 46,339 64,250 68,118 49,977 40,372
Involuntary 33,729 44,229 81,006 113,483 113,498
Other 54,328 43,080 35,214 41,144 50,313
----------------------------------------------------------------------------------
$2,065,847 $1,846,199 $1,779,040 $1,764,290 $1,770,597
==================================================================================
</TABLE>
Combined ratios (on a GAAP basis), after policyholders' dividends, for each
line of property and casualty insurance are as
follows:
<TABLE>
<CAPTION>
Year Ended December 31 1997 1996(2) 1995(3) 1994(3) 1993
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
General Liability 100.0% 95.5% 102.4% 106.0% 105.0%
Commercial Automobile 115.1 123.7 126.3 116.6 125.5
Workers' Compensation 93.0 94.1 79.1 95.3 96.5
Multiple Peril 100.9 107.0 117.3 114.8 121.6
Ocean and Inland Marine 92.1 100.3 96.0 124.9 113.9
Surety 77.0 75.5 65.6 74.3 81.0
Reinsurance 101.8 102.7 114.9 111.3 104.8
Non-Standard Automobile 140.8(1) - - - -
Accident and Health 97.3 96.0 81.2 88.9 94.2
Fire and Allied 121.4 100.9 117.4 75.5 158.4
Involuntary 96.7 98.8 94.6 100.3 133.6
Other 127.5 156.6 155.7 120.7 187.8
------------------------------------------------------------------------------
100.9% 101.6% 101.8% 104.4% 110.8%
==============================================================================
</TABLE>
(1) Includes administrative expenses associated with building an infrastructure
and quality control systems to support future premium growth of this
start-up operation.
(2) Excluded the effect of the $134.0 million increase in net loss reserves for
asbestos-related and environmental pollution claims for business written in
or before 1987. This charge impacted the general liability, commercial
automobile, multiple peril and reinsurance lines of business. Including
this charge, the total combined ratio was 109.0%, while the combined ratios
of the general liability, commercial automobile, multiple peril and
reinsurance lines of business were 113.8%, 124.5%, 123.9% and 115.5%,
respectively.
(3) Excluded the effect of the $4.0 million and $11.6 million charge pertaining
to California's Proposition 103 in 1995 and 1994.
<PAGE>
24 Reliance Group Holdings, Inc. and Subsidiaries
Financial Review
Sale of Title Insurance Operations
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 of 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 $110,000,000 and which is
convertible into 4,824,561 shares of LandAmerica common stock. Such shares of
common and preferred stock are subject to various terms, conditions and
restrictions with regard to sale, conversion and voting. The Company owns
approximately 27% of LandAmerica's outstanding common stock and, on a diluted
basis, 45% of LandAmerica's common stock, and has three representatives on its
14 member board of directors. Accordingly, the Company will account for its
investment in LandAmerica by the equity method of accounting for periods
subsequent to the sale date. The sale resulted in an after-tax gain of
approximately $245 million of which approximately $135 million will be
recognized in the first quarter of 1998. The balance of the gain will be
recognized as the equity securities of LandAmerica are sold. The Company intends
to use a portion of the cash proceeds from the sale to purchase approximately
$125 million of its debt.
Overview
The Company had income from continuing operations, before gains on sales of
investments, of $127.0 million ($1.07 per diluted share) in 1997, compared to
$16.0 million ($.14 per diluted share) in 1996 and $76.4 million ($.66 per
diluted share) in 1995. The 1996 operating results included an after-tax charge
of $87.1 million ($.75 per diluted share) to increase property and casualty
insurance net loss reserves for asbestos-related and environmental pollution
claims for business written in or before 1987. Excluding the effects of this
charge, 1996 operating income, before gains on sales of investments, was $103.1
million ($.89 per diluted share). The improved results in 1997 and 1996 resulted
from increased profitability in both property and casualty and title insurance
operations. After-tax gains on sales of investments were $47.5 million ($.40 per
diluted share), $32.2 million ($.27 per diluted share) and $19.5 million ($.17
per diluted share) in 1997, 1996 and 1995, respectively.
Net income in 1997 was $229.4 million ($1.94 per diluted share) which
includes an after-tax gain of $68.9 million ($.58 per diluted share) resulting
from a tax benefit realized from the sale of all the issued and outstanding
common stock of Prometheus Funding Corp. ("Prometheus"), formerly Frank B. Hall
& Co. Inc., a subsidiary previously classified as discontinued, and an after-tax
charge of $7.5 million ($.06 per diluted share) for a litigation settlement
pertaining to Prometheus. Net income in 1997 also includes an after-tax charge
of $6.4 million ($.05 per diluted share) representing the cumulative effect of
adopting Emerging Issues Task Force Issue No. 97-13, which prohibits
capitalization of process reengineering costs. Net income in 1996 was $48.2
million ($.41 per diluted share) and $88.1 million ($.74 per diluted share) in
1995. Excluding the effects of the charge to strengthen asbestos and
environmental net loss reserves, net income in 1996 was $135.3 million ($1.16
per diluted share). Net income in 1995 included a loss of $4.5 million on the
disposal of discontinued life insurance operations by Zenith National Insurance
Corp. ("Zenith"), an investee company, and an extraordinary loss of $3.4 million
from the early extinguishment of debt.
Property and Casualty Insurance Operations
Property and casualty insurance pretax operating income, before gains on sales
of investments, increased to $232.3 million in 1997, from $218.7 million in 1996
(which excludes the $134.0 million pretax charge to strengthen asbestos-related
and environmental pollution claims net loss reserves), and $201.7 million in
1995. These increases reflect continued strong underwriting results and higher
levels of net investment income. Pretax gains on sales of investments were $71.5
million, $49.3 million and $27.4 million in 1997, 1996 and 1995, respectively.
<PAGE>
Reliance Group Holdings, Inc. and Subsidiaries 25
Net premiums written and premiums earned for each line of property and casualty
insurance are as follows:
<TABLE>
<CAPTION>
Year Ended December 31 1997 1996 1995
- -------------------------------------------------------------------------------------------------------------------
Net Net Net Net Net Net
Premiums Premiums Premiums Premiums Premiums Premiums
Written Earned Written Earned Written Earned
- -------------------------------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
General Liability $ 423,278 $ 420,645 $ 466,636 $ 437,634 $ 468,951 $ 451,867
Commercial Automobile 295,014 275,467 265,206 260,735 239,819 236,592
Workers' Compensation 275,898 249,135 249,638 276,938 265,882 290,241
Multiple Peril 221,021 207,369 211,857 200,301 184,600 180,166
Ocean and Inland Marine 191,055 188,001 129,148 123,352 118,757 115,590
Surety 176,500 167,251 159,183 147,416 139,298 127,355
Reinsurance 159,032 152,754 151,099 140,334 118,969 119,921
Non-Standard Automobile 97,939 53,512 - - - -
Accident and Health 91,714 87,196 61,873 60,394 58,426 58,636
Fire and Allied 46,339 55,336 64,250 63,020 68,118 61,430
Involuntary 33,729 38,955 44,229 50,489 81,006 88,734
Other 54,328 51,395 43,080 40,241 35,214 44,059
------------------------------------------------------------------------------------
$2,065,847 $1,947,016 $1,846,199 $1,800,854 $1,779,040 $1,774,591
====================================================================================
</TABLE>
The increase in net premiums written and premiums earned in 1997 resulted from
continued growth in both domestic and international operations and reflect
premiums generated from the start-up of the Company's non-standard automobile
line. Premiums from the non-standard automobile business are expected to
continue to grow throughout 1998. The increase in 1997 premiums also reflect
growth in the commercial automobile, ocean and inland marine, surety and
accident and health lines of business. Net premiums written and premiums earned
in 1996 benefitted from increased writings in the multiple peril, commercial
automobile and reinsurance lines of business. Net premiums written and premiums
earned in 1996 also benefitted from growth in surety premiums, resulting from a
higher level of construction activity by insureds and growth in small contractor
business.
The underwriting losses in 1997, 1996 and 1995 were $31.7 million, $38.4
million and $45.6 million, respectively, and the combined ratios (calculated on
a GAAP basis), after policyholders' dividends, were 100.9%, 101.6% and 101.8%,
in 1997, 1996 and 1995, respectively. The 1996 underwriting results exclude the
pretax charge of $134.0 million to increase asbestos-related and environmental
pollution claims net loss reserves. Including the effects of this charge, the
1996 underwriting loss and combined ratio were $172.4 million and 109.0%. The
low level of underwriting losses in 1997 and 1996 reflect strong underwriting
results in most of the Company's lines of business, including workers'
compensation which has benefitted from various state reforms and lower medical
costs, general liability, ocean and inland marine, surety, reinsurance and
accident and health lines. The 1997 underwriting results also benefitted from
lower underwriting losses in the multiple peril and the commercial automobile
lines. The favorable underwriting results in 1997 were partially offset by
start-up costs associated with the Company's non-standard automobile line, which
has adversely impacted the underwriting expense ratio. The Company's
underwriting results have also benefitted from a relatively low level of
catastrophe losses, which were $11.1 million, $19.9 million and $25.7 million in
1997, 1996 and 1995, respectively.
The property and casualty insurance operations assume and cede reinsurance in
the normal course of business. The Company's aggregate reinsurance recoverables
were $4.24 billion at December 31, 1997, representing estimated amounts
recoverable from reinsurers pertaining to unpaid claims, claims incurred but not
reported, unearned premiums and paid claims. The Company is subject to credit
risk with respect to its reinsurers, as the ceding of risk to reinsurers does
not relieve the Company of its liability to insureds. In order to minimize
potential losses from uncollectible reinsurance, the Company
<PAGE>
26 Reliance Group Holdings, Inc. and Subsidiaries
Financial Review continued
places its reinsurance with a number of different reinsurers and utilizes a
security committee to approve, in advance, the reinsurers which meet its
standards of financial strength. The Company holds substantial amounts of
collateral to secure recoverables from unauthorized reinsurers. See note 9 to
the consolidated financial statements.
Policy claims and settlement expenses for 1997 include favorable development
of $36.0 million pertaining to insured events of prior years. This redundancy
reflects favorable development in workers' compensation partially offset by
adverse development in the commercial automobile line. The redundancy in
workers' compensation is due, in part, to favorable development in
retrospectively rated policies, which was more than offset by a corresponding
reduction in premiums earned. Policy claims and settlement expenses for 1996 and
1995 included a provision for insured events of prior years of $138.7 million
and $38.5 million, respectively. The provision for 1996 and 1995 included
adverse development related to prior year asbestos-related and environmental
pollution claims, which primarily affected general liability, multiple peril and
reinsurance lines of business, and included a pretax charge of $134.0 million in
1996 to increase net loss reserves for asbestos-related and environmental
pollution claims for business written in or before 1987. The 1996 provision also
included adverse development in the commercial automobile line, offset by
favorable development in workers' compensation. The 1995 provision also included
adverse development in other general liability, commercial automobile and
reinsurance lines, partially offset by favorable development in workers'
compensation.
The Company records involuntary assessments when such assessments are billed
by the respective state insurance facilities. These assessments are subject to
large variations in timing and amount and, accordingly, the Company cannot
reasonably estimate a minimum amount of liability prior to billing. While the
amount of any involuntary assessments cannot be predicted with certainty, the
Company believes that future assessments will not have a material effect on its
liquidity or capital resources.
The liability for property and casualty insurance loss reserves at December
31, 1997 was $6.67 billion compared to $6.14 billion at December 31, 1996. This
liability is based on an evaluation of reported claims in addition to
statistical projections of claims incurred but not reported and loss adjustment
expenses. Estimates of salvage and subrogation are deducted from the liability.
Reinsurance recoverables of $3.43 billion and $2.82 billion at December 31, 1997
and 1996, respectively, are included in the liability.
The establishment of loss reserves requires an estimate of the ultimate
liability based primarily on past experience. The Company applies a variety of
generally accepted actuarial techniques to determine the estimates of ultimate
liability. The techniques recognize, among other factors, the Company's and
industry's experience with similar business, historical trends in reserving
patterns and loss payments, pending level of unpaid claims, cost of claim
settlements, product mix and the economic environment in which property and
casualty companies operate. Estimates are continually reviewed and adjustments
of the probable ultimate liability based on subsequent developments and new data
are included in operating results for the periods in which they are made. In
general, reserves are initially established based upon the actuarial and
underwriting data utilized to set pricing levels and are reviewed as additional
information, including claims experience, becomes available. The establishment
of loss reserves makes no provision for the broadening of coverage by
legislative action or judicial interpretation or for extraordinary future
emergence of new classes of losses not sufficiently represented in the Company's
historical data base, or which are not yet able to be quantified. The Company
regularly analyzes its reserves and reviews its pricing and reserving
methodologies so that future adjustments to prior years reserves can be
minimized. However, given the complexity of this process, reserves will require
continual updates and the ultimate liability may be more or less than such
estimates indicate. Estimation of loss reserves for long tail lines of business
is more difficult than for short tail lines because long tail claims may not
become apparent for a number of years, and a relatively higher proportion of
ultimate losses are considered incurred but not reported. As a result, variation
in loss development is more likely in long tail lines of business. The Company
attempts to reduce these variations in certain of its long tail lines, primarily
directors and officers liability and
<PAGE>
Reliance Group Holdings, Inc. and Subsidiaries 27
professional liability, by writing policies on a claims-made basis which
mitigates the long tail nature of the risks. The Company also limits the
potential loss from a single event through the extensive use of reinsurance.
Property and Casualty Insurance Investment Results
Net investment income of the property and casualty insurance operations
increased to $264.0 million in 1997 from $257.1 million in 1996 and $247.3
million in 1995. These increases reflect growth in the size of the fixed
maturity investment portfolio, partially offset, in 1997, by the effect of lower
interest rates.
Gains on sales of investments were $71.5 million in 1997 compared to $49.3
million in 1996 and $27.4 million in 1995. Gains on sales of investments in 1997
and 1996 primarily resulted from sales of equity securities. Gains on sales of
investments in 1997 also included gains of $42.8 million resulting from sales of
shopping centers, and an office building in Glendale, California. These real
estate gains were partially offset by a $25.9 million write-down of undeveloped
land which is zoned for mixed use development.
Property and Casualty Insurance Investment Portfolio
At December 31, 1997, the Company's property and casualty insurance investment
portfolio aggregated $3.75 billion (at cost), of which 10% was invested in
equity securities. The Company seeks to maintain a diversified and balanced
fixed maturity portfolio representing a broad spectrum of industries and types
of securities. At December 31, 1997, no one issuer comprised more than 3.5% of
the fixed maturity and short-term investment portfolio. The portfolio is managed
to achieve a proper balance of safety, liquidity and investment yields.
The property and casualty insurance fixed maturity portfolio consists of
investment grade securities (those rated "BBB" or better by Standard and Poor's)
and, to a lesser extent, non-investment grade securities and non-rated
securities. The risk of default is generally considered to be greater for
non-investment grade securities, when compared to investment grade securities,
since these issues may be more susceptible to severe economic downturns. At
December 31, 1997, the carrying values of non-investment grade securities and
securities not rated by Standard & Poor's were $539.6 million (16% of the fixed
income portfolio) and $181.3 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. See note 3 to the consolidated financial statements.
At December 31, 1997, approximately 28% of the property and casualty
insurance fixed maturity and short-term investment portfolio was comprised of
securities issued by utilities, the vast majority of which are rated investment
grade and are first mortgage or senior secured bonds. The utility portfolio is
widely diversified among various geographic regions in the United States and is
not dependent on the economic stability of any one particular region. No other
industry group comprises more than 10% of the fixed maturity and short-term
investment portfolio.
Title Insurance Operations
On February 27, 1998, the Company completed the sale of its title insurance
operations. See "Sale of Title Insurance Operations" for further discussion. The
title insurance operations reported pretax income, before gains on sales of
investments, of $63.4 million in 1997, $38.2 million in 1996 and $12.3 million
in 1995.
Premiums and fees were $863.7 million in 1997, $780.2 million in 1996 and
$671.9 million in 1995. The increase in premiums and fees in 1997 and 1996
resulted from an increase in residential resales and refinancings and commercial
real estate activity, reflecting a strong economy and favorable mortgage
interest rates.
Agency commissions represent the portion of premiums retained by agents
pursuant to the terms of their agency contracts and are the title insurance
operations' single largest expense. Agency
<PAGE>
28 Reliance Group Holdings, Inc. and Subsidiaries
Financial Review continued
commissions, which fluctuate in direct relation to agency premiums, were
$379.7 million in 1997, compared to $355.8 million in 1996 and $310.7 million in
1995. Other expenses of the title insurance operations include personnel costs
relating to marketing activities, title searches, information gathering on
specific properties and preparation of insurance policies, as well as costs
associated with the maintenance of title plants. Other expenses were $410.2
million in 1997, $355.4 million in 1996 and $318.4 million in 1995. The increase
in other expenses in 1997 and 1996 reflect higher employee related expenses due
to growth in premium volume. The expense ratio of the title insurance operations
(which includes agency commissions) was 90.9% in 1997 compared to 90.5% in 1996
and 93.1% in 1995. The provision for policy claims was $41.5 million in 1997
compared to $61.1 million in 1996 and $58.5 million in 1995. The decrease in the
provision for policy claims in 1997 reflects the favorable paid claims
experience in recent years.
Other 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 were $191.9
million in 1997, $136.7 million in 1996 and $106.4 million in 1995. The increase
in revenues in both 1997 and 1996 resulted from a significant increase in demand
for information technology services from both existing and new clients.
Information technology operating expenses increased to $187.1 million in 1997
from $134.4 million in 1996 and $101.0 million in 1995. These increases in
operating expenses in 1997 and 1996 resulted from higher employee related
expenses associated with the increased revenues and higher selling, recruiting
and administrative costs associated with building the infrastructure of the
information technology operations. RCG's revenues and expenses are included in
other revenues and other operating expenses in the accompanying consolidated
statement of income.
Equity in Investee Company
Equity in investee company was $7.7 million in 1997, $8.9 million in 1996 and
$7.8 million in 1995, respectively, from the Company's investment in Zenith. The
decline in equity income in 1997, when compared to 1996, reflects increased
underwriting losses in Zenith's workers' compensation business due, in part, to
reserve strengthening for prior year losses. The increase in equity income in
1996, when compared to 1995, reflects lower catastrophe losses. Catastrophe
losses for 1997 and 1995 were $1.0 million and $8.7 million, respectively. There
were no catastrophe losses in 1996.
Liquidity and Capital Resources
The Company's principal sources of funds consist of dividends, advances and net
tax payments from its subsidiaries. These payments aggregated $138.3 million for
the year ended December 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.
<PAGE>
Reliance Group Holdings, Inc. and Subsidiaries 29
Total common stock dividends paid by Reliance Insurance Company were $114.6
million in 1997 and $111.5 million in each of 1996 and 1995. During 1998, $130.1
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 operating cash needs. On March 5, 1998, Reliance Insurance Company
obtained the approval of the Pennsylvania Insurance Department to pay an
extraordinary dividend in the amount of an additional $135 million, representing
a portion of the gain from the sale of the title insurance operations. The
Company plans to use funds provided by the dividend to purchase approximately
$125 million of its outstanding debt.
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 timely payment of claims and other operating requirements. At December 31,
1997, the property and casualty insurance operations had $527 million of cash
and short-term investments.
For the year ended December 31, 1997, the Company generated $10.5 million of
cash flow from operating activities compared to $160.4 million in 1996 and
$168.5 million in 1995. The decline in 1997 operating cash flow reflects the
increase in premiums receivable, other receivables and reinsurance recoverables.
The decline in operating cash flow in 1997 also reflects higher payments for
property and casualty insurance policy claims and related expenses due, in part,
to a shift in the mix of business to shorter tailed lines. The decrease in 1996
operating cash flow when compared to 1995, reflected higher net payments for
property and casualty insurance policy claims and related expenses, partially
offset by higher levels of operating cash flow from the title insurance
operations, due to an increase in their operating income and a decline in paid
claims.
The Company generated $56.7 million of cash flow from investing activities
for the year ended December 31, 1997, primarily from sales of real estate. The
Company used $159.9 million and $111.2 million of cash flow for investing
activities for the years ended December 31, 1996 and 1995, respectively. Net
purchases of marketable securities for the property and casualty insurance
investment portfolio were $62.2 million and $90.8 million in 1996 and 1995,
respectively.
The Company used $34.6 million and $12.5 million of cash flow for financing
activities for the years ended December 31, 1997 and 1996, respectively,
primarily for the payment of dividends, partially offset, in 1996, by additional
term loan borrowings. The Company used $53.4 million of cash flow for financing
activities for the year ended December 31, 1995, principally for the payment of
dividends and reduction of debt.
During 1997, the Company increased term loan borrowings by $25 million to
$187.5 million. The additional borrowings were used to redeem all outstanding
7.866% senior reset notes, due December 1, 2000. The outstanding principal
amount of such notes was $25 million, including $9.6 million held by Reliance
Insurance Company. The redemption price was 100% of the principal amount of such
notes plus interest from June 1, 1997 to the redemption date.
The Company has a revolving credit facility with various banks providing for
aggregate maximum outstanding borrowings of $100 million. At December 31, 1997,
borrowings aggregating $25 million were outstanding under this facility. The
Company has $903.1 million of debt outstanding at December 31, 1997 with $11.5
million maturing on or before December 31, 1998. An additional $617.1 million of
debt matures on or before December 31, 2002 of which $563.8 million matures in
the year 2000. The Company expects to repay these amounts at their existing
maturities, utilizing a combination of refinancing these obligations and cash
flow generated from operations. In addition, the Company intends to use the
extraordinary dividend from Reliance Insurance Company to purchase, during 1998,
approximately $125 million of its debt.
<PAGE>
30 Reliance Group Holdings, Inc. and Subsidiaries
Financial Review continued
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 the 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
Many existing computer systems and software products are coded to accept only
two digit entries in the date code field. Beginning in the year 2000, these date
code fields will need to accept four digit entries to distinguish 21st century
dates from 20th century dates. If not corrected, the Company's business
operations, including claims and premiums processing operations, financial
reporting systems and its actuarial calculations could be affected by the year
2000 issue. The Company commenced its efforts to address the year 2000 issue in
1996 and believes that its claims and premiums processing systems and corporate
financial recording and reporting systems are year 2000 compliant. The Company
is currently in the process of confirming its belief that these systems are year
2000 compliant and that certain of its other computer systems and software
products are year 2000 compliant. Through year-end 1997, the Company has
incurred approximately $5 million to correct the year 2000 issue. The Company
does not believe that the costs associated with its resolution of the year 2000
issue will have a material adverse effect on its financial position, results of
operations or cash flows.
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. 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.
<PAGE>
RELIANCE GROUP HOLDINGS, INC. AND SUBSIDIARIES 31
Consolidated Statement of Income
<TABLE>
<CAPTION>
Year Ended December 31 1997 1996 1995
- ----------------------------------------------------------------------------------------------------------------------------------
(In thousands, except per share amounts)
<S> <C> <C> <C>
Revenues:
Premiums earned $2,810,762 $2,581,011 $2,446,538
Net investment income 294,971 287,588 275,289
Gain on sales of investments 73,097 49,610 27,377
Other 263,806 172,378 156,783
---------------------------------------------
3,442,636 3,090,587 2,905,987
---------------------------------------------
Claims and expenses:
Policy claims and settlement expenses 1,304,559 1,411,453 1,260,445
Policy acquisition costs and other insurance expenses 1,496,983 1,327,306 1,238,142
Interest 88,663 87,724 90,245
Other operating expenses 311,210 217,505 196,631
---------------------------------------------
3,201,415 3,043,988 2,785,463
---------------------------------------------
Income before income taxes and equity
in investee company 241,221 46,599 120,524
Provision for income taxes (74,400) (7,300) (32,400)
Equity in investee company 7,675 8,908 7,792
---------------------------------------------
Income from continuing operations 174,496 48,207 95,916
Gain on disposal of discontinued operation 68,865 - -
Litigation settlement of discontinued operation (7,500) - -
Loss on disposal of discontinued operations of
investee company - - (4,497)
---------------------------------------------
Income before extraordinary item and cumulative
effect of accounting change 235,861 48,207 91,419
Extraordinary item-early extinguishment of debt - - (3,363)
Cumulative effect of change in accounting for process reengineering costs (6,442) - -
---------------------------------------------
Net income $ 229,419 $ 48,207 $ 88,056
=============================================
Basic per share information:
Income from continuing operations $ 1.52 $ .42 $ .85
=============================================
Net income $ 2.00 $ .42 $ .75
=============================================
Diluted per share information:
Income from continuing operations $ 1.47 $ .41 $ .83
=============================================
Net income $ 1.94 $ .41 $ .74
=============================================
</TABLE>
See notes to consolidated financial statements
<PAGE>
32 RELIANCE GROUP HOLDINGS, INC. AND SUBSIDIARIES
Consolidated Balance Sheet
<TABLE>
<CAPTION>
Assets December 31 1997 1996
- --------------------------------------------------------------------------------------------------------------------------------
(In thousands, except per share amount)
<S> <C> <C>
Marketable securities:
Fixed maturities held for investment - at amortized cost
(quoted market $663,744 and $660,949) $ 636,119 $ 648,038
Fixed maturities available for sale - at quoted market
(amortized cost $2,214,963 and $2,311,548) 2,317,673 2,333,678
Equity securities - at quoted market
(cost $376,065 and $436,053) 708,563 716,606
Short-term investments 487,614 293,305
Cash 53,661 26,525
Premiums and other receivables 1,460,426 1,222,916
Reinsurance recoverables 4,241,015 3,447,953
Investment in investee company 166,673 159,157
Deferred policy acquisition costs 248,572 215,438
Excess of cost over fair value of net assets acquired,
less accumulated amortization 229,484 239,047
Other assets 494,067 558,914
Net assets of title insurance operations 288,619 282,115
-----------------------------
$11,332,486 $10,143,692
=============================
Liabilities and Shareholders' Equity
- --------------------------------------------------------------------------------------------------------------------------------
Unearned premiums $ 1,722,258 $ 1,468,299
Unpaid claims and related expenses 6,669,508 6,136,420
Accounts payable and accrued expenses 579,582 503,249
Reinsurance ceded premiums payable 402,972 365,412
Federal and foreign income taxes, including deferred taxes 92,568 92,100
Term loans and short-term debt 253,083 236,167
Debentures and notes 650,000 665,365
-----------------------------
10,369,971 9,467,012
=============================
Contingencies and commitments
Shareholders' equity:
Common stock, par value $.10 per share, 225,000 shares authorized,
114,857 and 114,282 shares issued and outstanding 11,486 11,428
Additional paid-in capital 542,049 540,465
Retained earnings (deficit) 142,701 (50,012)
Net unrealized gain on investments 292,081 198,786
Net unrealized loss on foreign currency translation (25,802) (23,987)
-----------------------------
962,515 676,680
-----------------------------
$11,332,486 $10,143,692
=============================
</TABLE>
See notes to consolidated financial statements
<PAGE>
RELIANCE GROUP HOLDINGS, INC. AND SUBSIDIARIES 33
Consolidated Statement of Changes in Shareholders' Equity
<TABLE>
<CAPTION>
Net
Net Unrealized
Unrealized Loss on
Additional Retained Gain Foreign
Common Paid-In Earnings (Loss) on Currency Shareholders'
Stock Capital (Deficit) Investments Translation Equity
- --------------------------------------------------------------------------------------------------------------------------------
(In thousands, except per share amounts)
<S> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1995 $11,313 $533,979 $(110,479) $(27,881) $(20,182) $386,750
Issuance of common stock 31 1,165 - - - 1,196
Transactions of investee company
and other - (53) - 8,693 - 8,640
Net income - - 88,056 - - 88,056
Loss on early extinguishment of
redeemable preferred stock
of a subsidiary - - (3,029) - - (3,029)
Dividends ($.32 per share) - - (36,242) - - (36,242)
Appreciation after deferred
income taxes - - - 238,544 - 238,544
Foreign currency translation - - - - (5,567) (5,567)
-----------------------------------------------------------------------------------------
Balance, December 31, 1995 11,344 535,091 (61,694) 219,356 (25,749) 678,348
Issuance of common stock 84 5,754 - - - 5,838
Transactions of investee company - (380) - (1,504) - (1,884)
Net income - - 48,207 - - 48,207
Dividends ($.32 per share) - - (36,525) - - (36,525)
Depreciation after deferred
income taxes - - - (19,066) - (19,066)
Foreign currency translation - - - - 1,762 1,762
-----------------------------------------------------------------------------------------
Balance, December 31, 1996 11,428 540,465 (50,012) 198,786 (23,987) 676,680
Issuance of common stock 58 2,393 - - - 2,451
Transactions of investee company
and other - (809) - 3,284 - 2,475
Net income - - 229,419 - - 229,419
Dividends ($.32 per share) - - (36,706) - - (36,706)
Appreciation after deferred
income taxes - - - 90,011 - 90,011
Foreign currency translation - - - - (1,815) (1,815)
------------------------------------------------------------------------------------------
Balance, December 31, 1997 $ 11,486 $ 542,049 $ 142,701 $ 292,081 $ (25,802) $ 962,515
------------------------------------------------------------------------------------------
</TABLE>
See notes to consolidated financial statements
<PAGE>
34 RELIANCE GROUP HOLDINGS, INC. AND SUBSIDIARIES
Consolidated Statement of Cash Flows
<TABLE>
<CAPTION>
Year Ended December 31 1997 1996 1995
- --------------------------------------------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (including net income of $42,176, $25,233 and $5,102
from the title insurance operations) $ 229,419 $ 48,207 $ 88,056
Adjustments to reconcile net income to net cash
provided from operating activities:
Discontinued operation (68,865) - -
Gain on sales of investments (73,097) (49,610) (27,377)
Deferred policy acquisition costs (33,134) (20,790) (12,710)
Premiums and other receivables and reinsurance recoverables (993,443) (418,187) (209,054)
Unearned premiums, unpaid claims and related expenses 788,523 532,699 271,574
Accounts payable, accrued expenses and other 134,757 25,902 52,404
Change in title insurance operating assets and liabilities 26,307 42,144 5,613
----------------------------------------------
10,467 160,365 168,506
----------------------------------------------
Cash flows from investing activities:
Proceeds from sales of:
Fixed maturities available for sale 503,609 541,463 507,118
Fixed maturities held for investment - 25,610 34,951
Equity securities 352,445 360,983 400,635
Maturities and repayments of:
Fixed maturities available for sale 259,717 93,140 46,349
Fixed maturities held for investment 49,885 28,441 52,033
Purchases of:
Fixed maturities available for sale (682,577) (888,946) (476,569)
Fixed maturities held for investment (41,156) (58,373) (97,071)
Equity securities (228,598) (343,146) (262,075)
(Increase) decrease in short-term investments - net (207,717) 178,580 (296,197)
Discontinued operation (11,238) - -
Investing cash flows of the title insurance operations (23,887) (51,319) (2,318)
Other - net 86,238 (46,362) (18,008)
-----------------------------------------------
56,721 (159,929) (111,152)
-----------------------------------------------
Cash flows from financing activities:
Increase in term loans 75,000 86,327 120,298
Increase (decrease) in short-term debt - net 985 (2,174) (5,400)
Repayments of term loans (61,003) (40,483) (68,152)
Issuance of common stock 2,451 5,838 1,196
Repurchases of senior reset notes (15,365) (25,000) (40,348)
Debt issuance costs - (480) (1,000)
Dividends (36,706) (36,525) (36,242)
Redemption of redeemable preferred stock of a subsidiary - - (23,769)
-----------------------------------------------
(34,638) (12,497) (53,417)
-----------------------------------------------
Increase (decrease) in cash 32,550 (12,061) 3,937
(Increase) decrease in cash of the title insurance operations (5,414) 902 (5,945)
Cash, beginning of year 26,525 37,684 39,692
----------------------------------------------
Cash, end of year $ 53,661 $ 26,525 $ 37,684
==============================================
Supplemental disclosures of cash flow information:
Interest paid $ 75,900 $ 75,100 $ 77,200
==============================================
Income taxes paid $ 39,700 $ 8,900 $ 9,500
==============================================
</TABLE>
See notes to consolidated financial statements
<PAGE>
RELIANCE GROUP HOLDINGS, INC. AND SUBSIDIARIES 35
Notes to Consolidated Financial Statements
NOTE 1 Nature of Operations/Summary of Significant Accounting Policies
Nature of Operations
The Company's property and casualty insurance business consists of
four principal operations: Reliance National, Reliance Insurance,
Reliance Surety and Reliance Reinsurance. Reliance National offers,
through brokers and agents, a broad range of commercial property and
casualty insurance products and services for large companies and
specialty line customers. Reliance National also offers, through
agents, non-standard automobile and smaller account workers'
compensation insurance. Reliance National selects market segments
where it can provide specialized coverages and services, and it
conducts business nationwide and in certain international markets.
In 1997, Reliance National accounted for 48% of the net premiums
written by the Company's property and casualty insurance operations.
The Reliance Insurance operation offers, through agents and brokers,
commercial property and casualty insurance coverages for mid-sized
companies primarily throughout the United States. Reliance Insurance
also offers traditional and specialized coverages for more complex
risks as well as insurance programs for groups with common insurance
needs. In 1997, Reliance Insurance accounted for 36% of the net
premiums written by the Company's property and casualty insurance
operations. Reliance Surety is a leading writer of surety bonds and
fidelity bonds in the United States and conducts its business
through agents and brokers. Reliance Reinsurance offers, primarily
through brokers, treaty and facultative reinsurance for small to
medium sized regional and specialty insurance companies located in
the United States. The Company's property and casualty insurance
operations accounted for $1,947,016,000 (69%) of the Company's 1997
net premiums earned.
On February 27, 1998, the Company completed the sale of its title
insurance operations to Lawyers Title Corporation ("Lawyers Title"),
whose name was changed to LandAmerica Financial Group, Inc.
("LandAmerica") on that date. As consideration for the sale, the
Company received cash, convertible preferred stock, and common stock
which represents ownership of 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. The Company also has three representatives on its 14 member
board of directors. Accordingly, the Company will account for its
investment in LandAmerica by the equity method of accounting for
periods subsequent to the sale date. See note 2 to the consolidated
financial statements. LandAmerica writes, through direct and agency
operations, title insurance for residential and commercial real
estate nationwide and provides escrow, appraisal and settlement
services in connection with real estate closings. The Company's
title insurance operations accounted for $863,746,000 (31%) of the
Company's 1997 net premiums earned.
The Company also provides computer-related professional services to
large corporate clients throughout the United States. Information
technology consulting revenues were $191,900,000 in 1997.
Basis of Consolidation and Presentation
The consolidated financial statements of the Company include the
accounts of all subsidiaries. The consolidated financial statements
have been prepared in conformity with generally accepted accounting
principles. Such statements include informed estimates and judgments
of management for those transactions that are not yet complete or
for which the ultimate effects cannot be precisely determined.
Actual results may differ from these estimates.
All material intercompany balances and transactions have been
eliminated in consolidation.
Insurance
The financial statements of the insurance subsidiaries have been
prepared in accordance with generally accepted accounting
principles, which differ in certain respects from those followed in
reports to regulatory authorities.
<PAGE>
36 RELIANCE GROUP HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements continued
Fixed maturity investments, the vast majority of which are
publicly traded securities, include bonds, notes and redeemable
preferred stocks. Fixed maturity investments classified as
"available for sale" represent securities that will be held for an
indefinite period of time and are carried at quoted market value
with the net unrealized gain or loss included in shareholders'
equity. Such investments may be sold in response to changes in
interest rates, future general liquidity needs and similar factors.
Fixed maturity investments classified as "held for investment" are
carried at amortized cost since the Company has the positive intent
and ability to hold these securities to maturity. Investments in
equity securities include common stocks, where the Company's
ownership of outstanding voting stock is less than 20%, and
nonredeemable preferred stocks and are carried at quoted market
value with the net unrealized gain or loss included in shareholders'
equity. Investments in which the Company has a 20% to 50% ownership
interest of voting stock, or otherwise exercises significant
influence, are reported using the equity method of accounting.
Short-term investments primarily consist of United States government
and other foreign government securities, certificates of deposit and
commercial paper carried at cost which approximates market value.
Investments whose declines in market values are deemed to be other
than temporary are written down to market value. In circumstances
where market values are not available, investments are written down
to estimated fair value. In determining estimated fair value of
investments, the Company reviews the issuer's financial condition
and the stability of its income, as well as the discounted cash flow
to be received by the Company. Write-downs and other realized gains
and losses, determined on a specific identification basis, are
included in income.
Property and casualty insurance premiums reported as earned
represent the portion of premiums written applicable to the current
period, computed on a pro-rata basis over the terms of the policies
in force. Premiums include estimated audit premiums and estimated
premiums on retrospectively rated policies.
The costs associated with the acquisition of property and
casualty business are deferred and amortized on a straight-line
basis over the terms (principally one year) of the policies in
force. Such deferred policy acquisition costs consist of
commissions, premium taxes and other variable policy issuance and
underwriting expenses. Deferred policy acquisition costs are
reviewed to determine that they do not exceed recoverable amounts,
including anticipated investment income.
Property and casualty unpaid claims and related expenses are
estimated based on an evaluation of reported claims in addition to
statistical projections of claims incurred but not reported and loss
adjustment expenses. Estimates of salvage and subrogation are
deducted from the liability. The Company applies a variety of
generally accepted actuarial techniques to determine the estimates
of ultimate liability. The process of estimating claims is a complex
task and the ultimate liability may be more or less than such
estimates indicate. Adjustments of the probable ultimate liability,
based on subsequent developments, are included in operations
currently.
Direct title insurance premiums and fees are recognized as
revenue when policies become effective. Agency title insurance
premiums are recognized as revenue when reported by the agent. Title
insurance claims arise principally from unknown title defects which
exist at the time policies become effective. The reserve for title
losses, which is based on historical and anticipated loss
experience, represents the estimated costs to settle reported claims
and claims incurred but not reported. The process of estimating
claims is a complex task and the actual payments may be more or less
than such estimates indicate. Changes in loss estimates, based on
subsequent developments, are included in operations currently.
Investments in Real Estate
Investments in real estate were $126,800,000 and $286,700,000 at
December 31, 1997 and 1996, respectively, and are included in other
assets in the accompanying consolidated balance sheet. Investments
in real estate, at December 31, 1997, consist primarily of office
buildings and undeveloped land zoned for mixed use development, and
are carried at cost (less accumulated
<PAGE>
RELIANCE GROUP HOLDINGS, INC. AND SUBSIDIARIES 37
depreciation), which includes real estate taxes and other carrying
costs incurred prior to substantial completion of the real estate
development projects. Depreciation expense is provided using the
straight-line method.
The Company's real estate properties are reviewed for impairment
whenever events or circumstances indicate that the carrying value of
such properties may not be recoverable. In performing the review for
recoverability of carrying value, the Company estimates the future
undiscounted cash flows expected to result from the use of each of its
properties and their eventual disposition. These cash flow projections
reflect changes in occupancy, new leases, current rent roll, future
expirations and general market conditions. If the total expected
future undiscounted cash flows are less than the carrying value of
such properties, impairment losses are recognized on a
property-by-property basis. An impairment loss is measured by the
amount that the carrying value of the property exceeds its fair value.
Excess of Cost Over Fair Value of Net Assets Acquired
The excess of cost over fair value of net assets acquired is being
amortized over 40 years using the straight-line method. The Company
evaluates the carrying amount of the excess of cost over fair value of
net assets acquired by analyzing historical and expected future income
and undiscounted cash flows of its operations.
Income Taxes
The Company and its domestic subsidiaries, where their ownership is at
least 80% of outstanding voting stock, file a consolidated federal
income tax return. The Company provides for deferred income taxes
under the asset and liability method, whereby deferred income taxes
result from temporary differences between the tax bases of assets and
liabilities and their reported amounts in the financial statements. In
addition, deferred income taxes are provided for unrealized
appreciation and depreciation on investments carried at quoted market
value.
Postretirement Benefit Plans
Retirement pension benefits, covering substantially all employees, are
provided under noncontributory trusteed defined benefit pension plans.
Contributions to the pension plans are based on the minimum funding
requirements of the Employee Retirement Income Security Act of 1974.
In addition, the Company sponsors defined contribution plans covering
employees who meet eligibility requirements.
Translation of Foreign Currency Financial Statements
Assets and liabilities of foreign subsidiaries are translated at
year-end exchange rates. Results of operations are translated at
average rates during the year. The effects of exchange rate changes in
translating foreign financial statements are excluded from the
consolidated statement of income and are presented as a separate
component of shareholders' equity. Exchange gains and losses resulting
from foreign currency transactions are included in operations
currently. Translation gains and losses relating to operations of
companies where hyperinflation exists are included in the consolidated
statement of income.
Fair Value of Financial Instruments
The estimated fair value of publicly traded financial instruments is
determined by the Company using quoted market prices, dealer quotes
and prices obtained from independent third parties. For financial
instruments not publicly traded, fair values are estimated based on
values obtained from independent third parties or quoted market prices
of comparable instruments. However, judgment is required to interpret
market data to develop the estimates of fair value. Accordingly, the
estimates are not necessarily indicative of the amounts that could be
realized in a current market exchange.
<PAGE>
38 RELIANCE GROUP HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements continued
The carrying values and fair values of financial instruments are as
follows:
<TABLE>
<CAPTION>
December 31 1997 1996
-----------------------------------------------------------------------------------------------------------
Carrying Fair Carrying Fair
Value Value Value Value
-----------------------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C> <C>
Assets:
Marketable securities:
Fixed maturities held for investment $ 636,119 $ 663,744 $ 648,038 $ 660,949
Fixed maturities available for sale 2,317,673 2,317,673 2,333,678 2,333,678
Equity securities 708,563 708,563 716,606 716,606
Short-term investments 487,614 487,614 293,305 293,305
Investment in investee company 166,673 169,292 159,157 179,975
Liabilities:
Term loans and short-term debt 253,083 253,083 236,167 236,167
Debentures and notes 650,000 675,375 665,365 684,553
</TABLE>
Reclassifications
Certain reclassifications have been made to the Company's prior years'
consolidated financial statements to conform with the current year's
consolidated financial statements.
Adoption of New Accounting Standards
In October 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" ("FAS 123"). This Statement was effective
for 1996 and encouraged, but did not require, companies to adopt a
fair value based method of accounting for stock compensation plans,
under which compensation cost is measured based on the fair value of
the award at the grant date. The resulting compensation cost would be
charged to income. Companies may continue to account for these plans
as prescribed in Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees," and related
interpretations ("APB 25"), under which compensation cost is measured
as the excess, if any, of the quoted market price of the stock at the
grant date over the exercise price to acquire the stock. Companies not
adopting the fair value based method of FAS 123 must present pro forma
disclosures of net income and net income per share as if this method
had been applied. The Company has elected to continue to follow APB 25
in accounting for its plans. See note 11 for the pro forma disclosures
of net income and net income per share.
Effective January 1, 1997, the Company adopted Statement of
Financial Accounting Standards No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities." The
adoption of this Statement had no material effect on the Company's
consolidated financial statements.
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. The Company adopted this
Statement in 1997. See note 16 to the consolidated financial
statements. All prior periods earnings per share data have been
restated to conform with the provisions of this Statement.
In June 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income" and Statement of Financial Accounting Standards
No. 131, "Disclosures about Segments of an Enterprise and Related
Information." The adoption of these Statements, which concern
disclosure standards only, is not required until 1998.
<PAGE>
RELIANCE GROUP HOLDINGS, INC. AND SUBSIDIARIES 39
On November 20, 1997, the Emerging Issues Task Force released
Issue No. 97-13, "Accounting for Costs Incurred in Connection with a
Consulting Contract or an Internal Project That Combines Business
Process Reengineering and Information Technology Transformation."
Issue No. 97-13 requires that the cost of business process
reengineering activities that are part of a systems development
project be expensed as those costs are incurred. Any unamortized costs
that were previously capitalized must be written off as a cumulative
adjustment in the quarter containing November 20, 1997. The effect of
adopting Issue No. 97-13 was a decrease in income for the cumulative
effect of the change in accounting principle of $6,442,000, net of an
income tax benefit of $3,468,000.
In December 1997, the American Institute of Certified Public
Accountants issued Statement of Position No. 97-3, "Accounting by
Insurance and Other Enterprises for Insurance-Related Assessments."
The adoption of this Statement, which is not required until 1999, is
not expected to have a material effect on the Company's consolidated
financial statements.
NOTE 2 Sale of Subsidiaries
Sale of Title Insurance Operations
On February 27, 1998, the Company completed the sale of its title
insurance operations to Lawyers Title, whose name was changed to
LandAmerica Financial Group, Inc. ("LandAmerica") on that date. As
consideration for the sale, the Company received $266,600,000 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 $110,000,000 and which is 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 sales proceeds were
approximately $662,000,000. 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 will account 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
approximately $245,000,000 of which approximately $135,000,000 will be
recognized in the first quarter of 1998. The deferred gain of
approximately $110,000,000 will be recognized as the equity securities
received from LandAmerica are sold. See note 17 to the consolidated
financial statements for business segment information regarding the
title insurance operations.
The assets and liabilities of the title insurance operations have been
reclassified as a one line item "net assets of title insurance
operations" in the accompanying consolidated balance sheet. Such net
assets are comprised of the following:
<TABLE>
<CAPTION>
December 31 1997 1996
-----------------------------------------------------------------------------------------------------------
<S> <C> <C>
(In thousands)
Investments $462,345 $455,649
Premiums and other receivables 37,132 27,415
Other assets 152,831 138,642
------- -------
652,308 621,706
------- -------
Unpaid claims and related expenses 272,792 264,838
Other liabilities 90,897 74,753
------- -------
363,689 339,591
------- -------
Net assets of title insurance operations $288,619 $282,115
======= =======
</TABLE>
The cash flows of the title insurance operations have likewise been
reclassified in the accompanying consolidated statement of cash flows.
<PAGE>
40 RELIANCE GROUP HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements continued
Sale of Discontinued Operation
On December 31, 1997, the Company sold all of the issued and
outstanding common stock of Prometheus Funding Corp. ("Prometheus"),
formerly known as Frank B. Hall & Co. Inc. The net proceeds received
were $5,954,000. The sale resulted in an after-tax gain of
$68,865,000, which included a tax benefit of $87,766,000. The tax
benefit resulted primarily from a reversal of a previously established
deferred tax asset valuation allowance pertaining to the tax basis
differential of the Company's investment in Prometheus. The
$68,865,000 after-tax gain has been classified as a gain on disposal
of a discontinued operation in the accompanying consolidated statement
of income.
NOTE 3 Investments
Fixed maturities held for investment at December 31, 1997 consisted
of:
<TABLE>
<CAPTION>
Gross Gross
Amortized Market Unrealized Unrealized
Cost Value Gains Losses(1)
------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
(In thousands)
Bonds and notes:
Public utilities $ 249,202 $ 257,434 $ 8,238 $ 6
Foreign government 129,571 137,544 7,973 -
Corporate bonds and notes and other 165,634 172,395 6,895 134
Redeemable preferred stock 91,712 96,371 4,728 69
-------------------------------------------------------
$ 636,119 $ 663,744 $ 27,834 $ 209
=======================================================
</TABLE>
(1)The amortized cost and market value of fixed maturities held for
investment which have unrealized losses were $30,537,000 and
$30,328,000.
Fixed maturities available for sale at December 31, 1997 consisted of:
<TABLE>
<CAPTION>
Gross Gross
Market Amortized Unrealized Unrealized
Value Cost Gains Losses(1)
------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
(In thousands)
Bonds and notes:
United States government and government
agencies and authorities $ 443,032 $ 438,885 $ 4,536 $ 389
States, municipalities and political
subdivisions 139,473 130,922 8,551 -
Public utilities 351,680 340,477 11,367 164
Corporate bonds and notes and other 919,724 880,068 50,696 11,040
Redeemable preferred stock 463,764 424,611 39,263 110
------------------------------------------------------
$2,317,673 $2,214,963 $114,413 $11,703
======================================================
</TABLE>
(1)The amortized cost and market value of fixed maturities available
for sale which have unrealized losses were $335,885,000 and
$324,182,000.
Fixed maturities held for investment at December 31, 1996 consisted
of:
<TABLE>
<CAPTION>
Gross Gross
Amortized Market Unrealized Unrealized
Cost Value Gains Losses(1)
------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
(In thousands)
Bonds and notes:
Public utilities $ 265,146 $ 266,767 $ 3,652 $ 2,031
Foreign government 133,575 138,665 6,115 1,025
Corporate bonds and notes and other 148,202 152,077 5,992 2,117
Redeemable preferred stock 101,115 103,440 2,461 136
------------------------------------------------------
$ 648,038 $ 660,949 $ 18,220 $ 5,309
======================================================
</TABLE>
(1)The amortized cost and market value of fixed maturities held for
investment which have unrealized losses were $192,403,000 and
$187,094,000.
<PAGE>
RELIANCE GROUP HOLDINGS, INC. AND SUBSIDIARIES 41
Fixed maturities available for sale at December 31, 1996 consisted of:
<TABLE>
<CAPTION>
Gross Gross
Market Amortized Unrealized Unrealized
Value Cost Gains Losses(1)
------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
(In thousands)
Bonds and notes:
United States government and government
agencies and authorities $ 607,325 $ 609,041 $ 2,268 $ 3,984
States, municipalities and political subdivisions 132,163 128,874 4,221 932
Public utilities 300,509 300,947 5,444 5,882
Corporate bonds and notes and other 828,472 826,303 29,827 27,658
Redeemable preferred stock 465,209 446,383 21,289 2,463
------------------------------------------------------
$2,333,678 $2,311,548 $ 63,049 $ 40,919
======================================================
</TABLE>
(1)The amortized cost and market value of fixed maturities available
for sale which have unrealized losses were $979,267,000 and
$938,348,000.
As of December 31, 1997, the contractual maturities of fixed maturity
investments are as follows:
<TABLE>
<CAPTION>
Held for investment Available for sale
--------------------------------------------------------
Amortized Market Amortized Market
Cost Value Cost Value
-----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
(In thousands)
Due within one year $ 6,894 $ 7,067 $ 132,746 $ 132,605
Due after one year through five years 107,110 112,278 279,467 287,073
Due after five years through ten years 292,601 307,278 674,634 708,874
Due after ten years 229,514 237,121 954,024 1,012,581
--------------------------------------------------------
636,119 663,744 2,040,871 2,141,133
Mortgage-backed securities - - 174,092 176,540
--------------------------------------------------------
$ 636,119 $ 663,744 $2,214,963 $2,317,673
========================================================
</TABLE>
Net investment income consisted of:
<TABLE>
<CAPTION>
Year Ended December 31 1997 1996 1995
-----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
(In thousands)
Investment income:
Fixed maturities $ 252,930 $ 236,093 $ 221,279
Equity securities 11,510 12,990 20,187
Short-term investments 24,607 32,244 30,292
Other 18,416 18,652 15,359
------------------------------------------
307,463 299,979 287,117
Investment expenses (12,492) (12,391) (11,828)
------------------------------------------
$ 294,971 $ 287,588 $ 275,289
==========================================
</TABLE>
<PAGE>
42 RELIANCE GROUP HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements continued
Gain on sales of investments consisted of:
<TABLE>
<CAPTION>
Year Ended December 31 1997 1996 1995
-----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
(In thousands)
Fixed maturities(1):
Realized gains $ 31,171 $ 15,302 $ 47,764
Realized losses(2) (26,828) (18,022) (28,406)
---------------------------------------
4,343 (2,720) 19,358
Equity securities(3) 55,667 58,296 19,457
Real estate(4) 16,955 - -
Other(3),(5) (3,868) (5,966) (11,438)
--------------------------------------
$ 73,097 $ 49,610 $ 27,377
======================================
</TABLE>
(1) The Company sold fixed maturities held for investment with an
amortized cost of $26,100,000 and $41,000,000 in 1996 and 1995,
respectively. These sales were in response to a significant
deterioration in the issuers' creditworthiness. No fixed
maturities held for investment were sold in 1997.
(2) Includes realized losses of $3,300,000, $600,000 and $7,600,000
in 1997, 1996 and 1995, respectively, and write-downs of
$18,100,000, $3,200,000 and $15,700,000 in 1997, 1996 and 1995,
respectively, related to securities not rated investment grade.
(3) Gain on sales of equity securities and other in 1997, 1996 and
1995 includes write-downs of $2,700,000, $3,600,000 and
$1,500,000, respectively.
(4) Includes gains of $42,800,000 resulting from the sale of shopping
centers located throughout the United States and an office
building located in Glendale, California and a write-down of
$25,900,000 related to undeveloped land.
(5) Includes exchange losses of $3,500,000, $3,300,000 and
$10,400,000 in 1997, 1996 and 1995, respectively, related to
certain foreign currency denominated investments.
Net unrealized appreciation (depreciation) on investments consisted
of:
<TABLE>
<CAPTION>
Year Ended December 31 1997 1996 1995
-----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
(In thousands)
Unrealized appreciation (depreciation):
Equity securities $ 51,945 $ 15,939 $ 182,507
Fixed maturities available for sale 80,580 (38,441) 161,756
-------------------------------------
132,525 (22,502) 344,263
Deferred income tax (provision) benefit (46,025) 7,533 (116,987)
Net unrealized appreciation (depreciation) in
investments of title insurance operations 3,511 (4,097) 11,268
Net unrealized appreciation (depreciation) in
investments of investee company 3,284 (1,504) 8,693
-------------------------------------
$ 93,295 $(20,570) $ 247,237
-------------------------------------
Unrealized appreciation (depreciation) on
fixed maturities held for investment $ 14,714 $(18,907) $ 119,490
=====================================
</TABLE>
<PAGE>
RELIANCE GROUP HOLDINGS, INC. AND SUBSIDIARIES 43
<TABLE>
<CAPTION>
Net unrealized gain on investments consisted of:
December 31 1997 1996 1995
-----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
(In thousands)
Equity securities:
Unrealized gains $ 340,361 $ 293,269 $ 276,760
Unrealized losses (7,863) (12,716) (12,146)
--------------------------------------
332,498 280,553 264,614
Fixed maturities available for sale:
Unrealized gains 114,413 63,049 78,017
Unrealized losses (11,703) (40,919) (17,446)
--------------------------------------
102,710 22,130 60,571
--------------------------------------
435,208 302,683 325,185
Deferred income tax provision (152,324) (106,299) (113,832)
Net unrealized gain in investments of title insurance operations 7,158 3,647 7,744
Net unrealized gain (loss) in investments of investee company 2,039 (1,245) 259
--------------------------------------
$ 292,081 $ 198,786 $ 219,356
======================================
</TABLE>
Fixed maturity investments carried at $567,300,000 at December 31,
1997 were on deposit under requirements of regulatory authorities,
including deposits related to workers' compensation reinsurance pools.
Investments in a single issuer, other than obligations of the
United States government, whose aggregate carrying value is in excess
of 10% of the Company's shareholders' equity at December 31, 1997 are
comprised of fixed maturity investments of Time Warner Inc. and United
Kingdom Gilts with carrying values of $100,169,000 and $119,878,000,
respectively, and market values of $100,169,000 and $121,680,000,
respectively, and equity securities of Occidental Petroleum Corp. and
Symbol Technologies, Inc. with carrying and market values of
$115,333,000 and $202,640,000, respectively.
NOTE 4 Investment in Investee Company
Investment in investee company at December 31, 1997 and 1996 was
$166,673,000 and $159,157,000 which represents the Company's
investment in Zenith National Insurance Corp. ("Zenith"). Equity
income in Zenith was $7,675,000, $8,908,000 and $7,792,000 for the
years ended December 31, 1997, 1996 and 1995, respectively. In
addition, in 1995, the Company recognized an after-tax loss of
$4,497,000 on the disposal of discontinued life insurance operations
by Zenith. Dividends received by the Company from Zenith were
$6,574,000 for each of the years ended December 31, 1997, 1996 and
1995.
<PAGE>
44 RELIANCE GROUP HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements continued
<TABLE>
<CAPTION>
Summarized financial information for Zenith is as follows:
Year Ended December 31 1997 1996 1995
-----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
(In thousands, except per share amounts)
Revenues $600,480 $ 556,371 $ 519,020
Income from continuing operations before income taxes 43,478 57,117 29,422
Loss on disposal of discontinued life insurance operations - - (19,553)
Net income 28,100 37,600 6,600
Net income per diluted share 1.57 2.12 .36
December 31 1997 1996
-----------------------------------------------------------------------------------------------------------
(In thousands, except percentage of ownership)
Total assets $1,252,156 $1,242,724
Senior notes 74,474 74,353
Common shareholders' equity 361,866 337,503
Percentage of ownership 36.9% 37.4%
</TABLE>
The Company's equity in net income includes amortization of excess of
cost over fair value of net assets acquired. At December 31, 1997,
retained earnings (deficit) included undistributed net income of
$31,247,000 from Zenith.
NOTE 5 Premiums and Other Receivables
<TABLE>
<CAPTION>
Premiums and other receivables consisted of:
December 31 1997 1996
-----------------------------------------------------------------------------------------------------------
<S> <C> <C>
(In thousands)
Premiums receivable $1,284,034 $1,092,296
Investment income receivable 47,868 49,733
Accounts, notes and other receivables 128,524 80,887
------------------------
$1,460,426 $1,222,916
========================
</TABLE>
At December 31, 1997, substantially all receivables were due within
one year.
NOTE 6 Income Taxes
Provision for income taxes consisted of:
<TABLE>
<CAPTION>
Year Ended December 31 1997 1996 1995
-----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
(In thousands)
Current:
Federal $ 64,944 $ (6,313) $ 11,611
Foreign 8,327 7,888 6,830
--------------------------------------
73,271 1,575 18,441
Deferred federal 1,129 5,725 13,959
--------------------------------------
$ 74,400 $ 7,300 $ 32,400
======================================
</TABLE>
<PAGE>
RELIANCE GROUP HOLDINGS, INC. AND SUBSIDIARIES 45
Domestic and foreign income before income taxes and equity in investee
company is as follows:
<TABLE>
<CAPTION>
Year Ended December 31 1997 1996 1995
-----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
(In thousands)
Domestic $217,430 $ 24,062 $ 101,010
Foreign 23,791 22,537 19,514
-------------------------------------
$241,221 $ 46,599 $ 120,524
=====================================
</TABLE>
The reconciliation of taxes computed at the statutory rate of 35% to
the provision for income taxes is as follows:
<TABLE>
<CAPTION>
Year Ended December 31 1997 1996 1995
-----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
(In thousands)
Tax provision at statutory rate $ 84,427 $ 16,310 $ 42,183
Nontaxable investment income (15,228) (14,403) (13,405)
Amortization of excess of cost over fair
value of net assets acquired 3,150 3,150 3,150
Net increase in valuation allowance - 2,400 1,226
Other 2,051 (157) (754)
---------------------------------------
Provision for income taxes $ 74,400 $ 7,300 $ 32,400
======================================
</TABLE>
The tax effects of items comprising the Company's net deferred tax
asset are as follows:
<TABLE>
<CAPTION>
December 31 1997 1996
-----------------------------------------------------------------------------------------------------------
<S> <C> <C>
(In thousands)
Deferred tax assets:
Discounting of loss reserves $ 192,939 $ 194,957
Tax basis differential of subsidiary not
included in consolidated tax return - 111,815
Operating loss carryforwards of subsidiary not
included in consolidated tax return - 61,110
Unearned premium reserve 52,067 43,063
Accruals not currently deductible 42,142 57,021
Other 102,174 32,278
-----------------------
389,322 500,244
Deferred tax liabilities:
Deferred policy acquisition costs 87,000 75,062
Unrealized investment gains 152,324 106,299
Investment in investee company 23,728 21,098
Other 75,386 94,572
-----------------------
50,884 203,213
Valuation allowance (10,672) (169,215)
-----------------------
Net deferred tax asset $ 40,212 $ 33,998
=======================
</TABLE>
As a result of the sale of Prometheus, the Company's valuation
allowance was decreased, in 1997, by $158,543,000 relating to deferred
tax assets for which it was likely that tax benefits would not be
realized. For the years ended December 31, 1996 and 1995, the
Company's valuation allowance and income tax provision were increased
by $2,400,000 and $1,226,000 relating primarily to deferred tax assets
for which it is likely that tax benefits will not be realized.
The Company is seeking a redetermination in the U.S. Tax Court of
an asserted tax deficiency for the year ended December 31, 1980, as
set forth by the Commissioner of Internal Revenue in a Notice of
Deficiency dated June 27, 1994. See note 15 to the consolidated
financial statements.
<PAGE>
46 RELIANCE GROUP HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements continued
The Internal Revenue Service ("IRS") completed its examination of
the Company's 1986 through 1991 federal income tax returns and issued
a Revenue Agent's Report on August 19, 1997. A protest in response to
the Revenue Agent's Report was submitted on January 16, 1998 and the
Company does not believe it is probable that its tax liability, if
any, will have a material adverse effect on its consolidated financial
statements. The IRS is currently examining the Company's 1992 through
1994 federal income tax returns. While the outcome of the current
examination is uncertain, the Company does not believe it is probable
that its tax liability, if any, will have a material adverse effect on
its consolidated financial statements.
NOTE 7 Unpaid Claims and Related Expenses
The reconciliation of the beginning to ending liability for unpaid
claims and related expenses ("loss reserves") for the Company's
property and casualty insurance operations is as follows:
<TABLE>
<CAPTION>
December 31 1997 1996 1995
-----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
(In thousands)
Loss reserves, beginning of year $6,136,420 $5,764,352 $5,517,483
Less reinsurance recoverables 2,824,814 2,584,917 2,389,702
---------------------------------------
Net loss reserves, beginning of year 3,311,606 3,179,435 3,127,781
---------------------------------------
Provision for policy claims and related expenses:
Provision for insured events of the current year 1,299,066 1,211,672 1,163,447
Increase (decrease) in provision for insured
events of prior years (35,980) 138,665 38,512
---------------------------------------
Total provision 1,263,086 1,350,337 1,201,959
---------------------------------------
Payments for policy claims and related expenses:
Attributable to insured events of the current year 367,763 298,838 271,915
Attributable to insured events of prior years 963,135 926,996 868,622
---------------------------------------
Total payments 1,330,898 1,225,834 1,140,537
---------------------------------------
Foreign currency translation (1,476) 7,668 (9,768)
---------------------------------------
Net loss reserves, end of year 3,242,318 3,311,606 3,179,435
Plus reinsurance recoverables 3,427,190 2,824,814 2,584,917
----------------------------------------
Loss reserves, end of year $6,669,508 $6,136,420 $5,764,352
=======================================
</TABLE>
The provision for policy claims and related expenses for 1997 includes
favorable development in workers' compensation partially offset by
adverse development in the commercial automobile line. The redundancy
in workers' compensation is due, in part, to favorable development in
retrospectively rated policies, which was more than offset by a
corresponding reduction in premiums earned. The provision for insured
events of prior years for 1996 and 1995 included adverse development
related to asbestos-related and environmental pollution claims, which
primarily affected general liability, multiple peril and reinsurance
lines of business, and included a pretax charge of $134,000,000 in
1996 to increase net loss reserves for asbestos-related and
environmental pollution claims for business written in or before 1987.
The 1996 provision also included adverse development in the commercial
automobile line, offset by favorable development in workers'
compensation. The 1995 provision also included adverse development in
other general liability, commercial automobile and reinsurance lines,
partially offset by favorable development in workers' compensation.
<PAGE>
RELIANCE GROUP HOLDINGS, INC. AND SUBSIDIARIES 47
At December 31, 1997 and 1996, loss reserves include $380,900,000
and $396,700,000 relating to short-duration contracts which are
expected to have fixed, periodic payment patterns and have been
discounted to present values using statutory annual rates ranging from
31/2% to 6%.
The reconciliation of the beginning to ending net loss reserves for
business written in or before 1987 pertaining to asbestos-related and
environmental pollution claims is as follows:
<TABLE>
<CAPTION>
December 31 1997 1996 1995
-----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
(In thousands)
Net loss reserves, beginning of year $213,047 $101,008 $100,404
Provision for policy claims and related expenses - 135,801 23,547
Payments for policy claims and related expenses (20,114) (23,762) (22,943)
--------------------------------------
Net loss reserves, end of year $192,933 $213,047 $101,008
=====================================
</TABLE>
The 1996 provision for policy claims and related expenses included a
pretax charge of $134,000,000 to increase net loss reserves for
asbestos-related and environmental pollution claims for business
written in or before 1987. In 1996, the Company completed a study of
its asbestos-related and environmental pollution reserves. The study
entailed a detailed review of the Company's claims, analysis of new
industry data, review of policies and classes of business written by
the Company and industry at large, and new actuarial methodologies for
projecting ultimate losses based on payment patterns and claims
analyses.
Included in the December 31, 1997 net loss reserves for business
written in or before 1987 pertaining to asbestos-related and
environmental pollution claims are $69,097,000 of loss costs for
claims incurred but not reported, $43,942,000 of loss costs for
reported claims and $79,894,000 of related expenses.
For business written in or before 1987, the number of insureds with
asbestos-related and environmental pollution claims outstanding is as
follows:
<TABLE>
<CAPTION>
December 31 1997 1996
-----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Number of insureds with outstanding claims, beginning of year 402 447
Additional insureds with claims during the year 168 207
Insureds with closed or settled claims during the year (225) (252)
------------------
Number of insureds with outstanding claims, end of year 345 402
=================
</TABLE>
For business written in or before 1987, the average net paid loss for
asbestos-related and environmental pollution claims was $44,200 and
$50,200 for the years 1997 and 1996.
In addition, the Company currently underwrites policies with
environmental coverage, primarily on a claims made basis, and
underwrites policies covering asbestos removal. The net loss reserves
for these policies as of December 31, 1997, 1996 and 1995 were
$20,193,000, $16,554,000 and $15,829,000, respectively. The provisions
for these policy claims and related expenses for the years 1997, 1996
and 1995 were $6,758,000, $4,053,000 and $1,891,000, respectively, and
related payments were $3,119,000, $3,328,000 and $991,000,
respectively. Included in the December 31, 1997 net loss reserves for
these policies are $13,642,000 of loss costs for claims incurred but
not reported, $2,271,000 of loss costs for reported claims and
$4,280,000 of related expenses. The number of direct insureds with
outstanding claims related to these policies as of December 31, 1997
and 1996 were 167 and 86. Additional direct insureds with claims
reported during the years 1997 and 1996 were 155 and 44, and with
claims closed or settled during 1997 and 1996 were 74 and 46. The
average net paid loss for these claims was $24,000 and $56,800 for the
years 1997 and 1996.
<PAGE>
48 RELIANCE GROUP HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements continued
NOTE 8 Debentures, Notes, Term Loans and Short-Term Debt
Debentures and notes outstanding are as follows:
<TABLE>
<CAPTION>
December 31 1997 1996
-----------------------------------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C>
9% senior notes due 2000 $400,000 $400,000
9 3/4% senior subordinated debentures due 2003 250,000 250,000
7.866% senior reset notes due 2000 - 15,365
----------------------
$650,000 $665,365
======================
</TABLE>
At December 31, 1997, term loans and short-term debt aggregated
$253,083,000 and consisted of $246,419,000 of term loans which are
payable in varying amounts through 2015 with interest rates ranging
from 3.0% to 9.0% and $6,664,000 of short-term debt. The weighted
average interest rate on term loans and short-term debt was 6.2% and
6.0% at December 31, 1997 and 1996.
Maturities of term loans and short-term debt for each of the next
five years are as follows: $11,511,000 in 1998; $51,267,000 in 1999;
$163,807,000 in 2000; $2,007,000 in 2001; and $67,000 in 2002. In
addition, $400,000,000 of notes mature in the year 2000.
Reliance Financial Services Corporation ("Reliance Financial")
has a revolving credit facility and term loan agreement with various
banks ("Credit Facility"). On July 8, 1997, the Company increased term
loan borrowings by $25,000,000 to $187,500,000. The additional
borrowings were used to redeem all outstanding 7.866% senior reset
notes, due December 1, 2000. The outstanding principal amount of such
notes was $25,000,000, including $9,600,000 held by Reliance Insurance
Company, the principal subsidiary of Reliance Financial. The
redemption price was 100% of the principal amount of such notes plus
interest from June 1, 1997 to the redemption date.
The revolving credit facility provides for aggregate maximum
outstanding borrowings of $100,000,000. At Reliance Financial's
option, all borrowings under the revolving credit facility will bear
interest at a floating rate based on a bank reference rate (or, if
higher, the Federal Funds rate plus 1/2%) or at a rate based on the
Eurodollar rate. At December 31, 1997, borrowings aggregating
$25,000,000 were outstanding under this facility. All of the common
stock of Reliance Insurance Company has been pledged to secure the
Credit Facility.
The provisions of notes and debentures contain limitations on the
payment of dividends, including maintaining a minimum fixed charge
coverage ratio. At February 11, 1998, the Company could pay up to
$106,100,000 in dividends without violating the most restrictive
provisions. See note 10 to the consolidated financial statements.
NOTE 9 Reinsurance
In the normal course of business, the property and casualty insurance
companies assume and cede reinsurance on both a pro-rata and excess
basis. Reinsurance provides greater diversification of business and
limits the maximum net loss potential arising from large claims.
Although the ceding of reinsurance does not discharge an insurer from
its primary legal liability to a policyholder, the reinsuring company
assumes the related liability.
Amounts recoverable from reinsurers are estimated in a manner
consistent with the liability for unpaid claims and related expenses
associated with the reinsurance. Estimated amounts of reinsurance
recoverables are reported as assets in the accompanying consolidated
balance sheet. As of December 31, 1997 and 1996, reinsurance
recoverables include $719,784,000 and $596,743,000 of prepaid
reinsurance premiums which represents the portion of property and
casualty premiums ceded to reinsurers applicable to unearned premiums.
<PAGE>
RELIANCE GROUP HOLDINGS, INC. AND SUBSIDIARIES 49
The reconciliation of property and casualty insurance direct premiums
to net premiums is as follows:
<TABLE>
<CAPTION>
Year Ended December 31 1997 1996 1995
-----------------------------------------------------------------------------------------------------------
Premiums Premiums Premiums Premiums Premiums Premiums
Written Earned Written Earned Written Earned
-----------------------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Direct $ 3,428,059 $ 3,232,403 $ 3,070,944 $ 2,894,096 $ 2,748,439 $ 2,707,978
Assumed 494,140 447,924 329,318 356,489 325,226 350,636
Ceded (1,856,352) (1,733,311) (1,554,063) (1,449,731) (1,294,625) (1,284,023)
------------------------------------------------------------------------------------
Net premiums $ 2,065,847 $ 1,947,016 $ 1,846,199 $ 1,800,854 $ 1,779,040 $ 1,774,591
====================================================================================
</TABLE>
The reconciliation of property and casualty insurance gross policy
claims and settlement expenses to net policy claims and settlement
expenses is as follows:
<TABLE>
<CAPTION>
Year Ended December 31 1997 1996 1995
-----------------------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C>
Gross $ 2,562,423 $ 2,228,809 $ 1,956,055
Reinsurance recoveries (1,299,337) (878,472) (754,096)
------------------------------------------
Net policy claims and settlement expenses $ 1,263,086 $ 1,350,337 $ 1,201,959
==========================================
</TABLE>
For the year ended December 31, 1996, gross policy claims and
settlement expenses included a charge of $134,500,000 and net policy
claims and settlement expenses included a charge of $134,000,000 to
increase property and casualty insurance loss reserves for
asbestos-related and environmental pollution claims for business
written in or before 1987.
The Company holds substantial amounts of funds and letters of
credit as collateral pursuant to recoverables from unauthorized
reinsurers. The Company is not aware of any impairment of the
creditworthiness of any of its significant reinsurers.
Reliance Insurance Company's ten largest reinsurers, based on 1997
ceded premiums, are as follows:
--------------------------------------------------------------------
(In thousands)
American Re-Insurance Company $ 171,092
General Reinsurance Corporation 70,337
Hertz International Reinsurance Ltd. 60,393
Commercial Risk Re-Insurance Company 60,223
Kemper Reinsurance Company 58,554
Swiss Reinsurance America Corporation 57,006
Everest Reinsurance Company 56,346
Zurich Reinsurance (North America), Inc. 49,723
Employers Reinsurance Corporation 41,405
SCOR Reinsurance Company 38,405
NOTE 10 Dividends of Subsidiaries
The Company's principal sources of funds consist of dividends,
advances and net tax payments from its subsidiaries. The Credit
Facility of Reliance Financial requires, among other things, a minimum
net worth requirement and a limitation of indebtedness. At February
11, 1998, Reliance Financial could pay up to $563,100,000 in cash
dividends without violating the most restrictive provisions. Dividend
payments by Reliance Insurance Company, without prior regulatory
approval, are limited to the greater of 10% of the preceding year-end
policyholders' surplus or the preceding year's statutory net income,
but in no event to exceed the amount of unassigned funds. In
accordance with these regulatory restrictions, $130,100,000 is
available for the payment of dividends to Reliance Financial
<PAGE>
50 RELIANCE GROUP HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements continued
in 1998, subject to the broad discretionary powers of insurance
regulatory authorities to further limit dividend payments of insurance
companies. On March 5, 1998, Reliance Insurance Company obtained the
approval of the Pennsylvania Insurance Department to pay an
extraordinary dividend in the amount of an additional $135,000,000,
representing a portion of the gain from the sale of the title
insurance operations. The Company plans to use the funds provided by
the dividend to purchase, during 1998, approximately $125,000,000 of
its outstanding debt.
NOTE 11 Stock Plans
Stock Options
The Company's stock option plans (the "Plans") provide for the
granting of incentive stock options and nonstatutory stock options to
officers, non-employee directors and key employees of the Company.
Under the terms of the Plans, options have a maximum term of 10 years
from the date of grant. At December 31, 1997, there were 3,152,400
options available for future grants.
<TABLE>
<CAPTION>
A summary of the Plans' activity is as follows:
Year Ended December 31 1997 1996 1995
----------------------------------------------------------------------------------------------------------------
Weighted Weighted Weighted
Number of Average Number of Average Number of Average
Shares Exercise Price Shares Exercise Price Shares Exercise Price
----------------------------------------------------------------------------------------------------------------
(Shares in thousands)
<S> <C> <C> <C> <C> <C> <C>
Balance, beginning
of year 10,905 $ 5.40 8,462 $4.48 8,129 $4.28
Granted 4,460 13.40 2,839 8.03 789 6.26
Exercised 573 4.28 292 4.21 313 3.83
Cancelled 125 6.71 104 5.52 143 4.57
------------------------------------------------------------------------------------
Balance, end of year 14,667 $ 7.87 10,905 $5.40 8,462 $4.48
====================================================================================
Exercisable portion 6,187 $ 4.19 6,196 $4.04 4,624 $3.96
====================================================================================
Weighted average
fair value of
options granted
during the year $ 4.53 $2.08 $1.64
====== ===== =====
</TABLE>
Summarized information about stock options outstanding at December 31,
1997 is as follows:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
---------------------------------------------------------------------------
Number of Weighted Average Weighted Number of Weighted
Range of Shares Remaining Average Shares Average
Exercise Prices Outstanding Contractual Life Exercise Price Exercisable Exercise Price
----------------------------------------------------------------------------------------------------------------
(Shares in thousands)
<S> <C> <C> <C> <C> <C>
$3.825 to $5.75 5,560 4.46 years $ 3.94 5,319 $ 3.89
$5.875 to $8.75 4,647 7.80 7.25 868 6.03
$11.00 to $14.375 4,460 9.80 13.40 - -
---------------------------------------------------------------------------
$3.825 to $14.375 14,667 7.13 years $ 7.87 6,187 $ 4.19
===========================================================================
</TABLE>
Employee Stock Purchase Plan
In 1997, the Company initiated an Employee Stock Purchase Plan
("ESPP") which enables eligible employees of the Company to subscribe
for shares of common stock on an annual offering date at a purchase
price which is the lesser of 85% of the fair market value of the
shares on the first day or the last day of the annual period. Employee
contributions to the ESPP were $2,388,000 in 1997. Pursuant to the
ESPP, 237,000 shares were sold to employees in January 1998 and
10,000,000 shares are available for future sales.
The Company has elected to follow APB 25 in accounting for its
Plans and ESPP. In applying APB 25 no compensation cost has been
recognized.
<PAGE>
RELIANCE GROUP HOLDINGS, INC. AND SUBSIDIARIES 51
Pro forma information regarding net income and net income per share is
required by FAS 123, and has been determined as if the Company had
accounted for its Plans and ESPP under the fair value based method of
FAS 123. The fair value of stock options granted under the Company's
Plans was estimated on the grant dates using the Black-Scholes
option-pricing model. The following weighted average assumptions were
used for grants in 1997, 1996 and 1995, respectively: dividend yields
of 2.4%, 4.0% and 5.1%, expected volatility of 30.2%, 27.3% and 33.7%,
risk-free interest rates of 6.1%, 6.4% and 6.5% and an expected life
of 7 years for all three years. The fair value of the shares purchased
under the ESPP was calculated as if the shares were "look back
options" as required by FAS 123.
Pro forma information regarding net income and diluted net income per
share is as follows:
<TABLE>
<CAPTION>
Year Ended December 31 1997 1996 1995
-----------------------------------------------------------------------------------------------------------
(In thousands, except per share amounts)
<S> <C> <C> <C>
Net income as reported $ 229,419 $ 48,207 $ 88,056
pro forma 226,814 47,724 87,956
Diluted net income per share as reported 1.94 .41 .74
pro forma 1.92 .41 .74
</TABLE>
NOTE 12 Policy Acquisition Costs and Other Insurance Expenses
<TABLE>
<CAPTION>
Year Ended December 31 1997 1996 1995
------------------------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C>
Policy acquisition costs amortized during the year $ 487,432 $ 414,636 $ 411,979
----------------------------------------
Other insurance expenses:
Salaries and commissions 696,747 630,777 563,680
Taxes, other than income taxes 38,689 41,564 48,603
Rent 61,001 61,305 55,848
Policyholders' dividends 4,224 3,158 7,065
Other 208,890 175,866 150,967
----------------------------------------
1,009,551 912,670 826,163
----------------------------------------
$1,496,983 $1,327,306 $1,238,142
========================================
</TABLE>
NOTE 13 Postretirement Benefit Plans
Retirement benefits under the Company's noncontributory trusteed
defined benefit pension plans are paid to eligible employees based
primarily on years of service and compensation. Plan assets
principally consist of corporate and government debt securities and
1,116,200 shares of the Company's common stock.
Pension cost includes the following components(1):
<TABLE>
<CAPTION>
Year Ended December 31 1997 1996 1995
------------------------------------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C>
Service cost - benefits earned during the period $ 6,784 $ 7,201 $ 5,176
Interest cost on projected benefit obligation 12,743 12,273 11,253
Actual return on plan assets (23,487) (7,574) (28,210)
Net amortization and deferral 6,892 (8,475) 14,803
------------------------------------------
$ 2,932 $ 3,425 $ 3,022
==========================================
(1) Excludes pension cost for the Company's title insurance
operations which was $2,852,000, $2,850,000 and $2,639,000 for
1997, 1996 and 1995, respectively.
<PAGE>
52 Reliance Group Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements continued
A reconciliation of the funded status of the plans with the accrued
pension cost included in accounts payable and accrued expenses is as
follows:
</TABLE>
<TABLE>
<CAPTION>
December 31 1997 1996
-----------------------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C>
Actuarial present value of benefit obligation:
Vested $ 162,071 $ 140,166
Nonvested 5,825 4,191
-------------------------
Accumulated benefit obligation 167,896 144,357
Effect of anticipated future compensation levels 28,821 23,166
-------------------------
Projected benefit obligation 196,717 167,523
Plan assets at market value (167,698) (150,640)
-------------------------
Projected benefit obligation in excess of plan assets 29,019 16,883
Unrecognized net asset at date of adoption 4,207 5,517
Unrecognized net loss (19,899) (10,908)
--------------------------
Accrued pension cost $ 13,327 $ 11,492
==========================
</TABLE>
Contributions under the Company's noncontributory trusteed defined
benefit pension plans were $1,097,000 and $2,550,000 in 1997 and 1996.
No contributions were made during 1995.
The assumptions used to measure the projected benefit obligation
at December 31, 1997 and 1996 include a discount rate of 7.25% and
8.0% and a weighted average rate of compensation increase of 4.0% for
both 1997 and 1996. The expected long-term investment rate of return
on plan assets for the years ended December 31, 1997 and 1996 was
10.0%.
Contributions under the Company's defined contribution plans were
$7,535,000, $6,102,000 and $4,670,000 in 1997, 1996 and 1995,
respectively, and were based on a formula specified in the plan
agreements.
NOTE 14 Statutory Information
Statutory net income is as follows:
<TABLE>
<CAPTION>
Year Ended December 31 1997 1996 1995
------------------------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C>
Property and casualty insurance operations $95,111 $121,665 $ 225,989
Title insurance operations 49,481 40,094 12,439
</TABLE>
Statutory policyholders' surplus at December 31, 1997 and 1996 was
$1,302,490,000 and $1,187,056,000 which reflects a reduction in
statutory loss reserves of $79,400,000 and $93,700,000, respectively,
representing discounts of workers' compensation reserves in excess of
GAAP discounts.
NOTE 15 Contingencies and Commitments
Legal Proceedings
The Company and its subsidiaries are involved in certain litigation
arising in the course of their businesses, some of which involve
claims of substantial amounts. Although the ultimate outcome of these
matters cannot be ascertained at this time, and the results of legal
proceedings cannot be predicted with certainty, the Company is
contesting the allegations of the complaints in each pending action
against it and believes, based on current knowledge and after
consultation with counsel, that the resolution of these matters will
not have a material adverse effect on the consolidated financial
statements of the Company. In addition, the Company is subject to the
litigation set forth below.
The Company is seeking a redetermination in the U.S. Tax Court of
an asserted tax deficiency for the year ended December 31, 1980, as
set forth by the Commissioner of Internal Revenue in a Notice
<PAGE>
RELIANCE GROUP HOLDINGS, INC. AND SUBSIDIARIES 53
of Deficiency dated June 27, 1994. The Company intends to pursue the
action vigorously. The IRS seeks to disallow investment tax credits of
approximately $36,500,000 with respect to intermodal cargo containers
leased to others by a former subsidiary of the Company. The Company
estimates that, if the IRS were to prevail, the deficiency would
result in an increase in tax of approximately $31,000,000 for 1980,
plus interest at the statutorily prescribed rates for the periods
since that year. On January 11, 1995, the U.S. Tax Court handed down a
decision in Norfolk Southern Corp. v. Commissioner, a case involving a
taxpayer, which, like the Company, had claimed investment tax credits
in connection with the leasing of intermodal cargo containers. In the
decision, which is the first pronouncement by the courts on this
issue, the Tax Court articulated a standard, different from that
proposed by the IRS, which, if applied to the Company, would result in
the disallowance of a substantial percentage (although significantly
less than that sought by the IRS) of the investment tax credits
claimed by the Company. The Company believes that it has appropriately
provided for this matter in light of its exposure in the event a
standard such as the one articulated in Norfolk Southern is applied to
the Company's facts and circumstances. On February 22, 1995, the Tax
Court granted the joint motion of the Company and the Commissioner to
postpone the trial of this matter until after the resolution of
appellate proceedings in Norfolk Southern. The Company does not
believe that it is probable that its liability, if any, in respect of
this matter will have a material adverse effect on the Company's
financial position, although there is no assurance that the
disposition of this matter will not materially affect the Company's
results of operations for any period.
The Company is also subject to the following litigation set forth
below.
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 and Missouri. The Georgia lawsuit was dismissed without
prejudice in February 1998 on the ground that the plaintiff was not
licensed to do business in Georgia; the plaintiff's appeal from that
ruling is pending. The other 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.
Cancellation of Partnership Guarantee
Certain current and former senior executives of the Company are
limited partners in a partnership which owns various real estate
properties. The general partner of the partnership was, until late
June 1997, an indirect subsidiary of Reliance Insurance Company. At
June 15, 1997, the partnership's total outstanding debt was
$174,600,000, including $12,700,000 borrowed from the Company under a
line of credit. As of June 15, 1997, $38,000,000 of that indebtedness
was guaranteed by Reliance Financial. In June 1997, investors
unaffiliated with the Company acquired all of the common stock of the
indirect subsidiary, and Reliance Insurance Company acquired
$27,600,000 face amount of its preferred stock. Subsequently, the
former indirect subsidiary sold to Reliance Insurance Company
$11,000,000 in aggregate principal amount of senior notes, due 2010,
and to the Company
<PAGE>
54 RELIANCE GROUP HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements continued
$18,000,000 in aggregate principal amount of subordinated notes, due
2020, the line of credit from the Company to the partnership was
repaid in full and the Reliance Financial guarantee was terminated.
Lease Commitments
The Company and its subsidiaries lease certain office facilities and
equipment under lease agreements that expire at various dates through
2007. Rent expense for the years ended December 31, 1997, 1996 and
1995 was $100,900,000, $97,300,000 and $95,900,000, respectively.
At December 31, 1997, future net minimum rental payments required
under noncancelable leases (excluding the title insurance operations)
are as follows:
------------------------------------------------------------------
(In thousands)
1998 $ 49,146
1999 44,348
2000 26,673
2001 17,285
2002 13,192
2003 and thereafter 21,380
---------
$ 172,024
=========
NOTE 16 Per Share Information
The basic and diluted per share reconciliations of income from
continuing operations to net income is as follows:
<TABLE>
<CAPTION>
Year Ended December 31 1997 1996 1995
------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Basic income per share:
Income from continuing operations $1.52 $.42 $.85
Gain on disposal of discontinued operation .60 - -
Litigation settlement of discontinued operation (.06) - -
Loss on disposal of discontinued operations of investee company - - (.04)
--------------------------------
Income before extraordinary item and cumulative
effect of accounting change 2.06 - .81
Extraordinary item - early extinguishment of debt(1) - - (.06)
Cumulative effect of change in accounting for process
reengineering costs (.06) - -
--------------------------------
Net income $2.00 $.42 $.75
================================
Diluted income per share:
Income from continuing operations $1.47 $.41 $.83
Gain on disposal of discontinued operation .58 - -
Litigation settlement of discontinued operation (.06) - -
Loss on disposal of discontinued operations of investee company - - (.04)
--------------------------------
Income before extraordinary item and cumulative
effect of accounting change 1.99 - .79
Extraordinary item - early extinguishment of debt(1) - - (.05)
Cumulative effect of change in accounting for process
reengineering costs (.05) - -
--------------------------------
Net income $1.94 $.41 $.74
================================
</TABLE>
(1) In 1995, all of the outstanding shares of redeemable preferred
stock of Reliance Insurance Company, which had a carrying value
of $20,740,000, were redeemed. The cost of the early redemption
in excess of the carrying value of the preferred stock,
$3,029,000 ("Redemption Premium"), was charged directly to
shareholders' equity. For purposes of computing net income per
share in 1995, the Redemption Premium was deducted from net
income available to common shareholders' and classified as an
extraordinary loss. This reduced both basic and diluted net
income per share by $.03.
<PAGE>
RELIANCE GROUP HOLDINGS, INC. AND SUBSIDIARIES 55
The reconciliation of the basic to diluted per share information is as
follows:
<TABLE>
<CAPTION>
Year Ended December 31 1997 1996 1995
----------------------------------------------------------------------------------------------------------------
Per Share Per Share Per Share
Income Shares Amount Income Shares Amount Income Shares Amount
----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
(In thousands, except
per share amounts)
Basic income
per share:
Income from
continuing
operations $174,496 114,651 $1.52 $48,207 113,838 $.42 $95,916 113,214 $.85
===== ==== ====
Effect of dilutive
securities:
Options - 3,712 - 2,443 - 1,840
------------------ ---------------- -----------------
Diluted income
per share:
Income from
continuing
operations $174,496 118,363 $1.47 $48,207 116,281 $.41 $95,916 115,054 $.83
=========================================================================================
</TABLE>
Options to purchase 2,000,000, 134,000 and 100,000 shares of common
stock were not included in the computation of diluted income per share
for the years 1997, 1996 and 1995, respectively, since the options'
exercise price was greater than the average market price of the common
shares.
<PAGE>
56 RELIANCE GROUP HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements continued
NOTE 17 Business Segment Information
<TABLE>
<CAPTION>
Year Ended December 31 1997 1996 1995
----------------------------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C>
Revenues:
Property and casualty insurance
Premiums earned $ 1,947,016 $ 1,800,854 $1,774,591
Net investment income 263,981 257,133 247,343
Gain on sales of investments 71,501 49,264 27,381
----------------------------------------
2,282,498 2,107,251 2,049,315
----------------------------------------
Title insurance
Premiums earned 863,746 780,157 671,947
Net investment income 30,990 30,455 27,946
Gain on sales of investments 1,596 346 1,729
----------------------------------------
896,332 810,958 701,622
----------------------------------------
Other 263,806 172,378 155,050
----------------------------------------
$ 3,442,636 $ 3,090,587 $2,905,987
========================================
Income before income taxes and equity in investee company:
Property and casualty insurance
Underwriting(1) $ (31,722) $ (172,387) $ (45,644)
Net investment income 263,981 257,133 247,343
Gain on sales of investments 71,501 49,264 27,381
----------------------------------------
303,760 134,010 229,080
----------------------------------------
Title insurance 64,963 38,580 14,012
----------------------------------------
Other (127,502) (125,991) (122,568)
----------------------------------------
$ 241,221 $ 46,599 $ 120,524
========================================
Identifiable assets at year-end:
Property and casualty insurance $10,639,179 $ 9,490,869 $8,982,897
Net assets of title insurance operations 288,619 282,115 277,939
Other 404,688 370,708 351,972
----------------------------------------
$11,332,486 $10,143,692 $9,612,808
========================================
</TABLE>
(1) The 1996 results included a charge of $134,000,000 to increase
net loss reserves for asbestos-related and environmental
pollution claims for business written in or before 1987.
On February 27, 1998, the Company completed the sale of its title
insurance operations to LandAmerica. See note 2 to the consolidated
financial statements.
Income before income taxes and equity in investee company
relating to property and casualty insurance underwriting has been
reduced by policyholders' dividends and other income and expense.
Income before income taxes and equity in investee company by segment
is before allocation of corporate overhead and corporate interest
expense, which relates primarily to the Company and its financing
subsidiary. Corporate overhead, corporate interest expense and the
pretax results of RCG International, Inc. (a subsidiary of the
property and casualty insurance operations) are included in Other.
Identifiable assets by industry segment are those assets which
are used in the Company's operations in each segment.
<PAGE>
RELIANCE GROUP HOLDINGS, INC. AND SUBSIDIARIES 57
NOTE 18 Quarterly Financial Data (Unaudited)
<TABLE>
<CAPTION>
1997 Quarter
------------------------------------------------------------------------------------------------------------
First Second Third Fourth
------------------------------------------------------------------------------------------------------------
(In thousands, except per share amounts)
<S> <C> <C> <C> <C>
Revenues:
Premiums earned $642,195 $689,929 $702,703 $775,935
Net investment income 74,279 70,644 73,571 76,477
Gain on sales of investments 15,304 13,431 36,070 8,292
Other 50,167 65,558 68,901 79,180
----------------------------------------------------
$781,945 $839,562 $881,245 $939,884
====================================================
Income from continuing operations $ 35,886 $ 39,562 $ 57,316 $ 41,732
Gain on disposal of discontinued operation - - - 68,865
Litigation settlement of discontinued operation (7,500) - - -
----------------------------------------------------
Income before cumulative effect
of accounting change 28,386 39,562 57,316 110,597
Cumulative effect of change in accounting for
process reengineering costs - - - (6,442)
----------------------------------------------------
Net income $ 28,386 $ 39,562 $ 57,316 $104,155
====================================================
Diluted per share information:
Income from continuing operations $ .30 $ .33 $ .48 $ .35
Gain on disposal of discontinued operation - - - .58
Litigation settlement of discontinued operation (.06) - - -
----------------------------------------------------
Income before cumulative effect
of accounting change .24 .33 .48 .93
Cumulative effect of change in accounting for
process reengineering costs - - - (.05)
-----------------------------------------------------
Net income $ .24 $ .33 $ .48 $ .88
====================================================
Basic per share information:
Net income $ .25 $ .35 $ .50 $ .91
====================================================
</TABLE>
<TABLE>
<CAPTION>
1996 Quarter
------------------------------------------------------------------------------------------------------------
First Second Third Fourth
------------------------------------------------------------------------------------------------------------
(In thousands, except per share amounts)
<S> <C> <C> <C> <C>
Revenues:
Premiums earned $609,867 $636,752 $661,980 $672,412
Net investment income 70,717 70,443 72,040 74,388
Gain on sales of investments 4,468 18,936 16,542 9,664
Other 38,734 41,765 43,548 48,331
----------------------------------------------------
$723,786 $767,896 $794,110 $804,795
====================================================
Net income (loss)(1) $ 22,512 $ (47,701) $ 37,651 $ 35,745
====================================================
Diluted per share information:
Net income (loss)(1) $.19 $(.42) $.32 $.31
====================================================
Basic per share information:
Net income (loss)(1) $.20 $(.42) $.33 $.31
====================================================
</TABLE>
(1) Includes a second quarter after-tax charge of $87,100,000, or
$.75 per basic and diluted share, to increase net loss reserves
for asbestos-related and environmental pollution claims for
business written in or before 1987.
<PAGE>
58 RELIANCE GROUP HOLDINGS, INC. AND SUBSIDIARIES
Independent Auditors' Report
Board of Directors and Shareholders
Reliance Group Holdings, Inc.
New York, New York
We have audited the accompanying consolidated balance sheets of
Reliance Group Holdings, Inc. and subsidiaries as of December 31, 1997
and 1996, and the related statements of income, changes in
shareholders' equity and cash flows for each of the three years in the
period ended December 31, 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly,
in all material respects, the financial position of Reliance Group
Holdings, Inc. and subsidiaries at December 31, 1997 and 1996, and the
results of their operations and their cash flows for each of the three
years in the period ended December 31, 1997 in conformity with
generally accepted accounting principles.
As discussed in note 1 to the consolidated financial statements, in
1997 the Company changed its method of accounting for process
reengineering costs to conform with Emerging Issues Task Force Issue
No. 97-13, "Accounting for Costs Incurred in Connection with a
Consulting Contract or an Internal Project That Combines Business
Process Reengineering and Information Technology Transformation."
/s/ Deloitte & Touche LLP
New York, New York
February 13, 1998, except as to notes 1
and 2, as to which the date is
February 27, 1998 and note 10, as to
which the date is March 5, 1998
<PAGE>
RELIANCE GROUP HOLDINGS, INC. AND SUBSIDIARIES 59
Report of Management
Scope of Responsibility
Management is responsible for the financial information included in
this annual report and for ascertaining that such information presents
fairly the financial position and operating results of the Company.
The accompanying consolidated financial statements have been prepared
in conformity with generally accepted accounting principles. Such
statements include informed estimates and judgments of management for
those transactions that are not yet complete or for which the ultimate
effects cannot be precisely determined. Financial information
presented elsewhere in this annual report is consistent with that in
the financial statements.
Internal Controls
The Company maintains a system of internal accounting controls
designed to provide reasonable assurance that assets are safeguarded
against losses from unauthorized use or disposition, that transactions
are executed in accordance with management's authorization and are
recorded properly. Qualified personnel throughout the organization
maintain and monitor these internal accounting controls on an ongoing
basis. In addition, the Company's Internal Audit Department
systematically reviews these controls, evaluates their adequacy and
effectiveness, and reports thereon.
Independent Auditors
The Company engages Deloitte & Touche LLP as independent auditors to
audit its financial statements and express their opinion thereon. They
have full access to each member of management in conducting their
audits. Such audits are conducted in accordance with generally
accepted auditing standards and include a review and evaluation of the
system of internal accounting controls, tests of the accounting
records and other auditing procedures they consider necessary to
express their opinion on the consolidated financial statements.
Audit Committee
The Audit Committee of the Board of Directors is comprised solely of
non-employee outside directors, and is responsible for overseeing and
monitoring the quality of the Company's accounting practices and
internal controls. The Committee meets regularly with management, the
internal auditors and the independent auditors to review the
accounting practices employed by the Company and to discuss auditing,
internal control and financial reporting matters. Both the internal
and independent auditors have unrestricted access to the Audit
Committee, without members of management present.
Saul P. Steinberg
Chairman of the Board and
Chief Executive Officer
George E. Bello
Executive Vice President
and Controller
<PAGE>
60 RELIANCE GROUP HOLDINGS, INC. AND SUBSIDIARIES
Market and Dividend Information for Common Stock
The Company's common stock, $.10 par value, is traded on the New York
Stock Exchange and the Pacific Exchange, Inc. under the symbol "REL".
As of March 1, 1998, there were approximately 2,300 holders of record
of the Company's common stock. The high and low sales prices of the
common stock, as reported by the New York Stock Exchange, are as
follows:
<TABLE>
<CAPTION>
1997 1996
---------------------------------------------------------------------------------------------------------------
Quarter High Low High Low
---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
First 12 1/4 8 3/4 8 3/4 7 1/2
Second 12 3/4 10 1/8 8 3/4 7 1/8
Third 14 7/16 11 5/8 8 1/8 6 1/2
Fourth 15 1/8 12 1/16 9 1/8 7 5/8
</TABLE>
Cash dividends for each share of the Company's common stock were $.08
for each quarter in 1997 and 1996.
The provisions of notes and debentures of the Company contain
limitations on the payment of dividends, including maintaining a
minimum fixed charge coverage ratio. At February 11, 1998, the Company
could pay up to $106,100,000 in dividends without violating the most
restrictive of these provisions. As a holding company, the Company is
dependent upon dividends, advances and net tax payments from its
wholly-owned subsidiaries to meet its debt service obligations, to pay
its expenses and to pay dividends to its shareholders. In addition to
the terms of bank covenants limiting the payment of dividends by
Reliance Financial, dividends from the Company's principal operating
subsidiaries are subject to regulatory limitations.
<PAGE>
Reliance Group Holdings, Inc. and Subsidiaries 61
Directors and Officers
Directors
George R.Baker(2),(5),(6),(7)
Corporate Director/Advisor
George E. Bello(3)
Executive Vice President
and Controller
Reliance Group Holdings, Inc.
Dennis A. Busti
President and
Chief Executive Officer
Reliance National Insurance
Company
Lowell C. Freiberg(3)
Senior Vice President and
Chief Financial Officer
Reliance Group Holdings, Inc.
Dr. Thomas P. Gerrity(2),(7)
Dean of the Wharton School
University of Pennsylvania
Jewell Jackson McCabe(3),(4),(5),(6)
President, Jewell Jackson
McCabe Associates
Irving Schneider(2),(6)
Co-Chairman and
Chief Operations Officer
Helmsley-Spear, Inc.
Bernard L. Schwartz(1)
Chairman, President
& CEO of Loral Space
& Communications Ltd.
and Chairman & CEO of
Globalstar
Richard E. Snyder(3),(7)
Chairman and
Chief Executive Officer
Golden Books Family
Entertainment, Inc.
Robert M. Steinberg(1),(4)
President and
Chief Operating Officer
Reliance Group Holdings, Inc.
Saul P. Steinberg(1),(4)
Chairman of the Board and
Chief Executive Officer
Reliance Group Holdings, Inc.
James E. Yacobucci
Senior Vice President
Investments
Reliance Group Holdings, Inc.
(1) Executive Committee
(2) Audit Committee
(3) Finance Committee
(4) Regular Compensation Committee
(5) Special Compensation Committee
(6) Stock Option Committee
(7) Nominating Committee
Officers
Saul P. Steinberg
Chairman of the Board and
Chief Executive Officer
Robert M. Steinberg
President and
Chief Operating Officer
George E. Bello
Executive Vice President
and Controller
Lowell C. Freiberg
Senior Vice President and
Chief Financial Officer
Dennis J. O'Leary
Senior Vice President
Taxes
Philip S. Sherman
Senior Vice President and
Group Controller
Bruce L. Sokoloff
Senior Vice President
Administration
Howard E. Steinberg
Senior Vice President,
General Counsel and
Corporate Secretary
James E. Yacobucci
Senior Vice President
Investments
Albert A. Benchimol
Vice President and
Treasurer
Eilene S. Bloom
Vice President
Administrative Services
Thomas G. Butler
Vice President
Taxes
Andrew B. Donnellan, Jr.
Vice President and
Chief Litigation Counsel
David F. Noyes
Vice President and
Chief Credit Officer
Steven A. Rautenberg
Vice President
Communications
Joel H. Rothwax
Vice President
Human Resources
Thomas J. Sanders
Vice President and
Assistant Controller
Paul W. Zeller
Vice President,
Deputy General Counsel
and Assistant Secretary
Officers of Operating Units
Reliance Insurance Group
Robert M. Steinberg
Chairman and
Chief Executive Officer
Jerome H. Carr
Senior Vice President and
Chief Financial Officer
Kenneth R. Frohlich
Senior Vice President and
Chief Actuarial Officer
Linda S. Kaiser
Senior Vice President,
General Counsel and Secretary
Property and Casualty Insurance
Dennis A. Busti
President and
Chief Executive Officer
Reliance National Insurance Company
Robert C. Olsman
President and
Chief Operating Officer
Reliance Insurance Company
George H. Roberts
President
Reliance Reinsurance Corp.
C. Brian Schmalz
President and
Chief Executive Officer
Reliance Surety Company
RCG Information Technology
Robert P. Buttacavoli
President and
Chief Executive Officer
RCG Information Technology, Inc.
Reliance Development Group
Henry A. Lambert
President and
Chief Executive Officer
Reliance Development Group, Inc.
<PAGE>
62 Reliance Group Holdings, Inc. and Subsidiaries
Corporate Data
Corporate Offices
Reliance Group Holdings, Inc.
Park Avenue Plaza
55 East 52nd Street
New York, NY 10055
(212) 909-1100
FAX (212) 909-1864
Common Stock Transfer Agent
Chase Mellon Shareholder Services, L.L.C.
Shareholder Relations
P. O. Box 3315
South Hackensack, NJ 07606
Independent Auditors
Deloitte & Touche LLP
New York, NY
Annual Meeting
The annual meeting of shareholders
of Reliance Group Holdings, Inc.
will be held on Thursday, May 14, 1998
at 11:00 A.M. at the
corporate headquarters of
Reliance Insurance Group
located at 3 Parkway, Philadelphia, PA
Form 10-K
A copy of the Company's Annual Report on Form 10-K to the Securities and
Exchange Commission will be furnished to any security holder upon written
request to Corporate Communications, Reliance Group Holdings, Inc., 55 East 52nd
Street, New York, NY 10055. This Report can also be obtained by calling (888)
REL-FACT or by visiting our Internet web site at http://www.rgh.com.
- --------------------------------------------------------------------------------
Listed Securities
Unless otherwise indicated, securities
are listed on the New York Stock Exchange.
Reliance Group Holdings, Inc.
Common Stock (Symbol: REL; New York Stock Exchange and
Pacific Exchange)
9% Senior Notes, due 2000
9 3/4% Senior Subordinated Debentures, due 2003
- --------------------------------------------------------------------------------
Reliance Group Holdings, Inc. quarterly results, as well as
Annual Reports on Form 10-K, Form 10-Q, Annual Reports
to shareholders, dividend declarations and other corporate information
can be obtained by calling (888) REL-FACT or by visiting our
Internet web site at http://www.rgh.com.
(Recycled Logo) The text of this annual report is printed on recycled paper
<PAGE>
Exhibit 21.1
Set forth below is a list of subsidiaries of the Registrant. Omitted from
the following list are the names of particular subsidiaries which, when
considered in the aggregate as a single subsidiary, do not constitute a
significant subsidiary. Subsidiaries of subsidiaries are indented.
Jurisdiction
of
Name Incorporation
- ---- -------------
..Reliance Financial Services Corporation Delaware
....Reliance Insurance Group, Inc. Delaware
......Reliance Corporate Services Inc. Delaware
....Reliance Insurance Company Pennsylvania
SEE ANNEX 1 FOR RELIANCE INSURANCE SUBSIDIARIES
..Reliance Development Group, Inc. Delaware
SEE ANNEX 2 FOR REAL ESTATE SUBSIDIARIES
..Convenience & Safety Corporation Delaware
..Leasco Intercontinental N.V. Neth. Antilles
..Reliance Protective Services, Inc. Delaware
..Reliance General Services, Inc. Delaware
<PAGE>
ANNEX 1 - INSURANCE SUBSIDIARIES
Jurisdiction
of
Name Incorporation
- ---- -------------
Reliance Insurance Company Pennsylvania
..Cananwill, Ltd. Bermuda
..Careways, Inc. Delaware
..Diamond Insurance Services, Inc. Delaware
..Flynns Crossing Development Corporation Virginia
....Flynns Crossing, L.P. Virginia
..Garnet Company Delaware
..IAGM Corporation New York
..LHIW Insurance Company Pennsylvania
..Marketing Management, Inc. Delaware
..Petroleum Interests, Inc. Delaware
..Platinum Investors, Inc. Delaware
..Regent International Insurance Company, Ltd. Bermuda
..Reliance Consumer Services, Inc. Texas
..Reliance Custom Underwriting Facility, Inc. Pennsylvania
..Reliance Development Company, Inc. of Tucson Delaware
....Reliance Centro Limited Partnership Arizona
..Reliance Development Pueblo Parking, Inc. Arizona
....Reliance Pueblo Limited Partnership Arizona
..Reliance Insurance Companies Foundation Pennsylvania
..Reliance Insurance Company of California California
..Reliance Insurance Company of Illinois Illinois
..Reliance Insurance Group Brokerage
Division, Inc. Pennsylvania
..Reliance Life Companies Pennsylvania
..Reliance Lloyds Texas
..Reliance National Asia Re Pte Ltd. Singapore
..Reliance National (Barbados) Insurance, Ltd. Barbados
..Reliance National Compania Argentina
De Seguros S.A. Argentina
..Reliance National Indemnity Company Wisconsin
..Reliance National Insurance Company Delaware
....Blackmoor Group, Inc. New York
......Waverly Insurance Agency, Inc. New York
....Reliance National Risk Services, Inc. New York
....Seguros Renamex Mexico
..Reliance National Insurance Company of New York New York
....Reliance Direct Insurance Company Pennsylvania
..Reliance National Risk Specialists, Inc. Pennsylvania
..Reliance National (U.K.) Ltd. England
....Reliance National Insurance Company
(Europe) Ltd. England
<PAGE>
Jurisdiction
of
Name Incorporation
- ---- -------------
..Reliance Reinsurance Company Delaware
..Reliance Reinsurance Corp. Pennsylvania
..Reliance Servicios Y Comissiones Mexico
..Reliance Special Risk, Inc. Pennsylvania
....Reliance Specialty Programs, Inc. Pennsylvania
..Reliance Surety Company Delaware
..Reliance Surety Managers, Inc. Pennsylvania
..Reliance USA Insurance Company Pennsylvania
..Reliant Insurance Corp. Delaware
..Sterling Administrative Services, Inc. Pennsylvania
..Union International Insurance Company Bermuda
..United Pacific Insurance Company Pennsylvania
....Uni-Pac Corporation Washington
......100 Bellevue Parkway Partners, L.P. Delaware
......Three Parkway Partners, L.P. Pennsylvania
..United Pacific Insurance Company of New York New York
..RCG International, Inc. Delaware
....RCG/Asbach, Inc. Delaware
....RCG Information Technology, Inc. New Jersey
......RCG IT Corp. Delaware
........Century Conversion Software, Inc. Delaware
........Quintic Systems, Inc. Delaware
......Integrated Systems Resources, Inc. Connecticut
....RCG-Moody International Limited England
......AOQC Moody International BV England
......AOQC Moody CERT GmbH Germany
......AOQC Moody International SRL Italy
......AOQC Moody International Ltd. (U.K.) England
........AOQC Moody International Ltd. (Japan) Japan
......ICSB B.V. Holland
........ICSB G.m.b.H. Germany
........ICSB Ltd. Hong Kong
........I.C.S.B. Sarl France
........International Container Survey
Bureau (UK) Ltd. England
......Moody International BV Holland
......Moody International Limited (U.K.) England
......Moody International GmbH Germany
......Moody International SRL Italy
......Moody International, Inc. Delaware
........Moody International Ltd. (Japan) Japan
........AOQC Moody International, Inc. Texas
........Inspection Services, Inc. Louisiana
<PAGE>
Jurisdiction
of
Name Incorporation
- ---- -------------
......AOQC Moody International Ltd.
(Channel Islands) Channel Islands
......Moody International (Australia) Pty Ltd. Australia
......Moody International Scandinavia AB Sweden
......Moody Energy Consulting Co. Ltd. Peoples Republic
of China
......Moody International Quality Assurance
Limited Hungary
......Moody International South Africa
(Proprietary) Limited South Africa
........FPH Inspection Authority
(Proprietary) Limited South Africa
....Werner International, Inc. Delaware
......Werner Management Consultants, Inc. New York
<PAGE>
ANNEX 2 - REAL ESTATE SUBSIDIARIES
Jurisdiction
of
Name Incorporation
- ---- -------------
Reliance Development Group, Inc. Delaware
..Continental Villages Company, Inc. Delaware
..Reliance Advisory Group, Inc. California
..Reliance Development Company, Inc. of Glendale California
..Reliance Development Parking Company Arizona
..Reliance Oriental Warehouse, Inc. Delaware
....Reliance Oriental Warehouse Associates
(A California Limited Partnership) California
......Oriental Warehouse Associates
(A California Limited Partnership) California
..Relibro Corp. New York
<PAGE>
Independent Auditor's Consent
We consent to the incorporation by reference in Registration Statements Nos.
33-19897, 33-31709, 33-63517, 33-63519 and 333-21389 of Reliance Group Holdings,
Inc. on Forms S-8 of our reports dated February 13, 1998, except as to notes 1
and 2 of the consolidated financial statements, as to which the date is February
27, 1998 and note 10 of the consolidated financial statements, as to which the
date is March 5, 1998 (which reports express an unqualified opinion and include
an explanatory paragraph relating to the adoption of Emerging Issues Task Force
Issue No. 97-13, "Accounting for Costs Incurred in Connection with a Consulting
Contract or an Internal Project That Combines Business Process Reengineering and
Information Technology Transformation"), appearing in and incorporated by
reference in the Annual Report on Form 10-K of Reliance Group Holdings, Inc. for
the year ended December 31, 1997. We also consent to the use of Touche Ross, and
statements with respect to Touche Ross, as appearing under the heading "Experts"
in the Prospectuses which are part of Registration Statements Nos. 33-19897 and
33-31709.
Deloitte & Touche LLP
New York, New York
March 30, 1998
<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> 1000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-1-1997
<PERIOD-END> DEC-31-1997
<DEBT-HELD-FOR-SALE> 2,317,673
<DEBT-CARRYING-VALUE> 636,119
<DEBT-MARKET-VALUE> 663,744
<EQUITIES> 708,563
<MORTGAGE> 0
<REAL-ESTATE> 126,822
<TOTAL-INVEST> 4,276,791
<CASH> 53,661
<RECOVER-REINSURE> 4,241,015
<DEFERRED-ACQUISITION> 248,572
<TOTAL-ASSETS> 11,332,486
<POLICY-LOSSES> 6,669,508
<UNEARNED-PREMIUMS> 1,722,258
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 903,083
0
0
<COMMON> 11,486
<OTHER-SE> 951,029
<TOTAL-LIABILITY-AND-EQUITY> 11,332,486
2,810,762
<INVESTMENT-INCOME> 294,971
<INVESTMENT-GAINS> 73,097
<OTHER-INCOME> 263,806
<BENEFITS> 1,304,559
<UNDERWRITING-AMORTIZATION> 1,496,983
<UNDERWRITING-OTHER> 0
<INCOME-PRETAX> 241,221
<INCOME-TAX> 74,400
<INCOME-CONTINUING> 174,496
<DISCONTINUED> 61,365
<EXTRAORDINARY> 0
<CHANGES> (6,442)
<NET-INCOME> 229,419
<EPS-PRIMARY> $2.00
<EPS-DILUTED> $1.94
<RESERVE-OPEN> 3,311,606
<PROVISION-CURRENT> 1,299,066
<PROVISION-PRIOR> (35,980)
<PAYMENTS-CURRENT> 367,763
<PAYMENTS-PRIOR> 963,135
<RESERVE-CLOSE> 3,242,318
<CUMULATIVE-DEFICIENCY> (35,980)
</TABLE>
