<PAGE>
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended March 31, 1998
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period From To
Commission File Number 1-8278
RELIANCE GROUP HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
Delaware 13-3082071
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
Park Avenue Plaza
55 East 52nd Street
New York, New York 10055
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (212) 909-1100
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [X] No [ ]
As of May 1, 1998, 115,266,000 shares of common stock of Reliance Group
Holdings, Inc. were outstanding.
<PAGE>
RELIANCE GROUP HOLDINGS, INC. AND SUBSIDIARIES
I N D E X
Page
No.
---
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statement of Income for the Quarters
Ended March 31, 1998 and 1997 (Unaudited)................. 2
Consolidated Balance Sheet at March 31, 1998 (Unaudited)
and December 31, 1997..................................... 3
Consolidated Statement of Changes in Shareholders' Equity
for the Quarter Ended March 31, 1998 (Unaudited).......... 4
Consolidated Condensed Statement of Cash Flows for the
Quarters Ended March 31, 1998 and 1997 (Unaudited)........ 5
Notes to Consolidated Financial Statements (Unaudited)........ 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations..................... 10
PART II. OTHER INFORMATION, AS APPLICABLE.......................... 15
SIGNATURES............................................................ 16
<PAGE>
RELIANCE GROUP HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME (UNAUDITED)
Quarter Ended March 31 1998 1997
- -------------------------------------------------------------------------------
(In thousands, except per share amounts)
Revenues:
Premiums earned ..................................... $ 659,681 $ 642,195
Net investment income ............................... 74,628 74,279
Gain on sales of investments ........................ 51,952 15,304
Gain on sales of subsidiaries ....................... 197,258 --
Other ............................................... 72,248 50,167
----------- -----------
1,055,767 781,945
----------- -----------
Claims and expenses:
Policy claims and settlement expenses ............... 348,113 319,226
Policy acquisition costs and other insurance expenses 311,238 329,462
Interest ............................................ 22,780 22,120
Other operating expenses ............................ 84,252 61,105
----------- -----------
766,383 731,913
----------- -----------
Income before income taxes and equity in
investee companies .............................. 289,384 50,032
Provision for income taxes .......................... (90,600) (15,700)
Equity in investee companies ........................ 3,510 1,554
----------- -----------
Income from continuing operations ................... 202,294 35,886
Litigation settlement of discontinued operation ..... -- (7,500)
----------- -----------
Income before extraordinary item .................... 202,294 28,386
Extraordinary item - early extinguishment of debt ... (1,912) --
----------- -----------
Net income .......................................... $ 200,382 $ 28,386
=========== ===========
Basic per share information:
Income from continuing operations ................... $ 1.76 $ .31
=========== ===========
Net income .......................................... $ 1.74 $ .25
=========== ===========
Diluted per share information:
Income from continuing operations ................... $ 1.69 $ .30
=========== ===========
Net income .......................................... $ 1.67 $ .24
=========== ===========
See notes to consolidated financial statements
2
<PAGE>
RELIANCE GROUP HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
March 31 December 31
1998 1997
----------- -----------
<S> <C> <C>
ASSETS
(In thousands, except per share amount)
Marketable securities:
Fixed maturities held for investment - at amortized cost
(quoted market $634,254 and $663,744) .............. $ 605,386 $ 636,119
Fixed maturities available for sale - at quoted market
(amortized cost $2,432,472 and $2,214,963) ......... 2,521,602 2,317,673
Equity securities - at quoted market (cost $296,823
and $376,065) ...................................... 651,208 708,563
Short-term investments ................................. 566,738 487,614
Cash ........................................................ 93,373 53,661
Premiums and other receivables .............................. 1,653,369 1,460,426
Reinsurance recoverables .................................... 4,566,496 4,241,015
Investment in investee companies ............................ 565,488 166,673
Deferred policy acquisition costs ........................... 262,615 248,572
Excess of cost over fair value of net assets acquired, less
accumulated amortization .............................. 227,024 229,484
Other assets ................................................ 490,236 494,067
Net assets of title insurance operations .................... -- 288,619
----------- -----------
$12,203,535 $11,332,486
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Unearned premiums ........................................... $ 1,946,335 $ 1,722,258
Unpaid claims and related expenses .......................... 6,833,982 6,669,508
Accounts payable and accrued expenses ....................... 724,222 579,582
Reinsurance ceded premiums payable .......................... 517,503 402,972
Federal and foreign income taxes, including deferred taxes .. 195,523 92,568
Term loans and short-term debt .............................. 225,243 253,083
Debentures and notes ........................................ 605,356 650,000
----------- -----------
11,048,164 10,369,971
----------- -----------
Contingencies and commitments
Shareholders' equity:
Common stock, par value $.10 per share, 225,000
shares authorized, 115,209 and 114,857 shares
issued and outstanding ............................... 11,521 11,486
Additional paid-in capital ............................. 544,068 542,049
Retained earnings ...................................... 333,874 142,701
Accumulated other comprehensive income ................. 265,908 266,279
----------- -----------
1,155,371 962,515
----------- -----------
$12,203,535 $11,332,486
=========== ===========
</TABLE>
See notes to consolidated financial statements
3
<PAGE>
RELIANCE GROUP HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY (UNAUDITED)
<TABLE>
<CAPTION>
Accumulated Other
Comprehensive Income
----------------------------
Net
Unrealized
Net Loss on
Additional Unrealized Foreign
Common Paid-In Retained Gain on Currency Shareholders'
Stock Capital Earnings Investments Translation Equity
---------- ------------ ----------- ------------ ------------ -------------
(In thousands, except per share amount)
<S> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1998 ......... $ 11,486 $ 542,049 $ 142,701 $ 292,081 $ (25,802) $ 962,515
Issuance of common stock ......... 35 1,719 1,754
Transactions of investee
company and other ........ 300 42 342
Net income ....................... 200,382 200,382
Dividends ($.08 per share) ....... (9,209) (9,209)
Depreciation after deferred
income taxes. .......... (1,759) (1,759)
Foreign currency translation ..... 1,346 1,346
---------- ------------ ----------- ------------ ------------ -------------
Balance, March 31, 1998. ......... $ 11,521 $ 544,068 $ 333,874 $ 290,364 $ (24,456) $ 1,155,371
========== ============ =========== ============ ============ =============
</TABLE>
See notes to consolidated financial statements
4
<PAGE>
RELIANCE GROUP HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENT OF CASH FLOWS (UNAUDITED)
Quarter Ended March 31 1998 1997
- -------------------------------------------------------------------------------
(In thousands)
CASH FLOWS USED BY OPERATING ACTIVITIES .............. $ (30,107) $(115,775)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of:
Fixed maturities available for sale .............. 113,508 128,887
Equity securities ................................ 169,863 52,516
Maturities and repayments of:
Fixed maturities available for sale .............. 92,513 90,196
Fixed maturities held for investment ............. 33,456 1,070
Purchases of:
Fixed maturities available for sale .............. (398,652) (160,245)
Fixed maturities held for investment ............. -- (20,194)
Equity securities ................................ (44,349) (79,942)
(Increase) decrease in short-term investments - net .. (79,173) 123,905
Proceeds from sales of subsidiaries .................. 271,852 --
Investing cash flows of the title insurance operations -- 5,709
Other - net .......................................... (6,686) (12,677)
--------- ---------
152,332 129,225
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in term loans ............................... -- 30,000
Increase (decrease) in short-term debt - net ......... (2,315) 3,906
Repayments of term loans ............................. (25,713) (35,722)
Redemption of debentures and notes ................... (47,030) --
Issuance of common stock ............................. 1,754 972
Dividends ............................................ (9,209) (9,160)
--------- ---------
(82,513) (10,004)
--------- ---------
Increase in cash ..................................... 39,712 3,446
Decrease in cash of the title insurance operations ... -- 3,514
Cash, beginning of period ............................ 53,661 26,525
--------- ---------
Cash, end of period .................................. $ 93,373 $ 33,485
========= =========
Supplemental disclosures of cash flow information:
Interest paid ........................................ $ 4,600 $ 4,000
========= =========
Income taxes paid ..................................... $ - $ 1,200
========= =========
See notes to consolidated financial statements
5
<PAGE>
RELIANCE GROUP HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
In the opinion of management, the accompanying unaudited consolidated
financial statements include all adjustments (consisting of normal recurring
accruals only) considered necessary to present fairly the financial position
at March 31, 1998, and the results of operations, changes in shareholders'
equity and cash flows for all periods presented. The results of operations for
the interim periods are not necessarily indicative of the results that may be
expected for any other interim period or for the entire year.
For a summary of significant accounting policies (which have not changed from
December 31, 1997) and additional financial information, see the Company's
Annual Report on Form 10-K for the year ended December 31, 1997.
Certain reclassifications have been made to the Company's prior year
consolidated financial statements to conform with the current year's
consolidated financial statements.
2. SALE OF SUBSIDIARIES
On February 27, 1998, the Company completed the sale of its title insurance
operations to Lawyers Title Corporation whose name was changed to LandAmerica
Financial Group, Inc. ("LandAmerica") on that date. As consideration for the
sale, the Company received $266.6 million in cash, 4,039,473 shares of
LandAmerica common stock and 2,200,000 shares of LandAmerica 7% cumulative
convertible preferred stock having a stated value of $110.0 million and which
is initially convertible into 4,824,561 shares of LandAmerica common stock.
Such shares of common stock and preferred stock are subject to various terms,
conditions and restrictions with regard to sale, conversion and voting. The
total sale proceeds were $662.1 million. The Company owns approximately 27% of
LandAmerica's outstanding common stock and, on a diluted basis, 45% of
LandAmerica's common stock, assuming the conversion of the preferred stock,
and has three representatives on its 14 member board of directors.
Accordingly, the Company 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 $242.9 million of which $133.6
million ($1.12 per diluted share) was recognized in the first quarter of 1998.
The deferred gain of $109.3 million will be recognized as the equity
securities received from LandAmerica are sold. The deferred gain, exclusive of
a related deferred tax amount, is included in accounts payable and accrued
expenses in the accompanying consolidated balance sheet.
In addition, in the first quarter of 1998 the Company sold a subsidiary, CSC
of Washington D.C., Inc., which resulted in an after-tax gain of $1.3 million,
net of tax expense of $1.8 million.
6
<PAGE>
3. EQUITY IN INVESTEE COMPANIES
The Company's investment and equity in investee companies are as follows:
<TABLE>
<CAPTION>
Investment in Equity in Investee
Investee Companies Companies
- ---------------------------------------------------------------------------------------------------------------------
(In thousands) Quarter Ended
March 31 December 31 March 31
1998 1997 1998 1997
------- ------- ----- -----
<S> <C> <C> <C> <C>
LandAmerica Financial Group, Inc.(1)................. $ 398,013 $ - $ 1,806 $ -
Zenith National Insurance Corp....................... 167,475 166,673 1,704 1,554
------- ------- ----- -----
$ 565,488 $ 166,673 $ 3,510 $ 1,554
======= ======= ===== =====
</TABLE>
(1) The equity in investee company for the quarter ended March 31, 1998
represents equity earnings for the one month period ending March 31,
1998.
Summarized financial information for LandAmerica Financial Group, Inc. is as
follows:
Quarter Ended March 31 1998
- -------------------------------------------------------------------------
(In thousands, except per share amount)
Revenues................................................ $ 256,988
Income before income taxes.............................. 7,250
Net income.............................................. 4,752
Net income per diluted share............................ .35
Summarized financial information for Zenith National Insurance Corp. is as
follows:
Quarter Ended March 31 1998 1997
- -------------------------------------------------------------------------
(In thousands, except per share amounts)
Revenues.................................... $ 145,295 $ 146,650
Income before income taxes.................. 10,698 10,721
Net income.................................. 7,100 7,100
Net income per diluted share................ .42 .40
7
<PAGE>
4. REINSURANCE
The reconciliation of property and casualty insurance direct premiums to net
premiums is as follows (in thousands):
<TABLE>
<CAPTION>
Quarter Ended March 31
---------------------------------------------------------
1998 1997
---------------------------------------------------------
Premiums Premiums Premiums Premiums
Written Earned Written Earned
---------- ---------- --------- ----------
<S> <C> <C> <C> <C>
Direct............................. $ 1,061,935 $ 852,609 $ 910,488 $ 777,480
Assumed............................ 177,429 136,699 110,199 83,029
Ceded.............................. (627,592) (468,759) (513,359) (400,199)
---------- ---------- ---------- ----------
Net Premiums....................... $ 611,772 $ 520,549 $ 507,328 $ 460,310
========== ========== ========== ==========
</TABLE>
The reconciliation of property and casualty insurance gross policy claims and
settlement expenses to net policy claims and settlement expenses is as follows
(in thousands):
Quarter Ended March 31
----------------------
1998 1997
---------- ----------
Gross......................................... $ 737,705 $ 587,662
Reinsurance recoveries........................ (396,268) (277,196)
---------- ----------
Net policy claims and settlement expenses..... $ 341,437 $ 310,466
========== ==========
5. EARNINGS PER SHARE
The basic and diluted per share reconciliations of income from continuing
operations to net income is as follows:
Quarter Ended March 31 1998 1997
- -------------------------------------------------------------------------------
Basic income per share:
Income from continuing operations.................... $ 1.76 $ .31
Litigation settlement of discontinued operation...... - (.06)
---- ----
Income before extraordinary item..................... 1.76 .25
Extraordinary item - early extinguishment of debt.... (.02) -
---- ----
Net income........................................... $ 1.74 $ .25
==== ===
Diluted income per share:
Income from continuing operations.................... $ 1.69 $ .30
Litigation settlement of discontinued operation...... - (.06)
---- ----
Income before extraordinary item..................... 1.69 .24
Extraordinary item - early extinguishment of debt.... (.02) -
---- ----
Net income........................................... $ 1.67 $ .24
==== ===
8
<PAGE>
The reconciliation of the basic to diluted per share information is as
follows:
<TABLE>
<CAPTION>
Quarter Ended March 31 1998 1997
- ----------------------------------------------------------------------------------------------------------------
Per Share Per Share
Income Shares Amount Income Shares Amount
- ----------------------------------------------------------------------------------------------------------------
(In thousands, except
per share amounts)
<S> <C> <C> <C> <C> <C> <C>
Basic income
per share:
Income from
continuing
operations $ 202,294 114,994 $ 1.76 $35,886 114,379 $ .31
========= =======
Effect of dilutive
securities:
Options -- 4,693 - 3,309
---------- ---------- -------- ---------
Diluted income
per share:
Income from
continuing
operations $ 202,294 119,687 $ 1.69 $ 35,886 117,688 $ .30
========== ========== ========= =========== ========== =======
</TABLE>
6. ADOPTION OF NEW ACCOUNTING STANDARD
Effective January 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income" ("FAS 130").
This Statement established standards for the reporting and presentation of
comprehensive income and its components. Net unrealized appreciation and
depreciation of investments and net unrealized gains and losses on foreign
currency translation are the items that are added to net income to arrive at
comprehensive income. The adoption of FAS 130 had no effect on the Company's
financial position or net income.
The Company's comprehensive income (loss) is as follows:
Quarter Ended March 31 1998 1997
- ------------------------------------------------------------------------------
(In thousands)
Net income................................... $ 200,382 $ 28,386
Depreciation of investments, net............. (1,717) (49,358)
Foreign currency translation................. 1,346 (1,390)
----------- ----------
Comprehensive income (loss).................. $ 200,011 $ (22,362)
=========== ==========
9
<PAGE>
RELIANCE GROUP HOLDINGS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
OVERVIEW
On February 27, 1998, the Company completed the sale of its title insurance
operations. See note 2 to the accompanying unaudited consolidated financial
statements for further discussion.
The Company had income from continuing operations, before gains on sales of
subsidiaries and investments, of $33.5 million ($.28 per diluted share) in the
first quarter of 1998 compared to $25.9 million ($.22 per diluted share) in
the corresponding prior year quarter. This improvement resulted from increased
operating income in the property and casualty insurance and title insurance
operations, and in the information technology consulting business.
Net income in the first quarter of 1998 was $200.4 million ($1.67 per diluted
share) and includes after-tax gains on sales of subsidiaries of $135.0 million
($1.13 per diluted share), after-tax gains on sales of investments of $33.8
million ($.28 per diluted share) and an after-tax extraordinary charge of $1.9
million ($.02 per diluted share) related to the early extinguishment of debt.
Net income in the first quarter of 1997 was $28.4 million ($.24 per diluted
share) and included after-tax gains on sales of investments of $9.9 million
($.08 per diluted share) and a charge of $7.5 million ($.06 per diluted share)
for a litigation settlement of a discontinued subsidiary.
PROPERTY AND CASUALTY INSURANCE OPERATIONS
Net premiums written and net premiums earned were $611.8 million and $520.5
million in the first quarter of 1998 compared to $507.3 million and $460.3
million in the corresponding 1997 period. The increases in net premiums
written and earned resulted from growth in both domestic and international
operations and reflect increased writings in many of the Company's lines of
business including non-standard automobile, general liability, commercial
automobile, workers' compensation, reinsurance and accident and health.
The combined ratio (calculated on a GAAP basis), after policyholders'
dividends, was 101.1% in both the first quarter of 1998 and the first quarter
of 1997. The underwriting loss for the first three months of 1998 was $7.3
million compared to $7.1 million in the corresponding 1997 period. The
underwriting results in 1998 reflect underwriting profits in surety, general
liability, workers' compensation and multiple peril lines of business,
partially offset by continued underwriting losses in the commercial automobile
line and losses in the ocean and inland marine line.
10
<PAGE>
PROPERTY AND CASUALTY INSURANCE INVESTMENT RESULTS
Net investment income of the property and casualty insurance operations
increased to $69.4 million during the three-month period ending March 31, 1998
from $66.3 million in the corresponding 1997 period. This increase resulted
from growth in the size of the fixed maturity investment portfolio due to the
Company's decision to sell certain equity securities in late 1997 and in the
first quarter of 1998, and reinvest the proceeds into higher yielding fixed
income securities and investing a portion of the cash proceeds received from
the sale of the title insurance operations.
Gains on sales of investments were $51.6 million in the first quarter of 1998,
primarily resulting from sales of equity securities, compared to $14.3 million
in the corresponding 1997 period.
TITLE INSURANCE OPERATIONS
The first quarter 1998 results of the title insurance operations include their
consolidated results up through the date of their sale, February 27, 1998. For
periods subsequent to the sale, the Company records its pro-rata share of
LandAmerica Financial Group, Inc.'s ("LandAmerica") earnings using the equity
method of accounting, and classifies such earnings as equity in investee
companies in the accompanying consolidated statement of income.
For the first two months of 1998, title insurance premiums and fees were
$139.1 million compared to $181.9 million in the entire first quarter of 1997.
Premiums and fees in both periods reflect the strong residential and
commercial real estate market. Agency commissions were $56.8 million during
the first two months of 1998 compared to $84.3 million in the entire first
quarter of 1997 and other expenses were $69.9 million in the first two months
of 1998 compared to $90.4 million in the entire first quarter of 1997. The
provision for policy claims was $6.7 million in the first two months of 1998
compared to $8.8 million in the entire first quarter of 1997. The title
insurance operations benefitted from favorable claims experience in recent
years.
INVESTMENT PORTFOLIO
At March 31, 1998, the Company's investment portfolio aggregated $3.97 billion
(at cost), of which 7% was invested in equity securities. The Company seeks to
maintain a diversified and balanced fixed maturity portfolio representing a
broad spectrum of industries and types of securities. The portfolio is managed
to achieve a proper balance of safety, liquidity and investment yields.
The Company's fixed maturity portfolio consists of investment grade securities
(those rated "BBB" or better by Standard & Poor's) and, to a lesser extent,
non-investment grade and non-rated securities. The risk of default is
generally considered to be greater for non-investment grade securities, when
compared to investment grade securities, since these issues may be more
susceptible to severe economic downturns. At March 31, 1998, the carrying
values of non-investment grade securities and securities not rated by Standard
& Poor's were $571.3 million (15% of the fixed income portfolio) and $196.9
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.
11
<PAGE>
INFORMATION TECHNOLOGY OPERATIONS
RCG Information Technology, Inc. ("RCG"), a subsidiary of the Company,
primarily provides computer-related professional services to large corporate
clients throughout the United States. Information technology revenues were
$57.2 million in the first quarter of 1998 compared to $38.4 million in the
first quarter of 1997. The increase in revenues resulted from increased
assignments from existing and new clients, together with an increase in
billing rates. Gross margins (revenues less cost of services) were $17.2
million, or 30% of revenues, in the first quarter of 1998 compared to $9.1
million, or 24% of revenues, in the corresponding prior year period. Selling,
general and administrative expenses were $13.0 million in the first quarter of
1998 compared to $9.0 million in the corresponding 1997 period. The increase
in these expenses are directly attributable to the increase in revenues. RCG's
revenues and expenses are included in other revenues and other operating
expenses in the accompanying consolidated statement of income.
EQUITY IN INVESTEE COMPANIES
Equity in investee companies income was $3.5 million in the first quarter of
1998 and was comprised of $1.8 million of equity earnings for the one-month
period ending March 31, 1998, from the Company's investment in LandAmerica,
and $1.7 million from the Company's investment in Zenith National Insurance
Corp. ("Zenith"). Equity in investee companies for the first quarter of 1997
was $1.6 million from the Company's Zenith investment.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal sources of funds consist of dividends, advances and
net tax payments from its subsidiaries. These net payments aggregated $66.4
million for the three months ended March 31, 1998. 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.
12
<PAGE>
Regular common stock dividends paid by Reliance Insurance Company during the
first three months of 1998 were $26.8 million. In addition, during the first
quarter of 1998, Reliance Insurance Company paid a special dividend of $85.0
million and, in April of 1998, an additional $50.0 million representing
portions of the gain from the sale of the title insurance operations. The
Company used the funds provided by the special dividends to purchase certain
of its outstanding debt. The Company believes that Reliance Insurance Company
has sufficient dividend paying capacity to meet the Company's operating cash
needs.
Reliance Insurance Company collects and invests premiums prior to payment of
associated claims, which are generally made months or years subsequent to the
receipt of premiums. For the three months ended March 31, 1998, Reliance
Insurance Company utilized $8.7 million of cash flow for operating activities.
Cash flow from operating activities is traditionally low during the first
quarter of the year, reflecting the increase in accounts receivable and
payments of certain expenses, such as premium taxes and contingent commissions
of the property and casualty insurance operations, which are accrued during
the previous year. Reliance Insurance Company carefully monitors its cash,
short-term investments and marketable securities to maintain adequate balances
for the timely payment of claims and other operating requirements. At March
31, 1998, Reliance Insurance Company had $634.6 million of cash and short-term
investments.
For the three months ended March 31, 1998, the Company utilized $30.1 million
of cash flow for operating activities compared to $115.8 million in the
corresponding 1997 period. The improvement in operating cash flow reflects
higher levels of operating cash flow from the property and casualty insurance
operations primarily due to an increase in reinsurance ceded premiums payable,
partially offset by an increase in premiums receivable and other receivables.
The Company generated $152.3 million of cash flow from investing activities
for the three months ended March 31, 1998 primarily from the sales of
subsidiaries partially offset by net purchases of marketable securities. The
Company generated $129.2 million of cash flow from investing activities for
the three months ended March 31, 1997 primarily from the net sales of
marketable securities.
For the three months ended March 31, 1998, the Company used $82.5 million of
cash flow for financing activities. During the first quarter of 1998, the
Company purchased $44.6 million of its outstanding senior notes and senior
subordinated debentures resulting in an after-tax extraordinary charge of $1.9
million, net of a $1.0 million tax benefit. In addition, the Company fully
repaid all borrowings under its $100.0 million revolving credit facility.
During the second quarter of 1998, the Company purchased an additional $99.6
million of its outstanding senior notes and senior subordinated debentures,
utilizing borrowings under its revolving credit facility and the special
dividend from Reliance Insurance Company. As a result of the second quarter
1998 purchases, the Company expects to incur an after-tax extraordinary charge
of approximately $4.3 million in the second quarter of 1998. For the three
months ended March 31, 1997, the Company used $10.0 million of cash flow for
financing activities, principally for the payment of dividends.
13
<PAGE>
The National Association of Insurance Commissioners has a risk-based capital
requirement for the property and casualty insurance industry. Risk-based
capital refers to the determination of the amount of statutory capital
required for an insurer based on the risks assumed by the insurer (including,
for example, investment risks, credit risks relating to reinsurance
recoverables and underwriting risks) rather than just the amount of net
premiums written by the insurer. A formula that applies prescribed factors to
the various risk elements in an insurer's business is used to determine the
minimum statutory capital requirement for the insurer. An insurer having less
statutory capital than the formula calculates would be subject to varying
degrees of regulatory intervention, depending on the level of capital
inadequacy. All of the Company's statutory insurance companies have statutory
capital in excess of the minimum required risk-based capital.
Maintaining appropriate levels of statutory surplus is considered important by
the Company's management, state insurance regulatory authorities and the
agencies that rate insurers' claims-paying abilities and financial strength.
Failure to maintain certain levels of statutory capital and surplus could
result in increased scrutiny or, in some cases, action taken by state
regulatory authorities and/or downgrades in an insurer's ratings.
14
<PAGE>
RELIANCE GROUP HOLDINGS, INC. AND SUBSIDIARIES
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders.
In January 1998, the Company commenced a solicitation of consents
from the holders of its 9% Senior Notes due 2000 (the "Notes")
and of its 9-3/4% Senior Subordinated Debentures due 2003 (the
"Debentures") to certain changes in the indentures governing the
respective instruments (the "Indentures"). The changes in the
Indentures, which were consented to by holders of approximately
$360,000,000 in aggregate principal amount of the Notes (or
approximately 90% of the then outstanding Notes) and holders of
approximately $230,000,000 in aggregate principal amount of the
Debentures (or approximately 92% of the then outstanding
Debentures) (i) permit the Company's insurance subsidiaries to
make single investments in excess of 3% of their total invested
assets so long as such investments are a result of a sale of an
existing investment and (ii) permit securities rated "investment
grade" by either Standard & Poor's Corporation or Moody's
Investors Service to be considered "Investment Grade" for purposes
of the Indentures. The changes to the Indentures became effective
as of February 17, 1998.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
27. Financial Data Schedule.
(b) Reports on Form 8-K.
During the quarter for which this report is filed, the Company
filed a Report on Form 8-K, dated (date of earliest event
reported) February 27, 1998, reporting an Item 2 matter, an
acquisition or disposition of assets.
15
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
RELIANCE GROUP HOLDINGS, INC.
------------------------------
(Registrant)
Date: May 15, 1998 /s/ George E. Bello
------------------------------
George E. Bello
Executive Vice President and Controller
(Chief Accounting Officer)
16
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
This schedule contains summary financial information extracted from the
Company's Consolidated Balance Sheet and the Consolidated Statement of Income
and is qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<DEBT-HELD-FOR-SALE> 2,521,602
<DEBT-CARRYING-VALUE> 605,386
<DEBT-MARKET-VALUE> 634,254
<EQUITIES> 651,208
<MORTGAGE> 0
<REAL-ESTATE> 127,645
<TOTAL-INVEST> 4,472,579
<CASH> 93,373
<RECOVER-REINSURE> 4,566,496
<DEFERRED-ACQUISITION> 262,615
<TOTAL-ASSETS> 12,203,535
<POLICY-LOSSES> 6,833,982
<UNEARNED-PREMIUMS> 1,946,335
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 830,599
0
0
<COMMON> 11,521
<OTHER-SE> 1,143,850
<TOTAL-LIABILITY-AND-EQUITY> 12,203,535
659,681
<INVESTMENT-INCOME> 74,628
<INVESTMENT-GAINS> 51,952
<OTHER-INCOME> 269,506
<BENEFITS> 348,113
<UNDERWRITING-AMORTIZATION> 311,238
<UNDERWRITING-OTHER> 0
<INCOME-PRETAX> 289,384
<INCOME-TAX> 90,600
<INCOME-CONTINUING> 202,294
<DISCONTINUED> 0
<EXTRAORDINARY> (1,912)
<CHANGES> 0
<NET-INCOME> 200,382
<EPS-PRIMARY> 1.74
<EPS-DILUTED> 1.67
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
