<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 June 30, 1998
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
- ---------- THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period From _________ To __________
Commission File Number 1-8278
RELIANCE GROUP HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
Delaware 13-3082071
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
Park Avenue Plaza
55 East 52nd Street
New York, New York 10055
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (212) 909-1100
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No
--- ---
As of August 1, 1998, 115,994,000 shares of common stock of Reliance Group
Holdings, Inc. were outstanding.
<PAGE>
RELIANCE GROUP HOLDINGS, INC. AND SUBSIDIARIES
I N D E X
PART I. FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Page
No.
----
<S> <C>
Item 1. Financial Statements
Consolidated Statement of Income for the Quarters and Six-Month
Periods Ended June 30, 1998 and 1997 (Unaudited) .............. 2
Consolidated Balance Sheet at June 30, 1998 (Unaudited) and
December 31, 1997 ............................................. 3
Consolidated Statement of Changes in Shareholders' Equity for the
Six-Month Period Ended June 30, 1998 (Unaudited) .............. 4
Consolidated Condensed Statement of Cash Flows for the Quarters and
Six-Month Periods Ended June 30, 1998 and 1997 (Unaudited) .... 5
Notes to Consolidated Financial Statements (Unaudited) ............ 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations ............................ 14
PART II. OTHER INFORMATION, AS APPLICABLE ....................................... 21
SIGNATURES ...................................................................... 23
</TABLE>
<PAGE>
RELIANCE GROUP HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME (UNAUDITED)
<TABLE>
<CAPTION>
Quarter Ended Six Months Ended
June 30 June 30
1998 1997 1998 1997
- --------------------------------------------------------------------------------------------------------------------------
(In thousands, except per share amounts)
<S> <C> <C> <C> <C>
Revenues:
Premiums earned.............................................. $560,566 $689,929 $1,220,247 $1,332,124
Net investment income........................................ 75,072 70,644 149,700 144,923
Gain on sales of investments................................. 53,986 13,431 105,938 28,735
Gain on sales of subsidiaries................................ -- -- 197,258 --
Other........................................................ 80,340 65,558 152,588 115,725
-------- -------- ---------- ----------
769,964 839,562 1,825,731 1,621,507
-------- -------- ---------- ----------
Claims and expenses:
Policy claims and settlement expenses........................ 367,472 326,036 715,585 645,262
Policy acquisition costs and other insurance expenses........ 195,740 359,666 506,978 689,128
Interest..................................................... 19,989 22,106 42,769 44,226
Other operating expenses..................................... 91,471 76,642 175,723 137,747
-------- -------- ---------- ----------
674,672 784,450 1,441,055 1,516,363
-------- -------- ---------- ----------
Income before income taxes and equity
in investee companies.................................... 95,292 55,112 384,676 105,144
Provision for income taxes................................... (31,500) (17,900) (122,100) (33,600)
Equity in investee companies................................. 7,097 2,350 10,607 3,904
-------- -------- ---------- ----------
Income from continuing operations............................ 70,889 39,562 273,183 75,448
Litigation settlement of discontinued operation.............. -- -- -- (7,500)
-------- -------- ---------- ----------
Income before extraordinary item............................. 70,889 39,562 273,183 67,948
Extraordinary item - early extinguishment of debt............ (5,592) -- (7,504) --
-------- -------- ---------- ----------
Net income................................................... $ 65,297 $ 39,562 $ 265,679 $ 67,948
======== ======== ========== ==========
Basic per share information:
Income from continuing operations............................ $ .61 $ .35 $ 2.37 $ .66
======== ======== ========== ==========
Net income .................................................. $ .56 $ .35 $ 2.30 $ .59
======== ======== ========== ==========
Diluted per share information:
Income from continuing operations............................ $ .59 $ .33 $ 2.27 $ .64
======== ======== ========== ==========
Net income .................................................. $ .54 $ .33 $ 2.21 $ .58
======== ======== ========== ==========
</TABLE>
See notes to consolidated financial statements
-2-
<PAGE>
RELIANCE GROUP HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
June 30 December 31
ASSETS 1998 1997
- -----------------------------------------------------------------------------------------
(In thousands, except per share amount)
<S> <C> <C>
Marketable securities:
Fixed maturities held for investment - at amortized cost
(quoted market $636,140 and $663,744) ............... $ 605,929 $ 636,119
Fixed maturities available for sale - at quoted market
(amortized cost $2,640,435 and $2,214,963) .......... 2,740,829 2,317,673
Equity securities - at quoted market (cost $263,559
and $376,065) ....................................... 571,559 708,563
Short-term investments ................................. 361,566 487,614
Cash ........................................................ 61,175 53,661
Premiums and other receivables .............................. 1,689,285 1,460,426
Reinsurance recoverables .................................... 4,671,935 4,241,015
Investment in investee companies ............................ 572,797 166,673
Deferred policy acquisition costs ........................... 282,023 248,572
Excess of cost over fair value of net assets acquired, less
accumulated amortization .............................. 224,634 229,484
Other assets ................................................ 486,993 494,067
Net assets of title insurance operations .................... -- 288,619
----------- -----------
$12,268,725 $11,332,486
=========== ===========
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY
- -----------------------------------------------------------------------------------------
<S> <C> <C>
Unearned premiums ........................................... $ 1,942,018 $ 1,722,258
Unpaid claims and related expenses .......................... 6,926,739 6,669,508
Accounts payable and accrued expenses ....................... 711,422 579,582
Reinsurance ceded premiums payable .......................... 560,359 402,972
Federal and foreign income taxes, including deferred taxes .. 172,337 92,568
Term loans and short-term debt .............................. 296,965 253,083
Debentures and notes ........................................ 471,686 650,000
----------- -----------
11,081,526 10,369,971
----------- -----------
Contingencies and commitments
Shareholders' equity:
Common stock, par value $.10 per share, 225,000
shares authorized, 115,989 and 114,857 shares
issued and outstanding ............................... 11,599 11,486
Additional paid-in capital ............................. 546,652 542,049
Retained earnings ...................................... 389,892 142,701
Accumulated other comprehensive income ................. 239,056 266,279
----------- -----------
1,187,199 962,515
----------- -----------
$12,268,725 $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 ... 113 5,057 5,170
Transactions of investee
company and other ........ (454) 142 (312)
Net income ................. 265,679 265,679
Dividends ($.16 per share).. (18,488) (18,488)
Depreciation after deferred
income taxes ............. (24,586) (24,586)
Foreign currency
translation............... (2,779) (2,779)
---------- ---------- ---------- ---------- ---------- ----------
Balance, June 30, 1998 .... $ 11,599 $ 546,652 $ 389,892 $ 267,637 $ (28,581) $1,187,199
========== ========== ========== ========== ========== ==========
</TABLE>
See notes to consolidated financial statements
-4-
<PAGE>
RELIANCE GROUP HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENT OF CASH FLOWS (UNAUDITED)
Six Months Ended June 30 1998 1997
- -------------------------------------------------------------------------------
(In thousands)
CASH FLOWS USED BY OPERATING ACTIVITIES .............. $ (61,305) $(139,881)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of:
Fixed maturities available for sale .............. 173,432 226,146
Equity securities ................................ 355,182 176,519
Maturities and repayments of:
Fixed maturities available for sale .............. 198,700 141,331
Fixed maturities held for investment ............. 44,918 14,686
Purchases of:
Fixed maturities available for sale .............. (786,315) (348,787)
Fixed maturities held for investment ............. (14,318) (27,879)
Equity securities ................................ (107,729) (143,772)
Decrease in short-term investments - net ............. 123,832 142,099
Proceeds from sales of subsidiaries .................. 271,852 --
Investing cash flows of the title insurance operations -- 28,125
Other - net .......................................... (35,743) (48,732)
--------- ---------
223,811 159,736
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in term loans ............................... 130,000 40,000
Increase in short-term debt - net .................... 1,730 3,390
Repayments of term loans ............................. (85,727) (40,735)
Redemption of debentures and notes ................... (187,677) --
Issuance of common stock ............................. 5,170 1,780
Dividends ............................................ (18,488) (18,336)
--------- ---------
(154,992) (13,901)
--------- ---------
Increase in cash ..................................... 7,514 5,954
Decrease in cash of the title insurance operations ... -- 1,267
Cash, beginning of period ............................ 53,661 26,525
--------- ---------
Cash, end of period .................................. $ 61,175 $ 33,746
========= =========
Supplemental disclosures of cash flow information:
Interest paid ........................................ $ 36,800 $ 37,500
========= =========
Income taxes paid .................................... $ 43,500 $ 12,500
========= =========
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 June 30, 1998, and the results of operations, changes in shareholders'
equity and cash flows for all periods presented. The results of operations for
the interim periods are not necessarily indicative of the results that may be
expected for any other interim period or for the entire year.
For a summary of significant accounting policies (which have not changed from
December 31, 1997) and additional financial information, see the Company's
Annual Report on Form 10-K for the year ended December 31, 1997.
Certain reclassifications have been made to the Company's prior year
consolidated financial statements to conform with the current year's
consolidated financial statements.
2. SALE OF SUBSIDIARIES
On February 27, 1998, the Company completed the sale of its title insurance
operations to Lawyers Title Corporation whose name was changed to LandAmerica
Financial Group, Inc. ("LandAmerica") on that date. As consideration for the
sale, the Company received $266.6 million in cash, 4,039,473 shares of
LandAmerica common stock and 2,200,000 shares of LandAmerica 7% cumulative
convertible preferred stock having a stated value of $110.0 million and which
is initially convertible into 4,824,561 shares of LandAmerica common stock.
Such shares of common stock and preferred stock are subject to various terms,
conditions and restrictions with regard to sale, conversion and voting. The
total sale proceeds were $662.1 million. The Company owns approximately 27% of
LandAmerica's outstanding common stock and, on a diluted basis, 45% of
LandAmerica's common stock, assuming the conversion of the preferred stock,
and has three representatives on its 14 member board of directors.
Accordingly, the Company accounts for its investment in LandAmerica by the
equity method of accounting for periods subsequent to the sale date. The
transaction resulted in an after-tax gain of $242.9 million of which $133.6
million ($1.11 per diluted share) was recognized in the first six months of
1998. The deferred gain of $109.3 million will be recognized as the equity
securities received from LandAmerica are sold. The deferred gain, exclusive of
a related deferred tax amount, is included in "accounts payable and accrued
expenses" in the accompanying consolidated balance sheet.
6
<PAGE>
Revenues and expenses of the title insurance operations included in the
accompanying unaudited consolidated statement of income are as follows:
<TABLE>
<CAPTION>
Quarter Ended Six Months Ended
June 30 June 30
1997 1998 (1) 1997
- ------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C>
Revenue:
Premiums earned ................. $ 204,818 $ 139,132 $ 386,703
Net investment income ........... 7,819 5,276 15,772
Gain on sales of investments..... 84 305 1,101
--------- --------- ---------
212,721 144,713 403,576
--------- --------- ---------
Expenses:
Agency commissions(2) ........... 86,177 56,815 170,447
Other expenses(2) ............... 100,015 69,936 190,367
Provision for policy claims...... 9,985 6,676 18,745
--------- --------- ---------
196,177 133,427 379,559
--------- --------- ---------
Income before income taxes ...... $ 16,544 $ 11,286 $ 24,017
========= ========= =========
</TABLE>
(1) Amounts for the six months ended June 30, 1998 are through the date
of the sale.
(2) Included in "policy acquisition costs and other insurance expenses" in
the accompanying unaudited consolidated statement of income.
In addition, in the first quarter of 1998 the Company sold a subsidiary, CSC
of Washington D.C., Inc., which resulted in an after-tax gain of $1.3 million,
net of tax expense of $1.8 million.
7
<PAGE>
3. EQUITY IN INVESTEE COMPANIES
The Company's investment in investee companies is as follows:
<TABLE>
<CAPTION>
June 30 December 31
1998 1997
- -------------------------------------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C>
LandAmerica Financial Group, Inc............... $404,686 $ --
Zenith National Insurance Corp................. 168,111 166,673
-------- --------
$572,797 $166,673
======== ========
<CAPTION>
The Company's equity in investee companies is as follows:
Quarter Ended Six Months Ended
June 30 June 30
1998 1997 1998 1997
- -------------------------------------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C> <C>
LandAmerica Financial Group, Inc. (1)....................... $ 4,516 $ -- $ 6,322 $ --
Zenith National Insurance Corp.............................. 2,581 2,350 4,285 3,904
----------- ---------- ----------- -----------
$ 7,097 $ 2,350 $ 10,607 $ 3,904
=========== ========== =========== ===========
</TABLE>
(1) The equity in investee company for the six months ended June 30, 1998
includes equity earnings for the four month period ending June 30, 1998.
Summarized financial information for LandAmerica Financial Group, Inc. is as
follows:
<TABLE>
<CAPTION>
Six Months Ended June 30 1998
- -----------------------------------------------------------------------------------
(In thousands, except per share amount)
<S> <C>
Revenues............................................................... $762,621
Income before income taxes............................................. 51,496
Net income............................................................. 33,483
Net income per diluted share........................................... 2.02
<CAPTION>
Summarized financial information for Zenith National Insurance Corp. is as
follows:
Six Months Ended June 30 1998 1997
- -----------------------------------------------------------------------------------------
(In thousands, except per share amounts)
<S> <C> <C>
Revenues............................................ $ 311,250 $ 299,057
Income before income taxes.......................... 22,661 22,943
Net income.......................................... 14,700 15,000
Net income per diluted share........................ .86 .84
</TABLE>
8
<PAGE>
4. REINSURANCE
The reconciliation of property and casualty insurance direct premiums to net
premiums is as follows (in thousands):
<TABLE>
<CAPTION>
Six Months Ended June 30
--------------------------------------------------------------------
1998 1997
--------------------------------------------------------------------
Premiums Premiums Premiums Premiums
Written Earned Written Earned
-------- -------- -------- --------
<S> <C>
Direct............................. $ 1,983,419 $ 1,800,128 $ 1,705,811 $ 1,573,762
Assumed............................ 345,231 288,396 230,121 183,815
Ceded.............................. (1,118,461) (1,007,409) (916,135) (812,156)
----------- ----------- ----------- -----------
Net Premiums....................... $ 1,210,189 $ 1,081,115 $ 1,019,797 $ 945,421
=========== =========== =========== ===========
</TABLE>
The reconciliation of property and casualty insurance gross policy claims and
settlement expenses to net policy claims and settlement expenses is as follows
(in thousands):
<TABLE>
<CAPTION>
Six Months Ended June 30
-----------------------------
1998 1997
------------ ------------
<S> <C> <C>
Gross.............................. $1,410,198 $1,163,635
Reinsurance recoveries............. (701,289) (537,118)
---------- ----------
Net policy claims and settlement expenses......... $ 708,909 $ 626,517
========== ==========
</TABLE>
9
<PAGE>
5. EARNINGS PER SHARE
The basic and diluted per share reconciliations of income from continuing
operations to net income is as follows:
<TABLE>
<CAPTION>
Quarter Ended Six Months Ended
June 30 June 30
1998 1997 1998 1997
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Basic income per share:
Income from continuing operations................................. $ .61 $ .35 $ 2.37 $ .66
Litigation settlement of discontinued operation................... -- -- -- (.07)
---------- -------- --------- --------
Income before extraordinary item.................................. .61 .35 2.37 .59
Extraordinary item - early extinguishment of debt................. (.05) -- (.07) --
--------- -------- --------- --------
Net income........................................................ $ .56 $ .35 $ 2.30 $ .59
========= ======== ========= ========
Diluted income per share:
Income from continuing operations................................. $ .59 $ .33 $ 2.27 $ .64
Litigation settlement of discontinued operation................... -- -- -- (.06)
--------- -------- --------- --------
Income before extraordinary item.................................. .59 .33 2.27 .58
Extraordinary item - early extinguishment of debt................. (.05) -- (.06) --
--------- -------- --------- --------
Net income........................................................ $ .54 $ .33 $ 2.21 $ .58
========= ======== ========= ========
</TABLE>
10
<PAGE>
The reconciliation of the basic to diluted per share information is as
follows:
<TABLE>
<CAPTION>
Quarter Ended June 30 1998 1997
- -----------------------------------------------------------------------------------------------------------
Per Share Per Share
Income Shares Amount Income Shares Amount
- -----------------------------------------------------------------------------------------------------------
(In thousands, except
per share amounts)
<S> <C> <C> <C> <C> <C> <C>
Basic income per share:
Income from continuing
operations $ 70,889 115,603 $ .61 $39,562 114,629 $ .35
====== =======
Effect of dilutive securities:
Options -- 4,966 -- 3,603
---------------------- ---------------------
Diluted income per share:
Income from continuing
operations $ 70,889 120,569 $ .59 $39,562 118,232 $ .33
===============================================================================
<CAPTION>
Six Months Ended June 30 1998 1997
- -----------------------------------------------------------------------------------------------------------
Per Share Per Share
Income Shares Amount Income Shares Amount
- -----------------------------------------------------------------------------------------------------------
(In thousands, except
per share amounts)
<S> <C> <C> <C> <C> <C> <C>
Basic income per share:
Income from continuing
operations $ 273,183 115,301 $ 2.37 $75,448 114,506 $ .66
====== =======
Effect of dilutive securities:
Options -- 4,830 -- 3,457
---------------------- ---------------------
Diluted income per share:
Income from continuing
operations $ 273,183 120,131 $ 2.27 $75,448 117,963 $ .64
=========================================================================
</TABLE>
11
<PAGE>
6. LEGAL PROCEEDINGS
Employers who purportedly purchased workers' compensation insurance policies
on a retrospectively rated or other loss-sensitive basis have brought several
putative class actions against, among others, individual insurance companies
ranging in number from approximately 30 to approximately 270, including
Reliance Insurance Company and several of its subsidiaries. The plaintiffs in
the actions assert that, from as early as January 1, 1985 through the present,
they and the members of the putative classes they purport to represent were
overcharged for such insurance covering workers' compensation risks in the
states in which the actions have been brought. In each of the cases, the
plaintiffs, on behalf of themselves and the putative class members, seek
unspecified monetary damages, with interest and attorneys' fees, against all
defendants jointly and severally, and injunctive and other equitable relief.
Such actions in which the Company is a defendant have been brought in Georgia,
Tennessee, Florida, New Jersey, Pennsylvania, Illinois, Missouri, California,
Alabama, Michigan, New York and Kentucky. In addition to these putative class
actions, approximately 85 employers, individually and not as a class, have
brought an action in Arizona asserting overcharge claims against approximately
125 defendants, including the Company.
The Company is also a defendant in a putative class action commenced in
federal court in Texas against approximately 150 individual insurance
companies, in which the plaintiff claims that the defendants violated federal
RICO statue by allegedly overcharging employers from 1988 to 1998 for
retrospectively rated workers' compensation insurance policies covering risks
in 44 states and the District of Columbia. The plaintiff, on behalf of itself
and the putative class of employers, seeks unspecified monetary damages and
attorneys' fees against all defendants jointly and severally, and injunctive
and other equitable relief.
The foregoing actions are in their early stages and there have been no rulings
on any motions by the plaintiffs for certification of the putative classes
they purport to represent. The Company has denied or intends to deny the
material allegations in each of the lawsuits and intends to contest each
action vigorously.
The Company does not believe that it is probable that its aggregate liability,
if any, in respect of these actions will have a material adverse effect on the
Company's financial position, although there is no assurance that the
disposition of the actions will not materially affect the Company's results of
operations for any period.
12
<PAGE>
7. ADOPTION OF NEW ACCOUNTING STANDARD
Effective January 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income" ("FAS 130").
This Statement established standards for the reporting and presentation of
comprehensive income and its components. Net unrealized appreciation and
depreciation of investments and net unrealized gains and losses on foreign
currency translation are the items that are added to net income to arrive at
comprehensive income. The adoption of FAS 130 had no effect on the Company's
financial position or net income.
The Company's comprehensive income is as follows:
<TABLE>
<CAPTION>
Quarter Ended Six Months Ended
June 30 June 30
1998 1997 1998 1997
- -----------------------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C> <C>
Net income..................................... $ 65,297 $ 39,562 $265,679 $67,948
(Depreciation) appreciation of
investments, net.......................... (22,727) 62,121 (24,444) 12,763
Foreign currency translation................... (4,125) (557) (2,779) (1,947)
-------- -------- -------- -------
Comprehensive income........................... $ 38,445 $101,126 $238,456 $78,764
======== ======== ======== =======
</TABLE>
13
<PAGE>
RELIANCE GROUP HOLDINGS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
===============================================================================
OVERVIEW
The Company had income from continuing operations, before gains on sales
of investments, of $35.8 million ($.30 per diluted share) and $69.3
million ($.58 per diluted share) in the second quarter and first six
months of 1998 compared to $30.8 million ($.26 per diluted share) and
$56.8 million ($.48 per diluted share) in the corresponding prior year
periods. These improvements reflect increased profits in the property and
casualty insurance operations, primarily due to higher levels of net
investment income, and increased profits in the information technology
business.
Net income was $65.3 million ($.54 per diluted share) and $265.7 million
($2.21 per diluted share) for the three months and six months ended June
30, 1998, which includes after-tax gains on sales of investments of $35.1
million ($.29 per diluted share) and $68.9 million ($.57 per diluted
share) and after-tax extraordinary charges of $5.6 million ($.05 per
diluted share) and $7.5 million ($.06 per diluted share) related to early
extinguishment of debt. Net income in the first six months of 1998 also
includes after-tax gains on sales of subsidiaries of $135.0 million
($1.12 per diluted share), substantially all of which relates to the
February 27, 1998 sale of the Company's title insurance operations (see
note 2 to the accompanying unaudited consolidated financial statements
for further discussion). Net income was $39.6 million ($.33 per diluted
share) and $67.9 million ($.58 per diluted share) in the second quarter
and first six months of 1997, which included after-tax gains on sales of
investments of $8.7 million ($.07 per diluted share) and $18.7 million
($.16 per diluted share). Net income in the first six months of 1997 also
included an after-tax charge of $7.5 million ($.06 per diluted share) for
a litigation settlement of a discontinued subsidiary.
PROPERTY AND CASUALTY INSURANCE OPERATIONS
Net premiums written in the quarter and six months ended June 30, 1998
increased to $598.4 million and $1.21 billion from $512.5 million and
$1.02 billion in the corresponding prior year periods. Net premiums
earned in the quarter and six months ended June 30, 1998 likewise
increased to $560.6 million and $1.08 billion from $485.1 million and
$945.4 million in the corresponding prior year periods. These increases
reflect growth in substantially all of the Company's lines of business,
including non-standard automobile, reinsurance, general liability and
accident and health.
The combined ratio (calculated on a GAAP basis), after policyholders'
dividends, was 100.8% and 100.9% in the second quarter and first six
months of 1998 compared to 100.6% and 100.9% in the corresponding 1997
periods. The underwriting losses were $4.6 million and $12.0 million in
the second quarter and first six months of 1998 compared to $6.7 million
and $13.8 million in the
14
<PAGE>
corresponding prior year periods. The continued strong underwriting
results in 1998 reflect underwriting profits in general liability, surety,
non-standard automobile and accident and health lines of business as well
as a continued low level of catastrophe losses, partially offset by
increased underwriting losses in the commercial automobile, workers'
compensation and ocean and inland marine lines of business.
PROPERTY AND CASUALTY INSURANCE INVESTMENT RESULTS
Net investment income of the property and casualty insurance operations
increased to $75.1 million and $144.4 million in the second quarter and
first six months of 1998 from $62.8 million and $129.2 million in the
comparable 1997 periods. These increases resulted from growth in the size
of the fixed maturity investment portfolio due to the sale of certain
equity securities in late 1997 and the first half of 1998, and the
reinvestment of the proceeds into higher yielding fixed income
securities.
Gains on sales of investments were $54.0 million and $105.6 million in
the three month and six month periods ending June 30, 1998 compared to
$13.3 million and $27.6 million in the corresponding 1997 periods. Gains
on sales of investments in 1998 primarily resulted from sales of equity
securities, partially offset in the second quarter by write-downs of
$21.7 million equal to the difference between the cost and market values
of certain fixed income investments to reflect other than temporary
declines.
INVESTMENT PORTFOLIO
At June 30, 1998, the Company's investment portfolio aggregated $3.91
billion (at cost), of which 7% was invested in equity securities. The
Company seeks to maintain a diversified and balanced fixed maturity
portfolio representing a broad spectrum of industries and types of
securities. The portfolio is managed to achieve a proper balance of
safety, liquidity and investment yields.
The Company's fixed maturity portfolio consists of investment grade
securities (those rated "BBB" or better by Standard & Poor's) and, to a
lesser extent, non-investment grade and non-rated securities. The risk of
default is generally considered to be greater for non-investment grade
securities, when compared to investment grade securities, since these
issues may be more susceptible to severe economic downturns. At June 30,
1998, the carrying values of non-investment grade securities and
securities not rated by Standard & Poor's were $549.5 million (15% of the
fixed income portfolio) and $223.4 million (6% of the fixed income
portfolio), respectively. Substantially all of the Company's
non-investment grade and non-rated securities are classified as available
for sale and, accordingly, are carried at market value.
15
<PAGE>
INFORMATION TECHNOLOGY OPERATIONS
RCG Information Technology, Inc. ("RCG"), a subsidiary of the Company,
primarily provides computer-related professional services to large
corporate clients throughout the United States. Information technology
revenues increased to $60.4 million and $117.6 million in the second
quarter and first six months of 1998 from $46.4 million and $84.8 million
in the corresponding 1997 periods resulting from increased assignments
from existing and new clients, together with an increase in billing
rates. Gross margins (revenues less cost of services) were $19.1 million
and $36.2 million, or 32% and 31% of revenues, in the second quarter and
first six months of 1998 compared to $11.8 million and $20.9 million, or
25% of revenues, in the corresponding prior year periods. Selling,
general and administrative expenses were $14.0 million and $27.0 million
in the three month and six month periods ended June 30, 1998 compared to
$11.4 million and $20.4 million in the corresponding 1997 periods. 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 unaudited consolidated
statement of income.
EQUITY IN INVESTEE COMPANIES
Equity in investee companies income was $7.1 million and $10.6 million in
second quarter and first six months of 1998 which includes equity
earnings of $4.5 million and $6.3 million from the Company's investment
in LandAmerica Financial Group, Inc. since March 1, 1998. Equity in
investee companies income was $2.4 million and $3.9 million in the second
quarter and first six months of 1997 from the Company's Zenith National
Insurance Corp. investment.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal sources of funds consist of dividends, advances
and net tax payments from its subsidiaries. These net payments aggregated
$246.8 million for the six months ended June 30, 1998 of which $187.7
million was used by the Company to purchase certain of its outstanding
debt. The Company's ability to receive cash dividends has depended upon
and continues to depend upon the dividend paying ability of its insurance
subsidiaries. The Insurance Law of Pennsylvania, where Reliance Insurance
Company (the Company's principal property and casualty insurance
subsidiary) is domiciled, limits the maximum amount of dividends which
may be paid without approval by the Pennsylvania Insurance Department.
Under such law, Reliance Insurance Company may pay dividends during the
year equal to the greater of (a) 10% of the preceding year-end
policyholders' surplus or (b) the preceding year's statutory net income.
Furthermore, the Pennsylvania Insurance Department has broad discretion
to limit the payment of dividends by insurance companies. There is no
assurance that Reliance Insurance Company will meet the tests in effect
from time to time under Pennsylvania law for the payment of dividends
without prior Insurance Department approval or that any requested
approval will be obtained. Reliance Insurance Company has been advised by
the Pennsylvania Insurance Department that any required approval will be
based upon a solvency standard and will not be unreasonably withheld. Any
significant limitation of Reliance Insurance Company's dividends would
adversely affect the Company's ability to service its debt and to pay
dividends on its common stock.
16
<PAGE>
Regular common stock dividends paid by Reliance Insurance Company during
the first six months of 1998 were $56.6 million. In addition, during the
first six months of 1998, Reliance Insurance Company paid special
dividends of $135.0 million representing a portion of the gain from the
sale of the title insurance operations. The Company 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 six months ended June 30, 1998,
Reliance Insurance Company utilized $16.4 million of cash flow for
operating activities. Cash flow from operating activities is
traditionally low during the first half of the year, reflecting the
increase in receivables 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 June 30, 1998,
Reliance Insurance Company had $403.7 million of cash and short-term
investments.
For the six months ended June 30, 1998, the Company utilized $61.3
million of cash flow for operating activities compared to $139.9 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.
The Company generated $223.8 million of cash flow from investing
activities for the six months ended June 30, 1998 primarily from the
sales of subsidiaries partially offset by net purchases of marketable
securities. The Company generated $159.7 million of cash flow from
investing activities for the six months ended June 30, 1997 primarily
from the net sales of marketable securities.
For the six months ended June 30, 1998, the Company used $155.0 million
of cash flow for financing activities. During the first six months of
1998, the Company purchased $178.3 million of its outstanding senior
notes and senior subordinated debentures utilizing the special dividend
from Reliance Insurance Company and borrowings under its revolving credit
facility. These purchases resulted in an after-tax extraordinary charge
of $7.5 million, net of a $4.0 million tax benefit. For the six months
ended June 30, 1997, the Company used $13.9 million of cash flow for
financing activities, principally for the payment of dividends.
The Company has a revolving credit facility with various banks providing
for aggregate maximum outstanding borrowings of $100 million. At June 30,
1998, borrowings aggregating $70 million were outstanding under this
facility.
17
<PAGE>
The National Association of Insurance Commissioners has a risk-based
capital requirement for the property and casualty insurance industry.
Risk-based capital refers to the determination of the amount of statutory
capital required for an insurer based on the risks assumed by the insurer
(including, for example, investment risks, credit risks relating to
reinsurance recoverables and underwriting risks) rather than just the
amount of net premiums written by the insurer. A formula that applies
prescribed factors to the various risk elements in an insurer's business
is used to determine the minimum statutory capital requirement for the
insurer. An insurer having less statutory capital than the formula
calculates would be subject to varying degrees of regulatory
intervention, depending on the level of capital inadequacy. All of the
Company's statutory insurance companies have statutory capital in excess
of the minimum required risk-based capital.
Maintaining appropriate levels of statutory surplus is considered
important by the Company's management, state insurance regulatory
authorities and the agencies that rate insurers' claims-paying abilities
and financial strength. Failure to maintain certain levels of statutory
capital and surplus could result in increased scrutiny or, in some cases,
action taken by state regulatory authorities and/or downgrades in an
insurer's ratings.
YEAR 2000
In general, the year 2000 issue concerns many existing computers
and software products which were originally coded to accept only two
digit entries in the date code field. These computers and software
products will need to be either replaced or reprogrammed in order
for computer systems to distinguish 21st century dates from 20th
century dates.
COMPANY INFORMATION TECHNOLOGY. The Company's insurance policies contain
date sensitive data, such as policy expiration dates and premium payment
dates. If the Company's material computer systems are not year 2000
compliant, the Company's business operations, including claims and
premiums processing operations, financial reporting systems and actuarial
calculations, could be materially adversely affected.
The Company commenced its efforts to address the year 2000 issue in 1996
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 compliance
assurance testing - that is, confirmation that such systems are year 2000
compliant and that certain of its other computer systems and software
products are year 2000 compliant. The Company expects that this
compliance assurance testing phase will be completed in 1998.
18
<PAGE>
THIRD PARTY INFORMATION TECHNOLOGY. The Company does business with
certain third parties, such as third-party administrators, insurance
brokers and insurance agents, who may either electronically receive
financial and other information from, or electronically transmit financial
and other information to, the Company. Thus, even if the Company's computer
systems and software products are year 2000 compliant, the failure of
third parties with whom the Company does significant business to be year
2000 compliant could materially adversely affect the financial position,
results of operations or cash flows of the Company. Accordingly, as part of
its year 2000 process, the Company is identifying certain third parties
with whom the Company does significant business to determine whether such
third parties are, or will be, year 2000 compliant. The Company expects to
complete this process by the end of 1998 and plans to conduct systems
testing as appropriate with such third parties in 1999. While the Company
is taking what it believes are appropriate safeguards, there can be no
assurances that the failure of such third parties to be year 2000 compliant
will not have a material adverse effect on the Company's financial
position, results of operations or cash flows in future financial periods.
CONTINGENCY PLANS. After evaluating its internal compliance efforts as
well as the compliance of third parties as described above by the end of
fiscal year 1998, the Company will develop during fiscal year 1999
appropriate contingency plans to address situations in which various
systems of the Company, or of third parties with whom the Company does
business, are not year 2000 compliant.
COSTS. Through year-end 1997, the Company had incurred approximately
$5 million to address the year 2000 issue and expects to incur an
additional $1.7 million through year-end 1999.
INSURANCE POLICIES. As an insurer, the Company may incur losses and loss
adjustment expenses (including attorneys' fees and other legal expenses)
arising from property and casualty insurance claims by its insureds, who
may incur losses as a result of the failure of such insureds, or the
customers or vendors of such insureds, to be year 2000 compliant. The
Company is in the process of assessing its exposures, if any, under its
policies with respect to year 2000 noncompliance by its insureds, and the
third parties who do business with its insureds, through various means
which include communications with insureds and distribution of year 2000
written questionnaires. The Company is also in the process of assessing
potential strategies to manage and mitigate such exposures, if any,
including, without limitation, policy exclusions and reinsurance. However,
because coverage determinations depend on unique factual situations,
specific policy language and other variables, it is not possible to
determine in advance whether and to what extent insureds will incur
losses, the amount of the losses or whether any such losses would be
covered under the Company's insurance policies.
19
<PAGE>
FORWARD LOOKING INFORMATION
Certain statements in this document may be considered to be "forward
looking statements" as that term is defined in the Private Securities
Litigation Reform Act of 1995, such as statements that include the words
"expects", "probable", "estimate", or similar expressions. Such
statements are subject to certain risks and uncertainties. The factors
which could cause actual results to differ materially from those
suggested by any such statements include, but are not limited to, those
discussed or identified from time to time in the Company's public
filings with the Securities and Exchange Commission and specifically to:
risks or uncertainties associated with general economic conditions
including changes in interest rates and the performance of the financial
markets, changes in domestic and foreign laws, regulations and taxes,
changes in competition and pricing environments, regional or general
changes in asset valuations, the occurrence of significant natural
disasters, the inability to reinsure certain risks economically, the
adequacy of loss reserves, as well as general market conditions,
competition, pricing and restructurings.
20
<PAGE>
RELIANCE GROUP HOLDINGS, INC. AND SUBSIDIARIES
PART II. OTHER INFORMATION
- -------------------------------------------------------------------------------
Item 4. Submission of Matters to a Vote of Security Holders.
On May 14, 1998, at the annual meeting of stockholders of the
Company, the stockholders elected the thirteen directors set
forth below and voted upon and authorized the adoption by the
Company of the Reliance Group Holdings, Inc. 1998 Stock Option
Plan, Reliance Group Holdings, Inc. 1998 Stock Option Plan for
Non-Employee Directors, Reliance Group Holdings, Inc. 1998
Executive Bonus Plan and Reliance Group Holdings, Inc. Executive
Bonus Plan for James E. Yacobucci. The number of votes cast for,
against (where applicable) or withheld, as well as the number of
abstentions and broker non-votes (where applicable), were as
follows:
Proposal - Election of Directors:
For Withheld
----------- --------
Saul P. Steinberg 104,822,664 282,500
Robert M. Steinberg 104,821,918 283,246
George R. Baker 104,923,157 182,007
George E. Bello 104,931,389 173,775
Dennis A. Busti 104,933,495 171,669
Lowell C. Freiberg 104,933,954 171,210
Dr. Thomas P. Gerrity 104,929,067 176,097
Jewell Jackson McCabe 104,919,691 185,473
Irving Schneider 104,906,968 198,196
Bernard L. Schwartz 104,902,517 202,647
Richard E. Snyder 104,927,542 177,622
Dr. Bruce E. Spivey 104,918,597 186,567
James E. Yacobucci 104,932,593 172,571
Proposal - Approval of the Reliance Group Holdings, Inc.
1998 Stock Option Plan
For: 79,494,425
Against: 14,524,362
Abstain: 207,727
Broker Non-Votes: 10,878,650
Proposal - Approval of the Reliance Group Holdings, Inc.
1998 Stock Option Plan for Non-Employee Directors
For: 85,049,370
Against: 8,883,103
Abstain: 294,041
Broker Non-Votes: 10,878,650
21
<PAGE>
Proposal - Approval of the Reliance Group Holdings, Inc.
1998 Executive Bonus Plan
For: 92,051,140
Against: 1,860,074
Abstain: 315,301
Broker Non-Votes: 10,878,649
Proposal - Approval of the Reliance Group Holdings, Inc.
Executive Bonus Plan for James E. Yacobucci
For: 89,445,967
Against: 4,443,978
Abstain: 336,570
Broker Non-Votes: 10,878,649
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
10.1 Reliance Group Holdings, Inc. 1998 Stock Option Plan
10.2 Reliance Group Holdings, Inc. 1998 Stock Option Plan
for Non-Employee Directors
10.3 Reliance Group Holdings, Inc. 1998 Executive Bonus Plan
10.4 Reliance Group Holdings, Inc. Executive Bonus Plan for
James E. Yacobucci
27. Financial Data Schedule.
(b) Reports on Form 8-K.
No reports on Form 8-K were filed during the quarter ended
June 30, 1998.
22
<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: August 14, 1998 /s/ George E. Bello
--------------- -----------------------------
George E. Bello
Executive Vice President and Controller
(Chief Accounting Officer)
23
<PAGE>
RELIANCE GROUP HOLDINGS, INC.
1998 STOCK OPTION PLAN
PART I
PURPOSES; DEFINITIONS; STOCKHOLDER APPROVAL;
RESERVATION OF SHARES; PARTICIPATION IN PLAN
ARTICLE I
Purposes
1.1 Purposes of Plan. The purpose of this Reliance Group Holdings,
Inc. 1998 Stock Option Plan (this 'Plan') is to provide incentives to selected
key employees of the Company and/or its Affiliates who contribute, and are
expected to contribute, materially to the success of the Company and its
Affiliates; to provide a means of rewarding outstanding performance; and to
enhance the interest of such key employees in the Company's continued success
and progress by providing them a proprietary interest in the Company. Further,
this Plan is designed to enhance the Company's ability to maintain a
competitive position in attracting and retaining qualified key personnel
necessary for the continued success and progress of the Company.
ARTICLE II
Definitions
Certain terms used herein shall have the meaning below
stated, subject to the provisions of Section 7.1.
'Affiliate' means a person that directly, or indirectly through one
or more intermediaries, controls, or is controlled by, the Company.
'Board' or 'Board of Directors' means the Board of Directors of the
Company.
'Chairman' means the Chairman of the Board of the Company.
<PAGE>
'Code' means the Internal Revenue Code of 1986, as amended.
'Committee' means, except as set forth in Article X, the Stock Option
Committee appointed by the Board to administer this Plan pursuant to Article
VII.
'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.
'Disability' means a physical or mental impairment of sufficient
severity such that an Employee is both eligible for and in receipt of benefits
under the long-term disability provisions of the Company's benefit plans.
'Employee' means an employee (including an officer) of the Company or
of an Affiliate of the Company.
'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 Committee on the
basis of available prices for such Common Stock or in such manner as may be
authorized by applicable regulations under the Code.
'Key Employee' means an Employee selected to participate in this Plan
pursuant to the terms hereof.
'Non-Qualified Option' means an option to purchase Common Stock,
granted by the Company to a Key Employee pursuant to Section 5.1.
Non-Qualified Options are not intended to qualify as 'incentive stock options'
under Section 422 of the Code and the regulations thereunder.
'Option' means a Non-Qualified Option.
'Option Agreement' has the meaning assigned to it in Section 5.1(c)
hereof.
'Plan' means the Reliance Group Holdings, Inc. 1998 Stock Option
Plan, as set forth herein and as from time to time amended.
<PAGE>
'Special Compensation Committee' means the Special Compensation
Committee of the Board.
ARTICLE III
Stockholder Approval; Reservation of Shares
3.1 Stockholder Approval. This Plan shall be effective upon approval
of the Plan by a vote of a majority of shares of Common Stock present or
represented and entitled to vote (including abstentions to the extent
abstentions are counted as voting under applicable state law), at the
Company's 1998 annual meeting of stockholders.
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 12,000,000 shares. Such shares
may be either authorized and unissued shares or shares issued and thereafter
acquired by the Company. Shares issued pursuant to this Plan shall 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 officers and other Employees of the Company or an
Affiliate of the Company on the date the Option is granted. A member of the
Board of Directors who is not also an Employee of the Company or of an
Affiliate of the Company shall not be eligible to receive an Option.
4.2 Participation Not Guarantee of Employment. Nothing in this Plan
or in the instrument evidencing the grant of an Option shall in any manner be
construed to limit in any way the right of the Company or an Affiliate to
terminate a Key Employee's employment at any time, without regard to the
effect of such termination on any rights such Key Employee would otherwise
have under this Plan, or give any right to such a Key Employee to remain
<PAGE>
employed by the Company or an Affiliate thereof in any particular position or
at any particular rate of compensation.
PART II
OPTIONS;
TERMINATION OF EMPLOYMENT AND DEATH
ARTICLE V
Options
5.1 Grants of Options.
(a) Grant. The Committee or the Special Compensation Committee, as
the case may be, may grant Options to Key Employees. All Options under this
Plan shall be granted within ten years of the date on which this Plan is
approved by the stockholders of the Company. No more than 1,000,000 of the
shares issuable under Options granted under this Plan may be granted to any
employee over the ten-year term of this Plan, subject to adjustment in
accordance with Section 9.3 hereof.
(b) Option Price. The purchase price per share of Common Stock under
each Option shall be determined by the Committee but, subject to Section 10.1
hereof, shall be not less than 90 percent 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 as the
Committee 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 Key Employee otherwise than by will or
the laws of descent and distribution, and except, solely to the extent
permitted by the Committee in an Option Agreement, to such persons or entities
that may be approved by the Committee, in each case subject to the condition
that the Committee be satisfied that such transfer is being made for estate or
tax planning purposes or for gratuitous or donative purposes, without
consideration being received therefor. No transfer of an Option by a Key
Employee shall be effective to bind the Company unless the Company shall have
been furnished with written notice
<PAGE>
thereof and a copy of such evidence as the Committee may determine necessary to
establish the validity of the transfer.
(e) Substitution and Cancellation. The Committee, in its sole
discretion, may grant to an Employee who has been granted an Option under this
Plan, in exchange for the surrender and cancellation of such Option, a new
Option having a purchase price lower (or higher) than the purchase price
provided in the Option so surrendered and cancelled and containing such other
terms as the Committee may deem appropriate.
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, except that an
Option with a per share Option price that equals or exceeds Fair Market Value
per share on the date of grant shall have a term of ten (10) years and ten
(10) days from the date of grant. An Option granted under this Plan shall
become 100% vested at the earliest of the following times if the Optionee is
an Employee at such time: (i) the Employee's normal retirement date (age 65 or
later), (ii) the Employee's death or Disability, or (iii) five years from the
date of grant. Each Option shall vest and become exercisable in cumulative
installments to the extent of 25% of the number of shares originally covered
thereby on and after the second, third, fourth and fifth anniversaries of the
grant of the Option, if the Optionee is an Employee on such anniversary. In
its sole discretion, the Committee or the Special Compensation Committee, as
the case may be, 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 Committee, 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 Key Employee shall have any rights as a stockholder
with respect to any share of Common Stock covered by an Option unless and
until such Employee 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 of other rights) in respect of such share for
which the record date is prior to the
<PAGE>
date on which such Employee 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 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 Employment and Death
6.1 Termination of Employment. Unless earlier terminated in
accordance with its terms, an Option shall terminate after 90 days after any
of the following:
(a) voluntary termination of employment by the Key Employee, with or
without consent of the Company,
(b) termination of employment of the Key Employee by the Company or
any of its Affiliates, with or without cause, or
(c) termination of employment of the Key Employee for any other
reason, including retirement under a retirement plan maintained by
the Company, or because the Affiliate employing such Key Employee
ceases to be an Affiliate of the Company and such Employee does not,
prior thereto or contemporaneously
<PAGE>
therewith, become a Key Employee of the Company or of another
Affiliate.
6.2 Death or Disability of Optionee. If a Key Employee's employment
is terminated as a result of Disability or death, such Employee or such
Employee's legal representatives, shall be entitled to exercise the Option in
whole or in part at any time within one year following the Disability or death
of such Key Employee.
6.3 Employment. For all purposes of this Plan, and any Option granted
hereunder, 'employment' shall be defined in accordance with the provisions of
Section 1.421-7(h) of the Income Tax Regulations (or any successor
regulations).
PART III
ADMINISTRATION, AMENDMENT AND TERMINATION
OF PLAN; MISCELLANEOUS
ARTICLE VII
Administration of Plan
7.1 The Committee. This Plan shall be administered by a Committee of
three or more persons, all of whom shall be members of the Board and shall be
appointed by, and serve at the pleasure of, the Board. Solely to the extent
deemed necessary or advisable by the Board to satisfy the requirements of Rule
16b-3 of the Exchange Act, each Committee member shall meet the definition of
a 'Non-employee Director' for purposes of such Rule 16b-3. 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. Vacancies occurring on the Committee shall be filled
by the Board. The Committee 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 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, the Company, the shareholders
of the Company, the Committee and each of the members thereof,
<PAGE>
Employees of the Company and its Affiliates, and their respective
successors-in-interest.
7.2 Liability of Committee. 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 this 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 this Plan at the Company's
expense.
7.3 Determinations of the Committee. In making its determinations
concerning the Key Employees 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 Committee shall take into account the nature of the services
rendered by the respective Key Employees, their past, present and potential
contribution to the Company's success and such other factors as the Committee
may deem relevant. The Committee 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 Committee may, in its discretion or in accordance
with a direction from the Board, 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 Committee shall act on behalf of the
Company as sponsor of the Plan. All expenses associated with the Plan shall be
borne by the Company.
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
Section 162(m) of the Code or 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. 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.
<PAGE>
8.2 Termination. The Board of Directors of the Company may at any
time terminate this Plan as of any date specified in a resolution adopted by
the Board. If not earlier terminated, this Plan shall terminate on the tenth
anniversary of the effective date of the Plan. No Options may be granted after
this Plan has terminated. After this Plan shall terminate, the function of the
Committee will be limited to supervising the administration of Options
previously granted.
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 granted pursuant to this Plan (whether
to permit the issuance of shares or the resale or other disposition of any such
shares of Common Stock by or on behalf of the Employees 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.
9.2 Restrictions upon Resale of Unregistered Stock. If the shares of
Common Stock that have been transferred to a Key Employee pursuant to the
terms of this Plan are not registered under the 1933 Act, pursuant to an
effective registration statement, such Key Employee, if the Committee shall
deem it advisable, may be required to represent and agree in writing (i) that
any shares of Common Stock acquired by such Key Employee 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 Key Employee is acquiring such shares of Common Stock for
such Employee's own account and not with a view to the distribution thereof.
<PAGE>
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, the 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 Key Employee hereunder, which shall increase or decrease the amount of
capital stock outstanding and which the Committee, in its sole discretion,
shall determine equitably requires an adjustment in the number of shares which
the holder should be permitted to acquire and/or the purchase price of the
Option, such adjustments as the Committee or the Special Compensation Committee,
as the case may be, shall determine may be made, and when so made shall be
effective and binding for all purposes of this Plan.
9.4 Withholding of Taxes. Each Key Employee who exercises an Option
to purchase Common Stock shall agree to pay to the Company, or make
arrangements satisfactory to the Committee regarding payment of, any taxes of
any kind required by law to be withheld with respect to the transfer to such
Employee of such shares of Common Stock.
9.5 Other Grants. Options may be granted under this Plan from time to
time in substitution for stock options and/or stock appreciation rights held
by employees of other corporations who are or are about to become employees of
the Company as the result of a merger or consolidation of the employing
corporation with the Company, or the acquisition by the Company of the assets
of the employing corporation, or the acquisition by the Company of stock of
the employing corporation as the result of which it becomes an Affiliate of
the Company. The terms and conditions of the substituted Options so granted
may vary from the terms and conditions set forth in Part II to such extent as
the Committee may deem appropriate to conform, in whole or in part, to the
provisions of the substituted stock incentives.
9.6 Other Benefits. Nothing contained herein shall prevent the
Company from establishing other incentive plans in which Key Employees in the
Plan may also participate. No award under this Plan shall be considered as
compensation in calculating any insurance, pension or other benefit for which
the recipient is
<PAGE>
eligible unless any such insurance, pension or other benefit is granted under
a plan which expressly provides that compensation under this Plan (and
specifying the type of such compensation) shall be considered as compensation
under such plan.
PART IV
PROVISIONS RELATING TO CERTAIN KEY EMPLOYEES
ARTICLE X
Limitation on Grants; Applicability of Other Provisions
10.1 Limitations With Respect To Executive Officers. Notwithstanding
any other provision contained in the Plan, the Special Compensation Committee
shall have the exclusive right to grant Options to the executive officers of the
Company and to make any adjustments (pursuant to section 9.3) to Options granted
thereto. Solely to the extent deemed necessary or advisable by the Board to
satisfy the requirements of Section 162(m) of the Code, each Special Committee
member shall meet the definition of an 'outside director' for purposes of such
Section 162(m). Any Options so granted in any year, shall be granted, in the
case of the persons who are the Chairman and the four other most highly
compensated executive officers, at not less than Fair Market Value.
10.2 Applicability of Other Provisions. Grants of Options to any
executive officer of the Company in exchange for the surrender and
cancellation of any Option pursuant to Section 5.1(e) shall be made only if
the purchase price of the newly granted Option is at least the Fair Market
Value of the Common Stock on the date such Option is granted. Any Option
granted to an executive officer of the Company that is cancelled pursuant to
Section 5.1(e), shall continue to be counted against the maximum number of
shares that may be granted to any Key Employee in accordance with Section
5.1(a). The provisions of Article VII shall be incorporated herein as if
included herein, except that 'Special Compensation Committee' shall replace
'Committee' whenever it appears therein.
<PAGE>
RELIANCE GROUP HOLDINGS, INC.
1998 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. 1998 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 Reliance Group Holdings, Inc. 1998 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 1998 Stock Option Plan for Non-Employee
Directors shall be effective upon approval of the Plan by a vote of a majority
of shares of Common Stock present or represented and entitled to vote on the
Plan (including abstentions to the extent abstentions are counted as voting
under applicable state law) at the Company's 1998 annual meeting of
stockholders.
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 350,000 shares. The shares
which may be issued and sold under this Plan may be either authorized and
unissued shares or shares issued
<PAGE>
and thereafter acquired by the Company. Shares issued pursuant to this Plan
shall 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 the grant. All Options under this Plan
shall be granted within ten years of the date of approval of the Plan by a
majority of shares of common stock at the annual meeting of stockholders of
the Company.
(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.
<PAGE>
(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 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 of other
rights) in respect of such share for which the record date is prior
<PAGE>
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 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
<PAGE>
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 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.
<PAGE>
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.
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 May 14, 2008 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.
<PAGE>
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 issuance of shares 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.
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.
<PAGE>
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 and/or the purchase price of the Option, such adjustments as the Board
shall determine may be made, and when so made shall be effective and binding
for all purposes of this Plan.
<PAGE>
RELIANCE GROUP HOLDINGS, INC.
1998 EXECUTIVE BONUS PLAN
ARTICLE I
Purpose
1.1 The purpose of this Plan is to provide performance-based
compensation to Covered Employees. This Plan, which is intended to comply with
the requirements of ss.162(m) of the Code, is designed to enhance the
Company's ability to retain and reward key executives who contribute
materially to the success of the Company by providing them the opportunity to
earn meaningful compensation tied to the Company's performance under the
predetermined criteria set forth herein.
ARTICLE II
Definitions
2.1 Capitalized terms used in this Plan shall have the meanings set
forth below.
'Base Salary' means the annual base salary of a Covered Employee as
in effect on January 1, 1998 (increased by 15% each year, on a
compound basis, but in no event more, as to any year, than the
Covered Employee's actual annual base salary for such year as so
increased) paid by the Company and any Subsidiary.
'Code' means the Internal Revenue Code of 1986, as amended.
'Company' means Reliance Group Holdings, Inc.
<PAGE>
'Compensation Committee' means the Special Compensation Committee of
the Board of Directors of the Company, comprised of at least two
'outside directors' as defined in ss.162(m) and solely of
'outside directors' if required by ss.162(m).
'Covered Employee' is as defined under ss.162(m)(3) of the Code
except that no person meeting that definition who has a separate
performance-based bonus plan shall be a 'Covered Employee' hereunder.
'Plan' means this Executive Bonus Plan as the same may be amended
from time to time.
'RCG IT' means the information technology operations of the Company.
'Reliance Insurance Group' means the property and casualty operations
of the Company.
'Section 162(m)' means ss.162(m) of the Code, and the regulations
promulgated thereunder, all as amended from time to time.
'Subsidiary' means a company 50% or more of whose voting capital
stock is held, directly or through one or more Subsidiaries, by the
Company.
'Year' means the applicable calendar year.
ARTICLE III
Stockholder Approval
3.1 The material terms of the performance goals under this Plan,
including the bonuses to be paid upon the attainment of the goals, shall be
disclosed to the stockholders of the Company and shall be submitted to the
stockholders for their approval (in accordance with ss.162(m)) at the annual
2
<PAGE>
meeting next following the date of adoption of this Plan by the Compensation
Committee. Subsequent disclosure to, and approvals by, the stockholders of the
Company shall be made and obtained, respectively, to the extent required by
the relevant provisions of ss.162(m). No amounts shall be paid under this Plan
unless the requisite stockholder approval of such payments under ss.162(m)
shall have been obtained.
ARTICLE IV
Participants; Pre-established Performance Goals
4.1 This Plan shall apply as to any Year only to persons who are
Covered Employees for such Year.
4.2 The specific targets applicable to all Covered Employees shall be
established in accordance with paragraph 4.3 hereof and shall be related to
any one or combination of the following criteria (alone or in such
combination, the 'Performance Goals'):
(a) stockholders' equity;
(b) combined ratio;
(c) total return on the investment portfolio;
(d) amount of pre-tax net realized capital gains of the investment
portfolio;
(e) pre-tax operating income;
(f) net premiums written;
(g) revenues of RCG-IT;
(h) gross margin of RCG-IT;
3
<PAGE>
(i) debt to total capitalization ratio;
(j) the price of the Company's common stock; and
(k) net investment income.
Targets set with respect to any Performance Goal may relate to absolute and/or
relative performance with respect to (unless otherwise specifically provided
above) any one or combination of the Company, Reliance Insurance Group, RCG-IT
or any other Subsidiary.
4.3 The specific targets for the Performance Goals shall be as
determined in any Year by the Compensation Committee in advance of the
deadlines applicable under Section 162(m) and while performance relating to
the Performance Goals remains substantially uncertain. The Compensation
Committee shall establish fifteen (15) targets for each Year for purposes of
paragraph 5.2 of this Plan (the '5.2 Targets') and two different targets for
purposes of paragraph 5.3 of this Plan (as more specifically described in
paragraph 5.3 below, the '5.3 Targets' and together with the 5.2 Targets, the
'Targets').
4.4 All Targets for each Year shall be set forth in writing and the
extent to which they have been achieved shall be certified in writing, prior
to the payment of any bonus under this Plan for such Year, by the Compensation
Committee. Any such writing or certification may be through approved minutes
or resolutions of the Compensation Committee.
4
<PAGE>
ARTICLE V
Calculation and Payment of Bonus
5.1 Subject to paragraphs 5.2 and 5.3 of this Plan, each Covered
Employee shall be eligible to receive a basic bonus under this Plan for each
Year, of between 85% and 150% of such Covered Employee's Base Salary for such
Year plus a supplemental bonus of up to 285% of such Covered Employee's Base
Salary. In no event, however, shall a Covered Employee be entitled to receive
for any Year, a bonus under this Plan that exceeds 400% of such Covered
Employee's Base Salary for such Year. The cost of any bonuses payable under
this Plan for any Year to a Covered Employee employed by the Company and/or
one or more Subsidiaries shall be allocated between such employing entities in
proportion to the respective amounts of Base Salary paid to the Covered
Employee by such entities.
5.2 Subject to paragraph 5.4 hereof, each Covered Employee shall be
entitled to receive a basic bonus for each Year, of between 85% and 150% of
such Covered Employee's Base Salary for such Year, in an amount determined as
follows: 85% of such Covered Employee's Base Salary if two of the 5.2 Targets
are achieved, increased by 5% of such Covered Employee's Base Salary for each
5.2 Target in excess of two that is achieved. If fewer than two 5.2 Targets
are achieved, no bonuses shall be paid hereunder for the applicable Year.
5
<PAGE>
5.3 In the event that at least eight (8) of the 5.2 Targets are
achieved for a Year, each Covered Employee shall be entitled to receive a
supplemental bonus for such Year, of up to an additional 285% of such Covered
Employee's Base Salary for such Year, if either or both of the 5.3 Targets are
achieved. The 5.3 Targets shall relate to the stockholders' equity Performance
Goal. At least one of the 5.3 Targets shall be based on average return on
stockholders' equity and neither of such Targets shall be identical to any 5.2
Target. At the time the 5.3 Targets are established, the Compensation
Committee shall provide an objective standard or formula for computing the
specific amount payable to each Covered Employee under this paragraph 5.3.
5.4 The Compensation Committee shall have the discretion to reduce or
eliminate bonuses payable under this Plan to any Covered Employee who the
Compensation Committee determines has breached a duty to the Company which
breach has or will result in material harm to the Company.
5.5 Bonuses earned under this Plan for any Year shall be paid as soon
as practicable following the Compensation Committee's certification under
paragraph 4.3 as to the extent to which the relevant Targets have been
achieved. Such certification by the Compensation Committee shall in no event
be given later than the sixtieth (60th) day after the end of the Year for
which bonuses are being paid. Any such bonuses shall be paid in cash or, at the
Covered Employee's option, such other form as is available under any deferred
compensation plan maintained by the Company, subject to required withholding for
taxes.
6
<PAGE>
ARTICLE VI
Non-Exclusivity
6.1 Nothing in this Plan shall prevent the Company from establishing
other incentive plans in which Covered Employees may participate, or from
making additional incentive payments to Covered Employees; provided that if
approved by the Company's stockholders at the relevant annual meeting, this
Plan will supercede the Amended Reliance Group Holdings, Inc. Executive Bonus
Plan, and no bonuses shall thereafter be paid thereunder.
ARTICLE VII
Authority and Administration
7.1 Subject to the limitations of the Plan, the Compensation
Committee shall have the sole and complete authority to establish the Targets
and to interpret this Plan and to make all the determinations necessary or
advisable in the administration of this Plan. The Compensation Committee may
adopt rules and regulations governing the administration of this Plan and
shall exercise all other powers conferred on it by this Plan, or which are
incident or ancillary thereto. In furtherance and not in limitation of the
foregoing, in the event of (i) any extraordinary gain or loss or other event
that is treated for accounting purposes as an extraordinary item under
generally accepted accounting principles, or (ii) any material change in
accounting policies or practices affecting the Company and/or the Performance
Goals or Targets, then, to the extent any
7
<PAGE>
of the foregoing events (or a material effect thereof) was not anticipated at
the time the Targets were set, the Compensation Committee shall make
adjustments to the Performance Goals and/or Targets, applied as of the date of
the event, and based solely on objective criteria, so as to neutralize, in the
Compensation Committee's judgment, the effect of the event on the applicable
performance based award.
7.2 The Compensation Committee shall have the sole and complete
authority to amend or terminate this Plan, subject to the stockholder approval
requirements of ss.162(m).
7.3 The Compensation Committee shall be entitled to rely upon
certificates of appropriate officers of the Company with respect to financial
and statistical data in order to calculate the bonuses for any Year payable
pursuant to this Plan. The Compensation Committee's determinations on matters
within its authority shall be conclusive and binding upon the Company and all
other persons. The Compensation Committee shall not be liable for any action or
determination made in good faith with respect to this Plan.
8
<PAGE>
RELIANCE GROUP HOLDINGS, INC.
-----------------------------
EXECUTIVE BONUS PLAN
--------------------
FOR JAMES E. YACOBUCCI
----------------------
ARTICLE I
Purpose
-------
1.1 The purpose of this Plan is to provide performance-based
compensation for James E. Yacobucci (the 'Employee'). This Plan, which is
intended to comply with the requirements of ss.162(m) is designed to enhance the
Company's ability to retain and reward a key executive who is expected to
contribute materially to the success of the Company by providing him the
opportunity to earn meaningful compensation tied to the Company's performance
under the predetermined criteria set forth herein.
ARTICLE II
Definitions
-----------
2.1 Capitalized terms used in this Plan shall have the meanings set
forth below.
'Base Salary' means $1 million.
'Code' means the Internal Revenue Code of 1986, as amended.
'Company' means Reliance Group Holdings, Inc.
'Compensation Committee' means the Special Compensation Committee
of the Board of Directors of the Company, comprised of at least two
'outside directors' as defined in ss.162(m) and solely of 'outside
directors' if required by ss.162(m).
<PAGE>
'Covered Employee' is as defined under ss.162(m)(3) of the Code.
'Investment Portfolio' means all or any part of the Cash and
Invested Assets of the Company's insurance subsidiaries, as
reflected in the statutory statements of such insurance
subsidiaries.
'Measurement Period' means the 12 month period ending December 31
of the year to which performance based compensation is applicable.
'Plan' means this Executive Bonus Plan, as the same may be amended
from time to time.
'Section 162(m)' means ss.162(m) of the Code, and the regulations
promulgated thereunder, all as amended from time to time.
ARTICLE III
Stockholder Approval
--------------------
3.1 The material terms of the performance goals under this Plan,
including the bonuses to be paid upon the attainment of the goals, shall be
disclosed to the stockholders of the Company and shall be submitted to the
stockholders for their approval (in accordance with ss.162(m)) at the annual
meeting next following the date of adoption of this Plan by the Compensation
Committee. Subsequent disclosure to, and approvals by, the stockholders of the
Company shall be made and obtained, respectively, to the extent required by the
relevant provisions of ss.162(m). No amounts shall be paid under this Plan
unless the requisite stockholder approval of such payments under ss.162(m) shall
have been obtained.
2
<PAGE>
ARTICLE IV
Preestablished Performance Goal
--------------------------------
4.1 This Plan shall apply as to any year in which the Employee is a
Covered Employee for such year.
4.2 The performance targets applicable to the Employee shall be
established in accordance with paragraph 4.3 hereof and shall be related to the
following criterion (the 'Performance Goal'):
- The performance of the Investment Portfolio for the Measurement
Period.
4.3 The specific targets for the Performance Goal shall be as
determined for any Measurement Period by the Compensation Committee in advance
of the deadlines applicable under ss.162(m) and while performance relating to
the Performance Goal remains substantially uncertain. All targets for each
Measurement Period shall be set forth in writing and the extent to which they
have been achieved shall be certified in writing, prior to the payment of any
bonus under this Plan for such Measurement Period, by the Compensation
Committee. Any such writing or certification may be through approved minutes or
resolutions of the Compensation Committee.
ARTICLE V
Calculation and Payment of Bonus
--------------------------------
5.1 Subject to paragraph 5.2 hereof, the Employee shall be eligible to
receive a maximum bonus of 400% of his Base Salary if the targets for the
Performance Goal set forth in paragraph 4.2 hereof have been met. The bonus
earned for any Measurement Period shall be paid as soon as practicable following
the Compensation Committee's certification under paragraph 4.3 as to the
3
<PAGE>
extent to which the relevant targets have been achieved. Such certification by
the Compensation Committee shall in no event be given later than the sixtieth
(60th) day after the end of the Measurement Period for which a bonus is being
paid. Any such bonus shall be paid in cash or, at the election of the Employee,
such other form as is available under any deferred compensation plan maintained
by the Company, subject to required withholding for taxes.
5.2 The Compensation Committee shall have the absolute discretion to
reduce or eliminate any amounts payable under this Plan to the Employee.
ARTICLE VI
Non-Exclusivity
---------------
6.1 Nothing in this Plan shall prevent the Company from establishing
other incentive plans in which the Employee may participate, or from making
additional incentive payments to the Employee.
ARTICLE VII
Authority and Administration
----------------------------
7.1 Subject to the limitations of this Plan, the Compensation Committee
shall have the sole and complete authority to establish the targets under this
Plan and to interpret this Plan and to make all the determinations necessary or
advisable in the administration of this Plan. The Compensation Committee may
adopt rules and regulations governing the administration of this Plan and shall
exercise all other powers conferred on it by this Plan, or which are incident or
ancillary thereto. The Compensation Committee shall be entitled to rely on
certificates of appropriate officers
4
<PAGE>
of the Company with respect to financial and statistical data in order to
calculate the bonus payable for any Measurement Period under this Plan. The
Compensation Committee's determinations on matters within its authority shall be
conclusive and binding upon the Company and all other persons. The Compensation
Committee shall not be liable for any action or determination made in good faith
with respect to this Plan.
The Compensation Committee shall have the sole authority to amend or
terminate this Plan, subject to the stockholder approval requirements of
ss.162(m).
5
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 7
<LEGEND>
This schedule contains summary financial information extracted from the
Company's Consolidated Balance Sheet and the Consolidated Statement of Income
and is qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<DEBT-HELD-FOR-SALE> 2,740,829
<DEBT-CARRYING-VALUE> 605,929
<DEBT-MARKET-VALUE> 636,140
<EQUITIES> 571,559
<MORTGAGE> 0
<REAL-ESTATE> 129,074
<TOTAL-INVEST> 4,408,957
<CASH> 61,175
<RECOVER-REINSURE> 4,671,935
<DEFERRED-ACQUISITION> 282,023
<TOTAL-ASSETS> 12,268,725
<POLICY-LOSSES> 6,926,739
<UNEARNED-PREMIUMS> 1,942,018
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 768,651
0
0
<COMMON> 11,599
<OTHER-SE> 1,175,600
<TOTAL-LIABILITY-AND-EQUITY> 12,268,725
1,220,247
<INVESTMENT-INCOME> 149,700
<INVESTMENT-GAINS> 105,938
<OTHER-INCOME> 349,846
<BENEFITS> 715,585
<UNDERWRITING-AMORTIZATION> 506,978
<UNDERWRITING-OTHER> 0
<INCOME-PRETAX> 384,676
<INCOME-TAX> 122,100
<INCOME-CONTINUING> 273,183
<DISCONTINUED> 0
<EXTRAORDINARY> (7,504)
<CHANGES> 0
<NET-INCOME> 265,679
<EPS-PRIMARY> $2.30
<EPS-DILUTED> $2.21
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
