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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 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
(ADDRESS OF PRINCIPAL EXECUTIVE 10055
OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (212) 909-1100
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
NAME OF EACH EXCHANGE ON WHICH
TITLE OF EACH CLASS REGISTERED
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New York Stock Exchange and Pacific
Common Stock, $.10 Par Value Exchange
9% Senior Notes, Due November 15, 2000 New York Stock Exchange
9 3/4% Senior Subordinated Debentures,
Due November 15, 2003 New York Stock Exchange
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No_
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
As of March 15, 1999, 116,118,031 shares of the common stock of Reliance
Group Holdings, Inc. were outstanding, and the aggregate market value of the
voting stock held by nonaffiliates was approximately $561,139,223.
DOCUMENTS INCORPORATED BY REFERENCE:
(1) Reliance Group Holdings, Inc. 1998 Annual Report--Parts I, II and
IV.
(2) Reliance Group Holdings, Inc. Proxy Statement for the Annual
Meeting of Stockholders to be held May 13, 1999--Part III.
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PART I
ITEM 1. BUSINESS.
GENERAL
Reliance Group Holdings, Inc. (the "Company" or "Reliance Group Holdings")
is a holding company whose principal business is the ownership of Reliance
Insurance Company and its property and casualty insurance subsidiaries (the
"Reliance Insurance Group"). The Reliance Insurance Group underwrites a broad
range of commercial line property and casualty insurance and also underwrites
personal automobile coverage. The Company also owns RCG Information Technology,
Inc. ("RCG Information Technology"), an information technology consulting
company.
On February 27, 1998, the Company completed the sale of its title insurance
companies, Commonwealth Land Title Insurance Company and Transnation Title
Insurance Company and their respective subsidiaries ("Commonwealth/Transnation
Title") to Lawyers Title Corporation, whose name was changed to LandAmerica
Financial Group, Inc. ("LandAmerica") on that date. As consideration for the
sale, the Company received $266.6 million in cash, 4,039,473 shares of
LandAmerica common stock and 2,200,000 shares of LandAmerica 7% cumulative
convertible preferred stock having a stated value of $110,000,000 and which is
initially convertible into 4,824,561 shares of LandAmerica common stock. Such
shares of common stock and preferred stock are subject to various terms,
conditions and restrictions with regard to sale, conversion and voting. The
total sale proceeds were $662.1 million. The Company owns approximately 26% of
LandAmerica's outstanding common stock and, on a diluted basis, 44% of
LandAmerica's common stock, assuming the conversion of the preferred stock, and
has three representatives on LandAmerica's 14-member board of directors.
Accordingly, the Company accounts for its investment in LandAmerica by the
equity method of accounting and has classified LandAmerica as an investee
company. The transaction resulted in an after-tax gain of $242.9 million, of
which $133.6 million was recognized in 1998. The deferred gain of approximately
$109.3 million will be recognized as the equity securities received from
LandAmerica are sold. See Note 2 to the Company's consolidated financial
statements (the "Consolidated Financial Statements"), which information is
incorporated herein by reference, and "Investee Companies".
Reliance Insurance Company has conducted business since 1817, making it one
of the oldest property and casualty insurance companies in the United States.
The Reliance Insurance Group consists of Reliance National, Reliance Insurance,
Reliance Reinsurance, Reliance Surety and Reliance Direct, each of which has a
distinct operating identity and is managed separately. Reliance National offers,
through brokers and agents, a broad range of commercial property and casualty
insurance products and services primarily for large companies and specialty
lines customers. Reliance National also offers, through agents, non-standard
automobile and smaller account workers' compensation insurance, as well as
insurance programs for groups with common insurance needs. Reliance National
selects market segments where it can provide specialized coverages and services.
It conducts business nationwide and in certain international markets. In 1998,
Reliance National accounted for 50% of the net premiums written by the Reliance
Insurance Group. Reliance Insurance provides, through agents and brokers,
commercial property and casualty insurance coverages for mid-sized companies
primarily in the United States. Reliance Insurance also offers traditional and
specialized coverages for more complex risks. In 1998, Reliance Insurance
accounted for 32% of the net premiums written by the Reliance Insurance Group.
Reliance Reinsurance offers, primarily through brokers, treaty and facultative
reinsurance, including products for agricultural-related risks, for small to
medium sized regional and specialty insurance companies located in the United
States. Reliance Surety is a leading writer of surety bonds and fidelity bonds
in the United States and conducts its business through agents and brokers.
Reliance Direct was formed in 1997 to market and underwrite preferred personal
automobile insurance on a direct basis. In the first quarter of 1999, the
Reliance Insurance Group commenced a review of its personal automobile lines of
business to determine the feasibility of combining the personal automobile
businesses of Reliance National and Reliance Direct into a single operating
unit. As a result, the Reliance Insurance Group has determined that it will
create Reliance Personal Insurance ("Reliance Personal"), a new unit designed to
serve both the standard and non-standard markets for personal automobile
insurance. Accordingly, the Company is reviewing the form in which it will
present the results of the Reliance Insurance Group's operating units in future
periods.
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RCG Information Technology provides computer-related services to corporate
clients primarily in the United States and had revenues of $247.7 million in
1998.
Business segment information for the years ended December 31, 1998, 1997
and 1996 is set forth in Note 18 to the Consolidated Financial Statements, which
information is incorporated herein by reference. All financial information in
this Annual Report on Form 10-K is presented in accordance with generally
accepted accounting principles ("GAAP") unless otherwise specified.
The Company owns all of the common stock of Reliance Financial Services
Corporation ("Reliance Financial") which in turn owns all of the common stock of
Reliance Insurance Company. The common stock of Reliance Insurance Company is
pledged to secure certain indebtedness. See Note 8 to the Consolidated Financial
Statements, which information is incorporated herein by reference. Reliance
Insurance Company indirectly owns all of the common stock of RCG Information
Technology.
OPERATING UNITS
Property and Casualty Insurance. The following table sets forth the amount
of net premiums written in each line of business for the years ended
December 31, 1998, 1997 and 1996 by Reliance National, Reliance Insurance,
Reliance Reinsurance, Reliance Surety and Reliance Direct.
<TABLE>
<CAPTION>
1998 1997 1996
------------------------------------- ------------------------------------- -------------------
RELIANCE RELIANCE RELIANCE RELIANCE RELIANCE RELIANCE
NATIONAL INSURANCE OTHER(1) TOTAL NATIONAL INSURANCE OTHER(1) TOTAL NATIONAL INSURANCE
-------- --------- -------- ------ -------- --------- -------- ------ -------- ---------
(IN MILLIONS, EXCEPT PERCENTAGES)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
General Liability............. $ 347 $ 118 $ -- $ 465 $311 $ 112 $ -- $ 423 $368 $ 99
Commercial Auto............... 109 226 -- 335 97 198 -- 295 86 179
Workers' Compensation......... 156 148 -- 304 128 148 -- 276 127 123
Multiple Peril................ 17 209 -- 226 18 203 -- 221 20 192
Reinsurance................... -- -- 217 217 -- -- 159 159 -- --
Surety........................ -- -- 204 204 -- -- 177 177 -- --
Non-Standard Auto............. 201 -- -- 201 98 -- -- 98 -- --
Ocean and Inland Marine....... 126 41 -- 167 150 41 -- 191 83 46
Accident and Health........... 154 -- -- 154 92 -- -- 92 62 --
Fire and Allied............... 36 24 -- 60 20 26 -- 46 22 42
Preferred Personal Auto....... -- -- 26 26 -- -- 1 1 -- --
Other......................... 68 9 2 79 73 12 2 87 66 21
------ ----- ---- ------ ---- ----- ---- ------ ---- -----
Total....................... $1,214 $ 775 $449 $2,438 $987 $ 740 $339 $2,066 $834 $ 702
------ ----- ---- ------ ---- ----- ---- ------ ---- -----
------ ----- ---- ------ ---- ----- ---- ------ ---- -----
Percent of Total.............. 50% 32% 18% 100% 48% 36% 16% 100% 45% 38%
------ ----- ---- ------ ---- ----- ---- ------ ---- -----
------ ----- ---- ------ ---- ----- ---- ------ ---- -----
<CAPTION>
1996
----------------
OTHER(1) TOTAL
-------- ------
<S> <C> <C>
General Liability............. $ -- $ 467
Commercial Auto............... -- 265
Workers' Compensation......... -- 250
Multiple Peril................ -- 212
Reinsurance................... 151 151
Surety........................ 159 159
Non-Standard Auto............. -- --
Ocean and Inland Marine....... -- 129
Accident and Health........... -- 62
Fire and Allied............... -- 64
Preferred Personal Auto....... -- --
Other......................... -- 87
---- ------
Total....................... $310 $1,846
---- ------
---- ------
Percent of Total.............. 17% 100%
---- ------
---- ------
</TABLE>
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(1) Consists of Reliance Reinsurance, Reliance Surety, Reliance Direct and
Other.
For information about the net premiums earned, underwriting gain (loss) and
combined ratios for the years ended December 31, 1998, 1997 and 1996 for
Reliance National, Reliance Insurance, Reliance Reinsurance, Reliance Surety and
Reliance Direct, see "Reliance Group Holdings, Inc. and Subsidiaries Financial
Review" on page 26 of the Reliance Group Holdings 1998 Annual Report, which
information is incorporated herein by reference.
The following table sets forth underwriting results for the Reliance
Insurance Group for the years ended December 31, 1998, 1997 and 1996.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------
1998 1997 1996
-------- -------- --------
(IN MILLIONS, EXCEPT RATIOS)
<S> <C> <C> <C>
Net premiums written... $2,438.3 $2,065.8 $1,846.2
Underwriting loss(1)... (52.1) (31.7) (38.4)(2)
Combined ratio......... 102.1% 100.9% 101.6%(2)
</TABLE>
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(1) Includes catastrophe losses (net of reinsurance) for the years ended
December 31, 1998, 1997 and 1996 of $33.3 million, $11.1 million and
$19.9 million, respectively.
(2) Excludes a charge of $134.0 million (7.4 combined ratio points) to
increase net loss reserves for asbestos-related and environmental
pollution claims for business written in or before 1987. The actual
underwriting loss was $172.4 million and the combined ratio was 109.0%.
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The following table sets forth certain financial information of the
Reliance Insurance Group based upon statutory accounting practices and
shareholder's equity of Reliance Insurance Company, the principal operating
subsidiary of the Company, based upon GAAP (in thousands):
<TABLE>
<CAPTION>
STATUTORY ACCOUNTING GAAP
---------------------------------------------------------------------------- -------------
NET TOTAL POLICY- COMMON
YEAR ENDED PREMIUMS UNEARNED LOSS ADMITTED TOTAL HOLDERS' SHAREHOLDER'S
DECEMBER 31, WRITTEN PREMIUMS RESERVES ASSETS LIABILITIES SURPLUS EQUITY
- - ------------ ---------- ---------- ---------- ---------- ----------- ---------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
1998........ $2,464,813 $1,117,095 $3,175,171 $6,665,158 $ 4,917,733 $1,747,425 $ 1,916,051
1997........ 2,081,991 980,146 3,172,266 5,955,177 4,652,687 1,302,490 1,704,256
1996........ 1,848,159 885,799 3,228,792 5,669,276 4,482,220 1,187,056 1,410,484
</TABLE>
The Reliance Insurance Group writes insurance in every state of the United
States, the District of Columbia, Puerto Rico, Guam and the Virgin Islands. In
1998, California, New York, Florida, Texas and Pennsylvania accounted for
approximately 15%, 10%, 8%, 6% and 5%, respectively, of direct premiums written.
No other state accounted for more than 5% of direct premiums written by the
Reliance Insurance Group. The Reliance Insurance Group writes insurance
primarily through agents and brokers and also underwrites personal lines
automobile insurance utilizing the Internet, direct mail and other direct
marketing channels.
The Reliance Insurance Group also writes insurance in the European
Community through Reliance National offices in the United Kingdom, the
Netherlands, Sweden, Spain and Germany, in the Americas through Reliance
National offices in Canada, Mexico, Argentina and Brazil, in the Pacific Rim
through a Reliance National office in Singapore, and in Asia through a Reliance
National office in South Korea and a joint venture insurance operation in Hong
Kong called Lippo Reliance Insurance Company Ltd. The Reliance Insurance Group
also writes insurance through Reliance National offices in Switzerland and in
South Africa. In addition, the Reliance Insurance Group has cooperation
agreements between Reliance National and each of Huatai Insurance Company and
Tian An Insurance Company, both in China. The Reliance Insurance Group's
foreign-sourced net written premiums were $284.2 million, $271.2 million and
$195.7 million for the years ended December 31, 1998, 1997 and 1996,
respectively.
Aon Group, Inc., a worldwide insurance brokerage firm, accounted for 11.8%
of the direct premiums written in 1998 by the Reliance Insurance Group.
A. M. Best & Company, Inc. ("Best"), publisher of Best's Insurance Reports,
Property-Casualty, has assigned an "A- (Excellent)" rating to the Reliance
Insurance Group. Best's ratings are based on an analysis of the financial
strength, operating performance and market profile of an insurance company as
they relate to Best's quantitative and qualitative standards. An "A-
(Excellent)" rating is assigned to those companies which have, on balance,
excellent financial strength, operating performance and market profile when
compared to the standards established by Best. Standard & Poor's ("S&P") has
assigned an "A" rating to the claims-paying ability of the Reliance Insurance
Group. An "A" rating is assigned to those companies which have strong financial
security characteristics, but are somewhat more likely to be affected by adverse
business conditions than are insurers with higher ratings. The Best and S&P
ratings are not designed for the protection of investors and do not constitute
recommendations to buy, sell or hold any security. Although the Best and S&P
ratings of the Reliance Insurance Group are not as high as many of the insurance
companies with which the Reliance Insurance Group competes, management believes
that the current ratings are adequate to enable the Reliance Insurance Group to
compete successfully.
Reliance National. Reliance National offers a broad range of commercial
insurance products and services, both on a primary and assumed basis, with a
focus on large accounts and specialty lines customers. Reliance National selects
market segments where it can provide specialized coverages, such as directors
and officers liability insurance, or specialized services, such as providing
captive insurance arrangements to the alternative risk markets. During 1998,
Reliance National provided non-standard personal automobile insurance. It also
provides traditional commercial insurance products. In 1998, Reliance National
accounted for 50% of the net premiums written by the Reliance Insurance Group.
Reliance National, which conducts business nationwide and in certain
international locations, is headquartered in New York City and has 88 offices in
twenty-four states and fourteen countries. Reliance National distributes its
products through insurance brokers and agents. Net
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premiums written by Reliance National were $1.2 billion, $987.3 million and
$833.7 million for the years ended December 31, 1998, 1997 and 1996,
respectively.
Reliance National is organized into eight major divisions. Each division is
comprised of departments which focus on particular types of businesses, programs
or market segments. Each department makes use of underwriters, actuaries, claims
personnel and other professionals to market, structure, price and service its
products. Reliance National's eight major divisions are:
o Casualty Risk Services, Reliance National's largest division, which
writes workers' compensation, commercial automobile and general liability
coverages primarily to Fortune 1,000 companies, multinationals and the
construction industry. These coverages are primarily provided on a large
deductible basis and to the alternative risk markets through captive
reinsurance arrangements. This division also provides environmental
pollution coverages primarily on a claims-made basis for consultants,
contractors, transporters and certain other insureds, and operates
CyberComp, which permits Reliance National to utilize the Internet to
write, through agents, guaranteed cost workers' compensation coverages
for smaller accounts.
o Non-Standard Automobile, which primarily writes personal automobile
insurance for drivers unable to obtain insurance in the standard
automobile insurance market. In 1999, these operations will be
consolidated into Reliance Personal.
o International, which writes predominantly commercial casualty and
property insurance products, including commercial automobile and
specialized coverages such as excess casualty, directors and officers
liability insurance, fidelity insurance and accident and health coverage
in certain international markets. This division also writes ocean marine
coverages in domestic and certain international markets.
o International Reinsurance and Special Risk, which writes aviation and
space satellite risk coverages, as well as certain non-traditional
insurance products, in domestic and certain international markets.
o Accident and Health, which writes high limit disability, group accident,
blanket special risk and medical excess of loss programs.
o Financial Products, which writes directors and officers liability
insurance, errors and omissions insurance, employment practices liability
insurance and fidelity and fiduciary coverages in the domestic market.
o Excess and Surplus Lines, which primarily writes professional liability
insurance to architects, engineers, lawyers, healthcare providers and
other professionals, and writes excess and umbrella coverages.
o Property/Custom Casualty, which primarily writes commercial property,
casualty and inland marine coverages focusing on excess and specialty
commercial accounts.
Reliance National formed a Credit Insurance division in 1998, which is
expected to commence the writing of premiums in 1999. This division plans to
write a range of consumer insurance products including credit life insurance,
disability insurance and unemployment insurance.
Reliance National attempts to limit its exposure to losses through the use
of claims-made policies, policies written on a large deductible basis and by
purchasing reinsurance. Policies written on a "claims-made" basis accounted for
approximately 20%, 23% and 26% of Reliance National's net premiums written
during 1998, 1997 and 1996, respectively. Policies written on a "claims-made"
basis provide coverage only for claims made against the insured during the
policy period or within an established reporting period, as opposed to
"occurrence" basis policies which provide coverage for events that occur during
the policy period without regard for when the claim is reported. Claims-made
policies mitigate the "long tail" nature of the risks insured. Policies written
on a large deductible basis accounted for approximately 9%, 9% and 14% of
Reliance National's net premiums written during 1998, 1997 and 1996,
respectively. Under policies written on a large deductible basis, the insured
pays, or reimburses the insurer for, all of its losses up to the deductible
amount. Under a large deductible policy, the insured may also pay for a portion
of the allocated loss adjustment expenses within the deductible amount. The use
of large deductible policies results in lower premiums and losses for Reliance
National as payments or reimbursements for losses made by an insured under a
large deductible policy are generally not considered premiums or losses to an
insurer. With large deductible policies, Reliance National
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provides insurance and loss control management services while reducing its
underwriting risk. Reliance National assumes a credit risk in connection with
large deductible policies and, therefore, insureds with such policies undergo
extensive credit analysis by a centralized credit department that is independent
from the underwriting process. Collateral in the form of bank letters of credit,
trust accounts or cash is generally provided by the insured to cover a
significant portion of Reliance National's credit exposure.
To further limit exposures, a substantial majority of Reliance National's
net premiums written during 1998 were for policies with net retentions equal to
or lower than $1.5 million per risk. By reinsuring a large proportion of its
business, Reliance National seeks to limit its exposure to losses on each line
of business it writes.
Reliance Insurance. Reliance Insurance offers commercial lines property
and casualty insurance products, primarily focusing on the diverse needs of
mid-sized companies nationwide. Reliance Insurance conducts business through 37
offices and distributes its products through approximately 1,400 agents and
brokers. Reliance Insurance's insureds are primarily closely held companies with
100 to 1,000 employees and annual sales of $5 million to $300 million. Reliance
Insurance underwrites a variety of commercial insurance coverages, including
commercial automobile, multiple peril, workers' compensation and general
liability. In 1998, Reliance Insurance accounted for 32% of the net premiums
written by the Reliance Insurance Group. Reliance Insurance is headquartered in
Philadelphia and operates in 50 states, the District of Columbia, Puerto Rico,
Guam and the Virgin Islands. Net premiums written by Reliance Insurance were
$775.5 million, $740.4 million and $702.4 million for the years ended December
31, 1998, 1997 and 1996, respectively.
Reliance Insurance's three major divisions are:
o Commercial Accounts, which focuses on accounts with annual premiums of up
to $1 million. This division writes a broad range of traditional
commercial coverages, primarily on a guaranteed cost basis.
o Specialty, which provides underwriting for industry segments with special
exposures and in 1998 wrote specific business segments: transportation,
manufacturing, contracting, public entities and social services. In 1999,
the manufacturing and contracting segments are expected to be
consolidated into the Commercial Accounts Division.
o Large Accounts, which focuses on casualty exposures of accounts with
annual premiums in excess of $1 million where it is able to offer more
flexible coverages through the use of large deductible and
retrospectively rated policies. With retrospectively rated policies, the
insured effectively pays for a large portion or, in many cases, all of
its losses. The Large Accounts division primarily provides workers'
compensation insurance and approximately 39% of its business was written
on a large deductible and retrospectively rated basis. Accounts with
large deductible and retrospectively rated policies undergo extensive
credit analysis by a centralized credit department that is independent
from the underwriting process. Collateral in the form of bank letters of
credit, trust accounts or cash is generally provided by the insured to
cover a significant portion of Reliance Insurance's credit exposure.
The Commercial Accounts and Large Accounts divisions provide their products
and services through a decentralized network of regional and branch offices.
This organization allows the Commercial Accounts and Large Accounts divisions to
place major responsibility and accountability for underwriting, sales and
customer service close to the insured. The Specialty division has a centralized
underwriting and customer service operation with a decentralized network of
sales representatives throughout the country. Reliance Insurance manages claims
for all of its divisions through a decentralized network of regional and branch
offices, which allows the point of service to be close to the insured.
Reliance Reinsurance. Reliance Reinsurance provides casualty reinsurance
on both a treaty (blocks of risk) and facultative (individual risks) basis and
property reinsurance on a treaty basis. The business of Reliance Reinsurance is
primarily conducted on a treaty basis. All treaty business is marketed through
reinsurance brokers who negotiate contracts of reinsurance on behalf of the
primary insurer or ceding reinsurer, while facultative business is produced both
directly and through reinsurance brokers. While Reliance Reinsurance's treaty
clients include all types and sizes of insurers, it typically targets treaty
reinsurance for small to medium sized regional and specialty insurance
companies, as well as captives, risk retention groups and other alternative risk
markets, providing both pro rata and excess of loss coverage. Reliance
Reinsurance believes that this market is subject to less competition and
provides an opportunity to develop and market innovative programs where pricing
is not the
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key competitive factor. Reliance Reinsurance typically avoids participating in
large capacity reinsurance treaties where price is the predominant competitive
factor. It generally writes reinsurance in the "lower layers", the first
$1 million of primary coverage, where losses are more predictable and
quantifiable. Reliance Reinsurance also operates an Agriculture division
reinsuring insurers whose products include crop insurance and other products for
agricultural-related risks. It also formed, in 1998, a unit to structure
specialized loss portfolio transfers and other financing programs for its
clients' insurance liabilities, principally in run-off situations. Reliance
Reinsurance conducts its business nationwide through three offices and is
headquartered in Philadelphia. Net premiums written by Reliance Reinsurance were
$217.3 million, $159.0 million and $151.1 million for the years ended
December 31, 1998, 1997 and 1996, respectively.
Reliance Surety. Reliance Surety is a leading writer of surety and
fidelity bonds in the United States. Reliance Surety concentrates on writing
performance and payment bonds for contractors of public works projects,
commercial real estate and multi-family housing. It also writes commercial
surety, financial institution and commercial fidelity bonds. Reliance Surety
performs extensive credit analysis on its clients and actively manages claims to
minimize losses and maximize recoveries. Reliance Surety has enjoyed long
relationships with a large majority of the contractors and accounts it has
insured. Reliance Surety recently established a Specialty Division to serve the
large contractor market. Its Firemark and Express Surety operations target
smaller contractors and accounts, a market traditionally less fully serviced by
national surety companies. Reliance Surety is headquartered in Philadelphia and
conducts business nationwide through 33 branch offices and distributes its
products through approximately 3000 agents and brokers. In addition, Reliance
Surety has a presence in London. Net premiums written by Reliance Surety were
$204.4 million, $176.5 million and $159.2 million for the years ended December
31, 1998, 1997 and 1996, respectively.
Surety bonds guarantee the payment or performance of one party (called the
principal) to another party (called the obligee). This guarantee is typically
evidenced by a written agreement by the surety (e.g., Reliance Surety) to
discharge the payment or performance obligations of the principal pursuant to
the underlying contract between the obligee and the principal. Fidelity bonds
insure against losses arising from employee dishonesty. Financial institution
fidelity bonds insure against losses arising from employee dishonesty and other
specifically named theft and fraud perils.
Reliance Direct. Reliance Direct was formed in 1997 to market and
underwrite preferred personal automobile insurance on a direct basis. Net
premiums written by Reliance Direct were $26.2 million and $1.1 million for the
years ended December 31, 1998 and 1997, respectively. In 1999, these operations
will be consolidated into Reliance Personal.
Information Technology Consulting Services. RCG Information Technology
provides a full range of information technology services to corporate clients
primarily in the United States, including clients in the following sectors:
financial services, energy, computer services, health care, pharmaceuticals,
telecommunications, public entities, publishing, electronics, travel and food
and beverage. Such services include: staff augmentation; systems analysis,
design and integration; enterprise resource planning and implementation;
imaging; client-server technologies; testing and quality assurance; work-flow
management; outsourcing; and management consulting. RCG Information Technology
has 19 offices in the United States and two offices overseas in the Philippines
and South Africa. RCG Information Technology recruits computer professionals
both in the United States and internationally to meet demands for its services,
and has established recruiting capabilities through its domestic offices and its
overseas offices. RCG Information Technology had revenues of $247.7 million,
$191.9 million and $136.7 million for the years ended December 31, 1998, 1997
and 1996, respectively, and its pretax operating income was $19.4 million, $5.6
million and $2.7 million for the years ended December 31, 1998, 1997 and 1996,
respectively.
INSURANCE CEDED AND ASSUMED
The Reliance Insurance Group's insurance operations purchase reinsurance to
limit the Company's exposure to losses. The Reliance Insurance Group enters into
reinsurance arrangements that are both facultative (individual risks) and treaty
(blocks of risk). Limits and retentions, which may change from time to time, are
based on a number of factors, including the previous loss history of the
operating unit, policy limits and exposure data, industry studies as to
potential severity, and market terms, conditions and capacity. Where
appropriate, the
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Reliance Insurance Group limits its exposure to individual risks by purchasing
excess of loss and quota share reinsurance, with treaty structures and net
retentions varying with the specific requirements of the line of business or
program being reinsured. In many cases, the Reliance Insurance Group purchases
additional facultative reinsurance to further reduce its retentions below treaty
levels.
The Reliance Insurance Group also assumes insurance ceded from other
insurers. The total premiums assumed from other insurers were $875.5 million,
$447.9 million and $356.5 million for the years ended December 31, 1998, 1997
and 1996, respectively. In addition to the growth in Reliance Reinsurance's
business, especially its agricultural business, the growth in assumed premiums
is attributable to captive and fronting arrangements with primary insurers in
which Reliance National, for a fee, assumes risk from such primary insurers and,
in turn, cedes all or a portion of such risk to a reinsurer. In such cases, a
third party generally underwrites the risks and investigates, adjusts and
settles the claims.
Reinsurers of the Reliance Insurance Group. Premiums ceded by the Reliance
Insurance Group to reinsurers were $2.4 billion, $1.9 billion and $1.6 billion
in 1998, 1997 and 1996, respectively. The Reliance Insurance Group is subject to
credit risk with respect to its reinsurers, as the ceding of risk to reinsurers
does not relieve the Reliance Insurance Group of its liability to insureds or
cedents, even though the reinsuring company assumes the related liability. At
December 31, 1998, the Reliance Insurance Group had aggregate reinsurance
recoverables of $5.0 billion, representing estimated amounts recoverable from
reinsurers pertaining to paid claims, unpaid claims, claims incurred but not
reported and unearned premiums. The Reliance Insurance Group holds substantial
amounts of collateral, consisting of letters of credit, trust accounts and cash,
to secure recoverables from unauthorized reinsurers. The Company had
$6.4 million reserved for potentially unrecoverable reinsurance at December 31,
1998.
In 1998, Reliance National entered into reinsurance fronting arrangements
as part of a workers' compensation insurance facility created and managed by
Unicover Managers, Inc., a third party manager of reinsurance pools. Under these
arrangements, Reliance National reinsures workers' compensation policies, the
occupational accident portion of which is then 100 percent reinsured by (also
referred to as "retroceded to") a number of other reinsurance companies
("retrocessional reinsurers"), many of which are life insurance companies.
Reliance National understands that several of its retrocessional reinsurers, or
their reinsurers, are projected to sustain substantial losses on this business.
In letters from certain retrocessional reinsurers and in published reports,
issues have been raised as to whether these retrocessional reinsurers will
attempt to avoid their obligations and as to whether one of them has become
financially impaired. In addition, the Insurance Department of the State of
Connecticut recently issued two bulletins asserting that life insurance
companies domiciled in Connecticut are not authorized to reinsure the
occupational accident portion of workers' compensation policies, although in the
second bulletin the Department makes it clear that it does not purport to
invalidate existing reinsurance contracts. Based on its review and assessment of
the information currently available to it, the Company believes that it has
valid and enforceable retrocessional reinsurance contracts with its
retrocessional reinsurers, and that ultimately it will recover the full amount
of such coverage.
7
<PAGE>
In 1998, the Reliance Insurance Group did not cede more than 5% of gross
written premiums to any one reinsurer and no one reinsurer accounted for more
than 10% of total ceded premiums. The Reliance Insurance Group's ten largest
reinsurers, based on 1998 ceded premiums, are as follows:
<TABLE>
<CAPTION>
1998
CEDED BEST
PREMIUM RATING
------------- ------
(IN MILLIONS)
<S> <C> <C>
American Re-Insurance Company..................... $ 239.9 A++
Lincoln National Life Insurance Company........... 114.6 A
Swiss Reinsurance America Corporation............. 100.4 A+
Commercial Risk Re-Insurance Company.............. 91.5 A
Connecticut General Life Insurance Company........ 71.0 A+
Employers Reinsurance Corporation................. 67.2 A++
Phoenix Home Life Mutual Insurance Company........ 65.8 A
Kemper Reinsurance Company........................ 61.1 A
Hertz International Reinsurance Ltd............... 59.1 (1)
General Reinsurance Corporation................... 56.3 A++
</TABLE>
- - ------------------
(1) An unrated captive reinsurer that is not affiliated with the Company.
Recoverables from such reinsurer are fully collateralized.
The Reliance Insurance Group maintains no "Funded Cover" reinsurance
agreements. "Funded Cover" reinsurance agreements are multi-year retrospectively
rated, non-cancelable reinsurance agreements which do not meet relevant
accounting standards for risk transfer and under which the reinsured must pay
additional premiums in subsequent years if losses in the current year exceed
levels specified in the reinsurance agreement.
8
<PAGE>
PROPERTY AND CASUALTY LOSS RESERVES
The Reliance Insurance Group's staff of over 100 actuaries regularly
performs comprehensive analyses of reserves and reviews the pricing and
reserving methodologies of the Reliance Insurance Group. Although the Company
believes, in light of present facts and current legal interpretations, that the
Reliance Insurance Group's overall property and casualty reserve levels are
adequate to meet its obligations under existing policies, due to the inherent
uncertainty and complexity of the reserving process, the ultimate liability may
be more or less than such reserves.
The following tables present information relating to the liability for unpaid
claims and related expenses ("loss reserves") for the Reliance Insurance Group.
The table below provides a reconciliation of the beginning to ending liability
balances for the years ended December 31, 1998, 1997 and 1996.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------
1998 1997 1996
---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
Loss reserves, beginning of year........ $6,559,508 $6,048,240 $5,695,678
Less reinsurance recoverables......... 3,317,190 2,736,634 2,516,243
---------- ---------- ----------
Net loss reserves, beginning of year.... 3,242,318 3,311,606 3,179,435
---------- ---------- ----------
Provision for policy claims and related
expenses:
Provision for insured events of the
current year....................... 1,549,907 1,299,066 1,211,672
Increase (decrease) in provision for
insured events
of prior years...................... (32,959) (35,980) 138,665(1)
---------- ---------- ----------
Total provision.................. 1,516,948 1,263,086 1,350,337
---------- ---------- ----------
Payments for policy claims and related
expenses:
Attributable to insured events of the
current year.......................... 490,146 367,763 298,838
Attributable to insured events of
prior years........................... 1,046,583 963,135 926,996
---------- ---------- ----------
Total payments................... 1,536,729 1,330,898 1,225,834
---------- ---------- ----------
Foreign currency translation............ (2,491) (1,476) 7,668
---------- ---------- ----------
Net loss reserves, end of year.......... 3,220,046 3,242,318 3,311,606
Plus reinsurance recoverables......... 3,953,840 3,317,190 2,736,634
---------- ---------- ----------
Loss reserves, end of year.............. $7,173,886 $6,559,508 $6,048,240
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
- - ------------------
(1) The 1996 increase in provision for insured events of prior years included a
pretax charge of $134.0 million to increase net loss reserves for
asbestos-related and environmental pollution claims for business written in
or before 1987.
The provision for policy claims and related expenses for 1998 and 1997
included favorable development in workers' compensation partially offset by
adverse development in the commercial automobile line. The redundancy in
workers' compensation is due, in part, to favorable development in
retrospectively rated policies, which was more than offset by a corresponding
reduction in premiums earned. The 1998 redundancy also includes favorable
development in the general liability and multiple peril lines of business and
adverse development in the ocean marine line of business. The provision for
insured events of prior years for 1996 included adverse development related to
asbestos-related and environmental pollution claims, which primarily affected
general liability, multiple peril and reinsurance lines of business, and
included a pretax charge of $134.0 million to increase net loss reserves for
asbestos-related and environmental pollution claims for business written in or
before 1987. The 1996 provision also included adverse development in the
commercial automobile line, offset by favorable development in workers'
compensation.
The table below summarizes the development of the estimated liability for
loss reserves (net of reinsurance recoverables) as of December 31 of each of the
prior ten years. The amounts shown on the top line of the table represent the
estimated liability for loss reserves (net of reinsurance recoverables) for
claims that are unpaid at
9
<PAGE>
the particular balance sheet date, including losses that had been incurred but
not reported to the Reliance Insurance Group. The upper portion of the table
indicates the loss reserves as they are reestimated in subsequent periods as a
percentage of the originally recorded reserves. These estimates change as losses
are paid and more accurate information becomes available about remaining loss
reserves. A redundancy exists when the original loss reserve estimate is
greater, and a deficiency exists when the original loss reserve estimate is
less, than the reestimated loss reserve at December 31, 1998. A redundancy or
deficiency indicates the cumulative percentage change, as of December 31, 1998,
of originally recorded loss reserves. The lower portion of the table indicates
the cumulative amounts paid as of successive periods as a percentage of the
original loss reserve liability. In calculating the percentage of cumulative
paid losses to the loss reserve liability in each year, unpaid losses of General
Casualty Company of Wisconsin, a former wholly-owned subsidiary, and its
subsidiaries ("General Casualty") at April 30, 1990 (the date of sale of General
Casualty), relating to 1988 through 1989, were deducted from the original
liability in each year. Each amount in the following table includes the effects
of all changes in amounts for prior periods. The table does not present accident
or policy year development data. For the years 1988 through 1995, the Company
had experienced deficiencies in its estimated liability for loss reserves and
for 1996 and 1997 the Company experienced redundancies. The table includes
provisions specifically made to strengthen prior-years' loss reserves of
$134.0 million in 1996 and $156.0 million in 1991. The Company's loss reserves
from 1988 to 1995 had been adversely affected by a number of factors beyond the
Company's control as follows: (i) significant increases in claim settlements
reflecting, among other things, inflation in medical costs; (ii) increases in
the costs of settling claims, particularly legal expenses; (iii) more frequent
resort to litigation in connection with claims; and (iv) a widening
interpretation of what constitutes a covered claim.
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994 1993 1992 1991
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
(IN THOUSANDS, EXCEPT PERCENTAGES)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net liability for unpaid claims
and
related expenses (loss
reserves)(1)..................... $3,220,046 $3,242,318 $3,311,606 $3,179,435 $3,127,781 $2,931,528 $2,702,992 $2,375,235
Net liability reestimated as of:
One year later................... -- 99.0% 98.9% 104.4% 101.2% 100.8% 101.5% 101.3%
Two years later.................. -- -- 97.3% 104.4% 104.8% 101.7% 103.1% 104.4%
Three years later................ -- -- -- 102.5% 103.6% 104.2% 104.0% 105.7%
Four years later................. -- -- -- -- 101.3% 103.0% 107.2% 106.7%
Five years later................. -- -- -- -- -- 100.7% 106.2% 110.5%
Six years later.................. -- -- -- -- -- -- 103.9% 109.7%
Seven years later................ -- -- -- -- -- -- -- 107.8%
Eight years later................ -- -- -- -- -- -- -- --
Nine years later................. -- -- -- -- -- -- -- --
Ten years later.................. -- -- -- -- -- -- -- --
Redundancy (Deficiency)........... 1.0% 2.7% (2.5%) (1.3%) (.7%) (3.9%) (7.8%)
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Paid (cumulative) as of:
One year later................... -- 32.3% 29.1% 29.2% 27.8% 26.6% 28.7% 29.0%
Two years later.................. -- -- 48.6% 48.7% 46.8% 44.9% 48.0% 48.6%
Three years later................ -- -- -- 62.2% 59.8% 58.4% 61.1% 62.1%
Four years later................. -- -- -- -- 69.1% 67.3% 70.5% 71.6%
Five years later................. -- -- -- -- -- 73.7% 76.5% 78.1%
Six years later.................. -- -- -- -- -- -- 80.9% 82.7%
Seven years later................ -- -- -- -- -- -- -- 86.2%
Eight years later................ -- -- -- -- -- -- -- --
Nine years later................. -- -- -- -- -- -- -- --
Ten years later.................. -- -- -- -- -- -- -- --
<CAPTION>
DECEMBER 31
----------------------------------
1990 1989 1988
---------- ---------- ----------
<S> <C> <C> <C>
Net liability for unpaid claims
and related expenses (loss
reserves)(1)..................... $1,893,421 $1,962,822 $1,644,057
Net liability reestimated as of:
One year later................... 114.4% 104.8% 104.8%
Two years later.................. 115.2% 117.0% 113.5%
Three years later................ 119.6% 118.2% 121.8%
Four years later................. 120.7% 120.9% 123.2%
Five years later................. 122.0% 122.2% 127.8%
Six years later.................. 127.0% 123.8% 128.7%
Seven years later................ 126.2% 129.1% 130.7%
Eight years later................ 124.9% 128.5% 138.0%
Nine years later................. -- 127.4% 137.7%
Ten years later.................. -- -- 136.6%
Redundancy (Deficiency)........... (24.9%) (27.4%) (36.6%)
---------- ---------- ----------
Paid (cumulative) as of:
One year later................... 36.6% 40.7% 41.6%
Two years later.................. 57.9% 65.4% 71.6%
Three years later................ 72.8% 82.2% 86.4%
Four years later................. 83.0% 91.3% 97.2%
Five years later................. 90.3% 97.8% 103.0%
Six years later.................. 95.5% 103.1% 107.3%
Seven years later................ 99.2% 106.8% 111.5%
Eight years later................ 102.2% 109.9% 114.3%
Nine years later................. -- 112.3% 117.2%
Ten years later.................. -- -- 119.4%
</TABLE>
- - ------------------
(1) The gross liability for unpaid claims and related expenses was $7.2 billion
at December 31, 1998. The gross liability for unpaid claims and related
expenses for years 1997 and prior was redundant by $126.3 million at
December 31, 1998.
10
<PAGE>
The difference between the property and casualty liability for loss
reserves at December 31, 1998 and 1997 reported in the Consolidated Financial
Statements (net of reinsurance recoverables) and the liability which would be
reported in accordance with statutory accounting practices is as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1998 1997
---------- ----------
(IN THOUSANDS)
<S> <C> <C>
Net liability reported under statutory accounting practices........................... $3,175,171 $3,172,266
Adjustment for GAAP basis accrual of estimated salvage and subrogation recoveries..... (16,325) (9,325)
Additional discount of workers' compensation reserves................................. 61,200 79,377
---------- ----------
Net liability reported on a GAAP basis................................................ $3,220,046 $3,242,318
---------- ----------
---------- ----------
</TABLE>
The difference between the property and casualty liability for gross loss
reserves at December 31, 1998 and 1997 reported in the Consolidated Financial
Statements and the liability which would be reported in accordance with
statutory accounting practices is as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1998 1997
---------- ----------
(IN THOUSANDS)
<S> <C> <C>
Liability reported under statutory accounting practices............................... $6,963,729 $6,386,144
Adjustment for GAAP basis accrual of estimated salvage and subrogation recoveries..... (21,925) (13,884)
Additional discount of workers' compensation reserves................................. 232,082 187,248
---------- ----------
Liability reported on a GAAP basis.................................................... $7,173,886 $6,559,508
---------- ----------
---------- ----------
</TABLE>
Property and casualty loss reserves are based on an evaluation of reported
claims, in addition to statistical projections of claims incurred but not
reported and loss adjustment expenses. Estimates of salvage and subrogation are
deducted from the liability for unpaid claims. Also considered are other factors
such as the promptness with which claims are reported, the history of the
ultimate liability for such claims compared with initial and intermediate
estimates, the type of insurance coverage involved, the experience of the
property and casualty industry and other economic indicators, when applicable.
The establishment of loss reserves requires an estimate of the ultimate
liability based primarily on past experience. The Reliance Insurance Group
applies a variety of generally accepted actuarial techniques to determine the
estimates of ultimate liability. The techniques recognize, among other factors,
the Reliance Insurance Group's and the industry's experience with similar
business, historical trends in reserving patterns and loss payments, pending
levels of unpaid claims, the cost of claim settlements, the Reliance Insurance
Group's product mix and the economic environment in which property and casualty
companies operate. Estimates are continually reviewed and adjustments of the
probable ultimate liability based on subsequent developments and new data are
included in operating results for the periods in which they are made. In
general, reserves are initially established based upon the actuarial and
underwriting data utilized to set pricing levels, and are reviewed as additional
information, including claims experience, becomes available. The establishment
of loss reserves makes no provision for the broadening of coverage by
legislative action or judicial interpretation or for extraordinary future
emergence of new classes of losses not sufficiently represented in the Reliance
Insurance Group's historical data base, or which are not yet able to be
quantified. The Reliance Insurance Group regularly analyzes its reserves and
reviews its pricing and reserving methodologies, using Reliance Insurance Group
actuaries, so that future adjustments to prior year reserves can be minimized.
However, given the complexity of this process, reserves require continual
updates and the ultimate liability may be more or less than such estimates
indicate. Estimation of loss reserves for long tail lines of business is more
difficult than for short tail lines because long tail claims may not become
apparent for a number of years, and a relatively higher proportion of ultimate
losses are considered incurred but not reported. As a result, variation in loss
development is more likely in long tail lines of business. The Reliance
Insurance Group attempts to reduce these variations in certain of its long tail
lines, primarily directors and officers liability and professional liability, by
writing policies on a claims-made basis.
11
<PAGE>
The Reliance Insurance Group also limits the potential loss from a single event
through the extensive use of reinsurance.
From time to time, the Reliance Insurance Group consults with independent
actuarial firms concerning reserving practices and levels. The subsidiaries of
the Reliance Insurance Group are required by state insurance regulators to file,
along with their statutory reports, an actuarial reserve opinion setting forth
an actuary's assessment of its reserve status. Since 1992, the Reliance
Insurance Group has used an independent actuarial firm to meet such
requirements.
In calculating the liability for loss reserves, the Reliance Insurance
Group discounts both direct workers' compensation pension claims and the
reserves for claims assumed through the participation of the Reliance Insurance
Group in the National Workers' Compensation Reinsurance Pool and the Workers'
Compensation Reinsurance Pool, which are expected to have regular, periodic
payment patterns. These claims are discounted for mortality and for interest
using statutory annual rates ranging from 3.5% to 6%. The discounting of such
claims (net of reinsurance recoverables) resulted in a decrease in the liability
for loss reserves of $197.3 million, $216.7 million and $230.0 million at
December 31, 1998, 1997 and 1996, respectively. The discount in 1998 was
decreased by $9.7 million, in addition to discount amortization of
$9.7 million, resulting in a decrease of pre-tax income of $19.4 million. The
discount in 1997 was decreased by $0.5 million, in addition to discount
amortization of $12.8 million, resulting in a decrease in pre-tax income of
$13.3 million. These decreases in pre-tax income for 1998 and 1997 were more
than offset by favorable prior period reserve development in workers'
compensation. The discount in 1996 was increased by $5.4 million, which was more
than offset by discount amortization of $11.1 million, resulting in a reduction
in pre-tax income of $5.7 million.
The liability for loss reserves includes provisions for inflation in
several ways, depending on how the reserve is established. An explicit provision
for inflation is used where estimates of ultimate loss are based on pricing. A
provision for inflation is also included for certain discounted workers'
compensation claims. In these cases, the provision for inflation is based on
factors supplied by the respective workers' compensation rating bureaus which
have jurisdiction for states which provide for cost-of-living increases in
indemnity benefits. In other reserves, the analysis reflects the effect of
inflationary trends as part of the overall effect on claim costs, as well as
changes in marketing, underwriting, reporting and processing systems, claims
settlement and coverages purchased.
Included in the liability for loss reserves at December 31, 1998 are
$199.2 million ($174.8 million net of reinsurance recoverables) of loss reserves
pertaining to asbestos-related and environmental pollution claims for business
written in or before 1987. The following table presents information relating to
the net loss reserves pertaining to asbestos-related and environmental pollution
claims for business written in or before 1987 for the years ended December 31,
1998, 1997 and 1996:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------------
1998 1997 1996
---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
Net loss reserves, beginning of year.................................... $ 192,933 $ 213,047 $ 101,008
Provision for policy claims and related expenses........................ -- -- 135,801
Payments for policy claims and related expenses......................... (18,168) (20,114) (23,762)
---------- ---------- ----------
Net loss reserves, end of year.......................................... $ 174,765 $ 192,933 $ 213,047
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
The 1996 provision for policy claims and related expenses includes a pretax
charge of $134.0 million to increase net loss reserves for asbestos-related and
environmental pollution claims for business written in or before 1987. In 1996,
the Company completed a study of its asbestos-related and environmental
pollution reserves. The study entailed a detailed review of the Company's
claims, analysis of new industry data, review of policies and classes of
business written by the Company and industry at large, and new actuarial
methodologies for projecting ultimate losses based on payment patterns and
claims analyses.
Included in the December 31, 1998 net loss reserves pertaining to
asbestos-related and environmental pollution claims for business written in or
before 1987 are $60.6 million of loss costs for claims incurred but not
reported, $43.9 million of loss costs for reported claims and $70.3 million of
related expenses.
12
<PAGE>
The following table presents information related to the number of insureds
with asbestos-related and environmental pollution claims outstanding for
business written in or before 1987:
<TABLE>
<CAPTION>
DECEMBER 31,
------------
1998 1997
---- ----
<S> <C> <C>
Number of insureds with outstanding claims, beginning of year...................................... 345 402
Additional insureds with claims during the year.................................................... 183 168
Insureds with closed or settled claims during the year............................................. (222) (225)
---- ----
Number of insureds with outstanding claims, end of year............................................ 306 345
---- ----
---- ----
</TABLE>
The average net paid loss per insured for asbestos-related and
environmental pollution claims for business written in or before 1987 was
$23,500 and $44,200 for the years 1998 and 1997, respectively.
The Company continues to receive claims asserting injuries from hazardous
materials and alleged damages to cover various clean-up costs. Asbestos-related
and environmental pollution claims primarily affect the Company's general
liability, multiple peril and reinsurance lines of business. For business
written in or before 1987, coverage and claim settlement issues, such as the
determination that coverage exists and the definition of an occurrence, may
cause the actual loss development for asbestos-related and environmental
pollution claims to exhibit more variation than the remainder of the Company's
book of business. On February 26, 1999, the Company received a preliminary
decision in an initial phase of an alternative dispute resolution trial of
certain contested issues between an asbestos producer and certain of its
liability carriers, including the Company. A description of the matter is set
forth in Note 15 to the Consolidated Financial Statements, which information is
incorporated herein by reference.
Since 1987, the Company has generally excluded coverage for most types of
asbestos-related and environmental pollution claims from its general liability
policies, other than policies specifically intended to provide environmental
pollution and asbestos removal coverages. Policies written by the Company after
1987 ("post-1987 A&E business") which specifically intend to provide
environmental pollution coverages are written primarily on a claims-made basis
and those which specifically intend to provide asbestos removal coverages are
written on an occurrence basis, generally with liability limits of $1.1 million
(net of reinsurance), including defense costs.
The liability for loss reserves at December 31, 1998 also included
$56.7 million ($33.7 million net of reinsurance recoverables) of loss reserves
pertaining to post-1987 A&E business. The following table presents information
relating to the net loss reserves pertaining to claims for post-1987 A&E
business for the years ended December 31, 1998, 1997 and 1996:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------
1998 1997 1996
-------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Net loss reserves, beginning of year............................................ $ 27,433 $29,388 $24,548
Provision for policy claims and related expenses................................ 24,144 7,094 12,051
Payments for policy claims and related expenses................................. (17,864) (9,049) (7,211)
-------- ------- -------
Net loss reserves, end of year.................................................. $ 33,713 $27,433 $29,388
-------- ------- -------
-------- ------- -------
</TABLE>
The December 31, 1998 net loss reserves pertaining to claims for post-1987
A&E business include $14.0 million of loss costs for claims incurred but not
reported, $14.1 million of loss costs for reported claims and $5.6 million of
related expenses.
13
<PAGE>
The following table presents information related to the number of insureds
with claims outstanding for post-1987 A&E business:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------
1998 1997
----- -----
<S> <C> <C>
Number of insureds with outstanding claims, beginning of year.................................... 381 308
Additional insureds with claims during the year.................................................. 168 180
Insureds with closed or settled claims during the year........................................... (164) (107)
----- -----
Number of insureds with outstanding claims, end of year.......................................... 385 381
----- -----
----- -----
</TABLE>
The average net paid loss per insured for claims for post-1987 A&E business
was $82,100 and $64,200 for the years 1998 and 1997, respectively.
Although the Company believes, in light of present facts and current legal
interpretations, that the overall loss reserves of the Reliance Insurance Group
are adequate to meet their obligations under existing policies, due to the
inherent uncertainty and complexity of the reserving process, the ultimate
liability may be more or less than such reserves.
14
<PAGE>
PORTFOLIO INVESTMENTS
Investment activities are an integral part of the business of the Reliance
Insurance Group. The Reliance Insurance Group believes that the investment
objectives of safety and liquidity, while seeking to maximize total return, can
be achieved by active portfolio management and intensive monitoring of
investments. Reference is made to "Financial Review--Property and Casualty
Insurance Investment Results", "--Investment Portfolio" and "--Market Risks" on
pages 28-29, 29 and 31-32, respectively, of the Company's 1998 Annual Report and
to Note 3 to the Consolidated Financial Statements, which information is
incorporated herein by reference.
At December 31, 1998, the Reliance Insurance Group's investment portfolio
was $3.9 billion (at cost) with 93% in fixed maturities and short-term
securities (including redeemable preferred stock and cash) and 7% in equity
securities, approximately 36% of which were convertible preferred stock. The
following table details the distribution of the Reliance Insurance Group's
investments at December 31, 1998:
<TABLE>
<CAPTION>
MARKET CARRYING
COST(1) VALUE VALUE
---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
Fixed maturities available for sale:
Bonds and notes:
United States government and government agencies and authorities... $ 545,482 $ 552,547 $ 552,547
States, municipalities and political subdivisions.................. 130,982 143,117 143,117
Foreign-government................................................. 47,810 50,934 50,934
Foreign-other...................................................... 154,893 153,789 153,789
Public utilities................................................... 451,046 469,349 469,349
Convertibles and bonds with warrants attached...................... 31,375 30,708 30,708
All other corporate bonds and notes................................ 999,133 995,104 995,104
Redeemable preferred stocks........................................... 326,288 343,316 343,316
---------- ---------- ----------
2,687,009 2,738,864 2,738,864
---------- ---------- ----------
Fixed maturities held for investment:
Bonds and notes:
States, municipalities and political subdivisions.................. 6,709 6,726 6,709
Foreign-government................................................. 123,615 136,020 123,615
Foreign-other...................................................... 14,448 15,243 14,448
Public utilities................................................... 199,574 211,261 199,574
All other corporate bonds and notes................................ 130,567 139,124 130,567
Redeemable preferred stocks........................................... 64,935 69,805 64,935
---------- ---------- ----------
539,848 578,179 539,848
---------- ---------- ----------
Total fixed maturities........................................... 3,226,857 3,317,043 3,278,712
---------- ---------- ----------
Equity securities(2):
Common stocks:
Banks, trusts and insurance companies.............................. 49,683 56,584 56,584
Industrial and other............................................... 82,572 577,172 577,172
Nonredeemable preferred stocks........................................ 130,731 120,787 120,787
---------- ---------- ----------
262,986 754,543 754,543
---------- ---------- ----------
Short-term investments(3)............................................... 448,966 448,966 448,966
---------- ---------- ----------
Total investment portfolio....................................... $3,938,809 $4,520,552 $4,482,221
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
<TABLE>
<CAPTION>
COST AND CARRYING
VALUE
-----------------
(IN THOUSANDS)
<S> <C>
Mortgage Loans(4)................................................... $ 3,526
Investments in real estate.......................................... 135,746
</TABLE>
- - ------------------
(1) With respect to fixed maturities, "cost" is original cost reduced by
repayments and adjusted for amortization of premiums or accretion of
discounts. With respect to equities, "cost" is original cost.
(2) Does not include investment in LandAmerica Financial Group, Inc. which, as
of December 31, 1998, had a carrying value of $415.7 million (excluding the
pretax deferred gain of $158.8 million on the sale of
Commonwealth/Transnation Title) and a market value of $507.1 million, and
investment in Zenith National Insurance Corp. which, as of December 31,
1998, had a carrying value of $166.0 million and a market value of
$152.0 million. See "Investee Companies."
(3) Includes cash of $65.3 million.
(4) In the Consolidated Financial Statements, mortgage loans are included in
premiums and other receivables.
15
<PAGE>
The Company seeks to maintain a diversified and balanced fixed maturity
portfolio representing a broad spectrum of industries and types of securities.
The Company holds virtually no investments in commercial real estate mortgages
and has no exposure to derivative securities (other than through its ownership
of any option, warrant or convertible security with an exercise or conversion
price related to an equity security). Purchases of fixed maturity securities are
researched individually based on in-depth analysis and objective predetermined
investment criteria and are managed to achieve a proper balance of safety,
liquidity and investment yields. The Reliance Insurance Group primarily invests
in investment grade securities (those rated "BBB" or better by S&P), and, to a
lesser extent, non-investment grade and non-rated securities.
At December 31, 1998, the aggregate carrying value and market value of
fixed maturities (other than short-term investments and cash) that either have
been rated by S&P in the following categories or are non-rated were as follows:
<TABLE>
<CAPTION>
PERCENT
CARRYING MARKET OF MARKET
VALUE VALUE VALUE
---------- ---------- ---------
(IN THOUSANDS, EXCEPT PERCENTAGES)
<S> <C> <C> <C>
AAA to A...................... $1,819,886 $1,846,603 56%
BBB........................... 806,978 818,382 25%
---------- ---------- ---
Total investment grade... 2,626,864 2,664,985 81%
---------- ---------- ---
BB to B....................... 449,913 450,123 13%
CCC to D...................... 9,260 9,260 --
Non-rated..................... 192,675 192,675 6%
---------- ---------- ---
Total.................... $3,278,712 $3,317,043 100%
---------- ---------- ---
---------- ---------- ---
</TABLE>
Substantially all of the non-investment grade and non-rated fixed
maturities are classified as "available for sale" and, accordingly, are carried
at quoted market value. All publicly traded investment grade securities are
priced using the Merrill Lynch Matrix Pricing model, which model is one of the
standard methods of pricing such securities in the industry. All publicly traded
non-investment grade securities, except as indicated below, are priced from
broker-dealers who make markets in these and other similar securities. For fixed
maturities not publicly traded, prices are estimated based on values obtained
from independent third parties or quoted market prices of comparable
instruments. Upon sale, such prices may not be realized when the size of a
particular investment in an issue is significant in relation to the total size
of such issue. Non-investment grade securities that are thinly traded are priced
using internally developed calculations. Such securities represent less than 1%
of the Reliance Insurance Group's fixed maturities portfolio.
Equity investments are made after the Reliance Insurance Group's staff of
investment professionals identify companies with strong growth prospects or
equities that appear to be undervalued relative to the issuer's business
fundamentals, such as earnings, cash flows, balance sheet and future prospects.
Subsequent to purchase, the business fundamentals of each equity investment are
carefully monitored.
As of March 15, 1999, the Reliance Insurance Group owned 8,051,927 shares
of common stock of Symbol Technologies, Inc. ("Symbol"), representing 13.7% of
the then outstanding common stock of Symbol. Symbol is the nation's largest
manufacturer of bar code-based data capture systems. As of March 15, 1999, the
market value of the Reliance Insurance Group's investment in Symbol was
$370,389,000 (based upon the closing price of Symbol common stock on such date
as reported by the NYSE), with a cost basis of $27,252,000. Certain executive
officers of the Company serve, at the Company's request, as directors of Symbol.
At December 31, 1998, the Company's real estate operations had holdings
with a carrying value of $135.7 million, which includes office buildings and
other commercial properties with an aggregate carrying value of $76.8 million,
undeveloped land with a carrying value of $36.9 million, and residential real
estate projects under construction with a carrying value of $22.0 million.
16
<PAGE>
The following table presents the investment results of the Reliance
Insurance Group's investment portfolio (including Commonwealth/Transnation's
investment portfolio for periods prior to the sale of the title insurance
operations) for each of the years ended December 31, 1998, 1997 and 1996:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------
1998 1997 1996
---------- ---------- ----------
(IN THOUSANDS, EXCEPT PERCENTAGES)
<S> <C> <C> <C>
Fixed Maturities:
Average investments(1).................. $3,815,319 $3,764,220 $3,625,144
Net investment income................... 276,303 267,895 260,275
Realized (losses) gains................. (13,131) 476 (5,686)
(Decrease) increase in unrealized
gains................................. (55,448) 103,992 (68,739)
Average annual yield:
Net investment income................. 7.23% 7.12% 7.18%
Realized (losses) gains............... (.34) 0.01 (0.15)
(Decrease) increase in unrealized
gains.............................. (1.45) 2.76 (1.90)
---------- ---------- ----------
Return on fixed maturities.............. 5.44% 9.89% 5.13%
---------- ---------- ----------
---------- ---------- ----------
Equity Securities:(2)
Average investments(1).................. $ 673,009 $ 727,287 $ 703,121
Net investment income................... 17,659 11,017 12,425
Realized gains.......................... 120,316 55,666 58,296
Increase in unrealized gains............ 159,059 51,945 15,939
Average annual yield:
Net investment income................. 2.62% 1.51% 1.77%
Realized gains........................ 17.88 7.66 8.29
Increase in unrealized gains.......... 23.64 7.14 2.27
---------- ---------- ----------
Return on equity securities............. 44.14% 16.31% 12.33%
---------- ---------- ----------
Total weighted average return on fixed
maturities and equity securities(3)... 11.25% 10.93% 6.30%
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
- - ------------------
(1) The average is computed by dividing the total market value of investments at
the beginning of the period plus the individual quarter-end balances by five
for the years ended December 31, 1998, 1997 and 1996.
(2) Does not include investments in LandAmerica Financial Group, Inc. for
periods subsequent to the sale of Commonwealth/Transnation Title and
investments in Zenith National Insurance Corp. See "Investee Companies."
(3) The impact on the overall rate of return of a one percent increase or
decrease in the December 31, 1998 fixed maturity portfolio market value
would be approximately 0.72%.
The carrying value and market value at December 31, 1998 of fixed
maturities for which interest is payable on a deferred basis was
$189.9 million.
INVESTEE COMPANIES
As of March 15, 1999, the Reliance Insurance Group owned 4,039,473 shares
of common stock of LandAmerica, representing 26.4% of the outstanding common
stock of LandAmerica, a Virginia-based title insurance company which on a pro
forma basis is the second largest title insurer in the United States based on
revenues, and owned 2,200,000 shares of the 7% cumulative convertible preferred
stock of LandAmerica having an aggregate stated value of $110,000,000 and
initially convertible into 4,824,561 shares of LandAmerica common stock. As of
March 15, 1999, the market value of the Reliance Insurance Group's investment in
LandAmerica was $329,749,000 (based upon the closing price of LandAmerica common
stock on such date as reported by the NYSE and upon an investment bank's
valuation of the preferred stock). The net value of the Reliance Insurance
Group's investment in LandAmerica as of March 15, 1999 was $256,854,000 (net of
a pretax
17
<PAGE>
deferred gain of $158,800,000, which is included in "accounts payable and
accrued expenses" in the Company's consolidated balance sheet). Certain
executive officers of the Company serve, at the Company's request, as directors
of LandAmerica. The Company's investment in LandAmerica for periods subsequent
to the sale of Commonwealth/Transnation Title is accounted for by the equity
method. See Notes 2 and 4 to the Consolidated Financial Statements, which
information is incorporated herein by reference.
As of March 15, 1999, the Reliance Insurance Group owned 6,574,445 shares
of common stock of Zenith National Insurance Corp. ("Zenith"), representing
38.3% of the outstanding common stock of Zenith, a California-based insurance
company with significant workers' compensation and standard commercial and
personal lines business. As of March 15, 1999, the market value of the Reliance
Insurance Group's investment in Zenith was $167,648,000 (based upon the closing
price of Zenith common stock on such date as reported by the NYSE), with a
carrying value of $166,014,000. Certain executive officers of the Company serve,
at the Company's request, as directors of Zenith. The Company's investment in
Zenith is accounted for by the equity method. See Note 4 to the Consolidated
Financial Statements, which information is incorporated herein by reference.
On February 22, 1999, Zenith Insurance Company ("Zenith Insurance"), a
wholly owned subsidiary of Zenith, and Nationwide Mutual Insurance Company
("Nationwide"), entered into a Stock Purchase Agreement (the "Agreement")
pursuant to which Zenith Insurance agreed to sell to Nationwide all of the
issued and outstanding capital stock of CalFarm Insurance Company, a wholly
owned subsidiary of Zenith Insurance. The purchase price under the Agreement is
$272 million cash, subject to adjustment in certain circumstances. The
transaction is expected to close in the second quarter of 1999. The Company
expects to realize a gain on the transaction. On March 22, 1999, Zenith
announced that it had received a report from a neutral third party relating to
the determination of the final purchase price of the assets and liabilities that
Zenith Insurance acquired from RISCORP Inc. on April 1, 1998. According to
Zenith, the report indicates that the total purchase price would be $92.3
million, of which $35 million already has been paid by Zenith. Because Zenith
has not yet indicated what changes to its financial statements, if any, may be
necessary or appropriate as a result of the report, the Company cannot yet
assess the impact of the determination of the purchase price upon its investment
in Zenith.
REGULATION
The businesses of the Reliance Insurance Group, in common with those of
other insurance companies, are subject to comprehensive, detailed regulation in
the jurisdictions in which they do business. Such regulation is primarily for
the protection of policyholders rather than for the benefit of investors.
Although their scope varies from place to place, insurance laws in general grant
broad powers to supervisory agencies or officials to examine companies and to
enforce rules or exercise discretion touching almost every significant aspect of
the conduct of the insurance business. These include the licensing of companies
and agents to transact business, the imposition of monetary penalties for rules
violations, varying degrees of control over premium rates, the forms of policies
offered to customers, financial statements, periodic reporting, permissible
investments and adherence to financial standards relating to surplus, dividends
and other criteria of solvency intended to assure the satisfaction of
obligations to policyholders. Other legislation obliges the Reliance Insurance
Group to offer policies or assume risks in various markets which it would not
seek if it were acting solely in its own interest. While such regulation and
legislation is sometimes burdensome, inasmuch as all insurance companies
similarly situated are subject to such controls, the Company does not believe
that the competitive position of the Reliance Insurance Group is affected
adversely.
State holding company acts also regulate changes of control in insurance
holding companies and transactions and dividends between an insurance company
and its parent or affiliates. Although the specific provisions vary, the holding
company acts generally prohibit a person from acquiring a controlling interest
in an insurer incorporated in the state promulgating the act or in any other
controlling person of such insurer unless the insurance authority has approved
the proposed acquisition in accordance with the applicable regulations. In many
states, including Pennsylvania, where Reliance Insurance Company is domiciled,
"control" is presumed to exist if 10% or more of the voting securities of the
insurer are owned or controlled by a party, although the insurance authority may
find that "control" in fact does or does not exist where a person owns or
controls either a lesser or a greater amount of securities. The holding company
acts also impose standards on certain transactions with related companies, which
generally include, among other requirements, that all transactions be fair and
18
<PAGE>
reasonable and that certain types of transactions receive prior regulatory
approval either in all instances or when certain regulatory thresholds have been
exceeded.
The Insurance Law of Pennsylvania limits the maximum amount of dividends
which may be paid without approval by the Pennsylvania Insurance Department.
Under such law, Reliance Insurance Company may pay dividends during the year
equal to the greater of (a) 10% of the preceding year-end policyholders' surplus
or (b) the preceding year's statutory net income, but in no event to exceed the
amount of unassigned funds, which are defined as "undistributed, accumulated
surplus including net income and unrealized gains since the organization of the
insurer." In addition, the Pennsylvania law specifies factors to be considered
by the Pennsylvania Insurance Department to allow it to determine that statutory
surplus after the payment of dividends is reasonable in relation to an insurance
company's outstanding liabilities and adequate for its financial needs. Such
factors include the size of the company, the extent to which its business is
diversified among several lines of insurance, the number and size of risks
insured, the nature and extent of the insurance company's reinsurance and the
adequacy of the insurance company's reserves. The maximum dividend permitted by
law is not indicative of an insurer's actual ability to pay dividends, which may
be constrained by business and regulatory considerations, such as the impact of
dividends on surplus, which could affect an insurer's ratings, competitive
position, the amount of premiums that can be written and the ability to pay
future dividends. Furthermore, the Pennsylvania Insurance Department has broad
discretion to limit the payment of dividends by insurance companies. There is no
assurance that Reliance Insurance Company will meet the tests in effect from
time to time under Pennsylvania law for the payment of dividends without prior
Insurance Department approval or that any requested approval will be obtained.
Reliance Insurance Company has been advised by the Pennsylvania Insurance
Department that any required approval will be based upon a solvency standard and
will not be unreasonably withheld. Any significant limitation of Reliance
Insurance Company's dividends would adversely affect the Company's ability to
service its debt and to pay dividends on its common stock.
Regular common stock dividends paid by Reliance Insurance Company were
$136.0 million in 1998, $114.6 million in 1997 and $111.5 million in 1996. In
addition, during 1998, Reliance Insurance Company paid extraordinary dividends
of $135.0 million representing a portion of the gain from the sale of
Commonwealth/Transnation Title. During 1999, $585.3 million would be available
for dividend payments by Reliance Insurance Company under Pennsylvania law.
Maintaining appropriate levels of statutory surplus is considered important
by the Company's management, state insurance regulatory authorities, and the
agencies that rate insurers' claims-paying abilities and financial strength.
Failure to maintain certain levels of statutory capital and surplus could result
in increased scrutiny or, in some cases, action taken by state regulatory
authorities and/or downgrades in an insurer's ratings.
The National Association of Insurance Commissioners (the "NAIC") has a
"risk-based capital" requirement for the property and casualty insurance
industry. "Risk-based capital" refers to the determination of the amount of
statutory capital required for an insurer based on the risks assumed by the
insurer (including, for example, investment risks, credit risks relating to
reinsurance recoverables and underwriting risks) rather than just the amount of
net premiums written by the insurer. A formula that applies prescribed factors
to the various risk elements in an insurer's business is used to determine the
minimum statutory capital requirement for the insurer. An insurer having less
statutory capital than the formula calculates would be subject to varying
degrees of regulatory intervention, depending on the level of capital
inadequacy. All of the Company's statutory insurance companies have statutory
capital in excess of the minimum required risk-based capital.
Reliance Insurance Company had values which in 1998 fell outside of the
usual range for two NAIC financial ratio ranges. Both financial ratio ranges are
intended to permit the NAIC to monitor insurance companies' performance with
respect to such ranges. With respect to the first test, Liabilities to Liquid
Assets, investments in affiliates are excluded from the definition of liquid
assets. Reliance Insurance Company is the ultimate parent company of all of the
property and casualty companies of the Reliance Insurance Group and therefore
the results for this test consistently fall outside the usual range. The Company
believes that it has sufficient marketable assets on hand to make timely payment
of claims and to meet other operating requirements. With respect to the second
test, Estimated Current Reserve Deficiency to Surplus, Reliance Insurance
Company's growth in earned premiums in 1998, in conjunction with a change in the
mix of business to more short-tailed lines, caused test results to fall outside
of the usual range. The Company believes that its value for this range is not
reflective of the adequacy of Reliance Insurance Company's current reserves.
19
<PAGE>
From time to time, states have adopted or considered adopting legislation
or regulations which could adversely affect the manner in which the Company sets
rates for policies of insurance, particularly as they relate to personal lines.
No assurance can be given as to what effect the adoption of such legislation or
regulations in the future would have on the ability of the Company to raise its
rates.
COMPETITION
The markets in which the Company's businesses compete are highly
competitive. The property and casualty insurance business is fragmented and no
single company dominates any of the markets in which the Company operates. The
Reliance Insurance Group competes with individual companies and with groups of
affiliated companies with greater financial resources, larger sales forces and
more widespread agency and broker relationships. Competition in the property and
casualty insurance industry is based primarily on price, product design and
service. In addition, because the Reliance Insurance Group sells policies
primarily through agents and insurance brokers who are not obligated to choose
the policies of the Reliance Insurance Group over those of another insurer, the
Reliance Insurance Group must compete for agents and brokers and for the
business they control. Such competition is based upon price, product design,
policyholder service, commissions and service to agents and brokers.
RCG Information Technology competes with other national information
technology services companies, as well as smaller computer professional
supplemental staffing firms. Competition in the information technology
consulting business is based primarily on price, service, quality of the
solutions provided and the availability of qualified computer professionals.
SALE OF DISCONTINUED OPERATION
On December 31, 1997, the Company sold all of the issued and outstanding
common stock of its subsidiary, Prometheus Funding Corp. ("Prometheus"),
formerly known as Frank B. Hall & Co. Inc. ("Hall"), an insurance broker.
Prometheus had previously sold substantially all of its operating assets and
insurance brokerage, employee benefits consulting and related services
businesses. See Note 2 to the Consolidated Financial Statements, which
information is incorporated herein by reference.
ITEM 2. PROPERTIES.
The Company and its consolidated subsidiaries own and lease offices in
various locations primarily in the United States. None of these properties is
material to the Company's business. At December 31, 1998, the Company and its
consolidated subsidiaries employed approximately 6,640 persons full time and
leased approximately 190 properties. Of those properties, approximately 130 are
for Reliance Insurance Group office space, approximately 20 are for RCG
Information Technology office space, and approximately 40 are for office space
of RCG Moody International Limited, a subsidiary of the Company which provides
international inspection and quality assurance services.
ITEM 3. LEGAL PROCEEDINGS.
The Company and its subsidiaries are involved in certain litigation arising
in the course of their businesses, some of which involve claims of substantial
amounts. Although the ultimate outcome of these matters cannot be ascertained at
this time, and the results of legal proceedings cannot be predicted with
certainty, the Company is contesting the allegations of the complaints in each
action pending against it and believes, based on current knowledge and after
consultation with counsel, that the resolution of these matters will not have a
material adverse effect on the Consolidated Financial Statements.
In addition, the Company is subject to the litigation set forth in Note 15
to the Consolidated Financial Statements, which information is incorporated
herein by reference.
20
<PAGE>
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matter was submitted to a vote of security holders in the fourth quarter
of the fiscal year covered by this Annual Report on Form 10-K.
EXECUTIVE OFFICERS OF THE REGISTRANT
Set forth below is the name, age and position of each of the executive
officers of the Company:
<TABLE>
<CAPTION>
NAME AND AGE POSITION
------------ --------
<S> <C>
Saul P. Steinberg (59)......... Chairman of the Board and Chief Executive
Officer
Robert M. Steinberg (56)....... President, Chief Operating Officer and Director
George E. Bello (63)........... Executive Vice President, Controller and
Director
Lowell C. Freiberg (59)........ Executive Vice President, Chief Financial
Officer and Director
Howard E. Steinberg (54)....... Executive Vice President, General Counsel and
Corporate Secretary
Albert A. Benchimol (41)....... Senior Vice President and Treasurer
Henry A. Lambert (63) ......... Senior Vice President--Real Estate Investments
and Operations
Dennis J. O'Leary (51)......... Senior Vice President--Taxes
Philip S. Sherman (50)......... Senior Vice President--Group Controller
Bruce L. Sokoloff (50)......... Senior Vice President--Administration
James E. Yacobucci (47)........ Senior Vice President--Investments and Director
Paul W. Zeller (50)............ Senior Vice President and Deputy General
Counsel
</TABLE>
The association between the Company and each of its executive officers is
described below.
Saul P. Steinberg founded and has been the Chief Executive Officer and a
Director of the Company and predecessors of the Company since 1961.
Mr. Steinberg is a Director of Symbol Technologies, Inc. and Zenith National
Insurance Corp. He is Chairman of the Executive Committee and the Regular
Compensation Committee of the Board of Directors. He is the brother of Robert M.
Steinberg and the brother-in-law of Bruce L. Sokoloff.
Robert M. Steinberg became a Director of the Company in 1981 and President
and Chief Operating Officer in 1982. He has held various positions with
predecessors of the Company since 1965. In October 1984, Mr. Steinberg was
elected Chairman of the Board and Chief Executive Officer of Reliance Insurance
Company. He is a Director of LandAmerica Financial Group, Inc. and Zenith
National Insurance Corp. Mr. Steinberg is a member of the Executive Committee
and the Regular Compensation Committee of the Board of Directors. Mr. Steinberg
is the brother of Saul P. Steinberg and the brother-in-law of Bruce L. Sokoloff.
George E. Bello became Executive Vice President and Controller and a
Director of the Company in 1982. He has held various positions with predecessors
of the Company since 1968. He is a Director of LandAmerica Financial Group,
Inc., Zenith National Insurance Corp. and Horizon Health Corporation. Mr. Bello
is Chairman of the Finance Committee of the Board of Directors.
Lowell C. Freiberg became Executive Vice President of the Company in May
1998, and has served as Chief Financial Officer of the Company since 1985 and as
a Director of the Company since 1982. He also served as Senior Vice President of
the Company from 1982 to May 1998 and as Treasurer of the Company from 1982
until March 1994. Mr. Freiberg has held various positions with predecessors of
the Company since 1969. He is a
21
<PAGE>
Director of LandAmerica Financial Group, Inc. and Symbol Technologies, Inc.
Mr. Freiberg is a member of the Finance Committee of the Board of Directors.
Howard E. Steinberg, Esq. became Executive Vice President of the Company in
May 1998 and has served as General Counsel and Corporate Secretary of the
Company since March 1983, when he joined the Company. He also served as Senior
Vice President of the Company from March 1983 to May 1998. Prior to joining the
Company, he was a partner in the law firm of Dewey, Ballantine, Bushby, Palmer &
Wood. Mr. Steinberg also serves as the Chairman of the New York State Thruway
Authority, an unpaid position to which he was appointed in January 1996.
Albert A. Benchimol joined the Company in 1989 as Vice President and
Assistant Treasurer. In 1994, he was elected Treasurer of the Company and in
August 1998 he was elected Senior Vice President.
Henry A. Lambert was elected Senior Vice President--Real Estate Investments
and Operations of the Company in 1982. He has held various positions with
predecessors of the Company since 1977. He is President and Chief Executive
Officer of Reliance Development Group, Inc., the real estate management
subsidiary of the Company.
Dennis J. O'Leary joined the Company in 1985 as Vice President--Director of
Taxes. Prior thereto, he was a partner at the accounting firm of Deloitte &
Touche LLP (formerly Touche Ross & Co.) since 1980 and was associated with the
firm since 1975. In 1987 he was elected Senior Vice President--Taxes.
Philip S. Sherman was elected Vice President--Group Controller of the
Company in l984 and in 1987 he was elected Senior Vice President--Group
Controller. He has held various positions with predecessors of the Company since
l980.
Bruce L. Sokoloff was elected Senior Vice President--Administration of the
Company in 1982. He has held various positions with predecessors of the Company
since 1973. He is a Director of Individual Investor Group, Inc. Mr. Sokoloff is
the brother-in-law of Messrs. Saul P. Steinberg and Robert M. Steinberg.
James E. Yacobucci became a Director of the Company and Senior Vice
President--Investments of Reliance Insurance Company in May 1989. He became
Senior Vice President--Investments of the Company in December 1990.
Paul W. Zeller was elected Vice President of the Company in 1983 and Senior
Vice President in August 1998. He has been Deputy General Counsel of the Company
since March 1984 and has held various positions with predecessors of the Company
since 1981.
Officers are not elected for a fixed term of office but serve at the
discretion of the Board of Directors. Certain executive officers have employment
agreements with the Company.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
See the information in "Market and Dividend Information for Common Stock"
on page 66 of the Reliance Group Holdings 1998 Annual Report, which information
is incorporated herein by reference.
ITEM 6. SELECTED FINANCIAL DATA.
See the information in "Reliance Group Holdings, Inc. and Subsidiaries
Selected Financial Data" on pages 21 and 22 of the Reliance Group Holdings 1998
Annual Report, which information is incorporated herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
See the information in "Reliance Group Holdings, Inc. and Subsidiaries
Financial Review" on pages 25 through 33 of the Reliance Group Holdings 1998
Annual Report, which information is incorporated herein by reference.
22
<PAGE>
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
See the information in "Reliance Group Holdings, Inc. and Subsidiaries
Financial Review--Market Risks" on pages 31 and 32 of the Reliance Group
Holdings 1998 Annual Report, which information is incorporated herein by
reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The financial statements of the Company and its consolidated subsidiaries,
included on pages 34 through 63 of the Reliance Group Holdings 1998 Annual
Report, which information is incorporated herein by reference, are listed in
Item 14 below.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Information regarding the executive officers of the Company is included in
Part I of this report under the caption "Executive Officers of the Registrant."
Information regarding the directors of the Company is incorporated herein
by reference from its Proxy Statement for the Annual Meeting of Stockholders to
be held May 13, 1999, under the caption "Proposal 1--Election of Directors."
ITEM 11. EXECUTIVE COMPENSATION.
See the information in the Company's Proxy Statement for the Annual Meeting
of Stockholders to be held May 13, 1999, under the caption "Executive
Compensation," which information (other than the information under the captions
"Executive Compensation--Report of Compensation Committees of the Board" and
"Executive Compensation--Performance Graph") is incorporated herein by
reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
See the information in the Company's Proxy Statement for the Annual Meeting
of Stockholders to be held May 13, 1999, under the caption "Security Ownership
of Certain Beneficial Owners and Management," which information is incorporated
herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
See the information in the Company's Proxy Statement for the Annual Meeting
of Stockholders to be held May 13, 1999, under the captions "Executive
Compensation--Compensation Committee Interlocks and Insider Participation" and
"Related Party Transactions," which information is incorporated herein by
reference.
23
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(A) 1. FINANCIAL STATEMENTS.
The consolidated financial statements of Reliance Group Holdings, Inc. and
Subsidiaries, which appear on pages 34 through 63 of the Reliance Group Holdings
1998 Annual Report, are incorporated herein by reference.
<TABLE>
<CAPTION>
PAGE REFERENCE
-----------------------
1998
ANNUAL
FORM 10-K REPORT
------------- ------
<S> <C> <C>
RELIANCE GROUP HOLDINGS, INC. AND SUBSIDIARIES:
Independent Auditors' Report............................ A-1 64
Consolidated Financial Statements at December 31, 1998
and 1997 and for the three years ended December 31,
1998:
Statement of Income................................ 34
Balance Sheet...................................... 35
Statement of Changes in Shareholders' Equity....... 36
Statement of Cash Flows............................ 37
Notes to Financial Statements (1-19)............... 38-63
<CAPTION>
2. FINANCIAL STATEMENT SCHEDULES.
<S> <C> <C>
I -- Summary of Investments of Insurance Subsidiaries -- Other Than Investments in
Related Parties................................................................ A-2
II -- Condensed Financial Information of the Registrant at December 31, 1998 and 1997
and for the three years ended December 31, 1998:
Statement of Income............................................................ A-3
Balance Sheet.................................................................. A-4
Statement of Cash Flows........................................................ A-5
III -- Supplementary Insurance Information.............................................. A-6
IV -- Reinsurance...................................................................... A-7
VI -- Supplemental Information Concerning Property and Casualty Insurance Operations... A-8
</TABLE>
Pursuant to Rule 1-02(w) of Regulation S-X, Reliance Insurance Group's
investment in Zenith National Insurance Corp. met the definition of a
"significant subsidiary" in 1996. Zenith National Insurance Corp. files
financial statements with the Securities and Exchange Commission which should be
referred to for additional information.
3. EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- - --------- ----------------------
<S> <C>
3.1 Reliance Group Holdings' Certificate of Incorporation, as amended
(incorporated by reference to Exhibit 3(a) to Registration Statement
No. 2-77043).
3.2 Amendment to Exhibit 3.1, as filed with the Secretary of State of
the State of Delaware on July 22, 1986 (incorporated by reference
to Exhibit 3.2 to Registration Statement No. 33-7493).
3.3 Amendment to Exhibit 3.1, as filed with the Secretary of State of
the State of Delaware on May 27, 1993 (incorporated by reference to
Exhibit 4.5 to Registration Statement No. 33-67396).
</TABLE>
24
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- - --------- ----------------------
<S> <C>
3.4 Reliance Group Holdings' Amended and Restated By-Laws (incorporated
by reference to Exhibit 3.2 to Reliance Group Holdings' Form 8-A
filed with the Securities and Exchange Commission on January 11,
1999).
*4.
+10.1 Employment Agreement between Reliance Group Holdings and Saul P.
Steinberg, dated as of February 15, 1996 (and the Schedule attached
thereto pursuant to Instruction 2 to Item 601 of Regulation S-K
listing George E. Bello, Lowell C. Freiberg, Howard E. Steinberg and
Robert M. Steinberg as having employment agreements identical in
all respects to Exhibit 10.1 other than as specified in such
schedule) (incorporated by reference to Exhibit 10.1 to Reliance
Group Holdings' Quarterly Report on Form 10-Q for the quarter ended
March 31, 1996).
+10.2 Amendment, dated as of December 29, 1997, to Employment Agreement
between Reliance Group Holdings and Saul P. Steinberg, dated as of
February 15, 1996 (and the Schedule attached thereto pursuant to
Instruction 2 to Item 601 of Regulation S-K listing George E. Bello,
Lowell C. Freiberg, Howard E. Steinberg and Robert M. Steinberg as
having amendments to their employment agreements identical in all
respects to Exhibit 10.2 other than as specified in such schedule).
+10.3 Employment Agreement between Reliance Insurance Company and Saul P.
Steinberg, dated as of February 15, 1996 (and Schedule attached
thereto pursuant to Instruction 2 to Item 601 of Regulation S-K
listing Robert M. Steinberg as having an employment agreement
identical in all respects to Exhibit 10.3) (incorporated by
reference to Exhibit 10.1 to Reliance Group Holdings' Quarterly
Report on Form 10-Q for the quarter ended March 31, 1996).
+10.4 Employment Agreement between Reliance Group Holdings and Bruce L.
Sokoloff, dated as of May 15, 1996 (incorporated by reference to
Exhibit 10.1 to Reliance Group Holdings' Quarterly Report on
Form 10-Q for the quarter ended June 30, 1996).
+10.5 Amendment, dated as of December 29, 1997, to Employment Agreement
between Reliance Group Holdings and Bruce L. Sokoloff, dated as of
May 15, 1996 (incorporated by reference to Exhibit 10.5 of Reliance
Group Holdings' Annual Report on Form 10-K for the year ended
December 31, 1997).
+10.6 1986 Stock Option Plan of Reliance Group Holdings, as amended
(incorporated by reference to Exhibit 19.2 to Reliance Group
Holdings' Quarterly Report on Form 10-Q for the quarter ended
June 30, 1990).
+10.7 The Reliance Group Holdings, Inc. 1994 Stock Option Plan
(incorporated by reference to Exhibit 10.2 to Reliance Group
Holdings' Quarterly Report on Form 10-Q for the quarter ended
June 30, 1994).
+10.8 Amended and Restated 1994 Stock Option Plan for Non-Employee
Directors (incorporated by reference to Exhibit 10.7 of Reliance
Group Holdings' Annual Report on Form 10-K for the year ended
December 31, 1997).
+10.9 The Reliance Group Holdings, Inc. 1997 Stock Option Plan
(incorporated by reference to Exhibit 10.2 to Reliance Group
Holdings' Quarterly Report on Form 10-Q for the quarter ended
June 30, 1997).
+10.10 The Reliance Group Holdings, Inc. 1998 Stock Option Plan
(incorporated by reference to Exhibit 10.1 to Reliance Group
Holdings' Quarterly Report on Form 10-Q for the quarter ended
June 30, 1998).
</TABLE>
- - ------------------
* Neither Reliance Group Holdings nor its subsidiaries is a party to any
instrument relating to long-term debt under which the securities authorized
exceed 10% of the total consolidated assets of Reliance Group Holdings and its
subsidiaries. Copies of instruments relating to long-term debt of lesser
amounts will be provided to the Securities and Exchange Commission upon
request.
+ Management contract or compensatory plan or arrangement required to be filed
as an Exhibit to this Form 10-K pursuant to Item 14(c).
25
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- - --------- ----------------------
<S> <C>
+10.11 The Reliance Group Holdings, Inc. 1998 Stock Option Plan for
Non-Employee Directors (incorporated by reference to Exhibit 10.2 to
Reliance Group Holdings' Quarterly Report on Form 10-Q for the
quarter ended June 30, 1998).
+10.12 The Reliance Group Holdings, Inc. Employee Stock Purchase Plan
(incorporated by reference to Exhibit 10.1 to Reliance Group
Holdings' Quarterly Report on Form 10-Q for the quarter ended
June 30, 1997).
+10.13 The Reliance Group Holdings, Inc. Key Employee Share Option Plan
(incorporated by reference to Exhibit 10.11 of Reliance Group
Holdings' Annual Report on Form 10-K for the year ended
December 31, 1997).
+10.14 Reliance Group Holdings, Inc. 1998 Executive Bonus Plan
(incorporated by reference to Exhibit 10.3 of Reliance Group
Holdings' Quarterly Report on Form 10-Q for the quarter ended
June 30, 1998).
+10.15 Amendment to Reliance Group Holdings, Inc. 1998 Executive Bonus
Plan.
+10.16 Reliance Group Holdings, Inc. Executive Bonus Plan for James E.
Yacobucci (incorporated by reference to Exhibit 10.4 of Reliance
Group Holdings' Quarterly Report on Form 10-Q for the quarter ended
June 30, 1998).
+10.17 Reliance National Risk Specialists 1992 Key Management Incentive
Plan (incorporated by reference to Exhibit 10.9 to Reliance
Insurance Company's Annual Report on Form 10-K for the year ended
December 31, 1993).
+10.18 Reliance National Risk Specialists 1993 Key Management Incentive
Plan (incorporated by reference to Exhibit 10.10 to Reliance
Insurance Company's Annual Report on Form 10-K for the year ended
December 31, 1993).
+10.19 Reliance National Risk Specialists 1994 Key Management Incentive
Plan (incorporated by reference to Exhibit 10.14 to Reliance
Insurance Company's Annual Report on Form 10-K for the year ended
December 31, 1994).
+10.20 Reliance National Risk Specialists 1995 Key Management Incentive
Plan (incorporated by reference to Exhibit 10.25 to Reliance Group
Holdings' Annual Report on Form 10-K for the year ended
December 31, 1996).
+10.21 Reliance National Risk Specialists Supplemental Key Management
Incentive Plan (effective for policy years 1993, 1994 and 1995)
(incorporated by reference to Exhibit 10.26 to Reliance Group
Holdings' Annual Report on Form 10-K for the year ended
December 31, 1996).
+10.22 Reliance National Risk Specialists 1996 Key Management Incentive
Plan (incorporated by reference to Exhibit 10.27 to Reliance Group
Holdings' Annual Report on Form 10-K for the year ended
December 31, 1996).
+10.23 Reliance National 1997 Key Management Incentive Plan (incorporated
by reference to Exhibit 10.23 to Reliance Group Holdings' Annual
Report on Form 10-K for the year ended December 31, 1997).
+10.24 Reliance National 1998 Key Management Incentive Plan.
+10.25 Memorandum, dated February 8, 1989, summarizing employment
arrangements between Reliance Insurance Company and Dennis Busti
(incorporated by reference to Exhibit 10.8 to Reliance Insurance
Company's Annual Report on Form 10-K for the year ended
December 31, 1988).
10.26 Asset Purchase Agreement, dated July 24, 1992, between Frank B. Hall
& Co. Inc. ("Hall") and Aon Corporation ("Aon") (incorporated by
reference to Exhibit 2.1 to Reliance Group Holdings' Quarterly
Report on Form 10-Q for the quarter ended June 30, 1992).
10.27 Agreement and Plan of Merger, dated as of July 24, 1992, among
Reliance Group Holdings, Hall and Prometheus Liquidating Corp.
(incorporated by reference to Exhibit 2.2 to Reliance Group
Holdings' Quarterly Report on Form 10-Q for the quarter ended
June 30, 1992).
</TABLE>
- - ------------------
+ Management contract or compensatory plan or arrangement required to be filed
as an Exhibit to this Form 10-K pursuant to Item 14(c).
26
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- - --------- ----------------------
<S> <C>
10.28 Employee Benefit Agreement, dated July 24, 1992, among Reliance
Group Holdings and Aon (incorporated by reference to Exhibit 28.2 to
Reliance Group Holdings' Quarterly Report on Form 10-Q for the
quarter ended June 30, 1992).
10.29 Amendment, dated November 2, 1992, to Exhibit 10.26 (incorporated by
reference to Exhibit 2.1 to Reliance Group Holdings' Quarterly
Report on Form 10-Q for the quarter ended September 30, 1992).
10.30 Settlement Agreement and Release, dated June 2, 1989, between James
P. Corcoran, Superintendent of Insurance of the State of New York,
as Liquidator of Union Indemnity Insurance Company of New York, Inc.
and Hall (now known as Prometheus Funding Corp.)(incorporated herein
by reference to Exhibit 10.01 to Frank B. Hall & Co. Inc.'s report
on Form 10-Q for the quarter ended June 30, 1989).
10.31 Amendment No. 1, dated April 21, 1997, to Exhibit 10.30
(incorporated by reference to Exhibit 10.1 to Reliance Group
Holdings' Quarterly Report on Form 10-Q for the quarter ended
March 31, 1997).
10.32 Stock Purchase Agreement, dated as of December 31, 1997, among Bear
Stearns Acquisition Corp. XVI, Reliance National (U.K.) Ltd. and
Reliance Insurance Company (incorporated by reference to
Exhibit 10.31 to Reliance Group Holdings' Annual Report on Form 10-K
for the year ended December 31, 1997).
10.33 Amended and Restated Stock Purchase Agreement, dated as of
December 11, 1997 by and among Reliance Insurance Company,
LandAmerica and Lawyers Title Insurance Corporation (incorporated by
reference to Exhibit 2.1 to LandAmerica's Current Report on
Form 8-K filed with the Securities and Exchange Commission on
March 16, 1998).
10.34 Voting and Standstill Agreement, dated as of February 27, 1998, by
and among LandAmerica, Reliance Group Holdings and Reliance
Insurance Company (incorporated by reference to Exhibit 10.26 to
LandAmerica's Annual Report on Form 10-K for the year ended
December 31, 1997).
10.35 Registration Rights Agreement, dated as of February 27, 1998, by and
among LandAmerica and Reliance Insurance Company (incorporated by
reference to Exhibit 10.27 to LandAmerica's Annual Report on
Form 10-K for the year ended December 31, 1997).
10.36 Articles of Amendment to LandAmerica's Articles of Incorporation
(incorporated by reference to Exhibit 4.2 to LandAmerica's Form 8-A
filed with the Securities and Exchange Commission on February 27,
1998).
10.37 Stock Purchase Agreement, dated as of February 22, 1999, between
Zenith Insurance Company and Nationwide Mutual Insurance Company
(incorporated by reference to Zenith's Current Report on Form 8-K
filed with the Securities and Exchange Commission on March 9, 1999).
13.1 Reliance Group Holdings 1998 Annual Report.
21.1 List of Subsidiaries of Reliance Group Holdings.
23.1 Consent of Deloitte & Touche LLP.
27.1 Financial Data Schedule.
**99.1 Annual Report on Form 11-K of Reliance Insurance Company Savings
Incentive Plan for the year ended December 31, 1998.
</TABLE>
- - ------------------
** To be filed by Amendment.
(B) REPORTS ON FORM 8-K.
No reports on Form 8-K were filed during the three months ended
December 31, 1998.
27
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON
ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, ON THE 31ST DAY OF
MARCH, 1999.
RELIANCE GROUP HOLDINGS, INC.
BY: /s/ SAUL P. STEINBERG
-----------------------------------
SAUL P. STEINBERG
CHAIRMAN OF THE BOARD
AND CHIEF EXECUTIVE OFFICER
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS
REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE
REGISTRANT AND IN THE CAPACITIES AND ON THE DATES INDICATED.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
<CAPTION>
/s/ SAUL P. STEINBERG Chairman of the Board, March 31, 1999
- - ----------------------- Principal Executive Officer
SAUL P. STEINBERG and Director
/s/ GEORGE E. BELLO Principal Accounting March 31, 1999
- - ----------------------- Officer and Director
GEORGE E. BELLO
/s/ LOWELL C. FREIBERG Principal Financial March 31, 1999
- - ----------------------- Officer and Director
LOWELL C. FREIBERG
/s/ GEORGE R. BAKER Director March 31, 1999
- - -----------------------
GEORGE R. BAKER
/s/ DENNIS A. BUSTI Director March 31, 1999
- - -----------------------
DENNIS A. BUSTI
/s/ THOMAS P. GERRITY Director March 31, 1999
- - -----------------------
THOMAS P. GERRITY
</TABLE>
28
<PAGE>
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- -----
<S> <C> <C>
/s/ JEWELL J. MCCABE Director March 31, 1999
- - ------------------------
JEWELL J. MCCABE
/s/ IRVING SCHNEIDER Director March 31, 1999
- - ------------------------
IRVING SCHNEIDER
/s/ BERNARD L. SCHWARTZ Director March 31, 1999
- - ------------------------
BERNARD L. SCHWARTZ
/s/ ROBERT M. STEINBERG Director March 31, 1999
- - ------------------------
ROBERT M. STEINBERG
/s/ JAMES E. YACOBUCCI Director March 31, 1999
- - ------------------------
JAMES E. YACOBUCCI
</TABLE>
29
<PAGE>
INDEPENDENT AUDITORS' REPORT
- - --------------------------------------------------------------------------------
Board of Directors and Shareholders
Reliance Group Holdings, Inc.
New York, New York
We have audited the consolidated financial statements of Reliance Group
Holdings, Inc. and subsidiaries (the "Company") as of December 31, 1998 and
1997, and for each of the three years in the period ended December 31, 1998, and
have issued our report thereon dated February 12, 1999, except as to
note 15(c), as to which the date is February 26, 1999; such consolidated
financial statements and report are included in your 1998 Annual Report to
Shareholders and are incorporated herein by reference. Our audits also included
the financial statement schedules of the Company listed in Item 14. These
financial statement schedules are the responsibility of the Company's
management. Our responsibility is to express an opinion based on our audits. In
our opinion, such financial statement schedules, when considered in relation to
the basic consolidated financial statements taken as a whole, present fairly in
all material respects the information set forth therein.
Deloitte & Touche LLP
New York, New York
February 12, 1999, except as to note 15(c)
of the consolidated financial statements,
as to which the date is February 26, 1999
A-1
<PAGE>
SCHEDULE I
ITEM 14(A)2
RELIANCE GROUP HOLDINGS, INC. AND SUBSIDIARIES
SUMMARY OF INVESTMENTS OF INSURANCE SUBSIDIARIES -- OTHER THAN INVESTMENTS IN
RELATED PARTIES
DECEMBER 31, 1998
<TABLE>
<CAPTION>
- - -------------------------------------------------------------------------------------------------------------------
COLUMN A COLUMN B COLUMN C COLUMN D
- - -------------------------------------------------------------------------------------------------------------------
AMOUNT AT
WHICH
SHOWN IN THE
BALANCE
TYPE OF INVESTMENT COST VALUE SHEET
- - -------------------------------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C>
Fixed maturities available for sale:
Bonds and notes:
United States government and government agencies
and authorities..................................................... $ 545,482 $ 552,547 $ 552,547
States, municipalities and political subdivisions..................... 130,982 143,117 143,117
Foreign -- government................................................. 47,810 50,934 50,934
Foreign -- other...................................................... 154,893 153,789 153,789
Public utilities...................................................... 451,046 469,349 469,349
Convertibles and bonds with warrants attached......................... 31,375 30,708 30,708
All other corporate bonds and notes................................... 999,133 995,104 995,104
Redeemable preferred stocks.............................................. 326,288 343,316 343,316
---------- ---------- ----------
2,687,009 2,738,864 2,738,864
---------- ---------- ----------
Fixed maturities held for investment:
Bonds and notes:
States, municipalities and political subdivisions..................... 6,709 6,726 6,709
Foreign -- government................................................. 123,615 136,020 123,615
Foreign -- other...................................................... 14,448 15,243 14,448
Public utilities...................................................... 199,574 211,261 199,574
All other corporate bonds and notes................................... 130,567 139,124 130,567
Redeemable preferred stocks.............................................. 64,935 69,805 64,935
---------- ---------- ----------
539,848 578,179 539,848
---------- ---------- ----------
Equity securities:
Common stocks:
Banks, trusts and insurance companies................................. 49,683 56,584 56,584
Industrial and other.................................................. 82,572 577,172 577,172
Nonredeemable preferred stocks........................................... 130,731 120,787 120,787
---------- ---------- ----------
262,986 754,543 754,543
---------- ---------- ----------
Short-term investments..................................................... 383,658 383,658 383,658
---------- ---------- ----------
Cash....................................................................... 65,308 65,308 65,308
---------- ---------- ----------
$4,520,552
----------
----------
Mortgage loans(1).......................................................... 3,526 3,526
Investments in real estate(2).............................................. 134,480 134,480
---------- ----------
---------- ----------
$4,076,815 $4,620,227
---------- ----------
---------- ----------
</TABLE>
- - ------------------
(1) In the consolidated financial statements, mortgage loans are included in
premiums and other receivables.
(2) Excludes investments in real estate held by non-insurance subsidiaries with
a cost and carrying value of $1,266,000.
A-2
<PAGE>
SCHEDULE II
ITEM 14(A)2
RELIANCE GROUP HOLDINGS, INC.
(PARENT COMPANY)
STATEMENT OF INCOME
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31 1998 1997 1996
- - -----------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C>
REVENUES:
Dividends from subsidiaries........... $ 268,000 $ 315,272 $ 110,000
Interest (including $4,438, $4,598 and
$6,415 from subsidiaries)........... 4,451 5,214 7,246
Loss on sale of subsidiary............ (5,160) -- --
---------- ---------- ----------
267,291 320,486 117,246
---------- ---------- ----------
EXPENSES:
Interest (including $5,681, $8,032 and
$21,212 to subsidiaries)............ 62,071 76,032 89,220
General and administrative............ 40,597 42,268 36,081
---------- ---------- ----------
102,668 118,300 125,301
---------- ---------- ----------
164,623 202,186 (8,055)
Income tax benefit.................... 37,609 40,219 42,488
---------- ---------- ----------
INCOME BEFORE EQUITY IN SUBSIDIARIES
AND INVESTEE COMPANIES.............. 202,232 242,405 34,433
Equity in subsidiaries (net income
less dividends received)............ 109,983 (12,907) 4,866
Equity in investee companies.......... 22,000 7,675 8,908
Loss on sale of discontinued
operation........................... -- (1,312) --
---------- ---------- ----------
INCOME BEFORE EXTRAORDINARY ITEM AND
CUMULATIVE
EFFECT OF ACCOUNTING CHANGE......... 334,215 235,861 48,207
Extraordinary item--early
extinguishment of debt.............. (7,766) -- --
Cumulative effect of change in
accounting for subsidiaries' process
reengineering costs................. -- (6,442) --
---------- ---------- ----------
NET INCOME............................ $ 326,449 $ 229,419 $ 48,207
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
A-3
<PAGE>
SCHEDULE II
ITEM 14(A)2
RELIANCE GROUP HOLDINGS, INC.
(PARENT COMPANY)
BALANCE SHEET
<TABLE>
<CAPTION>
ASSETS DECEMBER 31 1998 1997
- - ----------------------------------------------------------------
(In thousands, except per share amount)
<S> <C> <C>
Cash.................................. $ 83 $ 147
Investments in subsidiaries........... 1,794,269 1,618,853
Due from subsidiaries................. 73,232 80,849
Excess of cost over fair value of net
assets acquired, less accumulated
amortization........................ 25,426 26,873
Other assets.......................... 39,028 41,353
---------- ----------
$1,932,038 $1,768,075
---------- ----------
---------- ----------
</TABLE>
<TABLE>
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY
- - ----------------------------------------------------------------
<S> <C> <C>
Accounts payable and accrued
expenses............................ $ 49,046 $ 46,772
Federal income taxes, including
deferred taxes...................... 96,915 94,346
Debentures............................ 463,480 650,000
Due to subsidiaries................... 7,077 14,442
---------- ----------
616,518 805,560
---------- ----------
Contingencies and commitments
Shareholders' equity:
Common stock, par value $.10 per
share, 225,000 shares authorized,
116,076 and 114,857 shares issued
and outstanding.................. 11,608 11,486
Additional paid-in capital.......... 548,674 542,049
Retained earnings (including
undistributed net income of
subsidiaries of $508,735 and
$376,752)........................ 432,096 142,701
Accumulated other comprehensive
income of subsidiaries........... 323,142 266,279
---------- ----------
1,315,520 962,515
---------- ----------
$1,932,038 $1,768,075
---------- ----------
---------- ----------
</TABLE>
A-4
<PAGE>
SCHEDULE II
ITEM 14(A)2
RELIANCE GROUP HOLDINGS, INC.
(PARENT COMPANY)
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31 1998 1997 1996
- - -----------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income............................ $ 326,449 $ 229,419 $ 48,207
Equity in undistributed net income of
subsidiaries and investee
companies........................... (279,699) (190,598) (13,774)
Other -- net.......................... 28,550 9,982 (5,354)
---------- ---------- ----------
75,300 48,803 29,079
---------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Other -- net.......................... 4,287 (8,386) (555)
---------- ---------- ----------
4,287 (8,386) (555)
---------- ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase (decrease) in amounts due
from/to subsidiaries -- net......... 147,968 (6,199) 2,160
Issuance of common stock.............. 5,631 2,451 5,838
Dividends............................. (37,054) (36,706) (36,525)
Repurchases of debt................... (196,196) -- --
---------- ---------- ----------
(79,651) (40,454) (28,527)
---------- ---------- ----------
Decrease in cash...................... (64) (37) (3)
Cash, beginning of year............... 147 184 187
---------- ---------- ----------
Cash, end of year..................... $ 83 $ 147 $ 184
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
SUPPLEMENTAL DISCLOSURE OF NON-CASH FINANCING ACTIVITIES:
In 1998, investments in subsidiaries and due to subsidiaries were reduced by
$135,000,000 and $12,716,000 to reflect a non-cash dividend from subsidiaries
and the elimination of a subsidiary that was sold. In 1997, investments in
subsidiaries and due to subsidiaries were reduced by $202,272,000 to reflect a
non-cash dividend from subsidiaries. Also in 1997, investments in subsidiaries,
due to subsidiaries and due from subsidiaries were reduced to reflect the
elimination of intercompany balances of a dormant subsidiary.
A-5
<PAGE>
SCHEDULE III
ITEM 14(A)2
RELIANCE GROUP HOLDINGS, INC. AND SUBSIDIARIES
SUPPLEMENTARY INSURANCE INFORMATION
<TABLE>
<CAPTION>
- - -------------------------------------------------------------------------------------------------------------------------
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E COLUMN F COLUMN G
- - -------------------------------------------------------------------------------------------------------------------------
DEFERRED UNPAID POLICY
POLICY CLAIMS AND NET CLAIMS AND
ACQUISITION RELATED UNEARNED PREMIUMS INVESTMENT SETTLEMENT
SEGMENT COSTS EXPENSES PREMIUMS EARNED INCOME EXPENSES
- - -------------------------------------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1998:
Property and casualty.......... $ 295,939 $7,173,886 $1,980,481 $2,304,280 $294,743 $1,516,948
Title.......................... -- -- -- 139,132 5,276 6,676
--------- ---------- ---------- ---------- -------- ----------
$ 295,939 $7,173,886 $1,980,481 $2,443,412 $300,019 $1,523,624
--------- ---------- ---------- ---------- -------- ----------
--------- ---------- ---------- ---------- -------- ----------
Year Ended December 31, 1997:
Property and casualty.......... $ 248,572 $6,559,508 $1,722,258 $1,947,016 $263,981 $1,263,086
Title.......................... -- 272,792 -- 863,746 30,990 41,473
--------- ---------- ---------- ---------- -------- ----------
$ 248,572 $6,832,300 $1,722,258 $2,810,762 $294,971 $1,304,559
--------- ---------- ---------- ---------- -------- ----------
--------- ---------- ---------- ---------- -------- ----------
Year Ended December 31, 1996:
Property and casualty.......... $ 215,438 $6,048,240 $1,468,299 $1,800,854 $257,133 $1,350,337
Title.......................... -- 264,838 -- 780,157 30,455 61,116
--------- ---------- ---------- ---------- -------- ----------
$ 215,438 $6,313,078 $1,468,299 $2,581,011 $287,588 $1,411,453
--------- ---------- ---------- ---------- -------- ----------
--------- ---------- ---------- ---------- -------- ----------
<CAPTION>
- - ----------------------------------------------------------------------------
COLUMN A COLUMN H COLUMN I COLUMN J
- - ----------------------------------------------------------------------------
AMORTIZATION
OF DEFERRED
POLICY OTHER
ACQUISITION INSURANCE PREMIUMS
SEGMENT COSTS EXPENSES WRITTEN
<S> <C> <C> <C>
- - ------------------------------- ------------ ---------- ----------
(In thousands)
YEAR ENDED DECEMBER 31, 1998:
Property and casualty.......... $578,529 $ 253,030 $2,438,310
----------
----------
Title.......................... -- 126,751
-------- ----------
$578,529 $ 379,781
-------- ----------
-------- ----------
Year Ended December 31, 1997:
Property and casualty.......... $487,432 $ 219,698 $2,065,847
----------
----------
Title.......................... -- 789,853
-------- ----------
$487,432 $1,009,551
-------- ----------
-------- ----------
Year Ended December 31, 1996:
Property and casualty.......... $414,636 $ 201,485 $1,846,199
----------
----------
Title.......................... -- 711,185
-------- ----------
$414,636 $ 912,670
-------- ----------
-------- ----------
</TABLE>
A-6
<PAGE>
SCHEDULE IV
ITEM 14(A)2
RELIANCE GROUP HOLDINGS, INC. AND SUBSIDIARIES
REINSURANCE
<TABLE>
<CAPTION>
- - ------------------------------------------------------------------------------------------------------------------
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E COLUMN F
- - ------------------------------------------------------------------------------------------------------------------
CEDED ASSUMED PERCENTAGE
TO FROM OF AMOUNT
GROSS OTHER OTHER NET ASSUMED TO
AMOUNT COMPANIES COMPANIES AMOUNT NET
- - ------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1998:
Premiums:
Property and casualty............................. $3,743,993 $2,315,195 $875,482 $2,304,280 37.99%
Title............................................. 139,253 524 403 139,132 0.29
---------- ---------- -------- ----------
$3,883,246 $2,315,719 $875,885 $2,443,412 35.85
---------- ---------- -------- ----------
---------- ---------- -------- ----------
Year Ended December 31, 1997:
Premiums:
Property and casualty............................. $3,232,403 $1,733,311 $447,924 $1,947,016 23.01
Title............................................. 862,499 1,338 2,585 863,746 0.30
---------- ---------- -------- ----------
$4,094,902 $1,734,649 $450,509 $2,810,762 16.03
---------- ---------- -------- ----------
---------- ---------- -------- ----------
Year Ended December 31, 1996:
Premiums:
Property and casualty............................. $2,894,096 $1,449,731 $356,489 $1,800,854 19.80
Title............................................. 779,318 1,406 2,245 780,157 0.29
---------- ---------- -------- ----------
$3,673,414 $1,451,137 $358,734 $2,581,011 13.90
---------- ---------- -------- ----------
---------- ---------- -------- ----------
</TABLE>
A-7
<PAGE>
SCHEDULE VI
ITEM 14(A)2
RELIANCE GROUP HOLDINGS, INC. AND SUBSIDIARIES
SUPPLEMENTAL INFORMATION CONCERNING PROPERTY AND CASUALTY INSURANCE OPERATIONS
<TABLE>
<CAPTION>
- - -----------------------------------------------------------------------------------------------------------------------
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E COLUMN F COLUMN G COLUMN H
- - -----------------------------------------------------------------------------------------------------------------------
CLAIMS AND
UNPAID SETTLEMENT EXPENSES
DEFERRED CLAIMS (REDUNDANCY)
AFFILIATION POLICY AND DISCOUNT NET INCURRED RELATED TO
WITH ACQUISITION RELATED DEDUCTED IN UNEARNED EARNED INVESTMENT CURRENT PRIOR
REGISTRANT COSTS EXPENSES COLUMN C(a) PREMIUMS PREMIUMS INCOME YEAR YEARS
- - -----------------------------------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Consolidated subsidiaries:
YEAR ENDED
DECEMBER 31,
1998........... $ 295,939 $7,173,886 $197,305 $1,980,481 $2,304,280 $294,743 $1,549,907 ($32,959)
--------- ---------- -------- ---------- ---------- -------- ---------- --------
--------- ---------- -------- ---------- ---------- -------- ---------- --------
Year Ended
December 31,
1997........... $ 248,572 $6,559,508 $216,704 $1,722,258 $1,947,016 $263,981 $1,299,066 ($35,980)
--------- ---------- -------- ---------- ---------- -------- ---------- --------
--------- ---------- -------- ---------- ---------- -------- ---------- --------
Year Ended
December 31,
1996........... $ 215,438 $6,048,240 $229,963 $1,468,299 $1,800,854 $257,133 $1,211,672 $138,665
--------- ---------- -------- ---------- ---------- -------- ---------- --------
--------- ---------- -------- ---------- ---------- -------- ---------- --------
<CAPTION>
<S> <C> <C> <C>
COLUMN A COLUMN I COLUMN J COLUMN K
- - --------------------------------------------------------
AMORTIZATION PAID
OF DEFERRED CLAIMS
AFFILIATION POLICY AND
WITH ACQUISITION SETTLEMENT PREMIUMS
REGISTRANT COSTS EXPENSES WRITTEN
- - --------------------------------------------------------
<S> <C> <C> <C>
(In thousands)
Consolidated subsidiaries:
YEAR ENDED
DECEMBER 31,
1998........... $578,529 $1,536,729 $2,438,310
-------- ---------- ----------
-------- ---------- ----------
Year Ended
December 31,
1997........... $487,432 $1,330,898 $2,065,847
-------- ---------- ----------
-------- ---------- ----------
Year Ended
December 31,
1996........... $414,636 $1,225,834 $1,846,199
-------- ---------- ----------
-------- ---------- ----------
</TABLE>
- - ------------------
(a) Liabilities for unpaid claims and related expenses for short-duration
contracts which are expected to have fixed, periodic payment patterns are
discounted to present values using statutory annual rates ranging from
3 1/2% to 6%. Discount shown relates to net liabilities for unpaid claims
and related expenses for short-duration contracts which are expected to have
fixed, periodic payment patterns.
A-8
<PAGE>
EXHIBITS
TO
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED COMMISSION FILE NUMBER
DECEMBER 31, 1998 1-8278
RELIANCE GROUP HOLDINGS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- - --------- ----------------------
<S> <C>
3.1 Reliance Group Holdings' Certificate of Incorporation,
as amended (incorporated by reference to
Exhibit 3(a) to Registration Statement No. 2-77043).
3.2 Amendment to Exhibit 3.1, as filed with the Secretary
of State of the State of Delaware on July 22, 1986
(incorporated by reference to Exhibit 3.2 to
Registration Statement No. 33-7493).
3.3 Amendment to Exhibit 3.1, as filed with the Secretary
of State of the State of Delaware on May 27, 1993
(incorporated by reference to Exhibit 4.5 to
Registration Statement No. 33-67396).
3.4 Reliance Group Holdings' Amended and Restated By-Laws
(incorporated by reference to Exhibit 3.2 to Reliance
Group Holdings' Form 8-A filed with the Securities and
Exchange Commission on January 11, 1999).
*4.
+10.1 Employment Agreement between Reliance Group Holdings
and Saul P. Steinberg, dated as of February 15, 1996
(and the Schedule attached thereto pursuant to
Instruction 2 to Item 601 of Regulation S-K listing
George E. Bello, Lowell C. Freiberg, Howard E.
Steinberg and Robert M. Steinberg as having employment
agreements identical in all respects to Exhibit 10.1
other than as specified in such schedule) (incorporated
by reference to Exhibit 10.1 to Reliance Group
Holdings' Quarterly Report on Form 10-Q for the
quarter ended March 31, 1996).
+10.2 Amendment, dated as of December 29, 1997, to Employment
Agreement between Reliance Group Holdings and Saul P.
Steinberg, dated as of February 15, 1996 (and the
Schedule attached thereto pursuant to Instruction 2 to
Item 601 of Regulation S-K listing George E. Bello,
Lowell C. Freiberg, Howard E. Steinberg and Robert M.
Steinberg as having amendments to their employment
agreements identical in all respects to Exhibit 10.2
other than as specified in such schedule).
+10.3 Employment Agreement between Reliance Insurance Company
and Saul P. Steinberg, dated as of February 15, 1996
(and Schedule attached thereto pursuant to
Instruction 2 to Item 601 of Regulation S-K listing
Robert M. Steinberg as having an employment agreement
identical in all respects to Exhibit 10.3)
(incorporated by reference to Exhibit 10.1 to Reliance
Group Holdings' Quarterly Report on Form 10-Q for the
quarter ended March 31, 1996).
+10.4 Employment Agreement between Reliance Group Holdings
and Bruce L. Sokoloff, dated as of May 15, 1996
(incorporated by reference to Exhibit 10.1 to Reliance
Group Holdings' Quarterly Report on Form 10-Q for the
quarter ended June 30, 1996).
+10.5 Amendment, dated as of December 29, 1997, to Employment
Agreement between Reliance Group Holdings and Bruce L.
Sokoloff, dated as of May 15, 1996 (incorporated by
reference to Exhibit 10.5 of Reliance Group Holdings'
Annual Report on Form 10-K for the year ended
December 31, 1997).
+10.6 1986 Stock Option Plan of Reliance Group Holdings, as
amended (incorporated by reference to Exhibit 19.2 to
Reliance Group Holdings' Quarterly Report on Form 10-Q
for the quarter ended June 30, 1990).
+10.7 The Reliance Group Holdings, Inc. 1994 Stock Option
Plan (incorporated by reference to Exhibit 10.2 to
Reliance Group Holdings' Quarterly Report on Form 10-Q
for the quarter ended June 30, 1994).
</TABLE>
- - ------------------
* Neither Reliance Group Holdings nor its subsidiaries is a party to any
instrument relating to long-term debt under which the securities authorized
exceed 10% of the total consolidated assets of Reliance Group Holdings and its
subsidiaries. Copies of instruments relating to long-term debt of lesser
amounts will be provided to the Securities and Exchange Commission upon
request.
+ Management contract or compensatory plan or arrangement required to be filed
as an Exhibit to this Form 10-K pursuant to Item 14(c).
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- - --------- ----------------------
<S> <C>
+10.8 Amended and Restated 1994 Stock Option Plan for
Non-Employee Directors (incorporated by reference to
Exhibit 10.7 of Reliance Group Holdings' Annual Report
on Form 10-K for the year ended December 31, 1997).
+10.9 The Reliance Group Holdings, Inc. 1997 Stock Option
Plan (incorporated by reference to Exhibit 10.2 to
Reliance Group Holdings' Quarterly Report on Form 10-Q
for the quarter ended June 30, 1997).
+10.10 The Reliance Group Holdings, Inc. 1998 Stock Option
Plan (incorporated by reference to Exhibit 10.1 to
Reliance Group Holdings' Quarterly Report on Form 10-Q
for the quarter ended June 30, 1998).
+10.11 The Reliance Group Holdings, Inc. 1998 Stock Option
Plan for Non-Employee Directors (incorporated by
reference to Exhibit 10.2 to Reliance Group Holdings'
Quarterly Report on Form 10-Q for the quarter ended
June 30, 1998).
+10.12 The Reliance Group Holdings, Inc. Employee Stock
Purchase Plan (incorporated by reference to
Exhibit 10.1 to Reliance Group Holdings' Quarterly
Report on Form 10-Q for the quarter ended June 30,
1997).
+10.13 The Reliance Group Holdings, Inc. Key Employee Share
Option Plan (incorporated by reference to
Exhibit 10.11 of Reliance Group Holdings' Annual Report
on Form 10-K for the year ended December 31, 1997).
+10.14 Reliance Group Holdings, Inc. 1998 Executive Bonus Plan
(incorporated by reference to Exhibit 10.3 of Reliance
Group Holdings' Quarterly Report on Form 10-Q for the
quarter ended June 30, 1998).
+10.15 Amendment to Reliance Group Holdings, Inc. 1998
Executive Bonus Plan.
+10.16 Reliance Group Holdings, Inc. Executive Bonus Plan for
James E. Yacobucci (incorporated by reference to
Exhibit 10.4 of Reliance Group Holdings' Quarterly
Report on Form 10-Q for the quarter ended June 30,
1998).
+10.17 Reliance National Risk Specialists 1992 Key Management
Incentive Plan (incorporated by reference to
Exhibit 10.9 to Reliance Insurance Company's Annual
Report on Form 10-K for the year ended December 31,
1993).
+10.18 Reliance National Risk Specialists 1993 Key Management
Incentive Plan (incorporated by reference to
Exhibit 10.10 to Reliance Insurance Company's Annual
Report on Form 10-K for the year ended December 31,
1993).
+10.19 Reliance National Risk Specialists 1994 Key Management
Incentive Plan (incorporated by reference to
Exhibit 10.14 to Reliance Insurance Company's Annual
Report on Form 10-K for the year ended December 31,
1994).
+10.20 Reliance National Risk Specialists 1995 Key Management
Incentive Plan (incorporated by reference to
Exhibit 10.25 to Reliance Group Holdings' Annual Report
on Form 10-K for the year ended December 31, 1996).
+10.21 Reliance National Risk Specialists Supplemental Key
Management Incentive Plan (effective for policy years
1993, 1994 and 1995) (incorporated by reference to
Exhibit 10.26 to Reliance Group Holdings' Annual Report
on Form 10-K for the year ended December 31, 1996).
+10.22 Reliance National Risk Specialists 1996 Key Management
Incentive Plan (incorporated by reference to
Exhibit 10.27 to Reliance Group Holdings' Annual Report
on Form 10-K for the year ended December 31, 1996).
+10.23 Reliance National 1997 Key Management Incentive Plan
(incorporated by reference to Exhibit 10.23 to Reliance
Group Holdings' Annual Report on Form 10-K for the year
ended December 31, 1997).
+10.24 Reliance National 1998 Key Management Incentive Plan.
</TABLE>
- - ------------------
+ Management contract or compensatory plan or arrangement required to be filed
as an Exhibit to this Form 10-K pursuant to Item 14(c).
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- - --------- ----------------------
<S> <C>
+10.25 Memorandum, dated February 8, 1989, summarizing
employment arrangements between Reliance Insurance
Company and Dennis Busti (incorporated by reference to
Exhibit 10.8 to Reliance Insurance Company's Annual
Report on Form 10-K for the year ended December 31,
1988).
10.26 Asset Purchase Agreement, dated July 24, 1992, between
Frank B. Hall & Co. Inc. ("Hall") and Aon Corporation
("Aon") (incorporated by reference to Exhibit 2.1 to
Reliance Group Holdings' Quarterly Report on Form 10-Q
for the quarter ended June 30, 1992).
10.27 Agreement and Plan of Merger, dated as of July 24,
1992, among Reliance Group Holdings, Hall and
Prometheus Liquidating Corp. (incorporated by reference
to Exhibit 2.2 to Reliance Group Holdings' Quarterly
Report on Form 10-Q for the quarter ended June 30,
1992).
10.28 Employee Benefit Agreement, dated July 24, 1992, among
Reliance Group Holdings and Aon (incorporated by
reference to Exhibit 28.2 to Reliance Group Holdings'
Quarterly Report on Form 10-Q for the quarter ended
June 30, 1992).
10.29 Amendment, dated November 2, 1992, to Exhibit 10.26
(incorporated by reference to Exhibit 2.1 to Reliance
Group Holdings' Quarterly Report on Form 10-Q for the
quarter ended September 30, 1992).
10.30 Settlement Agreement and Release, dated June 2, 1989,
between James P. Corcoran, Superintendent of Insurance
of the State of New York, as Liquidator of Union
Indemnity Insurance Company of New York, Inc. and Hall
(now known as Prometheus Funding Corp.)(incorporated
herein by reference to Exhibit 10.01 to Frank B. Hall &
Co. Inc.'s report on Form 10-Q for the quarter ended
June 30, 1989).
10.31 Amendment No. 1, dated April 21, 1997, to
Exhibit 10.30 (incorporated by reference to
Exhibit 10.1 to Reliance Group Holdings' Quarterly
Report on Form 10-Q for the quarter ended March 31,
1997).
10.32 Stock Purchase Agreement, dated as of December 31,
1997, among Bear Stearns Acquisition Corp. XVI,
Reliance National (U.K.) Ltd. and Reliance Insurance
Company (incorporated by reference to Exhibit 10.31 to
Reliance Group Holdings' Annual Report on Form 10-K for
the year ended December 31, 1997).
10.33 Amended and Restated Stock Purchase Agreement, dated as
of December 11, 1997 by and among Reliance Insurance
Company, LandAmerica and Lawyers Title Insurance
Corporation (incorporated by reference to Exhibit 2.1
to LandAmerica's Current Report on Form 8-K filed with
the Securities and Exchange Commission on March 16,
1998).
10.34 Voting and Standstill Agreement, dated as of
February 27, 1998, by and among LandAmerica, Reliance
Group Holdings and Reliance Insurance Company
(incorporated by reference to Exhibit 10.26 to
LandAmerica's Annual Report on Form 10-K for the year
ended December 31, 1997).
10.35 Registration Rights Agreement, dated as of
February 27, 1998, by and among LandAmerica and
Reliance Insurance Company (incorporated by reference
to Exhibit 10.27 to LandAmerica's Annual Report on
Form 10-K for the year ended December 31, 1997).
10.36 Articles of Amendment to LandAmerica's Articles of
Incorporation (incorporated by reference to
Exhibit 4.2 to LandAmerica's Form 8-A filed with the
Securities and Exchange Commission on February 27,
1998).
10.37 Stock Purchase Agreement, dated as of February 22,
1999, between Zenith Insurance Company and Nationwide
Mutual Insurance Company (incorporated by reference to
Zenith's Current Report on Form 8-K filed with the
Securities and Exchange Commission on March 9, 1999).
13.1 Reliance Group Holdings 1998 Annual Report.
21.1 List of Subsidiaries of Reliance Group Holdings.
23.1 Consent of Deloitte & Touche LLP.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- - --------- ----------------------
<S> <C>
27.1 Financial Data Schedule.
**99.1 Annual Report on Form 11-K of Reliance Insurance
Company Savings Incentive Plan for the year ended
December 31, 1998.
</TABLE>
- - ------------------
** To be filed by Amendment.
<PAGE>
Exhibit 10.15
AMENDMENT TO
RELIANCE GROUP HOLDINGS, INC.
1998 EXECUTIVE BONUS PLAN
The Reliance Group Holdings, Inc. Executive Bonus Plan (the "Plan")
was adopted by the Special Compensation Committee of the Board of Directors of
Reliance Group Holdings, Inc. (the "Company") on March 26, 1998 and approved
by the stockholders of the Company on May 14, 1998. Pursuant to Article VII,
Section 7.2 of the Plan, the Special Compensation Committee determined to
amend the Plan as set forth below, and by resolution duly adopted at a meeting
held on February 11, 1999 voted to approve such amendment which does not
require the approval of the Company's stockholders under Section 162(m) of the
Internal Revenue Code of 1986 and, which therefore, became effective on
February 11, 1999, including with respect to bonuses not yet determined with
respect to the 1998 Year under the Plan. Capitalized terms used herein without
definition shall have the meanings assigned to them in the Plan.
1. Section 5.4 of the Plan shall be amended to read in its entirety as
follows:
"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. In addition and
without limiting the generality of the foregoing, in the event that the
aggregate basic bonus and supplemental bonuses payable under this Plan to any
Covered Employee pursuant to Sections 5.2 and 5.3 hereof would otherwise
exceed 300% of his Base Salary for the applicable Year, the Compensation
Committee shall have the discretion to reduce such bonuses to an amount equal
to no less than 300% of such Base Salary."
<PAGE>
RELIANCE NATIONAL (RN)
1998 KEY MANAGEMENT INCENTIVE PLAN (KMIP)
EFFECTIVE FOR POLICY YEAR 1998
Table of Contents
PARTICIPATION............................................................Page 2
ADMINISTRATION...........................................................Page 3
KMIP BONUS POOL..........................................................Page 4
PLAN YEAR................................................................Page 4
PRETAX OPERATING PROFIT..................................................Page 5
POLICY YEAR NET INVESTMENT INCOME........................................Page 6
POLICY YEAR AVERAGE INVESTED ASSETS......................................Page 7
VESTING..................................................................Page 8
VESTING ADVISORY COMMITTEE...............................................Page 9
DISTRIBUTION SCHEDULE...................................................Page 11
CHANGE OF CONTROL.......................................................Page 12
PARTICIPANTS STATEMENTS.................................................Page 13
MISCELLANEOUS...........................................................Page 13
EXHIBITS
1a & 1b - Hypothetical Example of Distribution Schedule
2 - Example of Participants Statement
3 - Example of Investment Income Calculation
<PAGE>
PARTICIPATION
Participation for the plan year is represented by units assigned to each
participant at the inception of the plan year. Each plan year will contain 1,300
units in total. This total may be reduced for forfeitures as a result of
voluntary or involuntary terminations, or maintained by a redistribution of
forfeited units to other participants at the discretion of the C.E.O. of
Reliance National with the approval of the C.E.O. of Reliance Insurance Group.
Units may be granted only to officers and key employees of RN selected by the
Committee (as hereinafter defined).
Nothing in this Plan, nor in the instrument evidencing the grant of units, shall
in any manner be construed to limit in any way the right of RN to terminate a
participant's employment at any time, without regard to the effect of such
termination on any rights such participant would otherwise have under this Plan,
or give any right to such a participant to remain employed by RN in any
particular position, or at any particular rate of compensation, or to receive a
grant of units for any other plan year.
2
<PAGE>
ADMINISTRATION
This Plan shall be administered by the Compensation Committee of the Board of
Directors of Reliance Insurance Company or such body as may be designated by the
Board of Directors of Reliance Insurance Company (the "Committee"). A majority
of the Committee shall constitute a quorum thereof and the actions of a majority
of the Committee at a meeting at which a quorum is present, or actions
unanimously approved in writing by all members of the Committee, shall be the
actions of the Committee. The Committee shall have full and final authority to
interpret this Plan and the instruments granting units hereunder (which
instruments need not be identical), to prescribe, amend and rescind rules and
regulations, if any, relating to this Plan and, except as expressly provided to
the contrary, to make all determinations necessary or advisable for the
administration of this Plan (including, without limitation, determinations of
pretax operating profits, policy year investment income, and all other financial
calculations called for by this Plan). The Committee's determination in all
matters referred to herein shall be conclusive and binding for all purposes and
upon all persons including, but without limitation, participants under the Plan.
No member of the Committee shall be liable for anything done or omitted to be
done by such member or by any other member of the Committee in connection with
the Plan, except for the willful misconduct or gross negligence of such member.
The Committee shall have power to engage outside consultants, auditors or other
professional help to assist in the fulfillment of the Committee's duties under
the Plan at RN's expense.
In making its determinations concerning the officers and key employees who shall
receive grants under the Plan, as well as the number of units to be covered
thereby and time or times at which they shall be granted, the Committee shall
take into account the nature of the services rendered by the respective officers
and key employees, their past, present and potential contribution to RN's
success and such other factors as the Committee may deem relevant. The Committee
shall also determine the form of instrument granting units hereunder and the
terms and conditions to be included therein, provided such terms and conditions
are not inconsistent with the terms of this Plan. The Committee may, in its
discretion, waive any provisions of any grant, provided such waiver is not
inconsistent with the terms of the Plan as then in effect.
The Plan may be terminated or amended at any time and from time to time by the
Board of Directors of Reliance Insurance Company. No termination or amendment of
this Plan, without the consent of the holder of any units then granted, may
terminate such holder's units or materially and adversely affect such holder's
rights thereunder.
3
<PAGE>
KMIP BONUS POOL
The maximum bonus pool expressed as a percentage of policy year pretax operating
profit (as defined) before bonuses is 13 percent, subject to the limitation
described in the following section.
The total of bonuses earned under all incentive plans of RN including KMIP,
Regular MIP, and "Mini-MIP" may not exceed 13 percent of policy year pretax
operating profits (as defined herein) before bonuses. The total of bonuses
earned under all incentive plans of RN excluding KMIP may not exceed eight
percent of calendar year GAAP pretax operating income before any provisions for
bonus expenses. For example:
<TABLE>
<S> <C>
1998 policy year projected pretax operating profit
(before bonuses) = $ 100,000,000
---------------
Limitation 13% = 13,000,000
Bonus earned under all other incentive plans (1) (Not to = 7,000,000
exceed 8% of calendar year GAAP pretax operating income
before bonuses)
Maximum KMIP bonus pool $ 6,000,000
===============
</TABLE>
(1) This includes projected policy year earnings projected to ultimate for the
Mini-Mip.
A total of 1,300 KMIP units will be issued for each plan year and allocated to
participants by the RN CEO.
The bonus earned per unit for the plan year is equal to the KMIP bonus pool for
the year divided by 1,300 units. In the above example, the amount earned per
unit is equal to $4,615.00 ($6,000,000 / 1,300). If an individual was awarded
100 units, his/her share of the bonus pool would be $461,500 (100 units x $4,615
per unit).
PLAN YEAR
The term "plan year" comprises the period from January 1 to December 31 of the
specified year during which an accounting will be made of premiums written and
losses incurred on policies with effective dates from January 1 to December 31
of such year (termed "policy year").
4
<PAGE>
PRETAX OPERATING PROFIT
Pretax operating profit for a plan year will be calculated on a policy year
basis using statutory accounting principles as follows:
<TABLE>
<S> <C> <C>
Net policy year written premium $ xxxx
(including retro, audit and similar ------
adjustments)
Less:
Net Policy year losses incurred $ xxxx
Net Policy year loss expenses incurred $ xxxx
Net Calendar year underwriting expenses* $ xxxx
------ ------
Underwriting gain (loss) xxxx
Plus: Policy year cumulative net investment income
(excluding realized capital gain or loss) xxxx
------
Total $ xxxx
Plus: Other calendar year income
(excluding realized capital gain/loss) xxxx
Less: Other calendar year expenses
(including policy year policyholder dividends) $ xxxx
------
Pretax operating profit $ xxxx
======
</TABLE>
* Defined as the sum of calendar year operating expenses and
acquisition expenses.
- Operating expenses exclude all bonuses recorded under
all incentive plans of Reliance National during the
year.
- Acquisition expenses are determined by multiplying the
calendar year acquisition expense ratio by the policy
year written premium.
Pretax operating profit for a plan year will be recalculated at the end of
subsequent calendar years. Policy year losses and loss adjustment expenses
incurred will be based on loss and loss expense ratios provided by the Corporate
Actuarial Department under the supervision of Reliance Insurance Company's Chief
Actuary.
Reasonable allocations will be made by Reliance Insurance Company to RN for
Reliance Insurance Company's corporate overhead under the normal allocation
methods. There will be no allocation to RN for "excess rent" and "excess lease
costs."
5
<PAGE>
POLICY YEAR NET INVESTMENT INCOME
Policy year net investment income will be calculated by multiplying the average
fixed income yield (excluding realized or unrealized capital gains or losses),
net of investment expenses (excluding interest expense) per Reliance's statutory
Consolidated Annual Statement for the calendar year which coincides with the
plan year, by the average policy year invested assets (as defined) of RN for
each calendar year. For example, for plan year 1998 the fixed income yield
determined from the calendar year 1998 consolidated statutory statement would be
used. This yield will be used in all subsequent calendar years to determine
policy year net investment income for plan year 1998.
<TABLE>
<CAPTION>
For example: Calendar Year
2000-
1998 1999 2006 Total
---- ---- ---- -----
<S> <C> <C> <C> <C>
Average Invested Assets (RN)
Policy Year 1998 xxxx xxxx xxxx xxxx
Reliance Insurance Company net fixed income
Yield Per 1998 Consolidated Annual
Statement (yield for
illustrative purposes only) 7% 7% 7%
Policy Year Net Investment Income:
(Yield x Invested Assets) xxxx xxxx xxxx xxxx
</TABLE>
Policy year net investment income for the plan year is calculated on a
cumulative basis for nine calendar years. In the ninth calendar year a "run-off"
calculation will be made to project policy year net investment income for the
ensuing five calendar years assuming the balance of loss and loss expense
resumes at the end of calendar year nine is reduced ratably to zero over the
four years. The average invested assets (average loss and loss reserve balances)
will be multiplied by the net fixed income yield described above to determine
the "run-off" calculation of net investment income for calendar years ten to
thirteen.
Total net investment income shall consist of the cumulative net investment for
the nine calendar years plus the "run-off" period.
6
<PAGE>
POLICY YEAR AVERAGE INVESTED ASSETS
Average invested assets for each policy year will be calculated as described
below.
Invested assets shall be equal to cumulative net cash flow from operations
including cash flow from underwriting, other income and expenses, net investment
income and federal income taxes and assumed shareholder dividends from
accumulated surplus. In determining cash flow, identifiable Reliance National
balance sheet accounts as of the close of the calendar year which coincides with
the policy year shall be allocated wholly to the current policy year unless
other reasonable estimation methods are available to allocate balance sheet
accounts.
In determining cash flow a dividend to shareholders of 10% of ending calendar
year surplus (if any) shall be assumed.
Average invested assets for each calendar year is equal to the beginning and
ending invested asset balances divided by 2.
An example of the calculation of net invested assets is contained in Exhibit 3.
7
<PAGE>
VESTING
Participants will become vested (subject to the provisions of the next
paragraph) based upon completing the years of employment as set in the following
standard vesting schedule:
Number of Years
Plan year plus 1 2 3 4 5 6 7 8
Cumulative vesting
percentage 10% 30% 50% 60% 70% 80% 90% 100%
A participant who is an employee of Reliance National when a change in control
(as hereinafter defined under CHANGE OF CONTROL) of Reliance National occurs
will become fully vested in the units awarded to him for all plan years. A
participant whose employment terminates for reasons of death or total
disability, as defined in the benefit plans of Reliance National, will become
fully vested in the units awarded to him for all plan years. A participant whose
employment terminates by reason of normal retirement, as defined in the benefit
plans of Reliance National, will fully vest in the units awarded to him for all
plan years preceding the year of retirement and will vest in that percentage of
the units awarded to him for the plan year in which he retires which equals the
number of months of employment completed during the plan year divided by 12. If
(1) a participant's employment terminates for any reason other than death, total
disability or normal retirement and (2) the participant has not become fully
vested in the units awarded to him as a result of a change in control, then the
number of units in which the participant is vested (if any) for each plan year
will be determined by the Chief Executive Officer of Reliance National with the
non-binding advice of the Vesting Advisory Committee.
8
<PAGE>
VESTING ADVISORY COMMITTEE
The Vesting Advisory Committee shall consist of five rotating members. The CEO
of Reliance National will appoint the five rotating members from among the MIP
participants. Each rotating member will serve a term of two years.
The purpose of the Vesting Advisory Committee is to make a non-binding
recommendation to the CEO of Reliance National whether the standard vesting
schedule contained in the Plan shall be followed with respect to a participant
who: (1) terminates from the Company for any reason other than a termination by
death, total disability or normal retirement and (2) has not become fully vested
in the units awarded to him as a result of a change in control. In determining
the recommendation whether to follow the standard schedule, the Vesting Advisory
Committee shall consider:
The reasons for the participant's termination,
The past performance of the participant,
The past contributions of the participant to Reliance National,
The future employer of the participant and
Any other factors the committee shall deem relevant.
The recommendation of the Committee shall be by a simple majority and the
decision of the CEO of Reliance National with respect thereto shall be absolute,
final and binding on all parties including, without limitation, participants
under the plan. The CEO of Reliance National may in his sole and absolute
discretion, specify conditions for the receipt by a terminating participant
(other than a participant who has fully vested in the units awarded to him as a
result of a change in control) of any payments under the Plan, including but not
limited to requiring the terminating participant to enter into a written
Non-compete or Non-interference Agreement with Reliance National. Such
agreement, if any, will be binding on all parties.
In the event that a member of the Committee terminates from Reliance National,
the CEO of Reliance National shall appoint another rotating member to serve on
the Committee to participate in the recommendation of the application of the
vesting schedule with respect to the terminating participant Vesting Schedule.
In the event the CEO of Reliance National is unavailable, or that office is
vacant, the Chairman of the Reliance Insurance Group will act in his place.
9
<PAGE>
Neither the CEO of Reliance National nor any member of the Vesting Advisory
Committee shall be liable for anything done or omitted to be done in connection
with the Plan, except for his or her own willful misconduct or gross negligence.
10
<PAGE>
DISTRIBUTION SCHEDULE
Participation units will be paid as shown below after the end of the years
indicated (except as provided to the contrary in the next paragraph and in the
second paragraph under CHANGE OF CONTROL):
Plan year plus 1 2 3 4 5 6 7 8
Cumulative Percentage 10% 30% 50% 60% 70% 80% 90% 100%
Distribution of Projected
Ultimate Awards
In the event a participant's employment terminates by reason of death, his or
her estate shall receive within 90 days following the date of death the net
present value (using a discount rate equal to the then prime lending rate of
Chase Manhattan Bank), less any advance payments previously made, for all units
for all policy years in which he or she was a participant. The basis for valuing
the outstanding units for each policy year will be the projected final value for
each policy year which is outstanding.
In all cases, distributions will be adjusted for any prior distributions or
advances paid and for losses from other plan years as described in the next
paragraph. Any calculated overpayments for a plan year are not refundable by a
participant except to offset amounts due the participant for other plan years.
At the sole discretion of the C.E.O. of Reliance National, one (1) Year may be
selected to be excluded from this Plan. In this event, the results of that Year
would not serve to reduce or alter any other payments, either earned or
outstanding, computed from all other Plan Years. The selection of an excluded
year may be made in writing at anytime during which a plan year is open and is
irrevocable.
Amounts due a participant in accordance with the distribution schedule above
will be offset by losses from other plan years in which the participant was a
member of KMIP. For example, in Exhibit 1.a the plan experienced an operating
loss before bonuses of $50 million in plan year 1997. The loss per unit of
$5,000 calculated on the pretax loss of $50 million before other bonuses earned
is deducted from amounts per unit due for other plan years in accordance with
the distribution schedule until absorbed (see exhibit 1.b).
The above applies only when the plan experiences an operating loss before other
bonuses earned. In the example in Exhibit 1.a, all other bonuses earned exceeded
the maximum bonus pool for plan year 1995, therefore no amounts are allocable to
the KMIP. This excess is not deducted from amounts due for other plan years
because the plan did not experience an operating loss in 1995.
11
<PAGE>
CHANGE OF CONTROL(1)
In the event of a change of control of Reliance National, whether directly or
indirectly (including, for example, through the sale of Reliance Insurance
Company or Reliance Group Holdings, Inc.), any successor to all or substantially
all of the business or assets of Reliance National or Reliance Insurance Company
shall assume all liabilities to participants under this Plan and perform all
duties and responsibilities in the same manner that would have been required of
Reliance National and Reliance Insurance Company if no such change had taken
place, and all participants will automatically become fully (100%) vested for
all plan years.
In the event the employment of a participant (a) is terminated by Reliance
National within 18 months following a change of control without Cause or (b) is
terminated by the participant within 18 months following a change of control
with Good Reason, he/she may elect to receive within 90 days following the date
of his/her termination the net present value (using a discount rate equal to the
then prime lending rate of Chase Manhattan Bank) less any advance payments made
for all units for all policy years in which he/she was a participant. The basis
for valuing the outstanding units for each policy year will be the projected
final value for each policy year which is outstanding.
For purposes of this section, Cause shall be defined as: (1) conviction of a
crime, (2) material and deliberate violation of Reliance National's Code of
Conduct or (3) dishonest acts in connection with the participant's employment by
Reliance National. For purposes of this section, Good Reason shall be defined as
a reduction in the participant's authority, duties, responsibilities or title,
any reduction in his/her compensation, or any change caused by Reliance in
his/her office location of more than 35 miles from its location on the date of
the change of control.
Subsequent to a change of control, if there is a disagreement as to the
calculation of KMIP awards for any open plan year or years then such
calculations may be submitted for arbitration provided a simple majority of the
KMIP participants for such year or years are in favor of submitting such
disagreement for arbitration. An independent certified actuary accountable to
both the participants and the company will be selected and the findings of the
independent actuary will be binding on both parties. The cost of the independent
actuary will be paid by the participants.
(1) This provision applies to all open plan years.
12
<PAGE>
PARTICIPANT STATEMENT
Each participant shall be provided a statement of his/her account for each plan
year showing actual and projected amounts earned, paid and payable. See exhibit
2 for an example of the report to be provided.
MISCELLANEOUS
No award under this Plan shall be considered as compensation in calculating any
insurance, pension or other benefit for which the recipient is eligible unless
any such insurance, pension or other benefit is granted under a plan which
expressly provides that compensation under this Plan shall be considered as
compensation under such plan.
13
<PAGE>
Exhibit 1.a
HYPOTHETICAL EXAMPLE
OF DISTRIBUTION SCHEDULE
- - ------------------------
($000's omitted - except per unit amounts)
<TABLE>
<CAPTION>
Policy Years
--------------------------------------------------------------
1995 1996 1997 1998 1999
--------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Projected Ultimate Pretax Operating Income - Before Bonuses: 50,000 120,000 (50,000) 150,000 170,000
--------------------------------------------------------------
Maximum Bonus Pool @ 13%: 6,500 15,600 (6,500) 19,500 22,100
All Other (non-KMIP) Bonuses Earned: 8,000 8,000 5,000 10,000 12,000
==============================================================
Remainder Available for KMIP Bonus: (1,500) 7,600 (11,500) 9,500 10,100
==============================================================
KMIP Bonus Earned per Unit 0 (a) 5,846 (5,000)(b) 7,308 7,769
==============================================================
</TABLE>
(a) Since all other bonuses earned exceeded the maximum
bonus pool, the KMIP bonus is $0. Because the profit
center pretax operating income is a profit, this excess
is not deducted from amounts due for other years.
(b) Since the profit center ultimate pretax operating income
is a loss for 1997, this loss must be deducted from
other policy years.
<TABLE>
<CAPTION>
<S> <C>
Projected Ultimate Pretax Operating Loss: (50,000)
All Other Bonuses (5,000)
=========
Projected Ultimate Pretax Operating Loss: (55,000)
=========
Amount Deducted From Other Policy Years:
13% of $50,000 (the loss before all other bonuses earned) (6,500)
=========
Amount Deducted Per Unit ($6.5 million / 1300 units): (5,000)
=========
</TABLE>
<PAGE>
Exhibit 1.b
HYPOTHETICAL EXAMPLE
DISTRIBUTION PAID PER UNIT
- - --------------------------
<TABLE>
<CAPTION>
Distribution Calendar Year
Schedule ---------------------------------------------------------------------------------------------
Cumulative (A) 1995 1996 1997 1998 1999 2000 2001 2002 2003
- - ----------------------- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Plan Years 1995 0% 10% 30% 50% 60% 70% 80% 90% 100%
1996 0% 10% 30% 50% 60% 70% 80% 90%
1997 0% 10% 30% 50% 60% 70% 80%
1998 0% 10% 30% 50% 60% 70%
1999 0% 10% 30% 50% 60%
Ultimate
Bonus Earned (B)
- - -----------------------
Plan Years 1995 0 0 0 0 0 0 0 0
1996 5,846 5,846 5,846 5,846 5,846 5,846 5,846
1997 (5,000) (5,000) (5,000) (5,000) (5,000) (5,000)
1998 7,308 7,308 7,308 7,308 7,308
1999 7,769 7,769 7,769 7,769
Distribution Due
Cumulative (C)
- - -----------------------
(C = A x B)
Plan Years 1995 0 0 0 0 0 0 0 0
1996 585 1,754 2,923 3,508 4,092 4,677 5,261
1997 (500) (1,500) (2,500) (3,000) (3,500) (4,000)
1998 731 2,192 3,654 4,385 5,116
1999 777 2,331 3,885 4,661
Net ---------------------------------------------------------------------------------------------
Cumulative Payable 0 585 1,254 2,154 3,977 7,077 9,446 11,038
Less
Cumulative Paid * 0 0 585 1,254 2,154 3,977 7,077 9,446
Cumulative =============================================================================================
Balance Due 0 585 669 900 1,823 3,100 2,369 1,592
=============================================================================================
</TABLE>
* Payment is generally made in February of the succeding year.
<PAGE>
Reliance National KMIP Exhibit 2
Status as of December 31, 1997
(Hypothetical)
<TABLE>
<CAPTION>
1997 Policy Year Calculated Projected
as of Ultimate to
12/31/97 12/31/05
--------------- ---------------
<S> <C> <C>
Written Premium 1,006,664,847 1,006,664,847
Policy Year Earned Premium 507,996,847 1,006,664,847
Loss + Lae 380,489,639 753,991,971
Expense 266,981,882 266,981,882
--------------- --------------
Underwriting Gain (Loss) (139,474,674) (14,309,006)
Investment Income 19,393,499 136,284,697
=============== ==============
Pretax Profit (120,081,175) 121,975,692
=============== ==============
Loss Ratio 74.9% 74.9%
Expense Ratio 26.5% 26.5%
--------------- --------------
Combined Ratio 101.4% 101.4%
Investment Income 1.9% 13.5%
=============== ==============
Pretax Profit 99.5% 87.9%
=============== ==============
<CAPTION>
Bonus Calculation 12/31/97 Per Unit 12/31/05 Per Unit
----------------------------------------------------------------
<S> <C> <C> <C> <C>
Cumulative Bonus Earned (Pretax X 13%) 0 15,856,840
Less: bonuses paid under all other plans 12,500,000 12,500,000
Less: surplus charge 0
---------------------------------------------------------------
Adjusted Award (Available for KMIP) (12,500,000) 0 3,356,840 2,582
Cumulative Bonus Payable 0 0
Cumulative Paid/Advanced 0 0
===========================
Balance Payable 0 0
===========================
<CAPTION>
Total
Earned Payable
Prelim as of as of Payable in Payable In Payable In Payable In
Participants Units 12/31/97 12/31/97 1998 1999 2000 2001
--------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Bonus Per Unit 0 0 0 258 516 516
Individual 80 0 0 0 20,657 41,315 41,315
<CAPTION>
(Projected
Payable)
Policy Yr 1997
Projected
Projected Earned
Payable In Payable In Payable In Payable In Payable In Earned Less Pd Thru
Participants 2002 2003 2004 2005 2006 To 2005 Dec-97
-------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Bonus Per Unit 258 258 258 258 258 2,582 2,582
Individual 20,657 20,657 20,657 20,657 20,657 206,575 206,575
</TABLE>
<PAGE>
Reliance National KMIP Exhibit 3
Plan Year 1997 (Hypothetical)
Investment Income Calculation
<TABLE>
<CAPTION>
Cash Flow Method:
1997 1998 1999 2000 2001 2002 2003
-----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Cash Flow
Premiums Written 1,006,665
Change In Rec 450,645 (143,738) (105,919) (84,853) (80,488) (5,447) (5,033)
Net Premiums Collected (+) 556,020 143,738 105,919 84,853 80,488 5,447 5,033
Losses Paid (-) 128,931 154,570 106,313 89,725 72,383 41,470 33,930
Expenses Paid (-) 266,982 0 0 0 0 0 0
Imprest Funds (-) 53,132 (53,132)
Reinsurance Recoverables (-) 49,760 (49,760)
Other Liab (+) 492,360 (492,360)
Fixed assets (-) 11,892 (3,641) (3,641) (2,518) (1,395) (698) 0
-----------------------------------------------------------------------------------------
Cash Flow 537,683 (396,659) 3,247 (2,354) 9,500 (35,325) (28,896)
Net Inv.Income 19,393 24,570 10,980 11,791 12,657 12,367 10,555
Income Taxes (8,462) (30,076) 4,304 (2,270) 75 (1,134) (1,486)
Paid Surplus Dividend (480) (1,273) (2,283) (3,065) (3,585)
Paid Bonus 0 0 (336) (671) (671) (336) (336)
-----------------------------------------------------------------------------------------
Net Cash 548,614 (402,164) 17,715 5,223 19,279 (27,493) (23,747)
Investment Income
Invested Assets (Beginning) 0 548,614 146,449 164,165 169,387 188,666 161,173
Invested Assets (Ending) 548,614 146,449 164,165 169,387 188,666 161,173 137,426
Avg. Invested Assets 274,307 347,532 155,307 166,776 179,027 174,919 149,299
Rate 7.07% 7.07% 7.07% 7.07% 7.07% 7.07% 7.07%
Net Investment Income 19,393 24,570 10,980 11,791 12,657 12,367 10,555
Balance Sheet
Assets
Net inv. assets 548,614 146,449 164,165 169,387 188,666 161,173 137,426
Imprest Funds 53,132
Reins Recoverables 49,760
Receivables 450,645 306,907 200,988 116,135 35,647 30,200 25,167
Fixed assets 11,892 8,252 4,611 2,093 698 0 0
=========================================================================================
Total 1,114,043 461,608 369,763 287,615 225,010 191,373 162,592
=========================================================================================
Liabilities
UPR 498,668
Accrued Bonus 0 816 783 436 113 117 72
Reserves 251,559 470,491 364,178 274,453 202,070 160,600 126,671
Accrued Dividend
Other 492,360
=========================================================================================
Total 1,242,587 471,307 364,961 274,889 202,183 160,718 126,743
=========================================================================================
Surplus (128,544) (9,699) 4,803 12,726 22,828 30,655 35,849
=========================================================================================
Dividend Calculation
Pre Dividend Surplus (128,544) (9,699) 4,803 12,726 22,828 30,655 35,849
Dividend Percent: 10.00%
Dividend 0 480 1,273 2,283 3,065 3,585
Surplus Reconciliation
Beginning of Year 0 (128,544) (9,699) 4,803 12,726 22,828 30,655
Pretax Income (120,081) 149,736 10,980 11,791 12,657 12,367 10,555
Taxes (8,462) (30,076) 4,304 (2,270) 75 (1,134) (1,486)
Paid Surplus Dividend (480) (1,273) (2,283) (3,065) (3,585)
Earned Award (816) (302) (324) (348) (340) (290)
=========================================================================================
End of Year (128,544) (9,699) 4,803 12,726 22,828 30,655 35,849
=========================================================================================
<CAPTION>
Cash Flow Method: Reserve
2004 2005 Runoff
------------------------------------
<S> <C> <C> <C>
Cash Flow
Premiums Written
Change In Rec (5,033) 0
Net Premiums Collected (+) 5,033 0
Losses Paid (-) 21,112 13,572 91,987
Expenses Paid (-) 0 0
Imprest Funds (-)
Reinsurance Recoverables (-)
Other Liab (+)
Fixed assets (-) 0 0
-------------------------------------
Cash Flow (16,078) (13,572) (91,987)
Net Inv.Income 9,264 8,448 16,259
Income Taxes (1,720) (579) (5,691)
Paid Surplus Dividend (3,922) (4,259)
Paid Bonus (336) (336)
-------------------------------------
Net Cash (12,792) (10,298) (81,419)
Investment Income
Invested Assets (Beginning) 137,426 124,633
Invested Assets (Ending) 124,633 114,335
Avg. Invested Assets 131,029 119,484
Rate 7.07% 7.07% 7.07%
Net Investment Income 9,264 8,448 16,259
Balance Sheet
Assets
Net inv. assets 124,633 114,335
Imprest Funds
Reins Recoverables
Receivables 20,133 20,133 0
Fixed assets 0 0 0
=====================================
Total 144,767 134,468 0
=====================================
Liabilities
UPR
Accrued Bonus (9) (112) 0
Reserves 105,559 91,987 0
Accrued Dividend
Other
=====================================
Total 105,550 91,875 0
=====================================
Surplus 39,216 42,593 0
=====================================
Dividend Calculation
Pre Dividend Surplus 39,216 42,593 0
Dividend Percent: 10.00%
Dividend 3,922 4,259
Surplus Reconciliation
Beginning of Year 35,849 39,216
Pretax Income 9,264 8,448
Taxes (1,720) (579)
Paid Surplus Dividend (3,922) (4,259)
Earned Award (255) (232)
=====================================
End of Year 39,216 42,593 0
=====================================
</TABLE>
<PAGE>
Reliance Group Holdings, Inc.
1998 Annual Report
[Image Centered on Cover: Reliance Logo - Oval with
firemark (fire hydrant wrapped with fire hose)
and "1817" underneath.]
[Photos of Reliance Employees (left to right):
Jeff Miller, standing with left arm outstretched;
Coy Rudd, standing with suit jacket held over right
shoulder and notebook in left hand; Ted Martinez,
seated on stool; Millie Ramos, standing; and
Terry Gawlinski, standing and holding a notebook
with both arms.]
Text, in large type: Owners
<PAGE>
ABOUT THE COMPANY
Reliance Group Holdings, Inc. is a leading property and casualty insurer with
specialized capabilities and coverages. In addition to its core property and
casualty insurance operations, Reliance has a growing information technology
consulting business.
owners: Reliance people have a strong sense of ownership. Employees at every
level own Reliance stock, and management has a substantial equity stake in the
company. The interests of Reliance people are closely aligned with those of its
shareholders. We manage with the commitment and responsibility of owners, and we
are driven by the goal of building shareholder value.
[Photos of Reliance Employees (left to right):
Cynthia Miller, standing and leaning to the left;
Anthony Perez, seated; Ki-Young Chris Kim, standing;
Jackie Cartagena, standing; and Tom
Montgomery, standing with arms folded.]
<PAGE>
1998 Financial Highlights
<TABLE>
<CAPTION>
1998 1997 1996
- - -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
In thousands, except per share amounts
Revenues $ 3,369,120 $ 3,442,636 $ 3,090,587
Income from continuing operations
before gain on sales of investments
and subsidiaries 128,484 127,033 103,061(2)
Net income 326,449(1) 229,419 135,307(2)
Diluted per share information:
Income from continuing operations
before gain on sales of investments
and subsidiaries 1.07 1.07 .89(2)
Net income 2.72(1) 1.94 1.16(2)
Assets 12,775,339 11,222,486 10,055,512
Shareholders' equity 1,315,520 962,515 676,680
Shareholders' equity per share 11.33 8.38 5.92
</TABLE>
OPERATING INCOME
Dollars in Millions
[BAR CHART]
96 103.1(2)
97 127.0
98 128.5
SHAREHOLDERS' EQUITY
Dollars in Millions
[BAR CHART]
96 676.7
97 962.5
98 1,315.5
ASSETS
Dollars in Billions
[BAR CHART]
96 10.1
97 11.2
98 12.8
STATUTORY SURPLUS
Dollars in Millions
[BAR CHART]
96 1,187
97 1,302
98 1,747
(1) Net income for 1998 includes an after-tax gain of $133.6 million, or $1.11
per diluted share, from the sale of title insurance operations.
(2) 1996 excludes an after-tax charge of $87.1 million, or $ .75 per diluted
share, to strengthen net loss reserves for asbestos-related and environmental
pollution claims.
1
<PAGE>
Reliance at a Glance
PERCENT OF NET PROPERTY AND CASUALTY PREMIUMS WRITTEN
[PIE CHART]
Reliance National 50%
Reliance Insurance 32%
Reliance Reinsurance 9%
Reliance Surety 8%
Total net premiums written $2.44 billion
CONSOLIDATED COMBINED RATIO
In Percent
[BAR CHART]
96 101.6*
97 100.9
98 102.1
Reliance
National
- - --------------------------------------------------------------------------------
Market Focus
A broad array of specialized property and casualty insurance coverages, as well
as risk management services for Fortune 1,000 companies and other major
corporations in the U.S. and internationally.
VITAL STATISTICS
RELIANCE NATIONAL COMBINED RATIO
In Percent
[BAR CHART]
96 101.7
97 102.0
98 102.2
1998 Highlights
o Net premiums written grew to $1.21 billion as new business initiatives and
international operations contributed to growth.
o Nonstandard auto insurer Reliant expanded to 16 states and generated $201
million in net premiums written; 13 new claims offices were opened across the
country and a western region policy servicing center opened in Tucson, Arizona.
o CyberComp, Reliance National's Internet-based workers' compensation insurance
business, completed its first full year of operation with $81 million in gross
premiums written ($43 million net).
o International presence broadened with a new operation in Hong Kong; the
opening of offices in Barcelona, Johannesburg, Munich, Sao Paulo and Zurich; and
the establishment of a joint cooperative agreement with the Tian An Insurance
Co. in China.
Looking Ahead
Growth is expected to continue in non-standard auto, CyberComp, accident and
health, directors and officers insurance, and international operations.
Investments in international markets offer additional long-term growth
potential.
Reliance
Insurance
- - --------------------------------------------------------------------------------
Market Focus
Local service and a full range of property and casualty products for the more
complex risks of middle-market customers, typically companies with up to 1,000
employees and revenues from $5 million to $300 million.
VITAL STATISTICS
RELIANCE INSURANCE COMBINED RATIO
In Percent
[BAR CHART]
96 104.9*
97 103.7
98 106.7
1998 Highlights
o Greater diversification in casualty product offerings, with captives, wrap-ups
and loss portfolio transfers, enhanced Reliance Insurance's ability to satisfy
the increasingly sophisticated insurance requirements of larger middle-market
customers.
o Outcome Management, Reliance Insurance's new approach to claims, succeeded in
reducing the cost of third-party liability claims and resulted in a benefit of
more than one point to the combined ratio for the year.
o Built business in key specialty segments, such as public entities, social
services and transportation.
o Underwriting and claims capabilities expanded in Boston and Washington, D.C.
Looking Ahead
Reliance Insurance will remain focused on larger middle-market accounts, which
offer higher profit potential, while leveraging the strength of its national
network of 37 offices.
2
<PAGE>
Reliance
Reinsurance
- - --------------------------------------------------------------------------------
Market Focus
Customized treaty and facultative reinsurance solutions for small and midsize
insurers and the specialty divisions of larger insurers.
VITAL STATISTICS
RELIANCE REINSURANCE COMBINED RATIO
In Percent
[BAR CHART]
96 102.7*
97 101.8
98 102.5
1998 Highlights
o Strategic risk selection yielded solid returns in casualty reinsurance,
particularly on quota share and excess-of-loss arrangements.
o Entered agriculture reinsurance market with a top team of experts and advanced
computer modeling systems to create a geographically diverse book of business.
o Took advantage of favorable retrocessional market to minimize new business
exposures.
o Formed Reliance Portfolio Solutions, Ltd. to structure specialized loss
portfolio transfers and other financing programs for clients' insurance
liabilities, principally in runoff situations.
o Established professional liability unit to develop selective opportunities in
this market.
Looking Ahead
Reliance Reinsurance is positioned to succeed as an agile, niche underwriter.
Further business development anticipated in casualty reinsurance, capital
planning, finite risk insurance and professional liability.
Reliance
Surety
- - --------------------------------------------------------------------------------
Market Focus
A leader in the contract surety bond market and a major underwriter of
commercial surety bonds and fidelity bonds.
VITAL STATISTICS
RELIANCE SURETY COMBINED RATIO
In Percent
[BAR CHART]
96 75.5
97 77.0
98 72.4
1998 Highlights
o Superb underwriting performance as net premiums written rose to a record $204
million.
o Midsize contract surety business increased 16%, and new small contract surety
program grew more than 20%.
o Established Specialty Division to serve large contractor market.
o Technology utilized by Express Surety to increase efficiency and expedite the
processing of small, high-volume commercial bonds.
o Enhanced capabilities with U.K.-based international operation, enabling the
issuance of bonds in more than 40 countries.
Looking Ahead
Priorities include pursuing the most rewarding opportunities in contract surety,
commercial surety and fidelity bonds. Recently established Specialty Division to
contribute to growth. International expansion planned in Canada and South
America.
RCG
Information
Technology
- - --------------------------------------------------------------------------------
Market Focus
A full-service information technology consulting company with expertise in
software programming, client-server systems development and supplemental
computer staffing.
VITAL STATISTICS
RCG INFORMATION TECHNOLOGY REVENUES & PRETAX OPERATING INCOME
Dollars in Millions
[BAR CHART]
96
Revenue 136.7
Pretax Operating Income 2.7
97
Revenue 191.9
Pretax Operating Income 5.6
98
Revenue 247.7
Pretax Operating Income 19.4
1998 Highlights
o Record performance as revenues grew 29%, and pretax operating income more than
tripled.
o Increased IT solutions assignments contributed to higher profit margins this
year.
o Developed business in new areas, including imaging, enterprise resource
planning, work-flow management, testing and quality assurance.
o Invested in new facilities and hired additional IT consultants to meet the
growing demand for computer-related services.
Looking Ahead
Investments in infrastructure and new capabilities pave the way for future
growth. RCG Information Technology will identify opportunities to increase
solutions business in the U.S.
* 1996 excludes $134 million pretax charge for increasing reserves for
asbestos-related and environmental pollution claims. Including this reserve
addition, Reliance's 1996 consolidated property and casualty combined ratio was
109.0%, the combined ratio for Reliance Insurance was 121.9%, and the combined
ratio for Reliance Reinsurance was 115.5%.
3
<PAGE>
To Our Fellow Shareholders:
--------------------------
1998 was another year of accomplishment for Reliance Group.
o Operating income was $128.5 million--or $1.07 per diluted share--just
exceeding our 1997 results.
o Net income was a record $326.4 million--or $2.72 per diluted share-which
included $133.6 million--or $1.11 per diluted share--from the sale of our title
insurance operations. As we reported to you last year, we have created
substantial economic value for our shareholders through this transaction.
o Reliance grew shareholders' equity 37% to $1.32 billion--or $11.33 per
share--at year-end, the highest it has ever been.
o Our property and casualty pretax operating income was $242.6 million,
surpassing last year's results. Net premiums written grew by 18% to $2.44
billion.
Reliance's performance was particularly noteworthy in a year when
continued soft market conditions, high catastrophe losses and a large number of
other weather-related losses contributed to the property and casualty industry's
worst results since 1994. Reliance, of course, is not immune to these market
conditions. Our combined ratio of 102.1% included 1.4 points of catastrophe
losses, and we had a high frequency of other property losses.
Property and casualty insurance is not a uniform market, and a disciplined,
fast-moving, entrepreneurial company such as Reliance can differentiate itself
even in the current challenging environment.
[Arrow Right] OWNERS
------
Ownership makes Reliance different. Our people manage with the commitment and
responsibility owners bring to their businesses. Reliance management has a
significant equity stake, and employees at every level participate in company
stock programs. By aligning the interests of our employees and shareholders, we
have created a distinctive organization driven by a common goal of building
shareholder value.
WE ARE BUILDERS. Reliance has a successful track record putting innovative ideas
and specialized skills to work, and building large and profitable businesses
around them. We have grown by continually investing in attractive new business
opportunities. More than one point of our combined ratio represents investments
in the new businesses we believe will contribute to our future success.
WE ARE SPECIALISTS. We differentiate ourselves in competitive markets with
innovative distribution, exceptional service and sophisticated underwriting.
WE ARE FAST AND FLEXIBLE. We move rapidly when we see a growth opportunity and
are just as quick to back away from business that does not meet our risk-reward
criteria.
- - -------------------------------------------------------------------------------
"Reliance has a solid group of insurance companies and is a proven incubator of
new businesses." PaineWebber, July 1998
- - -------------------------------------------------------------------------------
4
<PAGE>
WE ARE DISCIPLINED UNDERWRITERS. We take a proactive approach to managing risks
with the support of sophisticated management information systems that track
pricing and profitability in each of our lines of business. In addition,
Reliance makes extensive use of reinsurance to mitigate risks and reduce
earnings volatility.
OUR PEOPLE MAKE A DIFFERENCE. We recruit and cultivate the right people for the
specific lines of business we are building. We instill the Reliance ownership
culture, give our people the resources they need and reward them for long-term
success.
Our focused, entrepreneurial approach cannot be grafted onto a
one-size-fits-all organization, so each of our profit centers has developed the
strategy, structure and skills best suited to its specific market.
[Arrow Right] RELIANCE NATIONAL
-----------------
Reliance National is our largest profit center and a leader in specialized
property and casualty coverages and risk management services. In 1998, Reliance
National had strong results in businesses where it is a long-standing market
leader and broke new ground in overseas markets and e-commerce.
Risk management is Reliance National's original business and its largest.
We are a leader in providing risk management services to large companies, and we
achieved superb retention rates and excellent profitability from this division
in 1998. Reliance National also is the third-largest writer of directors and
officers insurance, a business that continued to be very profitable in 1998.
Our specialized approach has been well received internationally.
Approximately 12% of Reliance's total net premiums written are from
international sources, and we expect that share to grow in the years ahead. In
1998, we opened new offices in Europe, Asia, Latin America and Africa. Europe,
which has our largest book of international business, had particularly strong
growth. Overseas markets are competitive, but less so than the U.S.
CyberComp, our Internet-based workers' compensation company, more than
doubled its gross premiums in 1998, exceeding the $80 million mark. We have
become a leader in e-commerce in the commercial property and casualty industry,
and we see opportunities for applying the skills that we've developed at
CyberComp to new products and markets both in the U.S. and internationally.
[Arrow Right] RELIANCE INSURANCE
------------------
Reliance Insurance, our middle-market company, is one of only a very few
competitors to offer a full range of specialized products and a high standard of
service delivered locally. A growing share of our new business is in the upper
end of the middle market, where Reliance's sophisticated product capabilities
are in higher demand.
[Photo of Saul P. Steinberg and Robert M. Steinberg]
(Photo Caption) [Arrow Right] SAUL P. STEINBERG (LEFT)
CHAIRMAN AND CHIEF EXECUTIVE OFFICER
RELIANCE GROUP HOLDINGS, INC.
[Arrow Right] ROBERT M. STEINBERG
PRESIDENT AND CHIEF OPERATING OFFICER
RELIANCE GROUP HOLDINGS, INC.
- - -------------------------------------------------------------------------------
"Over the past ten years, management has spent considerable time and effort to
build and develop a company that could effectively meet the challenges of a very
difficult operating environment." Goldman Sachs, December 1998
- - -------------------------------------------------------------------------------
<PAGE>
An outcome-driven approach to claims management is yielding concrete
results at Reliance Insurance. By having more and higher skilled people managing
claims in an entrepreneurial organization, Reliance Insurance has benefited its
combined ratio by more than one percentage point in 1998.
The middle market continues to be the most competitive segment of the
market but by differentiating ourselves with our product depth and national
network of 37 offices, we have been able to achieve pricing increases as we
build our business.
[Arrow Right] RELIANCE REINSURANCE
--------------------
Reliance Reinsurance demonstrated in 1998 our disciplined and agile approach to
shifting market opportunities. We reduced our exposure to several less
attractive lines, but total premiums grew primarily due to a new agriculture
reinsurance unit.
Agriculture reinsurance was one area at Reliance affected by the year's
high level of catastrophes. Yet we were able to lock in a profit by purchasing
retrocessional insurance, which is essentially reinsurance for reinsurers. To
find new reinsurance opportunities, Reliance Reinsurance also established a
Strategic Development Group, which identifies and analyzes promising products
and services.
[Arrow Right] RELIANCE SURETY
---------------
Reliance Surety is one of our original specialization success stories. We are a
leader in contract surety for midsize contractors. Over the last few years, we
expanded into the smaller contractor market, and this business grew over 20% in
1998. More recently, we built a business serving large accounts. This initiative
looks very promising, and we expect it to contribute to our growth and
profitability.
We are making greater use of technology in the high-volume, low-premium
end of the business and plan to use the Internet as an efficient, low-cost
distribution vehicle.
Over the past five years, premium growth has averaged 14%, and the combined
ratio averaged 73%. Reliance Surety continues to be a stellar performer.
[Arrow Right] PERSONAL AUTO
-------------
Reliance is building a focused franchise in personal auto insurance, which is a
profitable $120 billion market in the United States. Reliance National's
nonstandard auto insurer, Reliant, is an outstanding new business success story.
In its first full year of operation, 1997, it had $98 million in net premiums
written. In 1998, its premiums doubled to $201 million. More recently, we
launched RelianceDirect, which is utilizing our growing e-commerce capabilities
and other direct marketing channels to serve the personal auto insurance market.
We believe we can maximize profit opportunities by serving the standard and
nonstandard markets through both agency and direct marketing channels. Going
forward, these two initiatives will be more closely integrated to take advantage
of cross-marketing opportunities, to share infrastructure such as claims and
service capabilities, and to build a distinctive Reliance brand in the personal
auto market.
[Arrow Right] RCG INFORMATION TECHNOLOGY
--------------------------
The investments we made over the past several years in our information
technology consulting company, RCG Information Technology (RCG IT), were evident
in its strong 1998 performance. Revenues rose 29% to a record $247.7 million.
Higher billing rates, increased solution assignments and value-added staff
supplement services contributed to record pretax operating income. We offer a
broad range of capabilities from top-level IT consulting to bottom-line project
implementation in key technologies such as SAP, People Soft and Oracle. We
intend to continue to build RCG IT's solutions business
- - -------------------------------------------------------------------------------
Forbes magazine selected Reliance Group in January 1999 for its "Platinum List"
of the best performing big companies in the U.S. based on growth and
profitability.
- - -------------------------------------------------------------------------------
"Strong underwriting expertise in several specialty insurance segments."
Duff & Phelps Credit Rating Co., June 1998
- - -------------------------------------------------------------------------------
"Reliance has transformed itself into a disciplined underwriter that has
demonstrated the ability to grow profitably."
Donaldson, Lufkin & Jenrette, December 1998
- - -------------------------------------------------------------------------------
6
<PAGE>
and expand its presence in the United States. Our efforts have built RCG IT into
a valuable asset for our company.
[Arrow Right] A STRONG FINANCIAL POSITION
---------------------------
Reliance entered 1999 with more capital and less leverage than at any time in
its history. Our year-end book value of $11.33 per share nearly doubled in two
years.
We also reduced debt by more than $180 million in 1998, which brought our
debt-to-capitalization down to 35%, from 48% at the beginning of the year.
Our success in enhancing profitability and strengthening our balance sheet
has earned us recognition from the debt rating agencies. Last summer, both Duff
& Phelps and Standard & Poor's raised our senior debt ratings to investment
grade.
This will provide us with an opportunity to refinance our debt at lower
rates, and thereby further reduce interest expense.
[Arrow Right] OUTLOOK
-------
The property and casualty market continues to be very challenging. It's been
aptly called a 10-year price war. Several insurance companies that have been
writing unprofitable business announced that they will shrink their business
rather than spill more red ink. If they are firm in their resolve, and other
companies that have not been achieving acceptable returns follow suit and demand
an acceptable risk-adjusted return for their shareholders, then we might see the
long-awaited hardening of this notoriously soft market. However, you can be sure
that Reliance will not stand by passively waiting for a change in market
conditions. We will differentiate ourselves and find opportunities to succeed
with disciplined, selective and sophisticated underwriting, outstanding service
and value-added distribution. As we capitalize on opportunities and create
tomorrow's success stories, we look forward to reporting to you on our progress.
- - -------------------------------------------------------------------------------
"Strong profitable growth is supported by a business portfolio of predominantly
casualty risks that is well diversified and prudently managed." Standard &
Poor's, August 1998
- - -------------------------------------------------------------------------------
[Arrow Right] CONCLUSION
----------
Great companies often distinguish themselves most dramatically in challenging
markets. Reliance people--our colleagues and co-owners--refuse to be deterred by
the market's gloom and hand-wringing. They are solving problems for customers,
opening new markets with higher profit potential for Reliance and building value
for their fellow shareholders. Some of our co-owners are featured in this
report, but our praise and thanks go to all of them. Together, we will continue
to work on behalf of all of our owners demonstrating what sets Reliance apart
from the competition.
/s/ Saul P. Steinberg
Saul P. Steinberg
Chairman and Chief Executive Officer
/s/ Robert M. Steinberg
Robert M. Steinberg
President and Chief Operating Officer
7
<PAGE>
[Image of American Flag in Upper Left Hand Corner]
(Photo Caption) Below, Left to right: [Arrow Right]Nancy McClure
[Arrow Right]Wes Johnson [Arrow Right]Greg Wade [Arrow Right]Becky Clark [Arrow
Right]Bob Lynam / Reliance Insurance, Nashville
[Small Photo of Reliance Employees (left to right): Nancy McClure, standing
with arms folded; Wes Johnson, standing; Greg Wade, standing with hands in
pockets; Becky Clark, standing; Bob Lynam, standing with arms folded.]
[Large Center Photo of Reliance Employee: Joe Graziano, standing with left leg
on briefcase and hands crossed on left knee.]
[Background Image: Enlarged photo of globe.]
(Photo Caption) [Arrow Right]Joe Graziano / Reliance National, International
<PAGE>
(Photo Caption) Below, left to right: [Arrow Right]Alvaro Mengotti, Spain
[Arrow Right]Carl Bach, Europe [Arrow Right]Jan Visscher, Netherlands [Arrow
Right]Paul Bialek, Germany / Reliance National market experts: From Nashville to
the Netherlands, Reliance has the right people in the right locations with the
right products for each distinct market we serve. For example, we know that
middle-market businesses have unique insurance needs and want to be served
locally. So Reliance Insurance is there with 37 offices nationwide and our
entire portfolio of insurance products. We provide the local service midsize
companies desire and the increasingly sophisticated insurance solutions they
require. [Arrow Right] Internationally, we selectively target those markets
where we know our specialized insurance coverages and value-added services can
give us a competitive advantage. In entering a market, we move carefully,
underwriting through one of our established facilities first and then opening an
in-country office only when we are confident that we can grow the business
profitably. Some markets require a different approach, such as a joint venture
or an alliance with a local insurer. We make sure we have the best strategy in
place wherever we do business. [Arrow Right] Our people are experienced in the
local marketplace, and they understand the cultures, business practices, and
regulatory and legal environments of the countries in which they work. With this
expertise and local know-how, Reliance is building profitable new business and
successfully serving customers, agents and brokers throughout the world.
[Photo of Reliance Employees (left to right): Alvaro Mengotti, standing with
arms behind back; Carl Bach, standing with left hand in pocket; Jan Visscher,
standing with arms folded; Paul Bialek, standing with left hand holding suit
jacket lapel and right hand in pocket.]
[Background Image: Enlarged photo of globe continued from previous page.]
9
<PAGE>
(Photo Caption) [Arrow Right]Jeff Dailey / Reliant
[Full-Page Photograph: Jeff Dailey standing with left arm leaning on sign that
says "Speed Limit 55."]
[Background Image: Photo of winding road.]
<PAGE>
(Photo Caption) Below, left to right: [Arrow Right]Bob Sadler [Arrow Right]Sue
Tyler [Arrow Right]Roger Bevan [Arrow Right]Nila Harrison / Reliant
[Small Photo of Reliance Employees (left to right): Bob Sadler, standing; Sue
Tyler, standing; Roger Bevan, standing and leaning to the left; Nila Harrison,
standing and facing left.]
[On left, image of winding road continued from previous page.]
[In upper right hand corner, image of roadside mile marker that says "200."]
builders: Reliance has a successful track record building new businesses. One of
our recent success stories is Reliant, the nonstandard auto insurance company we
founded two years ago. From a start-up in 1996, Reliant has grown to $201
million in net premiums written in 1998. Reliant is moving quickly to gain a
profitable share of the $24 billion nonstandard auto insurance market. [Right
Arrow] Twelve years ago, when we saw promising opportunities in specialty lines
and risk management, we created Reliance National and formed the Casualty Risk
Services Division. This division developed new business with flexible retention
structures, fronting for captive insurance facilities and other nontraditional
approaches. A major source of innovative, new products, the Casualty Risk
Services Division has become a leader in its field. [Right Arrow] Our blueprint
for success: We recruit the best people in the industry--entrepreneurial people
who love a challenge. We give them the freedom and the flexibility to start a
business and manage it the way they know best. We reward them for positive
long-term results, and we put in place the necessary checks and balances to
ensure underwriting excellence and profitable growth. [Right Arrow] Driven by
the goal of building shareholder value, Reliance will continue investing in new
businesses and capabilities that will pave the way for future success.
[Photo of Reliance Employee: Mario Vitale, standing with arms folded.]
(Photo Caption) [Arrow Right]Mario Vitale / Reliance National, Casualty Risk
Services
11
<PAGE>
(Photo Caption) [Arrow Right]Joe Pedrick / Reliance Insurance, Special
Investigation Unit
[Small Photo of Reliance Employee: Joe Pedrick, standing and facing left
with arms folded.]
movers & shakers: Reliance people think and act like business owners, not
bureaucrats. When a claim occurs, we move quickly and mobilize our resources to
achieve the best results--the optimal outcome for our customers, our company
and, ultimately, our shareholders. [Arrow Right] At Reliance Insurance, we call
this approach Outcome Management, and it's working. We've increased staffing and
lowered caseloads so our claims professionals can devote more time to each claim
and produce better and faster results. Old processes have been discarded, and
greater emphasis is placed on investigation and settlement negotiation of
third-party claims. As a result, Reliance Insurance realized a benefit of more
than one point to its combined ratio in 1998. [Arrow Right] Throughout Reliance,
claims professionals are having a positive impact on customer satisfaction and
the bottom line. Reliance Surety utilizes its construction industry expertise to
help complete projects and minimize claims costs when contractors run into
trouble. Other customers benefit from the unbundled claims and loss control
services provided by Sterling, our third party administrator (TPA), as well as
from Reliance National's flexibility and skill in working with TPAs. [Arrow
Right] Uncovering insurance fraud is also critical for achieving the optimal
outcome, and Reliance's Special Investigation Units have been very successful at
this effort. [Arrow Right] Superior claims capabilities are distinguishing
Reliance in the marketplace and contributing to profitable growth.
[Larger photo of Reliance Employees (left to right): Gary Judd, standing with
hands on hips; Vince Fasano, standing and resting hands on left knee while
holding blueprints.]
[Background Image: Enlarged photo of a Reliance claims check.]
(Photo Caption) Left to right: [Arrow Right]Gary Judd [Arrow Right]Vince
Fasano / Reliance Surety, Claims
<PAGE>
(Photo Caption) Left to right: [Arrow Right]John Quinn [Arrow Right] Lee
Routledge [Arrow Right] Sally McNeill / Reliance Insurance, Outcome Management
[Image of Sunrise in upper right hand corner.]
[Full-Page Photo of Reliance Employees (left to right): John Quinn, standing
with his arms folded facing right; Lee Routledge, standing and turned towards
the right; Sally McNeill, standing and facing left.]
13
<PAGE>
(Photo Caption) [Arrow right]Mark Benson / CyberComp
[Large Photo of Reliance Employee: Mark Benson, seated with laptop computer.]
(Photo Caption) Left to right: [Arrow Right]John Carola [Arrow Right]Joan Carr
/ Express Surety
[Small Photo of Reliance Employees (left to right): John Carola, standing with
left hand on chin and right hand folded; Joan Carr, standing.]
<PAGE>
(Photo Caption) Left to right: [Arrow Right]Dean Watters [Arrow Right]Bill
Clark / CyberComp
[Large Background Image of CyberComp's Web Site]
[Photo of Reliance Employees (left to right): Dean Watters, standing with both
hands in pockets; Bill Clark, standing and facing left with arms crossed behind
back.]
[Image of computer circuits in bottom right hand corner.]
innovators: Beyond bricks and mortar, Reliance has set up shop on the
Information Superhighway. We are a leader in e-commerce within the property and
casualty insurance industry. We pioneered the creation of a virtual insurance
operation, CyberComp, in 1997--becoming the first insurer to sell workers'
compensation coverage on the World Wide Web. Today, CyberComp is thriving. We
have more than $80 million in gross premiums written, and more than 500
independent agents are online with CyberComp in 43 states. Quoting and binding
accounts via the Internet takes less than 10 minutes, making CyberComp an
efficient provider of workers' compensation for small businesses. [Arrow Right]
Our Express Surety unit is moving to an Internet-based system, which will
further expedite the already quick turnaround it provides agents on small
commercial surety and fidelity bonds. [Arrow Right] Agents are also able to
renew their professional liability coverage online with Reliance National.
[Arrow Right] The Internet also is playing a role as we market personal auto
insurance. Other areas of Reliance are utilizing advanced computer networking
technologies to enable producers and customers to access detailed claims and
loss control information online. [Arrow Right] Throughout Reliance, we are
harnessing the power of the World Wide Web to increase efficiency, expand our
distribution channels, reduce costs and enhance service to agents, brokers and
our customers.
15
<PAGE>
(Photo Caption) Left to right: [Arrow Right]Ed Stanco [Arrow Right]Roger
Heckman / Reliance Reinsurance
[Small Photo of Reliance Employees (left to right): Ed Stanco, seated with left
hand on chin and right hand on knee; Roger Heckman seated with arms resting on
knees.]
[Background Image: Enlarged photo of designer's template.]
[Large Photo of Reliance Employee: Sue Monahan, seated and gesturing with both
hands to the right.]
<PAGE>
[Image of ruler in upper right hand corner.]
designers: Reliance has a diverse range of customers with vastly different
coverage requirements. [Arrow Right] Each profit center is staffed with
disciplined underwriters who understand the specialized needs of the customers
they serve. We provide real value for our customers by creating customized
insurance and reinsurance solutions, instead of simply selling conventional,
off-the-shelf policies. [Arrow Right] For instance, when we saw that midsize
companies were interested in some of the risk management techniques used by
Fortune 1,000 companies, Reliance Insurance designed captive insurance
arrangements, wrap-ups, loss portfolio transfers and other innovative approaches
specifically for the middle market. [Arrow Right] At Reliance Reinsurance, we
review each client's needs and then utilize interactive, computer-aided modeling
systems to formulate strategies that help our clients achieve their particular
objectives. From balance sheet management to long-range capital planning, we
structure highly effective risk financing alternatives. [Arrow Right] Reliance's
success in tailoring coverages and in developing new products and services to
meet customer needs is a key factor in our ongoing ability to retain profitable
accounts and win quality business.
[Image of designer's template continued from previous page.]
[Large Photo of Reliance Employee: John Gribben, seated and facing left with
calculator in both hands.]
(Photo Caption) Left to right: [Arrow Right]Sue Monahan [Arrow Right]John
Gribben / Reliance Insurance
17
<PAGE>
(Photo Caption) Left to right: [Arrow Right]Frank Filippo [Arrow Right]Tom
O'Brien [Arrow Right]Bruni Hernandez / RCG IT
[Small Photo of Reliance Employees (left to right): Tom O'Brien, standing and
gesturing to the right; Bruni Hernandez, standing and facing left with arms
folded.]
[Larger Photo of Reliance Employee: Frank Filippo, standing with both hands in
pockets.]
[Large Photo of computer keyboard in center of page.]
problem solvers: RCG Information Technology (RCG IT), Reliance's information
technology consulting subsidiary, has become one of the industry's fastest
growing companies by providing technology-based solutions that give clients a
competitive advantage. [Right Arrow] Leading corporations in financial services,
energy, health care, pharmaceuticals, telecommunications, electronics and other
industries, as well as the public sector, count on RCG IT for a broad range of
services. Our areas of excellence include: systems analysis, design and
integration; enterprise resource planning and implementation; imaging;
client-server technologies; testing and quality assurance; work-flow management;
staff augmentation; outsourcing; and management consulting. [Right Arrow] To
keep pace with the high demand for services, RCG IT has expanded its network to
more than 20 offices and now has 2,000 consultants engaged in technology
projects around the globe. From sophisticated databases to virtual private
networks, we have the ability to create exactly what clients need to enhance
productivity and differentiate themselves from the competition. With these
skills and strengths, RCG IT is growing successfully. [Right Arrow] RCG IT has
dramatically increased profit margins and developed the specialized IT solutions
capabilities that private and public entities will require in the next
millennium.
18
<PAGE>
[Image of graph paper in upper right hand corner]
[Photo of enlarged computer keyboard continued from previous page.]
[(Left to right) Photo of: Ed Grosso, seated on enlarged computer keyboard;
Vivian Regino, standing and holding CD-ROM.]
(Photo Caption) Left to right: [Right Arrow]Ed Grosso [Right Arrow]Vivian
Regino / RCG IT
<PAGE>
leaders: Strong leadership is the driving force behind Reliance's profitable
growth. We develop the talent within our organization and recruit outstanding
people with the right skills and experience for each of our lines of business.
We build valuable, market-leading franchises and instill throughout our business
the distinctive, ownership culture that is vital to Reliance's ongoing success.
[Photo of Reliance Leaders (left to right): C. Brian Schmalz, standing with
hands behind back; Dennis A. Busti, standing with right hand in pocket; Robert
C. Olsman, standing with hands clasped together in front; George H. Roberts,
standing with arms folded across chest.]
[Background Image: Actual firemark of the Fire Association of Philadelphia,
which later became Reliance. The firemark has an imprint of a fire hydrant
wrapped with a fire hose and the letter "F" on the left side of the hydrant and
the letter "A" on the right side of the hydrant.]
(Photo Caption) Left to right: [Arrow Right]C. Brian Schmalz, President,
Reliance Surety [Arrow Right]Dennis A. Busti, President, Reliance National
[Arrow Right]Robert C. Olsman, President, Reliance Insurance [Arrow
Right]George H. Roberts, President, Reliance Reinsurance
20
<PAGE>
SELECTED FINANCIAL DATA
RELIANCE GROUP HOLDINGS, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
- - --------------------------------------------------------------------------------------------------------------------------------
Year Ended December 31 1998 1997 1996 1995 1994
- - --------------------------------------------------------------------------------------------------------------------------------
(In thousands, except per share amounts)
Income Statement Data:
Revenues:
<S> <C> <C> <C> <C> <C>
Property and casualty insurance
Premiums earned $2,304,280 $1,947,016 $1,800,854 $1,774,591 $1,777,318
Net investment income 294,743 263,981 257,133 247,343 232,299
Gain on sales of investments 108,535 71,501 49,264 27,381 8,851
Gain on sales of subsidiaries(1) 194,080 - - - -
- - --------------------------------------------------------------------------------------------------------------------------------
2,901,638 2,282,498 2,107,251 2,049,315 2,018,468
Title insurance(1) 144,713 896,332 810,958 701,622 883,903
Information technology consulting 247,749 191,886 136,709 106,443 89,993
Other 75,020 71,920 35,669 48,607 54,686
- - --------------------------------------------------------------------------------------------------------------------------------
$3,369,120 $3,442,636 $3,090,587 $2,905,987 $3,047,050
================================================================================================================================
Income (loss) from continuing operations
before gain on sales of investments and
subsidiaries, income taxes and equity
in investee companies:
Property and casualty insurance $ 242,635 $ 232,259 $ 218,746 $ 201,699 $ 134,956
Asbestos and environmental loss
reserve increase(2) - - (134,000)(2) - -
- - --------------------------------------------------------------------------------------------------------------------------------
242,635 232,259 84,746 201,699 134,956
Title insurance(1) 10,981 63,367 38,234 12,283 30,810
Information technology consulting 19,382 5,623 2,675 5,271 5,985
Corporate interest expense (63,285) (74,407) (74,253) (76,230) (75,619)
Corporate overhead and other (69,996) (57,918) (54,013) (51,955) (56,756)
- - --------------------------------------------------------------------------------------------------------------------------------
139,717 168,924 (2,611) 91,068 39,376
Income tax (provision) benefit (33,233) (49,566) 9,664 (22,429) (10,064)
Equity in investee companies(1) 22,000 7,675 8,908 7,792 9,478
- - --------------------------------------------------------------------------------------------------------------------------------
Income from continuing operations
before gain on sales of investments
and subsidiaries 128,484 127,033 15,961(2) 76,431 38,790
After-tax gain on sales of investments 70,746 47,463 32,246 19,485 5,031
After-tax gain on sales of subsidiaries 134,985 - - - -
- - --------------------------------------------------------------------------------------------------------------------------------
Income from continuing operations 334,215 174,496 48,207(2) 95,916 43,821
Gain on sale of discontinued operation - 68,865 - - -
Other-net (7,766) (13,942) - (7,860) -
- - --------------------------------------------------------------------------------------------------------------------------------
Net income $ 326,449 $ 229,419 $ 48,207 $ 88,056 $ 43,821
================================================================================================================================
Diluted per share information:
Income from continuing operations
before gain on sales of investments
and subsidiaries $1.07 $1.07 $.14(2) $.66 $.34
After-tax gain on sales of investments .59 .40 .27 .17 .04
After-tax gain on sales of subsidiaries 1.12 - - - -
- - --------------------------------------------------------------------------------------------------------------------------------
Income from continuing operations $2.78 $1.47 $.41(2) $.83 $.38
================================================================================================================================
Net income $2.72 $1.94 $.41 $.74 $.38
================================================================================================================================
Weighted average number of
diluted shares outstanding 120,073 118,363 116,281 115,054 114,306
Cash dividends per common share $ .32 $ .32 $.32 $.32 $.32
</TABLE>
21
<PAGE>
SELECTED FINANCIAL DATA continued
RELIANCE GROUP HOLDINGS, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
- - ------------------------------------------------------------------------------------------------------------------------------------
Year Ended December 31 1998 1997 1996 1995 1994
- - ------------------------------------------------------------------------------------------------------------------------------------
(In thousands, except ratios)
Other Operating Data(3):
<S> <C> <C> <C> <C> <C>
Underwriting loss $ (52,108) $ (31,722) $ (38,387)(4) $ (45,644) $ (97,343)
Loss and loss expense ratio 65.8% 64.8% 67.6%(4) 67.7% 73.0%
Underwriting expense ratio 36.3 36.1 34.0 34.1 31.4
- - --------------------------------------------------------------------------------------------------------------------------------
Combined ratio 102.1% 100.9% 101.6%(4) 101.8% 104.4%
================================================================================================================================
- - --------------------------------------------------------------------------------------------------------------------------------
December 31 1998 1997 1996 1995 1994
- - --------------------------------------------------------------------------------------------------------------------------------
(In thousands, except per share amounts)
Balance Sheet Data:
Assets $12,775,339 $11,222,486 $10,055,512 $9,544,134 $8,962,042
Marketable securities 4,416,913 4,149,969 3,991,627 3,876,551 3,394,068
Excess of cost over fair value of net
assets acquired 219,854 229,484 239,047 248,610 258,173
Debt outstanding 720,243 903,083 901,532 878,419 892,579
Shareholders' equity 1,315,520 962,515 676,680 678,348 386,750
Shareholders' equity per common share 11.33 8.38 5.92 5.98 3.42
Statutory policyholders' surplus of property
and casualty insurance subsidiaries 1,747,425 1,302,490 1,187,056 1,128,336 908,538
</TABLE>
- - ----------
(1) On February 27, 1998, the Company completed the sale of its title
insurance operations to LandAmerica Financial Group, Inc. See note 2 to
the consolidated financial statements.
(2) The 1996 results included a charge of $134.0 million ($87.1 million
after-tax, or $.75 per diluted share) to increase net loss reserves
for asbestos-related and environmental pollution claims for business
written in or before 1987. Excluding this charge, 1996 income from
continuing operations, before gains on sales of investments, would
have been $103.1 million, or $.89 per diluted share.
(3) Underwriting results include policyholders' dividends and other income
and expense.
(4) The 1996 data excluded the charge of $134.0 million (7.4 combined
ratio points) to increase net loss reserves for asbestos-related and
environmental pollution claims for business written in or before 1987.
The actual 1996 underwriting loss was $172.4 million, the loss and
loss expense ratio was 75.0% and the combined ratio was 109.0%.
22
<PAGE>
<PAGE>
PROPERTY AND CASUALTY INSURANCE OPERATIONS
RELIANCE GROUP HOLDINGS, INC. AND SUBSIDIARIES
- - --------------------------------------------------------------------------------
Net premiums written for each line of property and casualty insurance are as
follows:
<TABLE>
<CAPTION>
Year Ended December 31 1998 1997 1996 1995 1994
- - --------------------------------------------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C> <C> <C>
General Liability $ 465,208 $ 423,278 $ 466,636 $ 468,951 $ 423,377
Commercial Automobile 335,505 295,014 265,206 239,819 244,000
Workers' Compensation 304,281 275,898 249,638 265,882 312,808
Multiple Peril 226,089 221,021 211,857 184,600 180,074
Reinsurance 217,287 159,032 151,099 118,969 125,597
Surety 204,367 176,500 159,183 139,298 117,989
Non-Standard Automobile 200,606 97,939 - - -
Ocean and Inland Marine 166,785 191,055 129,148 118,757 103,865
Accident and Health 154,323 91,714 61,873 58,426 51,976
Fire and Allied 60,005 46,339 64,250 68,118 49,977
Preferred Personal Automobile 26,195 1,068 - - -
Other 77,659 86,989 87,309 116,220 154,627
------------------------------------------------------------------------------
$2,438,310 $2,065,847 $1,846,199 $1,779,040 $1,764,290
==============================================================================
Combined ratios (on a GAAP basis), after
policyholders' dividends, for each line
of property and casualty insurance are
as follows:
<CAPTION>
Year Ended December 31 1998 1997 1996(1) 1995 1994
- - --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
General Liability 89.7% 100.0% 95.5% 102.4% 106.0%
Commercial Automobile 122.8 118.1 123.7 126.3 116.6
Workers' Compensation 91.3 93.0 94.1 79.1 95.3
Multiple Peril 98.7 100.9 107.0 117.3 114.8
Reinsurance 102.5 101.8 102.7 114.9 111.3
Surety 72.4 77.0 75.5 65.6 74.3
Non-Standard Automobile 99.8 125.5 - - -
Ocean and Inland Marine 121.1 92.1 100.3 96.0 124.9
Accident and Health 99.8 97.3 96.0 81.2 88.9
Fire and Allied 126.4 121.4 100.9 117.4 75.5
Preferred Personal Automobile N/M N/M - - -
Other 132.7 107.5 124.4 114.9 106.1
-----------------------------------------------------------------------
102.1% 100.9% 101.6% 101.8% 104.4%
=======================================================================
</TABLE>
- - ----------
(1) Excludes the effect of the $134.0 million increase in net loss reserves
for asbestos-related and environmental pollution claims for business
written in or before 1987. This charge impacted the general liability,
commercial automobile, multiple peril and reinsurance lines of
business. Including this charge, the total combined ratio was 109.0%,
while the combined ratios of the general liability, commercial
automobile, multiple peril and reinsurance lines of business were
113.8%, 124.5%, 123.9% and 115.5%, respectively.
N/M-Not Meaningful
23
<PAGE>
PROPERTY AND CASUALTY INSURANCE OPERATIONS continued
RELIANCE GROUP HOLDINGS, INC. AND SUBSIDIARIES
- - --------------------------------------------------------------------------------
Net premiums written, net premiums earned, underwriting gain (loss) and combined
ratios for each of the property and casualty insurance operating units are as
follows:
<TABLE>
<CAPTION>
Year Ended December 31 1998 1997 1996(1) 1995 1994
- - --------------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
Net Premiums Written
<S> <C> <C> <C> <C> <C>
Reliance National $1,214,256 $ 987,253 $ 833,674 $ 864,387 $ 889,726
Reliance Insurance 775,480 740,362 702,433 649,395 611,363
Reliance Reinsurance 217,287 159,032 151,099 118,969 125,597
Reliance Surety 204,367 176,500 159,183 139,298 117,989
Reliance Direct 26,195 1,068 - - -
Other 725 1,632 (190) 6,991 19,615
-----------------------------------------------------------------------------
$2,438,310 $2,065,847 $1,846,199 $1,779,040 $1,764,290
=============================================================================
Net Premiums Earned
Reliance National $1,126,901 $ 926,154 $ 827,037 $ 882,753 $ 897,409
Reliance Insurance 754,007 698,537 683,387 628,055 609,704
Reliance Reinsurance 214,712 152,754 140,334 119,921 132,694
Reliance Surety 196,693 167,251 147,416 127,355 108,833
Reliance Direct 10,791 136 - - -
Other 1,176 2,184 2,680 16,507 28,678
-----------------------------------------------------------------------------
$2,304,280 $1,947,016 $1,800,854 $1,774,591 $1,777,318
=============================================================================
Underwriting Gain (Loss)
Reliance National $ (31,626) $ (25,803) $ (19,941) $ 481 $ (46,821)
Reliance Insurance (49,676) (29,716) (35,697) (42,344) (45,795)
Reliance Reinsurance (5,070) (3,120) (4,117) (18,204) (15,455)
Reliance Surety 54,346 37,733 34,421 41,544 27,493
Reliance Direct (18,289) (6,039) - - -
Other (1,793) (4,777) (13,053) (27,121) (16,765)
-----------------------------------------------------------------------------
$ (52,108) $ (31,722) $ (38,387) $ (45,644) $ (97,343)
=============================================================================
Combined Ratios(2)
Reliance National 102.2% 102.0% 101.7% 99.1% 104.5%
Reliance Insurance 106.7% 103.7% 104.9% 106.3% 106.4%
Reliance Reinsurance 102.5% 101.8% 102.7% 114.9% 111.3%
Reliance Surety 72.4% 77.0% 75.5% 65.6% 74.3%
Consolidated 102.1% 100.9% 101.6% 101.8% 104.4%
</TABLE>
- - ----------
(1) Excludes the effect of the $134.0 million increase in net loss reserves
for asbestos-related and environmental pollution claims. This charge
impacted Reliance Insurance and Reliance Reinsurance. Including this
charge, the total underwriting loss and combined ratio was $172.4
million and 109.0%, while the total underwriting loss and combined
ratio for Reliance Insurance was $151.7 million and 121.9% and for
Reliance Reinsurance was $22.1 million and 115.5%.
(2) Calculated on a GAAP basis, after policyholders' dividends. Combined
ratios for Reliance Direct and Other are not presented since they are
not meaningful.
24
<PAGE>
FINANCIAL REVIEW
RELIANCE GROUP HOLDINGS, INC. AND SUBSIDIARIES
- - --------------------------------------------------------------------------------
OVERVIEW
The Company had income from continuing operations, before
gains on sales of investments and subsidiaries, of $128.5
million ($1.07 per diluted share) in 1998, compared to $127.0
million ($1.07 per diluted share) in 1997. Operating results
in 1998, when compared to 1997, reflect higher levels of net
investment income and increased profits from the information
technology business, offset by higher catastrophe claims and
other weather related losses in the property and casualty
insurance operations and less income from the title insurance
operations which were sold in February 1998. Operating income
in 1996 was $16.0 million ($.14 per diluted share) which
included an after-tax charge of $87.1 million ($.75 per
diluted share) to increase property and casualty insurance net
loss reserves for asbestos-related and environmental pollution
claims.
Net income in 1998 was $326.4 million ($2.72 per diluted
share) which includes after-tax gains of $135.0 million ($1.12
per diluted share) primarily resulting from the sale of the
Company's title insurance operations. See note 2 to the
consolidated financial statements for further discussion. Net
income in 1998 also includes an after-tax extraordinary charge
of $7.8 million ($.06 per diluted share) related to early
extinguishment of debt. Net income in 1997 was $229.4 million
($1.94 per diluted share) which includes an after-tax gain of
$68.9 million ($.58 per diluted share) resulting from a tax
benefit realized from the sale of Prometheus Funding Corp.
("Prometheus"), a subsidiary previously classified as
discontinued, and an after-tax charge of $7.5 million ($.06
per diluted share) for a litigation settlement pertaining to
Prometheus. Net income in 1997 also includes an after-tax
charge of $6.4 million ($.05 per diluted share) representing
the cumulative effect of adopting Emerging Issues Task Force
Issue No. 97-13, which prohibits capitalization of process
reengineering costs. Net income in 1996 was $48.2 million
($.41 per diluted share). Net income in 1998, 1997 and 1996
also included after-tax gains on sales of investments of $70.7
million ($.59 per diluted share), $47.5 million ($.40 per
diluted share) and $32.2 million ($.27 per diluted share),
respectively.
PROPERTY AND CASUALTY INSURANCE OPERATIONS
Property and casualty insurance pretax operating income,
before gains on sales of investments and subsidiaries,
increased to $242.6 million in 1998 from $232.3 million in
1997 and $218.7 million in 1996 (which excludes the $134.0
million pretax charge to strengthen asbestos-related and
environmental pollution claims net loss reserves). The
increase in 1998 operating income reflects higher levels of
net investment income partially offset by an increase in
underwriting losses. Underwriting results in 1998 were
adversely affected by an increase in catastrophe losses which
were $33.3 million in 1998 compared to $11.1 million in 1997
and $19.9 million in 1996, and increased losses in property
and marine lines of business. The improvement in 1997
operating income, when compared to 1996, resulted from lower
underwriting losses and increased net investment income.
25
<PAGE>
FINANCIAL REVIEW continued
RELIANCE GROUP HOLDINGS, INC. AND SUBSIDIARIES
- - --------------------------------------------------------------------------------
Net premiums written, net premiums earned, underwriting gain
(loss) and combined ratios for each of the property and
casualty insurance operating units are as follows (dollars in
thousands):
<TABLE>
<CAPTION>
1998 1997 1996(1)
-----------------------------------------------------------------------------------------------------------------
Net Premiums Written
<S> <C> <C> <C>
Reliance National $1,214,256 $ 987,253 $ 833,674
Reliance Insurance 775,480 740,362 702,433
Reliance Reinsurance 217,287 159,032 151,099
Reliance Surety 204,367 176,500 159,183
Reliance Direct 26,195 1,068 -
Other 725 1,632 (190)
---------------------------------------------
$2,438,310 $2,065,847 $1,846,199
=============================================
Net Premiums Earned
Reliance National $1,126,901 $ 926,154 $ 827,037
Reliance Insurance 754,007 698,537 683,387
Reliance Reinsurance 214,712 152,754 140,334
Reliance Surety 196,693 167,251 147,416
Reliance Direct 10,791 136 -
Other 1,176 2,184 2,680
---------------------------------------------
$2,304,280 $ 1,947,016 $1,800,854
=============================================
Underwriting Gain (Loss)
Reliance National $ (31,626) $ (25,803) $ (19,941)
Reliance Insurance (49,676) (29,716) (35,697)
Reliance Reinsurance (5,070) (3,120) (4,117)
Reliance Surety 54,346 37,733 34,421
Reliance Direct (18,289) (6,039) -
Other (1,793) (4,777) (13,053)
----------------------------------------------
$ (52,108) $ (31,722) $ (38,387)
==============================================
Combined Ratios(2)
Reliance National 102.2% 102.0% 101.7%
Reliance Insurance 106.7% 103.7% 104.9%
Reliance Reinsurance 102.5% 101.8% 102.7%
Reliance Surety 72.4% 77.0% 75.5%
Consolidated 102.1% 100.9% 101.6%
</TABLE>
- - ----------
(1) Excludes the effect of the $134.0 million increase in net loss reserves
for asbestos-related and environmental pollution claims. This charge
impacted Reliance Insurance and Reliance Reinsurance. Including this
charge, the total underwriting loss and combined ratio was $172.4
million and 109.0%, while the total underwriting loss and combined
ratio for Reliance Insurance was $151.7 million and 121.9% and for
Reliance Reinsurance was $22.1 million and 115.5%.
(2) Calculated on a GAAP basis, after policyholders' dividends. Combined
ratios for Reliance Direct and Other are not presented since they are
not meaningful.
RELIANCE NATIONAL
The increase in net premiums written and net premiums earned
in 1998 and 1997 reflects increased premiums from the
Non-Standard Automobile division which commenced operation in
late 1996. Non-Standard Automobile net premiums written were
$200.6 million in 1998 and $97.9 million in 1997. The Company
expects continued strong growth in Non-Standard Automobile
premiums. Premium increases in 1998 and 1997 also reflects
growth in the Accident and Health division, growth in the
Casualty Risk Services division, including premiums generated
from the internet-based marketing of workers' compensation
business, and continued growth in European operations. The
increase in net premiums written and net premiums earned in
1997 also reflects geographic expansion in the International
Reinsurance and Special Risks division.
The increase in the underwriting loss in 1998, when
compared to 1997, reflects an increase in property and marine
losses in the fourth quarter of 1998, primarily attributable
to unusually harsh weather
26
<PAGE>
RELIANCE GROUP HOLDINGS, INC. AND SUBSIDIARIES
- - --------------------------------------------------------------------------------
conditions. Reliance National plans to curtail writing certain
of its property and marine lines. These losses offset the
strong underwriting results in Reliance National's
Non-Standard Automobile, Excess and Surplus and Financial
Products divisions. The increase in underwriting loss in 1997,
when compared to 1996, reflects reserve strengthening in
Excess and Surplus, and start-up costs associated with
Non-Standard Automobile, which offset the strong performance
in most of Reliance National's other operating divisions.
RELIANCE INSURANCE
The increase in net premiums written and net premiums earned
in 1998 and 1997 reflects growth in the Commercial Accounts
division, particularly in commercial automobile and general
liability lines of business, reflecting new business
production and modest price increases. Underwriting results in
1998 were adversely impacted by an increase in catastrophe
claims, including hurricane related losses. Catastrophe claims
were $22.0 million in 1998 compared to $9.5 million in 1997
and $16.2 million in 1996. In addition, in the fourth quarter
of 1998, Reliance Insurance experienced a high level of
property and marine losses, primarily attributable to
unusually harsh weather conditions. Reliance Insurance plans
to curtail writing certain of its property and marine lines.
The effects of the increase in catastrophe claims and property
and marine losses were partially offset by improved
underwriting results in Reliance Insurance's workers'
compensation business.
RELIANCE REINSURANCE
The increase in net premiums written and net premiums earned
in 1998, when compared to 1997, resulted from the start-up of
the Agricultural Reinsurance division, which wrote $68.4
million of premiums in 1998 compared to $5.0 million in 1997.
The combined ratios in 1998 reflect strong underwriting
results in Agricultural Reinsurance and, in 1997 and 1996,
reflect a low level of losses in Reliance Reinsurance's
traditional treaty book of business.
RELIANCE SURETY
The increase in net premiums written and net premiums earned
in 1998 and 1997 reflects continued growth in surety contract
business for mid-sized companies and in small contractor
surety business. Small contractor net premiums written
increased to $37.8 million in 1998 from $31.1 million in 1997
and $22.8 million in 1996. Underwriting results in all years
were strong due to the low level of loss activity in the
contract surety business, and continued underwriting profits
in the fidelity line.
RELIANCE DIRECT
Reliance Direct was formed in 1997 to market and underwrite
preferred personal automobile insurance on a direct basis.
Reliance Direct's underwriting losses in 1998 and 1997 include
administrative expenses associated with building an
infrastructure to support future premium growth. In the first
quarter of 1999, the company commenced a review of its
personal automobile lines of business to determine the
feasibility of combining these businesses into a single
operating unit.
The consolidated property and casualty insurance operations
assume and cede reinsurance in the normal course of business.
The Company's aggregate reinsurance recoverables were $5.0
billion at December 31, 1998, representing estimated amounts
recoverable from reinsurers pertaining to unpaid claims,
claims incurred but not reported, unearned premiums and paid
claims. The Company is subject to credit risk with respect to
its reinsurers, as the ceding of risk to reinsurers does not
relieve the Company of its liability to insureds. The Company
holds substantial amounts of collateral to secure recoverables
from unauthorized reinsurers. See note 9 to the consolidated
financial statements.
Policy claims and settlement expenses for 1998 and 1997
include favorable development of $33.0 million and $36.0
million, respectively, pertaining to insured events of prior
years. These redundancies reflect favorable development in
workers' compensation partially offset by adverse development
in the commercial automobile line. The redundancy in workers'
compensation is due, in part, to favorable development in
retrospectively rated policies, which was more than offset by
a corresponding reduction in
27
<PAGE>
FINANCIAL REVIEW continued
RELIANCE GROUP HOLDINGS, INC. AND SUBSIDIARIES
- - --------------------------------------------------------------------------------
premiums earned. The 1998 redundancy also includes favorable
development in general liability and multiple peril lines of
business and adverse development in ocean marine line of
business. Policy claims and settlement expenses for 1996
included a provision for insured events of prior years of
$138.7 million. The provision for 1996 included adverse
development related to prior year asbestos-related and
environmental pollution claims, which primarily affected
general liability, multiple peril and reinsurance lines of
business, and included a pretax charge of $134.0 million to
increase net loss reserves for asbestos-related and
environmental pollution claims for business written in or
before 1987. The 1996 provision also included adverse
development in the commercial automobile line, offset by
favorable development in workers' compensation.
In the first quarter of 1999, the Company plans to adopt
Statement of Position 97-3, "Accounting by Insurance and Other
Enterprises for Insurance-Related Assessments." See note 1 to
the consolidated financial statements for further discussion.
The liability for property and casualty insurance loss
reserves at December 31, 1998 was $7.17 billion compared to
$6.56 billion at December 31, 1997. The liability is based on
an evaluation of reported claims in addition to statistical
projections of claims incurred but not reported and loss
adjustment expenses. Estimates of salvage and subrogation are
deducted from the liability. Reinsurance recoverables of $3.95
billion and $3.32 billion at December 31, 1998 and 1997,
respectively, are included in the liability.
The establishment of loss reserves requires an estimate of
the ultimate liability based primarily on past experience. The
Company applies a variety of generally accepted actuarial
techniques to determine the estimates of ultimate liability.
The techniques recognize, among other factors, the Company's
and industry's experience with similar business, historical
trends in reserving patterns and loss payments, pending level
of unpaid claims, cost of claim settlements, product mix and
the economic environment in which property and casualty
companies operate. Estimates are continually reviewed and
adjustments of the probable ultimate liability based on
subsequent developments and new data are included in operating
results for the periods in which they are made. In general,
reserves are initially established based upon the actuarial
and underwriting data utilized to set pricing levels and are
reviewed as additional information, including claims
experience, becomes available. The establishment of loss
reserves makes no provision for the broadening of coverage by
legislative action or judicial interpretation or for
extraordinary future emergence of new classes of losses not
sufficiently represented in the Company's historical data
base, or which are not yet able to be quantified. The Company
regularly analyzes its reserves and reviews its pricing and
reserving methodologies so that future adjustments to prior
years reserves can be minimized. However, given the complexity
of this process, reserves will require continual updates and
the ultimate liability may be more or less than such estimates
indicate. Estimation of loss reserves for long tail lines of
business is more difficult than for short tail lines because
long tail claims may not become apparent for a number of
years, and a relatively higher proportion of ultimate losses
are considered incurred but not reported. As a result,
variation in loss development is more likely in long tail
lines of business. The Company attempts to reduce these
variations in certain of its long tail lines, primarily
directors and officers liability and professional liability,
by writing policies on a claims-made basis which mitigates the
long tail nature of the risks. The Company also limits the
potential loss from a single event through the extensive use
of reinsurance.
PROPERTY AND CASUALTY INSURANCE INVESTMENT RESULTS
Net investment income of the property and casualty insurance
operations increased to $294.7 million in 1998 from $264.0
million in 1997 and $257.1 million in 1996. These increases
resulted from growth in the size of the fixed maturity
investment portfolio reflecting the investment of a portion of
the proceeds received from the sale of the title insurance
operations. The effects of these increases were partially
offset by lower interest rates.
Gains on sales of investments of $108.5 million in 1998,
$71.5 million in 1997 and $49.3 million in 1996 primarily
resulted from sales of equity securities. Gains on sales of
investments in 1998 are net of write-downs of $50.8 million
equal to the difference between the cost and market values of
certain investments to reflect other than temporary declines.
Gains on sales of investments in 1997 included
28
<PAGE>
RELIANCE GROUP HOLDINGS, INC. AND SUBSIDIARIES
- - --------------------------------------------------------------------------------
gains of $42.8 million resulting from sales of shopping
centers and an office building, partially offset by a $25.9
million write-down of undeveloped land which is zoned for
mixed use development.
INVESTMENT PORTFOLIO
Investment activities are an integral part of the business of
the property and casualty insurance operations. At December
31, 1998, the Company's investment portfolio aggregated $3.94
billion (at cost) of which 93% was invested in fixed
maturities and 7% 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 and invests in investment grade securities
(those rated "BBB" or better by Standard and Poor's) and, to a
lesser extent, non-investment grade securities and non-rated
securities. At December 31, 1998, no one issuer comprised more
than 2.5% of the fixed maturity and short-term investment
portfolio.
Fixed maturity securities classified as held for investment
consist primarily of corporate securities of which
substantially all are rated investment grade. Fixed maturity
securities classified as available for sale consist of
corporate, U.S. Treasury and Government National Mortgage
Association (GNMA) securities. At December 31, 1998, the
carrying values of non-investment grade securities and
securities not rated by Standard and Poor's were $459.2
million (12% of the fixed income portfolio) and $194.5 million
(5% of the fixed income portfolio), respectively.
Substantially all of the Company's non-investment grade and
non-rated securities are classified as available for sale. The
weighted average maturity of the fixed maturity portfolio
(excluding short-term investments) is approximately nine
years.
At December 31, 1998, approximately 26% of the fixed
maturity and short-term investment portfolio was comprised of
securities issued by utilities, the vast majority of which are
rated investment grade and are first mortgage or senior
secured bonds. The utility portfolio is widely diversified
among various geographic regions in the United States and is
not dependent on the economic stability of any one particular
region. No other industry group comprises more than 10% of the
fixed maturity and short-term investment portfolio.
OTHER OPERATIONS
RCG Information Technology, Inc. ("RCG"), a subsidiary of the
Company, provides computer-related services to large corporate
clients throughout the United States. Information technology
revenues were $247.7 million in 1998, $191.9 million in 1997
and $136.7 million in 1996. The increase in revenues resulted
from a significant increase in demand for information
technology services from both existing and new clients,
together with an increase in higher margin solutions business
and an increase in billing rates. Gross margins (revenues less
cost of services) were $78.8 million in 1998, $51.4 million in
1997 and $30.4 million in 1996. Pretax income increased to
$19.4 million in 1998 from $5.6 million in 1997 and $2.7
million in 1996 resulting from increased gross margins,
partially offset by higher selling, general and administrative
expenses associated with continued domestic geographic
expansion and investments in technical and sales capabilities.
RCG's revenues and expenses are included in other revenues and
other operating expenses in the accompanying consolidated
statement of income.
EQUITY IN INVESTEE COMPANIES
Equity in investee companies was $22.0 million in 1998 which
includes equity earnings of $15.6 million from the Company's
investment in LandAmerica Financial Group, Inc. since March 1,
1998. The remaining 1998 equity earnings of $6.4 million is
from the Company's Zenith National Insurance Corp. ("Zenith")
investment, which compares to equity earnings from Zenith of
$7.7 million in 1997 and $8.9 million in 1996. The decline in
Zenith's equity earnings in 1998 reflects increased
catastrophe losses.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal sources of funds consist of dividends,
advances and net tax payments from its subsidiaries. These
payments aggregated $308.1 million for the year ended December
31, 1998. The Company's ability to receive cash dividends has
depended upon and continues to depend upon the dividend paying
ability of its insurance subsidiaries. The Insurance Law of
Pennsylvania, where Reliance Insurance Company (the Company's
principal 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
29
<PAGE>
FINANCIAL REVIEW continued
RELIANCE GROUP HOLDINGS, INC. AND SUBSIDIARIES
- - --------------------------------------------------------------------------------
(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.
Regular common stock dividends paid by Reliance Insurance
Company were $136.0 million in 1998, $114.6 million in 1997
and $111.5 million in 1996. In addition, during 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. During 1999, $585.3 million would be
available for dividend payments by Reliance Insurance Company
under Pennsylvania law.
Reliance Insurance Company collects and invests premiums
prior to payment of associated claims, which are generally
made months or years subsequent to the receipt of premiums.
Reliance Insurance Company carefully monitors its cash,
short-term investments and marketable securities to maintain
adequate balances for the timely payment of claims and other
operating requirements. At December 31, 1998, Reliance
Insurance Company had $449 million of cash and short-term
investments.
For the year ended December 31, 1998, the Company generated
$86.8 million of cash flow from operating activities compared
to $10.5 million in 1997 and $160.4 million in 1996. The
increase in 1998 operating cash flow reflects an increase in
the net collection of insurance premiums as well as an
increase in operating cash flow from the information
technology operations. The 1998 increase was partially offset
by higher net payments for policy claims and related expenses
due, in part, to a shift in the mix of business to shorter
tailed lines. Operating cash flow in 1998 was also reduced by
higher payments of income taxes resulting from increased
amounts of taxable income due, in part, to gains on sales of
subsidiaries and investments. The decrease in 1997 operating
cash flow when compared to 1996, reflected the increase in
premiums receivable, other receivables and reinsurance
recoverables as well as higher net payments for policy claims
and related expenses due, in part, to a shift in the mix of
business to shorter tailed lines.
The Company generated $163.4 million and $56.7 million of
cash flow from investing activities for the years ended
December 31, 1998 and 1997, respectively, primarily from the
sales of subsidiaries in 1998 and sales of real estate in
1997. The increase in cash flow from investing activities in
1998 was partially offset by net purchases of securities. The
Company used $159.9 million of cash flow for investing
activities for the year ended December 31, 1996, primarily due
to net purchases of marketable securities.
For the year ended December 31, 1998, the Company used
$222.3 million of cash flow for financing activities. During
1998, the Company purchased $186.5 million of its outstanding
senior notes and senior subordinated debentures utilizing the
dividends from Reliance Insurance Company. These purchases
resulted in an after-tax extraordinary charge of $7.8 million,
net of a $4.2 million tax benefit. The Company used $34.6
million and $12.5 million of cash flow for financing
activities for the years ended December 31, 1997 and 1996,
respectively, primarily for the payment of dividends,
partially offset in 1996, by additional term loan borrowings.
The Company has a revolving credit facility with various
banks providing for aggregate maximum outstanding borrowings
of $100 million. At December 31, 1998, borrowings aggregating
$38 million were outstanding under this facility. The Company
had $720.2 million of debt outstanding at December 31, 1998
with $56.3 million maturing on or before December 31, 1999. An
additional $639.2 million of debt matures on or before
December 31, 2003 of which $465.4 million matures in the year
2000. The Company expects to repay these amounts at their
existing maturities, utilizing a combination of refinancing
and cash flow generated from operations.
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,
30
<PAGE>
RELIANCE GROUP HOLDINGS, INC. AND SUBSIDIARIES
- - --------------------------------------------------------------------------------
investment risks, credit risks relating to reinsurance
recoverables and underwriting risks) rather than just the
amount of net premiums written by the insurer. A formula that
applies prescribed factors to the various risk elements in an
insurer's business is used to determine the minimum statutory
capital requirement for the insurer. An insurer having less
statutory capital than the formula calculates would be subject
to varying degrees of regulatory intervention, depending on
the level of capital inadequacy. All of the Company's
statutory insurance companies have statutory capital in excess
of the minimum required risk-based capital.
Maintaining appropriate levels of statutory surplus is
considered important by the Company's management, state
insurance regulatory authorities and the agencies that rate
the insurers' claims-paying abilities and financial strength.
Failure to maintain certain levels of statutory capital and
surplus could result in increased scrutiny or, in some cases,
action taken by state regulatory authorities and/or downgrades
in an insurer's ratings.
The Company and its subsidiaries are involved in certain
litigation arising in the course of their businesses, some of
which involve claims of substantial amounts. See note 15 to
the consolidated financial statements for further discussion.
MARKET RISKS
The Company manages its investment portfolio to achieve safety
and liquidity, while seeking to maximize total return. The
Company believes it can achieve these objectives by active
portfolio management and intensive monitoring of investments.
Investment decisions are centrally managed by investment
professionals, including a fixed income investment department,
which is staffed with individuals who have extensive
experience in both the investment grade and non-investment
grade bond markets.
Market risk represents the potential for loss due to
adverse changes in the fair value of financial instruments.
The market risk related to financial instruments of the
Company primarily relate to the investment portfolio, which
exposes the Company to risks related to interest rates,
defaults, prepayments, foreign currency exchange rates,
concentration risk and declines in equity prices. 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. Analytical tools and monitoring
systems are in place to assess each of these elements of
market risk.
Interest rate risk is the price sensitivity of a fixed
income security to changes in interest rates. The Company
views these potential changes in price within the overall
context of asset and liability management. The Company's
actuaries estimate the payout pattern of the property and
casualty insurance loss reserves, to determine their duration,
which is the weighted average payments expressed in years. The
Company sets duration targets for fixed income investment
portfolios which the Company believes mitigates the overall
effect of interest rate risk. Based upon assumptions the
Company uses in its duration calculations, increases in
interest rates of 100 and 150 basis points would cause
decreases in the market value of the fixed maturity portfolio
(excluding short-term investments) of approximately $210
million and $320 million, respectively. Similarly, a decrease
in interest rates of 100 to 150 basis points would cause
increases in the market value of the fixed maturity portfolio
of approximately $210 million and $320 million, respectively.
Foreign currency risk is the sensitivity to foreign
exchange rate fluctuations of foreign currency denominated
financial instruments. The functional currency of the
Company's foreign operations is generally the currency of the
local operating environment since their business is primarily
transacted in such local currency. The Company reduces the
risks relating to currency fluctuations by maintaining
investments in those foreign currencies in which the Company
transacts business. Such investments have characteristics
similar to liabilities in those currencies. In addition, the
Company also invests in certain foreign currency denominated
fixed income securities in its domestic portfolio. At December
31, 1998, the Company held foreign currency denominated fixed
income investments of $437 million, including $146 million
held in its domestic portfolio. The principal currencies
creating foreign exchange rate risk for the Company are the
Canadian dollar, British pound sterling and the Mexican peso.
If the U.S. dollar strengthened by 10% in comparison to each
of the foreign currencies held by the Company, an approximate
$45 million decrease would have occurred in the market value
of fixed maturity investments denominated
31
<PAGE>
FINANCIAL REVIEW continued
RELIANCE GROUP HOLDINGS, INC. AND SUBSIDIARIES
- - --------------------------------------------------------------------------------
in foreign currencies at December 31, 1998. If the U.S.
dollar weakened by 10% in comparison to each of the foreign
currencies held by the Company, an approximate $45 million
increase would have occurred in the market value of fixed
maturity investments denominated in foreign currencies at
December 31, 1998. The Company believes that the effects on
its shareholders' equity resulting from exchange rate
fluctuations on foreign currency investments held by its
international operations would be partially offset by the
effect of exchange rate fluctuations on the liabilities
maintained by the international operations.
At December 31, 1998, the market value and cost of the
Company's equity securities were $754.5 million and $263.0
million. The Company is exposed to equity price risk as a
result of its investment in equity securities. Equity price
risk results from changes in the level of equity prices which
affect the value of equity securities. An approximate $75
million decrease in the market value of equity securities
would have occurred if there had been a 10% decrease in the
market prices of all equity securities, and an approximate $75
million increase in the market value of equity securities
would have occurred if there had been a 10% increase in the
market prices of all equity securities. The Company's
investment in the common stock of Symbol Technologies, Inc.
represented 68% of the market value of the equity portfolio at
December 31, 1998. A 20% decline in the market price of this
security would result in an approximate $100 million decrease
in the market value of equity securities and a 20% increase in
the market value of this security would result in an
approximate $100 million increase in the market value of
equity securities.
At December 31, 1998, the Company had total debt
outstanding of $720.2 million of which $483 million is fixed
interest rate debt. The interest rate on the Company's
remaining debt is variable. The Company believes that the
impact of a 100 basis point increase in interest rates on the
variable rate debt would result in an increase in annual
interest expense of approximately $2.4 million, while a 100
basis point decrease in interest rates on the variable rate
debt would result in a decrease in annual interest expense of
approximately $2.4 million.
YEAR 2000
In general, the year 2000 issue concerns many existing
computers and software products which were originally coded to
accept only two digit entries in the date code field. These
computers and software products will need to be either
replaced or reprogrammed in order for computer systems to
distinguish 21st century dates from 20th century dates.
Company Information Technology
The Company's insurance policies contain date sensitive data,
such as policy expiration dates and premium payment dates. If
the Company's material computer systems are not year 2000
compliant, the Company's business operations, including claims
and premiums processing operations, financial reporting
systems and actuarial calculations, could be materially
adversely affected.
The Company commenced its efforts to address the year 2000
issue in 1996. All but two of its claims and premiums
processing systems and corporate financial recording and
reporting systems have been remediated and tested where
necessary and the Company believes they are year 2000
compliant. While the Company has completed its originally
scheduled testing for the remediated systems, in light of the
additional time available to it, the Company implemented a
second round of compliance assurance testing of these systems,
which the Company plans to substantially complete by the third
quarter of 1999. Of the two noncompliant systems (one of which
was identified subsequent to the filing of the September 30,
1998, Quarterly Report on Form 10-Q of the Company), the
Company plans to transfer the data from one of the systems to
a year 2000 compliant system and plans to replace the other
system. In addition, the Company plans to complete remediation
of certain of its actuarial systems by the third quarter of
1999, and to perform compliance assurance testing on these
actuarial systems by the last quarter of 1999. The year 2000
issue is constantly evolving, so the Company anticipates that
it may from time to time revise its year 2000 compliance
schedule; however, the Company expects that its year 2000
efforts will be completed in a timely fashion.
Third Party Information Technology
Even if all of the Company's computer systems and software
products are year 2000 compliant, the failure of third parties
with whom the Company does significant business to be year
2000 compliant could materially adversely affect the financial
position, results of operations or cash flows of the Company.
32
<PAGE>
RELIANCE GROUP HOLDINGS, INC. AND SUBSIDIARIES
- - --------------------------------------------------------------------------------
Accordingly, as part of its year 2000 process, the Company is
identifying certain third parties with whom the Company does
significant business to determine whether such third parties
are, or will be, year 2000 compliant. The Company has sent
year 2000 compliance questionnaires to its property managers,
third party administrators, major reinsurers, reinsurance
intermediaries, and employee benefit providers and to
government and private agencies to which the Company
electronically transmits, and from which the Company
electronically receives, financial and other information. The
Company expects to substantially complete by the end of March
1999 its initial follow-up with any of such third parties who
either had not responded to such questionnaires or who had
provided insufficiently detailed or inadequate responses to
such questionnaires. As part of this process, the Company
completed in January 1999 its distribution of year 2000
compliance questionnaires to insurance brokers and agents with
whom the Company does significant business, and is in the
process of distributing year 2000 compliance questionnaires to
financial institutions and other vendors with whom the Company
does significant business. The Company will follow-up with
parties who either have not responded to such questionnaires
or who have provided insufficiently detailed or inadequate
responses to such questionnaires. The Company plans to conduct
systems testing as appropriate with third parties in 1999.
While the Company is taking what it believes are appropriate
safeguards, there can be no assurances that the failure of
such third parties to be year 2000 compliant will not have a
material adverse effect on the Company's financial position,
results of operations or cash flows in future financial
periods.
Contingency Plans
The Company conducted in February 1999 workshops to assist
business units in formulating contingency plans to deal with
situations in which various systems of the Company, or of
third parties with whom the Company does business, are not
year 2000 compliant. Contingency plans are scheduled to be
completed, and reviewed by the Company's year 2000 program
office, by July 1, 1999.
Costs
Through year-end 1998, the Company had incurred approximately
$5.5 million to address the year 2000 issue and expects to
incur an additional $1.25 million through year-end 2000.
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 reviewing
its exposures 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 implementing appropriate strategies to manage and
mitigate such exposures 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.
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.
33
<PAGE>
<TABLE>
CONSOLIDATED STATEMENT OF INCOME RELIANCE GROUP HOLDINGS, INC. AND
SUBSIDIARIES
<CAPTION>
- - ------------------------------------------------------------------------------------------------------
Year Ended December 31 1998 1997 1996
- - -----------------------------------------------------------------------------------------------------
(In thousands, except per share amounts)
<S> <C> <C> <C>
Revenues:
Premiums earned $2,443,412 $2,810,762 $2,581,011
Net investment income 300,019 294,971 287,588
Gain on sales of investments 108,840 73,097 49,610
Gain on sales of subsidiaries 197,258 -- --
Other 319,591 263,806 172,378
---------- ---------- ----------
3,369,120 3,442,636 3,090,587
---------- ---------- ----------
Claims and expenses:
Policy claims and settlement expenses 1,523,624 1,304,559 1,411,453
Policy acquisition costs and other insurance
expenses 958,310 1,496,983 1,327,306
Interest 79,840 88,663 87,724
Other operating expenses 361,531 310,410 217,105
---------- ---------- ----------
2,923,305 3,200,615 3,043,588
---------- ---------- ----------
Income before income taxes and equity
in investee companies 445,815 242,021 46,999
Provision for income taxes (133,600) (75,200) (7,700)
Equity in investee companies 22,000 7,675 8,908
---------- ---------- ----------
Income from continuing operations 334,215 174,496 48,207
Gain on disposal of discontinued operation -- 68,865 --
Litigation settlement of discontinued operation -- (7,500) --
---------- ---------- ----------
Income before extraordinary item and cumulative
effect of accounting change 334,215 235,861 48,207
Extraordinary item-early extinguishment of debt (7,766) -- --
Cumulative effect of change in accounting for
process reengineering costs -- (6,442) --
---------- ---------- ----------
Net income $ 326,449 $ 229,419 $ 48,207
========== ========== ==========
Basic per share information:
Income from continuing operations $2.89 $1.52 $.42
========== ========== ==========
Net income $2.82 $2.00 $.42
========== ========== ==========
Diluted per share information:
Income from continuing operations $2.78 $1.47 $.41
========== ========== ==========
Net income $2.72 $1.94 $.41
========== ========== ==========
</TABLE>
See notes to consolidated financial statements
34
<PAGE>
CONSOLIDATED BALANCE SHEET RELIANCE GROUP HOLDINGS, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
- - -------------------------------------------------------------------------------------------
Assets December 31 1998 1997
- - -------------------------------------------------------------------------------------------
(In thousands, except per share amount)
<S> <C> <C>
Marketable securities:
Fixed maturities held for investment-at amortized cost
(quoted market $578,179 and $663,744) $ 539,848 $ 636,119
Fixed maturities available for sale-at quoted market
(amortized cost $2,687,009 and $2,214,963) 2,738,864 2,317,673
Equity securities-at quoted market
(cost $262,986 and $376,065) 754,543 708,563
Short-term investments 383,658 487,614
Cash 81,612 53,661
Premiums and other receivables 1,708,761 1,460,426
Reinsurance recoverables 4,958,504 4,131,015
Investment in investee companies 581,668 166,673
Deferred policy acquisition costs 295,939 248,572
Excess of cost over fair value of net assets acquired,
less accumulated amortization 219,854 229,484
Other assets 512,088 494,067
Net assets of title insurance operations -- 288,619
----------- -----------
$12,775,339 $11,222,486
=========== ===========
Liabilities and Shareholders' Equity
- - -------------------------------------------------------------------------------------------
Unearned premiums $ 1,980,481 $ 1,722,258
Unpaid claims and related expenses 7,173,886 6,559,508
Accounts payable and accrued expenses 847,452 579,582
Reinsurance ceded premiums payable 570,252 402,972
Federal and foreign income taxes, including deferred
taxes 167,505 92,568
Term loans and short-term debt 256,763 253,083
Debentures and notes 463,480 650,000
----------- -----------
11,459,819 10,259,971
----------- -----------
Contingencies and commitments
Shareholders' equity:
Common stock, par value $.10 per share, 225,000 shares
authorized, 116,076 and 114,857 shares issued and
outstanding 11,608 11,486
Additional paid-in capital 548,674 542,049
Retained earnings 432,096 142,701
Accumulated other comprehensive income 323,142 266,279
----------- -----------
1,315,520 962,515
----------- -----------
$12,775,339 $11,222,486
=========== ===========
</TABLE>
See notes to consolidated financial statements
35
<PAGE>
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
RELIANCE GROUP HOLDINGS, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
Accumulated Other
Comprehensive Income
---------------------------
Net
Unrealized
Net Loss on
Additional Retained Unrealized Foreign
Common Paid-In Earnings Gain on Currency Shareholders'
Stock Capital (Deficit) Investments Translation Equity
- - ----------------------------------------------------------------------------------------------------------------------------------
(In thousands, except per share amounts)
<S> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1996 $ 11,344 $ 535,091 $ (61,694) $ 219,356 $ (25,749) $ 678,348
Issuance of common stock 84 5,754 -- -- -- 5,838
Transactions of investee company -- (380) -- (1,504) -- (1,884)
Net income -- -- 48,207 -- -- 48,207
Dividends ($.32 per share) -- -- (36,525) -- -- (36,525)
Depreciation after deferred
income taxes -- -- -- (19,066) -- (19,066)
Foreign currency translation -- -- -- -- 1,762 1,762
-------------------------------------------------------------------------------------------
Balance, December 31, 1996 11,428 540,465 (50,012) 198,786 (23,987) 676,680
Issuance of common stock 58 2,393 -- -- -- 2,451
Transactions of investee company
and other -- (809) -- 3,284 -- 2,475
Net income -- -- 229,419 -- -- 229,419
Dividends ($.32 per share) -- -- (36,706) -- -- (36,706)
Appreciation after deferred
income taxes -- -- -- 90,011 -- 90,011
Foreign currency translation -- -- -- -- (1,815) (1,815)
-------------------------------------------------------------------------------------------
Balance, December 31, 1997 11,486 542,049 142,701 292,081 (25,802) 962,515
Issuance of common stock 122 5,509 -- -- -- 5,631
Transactions of investee companies
and other -- 1,116 -- 503 -- 1,619
Net income -- -- 326,449 -- -- 326,449
Dividends ($.32 per share) -- -- (37,054) -- -- (37,054)
Appreciation after deferred
income taxes -- -- -- 63,175 -- 63,175
Foreign currency translation -- -- -- -- (6,815) (6,815)
-------------------------------------------------------------------------------------------
Balance, December 31, 1998 $11,608 $548,674 $432,096 $355,759 $(32,617) $1,315,520
===========================================================================================
</TABLE>
See notes to consolidated financial statements, including note 17 for an
analysis of comprehensive income
36
<PAGE>
CONSOLIDATED STATEMENT OF CASH FLOWS RELIANCE GROUP HOLDINGS, INC. AND
SUBSIDIARIES
<TABLE>
<CAPTION>
- - ----------------------------------------------------------------------------------------------------------
Year Ended December 31 1998 1997 1996
- - ----------------------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (including net income of $7,293, $42,176 and
$25,233 from the title insurance operations) $ 326,449 $ 229,419 $ 48,207
Adjustments to reconcile net income to net cash
provided from operating activities:
Discontinued operation -- (68,865) --
Gain on sales of investments (108,840) (73,097) (49,610)
Gain on sales of subsidiaries (197,258) -- --
Deferred policy acquisition costs (47,367) (33,134) (20,790)
Premiums and other receivables and reinsurance
recoverables (325,934) (397,026) (20,472)
Unearned premiums, unpaid claims and related
expenses 119,825 192,106 134,984
Accounts payable, accrued expenses, reinsurance
premiums payable and other 319,929 134,757 25,902
Change in title insurance operating assets and
liabilities -- 26,307 42,144
------------------------------------------
86,804 10,467 160,365
------------------------------------------
Cash flows from investing activities:
Proceeds from sales of:
Fixed maturities available for sale 502,179 503,609 541,463
Fixed maturities held for investment -- -- 25,610
Equity securities 430,353 352,445 360,983
Maturities and redemptions of:
Fixed maturities available for sale 342,030 259,717 93,140
Fixed maturities held for investment 124,114 49,885 28,441
Purchases of:
Fixed maturities available for sale (1,282,351) (682,577) (888,946)
Fixed maturities held for investment (27,830) (41,156) (58,373)
Equity securities (206,279) (228,598) (343,146)
(Increase) decrease in short-term investments-net 90,609 (207,717) 178,580
Investing cash flows of the title insurance
operations -- (23,887) (51,319)
Proceeds from sales of subsidiaries 271,852 -- --
Other-net (81,280) 75,000 (46,362)
------------------------------------------
163,397 56,721 (159,929)
------------------------------------------
Cash flows from financing activities:
Increase in term loans 145,000 75,000 86,327
Increase (decrease) in short-term debt-net (3,876) 985 (2,174)
Repayments of term loans (135,755) (61,003) (40,483)
Repurchases of debt (196,196) (15,365) (25,000)
Issuance of common stock 5,631 2,451 5,838
Debt issuance costs -- -- (480)
Dividends (37,054) (36,706) (36,525)
------------------------------------------
(222,250) (34,638) (12,497)
------------------------------------------
Increase (decrease) in cash 27,951 32,550 (12,061)
(Increase) decrease in cash of the title
insurance operations -- (5,414) 902
Cash, beginning of year 53,661 26,525 37,684
------------------------------------------
Cash, end of year $ 81,612 $ 53,661 $ 26,525
==========================================
Supplemental disclosures of cash flow
information:
Interest paid $ 67,300 $ 75,900 $ 75,100
==========================================
Income taxes paid $ 109,100 $ 39,700 $ 8,900
==========================================
</TABLE>
See notes to consolidated financial statements
37
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS RELIANCE GROUP HOLDINGS, INC. AND
SUBSIDIARIES
- - --------------------------------------------------------------------------------
Note 1 NATURE OF OPERATIONS/SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
Nature of Operations
The Company's property and casualty insurance business
consists of five operations: Reliance National, Reliance
Insurance, Reliance Reinsurance, Reliance Surety and Reliance
Direct.
Reliance National offers a broad range of commercial
insurance products and services with a focus on large accounts
and specialty lines customers. Reliance National selects
market segments where it can provide specialized coverages,
such as directors and officers liability insurance, or
specialized services, such as providing captive insurance
arrangements to the alternative risk markets. In addition,
Reliance National provides non-standard personal automobile
insurance and traditional commercial insurance products. In
1998, Reliance National accounted for 50% of the net premiums
written by the Company. Reliance National is organized into
eight major divisions: casualty risk services, non-standard
auto, international, international reinsurance and special
risks, accident and health, financial products, excess and
surplus and property. In addition, in 1998, Reliance National
formed a new division, credit insurance, which is expected to
write premiums in 1999. Reliance National, which conducts
business nationwide, is headquartered in New York City and has
offices in twenty-four states. Reliance National also conducts
business in Europe, the Americas, the Pacific Rim and Africa.
Reliance National distributes its products through insurance
brokers and agents. Net premiums written by Reliance National
were $1,214,256,000, $987,253,000 and $833,674,000 for the
years ended December 31, 1998, 1997 and 1996, respectively.
Reliance Insurance offers commercial lines property and
casualty insurance products, primarily focusing on the diverse
needs of mid-sized companies nationwide. Reliance Insurance
conducts business through a national network of offices and
distributes its products through agents and brokers. Reliance
Insurance's insureds are primarily closely held companies with
100 to 1,000 employees and annual sales of $5 million to $300
million. Reliance Insurance underwrites a variety of
commercial insurance coverages, including commercial
automobile, multiple peril, workers' compensation and general
liability. In 1998, Reliance Insurance accounted for 32% of
the net premiums written by the the Company. Reliance
Insurance is organized into three major divisions: commercial
accounts, specialty and large accounts. Reliance Insurance is
headquartered in Philadelphia and operates in 50 states, the
District of Columbia, Puerto Rico, Guam and the Virgin
Islands. Net premiums written by Reliance Insurance were
$775,480,000, $740,362,000 and $702,433,000 for the years
ended December 31, 1998, 1997 and 1996, respectively.
Reliance Reinsurance provides casualty reinsurance on both
a treaty (blocks of risk) and facultative (individual risks)
basis and property reinsurance on a treaty basis. The business
of Reliance Reinsurance is primarily conducted on a treaty
basis. All treaty business is marketed through reinsurance
brokers who negotiate contracts of reinsurance on behalf of
the primary insurer or ceding reinsurer, while facultative
business is produced both directly and through reinsurance
brokers. While Reliance Reinsurance's treaty clients include
all types and sizes of insurers, it typically targets treaty
reinsurance for small to medium sized regional and specialty
insurance companies, as well as captives, risk retention
groups and other alternative risk markets, providing both
pro-rata and excess of loss coverage. Reliance Reinsurance
believes that this market is subject to less competition and
provides an opportunity to develop and market innovative
programs where pricing is not the key competitive factor.
Reliance Reinsurance typically avoids participating in large
capacity reinsurance treaties where price is the predominant
competitive factor. It generally writes reinsurance in the
"lower layers," the first $1 million of primary coverage,
where losses are more predictable and quantifiable. Reliance
Reinsurance also has an agriculture division reinsuring
insurers whose products include crop insurance and other
products for agricultural-related risks. Reliance Reinsurance
conducts its business nationwide and is headquartered in
Philadelphia. Net premiums written by Reliance Reinsurance
were $217,287,000, $159,032,000 and $151,099,000 for the years
ended December 31, 1998, 1997 and 1996, respectively.
Reliance Surety is a leading writer of surety and fidelity
bonds in the United States. Reliance Surety concentrates on
writing performance and payment bonds for contractors of
public works projects, commercial real estate and multi-family
housing. It also writes commercial surety, financial
institution and commercial fidelity bonds. Reliance Surety
performs extensive credit analysis on its clients and actively
38
<PAGE>
RELIANCE GROUP HOLDINGS, INC. AND SUBSIDIARIES
- - --------------------------------------------------------------------------------
manages claims to minimize losses and maximize recoveries.
Reliance Surety's Firemark and Express Surety operations
target smaller contractors and accounts, a market
traditionally less fully serviced by national surety
companies. In 1998, Reliance Surety established a new division
to write surety bonds for large contractors. Reliance Surety
is headquartered in Philadelphia and conducts business
nationwide through 33 branch offices and distributes its
products through agents and brokers. In addition, Reliance
Surety has established a presence in London. Net premiums
written by Reliance Surety were $204,367,000, $176,500,000 and
$159,183,000 for the years ended December 31, 1998, 1997 and
1996, respectively.
Reliance Direct was formed in 1997 to market and underwrite
preferred personal automobile insurance on a direct basis. Net
premiums written by Reliance Direct were $26,195,000 and
$1,068,000 for the years ended December 31, 1998 and 1997. In
the first quarter of 1999, the Company commenced a review of
its personal automobile lines of business to determine the
feasibility of combining these businesses into a single
operating unit.
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 cash, convertible preferred stock and
common stock which represents ownership of approximately 26%
of LandAmerica's outstanding common stock and, on a diluted
basis, 44% of LandAmerica's common stock, assuming the
conversion of the preferred stock. The Company also has three
representatives on its 14 member board of directors.
Accordingly, the Company accounts for its investment in
LandAmerica by the equity method of accounting for periods
subsequent to the sale date. See note 2 to the consolidated
financial statements. LandAmerica writes, through direct and
agency operations, title insurance for residential and
commercial real estate nationwide and provides escrow,
appraisal and settlement services in connection with real
estate closings.
RCG Information Technology provides a full range of
information technology services to large corporate clients in
the United States including clients in the following sectors:
financial services, energy, computer services, healthcare and
pharmaceuticals, telecommunications, public entities,
publishing, electronics, travel and food and beverage. Such
services include providing systems analysis, design and
integration, enterprise resource planning and implementation,
imaging, client-server technologies, testing and quality
assurance, work-flow management, staff augmentation,
outsourcing and management consulting. RCG Information
Technology has 21 offices. RCG Information Technology recruits
programmers both in the United States and internationally to
meet demands for its services, and has established recruiting
capabilities in the Philippines and South Africa. RCG
Information Technology had revenues of $247,749,000,
$191,886,000 and $136,709,000 for the years ended December 31,
1998, 1997 and 1996, respectively.
Basis of Consolidation and Presentation
The consolidated financial statements of the Company include
the accounts of all subsidiaries. The consolidated financial
statements have been prepared in conformity with generally
accepted accounting principles. Such statements include
informed estimates and judgments of management for those
transactions that are not yet complete or for which the
ultimate effects cannot be precisely determined. Actual
results may differ from these estimates.
All material intercompany balances and transactions have
been eliminated in consolidation.
Insurance
The financial statements of the insurance subsidiaries have
been prepared in accordance with generally accepted accounting
principles, which differ in certain respects from those
followed in reports to regulatory authorities.
Fixed maturity investments, the vast majority of which are
publicly traded securities, include bonds, notes and
redeemable preferred stocks. Fixed maturity investments
classified as "available for sale" represent securities that
will be held for an indefinite period of time and are carried
at quoted market value with the net unrealized gain or loss
included in shareholders' equity. Such investments may be sold
in response to changes in interest rates, future general
liquidity needs and similar factors. Fixed maturity
investments classified as "held for investment" are carried at
amortized cost since the Company has the positive intent
39
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS continued
RELIANCE GROUP HOLDINGS, INC. AND SUBSIDIARIES
- - --------------------------------------------------------------------------------
and ability to hold these securities to maturity. Investments
in equity securities include common stocks, where the
Company's ownership of outstanding voting stock is less than
20%, and nonredeemable preferred stocks and are carried at
quoted market value with the net unrealized gain or loss
included in shareholders' equity. Investments in which the
Company has a 20% to 50% ownership interest of voting stock,
or otherwise exercises significant influence, are reported
using the equity method of accounting. Short-term investments
primarily consist of United States government and other
foreign government securities, certificates of deposit and
commercial paper carried at cost which approximates market
value. Investments whose declines in market values are deemed
to be other than temporary are written down to market value.
In circumstances where market values are not available,
investments are written down to estimated fair value. In
determining estimated fair value of investments, the Company
reviews the issuer's financial condition and the stability of
its income, as well as the discounted cash flow to be received
by the Company. Write-downs and other realized gains and
losses, determined on a specific identification basis, are
included in income.
Insurance premiums reported as earned represent the portion
of premiums written applicable to the current period,
generally computed on a pro-rata basis over the terms of the
policies in force. Premiums include estimated audit premiums
and estimated premiums on retrospectively rated policies.
The costs associated with the acquisition of property and
casualty business are deferred and amortized on a
straight-line basis over the terms (principally one year) of
the policies in force. Such deferred policy acquisition costs
consist of commissions, premium taxes and other variable
policy issuance and underwriting expenses. Deferred policy
acquisition costs are reviewed to determine that they do not
exceed recoverable amounts, including anticipated investment
income.
Unpaid claims and related expenses are estimated based on
an evaluation of reported claims in addition to statistical
projections of claims incurred but not reported and loss
adjustment expenses. Estimates of salvage and subrogation are
deducted from the liability. The Company applies a variety of
generally accepted actuarial techniques to determine the
estimates of ultimate liability. The process of estimating
claims is a complex task and the ultimate liability may be
more or less than such estimates indicate. Adjustments of the
probable ultimate liability, based on subsequent developments,
are included in operations currently.
Investments In Real Estate
Investments in real estate were $135,700,000 and $126,800,000
at December 31, 1998 and 1997, respectively, and are included
in other assets in the accompanying consolidated balance
sheet. Investments in real estate, at December 31, 1998,
consist primarily of office buildings and undeveloped land
zoned for mixed use development, and are carried at cost (less
accumulated depreciation), which includes interest, real
estate taxes and other carrying costs incurred prior to
substantial completion of the real estate development
projects. Depreciation expense is provided using the
straight-line method.
The Company's real estate properties are reviewed for
impairment whenever events or circumstances indicate that the
carrying value of such properties may not be recoverable. In
performing the review for recoverability of carrying value,
the Company estimates the future undiscounted cash flows
expected to result from the use of each of its properties and
their eventual disposition. These cash flow projections
reflect changes in occupancy, new leases, current rent roll,
future expirations and general market conditions. If the total
expected future undiscounted cash flows are less than the
carrying value of such properties, impairment losses are
recognized on a property-by-property basis. An impairment loss
is measured by the amount that the carrying value of the
property exceeds its fair value.
Excess of Cost Over Fair Value of Net Assets Acquired
The excess of cost over fair value of net assets acquired is
being amortized over 40 years using the straight-line method.
The Company evaluates the carrying amount of the excess of
cost over fair value of net assets acquired by analyzing
historical and expected future income and undiscounted cash
flows of its operations.
Income Taxes
The Company and its domestic subsidiaries, where their
ownership is at least 80% of outstanding voting stock, file a
consolidated federal income tax return. The Company provides
for deferred income taxes
40
<PAGE>
RELIANCE GROUP HOLDINGS, INC. AND SUBSIDIARIES
- - --------------------------------------------------------------------------------
under the asset and liability method, whereby deferred income
taxes result from temporary differences between the tax bases
of assets and liabilities and their reported amounts in the
financial statements. In addition, deferred income taxes are
provided for unrealized appreciation and depreciation on
investments carried at quoted market value.
Postretirement Benefit Plans
Retirement pension benefits, covering substantially all
employees, are provided under noncontributory trusteed defined
benefit pension plans. Contributions to the pension plans are
based on the minimum funding requirements of the Employee
Retirement Income Security Act of 1974. In addition, the
Company sponsors defined contribution plans covering employees
who meet eligibility requirements.
Translation of Foreign Currency Financial Statements
Assets and liabilities of foreign subsidiaries are translated
at year-end exchange rates. Results of operations are
translated at average rates during the year. The effects of
exchange rate changes in translating foreign financial
statements are excluded from the consolidated statement of
income and are presented as a separate component of
shareholders' equity. Exchange gains and losses resulting from
foreign currency transactions are included in operations
currently. Translation gains and losses relating to operations
of subsidiaries where hyperinflation exists are included in
the consolidated statement of income.
Fair Value of Financial Instruments
The estimated fair value of publicly traded financial
instruments is determined by the Company using quoted market
prices, dealer quotes and prices obtained from independent
third parties. For financial instruments not publicly traded,
fair values are estimated based on values obtained from
independent third parties or quoted market prices of
comparable instruments. However, judgment is required to
interpret market data to develop the estimates of fair value.
Accordingly, the estimates are not necessarily indicative of
the amounts that could be realized in a current market
exchange.
The carrying values and fair values of financial instruments
are as follows:
<TABLE>
<CAPTION>
December 31 1998 1997
- - --------------------------------------------------------------------------------------------------------------------------------
Carrying Fair Carrying Fair
Value Value Value Value
- - --------------------------------------------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C> <C>
Assets:
Marketable securities:
Fixed maturities held for investment $ 539,848 $ 578,179 $ 636,119 $ 663,744
Fixed maturities available for sale 2,738,864 2,738,864 2,317,673 2,317,673
Equity securities 754,543 754,543 708,563 708,563
Short-term investments 383,658 383,658 487,614 487,614
Investment in investee companies 581,668 659,087 166,673 169,292
Liabilities:
Term loans and short-term debt 256,763 256,763 253,083 253,083
Debentures and notes 463,480 481,890 650,000 675,375
</TABLE>
Reclassifications
Certain reclassifications have been made to the Company's
prior years' consolidated financial statements to conform with
the current year's consolidated financial statements.
Adoption of New Accounting Standards
In June 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 130,
"Reporting Comprehensive Income" and Statement of Financial
Accounting Standards No. 131, "Disclosures about Segments of
an Enterprise and Related Information." These Statements,
which concern disclosure standards only, were adopted in 1998.
See notes 17 and 18, respectively, to the consolidated
financial statements. In addition, in February 1998, the
Financial Accounting Standards Board
41
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS continued
RELIANCE GROUP HOLDINGS, INC. AND SUBSIDIARIES
- - --------------------------------------------------------------------------------
issued Statement of Financial Accounting Standards No. 132,
"Employers' Disclosures about Pensions and Other
Postretirement Benefits." This Statement standardizes the
disclosure requirements for pensions and other postretirement
benefits, requires additional information on changes in the
benefit obligations and fair values of plan assets and
eliminates certain disclosures that are no longer useful. The
Company also adopted this Statement in 1998. See note 13 to
the consolidated financial statements.
In November 1997, the Emerging Issues Task Force released
Issue No. 97-13, "Accounting for Costs Incurred in Connection
with a Consulting Contract or an Internal Project That
Combines Business Process Reengineering and Information
Technology Transformation." Issue No. 97-13 requires that the
cost of business process reengineering activities that are
part of a systems development project be expensed as those
costs are incurred. Any unamortized costs that were previously
capitalized must be written off as a cumulative adjustment in
the quarter containing November 20, 1997. The effect of
adopting Issue No. 97-13 was a decrease in 1997 net income for
the cumulative effect of the change in accounting principle of
$6,442,000, net of an income tax benefit of $3,468,000.
In December 1997, the American Institute of Certified
Public Accountants issued Statement of Position No. 97-3,
"Accounting by Insurance and Other Enterprises for
Insurance-Related Assessments." This Statement provides
guidance on accounting by entities subject to
insurance-related assessments in an effort to improve the
comparability of amounts reported and disclosures made. This
Statement, which is required to be adopted in the first
quarter of 1999, will result in an after-tax charge of
approximately $60,000,000 which will be recorded as a
cumulative effect of a change in accounting principle.
In March 1998, the American Institute of Certified Public
Accountants issued Statement of Position No. 98-1, "Accounting
for Costs of Computer Software Developed or Obtained for
Internal Use." This Statement, which is required to be adopted
in the first quarter of 1999, is not expected to have a
material effect on the Company's consolidated financial
statements.
In June 1998, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards No. 133,
"Accounting for Derivative Instruments and Hedging
Activities." This Statement establishes accounting and
reporting standards for derivative instruments, including
certain derivative instruments embedded in other contracts and
for hedging activities. The adoption of this Statement, which
is not required until 2000, is not expected to have a material
effect on the Company's consolidated financial statements.
In October 1998, the American Institute of Certified Public
Accountants issued Statement of Position No. 98-7, "Deposit
Accounting: Accounting for Insurance and Reinsurance Contracts
That Do Not Transfer Insurance Risk." The adoption of this
Statement, which is not required until 2000, is not expected
to have a material effect on the Company's consolidated
financial statements.
In 1998, the National Association of Insurance
Commissioners and the state of Pennsylvania (the state where
Reliance Insurance Company is domiciled) adopted the
Codification of Statutory Accounting Principles
("Codification"). The Codification, which is intended to
standardize regulatory accounting and reporting for the
insurance industry, is proposed to be effective January 1,
2001. The Company has not finalized the quantification of the
effects of Codification on its statutory financial statements.
- - --------------------------------------------------------------------------------
Note 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 $266,600,000 in cash, 4,039,473 shares of
LandAmerica common stock and 2,200,000 shares of LandAmerica
7% cumulative convertible preferred stock having a stated
value of $110,000,000 and which is 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 sales proceeds were $662,100,000. The
Company owns approximately 26% of LandAmerica's outstanding
common stock and, on a diluted basis, 44% of LandAmerica's
common stock, assuming the conversion of the preferred stock,
42
<PAGE>
RELIANCE GROUP HOLDINGS, INC. AND SUBSIDIARIES
- - --------------------------------------------------------------------------------
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 $242,900,000 of which
$133,640,000 ($1.11 per diluted share) was recognized in 1998.
The deferred gain of $109,300,000 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. See note 18 to the
consolidated financial statements for business segment
information regarding the title insurance operations.
The assets and liabilities of the title insurance
operations have been reclassified as a one line item "net
assets of title insurance operations" in the accompanying
consolidated balance sheet. Such net assets are comprised of
the following:
<TABLE>
<CAPTION>
December 31 1997
- - ----------------------------------------------------------------------------------------------
(In thousands)
<S> <C>
Investments $462,345
Premiums and other receivables 37,132
Other assets 152,831
--------
652,308
--------
Unpaid claims and related expenses 272,792
Other liabilities 90,897
--------
363,689
--------
Net assets of title insurance operations $288,619
========
The cash flows of the title insurance operations have likewise
been reclassified in the accompanying consolidated statement
of cash flows.
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 $1,345,000, net of tax
expense of $1,833,000.
Sale of Discontinued Operation
On December 31, 1997, the Company sold all of the issued and
outstanding common stock of Prometheus Funding Corp.
("Prometheus"), formerly known as Frank B. Hall & Co. Inc. The
net proceeds received were $5,954,000. The sale resulted in an
after-tax gain of $68,865,000, which included a tax benefit of
$87,766,000. The tax benefit resulted primarily from a
reversal of a previously established deferred tax asset
valuation allowance pertaining to the tax basis differential
of the Company's investment in Prometheus. The $68,865,000
after-tax gain has been classified as a gain on disposal of a
discontinued operation in the accompanying consolidated
statement of income.
- - --------------------------------------------------------------------------------
Note 3 INVESTMENTS
Fixed maturities held for investment at December 31, 1998
consisted of:
Gross Gross
Amortized Market Unrealized Unrealized
Cost Value Gains Losses(1)
- - -----------------------------------------------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C> <C>
Bonds and notes:
Public utilities $199,574 $211,261 $11,687 $ -
Foreign government 123,615 136,020 12,405 -
Corporate bonds and notes and other 151,724 161,093 9,471 102
Redeemable preferred stock 64,935 69,805 4,870 -
-------------------------------------------------------------
$539,848 $578,179 $38,433 $ 102
=============================================================
</TABLE>
(1) The amortized cost and market value of fixed maturities
held for investment which have unrealized losses were $2,741,000 and $2,639,000.
43
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS continued
RELIANCE GROUP HOLDINGS, INC. AND SUBSIDIARIES
- - --------------------------------------------------------------------------------
Fixed maturities available for sale at December 31, 1998
consisted of:
<TABLE>
<CAPTION>
Gross Gross
Market Amortized Unrealized Unrealized
Value Cost Gains Losses(1)
- - ---------------------------------------------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C> <C>
Bonds and notes:
United States government and
government agencies and authorities $ 552,547 $ 545,482 $ 7,328 $ 263
States, municipalities and political
subdivisions 143,117 130,982 12,135 -
Public utilities 469,349 451,046 19,675 1,372
Corporate bonds and notes and other 1,230,535 1,233,211 34,747 37,423
Redeemable preferred stock 343,316 326,288 23,388 6,360
----------------------------------------------------------------
$2,738,864 $2,687,009 $ 97,273 $45,418
================================================================
</TABLE>
(1) The amortized cost and market value of fixed maturities
available for sale which have unrealized losses were $620,598,000 and
$575,180,000.
Fixed maturities held for investment at December 31, 1997
consisted of:
<TABLE>
<CAPTION>
Gross Gross
Amortized Market Unrealized Unrealized
Cost Value Gains Losses(1)
- - -----------------------------------------------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C> <C>
Bonds and notes:
Public utilities $ 249,202 $ 257,434 $ 8,238 $ 6
Foreign government 129,571 137,544 7,973 -
Corporate bonds and notes and other 165,634 172,395 6,895 134
Redeemable preferred stock 91,712 96,371 4,728 69
----------------------------------------------------------------
$ 636,119 $ 663,744 $ 27,834 $ 209
================================================================
</TABLE>
(1) The amortized cost and market value of fixed maturities
held for investment which have unrealized losses were $30,537,000 and
$30,328,000.
Fixed maturities available for sale at December 31, 1997
consisted of:
<TABLE>
<CAPTION>
Gross Gross
Market Amortized Unrealized Unrealized
Value Cost Gains Losses(1)
- - -----------------------------------------------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C> <C>
Bonds and notes:
United States government and
government agencies and authorities $ 443,032 $ 438,885 $ 4,536 $ 389
States, municipalities and political
subdivisions 139,473 130,922 8,551 -
Public utilities 351,680 340,477 11,367 164
Corporate bonds and notes and other 919,724 880,068 50,696 11,040
Redeemable preferred stock 463,764 424,611 39,263 110
----------------------------------------------------------------
$ 2,317,673 $ 2,214,963 $114,413 $ 11,703
================================================================
</TABLE>
(1) The amortized cost and market value of fixed maturities
available for sale which have unrealized losses were $335,885,000 and
$324,182,000.
44
<PAGE>
RELIANCE GROUP HOLDINGS, INC. AND SUBSIDIARIES
- - --------------------------------------------------------------------------------
As of December 31, 1998, the contractual maturities of fixed
maturity investments are as follows:
<TABLE>
<CAPTION>
Held for investment Available for sale
--------------------------------------------------------------
Amortized Market Amortized Market
Cost Value Cost Value
- - --------------------------------------------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C> <C>
Due within one year $ 18,820 $ 19,034 $ 51,276 $ 51,567
Due after one year through five years 163,220 172,708 535,341 550,875
Due after five years through ten years 240,416 262,005 837,822 836,902
Due after ten years 117,392 124,432 1,084,005 1,120,430
--------------------------------------------------------------
539,848 578,179 2,508,444 2,559,774
Government National Mortgage
Association (GNMA) securities - - 178,565 179,090
--------------------------------------------------------------
$539,848 $578,179 $2,687,009 $2,738,864
==============================================================
</TABLE>
<TABLE>
<CAPTION>
Net investment income consisted of:
Year Ended December 31 1998 1997 1996
- - --------------------------------------------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C>
Investment income:
Fixed maturities $242,465 $ 252,930 $ 236,093
Equity securities 18,229 11,510 12,990
Short-term investments 41,073 24,607 32,244
Other 7,744 18,416 18,652
-------------------------------------------
309,511 307,463 299,979
Investment expenses (9,492) (12,492) (12,391)
-------------------------------------------
$300,019 $ 294,971 $ 287,588
===========================================
</TABLE>
Gain on sales of investments consisted of:
<TABLE>
<CAPTION>
Year Ended December 31 1998 1997 1996
- - ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
(In thousands)
Fixed maturities:
Realized gains $ 61,794 $ 31,171 $ 15,302
Realized losses(1) (46,482) (26,828) (18,022)
-------------------------------------------
15,312 4,343 (2,720)
Equity securities 120,316 55,667 58,296
Real estate(2) - 16,955 -
Other(3) (26,788) (3,868) (5,966)
-------------------------------------------
$108,840 $ 73,097 $ 49,610
===========================================
</TABLE>
(1) Includes write-downs of $37,000,000, $18,100,000 and
$3,200,000 in 1998, 1997 and 1996, respectively,
related to securities not rated investment grade.
(2) Includes gains of $42,800,000 resulting from the sale
of shopping centers located throughout the United
States and an office building located in Glendale,
California and a write-down of $25,900,000 related to
undeveloped land.
(3) Includes exchange losses of $16,600,000, $3,500,000
and $3,300,000 in 1998, 1997 and 1996, respectively,
related to certain foreign currency denominated
investments and write-downs of $10,500,000 in 1998.
45
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS continued
RELIANCE GROUP HOLDINGS, INC. AND SUBSIDIARIES
- - --------------------------------------------------------------------------------
Net unrealized appreciation (depreciation) on investments
consisted of:
<TABLE>
<CAPTION>
Year Ended December 31 1998 1997 1996
- - ---------------------------------------------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C>
Unrealized appreciation (depreciation):
Equity securities $ 159,059 $ 51,945 $ 15,939
Fixed maturities available for sale (50,855) 80,580 (38,441)
----------------------------------------------
108,204 132,525 (22,502)
Deferred income tax (provision) benefit (37,871) (46,025) 7,533
Net unrealized appreciation (depreciation) in
investments of title insurance operations (7,158) 3,511 (4,097)
Net unrealized appreciation (depreciation) in
investments of investee companies 503 3,284 (1,504)
----------------------------------------------
$ 63,678 $ 93,295 $ (20,570)
==============================================
Unrealized appreciation (depreciation) on
fixed maturities held for investment $ 10,706 $ 14,714 $ (18,907)
==============================================
Net unrealized gain on investments consisted of:
<CAPTION>
December 31 1998 1997 1996
- - ---------------------------------------------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C>
Equity securities:
Unrealized gains $ 510,354 $ 340,361 $ 293,269
Unrealized losses (18,797) (7,863) (12,716)
----------------------------------------------
491,557 332,498 280,553
----------------------------------------------
Fixed maturities available for sale:
Unrealized gains 97,273 114,413 63,049
Unrealized losses (45,418) (11,703) (40,919)
----------------------------------------------
51,855 102,710 22,130
----------------------------------------------
543,412 435,208 302,683
Deferred income tax provision (190,195) (152,324) (106,299)
Net unrealized gain in investments of
title insurance operations - 7,158 3,647
Net unrealized gain (loss) in investments of
investee companies 2,542 2,039 (1,245)
----------------------------------------------
$ 355,759 $ 292,081 $ 198,786
==============================================
</TABLE>
Fixed maturity investments carried at $506,800,000 at December
31, 1998 were on deposit under requirements of regulatory
authorities, including deposits related to workers'
compensation reinsurance pools.
Investments in a single issuer, other than obligations of
the United States government, whose aggregate carrying value
is in excess of 10% of the Company's shareholders' equity at
December 31, 1998 is comprised of the equity securities of
Symbol Technologies, Inc. with a carrying and market value of
$514,800,000.
46
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS continued
RELIANCE GROUP HOLDINGS, INC. AND SUBSIDIARIES
- - --------------------------------------------------------------------------------
Note 4 INVESTMENT IN INVESTEE COMPANIES
The Company's investment in investee companies is as follows:
<TABLE>
<CAPTION>
December 31 1998 1997
- - --------------------------------------------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C>
LandAmerica Financial Group, Inc. $415,654 $ -
Zenith National Insurance Corp. 166,014 166,673
--------------------------
$581,668 $ 166,673
==========================
</TABLE>
The Company's equity in investee companies is as follows:
<TABLE>
<CAPTION>
Year Ended December 31 1998 1997 1996
- - --------------------------------------------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C>
LandAmerica Financial Group, Inc.(1) $15,594 $ - $ -
Zenith National Insurance Corp. 6,406 7,675 8,908
------------------------------------------
$22,000 $ 7,675 $ 8,908
==========================================
</TABLE>
(1) The equity in investee company for 1998 includes equity
earnings for the ten month period ending December 31, 1998.
Common stock dividends received by the Company from
LandAmerica Financial Group, Inc. were $808,000 for the year
ended December 31, 1998. Dividends received by the Company
from Zenith National Insurance Corp. were $6,574,000 for each
of the years ended December 31, 1998, 1997 and 1996.
Summarized financial information for LandAmerica Financial
Group, Inc. is as follows:
<TABLE>
<CAPTION>
Year Ended December 31 1998
- - --------------------------------------------------------------------------------------------------------------------------------
(In thousands, except per share amount)
<S> <C> <C>
Revenues $1,848,870
Income before income taxes 146,302
Net income 93,028
Net income per diluted share 5.05
December 31 1998
- - ---------------------------------------------------------------------------------------------------------------------------------
(In thousands, except percentage of ownership)
Total assets $1,692,358
Long-term debt 207,792
Shareholders' equity 771,189
Percentage of ownership 26.4%
</TABLE>
47
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS continued
RELIANCE GROUP HOLDINGS, INC. AND SUBSIDIARIES
- - --------------------------------------------------------------------------------
Summarized financial information for Zenith National Insurance
Corp. is as follows:
<TABLE>
<CAPTION>
Year Ended December 31 1998 1997 1996
- - --------------------------------------------------------------------------------------------------------------------------------
(In thousands, except per share amounts)
<S> <C> <C> <C>
Revenues $639,760 $600,480 $556,371
Income before income taxes 33,117 43,478 57,117
Net income 21,600 28,100 37,600
Net income per diluted share 1.26 1.57 2.12
December 31 1998 1997
- - --------------------------------------------------------------------------------------------------------------------------------
(In thousands, except percentage of ownership)
Total assets $1,972,773 $ 1,252,156
Senior notes 74,596 74,474
Common shareholders' equity 349,452 361,866
Percentage of ownership 38.3% 36.9%
</TABLE>
The Company's equity in net income includes amortization of
excess of cost over fair value of net assets acquired. At
December 31, 1998, retained earnings included undistributed
net income of $14,786,000 and $31,079,000 from LandAmerica
Financial Group, Inc. and Zenith National Insurance Corp.,
respectively.
- - --------------------------------------------------------------------------------
Note 5 PREMIUMS AND OTHER RECEIVABLES
Premiums and other receivables consisted of:
<TABLE>
<CAPTION>
December 31 1998 1997
- - --------------------------------------------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C>
Premiums receivable $1,513,536 $1,284,034
Investment income receivable 67,322 47,868
Accounts, notes and other receivables 127,903 128,524
----------------------------
$1,708,761 $1,460,426
============================
</TABLE>
At December 31, 1998, substantially all receivables were due
within one year.
- - --------------------------------------------------------------------------------
Note 6 INCOME TAXES
Provision for income taxes consisted of:
<TABLE>
<CAPTION>
Year Ended December 31 1998 1997 1996
- - -----------------------------------------------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C>
Current:
Federal $127,676 $65,744 $(5,913)
Foreign (2,773) 8,327 7,888
--------------------------------------------
124,903 74,071 1,975
Deferred:
Federal 3,926 1,129 5,725
Foreign 4,771 - -
--------------------------------------------
$133,600 $75,200 $7,700
============================================
</TABLE>
Domestic and foreign income before income taxes and equity in
investee companies is as follows:
<TABLE>
<CAPTION>
Year Ended December 31 1998 1997 1996
- - -----------------------------------------------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C>
Domestic $421,177 $ 218,230 $ 24,462
Foreign 24,638 23,791 22,537
--------------------------------------------
$445,815 $ 242,021 $ 46,999
============================================
</TABLE>
48
<PAGE>
RELIANCE GROUP HOLDINGS, INC. AND SUBSIDIARIES
- - --------------------------------------------------------------------------------
The reconciliation of taxes computed at the statutory rate of
35% to the provision for income taxes is as follows:
<TABLE>
<CAPTION>
Year Ended December 31 1998 1997 1996
- - ---------------------------------------------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C>
Tax provision at statutory rate $156,035 $ 84,707 $ 16,450
Nontaxable investment income (16,161) (15,228) (14,403)
Amortization of excess of cost over fair
value of net assets acquired 2,905 3,150 3,150
Sale of subsidiaries (6,767) - -
Other (2,412) 2,571 2,503
-------------------------------------------
Provision for income taxes $133,600 $ 75,200 $ 7,700
===========================================
</TABLE>
The tax effects of items comprising the Company's net deferred
tax (liability) asset are as follows:
<TABLE>
<CAPTION>
December 31 1998 1997
- - ---------------------------------------------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C>
Deferred tax assets:
Discounting of loss reserves $170,757 $192,939
Unearned premium reserve 62,438 52,067
Accruals not currently deductible 47,252 42,142
Deferred gain on sale of subsidiary 49,657 -
Other 71,328 102,174
--------------------------
401,432 389,322
Deferred tax liabilities:
Deferred policy acquisition costs 99,541 87,000
Unrealized investment gains 190,193 152,324
Investment in investee companies 23,497 23,728
Other 101,436 75,386
--------------------------
(13,235) 50,884
Valuation allowance (8,695) (10,672)
--------------------------
Net deferred tax (liability) asset $(21,930) $ 40,212
==========================
</TABLE>
As a result of the sale of Prometheus, the Company's valuation
allowance was decreased, in 1997, by $158,543,000 relating to
deferred tax assets for which it was likely that tax benefits
would not be realized. For the year ended December 31, 1996,
the Company's valuation allowance and income tax provision
were increased by $2,400,000 relating primarily to deferred
tax assets for which it is likely that tax benefits will not
be realized.
The Company is seeking a redetermination in the U.S. Tax
Court of an asserted tax deficiency for the year ended
December 31, 1980, as set forth by the Commissioner of
Internal Revenue in a Notice of Deficiency dated June 27,
1994. See note 15 to the consolidated financial statements.
The Internal Revenue Service ("IRS") completed its
examination of the Company's 1986 through 1991 federal income
tax returns and issued a Revenue Agent's Report on August 19,
1997. A protest in response to the Revenue Agent's Report was
submitted on January 16, 1998 and the Company does not believe
it is probable that its tax liability, if any, will have a
material adverse effect on its consolidated financial
statements. The IRS is currently examining the Company's 1992
through 1994 federal income tax returns. While the outcome of
the current examination is uncertain, the Company does not
believe it is probable that its tax liability, if any, will
have a material adverse effect on its consolidated financial
statements.
49
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS continued
RELIANCE GROUP HOLDINGS, INC. AND SUBSIDIARIES
- - --------------------------------------------------------------------------------
Note 7 UNPAID CLAIMS AND RELATED EXPENSES
The reconciliation of the beginning to ending liability for
unpaid claims and related expenses ("loss reserves") for the
Company's property and casualty insurance operations is as
follows:
<TABLE>
<CAPTION>
December 31 1998 1997 1996
- - --------------------------------------------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C>
Loss reserves, beginning of year $6,559,508 $6,048,240 $5,695,678
Less reinsurance recoverables 3,317,190 2,736,634 2,516,243
---------------------------------------------
Net loss reserves, beginning of year 3,242,318 3,311,606 3,179,435
---------------------------------------------
Provision for policy claims and related expenses:
Provision for insured events of the current year 1,549,907 1,299,066 1,211,672
Increase (decrease) in provision for insured
events of prior years (32,959) (35,980) 138,665
---------------------------------------------
Total provision 1,516,948 1,263,086 1,350,337
---------------------------------------------
Payments for policy claims and related expenses:
Attributable to insured events of the current year 490,146 367,763 298,838
Attributable to insured events of prior years 1,046,583 963,135 926,996
---------------------------------------------
Total payments 1,536,729 1,330,898 1,225,834
---------------------------------------------
Foreign currency translation (2,491) (1,476) 7,668
---------------------------------------------
Net loss reserves, end of year 3,220,046 3,242,318 3,311,606
Plus reinsurance recoverables 3,953,840 3,317,190 2,736,634
---------------------------------------------
Loss reserves, end of year $7,173,886 $6,559,508 $6,048,240
=============================================
</TABLE>
The provision for policy claims and related expenses for 1998
and 1997 includes favorable development in workers'
compensation partially offset by adverse development in the
commercial automobile line. The redundancy in workers'
compensation is due, in part, to favorable development in
retrospectively rated policies, which was more than offset by
a corresponding reduction in premiums earned. The 1998
redundancy also includes favorable development in general
liability and multiple peril lines of business and adverse
development in ocean marine line of business. The provision
for insured events of prior years for 1996 included adverse
development related to asbestos-related and environmental
pollution claims, which primarily affected general liability,
multiple peril and reinsurance lines of business, and included
a pretax charge of $134,000,000 to increase net loss reserves
for asbestos-related and environmental pollution claims for
business written in or before 1987. The 1996 provision also
included adverse development in the commercial automobile
line, offset by favorable development in workers'
compensation.
At December 31, 1998 and 1997, loss reserves include
$357,800,000 and $380,900,000 relating to short-duration
contracts which are expected to have fixed, periodic payment
patterns and have been discounted to present values using
statutory annual rates ranging from 3 1/2% to 6%.
50
<PAGE>
RELIANCE GROUP HOLDINGS, INC. AND SUBSIDIARIES
- - --------------------------------------------------------------------------------
The reconciliation of the beginning to ending net loss
reserves for business written in or before 1987 pertaining to
asbestos-related and environmental pollution claims is as
follows:
<TABLE>
<CAPTION>
December 31 1998 1997 1996
- - ---------------------------------------------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C>
Net loss reserves, beginning of year $192,933 $213,047 $101,008
Provision for policy claims and related expenses - - 135,801
Payments for policy claims and related expenses (18,168) (20,114) (23,762)
--------------------------------------------
Net loss reserves, end of year $174,765 $192,933 $213,047
============================================
The 1996 provision for policy claims and related expenses
included a pretax charge of $134,000,000 to increase net loss
reserves for asbestos-related and environmental pollution
claims for business written in or before 1987. In 1996, the
Company completed a study of its asbestos-related and
environmental pollution reserves. The study entailed a
detailed review of the Company's claims, analysis of new
industry data, review of policies and classes of business
written by the Company and industry at large, and new
actuarial methodologies for projecting ultimate losses based
on payment patterns and claims analyses.
Included in the December 31, 1998 net loss reserves for
business written in or before 1987 pertaining to
asbestos-related and environmental pollution claims are
$60,553,000 of loss costs for claims incurred but not
reported, $43,902,000 of loss costs for reported claims and
$70,310,000 of related expenses.
For business written in or before 1987, the number of insureds
with asbestos-related and environmental pollution claims
outstanding is as follows:
December 31 1998 1997
- - ---------------------------------------------------------------------------------------------------------------------------------
Number of insureds with outstanding claims, beginning of year 345 402
Additional insureds with claims during the year 183 168
Insureds with closed or settled claims during the year (222) (225)
-----------------------
Number of insureds with outstanding claims, end of year 306 345
=======================
For business written in or before 1987, the average net paid
loss for asbestos-related and environmental pollution claims
was $23,500 and $44,200 for the years 1998 and 1997,
respectively.
On February 26, 1999, the Company received a preliminary
decision in an initial phase of an alternative dispute
resolution trial of certain contested issues between an
asbestos producer and certain of its liability insurance
carriers, including the Company. See note 15 for further
information.
The Company currently underwrites policies with
environmental coverage, primarily on a claims made basis, and
underwrites policies covering asbestos removal. The net loss
reserves for these policies as of December 31, 1998, 1997 and
1996 were $33,713,000, $27,433,000 and $29,388,000,
respectively. The provisions for these policy claims and
related expenses for the years 1998, 1997 and 1996 were
$24,144,000, $7,094,000 and $12,051,000, respectively, and
related payments were $17,864,000, $9,049,000 and $7,211,000,
respectively. Included in the December 31, 1998 net loss
reserves for these policies are $14,022,000 of loss costs for
claims incurred but not reported, $14,108,000 of loss costs
for reported claims and $5,583,000 of related expenses. The
number of direct insureds with outstanding claims related to
these policies as of December 31, 1998 and 1997 were 385 and
381. Additional direct insureds with claims reported during
the years 1998 and 1997 were 168 and 180, and claims closed or
settled during 1998 and 1997 were 164 and 107. The average net
paid loss for these claims was $82,100 and $64,200 for the
years 1998 and 1997.
51
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS continued
RELIANCE GROUP HOLDINGS, INC. AND SUBSIDIARIES
- - --------------------------------------------------------------------------------
Note 8 DEBENTURES, NOTES, TERM LOANS AND SHORT-TERM DEBT
Debentures and notes outstanding are as follows:
</TABLE>
<TABLE>
<CAPTION>
December 31 1998 1997
- - --------------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C>
9% senior notes due 2000 $ 291,710 $400,000
9 3/4% senior subordinated debentures due 2003 171,770 250,000
---------------------------
$463,480 $650,000
============================
</TABLE>
During 1998, the Company purchased $186,520,000 of its
outstanding senior notes and senior subordinated debentures
utilizing dividends received from Reliance Insurance Company.
These purchases resulted in an after-tax extraordinary charge
of $7,766,000 net of a $4,181,000 tax benefit.
At December 31, 1998, term loans and short-term debt
aggregated $256,763,000 and consisted of $253,763,000 of term
loans which are payable in varying amounts through 2015 with
interest rates ranging from 3.0% to 9.0% and $3,000,000 of
short-term debt. The weighted average interest rate on term
loans and short-term debt was 5.7% and 6.2% at December 31,
1998 and 1997.
Maturities of term loans and short-term debt for each of
the next five years are as follows: $56,279,000 in 1999;
$173,697,000 in 2000; $1,897,000 in 2001; $67,000 in 2002 and
$67,000 in 2003. In addition, $291,710,000 of senior notes
mature in the year 2000 and $171,770,000 of senior
subordinated debentures mature in 2003.
Reliance Financial Services Corporation ("Reliance
Financial") has a revolving credit facility and term loan
agreement with various banks ("Credit Facility"). The
revolving credit facility provides for aggregate maximum
outstanding borrowings of $100,000,000. At Reliance
Financial's option, all borrowings under the revolving credit
facility will bear interest at a floating rate based on a bank
reference rate (or, if higher, the Federal Funds rate plus
1/2%) or at a rate based on the Eurodollar rate. At December
31, 1998, borrowings aggregating $38,000,000 were outstanding
under this facility. All of the common stock of Reliance
Insurance Company has been pledged to secure the Credit
Facility.
The provisions of certain notes and debentures contain
limitations on the payment of dividends, including maintaining
a minimum fixed charge coverage ratio. At February 8, 1999,
the Company could pay up to $84,200,000 in dividends without
violating the most restrictive provisions. See note 10 to the
consolidated financial statements.
- - -------------------------------------------------------------------------------
Note 9 REINSURANCE
In the normal course of business, the property and casualty
insurance companies assume and cede reinsurance on both a
pro-rata and excess basis. Reinsurance provides greater
diversification of business and limits the maximum net loss
potential arising from large claims. Although the ceding of
reinsurance does not discharge an insurer from its primary
legal liability to a policyholder, the reinsuring company
assumes the related liability.
Amounts recoverable from reinsurers are estimated in a
manner consistent with the liability for unpaid claims and
related expenses associated with the reinsurance. Estimated
amounts of reinsurance recoverables are reported as assets in
the accompanying consolidated balance sheet. As of December
31, 1998 and 1997, reinsurance recoverables include
$838,397,000 and $719,784,000 of prepaid reinsurance premiums
which represents the portion of property and casualty premiums
ceded to reinsurers applicable to unearned premiums.
52
<PAGE>
RELIANCE GROUP HOLDINGS, INC. AND SUBSIDIARIES
- - --------------------------------------------------------------------------------
The reconciliation of property and casualty insurance direct
premiums to net premiums is as follows:
<TABLE>
<CAPTION>
Year Ended December 31 1998 1997 1996
- - --------------------------------------------------------------------------------------------------------------------------------
Premiums Premiums Premiums Premiums Premiums Premiums
Written Earned Written Earned Written Earned
- - --------------------------------------------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Direct $ 4,018,450 $ 3,743,993 $ 3,428,059 $ 3,232,403 $ 3,070,944 $ 2,894,096
Assumed 849,966 875,482 494,140 447,924 329,318 356,489
Ceded (2,430,106) (2,315,195) (1,856,352) (1,733,311) (1,554,063) (1,449,731)
--------------------------------------------------------------------------------------
Net premiums $ 2,438,310 $ 2,304,280 $ 2,065,847 $ 1,947,016 $ 1,846,199 $ 1,800,854
======================================================================================
</TABLE>
The reconciliation of property and casualty insurance gross
policy claims and settlement expenses to net policy claims and
settlement expenses is as follows:
<TABLE>
<CAPTION>
Year Ended December 31 1998 1997 1996
- - ---------------------------------------------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C>
Gross $ 3,100,093 $ 2,540,603 $ 2,209,303
Reinsurance recoveries (1,583,145) (1,277,517) (858,966)
-----------------------------------------
Net policy claims and settlement expenses $ 1,516,948 $ 1,263,086 $ 1,350,337
=========================================
</TABLE>
For the year ended December 31, 1996, gross policy claims and
settlement expenses included a charge of $134,500,000 and net
policy claims and settlement expenses included a charge of
$134,000,000 to increase property and casualty insurance loss
reserves for asbestos-related and environmental pollution
claims for business written in or before 1987.
The Company holds substantial amounts of funds and
letters of credit as collateral pursuant to recoverables from
unauthorized reinsurers.
Reliance Insurance Company's ten largest reinsurers, based on
1998 ceded premiums, are as follows:
<TABLE>
<CAPTION>
- - --------------------------------------------------------------------------------------
(In thousands)
<S> <C>
American Re-Insurance Company $ 239,911
Lincoln National Life Insurance Company 114,619
Swiss Reinsurance America Corporation 100,368
Commercial Risk Re-Insurance Company 91,525
Connecticut General Life Insurance Company 70,986
Employers Reinsurance Corporation 67,181
Phoenix Home Life Mutual Insurance Company 65,813
Kemper Reinsurance Company 61,098
Hertz International Reinsurance Ltd. 59,130
General Reinsurance Corporation 56,329
</TABLE>
53
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS continued
RELIANCE GROUP HOLDINGS, INC. AND SUBSIDIARIES
- - --------------------------------------------------------------------------------
Note 10 DIVIDENDS OF SUBSIDIARIES
The Company's principal sources of funds consist of dividends,
advances and net tax payments from its subsidiaries. The
Credit Facility of Reliance Financial requires, among other
things, a minimum net worth requirement and a limitation of
indebtedness. At February 8, 1999, Reliance Financial could
pay up to $785,500,000 in cash dividends without violating the
most restrictive provisions. Dividend payments by Reliance
Insurance Company, without prior regulatory approval, are
limited to the greater of 10% of the preceding year-end
policyholders' surplus or the preceding year's statutory net
income, but in no event to exceed the amount of unassigned
funds. In accordance with these regulatory restrictions,
$585,300,000 is available for the payment of dividends to
Reliance Financial in 1999, subject to the broad discretionary
powers of insurance regulatory authorities to further limit
dividend payments of insurance companies. In 1998, Reliance
Insurance Company paid a special dividend in the amount of
$135,000,000 which was used by the Company to purchase a
portion of its outstanding debt.
- - --------------------------------------------------------------------------------
Note 11 STOCK PLANS
Stock Options
The Company's stock option plans (the "Plans") provide for the
granting of incentive stock options and nonstatutory stock
options to officers, non-employee directors and key employees
of the Company. Under the terms of the Plans, options have a
maximum term of 10 years from the date of grant. At December
31, 1998, there were 6,502,000 options available for future
grants.
A summary of the Plans' activity is as follows:
<TABLE>
<CAPTION>
Year Ended December 31 1998 1997 1996
- - ------------------------------------------------------------------------------------------------------------------------------------
Weighted Weighted Weighted
Number of Average Number of Average Number of Average
Shares Exercise Price Shares Exercise Price Shares Exercise Price
- - ------------------------------------------------------------------------------------------------------------------------------------
(Shares in thousands)
<S> <C> <C> <C> <C> <C> <C>
Balance, beginning
of year 14,667 $ 7.87 10,905 $ 5.40 8,462 $ 4.48
Granted 9,159 15.14 4,460 13.40 2,839 8.03
Exercised 1,219 4.62 573 4.28 292 4.21
Cancelled 229 9.54 125 6.71 104 5.52
---------------------------------------------------------------------------------
Balance, end of year 22,378 $11.00 14,667 $ 7.87 10,905 $ 5.40
=================================================================================
Exercisable portion 6,425 $ 4.90 6,187 $ 4.19 6,196 $ 4.04
=================================================================================
Weighted average fair
value of options granted
during the year $ 5.36 $ 4.53 $ 2.08
====== ====== =======
</TABLE>
Summarized information about stock options outstanding at
December 31, 1998 is as follows:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
- - ----------------------------------------------------------------------------------------------------------------------------------
Number of Weighted Average Weighted Number of Weighted
Range of Shares Remaining Average Shares Average
Exercise Prices Outstanding Contractual Life Exercise Price Exercisable Exercise Price
- - ----------------------------------------------------------------------------------------------------------------------------------
(Shares in thousands)
<S> <C> <C> <C> <C> <C>
$ 3.825 to $5.75 4,636 3.49 years $ 3.96 4,510 $ 3.92
$ 5.875 to $8.75 4,209 6.93 7.26 1,765 6.72
$ 11.00 to $14.375 8,116 9.20 13.24 150 12.69
$15.625 to $18.00 5,417 9.52 16.59 - -
------------------------------------------------------------------------
$ 3.825 to $18.00 22,378 7.77 years $11.00 6,425 $ 4.90
========================================================================
</TABLE>
54
<PAGE>
RELIANCE GROUP HOLDINGS, INC. AND SUBSIDIARIES
- - --------------------------------------------------------------------------------
Employee Stock Purchase Plan
In 1997, the Company initiated an Employee Stock Purchase Plan
("ESPP") which enables eligible employees of the Company to
subscribe for shares of common stock on an annual offering
date at a purchase price which is the lesser of 85% of the
fair market value of the shares on the first day or the last
day of the annual period. Employee contributions to the ESPP
were $2,956,000 and $2,388,000 in 1998 and 1997, respectively.
Pursuant to the ESPP, 270,000 and 237,000 shares were sold to
employees in January 1999 and 1998 and 10,000,000 shares are
available for future sales.
The Company has elected to follow Accounting Principles
Board Opinion No. 25, "Accounting for Stock Issued to
Employees," ("APB 25") in accounting for its Plans and ESPP.
In applying APB 25 no compensation cost has been recognized.
Pro forma information regarding net income and diluted net
income per share has been determined as if the Company had
accounted for the Plans and ESPP under the fair value based
method. The fair value of stock options granted under the
Company's Plans was estimated on the grant dates using the
Black-Scholes option-pricing model. The following weighted
average assumptions were used for grants in 1998, 1997 and
1996, respectively: dividend yields of 2.1%, 2.4% and 4.0%,
expected volatility of 33.2%, 30.2% and 27.3%, risk-free
interest rates of 5.2%, 6.1% and 6.4% and an expected life of
7 years for all three years. The fair value of the shares
purchased under the ESPP was calculated as if the shares were
"look back options."
Pro forma information regarding net income and diluted net
income per share is as follows:
<TABLE>
<CAPTION>
Year Ended December 31 1998 1997 1996
- - --------------------------------------------------------------------------------------------------------------------------------
(In thousands, except per share amounts)
<S> <C> <C> <C> <C>
Net income as reported $326,449 $ 229,419 $ 48,207
pro forma 316,507 226,814 47,724
Diluted net income per share as reported 2.72 1.94 .41
pro forma 2.64 1.92 .41
</TABLE>
<TABLE>
<CAPTION>
- - --------------------------------------------------------------------------------------------------------------------------------
Note 12 POLICY ACQUISITION COSTS AND OTHER INSURANCE EXPENSES
Year Ended December 31 1998 1997 1996
- - --------------------------------------------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C>
Policy acquisition costs amortized during the year $578,529 $ 487,432 $ 414,636
-------------------------------------------
Other insurance expenses:
Salaries and commissions 214,929 696,747 630,777
Taxes, other than income taxes 23,635 38,689 41,564
Rent 32,124 61,001 61,305
Policyholders' dividends 5,939 4,224 3,158
Other 103,154 208,890 175,866
-------------------------------------------
379,781 1,009,551 912,670
-------------------------------------------
$958,310 $1,496,983 $1,327,306
===========================================
</TABLE>
For the years ended December 31, 1998, 1997 and 1996, other
insurance expenses include $126,800,000, $789,900,000 and
$711,200,000 related to the Company's title insurance
operations which were sold on February 27, 1998.
- - --------------------------------------------------------------------------------
Note 13 POSTRETIREMENT BENEFIT PLANS
Retirement benefits under the Company's noncontributory
trusteed defined benefit pension plans are paid to eligible
employees based primarily on years of service and
compensation. Plan assets principally consist of corporate and
government debt securities and 1,116,200 shares of the
Company's common stock.
55
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS continued
RELIANCE GROUP HOLDINGS, INC. AND SUBSIDIARIES
- - --------------------------------------------------------------------------------
The reconciliation of the beginning to ending projected
benefit obligation is as follows:
<TABLE>
<CAPTION>
December 31 1998 1997
- - --------------------------------------------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C>
Projected benefit obligation, beginning of year $196,717 $167,523
Service cost 9,687 6,784
Interest cost 14,155 12,743
Actuarial loss 11,629 17,193
Benefits paid (7,694) (7,526)
---------------------------
Projected benefit obligation, end of year $224,494 $196,717
===========================
</TABLE>
The reconciliation of the beginning to ending fair value of
plan assets is as follows:
<TABLE>
<CAPTION>
December 31 1998 1997
- - -----------------------------------------------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C>
Fair value of plan assets, beginning of year $ 167,698 $150,640
Actual return on plan assets 2,087 23,487
Employer contributions 16,030 1,097
Benefits paid (7,694) (7,526)
---------------------------
Fair value of plan assets, end of year $ 178,121 $ 167,698
===========================
</TABLE>
The funded status of the plans includes the following
components:
<TABLE>
<CAPTION>
December 31 1998 1997
- - ---------------------------------------------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C>
Funded status-projected benefit obligation
in excess of fair value of plan assets $ 46,373 $29,019
Unrecognized net actuarial loss (49,496) (23,942)
Unrecognized prior service cost 3,439 4,043
Unrecognized transition asset 2,897 4,207
---------------------------
Accrued pension cost $ 3,213 $13,327
===========================
</TABLE>
Pension cost includes the following components(1):
<TABLE>
<CAPTION>
Year Ended December 31 1998 1997 1996
- - ----------------------------------------------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C>
Service cost $ 9,687 $ 6,784 $ 7,201
Interest cost 14,155 12,743 12,273
Expected return on plan assets (16,561) (14,679) (14,491)
Amortization of prior service cost (606) (606) (606)
Amortization of net loss 551 - 358
Amortization of transition asset (1,310) (1,310) (1,310)
---------------------------------------------
Net periodic benefit cost $ 5,916 $ 2,932 $ 3,425
=============================================
</TABLE>
(1) Excludes pension cost for the Company's then owned title
insurance operations which was $2,852,000 and $2,850,000 for 1997 and 1996.
The assumptions used to measure the projected benefit
obligation at December 31, 1998 and 1997 include a discount
rate of 7.0% and 7.25% and a weighted average rate of
compensation increase of 5.2% for both 1998 and 1997. The
expected long-term investment rate of return on plan assets
for the years ended December 31, 1998 and 1997 was 10.0%.
Contributions under the Company's defined contribution
plans were $4,936,000, $7,778,000 and $6,102,000 in 1998,
1997 and 1996, respectively, and were based on a formula
specified in the plan agreements.
56
<PAGE>
RELIANCE GROUP HOLDINGS, INC. AND SUBSIDIARIES
- - --------------------------------------------------------------------------------
Note 14 STATUTORY INFORMATION
Statutory net income for the years ended December 31, 1998,
1997 and 1996 was $649,222,000, $95,111,000 and $121,665,000.
Statutory policyholders' surplus at December 31, 1998 and
1997 was $1,747,425,000 and $1,302,490,000 which reflects a
reduction in statutory loss reserves of $61,200,000 and
$79,400,000, respectively, representing discounts of workers'
compensation reserves in excess of GAAP discounts.
- - --------------------------------------------------------------------------------
Note 15 CONTINGENCIES AND COMMITMENTS
Legal Proceedings
The Company and its subsidiaries are involved in certain
litigation arising in the course of their businesses, some of
which involve claims of substantial amounts. Although the
ultimate outcome of these matters cannot be ascertained at
this time, and the results of legal proceedings cannot be
predicted with certainty, the Company is contesting the
allegations of the complaints in each pending action against
it and believes, based on current knowledge and after
consultation with counsel, that the resolution of these
matters will not have a material adverse effect on the
consolidated financial statements of the Company. In addition,
the Company is subject to the litigation set forth below.
(a) The Company is seeking a redetermination in the U.S.
Tax Court of an asserted tax deficiency for the year ended
December 31, 1980, as set forth by the Commissioner of
Internal Revenue in a Notice of Deficiency dated June 27,
1994. The Company intends to pursue the action vigorously. The
IRS seeks to disallow investment tax credits of approximately
$36,500,000 with respect to intermodal cargo containers leased
to others by a former subsidiary of the Company. The Company
estimates that, if the IRS were to prevail, the deficiency
would result in an increase in tax of approximately
$31,000,000 for 1980, plus interest at the statutorily
prescribed rates for the periods since that year. In 1995, the
U.S. Tax Court handed down a decision in Norfolk Southern
Corp. v. Commissioner, a case involving a taxpayer, which,
like the Company, had claimed investment tax credits in
connection with the leasing of intermodal cargo containers. In
the decision, the Tax Court articulated a standard different
from that proposed by the IRS, which, if applied to the
Company, would result in the disallowance of a substantial
percentage (although significantly less than that sought by
the IRS) of the investment tax credits claimed by the Company.
The Company believes that it has appropriately provided for
this matter in light of its exposure in the event a standard
such as the one articulated in Norfolk Southern is applied to
the Company's facts and circumstances. The Company does not
believe that it is probable that its liability, if any, in
respect of this matter will have a material adverse effect on
the Company's financial position, although there is no
assurance that the disposition of this matter will not
materially affect the Company's results of operations for any
period.
(b) 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 50 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 65
defendants, including the Company.
57
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS continued
RELIANCE GROUP HOLDINGS, INC. AND SUBSIDIARIES
- - --------------------------------------------------------------------------------
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 plaintiffs claim
that the defendants violated the federal RICO statute by
allegedly overcharging employers from 1988 to 1999 for
retrospectively rated workers' compensation insurance policies
covering risks in 44 states and the District of Columbia. The
plaintiffs, on behalf of themselves and the putative class of
employers, seek unspecified monetary damages, with interest
and attorneys' fees, against all defendants jointly and
severally.
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.
(c) On February 26, 1999, the Company received a
preliminary decision in an initial phase of an alternative
dispute resolution trial of certain contested issues between
an asbestos producer and certain of its liability insurance
carriers, including the Company.
At issue in this proceeding, among other things, is the
amount of remaining insurance coverage, if any, under primary
policies written by a predecessor of the Company during the
years 1942 to 1951, applicable to asbestos related bodily
injury claims against the producer. Those policies are treated
as having separate coverage limits for bodily injury claims
resulting from the producer's products and those resulting
from its operations. Since 1970, the producer's insurers,
including the Company, have treated all such claims as coming
within the products coverage and on that basis the Company
exhausted the coverage limits of its policies in 1987.
In 1996, pursuant to a 1985 settlement agreement between
certain asbestos producers and certain of their insurers, the
producer instituted alternative dispute resolution proceedings
against various of its insurers, including the Company. The
proceedings sought to re-allocate a substantial percentage of
claims to operations coverage, which had not been previously
exhausted. In the preliminary decision, which is subject to
appeal, the trial judge did not decide the issue of the
allocation of pending and future claims or direct the payment
of any amount by the Company to the producer. He did, however,
reject the Company's position as to re-allocation of past
claims and ruled, based on statistical data, that a
substantial percentage of claims paid through September 1996
should have been classified as operations claims.
Given the preliminary and partial nature of the decision
and the absence of reliable data regarding the amount of
claims attributable to the Company's early coverage period,
the Company is unable to determine the amount that it may be
required to pay. Further trial phases may be required to
determine the financial implications of the preliminary
decision.
If not overturned on appeal, an effect of the decision
would be to make available for the payment of asbestos related
bodily injury claims, up to an additional $44,000,000 in
liability coverage, plus associated defense and loss
adjustment expenses, under the Company's policies.
The Company believes that the decision incorrectly rejects
its position and is based on flawed statistical data. The
Company intends to appeal. The Company does not believe that
it is probable that its liability, if any, in respect of this
matter will have a material adverse effect on the Company's
financial position, although there is no assurance that the
disposition of this matter will not materially affect the
Company's results of operations for any period.
58
<PAGE>
RELIANCE GROUP HOLDINGS, INC. AND SUBSIDIARIES
- - --------------------------------------------------------------------------------
Lease Commitments
The Company and its subsidiaries lease certain office
facilities and equipment under lease agreements that expire at
various dates through 2012. Rent expense for the years ended
December 31, 1998, 1997 and 1996 was $80,800,000, $100,900,000
and $97,300,000, respectively.
At December 31, 1998, future net minimum rental payments
required under noncancelable leases are as follows:
- - --------------------------------------------------------------------------------
(In thousands)
1999 $ 56,017
2000 53,087
2001 50,728
2002 35,554
2003 28,584
2004 and thereafter 126,353
--------
$350,323
========
- - --------------------------------------------------------------------------------
Note 16 PER SHARE INFORMATION
The basic and diluted per share reconciliations of income from
continuing operations to net income is as follows:
<TABLE>
<CAPTION>
Year Ended December 31 1998 1997 1996
- - --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Basic income per share:
Income from continuing operations $2.89 $1.52 $.42
Gain on disposal of discontinued operation - .60 -
Litigation settlement of discontinued operation - (.06) -
----------------------------------------
Income before extraordinary item and cumulative
effect of accounting change 2.89 2.06 .42
Extraordinary item-early extinguishment of debt (.07) - -
Cumulative effect of change in accounting for process
reengineering costs - (.06) -
----------------------------------------
Net income $2.82 $2.00 $.42
========================================
Diluted income per share:
Income from continuing operations $2.78 $1.47 $.41
Gain on disposal of discontinued operation - .58 -
Litigation settlement of discontinued operation - (.06) -
----------------------------------------
Income before extraordinary item and cumulative
effect of accounting change 2.78 1.99 .41
Extraordinary item--early extinguishment of debt (.06) - -
Cumulative effect of change in accounting for process
reengineering costs - (.05) -
----------------------------------------
Net income $2.72 $1.94 $.41
========================================
</TABLE>
59
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS continued
RELIANCE GROUP HOLDINGS, INC. AND SUBSIDIARIES
- - --------------------------------------------------------------------------------
The reconciliation of the basic to diluted per share
information is as follows:
<TABLE>
<CAPTION>
Year Ended December 31 1998 1997 1996
- - -----------------------------------------------------------------------------------------------------------------------------------
Per Share Per Share Per Share
Income Shares Amount Income Shares Amount Income Shares Amount
- - -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
(In thousands, except
per share amounts)
Basic income
per share:
Income from
continuing
operations $334,215 115,672 $2.89 $174,496 114,651 $1.52 $48,207 113,838 $.42
===== ===== ====
Effect of dilutive
securities:
Options - 4,401 - 3,712 - 2,443
------------------ ------------------ -----------------
Diluted income
per share:
Income from
continuing
operations $334,215 120,073 $2.78 $174,496 118,363 $1.47 $48,207 116,281 $.41
======================================================================================
</TABLE>
Options to purchase 5,371,000, 2,000,000 and 134,000 shares of
common stock were not included in the computation of diluted
income per share for the years 1998, 1997 and 1996,
respectively, since the options' exercise price was greater
than the average market price of the common shares.
- - --------------------------------------------------------------------------------
Note 17 COMPREHENSIVE INCOME
The Company's comprehensive income is as follows:
<TABLE>
<CAPTION>
Year Ended December 31 1998 1997 1996
- - -----------------------------------------------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C>
Net income $326,449 $229,419 $ 48,207
Unrealized holding gains, net of deferred tax expense
of $65,968, $67,035 and $3,010 122,511 125,518 4,611
Less: reclassification adjustment for gains realized
in net income, net of tax benefit of
$31,679, $17,351 and $13,560 (58,833) (32,223) (25,181)
Foreign currency translation, net of deferred tax benefit
(expense) of $3,670, $977 and $(949) (6,815) (1,815) 1,762
--------------------------------------------
Comprehensive income $383,312 $320,899 $ 29,399
=============================================
</TABLE>
60
<PAGE>
RELIANCE GROUP HOLDINGS, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
- - --------------------------------------------------------------------------------------------------------------------------
NOTE 18 BUSINESS SEGMENT INFORMATION
Year Ended December 31 1998 1997 1996
----------------------------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C>
Revenues:
Property and casualty insurance
Premiums earned(1):
Reliance National $ 1,126,901 $ 926,154 $ 827,037
Reliance Insurance 754,007 698,537 683,387
Reliance Reinsurance 214,712 152,754 140,334
Reliance Surety 196,693 167,251 147,416
Reliance Direct 10,791 136 -
Other 1,176 2,184 2,680
-------------------------------------------------
2,304,280 1,947,016 1,800,854
Net investment income 294,743 263,981 257,133
Gain on sales of investments 108,535 71,501 49,264
Gain on sales of subsidiaries 194,080 - -
-------------------------------------------------
2,901,638 2,282,498 2,107,251
-------------------------------------------------
Title insurance
Premiums earned 139,132 863,746 780,157
Net investment income 5,276 30,990 30,455
Gain on sales of investments 305 1,596 346
-------------------------------------------------
144,713 896,332 810,958
-------------------------------------------------
Information technology consulting 247,749 191,886 136,709
-------------------------------------------------
Other 75,020 71,920 35,669
-------------------------------------------------
$ 3,369,120 $ 3,442,636 $ 3,090,587
=================================================
Income before income taxes and
equity in investee companies:
Property and casualty insurance
Underwriting gain (loss):
Reliance National $ (31,626) $ (25,803) $ (19,941)
Reliance Insurance(2) (49,676) (29,716) (151,697)
Reliance Reinsurance(2) (5,070) (3,120) (22,117)
Reliance Surety 54,346 37,733 34,421
Reliance Direct (18,289) (6,039) -
Other (1,793) (4,777) (13,053)
-------------------------------------------------
(52,108) (31,722) (172,387)
Net investment income 294,743 263,981 257,133
Gain on sales of investments 108,535 71,501 49,264
Gain on sales of subsidiaries 194,080 - -
-------------------------------------------------
545,250 303,760 134,010
-------------------------------------------------
Title insurance 11,286 64,963 38,580
-------------------------------------------------
Information technology consulting 19,382 5,623 2,675
-------------------------------------------------
Other (130,103) (132,325) (128,266)
-------------------------------------------------
$ 445,815 $ 242,021 $ 46,999
=================================================
Identifiable assets at year-end:
Property and casualty insurance $12,387,131 $10,529,179 $ 9,402,689
Net assets of title insurance operations - 288,619 282,115
Information technology consulting 97,144 82,155 52,123
Other 291,064 322,533 318,585
-------------------------------------------------
$12,775,339 $11,222,486 $10,055,512
=================================================
</TABLE>
- - ----------
(1) Includes foreign sourced premiums, representing premiums that are
generated outside the United States regardless of underwriting
location, of $261,000,000, $255,000,000 and $182,000,000 in 1998, 1997
and 1996, respectively.
(2) The 1996 results included charges of $116,000,000 and $18,000,000 for
Reliance Insurance and Reliance Reinsurance, respectively, to increase
net loss reserves for asbestos-related and environmental pollution
claims for business written in or before 1987.
61
<PAGE>
RELIANCE GROUP HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS continued
- - --------------------------------------------------------------------------------
On February 27, 1998, the Company completed the sale of its title
insurance operations to LandAmerica. See note 2 to the consolidated
financial statements.
The Company operates in two business segments, property and
casualty insurance and information technology consulting. The property
and casualty insurance business consists of five operations: Reliance
National, Reliance Insurance, Reliance Reinsurance, Reliance Surety
and Reliance Direct, each of which has a distinct operating identity
and is managed separately.
Income before income taxes and equity in investee companies
relating to property and casualty insurance underwriting has been
reduced by policyholders' dividends and other income and expense.
Income before income taxes and equity in investee companies by segment
is before allocation of corporate overhead and corporate interest
expense, which relates primarily to the Company and its financing
subsidiary. Corporate overhead and corporate interest expense are
included in Other.
Identifiable assets are those assets that are used in the Company's
operations in each segment.
<TABLE>
<CAPTION>
- - -------------------------------------------------------------------------------------------------------------------------
NOTE 19 QUARTERLY FINANCIAL DATA (UNAUDITED)
1998 Quarter
- - -------------------------------------------------------------------------------------------------------------------------
First Second Third Fourth
- - -------------------------------------------------------------------------------------------------------------------------
(In thousands, except per share amounts)
<S> <C> <C> <C> <C>
Revenues:
Premiums earned $ 659,681 $560,566 $588,341 $634,824
Net investment income 74,628 75,072 74,908 75,411
Gain on sales of investments 51,952 53,986 1,483 1,419
Gain on sales of subsidiaries 197,258 - - -
Other 72,248 80,340 83,339 83,664
---------------------------------------------------------------
$1,055,767 $769,964 $748,071 $795,318
===============================================================
Income from continuing operations $ 202,294 $ 70,889 $ 30,006 $ 31,026
Extraordinary item-early
extinguishment of debt (1,912) (5,592) - (262)
---------------------------------------------------------------
Net income $ 200,382 $ 65,297 $ 30,006 $ 30,764
===============================================================
Diluted per share information:
Income from continuing operations $1.69 $ .59 $.25 $.26
Extraordinary item-early
extinguishment of debt (.02) (.05) - -
---------------------------------------------------------------
Net income $1.67 $ .54 $.25 $.26
===============================================================
Basic per share information:
Net income $1.74 $ .56 $.26 $.27
===============================================================
</TABLE>
62
<PAGE>
RELIANCE GROUP HOLDINGS, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
- - -------------------------------------------------------------------------------------------------------------------------
1997 Quarter
- - -------------------------------------------------------------------------------------------------------------------------
First Second Third Fourth
- - -------------------------------------------------------------------------------------------------------------------------
(In thousands, except per share amounts)
<S> <C> <C> <C> <C>
Revenues:
Premiums earned $ 642,195 $689,929 $702,703 $775,935
Net investment income 74,279 70,644 73,571 76,477
Gain on sales of investments 15,304 13,431 36,070 8,292
Other 50,167 65,558 68,901 79,180
---------------------------------------------------------------
$ 781,945 $839,562 $881,245 $939,884
===============================================================
Income from continuing operations $ 35,886 $ 39,562 $ 57,316 $ 41,732
Gain on disposal of discontinued operation - - - 68,865
Litigation settlement of discontinued
operation (7,500) - - -
---------------------------------------------------------------
Income before cumulative effect
of accounting change 28,386 39,562 57,316 110,597
Cumulative effect of change in accounting
for process reengineering costs - - - (6,442)
---------------------------------------------------------------
Net income $ 28,386 $ 39,562 $ 57,316 $104,155
===============================================================
Diluted per share information:
Income from continuing operations $ .30 $.33 $.48 $ .35
Gain on disposal of discontinued operation - - - .58
Litigation settlement of discontinued
operation (.06) - - -
---------------------------------------------------------------
Income before cumulative effect
of accounting change .24 .33 .48 .93
Cumulative effect of change in accounting
for process reengineering costs - - - (.05)
---------------------------------------------------------------
Net income $ .24 $.33 $.48 $ .88
===============================================================
Basic per share information:
Net income $ .25 $.35 $.50 $ .91
===============================================================
</TABLE>
63
<PAGE>
RELIANCE GROUP HOLDINGS, INC. AND SUBSIDIARIES
INDEPENDENT AUDITORS' REPORT
- - --------------------------------------------------------------------------------
Board of Directors and Shareholders
Reliance Group Holdings, Inc.
New York, New York
We have audited the accompanying consolidated balance sheets
of Reliance Group Holdings, Inc. and subsidiaries as of
December 31, 1998 and 1997, and the related consolidated
statements of income, changes in shareholders' equity and cash
flows for each of the three years in the period ended December
31, 1998. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally
accepted auditing standards. Those standards require that we
plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements
present fairly, in all material respects, the financial
position of Reliance Group Holdings, Inc. and subsidiaries as
of December 31, 1998 and 1997, and the results of their
operations and their cash flows for each of the three years in
the period ended December 31, 1998 in conformity with
generally accepted accounting principles.
/s/ Deloitte & Touche LLP
New York, New York
February 12, 1999, except as to note 15(c),
as to which the date is February 26, 1999
64
<PAGE>
RELIANCE GROUP HOLDINGS, INC. AND SUBSIDIARIES
REPORT OF MANAGEMENT
- - --------------------------------------------------------------------------------
Scope of Responsibility
Management is responsible for the financial information
included in this annual report and for ascertaining that such
information presents fairly the financial position and
operating results of the Company. The accompanying
consolidated financial statements have been prepared in
conformity with generally accepted accounting principles. Such
statements include informed estimates and judgments of
management for those transactions that are not yet complete or
for which the ultimate effects cannot be precisely determined.
Financial information presented elsewhere in this annual
report is consistent with that in the financial statements.
Internal Controls
The Company maintains a system of internal accounting controls
designed to provide reasonable assurance that assets are
safeguarded against losses from unauthorized use or
disposition, that transactions are executed in accordance with
management's authorization and are recorded properly.
Qualified personnel throughout the organization maintain and
monitor these internal accounting controls on an ongoing
basis. In addition, the Company's Internal Audit Department
systematically reviews these controls, evaluates their
adequacy and effectiveness, and reports thereon.
Independent Auditors
The Company engages Deloitte & Touche LLP as independent
auditors to audit its financial statements and express their
opinion thereon. They have full access to each member of
management in conducting their audits. Such audits are
conducted in accordance with generally accepted auditing
standards and include a review and evaluation of the system of
internal accounting controls, tests of the accounting records
and other auditing procedures they consider necessary to
express their opinion on the consolidated financial
statements.
Audit Committee
The Audit Committee of the Board of Directors is comprised
solely of non-employee outside directors, and is responsible
for overseeing and monitoring the quality of the Company's
accounting practices and internal controls. Management, the
internal auditors and the independent auditors meet regularly
with the Committee to review the accounting practices employed
by the Company and to discuss auditing, internal control,
financial reporting and any other matters they believe should
be brought to the Committee's attention. Both the internal and
independent auditors have unrestricted access to the Audit
Committee, without members of management present.
Saul P. Steinberg
Chairman of the Board and
Chief Executive Officer
George E. Bello
Executive Vice President
and Controller
65
<PAGE>
RELIANCE GROUP HOLDINGS, INC. AND SUBSIDIARIES
MARKET AND DIVIDEND INFORMATION FOR COMMON STOCK
- - --------------------------------------------------------------------------------
The Company's common stock, $.10 par value, is traded on the
New York Stock Exchange and the Pacific Exchange under the
symbol "REL". As of March 1, 1999, there were approximately
2,100 holders of record of the Company's common stock. The
high and low sales prices of the common stock, as reported by
the New York Stock Exchange, are as follows:
<TABLE>
<CAPTION>
1998 1997
-----------------------------------------------------------------------------------
Quarter High Low High Low
-----------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
First 19 1/8 12 5/8 12 1/4 8 3/4
Second 19 1/8 16 7/16 12 3/4 10 1/8
Third 19 13/16 12 1/4 14 7/16 11 5/8
Fourth 15 1/8 10 3/4 15 1/8 12 1/16
</TABLE>
Cash dividends for each share of the Company's common stock
were $.08 for each quarter in 1998 and 1997.
The provisions of notes and debentures of the Company
contain limitations on the payment of dividends, including
maintaining a minimum fixed charge coverage ratio. At February
8, 1999, the Company could pay up to $84,200,000 in dividends
without violating the most restrictive of these provisions. As
a holding company, the Company is dependent upon dividends,
advances and net tax payments from its wholly-owned
subsidiaries to meet its debt service obligations, to pay its
expenses and to pay dividends to its shareholders. In addition
to the terms of bank covenants limiting the payment of
dividends by Reliance Financial, dividends from the Company's
principal operating subsidiaries are subject to regulatory
limitations.
66
<PAGE>
RELIANCE GROUP HOLDINGS, INC. AND SUBSIDIARIES
DIRECTORS AND OFFICERS
- - --------------------------------------------------------------------------------
DIRECTORS
George R. Baker(2),(5),(6),(7)
Corporate Director/Advisor
George E. Bello(3)
Executive Vice President and Controller
Reliance Group Holdings, Inc.
Dennis A. Busti
President and Chief Executive Officer
Reliance National
Lowell C. Freiberg(3)
Executive Vice President
and Chief Financial Officer
Reliance Group Holdings, Inc.
Dr. Thomas P. Gerrity(2),(7)
Dean of the Wharton School
University of Pennsylvania
Jewell Jackson McCabe(4),(5)
President, Jewell Jackson
McCabe Associates
Irving Schneider(2),(6)
Co-Chairman and
Chief Operations Officer
Helmsley-Spear, Inc.
Bernard L. Schwartz(1)
Chairman, President & CEO of Loral
Space & Communications Ltd.
and Chairman & CEO of Globalstar
Richard E. Snyder(3),(7)
Chairman and Chief Executive Officer
Golden Books Family
Entertainment, Inc.
Dr. Bruce E. Spivey(3),(6)
President and CEO
Columbia-Cornell Care LLC
Robert M. Steinberg(1),(4)
President and Chief Operating Officer
Reliance Group Holdings, Inc.
Saul P. Steinberg(1),(4)
Chairman of the Board and
Chief Executive Officer
Reliance Group Holdings, Inc.
James E. Yacobucci
Senior Vice President
Investments
Reliance Group Holdings, Inc.
- - ----------
(1) Executive Committee
(2) Audit Committee
(3) Finance Committee
(4) Regular Compensation Committee
(5) Special Compensation Committee
(6) Stock Option Committee
(7) Nominating Committee
- - --------------------------------------------------------------------------------
OFFICERS
Saul P. Steinberg
Chairman of the Board and
Chief Executive Officer
Robert M. Steinberg
President and
Chief Operating Officer
George E. Bello
Executive Vice President
and Controller
Lowell C. Freiberg
Executive Vice President
and Chief Financial Officer
Howard E. Steinberg
Executive Vice President,
General Counsel and
Corporate Secretary
Albert A. Benchimol
Senior Vice President and
Treasurer
Dennis J. O'Leary
Senior Vice President
Taxes
Philip S. Sherman
Senior Vice President
and Group Controller
Bruce L. Sokoloff
Senior Vice President
Administration
James E. Yacobucci
Senior Vice President
Investments
Paul W. Zeller
Senior Vice President,
Deputy General Counsel
and Assistant Secretary
Eilene S. Bloom
Vice President
Administrative Services
Thomas G. Butler
Vice President
Taxes
Andrew B. Donnellan, Jr.
Vice President and
Chief Litigation Counsel
Hilary E. Glassman
Vice President and
Corporate Counsel
David F. Noyes
Vice President and
Chief Credit Officer
Steven A. Rautenberg
Vice President
Communications
Joel H. Rothwax
Vice President
Human Resources
Thomas J. Sanders
Vice President and
Assistant Controller
OFFICERS OF
OPERATING UNITS
Reliance Insurance Group
Robert M. Steinberg
Chairman and
Chief Executive Officer
Jerome H. Carr
Senior Vice President
and Chief Financial Officer
Kenneth R. Frohlich
Senior Vice President and
Chief Actuarial Officer
Linda S. Kaiser
Senior Vice President,
General Counsel and Secretary
- - --------------------------------------------------------------------------------
Property and Casualty Insurance
Dennis A. Busti
President and Chief Executive Officer
Reliance National
Robert C. Olsman
President and Chief Operating Officer
Reliance Insurance
George H. Roberts
President
Reliance Reinsurance
C. Brian Schmalz
President and Chief Executive Officer
Reliance Surety
RCG Information Technology
George E. Bello
President and Chief Executive Officer
RCG Information Technology, Inc.
Reliance Development Group
Henry A. Lambert
President and Chief Executive Officer
Reliance Development Group, Inc.
67
<PAGE>
RELIANCE GROUP HOLDINGS, INC. AND SUBSIDIARIES
CORPORATE DATA
- - --------------------------------------------------------------------------------
CORPORATE OFFICES
Reliance Group Holdings, Inc.
Park Avenue Plaza
55 East 52nd Street
New York, NY 10055
(212) 909-1100
FAX (212) 909-1864
- - --------------------------------------------------------------------------------
COMMON STOCK TRANSFER AGENT
American Stock Transfer
& Trust Company
40 Wall Street
New York, NY 10005
INDEPENDENT AUDITORS
Deloitte & Touche LLP
New York, NY
ANNUAL MEETING
The annual meeting of shareholders
of Reliance Group Holdings, Inc.
will be held on Thursday, May 13, 1999
at 10:00 A.M. in the third floor
auditorium of the
Chase Manhattan Corporation located at
270 Park Avenue, New York, NY
- - --------------------------------------------------------------------------------
LISTED SECURITIES
All securities are listed on the
New York Stock Exchange.
Reliance Group Holdings, Inc.
Common Stock (Symbol: REL; New York Stock Exchange and
Pacific Exchange)
9% Senior Notes, due 2000
9 3/4% Senior Subordinated Debentures, due 2003
- - --------------------------------------------------------------------------------
Reliance Group Holdings, Inc. quarterly results, as well as Annual Reports on
Form 10-K, Form 10-Q, Annual Reports to shareholders, dividend declarations and
other corporate information can be obtained by calling (888) REL-FACT or by
visiting our Internet web site at http://www.rgh.com.
- - --------------------------------------------------------------------------------
FORM 10-K
A copy of the Company's Annual Report on Form 10-K to the Securities and
Exchange Commission will be furnished to any security holder upon written
request to Corporate Communications, Reliance Group Holdings, Inc., 55 East 52nd
Street, New York, NY 10055.
[LOGO] This annual report is printed on recycled paper
68
<PAGE>
(Photo Caption)
Front cover, left to right: [Right Arrow]Jeff Miller, Reliance Insurance [Right
Arrow]Coy Rudd, Reliance National [Right Arrow]Ted Martinez, Reliance Surety
[Right Arrow]Millie Ramos, Reliance Insurance [Right Arrow]Terry Gawlinski,
Reliance Insurance
Inside front cover, left to right: [Right Arrow]Cynthia Miller, Reliance
National [Right Arrow]Anthony Perez, Reliance National [Right Arrow]Ki-Young
Chris Kim, Reliance National [Right Arrow]Jackie Cartagena, Reliance National
[Right Arrow]Tom Montgomery, Reliance Insurance
Inside back cover, left to right: [Right Arrow]Liz Pepe, Reliance Insurance
[Right Arrow]John Briggs, Reliance Insurance [Right Arrow]Ken Rookstool,
Reliance Surety [Right Arrow]Yvonne Providence, Reliance Surety
Back cover, left to right: [Right Arrow]Ron Grobeck, Investments [Right
Arrow]Rick McConnell, Reliance Reinsurance [Right Arrow]Nancy Dodd, Reliance
Reinsurance [Right Arrow]Edward McBride, Reliance Reinsurance [Right
Arrow]Stephanie Wallace, Reliance Insurance
[Photo of Reliance employees (left to right): Liz Pepe, seated on stool; John
Briggs, standing and facing right with right hand on hip; Ken Rookstool,
standing and facing left while holding eyeglasses; Yvonne Providence, standing
and waving.]
Design: The Graphic Expression, Inc., New York
<PAGE>
[Reliance Logo; Oval with image of firemark - fire hydrant wrapped with fire
hose - and "1817" underneath.]
Reliance
Reliance Group Holdings, Inc.
[Photo of Reliance Employees (left to right): Ron Grobeck, standing and
pointing with left hand; Rick McConnell, standing and facing left with both
hands in pockets; Nancy Dodd, standing with hands clasped; Edward McBride,
standing and facing right with arms folded across his chest; Stephanie Wallace,
standing with hands crossed in front.]
<PAGE>
Reliance Group Holdings, Inc. 1998 Annual Report
Spine copy:
Center side to side
within spine
<PAGE>
Exhibit 21.1
Set forth below is a list of subsidiaries of the Registrant. Omitted
from the following list are the names of particular subsidiaries which, when
considered in the aggregate as a single subsidiary, do not constitute a
significant subsidiary. Subsidiaries of subsidiaries are indented.
Jurisdiction
of
Name Incorporation
- - ---- -------------
..Reliance Financial Services Corporation Delaware
....Reliance Insurance Group, Inc. Delaware
......Reliance Corporate Services Inc. Delaware
....Reliance Insurance Company Pennsylvania
SEE ANNEX 1 FOR SUBSIDIARIES
OF
RELIANCE INSURANCE COMPANY
..Reliance Development Group, Inc. Delaware
SEE ANNEX 2 FOR SUBSIDIARIES
OF
RELIANCE DEVELOPMENT GROUP, INC.
..Convenience & Safety Corporation Delaware
..Leasco Intercontinental N.V. Neth. Antilles
..Reliance Protective Services, Inc. Delaware
..Reliance General Services, Inc. Delaware
<PAGE>
ANNEX 1 - SUBSIDIARIES OF RELIANCE INSURANCE COMPANY
Jurisdiction
of
Name Incorporation
- - ---- -------------
Reliance Insurance Company Pennsylvania
..Arcadia National Life Insurance Company Arizona
..Cananwill, Ltd. Bermuda
..Diamond Insurance Services, Inc. Delaware
..Flynns Crossing Development Corporation Virginia
....Flynns Crossing, L.P. Virginia
..Flynns Crossing Homeowners Association Virginia
..Flynns Crossing Realty Corp. Virginia
..Garnet Company Delaware
..IAGM Corporation New York
..Marketing Management, Inc. Delaware
..Petroleum Interests, Inc. Delaware
..Platinum Investors, Inc. Delaware
..Regent International Insurance Company, Ltd. Bermuda
..Reliance Consumer Services, Inc. Texas
..Reliance Custom Underwriting Facility, Inc. Pennsylvania
..Reliance Development Company, Inc. of Tucson Delaware
....Reliance Centro Limited Partnership Arizona
..Reliance Development Pueblo Parking, Inc. Arizona
....Reliance Pueblo Limited Partnership Arizona
..Reliance Direct Insurance Company Pennsylvania
....Reliance Direct Agency, Inc. Pennsylvania
..Reliance Insurance Companies Foundation Pennsylvania
..Reliance Insurance Company of California California
..Reliance Insurance Company of Illinois Illinois
..Reliance Insurance Group Brokerage Division, Inc. Pennsylvania
..Reliance Life Companies Pennsylvania
..Reliance Lloyds Texas
..Reliance National Asia Re Pte Ltd. Singapore
..Reliance National (Barbados) Insurance, Ltd. Barbados
....Reliance National Compania Argentina de Seguros S.A. Argentina
..Reliance National Indemnity Company Wisconsin
....Careways, Inc. Delaware
..Reliance National Insurance Company Delaware
....Blackmoor Group, Inc. New York
......Waverly Insurance Agency, Inc. New York
....Reliance National De Mexico S.A. Mexico
....Reliance National Risk Services, Inc. New York
....Reliance USA Insurance Company Pennsylvania
..Reliance National Risk Specialists, Inc. Pennsylvania
<PAGE>
Jurisdiction
of
Name Incorporation
- - ---- -------------
..Reliance National (U.K.) Ltd. England
....Reliance National Insurance Company (Europe) Ltd. England
......Lippo Reliance Insurance Company Hong Kong
......Reliance Servicios Y Comissiones Mexico
......Renasa Insurance Company Ltd. South Africa
..Reliance Oriental Warehouse, Inc. Delaware
....Reliance Oriental Warehouse Associates
(A California Limited Partnership) California
........Oriental Warehouse Associates
(A California Limited Partnership) California
..Reliance Portfolio Solutions, Ltd. Pennsylvania
..Reliance Reinsurance Company Delaware
..Reliance Reinsurance Corp. Pennsylvania
..Reliance Special Risk, Inc. Pennsylvania
....Reliance Specialty Programs, Inc. Pennsylvania
..Reliance Surety Company Delaware
..Reliance Surety Managers, Inc. Pennsylvania
..Reliant Insurance Company Pennsylvania
..Reliant Insurance Corp. Delaware
..Sterling Administrative Services, Inc. Pennsylvania
..Union International Insurance Company Limited Bermuda
..United Pacific Insurance Company Pennsylvania
....Uni-Pac Corporation Washington
......100 Bellevue Parkway Partners, L.P. Delaware
......Three Parkway Partners, L.P. Pennsylvania
..United Pacific Insurance Company of New York New York
..RCG International, Inc. Delaware
....RCG/Asbach, Inc. Delaware
....RCG Information Technology, Inc. New Jersey
......RCG Information Technology (Proprietary) Limited South Africa
......RCG IT Corp. Delaware
........Century Conversion Software, Inc. Delaware
........Quintic Systems, Inc. Delaware
......Integrated Systems Resources, Inc. Connecticut
....RCG-Moody International Limited England
......AOQC Moody CERT GmbH Germany
......AOQC Moody International BV Netherlands
......AOQC Moody International Ltd. (Channel Islands) Channel Islands
......AOQC Moody International Ltd. (U.K.) England
........AOQC Moody International Ltd. (Japan) Japan
......AOQC Moody International SARL France
......International Container Survey Bureau (UK) Ltd. England
<PAGE>
Jurisdiction
of
Name Incorporation
- - ---- -------------
......Moody Energy Technical Services Co. Ltd. Peoples Republic
of China
......Moody International BV Holland
......Moody International Finland Finland
......Moody International GmbH Germany
......Moody International, Inc. Delaware
........Moody International Ltd. (Japan) Japan
........AOQC Moody International, Inc. Texas
........Inspection Services, Inc. Louisiana
........Moody International (Thailand) Ltd. Thailand
......Moody International Limited (U.K.) England
......Moody International Pty Ltd. Australia
......Moody International Quality Assurance Limited Hungary
......Moody International Scandinavia AB Sweden
......Moody International South Africa (Proprietary) Limited South Africa
........FPH Inspection Authority (Proprietary) Limited South Africa
......Moody International SRL Italy
........AOQC Moody CERT SRL Italy
......Moody Shenzen Quality Management Ltd. Peoples Republic
of China
......PT Mody Inter Indonesia Pty Ltd. Indonesia
....Werner International, Inc. Delaware
......Werner Management Consultants, Inc. New York
<PAGE>
ANNEX 2 - SUBSIDIARIES OF RELIANCE DEVELOPMENT GROUP, INC.
Jurisdiction
of
Name Incorporation
- - ---- -------------
Reliance Development Group, Inc. Delaware
..Continental Villages Company, Inc. Delaware
..Reliance Advisory Group, Inc. California
..Reliance Development Company, Inc. of Glendale California
..Reliance Development Parking Company Arizona
..Relibro Corp. New York
<PAGE>
Exhibit 23.1
Independent Auditors' Consent
We consent to the incorporation by reference in Registration Statements Nos.
33-19897, 33-31709, 33-63517, 33-63519, 333-21389, 333-65777, 333-65779 and
333-65791 of Reliance Group Holdings, Inc. on Forms S-8 of our reports dated
February 12, 1999, except as to note 15(c) of the consolidated financial
statements, as to which the date is February 26, 1999, appearing in and
incorporated by reference in this Annual Report on Form 10-K of Reliance Group
Holdings, Inc. for the year ended December 31, 1998. We also consent to the
use of Touche Ross & Co., and statements with respect to Touche Ross & Co., as
appearing under the heading "Experts" in the Prospectuses which are part of
Registration Statements Nos. 33-19897 and 33-31709.
Deloitte & Touche LLP
New York, New York
March 25, 1999
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
This schedule contains summary financial information extracted from the
Company's Consolidated Balance Sheet and the Consolidated Statement of Income
and is qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<DEBT-HELD-FOR-SALE> 2,738,864
<DEBT-CARRYING-VALUE> 539,848
<DEBT-MARKET-VALUE> 578,179
<EQUITIES> 754,543
<MORTGAGE> 0
<REAL-ESTATE> 135,746
<TOTAL-INVEST> 4,552,659
<CASH> 81,612
<RECOVER-REINSURE> 4,958,504
<DEFERRED-ACQUISITION> 295,939
<TOTAL-ASSETS> 12,775,339
<POLICY-LOSSES> 7,173,886
<UNEARNED-PREMIUMS> 1,980,481
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 720,243
0
0
<COMMON> 11,608
<OTHER-SE> 1,303,912
<TOTAL-LIABILITY-AND-EQUITY> 12,775,339
2,443,412
<INVESTMENT-INCOME> 300,019
<INVESTMENT-GAINS> 108,840
<OTHER-INCOME> 516,849
<BENEFITS> 1,523,624
<UNDERWRITING-AMORTIZATION> 958,310
<UNDERWRITING-OTHER> 0
<INCOME-PRETAX> 445,815
<INCOME-TAX> 133,600
<INCOME-CONTINUING> 334,215
<DISCONTINUED> 0
<EXTRAORDINARY> (7,766)
<CHANGES> 0
<NET-INCOME> 326,449
<EPS-PRIMARY> 2.82
<EPS-DILUTED> 2.72
<RESERVE-OPEN> 3,242,318
<PROVISION-CURRENT> 1,549,907
<PROVISION-PRIOR> (32,959)
<PAYMENTS-CURRENT> 490,146
<PAYMENTS-PRIOR> 1,046,583
<RESERVE-CLOSE> 3,220,046
<CUMULATIVE-DEFICIENCY> (32,959)
</TABLE>
