<PAGE>
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
- ---------- OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended March 31, 1999
OR
- ----------- TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period From_____To
Commission File Number 1-8278
RELIANCE GROUP HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
Delaware 13-3082071
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
Park Avenue Plaza
55 East 52nd Street
New York, New York 10055
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (212) 909-1100
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
As of May 1, 1999, 114,814,000 shares of common stock of Reliance Group
Holdings, Inc. were outstanding.
<PAGE>
RELIANCE GROUP HOLDINGS, INC. AND SUBSIDIARIES
I N D E X
Page
No.
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statement of Operations for the Quarters Ended
March 31, 1999 and 1998 (Unaudited)........................... 2
Consolidated Balance Sheet at March 31, 1999 (Unaudited) and
December 31, 1998............................................. 3
Consolidated Statement of Changes in Shareholders' Equity for the
Quarter Ended March 31, 1999 (Unaudited)...................... 4
Consolidated Statement of Comprehensive Income (Loss)
for the Quarters Ended March 31, 1999 and 1998 (Unaudited).... 5
Consolidated Condensed Statement of Cash Flows for the Quarters
Ended March 31, 1999 and 1998 (Unaudited)..................... 6
Notes to Consolidated Financial Statements (Unaudited)............ 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations............................ 14
PART II. OTHER INFORMATION, AS APPLICABLE................................... 25
SIGNATURES ................................................................. 26
<PAGE>
RELIANCE GROUP HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
Quarter Ended March 31 1999 1998
- -------------------------------------------------------------------------------------------
(In thousands, except per share amounts)
<S> <C> <C>
Revenues:
Premiums earned.............................................. $588,994 $ 659,681
Net investment income........................................ 73,188 74,628
Gain on sales of investments................................. 9,177 51,952
Gain on sales of subsidiaries................................ - 197,258
Other........................................................ 78,667 72,248
--------- ------------
750,026 1,055,767
--------- ------------
Claims and expenses:
Policy claims and settlement expenses........................ 391,686 348,113
Policy acquisition costs and other insurance expenses........ 212,548 311,238
Restructuring charge......................................... 24,000 -
Interest..................................................... 15,493 22,780
Other operating expenses..................................... 85,688 84,252
--------- ------------
729,415 766,383
--------- ------------
Income before income taxes and equity in
investee companies....................................... 20,611 289,384
Provision for income taxes................................... (5,600) (90,600)
Equity in investee companies................................. 27,290 3,510
--------- ------------
Income before extraordinary item and
cumulative effect of accounting change.................. 42,301 202,294
Extraordinary item - early extinguishment of debt............ - (1,912)
Cumulative effect of change in accounting
for insurance assessments............................... (57,850) -
--------- ------------
Net income (loss) ........................................... $ (15,549) $ 200,382
========= ============
Basic per share information:
Income before extraordinary item and
cumulative effect of accounting change.................. $ .37 $ 1.76
========= ============
Net income (loss)............................................ $ (.13) $ 1.74
========== ============
Diluted per share information:
Income before extraordinary item and
cumulative effect of accounting change.................. $ .36 $ 1.69
========= ============
Net income (loss)............................................ $ (.13) $ 1.67
========= ============
</TABLE>
See notes to consolidated financial statements
-2-
<PAGE>
RELIANCE GROUP HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
March 31 December 31
ASSETS 1999 1998
- ----------------------------------------------------------------------------------------------------------------
(In thousands, except per share amount)
<S> <C> <C>
Marketable securities:
Fixed maturities held for investment - at amortized cost
(quoted market $540,766 and $578,179)............................ $ 511,361 $ 539,848
Fixed maturities available for sale - at quoted market
(amortized cost $2,743,555 and $2,687,009)....................... 2,766,024 2,738,864
Equity securities - at quoted market (cost $283,736
and $262,986).................................................... 631,714 754,543
Short-term investments.............................................. 233,624 383,658
Cash..................................................................... 67,701 81,612
Premiums and other receivables........................................... 1,968,513 1,708,761
Reinsurance recoverables................................................. 5,549,052 4,958,504
Investment in investee companies......................................... 621,438 581,668
Deferred policy acquisition costs........................................ 291,346 295,939
Excess of cost over fair value of net assets acquired, less
accumulated amortization........................................... 217,464 219,854
Other assets............................................................. 578,713 512,088
----------- -----------
$13,436,950 $12,775,339
=========== ===========
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Unearned premiums........................................................ $ 2,314,970 $ 1,980,481
Unpaid claims and related expenses....................................... 7,483,236 7,173,886
Accounts payable and accrued expenses.................................... 897,686 847,452
Reinsurance ceded premiums payable....................................... 755,375 570,252
Federal and foreign income taxes, including deferred taxes............... 103,493 167,505
Term loans and short-term debt........................................... 259,419 256,763
Debentures and notes..................................................... 455,980 463,480
----------- -----------
12,270,159 11,459,819
----------- -----------
Contingencies and commitments
Shareholders' equity:
Common stock, par value $.10 per share, 225,000
shares authorized, 116,125 and 116,076 shares
issued and outstanding............................................ 11,613 11,608
Additional paid-in capital.......................................... 548,912 548,674
Retained earnings .................................................. 407,260 432,096
Accumulated other comprehensive income.............................. 209,978 323,142
----------- -----------
1,177,763 1,315,520
Treasury stock, 1,256 shares....................................... (10,972) -
----------- ------------
1,166,791 1,315,520
----------- -----------
$13,436,950 $12,775,339
=========== ===========
</TABLE>
See notes to consolidated financial statements
-3-
<PAGE>
RELIANCE GROUP HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY (UNAUDITED)
<TABLE>
<CAPTION>
Accumulated Other
Comprehensive Income
------------------------
Net
Unrealized
Net Loss on
Additional Unrealized Foreign
Common Paid-In Retained Gain on Currency Treasury Shareholders'
Stock Capital Earnings Investments Translation Stock Equity
- ------------------------------------------------------------------------------------------------------------------------------------
(In thousands, except per share amount)
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1999............... $ 11,608 $ 548,674 $ 432,096 $ 355,759 $ (32,617) $ - $1,315,520
Issuance of common stock............... 5 242 247
Transactions of investee
companies...................... (4) 258 254
Net loss............................... (15,549) (15,549)
Dividends ($.08 per share)............. (9,287) (9,287)
Depreciation after deferred
income taxes................. (112,426) (112,426)
Foreign currency translation........... (996) (996)
Purchase of treasury stock............. (10,972) (10,972)
---------- ----------- ----------- ------------ ---------- ----------- -----------
Balance, March 31, 1999................ $ 11,613 $ 548,912 $ 407,260 $ 243,591 $ (33,613) $ (10,972) $1,166,791
========== =========== =========== ============ ========== =========== ===========
</TABLE>
See notes to consolidated financial statements
-4-
<PAGE>
RELIANCE GROUP HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (LOSS) (UNAUDITED)
<TABLE>
<CAPTION>
Quarter Ended March 31 1999 1998
- ---------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C>
Net income (loss)................................................. $ (15,549) $ 200,382
Other comprehensive income (loss):
Unrealized holding gains (losses), net of deferred tax
benefit (expense) of $55,367 and $(17,152).............. (102,821) 31,849
Less: reclassification adjustment for gains realized
in net income (loss), net of tax benefit of
$5,033 and $18,074...................................... (9,347) (33,566)
Foreign currency translation, net of deferred tax benefit
(expense) of $536 and $(725)............................ (996) 1,346
---------- -----------
Comprehensive income (loss)....................................... $ (128,713) $ 200,011
========== ===========
</TABLE>
See notes to consolidated financial statements
-5-
<PAGE>
RELIANCE GROUP HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENT OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
Quarter Ended March 31 1999 1998
- --------------------------------------------------------------------------------
(In thousands)
<S> <C> <C>
CASH FLOWS USED BY OPERATING ACTIVITIES............... $ (89,173) $ (30,107)
---------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of:
Fixed maturities available for sale............... 157,569 113,508
Equity securities................................. 6,748 169,863
Maturities and redemptions of:
Fixed maturities available for sale............... 61,562 92,513
Fixed maturities held for investment.............. 27,714 33,456
Purchases of:
Fixed maturities available for sale............... (259,201) (398,652)
Equity securities................................. (13,704) (44,349)
(Increase) decrease in short-term investments - net... 159,281 (79,173)
Proceeds from sales of subsidiaries................... - 271,852
Other - net........................................... (37,981) (6,686)
---------- ---------
101,988 152,332
---------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in term loans................................ 45,000 -
Decrease in short-term debt - net..................... (1,000) (2,315)
Repayments of term loans.............................. (43,214) (25,713)
Redemption of debentures and notes.................... (7,500) (47,030)
Issuance of common stock.............................. 247 1,754
Dividends............................................. (9,287) (9,209)
Purchase of treasury stock............................ (10,972) -
---------- ---------
(26,726) (82,513)
---------- ---------
Increase (decrease) in cash........................... (13,911) 39,712
Cash, beginning of period............................. 81,612 53,661
---------- ---------
Cash, end of period................................... $ 67,701 $ 93,373
========== =========
Supplemental disclosures of cash flow information:
Interest paid......................................... $ 3,000 $ 4,600
========== =========
Income taxes refunded................................. $ 7,500 $ -
========== =========
</TABLE>
See notes to consolidated financial statements
-6-
<PAGE>
RELIANCE GROUP HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
- --------------------------------------------------------------------------------
1. UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
In the opinion of management, the accompanying unaudited consolidated financial
statements include all adjustments (consisting of normal recurring accruals
only) considered necessary to present fairly the financial position at March 31,
1999, and the results of operations, changes in shareholders' equity,
comprehensive income (loss) and cash flows for all periods presented. The
results of operations for the interim periods are not necessarily indicative of
the results that may be expected for any other interim period or for the entire
year.
For a summary of significant accounting policies (which have not changed from
December 31, 1998 with the exception of the adoption of Statement of Position
No. 97-3 - see note 3 to the unaudited consolidated financial statements.) and
additional financial information, see the Company's Annual Report on Form 10-K
for the year ended December 31, 1998.
2. RESTRUCTURING CHARGE
During the first quarter of 1999, the Company recorded a $24 million
restructuring charge. This charge resulted from the consolidation, in late March
of 1999, of the Company's non-standard automobile insurance operation, Reliant,
formerly part of Reliance National, with Reliance Direct, formerly a separate
operating unit, which markets standard and preferred automobile insurance
through direct marketing channels. The new combined operating unit is named
Reliance Personal.
The restructuring charge includes the write-off of $18 million of deferred
policy acquisition costs at Reliance Direct, which resulted from the decision to
offer a new integrated product, change marketing focus and support, non-renew
certain policies, and the related reduction in the estimate of automobile policy
renewal rates. The Company believes that Reliance Direct's remaining $6 million
of deferred policy acquisition costs will be recoverable. The charge also
includes the write-off of $2.2 million of previously capitalized information
technology expenditures at Reliance Direct which will not be utilized by
Reliance Personal and which have no alternative use. The charge also includes $2
million of severance costs related to the termination of approximately
thirty-five Reliance Direct employees and $1.8 million of costs associated with
the termination of certain of Reliance Direct's third party service contracts.
The Company estimates that the severance and terminated service contracts will
be substantially paid over the next twelve months.
7
<PAGE>
3. ADOPTION OF STATEMENT OF POSITION
Effective January 1, 1999, the Company adopted the American Institute of
Certified Public Accountants' Statement of Position No. 97-3, "Accounting by
Insurance and Other Enterprises for Insurance-Related Assessments" ("SOP"). The
SOP provides guidance as to when to recognize a liability for loss-based and
other insurance-related assessments. Previously, and as was the practice of many
property and casualty insurance companies, the Company had accounted for these
assessments on a pay-as-you-go basis and, accordingly, had no recorded liability
related to these assessments. The effect of adopting the SOP was a decrease in
net income in the first quarter of 1999 for the cumulative effect of the change
in accounting principle of $57.9 million ($.49 per diluted share), net of a
$31.1 million income tax benefit. Approximately $61 million of the $89 million
pretax charge relates to loss-based assessments for workers' compensation
insurance. The remaining $28 million charge relates primarily to premium-based
assessments and assessments by guaranty funds. The Company estimates that a
substantial majority of the $89 million liability for assessments will be paid
over the next ten years.
4. EQUITY IN INVESTEE COMPANIES
The Company's investment and equity in investee companies are as follows:
<TABLE>
<CAPTION>
Investment in Equity in Investee
Investee Companies Companies
- -------------------------------------------------------------------------------------------------------------------------
(In thousands) Quarter Ended
March 31 December 31 March 31
1999 1998 1999 1998
------------- ------------- ---------- -----------
<S> <C> <C> <C> <C>
LandAmerica Financial Group, Inc.(1)................. $ 419,870 $ 415,654 $ 2,105 $ 1,806
Zenith National Insurance Corp. (2).................. 201,568 166,014 25,185 1,704
------------- ------------- ---------- -----------
$ 621,438 $ 581,668 $ 27,290 $ 3,510
============= ============= ========== ===========
</TABLE>
(1) The equity in investee company for the quarter ended March 31, 1998
represents equity earnings for the one month period ending March 31, 1998.
(2) The equity in investee company for the quarter ended March 31, 1999
includes $24.9 million representing the Company's portion of a gain
recognized from the sale of the CalFarm Insurance subsidiary by Zenith
National.
8
<PAGE>
Summarized financial information for LandAmerica Financial Group, Inc. is as
follows:
Quarter Ended March 31 1999 1998
- --------------------------------------------------------------------------------
(In thousands, except per share amounts)
Revenues................................................ $ 489,903 $ 256,988
Income before income taxes.............................. 23,585 7,250
Net income.............................................. 14,870 4,752
Net income per diluted share............................ .73 .35
Summarized financial information for Zenith National Insurance Corp. is as
follows:
Quarter Ended March 31 1999 1998
- --------------------------------------------------------------------------------
(In thousands, except per share amounts)
Revenues ............................................... $ 162,163 $ 145,295
Income before income taxes ............................. 28 10,698
Net income (1).......................................... 104,400 7,100
Net income per diluted share (1)........................ 6.09 .42
(1) 1999 includes an after-tax gain of $104.3 million ($6.08 per diluted share)
from the sale of CalFarm Insurance Company.
9
<PAGE>
5. REINSURANCE
The reconciliation of property and casualty insurance direct premiums to net
premiums is as follows (in thousands):
Quarter Ended March 31
------------------------------------------------
1999 1998
------------------------------------------------
Premiums Premiums Premiums Premiums
Written Earned Written Earned
------------------------------------------------
Direct............... $1,325,151 $1,040,959 $1,061,935 $ 852,609
Assumed.............. 352,027 266,233 177,429 136,699
Ceded................ (960,054) (718,198) (627,592) (468,759)
----------- ---------- --------- --------
Net Premiums......... $ 717,124 $ 588,994 $ 611,772 $ 520,549
========== =========== ========== ==========
The reconciliation of property and casualty insurance gross policy claims and
settlement expenses to net policy claims and settlement expenses is as follows
(in thousands):
Quarter Ended March 31
----------------------
1999 1998
---------- ----------
Gross........................................ $1,028,115 $ 704,653
Reinsurance recoveries....................... (636,429) (363,216)
----------- ----------
Net policy claims and settlement expenses.... $ 391,686 $ 341,437
========== ==========
6. EARNINGS PER SHARE
The basic and diluted per share reconciliations of income before extraordinary
item and cumulative effect of accounting change to net income (loss) is as
follows:
Quarter Ended March 31 1999 1998
- --------------------------------------------------------------------------------
Basic income (loss) per share:
Income before extraordinary item and
cumulative effect of accounting change.......... $ .37 $1.76
Extraordinary item - early extinguishment of debt... - (.02)
Cumulative effect of change in accounting
for insurance assessments....................... (.50) -
----- -----
Net income (loss)................................... $(.13) $1.74
===== =====
Diluted income (loss) per share:
Income before extraordinary item and
cumulative effect of accounting change.......... $ .36 $1.69
Extraordinary item - early extinguishment of debt... - (.02)
Cumulative effect of change in accounting
for insurance assessments....................... (.49) -
----- -----
Net income (loss)................................... $(.13) $1.67
===== =====
10
<PAGE>
The reconciliation of the basic to diluted per share information is as follows:
<TABLE>
<CAPTION>
Quarter Ended March 31 1999 1998
- --------------------------------------------------------------------------------------------------------
Per Share Per Share
Income Shares Amount Income Shares Amount
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
(In thousands, except
per share amounts)
Basic income
per share:
Income before
extraordinary
item and
cumulative
effect of
accounting
change $42,301 115,615 $.37 $202,294 114,994 $1.76
==== =====
Effect of dilutive
securities:
Options - 2,698 - 4,693
----------------------- ----------------------
Diluted income
per share:
Income before
extraordinary
item and
cumulative
effect of
accounting
change $42,301 118,313 $.36 $202,294 119,687 $1.69
=========================================================================
</TABLE>
11
<PAGE>
7. BUSINESS SEGMENT INFORMATION
Quarter Ended March 31 1999 1998
- --------------------------------------------------------------------------------
(In thousands)
Revenues:
Property and casualty insurance
Premiums earned:
Reliance National (1) $249,981 $ 228,063
Reliance Insurance 193,394 176,545
Reliance Reinsurance 38,970 43,666
Reliance Surety 49,614 45,870
Reliance Personal (1) 57,045 25,996
Other (10) 409
-------- ----------
588,994 520,549
Net investment income 73,188 69,352
Gain on sales of investments 9,177 51,647
Gain on sales of subsidiaries - 194,080
-------- ----------
671,359 835,628
-------- ----------
Title insurance
Premiums earned - 139,132
Net investment income - 5,276
Gain on sales of investments - 305
-------- ----------
- 144,713
-------- ----------
Information technology consulting 63,952 57,195
Other 14,715 18,231
-------- ----------
$750,026 $1,055,767
======== ==========
Income before income taxes and
equity in investee companies:
Property and casualty insurance
Underwriting gain (loss):
Reliance National (1) $ (5,457) $ (4,265)
Reliance Insurance (10,581) (13,745)
Reliance Reinsurance (1,035) (1,411)
Reliance Surety 10,986 13,567
Reliance Personal (1) (34,905) (2,155)
Other 399 664
--------- ----------
(40,593) (7,345)
Net investment income 73,188 69,352
Gain on sales of investments 9,177 51,647
Gain on sales of subsidiaries - 194,080
--------- ----------
41,772 307,734
Title insurance - 11,286
Information technology consulting 4,878 4,187
Other (26,039) (33,823)
--------- ----------
$ 20,611 $ 289,384
========= ==========
(1) In the first quarter of 1999, the Company consolidated its non-standard
automobile operation, Reliant, formerly part of Reliance National, with
Reliance Direct into a new operating unit, Reliance Personal. Prior period
results of Reliance National have been restated to reflect the transfer of
Reliant. See note 2 to the unaudited consolidated financial statements.
12
<PAGE>
8. SALE OF SUBSIDIARIES
In the first quarter of 1998, the Company sold its title insurance operations to
LandAmerica Financial Group, Inc. ("LandAmerica"). The transaction resulted in
an after-tax gain of $242.9 million of which $133.6 million ($1.12 per diluted
share) was recognized in the first quarter of 1998. The deferred gain, exclusive
of a related deferred tax amount, is included in "accounts payable and accrued
expenses" in the accompanying consolidated balance sheet. The Company accounts
for its investment in LandAmerica by the equity method of accounting for periods
subsequent to the sale date. See note 7 to the unauditied consolidated financial
statements for business segment information regarding the title insurance
operations.
In addition, in the first quarter of 1998 the Company sold a subsidiary which
resulted in an after-tax gain of $1.3 million, net of tax expense of $1.8
million.
13
<PAGE>
RELIANCE GROUP HOLDINGS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
================================================================================
OVERVIEW
The Company had operating income in the first quarter of 1999, before gains
on sales of investments and equity in an investee company's gain on sale of
subsidiary, of $11.4 million ($.10 per diluted share). Operating income in
the first quarter of 1999 includes an after-tax restructuring charge of
$15.6 million ($.13 per diluted share) which resulted from the
consolidation of the Company's non-standard automobile insurance operation
and Reliance Direct into a new operating unit, Reliance Personal. See note
2 to the unaudited consolidated financial statements for further
discussion. Excluding the restructuring charge, operating income in the
first quarter of 1999 would have been $27.0 million ($.23 per diluted
share). Operating income in the first quarter of 1998, before gains on
sales of subsidiaries and investments was $33.5 million ($.28 per diluted
share). The decline in operating income in 1999 reflects higher property
and casualty insurance underwriting losses, less income from the title
insurance operations which were sold in February 1998, partially offset by
reduced interest expense.
The net loss in the first quarter of 1999 was $15.5 million ($.13 per
diluted share). The net loss resulted from the adoption of the American
Institute of Certified Public Accountants' Statement of Position No. 97-3,
"Accounting by Insurance and Other Enterprises for Insurance-Related
Assessments" ("SOP"). The effect of adopting the SOP was to reduce net
income for the cumulative effect of the change in accounting principle by
$57.9 million ($.49 per diluted share). The first quarter 1999 net results
also include: (i) a gain of $24.9 million ($.21 per diluted share)
representing the pro rata portion of a gain realized by an investee
company, Zenith National Insurance Corp., on the sale of its CalFarm
Insurance subsidiary, and (ii) after-tax gain on sales of investments of
$6.0 million ($.05 per diluted share). Net income in the first quarter of
1998 was $200.4 million ($1.67 per diluted share) and included: (i)
after-tax gains on sales of subsidiaries of $135.0 million ($1.13 per
diluted share), primarily resulting from the sale of the Company's title
insurance operations, (ii) after-tax gains on sales of investments of $33.8
million ($.28 per diluted share), and (iii) an after-tax extraordinary
charge of $1.9 million ($.02 per diluted share) related to the early
extinguishment of debt. See notes 3 and 8 to the unaudited consolidated
financial statements for further discussion of the adoption of the SOP and
the sale of subsidiaries.
14
<PAGE>
PROPERTY AND CASUALTY INSURANCE OPERATIONS
The consolidated property and casualty insurance underwriting loss was
$40.6 million in the first quarter of 1999, which included a $24.0 million
restructuring charge for Reliance Personal. Excluding the restructuring
charge, the underwriting loss in the first quarter of 1999 was $16.6
million compared to $7.3 million in the corresponding 1998 period. The
increase in underwriting loss in 1999, when compared to 1998, reflects
higher losses in the personal automobile business written on a direct
basis. Catastrophe claims in the first quarter of 1999 were $13.0 million
(2.2 combined ratio points), including adverse development of prior year
catastrophes in Reliance National's International Reinsurance business,
compared to catastrophe claims of $4.9 million (.9 combined ratio points)
in the first quarter of 1998. The increase in underwriting loss in the
first quarter of 1999 resulting from Reliance Personal and from catastrophe
claims was partially offset by the ceding of losses under certain excess
of loss reinsurance agreements which benefited underwriting results by
$14.5 million.
15
<PAGE>
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>
Quarter Ended March 31
----------------------------------------------------------------------
1999 1998
-------------------------------------------- -----------------
excludes
restructuring charge (2)
<S> <C> <C> <C>
Net Premiums Written
Reliance National (1) $ 352,040 $ 352,040 $ 307,348
Reliance Insurance 186,931 186,931 168,298
Reliance Reinsurance 54,845 54,845 54,780
Reliance Surety 43,872 43,872 39,442
Reliance Personal (1) 79,456 79,456 41,585
Other (20) (20) 319
-------------- -------------- ---------------
$ 717,124 $ 717,124 $ 611,772
============== ============== ===============
Net Premiums Earned
Reliance National (1) $ 249,981 $ 249,981 $ 228,063
Reliance Insurance 193,394 193,394 176,545
Reliance Reinsurance 38,970 38,970 43,666
Reliance Surety 49,614 49,614 45,870
Reliance Personal (1) 57,045 57,045 25,996
Other (10) (10) 409
-------------- -------------- ---------------
$ 588,994 $ 588,994 $ 520,549
============== ============== ===============
Underwriting Gain (Loss)
Reliance National (1) $ (5,457) $ (5,457) $ (4,265)
Reliance Insurance (10,581) (10,581) (13,745)
Reliance Reinsurance (1,035) (1,035) (1,411)
Reliance Surety 10,986 10,986 13,567
Reliance Personal (1) (34,905) (10,905) (2,155)
Other 399 399 664
-------------- -------------- ---------------
$ (40,593) $ (16,593) $ (7,345)
============== ============== ===============
Combined Ratios (3)
Reliance National (1) 101.9% 101.9% 101.7%
Reliance Insurance 105.1% 105.1% 107.1%
Reliance Reinsurance 102.8% 102.8% 103.0%
Reliance Surety 77.8% 77.8% 70.1%
Reliance Personal (1) 161.3% 119.2% 108.2%
Consolidated 106.7% 102.6% 101.1%
</TABLE>
(1) In the first quarter of 1999, the Company consolidated its
non-standard automobile operation, Reliant, formerly part of
Reliance National, with Reliance Direct into a new operating
unit, Reliance Personal. Prior period results of Reliance
National have been restated to reflect the transfer of Reliant.
(2) Excludes the effect of the $24.0 million restructuring charge for
Reliance Personal.
(3) Calculated on a GAAP basis, after policyholders' dividends.
Combined ratios for Other are not presented since they are not
meaningful.
16
<PAGE>
RELIANCE NATIONAL
The increase in net premiums written and net premiums earned in the first
quarter of 1999 resulted from increased foreign sourced premiums including
premiums from the International Reinsurance and International divisions.
Foreign sourced net premiums written were $124.6 million in the first three
months of 1999 compared to $93.1 million in the corresponding 1998 period.
Reliance National also experienced premium growth in Accident & Health,
Financial Products and from the internet based marketing of workers'
compensation business. The premium growth in the first quarter of 1999 was
partially offset by a reduction in net premiums written in certain
under-performing property and transportation business.
The underwriting loss in the first quarter of 1999 reflects increased
underwriting profits in Casualty Risk Services, offset by increased
underwriting losses in International Reinsurance, due, in part, to a higher
level of catastrophe claims. Catastrophe claims for Reliance National in
the first quarter of 1999 were $9.2 million compared to $1.5 million in the
corresponding 1998 period. The adverse effects of the increased
catastrophe claims were more than offset by the ceding of losses under
certain excess of loss reinsurance agreements, which benefited Reliance
National's underwriting results by $11.4 million.
RELIANCE INSURANCE
The increase in net premiums written and net premiums earned in the first
quarter of 1999 resulted from continued new business production and price
increases in the Commercial Accounts division, as well as new business
production in the Large Accounts division. These increases were most
prevalent in workers' compensation, and were partially offset by Reliance
Insurance's decision not to renew certain under-performing property and
marine lines of business. The lower underwriting loss in 1999 resulted from
improved loss experience in the Commercial Account and Large Account
divisions.
RELIANCE REINSURANCE
Net premiums written in the first quarter of 1999 were flat with those of
the corresponding 1998 period as premiums from the new professional
liability unit were offset by lower writings in traditional treaty business
and the decision to cede additional premiums to certain retrocessional
reinsurance arrangements.
RELIANCE SURETY
The increase in net premiums written and net premiums earned in the first
quarter of 1999 reflects new writings in large contractor surety business
which were $2.8 million in 1999. Underwriting results in Reliance Surety
remain strong, although underwriting profits in small contractor surety
business were lower reflecting increased losses and increasingly
competitive pricing.
17
<PAGE>
RELIANCE PERSONAL
Reliance Personal was created in late March 1999 by consolidating Reliance
National's non-standard automobile operation, Reliant, with Reliance Direct
which formerly was a separate operating unit. As a result of the
consolidation, a $24.0 million restructuring charge was recorded by
Reliance Personal in the first quarter of 1999. See note 2 to the unaudited
consolidated financial statements for further discussion.
The increase in net premiums written and net premiums earned in the first
quarter of 1999 reflects the continued growth in Reliance Personal's
non-standard automobile writings, which are expected to continue to
increase throughout 1999. The increase in underwriting loss in the first
quarter of 1999, after excluding the effects of the restructuring charge,
reflects administrative costs incurred by the direct standard automobile
operation. The Company anticipates that these costs will be reduced
throughout the remainder of 1999.
PROPERTY AND CASUALTY INSURANCE INVESTMENT RESULTS
Net investment income of the property and casualty insurance operations
increased to $73.2 million during the three-month period ending March 31,
1999 from $69.4 million in the corresponding 1998 period. This increase
resulted from growth in the size of the average fixed maturity investment
portfolio reflecting the investment of a portion of the proceeds received
from the February 27, 1998 sale of the title insurance operations. The
effects of these increases were partially offset by lower interest rates.
Gains on sales of investments were $9.2 million in the first quarter of
1999 compared to $51.6 million in the corresponding 1998 period which
primarily resulted from sales of equity securities.
INVESTMENT PORTFOLIO
At March 31, 1999, the Company's investment portfolio aggregated $3.83
billion (at cost), of which 93% was invested in fixed maturities and 7% was
invested in equity securities. The Company seeks to maintain a diversified
and balanced fixed maturity portfolio representing a broad spectrum of
industries and types of securities 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.
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 March 31, 1999, the carrying values of
non-investment grade securities and securities not rated by Standard and
Poor's were $494.0 million (14% of the fixed income portfolio) and $199.7
million (6% of the fixed income portfolio), respectively. Substantially all
of the Company's non-investment grade and non-rated securities are
classified as available for sale.
18
<PAGE>
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 increased to $64.0
million in the first three months of 1999 from $57.2 million in the
corresponding 1998 period. The increase in revenues resulted from an
increase in higher margin solutions business and an increase in billing
rates. Gross margins (revenues less cost of services) were $21.1 million in
the first quarter of 1999 compared to $17.2 million in the first quarter of
1998. Pretax income increased to $4.9 million in the first quarter of 1999
from $4.2 million in the corresponding 1998 period 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 unaudited consolidated financial statement of
operations.
INTEREST EXPENSE
Interest expense declined to $15.5 million in the first quarter of 1999
from $22.8 million in the first quarter of 1998. The decline resulted from
the lower levels of debt outstanding. Since January 1, 1998, the Company
has reduced its debt by $188 million.
EQUITY IN INVESTEE COMPANIES
Equity in investee companies income was $27.3 million in the first quarter
of 1999 which includes equity earnings of $25.2 million from the Company's
investment in Zenith National Insurance Corp. ("Zenith"), and $2.1 million
from the Company's investment in LandAmerica Financial Group, Inc.
("LandAmerica"). Equity earnings from Zenith in 1999 includes a gain of
$24.9 million representing the Company's pro rata portion of a gain
realized by Zenith on the sale of its CalFarm subsidiary. Equity in
investee companies was $3.5 million in the first quarter of 1998 and was
comprised of $1.8 million of equity earnings for the one-month period
ending March 31, 1998 from the Company's investment in LandAmerica, and
$1.7 million from the Company's investment in Zenith.
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 $8.6
million for the three-month period ending March 31, 1999. Dividends paid by
Reliance Insurance Company were $35.7 million in the first quarter of 1999.
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
19
<PAGE>
such law, Reliance Insurance Company may pay dividends during the year
equal to the greater of (a) 10% of the preceding year-end policyholders'
surplus or (b) the preceding year's statutory net income. Furthermore, the
Pennsylvania Insurance Department has broad discretion to limit the payment
of dividends by insurance companies. During 1999, $585.3 million would be
available for dividend payments by Reliance Insurance Company under
Pennsylvania law. 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.
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. Cash flow from operating activities is
traditionally low during the first quarter of the year, reflecting the
payment of certain expenses, such as premium taxes and contingent
commissions which are accrued during the previous year. Reliance Insurance
Company carefully monitors its cash, short-term investments and marketable
securities to maintain adequate balances for the timely payment of claims
and other operating requirements. At March 31, 1999, Reliance Insurance
Company had $290 million of cash and short-term investments.
For the three months ended March 31, 1999, the Company utilized $89.2
million of cash flow for operating activities compared to $30.1 million in
the corresponding 1998 period. The decrease in operating cash flow reflects
an increase in net paid losses in the property and casualty insurance
operations.
The Company generated $102.0 million of cash flow from investing activities
for the three months ended March 31, 1999 primarily from the net sales of
marketable securities. The Company generated $152.3 million of cash flow
from investing activities for the three months ended March 31, 1998
primarily from the sales of subsidiaries partially offset by net purchases
of marketable securities.
For the three months ended March 31, 1999, the Company used $26.7 million
of cash flow for financing activities for the purchase of treasury stock
and payment of dividends. For the three months ended March 31, 1998, the
Company used $82.5 million of cash flow for financing activities. During
the first quarter of 1998, the Company purchased $44.6 million of its
outstanding senior notes and senior subordinated debentures resulting in an
after-tax extraordinary charge of $1.9 million, net of a $1.0 million tax
benefit.
20
<PAGE>
The Company has a revolving credit facility with various banks providing
for aggregate maximum outstanding borrowings of $100 million. At March 31,
1999, borrowings aggregating $52 million were outstanding under the
facility compared to $38 million at December 31, 1998. The increase in
borrowings during the first quarter of 1999 were primarily used to meet the
scheduled maturity of $12.5 million of bank term loan borrowings.
WORKERS' COMPENSATION REINSURANCE FACILITY
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. In
addition, the Insurance Department of the State of Connecticut 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.
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.
Currently, 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 in the
third quarter of 1999. Of the two noncompliant systems, the Company plans
to complete the transfer of the data from one of the systems to a year 2000
compliant system in the third quarter of 1999 and plans to complete the
replacement of the other system in the third quarter of 1999. In addition,
the Company plans to complete remediation of certain of its actuarial
systems in the third quarter of 1999, and to perform compliance assurance
testing on these actuarial systems in 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.
21
<PAGE>
Third Party Information Technology. Even if all of the Company's computer
systems and software products are year 2000 compliant, the failure of third
parties with whom the Company does significant business to be year 2000
compliant could materially adversely affect the financial position, results
of operations or cash flows of the Company. Accordingly, as part of its
year 2000 process, the Company has substantially completed its process of
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, insurance brokers and agents, 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 has substantially
completed 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. The Company is in
the process of distributing year 2000 compliance questionnaires to certain
financial institutions and other vendors with whom the Company does
business. The Company will follow-up with any of such financial
institutions or other vendors who either have not responded to such
questionnaires or who have provided insufficiently detailed or inadequate
responses to such questionnaires. The Company has conducted, and will
conduct, systems testing as appropriate with third parties during 1999.
In assessing the year 2000 readiness of third parties, the Company has been
relying on the statements of such third parties and in most cases has not
independently verified the accuracy of such statements. In certain cases,
third parties have not responded, or have not responded adequately, to the
Company's inquiries, and therefore the Company has not been able to obtain
reliable information regarding the year 2000 readiness of such third
parties. The Company is in the process of assessing whether the failure to
be year 2000 compliant of any of such third parties would have a material
adverse effect on the financial position, results of operations or cash
flows of the Company. Of the responses that the Company has received to
date, no third party has advised the Company that it has a year 2000 issue
that would have a material adverse effect on the Company. While the Company
has taken, and is taking, what it believes are appropriate safeguards based
on the assumption that the information provided by third parties who have
responded adequately is accurate, 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, if the information
provided by such third parties is not accurate.
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.
22
<PAGE>
Costs. Through March 31, 1999, the Company had incurred approximately $5.75
million to address the year 2000 issue and expects to incur an additional
$1 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.
23
<PAGE>
FORWARD LOOKING INFORMATION
Certain statements in this document may be considered to be "forward
looking statements" as that term is defined in the Private Securities
Litigation Reform Act of 1995, such as statements that include the words
"expects", "probable", "estimate", or similar expressions. Such statements
are subject to certain risks and uncertainties. The factors which could
cause actual results to differ materially from those suggested by any such
statements include, but are not limited to, those discussed or identified
from time to time in the Company's public filings with the Securities and
Exchange Commission and specifically to: risks or uncertainties associated
with general economic conditions including changes in interest rates and
the performance of the financial markets, changes in domestic and foreign
laws, regulations and taxes, changes in competition and pricing
environments, regional or general changes in asset valuations, the
occurrence of significant natural disasters, the inability to reinsure
certain risks economically, the adequacy of loss reserves, as well as
general market conditions, competition, pricing and restructurings.
24
<PAGE>
RELIANCE GROUP HOLDINGS, INC. AND SUBSIDIARIES
PART II. OTHER INFORMATION
- --------------------------------------------------------------------------------
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
27. Financial Data Schedule.
(b) Reports on Form 8-K.
No reports on Form 8-K were filed during the quarter ended
March 31, 1999.
25
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
RELIANCE GROUP HOLDINGS, INC.
-----------------------------
(Registrant)
Date: May 17, 1999 /s/ George E. Bello
------------ --------------------------------------
George E. Bello
Executive Vice President and Controller
(Chief Accounting Officer)
<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
Operations and is qualified in its entirety by reference to such financial
statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-1-1999
<PERIOD-END> MAR-31-1999
<DEBT-HELD-FOR-SALE> 2,766,024
<DEBT-CARRYING-VALUE> 511,361
<DEBT-MARKET-VALUE> 540,766
<EQUITIES> 631,714
<MORTGAGE> 0
<REAL-ESTATE> 143,665
<TOTAL-INVEST> 4,286,388
<CASH> 67,701
<RECOVER-REINSURE> 5,549,052
<DEFERRED-ACQUISITION> 291,346
<TOTAL-ASSETS> 13,436,950
<POLICY-LOSSES> 7,483,236
<UNEARNED-PREMIUMS> 2,314,970
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 715,399
0
0
<COMMON> 11,613
<OTHER-SE> 1,155,178
<TOTAL-LIABILITY-AND-EQUITY> 13,436,950
588,994
<INVESTMENT-INCOME> 73,188
<INVESTMENT-GAINS> 9,177
<OTHER-INCOME> 78,667
<BENEFITS> 391,686
<UNDERWRITING-AMORTIZATION> 212,548
<UNDERWRITING-OTHER> 0
<INCOME-PRETAX> 20,611
<INCOME-TAX> 5,600
<INCOME-CONTINUING> 42,301
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> (57,850)
<NET-INCOME> (15,549)
<EPS-PRIMARY> ($0.13)
<EPS-DILUTED> ($0.13)
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
