<PAGE>
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FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
--- OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended June 30, 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 August 1, 1999, 114,827,000 shares of common stock of Reliance Group
Holdings, Inc. were outstanding.
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<PAGE>
RELIANCE GROUP HOLDINGS, INC. AND SUBSIDIARIES
I N D E X
---------
<TABLE>
<CAPTION>
Page
No.
----
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statement of Operations for the Quarters and Six-Month
Periods Ended June 30, 1999 and 1998 (Unaudited)........................................ 2
Consolidated Balance Sheet at June 30, 1999 (Unaudited) and
December 31, 1998....................................................................... 3
Consolidated Statement of Changes in Shareholders' Equity for the
Six-Month Period Ended June 30, 1999 (Unaudited)........................................ 4
Consolidated Statement of Comprehensive Income (Loss)
for the Quarters and Six-Month Periods Ended
June 30, 1999 and 1998 (Unaudited)...................................................... 5
Consolidated Condensed Statement of Cash Flows for the Six-Month
Periods Ended June 30, 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...................................................... 18
PART II. OTHER INFORMATION, AS APPLICABLE................................................................. 29
SIGNATURES................................................................................................ 30
</TABLE>
<PAGE>
RELIANCE GROUP HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
Quarter Ended Six Months Ended
June 30 June 30
1999 1998 1999 1998
- ------------------------------------------------------------------------------------------------------------------------------------
(In thousands, except per share amounts)
<S> <C> <C> <C> <C>
Revenues:
Premiums earned.............................................. $ 585,766 $560,566 $1,174,760 $ 1,220,247
Net investment income........................................ 71,270 75,072 144,458 149,700
Gain (loss) on sales of investments.......................... (2,762) 53,986 6,415 105,938
Gain on sales of subsidiaries................................ - - - 197,258
Other........................................................ 81,735 80,340 160,402 152,588
---------- -------- --------- -----------
736,009 769,964 1,486,035 1,825,731
---------- -------- --------- -----------
Claims and expenses:
Policy claims and settlement expenses........................ 704,830 367,472 1,096,516 715,585
Policy acquisition costs and other insurance expenses........ 253,925 195,740 466,473 506,978
Restructuring charge......................................... - - 24,000 -
Interest..................................................... 15,599 19,989 31,092 42,769
Reversal of interest expense related to income tax........... (31,500) - (31,500) -
Other operating expenses..................................... 88,754 91,471 174,442 175,723
---------- -------- --------- -----------
1,031,608 674,672 1,761,023 1,441,055
---------- -------- --------- -----------
Income (loss) before income taxes and equity
in investee companies.................................... (295,599) 95,292 (274,988) 384,676
Income tax (provision) benefit............................... 137,700 (31,500) 132,100 (122,100)
Equity in investee companies................................. 1,008 7,097 28,298 10,607
---------- -------- --------- -----------
Income (loss) before extraordinary item and
cumulative effect of accounting change.................. (156,891) 70,889 (114,590) 273,183
Extraordinary item - early extinguishment of debt............ - (5,592) - (7,504)
Cumulative effect of change in accounting
for insurance assessments............................... - - (57,850) -
---------- -------- --------- -----------
Net income (loss)............................................ $ (156,891) $ 65,297 $(172,440) $ 265,679
========== ======== ========= ===========
Basic per share information:
Income (loss) before extraordinary item and
cumulative effect of accounting change.................. $ (1.38) $ .61 $ (1.00) $ 2.37
========== ======== ========= ===========
Net income (loss) ........................................... $ (1.38) $ .56 $ (1.50) $ 2.30
========== ======== ========= ===========
Diluted per share information:
Income (loss) before extraordinary item and
cumulative effect of accounting change.................. $ (1.38) $ .59 $ (1.00) $ 2.27
========== ======== ========= ===========
Net income (loss) ........................................... $ (1.38) $ .54 $ (1.50) $ 2.21
========== ======== ========= ===========
</TABLE>
See notes to consolidated financial statements
-2-
<PAGE>
RELIANCE GROUP HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
June 30 December 31
ASSETS 1999 1998
- -------------------------------------------------------------------------------------------------------------------
(In thousands, except per share amount)
<S> <C> <C>
Marketable securities:
Fixed maturities held for investment - at amortized cost
(quoted market $523,733 and $578,179)................................... $ 511,451 $ 539,848
Fixed maturities available for sale - at quoted market
(amortized cost $2,738,210 and $2,687,009).............................. 2,699,908 2,738,864
Equity securities - at quoted market (cost $311,616
and $262,986)........................................................... 799,356 754,543
Short-term investments..................................................... 236,280 383,658
Cash............................................................................ 60,265 81,612
Premiums and other receivables.................................................. 1,970,617 1,708,761
Reinsurance recoverables........................................................ 6,212,280 4,958,504
Investment in investee company.................................................. 421,293 415,654
Deferred policy acquisition costs............................................... 307,928 295,939
Excess of cost over fair value of net assets acquired, less
accumulated amortization.................................................. 215,074 219,854
Federal and foreign income taxes, including deferred taxes...................... 40,670 -
Other assets.................................................................... 796,997 678,102
------------ ------------
$ 14,272,119 $ 12,775,339
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
- -----------------------------------------------------------------------------------------------------------------
Unearned premiums............................................................... $ 2,304,334 $ 1,980,481
Unpaid claims and related expenses.............................................. 8,351,282 7,173,886
Accounts payable and accrued expenses........................................... 1,081,519 847,452
Reinsurance ceded premiums payable.............................................. 774,169 570,252
Federal and foreign income taxes, including deferred taxes...................... - 167,505
Term loans and short-term debt.................................................. 254,915 256,763
Debentures and notes............................................................ 455,980 463,480
------------ ------------
13,222,199 11,459,819
------------ ------------
Contingencies and commitments
Shareholders' equity:
Common stock, par value $.10 per share, 225,000
shares authorized, 116,158 and 116,076 shares
issued and outstanding................................................... 11,616 11,608
Additional paid-in capital................................................. 549,212 548,674
Retained earnings ......................................................... 241,355 432,096
Accumulated other comprehensive income..................................... 258,709 323,142
------------ ------------
1,060,892 1,315,520
Treasury stock, 1,331 shares............................................... (10,972) -
------------ ------------
1,049,920 1,315,520
------------ ------------
$ 14,272,119 $ 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
Stock Capital Earnings Investments Translation
- ----------------------------------------------------------------------------------------------------------------
(In thousands, except per share amount)
<S> <C> <C> <C> <C> <C>
Balance, January 1, 1999..................... $11,608 $548,674 $ 432,096 $355,759 $(32,617)
Issuance of common stock..................... 8 372
Transactions of investee
companies............................ 166 (3,374)
Net loss..................................... (172,440)
Dividends ($.16 per share)................... (18,301)
Depreciation after deferred
income taxes....................... (61,174)
Foreign currency translation................. 115
Purchase of treasury stock...................
------- -------- --------- -------- --------
Balance, June 30, 1999....................... $11,616 $549,212 $ 241,355 $291,211 $(32,502)
======= ======== ========= ======== ========
</TABLE>
Treasury Shareholders'
Stock Equity
- -----------------------------------------------------------------------------
(In thousands, except per share amount)
Balance, January 1, 1999..................... $ - $1,315,520
Issuance of common stock..................... 380
Transactions of investee
companies............................ (3,208)
Net loss..................................... (172,440)
Dividends ($.16 per share)................... (18,301)
Depreciation after deferred
income taxes....................... (61,174)
Foreign currency translation................. 115
Purchase of treasury stock................... (10,972) (10,972)
-------- -----------
Balance, June 30, 1999....................... $(10,972) $1,049,920
======== ===========
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 June 30
-----------------------------------------------------------------------
1999 1998
-------------------------------- --------------------------------
Income tax Income tax
Pretax effect After-tax Pretax effect After-tax
------ ------ --------- ------ ------ ---------
<S> <C> <C> <C> <C> <C> <C>
Net income (loss) $(156,891) $ 65,297
--------- ---------
Other comprehensive income (loss):
Unrealized holding gains $ 83,024 $ (29,058) 53,966 $ 7,136 $ (2,496) 4,640
Less: reclassification adjustment for
gains realized in net income (loss) (10,127) 3,781 (6,346) (42,103) 14,736 (27,367)
-------- --------- -------- --------- --------- ---------
Net unrealized gains (losses) recognized
in other comprehensive income (loss) 72,897 (25,277) 47,620 (34,967) 12,240 (22,727)
Foreign currency translation 1,709 (598) 1,111 (6,346) 2,221 (4,125)
-------- --------- --------- --------- --------- ---------
Total other comprehensive income (loss) $ 74,606 $ (25,875) 48,731 $ (41,313) $ 14,461 (26,852)
-------- --------- --------- --------- --------- ---------
Total comprehensive income (loss) $(108,160) $ 38,445
========= =========
<CAPTION>
Six Months Ended June 30
-----------------------------------------------------------------------
1999 1998
-------------------------------- --------------------------------
Income tax Income tax
Pretax effect After-tax Pretax effect After-tax
------ ------ --------- ------ ------ ---------
<S> <C> <C> <C> <C> <C> <C>
Net income (loss) $(172,440) $ 265,679
--------- ---------
Other comprehensive income (loss):
Unrealized holding gains (losses) $(75,164) $ 26,309 (48,855) $ 56,137 $(19,648) 36,489
Less: reclassification adjustment for
gains realized in net income (loss) (24,507) 8,814 (15,693) (93,743) 32,810 (60,933)
-------- --------- --------- --------- --------- ---------
Net unrealized losses recognized
in other comprehensive income (loss) (99,671) 35,123 (64,548) (37,606) 13,162 (24,444)
Foreign currency translation 177 (62) 115 (4,275) 1,496 (2,779)
-------- --------- --------- --------- --------- ---------
Total other comprehensive income (loss) $(99,494) $ 35,061 (64,433) $ (41,881) $ 14,658 (27,223)
-------- --------- --------- --------- --------- ---------
Total comprehensive income (loss) $(236,873) $ 238,456
========= =========
</TABLE>
See notes to consolidated financial statements
-5-
<PAGE>
RELIANCE GROUP HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENT OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
Six Months Ended June 30 1999 1998
- --------------------------------------------------------------------------------
(In thousands)
<S> <C> <C>
CASH FLOWS USED BY OPERATING ACTIVITIES ............... $ (51,344) $ (61,305)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of:
Fixed maturities available for sale ............... 302,348 173,432
Equity securities ................................. 20,364 355,182
Maturities and redemptions of:
Fixed maturities available for sale ............... 89,274 198,700
Fixed maturities held for investment .............. 31,063 44,918
Purchases of:
Fixed maturities available for sale ............... (413,414) (786,315)
Fixed maturities held for investment .............. (3,310) (14,318)
Equity securities ................................. (53,386) (107,729)
Decrease in short-term investments - net .............. 164,777 123,832
Proceeds from sales of subsidiaries ................... - 271,852
Other - net ........................................... (69,320) (35,743)
--------- ---------
68,396 223,811
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in term loans ................................ 61,722 130,000
Increase (decrease) in short-term debt - net .......... (3,000) 1,730
Repayments of term loans .............................. (60,728) (85,727)
Redemption of debentures and notes .................... (7,500) (187,677)
Issuance of common stock .............................. 380 5,170
Dividends ............................................. (18,301) (18,488)
Purchase of treasury stock ............................ (10,972) -
--------- ---------
(38,399) (154,992)
--------- ---------
Increase (decrease) in cash ........................... (21,347) 7,514
Cash, beginning of period ............................. 81,612 53,661
--------- ---------
Cash, end of period ................................... $ 60,265 $ 61,175
========= =========
Supplemental disclosures of cash flow information:
Interest paid ......................................... $ 26,900 $ 36,800
========= =========
Income taxes paid (refunded) .......................... $ (7,100) $ 43,500
========= =========
</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 June 30,
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 5 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.
Certain reclassifications have been made to the Company's prior year
consolidated financial statements to conform with the current year's unaudited
consolidated financial statements.
2. Increase in Loss Reserves
Net policy claims and settlement expenses for the second quarter and first six
months of 1999 include a provision of $227.2 million to increase net loss
reserves related to policies issued in prior periods, resulting from updated
information and subsequent developments. In addition, the Company also incurred
an expense of $103.2 million representing the cost of ceding to reinsurers
$172.1 million of losses under various stop loss treaties. Accordingly, for the
second quarter and first six months of 1999, the net effect of the increase in
net loss reserves and the amounts ceded to reinsurers was a pretax charge of
$330.4 million, of which $171.0 million was incurred at Reliance National,
$104.9 million at Reliance Insurance, $49.4 million at Reliance Reinsurance
and $4.1 million at Reliance Surety.
Regularly scheduled actuarial loss reserve reviews in the second quarter of
1999, revealed significant deterioration in a number of lines and programs. As a
result of this updated information, the Company hired an independent actuarial
firm to assist in its loss reserve reviews. The results of these reviews led
the Company to conclude that an increase in loss reserves in the second quarter
of 1999 was appropriate. The increase in loss reserves is due principally to
construction defect claims, higher than expected losses in property, marine and
aviation lines, deterioration in a program which wrote environmental coverages
and adverse development in the commercial automobile line. The increase in loss
reserves (before application of the aggregate stop loss treaties) was comprised
of the following:
-7-
<PAGE>
o $108.4 million for construction defect claims, arising mostly in California.
In the second quarter of 1999, the Company completed an actuarial study of these
claims, utilizing methodologies provided by the independent actuarial firm.
Actuarial analysis of these types of claims is particularly complex due to the
protracted claims settlement process, as well as a widening interpretation of
what constitutes insurance coverage that courts have applied to these cases. The
Company is now using an exclusion on construction policies that should mitigate
its exposure on recently issued policies.
o $106.7 million for property, marine and aviation lines. This is largely the
result of higher than expected losses reported to the Company during the second
quarter on assumed excess of loss reinsurance treaties. The Company has decided
to non-renew the majority of these treaties.
o $70.1 million for business written by a program manager, which provided
commercial automobile coverage to hazardous waste haulers and general liability
coverage to entities with environmental exposures. The Company's second quarter
1999 actuarial study of this program revealed recent price deterioration and an
unusual amount of recent loss activity. With the completion of the actuarial
study, the Company has taken steps to eliminate this program by no later than
year-end 1999.
o $114.1 million for adverse development in other lines of business, including
$77.2 million for commercial automobile where loss activity was higher than
expected.
3. Tax Settlement
In the second quarter of 1999, the Company reached settlement with the Internal
Revenue Service concerning various tax matters, including a 1980 asserted tax
deficiency with respect to investment tax credits. As a result of the
settlement, the Company recorded an after-tax benefit in the second quarter and
first six months of 1999 of $55.5 million, including the reversal of $31.5
million of previously accrued interest expense.
4. Restructuring Charge
During the first six months 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 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
-8-
<PAGE>
costs, of which $400,000 has been paid through June 30, 1999, related to the
termination of Reliance Direct employees, and $1.8 million of costs, of which
$750,000 has been paid through June 30, 1999, associated with the termination of
certain of Reliance Direct's third party service contracts. The Company
estimates that the remaining severance and terminated service contracts will be
substantially paid by the first quarter of 2000.
5. 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 an increase in
the net loss in the first six months of 1999 for the cumulative effect of the
change in accounting principle of $57.9 million ($.50 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.
-9-
<PAGE>
6. Equity In Investee Companies
The Company has entered into an agreement to sell its entire investment in
Zenith National Insurance Corp. ("Zenith"). The completion of the sale, which is
expected to occur in the fall of 1999, is subject to regulatory approval. As a
result of the pending sale, the Company wrote-down its investment in Zenith by
$9.3 million in the second quarter of 1999 and, effective July 1, 1999, will no
longer account for Zenith under the equity method of accounting. The write-down
is included in gain (loss) on sales of investments in the accompanying unaudited
consolidated statement of operations, and the Company's investment in Zenith has
been reclassified from investment in investee company to other assets in the
accompanying unaudited consolidated balance sheet.
The Company's equity in investee companies is as follows:
<TABLE>
<CAPTION>
Quarter Ended Six Months Ended
June 30 June 30
1999 1998 1999 1998
- -------------------------------------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C> <C>
LandAmerica Financial Group, Inc. (1)....................... $ 2,416 $4,516 $ 4,521 $ 6,322
Zenith (2).................................................. (1,408) 2,581 23,777 4,285
------- ------ ------- -------
$ 1,008 $7,097 $28,298 $10,607
======= ====== ======= =======
</TABLE>
(1) The equity in investee company for the six months ended June 30, 1998
includes equity earnings for the four month period ending June 30, 1998.
(2) The equity in investee company for the six months ended June 30, 1999
includes $24.9 million representing the Company's portion of a gain from the
sale of CalFarm Insurance Company by Zenith.
Summarized financial information for LandAmerica Financial Group, Inc. is as
follows:
<TABLE>
<CAPTION>
Six Months Ended June 30 1999 1998
- ---------------------------------------------------------------------------------------------------------------------------
(In thousands, except per share amounts)
<S> <C> <C>
Revenues............................................................................ $1,034,048 $762,621
Income before income taxes.......................................................... 50,755 51,496
Net income.......................................................................... 32,001 33,483
Net income per diluted share........................................................ 1.59 2.02
Summarized financial information for Zenith is as follows:
</TABLE>
<TABLE>
<CAPTION>
Six Months Ended June 30 1999 1998
- ---------------------------------------------------------------------------------------------------------------------------
(In thousands, except per share amounts)
<S> <C> <C>
Revenues............................................................................ $268,640 $310,262
Income (loss) before income taxes................................................... (5,149) 22,239
Net income (1)...................................................................... 101,000 14,400
Net income per diluted share (1).................................................... 5.89 .84
</TABLE>
(1) 1999 includes an after-tax gain of $104.3 million ($6.08 per diluted share)
from the sale of CalFarm Insurance Company in the first quarter.
-10-
<PAGE>
7. Reinsurance
The reconciliation of property and casualty insurance direct premiums to net
premiums is as follows (in thousands):
<TABLE>
<CAPTION>
Six Months Ended June 30
-----------------------------------------------------------------
1999 1998
-----------------------------------------------------------------
Premiums Premiums Premiums Premiums
Written Earned Written Earned
----------- ----------- ----------- ------------
<S> <C> <C> <C> <C>
Direct............................. $ 2,409,923 $ 2,149,037 $ 1,983,419 $ 1,800,128
Assumed............................ 708,602 608,664 345,231 288,396
Ceded.............................. (1,759,770) (1,582,941) (1,118,461) (1,007,409)
----------- ----------- ----------- -----------
Net Premiums....................... $ 1,358,755 $ 1,174,760 $ 1,210,189 $ 1,081,115
=========== =========== =========== ===========
</TABLE>
The reconciliation of property and casualty insurance gross policy claims and
settlement expenses to net policy claims and settlement expenses is as follows
(in thousands):
<TABLE>
<CAPTION>
Six Months Ended June 30
------------------------------
1999 1998
------------------------------
<S> <C> <C>
Gross.................................................................. $ 2,693,857 $1,410,198
Reinsurance recoveries................................................. (1,597,341) (701,289)
----------- ----------
Net policy claims and settlement expenses.............................. $ 1,096,516 $ 708,909
=========== ==========
</TABLE>
-11-
<PAGE>
8. Earnings Per Share
The basic and diluted per share reconciliations of income (loss) from continuing
operations to net income (loss) is as follows:
<TABLE>
<CAPTION>
Quarter Ended Six Months Ended
June 30 June 30
1999 1998 1999 1998
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Basic income (loss) per share:
Income (loss) before extraordinary item and
cumulative effect of accounting change......................... $(1.38) $.61 $(1.00) $2.37
Extraordinary item - early extinguishment of debt................. - (.05) - (.07)
Cumulative effect of change in accounting
for insurance assessments..................................... - - (.50) -
------ ---- ------ -----
Net income (loss)................................................. $(1.38) $ .56 $(1.50) $2.30
====== ===== ====== =====
Diluted income (loss) per share:
Income (loss) before extraordinary item and
cumulative effect of accounting change......................... $(1.38) $ .59 $(1.00) $2.27
Extraordinary item - early extinguishment of debt................. - (.05) - (.06)
Cumulative effect of change in accounting
for insurance assessments...................................... - - (.50) -
------ ---- ------ -----
Net income (loss)................................................. $(1.38) $ .54 $(1.50) $2.21
====== ===== ====== =====
</TABLE>
-12-
<PAGE>
The reconciliation of the basic to diluted per share information is as follows:
<TABLE>
<CAPTION>
Quarter Ended June 30 1999 1998
- ---------------------------------------------------------------------------------------------------------------------------
Per Share Per Share
Loss Shares Amount Income Shares Amount
- ---------------------------------------------------------------------------------------------------------------------------
(In thousands, except per share amounts)
<S> <C> <C> <C> <C> <C> <C>
Basic income (loss)
per share:
Income (loss) before
extraordinary
item and
cumulative
effect of
accounting
change $(156,891) 113,617 $(1.38) $70,889 115,603 $ .61
Effect of dilutive ====== =====
securities:
Options(1) - - - 4,966
--------- ------- ------- -------
Diluted income (loss)
per share:
Income (loss) before
extraordinary
item and
cumulative
effect of
accounting
change $(156,891) 113,617 $(1.38) $70,889 120,569 $ .59
========= ======= ====== ======= ======= =====
</TABLE>
<TABLE>
<CAPTION>
Six Months Ended June 30 1999 1998
- ---------------------------------------------------------------------------------------------------------------------------
Per Share Per Share
Loss Shares Amount Income Shares Amount
- ---------------------------------------------------------------------------------------------------------------------------
(In thousands, except per share amounts)
<S> <C> <C> <C> <C> <C> <C>
Basic income (loss)
per share:
Income (loss) before
extraordinary
item and
cumulative
effect of
accounting
change $(114,590) 114,603 $(1.00) $273,183 115,301 $2.37
====== =====
Effect of dilutive
securities:
Options(1) - - - 4,830
--------- ------- -------- -------
Diluted income (loss)
per share:
Income (loss) before
extraordinary
item and
cumulative
effect of
accounting
change $(114,590) 114,603 $(1.00) $273,183 120,131 $2.27
========= ======= ====== ======== ======= =====
</TABLE>
(1) For the quarter and six months ended June 30, 1999, the effect of options
has been excluded since their inclusion would be anti-dilutive.
-13-
<PAGE>
9. Business Segment Information
<TABLE>
<CAPTION>
Quarter Ended Six Months Ended
June 30 June 30
1999 1998 1999 1998
- ------------------------------------------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C> <C>
Revenues:
Property and casualty insurance
Premiums earned:
Reliance National (1) $ 235,950 $ 251,946 $ 485,931 $ 480,009
Reliance Insurance 164,607 180,065 358,001 356,610
Reliance Reinsurance 62,117 45,195 101,087 88,861
Reliance Surety 51,777 47,800 101,391 93,670
Reliance Personal (1) 71,255 35,595 128,300 61,591
Other 60 (35) 50 374
--------- --------- ---------- ----------
585,766 560,566 1,174,760 1,081,115
Net investment income 71,270 75,072 144,458 144,424
Gain (loss) on sales of investments (2,762) 53,986 6,415 105,633
Gain on sales of subsidiaries - - - 194,080
--------- --------- ---------- ----------
654,274 689,624 1,325,633 1,525,252
--------- --------- ---------- ----------
Title insurance
Premiums earned - - - 139,132
Net investment income - - - 5,276
Gain on sales of investments - - - 305
--------- --------- ---------- ----------
- - - 144,713
--------- --------- ---------- ----------
Information technology consulting 63,056 60,397 127,008 117,592
Other 18,679 19,943 33,394 38,174
--------- --------- ---------- ----------
$ 736,009 $769,964 $1,486,035 $1,825,731
========= ======== ========== ==========
Income (loss) before income taxes and
equity in investee companies:
Property and casualty insurance
Underwriting gain (loss):
Reliance National (1) $(207,302) $ (4,499) $ (212,759) $ (8,764)
Reliance Insurance (113,139) (10,923) (123,720) (24,668)
Reliance Reinsurance (49,530) 365 (50,565) (1,046)
Reliance Surety 6,826 12,249 17,812 25,816
Reliance Personal (1) (10,187) (1,383) (45,092) (3,538)
Other (1,504) (426) (1,105) 238
--------- --------- ---------- ----------
(374,836) (4,617) (415,429) (11,962)
Net investment income 71,270 75,072 144,458 144,424
Gain (loss) on sales of investments (2,762) 53,986 6,415 105,633
Gain on sales of subsidiaries - - - 194,080
--------- --------- ---------- ----------
(306,328) 124,441 (264,556) 432,175
Title insurance - - - 11,286
Information technology consulting 4,678 5,046 9,556 9,233
Other 6,051 (34,195) (19,988) (68,018)
--------- --------- ---------- ----------
$(295,599) $ 95,292 $ (274,988) $ 384,676
========= ========= ========== ==========
</TABLE>
(1) In the first six months 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 4 to the unaudited consolidated financial statements.
-14-
<PAGE>
10. Sale of Subsidiaries
In the first six months 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 ($1.11 per
diluted share) was recognized in the first six months of 1998. The pretax
deferred gain of $158.8 million is included in "accounts payable and accrued
expenses" in the accompanying unaudited 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 9 to the unaudited
consolidated financial statements for business segment information regarding the
title insurance operations.
In addition, in the first six months 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.
11. 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"). In July 1999, the
Company received a copy of a letter from one of its retrocessional
reinsurers, Sun Life Assurance Company of Canada ("Sun Life"), purporting
to demand arbitration against Unicover Managers, Inc. and several Unicover
pools and facilities. According to the letter, in the arbitration, Sun Life
will seek, among other things, rescission of retrocessional reinsurance
contracts with the Unicover pool and facilities, including the Reliance
facility, based on alleged but unspecified material misrepresentations and
nondisclosures by Unicover. The Company believes that the amount of the
ultimate losses which Sun Life seeks to avoid are substantial and would be
material to the Company's financial condition if the Company's reinsurance
contracts with Sun Life were found to be unenforceable. Based on its review
and assessment of the information currently available to it and after
consultation with counsel, the Company believes that it has valid and
enforceable retrocessional reinsurance contracts with Sun Life and its
other reinsurers and that the eventual resolution of this matter will not
have a material adverse effect on its consolidated financial condition.
There is no assurance, however, that future developments may not cause the
Company to change its belief concerning the effect of this matter on its
consolidated financial condition or that the matter may not have such an
effect on results of operations in a given period or periods.
-15-
<PAGE>
12. Other Contingencies
The Company is subject to the litigation set forth below:
(a) In February 1999, the Company received a 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 decision, which the Company has appealed, 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 partial nature of the decision and the absence of reliable data
regarding the amount of recent and pending 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 have been
scheduled to determine the financial implications of the decision, the
outcome of which may also be appealed.
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 million in liability coverage plus associated defense and
loss adjustment expenses, under the Company's policies.
The Company believes that the decision is incorrect and is based on flawed
statistical data. 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.
-16-
<PAGE>
(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 6 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. 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.
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.
-17-
<PAGE>
RELIANCE GROUP HOLDINGS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
================================================================================
Overview
The Company incurred an operating loss of $154.9 million ($1.36 per diluted
share) and $143.4 million ($1.25 per diluted share) in the second quarter
and first six months of 1999. The Company's operating results in 1999
contain several significant items. First, in the second quarter of 1999,
the Company recorded an after-tax charge of $147.7 million ($1.30 per
diluted share) for increasing net loss reserves for policies issued in
prior periods, which resulted from updated information and subsequent
developments, and an after-tax charge of $67.1 million ($.59 per diluted
share) representing the cost of ceding to reinsurers losses under various
stop loss treaties. Also, in the second quarter of 1999, the Company
settled various federal income tax issues which resulted in an after-tax
benefit of $55.5 million ($.49 per diluted share). In addition, in the
first six months of 1999, the Company recorded an after-tax restructuring
charge of $15.6 million ($.14 per diluted share) which resulted from the
consolidation of the Company's non-standard automobile operation and
Reliance Direct into a new operating unit, Reliance Personal. (See notes 2,
3 and 4 to the unaudited consolidated financial statements for further
discussion of the increase in net loss reserves, settlement of tax issues
and restructuring charge, respectively.) Excluding the effects of these
items on 1999 operating results, the Company's operating income declined to
$4.4 million ($.04 per diluted share) and $31.5 million ($.27 per diluted
share) in the second quarter and first six months of 1999, from $35.8
million ($.30 per diluted share) and $69.3 million ($.58 per diluted
share) in the corresponding 1998 periods.
The net loss in the second quarter of 1999 was $156.9 million ($1.38 per
diluted share) which includes an after-tax loss on sales of investments of
$2.0 million ($.02 per diluted share), including an after-tax write-down of
$6.3 million of the Company's investment in Zenith National Insurance Corp.
("Zenith") to reflect the pending sale of the Company's entire interest in
Zenith. The net loss for the first six months of 1999 was $172.4 million
($1.50 per diluted share) which included (i) an after-tax charge of $57.9
million ($.50 per diluted share) representing the cumulative effect of
adopting the American Institute of Certified Public Accountants' Statement
of Position No. 97-3, "Accounting by Insurance and Other Enterprises for
Insurance- Related Assessments" ("SOP"), (ii) an after-tax gain of $24.9
million ($.22 per diluted share) representing the pro rata portion of a
gain realized by Zenith on the sale of its CalFarm subsidiary, and (iii) an
after-tax gain on sales of investments of $3.9 million ($.03 per diluted
share). Net income in the second quarter and first six months of 1998 was
$65.3 million ($.54 per diluted share) and $265.7 million ($2.21 per
diluted share) which included after-tax gains on sales of investments of
$35.1 million ($.29 per diluted share) and $68.9 million ($.57 per diluted
share), respectively, and after-tax extraordinary charges of $5.6 million
($.05 per diluted share) and $7.5 million ($.06 per diluted share),
respectively, related to the early extinguishment of debt. Net income in
the first six months of 1998 also included after-tax gains on sales of
subsidiaries of $135.0 million ($1.12 per diluted share) primarily
resulting from the sale of the Company's title insurance operations. See
notes 5 and 10 to the unaudited consolidated financial statements for
further discussion of the adoption of the SOP and the sale of subsidiaries.
-18-
<PAGE>
Property and Casualty Insurance Operations
The consolidated property and casualty insurance underwriting loss was
$374.8 million and $415.4 million in the second quarter and first six
months of 1999, which included a pretax charge of $330.4 million to
increase net loss reserves and the cost of ceding to reinsurers
losses under various stop loss treaties.
Regularly scheduled actuarial loss reserve reviews in the second quarter
of 1999, revealed significant deterioration in a number of lines and
programs. As a result of this updated information, the Company hired an
independent actuarial firm to assist in its loss reserve reviews. The
results of these reviews led the Company to conclude that an increase in
loss reserves in the second quarter of 1999 was appropriate. The increase
in loss reserves is due principally to construction defect claims, higher
than expected losses in property, marine and aviation lines, deterioration
in a program which wrote environmental coverages and adverse development in
the commercial automobile line. The increase in loss reserves (before
application of the aggregate stop loss treaties) was comprised of the
following:
o $108.4 million for construction defect claims, arising mostly in
California. In the second quarter of 1999, the Company completed an
actuarial study of these claims, utilizing methodologies provided by the
independent actuarial firm. Actuarial analysis of these types of claims is
particularly complex due to the protracted claims settlement process, as
well as a widening interpretation of what constitutes insurance coverage
that courts have applied to these cases. The Company is now using an
exclusion on construction policies that should mitigate its exposure on
recently issued policies.
o $106.7 million for property, marine and aviation lines. This is largely
the result of higher than expected losses reported to the Company during
the second quarter on assumed excess of loss reinsurance treaties. The
Company has decided to non-renew the majority of these treaties.
o $70.1 million for business written by a program manager, which provided
commercial automobile coverage to hazardous waste haulers and general
liability coverage to entities with environmental exposures. The Company's
second quarter 1999 actuarial study of this program revealed recent price
deterioration and an unusual amount of recent loss activity. With the
completion of the actuarial study, the Company has taken steps to eliminate
this program by no later than year-end 1999.
o $114.1 million for adverse development in other lines of business,
primarily $77.2 million for commercial automobile where loss activity was
higher than expected.
Excluding the $330.4 million pretax charge, the underwriting loss in the
second quarter and first six months of 1999 was $44.4 million and $85.0
million compared to underwriting losses of $4.6 million and $12.0 million
in the corresponding 1998 periods. The increased underwriting loss in the
second quarter of 1999, when compared to the second quarter of 1998,
reflects increased losses in the environmental program and in
transportation and property lines. The increased underwriting loss for the
first six months of 1999, when compared to the corresponding prior year
period, also reflects the $24 million restructuring charge which resulted
from the consolidation of the Company's non-standard automobile insurance
operation and Reliance Direct into a new operating unit, Reliance Personal.
Catastrophe claims also increased in 1999 to $7.7 million and $20.8 million
in the second quarter and first six months of 1999 from $3.7 million and
$8.5 million in the corresponding 1998 periods.
-19-
<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 June 30
-----------------------------------------------------------
1999 1998
-----------------------------------------------------------
Excludes effect of reserve
strengthening and cost
of ceding losses (2)
--------------------------
<S> <C> <C> <C>
Net Premiums Written
Reliance National (1) $ 243,125 $295,825 $242,789
Reliance Insurance 169,909 194,409 192,973
Reliance Reinsurance 77,698 88,698 57,206
Reliance Surety 59,537 59,537 52,353
Reliance Personal (1) 91,318 91,318 53,373
Other 44 44 (277)
--------- -------- --------
$ 641,631 $729,831 $598,417
========= ======== ========
Net Premiums Earned
Reliance National (1) $ 235,950 $288,650 $251,946
Reliance Insurance 164,607 189,107 180,065
Reliance Reinsurance 62,117 73,117 45,195
Reliance Surety 51,777 51,777 47,800
Reliance Personal (1) 71,255 71,255 35,595
Other 60 60 (35)
--------- -------- --------
$ 585,766 $673,966 $560,566
========= ======== ========
Underwriting Gain (Loss)
Reliance National (1) $(207,302) $(36,302) $ (4,499)
Reliance Insurance (113,139) (8,239) (10,923)
Reliance Reinsurance (49,530) (130) 365
Reliance Surety 6,826 10,926 12,249
Reliance Personal (1) (10,187) (10,187) (1,383)
Other (1,504) (504) (426)
--------- -------- --------
$(374,836) $(44,436) $ (4,617)
========= ======== ========
Combined Ratios (3)
Reliance National (1) 187.1% 112.1% 101.8%
Reliance Insurance 168.0% 103.7% 105.9%
Reliance Reinsurance 179.6% 100.1% 99.6%
Reliance Surety 86.8% 78.9% 74.5%
Reliance Personal (1) 114.1% 114.1% 103.9%
Consolidated 163.4% 106.2% 100.8%
</TABLE>
(1) In the first six months 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 $227.2 million pretax charge for increasing net loss
reserves and $103.2 million pretax charge for amounts ceded to
reinsurers for assuming losses under various stop loss treaties.
(3) Calculated on a GAAP basis, after policyholders' dividends.
Combined ratios for Other are not presented since they are not
meaningful.
-20-
<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>
Six Months Ended June 30
-----------------------------------------------------------
1999 1998
-----------------------------------------------------------
Excludes effect of reserve
strengthening and cost
of ceding losses (2)
--------------------------
<S> <C> <C> <C>
Net Premiums Written
Reliance National (1) $ 595,165 $ 647,865 $ 550,137
Reliance Insurance 356,840 381,340 361,271
Reliance Reinsurance 132,543 143,543 111,986
Reliance Surety 103,409 103,409 91,795
Reliance Personal (1) 170,774 170,774 94,958
Other 24 24 42
---------- ---------- ----------
$1,358,755 $1,446,955 $1,210,189
========== ========== ==========
Net Premiums Earned
Reliance National (1) $ 485,931 $ 538,631 $ 480,009
Reliance Insurance 358,001 382,501 356,610
Reliance Reinsurance 101,087 112,087 88,861
Reliance Surety 101,391 101,391 93,670
Reliance Personal (1) 128,300 128,300 61,591
Other 50 50 374
---------- ---------- ----------
$1,174,760 $1,262,960 $1,081,115
========== ========== ==========
Underwriting Gain (Loss)
Reliance National (1) $ (212,759) $ (41,759) $ (8,764)
Reliance Insurance (123,720) (18,820) (24,668)
Reliance Reinsurance (50,565) (1,165) (1,046)
Reliance Surety 17,812 21,912 25,816
Reliance Personal (1) (45,092) (45,092) (3,538)
Other (1,105) (105) 238
---------- ---------- ----------
$ (415,429) $ (85,029) $ (11,962)
========== ========== ===========
Combined Ratios (3)
Reliance National (1) 143.3% 107.3% 101.6%
Reliance Insurance 134.1% 104.5% 106.5%
Reliance Reinsurance 150.0% 101.0% 101.2%
Reliance Surety 82.5% 78.4% 72.3%
Reliance Personal (1) 135.1% 135.1% 105.7%
Consolidated 134.9% 106.3% 100.9%
</TABLE>
(1) In the first six months 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 $227.2 million pretax charge for increasing net loss
reserves and $103.2 million pretax charge for amounts ceded to
reinsurers for assuming losses under various stop loss treaties.
(3) Calculated on a GAAP basis, after policyholders' dividends.
Combined ratios for Other are not presented since they are not
meaningful.
-21-
<PAGE>
Reliance National
Net premiums written were essentially flat in the second quarter of 1999,
when compared to the corresponding prior year period, and net premiums
earned declined, due to the ceding of $52.7 million of premiums in 1999 to
various stop loss treaties. Absent the effect of cessions, net premiums
increased due to higher writings of foreign sourced premiums, as well as
increased writings in Accident and Health and from the internet based
marketing of workers' compensation business. These factors also caused the
increase in net premiums written and net premiums earned during the first
six months of 1999 when compared to the first six months of 1998.
The increase in the underwriting loss in 1999 resulted from the second
quarter increase in net loss reserves and the cost of ceding losses to
reinsurers, which increased the underwriting loss by $171.0 million, higher
losses in an environmental program as well as increased losses in property,
marine and aviation lines. Many of these programs and lines are being
curtailed and, as a result, Reliance National expects premium writings will
decline in the second half of 1999 when compared to the first half of
1999.
Reliance Insurance
The decline in net premiums written and net premiums earned in the second
quarter of 1999, when compared to the corresponding prior year period,
reflects the ceding of $24.5 million of premiums in 1999 to various stop
loss treaties. Absent the effect of cessions, net premiums written in the
second quarter and first six months of 1999 grew by 1% and 6%, reflecting
increased writings in the Commercial Accounts and Large Accounts divisions,
particularly in workers' compensation. These increases were offset by the
decision not to renew certain under-performing property and marine lines of
business, which has resulted in lower premium writings in the Specialty
division.
The increase in the underwriting loss in the second quarter and first six
months of 1999, when compared to the corresponding prior year periods,
resulted from the second quarter 1999 increase in net loss reserves and the
cost of ceding losses to reinsurers which increased the underwriting loss
by $104.9 million. Absent this effect, Reliance Insurance's underwriting
results improved in 1999 reflecting price increases in many of its lines of
business and favorable results in workers' compensation.
Reliance Reinsurance
The increase in net premiums written and net premiums earned in the second
quarter and first six months of 1999, when compared to the corresponding
prior year periods, reflects premiums generated by new reinsurance treaties
and growth in agricultural reinsurance. These increases were partially
offset by the ceding of $11.0 million of premiums to various stop loss
treaties in the second quarter of 1999.
The increase in the underwriting loss in the second quarter and first six
months of 1999, when compared to the corresponding 1998 periods, resulted
from the second quarter 1999 increase in net loss reserves, primarily in
marine and aviation lines of business and the cost of ceding losses to
reinsurers which increased the underwriting loss by $49.4 million. Reliance
Reinsurance will not renew its marine and aviation lines of business.
-22-
<PAGE>
Reliance Surety
The increase in net premiums written and net premiums earned in the second
quarter and first six months of 1999, when compared to the corresponding
prior year periods, reflects new writings in large contractor surety
business.
The increase in the underwriting loss in the second quarter and first six
months of 1999, when compared to the corresponding 1998 periods, reflects
the second quarter 1999 increase in net loss reserves which increased the
underwriting loss by $4.1 million.
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 million restructuring charge was recorded by Reliance
Personal in the first quarter of 1999. See note 4 to the unaudited
consolidated financial statements for further discussion.
The increase in net premiums written and net premiums earned in the second
quarter and first six months of 1999, when compared to the corresponding
1998 periods, resulted from the continued growth in Reliance Personal's
non-standard automobile writings.
The increase in the underwriting loss in the second quarter of 1999, when
compared to the second quarter of 1998, reflects increased losses by the
direct standard automobile operation. Reliance Personal also experienced
increased underwriting losses in its non-standard automobile business as a
result of weather-related losses and increased losses in certain states.
The increase in underwriting loss in the first half of 1999, when compared
to the first half of 1998, also reflects the $24 million restructuring
charge.
Property and Casualty Insurance Investment Results
Net investment income of the property and casualty insurance operations
declined in the second quarter of 1999 to $71.3 million from $75.1 million
in the corresponding 1998 period. The decrease resulted from a decline in
the average size of the fixed maturity portfolio due, in part, to
utilization of a portion of the investment portfolio to retire certain
corporate debt in the second quarter of 1998. Net investment income for the
first six months of 1999 was $144.5 million, essentially flat with net
investment income in the first six months of 1998 of $144.4 million.
Loss on sales of investments in the second quarter of 1999 was $2.8 million
which included a write-down of $9.3 million of the Company's investment in
Zenith to reflect the pending sale of the Company's entire investment in
Zenith. Gains on sales of investments for the first six months of 1999 were
$6.4 million. Gains on sales of investments in the second quarter and first
six months of 1998 were $54.0 million and $105.6 million resulting from
sales of equity securities.
Investment Portfolio
At June 30, 1999, the Company's investment portfolio aggregated $3.84
billion (at cost), of which 92% was invested in fixed maturities and 8% was
invested in equity securities. The
-23-
<PAGE>
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 June 30, 1999, the carrying values of
non-investment grade securities and securities not rated by Standard and
Poor's were $482.1 million (14% of the fixed income portfolio) and $213.4
million (6% of the fixed income portfolio), respectively. Substantially all
of the Company's non-investment grade and non-rated securities are
classified as available for sale.
Information Technology 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 $63.1
million and $127.0 million in the second quarter and first six months of
1999 from $60.4 million and $117.6 million in the corresponding 1998
periods resulting from an increase in higher margin solutions business.
Gross margins (revenues less cost of services) were $21.7 million and $42.8
million, or 34% of revenues, in the second quarter and first six months of
1999 compared to $19.1 million and $36.2 million, or 32% and 31% of
revenues, in the corresponding prior year periods. Pretax income declined
to $4.7 million in the second quarter of 1999 from $5.0 million in the
second quarter of 1998 resulting from higher selling, general and
administrative expenses associated with investments in technical and sales
capabilities, and continued domestic geographic expansion. Pretax income
increased in the first six months of 1999 to $9.6 million from $9.2 million
in the corresponding prior year period, resulting from increased gross
margins.
Interest Expense
Interest expense declined to $15.6 million and $31.1 million in the second
quarter and first six months of 1999 from $20.0 million and $42.8 million
in the corresponding 1998 periods. These declines resulted from lower
levels of debt outstanding. Since January 1, 1998, the Company has reduced
its debt by $192 million.
Equity in Investee Companies
Equity in investee companies was $1.0 million in the second quarter of 1999
compared to $7.1 million in the corresponding 1998 period. The decline in
equity in investee companies resulted from lower earnings from both Zenith
and LandAmerica Financial Group, Inc. Equity in investee companies for the
first six months of 1999 was $28.3 million which included a gain of $24.9
million representing the Company's pro rata portion of a gain realized by
Zenith. Equity in investee companies for the first six months of 1998 was
$10.6 million.
The Company has entered into an agreement to sell its entire investment in
Zenith. The completion of the sale, which is expected to occur in the fall
of 1999, is subject to regulatory approval. As a result of the pending
sale, the Company wrote-down its investment in Zenith by $9.3 million and,
effective July 1, 1999, will no longer account for Zenith under the equity
method of accounting. The Company's investment in Zenith has been
reclassified from
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<PAGE>
investment in investee company to other assets in the accompanying
unaudited consolidated balance sheet.
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 $73.4
million for the six-month period ending June 30, 1999. Dividends paid by
Reliance Insurance Company were $66.0 million in the first six months 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 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 half 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 June 30, 1999, Reliance Insurance Company had
$277 million of cash and short-term investments.
For the six months ended June 30, 1999, the Company utilized $51.3 million
of cash flow for operating activities compared to $61.3 million in the
corresponding 1998 period. Operating cash flow for the first six months of
1998 was reduced by income tax payments resulting from higher amounts of
taxable income due, in part, to gains on sales of subsidiaries and
investments. In conjunction with the tax settlement described in note 3 to
the unaudited consolidated financial statements, the Company will make a
$42.6 million payment to the Internal Revenue Service in the third quarter
of 1999. This payment will adversely affect third quarter 1999 operating
cash flows.
The Company generated $68.4 million of cash flow from investing activities
for the six months ended June 30, 1999 primarily from the net sales of
marketable securities. The Company generated $223.8 million of cash flow
from investing activities for the six months ended June 30, 1998, primarily
from the sales of subsidiaries partially offset by net purchases of
marketable securities.
-25-
<PAGE>
For the six months ended June 30, 1999, the Company used $38.4 million of
cash flow for financing activities, primarily for the purchase of treasury
stock and payment of dividends. For the six months ended June 30, 1998, the
Company used $155.0 million of cash flow for financing activities. During
the first six months of 1998, the Company purchased $178.3 million of its
outstanding senior notes and senior subordinated debentures utilizing a
special dividend from Reliance Insurance Company and borrowings under its
revolving credit facility. These purchases resulted in an after-tax
extraordinary charge of $7.5 million, net of a $4.0 million tax benefit.
The Company has a revolving credit facility with various banks providing
for aggregate maximum outstanding borrowings of $100 million. At June 30,
1999, borrowings aggregating $55 million were outstanding under the
facility. The Company had $710.9 million of debt outstanding at June 30,
1999, with $220.7 million maturing within one year and an additional $284.8
million maturing in the last half of 2000. The Company expects to repay
these amounts on or prior to their existing maturities by refinancing.
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.
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
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<PAGE>
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, employee benefit
providers, government and private agencies to which the Company
electronically transmits, and from which the Company electronically
receives, financial and other information, and to financial institutions
and other vendors with which the Company does business. The Company has
substantially completed its initial follow-up with third parties who either
had not responded to such questionnaires or who had provided insufficiently
detailed or inadequate responses to such questionnaires. The Company has
conducted, and will conduct, selected 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's business units are still in the process of
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 being
completed and reviewed by the Company's year 2000 program office and this
process is expected to be completed in the third quarter of 1999.
Costs. Through June 30, 1999, the Company had incurred $6.2 million to
address the year 2000 issue and expects to incur additional costs of $1.2
million through year-end 2000. The Company has increased its estimate of
total expected costs by $650,000. This increase is attributable in part to
increases in the costs of the second round of compliance assurance testing
which the Company is conducting, as well as additional remediation costs.
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 has received notice of a small number of potential claims, and
actual claims, from its insureds, and is reviewing its exposures, if any,
under these policies. The Company is continuing to review its exposures
under its other 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
-27-
<PAGE>
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.
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<PAGE>
RELIANCE GROUP HOLDINGS, INC. AND SUBSIDIARIES
PART II. OTHER INFORMATION
------------------------------------------------------------------------------
Item 4. Submission of Matters to a Vote of Security Holders.
On May 13, 1999, at the annual meeting of stockholders of the
Company, the stockholders elected the thirteen directors set forth
below and voted upon and authorized the adoption by the Company of
the Reliance Group Holdings, Inc. Amended and Restated 1998 Stock
Option Plan. The number of votes cast for, against (where
applicable) or withheld, as well as the number of abstentions and
broker non-votes (where applicable), were as follows:
Proposal - Election of Directors:
<TABLE>
<CAPTION>
For Withheld
--- --------
<S> <C> <C>
Saul P. Steinberg 102,001,007 1,480,953
Robert M. Steinberg 102,000,914 1,481,046
George R. Baker 102,001,310 1,480,650
George E. Bello 102,001,310 1,480,650
Dennis A. Busti 102,001,310 1,480,650
Lowell C. Freiberg 102,001,310 1,480,650
Dr. Thomas P. Gerrity 102,001,310 1,480,650
Jewell Jackson McCabe 102,001,310 1,480,650
Irving Schneider 101,998,860 1,483,100
Bernard L. Schwartz 101,996,540 1,485,420
Richard E. Snyder 101,893,410 1,588,550
Dr. Bruce E. Spivey 102,000,869 1,481,091
James E. Yacobucci 102,001,310 1,480,650
</TABLE>
Proposal - Approval of the Reliance Group Holdings, Inc. Amended
and Restated 1998 Stock Option Plan:
For: 80,605,946
Against: 21,920,709
Abstain: 955,303
Broker Non-Votes: 2
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
June 30, 1999.
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<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
RELIANCE GROUP HOLDINGS, INC.
------------------------------
(Registrant)
Date: August 16, 1999 /s/ George E. Bello
--------------- ------------------------------
George E. Bello
Executive Vice President and
Controller
(Chief Accounting Officer)
-30-
<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>
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<EXCHANGE-RATE> 1.000
<DEBT-HELD-FOR-SALE> 2,699,908
<DEBT-CARRYING-VALUE> 511,451
<DEBT-MARKET-VALUE> 523,733
<EQUITIES> 799,356
<MORTGAGE> 0
<REAL-ESTATE> 151,623
<TOTAL-INVEST> 4,398,618
<CASH> 60,265
<RECOVER-REINSURE> 6,212,280
<DEFERRED-ACQUISITION> 307,928
<TOTAL-ASSETS> 14,272,119
<POLICY-LOSSES> 8,351,282
<UNEARNED-PREMIUMS> 2,304,334
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 710,895
0
0
<COMMON> 11,616
<OTHER-SE> 1,038,304
<TOTAL-LIABILITY-AND-EQUITY> 14,272,119
1,174,760
<INVESTMENT-INCOME> 144,458
<INVESTMENT-GAINS> 6,415
<OTHER-INCOME> 160,402
<BENEFITS> 1,096,516
<UNDERWRITING-AMORTIZATION> 466,473
<UNDERWRITING-OTHER> 0
<INCOME-PRETAX> (274,988)
<INCOME-TAX> (132,100)
<INCOME-CONTINUING> (114,590)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> (57,850)
<NET-INCOME> (172,440)
<EPS-BASIC> (1.50)
<EPS-DILUTED> (1.50)
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
