<PAGE>
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended June 30, 2000
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, 2000, 114,835,000 shares of common stock of Reliance Group
Holdings, Inc. were outstanding.
<PAGE>
RELIANCE GROUP HOLDINGS, INC. AND SUBSIDIARIES
I N D E X
<TABLE>
<CAPTION>
Page
No.
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PART I. FINANCIAL INFORMATION
<S> <C>
Item 1. Financial Statements
Consolidated Statement of Operations for the Quarters and Six-Month
Periods Ended June 30, 2000 and 1999 (Unaudited)........................................ 2
Consolidated Balance Sheet at June 30, 2000 (Unaudited) and
December 31, 1999....................................................................... 3
Consolidated Statement of Changes in Shareholders' Equity for the
Six-Month Period Ended June 30, 2000 (Unaudited)........................................ 4
Consolidated Statement of Comprehensive Loss for the
Quarters and Six-Month Periods Ended
June 30, 2000 and 1999 (Unaudited)...................................................... 5
Consolidated Condensed Statement of Cash Flows for the Six-Month
Periods Ended June 30, 2000 and 1999 (Unaudited)........................................ 6
Notes to Consolidated Financial Statements (Unaudited)...................................... 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations...................................................... 19
PART II. OTHER INFORMATION, AS APPLICABLE................................................................. 27
SIGNATURES .................................................................................... 29
</TABLE>
<PAGE>
RELIANCE GROUP HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
Quarter Ended Six Months Ended
June 30 June 30
2000 1999 2000 1999
----------------------------------------------------------------------------------------------------------------------------------
(In thousands, except per share amounts)
<S> <C> <C> <C> <C>
Revenues:
Premiums earned ..................................... $ 568,904 $ 585,766 $ 1,186,914 $ 1,174,760
Net investment income ............................... 63,634 71,270 130,373 144,458
Gain (loss) on sales of investments ................. 88,699 (2,762) 368,748 6,415
Gain on sale of surety and fidelity operation ....... 374,192 - 374,192 -
Other ............................................... 60,149 81,735 118,584 160,402
--------------- ------------------ ------------------ ---------------
1,155,578 736,009 2,178,811 1,486,035
--------------- ------------------ ------------------ ---------------
Claims and expenses:
Policy claims and settlement expenses ............... 962,146 704,830 1,455,090 1,096,516
Policy acquisition costs and other
insurance expenses ............................ 219,747 253,925 440,409 466,473
Interest ............................................ 14,414 15,599 29,189 31,092
Restructuring charge ................................ 75,144 - 75,144 24,000
Write-off of excess of costs over fair value
of net assets acquired ......................... 195,552 - 195,552 -
Reversal of interest expense related to income tax .. - (31,500) - (31,500)
Other operating expenses ............................ 73,740 88,754 148,275 174,442
--------------- ------------------ ------------------ ---------------
1,540,743 1,031,608 2,343,659 1,761,023
--------------- ------------------ ------------------ ---------------
Loss before income taxes and equity
in investee companies ........................... (385,165) (295,599) (164,848) (274,988)
Income tax (provision) benefit ...................... (122,300) 137,700 (197,000) 132,100
Equity in investee companies ........................ 2,976 1,008 2,858 28,298
--------------- ------------------ ------------------ ---------------
Loss before cumulative effect of
accounting change .............................. (504,489) (156,891) (358,990) (114,590)
Cumulative effect of change in accounting
for insurance assessments ...................... - - - (57,850)
--------------- ------------------ ------------------ ---------------
Net loss ............................................ $ (504,489) $ (156,891) $ (358,990) $ (172,440)
=============== ================== ================== ===============
Basic per share information:
Loss before cumulative effect
of accounting change ........................... $ (4.40) $ (1.38) $ (3.13) $ (1.00)
=============== ================== ================== ===============
Net loss ............................................ $ (4.40) $ (1.38) $ (3.13) $ (1.50)
=============== ================== ================== ===============
Diluted per share information:
Loss before cumulative effect
of accounting change ........................... $ (4.40) $ (1.38) $ (3.13) $ (1.00)
=============== ================== ================== ===============
Net loss ............................................ $ (4.40) $ (1.38) $ (3.13) $ (1.50)
=============== ================== ================== ===============
</TABLE>
See notes to consilidated financial statements
-2-
<PAGE>
RELIANCE GROUP HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
June 30 December 31
ASSETS 2000 1999
----------------------------------------------------------------------------------------------
(In thousands, except per share amount)
<S> <C> <C>
Marketable securities:
Fixed maturities held for investment - at
amortized cost (quoted market $ - and $480,016).... $ - $ 484,340
Fixed maturities available for sale - at quoted market
(amortized cost $2,929,094 and $2,849,448).......... 2,788,546 2,763,508
Equity securities - at quoted market (cost $198,396
and $277,317)....................................... 709,144 1,004,776
Short-term investments................................. 379,859 263,042
Cash........................................................ 218,994 106,207
Premiums and other receivables.............................. 1,854,806 1,763,561
Reinsurance recoverables.................................... 6,762,390 6,263,553
Federal and foreign income taxes, including deferred taxes . - 93,374
Investment in investee company.............................. 428,060 423,398
Deferred policy acquisition costs........................... 227,513 301,168
Excess of cost over fair value of net assets acquired, less
accumulated amortization.............................. - 210,294
Other assets................................................ 533,453 938,282
----------- ------------
$13,902,765 $ 14,615,503
=========== ============
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY
----------------------------------------------------------------------------------------------
<S> <C> <C>
Unearned premiums........................................... $1,907,308 $ 2,065,411
Unpaid claims and related expenses.......................... 8,858,719 8,285,977
Accounts payable and accrued expenses....................... 1,328,055 1,842,769
Reinsurance ceded premiums payable.......................... 618,823 667,924
Term loans and short-term debt.............................. 279,072 279,105
Debentures and notes........................................ 455,980 455,980
----------- ------------
13,447,957 13,597,166
----------- ------------
Contingencies and commitments
Shareholders' equity:
Common stock, par value $.10 per share, 225,000
shares authorized, 116,166 shares issued and
outstanding ......................................... 11,617 11,617
Additional paid-in capital............................. 554,895 551,514
Retained earnings (deficit) ........................... (273,918) 85,072
Accumulated other comprehensive income................. 173,186 381,106
----------- ------------
465,780 1,029,309
Treasury stock, 1,331 shares........................... (10,972) (10,972)
----------- ------------
454,808 1,018,337
----------- ------------
$13,902,765 $ 14,615,503
=========== ============
</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 Retained Unrealized Foreign
Common Paid-In Earnings Gain on Currency Treasury Shareholders'
Stock Capital (Deficit) Investments Translation Stock Equity
---------------------------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, January 1, 2000.. $ 11,617 $551,514 $ 85,072 $413,133 $(32,027) $(10,972) $1,018,337
Transactions of investee
company........... 3,381 (2,850) 531
Net loss.................. (358,990) (358,990)
Depreciation after
deferred income
taxes........... (176,356) (176,356)
Foreign currency
translation..... (28,714) (28,714)
------- -------- --------- -------- -------- -------- ----------
Balance, June 30, 2000.... $11,617 $554,895 $(273,918) $233,927 $(60,741) $(10,972) $ 454,808
======= ======== ========= ======== ======== ======== ==========
</TABLE>
See notes to consolidated financial statements
-4-
<PAGE>
RELIANCE GROUP HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF COMPREHENSIVE LOSS (UNAUDITED)
<TABLE>
<CAPTION>
(In thousands)
Quarter Ended June 30
---------------------------------------------------------------------------------
2000 1999
---------------------------------------- -------------------------------------
Income tax Income tax
Pretax effect After-tax Pretax effect After-tax
----------- ---------- ----------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Net loss ................................ $ (504,489) $ (156,891)
----------- -----------
Other comprehensive income (loss):
Unrealized holding gains (losses) ....... $ (134,946) $ 47,234 (87,712) $ 83,024 $ (29,058) 53,966
Less: reclassification adjustment for
gains realized in net loss ............ (83,632) 29,271 (54,361) (10,127) 3,781 (6,346)
----------- ---------- ----------- ---------- ---------- -----------
Net unrealized gains (losses) recognized
in other comprehensive income (loss) .. (218,578) 76,505 (142,073) 72,897 (25,277) 47,620
Foreign currency translation ............ (10,278) (15,495)(a) (25,773) 1,709 (598) 1,111
----------- ---------- ----------- ---------- ---------- -----------
Total other comprehensive income (loss) . $ (228,856) $ 61,010 (167,846) $ 74,606 $ (25,875) 48,731
----------- ---------- ----------- ---------- ---------- -----------
Total comprehensive loss ................ $ (672,335) $ (108,160)
=========== ===========
<CAPTION>
Six Months Ended June 30
---------------------------------------------------------------------------------
2000 1999
---------------------------------------- -------------------------------------
Income tax Income tax
Pretax effect After-tax Pretax effect After-tax
----------- ---------- ----------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Net loss ................................ $ (358,990) $ (172,440)
----------- -----------
Other comprehensive loss:
Unrealized holding gains (losses) ....... $ 92,505 $ (32,375) 60,130 $ (75,164) $ 26,309 (48,855)
Less: reclassification adjustment for
gains realized in net loss ............ (368,209) 128,873 (239,336) (24,507) 8,814 (15,693)
----------- ---------- ----------- ---------- ---------- -----------
Net unrealized losses recognized
in other comprehensive income (loss) .. (275,704) 96,498 (179,206) (99,671) 35,123 (64,548)
Foreign currency translation ............ (14,803) (13,911)(a) (28,714) 177 (62) 115
----------- ---------- ----------- ---------- ---------- -----------
Total other comprehensive loss .......... $ (290,507) $ 82,587 (207,920) $ (99,494) $ 35,061 (64,433)
----------- ---------- ----------- ---------- ---------- -----------
Total comprehensive loss ................ $ (566,910) $ (236,873)
=========== ===========
</TABLE>
(a) Includes the effect of a $19.1 million increase in the deferred tax
asset valuation allowance.
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 2000 1999
------------------------------------------------------------------------------
(In thousands)
<S> <C> <C>
CASH FLOWS USED BY OPERATING ACTIVITIES............. $ (750,391) $ (51,344)
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of:
Fixed maturities available for sale............. 454,323 302,348
Equity securities............................... 330,097 20,364
Maturities and redemptions of:
Fixed maturities available for sale............. 147,006 89,274
Fixed maturities held for investment............ 16,995 31,063
Purchases of:
Fixed maturities available for sale............. (162,491) (413,414)
Fixed maturities held for investment............ -- (3,310)
Equity securities............................... (30,653) (53,386)
(Increase) decrease in short-term investments - net. (111,986) 164,777
Proceeds from sale of surety and fidelity operation. 278,433 --
Other - net......................................... (58,343) (69,320)
---------- ----------
863,381 68,396
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in term loans.............................. 876 61,722
Decrease in short-term debt - net................... -- (3,000)
Repayments of term loans............................ (1,079) (60,728)
Redemption of debentures and notes.................. -- (7,500)
Issuance of common stock............................ -- 380
Dividends........................................... -- (18,301)
Purchase of treasury stock ......................... -- (10,972)
---------- ----------
(203) (38,399)
---------- ----------
Increase (decrease) in cash......................... 112,787 (21,347)
Cash, beginning of period........................... 106,207 81,612
---------- ----------
Cash, end of period................................. $ 218,994 $ 60,265
========== ==========
Supplemental disclosures of cash flow information:
Interest paid....................................... $ 29,700 $ 26,900
========== ==========
Income taxes refunded............................... $ 45,400 $ 7,100
========== ==========
</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,
2000, and the results of operations, changes in shareholders' equity,
comprehensive 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, 1999 with the exception of the reclassification of the "held for
investment" portfolio described below) and additional financial information, see
the Company's Annual Report on Form 10-K for the year ended December 31, 1999.
The Company no longer intends to hold fixed income securities classified as
"held for investment" to maturity. As a result, at June 30, 2000, the Company
reclassified the "held for investment" securities to "available for sale" and
included the after-tax unrealized loss of $9.7 million associated with these
securities in shareholders' equity. In future periods, the Company intends that
all fixed income securities will be classified as "available for sale" and,
accordingly, will be carried at quoted market.
2. Sale of Certain Property and Casualty Operations
On May 31, 2000, the Company completed the sale of its surety and fidelity
operation to Travelers Casualty and Surety Company for $580 million. This
transaction resulted in an after-tax gain of $235 million and increased
statutory policyholders' surplus by $308 million. The pretax gain of $374.2
million is included in "Revenues" in the accompanying unaudited consolidated
statement of operations. The gain on this sale is subject to the finalization of
a closing balance sheet.
Since April 1, 2000, the Company has entered into the following sales
agreements:
o On June 30, 2000, the Company entered into an agreement with Hartford
Fire Insurance Company ("Hartford") to sell the renewal rights and cede to
Hartford its net liability for claims arising after July 1, 2000 for certain
business written by its Financial Products, Excess and Surplus and Property
divisions. In consideration, the Company will receive from Hartford a payment of
$50 million. The Company will pay to Hartford an estimate of unearned premium
less a ceding commission of 20%. Unearned premium is estimated to be $63
million. Net premiums written for these businesses to be sold were $50.4 million
in the first six months of 2000. This transaction, which is subject to
regulatory approval, is expected to close in the third quarter of 2000.
7
<PAGE>
o On June 30, 2000, the Company entered into an agreement with Overseas
Partners Ltd.("OPL") to sell the stock of Reliance Reinsurance Company for cash
consideration of $6 million plus the statutory capital and surplus of Reliance
Reinsurance Company, which was approximately $27 million at June 30, 2000. This
transaction, which is subject to regulatory approval, is expected to close in
the third quarter of 2000. Following the closing of this transaction the Company
no longer intends to write business through its Reliance Reinsurance profit
center. OPL is not assuming any liabilities in connection with the sale. Net
premiums written by Reliance Reinsurance profit center were $96.5 million in the
first six months of 2000.
o On July 14, 2000, the Company consummated the sale to Kemper Casualty,
Inc., Kemper Casualty Insurance Company and Lumbermens Mutual and Casualty
Company (collectively, "Kemper") of the renewal rights with respect to the
Company's Risk Management Individual Large Accounts business ("Business"). In
consideration, Kemper paid the Company $3 million. Additionally, Kemper will pay
(i) on September 15, 2000, an amount equal to the sum of (x) 40% of the
Annualized Profit and Administrative Charges (as defined) and (y) 15% of the
annualized Insurance Premium Charges (as defined), for each of the insurance
contracts of the Business which have been novated, written and/or reinsured by
Kemper between and including June 19, 2000 and September 12, 2000 (the
"September 15th Payment"), (ii) on January 15, 2001, an amount equal to the sum
of (x) 40% of the Annualized Profit and Administrative Charges and (y) 15% of
the annualized Insurance Premium Charges, for each of the insurance contracts of
the Business which have been novated, written and/or administered by Kemper from
and including June 19, 2000 until and including January 5, 2001, exclusive of
the insurance contracts which have were subject to the September 15th Payment
(the "January 15th Payment"), and (iii) at the earlier of (x) June 19, 2001 or
(y) ten (10) days after the date on which Kemper has novated, written and/or
reinsured insurance contracts of the Business with an Annualized Profit and
Administration Charges equal to at least $42.7 million, inclusive of the
insurance contracts of the Business which were subject to the September 15th
Payment and the January 15th Payment, $5 million (the "Final Payment"). In the
event (i) Kemper has not novated, written and/or reinsured insurance contracts
of the Business with an Annualized Profit and Administration Charges equal to at
least $42.7 million on or before June 19, 2001, Kemper shall not owe the Company
the Final Payment. Kemper is not assuming any liabilities in connection with the
sale. Net premiums written by the Business were $116.4 million in the first six
months of 2000.
o On August 4, 2000, the Company consummated the sale to Travelers
Indemnity Company ("Travelers") of the renewal rights to the Company's middle
market business. Consideration will range from $8 million to $35 million
depending on the level of premiums renewed by Travelers. Net premiums written by
the middle market division were $204.1 million in the first six months of 2000.
The Company believes that any gains from these transactions, including any gains
from the agreements signed on June 30, 2000, will be partially offset by
severance related to the termination of employees not transferred to the buyers,
and by costs associated with the shut-down of office facilities.
8
<PAGE>
As a result of the Company's intent to dispose of a substantial portion of its
ongoing property and casualty insurance operations, including the Company's
middle market business, the Company has concluded that its remaining excess of
cost over fair value of net assets acquired ("Goodwill") has been impaired.
Accordingly, the second quarter and first six months of 2000 results include a
charge of $195.6 million ($1.70 per diluted share) representing the write-off of
the June 30, 2000 Goodwill balance.
3. Increase in Loss Reserves
Net policy claims and settlement expenses for the second quarter and first six
months of 2000 include a provision of $444.2 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 $40.7 million representing the cost of ceding to reinsurers $64.1
million of losses under various stop loss treaties. Accordingly, for the second
quarter and first six months of 2000, the net effect of the increase in net loss
reserves and the amounts ceded to reinsurers was a pretax charge of $484.9
million.
Actuarial loss reserve reviews in the second quarter of 2000, revealed
significant deterioration during 2000 in a number of lines. As a result of this
updated information, the Company concluded that an increase in loss reserves in
the second quarter of 2000 was appropriate. The increase in loss reserves is due
principally to construction defect claims and higher than expected losses in
assumed reinsurance, workers' compensation and commercial automobile lines of
business. The increase in loss reserves (before application of the aggregate
stop loss treaties) was comprised of the following:
o $117.5 million for construction defect claims. The recent number of
reported construction defect claims and incurred losses has significantly
increased causing the Company to update its assumptions and factors. As a
result, an increase in net loss reserves was deemed appropriate.
o $83.6 million for property, marine and aviation lines. This is
primarily the result of higher than expected losses reported to the Company on
assumed reinsurance treaties. In addition, the Company experienced adverse
development in Reliance Reinsurance's workers' compensation business.
o $67.4 million for adverse development in commercial automobile,
including trucking and specialty automobile, where there has been a significant
increase in claim activity.
o $62.1 million for workers' compensation. Adverse development in this
line reflected growth in premium writings in 1998 and 1999 which, based on
recent loss emergence data, appear to have been underpriced, together with a
recent increase in claim severity above industry averages.
9
<PAGE>
o $50 million related to an alternative dispute resolution trial of
certain contested issues between an asbestos producer and certain of its
liability insurance carriers, including the Company.
o $127.6 million for adverse development in other lines of business,
including personal automobile, accident and health and commercial multiple
peril. In addition, the Company has established additional loss adjustment
expense reserves for litigation costs associated with settling claims.
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 for policies issued in prior years, which resulted from updated
information and subsequent developments, and a charge 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.
The increase in loss reserves was due principally to construction defect claims,
higher than expected losses in property, assumed reinsurance, 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 an independent
actuarial firm which indicated the need to increase loss reserves.
o $106.7 million for property, marine and aviation lines. This is largely
the result of higher than expected losses reported to the Company on assumed
reinsurance 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. The Company no longer writes this
program.
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.
10
<PAGE>
4. Restructuring Charges
On February 29, 2000, the Company announced a series of strategic and financial
actions and initiatives including the consolidation of its business units and
corporate infrastructure. During the second quarter of 2000, the Company
recorded a $75.1 million pretax restructuring charge related to this
consolidation.
The restructuring charge includes, (i) $31.1 million for employee separations
related to approximately 400 employees company-wide (including $10.5 million
related to severance payments to a former executive officer of the Company) with
$3.5 million paid through June 30, 2000, (ii) $28.2 million to write-off
previously capitalized systems in progress which will not be completed and which
will have no alternative use, (iii) $12.7 million to exit the Satellite
insurance business and property and casualty insurance business located in the
Mid-East and, (iv) $3.1 million of other restructuring costs.
Going forward the Company expects to incur additional costs for employee
separations, costs related to the continuance of employment of key personnel,
and costs associated with office facilities including canceling leases and
writing off leasehold improvements and furniture and fixtures. These costs are
not currently estimable.
During the first quarter of 1999, the Company recorded a $24 million
restructuring charge. This charge resulted from the consolidation of the
Company's personal automobile insurance operations. The restructuring charge
included the write-off of $18 million of deferred policy acquisition costs, $2.2
million of previously capitalized information technology expenditures which will
not be utilized by the Company and which have no alternative use, $2 million of
severance costs related to the termination of employees, and $1.8 million of
costs associated with the termination of certain third party service contracts.
As of June 30, 2000, substantially all of the severance and third party contract
terminations have been paid.
11
<PAGE>
5. Equity In Investee Companies
The Company's equity in investee companies is as follows:
<TABLE>
<CAPTION>
Quarter Ended Six Months Ended
June 30 June 30
2000 1999 2000 1999
-------------------------------------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C> <C>
LandAmerica Financial Group, Inc. .......................... $ 2,976 $ 2,416 $ 2,858 $ 4,521
Zenith National Insurance Corp. (1)......................... - (1,408) - 23,777
----------- ----------- ----------- -----------
$ 2,976 $ 1,008 $ 2,858 $ 28,298
=========== ========== =========== ===========
</TABLE>
(1) 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 National Insurance Corp.
("Zenith"). On October 25, 1999, the Company sold its entire investment in
Zenith.
Summarized financial information for LandAmerica Financial Group, Inc. is as
follows:
<TABLE>
<CAPTION>
Six Months Ended June 30 2000 1999
---------------------------------------------------------------------------------------------------------------------------
(In thousands, except per share amounts)
<S> <C> <C>
Revenues............................................................................ $ 873,221 $ 1,034,048
Income before income taxes.......................................................... 23,767 50,755
Net income.......................................................................... 15,686 32,001
Net income per diluted share........................................................ 0.86 1.59
</TABLE>
12
<PAGE>
6. 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
--------------------------------------------------------------------
2000 1999
--------------------------- -----------------------------
Premiums Premiums Premiums Premiums
Written Earned Written Earned
---------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
Direct............................. $1,935,951 $2,083,067 $ 2,409,923 $ 2,149,037
Assumed............................ 340,552 322,234 708,602 608,664
Ceded.............................. (1,257,860) (1,218,387) (1,759,770) (1,582,941)
---------- ---------- ----------- -----------
Net Premiums....................... $1,018,643 $1,186,914 $ 1,358,755 $ 1,174,760
========== ========== =========== ===========
</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
-----------------------------
2000 1999
---------- ------------
<S> <C> <C>
Gross.................................................................. $2,667,420 $ 2,693,857
Reinsurance recoveries................................................. (1,212,330) (1,597,341)
---------- ------------
Net policy claims and settlement expenses.............................. $1,455,090 $ 1,096,516
========== ===========
</TABLE>
13
<PAGE>
7. Earnings Per Share
The basic and diluted per share reconciliations of loss before cumulative effect
of accounting change to net loss is as follows:
<TABLE>
<CAPTION>
Quarter Ended Six Months Ended
June 30 June 30
2000 1999 2000 1999
-----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Basic loss per share:
Loss before cumulative effect
of accounting change........................................... $ (4.40) $ (1.38) $ (3.13) $ (1.00)
Cumulative effect of change in accounting
for insurance assessments..................................... - - - (.50)
------- --------- ------- ---------
Net loss.......................................................... $ (4.40) $ (1.38) $ (3.13) $ (1.50)
======= ========= ======= =========
Diluted loss per share:
Loss before cumulative effect
of accounting change........................................... $ (4.40) $ (1.38) $ (3.13) $ (1.00)
Cumulative effect of change in accounting
for insurance assessments...................................... - - - (.50)
------- --------- ------- ---------
Net loss.......................................................... $ (4.40) $ (1.38) $ (3.13) $ (1.50)
======= ========= ======= =========
</TABLE>
14
<PAGE>
The reconciliation of the basic to diluted per share information is as follows:
<TABLE>
<CAPTION>
Quarter Ended Six Months Ended
June 30 June 30
2000 1999 2000 1999
--------------------------------------------------------------------------------------------------------------------------
(In thousands, except per share amounts)
<S> <C> <C> <C> <C>
Loss before cumulative effect of
accounting change...................... $ (504,489) $ (156,891) $ (358,990) $ (114,590)
============= ============= ============ =============
Weighted average number of
basic shares outstanding............... 114,734 113,617 114,734 114,603
Effect of dilutive securities-
options (1)............................ - - - -
------------- ------------- ------------ -------------
Weighted average number of
dilutive shares outstanding............ 114,734 113,617 114,734 114,603
============= ============= ============ =============
Basic per share loss before
cumulative effect of
accounting change...................... $ (4.40) $ (1.38) $ (3.13) $ (1.00)
============= ============= ============ =============
Diluted per share loss before
cumulative effect of
accounting change...................... $ (4.40) $ (1.38) $ (3.13) $ (1.00)
============= ============= ============ =============
</TABLE>
(1) For all periods presented, the effect of options has been excluded since
their inclusion would be anti-dilutive.
15
<PAGE>
8. Business Segment Information
<TABLE>
<CAPTION>
Quarter Ended Six Months Ended
June 30 June 30
2000 1999 2000 1999
-------------------------------------------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C> <C>
Revenues:
Property and casualty insurance:
Premiums earned $ 568,904 $ 585,766 $ 1,186,914 $ 1,174,760
Net investment income 63,634 71,270 130,373 144,458
Gain (loss) on sales of investments 88,699 (2,762) 368,748 6,415
Gain on sale of surety and fidelity
operation 374,192 - 374,192 -
-------------- --------------- --------------- ----------------
1,095,429 654,274 2,060,227 1,325,633
Information technology consulting 42,181 63,056 85,565 127,008
Other 17,968 18,679 33,019 33,394
-------------- --------------- --------------- ----------------
$ 1,155,578 $ 736,009 $ 2,178,811 $ 1,486,035
============== =============== =============== ================
Loss before income taxes and equity in
investee companies:
Property and casualty insurance:
Underwriting loss $ (683,447) $ (374,836) $ (779,958) $ (415,429)
Net investment income 63,634 71,270 130,373 144,458
Gain (loss) on sales of investments 88,699 (2,762) 368,748 6,415
Gain on sale of surety and fidelity
operation 374,192 - 374,192 -
-------------- --------------- --------------- ----------------
(156,922) (306,328) 93,355 (264,556)
Information technology consulting (5,691) 4,678 (7,142) 9,556
Write-off of excess of costs over
fair value of net assets acquired (195,552) - (195,552) -
Other (27,000) 6,051 (55,509) (19,988)
-------------- --------------- --------------- ----------------
$ (385,165) $ (295,599) $ (164,848) $ (274,988)
============== =============== =============== ================
</TABLE>
16
<PAGE>
9. Litigation
Beginning in June 2000, common stockholders of the Company have commenced
putative class actions in the U.S. District Court for the Southern District of
New York against the Company and four of its present or former officers and
directors. The actions, which are substantially similar, are brought on behalf
of purchasers of the common stock of the Company between February 8, 1999 and
May 10, 2000, inclusive, although in some cases the class is defined more
generally to include the purchasers of any securities of the Company between
those dates. In August 2000, several bondholders commenced putative class
actions in the same court against the same defendants. The bondholder actions
purport to be brought on behalf of all purchasers of the 9% Senior Notes or 9
3/4% Senior Subordinated Debentures of the Company as early as February 8, 1999
and as late as July 19, 2000. The plaintiffs in the stockholder and bondholder
actions allege that the members of the putative classes paid inflated prices for
the securities at issue as a result of the defendants' alleged publication of
false and misleading statements concerning the financial condition of the
Company. The plaintiffs in the stockholder and bondholder actions assert claims
for violations of the federal securities laws and, on behalf of themselves and
the other putative class members, seek monetary damages, with interest and
attorneys' fees, and in some cases also seek declaratory or equitable relief.
The Company has not yet been served in several of the stockholder actions or in
the bondholder actions and has not yet answered or otherwise responded to any of
the complaints. The Company intends to deny the material allegations in each of
the lawsuits and to contest vigorously the actions, or such consolidated actions
as may be formed.
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 or defense of the actions will not materially affect the Company's
results for any period.
10. Tax Matters
Based upon a review of its current tax status, the Company has concluded that it
is uncertain whether its net deferred tax assets will be realized. Accordingly,
in the second quarter of 2000, the Company increased its deferred tax valuation
allowance by $197.4 million, of which $178.3 million was charged to income in
the second quarter and first six months of 2000 and the remainder, $19.1
million, charged directly to other comprehensive income.
In the second quarter of 1999, the Company reached a 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.
17
<PAGE>
11. 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. The effect of adopting the SOP was an
increase in the net loss in 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.
18
<PAGE>
RELIANCE GROUP HOLDINGS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
================================================================================
Overview
On June 8, 2000, A.M. Best & Company ("Best") downgraded the rating of
Reliance Insurance Company from "A-" (Excellent) to "B++" (Very Good).
Subsequently, on July 14, 2000, Best further downgraded Reliance Insurance
Company to "B" (Fair). Among the factors Best cited for its downgrades were
high operating leverage, reduced liquidity, unfavorable underwriting
results, uncertainty related to loss reserve adequacy and Best's belief
that the Company would not be able to refinance its bank borrowings and
senior notes maturing in 2000. In a separate rating action, Best downgraded
the Company's European property and casualty insurance operations from "A-"
to "B". The Company believes that these downgrades seriously impair its
ability to write many of its lines of business, including most of its
long-tail lines of business. As a result, the Company has entered into
agreements with various third parties to sell, and/or transfer renewal
rights to, property and casualty businesses as follows (and which are more
fully described in note 2 to the unaudited consolidated financial
statements):
o On June 30, 2000, entered into an agreement with Hartford Fire
Insurance Company to sell the renewal rights to certain of its
Financial Products, Excess and Surplus and Property business.
Net premiums written by these divisions in the first six
months of 2000, were $50.4 million. This transaction, which is
subject to regulatory approval, is expected to close in the
third quarter of 2000.
o On June 30, 2000, entered into an agreement with Overseas
Partners Ltd. to sell the stock of Reliance Reinsurance
Company. Following the closing of this transaction, the
Company no longer intends to write business through its
Reliance Reinsurance profit center. Net premiums written by
the Reliance Reinsurance profit center were $96.5 million in
the first six months of 2000. This transaction is expected to
close in the third quarter of 2000.
o On July 14, 2000, consummated the sale to Kemper Casualty,
Inc., Kemper Casualty Insurance Company and Lumbermans Mutual
and Casualty Company of renewal rights to the Company's Risk
Management Individual Large Accounts business. Net premiums
written in the first six months of 2000 by this division were
$116.4 million.
o On August 4, 2000, consummated an agreement with Travelers
Indemnity Company to sell the renewal rights to the Company's
Middle Market business, mainly comprised of Reliance
Insurance's Commercial Accounts Division. Net premiums written
in the first six months of 2000 by this division were $204.1
million.
The Company believes that any gains from these transactions, including any
gains from the agreements signed on June 30, 2000, will be partially offset
by severance related to the termination of employees not transferred to the
buyers, and by costs associated with the closing of office facilities.
The Company is continuing to seek buyers for substantially all of its
remaining lines of property and casualty insurance; however, no assurance
can be given that such sales can be consummated or the timing of such
sales. As a result of these sales, the Company's future level of net
premiums written will be significantly lower than current amounts. Since
the Company intends to dispose of a substantial portion of its ongoing
property and casualty insurance operations, including the Company's middle
market business, the Company has concluded that its remaining excess of
cost over fair value of net assets
19
<PAGE>
acquired ("Goodwill") has been impaired. Accordingly, the results for
the second quarter and first six months of 2000 include a charge of
$195.6 million ($1.70 per diluted share) representing the write-off of
the June 30, 2000 Goodwill balance.
At June 30, 2000, the Company had $735.1 million of debt outstanding,
including $237.5 million of bank borrowings with a maturity date of August
31, 2000 and $291.7 million of senior notes due November of 2000 (including
$7.5 million held by Reliance Insurance Company). As a result of the
uncertainty created by the recent Best downgrade, the Company does not
expect to be able to obtain regulatory approval for dividends from Reliance
Insurance Company sufficient to fund the repayment at maturity of the bank
debt and the senior notes. In addition, $171.8 million of senior
subordinated debentures mature in 2003, unless accelerated as a result of
an event of default. The Company is in discussions with its creditors and
regulators to develop a comprehensive plan to restructure its outstanding
debt. However, there can be no assurance that its efforts will be
successful. The Company is exploring a full range of alternatives to
restructure its debt, among which would be to seek protection under the
Federal Bankruptcy Code, which could be in conjunction with a negotiated
settlement in advance of filing.
The Company expects to agree with the Pennsylvania Insurance Department
that Reliance Insurance Company will not pay dividends nor engage in
non-ordinary course of business transactions without the prior review of,
or in some cases the approval of, such Insurance Department. The Company
also expects to agree with the Wisconsin Insurance Department to certain
similar restrictions applicable to Reliance National Indemnity Company, a
Wisconsin subsidiary of Reliance Insurance Company.
On July 19, 2000, the Company announced that its agreement with Leucadia
National Corporation ("Leucadia") to acquire all of the Company's
outstanding common stock had been terminated by Leucadia. On May 26, 2000,
the Company had reached an acquisition agreement with Leucadia that was
subject to a number of terms and conditions, including completion of
Leucadia's due diligence review.
On May 31, 2000, the Company completed the sale of its surety and fidelity
operation ("Surety") to Travelers Casualty and Surety Company for $580
million. This transaction resulted in an after-tax gain of $235 million and
increased statutory policyholders' surplus by $308 million. The amount of
gain on this sale is subject to the finalization of a closing balance
sheet.
Operating Overview
The Company incurred an operating loss in the second quarter of 2000,
before gains on sales of investments and the gain from the sale of Surety,
of $797.0 million ($6.95 per diluted share). This operating loss contains a
number of significant items:
o An after-tax charge of $288.7 million ($2.52 per diluted
share) for increasing net loss reserves for policies issued in
prior periods, which resulted from updated information and
subsequent developments, and $26.5 million ($.23 per diluted
share) representing the cost of ceding to reinsurers losses
under various stop loss treaties.
o A write-off of the Company's remaining Goodwill balance
totaling $195.6 million ($1.70 per diluted share).
20
<PAGE>
o An increase in the Company`s deferred tax asset valuation
allowance of $197.4 million of which $178.3 million ($1.55 per
diluted share) was charged to income and the remainder, $19.1
million charged directly to other comprehensive income. Based
upon a review of its current tax status, the Company has
concluded that it is uncertain whether its net deferred tax
assets will be realized.
o An after-tax restructuring charge of $48.8 million ($.43 per
diluted share). See note 4 to the unaudited consolidated
financial statements for further discussion of the
restructuring charge.
The Company's operating loss in the first six months of 2000 was $833.6
million ($7.27 per diluted share).
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:
o 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.
o In the second quarter of 1999, the Company settled various
federal income tax issues which resulted in a tax benefit of
$55.5 million ($.49 per diluted share).
o In the first quarter 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 personal automobile insurance operations.
The net loss in the second quarter and first six months of 2000 was $504.5
million ($4.40 per diluted share) and $359.0 million ($3.13 per diluted
share), respectively, and includes after-tax gains on sales of investments
of $57.7 million ($.50 per diluted share) and $239.7 million ($2.09 per
diluted share). These investment gains resulted from the sale of common
stock of Symbol Technologies, Inc. Also included in the second quarter 2000
net loss is an after-tax gain on the sale of Surety of $235 million ($2.05
per diluted share).
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). 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", (ii)
an after-tax gain of $24.9 million ($.22 per diluted share) representing
the pro rata portion of a gain realized by Zenith National Insurance Corp.
on the sale of its CalFarm subsidiary, and (iii) and after-tax gain on
sales of investments of $3.9 million ($.03 per diluted share).
Property and Casualty Insurance Operations
Net premiums written and earned in the second quarter of 2000 were $393.5
million and $568.9 million compared to $641.6 million and $585.8 million in
the corresponding prior year
21
<PAGE>
period. Net premiums written and earned in the first six months of 2000
were $1.02 billion and $1.19 billion compared to $1.36 billion and $1.17
billion in the corresponding 1999 period. These declines in net premiums
written resulted from run-off business which had been canceled or not
renewed and the ceding of unearned premium related to the sale of Surety.
As a result of the downgrade of Reliance Insurance Company by Best and the
resultant sales of certain property and casualty insurance businesses, the
Company expects its volume of premiums writings to decline significantly
in future periods.
The consolidated property and casualty insurance underwriting loss was
$683.4 million and $780.0 million in the second quarter and first six
months of 2000, which includes a pretax charge of $484.9 million to
increase net loss reserves and the cost to ceding to reinsurers losses
under various stop loss treaties.
Actuarial loss reserve reviews in the second quarter of 2000, revealed
significant deterioration in a number of lines. As a result of this updated
information, the Company concluded that an increase in loss reserves in the
second quarter of 2000 was appropriate. The increase in loss reserves is
due principally to construction defect claims and higher than expected
losses in assumed reinsurance, workers' compensation and commercial
automobile lines of business. The increase in loss reserves (before
application of the aggregate stop loss treaties) was comprised of the
following:
o $117.5 million for construction defect claims. The recent number of
reported construction defect claims and incurred losses has
significantly increased causing the Company to update its assumptions
and factors. As a result, an increase in net loss reserves was deemed
appropriate.
o $83.6 million for property,marine and aviation lines. This is primarily
the result of higher than expected losses reported to the company on
assumed reinsurance treaties. In addition, the Company experienced
adverse development in Reliance Reinsurance's workers' compensation
business.
o $67.4 million for adverse development in commercial automobile,
including trucking and specialty automobile, where there has been a
significant increase in claim activity.
o $62.1 million for workers' compensation. Adverse development in this
line reflected growth in premium writings in 1998 and 1999 which, based
on recent loss emergence data, appear to have been underpriced,
together with a recent increase in claim severity above industry
averages.
o $50 million related to an alternative dispute resolution trial of
certain contested issues between an asbestos producer and certain of
its liability insurance carriers, including the Company.
o $127.6 million for adverse development in other lines of business,
including personal automobile, accident and health and
commercial multiple peril. In addition, the Company has established
additional loss adjustment expense reserves for litigation costs
associated with settling claims.
In addition to the above, the property and casualty insurance
operations recorded a restructuring charge of $69.5 million in the
second quarter of 2000 (see note 4 to the unaudited consolidated
financial statements for discussion of the restructuring charge) and
22
<PAGE>
a write-off of $15.9 million of deferred policy acquisition costs in
property lines of business where recoverability could not be
demonstrated. The property and casualty insurance operations may incur
future costs in connection with its long-term commitment to Aon
Corporation ("Aon"), which specifies that the Company provide $18.0
million of brokerage commissions annually to Aon until 2007.
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.
The increase in loss reserves was due principally to construction
defect claims, higher than expected losses in assumed reinsurance,
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 an independent actuarial firm, which indicated the
need to increase loss reserves.
o $106.7 million for property, marine and aviation lines. This is
largely the result of higher than expected losses reported to the
Company on assumed reinsurance 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. The Company no longer writes this
program.
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.
The underwriting results for the first six months of 1999 also reflect a
$24 million restructuring charge which resulted from the consolidation of
the Company's personal automobile insurance operations.
Property and Casualty Insurance Investment Results
Net investment income of the property and casualty insurance operations
declined to $63.6 million and $130.4 million in the second quarter and
first six months of 2000, from $71.3 million and $144.5 million in the
corresponding prior-year periods. These declines resulted from the
reduction in the size of the average fixed maturity investment portfolio
reflecting the utilization of cash flow in 1999 and 2000.
Gains on sales of investments were $88.7 million and $368.7 million in the
second quarter and first six months of 2000, which includes gains of $123.2
million and $392.1 million from the sale of a portion of the Company's
investment in Symbol Technologies, Inc. ("Symbol") common stock. As of July
31, 2000, the Company owns 8.2 million shares of Symbol common stock with a
market value of $325.9 million and an unrealized gain of $318.8 million. In
the second quarter and first six months of 2000 gains from the sale of
Symbol common stock were partially offset by losses from sales of certain
fixed-income securities. Loss on sales of investments was $2.8 million in
the second quarter of 1999. Gains on sales of investments for the first six
months of 1999 were $6.4 million.
23
<PAGE>
Investment Portfolio
The Company no longer intends to hold fixed income securities classified as
"held for investment" to maturity. As a result, at June 30, 2000, the
Company reclassified fixed income securities previously classified as "held
for investment" to "available for sale" and included the after-tax
unrealized loss of $9.7 million associated with these securities in
shareholders' equity. In future periods, the Company intends that all fixed
income securities will be classified as "available for sale" and,
accordingly, will be carried at quoted market.
At June 30, 2000, the Company's investment portfolio aggregated $3.59
billion (at cost), of which 94% was invested in fixed maturities and 6% 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. At
June 30, 2000, the carrying values of non-investment grade securities and
securities not rated by Standard and Poor's were $407.0 million (13% of the
fixed income portfolio) and $179.1 million (6% of the fixed income
portfolio), respectively.
Other Operations
RCG Information Technology, Inc. ("RCG"), a subsidiary of the Company,
provides information technology services to large corporate clients
throughout the United States. Information technology revenues declined to
$42.2 million and $85.6 million in the second quarter and first six months
of 2000, from $63.1 million and $127.0 million in the corresponding
prior-year periods. The decline in revenue resulted from a slowdown in
market demand being experienced throughout the entire industry and a
decline in solutions business. Gross margins (revenues less cost of
services) were $12.5 million and $24.7 million in the second quarter and
first six months of 2000 compared to $21.7 million and $42.8 million in the
corresponding prior-year periods. Gross margin percentages were 29.6% and
28.9% in the second quarter and first six months of 2000 compared to 34.4%
and 33.7% in the corresponding prior-year periods. The decline in the gross
margin percentages primarily reflects a lower level of solutions business.
The decline in gross margins, which was partially offset by lower selling,
general and administrative expenses, resulted in a pretax loss of $5.7
million and $7.1 million in the second quarter and first six months of
2000. Included in the pretax loss in the second quarter and first six
months of 2000 is a restructuring charge of $4.3 million primarily related
to the write-off of capitalized costs associated with a product which has
been discontinued. Pretax income in the second quarter and first six months
of 1999 was $4.7 million and $9.6 million, respectively. RCG's revenues and
expenses are included in other revenues and other operating expenses in the
accompanying unaudited consolidated financial statement of operations.
Equity in Investee Companies
Equity income from the Company's investment in LandAmerica Financial Group,
Inc. ("LandAmerica") was $3.0 million and $2.9 million in the second
quarter and first six months of 2000, compared to $2.4 million and $4.5
million in the corresponding 1999 periods. Equity income (loss) from the
Company's investment in Zenith National Insurance Corp. ("Zenith"), which
was sold in October 1999, was $(1.4 million) and $23.8 million in the
second quarter and first six months of 1999. Equity income for Zenith in
the first six months of 1999 included a gain of $24.9 million representing
the Company's pro rata portion of a gain realized by Zenith.
24
<PAGE>
Liquidity and Capital Resources
The Company's principal sources of funds consist of dividends, advances and
net tax payments from its subsidiaries. Dividends paid by Reliance
Insurance Company were $50.4 million in the six months ended June 30, 2000.
As discussed in the "Overview" section of this management's discussion and
analysis, the Company does not anticipate that it will have sufficient cash
available at the holding company to repay its bank debt and senior notes
due in 2000. See "Overview" section for further discussion. 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 years' statutory net
income. Furthermore, the Pennsylvania Insurance Department has broad
discretion to limit the payment of dividends by insurance companies. During
2000, under ordinary circumstances, $124 million would be available for
dividend payments by Reliance Insurance Company under Pennsylvania law
without prior approval by the Pennsylvania Insurance Department. However,
based upon recent events as described in the "Overview" section of this
management's discussion and analysis, the Company expects to agree with the
Pennsylvania Insurance Department that Reliance Insurance Company will not
pay dividends nor engage in non-ordinary course of business transactions
without the prior review of, or in some cases the approval of, such
Insurance Department. The Company also expects to agree with the Wisconsin
Insurance Department to certain similar restrictions applicable to Reliance
National Indemnity Company, a Wisconsin subsidiary of Reliance Insurance
Company.
For the six months ended June 30, 2000, the Company utilized $750.4 million
of cash flow for operating activities compared to $51.3 million in the
corresponding 1999 period. The decrease in operating cash flow reflects net
cash payments made to settle issues involving the Unicover workers'
compensation reinsurance facility and an increase in net payments for
property and casualty policy claims and related expenses. The Company
anticipates that it will continue to utilize operating cash flow in future
periods, as it expects its premiums written to decline while settling its
remaining insurance liabilities.
The Company generated $863.4 million and $68.4 million of cash flow from
investing activities for the six months ended June 30, 2000 and June 30,
1999, respectively, primarily from the net sales of marketable securities
and, in 2000, the sale of Surety.
For the six months ended June 30, 2000, the Company used $203,000 of cash
flow for financing activities. 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.
25
<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.
26
<PAGE>
RELIANCE GROUP HOLDINGS, INC. AND SUBSIDIARIES
PART II. OTHER INFORMATION
--------------------------------------------------------------------------------
Item 4. Submission of Matters to a Vote of Security Holders.
On June 21, 2000, at the annual meeting of stockholders of the
Company, the stockholders elected the eleven directors set forth
below and voted upon and authorized the adoption by the Company
of the Reliance Group Holdings, Inc. 1999 Stock Option Plan and
Reliance Group Holdings, Inc. 2000 Restricted Stock 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 57,657,333 5,317,117
George R. Baker 57,666,718 5,307,732
George E. Bello 57,506,016 5,468,434
Lowell C. Freiberg 57,667,750 5,306,700
Dr. Thomas P. Gerrity 57,666,718 5,307,732
Jewell Jackson McCabe 57,666,718 5,307,732
Irving Schneider 57,667,621 5,306,829
Bernard L. Schwartz 57,667,419 5,307,031
Richard E. Snyder 57,495,332 5,479,118
Dr. Bruce E. Spivey 57,667,750 5,306,700
Howard E. Steinberg 57,659,498 5,314,952
</TABLE>
Proposal - Approval of Reliance Group Holdings, Inc. 1999 Stock
Option Plan:
For: 50,121,280
Against: 17,473,563
Abstain: 142,935
Proposal - Approval of Reliance Group Holdings, Inc. 2000
Restricted Stock Plan
For: 50,128,936
Against: 17,480,054
Abstain: 128,788
27
<PAGE>
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
10.1 Agreement and General Release entered into among Reliance
Group Holdings, Inc., Reliance Insurance Company and
Robert M. Steinberg.
27. Financial Data Schedule.
(b) Reports on Form 8-K.
During the quarter for which this report is filed, the Company
filed a Report on Form 8-K, dated (date of earliest event
reported) May 25, 2000, reporting an Item 5 matter, the
Agreement and Plan of Merger among the Company, Leucadia and
Leucadia Acquisition Corp.
During the quarter for which this report is filed, the Company
filed a Report on Form 8-K, dated (date of earliest event
reported) May 31, 2000, reporting an Item 2 matter, the
consummation of the sale of the Company's surety and fidelity
business to Traveler's Casualty and Surety Company.
28
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
RELIANCE GROUP HOLDINGS, INC.
(Registrant)
Date: August 14, 2000 /s/ George E. Bello
----------------- --------------------------------------------
George E. Bello
Executive Vice President and Controller
(Chief Accounting Officer)
29
