<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 September 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 November 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
Page
No.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statement of Operations for the Quarters and Nine-Month
Periods Ended September 30, 2000 and 1999 (Unaudited) .......... 2
Consolidated Balance Sheet at September 30, 2000 (Unaudited) and
December 31, 1999 .............................................. 3
Consolidated Statement of Changes in Shareholders'
Equity (Deficit) for the Nine-Month Period
Ended September 30, 2000 (Unaudited) ........................... 4
Consolidated Statement of Comprehensive Loss for the
Quarters and Nine-Month Periods Ended
September 30, 2000 and 1999 (Unaudited) ........................ 5
Consolidated Condensed Statement of Cash Flows for the Nine-Month
Periods Ended September 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 ................................. 28
SIGNATURES ................................................................ 29
<PAGE>
RELIANCE GROUP HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
Quarter Ended Nine Months Ended
September 30 September 30
2000 1999 2000 1999
------------------------------------------------------------------------------------------------------------------------
(In thousands, except per share amounts)
<S> <C> <C> <C> <C>
Revenues:
Premiums earned ..................................... $ 458,887 $ 719,293 $ 1,645,801 $ 1,894,053
Net investment income ............................... 56,447 72,107 186,820 216,565
Gain on sales of investments ........................ 11,044 3,193 379,792 9,608
Gain (loss) on sale of surety and fidelity operation (3,751) -- 370,441 --
Other ............................................... 60,303 72,093 178,887 232,495
------------- ------------- ------------- -------------
582,930 866,686 2,761,741 2,352,721
------------- ------------- ------------- -------------
Claims and expenses:
Policy claims and settlement expenses ............... 754,533 548,684 2,209,623 1,645,200
Policy acquisition costs and other insurance expenses 257,677 248,283 698,086 714,756
Interest ............................................ 15,400 15,246 44,589 46,338
Restructuring charge ................................ 27,904 -- 103,048 24,000
Write-off of excess of cost over fair value
of net assets acquired ......................... -- -- 195,552 --
Reversal of interest expense related to income tax .. -- -- -- (31,500)
Other operating expenses ............................ 75,556 77,823 223,831 252,265
------------- ------------- ------------- -------------
1,131,070 890,036 3,474,729 2,651,059
------------- ------------- ------------- -------------
Loss before income taxes and equity
in investee companies ........................... (548,140) (23,350) (712,988) (298,338)
Income tax (provision) benefit ...................... -- 7,000 (197,000) 139,100
Equity in investee companies ........................ 1,620 1,287 4,478 29,585
------------- ------------- ------------- -------------
Loss before cumulative effect of
accounting change .............................. (546,520) (15,063) (905,510) (129,653)
Cumulative effect of change in accounting
for insurance assessments ...................... -- -- -- (57,850)
------------- ------------- ------------- -------------
Net loss ............................................ $ (546,520) $ (15,063) $ (905,510) $ (187,503)
============= ============= ============= =============
Basic per share information:
Loss before cumulative effect
of accounting change ........................... $ (4.76) $ (.13) $ (7.89) $ (1.13)
============= ============= ============= =============
Net loss ............................................ $ (4.76) $ (.13) $ (7.89) $ (1.64)
============= ============= ============= =============
Diluted per share information:
Loss before cumulative effect
of accounting change ........................... $ (4.76) $ (.13) $ (7.89) $ (1.13)
============= ============= ============= =============
Net loss ............................................ $ (4.76) $ (.13) $ (7.89) $ (1.64)
============= ============= ============= =============
</TABLE>
See notes to consolidated financial statements
-2-
<PAGE>
RELIANCE GROUP HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
September 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 $2,404,687 and $2,849,448) ............ 2,295,429 2,763,508
Equity securities - at quoted market (cost $52,180
and $277,317) ......................................... 346,195 1,004,776
Short-term investments ................................... 449,501 263,042
Cash .......................................................... 190,210 106,207
Premiums and other receivables ................................ 1,498,295 1,763,561
Reinsurance recoverables ...................................... 6,712,919 6,263,553
Federal and foreign income taxes, including deferred taxes .... -- 93,374
Investment in investee company ................................ 429,663 423,398
Deferred policy acquisition costs ............................. 125,903 301,168
Excess of cost over fair value of net assets acquired, less
accumulated amortization ................................ -- 210,294
Other assets .................................................. 549,939 938,282
------------ ------------
$ 12,598,054 $ 14,615,503
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
----------------------------------------------------------------------------------------------
Unearned premiums ............................................. $ 1,211,412 $ 2,065,411
Unpaid claims and related expenses ............................ 9,147,136 8,285,977
Accounts payable and accrued expenses ......................... 1,353,862 1,842,769
Reinsurance ceded premiums payable ............................ 453,672 667,924
Term loans and short-term debt ................................ 255,410 279,105
Debentures and notes .......................................... 455,980 455,980
------------ ------------
12,877,472 13,597,166
------------ ------------
Contingencies and commitments
Shareholders' equity (deficit):
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 ............................... 554,951 551,514
Retained earnings (deficit) .............................. (820,438) 85,072
Accumulated other comprehensive income (loss) ............ (14,576) 381,106
------------ ------------
(268,446) 1,029,309
Treasury stock, 1,331 shares ............................. (10,972) (10,972)
------------ ------------
(279,418) 1,018,337
------------ ------------
$ 12,598,054 $ 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 (DEFICIT) (UNAUDITED)
<TABLE>
<CAPTION>
Accumulated Other
Comprehensive Income (Loss)
---------------------------
Net
Unrealized
Net Loss on
Additional Retained Unrealized Foreign Shareholders'
Common Paid-In Earnings Gain on Currency Treasury Equity
Stock Capital (Deficit) Investments Translation Stock (Deficit)
------------------------------------------------------------------------------------------------------------------------------
(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 ............ 3,437 (3,550) (113)
Net loss ................... (905,510) (905,510)
Depreciation after deferred
income taxes ..... (361,802) (361,802)
Foreign currency translation (30,330) (30,330)
-------- ----------- ----------- ----------- ----------- --------- -----------
Balance, September 30, 2000 $ 11,617 $ 554,951 $ (820,438) $ 47,781 $ (62,357) $ (10,972) $ (279,418)
======== =========== =========== =========== =========== ========= ===========
</TABLE>
See notes to consolidated financial statements
-4-
<PAGE>
RELIANCE GROUP HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF COMPREHENSIVE LOSS (UNAUDITED)
--------------------------------------------------------------------------------
(In thousands)
<TABLE>
<CAPTION>
Quarter Ended September 30
-----------------------------------------------------------------------------------
2000 1999
---------------------------------- ------------------------------------------
Income tax Income tax
Pretax effect After-tax Pretax effect After-tax
------- --------- --------- ------------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Net loss $(546,520) $ (15,063)
---------- ------------
Other comprehensive loss:
Unrealized holding losses $(182,725) $ (1,198) (183,923) $ (67,421) $ 23,598 (43,823)
Less: reclassification adjustment for
gains realized in net loss (3,421) 1,198 (2,223) (2,965) 1,038 (1,927)
---------- --------- --------- -------------- ---------- ------------
Net unrealized losses recognized
in other comprehensive loss (186,146) -(a) (186,146) (70,386) 24,636 (45,750)
Foreign currency translation (1,616) -(b) (1,616) (400) 140 (260)
---------- --------- ---------- -------------- ---------- ------------
Total other comprehensive loss $(187,762) $ - (187,762) $ (70,786) $ 24,776 (46,010)
--------- --------- ---------- -------------- ---------- ------------
Total comprehensive loss $(734,282) $ (61,073)
========== ============
<CAPTION>
Nine Months Ended September 30
-----------------------------------------------------------------------------------
2000 1999
---------------------------------- ------------------------------------------
Income tax Income tax
Pretax effect After-tax Pretax effect After-tax
------- --------- --------- ------------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Net loss $ (905,510) $ (187,503)
------------ ------------
Other comprehensive loss:
Unrealized holding losses $ (90,220) $ (33,573) (123,793) $ (142,585) $ 49,907 (92,678)
Less: reclassification adjustment for
gains realized in net loss (371,630) 130,071 (241,559) (27,472) 9,852 (17,620)
----------- ---------- ------------ -------------- ----------- ------------
Net unrealized losses recognized
in other comprehensive loss (461,850) 96,498(a) (365,352) (170,057) 59,759 (110,298)
Foreign currency translation (16,419) (13,911)(b) (30,330) (223) 78 (145)
----------- ----------- ------------ -------------- ---------- -----------
Total other comprehensive loss $ (478,269) $ 82,587 (395,682) $ (170,280) $ 59,837 (110,443)
----------- ----------- ------------ -------------- ---------- -----------
Total comprehensive loss $(1,301,192) $ (297,946)
============ ===========
</TABLE>
(a) Includes the effect of a $65.1 million increase in the deferred tax
assset valuation allowance in both the quarter and nine months ended
September 30, 2000.
(b) Includes the effect of a $0.6 million and $19.7 million increase in the
deferred tax asset valuation allowance in the quarter and nine months
ended September 30, 2000, respectively.
See notes to consolidated financial statements
-5-
<PAGE>
RELIANCE GROUP HOLDINGS, INC AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENT OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended September 30 2000 1999
------------------------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C>
CASH FLOWS FROM (USED BY) OPERATING ACTIVITIES $ (1,435,235) $ 8,875
------------------- -------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of:
Fixed maturities available for sale ................... 1,012,009 427,730
Equity securities ..................................... 649,955 107,325
Maturities and redemptions of:
Fixed maturities available for sale ................... 161,741 115,280
Fixed maturities held for investment .................. 16,995 48,693
Purchases of:
Fixed maturities available for sale ................... (366,124) (591,896)
Fixed maturities held for investment .................. - (12,280)
Equity securities ..................................... (31,002) (133,502)
(Increase) decrease in short-term investments - net ....... (179,460) 167,239
Proceeds from sale of surety and fidelity operation ....... 267,433 -
Other - net ............................................... 11,637 (95,237)
------------------- -------------------
1,543,184 33,352
------------------- -------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in term loans .................................... 876 99,380
Decrease in short-term debt - net ......................... - (2,000)
Repayments of term loans .................................. (24,822) (93,269)
Redemption of debentures and notes ........................ - (7,500)
Issuance of common stock .................................. - 414
Dividends ................................................. - (27,387)
Purchase of treasury stock ................................ - (10,972)
------------------- -------------------
(23,946) (41,334)
------------------- -------------------
Increase in cash .......................................... 84,003 893
Cash, beginning of period ................................. 106,207 81,612
------------------- -------------------
Cash, end of period ....................................... $ 190,210 $ 82,505
=================== ===================
Supplemental disclosures of cash flow information:
Interest paid ............................................. $ 36,000 $ 66,500
=================== ===================
Income taxes refunded ..................................... $ 53,340 $ 200
=================== ===================
</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 considered necessary to present fairly the
financial position at September 30, 2000, and the results of operations, changes
in shareholders' equity (deficit), 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, in 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 (deficit). All fixed income securities are
classified as "available for sale" and, accordingly, are carried at quoted
market.
2. SALE OF CERTAIN PROPERTY AND CASUALTY OPERATIONS
o On May 31, 2000, the Company completed the sale of its surety and
fidelity operation to Travelers Casualty and Surety Company for $569 million.
This transaction resulted in an after-tax gain of $232.5 million and increased
statutory policyholders' surplus by $305 million. For the nine-month period
ended September 30, 2000, the pretax gain of $370.4 million, net of an
adjustment of $3.8 million recorded in the third quarter of 2000, is included in
"Revenues" in the accompanying unaudited consolidated statement of operations.
o On September 12, 2000, the Company sold to Hartford Fire Insurance
Company ("Hartford") the renewal rights and ceded 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 received from Hartford a payment of $50 million and the Company paid
to Hartford applicable unearned premium less a ceding commission of 20%. A gain
of $47.5 million was recognized in the third quarter of 2000.
7
<PAGE>
o During October of 2000, the Company sold to Overseas Partners Ltd.
("OPL") the stock of Reliance Reinsurance Company for cash of $6 million plus
the statutory capital and surplus of Reliance Reinsurance Company, which was
$28.6 million at September 30, 2000. OPL did not assume any liabilities in
connection with the sale. The gain on this sale will be recognized in the fourth
quarter 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 has
agreed to pay a percentage of the Annualized Profit and Administrative Charges
(as defined) and 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 July 19,
2001. Kemper did not assume any liabilities in connection with the sale. Any
gain from this sale is not expected to be material.
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. In the third quarter of
2000, a gain of $2 million was recorded.
o On September 14, 2000, the Company sold to Swett and Crawford the
assets of Reliance Integramark, the Company's credit insurance business for
$500,000 in cash. Any gain from this sale is not expected to be material.
o During November of 2000, the Company signed a letter of intent with
a third party to sell the Company's non-standard automobile operation. The
completion of this transaction is subject to due diligence, execution of a
definitive sales agreement and regulatory approvals. It is anticipated that the
buyer will not assume liabilities.
8
<PAGE>
Gains and losses from these transactions have been offset by costs associated
with the closing of office facilities and, with the exception of the gain
associated with the sale of the surety and fidelity operation, have been
included in the third quarter of 2000 restructuring charge.
As a result of the Company's disposal of a substantial portion of its ongoing
property and casualty insurance operations, including the Company's middle
market business, the Company concluded that its remaining excess of cost
over fair value of net assets acquired ("Goodwill") had been impaired.
Accordingly, results for the first nine months of 2000 include a second quarter
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 third quarter of 2000 includes
a pretax charge of $332 million to increase net loss and loss adjustment expense
reserves. In the third quarter of 2000, the Company engaged an independent
actuarial firm, Tillinghast-Towers Perrin, to conduct a comprehensive actuarial
review of its loss reserves. Following the completion of this review, which
revealed significant deterioration in a number of lines of business, the Company
concluded that an increase in net loss and loss adjustment expense reserves was
appropriate. The increase was comprised of the following:
o $115.5 million in general liability lines, including higher than expected
losses reported to the Company on assumed reinsurance treaties. In
addition, the Company experienced adverse development in certain lines of
professional liability and asbestos claims.
o $70.8 million for commercial automobile to reflect continued adverse
development including losses in trucking and several transportation
programs.
o $60.4 million for property and marine lines reflecting inadequate pricing
of policies written in prior years.
o $65.6 million for an increase in loss adjustment expenses representing the
cost of the claims department which will now be fully devoted to settling
reported claims, rather than underwriting and/or marketing.
o $19.7 million for other lines of business including accident and health and
personal automobile, partially offset by favorable prior-year development
in workers compensation.
The first nine months of 2000 includes a pretax charge of $816.9 million to
increase net loss and loss adjustment expense reserves and the cost of ceding to
reinsurers losses under various stop loss treaties. The increase in net loss
reserves is due principally to higher than expected losses in general liability,
commercial automobile, property, marine and aviation lines and an increase in
construction defect claims.
9
<PAGE>
Net policy claims and settlement expenses for the third quarter and first nine
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 first nine 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
The Company had previously announced a series of strategic and financial actions
including the run-off of its insurance businesses and the consolidation of its
business units and corporate infrastructure. Accordingly, in the third quarter
of 2000, the Company recorded a $27.9 million pretax restructuring charge
related to these actions.
The third quarter 2000 restructuring charge includes: (i) $27.9 million for
employee separations related to approximately 600 employees company-wide with
$8.0 million paid through September 30, 2000, (ii) $13.5 million to write-off
leasehold improvements and furniture and fixtures no longer being used by the
Company's businesses, (iii) $19.2 million to write-off previously capitalized
systems which will have no alternative use and (iv) $16.7 million to cancel
leases for office space which is no longer being occupied by the Company.
Offsetting these charges are $49.4 million of gains from sales of renewal rights
of several businesses, primarily the financial products division. See note 2 -
Sale of Certain Property and Casualty Operations.
The nine months ended September 30, 2000, includes a $103.0 million
restructuring charge including: (i) $59.0 million for employee separations
related to approximately 1,000 employees company-wide with $11.5 million paid
through September 30, 2000, (ii) $13.5 million to write-off leasehold
improvements and furniture and fixtures no longer being used by the Company's
businesses, (iii) $47.4 million to write-off previously capitalized systems
which will have no alternative use (iv) $16.7 million to buy-out leases for
office space which is no longer being occupied by the Company, (v) $12.7 million
to exit certain property and casualty insurance businesses and (vi) $3.1 million
of other restructuring costs. Offsetting these charges are $49.4 million of
gains from sales of renewal rights of several businesses, primarily the
financial products division. See note 2 - Sale of Certain Property and Casualty
Operations.
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 systems 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 September 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 Nine Months Ended
September 30 September 30
2000 1999 2000 1999
-------------------------------------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C> <C>
LandAmerica Financial Group, Inc. .......................... $ 1,620 $ 1,287 $ 4,478 $ 5,808
Zenith National Insurance Corp. (1)......................... - - - 23,777
----------- ---------- ----------- -----------
$ 1,620 $ 1,287 $ 4,478 $ 29,585
=========== ========== =========== ===========
</TABLE>
(1) The equity in investee company for the nine months ended September 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>
Nine Months Ended September 30 2000 1999
-------------------------------------------------------------------------------------------------------------------------
(In thousands, except per share amounts)
<S> <C> <C>
Revenues............................................................................ $ 1,325,617 $ 1,547,846
Income before income taxes.......................................................... 35,634 64,904
Net income.......................................................................... 23,518 41,214
Net income per diluted share........................................................ 1.28 2.08
</TABLE>
12
<PAGE>
6. REINSURANCE
The reconciliation of property and casualty insurance direct premiums to net
premiums is as follows (in thousands):
<TABLE>
<CAPTION>
Nine Months Ended September 30
--------------------------------------------------------------------
2000 1999
--------------------------------------------------------------------
Premiums Premiums Premiums Premiums
Written Earned Written Earned
---------------- ----------------- --------------- ----------------
<S> <C> <C> <C> <C>
Direct............................. $ 2,053,196 $ 2,854,875 $ 3,441,134 $ 3,247,043
Assumed............................ 430,187 466,122 1,089,455 1,029,711
Ceded.............................. (1,354,919) (1,675,196) (2,518,046) (2,382,701)
---------------- ----------------- --------------- ----------------
Net Premiums....................... $ 1,128,464 $ 1,645,801 $ 2,012,543 $ 1,894,053
=============== ================ =============== ================
</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>
Nine Months Ended
September 30
---------------------------------
2000 1999
--------------- ----------------
<S> <C> <C>
Gross.................................................................. $ 4,024,325 $ 3,905,454
Reinsurance recoveries................................................. (1,814,702) (2,260,254)
---------------- ----------------
Net policy claims and settlement expenses.............................. $ 2,209,623 $ 1,645,200
=============== ================
</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 Nine Months Ended
September 30 September 30
2000 1999 2000 1999
-----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Basic loss per share:
Loss before cumulative effect
of accounting change........................................... $ (4.76) $ (.13) $ (7.89) $ (1.13)
Cumulative effect of change in accounting
for insurance assessments..................................... - - - (.51)
--------- --------- --------- ---------
Net loss.......................................................... $ (4.76) $ (.13) $ (7.89) $ (1.64)
========= ========= ========= =========
Diluted loss per share:
Loss before cumulative effect
of accounting change........................................... $ (4.76) $ (.13) $ (7.89) $ (1.13)
Cumulative effect of change in accounting
for insurance assessments...................................... - - - (.51)
--------- --------- --------- ---------
Net loss.......................................................... $ (4.76) $ (.13) $ (7.89) $ (1.64)
========= ========= ========= =========
</TABLE>
14
<PAGE>
The reconciliation of the basic to diluted per share information is as follows:
<TABLE>
<CAPTION>
Quarter Ended Nine Months Ended
September 30 September 30
2000 1999 2000 1999
-------------------------------------------------------------------------------------------------------------------------
(In thousands, except per share amounts)
<S> <C> <C> <C> <C>
Loss before cumulative effect of
accounting change...................... $ (546,520) $ (15,063) $ (905,510) $ (129,653)
=============== ============== =============== ==============
Weighted average number of
basic shares outstanding............... 114,734 113,639 114,734 114,278
Effect of dilutive securities-
options (1)............................ - - - -
-------------- -------------- -------------- --------------
Weighted average number of
dilutive shares outstanding............ 114,734 113,639 114,734 114,278
============== ============== ============== ==============
Basic per share loss before
cumulative effect of
accounting change...................... $ (4.76) $ (.13) $ (7.89) $ (1.13)
============== ============= ============= =============
Diluted per share loss before
cumulative effect of
accounting change...................... $ (4.76) $ (.13) $ (7.89) $ (1.13)
============== ============= ============= =============
</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 Nine Months Ended
September 30 September 30
2000 1999 2000 1999
------------------------------------------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C> <C>
Revenues:
Property and casualty insurance:
Premiums earned $ 458,887 $ 719,293 $ 1,645,801 $ 1,894,053
Net investment income 56,447 72,107 186,820 216,565
Gain on sales of investments 11,044 3,193 379,792 9,608
Gain (loss) on sale of surety
and fidelity operation (3,751) - 370,441 -
--------------- --------------- --------------- ----------------
522,627 794,593 2,582,854 2,120,226
Information technology consulting 40,821 54,571 126,386 181,579
Other 19,482 17,522 52,501 50,916
-------------- --------------- --------------- ----------------
$ 582,930 $ 866,686 $ 2,761,741 $ 2,352,721
============== =============== =============== ================
Loss before income taxes and
equity in investee companies:
Property and casualty insurance:
Underwriting loss $ (582,142) $ (79,369) $ (1,362,100) $ (494,798)
Net investment income 56,447 72,107 186,820 216,565
Gain on sales of investments 11,044 3,193 379,792 9,608
Gain (loss) on sale of surety and
fidelity operation (3,751) - 370,441 -
--------------- --------------- --------------- ----------------
(518,402) (4,069) (425,047) (268,625)
Information technology consulting (1,321) 2,040 (8,463) 11,596
Write-off of excess of costs over
fair value of net assets acquired - - (195,552) -
Other (28,417) (21,321) (83,926) (41,309)
--------------- --------------- ---------------- ----------------
$ (548,140) $ (23,350) $ (712,988) $ (298,338)
=============== =============== ================ ================
</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
through as late as August 16, 2000, although in some cases the class is defined
more generally to include the purchasers of any securities of the Company during
the putative class period. In August 2000, several bondholders commenced
putative class actions in the same court against the Company and several of its
present or former officers and directors. 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 through 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.
By order dated October 6, 2000, the Court consolidated the various stockholder
and bondholder actions for all purposes into a single action entitled In re
Reliance Group Holdings, Inc. Securities Litigation. The Court has directed the
plaintiffs to file a single consolidated amended class action complaint; to
date, no such complaint has been filed. The Company intends to contest the
consolidated 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 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 third quarter and first nine months of 2000, the Company increased its
deferred tax valuation allowance by $252.0 million and $449.5 million, of which
$186.3 million and $364.7 million was charged to income and the remainder, $65.7
million and $84.8 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 nine month
period ended September 30, 1999 of $55.5 million, including the reversal of
$31.5 million of previously accrued interest expense.
17
<PAGE>
11. ADOPTION OF ACCOUNTING PRONOUNCEMENTS
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.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities." This statement establishes accounting and reporting
standards for derivative instruments, including certain derivative instruments
embedded in other contracts and for hedging activities. The adoption of this
Statement, which is not required until 2001, is not expected to have a material
effect on the Company's consolidated financial statements.
18
<PAGE>
RELIANCE GROUP HOLDINGS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
================================================================================
OVERVIEW
At September 30, 2000, the Company had $711.4 million of debt outstanding,
including $237.5 million of bank borrowings with a maturity date of
November 10, 2000 and $291.7 million of senior notes due November 15, 2000
(including $7.5 million held by Reliance Insurance Company). The Company
does not have sufficient cash resources to meet these obligations. In
addition, the Company has $171.8 million of senior subordinated debentures
due to mature in 2003. The Company is in discussions with its creditors and
insurance regulators to develop a comprehensive plan to restructure its
outstanding debt. The Company understands that its bank lenders are not
currently intending to take any action while negotiations continue. There
can be no assurance that the Company's efforts to restructure its
outstanding debt will be successful. As a result of these events, the
Company may seek protection under the Federal Bankruptcy Code, which could
be in conjunction with a negotiated settlement in advance of filing.
The Company has agreed 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 agreed with the Wisconsin Insurance Department to certain similar
restrictions applicable to Reliance National Indemnity Company, a Wisconsin
subsidiary of Reliance Insurance Company, and with the New York State
Insurance Department with respect to United Pacific Insurance Company of
New York, a New York subsidiary of Reliance Insurance Company.
As a result of the rating downgrades by A.M. Best & Company that
occurred in the second quarter of 2000, the Company concluded that its
ability to continue to write property and casualty insurance had been
impaired. The Company's current business plan is to operate its
property and casualty insurance business as a run-off company.
Subsequently, 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 Septmeber 12, 2000, consummated an agreement with Hartford
Fire Insurance Company to sell the renewal rights to certain
of its Financial Products, Excess and Surplus and Property
business.
19
<PAGE>
This transaction resulted in a third quarter of 2000 gain of
$47.5 million.
o During October of 2000, consummated an agreement with Overseas
Partners Ltd. to sell the stock of Reliance Reinsurance
Company. The anticipated gain on this transaction,
which is not expected to be material, will be recognized in
the fourth 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. Any gain from
this transaction is not expected to be material.
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. In the third quarter
of 2000, a gain of $2.0 million was recognized.
o During November of 2000, signed a letter of intent with a
third party to sell the Company's non-standard automobile
operation. The completion of this transaction is subject to
due diligence, execution of a definitive sales agreement and
regulatory approvals.
Gains from these transactions have been offset by costs associated with
the closing of office facilities, and have been included in the third
quarter of 2000 restructuring charge. 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 and earned
will continue to decline. Since the Company has disposed of a
substantial portion of its ongoing property and casualty insurance
operations, including the Company's middle market business, the Company
had concluded that its remaining excess of cost over fair value of net
assets acquired ("Goodwill") had been impaired. Accordingly, the
results for the first nine months of 2000 include a second quarter
charge of $195.6 million ($1.70 per diluted share) representing the
write-off of the June 30, 2000 Goodwill balance.
20
<PAGE>
On May 31, 2000, the Company completed the sale of its surety and fidelity
operation ("Surety") to Travelers Casualty and Surety Company for $569
million. This transaction resulted in an after-tax gain of $232.5 million
and increased statutory policyholders' surplus by $305 million in the first
nine months of 2000.
OPERATING OVERVIEW
The Company incurred an operating loss in the third quarter of 2000, before
gains on sales of investments, of $551.3 million ($4.80 per diluted share).
This operating loss contains a number of significant items:
o An after-tax charge of $215.8 million ($1.88 per diluted
share) for increasing net loss and loss adjustment expense
reserves for policies issued in prior periods, which resulted
from updated information and subsequent developments.
o An increase in the Company`s deferred tax asset valuation
allowance of $252.0 million of which $186.3 million ($1.62 per
diluted share) was charged to income and the remainder, $65.7
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 $18.1 million ($.16 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 nine months of 2000, before gains
on sales of investments and the gain from the sale of Surety, was $1.38
billion ($12.07 per diluted share.) This operating loss contains a number
of significant items:
o An after-tax charge of $531.0 million ($4.63 per diluted
share) for increasing net loss and loss adjustment expense
reserves for policies issued in prior periods, 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 of
$195.6 million ($1.70 per diluted share).
21
<PAGE>
o An increase in the Company's deferred tax asset valuation
allowance of $449.5 million, of which $364.7 million ($3.18
per diluted share) was charged to income and the remainder,
$84.8 million charged directly to comprehensive income.
o An after-tax restructuring charge of $67.0 million ($.58 per
diluted share).
The Company incurred on operating loss of $17.1 million ($.15 per diluted
share) and $160.6 million ($1.40 per diluted share) in the third quarter and
first nine months of 1999. The operating results in the nine-month period ended
September 30, 1999 contain several significant items:
o An after-tax charge of $147.7 million ($1.29 per diluted
share) for increasing net loss reserves for policies issued in
prior periods, 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 An after-tax benefit of $55.5 million ($.49 per diluted share)
resulting from the settlement of various federal income tax
issues.
o An after-tax restructuring charge of $15.6 million ($.14 per
diluted share).
The net loss in the third quarter and first nine months of 2000 was $546.5
million ($4.76 per diluted share) and $905.5 million ($7.89 per diluted
share), respectively, and includes after-tax gain on sales of investments
of $7.2 million ($.06 per diluted share) and $246.9 million ($2.15 per
diluted share). These investment gains primarily resulted from the sale of
common stock of Symbol Technologies, Inc. Also included in the net loss
for the first nine months of 2000, is an after-tax gain on the sale of
Surety of $232.5 million ($2.03 per diluted share).
The net loss in the third quarter of 1999 was $15.1 million ($.13 per
diluted share) which includes an after-tax gain on sales of investments of
$2.1 million ($.02 per diluted share). The net loss for the first nine
months of 1999 was $187.5 million ($1.64 per diluted share) which included
(i) an after-tax charge of $57.9 million ($.51 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) an after-tax gain on sales
of investments of $6.0 million ($.05 per diluted share).
22
<PAGE>
PROPERTY AND CASUALTY INSURANCE OPERATIONS
Net premiums written and earned in the third quarter of 2000 were $109.8
million and $458.9 million compared to $653.8 million and $719.3 million in
the corresponding prior year period. Net premiums written and earned in the
first nine months of 2000 were $1.13 billion and $1.65 billion compared to
$2.01 billion and $1.89 billion in the corresponding 1999 period. These
declines resulted from the Company's inability to write a substantial
portion of its property and casualty insurance business and the resultant
sales of renewal rights to many of its lines of business. The Company
expects its volume of premium writings to continue to decline in future
periods.
The property and casualty insurance underwriting loss was $582.1 million in
the third quarter of 2000, which includes a pretax charge of $332 million
to increase net loss and loss adjustment expense reserves. In the third
quarter of 2000, the Company engaged an independent actuarial firm,
Tillinghast-Towers Perrin, to conduct a comprehensive actuarial review of
its loss reserves. Following the completion of this review, which revealed
significant deterioration in a number of lines of business, the Company
concluded that an increase in net loss and loss adjustment expense reserves
was appropriate. The increase was comprised of the following:
o $115.5 million in general liability lines, including higher than
expected losses reported to the Company on assumed reinsurance
treaties. In addition, the Company experienced adverse development in
certain lines of professional liability and asbestos claims.
o $70.8 million for commercial automobile to reflect continued adverse
development including losses in trucking and several transportation
programs.
o $60.4 million for property and marine lines reflecting inadequate
pricing of policies written in prior years.
o $65.6 million for an increase in loss adjustment expenses representing
the cost of the claims department which will now be fully devoted to
settling reported claims, rather than underwriting and/ or marketing.
23
<PAGE>
o $19.7 million for other lines of business including accident and
health and personal automobile, partially offset by favorable
prior-year development in workers compensation.
In addition to the above, the property and casualty insurance operations
recorded a restructuring charge of $27.9 million in the third quarter of
2000 (see note 4 to the unaudited consolidated financial statements for
discussion of the restructuring charge) and a write-off of $11.7 million of
deferred policy acquisition costs in property and commercial automobile
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.
For the first nine months of 2000, the property and casualty underwriting
loss was $1.36 billion which includes a pretax charge of $816.9 million to
increase net loss and loss adjustment expense reserves and the cost of
ceding to reinsurers losses under various stop loss treaties. The increase
in net loss reserves is due principally to higher than expected losses in
general liability, commercial automobile, property, marine and aviation
lines and an increase in construction defect claims. In addition,
underwriting results for the first nine months of 2000 include a
restructuring charge of $97.4 million and a write-off of $27.6 million of
deferred policy acquisition costs.
The property and casualty insurance underwriting loss was $79.4 million and
$494.8 million in the third quarter and first nine months of 1999. Included
in the underwriting loss for the first nine months of 1999 was, (i) a
second quarter pretax charge of $330.4 million to increase net loss
reserves and the cost of ceding to reinsurers losses under various stop
loss treaties, (ii) catastrophe claims of $54.5 million, and (iii) a $24
million restructuring charge.
PROPERTY AND CASUALTY INSURANCE INVESTMENT RESULTS
Net investment income of the property and casualty insurance operations
declined to $56.4 million and $186.8 million in the third quarter and first
nine months of 2000, from $72.1 million and $216.6 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. The Company
expects net investment income to gradually decline in future periods, as
cash is utilized to pay insurance claims and operating expenses.
Gains on sales of investments were $11.0 million and $397.8 million in the
third quarter and first nine months of 2000, which includes gains of $24.8
24
<PAGE>
million and $417.0 million, respectively, from the sale of a portion of the
Company's investment in Symbol Technologies, Inc. ("Symbol") common stock.
As of October 31, 2000, the Company owns 8.2 million shares of Symbol
common stock with a market value of $371.4 million and an unrealized gain
of $364.2 million. In the third quarter and first nine months of 2000,
gains from the sale of Symbol common stock were partially offset by losses
from sales of certain fixed-income securities and write-downs of certain
other fixed-income securities equal to the difference between their cost
and market values to reflect other than temporary declines. Gains on sales
of investments was $3.2 million and $9.6 million in the third quarter and
first nine months of 1999.
INVESTMENT PORTFOLIO
During 2000 the Company concluded that it no longer intends to hold fixed
income securities classified as "held for investment" to maturity. As a
result, in 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 (deficit). All fixed income
securities are classified as "available for sale" and, accordingly, are
carried at quoted market.
At September 30, 2000, the Company's investment portfolio aggregated $2.97
billion (at cost), of which 98% was invested in fixed maturities and 2% was
invested in equity securities. At September 30, 2000, the carrying values
of non-investment grade securities and securities not rated by Standard and
Poor's were $322.2 million (11% of the fixed income portfolio) and $141.3
million (5% 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
$40.8 million and $126.4 million in the third quarter and first nine months
of 2000, from $54.6 million and $181.6 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 $11.9 million and $36.3 million in the third quarter and
first nine months of 2000 compared to $17.5 million and $60.3 million in
the corresponding prior-year periods. Gross margin percentages were 29.1%
and 29% in the third quarter and first nine months of 2000 compared to 32%
and 33% 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,
25
<PAGE>
general and administrative expenses, resulted in a pretax loss of $1.3
million and $8.5 million in the third quarter and first nine months of
2000. Included in the pretax loss in the first nine 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 third quarter and first nine months of 1999 was $2.0
million and $11.6 million, respectively. RCG's revenues and expenses are
included in other revenues and other operating expenses in the accompanying
unaudited consolidated statement of operations.
EQUITY IN INVESTEE COMPANIES
Equity income from the Company's investment in LandAmerica Financial Group,
Inc. was $1.6 million and $4.5 million in the third quarter and first nine
months of 2000, compared to $1.3 million and $5.8 million in the
corresponding 1999 periods. Equity income from the Company's investment in
Zenith National Insurance Corp. ("Zenith"), which was sold in October 1999,
was $23.8 million in the first nine months of 1999 and included a gain of
$24.9 million representing the Company's pro rata portion of a gain
realized by Zenith.
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 nine months ended September 30,
2000. As discussed in the "Overview" section of this management's
discussion and analysis, the Company does not have sufficient cash
available at the holding company to repay its bank borrowings and senior
notes due in November of 2000. See "Overview" section for further
discussion. The Company does not intend to pay interest on its senior notes
and senior subordinated debentures due on November 15, 2000. The Company's
ability to receive cash dividends has depended upon and continues to depend
upon the dividend paying ability of its insurance subsidiaries. Based upon
recent events as described in the
26
<PAGE>
"Overview" section of this management's discussion and analysis, the
Company has agreed 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 has agreed with
the Wisconsin Insurance Department to certain similar restrictions
applicable to Reliance National Indemnity Company, a Wisconsin subsidiary
of Reliance Insurance Company, and with the New York State Insurance
Department with respect to United Pacific Insurance Company of New York, a
New York subsidiary of Reliance Insurance Company.
For the nine months ended September 30, 2000, the Company utilized $1.44
billion of cash flow for operating activities. The Company generated $8.9
million in the corresponding 1999 period. The decrease in operating cash
flow reflects an increase in net payments for property and casualty policy
claims and related expenses and net cash payments made to settle issues
involving the Unicover workers' compensation reinsurance facility. The
Company anticipates that it will contine 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 $1.54 billion and $33.4 million of cash flow from
investing activities for the nine months ended September 30, 2000 and
September 30, 1999, respectively, primarily from the net sales of
marketable securities and, in 2000, the sale of property and casualty
operations, primarily the surety and fidelity insurance operation.
For the nine months ended September 30, 2000, the Company used $23.9
million of cash flow for financing activities primarily for the payment of
debt relating to real estate. For the nine months ended September 30, 1999,
the Company used $41.3 million of cash flow for financing activities
primarily for the purchase of treasury stock and payment of dividends.
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.
27
<PAGE>
RELIANCE GROUP HOLDINGS, INC. AND SUBSIDIARIES
PART II. OTHER INFORMATION
--------------------------------------------------------------------------------
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
27. Financial Data Schedule.
(b) Reports on Form 8-K.
During the quarter for which this report is filed, the Company
filed a Report on Form 8-K, dated (date of earliest event
reported) July 31, 2000, reporting an Item 5 matter, the
consummation of the sale to Kemper Casualty Company, Inc.,
Kemper Casualty Insurance Company and Lumbermans Mutual and
Casualty Company of the renewal rights with respect to
Company's Risk Management Individual Large Accounts business.
During the quarter for which this report is filed, the Company
filed a Report on Form 8-K, dated (date of earliest event
reported) August 22, 2000, reporting an Item 7 matter, the
Agreement between Reliance Insurance Company and the
Pennsylvania Insurance Department.
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: November 14, 2000 /s/ George E. Bello
----------------- --------------------
George E. Bello
Executive Vice President and Controller
(Chief Accounting Officer)
29
