<PAGE>
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
/x/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended March 31, 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 May 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 Ended
March 31, 2000 and 1999 (Unaudited).......................... 2
Consolidated Balance Sheet at March 31, 2000 (Unaudited) and
December 31, 1999............................................ 3
Consolidated Statement of Changes in Shareholders' Equity for
the Quarter Ended March 31, 2000 (Unaudited)................. 4
Consolidated Statement of Comprehensive Income (Loss)
for the Quarters Ended March 31, 2000 and 1999 (Unaudited)... 5
Consolidated Condensed Statement of Cash Flows for the Quarters
Ended March 31, 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.............................. 13
PART II. OTHER INFORMATION, AS APPLICABLE................................ 21
SIGNATURES ............................................................. 22
<PAGE>
RELIANCE GROUP HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
Quarter Ended March 31 2000 1999
- ----------------------------------------------------------------------------------
(In thousands, except per share amounts)
<S> <C> <C>
Revenues:
Premiums earned ..................................... $ 618,010 $ 588,994
Net investment income ............................... 66,739 73,188
Gain on sales of investments ........................ 280,049 9,177
Other ............................................... 58,435 78,667
----------- -----------
1,023,233 750,026
----------- -----------
Claims and expenses:
Policy claims and settlement expenses ............... 492,944 391,686
Policy acquisition costs and other insurance expenses 220,662 212,548
Restructuring charge ................................ -- 24,000
Interest ............................................ 14,775 15,493
Other operating expenses ............................ 74,535 85,688
----------- -----------
802,916 729,415
----------- -----------
Income before income taxes and equity in
investee companies .............................. 220,317 20,611
Provision for income taxes .......................... (74,700) (5,600)
Equity in investee companies ........................ (118) 27,290
----------- -----------
Income before cumulative effect of accounting change 145,499 42,301
Cumulative effect of change in accounting
for insurance assessments ...................... -- (57,850)
----------- -----------
Net income (loss) ................................... $ 145,499 $ (15,549)
=========== ===========
Basic per share information:
Income before cumulative effect of accounting change $ 1.27 $ .37
=========== ===========
Net income (loss) ................................... $ 1.27 $ (.13)
=========== ===========
Diluted per share information:
Income before cumulative effect of accounting change $ 1.23 $ .36
=========== ===========
Net income (loss) ................................... $ 1.23 $ (.13)
=========== ===========
</TABLE>
See notes to consolidated financial statements
-2-
<PAGE>
RELIANCE GROUP HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
March 31 December 31
ASSETS 2000 1999
- -----------------------------------------------------------------------------------------------
(In thousands, except per share amount)
<S> <C> <C>
Marketable securities:
Fixed maturities held for investment - at amortized cost
(quoted market $460,059 and $480,016) .................. $ 466,625 $ 484,340
Fixed maturities available for sale - at quoted market
(amortized cost $2,659,915 and $2,849,448) ............. 2,573,166 2,763,508
Equity securities - at quoted market (cost $236,439
and $277,317) .......................................... 912,995 1,004,776
Short-term investments .................................... 226,186 263,042
Cash ........................................................... 146,556 106,207
Premiums and other receivables ................................. 1,857,891 1,763,561
Reinsurance recoverables ....................................... 6,466,181 6,263,553
Federal and foreign income taxes, including deferred taxes ..... 38,743 93,374
Investment in investee company ................................. 421,954 423,398
Deferred policy acquisition costs .............................. 292,394 301,168
Excess of cost over fair value of net assets acquired, less
accumulated amortization ................................. 207,904 210,294
Other assets ................................................... 602,056 938,282
------------ ------------
$ 14,212,651 $ 14,615,503
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
- -----------------------------------------------------------------------------------------------
Unearned premiums .............................................. $ 2,060,134 $ 2,065,411
Unpaid claims and related expenses ............................. 8,362,211 8,285,977
Accounts payable and accrued expenses .......................... 1,247,900 1,842,769
Reinsurance ceded premiums payable ............................. 680,617 667,924
Term loans and short-term debt ................................. 279,168 279,105
Debentures and notes ........................................... 455,980 455,980
------------ ------------
13,086,010 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 ................................ 554,393 551,514
Retained earnings ......................................... 230,571 85,072
Accumulated other comprehensive income .................... 341,032 381,106
------------ ------------
1,137,613 1,029,309
Treasury stock, 1,331 shares .............................. (10,972) (10,972)
------------ ------------
1,126,641 1,018,337
------------ ------------
$ 14,212,651 $ 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 Unrealized Foreign
Common Paid-In Retained Gain on Currency Treasury Shareholders'
Stock Capital Earnings Investments Translation Stock Equity
- ------------------------------------------------------------------------------------------------------------------------------------
(In thousands, except per share amount)
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, January 1, 2000 ........... $11,617 $ 551,514 $ 85,072 $ 413,133 $ (32,027) $ (10,972) $ 1,018,337
Transactions of investee
company .................... 2,879 (3,519) (640)
Net income ......................... 145,499 145,499
Depreciation after deferred
income taxes ............. (33,614) (33,614)
Foreign currency translation ....... (2,941) (2,941)
------- ---------- ---------- ------------ ------------ --------- -----------
Balance, March 31, 2000 ............ $11,617 $ 554,393 $ 230,571 $ 376,000 $ (34,968) $ (10,972) $ 1,126,641
======= ========== ========== ============ ============ ========= ===========
</TABLE>
See notes to consolidated financial statements
-4-
<PAGE>
RELIANCE GROUP HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (LOSS) (UNAUDITED)
<TABLE>
<CAPTION>
Quarter Ended March 31
-------------------------------------------------------------------------------
2000 1999
------------------------------------- -------------------------------------
Income tax Income tax
Pretax effect After-tax Pretax effect After-tax
--------- ---------- --------- --------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Net income (loss) ............................... $ 145,499 $ (15,549)
--------- ---------
Other comprehensive income (loss):
Unrealized holding gains (losses) ............... $ 227,451 $ (79,609) $ 147,842 $(158,188) $ 55,367 $(102,821)
Less: reclassification adjustment for
gains realized in net income (loss) ........ (284,577) 99,602 (184,975) (14,380) 5,033 (9,347)
------------------------------------- ------------------------------------
Net unrealized gains (losses) recognized
in other comprehensive income (loss) ....... (57,126) 19,993 (37,133) (172,568) 60,400 (112,168)
Foreign currency translation .................... (4,525) 1,584 (2,941) (1,532) 536 (996)
------------------------------------- ------------------------------------
Total other comprehensive income (loss) ......... $ (61,651) $ 21,577 (40,074) $(174,100) $ 60,936 (113,164)
------------------------------------- ------------------------------------
Total comprehensive income (loss) ............... $ 105,425 $(128,713)
========= =========
</TABLE>
See notes to consolidated financial statements
-5-
<PAGE>
RELIANCE GROUP HOLDINGS, INC AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENT OF CASH FLOWS (UNAUDITED)
Quarter Ended March 31 2000 1999
- --------------------------------------------------------------------------------
(In thousands)
CASH FLOWS USED BY OPERATING ACTIVITIES .............. $(482,924) $ (89,173)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of:
Fixed maturities available for sale .............. 247,822 157,569
Equity securities ................................ 337,188 6,748
Maturities and redemptions of:
Fixed maturities available for sale .............. 19,624 61,562
Fixed maturities held for investment ............. 16,930 27,714
Purchases of:
Fixed maturities available for sale .............. (85,585) (259,201)
Equity securities ................................ (23,862) (13,704)
Decrease in short-term investments - net ............. 40,848 159,281
Other - net .......................................... (29,671) (37,981)
--------- ---------
523,294 101,988
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in term loans ............................... 717 45,000
Decrease in short-term debt - net .................... -- (1,000)
Repayments of term loans ............................. (738) (43,214)
Redemption of debentures and notes ................... -- (7,500)
Issuance of common stock ............................. -- 247
Dividends ............................................ -- (9,287)
Purchase of treasury stock ........................... -- (10,972)
--------- ---------
(21) (26,726)
--------- ---------
Increase (decrease) in cash .......................... 40,349 (13,911)
Cash, beginning of period ............................ 106,207 81,612
--------- ---------
Cash, end of period .................................. $ 146,556 $ 67,701
========= =========
Supplemental disclosures of cash flow information:
Interest paid ........................................ $ 4,300 $ 3,000
========= =========
Income taxes (paid) refunded ......................... $ (200) $ 7,500
========= =========
See notes to consolidated financial statements
-6-
<PAGE>
RELIANCE GROUP HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
- --------------------------------------------------------------------------------
1. UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
In the opinion of management, the accompanying unaudited consolidated financial
statements include all adjustments (consisting of normal recurring accruals
only) considered necessary to present fairly the financial position at March 31,
2000, and the results of operations, changes in shareholders' equity,
comprehensive income (loss) and cash flows for all periods presented. The
results of operations for the interim periods are not necessarily indicative of
the results that may be expected for any other interim period or for the entire
year.
For a summary of significant accounting policies (which have not changed from
December 31, 1999) and additional financial information, see the Company's
Annual Report on Form 10-K for the year ended December 31, 1999.
2. SALE OF SURETY
On April 10, 2000, the Company reached a definitive agreement to sell the
Reliance Surety operation to Travelers Property Casualty Corp. for $580 million
in cash. This transaction will result in an after-tax gain of approximately $240
million and increase statutory policyholders' surplus by approximately $300
million. The closing of the sale, which is subject to customary corporate and
regulatory approvals, is expected to occur in the second quarter of 2000.
7
<PAGE>
3. EQUITY IN INVESTEE COMPANIES
The Company's equity in investee companies is as follows:
Quarter Ended March 31 2000 1999
- -----------------------------------------------------------------------------
(In thousands)
LandAmerica Financial Group, Inc. ................... $ (118) $ 2,105
Zenith National Insurance Corp. (1).................. -- 25,185
-------- --------
$ (118) $ 27,290
======== ========
(1) The equity in investee company for the quarter ended March 31, 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:
Quarter Ended March 31 2000 1999
- -----------------------------------------------------------------------------
(In thousands, except per share amounts)
Revenues........................................ $ 406,639 $ 489,903
Income (loss) before income taxes............... (3,108) 23,585
Net income (loss)............................... (2,051) 14,870
Net income (loss) per diluted share............. (.30) .73
8
<PAGE>
4. Reinsurance
The reconciliation of property and casualty insurance direct premiums to net
premiums is as follows (in thousands):
Quarter Ended March 31
-----------------------------------------------------
2000 1999
-----------------------------------------------------
Premiums Premiums Premiums Premiums
Written Earned Written Earned
---------- ---------- ---------- ----------
Direct............. $1,114,874 $1,113,204 $1,325,151 $1,040,959
Assumed............ 184,505 163,418 352,027 266,233
Ceded.............. (674,279) (658,612) (960,054) (718,198)
---------- ---------- ---------- ----------
Net premiums....... $ 625,100 $ 618,010 $ 717,124 $ 588,994
========== ========== ========== ==========
The reconciliation of property and casualty insurance gross policy claims and
settlement expenses to net policy claims and settlement expenses is as follows
(in thousands):
Quarter Ended March 31
-----------------------
2000 1999
---------- ----------
Gross........................................ $1,072,793 $1,028,115
Reinsurance recoveries....................... (579,849) (636,429)
---------- ----------
Net policy claims and settlement expenses.... $ 492,944 $ 391,686
========== ==========
5. EARNINGS PER SHARE
The basic and diluted per share reconciliations of income before cumulative
effect of accounting change to net income (loss) is as follows:
Quarter Ended March 31 2000 1999
- ------------------------------------------------------------------------------
Basic income (loss) per share:
Income before cumulative effect
of accounting change............................ $ 1.27 $ .37
Cumulative effect of change in accounting
for insurance assessments....................... -- (.50)
------ ------
Net income (loss).................................. $ 1.27 $ (.13)
====== ======
Diluted income (loss) per share:
Income before cumulative effect
of accounting change............................ $ 1.23 $ .36
Cumulative effect of change in accounting
for insurance assessments....................... -- (.49)
------ ------
Net income (loss).................................. $ 1.23 $ (.13)
====== ======
9
<PAGE>
The reconciliation of the basic to diluted per share information is as follows:
Quarter Ended March 31 2000 1999
- ------------------------------------------------------------------------------
(In thousands, except per share amounts)
Income before cumulative effect of
accounting change................................. $145,499 $ 42,301
======== ========
Weighted average number of basic shares outstanding.. 114,734 115,615
Effect of dilutive securities-options................ 3,132 2,698
-------- --------
Weighted average number of dilutive shares
outstanding ....................................... 117,866 118,313
======== ========
Basic per share income before cumulative
effect of accounting change....................... $ 1.27 $ .37
======== ========
Diluted per share income before cumulative
effect of accounting change....................... $ 1.23 $ .36
======== ========
10
<PAGE>
6. BUSINESS SEGMENT INFORMATION
Quarter Ended March 31 2000 1999
- --------------------------------------------------------------------------------
(In thousands)
Revenues:
Property and casualty insurance
Premiums earned:
Reliance National .......................... $ 270,131 $ 249,981
Reliance Insurance ......................... 182,614 193,394
Reliance Personal .......................... 76,329 57,045
Reliance Reinsurance ....................... 36,571 38,970
Reliance Surety ............................ 52,329 49,614
Other ...................................... 36 (10)
----------- -----------
618,010 588,994
Net investment income ......................... 66,739 73,188
Gain on sales of investments .................. 280,049 9,177
----------- -----------
964,798 671,359
Information technology consulting ................ 43,384 63,952
Other ............................................ 15,051 14,715
----------- -----------
$ 1,023,233 $ 750,026
=========== ===========
Income before income taxes and
equity in investee companies:
Property and casualty insurance
Underwriting gain (loss):
Reliance National .......................... $ (63,314) $ (5,457)
Reliance Insurance ......................... (29,605) (10,581)
Reliance Personal (1) ...................... (13,007) (34,905)
Reliance Reinsurance ....................... (6,481) (1,035)
Reliance Surety ............................ 16,110 10,986
Other ...................................... (214) 399
----------- -----------
(96,511) (40,593)
Net investment income ......................... 66,739 73,188
Gain on sales of investments .................. 280,049 9,177
----------- -----------
250,277 41,772
Information technology consulting ................ (1,451) 4,878
Other ............................................ (28,509) (26,039)
----------- -----------
$ 220,317 $ 20,611
=========== ===========
(1) Includes the effect of the $24.0 million restructuring charge in 1999.
See note 7 to the unaudited consolidated financial statements.
11
<PAGE>
7. RESTRUCTURING CHARGE
During the first quarter of 1999, the Company recorded a $24 million
restructuring charge. This charge resulted from the consolidation of the
Company's non-standard automobile insurance operation, Reliant, formerly part of
Reliance National, with Reliance Direct, formerly a separate operating unit. The
new combined operating unit is named Reliance Personal.
The restructuring charge includes the write-off of $18 million of deferred
policy acquisition costs at Reliance Direct, which resulted from the decision to
offer a new integrated product, change marketing focus and support, non-renew
certain policies, and the related reduction in the estimate of automobile policy
renewal rates. The charge also includes write-off of $2.2 million of previously
capitalized information technology expenditures at Reliance Direct which will
not be utilized by Reliance Personal and which have no alternative use. The
charge also includes $2 million of severance costs, of which $1.7 million has
been paid through March 31, 2000, related to the termination of Reliance Direct
employees, and $1.8 million of costs, of which $1.7 million has been paid
through March 31, 2000, associated with the termination of certain of Reliance
Direct's third party service contracts. The Company estimates that the remaining
severance and terminated service contracts will be paid by the end of 2000.
On February 29, 2000, the Company announced a series of strategic and financial
actions and initiatives including the consolidation of the corporate
infrastructure and business units, which is expected to result in expense
savings. In conjunction with the consolidation effort, which the Company
believes will be finalized prior to June 30, 2000, the Company expects to incur
a significant restructuring charge in the second quarter of 2000. In addition,
the Company expects, under certain circumstances, to incur a pretax charge of
approximately $18 million, in 2000, related to its capital raising initiatives.
8. 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 $57.9 million ($.49 per diluted share), net of a $31.1
million income tax benefit. Approximately $61 million of the $89 million pretax
charge relates to loss-based assessments for workers' compensation insurance.
The remaining $28 million charge relates primarily to premium-based assessments
and assessments by guaranty funds.
12
<PAGE>
RELIANCE GROUP HOLDINGS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
================================================================================
OVERVIEW
On April 10, 2000, the Company reached a definitive agreement to sell the
Reliance Surety operation to Travelers Property Casualty Corp. for $580
million in cash. This transaction will result in an after-tax gain of
approximately $240 million and increase policyholders' surplus by
approximately $300 million. The closing of the sale, which is subject to
customary corporate and regulatory approvals, is expected to occur in the
second quarter of 2000. The net proceeds from the sale, which will be
retained by Reliance Insurance Company, are expected to be invested in
fixed income securities. After taking into account the expected increase
in net investment income on an ongoing basis, the Company estimates that,
as a result of the sale, its after-tax annualized operating income will be
reduced by $24 million.
On February 29, 2000, the Company announced a series of strategic and
financial actions and initiatives which, in addition to the sale of
Reliance Surety, are designed to strengthen its capital and improve its
credit rating. These actions include:
o Extension of the maturity of $237.5 million of bank borrowings from
March 31, 2000 to August 31, 2000.
o Suspension of the Company's $.08 per share quarterly dividend, which
is estimated to reduce cash payments by $37 million per year.
o Consolidation of the corporate infrastructure and business units
which is expected to result in approximately $80 million in
annualized expense savings. In conjunction with the consolidation
effort, which the Company believes will be finalized prior to June
30, 2000, the Company expects to incur a significant restructuring
charge in the second quarter of 2000.
The Company had an operating loss in the first quarter of 2000, before
gains on sale of investments, of $36.5 million ($.31 per diluted share).
The first quarter 2000 operating loss includes after-tax underwriting
losses of $40.0 million ($.34 per diluted share) from property and
casualty insurance business that has been classified as run-off. Operating
income in the first quarter of 1999 was $11.4 million ($.10 per diluted
share) and includes an after-tax restructuring charge of $15.6 million
($.13 per diluted share). See note 7 to the unaudited consolidated
financial statements for further discussion of the 1999 restructuring
charge. Net income in the first quarter of 2000 was $145.5 million ($1.23
per diluted share) and included after-tax gains on sales of investments of
$182.0 million ($1.54 per diluted share). These investment gains resulted
from the sale of equity securities, primarily common stock of Symbol
Technologies, Inc. The net loss in the first quarter of 1999 was $15.5
million ($.13 per diluted share). The net loss resulted from the adoption
of the American Institute of Certified Public Accountants' Statement of
Position No. 97-3 ("SOP"). The effect of adopting the SOP was to reduce
net income for the cumulative effect of the change in accounting principle
by $57.9 million ($.49 per diluted share). The first
13
<PAGE>
quarter 1999 net results also include: (i) a gain of $24.9 million ($.21
per diluted share) representing the pro rata portion of a gain realized by
an investee company, Zenith National Insurance Corp., on the sale of its
CalFarm Insurance subsidiary, and (ii) after-tax gains on sales of
investments of $6.0 million ($.05 per diluted share).
PROPERTY AND CASUALTY INSURANCE OPERATIONS
The consolidated property and casualty insurance underwriting loss was
$96.5 million in the first quarter of 2000, which includes a $62 million
underwriting loss from business that has been classified as run-off. The
consolidated underwriting loss in the first quarter of 1999 was $40.6
million, which included a $24.0 million restructuring charge for Reliance
Personal.
14
<PAGE>
Net premiums written, net premiums earned, underwriting gain (loss) and
combined ratios for each of the property and casualty insurance operating
units are as follows (dollars in thousands):
Quarter Ended March 31
--------------------------
2000 1999
--------- ---------
Net Premiums Written
Reliance National $ 312,754 $ 352,040
Reliance Insurance 159,934 186,931
Reliance Personal 54,782 79,456
Reliance Reinsurance 48,941 54,845
Reliance Surety 48,662 43,872
Other 27 (20)
--------- ---------
$ 625,100 $ 717,124
========= =========
Net Premiums Earned
Reliance National $ 270,131 $ 249,981
Reliance Insurance 182,614 193,394
Reliance Personal 76,329 57,045
Reliance Reinsurance 36,571 38,970
Reliance Surety 52,329 49,614
Other 36 (10)
--------- ---------
$ 618,010 $ 588,994
========= =========
Underwriting Gain (Loss)
Reliance National $ (63,314) $ (5,457)
Reliance Insurance (29,605) (10,581)
Reliance Personal (1) (13,007) (34,905)
Reliance Reinsurance (6,481) (1,035)
Reliance Surety 16,110 10,986
Other (214) 399
--------- ---------
$ (96,511) $ (40,593)
========= =========
Combined Ratios (2)
Reliance National 121.8% 101.9%
Reliance Insurance 115.5% 105.1%
Reliance Personal (1) 117.1% 161.3%
Reliance Reinsurance 117.8% 102.8%
Reliance Surety 69.1% 77.8%
Consolidated 114.6% 106.7%
(1) Includes the effect of the $24.0 million restructuring charge in
1999.
(2) Calculated on a GAAP basis, after policyholders' dividends. Combined
ratios for Other are not presented since they are not meaningful.
15
<PAGE>
RELIANCE NATIONAL
The decline in net premiums written in the first quarter of 2000 primarily
resulted from run-off business which has either been cancelled or not
renewed, including foreign sourced business. Foreign sourced premiums were
$85.8 million in the first quarter of 2000 compared to $124.6 million in
corresponding 1999 period. The decline in net premiums written in 2000
also reflects a slowdown in new business production. The increase in net
premiums earned in 2000 reflects increased writings in 1999 which are
being earned in 2000.
The increased underwriting loss in the first quarter of 2000 primarily
reflects run-off business which had an underwriting loss of $50.0 million,
including an underwriting loss from foreign sourced business.
In conjunction with the Company's plan to reduce operating expenses,
Reliance National will be restructured and will merge with Reliance
Insurance.
RELIANCE INSURANCE
The decline in net premiums written and earned in 2000 reflects the
decision to curtail writing certain under-performing transportation lines
of business, and a slowdown in new business production, which more than
offset price increases on renewed business.
The increased underwriting loss in the first quarter of 2000 primarily
reflects run-off business which had an underwriting loss of $12.5 million,
primarily in certain transportation lines. The first quarter 2000
underwriting loss also reflect increased losses in workers' compensation.
In conjunction with the Company's plan to reduce operating expenses,
Reliance Insurance will be restructured and will merge with Reliance
National.
RELIANCE PERSONAL
The decline in net written premiums in 2000 reflects the ceding of $20.8
million of Reliance Direct premium in connection with the transfer to a
third party of all of Reliance Direct's liabilities for unearned premium
and related insured losses. The Company also transferred substantially all
of Reliance Direct's assets and non-insurance liabilities. The gain from
these transactions was not significant.
The underwriting loss in the first quarter of 1999 includes a $24 million
restructuring charge. See note 7 to the unaudited consolidated financial
statements for further discussion. Excluding the effect of the
restructuring charge, the first quarter 2000 underwriting loss increased
reflecting losses in the non-standard automobile line. Reliance Personal
is implementing significant price increases and using more stringent
underwriting criteria in its non-standard automobile line.
16
<PAGE>
RELIANCE REINSURANCE
The decline in net premiums written and earned in the first quarter of
2000 resulted from Reliance Reinsurance's decision to discontinue its
marine and aviation lines, and from lower premiums in the agricultural
reinsurance division due to the loss of key personnel.
The increased underwriting loss in the first quarter of 2000 reflects
reserve strengthening in marine and aviation lines.
RELIANCE SURETY
On April 10, 2000, the Company signed a definitive agreement to sell
Reliance Surety. See "Overview" section of this Management's Discussion
and Analysis.
The increase in net premiums written and earned in 2000 resulted from
growth in contract surety and commercial surety premiums.
The increase in underwriting profits in 2000 reflects a low level of loss
activity particularly in contract surety and fidelity lines of business.
PROPERTY AND CASUALTY INSURANCE INVESTMENT RESULTS
Net investment income of the property and casualty insurance operations
declined to $66.7 million during the three-month period ending March 31,
2000 from $73.2 million in the corresponding 1999 period. The decline
primarily resulted from the reduction in the size of the average fixed
maturity investment portfolio reflecting the utilization of operating cash
flow in 1999 and 2000.
Gains on sales of investments were $280.0 million in first quarter of 2000
which included $269.0 million from the sale of a portion of the Company's
investment in Symbol Technologies, Inc. ("Symbol") common stock. As of May
10, 2000, the Company owns 11.0 million shares of Symbol common stock with
a market value of $457.3 million and an unrealized gain of $447.9 million.
Gains on sales of investments were $9.2 million in the first quarter of
1999.
INVESTMENT PORTFOLIO
At March 31, 2000, the Company's investment portfolio aggregated $3.66
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.
Fixed maturity securities classified as held for investment consist
primarily of corporate securities of which substantially all are rated
investment grade. Fixed maturity securities classified as available for
sale consist of corporate, U.S. Treasury and Government National Mortgage
Association (GNMA) securities. At March 31,
17
<PAGE>
2000, the carrying values of non-investment grade securities and
securities not rated by Standard and Poor's were $453.2 million (14% of
the fixed income portfolio) and $200.7 million (6% of the fixed income
portfolio), respectively. Substantially all of the Company's
non-investment grade and non-rated securities are classified as available
for sale.
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
$43.4 million in the first three months of 2000 from $64.0 million in the
corresponding 1999 period. The decline in revenue resulted from a slowdown
in market demand being experienced throughout the entire industry and a
decline in solutions business reflecting the reluctance of clients to
begin new technology initiatives while monitoring the effectiveness of
their Year 2000 conversions. The Company expects its information
technology revenues to increase sequentially in the second quarter and the
second half of 2000. Gross margins (revenues less cost of services) were
$12.2 million in the first quarter of 2000 compared to $21.1 million in
the first quarter of 1999. Gross margins as a percentage of revenue were
28.2% in the first quarter of 2000 compared to 33.0% in the corresponding
1999 period. The decline in the gross margin percentage reflects a lower
consultant utilization rate and 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 $1.5
million in the first quarter of 2000 compared to pretax income of $4.9
million in the first quarter of 1999. 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 (loss) from the Company's investment in LandAmerica
Financial Group, Inc. ("LandAmerica") was $(118,000) in the first quarter
of 2000 compared to $2.1 million in the corresponding 1999 period. The
decline in LandAmerica's equity earnings reflects an increase in mortgage
interest rates. Equity earnings in the first quarter of 1999 includes a
gain of $24.9 million representing the Company's pro rata portion of a
gain realized by Zenith National Insurance Corp. ("Zenith") on the sale of
its CalFarm subsidiary. The Company sold its entire investment in Zenith
in the third quarter of 1999.
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 three months ended March 31,
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. 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
18
<PAGE>
the greater of (a) 10% of the preceding year-end policyholders' surplus or
(b) the preceding year's statutory net income. Furthermore, the
Pennsylvania Insurance Department has broad discretion to limit the
payment of dividends by insurance companies. During 2000, $124 million
would be available for dividend payments by Reliance Insurance Company
under Pennsylvania law without prior approval by the Pennsylvania
Insurance Department. The Company believes that such amount will be
sufficient to meet its operating cash needs. There is no assurance that
Reliance Insurance Company will meet its tests in effect from time to time
under Pennsylvania law for the payment of dividends without prior
Insurance Department approval or that any requested approval will be
obtained. Reliance Insurance Company has been advised by the Pennsylvania
Insurance Department that any required approval will be based upon a
solvency standard and will not be unreasonably withheld. Any significant
limitation of Reliance Insurance Company's dividends would adversely
affect the Company's ability to service its debt.
Reliance Insurance Company collects and invests premiums prior to payment
of associated claims, which are generally made months or years subsequent
to the receipt of premiums. Reliance Insurance Company carefully monitors
its cash, short-term investments and marketable securities to maintain
adequate balances for the timely payment of claims and other operating
requirements. At March 31, 2000, Reliance Insurance Company had $297
million of cash and short-term investments.
For the three months ended March 31, 2000, the Company utilized $482.9
million of cash flow for operating activities compared to $89.2 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 generated $523.3 million and $102.0 million of cash flow from
investing activities for the three months ended March 31, 2000 and March
31, 1999, respectively, primarily from the net sales of marketable
securities.
For the three months ended March 31, 2000, the Company used $21,000 of
cash flow for financing activities. For the three months ended March 31,
1999, the Company used $26.7 million of cash flow for financing activities
primarily for the purchase of treasury stock and payment of dividends.
At March 31, 2000, the Company had $735.1 million of outstanding debt,
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). The Company
expects to repay these amounts by refinancing. In addition, during the
years 2001 to 2004, $176.6 million of debt matures, including $171.8
million of senior subordinated debentures due 2003. The Company expects to
repay these amounts by either refinancing this debt or using cash flow
from operations or a combination thereof.
Maintaining appropriate levels of statutory policyholders' surplus is
considered important by the Company's management, state insurance
regulatory authorities and
19
<PAGE>
agencies that rate the insurers' claims-paying abilities and financial
strength. Failure to maintain certain levels of statutory policyholders'
surplus could result in increased scrutiny or, in some cases, action taken
by state regulatory authorities and/or downgrades in an insurer's ratings.
In the third quarter of 1999, Standard and Poor's and Moody's Investor
Service ("Moody's") placed the ratings of the Company's senior notes,
senior subordinated debentures and the claims paying rating of Reliance
Insurance Company on credit watch with negative implications. Standard and
Poor's also lowered the claims paying rating of Reliance Insurance Company
to "A-". In addition, A.M. Best & Company ("Best") placed the
"A-(Excellent)" rating of Reliance Insurance Company under review with
negative implications. The Company believes that any downgrade in its Best
rating would adversely affect its ability to underwrite certain lines of
business.
According to the various rating agencies, these actions were taken due to
uncertainty relating to the Company's exposure in the Unicover workers'
compensation reinsurance facility ("Unicover"), the Company's ability to
accomplish its capital raising objectives and refinancing of its debt.
However, subsequent to these actions, the Company has made substantial
progress in resolving these uncertainties. In January of 2000, the Company
reached settlements with various parties with respect to Unicover. The
costs of these settlements were recorded in 1999. In addition, the Company
is taking actions designed to strengthen its capital base, including
entering into an agreement with Travelers Property Casualty Corp. to sell
its Reliance Surety operation for cash proceeds of $580 million, the
extension of the maturity date of its bank borrowings until August 31,
2000, and the suspension of cash dividends on the Company's common stock.
As a result of these developments, Best improved the status of Reliance
Insurance Company's rating from "under review with negative implications"
to "under review with developing implications." In addition, Standard &
Poor's reaffirmed its rating on the Company including its investment grade
rating on the senior notes. Moody's lowered its ratings of the Company's
senior notes and senior subordinated debentures, but confirmed the claims
paying rating of Reliance Insurance Company.
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.
20
<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)
January 21, 2000, reporting an Item 5 matter, the conclusion of
settlements with various insurance and reinsurance companies to
resolve outstanding issues relating to a workers' compensation
insurance program created and managed by Unicover Managers, Inc.
During the quarter for which this report is filed, the Company filed
a Report on Form 8-K, dated (date of earliest event reported)
February 28, 2000, reporting an Item 5 matter, the appointment of
George R. Baker as President and Chief Executive Officer of the
Company, Saul P. Steinberg stepping down as Chief Executive Officer
of the Company and the resignation of Robert S. Miller as President
and Director of the Company. The Company also reported an agreement
in principle to sell its Surety business to Travelers Property
Casualty Corp.
21
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
RELIANCE GROUP HOLDINGS, INC.
-----------------------------
(Registrant)
Date: May 15, 2000 /s/ George E. Bello
------------ ---------------------------------------
George E. Bello
Executive Vice President and Controller
(Chief Accounting Officer)
22
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
This schedule contains summary financial information extracted from the
Company's Consolidated Balance Sheet and the Consolidated Statement of
Operations and is qualified in its entirety by reference to such financial
statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<DEBT-HELD-FOR-SALE> 2,573,166
<DEBT-CARRYING-VALUE> 466,625
<DEBT-MARKET-VALUE> 460,059
<EQUITIES> 912,995
<MORTGAGE> 0
<REAL-ESTATE> 186,072
<TOTAL-INVEST> 4,365,044
<CASH> 146,556
<RECOVER-REINSURE> 6,466,181
<DEFERRED-ACQUISITION> 292,394
<TOTAL-ASSETS> 14,212,651
<POLICY-LOSSES> 8,362,211
<UNEARNED-PREMIUMS> 2,060,134
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 735,148
0
0
<COMMON> 11,617
<OTHER-SE> 1,115,024
<TOTAL-LIABILITY-AND-EQUITY> 14,212,651
618,010
<INVESTMENT-INCOME> 66,739
<INVESTMENT-GAINS> 280,049
<OTHER-INCOME> 58,435
<BENEFITS> 492,944
<UNDERWRITING-AMORTIZATION> 220,662
<UNDERWRITING-OTHER> 0
<INCOME-PRETAX> 220,317
<INCOME-TAX> 74,700
<INCOME-CONTINUING> 145,499
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 145,499
<EPS-BASIC> $1.27
<EPS-DILUTED> $1.23
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
