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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Date of Report (date of Earliest Event Reported) - May 31, 2000
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RELIANCE GROUP HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 1-8278 13-3082071
(State or other jurisdiction of (Commission File Number) (IRS Employer
Incorporation) Identification No.)
Park Avenue Plaza 10055
55 East 52nd Street, 29th Floor (Zip Code)
New York, New York
(Address of principal executive offices)
(212) 909-1100
(Registrant's telephone number, including area code)
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N/A
(Former name or address, if changed since last report)
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Item 2. Acquisition or Disposition of Assets.
On May 31, 2000 (the "Closing Date"), Reliance Group Holdings, Inc.
(the "Company"), along with certain of its subsidiaries (the "Subsidiaries"),
and Travelers Casualty and Surety Company ("Travelers"), consummated the sale of
the Company's surety and fidelity business (the "Business") to Travelers. The
sale was made pursuant to the Asset Transfer Agreement, dated as of April 10,
2000, by and among Travelers, the Company, Reliance Insurance Company, Reliance
National Indemnity Company, United Pacific Insurance Company, Reliance Insurance
Company of Illinois, Reliance Surety Company and Reliance National Insurance
Company (Europe) Ltd. Specified insurance liabilities of the Business have been
transferred to Travelers pursuant to the Loss and Unearned Premium Reserve
Portfolio Reinsurance Agreement ("Loss Portfolio Agreement"), dated as of May
31, 2000, by and among Travelers and each of Reliance Insurance Company,
Reliance Surety Company and Reliance National Insurance Company (Europe) Ltd.,
and the Quota Share Reinsurance Agreement, dated as of May 31, 2000, by and
between Travelers and certain subsidiaries of the company.
Pursuant to the Asset Transfer Agreement, Travelers paid an aggregate
cash amount of $580 million which was comprised of a purchase price of $527
million (the "Purchase Price") and a ceding commission of $53 million in
connection with the Loss Portfolio Agreement. The transaction results for the
Company in an after-tax statutory gain of approximately $300 million, and an
after-tax GAAP gain of approximately $240 million. In addition to the reinsured
insurance liabilities, assets transferred to Travelers include computer
equipment, telephone equipment, books and records, certain intellectual property
and other assets related to the Business. The Purchase Price is subject to
adjustment as described in Section 2.5 of the Asset Transfer Agreement based on
Policyholders' Surplus (as defined in the Asset Transfer Agreement) of the
Business and GAAP Net Worth (as defined in the Asset Transfer Agreement) of the
Business as of May 31, 2000. The aggregate consideration for the sale was
determined based on an arm's length negotiation between the Company and
Travelers.
Travelers Casualty and Surety Company will be providing certain
administrative services to the Subsidiaries in connection with the contracts and
policies being reinsured, and has been granted by the Subsidiaries the exclusive
right to issue new surety and fidelity policies in the name of the Subsidiaries
in the United States for two years following the Closing Date and outside of the
United States for five years following the Closing Date.
Prior to the Merger, no material relationship existed between Travelers
and the Company, or any of its affiliates, any director or officer of the
Company or any associate of any such director or officer.
Item 7. Financial Statements and Exhibits.
(a) Not applicable.
(b) Pro forma financial information.
See pages 4 - 8.
(c) Exhibits.
2.1 Asset Transfer Agreement, dated as of April 10, 2000, by and
among Travelers Casualty and Surety Company, Reliance Group
Holdings, Inc., certain subsidiaries of Reliance Group
Holdings, Inc.
<PAGE>
Reliance Insurance Company, Reliance National Indemnity
Company, United Pacific Insurance Company, Reliance Insurance
Company of Illinois, Reliance Surety Company and Reliance
National Insurance Company (Europe) Ltd.
2.2 Loss and Unearned Premium Reserve Portfolio Reinsurance
Agreement, dated as of May 31, 2000, by and among Travelers
Casualty and Surety Company, Reliance Insurance Company,
Reliance Surety Company and Reliance National Insurance
Company (Europe) Ltd.
2.3 Form of Quota Share Reinsurance Agreement, dated as of May 31,
2000, by and between Travelers Casualty and Surety Company and
certain subsidiaries of Reliance Group Holdings, Inc.
2
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
Reliance Group Holdings, Inc. has duly caused this report to be signed on its
behalf by the undersigned hereunto duly authorized.
RELIANCE GROUP HOLDINGS, INC.
By: /s/ Lowell C. Freiberg
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Name: Lowell C. Freiberg
Title: Executive Vice President &
Chief Financial Officer
Date: June 15, 2000
3
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RELIANCE GROUP HOLDINGS, INC. AND SUBSIDIARIES
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED)
YEAR ENDED DECEMBER 31, 1999
(In thousands, except per-share amounts)
The following unaudited pro forma consolidated statement of operations of the
Company and its subsidiaries for the year ended December 31, 1999, gives effect
to the sale of the Company's surety and fidelity operation to Travelers Casualty
and Surety Company, assuming such sale took place as of January 1, 1999. The pro
forma information is based upon the historical financial statements of the
Company and the pro forma adjustments as described in the accompanying notes.
<TABLE>
<CAPTION>
Less: Pro Forma
Surety -------------------------------
Historical Operations (2) Adjustments Adjusted
-------------- -------------- -------------- -------------
<S> <C> <C> <C> <C>
Revenues:
Premiums earned.......................................... $ 2,503,981 $ (206,306) $ -- $ 2,297,675
Net investment income.................................... 286,420 286,420
Gain on sales of investments............................. 63,018 63,018
Other.................................................... 299,837 299,837
----------- ----------- ----------- -----------
3,153,256 (206,306) 0 2,946,950
----------- ----------- ----------- -----------
Claims and expenses:
Policy claims and settlement expenses.................... 2,111,072 (57,561) 2,053,511
Policy acquisition costs and other insurance expenses.... 1,150,720 (107,170) 1,043,550
Restructuring charge..................................... 24,000 24,000
Interest................................................. 61,774 61,774
Reversal of interest expense related to income tax....... (31,500) (31,500)
Other operating expenses................................. 332,864 (417)(2) 332,447
----------- ----------- ----------- -----------
3,648,930 (164,731) (417) 3,483,782
----------- ----------- ----------- -----------
Loss before income taxes and equity in
investee companies................................... (495,674) (41,575) 417 (536,832)
Income tax benefit....................................... 212,200 14,765 226,965
Equity in investee companies............................. 30,778 30,778
----------- ----------- ----------- -----------
Loss before cumulative effect of accounting change....... (252,696) (26,810) 417 (279,089)
Cumulative effect of change in accounting
for insurance assessments .......................... (57,850) (57,850)
----------- ----------- ----------- -----------
Net loss ................................................ $ (310,546) $ (26,810) $ 417 $ (336,939)
=========== =========== =========== ===========
Basic per share information:
Loss before cumulative effect of accounting change ...... $ (2.21) $ (2.45)
=========== ===========
Net loss................................................. $(2.72) $ (2.95)
=========== ===========
Diluted per share information:
Loss before cumulative effect of accounting change ...... $ (2.21) $ (2.45)
=========== ===========
Net loss ................................................ $ (2.72) $ (2.95)
=========== ===========
</TABLE>
See notes and assumptions to pro forma consolidated statement of operations and
condensed consolidated balance sheet.
4
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RELIANCE GROUP HOLDINGS, INC. AND SUBSIDIARIES
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED)
QUARTER ENDED MARCH 31, 2000
(In thousands, except per-share amounts)
The following unaudited pro forma consolidated statement of operations of the
Company and its subsidiaries for the quarter ended March 31, 2000, gives effect
to the sale of the Company's surety operation to Travelers Casualty and Surety
Company, assuming such sale took place as of January 1, 2000. The pro forma
information is based upon the historical financial statements of the Company and
the pro forma adjustments as described in the accompanying notes.
<TABLE>
<CAPTION>
Less: Pro Forma
Surety -------------------------------
Historical Operations (2) Adjustments Adjusted
-------------- -------------- -------------- -------------
<S> <C> <C> <C> <C>
Revenues:
Premiums earned ........................................... $ 618,010 $ (52,329) $ -- $ 565,681
Net investment income ..................................... 66,739 66,739
Gain on sales of investments .............................. 280,049 280,049
Other ..................................................... 58,435 58,435
----------- ----------- ----------- -----------
1,023,233 (52,329) 0 970,904
----------- ----------- ----------- -----------
Claims and expenses:
Policy claims and settlement expenses ..................... 492,944 (8,992) 483,952
Policy acquisition costs and other insurance expenses ..... 220,662 (27,227) 193,435
Interest .................................................. 14,775 14,775
Other operating expenses .................................. 74,535 (104)(2) 74,431
----------- ----------- ----------- -----------
802,916 (36,219) (104) 766,593
----------- ----------- ----------- -----------
Income before income taxes and equity in
investee company ...................................... 220,317 (16,110) 104 204,311
Provision for income taxes ................................ (74,700) 5,684 (69,016)
Equity in investee company ................................ (118) (118)
----------- ----------- ----------- -----------
Net income ................................................ $ 145,499 $ (10,426) $ 104 $ 135,177
=========== =========== =========== ===========
Basic per share information:
Net income ................................................ $ 1.27 $ 1.18
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Diluted per share information:
Net income ................................................ $ 1.23 $ 1.15
=========== ===========
</TABLE>
See notes and assumptions to pro forma consolidated statement of operations and
condensed consolidated balance sheet.
5
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RELIANCE GROUP HOLDINGS, INC. AND SUBSIDIARIES
PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET (UNAUDITED)
MARCH 31, 2000
(In thousands)
The following unaudited pro forma condensed consolidated balance sheet of the
Company and its subsidiaries as of March 31, 2000, gives effect to the sale of
the Company's surety and fidelity operation to Travelers Casualty and Surety
Company, assuming such sale took place as of March 31, 2000. The pro forma
information is based upon the historical financial statements of the Company and
the pro forma adjustments as described in the accompanying notes.
<TABLE>
<CAPTION>
Less: Pro Forma
Surety -----------------------------
ASSETS Historical Operations Adjustments Adjusted
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Investments.................................................. $ 4,515,666 $ - $ 269,401(1) $ 4,785,067
Receivable from parent....................................... - (310,599)(1) 310,599(1) -
Premiums and other receivables............................... 1,763,561 (40,136)(1) 1,723,425
Reinsurance recoverables..................................... 6,263,553 (78,358)(1) 6,185,195
Investment in investee company............................... 423,398 423,398
Other assets................................................. 1,649,325 (69,795)(1) 1,579,530
-------------- ------------- -------------- ------------
$ 14,615,503 $ (498,888) $ 580,000 $ 14,696,615
============== ============= ============== ============
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------------------------------------------------------------------------------------------------------
Unearned premiums............................................. $ 2,065,411 $ (157,724)(1) $ 1,907,687
Unpaid claims and related expenses............................ 8,285,977 (126,824)(1) 8,159,153
Term loans and short-term debt................................ 279,105 279,105
Debentures and notes.......................................... 455,980 455,980
Accounts payable, accrued expenses and other.................. 2,510,693 (42,340)(1) 166,450 (3) 2,634,803
-------------- ------------- -------------- -------------
13,597,166 (326,888) 166,450 13,436,728
-------------- ------------- -------------- -------------
Shareholders' equity:
Common stock............................................ 11,617 11,617
Additional paid-in capital.............................. 551,514 551,514
Retained earnings ...................................... 85,072 (172,000)(1)(3) 413,550(3) 326,622
Accumulated other comprehensive income.................. 381,106 381,106
-------------- ------------- -------------- -------------
1,029,309 (172,000) 413,550 1,270,859
Treasury stock.......................................... (10,972) (10,972)
-------------- ------------- -------------- -------------
1,018,337 (172,000) 413,550 1,259,887
-------------- ------------- -------------- -------------
$ 14,615,503 $ (498,888) $ 580,000 $ 14,696,615
============== ============= ============== =============
</TABLE>
See notes and assumptions to pro forma consolidated statement of operations and
condensed consolidated balance sheet.
6
<PAGE>
Reliance Group Holdings, Inc. and Subsidiaries
Notes and Assumptions to the Unaudited Pro Forma
Consolidated Statements of Operations and Unaudited Pro Forma Condensed
Consolidated Balance Sheet
(1) The unaudited pro forma consolidated statements of operations and
unaudited pro forma condensed consolidated balance sheet give effect to
the sale of the Company's surety and fidelity operations to Travelers
Casualty and Surety Company for $580 million of cash. The estimated pro
forma gain is as follows:
(in thousands)
Sales price $ 580,000
Net assets of surety operations (172,000)
Expenses (31,000)
--------------
Pretax gain 377,000
Taxes 135,450
--------------
After-tax gain $ 241,550
===============
The after-tax pro forma gain of $241.6 million has not been reflected
in the accompanying unaudited pro forma consolidated statement of
operations.
The net proceeds received from the sale were $269.4 million and were
determined as follows:
(in thousands)
Sales price $ 580,000
Less: Receivable due surety
operations from parent (310,599)
------------------
Net proceeds $ 269,401
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(2) The unaudited pro forma statements of operations remove the
historical underwriting results of the surety operations for the year 1999 and
the three months ended March 31, 2000. Since Reliance Group Holdings, Inc. did
not historically allocate the investment portfolio or capital of its
subsidiaries to its business units like the surety operations, the historical
financial statements of the surety operations do not include an investment
portfolio or investment income. The pro forma adjustments to the unaudited 1999
and March 31, 2000 statements of operations include a $417,000 and $104,000
reduction in other operating expenses resulting from lower goodwill amortization
due to the elimination of goodwill attributable to the surety operations. No
adjustment has been included in the unaudited pro forma statements of operations
for the anticipated increased investment income resulting from the increase in
the Company's investment portfolio.
7
<PAGE>
(3) The shareholders' equity section of the unaudited pro forma
condensed balance sheet reflects the estimated after-tax gain on the sale of the
surety and fidelity operations of $241.6 million. The tax payable from the sale
of $135.5 million and accrued expenses related to the sale of $31.0 million are
included in "accounts payable, accrued expenses and other" line in the
accompanying unaudited pro forma condensed consolidated balance sheet.
8
<PAGE>
EXHIBIT INDEX
Exhibit No. Description
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2.1 Asset Transfer Agreement, dated as of April 10, 2000, by
and among Travelers Casualty and Surety Company, Reliance
Group Holdings, Inc., Reliance Insurance Company, Reliance
National Indemnity Company, United Pacific Insurance
Company, Reliance Insurance Company of Illinois, Reliance
Surety Company and Reliance National Insurance Company
(Europe) Ltd.
2.2 Loss and Unearned Premium Reserve Portfolio Reinsurance
Agreement, dated as of May 31, 2000, by and among
Travelers Casualty and Surety Company, Reliance Insurance
Company, Reliance Surety Company and Reliance National
Insurance Company (Europe) Ltd.
2.3 Form of Quota Share Reinsurance Agreement, dated as of May
31, 2000, by and between Travelers Casualty and Surety
Company and certain subsidiaries of Reliance Group
Holdings, Inc.
9
