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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-K
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 1-8278
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RELIANCE GROUP HOLDINGS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C>
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)
</TABLE>
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (212) 909-1100
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
<TABLE>
<CAPTION>
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
- -------------------------------------------------------- --------------------------------------------------------
<S> <C>
Common Stock, $.10 Par Value New York Stock Exchange and Pacific Exchange
9% Senior Notes, Due November 15, 2000 New York Stock Exchange
9 3/4% Senior Subordinated Debentures,
Due November 15, 2003 New York Stock Exchange
</TABLE>
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
None
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 / /
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. / /
As of March 15, 2000, 116,166,281 shares of the common stock of Reliance
Group Holdings, Inc. were outstanding, and the aggregate market value of the
voting stock held by nonaffiliates was approximately $240,856,457.
DOCUMENTS INCORPORATED BY REFERENCE:
(1) Reliance Group Holdings, Inc. 1999 Annual Report--Parts I, II and IV.
(2) Reliance Group Holdings, Inc. Proxy Statement for the Annual Meeting of
Stockholders to be held June 21, 2000--Part III.
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PART I
ITEM 1. BUSINESS.
GENERAL
Reliance Group Holdings, Inc. (the "Company" or "Reliance Group Holdings")
is a holding company whose principal business is the ownership of Reliance
Insurance Company and its property and casualty insurance subsidiaries (the
"Reliance Insurance Group"). The Reliance Insurance Group underwrites a broad
range of commercial line property and casualty insurance and also underwrites
personal automobile coverage. The Company also owns RCG Information Technology,
Inc. ("RCG Information Technology"), an information technology consulting
company.
Reliance Insurance Company has conducted business since 1817, making it one
of the oldest property and casualty insurance companies in the United States.
The Reliance Insurance Group consists of Reliance National, Reliance Insurance,
Reliance Personal, Reliance Reinsurance and Reliance Surety. Reliance National
offers, through brokers and agents, a broad range of commercial property and
casualty insurance products and services primarily for large companies and
specialty lines customers. Reliance National also offers, through agents,
smaller account workers' compensation insurance, as well as insurance programs
for groups with common insurance needs. Reliance National selects market
segments where it can provide specialized coverages and services. It conducts
business nationwide and in certain international markets. In 1999, Reliance
National accounted for 41% of the net premiums written by the Reliance Insurance
Group. Reliance Insurance provides, through agents and brokers, commercial
property and casualty insurance coverages for mid-sized companies primarily in
the United States. Reliance Insurance also offers traditional and specialized
coverages for more complex risks. In 1999, Reliance Insurance accounted for 27%
of the net premiums written by the Reliance Insurance Group. Reliance Personal
writes personal automobile insurance through agents in both the non-standard and
standard markets. Reliance Reinsurance offers, primarily through brokers, treaty
and facultative reinsurance for small to medium sized regional and specialty
insurance companies located in the United States. Reliance Surety is a leading
writer of surety bonds and fidelity bonds in the United States and conducts its
business through agents and brokers. On February 29, 2000, the Company announced
that it had reached an agreement in principle to sell its surety operations to
Travelers Property Casualty Corp. for $580 million in cash. The transaction,
which is subject to the negotiation and execution of definitive agreements and
customary corporate and regulatory approvals, is expected to close in the second
quarter of 2000.
On February 29, 2000, the Company announced that it will consolidate 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, the Company expects to incur a restructuring charge in the
first half of 2000. In addition, the Company expects, under certain
circumstances, to incur a pretax charge of approximately $18.0 million in 2000
related to its capital raising initiatives. On February 29, 2000 the Company
also announced suspension of its quarterly cash common stock dividend.
RCG Information Technology provides computer-related services to corporate
clients primarily in the United States and had revenues of $230.7 million in
1999.
Business segment information for the years ended December 31, 1999, 1998
and 1997 is set forth in Note 19 to the Consolidated Financial Statements, which
information is incorporated herein by reference. All financial information in
this Annual Report on Form 10-K is presented in accordance with generally
accepted accounting principles ("GAAP") unless otherwise specified.
The Company owns all of the common stock of Reliance Financial Services
Corporation ("Reliance Financial") which in turn owns all of the common stock of
Reliance Insurance Company. The common stock of Reliance Insurance Company is
pledged to secure certain indebtedness. See Note 9 to the Consolidated Financial
Statements, which information is incorporated herein by reference. Reliance
Insurance Company indirectly owns all of the common stock of RCG Information
Technology.
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OPERATING UNITS
Property and Casualty Insurance. The following table sets forth the amount
of net premiums written in each line of business for the years ended December
31, 1999, 1998 and 1997 by Reliance National, Reliance Insurance, Reliance
Personal, Reliance Reinsurance and Reliance Surety.
<TABLE>
<CAPTION>
1999 1998 1997
-------------------------------------- ---------------------------------------- ----------------------
RELIANCE RELIANCE RELIANCE RELIANCE RELIANCE RELIANCE
NATIONAL INSURANCE OTHER(1) TOTAL NATIONAL(2) INSURANCE OTHER(1) TOTAL NATIONAL(2) INSURANCE
--------- --------- -------- ------ ----------- --------- -------- ------ ----------- ---------
(IN MILLIONS, EXCEPT PERCENTAGES)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Workers' Compensation...... $ 261 $ 197 $ -- $ 458 $ 156 $ 148 $ -- $ 304 $ 128 $ 148
Personal Auto(3)........... -- -- 346 346 -- -- 227 227 -- --
Commercial Auto............ 85 203 -- 288 109 226 -- 335 97 198
General Liability.......... 176 79 -- 255 347 118 -- 465 311 112
Reinsurance................ -- -- 247 247 -- -- 217 217 -- --
Surety..................... -- -- 213 213 -- -- 204 204 -- --
Multiple Peril............. 29 184 -- 213 17 209 -- 226 18 203
Accident and Health........ 190 -- -- 190 154 -- -- 154 92 --
Ocean and Inland Marine.... 162 7 -- 169 126 41 -- 167 150 41
Fire and Allied............ 83 18 -- 101 36 24 -- 60 20 26
Other...................... 75 5 -- 80 69 9 1 79 73 12
------- ----- ---- ------ ------- ----- ---- ------ ----- -----
Total.................. $ 1,061 $ 693 $806 $2,560 $ 1,014 $ 775 $649 $2,438 $ 889 $ 740
------- ----- ---- ------ ------- ----- ---- ------ ----- -----
------- ----- ---- ------ ------- ----- ---- ------ ----- -----
Percent of Total........... 41% 27% 32% 100% 42% 32% 26% 100% 43% 36%
------- ----- ---- ------ ------- ----- ---- ------ ----- -----
------- ----- ---- ------ ------- ----- ---- ------ ----- -----
<CAPTION>
OTHER(1) TOTAL
-------- ------
<S> <C> <C>
Workers' Compensation...... $ -- $ 276
Personal Auto(3)........... 99 99
Commercial Auto............ -- 295
General Liability.......... -- 423
Reinsurance................ 159 159
Surety..................... 177 177
Multiple Peril............. -- 221
Accident and Health........ -- 92
Ocean and Inland Marine.... -- 191
Fire and Allied............ -- 46
Other...................... 2 87
---- ------
Total.................. $437 $2,066
---- ------
---- ------
Percent of Total........... 21% 100%
---- ------
---- ------
</TABLE>
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(1) Consists of Reliance Personal, Reliance Reinsurance, Reliance Surety, and
Other.
(2) Restated to exclude Reliant, a nonstandard auto insurer, which is now part
of Reliance Personal.
(3) Represents combination of Reliant and personal auto insurance marketed
through direct channels.
For information about the net premiums earned, underwriting gain (loss) and
combined ratios for the years ended December 31, 1999, 1998 and 1997 for
Reliance National, Reliance Insurance, Reliance Personal, Reliance Reinsurance
and Reliance Surety see "Reliance Group Holdings, Inc. and Subsidiaries
Financial Review" on page 23 of the Reliance Group Holdings 1999 Annual Report,
which information is incorporated herein by reference.
The following table sets forth underwriting results for the Reliance
Insurance Group for the years ended December 31, 1999, 1998 and 1997.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
1999 1998 1997
-------- -------- --------
(IN MILLIONS, EXCEPT RATIOS)
<S> <C> <C> <C>
Net premiums written................................................. $2,560.4 $2,438.3 $2,065.8
Underwriting loss(1)................................................. (788.4) (52.1) (31.7)
Combined ratio....................................................... 124.3% 102.1% 100.9%
</TABLE>
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(1) Includes, for 1999, a charge of $170.8 million relating to the settlement of
issues involving the Unicover workers' compensation reinsurance facility, a
charge of $254.3 million to increase net loss reserves for policies issued
in prior years and a charge of $132.1 million representing the cost of
ceding to reinsurers losses under various stop loss treaties. Catastrophe
claims (net of reinsurance) for the years ended December 31, 1999, 1998 and
1997 of $74.8 million, $33.3 million, and $11.1 million, respectively.
The following table sets forth certain financial information of the
Reliance Insurance Group based upon statutory accounting practices and
shareholder's equity of Reliance Insurance Company, the principal operating
subsidiary of the Company, based upon GAAP (in thousands):
<TABLE>
<CAPTION>
STATUTORY ACCOUNTING GAAP
---------------------------------------------------------------------------- -------------
NET TOTAL POLICY- COMMON
YEAR ENDED PREMIUMS UNEARNED LOSS ADMITTED TOTAL HOLDERS' SHAREHOLDER'S
DECEMBER 31, WRITTEN PREMIUMS RESERVES ASSETS LIABILITIES SURPLUS EQUITY
- ------------------------------- ---------- ---------- ---------- ---------- ----------- ---------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
1999........................... $2,572,433 $1,166,214 $3,292,006 $7,198,751 $ 5,954,748 $1,244,003 $ 1,523,132
1998........................... 2,464,813 1,117,095 3,175,171 6,665,158 4,917,733 1,747,425 1,916,051
1997........................... 2,081,991 980,146 3,172,266 5,955,177 4,652,687 1,302,490 1,704,256
</TABLE>
2
<PAGE>
The Reliance Insurance Group writes insurance in every state of the United
States, the District of Columbia, Puerto Rico, Guam and the Virgin Islands. In
1999, California, New York, Florida, Texas and Pennsylvania accounted for
approximately 14%, 10%, 8%, 6% and 5%, respectively, of direct premiums written.
No other state accounted for more than 5% of direct premiums written by the
Reliance Insurance Group. The Reliance Insurance Group writes insurance
primarily through agents and brokers.
The Reliance Insurance Group also writes insurance in Europe through
Reliance National offices in the United Kingdom, the Netherlands, Sweden, Spain,
Germany and Switzerland, in the Americas through Reliance National offices in
Canada, Mexico, Argentina and Brazil, in the Pacific Rim through a Reliance
National office in Singapore, and in Asia through a joint venture insurance
operation in Hong Kong called Reliance HKCB Insurance Company Ltd. The Reliance
Insurance Group also writes insurance in Africa through a Reliance National
office in South Africa. In addition, the Reliance Insurance Group has
cooperation agreements between Reliance National and each of Huatai Insurance
Company and Tian An Insurance Company, both in China. The Reliance Insurance
Group's foreign-sourced net written premiums were $339.9 million,
$284.2 million and $271.2 million for the years ended December 31, 1999, 1998
and 1997, respectively.
Aon Group, Inc., a worldwide insurance brokerage firm, produced 10.8% of
the direct premiums written in 1999 by the Reliance Insurance Group.
In the third quarter of 1999, A.M. Best & Company ("Best"), publisher of
Best's Insurance Reports, Property-Casualty, placed the "A- (Excellent)" rating
of Reliance Insurance Company under review with negative implications, and
Standard and Poor's ("S&P") 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. S&P also lowered its rating of the claims paying ability of the
Reliance Insurance Group from "A" to "A-minus" in the third quarter of 1999.
According to these rating agencies, these actions were taken due to
uncertainty relating to the Company's exposure in the Unicover workers'
compensation reinsurance facility (as discussed below under the heading
"Insurance Ceded and Assumed") and the Company's ability to accomplish its
capital raising objectives and refinancing of its debt. Subsequent to these
actions, the Company has made substantial progress in resolving these
uncertainties. In January 2000, the Company reached settlements with various
parties with respect to Unicover. In addition, the Company on February 29, 2000
announced a series of strategic and financial actions designed to strengthen its
capital base, including the sale of its surety operations, 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, on February 29, 2000, improved the status of Reliance
Insurance Company from "under review with negative implications" to "under
review with developing implications." Best has indicated its intention to
reaffirm Reliance Insurance Company's "A- (Excellent)" rating upon the
successful completion of the Company's capital-enhancement program. On March 2,
2000, S&P announced that it had removed its Reliance ratings from its credit
watch and affirmed these ratings with negative outlook. On March 24, 2000,
Moody's lowered its ratings of the Company's senior notes and senior
subordinated debentures, but confirmed the claims paying rating of Reliance
Insurance Group.
Best's ratings are based on an analysis of the financial strength,
operating performance and market profile of an insurance company as they relate
to Best's quantitative and qualitative standards. An "A- (Excellent)" rating is
assigned to those companies which have, on balance, excellent financial
strength, operating performance and market profile when compared to the
standards established by Best. The Company believes that any downgrade in its
Best rating would adversely affect its ability to underwrite certain lines of
business. S&P assigns its "A minus" rating to those companies which have strong
financial security characteristics, but are somewhat more likely to be affected
by adverse business conditions than are insurers with higher ratings. Moody's
has assigned a rating of "Baa2" to the claims paying ability of the Reliance
Insurance Group. A "Baa" rating is assigned to insurance companies which offer
adequate financial security, but whose protective elements may be lacking or
characteristically unreliable over any great length of time. The Best, S&P and
Moody's ratings are not designed for the protection of investors and do not
constitute recommendations to buy, sell or hold any security.
Reliance National. Reliance National offers a broad range of commercial
insurance products and services on a primary basis, with a focus on large
accounts and specialty lines customers. Reliance National selects market
segments where it can provide specialized coverages, such as directors and
officers liability insurance, or specialized services, such as providing captive
insurance arrangements to the alternative risk markets. It also
3
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provides traditional commercial insurance products. In 1999, Reliance National
accounted for 41% of the net premiums written by the Reliance Insurance Group.
Reliance National, which conducts business nationwide and in certain
international locations, is headquartered in New York City and has 53 offices in
16 states and 21 countries. Reliance National distributes its products through
insurance brokers and agents. Net premiums written by Reliance National were
$1.1 billion, $1.0 billion and $889.3 million for the years ended December 31,
1999, 1998 and 1997, respectively.
Reliance National is organized into eight major divisions as follows:
o Casualty Risk Services, Reliance National's largest division, which
writes workers' compensation, commercial automobile and general liability
coverages primarily to Fortune 1,000 companies and the construction
industry. These coverages are primarily provided on a large deductible
basis and to the alternative risk markets through captive reinsurance
arrangements.
o International, which writes predominantly commercial casualty and
property insurance products, including commercial automobile and
specialized coverages such as excess casualty, directors and officers
liability insurance, fidelity insurance and accident and health coverage
in certain international markets. This division also writes ocean marine
coverages in domestic and international markets.
o Accident and Health, which writes high limit disability, group accident,
blanket special risk and medical excess of loss programs.
o Property/Custom Casualty, which primarily writes commercial property,
casualty and inland marine coverages focusing on excess and specialty
commercial accounts.
o Excess and Surplus Lines, which primarily writes professional liability
insurance to architects, engineers, lawyers, healthcare providers,
insurance agents and brokers, and miscellaneous other professionals, and
also writes excess and umbrella coverages.
o Financial Products, which writes directors and officers liability
insurance, financial services insurance, errors and omissions insurance,
employment practices liability insurance and fidelity in the domestic
market.
o CyberComp, which utilizes the Internet to write, through agents,
guaranteed cost workers' compensation coverages for smaller accounts.
o Credit Insurance, which commenced the writing of premiums in 1999 and
which writes a range of consumer insurance products including credit life
insurance, disability insurance, unemployment insurance and warranty
coverage.
In connection with the consolidation of the operations of its corporate
infrastructure and business units, the Company is in the process of reviewing
Reliance National's divisions to determine to what extent such operations can be
consolidated with other operations of the Reliance Insurance Group.
Reliance National attempts to limit its exposure to losses through the use
of claims-made policies, policies written on a large deductible basis and by
purchasing reinsurance. Policies written on a "claims-made" basis accounted for
approximately 17%, 24% and 25% of Reliance National's net premiums written
during 1999, 1998 and 1997, respectively. Policies written on a "claims-made"
basis provide coverage only for claims made against the insured during the
policy period or within an established reporting period, as opposed to
"occurrence" policies which provide coverage for events that occur during the
policy period without regard for when the claim is reported. Claims-made
policies mitigate the "long tail" nature of the risks insured. Policies written
on a large deductible basis accounted for approximately 10% of Reliance
National's net premiums written in each of 1999, 1998 and 1997. Under policies
written on a large deductible basis, the insured pays, or reimburses the insurer
for, all of its losses up to the deductible amount. Under a large deductible
policy, the insured may also pay for a portion of the allocated loss adjustment
expenses within the deductible amount. The use of large deductible policies
results in lower premiums and losses for Reliance National as payments or
reimbursements for losses made by an insured under a large deductible policy are
generally not considered premiums or losses to an insurer. With large deductible
policies, Reliance National provides insurance and loss control management
services while reducing its underwriting risk. Reliance National assumes a
credit risk in connection with large deductible policies and, therefore,
insureds with such policies undergo extensive credit analysis by a centralized
credit department that is independent from the underwriting process. Collateral
in the
4
<PAGE>
form of bank letters of credit, trust accounts or cash is generally provided by
the insured to cover a significant portion of Reliance National's credit
exposure.
Reliance Insurance. Reliance Insurance offers commercial lines property
and casualty insurance products, primarily focusing on the diverse needs of
mid-sized companies nationwide. Reliance Insurance conducts business through 36
offices in 22 states and the District of Columbia and distributes its products
through approximately 3,400 agents and brokers. Reliance Insurance's insureds
are primarily closely held companies with 100 to 1,000 employees and annual
sales of $5 million to $300 million. Reliance Insurance underwrites a variety of
commercial insurance coverages, including commercial automobile, multiple peril,
workers' compensation, general liability and property. In 1999, Reliance
Insurance accounted for 27% of the net premiums written by the Reliance
Insurance Group. Reliance Insurance is headquartered in Philadelphia and
operates nationwide and in Puerto Rico, Guam and the Virgin Islands. Net
premiums written by Reliance Insurance were $693.2 million, $775.5 million and
$740.4 million for the years ended December 31, 1999, 1998 and 1997,
respectively.
Reliance Insurance's three major divisions are:
o Commercial Accounts, which generally focuses on accounts with annual
premiums of up to $1 million. This division writes a broad range of
traditional commercial coverages, primarily on a guaranteed cost basis.
o Specialty, which provides underwriting for industry segments with special
exposures and writes the following specific business segments: public
entities, social services and specialty automobile.
o Large Accounts primarily provides workers' compensation coverage and
generally focuses on accounts with annual premiums in excess of
$1 million where it is able to offer more flexible programs through
captive reinsurance arrangements and through the use of large deductible
policies. Approximately 21% of Large Accounts' business in 1999 was
written on a large deductible and retrospectively rated basis. Accounts
with large deductible and retrospectively rated policies undergo
extensive credit analysis by a centralized credit department that is
independent from the underwriting process. Collateral in the form of bank
letters of credit, trust accounts or cash is generally provided by the
insured to cover a significant portion of Reliance Insurance's credit
exposure.
In connection with the consolidation of the operations of its corporate
infrastructure and business units, the Company is in the process of reviewing
Reliance Insurance's divisions and offices to determine to what extent such
operations can be consolidated with other operations of the Reliance Insurance
Group.
Reliance Personal. Reliance Personal was created in March 1999 by
consolidating Reliant, a non-standard automobile insurance operation formerly
part of Reliance National, with Reliance Direct, an operating division that was
a direct writer of personal automobile insurance. Reliance Personal is
headquartered in Cleveland and conducts business in 18 states through 42 offices
and distributes its products through approximately 8,200 agents and brokers. Net
premiums written by Reliance Personal were $346.1 million, $226.8 million and
$99.0 million for the years ended December 31, 1999, 1998 and 1997,
respectively. In December 1999, the Company entered into an asset purchase
agreement pursuant to which it transferred substantially all of the assets and
non-insurance liabilities of Reliance Direct to a third party. In addition,
through reinsurance and other arrangements, effective January 15, 2000, the
Company transfered all of Reliance Direct's liabilities for unearned premium and
related insured losses, as well as the renewal rights to in-force policies. The
gain from this transaction, which will be recognized in 2000, is not
significant.
Reliance Reinsurance. Reliance Reinsurance provides casualty reinsurance
on primarily a treaty (blocks of risk) and also a facultative (individual risks)
basis and property reinsurance on a treaty basis. All treaty business is
marketed through reinsurance brokers who negotiate contracts of reinsurance on
behalf of the primary insurer or ceding reinsurer, while facultative business is
produced both directly and through reinsurance brokers. While Reliance
Reinsurance's treaty clients include all types and sizes of insurers, it
typically targets treaty reinsurance for small to medium sized regional and
specialty insurance companies, as well as captives, risk retention groups and
other alternative risk markets, providing both pro rata and excess of loss
coverage. Reliance Reinsurance believes that this market is subject to less
competition and provides an opportunity to develop and market innovative
programs where pricing is not the key competitive factor. Reliance Reinsurance
typically avoids participating in large capacity reinsurance treaties where
price is the predominant competitive factor. It generally writes reinsurance in
the "lower layers", the first $1 million of primary coverage. Reliance
Reinsurance
5
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conducts its business nationwide and is headquartered in Philadelphia. Net
premiums written by Reliance Reinsurance were $247.2 million, $217.3 million and
$159.0 million for the years ended December 31, 1999, 1998 and 1997,
respectively.
Reliance Surety. Reliance Surety is a leading writer of surety and
fidelity bonds in the United States. Reliance Surety concentrates on writing
performance and payment bonds for contractors of public works projects,
commercial real estate and multi-family housing. It also writes commercial
surety, financial institution and commercial fidelity bonds. Reliance Surety
recently established a Specialty Division to serve the large contractor market.
Its Firemark and Express Surety operations target smaller contractors and
accounts, a market traditionally less fully serviced by national surety
companies. Reliance Surety is headquartered in Philadelphia and generally
conducts business nationwide and in Europe through 35 offices and distributes
its products through approximately 3,500 agents and brokers. Net premiums
written by Reliance Surety were $213.4 million, $204.4 million and
$176.5 million for the years ended December 31, 1999, 1998 and 1997,
respectively.
On February 29, 2000, the Company announced that it had reached an
agreement in principle to sell its surety operations to Travelers Property
Casualty Corp. for $580 million in cash. The transaction, which is subject to
the negotiation and execution of definitive agreements and customary corporate
and regulatory approvals, is expected to close in the second quarter of 2000.
Information Technology Consulting Services. RCG Information Technology
provides a range of information technology services to corporate clients
primarily in the United States, including clients in the following sectors:
financial services, energy, computer services, health care, pharmaceuticals,
telecommunications, public entities, publishing, electronics, travel and food
and beverage. Such services include: e-solutions, customer relationship
management, application management, data warehousing, enterprise resource
planning, and staff augmentation. RCG Information Technology has 21 offices in
the United States, a business office in the Philippines and a recruiting office
in South Africa. RCG Information Technology recruits computer professionals both
in the United States and internationally to meet demands for its services, and
has established recruiting capabilities through its domestic offices and its
overseas offices. RCG Information Technology had revenues of $230.7 million,
$247.7 million and $191.9 million for the years ended December 31, 1999, 1998
and 1997, respectively.
INSURANCE CEDED AND ASSUMED
The Reliance Insurance Group's insurance operations purchase reinsurance to
limit the Company's exposure to losses. The Reliance Insurance Group enters into
reinsurance arrangements that are both facultative (individual risks) and treaty
(blocks of risk). In addition, the Company utilized various stop-loss treaties
to which it has ceded significant amounts of premiums and losses in 1999. Limits
and retentions, which may change from time to time, are based on a number of
factors, including the previous loss history of the operating unit, policy
limits and exposure data, industry studies as to potential severity, and market
terms, conditions and capacity. Where appropriate, the Reliance Insurance Group
limits its exposure to individual risks by purchasing excess of loss and quota
share reinsurance, with treaty structures and net retentions varying with the
specific requirements of the line of business or program being reinsured. In
many cases, the Reliance Insurance Group purchases additional facultative
reinsurance to further reduce its retentions below treaty levels.
The Reliance Insurance Group also assumes insurance ceded from other
insurers. The total premiums assumed from other insurers were $863.8 million,
$633.6 million (which excludes premiums related to the workers' compensation
insurance program created and managed by Unicover Managers, Inc.) and
$494.1 million for the years ended December 31, 1999, 1998 and 1997,
respectively.
Reinsurers of the Reliance Insurance Group. Premiums ceded by the Reliance
Insurance Group to reinsurers were $2.7 billion, $2.2 billion (which excludes
premiums related to the workers' compensation insurance program created and
managed by Unicover Managers, Inc.) and $1.9 billion in 1999, 1998 and 1997,
respectively. The Reliance Insurance Group is subject to credit risk with
respect to its reinsurers, as the ceding of risk to reinsurers does not relieve
the Reliance Insurance Group of its liability to insureds or cedents, even
though the reinsuring company assumes the related liability. At December 31,
1999, the Reliance Insurance Group had aggregate reinsurance recoverables of
$6.3 billion, representing estimated amounts recoverable from reinsurers
pertaining to paid claims, unpaid claims, claims incurred but not reported and
unearned premiums. The Reliance
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Insurance Group holds substantial amounts of collateral, consisting of letters
of credit, trust accounts and cash, to secure recoverables from unauthorized
reinsurers.
In 1998, the Company entered into reinsurance fronting arrangements as part
of a workers' compensation insurance facility created and managed by Unicover
Managers, Inc. ("Unicover"), a third party manager of reinsurance pools. Under
these arrangements, the Company reinsured workers' compensation policies, the
occupational accident portion of which was then 100 percent retroceded to a
number of retrocessional reinsurers. In 1999, two of the Company's
retrocessional reinsurers, Sun Life Assurance Company of Canada ("Sun Life") and
Phoenix Home Life Mutual Insurance Company ("Phoenix"), sought to rescind their
retrocessional reinsurance contracts with the Unicover pool and facilities,
including the Reliance facility.
On January 21, 2000, the Company concluded settlements with various
insurance and reinsurance companies to resolve outstanding issues relating to
Unicover. The settlements were reached with the Company's retrocessional
reinsurers, including Sun Life, Phoenix, and Cologne Life Reinsurance Company,
and all of the insurance companies that purchased reinsurance from the Reliance
Unicover facility. As a result of the settlements, the Company has taken a
pre-tax charge in 1999 of $170.8 million which includes $3.8 million for various
costs and expenses relating to the Unicover facility. This charge also includes
$20.0 million for the settlement regarding the Company's participation in the
Lincoln National facility managed by Unicover.
In 1999, the Reliance Insurance Group did not cede more than 5% of gross
written premiums to any one reinsurer and no one reinsurer accounted for more
than 10% of total ceded premiums. The Reliance Insurance Group's ten largest
reinsurers, based on 1999 ceded premiums, are as follows:
<TABLE>
<CAPTION>
1999
CEDED BEST
PREMIUM RATING
------------- ------
(IN MILLIONS)
<S> <C> <C>
American Re-Insurance Company........................................... $ 245,187 A++
NAC Reinsurance Corporation............................................. 160,519 A+
Swiss Reinsurance America Corporation................................... 159,172 A+
Employers Reinsurance Corporation....................................... 78,741 A++
Sun Life Assurance Company of Canada.................................... 74,970 A++
Hertz International Reinsurance Ltd..................................... 58,815 (1)
Zurich Reinsurance Group................................................ 54,122 A+
Hannover Reinsurance Ltd................................................ 48,300 A+
General Reinsurance Corporation......................................... 46,577 A++
Gerling Global Reinsurance Corporation.................................. 43,876 A
</TABLE>
- ------------------
(1) An unrated captive insurer that is not affiliated with the Company.
Recoverables from such reinsurer are collateralized to the extent of
predicted losses.
The Reliance Insurance Group maintains no "Funded Cover" reinsurance
agreements. "Funded Cover" reinsurance agreements are multi-year retrospectively
rated, non-cancelable reinsurance agreements which do not meet relevant
accounting standards for risk transfer and under which the reinsured must pay
additional premiums in subsequent years if losses in the current year exceed
levels specified in the reinsurance agreement.
7
<PAGE>
PROPERTY AND CASUALTY LOSS RESERVES
The Reliance Insurance Group's staff of actuaries regularly performs
comprehensive analyses of reserves and reviews the pricing and reserving
methodologies of the Reliance Insurance Group. Although the Company believes, in
light of present facts and current legal interpretations, that the Reliance
Insurance Group's overall property and casualty reserve levels are adequate to
meet its obligations under existing policies, due to the inherent uncertainty
and complexity of the reserving process, the ultimate liability may be more or
less than such reserves.
The following tables present information relating to the liability for
unpaid claims and related expenses ("loss reserves") for the Reliance Insurance
Group. The table below provides a reconciliation of the beginning to ending
liability balances for the years ended December 31, 1999, 1998 and 1997.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------
1999 1998 1997
---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
Loss reserves, beginning of year......................... $7,016,586 $6,559,508 $6,048,240
Less reinsurance recoverables.......................... 3,796,540 3,317,190 2,736,634
---------- ---------- ----------
Net loss reserves, beginning of year..................... 3,220,046 3,242,318 3,311,606
---------- ---------- ----------
Provision for policy claims and related expenses:
Provision for insured events of the current year....... 1,856,774 1,549,907 1,299,066
Increase (decrease) in provision for insured events
of prior years......................................... 254,298 (32,959) (35,980)
---------- ---------- ----------
Total provision..................................... 2,111,072 1,516,948 1,263,086
---------- ---------- ----------
Payments for policy claims and related expenses:
Attributable to insured events of the current year..... 621,569 490,146 367,763
Attributable to insured events of prior years.......... 1,371,242 1,046,583 963,135
---------- ---------- ----------
Total payments...................................... 1,992,811 1,536,729 1,330,898
---------- ---------- ----------
Foreign currency translation............................. 1,347 (2,491) (1,476)
---------- ---------- ----------
Net loss reserves, end of year........................... 3,339,654 3,220,046 3,242,318
Plus reinsurance recoverables.......................... 4,946,323 3,796,540 3,317,190
---------- ---------- ----------
Loss reserves, end of year............................... $8,285,977 $7,016,586 $6,559,508
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
The provision for insured events of prior years in 1999 of $254.3 million
(net of losses ceded to reinsurers under various stop-loss treaties) resulted
from updated information and subsequent developments. Regularly scheduled
actuarial loss reserve reviews in the second quarter of 1999 revealed
significant deterioration in a number of lines and programs. As a result of this
updated information, the Company hired an independent actuarial firm to assist
in its loss reserve reviews. The results of these reviews led the Company to
conclude that an increase in loss reserves during 1999 was appropriate. The
increase in loss reserves for the full year 1999 was comprised of the following:
o Construction defect claims, arising mostly out of California. In the
second quarter, the Company completed an actuarial study of these claims,
utilizing methodologies provided by an independent actuarial firm.
Actuarial analysis of these types of claims is particularly complex due
to the protracted claims settlement process, as well as a widening
interpretation of what constitutes insurance coverage that the courts
have applied to these cases.
o Property, marine and aviation lines, resulting from higher than expected
losses reported to the Company on assumed reinsurance treaties. The
Company has decided to non-renew the majority of these treaties.
o 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 Adverse development in other lines of business, primarily commercial
automobile where loss activity was higher than expected.
8
<PAGE>
The provision for policy claims and related expenses for 1998 and 1997
included favorable development in workers' compensation and surety lines of
business partially offset by adverse development in the commercial automobile
line. The redundancy in workers' compensation is due, in part, to favorable
development in retrospectively rated policies, which was more than offset by a
corresponding reduction in premiums earned. The 1998 redundancy also includes
favorable development in the general liability and multiple peril lines of
business and adverse development in the ocean marine line of business.
The table below summarizes the development of the estimated liability for loss
reserves (net of reinsurance recoverables) as of December 31 of each of the
prior ten years. The amounts shown on the top line of the table represent the
estimated liability for loss reserves (net of reinsurance recoverables) for
claims that are unpaid at the particular balance sheet date, including losses
that had been incurred but not reported to the Reliance Insurance Group. The
upper portion of the table indicates the loss reserves as they are reestimated
in subsequent periods as a percentage of the originally recorded reserves. These
estimates change as losses are paid and more accurate information becomes
available about remaining loss reserves. A deficiency exists when the original
loss reserve estimate is less than the reestimated loss reserve and a redundancy
exists when the original loss reserve is greater than the reestimated loss
reserve at December 31, 1999. A deficiency or redundancy indicates the
cumulative percentage change, as of December 31, 1999, of originally recorded
loss reserves. The lower portion of the table indicates the cumulative amounts
paid as of successive periods as a percentage of the original loss reserve
liability. Each amount in the following table includes the effects of all
changes in amounts for prior periods. The table does not present accident or
policy year development data. The table includes provisions specifically made to
strengthen prior-years' loss reserves in 1999, 1996 and in 1991. The Company's
loss reserves from 1989 to 1998 had been adversely affected by a number of
factors including: (i) a widening interpretation of what constitutes a covered
claim particularly in the areas of construction defects and environmental
pollution and asbestos coverages; (ii) significant increases in claim
settlements including continued adverse development in the commercial automobile
line of business; and (iii) the more frequent resort to litigation in connection
with claims.
<TABLE>
<CAPTION>
December 31,
----------------------------------------------------------------------------------------------
1999 1998 1997 1996 1995 1994 1993 1992
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
(In thousands, except percentages)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net liability for unpaid claims
andrelated expenses (loss
reserves)(1)..................... $3,339,654 $3,220,046 $3,242,318 $3,311,606 $3,179,435 $3,127,781 $2,931,528 $2,702,992
Net liability reestimated as of:
One year later................... -- 107.9% 99.0% 98.9% 104.4% 101.2% 100.8% 101.5%
Two years later.................. -- -- 100.5% 97.3% 104.4% 104.8% 101.7% 103.1%
Three years later................ -- -- -- 96.6% 102.5% 103.6% 104.2% 104.0%
Four years later................. -- -- -- -- 101.2% 101.3% 103.0% 107.2%
Five years later................. -- -- -- -- -- 100.8% 100.7% 106.2%
Six years later.................. -- -- -- -- -- -- 100.2% 103.9%
Seven years later................ -- -- -- -- -- -- -- 104.0%
Eight years later................ -- -- -- -- -- -- -- --
Nine years later................. -- -- -- -- -- -- -- --
Ten years later.................. -- -- -- -- -- -- -- --
Redundancy (Deficiency).......... (7.9%) (0.5%) 3.4% (1.2%) (0.8%) (0.2%) (4.0%)
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Paid (cumulative) as of:
One year later................... -- 42.6% 32.3% 29.1% 29.2% 27.8% 26.6% 28.7%
Two years later.................. -- -- 55.6% 48.6% 48.7% 46.8% 44.9% 48.0%
Three years later................ -- -- -- 62.9% 62.2% 59.8% 58.4% 61.1%
Four years later................. -- -- -- -- 71.8% 69.1% 67.3% 70.5%
Five years later................. -- -- -- -- -- 75.2% 73.7% 76.5%
Six years later.................. -- -- -- -- -- -- 78.1% 80.9%
Seven years later................ -- -- -- -- -- -- -- 84.0%
Eight years later................ -- -- -- -- -- -- -- --
Nine years later................. -- -- -- -- -- -- -- --
Ten years later.................. -- -- -- -- -- -- -- --
<CAPTION>
1991 1990 1989
---------- ---------- ----------
<S> <C> <C> <C>
Net liability for unpaid claims
andrelated expenses (loss
reserves)(1)..................... $2,375,235 $1,893,421 $1,962,822
Net liability reestimated as of:
One year later................... 101.3% 114.4% 104.8%
Two years later.................. 104.4% 115.2% 117.0%
Three years later................ 105.7% 119.6% 118.2%
Four years later................. 106.7% 120.7% 120.9%
Five years later................. 110.5% 122.0% 122.2%
Six years later.................. 109.7% 127.0% 123.8%
Seven years later................ 107.8% 126.2% 129.1%
Eight years later................ 108.1% 124.9% 128.5%
Nine years later................. -- 125.6% 127.4%
Ten years later.................. -- -- 128.4%
Redundancy (Deficiency).......... (8.1%) (25.6%) (28.4%)
---------- ---------- ----------
Paid (cumulative) as of:
One year later................... 29.0% 36.6% 40.7%
Two years later.................. 48.6% 57.9% 65.4%
Three years later................ 62.1% 72.8% 82.2%
Four years later................. 71.6% 83.0% 91.3%
Five years later................. 78.1% 90.3% 97.8%
Six years later.................. 82.7% 95.5% 103.1%
Seven years later................ 86.2% 99.2% 106.8%
Eight years later................ 88.8% 102.2% 109.9%
Nine years later................. -- 104.7% 112.3%
Ten years later.................. -- -- 112.1%
</TABLE>
- ------------------
(1) The gross liability for unpaid claims and related expenses was $8.3 billion
at December 31, 1999. The gross liability for unpaid claims and related
expenses for years 1998 and prior was deficient by $520.1 million at
December 31, 1999.
9
<PAGE>
The difference between the property and casualty liability for loss
reserves at December 31, 1999 and 1998 reported in the Consolidated Financial
Statements (net of reinsurance recoverables) and the liability which would be
reported in accordance with statutory accounting practices is as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1999 1998
---------- ----------
(IN THOUSANDS)
<S> <C> <C>
Net liability reported under statutory accounting practices...
3,292,006 $3,175,171
Adjustment for GAAP basis accrual of estimated salvage and
subrogation recoveries................................... (14,252) (16,325)
Additional discount of workers' compensation reserves......... 61,900 61,200
---------- ----------
Net liability reported on a GAAP basis........................ $3,339,654 $3,220,046
---------- ----------
---------- ----------
</TABLE>
The difference between the property and casualty liability for gross loss
reserves at December 31, 1999 and 1998 reported in the Consolidated Financial
Statements and the liability which would be reported in accordance with
statutory accounting practices is as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1999 1998
---------- ----------
(IN THOUSANDS)
<S> <C> <C>
Liability reported under statutory accounting practices....... $8,003,530 $6,806,429
Adjustment for GAAP basis accrual of estimated salvage and
subrogation recoveries...................................... (19,853) (21,925)
Additional discount of workers' compensation reserves......... 302,300 232,082
---------- ----------
Liability reported on a GAAP basis............................ $8,285,977 7,016,586
========== ==========
</TABLE>
Property and casualty loss reserves are based on an evaluation of reported
claims, in addition to statistical projections of claims incurred but not
reported and loss adjustment expenses. Estimates of salvage and subrogation are
deducted from the liability for unpaid claims. Also considered are other factors
such as the promptness with which claims are reported, the history of the
ultimate liability for such claims compared with initial and intermediate
estimates, the type of insurance coverage involved, the experience of the
property and casualty industry and other economic indicators, when applicable.
The establishment of loss reserves requires an estimate of the ultimate
liability based primarily on past experience. The Reliance Insurance Group
applies a variety of generally accepted actuarial techniques to determine the
estimates of ultimate liability. The techniques recognize, among other factors,
the Reliance Insurance Group's and the industry's experience with similar
business, historical trends in reserving patterns and loss payments, pending
levels of unpaid claims, the cost of claim settlements, the Reliance Insurance
Group's product mix and the economic environment in which property and casualty
companies operate. Estimates are continually reviewed and adjustments of the
probable ultimate liability based on subsequent developments and new data are
included in operating results for the periods in which they are made. In 1999,
the Company experienced a significant provision for insured events of prior
years. See page 8 for further discussion. In general, reserves are initially
established based upon the actuarial and underwriting data utilized to set
pricing levels, and are reviewed as additional information, including claims
experience, becomes available. The establishment of loss reserves makes no
provision for the broadening of coverage by legislative action or judicial
interpretation or for extraordinary future emergence of new classes of losses
not sufficiently represented in the Reliance Insurance Group's historical data
base, or which are not yet able to be quantified. The Reliance Insurance Group
regularly analyzes its reserves and reviews its pricing and reserving
methodologies, using Reliance Insurance Group actuaries, so that future
adjustments to prior year reserves can be minimized. However, given the
complexity of this process, reserves require continual updates and the ultimate
liability may be more or less than such estimates indicate. Estimation of loss
reserves for long tail lines of business is more difficult than for short tail
lines because long tail claims may not become apparent for a number of years,
and a relatively higher proportion of ultimate losses are considered incurred
but not reported. As a result, variation in loss development is more likely in
long tail lines of business. The Reliance Insurance Group attempts to reduce
these variations in certain of its long
10
<PAGE>
tail lines, primarily directors and officers liability and professional
liability, by writing policies on a claims-made basis. The Reliance Insurance
Group also limits potential losses through the extensive use of reinsurance.
From time to time, the Reliance Insurance Group consults with independent
actuarial firms concerning reserving practices and levels. The subsidiaries of
the Reliance Insurance Group are required by state insurance regulators to file,
along with their statutory reports, an actuarial reserve opinion setting forth
an actuary's assessment of its reserve status. Since 1992, the Reliance
Insurance Group has used an independent actuarial firm to meet such
requirements.
In calculating the liability for loss reserves, the Reliance Insurance
Group discounts both direct workers' compensation pension claims and the
reserves for claims assumed through the participation of the Reliance Insurance
Group in the National Workers' Compensation Reinsurance Pool and the Workers'
Compensation Reinsurance Pool, which are expected to have regular, periodic
payment patterns. These claims are discounted for mortality and for interest
using statutory annual rates ranging from 3.5% to 6%. The discounting of such
claims (net of reinsurance recoverables) resulted in a decrease in the liability
for loss reserves of $174.1 million, $197.3 million and $216.7 million at
December 31, 1999, 1998 and 1997, respectively. The discount in 1999 was
decreased by $13.1 million in addition to discount amortization of
$10.1 million, resulting in a decrease in pre-tax income of $23.2 million. The
discount in 1998 was decreased by $9.7 million, in addition to discount
amortization of $9.7 million, resulting in a decrease of pre-tax income of
$19.4 million. The discount in 1997 was decreased by $0.5 million, in addition
to discount amortization of $12.8 million, resulting in a decrease in pre-tax
income of $13.3 million. These decreases in pre-tax income for 1998 and 1997
were more than offset by favorable prior period reserve development in workers'
compensation.
The liability for loss reserves includes provisions for inflation in
several ways, depending on how the reserve is established. An explicit provision
for inflation is used where estimates of ultimate loss are based on pricing. A
provision for inflation is also included for certain discounted workers'
compensation claims. In these cases, the provision for inflation is based on
factors supplied by the respective workers' compensation rating bureaus which
have jurisdiction for states which provide for cost-of-living increases in
indemnity benefits. In other reserves, the analysis reflects the effect of
inflationary trends as part of the overall effect on claim costs, as well as
changes in marketing, underwriting, reporting and processing systems, claims
settlement and coverages purchased.
Included in the liability for loss reserves at December 31, 1999 are $188.2
million ($168.2 million net of reinsurance recoverables) of loss reserves
pertaining to asbestos-related and environmental pollution claims for business
written in or before 1987. The following table presents information relating to
the net loss reserves pertaining to asbestos-related and environmental pollution
claims for business written in or before 1987 for the years ended December 31,
1999, 1998 and 1997:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------
1999 1998 1997
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Net loss reserves, beginning of year............................ $163,788 $185,836 $208,456
Provision for policy claims and related expenses................ 23,100 -- --
Payments for policy claims and related expenses................. (18,710) (22,048) (22,620)
-------- -------- --------
Net loss reserves, end of year.................................. $168,178 $163,788 $185,836
-------- -------- --------
-------- -------- --------
</TABLE>
In 1999, the Company increased its loss reserves for asbestos claims based
on a review of asbestos payments over the past several years, as well as a
review by an independent actuarial firm. Of this $23.1 million increase,
$15.1 million relates to primary business and $8.0 million relates to assumed
reinsurance and pools.
Included in the December 31, 1999 net loss reserves pertaining to
asbestos-related and environmental pollution claims for business written in or
before 1987 are $52.5 million of loss costs for claims incurred but not
reported, $49.6 million of loss costs for reported claims and $66.1 million of
related expenses.
11
<PAGE>
The following table presents information related to the number of insureds
with asbestos-related and environmental pollution claims outstanding for
business written in or before 1987:
<TABLE>
<CAPTION>
DECEMBER 31,
------------
1999 1998
---- ----
<S> <C> <C>
Number of insureds with outstanding claims, beginning of year............... 302 345
Additional insureds with claims during the year............................. 186 178
Insureds with closed or settled claims during the year...................... (191) (221)
---- ----
Number of insureds with outstanding claims, end of year..................... 297 302
---- ----
---- ----
</TABLE>
The average net paid loss and expenses per insured for asbestos-related and
environmental pollution claims for business written in or before 1987 was
$75,800 and $80,800 for the years 1999 and 1998, respectively.
The Company continues to receive claims asserting injuries from hazardous
materials and alleged damages to cover various clean-up costs. Asbestos-related
and environmental pollution claims primarily affect the Company's general
liability, multiple peril and reinsurance lines of business. For business
written in or before 1987, coverage and claim settlement issues, such as the
determination that coverage exists and the definition of an occurrence, may
cause the actual loss development for asbestos-related and environmental
pollution claims to exhibit more variation than the remainder of the Company's
book of business. In February 1999, the Company received a decision in an
initial phase of an alternative dispute resolution trial of certain contested
issues between an asbestos producer and certain of its liability carriers,
including the Company. A description of the matter is set forth in Note 17 to
the Consolidated Financial Statements, which information is incorporated herein
by reference.
Since 1987, the Company has generally excluded coverage for most types of
asbestos-related and environmental pollution claims from its general liability
policies, other than policies specifically intended to provide environmental
pollution and asbestos removal coverages. Policies written by the Company after
1987 ("post-1987 A&E business") which specifically intend to provide
environmental pollution coverages are written primarily on a claims-made basis
and those which specifically intend to provide asbestos removal coverages are
written on an occurrence basis, generally with liability limits of $1.1 million
(net of reinsurance), including defense costs. Since the Company is no longer
writing a program which provided environmental coverage, it expects
environmental premiums to decline in 2000.
The liability for loss reserves at December 31, 1999 also included $83.1
million ($42.8 million net of reinsurance recoverables) of loss reserves
pertaining to post-1987 A&E business. The following table presents information
relating to the net loss reserves pertaining to claims for post-1987 A&E
business for the years ended December 31, 1999, 1998 and 1997:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------
1999 1998 1997
------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Net loss reserves, beginning of year................................ $33,713 $27,433 $29,388
Provision for policy claims and related expenses.................... 23,149 24,144 7,094
Payments for policy claims and related expenses..................... (14,096) (17,864) (9,049)
------- ------- -------
Net loss reserves, end of year...................................... $42,766 $33,713 $27,433
------- ------- -------
------- ------- -------
</TABLE>
The December 31, 1999 net loss reserves pertaining to claims for post-1987
A&E business include $24.1 million of loss costs for claims incurred but not
reported, $12.1 million of loss costs for reported claims and $6.6 million of
related expenses.
12
<PAGE>
The following table presents information related to the number of insureds
with claims outstanding for post-1987 A&E business:
<TABLE>
<CAPTION>
DECEMBER 31,
------------
1999 1998
---- ----
<S> <C> <C>
Number of insureds with outstanding claims, beginning of year............... 385 381
Additional insureds with claims during the year............................. 143 168
Insureds with closed or settled claims during the year...................... (218) (164)
---- ----
Number of insureds with outstanding claims, end of year..................... 310 385
---- ----
---- ----
</TABLE>
The average net paid loss and expenses per insured for claims for post-1987
A&E business was $64,700 and $108,900 for the years 1999 and 1998, respectively.
Although the Company believes, in light of present facts and current legal
interpretations, that the overall loss reserves of the Reliance Insurance Group
are adequate to meet their obligations under existing policies, due to the
inherent uncertainty and complexity of the reserving process, the ultimate
liability may be more or less than such reserves.
13
<PAGE>
PORTFOLIO INVESTMENTS
Investment activities are an integral part of the business of the Reliance
Insurance Group. The Reliance Insurance Group believes that the investment
objectives of safety and liquidity, while seeking to maximize total return, can
be achieved by active portfolio management and intensive monitoring of
investments. Reference is made to "Financial Review--Property and Casualty
Insurance Investment Results", "--Investment Portfolio" and "--Market Risks" on
pages 25-26, 26 and 28 through 30, respectively, of the Company's 1999 Annual
Report and to Note 4 to the Consolidated Financial Statements, which information
is incorporated herein by reference.
At December 31, 1999, the Reliance Insurance Group's investment portfolio
was $3.9 billion (at cost) with 93% in fixed maturities and short-term
securities (including redeemable preferred stock and cash) and 7% in equity
securities. The following table details the distribution of the Reliance
Insurance Group's investments at December 31, 1999:
<TABLE>
<CAPTION>
MARKET CARRYING
COST(1) VALUE VALUE
-------------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
Fixed maturities available for sale:
Bonds and notes:
United States government and government agencies and
authorities................................................... $ 425,497 $ 416,756 $ 416,756
States, municipalities and political subdivisions............... 146,231 147,633 147,633
Foreign--government............................................. 137,687 137,032 137,032
Foreign--other.................................................. 131,243 131,866 131,866
Public utilities................................................ 548,632 512,323 512,323
Convertibles and bonds with warrants attached................... 122,550 129,206 129,206
All other corporate bonds and notes............................. 1,042,578 980,978 980,978
Redeemable preferred stocks..................................... 295,030 307,714 307,714
---------- ---------- ----------
2,849,448 2,763,508 2,763,508
---------- ---------- ----------
Fixed maturities held for investment:
Bonds and notes:
States, municipalities and political subdivisions............... 6,487 6,191 6,487
Foreign--government............................................. 106,367 110,587 106,367
Foreign--other.................................................. 15,197 15,547 15,197
Public utilities................................................ 166,543 160,705 166,543
All other corporate bonds and notes............................. 128,995 127,307 128,995
Redeemable preferred stocks..................................... 60,751 59,679 60,751
---------- ---------- ----------
484,340 480,016 484,340
---------- ---------- ----------
Total fixed maturities........................................ 3,333,788 3,243,524 3,247,848
---------- ---------- ----------
Equity securities(2):
Common stocks:
Banks, trusts and insurance companies........................... 51,576 70,802 70,802
Industrial and other............................................ 188,340 891,898 891,898
Nonredeemable preferred stocks..................................... 37,401 42,076 42,076
---------- ---------- ----------
277,317 1,004,776 1,004,776
---------- ---------- ----------
Short-term investments(3)............................................ 313,607 313,607 313,607
---------- ---------- ----------
Total investment portfolio.................................... $3,924,712 $4,561,907 $4,566,231
---------- ---------- ----------
---------- ---------- ----------
<CAPTION>
COST AND
CARRYING VALUE
----------
(IN THOUSANDS)
<S> <C> <C> <C>
Mortgage loans(4).................................................... $ 3,526
Investments in real estate........................................... 175,202
</TABLE>
(Footnotes on next page)
14
<PAGE>
(footnotes from previous page)
- ------------------
(1) With respect to fixed maturities, "cost" is original cost reduced by
repayments and adjusted for amortization of premiums or accretion of
discounts. With respect to equities, "cost" is original cost.
(2) Does not include investment in LandAmerica Financial Group, Inc. which, as
of December 31, 1999, had a carrying value of $423.4 million (excluding the
pretax deferred gain of $158.8 million on the sale of
Commonwealth/Transnation Title) and a market value of $190.1 million. See
"Investee Companies."
(3) Includes cash of $50.6 million.
(4) In the Consolidated Financial Statements, mortgage loans are included in
premiums and other receivables.
The Company seeks to maintain a diversified and balanced fixed maturity
portfolio representing a broad spectrum of industries and types of securities.
The Company holds virtually no investments in commercial real estate mortgages
and has no exposure to derivative securities (other than through its ownership
of any option, warrant or convertible security with an exercise or conversion
price related to an equity security). Purchases of fixed maturity securities are
researched individually based on in-depth analysis and objective predetermined
investment criteria and are managed to achieve a proper balance of safety,
liquidity and investment yields. The Reliance Insurance Group primarily invests
in investment grade securities (those rated "BBB" or better by S&P), and, to a
lesser extent, non-investment grade and non-rated securities.
At December 31, 1999, the aggregate carrying value and market value of
fixed maturities (other than short-term investments and cash) that either have
been rated by S&P in the following categories or are non-rated were as follows:
<TABLE>
<CAPTION>
PERCENT
CARRYING MARKET OF MARKET
VALUE VALUE VALUE
---------- ---------- ---------
(IN THOUSANDS, EXCEPT PERCENTAGES)
<S> <C> <C> <C>
AAA to A..................................................... $1,747,418 $1,745,040 54%
BBB.......................................................... 829,131 826,991 25%
---------- ---------- -----
Total investment grade..................................... 2,576,549 2,572,031 79%
---------- ---------- -----
BB to B...................................................... 414,482 414,676 13%
CCC to D..................................................... 58,935 58,935 2%
Non-rated.................................................... 197,882 197,882 6%
---------- ---------- -----
Total...................................................... $3,247,848 $3,243,524 100%
---------- ---------- -----
---------- ---------- -----
</TABLE>
Substantially all of the non-investment grade and non-rated fixed
maturities are classified as "available for sale" and, accordingly, are carried
at quoted market value. All publicly traded investment grade securities are
priced using the Merrill Lynch Matrix Pricing model, which model is one of the
standard methods of pricing such securities in the industry. All publicly traded
non-investment grade securities, except as indicated below, are priced from
broker-dealers who make markets in these and other similar securities. For fixed
maturities not publicly traded, prices are estimated based on values obtained
from independent third parties or quoted market prices of comparable
instruments. Upon sale, such prices may not be realized when the size of a
particular investment in an issue is significant in relation to the total size
of such issue. Non-investment grade securities that are thinly traded are priced
using internally developed calculations. Such securities represent less than 1%
of the Reliance Insurance Group's fixed maturities portfolio.
Equity investments are made after the Reliance Insurance Group's staff of
investment professionals identify companies with strong growth prospects or
equities that appear to be undervalued relative to the issuer's business
fundamentals, such as earnings, cash flows, balance sheet and future prospects.
Subsequent to purchase, the business fundamentals of each equity investment are
carefully monitored.
As of March 15, 2000, the Reliance Insurance Group owned 7,529,288 shares
of common stock of Symbol Technologies, Inc. ("Symbol"), representing 8.5% of
the then outstanding common stock of Symbol. Symbol is the nation's largest
manufacturer of bar code-based data capture systems. As of March 15, 2000, the
market value of the Reliance Insurance Group's investment in Symbol was
$694,577,000 (based upon the closing price of
15
<PAGE>
Symbol common stock on such date as reported by the NYSE), with a cost basis of
$9,614,000. Certain executive officers of the Company serve, at the Company's
request, as directors of Symbol.
At December 31, 1999, the Company's real estate operations had holdings
with a carrying value of $178.8 million, which includes office buildings and
other commercial properties with an aggregate carrying value of $75.3 million,
undeveloped land with a carrying value of $41.7 million, and residential real
estate projects under construction with a carrying value of $61.8 million.
The following table presents the investment results of the Reliance
Insurance Group's investment portfolio (including Commonwealth/Transnation's
investment portfolio for periods prior to the sale of the title insurance
operations) for each of the years ended December 31, 1999, 1998 and 1997:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------
1999 1998 1997
---------- ---------- ----------
(IN THOUSANDS, EXCEPT PERCENTAGES)
<S> <C> <C> <C>
Fixed Maturities:
Average investments(1)............................................... $3,589,745 $3,815,319 $3,764,220
Net investment income................................................ 261,112 276,303 267,895
Realized (losses) gains.............................................. (1,936) (13,131) 476
(Decrease) increase in unrealized gains.............................. (180,450) (55,448) 103,992
Average annual yield:
Net investment income.............................................. 7.27% 7.23% 7.12%
Realized (losses) gains............................................ (0.05) (0.34) 0.01
(Decrease) increase in unrealized gains............................ (5.03) (1.45) 2.76
---------- ---------- ----------
Return on fixed maturities........................................... 2.19% 5.44% 9.89%
---------- ---------- ----------
---------- ---------- ----------
Equity Securities:(2)
Average investments(1)............................................... $ 794,790 $ 673,009 $ 727,287
Net investment income................................................ 20,075 17,659 11,017
Realized gains....................................................... 82,810 120,316 55,666
Increase in unrealized gains......................................... 235,902 159,059 51,945
Average annual yield:
Net investment income.............................................. 2.53% 2.62% 1.51%
Realized gains..................................................... 10.42 17.88 7.66
Increase in unrealized gains....................................... 29.68 23.64 7.14
---------- ---------- ----------
Return on equity securities.......................................... 42.63% 44.14% 16.31%
---------- ---------- ----------
---------- ---------- ----------
Total weighted average return on fixed maturities and equity
securities(3)...................................................... 9.52% 11.25% 10.93%
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
- ------------------
(1) The average is computed by dividing the total market value of investments at
the beginning of the period plus the individual quarter-end balances by five
for the years ended December 31, 1999, 1998 and 1997.
(2) Does not include investments in LandAmerica Financial Group, Inc. for
periods subsequent to the sale of Commonwealth/Transnation Title and
investments in Zenith National Insurance Corp. See "Investee Companies."
(3) The impact on the overall rate of return of a one percent increase or
decrease in the December 31, 1999 fixed maturity portfolio market value
would be approximately 0.73%.
The carrying value and market value at December 31, 1999 of fixed
maturities for which interest is payable on a deferred basis was
$199.1 million.
INVESTEE COMPANIES
As of March 15, 2000, the Reliance Insurance Group owns 4,039,473 shares of
common stock of LandAmerica Financial Group, Inc. ("LandAmerica"), a
Virginia-based title insurance company, and owns 2,200,000 shares of the 7%
cumulative convertible preferred stock of LandAmerica having an aggregate stated
16
<PAGE>
value of $110,000,000 and initially convertible into 4,824,561 shares of
LandAmerica common stock. The Company owns approximately 30% of LandAmerica's
outstanding common stock and, on a diluted basis, 48% of LandAmerica's common
stock, assuming the conversion of the preferred stock.
As of March 15, 2000, the market value of the Reliance Insurance Group's
investment in LandAmerica was $184.0 million (based upon the closing price of
LandAmerica common stock on such date as reported by the NYSE and upon an
investment bank's valuation of the preferred stock). The net value of the
Reliance Insurance Group's investment in LandAmerica as of March 15, 2000 was
$264.6 million (net of a pretax deferred gain of $158.8 million which is
included in "accounts payable and accrued expenses" in the Company's
consolidated balance sheet). The common stock and cumulative convertible
preferred stock, together with $266.6 million in cash, were received in
consideration for the sale to LandAmerica in February 1998 of the Company's
title insurance companies, Commonwealth Land Title Insurance Company and
Transnation Title Insurance Company and their respective subsidiaries
("Commonwealth/Transnation Title"). Such shares of common stock and preferred
stock are subject to various terms, conditions and restrictions with regard to
sale, conversion and voting. The transaction resulted in an after-tax gain of
$242.9 million, of which $133.6 million was recognized in 1998. The deferred
gain of $158.8 million will be recognized as the equity securities received from
LandAmerica are sold. Three executive officers of the Company serve at the
request of the Company as the Company's representatives on the LandAmerica's
14-member board of directors.
The Company's investment in LandAmerica for periods subsequent to the sale
of Commonwealth/Transnation Title is accounted for by the equity method. See
Notes 3 and 5 to the Consolidated Financial Statements, which information is
incorporated herein by reference.
On October 25, 1999, the Company completed the sale of its entire
investment in Zenith National Insurance Corp. ("Zenith") for cash proceeds of
$184.1 million. In connection with the sale, the Company wrote-down its
investment in Zenith in 1999 by $9.3 million. On March 31, 1999, Zenith
Insurance Company ("Zenith Insurance"), a wholly owned subsidiary of Zenith, and
Nationwide Mutual Insurance Company ("Nationwide"), consummated the sale to
Nationwide all of the issued and outstanding capital stock of CalFarm Insurance
Company, a wholly owned subsidiary of Zenith Insurance. The Company realized an
after-tax gain of $24.9 million from the transaction.
REGULATION
The businesses of the Reliance Insurance Group, in common with those of
other insurance companies, are subject to comprehensive, detailed regulation in
the jurisdictions in which they do business. Such regulation is primarily for
the protection of policyholders rather than for the benefit of investors.
Although their scope varies from place to place, insurance laws in general grant
broad powers to supervisory agencies or officials to examine companies and to
enforce rules or exercise discretion touching almost every significant aspect of
the conduct of the insurance business. These include the licensing of companies
and agents to transact business, the imposition of monetary penalties for rules
violations, varying degrees of control over premium rates, the forms of policies
offered to customers, financial statements, periodic reporting, permissible
investments and adherence to financial standards relating to surplus, dividends
and other criteria of solvency intended to assure the satisfaction of
obligations to policyholders. Other legislation obliges the Reliance Insurance
Group to offer policies or assume risks in various markets which it would not
seek if it were acting solely in its own interest. While such regulation and
legislation is sometimes burdensome, inasmuch as all insurance companies
similarly situated are subject to such controls, the Company does not believe
that the competitive position of the Reliance Insurance Group is affected
adversely.
State holding company acts also regulate changes of control in insurance
holding companies and transactions and dividends between an insurance company
and its parent or affiliates. Although the specific provisions vary, the holding
company acts generally prohibit a person from acquiring a controlling interest
in an insurer incorporated in the state promulgating the act or in any other
controlling person of such insurer unless the insurance authority has approved
the proposed acquisition in accordance with the applicable regulations. In many
states, including Pennsylvania, where Reliance Insurance Company is domiciled,
"control" is presumed to exist if 10% or more of the voting securities of the
insurer are owned or controlled by a party, although the insurance authority may
find that "control" in fact does or does not exist where a person owns or
controls either a lesser or
17
<PAGE>
a greater amount of securities. The holding company acts also impose standards
on certain transactions with related companies, which generally include, among
other requirements, that all transactions be fair and reasonable and that
certain types of transactions receive prior regulatory approval either in all
instances or when certain regulatory thresholds have been exceeded.
The Insurance Law of Pennsylvania limits the maximum amount of dividends
which may be paid without approval by the Pennsylvania Insurance Department.
Under such law, Reliance Insurance Company may pay dividends during the year
equal to the greater of (a) 10% of the preceding year-end policyholders' surplus
or (b) the preceding year's statutory net income, but in no event to exceed the
amount of unassigned funds, which are defined as "undistributed, accumulated
surplus including net income and unrealized gains since the organization of the
insurer." In addition, the Pennsylvania law specifies factors to be considered
by the Pennsylvania Insurance Department to allow it to determine that statutory
surplus after the payment of dividends is reasonable in relation to an insurance
company's outstanding liabilities and adequate for its financial needs. Such
factors include the size of the company, the extent to which its business is
diversified among several lines of insurance, the number and size of risks
insured, the nature and extent of the insurance company's reinsurance and the
adequacy of the insurance company's reserves. The maximum dividend permitted by
law is not indicative of an insurer's actual ability to pay dividends, which may
be constrained by business and regulatory considerations, such as the impact of
dividends on surplus, which could affect an insurer's ratings, competitive
position, the amount of premiums that can be written and the ability to pay
future dividends. Furthermore, the Pennsylvania Insurance Department has broad
discretion to limit the payment of dividends by insurance companies. There is no
assurance that Reliance Insurance Company will meet the tests in effect from
time to time under Pennsylvania law for the payment of dividends without prior
Insurance Department approval or that any requested approval will be obtained.
Reliance Insurance Company has been advised by the Pennsylvania Insurance
Department that any required approval will be based upon a solvency standard and
will not be unreasonably withheld. Any significant limitation of Reliance
Insurance Company's dividends would adversely affect the Company's ability to
service its debt.
Regular common stock dividends paid by Reliance Insurance Company were
$175.7 million in 1999, $136.0 million in 1998 and $114.6 million in 1997. In
addition, during 1998, Reliance Insurance Company paid extraordinary dividends
of $135.0 million representing a portion of the gain from the sale of
Commonwealth/Transnation Title. During 2000, $124.0 million would be available
for dividend payments by Reliance Insurance Company under Pennsylvania law
without prior approval.
The Company has announced the suspension of its quarterly common stock
dividend, which totaled $36.5 million, $37.1 million and $36.7 million in 1999,
1998 and 1997, respectively.
Maintaining appropriate levels of statutory surplus is considered important
by the Company's management, state insurance regulatory authorities, and the
agencies that rate insurers' claims-paying abilities and financial strength.
Failure to maintain certain levels of statutory capital and surplus could result
in increased scrutiny or, in some cases, action taken by state regulatory
authorities and/or downgrades in an insurer's ratings.
Most states have a "risk based capital" requirement for the property and
casualty insurance industry. "Risk-based capital" refers to the determination of
the amount of statutory capital required for a property and casualty insurer
based on the risks assumed by the insurer (including, for example, investment
risks, credit risks relating to reinsurance recoverables and underwriting risks)
rather than just the amount of net premiums written by the insurer. A formula
that applies prescribed factors to the various risk elements in an insurer's
business is used to determine the minimum statutory capital requirement for the
insurer. An insurer having less statutory capital than the formula calculates
would be subject to varying degrees of regulatory intervention, depending on the
level of capital inadequacy. All of the Company's statutory insurance companies,
except for Reliance Insurance Company, have statutory capital in excess of the
minimum required risk-based capital. Because Reliance Insurance Company had
statutory capital below the minimum required risk-based capital at the time the
risk-based capital test was performed, it had a "Company Action Level Event",
which required it to file a remediation plan with the Pennsylvania Insurance
Department and certain other state regulators. Subsequent to December 31, 1999,
the market value of the Company's investment in Symbol common stock has
increased thereby increasing statutory capital. As a result, the Company
believes that Reliance Insurance Company's statutory capital is in excess of the
minimum required risk based capital. Additionally, upon completion of the
18
<PAGE>
sale of Reliance Surety which is expected to occur in the second quarter of
2000, it is estimated that Reliance Insurance Company's statutory capital will
further increase by approximately $300 million.
Reliance Insurance Company had values which in 1999 fell outside of the
usual range for five financial ratio ranges established by the National
Association of Insurance Commissioners and adopted by most states. These ranges
are intended to permit insurance regulators to monitor insurance companies'
performance with respect to such ranges. The Two Year Operating Ratio is a
measure of an insurance company's profitability, which was negatively impacted
in 1999 by Reliance Insurance Company's reserve strengthening in the second
quarter. The Changes in Surplus test is a measure of improvement or
deterioration in the Company's financial position during the year, which was
negatively impacted in 1999 by the Company's operating results and a decrease in
market value of investments, including the Company's investment in LandAmerica.
With respect to Liabilities to Liquid Assets, investments in affiliates are
excluded from the definition of liquid assets. Reliance Insurance Company is the
ultimate parent company of all of the property and casualty companies of the
Reliance Insurance Group and therefore the results for this test consistently
fall outside the usual range. The Company believes that it has sufficient
marketable assets on hand to make timely payment of claims and to meet other
operating requirements. The Agents' Balances to Surplus test measures agents'
balances as a percentage of policyholders' surplus, and the second quarter 1999
reserve strengthening adversely impacted this ratio. With respect to the
Estimated Current Reserve Deficiency to Surplus test, the Company's growth in
earned premium over the past two years, and the deterioration in the Company's
surplus during the year, also caused the Company to fail the Estimated Current
Reserve Deficiency to Surplus test, despite the reserve strengthening done in
1999. The Company believes that the value for this range is not reflective of
the adequacy of Reliance Insurance Company's current reserves.
From time to time, states have adopted or considered adopting legislation
or regulations which could adversely affect the manner in which the Company sets
rates for policies of insurance, particularly as they relate to personal lines.
No assurance can be given as to what effect the adoption of such legislation or
regulations in the future would have on the ability of the Company to raise its
rates.
COMPETITION
The markets in which the Company's businesses compete are highly
competitive. The property and casualty insurance business is fragmented and no
single company dominates any of the markets in which the Company operates. The
Reliance Insurance Group competes with individual companies and with groups of
affiliated companies with greater financial resources, larger sales forces and
more widespread agency and broker relationships. Competition in the property and
casualty insurance industry is based primarily on price, product design and
service. In addition, because the Reliance Insurance Group sells policies
primarily through agents and insurance brokers who are not obligated to choose
the policies of the Reliance Insurance Group over those of another insurer, the
Reliance Insurance Group must compete for agents and brokers and for the
business they control. Such competition is based upon price, product design,
policyholder service, commissions and service to agents and brokers.
RCG Information Technology competes with other national information
technology services companies, as well as smaller computer professional
supplemental staffing firms. Competition in the information technology
consulting business is based primarily on price, service, quality of the
solutions provided and the availability of qualified computer professionals.
SALE OF DISCONTINUED OPERATION
On December 31, 1997, the Company sold all of the issued and outstanding
common stock of its subsidiary, Prometheus Funding Corp. ("Prometheus"),
formerly known as Frank B. Hall & Co. Inc. ("Hall"), an insurance broker.
Prometheus had previously sold substantially all of its operating assets and
insurance brokerage, employee benefits consulting and related services
businesses. See Note 3 to the Consolidated Financial Statements for a further
description of the sale, which information is incorporated herein by reference.
19
<PAGE>
ITEM 2. PROPERTIES.
The Company and its consolidated subsidiaries own and lease offices in
various locations primarily in the United States. None of these properties is
material to the Company's business. At December 31, 1999, the Company and its
consolidated subsidiaries employed approximately 6,050 persons full time and
leased approximately 230 properties. Of those properties, approximately 160 are
for Reliance Insurance Group office space, approximately 20 are for RCG
Information Technology office space, and approximately 50 are for office space
of RCG Moody International Limited, a subsidiary of the Company which provides
international inspection and quality assurance services.
ITEM 3. LEGAL PROCEEDINGS.
The Company and its subsidiaries are involved in certain litigation arising
in the course of their businesses, some of which involve claims of substantial
amounts. Although the ultimate outcome of these matters cannot be ascertained at
this time, and the results of legal proceedings cannot be predicted with
certainty, the Company is contesting the allegations of the complaints in each
action pending against it and believes, based on current knowledge and after
consultation with counsel, that the resolution of these matters will not have a
material adverse effect on the Consolidated Financial Statements.
In addition, the Company is subject to the litigation set forth in Note 17
to the Consolidated Financial Statements, which information is incorporated
herein by reference.
20
<PAGE>
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matter was submitted to a vote of security holders in the fourth quarter
of the fiscal year covered by this Annual Report on Form 10-K.
EXECUTIVE OFFICERS OF THE REGISTRANT
Set forth below is the name, age and position of each of the executive
officers of the Company:
<TABLE>
<CAPTION>
NAME AND AGE POSITION
- -------------------------------------------------------------- ------------------------------------------------
<S> <C>
Saul P. Steinberg (60)........................................ Chairman of the Board of Directors
Robert M. Steinberg (57)...................................... Vice Chairman of the Board of Directors
George R. Baker (70).......................................... President, Chief Executive Officer and Director
George E. Bello (64).......................................... Executive Vice President, Controller and
Director
Lowell C. Freiberg (60)....................................... Executive Vice President, Chief Financial
Officer and Director
Howard E. Steinberg (55)...................................... Executive Vice President, Chief of Corporate
Operations and Director
Dennis J. O'Leary (52)........................................ Senior Vice President--Taxes
Philip S. Sherman (51)........................................ Senior Vice President--Group Controller
Bruce L. Sokoloff (51)........................................ Senior Vice President--Administration
James E. Yacobucci (48)....................................... Senior Vice President--Investments and Director
Paul W. Zeller (51)........................................... Senior Vice President and Deputy General Counsel
</TABLE>
The association between the Company and each of its executive officers is
described below.
Saul P. Steinberg founded and has been a Director of the Company and
predecessors of the Company since 1961. He served as Chief Executive Officer of
the Company and predecessors of the Company from 1961 until February 2000, and
served as Chief Operating Officer of the Company from November 1999 until
February 2000. He has been Chairman of the Board and Chief Executive Officer of
Reliance Insurance Company since November 1999. Mr. Steinberg is a Director of
Symbol Technologies, Inc. He is Chairman of the Executive Committee and the
Regular Compensation Committee of the Board of Directors. He is the brother of
Robert M. Steinberg and the brother-in-law of Bruce L. Sokoloff.
Robert M. Steinberg became a Director of the Company in 1981 and Vice
Chairman of the Company in November 1999. He served as President and Chief
Operating Officer of the Company from 1982 until November 1999. He has held
various positions with predecessors of the Company since 1965. Mr. Steinberg
became Vice Chairman of Reliance Insurance Company in November 1999, and served
as Chairman of the Board and Chief Executive Officer of Reliance Insurance
Company from 1984 until November 1999. Mr. Steinberg is the brother of Saul P.
Steinberg and the brother-in-law of Bruce L. Sokoloff.
George R. Baker was appointed President and Chief Executive Officer of the
Company in February 2000. He served as Assistant to the Chairman of the Company
from November 1999 until February 2000. He became a Director of the Company in
January 1983 and was a Director of predecessors of the Company since 1974,
except for the period February 1982 through January 1983. His principal business
activity during the past five years has been serving as a Corporate
Director/Advisor to various business enterprises. Mr. Baker is a Director of the
Midland Company, W.W. Grainger, Inc. and Loral Cyberstar, Inc. Mr. Baker is a
member of the Executive Committee of the Board of Directors.
George E. Bello became Executive Vice President and Controller and a
Director of the Company in 1982. He has held various positions with predecessors
of the Company since 1968. He is a Director of LandAmerica Financial Group, Inc.
and Horizon Health Corporation. Mr. Bello is Chairman of the Finance Committee
of the Board of Directors and is a member of the Executive and Regular
Compensation Committees of the Board of Directors.
21
<PAGE>
Lowell C. Freiberg became Executive Vice President of the Company in May
1998, and has served as Chief Financial Officer of the Company since 1985 and as
a Director of the Company since 1982. He also served as Senior Vice President of
the Company from 1982 to May 1998 and as Treasurer of the Company from 1982
until March 1994. Mr. Freiberg has held various positions with predecessors of
the Company since 1969. He is a Director of LandAmerica Financial Group, Inc.
and Symbol Technologies, Inc. Mr. Freiberg is a member of the Finance Committee
of the Board of Directors.
Howard E. Steinberg was elected Chief of Corporate Operations and a
Director of the Company in March 2000. He has been Executive Vice President of
the Company since May 1998 and served as General Counsel and Corporate Secretary
of the Company from March 1983, when he joined the Company, until March 2000. He
also served as Senior Vice President of the Company from March 1983 to May 1998.
Prior to joining the Company, he was a partner in the law firm of Dewey,
Ballantine, Bushby, Palmer & Wood. Mr. Steinberg also serves as Deputy Chairman
of the Long Island Power Authority, an unpaid position to which he was appointed
in May 1999. He previously served from January 1996 to May 1999 as Chairman of
the New York State Thruway Authority, an unpaid position. He is a director of
LandAmerica Financial Group, Inc.
Dennis J. O'Leary joined the Company in 1985 as Vice President--Director of
Taxes. Prior thereto, he was a partner at the accounting firm of Deloitte &
Touche LLP (formerly Touche Ross & Co.) since 1980 and was associated with the
firm since 1975. In 1987 he was elected Senior Vice President--Taxes.
Philip S. Sherman was elected Vice President--Group Controller of the
Company in 1984 and in 1987 he was elected Senior Vice President--Group
Controller. He has held various positions with predecessors of the Company since
1980.
Bruce L. Sokoloff was elected Senior Vice President--Administration of the
Company in 1982. He has held various positions with predecessors of the Company
since 1973. He is a Director of Individual Investor Group, Inc. Mr. Sokoloff is
the brother-in-law of Messrs. Saul P. Steinberg and Robert M. Steinberg.
James E. Yacobucci became a Director of the Company and Senior Vice
President--Investments of Reliance Insurance Company in May 1989. He became
Senior Vice President--Investments of the Company in December 1990.
Paul W. Zeller was elected Vice President of the Company in 1983 and Senior
Vice President in August 1998. He has been Deputy General Counsel of the Company
since March 1984 and has held various positions with predecessors of the Company
since 1981.
Officers are not elected for a fixed term of office but serve at the
discretion of the Board of Directors. Certain executive officers have employment
agreements with the Company.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
See the information in "Market and Dividend Information for Common Stock"
on page 66 of the Reliance Group Holdings 1999 Annual Report, which information
is incorporated herein by reference.
ITEM 6. SELECTED FINANCIAL DATA.
See the information in "Reliance Group Holdings, Inc. and Subsidiaries
Selected Financial Data" on pages 17 and 18 of the Reliance Group Holdings 1999
Annual Report, which information is incorporated herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
See the information in "Reliance Group Holdings, Inc. and Subsidiaries
Financial Review" on pages 21 through 30 of the Reliance Group Holdings 1999
Annual Report, which information is incorporated herein by reference.
22
<PAGE>
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
See the information in "Reliance Group Holdings, Inc. and Subsidiaries
Financial Review--Market Risks" on pages 28 through 30 of the Reliance Group
Holdings 1999 Annual Report, which information is incorporated herein by
reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The financial statements of the Company and its consolidated subsidiaries,
included on pages 31 through 63 of the Reliance Group Holdings 1999 Annual
Report, which information is incorporated herein by reference, are listed in
Item 14 below.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Information regarding the executive officers of the Company is included in
Part I of this report under the caption "Executive Officers of the Registrant."
Information regarding the directors of the Company is incorporated herein
by reference from its Proxy Statement for the Annual Meeting of Stockholders to
be held June 21, 2000, under the caption "Proposal 1--Election of Directors."
ITEM 11. EXECUTIVE COMPENSATION.
See the information in the Company's Proxy Statement for the Annual Meeting
of Stockholders to be held June 21, 2000, under the caption "Executive
Compensation," which information (other than the information under the captions
"Executive Compensation--Report of Compensation Committees of the Board" and
"Executive Compensation--Performance Graph") is incorporated herein by
reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
See the information in the Company's Proxy Statement for the Annual Meeting
of Stockholders to be held June 21, 2000, under the caption "Security Ownership
of Certain Beneficial Owners and Management," which information is incorporated
herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
See the information in the Company's Proxy Statement for the Annual Meeting
of Stockholders to be held June 21, 2000, under the captions "Executive
Compensation--Compensation Committee Interlocks and Insider Participation" and
"Related Party Transactions," which information is incorporated herein by
reference.
23
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(A) 1. FINANCIAL STATEMENTS.
The consolidated financial statements of Reliance Group Holdings, Inc. and
Subsidiaries, which appear on pages 31 through 63 of the Reliance Group Holdings
1999 Annual Report, are incorporated herein by reference.
<TABLE>
<CAPTION>
PAGE REFERENCE
-------------------
1999
ANNUAL
FORM 10-K REPORT
--------- ------
<S> <C> <C>
RELIANCE GROUP HOLDINGS, INC. AND SUBSIDIARIES:
Independent Auditors' Report............................................................... A-1 64
Consolidated Financial Statements at December 31, 1999 and 1998 and for the three years
ended December 31, 1999:
Statement of Operations............................................................... 31
Balance Sheet......................................................................... 32
Statement of Changes in Shareholders' Equity.......................................... 33
Statement of Comprehensive Income (Loss).............................................. 34
Statement of Cash Flows............................................................... 35
Notes to Financial Statements (1-20).................................................. 36-63
2. FINANCIAL STATEMENT SCHEDULES.
I -- Summary of Investments of Insurance Subsidiaries--Other Than Investments in Related A-2
Parties............................................................................
II -- Condensed Financial Information of the Registrant at December 31, 1999 and 1998 and
for the three years ended December 31, 1999:
Statement of Operations............................................................ A-3
Balance Sheet...................................................................... A-4
Statement of Cash Flows............................................................ A-5
III -- Supplementary Insurance Information................................................ A-6
IV -- Reinsurance........................................................................ A-7
V -- Supplemental Information Concerning Property and Casualty Insurance Operations..... A-8
</TABLE>
3. EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ---------- ------------------------------------------------------------------------------------------------------
<S> <C>
3.1 Reliance Group Holdings' Certificate of Incorporation, as amended (incorporated by reference to
Exhibit 3(a) to Registration Statement No. 2-77043).
3.2 Amendment to Exhibit 3.1, as filed with the Secretary of State of the State of Delaware on July 22,
1986 (incorporated by reference to Exhibit 3.2 to Registration Statement No. 33-7493).
3.3 Amendment to Exhibit 3.1, as filed with the Secretary of State of the State of Delaware on May 27,
1993 (incorporated by reference to Exhibit 4.5 to Registration Statement No. 33-67396).
3.4 Reliance Group Holdings' Amended and Restated By-Laws amended as of March 20, 2000.
*4.
+10.1 Employment Agreement between Reliance Group Holdings and Saul P. Steinberg, dated as of February 15,
1996 (and the Schedule attached thereto pursuant to Instruction 2 to Item 601 of Regulation S-K
listing George E. Bello, Lowell C. Freiberg, Howard E. Steinberg and Robert M. Steinberg as having
employment agreements identical in all respects to Exhibit 10.1 other than as specified in such
schedule) (incorporated by reference to Exhibit 10.1 to Reliance Group Holdings' Quarterly Report on
Form 10-Q for the quarter ended March 31, 1996).
</TABLE>
24
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ---------- ------------------------------------------------------------------------------------------------------
<S> <C>
+10.2 Amendment, dated as of December 29, 1997, to Employment Agreement between Reliance Group Holdings and
Saul P. Steinberg, dated as of February 15, 1996 (and the Schedule attached thereto pursuant to
Instruction 2 to Item 601 of Regulation S-K listing George E. Bello, Lowell C. Freiberg, Howard E.
Steinberg and Robert M. Steinberg as having amendments to their employment agreements identical in all
respects to Exhibit 10.2 other than as specified in such schedule).
+10.3 Employment Agreement between Reliance Insurance Company and Saul P. Steinberg, dated as of
February 15, 1996 (and Schedule attached thereto pursuant to Instruction 2 to Item 601 of Regulation
S-K listing Robert M. Steinberg as having an employment agreement identical in all respects to
Exhibit 10.3) (incorporated by reference to Exhibit 10.1 to Reliance Group Holdings' Quarterly Report
on Form 10-Q for the quarter ended March 31, 1996).
+10.4 Employment Agreement between Reliance Group Holdings and Bruce L. Sokoloff, dated as of May 15, 1996
(incorporated by reference to Exhibit 10.1 to Reliance Group Holdings' Quarterly Report on Form 10-Q
for the quarter ended June 30, 1996).
+10.5 Amendment, dated as of December 29, 1997, to Employment Agreement between Reliance Group Holdings and
Bruce L. Sokoloff, dated as of May 15, 1996 (incorporated by reference to Exhibit 10.5 of Reliance
Group Holdings' Annual Report on Form 10-K for the year ended December 31, 1997).
+10.6 Employment Agreement between Reliance Group Holdings and Robert S. Miller, dated November 22, 1999.
+10.7 Employment Agreement between Reliance Group Holdings and George R. Baker, dated as of February 29,
2000.
+10.8 Employment Agreement between Reliance Group Holdings, Inc. and Dennis J. O'Leary, dated as of
September 1, 1999 and Amendment dated as of December 1, 1999 (and the Schedule attached there to
pursuant to Instruction 2 to item 601 of Regulation S-K listing Philip S. Sherman and Paul W. Zeller
as having employment agreements identical in all respects to Exhibit 10.8).
+10.9 1986 Stock Option Plan of Reliance Group Holdings, as amended (incorporated by reference to Exhibit
19.2 to Reliance Group Holdings' Quarterly Report on Form 10-Q for the quarter ended June 30, 1990).
+10.10 The Reliance Group Holdings, Inc. 1994 Stock Option Plan (incorporated by reference to Exhibit 10.2 to
Reliance Group Holdings' Quarterly Report on Form 10-Q for the quarter ended June 30, 1994).
+10.11 Amended and Restated 1994 Stock Option Plan for Non-Employee Directors (incorporated by reference to
Exhibit 10.7 of Reliance Group Holdings' Annual Report on Form 10-K for the year ended December 31,
1997).
+10.12 The Reliance Group Holdings, Inc. 1997 Stock Option Plan (incorporated by reference to Exhibit 10.2 to
Reliance Group Holdings' Quarterly Report on Form 10-Q for the quarter ended June 30, 1997).
+10.13 The Reliance Group Holdings, Inc. 1998 Stock Option Plan (incorporated by reference to Exhibit 10.1 to
Reliance Group Holdings' Quarterly Report on Form 10-Q for the quarter ended June 30, 1998).
+10.14 The Reliance Group Holdings, Inc. 1998 Stock Option Plan for Non-Employee Directors (incorporated by
reference to Exhibit 10.2 to Reliance Group Holdings' Quarterly Report on Form 10-Q for the quarter
ended June 30, 1998).
+10.15 The Reliance Group Holdings, Inc. Employee Stock Purchase Plan (incorporated by reference to Exhibit
10.1 to Reliance Group Holdings' Quarterly Report on Form 10-Q for the quarter ended June 30, 1997).
+10.16 The Reliance Group Holdings, Inc. Key Employee Share Option Plan (incorporated by reference to Exhibit
10.11 of Reliance Group Holdings' Annual Report on Form 10-K for the year ended December 31, 1997).
+10.17 Termination of Reliance Group Holdings, Inc. Key Employee Share Option Plan.
</TABLE>
25
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ---------- ------------------------------------------------------------------------------------------------------
<S> <C>
+10.18 Reliance Group Holdings, Inc. 1998 Executive Bonus Plan (incorporated by reference to Exhibit 10.3 of
Reliance Group Holdings' Quarterly Report on Form 10-Q for the quarter ended June 30, 1998).
+10.19 Amendment to Reliance Group Holdings, Inc. 1998 Executive Bonus Plan (incorporated by reference to
Exhibit 10.15 of Reliance Group Holdings' Annual Report on Form 10-K for the year ended December 31,
1998).
+10.20 Reliance Group Holdings, Inc. Executive Bonus Plan for James E. Yacobucci (incorporated by reference
to Exhibit 10.4 of Reliance Group Holdings' Quarterly Report on Form 10-Q for the quarter ended
June 30, 1998).
+10.21 Reliance National Risk Specialists 1992 Key Management Incentive Plan (incorporated by reference to
Exhibit 10.9 to Reliance Insurance Company's Annual Report on Form 10-K for the year ended
December 31, 1993).
+10.22 Reliance National Risk Specialists 1993 Key Management Incentive Plan (incorporated by reference to
Exhibit 10.10 to Reliance Insurance Company's Annual Report on Form 10-K for the year ended
December 31, 1993).
+10.23 Reliance National Risk Specialists 1994 Key Management Incentive Plan (incorporated by reference to
Exhibit 10.14 to Reliance Insurance Company's Annual Report on Form 10-K for the year ended
December 31, 1994).
+10.24 Reliance National Risk Specialists 1995 Key Management Incentive Plan (incorporated by reference to
Exhibit 10.25 to Reliance Group Holdings' Annual Report on Form 10-K for the year ended December 31,
1996).
+10.25 Reliance National Risk Specialists Supplemental Key Management Incentive Plan (effective for policy
years 1993, 1994 and 1995) (incorporated by reference to Exhibit 10.26 to Reliance Group Holdings'
Annual Report on Form 10-K for the year ended December 31, 1996).
+10.26 Reliance National Risk Specialists 1996 Key Management Incentive Plan (incorporated by reference to
Exhibit 10.27 to Reliance Group Holdings' Annual Report on Form 10-K for the year ended December 31,
1996).
+10.27 Reliance National 1997 Key Management Incentive Plan (incorporated by reference to Exhibit 10.23 to
Reliance Group Holdings' Annual Report on Form 10-K for the year ended December 31, 1997).
+10.28 Reliance National 1998 Key Management Incentive Plan (incorporated by reference to Exhibit 10.24 of
Reliance Group Holdings' Annual Report on Form 10-K for the year ended December 31, 1998).
+10.29 Memorandum, dated February 8, 1989, summarizing employment arrangements between Reliance Insurance
Company and Dennis Busti (incorporated by reference to Exhibit 10.8 to Reliance Insurance Company's
Annual Report on Form 10-K for the year ended December 31, 1988).
10.30 Asset Purchase Agreement, dated July 24, 1992, between Frank B. Hall & Co. Inc. ("Hall") and Aon
Corporation ("Aon") (incorporated by reference to Exhibit 2.1 to Reliance Group Holdings' Quarterly
Report on Form 10-Q for the quarter ended June 30, 1992).
10.31 Agreement and Plan of Merger, dated as of July 24, 1992, among Reliance Group Holdings, Hall and
Prometheus Liquidating Corp. (incorporated by reference to Exhibit 2.2 to Reliance Group Holdings'
Quarterly Report on Form 10-Q for the quarter ended June 30, 1992).
10.32 Employee Benefit Agreement, dated July 24, 1992, among Reliance Group Holdings and Aon (incorporated
by reference to Exhibit 28.2 to Reliance Group Holdings' Quarterly Report on Form 10-Q for the quarter
ended June 30, 1992).
10.33 Amendment, dated November 2, 1992, to Exhibit 10.26 (incorporated by reference to Exhibit 2.1 to
Reliance Group Holdings' Quarterly Report on Form 10-Q for the quarter ended September 30, 1992).
</TABLE>
26
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ---------- ------------------------------------------------------------------------------------------------------
<S> <C>
10.34 Settlement Agreement and Release, dated June 2, 1989, between James P. Corcoran, Superintendent of
Insurance of the State of New York, as Liquidator of Union Indemnity Insurance Company of New York,
Inc. and Hall (now known as Prometheus Funding Corp.)(incorporated herein by reference to Exhibit
10.01 to Frank B. Hall & Co. Inc.'s report on Form 10-Q for the quarter ended June 30, 1989).
10.35 Amendment No. 1, dated April 21, 1997, to Exhibit 10.30 (incorporated by reference to Exhibit 10.1 to
Reliance Group Holdings' Quarterly Report on Form 10-Q for the quarter ended March 31, 1997).
10.36 Stock Purchase Agreement, dated as of December 31, 1997, among Bear Stearns Acquisition Corp. XVI,
Reliance National (U.K.) Ltd. and Reliance Insurance Company (incorporated by reference to Exhibit
10.31 to Reliance Group Holdings' Annual Report on Form 10-K for the year ended December 31, 1997).
10.37 Amended and Restated Stock Purchase Agreement, dated as of December 11, 1997 by and among Reliance
Insurance Company, LandAmerica and Lawyers Title Insurance Corporation (incorporated by reference to
Exhibit 2.1 to LandAmerica's Current Report on Form 8-K filed with the Securities and Exchange
Commission on March 16, 1998).
10.38 Voting and Standstill Agreement, dated as of February 27, 1998, by and among LandAmerica, Reliance
Group Holdings and Reliance Insurance Company (incorporated by reference to Exhibit 10.26 to
LandAmerica's Annual Report on Form 10-K for the year ended December 31, 1997).
10.39 Registration Rights Agreement, dated as of February 27, 1998, by and among LandAmerica and Reliance
Insurance Company (incorporated by reference to Exhibit 10.27 to LandAmerica's Annual Report on
Form 10-K for the year ended December 31, 1997).
10.40 Articles of Amendment to LandAmerica's Articles of Incorporation (incorporated by reference to
Exhibit 4.2 to LandAmerica's Form 8-A filed with the Securities and Exchange Commission on February
27, 1998).
10.41 Stock Purchase Agreement, dated as of February 22, 1999, between Zenith Insurance Company and
Nationwide Mutual Insurance Company (incorporated by reference to Zenith's Current Report on Form 8-K
filed with the Securities and Exchange Commission on March 9, 1999).
10.42 Retrocession Settlement Agreement, dated as of January 7, 2000, among Reliance Insurance Company,
Reliance Group Holdings, Inc., Sun Life Assurance Company of Canada, Phoenix Home Life Mutual
Insurance Company, American Phoenix Life Mutual Insurance Company, American Phoenix Life and
Reassurance Company, and Cologne Life Reinsurance Company.
13.1 Reliance Group Holdings 1999 Annual Report.
21.1 List of Subsidiaries of Reliance Group Holdings.
23.1 Consent of Deloitte & Touche LLP.
27.1 Financial Data Schedule.
**99.1 Annual Report on Form 11-K of Reliance Insurance Company Savings Incentive Plan for the year ended
December 31, 1999.
</TABLE>
- ------------------
* Neither Reliance Group Holdings nor its subsidiaries is a party to any
instrument relating to long-term debt under which the securities authorized
exceed 10% of the total consolidated assets of Reliance Group Holdings and
its subsidiaries. Copies of instruments relating to long-term debt of lesser
amounts will be provided to the Securities and Exchange Commission upon
request.
+ Management contract or compensatory plan or arrangement required to be filed
as an Exhibit to this Form 10-K pursuant to Item 14(c).
** To be filed by Amendment.
27
<PAGE>
(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) November 24, 1999,
reporting an Item 5 matter, the appointment of Robert M. Steinberg as Vice
Chairman of the Company, the appointment of Robert S. Miller as President of the
Company and the election of Mr. Miller as a Director of the Company, the
appointment of George R. Baker as Assistant to the Chairman of the Company, the
assumption by Saul P. Steinberg, Chairman and Chief Executive Officer of the
Company, of the additional responsibility of Chief Operating Officer of the
Company, and the resignation of Dennis A. Busti from the Company's Board of
Directors.
28
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) 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, ON THE 29TH DAY OF
MARCH, 2000.
RELIANCE GROUP HOLDINGS, INC.
By: /s/ GEORGE R. BAKER
----------------------------------
George R. Baker
President and Chief Executive
Officer
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS
REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE
REGISTRANT AND IN THE CAPACITIES AND ON THE DATES INDICATED.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------------------ ---------------------------------------- -------------------
<S> <C> <C>
/s/ GEORGE R. BAKER Principal Executive Officer March 29, 2000
- ------------------------------------------ and Director
George R. Baker
/s/ GEORGE E. BELLO Principal Accounting Officer March 29, 2000
- ------------------------------------------ and Director
George E. Bello
/s/ LOWELL C. FREIBERG Principal Financial Officer March 29, 2000
- ------------------------------------------ and Director
Lowell C. Freiberg
/s/ SAUL P. STEINBERG Chairman of the Board March 29, 2000
- ------------------------------------------ of Directors
Saul P. Steinberg
Director
- ------------------------------------------
Thomas P. Gerrity
/s/ JEWELL J. MCCABE Director March 29, 2000
- ------------------------------------------
Jewell J. McCabe
/s/ IRVING SCHNEIDER Director March 24, 2000
- ------------------------------------------
Irving Schneider
Director
- ------------------------------------------
Bernard L. Schwartz
/s/ RICHARD E. SNYDER Director March 24, 2000
- ------------------------------------------
Richard E. Snyder
/s/ BRUCE E. SPIVEY Director March 24, 2000
- ------------------------------------------
Bruce E. Spivey
</TABLE>
29
<PAGE>
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------------------ ---------------------------------------- -------------------
<S> <C> <C>
Director
- ------------------------------------------
Howard E. Steinberg
/s/ ROBERT M. STEINBERG Director March 29, 2000
- ------------------------------------------
Robert M. Steinberg
/s/ JAMES E. YACOBUCCI Director March 29, 2000
- ------------------------------------------
James E. Yacobucci
</TABLE>
30
<PAGE>
INDEPENDENT AUDITORS' REPORT
- --------------------------------------------------------------------------------
Board of Directors and Shareholders
Reliance Group Holdings, Inc.
New York, New York
We have audited the consolidated financial statements of Reliance Group
Holdings, Inc. and subsidiaries (the "Company") as of December 31, 1999 and
1998, and for each of the three years in the period ended December 31, 1999, and
have issued our report thereon dated February 29, 2000, except as to Note 4, as
to which the date is March 15, 2000, (which report expresses an unqualified
opinion and includes an explanatory paragraph related to the Company's change in
accounting for insurance related assessments in 1999 and process reengineering
costs in 1997); such consolidated financial statements and report are included
in your 1999 Annual Report to Shareholders and are incorporated herein by
reference. Our audits also included the financial statement schedules of the
Company listed in Item 14. These financial statement schedules are the
responsibility of the Company's management. Our responsibility is to express an
opinion based on our audits. In our opinion, such financial statement schedules,
when considered in relation to the basic consolidated financial statements taken
as a whole, present fairly in all material respects the information set forth
therein.
DELOITTE & TOUCHE LLP
NEW YORK, NEW YORK
February 29, 2000, except as to Note 4,
of the consolidated financial statements,
as to which the date is March 15, 2000.
A-1
<PAGE>
SCHEDULE I
ITEM 14(A)2
RELIANCE GROUP HOLDINGS, INC. AND SUBSIDIARIES
SUMMARY OF INVESTMENTS OF INSURANCE SUBSIDIARIES--OTHER THAN INVESTMENTS IN
RELATED PARTIES
DECEMBER 31, 1999
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------
COLUMN A COLUMN B COLUMN C COLUMN D
- ------------------------------------------------------------------------------------------------------------------
AMOUNT AT
WHICH
SHOWN IN THE
TYPE OF INVESTMENT COST VALUE BALANCE SHEET
- ------------------------------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C>
Fixed maturities available for sale:
Bonds and notes:
United States government and government agencies and
authorities.................................................. $ 425,497 $ 416,756 $ 416,756
States, municipalities and political subdivisions.............. 146,231 147,633 147,633
Foreign--government............................................ 137,687 137,032 137,032
Foreign--other................................................. 131,243 131,866 131,866
Public utilities............................................... 548,632 512,323 512,323
Convertibles and bonds with warrants attached.................. 122,550 129,206 129,206
All other corporate bonds and notes............................ 1,042,578 980,978 980,978
Redeemable preferred stocks....................................... 295,030 307,714 307,714
---------- ---------- -----------
2,849,448 2,763,508 2,763,508
---------- ---------- -----------
Fixed maturities held for investment:
Bonds and notes:
States, municipalities and political subdivisions.............. 6,487 6,191 6,487
Foreign--government............................................ 106,367 110,587 106,367
Foreign--other................................................. 15,197 15,547 15,197
Public utilities............................................... 166,543 160,705 166,543
All other corporate bonds and notes............................ 128,995 127,307 128,995
Redeemable preferred stocks.................................... 60,751 59,679 60,751
---------- ---------- -----------
484,340 480,016 484,340
---------- ---------- -----------
Equity securities:
Common stocks:
Banks, trusts and insurance companies.......................... 51,576 70,802 70,802
Industrial and other........................................... 188,340 891,898 891,898
Nonredeemable preferred stocks.................................... 37,401 42,076 42,076
---------- ---------- -----------
277,317 1,004,776 1,004,776
---------- ---------- -----------
Short-term investments.............................................. 263,042 263,042 263,042
---------- ---------- -----------
Cash................................................................ 50,565 50,565 50,565
---------- ---------- -----------
$4,561,907
----------
----------
Mortgage loans(1)................................................... 3,526 3,526
---------- -----------
Investments in real estate(2)....................................... 175,202 175,202
---------- -----------
$4,103,440 $ 4,744,959
---------- -----------
---------- -----------
</TABLE>
- ------------------
(1) In the consolidated financial statements, mortgage loans are included in
premiums and other receivables.
(2) Excludes investments in real estate held by non-insurance subsidiaries with
a cost and carrying value of $3,640,000
A-2
<PAGE>
SCHEDULE II
ITEM 14(A)2
RELIANCE GROUP HOLDINGS, INC.
(PARENT COMPANY)
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31 1999 1998 1997
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
(In thousands)
REVENUES:
Dividends from subsidiaries............................................... $ 174,000 $268,000 $315,272
Interest (including $6,137, $4,438 and $4,598 from subsidiaries).......... 6,140 4,451 5,214
Loss on sale of investee company/subsidiary............................... (1,263) (5,160) --
--------- -------- --------
178,877 267,291 320,486
--------- -------- --------
EXPENSES:
Interest (including $5,681 and $8,032 to subsidiaries in 1998
and 1997)............................................................... 11,189 62,071 76,032
General and administrative................................................ 37,383 40,597 42,268
--------- -------- --------
48,572 102,668 118,300
--------- -------- --------
130,305 164,623 202,186
Income tax benefit........................................................ 51,043 37,609 40,219
--------- -------- --------
INCOME BEFORE EQUITY IN SUBSIDIARIES AND INVESTEE COMPANIES............... 181,348 202,232 242,405
Equity in subsidiaries (net income (loss) less dividends received)........ (464,822) 109,983 (12,907)
Equity in investee companies.............................................. 30,778 22,000 7,675
Loss on sale of discontinued operation.................................... -- -- (1,312)
--------- -------- --------
INCOME (LOSS) BEFORE EXTRAORDINARY ITEM AND CUMULATIVE EFFECT OF ACCOUNTING
CHANGE.................................................................. (252,696) 334,215 235,861
Extraordinary item--early extinguishment of debt.......................... -- (7,766) --
Cumulative effect of change in accounting................................. (57,850) -- (6,442)
--------- -------- --------
NET INCOME (LOSS)......................................................... ($310,546) $326,449 $229,419
--------- -------- --------
--------- -------- --------
</TABLE>
A-3
<PAGE>
SCHEDULE II
ITEM 14(A)2
RELIANCE GROUP HOLDINGS, INC.
(PARENT COMPANY)
BALANCE SHEET
<TABLE>
<CAPTION>
ASSETS DECEMBER 31, 1999 1998
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
(In thousands, except per share amount)
Cash.................................................................................. $ 9,968 $ 83
Investments in subsidiaries........................................................... 1,344,996 1,794,269
Due from subsidiaries................................................................. 113,111 73,232
Excess of cost over fair value of net assets acquired, less accumulated
amortization........................................................................ 24,049 25,426
Other assets.......................................................................... 44,273 39,028
---------- ----------
$1,536,397 $1,932,038
---------- ----------
---------- ----------
LIABILITIES AND SHAREHOLDERS' EQUITY
- -----------------------------------------------------------------------------------------------------------------
Accounts payable and accrued expenses................................................. $ 39,886 $ 49,046
Federal income taxes, including deferred taxes........................................ 15,968 96,915
Debentures............................................................................ 455,980 463,480
Due to subsidiaries................................................................... 6,226 7,077
---------- ----------
518,060 616,518
---------- ----------
Contingencies and commitments
Shareholders' equity:
Common stock, par value $.10 per share, 225,000 shares authorized, 116,166 and
116,076 shares issued and outstanding............................................ 11,617 11,608
Additional paid-in capital.......................................................... 551,514 548,674
Retained earnings (including undistributed net income of subsidiaries of $16,841 and
$508,735)........................................................................ 85,072 432,096
Accumulated other comprehensive income of subsidiaries.............................. 381,106 323,142
---------- ----------
1,029,309 1,315,520
Treasury stock, 1,331 shares........................................................ (10,972) --
---------- ----------
1,018,337 1,315,520
---------- ----------
$1,536,397 $1,932,038
---------- ----------
---------- ----------
</TABLE>
A-4
<PAGE>
SCHEDULE II
ITEM 14(A)2
RELIANCE GROUP HOLDINGS, INC.
(PARENT COMPANY)
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31 1999 1998 1997
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)....................................................... $(310,546) $ 326,449 $ 229,419
Equity in undistributed net (income) loss of subsidiaries and investee
companies............................................................. 491,894 (279,699) (190,598)
Other -- net............................................................ (98,799) 28,550 9,982
--------- --------- ---------
82,549 75,300 48,803
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Other -- net............................................................ 4,129 4,287 (8,386)
--------- --------- ---------
4,129 4,287 (8,386)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Change in amounts due from/to subsidiaries -- net....................... (40,730) 147,968 (6,199)
Issuance of common stock................................................ 415 5,631 2,451
Dividends............................................................... (36,478) (37,054) (36,706)
Repurchases of debt..................................................... -- (196,196) --
--------- --------- ---------
(76,793) (79,651) (40,454)
--------- --------- ---------
Increase (decrease) in cash............................................. 9,885 (64) (37)
Cash, beginning of year................................................. 83 147 184
--------- --------- ---------
Cash, end of year....................................................... $ 9,968 $ 83 $ 147
--------- --------- ---------
--------- --------- ---------
</TABLE>
SUPPLEMENTAL DISCLOSURE OF NON-CASH FINANCING ACTIVITIES:
In 1998, investments in subsidiaries and due to subsidiaries were reduced by
$135,000,000 and $12,716,000 to reflect a non-cash dividend from subsidiaries
and the elimination of a subsidiary that was sold. In 1997, investments in
subsidiaries and due to subsidiaries were reduced by $202,272,000 to reflect a
non-cash dividend from subsidiaries. Also in 1997, investments in subsidiaries,
due to subsidiaries and due from subsidiaries were reduced to reflect the
elimination of intercompany balances of a dormant subsidiary.
A-5
<PAGE>
SCHEDULE III
ITEM 14(A)2
RELIANCE GROUP HOLDINGS, INC. AND SUBSIDIARIES
SUPPLEMENTAL INSURANCE INFORMATION
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E COLUMN F COLUMN G COLUMN H
- -----------------------------------------------------------------------------------------------------------------------------
AMORTIZATION
DEFERRED UNPAID POLICY OF DEFERRED
POLICY CLAIMS AND NET CLAIMS AND POLICY
ACQUISITION RELATED UNEARNED PREMIUMS INVESTMENT SETTLEMENT ACQUISITION
SEGMENT COSTS EXPENSES PREMIUMS EARNED INCOME EXPENSES COSTS
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
(In thousands)
YEAR ENDED DECEMBER 31, 1999:
Property and casualty ....... $ 301,168 $8,285,977 $2,065,411 $2,503,981 $286,420 $2,111,072 $677,766
--------- ---------- ---------- ---------- -------- ---------- --------
--------- ---------- ---------- ---------- -------- ---------- --------
Year Ended December 31, 1998:
Property and casualty ....... $ 295,939 $7,016,586 $1,980,481 $2,304,280 $294,743 $1,516,948 $578,529
Title........................ -- -- -- 139,132 5,276 6,676 --
--------- ---------- ---------- ---------- -------- ---------- --------
$ 295,939 $7,016,586 $1,980,481 $2,443,412 $300,019 $1,523,624 $578,529
--------- ---------- ---------- ---------- -------- ---------- --------
--------- ---------- ---------- ---------- -------- ---------- --------
Year Ended December 31, 1997:
Property and casualty ....... $ 248,572 $6,559,508 $1,722,258 $1,947,016 $263,981 $1,263,086 $487,432
Title........................ -- 272,792 -- 863,746 30,990 41,473 --
--------- ---------- ---------- ---------- -------- ---------- --------
$ 248,572 $6,832,300 $1,722,258 $2,810,762 $294,971 $1,304,559 $487,432
--------- ---------- ---------- ---------- -------- ---------- --------
--------- ---------- ---------- ---------- -------- ---------- --------
<CAPTION>
- ----------------------------------------------------------
COLUMN A COLUMN I COLUMN J
- ----------------------------------------------------------
OTHER
INSURANCE PREMIUMS
SEGMENT EXPENSES WRITTEN
- ----------------------------------------------------------
<S> <C> <C>
(In thousands)
YEAR ENDED DECEMBER 31, 1999:
Property and casualty ....... $ 472,954 $2,560,409
---------- ----------
---------- ----------
Year Ended December 31, 1998:
Property and casualty ....... $ 253,030 $2,438,310
----------
----------
Title........................ 126,751
----------
$ 379,781
----------
----------
Year Ended December 31, 1997:
Property and casualty ....... $ 219,698 $2,065,847
----------
----------
Title........................ 789,853
----------
$1,009,551
----------
----------
</TABLE>
A-6
<PAGE>
SCHEDULE IV
ITEM 14(A)2
RELIANCE GROUP HOLDINGS, INC. AND SUBSIDIARIES
REINSURANCE
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E COLUMN F
- -------------------------------------------------------------------------------------------------------------------
ASSUMED PERCENTAGE
CEDED TO FROM OF AMOUNT
GROSS OTHER OTHER NET ASSUMED
AMOUNT COMPANIES COMPANIES AMOUNT TO NET
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
(Dollars in thousands)
YEAR ENDED DECEMBER 31, 1999:
Premiums earned:
Property and casualty........................ $4,343,510 $2,690,241 $850,712 $2,503,981 33.97%
---------- ---------- --------- ---------- ------
---------- ---------- --------- ---------- ------
Year Ended December 31, 1998:
Premiums earned:
Property and casualty........................ $3,743,993 $2,098,802 $659,089 $2,304,280 28.60%
Title........................................ 139,253 524 403 139,132 0.29
---------- ---------- --------- ---------- ------
$3,883,246 $2,099,326 $659,492 $2,443,412 26.99%
---------- ---------- --------- ---------- ------
---------- ---------- --------- ---------- ------
Year Ended December 31, 1997:
Premiums earned:
Property and casualty........................ $3,232,403 $1,733,311 $447,924 $1,947,016 23.01%
Title........................................ 862,499 1,338 2,585 863,746 0.30
---------- ---------- --------- ---------- ------
$4,094,902 $1,734,649 $450,509 $2,810,762 16.03%
---------- ---------- --------- ---------- ------
---------- ---------- --------- ---------- ------
</TABLE>
A-7
<PAGE>
SCHEDULE V
ITEM 14(A)2
RELIANCE GROUP HOLDINGS, INC. AND SUBSIDIARIES
SUPPLEMENTAL INFORMATION CONCERNING PROPERTY AND CASUALTY INSURANCE OPERATIONS
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E COLUMN F COLUMN G COLUMN H
- -----------------------------------------------------------------------------------------------------------------------
CLAIMS AND
UNPAID SETTLEMENT EXPENSES
DEFERRED CLAIMS (REDUNDANCY)
AFFILIATION POLICY AND DISCOUNT NET INCURRED RELATED TO
WITH ACQUISITION RELATED DEDUCTED IN UNEARNED EARNED INVESTMENT CURRENT PRIOR
REGISTRANT COSTS EXPENSES COLUMN C(A) PREMIUMS PREMIUMS INCOME YEAR YEARS
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
(In thousands)
Consolidated subsidiaries:
YEAR ENDED
DECEMBER 31,
1999........... $ 301,168 $8,285,977 $174,061 $2,065,411 $2,503,981 $286,420 $1,856,774 $254,298
--------- ---------- -------- ---------- ---------- -------- ---------- --------
--------- ---------- -------- ---------- ---------- -------- ---------- --------
Year Ended
December 31,
1998........... $ 295,939 $7,016,586 $197,305 $1,980,481 $2,304,280 $294,743 $1,549,907 $(32,959)
--------- ---------- -------- ---------- ---------- -------- ---------- --------
--------- ---------- -------- ---------- ---------- -------- ---------- --------
Year Ended
December 31,
1997........... $ 248,572 $6,559,508 $216,704 $1,722,258 $1,947,016 $263,981 $1,299,066 $(35,980)
--------- ---------- -------- ---------- ---------- -------- ---------- --------
--------- ---------- -------- ---------- ---------- -------- ---------- --------
<CAPTION>
- ------------------------------------------------------------------
COLUMN A COLUMN I COLUMN J COLUMN K
- ------------------------------------------------------------------
AMORTIZATION PAID
OF DEFERRED CLAIMS
AFFILIATION POLICY AND
WITH ACQUISITION SETTLEMENT PREMIUMS
REGISTRANT COSTS EXPENSES WRITTEN
- ------------------------------------------------------------------
<S> <C> <C> <C>
(In thousands)
Consolidated subsidiaries:
YEAR ENDED
DECEMBER 31,
1999........... $677,766 $1,992,811 $2,560,409
-------- ---------- ----------
-------- ---------- ----------
Year Ended
December 31,
1998........... $578,529 $1,536,729 $2,438,310
-------- ---------- ----------
-------- ---------- ----------
Year Ended
December 31,
1997........... $487,432 $1,330,898 $2,065,847
-------- ---------- ----------
-------- ---------- ----------
</TABLE>
- ------------------
(a) Liabilities for unpaid claims and related expenses for short-duration
contracts which are expected to have fixed, periodic payment patterns are
discounted to present values using statutory annual rates ranging from
3 1/2% to 6%. Discount shown relates to net liabilities for unpaid claims
and related expenses for short-duration contracts which are expected to have
fixed, periodic payment patterns.
A-8
<PAGE>
EXHIBITS
TO
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED COMMISSION FILE NUMBER
DECEMBER 31, 1999 1-8278
RELIANCE GROUP HOLDINGS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIAL
NUMBER DESCRIPTION OF EXHIBIT PAGE NO.
- ---------- ------------------------------------------------------------------------------------------ ----------
<S> <C> <C>
3.1 Reliance Group Holdings' Certificate of Incorporation, as amended (incorporated by
reference to Exhibit 3(a) to Registration Statement No. 2-77043).
3.2 Amendment to Exhibit 3.1, as filed with the Secretary of State of the State of Delaware on
July 22, 1986 (incorporated by reference to Exhibit 3.2 to Registration Statement
No. 33-7493).
3.3 Amendment to Exhibit 3.1, as filed with the Secretary of State of the State of Delaware on
May 27, 1993 (incorporated by reference to Exhibit 4.5 to Registration Statement
No. 33-67396).
3.4 Reliance Group Holdings' Amended and Restated By-Laws amended as of March 20, 2000.
*4.
+10.1 Employment Agreement between Reliance Group Holdings and Saul P. Steinberg, dated as of
February 15, 1996 (and the Schedule attached thereto pursuant to Instruction 2 to Item 601
of Regulation S-K listing George E. Bello, Lowell C. Freiberg, Howard E. Steinberg and
Robert M. Steinberg as having employment agreements identical in all respects to
Exhibit 10.1 other than as specified in such schedule) (incorporated by reference to
Exhibit 10.1 to Reliance Group Holdings' Quarterly Report on Form 10-Q for the quarter
ended March 31, 1996).
+10.2 Amendment, dated as of December 29, 1997, to Employment Agreement between Reliance Group
Holdings and Saul P. Steinberg, dated as of February 15, 1996 (and the Schedule attached
thereto pursuant to Instruction 2 to Item 601 of Regulation S-K listing George E. Bello,
Lowell C. Freiberg, Howard E. Steinberg and Robert M. Steinberg as having amendments to
their employment agreements identical in all respects to Exhibit 10.2 other than as
specified in such schedule).
+10.3 Employment Agreement between Reliance Insurance Company and Saul P. Steinberg, dated as of
February 15, 1996 (and Schedule attached thereto pursuant to Instruction 2 to Item 601 of
Regulation S-K listing Robert M. Steinberg as having an employment agreement identical in
all respects to Exhibit 10.3) (incorporated by reference to Exhibit 10.1 to Reliance Group
Holdings' Quarterly Report on Form 10-Q for the quarter ended March 31, 1996).
+10.4 Employment Agreement between Reliance Group Holdings and Bruce L. Sokoloff, dated as of
May 15, 1996 (incorporated by reference to Exhibit 10.1 to Reliance Group Holdings'
Quarterly Report on Form 10-Q for the quarter ended June 30, 1996).
+10.5 Amendment, dated as of December 29, 1997, to Employment Agreement between Reliance Group
Holdings and Bruce L. Sokoloff, dated as of May 15, 1996 (incorporated by reference to
Exhibit 10.5 of Reliance Group Holdings' Annual Report on Form 10-K for the year ended
December 31, 1997).
+10.6 Employment Agreement between Reliance Group Holdings and Robert S. Miller, dated
November 22, 1999.
+10.7 Employment Agreement between Reliance Group Holdings and George R. Baker, dated as of
February 29, 2000.
+10.8 Employment Agreement between Reliance Group Holdings, Inc. and Dennis J. O'Leary, dated as
of September 1, 1999 and Amendment dated as of December 1, 1999 (and the Schedule attached
there to pursuant to Instruction 2 to item 601 of Regulation S-K listing Philip S. Sherman
and Paul W. Zeller as having employment agreements identical in all respects to
Exhibit 10.8).
+10.9 1986 Stock Option Plan of Reliance Group Holdings, as amended (incorporated by reference
to Exhibit 19.2 to Reliance Group Holdings' Quarterly Report on Form 10-Q for the quarter
ended June 30, 1990).
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIAL
NUMBER DESCRIPTION OF EXHIBIT PAGE NO.
- ---------- ------------------------------------------------------------------------------------------ ----------
<S> <C> <C>
+10.10 The Reliance Group Holdings, Inc. 1994 Stock Option Plan (incorporated by reference to
Exhibit 10.2 to Reliance Group Holdings' Quarterly Report on Form 10-Q for the quarter
ended June 30, 1994).
+10.11 Amended and Restated 1994 Stock Option Plan for Non-Employee Directors (incorporated by
reference to Exhibit 10.7 of Reliance Group Holdings' Annual Report on Form 10-K for the
year ended December 31, 1997).
+10.12 The Reliance Group Holdings, Inc. 1997 Stock Option Plan (incorporated by reference to
Exhibit 10.2 to Reliance Group Holdings' Quarterly Report on Form 10-Q for the quarter
ended June 30, 1997).
+10.13 The Reliance Group Holdings, Inc. 1998 Stock Option Plan (incorporated by reference to
Exhibit 10.1 to Reliance Group Holdings' Quarterly Report on Form 10-Q for the quarter
ended June 30, 1998).
+10.14 The Reliance Group Holdings, Inc. 1998 Stock Option Plan for Non-Employee Directors
(incorporated by reference to Exhibit 10.2 to Reliance Group Holdings' Quarterly Report on
Form 10-Q for the quarter ended June 30, 1998).
+10.15 The Reliance Group Holdings, Inc. Employee Stock Purchase Plan (incorporated by reference
to Exhibit 10.1 to Reliance Group Holdings' Quarterly Report on Form 10-Q for the quarter
ended June 30, 1997).
+10.16 The Reliance Group Holdings, Inc. Key Employee Share Option Plan (incorporated by
reference to Exhibit 10.11 of Reliance Group Holdings' Annual Report on Form 10-K for the
year ended December 31, 1997).
+10.17 Termination of Reliance Group Holdings, Inc. Key Employee Share Option Plan.
+10.18 Reliance Group Holdings, Inc. 1998 Executive Bonus Plan (incorporated by reference to
Exhibit 10.3 of Reliance Group Holdings' Quarterly Report on Form 10-Q for the quarter
ended June 30, 1998).
+10.19 Amendment to Reliance Group Holdings, Inc. 1998 Executive Bonus Plan (incorporated by
reference to Exhibit 10.15 of Reliance Group Holdings' Annual Report on Form 10-K for the
year ended December 31, 1998).
+10.20 Reliance Group Holdings, Inc. Executive Bonus Plan for James E. Yacobucci (incorporated by
reference to Exhibit 10.4 of Reliance Group Holdings' Quarterly Report on Form 10-Q for
the quarter ended June 30, 1998).
+10.21 Reliance National Risk Specialists 1992 Key Management Incentive Plan (incorporated by
reference to Exhibit 10.9 to Reliance Insurance Company's Annual Report on Form 10-K for
the year ended December 31, 1993).
+10.22 Reliance National Risk Specialists 1993 Key Management Incentive Plan (incorporated by
reference to Exhibit 10.10 to Reliance Insurance Company's Annual Report on Form 10-K for
the year ended December 31, 1993).
+10.23 Reliance National Risk Specialists 1994 Key Management Incentive Plan (incorporated by
reference to Exhibit 10.14 to Reliance Insurance Company's Annual Report on Form 10-K for
the year ended December 31, 1994).
+10.24 Reliance National Risk Specialists 1995 Key Management Incentive Plan (incorporated by
reference to Exhibit 10.25 to Reliance Group Holdings' Annual Report on Form 10-K for the
year ended December 31, 1996).
+10.25 Reliance National Risk Specialists Supplemental Key Management Incentive Plan (effective
for policy years 1993, 1994 and 1995) (incorporated by reference to Exhibit 10.26 to
Reliance Group Holdings' Annual Report on Form 10-K for the year ended December 31, 1996).
+10.26 Reliance National Risk Specialists 1996 Key Management Incentive Plan (incorporated by
reference to Exhibit 10.27 to Reliance Group Holdings' Annual Report on Form 10-K for the
year ended December 31, 1996).
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIAL
NUMBER DESCRIPTION OF EXHIBIT PAGE NO.
- ---------- ------------------------------------------------------------------------------------------ ----------
<S> <C> <C>
+10.27 Reliance National 1997 Key Management Incentive Plan (incorporated by reference to Exhibit
10.23 to Reliance Group Holdings' Annual Report on Form 10-K for the year ended
December 31, 1997).
+10.28 Reliance National 1998 Key Management Incentive Plan (incorporated by reference to Exhibit
10.24 of Reliance Group Holdings' Annual Report on Form 10-K for the year ended
December 31, 1998).
+10.29 Memorandum, dated February 8, 1989, summarizing employment arrangements between Reliance
Insurance Company and Dennis Busti (incorporated by reference to Exhibit 10.8 to Reliance
Insurance Company's Annual Report on Form 10-K for the year ended December 31, 1988).
10.30 Asset Purchase Agreement, dated July 24, 1992, between Frank B. Hall & Co. Inc. ("Hall")
and Aon Corporation ("Aon") (incorporated by reference to Exhibit 2.1 to Reliance Group
Holdings' Quarterly Report on Form 10-Q for the quarter ended June 30, 1992).
10.31 Agreement and Plan of Merger, dated as of July 24, 1992, among Reliance Group Holdings,
Hall and Prometheus Liquidating Corp. (incorporated by reference to Exhibit 2.2 to
Reliance Group Holdings' Quarterly Report on Form 10-Q for the quarter ended June 30,
1992).
10.32 Employee Benefit Agreement, dated July 24, 1992, among Reliance Group Holdings and Aon
(incorporated by reference to Exhibit 28.2 to Reliance Group Holdings' Quarterly Report on
Form 10-Q for the quarter ended June 30, 1992).
10.33 Amendment, dated November 2, 1992, to Exhibit 10.26 (incorporated by reference to
Exhibit 2.1 to Reliance Group Holdings' Quarterly Report on Form 10-Q for the quarter
ended September 30, 1992).
10.34 Settlement Agreement and Release, dated June 2, 1989, between James P. Corcoran,
Superintendent of Insurance of the State of New York, as Liquidator of Union Indemnity
Insurance Company of New York, Inc. and Hall (now known as Prometheus Funding
Corp.)(incorporated herein by reference to Exhibit 10.01 to Frank B. Hall & Co. Inc.'s
report on Form 10-Q for the quarter ended June 30, 1989).
10.35 Amendment No. 1, dated April 21, 1997, to Exhibit 10.30 (incorporated by reference to
Exhibit 10.1 to Reliance Group Holdings' Quarterly Report on Form 10-Q for the quarter
ended March 31, 1997).
10.36 Stock Purchase Agreement, dated as of December 31, 1997, among Bear Stearns Acquisition
Corp. XVI, Reliance National (U.K.) Ltd. and Reliance Insurance Company (incorporated by
reference to Exhibit 10.31 to Reliance Group Holdings' Annual Report on Form 10-K for the
year ended December 31, 1997).
10.37 Amended and Restated Stock Purchase Agreement, dated as of December 11, 1997 by and among
Reliance Insurance Company, LandAmerica and Lawyers Title Insurance Corporation
(incorporated by reference to Exhibit 2.1 to LandAmerica's Current Report on Form 8-K
filed with the Securities and Exchange Commission on March 16, 1998).
10.38 Voting and Standstill Agreement, dated as of February 27, 1998, by and among LandAmerica,
Reliance Group Holdings and Reliance Insurance Company (incorporated by reference to
Exhibit 10.26 to LandAmerica's Annual Report on Form 10-K for the year ended December 31,
1997).
10.39 Registration Rights Agreement, dated as of February 27, 1998, by and among LandAmerica and
Reliance Insurance Company (incorporated by reference to Exhibit 10.27 to LandAmerica's
Annual Report on Form 10-K for the year ended December 31, 1997).
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIAL
NUMBER DESCRIPTION OF EXHIBIT PAGE NO.
- ---------- ------------------------------------------------------------------------------------------ ----------
<S> <C> <C>
10.40 Articles of Amendment to LandAmerica's Articles of Incorporation (incorporated by
reference to Exhibit 4.2 to LandAmerica's Form 8-A filed with the Securities and Exchange
Commission on February 27, 1998).
10.41 Stock Purchase Agreement, dated as of February 22, 1999, between Zenith Insurance Company
and Nationwide Mutual Insurance Company (incorporated by reference to Zenith's Current
Report on Form 8-K filed with the Securities and Exchange Commission on March 9, 1999).
10.42 Retrocession Settlement Agreement, dated as of January 7, 2000, among Reliance Insurance
Company, Reliance Group Holdings, Inc., Sun Life Assurance Company of Canada, Phoenix Home
Life Mutual Insurance Company, American Phoenix Life Mutual Insurance Company, American
Phoenix Life and Reassurance Company, and Cologne Life Reinsurance Company.
13.1 Reliance Group Holdings 1999 Annual Report.
21.1 List of Subsidiaries of Reliance Group Holdings.
23.1 Consent of Deloitte & Touche LLP.
27.1 Financial Data Schedule.
**99.1 Annual Report on Form 11-K of Reliance Insurance Company Savings Incentive Plan for the
year ended December 31, 1999.
</TABLE>
- ------------------
* Neither Reliance Group Holdings nor its subsidiaries is a party to any
instrument relating to long-term debt under which the securities authorized
exceed 10% of the total consolidated assets of Reliance Group Holdings and
its subsidiaries. Copies of instruments relating to long-term debt of lesser
amounts will be provided to the Securities and Exchange Commission upon
request.
+ Management contract or compensatory plan or arrangement required to be filed
as an Exhibit to this Form 10-K pursuant to Item 14(c).
** To be filed by Amendment.
<PAGE>
Exhibit 3.4
AMENDED AND RESTATED
BY-LAWS
OF
RELIANCE GROUP HOLDINGS, INC.
ADOPTED ON NOVEMBER 18, 1998
ARTICLE I
Offices
1. Registered Office. The registered office of the Corporation in Delaware
shall be at 1209 Orange Street, in the City of Wilmington, County of New Castle,
State of Delaware, and the name of the resident agent in charge thereof is The
Corporation Trust Company.
2. Other Offices. The Corporation may also have an office or offices at such
other place or places, within or without the State of Delaware, as the Board of
Directors may from time to time designate or the business of the Corporation may
require.
ARTICLE II
Stockholders' Meetings
1. Annual Meetings. The annual meeting of the stockholders of the Corporation
for the purpose of electing directors and for the transaction of such other
business as may properly be brought before the meeting shall be held on the
second Thursday of May in each year (or if such day be a legal holiday, then on
the next succeeding day not a legal holiday) at 10:00 o'clock a.m., or at such
other time and date as shall be fixed from time to time by resolution of the
Board of Directors and as set forth in the notice of the meeting. Such annual
meeting of stockholders shall be held at such place, within or without the State
of Delaware, as may be fixed by the Board of Directors.
2. Special Meetings. Special meetings of the stockholders shall be held at
such place within or without the State of Delaware as may be designated in the
notice of said meeting, upon call of the Board of Directors, the Chairman of the
Board, the President or the Secretary but not by any other person.
<PAGE>
3. Notice of Meetings. The Secretary or any Assistant Secretary shall cause
notice of the place, date and hour of each meeting of the stockholders, and, in
the case of a special meeting, the purpose or purposes for which such meeting is
called, to be given personally or by mail, at least ten (10) but not more than
sixty (60) days prior to the meeting, to each stockholder of record entitled to
vote at his post office address as the same appears on the books of the
Corporation at the time of such mailing. Notice of any meeting of stockholders
need not be given to any stockholder who shall sign a waiver of such notice in
writing, whether before or after the time of such meeting, or to any stockholder
who shall attend such meeting in person or by proxy. Notice of any adjourned
meeting of the stockholders of the Corporation need not be given, except as
otherwise required by statute.
4. Nature of Business at Annual Meetings of Stockholders. No business may be
transacted at an annual meeting of the stockholders of the Corporation, other
than business that is either (a) specified in the notice of meeting (or any
supplement thereto) given by or at the direction of the Board of Directors (or
any duly authorized committee thereof), (b) otherwise properly brought before
the annual meeting by or at the direction of the Board of Directors (or any duly
authorized committee thereof) or (c) otherwise properly brought before the
annual meeting by any stockholder of the Company (i) who is a stockholder of
record on the date of the giving of the notice provided for in this paragraph 4
and on the record date for the determination of stockholders entitled to vote at
such annual meeting and (ii) who complies with the notice procedures set forth
in this paragraph 4.
In addition to any other applicable requirements (including that the
business proposed to be brought before the annual meeting of the stockholders of
the Corporation be a proper matter for stockholder action), for business to be
properly brought before an annual meeting by a stockholder, such stockholder
must have given timely notice thereof in proper written form to the Secretary of
the Corporation.
To be timely, a stockholder's notice to the Secretary must be delivered
to or mailed and received at the principal executive offices of the Corporation
not less than ninety (90) days nor more than one hundred twenty (120) days prior
to the anniversary date of the immediately preceding annual meeting of
stockholders; provided, however, that in the event that the annual meeting is
called for a date that is not within thirty (30) days before or after such
anniversary date, notice by the stockholder in order to be timely must be so
received not later than the close of business on the tenth (10th) day following
the day on which such notice of the date of the annual meeting was mailed or
public disclosure of the date of the annual meeting was made, whichever first
occurs.
To be proper written form, a stockholder's notice to the Secretary must
set forth as to each matter such stockholder proposes to bring before the annual
2
<PAGE>
meeting of the stockholders of the Corporation (i) a brief description of the
business desired to be brought before the annual meeting and the reasons for
conducting such business at the annual meeting, (ii) the name and record address
of such stockholder and any beneficial owner on whose behalf the proposal is
being made, (iii) the class or series and number of shares of capital stock of
the Corporation which are owned beneficially or of record by such stockholder
and any beneficial owner on whose behalf the proposal is being made, (iv) a
description of all arrangements or understandings between such stockholder and
any other person or persons (including beneficial owners and, in all cases, the
names of such other person or persons) in connection with the proposal of such
business by such stockholder and any material interest of such stockholder or
such other person or persons in such business and (v) a representation that such
stockholder intends to appear in person or by proxy at the annual meeting to
bring such business before the meeting.
No business shall be conducted at the annual meeting of stockholders of
the Corporation except business brought before the annual meeting in accordance
with the procedures set forth in this paragraph 4; provided, however, that, once
business has been properly brought before the annual meeting in accordance with
such procedures, nothing in this paragraph 4 shall be deemed to preclude
discussion by any stockholder of any such business. If the Chairman of an annual
meeting of the stockholders of the Corporation determines that business was not
properly brought before the annual meeting in accordance with the foregoing
procedures, the Chairman shall declare to the meeting that the business was not
properly brought before the meeting and such business shall not be transacted.
The provisions of this paragraph 4 shall first be effective with
respect to the Corporation's Annual Meeting of Stockholders to be held in the
year 2000.
5. Nomination of Directors. Only persons who are nominated in accordance with
the procedures set forth in this paragraph 5 shall be eligible for election as
directors of the Corporation, except as may be otherwise provided in the
Certificate of Incorporation with respect to the right of holders of preferred
stock, if any, of the Corporation to nominate and elect a specified number of
directors in certain circumstances. Nominations of persons for election to the
Board of Directors may be made at any annual meeting of stockholders of the
Corporation, or at any special meeting of stockholders called for the purpose of
electing directors, (a) by or at the direction of the Board of Directors (or any
duly authorized committee thereof) or (b) by any stockholder of the Corporation
(i) who is a stockholder of record on the date of the giving of the notice
provided for in this paragraph 5 and on the record date for the determination of
stockholders entitled to vote at such meeting and (ii) who complies with the
notice procedures set forth in this paragraph 5.
3
<PAGE>
In addition to any other applicable requirements, for a nomination to
be made by a stockholder, such stockholder must have given timely notice thereof
in proper written form to the Secretary of the Corporation.
To be timely, a stockholder's notice to the Secretary must be delivered
to or mailed and received at the principal executive offices of the Corporation
(a) in the case of an annual meeting, not less than ninety (90) days nor more
than one hundred twenty (120) days' prior to the anniversary date of the
immediately preceding annual meeting of stockholders; provided, however, that in
the event that the annual meeting is called for a date that is not within thirty
(30) days before or after such anniversary date, notice by the stockholder in
order to be timely must be so received not later than the close of business on
the tenth (10th) day following the day on which such notice of the date of the
annual meeting was mailed or public disclosure of the date of the annual meeting
was made, whichever first occurs and (b) in the case of a special meeting of
stockholders called for the purpose of electing directors, not later than the
close of business on the tenth (10th) day following the day on which the notice
of the date of the special meeting was mailed or public disclosure of the date
of the special meeting was made, whichever occurs first. In no event shall the
public announcement of the adjournment of a meeting commence a new time period
for the giving of a stockholder's notice as described above.
To be in proper written form, a stockholder's notice to the Secretary
must set forth (a) as to each person whom the stockholder proposes to nominate
for election as a director (i) the name, age, business address and residence
address of the person, (ii) the principal occupation or employment of the
person, (iii) the class or series and number of shares of capital stock of the
Corporation which are owned beneficially or of record by the person and (iv) any
other information relating to the person that would be required to be disclosed
in a proxy statement or other filings required to be made in connection with
solicitations of proxies for election of directors pursuant to Section 14 of the
Securities Exchange Act of 1934, as amended and the rules and regulations
promulgated thereunder (the "Exchange Act") and (b) as to the stockholder giving
the notice (i) the name and record address of such stockholder, (ii) the class
or series and number of shares of capital stock of the Corporation which are
owned beneficially or of record by such stockholder, (iii) a description of all
arrangements or understandings between such stockholder and each proposed
nominee and any other person or person (including their names) pursuant to which
the nomination(s) are to be made by such stockholder, (iv) a representation that
such stockholder intends to appear in person or by proxy at the meeting to
nominate the persons named in its notice and (v) any other information relating
to such stockholder that would be required to be disclosed in a proxy statement
or other filings required to be made in connection with solicitations of proxies
for election of directors pursuant to Section 14 of the Exchange Act and the
rules and regulations promulgated thereunder. Such notice must be accompanied by
a written consent of each
4
<PAGE>
proposed nominee to being named as a nominee and to serve as a director if
elected.
No person shall be eligible for election as a director of the
Corporation unless nominated in accordance with the procedures set forth in this
paragraph 5. If the Chairman of the meeting determines that a nomination was not
made in accordance with the foregoing procedures, the Chairman shall declare to
the meeting that the nomination was defective and such defective nomination
shall be disregarded.
The provisions of this paragraph 5 shall first be effective with
respect to the Corporation's Annual Meeting of Stockholders to be held in the
year 2000.
6. Conduct of Meetings. The Board of Directors of the Corporation may adopt
by resolution such rules and regulations for the conduct of the meeting of
stockholders as it shall deem appropriate. Except to the extent inconsistent
with such rules and regulations as adopted by the Board of Directors, the
Chairman of any meeting of stockholders shall have the right and authority to
prescribe such rules, regulations and procedures and to do all such acts as, in
the judgment of such Chairman, are appropriate for the proper conduct of the
meeting. Such rules, regulations or procedures, whether adopted by the Board of
Directors or prescribed by the Chairman of the meeting, may include, without
limitation, the following: (i) the establishment of an agenda or order of
business for the meeting; (ii) rules and procedures for maintaining order at the
meeting and the safety of those present; (iii) limitations on attendance at or
participation in the meeting to stockholders of record of the Corporation, their
duly authorized and constituted proxies or such other persons as the Chairman of
the meeting shall determine; (iv) restrictions on entry to the meeting after the
time fixed for the commencement thereof and (v) limitations on the allotted
questions or comments by participants. Unless and to the extent determined by
the Board of Directors or the Chairman of the meeting, meetings of stockholders
shall not be required to be held in accordance with the rules of parliamentary
procedure.
7. Quorum. A quorum at all meetings of stockholders shall consist of the
holders of record of a majority of the shares of stock of the Corporation,
issued and outstanding, entitled to vote at the meeting, present in person or by
proxy, except as otherwise provided by statute or the Certificate of
Incorporation. When a quorum is once present to organize a meeting, it is not
broken by the subsequent withdrawal of any stockholders.
8. Absence of Quorum. In the absence of a quorum at any meeting or any
adjournment thereof, a majority of those present in person or by proxy and
entitled to vote may adjourn such meeting from time to time. At any such
adjourned meeting at which a quorum is present any business may be transacted
which might have been transacted at the meeting as originally called.
5
<PAGE>
9. Voting in General. Except as otherwise provided in these By-Laws, the
Certificate of Incorporation or in the laws of the State of Delaware, at every
meeting of the stockholders, each stockholder of record of the Corporation shall
have one vote in person or by proxy for each share of stock having voting rights
held by him and registered in his name on the books of the Corporation. Any vote
on shares of stock of the Corporation may be given by the stockholder entitled
thereto in person or by his proxy appointed by an instrument in writing,
subscribed by such stockholder, or by his attorney thereunto authorized, and
delivered to the secretary of the meeting. Except as otherwise required by the
laws of the State of Delaware, by the Certificate of Incorporation or these
By-Laws, all matters coming before any meeting of the stockholders shall be
decided by a plurality vote of the stockholders of the Corporation present in
person or by proxy at such meeting and entitled to vote thereat, a quorum being
present.
10. Consent of Stockholders in Lieu of Meeting. To the fullest extent
permitted by law, whenever any action is required or permitted to be taken at a
meeting of stockholders, by law, by the Certificate of Incorporation or by these
By-Laws, such action may be taken without a meeting, without prior notice and
without a vote of stockholders, if a consent in writing, setting forth the
action so taken, shall be signed by the holders of outstanding stock having not
less than the minimum number of votes that would be necessary to authorize or
take such action at a meeting at which all shares entitled to vote thereon were
present and voted.
ARTICLE III
Directors
1. General Powers The property, affairs and business of the Corporation shall
be managed by or under the direction of its Board of Directors, which shall
consist of not less than one (1) nor more than twenty (20) persons. The exact
number of directors within the maximum and minimum limitations specified shall
be fixed from time to time by resolution of the Board of Directors or by the
stockholders.
2. Term of Office. Each director (whether elected at an annual meeting, or to
fill a vacancy or newly created directorship or otherwise) shall hold office
until his successor shall be elected and shall qualify or until his earlier
resignation or removal.
3. Meetings. Meetings of the Board of Directors shall be held at such place
within or outside of the State of Delaware as may from time to time be fixed by
resolution of the Board of Directors, or as may be specified in the notice of
the meeting. Regular meetings of the Board of Directors shall be held at such
times as may from time to time be fixed by resolution of the Board of Directors,
and
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special meetings may be held at any time upon the call of the Chairman of the
Board or President or a majority of the directors by oral, telegraphic or
written notice duly served on or sent or mailed to each director not less than
one day before such meeting. A meeting of the Board of Directors may be held
without notice immediately after the annual meeting of stockholders. Notice need
not be given of regular meetings of the Board of Directors. Meetings may be held
at any time without notice if all the directors are present, or if at any time
before or after the meeting those not present waive notice of the meeting in
writing.
4. Quorum. One-third of the members of the Board of Directors then acting
shall constitute a quorum for the transaction of business, but if at any meeting
of the Board of Directors there shall be less than a quorum present, a majority
of those present may adjourn the meeting, without further notice, from time to
time until a quorum shall have been obtained.
5. Vacancies. In case one or more vacancies shall occur in the Board of
Directors by reason of death, resignation, increase in the number of directors
or otherwise except in so far as otherwise provided in these By-Laws, the
remaining directors, although less than a quorum, may, by a majority vote, elect
a successor or successors for the unexpired term or terms.
6. Removal from Office. Any or all of the directors may by the affirmative
vote of the holders of a majority of all the shares of stock outstanding and
entitled to vote for the election of directors be removed from office, either
with or without cause.
7. Action Without a Meeting. Any action required or permitted to be taken at
any meeting of the Board of Directors or any committee thereof may be taken
without a meeting if all members of the Board of Directors or of the committee,
as the case may be, consent thereto in writing, and such writing or writings are
filed with the minutes of proceedings of the Board of Directors or the
committee.
8. Regulations; Manner of Acting. To the extent consistent with law, the
Certificate of Incorporation and these By-Laws, the Board of Directors and any
committee thereof may adopt such rules and regulations for the conduct of
meetings of the Board or such committee and for the management of the property,
affairs and business of the Corporation as the Board may deem appropriate.
Members of the Board of Directors and any committee thereof may participate in a
meeting of the Board or such committee by means of conference telephone or
similar communications equipment by means of which all persons participating in
the meeting can hear each other, and such participation shall constitute
presence in person at such meeting for all purposes of these By-Laws.
9. Compensation. Directors may, by resolution of the Board of Directors, be
allowed a fixed sum and expenses of attendance for attendance at regular or
special meetings of the Board of Directors; provided that nothing herein
contained
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shall be construed to preclude any director from serving the Corporation in any
other capacity and receiving compensation therefor. Members of special or
standing committees, and others who attend pursuant to direction, may, by vote
of the Board of Directors, be allowed a like fixed sum and expenses of
attendance for attending committee meetings. The Chairman of each committee,
may, by vote of the Board of Directors, be allowed an additional fixed sum for
acting as such.
10. Executive Committee. The Board of Directors shall appoint an Executive
Committee consisting of one or more members of the Board of Directors, who shall
serve at the pleasure of the Board of Directors. The Board of Directors may
appoint one of the members of the Executive Committee to act as Chairman of the
Executive Committee. The Executive Committee shall have and may exercise all the
powers and authority of the Board of Directors in the management of the business
and affairs of the Corporation, and may authorize the seal of the Corporation to
be affixed to all papers which may require it, except that to the extent
prohibited by the laws of the State of Delaware, the Executive Committee shall
not have the power or authority to approve, adopt or recommend to the
stockholders of this Corporation, any action or matter expressly required by the
laws of the State of Delaware to be submitted to stockholders for approval or to
adopt, amend or repeal any bylaw of the Corporation.
11. Finance Committee. The Board of Directors shall appoint a Finance
Committee consisting of one or more members of the Board of Directors, who shall
serve at the pleasure of the Board of Directors. The Board of Directors may
appoint one of the members of the Finance Committee to act as Chairman of the
Finance Committee. The Finance Committee shall have and may exercise, all powers
of the Board of Directors with respect to all financings by the Corporation and
its subsidiaries for whatever purpose (including without limitation, for
operations, acquisitions and/or sales). The financings approved by the Finance
Committee may be effected through borrowings, financing leases, issues of notes,
bonds, debentures, mortgages, guarantees (including without limitation,
guarantees and indemnifications required by purchasers in connection with sales
of assets), common and preferred stock, warrants, options, rights, other
convertible or non-convertible securities or otherwise and, may be, at the
discretion of the Committee, secured by the assets of the Corporation and/or its
subsidiaries. The Finance Committee may authorize the seal of the Corporation to
be affixed to all papers which may require it.
12. Nominating Committee. The Board of Directors shall appoint a Nominating
Committee consisting of one or more members of the Board of Directors, who shall
serve at the pleasure of the Board of Directors. The Board of Directors may
appoint one of the members of the Nominating Committee to act as Chairman of the
Nominating Committee. The Nominating Committee shall recommend to the Board of
Directors candidates for election to the Board of Directors. The Nominating
Committee shall consider candidates recommended
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for nomination at an annual meeting of stockholders by holders of the
Corporation's common stock who are stockholders of record on the date of the
giving of notice provided in this paragraph 12; provided that such
recommendations are received by the Corporation no less than ninety (90) and no
more than one hundred twenty (120) days prior to the anniversary date of the
immediately preceding annual meeting of stockholders and; provided further that
such recommendation is delivered together with a resume of the experience and
qualifications of the proposed nominee and a written statement from such nominee
consenting to be nominated and to serve, if elected.
13. Regular Compensation Committee. The Board of Directors shall appoint a
Regular Compensation Committee consisting of one or more members of the Board of
Directors, who shall serve at the pleasure of the Board of Directors. The Board
of Directors may appoint one of the members of the Regular Compensation
Committee to act as Chairman of the Regular Compensation Committee. The Regular
Compensation Committee shall have and may exercise the authority to evaluate the
performance and approve the compensation of all principal executive officers of
the Corporation who are not directors.
14. Special Compensation Committee. The Board of Directors shall appoint a
Special Compensation Committee consisting of one or more members of the Board of
Directors, who shall serve at the pleasure of the Board of Directors. The Board
of Directors may appoint one of the members of the Special Compensation
Committee to act as Chairman of the Special Compensation Committee. The Special
Compensation Committee shall have and may exercise the authority to (a) evaluate
performance and approve compensation of officers of the Corporation who are also
directors of the Corporation and of the principal executive officers of the
Corporation's insurance operations, (b) approve transactions which would be
required to be disclosed to stockholders of the Corporation under Item 404(a) of
Regulation S-K of the Securities Exchange Act of 1933, as amended, (c)
administer such bonus, stock option, stock purchase, compensation and other
similar plans as the Board of Directors may from time to time approve and to
which plans the provisions of Section 162(m) of the Internal Revenue Code of
1986, as amended, apply.
15. Audit Committee. The Board of Directors shall appoint an Audit Committee
consisting of one or more members of the Board of Directors (provided that for
so long as the Corporation has common stock listed on the New York Stock
Exchange, the members of the Audit Committee shall be directors who meet the New
York Stock Exchange's requirements for independence), who shall serve at the
pleasure of the Board of Directors. The Board of Directors may appoint one of
the members of the Audit Committee to act as Chairman of the Audit Committee.
The Audit Committee shall have and may exercise the authority to (i) nominate
the
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Corporation's auditors for approval of the stockholders of the Corporation if it
deems such approval necessary or appropriate, (ii) review the results of the
annual audits performed by the Corporation's auditors, (iii) review the adequacy
of internal accounting and financial reporting controls, (iv) review the
internal audit function, (v) review new developments that may have an effect on
the Corporation's financial reports, and (vi) review any potential conflicts of
interest and business ethics questions which arise with respect to the
Corporation.
16. Other Committees; Elimination of Committees. The Board of Directors, in
its discretion, may appoint one or more committees (in addition to the
Committees described above), each consisting of one or more members of the Board
of Directors. The Board of Directors may appoint one of the members of any such
committee to be the Chairman of that Committee. Each such committee shall have
such powers and duties as may be provided by resolution or resolutions of the
Board of Directors. The Board of Directors may also change the authority or size
of, or eliminate entirely, any of the Committees described in these By-Laws or
created hereafter.
17. Quorum; Manner of Acting, etc. Each Committee shall have quorum
requirements which are no more restrictive than those of the Board of Directors
and shall in all other respects act in the manner and following the procedures
established for the Board of Directors.
ARTICLE IV
Officers
1. General. Subject to the last sentence hereof, the officers of the
Corporation shall be appointed by the Board of Directors and shall be a Chairman
of the Board, a President, one or more Executive Vice Presidents, one or more
Vice Presidents (one or more of which may be designated Senior Vice Presidents
by the Board of Directors), a Secretary and a Treasurer. From time to time the
Board of Directors may appoint such Assistant Secretaries, Assistant Treasurers
and such other officers, agents and employees as it may deem proper. Any number
of offices may be held by the same person. The Chairman of the Board and the
President shall be chosen from among the Directors. Notwithstanding the
authority granted to the Board in this paragraph 1, the Chairman of the Board
and the President, acting singly or together, may appoint one or more Vice
Presidents (but may not designate any such Vice Presidents as Senior Vice
Presidents), Assistant Secretaries and Assistant Treasurers.
2. Term. All officers shall hold their offices until their respective
successors are elected and qualify, or until their earlier resignation or
removal. Any officer may be removed from office, either with or without cause,
at any time by the affirmative vote of a majority of the members of the Board of
Directors then in office or by the Chairman of the Board or the President, if
such officer holds an office to which he could have been appointed by the
Chairman of the Board or the
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President under these By-Laws. Any officer may resign at any time upon written
notice to the Corporation.
3. Power to Vote and Sell Securities Owned by the Corporation. Unless
otherwise ordered by the Board of Directors, the Chairman of the Board, the
President, any Executive Vice President or the Senior Vice President and Chief
Investment Officer, acting singly or together, shall have full power and
authority on behalf of the Corporation (a) to attend, to act and to vote at any
meetings of security holders of the corporations in which the Corporation may
hold securities, and at any such meetings shall possess and may exercise any and
all the rights and powers incident to the ownership of such securities, and
which, as the owner thereof, the Corporation might have possessed and exercised,
if present and (b) to sell any securities of corporations owned by the
Corporation (as long as the value of such securities does not constitute all or
substantially all of the assets of the Corporation). The Board of Directors by
resolution from time to time may confer like powers upon any other person or
persons.
ARTICLE V
Duties of Officers
1. Chairman of the Board. The Chairman of the Board shall preside at meetings
of the stockholders and of the Board of Directors. He shall sign (unless the
President, an Executive Vice President or a Vice President shall have signed)
certificates representing the stock of the Corporation authorized for issuance
by the Board of Directors or the Executive Committee. He shall have such other
duties as are given to him by these By-Laws or as from time to time may be
assigned to him by the Board of Directors or the Executive Committee.
2. Vice Chairman. The Vice Chairman, if the Board of Directors shall elect
one, shall perform and carry out such executive functions as may be assigned him
from time to time by the Chairman of the Board, the Board of Directors or the
Executive Committee.
3. President. The President shall be the Chief Executive Officer of the
Corporation and shall have general charge and control of all the property,
business and affairs of the Corporation and, subject to the supervision of the
Board of Directors, he shall have general supervision over the Corporation's
officers, employees and agents. He shall have all powers and perform all duties
incident to the office of a chief executive officer of a corporation and such
other duties as are given to him by these By-Laws or as from time to time may be
assigned to him by the Board of Directors or the Executive Committee. He may
enter into any contract or execute and deliver any instrument in the name and on
behalf of the Corporation in the ordinary course of the Corporation's business.
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The President shall, in the absence of the Chairman of the Board, preside at
meetings of the stockholders and of the Board of Directors.
4. Chief of Corporate Operations. The Chief of Corporate Operations shall
have operational authority over such departments, divisions and operations of
the Corporation and its subsidiaries as are given to him by these By-Laws or as
from time to time may be assigned to him by the Chief Executive Officer of the
Corporation, the Board of Directors or the Executive Committee.
5. Executive Vice President. Each Executive Vice President shall perform and
carry out such executive functions as may be assigned him from time to time by
the Chairman of the Board, the President, the Board of Directors or the
Executive Committee. At the request or absence or disability of the Chairman of
the Board and the President, the most senior Executive Vice President shall
perform and carry out the functions and duties of those officers.
6. Vice Presidents. Each Vice President shall have such powers and perform
such duties as may be assigned to him by the Chairman of the Board, the
President, an Executive Vice President, the Board of Directors or the Executive
Committee. At the request or in the absence or disability of the Chairman of the
Board, the President and the Executive Vice Presidents, the senior of the Senior
Vice Presidents (or if none shall have been designated, the senior of the Vice
Presidents present and able to act or such other Vice President as may be
designated by the Board of Directors) may perform all the duties of such
officers and, when so acting, shall have all the powers of and be subject to all
the restrictions upon such officers. Any Vice President may sign (unless the
Chairman of the Board, the President, an Executive Vice President or another
Vice President shall have signed) certificates representing stock of the
Corporation authorized for issuance by the Board of Directors or the Executive
Committee.
7. Treasurer. The Treasurer shall have the custody of all the funds and
securities of the Corporation. Whenever required by the Board of Directors, he
shall render an account of all his transactions as Treasurer and of the
financial condition of the Corporation. He shall give bond for the faithful
discharge of his duties if the Board of Directors so requires. He may sign
(unless an Assistant Treasurer or the Secretary or an Assistant Secretary shall
have signed) certificates representing stock of the Corporation authorized for
issuance by the Board of Directors or the Executive Committee. He shall perform,
in general, all duties incident to the office of a treasurer of a corporation
and such other duties as are given to him by these By-Laws or as from time may
be assigned to him by the Board of Directors, the Executive Committee, the
Chairman of the Board or the President.
8. Assistant Treasurers. The Board of Directors may, from time to time,
designate and elect one or more Assistant Treasurers who shall have such powers
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and perform such duties as may be assigned to them by the Board of Directors,
the Executive Committee or the Treasurer. At the request or in the absence or
disability of the Treasurer, the Assistant Treasurer (or, if there are two or
more Assistant Treasurers, then the senior of the Assistant Treasurers present
and able to act or such other Assistant Treasurer as may be designed by the
Board of Directors) may perform all the duties of the Treasurer and, when so
acting, shall have all the powers of and be subject to all the restrictions upon
the Treasurer.
9. Secretary. The Secretary shall attend to the giving and serving of all
notices of the Corporation. He shall keep or cause to be kept a record of the
proceedings of the meetings of the stockholders and of the Board of Directors in
books kept for that purpose. He shall be the custodian of the seal of the
Corporation, and cause such seal (or a facsimile thereof) to be affixed to all
certificates representing the stock of the Corporation prior to the issuance
thereof and to all instruments the execution of which on behalf of the
Corporation under its seal shall have been duly authorized in accordance with
these By-Laws, and when so affixed he may attest the same. He shall have charge
of the records of the Corporation, including the stock books and such other
books, reports, statements and other documents as the Board of Directors may
direct to be kept or as are required by law to be kept, all of which shall at
all reasonable times be open to inspection by any director. He shall sign
(unless the Treasurer, an Assistant Treasurer or an Assistant Secretary shall
sign) certificates representing stock of the Corporation authorized for issuance
by the Board of Directors or the Executive Committee. He shall perform all
duties incident to the office of a secretary of a corporation and such other
duties as are given to him by these By-Laws or as from time to time may be
assigned to him by the Board of Directors, the Chairman of the Board or the
President.
10. Assistant Secretaries. The Board of Directors may, from time to time,
designate and elect one or more Assistant Secretaries who shall have such powers
and perform such duties as may be assigned to them by the Board of Directors or
the Secretary. At the request or in the absence of the Secretary, the Assistant
Secretary (or, if there are two or more Assistant Secretaries, then the senior
of the Assistant Secretaries present and able to act or such other Assistant
Secretary as may be designated by the Board of Directors) may perform all the
duties of the Secretary and, when so acting, shall have all the powers of and be
subject to all the restrictions upon the Secretary.
11. Delegation by Board of Directors. In the case of absence or inability to
act of any officer of the Corporation and of any person herein authorized to act
in his place, the Board of Directors or (in the case of any Vice President,
other than one designated as senior vice president, Assistant Vice President,
Assistant Treasurer or Assistant Secretary), the Chairman of the Board or
President may from time to time delegate the powers of such officer to any other
officer or any director or any other person so selected.
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ARTICLE VI
Capital Stock
1. Certificates of Stock.
(a) All classes or series of stock of the Corporation may be issued in
uncertificated form. Notwithstanding the preceding sentence, every holder of
stock in the Corporation shall be entitled, upon his request, to have a
certificate, signed by, or in the name of the Corporation by, the Chairman of
the Board, the President, an Executive Vice President or any Vice President and
the Treasurer or any Assistant Treasurer or the Secretary or any Assistant
Secretary, certifying the number of shares owned by him in the Corporation. Any
or all signatures on the certificate may be a facsimile.
(b) Certificates representing shares of stock of the Corporation, if any,
shall be in such form as shall be approved by the Board of Directors.
(c) There shall be entered upon the stock books of the Corporation at the
time of issuance of each share the number of the certificate issued, the name of
the person owning the shares represented thereby, the number and class of such
shares, and the date of issuance thereof. Every certificate exchanged or
returned to the Corporation shall be marked "Cancelled", with the date of
cancellation.
2. Transfers of Stock. Upon surrender to the Corporation or the transfer agent
of the Corporation of a certificate representing shares, duly endorsed or
accompanied by appropriate evidence of succession, assignment or authority to
transfer, the Corporation shall issue a new certificate to the person entitled
thereto, cancel the old certificate, and record the transaction upon its books.
Subject to the provisions of the Certificate of Incorporation and these By-Laws,
the Board of Directors may prescribe such additional rules and regulations as it
may deem appropriate relating to the issue, transfer and registration of shares
of the Corporation.
ARTICLE VII
Corporate Seal
The Corporate Seal of the Corporation shall be circular in form and
shall bear the name of the Corporation, the year of incorporation and the words,
"Corporate Seal" and "Delaware". The form of the seal shall be subject to
alteration by the Board of Directors and the seal may be used by causing it or a
facsimile to be impressed or affixed or printed or otherwise reproduced. Any
officer or director of the Corporation shall have authority to affix the
corporate seal of the Corporation to any document requiring the same, and to
attest the same.
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ARTICLE VIII
Indemnification and Insurance
1. Indemnification. Each person who has been or is threatened to be made a
party to any threatened, pending or completed action, suit or proceedings,
whether civil, criminal, administrative or investigative, by reason of the fact
that he is or was a director, officer, employee or agent of the Corporation, or
is serving or has served at the request of the Corporation as a director,
officer, employee or agent of another corporation, partnership, joint venture,
trust or other enterprise, shall be indemnified by the Corporation against
expenses (including attorneys' fees), judgments, fines and amounts paid in
settlement actually and reasonably incurred by him in connection with such
action, suit or proceeding, and expenses (including attorneys' fees) incurred in
connection therewith may be advanced by the Corporation, all to the full extent
and in the manner permitted by Section 145 of the General Corporation Law of the
State of Delaware (or any other similar provision or provisions of applicable
law at the time in effect). Without in any way limiting the generality of the
foregoing, expenses (including attorneys' fees) incurred by an officer or
director in defending any civil, criminal, administrative or investigative
action, suit or proceeding shall be paid by the Corporation in advance of the
final disposition of such action, suit or proceeding upon receipt of an
undertaking by or on behalf of such director or officer to repay such amount if
it shall ultimately be determined that he is not entitled to be indemnified by
the Corporation as authorized in Section 145 of the Delaware General Corporation
Law.
The indemnification provided hereby shall not be deemed exclusive of
any other rights to which those indemnified may be entitled under any by-law,
agreement, vote of stockholders or disinterested directors or otherwise, both as
to action in his official capacity and as to action in another capacity while
holding such office, and shall continue as to a person who has ceased to be a
director, officer, employee or agent and shall inure to the benefit of the
heirs, executors and administrators of such a person.
2. Insurance. By action of the Board of Directors, notwithstanding any
interest of the Directors in such action, the Corporation may purchase and
maintain insurance, in such amounts as the Board may deem appropriate, on behalf
of any person who is or was a Director, officer, employee or agent of the
Corporation or is or was serving at the request of the Corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise against any liability asserted against him
and incurred by him in any such capacity, or arising out of his status as such,
whether or not the Corporation would have the power to indemnity him against
such liability under applicable provisions of law.
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ARTICLE IX
Amendments
The By-Laws of the Corporation shall be subject to alteration,
amendment or repeal, and new By-Laws not inconsistent with any provision of the
Certificate of Incorporation or statute, may be made, either by the affirmative
vote of the holders of a majority in interest of the stockholders of the
Corporation present in person or by proxy at any annual or special meeting of
the stockholders and entitled to vote thereat a quorum being present, provided
that notice of such proposed action shall have been given in the call for the
meeting, or by the affirmative vote of a majority of the whole Board, given at
any regular or special meeting of the Board of Directors.
ARTICLE X
Business Combinations with Interested Stockholders
The Corporation hereby elects not to be governed by Section 203 of the
General Corporation Law relating to business combinations with interested
stockholders and, accordingly, shall not be governed by such Section 203. As and
to the extent required by Section 203 (b)(2) of the General Corporation Law,
this Article X shall not be further amended by the Board of Directors.
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Exhibit 10.6
[LETTERHEAD OF RELIANCE GROUP HOLDINGS, INC.]
November 22, 1999
Mr. Robert S. Miller
20 Maury Mountain Lane
P.O. Box 4130
Sunriver, Oregon 97707
Dear Steve:
This will confirm that we have reached the following agreements concerning your
employment by Reliance Group Holdings, Inc. ("Reliance"):
1. You will serve as President of Reliance for a term of up to six months,
commencing today and ending on the earlier of May 22, 2000 or the
effective date of a Change of Control of Reliance, i.e. the acquisition
by a non-affiliate of more than 50% of the outstanding common stock of
Reliance or substantially all of Reliance's assets (your "Term of
Employment").
2. Your principal responsibilities as President will be to assist me and
the Board of Directors in developing and implementing strategic and
financial alternatives for Reliance with the goal of maximizing the
value of Reliance for the shareholders. You will devote your full
working time during customary business hours and your best efforts to
the proper performance of your duties hereunder and you will not have
any other employment (excluding serving as an outside director of
companies previously disclosed to us) during your Term of Employment.
3. You will also serve as a Director of Reliance at the pleasure of the
Board and the shareholders.
4. During your Term of Employment, you will be paid a salary of one
million dollars, payable in accordance with Reliance's usual and
customary pay procedures and subject to appropriate withholding for
federal, state or local income or other taxes which Reliance determines
are required to be withheld.
<PAGE>
Mr. Robert S. Miller
November 22, 1999
Page 2
5. You will be granted a stock option under Reliance's 1999 Stock Option
Plan for one million shares of Reliance common stock, which will vest
in full on the earlier of the end of your Term of Employment or the
effective date of a Change of Control of Reliance.
6. You will be reimbursed by Reliance for all documented reasonable
business expenses actually incurred and paid by you during the Term of
Employment in the performance of your duties to Reliance in accordance
with the policies of Reliance in effect from time to time.
7. You will acquaint yourself with and abide by Reliance's corporate
policies including its Code of Conduct and its policy on the trading of
securities.
8. Reliance may terminate you "for cause" in the event of the following:
(a) your conviction of a crime;
(b) your willful misconduct in connection with the performance of
your duties, after a determination by Reliance's Board of
Directors that such conduct warrants your termination; or
(c) your willful failure to perform specific written directives
from Reliance's Board of Directors or Chairman, which
directives are consistent with the scope and nature of your
responsibilities as President, and failure to cure such
failure within five days after written notice thereof.
<PAGE>
Mr. Robert S. Miller
November 22, 1999
Page 3
9. If you are terminated not "for cause", your Term of Employment will be
deemed to end and you will be paid the balance of your salary as set
forth above and your stock options will immediately vest as set forth
above.
10. During your Term of Employment and thereafter, you will not disclose,
directly or indirectly, to any third party any confidential or
non-public proprietary information pertaining to Reliance or any of its
affiliates, unless specifically authorized to do so by the Chairman of
the Board of Reliance. All internal documents pertaining to Reliance or
its affiliates which are made available to you or prepared or compiled
by you during your Term of Employment are the exclusive property of
Reliance and shall be delivered to Reliance upon the termination of
your Term of Employment, or upon request of the Chairman of the Board
of Reliance. You will continue to cooperate with Reliance after your
Term of Employment as to any matter with which you were involved during
your Term of Employment, and will be reimbursed for any time and
expenses incurred by you in such cooperation. This paragraph 11 will
survive the termination of this agreement and your Term of Employment.
11. This Agreement is intended to be binding on you and Reliance, is to be
governed by and construed in accordance with the laws of New York, and
contains our complete agreement with respect to your employment by
Reliance.
<PAGE>
Mr. Robert S. Miller
November 22, 1999
Page 4
Please indicate your complete agreement to the foregoing by signing a copy of
this letter and returning it to me.
Sincerely,
/s/Saul P. Steinberg
--------------------
Saul P. Steinberg
SPS:ho'l
AGREED:
/s/ Robert S. Miller
- ----------------------------
Robert S. Miller
<PAGE>
Exhibit 10.7
EMPLOYMENT AGREEMENT
THIS AGREEMENT is made and entered into and as of the 29th day of
February, 2000, by and between GEORGE R. BAKER (the "Executive") and RELIANCE
GROUP HOLDINGS, INC., a Delaware corporation having its principal place of
business at Park Avenue Plaza, 55 East 52nd Street, New York, New York 10055
(the "Company").
1. Employment.
(a) The Company agrees to employ the Executive, and the Executive
agrees to be employed by the Company, as the President and Chief Executive
Officer of the Company. During the term hereinafter specified, the Executive
agrees to perform the duties customarily performed by chief executive officers
of publicly held corporations and to perform such other duties as from time to
time may be reasonably requested of him by the Board of Directors of the Company
or any duly empowered committee thereof (the "Board of Directors").
(b) During the term of this Agreement, the Executive shall devote
his full working time during customary business hours and his best efforts, and
apply all of his skill and experience, to the proper performance of his duties
hereunder and to the business and affairs of the Company and its subsidiaries.
2. Term. Subject to Sections 4 and 5 hereof, the term of employment
of the Executive hereunder shall be for the period commencing on the date
hereof and ending on February 28, 2002.
3. Compensation.
(a) Base Salary. The Company will pay to the Executive during the
term of his employment hereunder a salary ("Base Salary") of not less than the
Executive's annual base salary on the date hereof, payable in accordance with
the Company's usual and customary pay procedures.
(b) Bonus. For each calendar year of the Company during the term of
the Executive's employment, the Executive shall be eligible to receive a bonus
based on a percentage of his Base Salary for such year (not less than 115%) as
determined pursuant to the Company's existing Executive Bonus Plan (or any other
subsequent executive bonus compensation plan in which the chief executive
officer participates and which has been approved by the stockholders and does
not reduce the Executive's bonus potential below 100% of Base Salary), provided
that, except in the case of the bonus for the calendar year in which this
Agreement terminates in accordance with Section 2 hereof, the Executive has not
"voluntarily resigned" or been terminated for "cause" prior to the time of
payment of the bonus.
<PAGE>
(c) Reimbursement of Expenses. The Company shall pay or reimburse
the Executive for all reasonable business expenses actually incurred or paid by
the Executive during the term of his employment under this Agreement in the
performance of his services hereunder in accordance with the current policies of
the Company applicable to the Executive, subject to modification from time to
time hereafter, provided that such modification does not significantly and
adversely affect the Executive's payments or reimbursements thereunder. Such
payment or reimbursement shall be made upon presentation of expense statements
or vouchers or such other supporting information as the Company may customarily
require of its senior executives.
(d) Vacations. The Executive shall be entitled to not less than four
weeks' paid vacation. Vacation shall be taken at times reasonably consistent
with the needs of the Company. Vacation earned for a year but not taken during
that year shall not be paid for nor taken in a subsequent year.
(e) Perquisites. The Executive shall be entitled to such other
perquisites as are currently provided to the Executive.
(f) Withholding. The Executive acknowledges and agrees that the
Company shall be entitled to withhold from his compensation, or otherwise
provide for, all federal, state or local income or other taxes which the Company
determines are required to be withheld on amounts payable to the Executive
pursuant to this Agreement or otherwise.
4. Termination of Employment.
(a) With or Without Cause; Resignation. The Company shall have the
right to terminate the employment of the Executive with or without "cause" (as
hereinafter defined) and the Executive shall have the right to resign from his
employment by the Company. If (i) the Executive's employment with the Company is
(i) terminated for "cause", or (ii) the Executive has "voluntarily resigned" (as
hereinafter defined) his employment, the Company shall have no further
obligation to the Executive hereunder, except, in the case of clause (ii), to
pay to the Executive the amounts, if any, due him pursuant to subsection (c) of
Section 3 hereof.
(b) Definitions of Cause and Voluntarily Resigned. For purposes of
this Agreement, "cause" shall mean:
(i) conviction of the Executive of a felony, or of any lesser
crime or offense involving the property of the Company or any
of its subsidiaries or affiliates;
(ii) willful misconduct by the Executive in connection with
the performance of his duties hereunder, or material and
willful breach by him of any of the provisions of this
Agreement and failure to cure such misconduct or breach within
two (2) weeks after receipt of written notice thereof;
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(iii) the Executive's conviction in a court of law of any
criminal offense involving moral turpitude under the laws of
the United States or any other jurisdiction the laws of which
may apply; and
(iv) the Executive's willful failure to perform specific
written directives of the Board of Directors of the Company,
which directives are consistent with the scope and nature of
the Executive's existing duties and responsibilities as set
forth in Section 1 hereof, and failure to cure such failure
within two (2) weeks after receipt of written notice thereof.
For purposes of this Agreement, "voluntarily resigned" shall mean the
Executive's decision to no longer serve as an executive officer of the Company,
which decision shall not have resulted from any of the following:
(i) a substantial diminution of the Executive's duties without
the Executive's written consent;
(ii) a demotion in title; or
(iii) a relocation or attempted relocation of the Executive
without the Executive's written consent to an office outside a
25-mile radius of New York City.
(c) Termination Without Cause; Resignation. If the Executive is
terminated without "cause" or has resigned, but not "voluntarily resigned", the
Company shall have no obligation to the Executive hereunder, except (i) to
continue to provide the Executive with the benefits under the medical and dental
plans of the Company then in effect for senior executives of the Company until
February 28, 2002, at the same charge to the Executive as he would have paid as
an active employee of the Company, (ii) to fully vest all stock option grants
held by the Executive and permit the immediate exercise thereof for a period of
12 months after the date of such termination or such resignation, (iii) to pay
to the Executive, within 20 days after the date of such termination or such
resignation, a lump sum in the amount determined by multiplying (A) the number
of years (including fractional years) remaining from the date of such
termination or such resignation to February 28, 2002, times (B) the sum of Base
Salary and the bonus, if any, paid Executive for the year immediately prior to
the date of such termination or such resignation and (iv) to pay the amounts due
him under subsection (c) of Section 3 hereof.
5. Death or Disability.
(a) Termination. The term of employment of the Executive shall
terminate forthwith in the event of the death of the Executive, and, at the
option of the Company upon written notice to the Executive, in the event that
the Executive shall fail for a period of four consecutive months to render and
perform the services required of him under this Agreement because of
"disability" (as currently defined in the Company's existing long-term
disability plan). Upon a
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termination of the Executive's employment hereunder because of death or
"disability", the Executive shall be entitled to receive and shall be paid as
provided for in subsection (b) of Section 5 hereof and the Company shall have no
further obligation to him hereunder, except (i) to pay to the Executive or his
estate, as the case may be, the amounts, if any, due him pursuant to subsection
(c) of Section 3 hereof and (ii) solely in the case of "disability", to continue
to provide the Executive with the benefits under the medical and dental plans of
the Company then in effect for senior executives of the Company until February
28, 2002, at the same charge to the Executive as he would have paid as an active
employee of the Company.
(b) Payments Required.
(i) In the event of the death of the Executive, his estate
shall be paid, within 20 days after the date of his death, a
lump sum in the amount equal to the Base Salary for one year
from the date of his death.
(ii) In the event of a "partial disability" or a "total
disability" (as such terms are currently defined in the
Company's existing long-term disability plan), the Executive
shall continue to be paid, until February 28, 2002, his Base
Salary.
(iii) All amounts payable pursuant to clause (ii) of this
subsection (b) shall be reduced by amounts paid to the
Executive under any of the Company's disability plans.
6. Covenant Not to Compete or Interfere; Proprietary Information;
and Injunctive Relief.
(a) Limited Covenants Not to Compete or Interfere. Executive
recognizes that a substantial part of the value of a company such as the
Company's resides in the expertise of its employees such as Executive and the
goodwill with its customers which Executive significantly influences, and that
the value of the Company will be significantly diminished if Executive attempts
to compete with the Company or interfere with its activities, or solicit its
clients in contravention of this Section 6. Executive also acknowledges that his
services are unique and special and that his compensation is partially in
consideration of and conditioned upon his not competing with the Company.
Executive agrees that, during the term of his employment and until 12 months
thereafter, Executive will not, directly or indirectly, (i) interfere with,
disrupt or attempt to interfere with or disrupt the relationship, contractual or
otherwise, between the Company and any customer, supplier, lessee, employee,
consultant or subcontractor of the Company, (ii) solicit or sell to any person
or entity who was a customer of the Company during the one-year period prior to
the termination of Executive's employment pursuant to this Agreement any service
or product or related service or product, which is offered, has been offered or
is being proposed to be offered by the Company or its subsidiaries within the
one-year period prior to such solicitations or (iii) hire or attempt to hire
directly or indirectly any non-clerical employee of the Company who was employed
by the Company during the six months preceding the termination of his
employment.
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(b) Proprietary Information. Executive agrees that all information,
whether or not in writing, of a private, secret or confidential nature relating
to the Company's or any of its affiliates' business, business relationships,
financial affairs or customers (collectively, the "Proprietary Information") is
and shall be the exclusive property of the Company or its affiliates during the
term of his employment and thereafter. Executive shall not, except as required
in the ordinary course of performance of his duties as an employee of the
Company, disclose, or use during the term of his employment and thereafter any
Proprietary Information. By way of illustration but not limitation, Proprietary
Information includes client, customer and supplier lists, data, records,
computer programs, manuals, processes, methods, contacts at or knowledge of
customers or prospective customers of the Company or any of its subsidiaries and
intangible rights which are either developed by Executive during the term of his
employment or to which Executive has access, which development or access was
rendered possible by virtue of Executive's employment.
Upon termination of employment, Executive shall promptly return to the
Company all materials and all copies of materials involving any Proprietary
Information in Executive's possession or control. Executive agrees to represent
to the Company that he has complied with the provisions of this Section 6 upon
termination of employment.
(c) Memoranda, Etc. Executive acknowledges and agrees that all
memoranda, notes, reports, records and other documents made or compiled by
Executive, or made available to Executive during the term of his employment
concerning the business of the Company or any of its affiliates, shall be the
Company's property and shall be delivered to the Company upon the termination of
Executive's employment hereunder or at any other time upon request by the Board
of Directors. Following the expiration or termination of Executive's employment
hereunder, Executive agrees to cooperate, for a period of five (5) years with
respect to legal matters and for a period of one (1) year with respect to all
other matters, with the Company and its affiliates with respect to matters with
which Executive was involved during the term of his employment.
(d) Survival. The provisions of this Section 6 shall survive the
termination or expiration of this Agreement and Executive's term of employment
hereunder.
(e) Injunctive Relief. Executive consents and agrees that, if he
violates any of the provisions of this Agreement with respect to
non-interference or confidentiality, the Company would sustain irreparable harm
and, therefore, in addition to any other remedies which the Company may have
under this Agreement or otherwise, the Company shall be entitled to apply to any
court of competent jurisdiction for an injunction restraining Executive from
committing or continuing any such violation of this Agreement, and Executive
shall not object to any such application.
(f) New or Prospective Employer Notification. Executive agrees that,
prior to the commencement of any new employment with a new employer during the
12-month period following the term of his employment, Executive will notify the
Company of the name and address of such new Company and will furnish such new
employer with a copy of Section 6 of this Agreement. Executive agrees that the
Company may advise any new or prospective employer of Executive of the existence
and terms of Section 6 of this Agreement and furnish such new or prospective
employer with a copy of Section 6 of this Agreement.
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(g) Challenge To Section 6. Executive agrees that, as a condition
precedent to the commencement or maintenance of any action, suit or proceeding
challenging, directly or collaterally, the validity or enforceability of this
Section 6, or any provision hereof, he will pay the Company an amount equal to
all payments received by him from the Company on and after the date of
termination of his employment. In addition, if Executive shall fail in such
challenge, Executive agrees to reimburse the Company for all costs (including
attorneys fees and expenses) of the Company's defense to such challenge.
7. Assignment.
(a) This Agreement is personal as to the Executive and shall not be
assignable by the Executive.
(b) This Agreement shall not be assigned by the Company without the
prior written consent of the Executive.
8. Notices. All notices and other communications under this Agreement
shall be in writing and shall be deemed to have been duly given if delivered
personally (when delivered), sent by registered mail, return receipt requested
(upon confirmation of receipt) or by recognized overnight courier (one day after
being sent) to such address as the Executive or the Company may designate by
notice to the other party.
9. Complete Understanding. This Agreement constitutes the sole and entire
agreement between the Executive and the Company with respect to the Company's
employment of the Executive and shall not be altered, modified or amended except
by written instrument signed by the party against whom such alteration,
modification or amendment is sought to be enforced. This Agreement does not
alter, amend or modify any rights of the Executive to indemnification under
either the Company's Charter or By-laws or his indemnification agreement with
the Company.
10. Binding Effect. This Agreement shall be binding upon and shall inure
to the benefit of and be enforceable by the parties hereto and their respective
heirs, executors, administrators, successors and assigns.
11. Termination of Agreement. This Agreement (other than the provisions of
Sections 4(c), 5(b) and 6 hereof) shall terminate upon the expiration or
termination, in accordance with the terms hereof, of the Executive's employment
hereunder.
12. Governing Law. This Agreement shall be governed by and construed
in accordance with the laws of the State of New York.
13. Severability. The invalidity of all or any part of any provision
of this Agreement shall not invalidate the remainder of this Agreement or the
remainder of any paragraph which can be given effect without such invalid
provision.
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14. Paragraph Headings. The paragraph headings contained in this
Agreement are for reference purposes only and shall not affect in any way the
meaning or interpretation of this Agreement.
IN WITNESS WHEREOF, the Company has caused this Agreement to be
executed by its duly authorized representative and the Executive has executed
this Agreement, in each case, as of the day and year first above written.
RELIANCE GROUP HOLDINGS, INC.
By: /s/ Howard E. Steinberg
-------------------------------
Title: Executive Vice President
/s/ George R. Baker
----------------------------------
Name: George R. Baker
<PAGE>
Exhibit 10.8
EMPLOYMENT AGREEMENT
--------------------
THIS AGREEMENT is made and entered into and as of the 1st day of
September, 1999, by and between Dennis J. O'Leary (the "Executive") and RELIANCE
GROUP HOLDINGS, INC., a Delaware corporation having its principal place of
business at Park Avenue Plaza, 55 East 52nd Street, New York, New York 10055
(the "Company").
1. Employment.
(a) The Company agrees to employ the Executive, and the Executive
agrees to be employed by the Company, as an executive officer of the Company
having his existing title and duties. During the term hereinafter specified, the
Executive agrees to perform such duties and render such services, consistent
with his current duties and services, as from time to time may be requested of
him by the chief executive officer or the Board of Directors of the Company or
any duly empowered committee thereof (the "Board of Directors") or his current
direct report.
(b) During the term of this Agreement, the Executive shall devote
his full working time during customary business hours and his best efforts, and
apply all of his skill and experience, to the proper performance of his duties
hereunder and to the business and affairs of the Company and its subsidiaries.
2. Term. Subject to Sections 4 and 5 hereof, the term of employment of
the Executive hereunder shall be for the period commencing on the date hereof
and ending on August 31, 2002.
3. Compensation.
(a) Base Salary. The Company will pay to the Executive during the
term of his employment hereunder a base salary ("Base Salary") of not less than
Executive's annual base salary on September 1, 1999, payable in accordance with
the Company's usual and customary pay procedures. The Base Salary shall be
subject to increase by the Company in its absolute discretion during the term of
the Executive's employment hereunder. Any increase in the base salary shall
become the new Base Salary for all purposes hereof. Notwithstanding the
foregoing, in any year in which the current chief executive officer and the
current chief operating officer of the Company have their base salaries from the
Company and its affiliates reduced, the Executive's Base Salary may be reduced
by a percentage equal to the percentage reduction of base salary of the chief
executive officer or the chief operating officer, whichever is lower, provided
that the reduction of the Executive's Base Salary shall in no case exceed 15% of
his prior year's Base Salary.
(b) Bonus. For each calendar year of the Company during the term of
the Executive's employment, the Executive shall be eligible to receive a bonus
based on a percentage of his Base Salary for such year (such percentage to be
his current percentage) as determined by the Company in its discretion.
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(c) Reimbursement of Expenses. The Company shall pay or reimburse
the Executive for all reasonable business expenses actually incurred or paid by
the Executive during the term of his employment under this Agreement in the
performance of his services hereunder in accordance with the current policies of
the Company applicable to the Executive, subject to modification from time to
time hereafter, provided that such modification does not significantly and
adversely affect the Executive's payments or reimbursements thereunder. Such
payment or reimbursement shall be made upon presentation of expense statements
or vouchers or such other supporting information as the Company may customarily
require of its senior executives.
(d) Vacations. The Executive shall be entitled to not less than four
weeks' paid vacation. Vacation shall be taken at times reasonably consistent
with the needs of the Company. Vacation earned for a year but not taken during
that year shall not be paid for nor taken in a subsequent year.
(e) Perquisites. The Executive shall be entitled to such other
perquisites as are currently provided to the Executive.
(f) Withholding. The Executive acknowledges and agrees that the
Company shall be entitled to withhold from his compensation, or otherwise
provide for, all federal, state or local income or other taxes which the Company
determines are required to be withheld on amounts payable to the Executive
pursuant to this Agreement or otherwise.
4. Termination of Employment.
(a) With or Without Cause; Resignation. The Company shall have the
right to terminate the employment of the Executive with or without "cause" (as
hereinafter defined) and the Executive shall have the right to resign from his
employment by the Company. If (i) the Executive's employment with the Company is
(i) terminated for "cause", or (ii) the Executive has "voluntarily resigned" (as
hereinafter defined) his employment, the Company shall have no further
obligation to the Executive hereunder, except, in the case of clause (ii), to
pay to the Executive the amounts, if any, due him pursuant to subsections (a)
and (c) of Section 3 hereof.
(b) Definitions of Cause and Voluntarily Resigned. For purposes of
this Agreement, "cause" shall mean:
(i) conviction of the Executive of a felony, or of any lesser
crime or offense involving the property of the Company or any
of its subsidiaries or affiliates;
(ii) willful misconduct by the Executive in connection with
the performance of his duties hereunder, or material and
willful breach by him of any of the provisions of this
Agreement and failure to cure such misconduct or breach within
two (2) weeks after receipt of written notice thereof;
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(iii) the Executive's conviction in a court of law of any
criminal offense involving moral turpitude under the laws of
the United States or any other jurisdiction the laws of which
may apply; and
(iv) the Executive's willful failure to perform specific
written directives of the Board of Directors of the Company or
his direct report, which directives are consistent with the
scope and nature of the Executive's existing duties and
responsibilities as set forth in Section 1 hereof, and failure
to cure such failure within two (2) weeks after receipt of
written notice thereof.
For purposes of this Agreement, "voluntarily resigned" shall mean the
Executive's decision to no longer serve as an executive officer of the Company,
which decision shall not have resulted from any of the following:
(i) a substantial diminution of the Executive's duties without
the Executive's written consent;
(ii) a demotion in title;
(iii) a relocation or attempted relocation of the Executive
without the Executive's written consent to an office outside a
25-mile radius of New York City; or
(iv) an increase in any year in the amount of travel required
of the Executive by more than 30% of the average amount of
travel required during the previous three years.
(c) Discharge Without Cause; Resignation. If the Executive is
discharged without "cause" or has not "voluntarily resigned", the Company shall
have no obligation to the Executive hereunder, except (i) to continue to provide
the Executive with the benefits under the medical and dental plans of the
Company then in effect for senior executives of the Company until August 31,
2002, at the same charge to the Executive as he would have paid as an active
employee of the Company, (ii) to fully vest all stock option grants held by the
Executive and permit the immediate exercise thereof for a period of 12 months
after the date of such discharge or such resignation, (iii) to pay to the
Executive, within 20 days after the date of such discharge or such resignation,
a lump sum in the amount determined by multiplying (A) the number of years
(including fractional years) remaining from the date of such discharge or such
resignation to August 31, 2002, times (B) the sum of Base Salary and the average
bonus paid Executive for the two years immediately prior to the date of such
discharge or such resignation and (iv) to pay the amounts due him under
subsection (c) of Section 3 hereof.
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5. Death or Disability.
(a) Termination. The term of employment of the Executive shall
terminate forthwith in the event of the death of the Executive, and, at the
option of the Company upon written notice to the Executive, in the event that
the Executive shall fail for a period of four consecutive months to render and
perform the services required of him under this Agreement because of
"disability" (as currently defined in the Company's existing long-term
disability plan). Upon a termination of the Executive's employment hereunder
because of death or "disability", the Executive shall be entitled to receive and
shall be paid as provided for in subsection (b) of Section 5 hereof and the
Company shall have no further obligation to him hereunder, except (i) to pay to
the Executive or his estate, as the case may be, the amounts, if any, due him
pursuant to subsection (c) of Section 3 hereof and (ii) solely in the case of
"disability", to continue to provide the Executive with the benefits under the
medical and dental plans of the Company then in effect for senior executives of
the Company until August 31, 2002, at the same charge to the Executive as he
would have paid as an active employee of the Company.
(b) Payments Required.
(i) In the event of the death of the Executive, his estate
shall be paid, within 20 days after the date of his death, a
lump sum in the amount equal to the sum of (A) Base Salary for
one year from the date of his death and (B) the average bonus
paid Executive for the two years immediately prior to the date
of the Executive's death.
(ii) In the event of a "total disability" (as currently
defined in the Company's existing long-term disability plan),
the Executive shall continue to be paid, until the third
anniversary of the date of his termination for "disability",
his Base Salary and shall receive a bonus, at the time bonuses
are paid to other senior executives, in an amount equal to the
average bonus paid Executive for the two years immediately
prior to the date of the Executive's termination for
"disability".
(iii) In the event of a "partial disability" (as currently
defined in the Company's existing long-term disability plan),
the Executive shall continue to be paid, until the third
(second, if such termination occurs in 2001, first, if such
event occurs in 2002) anniversary of the date of his
termination for "disability", his Base Salary and shall
receive a bonus, at the time bonuses are paid to other senior
executives, in an amount equal to the average bonus paid
Executive for the two years immediately prior to the date of
the Executive's termination for "disability".
(iv) All amounts payable pursuant to clause (ii) or (iii) of
this subsection (b) shall be reduced by amounts paid to the
Executive under any of the Company's disability plans.
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6. Covenant Not to Compete or Interfere; Proprietary Information; and
Injunctive Relief.
(a) Limited Covenants Not to Compete or Interfere. Executive
recognizes that a substantial part of the value of a company such as the
Company's resides in the expertise of its employees such as Executive and the
goodwill with its customers which Executive significantly influences, and that
the value of the Company will be significantly diminished if Executive attempts
to compete with the Company or interfere with its activities, or solicit its
clients in contravention of this Section 6. Executive also acknowledges that his
services are unique and special and that his compensation is partially in
consideration of and conditioned upon his not competing with the Company.
Executive agrees that, during the term of his employment and until 12 months
thereafter, Executive will not, directly or indirectly, (i) interfere with,
disrupt or attempt to interfere with or disrupt the relationship, contractual or
otherwise, between the Company and any customer, supplier, lessee, employee,
consultant or subcontractor of the Company, (ii) solicit or sell to any person
or entity who was a customer of the Company during the one-year period prior to
the termination of Executive's employment pursuant to this Agreement any service
or product or related service or product, which is offered, has been offered or
is being proposed to be offered by the Company or its subsidiaries within the
one-year period prior to such solicitations or (iii) hire or attempt to hire
directly or indirectly any non-clerical employee of the Company who was employed
by the Company during the six months preceding the termination of his
employment.
(b) Proprietary Information. Executive agrees that all information,
whether or not in writing, of a private, secret or confidential nature relating
to the Company's or any of its affiliates' business, business relationships,
financial affairs or customers (collectively, the "Proprietary Information") is
and shall be the exclusive property of the Company or its affiliates during the
term of his employment and thereafter. Executive shall not, except as required
in the ordinary course of performance of his duties as an employee of the
Company, disclose, or use during the term of his employment and thereafter any
Proprietary Information. By way of illustration but not limitation, Proprietary
Information includes client, customer and supplier lists, data, records,
computer programs, manuals, processes, methods, contacts at or knowledge of
customers or prospective customers of the Company or any of its subsidiaries and
intangible rights which are either developed by Executive during the term of his
employment or to which Executive has access, which development or access was
rendered possible by virtue of Executive's employment.
Upon termination of employment, Executive shall promptly return to the
Company all materials and all copies of materials involving any Proprietary
Information in Executive's possession or control. Executive agrees to represent
to the Company that he has complied with the provisions of this Section 6 upon
termination of employment.
(c) Memoranda, Etc. Executive acknowledges and agrees that all
memoranda, notes, reports, records and other documents made or compiled by
Executive, or made available to Executive during the term of his employment
concerning the business of the Company or any of its affiliates, shall be the
Company's property and shall be delivered to the Company upon the termination
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of Executive's employment hereunder or at any other time upon request by the
Board of Directors. Following the expiration or termination of Executive's
employment hereunder, Executive agrees to cooperate, for a period of five (5)
years with respect to legal matters and for a period of one (1) year with
respect to all other matters, with the Company and its affiliates with respect
to matters with which Executive was involved during the term of his employment.
(d) Survival. The provisions of this Section 6 shall survive the
termination or expiration of this Agreement and Executive's term of employment
hereunder.
(e) Injunctive Relief. Executive consents and agrees that, if he
violates any of the provisions of this Agreement with respect to
non-interference or confidentiality, the Company would sustain irreparable harm
and, therefore, in addition to any other remedies which the Company may have
under this Agreement or otherwise, the Company shall be entitled to apply to any
court of competent jurisdiction for an injunction restraining Executive from
committing or continuing any such violation of this Agreement, and Executive
shall not object to any such application.
(f) New or Prospective Employer Notification. Executive agrees that,
prior to the commencement of any new employment with a new employer during the
12-month period following the term of his employment, Executive will notify the
Company of the name and address of such new Company and will furnish such new
employer with a copy of Section 6 of this Agreement. Executive agrees that the
Company may advise any new or prospective employer of Executive of the existence
and terms of Section 6 of this Agreement and furnish such new or prospective
employer with a copy of Section 6 of this Agreement.
(g) Challenge To Section 6. Executive agrees that, as a condition
precedent to the commencement or maintenance of any action, suit or proceeding
challenging, directly or collaterally, the validity or enforceability of this
Section 6, or any provision hereof, he will pay the Company an amount equal to
all payments received by him from the Company on and after the date of
termination of his employment. In addition, if Executive shall fail in such
challenge, Executive agrees to reimburse the Company for all costs (including
attorneys fees and expenses) of the Company's defense to such challenge.
7. Assignment.
(a) This Agreement is personal as to the Executive and shall
not be assignable by the Executive.
(b) This Agreement shall not be assigned by the Company without the
prior written consent of the Executive.
8. Notices. All notices, requests, demands and other communications
hereunder shall be in writing and shall be deemed to have been duly given if
delivered personally (when delivered), sent by registered mail, return receipt
requested (upon confirmation of receipt) or by recognized
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overnight courier (one day after being sent) to the address shown below, or to
such other address as the applicable party hereto may designate by notice to the
other party given as herein provided:
If to the Company, to:
Reliance Group Holdings, Inc.
55 East 52nd Street
New York, New York 10055
Attention: Chief Executive Officer
If to the Executive to:
Dennis J. O'Leary
71 Colfax Road
Skillman, New Jersey 08558
9. Complete Understanding. This Agreement constitutes the sole and entire
agreement between the Executive and the Company with respect to the Company's
continued employment of the Executive and shall not be altered, modified or
amended except by written instrument signed by the party against whom such
alteration, modification or amendment is sought to be enforced. This Agreement
does not alter, amend or modify any rights of the Executive to indemnification
under either the Company's Charter or By-laws or his indemnification agreement
with the Company.
10. Binding Effect. This Agreement shall be binding upon and shall inure
to the benefit of and be enforceable by the parties hereto and their respective
heirs, executors, administrators, successors and assigns.
11. Termination of Agreement. This Agreement (other than the provisions of
Sections 4(c), 5(b) and 6 hereof) shall terminate upon the expiration or
termination, in accordance with the terms hereof, of the Executive's employment
hereunder.
12. Effect of Any Deferred Compensation Plan. Any amounts of bonus
compensation of the Executive which have been replaced or deferred under any
deferred compensation plan of the Company or its affiliates shall nevertheless
be deemed to be a part of Executive's bonus for purposes of Section 3(b), 4(c),
5(b)(i), 5(b)(ii) and 5(b)(iii) of this Agreement and any amounts of
compensation received by the Executive pursuant to payment of any deferred
compensation plan amounts shall not be deemed a part of the Executive's bonus
for purposes of Section 3(b), 4(c), 5(b)(i), 5(b)(ii) and 5(b)(iii) of this
Agreement.
13. Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of New York.
14. Severability. The invalidity of all or any part of any provision of
this Agreement shall not invalidate the remainder of this Agreement or the
remainder of any paragraph which can be given effect without such invalid
provision.
15. Paragraph Headings. The paragraph headings contained in this Agreement
are for reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement.
IN WITNESS WHEREOF, the Company has caused this Agreement to be
executed by its duly authorized representative and the Executive has executed
this Agreement, in each case, as of the day and year first above written.
RELIANCE GROUP HOLDINGS, INC.
By: /s/ George E. Bello
----------------------------------
Title: Executive Vice President
/s/ Dennis J. O'Leary
-------------------------------------
Name: Dennis J. O'Leary
7
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AMENDMENT, dated as of December 1, 1999, to Employment Agreement (the
"Employment Agreement"), dated as of September 1, 1999, between the executive
whose signature appears below (the "Executive") and Reliance Group Holdings,
Inc., a Delaware corporation (the "Company").
1. The Company and the Executive wish to amend the Employment Agreement so
as to protect the Executive from certain uncertainties.
2. Intending to be legally bound, the Company and the Executive agree that
Section 4(c) of the Employment Agreement is hereby amended to read in its
entirety as follows:
"(c) Discharge Without Cause; Resignation. If the Executive is discharged
without "cause" or has resigned, but not "voluntarily resigned", the
Company shall have no obligation to the Executive hereunder, except (i) to
continue to provide the Executive with the benefits under the medical and
dental plans of the Company then in effect for senior executives of the
Company until the third anniversary of the date of such discharge or
resignation at the same charge to the Executive as he would have paid as
an active employee of the Company, (ii) to fully vest all stock option
grants held by the Executive and permit the immediate exercise thereof for
a period of 12 months after the date of such discharge or such
resignation, (iii) to pay to the Executive, within 20 days after the date
of such discharge or such resignation, a lump sum in the amount determined
by multiplying (A) three (3), times (B) the sum of Base Salary and the
average bonus paid Executive for the two years immediately prior to the
date of such discharge or such resignation and (iv) to pay the amounts due
him under subsection (c) of Section 3 hereof."
3. In all other respects the Employment Agreement shall remain in full force
and effect.
4. This Amendment shall be governed by and construed in accordance with
the laws of the State of New York.
IN WITNESS WHEREOF, the Company has caused the Amendment to be executed by
its duly authorized representative and the Executive has executed the
Amendment, in each case, as of the day and year first above written.
RELIANCE GROUP HOLDINGS, INC.
By: /s/ George E. Bello
----------------------------------
Title: Executive Vice President
/s/ Dennis J. O'Leary
-----------------------------------
Executive
8
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Schedule to Exhibit 10.8
Philip S. Sherman and Paul W. Zeller entered into Employment Agreements with
Reliance Group Holdings, Inc., including the Amendments thereto, which are
identical to Exhibit 10.8 hereto in all material respects.
9
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Exhibit 10.17
TERMINATION OF RELIANCE GROUP HOLDINGS, INC.
KEY EMPLOYEE SHARE OPTION PLAN
Preamble
Reliance Group Holdings, Inc. (the "Sponsor") established the Reliance
Group Holdings, Inc. Key Employee Share Option Plan (the "Plan"), effective as
of the 10th day of December 1997. Pursuant to Article IV of the Plan, the
Sponsor reserved the right to amend or terminate the Plan. As used in this
document, capitalized words and phrases have the meanings set forth in the Plan,
unless the context requires a different meaning.
ARTICLE I
Termination of the Plan
1.1 Termination. Pursuant to Article IV of the Plan, the Sponsor hereby
terminates the Plan, subject to the provisions hereof. Such termination is
binding upon all Employers and Participants, the Compensation Committee, the
Administrative Committee and all other parties in interest.
1.2 When Termination Takes Effect. The termination of the Plan is
effective as of the date hereof.
1.3 Exercisability upon Termination. The Sponsor hereby requires all
outstanding Options to be exercised within two years of the date hereof.
ARTICLE II
Plan Administration
2.1 Administration of Plan. The provisions of Article V, Plan
Administration, of the Plan shall continue to apply until such time as there are
no longer any Participants in the Plan.
ARTICLE III
Options; Cash Payments
3.1 Acceleration of Options. Notwithstanding any provisions to the
contrary contained in Options granted in calendar year 2000, all such Options
may be exercised on or after the date hereof.
3.2 Future Options. Except as provided in the next sentence hereof, no
additional Options shall be granted after the date hereof. The Sponsor shall
issue to each Participant on the first anniversary of the date hereof, an Option
reflecting the dividends and capital gains distributions on outstanding
Designated Property covered by unexercised Options held by such Participant on
such date.
<PAGE>
3.2 Cash Payments. In light of the required exercise of all outstanding
Options on or prior to the second anniversary of the date hereof, the Sponsor
shall pay to each Participant on the second anniversary of the date hereof, in
cash, the dividends and capital gains distributions on outstanding Designated
Property covered by unexercised Options held by such Participant on the day
immediately preceding the second anniversary of the date hereof.
ARTICLE IV
Miscellaneous
4.1 Governing law. The construction and operation of this Plan
Termination are governed by the laws of the State of New York.
4.2 Headings. The headings of Articles, Sections and Subsections are
for reference only and are not to be utilized in construing this Plan
Termination.
IN WITNESS WHEREOF, Reliance Group Holdings, Inc. has caused this Plan
Termination to be executed by its duly authorized officer and its corporate seal
to be hereunto affixed by authority of its Board of Directors this 1st day of
February, 2000.
RELIANCE GROUP HOLDINGS, INC.
[Corporate Seal]
By: /s/Saul P. Steinberg
-------------------------------
Chairman of the Board and
Chief Executive Officer
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Exhibit 10.42
RETROCESSION SETTLEMENT AGREEMENT
This RETROCESSION SETTLEMENT AGREEMENT ("this Agreement") dated as of
the 7th day of January, 2000, is entered into by and among RELIANCE INSURANCE
COMPANY, a corporation organized under the insurance laws of the Commonwealth of
Pennsylvania ("Reliance"), RELIANCE GROUP HOLDINGS, INC., a corporation
organized under the laws of the State of Delaware, on behalf of itself and each
of its subsidiaries and affiliates ("Reliance Group"), SUN LIFE ASSURANCE
COMPANY OF CANADA, a corporation organized under the insurance laws of Canada
("Sun Life"), PHOENIX HOME LIFE MUTUAL INSURANCE COMPANY, a corporation
organized under the insurance laws of the State of New York, and AMERICAN
PHOENIX LIFE AND REASSURANCE COMPANY, a corporation organized under the
insurance laws of the State of Connecticut (Phoenix Home Life Mutual Insurance
Company and American Phoenix Life and Reassurance Company are referred to
together as "Phoenix"), and COLOGNE LIFE REINSURANCE COMPANY, a corporation
organized under the insurance laws of the State of Connecticut ("Cologne Life")
(Sun Life, Phoenix and Cologne Life individually, a "Retrocessionaire", and
collectively, the "Retrocessionaires").
WHEREAS, Reliance and each of the insurers (individually, an "Insurer";
collectively, the "Insurers") listed on Exhibit A attached hereto have
heretofore entered into the reinsurance agreements (individually, a "Reinsurance
Agreement"; collectively, the "Reinsurance Agreements") listed on Exhibit A,
pursuant to which Reliance agreed to reinsure, and the Insurers agreed to cede,
certain subject business (as defined in the Reinsurance Agreements); and
WHEREAS, Reliance is negotiating with certain of the Insurers the
complete and final settlement of their respective obligations under the
Reinsurance Agreements in accordance with the terms of certain Settlement
Agreements (as hereinafter defined) to be entered into between Reliance and such
Insurers; and
WHEREAS, Reliance asserts that each of the Retrocessionaires has
heretofore entered into one or more of the agreements listed on Exhibit B
(including the Occupational Accident Excess of Loss Whole Account Retrocession,
Burning Cost Premium Protection, and Occupational Disease and Cumulative Trauma
Whole Account Quota Share Reinsurance), pursuant to which, Reliance asserts,
each Retrocessionaire has agreed to reinsure, and Reliance has agreed to
retrocede, certain liabilities under policies issued by the Insurers and
reinsured by Reliance; and
WHEREAS, the draft contract wordings also listed on Exhibit B were
provided to the Retrocessionaires naming Reliance as a retrocedent pursuant to
which Reliance asserts the Retrocessionaires are obligated to provide
retrocessional coverage to Reliance (the documents listed in Exhibit B are
hereinafter collectively referred to as the "Asserted Retrocession Agreements");
and
WHEREAS, two of the retrocessionaires, Sun Life and Phoenix, have
commenced arbitration proceedings, inter alia, to rescind certain of the
Asserted Retrocession Agreements; and
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WHEREAS, Reliance has commenced an arbitration proceeding seeking,
inter alia, a declaration that the Asserted Retrocession Agreements are valid
and enforceable; and
WHEREAS, this Agreement will enable Reliance, Sun Life, and Phoenix to
avoid the expense and uncertainty of arbitration, litigation, or other
proceedings; and
WHEREAS, upon the fulfillment of certain conditions (as hereinafter
provided), Reliance and the Retrocessionaires wish to fully and finally settle
their respective obligations to each other under the Asserted Retrocession
Agreements.
NOW THEREFORE, in consideration of the mutual promises contained herein
and other good and valuable consideration, the parties hereby agree as follows:
ARTICLE I
CERTAIN DEFINITIONS
Section 1.01 Definitions. As used in this Agreement, the following
terms shall have the following respective meanings:
"Aon" means Aon Re Inc., all subsidiary and affiliated entities, and
all predecessors and successors of Aon Re Inc. or of any subsidiary or
affiliated entity thereof.
"Asserted Retrocession Agreements" shall have the meaning set forth in
the fourth whereas clause of this Agreement.
"Closing" and "Closing Date" shall have the meanings set forth in
Section 2.07 hereof.
"Cologne Life" shall have the meaning set forth in the first paragraph
of this Agreement.
"Delphi" means Delphi Financial Group, Inc., all subsidiary and
affiliated entities, and all predecessors and successors of Delphi Financial
Group, Inc. or of any subsidiary or affiliated entity thereof.
"Delphi Release" shall have the meaning set forth in Section 2.04
hereof.
"Insurer" and "Insurers" shall have the meanings set forth in the first
whereas clause of this Agreement.
"Measured Cost " shall have the meaning set forth in Section 6.01(a)
hereof.
"Phoenix" shall have the meaning set forth in the first paragraph of
this Agreement.
"Quota Share Retrocession Agreement" means that agreement by which
Reliance Standard Life, Safety National, and Lumbermens Mutual Casualty Company
agreed to reinsure, and Reliance agreed to retrocede, certain policy liabilities
under reinsurance policies underwritten by Unicover on behalf of Reliance, and
which agreement bears an effective date of April 1, 1998.
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<PAGE>
"Rattner" means Rattner Mackenzie Limited, all subsidiary and
affiliated entities, and all predecessors and successors of Rattner Mackenzie
Limited or of any subsidiary or affiliated entity thereof.
"Reinsurance Agreement" and "Reinsurance Agreements" shall have the
meanings set forth in the first whereas clause of this Agreement.
"Reinsurance Agreement Liability" means, for each Reinsurance
Agreement, the estimated ultimate gross nominal underwriting loss (estimated
ultimate gross premium minus estimated ultimate gross commission minus estimated
ultimate gross claims).
"Reliance" shall have the meaning set forth in the first paragraph of
this Agreement.
"Reliance Compensation" shall have the meaning set forth in Section
6.01(b) hereof.
"Reliance Adjustment" shall have the meaning set forth in Schedule II.
"Reliance Group" shall have the meaning set forth in the first
paragraph of this Agreement.
"Reliance Measured Cost" shall have the meaning set forth in Schedule
II.
"Reliance Recovered Amount from Aon," "Reliance Recovered Amount from
Rattner," "Reliance Recovered Amount from Unicover," and "Reliance Recovered
Amounts," shall have the meanings set forth in Section 6.01(c) hereof.
"Reliance Release" shall have the meaning set forth in Section 2.03
hereof.
"Reliance Standard Life" means Reliance Standard Life Insurance
Company.
"Retrocession Settlement Amount" shall have the meaning set forth in
Section 2.02(a) hereof.
"Retrocessionaire" and "Retrocessionaires" shall have the meanings set
forth in the first paragraph of this Agreement.
"Retrocessionaires Adjustment" shall have the meaning set forth in
Schedule III.
"Retrocessionaires Measured Cost" shall have the meaning set forth in
Schedule III.
"Retrocessionaires Recovered Amount from Aon," "Retrocessionaires
Recovered Amount from Rattner," "Retrocessionaires Recovered Amount from
Unicover," and "Retrocessionaires Recovered Amounts" shall have the meanings set
forth in Section 6.01(d) hereof.
"Safety National" means Safety National Casualty Corporation.
"Settlement Agreement" means an agreement to effect a complete and
final settlement of the respective obligations of Reliance and an Insurer under
the Reinsurance Agreement or
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<PAGE>
Agreements between them, and that is contingent, if at all, principally upon a
one-time payment by Reliance to the Insurer.
"Sun Life" shall have the meaning set forth in the first paragraph of
this Agreement.
"This Agreement" shall have the meaning set forth in the first
paragraph of this Agreement.
"Total Reinsurance Agreement Liability" means the sum of the
Reinsurance Agreement Liability for all Reinsurance Agreements listed on Exhibit
A.
"Unicover" shall mean Unicover Managers, Inc., Unicover Managers LLC,
all affiliates and successors of either of them, and all predecessors and
successors of Unicover Managers, Inc. or Unicover Managers LLC or of any
subsidiary or affiliated entity of any of them.
"Unicover Business" means all insurance, reinsurance, and
retrocessional transactions, and all other business or transactions of any kind
or character, in which Unicover was involved directly or indirectly, or that are
otherwise related to Unicover in any way, including but not limited to all
transactions of any kind or character involving any of the Reinsurance
Agreements, Settlement Agreements, or Asserted Retrocession Agreements.
ARTICLE II
TERMS AND CLOSING OF THIS AGREEMENT
Section 2.01 Settlement Agreements.
(a) Reliance shall use commercially reasonable efforts to enter into
Settlement Agreements with each of the Insurers.
(b) Neither Reliance nor Reliance Group shall pay or accept any
consideration for a Settlement Agreement other than the consideration recited in
that Settlement Agreement. The consideration prohibited by the previous sentence
includes, but is not limited to, any agreements, arrangements, or understandings
that are conditioned upon, or would not have been entered into except in
connection with or consideration of, a Settlement Agreement.
(c) At the Closing, Reliance shall deliver to each Retrocessionaire a
true and complete copy of each such written Settlement Agreement, and shall
fully disclose, by notice to all Retrocessionaires, all terms of any agreements,
arrangements, or understandings described in Section 2.01(b) or otherwise
related to any Settlement Agreement, whether written or unwritten.
Section 2.02 Retrocession Settlement Amount.
(a) If, on or before January 21, 2000, Reliance has reached Settlement
Agreements which taken together cover Reinsurance Agreements aggregating not
less than 95% of the Total Reinsurance Agreement Liability, and subject to the
satisfaction of the conditions precedent stated in Section 4.01, the
Retrocessionaires shall pay to Reliance on the Closing Date an aggregate amount
equal to $281,523,831 (payable severally by Cologne Life, Phoenix and Sun
4
<PAGE>
Life in the amounts set forth in Exhibit C hereto) (the "Retrocession
Settlement Amount"). Payment of the Retrocession Settlement Amount shall be made
by wire transfer of immediately available funds to a Reliance bank account or
accounts designated in writing by Reliance. For purposes of determining whether
Reliance has satisfied the requirement that it reach by January 21, 2000,
Settlement Agreements covering Reinsurance Agreements aggregating not less than
95% of the Total Reinsurance Agreement Liability, the parties agree that the
percentage figures assigned to each Reinsurance Agreement listed on Exhibit A
shall govern.
(b) Any payments otherwise due and owing to the Retrocessionaires after
the execution of this Agreement shall be suspended and placed in an interest
bearing fiduciary account until payment of the Retrocession Settlement Amount or
the termination of this Agreement pursuant to Section 9.01. If this Agreement is
terminated pursuant to Section 9.01, then, on the next business day after such
termination, Reliance shall pay the amounts in the fiduciary account to the
Retrocessionaires or their designated agents. Reliance's failure to timely remit
premium to each Retrocessionaire or its agent from the execution date of this
Agreement until the next business day after its termination shall not constitute
a breach or other default under the Asserted Retrocession Agreements. Each
Retrocessionaire may set off against loss payments otherwise due Reliance in
connection with the Reinsurance Agreements all amounts that Reliance deposits
pursuant to this Section 2.02(b) until Reliance remits premium to that
Retrocessionaire upon termination of this Agreement. Notwithstanding the
foregoing, the parties recognize that Phoenix and Sun Life have commenced
arbitration proceedings to rescind the Asserted Retrocession Agreements, have
tendered back to their purported retrocedents all premium received from them and
are not accepting any additional premium from their purported retrocedents;
accordingly this Section 2.02(b) shall not apply to Phoenix and Sun Life.
Section 2.03 Releases by Reliance, Reliance Group, and
Retrocessionaires. At the Closing, each Retrocessionaire, on the one hand, and
Reliance and Reliance Group, on the other hand, will exchange a fully executed
mutual limited release in the form of Exhibit D (the "Reliance Release").
Section 2.04 Releases by Retrocessionaires and Delphi, Reliance
Standard Life, and Safety National. At the Closing, each Retrocessionaire, on
the one hand, and Reliance on behalf of Delphi, Reliance Standard Life, and
Safety National, on the other hand, will exchange a fully executed mutual
limited release in the form of Exhibit E (the "Delphi Release"). Following
execution of this Agreement, Cologne Life and Phoenix shall make reasonable
efforts (which efforts, however, shall not involve the payment of money) to
persuade the other members of the Unicover Occupational Accident Reinsurance
Pool, including Connecticut General Life Insurance Company, Reliastar Life
Insurance Company, the Lincoln National Life Insurance Company, and Life
Reassurance Corporation of America, to enter into mutual limited releases with
Safety National, Reliance Standard Life, and Delphi similar in form to Exhibit
E.
Section 2.05 Delivery of Certificates and Documents by Reliance. At the
Closing, Reliance shall deliver the following to each Retrocessionaire:
(a) Certificates of responsible officers of Reliance and Reliance Group
confirming to the best of their knowledge after reasonable inquiry (i)
satisfaction of the conditions set forth in Sections 2.01(b), 2.01(c), and
2.02(a) and (ii) that the representations and warranties of Reliance
5
<PAGE>
and Reliance Group set forth herein are true and correct on the date of the
certificates as if made on such date; and
(b) Copies of all documents that (i) are in the possession, custody, or
control of Reliance or Reliance Group, or in the possession, custody, or control
of any person or entity from which Reliance or Reliance Group has the practical
ability to obtain the documents without instituting any legal proceedings to do
so, and (ii) relate to, refer to, describe, evidence, or constitute any
Reinsurance Agreement, any Settlement Agreement, the Asserted Retrocession
Agreements, or the Unicover Business, together with certificates of responsible
officers of Reliance and Reliance Group that to the best of their knowledge
after reasonable inquiry they have delivered all such documents and the logs
required by Section 2.05(c). As used in this Agreement, the terms "documents"
and "possession, custody or control" have the same meanings as under Rule 34(a)
of the Federal Rules of Civil Procedure.
(c) Section 2.05(b) shall not require Reliance to deliver either (i)
documents the disclosure of which would, in the reasonable opinion of Paul,
Weiss, Rifkind, Wharton & Garrison, violate any of the confidentiality
agreements listed on Exhibit F, copies of each of which Reliance has delivered
to the Retrocessionaires, or (ii) documents covered by either the
attorney-client privilege or the protection of documents prepared in
anticipation of litigation or for trial; but under both clauses (i) and (ii)
above, provided that Reliance delivers to each Retrocessionaire a log of all
such confidential documents, whenever created, and a log of all such privileged
or protected documents created prior to March 15, 1999, stating for each such
document on each log the information customarily stated in privilege logs.
Section 2.06. Payment under Settlement Agreements. Promptly after
receiving payment of the Retrocession Settlement Amount, Reliance shall pay all
amounts payable to Insurers under all Settlement Agreements. By the end of the
third business day after it makes any payment under any Settlement Agreement,
Reliance shall deliver to each Retrocessionaire a certificate of a responsible
officer of Reliance confirming payment of same, together with evidence of such
payment.
Section 2.07. The Closing. The closing of this Agreement (the
"Closing") shall be held at the offices of Gibson, Dunn & Crutcher LLP, 200 Park
Ave., 48th Floor, New York, New York 10166 or at such other place as the parties
may agree, at 9:30 a.m. on January 21, 2000 (the "Closing Date"), or on such
other date and time as the parties may agree.
ARTICLE III
REPRESENTATIONS AND WARRANTIES
Section 3.01 Representations and Warranties of Reliance and Reliance
Group. Reliance and Reliance Group each represents and warrants to each
Retrocessionaire that:
(a) Reliance and Reliance Group each has the corporate power to enter
into this Agreement and to carry out its obligations hereunder. The execution
and delivery of this Agreement and the consummation of the transactions
contemplated hereby have been duly authorized by the boards of directors of
Reliance and Reliance Group, respectively.
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<PAGE>
(b) This Agreement constitutes a valid and binding obligation of
Reliance and Reliance Group, enforceable in accordance with its terms. No other
corporate proceedings by Reliance or Reliance Group are necessary to authorize
this Agreement or the transactions contemplated hereby.
(c) Exhibit A is a complete list of all agreements or contracts for
which Reliance or Reliance Group contends that the Asserted Retrocession
Agreements provide Reliance retrocessional reinsurance or any other right of
indemnity.
(d) Other than as disclosed on Exhibit G to this Agreement, neither
Reliance nor Reliance Group has any retrocessional reinsurance or other
contractual right of indemnity with respect to any of the Reinsurance Agreements
other than as may have been provided by the Retrocessionaires under the Asserted
Retrocession Agreements.
(e) Reliance has previously delivered to Gibson, Dunn & Crutcher LLP on
behalf of the Retrocessionaires true and complete copies of all written
agreements and arrangements, and has fully disclosed the terms and conditions of
all non-written agreements and arrangements, direct or indirect, between
Reliance Group or any subsidiary thereof and either (i) any Insurer or any
subsidiary or affiliate of each Insurer or (ii) any agent, broker, or other
intermediary, which agreements or arrangements arise out of or are related to
the Unicover Business.
(f) Based on advice of their respective counsel and actuaries, Reliance
and Reliance Group each believes that the Retrocession Settlement Amount and
other consideration to be given by the Retrocessionaires hereunder is present
fair equivalent value for the releases and other consideration to be given by
Reliance and Reliance Group hereunder.
(g) Except as set forth in Exhibit H, no Settlement Agreement that
Reliance has reached to date with any Insurer will lapse or is otherwise
terminable before January 21, 2000.
Section 3.02 Representations and Warranties of Retrocessionaires. Each
Retrocessionaire severally represents and warrants to each of Reliance and
Reliance Group that:
(a) Such Retrocessionaire has the corporate power to enter into this
Agreement and to carry out its obligations hereunder. The board of directors of
each Retrocessionaire has authorized the officer signing this agreement on
behalf of that Retrocessionaire to do so and evidence of such authority has been
provided to Reliance.
(b) This Agreement constitutes a valid and binding obligation of such
Retrocessionaire, enforceable in accordance with its terms. No other corporate
proceedings by such Retrocessionaire are necessary to authorize this Agreement
or the transactions contemplated hereby.
ARTICLE IV
CONDITIONS PRECEDENT
Section 4.01 Conditions Precedent to Certain Obligations of each
Retrocessionaire. The obligations of each Retrocessionaire under Sections 2.02,
2.03, and 2.04 of this Agreement shall
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<PAGE>
be subject to the satisfaction, as of the Closing Date, of the following
conditions (any or all of which may be waived in whole or in part by each
Retrocessionaire):
(a) Delivery to each Retrocessionaire of the Reliance Release duly
executed by Reliance and Reliance Group;
(b) Delivery to each Retrocessionaire of the Settlement Agreements
described in Section 2.01(c);
(c) Delivery to each Retrocessionaire of all certificates and documents
described in Section 2.05;
(d) Delivery to each Retrocessionaire of the Delphi Release duly
executed by Delphi, Reliance Standard Life, and Safety National;
(e) Delivery to each Retrocessionaire of copies of all agreements
pursuant to which Safety National or Reliance Standard Life paid Reliance as
described in Section 4.02(d) below, or pursuant to which any of Safety National,
Reliance Standard Life, or Delphi released Reliance, or Reliance released any of
Safety National, Reliance Standard Life, or Delphi from any claim arising out of
or related to the Unicover Business;
(f) Delivery to each Retrocessionaire of a certificate of an officer of
Reliance confirming that all conditions stated in Section 4.01(e) have been
satisfied;
(g) Delivery to each Retrocessionaire of copies of all agreements
pursuant to which Aon returned funds to Reliance as described in Section 4.02(e)
below, Aon paid Reliance as described in Section 4.02(f) below, or pursuant to
which Aon and Reliance or Reliance Group released each other from any claim
arising out of or related to the Unicover Business;
(h) Delivery to each Retrocessionaire of a certificate of an officer of
Reliance confirming that all conditions stated in Section 4.01(g) have been
satisfied; and
(i) Delivery to each Retrocessionaire of a certificate of an officer of
Reliance confirming that all conditions stated in Sections 4.02(d), 4.02(e), and
4.02(f) have been satisfied.
Section 4.02 Conditions Precedent to Certain Obligations of Reliance
and Reliance Group. The obligations of Reliance and Reliance Group under
Sections 2.01(c), 2.03, 2.04, and 2.05 of this Agreement shall be subject to the
satisfaction, as of the Closing Date, of the following conditions (any or all of
which may be waived in whole or in part by Reliance or Reliance Group):
(a) Receipt by Reliance of the Retrocession Settlement Amount;
(b) Delivery to Reliance and Reliance Group of the Reliance Release
duly executed by each Retrocessionaire;
(c) Delivery to Reliance and Reliance Group of the Delphi Release duly
executed by each Retrocessionaire;
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<PAGE>
(d) Receipt by Reliance from Safety National and Reliance Standard Life
of substantially all of the funds, fees, or other compensation or consideration
that Safety National and Reliance Standard Life received relating to the
Reinsurance Agreements (which funds, fees, or other compensation or
consideration Reliance estimates to have been $58,113,432);
(e) Receipt by Reliance from Aon of any funds Aon may be holding in any
capacity (including broker for Insurers, broker of the Asserted Retrocession
Agreements, but only to the extent applicable to the Reinsurance Agreements, and
broker of the Quota Share Retrocession Agreement) relating to the Reinsurance
Agreements (which funds Reliance estimates to be $31,123,084); and
(f) Receipt by Reliance from Aon of substantially all of the
commissions, fees, brokerage, or other compensation or consideration that Aon
received in any capacity (including broker for Insurers, broker of the Asserted
Retrocession Agreements, but only to the extent applicable to the Reinsurance
Agreements, and broker of the Quota Share Retrocession Agreement) in connection
with the Reinsurance Agreements (which commissions, fees, brokerage, or other
compensation or consideration Reliance estimates to have been $25,639,383).
ARTICLE V
TERMINATION OF ASSERTED RETROCESSION AGREEMENTS;
DISMISSAL OF PROCEEDINGS
Section 5.01 Termination of Agreements. Effective upon payment in full
of the Retrocession Settlement Amount, and without execution or delivery of any
other document: (a) no Retrocessionaire shall have any further obligation
whatsoever (including, but not limited to, obligations in law or equity, which
exist or may in the future exist, whether known or unknown to any party, and
whether concealed or unconcealed) to Reliance or Reliance Group arising out of
or related to any of the Asserted Retrocession Agreements or any other agreement
arising out of or related to Unicover Business, other than this Agreement,
except that this Section 5.01 does not extend to or affect any liabilities or
obligations of Phoenix or Cologne Life with respect to reinsurance business
ceded by Reliance to the Unicover Occupational Accident Reinsurance Pool; and
(b) Reliance and Reliance Group shall have no further obligation whatsoever
(including, but not limited to, obligations in law or equity, which exist or may
in the future exist, whether known or unknown to any party, and whether
concealed or unconcealed) to any Retrocessionaire under any of the Asserted
Retrocession Agreements.
Section 5.02. Dismissal of Proceedings. Immediately after the Closing,
Reliance, Sun Life, and Phoenix will cause their respective attorneys to
execute, deliver, and file documents substantially in the form attached as
Exhibit I.
ARTICLE VI
SHARING OF COSTS AND RECOVERIES
Section 6.01 Definitions.
9
<PAGE>
(a) The "Measured Cost" as of any given date shall mean (i) the total
cash consideration that Reliance has then actually paid in consideration of all
Settlement Agreements, minus (ii) $56,523,831, and minus (iii) the Reliance
Compensation.
(b) "Reliance Compensation" shall mean all funds, fees, and other
compensation or consideration that Reliance received in connection with the
Reinsurance Agreements, minus amounts Reliance actually paid to Unicover in
connection with the Reinsurance Agreements (but amounts that Reliance has set
aside in a segregated account shall not be deemed paid to Unicover unless and
until Unicover actually receives them), minus amounts Reliance actually paid and
the Retrocessionaires or their managing general underwriters actually received
in connection with the Asserted Retrocession Agreements, minus amounts that
Reliance actually paid and that Aon or Rattner actually received as
retrocessional commissions, fees, brokerage or other compensation or
consideration in connection with the Asserted Retrocession Agreements.
(c) In the event and to the extent that Reliance or Reliance Group
recovers from Aon, Rattner, or Unicover, whether by agreement, litigation,
arbitration, settlement, or otherwise, any amounts on account of or otherwise
reasonably allocable to any Reinsurance Agreement or the Asserted Retrocession
Agreements, then the recovered amount, net of reasonable attorneys fees and
other out-of-pocket expenses of collection actually paid to third parties, shall
be: (i) if recovered from Aon, a "Reliance Recovered Amount from Aon," (ii) if
recovered from Rattner, a "Reliance Recovered Amount from Rattner," and (iii) if
recovered from Unicover, a "Reliance Recovered Amount from Unicover" (but
amounts that Reliance has set aside in a segregated account and not actually
paid to Unicover shall in no event be deemed a Reliance Recovered Amount from
Unicover), provided that the Reliance Recovered Amount from Aon shall not exceed
$13,705,357, the Reliance Recovered Amount from Rattner shall not exceed the
total amount that Reliance actually paid and that Rattner actually received as
retrocessional commissions, fees, brokerage or other compensation or
consideration in connection with the Asserted Retrocession Agreements, and the
Reliance Recovered Amount from Unicover shall not exceed the total amount that
Reliance paid Unicover in fees and other compensation related to the Reinsurance
Agreements. "Reliance Recovered Amounts" shall be the sum of the "Reliance
Recovered Amount from Aon," the "Reliance Recovered Amount from Rattner," and
the "Reliance Recovered Amount from Unicover."
(d) In the event and to the extent that any Retrocessionaire recovers
from Aon, Rattner, or Unicover, whether by agreement, litigation, arbitration,
settlement, or otherwise, any amounts on account of or otherwise reasonably
allocable to any Reinsurance Agreement or the Asserted Retrocession Agreements,
but as to the latter only to the extent applicable and reasonably allocable to
the Reinsurance Agreements, then the recovered amount, net of reasonable
attorneys fees and other out-of-pocket expenses of collection actually paid to
third parties, shall be (i) if recovered from Aon, a "Retrocessionaires
Recovered Amount from Aon," (ii) if recovered from Rattner, a "Retrocessionaires
Recovered Amount from Rattner," and (iii) if recovered from Unicover, a
"Retrocessionaires Recovered Amount from Unicover," provided that the
Retrocessionaires Recovered Amount from Aon shall not exceed $13,705,357 minus
the Reliance Recovered Amount from Aon; the Retrocessionaires Recovered Amount
from Rattner shall not exceed the total amount that Reliance actually paid and
that Rattner actually received as retrocessional commissions, fees, brokerage or
other compensation or consideration in connection with the Asserted Retrocession
Agreements minus the Reliance Recovered Amount
10
<PAGE>
from Rattner; and the Retrocessionaires Recovered Amount from Unicover shall not
exceed the total amount that Reliance paid Unicover in fees and other
compensation related to the Reinsurance Agreements minus the Reliance Recovered
Amount from Unicover. "Retrocessionaires Recovered Amounts" shall be the sum of
the "Retrocessionaires Recovered Amount from Aon," the "Retrocessionaires
Recovered Amount from Rattner," and the "Retrocessionaires Recovered Amount from
Unicover."
Section 6.02 Sharing of Costs and Recoveries by Reliance and the
Retrocessionaires. On or before the 15th day after the end of each calendar
quarter starting with the quarter ending March 31, 2000, and for as long as
necessary thereafter, Reliance will pay the Retrocessionaires and the
Retrocessionaires will pay Reliance amounts computed in accordance with
Schedules I, II, and III to this Agreement. On each of those dates, whether or
not a payment is required, each party will submit to each other party a
certificate of a responsible officer attesting to the correct amount of the
then-current Measured Cost, Reliance Recovered Amounts, Retrocessionaires
Recovered Amounts, as applicable; providing all pertinent underlying amounts and
calculations; and attaching copies of all pertinent underlying documentation
(for example, agreements, awards, or judgments under which amounts may have been
recovered from Aon, Rattner, or Unicover).
Section 6.03 Allocation of Costs and Recoveries between the
Retrocessionaires. The total payments by all Retrocessionaires to Reliance under
Section 6.02 and Schedules I, II, and III shall be divided between the
Retrocessionaires in the same proportion as the Retrocessionaires Recovered
Amounts that each Retrocessionaire recovered shall bear to the total
Retrocessionaires Recovered Amounts that all Retrocessionaires recovered, in
each case irrespective of whether recovered from Aon, Rattner, or Unicover, but
for purposes of this Section 6.03 Retrocessionaires Recovered Amounts shall be
computed without regard to the proviso in Section 6.01(d). Payments by Reliance
to the Retrocessionaires up to the total amount that all Retrocessionaires have
then paid Reliance under Section 6.02 shall be made so as to achieve the
proportion described in the previous sentence, and any payments by Reliance to
the Retrocessionaires above that amount shall be made in the proportions stated
in Exhibit J.
ARTICLE VII
AUDITS; COOPERATION; ACCESS TO DOCUMENTS AND EMPLOYEES
Section 7.01 Audit of Reliance Documents Relating to Settlement
Agreements. The Retrocessionaires shall have the right to conduct reasonable
audits, no less often than annually, of all documents in the possession,
custody, or control of Reliance or Reliance Group that relate in any way to any
Settlement Agreement, the consideration therefor, any agreement, arrangement, or
understanding described in Section 2.01(b), or Reliance's payment under any
Settlement Agreement. Reliance shall not execute any Settlement Agreement the
terms of which do not permit Reliance to disclose to the Retrocessionaires all
documents relating thereto, as required by this Section 7.01. Reliance and
Reliance Group shall make all such documents available for inspection and
copying by the Retrocessionaires or their agents during normal business hours at
its offices in New York, New York.
Section 7.02 Cooperation and Access to Employees.
11
<PAGE>
(a) Reliance and Reliance Group will extend to each Retrocessionaire,
at the expense of Reliance or Reliance Group (except that each Retrocessionaire
agrees to reimburse Reliance or Reliance Group for all reasonable out-of-pocket
expenses for travel and other incidentals, but not for compensation of its
employees, that Reliance or Reliance Group incurs at the request of that
Retrocessionaire), all reasonable cooperation in connection with any litigation
or arbitration relating to the Unicover Business. This cooperation will include,
but not be limited to, making available to each Retrocessionaire (but where
reasonably practicable Sun and Phoenix shall participate jointly), for a
reasonable time, each employee of Reliance or Reliance Group (other than the
attorneys named on a separate schedule agreed to by the parties, each of whom
Reliance and Reliance Group represent to be a member of the legal departments of
Reliance or Reliance Group) with knowledge of matters reasonably relevant to the
Unicover Business (excluding the negotiation and consummation of this
Agreement), upon reasonable notice and during normal business hours, to be
interviewed and to prepare for and participate in arbitration or litigation
proceedings relating to the Unicover Business. Reliance and Reliance Group
further agree that they will cooperate with any reasonable efforts of the
Retrocessionaires to obtain access to former employees of Reliance or Reliance
Group regarding such arbitration or litigation proceedings. This cooperation
will also include promptly giving each Retrocessionaire copies of all documents
described in Section 2.05(b) that come into the possession, custody, or control
of Reliance or Reliance Group after the date of this Agreement, subject to the
same requirements, conditions, and limitations set forth in Section 2.05(c).
(b) Reliance and Reliance Group will extend to each Retrocessionaire
all reasonable cooperation in any litigation, arbitration, or other proceeding
that any Retrocessionaire may reasonably think necessary or desirable to enforce
any right of Reliance or Reliance Group to documents in the possession, custody,
or control of Aon, Rattner, or Unicover. This cooperation shall include, but not
be limited to, the execution of powers of attorney designating each
Retrocessionaire, or any of them, to prosecute such proceedings against Rattner
or Unicover on behalf of Reliance and Reliance Group and assignments to each
Retrocessionaire, or any of them, of all rights (to the maximum extent
assignable) of Reliance and Reliance Group to documents in the possession,
custody, or control of Aon, Rattner, or Unicover. If documents are received from
Aon, Rattner, or Unicover as a result of any such proceeding, Reliance and
Reliance Group shall immediately give each Retrocessionaire copies of all such
documents unless, in the reasonable opinion of Paul, Weiss, Rifkind, Wharton &
Garrison, such disclosure would violate a confidentiality agreement that is
binding upon Reliance. In the event such a determination is made by Paul, Weiss,
Rifkind, Wharton & Garrison, Reliance shall promptly identify the applicable
confidentiality agreement to each Retrocessionaire and shall promptly provide a
log to each Retrocessionaire of each confidential document, stating for each
such document the information customarily stated in privilege logs.
(c) Reliance and Reliance Group will not enter into any confidentiality
agreement that would reduce or limit their rights to disclose any documents to
the Retrocessionaires.
ARTICLE VIII
CONFIDENTIALITY; PUBLICITY
Section 8.01 Confidentiality.
12
<PAGE>
(a) This Agreement and its terms shall remain confidential and shall
not be disclosed to any person other than the parties hereto, provided, however,
that each party may disclose this Agreement and its terms (i) to its directors,
officers, employees, and attorneys, and those of its parent company, who have a
legitimate need to know such information, (ii) to its accountants and other
professional advisors who have a legitimate need to know such information, (iii)
to rating agencies, (iv) to regulatory agencies, (v) as required by law
(including, without limitation, pursuant to any insurance or securities law or
any legal, regulatory or legislative proceeding), but only after giving the
other parties notice of such proposed disclosure as far in advance as practical,
and (vi) in the case of the Retrocessionaires only, to their retrocessionaires
on the Unicover Business. The disclosing party shall inform the person or entity
obtaining this Agreement or any information about its terms of the confidential
nature of the terms of this Agreement and its terms and the need to maintain
that confidentiality. In the event that disclosure of the Agreement itself is
made pursuant to subsections (ii) or (vi) above, the disclosing party shall
first obtain a signed confidentiality agreement substantially in the form of
Exhibit K to this Agreement. In the event that disclosure of the Agreement
itself is made pursuant to subsections (iv) or (v) above, the disclosing party
will make reasonable efforts to file any copy of this Agreement under seal.
(b) Reliance and each Retrocessionaire may disclose material terms of
this Agreement, but not a copy of the Agreement itself, to Aon, Delphi, Safety
National, or Reliance Standard, but only for the purpose of obtaining from the
recipient the return of funds, fees, commissions, brokerage, or other
compensation or consideration in respect of or otherwise attributable to the
Reinsurance Agreements, provided that the proposed recipient has first signed a
confidentiality agreement substantially in the form of Exhibit L.
(c) With the prior approval of the Retrocessionaires, which they will
not unreasonably withhold, Reliance may disclose material terms of this
Agreement, but not a copy of the Agreement itself, to Insurers or brokers for
Insurers, but only for the purposes of negotiating Settlement Agreements or of
obtaining from the recipient the return of funds, fees, commissions, brokerage,
or other compensation or consideration in respect of or otherwise attributable
to the Reinsurance Agreements, provided that the proposed recipient has first
signed a confidentiality agreement substantially in the form of Exhibit L.
(d) Reliance Group may disclose either the terms or a copy of this
Agreement to any potential material investor in or acquirer of Reliance Group
(i) that is conducting a due diligence investigation of Reliance Group, (ii)
that has signed a confidentiality agreement with Reliance Group that covers this
Agreement and the terms thereof and obligates the recipient to use that
information for the sole purpose of evaluating a possible material investment in
or acquisition of Reliance Group, and (iii) to which Reliance Group has
disclosed information that is, in the reasonable opinion of the chief financial
officer of Reliance Group, Reliance Group's own most sensitive and confidential
information.
Section 8.02 Publicity.
(a) Each party to this Agreement, on behalf of itself and its
respective subsidiaries, directors, officers, and employees, covenants that it
shall not issue any press release or make any other statement that contains or
might reasonably be deemed to imply any
13
<PAGE>
disparaging remarks concerning another party to this Agreement or make
statements that present another party to this Agreement in a negative context
with respect to the Reinsurance Agreements, Settlement Agreements, Asserted
Retrocession Agreements, or Unicover Business, provided, however, that nothing
herein will prohibit any party from making any statement to the extent that such
party reasonably determines upon advice of counsel that such statement is
required by law.
(b) If any party to this Agreement contemplates any public release or
announcement about this Agreement, the party contemplating such a release or
announcement will send the other parties to this Agreement the text of the
proposed release or announcement a reasonable time in advance of its issuance.
ARTICLE IX
GENERAL PROVISIONS
Section 9.01 Termination. In the event that, as of 11:59 p.m., Eastern
Standard Time, on January 21, 2000, any condition precedent stated in Section
4.01 has not been either satisfied or waived by each Retrocessionaire, then any
Retrocessionaire may terminate this Agreement by notice to all other parties. In
the event that, as of 11:59 p.m., Eastern Standard Time, on January 21, 2000,
any condition precedent stated in Section 4.02 has not been either satisfied or
waived by each of Reliance and Reliance Group, then either Reliance or Reliance
Group may terminate this Agreement by notice to all other parties. If any party
so terminates this Agreement, then (i) this Agreement shall terminate and the
rights, duties, and obligations hereunder of the parties hereto and of their
respective directors, officers, employees, agents, representatives, successors
or assigns, shall be void ab initio and (ii) this Agreement shall be deemed to
have been made solely for purposes of settlement, and no party shall refer to
this Agreement or the fact that any party executed it in any subsequent legal
proceeding. Notwithstanding the foregoing, (x) no termination of this Agreement
pursuant to this Section 9.01 shall eliminate any liability of the parties
hereto with respect to any breaches hereof arising before such termination and
(y) the provisions of Section 8.01 of this Agreement relating to the obligations
of the parties hereto to keep information confidential shall survive the
termination of this Agreement.
Section 9.02 Entire Agreement. This Agreement and its schedules and
exhibits constitutes the entire agreement between the parties with respect to
the transactions contemplated hereby, and supersedes all prior agreements and
understandings, written and oral, among the parties with respect to the subject
matters hereof. Any amendment or modification hereto shall be null and void
unless made in writing by amendment to this Agreement and executed by all
parties.
Section 9.03 Governing Law. This Agreement shall be governed by,
interpreted under and construed in accordance with New York law, without regard
to conflicts or choice of laws principles.
Section 9.04. Arbitration.
14
<PAGE>
(a) Any dispute or claim arising out of or relating to this Agreement,
including its formation and validity, shall be referred to arbitration.
Arbitration shall be initiated by the delivery, by mail, facsimile, or other
reliable means, of a written demand for arbitration by one party or the other.
The arbitration shall be held in New York, New York, or such other place as the
parties may mutually agree.
(b) For purposes of any arbitration between one or both of Reliance and
Reliance Group, on the one hand, and one or more of the Retrocessionaires, on
the other hand, Reliance and Reliance Group shall be one party and the
Retrocessionaires together shall be one party.
(c) Arbitration shall be conducted before a three-person Arbitration
Panel appointed as follows. Each party shall appoint one arbitrator, and the two
arbitrators so appointed shall then appoint an impartial Umpire before
proceeding. If either party fails to appoint an arbitrator within thirty (30)
days after it receives a written request by the other party to do so, the other
party may appoint an arbitrator for it. Should the two party appointed
arbitrators fail to choose an Umpire within thirty (30) days of the appointment
of the second arbitrator, each arbitrator shall propose three names, of whom the
other shall strike two, and the decision shall be made from the remaining two by
drawing lots. The arbitrators and Umpire shall be present or former executives
or officers of insurance or reinsurance companies or shall be arbitrators
certified by ARIAS-U.S. The arbitrators and Umpire shall have no financial
interest in the outcome of the arbitration.
(d) The arbitrators and Umpire shall interpret this Agreement under New
York law. They may permit or order such discovery, if any, as they think
appropriate and may conduct the hearing of the arbitration by written
submissions, oral testimony, or any combination thereof as they think
appropriate.
(e) The decision of a majority of the Arbitration Panel shall be final
and binding, except to the extent otherwise provided in the Federal Arbitration
Act. The Arbitration Panel shall render its award in writing. Judgment upon the
award may be entered in any court having jurisdiction, pursuant to the Federal
Arbitration Act. Unless the Arbitration Panel orders otherwise, each party shall
pay: (1) the fees and expenses of its own arbitrator, and (2) an equal share of
the fees and expenses of the Umpire and of the other expenses of the
arbitration.
(f) It is the intent and desire of the parties that any arbitration
under this Section 9.04 should be concluded and an award rendered as
expeditiously as reasonably possible and that the arbitrators should schedule
and conduct the arbitration accordingly.
Section 9.05 Counterparts. This Agreement may be executed in two or
more counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument. This Agreement shall
become effective when one or more counterparts have been signed by each party
hereto and delivered to the other parties hereto. For purposes of the foregoing,
a facsimile of a signed counterpart shall constitute an original, and delivery
of a facsimile signature shall be effective.
Section 9.06 No Third Party Beneficiaries. Nothing in this Agreement is
intended or shall be construed to give any person, other than the parties
hereto, any legal or equitable right, remedy or claim under or in respect of
this Agreement or any provision contained herein.
15
<PAGE>
Section 9.07 Assignment. This Agreement shall be binding upon and inure
to the benefit of the parties hereto and their respective successors and assigns
and legal representatives. This Agreement is not assignable except by operation
or law or by mutual written consent of the parties.
Section 9.08 Waivers. The terms of this Agreement may be waived only by
a written instrument signed by the party waiving compliance. No delay on the
part of any party in exercising any right, power or privilege hereunder shall
operate as a waiver thereof; nor shall any waiver on the part of any party of
any right, power, privilege, nor any single or partial exercise of any such
right, power or privilege, preclude any further exercise thereof or the exercise
of any other such right, power or privilege.
Section 9.09 Currency. All payments hereunder shall be in United States
Dollars. All monetary amounts referred to herein are in United States Dollars.
All reports and accounts hereunder shall be rendered in United States Dollars.
Section 9.10 Headings. The headings in this Agreement are for the
convenience of reference only and shall not affect its interpretation.
Section 9.11 Preparation. This Agreement is the product of informed
arms-length negotiations between the parties hereto and competent counsel of
their choice, and may involve compromises of previously asserted positions. This
Agreement has been jointly prepared by the parties hereto and the terms hereof
will not be construed in favor of or against any party to this Agreement by
reason of its participation in such preparation. By executing this Agreement, no
party is conceding liability, and this Agreement shall not be construed as an
admission of any kind relating to any claim, liability or obligation relating to
the Asserted Retrocession Agreements.
Section 9.12 Notices. All notices, requests, demands, approvals and
other communications under this Agreement shall be in writing and shall be
delivered personally; by facsimile transmission; by certified, registered or
express mail, postage prepaid; or by a recognized overnight courier service. Any
such notice or other communication shall be deemed given upon actual delivery if
actually delivered during normal business hours, and at the beginning of the
next business day if actually delivered outside normal business hours, in each
case to the following addresses:
If to Reliance
or Reliance Group: Lowell Freiberg
Chief Financial Officer
Executive Vice President
Reliance Group Holdings
55 East 52nd Street, 29th Floor
New York, New York 10055
Tel: (212) 909-1160
Fax: (212) 909-1864
with copies to:
16
<PAGE>
Jeffrey A. Welikson, Esq.
Reliance National
77 Water Street, 21st Floor
New York, New York 10005
Tel: (212) 858-3862
Fax: (212) 858-9118
and
Howard E. Steinberg, Esq.
Reliance Group Holdings
55 East 52nd Street, 29th Floor
New York, New York 10055
Tel: (212) 909-1136
Fax: (212) 909-1241
and
Brad S. Karp, Esq.
Claudia Hammerman, Esq.
Paul, Weiss, Rifkind, Wharton
& Garrison
1285 Avenue of the Americas
New York, New York 10019
Tel: (212) 373-3000
Fax: (212) 757-3990
If to Sun Life: Sun Life Assurance Company of
Canada
150 King Street West
Toronto, Ontario, M5H 1J9
Canada
Attention: Senior Vice-President
and Chief Legal Officer
Tel: (416) 979-4024
Fax: (416) 260-8318
and
Attention: Vice President &
General Manager, Reinsurance
Tel: (416) 979-6059
Fax: (416) 585-9908
with copies to:
17
<PAGE>
Peter R. Chaffetz, Esq.
Chadbourne & Parke LLP
30 Rockefeller Plaza
New York, New York 10112
Tel: (212) 408-2335
Fax: (212) 541-5369
If to Phoenix: Dona D. Young, Esq.
Phoenix Home Life Mutual
Insurance Company
One American Row
Hartford, Connecticut 06115
Tel: (860) 403-5967
Fax: (860) 403-5543
with copies to:
Alan J. Levin, Esq.
Edwards & Angell, LLP
90 State House Square
Hartford, Connecticut 06103
Tel: (860) 541-7747
Fax: (860) 527-4198
If to Cologne Life: Charles F. Barr, Esq.
Cologne Life Reinsurance Company
Financial Centre
Post Office Box 10351
Stamford, Connecticut 06904-2351
Tel: (203) 328-5506
Fax: (203) 328-5877
with copies to:
David J. Grais, Esq.
Gibson, Dunn & Crutcher LLP
200 Park Avenue
18
<PAGE>
New York, New York 10166
Tel: (212) 351-4087
Fax: (212) 351-5229
Any party may, by notice given in accordance with this Agreement to the
other parties, designate another address, fax number or person for receipt of
notices hereunder.
IN WITNESS WHEREOF, and intending to be legally bound, the parties have
executed this Agreement by their duly authorized representatives on the date(s)
so indicated.
RELIANCE INSURANCE COMPANY
By: /s/ Lowell C. Freiberg
--------------------------
Name: Lowell C. Freiberg
Title: Senior Vice-sPresident
Date: January 7, 2000
RELIANCE GROUP HOLDINGS, INC.
By: /s/ Lowell C. Freiberg
--------------------------
Name: Lowell C. Freiberg
Title: Executive Vice President
Date: January 7, 2000
SUN LIFE ASSURANCE COMPANY OF CANADA
By: /s/ Thomas A. Bogart By: /s/ Robin E. Fitzgerald
-------------------------- --------------------------
Name: Thomas A. Bogart Name: Robin E. Fitzgerald
Title: SVP & Chief Legal Officer Title: VP & GM, Reinsurance
Date: January __, 2000 Date: January __, 2000
PHOENIX HOME LIFE MUTUAL INSURANCE COMPANY
By: /s/ Dona D. Young
--------------------------
Name: Dona D. Young
Title: Executive Vice President, Individual Insurance and General Counsel
Date: January 7, 2000
AMERICAN PHOENIX LIFE AND REASSURANCE COMPANY
By: /s/ David W. Searfoss
--------------------------
19
<PAGE>
Name: David W. Searfoss
Title: Vice President and Chief Financial Officer
Date: January 7, 2000
COLOGNE LIFE REINSURANCE COMPANY
By: /s/ Charles F. Barr
--------------------------
Name: Charles F. Barr
Title: Assistant General Counsel
Date: January 7, 2000
20
<PAGE>
Exhibit 13.1
1999 Annual Report
[Reliance logo - oval with firemark
(fire hydrant wrapped with fire
hose and "1817" underneath).]
Reliance Group
Holdings, Inc.
<PAGE>
About the Company
Reliance Group Holdings, Inc. (NYSE: REL) is a leading property and casualty
insurer with specialized capabilities and coverages, and a leader in the
business-to-business Internet insurance marketplace. In addition to its core
property and casualty insurance operations, Reliance has a full-service
information technology consulting company with growing e-solutions capabilities.
<PAGE>
To Our Shareholders
Reliance Group's 1999 results were unacceptable. Reliance had an operating
loss of $318.3 million, or $2.79 per diluted share, including a $111.0 million
after-tax charge for Unicover settlements and catastrophe losses of
$48.6 million after tax.
We have taken aggressive steps to eliminate unprofitable business,
strengthen management, build capital and enhance productivity. As a result of
these forceful actions and because of the underlying soundness of our core
business, we expect to achieve substantially improved operating performance in
2000. Reliance will be stronger, more focused and better equipped to deliver
outstanding results for our customers and value to our shareholders.
- --------------------------------------------------------------------------------
Reliance will be stronger, more focused and better equipped to deliver
outstanding results for our customers and value to our shareholders.
- --------------------------------------------------------------------------------
In the second quarter of 1999, we identified deteriorating
profitability in certain lines of business. Working with Tillinghast-Towers
Perrin, a highly respected independent actuarial firm, we conducted a
comprehensive actuarial review of all of our insurance profit centers. Following
this review, we took a pretax charge to operating income of $330.4 million, to
increase reserves for policies written in prior years and for the cost of ceding
losses to reinsurers. We targeted for cancellation or nonrenewal more than
$300 million in annual net written premiums of unprofitable business. This
runoff business generated $539.1 million in 1999 underwriting losses.
We will continue to closely monitor market conditions and trends to
ensure that we catch adverse developments--and take appropriate action--as soon
as possible.
Unicover Settlement
The Unicover settlement in January 2000 is one of the most important recent
steps we took to eliminate uncertainty and restore confidence in our company.
This situation involved a reinsurance arrangement that was part of a workers'
compensation insurance facility created and managed by Unicover Managers, Inc.
Reliance acted as a fronting
1
<PAGE>
reinsurance carrier, which meant we reinsured these policies with other
insurance companies that assumed the risk. However, those other insurers sought
to rescind their contracts, which would have deprived Reliance of its
reinsurance coverage, thereby creating significant financial uncertainty for our
company. Although this settlement cost us $111 million after tax, by entering
into it, we avoided protracted arbitration proceedings and litigation with our
reinsurers, and lifted a cloud that had been casting a long shadow on our credit
ratings and our competitive position in the market. Reliance believes it was
defrauded by Unicover Managers, and has commenced legal proceedings to recover
the amount paid to settle this matter, as well as additional damages.
- --------------------------------------------------------------------------------
Reliance has taken forceful action to build its capital to a level that
engenders the confidence of customers, producers, rating agencies and investors.
- --------------------------------------------------------------------------------
Capital
In addition to addressing the operating issues that have undermined our
profitability, Reliance has taken forceful action to build its capital to a
level that engenders the confidence of customers, producers, rating agencies and
investors.
In February 2000, we reached an agreement in principle to sell our
surety business to Travelers Property Casualty Corp. for $580 million in cash.
This transaction, which we expect to close in the second quarter, will result in
an after-tax GAAP gain of approximately $250 million and an after-tax statutory
gain of approximately $300 million.
On completion of this transaction and as a result of a substantial
increase in the value of the company's investment portfolio since year-end 1999,
Reliance would have a pro forma statutory surplus of approximately $1.7 billion
and a GAAP book value of approximately $1.4 billion, or $12 per share. This
compares with a statutory surplus of $1.2 billion and book value of $8.87 per
share on December 31, 1999. In addition, the company's debt to total
capitalization improves from 42% at year-end to 35% on a pro forma basis.
2
<PAGE>
- --------------------------------------------------------------------------------
Going forward, Reliance's goal is to build substantial additional capital and
bring the debt-to-capital ratio into the 25% to 30% range.
- --------------------------------------------------------------------------------
Reliance's bank group has extended from March 31, 2000, to August 31,
2000, the maturity of its $237.5 million credit. Reliance plans to complete a
comprehensive refinancing of its debt prior to that date.
In recognition of the progress we have already made, Standard & Poor's
has affirmed its ratings of Reliance, including its investment grade senior debt
rating. In addition, A.M. Best Co. has revised the status of Reliance Insurance
Group's A- (Excellent) rating to "under review with developing implications."
Going forward, Reliance's goal is to build substantial additional
capital and bring the debt-to-capital ratio into the 25% to 30% range. To help
achieve these goals in a timely fashion, the board of directors has suspended
the quarterly dividend payment on the company's common stock. The board will
review and evaluate the dividend policy after the company completes the
refinancing of its debt and achieves its financial and business objectives.
Discipline and Productivity
We have sought to make certain that we have the right policies, processes and
people in place, and to ensure that we have stronger controls on the type and
quality of business we write. At Reliance National, where most of the problems
occurred, we have eliminated unprofitable divisions and refocused the business
on its core competencies.
Throughout our organization, we are becoming more attuned to
marketplace risks and more efficient.
- --------------------------------------------------------------------------------
We expect to achieve approximately $80 million in annualized expense savings by
year-end 2000.
- --------------------------------------------------------------------------------
As a smaller, more focused company, Reliance intends to be leaner and
more productive. We expect to achieve approximately $80 million in annualized
expense savings by year-end 2000 by consolidating our corporate and business
units. This consolidation will eliminate duplicative and overlapping resources
and will more closely align the company's resources and capabilities to its
customers' needs.
3
<PAGE>
Strong Core Franchise
Reliance has distinctive competitive strengths. The value we bring to the
marketplace was demonstrated under the challenging circumstances of 1999 and
early 2000, when we were able to renew nearly 90% of the business we would
ordinarily expect to retain under business-as-usual market conditions. Customers
have repeatedly told us that they want to do business with Reliance because of
our singular strengths and capabilities.
- --------------------------------------------------------------------------------
Reliance has distinctive competitive strengths.
- --------------------------------------------------------------------------------
We have strong franchises in some of the industry's largest and most
attractive segments, such as risk management, directors and officers coverages,
the middle market, international and nonstandard personal auto insurance.
We are an e-commerce pacesetter. With a growing roster of products
delivered via the World Wide Web, including CyberComp(R), Umbrella Online and
business owners' policies, Reliance is a leader in the business-to-business
Internet insurance marketplace. In 1999, we established Point, Click & Bind as a
focal point for our e-commerce efforts. We plan to continue to break new ground,
serving customers faster and more efficiently through the World Wide Web, and to
maximize the value of our e-commerce business.
- --------------------------------------------------------------------------------
With a growing roster of products delivered via the World Wide Web, including
CyberComp(r), Umbrella Online and business owners' policies, Reliance is a
leader in the business-to-business Internet insurance marketplace.
- --------------------------------------------------------------------------------
Reliance is a proven business builder and innovator. Reliance has
developed a valuable international franchise; built a personal auto insurer with
a focus on the nonstandard segment; and brought such new products to the market
as liability insurance for companies' e-commerce systems and computer networks.
An emphasis on service excellence and tailored solutions has enabled
Reliance to build strong relationships throughout all of our markets.
RCG Information Technology
We also have successfully grown RCG Information Technology (RCG IT), our
computer technology consulting business. RCG IT has more than doubled revenues
since 1995 by focusing on value-added solutions.
4
<PAGE>
In 1999, revenues were $230.7 million, and pretax operating income was
$12.7 million, compared with $247.7 million and $19.4 million, respectively, in
1998. The decline was a result of decreasing demand for Y2K and mainframe
solutions. However, we expect growth and profitability to reaccelerate as RCG IT
offers a growing array of capabilities--including e-solutions, enterprise
resource planning and data warehousing systems--to corporations that have
successfully completed their year 2000 conversions and are now investing in a
new generation of technology. We will explore a range of strategic options to
maximize the value of this business to our shareholders.
- --------------------------------------------------------------------------------
RCG IT offers a growing array of capabilities, including e-solutions, enterprise
resource planning and data warehousing systems.
- --------------------------------------------------------------------------------
An Enhanced Management Team
We have made some very valuable additions to our management team.
Our board member of nearly 30 years, George Baker, has been named
president and chief executive officer of the company. Mr. Baker had been special
assistant to the chairman since November 1999, and has served as a director and
advisor to a number of corporations. Mr. Baker is providing us the benefit of
his top management experience, leadership and financial insight.
Saul Steinberg will continue as chairman of the board and will devote
more time to developing the company's e-commerce capabilities.
In addition, George (Terry) Van Gilder has been named president and
chief executive officer of Reliance Insurance Group, the company's combined
property and casualty insurance operations. In this position, Mr. Van Gilder
will lead the transformation and consolidation of Reliance's core property and
casualty insurance operations.
Mr. Van Gilder, who joined Reliance in October 1999, had a 24-year
career at Chubb Group of Insurance Companies. He served as Chubb's executive
vice president and chief underwriting officer. In this position, Mr. Van Gilder
had management responsibility for Chubb's domestic and international operations,
which generated $4 billion in premiums annually.
5
<PAGE>
Howard E. Steinberg, an executive vice president of Reliance Group, was
named Chief of Corporate Operations and a member of the board of directors. He
will work closely with Mr. Van Gilder to facilitate the strategic consolidation
of the company's insurance operations and corporate infrastructure.
Mr. Steinberg previously served as general counsel and corporate secretary.
In September 1999, Robert D. Simplot was named president and chief
executive officer of RCG Information Technology, following a 21-year career at
Unisys, where he was responsible for sales, marketing and solutions delivery in
the distributed computing services business throughout the United States and
Canada.
Conclusion
As managers and shareholders, we are profoundly dissatisfied with our 1999
performance. We are deeply committed to, and hard at work at, regaining your
confidence. The comprehensive plan we have been implementing to become a
stronger, more profitable, more focused company is beginning to produce the
intended results. We have the franchise, the people, the discipline and the
commitment to deliver exemplary, long-term performance to our shareholders.
- --------------------------------------------------------------------------------
Our best customers and producers stood behind us during a challenging year, and
we are deeply grateful for their support.
- --------------------------------------------------------------------------------
One of the lessons we learned during our annus horribilis is the value
our producers and customers place on the solutions and service we bring to the
marketplace. Our best customers and producers stood behind us during a
challenging year, and we are deeply grateful for their support. We also
appreciate the efforts of Reliance people around the world, who were undaunted
by the obstacles before them and performed with excellence and enthusiasm. They,
too, give us great confidence in the future.
/s/ Saul P. Steinberg /s/ George R. Baker
Saul P. Steinberg George R. Baker
Chairman of the Board President and Chief Executive Officer
March 15, 2000
6
<PAGE>
What Sets Reliance Apart from the Competition
Reliance is comprised of valuable franchises in property and casualty insurance
and information technology consulting. We are focused on our core competencies
and have compelling competitive strengths:
o Risk Management Know-how and demonstrated leadership serving large
corporations.
o D&O Expertise and consistent profitable performance providing liability
coverage for corporate directors and officers.
o A Strong Nationwide Presence, which enables us to excel in meeting the
needs of middle-market commercial customers.
o International Reach, including global coverage capabilities and an
in-country presence in targeted markets.
o Specialized Capabilities in excess and surplus lines, reinsurance and
nonstandard auto insurance.
o E-Commerce Innovation, which has made Reliance the leader in the
business-to-business Internet insurance marketplace.
o Information Technology Solutions, including end-to-end consulting
services and e-business solutions, provided by Reliance's RCG Information
Technology subsidiary.
7
<PAGE>
Risk Management Know-how
Reliance is a premier provider of casualty insurance coverages and risk
management services for corporate clients. We are a leader in the industry,
serving Fortune 1,000 companies and other large corporations with captive
insurance arrangements and customized, high-deductible policies. The flexibility
we have shown in structuring cost-effective risk management programs and in the
unbundling of risk management services continues to distinguish us in the
market. A culture of innovation keeps us at the forefront of new product
development. Reliance is also gaining recognition for a unique, integrated
benefits program that combines workers' compensation with disability and medical
stop-loss insurance to improve efficiency for employers in the administration of
coverage and the management of occupational and nonoccupational injury and
illness claims.
D&O Expertise
1999 marked the 12th consecutive year of profitable growth for Reliance's
directors and officers (D&O) insurance business. We have an outstanding
specialty lines franchise and are the nation's third largest provider of D&O
liability coverage. Our consistent track record reflects an unwavering
commitment to underwriting excellence, careful risk selection and the very best
claims handling practices. Our underwriters and claims
8
<PAGE>
professionals, many of whom are attorneys, work closely together to structure
coverage appropriately and to ensure prompt, effective claims resolution. Over
the years, we've proven that we have an astute understanding of complex
liability issues and the risks corporate directors and officers face. We build
relationships that last. Companies count on us for our experience, business
acumen, high-quality coverages and the superior level of service we provide.
With an extensive array of specialized management and professional liability
insurance products tailored for banks, financial service firms, and other public
and private companies, Reliance excels at delivering the essential protection
these businesses require.
Strong Nationwide Presence
Reliance has teams of underwriters, claims professionals and loss control
specialists located throughout the United States. Our nationwide branch office
network makes us a formidable competitor within the $47 billion middle market.
We deliver the locally based service that midsize companies want, while offering
a diverse portfolio of property and casualty insurance products that go far
beyond what regional carriers can offer. We distinguish ourselves in the
marketplace with custom-tailored coverages for midsize companies and a constant
focus on
9
<PAGE>
managing claims to achieve the best results. Customers value our product
diversity, our longevity in the business and the personalized service they
receive. With a strong middle-market franchise, Reliance is able to meet the
insurance needs of growing companies within this vital segment of our nation's
economy.
International Reach
Reliance is a global insurer with the resources to coordinate coverage for
multinational companies, as well as serve foreign customers locally. Since 1991,
we have increased our international presence by opening offices in select major
markets around the world. This strategy has worked very well for us, and we now
have an international network consisting of 22 offices in the United Kingdom,
continental Europe, Canada, Mexico, South America, South Africa and Asia. Our
European operations are the largest and most established, while our business in
emerging regions is growing steadily. In 1999, Reliance obtained a license to
sell property and casualty insurance and life insurance products in Brazil. This
paves the way for us to capture a share of the largest insurance market in South
America. In each country in which we operate, we offer special-
10
<PAGE>
ized capabilities and coverages that stand out from the competition. We identify
the most promising growth opportunities, and we stay focused on attractive
lines, such as directors and officers liability insurance, professional
liability and excess casualty coverages. Our experienced, in-country personnel
understand the nuances of the local marketplace and take a disciplined approach
to building new business.
Specialized Capabilities
There is no one-size-fits-all approach to business at Reliance. We determine the
right strategies and skills for each particular market.
Reliance has been successful in excess and surplus lines by developing
specialized coverages for a wide array of professional liability exposures, and
by being first to market with such products as employment practices liability
insurance, network computer liability insurance, and insurance that helps
mitigate the risks associated with mergers and acquisitions.
In our reinsurance business, we have concentrated primarily on casualty lines,
reinsuring lower layers, such as the first $1 million of coverage. We are
selective and target niches that are less competitive and afford greater profit
potential. In turn, our underwriting and actuarial services are highly valued by
our clients, which include small and midsize insurance
11
<PAGE>
companies and the specialty divisions of larger insurers. Whether structuring
coverage for groups of risks under custom-tailored treaties or providing
facultative reinsurance for individual risks, we demonstrate an in-depth
understanding of the business, which few can match.
Reliance has also made its mark in personal auto insurance. We entered
the market in 1996 with a focus on the nonstandard segment, and in 1999 we had
$346 million in net premiums written. We now offer personal auto insurance in 18
states. Reliance provides auto insurance coverage to consumers through more than
8,800 independent insurance agents and via the Internet. Reliance is well
positioned for success in this market.
E-Commerce Innovation
The Internet is transforming the way the entire world does business. From
facilitating instantaneous communication to enabling products to be sold with a
few simple keystrokes, the World Wide Web is setting new standards for
performance and productivity. Those companies that harness the power of web
technology and use it effectively to gain a competitive advantage will realize
the greatest rewards. Reliance was one of the first insurers to view the
Internet as an enabler--a revolutionary new tool that could help us
substantially decrease the amount of paperwork we have to process, reduce
frictional costs and
12
<PAGE>
lower overhead expenses. We created an online business, CyberComp(R), based on
this premise. In 1997, our CyberComp operation was the first to quote and bind
workers' compensation insurance over the Internet.
Today, we are the leading business-to-business Internet insurer.
CyberComp generated $146 million in gross premiums written in 1999, up from $81
million in 1998. More than 1,500 insurance agents are online with CyberComp in
43 states.
Reliance has a rapidly growing portfolio of Internet-based insurance
coverages designed for small businesses, including CyberComp workers'
compensation, the Umbrella Online product that we introduced in 1999 and a
Business Owner's Policy--eBOP(sm)--which we launched in early 2000.
Our highly efficient electronic system enables agents and brokers to
get price quotes and obtain coverage for their clients faster and easier than
ever before. Transactions can be completed online in a matter of minutes, while
traditional insurers can take up to two weeks to process an application. Every
electronic submission Reliance receives is analyzed by a sophisticated computer
program, which ensures that business is written in accordance with prescribed
underwriting guidelines.
We intend to further our e-commerce strategy with Point, Click & Bind,
a new Reliance company that will market our growing array of online insurance
coverages. We will have a distinct brand on the World Wide Web and be better
positioned to capitalize on new opportunities in the burgeoning e-commerce
13
<PAGE>
arena. We are also exploring a full range of alternatives to maximize the value
of our e-commerce operations for Reliance shareholders.
Beyond the online sales of insurance, Reliance is utilizing the
Internet to enhance service and deliver added value. We have created private
portals where agents and brokers can access product descriptions, underwriting
criteria, coverage applications, policy forms and other important data.
Producers and customers can e-mail us and get quick responses. We are posting
loss control tips and billing information online, and we have an Internet-based
risk management system that provides our insureds and producers with real-time
claims information. This system, Insight RMS, was recognized in 1999 as one of
the top 10 innovations in the InfoWorld 100 listing of technology solutions.
Going forward, Reliance will have an even stronger presence in the e-commerce
marketplace, along with greater online capabilities, which will enable us to
retain quality business, attract new customers and expand our producer base.
Information Technology Solutions
Reliance's RCG Information Technology (RCG IT) subsidiary is a $231 million IT
consulting company. We transformed a small computer staffing firm into a leading
full-service provider of technology-based solutions for Fortune 1,000 companies
and other major corporations. RCG IT has consultants in 21 offices
14
<PAGE>
nationwide, as well as offshore programming resources in Asia. RCG IT is
focusing on opportunities in the e-commerce arena--a market with a compound
annual growth rate of more than 50%. RCG IT offers a full range of technology
solutions, from the development of web-enabled architecture fully integrated
with back-office and front-office systems, to the customization and optimization
of Enterprise Resource Planning (ERP) software. RCG IT also has a successful
data warehousing practice and is developing new capabilities in Customer
Relationship Management (CRM), designing system interfaces that enable companies
to deal more effectively with their clients. Working closely with SAP, Oracle,
Microsoft and Siebel, RCG IT is able to leverage its skills in the latest
technologies to serve a broad spectrum of clients in financial services,
telecommunications, pharmaceuticals, the oil and gas industry and other business
sectors. As more companies seek to outsource various IT functions, such as data
management and the maintenance of legacy systems, RCG IT is well equipped to
take on these assignments.
15
<PAGE>
Reliance Group Holdings, Inc.
1999 Financial Information
16
<PAGE>
Reliance Group Holdings, Inc. and Subsidiaries
SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31 1999 1998 1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
(In thousands)
INCOME STATEMENT DATA:
REVENUES:
Property and casualty insurance
Premiums earned $ 2,503,981 $ 2,304,280 $ 1,947,016 $ 1,800,854 $1,774,591
Net investment income 286,420 294,743 263,981 257,133 247,343
Gain on sales of investments 63,018 108,535 71,501 49,264 27,381
Gain on sales of subsidiaries(1) - 194,080 - - -
--------------------------------------------------------------------------
2,853,419 2,901,638 2,282,498 2,107,251 2,049,315
Title insurance(1) - 144,713 896,332 810,958 701,622
Information technology consulting 230,654 247,749 191,886 136,709 106,443
Other 69,183 75,020 71,920 35,669 48,607
--------------------------------------------------------------------------
$ 3,153,256 $ 3,369,120 $ 3,442,636 $ 3,090,587 $2,905,987
--------------------------------------------------------------------------
--------------------------------------------------------------------------
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE
GAIN ON SALES OF INVESTMENTS AND SUBSIDIARIES,
INCOME TAXES AND EQUITY IN INVESTEE COMPANIES:
Property and casualty insurance $ (502,006)(2) $ 242,635 $ 232,259 $ 84,746(3) $ 201,699
Title insurance (1) - 10,981 63,367 38,234 12,283
Information technology consulting 12,743 19,382 5,623 2,675 5,271
Corporate interest expense (54,518) (63,285) (74,407) (74,253) (76,230)
Corporate overhead and other (46,411) (69,996) (57,918) (54,013) (51,955)
--------------------------------------------------------------------------
(590,192) 139,717 168,924 (2,611) 91,068
Income tax (provision) benefit 210,519 (33,233) (49,566) 9,664 (22,429)
Reversal of income tax and related interest
expense 55,475 - - - -
Equity in investee companies 5,883 22,000 7,675 8,908 7,792
--------------------------------------------------------------------------
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE
GAIN ON SALES OF INVESTMENTS AND SUBSIDIARIES (318,315)(2) 128,484 127,033 15,961(3) 76,431
After-tax gain on sales of investments 40,724 70,746 47,463 32,246 19,485
After-tax gain on sales of subsidiaries - 134,985 - - -
Equity in investee company-gain on sale of
subsidiary 24,895 - - - -
--------------------------------------------------------------------------
INCOME (LOSS) FROM CONTINUING OPERATIONS (252,696)(2) 334,215 174,496 48,207(3) 95,916
Gain on sale of discontinued operation - - 68,865 - -
Cumulative effect of change in accounting for
insurance assessments (57,850) - - - -
Other-net - (7,766) (13,942) - (7,860)
--------------------------------------------------------------------------
NET INCOME (LOSS) $ (310,546) $ 326,449 $ 229,419 $ 48,207 $ 88,056
--------------------------------------------------------------------------
--------------------------------------------------------------------------
</TABLE>
17
<PAGE>
Reliance Group Holdings, Inc. and Subsidiaries
SELECTED FINANCIAL DATA CONTINUED
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31 1999 1998 1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
(In thousands, except per share amounts and
ratios)
DILUTED PER SHARE INFORMATION:
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE
GAIN ON SALES OF INVESTMENTS AND SUBSIDIARIES $ (2.79)(2) $ 1.07 $ 1.07 $ .14(3) $ .66
After-tax gain on sales of investments .36 .59 .40 .27 .17
After-tax gain on sales of subsidiaries - 1.12 - - -
Equity in investee company-gain on sale of
subsidiary .22 - - - -
--------------------------------------------------------------------------
INCOME (LOSS) FROM CONTINUING OPERATIONS $ (2.21)(2) $ 2.78 $ 1.47 $ .41(3) $ .83
--------------------------------------------------------------------------
--------------------------------------------------------------------------
NET INCOME (LOSS) $ (2.72) $ 2.72 $ 1.94 $ .41 $ .74
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Weighted average number of diluted shares
outstanding 114,124 120,073 118,363 116,281 115,054
CASH DIVIDENDS PER COMMON SHARE $ .32 $ .32 $ .32 $ .32 $ .32
OTHER OPERATING DATA(4):
Underwriting loss $ (788,426)(2) $ (52,108) $ (31,722) $ (172,387)(3) $ (45,644)
Loss and loss expense ratio 84.3% 65.8% 64.8% 75.0% 67.7%
Underwriting expense ratio 40.0% 36.3 36.1 34.0 34.1
--------------------------------------------------------------------------
Combined ratio 124.3% 102.1% 100.9% 109.0% 101.8%
--------------------------------------------------------------------------
--------------------------------------------------------------------------
<CAPTION>
DECEMBER 31 1999 1998 1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
(In thousands, except per share amounts)
BALANCE SHEET DATA:
Assets $14,615,503 $12,618,039 $11,222,486 $10,055,512 $9,544,134
Marketable securities 4,515,666 4,416,913 4,149,969 3,991,627 3,876,551
Excess of cost over fair value of net assets
acquired 210,294 219,854 229,484 239,047 248,610
Debt outstanding 735,085 720,243 903,083 901,532 878,419
Shareholders' equity 1,018,337 1,315,520 962,515 676,680 678,348
Shareholders' equity per common share 8.87 11.33 8.38 5.92 5.98
Statutory policyholders' surplus of property and
casualty insurance subsidiaries 1,244,003 1,747,425 1,302,490 1,187,056 1,128,336
</TABLE>
(1) In 1998, the Company completed the sale of its title insurance operations to
LandAmerica Financial Group, Inc. See note 3 to the consolidated financial
statements.
(2) The 1999 results include a charge of $170.8 million ($111.0 million
after-tax, or $.97 per diluted share) relating to the settlement of issues
involving the Unicover workers' compensation reinsurance facility, a charge
of $254.3 million ($165.3 million after-tax, or $1.45 per diluted share) to
increase net loss reserves for policies issued in prior years and a charge
of $132.1 million ($85.9 million after-tax, or $.75 per diluted share)
representing the cost of ceding to reinsurers losses under various stop loss
treaties.
(3) The 1996 results included a charge of $134.0 million ($87.1 million
after-tax, or $.75 per diluted share) to increase net loss reserves for
asbestos-related and environmental pollution claims for business written in
or before 1987.
(4) Underwriting results include policyholders' dividends and other income and
expense.
18
<PAGE>
Reliance Group Holdings, Inc. and Subsidiaries
PROPERTY AND CASUALTY INSURANCE OPERATIONS
- --------------------------------------------------------------------------------
Net premiums written for each line of property and casualty insurance are as
follows:
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31 1999 1998 1997 1996 1995
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
(In thousands)
Workers' Compensation $ 457,784 $ 304,281 $ 275,898 $ 249,638 $ 265,882
Personal Automobile(1) 346,086 226,801 99,007 - -
Commercial Automobile 288,003 335,505 295,014 265,206 239,819
General Liability 255,173 465,208 423,278 466,636 468,951
Reinsurance 247,164 217,287 159,032 151,099 118,969
Surety 213,413 204,367 176,500 159,183 139,298
Multiple Peril 212,930 226,089 221,021 211,857 184,600
Accident and Health 190,221 154,323 91,714 61,873 58,426
Ocean and Inland Marine 168,391 166,785 191,055 129,148 118,757
Fire and Allied 100,984 60,005 46,339 64,250 68,118
Other 80,260 77,659 86,989 87,309 116,220
-----------------------------------------------------------------------
$2,560,409 $2,438,310 $2,065,847 $1,846,199 $1,779,040
-----------------------------------------------------------------------
-----------------------------------------------------------------------
</TABLE>
Combined ratios (on a GAAP basis), after policyholders' dividends, for each line
of property and casualty insurance are as follows:
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31 1999(2) 1998 1997 1996(3) 1995
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Workers' Compensation 103.1% 91.3% 93.0% 94.1% 79.1%
Personal Automobile(1) 125.8 111.3 136.6 - -
Commercial Automobile 140.3 122.8 118.1 124.5 126.3
General Liability 123.0 89.7 100.0 113.8 102.4
Reinsurance 129.3 102.5 101.8 115.5 114.9
Surety 79.6 72.4 77.0 75.5 65.6
Multiple Peril 123.3 98.7 100.9 123.9 117.3
Accident and Health 114.2 99.8 97.3 96.0 81.2
Ocean and Inland Marine 178.8 121.1 92.1 100.3 96.0
Fire and Allied 142.8 126.4 121.4 100.9 117.4
Other 174.4 132.7 107.5 124.4 114.9
-----------------------------------------------------------------------
124.3% 102.1% 100.9% 109.0% 101.8%
-----------------------------------------------------------------------
-----------------------------------------------------------------------
</TABLE>
(1) Represents the combination of non-standard automobile and personal
automobile marketed through direct channels. As a result of the combination,
a $24 million restructuring charge was recorded in 1999. See note 2 to the
consolidated financial statements.
(2) Excludes the effect of the charge relating to the settlement of issues
involving the Unicover workers' compensation reinsurance facility. Includes
the effect of a charge of $254.3 million to increase net loss reserves for
policies issued in prior years and a charge of $132.1 million representing
the cost of ceding to reinsurers losses under various stop loss treaties.
(3) Includes the effect of the $134.0 million increase in net loss reserves for
asbestos-related and environmental pollution claims for business written in
or before 1987. This charge impacted the commercial automobile, general
liability, reinsurance and multiple peril lines of business.
19
<PAGE>
Reliance Group Holdings, Inc. and Subsidiaries
PROPERTY AND CASUALTY INSURANCE OPERATIONS CONTINUED
- --------------------------------------------------------------------------------
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:
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31 1999(1) 1998 1997 1996(4) 1995
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
(Dollars in thousands)
NET PREMIUMS WRITTEN
Reliance National(2) $1,060,654 $1,013,650 $ 889,314 $ 833,674 $ 864,387
Reliance Insurance 693,189 775,480 740,362 702,433 649,395
Reliance Personal(3) 346,086 226,801 99,007 - -
Reliance Reinsurance 247,164 217,287 159,032 151,099 118,969
Reliance Surety 213,413 204,367 176,500 159,183 139,298
Other (97) 725 1,632 (190) 6,991
-----------------------------------------------------------------------
$2,560,409 $2,438,310 $2,065,847 $1,846,199 $1,779,040
-----------------------------------------------------------------------
-----------------------------------------------------------------------
NET PREMIUMS EARNED
Reliance National(2) $1,042,527 $ 977,947 $ 872,642 $ 827,037 $ 882,753
Reliance Insurance 718,545 754,007 698,537 683,387 628,055
Reliance Personal(3) 294,860 159,745 53,648 - -
Reliance Reinsurance 241,593 214,712 152,754 140,334 119,921
Reliance Surety 206,306 196,693 167,251 147,416 127,355
Other 150 1,176 2,184 2,680 16,507
-----------------------------------------------------------------------
$2,503,981 $2,304,280 $1,947,016 $1,800,854 $1,774,591
-----------------------------------------------------------------------
-----------------------------------------------------------------------
UNDERWRITING GAIN (LOSS)
Reliance National(2) $ (495,306) $ (31,966) $ (12,161) $ (19,941) $ 481
Reliance Insurance (186,962) (49,676) (29,716) (151,697) (42,344)
Reliance Personal(3) (76,329) (17,949) (19,681) - -
Reliance Reinsurance (71,242) (5,070) (3,120) (22,117) (18,204)
Reliance Surety 41,575 54,346 37,733 34,421 41,544
Other (162) (1,793) (4,777) (13,053) (27,121)
-----------------------------------------------------------------------
$ (788,426) $ (52,108) $ (31,722) $ (172,387) $ (45,644)
-----------------------------------------------------------------------
-----------------------------------------------------------------------
COMBINED RATIOS(5)
Reliance National(2) 131.2% 102.6% 100.6% 101.7% 99.1%
Reliance Insurance 125.2% 106.7% 103.7% 121.9% 106.3%
Reliance Personal(3) 125.8% 111.3% 136.6% N/A N/A
Reliance Reinsurance 129.3% 102.5% 101.8% 115.5% 114.9%
Reliance Surety 79.6% 72.4% 77.0% 75.5% 65.6%
Consolidated 124.3% 102.1% 100.9% 109.0% 101.8%
</TABLE>
(1) Includes the effects of the 1999 charge of $170.8 million incurred by
Reliance National relating to the settlement of issues involving the
Unicover workers' compensation reinsurance facility, a charge of
$254.3 million to increase net loss reserves for policies issued in prior
years and a charge of $132.1 million representing the cost of ceding to
reinsurers losses under various stop loss treaties.
(2) Restated to exclude Reliant, a non-standard auto insurer, which is now part
of Reliance Personal.
(3) Represents the combination of Reliant and personal auto insurance marketed
through direct channels.
(4) Includes the effect of the $134.0 million increase in net loss reserves for
asbestos-related and environmental pollution claims. This charge impacted
Reliance Insurance and Reliance Reinsurance.
(5) Calculated on a GAAP basis, after policyholders' dividends. Combined ratios
for Other are not presented since they are not meaningful. The 1999 combined
ratios excludes the effect of the charge incurred by Reliance National
relating to the Unicover facility.
20
<PAGE>
Reliance Group Holdings, Inc. and Subsidiaries
FINANCIAL REVIEW
- --------------------------------------------------------------------------------
OVERVIEW
The Company incurred a loss from continuing operations, before gains on sales of
investments and subsidiaries, of $318.3 million ($2.79 per diluted share) in
1999. These results include several significant items: (i) a provision for
insured events of prior years which aggregated $165.3 million ($1.45 per diluted
share) after-tax, and an after-tax charge of $85.9 million ($.75 per diluted
share) representing the cost of ceding to reinsurers losses under various stop
loss treaties, (ii) an after-tax charge of $111.0 million ($.97 per diluted
share) for the settlement of issues involving the Unicover workers' compensation
reinsurance facility, (iii) an after-tax benefit of $55.5 million ($.49 per
diluted share) resulting from the settlement of various federal income tax
issues, (iv) an increase in catastrophe claims which were $48.6 million
after-tax ($.43 per diluted share) in 1999, compared to $21.6 million after-tax
($.18 per diluted share) in 1998 and $7.2 million after-tax ($.06 per diluted
share) in 1997, and (v) an after-tax restructuring charge of $15.6 million ($.14
per diluted share). See notes 8, 16, 7 and 2 of the consolidated financial
statements for a discussion of the increase in net loss reserves, Unicover
settlement, tax settlement and restructuring charge, respectively. Operating
income in 1998 was $128.5 million ($1.07 per diluted share), compared to $127.0
million ($1.07 per diluted share) in 1997. Operating results in 1998 reflected
higher levels of net investment income and increased profits in the information
technology business, offset by increased catastrophe claims and less income from
the title insurance operations which were sold in February 1998.
The net loss in 1999 was $310.5 million ($2.72 per diluted share) which
included an (i) after-tax charge of $57.9 million ($.51 per diluted share)
representing the cumulative effect of adopting Statement of Position No. 97-3,
'Accounting by Insurance and Other Enterprises for Insurance Related
Assessments' ('SOP'), (ii) an after-tax gain of $24.9 million ($.22 per diluted
share) representing the pro rata portion of a gain realized by Zenith National
Insurance Corp. ('Zenith') on the sale of its CalFarm subsidiary, and (iii) an
after-tax gain on sales of investments of $40.7 million ($.36 per diluted
share). See note 1 to the consolidated financial statements for a discussion of
the adoption, in 1999, of the SOP. Net income in 1998 was $326.4 million ($2.72
per diluted share) which includes after-tax gains of $135.0 million ($1.12 per
diluted share) primarily resulting from the sale of the Company's title
insurance operations. See note 3 to the consolidated financial statements for
further discussion. Net income in 1998 also includes an after-tax extraordinary
charge of $7.8 million ($.06 per diluted share) related to early extinguishment
of debt. Net income in 1997 was $229.4 million ($1.94 per diluted share) which
includes an after-tax gain of $68.9 million ($.58 per diluted share) resulting
from a tax benefit realized from the sale of Prometheus Funding Corp.
('Prometheus'), a subsidiary previously classified as discontinued, and an
after-tax charge of $7.5 million ($.06 per diluted share) for a litigation
settlement pertaining to Prometheus. Net income in 1998 and 1997 also included
after-tax gains on sales of investments of $70.7 million ($.59 per diluted
share) and $47.5 million ($.40 per diluted share), respectively.
On February 29, 2000, the Company announced a series of strategic and
financial actions and initiatives designed to strengthen its capital and improve
its credit ratings. These actions include:
o Reaching an agreement in principle to sell the Reliance Surety operation
to Travelers Property Casualty Corp. for $580 million in cash. This
transaction, which is expected to close in the second quarter of 2000, will
result in an after-tax gain of approximately $250 million and increase
statutory policyholders' surplus by approximately $300 million.
Consummation of the sale is subject to the negotiation and execution of
definitive agreements and customary corporate and regulatory approvals. 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.
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, the Company expects
to incur a restructuring charge in the first half of 2000.
o Changes in the senior management team, including naming George R. Baker
president and chief executive officer. Saul P. Steinberg will continue as
chairman of the board.
21
<PAGE>
Reliance Group Holdings, Inc. and Subsidiaries
FINANCIAL REVIEW CONTINUED
- --------------------------------------------------------------------------------
PROPERTY AND CASUALTY INSURANCE OPERATIONS
The property and casualty insurance operations incurred a pretax operating loss
in 1999, before gains on sales of investments and subsidiaries, of $502.0
million. The loss in 1999 reflects a provision of $254.3 million to increase net
loss reserves for policies issued in prior years, which resulted from updated
information and subsequent developments, and a charge of $132.1 million
representing the cost of ceding to reinsurers losses under various stop loss
treaties. Regularly scheduled actuarial loss reserve reviews in the second
quarter of 1999 revealed significant deterioration in a number of lines and
programs. As a result of this updated information, the Company hired an
independent actuarial firm to assist in its loss reserve reviews. The results of
these reviews led the Company to conclude that an increase in loss reserves
during 1999 was appropriate. The increase in loss reserves was due principally
to construction defect claims, higher than expected losses in property, marine
and aviation lines, deterioration in a program which wrote environmental
coverages and adverse development in the commercial automobile line. The
increase in loss reserves for the full year 1999 (before application of the stop
loss treaties) was comprised of the following:
o $121.4 million for construction defect claims, arising mostly in
California. In 1999, the Company completed an actuarial study of these
claims, utilizing methodologies provided by an independent actuarial firm.
Actuarial analysis of these types of claims is particularly complex due to
the protracted claims settlement process, as well as a widening
interpretation of what constitutes insurance coverage that courts have
applied to these cases.
o $168.5 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. The Company has decided to non-renew the
majority of these treaties.
o $72.0 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
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 $112.0 million for adverse development in other lines of business,
primarily $73.1 million for commercial automobile where loss activity was
higher than expected.
The 1999 property and casualty insurance operating results also include a
charge of $170.8 million relating to the settlement of issues involving the
Unicover workers' compensation reinsurance facility, and includes $20 million
for an anticipated settlement regarding the Company's participation in the
Lincoln National facility managed by Unicover. In addition, the 1999
underwriting loss includes a $24 million restructuring charge which resulted
from the consolidation of the Company's automobile insurance operations into a
new operating unit, Reliance Personal.
Pretax operating income was $242.6 million in 1998 compared to
$232.3 million in 1997. The increase in 1998 operating income reflects higher
levels of net investment income partially offset by an increase in underwriting
losses. Underwriting results in all years have been adversely effected by
catastrophe claims which totaled $74.8 million, $33.3 million and
$11.1 million, in 1999, 1998 and 1997, respectively.
Policy claims and settlement expenses for 1998 and 1997 include favorable
development of $33.0 million and $36.0 million, respectively, pertaining to
insured events of prior years. These redundancies reflect favorable development
in workers' compensation and surety line of business partially offset by adverse
development in the commercial automobile line. The redundancy in workers'
compensation is due, in part, to favorable development in retrospectively rated
policies, which was more than offset by a corresponding reduction in premiums
earned. The 1998 redundancy also includes favorable development in general
liability and multiple peril lines of business and adverse development in ocean
marine line of business.
22
<PAGE>
Reliance Group Holdings, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
Net premiums written, net premiums earned, underwriting gain (loss) and combined
ratios for each of the property and casualty insurance operating units are as
follows (dollars in thousands):
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------
1999 1998 1997
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
NET PREMIUMS WRITTEN
Reliance National(1) $ 1,060,654 $ 1,013,650 $ 889,314
Reliance Insurance 693,189 775,480 740,362
Reliance Personal(1) 346,086 226,801 99,007
Reliance Reinsurance 247,164 217,287 159,032
Reliance Surety 213,413 204,367 176,500
Other (97) 725 1,632
-------------------------------------------
$ 2,560,409 $ 2,438,310 $ 2,065,847
-------------------------------------------
-------------------------------------------
NET PREMIUMS EARNED
Reliance National(1) $ 1,042,527 $ 977,947 $ 872,642
Reliance Insurance 718,545 754,007 698,537
Reliance Personal(1) 294,860 159,745 53,648
Reliance Reinsurance 241,593 214,712 152,754
Reliance Surety 206,306 196,693 167,251
Other 150 1,176 2,184
-------------------------------------------
$ 2,503,981 $ 2,304,280 $ 1,947,016
-------------------------------------------
-------------------------------------------
UNDERWRITING GAIN (LOSS)
Reliance National(1) $ (495,306) $ (31,966) $ (12,161)
Reliance Insurance (186,962) (49,676) (29,716)
Reliance Personal(1) (76,329) (17,949) (19,681)
Reliance Reinsurance (71,242) (5,070) (3,120)
Reliance Surety 41,575 54,346 37,733
Other (162) (1,793) (4,777)
-------------------------------------------
$ (788,426) $ (52,108) $ (31,722)
-------------------------------------------
-------------------------------------------
COMBINED RATIOS(2)
Reliance National(1) 131.2% 102.6% 100.6%
Reliance Insurance 125.2% 106.7% 103.7%
Reliance Personal(1) 125.8% 111.3% 136.6%
Reliance Reinsurance 129.3% 102.5% 101.8%
Reliance Surety 79.6% 72.4% 77.0%
Consolidated 124.3% 102.1% 100.9%
</TABLE>
(1) In the first quarter of 1999, the Company consolidated its non-standard
automobile operation, formerly part of Reliance National, with its personal
automobile direct writer Reliance Direct, into a new operating unit,
Reliance Personal. Prior period results of Reliance National have been
restated to reflect this consolidation.
(2) Calculated on a GAAP basis, after policyholders' dividends. Combined ratios
for Other are not presented since they are not meaningful. The 1999 combined
ratios exclude the effect of the charge incurred by Reliance National
related to the Unicover facility.
RELIANCE NATIONAL
The increase in net premiums written and net premiums earned in 1999, when
compared to 1998, reflect increased writings in the Accident & Health and
Property divisions and increased foreign sourced premiums. These increases were
partially offset by the ceding of $70.5 million of premiums in 1999 to various
stop loss treaties, and by lower net premiums written by a program manager which
had provided commercial automobile and general liability coverage. Due to the
Company's decision to cancel or not to renew certain under-performing lines of
business, including certain lines which contributed to the growth in 1999
premiums, Reliance National expects premium writings in 2000 to be lower than
those in 1999. Premium increases in 1998, when compared to 1997, reflect growth
in the Accident & Health and Casualty Risk Services divisions.
Underwriting results in 1999 were adversely affected by losses from business
that the Company has either cancelled or had decided not to renew. The
underwriting results in 1999 were adversely affected by $194.8 million
23
<PAGE>
Reliance Group Holdings, Inc. and Subsidiaries
FINANCIAL REVIEW CONTINUED
- --------------------------------------------------------------------------------
from an increase in net loss reserves for policies written in prior years and
cost of ceding losses to reinsurers. The 1999 underwriting results also include
a charge of $170.8 million pertaining to the settlement of issues involving the
Unicover facility. The increase in underwriting loss in 1999, when compared to
prior years, also resulted from an increase in catastrophe losses, which were
$59.0 million in 1999, primarily from international catastrophes, compared to
$6.3 million in 1998 and $1.2 million in 1997. The increase in underwriting loss
in 1998, when compared to 1997, reflects an increase in property and marine
losses, offset by strong underwriting results in the Excess and Surplus and
Financial Products divisions.
RELIANCE INSURANCE
The decline in net premiums written and net premiums earned in 1999, when
compared to 1998, resulted from the decision to curtail writing certain
under-performing contractors and transportation lines of business in the
Specialty division, and the ceding of $28.1 million of premiums in 1999 to
various stop loss treaties. These declines were partially offset by increased
writings in the Commercial Accounts and Large Accounts divisions, particularly
in workers' compensation and in commercial multiple peril and general liability
lines of business. The increase in net premiums written and net premiums earned
in 1998, when compared to 1997, reflects growth in the Commercial Accounts
division, particularly in commercial automobile and general liability lines of
business.
The underwriting results in 1999 were adversely affected by $121.4 million
from an increase in net loss reserves, including reserves for construction
defect claims, for policies written in prior years and the cost of ceding losses
to reinsurers. Underwriting results in 1999 also reflect increased losses in the
commercial automobile line and in workers' compensation. The increase in the
underwriting loss in 1998, when compared to 1997, reflects an increase in
catastrophe claims as well as a high level of property and marine losses.
RELIANCE PERSONAL
Reliance Personal was created in late March 1999 by consolidating Reliance
National's non-standard automobile operation, Reliant, with Reliance Direct (a
direct writer of personal automobile insurance) which formerly was a separate
operating unit. As a result of the consolidation, a $24 million restructuring
charge was recorded by Reliance Personal in the first quarter of 1999 and is
included in underwriting losses. Due to poor underwriting results in the direct
automobile operation, the Company decided in late 1999 to discontinue this line.
In November 1999, the Company entered into an agreement to transfer to a third
party substantially all the assets and non-insurance liabilities related to
policies written by Reliance Direct as well as the renewal rights to in-force
policies. See note 1 to the consolidated financial statements for further
discussion of this transfer.
The increase in net premiums written and net premiums earned in 1999 and 1998
resulted from growth in non-standard automobile writings.
The increase in the underwriting loss in 1999 resulted from increased losses
in the non-standard automobile line. As a result of these losses, Reliance
Personal will seek significant price increases and use more stringent
underwriting criteria. Accordingly, the Company does not expect its non-standard
automobile writings to increase in 2000.
RELIANCE REINSURANCE
The increase in net premiums written and net premiums earned in 1999 and 1998
resulted from new assumed reinsurance treaties, including the start-up in 1998
of an agricultural reinsurance division which generated $66.3 million and
$68.4 million of net premiums written in 1999 and 1998, respectively. Due to the
recent loss of key personnel in the agricultural reinsurance division, these
writings are expected to substantially decline in 2000.
The underwriting results in 1999 were adversely affected by $66.4 million
from an increase in net loss reserves for policies written in prior years,
primarily in marine and aviation lines, and the cost of ceding losses to
reinsurers under various stop-loss treaties. Reliance Reinsurance has
discontinued its marine and aviation lines.
RELIANCE SURETY
The increase in net premiums written and net premiums earned in 1999, when
compared to 1998, resulted from an increase in contract surety premiums and
growth in commercial surety premiums. The increase in net premiums written and
net premiums earned in 1998, when compared to 1997, primarily resulted from an
increase in contract surety business.
24
<PAGE>
Reliance Group Holdings, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
The decline in underwriting income in 1999, when compared to 1998, resulted
from an increase in large losses, primarily in contract surety. Losses over $1.0
million were $33.2 million in 1999 compared to $18.2 million in 1998. Loss
activity in 1998 was unusually low which benefited 1998 underwriting results.
On February 29, 2000, the Company announced that it had reached an agreement
in principle to sell Reliance Surety for $580 million in cash. See 'Overview'
section for further discussion.
The consolidated property and casualty insurance operations assume and cede
reinsurance in the normal course of business. The Company's aggregate
reinsurance recoverables were $6.3 billion at December 31, 1999, representing
estimated amounts recoverable from reinsurers pertaining to unpaid claims,
claims incurred but not reported, unearned premiums and paid claims. The Company
is subject to credit risk with respect to its reinsurers, as the ceding of risk
to reinsurers does not relieve the Company of its liability to insureds. The
Company holds substantial amounts of collateral to secure recoverables from
unauthorized reinsurers. See note 10 to the consolidated financial statements.
The liability for property and casualty insurance loss reserves at December
31, 1999 was $8.3 billion compared to $7.0 billion at December 31, 1998. The
liability is based on an evaluation of reported claims in addition to
statistical projections of claims incurred but not reported and loss adjustment
expenses. Estimates of salvage and subrogation are deducted from the liability.
Reinsurance recoverables of $4.9 billion and $3.8 billion at December 31, 1999
and 1998, respectively, are included in the liability.
The establishment of loss reserves requires an estimate of the ultimate
liability based primarily on past experience. The Company applies a variety of
generally accepted actuarial techniques to determine the estimates of ultimate
liability. The techniques recognize, among other factors, the Company's and
industry's experience with similar business, historical trends in reserving
patterns and loss payments, pending level of unpaid claims, cost of claim
settlements, product mix and the economic environment in which property and
casualty companies operate. Estimates are continually reviewed and adjustments
of the probable ultimate liability based on subsequent developments and new data
are included in operating results for the periods in which they are made. In
general, reserves are initially established based upon the actuarial and
underwriting data utilized to set pricing levels and are reviewed as additional
information, including claims experience, becomes available. The establishment
of loss reserves makes no provision for the broadening of coverage by
legislative action or judicial interpretation or for extraordinary future
emergence of new classes of losses not sufficiently represented in the Company's
historical data base, or which are not yet able to be quantified. The Company
regularly analyzes its reserves and reviews its pricing and reserving
methodologies so that future adjustments to prior years reserves can be
minimized. However, given the complexity of this process, reserves will require
continual updates and the ultimate liability may be more or less than such
estimates indicate. Estimation of loss reserves for long tail lines of business
is more difficult than for short tail lines because long tail claims may not
become apparent for a number of years, and a relatively higher proportion of
ultimate losses are considered incurred but not reported. As a result, variation
in loss development is more likely in long tail lines of business. The Company
attempts to reduce these variations in certain of its long tail lines, primarily
directors and officers liability and professional liability, by writing policies
on a claims-made basis which mitigates the long tail nature of the risk. The
Company also limits the potential loss from a single event through the extensive
use of reinsurance.
PROPERTY AND CASUALTY INSURANCE INVESTMENT RESULTS
Net investment income of the property and casualty insurance operations was
$286.4 million in 1999 compared to $294.7 million in 1998 and $264.0 million in
1997. The decline in net investment income in 1999, when compared to 1998,
resulted from an increase in interest accrued on insurance funds held on behalf
of reinsurers in connection with certain stop loss treaties. The increase in net
investment income in 1998, when compared to 1997, resulted from growth in the
size of the fixed maturity investment portfolio.
Gains on sales of investments of $63.0 million in 1999, $108.5 million in
1998 and $71.5 million in 1997 primarily resulted from sales of equity
securities, including the 1999 sale of 1.5 million shares of Symbol
Technologies, Inc. ('Symbol') common stock which resulted in a realized gain of
$66.0 million. From January 1, 2000 through March 15, 2000, the Company sold an
additional 3.0 million shares of Symbol common stock which resulted in a
realized gain of $266.6 million which will be recognized in the first quarter of
2000. Gains on sales of investments in
25
<PAGE>
Reliance Group Holdings, Inc. and Subsidiaries
FINANCIAL REVIEW CONTINUED
- --------------------------------------------------------------------------------
1999, 1998 and 1997 are net of write-downs of $31.7 million, $50.8 million and
$20.8 million, respectively, equal to the difference between the cost and market
values of certain investments to reflect other than temporary declines.
INVESTMENT PORTFOLIO
Investment activities are an integral part of the business of the property and
casualty insurance operations. At December 31, 1999, the Company's investment
portfolio aggregated $3.92 billion (at cost) of which 93% was invested in fixed
maturities and 7% invested in equity securities. The Company seeks to maintain a
diversified and balanced fixed maturity portfolio representing a broad spectrum
of industries and types of securities and invests in investment grade securities
(those rated 'BBB' or better by Standard and Poor's) and, to a lesser extent,
non-investment grade securities and non-rated securities. At December 31, 1999,
no one issuer comprised more than 3% of the fixed maturity and short-term
investment portfolio.
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
December 31, 1999, the carrying values of non-investment grade securities and
securities not rated by Standard and Poor's were $473.4 million (13% of the
fixed income portfolio) and $197.9 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. The weighted average
maturity of the fixed maturity portfolio (excluding short-term investments) is
approximately eleven years.
At December 31, 1999, approximately 28% of the fixed maturity and short-term
investment portfolio was comprised of securities issued by utilities, the vast
majority of which are rated investment grade and are first mortgage or senior
secured bonds. The utility portfolio is widely diversified among various
geographic regions in the United States and is not dependent on the economic
stability of any one particular region. No other industry group comprises more
than 10% of the fixed maturity and short-term investment portfolio.
OTHER OPERATIONS
RCG Information Technology, Inc. ('RCG'), a subsidiary of the Company, provides
computer-related services to large corporate clients throughout the United
States. Information technology revenues were $230.7 million in 1999, $247.7
million in 1998 and $191.9 million in 1997. The decrease in revenues in 1999,
when compared to 1998, resulted from an overall slowdown in the demand for
certain consultant skill sets and a decline in solutions business reflecting the
reluctance of clients to begin new technology initiatives until the impact of
Year 2000 on their systems was known. The increase in revenues in 1998, when
compared to 1997, resulted from a significant increase in demand for information
technology services from both existing and new clients, together with an
increase in higher margin solutions business and an increase in billing rates.
Gross margins (revenues less cost of services) were $76.1 million in 1999,
$78.8 million in 1998 and $51.4 million in 1997. Gross margins as a percentage
of revenues were 33.0%, 31.8% and 26.8% in 1999, 1998 and 1997, respectively.
Pretax income was $12.7 million in 1999, $19.4 million in 1998 and $5.6 million
in 1997. The decline in pretax income in 1999, when compared to 1998, reflects a
lower volume of business, as well as higher selling, general and administrative
expenses associated with investments in technical and sales capabilities. The
increase in pretax income in 1998, when compared to 1997, resulted from
increased gross margins. RCG's revenues and expenses are included in other
revenues and other operating expenses in the accompanying consolidated statement
of operations.
EQUITY IN INVESTEE COMPANIES
On October 25, 1999, the Company completed the sale of its investment in Zenith
for cash proceeds of $184.1 million. In conjunction with the sale, the Company
wrote-down its investment in Zenith by $9.3 million in 1999. The Company's
investment in Zenith has been reclassified from investment in investee company
to other assets in the accompanying 1998 consolidated balance sheet.
Equity in investee companies was $30.8 million in 1999, which included a gain
of $24.9 million representing the Company's pro rata portion of a gain realized
by Zenith. Equity earnings in 1999 from the Company's investment in LandAmerica
Financial Group ('LandAmerica') were $7.0 million. Equity in investee companies
was $22.0 million in 1998 which includes equity earnings of $15.6 million from
LandAmerica. The remaining 1998 equity earnings of $6.4 million pertains to
Zenith. The decline in equity earnings from LandAmerica in 1999, when compared
to 1998,
26
<PAGE>
Reliance Group Holdings, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
reflects a decline in revenues due to a reduction in refinancing transactions.
Equity in investee companies was $7.7 million in 1997 from Zenith.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal sources of funds consist of dividends, advances and net
tax payments from its subsidiaries. These payments aggregated $170.3 million for
the year ended December 31, 1999. Dividends paid by Reliance Insurance Company
were $175.7 million in 1999. The Company's ability to receive cash dividends has
depended upon and continues to depend upon the dividend paying ability of its
insurance subsidiaries. The Insurance Law of Pennsylvania, where Reliance
Insurance Company (the Company's principal insurance subsidiary) is domiciled,
limits the maximum amount of dividends which may be paid without approval by the
Pennsylvania Insurance Department. Under such law, Reliance Insurance Company
may pay dividends during the year equal to the greater of (a) 10% of the
preceding year-end policyholders' surplus or (b) the preceding year's statutory
net income. Furthermore, the Pennsylvania Insurance Department has broad
discretion to limit the payment of dividends by insurance companies. During
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 the tests in effect from time to time under
Pennsylvania law for the payment of dividends without prior Insurance Department
approval or that any requested approval will be obtained. Reliance Insurance
Company has been advised by the Pennsylvania Insurance Department that any
required approval will be based upon a solvency standard and will not be
unreasonably withheld. Any significant limitation of Reliance Insurance
Company's dividends would adversely affect the Company's ability to service its
debt.
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
December 31, 1999, Reliance Insurance Company had $314 million of cash and
short-term investments.
For the year ended December 31, 1999, the Company utilized $171.0 million of
cash flow for operating activities. In conjunction with the tax settlement
described in note 7 to the consolidated financial statements, the Company made a
$43.0 million payment, primarily interest, to the Internal Revenue Service. The
Company also incurred higher net payments for property and casualty insurance
policy claims and related expenses, which were partially offset by an increase
in the net collection of insurance premiums. For the years ended December 31,
1999, 1998 and 1997, these payments were $2.0 billion, $1.5 billion and
$1.3 billion, respectively. For the year ended December 31, 1998, the Company
generated $86.8 million of cash flow from operating activities compared to
$10.5 million in 1997. The increase in 1998 operating cash flow reflects an
increase in the net collection of insurance premiums as well as an increase in
operating cash flow from the information technology operations. The 1998
increase was partially offset by higher net payments for policy claims and
related expenses. Operating cash flow in 1998 was also reduced by higher
payments of income taxes resulting from increased amounts of taxable income due,
in part, to gains on sales of subsidiaries and investments.
The Company generated $228.1 million, $163.4 million and $56.7 million of
cash flow from investing activities for the years ended December 31, 1999, 1998
and 1997, respectively, primarily from the sale of an investee company in 1999,
sales of subsidiaries in 1998 and sales of real estate in 1997. The increase in
cash flow from investing activities in 1999 also reflects net sales of
marketable securities. The increase in cash flow from investing activities in
1998 was partially offset by net purchases of securities.
For the year ended December 31, 1999, the Company used $32.5 million of cash
flow for financing activities, principally for the payment of dividends. On
February 29, 2000, the Company announced the suspension of the common stock
dividend, which totaled $36.5 million, $37.1 million and $36.7 million in 1999,
1998 and 1997. For the year ended December 31, 1998, the Company used
$222.3 million of cash flow for financing activities. During 1998, the Company
purchased $186.5 million of its outstanding senior notes and senior subordinated
debentures utilizing the dividends from Reliance Insurance Company. These
purchases resulted in an after-tax extraordinary charge of $7.8 million, net of
a $4.2 million tax benefit. The Company used $34.6 million of cash flow for
financing activities for the year ended December 31, 1997, primarily for the
payment of dividends.
27
<PAGE>
Reliance Group Holdings, Inc. and Subsidiaries
FINANCIAL REVIEW CONTINUED
- --------------------------------------------------------------------------------
At December 31, 1999, the Company had $735.1 million of outstanding debt,
including $237.5 million of bank borrowings with an original maturity date of
March 31, 2000, which date has been extended until 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.
The National Association of Insurance Commissioners has a risk-based capital
requirement for the property and casualty insurance industry. Risk-based capital
refers to the determination of the amount of statutory capital required for an
insurer based on the risks assumed by the insurer (including, for example,
investment risks, credit risks relating to reinsurance recoverables and
underwriting risks) rather than just the amount of net premiums written by the
insurer. A formula that applies prescribed factors to the various risk elements
in an insurer's business is used to determine the minimum statutory capital
requirement for the insurer. An insurer having less statutory capital than the
formula calculates would be subject to varying degrees of regulatory
intervention, depending on the level of capital inadequacy. At December 31,
1999, all of the Company's statutory insurance companies have, with the
exception of Reliance Insurance Company, statutory capital in excess of the
minimum required risk-based capital. Subsequent to December 31, 1999, the market
value of the Company's investment in Symbol common stock has increased thereby
increasing statutory capital. As a result, the Company believes that Reliance
Insurance Company's statutory capital is in excess of the minimum required risk
based capital. Additionally, upon completion of the sale of Reliance Surety
which is expected to occur in the second quarter of 2000, it is estimated that
Reliance Insurance Company's statutory capital will further increase by
approximately $300 million.
Maintaining appropriate levels of statutory policyholders' surplus is
considered important by the Company's management, state insurance regulatory
authorities and agencies that rate the insurers' claims-paying abilities and
financial strength. Failure to maintain certain levels of statutory
policyholder' 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 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, 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. (See note 16 to the consolidated financial
statements for a discussion of the Unicover settlement.) In addition, on
February 29, 2000, the Company announced a series of strategic and financial
actions designed to strengthen its capital base, including entering into an
agreement in principle 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 from 'under
review with negative implications' to 'under review with developing
implications.' Best has indicated its intention to reaffirm Reliance Insurance
Company's 'A-(Excellent)' rating upon the successful completion of the Company's
capital-enhancement program. In addition, Standard & Poor's reaffirmed its
rating on the Company including its investment grade rating on the senior notes.
The Company and its subsidiaries are involved in certain litigation arising
in the course of their businesses, some of which involve claims of substantial
amounts. See note 17 to the consolidated financial statements for further
discussion.
MARKET RISKS
The Company manages its investment portfolio to achieve safety and liquidity,
while seeking to maximize total return. The Company believes it can achieve
these objectives by active portfolio management and intensive monitoring of
28
<PAGE>
Reliance Group Holdings, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
investments. Investment decisions are centrally managed by investment
professionals, including a fixed income investment department, which is staffed
with individuals who have extensive experience in both the investment grade and
non-investment grade bond markets.
Market risk represents the potential for loss due to adverse changes in the
fair value of financial instruments. The market risk related to financial
instruments of the Company primarily relate to the investment portfolio, which
exposes the Company to risks related to interest rates, defaults, prepayments,
foreign currency exchange rates, concentration risk and declines in equity
prices. The risk of default is generally considered to be greater for
non-investment grade securities, when compared to investment grade securities,
since these issues may be more susceptible to severe economic downturns.
Analytical tools and monitoring systems are in place to assess each of these
elements of market risk.
Interest rate risk is the price sensitivity of a fixed security to changes in
interest rates. The Company views these potential changes in price within the
overall context of asset and liability management. The Company's actuaries
estimate the payout pattern of the property and casualty insurance loss
reserves, to determine their duration, which is the weighted average payments
expressed in years. The Company sets duration targets for fixed income
investment portfolios which the Company believes mitigates the overall effect of
interest rate risk. Based upon assumptions the Company uses in its duration
calculations, increases in interest rates of 100 and 150 basis points would
cause decreases in the market value of the fixed maturity portfolio (excluding
short-term investments) of approximately $203 million and $305 million,
respectively, at December 31, 1999 and approximately $210 million and $320
million, respectively, at December 31, 1998. Similarly, a decrease in interest
rates of 100 to 150 basis points would cause increases in the market value of
the fixed maturity portfolio of approximately $203 million and $305 million,
respectively, at December 31, 1999 and approximately $210 million and
$320 million, respectively, at December 31, 1998.
Foreign currency risk is the sensitivity to foreign exchange rate
fluctuations of foreign currency denominated financial instruments. The
functional currency of the Company's foreign operations is generally the
currency of the local operating environment since their business is primarily
transacted in such local currency. The Company reduces the risks relating to
currency fluctuations by maintaining investments in those foreign currencies in
which the Company transacts business. Such investments have characteristics
similar to liabilities in those currencies. In addition, the Company also
invests in certain foreign currency denominated fixed income securities in its
domestic portfolio. At December 31, 1999 and 1998, the Company held foreign
currency denominated fixed income investments of $482 million and $437 million,
including $80 million and $146 million held in its domestic portfolio. The
principal currencies creating foreign exchange rate risk for the Company are the
British pound sterling, Canadian dollar and the Mexican peso. If the U.S. dollar
strengthened by 10% in comparison to each of the foreign currencies held by the
Company, an approximate $49 million and $45 million decrease would have occurred
in the market value of fixed maturity investments denominated in foreign
currencies at December 31, 1999 and 1998. If the U.S. dollar weakened by 10% in
comparison to each of the foreign currencies held by the Company, an approximate
$49 million and $45 million increase would have occurred in the market value of
fixed maturity investments denominated in foreign currencies at December 31,
1999 and 1998. The Company believes that the effects on its shareholders' equity
resulting from exchange rate fluctuations on foreign currency investments held
by its international operations would be partially offset by the effect of
exchange rate fluctuations on the liabilities maintained by the international
operations.
At December 31, 1999 and 1998, the market value of the Company's equity
securities were $1.0 billion and $754.5 million, respectively. The Company is
exposed to equity price risk as a result of its investment in equity securities.
An approximate $100 million and $75 million decrease in the market value of
equity securities would have occurred if there had been a 10% decrease in the
market prices of all equity securities at December 31, 1999 and 1998, and an
approximate $100 million and $75 million increase in the market value of equity
securities would have occurred if there had been a 10% increase in the market
prices of all equity securities at December 31, 1999 and 1998. At December 31,
1999 and 1998, the Company owned 10.6 million and 12.1 million shares,
respectively, of Symbol common stock which represented 67% and 68% of the market
value of the equity portfolio. Subsequent to year-end 1999, the Company sold
3.0 million shares of Symbol and at March 15, 2000, owns 7.5 million shares of
Symbol with a market value of $694.6 million. At March 15, 2000, a 10% decline
in the market value of this security would result in an approximate $69 million
decrease in the market value of equity securities, and a 10% increase in
29
<PAGE>
Reliance Group Holdings, Inc. and Subsidiaries
FINANCIAL REVIEW CONTINUED
- --------------------------------------------------------------------------------
the market value of this security would result in an approximate $69 million
increase in the market value of equity securities.
At December 31, 1999 and 1998, the Company had total debt outstanding of
$735.1 million and $720.2 million, respectively, of which $474 million and
$471 million is fixed interest rate debt. The interest rate on the Company's
remaining debt is variable. The Company believes that the impact of a 100 basis
point increase in interest rates on the variable rate debt would result in an
increase in annual interest expense of approximately $2.6 million, while a 100
basis point decrease in interest rates on the variable rate debt would result in
a decrease in annual interest expense of approximately $2.6 million.
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.
30
<PAGE>
Reliance Group Holdings, Inc. and Subsidiaries
CONSOLIDATED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31 1999 1998 1997
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C>
(In thousands, except per share amounts)
REVENUES:
Premiums earned $2,503,981 $2,443,412 $2,810,762
Net investment income 286,420 300,019 294,971
Gain on sales of investments 63,018 108,840 73,097
Gain on sales of subsidiaries - 197,258 -
Other 299,837 319,591 263,806
--------------------------------------
3,153,256 3,369,120 3,442,636
--------------------------------------
CLAIMS AND EXPENSES:
Policy claims and settlement expenses 2,111,072 1,523,624 1,304,559
Policy acquisition costs, other insurance
expenses and Unicover settlement 1,150,720 958,310 1,496,983
Restructuring charge 24,000 - -
Interest 61,774 79,840 88,663
Reversal of interest expense related
to income tax (31,500) - -
Other operating expenses 332,864 361,531 310,410
--------------------------------------
3,648,930 2,923,305 3,200,615
--------------------------------------
INCOME (LOSS) BEFORE INCOME TAXES AND EQUITY IN
INVESTEE COMPANIES (495,674) 445,815 242,021
Income tax benefit (provision) 212,200 (133,600) (75,200)
Equity in investee companies 30,778 22,000 7,675
--------------------------------------
INCOME (LOSS) FROM CONTINUING OPERATIONS (252,696) 334,215 174,496
Gain on disposal of discontinued operation - - 68,865
Litigation settlement of discontinued operation - - (7,500)
--------------------------------------
INCOME (LOSS) BEFORE EXTRAORDINARY ITEM AND
CUMULATIVE EFFECT OF ACCOUNTING CHANGE (252,696) 334,215 235,861
Extraordinary item-early extinguishment of debt - (7,766) -
Cumulative effect of change in accounting (57,850) - (6,442)
--------------------------------------
NET INCOME (LOSS) $ (310,546) $ 326,449 $ 229,419
--------------------------------------
--------------------------------------
BASIC PER SHARE INFORMATION:
INCOME (LOSS) FROM CONTINUING OPERATIONS $ (2.21) $ 2.89 $ 1.52
--------------------------------------
--------------------------------------
NET INCOME (LOSS) $ (2.72) $ 2.82 $ 2.00
--------------------------------------
--------------------------------------
DILUTED PER SHARE INFORMATION:
INCOME (LOSS) FROM CONTINUING OPERATIONS $ (2.21) $ 2.78 $ 1.47
--------------------------------------
--------------------------------------
NET INCOME (LOSS) $ (2.72) $ 2.72 $ 1.94
--------------------------------------
--------------------------------------
</TABLE>
See notes to consolidated financial statements
31
<PAGE>
Reliance Group Holdings, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
ASSETS DECEMBER 31 1999 1998
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
(In thousands, except per share amount)
Marketable securities:
Fixed maturities held for investment - at amortized cost
(quoted market $480,016 and $578,179) $ 484,340 $ 539,848
Fixed maturities available for sale - at quoted market
(amortized cost $2,849,448 and $2,687,009) 2,763,508 2,738,864
Equity securities - at quoted market (cost $277,317 and $262,986) 1,004,776 754,543
Short-term investments 263,042 383,658
Cash 106,207 81,612
Premiums and other receivables 1,763,561 1,708,761
Reinsurance recoverables 6,263,553 4,801,204
Federal and foreign income taxes, including deferred taxes 93,374 -
Investment in investee company 423,398 415,654
Deferred policy acquisition costs 301,168 295,939
Excess of cost over fair value of net assets acquired, less
accumulated amortization 210,294 219,854
Other assets 938,282 678,102
--------------------------
$14,615,503 $12,618,039
--------------------------
--------------------------
</TABLE>
<TABLE>
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Unearned premiums $ 2,065,411 $ 1,980,481
Unpaid claims and related expenses 8,285,977 7,016,586
Accounts payable and accrued expenses 1,842,769 847,452
Reinsurance ceded premiums payable 667,924 570,252
Federal and foreign income taxes, including deferred taxes - 167,505
Term loans and short-term debt 279,105 256,763
Debentures and notes 455,980 463,480
--------------------------
13,597,166 11,302,519
--------------------------
Contingencies and commitments
Shareholders' equity:
Common stock, par value $.10 per share, 225,000 shares
authorized, 116,166 and 116,076 shares issued and outstanding 11,617 11,608
Additional paid-in capital 551,514 548,674
Retained earnings 85,072 432,096
Accumulated other comprehensive income 381,106 323,142
--------------------------
1,029,309 1,315,520
Treasury stock, 1,331 shares (10,972) -
--------------------------
1,018,337 1,315,520
--------------------------
$14,615,503 $12,618,039
--------------------------
--------------------------
</TABLE>
See notes to consolidated financial statements
32
<PAGE>
Reliance Group Holdings, Inc. and Subsidiaries
CONSOLIDATED STATEMENT OF CHANGES
IN SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
Accumulated Other
Comprehensive Income
---------------------------
Net
Unrealized
Net Loss on
Additional Unrealized Foreign
Common Paid-In Retained Gain on Currency Treasury
Stock Capital Earnings Investments Translation Stock
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
(In thousands, except per share
amounts)
Balance, January 1, 1997 $11,428 $540,465 $(50,012) $198,786 $ (23,987) $ -
Issuance of common stock 58 2,393 - - - -
Transactions of investee company and
other - (809) - 3,284 - -
Net income - - 229,419 - - -
Dividends ($.32 per share) - - (36,706) - - -
Appreciation after deferred income
taxes - - - 90,011 - -
Foreign currency translation - - - - (1,815) -
---------------------------------------------------------------------------------
Balance, December 31, 1997 11,486 542,049 142,701 292,081 (25,802) -
Issuance of common stock 122 5,509 - - - -
Transactions of investee companies
and other - 1,116 - 503 - -
Net income - - 326,449 - - -
Dividends ($.32 per share) - - (37,054) - - -
Appreciation after deferred income
taxes - - - 63,175 - -
Foreign currency translation - - - - (6,815) -
---------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1998 11,608 548,674 432,096 355,759 (32,617) -
Issuance of common stock 9 406 - - - -
Transactions of investee companies - 2,434 - (6,396) - -
Net loss - - (310,546) - - -
Dividends ($.32 per share) - - (36,478) - - -
Appreciation after deferred income
taxes - - - 63,770 - -
Foreign currency translation - - - - 590 -
Purchase of treasury stock - - - - - (10,972)
---------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1999 $11,617 $551,514 $ 85,072 $413,133 $ (32,027) $ (10,972)
---------------------------------------------------------------------------------
---------------------------------------------------------------------------------
<CAPTION>
Shareholders'
Equity
- ---------------------------------------------------
<S> <C>
(In thousands, except per share
amounts)
Balance, January 1, 1997 $676,680
Issuance of common stock 2,451
Transactions of investee company and
other 2,475
Net income 229,419
Dividends ($.32 per share) (36,706)
Appreciation after deferred income
taxes 90,011
Foreign currency translation (1,815)
----------
Balance, December 31, 1997 962,515
Issuance of common stock 5,631
Transactions of investee companies
and other 1,619
Net income 326,449
Dividends ($.32 per share) (37,054)
Appreciation after deferred income
taxes 63,175
Foreign currency translation (6,815)
----------
BALANCE, DECEMBER 31, 1998 1,315,520
Issuance of common stock 415
Transactions of investee companies (3,962)
Net loss (310,546)
Dividends ($.32 per share) (36,478)
Appreciation after deferred income
taxes 63,770
Foreign currency translation 590
Purchase of treasury stock (10,972)
- --------------------------------------------------
BALANCE, DECEMBER 31, 1999 $1,018,337
- --------------------------------------------------
- --------------------------------------------------
</TABLE>
See notes to consolidated financial statements
33
<PAGE>
Reliance Group Holdings, Inc. and Subsidiaries
CONSOLIDATED STATEMENT OF
COMPREHENSIVE INCOME (LOSS)
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
Year Ended December 31
----------------------------------------------------------------------------------------------------------
1999 1998 1997
------------------------------------- ------------------------------------ -----------------------
INCOME TAX Income tax Income tax
PRETAX EFFECT AFTER-TAX Pretax effect After-tax Pretax effect
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net income (loss) $(310,546) $326,449
--------- --------
Other comprehensive
income:
Unrealized holding
gains $159,210 $(55,723) 103,487 $188,479 $(65,968) 122,511 $192,553 $(67,035)
Less:
reclassification
adjustment for
gains realized in
net income (loss) (71,307) 25,194 (46,113) (90,512) 31,679 (58,833) (49,574) 17,351
----------------------------------------------------------------------------------------------------------
Net unrealized gains
recognized in
other
comprehensive
income 87,903 (30,529) 57,374 97,967 (34,289) 63,678 142,979 (49,684)
Foreign currency
translation 908 (318) 590 (10,485) 3,670 (6,815) (2,792) 977
----------------------------------------------------------------------------------------------------------
Total other
comprehensive
income $ 88,811 $(30,847) 57,964 $ 87,482 $(30,619) 56,863 $140,187 $(48,707)
----------------------------------------------------------------------------------------------------------
Total comprehensive
income (loss) $(252,582) $383,312
--------- --------
--------- --------
<CAPTION>
After-tax
- -------------------------------
<S> <C>
Net income (loss) $229,419
--------
Other comprehensive
income:
Unrealized holding
gains 125,518
Less:
reclassification
adjustment for
gains realized in
net income (loss) (32,223)
--------
Net unrealized gains
recognized in
other
comprehensive
income 93,295
Foreign currency
translation (1,815)
--------
Total other
comprehensive
income 91,480
--------
Total comprehensive
income (loss) $320,899
--------
--------
</TABLE>
See notes to consolidated financial statements
34
<PAGE>
Reliance Group Holdings, Inc. and Subsidiaries
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31 1999 1998 1997
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
(In thousands)
CASH FLOWS (DEFICIT) FROM OPERATING ACTIVITIES:
Net income (loss) (including net income of $7,293 and $42,176 from the title insurance
operations in 1998 and 1997) $(310,546) $ 326,449 $ 229,419
Adjustments to reconcile net income (loss) to net cash (used by)
provided from operating activities:
Discontinued operation - - (68,865)
Gain on sales of investments (63,018) (108,840) (73,097)
Gain on sales of subsidiaries - (197,258) -
Deferred policy acquisition costs (23,229) (47,367) (33,134)
Premiums and other receivables and reinsurance recoverables (319,893) (325,934) (397,026)
Unearned premiums, unpaid claims and related expenses 142,390 119,825 192,106
Accounts payable, accrued expenses, reinsurance
premiums payable and other 403,312 319,929 134,757
Change in title insurance operating assets and liabilities - - 26,307
-------------------------------------
(170,984) 86,804 10,467
-------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of:
Fixed maturities available for sale 531,105 502,179 503,609
Equity securities 235,779 430,353 352,445
Maturities and redemptions of:
Fixed maturities available for sale 167,410 342,030 259,717
Fixed maturities held for investment 61,636 124,114 49,885
Purchases of:
Fixed maturities available for sale (838,718) (1,282,351) (682,577)
Fixed maturities held for investment (4,641) (27,830) (41,156)
Equity securities (157,445) (206,279) (228,598)
(Increase) decrease in short-term investments-net 143,213 90,609 (207,717)
Investing cash flows of the title insurance operations - - (23,887)
Proceeds from sales of subsidiaries - 271,852 -
Proceeds from sale of investee company 184,084 - -
Other-net (94,330) (81,280) 75,000
-------------------------------------
228,093 163,397 56,721
-------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in term loans 131,331 145,000 75,000
Increase (decrease) in short-term debt-net (3,000) (3,876) 985
Repayments of term loans (106,310) (135,755) (61,003)
Redemption of debentures and notes (7,500) (196,196) (15,365)
Issuance of common stock 415 5,631 2,451
Dividends (36,478) (37,054) (36,706)
Purchase of treasury stock (10,972) - -
-------------------------------------
(32,514) (222,250) (34,638)
-------------------------------------
Increase in cash 24,595 27,951 32,550
Increase in cash of the title insurance operations - - (5,414)
Cash, beginning of year 81,612 53,661 26,525
-------------------------------------
Cash, end of year $ 106,207 $ 81,612 $ 53,661
-------------------------------------
-------------------------------------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Interest paid, including $36,300 in 1999 pertaining to a tax settlement $ 91,800 $ 67,300 $ 75,900
-------------------------------------
-------------------------------------
Income taxes refunded (paid) $ 5,900 $ (109,100) $ (39,700)
-------------------------------------
-------------------------------------
</TABLE>
See notes to consolidated financial statements
35
<PAGE>
Reliance Group Holdings, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1 NATURE OF OPERATIONS/SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS
The Company's property and casualty insurance business consists of five
operations: Reliance National, Reliance Insurance, Reliance Personal, Reliance
Reinsurance and Reliance Surety.
Reliance National offers a broad range of commercial insurance products and
services with a focus on large accounts and specialty lines customers. Reliance
National selects market segments where it can provide specialized coverages,
such as directors and officers liability insurance, or specialized services,
such as providing captive insurance arrangements to the alternative risk
markets. In addition, Reliance National provides traditional commercial
insurance products. In 1999, Reliance National accounted for 41% of the net
premiums written by the Company. Reliance National is organized into eight major
divisions: casualty risk services, international, accident and health, property,
excess and surplus, financial products, cybercomp (which writes workers'
compensation coverage utilizing the internet) and credit insurance. In
conjunction with the Company's plan to reduce operating expenses, the Company
may merge certain of Reliance National's divisions. Reliance National, which
conducts business nationwide, is headquartered in New York City. Reliance
National also conducts business in the European Community, the Americas, the
Pacific Rim and Africa. Reliance National distributes its products through
insurance brokers and agents. Net premiums written by Reliance National were
$1,060,654,000, $1,013,650,000 and $889,314,000 for the years ended December 31,
1999, 1998 and 1997, respectively.
Reliance Insurance offers commercial lines property and casualty insurance
products, primarily focusing on the diverse needs of mid-sized companies
nationwide. Reliance Insurance conducts business through a national network of
offices and distributes its products through agents and brokers. Reliance
Insurance's insureds are primarily closely held companies with 100 to 1,000
employees and annual sales of $5 million to $300 million. Reliance Insurance
underwrites a variety of commercial insurance coverages, including commercial
automobile, workers' compensation, multiple peril and general liability. In
1999, Reliance Insurance accounted for 27% of the net premiums written by the
Company. Reliance Insurance is organized into three major divisions: commercial,
specialty and large accounts. In conjunction with the Company's plan to reduce
operating expenses, the Company may merge certain of Reliance Insurance's
divisions. Reliance Insurance is headquartered in Philadelphia and operates in
50 states, the District of Columbia, Puerto Rico, Guam and the Virgin Islands.
Net premiums written by Reliance Insurance were $693,189,000, $775,480,000 and
$740,362,000 for the years ended December 31, 1999, 1998 and 1997, respectively.
Reliance Personal was created in late March 1999 by consolidating Reliance
National's non-standard automobile operation, Reliant, with Reliance Direct
which formerly was a separate operating unit. As a result of the consolidation,
a $24,000,000 restructuring charge was recorded by Reliance Personal in the
first quarter of 1999. See note 2 to the consolidated financial statements.
Reliance Personal is headquartered in Cleveland and conducts business nationwide
through branch offices and distributes its products through agents and brokers.
Net premiums written by Reliance Personal were $346,086,000, $226,801,000 and
$99,007,000 for the years ended December 31, 1999, 1998 and 1997, respectively.
In the fourth quarter of 1999, the Company entered into an Asset Purchase
Agreement pursuant to which it transferred substantially all of the assets and
non-insurance liabilities of Reliance Direct to a third party. In addition,
through reinsurance and other arrangements effective January 15, 2000, the
Company transferred all of Reliance Direct's liabilities for unearned premium
and related insured losses, as well as the renewal rights to in-force policies.
The gain from the transaction, which will be recognized in 2000, is not
significant.
Reliance Reinsurance provides casualty reinsurance on both a treaty (blocks
of risk) and facultative (individual risks) basis and property reinsurance on a
treaty basis. The business of Reliance Reinsurance is primarily conducted on a
treaty basis. All treaty business is marketed through reinsurance brokers who
negotiate contracts of reinsurance on behalf of the primary insurer or ceding
reinsurer, while facultative business is produced both directly and through
reinsurance brokers. While Reliance Reinsurance's treaty clients include all
types and sizes of insurers, it typically targets treaty reinsurance for small
to medium sized regional and specialty insurance companies, as well as captives,
risk retention groups and other alternative risk markets, providing both
pro-rata and excess of loss coverage. Reliance Reinsurance believes that this
market is subject to less competition and provides an opportunity to develop and
market innovative programs where pricing is not the key competitive factor.
Reliance Reinsurance typically
36
<PAGE>
Reliance Group Holdings, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
avoids participating in large capacity reinsurance treaties where price is the
predominant competitive factor. It generally writes reinsurance in the 'lower
layers,' the first $1 million of primary coverage. Reliance Reinsurance conducts
its business nationwide and is headquartered in Philadelphia. Net premiums
written by Reliance Reinsurance were $247,164,000, $217,287,000 and $159,032,000
for the years ended December 31, 1999, 1998 and 1997, respectively.
Reliance Surety is a leading provider of surety and fidelity bonds in the
United States. Reliance Surety concentrates on writing performance and payment
bonds for contractors of public works projects, commercial real estate and
multi-family housing. It also writes commercial surety, financial institution
and commercial fidelity bonds. Reliance Surety performs extensive credit
analysis on its clients and actively manages claims to minimize losses and
maximize recoveries. Reliance Surety's Firemark and Express Surety operations
target smaller contractors and accounts, a market traditionally less fully
serviced by national surety companies. In 1998, Reliance Surety established a
new division to write surety bonds for large contractors. Reliance Surety is
headquartered in Philadelphia and conducts business nationwide through branch
offices and distributes its products through agents and brokers. In addition,
Reliance Surety has established a presence in London. Net premiums written by
Reliance Surety were $213,413,000, $204,367,000 and $176,500,000 for the years
ended December 31, 1999, 1998 and 1997, respectively.
On February 29, 2000, the Company announced that it had reached an agreement
in principle to sell its surety operations to Travelers Property Casualty Corp.
for $580,000,000 in cash. The transaction, which is subject to the negotiation
and execution of definitive agreements and customary corporate and regulatory
approvals, is expected to close in the second quarter of 2000.
RCG Information Technology provides a full range of information technology
services to large corporate clients in the United States including clients in
the following sectors: financial services, energy, computer services, healthcare
and pharmaceuticals, telecommunications, public entities, publishing,
electronics, travel and food and beverage. Such services include E-solutions,
customer relationship management, application management, data warehousing,
enterprise resource planning and staff augmentation. RCG Information Technology
has 21 offices nationwide. RCG Information Technology recruits programmers both
in the United States and internationally to meet demands for its services, and
has established recruiting capabilities in the Philippines and South Africa. RCG
Information Technology had revenues of $230,654,000, $247,749,000 and
$191,886,000 for the years ended December 31, 1999, 1998 and 1997, respectively.
In 1998, the Company completed the sale of its title insurance operations to
LandAmerica Financial Group, Inc. ('LandAmerica'). The Company accounts for its
investment in LandAmerica by the equity method of accounting for periods
subsequent to the sale date. See note 3 to the consolidated financial
statements. LandAmerica writes, through direct and agency operations, title
insurance for residential and commercial real estate nationwide and provides
escrow, appraisal and settlement services in connection with real estate
closings.
BASIS OF CONSOLIDATION AND PRESENTATION
The consolidated financial statements of the Company include the accounts of all
subsidiaries. The consolidated financial statements have been prepared in
conformity with generally accepted accounting principles. Such statements
include informed estimates and judgments of management for those transactions
that are not yet complete or for which the ultimate effects cannot be precisely
determined. Actual results may differ from these estimates. Intercompany
balances and transactions have been eliminated in consolidation.
INSURANCE
The financial statements of the insurance subsidiaries have been prepared in
accordance with generally accepted accounting principles, which differ in
certain respects from those followed in reports to regulatory authorities.
Fixed maturity investments, the vast majority of which are publicly traded
securities, include bonds, notes and redeemable preferred stocks. Fixed maturity
investments classified as 'available for sale' represent securities that will be
held for an indefinite period of time and are carried at quoted market value
with the net unrealized gain or loss included in shareholders' equity. Such
investments may be sold in response to changes in interest rates, future general
liquidity needs and similar factors. Fixed maturity investments classified as
'held for investment' are carried at amortized cost since the Company has the
positive intent and ability to hold these securities to maturity. Investments in
equity securities include common stocks, where the Company's ownership of
outstanding voting stock
37
<PAGE>
Reliance Group Holdings, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
- --------------------------------------------------------------------------------
is less than 20%, and nonredeemable preferred stocks and are carried at quoted
market value with the net unrealized gain or loss included in shareholders'
equity. Investments in which the Company has a 20% to 50% ownership interest of
voting stock, or otherwise exercises significant influence, are reported using
the equity method of accounting. Short-term investments primarily consist of
United States government and other foreign government securities, certificates
of deposit and commercial paper carried at cost which approximates market value.
Investments whose declines in market values are deemed to be other than
temporary are written down to market value. In circumstances where market values
are not available, investments are written down to estimated fair value. In
determining estimated fair value of investments, the Company reviews the
issuer's financial condition and the stability of its income, as well as the
discounted cash flow to be received by the Company. Write-downs and other
realized gains and losses, determined on a specific identification basis, are
included in income.
Insurance premiums reported as earned represent the portion of premiums
written applicable to the current period, generally computed on a pro-rata basis
over the terms of the policies in force. Premiums include estimated audit
premiums and estimated premiums on retrospectively rated policies.
The costs associated with the acquisition of property and casualty business
are deferred and amortized on a straight-line basis over the terms (principally
one year) of the policies in force. Such deferred policy acquisition costs
consist of commissions, premium taxes and other variable policy issuance and
underwriting expenses. Deferred policy acquisition costs are reviewed to
determine that they do not exceed recoverable amounts, including anticipated
investment income.
Unpaid claims and related expenses are estimated based on an evaluation of
reported claims in addition to statistical projections of claims incurred but
not reported and loss adjustment expenses. Estimates of salvage and subrogation
are deducted from the liability. The Company applies a variety of generally
accepted actuarial techniques to determine the estimates of ultimate liability.
The process of estimating claims is a complex task and the ultimate liability
may be more or less than such estimates indicate. Adjustments of the probable
ultimate liability, based on subsequent developments, are included in operations
currently. In 1999, the Company recorded a significant provision attributable to
insured events of prior years. See note 8 to the consolidated financial
statements.
INVESTMENTS IN REAL ESTATE
Investments in real estate were $178,800,000 and $135,700,000 at December 31,
1999 and 1998, respectively, and are included in other assets in the
accompanying consolidated balance sheet. Investments in real estate, at
December 31, 1999, consist primarily of office buildings, construction in
progress and undeveloped land zoned for mixed use development, and are carried
at cost (less accumulated depreciation), which includes interest, real estate
taxes and other carrying costs incurred prior to substantial completion of the
real estate development projects. Depreciation expense is provided using the
straight-line method.
The Company's real estate properties are reviewed for impairment whenever
events or circumstances indicate that the carrying value of such properties may
not be recoverable. In performing the review for recoverability of carrying
value, the Company estimates the future undiscounted cash flows expected to
result from the use of each of its properties and their eventual disposition.
These cash flow projections reflect changes in occupancy, new leases, current
rent roll, future expirations and general market conditions. If the total
expected future undiscounted cash flows are less than the carrying value of such
properties, impairment losses are recognized on a property-by-property basis. An
impairment loss is measured by the amount that the carrying value of the
property exceeds its fair value.
EXCESS OF COST OVER FAIR VALUE OF NET ASSETS ACQUIRED
The excess of cost over fair value of net assets acquired is being amortized
over 40 years using the straight-line method. The Company evaluates the carrying
amount of the excess of cost over fair value of net assets acquired by analyzing
historical and expected future income and undiscounted cash flows of its
operations.
INCOME TAXES
The Company and its domestic subsidiaries, where their ownership is at least 80%
of outstanding voting stock, file a consolidated federal income tax return. The
Company provides for deferred income taxes under the asset and liability method,
whereby deferred income taxes result from temporary differences between the tax
bases of assets and liabilities and their reported amounts in the financial
statements. In addition, deferred income taxes are provided for unrealized
appreciation and depreciation on investments carried at quoted market value.
38
<PAGE>
Reliance Group Holdings, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
POSTRETIREMENT BENEFIT PLANS
Retirement pension benefits, covering substantially all employees, are provided
under noncontributory trusteed defined benefit pension plans. Contributions to
the pension plans are based on the minimum funding requirements of the Employee
Retirement Income Security Act of 1974. In addition, the Company sponsors
defined contribution plans covering employees who meet eligibility requirements.
TRANSLATION OF FOREIGN CURRENCY FINANCIAL STATEMENTS
Assets and liabilities of foreign subsidiaries are translated at year-end
exchange rates. Results of operations are translated at average rates during the
year. The effects of exchange rate changes in translating foreign financial
statements are excluded from the consolidated statement of operations and are
presented as a separate component of shareholders' equity. Exchange gains and
losses resulting from foreign currency transactions are included in operations
currently. Translation gains and losses relating to operations of subsidiaries
where hyperinflation exists are included in the consolidated statement of
operations.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair value of publicly traded financial instruments is determined
by the Company using quoted market prices, dealer quotes and prices obtained
from independent third parties. For financial instruments not publicly traded,
fair values are estimated based on values obtained from independent third
parties or quoted market prices of comparable instruments. However, judgment is
required to interpret market data to develop the estimates of fair value.
Accordingly, the estimates are not necessarily indicative of the amounts that
could be realized in a current market exchange.
The carrying values and fair values of financial instruments are as follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
DECEMBER 31 1999 1998
- -------------------------------------------------------------------------------------------------------------
CARRYING FAIR Carrying Fair
VALUE VALUE Value Value
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
(In thousands)
ASSETS:
Marketable securities:
Fixed maturities held for investment $ 484,340 $ 480,016 $ 539,848 $ 578,179
Fixed maturities available for sale 2,763,508 2,763,508 2,738,864 2,738,864
Equity securities 1,004,776 1,004,776 754,543 754,543
Short-term investments 263,042 263,042 383,658 383,658
Investment in investee company 423,398 190,125 415,654 507,053
LIABILITIES:
Term loans and short-term debt 279,105 279,105 256,763 256,763
Debentures and notes 455,980 382,899 463,480 481,890
</TABLE>
RECLASSIFICATIONS
Certain reclassifications have been made to the Company's prior years'
consolidated financial statements to conform with the current year's
consolidated financial statements.
ADOPTION OF NEW ACCOUNTING STANDARDS
Effective January 1, 1999, the Company adopted the American Institute of
Certified Public Accountants' Statement of Position No. 97-3, 'Accounting by
Insurance and Other Enterprises for Insurance-Related Assessments' ('SOP'). The
SOP provides guidance as to when to recognize a liability for loss-based and
other insurance-related assessments. Previously, and as was the practice of many
property and casualty insurance companies, the Company had accounted for these
assessments on a pay-as-you-go basis and, accordingly, had no recorded liability
related to these assessments. The effect of adopting the SOP was an increase in
the net loss in 1999 for the cumulative effect of the change in accounting
principle of $57,850,000 ($.51 per diluted share), net of a $31,150,000 income
tax benefit. Approximately $61,000,000 of the $89,000,000 pretax charge relates
to loss-based assessments for workers' compensation insurance. The remaining
$28,000,000 charge relates primarily to premium-based
39
<PAGE>
Reliance Group Holdings, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
- --------------------------------------------------------------------------------
assessments and assessments by guaranty funds. The Company estimates that a
substantial majority of the liability for assessments will be paid over the next
ten years.
Exclusive of the impact of the cumulative effect, the adoption of the SOP
reduced policy acquisition costs in 1999 by $8,300,000 including the impact of
new legislation by New York State which changed the assessment liability for
workers' compensation insurance.
In March 1998, the American Institute of Certified Public Accountants issued
Statement of Position No. 98-1, 'Accounting for Costs of Computer Software
Developed or Obtained for Internal Use.' This Statement was adopted in the first
quarter of 1999 and did not have a material effect on the Company's consolidated
financial statements.
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.
In October 1998, the American Institute of Certified Public Accountants
issued Statement of Position No. 98-7, 'Deposit Accounting: Accounting for
Insurance and Reinsurance Contracts That Do Not Transfer Insurance Risk.' The
adoption of this Statement, which is not required until 2000, is not expected to
have a material effect on the Company's consolidated financial statements.
In 1998, the National Association of Insurance Commissioners and the state of
Pennsylvania (the state where Reliance Insurance Company is domiciled) adopted
the Codification of Statutory Accounting Principles ('Codification'). The
Codification, which is intended to standardize regulatory accounting and
reporting for the insurance industry, is proposed to be effective January 1,
2001. The Company has not finalized the quantification of the effects of
Codification on its statutory financial statements.
In November 1997, the Emerging Issues Task Force released Issue No. 97-13,
'Accounting for Costs Incurred in Connection with a Consulting Contract or an
Internal Project That Combines Business Process Reengineering and Information
Technology Transformation.' Issue No. 97-13 requires that the cost of business
process reengineering activities that are part of a systems development project
be expensed as those costs are incurred. Any unamortized costs that were
previously capitalized must be written off as a cumulative adjustment in the
quarter containing November 20, 1997. The effect of adopting Issue No. 97-13 was
a decrease in 1997 net income for the cumulative effect of the change in
accounting principle of $6,442,000, net of an income tax benefit of $3,468,000.
- --------------------------------------------------------------------------------
2 RESTRUCTURING CHARGE
During the first quarter of 1999, the Company recorded a $24,000,000
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 $18,000,000 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 the write-off of $2,200,000 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 $2,000,000 of severance costs, of which $1,000,000
has been paid through December 31, 1999, related to the termination of Reliance
Direct employees, and $1,800,000 of costs, of which $1,700,000 has been paid
through December 31, 1999, associated with the termination of certain of
Reliance Direct's third party service contracts. The Company estimates that the
remaining severance and terminated service contracts will be substantially paid
by the 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, the Company expects to
incur a restructuring charge in the first half of 2000. In addition, the Company
expects, under certain circumstances, to incur a pretax charge of approximately
$18,000,000, in 2000, related to its capital raising initiatives.
40
<PAGE>
Reliance Group Holdings, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
3 SALE OF OPERATIONS
On February 29, 2000, the Company announced that it had reached an agreement in
principle to sell its surety operations to Travelers Property Casualty Corp. for
$580,000,000 in cash. The transaction, which is subject to the negotiation and
execution of definitive agreements and customary corporate and regulatory
approvals, is expected to close in the second quarter of 2000 and will result in
an after-tax gain of approximately $250,000,000 and increase statutory
policyholders' surplus by approximately $300,000,000.
In the first quarter of 1998, the Company completed the sale of its title
insurance operations to LandAmerica Financial Group, Inc. ('LandAmerica'). The
transaction resulted in an after-tax gain of $242,900,000 of which $133,640,000
($1.11 per diluted share) was recognized in the first quarter of 1998. The
deferred pretax gain of $158,793,000 is included in 'accounts payable and
accrued expenses' in the accompanying consolidated balance sheet. The Company
accounts for its investment in LandAmerica by the equity method of accounting
for periods subsequent to the sale date. The Company owns 4,039,473 shares of
LandAmerica common stock and 2,200,000 shares of LandAmerica 7% cumulative
convertible preferred stock which is initially convertible into 4,824,561 shares
of LandAmerica common stock. The Company owns approximately 30% of LandAmerica's
outstanding common stock and, on a diluted basis, 48% of LandAmerica's common
stock, assuming the conversion of the preferred stock. See note 19 to the
consolidated financial statements for business segment information regarding the
title insurance operations.
In addition, in the first quarter of 1998, the Company sold a subsidiary, CSC
of Washington D.C., Inc., which resulted in an after-tax gain of $1,345,000, net
of tax expense of $1,833,000.
SALE OF DISCONTINUED OPERATION
On December 31, 1997, the Company sold all of the issued and outstanding common
stock of Prometheus Funding Corp. ('Prometheus'), formerly known as Frank B.
Hall & Co. Inc. The net proceeds received were $5,954,000. The sale resulted in
an after-tax gain of $68,865,000, which included a tax benefit of $87,766,000.
The tax benefit resulted primarily from a reversal of a previously established
deferred tax asset valuation allowance pertaining to the tax basis differential
of the Company's investment in Prometheus. The $68,865,000 after-tax gain has
been classified as a gain on disposal of a discontinued operation in the
accompanying consolidated statement of operations.
41
<PAGE>
Reliance Group Holdings, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
- --------------------------------------------------------------------------------
4 INVESTMENTS
Fixed maturities held for investment at December 31, 1999 consisted of:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
Gross Gross
Amortized Market Unrealized Unrealized
Cost Value Gains Losses(1)
- --------------------------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C> <C>
Bonds and notes:
Public utilities $166,543 $160,705 $ 417 $ 6,255
Foreign government 106,367 110,587 4,220 -
Corporate bonds and notes and other 150,679 149,045 1,138 2,772
Redeemable preferred stock 60,751 59,679 491 1,563
-------------------------------------------------------
$484,340 $480,016 $6,266 $10,590
-------------------------------------------------------
-------------------------------------------------------
</TABLE>
(1) The amortized cost and market value of fixed maturities held for investment
which have unrealized losses were $284,508,000 and $273,918,000.
Fixed maturities available for sale at December 31, 1999 consisted of:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
Gross Gross
Market Amortized Unrealized Unrealized
Value Cost Gains Losses(1)
- --------------------------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C> <C>
Bonds and notes:
United States government and government agencies
and authorities $ 416,756 $ 425,497 $ 324 $ 9,065
States, municipalities and political subdivisions 147,633 146,231 5,145 3,743
Public utilities 512,323 548,632 1,295 37,604
Corporate bonds and notes and other 1,379,082 1,434,058 25,303 80,279
Redeemable preferred stock 307,714 295,030 13,905 1,221
-------------------------------------------------------
$2,763,508 $2,849,448 $ 45,972 $131,912
-------------------------------------------------------
-------------------------------------------------------
</TABLE>
(1) The amortized cost and market value of fixed maturities available for sale
which have unrealized losses were $2,111,348,000 and $1,979,436,000.
Fixed maturities held for investment at December 31, 1998 consisted of:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
Gross Gross
Amortized Market Unrealized Unrealized
Cost Value Gains Losses(1)
- --------------------------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C> <C>
Bonds and notes:
Public utilities $199,574 $211,261 $ 11,687 $ -
Foreign government 123,615 136,020 12,405 -
Corporate bonds and notes and other 151,724 161,093 9,471 102
Redeemable preferred stock 64,935 69,805 4,870 -
-------------------------------------------------------
$539,848 $578,179 $38,433 $102
-------------------------------------------------------
-------------------------------------------------------
</TABLE>
(1) The amortized cost and market value of fixed maturities held for investment
which have unrealized losses were $2,741,000 and $2,639,000.
42
<PAGE>
Reliance Group Holdings, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
Fixed maturities available for sale at December 31, 1998 consisted of:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
Gross Gross
Market Amortized Unrealized Unrealized
Value Cost Gains Losses(1)
- --------------------------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C> <C>
Bonds and notes:
United States government and government agencies
and authorities $ 552,547 $ 545,482 $ 7,328 $ 263
States, municipalities and political subdivisions 143,117 130,982 12,135 -
Public utilities 469,349 451,046 19,675 1,372
Corporate bonds and notes and other 1,230,535 1,233,211 34,747 37,423
Redeemable preferred stock 343,316 326,288 23,388 6,360
-------------------------------------------------------
$2,738,864 $2,687,009 $97,273 $45,418
-------------------------------------------------------
-------------------------------------------------------
</TABLE>
(1) The amortized cost and market value of fixed maturities available for sale
which have unrealized losses were $620,598,000 and $575,180,000.
As of December 31, 1999, the contractual maturities of fixed maturity
investments are as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
Held for investment Available for sale
- --------------------------------------------------------------------------------------------------------------
Amortized Market Amortized Market
Cost Value Cost Value
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
(In thousands)
Due within one year $ 21,364 $ 21,489 $ 156,996 $ 156,682
Due after one year through five years 185,818 188,447 373,016 370,790
Due after five years through ten years 235,314 231,681 927,228 922,209
Due after ten years 41,844 38,399 1,244,371 1,172,321
-------------------------------------------------------
484,340 480,016 2,701,611 2,622,002
Government National Mortgage Association (GNMA)
securities - - 147,837 141,506
-------------------------------------------------------
$484,340 $ 480,016 $2,849,448 $2,763,508
-------------------------------------------------------
-------------------------------------------------------
</TABLE>
Net investment income consisted of:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31 1999 1998 1997
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
(In thousands)
Investment income:
Fixed maturities $ 235,152 $ 242,465 $ 252,930
Equity securities 20,668 18,229 11,510
Short-term investments 31,339 41,073 24,607
Other 7,564 7,744 18,416
----------------------------------------
294,723 309,511 307,463
Investment expenses (8,303) (9,492) (12,492)
----------------------------------------
$ 286,420 $ 300,019 $ 294,971
----------------------------------------
----------------------------------------
</TABLE>
43
<PAGE>
Reliance Group Holdings, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Gain on sales of investments consisted of:
- ----------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31 1999 1998 1997
- ----------------------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C>
Fixed maturities:
Realized gains $ 48,570 $ 61,794 $ 31,171
Realized losses(1) (53,940) (46,482) (26,828)
--------------------------------
(5,370) 15,312 4,343
Equity securities 73,494 120,316 55,667
Real estate(2) 1,460 - 16,955
Other(3) (6,566) (26,788) (3,868)
--------------------------------
$ 63,018 $108,840 $ 73,097
--------------------------------
--------------------------------
</TABLE>
(1) Includes write-downs of $12,300,000, $37,000,000 and $18,100,000 in 1999,
1998 and 1997, respectively, related to securities not rated investment
grade.
(2) Includes gains in 1997 of $42,800,000 resulting from the sale of shopping
centers located throughout the United States and an office building located
in Glendale, California and a write-down of $25,900,000 related to
undeveloped land.
(3) Includes exchange gains of $6,700,000 in 1999 and exchange losses of
$16,600,000 and $3,500,000 in 1998 and 1997, respectively, related to
certain foreign currency denominated investments and write-downs of
$10,000,000 and $10,500,000 in 1999 and 1998.
44
<PAGE>
Reliance Group Holdings, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
<TABLE>
Net unrealized appreciation on investments consisted of:
- ----------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31 1999 1998 1997
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C>
(In thousands)
Unrealized appreciation (depreciation):
Equity securities $ 235,902 $ 159,059 $ 51,945
Fixed maturities available for sale (137,795) (50,855) 80,580
-------------------------------------
98,107 108,204 132,525
Deferred income tax provision (34,337) (37,871) (46,025)
Net unrealized appreciation (depreciation) in
investments of title insurance operations - (7,158) 3,511
Net unrealized appreciation (depreciation) in
investments of investee companies (6,396) 503 3,284
-------------------------------------
$ 57,374 $ 63,678 $ 93,295
-------------------------------------
-------------------------------------
Unrealized appreciation (depreciation) on fixed
maturities held for investment $ (42,655) $ 10,706 $ 14,714
-------------------------------------
-------------------------------------
</TABLE>
<TABLE>
Net unrealized appreciation on investments consisted of:
- ----------------------------------------------------------------------------------------
DECEMBER 31 1999 1998 1997
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C>
(In thousands)
Equity securities:
Unrealized gains $ 739,691 $ 510,354 $ 340,361
Unrealized losses (12,232) (18,797) (7,863)
-------------------------------------
727,459 491,557 332,498
-------------------------------------
Fixed maturities available for sale:
Unrealized gains 45,972 97,273 114,413
Unrealized losses (131,912) (45,418) (11,703)
-------------------------------------
(85,940) 51,855 102,710
-------------------------------------
641,519 543,412 435,208
Deferred income tax provision (224,532) (190,195) (152,324)
Net unrealized gain in investments of title
insurance operations - - 7,158
Net unrealized gain (loss) in investments of
investee companies (3,854) 2,542 2,039
-------------------------------------
$ 413,133 $ 355,759 $ 292,081
-------------------------------------
-------------------------------------
</TABLE>
Fixed maturity investments carried at $605,100,000 at December 31, 1999 were on
deposit under requirements of regulatory authorities, including deposits related
to workers' compensation reinsurance pools.
Investments in a single issuer, other than obligations of the United States
government, whose aggregate carrying value is in excess of 10% of the Company's
shareholders' equity at December 31, 1999 are comprised of fixed maturity
investments of UK Gilts and NTL Incorporated with carrying values of
$118,600,000 and $103,600,000, respectively, and market values of $120,000,000
and $103,600,000, respectively, and the equity securities of Symbol
Technologies, Inc. ('Symbol') with a carrying and market value of $672,400,000.
From January 1, 2000 through March 15, 2000, the Company sold 3,049,000 shares
of Symbol common stock. As of March 15, 2000, the carrying and market value of
the remaining investment in equity securities of Symbol was $694,600,000.
45
<PAGE>
Reliance Group Holdings, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
- --------------------------------------------------------------------------------
5 INVESTMENT IN INVESTEE COMPANIES
On October 25, 1999, the Company completed the sale of its entire investment in
Zenith National Insurance Corp. ('Zenith') for cash proceeds of $184,084,000. In
connection with the sale, the Company wrote-down its investment in Zenith in
1999 by $9,316,000. The write-down is included in gain on sales of investments
in the accompanying consolidated statement of operations, and the Company's
investment in Zenith has been reclassified from investment in investee company
to other assets in the accompanying 1998 consolidated balance sheet.
The Company's equity in investee companies is as follows:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31 1999 1998 1997
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C>
(In thousands)
LandAmerica Financial Group, Inc. (1) $ 7,001 $ 15,594 $ -
Zenith (2) 23,777 6,406 7,675
-------------------------------------
$ 30,778 $ 22,000 $ 7,675
-------------------------------------
-------------------------------------
</TABLE>
(1) The equity in investee company for 1998 includes equity earnings for the ten
month period ending December 31, 1998.
(2) The equity in investee company for 1999 includes $24,895,000 representing
the Company's portion of a gain from the sale of CalFarm Insurance Company
by Zenith.
Common stock dividends received by the Company from LandAmerica Financial Group,
Inc. were $808,000 for each of the years ended December 31, 1999 and 1998.
Dividends received by the Company from Zenith were $4,931,000 for the year ended
December 31, 1999 and $6,574,000 for each of the years ended December 31, 1998
and 1997.
Summarized financial information for LandAmerica Financial Group, Inc. is as
follows:
- ------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31 1999 1998
- ------------------------------------------------------------------------------
(In thousands, except per share amounts)
Revenues $ 2,048,013 $ 1,848,870
Income before income taxes 84,870 146,302
Net income 54,317 93,028
Net income per diluted share 2.79 5.05
- ------------------------------------------------------------------------------
DECEMBER 31 1999 1998
- ------------------------------------------------------------------------------
(In thousands, except percentage of ownership)
Total assets $ 1,667,570 $ 1,692,358
Notes payable 207,653 207,792
Shareholders' equity 742,223 771,189
Percentage of ownership 29.5% 26.4%
The Company's equity in net income includes amortization of excess of cost over
fair value of net assets acquired. At December 31, 1999, retained earnings
included undistributed net income of $20,979,000 from LandAmerica Financial
Group, Inc.
46
<PAGE>
Reliance Group Holdings, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
6 PREMIUMS AND OTHER RECEIVABLES
Premiums and other receivables consisted of:
- ------------------------------------------------------------------------------
DECEMBER 31 1999 1998
- ------------------------------------------------------------------------------
(In thousands)
Premiums receivable $ 1,602,379 $ 1,513,536
Investment income receivable 61,325 67,322
Accounts, notes and other receivables 99,857 127,903
--------------------------
$ 1,763,561 $ 1,708,761
--------------------------
--------------------------
At December 31, 1999, substantially all receivables were due within one year.
- --------------------------------------------------------------------------------
7 INCOME TAXES
Income tax benefit (provision) consisted of:
<TABLE>
- -----------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31 1999 1998 1997
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C>
(In thousands)
Current:
Federal $220,125 $(127,676) $ (65,744)
Foreign 2,090 2,773 (8,327)
-------------------------------------
222,215 (124,903) (74,071)
Deferred:
Federal (7,700) (3,926) (1,129)
Foreign (2,315) (4,771) -
-------------------------------------
$212,200 $(133,600) $ (75,200)
-------------------------------------
-------------------------------------
</TABLE>
47
<PAGE>
Reliance Group Holdings, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
- --------------------------------------------------------------------------------
Domestic and foreign income (loss) before income taxes and equity in investee
companies is as follows:
<TABLE>
- ----------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31 1999 1998 1997
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C>
(In thousands)
Domestic $(503,850) $421,177 $218,230
Foreign 8,176 24,638 23,791
------------------------------------
$(495,674) $445,815 $242,021
------------------------------------
------------------------------------
</TABLE>
The reconciliation of taxes computed at the statutory rate of 35% to the income
tax benefit (provision) is as follows:
<TABLE>
- ----------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31 1999 1998 1997
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C>
(In thousands)
Tax benefit (provision) at the statutory rate $ 173,486 $(156,035) $(84,707)
Nontaxable investment income 14,146 16,161 15,228
Amortization of excess of cost over fair value
of net assets acquired (2,800) (2,905) (3,150)
Tax reversal 35,000 - -
Sale of subsidiary - 6,767 -
Other (7,632) 2,412 (2,571)
------------------------------------
Income tax benefit (provision) $ 212,200 $(133,600) $(75,200)
------------------------------------
------------------------------------
</TABLE>
The tax effects of items comprising the Company's net deferred tax asset
(liability) are as follows:
- -------------------------------------------------------------------------------
DECEMBER 31 1999 1998
- -------------------------------------------------------------------------------
(In thousands)
DEFERRED TAX ASSETS:
Discounting of loss reserves $168,912 $170,757
Unearned premium reserve 66,005 62,438
Accruals not currently deductible 50,793 47,252
Deferred gain on sale of subsidiary 49,657 49,657
Net operating loss and other carryforwards 135,092 -
Other 89,038 71,328
---------------------------
559,497 401,432
DEFERRED TAX LIABILITIES:
Deferred policy acquisition costs 103,679 99,541
Unrealized investment gains 224,532 190,193
Investment in investee companies - 23,497
Other 119,519 101,436
---------------------------
111,767 (13,235)
Valuation allowance (8,695) (8,695)
---------------------------
Net deferred tax (liability) asset $103,072 $(21,930)
---------------------------
---------------------------
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 year ended
December 31, 1999 of $55,475,000, including the reversal of $31,500,000 of
previously accrued interest expense.
At December 31, 1999, the Company had available net operating loss
carryforwards of approximately $376,000,000 which expire in 2019.
The Internal Revenue Service ('IRS') completed its examination of the
Company's 1986 through 1991 federal income tax returns and issued a Revenue
Agent's Report on August 19, 1997. A protest in response to the Revenue Agent's
Report was submitted on January 16, 1998 and the Company has negotiated with the
IRS a resolution in principle of the Revenue Agent's Report subject to final
administrative approval. The Company does not believe it is probable that its
additional tax liability will have a material adverse effect on its consolidated
financial statements. The IRS completed its examination of the Company's 1992
through 1994 federal income tax returns and issued a
48
<PAGE>
Reliance Group Holdings, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
Revenue Agent's Report on December 8, 1999. A protest in response to the Revenue
Agent's Report was submitted and the Company does not believe it is probable
that its additional tax liability, if any, will have a material adverse effect
on its consolidated financial statements.
- --------------------------------------------------------------------------------
8 UNPAID CLAIMS AND RELATED EXPENSES
The reconciliation of the beginning to ending liability for unpaid claims and
related expenses ('loss reserves') for the Company's property and casualty
insurance operations is as follows:
<TABLE>
- --------------------------------------------------------------------------------------------
DECEMBER 31 1999 1998 1997
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C>
(In thousands)
Loss reserves, beginning of year $7,016,586 $6,559,508 $6,048,240
Less reinsurance recoverables 3,796,540 3,317,190 2,736,634
----------------------------------------
Net loss reserves, beginning of year 3,220,046 3,242,318 3,311,606
----------------------------------------
Provision for policy claims and related
expenses:
Provision for insured events of the
current year 1,856,774 1,549,907 1,299,066
Increase (decrease) in provision for insured
events of prior years 254,298 (32,959) (35,980)
----------------------------------------
Total provision 2,111,072 1,516,948 1,263,086
----------------------------------------
Payments for policy claims and related expenses:
Attributable to insured events of the
current year 621,569 490,146 367,763
Attributable to insured events of prior years 1,371,242 1,046,583 963,135
----------------------------------------
Total payments 1,992,811 1,536,729 1,330,898
----------------------------------------
Foreign currency translation 1,347 (2,491) (1,476)
----------------------------------------
Net loss reserves, end of year 3,339,654 3,220,046 3,242,318
Plus reinsurance recoverables 4,946,323 3,796,540 3,317,190
----------------------------------------
Loss reserves, end of year $8,285,977 $7,016,586 $6,559,508
----------------------------------------
----------------------------------------
</TABLE>
The provision for policy claims and settlement expenses for insured events of
prior years in 1999 was $254,298,000 net of losses ceded to reinsurers under
various stop loss treaties and was comprised of the following:
o Construction defect claims, arising mostly in California. In 1999, the
Company completed an actuarial study of these claims, utilizing the
methodologies provided by an independent actuarial firm. Actuarial analysis
of these types of claims is particularly complex due to the protracted
claims settlement process, as well as a widening interpretation of what
constitutes insurance coverage that courts have applied to these cases.
o Property, marine and aviation lines resulting from higher than expected
losses reported to the Company on assumed reinsurance treaties. The Company
has decided to non-renew the majority of these treaties.
o 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 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 Adverse development in other lines of business, primarily commercial
automobile where loss activity was higher than expected.
The provision for policy claims and related expenses for 1998 and 1997
includes favorable development in workers' compensation and surety line of
business partially offset by adverse development in the commercial automobile
line. The redundancy in workers' compensation is due, in part, to favorable
development in retrospectively rated policies, which was more than offset by a
corresponding reduction in premiums earned. The 1998 redundancy also includes
favorable development in general liability and multiple peril lines of business
and adverse development in ocean marine line of business.
49
<PAGE>
Reliance Group Holdings, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
- --------------------------------------------------------------------------------
At December 31, 1999 and 1998, loss reserves include $355,100,000 and
$357,800,000 relating to short-duration contracts which are expected to have
fixed, periodic payment patterns and have been discounted to present values
using statutory annual rates ranging from 3 1/2% to 6%.
The reconciliation of the beginning to ending net loss reserves for business
written in or before 1987 pertaining to asbestos-related and environmental
pollution claims is as follows:
<TABLE>
- --------------------------------------------------------------------------------------
DECEMBER 31 1999 1998 1997
- --------------------------------------------------------------------------------------
<S> <C> <C> <C>
(In thousands)
Net loss reserves, beginning of year $163,788 $185,836 $208,456
Provision for policy claims and related expenses 23,100 - -
Payments for policy claims and related expenses (18,710) (22,048) (22,620)
----------------------------------
Net loss reserves, end of year $168,178 $163,788 $185,836
----------------------------------
----------------------------------
</TABLE>
In 1999, the Company increased its loss reserves for asbestos claims based on a
review of asbestos payments over the past several years, as well as a review by
an independent actuarial firm. Of this $23,100,000 increase, $15,100,000 relates
to primary business and $8,000,000 relates to assumed reinsurance and pools.
Included in the December 31, 1999 net loss reserves for business written in
or before 1987 pertaining to asbestos-related and environmental pollution claims
are $52,531,000 of loss costs for claims incurred but not reported, $49,608,000
of loss costs for reported claims and $66,039,000 of related expenses.
For business written in or before 1987, the number of insureds with
asbestos-related and environmental pollution claims outstanding is as follows:
<TABLE>
- --------------------------------------------------------------------------------------
DECEMBER 31 1999 1998
- --------------------------------------------------------------------------------------
<S> <C> <C>
(In thousands)
Number of insureds with outstanding claims,
beginning of year 302 345
Additional insureds with claims during the year 186 178
Insureds with closed or settled claims
during the year (191) (221)
---------------------
Number of insureds with outstanding claims,
end of year 297 302
---------------------
---------------------
</TABLE>
For business written in or before 1987, the average net paid loss and expenses
for asbestos-related and environmental pollution claims was $75,800 and $80,800
for the years 1999 and 1998, respectively.
In February 1999, the Company received a decision in an initial phase of an
alternative dispute resolution trial of certain contested issues between an
asbestos producer and certain of its liability insurance carriers, including the
Company. See note 17 for further information.
The Company underwrites policies with environmental coverage, primarily on a
claims made basis, and underwrites policies covering asbestos removal. The
reconciliation of the beginning to ending net loss reserves for these policies
is as follows:
<TABLE>
- -------------------------------------------------------------------------------------
DECEMBER 31 1999 1998 1997
- -------------------------------------------------------------------------------------
<S> <C> <C> <C>
(In thousands)
Net loss reserves, beginning of year $ 33,713 $ 27,433 $29,388
Provision for policy claims and related expenses 23,149 24,144 7,094
Payments for policy claims and related expenses (14,096) (17,864) (9,049)
---------------------------------
Net loss reserves, end of year $ 42,766 $ 33,713 $27,433
---------------------------------
---------------------------------
</TABLE>
Since the Company is no longer writing a program which provided environment
coverage, it expects environmental and asbestos premium writings to decline in
2000. Included in the December 31, 1999 net loss reserves for these policies are
$24,058,000 of loss costs for claims incurred but not reported, $12,119,000 of
loss costs for reported claims and $6,589,000 of related expenses.
50
<PAGE>
Reliance Group Holdings, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
The number of insureds with outstanding claims related to these policies is as
follows:
<TABLE>
- ------------------------------------------------------------------------------------------
DECEMBER 31 1999 1998
- ------------------------------------------------------------------------------------------
<S> <C> <C>
Number of insureds with outstanding claims,
beginning of year 385 381
Additional insureds with claims during the year 143 168
Insureds with closed or settled claims during
the year (218) (164)
-------------------------
Number of insureds with outstanding claims, end
of year 310 385
-------------------------
-------------------------
</TABLE>
The average net paid loss for these claims and expenses was $64,700 and
$108,900 for the years 1999 and 1998, respectively.
- --------------------------------------------------------------------------------
9 DEBENTURES, NOTES AND TERM LOANS
Debentures and notes outstanding are as follows:
<TABLE>
- ------------------------------------------------------------------------------------------
DECEMBER 31 1999 1998
- ------------------------------------------------------------------------------------------
<S> <C> <C>
(Dollars in thousands)
9% senior notes due 2000 $284,210 $291,710
9 3/4% senior subordinated debentures due 2003 171,770 171,770
-------------------------
$455,980 $463,480
-------------------------
-------------------------
</TABLE>
As of December 31, 1999, the 9% senior notes exclude $7,500,000 held by Reliance
Insurance Company. During 1998, the Company purchased $186,520,000 of its
outstanding senior notes and senior subordinated debentures utilizing dividends
received from Reliance Insurance Company. These purchases resulted in an
after-tax extraordinary charge of $7,766,000 net of a $4,181,000 tax benefit.
At December 31, 1999, term loans aggregated $279,105,000 which are payable in
varying amounts through 2015 with interest rates ranging from 3.0% to 9.0%. The
weighted average interest rate on term loans was 6.3% and 5.7% at December 31,
1999 and 1998.
Maturities of term loans for each of the next five years are as follows:
$241,444,000 in 2000 including $237,500,000 of bank borrowings; $2,644,000 in
2001; $814,000 in 2002, $814,000 in 2003 and $514,000 in 2004. In addition,
$284,210,000 of senior notes mature in the year 2000 and $171,770,000 of senior
subordinated debentures mature in 2003. The Company expects to refinance the
senior notes and term loans which come due in 2000. The Company expects to repay
debt maturing in 2001 through 2003 by either refinancing or using cash flow from
operations or a combination thereof.
Reliance Financial Services Corporation ('Reliance Financial') has a
revolving credit facility and term loan agreement with various banks ('Credit
Facility'). The revolving credit facility provides for aggregate maximum
outstanding borrowings of $100,000,000. At Reliance Financial's option, all
borrowings under the revolving credit facility will bear interest at a floating
rate based on a bank reference rate (or, if higher, the Federal Funds rate plus
1/2%) or at a rate based on the Eurodollar rate. At December 31, 1999,
borrowings aggregating $100,000,000 were outstanding under this facility. All of
the common stock of Reliance Insurance Company has been pledged to secure the
Credit Facility. The Company's banks have extended to August 31, 2000 from
March 31, 2000 the maturity of the Credit Facility. The Company plans to
complete a comprehensive refinancing of its debt prior to that date.
The provisions of certain notes and debentures contain limitations on the
payment of dividends, including maintaining a minimum fixed charge coverage
ratio. At February 29, 2000, the Company could pay up to $54,000,000 in
dividends without violating the most restrictive provisions; however, on
February 29, 2000, the Company announced the suspension of the common stock cash
dividend. See note 11 to the consolidated financial statements.
51
<PAGE>
Reliance Group Holdings, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
- --------------------------------------------------------------------------------
10 REINSURANCE
In the normal course of business, the property and casualty insurance companies
assume and cede reinsurance on both a pro-rata and excess basis. Reinsurance
provides greater diversification of business and limits the maximum net loss
potential arising from large claims. Although the ceding of reinsurance does not
discharge an insurer from its primary legal liability to a policyholder, the
reinsuring company assumes the related liability.
Amounts recoverable from reinsurers are estimated in a manner consistent with
the liability for unpaid claims and related expenses associated with the
reinsurance. Estimated amounts of reinsurance recoverables are reported as
assets in the accompanying consolidated balance sheet. As of December 31, 1999
and 1998, reinsurance recoverables include $899,197,000 and $838,397,000 of
prepaid reinsurance premiums which represents the portion of property and
casualty premiums ceded to reinsurers applicable to unearned premiums.
The reconciliation of property and casualty insurance direct premiums to net
premiums is as follows:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31 1999 1998 1997
- ---------------------------------------------------------------------------------------------------------------
(In thousands)
PREMIUMS PREMIUMS Premiums Premiums Premiums Premiums
WRITTEN EARNED Written Earned Written Earned
---------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Direct $ 4,443,928 $ 4,343,510 $ 4,018,450 $ 3,743,993 $ 3,428,059 $ 3,232,403
Assumed 863,834 850,712 633,573 659,089 494,140 447,924
Ceded (2,747,353) (2,690,241) (2,213,713) (2,098,802) (1,856,352) (1,733,311)
---------------------------------------------------------------------------------
Net premiums $ 2,560,409 $ 2,503,981 $ 2,438,310 $ 2,304,280 $ 2,065,847 $ 1,947,016
---------------------------------------------------------------------------------
---------------------------------------------------------------------------------
</TABLE>
The reconciliation of property and casualty insurance gross policy claims and
settlement expenses to net policy claims and settlement expenses is as follows:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31 1999 1998 1997
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
(In thousands)
Gross $ 4,587,277 $ 2,942,793 $ 2,540,603
Reinsurance recoveries (2,476,205) (1,425,845) (1,277,517)
-------------------------------------------------------------------
Net policy claims and
settlement expenses $ 2,111,072 $ 1,516,948 $ 1,263,086
-------------------------------------------------------------------
-------------------------------------------------------------------
</TABLE>
The Company holds substantial amounts of funds and letters of credit as
collateral pursuant to recoverables from unauthorized reinsurers.
Reliance Insurance Company's ten largest reinsurers, based on 1999 ceded
premiums, are as follows:
<TABLE>
- ---------------------------------------------------------------------------------------------------------------
<S> <C>
(In thousands)
American Re-Insurance Company $245,187
NAC Reinsurance Corporation 160,519
Swiss Reinsurance America Corporation 159,172
Employers Reinsurance Corporation 78,741
Sun Life Assurance Company of Canada 74,970
Hertz International Reinsurance Ltd 58,815
Zurich Reinsurance Group 54,122
Hanover Reinsurance Ltd 48,300
General Reinsurance Corporation 46,577
Gerling Global Reinsurance Corporation 43,876
</TABLE>
52
<PAGE>
Reliance Group Holdings, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
11 DIVIDENDS OF SUBSIDIARIES
The Company's principal sources of funds consist of dividends, advances and net
tax payments from its subsidiaries. The Credit Facility of Reliance Financial
requires, among other things, a minimum net worth requirement and a limitation
of indebtedness. At February 29, 2000, Reliance Financial could pay up to
$365,500,000 in cash dividends without violating the most restrictive
provisions. Dividend payments by Reliance Insurance Company, without prior
regulatory approval, are limited to the greater of 10% of the preceding year-end
policyholders' surplus or the preceding year's statutory net income, but in no
event to exceed the amount of unassigned funds. In accordance with these
regulatory restrictions, $124,000,000 is available for the payment of dividends
to Reliance Financial in 2000, subject to the broad discretionary powers of
insurance regulatory authorities to further limit dividend payments of insurance
companies. In 1998, Reliance Insurance Company paid an extraordinary dividend in
the amount of $135,000,000 which was used by the Company to purchase a portion
of its outstanding debt.
- --------------------------------------------------------------------------------
12 STOCK PLANS
STOCK OPTIONS
The Company's stock option plans (the 'Plans') provide for the granting of
incentive stock options and nonstatutory stock options to officers, non-employee
directors and key employees of the Company. Under the terms of the Plans,
options have a maximum term of 10 years from the date of grant. At December 31,
1999, there were 7,555,700 options available for future grants, subject to
shareholder approval.
A summary of the Plans' activity is as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31 1999 1998 1997
- --------------------------------------------------------------------------------------------------------------------
Number Weighted Number Weighted Number Weighted
of Average of Average of Average
Shares Exercise Price Shares Exercise Price Shares Exercise Price
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
(Shares in thousands)
Balance, beginning of year 22,378 $ 11.00 14,667 $ 7.87 10,905 $ 5.40
Granted 14,413 4.52 9,159 15.14 4,460 13.40
Exercised 91 4.59 1,219 4.62 573 4.28
Cancelled 453 10.98 229 9.54 125 6.71
-----------------------------------------------------------------------------------
Balance, end of year 36,247 $ 8.44 22,378 $ 11.00 14,667 $ 7.87
-----------------------------------------------------------------------------------
-----------------------------------------------------------------------------------
Exercisable portion 8,455 $ 6.24 6,425 $ 4.90 6,187 $ 4.19
-----------------------------------------------------------------------------------
-----------------------------------------------------------------------------------
Weighted average fair value of
options granted during the
year $ 1.61 $ 5.36 $ 4.53
-------- -------- --------
-------- -------- --------
</TABLE>
53
<PAGE>
Reliance Group Holdings, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
- --------------------------------------------------------------------------------
Summarized information about stock options outstanding at December 31, 1999 is
as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
Options Outstanding Options Exercisable
------------------------------------------------------ -------------------------------
Number of Weighted Average Number of
Range of Shares Remaining Weighted Average Shares Weighted Average
Exercise Prices Outstanding Contractual Life Exercise Price Exercisable Exercise Price
- --------------------------------------------------------------------------------- -------------------------------
<S> <C> <C> <C> <C> <C>
(Shares in thousands)
$3.125 to $5.75 15,761 7.4 YEARS $ 3.64 5,539 $ 4.30
$5.875 to $8.75 7,199 8.1 7.56 1,716 7.53
$11.00 to $14.375 7,850 8.2 13.25 1,200 13.36
$15.625 to $18.00 5,437 8.4 16.59 - -
------------------------------------------------------ -------------------------------
$3.125 to $18.00 36,247 7.9 YEARS $ 8.44 8,455 $ 6.24
------------------------------------------------------ -------------------------------
------------------------------------------------------ -------------------------------
</TABLE>
EMPLOYEE STOCK PURCHASE PLAN
The Company's Employee Stock Purchase Plan ('ESPP') enables eligible employees
of the Company to subscribe for shares of common stock on an annual offering
date at a purchase price which is the lesser of 85% of the fair market value of
the shares on the first day or the last day of the annual period. Employee
contributions to the ESPP were $1,866,000 and $2,956,000 in 1999 and 1998,
respectively. Pursuant to the ESPP, 328,000 and 270,000 shares were sold to
employees in January 2000 and 1999 and 10,000,000 shares are available for
future sales.
The Company has elected to follow Accounting Principles Board Opinion
No. 25, 'Accounting for Stock Issued to Employees' ('APB 25') in accounting for
its Plans and ESPP. In applying APB 25 no compensation cost has been recognized.
PRO FORMA INFORMATION
Pro forma information regarding net income and diluted net income per share has
been determined as if the Company had accounted for its Plans and ESPP under the
fair value based method. The fair value of stock options granted under the
Company's Plans was estimated on the grant dates using the Black-Scholes
option-pricing model. The following weighted average assumptions were used for
grants in 1999, 1998 and 1997, respectively: dividend yields of 8.2%, 2.1% and
2.4%, expected volatility of 72.0%, 33.2% and 30.2%, risk-free interest rates of
5.9%, 5.2% and 6.1% and an expected life of 7 years for all three years. The
fair value of the shares purchased under the ESPP was calculated as if the
shares were 'look back options'.
Pro forma information regarding net income (loss) and diluted net income (loss)
per share is as follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31 1999 1998 1997
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
(In thousands, except per share
amounts)
Net income (loss) as reported $(310,546) $ 326,449 $ 229,419
pro forma (327,675) 316,507 226,814
Diluted net income (loss) per
share as reported (2.72) 2.72 1.94
pro forma (2.87) 2.64 1.92
</TABLE>
54
<PAGE>
Reliance Group Holdings, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
13 POLICY ACQUISITION COSTS, OTHER INSURANCE EXPENSES AND UNICOVER SETTLEMENT
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31 1999 1998 1997
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C>
(In thousands)
Policy acquisition costs amortized during the
year $ 677,766 $578,529 $ 487,432
--------------------------------------
Other insurance expenses:
Salaries and commissions 134,946 214,929 696,747
Taxes, other than income taxes 24,392 23,635 38,689
Rent 31,167 32,124 61,001
Policyholders' dividends 10,307 5,939 4,224
Unicover settlement 167,065 - -
Other 105,077 103,154 208,890
--------------------------------------
472,954 379,781 1,009,551
--------------------------------------
$1,150,720 $958,310 $1,496,983
--------------------------------------
--------------------------------------
</TABLE>
For the years ended December 31, 1998 and 1997, other insurance expenses include
$126,800,000 and $789,900,000 related to the Company's title insurance
operations which were sold in February 1998.
55
<PAGE>
Reliance Group Holdings, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
- --------------------------------------------------------------------------------
14 POSTRETIREMENT BENEFIT PLANS
Retirement benefits under the Company's noncontributory trusteed defined benefit
pension plans are paid to eligible employees based primarily on years of service
and compensation. Plan assets principally consist of corporate and government
debt securities and 1,116,200 shares of the Company's common stock, which
subsequent to December 31, 1999, were sold by the Plan pursuant to instructions
issued by the Plan's independent trustee.
The reconciliation of the beginning to ending projected benefit obligation is as
follows:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------
DECEMBER 31 1999 1998
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C>
(In thousands)
Projected benefit obligation, beginning of year $224,494 $196,717
Service cost 10,366 9,687
Interest cost 15,091 14,155
Actuarial (gain) loss (44,967) 11,629
Benefits paid (8,333) (7,694)
--------------------
Projected benefit obligation, end of year $196,651 $224,494
--------------------
--------------------
The reconciliation of the beginning to ending fair value of plan assets is as
follows:
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------
DECEMBER 31 1999 1998
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C>
(In thousands)
Fair value of plan assets, beginning of year $178,121 167,698
Actual return on plan assets 1,206 2,087
Employer contributions - 16,030
Benefits paid (8,333) (7,694)
--------------------
Fair value of plan assets, end of year $170,994 $178,121
--------------------
--------------------
The funded status of the plans includes the following components:
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------
DECEMBER 31 1999 1998
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C>
(In thousands)
Funded status-projected benefit obligation in excess of fair value of plan assets $ 25,657 $ 46,373
Unrecognized net actuarial loss (18,797) (49,496)
Unrecognized prior service cost 2,834 3,439
Unrecognized transition asset 1,586 2,897
--------------------
Accrued pension cost $ 11,280 $ 3,213
--------------------
--------------------
Pension cost includes the following components (1):
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31 1999 1998 1997
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
(In thousands)
Service cost $ 10,366 $ 9,687 $ 6,784
Interest cost 15,091 14,155 12,743
Expected return on plan assets (17,361) (16,561) (14,679)
Amortization of prior service cost (606) (606) (606)
Amortization of net loss 1,887 551 -
Amortization of transition asset (1,310) (1,310) (1,310)
--------------------------------
Net periodic benefit cost $ 8,067 $ 5,916 $ 2,932
--------------------------------
--------------------------------
</TABLE>
(1) Excludes pension cost for the Company's then owned title insurance
operations which was $2,852,000 for 1997.
56
<PAGE>
Reliance Group Holdings, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
The assumptions used to measure the projected benefit obligation at December
31, 1999 and 1998 include a discount rate of 8.25% and 7.0% and a weighted
average rate of compensation increase of 5.2% for both 1999 and 1998. The
expected long-term investment rate of return on plan assets for the years ended
December 31, 1999 and 1998 was 10.0%. The Company will use an expected long-term
investment rate of return on plan assets of 9.5% for the year ended
December 31, 2000.
Contributions under the Company's defined contribution plans were $5,107,000,
$4,936,000 and $7,778,000 in 1999, 1998 and 1997, respectively, and were based
on a formula specified in the plan agreements.
- --------------------------------------------------------------------------------
15 STATUTORY INFORMATION
Statutory net income (loss) for the years ended December 31, 1999, 1998 and 1997
was $(222,487,000), $649,222,000 and $95,111,000.
Statutory policyholders' surplus at December 31, 1999 and 1998 was
$1,244,003,000 and $1,747,425,000 which reflects a reduction in statutory loss
reserves of $61,900,000 and $61,200,000, respectively, representing discounts of
workers' compensation reserves in excess of GAAP discounts.
- --------------------------------------------------------------------------------
16 WORKERS' COMPENSATION REINSURANCE FACILITY
In 1998, the Company entered into reinsurance fronting arrangements as part of a
workers' compensation insurance facility created and managed by Unicover
Managers, Inc. ('Unicover'), a third party manager of reinsurance pools. Under
these arrangements, the Company reinsured workers' compensation policies, the
occupational accident portion of which was then 100 percent retroceded to a
number of retrocessional reinsurers. In 1999, two of the Company's
retrocessional reinsurers, Sun Life Assurance Company of Canada ('Sun Life') and
Phoenix Home Life Mutual Insurance Company ('Phoenix'), sought to rescind their
retrocessional reinsurance contracts with the Unicover pool and facilities,
including the Reliance facility.
On January 21, 2000, the Company concluded settlements with various insurance
and reinsurance companies to resolve outstanding issues relating to Unicover.
The settlements were reached with the Company's retrocessional reinsurers,
including Sun Life, Phoenix and Cologne Life Reinsurance Company, and all of the
insurance companies that purchased reinsurance from the Reliance Unicover
facility.
As a result of the settlements, the Company has taken a pre-tax charge in
1999 of $170,800,000 ($111,000,000 or $.97 per diluted share after-tax) which
includes $3,800,000 for various costs and expenses relating to the Unicover
facility. This charge also includes $20,000,000 for an anticipated settlement
regarding the Company's participation in the Lincoln National facility managed
by Unicover.
At December 31, 1999, other assets, as shown in the accompanying consolidated
balance sheet, include $399,900,000 of receivables from third parties relating
to the Unicover settlement, and accounts payable and accrued expenses, as shown
in the accompanying consolidated balance sheet, include $570,700,000 due to the
insurance companies that purchased reinsurance from the Unicover facilities.
These amounts were collected and paid in January 2000.
- --------------------------------------------------------------------------------
17 CONTINGENCIES AND COMMITMENTS
LEGAL PROCEEDINGS
The Company and its subsidiaries are involved in certain litigation arising in
the course of their businesses, some of which involve claims of substantial
amounts. Although the ultimate outcome of these matters cannot be ascertained at
this time, and the results of legal proceedings cannot be predicted with
certainty, the Company is contesting the allegations of the complaints in each
pending action against it and believes, based on current knowledge and after
consultation with counsel, that the resolution of these matters will not have a
material adverse effect on the consolidated financial statements of the Company.
In addition, the Company is subject to the litigation set forth below.
57
<PAGE>
Reliance Group Holdings, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
- --------------------------------------------------------------------------------
(a) In February 1999, the Company received a decision in an initial phase of
an alternative dispute resolution trial of certain contested issues between an
asbestos producer and certain of its liability insurance carriers, including the
Company.
At issue in this proceeding, among other things, is the amount of remaining
insurance coverage, if any, under primary policies written by a predecessor of
the Company during the years 1942 to 1951, applicable to asbestos related bodily
injury claims against the producer. Those policies are treated as having
separate coverage limits for bodily injury claims resulting from the producer's
products and those resulting from its operations. Since 1970, the producer's
insurers, including the Company, have treated all such claims as coming within
the products coverage and on that basis the Company exhausted the coverage
limits of its policies in 1987.
In 1996, pursuant to a 1985 settlement agreement between certain asbestos
producers and certain of their insurers, the producer instituted alternative
dispute resolution proceedings against various of its insurers, including the
Company. The proceedings sought to re-allocate a substantial percentage of
claims to operations coverage, which had not been previously exhausted. In the
decision, which the Company has appealed, the trial judge did not decide the
issue of the allocation of pending and future claims or direct the payment of
any amount by the Company to the producer. He did, however, reject the Company's
position as to re-allocation of past claims and ruled, based on statistical
data, that a substantial percentage of claims paid through September 1996 should
have been classified as operations claims.
In December 1999, a further trial phase was conducted to determine the
financial implications of the decision and the allocation of claims closed since
September 1996. The outcome of this trial phase may also be appealed. The
Company is unable to determine, at this time, the amount that it may be required
to pay.
If not overturned on appeal, an effect of the decision would be to make
available for the payment of asbestos related bodily injury claims, up to an
additional $44,000,000 in liability coverage, plus associated defense and loss
adjustment expenses, under the Company's policies.
The Company believes that the decision is incorrect and is based on flawed
statistical data. The Company does not believe that it is probable that its
liability, if any, in respect of this matter will have a material adverse effect
on the Company's financial position, although there is no assurance that the
disposition of this matter will not materially affect the Company's results of
operations for any period.
(b) Employers who purportedly purchased workers' compensation insurance
policies on a retrospectively rated or other loss-sensitive basis have brought
several putative class actions against, among others, individual insurance
companies ranging in number from approximately 6 to approximately 160, including
Reliance Insurance Company and several of its subsidiaries. The plaintiffs in
the actions assert that, from as early as January 1, 1985, they and the members
of the putative classes they purport to represent were overcharged for such
insurance covering workers' compensation risks in the states in which the
actions have been brought. The plaintiffs, on behalf of themselves and the
putative class members, seek unspecified monetary damages, with interest and
attorneys' fees, against all defendants jointly and severally, and in most cases
also seek injunctive and other equitable relief.
Such actions in which the Company is a defendant have been brought in
Georgia, Tennessee, Florida, New Jersey, Pennsylvania, Illinois, Missouri,
California, Alabama, Michigan, New York, and Kentucky. In addition to these
putative class actions, approximately 85 employers, individually and not as a
class, have brought an action in Arizona asserting overcharge claims against
approximately 65 defendants, including the Company.
The Company is also a defendant in a putative class action commenced in
federal court in Texas against approximately 150 individual insurance companies,
in which the plaintiffs claim that the defendants violated the federal RICO
statute by allegedly overcharging employers from 1988 to 1999 for
retrospectively rated workers' compensation insurance policies covering risks in
44 states and the District of Columbia. The plaintiffs, on behalf of themselves
and the putative class of employers, seek unspecified monetary damages, with
interest and attorneys' fees, against all defendants jointly and severally.
In January 2000, the court in the Pennsylvania action denied the plaintiff's
motion for class certification, and ruled that the case could not proceed as a
class action. The plaintiffs did not appeal from that ruling. To date, there
have been no other rulings on motions by the plaintiffs for certification of the
putative classes they purport to represent. The Company has denied or intends to
deny the material allegations in each of the lawsuits and intends to contest
each action vigorously.
58
<PAGE>
Reliance Group Holdings, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
The Company does not believe that it is probable that its aggregate
liability, if any, in respect of these actions will have a material adverse
effect on the Company's financial position, although there is no assurance that
the disposition of the actions will not materially affect the Company's results
of operations for any period.
LEASE COMMITMENTS
The Company and its subsidiaries lease certain office facilities and equipment
under lease agreements that expire at various dates through 2012. Rent expense
for the years ended December 31, 1999, 1998 and 1997 was $91,100,000,
$80,800,000 and $100,900,000, respectively.
At December 31, 1999, future net minimum rental payments required under
noncancelable leases are as follows:
- --------------------------------------------------------------------------------
(In thousands)
2000 $ 60,123
2001 56,698
2002 47,306
2003 35,831
2004 30,552
2005 and thereafter 122,295
--------
$352,805
--------
--------
59
<PAGE>
Reliance Group Holdings, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
- --------------------------------------------------------------------------------
18 PER SHARE INFORMATION
The basic and diluted per share reconciliations of income (loss) from continuing
operations to net income (loss) is as follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31 1999 1998 1997
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
BASIC INCOME (LOSS) PER SHARE:
INCOME (LOSS) FROM CONTINUING OPERATIONS $ (2.21) $ 2.89 $ 1.52
Gain on disposal of discontinued operation - - .60
Litigation settlement of discontinued operation - - (.06)
-----------------------------------
INCOME (LOSS) BEFORE EXTRAORDINARY ITEM AND CUMULATIVE EFFECT OF
ACCOUNTING CHANGE (2.21) 2.89 2.06
Extraordinary item-early extinguishment of debt - (.07) -
Cumulative effect of change in accounting (.51) - (.06)
-----------------------------------
Net income (loss) $ (2.72) $ 2.82 $ 2.00
-----------------------------------
-----------------------------------
DILUTED INCOME (LOSS) PER SHARE:
INCOME (LOSS) FROM CONTINUING OPERATIONS $ (2.21) $ 2.78 $ 1.47
Gain on disposal of discontinued operation - - .58
Litigation settlement of discontinued operation - - (.06)
-----------------------------------
INCOME (LOSS) BEFORE EXTRAORDINARY ITEM AND CUMULATIVE EFFECT OF
ACCOUNTING CHANGE (2.21) 2.78 1.99
Extraordinary item-early extinguishment of debt - (.06) -
Cumulative effect of change in accounting (.51) - (.05)
-----------------------------------
NET INCOME (LOSS) $ (2.72) $ 2.72 $ 1.94
-----------------------------------
-----------------------------------
</TABLE>
The reconciliation of the basic to diluted per share information is as follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31 1999 1998 1997
- -------------------------------------------------------------------------------------------------------------
(In thousands, except per share amounts)
<S> <C> <C> <C>
Income (loss) from continuing operations $(252,696) $ 334,215 $ 174,496
-----------------------------------
-----------------------------------
Weighted average number of basic shares outstanding 114,124 115,672 114,651
Effect of dilutive securities-options - 4,401 3,712
-----------------------------------
Weighted average number of diluted shares outstanding 114,124 120,073 118,363
-----------------------------------
-----------------------------------
Basic per share income (loss) before extraordinary item and cumulative
effect of accounting change $ (2.21) $ 2.89 $ 1.52
-----------------------------------
-----------------------------------
Diluted per share income (loss) before extraordinary item and
cumulative effect of accounting change $ (2.21) $ 2.78 $ 1.47
-----------------------------------
-----------------------------------
</TABLE>
For the year ended December 31, 1999, the effect of options has been
excluded since their inclusion would be anti-dilutive. Options to purchase
5,371,000 and 2,000,000 shares of common stock were not included in the
computation of diluted income per share for the years 1998 and 1997,
respectively, since the options' exercise price was greater than the average
market price of the common shares.
60
<PAGE>
Reliance Group Holdings, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
19 BUSINESS SEGMENT INFORMATION
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31 1999 1998 1997
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
(In thousands)
REVENUES:
Property and casualty insurance
Premiums earned (1):
Reliance National $ 1,042,527 $ 977,947 $ 872,642
Reliance Insurance 718,545 754,007 698,537
Reliance Personal 294,860 159,745 53,648
Reliance Reinsurance 241,593 214,712 152,754
Reliance Surety 206,306 196,693 167,251
Other 150 1,176 2,184
-----------------------------------------
2,503,981 2,304,280 1,947,016
Net investment income 286,420 294,743 263,981
Gain on sales of investments 63,018 108,535 71,501
Gain on sales of subsidiaries - 194,080 -
-----------------------------------------
2,853,419 2,901,638 2,282,498
-----------------------------------------
Title insurance
Premiums earned - 139,132 863,746
Net investment income - 5,276 30,990
Gain on sales of investments - 305 1,596
-----------------------------------------
- 144,713 896,332
Information technology consulting 230,654 247,749 191,886
Other 69,183 75,020 71,920
-----------------------------------------
$ 3,153,256 $ 3,369,120 $ 3,442,636
-----------------------------------------
-----------------------------------------
INCOME (LOSS) BEFORE INCOME TAXES AND EQUITY IN INVESTEE
COMPANIES:
Property and casualty insurance
Underwriting gain (loss):
Reliance National $ (495,306) $ (31,966) $ (12,161)
Reliance Insurance (186,962) (49,676) (29,716)
Reliance Personal (76,329) (17,949) (19,681)
Reliance Reinsurance (71,242) (5,070) (3,120)
Reliance Surety 41,575 54,346 37,733
Other (162) (1,793) (4,777)
-----------------------------------------
(788,426) (52,108) (31,722)
Net investment income 286,420 294,743 263,981
Gain on sales of investments 63,018 108,535 71,501
Gain on sales of subsidiaries - 194,080 -
-----------------------------------------
(438,988) 545,250 303,760
Title insurance - 11,286 64,963
Information technology consulting 12,743 19,382 5,623
Other (69,429) (130,103) (132,325)
-----------------------------------------
$ (495,674) $ 445,815 $ 242,021
-----------------------------------------
-----------------------------------------
IDENTIFIABLE ASSETS AT YEAR-END:
Property and casualty insurance $14,215,508 $12,229,831 $10,529,179
Net assets of title insurance operations - - 288,619
Information technology consulting 97,742 97,144 82,155
Other 302,253 291,064 322,533
-----------------------------------------
$14,615,503 $12,618,039 $11,222,486
-----------------------------------------
-----------------------------------------
</TABLE>
(1) Includes foreign sourced premiums, representing premiums that are generated
outside the United States regardless of underwriting location, of
$307,000,000, $261,000,000 and $255,000,000 in 1999, 1998 and 1997,
respectively.
61
<PAGE>
Reliance Group Holdings, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
- --------------------------------------------------------------------------------
On February 27, 1998, the Company completed the sale of its title insurance
operations to LandAmerica. See note 3 to the consolidated financial statements.
The Company operates in two business segments, property and casualty
insurance and information technology consulting. The property and casualty
insurance business consists of five operations, Reliance National, Reliance
Insurance, Reliance Personal, Reliance Reinsurance and Reliance Surety.
Income before income taxes and equity in investee companies relating to
property and casualty insurance underwriting has been reduced by policyholders'
dividends and other income and expense. Income before income taxes and equity in
investee companies by segment is before allocation of corporate overhead and
corporate interest expense, which relates primarily to the Company and its
financing subsidiary. Corporate overhead and corporate interest expense are
included in Other which, in 1999, includes the reversal of $31,500,000 of
previously accrued interest expense pertaining to a tax settlement.
Identifiable assets are those assets that are used in the Company's
operations in each segment.
- --------------------------------------------------------------------------------
20 QUARTERLY FINANCIAL DATA (UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
1999 QUARTER
- --------------------------------------------------------------------------------------------------------
Second Fourth
First (1) Third (2)
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
(In thousands, except per share amounts)
REVENUES:
Premiums earned $588,994 $ 585,766 $ 719,293 $ 609,928
Net investment income 73,188 71,270 72,107 69,855
Gain (loss) on sales of investments 9,177 (2,762) 3,193 53,410
Other 78,667 81,735 72,093 67,342
--------------------------------------------------
$750,026 $ 736,009 $ 866,686 $ 800,535
--------------------------------------------------
--------------------------------------------------
INCOME (LOSS) BEFORE CUMULATIVE EFFECT OF
ACCOUNTING CHANGE $ 42,301 $(156,891) $ (15,063) $(123,043)
Cumulative effect of change in accounting for
insurance assessments (57,850) - - -
--------------------------------------------------
NET INCOME (LOSS) $(15,549) $(156,891) $ (15,063) $(123,043)
--------------------------------------------------
--------------------------------------------------
DILUTED PER SHARE INFORMATION:
Income (loss) before cumulative effect of
accounting change $ .36 $ (1.38) $ (.13) $ (1.08)
Cumulative effect of change in accounting for
insurance assessments (.49) - - -
--------------------------------------------------
NET INCOME (LOSS) $ (.13) $ (1.38) $ (.13) $ (1.08)
--------------------------------------------------
--------------------------------------------------
BASIC PER SHARE INFORMATION:
NET INCOME (LOSS) $ (.13) $ (1.38) $ (.13) $ (1.08)
--------------------------------------------------
--------------------------------------------------
</TABLE>
(1) Includes an after-tax charge of $147.7 million ($1.30 per diluted share) to
increase net loss reserves related to policies issued in prior periods,
resulting from updated information and subsequent developments. In addition,
the Company also incurred a charge of $67.1 million ($.59 per diluted share)
representing the cost of ceding to reinsurers losses under various stop loss
treaties.
(2) Includes an after-tax charge of $117.0 million ($1.03 per diluted share)
relating to the settlement of issues involving the Unicover workers'
compensation reinsurance facility.
62
<PAGE>
Reliance Group Holdings, Inc. and Subsidiaries
<TABLE>
<CAPTION>
1998 QUARTER
- -------------------------------------------------------------------------------------------------------
First Second Third Fourth
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
(In thousands, except per share amounts)
REVENUES:
Premiums earned $ 659,681 $560,566 $588,341 $634,824
Net investment income 74,628 75,072 74,908 75,411
Gain on sales of investments 51,952 53,986 1,483 1,419
Gain on sales of subsidiaries 197,258 - - -
Other 72,248 80,340 83,339 83,664
-------------------------------------------------
$1,055,767 $769,964 $748,071 $795,318
-------------------------------------------------
-------------------------------------------------
INCOME FROM CONTINUING OPERATIONS $ 202,294 $ 70,889 $ 30,006 $ 31,026
Extraordinary item-early extinguishment of debt (1,912) (5,592) - (262)
-------------------------------------------------
Net income $ 200,382 $ 65,297 $ 30,006 $ 30,764
-------------------------------------------------
-------------------------------------------------
DILUTED PER SHARE INFORMATION:
Income from continuing operations $ 1.69 $ .59 $ .25 $ .26
Extraordinary item-early extinguishment of debt (.02) (.05) - -
-------------------------------------------------
Net income $ 1.67 $ .54 $ .25 $ .26
-------------------------------------------------
-------------------------------------------------
BASIC PER SHARE INFORMATION:
Net income $ 1.74 $ .56 $ .26 $ .27
-------------------------------------------------
-------------------------------------------------
</TABLE>
63
<PAGE>
Reliance Group Holdings, Inc. and Subsidiaries
INDEPENDENT AUDITORS' REPORT
- --------------------------------------------------------------------------------
Board of Directors and Shareholders
Reliance Group Holdings, Inc.
New York, New York
We have audited the accompanying consolidated balance sheets of Reliance Group
Holdings, Inc. and subsidiaries as of December 31, 1999 and 1998, and the
related consolidated statements of operations, changes in shareholders' equity,
comprehensive income (loss) and cash flows for each of the three years in the
period ended December 31, 1999. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Reliance Group Holdings, Inc. and
subsidiaries as of December 31, 1999 and 1998, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1999 in conformity with generally accepted accounting principles.
As discussed in note 1 to the consolidated financial statements, the Company
changed its method of accounting for insurance related assessments in 1999 and
process reengineering costs in 1997.
/s/ Deloitte & Touche LLP
New York, New York
February 29, 2000, except as to note 4,
as to which the date is March 15, 2000
64
<PAGE>
Reliance Group Holdings, Inc. and Subsidiaries
REPORT OF MANAGEMENT
- --------------------------------------------------------------------------------
SCOPE OF RESPONSIBILITY
Management is responsible for the financial information included in
this annual report and for ascertaining that such information
presents fairly the financial position and operating results of the
Company. The accompanying consolidated financial statements have been
prepared in conformity with generally accepted accounting principles.
Such statements include informed estimates and judgments of
management for those transactions that are not yet complete or for
which the ultimate effects cannot be precisely determined. Financial
information presented elsewhere in this annual report is consistent
with that in the consolidated financial statements.
INTERNAL CONTROLS
The Company maintains a system of internal accounting controls
designed to provide reasonable assurance that assets are safeguarded
against losses from unauthorized use or disposition, that
transactions are executed in accordance with management's
authorization and are recorded properly. Qualified personnel
throughout the organization maintain and monitor these internal
accounting controls on an ongoing basis. In addition, the Company's
Internal Audit Department systematically reviews these controls,
evaluates their adequacy and effectiveness, and reports thereon.
INDEPENDENT AUDITORS
The Company engages Deloitte & Touche LLP as independent auditors to
audit its financial statements and express their opinion thereon.
They have full access to each member of management in conducting
their audits. Such audits are conducted in accordance with generally
accepted auditing standards and include a review and evaluation of
the system of internal accounting controls, tests of the accounting
records and other auditing procedures they consider necessary to
express their opinion on the consolidated financial statements.
AUDIT COMMITTEE
The Audit Committee of the Board of Directors is comprised solely of
non-employee outside directors, and is responsible for overseeing and
monitoring the quality of the Company's accounting practices and
internal controls. Management, the internal auditors and the
independent auditors meet regularly with the Committee to review the
accounting practices employed by the Company and to discuss auditing,
internal control, financial reporting matters and any other matters
they believe should be brought to the Committee's attention. Both the
internal and independent auditors have unrestricted access to the
Audit Committee, without members of management present.
George R. Baker
President and
Chief Executive Officer
George E. Bello
Executive Vice President
and Controller
65
<PAGE>
Reliance Group Holdings, Inc. and Subsidiaries
MARKET AND DIVIDEND INFORMATION FOR COMMON STOCK
- --------------------------------------------------------------------------------
The Company's common stock, $.10 par value, is traded on the New York Stock
Exchange and the Pacific Exchange, Inc. under the symbol 'REL.' As of
March 15, 2000, there were approximately 2150 holders of record of the Company's
common stock. The high and low sales prices of the common stock, as reported by
the New York Stock Exchange, are as follows:
<TABLE>
1999 1998
- --------------------------------------------------------------------------------------------
QUARTER HIGH LOW High Low
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
First 13 11/16 7 9/16 19 1/8 12 5/8
Second 10 7/8 6 1/4 19 7/8 16 7/16
Third 7 9/16 3 15/16 19 13/16 12 1/4
Fourth 7 3/4 2 13/16 15 1/8 10 3/4
</TABLE>
Cash dividends for each share of the Company's common stock were $.08 for each
quarter in 1999 and 1998. On February 29, 2000, the Company announced the
suspension of the common stock dividend.
As a holding company, the Company is dependent upon dividends, advances and
net tax payments from its wholly-owned subsidiaries to meet its debt service
obligations and to pay its expenses. In addition to the terms of bank covenants
limiting the payment of dividends by Reliance Financial, dividends from the
Company's principal operating subsidiaries are subject to regulatory
limitations.
66
<PAGE>
Reliance Group Holdings, Inc. and Subsidiaries
DIRECTORS AND OFFICERS
- --------------------------------------------------------------------------------
DIRECTORS
George R. Baker(1)
President and Chief Executive Officer
Reliance Group Holdings, Inc.
George E. Bello(1)(3)(4)
Executive Vice President and Controller
Reliance Group Holdings, Inc.
Lowell C. Freiberg(3)
Executive Vice President and Chief Financial Officer
Reliance Group Holdings, Inc.
Dr. Thomas P. Gerrity(2)(7)
Professor of Management of the Wharton School
University of Pennsylvania
Jewell Jackson McCabe(4)(5)(6)
President, Jewell Jackson McCabe Associates
Irving Schneider(2)(5)(6)
Co-Chairman and Chief Operations Officer
Helmsley-Spear, Inc.
Bernard L. Schwartz(1)
Chairman, President & CEO of Loral Space & Communications Ltd. and
Chairman & CEO of Globalstar
Richard E. Snyder(3)(7)
Chairman and Chief Executive Officer
Golden Books Family Entertainment, Inc.
Dr. Bruce E. Spivey(2)(3)(6)
President and CEO
Columbia-Cornell Care LLC
Howard E. Steinberg
Executive Vice President and Chief of Corporate Operations
Reliance Group Holdings, Inc.
Robert M. Steinberg
Vice-Chairman
Reliance Group Holdings, Inc.
Saul P. Steinberg(1)(4)
Chairman of the Board
Reliance Group Holdings, Inc.
James E. Yacobucci
Senior Vice President Investments
Reliance Group Holdings, Inc.
- ----------------------------------
(1) Executive Committee
(2) Audit Committee
(3) Finance Committee
(4) Regular Compensation Committee
(5) Special Compensation Committee
(6) Stock Option Committee
(7) Nominating Committee
OFFICERS
Saul P. Steinberg
Chairman of the Board
Robert M. Steinberg
Vice-Chairman
George R. Baker
President and Chief Executive Officer
George E. Bello
Executive Vice President and Controller
Lowell C. Freiberg
Executive Vice President and Chief Financial Officer
Howard E. Steinberg
Executive Vice President and Chief of Corporate Operations
Dennis J. O'Leary
Senior Vice President
Taxes
Philip S. Sherman
Senior Vice President and Group Controller
Bruce L. Sokoloff
Senior Vice President Administration
James E. Yacobucci
Senior Vice President Investments
Paul W. Zeller
Senior Vice President,
Deputy General Counsel and Assistant Secretary
Eilene S. Bloom
Vice President
Administrative Services
Thomas G. Butler
Vice President
Taxes
Gregory P. Candela
Vice President and Litigation Counsel
Andrew B Donnellan, Jr.
Vice President and Chief Litigation Counsel
David J. Grill
Vice President and Assistant Treasurer
David F. Noyes
Vice President and Chief Credit Officer
Steven A Rautenberg
Vice President Communications
Joel H. Rothwax
Vice President
Human Resources
Thomas J. Sanders
Vice President and Assistant Controller
OFFICERS OF OPERATING UNITS
RELIANCE INSURANCE GROUP
George T. Van Gilder
President and Chief Executive Officer
Stewart J. Gerson
Senior Vice President, Chief Executive Officer and Treasurer
Kenneth R. Frohlich
Senior Vice President and Chief Actuarial Officer
Linda S. Kaiser
Senior Vice President, General Counsel and Secretary
PROPERTY AND CASUALTY INSURANCE
George T. Van Gilder
President and Chief Executive Officer
Reliance National
Robert C. Olsman
President and Chief Operating Officer
Reliance Insurance
Jeffrey J. Dailey
President and Chief Executive Officer
Reliance Personal
George H. Roberts
President
Reliance Reinsurance
C. Brian Schmalz
President and Chief Executive Officer
Reliance Surety
RCG INFORMATION TECHNOLOGY
Robert D. Simplot
President and Chief Executive Officer
RCG Information Technology, Inc.
RELIANCE DEVELOPMENT GROUP
Henry A. Lambert
President and Chief Executive Officer
Reliance Development Group, Inc.
67
<PAGE>
Reliance Group Holdings, Inc. and Subsidiaries
CORPORATE DATA
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
<S> <C>
CORPORATE OFFICES COMMON STOCK TRANSFER AGENT FORM 10-K
Reliance Group Holdings, Inc. American Stock Transfer & Trust Company A copy of the Company's Annual
Park Avenue Plaza 40 Wall Street Report on Form 10-K to the Securities
55 East 52nd Street New York, NY 10005 and Exchange Commission will be
New York, NY 10055 furnished to any security holder upon
(212) 909-1100 INDEPENDENT AUDITOR written request to Corporate
FAX (212) 909-1864 Deloitte & Touche LLP Communications, Reliance Group
New York, NY Holdings, Inc., 55 East 52nd Street,
New York, NY 10055.
------------------------------------------------------------------------------------
LISTED SECURITIES
All securities are listed on the New York Stock Exchange
RELIANCE GROUP HOLDINGS, INC.
Common Stock (Symbol: REL; New York Stock Exchange
and Pacific Exchange)
9% Senior Notes, due 2000
9 3/4% Senior Subordinated Debentures, due 2003
------------------------------------------------------------------------------------
Reliance Group Holdings, Inc. quarterly results, as well as Annual Reports on
Form 10-K, Form 10-Q, Annual Reports to shareholders and other corporate
information can be obtained by calling (888) REL-FACT or by visiting our internet
web site at http://www.rgh.com.
</TABLE>
68
<PAGE>
Design: The Graphic Expression, Inc., New York
<PAGE>
[Reliance Group Holdings, Inc. logo]
<PAGE>
Reliance Group Holdings, Inc. o 1999 Annual Report
<PAGE>
Exhibit 21.1
Set forth below is a list of subsidiaries of the Registrant. Omitted from
the following list are the names of particular subsidiaries which, when
considered in the aggregate as a single subsidiary, do not constitute a
significant subsidiary. Subsidiaries of subsidiaries are indented.
Jurisdiction
of
Name Incorporation
- ---- -------------
..Reliance Financial Services Corporation Delaware
....Reliance Insurance Group, Inc. Delaware
......Reliance Corporate Services Inc. Delaware
....Reliance Insurance Company Pennsylvania
SEE ANNEX 1 FOR SUBSIDIARIES
OF
RELIANCE INSURANCE COMPANY
..Reliance Development Group, Inc. Delaware
SEE ANNEX 2 FOR SUBSIDIARIES
OF
RELIANCE DEVELOPMENT GROUP, INC.
..Convenience & Safety Corporation Delaware
..Leasco Intercontinental N.V. Neth. Antilles
..Reliance Protective Services, Inc. Delaware
..Reliance General Services, Inc. Delaware
<PAGE>
ANNEX 1 - SUBSIDIARIES OF RELIANCE INSURANCE COMPANY
Jurisdiction
of
Name Incorporation
- ---- -------------
Reliance Insurance Company Pennsylvania
..Arcadia National Life Insurance Company Arizona
..Cananwill, Ltd. Bermuda
..Diamond Insurance Services, Inc. Delaware
..Enterprise Earnings Protection, Inc. Delaware
....EEPI Adjusting, Inc. Delaware
....Enterprise Earnings Insurance Services Delaware
..Flynns Crossing Development Corporation Virginia
....Flynns Crossing, L.P. Virginia
..Flynn's Crossing Homeowners Association Virginia
..Flynn's Crossing Realty Corp. Virginia
..Garnet Company Delaware
..IAGM Corporation New York
..Market Axis Insurance Agency, Inc. New Jersey
..Marketing Management, Inc. Delaware
..Petroleum Interests, Inc. Delaware
..Platinum Investors, Inc. Delaware
..Point, Click & Bind, Inc. Delaware
..Regent International Insurance Company, Ltd. Bermuda
..Reliance Consumer Services, Inc. Texas
..Reliance Custom Underwriting Facility, Inc. Pennsylvania
..Reliance Development Company, Inc. of Tucson Delaware
....Reliance Centro Limited Partnership Arizona
..Reliance Development Pueblo Parking, Inc. Arizona
....Reliance Pueblo Limited Partnership Arizona
..Reliance Direct Insurance Company Pennsylvania
....Reliance Direct Agency, Inc. Pennsylvania
..Reliance Insurance Companies Foundation Pennsylvania
..Reliance Insurance Company of Illinois Illinois
..Reliance Insurance Group Brokerage Division, Inc. Pennsylvania
..Reliance Life Companies Pennsylvania
..Reliance Life Insurance Company Delaware
..Reliance Lloyds Texas
..Reliance National Asia Re Pte Ltd. Singapore
..Reliance National (Barbados) Insurance, Ltd. Barbados
....Reliance National Brasil Seguros S.A. Brazil
....Reliance National Compania Argentina de Seguros S.A. Argentina
..Reliance National Indemnity Company Wisconsin
....Careways, Inc. Delaware
..Reliance National Insurance Company Delaware
....Blackmoor Group, Inc. New York
......Waverly Insurance Agency, Inc. New York
....Reliance National De Mexico S.A. Mexico
....Reliance National Risk Services, Inc. New York
..Reliance National Risk Specialists, Inc. Pennsylvania
2
<PAGE>
Jurisdiction
of
Name Incorporation
- ---- -------------
..Reliance National (U.K.) Ltd. England
....Reliance National Insurance Company (Europe) Ltd. England
......Reliance HKCB Insurance Company Limited Hong Kong
......Reliance Servicios Y Comissiones Mexico
......Renasa Insurance Company Ltd. South Africa
..Reliance Oriental Warehouse, Inc. Delaware
....Reliance Oriental Warehouse Associates
(A California Limited Partnership) California
........Oriental Warehouse Associates
(A California Limited Partnership) California
..Reliance Portfolio Solutions, Ltd. Pennsylvania
..Reliance Reinsurance Company Delaware
..Reliance Reinsurance Corp. Pennsylvania
..Reliance Special Risk, Inc. Pennsylvania
....Reliance Specialty Programs, Inc. Pennsylvania
..Reliance Surety Company Delaware
..Reliance Surety Group, Inc. Delaware
..Reliance Surety Managers, Inc. Pennsylvania
..Reliance Universal Insurance Company California
..Reliance Warranty Company, Inc. Delaware
..Reliant Insurance Company Pennsylvania
..Reliant Insurance Corp. Delaware
..Sandenhill, Inc. Pennsylvania
....LG Partners, Inc. Delaware
..Sterling Administrative Services, Inc. Pennsylvania
..Union International Insurance Company Limited Bermuda
..United Pacific Insurance Company Pennsylvania
....Uni-Pac Corporation Washington
......100 Bellevue Parkway Partners, L.P. Delaware
......Three Parkway Partners, L.P. Pennsylvania
..United Pacific Insurance Company of New York New York
........Reliance USA Insurance Company Pennsylvania
..RCG International, Inc. Delaware
....RCG/Asbach, Inc. Delaware
....RCG Information Technology, Inc. New Jersey
......RCG Information Technology (Proprietary) Limited South Africa
......RCG IT Corp. Delaware
........Century Conversion Software, Inc. Delaware
........Quintic Systems, Inc. Delaware
......Integrated Systems Resources, Inc. Connecticut
....RCG-Moody International Limited England
......AOQC Moody CERT GmbH Germany
......AOQC Moody International BV Netherlands
......AOQC Moody International Ltd. (Channel Islands) Channel Islands
......AOQC Moody International Ltd. (U.K.) England
3
<PAGE>
Jurisdiction
of
Name Incorporation
- ---- -------------
........AOQC Moody International Ltd. (Japan) Japan
......AOQC Moody International SARL France
......International Container Survey Bureau (UK) Ltd. England
......Moody Energy Technical Services Co. Ltd. Peoples Republic
of China
......Moody International BV Holland
......Moody International de Argentina SA Buenos Aires
......Moody International Finland Finland
......Moody International GmbH Germany
......Moody International, Inc. Delaware
........Moody International Ltd. (Japan) Japan
........AOQC Moody International, Inc. Texas
........Inspection Services, Inc. Louisiana
........Moody International (Thailand) Ltd. Thailand
......Moody International Limited (U.K.) England
......Moody International Pty Ltd. Australia
......Moody International Quality Assurance Limited Hungary
......Moody International Scandinavia AB Sweden
......Moody International South Africa (Proprietary)
Limited South Africa
........FPH Inspection Authority (Proprietary) Limited South Africa
......Moody International SRL Italy
........AOQC Moody CERT SRL Italy
......Moody Shenzen Quality Management Ltd. Peoples Republic
of China
......Premier Assessments Ltd. England
......PT Mody Inter Indonesia Pty Ltd. Indonesia
....Werner International, Inc. Delaware
......Werner Management Consultants, Inc. New York
4
<PAGE>
ANNEX 2 - SUBSIDIARIES OF RELIANCE DEVELOPMENT GROUP, INC.
Jurisdiction
of
Name Incorporation
- ---- -------------
Reliance Development Group, Inc. Delaware
..Continental Villages Company, Inc. Delaware
..Reliance Advisory Group, Inc. California
..Reliance Development Company, Inc. of Glendale California
..Reliance Development Parking Company Arizona
..Relibro Corp. New York
5
<PAGE>
Exhibit 23.1
Independent Auditors' Consent
We consent to the incorporation by reference in Registration Statements Nos.
33-19897, 33-31709, 33-63517, 33-63519, 333-21389, 333-65777, 333-65779 and
333-65791 of Reliance Group Holdings, Inc. on Forms S-8 of our reports dated
February 29, 2000, except as to note 4 of the consolidated financial statements,
as to which the date is March 15, 2000, appearing in and incorporated by
reference in this Annual Report on Form 10-K of Reliance Group Holdings, Inc.
for the year ended December 31, 1999. We also consent to the use of Touche Ross
& Co., and statements with respect to Touche Ross & Co., as appearing under the
heading "Experts" in the Propectuses which are part of registration statement
Nos. 33-19897 and 33-31709.
Deloitte & Touche LLP
New York, New York
March 28, 2000
<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>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> DEC-31-1999
<DEBT-HELD-FOR-SALE> 2,763,508
<DEBT-CARRYING-VALUE> 484,340
<DEBT-MARKET-VALUE> 480,016
<EQUITIES> 1,004,776
<MORTGAGE> 0
<REAL-ESTATE> 178,842
<TOTAL-INVEST> 4,694,508
<CASH> 106,207
<RECOVER-REINSURE> 6,263,553
<DEFERRED-ACQUISITION> 301,168
<TOTAL-ASSETS> 14,615,503
<POLICY-LOSSES> 8,285,977
<UNEARNED-PREMIUMS> 2,065,411
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 735,085
0
0
<COMMON> 11,617
<OTHER-SE> 1,006,720
<TOTAL-LIABILITY-AND-EQUITY> 14,615,503
2,503,981
<INVESTMENT-INCOME> 286,420
<INVESTMENT-GAINS> 63,018
<OTHER-INCOME> 299,837
<BENEFITS> 2,111,072
<UNDERWRITING-AMORTIZATION> 1,150,720
<UNDERWRITING-OTHER> 0
<INCOME-PRETAX> (495,674)
<INCOME-TAX> (212,200)
<INCOME-CONTINUING> (252,696)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> (57,850)
<NET-INCOME> (310,546)
<EPS-BASIC> (2.72)
<EPS-DILUTED> (2.72)
<RESERVE-OPEN> 3,220,046
<PROVISION-CURRENT> 1,856,774
<PROVISION-PRIOR> 254,298
<PAYMENTS-CURRENT> 621,569
<PAYMENTS-PRIOR> 1,371,242
<RESERVE-CLOSE> 3,339,654
<CUMULATIVE-DEFICIENCY> 254,298
</TABLE>
