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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 [FEE REQUIRED]
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1993
OR
[ ]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
FOR THE TRANSITION PERIOD FROM TO
----- -----
COMMISSION FILE NUMBER 1-7080
RELIANCE FINANCIAL SERVICES CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 51-0113548
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
PARK AVENUE PLAZA
55 EAST 52ND STREET
NEW YORK, NEW YORK 10055
(ADDRESS OF PRINCIPAL EXECUTIVE (ZIP CODE)
OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (212) 909-1100
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
<TABLE>
<CAPTION>
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
------------------- ---------------------
<S> <C>
Senior Reset Notes, Due November 1, 2000 New York Stock Exchange
Senior Reset Notes, Due December 1, 2000 New York Stock Exchange
</TABLE>
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
NONE
The registrant meets the conditions set forth in General Instructions
J(1)(a) and (b) of Form 10-K and is therefore filing this Form with reduced
disclosure as permitted thereunder.
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. [X]
As of March 15, 1994, 1,000 shares of the common stock of Reliance Financial
Services Corporation were outstanding, none of which were held by
nonaffiliates.
DOCUMENTS INCORPORATED BY REFERENCE:
Reliance Financial Services Corporation 1993 Annual Report--Parts I, II and
IV.
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<PAGE>
PART I
ITEM 1. BUSINESS.
GENERAL
Reliance Financial Services Corporation ("Reliance Financial", "Company" or
"Registrant") owns all of the common stock of Reliance Insurance Company
("Reliance Insurance Company"). Reliance Insurance Company and its property
and casualty insurance subsidiaries (such subsidiaries, together with Reliance
Insurance Company, the "Reliance Property and Casualty Companies") and its
title insurance subsidiaries (collectively, the "Reliance Insurance Group")
underwrite a broad range of standard commercial and specialty commercial lines
of property and casualty insurance, as well as title insurance. 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 Property and Casualty Companies consist of four principal
operations: Reliance National, Reliance Insurance, Reliance Reinsurance and
Reliance Surety. Reliance National was established in 1987 to provide
specialty commercial insurance products and services, and innovative coverages
in standard commercial lines, to selected segments of the property and
casualty market which do not lend themselves to traditional insurance products
and services, and which are not extensively served by competitors. In 1993,
Reliance National accounted for 49% of the net premiums written by the
Reliance Property and Casualty Companies. Reliance Insurance offers standard
commercial lines of property and casualty insurance and is focused on the
diverse needs of mid-sized companies throughout the United States. Reliance
Reinsurance primarily provides property and casualty treaty 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. The Reliance Property and Casualty
Companies accounted for $1,571.5 million (64%) of the Reliance Insurance
Group's 1993 net premiums earned.
The Reliance Insurance Group's title insurance business consists of
Commonwealth Land Title Insurance Company ("Commonwealth") and Transamerica
Title Insurance Company ("Transamerica Title", together with Commonwealth and
their respective subsidiaries, "Commonwealth/Transamerica Title").
Commonwealth/Transamerica Title comprised the third largest title insurance
operation in the United States, in terms of 1992 total premiums and fees.
Commonwealth/Transamerica Title accounted for $893.4 million (36%) of the
Reliance Insurance Group's 1993 net premiums earned.
Business segment information for the years ended December 31, 1993, 1992 and
1991 is set forth in Note 17 to the Company's consolidated financial
statements, which are included in the Company's 1993 Annual Report and are
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 common stock of Reliance Insurance Company, which represents
approximately 98% of the combined voting power of all Reliance Insurance
Company stockholders, has been pledged by the Company to secure certain
indebtedness. See Note 7 to the Company's consolidated financial statements.
The Company is a wholly-owned subsidiary of Reliance Group Holdings, Inc.
("Reliance Group Holdings"). Approximately 49.5% of the common stock of
Reliance Group Holdings, the only class of voting securities outstanding, is
owned by Saul P. Steinberg, members of his family and affiliated trusts. In
November 1993, Reliance Group, Incorporated, which owned
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all of the Common Stock of the Company and was a wholly-owned subsidiary of
Reliance Group Holdings, was merged into Reliance Group Holdings. The reason
for the merger was to simplify the corporate structure of Reliance Group
Holdings by eliminating an intermediate holding company.
OPERATING UNITS
Property and Casualty Insurance. The Reliance Property and Casualty Companies
consist of four principal operations: Reliance National, Reliance Insurance,
Reliance Reinsurance and Reliance Surety.
The following table sets forth the amount of net premiums written in each
line of business by Reliance National, Reliance Insurance, Reliance Reinsurance
and Reliance Surety for the years ended December 31, 1993, 1992 and 1991.
<TABLE>
<CAPTION>
1993 1992
-------------------------------------- --------------------------------------
RELIANCE RELIANCE
RELIANCE RELIANCE REINSURANCE/ RELIANCE RELIANCE REINSURANCE/
NATIONAL INSURANCE SURETY TOTAL NATIONAL INSURANCE SURETY TOTAL
-------- --------- ------------ ------ -------- --------- ------------ ------
(IN MILLIONS, EXCEPT PERCENTAGES)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Standard
Commercial:
Automobile...... $119 $141 $ -- $ 260 $151 $111 $ -- $ 262
Multiple Peril.. 33 154 -- 187 12 114 -- 126
Workers'
Compensation... 232 146 -- 378 251 168 -- 419
Ocean and Inland
Marine......... 54 51 -- 105 10 39 -- 49
General
Liability...... -- 82 -- 82 -- 59 -- 59
Involuntary..... 87 27 -- 114 82 28 -- 110
Personal........ -- 45 -- 45 -- 9 -- 9
Other........... 52 22 -- 74 26 (17) -- 9
---- ---- ---- ------ ---- ---- ---- ------
Total Standard. 577 668 -- 1,245 532 511 -- 1,043
---- ---- ---- ------ ---- ---- ---- ------
Specialty
Commercial:
Reinsurance..... -- -- 124 124 -- -- 108 108
Surety.......... 7 -- 107 114 6 -- 94 100
General
Liability...... 288 -- -- 288 291 -- -- 291
---- ---- ---- ------ ---- ---- ---- ------
Total Specialty 295 -- 231 526 297 -- 202 499
---- ---- ---- ------ ---- ---- ---- ------
Total.......... $872 $668 $231 $1,771 $829 $511 $202 $1,542
==== ==== ==== ====== ==== ==== ==== ======
Percent of Total 49% 38% 13% 100% 54% 33% 13% 100%
==== ==== ==== ====== ==== ==== ==== ======
</TABLE>
<TABLE>
<CAPTION>
1991
--------------------------------------
RELIANCE
RELIANCE RELIANCE REINSURANCE/
NATIONAL INSURANCE SURETY TOTAL
-------- --------- ------------ ------
(IN MILLIONS, EXCEPT PERCENTAGES)
<S> <C> <C> <C> <C>
Standard
Commercial:
Automobile...... $114 $142 $ -- $ 256
Multiple Peril.. 1 133 -- 134
Workers'
Compensation... 330 173 -- 503
Ocean and Inland
Marine......... 10 42 -- 52
General
Liability...... -- 46 -- 46
Involuntary..... 51 27 -- 78
Personal........ -- 8 -- 8
Other........... 9 8 -- 17
---- ---- ---- ------
Total Standard. 515 579 -- 1,094
---- ---- ---- ------
Specialty
Commercial:
Reinsurance..... -- 50 106 156
Surety.......... 4 -- 90 94
General
Liability...... 267 -- -- 267
---- ---- ---- ------
Total Specialty 271 50 196 517
---- ---- ---- ------
Total.......... $786 $629 $196 $1,611
==== ==== ==== ======
Percent of Total 49% 39% 12% 100%
==== ==== ==== ======
</TABLE>
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The Company has been following a strategy of changing the business mix of
the Reliance Property and Casualty Companies by emphasizing specialty
commercial insurance products and services and focusing its standard
commercial insurance business on programs, larger accounts, and loss sensitive
and retrospectively rated policies. The following table sets forth
underwriting results, on a GAAP basis, for the Reliance Property and Casualty
Companies' standard commercial and specialty commercial lines for the years
ended December 31, 1993, 1992, 1991, 1990 and 1989.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------
1993 1992 1991 1990 1989
-------- -------- -------- -------- --------
(IN MILLIONS, EXCEPT RATIOS)
<S> <C> <C> <C> <C> <C>
Standard Commercial:
Net premiums written(1)..... $1,244.9 $1,042.3 $1,093.9 $1,256.7 $1,471.2
Underwriting loss........... (209.2) (226.0) (331.3) (156.0) (147.4)
Combined ratio.............. 119.3% 122.2% 129.9% 112.7% 109.9%
Specialty Commercial:
Net premiums written........ $ 525.7 $ 499.3 $ 517.1 $ 438.0 $ 322.9
Underwriting gain (loss).... 33.6 6.7 5.3 11.8 (9.7)
Combined ratio.............. 92.9% 98.5% 98.3% 97.1% 103.9%
Total:
Net premiums written........ $1,770.6 $1,541.6 $1,611.0 $1,694.7 $1,794.1
Underwriting loss........... (175.6) (219.3) (326.0) (144.2) (157.1)
Combined ratio(2)........... 110.8% 114.1% 121.0% 108.9% 109.0%
</TABLE>
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(1) Includes net premiums written in personal lines of $45.4 million, $8.8
million, $7.7 million, $178.6 million and $408.0 million for the years
ended December 31, 1993, 1992, 1991, 1990 and 1989, respectively. The
increase in net premiums written in personal lines for 1993 resulted from
the expiration and non-renewal of a quota share treaty on June 30, 1993.
The personal lines quota share treaty was not renewed in anticipation of
transferring or running off the Company's personal lines business.
(2) Catastrophe losses (net of reinsurance) for the Reliance Property and
Casualty Companies for the years ended December 31, 1993, 1992, 1991, 1990
and 1989 were $39.3 million, $61.1 million, $28.7 million, $22.8 million
and $29.2 million, respectively. Gross catastrophe losses (before
reinsurance) for the Reliance Property and Casualty Companies for the
years ended December 31, 1993, 1992, 1991, 1990 and 1989 were $88.5
million, $119.2 million, $29.7 million, $28.4 million and $46.3 million,
respectively. For the years ended December 31, 1993, 1992, 1991, 1990 and
1989, the provision for the insured events of prior years was $40.2
million, $31.5 million, $271.7 million, $93.7 million and $78.1 million,
respectively.
The following table sets forth certain financial information of the Reliance
Property and Casualty Companies based upon statutory accounting practices and
common shareholder's equity of Reliance Insurance Company based upon GAAP, in
thousands:
<TABLE>
<CAPTION>
STATUTORY ACCOUNTING GAAP
-------------------------------------------------------------- -------------
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>
1993................... $1,810,070 $834,855 $2,846,073 $4,968,714 $4,066,424 $902,290 $1,171,490
1992................... 1,548,819 648,705 2,617,040 4,521,153 3,663,542 857,611 1,060,774
1991................... 1,509,012 622,985 2,280,939 4,214,864 3,374,326 840,538 988,804
</TABLE>
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* Includes Reliance Insurance Company's investment in title insurance
operations of $176.9 million at December 31, 1993.
The Reliance Property and Casualty Companies write insurance in every state
of the United States, the District of Columbia and Puerto Rico and through
offices located in the United
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Kingdom, the Netherlands and Canada, and have an affiliation with an insurer
in Mexico. In 1993, California, New York, Pennsylvania and Texas accounted for
approximately 19%, 12%, 7%, and 5%, respectively, of direct premiums written.
No other state accounted for more than 5% of direct premiums written by the
Reliance Property and Casualty Companies. The Reliance Property and Casualty
Companies write insurance through independent agents and brokers. No single
insurance agent or broker accounts for 10% or more of the direct premiums
written by the Reliance Property and Casualty Companies.
The Reliance Property and Casualty Companies ranked 31st among property and
casualty insurance companies and groups in terms of net premiums written
during 1992, according to Best's Insurance Management Reports. A. M. Best &
Company, Inc. ("Best"), publisher of Best's Insurance Reports, Property--
Casualty, has assigned an A- (Excellent) rating to the Reliance Property and
Casualty Companies. Best's ratings are based on an analysis of the financial
condition and operations of an insurance company as they relate to the
industry in general. An A- (Excellent) rating is assigned to those companies
which have achieved excellent overall performance when compared to the norms
of the property and casualty industry. Standard & Poor's ("S&P") rates the
claims-paying ability of the Reliance Property and Casualty Companies A. S&P's
ratings are based on quantitative and qualitative analysis including
consideration of ownership and support factors, if applicable. An A rating is
assigned to those companies which have good financial security, but capacity
to meet policyholder obligations is somewhat susceptible to adverse economic
and underwriting conditions. Best's ratings are not designed for the
protection of investors and do not constitute recommendations to buy, sell or
hold any security. Although the Best and S&P ratings of the Reliance Property
and Casualty Companies are lower than those of many of the insurance companies
with which the Reliance Property and Casualty Companies compete, management
believes that the current ratings are adequate to enable the Reliance Property
and Casualty Companies to compete successfully.
Reliance National. Reliance National was established in 1987 to provide
specialty commercial insurance products and services, and innovative coverages
in standard commercial lines, to selected segments of the property and
casualty market which do not lend themselves to traditional insurance products
and services, and which are not extensively served by competitors. In 1993,
Reliance National accounted for 49% of the net premiums written by the
Reliance Property and Casualty Companies. Reliance National, which conducts
business nationwide, is headquartered in New York City and has offices in
eight states and in Canada, the United Kingdom and the Netherlands and has an
affiliation with an insurer in Mexico. Reliance National distributes its
products primarily through national insurance brokers. Reliance National
maintains a strong centralized underwriting and actuarial staff and makes
extensive use of third party administrators and technical consultants for
certain claims and loss control services. Net premiums written by Reliance
National were $872.2 million, $828.6 million and $785.8 million for the years
ended December 31, 1993, 1992 and 1991, respectively.
Reliance National is organized into eight divisions. Each division is
comprised of individual departments, each focusing on a particular type of
business, program or market segment. Each department makes use of
underwriters, actuaries and other professionals to market, structure and price
its products. Reliance National's eight divisions are:
. Risk Management Services, Reliance National's largest division, targets
Fortune 1,000 companies and multinationals with a broad array of
coverages and services. Its use of risk financing techniques such as
retrospectively rated policies, self-insured retentions, deductibles,
captives and fronting arrangements all help clients to reduce costs
and/or manage cash flow more efficiently. It also applies risk management
principles to pollution exposures. In 1993, this division had net
premiums written of $329.2 million.
5
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. Special Operations provides coverages for the construction and
transportation industries and has started a new facility for ocean marine
risks and a new facility for non-standard personal automobile coverage.
In 1993, this division had net premiums written of $162.1 million.
. Excess and Surplus Lines provides professional liability insurance to
architects and engineers, lawyers, healthcare providers and other
professions, and markets excess and umbrella coverages. It also develops
and provides insurance products to certain markets requiring specialized
underwriting. In 1993, this division had net premiums written of $147.2
million.
. Financial Products provides directors and officers liability insurance
and, for financial institutions, errors and omissions insurance. In 1993,
this division had net premiums written of $67.0 million.
. International writes predominantly large accounts and specialty business
in the United Kingdom and Canada and provides management, insurance and
reinsurance services to a Mexican insurer with which Reliance National
has an affiliation. It also provides some risk management services for
foreign subsidiaries of United States multinational corporations. In
1993, this division had net premiums written of $66.4 million.
. Property, a recently constituted division, provides commercial property
coverage focusing on excess and specialty commercial property. In 1993,
the departments which were combined into this division had net premiums
written of $36.5 million.
. Financial Specialty Coverages provides finite risk insurance and other
unusual coverages. In 1993, this division had net premiums written of
$33.1 million.
. Accident and Health provides high limit disability, group accident,
blanket special risk and medical excess of loss programs. In 1993, this
division had net premiums written of $30.7 million.
In the fourth quarter of 1993, Reliance National realigned several of its
departments, including those which had comprised its Specialty Lines and
Programs division which provided liability and property insurance (including
pollution, casualty and commercial property coverages), primarily for
companies in hard to insure industries, and formed a new Property division.
The 1993 net premiums written for all divisions include the premiums of the
departments previously within the Specialty Lines and Programs division.
Reliance National attempts to reduce its losses through the use of
retrospectively rated pricing, claims-made policies and reinsurance.
Approximately 21% of Reliance National's net premiums written during 1993 were
written on a retrospectively rated or loss sensitive basis, whereby the
insured effectively pays for a large portion or, in many cases, all of its
losses. With retrospectively rated pricing, Reliance National provides
insurance and loss control management services, while reducing its
underwriting risk. Reliance National does, however, assume a credit risk and,
therefore, accounts with retrospectively rated pricing undergo extensive
credit analysis. Collateral in the form of bank letters of credit or cash
collateral is generally provided by the insured to cover Reliance National's
exposure.
Nearly 66% of Reliance National's specialty commercial net premiums written
during 1993 were written on a "claims-made" basis which provides coverage only
for claims reported during the policy period or within an established
reporting period as opposed to "occurrence" basis policies which provide
coverage for events during the policy period without regard for when the claim
is reported. Claims-made policies mitigate the "long tail" nature of the risks
insured.
To further limit exposures, approximately 91% of Reliance National's net
premiums written during 1993 were for policies with net retentions equal to or
lower than $1.5 million per risk. By reinsuring a large proportion of its
business, Reliance National seeks to limit its exposure to losses
6
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on each line of business it writes. Its largest single exposure, net of
reinsurance, at December 31, 1993, was $2.4 million per occurrence.
Reliance Insurance. Reliance Insurance offers standard commercial lines
property and casualty insurance products, focusing on the diverse needs of
mid-sized companies nationwide. Reliance Insurance distributes its products
primarily through approximately 2,400 independent agents, as well as through
regional and national brokers. Reliance Insurance's customers are primarily
closely held companies with 25 to 1,000 employees and annual sales of $5
million to $300 million. Reliance Insurance underwrites a variety of
commercial insurance coverages including property, general liability,
automobile and workers' compensation (written on both a guaranteed cost and a
retrospectively rated basis). Reliance Insurance is headquartered in
Philadelphia and operates in 50 states and the District of Columbia. Reliance
Insurance provides its products and services through a decentralized network
of profit centers. This organization allows it to place major responsibility
and accountability for underwriting, sales, claims, and customer service close
to the insured.
Historically, Reliance Insurance underwrote personal lines insurance and
commodity-type standard commercial lines of insurance for small accounts.
Regulatory restrictions, intense competition and inadequate pricing in these
lines caused Reliance Insurance to change its strategic direction in order to
position itself for improved operating results. Reliance Insurance's strategy
includes:
. Increased emphasis on custom underwriting. Reliance Insurance's custom
underwriting facility provides centralized underwriting of excess and
surplus exposures (generally with lower net retentions than for other
standard commercial lines written by Reliance Insurance) and provides
property and liability insurance programs, targeting homogeneous groups
of insureds with particular insurance needs, such as auto rental
companies, day care centers, municipalities and trash haulers. These
programs are administered by independent program agents, with Reliance
Insurance retaining authority for all underwriting and pricing decisions.
Program agents market the programs, gather the initial underwriting data
and, if authorized by Reliance Insurance, issue the policies. All claims
and other services are handled by Reliance Insurance. Net premiums
written under the custom underwriting facility were $179.1 million in
1993.
. Increased emphasis on its large accounts division. Reliance Insurance's
large accounts division targets accounts with annual premiums in excess
of $500,000, where it is able to offer more flexible coverages that can
be quoted on a loss sensitive or experience rated basis. The large
accounts division wrote $136.0 million of net premiums in 1993.
. Withdrawal from personal lines. Reliance Insurance has substantially
withdrawn from personal lines, where it has had unfavorable experience
and it does not perceive a potential for long-term profitability. The
Reliance Property and Casualty Companies derived 2.6% of their net
premiums written from personal lines in 1993, compared with 22.7% in
1989.
. Reductions in employees and offices. To reduce the number of its
employees and offices, Reliance Insurance has merged its East and West
Coast operations, implemented automated systems to process policies and
related data, eliminated non-productive branch offices (resulting in a
reduction in the number of branch offices from 48 in 1989 to 40 in 1993),
and streamlined and downsized its home office support functions. These
efforts have resulted in a reduction in head count from approximately
2,900 in 1989 to approximately 1,950 at December 31, 1993.
. Reduction in guaranteed cost workers' compensation. Reliance Insurance
has restructured its workers' compensation business to reduce its
guaranteed cost writings in those states where Reliance Insurance
believes there is limited opportunity for profit. These actions have
resulted in Reliance Insurance's guaranteed cost net premiums written
declining from $116.2
7
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million in 1990 to $42.4 million in 1993. Policies written on a
retrospectively priced basis increased from $36.0 million in 1990 to
$103.3 million in 1993.
Reliance Reinsurance. Reliance Reinsurance provides property reinsurance on
a treaty basis and casualty reinsurance on both a treaty and facultative
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, Reliance Reinsurance typically targets treaty
reinsurance for small to medium sized regional and specialty insurance
companies, as well as captives, risk retention groups and other alternative
markets, providing both pro rata and excess of loss coverage. Reliance
Reinsurance believes that this market is subject to less competition and
provides Reliance Reinsurance an opportunity to develop and market innovative
programs where pricing is not the key competitive factor for success. 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, where losses are more predictable and quantifiable. The assumed
reinsurance business of the Reliance Property and Casualty Companies is
conducted nationwide and is headquartered in Philadelphia.
Reliance Surety. Reliance Surety is a leading writer of surety bonds and
fidelity bonds in the United States. Reliance Surety concentrates on writing
performance bonds for contractors of public works projects, commercial real
estate and multi-family housing. It also writes financial institution and
commercial fidelity bonds. Reliance Surety has established an operation
targeting smaller contractors, an area traditionally less fully serviced by
national surety companies and one providing potential growth for Reliance
Surety. Reliance Surety is headquartered in Philadelphia and conducts business
nationwide through 39 branch offices and approximately 3,200 independent
agents and brokers.
Surety bonds guarantee the payment or performance of one party (called the
principal) to another party (called the obligee). This guarantee is typically
evidenced by a written agreement by the surety (e.g., Reliance Insurance
Company) to discharge the payment or performance obligations of the principal
pursuant to the underlying contract between the obligee and the principal. An
example of a surety bond is a performance bond posted by a contractor to
guarantee the completion of his work on a construction project. Fidelity bonds
insure against losses arising from employee dishonesty. Financial institution
fidelity bonds insure against losses arising from employee dishonesty and
other specifically named theft and fraud perils.
Reliance Surety performs extensive credit analysis on its clients, and
actively manages the claims function to minimize losses and maximize
recoveries. Reliance Surety has enjoyed long relationships with the major
contractors it has insured.
Title Insurance. Through Commonwealth/Transamerica Title, the Company writes
title insurance for commercial and residential real estate nationwide and
provides escrow and settlement services in connection with real estate
closings. The acquisition of Transamerica Title in 1990 allowed the Company to
solidify its national presence and expand its National Title Service division,
whereby the Company provides title services for large and multi-state
commercial transactions, as well as high-volume residential title services for
national lenders. Commercial business has grown to include transactions
relating to the formation of real estate investment trusts (REITs), sales of
troubled properties and sales of mortgage-backed securities.
Commonwealth/Transamerica Title comprised the third largest title insurance
operation in the United States, based on 1992 total premiums and fees.
Commonwealth/Transamerica Title had premiums and fees (excluding Commonwealth
Mortgage Assurance Corporation, its mortgage insurance subsidiary which was
sold in the fourth quarter of 1992) of $893.4 million, $770.5 million and
$613.7 million for the years 1993, 1992 and 1991, respectively.
8
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Commonwealth/Transamerica Title is organized into six regions with more than
250 branch offices covering all 50 states, as well as Puerto Rico and the
Virgin Islands. In 1993, California, Texas, Florida, Pennsylvania, Washington,
New York and Michigan accounted for approximately 16%, 11%, 8%, 7%, 6%, 6% and
5%, respectively, of revenues for premiums and services related to title
insurance. No other state accounted for more than 5% of such revenues.
Commonwealth/ Transamerica Title is committed to increasing its market share
through a carefully developed plan of expanding its direct and agency
operations, including selective acquisitions.
Commonwealth has been consistently profitable through periods of both strong
and weak economic conditions, including the recent commercial real estate
downturn. The Company believes that the primary reasons for Commonwealth's
consistent profitability are Commonwealth's continuous efforts to monitor and
control losses and expenses, while growing the business on a selective basis.
Successful efforts in loss mitigation include strict quality control
procedures, as well as extensive educational programs for its agents and
employees.
A title insurance policy protects the insured party and certain successors
in interest against losses resulting from title defects, liens and
encumbrances existing as of the date of the policy and not specifically
excepted from the policy's provisions. Generally, a title policy is obtained
by the buyer, the mortgage lender or both at the time real property is
transferred or refinanced. The policy is written for an indefinite term for a
single premium which is due in full upon issuance of the policy. The face
amount of the policy is usually either the purchase price of the property or
the amount of the loan secured by the property. Title policies issued to
lenders insure the priority position of the lender's lien. Many lenders
require title insurance as a condition to making loans secured by real estate.
Title insurers, unlike other types of insurers, seek to eliminate future
losses through the title examination process and the closing process, and a
substantial portion of the expenses of a title insurer relate to those
functions.
Consulting and Technical Services. RCG International, Inc. ("RCG"), a
subsidiary of the Reliance Insurance Group, and its subsidiaries provide a
broad range of consulting and technical services to industry, government and
nonprofit organizations, principally in the United States and Europe, and also
in Canada, Asia, South America, Africa and Australia. The services provided by
RCG include consulting in two principal areas: information technology and
energy/environmental services. RCG and its subsidiaries had revenues of $116.8
million and $109.1 million for 1993 and 1992, respectively.
SALE OF NON-CORE OPERATIONS
During 1992 and 1993, the Company realigned its operations in line with its
strategy of emphasizing specialty commercial property and casualty insurance
products and services and title insurance and focusing its standard commercial
insurance business on programs, larger accounts and loss sensitive and
retrospectively rated policies.
In July 1993, the Company completed the sale of its life insurance
subsidiary, United Pacific Life Insurance Company ("UPL"), for total
consideration of $567 million. Pursuant to the terms of the sale, Reliance
Insurance Company purchased $482 million of UPL's invested assets consisting
principally of (a) publicly traded non-investment grade securities and (b)
income-producing real estate.
In the fourth quarter of 1992, the Company sold substantially all of the
operating assets and insurance brokerage, employee benefits consulting and
related services businesses of its insurance brokerage subsidiary, Frank B.
Hall & Co. Inc. ("Hall") to Aon Corporation ("Aon") for total consideration of
$457 million (consisting of $125 million in cash, $225 million of 8%
cumulative perpetual preferred stock of Aon and $107 million of 6 1/4%
cumulative convertible exchangeable
9
<PAGE>
preferred stock of Aon) plus the assumption by Aon of certain of Hall's
operating liabilities. In connection with the sale of Hall, the Reliance
Insurance Group agreed to place reinsurance through an Aon subsidiary,
providing reinsurance brokerage commissions to Aon of $18 million per year
until the year 2007. Concurrently with this sale, Hall was merged with a
wholly-owned subsidiary of Reliance Group Holdings and each outstanding share
of common stock of Hall, other than shares owned by the Company, was converted
into .625 of a share of Reliance Group Holdings Common Stock. In the first
quarter of 1994, Reliance Group Holdings agreed to increase such conversion
ratio by .02 of a share of Reliance Group Holdings Common Stock.
Also in the fourth quarter of 1992, the Company sold its mortgage insurance
subsidiary, Commonwealth Mortgage Assurance Corporation ("CMAC"), through a
public offering of 100% of the common stock of CMAC Investment Corporation
("CMAC Investment"), a newly-formed holding company for CMAC, for net proceeds
of $118.5 million. In connection with this sale, the Company purchased 800,000
shares of $4.125 redeemable preferred stock of CMAC Investment for an
aggregate purchase price of $40 million.
In connection with the sales of UPL and Hall, customary representations,
warranties and indemnities were made to the buyers. For a further description
of the above transactions, see Notes 12 and 15 to the Consolidated Financial
Statements.
INSURANCE CEDED
All of the Reliance Insurance Group's insurance operations purchase
reinsurance to limit the Company's exposure to losses. Although the ceding of
insurance does not discharge an insurer from its primary legal liability to a
policyholder, the reinsuring company assumes a related liability and,
accordingly, it is the practice of the industry, as permitted by statutory
regulations, to treat properly reinsured exposures as if they were not
exposures for which the primary insurer is liable.
The Reliance Insurance Group enters into reinsurance arrangements that are
both facultative (individual risks) and treaty (blocks of risk). Limits and
retentions 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, market terms, conditions and capacity, and
may change over time.
Reliance Insurance and Reliance National limit their 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, Reliance Insurance
and Reliance National purchase additional facultative reinsurance to further
reduce their retentions below the treaty levels.
During 1993, the highest net retention per occurrence for casualty risk was
$2.7 million for Reliance Insurance and $2.4 million for Reliance National. In
addition, both Reliance Insurance and Reliance National purchase "casualty
clash" coverage to provide protection in the event of losses incurred by
multiple coverages on one occurrence.
During 1993, the highest net retention per occurrence for property risk was
$3.2 million for Reliance Insurance and $2.3 million for Reliance National. In
addition, as of December 31, 1993, Reliance Insurance and Reliance National
together had reinsurance for property catastrophe losses in excess of $15
million. Between $15 million and $22 million, Reliance Insurance and Reliance
National together retained up to $2.1 million of all losses attributable to a
single catastrophe. Between $22 million and $107 million, Reliance Insurance
and Reliance National together retained up to $10.5 million of all losses
attributable to a single catastrophe. Thus, for all losses attributable to a
single catastrophe of $107 million, Reliance Insurance and Reliance National
together retained a maximum exposure of $27.6 million. Effective January 1,
1994, Reliance Insurance and Reliance National together retain up to $4.6
million of all losses attributable to a single catastrophe between
10
<PAGE>
$15 million and $107 million. Thus, for all losses attributable to a single
catastrophe of $107 million, Reliance Insurance and Reliance National together
retain a maximum exposure of $19.6 million. Any loss from a single catastrophe
beyond $107 million is not reinsured and is retained by Reliance Insurance and
Reliance National together. Renewal of catastrophe coverage during the term of
the treaty is provided by a provision for one automatic reinstatement of the
original coverage at a contractually determined premium. The Company believes
that the limit of $107 million per occurrence is sufficient to cover its
probable maximum loss in the event of a catastrophe.
Additionally, Reliance National has catastrophe protection for losses in
excess of a retention of $8 million, up to the $15 million attachment point of
the property catastrophe cover.
Catastrophe losses, including losses incurred by Reliance Reinsurance on
insurance assumed, were $39.3 million in 1993 ($88.5 million before insurance
ceded) compared to $61.1 million in 1992 ($119.2 million before insurance
ceded), which included $45.6 million ($94.1 million before insurance ceded)
arising from Hurricane Andrew. Catastrophe losses, including losses incurred
by Reliance Reinsurance on insurance assumed, were $28.7 million ($29.7
million before insurance ceded) in 1991.
A catastrophic event can cause losses in lines of insurance other than
property. Both Reliance Insurance and Reliance National purchase workers'
compensation reinsurance coverage up to $200 million to provide protection
against losses under workers' compensation policies which might be caused by
catastrophes. Any such losses over $200 million would be covered by the
property catastrophe treaty to the extent of available capacity.
Reliance Insurance and Reliance National have also purchased reinsurance to
cover aggregate retained catastrophe losses in the event of multiple
catastrophes in any one year. This reinsurance agreement provides coverage for
up to 70% of aggregate catastrophe losses between $12.5 million and $39.0
million, after applying a deductible of $3.8 million per catastrophe.
Reliance Surety retains 100% of surety bond limits up to $1 million. For
surety bonds in excess of $1 million, up to $35 million, Reliance Surety
obtains 50% quota share reinsurance. In addition, Reliance Surety has excess
of loss protection, with a net retention of $3 million, for losses up to $25
million on any one principal insured. For fidelity business, Reliance Surety
retains 100% of each loss up to $500,000. Reliance Surety has obtained
reinsurance above that retention up to a maximum of $9,500,000 on each loss
subject, however, to an annual aggregate deductible of $1,500,000.
Reliance Reinsurance writes treaty property and casualty reinsurance and
facultative casualty reinsurance with limits of $1.5 million per program.
Facultative property reinsurance, which was discontinued in February 1994, was
written with limits of $10 million per risk, of which the Company retained
$500,000 after the purchase of reinsurance. Reliance Reinsurance purchases
catastrophe protection for its property treaty and facultative insurance
assumed of $5.2 million in excess of a $3 million per occurrence retention,
with a contractual provision for a reinstatement. Reliance Reinsurance also
writes a specific catastrophe book of business with an aggregate limit of $25
million for any one event, not subject to the above protection. In 1993, no
losses were incurred under this specific catastrophe program.
Commonwealth/Transamerica Title generally retains no more than $60 million
on any one risk, although it often retains significantly less than this
amount, with reinsurance placed with other title companies.
Commonwealth/Transamerica Title also purchases reinsurance from Lloyd's of
London which provides coverage for 80% of losses in excess of $20 million, up
to $60 million, on any one risk. The largest net loss paid by Commonwealth or,
since its acquisition, Transamerica Title on any one risk was approximately $3
million.
11
<PAGE>
Premiums ceded by the Reliance Insurance Group to reinsurers were $1.1
billion and $1.2 billion in 1993 and 1992, 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. At December 31, 1993, the Reliance Insurance
Group had reinsurance recoverables of $2.6 billion, representing estimated
amounts recoverable from reinsurers pertaining to paid claims, unpaid claims,
claims incurred but not reported and unearned premiums. The Reliance Insurance
Group holds substantial amounts of collateral, consisting of letters of credit
and cash collateral, to secure recoverables from unauthorized reinsurers. In
order to minimize losses from uncollectible reinsurance, the Reliance
Insurance Group places its reinsurance with a number of different reinsurers,
and utilizes a security committee to approve in advance the reinsurers which
meet its standards of financial strength and are acceptable for use by
Reliance Insurance Group. The Company had $8.2 million reserved for
potentially unrecoverable reinsurance at December 31, 1993. The Company is not
aware of any impairment of the creditworthiness of any of the Reliance
Insurance Group's significant reinsurers. While the Company is aware of
financial difficulties experienced by certain Lloyd's of London syndicates,
the Company has not experienced deterioration of payments from the Lloyd's of
London syndicates from which it has reinsurance. The Company has no reason to
believe that the Lloyd's of London syndicates from which it has reinsurance
will be unable to satisfy claims that may arise with respect to ceded losses.
In 1993, the Reliance Property and Casualty Companies did not cede more than
5.4% of direct premiums to any one reinsurer and no one reinsurer accounted
for more than 12.2% of total ceded premiums. The Reliance Insurance Group's
ten largest reinsurers, based on 1993 ceded premiums, are as follows:
<TABLE>
<CAPTION>
1993
CEDED BEST
PREMIUM RATING
------- ------
(IN MILLIONS)
<S> <C> <C>
American Re-Insurance Company................................... $138.0 A+
Lloyd's of London............................................... 93.2 n/a
North American Reinsurance Corp................................. 66.8 A
Commercial Risk Re-Insurance Co................................. 51.4 (1)
Employers Reinsurance Corp...................................... 44.2 A++
GIO Insurance Ltd............................................... 39.4 A
TIG Reinsurance Company......................................... 30.5 A
TRN Insurance Company........................................... 26.5 (2)
Transatlantic Reinsurance Company............................... 21.1 A+
Underwriters Reinsurance Company................................ 20.6 A
</TABLE>
- --------
(1) Assigned a Best's Rating of NA-4 (Rating Procedure Inapplicable) as the
normal rating procedures for property/casualty companies do not apply to
companies that retain less than 25% of gross writings.
(2) An unrated captive reinsurer that is not affiliated with the Company.
Obligations are fully collateralized.
Reliance Insurance Company arranged with Centre Reinsurance International
Company a five-year aggregate excess of loss Reinsurance Treaty effective
January 1, 1994 through December 31, 1998 (the "Reinsurance Treaty"). The
Reinsurance Treaty indemnifies Reliance Insurance Company for ultimate
accident year losses (including loss adjustment expenses) in excess of
retained accident year losses for each accident year. The retained accident
year losses are determined in advance of each accident year and expressed as a
planned loss ratio. The recoveries under the Reinsurance Treaty are subject to
a limit of $200 million per accident year and an aggregate five-year limit of
$700 million. The Reinsurance Treaty provides for an annual premium deposit of
$25
12
<PAGE>
million which is subject to adjustment based on loss experience and a maximum
aggregate five-year premium of $400 million. Premiums in the amount of 57% of
ceded losses will be paid to the reinsurer whenever losses are ceded. The
Reinsurance Treaty is cancelable by Reliance Insurance Company on any December
31 during the five-year term upon thirty (30) days written notice. Reliance
Insurance Company is able to commute the Reinsurance Treaty on December 31,
2003 or any December 31, thereafter subject to specific terms of the
Reinsurance Treaty. The Reinsurance Treaty does not apply to the Company's
title insurance subsidiaries.
The Reliance Insurance Group maintains no "Funded Cover" reinsurance
agreements. "Funded Cover" reinsurance agreements are multi-year
retrospectively rated 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.
PROPERTY AND CASUALTY LOSS RESERVES
As of March 15, 1994, the Reliance Insurance Group maintains a staff of 89
actuaries, of whom 15 are fellows of the Casualty Actuarial Society and one is
a fellow of the Society of Actuaries. This staff 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 Property
and Casualty Companies. The table below provides a reconciliation of beginning
and ending liability balances (net of reinsurance recoverables) for the years
ended December 31, 1993, 1992 and 1991.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
1993 1992 1991
---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
Liability for unpaid claims and related
expenses (loss reserves), beginning of
year....................................... $2,702,992 $2,375,235 $1,893,421
---------- ---------- ----------
Provision for policy claims and related
expenses:
Provision for insured events of the
current year............................. 1,195,425 1,258,111 1,120,746
Increase in provision for insured events
of prior years........................... 40,169 31,487 271,714
---------- ---------- ----------
Total provision......................... 1,235,594 1,289,598 1,392,460
---------- ---------- ----------
Payments for policy claims and related
expenses:
Attributable to insured events of the
current year............................. 229,778 271,878 218,607
Attributable to insured events of prior
years.................................... 776,881 689,181 692,039
---------- ---------- ----------
Total payments.......................... 1,006,659 961,059 910,646
---------- ---------- ----------
Foreign currency translation................ (399) (782) --
---------- ---------- ----------
Liability for unpaid claims and related
expenses (loss reserves), end of year*..... $2,931,528 $2,702,992 $2,375,235
========== ========== ==========
</TABLE>
- --------
* Loss reserves exclude estimated reinsurance recoverables of $2.12 billion at
December 31, 1993, $1.87 billion at December 31, 1992 and $1.31 billion at
December 31, 1991 and exclude the loss reserves of title operations of
$204.7 million at December 31, 1993 and $173.3 million at December 31, 1992
and the loss reserves of title and mortgage insurance operations of $177.4
million at December 31, 1991.
13
<PAGE>
The table below provides a reconciliation of beginning and ending liability
balances (before reinsurance recoverables) for the year ended December 31,
1993.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1993
----------------------------
(IN THOUSANDS)
<S> <C>
Liability for unpaid claims and related expenses
(loss reserves), beginning of year............... $4,571,792
----------
Provision for policy claims and related expenses:
Provision for insured events of the current
year........................................... 2,212,408
Decrease in provision for insured events of
prior years.................................... (114,980)
----------
Total provision............................... 2,097,428
Payments for policy claims and related expenses:
Attributable to insured events of the current
year........................................... 387,960
Attributable to insured events of prior years... 1,228,954
----------
Total payments................................ 1,616,914
Foreign currency translation...................... (3,864)
----------
Liability for unpaid claims and related expenses
(loss reserves), end of year*.................... $5,048,442
==========
</TABLE>
- --------
* Loss reserves at December 31, 1993 exclude the loss reserves of title
operations of $204.7 million at December 31, 1993.
Policy claims and related expenses include a provision for insured events of
prior years of $40.2 million in 1993, compared to $31.5 million in 1992 and
$271.7 million in 1991. The 1993 provision includes $21.1 million of adverse
development from workers' compensation reinsurance pools and $35.2 million of
adverse development related to prior-year asbestos-related and environmental
pollution claims. This development was partially offset by favorable
development in other lines of business, including specialty commercial general
liability lines. The 1992 provision includes $55.6 million of adverse
development from workers' compensation and automobile reinsurance pools. This
development was partially offset by favorable development of $11.9 million
from two general liability claims and favorable development of $10.7 million
related to unallocated loss adjustment expenses. The 1991 provision includes
$156.0 million to strengthen loss reserves principally in guaranteed cost
workers' compensation business and loss adjustment expense reserves in other
standard commercial lines. The 1991 provision also includes $57.3 million of
adverse development from workers' compensation reinsurance pools and a $5.2
million provision in personal lines resulting from prior years' catastrophes.
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 Property and
Casualty Companies. 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
redundancy exists when the original loss reserve estimate is greater, and a
deficiency exists when the original loss reserve estimate is less, than the
reestimated loss reserve at December 31, 1993. A redundancy or deficiency
indicates the cumulative percentage change, as of December 31, 1993, 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. In calculating the percentage of cumulative
paid losses to the loss reserve liability in each year, unpaid losses of
General Casualty at April 30, 1990 (the date of sale), relating to 1983 to
1989, were deducted from the original
14
<PAGE>
liability in each year. 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. For the years 1983 through
1992, the Company has experienced deficiencies in its estimated liability for
loss reserves. Included in these deficiencies were provisions of $156.0
million in 1991 and $100.0 million in 1986 specifically made to strengthen
prior-years' loss reserves. The Company's loss reserves during this period
have been adversely affected by a number of factors beyond the Company's
control as follows: (i) significant increases in claim settlements reflecting,
among other things, inflation in medical costs; (ii) increases in the costs of
settling claims, particularly legal expenses; (iii) more frequent resort to
litigation in connection with claims; and (iv) a widening interpretation of
what constitutes a covered claim.
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------------------------------------------------------------
1993 1992 1991 1990 1989 1988 1987
---------- ---------- ---------- ---------- ---------- ---------- ----------
(IN THOUSANDS, EXCEPT PERCENTAGES)
<S> <C> <C> <C> <C> <C> <C> <C>
Liability for
unpaid claims
and related
expenses (loss
reserves)(1).... $2,931,528 $2,702,992 $2,375,235 $1,893,421 $1,962,822 $1,644,057 $1,494,227
Liability
reestimated as
of:
One year later.. -- 101.5% 101.3% 114.4% 104.8% 104.8% 107.8%
Two years later. -- -- 104.4 115.2 117.0 113.5 112.0
Three years
later.......... -- -- -- 119.6 118.2 121.8 118.5
Four years
later.......... -- -- -- -- 120.9 123.2 125.0
Five years
later.......... -- -- -- -- -- 127.8 126.7
Six years later. -- -- -- -- -- -- 131.8
Seven years
later.......... -- -- -- -- -- -- --
Eight years
later.......... -- -- -- -- -- -- --
Nine years
later.......... -- -- -- -- -- -- --
Ten years later. -- -- -- -- -- -- --
Redundancy
(Deficiency).... -- (1.5%) (4.4%) (19.6%) (20.9%) (27.8%) (31.8%)
Paid (cumulative)
as of:
One year later.. -- 28.7% 29.0% 36.6% 40.7% 41.6% 38.6%
Two years later. -- -- 48.6 57.9 65.4 71.6 65.8
Three years
later.......... -- -- -- 72.8 82.2 86.4 88.2
Four years
later.......... -- -- -- -- 91.3 97.2 99.5
Five years
later.......... -- -- -- -- -- 103.0 106.2
Six years later. -- -- -- -- -- -- 110.7
Seven years
later.......... -- -- -- -- -- -- --
Eight years
later.......... -- -- -- -- -- -- --
Nine years
later.......... -- -- -- -- -- -- --
Ten years later. -- -- -- -- -- -- --
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------------------
1986 1985 1984 1983
---------- ---------- ---------- ----------
(IN THOUSANDS, EXCEPT PERCENTAGES)
<S> <C> <C> <C> <C>
Liability for
unpaid claims
and related
expenses (loss
reserves)(1).... $1,425,942 $1,248,713 $1,162,200 $1,110,565
Liability
reestimated as
of:
One year later.. 106.6% 122.1% 109.3% 101.9%
Two years later. 115.6 134.5 126.3 102.1
Three years
later.......... 121.6 142.5 135.7 110.5
Four years
later.......... 127.2 150.4 142.3 116.0
Five years
later.......... 132.3 155.1 149.2 119.9
Six years later. 135.1 161.2 152.4 125.4
Seven years
later.......... 140.0 163.5 157.8 127.4
Eight years
later.......... -- 168.5 159.6 131.5
Nine years
later.......... -- -- 165.1 134.0
Ten years later. -- -- -- 138.7
Redundancy
(Deficiency).... ) (40.0%) (68.5%) (65.1%) (38.7%)
Paid (cumulative)
as of:
One year later.. 42.0% 48.1% 47.2% 39.4%
Two years later. 68.4 79.1 76.2 61.7
Three years
later.......... 88.1 98.9 98.5 78.9
Four years
later.......... 103.9 114.4 111.0 92.5
Five years
later.......... 112.1 127.3 121.2 99.4
Six years later. 117.1 134.9 130.1 104.7
Seven years
later.......... 120.8 138.5 135.8 110.0
Eight years
later.......... -- 141.9 138.6 113.5
Nine years
later.......... -- -- 142.2 116.0
Ten years later. -- -- -- 118.9
</TABLE>
- -------
(1) The liability for unpaid claims and related expenses (loss reserves),
before reinsurance recoverables, was $5.0 billion at December 31, 1993.
The loss reserve, before reinsurance recoverables, for years 1992 and
prior was redundant by $115.0 million at December 31, 1993.
15
<PAGE>
The difference between the property and casualty liability for loss reserves
at December 31, 1993 and 1992 reported in the Company's 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,
----------------------
1993 1992
---------- ----------
(IN THOUSANDS)
<S> <C> <C>
Liability reported under statutory accounting
practices............................................. $2,846,073 $2,617,040
Adjustment for GAAP basis accrual of estimated salvage
and subrogation recoveries............................ (9,360) (11,248)
Additional discount of workers' compensation reserves.. 95,996 97,982
Foreign currency translation........................... (1,181) (782)
---------- ----------
Liability reported..................................... $2,931,528 $2,702,992
========== ==========
</TABLE>
The difference between the property and casualty liability for loss reserves
at December 31, 1993 reported in the Company's consolidated financial
statements (before reinsurance recoverables) and the liability which would be
reported in accordance with statutory accounting practices (before reinsurance
recoverables) is as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1993
-----------------
(IN THOUSANDS)
<S> <C>
Liability reported under statutory accounting practices...... $4,878,016
Adjustment for GAAP basis accrual of estimated salvage and
subrogation recoveries...................................... (11,484)
Additional discount of workers' compensation reserves........ 186,556
Foreign currency translation................................. (4,646)
----------
Liability reported........................................... $5,048,442
==========
</TABLE>
Property and casualty loss reserves are based on an evaluation of reported
claims and 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 Property and
Casualty Companies apply 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 level of unpaid claims, the cost of claim settlements,
the Reliance Insurance Group's product mix, the economic environment in which
property and casualty companies operate and the trend toward increasing claims
and awards. 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 Reliance
Property and Casualty Companies regularly analyze their reserves and review
their pricing and reserving methodologies, using Reliance Insurance Group
actuaries, so that future adjustments to prior year reserves can be minimized.
From time to time, the Reliance Property and Casualty Companies consult with
independent actuarial firms concerning reserving practices and levels. The
Reliance Property and
16
<PAGE>
Casualty Companies are required by state insurance regulators to file, along
with their statutory reports, a statement of actuarial reserve opinion setting
forth an actuary's assessment of their reserve status and, in 1993, the
Reliance Property and Casualty Companies used an independent actuarial firm to
meet such requirements. However, given the complexity of this process,
reserves will require continual updates. The process of estimating claims is a
complex task and the ultimate liability may be more or less than such
estimates indicate. Since 1989, the Reliance Property and Casualty Companies
have increased their premium writings in specialty commercial lines of
business. Estimation of loss reserves for many specialty commercial lines of
business is more difficult than for certain standard commercial lines because
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, variations in loss development are more likely in these lines of
business. The Reliance Property and Casualty Companies attempt to reduce these
variations in certain of its specialty commercial lines, primarily directors
and officers liability, professional liability and general liability, by
writing policies on a claims-made basis, which mitigates the long tail nature
of the risks. The Reliance Property and Casualty Companies also seeks to limit
the loss from a single event through the use of reinsurance.
In calculating the liability for loss reserves, the Reliance Property and
Casualty Companies discount workers' compensation pension claims 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% to 6%. In addition, the reserves for claims assumed through the
participation of the Reliance Property and Casualty Companies in workers'
compensation reinsurance pools are discounted. In the fourth quarter of 1993,
the Reliance Property and Casualty Companies commuted a treaty with a
voluntary workers' compensation pool and is holding the same reserves for
claims incurred but not reported and discount as was previously held by such
pool before the treaty was commuted. The discounting of all claims (net of
reinsurance recoverables) resulted in a $284.7 million, $289.5 million and
$243.8 million decrease in the liability for loss reserves at December 31,
1993, 1992 and 1991, respectively. The discounts taken in 1993, 1992 and 1991
were $7.9 million, $54.1 million and $50.9 million, respectively. In 1993,
these discounts were more than offset by discount amortization resulting in a
decrease in pretax income of $4.8 million. In 1992 and 1991, these discounts
were partially offset by discount amortization, resulting in an increase in
pretax income of $45.7 million and $43.7 million, respectively.
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, 1993 are $152
million ($122 million net of reinsurance recoverables) of loss reserves
pertaining to asbestos-related and environmental pollution claims. Included in
these reserves are reserves for claims incurred but not reported and reserves
for loss expenses, which include litigation expenses. The Company continues to
receive claims asserting injuries from hazardous materials and alleged damages
to cover various clean-up costs relating to policies written in prior years.
Coverage and claim settlement issues, such as the determination that coverage
exists and the definition of an occurrence, may cause the actual loss
development to exhibit more variation than the remainder of the Company's book
of business. The Company's net paid losses and related expenses for asbestos-
related and environmental pollution claims have not been material in relation
to the Company's total net paid losses and related
17
<PAGE>
expenses. Net paid losses and related expenses (primarily legal fees and
expenses) relating to these claims were $23.0 million (including $8.6 million
of related expenses), $17.3 million (including $7.7 million of related
expenses) $20.3 million (including $11.5 million of related expenses), $5.6
million (including $3.6 million of related expenses) and $8.5 million
(including $5.0 million of related expenses) for the years ended December 31,
1993, 1992, 1991, 1990 and 1989, respectively. Total payments for all policy
claims and related expenses were $1.0 billion, $961.1 million, $910.6 million,
$1.0 billion and $1.1 billion for the years ended December 31, 1993, 1992,
1991, 1990 and 1989, respectively. As of December 31, 1993, the Company had
approximately 700 direct insureds for which one or more environmental or
asbestos claims were open. As of December 31, 1993, the Company was involved
in approximately 40 coverage disputes (where a motion for declaratory judgment
had been filed, the resolution of which will require a judicial interpretation
of an insurance policy) related to asbestos or environmental pollution claims.
The Company is not aware of any pending litigation or pending claim which will
result in significant contingent liabilities in these areas. The Company
believes it has made reasonable provisions for these claims, although the
ultimate liability may be more or less than such reserves. The Company
believes that future losses associated with these claims will not have a
material adverse effect on its financial position, although there is no
assurance that such losses will not materially affect the Company's results of
operations for any period.
Although the Company believes, in light of present facts and current legal
interpretations, that the overall loss reserves of the Reliance Property and
Casualty Companies 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.
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 the best available return,
can be achieved by active portfolio management and by the intensive monitoring
of investments. Reference is made to "Reliance Financial Services Corporation
and Subsidiaries Financial Review--Investment Portfolio" on page 31 of the
Company's 1993 Annual Report, which section is incorporated herein by
reference, and Note 2 to the Consolidated Financial Statements.
18
<PAGE>
The following table details the distribution of the Company's investments at
December 31, 1993:
<TABLE>
<CAPTION>
AMORTIZED MARKET CARRYING
COST VALUE VALUE
-------------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
Fixed maturities available for sale:
Bonds and notes:
United States Government and government
agencies and authorities............... $ 466,897 $ 475,060 $ 475,060
Foreign-governments..................... 18,396 22,273 22,273
Foreign-other........................... 21,519 26,117 26,117
Public utilities........................ 86,943 91,556 91,556
All other corporate bonds and notes..... 904,006 945,764 945,764
Redeemable preferred stocks.............. 359,208 383,329 383,329
---------- ---------- ----------
1,856,969 1,944,099 1,944,099
---------- ---------- ----------
Fixed maturities held for investment:
Bonds and notes:
States, municipalities and political
subdivisions........................... $ 13,965 14,312 13,965
Foreign-government...................... 26,507 28,659 26,507
Foreign-other........................... 49,311 52,710 49,311
Public utilities........................ 433,138 446,506 433,138
All other corporate bonds and notes..... 277,914 287,836 277,914
Redeemable preferred stocks.............. 135,808 143,090 135,808
---------- ---------- ----------
936,643 973,113 936,643
---------- ---------- ----------
Total fixed maturities................ 2,793,612 2,917,212 2,880,742
---------- ---------- ----------
Equity securities(1):
Common stocks:
Public utilities........................ 55,861 60,695 60,695
Banks, trusts and insurance companies... 9,668 9,113 9,113
Industrial and other.................... 171,530 233,846 233,846
Nonredeemable preferred stocks........... 221,158 243,519 243,519
---------- ---------- ----------
458,217 547,173 547,173
---------- ---------- ----------
Short-term investments.................... 372,507 373,015 372,507
---------- ---------- ----------
Total investment portfolio............ $3,624,336 $3,837,400 $3,800,422
========== ========== ==========
<CAPTION>
COST AND
CARRYING
VALUE
--------------
(IN THOUSANDS)
<S> <C>
Mortgage loans (2)........................ $ 17,188
Investments in real estate................ 282,836
</TABLE>
- --------
(1) Does not include investment in Zenith National Insurance Corp. which is
accounted for by the equity method and which, as of December 31, 1993, had
a carrying value of $157.0 million. See "--Investee Company."
(2) In the Company's Consolidated Financial Statements, mortgage loans are
included in other accounts and notes receivable.
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
19
<PAGE>
no investments in commercial real estate mortgages. 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.
Equity investments are made after in-depth analysis of individual companies'
fundamentals by the Reliance Insurance Group's staff of investment
professionals. They seek to identify equities that appear to be undervalued
relative to the issuer's business fundamentals, such as earnings, cash flows,
balance sheets and future prospects. Rather than maintaining a portfolio with
large numbers of issuers weighted across a broad range of industry sectors,
the Company invests in sufficiently few issuers to allow it to effectively
monitor each investment. The Reliance Insurance Group has increased the
liquidity of its equity portfolio by investing in issuers which have
significant market capitalizations.
At December 31, 1993, the Company's real estate holdings had a carrying
value of $282.8 million, which includes 11 shopping centers with an aggregate
carrying value of $130.3 million, office buildings and other commercial
properties with an aggregate carrying value of $91.9 million, and undeveloped
land with a carrying value of $60.6 million.
At December 31, 1993, the Reliance Insurance Group's investment portfolio
was $3.6 billion (at cost) with 87.4% in fixed maturities and short-term
securities (including redeemable preferred stock) and 12.6% in equity
securities, including convertible preferred stock.
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.
20
<PAGE>
The following table presents the investment results of the Reliance
Insurance Group's investment portfolio for each of the years ended December
31, 1993, 1992 and 1991:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------
1993 1992 1991
----------- ----------- -----------
(IN THOUSANDS, EXCEPT PERCENTAGES)
<S> <C> <C> <C>
Fixed Maturities:
Average investments(1)................ $ 3,050,018 $ 2,667,220 $ 2,538,315
Net investment income(2).............. 210,916 196,021 212,887
Realized gains........................ 59,252 30,508 18,449
Increase in unrealized gains.......... 51,787 55,937 179,061
Average annual yield:
Net investment income............... 6.92% 7.35% 8.39%
Realized gains...................... 1.94 1.14 0.73
Increase in unrealized gains........ 1.70 2.10 7.05
----------- ----------- -----------
Return on fixed maturities............ 10.56% 10.59% 16.17%
=========== =========== ===========
Equity Securities(3):
Average investments(1)................ $ 622,435 $ 510,986 $ 289,473
Net investment income(2).............. 28,259 20,995 9,639
Realized gains........................ 98,944 19,628 3,841
Increase (decrease) in unrealized
gains................................ (9,670) 31,619 64,226
Average annual yield:
Net investment income............... 4.54% 4.11% 3.33%
Realized gains...................... 15.89 3.84 1.33
Increase (decrease) in unrealized
gains.............................. (1.55) 6.19 22.18
----------- ----------- -----------
Return on equity securities........... 18.88% 14.14% 26.84%
=========== =========== ===========
Total weighted average return on fixed
maturities and equity securities(4).... 11.97% 11.16% 17.26%
=========== =========== ===========
</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, 1993, 1992 and 1991.
(2) Consists principally of interest and dividend income, less investment
expenses.
(3) Does not include investment in Zenith National Insurance Corp. see "--
Investee Company."
(4) The impact on the overall rate of return of a one percent increase or
decrease in the December 31, 1993 fixed maturity portfolio market value
would be approximately 0.78%.
The carrying value and market value at December 31, 1993 of fixed maturities
for which interest is payable on a deferred basis was $77.4 million.
21
<PAGE>
At December 31, 1993, 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 OF
TOTAL
CARRYING MARKET MARKET
VALUE VALUE VALUE
---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
AAA to A....................................... $1,338,971 $1,359,469 47%
BBB............................................ 1,044,508 1,057,803 36
---------- ---------- ---
Total investment grade....................... 2,383,479 2,417,272 83
---------- ---------- ---
BB to B........................................ 326,829 327,970 11
CCC to C....................................... 45,795 45,795 2
Below C........................................ 3,829 3,829 --
Non-rated...................................... 120,810 122,346 4
---------- ---------- ---
Total........................................ $2,880,742 $2,917,212 100%
========== ========== ===
</TABLE>
Substantially all of the non-investment grade fixed maturities are
classified as "available for sale" and, accordingly, are carried at quoted
market value.
The contractual maturities of short-term and fixed maturity investments at
December 31, 1993 are set forth below:
<TABLE>
<CAPTION>
AMORTIZED MARKET
COST VALUE
---------- ----------
(IN THOUSANDS)
<S> <C> <C>
Short-term investments.................................... $ 372,507 $ 373,015
========== ==========
Fixed maturity investments:
1995.................................................... $ 21,044 $ 22,184
1996.................................................... 36,172 33,523
1997.................................................... 69,423 79,395
1998.................................................... 380,265 381,633
1999-2003............................................... 635,870 673,686
2004 and thereafter..................................... 1,627,558 1,702,403
---------- ----------
2,770,332 2,892,824
Mortgage-backed securities................................ 23,280 24,388
---------- ----------
Total................................................. $2,793,612 $2,917,212
========== ==========
</TABLE>
As of March 15, 1994, the Reliance Insurance Group owned 3,568,634 shares of
common stock of Symbol Technologies, Inc. ("Symbol"), representing 14.8% 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, 1994, the
market value of the Reliance Insurance Group's investment in Symbol was
$72,264,839 (based upon the closing price on such date as reported by the
NYSE).
INVESTEE COMPANY
As of March 15, 1994, the Reliance Insurance Group owned 6,574,445 shares of
common stock of Zenith National Insurance Corp. ("Zenith"), representing 34.4%
of the outstanding common stock of Zenith, a California-based insurance
company with significant workers' compensation and standard commercial and
personal lines business. As of March 15, 1994, the market value of the
Reliance Insurance Group's investment in Zenith was $139,706,957 (based upon
the closing price on such date as reported by the NYSE).
22
<PAGE>
The board of directors of Zenith includes certain executive officers of the
Company. The Company's investment in Zenith is accounted for by the equity
method. See Note 3 to the Consolidated Financial Statements.
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, varying degrees of control over
premium rates (particularly for property and casualty companies), 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 Property and Casualty Companies to offer policies or assume risks in
various markets which they would not seek if they were acting solely in their
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 adversely affected.
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 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.
Other states, in addition to an insurance company's state of domicile, may
regulate affiliated transactions and the acquisition of control of licensed
insurers. The State of California, for example, presently treats certain
insurance subsidiaries of the Company which are not domiciled in California as
though they were domestic insurers for insurance holding company purposes and
such subsidiaries are required to comply with the holding company provisions
of the California Insurance Code, which provisions are more restrictive than
the comparable laws of the states of domicile of such subsidiaries.
The Insurance Law of Pennsylvania, where Reliance Insurance Company is
domiciled, was amended in February 1994 (effective immediately) to establish a
new test limiting the maximum amount of dividends which may be paid without
prior approval by the Pennsylvania Insurance Department. Under such test,
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 net income, but in no event to exceed the amount of
"unassigned funds (surplus)", which is
23
<PAGE>
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 company's reinsurance, and the adequacy
of the 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.
Total common and preferred stock dividends paid by Reliance Insurance
Company during 1993, 1992 and 1991 were, $133.7 million ($130.6 million for
common stock), $143.7 million ($140.4 million for common stock) and $160.6
million ($156.9 million for common stock), respectively. During 1994, $126.8
million would be available for dividend payments by Reliance Insurance Company
based upon the new dividend test under Pennsylvania Law. As a result of the
refinancing completed on November 15, 1993, the Company believes such amount
will be sufficient to meet its 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. However, Reliance Insurance Company has been advised by the
Pennsylvania Insurance Department that any required prior 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 and to pay
dividends on its Common Stock.
The NAIC has adopted a "risk-based capital" requirement for the property and
casualty insurance industry which becomes effective in 1995 (based on 1994
financial results). "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 would
be 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. Although the regulations governing risk based
capital are not effective until 1995 (based on 1994 financial results), the
Company has calculated that its capital exceeds the risk based capital that
would be required if the formula was currently in effect (based on 1993
financial results). However, because certain terms of the regulation have yet
to be defined, management cannot predict the ultimate impact of risk-based
capital requirements on the Company's capital requirements or its competitive
position.
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 insurers' ratings.
The Company's principal property and casualty insurance subsidiary, Reliance
Insurance Company, has operated outside of the NAIC financial ratio range
concerning liabilities to liquid
24
<PAGE>
assets (the "NAIC liquidity test"). This ratio is intended only as a guideline
for an insurance company to follow. The Company believes that it has
sufficient marketable assets on hand to make timely payment of claims and
other operating requirements.
On November 8, 1988, voters in California approved Proposition 103, which
requires a rollback of rates for property and casualty insurance policies
issued or renewed after November 8, 1988 of 20% from November 1987 levels and
freezes rates at such lower levels until November 1989. Proposition 103 also
requires that subsequent rate changes be justified to, and approved by, an
elected Insurance Commissioner, automobile insurance rates be determined
primarily by the driver's safety record and mileage driven, and "good drivers"
be given a 20% discount (in addition to the 20% rollback).
In 1989, the California Department of Insurance notified United Pacific
Insurance Company, one of the Company's California subsidiaries, which writes
business in California, that under Proposition 103, profits generated by
current rates exceeded the Department's rates for a fair and reasonable return
by approximately $10.0 million. Since then, there have been several
administrative hearings on rate rollback and several different regulations
issued. None survived the administrative process until Emergency Regulations
were approved in August and October 1991 and then readopted in February 1992.
The regulations allowed the Commissioner of Insurance to order insurance
companies to rollback 1988 rates and issue refunds to policyholders. In June
1992, the California Office of Administrative Law (the "OAL") disapproved the
Department's Emergency Regulations. In July 1992 the OAL disapproved the
Department's permanent regulations governing rate rollbacks, which were
materially the same as the Department's Emergency Regulations. In February
1993, a Los Angeles Superior Court issued a decision in the consolidated case
challenging the Department's Emergency Regulations and the application of
these regulations. The court declared several sections of the regulations
invalid and enjoined the enforcement of the regulations. In June 1993, the
California Supreme Court agreed to hear the appeal from this decision. The
regulations, if ultimately adopted and upheld, could result in the Company
having to make a refund to policyholders possibly in excess of the amount
specified in the Department's 1989 notice. In October 1991, the Commissioner
announced orders to fourteen insurer groups directing specified refunds to
policyholders. Insurers could comply or a departmental hearing would be
scheduled. The Company was not included in the group of fourteen insurers. The
amount and timing of any rate rollback or refunds by the Company remain
uncertain. The Company's property and casualty insurance subsidiaries have not
earned underwriting profits in California in the past five years. The Company
believes that even after considering investment income, total returns in
California have been less than what would be considered "fair". The Company
will contest vigorously any unreasonable premium rollback determination by the
California Insurance Department. Accordingly, the Company believes that it is
probable that its premium revenues will not be subject to a refund which would
have a material effect on the results of operations or financial condition of
the Company.
From time to time, other states have considered adopting legislation or
regulations which could adversely affect the manner in which the Reliance
Insurance Group 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 any such legislation or regulation would have on the ability of
the Company to raise its rates. However, since the Company has substantially
withdrawn from personal lines, the Company believes that these initiatives
will not have a material effect on its on-going business.
COMPETITION
All of the Company's businesses are highly competitive. The property and
casualty insurance business is fragmented and no single company dominates any
of the markets in which the Company
25
<PAGE>
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 both
price and service. In addition, because the Reliance Insurance Group sells its
policies through independent agents and insurance brokers who are not
obligated to choose the Reliance Insurance Group's policies 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.
Commonwealth/Transamerica Title compete with large national title insurance
companies and with smaller, locally established businesses which may possess
distinct competitive advantages. Competition in the title insurance business
is based primarily on the quality and timeliness of service. In some market
areas, abstracts and title opinions issued by attorneys are used as an
alternative to title insurance and other services provided by title companies.
In addition, certain jurisdictions have title registration systems which can
lessen the demand for title insurance.
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, 1993, the Company and its
consolidated subsidiaries employed approximately 9,600 persons in
approximately 440 offices.
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
pending action 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, Hall, the predecessor corporation of Prometheus Funding Corp., a
subsidiary of the Company ("Prometheus"), entered into a settlement agreement,
which is subject to court approval, with the Superintendent of Insurance of
the State of New York (the "Superintendent"), arising out of the insolvency of
Union Indemnity Insurance Company of New York, Inc. ("Union Indemnity"). The
settlement agreement was submitted to the court for approval in October 1989
and objections were filed by various parties. In March 1994, the
Superintendent informed Prometheus that he did not intend to pursue court
approval of the settlement until the resolution of appellate proceedings in a
pending litigation between the Superintendent and certain of Union Indemnity's
reinsurers. Prometheus has advised the Superintendent that this position is in
breach of the settlement agreement's requirement that the parties diligently
make every effort to obtain court approval of the settlement, and Prometheus
has reserved all of its rights with respect thereto. There is no assurance
that such approval will be obtained. The settlement agreement will not become
effective until final approval by the court. See Note 16 to the consolidated
financial statements for additional information concerning such legal
proceedings and contingencies affecting the Company and its subsidiaries.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Item 4 is not required pursuant to the reduced disclosure requirements
applicable to this Form 10-K.
26
<PAGE>
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
As of March 15, 1994, all 1,000 outstanding shares of Reliance Financial's
common stock are held of record by Reliance Group Holdings and are not
publicly traded. See the information in "Market and Dividend Information for
Common Stock" on page 33 of the Reliance Financial 1993 Annual Report, which
information is incorporated herein by reference.
ITEM 6. SELECTED FINANCIAL DATA.
Item 6 is not required pursuant to the reduced disclosure requirements
applicable to this Form 10-K.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
See the information in "Reliance Financial Services Corporation and
Subsidiaries Financial Review" on pages 26 through 33 of the Reliance
Financial 1993 Annual Report, which information is incorporated herein by
reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
See the information on pages 1 through 24 of the Reliance Financial 1993
Annual Report, which information is incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
Items 10, 11, 12 and 13, which comprise Part III, are not required pursuant
to the reduced disclosure requirements applicable to this Form 10-K.
27
<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 Financial Services
Corporation and Subsidiaries, which appear on pages 1 through 24 of the
Reliance Financial 1993 Annual Report, are incorporated herein by reference.
<TABLE>
<CAPTION>
PAGE REFERENCE
----------------
1993
ANNUAL
FORM 10-K REPORT
--------- ------
<S> <C> <C>
RELIANCE FINANCIAL SERVICES CORPORATION AND SUBSIDIARIES:
Independent Auditors' Report................................ A-1
Consolidated Financial Statements at December 31, 1993 and
1992 and for the three years ended December 31, 1993:
Statement of Operations................................... 1
Balance Sheet............................................. 2
Statement of Changes in Shareholder's Equity.............. 3
Statement of Cash Flows................................... 4
Notes to Financial Statements (1-18)...................... 5-24
</TABLE>
2. FINANCIAL STATEMENT SCHEDULES:
<TABLE>
<C> <S> <C>
I-- Summary of Investments--Other Than Investments in Related
Parties..................................................... A-2
II-- Amounts Receivable From Related Parties and Underwriters,
Promoters and Employees Other Than Related Parties.......... A-3
III-- Condensed Financial Information of the Registrant at Decem-
ber 31, 1993 and 1992 and for the three years ended Decem-
ber 31, 1993:
Statement of Operations..................................... A-4
Balance Sheet............................................... A-5
Statement of Cash Flows..................................... A-6
V-- Supplementary Insurance Information......................... A-7
VI-- Reinsurance................................................. A-8
IX-- Short-Term Borrowings....................................... A-9
X-- Supplemental Information Concerning Property and Casualty
Insurance Operations........................................ A-10
</TABLE>
All other schedules have been omitted because they are inapplicable, not
required, or the information is included elsewhere in the financial statements
or notes thereto.
Pursuant to Rule 1-02(v) of Regulation S-X, Reliance Insurance Group's
investment in Zenith National Insurance Corp. meets the definition of a
"significant subsidiary." Zenith National Insurance Corp. files financial
statements with the Securities and Exchange Commission which should be
referred to for additional information.
3. EXHIBITS
<TABLE>
<C> <S>
3.1 Reliance Financial's Certificate of Incorporation, as amended
(incorporated by reference to Exhibit 3.1 to Registration Statement
No. 2-458933).
3.2 Amendment to Exhibit 3.1 (incorporated by reference to Exhibit 3.2 to
Registration Statement No. 2-60201).
</TABLE>
28
<PAGE>
<TABLE>
<C> <S>
3.3 Amendment to Exhibit 3.1 (incorporated by reference to Exhibit 3.3 to
Reliance Financial's Annual Report on Form 10-K for the year ended
December 31, 1983).
3.4 Reliance Financial's By-Laws, as amended (incorporated by reference to
Exhibit 3.4 to Reliance Financial's Annual Report on Form 10-K for the
year ended December 31, 1990).
*4.
10.1 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).
10.2 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).
10.3 Parent Undertaking Agreement, dated July 24, 1992, among Reliance
Group Holdings, Inc., Reliance Insurance Company and Aon (incorporated
by reference to Exhibit 28.1 to Reliance Group Holdings' Quarterly
Report on Form 10-Q for the Quarter ended June 30, 1992).
10.4 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).
10.5 Amendment, dated November 2, 1992, to Exhibit 10.1 (incorporated by
reference to Exhibit 2.1 to Reliance Group Holdings' Quarterly Report
on Form 10-Q for the Quarter ended September 30, 1992).
10.6 Underwriting Agreement, dated October 30, 1992, among Shearson Lehman
Brothers Inc., Salomon Brothers, Inc, Commonwealth Land Title
Insurance Company ("Commonwealth"), Commonwealth Mortgage Assurance
Company ("CMAC") and CMAC Investment Corporation ("CIC") (incorporated
by reference to Exhibit 10.1 to Reliance Group Holdings' Quarterly
Report on Form 10-Q for the Quarter ended September 30, 1992).
10.7 International Underwriting Agreement, dated October 30, 1992, among
Lehman Brothers International Limited, Salomon Brothers International
Limited, Commonwealth, CMAC and CIC (incorporated by reference to
Exhibit 10.2 to Reliance Group Holdings' Quarterly Report on Form 10-Q
for the Quarter ended September 30, 1992).
10.8 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 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).
</TABLE>
- --------
* Neither Reliance Financial 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 Financial 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.
29
<PAGE>
<TABLE>
<C> <S>
10.9 Stock Purchase Agreement, dated April 3, 1993, by and among Reliance
Group Holdings, Inc., Reliance Insurance Company and General Electric
Capital Corporation (incorporated by reference to Exhibit 10.22 to
Reliance Insurance Company's Annual Report on Form 10-K for the year
ended December 31, 1992).
10.10 First Amendment, dated as of May 31, 1993, to Exhibit 10.9
(incorporated by reference to Exhibit 2.2 to Reliance Insurance
Company's Current Report on Form 8-K dated (date of earliest event
reported) July 14, 1993).
10.11 Amendment, dated July 14, 1993, to Exhibit 10.9 (incorporated by
reference to Exhibit 2.3 to Reliance Insurance Company's Current
Report on Form 8-K dated (date of earliest event reported) July 14,
1993).
13.1 Reliance Financial 1993 Annual Report.
**28.1 Schedule P from the statutory reports of the Reliance Property and
Casualty Companies (incorporated by reference to Exhibit 28.1 to
Reliance Insurance Company's Annual Report on Form 10-K for the year
ended December 31, 1993).
</TABLE>
- --------
** Schedule P from the statutory reports of Zenith National Insurance Corp.,
34.4% of the outstanding common stock of which is owned by the Reliance
Insurance Group, is omitted herefrom as such Schedule P is filed directly
with the Securities and Exchange Commission.
(B) REPORTS ON FORM 8-K
No reports on Form 8-K were filed during the three months ended December 31,
1993.
30
<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, 1994.
Reliance Financial Services Corporation
Saul P. Steinberg
By: ___________________________________
SAUL P. STEINBERG
CHAIRMAN OF THE BOARD
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.
SIGNATURE TITLE DATE
Saul P. Steinberg Chairman of the Board, March 29, 1994
- ------------------------------------- Principal Executive
SAUL P. STEINBERG Officer and Director
George E. Bello Principal Accounting March 29, 1994
- ------------------------------------- Officer and Director
GEORGE E. BELLO
Lowell C. Freiberg Principal Financial March 29, 1994
- ------------------------------------- Officer and Director
LOWELL C. FREIBERG
George R. Baker Director March 29, 1994
- -------------------------------------
GEORGE R. BAKER
Carter Burden Director March 29, 1994
- -------------------------------------
CARTER BURDEN
Dennis A. Busti Director March 29, 1994
- -------------------------------------
DENNIS A. BUSTI
Dean W. Case Director March 29, 1994
- -------------------------------------
DEAN W. CASE
31
<PAGE>
SIGNATURE TITLE DATE
--------- ----- ----
Thomas P. Gerrity Director March 29, 1994
- -------------------------------------
THOMAS P. GERRITY
Jewell J. McCabe Director March 29, 1994
- -------------------------------------
JEWELL J. MCCABE
Irving Schneider Director March 29, 1994
- -------------------------------------
IRVING SCHNEIDER
Bernard L. Schwartz Director March 29, 1994
- -------------------------------------
BERNARD L. SCHWARTZ
Director
- -------------------------------------
RICHARD E. SNYDER
Thomas J. Stanton, Jr. Director March 29, 1994
- -------------------------------------
THOMAS J. STANTON, JR.
Robert M. Steinberg Director March 29, 1994
- -------------------------------------
ROBERT M. STEINBERG
James E. Yacobucci Director March 29, 1994
- -------------------------------------
JAMES E. YACOBUCCI
32
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors and Shareholder
Reliance Financial Services Corporation
New York, New York
We have audited the consolidated financial statements of Reliance Financial
Services Corporation (a subsidiary of Reliance Group Holdings, Inc.) and
subsidiaries as of December 31, 1993 and 1992, and for each of the three years
in the period ended December 31, 1993, and have issued our report thereon
dated February 18, 1994, except for note 16, as to which the date is March 9,
1994 (which report includes an explanatory paragraph concerning the adoption
of Statement of Financial Accounting Standards No. 106, 109, 113 and 115);
such financial statements and report are included in your 1993 Annual Report
and are incorporated herein by reference. Our audits also included the
financial statement schedules of Reliance Financial Services Corporation,
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.
/s/Deloitte & Touche
New York, New York
February 18, 1994, except for note 16,
as to which the date is March 9, 1994
A-1
<PAGE>
SCHEDULE I
ITEM 14(A)2
RELIANCE FINANCIAL SERVICES CORPORATION AND SUBSIDIARIES
SUMMARY OF INVESTMENTS--OTHER THAN INVESTMENTS IN RELATED PARTIES
DECEMBER 31, 1993
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D
- -------------------------------------------------------------------------------
AMOUNT AT WHICH
SHOWN IN THE
TYPE OF INVESTMENT COST VALUE BALANCE SHEET
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
(In thousands)
Fixed maturities available for sale:
Bonds and notes:
United States government and
government agencies and authorities.. $ 466,897 $ 475,060 $ 475,060
Foreign-government.................... 18,396 22,273 22,273
Foreign-other......................... 21,519 26,117 26,117
Public utilities...................... 86,943 91,556 91,556
All other corporate bonds and notes... 904,006 945,764 945,764
Redeemable preferred stocks............. 359,208 383,329 383,329
---------- ---------- ----------
1,856,969 1,944,099 1,944,099
---------- ---------- ----------
Fixed maturities held for investment:
Bonds and notes:
States, municipalities and political
subdivisions......................... 13,965 14,312 13,965
Foreign-government.................... 26,507 28,659 26,507
Foreign-other......................... 49,311 52,710 49,311
Public utilities...................... 433,138 446,506 433,138
All other corporate bonds and notes... 277,914 287,836 277,914
Redeemable preferred stocks............. 135,808 143,090 135,808
---------- ---------- ----------
936,643 973,113 936,643
---------- ---------- ----------
Equity securities:
Common stocks:
Public utilities...................... 55,861 60,695 60,695
Banks, trusts and insurance companies. 9,668 9,113 9,113
Industrial and other.................. 171,530 233,846 233,846
Nonredeemable preferred stocks.......... 221,158 243,519 243,519
---------- ---------- ----------
458,217 547,173 547,173
---------- ---------- ----------
Short-term investments................... 372,507 373,015 372,507
---------- ---------- ----------
$3,837,400
==========
Mortgage loans (1)....................... 17,188 17,188
Investments in real estate............... 282,836 282,836
---------- ----------
$3,924,360 $4,100,446
========== ==========
</TABLE>
(1) In the consolidated financial statements, mortgage loans are included in
other accounts and notes receivable.
A-2
<PAGE>
SCHEDULE II
ITEM 14(A)2
RELIANCE FINANCIAL SERVICES CORPORATION AND SUBSIDIARIES
AMOUNTS RECEIVABLE FROM RELATED PARTIES AND UNDERWRITERS, PROMOTERS, AND
EMPLOYEES OTHER THAN RELATED PARTIES
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
- ------------------------------------------------------------------------------
BALANCE--
END OF PERIOD
BALANCE-- -------------------
BEGINNING AMOUNTS
NAME OF DEBTOR OF PERIOD ADDITIONS COLLECTED CURRENT NOT CURRENT
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
(In thousands)
YEAR ENDED DECEMBER 31,
1993:
Receivable from officer:
Lawrence Mitchell......... $243 $ 14(a) $ -- $ 5 $252
==== ==== ==== === ====
Year Ended December 31,
1992:
Receivable from officer:
Lawrence Mitchell......... $ -- $240(b) $ -- $-- $243
3(a)
---- ---- ---- --- ----
$ -- $243 $ -- $-- $243
==== ==== ==== === ====
Year Ended December 31,
1991:
Receivables from officers:
Robert J. Joyce........... $ 51 $ -- $ 51 $-- $ --
James J. McGarr........... 36 1(a) 37 -- --
---- ---- ---- --- ----
$ 87 $ 1 $ 88 $-- $ --
==== ==== ==== === ====
</TABLE>
(a) Accrued interest receivable.
(b) Demand note receivable bearing interest at the prime rate.
A-3
<PAGE>
SCHEDULE III
ITEM 14(A)2
RELIANCE FINANCIAL SERVICES CORPORATION
(PARENT COMPANY)
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31 1993 1992 1991
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
(In thousands)
REVENUES:
Dividends from subsidiaries..................... $130,639 $140,448 $ 156,948
Interest and other income, principally from
affiliates..................................... 18,560 20,237 22,210
-------- -------- ---------
149,199 160,685 179,158
-------- -------- ---------
EXPENSES:
Interest........................................ 18,423 19,077 16,859
General and administrative...................... 537 168 27
-------- -------- ---------
18,960 19,245 16,886
-------- -------- ---------
130,239 141,440 162,272
Income tax (provision) benefit.................. 140 (337) (1,858)
-------- -------- ---------
INCOME BEFORE EQUITY IN SUBSIDIARIES AND
INVESTEE COMPANIES............................. 130,379 141,103 160,414
Equity in subsidiaries (net income (loss) less
dividends received):
Income (loss) from continuing operations...... 42,529 (73,642) (197,666)
Income from discontinued operations........... -- 64,105 31,444
Loss on disposal of discontinued operations... -- (47,300) --
Equity in net income (loss) of investee
companies...................................... 12,441 5,206 (16,574)
-------- -------- ---------
INCOME (LOSS) BEFORE EXTRAORDINARY ITEMS AND
CUMULATIVE EFFECT OF ACCOUNTING CHANGE......... 185,349 89,472 (22,382)
Extraordinary item--early extinguishment of
debt........................................... (3,666) -- --
Extraordinary item of investee company.......... -- -- 894
Cumulative effect of change in accounting for
subsidiaries' income taxes..................... 24,335 -- --
-------- -------- ---------
NET INCOME (LOSS)............................... $206,018 $ 89,472 $ (21,488)
======== ======== =========
</TABLE>
A-4
<PAGE>
SCHEDULE III
ITEM 14(A)2
RELIANCE FINANCIAL SERVICES CORPORATION
(PARENT COMPANY)
BALANCE SHEET
<TABLE>
<CAPTION>
ASSETS DECEMBER 31 1993 1992
- -------------------------------------------------------------------------------
<S> <C> <C>
(Dollars in thousands, except per-share amounts)
Cash................................................... $ 29,711 $ 10
Investment in subsidiaries............................. 1,165,268 1,055,392
Notes receivable from parent company................... 194,513 280,237
Other assets........................................... 20,818 15,243
---------- ----------
$1,410,310 $1,350,882
========== ==========
LIABILITIES AND SHAREHOLDER'S EQUITY
- -------------------------------------------------------------------------------
Accounts payable and accrued expenses.................. $ 1,929 $ 2,886
Federal income taxes due to parent company............. 20,578 22,692
Term loans and short-term debt......................... 105,000 --
Debentures and notes................................... 99,863 174,793
---------- ----------
227,370 200,371
---------- ----------
Contingencies and commitments
Shareholder's equity:
Common stock, par value $.10 per share, 1,000 shares
authorized,
issued and outstanding.............................. -- --
Additional paid-in capital........................... 677,510 676,696
Retained earnings (including undistributed net income
of subsidiaries
of $238,535 and $159,230)........................... 406,138 400,120
Net unrealized gain of subsidiaries on investments... 115,023 86,021
Net unrealized loss of subsidiaries on foreign
currency translation................................ (15,731) (12,326)
---------- ----------
1,182,940 1,150,511
---------- ----------
$1,410,310 $1,350,882
========== ==========
</TABLE>
A-5
<PAGE>
SCHEDULE III
ITEM 14(A)2
RELIANCE FINANCIAL SERVICES CORPORATION
(PARENT COMPANY)
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31 1993 1992 1991
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)............................. $ 206,018 $ 89,472 $ (21,488)
Excess of dividends received over equity in
net income
of subsidiaries and investee companies....... -- 51,631 181,902
Equity in undistributed net income of
subsidiaries and
investee companies........................... (79,305) -- --
Other--net.................................... (3,431) 867 2,332
--------- --------- ---------
123,282 141,970 162,746
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital contribution to subsidiary............ (5,000) -- --
Other--net.................................... 755 -- (3,858)
--------- --------- ---------
(4,245) -- (3,858)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in notes receivable from parent
company--net................................. (14,212) (12,356) (44,859)
Increase in term loans and short-term debt.... 105,000 -- --
Repurchases of debentures..................... (80,060) (9,628) (9,028)
Dividends..................................... (100,064) (120,000) (105,000)
--------- --------- ---------
(89,336) (141,984) (158,887)
--------- --------- ---------
Increase (decrease) in cash................... 29,701 (14) 1
Cash, beginning of year....................... 10 24 23
--------- --------- ---------
Cash, end of year............................. $ 29,711 $ 10 $ 24
========= ========= =========
</TABLE>
SUPPLEMENTAL DISCLOSURE OF NON-CASH FINANCING ACTIVITIES:
In 1993, non-cash dividends of $99,936,000 were recorded as a reduction in
notes receivable from parent company.
A-6
<PAGE>
SCHEDULE V
ITEM 14(A)2
RELIANCE FINANCIAL SERVICES CORPORATION AND SUBSIDIARIES
SUPPLEMENTARY INSURANCE INFORMATION
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E COLUMN F COLUMN G COLUMN H COLUMN I COLUMN J
- ------------------------------------------------------------------------------------------------------------------------
AMORTIZATION
DEFERRED UNPAID POLICY OF DEFERRED
POLICY CLAIMS AND NET CLAIMS AND POLICY OTHER
ACQUISITION RELATED UNEARNED PREMIUMS INVESTMENT SETTLEMENT ACQUISITION INSURANCE PREMIUMS
SEGMENT COSTS EXPENSES PREMIUMS EARNED INCOME (A) EXPENSES COSTS EXPENSES WRITTEN
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
(In thousands)
YEAR ENDED
DECEMBER 31,
1993:
Property and
casualty:
Underwriting
Standard
commercial..... $120,812 $2,073,338 $ 567,672 $1,069,933 $ 947,347 $222,925 $102,159 $1,244,917
Specialty
commercial..... 57,317 858,190 269,322 501,606 288,247 104,512 72,450 525,680
Reinsurance
recoverable.... -- 2,116,914 439,337 -- -- -- -- --
-------- ---------- ---------- ---------- ---------- -------- -------- ----------
178,129 5,048,442 1,276,331 1,571,539 $226,517 1,235,594 327,437 174,609 $1,770,597
==========
Title............. -- 204,695 -- 893,364 24,282 81,803 -- 780,138
-------- ---------- ---------- ---------- -------- ---------- -------- --------
$178,129 $5,253,137 $1,276,331 $2,464,903 $250,799 $1,317,397 $327,437 $954,747
======== ========== ========== ========== ======== ========== ======== ========
Year Ended
December 31,
1992:
Property and
casualty:
Underwriting
Standard
commercial..... $ 80,488 $1,918,404 $ 392,828 $1,011,229 $ 919,330 $181,847 $135,745 $1,042,267
Specialty
commercial..... 42,862 784,588 245,389 524,511 370,268 94,307 53,081 499,293
Reinsurance
recoverable.... -- 1,868,800 564,990 -- -- -- -- --
-------- ---------- ---------- ---------- ---------- -------- -------- ----------
123,350 4,571,792 1,203,207 1,535,740 $199,556 1,289,598 276,154 188,826 $1,541,560
==========
Title and
mortgage......... -- 173,328 -- 826,493 26,224 100,562 13,437 691,048
-------- ---------- ---------- ---------- -------- ---------- -------- --------
$123,350 $4,745,120 $1,203,207 $2,362,233 $225,780 $1,390,160 $289,591 $879,874
======== ========== ========== ========== ======== ========== ======== ========
Year Ended
December 31,
1991:
Property and
casualty:
Underwriting
Standard
commercial..... $ 73,447 $1,742,435 $ 362,298 $1,111,055 $1,117,733 $207,989 $116,170 $1,093,907
Specialty
commercial..... 36,721 632,800 271,115 437,783 274,727 72,949 84,550 517,137
Reinsurance
recoverable.... -- 1,309,814 472,810 -- -- -- -- --
-------- ---------- ---------- ---------- ---------- -------- -------- ----------
110,168 3,685,049 1,106,223 1,548,838 $202,348 1,392,460 280,938 200,720 $1,611,044
==========
Title and
mortgage......... 10,078 177,449 40,262 675,904 26,233 90,485 10,874 575,558
Other............. -- -- -- -- -- -- -- 11
-------- ---------- ---------- ---------- -------- ---------- -------- --------
$120,246 $3,862,498 $1,146,485 $2,224,742 $228,581 $1,482,945 $291,812 $776,289
======== ========== ========== ========== ======== ========== ======== ========
</TABLE>
(a) An allocation of net investment income to the individual underwriting
segments is not appropriate since allocation would be arbitrary and, in
management's judgment, misleading.
A-7
<PAGE>
SCHEDULE VI
ITEM 14(A)2
RELIANCE FINANCIAL SERVICES CORPORATION AND SUBSIDIARIES
REINSURANCE
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E COLUMN F
- ------------------------------------------------------------------------------
CEDED ASSUMED PERCENTAGE
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,
1993:
Premiums:
Property and casualty.. $2,531,478 $1,264,361 $304,422 $1,571,539 19.37%
Title.................. 891,843 1,411 2,932 893,364 .33
---------- ---------- -------- ----------
$3,423,321 $1,265,772 $307,354 $2,464,903 12.47
========== ========== ======== ==========
Year Ended December 31,
1992:
Premiums:
Property and casualty.. $2,350,216 $1,127,206 $312,730 $1,535,740 20.36
Title and mortgage..... 828,886 6,080 3,687 826,493 .45
---------- ---------- -------- ----------
$3,179,102 $1,133,286 $316,417 $2,362,233 13.39
========== ========== ======== ==========
Year Ended December 31,
1991:
Premiums:
Property and casualty.. $2,281,828 $ 949,995 $217,005 $1,548,838 14.01
Title and mortgage..... 674,024 2,906 4,786 675,904 .71
---------- ---------- -------- ----------
$2,955,852 $ 952,901 $221,791 $2,224,742 9.97
========== ========== ======== ==========
</TABLE>
A-8
<PAGE>
SCHEDULE IX
ITEM 14(A)2
RELIANCE FINANCIAL SERVICES CORPORATION AND SUBSIDIARIES
SHORT-TERM BORROWINGS
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E COLUMN F
- ------------------------------------------------------------------------------------
MAXIMUM AVERAGE WEIGHTED
WEIGHTED AMOUNT AMOUNT AVERAGE
BALANCE AT AVERAGE OUTSTANDING OUTSTANDING INTEREST RATE
CATEGORY OF AGGREGATE END INTEREST DURING DURING DURING
SHORT-TERM BORROWING OF PERIOD RATE THE PERIOD THE PERIOD(A) THE PERIOD(B)
- ------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
(Dollars in thousands)
YEAR ENDED DECEMBER 31,
1993:
Payable to banks....... $ 2,444 5.3% $58,365 $26,601 2.5%
Year Ended December 31,
1992:
Payable to banks....... 2,804 5.2 45,687 18,818 2.7
Year Ended December 31,
1991:
Payable to banks....... 16,461 9.0 24,407 15,424 5.9
</TABLE>
(a) Average amount outstanding during the period was computed by dividing the
total of the principal outstanding at the beginning of the period plus the
individual month-end principal balances by 13.
(b) Weighted average interest rate during the period was computed by dividing
interest expense on short-term borrowings by the average short-term
borrowings outstanding.
A-9
<PAGE>
SCHEDULE X
ITEM 14(A)2
RELIANCE FINANCIAL SERVICES CORPORATION 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 COLUMN I
- ---------------------------------------------------------------------------------------------------------------------------------
CLAIMS AND
UNPAID SETTLEMENT EXPENSES AMORTIZATION
DEFERRED CLAIMS INCURRED RELATED TO OF DEFERRED
AFFILIATION POLICY AND DISCOUNT NET ------------------- POLICY
WITH ACQUISITION RELATED DEDUCTED IN UNEARNED EARNED INVESTMENT CURRENT PRIOR ACQUISITION
REGISTRANT COSTS EXPENSES COLUMN C (A) PREMIUMS PREMIUMS INCOME YEAR YEARS COSTS
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
(In thousands)
Consolidated subsidiaries:
YEAR ENDED
DECEMBER 31, 1993. $178,129 $5,048,442 $284,681 $1,276,331 $1,571,539 $226,517 $1,195,425 $ 40,169 $327,437
======== ========== ======== ========== ========== ======== ========== ======== ========
Year Ended
December 31, 1992. $123,350 $4,571,792 $289,500 $1,203,207 $1,535,740 $199,556 $1,258,111 $ 31,487 $276,154
======== ========== ======== ========== ========== ======== ========== ======== ========
Year Ended
December 31, 1991. $110,168 $3,685,049 $243,800 $1,106,223 $1,548,838 $202,348 $1,120,746 $271,714 $280,938
======== ========== ======== ========== ========== ======== ========== ======== ========
<CAPTION>
COLUMN A COLUMN J COLUMN K
- ---------------------------------------------------------------------------------------------------------------------------------
PAID
CLAIMS
AFFILIATION AND
WITH SETTLEMENT PREMIUMS
REGISTRANT EXPENSES WRITTEN
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
(In thousands)
Consolidated subsidiaries:
YEAR ENDED
DECEMBER 31, 1993. $1,006,659 $1,770,597
========== ==========
Year Ended
December 31, 1992. $ 961,059 $1,541,560
========== ==========
Year Ended
December 31, 1991. $ 910,646 $1,611,044
========== ==========
</TABLE>
(a)Liabilities (net of reinsurance recoverables) 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% to 6%.
A-10
<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 DECEMBER COMMISSION FILE NUMBER 1-7080
31, 1993
RELIANCE FINANCIAL SERVICES CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<PAGE>
RELIANCE FINANCIAL SERVICES CORPORATION
EXHIBIT INDEX
EXHIBIT
NUMBER
- -------
3.1 Reliance Financial's Certificate of Incorporation, as amended
(incorporated by reference to Exhibit 3.1 to Registration Statement No.
2-458933).
3.2 Amendment to Exhibit 3.1 (incorporated by reference to Exhibit 3.2 to
Registration Statement No. 2-60201).
3.3 Amendment to Exhibit 3.1 (incorporated by reference to Exhibit 3.3 to
Reliance Financial's Annual Report on Form 10-K for the year ended
December 31, 1983).
3.4 Reliance Financial's By-Laws, as amended (incorporated by reference to
Exhibit 3.4 to Reliance Financial's Annual Report on Form 10-K for the
year ended December 31, 1990).
*4.
10.1 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).
10.2 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).
10.3 Parent Undertaking Agreement, dated July 24, 1992, among Reliance Group
Holdings, Inc., Reliance Insurance Company and Aon (incorporated by
reference to Exhibit 28.1 to Reliance Group Holdings' Quarterly Report
on Form 10-Q for the Quarter ended June 30, 1992).
10.4 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).
10.5 Amendment, dated November 2, 1992, to Exhibit 10.1 (incorporated by
reference to Exhibit 2.1 to Reliance Group Holdings' Quarterly Report
on Form 10-Q for the Quarter ended September 30, 1992).
10.6 Underwriting Agreement, dated October 30, 1992, among Shearson Lehman
Brothers Inc., Salomon Brothers, Inc, Commonwealth Land Title Insurance
Company ("Commonwealth"), Commonwealth Mortgage Assurance Company
("CMAC") and CMAC Investment Corporation ("CIC") (incorporated by
reference to Exhibit 10.1 to Reliance Group Holdings' Quarterly Report
on Form 10-Q for the Quarter ended September 30, 1992).
- --------
* Neither Reliance Financial 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 Financial 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.
<PAGE>
EXHIBIT
NUMBER
- -------
10.7 International Underwriting Agreement, dated October 30, 1992, among
Lehman Brothers International Limited, Salomon Brothers International
Limited, Commonwealth, CMAC and CIC (incorporated by reference to
Exhibit 10.2 to Reliance Group Holdings' Quarterly Report on Form 10-Q
for the Quarter ended September 30, 1992).
10.8 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).
10.9 Stock Purchase Agreement, dated April 3, 1993, by and among Reliance
Group Holdings, Inc., Reliance Insurance Company and General Electric
Capital Corporation (incorporated by reference to Exhibit 10.22 to
Reliance Insurance Company's Annual Report on Form 10-K for the year
ended December 31, 1992).
10.10 First Amendment, dated as of May 31, 1993, to Exhibit 10.9
(incorporated by reference to Exhibit 2.2 to Reliance Insurance
Company's Current Report on Form 8-K dated (date of earliest event
reported) July 14, 1993).
10.11 Amendment, dated July 14, 1993, to Exhibit 10.9 (incorporated by
reference to Exhibit 2.3 to Reliance Insurance Company's Current
Report on Form 8-K dated (date of earliest event reported) July 14,
1993).
13.1 Reliance Financial 1993 Annual Report.
**28.1 Schedule P from the statutory reports of the Reliance Property and
Casualty Companies (incorporated by reference to Exhibit 28.1 to
Reliance Insurance Company's Annual Report on Form 10-K for the year
ended December 31, 1993).
- --------
** Schedule P from the statutory reports of Zenith National Insurance Corp.,
34.4% of the outstanding common stock of which is owned by the Reliance
Insurance Group, is omitted herefrom as such Schedule P is filed directly
with the Securities and Exchange Commission.
2
<PAGE>
EXHIBIT 13.1
LOGO
===================
RELIANCE
FINANCIAL
SERVICES
===================
Annual Report 1993
<PAGE>
<TABLE>
<S> <C>
CONTENTS
Financial Statements 1
Independent Auditors' Report 25
Financial Review 26
Market and Dividend Information 33
Directors 34
Officers 35
Corporate Data 36
</TABLE>
A copy of the Company's Annual Report on Form 10-K to the Securities and
Exchange Commission will be furnished to any security holder upon written
request to: Corporate Communications, Reliance Group Holdings, Inc., 55 East
52nd Street, New York, N.Y. 10055.
<PAGE>
RELIANCE FINANCIAL SERVICES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
Year Ended December 31 1993 1992 1991
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
(In thousands)
REVENUES:
Premiums earned............................ $2,464,903 $2,362,233 $2,224,742
Net investment income...................... 250,799 225,780 228,581
Gain (loss) on sales of investments........ 158,196 50,136 (8,210)
Gain on sale of subsidiary................. -- 8,999 --
Interest income from parent company........ 18,491 20,203 22,194
Other...................................... 116,802 109,142 --
---------- ---------- ----------
3,009,191 2,776,493 2,467,307
---------- ---------- ----------
CLAIMS AND EXPENSES:
Policy claims and settlement expenses...... 1,317,397 1,390,160 1,482,945
Policy acquisition costs................... 327,437 289,591 291,812
Interest................................... 21,365 20,256 18,724
Other insurance expenses................... 954,747 879,874 776,289
Other...................................... 119,186 105,134 --
---------- ---------- ----------
2,740,132 2,685,015 2,569,770
---------- ---------- ----------
INCOME (LOSS) FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES, MINORITY INTERESTS
AND EQUITY IN INVESTEE COMPANIES.......... 269,059 91,478 (102,463)
Income tax (provision) benefit............. (92,994) (20,705) 68,901
Minority interests......................... (3,157) (3,312) (3,690)
Equity in investee companies............... 12,441 5,206 (16,574)
---------- ---------- ----------
INCOME (LOSS) FROM CONTINUING OPERATIONS... 185,349 72,667 (53,826)
Income from discontinued operations........ -- 64,105 31,444
Loss on disposal of discontinued
operations................................ -- (47,300) --
---------- ---------- ----------
INCOME (LOSS) BEFORE EXTRAORDINARY ITEMS
AND CUMULATIVE
EFFECT OF ACCOUNTING CHANGE............... 185,349 89,472 (22,382)
Extraordinary item--early extinguishment of
debt...................................... (3,666) -- --
Extraordinary item of investee company..... -- -- 894
Cumulative effect of change in accounting
for income taxes.......................... 24,335 -- --
---------- ---------- ----------
NET INCOME (LOSS).......................... $ 206,018 $ 89,472 $ (21,488)
========== ========== ==========
</TABLE>
See notes to consolidated financial statements
1
<PAGE>
RELIANCE FINANCIAL SERVICES CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
ASSETS December 31 1993 1992
- -------------------------------------------------------------------------------
<S> <C> <C>
(Dollars in thousands, except per-share amounts)
Marketable securities:
Fixed maturities held for investment--at amortized
cost
(quoted market $973,113 and $618,185)............... $ 936,643 $ 584,813
Fixed maturities available for sale--at quoted market
(cost $1,856,969 and $1,543,461).................... 1,944,099 1,581,902
Equity securities--at quoted market (cost $458,217
and $626,260)....................................... 547,173 724,886
Short-term investments............................... 372,507 601,042
Cash................................................... 91,608 58,947
Premiums receivable.................................... 963,570 880,650
Other accounts and notes receivable.................... 124,911 168,257
Reinsurance recoverables............................... 2,573,688 2,448,597
Federal and foreign income taxes, including deferred
taxes................................................. 108,571 37,957
Notes receivable from parent company................... 194,513 280,237
Investments in real estate--at cost, less accumulated
depreciation.......................................... 282,836 272,800
Investment in investee company......................... 157,016 143,428
Deferred policy acquisition costs...................... 178,129 123,350
Other assets........................................... 312,129 315,297
---------- ----------
$8,787,393 $8,222,163
========== ==========
LIABILITIES AND SHAREHOLDER'S EQUITY
- -------------------------------------------------------------------------------
Unearned premiums...................................... $1,276,331 $1,203,207
Unpaid claims and related expenses..................... 5,253,137 4,745,120
Accounts payable and accrued expenses.................. 616,499 618,512
Reinsurance ceded premiums payable..................... 206,373 205,812
Debentures and notes................................... 99,863 174,793
Term loans and short-term debt......................... 125,373 22,478
Net liabilities of discontinued life insurance
operations............................................ -- 71,493
Minority interests--redeemable preferred stock of a
subsidiary............................................ 26,877 30,237
---------- ----------
7,604,453 7,071,652
---------- ----------
Contingencies and commitments
Shareholder's equity:
Common stock, par value $.10 per share, 1,000 shares
authorized,
issued and outstanding.............................. -- --
Additional paid-in capital........................... 677,510 676,696
Retained earnings.................................... 406,138 400,120
Net unrealized gain on investments................... 115,023 86,021
Net unrealized loss on foreign currency translation.. (15,731) (12,326)
---------- ----------
1,182,940 1,150,511
---------- ----------
$8,787,393 $8,222,163
========== ==========
</TABLE>
See notes to consolidated financial statements
2
<PAGE>
RELIANCE FINANCIAL SERVICES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDER'S EQUITY
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------
(In thousands)
NET
UNREALIZED
NET GAIN (LOSS)
ADDITIONAL UNREALIZED ON FOREIGN
COMMON PAID-IN RETAINED GAIN (LOSS) ON CURRENCY SHAREHOLDER'S
STOCK CAPITAL EARNINGS INVESTMENTS TRANSLATION EQUITY
------ ---------- --------- -------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance, January 1,
1991................... $ -- $582,916 $ 553,937 $(16,886) $ 12,484 $1,132,451
Transactions of investee
companies.............. -- 566 -- 5,671 -- 6,237
Net loss................ -- -- (21,488) -- -- (21,488)
Dividends............... -- -- (105,000) -- -- (105,000)
Appreciation after
deferred income taxes.. -- -- -- 51,431 -- 51,431
Foreign currency
translation............ -- -- -- -- (6,193) (6,193)
----- -------- --------- -------- -------- ----------
Balance, December 31,
1991................... -- 583,482 427,449 40,216 6,291 1,057,438
Transactions of investee
company................ -- 10,578 -- 3,818 -- 14,396
Net income.............. -- -- 89,472 -- -- 89,472
Dividends............... -- -- (120,000) -- -- (120,000)
Capital contributions... -- 82,636 3,199 -- (3,684) 82,151
Appreciation after
deferred income taxes.. -- -- -- 41,987 -- 41,987
Foreign currency
translation............ -- -- -- -- (14,933) (14,933)
----- -------- --------- -------- -------- ----------
BALANCE, DECEMBER 31,
1992................... -- 676,696 400,120 86,021 (12,326) 1,150,511
Transactions of investee
company................ -- 814 -- 1,244 -- 2,058
Net income.............. -- -- 206,018 -- -- 206,018
Dividends............... -- -- (200,000) -- -- (200,000)
Appreciation after
deferred income taxes.. -- -- -- 27,758 -- 27,758
Foreign currency
translation............ -- -- -- -- (3,405) (3,405)
----- -------- --------- -------- -------- ----------
BALANCE, DECEMBER 31,
1993................... $ -- $677,510 $ 406,138 $115,023 $(15,731) $1,182,940
===== ======== ========= ======== ======== ==========
</TABLE>
See notes to consolidated financial statements
3
<PAGE>
RELIANCE FINANCIAL SERVICES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31 1993 1992 1991
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)......................... $ 206,018 $ 89,472 $ (21,488)
Adjustments to reconcile net income (loss)
to net cash provided from operating
activities:
Discontinued operations................. -- 23,195 (31,444)
Cumulative effect of change in
accounting for income taxes............ (24,335) -- --
Deferred policy acquisition costs....... (54,779) (13,182) 198
Premiums and other receivables and
reinsurance recoverables............... (221,956) (709,116) (903,260)
Unearned premiums, unpaid claims and
related expenses....................... 581,141 997,889 1,042,626
Accounts payable, accrued expenses and
other.................................. (39,439) 636 156,945
----------- --------- ----------
446,650 388,894 243,577
----------- --------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Sales of fixed maturities available for
sale..................................... 301,579 289,583 --
Sales of fixed maturities held for
investment............................... -- 145,237 885,439
Redemptions of fixed maturity investments. 411,789 285,713 80,257
Sales of equity securities................ 912,197 450,272 249,976
Sales (purchases) of short-term
investments--net......................... 238,811 (58,585) 12,577
Sale of net assets of a subsidiary........ -- 109,481 --
Purchases of fixed maturity investments... (1,545,494) (900,604) (654,765)
Purchases of equity securities............ (680,760) (472,072) (490,596)
Discontinued operations................... 69,157 8,569 (60,722)
Other--net................................ (26,467) (65,371) (119,986)
----------- --------- ----------
(319,188) (207,777) (97,820)
----------- --------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in notes receivable from parent
company.................................. (14,212) (12,356) (44,859)
Increase in term loans.................... 105,248 221 8,261
Decrease in term loans and short-term
debt--net................................ (2,353) (16,312) (2,160)
Repurchases of debentures and notes....... (80,060) (9,628) (9,028)
Dividends................................. (100,064) (120,000) (105,000)
Redemption of redeemable preferred stock
of a subsidiary.......................... (3,360) (3,360) (3,360)
----------- --------- ----------
(94,801) (161,435) (156,146)
----------- --------- ----------
Increase (decrease) in cash............... 32,661 19,682 (10,389)
Cash, beginning of year................... 58,947 39,265 49,654
----------- --------- ----------
Cash, end of year......................... $ 91,608 $ 58,947 $ 39,265
=========== ========= ==========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Interest paid............................. $ 19,600 $ 19,900 $ 18,000
=========== ========= ==========
</TABLE>
SUPPLEMENTAL DISCLOSURE OF NONCASH FINANCING ACTIVITIES:
In 1993, non-cash dividends of $99,936,000 were recorded as a reduction in
notes receivable from parent company.
In connection with the 1992 sale of the operating assets of Frank B. Hall & Co.
Inc., the Company received a capital contribution from Reliance Group,
Incorporated, the former parent of the Company. See note 15 to the consolidated
financial statements.
In 1992, Reliance Group, Incorporated contributed to the Company all of the
outstanding stock of RCG International, Inc., a company engaged in consulting
and technical services. See note 1 to the consolidated financial statements.
See notes to consolidated financial statements
4
<PAGE>
RELIANCE FINANCIAL SERVICES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Ownership of the Company's Common Stock
Reliance Group Holdings, Inc. owns 100% of the common stock of the Company. On
November 15, 1993, Reliance Group, Incorporated, the former parent of the
Company and a subsidiary of Reliance Group Holdings, Inc., was merged into
Reliance Group Holdings, Inc.
Basis of Consolidation and Presentation
The consolidated financial statements of the Company include the accounts of
all subsidiaries. All material 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. Effective
June 30, 1992, the Company designated a portion of its fixed maturity portfolio
as "available for sale". Securities so classified, which represent securities
that will be held for an indefinite period of time, are carried at quoted
market value with the net unrealized gain or loss included in shareholder's
equity. Such securities may be sold in response to changes in interest rates,
future general liquidity needs and similar factors. Fixed maturity securities
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. Sales of fixed maturity investments designated "held for investment"
as shown in the accompanying consolidated statement of cash flows represent all
sales of fixed maturity investments during the period January 1, 1991 through
June 30, 1992. Investments in equity securities include common stocks, where
ownership of outstanding voting stock is less than 20%, and nonredeemable
preferred stocks, and are carried at quoted market value with the net
unrealized gain or loss included in shareholder's equity. Investments in which
the Company has a 20% to 50% ownership interest, or otherwise exercises
significant influence, are reported using the equity method of accounting.
Short-term investments primarily consist of U.S. treasury securities,
certificates of deposit and commercial paper carried at cost which approximates
market. Investments whose declines in market values are deemed to be other than
temporary are written down to market value and the accrual of investment income
is discontinued. In circumstances where market values are not available,
investments are written down to estimated net realizable value. In determining
estimated net realizable 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.
Property and casualty insurance premiums reported as earned represent the
portion of premiums written applicable to the current period, computed on a
pro-rata basis over the terms of the policies in force.
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.
5
<PAGE>
Property and casualty claims and settlement expenses are based on an evaluation
of reported claims, claims incurred but not reported, estimates of salvage and
subrogation and reinsurance recoverables. Adjustments of the probable ultimate
liability, based on subsequent developments, are included in operations
currently. At December 31, 1993 and 1992, liabilities for unpaid claims and
related expenses include $411,023,000 and $411,859,000 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% to 6%.
Direct title insurance premiums and fees are recognized as revenue when
policies become effective. Agency insurance premiums are recognized as revenue
when reported by the agent. Title insurance claims arise principally from
unknown title defects which exist at the time policies become effective. The
reserve for title losses, which is based on historical and anticipated loss
experience, represents the estimated costs to settle reported claims and
estimated future claims relating to policies issued. Changes in loss estimates,
resulting from management's continuing review process and differences between
estimates and actual payments, are included in operations currently.
Investments in Real Estate
Investments in real estate consist primarily of shopping centers and office
buildings, and are carried at cost (less accumulated depreciation), which
includes real estate taxes, interest and other carrying costs incurred prior to
substantial completion of the real estate development projects. Investments in
real estate at December 31, 1993 include $60,600,000 related to a 520 acre
project, the majority of which has been rezoned for mixed use development.
Interest capitalized relating to the development of real estate properties was
$398,000 and $4,800,000 in 1992 and 1991, respectively. No interest was
capitalized in 1993. Depreciation expense is provided using the straight-line
method.
The Company periodically evaluates the discounted cash flow of each of its real
estate properties over a ten-year period to determine whether they are carried
at or below net realizable value. These cash flow projections reflect changes
in occupancy, new leases, current rent roll, future expirations and general
market conditions. Based on this analysis, impairment write-downs, if required,
are made on a property-by-property basis. The Company does not rely on market
value appraisals in determining net realizable value and obtains such
appraisals on an infrequent basis.
Income Taxes
The Company and its domestic subsidiaries, where their ownership is at least
80% of outstanding voting stock, are included in the consolidated federal
income tax return of Reliance Group Holdings, Inc. 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.
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
and postretirement medical and life insurance plans for certain employees of a
subsidiary.
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
6
<PAGE>
financial statements are excluded from the consolidated results of operations
and are presented as a separate component of shareholder's equity.
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 Company believes the fair value of notes receivable from Reliance Group
Holdings, Inc. at December 31, 1993 approximates their carrying value.
Reclassifications
Certain reclassifications have been made to the Company's 1992 and 1991
consolidated financial statements to conform with the current year consolidated
financial statements.
Adoption of New Accounting Standards
Effective January 1, 1993, the Company adopted Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes" ("FAS 109"). The
effect of adopting FAS 109 in 1993 was to increase net income by $24,878,000
representing a decrease in the provision for income taxes of $4,043,000, an
increase in income for the cumulative effect of the change in accounting
principle of $24,335,000 and a decrease in extraordinary income from the
utilization of net operating loss carryforwards ("NOL") of $3,500,000. As a
result of adopting FAS 109, previously unrecorded deferred tax benefits from
NOL's were recognized. These benefits amounted to $31,100,000, net of a
valuation allowance of $25,000,000. See note 6 to the consolidated financial
statements.
Effective January 1, 1993, the Company adopted Statement of Financial
Accounting Standards No. 113, "Accounting and Reporting for Reinsurance of
Short-Duration and Long-Duration Contracts" ("FAS 113"). As a result, estimated
amounts recoverable from reinsurers pertaining to unpaid claims, claims
incurred but not reported and unearned premiums are reported as assets, with a
corresponding increase in unpaid claims and unearned premiums. Prior year
amounts have been restated to conform with the current year's presentation. The
adoption of FAS 113 has resulted in an increase in estimated amounts
recoverable from reinsurers (and a corresponding increase in unpaid claims and
unearned premiums) of $2,556,000,000 and $2,434,000,000 at December 31, 1993
and 1992, respectively. The adoption of this statement had no effect on the
Company's results of operations.
Effective January 1, 1993, the Company adopted Statement of Financial
Accounting Standards No. 106, "Employers' Accounting for Postretirement
Benefits Other Than Pensions" ("FAS 106"). FAS 106 requires the Company to
accrue the estimated cost of retiree payments during the years the employee
provides services. The Company previously expensed the cost of these benefits
as claims were incurred. The Company has elected to amortize the transition
obligation of $10,500,000 over 20 years. The effect of adopting FAS 106 on
income from continuing operations before income taxes for the year ended
December 31, 1993 was a decrease of $663,000.
Effective December 31, 1993, the Company adopted Statement of Financial
Accounting Standards No. 115, "Accounting for Certain Investments in Debt and
Equity Securities" ("FAS 115"). The adoption of FAS 115 had no effect on the
Company's consolidated financial position or results of operations.
7
<PAGE>
Capital Contribution
On December 31, 1992, Reliance Group, Incorporated (the former parent of the
Company) contributed to the Company, at carrying value, all of the outstanding
common stock of RCG International, Inc. ("RCG"), a company engaged in
consulting and technical services. The contribution, which has been reflected
on the accompanying consolidated financial statements as of January 1, 1992,
increased shareholder's equity by $34,140,000 at January 1, 1992. The
operations of RCG were not material for years prior to 1992.
2. INVESTMENTS
Fixed maturities held for investment at December 31, 1993 consisted of:
<TABLE>
<CAPTION>
Gross Gross
Amortized Market Unrealized Unrealized
Cost Value Gains Losses(1)
- ----------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
(In thousands)
Bonds and notes:
Public utilities................. $ 433,138 $ 446,506 $14,668 $ 1,300
Corporate bonds and notes and
other........................... 367,697 383,517 17,190 1,370
Redeemable preferred stock......... 135,808 143,090 7,382 100
---------- ---------- ------- -------
$ 936,643 $ 973,113 $39,240 $ 2,770
========== ========== ======= =======
</TABLE>
(1) The amortized cost and market value of fixed maturity investments which
have unrealized losses were $78,143,000 and $75,373,000.
Fixed maturities available for sale at December 31, 1993 consisted of:
<TABLE>
<CAPTION>
Gross Gross
Market Amortized Unrealized Unrealized
Value Cost Gains Losses(1)
- ----------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
(In thousands)
Bonds and notes:
United States government and
government
agencies and authorities....... $ 475,060 $ 466,897 $10,087 $ 1,924
Public utilities................. 91,556 86,943 4,725 112
Corporate bonds and notes and
other........................... 994,154 943,921 59,013 8,780
Redeemable preferred stock......... 383,329 359,208 25,796 1,675
---------- ---------- ------- -------
$1,944,099 $1,856,969 $99,621 $12,491
========== ========== ======= =======
</TABLE>
(1) The amortized cost and market value of fixed maturity investments which
have unrealized losses were $386,455,000 and $373,964,000.
Fixed maturities held for investment at December 31, 1992 consisted of:
<TABLE>
<CAPTION>
Gross Gross
Amortized Market Unrealized Unrealized
Cost Value Gains Losses(1)
- ----------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
(In thousands)
Bonds and notes:
Public utilities................. $ 297,073 $ 305,187 $ 8,321 $ 207
Corporate bonds and notes and
other (2)....................... 222,378 246,123 25,147 1,402
Redeemable preferred stock......... 65,362 66,875 1,636 123
---------- ---------- ------- -------
$ 584,813 $ 618,185 $35,104 $ 1,732
========== ========== ======= =======
</TABLE>
(1) The amortized cost and market value of fixed maturity investments which
had unrealized losses were $86,396,000 and $84,664,000.
(2) Includes debentures of Reliance Group Holdings, Inc. with an amortized
cost and market value of $53,757,000 and $75,276,000. These debentures
were redeemed during 1993 resulting in a realized gain of $24,538,000.
8
<PAGE>
Fixed maturities available for sale at December 31, 1992 consisted of:
<TABLE>
<CAPTION>
Gross Gross
Market Amortized Unrealized Unrealized
Value(2) Cost Gains Losses(1)
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
(In thousands)
Bonds and notes:
United States government and government
agencies and authorities.............. $ 282,996 $ 276,373 $ 7,066 $ 443
Public utilities....................... 58,421 55,258 3,206 43
Corporate bonds and notes and other.... 758,120 757,750 27,639 27,269
Redeemable preferred stock............... 482,365 454,080 28,481 196
---------- ---------- ---------- ----------
$1,581,902 $1,543,461 $ 66,392 $ 27,951
========== ========== ========== ==========
</TABLE>
(1) The amortized cost and market value of fixed maturity investments which
had unrealized losses were $371,851,000 and $343,900,000.
(2) Includes fixed maturities with a carrying value of $28,200,000 which were
in default; accordingly, the accrual of investment income was ceased.
As of December 31, 1993, the contractual maturities of short-term and fixed
maturity investments are as follows:
<TABLE>
<CAPTION>
Amortized Market
Cost Value
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
(In thousands)
Short-term investments......................................... $ 372,507 $ 373,015
========== ==========
Fixed maturity investments:
1995......................................................... $ 21,044 $ 22,184
1996......................................................... 36,172 33,523
1997......................................................... 69,423 79,395
1998......................................................... 380,265 381,633
1999--2003................................................... 635,870 673,686
2004 and thereafter.......................................... 1,627,558 1,702,403
---------- ----------
2,770,332 2,892,824
Mortgage-backed securities................................... 23,280 24,388
---------- ----------
$2,793,612 $2,917,212
========== ==========
</TABLE>
Net investment income consisted of:
<TABLE>
<CAPTION>
Year Ended December 31 1993 l992 1991
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
(In thousands)
Investment income:
Fixed maturities (1).............................. $ 197,094 $ 185,026 $ 201,078
Equity securities................................. 29,640 22,229 10,172
Short-term investments............................ 19,920 17,615 17,732
Other............................................. 15,832 13,664 11,895
---------- ---------- ----------
262,486 238,534 240,877
Investment expenses................................. (11,687) (12,754) (12,296)
---------- ---------- ----------
$ 250,799 $ 225,780 $ 228,581
========== ========== ==========
</TABLE>
(1) Includes investment income from debentures of Reliance Group Holdings,
Inc. of $10,085,000, $10,269,000 and $9,685,000 in 1993, 1992 and 1991,
respectively.
9
<PAGE>
Gain (loss) on sales of investments consisted of:
<TABLE>
<CAPTION>
Year Ended December 31 1993 1992 1991
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
(In thousands)
Fixed maturities (1):
Realized gains................................. $ 83,338 $ 40,359 $ 57,780
Realized losses (2)............................ (21,179) (9,386) (25,044)
-------- -------- --------
62,159 30,973 32,736
Equity securities................................ 98,944 19,628 (26,659)
Other............................................ (2,907) (465) (14,287)
-------- -------- --------
$158,196 $ 50,136 $ (8,210)
======== ======== ========
</TABLE>
(1) Proceeds from sales of fixed maturity investments were $377,000,000,
$465,800,000 and $918,200,000 in 1993, 1992 and 1991, respectively.
(2) Includes $18,400,000, $9,000,000 and $6,000,000 in 1993, 1992 and 1991,
respectively, related to non-investment grade securities.
Net unrealized appreciation on investments consisted of:
<TABLE>
<CAPTION>
Year Ended December 31 1993 1992 1991
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
(In thousands)
Equity securities:
Unrealized appreciation (depreciation),
including $13,419
in 1991 relating to other investments......... $ (9,670) $ 31,347 $ 78,102
Fixed maturities available for sale:
Unrealized appreciation........................ 48,689 38,441 --
-------- -------- --------
39,019 69,788 78,102
Deferred income tax provision.................... (11,261) (27,801) (26,671)
Net unrealized appreciation in investments of
investee company................................ 1,244 3,818 5,671
-------- -------- --------
$ 29,002 $ 45,805 $ 57,102
======== ======== ========
Fixed maturities held for investment:
Unrealized appreciation (1).................... $ 3,098 $ 17,496 $166,101
======== ======== ========
</TABLE>
(1) The Company has not assumed any deferred income tax provision relating to
unrealized appreciation on fixed maturities held for investment.
Net unrealized gain on investments consisted of:
<TABLE>
<CAPTION>
December 31 1993 1992 1991
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
(In thousands)
Equity securities:
Unrealized gains............................... $100,179 $ 99,986 $ 80,808
Unrealized losses.............................. (11,223) (1,360) (13,529)
-------- -------- --------
88,956 98,626 67,279
-------- -------- --------
Fixed maturities available for sale:
Unrealized gains............................... 99,621 66,392 --
Unrealized losses.............................. (12,491) (27,951) --
-------- -------- --------
87,130 38,441 --
-------- -------- --------
176,086 137,067 67,279
Deferred income tax provision.................... (61,631) (50,370) (22,569)
Net unrealized gain (loss) in investments of
investee company................................ 568 (676) (4,494)
-------- -------- --------
$115,023 $ 86,021 $ 40,216
======== ======== ========
</TABLE>
10
<PAGE>
Fixed maturity investments carried at $494,692,000 at December 31, 1993 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 U.S. government,
totalling in excess of 10% of the Company's shareholder's equity at December
31, 1993 were comprised of nonredeemable preferred stock of Aon Corporation
with a carrying and market value of $139,709,000.
3. INVESTMENTS IN INVESTEE COMPANIES
Investments in investee company at December 31, 1993 and 1992 were $157,016,000
and $143,428,000 which represents the Company's investment in Zenith National
Insurance Corp. ("Zenith"). Equity income in Zenith was $12,441,000, $5,206,000
and $13,511,000 for the years ended December 31, 1993, 1992 and 1991,
respectively. Dividends received by the Company from Zenith were $6,574,000 for
each of the years ended December 31, 1993, 1992 and 1991.
Summarized financial information for Zenith is as follows:
<TABLE>
<CAPTION>
Year Ended December 31 1993 1992 1991
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
(In thousands, except per-share amounts)
Revenues...................................... $585,782 $ 549,335 $ 546,308
Income before income taxes and extraordinary
item......................................... 73,479 19,706 52,520
Net income.................................... 53,200 28,700 45,901
Net income per share.......................... 2.76 1.52 2.42
</TABLE>
<TABLE>
<CAPTION>
December 31 1993 1992
- --------------------------------------------------------------------------------
<S> <C> <C>
(In thousands, except percentage of ownership)
Total assets........................................... $1,857,790 $1,703,553
Senior notes and bank debt............................. 73,989 73,868
Common shareholders' equity............................ 349,465 301,598
Percentage of ownership................................ 34.5% 34.9%
Market value of investment in equity securities........ 147,103 129,845
</TABLE>
The Company's equity in net income includes amortization of excess of cost over
fair value of net assets acquired. At December 31, 1993, retained earnings
included undistributed net income of $28,187,000 from Zenith.
As of December 31, 1993, the Company owned 34.9% of Telemundo Group, Inc.
("Telemundo") common stock. In addition, Reliance Capital Group, L.P. (the
"Fund"), a limited partnership, the general partner of which is Reliance
Associates, L.P., which has as its general partner Reliance Capital Group, Inc.
("RCGI"), a wholly-owned subsidiary of Reliance Insurance Company ("Reliance
Insurance"), owned 15,373,917 shares of Telemundo common stock at December 31,
1993, representing 41.5% of the common stock outstanding. Equity losses in
Telemundo were $30,085,000 for the year ended December 31, 1991. Gain (loss) on
sales of investments in 1991 includes a write-off, which aggregated
$30,500,000, of the Company's investment in Telemundo and in the Fund. As a
result of the write-off of the Company's investment in Telemundo, the Company
no longer records its equity in Telemundo's operations.
On July 30, 1993, Telemundo agreed with its largest creditors to the terms of a
restructuring plan which is to serve as the basis for Telemundo's Plan of
Reorganization in its Chapter 11 bankruptcy proceeding. Under the terms of the
restructuring plan: Telemundo's outstanding common stock and warrants would be
extinguished; Telemundo's existing shareholders would have an opportunity to
purchase their pro-rata share of 1,450,000 shares of the new common stock
(14.5% of the then outstanding new common stock) to be issued under the
restructuring plan by the reorganized issuer; Reliance Insurance would act as a
standby purchaser of any new common stock not acquired by Telemundo's
shareholders; and Reliance Insurance would receive
11
<PAGE>
warrants to purchase up to an additional 416,667 shares of new common stock for
serving as a standby purchaser. The terms of the restructuring plan also would
permit certain creditors to require Reliance Insurance to purchase up to
300,000 shares of new common stock which such creditors have received in
payment for their subordinated debt from such creditors at a price of $7.00 per
share. The purchase price for the new common stock and the warrant exercise
price is $7.00 per share, subject to increase at the rate of 5% per annum from
January 31, 1994 to the date the plan becomes effective. There can be no
assurances that Telemundo's Plan of Reorganization will be approved by the
necessary creditor classes and confirmed by the bankruptcy court.
4. PREMIUMS AND OTHER ACCOUNTS RECEIVABLE
As of December 31, 1993 and 1992, the Company sold with limited recourse
$117,900,000 and $68,500,000 of reinsurance recoverables and premiums
receivable relating to its property and casualty insurance operations. Pursuant
to the limited recourse provisions, the maximum amount, at December 31, 1993,
that the Company may be obligated to repurchase is $10,900,000.
5. NOTES RECEIVABLE FROM PARENT COMPANY
The notes receivable from parent company, Reliance Group Holdings, Inc., bear
interest at rates sufficient to cover the annual interest expense of the
Company for such funds and are due at various dates commencing June 1, 2000.
6. INCOME TAXES
Federal income tax has been computed as if the Company filed a separate
consolidated tax return with its domestic subsidiaries where their ownership is
at least 80% of outstanding voting stock. The current tax so computed is paid
to or due from Reliance Group Holdings, Inc.
Income tax (provision) benefit from continuing operations consisted of:
<TABLE>
<CAPTION>
Year Ended December 31 1993 1992 1991
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
(In thousands)
Current:
Federal......................................... $(87,627) $(45,261) $ 9,203
Foreign......................................... (1,949) (1,621) (1,979)
-------- -------- ---------
(89,576) (46,882) 7,224
Deferred federal................................. (3,418) 26,177 61,677
-------- -------- ---------
$(92,994) $(20,705) $ 68,901
======== ======== =========
</TABLE>
Domestic and foreign income (loss) from continuing operations before income
taxes, minority interests and equity in investee companies were:
<TABLE>
<CAPTION>
Year Ended December 31 1993 1992 1991
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
(In thousands)
Domestic......................................... $263,490 $ 86,710 $(108,284)
Foreign.......................................... 5,569 4,768 5,821
-------- -------- ---------
$269,059 $ 91,478 $(102,463)
======== ======== =========
</TABLE>
12
<PAGE>
The reconciliation of taxes computed at the statutory rate (35% in 1993 and 34%
in 1992 and 1991) to the income tax (provision) benefit is as follows:
<TABLE>
<CAPTION>
Year Ended December 31 1993 1992 1991
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
(In thousands)
Tax (provision) benefit at statutory rate....... $(94,171) $(31,103) $ 34,837
Nontaxable investment income.................... 1,743 7,999 10,684
Temporary differences related to investment
transactions................................... -- -- 20,890
Impact of change in statutory rate from new tax
act............................................ 4,043 -- --
Other........................................... (4,609) 2,399 2,490
-------- -------- ---------
Income tax (provision) benefit.................. $(92,994) $(20,705) $ 68,901
======== ======== =========
<CAPTION>
Deferred income tax (provision) benefit arose from the following:
Year Ended December 31 1993 1992 1991
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
(In thousands)
Deferred policy acquisition costs............... $(18,743) $ (5,211) $ (1,156)
Unearned premium reserve........................ 12,844 12,158 (1,084)
Sales of investments............................ (36,515) 6,971 9,736
Discounting of loss reserves.................... 38,934 8,779 43,116
Other........................................... 62 3,480 11,065
-------- -------- ---------
$ (3,418) $ 26,177 $ 61,677
======== ======== =========
</TABLE>
The tax effects of items comprising the Company's net deferred tax asset as of
December 31, 1993 are as follows (in thousands):
<TABLE>
<S> <C>
Deferred tax assets:
Discounting of loss reserves...................................... $ 190,862
Tax basis differential of subsidiary not included in consolidated
tax return....................................................... 120,600
Operating loss carryforwards of subsidiary not included in
consolidated tax return.......................................... 54,600
Unearned premium reserve.......................................... 41,198
Other............................................................. 91,515
---------
498,775
Deferred tax liabilities:
Deferred policy acquisition costs................................. 61,915
Unrealized investment gains....................................... 61,631
Investment in investee company.................................... 20,898
Other............................................................. 78,147
---------
276,184
Valuation allowance................................................. (156,511)
---------
Net deferred tax asset.............................................. $ 119,673
=========
</TABLE>
The Company believes that its net deferred tax asset will be fully recoverable
under Section 847 of the Internal Revenue Code and from the utilization of
certain NOL's.
At December 31, 1993, a subsidiary of the Company, not included in the
consolidated tax return, had available NOL's of approximately $156,000,000. For
federal income tax purposes, approximately $122,000,000 expires in 2001,
$17,000,000 in 2002 and $17,000,000 in 2004. The Internal Revenue Code
13
<PAGE>
imposes limitations on the availability of these NOL's since the subsidiary
experienced a more than 50 percentage point ownership change in 1989. The
amount of the NOL incurred prior to the ownership change which can be utilized
in each subsequent year is limited (the "Loss Limitation") based on the value
of the subsidiary on the date of the ownership change. The annual Loss
Limitation approximates $25,000,000.
7. DEBENTURES, NOTES, TERM LOANS AND SHORT-TERM DEBT
On November 15, 1993, the Company entered into a $175,000,000 revolving credit
facility and term loan agreement ("Credit Facility"). Borrowings under the
Credit Facility were used to redeem all outstanding debentures and notes, other
than the senior reset notes which remain outstanding. As a result of the early
extinguishment of its debt, the Company incurred an extraordinary loss of
$3,666,000, net of income taxes of $1,974,000, in the fourth quarter of 1993.
Debentures and notes outstanding are as follows:
<TABLE>
<CAPTION>
December 31 1993 1992
- -------------------------------------------------------------------------------
<S> <C> <C>
(Dollars in thousands)
10 3/8% senior reset notes (interest rate is adjustable every
five years based on Treasury rate) due 1995-2000............. $50,000 $ 50,000
9 1/4% senior reset notes (interest rate is adjustable every
three years based on Treasury rate) due 1995-2000; ($50,000
principal amount, less unamortized discount of $137 at
December 31, 1993)........................................... 49,863 49,843
Other debentures redeemed during 1993......................... -- 74,950
------- --------
$99,863 $174,793
======= ========
</TABLE>
The fair value of the Company's senior reset notes at December 31, 1993 was
$102,280,000 based on quoted market prices.
Term Loans and Short-Term Debt
At December 31, 1993, term loans and short-term debt aggregated $125,373,000
and consisted of $122,929,000 of term loans which are payable in varying
amounts through 2015 with interest rates ranging from 3.30% to 10.50% and
$2,444,000 of short-term debt. The Company believes the fair value of term
loans and short-term debt at December 31, 1993 approximates its carrying value.
Maturities and sinking fund payments of the senior reset notes and term loans
and short-term debt for each of the next five years are as follows:
<TABLE>
<CAPTION>
Term Loans
Senior and
Reset Short-Term
Notes Debt
- ----------------------------------------------------------------------------------------
<S> <C> <C>
(In thousands)
1994................................................................. $ -- $ 14,356
1995................................................................. 10,000 10,666
1996................................................................. 10,000 15,656
1997................................................................. 10,000 22,995
1998................................................................. 10,000 50,000
</TABLE>
The Company's Credit Facility includes a revolving credit facility with various
banks providing for aggregate maximum outstanding borrowings of $100,000,000
through December 31, 1998. At the Company'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
14
<PAGE>
December 31, 1993, borrowings aggregating $30,000,000 were outstanding under
this facility. All of the common stock of Reliance Insurance, the principal
subsidiary of the Company, has been pledged to secure the Credit Facility and
the senior reset notes.
The Company's dividends are subject to provisions of the senior reset notes.
These provisions are less restrictive than the provisions in the Credit
Facility which require, among other things, a minimum net worth requirement and
a limitation of indebtedness. At December 31, 1993, the Company could pay up to
$207,249,000 in dividends without violating the most restrictive provisions.
8. REDEEMABLE PREFERRED STOCK AND DIVIDENDS OF SUBSIDIARIES
The Reliance Insurance preferred stock (1,075,114 shares) has cumulative
dividend rights of $2.68 per share and is redeemable, at Reliance Insurance's
option, at various prices decreasing to $25 per share in 1996. Reliance
Insurance redeemed 134,389 shares during each of 1993 and 1992, which were used
to satisfy the mandatory annual redemption of one-fifteenth of all shares
issued. Dividends on the preferred stock are included in minority interests in
the consolidated statement of operations.
The Insurance Law of Pennsylvania, where Reliance Insurance is domiciled, was
amended in February 1994 (effective immediately) to establish a new test
limiting the maximum amount of dividends which may be paid without prior
approval by the Pennsylvania Insurance Department. Under such test, Reliance
Insurance 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 company's reinsurance and the adequacy of
the 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.
Total common and preferred stock dividends paid by Reliance Insurance during
1993, 1992 and 1991 were $133,671,000 ($130,639,000 for common stock),
$143,729,000 ($140,448,000 for common stock) and $160,638,000 ($156,948,000 for
common stock), respectively. During 1994, $126,844,000 would be available for
dividend payments by Reliance Insurance based upon the new dividend test under
Pennsylvania Law. The Company believes such amount will be sufficient to meet
its cash needs.
There is no assurance that Reliance Insurance 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. However, the Company has been advised by the Pennsylvania Insurance
Department that any required prior approval will be based upon a solvency
standard and will not be unreasonably withheld. Any significant limitation of
Reliance Insurance's dividends would adversely affect the Company's ability to
service its debt and to pay dividends on its common stock.
9. 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.
15
<PAGE>
The reconciliation of property and casualty insurance direct premiums to net
premiums is as follows:
<TABLE>
<CAPTION>
Year Ended December 31 1993 1992 1991
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
(In thousands)
<CAPTION>
PREMIUMS PREMIUMS Premiums Premiums Premiums Premiums
WRITTEN EARNED Written Earned Written Earned
----------- ----------- ----------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
Direct.................. $ 2,587,149 $ 2,531,478 $ 2,480,417 $ 2,350,216 $ 2,442,218 $2,281,828
Assumed................. 323,422 304,422 280,530 312,730 283,169 217,005
Ceded................... (1,139,974) (1,264,361) (1,219,387) (1,127,206) (1,114,343) (949,995)
----------- ----------- ----------- ----------- ----------- ----------
Net premiums.......... $ 1,770,597 $ 1,571,539 $ 1,541,560 $ 1,535,740 $ 1,611,044 $1,548,838
=========== =========== =========== =========== =========== ==========
</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 1993 1992 1991
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
(In thousands)
Gross....................................................... $ 2,097,428 $ 2,383,349 $2,179,032
Reinsurance recoveries...................................... (861,834) (1,093,751) (786,572)
----------- ----------- ----------
Net policy claims and settlement expenses................. $ 1,235,594 $ 1,289,598 $1,392,460
=========== =========== ==========
</TABLE>
The Company holds substantial amounts of funds and letters of credit as
collateral pursuant to recoverables from unauthorized reinsurers. The Company
is not aware of any impairment of the creditworthiness of any of its
significant reinsurers.
Reliance Insurance's ten largest reinsurers, based on 1993 ceded premiums, are
as follows (in thousands):
<TABLE>
<S> <C>
American Re-Insurance Company................................... $ 138,041
Lloyd's of London............................................... 93,237
North American Reinsurance Corp................................. 66,815
Commercial Risk Re-Insurance Co. ............................... 51,365
Employers Reinsurance Corp...................................... 44,153
G.I.O. Insurance Ltd. .......................................... 39,364
TIG Reinsurance Company......................................... 30,495
TRN Insurance Company........................................... 26,463
Transatlantic Reinsurance Co.................................... 21,142
Underwriters Reinsurance Co..................................... 20,635
</TABLE>
The Company entered into a five-year aggregate excess of loss reinsurance
treaty effective January 1, 1994 through December 31, 1998 (the "Reinsurance
Treaty"). The Reinsurance Treaty indemnifies the Company for ultimate accident
year losses (including loss adjustment expenses) in excess of retained accident
year losses for each accident year and reduces volatility in property and
casualty underwriting results. The retained accident year losses are determined
in advance of each accident year and are based on a planned loss ratio.
Premiums in the amount of 57% of ceded losses will be paid to the reinsurer
whenever losses are ceded. Ceded losses under the Reinsurance Treaty will be
subject to a limit of $200,000,000 per accident year and an aggregate five-year
limit of $700,000,000. The Reinsurance Treaty provides for an annual minimum
premium deposit of $25,000,000, which is subject to adjustment based on loss
experience. The Reinsurance Treaty is cancelable by the Company on any December
31 during the five-year term. The Company will be able to commute the
Reinsurance Treaty on December 31, 2003 or any December 31 thereafter, subject
to specific terms of the treaty. The Reinsurance Treaty does not apply to the
Company's title insurance subsidiaries.
16
<PAGE>
10. OTHER INSURANCE EXPENSES
<TABLE>
<CAPTION>
Year Ended December 31 1993 1992 1991
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
(In thousands)
Salaries and commissions...................... $ 684,362 $ 613,743 $ 537,858
Taxes, other than income taxes................ 54,049 52,161 52,434
Rent.......................................... 50,852 52,108 49,311
Policyholders' dividends...................... 6,342 9,827 10,986
Other......................................... 159,142 152,035 125,700
--------- --------- ---------
$ 954,747 $ 879,874 $ 776,289
========= ========= =========
</TABLE>
11. 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 consist of corporate and government
debt securities and equity securities, including 1,247,400 shares of Reliance
Group Holdings, Inc. common stock and 404,797 warrants to purchase shares of
Reliance Group Holdings, Inc. common stock.
Pension cost includes the following components:
<TABLE>
<CAPTION>
Year Ended December 31 1993 1992 1991
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
(In thousands)
Service cost--benefits earned during the
period....................................... $ 7,882 $ 9,528 $ 5,973
Interest cost on projected benefit obligation. 12,495 11,596 10,170
Actual return on plan assets.................. (25,596) (17,748) (22,446)
Net amortization and deferral................. 10,068 4,194 10,902
Effect of plan curtailment.................... (1,212) (542) --
--------- --------- ---------
$ 3,637 $ 7,028 $ 4,599
========= ========= =========
</TABLE>
A reconciliation of the funded status of the plans with the accrued pension
cost included in accounts payable and accrued expenses is as follows:
<TABLE>
<CAPTION>
December 31 1993 1992
- --------------------------------------------------------------------------------
<S> <C> <C>
(In thousands)
Actuarial present value of benefit obligation:
Vested................................................ $ 128,639 $ 99,938
Nonvested............................................. 7,182 4,242
--------- ---------
Accumulated benefit obligation.......................... 135,821 104,180
Effect of anticipated future compensation levels........ 40,104 32,573
--------- ---------
Projected benefit obligation............................ 175,925 136,753
Plan assets at market value............................. (157,836) (135,206)
--------- ---------
Projected benefit obligation in excess of plan assets... 18,089 1,547
Unrecognized net asset at date of adoption.............. 11,696 13,316
Unrecognized net gain (loss)............................ (15,303) 363
--------- ---------
Accrued pension cost.................................... $ 14,482 $ 15,226
========= =========
</TABLE>
Contributions under the Company's noncontributory trusteed defined benefit
pension plans were $4,381,000, $7,914,000 and $7,212,000 in 1993, 1992 and
1991, respectively.
17
<PAGE>
The assumptions used to measure the projected benefit obligation at December
31, 1993 and 1992 include a discount rate of 7.5% and 9.5%, respectively, and a
weighted average rate of compensation increase of 5.0% and 6.8%, respectively.
The expected long-term investment rate of return on plan assets for the years
ended December 31, 1993 and 1992 was 10.0%.
Contributions under the Company's defined contribution plans were $6,353,000,
$5,620,000 and $4,506,000 in 1993, 1992 and 1991, respectively, and were based
on a formula specified in the plan agreements.
The Company offers postretirement medical and life insurance plans to certain
employees of a subsidiary.
The funded status at December 31, 1993 of the Company's postretirement medical
and life insurance plans is as follows (in thousands):
<TABLE>
<S> <C>
Accumulated postretirement benefit obligation:
Retirees............................................................. $ 7,131
Other active plan participants....................................... 4,693
-------
Accumulated benefit obligation......................................... 11,824
Unrecognized net loss.................................................. (1,755)
Unrecognized transition obligation..................................... (9,406)
-------
Accrued postretirement benefit cost.................................... $ 663
=======
<CAPTION>
The postretirement benefit cost for the year ended December 31, 1993 consisted
of the following components (in thousands):
<S> <C>
Service cost--benefits earned during the period........................ $ 242
Interest cost on accumulated postretirement benefit obligation......... 893
Net amortization and deferral.......................................... 1,141
-------
$ 2,276
=======
</TABLE>
The assumed health care cost trend rate used in measuring the accumulated
postretirement benefit obligation as of December 31, 1993 was 15% for 1994
decreasing until it reaches 7% in 2007, after which it remains constant. A one-
percentage-point change in the assumed health care cost trend rate for each
year would change the accumulated postretirement benefit obligation as of
December 31, 1993 and net postretirement health care cost by approximately 2%
and 1%, respectively. The assumed discount rate used in determining the
accumulated postretirement benefit obligation was 7.5%.
In 1992, the Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 112, "Employers' Accounting for Postemployment
Benefits". The adoption of this Statement, which is not required until 1994, is
not expected to have a material effect on the Company's consolidated financial
position or results of operations.
12. SALE OF SUBSIDIARY
On October 30, 1992, Commonwealth Land Title Insurance Company ("Commonwealth")
sold its mortgage insurance operations, Commonwealth Mortgage Assurance Company
("CMAC"), through a public offering of common stock of CMAC Investment
Corporation ("CMAC Investment"), a newly-formed holding company for CMAC.
Commonwealth sold 100% of its CMAC Investment common stock for net proceeds of
$118,500,000 resulting in a pretax gain of $8,999,000. Commonwealth continues
to own 800,000 shares of $4.125 Redeemable Preferred Stock of CMAC Investment,
which were purchased for $40,000,000 in connection with the offering.
18
<PAGE>
Summarized financial information for CMAC was as follows:
<TABLE>
<CAPTION>
Year Ended December 31 1992(1) 1991
- -------------------------------------------------------------------------------
<S> <C> <C>
(In thousands)
Revenues................................................. $ 65,354 $ 69,608
======== ========
Income before income taxes............................... $ 15,875 $ 14,401
Provision for income taxes............................... (5,226) (4,748)
-------- --------
Net income............................................... $ 10,649 $ 9,653
======== ========
</TABLE>
(1) Represents summarized financial information for the ten months ended
October 30, 1992.
13. STATUTORY INFORMATION
Statutory net income (loss) was as follows:
<TABLE>
<CAPTION>
Year Ended December 31 1993 1992 1991
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
(In thousands)
Property and casualty insurance operations...... $217,353 $100,648 $ (4,050)
Title insurance operations...................... 43,906 22,575 7,434
</TABLE>
Statutory policyholders' surplus was as follows:
<TABLE>
<CAPTION>
December 31 1993 1992
- -------------------------------------------------------------------------------
<S> <C> <C>
(In thousands)
Property and casualty insurance operations (1)........... $902,290 $857,611
Title insurance operations............................... 176,868 152,833
</TABLE>
(1) Includes Reliance Insurance's investment in title operations. Also reflects
a reduction in statutory loss reserves of $96,000,000 and $98,000,000 at
December 31, 1993 and 1992, representing discounts of workers' compensation
reserves in excess of GAAP discounts.
14. RELATED PARTY TRANSACTIONS
In 1993, the Company purchased, at fair market value, an office building for
$10,500,000 from a wholly-owned subsidiary of Reliance Group Holdings, Inc. In
1992, the Company purchased, at fair market value, a shopping center for
$16,600,000 from a partnership in which a wholly-owned subsidiary of Reliance
Group Holdings, Inc. was the general partner.
15. DISCONTINUED OPERATIONS
Discontinued operations include the operations of United Pacific Life Insurance
Company ("UPL"), an indirect wholly-owned subsidiary of the Company, and the
insurance brokerage operations of Frank B. Hall & Co. Inc. ("Hall").
On April 3, 1993, the Company entered into an agreement for the sale of its
life insurance subsidiary, UPL, to General Electric Capital Corporation. The
sale was completed on July 14, 1993. In connection with the sale, the Company
purchased, from UPL, securities and real estate with a carrying value of
$482,000,000. The aggregate consideration was $567,000,000. The sale resulted
in a loss of $87,300,000 which was recorded in 1992.
19
<PAGE>
Results of operations for the discontinued life insurance operations are as
follows:
<TABLE>
<CAPTION>
Year Ended December 31 1992 1991
- -------------------------------------------------------------------------------
<S> <C> <C>
(In thousands)
Revenues............................................... $638,770 $ 841,523
======== ==========
Income before income taxes............................. $ 86,445 $ 92,664
Provision for income taxes............................. (29,093) (31,307)
-------- ----------
Net income............................................. $ 57,352 $ 61,357
======== ==========
</TABLE>
The net liabilities of the discontinued life insurance operations at December
31, 1992 are as follows (in thousands):
<TABLE>
<S> <C>
Marketable securities........................................... $5,188,610
Premiums and other receivables.................................. 213,556
Deferred policy acquisition costs............................... 261,903
Other assets.................................................... 25,732
----------
5,689,801
----------
Future policy benefits and policyholders' funds................. 5,621,964
Other liabilities............................................... 139,330
----------
5,761,294
----------
Net liabilities................................................. $ (71,493)
==========
</TABLE>
On November 2, 1992, Hall, the Company's discontinued insurance brokerage
operation, completed the sale of substantially all of its operating assets and
its insurance brokerage, employee benefits consulting and related services
businesses to Aon Corporation ("Aon"). Total consideration received by Hall was
$457,000,000, plus the assumption by Aon of certain of Hall's operating
liabilities. The Company's gain on the sale of Hall's operating assets was
$40,000,000, net of state and federal taxes of $30,000,000. Included in the
gain was the realization of $10,250,000 of Hall's foreign currency translation
gains. On November 2, 1992, pursuant to the terms of an Agreement and Plan of
Merger, dated July 24, 1992, each outstanding share of Hall, other than shares
owned by the Company, was converted into the right to receive .625 of a share
of Reliance Group Holdings, Inc. common stock. As a result, Reliance Group
Holdings, Inc. issued 9,232,968 shares of its common stock as merger
consideration to certain holders of Hall common stock. The issuance of the
Reliance Group Holdings, Inc. common stock was reflected as a $48,011,000
noncash capital contribution in the Company's 1992 financial statements. The
Company has also agreed to provide $18,000,000 per year until 2007 of
reinsurance brokerage commissions to Aon. In the first quarter of 1994, in
connection with the settlement of certain litigation, Reliance Group Holdings,
Inc. agreed to issue approximately 300,000 shares of its common stock as
additional merger consideration to former shareholders of Hall.
Results of operations for the discontinued insurance brokerage operations are
as follows:
<TABLE>
<CAPTION>
Year Ended December 31 1992(1) 1991
- -------------------------------------------------------------------------------
<S> <C> <C>
(In thousands)
Revenues............................................... $241,460 $ 461,592
======== ==========
Income (loss) before income taxes (2).................. $ 9,471 $ (28,793)
Provision for income taxes............................. (2,718) (1,120)
-------- ----------
Net income (loss)...................................... $ 6,753 $ (29,913)
======== ==========
</TABLE>
(1) Represents summarized financial information for the six months ended June
30, 1992.
(2) Includes amortization of excess of cost over fair value of net assets
acquired.
20
<PAGE>
16. CONTINGENCIES AND COMMITMENTS
Contingencies
In 1989, one of the Company's property and casualty insurance operations was
notified by the California Department of Insurance that under Proposition 103,
profits generated by current rates exceed the Department's rates for a fair and
reasonable return. See Financial Review section for further discussion of this
matter.
Legal Proceedings
The Company and it 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 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 March 1987, the Superintendent of Insurance of New York (the
"Superintendent"), as liquidator of Union Indemnity Insurance Company of New
York ("Union Indemnity"), formerly a wholly-owned subsidiary of Hall which the
Superintendent took possession of in 1985, commenced an action in the Supreme
Court of the State of New York seeking damages of not less than $140,000,000
against Hall, various subsidiaries of Hall, Hall's and Union Indemnity's
independent auditors, and certain individuals who were former officers and
directors of Union Indemnity. The Superintendent sought to hold the defendants
liable for the insolvency of Union Indemnity alleging, among other claims, that
Hall breached fiduciary and other duties owed to Union Indemnity and violated
provisions of the New York State Insurance Code, that Union Indemnity did not
have a separate operating identity, and that Hall and the Hall subsidiaries
named as defendants constituted a single enterprise which was liable for Union
Indemnity's obligations to its policyholders and other creditors.
In July 1987, American Centennial Insurance Company, International Fidelity
Insurance Company, and Ranger Insurance Company (the "American Centennial
Plaintiffs") commenced an action in the Supreme Court of the State of New York
against Hall, two subsidiaries of Hall, and certain individuals who were former
officers and directors of Union Indemnity seeking to hold the defendants liable
for certain alleged reinsurance obligations of Union Indemnity, certain
misrepresentations concerning Union Indemnity's financial position and the
breach of certain duties owed to the American Centennial Plaintiffs. The
American Centennial Plaintiffs sought damages of at least $54,900,000 and
punitive damages against all defendants.
The action brought by the Superintendent was settled by an agreement, dated
June 2, 1989, under which Hall, now known as Prometheus Funding Corp.
("Prometheus"), will make an initial payment of $19,000,000 and additional
payments aggregating $29,000,000 over a ten-year period without interest as
follows: $1,500,000 each in years one and two; $2,000,000 each in years three
and four; $5,000,000 in year five; $4,500,000 each in years six and seven;
$4,000,000 in year eight; and $2,000,000 each in years nine and ten. The
settlement agreement provides for the entry of an order by the court barring
other claims against Hall relating to Union Indemnity, including the claims by
the American Centennial Plaintiffs described above. The settlement agreement
was submitted to the court for approval in October 1989 and objections were
filed by various parties. In March 1994, the Superintendent informed Prometheus
that he did not intend to pursue court approval of the settlement until the
resolution of appellate proceedings in a pending litigation between the
Superintendent and certain of Union Indemnity's reinsurers. Prometheus has
advised the Superintendent that this position is in breach of the settlement
agreement's requirement that the parties diligently make every effort to obtain
court approval of the settlement, and Prometheus has reserved all of its rights
with respect thereto. There is no assurance that such approval will be
obtained. The settlement agreement will not become effective until final
approval by the court. Hall received $19,400,000 in insurance proceeds in
connection with this matter and is entitled to receive an additional $600,000
in 1994 from its insurance carrier. Hall has recorded a reserve of $36,000,000
representing the initial payment of $19,000,000, the present value of the
21
<PAGE>
additional remaining annual payments over a ten-year period, and $600,000 to be
received in 1994 from its insurance carrier. Recovery of the amount to be
received from the insurance carrier is deemed probable.
Commitments
A subsidiary of the Company, Saul P. Steinberg and other executives of the
Company are partners in a partnership which owns certain real estate
properties. As of March 9, 1994, the Company guaranteed $45,000,000 (of which
$42,000,000 matures December 29, 1994) of the partnership's outstanding debt.
The Company believes that the partnership will refinance this debt prior to
maturity. At March 9, 1994, the partnership's total outstanding debt was
$175,267,000. The Company receives a fee of .5% per annum on the average
outstanding debt covered by the guarantee. In addition, the Company will
receive 48% of any cumulative net profit (as defined) realized from the
activities of the partnership.
Lease Commitments
The Company and its subsidiaries lease certain office facilities and equipment
under lease agreements that expire at various dates through 2011. Rent expense
for the years ended December 31, 1993, 1992 and 1991 was $92,000,000,
$90,700,000 and $89,700,000, respectively.
At December 31, 1993, future net minimum rental payments required under
noncancelable leases were as follows:
<TABLE>
<CAPTION>
- --------------------------------
<S> <C>
(In thousands)
1994.................. $ 54,555
1995.................. 49,956
1996.................. 39,497
1997.................. 27,543
1998.................. 14,143
1999 and thereafter... 18,936
--------
$204,630
========
</TABLE>
22
<PAGE>
17. BUSINESS SEGMENT INFORMATION
<TABLE>
<CAPTION>
Year Ended December 31 1993 1992 1991
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
(In thousands)
REVENUES:
Property and casualty insurance
Premiums earned
Standard commercial................... $1,069,933 $1,011,229 $1,111,055
Specialty commercial.................. 501,606 524,511 437,783
---------- ---------- ----------
1,571,539 1,535,740 1,548,838
Net investment income................... 226,517 199,556 202,348
Gain (loss) on sales of investments..... 153,410 47,053 (1,682)
---------- ---------- ----------
1,951,466 1,782,349 1,749,504
---------- ---------- ----------
Title and mortgage insurance
Premiums earned......................... 893,364 826,493 675,904
Net investment income................... 24,282 26,224 26,233
Gain (loss) on sales of investments..... 4,786 3,083 (6,528)
Gain on sale of subsidiary.............. -- 8,999 --
---------- ---------- ----------
922,432 864,799 695,609
---------- ---------- ----------
Other..................................... 135,293 129,345 22,194
---------- ---------- ----------
$3,009,191 $2,776,493 $2,467,307
========== ========== ==========
INCOME (LOSS) FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES, MINORITY INTERESTS
AND EQUITY IN INVESTEE COMPANIES:
Property and casualty insurance
Underwriting
Standard commercial................... $ (209,123) $ (226,015) $ (331,252)
Specialty commercial.................. 33,558 6,729 5,255
---------- ---------- ----------
(175,565) (219,286) (325,997)
Net investment income................... 226,517 199,556 202,348
Gain (loss) on sales of investments..... 153,410 47,053 (1,682)
---------- ---------- ----------
204,362 27,323 (125,331)
---------- ---------- ----------
Title and mortgage insurance.............. 59,966 59,113 17,544
---------- ---------- ----------
Other..................................... 4,731 5,042 5,324
---------- ---------- ----------
$ 269,059 $ 91,478 $ (102,463)
========== ========== ==========
IDENTIFIABLE ASSETS AT YEAR-END:
Property and casualty insurance........... $7,969,296 $7,439,394 $6,087,995
Title and mortgage insurance.............. 547,778 471,226 494,839
Discontinued operations................... -- -- 279,821
Other..................................... 270,319 311,543 250,226
---------- ---------- ----------
$8,787,393 $8,222,163 $7,112,881
========== ========== ==========
</TABLE>
Income (loss) from continuing operations before income taxes, minority
interests and equity in investee companies relating to property and casualty
insurance underwriting has been reduced by policyholders' dividends and other
income and expense. Income (loss) from continuing operations before income
taxes, minority interests and equity in investee companies by segment is before
allocation of interest expense, which relates primarily to the Company.
Identifiable assets by industry segment are those assets which are used in the
Company's operations in each segment. An allocation of identifiable assets to
the individual lines of business is not appropriate since allocation would be
arbitrary and, in management's judgment, misleading.
23
<PAGE>
18. QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
1993 QUARTER(1)
- --------------------------------------------------------------------------------
First Second Third Fourth
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
(In thousands)
REVENUES:
Premiums earned......................... $550,028 $634,405 $612,768 $667,702
Net investment income................... 65,334 63,922 61,056 60,487
Gain on sales of investments............ 35,582 35,049 42,221 45,344
Interest income from parent company..... 5,044 5,029 5,063 3,355
Other................................... 27,120 29,699 29,704 30,279
-------- -------- -------- --------
$683,108 $768,104 $750,812 $807,167
======== ======== ======== ========
INCOME FROM CONTINUING OPERATIONS....... $ 37,062 $ 51,151 $ 62,647 $ 34,489
Extraordinary item--early extinguishment
of debt................................ -- -- -- (3,666)
Cumulative effect of change in
accounting for
income taxes........................... 24,335 -- -- --
-------- -------- -------- --------
NET INCOME.............................. $ 61,397 $ 51,151 $ 62,647 $ 30,823
======== ======== ======== ========
</TABLE>
(1) Effective January 1, 1993, the Company adopted FAS 106 and FAS 109. See
note 1 to the consolidated financial statements.
<TABLE>
<CAPTION>
1992 Quarter
- --------------------------------------------------------------------------------
First Second Third Fourth
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
(In thousands)
Revenues:
Premiums earned......................... $557,075 $578,759 $611,941 $614,458
Net investment income................... 55,587 55,527 55,852 58,814
Gain on sales of investments............ 13,217 17,494 3,378 16,047
Gain on sale of subsidiary.............. -- -- -- 8,999
Interest income from parent company..... 5,252 5,147 4,790 5,014
Other................................... 26,671 27,441 27,645 27,385
-------- -------- -------- --------
$657,802 $684,368 $703,606 $730,717
======== ======== ======== ========
Income (loss) from continuing
operations............................. $ 31,487 $ 39,972 $ (3,518) $ 4,726
Income from discontinued operations..... 14,892 14,085 30,016 5,112
Loss on disposal of discontinued
operations............................. -- -- -- (47,300)
-------- -------- -------- --------
Net income (loss)....................... $ 46,379 $ 54,057 $ 26,498 $(37,462)
======== ======== ======== ========
</TABLE>
24
<PAGE>
INDEPENDENT AUDITORS' REPORT
- --------------------------------------------------------------------------------
Board of Directors and Shareholder
Reliance Financial Services Corporation
New York, New York
We have audited the accompanying consolidated balance sheets of Reliance
Financial Services Corporation (a subsidiary of Reliance Group Holdings, Inc.)
and subsidiaries as of December 31, 1993 and 1992, and the related statements
of operations, changes in shareholder's equity and cash flows for each of the
three years in the period ended December 31, 1993. 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 Financial Services
Corporation and subsidiaries at December 31, 1993 and 1992 and the results of
their operations and their cash flows for each of the three years in the period
ended December 31, 1993 in conformity with generally accepted accounting
principles.
As discussed in note 1 to the consolidated financial statements, in 1993 the
Company adopted Statement of Financial Accounting Standards No. 106, 109, 113
and 115 and, accordingly, changed its method of accounting for postretirement
benefits, income taxes, reinsurance contracts and investments. In connection
with the adoption of Statement of Financial Accounting Standards No. 113, the
Company retroactively restated the 1992 consolidated balance sheet.
/s/ DELOITTE & TOUCHE
New York, New York
February 18, 1994, except for note 16,
as to which the date is March 9, 1994
25
<PAGE>
RELIANCE FINANCIAL SERVICES CORPORATION AND SUBSIDIARIES
FINANCIAL REVIEW
- --------------------------------------------------------------------------------
OVERVIEW
The Company had income from continuing operations of $185.3 million in 1993
compared to $72.7 million in 1992 and a loss of $53.8 million in 1991, which
included an after-tax provision of $103.0 million to strengthen prior-year loss
reserves. The improvement in 1993 and 1992 reflects a higher level of gains
from sales of investments, improved property and casualty insurance
underwriting results and improved operating results in title insurance.
Net income was $206.0 million in 1993 which includes a $3.7 million
extraordinary loss from early extinguishment of debt and income of $24.3
million representing the cumulative effect of adopting Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes". Net income in 1992
was $89.5 million compared to a net loss of $21.5 million in 1991. The 1992 and
1991 net income (loss) included results pertaining to discontinued life
insurance and insurance brokerage operations.
PROPERTY AND CASUALTY INSURANCE OPERATIONS
The property and casualty insurance operations reported pretax income of $204.4
million in 1993 compared to $27.3 million in 1992 and a pretax loss of $125.3
million in 1991, which included a $156.0 million provision to strengthen prior-
year loss reserves. Gains on sales of investments were $153.4 million and $47.1
million in 1993 and 1992 compared to a $1.7 million loss on sales of
investments in 1991.
Underwriting losses for the property and casualty insurance operations were
$175.6 million in 1993 compared to $219.3 million in 1992 and $326.0 million in
1991, which included a high level of provision for insured events of prior
years. Underwriting results continue to be adversely affected by catastrophe
losses. Catastrophe losses were $39.3 million ($88.5 million before
reinsurance) in 1993 compared to $61.1 million in 1992 ($119.2 million before
reinsurance), which included $45.6 million ($94.1 million before reinsurance)
arising from Hurricane Andrew. Catastrophe losses were $28.7 million ($29.7
million before reinsurance) in 1991. The Company anticipates first quarter 1994
losses of approximately $21 million (net of reinsurance) resulting from the Los
Angeles earthquake. The combined ratios (calculated on a GAAP basis), after
policyholders' dividends were 110.8%, 114.1% and 121.0% for 1993, 1992 and
1991, respectively.
26
<PAGE>
Net premiums written and premiums earned for each line of property and casualty
insurance were as follows:
<TABLE>
<CAPTION>
Year Ended December 31 1993 1992 1991
- ------------------------------------------------------------------------------------------
(In thousands)
NET NET Net Net Net Net
PREMIUMS PREMIUMS Premiums Premiums Premiums Premiums
WRITTEN EARNED Written Earned Written Earned
---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Standard Commercial:
Automobile............ $ 260,180 $ 225,910 $ 261,520 $ 250,246 $ 255,848 $ 265,801
Multiple Peril........ 187,438 147,158 126,070 126,263 134,286 174,362
Workers' Compensation. 377,592 360,613 418,685 427,337 503,323 440,111
Ocean and Inland
Marine............... 105,254 82,451 49,658 47,364 51,651 62,373
General Liability..... 82,148 63,550 58,670 54,931 46,028 61,211
Involuntary........... 113,498 112,700 109,583 98,038 77,624 72,163
Personal.............. 45,377 25,187 8,763 4,153 7,650 20,716
Other................. 73,430 52,364 9,318 2,897 17,497 14,318
---------- ---------- ---------- ---------- ---------- ----------
1,244,917 1,069,933 1,042,267 1,011,229 1,093,907 1,111,055
---------- ---------- ---------- ---------- ---------- ----------
Specialty Commercial:
Reinsurance........... 123,742 124,150 108,095 155,402 155,667 103,145
Surety................ 114,191 103,855 100,091 98,077 94,563 86,225
General Liability..... 287,747 273,601 291,107 271,032 266,907 248,413
---------- ---------- ---------- ---------- ---------- ----------
525,680 501,606 499,293 524,511 517,137 437,783
---------- ---------- ---------- ---------- ---------- ----------
$1,770,597 $1,571,539 $1,541,560 $1,535,740 $1,611,044 $1,548,838
========== ========== ========== ========== ========== ==========
</TABLE>
Standard commercial lines of business are the Company's largest property and
casualty segment. The increase in standard commercial net premiums written in
1993, when compared to 1992, reflects higher net retentions in multiple peril,
general liability and inland marine lines of insurance. The increase in net
premiums written in personal lines of insurance resulted from the expiration
and non-renewal of a quota share reinsurance treaty on June 30, 1993. The
personal lines quota share reinsurance treaty was not renewed in anticipation
of transferring or running off the Company's personal lines business. The
increase in other lines of standard commercial reflects growth in accident and
health lines. The growth in net premiums written was partially offset by a
decline in workers' compensation reflecting lower levels of writings of
guaranteed cost coverage. In addition, the decline in workers' compensation
premiums reflects the use of higher deductible non-retrospectively rated
insurance which results in lower premiums and lower losses.
Underwriting losses in standard commercial lines were $209.1 million in 1993
compared to $226.0 million in 1992 and $331.3 million in 1991, which included
catastrophe losses (net of reinsurance) of $35.3 million, $29.6 million and
$28.7 million in 1993, 1992 and 1991, respectively. The improvement in
underwriting results in 1993, when compared to 1992, reflects improved workers'
compensation results, which produced an underwriting profit of $11.4 million in
1993 compared to an underwriting loss of $25.6 million in 1992. The improved
underwriting results in workers' compensation reflects the use of
retrospectively rated and high deductible policies where losses are generally
lower than policies written on a guaranteed cost basis. The improvement in
workers' compensation results also reflects increases in premium rates. These
improvements were partially offset by increased losses in certain programs,
written by the Company's Reliance National unit, primarily in multiple peril
lines of business. Underwriting results in 1991 reflect a $156.0 million
provision for insured events of prior years in guaranteed cost workers'
compensation business, commercial automobile liability and multiple peril lines
of business.
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The increase in specialty commercial net written premiums in 1993, when
compared to 1992, resulted from growth in reinsurance premiums, reflecting
higher levels of treaty business, and increases in surety premiums, reflecting
higher retentions due to previous favorable experience and increased business
with smaller contractors, an area traditionally less fully serviced by national
surety companies. The decline in net premiums written in 1992, when compared to
1991, resulted from lower assumed reinsurance premiums which included a $50.0
million excess of loss treaty written in 1991 that was not renewed.
The Company's specialty commercial lines of business continue to achieve strong
underwriting results, particularly in surety lines of business as well as
general liability lines written by the Company's Reliance National unit.
Underwriting profits for specialty commercial lines in 1993 were $33.6 million,
which included favorable development of prior-year loss reserves, compared to
$6.7 million in 1992, which included a catastrophe loss of $31.5 million in the
reinsurance lines, and $5.3 million in 1991.
The property and casualty insurance operations assume and cede reinsurance in
the normal course of business. In addition, the Company has entered into a stop
loss reinsurance contract which will reduce volatility in property and casualty
underwriting results. See note 9 to the consolidated financial statements.
In 1989, the California Department of Insurance notified United Pacific
Insurance Company, one of the Company's California subsidiaries, which writes
business in California, that under Proposition 103, profits generated by
current rates exceeded the Department's rates for a fair and reasonable return
by approximately $10.0 million. Since then, there have been several
administrative hearings on rate rollback and several different regulations
issued. None survived the administrative process until Emergency Regulations
were approved in August and October 1991 and then readopted in February 1992.
In February 1993, a Los Angeles Superior Court issued a decision in the
consolidated case challenging the Department's Emergency Regulations and the
application of these regulations. The court declared several sections of the
regulations invalid and enjoined the enforcement of the regulations. In June
1993, the California Supreme Court agreed to hear the appeal from this
decision. The regulations, if ultimately adopted and upheld, could result in
the Company having to make a refund to policyholders possibly in excess of the
amount specified in the Department's 1989 notice. The Company's property and
casualty insurance subsidiaries have not earned underwriting profits in
California in the past five years. The Company believes that even after
considering investment income, total returns in California have been less than
what would be considered "fair". The Company will contest vigorously any
unreasonable premium rollback determination by the California Insurance
Department. Accordingly, the Company believes that it is probable that its
premium revenues will not be subject to a refund which would have a material
effect on the results of operations or financial condition of the Company.
From time to time, other states have 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 any such
legislation or regulation would have on the ability of the Company to raise its
rates. However, since the Company has substantially withdrawn from personal
lines, the Company believes that these initiatives will not have a material
effect on its on-going business.
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Policy claims and settlement expenses includes a provision for insured events
of prior years of $40.2 million in 1993 compared to $31.5 million in 1992 and
$271.7 million in 1991. The 1993 provision includes $21.1 million of adverse
development from workers' compensation reinsurance pools and $35.2 million of
adverse development related to prior-year asbestos-related and environmental
pollution claims. This development was partially offset by favorable
development in other lines of business, including specialty commercial general
liability lines. The 1992 provision included $55.6 million of adverse
development from workers' compensation and automobile reinsurance pools. This
development was partially offset by favorable development of $11.9 million from
two general liability claims and favorable development of $10.7 million related
to unallocated loss adjustment expenses. The 1991 provision included $156.0
million to strengthen prior-year loss reserves, principally in guaranteed cost
workers' compensation business, and loss adjustment expense reserves in other
standard commercial lines. The 1991 provision also included $57.3 million of
adverse development from workers' compensation reinsurance pools and a $5.2
million provision in personal lines resulting from prior years' catastrophes.
The Company records involuntary assessments when such assessments are billed by
the respective insurance facilities. These assessments are subject to large
variations in timing and amount, and accordingly, the Company cannot reasonably
estimate a minimum amount of liability prior to billing. While the amount of
any involuntary assessments cannot be predicted with certainty, the Company
believes that future assessments will not have a material adverse effect on its
liquidity or capital resources.
The liability for loss reserves at December 31, 1993 was $5.05 billion compared
to $4.57 billion at December 31, 1992. This liability is based on an evaluation
of reported claims, 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 $2.12 billion and $1.87 billion
at December 31, 1993 and 1992, respectively, are included in the liability in
accordance with Statement of Financial Accounting Standards No. 113.
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 the
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, the economic environment in which property and
casualty companies operate and the trend toward increasing claims and awards.
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 Company regularly analyzes
its reserves and reviews its pricing and reserving methodologies so that future
adjustments to prior-year 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. Over the
past five years, the Company has increased its premium writings in specialty
commercial lines of business. Estimation of loss reserves for many specialty
commercial lines of business is more difficult than for certain standard
commercial lines because 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
these lines of business. The Company attempts to reduce these variations in
certain of its specialty commercial lines, primarily directors and officers
liability, professional liability and general liability, by writing policies on
a claims-made basis, which mitigates the long tail nature of the risks. The
Company also limits the loss from a single event through the use of
reinsurance.
29
<PAGE>
Included in the liability for loss reserves at December 31, 1993 are $152
million ($122 million net of recoverables from reinsurers) of loss reserves
pertaining to asbestos-related and environmental pollution claims. Included in
these reserves are reserves for claims incurred but not reported and reserves
for loss expenses, which include litigation expenses. The Company continues to
receive claims asserting injuries from hazardous materials and alleged damages
to cover various clean-up costs relating to policies written in prior years.
Coverage and claim settlement issues, such as the determination that coverage
exists and the definition of an occurrence, may cause the actual loss
development to exhibit more variation than the remainder of the Company's book
of business. The Company's net paid losses and related expenses for asbestos-
related and environmental pollution claims have not been material in relation
to the Company's total net paid losses and related expenses. Net paid losses
and related expenses (primarily legal fees and expenses) relating to these
claims were $23.0 million (including $8.6 million of related expenses), $17.3
million (including $7.7 million of related expenses), $20.3 million (including
$11.5 million of related expenses), $5.6 million (including $3.6 million of
related expenses) and $8.5 million (including $5.0 million of related expenses)
for the years ended December 31, 1993, 1992, 1991, 1990 and 1989, respectively.
Total payments for all policy claims and related expenses were $1.0 billion,
$961.1 million, $910.6 million, $1.0 billion and $1.1 billion for the years
ended December 31, 1993, 1992, 1991, 1990 and 1989, respectively. As of
December 31, 1993, the Company had approximately 700 direct insureds for which
one or more environmental or asbestos claims were open. As of December 31,
1993, the Company was involved in approximately 40 coverage disputes (where a
motion for declaratory judgment had been filed, the resolution of which will
require a judicial interpretation of an insurance policy) related to asbestos
or environmental pollution claims. The Company is not aware of any pending
litigation or pending claim which will result in significant contingent
liabilities in these areas. The Company believes it has made reasonable
provisions for these claims, although the ultimate liability may be more or
less than such reserves. The Company believes that future losses associated
with these claims will not have a material adverse effect on its financial
position, although there is no assurance that such losses will not materially
effect the Company's results of operations for any period.
PROPERTY AND CASUALTY INSURANCE INVESTMENT RESULTS
Net investment income of the property and casualty insurance operations in 1993
was $226.5 million compared to $199.6 million in 1992 and $202.3 million in
1991. The increase in 1993 reflects growth in the average size of the
investment portfolio primarily attributable to proceeds from the fourth quarter
1992 sale of the operating assets of Frank B. Hall & Co. Inc. The growth in net
investment income in 1993 was partially offset by the effect of lower interest
rates. As a result of lower interest rates, the rate at which the Company is
able to reinvest interest and dividends received and proceeds from sales of
securities is lower than its current overall investment yield. The decline in
net investment income in 1992, when compared to 1991, reflects lower investment
yields in the fixed income portfolio resulting from a decline in interest rates
and an increase in lower yielding equity and convertible preferred securities.
Gain on sales of investments were $153.4 million in 1993 compared to $47.1
million in 1992 and a loss of $1.7 million in 1991. The gain on sales of
investments in 1993 primarily resulted from sales of equity securities
partially offset by a $23.4 million loss equal to the difference between cost
and market value of certain investments, to reflect other than temporary
declines. Included in the 1993 gain on sales of investments is a gain of $24.5
million resulting from the redemption of Reliance Group Holdings, Inc.
debentures. The gain on sales of investments in 1992 primarily resulted from
sales of fixed maturity investments. There can be no assurance that the Company
will sustain its current level of realized gains on sales of investments.
30
<PAGE>
TITLE INSURANCE OPERATIONS
Premiums and fees were $893.4 million in 1993 compared to $826.5 million in
1992 and $675.9 million in 1991. Included in the 1992 and 1991 premiums and
fees were $56.0 million and $62.2 million, respectively, from the Company's
mortgage insurance unit ("CMAC") which was sold through a public offering in
the fourth quarter of 1992. The increase in premiums and fees in 1993, which
occurred in both agency and direct title insurance operations, primarily
reflects increased residential refinancing activity resulting from lower
mortgage interest rates and, to a lesser extent, increased residential resale
activity and an acquisition completed in late 1992. The title insurance
operations experienced strong premium growth in most regions of the country,
except in California where the real estate market remains depressed. The
increase in premiums in 1992, when compared to 1991, reflects increased
residential refinancing activity.
Agency commissions represent the portion of premiums retained by agents
pursuant to the terms of their agency contracts and are the title insurance
operations' single largest expense. Agency commissions were $416.0 million in
1993 compared to $382.1 million in 1992 and $314.5 million in 1991. Agency
commissions as a percentage of agency premiums declined in 1993 and 1992. These
declines reflect a lower portion of agency business in the Western states where
agent commissions are generally higher, and a reduction in agency commission
rates in certain regions of the country. Other expenses of the title insurance
operations include personnel costs relating to marketing activities, title
searches, information gathering on specific properties and preparation of
insurance policies, as well as costs associated with the maintenance of title
plants. Other expenses increased to $364.1 million in 1993 from $322.4 million
in 1992 and $271.9 million in 1991, reflecting greater activity in the title
insurance operations. Included in the 1992 and 1991 other expenses were $17.1
million and $20.0 million from CMAC. The expense ratio of the title insurance
operations (which includes agency commissions) has declined to 87.3% in 1993
from 89.2% in 1992 and 92.3% in 1991. These declines reflect the lower
percentage of agency commissions to agency premiums, and the Company's
continued efforts to control costs, which have resulted in other expenses
increasing at a lower rate than premiums. The provision for claim losses was
$81.8 million in 1993 compared to $100.6 million in 1992 and $90.5 million in
1991. Included in the 1992 and 1991 provision for claim losses were $32.4
million and $35.2 million from CMAC.
The title insurance operations reported pretax income of $60.0 million in 1993,
which included a $4.8 million gain on sales of investments, compared to pretax
income of $59.1 million in 1992, which included a gain of $9.0 million from the
sale of CMAC and a $3.1 million gain on sales of investments and pretax income
of $17.5 million in 1991, which included a loss of $6.5 million on sales of
investments.
INVESTMENT PORTFOLIO
At December 31, 1993, the Company's investment portfolio aggregated $3.62
billion (at cost), of which 12.6% was invested in equity securities. The
Company seeks to maintain a diversified and balanced fixed maturity portfolio
representing a broad spectrum of industries and types of securities. At
December 31, 1993, no one issuer comprised more than 2.5% of the fixed maturity
and short-term portfolio. Furthermore, the Company holds virtually no
investments in commercial real estate mortgages in its investment portfolio.
Purchases of fixed maturity securities are researched individually based on in-
depth analysis and objective predetermined investment criteria and the
portfolio is managed to achieve a proper balance of safety, liquidity and
investment yields.
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The Company invests primarily in investment grade securities (those rated "BBB"
or better by Standard & Poor's) and, to a lesser extent, non-investment grade
and non-rated securities. 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. At December 31, 1993, the carrying values of non-investment grade
securities and securities not rated by Standard & Poor's were $376.5 million
(11% of the fixed income portfolio) and $126.1 million (4% of the fixed income
portfolio), respectively. Substantially all of the Company's non-investment
grade securities are classified as "available for sale" and, accordingly, are
carried at quoted market value.
At December 31, 1993, approximately 29% of the Company's fixed maturity and
short-term 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
The Company's consulting and technical services operations provide services in
the information technology and energy and environmental fields. Revenues for
these operations were $116.8 million and $109.1 million in 1993 and 1992,
respectively. Operating expenses incurred by these operations were $111.5
million and $104.5 million in 1993 and 1992, respectively. Revenues and
expenses of these operations are included in other revenues and other expenses
in the accompanying statement of operations.
At December 31, 1993, the Company's real estate holdings had a carrying value
of $282.8 million, which includes 11 shopping centers with an aggregate
carrying value of $130.3 million, office buildings and other commercial
properties, with an aggregate carrying value of $91.9 million, and undeveloped
land with a carrying value of $60.6 million.
INCOME TAXES
Effective January 1, 1993, the Company adopted Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes" ("FAS 109"). The
cumulative effect of adopting FAS 109 was to increase net income by $24.3
million. See notes 1 and 6 to the consolidated financial statements.
EQUITY IN INVESTEE COMPANIES
Equity in investee companies includes equity income of $12.4 million, $5.2
million and $13.5 million in 1993, 1992 and 1991, respectively, from the
Company's investment in Zenith National Insurance Corp. Equity losses in
Telemundo Group, Inc. ("Telemundo") were $30.1 million in 1991. As a result of
the write-off of the Company's investment in Telemundo in 1991, the Company no
longer records its equity in the operating results of Telemundo.
32
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OTHER MATTERS
The National Association of Insurance Commissioners' has adopted a risk-based
capital requirement for the property and casualty insurance industry which
becomes effective in 1995 (based on 1994 financial results). 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 would be 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. Although the
regulations governing risk-based capital are not effective until 1995 (based on
1994 financial results), the Company has calculated that its capital exceeds
the risk-based capital that would be required if the formula was currently in
effect (based on 1993 financial results). However, because certain terms of the
regulation have yet to be defined, management cannot predict the ultimate
impact of risk-based capital requirements on the Company's capital requirements
or its competitive position.
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 insurers' ratings.
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MARKET AND DIVIDEND INFORMATION FOR COMMON STOCK
Reliance Group Holdings, Inc. owns 100% of the common stock of the Company.
Dividends on common stock, which are subject to agreements governing the
Company's senior reset notes, were $200.0 million in 1993 and $120.0 million in
1992.
33
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RELIANCE FINANCIAL SERVICES CORPORATION
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DIRECTORS
GEORGE R. BAKER (2) RICHARD E. SNYDER
Corporate Director/Advisor Chairman of the Board and
Chief Executive Officer
Paramount Publishing
GEORGE E. BELLO(3)
Executive Vice President
and Controller THOMAS J. STANTON, JR.(2)
Reliance Group Holdings, Inc. Chairman Emeritus
National Westminster Bank NJ
CARTER BURDEN
Chairman of the Board ROBERT M. STEINBERG(1)(3)
CRB Broadcasting Corp. President and Chief Operating Officer
Reliance Group Holdings, Inc.
DENNIS A. BUSTI
President and
Chief Executive Officer SAUL P. STEINBERG(1)(3)
Reliance National Insurance Company Chairman of the Board and
Chief Executive Officer
Reliance Group Holdings, Inc.
DEAN W. CASE
President and
Chief Operating Officer JAMES E. YACOBUCCI
Reliance Insurance Company Senior Vice President
Investments
LOWELL C. FREIBERG(3) Reliance Group Holdings, Inc.
Senior Vice President and
Chief Financial Officer (1) Executive Committee Member
Reliance Group Holdings, Inc. (2) Audit Committee Member
(3) Finance Committee Member
THOMAS P. GERRITY
Dean of the Wharton School
University of Pennsylvania
JEWELL JACKSON MCCABE
President
Jewell Jackson McCabe Associates
IRVING SCHNEIDER(2)
Executive Vice President
Helmsley-Spear, Inc.
BERNARD L. SCHWARTZ(1)
Chairman of the Board,
President and
Chief Executive Officer
Loral Corporation
34
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RELIANCE FINANCIAL SERVICES CORPORATION
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OFFICERS
Corporate
SAUL P. STEINBERG
Chairman of the Board and Chief Executive Officer
ROBERT M. STEINBERG
President and Chief Operating Officer
GEORGE E. BELLO
Executive Vice President and Controller
LOWELL C. FREIBERG
Senior Vice President and Chief Financial Officer
HENRY A. LAMBERT
Senior Vice President Real Estate Investments and Operations
DENNIS J. O'LEARY
Senior Vice President Taxes
FRED M. SCHRIEVER
Senior Vice President Consulting Operations
PHILIP S. SHERMAN
Senior Vice President Group Controller
BRUCE L. SOKOLOFF
Senior Vice President Administration
HOWARD E. STEINBERG
Senior Vice President General Counsel and Corporate Secretary
JAMES E. YACOBUCCI
Senior Vice President Investments
ALBERT A. BENCHIMOL
Vice President and Treasurer
THOMAS G. BUTLER
Vice President Taxes
ANDREW B. DONNELLAN, JR.
Vice President and Litigation Counsel
JOEL H. ROTHWAX
Vice President Human Resources
THOMAS J. SANDERS
Vice President and Assistant Controller
JEFFREY A. WELIKSON
Vice President Assistant General Counsel and Assistant Secretary
THOMAS L. WRIGHT
Vice President and Assistant Treasurer
PAUL W. ZELLER
Vice President Deputy General Counsel and Assistant Secretary
RONALD S. ZIEMBA
Vice President Communications
Officers of Operating Units
Reliance Insurance Group
ROBERT M. STEINBERG
Chairman and Chief Executive Officer
JEROME H. CARR
Senior Vice President and Chief Financial Officer
KENNETH R. FROHLICH
Senior Vice President and Chief Actuarial Officer
Property and Casualty Insurance
DENNIS A. BUSTI
President and Chief Executive Officer Reliance National Insurance Company
DEAN W. CASE
President and Chief Operating Officer Reliance Insurance Company
GEORGE T. HOLBROOK, JR.
President and Chief Executive Officer Reliance Surety Company
GEORGE H. ROBERTS
President Reliance Reinsurance Corp.
Title Insurance
HERBERT WENDER
Chairman and Chief Executive Officer Commonwealth Land Title Insurance Company
Reliance Consulting Group
FRED M. SCHRIEVER
Chairman and President RCG International, Inc.
35
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RELIANCE FINANCIAL SERVICES CORPORATION
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CORPORATE DATA
RELIANCE INSURANCE GROUP
PROPERTY AND CASUALTY INSURANCE
Reliance Insurance Company
Reliance National Insurance Company
Reliance Reinsurance Corp.
Reliance Surety Company
TITLE INSURANCE
Commonwealth Land Title Insurance Company
Transamerica Title Insurance Company
CONSULTING
RCG International, Inc.
CORPORATE OFFICES
Reliance Financial Services Corporation
A subsidiary of Reliance Group Holdings, Inc.
Park Avenue Plaza
55 East 52nd Street
New York, NY 10055
(212) 909-1100
FAX (212) 909-1864
INDEPENDENT ACCOUNTANTS
Deloitte & Touche
New York, NY
LISTED SECURITIES
Unless otherwise indicated, securities are listed on the New York Stock
Exchange
RELIANCE FINANCIAL SERVICES CORPORATION
9.27% Senior Reset Notes, due 2000
10.36% Senior Reset Notes, due 2000
RELIANCE INSURANCE COMPANY
$2.68 Series A Cumulative Preferred Stock
(Philadelphia Stock Exchange)
36
