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FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
---------
THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended March 31, 1994
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
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THE SECURITIES EXCHANGE ACT OF 1934
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 (I.R.S. Employer
of incorporation or organization) Identification No.)
Park Avenue Plaza
55 East 52nd Street
New York, New York 10055
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (212) 909-1100
The Registrant meets the requirements and conditions set forth in General
Instruction H(1)(a) and (b) of Form 10-Q 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
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As of May 2, 1994, 1,000 shares of common stock of Reliance Financial Services
Corporation were outstanding.
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RELIANCE FINANCIAL SERVICES CORPORATION AND SUBSIDIARIES
I N D E X
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<CAPTION>
Page
No.
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PART I. FINANCIAL INFORMATION:
Item 1. Financial Statements
Consolidated Statement of Income for the Quarters Ended
March 31, 1994 and 1993 (Unaudited).............................. 2
Consolidated Balance Sheet at March 31, 1994 (Unaudited) and
December 31, 1993................................................ 3
Consolidated Statement of Changes in Shareholder's Equity for the
Quarter Ended March 31, 1994 (Unaudited)......................... 4
Consolidated Condensed Statement of Cash Flows for the Quarters
Ended March 31, 1994 and 1993 (Unaudited)........................ 5
Notes to Consolidated Financial Statements (Unaudited)............. 6
Item 2. Management's Discussion and Analysis of the Consolidated
Statement of Income....................................... 8
PART II. OTHER INFORMATION, AS APPLICABLE............................ 13
SIGNATURES............................................................ 14
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RELIANCE FINANCIAL SERVICES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME (UNAUDITED)
<TABLE>
<CAPTION>
Quarter Ended March 31 1994 1993
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<S> <C> <C>
(In thousands)
Revenues:
Premiums earned............................................. $685,885 $550,028
Net investment income....................................... 62,650 65,334
Gain on sales of investments................................ 3,637 35,582
Interest income from parent company......................... 2,918 5,044
Other....................................................... 31,475 27,120
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786,565 683,108
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Claims and expenses:
Policy claims and settlement expenses....................... 368,574 297,856
Policy acquisition costs.................................... 103,173 81,404
Interest.................................................... 4,906 5,452
Other insurance expenses.................................... 255,631 214,118
Other....................................................... 31,395 27,434
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763,679 626,264
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Income before income taxes, minority interests
and equity in investee company............................. 22,886 56,844
Provision for income taxes.................................. (6,767) (20,464)
Minority interests.......................................... (742) (818)
Equity in investee company.................................. 2,285 1,500
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Income before cumulative effect of change in
accounting for income taxes................................ 17,662 37,062
Cumulative effect of change in accounting for income taxes.. - 24,335
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Net income.................................................. $ 17,662 $ 61,397
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</TABLE>
See notes to consolidated financial statements
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RELIANCE FINANCIAL SERVICES CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
March 31 December 31
ASSETS 1994 1993
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<S> <C> <C>
(Dollars in thousands, except per-share amounts)
Marketable securities:
Fixed maturities held for investment - at amortized cost
(quoted market $1,130,603 and $973,113).................. $1,167,246 $ 936,643
Fixed maturities available for sale - at quoted market
(cost $1,913,130 and $1,856,969)......................... 1,927,367 1,944,099
Equity securities - at quoted market (cost $422,617
and $458,217)............................................ 475,538 547,173
Short-term investments.................................... 183,315 372,507
Cash........................................................ 58,473 91,608
Premiums receivable......................................... 1,072,543 963,570
Other accounts and notes receivable......................... 129,455 124,911
Reinsurance recoverables.................................... 2,709,905 2,573,688
Federal and foreign income taxes, including deferred taxes.. 125,070 108,571
Notes receivable from parent company........................ 192,825 194,513
Investments in real estate - at cost, less accumulated
depreciation............................................... 284,609 282,836
Investment in investee company.............................. 161,079 157,016
Deferred policy acquisition costs........................... 183,373 178,129
Other assets................................................ 310,546 312,129
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$8,981,344 $8,787,393
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LIABILITIES AND SHAREHOLDER'S EQUITY
Unearned premiums........................................... $1,320,753 $1,276,331
Unpaid claims and related expenses.......................... 5,459,645 5,253,137
Accounts payable and accrued expenses....................... 569,264 616,499
Reinsurance ceded premiums payable.......................... 296,674 206,373
Debentures and notes........................................ 99,868 99,863
Term loans and short-term debt.............................. 98,959 125,373
Minority interests - redeemable preferred stock of a
subsidiary................................................. 26,877 26,877
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7,872,040 7,604,453
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Contingencies and commitments
Shareholder's equity:
Common stock, par value $.10 per share, 1,000 shares
authorized, issued and outstanding....................... - -
Additional paid-in capital................................ 677,151 677,510
Retained earnings......................................... 403,800 406,138
Net unrealized gain on investments........................ 44,911 115,023
Net unrealized loss on foreign currency transaction....... (16,558) (15,731)
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1,109,304 1,182,940
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$8,981,344 $8,787,393
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</TABLE>
See notes to consolidated financial statements
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RELIANCE FINANCIAL SERVICES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDER'S EQUITY (UNAUDITED)
<TABLE>
<CAPTION>
Net
Unrealized
Net Loss on
Additional Unrealized Foreign
Common Paid-In Retained Gain on Currency Shareholder's
Stock Capital Earnings Investments Translation Equity
------ ---------- -------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
(In thousands)
Balance, December 31, 1993............. $ - $677,510 $406,138 $115,023 $(15,731) $1,182,940
Transactions of investee
company .............................. (359) 2,229 1,870
Net income............................. 17,662 17,662
Dividends.............................. (20,000) (20,000)
Depreciation after deferred
income taxes.......................... (72,341) (72,341)
Foreign currency translation........... (827) (827)
----- -------- -------- --------- -------- ----------
Balance, March 31, 1994................ $ - $677,151 $403,800 $ 44,911 $(16,558) $1,109,304
===== ======== ======== ========= ======== ==========
</TABLE>
See notes to consolidated financial statements
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RELIANCE FINANCIAL SERVICES CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENT OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
Quarter Ended March 31 1994 1993
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<S> <C> <C>
(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES................. $ 85,674 $ (195)
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CASH FLOWS FROM INVESTING ACTIVITIES:
Sales of fixed maturities available for sale......... 58,028 37,587
Sales of fixed maturities held for investment........ 4,791 -
Redemptions of fixed maturities available for sale... 6,678 46,925
Redemptions of fixed maturities held for investment.. 8,643 25,833
Sales of equity securities........................... 117,344 259,138
Sales of short-term investments - net................ 193,366 210,830
Purchases of fixed maturities available for sale..... (141,732) (217,884)
Purchases of fixed maturities held for investment.... (229,619) (218,554)
Purchases of equity securities....................... (80,335) (95,680)
Other - net.......................................... (11,247) (11,240)
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(74,083) 36,955
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CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in notes receivable from parent company..... (18,312) (5,172)
Repayments of term loans............................. (27,983) -
Increase in short-term debt - net.................... 1,569 1,570
Dividends............................................ - (40,000)
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(44,726) (43,602)
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Decrease in cash..................................... (33,135) (6,842)
Cash, beginning of period............................ 91,608 58,947
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Cash, end of period.................................. $ 58,473 $ 52,105
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Supplemental disclosures of cash flow information:
Interest paid........................................ $ 1,620 $ 90
========= =========
</TABLE>
Supplemental disclosure of non-cash financing activity:
In 1994, non-cash dividends of $20,000,000 were recorded as a reduction
in notes receivable from parent company.
See notes to consolidated financial statements
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RELIANCE FINANCIAL SERVICES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
In the opinion of management, the accompanying unaudited consolidated
financial statements include all adjustments (consisting of normal recurring
accruals, except in 1994 for the effect of the adoption of Statement of
Financial Accounting Standards No. 112 as described in note 4 herein)
considered necessary to present fairly the financial position at March 31,
1994, and the results of operations changes in shareholder's equity and cash
flows for all periods presented. The results of operations for the interim
periods are not necessarily indicative of the results that may be expected for
any other interim period or for the entire year.
For a summary of significant accounting policies (which have not changed from
December 31, 1993, except as described in note 4 herein) and additional
financial information, see the Company's Annual Report on Form 10-K for the
year ended December 31, 1993.
2. EQUITY IN INVESTEE COMPANY
Equity income in Zenith National Insurance Corp. was $2.3 million for the
quarter ended March 31, 1994 compared to $1.5 million in the corresponding
1993 period.
Summarized financial information for Zenith National Insurance Corp. is as
follows:
<TABLE>
<CAPTION>
Quarter Ended March 31 1994 1993
- - ---------------------- -------- --------
(In thousands, except per-share amounts)
<S> <C> <C>
Revenues.................................. $138,252 $143,256
Net income................................ 8,200 12,600
Net income per share...................... 0.43 0.66
</TABLE>
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3. REINSURANCE
The reconciliation of property and casualty insurance direct premiums to net
premiums is as follows (in thousands):
<TABLE>
<CAPTION>
Quarter Ended March 31
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1994 1993
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Premiums Premiums Premiums Premiums
Written Earned Written Earned
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Direct......... $ 711,679 $ 678,463 $ 666,678 $ 628,397
Assumed........ 89,931 79,306 79,500 70,287
Ceded.......... (305,252) (297,115) (285,636) (335,177)
--------- --------- --------- ---------
Net Premiums... $ 496,358 $ 460,654 $ 460,542 $ 363,507
========= ========= ========= =========
</TABLE>
The reconciliation of property and casualty insurance gross policy claims and
settlement expenses to net policy claims and settlement expenses is as follows
(in thousands):
<TABLE>
<CAPTION>
Quarter Ended March 31
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1994 1993
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<S> <C> <C>
Gross...................................... $589,730 $480,267
Reinsurance recoveries..................... (241,350) (199,003)
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Net policy claims and settlement expenses.. $348,380 $281,264
======== ========
</TABLE>
4. ADOPTION OF NEW ACCOUNTING STANDARD
Effective January 1, 1994, the Company adopted Statement of Financial
Accounting Standards No. 112, "Employers' Accounting for Postemployment
Benefits". The adoption of this Statement had no material effect on the
Company's consolidated financial position or results of operations.
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RELIANCE FINANCIAL SERVICES CORPORATION AND SUBSIDIARIES MANAGEMENT'S
DISCUSSION AND ANALYSIS OF THE CONSOLIDATED STATEMENT OF INCOME
OVERVIEW
Net income was $17.7 million in the first quarter of 1994 compared to $61.4
million in the corresponding 1993 period, which included income of $24.3
million resulting from the adoption of Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes". The decline in net income
in 1994 also reflects substantially lower realized gains from sales of
investments.
PROPERTY AND CASUALTY INSURANCE OPERATIONS
Net premiums written and net premiums earned were $496.4 million and $460.7
million in the first three months of 1994 compared to $460.5 million and
$363.5 million in the corresponding prior-year period. Net premiums written
and net premiums earned in the first quarter of 1993 were reduced by $40.3
million and $85.9 million, respectively, for premiums ceded certain quota
share treaties which were not renewed.
Underwriting losses for the three-month period ended March 31, 1994, were
$44.4 million compared to $44.1 million in the corresponding 1993 period.
Underwriting losses in standard commercial lines and specialty commercial
lines were $43.0 million and $1.4 million respectively in the first quarter of
1994. In the corresponding 1993 period, standard commercial lines had an
underwriting loss of $50.9 and specialty commercial lines had an underwriting
profit of $6.8 million. Underwriting results for both standard commercial and
specialty commercial lines in 1994 reflect a higher level of costs resulting
from catastrophes. The cost of catastrophes in the first quarter of 1994 was
$28.7 million ($89.5 million before reinsurance), arising primarily from the
January 1994 California earthquake and severe winter storms in the eastern and
midwestern regions of the country. Catastrophe losses in the first quarter of
1993 were $17.5 million ($56.1 million before reinsurance). The effects of
higher catastrophe losses in 1994 were offset by improved loss experience in
standard commercial lines, as well as lower underwriting losses from
involuntary pools which declined to $5.8 million in the first three months of
1994 from $10.8 million in the corresponding 1993 period. The combined ratio
(calculated on a GAAP basis), after policyholders' dividends, was 109.1% in
the first quarter of 1994 compared to 112.2% in the corresponding 1993 period.
Excluding the effects of catastrophes, the combined ratio was 102.9% in the
first quarter of 1994 compared to 107.4% in the corresponding 1993 period.
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.
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Since then, there have been several administrative hearings on rate rollback
and several different regulations issued. In February 1993, a Los Angeles
Superior 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 is transferring or running off its
personal lines business and, as a result, has substantially withdrawn from
personal lines, the Company believes that these initiatives will not have a
material effect on its on-going business.
PROPERTY AND CASUALTY INSURANCE INVESTMENT RESULTS
Net investment income of the property and casualty insurance operations was
$56.0 million in the first quarter of 1994 compared to $59.5 million in the
corresponding 1993 period. The decline in net investment income resulted from
lower yields in the fixed maturity investment portfolio, the effects of which
were partially offset by growth in the size of the average fixed maturity
investment portfolio. The growth in the size of the average fixed maturity
investment portfolio reflects the reinvestment of proceeds from the sales of
equity securities.
Gains on sales of investments were $3.2 million in the first three months of
1994 compared to $34.3 million in the first three months of 1993. Gains on
sales of investments during the 1993 period primarily resulted from sales of
convertible preferred and common stocks.
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TITLE INSURANCE OPERATIONS
Premiums and fees increased in the first quarter of 1994 to $225.2 million
from $186.5 million in the corresponding 1993 period. The increase in
premiums and fees resulted from increased residential refinancing activity,
which began in March 1993, as well as increased new and existing home sales.
As a result of recent increases in mortgage interest rates, it is not expected
that the increase in residential refinancing activity will continue.
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 $110.0 million in
the first quarter of 1994 compared to $94.8 million in the first quarter of
1993. Agency commissions as a percentage of agency premiums declined in the
first quarter of 1994 when compared to the corresponding 1993 period,
principally reflecting a shift in premiums to those regions where agency
commissions are generally lower. 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 $93.6 million in the first three months
of 1994 from $76.1 million in the corresponding 1993 period, reflecting
greater activity in the title insurance operations. The expense ratio of the
title insurance operations (which includes agency commissions) declined to
89.8% in the first quarter of 1994 from 91.5% in the first quarter of 1993.
This decline results principally from the lower percentage of agency
commissions to agency premiums. The provision for claim losses increased to
$20.2 million in the first quarter of 1994 from $16.6 million in the first
quarter of 1993 reflecting premium growth.
INVESTMENT PORTFOLIO
At March 31, 1994, the Company's investment portfolio aggregated $3.69 billion
(at cost), of which 11% 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 March 31, 1994, no
one issuer comprised more than 2.5% of the fixed maturity and short-term
investment 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.
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 March 31,
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1994, the carrying values of non-investment grade securities and securities
not rated by Standard & Poor's were $448.5 million (13% of the fixed income
portfolio) and $126.2 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.
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 $31.5 million in the first three months of 1994 compared
to $27.1 million in the corresponding 1993 period. Operating expenses
incurred by these operations were $30.7 million in the first three months of
1994 compared to $26.3 million in the corresponding 1993 period. Revenues and
expenses of these operations are included in other revenues and other
expenses in the accompanying statement of income.
At March 31, 1994, the Company's real estate holdings had a carrying value of
$284.6 million, which includes 11 shopping centers with an aggregate carrying
value of $132.3 million, office buildings and other commercial properties,
with an aggregate carrying value of $91.6 million, and undeveloped land with a
carrying value of $60.7 million.
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). Management cannot predict the ultimate impact of risk-based capital
requirements on the Company's competitive position and its resulting capital
requirement.
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
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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.
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RELIANCE FINANCIAL SERVICES CORPORATION AND SUBSIDIARIES
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
--------------------------------
(a) Exhibits.
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None
(b) Reports on Form 8-K.
-------------------
No reports on Form 8-K were filed during the quarter
ended March 31, 1994.
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SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
RELIANCE FINANCIAL SERVICES CORPORATION
---------------------------------------
(Registrant)
Date May 13, 1994 /s/ George E. Bello
------------ ---------------------------------------
George E. Bello
Executive Vice President and Controller
(Chief Accounting Officer)
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