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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, 1994
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)
<TABLE>
<S> <C>
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)
</TABLE>
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (212) 909-1100
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
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<S> <C>
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
------------------- --------------------
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, 1995, 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 1994 Annual
Report--Parts I, II and IV.
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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 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. Established in 1987, Reliance National offers, through national
and regional brokers, a broad range of commercial property and casualty
insurance products and services for large companies and specialty line
customers. Reliance National selects market segments where it can provide
specialized coverages and services, and it conducts business nationwide and in
certain international markets. In 1994, Reliance National accounted for 50% of
the net premiums written by the Reliance Property and Casualty Companies.
Reliance Insurance offers commercial property and casualty insurance coverages
for mid-sized companies throughout the United States. Reliance Insurance also
offers traditional and specialized coverages for more complex risks as well as
insurance programs for groups with common insurance needs. 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
$1,777.3 million (67%) of the Reliance Insurance Group's 1994 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 is the third largest title insurance operation
in the United States, in terms of 1993 total premiums and fees.
Commonwealth/Transamerica Title accounted for $856.8 million (33%) of the
Reliance Insurance Group's 1994 net premiums earned.
Business segment information for the years ended December 31, 1994, 1993
and 1992 is set forth in Note 18 to the Company's consolidated financial
statements (the 'Consolidated Financial Statements'), which segment information
is included in the Company's 1994 Annual Report and 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 8 to the Company's consolidated financial statements. The Company is a
wholly-owned subsidiary of Reliance Group Holdings, Inc. ('Reliance Group
Holdings'). Approximately 47% 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.
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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, 1994, 1993 and 1992.
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<CAPTION>
1994 1993 1992
-------------------------------------------- -------------------------------------------- --------
RELIANCE RELIANCE
RELIANCE RELIANCE REINSURANCE/ RELIANCE RELIANCE REINSURANCE/ RELIANCE
NATIONAL INSURANCE SURETY TOTAL NATIONAL INSURANCE SURETY TOTAL NATIONAL
-------- --------- ------------ ------ -------- --------- ------------ ------ --------
(IN MILLIONS, EXCEPT PERCENTAGES)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
General Liability........ $347 $ 76 $ -- $ 423 $288 $ 82 $ -- $ 370 $291
Workers' Compensation.... 179 134 -- 313 232 146 -- 378 251
Automobile............... 109 135 -- 244 119 141 -- 260 151
Multiple Peril........... 32 148 -- 180 33 154 -- 187 12
Reinsurance.............. -- -- 125 125 -- -- 124 124 --
Surety................... -- -- 118 118 -- -- 107 107 --
Involuntary.............. 82 32 -- 114 87 27 -- 114 82
Ocean and Inland
Marine................. 44 60 -- 104 54 51 -- 105 10
Accident and Health...... 52 -- -- 52 36 -- -- 36 8
Other.................... 45 46 -- 91 23 67 -- 90 24
-------- --------- ----- ------ -------- --------- ----- ------ --------
Total................ $890 $ 631 $243 $1,764 $872 $ 668 $231 $1,771 $829
-------- --------- ----- ------ -------- --------- ----- ------ --------
-------- --------- ----- ------ -------- --------- ----- ------ --------
Percent of Total......... 50% 36% 14% 100% 49% 38% 13% 100% 54%
-------- --------- ----- ------ -------- --------- ----- ------ --------
-------- --------- ----- ------ -------- --------- ----- ------ --------
<CAPTION>
RELIANCE
RELIANCE REINSURANCE/
INSURANCE SURETY TOTAL
--------- ------------ ------
<S> <C> <C> <C>
General Liability........ $ 59 $ -- $ 350
Workers' Compensation.... 168 -- 419
Automobile............... 111 -- 262
Multiple Peril........... 114 -- 126
Reinsurance.............. -- 108 108
Surety................... -- 94 94
Involuntary.............. 28 -- 110
Ocean and Inland
Marine................. 39 -- 49
Accident and Health...... -- -- 8
Other.................... (8) -- 16
--------- ----- ------
Total................ $ 511 $202 $1,542
--------- ----- ------
--------- ----- ------
Percent of Total......... 33% 13% 100%
--------- ----- ------
--------- ----- ------
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The following table sets forth underwriting results for the Reliance
Property and Casualty Companies for the years ended December 31, 1994, 1993 and
1992.
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<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
1994 1993 1992
-------- -------- --------
(IN MILLIONS, EXCEPT RATIOS)
<S> <C> <C> <C>
Net premiums written....................................... $1,764.3 $1,770.6 $1,541.6
Underwriting loss(1)....................................... (97.3) (175.6) (219.3)
Combined ratio............................................. 104.4% 110.8% 114.1%
</TABLE>
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(1) Includes catastrophe losses (net of reinsurance) for the years ended
December 31, 1994, 1993 and 1992 of $50.1 million, $39.3 million
and $61.1 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>
1994.................... $1,773,196 $833,643 $3,033,020 $5,296,931 $ 4,388,393 $908,538 $ 1,076,840
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
</TABLE>
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* Includes Reliance Insurance Company's investment in title insurance operations
of $180.8 million at December 31, 1994.
The Reliance Property and Casualty Companies write insurance in every state
of the United States, the District of Columbia, Puerto Rico, Guam and The Virgin
Islands. The Reliance Property and Casualty Companies also write insurance in
the European Community through offices in the United Kingdom, the Netherlands
and Spain, and in the Americas through offices in Canada, Mexico and Argentina.
In 1994, California, New York, Texas, Pennsylvania and Florida accounted for
approximately 18%, 9%, 7%, 6% 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, program 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 32nd among property and
casualty insurance companies and groups in terms of net premiums written during
1993, 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
demonstrated 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.
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Reliance National. Established in 1987, Reliance National offers a broad
range of commercial insurance products and services to selected segments of the
property and casualty market which do not lend themselves to traditional
insurance products and services. Reliance National selects market segments where
it can provide specialized coverages and services. In 1994, Reliance National
accounted for 50% 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 regional offices in seven states.
Reliance National also conducts business in the European Community through
offices located in the United Kingdom, the Netherlands and Spain and in the
Americas through offices in Canada, Mexico and Argentina. In 1994, Reliance
National completed its acquisition of a Mexican insurance company and purchased
an Argentinean insurance company. Reliance National distributes its products
primarily through national insurance brokers. Reliance National maintains an
underwriting staff in the United States, the United Kingdom, Canada and Mexico,
an actuarial staff in the United States 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 $889.7 million, $872.2
million and $828.6 million for the years ended December 31, 1994, 1993 and 1992,
respectively.
Reliance National is organized into eight major 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 major divisions are:
o 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, alternative risk funding and fronting arrangements all help
clients to reduce costs and/or manage cash flow more efficiently. It
provides workers' compensation, commercial automobile, general liability
and pollution coverages. In 1994, this division had net premiums written
of $290.8 million.
o Special Operations provides coverages for construction, transportation
and ocean marine risks and offers non-standard personal automobile
insurance for drivers unable to obtain insurance in the standard market.
In 1994, this division had net premiums written of $181.4 million.
o 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 provides
employment practices liability insurance and develops and provides
insurance products to certain markets requiring specialized underwriting,
such as the entertainment industry market. In 1994, this division had net
premiums written of $121.6 million.
o International writes predominantly commercial property and casualty
insurance products, including specialized coverages such as excess
casualty, directors and officers liability, and fidelity insurance, in
the European Community, Canada, Mexico and Argentina. It also provides
certain risk management services for foreign subsidiaries of United
States multinational corporations. In 1994, this division had net
premiums written of $86.4 million.
o Financial Products provides directors and officers liability insurance
and, for financial institutions, errors and omissions insurance. In 1994,
this division had net premiums written of $70.7 million.
o Financial Specialty Coverages provides aviation and space satellite risk
coverages on an assumed and direct basis, and also underwrites complex
non-traditional insurance and reinsurance products, including finite risk
transactions. In 1994, this division had net written premiums of $53.9
million.
o Accident and Health provides high limit disability, group accident,
blanket special risk and medical excess of loss programs. In 1994, this
division had net premiums written of $48.1 million.
o Property provides commercial property coverage focusing on excess and
specialty commercial property. In 1994, this division had net premiums
written of $23.0 million.
Reliance National attempts to limit its exposure to losses through the use
of certain methods such as claims-made policies, retrospectively rated policies,
high deductible policies and reinsurance. Approximately 23% of Reliance
National's net premiums written during 1994 were written on a 'claims-made'
basis which provides
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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.
Approximately 13% of Reliance National's net premiums written during 1994
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. Approximately 6% of Reliance National's net premiums written during
1994 were written on a high deductible basis, whereby the insured pays for all
of its losses up to the deductible amount. The use of high deductible policies
results in lower premiums and losses for Reliance National as loss payments made
by an insured under a high deductible policy are not considered premium or
losses to an insurer. With retrospectively rated and high deductible policies
Reliance National provides insurance and loss control management services, while
reducing its underwriting risk. Reliance National assumes a credit risk in
connection with retrospectively rated and high deductible policies and,
therefore, accounts with such policies undergo extensive credit analysis by a
centralized credit department. Collateral in the form of bank letters of credit,
trust accounts or cash collateral is generally provided by the insured to cover
a significant portion of Reliance National's credit exposure.
To further limit exposures, approximately 91% of Reliance National's net
premiums written during 1994 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 on each line
of business it writes. Its largest single exposure, net of reinsurance, at
December 31, 1994, was $2.3 million per occurrence.
Reliance Insurance. Reliance Insurance offers commercial lines property
and casualty insurance products, primarily focusing on the diverse needs of
mid-sized companies nationwide. Reliance Insurance distributes its products
through approximately 2,800 independent agents, program agents and 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, commercial automobile and workers' compensation
(the majority of which is written on a loss sensitive or retrospectively rated
basis). Reliance Insurance is headquartered in Philadelphia and operates in 50
states and the District of Columbia. Net written premiums by Reliance Insurance
were $631.0 million (including $20.7 million of personal lines premiums), $668.2
million (including $45.4 million of personal lines premiums) and $510.8 million
(including $8.8 million of personal lines premiums) for the years ended
December 31, 1994, 1993 and 1992, respectively.
Reliance Insurance is organized into the Commercial Insurance Division,
comprised of the Standard Commercial department and the Large Accounts
department, and the Custom Underwriting Facility, comprised of the Special Risk
department and the Program department. The Commercial Insurance Division
provides its products and services through a decentralized network of regional
and branch offices. This organization allows it to place major responsibility
and accountability for underwriting, sales, claims, and customer service close
to the insured. The Custom Underwriting Facility's Special Risk department has
three regional offices and the Program department has one central office.
The Commercial Insurance Division's Standard Commercial department focuses
on accounts with annual premiums of up to $1 million. This department offers a
broad range of traditional commercial coverages, primarily written on a
guaranteed cost basis. The Standard Commercial department had net written
premiums of $312.8 million in 1994. The Commercial Insurance Division's Large
Accounts department focuses on casualty exposures of accounts with annual
premiums in excess of $1 million, where it is able to offer more flexible
coverages through the use of retrospectively rated and high deductible policies.
The Large Accounts department primarily provides workers' compensation insurance
and approximately 85% of its business was written on a loss sensitive basis.
Accounts with retrospectively rated and high deductible policies undergo
extensive credit analysis by a centralized credit department and collateral is
generally provided by the insured to cover a significant portion of Reliance
Insurance's credit exposure. The Large Accounts department wrote $115.7 million
of net premiums in 1994.
The Custom Underwriting Facility's Special Risk department provides
underwriting of excess and surplus coverages (generally with lower net
retentions than for other commercial lines written by Reliance Insurance) for
risks with unique exposures. The Special Risk department had net written
premiums of $109.5 million in 1994. The Custom Underwriting Facility's Program
department provides property and liability insurance programs,
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targeting homogeneous groups of insureds with particular insurance needs, such
as auto rental companies, day care centers and municipalities. 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. The Program department had net written premiums
of $73.4 million in 1994.
Reliance Insurance has substantially withdrawn from personal lines, where
it has had unfavorable experience and does not perceive a potential for
long-term profitability. The Reliance Property and Casualty Companies derived
1.2% of their net premiums written from personal lines in 1994, compared with
2.6% in 1993.
Reliance Reinsurance. Reliance Reinsurance provides property reinsurance
on a treaty basis and casualty reinsurance on 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. 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. Net written premiums
by Reliance Reinsurance were $125.6 million, $123.6 million and $107.9 million
for the years ended December 31, 1994, 1993 and 1992, respectively.
Reliance Surety. Reliance Surety is a leading writer of surety bonds and
fidelity bonds in the United States. Reliance Surety concentrates on writing
performance and payment bonds for contractors of public works projects,
commercial real estate and multi-family housing. It also writes financial
institution and commercial fidelity bonds. 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. 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 43 branch offices and approximately 3,200
independent agents and brokers. Net written premiums by Reliance Surety were
$118.0 million, $106.7 million and $94.3 million for the years 1994, 1993 and
1992, respectively.
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.
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.
Title Insurance. Through Commonwealth/Transamerica Title, the Company
writes title insurance for residential and commercial real estate nationwide and
provides escrow and settlement services in connection with real estate closings.
The National Title Services division of Commonwealth/Transamerica Title provides
title services for large and multi-state commercial transactions. Through the
Commonwealth OneStop(Trademark) program, Commonwealth/Transamerica Title
provides national lenders with a full range of residential closing services,
including title insurance through its National Residential Title Services
division, appraisal management through its CLT Appraisal Services, Inc.
subsidiary, and other real estate related services. Commonwealth/Transamerica
Title is the third largest title insurance operation in the United States, based
on 1993 total premiums and fees. Commonwealth/Transamerica Title had premiums
and fees (excluding Commonwealth Mortgage Assurance
6
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Corporation, its mortgage insurance subsidiary which was sold in the fourth
quarter of 1992) of $856.8 million, $893.4 million and $770.5 million for the
years 1994, 1993 and 1992, respectively.
Commonwealth/Transamerica Title is organized into six regions with more
than 325 offices covering all 50 states, as well as Puerto Rico and the Virgin
Islands. In 1994, Texas, California, Florida, Pennsylvania, New York, Washington
and Michigan accounted for approximately 11%, 10%, 10%, 8%, 7%, 6% and 6%,
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.
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
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, which provides
computer-related professional services to large corporate clients, and
energy/environmental services. RCG and its subsidiaries had revenues of $141.6
million, $116.8 million and $109.1 million for 1994, 1993 and 1992,
respectively.
SALE OF NON-CORE OPERATIONS
The Company has realigned its operations to emphasize commercial property
and casualty insurance, particularly specialized insurance products and complex
risks of larger accounts, and title insurance. In July 1993, the Company
completed the sale of its life insurance subsidiary, United Pacific Life
Insurance Company ('UPL'). 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'). 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'). For a further
description of the above referenced transactions, see Notes 13 and 16 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, and market terms,
conditions and capacity, and may change over time. Reliance National and
Reliance Insurance 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 National and Reliance Insurance purchase
additional facultative reinsurance to further reduce their retentions below the
treaty levels.
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During 1994, the highest net retention per occurrence for casualty risk was
$2.2 million for Reliance National and $3.0 million for Reliance Insurance. In
addition, both Reliance National and Reliance Insurance purchase 'casualty
clash' coverage to provide protection in the event of losses incurred by
multiple coverages on one occurrence.
During 1994, the highest net retention per occurrence for property risk was
$2.3 million for Reliance National and $3.2 million for Reliance Insurance. In
addition, during 1994, Reliance National and Reliance Insurance together had
reinsurance for 95% of net retained property catastrophe losses in excess of $15
million and up to $107 million. Thus, for all net retained losses attributable
to a single catastrophe of $107 million, Reliance National and Reliance
Insurance together retained a maximum exposure of $19.6 million. Any net
retained loss from a single catastrophe beyond $107 million is not reinsured and
is retained by Reliance National and Reliance Insurance 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 of net
retained losses per occurrence is sufficient to cover its probable maximum loss
in the event of a catastrophe.
Catastrophe losses, including losses incurred by Reliance Reinsurance on
insurance assumed, were $50.1 million in 1994 ($134.0 million before insurance
ceded), which included $44.9 million ($127.0 million before insurance ceded)
arising from the January 1994 California earthquake, compared to $39.3 million
in 1993 ($88.5 million before insurance ceded). Catastrophe losses, including
losses incurred by Reliance Reinsurance on insurance assumed, were $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.
A catastrophic event can cause losses in lines of insurance other than
property. Both Reliance National and Reliance Insurance purchase workers'
compensation reinsurance coverage up to $200 million to provide protection
against losses under workers' compensation policies which might be caused by
catastrophes. Such workers' compensation reinsurance applies after retentions by
Reliance National of up to $500,000 and Reliance Insurance of up to $1 million.
For Reliance Insurance, any such losses over $200 million would be covered by
the property catastrophe treaty to the extent of available capacity. For
Reliance National, any such losses over $200 million and up to $255 million
would be covered by Reliance National's casualty clash coverage.
Reliance National and Reliance Insurance 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 93% of aggregate catastrophe losses between $12.5 million and $31.0
million, after applying a deductible of $3.8 million per catastrophe.
Reliance Surety retains 100% of surety bond limits up to $2 million. For
surety bonds in excess of $2 million, up to $40 million, Reliance Surety obtains
50% quota share reinsurance. For surety bonds between $40 million and $50
million, Reliance Surety obtains 60% quota share reinsurance. In addition,
Reliance Surety has excess of loss protection, with a net retention of up to
$4.3 million, for losses up to $30 million on any one principal insured. For
fidelity business, Reliance Surety retains 100% of each loss up to $1.5 million.
Reliance Surety has obtained reinsurance above that retention up to a maximum of
$8.5 million on each loss.
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 $5.0 million in excess of a $2.5 million per occurrence retention, with a
contractual provision for a reinstatement. In 1994, Reliance Reinsurance also
wrote a specific catastrophe book of business with an aggregate limit of $17.7
million for any one event, not subject to the above protection. In 1994, losses
and expenses of $12.5 million incurred under this specific catastrophe program
were offset by premiums of $11.0 million. As of December 31, 1994, Reliance
Reinsurance no longer writes a specific catastrophe book of business.
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
8
<PAGE>
for 80% of losses between $20 million and $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 $5 million.
Premiums ceded by the Reliance Insurance Group to reinsurers were $1.2
billion and $1.1 billion in 1994 and 1993, 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, 1994, the Reliance Insurance Group had
reinsurance recoverables of $2.9 billion, representing estimated amounts
recoverable from reinsurers pertaining to paid claims, unpaid claims, claims
incurred but not reported and unearned premiums. 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 or a credit department to approve in advance the reinsurers which meet
its standards of financial strength and are acceptable for use by Reliance
Insurance Group. The Reliance Insurance Group holds substantial amounts of
collateral, consisting of letters of credit, trust accounts and cash collateral,
to secure recoverables from unauthorized reinsurers. The Company had $8.2
million reserved for potentially unrecoverable reinsurance at December 31, 1994.
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 1994, the Reliance Property and Casualty Companies did not cede more
than 5.1% of direct premiums to any one reinsurer and no one reinsurer accounted
for more than 10.9% of total ceded premiums. The Reliance Insurance Group's ten
largest reinsurers, based on 1994 ceded premiums, are as follows:
<TABLE>
<CAPTION>
1994
CEDED BEST
PREMIUM RATING
------------- ------
(IN MILLIONS)
<S> <C> <C>
American Re-Insurance Company............................................. $ 132.8 A+
North American Reinsurance Corp........................................... 98.8 A
Lloyd's of London......................................................... 93.5 (1)
Hertz International Reinsurance Ltd....................................... 67.3 (2)
Commercial Risk Re-Insurance Co........................................... 45.8 (3)
GIO Insurance Ltd......................................................... 35.9 (4)
TRN Insurance Company..................................................... 34.7 (2)
Employers Reinsurance Corp................................................ 34.5 A++
TIG Reinsurance Company................................................... 29.6 A
Transatlantic Reinsurance Company......................................... 26.7 A+
</TABLE>
------------------
(1) Individual Lloyd's of London syndicates are not rated by Best.
(2) An unrated captive reinsurer that is not affiliated with the Company.
Recoverables from such reinsurer are fully collateralized.
(3) Assigned a Best's Rating of NA-3 (Insufficient Operating Experience) as the
reinsurer has not accumulated five years of representative operating
experience.
(4) Reinsurer is not rated by Best. The S&P Rating for such reinsurer is A.
The Reliance Insurance Group maintains no 'Funded Cover' reinsurance
agreements. 'Funded Cover' reinsurance agreements are multi-year retrospectively
rated reinsurance agreements which may 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, 1995, the Reliance Insurance Group maintains a staff of 101
actuaries, of whom 17 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
9
<PAGE>
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 for the years ended December 31, 1994, 1993 and
1992.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------
1994 1993 1992
---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
Liability for unpaid claims and related expenses (loss reserves),
beginning of year..................................................... $5,048,442 $4,571,792 $3,685,049
Less reinsurance recoverables......................................... 2,116,914 1,868,800 1,309,814
---------- ---------- ----------
Net liability for unpaid claims and related expenses (loss reserves),
beginning of year..................................................... 2,931,528 2,702,992 2,375,235
---------- ---------- ----------
Provision for policy claims and related expenses:
Provision for insured events of the current year...................... 1,274,649 1,195,425 1,258,111
Increase in provision for insured events of prior years............... 22,444 40,169 31,487
---------- ---------- ----------
Total provision.................................................... 1,297,093 1,235,594 1,289,598
---------- ---------- ----------
Payments for policy claims and related expenses:
Attributable to insured events of the current year.................... 321,538 229,778 271,878
Attributable to insured events of prior years......................... 780,961 776,881 689,181
---------- ---------- ----------
Total payments..................................................... 1,102,499 1,006,659 961,059
---------- ---------- ----------
Foreign currency translation............................................ 1,659 (399) (782)
---------- ---------- ----------
Net liability for unpaid claims and related expenses (loss reserves),
end of year........................................................... 3,127,781 2,931,528 2,702,992
Plus reinsurance recoverables......................................... 2,453,702 2,116,914 1,868,800
---------- ---------- ----------
Liability for unpaid claims and related expenses (loss reserves), end of
year*................................................................. $5,581,483 $5,048,442 $4,571,792
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
------------------
* Loss reserves exclude the loss reserves of title operations of $228.1 million,
$204.7 million and $173.3 million at December 31, 1994, 1993 and 1992,
respectively.
Policy claims and settlement expenses includes a provision for insured
events of prior years of $22.4 million, $40.2 million and $31.5 million for the
years 1994, 1993 and 1992, respectively. The 1994 provision includes $17.0
million of adverse development related to prior year asbestos-related and
environmental pollution claims. Development in asbestos-related and
environmental pollution claims primarily affects general liability and multiple
peril lines of business. The 1994 provision also includes $14.7 million of
adverse development from other general liability lines. This development was
partially offset by $13.3 million of favorable development in workers'
compensation. 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 other 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.
10
<PAGE>
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, 1994. A redundancy or deficiency indicates the cumulative
percentage change, as of December 31, 1994, 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 Company of Wisconsin,
a former wholly-owned subsidiary, and its subsidiaries ('General Casualty') at
April 30, 1990 (the date of sale of General Casualty), relating to 1984 to 1989,
were deducted from the original 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 1984 through 1993, 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,
----------------------------------------------------------------------------------------------------------
1994 1993 1992 1991 1990 1989 1988 1987 1986
---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
(IN THOUSANDS, EXCEPT PERCENTAGES)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net liability for
unpaid claims and
related expenses
(loss
reserves)(1)........ $3,127,781 $2,931,528 $2,702,992 $2,375,235 $1,893,421 $1,962,822 $1,644,057 $1,494,227 $1,425,942
Net liability
reestimated as of:
One year later...... -- 100.8% 101.5% 101.3% 114.4% 104.8% 104.8% 107.8% 106.6%
Two years later..... -- -- 103.1% 104.4% 115.2% 117.0% 113.5% 112.0% 115.6%
Three years later... -- -- -- 105.7% 119.6% 118.2% 121.8% 118.5% 121.6%
Four years later.... -- -- -- -- 120.7% 120.9% 123.2% 125.0% 127.2%
Five years later.... -- -- -- -- -- 122.2% 127.8% 126.7% 132.3%
Six years later..... -- -- -- -- -- -- 128.7% 131.8% 135.1%
Seven years later... -- -- -- -- -- -- -- 133.1% 140.0%
Eight years later... -- -- -- -- -- -- -- -- 141.4%
Nine years later.... -- -- -- -- -- -- -- -- --
Ten years later..... -- -- -- -- -- -- -- -- --
Redundancy
(Deficiency)........ -- (0.8%) (3.1%) (5.7%) (20.7%) (22.2%) (28.7%) (33.1%) (41.4%)
---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Paid (cumulative) as
of:
One year later...... -- 26.6% 28.7% 29.0% 36.6% 40.7% 41.6% 38.6% 42.0%
Two years later..... -- -- 48.0% 48.6% 57.9% 65.4% 71.6% 65.8% 68.4%
Three years later... -- -- -- 62.1% 72.8% 82.2% 86.4% 88.2% 88.1%
Four years later.... -- -- -- -- 83.0% 91.3% 97.2% 99.5% 103.9%
Five years later.... -- -- -- -- -- 97.8% 103.0% 106.2% 112.1%
Six years later..... -- -- -- -- -- -- 107.3% 110.7% 117.1%
Seven years later... -- -- -- -- -- -- -- 113.9% 120.8%
Eight years later... -- -- -- -- -- -- -- -- 123.7%
Nine years later.... -- -- -- -- -- -- -- -- --
Ten years later..... -- -- -- -- -- -- -- -- --
<CAPTION>
1985 1984
---------- ----------
<S> <C> <C>
Net liability for
unpaid claims and
related expenses
(loss
reserves)(1)........ $1,248,713 $1,162,200
Net liability
reestimated as of:
One year later...... 122.1% 109.3%
Two years later..... 134.5% 126.3%
Three years later... 142.5% 135.7%
Four years later.... 150.4% 142.3%
Five years later.... 155.1% 149.2%
Six years later..... 161.2% 152.4%
Seven years later... 163.5% 157.8%
Eight years later... 168.5% 159.6%
Nine years later.... 169.3% 165.1%
Ten years later..... -- 165.7%
Redundancy
(Deficiency)........ (69.3%) (65.7%)
---------- ----------
Paid (cumulative) as
of:
One year later...... 48.1% 47.2%
Two years later..... 79.1% 76.2%
Three years later... 98.9% 98.5%
Four years later.... 114.4% 111.0%
Five years later.... 127.3% 121.2%
Six years later..... 134.9% 130.1%
Seven years later... 138.5% 135.8%
Eight years later... 141.9% 138.6%
Nine years later.... 144.1% 142.2%
Ten years later..... -- 144.2%
</TABLE>
------------------
(1) The gross liability for unpaid claims and related expenses was $5.6 billion
at December 31, 1994. The gross liability for unpaid claims and related
expenses for years 1993 and prior was redundant by $144.4 million at
December 31, 1994.
11
<PAGE>
The difference between the property and casualty liability for loss
reserves at December 31, 1994 and 1993 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,
------------------------
1994 1993
---------- ----------
(IN THOUSANDS)
<S> <C> <C>
Net Liability reported under statutory accounting practices........................... $3,033,016 $2,846,073
Adjustment for GAAP basis accrual of estimated salvage and subrogation recoveries..... (9,858) (9,360)
Additional discount of workers' compensation reserves................................. 104,145 95,996
Foreign currency translation.......................................................... 478 (1,181)
---------- ----------
Net Liability reported................................................................ $3,127,781 $2,931,528
---------- ----------
---------- ----------
</TABLE>
The difference between the property and casualty liability for loss
reserves at December 31, 1994 and 1993 reported in the Company's consolidated
financial statements and the liability which would be reported in accordance
with statutory accounting practices is as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1994 1993
---------- ----------
(IN THOUSANDS)
<S> <C> <C>
Liability reported under statutory accounting practices............................... $5,395,846 $4,878,016
Adjustment for GAAP basis accrual of estimated salvage and subrogation recoveries..... (11,984) (11,484)
Additional discount of workers' compensation reserves................................. 198,808 186,556
Foreign currency translation.......................................................... (1,187) (4,646)
---------- ----------
Liability reported.................................................................... $5,581,483 $5,048,442
---------- ----------
---------- ----------
</TABLE>
Property and casualty loss reserves are based on an evaluation of reported
claims, in addition to statistical projections of claims incurred but not
reported and loss adjustment expenses. Estimates of salvage and subrogation are
deducted from the liability for unpaid claims. Also considered are other factors
such as the promptness with which claims are reported, the history of the
ultimate liability for such claims compared with initial and intermediate
estimates, the type of insurance coverage involved, the experience of the
property and casualty industry and other economic indicators, when applicable.
The establishment of loss reserves requires an estimate of the ultimate
liability based primarily on past experience. The Reliance 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
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 1994, the Reliance
Property and Casualty Companies used an independent actuarial firm to meet such
requirements. However, given the complexity of this process, reserves 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.
12
<PAGE>
Since 1989, the Reliance Property and Casualty Companies have increased their
premium writings in long tail lines of business. Estimation of loss reserves for
these lines of business is more difficult than for short tail 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 long tail 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 seek 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 3.5% 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. The discounting of all claims (net of
reinsurance recoverables) resulted in a decrease in the liability for loss
reserves of $245.7 million, $284.7 million and $289.5 million at December 31,
1994, 1993 and 1992, respectively. The discount in 1994 was reduced by $27.3
million plus discount amortization of $11.7 million, resulting in a reduction in
pre-tax income of $39.0 million. The discount in 1993 was increased by $7.9
million, which was more than offset by discount amortization resulting in a
decrease in pre-tax income of $4.8 million. The discount in 1992 was increased
by $54.1 million which was partially offset by discount amortization, resulting
in an increase in pre-tax income of $45.7 million.
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, 1994 are $182.2
million ($130.1 million net of reinsurance recoverables) of loss reserves
pertaining to asbestos-related and environmental pollution claims. The following
table presents information relating to the liability for unpaid claims and
related expenses pertaining to asbestos-related and environmental pollution
claims (such information is for the years 1994 and 1993 only as certain 1992
information is not available):
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1994 1993
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Net liability for unpaid claims and related expenses, beginning of year................... $122,034 $ 94,253
Provision for policy claims and related expenses.......................................... 28,279 52,630
Payments for policy claims and related expenses........................................... (20,170) (24,849)
-------- --------
Net liability for unpaid claims and related expenses, end of year......................... $130,143 $122,034
-------- --------
-------- --------
</TABLE>
Included in the December 31, 1994 net liability for unpaid claims and
related expenses for asbestos-related and environmental pollution claims are
$36.5 million of loss costs for claims incurred but not reported, $49.4 million
of loss costs for reported claims and $44.2 million of related expenses. The
Company continues to receive claims asserting injuries from hazardous materials
and alleged damages to cover various clean-up costs. Asbestos-related and
environmental pollution claims primarily result from the Company's general
liability and multiple peril lines of business. Loss and loss expense reserves
for asbestos-related and environmental pollution claims are established using
standard actuarial techniques as well as management's judgment. Coverage and
claim settlement issues, related to policies written in prior years, such as the
determination that coverage exists and the definition of an occurrence, may
cause the actual loss development for asbestos-related and environmental
pollution claims to exhibit more variation than the remainder of the Company's
book of business.
13
<PAGE>
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 relating to these claims were $20.2 million (including $7.9
million of related expenses), $24.8 million (including $8.1 million of related
expenses) and $16.1 million (including $6.2 million of related expenses) for the
years ended December 31, 1994, 1993 and 1992, respectively. Related expenses
consist primarily of legal costs. Total payments for all property and casualty
insurance policy claims and related expenses were $1.1 billion, $1.0 billion and
$961.1 million for the years ended December 31, 1994, 1993 and 1992,
respectively. The following table presents information related to the number of
insureds with asbestos-related and environmental pollution claims outstanding:
<TABLE>
<CAPTION>
DECEMBER 31,
------------
1994 1993
---- ----
<S> <C> <C>
Number of insureds with outstanding claims, beginning of year..................................... 661 807
Additional insureds with claims during the year................................................... 307 369
Insureds with closed or settled claims during the year............................................ (302) (515)
---- ----
Number of insureds with outstanding claims, end of year........................................... 666 661
---- ----
---- ----
</TABLE>
The average net paid loss per insured for asbestos-related and
environmental pollution claims was $34,200 and $28,200 for the years 1994 and
1993, respectively. As of December 31, 1994, the Company was involved in
approximately 45 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 intensive monitoring of
investments. Reference is made to 'Financial Review--Investment Portfolio' on
page 30 of the Company's 1994 Annual Report, which section is incorporated
herein by reference, and Note 2 to the Consolidated Financial Statements.
14
<PAGE>
At December 31, 1994, the Company's investment portfolio was $3.8 billion
(at cost) with 87.4% in fixed maturities and short-term securities (including
redeemable preferred stock) and 12.6% in equity securities, approximately half
of which were convertible preferred stock. The following table details the
distribution of the Company's investments at December 31, 1994:
<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............................................. $ 528,297 $ 495,007 $ 495,007
Foreign government............................................ 66,677 63,512 63,512
Foreign-other................................................. 103,263 99,032 99,032
Public utilities.............................................. 96,631 88,602 88,602
Convertibles and bonds with warrants.......................... 88,230 113,398 113,398
All other corporate bonds and notes........................... 713,460 638,962 638,962
Redeemable preferred stock......................................... 349,361 340,799 340,799
---------- ---------- ----------
1,945,919 1,839,312 1,839,312
---------- ---------- ----------
Fixed maturities held for investment:
Bonds and notes:
States, municipalities and political subdivisions............. 11,835 10,980 11,835
Foreign government............................................ 123,306 115,647 123,306
Foreign-other................................................. 20,630 20,501 20,630
Public utilities.............................................. 536,746 477,942 536,746
All other corporate bonds and notes........................... 322,750 285,521 322,750
Redeemable preferred stock......................................... 150,753 142,960 150,753
---------- ---------- ----------
1,166,020 1,053,551 1,166,020
---------- ---------- ----------
Total fixed maturities................................... 3,111,939 2,892,863 3,005,332
---------- ---------- ----------
Equity securities(1):
Common stocks:
Public utilities.............................................. 56,403 55,439 55,439
Industrial and other.......................................... 117,076 221,231 221,231
Nonredeemable preferred stock...................................... 309,050 287,966 287,966
---------- ---------- ----------
482,529 564,636 564,636
---------- ---------- ----------
Short-term investments.................................................. 229,906 229,906 229,906
---------- ---------- ----------
Total investment portfolio............................... $3,824,374 $3,687,405 $3,799,874
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
<TABLE>
<CAPTION>
COST AND
CARRYING
VALUE
----------
(IN THOUSANDS)
<S> <C>
Mortgage Loans(2)....................................................... $ 15,680
Investments in real estate.............................................. 289,465
</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, 1994, had a
carrying value of $147.5 million and a market value of $149.6 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 no investments in commercial real estate mortgages
and has no exposure to derivative securities (other than through its ownership
of any option, warrant or convertible security with an exercise or conversion
price related to an equity security). Purchases of fixed maturity securities are
researched individually based on in-depth analysis and objective predetermined
investment criteria and are managed to achieve a proper balance of safety,
liquidity and investment yields. The
15
<PAGE>
Reliance Insurance Group primarily invests in investment grade securities (those
rated 'BBB' or better by S&P), and, to a lesser extent, non-investment grade and
non-rated securities.
At December 31, 1994, the aggregate carrying value and market value of
fixed maturities (other than short-term investments and cash) that either have
been rated by S&P in the following categories or are non-rated were as follows:
<TABLE>
<CAPTION>
PERCENT
CARRYING MARKET OF MARKET
VALUE VALUE VALUE
---------- ---------- ---------
(IN THOUSANDS, EXCEPT PERCENTAGES)
<S> <C> <C> <C>
AAA to A.................................... $1,565,849 $1,494,459 52%
BBB......................................... 944,153 903,830 31
---------- ---------- ---
Total investment grade................. 2,510,002 2,398,289 83
BB to B..................................... 326,657 326,034 11
CCC to C.................................... 23,526 23,526 1
Non-rated................................... 145,147 145,014 5
---------- ---------- ---
Total.................................. $3,005,332 $2,892,863 100%
---------- ---------- ---
---------- ---------- ---
</TABLE>
Substantially all of the non-investment grade fixed maturities are
classified as 'available for sale' and, accordingly, are carried at quoted
market value. All publicly traded investment grade securities are priced using
the Merrill Lynch Matrix Pricing model, which model is one of the standard
methods of pricing such securities in the industry. All publicly traded
non-investment grade securities, except as indicated below, are priced from
broker-dealers who make markets in these and other similar securities. For fixed
maturities not publicly traded, prices are estimated based on values obtained
from independent third parties or quoted market prices of comparable
instruments. Upon sale, such prices may not be realized when the size of a
particular investment in an issue is significant in relation to the total size
of such issue. Non-investment grade securities that are thinly traded are priced
using internally developed calculations. Such securities represent less than 1%
of the Reliance Insurance Group's fixed maturities portfolio.
Equity investments are made after in-depth analysis of individual
companies' fundamentals by the Reliance Insurance Group's staff of investment
professionals. They seek to identify equities of large capitalization companies
with strong growth prospects and equities that appear to be undervalued relative
to the issuer's business fundamentals, such as earnings, cash flows, balance
sheet and future prospects. Subsequent to purchase, the business fundamentals of
each equity investment are carefully monitored.
As of March 15, 1995, the Reliance Insurance Group owned 3,568,634 shares
of common stock of Symbol Technologies, Inc. ('Symbol'), representing 13.9% 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, 1995, the
market value of the Reliance Insurance Group's investment in Symbol was
$105,274,703 (based upon the closing price on such date as reported by the
NYSE), with a cost basis of $26,890,000.
At December 31, 1994, the Company's real estate holdings had a carrying
value of $289.5 million, which includes 11 shopping centers with an aggregate
carrying value of $138.0 million, office buildings and other commercial
properties with an aggregate carrying value of $90.7 million, and undeveloped
land with a carrying value of $60.8 million.
16
<PAGE>
The following table presents the investment results of the Reliance
Insurance Group's investment portfolio for each of the years ended December 31,
1994, 1993, and 1992:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1994 1993 1992
---------- ---------- ----------
(IN THOUSANDS, EXCEPT PERCENTAGES)
<S> <C> <C> <C>
Fixed Maturities:
Average investments(1)............................................ $3,213,556 $3,050,018 $2,667,220
Net investment income............................................. 221,771 210,916 196,021
Realized gains.................................................... 16,556 59,252 30,508
Increase (decrease) in unrealized gains........................... (342,676) 51,787 55,937
Average annual yield:
Net investment income........................................ 6.90% 6.92% 7.35%
Realized gains............................................... 0.51 1.94 1.14
Increase (decrease) in unrealized gains...................... (10.66) 1.70 2.10
---------- ---------- ----------
Return on fixed maturities........................................ (3.25)% 10.56% 10.59%
---------- ---------- ----------
Equity Securities(2):
Average investments(1)............................................ $ 540,139 $ 622,435 $ 510,986
Net investment income............................................. 26,251 28,259 20,995
Realized gains.................................................... 1,611 98,944 19,628
Increase (decrease) in unrealized gains...................... (6,849) (9,670) 31,619
Average annual yield:
Net investment income........................................ 4.86% 4.54% 4.11%
Realized gains............................................... 0.30 15.89 3.84
Increase (decrease) in unrealized gains...................... (1.27) (1.55) 6.19
---------- ---------- ----------
Return on equity securities....................................... 3.89% 18.88% 14.14%
---------- ---------- ----------
---------- ---------- ----------
Total weighted average return on fixed maturities and equity
securities(3)................................................... (2.22)% 11.97% 11.16%
---------- ---------- ----------
---------- ---------- ----------
</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, 1994, 1993 and 1992.
(2) Does not include investment in Zenith National Insurance Corp. See
'--Investee Company.'
(3) The impact on the overall rate of return of a one percent increase or
decrease in the December 31, 1994 fixed maturity portfolio market value
would be approximately 0.77%.
The carrying value and market value at December 31, 1994 of fixed
maturities for which interest is payable on a deferred basis was $114.0 million.
INVESTEE COMPANY
As of March 15, 1995, the Reliance Insurance Group owned 6,574,445 shares
of common stock of Zenith National Insurance Corp. ('Zenith'), representing
34.7% 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, 1995 the market value of the Reliance
Insurance Group's investment in Zenith was $129,023,483 (based upon the closing
price on such date as reported by the NYSE), with a carrying value of
$147,513,000.
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.
17
<PAGE>
REGULATION
The businesses of the Reliance Insurance Group, in common with those of
other insurance companies, are subject to comprehensive, detailed regulation in
the jurisdictions in which they do business. Such regulation is primarily for
the protection of policyholders rather than for the benefit of investors.
Although their scope varies from place to place, insurance laws in general grant
broad powers to supervisory agencies or officials to examine companies and to
enforce rules or exercise discretion touching almost every significant aspect of
the conduct of the insurance business. These include the licensing of companies
and agents to transact business, the imposition of monetary penalties for rules
violations, varying degrees of control over premium rates (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, certain of 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, limits the maximum amount of dividends which may be paid without
approval by the Pennsylvania Insurance Department. Under such law, Reliance
Insurance Company may pay dividends during the year equal to the greater of (a)
10% of the preceding year-end policyholders' surplus or (b) the preceding year's
statutory net income, but in no event to exceed the amount of unassigned funds,
which are defined as 'undistributed, accumulated surplus including net income
and unrealized gains since the organization of the insurer.' In addition, the
Pennsylvania law specifies factors to be considered by the Pennsylvania
Insurance Department to allow it to determine that statutory surplus after the
payment of dividends is reasonable in relation to an insurance company's
outstanding liabilities and adequate for its financial needs. Such factors
include the size of the company, the extent to which its business is diversified
among several lines of insurance, the number and size of risks insured, the
nature and extent of the 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.
In addition, under California Insurance law, Reliance Insurance Company is
deemed to be a 'commercially domiciled' California insurer and therefore subject
to the dividend payment laws of California. The California
18
<PAGE>
laws that limit the maximum amount of dividends which may be paid without
approval by the California Insurance Department and specify the factors to be
considered by the California Insurance Department to determine if the payment of
the dividend is reasonable in relation to an insurance company's outstanding
liabilities and financial needs are substantially the same as the laws of
Pennsylvania. As in Pennsylvania, the California 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 1994, 1993 and 1992 were, $114.1 million ($111.5 million for
common stock), $133.7 million ($130.6 million for common stock) and $143.7
million ($140.4 million for common stock), respectively. During 1995, $124.5
million would be available for dividend payments by Reliance Insurance Company
under Pennsylvania and California law. 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 or California law for the payment
of dividends without prior Insurance Department approvals or that any requested
approvals will be obtained. However, Reliance Insurance Company has been advised
by the California Insurance Department that any required prior approval will be
based on the financial stability of the Company. Reliance Insurance Company has
also 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 National Association of Insurance Commissioners (the 'NAIC') has
adopted a 'risk-based capital' requirement for the property and casualty
insurance industry which became effective in 1995 based on annual statements as
of December 31, 1994. 'Risk-based capital' refers to the determination of the
amount of statutory capital required for an insurer based on the risks assumed
by the insurer (including, for example, investment risks, credit risks relating
to reinsurance recoverables and underwriting risks) rather than just the amount
of net premiums written by the insurer. A formula that applies prescribed
factors to the various risk elements in an insurer's business is used to
determine the minimum statutory capital requirement for the insurer. An insurer
having less statutory capital than the formula calculates would be subject to
varying degrees of regulatory intervention, depending on the level of capital
inadequacy. All of the Company's statutory insurance companies have
policyholders' surplus in excess of the minimum required risk-based capital.
Management cannot predict the ultimate impact of risk-based capital requirements
on the Company's 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 insurer's 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 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.
In 1989, the California Department of Insurance directed to United Pacific
Insurance Company, one of the Company's California subsidiaries which writes
business in California, a notice to reduce its current rates and make refunds to
its policyholders by approximately $10.0 million. In January 1991, the
regulations which formed the basis of the notice were repealed by the newly
elected Insurance Commissioner. Subsequently, there were several administrative
hearings on rate rollback and several different sets of regulations were issued.
The regulations were subject to ongoing administrative and legal challenges. In
February 1993, a Los Angeles Superior Court issued a decision declaring several
sections of the regulations invalid and enjoined the enforcement of the
regulations. On August 18, 1994, the California Supreme Court issued a decision
reversing the Superior Court and upholding the validity of the regulations
issued by the Insurance Commissioner. A
19
<PAGE>
petition filed with the United States Supreme Court seeking review of the
California Supreme Court decision was denied on February 21, 1995. On November
28, 1994, Reliance Insurance Company and several of its affiliates received an
order from the outgoing Insurance Commissioner ordering refunds totaling $44.8
million plus interest of $27.5 million. The Company believes that the refund
order is based on incomplete and erroneous data. Furthermore, the Company
believes that it did not earn a fair rate of return on its California business
during the year at issue, 1989. Consequently, it intends to contest the order
vigorously. The Company is entitled to a hearing to present evidence to
establish what it believes to be an appropriate rollback or refund amount, if
any. In the fourth quarter of 1994, the Company recorded a pre-tax charge of
$11.6 million related to Proposition 103. While this charge reflects the
Company's assessment of the impact of potential refunds to policyholders under
Proposition 103, the Company nevertheless intends to contest the imposition of
any refund on the basis of the matters set forth above. The Company does not
believe that it is probable that it will be subject to a refund in an amount
which will have a material adverse effect on the Consolidated Financial
Statements.
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 adverse 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 operates. The Reliance Property and Casualty
Companies compete with individual companies and with groups of affiliated
companies with greater financial resources, larger sales forces and more
widespread agency and broker relationships. Competition in the property and
casualty insurance industry is based primarily on price, product design and
service. In addition, because the Reliance Property and Casualty Companies sell
policies through independent agents and insurance brokers who are not obligated
to choose the policies of the Reliance Property and Casualty Companies over
those of another insurer, the Reliance Property and Casualty Companies 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, 1994, the Company and its
consolidated subsidiaries employed approximately 9,075 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. In addition, the
Company is subject to the litigation set forth below.
20
<PAGE>
In June 1989, 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.
Thirty-one employers doing business in Texas have brought two actions in
the District Court of Dallas County, Texas, against, among others, approximately
200 individual insurance companies, including Reliance Insurance Company and
several of its subsidiaries. The plaintiffs in the actions, which were commenced
against the Reliance parties in April 1992 and February 1995 respectively (and
the second of which has been stayed in light of the pendency of the first),
assert that they were overcharged for workers' compensation insurance and
multiple line retrospectively rated casualty insurance between 1987 and 1992. In
August 1994, the plaintiffs in the first action moved for certification of a
purported plaintiff class consisting of all employers who purchased Texas
workers' compensation insurance from the insurance company defendants during the
years in question. Plaintiffs seek monetary damages, with interest and
attorneys' fees, against all defendants jointly and severally, together with a
release of all purported class members from liability for payment of unlawful
premiums, and injunctive relief. The Company has filed answers denying the
allegations and is contesting the actions vigorously. The Company does not
believe that it is probable that its liability, if any, in excess of what the
Company has provided for in respect of this matter will have a material adverse
effect on the Consolidated Financial Statements.
See Note 16 to the Consolidated Financial Statements for additional
information concerning the above referenced legal proceedings 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.
21
<PAGE>
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
As of March 15, 1995, 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 32 of the Reliance Financial 1994 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 27 through 32 of the Reliance Financial
1994 Annual Report, which information is incorporated herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The financial statements of the Company and its consolidated subsidiaries,
included on pages 1 through 25 of the Reliance Financial 1994 Annual Report,
which information is incorporated herein by reference, are listed in Item 14
below.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
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.
22
<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 25 of the Reliance
Financial 1994 Annual Report, are incorporated herein by reference.
<TABLE>
<CAPTION>
PAGE REFERENCE
---------------------
1994
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, 1994 and 1993 and for the three
years ended December 31, 1994:
Statement of Income.............................................................. 1
Balance Sheet.................................................................... 2
Statement of Changes in Shareholder's Equity..................................... 3
Statement of Cash Flows.......................................................... 4
Notes to Financial Statements (1-19)............................................. 5-25
2. FINANCIAL STATEMENT SCHEDULES:
I--Summary of Investments--Other Than Investments in Related Parties................. A-2
II-- Condensed Financial Information of the Registrant at December 31, 1994 and
1993 and for the three years ended December 31, 1994:
Statement of Income......................................................... A-3
Balance Sheet............................................................... A-4
Statement of Cash Flows..................................................... A-5
III--Supplementary Insurance Information.............................................. A-6
IV--Reinsurance....................................................................... A-7
VI-- Supplemental Information Concerning Property and Casualty Insurance
Operations..................................................................... A-8
</TABLE>
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.
23
<PAGE>
3. EXHIBITS
<TABLE>
<S> <C>
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).
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.
24
<TABLE>
<S> <C>
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 1994 Annual Report.
27.1 Financial Data Schedule.
**+28.1 Schedule P from the statutory reports of the Reliance Property and Casualty Companies.
</TABLE>
------------------
+ Schedule P from the statutory reports of Zenith National Insurance Corp.,
34.7% 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.
** To be filed by Amendment.
(B) REPORTS ON FORM 8-K
During the last quarter of the period for which this report is filed, the
Company filed a Report on Form 8-K, dated (date of earliest event reported)
November 28, 1994, reporting an Item 5 matter regarding an order of the
insurance commissioner of California.
25
<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 30TH DAY OF
MARCH, 1995.
RELIANCE FINANCIAL SERVICES
COPORPORATION
By: SAUL P. STEINBERG
----------------------------------
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.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
------------------------------------------------------ --------------------------------- --------------
<S> <C> <C>
SAUL P. STEINBERG Chairman of the Board,
---------------------------- Principal Executive Officer March 30, 1995
SAUL P. STEINBERG and Director
GEORGE E. BELLO Principal Accounting Officer
---------------------------- and Director March 30, 1995
GEORGE E. BELLO
LOWELL C. FREIBERG Principal Financial Officer
---------------------------- and Director March 30, 1995
LOWELL C. FREIBERG
GEORGE R. BAKER Director
----------------------------
GEORGE R. BAKER March 30, 1995
CARTER BURDEN Director
----------------------------
CARTER BURDEN March 30, 1995
DENNIS A. BUSTI Director
----------------------------
DENNIS A. BUSTI March 30, 1995
DEAN W. CASE Director
----------------------------
DEAN W. CASE March 30, 1995
</TABLE>
26
<PAGE>
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
------------------------------------------------------ --------------------------------- --------------
<S> <C> <C>
THOMAS P. GERRITY Director
----------------------------
THOMAS P. GERRITY March 30, 1995
JEWELL J. MCCABE Director
----------------------------
JEWELL J. MCCABE March 30, 1995
IRVING SCHNEIDER Director
----------------------------
IRVING SCHNEIDER March 30, 1995
Director
----------------------------
BERNARD L. SCHWARTZ
RICHARD E. SNYDER Director
----------------------------
RICHARD E. SNYDER March 30, 1995
THOMAS J. STANTON, JR. Director
----------------------------
THOMAS J. STANTON, JR. March 30, 1995
ROBERT M. STEINBERG Director
----------------------------
ROBERT M. STEINBERG March 30, 1995
JAMES E. YACOBUCCI Director
----------------------------
JAMES E. YACOBUCCI March 30, 1995
</TABLE>
27
<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, 1994 and 1993, and for each of the three years
in the period ended December 31, 1994, and have issued our report thereon dated
February 22, 1995 (which report includes an explanatory paragraph concerning the
adoption of Statement of Financial Accounting Standards No. 109); such financial
statements and report are included in your 1994 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 LLP
New York, New York
February 22, 1995
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, 1994
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------
COLUMN A COLUMN B COLUMN C COLUMN D
------------------------------------------------------------------------------------------------------------------
AMOUNT AT WHICH
SHOWN IN THE
TYPE OF INVESTMENT COST VALUE BALANCE SHEET
------------------------------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C>
Fixed maturities available for sale:
Bonds and notes:
United States government and government agencies and
authorities.................................................. $ 528,297 $ 495,007 $ 495,007
States, municipalities and political subdivisions.............. 36,982 37,306 37,306
Foreign--government............................................ 66,677 63,512 63,512
Foreign--other................................................. 103,263 99,032 99,032
Public utilities............................................... 96,631 88,602 88,602
Convertibles and bonds with warrants attached.................. 88,230 113,398 113,398
All other corporate bonds and notes............................ 676,478 601,656 601,656
Redeemable preferred stocks....................................... 349,361 340,799 340,799
---------- ---------- ---------------
1,945,919 1,839,312 1,839,312
---------- ---------- ---------------
Fixed maturities held for investment:
Bonds and notes:
States, municipalities and political subdivisions.............. 11,835 10,980 11,835
Foreign--government............................................ 123,306 115,647 123,306
Foreign--other................................................. 20,630 20,501 20,630
Public utilities............................................... 536,746 477,942 536,746
All other corporate bonds and notes............................ 322,750 285,521 322,750
Redeemable preferred stocks....................................... 150,753 142,960 150,753
---------- ---------- ---------------
1,166,020 1,053,551 1,166,020
---------- ---------- ---------------
Equity securities:
Common stocks:
Public utilities............................................... 56,403 55,439 55,439
Industrial and other........................................... 117,076 221,231 221,231
Nonredeemable preferred stocks.................................... 309,050 287,966 287,966
---------- ---------- ---------------
482,529 564,636 564,636
---------- ---------- ---------------
Short-term investments.............................................. 229,906 229,906 229,906
---------- ---------- ---------------
$3,687,405
----------
----------
Mortgage loans(1)................................................... 15,680 15,680
Investments in real estate.......................................... 289,465 289,465
---------- ---------------
$4,129,519 $ 4,105,019
---------- ---------------
---------- ---------------
</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
(PARENT COMPANY)
STATEMENT OF INCOME
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31 1994 1993 1992
----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
(In thousands)
REVENUES:
Dividends from subsidiaries.................................................. $111,467 $130,639 $140,448
Interest and other income, principally from affiliates....................... 15,136 18,560 20,237
-------- -------- --------
126,603 149,199 160,685
-------- -------- --------
EXPENSES:
Interest..................................................................... 15,244 18,423 19,077
General and administrative................................................... 2,051 537 168
-------- -------- --------
17,295 18,960 19,245
-------- -------- --------
109,308 130,239 141,440
Income tax (provision) benefit............................................... 760 140 (337)
-------- -------- --------
INCOME BEFORE EQUITY IN SUBSIDIARIES AND INVESTEE COMPANY.................... 110,068 130,379 141,103
Equity in subsidiaries (net income (loss) less dividends received):
Income (loss) from continuing operations................................ 18,992 42,529 (73,642)
Income from discontinued operations..................................... -- -- 64,105
Loss on disposal of discontinued operations............................. -- -- (47,300)
Equity in net income of investee company................................ 9,478 12,441 5,206
-------- -------- --------
INCOME BEFORE EXTRAORDINARY ITEM AND CUMULATIVE EFFECT
OF ACCOUNTING CHANGE....................................................... 138,538 185,349 89,472
Extraordinary item--early extinguishment of debt............................. -- (3,666) --
Cumulative effect of change in accounting for subsidiaries'
income taxes............................................................... -- 24,335 --
-------- -------- --------
NET INCOME................................................................... $138,538 $206,018 $ 89,472
-------- -------- --------
-------- -------- --------
</TABLE>
A-3
<PAGE>
SCHEDULE II
ITEM 14(A)2
RELIANCE FINANCIAL SERVICES CORPORATION
(PARENT COMPANY)
BALANCE SHEET
<TABLE>
<CAPTION>
ASSETS DECEMBER 31 1994 1993
-----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
(Dollars in thousands, except per-share amount)
Cash.................................................................................. $ 8,923 $ 29,711
Investments in subsidiaries........................................................... 1,051,404 1,165,268
Notes receivable from parent company.................................................. 187,065 194,513
Other assets.......................................................................... 19,238 20,818
---------- ----------
$1,266,630 $1,410,310
---------- ----------
---------- ----------
LIABILITIES AND SHAREHOLDER'S EQUITY
Accounts payable and accrued expenses................................................. $ 2,137 $ 1,929
Federal income taxes due to parent company............................................ 19,818 20,578
Term loans and short-term debt........................................................ 100,000 105,000
Debentures and notes.................................................................. 80,596 99,863
---------- ----------
202,551 227,370
---------- ----------
Contingencies and commitments
Shareholder's equity:
Common stock, par value $.10 per-share, 1000 shares authorized,
issued and outstanding........................................................... -- --
Additional paid-in capital.......................................................... 678,502 677,510
Retained earnings (including undistributed net income of subsidiaries of $267,005
and $238,535).................................................................... 434,676 406,138
Net unrealized gain (loss) on investments of subsidiaries........................... (27,881) 115,023
Net unrealized loss on foreign currency translation of subsidiaries................. (21,218) (15,731)
---------- ----------
1,064,079 1,182,940
---------- ----------
$1,266,630 $1,410,310
---------- ----------
---------- ----------
</TABLE>
A-4
<PAGE>
SCHEDULE II
ITEM 14(A)2
RELIANCE FINANCIAL SERVICES CORPORATION
(PARENT COMPANY)
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31 1994 1993 1992
-----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................................................................. $ 138,538 $ 206,018 $ 89,472
Excess of dividends received over equity in net income of
subsidiaries and investee company........................................ -- -- 51,631
Equity in undistributed net income of subsidiaries and investee company.... (28,470) (79,305) --
Other--net................................................................. 821 (3,431) 867
--------- --------- ---------
110,889 123,282 141,970
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital contribution to subsidiary......................................... (15,000) (5,000) --
Other--net................................................................. -- 755 --
--------- --------- ---------
(15,000) (4,245) --
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in notes receivable from parent company--net...................... (17,365) (14,212) (12,356)
Increase (decrease) in term loans and short-term debt...................... (5,000) 105,000 --
Repurchases of debentures.................................................. (9,125) (80,060) (9,628)
Dividends.................................................................. (85,187) (100,064) (120,000)
--------- --------- ---------
(116,677) (89,336) (141,984)
--------- --------- ---------
Increase (decrease) in cash................................................ (20,788) 29,701 (14)
Cash, beginning of year.................................................... 29,711 10 24
--------- --------- ---------
Cash, end of year.......................................................... $ 8,923 $ 29,711 $ 10
--------- --------- ---------
--------- --------- ---------
</TABLE>
SUPPLEMENTAL DISCLOSURE OF NON-CASH FINANCING ACTIVITIES:
In 1994 and 1993, non-cash dividends of $24,813,000 and $99,936,000 were
recorded as a reduction in notes receivable from parent company.
A-5
<PAGE>
SCHEDULE III
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
------------------------------------------------------------------------------------------------------------------------------------
AMORTIZATION
DEFERRED UNPAID POLICY OF DEFERRED
POLICY CLAIMS AND NET CLAIMS AND POLICY
ACQUISITION RELATED UNEARNED PREMIUMS INVESTMENT SETTLEMENT ACQUISITION
SEGMENT COSTS EXPENSES PREMIUMS EARNED INCOME EXPENSES COSTS
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
(In thousands)
YEAR ENDED DECEMBER 31, 1994:
Property and casualty.................. $ 181,938 $5,581,483 $1,288,454 $1,777,318 $232,299 $1,297,093 $387,924
Title.................................. -- 228,063 -- 856,774 26,613 75,867 --
----------- ---------- ---------- ---------- ---------- ---------- ------------
$ 181,938 $5,809,546 $1,288,454 $2,634,092 $258,912 $1,372,960 $387,924
----------- ---------- ---------- ---------- ---------- ---------- ------------
----------- ---------- ---------- ---------- ---------- ---------- ------------
Year Ended December 31, 1993:
Property and casualty.................. $ 178,129 $5,048,442 $1,276,331 $1,571,539 $226,517 $1,235,594 $327,437
Title.................................. -- 204,695 -- 893,364 24,282 81,803 --
----------- ---------- ---------- ---------- ---------- ---------- ------------
$ 178,129 $5,253,137 $1,276,331 $2,464,903 $250,799 $1,317,397 $327,437
----------- ---------- ---------- ---------- ---------- ---------- ------------
----------- ---------- ---------- ---------- ---------- ---------- ------------
Year Ended December 31, 1992:
Property and casualty.................. $ 123,350 $4,571,792 $1,203,207 $1,535,740 $199,556 $1,289,598 $276,154
Title and mortgage..................... -- 173,328 -- 826,493 26,224 100,562 13,437
----------- ---------- ---------- ---------- ---------- ---------- ------------
$ 123,350 $4,745,120 $1,203,207 $2,362,233 $225,780 $1,390,160 $289,591
----------- ---------- ---------- ---------- ---------- ---------- ------------
----------- ---------- ---------- ---------- ---------- ---------- ------------
<CAPTION>
--------------------------------------------------------------
--------------------------------------------------------------
COLUMN A COLUMN I COLUMN J
--------------------------------------------------------------
OTHER
INSURANCE PREMIUMS
SEGMENT EXPENSES WRITTEN
--------------------------------------------------------------
<S> <C> <C>
(In thousands)
YEAR ENDED DECEMBER 31, 1994:
Property and casualty.................. $183,755 $1,764,290
----------
----------
Title.................................. 776,149
--------
$959,904
--------
--------
Year Ended December 31, 1993:
Property and casualty.................. $174,609 $1,770,597
----------
----------
Title.................................. 780,138
--------
$954,747
--------
--------
Year Ended December 31, 1992:
Property and casualty.................. $188,826 $1,541,560
----------
----------
Title and mortgage..................... 691,048
--------
$879,874
--------
--------
</TABLE>
A-6
<PAGE>
SCHEDULE IV
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
-------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1994:
Premiums:
Property and casualty........................ $2,630,549 $1,198,629 $ 345,398 $1,777,318 19.43%
Title........................................ 854,679 1,370 3,465 856,774 .40
---------- ---------- --------- ----------
$3,485,228 $1,199,999 $ 348,863 $2,634,092 13.24
---------- ---------- --------- ----------
---------- ---------- --------- ----------
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
---------- ---------- --------- ----------
---------- ---------- --------- ----------
</TABLE>
A-7
<PAGE>
SCHEDULE VI
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
-------------------------------------------------------------------------------------------------------------------------------
CLAIMS AND
UNPAID SETTLEMENT EXPENSES
DEFERRED CLAIMS INCURRED RELATED TO
AFFILIATION POLICY AND DISCOUNT NET --------------------
WITH ACQUISITION RELATED DEDUCTED IN UNEARNED EARNED INVESTMENT CURRENT PRIOR
REGISTRANT COSTS EXPENSES COLUMN C (A) PREMIUMS PREMIUMS INCOME YEAR YEARS
-------------------------------------------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Consolidated
subsidiaries:
YEAR ENDED
DECEMBER 31, 1994..... $ 181,938 $5,581,483 $245,737 $1,288,454 $1,777,318 $ 232,299 $1,274,649 $22,444
----------- ---------- ------------ ---------- ---------- ---------- ---------- -------
----------- ---------- ------------ ---------- ---------- ---------- ---------- -------
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
----------- ---------- ------------ ---------- ---------- ---------- ---------- -------
----------- ---------- ------------ ---------- ---------- ---------- ---------- -------
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
----------- ---------- ------------ ---------- ---------- ---------- ---------- -------
----------- ---------- ------------ ---------- ---------- ---------- ---------- -------
<CAPTION>
-----------------------------------------------------------------
-----------------------------------------------------------------
COLUMN A COLUMN I COLUMN J COLUMN K
-----------------------------------------------------------------
AMORTIZATION PAID
OF DEFERRED CLAIMS
AFFILIATION POLICY AND
WITH ACQUISITION SETTLEMENT PREMIUMS
REGISTRANT COST EXPENSES WRITTEN
-----------------------------------------------------------------
(In thousands)
<S> <C> <C> <C>
Consolidated
subsidiaries:
YEAR ENDED
DECEMBER 31, 1994..... $387,924 $1,102,499 $1,764,290
------------ ---------- ----------
------------ ---------- ----------
Year Ended
December 31, 1993..... $327,437 $1,006,659 $1,770,597
------------ ---------- ----------
------------ ---------- ----------
Year Ended
December 31, 1992..... $276,154 $ 961,059 $1,541,560
------------ ---------- ----------
------------ ---------- ----------
</TABLE>
(a) Liabilities for unpaid claims and related expenses for short-duration
contracts which are expected to have fixed, periodic payment patterns are
discounted to present values using statutory annual rates ranging from
3 1/2% to 6% in 1994 and 3% to 6% in 1993 and 1992.
A-8
<PAGE>
EXHIBITS
TO
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED COMMISSION FILE NUMBER
DECEMBER 31, 1994 1-7080
RELIANCE FINANCIAL SERVICES CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<PAGE>
RELIANCE FINANCIAL SERVICES CORPORATION
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER
---------
<S> <C>
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).
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).
</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.
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER
---------
<S> <C>
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 1994 Annual Report.
27.1 Financial Data Schedule.
**+28.1 Schedule P from the statutory reports of the Reliance Property and Casualty Companies.
</TABLE>
------------------
+ Schedule P from the statutory reports of Zenith National Insurance Corp.,
34.7% 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.
** To be filed by Amendment.
<PAGE>
CONTENTS
Financial Statements 1
Independent Auditors' Report 26
Financial Review 27
Market and Dividend Information 32
Directors 33
Officers 34
Corporate Data 35
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 INCOME
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31 1994 1993 1992
-----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
(In thousands)
REVENUES:
Premiums earned......................................................... $2,634,092 $2,464,903 $2,362,233
Net investment income................................................... 258,912 250,799 225,780
Gain on sales of investments............................................ 9,218 158,196 50,136
Gain on sale of subsidiary.............................................. -- -- 8,999
Interest income from parent company..................................... 14,864 18,491 20,203
Other................................................................... 141,609 116,802 109,142
---------- ---------- ----------
3,058,695 3,009,191 2,776,493
---------- ---------- ----------
CLAIMS AND EXPENSES:
Policy claims and settlement expenses................................... 1,372,960 1,317,397 1,390,160
Policy acquisition costs................................................ 387,924 327,437 289,591
Interest................................................................ 20,231 21,365 20,256
Other insurance expenses................................................ 959,904 954,747 879,874
Other................................................................... 137,877 119,186 105,134
---------- ---------- ----------
2,878,896 2,740,132 2,685,015
---------- ---------- ----------
INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES, MINORITY
INTERESTS AND EQUITY IN INVESTEE COMPANY.............................. 179,799 269,059 91,478
Provision for income taxes.............................................. (47,982) (92,994) (20,705)
Minority interests...................................................... (2,757) (3,157) (3,312)
Equity in investee company.............................................. 9,478 12,441 5,206
---------- ---------- ----------
INCOME FROM CONTINUING OPERATIONS....................................... 138,538 185,349 72,667
Income from discontinued operations..................................... -- -- 64,105
Loss on disposal of discontinued operations............................. -- -- (47,300)
---------- ---------- ----------
INCOME BEFORE EXTRAORDINARY ITEM AND CUMULATIVE
EFFECT OF ACCOUNTING CHANGE........................................... 138,538 185,349 89,472
Extraordinary item--early extinguishment of debt........................ -- (3,666) --
Cumulative effect of change in accounting for income taxes.............. -- 24,335 --
---------- ---------- ----------
NET INCOME.............................................................. $ 138,538 $ 206,018 $ 89,472
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
See notes to consolidated financial statements
1
<PAGE>
RELIANCE FINANCIAL SERVICES CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
ASSETS DECEMBER 31 1994 1993
-----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
(Dollars in thousands, except per-share amount)
Marketable securities:
Fixed maturities held for investment--at amortized cost (quoted market
$1,053,551 and $973,113)....................................................... $1,166,020 $ 936,643
Fixed maturities available for sale--at quoted market (cost $1,945,919
and $1,856,969)................................................................ 1,839,312 1,944,099
Equity securities--at quoted market (cost $482,529 and $458,217)................. 564,636 547,173
Short-term investments........................................................... 229,906 372,507
Cash.................................................................................. 46,814 91,608
Premiums receivable................................................................... 1,079,393 963,570
Other accounts and notes receivable................................................... 179,903 124,911
Reinsurance recoverables.............................................................. 2,928,533 2,573,688
Federal and foreign income taxes, including deferred taxes............................ 161,013 99,090
Notes receivable from parent company.................................................. 187,065 194,513
Investments in real estate--at cost, less accumulated depreciation.................... 289,465 282,836
Investment in investee company........................................................ 147,513 157,016
Deferred policy acquisition costs..................................................... 181,938 178,129
Other assets.......................................................................... 336,254 312,129
---------- ----------
$9,337,765 $8,777,912
---------- ----------
---------- ----------
LIABILITIES AND SHAREHOLDER'S EQUITY
<CAPTION>
-----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Unearned premiums..................................................................... $1,288,454 $1,276,331
Unpaid claims and related expenses.................................................... 5,809,546 5,253,137
Accounts payable and accrued expenses................................................. 650,374 607,018
Reinsurance ceded premiums payable.................................................... 291,844 206,373
Senior reset notes.................................................................... 80,596 99,863
Term loans and short-term debt........................................................ 129,355 125,373
Minority interests--redeemable preferred stock of a subsidiary........................ 23,517 26,877
---------- ----------
8,273,686 7,594,972
---------- ----------
Contingencies and commitments
Shareholder's equity:
Common stock, par value $.10 per share, 1,000 shares authorized, -- --
issued and outstanding.........................................................
Additional paid-in capital....................................................... 678,502 677,510
Retained earnings................................................................ 434,676 406,138
Net unrealized gain (loss) on investments........................................ (27,881) 115,023
Net unrealized loss on foreign currency translation.............................. (21,218) (15,731)
---------- ----------
1,064,079 1,182,940
---------- ----------
$9,337,765 $8,777,912
---------- ----------
---------- ----------
</TABLE>
See notes to consolidated financial statements
2
<PAGE>
RELIANCE FINANCIAL SERVICES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDER'S EQUITY
--------------------------------------------------------------------------------
(In thousands)
<TABLE>
<CAPTION>
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, 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
Transactions of investee company.......... -- (597) -- (9,002) -- (9,599)
Net income................................ -- -- 138,538 -- -- 138,538
Dividends................................. -- -- (110,000) -- -- (110,000)
Capital contribution...................... -- 1,589 -- -- -- 1,589
Depreciation after deferred
income taxes............................ -- -- -- (133,902) -- (133,902)
Foreign currency translation.............. -- -- -- -- (5,487) (5,487)
------ ---------- --------- -------------- ----------- -------------
BALANCE, DECEMBER 31, 1994................ $ -- $ 678,502 $ 434,676 $ (27,881) $ (21,218) $ 1,064,079
------ ---------- --------- -------------- ----------- -------------
------ ---------- --------- -------------- ----------- -------------
</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 1994 1993 1992
-----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income...................................................................... $ 138,538 $ 206,018 $ 89,472
Adjustments to reconcile net income to net cash provided
from operating activities:
Cumulative effect of change in accounting for income taxes................. -- (24,335) --
Gain on sales of investments............................................... (9,218) (158,196) (50,136)
Deferred policy acquisition costs.......................................... (3,809) (54,779) (13,182)
Premiums and other receivables and reinsurance recoverables................ (505,590) (221,956) (709,116)
Unearned premiums, unpaid claims and related expenses...................... 566,873 581,141 997,889
Accounts payable, accrued expenses and other............................... 131,239 (62,829) 14,559
--------- ---------- ---------
318,033 265,064 329,486
--------- ---------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of fixed maturities available for sale...................... 441,401 341,168 317,093
Proceeds from sales of fixed maturities held for investment..................... 18,481 -- 148,953
Proceeds from redemptions of fixed maturities available for sale................ 60,752 170,281 42,019
Proceeds from redemptions of fixed maturities held for investment............... 15,785 273,921 243,694
Proceeds from sales of equity securities........................................ 189,895 1,016,308 469,900
(Increase) decrease in short-term investments--net.............................. 151,965 240,884 (59,050)
Sale of net assets of a subsidiary.............................................. -- -- 118,500
Purchases of fixed maturities available for sale................................ (587,581) (958,817) (422,395)
Purchases of fixed maturities held for investment............................... (265,672) (586,677) (478,209)
Purchases of equity securities.................................................. (209,506) (680,760) (472,072)
Discontinued operations......................................................... 15,550 69,157 8,569
Other--net...................................................................... (72,905) (23,067) (65,371)
--------- ---------- ---------
(241,835) (137,602) (148,369)
--------- ---------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in notes receivable from parent company................................ (17,365) (14,212) (12,356)
Increase in term loans.......................................................... 75,272 105,248 221
Decrease in term loans and short-term debt--net................................. (71,290) (2,353) (16,312)
Repurchases of debentures and notes............................................. (19,062) (80,060) (9,628)
Dividends....................................................................... (85,187) (100,064) (120,000)
Redemption of redeemable preferred stock of a subsidiary........................ (3,360) (3,360) (3,360)
--------- ---------- ---------
(120,992) (94,801) (161,435)
--------- ---------- ---------
Increase (decrease) in cash..................................................... (44,794) 32,661 19,682
Cash, beginning of year......................................................... 91,608 58,947 39,265
--------- ---------- ---------
Cash, end of year............................................................... $ 46,814 $ 91,608 $ 58,947
--------- ---------- ---------
--------- ---------- ---------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid................................................................... $ 16,400 $ 19,600 $ 19,900
--------- ---------- ---------
--------- ---------- ---------
Income taxes refunded (paid).................................................... $ (44,500) $ (136,900) $ 12,000
--------- ---------- ---------
--------- ---------- ---------
</TABLE>
SUPPLEMENTAL DISCLOSURE OF NONCASH FINANCING ACTIVITIES:
In 1994 and 1993, non-cash dividends of $24,813,000 and $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. ('Hall'), the Company received a capital contribution from Reliance Group,
Incorporated, the former parent of the Company. In 1994, the Company received an
additional capital contribution from Reliance Group Holdings, Inc., the current
parent of the Company, in connection with the sale of Hall. See note 16 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. Fixed maturity
investments classified as 'available for sale' represent securities that will be
held for an indefinite period of time and are carried at quoted market value
with the net unrealized gain or loss included in shareholder's equity. Such
investments may be sold in response to changes in interest rates, future general
liquidity needs and similar factors. Fixed maturity investments classified as
'held for investment' are carried at amortized cost since the Company has the
positive intent and ability to hold these securities to maturity. Prior to June
30, 1992, the Company held all of its fixed maturity portfolio as 'held for
investment'. Accordingly, sales of fixed maturities held for investment during
1992, as shown in the accompanying consolidated statement of cash flows,
represent sales of all fixed maturity investments during the period January 1,
1992 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 fair value. In determining estimated
fair value of investments, the Company reviews the issuer's financial condition
and the stability of its income, as well as 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. Premiums include
estimated audit premiums and estimated premiums on retrospectively rated
policies.
The costs associated with the acquisition of property and casualty business are
deferred and amortized on a straight-line basis over the terms (principally one
year) of the policies in force. Such deferred policy acquisition costs consist
of commissions, premium taxes and other variable policy issuance and
underwriting expenses. Deferred policy acquisition costs are reviewed to
determine that they do not exceed recoverable amounts, including anticipated
investment income.
5
<PAGE>
Property and casualty unpaid claims and related expenses are based on an
evaluation of reported claims in addition to statistical projections of claims
incurred but not reported and loss adjustment expenses. Estimates of salvage and
subrogation are deducted from the liability. Adjustments of the probable
ultimate liability, based on subsequent developments, are included in operations
currently. At December 31, 1994 and 1993, liabilities for unpaid claims and
related expenses include $437,900,000 and $411,023,000 relating to
short-duration contracts which are expected to have fixed, periodic payment
patterns and have been discounted to present values using statutory annual rates
ranging from 3 1/2% to 6%.
Direct title insurance premiums and fees are recognized as revenue when policies
become effective. Agency title 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 recorded 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, 1994 include $60,800,000 related to undeveloped land
which has been rezoned for mixed use development. Interest capitalized relating
to the development of real estate properties was $398,000 in 1992. No interest
was capitalized in 1994 or 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 unfunded 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 financial
statements are excluded from the consolidated statement of income and are
presented as a separate component of shareholder's equity.
6
<PAGE>
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. See notes 2, 3 and 8 regarding
fair value information for the Company's financial instruments.
The Company believes the fair value of notes receivable from parent company at
December 31, 1994 and 1993 approximates their carrying value.
RECLASSIFICATIONS
The 1993 and 1992 consolidated statement of cash flows has been reclassified to
include gain on sales of investments as a component of cash flows from investing
activities, rather than a component of cash flows from operating activities.
Certain other reclassifications have been made to the Company's 1993 and 1992
consolidated financial statements to conform with the current year's
consolidated financial statements.
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 statements.
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., 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.
2. INVESTMENTS
Fixed maturities held for investment at December 31, 1994 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.................................... $ 536,746 $ 477,942 $ 202 $ 59,006
Corporate bonds and notes and other................. 478,521 432,649 899 46,771
Redeemable preferred stock............................... 150,753 142,960 1,613 9,406
---------- ---------- ---------- ----------
$1,166,020 $1,053,551 $2,714 $115,183
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
</TABLE>
(1) The amortized cost and market value of fixed maturity investments which have
unrealized losses were $1,065,908,000 and $950,725,000.
7
<PAGE>
Fixed maturities available for sale at December 31, 1994 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....................................... $ 495,007 $ 528,297 $ 615 $ 33,905
Public utilities.................................... 88,602 96,631 177 8,206
Corporate bonds and notes and other................. 914,904 971,630 32,020 88,746
Redeemable preferred stock............................... 340,799 349,361 5,695 14,257
---------- ---------- ---------- ----------
$1,839,312 $1,945,919 $ 38,507 $145,114
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
</TABLE>
(1) The amortized cost and market value of fixed maturity investments which have
unrealized losses were $1,533,070,000 and $1,387,956,000.
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.
8
<PAGE>
As of December 31, 1994, the contractual maturities of fixed maturity
investments are as follows:
<TABLE>
<CAPTION>
Held for investment Available for sale
------------------------ ------------------------
Amortized Market Amortized Market
Cost Value Cost Value
----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
(In thousands)
Due after one year through five years.................... $ 34,383 $ 33,924 $ 633,427 $ 596,571
Due after five years through ten years................... 355,174 327,308 446,452 444,450
Due after ten years...................................... 776,463 692,319 846,234 779,436
---------- ---------- ---------- ----------
1,166,020 1,053,551 1,926,113 1,820,457
Mortgage-backed securities............................... -- -- 19,806 18,855
---------- ---------- ---------- ----------
$1,166,020 $1,053,551 $1,945,919 $1,839,312
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
</TABLE>
Short-term investments represent securities which are scheduled to mature within
one year.
Net investment income consisted of:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31 1994 1993 1992
----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
(In thousands)
Investment income:
Fixed maturities (1)............................................. $ 218,970 $ 193,180 $ 180,388
Equity securities................................................ 27,390 29,640 22,229
Short-term investments........................................... 9,159 19,920 17,615
Other............................................................ 14,159 15,832 13,664
---------- ---------- ----------
269,678 258,572 233,896
Investment expenses................................................... (10,766) (7,773 ) (8,116)
---------- ---------- ----------
$ 258,912 $ 250,799 $ 225,780
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
(1) Includes investment income from debentures of Reliance Group Holdings, Inc.
of $10,085,000 and $10,269,000 in 1993 and 1992.
Gain on sales of investments consisted of:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31 1994 1993 1992
----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
(In thousands)
Fixed maturities (1):
Realized gains................................................... $ 44,512 $ 83,338 $ 40,359
Realized losses (2).............................................. (28,016) (21,179 ) (9,386)
---------- ---------- ----------
16,496 62,159 30,973
Equity securities..................................................... 8,890 98,944 19,628
Other (3)............................................................. (16,168) (2,907 ) (465)
---------- ---------- ----------
$ 9,218 $ 158,196 $ 50,136
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
(1) For the year ended December 31, 1994, the Company sold fixed maturities held
for investment with an amortized cost of $18,100,000. These sales were
principally in response to a significant deterioration in the issuers'
creditworthiness.
(2) Includes $21,900,000, $18,400,000 and $9,000,000 in 1994, 1993 and 1992,
respectively, related to non-investment grade securities.
(3) Includes realized losses of $14,500,000 in 1994 related to certain foreign
currency contracts. As of December 31, 1994, the Company did not hold any
derivative financial instruments.
Gain on sales of investments in 1994 and 1993 included write-downs of
$23,500,000 and $23,400,000 equal to the difference between cost and market
values of certain investments to reflect other than temporary declines.
9
<PAGE>
Net unrealized appreciation (depreciation) on investments consisted of:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31 1994 1993 1992
-----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
(In thousands)
Unrealized appreciation (depreciation):
Equity securities.......................................................... $ (6,849) $ (9,670) $ 31,347
Fixed maturities available for sale........................................ (193,737) 48,689 38,441
--------- -------- --------
(200,586) 39,019 69,788
Deferred income tax (provision) benefit...................................... 66,684 (11,261) (27,801)
Net unrealized appreciation (depreciation) in investments of
investee company........................................................... (9,002) 1,244 3,818
--------- -------- --------
$(142,904) $ 29,002 $ 45,805
--------- -------- --------
--------- -------- --------
Unrealized appreciation (depreciation) on fixed maturities
held for investment........................................................ $(148,939) $ 3,098 $ 17,496
--------- -------- --------
--------- -------- --------
</TABLE>
Net unrealized gain (loss) on investments consisted of:
<TABLE>
<CAPTION>
DECEMBER 31 1994 1993 1992
-----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
(In thousands)
Equity securities:
Unrealized gains........................................................ $ 114,231 $100,179 $ 99,986
Unrealized losses....................................................... (32,124) (11,223) (1,360)
--------- -------- --------
82,107 88,956 98,626
--------- -------- --------
Fixed maturities available for sale:
Unrealized gains........................................................ 38,507 99,621 66,392
Unrealized losses....................................................... (145,114) (12,491) (27,951)
--------- -------- --------
(106,607) 87,130 38,441
--------- -------- --------
(24,500) 176,086 137,067
Deferred income tax (provision) benefit...................................... 5,053 (61,631) (50,370)
Net unrealized gain (loss) in investments of investee company................ (8,434) 568 (676)
--------- -------- --------
$ (27,881) $115,023 $ 86,021
--------- -------- --------
--------- -------- --------
</TABLE>
Fixed maturity investments carried at $482,500,000 at December 31, 1994 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,
whose aggregate carrying value is in excess of 10% of the Company's
shareholder's equity at December 31, 1994 were comprised of nonredeemable
preferred stock of Aon Corporation and common stock of Symbol Technologies, Inc.
with a carrying and market value of $123,132,000 and $110,182,000, respectively.
10
<PAGE>
3. INVESTMENT IN INVESTEE COMPANY
Investment in investee company at December 31, 1994 and 1993 was $147,513,000
and $157,016,000 which represents the Company's investment in Zenith National
Insurance Corp. ('Zenith'). Equity income in Zenith was $9,478,000, $12,441,000
and $5,206,000 for the years ended December 31, 1994, 1993 and 1992,
respectively. Dividends received by the Company from Zenith were $6,574,000 for
each of the years ended December 31, 1994, 1993 and 1992.
Summarized financial information for Zenith is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31 1994 1993 1992
-----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
(In thousands, except per-share amounts)
Revenues.................................................................. $595,113 $ 585,782 $ 549,335
Income before income taxes and extraordinary item......................... 57,571 73,479 19,706
Net income................................................................ 37,900 53,200 28,700
Net income per-share...................................................... 1.99 2.76 1.52
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31 1994 1993
-----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
(In thousands, except percentage of ownership)
Total assets.......................................................................... $1,840,758 $1,857,790
Senior notes.......................................................................... 74,111 73,989
Common shareholders' equity........................................................... 309,860 349,465
Percentage of ownership............................................................... 34.7% 34.5%
Market value of investment in equity securities....................................... 149,569 147,103
</TABLE>
The Company's equity in net income includes amortization of excess of cost over
fair value of net assets acquired. At December 31, 1994, retained earnings
included undistributed net income of $31,091,000 from Zenith.
4. PREMIUMS AND OTHER ACCOUNTS RECEIVABLE
As of December 31, 1994 and 1993, the Company sold with recourse $126,700,000
and $117,900,000 of reinsurance recoverables and premiums receivable relating to
its property and casualty insurance operations.
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.
Provision for income taxes on continuing operations consisted of:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31 1994 1993 1992
-----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
(In thousands)
Current:
Federal.............................................................. $ 52,666 $ 87,627 $ 45,261
Foreign.............................................................. 6,204 1,949 1,621
-------- ---------- ----------
58,870 89,576 46,882
Deferred federal.......................................................... (10,888) 3,418 (26,177)
-------- ---------- ----------
$ 47,982 $ 92,994 $ 20,705
-------- ---------- ----------
-------- ---------- ----------
</TABLE>
11
<PAGE>
Domestic and foreign income from continuing operations before income taxes,
minority interests and equity in investee company were:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31 1994 1993 1992
-----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
(In thousands)
Domestic.................................................................... $161,301 $ 263,490 $ 86,710
Foreign..................................................................... 18,498 5,569 4,768
-------- --------- ---------
$179,799 $ 269,059 $ 91,478
-------- --------- ---------
-------- --------- ---------
</TABLE>
The reconciliation of taxes computed at the statutory rate (35% in 1994 and 1993
and 34% in 1992) to the provision for income taxes is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31 1994 1993 1992
-----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
(In thousands)
Tax provision at statutory rate............................................. $ 62,930 $ 94,171 $ 31,103
Nontaxable investment income................................................ (13,989) (1,743) (7,999)
Impact of change in statutory rate from new tax act......................... -- (4,043) --
Other....................................................................... (959) 4,609 (2,399)
-------- --------- ---------
Provision for income taxes.................................................. $ 47,982 $ 92,994 $ 20,705
-------- --------- ---------
-------- --------- ---------
</TABLE>
The tax effects of items comprising the Company's net deferred tax asset are as
follows:
<TABLE>
<CAPTION>
DECEMBER 31 1994 1993
-----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
(In thousands)
Deferred tax assets:
Discounting of loss reserves....................................................... $ 197,655 $ 190,862
Tax basis differential of subsidiary not included in consolidated tax return....... 120,600 120,600
Operating loss carryforwards of subsidiary not included in
consolidated tax return.......................................................... 57,925 54,600
Unearned premium reserve........................................................... 40,748 41,198
Accruals not currently deductible.................................................. 42,878 41,331
Other.............................................................................. 71,938 50,184
--------- ---------
531,744 498,775
Deferred tax liabilities:
Deferred policy acquisition costs.................................................. 62,874 61,915
Unrealized investment gains........................................................ -- 61,631
Investment in investee company..................................................... 17,499 20,898
Other.............................................................................. 83,419 78,147
--------- ---------
367,952 276,184
Valuation allowance..................................................................... (164,042) (156,511)
--------- ---------
Net deferred tax asset.................................................................. $ 203,910 $ 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 net operating loss carryforwards ('NOL'). The increase in the Company's
valuation allowance during 1994 relates principally to a subsidiary that is not
included in the consolidated tax return.
At December 31, 1994, a subsidiary of the Company, not included in the
consolidated tax return, had available NOL's of approximately $165,500,000. For
federal income tax purposes, approximately $131,500,000 expires in 2001,
$17,000,000 in 2002 and $17,000,000 in 2004. The Internal Revenue Code 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.
12
<PAGE>
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 NOL's
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.
7. UNPAID CLAIMS AND RELATED EXPENSES
The following table presents information relating to the liability for unpaid
claims and related expenses for the Company's property and casualty insurance
operations. The reconciliation of beginning and ending liability balances is as
follows:
<TABLE>
<CAPTION>
DECEMBER 31 1994 1993 1992
-----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
(In thousands)
Liability for unpaid claims and related expenses, beginning
of year............................................................... $5,048,442 $4,571,792 $3,685,049
Less reinsurance recoverables...................................... 2,116,914 1,868,800 1,309,814
---------- ---------- ----------
Net liability for unpaid claims and related expenses, beginning
of year............................................................... 2,931,528 2,702,992 2,375,235
---------- ---------- ----------
Provision for policy claims and related expenses:
Provision for insured events of the current year................... 1,274,649 1,195,425 1,258,111
Increase in provision for insured events of prior years............ 22,444 40,169 31,487
---------- ---------- ----------
Total provision............................................... 1,297,093 1,235,594 1,289,598
---------- ---------- ----------
Payments for policy claims and related expenses:
Attributable to insured events of the current year................. 321,538 229,778 271,878
Attributable to insured events of prior years...................... 780,961 776,881 689,181
---------- ---------- ----------
Total payments................................................ 1,102,499 1,006,659 961,059
---------- ---------- ----------
Foreign currency translation............................................ 1,659 (399) (782)
---------- ---------- ----------
Net liability for unpaid claims and related expenses, end of year....... 3,127,781 2,931,528 2,702,992
Plus reinsurance recoverables...................................... 2,453,702 2,116,914 1,868,800
---------- ---------- ----------
Liability for unpaid claims and related expenses, end of year........... $5,581,483 $5,048,442 $4,571,792
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
The 1994 provision for property and casualty insured events of prior years
includes $17,000,000 of adverse development related to prior year
asbestos-related and environmental pollution claims. Development of asbestos-
related and environmental pollution claims primarily effects general liability
and multiple peril lines of business. The 1994 provision also includes
$14,700,000 of adverse development from other general liability lines. This
development was partially offset by $13,300,000 of favorable development in
workers' compensation. The 1993 provision included $21,100,000 of adverse
development from workers' compensation reinsurance pools and $35,200,000 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 other general liability lines. The 1992
provision included $55,600,000 of adverse development from workers' compensation
and automobile reinsurance pools. This development was partially offset by
favorable development of $11,900,000 from two general liability claims and
favorable development of $10,700,000 related to unallocated loss adjustment
expenses.
13
<PAGE>
The following table presents information relating to the liability for unpaid
claims and related expenses for the Company's title insurance operations. The
reconciliation of beginning and ending liability balances is as follows:
<TABLE>
<CAPTION>
DECEMBER 31 1994 1993 1992
----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
(In thousands)
Liability for unpaid claims and related expenses, beginning of year.......... $204,695 $173,328 $177,449
-------- -------- --------
Provision for policy claims and related expenses:
Provision for insured events of the current year........................ 71,060 76,955 95,963
Increase in provision for insured events of prior years................. 4,807 4,848 4,599
-------- -------- --------
Total provision.................................................... 75,867 81,803 100,562
-------- -------- --------
Payments for policy claims and related expenses:
Attributable to insured events of the current year...................... 4,475 2,356 7,450
Attributable to insured events of prior years........................... 48,024 48,080 78,950
-------- -------- --------
Total payments..................................................... 52,499 50,436 86,400
-------- -------- --------
Other (1).................................................................... -- -- (18,283)
-------- -------- --------
Liability for unpaid claims and related expenses, end of year................ $228,063 $204,695 $173,328
-------- -------- --------
-------- -------- --------
</TABLE>
(1) Represents the effects of the sale and acquisition of certain subsidiaries.
The following table presents information relating to the net liability for
unpaid claims and related expenses pertaining to asbestos-related and
environmental pollution claims. Information is presented for 1994 and 1993 only,
as certain 1992 data is not available. The reconciliation of beginning and
ending net liability balances is as follows:
<TABLE>
<CAPTION>
DECEMBER 31 1994 1993
-----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
(In thousands)
Net liability for unpaid claims and related expenses, beginning of year................... $122,034 $ 94,253
Provision for policy claims and related expenses.......................................... 28,279 52,630
Payments for policy claims and related expenses........................................... (20,170) (24,849)
-------- --------
Net liability for unpaid claims and related expenses, end of year......................... $130,143 $122,034
-------- --------
-------- --------
</TABLE>
Included in the December 31, 1994 net liability for unpaid claims and related
expenses for asbestos-related and environmental pollution claims are $36,500,000
of loss costs for claims incurred but not reported, $49,400,000 of loss costs
for reported claims and $44,243,000 of related expenses. The Company continues
to receive claims asserting injuries from hazardous materials and alleged
damages to cover various clean-up costs. Loss and loss expense reserves for
asbestos-related and environmental pollution claims are established using
standard actuarial techniques as well as management's judgement. Coverage and
claim settlement issues, related to policies written in prior years, such as the
determination that coverage exists and the definition of an occurrence, may
cause the actual loss development for asbestos-related and environmental
pollution claims to exhibit more variation than the remainder of the Company's
book of business. See Financial Review section for further discussion.
8. SENIOR RESET NOTES, TERM LOANS AND SHORT-TERM DEBT
In 1993, the Company entered into a revolving credit facility and term loan
agreement ('Credit Facility'). Borrowings under the Credit Facility were used to
redeem all outstanding debentures. As a result of the early extinguishment of
this debt, the Company incurred an extraordinary loss of $3,666,000, net of
income taxes of $1,974,000, in 1993.
14
<PAGE>
Senior reset notes outstanding are as follows:
<TABLE>
<CAPTION>
DECEMBER 31 1994 1993
------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
(In thousands)
10.36% senior reset notes (interest rate is adjustable every five years based
on Treasury Rate) due 1998-2000...................................................... $30,713 $ 50,000
9.48% 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 $117 at December 31, 1994)............................................... 49,883 49,863
------- --------------
$80,596 $ 99,863
------- --------------
------- --------------
</TABLE>
The fair value of the Company's senior reset notes at December 31, 1994 and 1993
was $80,753,000 and $102,280,000 based on quoted market prices.
TERM LOANS AND SHORT-TERM DEBT
At December 31, 1994, term loans and short-term debt aggregated $129,355,000 and
consisted of $116,102,000 of term loans which are payable in varying amounts
through 2015 with interest rates ranging from 5.83% to 10.50% and $13,253,000 of
short-term debt. The weighted average interest rate on short-term debt was 7.4%
and 5.3% at December 31, 1994 and 1993. The Company believes that the fair value
of its term loans and short-term debt at December 31, 1994 and 1993 approximates
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)
1995................................................................................... $ 5,000 $ 23,736
1996................................................................................... 5,000 15,652
1997................................................................................... 5,000 23,267
1998................................................................................... 5,713 55,000
1999................................................................................... 10,000 --
</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 December 31, 1994, borrowings aggregating
$35,000,000 were outstanding under this facility. All of the common stock of
Reliance Insurance Company ('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, 1994, the Company could pay up to
$47,100,000 in dividends without violating the more restrictive minimum net
worth requirement. Reliance Financial's net worth increases with its net income,
subject to increases or decreases in net worth resulting from changes in the
market value of fixed maturities available for sale and of equity securities.
The Company is confident it will continue to pay all dividends necessary to meet
Reliance Group Holdings, Inc.'s cash needs.
15
<PAGE>
9. REDEEMABLE PREFERRED STOCK AND DIVIDENDS OF SUBSIDIARIES
The Reliance Insurance preferred stock (940,725 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 1994 and 1993, 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 income.
The Insurance Law of Pennsylvania, where Reliance Insurance Company (the
Company's principal property and casualty insurance subsidiary) is domiciled,
limits the maximum amount of dividends which may be paid without approval by the
Pennsylvania Insurance Department. Under such law, Reliance Insurance Company
may pay dividends during the year equal to the greater of (a) 10% of the
preceding year-end policyholders' surplus or (b) the preceding year's statutory
net income, 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.
In addition, under California Insurance law, Reliance Insurance Company is
deemed to be a 'commercially domiciled' California insurer and therefore subject
to the dividend payment laws of California. The California laws which limit the
maximum amount of dividends which may be paid without approval by the California
Insurance Department and specify the factors to be considered by the California
Insurance Department to determine if the payment of the dividend is reasonable
in relation to an insurance company's outstanding liabilities and financial
needs are substantially the same as the laws of Pennsylvania. As in
Pennsylvania, the California 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
1994, 1993 and 1992 were $114,139,000 ($111,467,000 for common stock),
$133,671,000 ($130,639,000 for common stock) and $143,729,000 ($140,448,000 for
common stock), respectively. During 1995, $124,500,000 would be available for
dividend payments by Reliance Insurance Company under Pennsylvania and
California law. 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 or California law for the payment of
dividends without prior Insurance Department approvals or that any requested
approvals will be obtained. However, Reliance Insurance Company has been advised
by the California Insurance Department that any required prior approval will be
based on the financial stability of the Company. Reliance Insurance Company has
also 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 effect the Company's ability to service its
debt and to pay dividends on its common stock.
10. REINSURANCE
In the normal course of business, the property and casualty insurance companies
assume and cede reinsurance on both a pro-rata and excess basis. Reinsurance
provides greater diversification of business and limits the maximum net loss
potential arising from large claims. Although the ceding of reinsurance does not
discharge an insurer from its primary legal liability to a policyholder, the
reinsuring company assumes the related liability.
16
<PAGE>
Amounts recoverable from reinsurers are estimated in a manner consistent with
the liability for unpaid claims and related expenses associated with the
reinsurance. Estimated amounts of reinsurance recoverables are reported as
assets in the accompanying consolidated balance sheet. As of December 31, 1994
and 1993, reinsurance recoverables include $463,380,000 and $439,337,000 of
prepaid reinsurance premiums which represents the portion of property and
casualty premiums ceded to reinsurers applicable to unearned premiums.
The reconciliation of property and casualty insurance direct premiums to net
premiums is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31 1994 1993 1992
--------------------------------------------------------------------------------------------------------------------
(In thousands)
Premiums Premiums Premiums Premiums Premiums Premiums
Written Earned Written Earned Written Earned
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Direct........................... $ 2,654,437 $ 2,630,549 $ 2,587,149 $ 2,531,478 $ 2,480,417 $ 2,350,216
Assumed.......................... 330,261 345,398 323,422 304,422 280,530 312,730
Ceded............................ (1,220,408) (1,198,629) (1,139,974) (1,264,361) (1,219,387) (1,127,206)
----------- ----------- ----------- ----------- ----------- -----------
Net premiums................ $ 1,764,290 $ 1,777,318 $ 1,770,597 $ 1,571,539 $ 1,541,560 $ 1,535,740
----------- ----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- ----------- -----------
</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 1994 1993 1992
--------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
(In thousands)
Gross..................................................................... $ 2,220,285 $ 2,097,428 $ 2,383,349
Reinsurance recoveries.................................................... (923,192) (861,834) (1,093,751)
----------- ----------- -----------
Net policy claims and settlement expenses............................ $ 1,297,093 $ 1,235,594 $ 1,289,598
----------- ----------- -----------
----------- ----------- -----------
</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 1994 ceded premiums, are
as follows:
<TABLE>
-----------------------------------------------------------------------------------------------------------------
<S> <C>
(In thousands)
American Re-Insurance Company...................................................................... $ 132,778
North American Reinsurance Corp.................................................................... 98,756
Lloyd's of London.................................................................................. 93,503
Hertz International Reinsurance Ltd................................................................ 67,309
Commercial Risk Re-Insurance Co.................................................................... 45,822
G.I.O. Insurance Ltd............................................................................... 35,869
TRN Insurance Company.............................................................................. 34,692
Employers Reinsurance Corp......................................................................... 34,537
TIG Reinsurance Company............................................................................ 29,550
Transatlantic Reinsurance Co....................................................................... 26,725
</TABLE>
17
<PAGE>
11. OTHER INSURANCE EXPENSES
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31 1994 1993 1992
-----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
(In thousands)
Salaries and commissions.................................................... $704,254 $ 684,362 $ 613,743
Taxes, other than income taxes.............................................. 34,849 54,049 52,161
Rent........................................................................ 54,863 50,852 52,108
Policyholders' dividends.................................................... 2,630 6,342 9,827
Other....................................................................... 163,308 159,142 152,035
-------- --------- ---------
$959,904 $ 954,747 $ 879,874
-------- --------- ---------
-------- --------- ---------
</TABLE>
12. POSTRETIREMENT BENEFIT PLANS
Retirement benefits under the Company's noncontributory trusteed defined benefit
pension plans are paid to eligible employees based primarily on years of service
and compensation. Plan assets principally consist of corporate and government
debt securities and 1,247,400 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 1994 1993 1992
-----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
(In thousands)
Service cost--benefits earned during the period............................. $ 10,255 $ 7,882 $ 9,528
Interest cost on projected benefit obligation............................... 12,941 12,495 11,596
Actual return on plan assets................................................ 8,920 (25,596) (17,748)
Net amortization and deferral............................................... (26,252) 10,068 4,194
Effect of plan curtailment.................................................. -- (1,212) (542)
-------- --------- ---------
$ 5,864 $ 3,637 $ 7,028
-------- --------- ---------
-------- --------- ---------
</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 1994 1993
-----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
(In thousands)
Actuarial present value of benefit obligation:
Vested............................................................................. $ 118,580 $ 128,639
Nonvested.......................................................................... 6,890 7,182
--------- ---------
Accumulated benefit obligation.......................................................... 125,470 135,821
Effect of anticipated future compensation levels........................................ 26,675 40,104
--------- ---------
Projected benefit obligation............................................................ 152,145 175,925
Plan assets at market value............................................................. (144,347) (157,836)
--------- ---------
Projected benefit obligation in excess of plan assets................................... 7,798 18,089
Unrecognized net asset at date of adoption.............................................. 10,076 11,696
Unrecognized net loss................................................................... (919) (15,303)
--------- ---------
Accrued pension cost.................................................................... $ 16,955 $ 14,482
--------- ---------
--------- ---------
</TABLE>
Contributions under the Company's noncontributory trusteed defined benefit
pension plans were $3,391,000, $4,381,000 and $7,914,000 in 1994, 1993 and 1992,
respectively.
The assumptions used to measure the projected benefit obligation at December 31,
1994 and 1993 include a discount rate of 9.0% and 7.5%, respectively. The
weighted average rate of compensation increase was 5.9% at December 31, 1994
compared to a fixed rate of compensation increase of 5.0% at December 31, 1993.
The expected long-term investment rate of return on plan assets for the years
ended December 31, 1994 and 1993 was 10.0%.
18
<PAGE>
Contributions under the Company's defined contribution plans were $5,095,000,
$6,353,000 and $5,620,000 in 1994, 1993 and 1992, respectively, and were based
on a formula specified in the plan agreements.
The Company offers unfunded postretirement medical and life insurance plans to
certain employees of a subsidiary. Postretirement benefit cost includes the
following components:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31 1994 1993
-----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
(In thousands)
Service cost-benefits earned during the period............................................ $ 226 $ 242
Interest cost on accumulated postretirement benefit obligation............................ 715 893
Net amortization and deferral............................................................. 790 1,141
-------- --------
$ 1,731 $ 2,276
-------- --------
-------- --------
</TABLE>
The components of the accumulated postretirement benefit obligation are as
follows:
<TABLE>
<CAPTION>
DECEMBER 31 1994 1993
-----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
(In thousands)
Accumulated postretirement benefit obligation:
Retirees................................................................................ $ 5,743 $ 7,131
Other active plan participants.......................................................... 3,001 4,693
-------- --------
Accumulated benefit obligation............................................................ 8,744 11,824
Unrecognized net gain (loss).............................................................. 853 (1,755)
Unrecognized transition obligation........................................................ (8,630) (9,406)
-------- --------
Accrued postretirement benefit cost....................................................... $ 967 $ 663
-------- --------
-------- --------
</TABLE>
The assumed health care cost trend rate used in measuring the accumulated
postretirement benefit obligation as of December 31, 1994 was 15.0% for 1995
decreasing until it reaches 7.0% 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, 1994 and the 1994 net postretirement health care cost by
approximately 4.1% and 2.2%, respectively. The assumed discount rate used in
determining the accumulated postretirement benefit obligation at December 31,
1994 and 1993 was 9.0% and 7.5%, respectively.
13. SALE OF SUBSIDIARY
During 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'). 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. For the ten months ended October 30, 1992, CMAC had revenues of
$65,354,000, income before income taxes of $15,875,000 and net income of
$10,649,000.
14. STATUTORY INFORMATION
Statutory net income was as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31 1994 1993 1992
----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
(In thousands)
Property and casualty insurance operations................................... $123,970 $217,353 $100,648
Title insurance operations................................................... 32,421 43,904 22,575
</TABLE>
Statutory policyholders' surplus was as follows:
<TABLE>
<CAPTION>
DECEMBER 31 1994 1993
-----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
(In thousands)
Property and casualty insurance operations (1)............................................ $908,538 $902,290
Title insurance operations................................................................ 180,757 176,868
</TABLE>
(1) Includes Reliance Insurance's investment in title operations. Also reflects
a reduction in statutory loss reserves of $104,100,000 and $96,000,000 at
December 31, 1994 and 1993, representing discounts of workers' compensation
reserves in excess of GAAP discounts.
19
<PAGE>
15. 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.
16. 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').
During 1993, the Company sold its life insurance subsidiary, UPL, to General
Electric Capital Corporation. 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. For the year ended December
31, 1992, UPL had revenues of $638,770,000, income before income taxes of
$86,445,000 and net income of $57,352,000.
During 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. For the six months
ended June 30, 1992, Hall had revenues of $241,460,000, income before income
taxes of $9,471,000 and net income of $6,753,000. Pursuant to the terms of an
Agreement and Plan of Merger, 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, in 1992, 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 litigation, Reliance Group Holdings, Inc.
issued 305,635 shares of its common stock as additional merger consideration to
former shareholders of Hall. The issuance of these shares was reflected as a
$1,589,000 noncash capital contribution in the Company's 1994 financial
statements.
17. CONTINGENCIES AND COMMITMENTS
CONTINGENCIES
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.
20
<PAGE>
In 1989, the California Department of Insurance directed to United Pacific
Insurance Company, one of the Company's California subsidiaries which writes
business in California, a notice to reduce its current rates and make refunds to
its policyholders by approximately $10,000,000. In January 1991, the regulations
which formed the basis of the notice were repealed by the newly elected
Insurance Commissioner. Subsequently, there were several administrative hearings
on rate rollback and several different sets of regulations were issued. The
regulations were subject to ongoing administrative and legal challenges. In
February 1993, a Los Angeles Superior Court issued a decision declaring several
sections of the regulations invalid and enjoined the enforcement of the
regulations. On August 18, 1994, the California Supreme Court issued a decision
reversing the Superior Court and upholding the validity of the regulations
issued by the Insurance Commissioner. A petition filed with the United States
Supreme Court seeking review of the California Supreme Court decision was denied
on February 21, 1995. On November 28, 1994, Reliance Insurance Company and
several of its affiliates received an order from the outgoing Insurance
Commissioner ordering refunds totaling $44,800,000 plus interest of $27,500,000.
The Company believes that the refund order is based on incomplete and erroneous
data. Furthermore, the Company believes that it did not earn a fair rate of
return on its California business during the year at issue, 1989. Consequently,
it intends to contest the order vigorously. The Company is entitled to a hearing
to present evidence to establish what it believes to be an appropriate rollback
or refund amount, if any. In the fourth quarter of 1994, the Company recorded a
pre-tax charge of $11,600,000 related to Proposition 103. While this charge
reflects the Company's assessment of the impact of potential refunds to
policyholders under Proposition 103, the Company nevertheless intends to contest
the imposition of any refund on the basis of the matters set forth above. The
Company does not believe that it is probable that it will be subject to a refund
in an amount which will have a material adverse effect on its consolidated
financial statements.
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, the Company is subject to the litigation set forth below.
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.
21
<PAGE>
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. Prometheus has recorded a
reserve of $36,000,000 representing the initial payment of $19,000,000 and the
present value of the additional remaining annual payments over a ten-year
period. In 1994, Prometheus received $600,000 in insurance proceeds and, in
prior years, had received an aggregate of $19,400,000 in insurance proceeds in
connection with this matter from its insurance carrier.
Thirty-one employers doing business in Texas have brought two actions in the
District Court of Dallas County, Texas, against, among others, approximately 200
individual insurance companies, including Reliance Insurance Company and several
of its subsidiaries. The plaintiffs in the actions, which were commenced against
the Reliance parties in April 1992 and February 1995 respectively (and the
second of which has been stayed in light of the pendency of the first), assert
that they were overcharged for workers' compensation insurance and multiple line
retrospectively rated casualty insurance between 1987 and 1992. In August 1994,
the plaintiffs in the first action moved for certification of a purported
plaintiff class consisting of all employers who purchased Texas workers'
compensation insurance from the insurance company defendants during the years in
question. Plaintiffs seek monetary damages, with interest and attorneys' fees,
against all defendants jointly and severally, together with a release of all
purported class members from liability for payment of unlawful premiums, and
injunctive relief. The Company has filed answers denying the allegations and is
contesting the actions vigorously. The Company does not believe that it is
probable that its liability, if any, in excess of what the Company has provided
for in respect of this matter, will have a material adverse effect on its
consolidated financial statements.
22
<PAGE>
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 December 31, 1994, the Company guaranteed $38,000,000 of the partnership's
outstanding debt which matures on December 29, 1996. At December 31, 1994, the
partnership's total outstanding debt was $171,902,000. 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, 1994, 1993 and 1992 was $92,400,000,
$92,000,000 and $90,700,000 respectively.
At December 31, 1994, future net minimum rental payments required under
noncancelable leases were as follows:
<TABLE>
-----------------------------------------------------------------------------------------------------------------
<S> <C>
(In thousands)
1995.................................................................................................. $ 63,408
1996.................................................................................................. 52,756
1997.................................................................................................. 40,947
1998.................................................................................................. 25,340
1999.................................................................................................. 20,443
2000 and thereafter................................................................................... 22,584
--------
$225,478
--------
--------
</TABLE>
23
<PAGE>
18. BUSINESS SEGMENT INFORMATION
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31 1994 1993 1992
-----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
(In thousands)
REVENUES:
Property and casualty insurance
Premiums earned.................................................... $1,777,318 $1,571,539 $1,535,740
Net investment income.............................................. 232,299 226,517 199,556
Gain on sales of investments....................................... 8,702 153,410 47,053
---------- ---------- ----------
2,018,319 1,951,466 1,782,349
---------- ---------- ----------
Title and mortgage insurance
Premiums earned.................................................... 856,774 893,364 826,493
Net investment income.............................................. 26,613 24,282 26,224
Gain on sales of investments....................................... 516 4,786 3,083
Gain on sale of subsidiary......................................... -- -- 8,999
---------- ---------- ----------
883,903 922,432 864,799
---------- ---------- ----------
Other................................................................... 156,473 135,293 129,345
---------- ---------- ----------
$3,058,695 $3,009,191 $2,776,493
---------- ---------- ----------
---------- ---------- ----------
INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES, MINORITY
INTERESTS AND EQUITY IN INVESTEE COMPANY:
Property and casualty insurance
Underwriting....................................................... $ (97,343) $ (175,565) $ (219,286)
Net investment income.............................................. 232,299 226,517 199,556
Gain on sales of investments....................................... 8,702 153,410 47,053
---------- ---------- ----------
143,658 204,362 27,323
---------- ---------- ----------
Title and mortgage insurance............................................ 31,326 59,966 59,113
---------- ---------- ----------
Other................................................................... 4,815 4,731 5,042
---------- ---------- ----------
$ 179,799 $ 269,059 $ 91,478
---------- ---------- ----------
---------- ---------- ----------
IDENTIFIABLE ASSETS AT YEAR-END:
Property and casualty insurance......................................... $8,541,019 $7,959,886 $7,439,394
Title insurance......................................................... 550,160 547,707 471,226
Other................................................................... 246,586 270,319 311,543
---------- ---------- ----------
$9,337,765 $8,777,912 $8,222,163
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
Income from continuing operations before income taxes, minority interests and
equity in investee company relating to property and casualty insurance
underwriting has been reduced by policyholders' dividends and other income and
expense. Income from continuing operations before income taxes, minority
interests and equity in investee company by segment is before allocation of
corporate interest expense.
Identifiable assets by industry segment are those assets which are used in the
Company's operations in each segment.
24
<PAGE>
19. QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
1994 Quarter
----------------------------------------------------------------------------------------------------------------
First Second Third Fourth
----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
(In thousands)
REVENUES:
Premiums earned.................................................. $685,885 $734,588 $623,547 $590,072
Net investment income............................................ 62,650 64,603 65,362 66,297
Gain on sales of investments..................................... 3,637 1,672 3,403 506
Interest income from parent company.............................. 2,918 3,046 3,551 5,349
Other............................................................ 31,475 37,109 36,847 36,178
-------- -------- -------- --------
$786,565 $841,018 $732,710 $698,402
-------- -------- -------- --------
-------- -------- -------- --------
NET INCOME....................................................... $ 17,662 $ 41,355 $ 43,194 $ 36,327
-------- -------- -------- --------
-------- -------- -------- --------
</TABLE>
<TABLE>
<CAPTION>
1993 Quarter
----------------------------------------------------------------------------------------------------------------
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>
25
<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, 1994 and 1993, and the related statements of
income, changes in shareholder's equity and cash flows for each of the three
years in the period ended December 31, 1994. 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, 1994 and 1993 and the results of
their operations and their cash flows for each of the three years in the period
ended December 31, 1994 in conformity with generally accepted accounting
principles.
As discussed in note 6 to the consolidated financial statements, in 1993 the
Company adopted Statement of Financial Accounting Standards No. 109 and,
accordingly, changed its method of accounting for income taxes.
/s/ Deloitte & Touche LLP
New York, New York
February 22, 1995
26
<PAGE>
RELIANCE FINANCIAL SERVICES CORPORATION AND SUBSIDIARIES
FINANCIAL REVIEW
--------------------------------------------------------------------------------
OVERVIEW
The Company had income from continuing operations, before gain on sales of
investments, of $132.5 million in 1994, which included improved underwriting
results in property and casualty insurance operations, compared to $82.5 million
in 1993 and $32.1 million in 1992. After-tax gain on sales of investments were
$6.0 million in 1994 compared to $102.8 million in 1993 and $40.6 million in
1992.
Net income was $138.5 million in 1994 compared to $206.0 million in 1993, which
included 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, which included results pertaining to discontinued
operations, was $89.5 million.
PROPERTY AND CASUALTY INSURANCE OPERATIONS
The property and casualty insurance operations reported pretax income, before
gain on sales of investments, of $135.0 million in 1994 compared to $51.0
million in 1993 and a loss of $19.7 million in 1992. Gain on sales of
investments were $8.7 million in 1994 compared to $153.4 million in 1993 and
$47.1 million in 1992.
The property and casualty insurance operations had strong underwriting results
in 1994, including continued underwriting profits in workers' compensation and
surety lines, as well as improved underwriting results in personal lines,
commercial automobile and involuntary insurance facilities. Underwriting losses
were $97.3 million in 1994 compared to $175.6 million in 1993 and $219.3 million
in 1992. Underwriting results continue to be adversely affected by catastrophe
losses. Catastrophe losses were $50.1 million in 1994 ($134.0 million before
reinsurance) which included $44.9 million arising from the January 1994
California earthquake, compared to $39.3 million in 1993 ($88.5 million before
reinsurance) and $61.1 million in 1992 ($119.2 million before reinsurance),
which included $45.6 million arising from Hurricane Andrew. The combined ratios
(calculated on a GAAP basis), after policyholders' dividends were 104.4%, 110.8%
and 114.1% for 1994, 1993 and 1992, respectively.
Net premiums written and premiums earned for each line of property and casualty
insurance were as follows:
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31 1994 1993 1992
----------------------------------------------------------------------------------------------------------------
Net Net Net Net Net Net
Premiums Premiums Premiums Premiums Premiums Premiums
(In thousands) Written Earned Written Earned Written Earned
---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
General Liability.................. $ 423,377 $ 427,864 $ 369,895 $ 337,151 $ 349,777 $ 325,963
Workers' Compensation.............. 312,808 323,891 377,592 360,613 418,685 427,337
Automobile......................... 244,000 251,038 260,180 225,910 261,520 250,246
Multiple Peril..................... 180,074 170,230 187,438 147,158 126,070 126,263
Reinsurance........................ 125,597 132,694 123,742 124,150 108,095 155,402
Surety............................. 117,989 108,833 106,664 97,414 94,316 93,246
Involuntary........................ 113,483 115,963 113,498 112,700 109,583 98,038
Ocean and Inland Marine............ 103,865 95,103 105,254 82,451 49,658 47,364
Other.............................. 143,097 151,702 126,334 83,992 23,856 11,881
---------- ---------- ---------- ---------- ---------- ----------
$1,764,290 $1,777,318 $1,770,597 $1,571,539 $1,541,560 $1,535,740
---------- ---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ---------- ----------
</TABLE>
27
<PAGE>
The decline in net premiums written in 1994, when compared to 1993, is primarily
attributable to lower writings in workers' compensation reflecting an increase
in return premiums on retrospectively rated policies due to improved loss
experience and the trend toward high deductible non-retrospectively rated
insurance, which results in lower premiums and lower losses. In addition,
workers' compensation net premiums written in 1994 were reduced as a result of
certain litigation claims in Texas. See note 17 to the consolidated financial
statements. This decline was substantially offset by growth in general
liability, surety and other lines. The increase in other lines net premiums
written during 1994 reflects continued growth in accident and health premiums,
partially offset by a decline in personal lines premiums. The increase in net
premiums earned in 1994, when compared to 1993, is due to the non-renewal of
certain quota share reinsurance treaties. These treaties reduced 1993 net
premiums earned by $209.2 million. The increase in net written premiums in 1993,
when compared to 1992, reflects higher net retentions in multiple peril, general
liability and inland marine lines of business, as well as growth in reinsurance,
surety and accident and health premiums.
Despite higher catastrophe losses, particularly in reinsurance, underwriting
results in 1994 improved, when compared to 1993, reflecting lower underwriting
losses in commercial automobile and multiple peril lines of business, as well as
lower losses from involuntary insurance facilities. Underwriting losses from
involuntary insurance facilities were $338,000 in 1994 compared to $37.9 million
in 1993 and $46.7 million in 1992. The improvement in 1994 underwriting results
also reflects lower losses in personal lines, as the Company continues to exit
this business, and an increase in underwriting profits in the surety line of
business. Underwriting profits in surety lines grew to $27.5 million in 1994
compared to $18.4 million in 1993 and $17.4 million in 1992. The 1994
underwriting results include a charge of $11.6 million reflecting the Company's
assessment of the impact of California Proposition 103. See note 17 to the
consolidated financial statements. The improvement in underwriting results in
1993, when compared to 1992, reflects a lower level of catastrophe losses as
well as improved underwriting results in workers' compensation.
The property and casualty insurance operations assume and cede reinsurance in
the normal course of business. See note 10 to the consolidated financial
statements.
Policy claims and settlement expenses includes a provision for insured events of
prior years of $22.4 million in 1994 compared to $40.2 million in 1993 and $31.5
million in 1992. The 1994 provision includes $17.0 million of adverse
development related to prior year asbestos-related and environmental pollution
claims. Development of asbestos-related and environmental pollution claims
primarily effects general liability and multiple peril lines of business. The
1994 provision also includes $14.7 million of adverse development from other
general liability lines. This development was partially offset by $13.3 million
of favorable development in workers' compensation. The 1993 provision included
$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
other 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 Company records involuntary assessments when such assessments are billed by
the respective state 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 effect on its
liquidity or capital resources.
The liability for property and casualty insurance loss reserves at December 31,
1994 was $5.58 billion compared to $5.05 billion at December 31, 1993. This
liability is based on an evaluation of reported claims in addition to
statistical projections of claims incurred but not reported and loss adjustment
expenses. Estimates of salvage and subrogation are deducted from the liability.
Reinsurance recoverables of $2.45 billion and $2.12 billion at December 31, 1994
and 1993, respectively, are included in the liability in accordance with
Statement of Financial Accounting Standards No. 113, 'Accounting and Reporting
for Reinsurance of Short-Duration and Long-Duration Contracts'.
28
<PAGE>
The establishment of loss reserves requires an estimate of the ultimate
liability based primarily on past experience. The Company applies a variety of
generally accepted actuarial techniques to determine the estimates of ultimate
liability. The techniques recognize, among other factors, the Company's and
industry's experience with similar business, historical trends in reserving
patterns and loss payments, pending level of unpaid claims, cost of claim
settlements, product mix, 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 long tail
lines of business. Estimation of loss reserves for these lines of business is
more difficult than for short tail 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 long tail 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.
Included in the liability for loss reserves at December 31, 1994 are $182.2
million ($130.1 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. Coverage and claim settlement issues, related
to policies written in prior years, 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 $20.2 million (including $7.9 million of related expenses),
$24.8 million (including $8.1 million of related expenses) and $16.1 million
(including $6.2 million of related expenses) for the years ended December 31,
1994, 1993 and 1992, respectively. Total payments for all property and casualty
insurance policy claims and related expenses were $1.1 billion, $1.0 billion and
$961.1 million for the years ended December 31, 1994, 1993 and 1992,
respectively. The following table presents information related to the number of
insureds with asbestos-related and environmental pollution claims outstanding:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31 1994 1993
------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Number of insureds with outstanding claims, beginning of year...................................... 661 807
Additional insureds with claims during the year.................................................... 307 369
Insureds with closed or settled claims during the year............................................. (302) (515)
----- -----
Number of insureds with outstanding claims, end of year............................................ 666 661
----- -----
----- -----
</TABLE>
The average net paid loss for asbestos-related and environmental pollution
claims was $34,200 and $28,200 for the years 1994 and 1993, respectively. As of
December 31, 1994, the Company was involved in approximately 45 coverage
disputes (where a motion for declaratory judgement 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.
29
<PAGE>
PROPERTY AND CASUALTY INSURANCE INVESTMENT RESULTS
Net investment income of the property and casualty insurance operations
increased to $232.3 million in 1994 from $226.5 million in 1993 and $199.6
million in 1992. These increases resulted from growth in the size of the fixed
maturity investment portfolio.
Gain on sales of investments were $8.7 million in 1994 compared to $153.4
million in 1993, which primarily resulted from sales of equity securities, and
$47.1 million in 1992.
TITLE INSURANCE OPERATIONS
The title insurance operations reported pretax income, before gain on sales of
investments, of $30.8 million in 1994, $55.2 million in 1993 and $47.0 million
in 1992.
Premiums and fees were $856.8 million in 1994 compared to $893.4 million in 1993
and $826.5 million in 1992. Included in the 1992 premiums and fees were $56.0
million from the Company's mortgage insurance unit ('CMAC'), which was sold
through a public offering in the fourth quarter of 1992. The decline in premiums
and fees in 1994 resulted from a decline in direct title insurance premiums due
to lower levels of residential refinancing activity. Refinancing activity has
declined steadily since March 1994 when mortgage interest rates began to rise.
This decline in direct title insurance premiums was partially offset by an
increase in agency premiums resulting from the strong market conditions that
existed in the fourth quarter of 1993 and the first quarter of 1994 and the
typical reporting lag of 60-90 days for agency premiums. The Company does not
anticipate an increase in residential activity during 1995. Partially offsetting
the decline in 1994 premiums and fees from residential transactions was an
increase in commercial real estate activity where operating margins are
generally higher. The increase in premiums and fees in 1993, when compared to
1992, reflected increased residential refinancing activity and, to a lesser
extent, increased residential resale activity and an acquisition completed in
late 1992.
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 $432.0 million in 1994 compared
to $418.4 million in 1993 and $382.1 million in 1992. Agency commissions as a
percentage of agency premiums declined in 1994 and 1993. These declines reflect
a lower portion of agency business in the Western states where agent commissions
are generally higher. 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 were
$344.7 million in 1994 compared to $362.3 million in 1993 and $323.0 million in
1992. Included in the 1992 other expenses were $17.1 million from CMAC. The
decline in other expenses in 1994, when compared to 1993, reflects various cost
control programs, including staff reductions, undertaken by the Company. The
expense ratio of the title insurance operations (which includes agency
commissions) was 90.2% in 1994 compared to 87.3% in 1993 and 89.2% in 1992. The
increase in the 1994 expense ratio resulted from the decline in premiums. The
provision for claim losses was $75.9 million in 1994 compared to $81.8 million
in 1993 and $100.6 million in 1992, which included $32.4 million from CMAC.
INVESTMENT PORTFOLIO
At December 31, 1994 , the Company's investment portfolio aggregated $3.82
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, 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.
30
<PAGE>
The Company's fixed maturity portfolio consists of 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, 1994, the carrying values of
non-investment grade securities and securities not rated by Standard & Poor's
were $350.2 million (11% of the fixed income portfolio) and $145.1 million (4%
of the fixed income portfolio), respectively. Substantially all of the Company's
non-investment grade and non-rated securities are classified as available for
sale and, accordingly, are carried at market value.
Due to the rise in interest rates during 1994, the market value of the Company's
fixed maturity investments designated available for sale has declined. At
December 31, 1994, the unrealized loss on fixed maturities available for sale
was $106.6 million compared to an unrealized gain of $87.1 million at December
31, 1993. This decline in market value was the principal reason the Company's
shareholder's equity has decreased to $1.06 billion at December 31, 1994 from
$1.18 billion at December 31, 1993.
At December 31, 1994, approximately 32% of the Company's fixed maturity and
short-term investment portfolio was comprised of securities issued by utilities,
the vast majority of which are rated investment grade and are first mortgage or
senior secured bonds. The utility portfolio is widely diversified among various
geographic regions in the United States and is not dependent on the economic
stability of any one particular region. No other industry group comprises more
than 10% of the fixed maturity and short-term investment portfolio.
OTHER OPERATIONS
The Company's consulting and technical services operations provide services in
the information technology and energy and environmental fields. Revenues for
these operations were $141.6 million in 1994, $116.8 million in 1993 and $109.1
million in 1992. The increase in revenues during 1994 resulted from growth in
the information technology business. Operating expenses incurred by these
operations were $134.7 million in 1994, $111.7 million in 1993 and $104.6
million in 1992. Revenues and expenses of these operations are included in other
revenues and other expenses in the accompanying statement of income.
At December 31, 1994, the Company's real estate holdings had a carrying value of
$289.5 million, which includes 11 shopping centers with an aggregate carrying
value of $138.0 million, office buildings and other commercial properties, with
an aggregate carrying value of $90.7 million, and undeveloped land with a
carrying value of $60.8 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 1993 net income by $24.3 million. See
note 6 to the consolidated financial statements.
OTHER MATTERS
The National Association of Insurance Commissioners has adopted a risk-based
capital requirement for the property and casualty insurance industry, effective
in 1995, based on 1994 annual statutory financial statements. Risk-based capital
refers to the determination of the amount of statutory capital required for an
insurer based on the risks assumed by the insurer (including, for example,
investment risks, credit risks relating to reinsurance recoverables and
underwriting risks) rather than just the amount of net premiums written by the
insurer. A formula that applies prescribed factors to the various risk elements
in an insurer's business is used to determine the minimum statutory capital
requirement for the insurer. An insurer having less statutory capital than the
formula calculates would be subject to varying degrees of regulatory
intervention, depending on the level of capital inadequacy. The Company's
statutory capital is in excess of the minimum required risk-based capital.
Management cannot predict the ultimate impact of risk-based capital requirements
on the Company's competitive position.
31
<PAGE>
Maintaining appropriate levels of statutory surplus is considered important by
the Company's management, state insurance regulatory authorities and the
agencies that rate insurers' claims-paying abilities and financial strength.
Failure to maintain certain levels of statutory capital and surplus could result
in increased scrutiny or, in some cases, action taken by state regulatory
authorities and/or downgrades in an insurer's ratings.
--------------------------------------------------------------------------------
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 Credit Facility and senior reset notes, were $110.0 million in 1994
and $200.0 million in 1993.
32
<PAGE>
RELIANCE FINANCIAL SERVICES CORPORATION
--------------------------------------------------------------------------------
DIRECTORS
GEORGE R. BAKER(2)
Corporate Director/Advisor
GEORGE E. BELLO(3)
Executive Vice President
and Controller
Reliance Group Holdings, Inc.
CARTER BURDEN
Managing General Partner
Willam A.M. Burden & Co.
DENNIS A. BUSTI
President and
Chief Executive Officer
Reliance National Insurance Company
DEAN W. CASE
Vice Chairman of the Board
Reliance Insurance Company
LOWELL C. FREIBERG(3)
Senior Vice President and
Chief Financial Officer
Reliance Group Holdings, Inc.
DR. THOMAS P. GERRITY(2)
Dean of the Wharton School
University of Pennsylvania
JEWELL JACKSON MCCABE(3)
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
RICHARD E. SNYDER(3)
Corporate Director/Advisor
THOMAS J. STANTON, JR.(2)
Chairman Emeritus
National Westminster Bank NJ
ROBERT M. STEINBERG(1)
President and
Chief Operating Officer
Reliance Group Holdings, Inc.
SAUL P. STEINBERG(1)
Chairman of the Board and
Chief Executive Officer
Reliance Group Holdings, Inc.
JAMES E. YACOBUCCI
Senior Vice President
Investments
Reliance Group Holdings, Inc.
(1) Executive Committee Member
(2) Audit Committee Member
(3) Finance Committee Member
33
<PAGE>
RELIANCE FINANCIAL SERVICES CORPORATION
--------------------------------------------------------------------------------
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
PHILIP S. SHERMAN
Senior Vice President and
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
Chief Litigation Counsel
DAVID F. NOYES
Vice President and
Chief Credit Officer
JOEL H. ROTHWAX
Vice President
Human Resources
THOMAS J. SANDERS
Vice President and
Assistant Controller
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
GEORGE T. HOLBROOK, JR.
President and
Chief Executive Officer
Reliance Surety Company
ROBERT C. OLSMAN
President and
Chief Operating Officer
Reliance Insurance 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. SCHREIVER
Chairman and
President
RCG International, Inc.
34
<PAGE>
RELIANCE FINANCIAL SERVICES CORPORATION
--------------------------------------------------------------------------------
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 AUDITORS
Deloitte & Touche LLP
New York, NY
LISTED SECURITIES
Unless otherwise indicated, securities are listed on the
New York Stock Exchange
RELIANCE FINANCIAL SERVICES CORPORATION
9.48% 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)
35
<PAGE>
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36
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
Exhibit 27
This schedule contains summary financial information extracted from the
Company's Consolidated Balance Sheet and the Consolidated Statement of Income
and is qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-END> DEC-31-1994
<DEBT-HELD-FOR-SALE> 1,839,312
<DEBT-CARRYING-VALUE> 1,166,020
<DEBT-MARKET-VALUE> 1,053,551
<EQUITIES> 564,636
<MORTGAGE> 0
<REAL-ESTATE> 289,465
<TOTAL-INVEST> 4,089,339
<CASH> 46,814
<RECOVER-REINSURE> 2,928,533
<DEFERRED-ACQUISITION> 181,938
<TOTAL-ASSETS> 9,337,765
<POLICY-LOSSES> 5,809,546
<UNEARNED-PREMIUMS> 1,288,454
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 209,951
0
0
<COMMON> 0
<OTHER-SE> 1,064,079
<TOTAL-LIABILITY-AND-EQUITY> 9,337,765
2,634,092
<INVESTMENT-INCOME> 258,912
<INVESTMENT-GAINS> 9,218
<OTHER-INCOME> 156,473
<BENEFITS> 1,372,960
<UNDERWRITING-AMORTIZATION> 387,924
<UNDERWRITING-OTHER> 959,904
<INCOME-PRETAX> 179,799
<INCOME-TAX> (47,982)
<INCOME-CONTINUING> 138,538
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 138,538
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
<RESERVE-OPEN> 2,931,528
<PROVISION-CURRENT> 1,274,649
<PROVISION-PRIOR> 22,444
<PAYMENTS-CURRENT> 321,538
<PAYMENTS-PRIOR> 780,961
<RESERVE-CLOSE> 3,127,781
<CUMULATIVE-DEFICIENCY> 22,444
</TABLE>
