<PAGE>
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended March 31, 1995
OR
___ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period From _____ To _____
Commission File Number 1-7080
RELIANCE FINANCIAL SERVICES CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 51-0113548
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
Park Avenue Plaza
55 East 52nd Street
New York, New York 10055
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (212) 909-1100
The Registrant meets the requirements and conditions set forth in General
Instruction H(1)(a) and (b) of Form 10-Q and is therefore filing this Form with
reduced disclosure as permitted thereunder.
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
As of May 1, 1995, 1,000 shares of common stock of Reliance Financial Services
Corporation were outstanding.
<PAGE>
RELIANCE FINANCIAL SERVICES CORPORATION AND SUBSIDIARIES
I N D E X
Page
No.
----
PART I. FINANCIAL INFORMATION:
Item 1. Financial Statements
Consolidated Statement of Income for the Quarters Ended
March 31, 1995 and 1994 (Unaudited)...................... 2
Consolidated Balance Sheet at March 31, 1995 (Unaudited) and
December 31, 1994.............................................. 3
Consolidated Statement of Changes in Shareholder's Equity for the
Quarter Ended March 31, 1995 (Unaudited)....................... 4
Consolidated Condensed Statement of Cash Flows for the Quarters
Ended March 31, 1995 and 1994 (Unaudited)...................... 5
Notes to Consolidated Financial Statements (Unaudited).............. 6
Item 2. Management's Discussion and Analysis of the Consolidated
Statement of Income.................................... 8
PART II. OTHER INFORMATION, AS APPLICABLE.................................... 12
SIGNATURES................................................................... 13
<PAGE>
RELIANCE FINANCIAL SERVICES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME (UNAUDITED)
Quarter Ended March 31 1995 1994
- -------------------------------------------------------------------
(In thousands)
Revenues:
Premiums earned................................. $604,666 $685,885
Net investment income........................... 69,378 62,650
Gain on sales of investments.................... 8,286 3,637
Interest income from parent company............. 4,917 2,918
Other........................................... 37,817 31,475
-------- --------
725,064 786,565
-------- --------
Claims and expenses:
Policy claims and settlement expenses........... 323,755 368,574
Policy acquisition costs........................ 93,305 103,173
Interest........................................ 5,188 4,906
Other insurance expenses........................ 202,099 255,631
Other........................................... 37,922 31,395
-------- --------
662,269 763,679
-------- --------
Income before income taxes, minority interests
and equity in investee company.............. 62,795 22,886
Provision for income taxes...................... (19,500) (6,767)
Minority interests.............................. (647) (742)
Equity in investee company...................... 1,754 2,285
-------- --------
Net income...................................... $ 44,402 $ 17,662
======== ========
See notes to consolidated financial statements
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<PAGE>
RELIANCE FINANCIAL SERVICES CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
March 31 December 31
ASSETS 1995 1994
- ------------------------------------------------------------------------------
(Dollars in thousands, except per-share amount)
Marketable securities:
Fixed maturities held for investment - at amortized
cost (quoted market $1,121,050 and $1,053,551)...... $1,184,285 $1,166,020
Fixed maturities available for sale - at quoted
market (amortized cost $1,881,784 and $1,945,919)... 1,826,708 1,839,312
Equity securities - at quoted market (cost
$496,518 and $482,529)............................... 601,891 564,636
Short-term investments................................ 171,676 229,906
Cash.................................................... 62,255 46,814
Premiums receivable..................................... 1,156,664 1,079,393
Other accounts and notes receivable..................... 146,637 179,903
Reinsurance recoverables................................ 3,078,531 2,928,533
Federal and foreign income taxes, including deferred
taxes................................................ 117,996 161,013
Notes receivable from parent company.................... 196,187 187,065
Investments in real estate - at cost, less accumulated
depreciation......................................... 288,063 289,465
Investment in investee company.......................... 144,436 147,513
Deferred policy acquisition costs....................... 187,939 181,938
Other assets............................................ 369,413 336,254
---------- ----------
$9,532,681 $9,337,765
========== ==========
LIABILITIES AND SHAREHOLDER'S EQUITY
- --------------------------------------------------------------------------------
Unearned premiums....................................... $1,324,966 $1,288,454
Unpaid claims and related expenses...................... 5,935,988 5,809,546
Accounts payable and accrued expenses................... 610,095 650,374
Reinsurance ceded premiums payable...................... 301,010 291,844
Senior reset notes...................................... 80,601 80,596
Term loans and short-term debt.......................... 120,547 129,355
Minority interests - redeemable preferred stock
of a subsidiary....................................... 23,517 23,517
---------- ----------
8,396,724 8,273,686
---------- ----------
Contingencies and commitments
Shareholder's equity:
Common stock, par value $.10 per share, 1,000 shares
authorized, issued and outstanding................... - -
Additional paid-in capital............................ 678,735 678,502
Retained earnings..................................... 459,078 434,676
Net unrealized gain (loss) on investments............. 19,529 (27,881)
Net unrealized loss on foreign currency
translation.......................................... (21,385) (21,218)
---------- ----------
1,135,957 1,064,079
---------- ----------
$9,532,681 $9,337,765
========== ==========
See notes to consolidated financial statements
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<PAGE>
RELIANCE FINANCIAL SERVICES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDER'S EQUITY (UNAUDITED)
<TABLE>
<CAPTION>
Net
Unrealized
Net Loss on
Additional Unrealized Foreign
Common Paid-In Retained Gain (Loss) on Currency Shareholder's
Stock Capital Earnings Investments Translation Equity
- ------------------------------------------------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1995............ $ - $678,502 $434,676 $(27,881) $(21,218) $1,064,079
Transactions of investee
company ....................... 233 (2,473) (2,240)
Net income.......................... 44,402 44,402
Dividends........................... (20,000) (20,000)
Appreciation after deferred
income taxes................... 49,883 49,883
Foreign currency translation........ (167) (167)
---- -------- -------- ------- -------- ----------
Balance, March 31, 1995............. $ - $678,735 $459,078 $19,529 $(21,385) $1,135,957
==== ======== ======== ======= ======== ==========
</TABLE>
See notes to consolidated financial statements
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<PAGE>
RELIANCE FINANCIAL SERVICES CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENT OF CASH FLOWS (UNAUDITED)
Quarter Ended March 31 1995 1994
- ------------------------------------------------------------------------------
(In thousands)
CASH FLOWS (USED BY) FROM OPERATING ACTIVITIES....... $ (43,732) $ 82,037
---------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of fixed maturities available
for sale........................................... 128,922 63,463
Proceeds from sales of fixed maturities held
for investment..................................... 14,419 5,021
Proceeds from redemptions of fixed maturities
available for sale................................. 4,224 6,777
Proceeds from redemptions of fixed maturities held
for investment..................................... 439 9,035
Proceeds from sales of equity securities............. 64,415 119,928
Decrease in short-term investments - net............. 55,494 193,368
Purchases of fixed maturities available for sale..... (56,821) (141,732)
Purchases of fixed maturities held for investment.... (33,965) (229,619)
Purchases of equity securities....................... (59,848) (80,335)
Other - net.......................................... (20,176) (16,352)
---------- ---------
97,103 (70,446)
---------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in notes receivable from parent company..... (9,122) (18,312)
Increase in term loans............................... 69 -
Increase (decrease) in short-term debt - net......... (6,257) 1,569
Repayments of term loans............................. (2,620) (27,983)
Dividends............................................ (20,000) -
---------- ---------
(37,930) (44,726)
---------- ---------
Increase (decrease) in cash.......................... 15,441 (33,135)
Cash, beginning of period............................ 46,814 91,608
---------- ---------
Cash, end of period.................................. $ 62,255 $ 58,473
========== =========
Supplemental disclosures of cash flow information:
Interest paid........................................ $ 2,000 $ 1,600
========== ==========
Income taxes refunded................................ $ 1,100 $ 10,100
========== ==========
Supplemental disclosure of non-cash financing activity:
In 1994, non-cash dividends of $20,000,000 were recorded as a reduction
in notes receivable from parent company.
See notes to consolidated financial statements
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<PAGE>
RELIANCE FINANCIAL SERVICES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
In the opinion of management, the accompanying unaudited consolidated financial
statements include all adjustments (consisting of normal recurring accruals
only) considered necessary to present fairly the financial position at March 31,
1995, and the results of operations, changes in shareholder's equity and cash
flows for all periods presented. The results of operations for the interim
periods are not necessarily indicative of the results that may be expected for
any other interim period or for the entire year.
For a summary of significant accounting policies (which have not changed from
December 31, 1994) and additional financial information, see the Company's
Annual Report on Form 10-K for the year ended December 31, 1994.
2. EQUITY IN INVESTEE COMPANY
Equity income in Zenith National Insurance Corp. was $1.8 million for the
quarter ended March 31, 1995 compared to $2.3 million in the corresponding 1994
period.
Summarized financial information for Zenith National Insurance Corp. is as
follows:
Quarter Ended March 31 1995 1994
- --------------------------------------------------------------------------------
(In thousands, except per-share amounts)
Revenues................................... $ 149,562 $ 138,252
Net income................................. 6,900 8,200
Net income per share....................... 0.36 0.43
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<PAGE>
3. REINSURANCE
The reconciliation of property and casualty insurance direct premiums to net
premiums is as follows (in thousands):
Quarter Ended March 31
------------------------------------------------
1995 1994
------------------------------------------------
Premiums Premiums Premiums Premiums
Written Earned Written Earned
---------- ---------- ---------- ----------
Direct............. $ 683,908 $ 681,275 $ 711,679 $ 678,463
Assumed............ 111,369 81,865 89,931 79,306
Ceded.............. (334,358) (311,335) (305,252) (297,115)
---------- ---------- ---------- ----------
Net Premiums....... $ 460,919 $ 451,805 $ 496,358 $ 460,654
========== ========== ========== ==========
The reconciliation of property and casualty insurance gross policy claims and
settlement expenses to net policy claims and settlement expenses is as follows
(in thousands):
Quarter Ended March 31
-----------------------
1995 1994
---------- ----------
Gross.............................................. $ 510,470 $ 589,730
Reinsurance recoveries............................. (200,004) (241,350)
---------- ----------
Net policy claims and settlement expenses.......... $ 310,466 $ 348,380
========== ==========
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<PAGE>
RELIANCE FINANCIAL SERVICES CORPORATION AND SUBSIDIARIES MANAGEMENT'S DISCUSSION
AND ANALYSIS OF THE CONSOLIDATED STATEMENT OF INCOME
OVERVIEW
The Company had income from operations, before gain on sales of investments, of
$39.0 million in the first quarter of 1995 compared to $15.3 million in the
corresponding 1994 period. The improvement in operating income reflects
significantly stronger underwriting results in property and casualty insurance
operations and lower catastrophe losses. Net income in the first quarter of 1995
was $44.4 million which included an after-tax gain on sales of investments of
$5.4 million, compared to $17.7 million in the first quarter of 1994 which
included an after-tax gain on sales of investments of $2.4 million.
PROPERTY AND CASUALTY INSURANCE OPERATIONS
Net premiums written and net premiums earned were $460.9 million and $451.8
million in the first quarter of 1995 compared to $496.4 million and $460.7
million in the corresponding 1994 period. The decline in net written and net
earned premiums in 1995 reflects lower writings in workers' compensation
resulting from the trend towards high deductible insurance and captive insurance
programs, both of which result in the recognition of lower premiums and lower
losses. Workers' compensation premiums also reflect an increase in return
premiums on retrospectively rated policies due to improved loss experience. The
decline in workers' compensation net premiums written was partially offset by
growth in general liability, reinsurance, surety and inland marine lines of
business.
The underwriting loss for the first three months of 1995 was $5.2 million
compared to $44.4 million in the corresponding 1994 period. The improved
underwriting results reflect lower catastrophe losses which were $3.4 million
($7.2 million before reinsurance) in the first quarter of 1995 compared to $28.7
million ($73.4 million before reinsurance) in the corresponding 1994 period.
Catastrophe losses in the first quarter of 1994 arose primarily from the January
1994 California earthquake. The underwriting results in 1995 also reflect
improved loss experience in workers' compensation and record underwriting
profits in the surety line of business of $11.4 million compared to $6.1 million
in the first three months of 1994. The combined ratio (calculated on a GAAP
basis), after policyholders' dividends was 101.4% in the first three months of
1995 compared to 109.1% in the corresponding 1994 period. Excluding the effects
of catastrophes, the combined ratio was 100.7% in the first quarter of 1995
compared to 102.9% in the first quarter of 1994.
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<PAGE>
PROPERTY AND CASUALTY INSURANCE INVESTMENT RESULTS
Net investment income of the property and casualty insurance operations
increased to $62.4 million during the three-month period ending March 31, 1995
from $56.0 million in the corresponding 1994 period. This increase resulted from
growth in the size of the fixed maturity investment portfolio and, to a lesser
extent, the increase in interest rates.
Gain on sales of investments was $8.1 million in the first quarter of 1995 and
$3.2 million in the corresponding 1994 period.
TITLE INSURANCE OPERATIONS
Premiums and fees in the first quarter of 1995 were $152.9 million compared to
$225.2 million in the corresponding quarter of 1994. This decrease resulted from
significantly lower levels of residential refinancing activity, as well as
declines in resale and new home sale activity. While the first quarter is
traditionally the weakest in the title insurance industry, in 1994 that seasonal
weakness was more than offset by strong residential refinancing activity.
Partially offsetting this decline in 1995 premiums and fees from residential
transactions was an increase in commercial real estate activity where operating
margins are generally higher.
As a result of lower agency revenues, agency commissions declined to $75.2
million during the three-month period ended March 31, 1995 from $110.0 million
in the corresponding 1994 period. Other expenses were $75.6 million in the first
quarter of 1995 compared to $93.8 million in the corresponding 1994 period. The
decline in other expenses 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 98.2% in the first
quarter of 1995 compared to 89.9% in the corresponding 1994 period. The increase
in the expense ratio resulted from the decline in premiums. As a result of lower
premiums, the provision for claim losses declined to $13.3 million in the first
three months of 1995 from $20.2 million in the first three months of 1994.
INVESTMENT PORTFOLIO
At March 31, 1995, the Company's investment portfolio aggregated $3.73 billion
(at cost), of which 13% was invested in equity securities. The Company seeks to
maintain a diversified and balanced fixed maturity portfolio representing a
broad spectrum of industries and types of securities. At March 31, 1995, 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.
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<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 March 31, 1995, the carrying values of
non-investment grade securities and securities not rated by Standard & Poor's
were $330.8 million (10% of the fixed income portfolio) and $118.3 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.
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 $37.8 million in the first quarter of 1995 compared to
$31.5 million in the corresponding 1994 period. The increase in revenues
resulted from growth in the information technology business. Operating expenses
incurred by these operations were $36.8 million in the first three months of
1995 compared to $30.7 million in the corresponding 1994 period. Revenues and
expenses of these operations are included in other revenues and other expenses
in the accompanying statement of income.
At March 31, 1995, the Company's real estate holdings had a carrying value of
$288.1 million, which includes 11 shopping centers with an aggregate carrying
value of $137.0 million, office buildings and other commercial properties, with
an aggregate carrying value of $90.3 million, and undeveloped land with a
carrying value of $60.8 million.
OTHER MATTERS
The Company has a revolving credit facility with various banks providing for
aggregate maximum outstanding borrowings of $100 million. At March 31, 1995,
borrowings aggregating $40.0 million were outstanding under this facility. On
April 26, 1995, the Company extended the revolving credit facility through March
31, 2000 from December 31, 1998. In addition, the Company increased term loan
borrowings to $137.5 million from $62.5 million and extended the maturity dates
of the term loan borrowings through March 31, 2000. The additional $75 million
of borrowings under the term loan were used to redeem all of the outstanding
redeemable preferred stock of Reliance Insurance Company ($24.0 million) and
will be used to redeem $25.0 million of the Company's 10.36% and $25.0 million
of 9.48% senior reset notes, which may include a portion of the notes currently
held by Reliance Insurance Company. In connection with these transactions, the
Company will incur an after-tax extraordinary loss of approximately $3.4 million
in the second quarter of 1995.
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
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<PAGE>
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 statutory capital in excess of the minimum
required risk-based capital.
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.
-11-
<PAGE>
RELIANCE FINANCIAL SERVICES CORPORATION AND SUBSIDIARIES
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
27. Financial Data Schedule.
(b) Reports on Form 8-K.
No reports on Form 8-K were filed during the quarter ended March
31, 1995.
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<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
RELIANCE FINANCIAL SERVICES CORPORATION
---------------------------------------
(Registrant)
Date: May 12, 1995 /s/ George E. Bello
------------ -----------------------------
George E. Bello
Executive Vice President and Controller
(Chief Accounting Officer)
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<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> 3-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> MAR-31-1995
<DEBT-HELD-FOR-SALE> 1,826,708
<DEBT-CARRYING-VALUE> 1,184,285
<DEBT-MARKET-VALUE> 1,121,050
<EQUITIES> 601,891
<MORTGAGE> 0
<REAL-ESTATE> 288,063
<TOTAL-INVEST> 4,072,623
<CASH> 62,255
<RECOVER-REINSURE> 3,078,531
<DEFERRED-ACQUISITION> 187,939
<TOTAL-ASSETS> 9,532,681
<POLICY-LOSSES> 5,935,988
<UNEARNED-PREMIUMS> 1,324,966
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 201,148
0
0
<COMMON> 0
<OTHER-SE> 1,135,957
<TOTAL-LIABILITY-AND-EQUITY> 9,532,681
604,666
<INVESTMENT-INCOME> 69,378
<INVESTMENT-GAINS> 8,286
<OTHER-INCOME> 42,734
<BENEFITS> 323,755
<UNDERWRITING-AMORTIZATION> 93,305
<UNDERWRITING-OTHER> 202,099
<INCOME-PRETAX> 62,795
<INCOME-TAX> (19,500)
<INCOME-CONTINUING> 44,402
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 44,402
<EPS-PRIMARY> $0.00
<EPS-DILUTED> $0.00
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
