<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, 1996
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, 1996, 1,000 shares of common stock of Reliance Financial Services
Corporation were outstanding.
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RELIANCE FINANCIAL SERVICES CORPORATION AND SUBSIDIARIES
INDEX
Page
No.
----
PART I. FINANCIAL INFORMATION:
Item 1. Financial Statements
Consolidated Statement of Income for the Quarters Ended
March 31, 1996 and 1995 (Unaudited)............................ 2
Consolidated Balance Sheet at March 31, 1996 (Unaudited) and
December 31, 1995.............................................. 3
Consolidated Statement of Changes in Shareholder's Equity for the
Quarter Ended March 31, 1996 (Unaudited)....................... 4
Consolidated Condensed Statement of Cash Flows for the Quarters
Ended March 31, 1996 and 1995 (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 1996 1995
================================================================================
(In thousands)
Revenues:
Premiums earned .................................. $ 609,867 $ 604,666
Net investment income ............................ 70,717 69,378
Gain on sales of investments ..................... 4,468 8,286
Interest income from parent company .............. 4,954 4,917
Other ............................................ 37,549 37,817
--------- ---------
727,555 725,064
--------- ---------
Claims and expenses:
Policy claims and settlement expenses ............ 316,707 323,755
Policy acquisition costs ......................... 95,570 93,305
Interest ......................................... 5,124 5,835
Other insurance expenses ......................... 209,925 202,099
Other ............................................ 37,146 37,922
--------- ---------
664,472 662,916
--------- ---------
Income before income taxes and equity in
investee company ............................. 63,083 62,148
Provision for income taxes ....................... (19,700) (19,500)
Equity in investee company ....................... 2,024 1,754
--------- ---------
Net income ....................................... $ 45,407 $ 44,402
========= =========
See notes to consolidated financial statements
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<PAGE>
RELIANCE FINANCIAL SERVICES CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
March 31 December 31
ASSETS 1996 1995
==========================================================================================
(Dollars in thousands, except per-share amount)
<S> <C> <C>
Marketable securities:
Fixed maturities held for investment - at amortized cost
(quoted market $761,188 and $791,459) .............. $ 752,643 $ 753,563
Fixed maturities available for sale - at quoted market
(amortized cost $2,472,939 and $2,299,510) .......... 2,469,489 2,371,995
Equity securities - at quoted market (cost $444,882
and $408,054) ...................................... 726,763 672,668
Short-term investments ................................. 188,374 500,284
Cash ........................................................ 40,811 50,848
Premiums receivable ......................................... 1,199,470 1,075,226
Other accounts and notes receivable ......................... 142,185 130,555
Reinsurance recoverables .................................... 3,256,107 3,163,073
Federal and foreign income taxes, including deferred taxes .. 9,091 9,784
Notes receivable from parent company ........................ 192,114 184,108
Investments in real estate - at cost, less accumulated
depreciation ........................................... 277,381 278,510
Investment in investee company .............................. 158,205 156,404
Deferred policy acquisition costs ........................... 203,760 194,648
Other assets ................................................ 336,683 354,254
----------- -----------
$ 9,953,076 $ 9,895,920
=========== ===========
LIABILITIES AND SHAREHOLDER'S EQUITY
==========================================================================================
Unearned premiums ........................................... $ 1,395,123 $ 1,299,465
Unpaid claims and related expenses .......................... 6,120,121 6,100,129
Accounts payable and accrued expenses ....................... 513,394 586,902
Reinsurance ceded premiums payable .......................... 342,361 325,246
Senior reset notes .......................................... 40,321 40,318
Term loans and short-term debt .............................. 184,887 176,101
----------- -----------
8,596,207 8,528,161
----------- -----------
Contingencies and commitments
Shareholder's equity:
Common stock, par value $.10 per-share, 1,000 shares
authorized, issued and outstanding .................. -- --
Additional paid-in capital ............................. 677,287 678,349
Retained earnings ...................................... 522,246 496,839
Net unrealized gain on investments ..................... 182,348 219,356
Net unrealized loss on foreign currency translation .... (25,012) (26,785)
----------- -----------
1,356,869 1,367,759
----------- -----------
$ 9,953,076 $ 9,895,920
=========== ===========
</TABLE>
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 on Currency Shareholder's
Stock Capital Earnings Investments Translation Equity
==================================================================================================================================
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1996 ....... $ - $ 678,349 $ 496,839 $ 219,356 $ (26,785) $ 1,367,759
Transactions of investee
company ................... (1,062) 1,722 660
Net income ..................... 45,407 45,407
Dividends ...................... (20,000) (20,000)
Depreciation after deferred
income taxes .............. (38,730) (38,730)
Foreign currency translation ... 1,773 1,773
--------- ------------- ------------- ------------- -------------- -----------
Balance, March 31, 1996 ........ $ - $ 677,287 $ 522,246 $ 182,348 $ (25,012) $ 1,356,869
========= ============= ============= ============= ============== ===========
</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)
<TABLE>
<CAPTION>
Quarter Ended March 31 1996 1995
===========================================================================================
(In thousands)
<S> <C> <C>
CASH FLOWS USED BY OPERATING ACTIVITIES ......................... $ (62,946) $ (43,376)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of fixed maturities available for sale ...... 263,753 128,922
Proceeds from sales of fixed maturities held for investment ..... -- 14,419
Proceeds from redemptions of fixed maturities available for sale 18,073 4,224
Proceeds from redemptions of fixed maturities held for investment 22,421 439
Proceeds from sales of equity securities ........................ 81,805 64,415
Decrease in short-term investments - net ........................ 313,538 55,494
Purchases of fixed maturities available for sale ................ (456,544) (56,821)
Purchases of fixed maturities held for investment ............... (21,545) (33,965)
Purchases of equity securities .................................. (143,816) (59,848)
Other - net ..................................................... (5,556) (20,176)
--------- ---------
72,129 97,103
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in notes receivable from parent company ................ (8,006) (9,122)
Increase in term loans .......................................... 20,816 25,069
Decrease in short-term debt - net ............................... (1,908) (11,257)
Repayments of term loans ........................................ (10,122) (22,620)
Debt issuance costs ............................................. -- (356)
Dividends ....................................................... (20,000) (20,000)
--------- ---------
(19,220) (38,286)
--------- ---------
Increase (decrease) in cash ..................................... (10,037) 15,441
Cash, beginning of period ....................................... 50,848 46,814
--------- ---------
Cash, end of period ............................................. $ 40,811 $ 62,255
========= =========
Supplemental disclosures of cash flow information:
Interest paid ................................................... $ 3,100 $ 2,000
========= =========
Income taxes refunded (paid) .................................... $ (1,500) $ 1,100
========= =========
</TABLE>
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,
1996, 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, 1995) and additional financial information, see the Company's
Annual Report on Form 10-K for the year ended December 31, 1995.
2. EQUITY IN INVESTEE COMPANY
Equity income in Zenith National Insurance Corp. was $2.0 million for the
quarter ended March 31, 1996 compared to $1.8 million in the corresponding 1995
period.
Summarized financial information for Zenith National Insurance Corp. is as
follows:
Quarter Ended March 31 1996 1995
- ---------------------------------------------------------------------------
(In thousands, except per-share amounts)
Revenues........................................ $ 134,548 $ 127,336
Income from continuing operations before
income taxes................................. 18,914 6,372
Net income...................................... 12,400 6,900
Net income per-share............................ 0.70 0.36
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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
------------------------------------------------------
1996 1995
------------------------------------------------------
Premiums Premiums Premiums Premiums
Written Earned Written Earned
--------- --------- --------- ---------
Direct ............. $ 774,655 $ 713,714 $ 683,908 $ 681,275
Assumed ............ 96,495 73,542 111,369 81,865
Ceded .............. (395,667) (347,455) (334,358) (311,335)
--------- --------- --------- ---------
Net Premiums ....... $ 475,483 $ 439,801 $ 460,919 $ 451,805
========= ========= ========= =========
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
------------------------
1996 1995
--------- ---------
Gross ............................................ $ 464,763 $ 510,470
Reinsurance recoveries ........................... (162,622) (200,004)
--------- ---------
Net policy claims and settlement expenses ........ $ 302,141 $ 310,466
========= =========
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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 gains on sales of investments, of
$42.5 million in the first quarter of 1996 compared to $39.0 million in the
corresponding 1995 period. The increase in operating income reflects stronger
results in title insurance operations. Net income in the first quarter of 1996
was $45.4 million, which included after-tax gains on sales of investments of
$2.9 million, compared to $44.4 million in the first quarter of 1995, which
included after-tax gains on sales of investments of $5.4 million.
PROPERTY AND CASUALTY INSURANCE OPERATIONS
Net premiums written and net premiums earned were $475.5 million and $439.8
million in the first quarter of 1996 compared to $460.9 million and $451.8
million in the corresponding 1995 period. The increase in net written premiums
reflects growth in multiple peril and commercial automobile lines partially
offset by a decline in the general liability line.
Property and casualty underwriting results remain strong. The combined ratio
(calculated on a GAAP basis), after policyholders' dividends, was 101.9% in the
first quarter of 1996 compared to 101.4% in the corresponding 1995 period. The
underwriting loss for the first three months of 1996 was $10.1 million compared
to $5.2 million in the corresponding 1995 period. The increase in underwriting
loss reflects lower underwriting profits in workers' compensation. Underwriting
results in 1996 also reflect an increase in underwriting losses in fire and
allied, as well as ocean and inland marine lines, resulting, in part, from harsh
winter conditions. These results were partially offset by improved underwriting
results in the multiple peril line.
The Company's liability for property and casualty loss reserves (net of
reinsurance recoverables) was $3.19 billion at March 31, 1996. Included in the
net liability for loss reserves at March 31, 1996 are $133.0 million of loss
reserves pertaining to asbestos-related and environmental pollution claims. In
view of recent developments in the insurance industry with regard to reserves
for asbestos-related and environmental pollution claims, the Company is
currently updating its analysis of loss reserves for asbestos-related and
environmental pollution claims, which it anticipates will be completed during
the second quarter of 1996.
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<PAGE>
PROPERTY AND CASUALTY INSURANCE INVESTMENT RESULTS
Net investment income of the property and casualty insurance operations
increased to $63.4 million during the three-month period ending March 31, 1996
from $62.4 million in the corresponding 1995 period. This increase resulted from
growth in the size of the fixed maturity investment portfolio offset, in part,
by the effects of lower interest rates.
Gain on sales of investments was $4.0 million in the first quarter of 1996 and
$8.1 million in the corresponding 1995 period.
TITLE INSURANCE OPERATIONS
Premiums and fees increased in the first quarter of 1996 to $170.1 million from
$152.9 million in the corresponding quarter of 1995 reflecting growth in
residential resale and refinancing activity. The higher levels of refinancing
activity resulted from the lower mortgage interest rates available during early
1996.
Agency commissions were $75.8 million during the three-month period ended March
31, 1996 compared to $75.2 million in the corresponding 1995 period. Other
expenses were $83.8 million in the first quarter of 1996 compared to $75.6
million in the corresponding 1995 period. The increase in other expenses
resulted from growth in direct title insurance premiums. The expense ratio of
the title insurance operations (which includes agency commissions) was 93.0% in
the first quarter of 1996 compared to 98.2% in the corresponding 1995 period.
The improvement in the expense ratio resulted from the increase in direct title
insurance premiums. The provision for claim losses was $14.6 million in the
first three months of 1996 compared to $13.3 million in the first three months
of 1995.
INVESTMENT PORTFOLIO
At March 31, 1996, the Company's investment portfolio aggregated $3.90 billion
(at cost), of which 11% was invested in equity securities. The Company seeks to
maintain a diversified and balanced fixed maturity portfolio representing a
broad spectrum of industries and types of securities. The Company holds
virtually no investments in commercial real estate mortgages in its investment
portfolio. Purchases of fixed maturity securities are researched individually
based on in-depth analysis and objective predetermined investment criteria and
the portfolio is managed to achieve a proper balance of safety, liquidity and
investment yields.
The Company'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, 1996, the carrying values of
non-investment grade securities and securities not
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<PAGE>
rated by Standard & Poor's were $318.9 million (9% of the fixed income
portfolio) and $46.7 million (1% 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
RCG International Inc. ("RCG"), a subsidiary of the Company, provides technical
services in the information technology and energy industries. RCG's revenues
were $37.5 million in the first quarter of 1996 compared to $37.8 million in the
first quarter of 1995, which included $7.2 million related to certain consulting
operations which were sold in the second quarter of 1995. Excluding revenues
pertaining to operations sold, revenues increased 22.6% in the first quarter of
1996 compared to the corresponding 1995 period resulting from continued growth
in the information technology business. RCG's operating expenses were $36.6
million in the first quarter of 1996 compared to $36.8 million in the
corresponding 1995 period which included $6.6 million related to the consulting
operations sold during the second quarter of 1995. RCG's revenues and expenses
are included in other revenues and other expenses in the accompanying
consolidated statement of income.
At March 31, 1996, the Company's real estate operations had holdings with a
carrying value of $277.4 million, which includes nine shopping centers with an
aggregate carrying value of $129.0 million, office buildings and other
commercial properties, with an aggregate carrying value of $86.8 million, and
undeveloped land with a carrying value of $61.6 million.
EQUITY IN INVESTEE COMPANY
Equity in investee company income was $2.0 million in the first quarter of 1996
compared to $1.8 million in the corresponding 1995 period from the Company's
investment in Zenith National Insurance Corp. ("Zenith"). The increase in equity
income reflects Zenith's improved property and casualty underwriting results.
OTHER MATTERS
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.
At March 31, 1996, the partnership's total outstanding debt was $172.5 million.
As of March 31, 1996, the Company guaranteed $38 million of the partnership's
outstanding debt which matures on December 29, 1996. The Company believes that,
to the extent such debt cannot be fully refinanced at maturity, the partnership
will need to seek additional financing from other sources, which may include the
Company or Reliance Group Holdings, Inc. The Company receives a fee of .5% per
annum on the average outstanding debt covered by the guarantee.
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<PAGE>
The National Association of Insurance Commissioners has a risk-based capital
requirement for the property and casualty insurance industry. Risk-based capital
refers to the determination of the amount of statutory capital required for an
insurer based on the risks assumed by the insurer (including, for example,
investment risks, credit risks relating to reinsurance recoverables and
underwriting risks) rather than just the amount of net premiums written by the
insurer. A formula that applies prescribed factors to the various risk elements
in an insurer's business is used to determine the minimum statutory capital
requirement for the insurer. An insurer having less statutory capital than the
formula calculates would be subject to varying degrees of regulatory
intervention, depending on the level of capital inadequacy. 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.
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<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, 1996.
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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 13, 1996 /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>
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>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> MAR-31-1996
<DEBT-HELD-FOR-SALE> 2,469,489
<DEBT-CARRYING-VALUE> 752,643
<DEBT-MARKET-VALUE> 761,188
<EQUITIES> 726,763
<MORTGAGE> 0
<REAL-ESTATE> 277,381
<TOTAL-INVEST> 4,414,650
<CASH> 40,811
<RECOVER-REINSURE> 3,256,107
<DEFERRED-ACQUISITION> 203,760
<TOTAL-ASSETS> 9,953,076
<POLICY-LOSSES> 6,120,121
<UNEARNED-PREMIUMS> 1,395,123
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 225,208
0
0
<COMMON> 0
<OTHER-SE> 1,356,869
<TOTAL-LIABILITY-AND-EQUITY> 9,953,076
609,867
<INVESTMENT-INCOME> 70,717
<INVESTMENT-GAINS> 4,468
<OTHER-INCOME> 42,503
<BENEFITS> 316,707
<UNDERWRITING-AMORTIZATION> 95,570
<UNDERWRITING-OTHER> 209,925
<INCOME-PRETAX> 63,083
<INCOME-TAX> (19,700)
<INCOME-CONTINUING> 45,407
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 45,407
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
